(AAR) (2009 TIOL 23 ARA IT)
AAR No. 790 of 2008
Dated : 11-9-2009
Issues :
German company is not liable to pay tax in respect of its
supervision activity in India which is expected to last for about 2 months.
Independent sub-contractor’s time is not to be added for
determining threshold for construction of PE.
Article 5, 12, India-Germany Treaty; S. 9(1)(vii),
Income-tax Act.
Facts :
The applicant, a German company, was awarded a contract by
Tuticorin Port Trust (TPT) on 28th November, 2006 through the process of
international bidding.
The scope of work for the contract was ‘work design,
fabrication supply, transportation, delivery, installation and maintenance of
mild steel, navigational channel and fairway buoys, mooring gear and solar
operated navigational lighting equipments’ in relation to Sethu Samudram Ship
Channel Project being executed by TPT in Tamil Nadu.
The applicant sub-contracted certain part of work to
independent third parties in India. Though the agreements with the
sub-contractors were entered into in 2006, formal permission for
sub-contracting was obtained from the TPT in June, 2009.
The following work was to be undertaken by the applicant :
(i) Study of the technical requirements in relation to
the execution of the Contract.
(ii) Designing of Fairway Buoys, Mooring Gears and Solar
Operated Navigational Equipments.
(iii) Supply of critical components to sub-contractors,
if required.
(iv) Supervision of installation of equipments and other
items mentioned in the Main Contract, as and when the installation is
carried out by the sub-contractor.
The scope of work mentioned in point (ii) and (iii) above
was to be executed by the applicant’s office in Germany.
(v) The work at point (iv) was to be carried out in India
and for this purpose two engineers were to be deputed to India. The work was
expected to last for not more than 2 months.
Before the AAR, the applicant contended that as per clause
(i) of Article 5.2 of the India Germany DTAA, it is not expected to have
Permanent Establishment in India and in absence thereof, no part of income is
liable to tax in India. In this regard the applicant placed reliance on the
decision of the Andhra Pradesh High Court in CIT v. Vishakapatnam Port
Trust, (144 ITR 146).
The revenue contended that the sub-contractor is
undertaking various activities which constitute the core of the contract work
entrusted to the applicant. All the activities undertaken by the
sub-contractor are on behalf of the applicant and in connection with the
execution of the contract between the applicant and TPT. As a result, length
of construction of PE needs to be reckoned having regard to time spent by the
sub contractor. Alternatively, place of manufacture of the sub-contractor
constitutes permanent establishment of the applicant itself. Still
alternatively, the revenue contended that length of construction PE needs to
be reckoned.
The revenue authorities also contended that the services
rendered for designing are taxable as fees for technical services under
Article 12.4 of the Indo German DTAA.1
Held :
AAR held :
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The work/project of the
applicant are in the nature of construction project. As a consequence,
article 5.2 gets attracted and therefore duration test of six months
necessarily applied to determine whether the applicant has taxable presence.
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AAR referred to and relied on
earlier ruling in the case of Cal Dive Marine Construction (Mauritius) Ltd.
315 ITR 334 to conclude that once construction PE clause is attracted,
minimum period test has to be necessarily applied. The fact that the
applicant may have a project office or a workshop for the purpose of
carrying out contract work does not bring the establishment of the applicant
within the other clauses of Article 5(2) to the exclusion of requirement of
minimum duration test of construction PE. In case of construction PE, a
specific provision dealing with construction or assembly project, prevails
over the other general clauses of Article 5(2). An office or workshop,
established as a part of or incidental to the execution of a construction or
assembly project does not alter the minimum period test contemplated by
construction PE.
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The fact that sub-contractor
is only a nominee carrying out the work which otherwise would have been
performed by the applicant does not transform the workshop of the
sub-contractor into the PE of the applicant. The sub-contractor cannot be
treated as a dependent agent of the applicant. Article 5 of the treaty
regards a place to be a PE only if the applicant carries on business through
such place. The concept of PE conveys the idea that the enterprise has
visible presence in the other country. The presence can be either in the
form of applicant’s own PE or the presence of dependent agent. The
independent contractor does not satisfy any of these tests.
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The revenue’s reliance on OECD
commentary which indicates that the time taken by a sub-contractor needs to
be added for reckoning threshold of PE of general contractor is limited in
its application to a situation where the building site is set up by the main
contractor and the services of the sub-contractor are deployed in aiding the
execution of such building project with conjoint effort of contractor and
sub-contractor. In case of the applicant, the sub-contractor carries out
fabrication and assembly at a place away from the installation site by
independently running such facility and does not get covered by this
contingency.
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The aspect of comprehensive
responsibility being that of the contractor as also the furnishing of
performance guarantee by applicant does not alter the legal position above.
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