2010 (3) TMI 1 - AT - Income Tax

PE in India - Double Taxation Relief - Income accrued in India - nature of business profits - Article 5 (2)(i) of the Indo-Mauritius tax treaty, which is broadly the same as art. 5 (3)(a) of UN model convention - replacement of 'six months' duration test by 'nine months' duration test and for including it in para 5(2) - HELD THAT - Permanence test for existence of a PE stands substituted, to this limited extent, by a duration test for certain types of business activities, i.e., building construction, construction or assembly project, or supervisory activity connected therewith. There is also a valid, and more holistic view of the matter, that this duration test does not really substitute permanence test but only limits the application of general principle of permanence test in as much as unless the activities of the specified nature cross the threshold time-limit of nine months, even if there exists a PE under the general rule of art. 5(1), it will be outside the ambit of definition of PE by the virtue of art. 5(2)(i). Therefore, when definition clause specifically provides for aggregation of time spent on various sites, projects or activities, the sum total of the time spent on such sites, projects or activities, except for parallel counting of days, is to be taken into account for applying the threshold time-limit. However, when aggregation is not specifically provided for in the relevant PE definition clause, as in the present case, normally it cannot be open to us to infer the application of aggregation principle. We are in considered agreement with this analysis and approach of the OECD Commentary which has also been, as we have noted earlier, adopted by the UN Commentary as well. However, there are two important issues that we need to deal with at this stage-first, as to who has the onus to show that the contracts are artificially split, or otherwise the affairs are so arranged, so as to circumvent the duration test; and-second, what are the circumstances in which the aggregation principle is to be applied, even in the absence of specific provisions to that effect in a tax treaty, so as to give a reasonable meaning to definition of a PE in respect of building, construction, or assembly project or supervisory activity in connection therewith. In our considered view, these are only two sets of circumstances in which time on each set of relevant business activity by an enterprise, in the other Contracting State, is to be aggregated. In the case before us, no such exercise is carried out. In the orders of the authorities below, a reference is made to the contracts having been awarded by one entity directly or indirectly, and the fact that the work is carried out at the same place but these facts, by themselves, does not put the case in the category in which treaty provisions are abused by artificial arrangements, and, for that reason alone, the time spent on all the activities is required to be aggregated. The aggregation of time spent on various activities, on account of artificial splitting of contract by the assessee or other modes of treaty abuse, cannot thus apply unless the reasons embedded in this approach are established by the Revenue. That is not the situation before us. In our considered view, the only other situation in which aggregation of time spent of various activities is to be done is when the activities are so inextricably interconnected or interdependent that these are essentially required to be viewed as a coherent whole. OECD Commentary has taken note of two such situations i.e., (a) a building site should be regarded as a single unit, even if it is based on several contracts, provided it forms a coherent whole commercially and geographically, and (b) when the very nature of construction or installation project may be such that the contractor's activity is to be relocated continuously or at least from time to time (e.g. construction of roads and canals, dredging of waterways or laying of pipelines), the activities performed at each particular spot in a single project must be regarded as a single unit. The test of 'commercial and geographical coherence ', It is thus clear that the justification for aggregation of time spent by the assessee on different project sites, for applying threshold of duration test, is not sustainable. Neither the work having been carried out for the same principal is sufficient to justify the aggregation of time spent on all the projects, nor the fact that this work was carried out in the same oilfield, which is a huge geographical area anyway, is sufficient to invoke that exercise. Even if these projects are commercially coherent in the sense that these projects are for the same principal, and geographically coherent in the sense that these are on nearby locations, these two factors would not necessarily mean that these projects are to be necessarily seen as a coherent whole geographically and commercially. AO has given a finding that, even on standalone basis, one of the contracts exceeds the threshold limit. It is pointed out that so far as Contract No. 95/C/04 (D-4522) is concerned, the actual contract period is concerned the same is nineteen months since the first invoice was raised on 1st Nov., 1996 and the last invoice was raised on 4th May, 1998. It is, however, noted that the commencement date, as per the contract, was 1st Nov., 1996 and the completion date of the contract was specified as 31st May, 1997. In appeal, the assessee had pointed out to the CIT(A) the invoices in question were for mobilization advance (invoice dt. 1st Nov., 1996) and for sail out of the Derrick Barge from outside India (invoice dt. 4th May, 1998), which have nothing to do with the actual work carried out at the site. It was also submitted that the actual work, as per completion certificates which were filed during the assessment proceedings, was started on 5th Feb., 1997 and ended on 31st May, 1997. The CIT(A), however, did not adjudicate on these factual issues as she concluded that the total time spent on all the contracts in India put together exceeds nine months, and, for that reason alone, the assessee could be said to have a PE in India. The date on which invoice is raised for mobilization advance, as adopted by the AO in this case, is also not decisive for the purpose of determining the duration of the PE. On what date a requisition is made for advance has nothing to do with the actual work, or incidental preparatory work preceding, and thus forming integral part of, the actual core work, at site. Similarly, sail out of barge is an activity which takes place after the work at site comes to an end. The date on which sail out of barge starts or is completed is essentially a date subsequent to abandoning the work at the site. This date is also not, therefore, relevant for the purpose of deciding the date on which activity at site comes to an end. It is also important to bear in mind the fact that dates of commencement and completion of work set out in the contracts are only indicative of plans and cannot be substituted for the actual dates of commencement of work and completion of work as evidenced by the material on record. The work schedule set out in the contract cannot, therefore, be decisive of the date of commencement and completion of work at site. What is really required to be seen, as we have elaborated above, is the duration for which the work-actual or preparatory, is carried out at site. While deciding the matter afresh on the question of duration of project, the CIT(A) will bear in mind the principles set out above and shall decide the matter by way of a speaking order dealing with the contentions of the assessee. With these directions and in the terms indicated above, the matter stands restored to the file of the CIT(A). Appeal is allowed for statistical purposes in the terms indicated above.

