Construction PE clause determines Existence of PE in case of engineering, procurement, commissioning services provider in oil fields Construction
Court :Mumbai bench of the Income-tax Appellate Tribunal
Citation : DDIT v. Clough Projects International Pvt. Ltd. (2010-TII-55-ITAT-MUM-INTL)
Brief :Mumbai bench of the Income-tax Appellate Tribunal held that carrying out engineering, procurement, installation and commissioning services in oil fields was in the nature of an installation project.
Therefore, for determining the existence of Permanent Establishment (PE) of the taxpayer in India, the construction PE clause (See Note- 1) of the India-Australia tax treaty (the tax treaty) is relevant and not the clause which deals with oil gas or gas well(See Note-2).
Further, since the installation projects were not carried on for more than six months, the construction PE clause of the tax treaty is not attracted.
The Mumbai Tribunal also held that a construction PE clause will come into effect only when the supply of steel arrives at the oil well site, which was falling in the next financial year.
Facts of the Case
• The taxpayer, an Australian company, entered into an agreement with an Indian company on 5 November 2004 for carrying out engineering, procurement, installation and commissioning services of three wellhead platforms and modifications to existing platforms in certain Oil fields in India. The taxpayer received USD 111,444,196 on 15 February 2005 on account of lump sum payment. For Assessment Year (AY) 2005-06, the taxpayer filed a tax return declaring nil income on the grounds that as per the provisions of the tax treaty, the taxpayer did not have PE in India and therefore, its business profits were not taxable in India.
• However, the Assessing officer (AO) held that since the taxpayer was exclusively dealing with the commissioning of new platform for oil wells, as per Article 5(2)(f) of the tax treaty the taxpayer formed PE in India. Accordingly, the AO estimated the income of the taxpayer at the rate of 10 percent of the gross receipts in terms of Section 44BB(2) of the Act.
• The taxpayer contended that Article 5(2)(f) of the tax treaty would apply to a person actually operating the mine, oil or gas well, etc. However, the work performed and to be performed by the taxpayer was in the nature of an installation project and therefore, the Article 5(2)(k) of the tax treaty dealing with construction PE would be applicable instead of Article 5(2)(f) of the tax treaty. The taxpayer also relied on the AAR decisions in the case of Advance Ruling P. No. 14 of 1997, In Advance Ruling P. No. 14 of 1997, In re  100 TAXMAN 1 (AAR) and Brown & Rout Inc v. CIT  237 ITR 156 (AAR).
• Further, for AY 2005-06, the taxpayer did only limited work like contracting with the sub-contractor, identifying the vendor for the purpose of procurement of necessary materials and equipments, etc. and did not work on the site.
• The Commissioner of Income-tax (Appeals) [CIT(A)] observed that the taxpayer was an engineering company and not a natural resource company. Further, the appellant has no right over the gas or oil well which was belonging to an Indian company. Accordingly, the CIT(A) after relying on the AAR decision in the case of Advance Ruling P. No. 14 of 1997, In re held that the taxpayer was not covered by Article 5(2)(f) of the tax treaty.
• Since the taxpayer entered into a contract with an Indian company for installing and commissioning three well head platform and modifications of existing platforms, its case was covered by Article 5(2)(k) of the tax treaty. However, since the taxpayer entered into an agreement on 5 November 2004, the taxpayer did not complete six months during the AY 2005-06. Therefore, taxpayer did not create PE in India in terms of Article 5(2)(k) of the tax treaty.
• Further, during the year under consideration, the work performed by the assessee was limited to placing orders for the offshore supply of steel and fabrication outside India and delivery of steel commenced on 30 April 2005. Accordingly, the CIT(A), after applying the decisions of Supreme Court in the case of Ishikawajima Harima Heavy Industries Co. Ltd. v. DIT 288 ITR 408 (SC) and CIT v. Hyundai Heavy Industries Co. Ltd.  291 ITR 482 (SC), held that an installation PE will commence when the supply of steel arrives at the oil well site, which falls in the next financial year.
• The Tribunal while upholding the order of the CIT(A) and after relying on the decision of the AAR in the case of Brown and Root Inc. held that since an installation project was not carried on for more than six months, as per Article 5(2)(k) of the tax treaty the taxpayer did not create PE in India.
1. Article 5(2)(k) of the tax treaty provides that the term “Permanent Establishment” shall include especially a building site or construction, installation or assembly project, or supervisory activities in connection with such a site or project, where that site or project exists or those activities are carried on (whether separately or together with other sites, projects or activities) for more than 6 months.
2. Article 5(2)(f) of the tax treaty provides that a PE shall include a mine, an oil gas or gas well, a quarry or any other place of extraction of natural resources.