2010 (4) TMI 1 - AT - Income Tax

Income accrued in India - PE in India or not - income from contracts - assessee is a company incorporated in and tax resident of Mauritius - Taxabilty of business profits u/s. 44BB - India-Mauritius tax treaty - as alleged treaty abuse, alleged artificial splitting of contracts, or other alleged modes of maneuverings to enter into sham arrangements to defeat the provisions of treaty - CIT(A) held that neither the income in question is taxable as business profits under art. 7 of the India-Mauritius tax treaty, nor can it be taxed as 'royalties' under the Act. It was thus held that the income earned by the assessee from various contracts is not taxable in India. HELD THAT - The provisions set out in protocol to the tax treaties need not necessarily be substantive provisions, and these can also be, and often are, merely clarificatory provisions 'ex abundanti cautela'. What is stated in the said protocol to Indo-UK tax treaty is nothing other than what is anyway within the scope of the construction PE clause, as analyzed in the OECD Model Convention Commentary (adopted by the UN Model Convention Commentary as well)-an analysis, with which we are in considered agreement. The protocol provision is merely clarificatory in nature and is apparently set out as a measure of abundant caution. The absence of similar protocol clarification in other tax treaties entered into by India would not, therefore, warrant a different interpretation of the treaty provision. There are two important issues, therefore, 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 views, 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. It is 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 area, 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 organization directly or through a sub-contractor, 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. The true test, is in interconnection and independence in addition to geographical proximity and commercial nexus. There is no finding, nor even a suggestion, by any of the authorities below to the effect that the three contracts are inextricably interconnected, interdependent or can only be seen only as a coherent whole in conjunction with each other. As a matter of all the three contracts are for three different purposes for charter of accommodation barge, for use of barge in domestic area and for replacement of decks. None of these contracts are such that these can be viewed as interconnected or interdependent. The CIT(A) was thus quite justified in holding that the duration of these projects cannot be aggregated for the purposes of ascertaining whether or not the PE of the assessee can be said to have existed in India. It is an admitted position that unless the time spent on these different contracts is aggregated, the threshold limit of nine months, as laid down in art. 5(2)(i), cannot be satisfied. In view of these discussions, and bearing in mind, entirety of the case, we hold that the CIT(A) was quite justified in holding that the assessee did not have a PE in India. Barge hire being treated as 'royalty'- HELD THAT - We, therefore, hold that while the assessee did not have a PE in India, and accordingly its business profits cannot be brought to tax, so far as the hire for barges is concerned, the taxability u/s. 44BB is upheld and confirmed. Levy of interest u/s. 234B and 234C - AR as agreed that the issue is now covered in favour of the assessee by a large number of decisions of the Tribunal, including Special Bench decision in the case of Motorola Inc. vs. Dy. CIT 2005 (6) TMI 226 - ITAT DELHI-A which has since been approved by the Hon'ble jurisdictional High Court in the case of Director of IT (International Taxation) vs. NGC Network Asia LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT . Therefore, the order of the AO is partly restored and, to that extent, grievance of the AO is upheld. In the result, the appeal is partly allowed.

Summary

Issues Involved:
1. Permanent Establishment (PE) in India
2. Application of sections 44BB and 44BBB of the IT Act
3. Classification of payments as royalty
4. Levy of interest under sections 234B and 234C

Detailed Analysis:

1. Permanent Establishment (PE) in India:
The primary issue was whether the assessee had a PE in India during the relevant assessment year. The CIT(A) concluded that the assessee did not have a PE in India as none of the contracts exceeded the nine-month threshold stipulated in Article 5(2)(i) of the India-Mauritius tax treaty. The AO, however, argued that the contracts should be aggregated, and thus the duration threshold was met. The Tribunal upheld the CIT(A)'s view, emphasizing that each contract must be considered independently unless they are inextricably interconnected or interdependent. The Tribunal also noted that the business of the assessee was giving barges on hire, which cannot be considered as a PE since the business activity was not carried out at the barge.

2. Application of sections 44BB and 44BBB of the IT Act:
The AO contended that the provisions of section 44BB, which deals with the taxation of income from providing services or facilities in connection with the extraction or production of mineral oils, were applicable. The CIT(A) disagreed, stating that the contracts were not interconnected and thus did not meet the threshold for a PE. The Tribunal upheld the CIT(A)'s decision, noting that the activities were not interdependent or interconnected, and therefore, the provisions of section 44BB were not applicable.

3. Classification of payments as royalty:
The AO classified the payments under contract C 99/05 and C 99/06 as royalties under section 9(1)(vi) of the IT Act and Article 12 of the Indo-Mauritius DTAA. The CIT(A) disagreed, stating that the payments were for time charter of barges, which are not covered under the definition of royalties. The Tribunal, however, noted that the issue was covered against the assessee in view of the Poompuhar Shipping Corpn. Ltd. vs. ITO decision, and thus, the AO's classification of these payments as royalties was upheld.

4. Levy of interest under sections 234B and 234C:
The CIT(A) ruled that the question of levy of interest under sections 234B and 234C did not arise. The Tribunal agreed with this view, citing various decisions, including the Special Bench decision in Motorola Inc. vs. Dy. CIT and the jurisdictional High Court's decision in Director of IT (International Taxation) vs. NGC Network Asia LLC, which supported the assessee's position.

Conclusion:
The Tribunal concluded that the assessee did not have a PE in India, and thus, its business profits could not be taxed. However, the taxability of barge hire under section 44BB was upheld. The classification of payments as royalties was also upheld. The levy of interest under sections 234B and 234C was ruled in favor of the assessee. The appeal was partly allowed, restoring the AO's order to the extent of the classification of payments as royalties and the application of section 44BB.