TaxTMI 
TaxTMI 
2018 (8) TMI 438
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....onfirming the action of the ADIT in holding that the activities of the Appellant constitutes a Permanent Establishment ('PE') under Article S(2)(g) of the Double Taxation Avoidance Agreement between India and Cyprus ('Tax Treaty') and thereby computing taxable income of Rs. 5,84,96,79S (being 10% of gross receipts of Rs. 58,49,67,946) by applying provisions of Section 44BB of the Income-tax Act, 1961 ('IT Act'). 2. On the facts and in the circumstances of the case and in law, the learned ADIT has erred in proposing and the DRP has further erred in upholding / confirming that the Appellant (who was a subcontractor) was responsible for multifarious functions under the contract and not mere rock placement functions by incorrectly referring to scope of work of the main Contractor (Allseas Marine Contractors SA). 3. 0n the facts and circumstances of the case and in law, the learned ADIT has erred in proposing and the DRP has further erred in upholding / confirming the date (i.e. September 2007) of visit of the employee for collection of data and information for tendering of the contract as the date of commencement for computing the threshold period ....
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....g the date of conversion and reversion of the vessels, i.e., arrival and departure of the vessels in India. The assessee's submission before the AO in this regard has been dealt at pages 2 and 3 of the impugned assessment order. Ld. AO after examining the scope of work, deduced that assessee was carrying various functions as per the contract which has been enumerated at page 4 of the assessment order which for the sake of ready reference is reproduced herein below:- "5.2 Upon examination of scope of work of the assessee the following functions to be performed by the assessee are noted- -Detailed engineering, design and analysis -Procurement of bulk items and material and equipment -Manufacture, fabrication and testing -QA/QC -Project planning -Interface management - Transportation -Pre-engineering and pre-construction surveys -Sea-bed preparation - Pre- Trenching - Post trenching -Installation of offshore and onshore facilities -Burial/Engineered Backfill - Post -installation and as built survey -Pigging and hydro-testing of all pipelines and subsea....
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....shold period of 12 months has not exceeded, then installation PE cannot be established. Clause (g) of Article 5(2) is basically an activity based and therefore, while examining the terms of contract the entire functions and activities carried out by the assessee has to be seen, as to what are the activities carried out by the assessee in India under the terms of the contract. Drawing our attention to various clauses of the contract, he first of all submitted that assessee has given its 'intent' to AMC to undertake all the works concerned with rock dumping and spreading and it has represented for construction, installation, rock dumping etc. The scope of function and work as incorporated by the AO in the impugned order was in fact outline and scope of work which AMC has to undertake for its contract with its principal. The assessee was given responsibility of only part of the work which has been given in section 3 of the "Scope of work" which is appearing at pages 335 to 337 of the contract. Under the said scope of work the assessee was required to carry out rock transport and delivery which included transportation and safety measures; scope of supply and construction, installation ....
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....n, he strongly relied upon the judgment of the Hon'ble Delhi High Court in the case of National Petroleum Construction vs. Director of Income Tax, reported in 386 ITR 648, wherein the Hon'ble Jurisdictional High Court has categorically held that assembly project or installation PE can only be construed as a fixed place of business only when an enterprise commences its activity at the project site. An activity which may be related or incidental to the project but which is not carried out at the site in the source company would not constitute as PE. Here in the present case, the ratio laid down by the Hon'ble High Court if applied, then under no circumstances it can be held that there is any kind of PE of assessee in India. 5. On the other hand Ld. CIT (DR), first of all emphatically relied upon the assessment order and directions of the DRP. He further submitted that the 'contract' itself indicates that the assessee's personnel were required to visit India and assessee's employee did visit India in the month of September, 2007 and the activity continued much beyond September 2008. That is, the assessee was involved in the installation project much before the effective date of con....
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....t following are to be provided on day "zero"(Emphasis provided) since the Effective Date: a. MDR and schedule b. Execution Plan c. Contract Schedule The highlighted/underlined portions indicate that the assessee was required to, and had made, extended study of, and consequently stay near, the site much before the effective date. This is what the AO has emphasized and for this the details of the visit and stay of the project manager Mr. H. Beljaars (PB page 279) was called for. Unfortunately, although Mr. Beljaars had been to India since as early as September 2007, (Refer DRP page- 4, para-3.2.2), the assessee has not provided the relevant details (stay, passport / visa stampings). 6. PB page 295 - 295: The Schedule 13 'Responsibility Matrix' of the assessee (contractor) as well as that of the 'company'. The Responsibility of the assessee includes: a) Transportation Engineering and Construction Engineering (points 1.5 and 1.7). This goes to show that the work is much more intricate than mere dumping / filling of rocks. The site is under water or at least offshore. These would have required the assessee to....
