2018 (8) TMI 438 - AT - Income Tax

Establishment of PE in India u/s 5(2)(g) - assessee s activity under the contract as constitute installation PE in India - Threshold period of 12 months - Held that - Any activity which may be related or incidental but was not carried out at the site in the source country would clearly not be construed as a PE. Albeit, preparatory work at the site itself can be counted for the purpose of determining of duration of PE. In the present case there is no such allegation or material on record that any kind of preparatory work had started at the installation sites prior to 4th of Jan 2008. The period from which it can be reckoned that enterprise has started to perform the activities in connection with installation project or site etc. is when the actual purpose of the business activity had started. The performance of the activities in the present case can only be reckoned from 4th January, 2008 (even though ld. Counsel stated that first mobilisation of vessel/barge was 23rd February, 2008); and not before that as the preparatory work if any, was for tendering purpose and to get the contract. As the date of completion, the Contract provides the completion date of 1st August, 2008, whereas as per the material placed on record and also the payment schedule etc., points out that all the activities connected with the project including the receiving of the payments was before 30th September 2008 and even the completion certificate mentions 30th September 2008. Though certain formalities for final completion certificate may have exceeded one or two months but still it will not make the continuity of the activity where it has been brought on record that the last barge sailed out or was decommissioned from India on 25th September, 2008 and the entire payments were received on or before that date. Onus is heavily upon the revenue to establish that that assessee s activity had crossed the threshold period of 12 months and hence constitutes PE in India in terms of Article 5(2)(g) so as to tax the receipts in India as per Article 7. Threshold period of 12 months have not exceeded in the present case and consequently no PE can be said to have been established in Article 5(2)(g) . Accordingly, we hold that no income of the assessee on the Contract executed by assessee in India can be held to be taxable in terms of Article 7. Thus grounds raised by the assessee on this score is allowed.

Summary

Issues Involved:

1. Determination of Permanent Establishment (PE) under Article 5(2)(g) of the India-Cyprus Double Taxation Avoidance Agreement (DTAA).
2. Scope of work and functions performed by the assessee.
3. Commencement date for computing the threshold period for PE.
4. Credit for taxes withheld.
5. Levy of interest under section 234B of the Income Tax Act, 1961.
6. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Determination of Permanent Establishment (PE) under Article 5(2)(g) of the India-Cyprus DTAA:

The core issue was whether the activities of the assessee constituted a PE in India under Article 5(2)(g) of the India-Cyprus DTAA. The assessee argued that the contract duration did not exceed the 12-month threshold required to establish a PE. The Revenue contended that the activities commenced with the visit of an employee in September 2007 and continued beyond September 2008, thus exceeding the threshold period. The Tribunal held that preparatory activities for tendering purposes before the effective date of the contract (4th January 2008) could not be counted towards the threshold period. The Tribunal relied on the Delhi High Court's judgment in National Petroleum Construction Company, which stated that the duration of a PE commences with the performance of business activities at the project site. Therefore, the Tribunal concluded that the threshold period of 12 months had not been exceeded, and no PE was established.

2. Scope of Work and Functions Performed by the Assessee:

The AO inferred that the assessee was responsible for multifarious functions based on the scope of work outlined in the contract. However, the Tribunal noted that the AO had incorrectly attributed the scope of work of the main contractor (AMC) to the assessee. The Tribunal clarified that the assessee's scope of work was limited to rock transport and delivery, supply of materials and equipment, construction and installation of temporary facilities, rock dumping activities, and site restoration. The Tribunal found that the AO's inference was not supported by the contract's terms and the material on record.

3. Commencement Date for Computing the Threshold Period for PE:

The AO and DRP considered the visit of an employee in September 2007 as the commencement date for computing the threshold period for PE. The assessee argued that the effective date of the contract (4th January 2008) should be the commencement date. The Tribunal held that preparatory activities for tendering purposes before the effective date could not be counted towards the threshold period. The Tribunal determined that the performance of activities commenced on 4th January 2008, and the completion date was 30th September 2008. Thus, the threshold period of 12 months was not exceeded.

4. Credit for Taxes Withheld:

The assessee claimed that the ADIT erred in not granting credit for taxes withheld amounting to ?8,77,45,192. The Tribunal did not specifically address this issue in detail, as the primary issue of PE determination was decided in favor of the assessee, rendering other grounds consequential.

5. Levy of Interest under Section 234B of the Income Tax Act, 1961:

The assessee contended that the ADIT erred in levying interest under section 234B, as there was no tax payable after granting credit for tax deducted at source, and the assessee, being a non-resident, was not liable to discharge any advance tax. The Tribunal did not specifically address this issue in detail, as the primary issue of PE determination was decided in favor of the assessee, rendering other grounds consequential.

6. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act, 1961:

The assessee argued that the ADIT erred in initiating penalty proceedings under section 271(1)(c). The Tribunal did not specifically address this issue in detail, as the primary issue of PE determination was decided in favor of the assessee, rendering other grounds consequential.

Conclusion:

The Tribunal concluded that the threshold period of 12 months for establishing a PE under Article 5(2)(g) of the India-Cyprus DTAA was not exceeded. Consequently, no PE was established, and the income earned by the assessee from the contract could not be taxed in India. The appeal of the assessee was allowed, and other grounds were rendered consequential.