TaxTMI 
TaxTMI 
2021 (7) TMI 324
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....39; in nature in terms of the Article 5(3)(e) of the Double Avoidance Agreement between India and the UAE.. 3. Whether on the facts and in the circumstances of the case, the CIT(A) erred in holding the assessee did not have a Installation Permanent Establishment under article 5(2)(h) of the Double Avoidance Agreement between India and the UAE.. 4. Whether on the facts and in the circumstances of the case, the CIT(A) erred in holding that M/s Arcadia Shipping Ltd was not a Dependent Agent Pernament Establishment of the assessee were 'preparatory and auxiliary' in nature in terms of the Article 5(4) of the Double Avoidance Agreement between India and the UAE. 5. Whether on the facts and in the circumstances of the case, the CIT(A) erred in holding taht no income of the assessee can be attributed to the assessee's Permanent Establishment in india. 6. Whether on the facts and in the circumstances of the case, the CIT(A) erred in holding that profit attributable to the assessee's PE at 2.81% of its offshore segment and 16.98% of its onshore service segment, were not tabable in India. 7. The appellant craves to add, amend, modi....
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....g substantial question of law were framed and answered by the Hon'ble High Court of Delhi :- 1) Whether the Income Tax Appellate Tribunal has not attributed and determined the taxable income under installation and commissioning; whether the said issue/ question has remained undecided and the effect thereof. 2) Whether the order of the I ncome Tax Appellate Tribunal violates and is contrary to Article 7 (6) of the Double Taxation Avoidance Agreement between India and UAE. 7. And the Hon'ble High Court adjudicated the quarrel as under :- Reasoning and Conclusion 13. The first three questions framed in the appeals preferred by the Assessee (ITA 143/2013 and 144/2013) relate to the existence of an Assessee's PE in India in terms of Article 5 of the DTAA. The other two questions relate to the attribution of income to the Assessee's PE. Thus, at the threshold, it would be necessary to refer to the text of Article 5 of the DTAA for ascertaining whether the Assessee had a PE in India during the relevant period. Article 5 of the DTAA is reproduced as under:- "1. For the purposes of this Agreement, the term "permanent establishment" means a fix....
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....ise, 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 Article 5 of the Model Conventions framed by OECD, United States and United Nations. Subparas (h) and (i) of paragraph 2 of Article 5 of the DTAA specifically includes a building site or an assembly project and furnishing of services within the definition of a 'Permanent Establishment'. The subject matter of clauses (h) and (i) are partly covered under paragraph 3 of Articl....
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.... 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 construed as a PE of an enterprise unless they exist for a period of atleast nine months. 17. Paragraph 3 of Article 5 is an exclusionary clause and is intended to exclude certain places of business from the scope of the expression 'Permanent Establishment'. Paragraph 3 begins with a non-obstante clause- "Notwithstanding the preceding provision....
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....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 enterprise for the purposes of the DTAA. First of all, the business of an enterprise must be carried on, wholly or partially, through the office in question; secondly, the business activity carried on must not be that of a preparatory or auxiliary character. The question, thus, arises is whether the activities carried out by th....
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....itted. 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 of Cl.7.3) and a copy of permission from Reserve Bank of India for opening Project office in India (in the case of foreign bidders)." A clause similar to the one above was also agreed to between ONGC and the Assessee under the C-Series Contract. 24. It is the A....
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....nnel, 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 allocate any profit to the fixed place of business in question. Examples are fixed places of business solely for the purpose of advertising or for the supply of information or for scientific research or for the servicing of a patent or a know-how ....
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....sent 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 expressed is only with regard to the AO. 31. Thus, the first question framed in the Assessee's appeals is answered in the negative, that is, in favour of the Assessee and against the Revenue. 32. It is als....
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....ed 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 installed at some other place. In such an event, preparatory and ancillary work is already connected with the building works proper, provided the former directly serve the oper....
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....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 excluded, the aggregate period would be less than nine months and this would exclude the applicability of Article 5(2)(h) of DTAA. It ....
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....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 Company in association with subsidiary Company M/s. Supreme Offshore Constru....
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....he 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 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 A....
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....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 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 Ass....
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....esumptive 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 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 charg....
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.... 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 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 establishm....