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....certificate as per Cl. 17.2 (B) of contract as referred to above) 13. PB page 222: "Clause 17.7 Final Completion - The contractor shall only be entitled to apply for the Final Completion Certificate once the following conditions have been satisfied: A. The Company has issued the Completion Certificate pursuant to Clause 17.3 and any punch list items listed......have been completed..... B. The contractor has provided the As-Built Drawings........ C. .......... D. The contractor is in compliance with all of its other obligations......(Emphasis provided) Seen against the above backdrop, the date of completion of activities is not the date of completion or the date of issuance of a certificate of completion as per Clause 17(2) or Clause 17(3) of the contract, but rather the Final Completion Certificate issued under Clause-17(8) (PB page-223) of the contract. The Completion Certificate produced by the assessee (page-49 of PB-1) is issued under Clauses 17.2 and 17.3 only and not under Clause 17.8 as provided in the Contract and hence cannot be taken as the date of the completion of the activities for the purpose of computation of the ....
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....Surveyor and Company during mobilization and demobilisation. 3.1.2 Safety Measures Provide unloading procedures and manuals for each operation covering vessel preparation, load out, and transportation. These procedures shall include but not be limited to: - Unloading procedures -Details of proposed equipment - Anchor handling and anchor pattern All procedures shall be subject to Company and CVA review and approval, Perform HAZOP /HAZID and QRA activities relevant to rock dumping work scope. Attend other HAZOP and QRA workshops as required by Company. 3.2 Scope of Supply Company will provide FIM via its other contractors, as detailed in Section 16. With the exception of FIM, Contractor shall procure all materials including temporary, permanent and consumable materials required for execution of the work. These shall include; Temporary installation aids Consumables and spares for installation All equipment and marine spread as required Contingency equipments All first aid and safety supplies Sea fastening materials Complete survey and position....
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....e a permanent establishment under this clause, it is sine qua non that the activities defined therein should be carried out/or is continued for a period of more than 12 months. In other words, if this threshold period is not crossed then such an activity cannot constitute a PE in India. The revenue's case is that; firstly, one of the employee of the assessee company had visited India in September, 2007 and thereafter activities of the assessee had started from September, 2007; secondly, prior to the effective date of 4th Jan 2008, a full review was undertaken before entering into contract and thus, the activities carried out prior to the contract date should be treated as extension/continuation of the installation activity; thirdly, there was pre-engineering survey and soil investigation studies under the scope of work for which assessee has made surveys much before the effective date which is 4th January,2008; fourthly, the assessee has not provided any relevant details of arrivals and stay etc., of the employees visiting India prior to the date of contract; fifthly, the responsibility matrix as appearing in Schedule 13 shows that assessee was required to carry out other various a....
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....fferent if after the contract/work has been awarded/assigned and then if any kind of active work of preparatory or auxiliary nature is carried out, it could be counted for determining the time period. 11. This principle has been well discussed by the Hon'ble Delhi High Court in the case of National Petroleum Construction Company (supra), wherein the Hon'ble High Court was analysing similar terminology appearing in Article 5(2) (h) of Indo-UAE Treaty wherein similar phrases have been used. The relevant observation and ratio laid down by the Hon'ble High Court reads as under:- "33. In terms of clause (h) of paragraph 2 of Article 5 of the DT AA, "a building site or construction or assembly project or supervisory activities in connection therewith" would also constitute a PE of an enterprise subject to that site, project or activity continuing for a period of at least nine months. Clearly, the purpose of the said clause is also to include a building site or a construction or an assembly project as a PE by itself. On a plain reading, a PE constituted by a building site or a construction or an assembly project, would commence on the commencement of activities relating to the....
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....vent, preparatory and ancillary work is already connected with the building works proper, proved the former directly serve the operation of the building site (likewise Ost BMF 3 SWI 19 (1993): DTC Austria; USSR). Providing for such an early beginning of the minimum period is the best way of taking the technical and economic nature of building works into account and it also avoids the practical difficulties of having to draw the line between ancillary activities and 'building works proper' ........." 35. The aforesaid passage also clearly indicates that the duration of a Permanent establishment would commence with the performance of business activities in connection with the building site or assembly project. 36. The activities at site carried on by any contractor through a sub-contractor would not count towards the duration of the contractor's PE, as in that case, the construction site or project cannot be construed as a fixed place of business of the contractor and would fail one of the essential tests of paragraph I of Article 5 of the DTAA. This, of course, would not hold good if the contractor's office or establishment- in the source country (i.e. ....
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....certificate may have exceeded one or two months but still it will not make the continuity of the activity where it has been brought on record that the last barge sailed out or was decommissioned from India on 25th September, 2008 and the entire payments were received on or before that date. The activity qua the project comes to an end when the work gets completed and the responsibility of the contractor with respect to that activity comes to end. Here activity of the assessee qua the project as per the terms of contract had come to an end on or before 30th September, 2008 for the reason that; firstly, last sail out of barge/vessel was 25th September 2008 and Customs authorities have also certified the demobilisation by this date; secondly, all the payments relating to contract work were received by the assessee much before the closing of September, 2008; thirdly, the completion certificate too mentions the date of completion as 30th September, 2008, though the formalities of final completion certificate may had exceed uptill November 2008, but the date mention for completion in the certificate is 30th September 2008 only; and lastly, there is nothing on record to suggest that any a....