2011 (9) TMI 70 - AAR - Income Tax

PE / Permanent Establishment - Whether the different periods of the contracts are to be aggregated to reckon the threshold of 183 days under Article 5.3 of the DTAA in a fiscal year in a case where the projects are not carried out for the same principal - Held that - Applicant submits that these four projects are independent of each other and secured through independent work orders - applicant submits that the scope of these installation projects comprise of erection and installation of certain heavy equipments at the site of the customers - The fact that the income from the execution of these projects is in the nature of business profits and taxable as per Article 7.1 of the DTAA is not denied by the Revenue - In fact the Revenue did not object when the applicant offered income in the past on the basis that it has a PE in terms of Article 5.3 of the DTAA - Held that in the given facts of the case aggregation of the periods of the contracts cannot be made for these four contracts and consequently the applicant cannot be said to have a PE in terms of Article 5.3 of the DTAA - the income is not taxable in India

Summary

Issues: Determination of tax liability for a Singapore-based company executing installation projects in India under Double Taxation Avoidance Agreement (DTAA).

Analysis:

1. The applicant, a Singapore-based company, executed four independent installation projects in India. The company argued that these projects would constitute a Permanent Establishment in India only if each project lasted more than 183 days in a year, as per Article 5.3 of the DTAA. The income from these projects, classified as business profits, would be taxable in India only if a Permanent Establishment existed. The applicant sought clarification on the taxability of its activities in India under the Income Tax Act, 1961. The Revenue challenged the nature of these projects, claiming they were service-based rather than installation projects, as asserted by the applicant.

2. The Authority examined the scope of work for the projects, which involved erecting heavy equipment provided by customers at the installation sites. The projects required ground preparation, load movement tests, and equipment placement, indicating installation or assembly work. The Authority disagreed with the Revenue's characterization of the projects as service-based, concluding that they fell under Article 5.3 of the DTAA governing installation and assembly projects, not service PE under Article 5.6.

3. The Authority addressed the aggregation of project durations under Article 5.3 of the DTAA to determine Permanent Establishment status. Despite the projects spanning different fiscal years and involving different customers, the Authority found them to be independent with no interconnection. As none of the projects extended beyond 183 days individually in a year, the Authority ruled that the applicant did not have a Permanent Establishment in India under Article 5.3 of the DTAA.

4. Consequently, the Authority ruled that the income earned by the applicant from the installation projects was not taxable in India. The first question raised by the applicant was answered in the negative, leading to the conclusion that the applicant did not have a tax liability in India for the specified projects. The ruling was pronounced on September 19, 2011, in favor of the applicant.