TaxTMI 
TaxTMI 
2016 (2) TMI 47
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..../2014 and 533/2013 have been preferred by the Revenue. 2. The controversy involved in the present appeals principally relates to the taxability of income earned by the Assessee in respect of a contract entered into by it with ONGC Limited, a public sector enterprise (hereafter 'ONGC').The aforesaid contract entailed designing, engineering, procurement, fabrication of fully loaded offshore platform and its installation, testing and commissioning at an offshore facility of ONGC. According to the Revenue, the income from the said contract is liable to be taxed in India as the Assessee is stated to have a Permanent Establishment (PE) in India. According to the Assessee, its income from the contract in question is not taxable under the Act by virtue of the Double Taxation Avoidance Agreement between India and United Arab Emirates (UAE) (hereafter referred to as the 'DTAA'). The Assessee claims that it does not have a PE in India and further, in any event, the income from fabrication and supply of platform is not taxable as the same pertains to the Assessee's activities outside India. 3. Whilst the ITAT had rejected the Assessee's contention that it does not have a PE in India, it ....
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....of UAE and is a tax resident of that country. The Assessee is, inter alia, engaged in fabrication of petroleum platforms, pipelines and other equipment and in addition, the Assessee also undertakes contracts for installation of petroleum platforms, submarine pipelines and pipeline coating at various sites. In the course of its business, the appellant tendered for and entered into contracts with ONGC for the installation of petroleum platforms and submarine pipelines. The first such contract was entered into by the Assessee during the previous year 1996-97 relevant to the AY 1997-98. On 28th August, 2005, the Assessee was awarded a contract for 4 Well Platform Project-II (termed as Contract No. MR/OW/MM/NHBS4WPP and hereafter referred to as '4WPP Contract'). The Assessee had tendered for the aforesaid contract pursuant to a global tender floated by ONGC in July, 2005. This was the third contract between the Assessee and ONGC. Subsequently, the Assessee entered into another contract for C-Series Project (termed as Contract No. MR/OW/MM/C-Series/03/2006, hereafter referred to as 'C-Series Contract') on 23rd November, 2006. 6.2 The scope of work as described in the "General Conditio....
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....a draft assessment order dated 31st December, 2009 under Section 144(5) of the Act for the AY 2007-08. The AO held that the Assessee had a Fixed Place PE in India in the form of a Project Office at Mumbai. The AO further held that Arcadia Shipping Ltd. (ASL) constituted a Dependent Agent PE (hereafter also referred to as 'DAPE') of the Assessee in India. In addition, the AO held that the Assessee also had a Installation/Construction PE in India. 7.1 Insofar as the Assessee's contention that the fabricated material was sold to ONGC outside India is concerned, the AO held that the contract was a turnkey and a composite contract and was not divisible as claimed by the Assessee. Accordingly, he held that the entire contractual receipts including the activities performed outside India were taxable in India. The consideration received by the Assessee for design and engineering was held to be Fees for Technical Services (hereafter 'FTS'). Since, the Assessee had not maintained separate books pertaining to the contract, the AO estimated the Assessee's profit to be 25% of the consideration received from ONGC. The Assessee's contention that it should be taxed by applying provision....
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....e for the employees of the Assessee visiting India for execution of the project from time to time and it was not necessary that the permanent employees at the Project Office be directly involved in the execution of the project; 8.1 Insofar as ASL is concerned, the DRP concurred with the AO that ASL was a DAPE of the Assessee for the reasons stated below: (i) that ASL was actively involved in the project since pre-bid meetings, hard core marketing and business development till finalization of the contract; (ii) that the communications issued by the Assessee as well as ASL to ONGC expressly stated that ASL represented the Assessee as its Agent; (iii) that the address of the employees of the Assessee was mentioned as ASL's address in the application to the Ministry of Home Affairs. 8.2 The DRP rejected the Assessee's contention that it had an Installation PE as described under Article 5(2)(h) of the DTAA for a duration of less than nine months and, therefore, the same could not be considered as a PE of the Assessee in terms of the DTAA. The DRP held that since the Assessee had contended that payments for engineering, procurement of material and fabrication could not be ....
