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TMI Blog2010 (3) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of installation of offshore platforms, decks, pipelines, jackets and various other similar activities, for the purpose of mineral oil exploration. During the relevant financial period, the assessee was engaged in executing certain installation contracts in Tapti and Panna offshore fields in the Indian continental shelf. However, according to the assessee, the income so earned by the assessee was not liable to be taxed in India. The assessee claimed the treaty benefits under India-Mauritius Convention for Avoidance of Double Taxation [(1984) 40 CTR (TLT) 4 : (1994) 146 ITR (St) 214]. According to the assessee, its income from the contracts so executed was in the nature of business profits which could be taxed only under art. 7 of the convention, but existence of a PE, as defined under art. 5 of the said convention, was a sine qua non for such a taxability. It was further pointed out that since the assessee did not have any such PE in India, the income of the assessee could not be brought to tax in India. In support of this claim, it was pointed out that the appellant had executed following contracts during the relevant period: Contract No. Contracting party &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rently clear that the work in Panna field was executed from March, 1996 to May, 1997. The assessee has deliberately given wrong dates of duration of work in both the returns of income and in reply dt. 15th March, 2000. Invoices have also been collected under s. 133(6). The last invoice for Panna field is raised on 4th May, 1992 (sic-4th May, 1998) (invoice No. 4522607/LO) and first invoice was raised on 1st Nov., 1996 (invoice No. 4522001/LO) under contract No. D-4522. The invoices are raised in 19 months under this contract. In view of the above facts, it is clear that the assessee's work in Panna field has exceeded the period for more than 9 months and the assessee is PE in India. The completion certificate issued by assessee on 18th May, 1997 is only in respect of a part of contract No. D-4522. It is pertinent to mention that the assessee company has been engaged in offshore exploration activities in Indian waters since financial year 1994495. The assessee had claimed exemption from PE, only on the basis of claim that the duration of the execution of the various projects was less than 9 months. While computing the period of presence the assessee has not taken into ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inuously from March, 1996 to May, 1997 as claimed by the Jt. CIT. - The appellant has retrieved the activity reports from its archives. Copies of relevant reports are attached to support the appellant's submission on the physical presence of equipment and personnel of India. 2. It is pointed out that each of the contracts entered into by our clients with various parties are independent contracts and are not related to each other. Each of the contracts continued for specific duration only. It is further contended that each of these contracts, D-4406 and D-4522 was bid negotiated and awarded separately. The work scope of each contract is distinct from the other and there is no interdependence between the contracts which would lead to the conclusion that they were no more than different phases of the same project. 3. However, the Jt. CIT has completely ignored the contract completion certificates issued by the third parties. He has proceeded only on the basis of the dates appearing in the agreement and has held the work in the Panna field was executed from March, 1996 to May, 1997. He has erroneously held that the certificate for the Enron (D-4522) contract is only in respect of pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be taken separately and the test of nine months has to be applied to each particular activity separately. The various periods during which the work was carried in India under various contracts at various periods during which the work was carried out in India under various contracts at various locations cannot be aggregated to determine whether your appellant carried out the work in India for a period of more than nine months. 7. Moreover, the period of nine months has to be computed with reference to the number of days the activity was carried out in India. In computing the period of nine months, the work, if any, done outside India cannot be considered. Your appellant has in computing the period of nine months, taken into account the time spent by them in India in performance of the work. The entire work relating to the contract was completed (including period spent on pre-job) inspection of the site and winding up activities) within a period mentioned above." 5. The CIT(A), however, was of the view that all the time spent on executing all the contracts was to be aggregated to apply the threshold limit of nine months for ascertaining whether or not the assessee had a PE in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion therewith shall be regarded as a PE where such site, project or supervisory activities continue for a period of more than nine months. In view of the above facts the appellant's contention that the periods during which work was carried out in India under various contracts cannot be aggregated for determination of PE because all three contracts are commercially separate is not acceptable. In this respect para 18 of the commentary on OECD model treaty is relevant wherein it has been observed that a "building site should be regarded as a single unit, even if it is based on several contracts, provided that it forms a coherent whole commercially and geographically". In the appellant's case principal is same, geographically the place is same i.e., only one location i.e., Tapi and Panna fields, offshore, nature of job is also same. All the contracts are ultimately carried out by the appellant's company only. If we see the duration of work in India it is noticed that the work was started in the month of March and continued till May, 1997. Thus, there is no overlapping of period also. The work has been carried out continuously from March, 1996 to May, 1997. 