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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 ..... erred in sustaining income at the rate of 10 per cent of gross contract receipts. (4)Alternatively, the CIT(A) has erred in not allowing part of reimbursement of expenses which was not the obligation of the assessee and not forming part of contract receipts." 3. In the appeal filed by the Assessing Officer, the grievances raised are as follows : "(1)On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the Assessing Officer, to work out the related amount of mobilization/demobilization charges pertaining to the transportation within continental shelf and exclusive economic zone of India, and take that much amount only for computation of total income under section 44BB of the Income-tax Act, 1961, towards reimbursement of expenses. (2)On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the interest charged under section 44B of the Income-tax Act, 1961, in this case." 4. In substance thus, all that we have to decide is whether or not the assessee can be said to have a permanent establishment in India in the relevant previous year, and, if so, whether or not the mobilization and demo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contracts was to be aggregated. The Assessing Officer held that since this period is more than nine months, the assessee can be said to have a permanent establishment, under Article 5(2)(i) of the India UAE tax treaty, in India. Aggrieved, assessee carried the matter in appeal but without any success. The CIT(A), inter alia, held that "since these contracts are with the same entity, in connection with the same Jamnagar Refinery Complex, they are commercially and geographically coherent and would be treated as a single unit for the purpose of applying the test of PE". The assessee is not satisfied and is in appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 7. Vide our order of even date, in the case of Addl. DIT v. Valentine Maritime (Mauritius) Ltd. [IT Appeal No. 1532 (Mum.) of 2005, dated 5-4-2010], we have observed as follows : "7. The first issue that we must address ourselves to is whether or not, on the facts and in the circumstances of the case, the assessee can be said to have a PE in India. Article 5(2)(i) of the Indo Mauritius tax treaty, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct (i.e., C 99/07) had some installation work while the other contract (i.e., C 99/05) was only for providing accommodation barges, the assessee can be said to have a fixed place of business for substantial duration and it should, therefore, be held that the assessee had a PE under Article 5(1) as a fixed place of business'. It is difficult to understand, much less approve, rationale of this argument. Firstly, in order to be treated as a PE, a fixed place of business must be a fixed place of business through which the business of the assessee is wholly or partly carried on. It is not the business of the assessee to provide accommodation on the barge and providing accommodation is the only activity carried on at the barge, if that can be treated as a fixed place of business. The business of the assessee is giving barge on hire and that activity is cannot be, and is certainly not, carried out at the barge so hired out. When business of the enterprise is not even carried out at this fixed place, there cannot be any basis for holding a barge to be a permanent establishment of the enterprise. In the case of McDermott Industries (Aust) Pty. Ltd. v. Commissioner of Federal Taxation1, even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in singular, and there is no specific mention about aggregating the number of days spent on various sites, projects or activities. In other words, each of the building site, construction project, assembly project or supervisory activities in connection therewith is to be viewed on standalone basis. Broadly, the underlying rationale of this approach is that various business activities performed by one and same enterprise, none of which constitutes a PE, cannot lead to a PE, if combined. In our humble understanding, the very conceptual foundation of this approach rests on the assumption that various business activities of the enterprise in different locations are not so inextricably interconnected that these are essentially required to be viewed as a coherent whole. The locations are thus separate places of business, and activities at different locations are, therefore, required to be viewed on standalone basis. In a typical building site, assembly or installation project, or supervisory activities in connection therewith, each of site or project is an independent unit, and the approach to these types of PEs recognize this normal business practice. 10. It is also interesting to no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 the relevant PE definition clause, as in the present case, normally it cannot be open to us to infer the application of aggregation principle. Revenue has laid lot of emphasis on the fact that while in Indo UK Double Taxation Avoidance Agreement1 , there is a specific mention in the protocol to record the agreement "to apply the 'more than six month test' separately to each site or project which has no connection with any other site or project and to each of the connected sites and projects", there is no such provision in the India Mauritius tax treaty and it is not open to us to infer the said provision. We are not impressed by this argument. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to put it more appropriately, the situations in which different locations of activities of an enterprise, in the other Contracting State, are required to be viewed as one place of business. The exercise of aggregation of time spent on various locations is only a logical consequence of those various locations being viewed as one place of business. A view can indeed be taken that a road or canal construction, or dredging of waterways or pipeline, is a single place of business for the enterprise, even if work is relocated periodically, because that a road, canal, waterways or canal have geographical unity in the sense these are one linear point on a map, as well as commercial unity-given the nature of the business of the enterprise, it is a single site and a single place of business. It is this approach that is true justification for the aggregation to be applied, if at all one considers these progressive relocations to be distinct sites, for time spent on difference sites. Therefore, so far as geographical coherence is concerned, what is to be really seen is whether different places of activities, of an enterprise in the other contracting State, are one place of business or different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revenue authorities to discharge this onus, the assessee must comply with reasonable requisitions of the revenue authorities and truthfully share the information available with him, but the exercise to establish treaty abuse is to be conducted by the revenue authorities. Unless that exercise is conducted, it cannot be open to disregard the claim of the assessee by simply making vague and generalized claims about artificial splitting of contracts and about the sham arrangements to defeat the treaty provisions. