2022 (11) TMI 831 - HC - Income Tax

PE in India - employees visiting India prior to the date of contract - scope of Article 5(2)(g) of India Cyprus Treaty - As per ITAT threshold period of twelve months has not been exceeded in present case and consequently no Permanent Establishment ( PE ) can be said to have been established in accordance with Article 5(2)(g) of India Cyprus Treaty on the basis of the dates mentioned in the contract - whether ITAT has erred in not appreciating that Article 5(2)(g) of the India Cyprus Treaty refers to PE as construction, assembly or installation project or supervisory activities in connection therewith where such activities continue for a period of more than twelve months? - HELD THAT - This Court in the case of National Petroleum Construction Company Vs. Director of Income Tax (International Taxation) 2016 (2) TMI 47 - DELHI HIGH COURT has analysed a similar clause being Article 5(2)(h) of the India UAE DTAA and held essence of a PE under Article 5(2)(h) is a building site or a construction or assembly project and the activities of an enterprise relating thereto in the source country - duration of a permanent establishment would commence with the performance of business activities in connection with the building site or assembly project. This Court is of the view that no material has been placed before us to impugn the Tribunal s finding that work had commenced at the site only on or after 4th January, 2008. It is settled law that preparatory work like travelling for obtaining tender/contract cannot be deemed to be the starting point of the contract. Consequently, this Court finds no perversity in the findings of fact rendered by the Tribunal. Accordingly, no substantial question of law arises for consideration in the present appeals and the same are dismissed.

Summary

Issues:
Challenge to ITAT orders for Assessment Years 2008-09 & 2009-10; Interpretation of Article 5(2)(g) of India Cyprus Treaty regarding Permanent Establishment (PE); Commencement of activities at the project site; Duration of PE; Preparatory work for tendering purpose; Taxability of income under Article 7.

Analysis:
The appellant challenged the ITAT orders for Assessment Years 2008-09 & 2009-10, arguing that the ITAT erred in its interpretation of Article 5(2)(g) of the India Cyprus Treaty regarding Permanent Establishment (PE). The appellant contended that the ITAT failed to recognize that activities had started at the site before the contract date, emphasizing the threshold period of twelve months specified in the treaty. The ITAT, in its order, analyzed the activities undertaken by the assessee before and after the contract date, emphasizing the necessity of actual business activities at the project site to establish a PE. The ITAT held that preparatory work for tendering purposes, without active work at the site, cannot be considered as establishing a PE under Article 5(2)(g).

The ITAT's decision was based on the principle that a building site or assembly project can only be construed as a fixed place of business when the enterprise commences activities at the project site. The ITAT emphasized that activities related to the project must be carried out at the site in the source country to constitute a PE. The ITAT also highlighted that the duration of a PE commences with the performance of business activities in connection with the building site or assembly project. The ITAT found that the activities at the site commenced on or after 4th January, 2008, and that preparatory work like travelling for obtaining tenders cannot be considered as the starting point of the contract.

The Court referred to a previous case analyzing a similar clause in the India UAE DTAA, emphasizing that the work at the site or project must commence for a PE to be established. The Court found no perversity in the ITAT's findings and dismissed the appeals, stating that no substantial question of law arose for consideration. Therefore, the Court upheld the ITAT's decision that the threshold period of twelve months had not been exceeded, and no PE was established under Article 5(2)(g) of the India Cyprus Treaty, leading to the non-taxability of the income under Article 7.