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TMI Blog1991 (5) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... at the relevant time was an employee of the said company. On4-2-1984, operating service an maintenance contract was entered into between the said foreign company and the ONGC of India. This Commission is a body corporate established under the Oil & Natural Gas Commission Act, 1959 (Act No. 43 of 1959) having its Head Office at Dehradun, India and its offshore project office at 12th Floor, Express Tower, Nariman Point, Bombay 400021. The Oil & Natural Gas Commission was the owner Jack-up rig named the "Sagar Pragati" deployed for drilling and exploration of oil & gas in offshore areas of Indian Waters. The foreign company was in the business of offshore drilling operations and was able to furnish to ONGC expatriate supervisory staff and personnel with expertise in operation and management of Jack-up rigs. The ONGC desired to utilise the services of the expatriate personnel for manning assisting in the operation and management of the Jack-up rigs "Sagar Pragati" for the exploration and development of oil and gas offshore India. An agreement was entered into on4-2-1984providing for the above, and also the terms and conditions they have agreed upon. The foreign company i.e., M/s. Fora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income of the foreign enterprise when an assessment was made on it through ONGC. The assessment was made on the foreign enterprise by applying a net profit rate of 7.5 per cent. This meant that all the expenditure incurred including those under the head salaries which included the payments made to these expatriate employees was allowed as a deduction in computing the income of the foreign enterprise. Having held that section 10(6)(vi) did not apply, the IAC (Assessment) examined the claim whether under the Double Taxation Avoidance Agreement betweenIndiaandFrance, the case of the assessees would fall. The claim of the assessee was based upon article XVI of the Double Taxation Avoidance Agreement betweenIndiaand theUnited Kingdom. Sub-clause (c) of cluase 2 of article XVI reads as under : " the remuneration is not 'deductible' in computing the profits of an enterprise chargeable to Indian Tax " (Emphasis provided). Applying the same argument as applied in the case of the application of clause (c) of section 10(6)(vi), the ITO held that the requirement of this clause was not satisfied. The IAC (Assessment) thus negatived the claim of the assessee on both the counts as mentioned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the foreign enterprise, the profits of the foreign enterprise from such a business could not be taxed in India under the Treaty for Avoidance of Double Taxation entered into between India and France. In order to decide whether the foreign enterprise maintained a permanent establishment in India, the CIT examined the provisions of the contract and found that under the terms of the agreement, the duplicate copies of all the instructions including details of import licence which were sent by ONGC to the foreign enterprise were to be forwarded to one Mr. M. K. Gandhi at Bombay at their address which was the address of foreign enterprise in India and, therefore, that established conclusively that the foreign enterprise maintained in India a permanent establishment. The counsel of the assessee had admitted during the course of assessment proceedings that the foreign enterprise maintained an office inBombayto deal with the travel arrangements of its employees. This was noted on the order sheet entry under dated6-8-1986. From this entry, it was inferred that there was an admission by the assessee that the foreign enterprise maintained a permanent establishment inIndia. Since the foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial activities or salaries or dividends, property income etc. are to be taxed. Article III of the Agreement provided for the taxation of income arising from industrial or commercial profits i.e. business income. This article provided : " Article III. (1) The industrial or commercial profits (excluding the profits derived from the operation of ships or aircraft) of an enterprise of one of the Contracting States shall not be subjected to tax in the other Contracting State unless the enterprise has a permanent establishment situated in that other Contracting State. If it has such a permanent establishment the profits attributable thereto shall be subjected to tax only in that otherContractingState. (2) Where an enterprise of one of the Contracting States has a permanent establishment situated in the otherContractingState, there shall be attributed to such permanent establishment the industrial or commercial profits which it might be expected to derive in that otherContractingState. If it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing on an independent basis with the enterprise of which it is a permanent est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following terms : " (i) the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on : (aa) The term 'fixed place of business' shall include a place of management, a branch, an office, a factory, a workshop, a warehouse, a mine, a quarry or other place of extraction of natural resources : (bb) an enterprise of one of the Contracting States shall be deemed to have a fixed place of business in the otherContractingStateif it carries on in that otherContractingStatea construction, installation or assembly project or the like : (cc) the use of mere storage facilities or the maintenance of a place of business exclusively for the purchase of goods or merchandise and not for any processing of such goods or merchandise in the country of purchase, shall not constitute a permanent establishment ; (dd) a person acting in one of the Contracting States for or on behalf of an enterprise of the other Contracting State shall be deemed to be a permanent establishment of that enterprise in the first mentioned Contracting State, if : 1. he has and habitually exercises in the first mentioned Contracting State, a general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eas, owner desires to utilize the services