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TMI Blog2021 (7) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... done outside India included any input from the Assessee's PE in India. The ITAT had considered the contract and in view of the fact that the consideration for various activities such as design and engineering, material procurement, fabrication, transportation, installation and commissioning had been separately specified, the Tribunal rightly held that the consideration for the activities carried on overseas could not be attributed to the Assessee's PE in India In view of the conclusion that the Assessee did not have a PE in India during the AYs 2007-08 and 2008-09, no income of the Assessee from the projects in question can be attributed to the Assessee s PE.- Decided in favour of assessee. - ITA No.5563/Del/2017 - - - Dated:- 1-7-2021 - Sh. N. K. Billaiya, Accountant Member And Sh. Sudhanshu Srivastava, Judicial Member For the Appellant : Sh. Amit Arora, CA For the Respondent : Dr. Prabha Kant, CIT ORDER PER N. K. BILLAIYA, AM: This appeal filed by the revenue is preferred against the order of the CIT(A)-43, New Delhi dated 06.06.2017 for A.Y. 2011-12. 2. The grievance of the revenue read as under :- 1. Whether, on fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The assessments for the following assessment years i.e. AY 2009-10 2010-11 have also been completed in the alomist idental manner, following the adjustments suggested by the TPO for those years. For this two assessment years, the assessee initially filed objections before Ld. DRP and Ld. DRP has rejected assesses objections holding that the assessee had got different types of PE in India viz. fixed place PE, dependent agency PE and construction/assembly PE, arising out of its activities. Now, it is observed that the nature of activities for the current assessment year under consideration i.e. AY 2011-12 is identical to that of the earlier years, as mentioned above and being so, the facts of the case as far as existence of PE is concerned remain the same as in earlier years. During the course of assessments of the assessee for the earlier years like AY 2008-09, 2010-11 etc., the aspect of PE of the assessee and its taxability were examinated in detail and discussed elaborately in the body of the assessment order. There being no material change in the business model and situation of the case, facts mentioned in the relevant paras of the assessment order for AY 2008-09 and 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hrough employees or other personnel in the other Contracting State, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period. 3. Notwithstanding the preceding provisions of this Article, the term permanent establishment shall be deemed not to include : (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise ; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery ; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. 4. Notwithstanding the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly through the said fixed place of business. These two conditions must necessarily be satisfied for the existence of a PE. In addition, the word permanent in the term Permanent Establishment indicates that there should be some degree of permanency attached to the fixed place of business before the same can be construed as a PE of an enterprise. The word permanent does not imply for all times to come but merely indicates a place which is not temporary, interim, short-lived or transitory. In Re. P. No. 24 of 1996: (1999) 237 ITR 798 (AAR), the Authority for Advance Ruling referred to Baker s Double Taxation Conventions and International Tax Law, second edition , wherein the author had cited the decision in Henriksen v. Grafton Hotel Limited: (1943) 11 ITR (E.C.) 10 (CA) and explained that the expression permanent is relative and not synonymous with everlasting ; the AAR ruled that it was used only in contradistinction to something fleeting, transitory, temporary or casual . 16. Paragraph 2 of Article 5 of the DTAA provides for an inclusive definition of the term Permanent Establishment and specifically lists out places of business that fall within the meaning of that e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icto senso fall within the definition of a permanent establishment as defined under paragraph 1 and/or paragraph 2 of Article 5 of the DTAA, yet it would be deemed that a permanent establishment of an enterprise exists if the business of an enterprise is carried on through an agent as described under paragraph 4 of the DTAA. Paragraph 5 of Article 5 provides for an exclusion to the application of paragraph 4 and the agents of a principal enterprise as described in paragraph 5 of the DTAA would be excluded from the scope of paragraph 4 of Article 5 of the DTAA. 19. The controversy whether the Assessee had a PE in India during the relevant period has to be answered in the context of the aforesaid provisions of the DTAA. Concededly, the Assessee had established a Project Office at Mumbai in 2005. This was also intimated to the Reserve Bank of India by a letter dated 24th January, 2006. It is also not disputed that the Assessee did carry on part of its business through its Project Office. In the circumstances, the conditions as spelt out in para 1 and paragraph 2(c) of Article 5 of the DTAA are satisfied. However, the matter does not rest here; it is next to be seen whether any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iaison office means a place of business to act as a channel of communication between the principal place of business or Head Office by whatever name called and entities in India but which does not undertake any commercial/trading/industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel; (f) Project Office means a place of business to represent the interests of the foreign company executing a project in India but excludes a Liaison office. 