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TMI Blog2010 (4) TMI 884X X X X Extracts X X X X X X X X Extracts X X X X ..... with each other - aggregation of time spent on different projects can only arise for connected projects. On the contrary, these two contracts are of different nature inasmuch as while one contract is for barge hire, the other one is for installation work - assessee did not have a ‘permanent establishment’ in India - amount received by the assessee as barge hire was rightly brought to tax by the Assessing Officer - any receipt for services rendered outside India’s continental shelf and economic zone are not taxable in India X X X X Extracts X X X X X X X X Extracts X X X X ..... oject or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months". The first question we have to thus determine whether or not the PE, under this treaty provision, can exist on the facts of the present case. The relevant material facts, for adjudication on this issue, are as follows. In the relevant financial period, the assessee carried out two projects for a company by the name of Saipem UK, pertaining to Jamnagar Refinery Complex. One of these contracts (i.e., C 98/09) was for certain installation work of equipments, and the other contract (i.e., C98/08) was for accommodation and hook support for Saimpan's project on high seas at Jamnagar. The first contract was for a period of 8 months and 4 days, while the period for the second contract was 8 months and 24 days. When overlapping days are excluded, the period of these two contracts, taken together, works out to 294 days which is in excess of threshold limit of nine months in the India UAE tax treaty. The Assessing Officer was of the view that these two contracts were executed in the same geographical area, i.e., Jamnagar, for the same party, i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alia, "a building site or construction or assembly project, or supervisory activities connected therewith, where such site, project or supervisory activity continue for a period of more than nine months". In a way, thus, the 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 inasmuch 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 Article 5(1), it will be outside the ambit of definition of PE by the virtue of Article 5(2)(i). To that extent, the construction PE clause could also be viewed as an arbitrary degree of permanency that is required for any fixed place of business PE. Save and except for this additional yardstick for the degree of permanence, the normal PE definition would apply. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This also shows, as we have noted above, that by no stretch of logic, when an assessee is in the business of hiring out the barges, a barge so hired out cannot be viewed as a place of carrying on its business, which, as we understand, is limited to, qua that barge, the barge having been so hired out. Secondly, treating a project site as PE under the main rule, i.e., Article 5(1), cannot be without taking into account the provisions of Article 5(2)(i) because in the case of an construction, installation or project site, as we have noted above, what is given in Article 5(2)(i) is a test of permanence, howsoever arbitrary as it may be, for the purpose of Article 5(1). Article 5(1) and Article 5(2)(i) of the India Mauritius tax treaty, in such cases, are required to read together rather than read on standalone basis. The argument of the learned Departmental Representative is thus devoid of any legally sustainable merits. 9. Coming back to the provisions of Article 5(2)(i), even a plain reading of Article 5(2)(i) would show that, for the purpose of computing the threshold time-limit, what is to be taken into account is activities of a foreign enterprise on a particular site or a parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the same or a connected project for a period of periods aggregating to more than 183 days" [Emphasis supplied]. Similar are the provisions in India's tax treaties with Austria2, Belgium3, Bulgaria 4, Canada5, China6 , Denmark7, Italy8, New Zealand 9, Norway1 0, Spain1 1, Turkey12 and USA13. In these remarkably large number of cases, the relevant PE clauses are so worded that there is a specific mention for application of aggregation principle on all, or even connected, sites, projects or activities for computation of threshold duration test. There are thus two types of provisions in the construction PE clauses - one set of cases in which treaties provide for aggregation of time spent on various projects, and other set of cases in which treaties do not provide for such an aggregation of time spent on different projects. Even such an aggregation, when applicable, would require exclusion of double counting of days when more than one site or project exists on a day, or when work is carried out at two or more different places on a day, as multiple counting of common days would lead to an absurdity inasmuch as when work is carried on five sites together for one hundred days each, such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope of abuse of these provisions such as by artificially splitting the contracts, each covering a period of less than threshold limit and each attributed to different company owned by the same group. Recognizing this fact, the OECD Commentary, dealing with the twelve month test for construction assembly and project site prescribed in the OECD Model Convention, observes that, "apart from the fact that such abuses may, depending on the circumstances, fall under the application of legislative or judicial anti-avoidance rules, countries concerned with this issue may adopt solutions in the framework of bilateral negotiations". The OECD Commentary further recognizes that 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 that in a situation in which the very nature of construction or installation project may be such that the contractors 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur 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. 