1997 (10) TMI 398 - AAR - Income Tax

Summary

Issues Involved:
1. Taxability of revenues earned by Brown and Root Inc. (BRI) under the DTAA between India and the USA.
2. Determination of Permanent Establishment (PE) status of BRI in India.
3. Applicability of specific clauses of Article 5 of the DTAA.
4. Interpretation of Article 7 of the DTAA regarding business profits.
5. Department's argument on the use of vessels as a place of management and office premises.
6. Department's alternate argument under Article 12(3)(b) of the DTAA.

Issue-wise Detailed Analysis:

1. Taxability of Revenues Earned by BRI:
The applicant, BRI, a US-based company, contends that its tax liability should be determined according to the DTAA between India and the USA. BRI argues that the revenues earned from its contract with Hyundai Heavy Industries Co. Limited (HHI) should not be taxable in India as per Article 7 of the DTAA, which states that business profits of a US tax resident are taxable in India only if the resident has a PE in India.

2. Determination of Permanent Establishment (PE) Status of BRI:
BRI asserts that it did not maintain any office or fixed place of business in India, nor did it have any establishment as defined in Article 5 of the DTAA. The work was executed over 39 days, which is less than the 120-day threshold stipulated in Article 5(2)(k) for a PE. Therefore, BRI claims it does not have a PE in India, and its revenues should not be taxable under Article 7 of the DTAA.

3. Applicability of Specific Clauses of Article 5 of the DTAA:
The Department argues that BRI's activities fall under Articles 5(2)(a) and 5(2)(f), which do not prescribe a time limit for the existence of a PE. They contend that the vessels used by BRI for the project constituted a PE as they were used for management and communication purposes. However, the ruling states that the specific provision of Article 5(2)(k) should override the general provisions, and since the project duration was less than 120 days, BRI does not have a PE in India.

4. Interpretation of Article 7 of the DTAA Regarding Business Profits:
Article 7 stipulates that business profits of a US resident are taxable in India only if the resident has a PE in India. Since BRI does not have a PE due to the project duration being less than 120 days, its business profits are not taxable in India. The ruling references a similar case (Singapore case) where the DTAA provisions were interpreted similarly, supporting BRI's position.

5. Department's Argument on the Use of Vessels as a Place of Management and Office Premises:
The Department contends that the vessels used by BRI served as office premises and a place of management, thus constituting a PE. However, the ruling finds that this argument lacks force, as the vessels were primarily used for transportation and did not meet the criteria for a fixed place of business under Article 5.

6. Department's Alternate Argument under Article 12(3)(b) of the DTAA:
The Department also argues that the revenues could be considered royalties under Article 12(3)(b) of the DTAA, which pertains to payments for the use of industrial, commercial, or scientific equipment. The ruling rejects this argument, stating that the installation of the gas pipeline does not fall under this provision and reiterates that the specific provision of Article 5(2)(k) should apply.

Conclusion:
The Authority concludes that the revenues earned by BRI from its contract with HHI are not liable to tax in India, as BRI did not have a permanent establishment in India. The ruling aligns with the principles of the DTAA, favoring the specific provision over general ones and ensuring the most beneficial interpretation for the assessee.