22. It is apparent from the plain reading of the aforesaid definitions that whereas a liaison office can act as a channel of communication between the principal place of business and the entities in India and cannot undertake any commercial trading or industrial activity; a project office can play a much wider role. Regulation (6)(ii) of the aforesaid regulations mandates that a project office shall not undertake or carry on any other activity other than the activity relating and incidental to execution of the project . Thus, a project office can undertake all activities that relate to the execution of the project and its function is not li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L and transmitting the same to the Assessee s office in Abu Dhabi and similarly transmitting communications from Assessee s office in Abu Dhabi to ONGC and ASL. It is claimed that the abovenamed three employees were simple graduates and were not capable for participating in the execution of the work undertaken. The DRP had observed that Sh. M.N. Shah, Sh. M. Karkera, Sh. C.G. Pillai, Sh. P.K.G. Nair and Sh. R.L. Kulkarni, who were employees of the Project Office of the Assessee, had attended the kick-off meeting with ONGC on 16th December, 2005 and had also signed the minutes of that meeting. The DRP had proceeded on the basis that this fact was not disputed. The ITAT had also concurred with the aforesaid finding. However, it is seen that the Assessee had repeatedly pointed out that persons named were not employees of the Project Office. Further, there is no material which would support the findings that Sh. M.N. Shah, Sh. M. Karkera, Sh. C.G. Pillai, Sh. P.K.G. Nair and Sh. R.L. Kulkarni were employees at the Project Office. 25. In our view, in absence of any material, observations made with regard to the employees of the Project Office being present at the meeting cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck office operations carried on at an office would fall within the exclusionary clause of Article 5(3)(e) of the Treaty between India and United States which is also identically worded as Article 5(3)(e) of the DTAA. 28. The Black's Law Dictionary defines the word 'auxiliary' to mean as aiding or supporting, subsidiary . The word 'auxiliary' owes its origin to the Latin word 'auxiliarius' (from auxilium meaning 'help'). The Oxford Dictionary defines the word 'auxiliary' to mean providing supplementary or additional help and support . In the context of Article 5(3)(e) of the DTAA, the expression would necessarily mean carrying on activities, other than the main business functions, that aid and support the Assessee. In the context of the contracts in question, where the main business is fabrication and installation of platforms, acting as a communication channel would clearly qualify as an activity of auxiliary character - an activity which aids and supports the Assessee in carrying on its main business. 29. In view of the above, the activity of the Assessee s Project Office in Mumbai would clearly fall within the exclusionary c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a construction or an assembly project as a PE by itself. On a plain reading, a PE constituted by a building site or a construction or an assembly project, would commence on the commencement of activities relating to the project or site. The said clause is also to be read harmoniously with paragraph 1 of Article 5 of the DTAA which necessarily entails a fixed place of business from which the business of an enterprise is carried on. Thus, a building site or an assembly project could be construed as a fixed place of business only when an enterprise commences its activity at the project site. An activity which may be related or incidental to the project but which is not carried out at the site in the source country would clearly not be construed as a PE as it would not comply with the essential conditions as stated in paragraph 1 of Article 5 of the DTAA. It is necessary to understand that a building site or a construction assembly project does not necessarily require an attendant office; the site or the attendant office in respect of the site/project itself would constitute a fixed place of business once an Assessee commences its work at site. Thus, for clause (h) of paragraph 2 of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of the essential tests of paragraph 1 of Article 5 of the DTAA. This, of course, would not hold good if the contractor's office or establishment in the source country (i.e. where the site/project is located) is also involved alongwith the sub-contractor. 37. In the present case, the Assessee claims that the survey was conducted by an independent third party engaged by the Assessee and that too for a period of 9 days in one instance and 27 days in another (from 27.02.2006 to 07.03.2006 and 25.04.2006 to 21.05.2006). The Assessee commenced its activities at site when the barges entered into the Indian territory on 19.11.2006 and such activities relating to the installation, testing and commissioning of the platforms continued till 27.04.2007. Thus, the Assessee's activity at site would indisputably commence on 19.11.2006 and continue till 20.04.2007, that is, for a period of less than nine months. 38. The initial activities at site were carried on by an independent subcontractor appointed by the Assessee. If the commencement of the activities of the sub-contractor is considered, the same commenced on 27.02.2006 and were concluded by 21.05.2006. It is seen that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (h) of DTAA would stand satisfied. A careful reading of Article 5(2)(h) of DTAA indicates that it is necessary that the site, project or activity continues for a period of more than nine months . It is an implicit condition that the enterprise should be involved at the site or involved in the assembly project in the source country. In the present case, the installation activities lasted from 19.11.2006 to 27.04.2007, which is much less than the minimum period of nine months. 