1 Article 5(2)(g) of India-Cyprus DTAA – auxiliary and preparatory activity undertaken prior to awarding of the contract cannot be reckoned for computing threshold for existence of PE.

Bellsea Ltd vs.
ADIT

A.Y: 2008-09, Date
of Order: 6^th July, 2018

Article 5(2)(g) of
India-Cyprus DTAA – auxiliary and preparatory activity undertaken prior to
awarding of the contract cannot be reckoned for computing threshold for
existence of PE.

Facts

The Taxpayer was a
company incorporated in Cyprus mainly engaged in the business of dredging and
pipeline related services for oil and gas installations. During the year under
consideration, Taxpayer was awarded a contract by another foreign entity (FCo)
for placement of rock in seabed for protection of gas pipelines and umbilical¹ of subsea structures in oil and gas field developed in
India.

On the basis that
construction work had started on 4^th January 2008 as per the
contractual terms, and was completed on 30^th September 2008 (i.e the
date of issuance of completion certificate as per the contract), the taxpayer
contended that it did not have any PE in India. Accordingly, it did not meet
the 12-month threshold for creation of installation PE under Article 5(2)(g) of
India- Cyprus DTAA.

However, the AO
contended that 12-month threshold should be computed from September 2007, when
one of the employees of the Taxpayer visited India for the purpose of
collecting information, until November 2008 (as the formalities of final
completion certificate had extended upto November 2008, even though the date
mentioned in the completion certificate is 30^th September 2008).
According to the AO, the presence was for a project which lasted for more than
12 months and triggered Installation PE.

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1     A subsea umbilical is a bundle of cables and
conduits that transfer hydraulic, and electric power within the field (long
distances), or from topsides to subsea. They also carry chemicals for subsea injection,
and gas for artificial lift.

The Dispute
Resolution Panel (DRP), confirmed AO’s order and held that Taxpayer’s
activities triggered an installation PE in India. Aggrieved, Taxpayer appealed
before the Tribunal.

Held

On date of
commencement of activities for computation of 12-month threshold

–     Article 5(2)(g) ostensibly
refers to activity-based PE. Hence, the duration of 12 months per se is
activity specific qua the site, construction, assembly or installation
project.

–     Auxiliary and Preparatory
work like pre-survey engineering, investigation of site, etc., for tendering
purpose without actually entering into the contract and without carrying out
any activity of economic substance or active work qua that project
cannot be construed as carrying out any activity of installation or
construction. Any kind of active work of preparatory or auxiliary nature could
be counted for determining the time period only if such work is undertaken
after the contract has been awarded/ assigned.

–     Further, no evidence was
placed on record to suggest that the Taxpayer had installed any project office
or developed a site for carrying out the preparatory work before entering into
the contract with FCo.

–    The performance of the
activities in connection with installation project or site, etc., commences
when the actual purpose of the business activity had started (which happened to
be 4^th January, 2008 in the present case) and not before that as the
preparatory work if any, was for tendering purpose and to get the contract.

–    Reliance was placed on
decision of National Petroleum Construction Company (386 ITR 648) wherein,
the Delhi HC analysed similar provision appearing in Article 5(2)(h) of
Indo-UAE DTAA and held that any activity which may be related or incidental,
but was not carried out at the site in the source country would clearly not be
construed as a PE. Albeit, preparatory work at the site itself can be counted
for the purpose of determining duration of PE. However, in the present case,
there is no such allegation or material on record that any kind of preparatory
work had started at the installation sites prior to January 2008.

On date of
completion of activities for computation of 12 month threshold

–     The activity qua
the project comes to an end when the work gets completed and the responsibility
of the contractor with respect to that activity comes to end. The following
facts suggest that activity of the Taxpayer qua the project as per the
terms of contract had come to an end on or before 30^th September,
2008;

•     Last sail out of barge/vessel was on 25^th
September 2008 and Customs authorities also certified the demobilisation by
this date

•     All the payments relating to contract work
were received by the Taxpayer much before the closing of September, 2008

•     Even though final completion certificate
was issued in November 2008, the completion certificate itself mentioned the
date of completion as 30^th September, 2008.

•     Also, there was nothing on record to
suggest that any activity post-completion was carried on or the project was not
completely abandoned before the completion of the period of 12 months.

–     Thus, 12-month threshold
period was not exceeded in the present case. Consequently, no PE can be said to
have been established under Article 5(2)(g).