TaxTMI 
TaxTMI 
2016 (2) TMI 47
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....he 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 accepted the Assessee's contention that the con....
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....troleum 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 Conditions of Contract" of both the 4WPP Contract and C-Series Contract included "Surveys (preengineering, pre-co....
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....he 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 provisions of Section 44BB of the Act was rejected as the AO held that the activities carried out by the Assessee were not covered under that Section. 8. The Assessee did not ac....
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.... 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 treated as FTS as being a part of the consideration for installing the platform, the Assessee could not treat those activities as separable for the purposes of limiting the duration of its PE in ....
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....n 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. 10.1 The ITAT concurred with the AO that ASL was a DAPE of the Assessee. The ITAT concurred with the finding of the AO/DRP that ASL was working wholly and exclusively for the Assessee. The ITAT held that ASL'....
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....tion 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.: (2009) 31 SOT 482 (ITAT[Del]) in support of his contention that the Assessee's activity of installation and commissioning of platforms could be examined only in the light of the provisions of Article 5(2)(h) of the DTAA.....
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.... 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 it had a PE in India and in the circumstances, a contrary claim could not be made by the Assessee at the time of the Assessment. He relied upon the decision of the Supreme Court in the case of Goetze (India) Ltd. v. CIT: (2006) 28....
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....ctivities. 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 "Klaus Vogel on Double Taxation Conventions, Third Edition", which provided that the minimum period for considering a construction site/project as a PE of an enterprise would begin when the enterprise starts to perform business activities o....
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....ate 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 in those cases was outside India; in the present case, possession of the platforms was handed over to ONGC in India. Reasoning and Conclusion 13. The first three questions framed in the appeals preferred by the Assessee (ITA 143/2013 and 144/20....
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....her 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 their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of independent status within the meaning of this paragraph." 14. Paragraph 1 and paragraph 2 to the extent of sub-paras (a) to (e) of Article 5 of the DTAA are identical to paragraph 1 and 2 of Articl....
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....tion 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 the essential conditions of paragraph 1 of Article 5 being met. Insofar as sub-paras (h) and (i) of paragraph 2 of Article 5 are concerned, the test of permanence as required under paragraph 1 of Article 5 is substituted by a specified minimum period of nine months. Thus, places of business as specified under sub-paras (h) and (i) of paragraph 2 of Article 5, cannot be c....
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....cable. 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 auxiliary character". The Assessee contends that its Project Office falls within this exclusionary clause. 20. It is clear from the plain language of paragraph 1 of Article 5 as well as Article 5(3)(e) of the DTAA that the functions performed at an office maintained by an enterprise would be vital to determine whether the office could be construed to be the PE of that enterpr....
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....ffice 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 15 days of receipt of Contractor's Application for Certification with all required supporting documents. No payments shall become due and payable to the Contractor until Contract is signed by the two parties and Contractor furnishes to the Company Performance Guarantee (as per Clause 3.3) and Certificate of insurance for Policy/Policies specific for the project and other policies (as per requirement ....
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....he 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 purposes of carrying on activity of a preparatory or auxiliary character has been explained by Professor Dr. Klaus Vogel. In his commentary on "Double Taxation Conventions, Third Edition", he states that "It is recognised that such a place of business may well contribute to the productivity of the enterprise, but the services it performs are so remote from the actual realisation of profits that it is difficult to....
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....t 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 the nature of the enquiry, it would always be open for the Assessee to explain that the Project Office was only involved as a communication channel and was not involved in any of the main activities required for execution of the contracts. Secondly, the decision in the case of Goetze (India) Ltd. (supra) does not fetter the Appellate Authority from considering the claim made by an Assessee. The limitation as express....
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....ctual 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 Conventions, Third Edition":- "the minimum period begins when the enterprise starts to perform business activities on the spot in connection with a building site or construction or assembly project. The term 'on the spot' should, in these instances, not necessarily be taken to denote the actual place where the building works, etc., are to be accomplished, for instance, in cases where a planning office for the construction work is....
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....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 performed prior to the interruption (see Schieber, P.-H., supra m.no.1, at 268; in contrast Skaar, A., supra m.no.1, at 390)." 39. In the facts of the present case, where admittedly the Assessee did not have access to the site during the period from 21.05.2006 till 19.11.2006, the same clearly cannot be construed as its PE under Article 5(2)(h) of DTAA. If the period during which the Assessee did not have access to the site in question is ex....
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....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 High for ONGC & other Indian/Foreign Companies. The company is qualified to bid as approved Offshore Project Contractor for ONGC, MDL, L&T, EIL, HHI, etc. The Company also continued to provide logistic, technical and marketing support to M/s. Winco Maritime Ltd., London in Technical & Commercial Management of their cargo vessels in worldwide trading and also in Indian Coastal Traffic. 3) OFFSHORE ACTIVITIES: Your Directors are pleased inform that your C....
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....see'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 Assessee, is clearly not sustainable. There was no material which would justify this conclusion. The consultancy agreement clearly indicates that ASL was engaged to (a) provide assistance in gathering relevant market information; (b) assistance in obtaining works; (c) active representation and promotion of the Assessee's activities in India; and (d) provide assistance in obtaining services and facilities in India. Clause 2 of the consultancy agreement clearly indicates that the contracts would be tendered for and executed by the Assessee. The Ass....
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....uch 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 Assessee in its normal course of business. This is evident from the Director's Report which indicates that regular activities of ASL include offshore marketing/technical consultancy and ASL in its regular course of business provides logistics and consultancy support to various entities including the Assessee. It is also apparent from the final accounts of ASL for the year 2006-07 that it carries on substantial business other than the services provided to the Assessee. The agreement entered into between the Assessee and ASL is also on principal-to-principal basi....
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....pported 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 arising from the contract into profits attributable to India and profits attributable to the Assessee overseas does not arise. In this view, it is not necessary to address the questions raised by the Revenue. However, for the sake of completeness, we consider it appropriate to address the said question on an assumption that the Assessee did have a PE in India during the relevant period. 57. Section 4 of the Act is a charging section by virtue of which income tax is charged in respect of the total income of every person. The scope of total income is described under Section 5 an....
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....h 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 only way to ascertain the profits arising in India would be by treating the Assessee's permanent establishment in India as a separate profit centre viz-a-viz the foreign enterprise. The Court held as under:- "The Indian Income-tax Act, 1961 is concerned only with the profits earned in India and, therefore, a method is to be found out to ascertain the profits arising in India and the only way to do so is by treating the Indian permanent establishment as a separate profit centre vis-a-vis. the foreign enterprise (the Korean GE, in the present case). This demarcation is necessary in order to earmark the tax....