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....%. On that basis, the DRP held that the profit margin of 25% of gross receipts estimated by the AO was justified. 9. Thereafter, the AO passed an assessment order dated 26th October, 2010 under Section 143(3) read with Section 144C of the Act. Proceedings before the ITAT 10. Aggrieved by the assessment order, the Assessee preferred an appeal before the ITAT. The ITAT concurred with the AO and rejected the Assessee's contention that it did not have a PE in India. The ITAT observed that the Assessee had itself shown the Project Office in Mumbai as its PE in India and the Assessee's employees were present during the negotiation of the contracts in question. The ITAT further reiterated the DRP's observation that the Assessee had not disputed that the employees of the Project Office also attended the kickoff meeting with ONGC. The ITAT also concurred with the DRP's conclusion that it was not possible for the Assessee, a non-resident company, to execute a contract which lasted for approximately two years without having any place of business in India from where the project could be managed. Accordingly, the ITAT concluded that the Assessee's Project Office in India was its PE. ....
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....India through a PE by alluding to the project offices established by the Assessee in respect of prior contracts. 11.1 Mr Aggarwal submitted that the only activity carried out by the Assessee in India was the installation and commissioning of the platforms which was carried out by the Assessee's employees at the offshore site with the help of barges. He submitted that the pre-engineering and pre-construction surveys were done by an independent third party, M/s Fugro-Geonics Pvt. Ltd., an Indian company which was engaged on a principal-to-principal basis. He contended that the finding that the Project Office was involved in pre-bid meetings and/or survey and/or kick-off and/or review meetings was erroneous as these meetings were attended by the Assessee's employees from Abu Dhabi and the Project Office was not involved. 11.2 Mr Aggarwal contended that the Project Office acted as Assessee's backoffice for liaison, coordination and collection of information from ONGC. Mr Aggarwal relied upon the decisions in CIT v. BKI/HAM: (2012) 347 ITR 570 (Uttarakhand); Cal Dive Marine Construction (Mauritius)Ltd., In Re: (2009) 315 ITR 334 (AAR); and DIT v. Hyundai Heavy Industries Co. Ltd.:....
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....al further submitted that the comparable companies selected by the DRP for justifying a profit margin of 25% / 28.58% was erroneous as the said alleged comparable companies were engaged in providing engineering services while the Assessee was engaged in construction and installation of pipelines and platforms. He submitted that the alleged comparable companies were functionally different and the ITAT had failed to consider the Assessee's submission in this regard. 11.5 Mr Aggarwal argued that the Assessee had estimated its taxable income on a consistent basis which had been adopted by the Assessee, which was accepted by the AO and there was no material on record which would justify a departure from the consistent methodology accepted earlier. He argued that the computation of presumptive profit was based on CBDT Instruction No.1767 and principles which were approved by the Supreme Court in Hyundai Heavy Industries (supra) and, thus, had a sound legal basis. Submissions on behalf of the Revenue 12. Mr Sahni, Senior Standing Counsel appearing for the Revenue controverted the contentions advanced by Mr Aggarwal. He submitted that the Assessee had filed a return admitting that....
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....tor (the Assessee) was also responsible for all statutory compliances under the Income Tax Act, Customs Act, FEMA etc. and this also indicated that the role of the Assessee's PO in India was not limited only to auxiliary or preparatory activities. 12.4 Insofar as the issue relating to the duration of the Installation PE is concerned, Mr Sahni referred to the terms of the 4WPP Contract which specifically recorded that the notice of award dated 29th November, 2005 would be the effective commencement of this contract. He pointed out that the scope of the work included surveys (pre-engineering, pre-construction/pre-installation and post-installation) and annexure D and E to the 4WPP Contract mentioned the dates and the milestone payments, the same also clearly indicated that activities/works relating to pre-engineering survey/inspection of existing facilities was to commence as earlier as 3rd December, 2005. The milestone payment formula also included payments for such activities. He, thus, submitted that the duration of the Assessee's Installation PE would also commence with the commencement of the contract. In support of the said contention, Mr Sahni also referred to the text of "....
