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Article 5(2)(i), 5(2)(c) of India-Mauritius DTAA – no construction PE in India as duration of each project in India was less than 9 months; Activities of LO being solely of a preparatory or auxiliary character, falls within the exclusion in Article 5(3)(e).
Facts
The Taxpayer, a Mauritius company was a member of a global group of companies, was engaged in transportation, installation and construction of offshore platforms for mineral oil exploration in India. During the relevant year, the Taxpayer carried out only one project the duration of which was only three months.
The AO considered the work executed by the Taxpayer at different locations in terms of different contracts represented one project. Accordingly, the AO aggregated number of days for execution of all the contracts and held that it exceeded period of 9 months. The AO also included the number of days estimated to have been spent for supervisory activities before the actual commencement of construction work. Thus, the AO held that the Taxpayer had a PE in India under Article 5(2)(i) (Construction PE) of India-Mauritius DTAA . Further, relying on the report of a survey carried out u/s. 133A of the Income-tax Act, 1961 (the Act), concluded that the LO premises of group company of the Taxpayer were used exclusively for the Taxpayer’s business and therefore the LO was a Fixed Place PE under Article 5(2)(c). Accordingly, the AO determined the taxable income of the PE and taxed it u/s. 44BB of the Act.
In appeal, CIT(A) held that while the Taxpayer did not have construction PE under Article 5(2)(i), it had Fixed Place PE since the LO was exclusively used for the projects of the Taxpayer in India.
The issues before the Tribunal were:
a) Whether independent activities of the Taxpayer under different contracts were to be aggregated for determining the 9-month threshold period under Article 5(2)(i) of India-Mauritius DTAA ?
b) Whether LO of group company of the Taxpayer constitute PE of the Taxpayer under Article 5(2)(c) of India-Mauritius DTAA ?
Held
As regards Construction PE
(i) In earlier year, the Tribunal after considering the language in Article 5(2)(i) had held that the permanence test for existence of a PE stands substituted by a duration test for building construction, construction or assembly project, or supervisory activity connected therewith. There is also a valid, and more holistic view of the matter, that this duration test does not really substitute permanence test but only limits the application of general principle of permanence test in as much as unless the activities of the specified nature cross the threshold time limit of nine months, even if there exists a PE under the general rule of Article 5(1), it will be outside the ambit of definition of PE by virtue of Article 5(2)(i).Plain reading of Article 5(2) (i) would show that, for the purpose of computing the threshold time limit, what is to be taken into account is activities of a foreign enterprise on a particular site or a particular project, or supervisory activity connected therewith on an independent and standalone basis.
(ii) As there is no specific mention about aggregating the number of days spent on various sites, projects, etc. each of the sites, projects, etc. is to be viewed on standalone basis. Thus the contention that all projects need to be aggregated for computing the threshold of 9 months is not valid.
(iii) In the relevant year Taxpayer carried on only one project and the duration of which did not exceed 9 months. Thus, the Taxpayer did not have a construction PE in India.
As regards LO as PE
(i) There was no material on record that the employees of the LO had reviewed engineering documents or had participated in discussions or approval of the designs. LO merely provided back office support in relation to projects in India. None of the documents showed that the employees of the LO negotiated or concluded contracts for the Taxpayer, or that substantive business was carried out from the LO. In absence of such material, the claim of the Taxpayer that its Project Office was merely a communication channel had to be accepted.
(ii) Since the main business of the Taxpayer was fabrication and installation of platforms, PE trigger can be examined only under Article 5(1)(i) Thus, the issue of determination of its ‘PE’ through any other clause does not arise unless and until any other activity is taken up by the Taxpayer which is having an independent identity or economic substance and yielding separate business profits
(iii) Thus, since the project of the Taxpayer did not have work duration of more than 9 months during the year, an activity of the maintenance of back-up cum support office ‘simpliciter’ will not constitute ‘PE’ in India.