41. Even if the time spent by ASL in conducting the pre-engineering, predesign survey is included, the duration of the project activities in India would not exceed nine months. The Assessee s Project Office is inextricably linked to the project. Therefore, if the duration of the project activities in India was less than nine months, it cannot be held that the Assessee had a PE in India under Article 5(2)(h) of the DTAA. 42. In view of the above, answer to the second question is in the negative, that is, in favour of the Assessee and against the Revenue. 43. The next issue to be addressed is whether ASL could be construed as a DAPE of the Assessee within the meaning of Article 5(4) of the DTAA. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded logistics and consultancy support to various companies other than the Assessee. The Director s Report also clearly indicates that the activity of providing offshore marketing/technical consultancy and offshore fabrication and installation work were amongst the regular activities carried on by ASL. 45. The Assessee has also placed on record a copy of the consultancy agreement dated 26th December, 1994 entered into with ASL. Clause 1, 2 3 are relevant and are quoted below:- Clause 1 The Consultant hereby agree to act as the sole and exclusive Consultant for the Principal in India and shall not represent any competitor to the Principal nor act in a manner which could be detrimental to the Principal's interests. Clause 2 The Principal shall in its name bid and execute contracts related to the works above defined. Clause 3 The Consultant shall provide the Principal with the following services: (a) Assistance in the gathering of relevant market information. (b) Assistance in obtaining works and active representation, promotion and support of the Principal's activities in India. (c) Assistance in obt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lude contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to the purchase of goods or merchandise for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such person are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph. 49. A plain reading of paragraph 4 of Article 5 indicates that for a person to constitute a DAPE, the agent must (a) not be an agent of independent status to whom paragraph 5 applies; (b) the agent acts on behalf of the enterprise; and (c) the agent habitually exercised authority to conclude contracts on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia. 53. In view of our conclusion that the Assessee did not have a permanent establishment in India, the question of attributing any income of the Assessee to the PE does not arise. However, the ITAT has erroneously held that the Assessee has a PE in India. Although the ITAT has held so, it has not quantified the income attributable to the PE. Thus, the answer to question no.4 framed in the Assessee s appeal is answered in favour of the Assessee and against the Revenue. 54. Insofar as the question whether the decision of the ITAT is contrary to Article 7(6) of the DTAA is concerned, we find that the AO as well as the ITAT had provided reasons for adopting the method of computation of the income of the Assessee. The ITAT had also found that there was no basis for the method adopted by the Assessee. This, in our view, would be a sufficient reason for not following the method of computation of taxable income as adopted in the preceding years. Although, the Assessee had claimed that Section 44BB and the CBDT Instruction No.1767 provided the legal basis for the method of computation of taxable income adopted by the Assessee, the same is clearly erroneous. Section 44BB of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the question whether the incomes attributable to design, procurement of material and fabrication of platforms are otherwise taxable under the Act and assuming it is so, it would still have to be determined whether such income is taxable under the Act in terms of the DTAA and, for the aforesaid purpose, it is necessary to refer to Article 7 of the DTAA, which provides for taxation of business profits. Paragraphs 1, 2 3 of Article 7 are relevant and are reproduced as under:- 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e more beneficial to the assessee. 60. In the present case, the consideration of various activities has been specified in the contracts in question. Annexure C (Contract Price Schedule and Rental Rates Schedule) specifically assigns value to various activities. It is also not disputed that the invoices raised by the Assessee specifically mentioned the work done outside India as well as in India. Thus, even though the contracts in question may be turnkey contracts, the value of the work done outside India is ascertainable. There is no dispute that the values ascribed to the activities under the contracts are not at Arm's Length. There is also no material to indicate that the work done outside India included any input from the Assessee's PE in India. The ITAT had considered the contract and in view of the fact that the consideration for various activities such as design and engineering, material procurement, fabrication, transportation, installation and commissioning had been separately specified, the Tribunal rightly held that the consideration for the activities carried on overseas could not be attributed to the Assessee's PE in India. 61. We find no infirm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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