of such expatriate personnel of Contractor as listed in Exhibit 'A' for manning, assisting in the operations and management of the Jack-up rig 'Sagar Pragati' for the exploration and development of oil and gas offshore India. " It clearly shows that the contractor namely the foreign enterprise was in the business of offshore drilling operations and was able to furnish expatriate supervisory staff and personnel with expertise in operation and management of Jack-up rig and since ONGC desired to utilise those services for manning and assisting in operation of the Jack-up rig, the agreement was entered into for employing the services of such expatriate personnel. This was interpreted by the Department as meaning or even establishing that the foreign enterprise was in the business of offshore drilling operations inIndia. From the Preamble extracted above, it is clear that the foreign enterprise because of itself being in the business of offshore drilling operations acquired the expertise and was able to furnish expatriate supervisory staff and personnel in operation and management of Jack-up rig. It is also clear that the foreign enterprise it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for or on behalf of the enterprise unless the activities of the person are limited exclusively to the purchase of the goods or merchandise for or on behalf of the enterprise. Mr. M. K. Gandhi did not have any general authority to negotiate and enter into contracts for or on behalf of the foreign enterprise. Nor was there any evidence to show that he had negotiated and entered into the contracts for or on behalf of the foreign enterprise nor is there any evidence to show that he has ever exercised habitually a general authority to negotiate and enter into contracts on behalf of the foreign enterprise. Unless this condition is satisfied without any reservation or blemish or clog, it cannot be said that M. K. Gandhi was a person who habitually exercised a general authority to negotiate and enter into contracts on behalf of the foreign enterprise. Mere service of duplicate copies of the orders does not make him a person who habitually exercised a general authority to negotiate and enter into contracts on behalf of the foreign enterprise. This is a job of a Post Office, nothing more and nothing less. The Department, is therefore, wrong in treating Shri M.K. Gandhi as a person possessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails thereof. It also provided that the safety of the units shall be under the control of contractor and under the direction of the ONGC. It is this agreement that was again interpreted by the Department as an aid to come to the conclusion that the foreign enterprise was an independent entity carrying on business inIndia. But clause 4.15 ensures independence to the foreign enterprise only because the foreign enterprise was made responsible for its safety and for all other purposes. When safety was made the responsibility of the foreign enterprise, he must be given independence to manage the work and rendering of technical service in such a way that no untoward event takes place. This does not mean, in our opinion, that the foreign enterprise was an independent contractor carrying on business inIndia. 13. We have seen from the above that the contract did not provide for the carrying on of any business as such inIndiaby the foreign enterprise except providing for technical services. Now the treaty by Article XVI provided for the taxation of technical services furnished by an enterprise in oneContractingStateto an enterprise in the otherContractingState. Article XVI is in the followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for exemption of salaries and wages received inIndiaare satisfied. This Article is Article XIV which is as under : " Article XIV. (1) Subject to the provisions of Axticle XIV, salaries, wages or other similar remuneration for services as an employee performed in one of the Contracting States by an individual who is a resident of the otherContractingState may be taxed only in theContractingState in which such services are rendered. (2) Notwithstanding the provisions of paragraph (1) of this article, salaries, wages, or other similar remuneration paid to an individual who is a resident of one of the Contracting States for services performed in the other Contracting State shall not be subjected to tax in that other Contracting State and may be subjected to tax in the former Contracting State, if : (a) he is present in that other Contracting State for a period or periods not exceeding in the aggregate 183 days in the taxable year concerned, and (b) the remuneration is paid by or on behalf of an employer who is not a resident of that otherContractingState, and (c) the remuneration is not deducted in computing the profits of a permanent establishment chargeable to tax in that other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). If the conditions in clauses (a) and (b) are satisfied and if clause (c) is not attracted, it must be held that all the conditions laid down in Article XIV were satisfied. Therefore, if the conditions in Article XVI are all satisfied as we have explained above, then those salaries and wages earn exemption from the levy of tax inIndiaby operation of Article XVI. It is now well settled as we have observed earlier that between the Income-tax Act and the provisions of Avoidance of Double Taxation Agreement, the provisions of Double Taxation Agreement prevail over the provisions of the Income-tax Act. Therefore, we have got to apply the provision of Article XVI for the purpose of finding out whether the salaries received by the expatriate employees are liable to tax in India or not and not the provisions of Income-tax Act. In our opinion and for the reasons given above, the provisions of the Avoidance of Double Taxation Agreement, particularly article XVI are satisfied and, therefore, these salaries earn exemption. To sum up neither the Department is right in holding that the foreign enterprise is having a permanent establishment inIndianor is it right in saying that the income that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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