Permanent establishment tests under tax treaty failed as liaison, construction duration, and agent status did not create taxable presence.

Delhi HC examined treaty permanent establishment tests and held that the Indian Project Office was only performing preparatory or auxiliary liaison functions, so it was excluded from PE status. It further found that the installation or construction activity did not continue in India for the treaty-prescribed period after excluding the gap when access to the site was unavailable, and the Indian agent was an independent business entity without authority to conclude contracts, so no dependent agent PE arose. As no PE existed, no contract profits could be attributed to India. The assessee's alternative computation method under Article 7(6) and Section 44BB was not accepted.

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Issues: (i) Whether the Project Office in India constituted a permanent establishment under Article 5(2)(c) and was nevertheless excluded by Article 5(3)(e) as a fixed place used only for preparatory or auxiliary activities; (ii) Whether an installation or construction permanent establishment arose under Article 5(2)(h) for a period exceeding nine months; (iii) Whether the Indian agent constituted a dependent agent permanent establishment under Article 5(4); (iv) Whether any income from the contract could be attributed to a permanent establishment in India when the assessee was held not to have a permanent establishment; and (v) Whether the method of computation of profits from earlier years and the assessee's reliance on Article 7(6) and Section 44BB were sustainable.

Issue (i): Whether the Project Office in India constituted a permanent establishment under Article 5(2)(c) and was nevertheless excluded by Article 5(3)(e) as a fixed place used only for preparatory or auxiliary activities.

Analysis: A fixed place office may fall within the general definition of permanent establishment, but it is excluded where it is maintained solely for preparatory or auxiliary functions. The material did not establish that the Project Office participated in execution of the contracts beyond acting as a communication channel and liaison office. In the absence of evidence showing involvement in the core project activities, the office was treated as performing an auxiliary function.

Conclusion: The Project Office was not a permanent establishment in India.

Issue (ii): Whether an installation or construction permanent establishment arose under Article 5(2)(h) for a period exceeding nine months.

Analysis: The duration test under the treaty requires that the site, project or activity continue for more than nine months, and the relevant period is the time during which the enterprise actually carries on activities at the site. The installation work in India, excluding the long gap when the assessee had no access to the site, did not cross the prescribed threshold. Activities carried out by an independent subcontractor and pre-site events did not extend the assessee's own period of presence so as to satisfy the treaty requirement.

Conclusion: No installation permanent establishment arose under Article 5(2)(h).

Issue (iii): Whether the Indian agent constituted a dependent agent permanent establishment under Article 5(4).

Analysis: A dependent agent permanent establishment arises only where the agent is not of independent status and habitually exercises authority to conclude contracts on behalf of the enterprise. The agent here carried on substantial independent business, rendered services to multiple entities, and the agreement did not authorise it to conclude contracts for the assessee. Its presence in meetings and promotional support was insufficient to establish dependent agent status.

Conclusion: The Indian agent did not constitute a dependent agent permanent establishment.

Issue (iv): Whether any income from the contract could be attributed to a permanent establishment in India when the assessee was held not to have a permanent establishment.

Analysis: Attribution of profits under the treaty arises only to the extent business profits are connected with a permanent establishment in India. Since no permanent establishment existed, no part of the contract receipts could be attributed to an Indian permanent establishment. Even otherwise, the record showed that consideration for offshore activities was separately identifiable and not shown to be linked to any Indian presence.

Conclusion: No income was attributable to a permanent establishment in India.

Issue (v): Whether the method of computation of profits from earlier years and the assessee's reliance on Article 7(6) and Section 44BB were sustainable.

Analysis: The tax authorities had recorded reasons for departing from the earlier computation method, and the assessee's proposed formula was not supported by the statute or the treaty. Section 44BB applies only to its specified receipts and does not permit the assessee's claimed split or deduction structure. The treaty did not compel continuation of the earlier method in the face of a reasoned departure.

Conclusion: The assessee's computation method was not accepted, while the Revenue's challenge on this aspect did not alter the absence of a permanent establishment.

Final Conclusion: The assessments and appellate orders were set aside because the assessee had no permanent establishment in India during the relevant years, and consequently no profits from the contracts were taxable in India on that basis.

Ratio Decidendi: A fixed place or construction-related presence is taxable as a permanent establishment only when the enterprise actually carries on qualifying business activity in India for the treaty-prescribed period and through a place that is not merely preparatory or auxiliary; absent such permanent establishment, no attribution of business profits can be made.

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