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for this reason that the fictional PE for these types of activities is created so as to meet the situations when no PE taxation is triggered under the basic rule. According to this school of thought, this fictional PE comes into existence because even though the nature of business carried out at these locations could be legitimately viewed as lacking permanence, once 'duration of activities test' is satisfied, nothing further needs to be established so far requirement of 'permanence' is concerned. This deeming fiction is to be applied for each construction or project site or supervisory activity in connection therewith. This deeming fiction, like all deeming fictions, is to be applied strictly. As an enterprise working in the other Contracting State, the situs of performing the activities, which triggers this fictional PE, is not necessarily a factor which is even controlled by the enterprise. It cannot thus have much bearing on the business model of the enterprise, and, therefore, on the question whether or not the enterprise is carrying on the business through the PE. As for the 'commercial coherence', there is hardly any consensus on its connotations either. Prof. Arvid Skaar, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l has also impliedly rejected the emphasis on commonality of principal. While doing so, the Tribunal has, inter alia, observed as follows : 79. Article 5(4)2 replaces the permanence element for existence of PE by the test of minimum length of time. In a case where there are several sites where supervision is going on in a country, the rule is that the test of minimum period should be determined for each individual site or installation project. Klaus Vogel in his commentary on Double Taxation Conventions, at page 308, has following to say on this aspect : 'The question whether there is a PE in a specific Contracting State or not should be considered separately for each activity performed in that State i.e., for each individual place of business existing there as well. In this connection, the place where individual activity is performed may very well be relocated, for instance, where a road is being constructed in stages. If, in contrast, all building sites maintained in one State are treated as one single PE, this would in effect tantamount to force of attraction principle. Moreover, this would violate the principle that various business activities performed by one and same enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hreshold test". The 'interdependence' test is something that can perhaps be applied with lesser ambiguity vis-a-vis 'cohesion' test simplicitor, and lesser ambiguity is certainly preferable. In any event, the highest common factor in both the examples set out in the OECD and UN Commentary is this 'interdependence' or 'interconnection'. In view of the discussions above, we are of the considered view that the true test must lie in examining whether or not the activities performed by the enterprise in various projects or sites are interconnected and have to be necessarily regarded as a coherent whole. Unless the activities are of such a nature as to be viewed only in conjunction and as a coherent whole, in our humble understanding, there is no justification in aggregation of time spent on various business activities, sites or projects of the enterprise. In this view of the matter, strictly speaking, it is not really relevant whether the activities so carried out by the enterprise are for the same principal or different principals. The relevant considerations, in our considered view, are the nature of activities, their interconnection and interrelationship and whether these activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Pumpuhar Shipping Corporation Limited v. ITO1 To that extent, therefore, the order of the Assessing Officer is to be restored. He, however, relies upon the order of the CIT(A). 20. We, therefore, hold that while the assessee did not have a permanent establishment in India, and accordingly, its business profits cannot be brought to tax, so far as the hire for barges is concerned, the taxability under section 44BB is upheld and confirmed. As regards levy of interest under section 234 B and C, learned representatives agree 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. v. DCIT2 which has since been approved by the Hon'ble jurisdictional High Court in the case of DIT v. NGC Network LLC3. 21. In view of the above discussions, and for the reasons set out above, the order of the Assessing Officer is partly restored and, to that extent, grievance of the Assessing Officer is upheld." 8. We have noted, and it has also been agreed to by the parties, that the provisions of the India UAE tax treaty are materially identical. Article 5(2), inter alia, provides that the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rried out beyond the continental shelf and exclusive economic zone. There is no dispute that application of Indian Income-tax Act, 1961, vide Notification No. GSR 304(E) extends to the continental shelf and EEZ only. In case, therefore, the assessee, which is a foreign company, has rendered services to another foreign company beyond the said area, and consideration for the same can be identified, the same is not liable to be taxed in India. The CIT(A) has only followed Third Member decision of this Tribunal in the case of Saipem S.P.A. v. Dy. CIT [2004] 88 ITD 213 (Delhi). We see no infirmity in these directions of the CIT(A) and we decline to interfere in respect of the same. So far as this issue is concerned, we see no reasons to interfere in the matter. 10. To sum up, while we hold that the assessee did not have a 'permanent establishment' in India, we also hold that the amount received by the assessee as barge hire was rightly brought to tax by the Assessing Officer. To this extent, the order of the CIT(A) stands modified. However, as regards directions of the CIT(A) to the effect that any receipt for services rendered outside India's continental shelf and economic zone are no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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