Section 44BB – Article 5 of India – UAE DTAA – In a composite contract part of which is sub-contracted time spent by sub-contractor is time spent by contractor – PE exists from date of award of contract – Parties to contract could abandon part of contract without making entire payment or refunding amount received – Contract divisible –Attribution of Profits –No PE in respect of fabrication and profits attributable thereto not taxable in India – Facility in connections with prospecting for or extraction or production of mineral oils does not fall u/s. 44 BB
Facts: The taxpayer was a company incorporated in, and a tax-resident of, UAE. The taxpayer was awarded a contract by ONGC under international competitive bidding. The contract had two distinct components: (i) designing, fabrication and supply of platform to be carried out exclusively in Abu Dhabi and (ii) installation and commissioning of the erected platform in India. RBI had granted its approval to the taxpayer to set up a project office (“PO”) in India to undertake the entire project. In earlier years as well as in the year under consideration, the taxpayer had shown its PO as its PE.
The taxpayer fabricated the platform in Abu Dhabi and got it certified by ONGC’s approved surveyors. Thereafter, it was brought to India and handed over to ONGC. The taxpayer had engaged a consultant for gathering information, representation and other related services and constituted its dependent agent’s PE.
According to the taxpayer, the work relating to designing, fabrication and supply of platform was performed and completed outside India. Further, it did not have an installation PE in India since installation and commissioning activity was carried out for less than nine months. Hence, the income relating to designing, fabrication and supply was not taxable in India.
The issues before the tribunal were as follows.
(i) Whether the taxpayer had a PE in India?
(ii) Whether a composite contract can be divided in different parts?
(iii) Whether income from offshore supplies was taxable in India?
(iv) Whether section 44BB of I T Act applied to the taxpayer?
Held:
The Tribunal observed and held as follows.
(i) PE in India
Fixed base PE
In earlier years as well as in the year under consideration, the taxpayer had shown its project office, which was approved by RBI to undertake entire project, as its PE. Under India-UAE DTAA, a PO is not a PE if it is involved in ancillary and auxiliary activity. The taxpayer had not adduced any evidence, to establish that the PO had undertaken only such activities.
During the negotiations, employees of the taxpayer had attended meeting s with ONGC and the taxpayer has not disputed that they were employees of its PO. The taxpayer was a non-resident and had undertaken a contract which continued for almost two years1. It was not possible to execute contract of such duration without having any fixed place of business in India.
Hence, the project office was the PE.
Dependent Agent PE
The AO had found that the consultant was actively involved in the project since pre-bidding meetings, hard core marketing and business development and till finalisation of the contract and was not merely assisting in collecting information as claimed by the taxpayer. Further, the employees of the consultant were attending meetings on behalf of the taxpayer2. Also, there was considerable cogency in the AO’s arguments that the consultant worked wholly and exclusively for the assessee, which is a precondition for dependent agent permanent establishment.
Hence, the consultant was dependent agent PE of the taxpayer in India.
Installation PE
In terms of the OECD commentary, if a contractor subcontracts parts of a project to a sub-contractor, the period spent by the sub-contractor must be considered as being time spent by the main contractor itself. The taxpayer had sub-contracted pre-engineering and preconstruction surveys. Hence, the performance of the taxpayer commenced with establishment of project office and pre-engineering/pre-construction surveys. Accordingly, the PE existed from the date of award of the contract to the taxpayer as the site was available since then for survey, etc.
Hence, the contention of the taxpayer that PE existed only after the platform landed in India was not correct and accordingly, the taxpayer had installation PE in India.
(ii) Whether contract was divisible
While the contract could be construed as an umbrella contract, it was a divisible contract since the consideration for various activities was separately stated. Also, either party could withdraw or abandon the contract without making entire payment or refunding the amount received. ONGC had the discretion to take the platform without having it installed by the taxpayer. In such a case, the taxpayer would not be entitled to the consideration for installation and commissioning. Similarly, if the taxpayer abandoned the contract, it would not be bound to refund the amount received towards executed work. All these factors indicated that it was not a turnkey contract.
(iii) Income attributable to PE
The scope of work involved sequential activities and the contract provided separate payment for these activities. Design, engineering, procurement and fabrication operations were carried on outside India.
The platform was fabricated in Abu Dhabi. Though possession was handed over to ONGC in India, the title passed outside of India and in the event of loss during transportation, the payee under the insurance policy was ONGC .
While the taxpayer had a PE in respect of installation and commissioning, it did not have a PE in respect of installation and fabrication. Only income from activities carried on in India could be attributed to PE in India. Hence, only profits in respect of installation and commissioning could be attributed to the PE and the profits attributable to fabrication of platform outside India were not taxable in India.
(iv) Applicability of section 44BB
As installation of the platform cannot be regarded as a “facility in connection with the prospecting for, of extraction or production of mineral oils”, it does not fall u/s. 44BB of I T Act.
