2017 (8) TMI 737 - AT - Income Tax

Contracts Deemed Independent; Income Not Taxable in India

M/s. Caterpillar Global Mining Europe GmbH India Project Office Versus Asstt. Director of Income Tax (International Taxation) -I, Hyderabad

The Tribunal held that the three contracts were independent and not part of a single composite contract. It found a Permanent Establishment (PE) for ... Composite, continuous and inseparable project - computation of table income in India - turnkey project - P.E. in India - avoidance of tax by splitting the alleged composite contract into three different contracts - DTAA - whether all the three contracts are independent and separate from each other? - Held that:- A turnkey project itself indicates that it is composite contract which involves activities from the initial stage to the final stage. All the activities are either interlinked and interdependent or consequent to one another. The Hon’ble Supreme court in the case of Ishikawajima Harima (2007 (1) TMI 91 - SUPREME COURT) was dealing with the case of a turnkey project by a consortium in which the scope of work of each of the constituent of consortium was specified. The Hon’ble Supreme Court has held that A contract must be construed keeping in view the intention of the parties. Even in the case before us, though SCCL had issued a single tender document for whole of the project, the intention of the assessee to segregate the contract into three contracts was clear from the beginning. It negotiated with SCCL who ultimately agreed to execute three separate contracts with specific scope of work for each of the contracts and different time frames. Thus, the intention of the parties to have three different contracts is proved. In such circumstances, the findings of the authorities below, that all the three contracts are part of a single and composite contract are not sustainable. The question No.1 is accordingly answered in favour of the assessee. The consequential finding that in a composite contract, if there is a PE for one of the contracts, then the PE is there for all the contracts is also not sustainable. According to the revenue, the project office set up on 21.04.2008 is the PE even for the contracts I and II. This is not acceptable. Article 5(2) of the DTAA between India and Germany defines Permanent Establishment and clause (i) thereof includes a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months. In the case before us, the activities under contract No.I did exceed six months. The contract was signed on 21.11.2006 while, DGMS approval was received on 18.10.2007 during which period the employees carried on the work of scientific site investigation and has also designed the mining method to be adopted for obtaining the optimum output as required under the contract. Thus, it can be said that there is a PE for contract I. The contracts II & III are to come into force only after approval of the DGMS is obtained. The results of the contract I are the basis for the design, manufacture and supply of the plant and equipment under contract II. The AO has not doubted the manufacture and delivery of the equipment outside India. His basis for bringing to tax a part of the income under contract II is that the findings of contract I are the basis for the design of the equipment and therefore part of the income is attributable to activities in India. Even if there is a PE in India for the contracts I and II, only such income which is attributable to activities of the assessee in India is taxable. There is no dispute that the entire activity of designing, (albeit with the information gathered during evaluation of the site and finalization of the project report during contract I), manufacture and delivery of the equipment including the payment was made outside India. Therefore, even if there was a PE for contract II, it cannot be said that the PE of the assessee had any role to play in any of the above activities. - Decided in favour of assessee. Issues Involved:1. Whether the three contracts are interlinked, interdependent, and indivisible, thus forming a single composite contract.2. Whether there was a Permanent Establishment (PE) of the assessee in India before the establishment of the project office.3. Determination of the income attributable to activities in India.Issue-wise Detailed Analysis:1. Interlinked, Interdependent, and Indivisible Contracts:The primary question was whether the three contracts (scientific site investigation, supply of equipment, and maintenance services) should be considered as a single composite contract. The Tribunal examined the nature of the contracts and the intention of the parties involved. It was noted that the assessee negotiated with SCCL to segregate the contract into three distinct contracts, each with specific scopes and different time frames. The Tribunal concluded that the intention of the parties was to have three separate contracts, which was evidenced by the execution of three different contracts with distinct scopes of work. Thus, the Tribunal held that the contracts were not part of a single composite contract.2. Permanent Establishment (PE) in India:The Tribunal analyzed whether there was a PE in India before the establishment of the project office on 21.04.2008. It was observed that the activities under Contract No. I (scientific site investigation) exceeded six months, and the employees carried out work in India during this period. However, Contracts II and III were to commence only after obtaining DGMS approval. The Tribunal concluded that there was a PE for Contract I due to the duration and nature of activities. However, for Contract II, the Tribunal noted that the design, manufacture, and delivery of equipment were conducted outside India, and the PE had no role in these activities. Therefore, even if there was a PE for Contract II, the income attributable to the activities in India was not taxable.3. Income Attributable to Activities in India:The Tribunal addressed the computation of taxable income for the relevant assessment year. The Assessing Officer (AO) had attributed 40% of the Contract II receipts to Indian business activities and 35% of the expenses to Indian operations. The Tribunal disagreed with the AO's findings, noting that the entire activity of designing, manufacturing, and delivering the equipment, including payment, was conducted outside India. Consequently, the Tribunal held that the income from Contract II was not attributable to the PE in India and, therefore, not taxable in India.Conclusion:The Tribunal allowed the assessee's appeal, concluding that the three contracts were independent and not part of a single composite contract. It was determined that there was a PE for Contract I but not for Contract II, and the income from Contract II was not taxable in India. The Tribunal's decision was based on the analysis of the nature of the contracts, the intention of the parties, and the activities conducted in India.