AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2009 (6) TMI 21
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.... off-shore portion of the Kaveri basin (in the State of Tamil Nadu). Accordingly, HOEC has given the contract to the applicant to carry out the work of laying pipelines under the sea. The work consists of transportation and installation engineering, transportation, pre-trenching, pipe laying, back filling, installation, pre-commissioning and surveys (pre-construction/pre-installation and post-installation), erection, construction, testing and handing over services. The contract for the aforesaid services/facilities will be executed both within and outside the Indian territorial waters. The contract document is at Annexure-A to the application. The applicant will hire barges and tugs for carrying out the proposed work. The applicant will enter into contracts with resident/non-resident contractors for supply of equipment, labour and services. Employees will be deputed to India either by the applicant or any other group entity in order to carry out the construction activity. The applicant will compensate the group entity for such supply of personnel. The lump sum contract price will be paid based on the progress of the work. Appendix A-1 to the contract gives the description of the mi....
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....from the completion of importation and arrival of the dredging spread at site (item 6) which took place on 24th November, 2008. The major part of the payment i.e, 29% and 10% will be received by the applicant on completion of installation of pipeline and Jacket & Deck (items 11 and 12). 1.5. The applicant states that during the period April to September, 2008, there have been intermittent visits of the project management team (PMT) to discuss the planning and contract issues with HOEC. The duration of each trip was 2 to 4 days. As regards the activity pertaining to item 6 above, it is stated that 6 to 8 members of PM Team arrived in India in January/February 2009 and coordinated with the Indian agent appointed by the applicant for the purpose of obtaining the permits, clearances and making other relevant applications to Indian authorities. The agent commenced its logistics services in Sept. 2008. It is further stated that in mid-November and December 2008, 6 to 8 members of PM team arrived in India to monitor the shore approach activities and to make preparation for pipe load out. Pre-construction survey was undertaken on 13th November 2008 which merely involved ascertaining whet....
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.... erect and pile drive the Jacket, Deck and accessories apart from assembly and laying of the pipelines into the sea bed. The clearance to the DLB to enter Indian waters was granted on 9 February 2009 and the DLB has moved to the site on 10 February 2009. The pipelines will be assembled and laid on the sea bed by 26th February 2009 while the Deck and Jacket will be assembled by the 17th March 2009. e. The project ends by the demobilization of the DLB from the site (expected date is 23rd/31 March 2009). f. In addition to the barges and tugs used for the transportation of pipelines, jacket and deck, there will be two barges and two tugs and one Supply cum crew boat used for the purposes of transportation of equipment, tools, crew, catering supplies etc. All vessels will be in India for short durations of time. g. Further, in order to obtain approvals from various Indian authorities such as Customs, Naval Authorities, etc. for using the aforesaid barges and tugs in the Indian waters, about 6 to 8 project management personnel visited Chennai and Vizag in India in January and February 2009 to oversee the process for the aforesaid approvals. They were overseeing the preparatory activi....
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.... 1 of Art.5 without reference to and without being trammelled by the test of duration laid down by clause I of Art.5.2. 5. For the purpose of deciding the contentious issue, let us analyze Artcile 5. The general concept of permanent establishment is articulated in the first and opening para of Article 5. It means a fixed place of business and a place from which the business of the enterprise is wholly or partly carried on. The requirement of a fixed place and carrying on business through that fixed place connote the idea of certain degree of permanence attached to it and this very idea is inbuilt into the nomenclature - 'permanent establishment'. Moreover, the activities must be considerable and regular. A passing, transient or casual activity, though carried out from a particular place does not fall within the scope of para 1. In some of the decisions, the criterion of 'enduring nature' was applied to pass the test of permanent establishment (vide CIT vs. Visakhapatnam Port Trust). The expression 'permanent establishment' shall not however be interpreted in a literal sense. As observed in Henriksen vs. Grafton Hotel Ltd. , the word 'permanent' is a relative term which is not syno....
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....f it lasts more than twelve months." 5.3. Para 3 of Article 5 of the India-Netherlands Treaty referred to in that case corresponds to clause (i) of Article 5(2) of the Treaty with which we are concerned. The learned Judge then highlighted the different language employed in the India-US and the U.N. Model. At page 803, the learned Judge observed that "the words 'permanent' and 'establishment', when read with the language of paragraph 1 of article 5, connote the existence of a substantial element of an enduring or permanent nature which can be attributed to a fixed place of business in that country but the issue whether the nexus can be said to be "substantial" or "enduring" would depend entirely on the facts and circumstances of each case." 6. It admits of no doubt that the activities of welding the pipes brought to site and laying them into the sea so as to establish connectivity from the well-head to the shore (where the gas processing facility is to be set up by HOEC) will fall within the description of both construction and assembly project. The work undertaken by the applicant which involves laying the pipelines under the sea using the barge as a construction platform is noth....
