TaxTMI 
TaxTMI 
2009 (9) TMI 26
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.... a company incorporated in Germany having its registered office in Dinslaken, Germany. Through the process of international bidding, the applicant was awarded a contract by M/s. Tuticorin Port Trust (hereinafter referred to as "TPT") on 28th November, 2006. The scope of work is "work design, fabrication supply, transportation, delivery, installation and maintenance of mild steel, navigational channel and fairway buoys, mooring gear and solar operated navigational lighting equipments in relation to Sethu Samudram Ship Channel Project being executed in Tamil Nadu. The applicant has sub-contracted most of the work to a third party, namely, Asia Navigation Aids, Delhi. Though the agreement with the sub-contractor was entered into in 2006, the formal permission for sub-contracting was obtained from the TPT in June, 2009. Leaving out the sub-contracted work, the following work will be undertaken by the applicant: i. Study of the technical requirements in relation to the execution of the Contract. ii. Designing of Fairway Buoys, Mooring Gears and Solar Operated Navigational Equipments. iii. Supply of critical components to sub-contractors, if required. iv. Supervision of insta....
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....t items 4 to 9 (a) of the purchase order were deleted and the applicant appointed M/s. Chain (P) Limited, Kolkata, for the mooring chain and accessories and another concern by name Technocrafts, Faridabad, for supply of sinkers as sub-contractors in place of ANA. A copy of the Purchase Order supplement dated 20.12.2006 issued to ANA has been filed. 2.2. The payment schedule is set out in detail in the purchase order. It is seen from the schedule that the items involved are designing fabrication of Navigational Channel Buoys (altogether 65 in number), mooring gear, buoys light, delivery at site, installation and successful commissioning after completion. Payments are made in specified percentages at various stages. The sub-contractor (ANA) has to to provide "guarantee period of 12 months from the date of taking over and provide maintenance for a period of 5 years after completion of the guarantee period. Separate consideration is stipulated for maintenance. All costs which occur in India due to transportation, storage, etc. are on account of the sub-contractor. 3. It is brought to my notice by the learned counsel for the applicant that the material and equipment for the manufa....
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....e to such an extent that it comes within the jurisdiction of that other States taxing rights." 6. As already noted, it is the contention of the applicant that there is no PE in India and no PE can be deemed to exist under Article 5. Article 5 defines the PE. The relevant part thereof is extracted below: Article 5: Permanent Establishment: 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially, - (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, quarry or any other place of extraction of natural resources, including an installation or structure used for the exploration or exploitation; (g) a warehouse or sales outlet; (h) a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on; and (i) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities cont....
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....part of or incidental to the execution of a construction or assembly project, it is clause (i) alone that comes into play. That is the only way to reconcile and avoid conflict between overlapping items/expressions contained in para 2 of Art.5. 6.2. Now, we must consider the more controversial aspect as regards the interplay of paragraph 1 and clause (i) of para 2 of Art.5. The question is whether paragraph 1 of Art.5 can be viewed on stand-alone basis without regard to clause (i) of para 2? If the project office and/or the Barge from which the applicant carries out its operations can be treated as a fixed place of business within the meaning of Art.5.1, is it still necessary that the business from such a fixed place should be carried on for a period of more than 9 months? These are the questions that should engage our attention. The argument in support of the contention that the minimum period of 9 months should not be imported into para 1 may be buttressed by the fact that para 2 purports to be an inclusive definition. An inclusive definition, normally speaking, will only expand rather than restrict the meaning and amplitude of the preceding general expression or term. In other....
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.... primary and main definition of PE does not mean that these two paras should be read distinctly, independent of each other. We reiterate that these two paras should be read harmoniously as part of the same concept. In relation to a building site and construction/assembly project, the prescribed minimum period should be read into the expression 'fixed place of business' occurring in para 1. As clarified earlier, it is implicit in the very concept of PE and the expression 'fixed place of business' that it should be in existence for a fairly long time and merely carrying on some activities intermittently or for a short while does not impress the place with the character of a fixed place through which the business of the enterprise is carried on." 9. The more crucial question that needs to be considered now is whether the work place set up by the sub-contractor to carry out the works entrusted to him by the applicant can be treated as the work place and the permanent establishment of the applicant. Does the fact that the sub-contractor is only a nominee of the applicant in carrying out the work which would have been otherwise performed by the applicant transform the sub-contractor's....
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....t the work of construction, installation, etc. through its agent i.e. a Poona based company which was given a sub-contract for fabrication of certain items in India and that the German company must, therefore, be deemed to have a PE through such agent in India. The contention was repelled thus: "This submission is based on an assumption that the word "it" in cl.(bb) can be applied not only to the German company but also to its agent. It is based on a further assumption that the Poona company is an agent of the Germany company. In our view the Agreement has made special provision in cl. (dd) in respect of agents who satisfy certain conditions. When such a special provision is made in respect of agents in cl (dd), it is highly doubtful if the respective Governments of India and Germany intended that sub-cl.(bb) is to cover once again the case of an agent so as to render the conditions imposed in cl. (dd) otiose." It was then observed that the relationship between the contractor and his sub-contractor was similar to that between one principal and another. After referring to the fact that the contract contemplated the employment of a sub-contractor and the contract itself draw....
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....ilding project. The sub-contractor himself has a PE at the site if his activities there last more than 12 months." 11.1. The context in which the passage occurs is important. The said passage, as I understand it,covers a situation where a building site has been set up by the main contractor and the services of the sub-contractor are also deployed in aiding the execution of the building project. Apparently, it applies to a situation where there is conjoint effort of both the contractor and the sub-contractor at the building site. In such a case, the building site of the contractor and sub-contractor is inseparable. Here, the fact situation is entirely different. The entirety of work of fabrication and assembly is carried out by the sub-contractor at the workshop set up by him at a place for away from installation site and run by him independent of any control of the applicant. Such a place of business of sub-contractor cannot be regarded as the PE of applicant. In any case, the language of section 5(1) being clear and as the concept of PE does not take in the establishment of an independent contractor or agent, the contention of the Revenue must fail. 11.2. The fact that the a....
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.... If at all, it is at that stage or perhaps from the stage of transportation of buoys etc. that the starting point of six month period would set in but not earlier. Even then, going by the applicant's version which accords with probabilities, the duration of the applicant's activities at the site/yard as well as the supervisory activities at the stage of installation and commissioning would not exceed six months. 11.4 I am, therefore, of the view that on the facts as presented in the application and at the present juncture it is not possible to hold that the applicant has or will have a PE in India. Hence, its business profits arising from the periodical payments made by TPT as a consideration for the contract cannot be subjected to tax under the Income-tax Act, 1961 in view of Article 7.1 of DTAA between India and Germany. 12. However, I would like to make it clear that the ruling is based on the fact situation as it exists today and as presented by the applicant. It is open to the Department to take stock of the actual state of affairs from the stage of transportation of equipments upto the date of successful commissioning of project so as to cross-check whether the applican....