Summary

Issues Involved:
1. Taxability of receipts from contracts under the India-Mauritius tax treaty.
2. Determination of Permanent Establishment (PE) in India.
3. Attribution of income to the PE.

Detailed Analysis:

1. Taxability of Receipts from Contracts under the India-Mauritius Tax Treaty:
The taxpayer, a Mauritius-based company, argued that its income from contracts executed in India should not be taxed in India, claiming treaty benefits under the India-Mauritius Convention for Avoidance of Double Taxation. The taxpayer asserted that the income was in the nature of business profits and could only be taxed if there was a PE in India, as defined under Article 5 of the treaty. The taxpayer contended that the duration of work under each contract did not exceed nine months, thus no PE was established.

2. Determination of Permanent Establishment (PE) in India:
The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed with the taxpayer's interpretation. The AO aggregated the duration of all contracts to determine the nine-month threshold, concluding that the taxpayer had a PE in India. The AO noted that the taxpayer's work spanned from March 1996 to May 1997, exceeding nine months, and included pre-job inspections, mobilization, and demobilization activities. The CIT(A) upheld this view, stating that all contracts were awarded by Enron Oil & Gas Ltd., either directly or indirectly, and were carried out in the same geographical location, thus forming a coherent whole commercially and geographically.

3. Attribution of Income to the PE:
The taxpayer argued that the CIT(A) erred in upholding the AO's action of attributing income to the PE. The taxpayer emphasized that each contract was independent and should not be aggregated. The CIT(A) dismissed this argument, relying on the OECD Model Convention Commentary, which suggests that a building site should be regarded as a single unit if it forms a coherent whole commercially and geographically.

Tribunal's Findings:

Applicability of India-Mauritius Tax Treaty:
The Tribunal confirmed that the India-Mauritius tax treaty applies and that the profits from these contracts are business profits, taxable in India only if a PE exists.

Aggregation of Contract Durations:
The Tribunal disagreed with the AO and CIT(A) on aggregating the durations of all contracts. It emphasized that each project or site should be considered independently unless they are inextricably interconnected or interdependent. The Tribunal noted that the OECD and UN Model Convention Commentaries support this view, stating that the duration test applies to each individual site or project.

Onus of Proof for Artificial Splitting of Contracts:
The Tribunal held that the onus is on the Revenue authorities to prove that contracts were artificially split to circumvent the duration test. In this case, the Revenue did not establish any such abuse of treaty provisions.

Examination of Individual Contracts:
The Tribunal found that the CIT(A) did not adjudicate on the factual issues regarding the duration of each contract. The Tribunal remitted the matter back to the CIT(A) to examine whether the duration of each contract exceeded nine months, based on actual work carried out at the site, not on the dates of invoices for mobilization advances or demobilization activities.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the CIT(A) to re-examine the duration of each contract independently and provide a detailed, speaking order addressing the taxpayer's contentions. The Tribunal clarified that the aggregation principle should not apply unless the projects are interconnected or interdependent, and the actual work duration at the site should be considered for determining the existence of a PE.