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....nd (c) that the said instruction envisaged calculating profit margin at 10% of the gross revenues from operations in India without any deduction. In the circumstances, the DRP had rightly applied Rule 10 of the Income Tax Rules, 1962 to calculate the profits of the Assessee. 12.7 In respect of the Revenue's appeals, Mr Sahni contended that the contracts in question were composite contracts and all activities were closely linked. Thus, the contract could not be split between the activities carried out overseas and activities carried out in India. He further contended that the ownership of the platforms and other material was transferred to ONGC only on ONGC issuing a certificate of completion and acceptance of work. Thus, the Assessee's contention that the income from activities conducted in relation to design, procurement of material and fabrication of the platforms, was not attributable to the PE in India was erroneous. 12.8 Mr Sahni sought to distinguish the decisions of the Supreme Court in the cases of Ishikawajima-Harima Heavy Industries Ltd. v. DIT: (2007) 288 ITR 408 (SC) and Hyundai Heavy Industries (supra) by contending that whilst the situs of transfer of properties....
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....urpose of purchasing goods or merchandise, or of collecting information, for the enterprise ; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. 4. Notwithstanding the provisions of paragraphs (1) and (3), where a person - other than an agent of independent status to whom paragraph (5) applies - is acting on behalf of an enterprise and has, and habitually exercises in a Contracting State an authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to the purchase of goods or merchandise for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of....
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....d that it was used only in "contradistinction to something fleeting, transitory, temporary or casual". 16. Paragraph 2 of Article 5 of the DTAA provides for an inclusive definition of the term "Permanent Establishment" and specifically lists out places of business that fall within the meaning of that expression. The use of the word 'especially' underscores the intention of the authors of the treaty to remove any doubts that the places listed in sub-paras (a) to (i) fall within the definition of the term 'Permanent Establishment'. Normally an inclusive definition is used to expand the width of the term sought to be defined, however, that does not appear to be the principal intent in drafting paragraph 2 of Article 5 of the DTAA. Read in the context of the other provisions of Article 5, paragraph 2 clearly indicates that it has been used as an explanatory provision to specifically include the species of places of business that would constitute a PE of an enterprise. In this view, paragraph 1 and 2 of Article 5 of the DTAA complement each other. Thus, all classes of PEs as specified in various subparas of paragraph 2 of Article 5 of the DTAA would be construed as a PE subject to th....
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....6. It is also not disputed that the Assessee did carry on part of its business through its Project Office. In the circumstances, the conditions as spelt out in para 1 and paragraph 2(c) of Article 5 of the DTAA are satisfied. However, the matter does not rest here; it is next to be seen whether any of the exclusionary clauses of paragraph 3 of Article 5 of the DTAA are applicable. As stated before, Paragraph 3 of Article 5 of the DTAA begins with a non-obstante clause and, thus, the exclusion provided under paragraph 3 of Article 5 of the DTAA would override paragraph 1 and 2 of Article 5 of the DTAA. Thus, even though the Assessee's Project Office established in Mumbai falls within the definition of PE in terms of paragraph 1 and 2 of Article of DTAA, it would still have to be seen whether it stands excluded under paragraph 3 of Article 5 of the DTAA. Clause (e) of paragraph 3 of Article 5 of the DTAA is relevant and it expressly provides that notwithstanding the provisions of paragraph 1 and paragraph 2 of Article 5, a PE would not include "maintenance of a fixed place of business solely for the purposes of carrying on, for the enterprise any other activity of a preparatory or au....
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....egulations mandates that a 'project office' shall not undertake or carry on any other activity other than the "activity relating and incidental to execution of the project". Thus, a project office can undertake all activities that relate to the execution of the project and its function is not limited only to act as a channel of communication. 23. The Assessee was required to open a project office in India for the purposes of executing the contract in question. Clause 3.2.1 of the 4WPP Contract, inter alia, provides that no payments would become due and payable to the Assessee until a copy of permission from the Reserve Bank of India for opening a project in India was submitted. Clause 3.2.1 of the 4WPP Contract is reproduced below for ready reference:- "Pending completion of the whole Works, provisional progressive payments for the part of the Works executed by the Contractor shall be made by Company on the basis of said work completed and certified by the Company's Representative as per the mile stone payment formula provided in the bidding document at Annexure-E of Agreement. Such certification of the Work completed shall be made by the Company's Representative within....