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.... cannot be cut-down by referring to the terminology of para 2. But, in our view, having regard to the contextual setting of the two paragraphs of Article 5, too much of emphasis cannot be placed on the fact that the definition in para 2 is apparently inclusive in nature. As observed by Lord Keith in Hemens vs. Whitsburry Farm Ltd…….. "there can be no doubt that in some cases, the language of an 'inclusive' definition considered with the general context can have the effect that the ordinary natural meaning of a word or expression is to some extent cut down." In that case, the argument on behalf of the rate-payer that the ordinary meaning of the 'livestock' is not cut down by the word 'includes' and therefore the thorough-bred horses were also embraced within the wide meaning of livestock was rejected. The definition clause in the relevant Act defined 'livestock' as including any mammal or bird kept for the production of food or wool or for the purpose of its use in the farming of lands. Keeping the context in view, it was held that the rate-payer's buildings could not be considered as buildings used for keeping or breeding of livestock. 6.3. In our view, the inclusive definitio....
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....ough which the business of the enterprise is carried on. That being so, when clause (i) of para 2 sets out a minimum period for the continuance of the construction or installation project, it stands to reason that the said period has to be projected into paragraph 1 for the purpose of judging whether there is fixed place of business within the meaning of para 1. Thus clause (i) of Art.5(2) ought to be treated as a provision complementary to para 1 of Art.5. 7. The view we have expressed above is fully supported by the earlier rulings of this Authority. The ruling in P. No. 24 of 1996 [237 ITR 798, referred to earlier] is a clear authority for the proposition that a "construction, installation or assembly project cannot be treated as a permanent establishment, unless it continues for a period of more than six months2 even though it might otherwise fulfill the definition contained in paragraph 1 or 2." In that ruling, the diving offshore vessel located and functioning within a definite area was treated as a fixed place of business from which the business activities were carried out; yet the existence of PE was ruled out for the reason that the time factor requirement was not satisfi....
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....ishment, if any, would be attracted under Article 5(2)(k) only if the installation project continues for a period of more than 120 days and that condition is not satisfied here." 8. The next question is whether the construction/installation project continues for a period beyond 9 months. It raises the issue as to how to calculate the duration of the project. What is the starting point of the 9 month period envisaged by clause (i) of Art.5.2? According to the applicant, the time commences from the date the installation/construction activity physically begins in India and not from the date of arrival of the dredger/equipment in India. The activity of laying pipelines begins in mid-January 2009 and will go on upto April 2009. The duration of the activity will therefore be 4 months approximately, according to the applicant. Alternatively, it is contended that the 'minimum threshold period' will commence from the date the preparatory activity in relation to installation/construction begins in India. If so, the starting point of time would be from early mid-November, 2008 i.e. when the project management team members arrived in India and started the preliminary activities of clearance a....
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....tarts. Some older tax-treaty commentators have held that the "12-month test" starts to run when the actual construction begins. In pre-1977 regulations, US tax authorities have assumed that the time limit starts when the work has commenced "physically." This seems to be too narrow, if interpreted to mean the beginning of the construction work itself. Such a narrow interpretation was criticized even before the revision of the OECD model treaty. Today, it is clear that preparatory activities, for example organizing the building site itself, will trigger the time limit. Thus, it is clear that the physical start of the actual construction task is not required. This conforms best with the way the basic rule is interpreted, where a PE is established as soon as preparatory business activities are commenced in the country, provided that the activity later leads to the performance of a core business activity. A practical starting point for the time limit is the day when the first employee of the contractor arrives at the building site. If earlier, the day for the first delivery of equipment or building materials will trigger the start of the time limit. Of course, the construction work must....
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....stallation of Jacket and Deck. 9.1. The pre-construction survey in November, 2008 and the arrival of members of PMT in mid-November 2008 to monitor the shore approach activities are the earliest events that would come within the fold of project work. Assuming that the project has been completed in all respects by the end of March or April 2009, the period will fall short of nine months. The duration will be even less, if the date of arrival of requisite equipment and mobilization of barges and tugs and pipes is to be taken into account. 9.2. The Commissioner in his comments has contended that the 'effective date' as per the Agreement should be taken as the starting point of 9 month period. The 'effective date' has been defined in the Contract document as follows : "11.1.1 The Parties agree that this Contract shall be deemed to have become effective, be of full force and effect and the Parties shall become bound by all terms and conditions of this Contract from the Date of Signing of this Contract (the "Effective Date"). 11.1.2 The Contractor agrees, represents and warrants that from Effective Date it will commence the Work in accordance with the commencement window agreed betw....