By Geeta Jani| Dhishat B. Mehta
Chartered Accountants
13 [2019] 105 taxmann.com 259 (Delhi – Trib.) ULO Systems LLC vs. DCIT ITA
Nos.: 5279 (Delhi) of 2011, 4849 (Delhi) of 2012 A.Y.s.: 2008-09 to 2012-13 Date of order: 29th
March, 2019
Article 5 of
India-UAE DTAA – Section 9 of the Act – Grouting activity carried out by the
assessee for companies in oil and gas industry did not constitute ‘construction
PE’ under Article 5(2)(h) – Since assessee had placed equipment and stationed
personnel on the vessel of the main contractor for carrying out grouting, the
vessel was a fixed place of business through which the assessee carried on
business – Hence, income of assessee was taxable in India
FACTS
The
assessee was a company incorporated in UAE. It was engaged in the business of
undertaking grouting work for customers in the oil and gas industry. Though the
assessee had executed contracts with Indian companies, it had not offered any
income from these contracts on the ground that it did not have any PE in India.
But
the AO held that grouting activity was carried out from a fixed place PE in
terms of Article 5(1) of the India-UAE DTAA. Hence, the income arising
therefrom was taxable in India.
Based
on its observations for assessment year 2007-08, DRP held that income from grouting
activity was taxable because of existence of PE in India under Article 5(1).
Before
the Tribunal, the assessee submitted that in terms of Article 5(2)(h) of the
India-UAE DTAA, its activities constituted a ‘construction PE’. Therefore, in
order to constitute a construction PE, each construction or assembly project
should have continued for a period of more than nine months in India. Since the
activities carried on by the assessee under contracts involved installation /
construction activities, and since none of the projects had continued for more
than nine months, the assessee could not be said to have a construction PE in
India in terms of Article 5(2)(h).
HELD
- For the purpose of Article 5(2)(h) of the
India-UAE DTAA, sub-sea activities that can be treated as ‘construction’ are
“laying of pipe-lines and excavating and dredging”. Thus, grouting activities
carried on by the assessee being pipelines and cable crossing, pipeline and
cable stabilisation, pipeline cable protection, stabilisation and protection of
various sub-sea structures, anti-scour protection, etc., cannot be held to be
‘construction’ under Article 5(2)(h) of the India-UAE DTAA.
- Article 7 provides that business profits
earned by a resident of UAE shall be taxable in India only if such resident
carries on business in India through a PE. As the activity of the assessee was
not a construction project, the activity of grouting carried out by the
assessee for the main contractors could not be considered ‘construction’ under
Article 5(2)(h).
- To bring an establishment of the kind not
mentioned in Article 5(2) within the ambit of PE, the criteria in Article 5(1)
should be satisfied. The two criteria are (a) existence of a fixed place of
business; and (b) wholly or partly carrying out of business or enterprise
through that place.
- The
Tribunal held that the assessee had a fixed place PE in India in the form of
the vessel on which equipment was placed and personnel were stationed for the
following reasons:
1. For carrying out
the grouting activity, equipment was the main place of business for the
assessee and equipment was placed and personnel were stationed on the vessel of
the main contractor. Further, in terms of the contracts, the assessee was
required to ensure that whenever required by the main contractor, personnel and
equipment will come to India, and, after completion of work, were sent out of
India until required by the main contractor again. Thus, the equipment and
personnel were demobilised after the work was completed.
2. Further,
the agreement entered into between the assessee and the customers in India
provided for free of charge food and accommodation to the personnel on board
the offshore vessel.
3. Thus,
the assessee had a fair amount of permanence through its personnel and its
equipments, within the territorial limits of India, to perform its business
activity for contractors with whom it has entered into agreements.
4. Thus,
the vessel on which equipment was placed and personnel were stationed, was the
fixed place of business through which business was carried on by the assessee.
5. Accordingly,
criteria under Article 5(1) were satisfied.
- Both the OECD Commentary and Professor Klaus
Vogel’s commentary mention that as long as the presence is in a physically
defined geographical area, permanence in such fixed place could be relative
having regard to the nature of business. Hence, the placing of equipment and
stationing of the personnel on the vessel of the main contractor constituted a
fixed place of the business of the assessee in India.
- The Coordinate bench’s decision in the
assessee’s own case for the A.Y. 2007-08 (see NOTE below) needed
reconsideration in view of the fact that the existence of a fixed place PE has
been decided by holding that ‘equipment’ cannot be held as a fixed place of
business and such view was not in accordance with the Supreme Court’s decision
in case of Formula One World Championship Ltd. (80 taxmann.com 347).
{NOTE:
For the A.Y 2007-08, the Delhi Tribunal had ruled in favour of the tax-payer by
stating that activities carried out by assessee amounts to ‘construction’ and
since the duration test of each contract is not satisfied, there was no
construction PE in India. Further, it held that Article 5(1) could not be
applied where activities are covered under the specific construction PE article
[Article 5(2)(h)] of the DTAA.}
