Site commencement rule for treaty permanent establishment excludes preparatory tendering work and defeats Indian taxability

Preparatory activity undertaken for tendering or obtaining a contract does not count towards the twelve-month threshold for a building, construction, assembly or installation project permanent establishment under Article 5(2)(g) of the India-Cyprus Treaty. The relevant period begins only when business activities at the site actually commence, and travel or other auxiliary steps taken before execution of the contract are excluded. On the facts, site work was found to have started only on or after 4 January 2008, with no perversity in the Tribunal's findings on the project dates. No permanent establishment was established, and the contract receipts were not taxable in India under Article 7.

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Issues: Whether the assessee had a Permanent Establishment in India under Article 5(2)(g) of the India Cyprus Treaty by reason of the project continuing for more than twelve months, and whether the contract receipts were taxable in India under Article 7.

Analysis: The Tribunal's finding that preparatory activity undertaken before execution of the contract for tendering purposes could not be counted towards the twelve-month threshold was upheld. The Court held that the relevant period for an installation project starts when business activities at the site commence, and that travel or other auxiliary steps to obtain the contract do not amount to commencement of the project. On the material before it, work at site was found to have commenced only on or after 4 January 2008, and there was no perversity in the Tribunal's factual findings regarding the start and end dates of the project.

Conclusion: No Permanent Establishment was established under Article 5(2)(g), and the contract receipts were not taxable in India under Article 7. The appeals were dismissed.

Ratio Decidendi: For a building, construction, assembly or installation project PE, only activities actually commenced at the site count towards the treaty duration threshold, while preparatory work undertaken merely for tendering or obtaining the contract does not.

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