2011 (9) TMI 240 - AT - Income Tax

Permanent Establishment ( PE ) - Applicability of provisions of section 44BB - Interest u/s 234B - DTAA with Mauritius - Held that - The assessee is not assembling parts of a machine but to our mind these words have been added in the dictionary by way of illustration. Putting together the pieces of pipe lines in a desired manner according to us would amount to assembling . - It is immaterial whether the activities are carried out for the same or different principals. The relevant consideration is the nature of activities their inter-connection and inter-relationship and whether the activities are required to be regarded as a coherent whole in conjunction with each other. Since the project did not satisfy the time criterion it has been held that the profits cannot be brought to tax. - Decided in favor of assessee. Stay in India - The contracting parties included within the definition of the PE only those assembly projects which lasted for more than 9 months. This has been specifically provided in the treaty. This leads to an inference that if an assembly project lasts for less than nine months or nine months there would be no inference of PE. It is held accordingly. - Matter restored to file of AO for limited purpose to ascertain the period of the existence of the assessee in India and thereafter decide the existence of PE.

Summary

Issues Involved:
1. Whether the assessee has a Permanent Establishment (PE) in India.
2. If yes, whether the income ought to be computed under the provision contained in section 44BB of the Income-tax Act, 1961.
3. Whether the assessee is liable to pay interest under section 234B of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Permanent Establishment (PE) in India:

The primary issue revolves around whether the assessee has a PE in India under the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius. The assessee argued that its activities in India were in the nature of an assembly or installation project, which lasted less than nine months, and hence, under Article 5(2)(i) of the DTAA, it does not constitute a PE. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) disagreed, citing that the assessee's activities constituted a fixed place of business under Article 5(1) of the DTAA, thereby establishing a PE.

2. Computation of Income under Section 44BB:

Since the primary issue of PE determination was decided in favor of the assessee, the Tribunal did not delve into the computation of income under section 44BB of the Income-tax Act. The AO had initially estimated the income at 25% of the total revenue due to the absence of a profit and loss account.

3. Liability to Pay Interest under Section 234B:

Similarly, the issue of liability to pay interest under section 234B of the Income-tax Act was not addressed, as the determination of PE was crucial to this decision. The DRP had previously stated that it was premature to consider directions regarding the levy of interest at this stage.

Detailed Analysis:

Permanent Establishment (PE):

The Tribunal examined the nature of the work performed by the assessee, which involved laying pipelines and associated tasks as specified in the agreement with BG Exploration & Production India Ltd. The work was carried out through Marine Vessel Spread, including various vessels and equipment necessary for pipeline installation.

The Tribunal considered the definitions and provisions under Article 5 of the DTAA. Article 5(1) defines a PE as a fixed place of business through which the business of the enterprise is wholly or partly carried on. Article 5(2)(i) specifically includes a building site or construction or assembly project that continues for more than nine months.

The Tribunal noted that the assessee's work involved assembling pipelines, which falls under the definition of an assembly project. The Tribunal agreed with the assessee's interpretation that Article 5(2)(i) should be applied, and since the project lasted less than nine months, the assessee did not have a PE in India.

The Tribunal referenced various case laws and rulings, including the decision in Fugro Engineers B.V. and the Authority for Advance Rulings (AAR) in Cal Dive Marine Construction (Mauritius) Ltd., to support its conclusion. The Tribunal emphasized the importance of reading Article 5(1) and 5(2) together to avoid rendering any part of the DTAA otiose.

The Tribunal directed the AO to verify the exact period of the assessee's activities in India to ensure it was indeed less than nine months. If confirmed, the assessee would not have a PE in India.

Conclusion:

The Tribunal concluded that the assessee did not have a PE in India under Article 5(2)(i) of the DTAA, as the assembly project lasted less than nine months. Consequently, the issues of income computation under section 44BB and liability to pay interest under section 234B were not addressed. The appeal was treated as allowed, subject to verification of the period of the assessee's activities in India by the AO.