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....ngs that Sh. M.N. Shah, Sh. M. Karkera, Sh. C.G. Pillai, Sh. P.K.G. Nair and Sh. R.L. Kulkarni were employees at the Project Office. 25. In our view, in absence of any material, observations made with regard to the employees of the Project Office being present at the meeting cannot be sustained. Similarly, there is also no material that the employees of the Project Office had participated in review of the engineering documents done in Mumbai or had participated in the discussions or approval of the designs submitted to ONGC. In absence of any material evidence to controvert the Assessee's claim that its Project Office was only used as a communication channel, the same has to be accepted. Thus, the next aspect to be considered is whether acting as a communication channel would fall within the exception of clause (e) of paragraph 3 of Article 5 of the DTAA. 26. The language of sub-para (e) of paragraph 3 of Article 5 of the DTAA is similar to the language of sub-para (e) of paragraph 4 of Article 5 of the Model Conventions framed by OECD, United Nations as well as the United States of America. The rationale for excluding a fixed place of business maintained solely for the purpo....
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....hannel would clearly qualify as an activity of auxiliary character - an activity which aids and supports the Assessee in carrying on its main business. 29. In view of the above, the activity of the Assessee's Project Office in Mumbai would clearly fall within the exclusionary clause of Article 5(3)(e) of the DTAA and, therefore, cannot be construed as the Assessee's PE in India. 30. We are also unable to accept Mr Sahni's contention that in view of the decision in the case of Goetze (India) Ltd. (supra), the Assessee was not entitled to contend that it had no PE in India for several reasons. First and foremost, in the present case, the Assessee's return was not accepted and the AO questioned the attribution of income to the Assessee's PE. In such circumstances, it would be open for the Assessee to point out that its office in India did not carry out any activities to which any income from the project could be attributed. In order to determine the Assessee's income attributable to its Project Office at Mumbai, it was necessary to examine the role played by the Assessee's Project Office and its involvement with the activities to be conducted under the contracts. In view of ....
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....uction assembly project does not necessarily require an attendant office; the site or the attendant office in respect of the site/project itself would constitute a fixed place of business once an Assessee commences its work at site. Thus, for clause (h) of paragraph 2 of Article 5 to be applicable, it is essential that the work at site or the project commences - it is not relevant whether the work relates to planning or actual execution of construction works or assembly activities. Preparatory work at site such as construction of a site office, a planning office or preparing the site itself would also be counted towards the minimum duration of a PE under Article 5(2)(h) of DTAA. In a given case, establishment of an office or any work which directly serves the operations at site may also be construed as a part of the building site, or construction or assembly project. The essence of a PE under Article 5(2)(h) is a building site or a construction or assembly project and the activities of an enterprise relating thereto in the source country. 34. At this stage, it would also be relevant to refer to the following extract from the commentary by Klaus Vogel on "Double Taxation Conventi....
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..... The initial activities at site were carried on by an independent subcontractor appointed by the Assessee. If the commencement of the activities of the sub-contractor is considered, the same commenced on 27.02.2006 and were concluded by 21.05.2006. It is seen that there is a large gap between the commencement of initial activities of pre-engineering survey and the commencement of installation works. The issue to be addressed is whether such interruptions should be excluded from the minimum duration period. An interruption in the normal course of activities such as weekly day off would undoubtedly be included in the duration of the PE but in cases where interruption exceeds substantial periods which represent cessation of the activities at site, it would be difficult to accept that the building/project site continues to represent a fixed place of business of an enterprise. Reference to the commentary by Klaus Vogel on Double Taxation Conventions on this aspect is also instructive. The relevant passage from the said text is quoted below:- "Long interruptions lead to a suspension of the minimum time period if the continuation of the work is functionally related with the work....