13. As for the cases of 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, the onus must lie on the revenue authorities to establish the factual elements embedded in such allegations. It is only elementary that no one is expected to prove a negative. Hon'ble Supreme Court, in the case of K.P. Varghese v. ITO1 has observed that ". . . to throw the burden of showing that there is no understatement of consideration, on the assessee, would be to cast an impossible burden upon him to establish a negative, namely, that he did not receive any consideration beyond that declared by him". By the same analogy, an assessee cannot be expected to demonstrate that contracts are not artificially split, that the affairs are not so contrived so as to circumvent the duration test or that there is no maneuvering so as to abuse the treaty provisions. It is, therefore, for the revenue authorities t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a conclusive test. There could be activities, such as construction of roads, which may or may not be geographically coherent but yet, according to the OECD Model Convention Commentary and in accordance with the fundamental rationale of construction PE concept, the time spent on progressive relocations is required to be aggregated. Similarly, there can be situations in which location of projects may be geographically the same, and yet as these are completely independent projects, the aggregation of time spent on the two projects may not be justified for that reason, as in the case of Sumitomo Corporation v. DCIT1 where even though the situs of activities were at different parts of the same factory "viz., assembly floor, paint shop and weld shop", yet the Tribunal came to the conclusion that "it cannot be said that all contracts put together formed a coherent whole - commercially or geographically". On a conceptual note also, merely because different construction, project or supervisory activities are being carried out at nearby physical locations, these activities, for this reason alone, are not required to be seen in conjunction with each other. A construction site or project site ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is held that even when contracts are relating to different areas of manufacture of cars but these contracts are independent and not capable on bringing in a coherent whole, 'mere commonality of principal cannot be sufficient'. The views expressed by the Tribunal are also on the same lines as expressed by Arvid A Skaar in his book "Permanent Establishment - Erosion of a Tax Treaty Principle"4, wherein he has questioned the school of thought advocated by Klaus Vogel as also the Belgian ruling mentioned above, and observed as follows : The significance of identical clients has been particularly emphasized by German tax treaty commentators. To be a coherent whole, according to Vogel, the tasks have to be performed at the same place and for the same client. In the present author's opinion, this position seems to presuppose that the creators of the commentaries agreed upon a specific criterion though they used an ambiguous one in the text of the commentaries. However, under treaty interpretation based on Vienna Convention, the intentions of the contracting parties are considered to be expressed in the treaty text. If the relatively precise criterion 'identical client' was intended, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dicate that the various contracts were independent and were not capable of bringing in a coherent whole commercially. Mere commonality of principal cannot be sufficient in this regard... 17. The two situations, referred to in the OECD Model Convention commentary and which have been incorporated in UN Model Convention Commentary as well, are thus essentially illustrative in nature, and the common thread, and the highest common factor, in both these situations is that in both the cases the activities are so inextricably interconnected that these cannot be viewed in isolation but only in conjunction with each other. The test of 'geographical coherence' and 'commercial coherence', in isolation with the larger picture of all the units forming part of a 'coherent whole', is not only a somewhat vague test with little consensus on its scope, and which can at best be loosely defined, but it is also somewhat unworkable in practical situations. In US Model Convention's Technical Explanation1 , reference to "commercial and geographical coherence" is substituted by reference to the contracts or projects being "interdependent - both commercially and geographically", and the said commentary, int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interconnection and interdependence - 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 are 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 permanent establishment 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 Article 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 permanent esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct or connected project for a period or periods aggregating more than 9 months within any twelve- month period". The word 'connected' is not defined anywhere in the India UAE tax treaty but, contextual meaning of that term, which is of paramount importance, would include connection in terms of the nature of work carried out. The connection would not arise only because these are carried out at the nearby geographical location or for the same person, but there has to be something in the nature of work that must be connected. It would imply that the aggregation of time spent on different projects can only arise for connected projects. On the contrary, these two contracts are of different nature inasmuch as while one contract is for barge hire, the other one is for installation work. On these facts, and in view of our analysis of legal position in the case of Valentine Maritime (Mauritius) Ltd. (supra) extracted above, we are of the considered view that the authorities below clearly erred in holding that the assessee had a PE on the facts of the present case. However, so far as barge hire is concerned, taxability of the same under section 44BB has been conceded by the assessee and is, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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