By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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Hiring of dredger owned by Netherlands company for work in India under control and supervision of Indian company does not constitute PE in India.
Facts:
The assessee was an Indian company (‘IndCo’) engaged in the business of marine dredging and port construction. IndCo was awarded contract for dredging of Inner Harbour Channel. For executing the contract, IndCo hired a dipper dredger from a Netherlands company (‘DutchCo’). As per the agreement between IndCo and DutchCo, the dipper dredger was provided to IndCo with two charter coordinators and two operators. During the course of survey by Tax Authority it was found that IndCo had made certain payments to DutchCo for usage of dredger. It had not deducted tax from these payments. Hence, the AO held that the dredger constituted PE and permanent base of business of DutchCo in India. Therefore, the AO passed order u/s. 201 of Income-tax Act levying tax and interest.
Before the Tribunal, IndCo contended that:
- merely because it hired the dredger together with coordinators and operators, it does not mean that the contract was carried out by DutchCo;
- equipment hired from a foreign company cannot be construed as place of business of foreign company and to constitute permanent base of foreign company in India, the foreign company must have PE to control its business activities in India;
- IndCo paid salary, lodging, board, etc. of crew and DutchCo had not incurred any expenditure for the crew which stayed in India for operating the dredger;
- the crew was to work under the directions and instructions of IndCo;
- IndCo executed the work on its own utilising the dredger and no part of the work was done by DutchCo.
- DutchCo had nothing to do with execution of the dredging contract; and
- therefore, dredger cannot be said to constitute PE of DutchCo in India.
The Tax Authority contended that:
- the dredger belonging to DutchCo stayed in Indian territory for sufficiently long period;
- the dredger had living space for stay of crew; it had advanced instruments like computer and communication equipments, which met the essential requirements of office/work place;
- the dredger remained in a particular location; and
hence, DutchCo had a permanent place of business in India and the dredger should be considered as PE of DutchCo.
Held:
As regards PE under Article 5(1):
- Payments made by IndCo to DutchCo were hire charges.
- Hiring of dredger for operations under direction, control and supervision of IndCo cannot be construed as PE of foreign company in India.
- Provision of living space and presence of communication and other equipments, for effective usage at sea cannot be construed as PE.
As regards Article 5(3):
Installation of structure used for more than 183 days would constitute PE if the foreign company was carrying out the contract in India. Since IndCo was carrying out the contract and dredger was used by IndCo and not DutchCo, DutchCo cannot be said to have installed equipment or structure for exploration in India.