4.18 In the light of the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pervisory activity continues for a period of more than nine months. .............." 9. In view of the above treaty provisions, it is unambiguous that a PE refers to a fixed place of business through which business of the enterprise is wholly or partly carried on, and includes, inter 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 in as much 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 art. 5(1), it will be outside the ambit of definition of PE by the virtue of ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s." In the case of India-Thailand tax treaty [(1986) 56 CTR (St) 22 : (1986) 161 ITR (St) 82], the definition for this type of PE, which finds place in art. 5(2)(h) of the said treaty, is worded as "a building site or construction or assembly project, or supervisory activities in connection therewith, where such site, project or activity continues for the same or a connected project for a period or periods aggregating to more than 183 days". Similar are the provisions in India's tax treaties with Austria [(2001) 170 CTR (St) 32 : (2001) 251 ITR (St) 97], Belgium [(2001) 165 CTR (St) 15 : (2001) 247 ITR (St) 39], Bulgaria [(1996) 132 CTR (St) 32 : (1996) 220 ITR (St) 30], Canada [(1998) 144 CTR (St) 48 : (1998) 229 ITR (St) 44], China [(1995) 125 CTR (St) 1 : (1995) 214 ITR (St) 160], Denmark [(1989) 80 CTR (St) 15 : (1989) 180 ITR (St) 1], Italy [(1996) 132 CTR (St) 13 : (1996) 220 ITR (St) 3], New Zealand [(1987) 63 CTR (St) 16 : (1987) 166 ITR (St) 90], Norway [(1988) 67 CTR (St) 145 : (1988) 169 ITR (St) 15], Spain [(1995) 125 CTR (St) 48 : (1995) 214 ITR (St) 197], Turkey [(1997) 137 CTR (St) 30 : (1997) 224 ITR (St) 145) and USA [(1991) 91 CTR (St) 6 : (1991) 187 ITR (St) 102] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial 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 contractor's 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 regarded as a single unit. In other words, OECD Commentary refers to the situations, in the second category, in which aggregation principle is to be applied even in the absence of specific treaty provisions to that effect. We are in considered agreement with this analysis and approach of the OECD Commentary which has also been, as we have noted earlier, adopted by the UN Commentary as well. However, there are two important issues that we need to deal with at this stage-first, as to who has the onus to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 this approach are established by the Revenue. That is not the situation before us. 12. In our considered view, the only other situation in which aggregation of time spent of various activities is to be done is when the activities are so inextricably interconnected or interdependent that these are essentially required to be viewed as a coherent whole. 13. OECD Commentary has taken note of two such situations i.e., (a) a building site should be regarded as a single ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upposed to continue for a limited time only i.e., till the objective is achieved, and it is perhaps 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. 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. Professor Arvid Skaar, a well-known Norwegian international tax scholar, in his book "Permanent Establishment-Erosion of a Tax Treaty Principle [Third Indian reprint, 2009 published by Kluwer Law International at p. 355]" suggests that "it can normally be ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so impliedly rejected the emphasis on commonality of principal. While doing so, the Tribunal has, inter alia, observed as follows: "79. Article 5(4) 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 p. 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 enterprise, none of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project for purposes of applying the twelve month (duration) threshold 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 inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the actual work, as per completion certificates which were filed during the assessment proceedings, was started on 5th Feb., 1997 and ended on 31st May, 1997. The CIT(A), however, did not adjudicate on these factual issues as she concluded that the total time spent on all the contracts in India put together exceeds nine months, and, for that reason alone, the assessee could be said to have a PE in India. 19. Having held that the aggregation of time on various contracts in India is not required, this is nevertheless to be examined whether time spent on a specific contract is more than nine months or not. The CIT(A) ought to have examined this aspect of the matter and given her findings on duration of each project site. We, therefore, consider it necessary to remit the matter for the limited purposes of adjudication on this aspect of the matter. Even as we do so, it is necessary to point out that what is required to be ascertained is the time spent on the contract and it is nothing to do with the dates on which invoices are raised for advances and for demobilizations and sail outs. As the UN Model Convention Commentary, incorporating OECD Model Convention Commentary, pu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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