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New Page 1Part C : Tribunal & AAR
International Tax Decisions
10 ADIT v. Valentine Maritime Mauritius Ltd. (2010)
TIOL 195 (ITAT-Mum.)
Article 5(2)(i), India-Mauritius DTAA
A.Y. : 2001-02. Dated : 5-4-2010
Mauritius company executing 3 contracts in India.
Whether the duration of each contract should be considered separately or should
be aggregated —DTAA applied test of PE to each construction site separately—The
3 contracts were not inextricably interconnected and interdependent—Hence, the
duration of 3 sites cannot be aggregated—Since none of the contracts exceeded
the threshold period, there was no PE.
Facts :
The taxpayer was a company incorporated in
Mauritius (‘MCo’). The Mauritius tax authority had issued tax residency
certificate to MCo, which qualified MCo to access India-Mauritius DTAA (‘the
DTAA’). MCo was engaged in the business of marine and general engineering and
construction. During the relevant assessment year, the taxpayer executed the
following three different contracts in India :
|
Contract |
Activity |
Duration |
|
1. |
Replacement of main
deck with temporary deck |
100 days |
|
2. |
Charter of barge for
accommodation |
137 days |
|
3. |
Charter of barge for
power project together with technical personnel |
225
days |
In respect of contract 2, the taxpayer had applied
for lower withholding of tax order u/s.197. The AO considered the hire charges
as income u/s.44B. Accordingly, the taxpayer accepted the liability @7.5% on
gross basis.
Subsequently, the taxpayer contended that in terms
of Article 5(2)(i) of the DTAA, a building site or a construction or assembly
project or supervisory activities in connection therewith, would constitute a PE
(Construction PE), only if it continues for a period of 9 months. Since income
from the contracts was ‘business profits’ of MCo, under Article 7 of the DTAA,
such income could be taxed in India only if MCo had a PE in India. As none of
the 3 contracts continued for more than 9 months, no Construction PE of MCo was
constituted in India. Accordingly, the profits from the execution of the 3
contracts were not taxable in India.
The AO concluded that to determine existence of a
Construction PE, time spent on all contracts should be aggregated. As aggregate
time spent on the 3 contracts was more than 9 months, MCo had a PE in India and
its income from all the contracts was taxable in India.
The CIT(A), however, held that to determine the
existence of a Construction PE, the time spent on each contract should be
separately considered.
The main issue before the Tribunal was, whether MCo
had a Construction PE in India.
The Tribunal considered the relevant provisions of
the DTAA, OECD Commentary and various case laws.
Held :
As regards ‘fixed place PE’ :
To constitute a fixed place PE, there must be a
fixed place through which business of the enterprise is carried on. The business
of MCo is that of giving barge on hire and business activity is not carried on
at the barge hired out. Since the business is not carried on at a fixed place,
the barge cannot be held to be a PE of MCo.
As regards relationship between ‘fixed place PE’
and ‘Construction PE’ :
In terms of the specific treaty provision, PE,
inter alia, includes a building or construction project if such project
continues for a period of more than 9 months. Thus, the ‘duration test’ for a
Construction PE limits the general principle of permanence under the fixed place
PE rule.Hence, even if a PE is constituted under the fixed place PE rule, if the
activity is that specified in Article 5(2)(i), the PE would not be constituted
if the specified activity does not cross the prescribed time threshold.
As regards ‘duration test’ for a ‘Construction PE’
:
For the following reason, activity of each
site/project should be considered separately and all the activities in a country
are not to be aggregated :
-
Reference to
Construction PE is in singular and the DTAA does not specifically provide for
aggregating number of days spent on all sites/projects. Also, activities of
MCo at different locations are not so inextricably interconnected that they
should be viewed as a coherent whole.
-
Large number of India’s
DTAAs specifically provide for aggregation of sites/projects for computing
threshold time period under ‘duration test’.
-
If DTAA does not
specifically mention aggregation principle, the same cannot be inferred or
applied.
-
Both OECD and UN Model Commentaries provide for application of ‘duration
test’ to each site/project.
-
OECD Commentary recognises possible abuse of duration test by
splitting of one contract into several parts. However, the onus is on the tax
authorities to establish artificial splitting of contract.
-
OECD Commentary recognises that even if a building site is based on
several contracts, it should be regarded as a single unit if commercially and
geographically it forms a coherent whole.
The test of geographical coherence and commercial coherence are only
vague tests. They cannot be applied universally or conclusively due to various
ambiguities. They are also unworkable in practical situation.
The true
test is, (in addition to geographical proximity and commercial nexus,)
interconnection and interrelationship.
The Tribunal did not
find that the 3 contracts were inextricably interconnected, interdependent or a
coherent whole in conjunction with each other. Hence, it held that as the
duration of the 3 contracts executed by MCo cannot be aggregated for
determining the existence of a PE, no PE of MCo in India was constituted.