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....answer to the second question is in the negative, that is, in favour of the Assessee and against the Revenue. 43. The next issue to be addressed is whether ASL could be construed as a DAPE of the Assessee within the meaning of Article 5(4) of the DTAA. The Assessee has placed on record the Director's Report and the final accounts of ASL for the financial year ended 31st March, 2007. The same indicates that during the year 2006-07, ASL earned a gross income of Rs. 54.42 crores. The Director's of ASL in their report for the year 2006-07, inter alia, reported as under:- "....Your Directors are pleased to inform that during the year under review the company continued its regular activities i.e. Shipping, Ship Owning/Chartering, Barge Owning, Lighterage, Transportation, Offshore Marketing/Technical Consultancy and Offshore Fabrication and Installation work. The Company provides all logistic and consultancy support to NPCC, Abu Dhabi, Valentine Maritime (Gulf) LLC, Abu Dhabi and Valentine Maritime (Mauritius) Ltd., Mauritius and other Indian Companies for their various Offshore Contracts towards Construction of Oil & Gas production/process Platforms and Pipelines at Mumbai Hi....
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....ith the following services: (a) Assistance in the gathering of relevant market information. (b) Assistance in obtaining works and active representation, promotion and support of the Principal's activities in India. (c) Assistance in obtaining services and facilities in India." 46. It is clear from the above that ASL had agreed to act as a 'sole and exclusive' consultant for the Assessee in India and had further agreed not to represent any competitor of the Assessee or act in a manner detrimental to the Assessee's interest. The recital to the agreement also indicates that the Assessee was desirous to undertake offshore contract work in India and had, therefore, appointed ASL as its sole and exclusive consultant in India. The consultancy agreement did not fetter ASL to carry on its regular activities including providing consultancy services to persons other than the Assessee's competitors. The financial accounts of ASL also clearly indicate that it had earned substantial income other than the remuneration received/receivable from the Assessee. 47. In view of the above, the ITAT's conclusion that ASL was working 'wholly and exclusively' for the Ass....
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....tes that for a person to constitute a DAPE, the agent must (a) not be an agent of independent status to whom paragraph 5 applies; (b) the agent acts on behalf of the enterprise; and (c) the agent habitually exercised authority to conclude contracts on behalf of the enterprise. 50. By virtue of paragraph 5 of Article 5 of the DTAA, an enterprise shall not be deemed to have a permanent establishment merely because it carries on business in a contracting state through a broker, general commission agent or any other agent of an independent status provided that such persons act in their ordinary course of business. Thus, even an independent agent who acts outside its ordinary course of business would fall outside the scope of paragraph 5 of Article 5 of the DTAA. Therefore, in order to consider whether an agent of an enterprise falls within the ambit of paragraph 5 of Article 5 of the DTAA, it is necessary to consider whether (a) the agent is one of an independent status and (b) whether he is acting on behalf of the enterprise in the ordinary course of its business. Applying the aforesaid tests in the facts of the present case, it is at once clear that ASL has acted on behalf of the ....
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....ceding years. Although, the Assessee had claimed that Section 44BB and the CBDT Instruction No.1767 provided the legal basis for the method of computation of taxable income adopted by the Assessee, the same is clearly erroneous. Section 44BB of the Act provides for levying tax on a presumptive basis and 10% of the receipts are presumed to be the profits of a foreign company rendering the services specified therein. There is no scope for allowing any deduction while computing tax on a presumptive basis. The method of computation as adopted by the Assessee is also not supported by the CBDT Instruction No. 1767 referred to by the Assessee. 55. In view of the above, question no.5 framed in the Assessee's appeals is answered in the affirmative, that is, in favour of the Revenue and against the Assessee. 56. The question framed in the appeals preferred by the Revenue essentially pertains to the attribution of income arising from the contracts in question for the purpose of taxing the same under the Act. In the present case, we have concluded that the Assessee does not have a PE in India in terms of the DTAA, thus, the question of splitting the business profits of the Assessee arisi....
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....ere an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the tax laws of that State." 59. It is apparent from the plain reading of the above quoted paragraphs that only such income as is attributable to a UAE based Assessee's PE in India can be taxed. In Hyundai Heavy Industries (supra), the Supreme Court had explained that the on....