Article 12 and Article 5 read with Article 7(3) of the India–Russia DTAA – consideration received by a member of a consortium qualifies as business income; as the income is attributable to the assessee’s PE in India, it is taxable in India

9

TS-212-ITAT-2019(Del)

PJSC Stroytransgaz vs. DDIT

ITA No. 2842/Del/2010 [A.Y.: 2004-05]

ITA No. 2843/Del/2010 [A.Y.: 2005-06]

ITA No. 6029/Del/2012 [A.Y.: 2006-07]

ITA No. 3821/Del/2010 [A.Y.: 2004-05]

ITA No. 3822/Del/2010 [A.Y.: 2005-06]

A.Y.s: 2004-05 & 2005-06

Dated: 15^th April, 2019

Article 12 and Article 5
read with Article 7(3) of the India–Russia DTAA – consideration received by a
member of a consortium qualifies as business income; as the income is
attributable to the assessee’s PE in India, it is taxable in India

FACTS

The
assessee is a company incorporated in Russia with expertise in implementation
of oil and gas industry projects. During the year under consideration, the
assessee entered into a consortium with an Indian company to execute certain
oil and gas projects for customers in India.

As agreed
between the parties to the consortium and the customer, the assessee was
required to (i) depute specialised manpower in India to undertake project
management and execution to the satisfaction of the customers for a specified
monthly consideration, and (ii) to prepare the technical bid to be provided to
the customer on the basis of its technical expertise and knowhow.

The
project management and execution work was performed by the branch office (BO)
of the assessee in India. On the other hand, the preparation of the technical
bids was undertaken by the assessee outside India.

There was
no dispute on the fact that the BO constituted the permanent establishment (PE)
of the assessee in India. The income from project management and execution
rendered by the BO was offered to tax as fee for technical services on gross
basis and the income from the supply of technical design and knowhow by the HO
was offered to tax as royalty on gross basis under Article 12 of the
India-Russia DTAA.

The
assessing officer (AO) contended that since the assessee had a PE in India,
Article 12 of the India–Russia DTAA was not applicable and the entire payment
received by the assessee had to be taxed on net basis as business profits.

HELD

•      A close
  reading of the agreements indicates that the assessee was one of the members of
  the consortium. The consideration received by the assessee from the project
  execution is nothing but its business profits from the execution of the
  project.

•     Being a
  member of the consortium, the assessee cannot pay royalty to itself and,
  therefore, the share received from the execution of the projects is nothing but
  business profits. Even in a case where services are rendered in India by the HO
  and not by the BO, the consideration received by the assessee cannot be
  bifurcated as royalty and business income.

•      Since the
  assessee had a PE in India and the income from both manpower supply and the
  technical bid carried out outside India was attributable to the PE in India,
  the total income earned from the project is taxable as business income in
  India.