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2016 (2) TMI 47 - HC - Income TaxTaxability of income earned by the Assessee in respect of a contract entered into by it with ONGC Limited a public sector enterprise (hereafter ONGC ) - existence of an Assessee s PE in India in terms of Article 5 of the DTAA - whether income from the contract in question is not taxable under the Act by virtue of the Double Taxation Avoidance Agreement between India and United Arab Emirates (UAE)? - Held that - Annexure C (Contract Price Schedule and Rental Rates Schedule) specifically assigns value to various activities. It is also not disputed that the invoices raised by the Assessee specifically mentioned the work done outside India as well as in India. Thus even though the contracts in question may be turnkey contracts the value of the work done outside India is ascertainable. There is no dispute that the values ascribed to the activities under the contracts are not at Arm s Length. There is also no material to indicate that the work done outside India included any input from the Assessee s PE in India. The ITAT had considered the contract and in view of the fact that the consideration for various activities such as design and engineering material procurement fabrication transportation installation and commissioning had been separately specified the Tribunal rightly held that the consideration for the activities carried on overseas could not be attributed to the Assessee s PE in India Assessee did not have a PE in India during the AYs 2007-08 and 2008-09 no income of the Assessee from the projects in question can be attributed to the Assessee s PE. The assessment orders dated 26th October 2010 and 18th November 2011 for the AYs 2007-08 and 2008-09 respectively as well as the corresponding orders passed by the ITAT in the corresponding appeals are set aside. - Decided in favour of assessee.
Issues Involved:
1. Whether the Assessee had a fixed place of business or permanent establishment (PE) in India as defined in Article 5(2)(c) of the Double Taxation Avoidance Agreement (DTAA) between India and UAE. 2. Whether the installation permanent establishment under Article 5(2)(h) of the DTAA came into existence on the date of award of the contract. 3. Whether Arcadia Shipping Ltd. (ASL) was a dependent agent permanent establishment (DAPE) of the Assessee in India under Article 5 of the DTAA. 4. Whether the Income Tax Appellate Tribunal (ITAT) has not attributed and determined the taxable income under installation and commissioning. 5. Whether the order of the ITAT violates and is contrary to Article 7(6) of the DTAA. 6. Whether the ITAT erred in holding that the Assessee's contract with ONGC was divisible. 7. Whether the ITAT erred in holding that no income accrued to the Assessee on account of offshore supplies. Issue-wise Detailed Analysis: 1. Fixed Place of Business or Permanent Establishment (PE) in India: The Assessee established a Project Office in Mumbai in 2005 to comply with contractual requirements and exchange control regulations. The Project Office was used solely as a communication channel between the Assessee and ONGC. The court held that the Project Office's activities were of a preparatory or auxiliary character, falling within the exclusionary clause of Article 5(3)(e) of the DTAA. Thus, the Project Office did not constitute a PE in India. The court emphasized that the mere existence of an office does not automatically create a PE unless it carries out core business activities. 2. Installation Permanent Establishment under Article 5(2)(h): The court held that a building site or construction or assembly project constitutes a PE only if it continues for a period of more than nine months. The Assessee's activities at the site commenced on 19th November 2006 and continued till 27th April 2007, which was less than nine months. The court also noted that the initial survey activities conducted by an independent third party did not count towards the duration of the Assessee's PE. Therefore, the Assessee did not have an Installation PE under Article 5(2)(h) of the DTAA. 3. Dependent Agent Permanent Establishment (DAPE): ASL provided logistics and consultancy support to various companies, including the Assessee, and was not working wholly and exclusively for the Assessee. The consultancy agreement between the Assessee and ASL did not authorize ASL to conclude contracts on behalf of the Assessee. The court concluded that ASL was an independent agent acting in its ordinary course of business and did not constitute a DAPE of the Assessee in India under Article 5(4) and 5(5) of the DTAA. 4. Attribution and Determination of Taxable Income: Since the court held that the Assessee did not have a PE in India, the question of attributing any income to the PE did not arise. The ITAT had not quantified the income attributable to the PE, and the court found that the Assessee's method of computing taxable income based on past years and CBDT Instruction No. 1767 was not justified. The court emphasized that the method of computation must be consistent with the provisions of the DTAA and the Act. 5. Violation of Article 7(6) of the DTAA: The court found that the AO and ITAT had provided sufficient reasons for not following the method of computation of taxable income adopted in the preceding years. The Assessee's claim that Section 44BB and CBDT Instruction No. 1767 provided a legal basis for its method was erroneous. Therefore, the court held that the ITAT's decision was not contrary to Article 7(6) of the DTAA. 6. Divisibility of the Contract with ONGC: The ITAT had accepted the Assessee's contention that the contract could be segregated into offshore and onshore activities. The court found no infirmity in this view, noting that the consideration for various activities was separately specified in the contract. Therefore, the consideration for activities carried out overseas could not be attributed to the Assessee's PE in India. 7. Income Accrued from Offshore Supplies: The court held that the value of work done outside India was ascertainable from the contract and invoices raised by the Assessee. There was no material to indicate that the work done outside India included any input from the Assessee's PE in India. Thus, the ITAT rightly held that the consideration for offshore supplies could not be taxed in India. Conclusion: The court concluded that the Assessee did not have a PE in India during the relevant assessment years. Consequently, no income from the projects could be attributed to the Assessee's PE. The assessment orders for the AYs 2007-08 and 2008-09 and the corresponding ITAT orders were set aside. The appeals were disposed of with parties bearing their own costs.
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