India-UAE DTAA-Project office used as communication channel is not a Permanent Establishment – Delhi High Court
Brief of the Case
Delhi High Court held In the case of National Petroleum Construction Company vs. DIT that in DIT (International Taxation) v. Morgan Stanley & Company Inc. (2007) 292 ITR 416 (SC), the Supreme Court held that the back office operations carried on at an office would fall within the exclusionary clause of Article 5(3) (e) of the Treaty between India and United States which is also identically worded as Article 5(3) (e) of the India-UAE DTAA. Further the Oxford Dictionary defines the word ‘auxiliary’ to mean “providing supplementary or additional help and support”. In the context of Article 5(3) (e) of the India-UAE DTAA, the expression would necessarily mean carrying on activities, other than the main business functions, that aid and support the Assessee. So, in the context of the contracts in question, where the main business is fabrication and installation of platforms, acting as a communication channel would clearly qualify as an activity of auxiliary character – an activity which aids and supports the Assessee in carrying on its main business. In view of the above, the activity of the Assessee’s Project Office in Mumbai would clearly fall within the exclusionary clause of Article 5(3) (e) of the India-UAE DTAA and, therefore, cannot be construed as the Assessee’s PE in India.
Facts of the Case
The Assessee is a company incorporated under the laws of UAE and is a tax resident of that country. The Assessee is, inter alia, engaged in fabrication of petroleum platforms, pipelines and other equipment and in addition, the Assessee also undertakes contracts for installation of petroleum platforms, submarine pipelines and pipeline coating at various sites. The controversy involved in the present appeals principally relates to the taxability of income earned by the Assessee in respect of a contract entered into by it with ONGC Limited, a public sector enterprise. The aforesaid contract entailed designing, engineering, procurement, fabrication of fully loaded offshore platform and its installation, testing and commissioning at an offshore facility of ONGC. According to the Revenue, the income from the said contract is liable to be taxed in India as the Assessee is stated to have a Permanent Establishment (PE) in India. According to the Assessee, its income from the contract in question is not taxable under the Act by virtue of the Double Taxation Avoidance Agreement between India and United Arab Emirates (UAE) (hereafter referred to as the ‘DTAA’).The Assessee claims that it does not have a PE in India and further, in any event, the income from fabrication and supply of platform is not taxable as the same pertains to the Assessee’s activities outside India.
Contention of the Assessee
The ld counsel of the assessee submitted that the Assessee had established the Project Office only to comply with the contractual requirements and the applicable exchange control regulations. The Project Office merely acted as a communication channel between the Assessee and ONGC and apart from that, it had no other role to play. He pointed out that the addresses of the project offices in the past were different and the said project offices had been established only for the contracts entered into earlier. He submitted that, therefore, the existence of the Assessee’s project offices in the past could not be linked to the Project Office established for the purpose of the contracts in question. He argued that the AO erred in holding that the Assessee had carried its business in India through a PE by alluding to the project offices established by the Assessee in respect of prior contracts.
He further submitted that the only activity carried out by the Assessee in India was the installation and commissioning of the platforms which was carried out by the Assessee’s employees at the offshore site with the help of barges. He submitted that the pre-engineering and pre-construction surveys were done by an independent third party, M/s Fugro-Geonics Pvt. Ltd., an Indian company which was engaged on a principal-to-principal basis. He contended that the finding that the Project Office was involved in pre-bid meetings and/or survey and/or kick-off and/or review meetings was erroneous as these meetings were attended by the Assessee’s employees from Abu Dhabi and the Project Office was not involved.
He further submitted that the Project Office acted as Assessee’s backoffice for liaison, coordination and collection of information from ONGC. He relied upon the decisions in CIT v. BKI/HAM: (2012) 347 ITR 570 (Uttarakhand); Cal Dive Marine Construction (Mauritius) Ltd., In Re: (2009) 315 ITR 334 (AAR); and DIT v. Hyundai Heavy Industries Co. Ltd.: (2009) 31 SOT 482 (ITAT[Del]) in support of his contention that the Assessee’s activity of installation and commissioning of platforms could be examined only in the light of the provisions of Article 5(2)(h) of the DTAA. Mr Aggarwal relied on the decision of UAE Exchange Centre Limited v. UOI: (2009) 313 ITR 94 (Del) and IAC v. Mitsui &. Co. Ltd.: (1991) 39 ITD 59 (ITAT[Del]) in support of its contention that the back office function of collection of information was specifically excluded from the purview of PE by virtue of Article 5(3)(d) and 5(3)(e) of the DTAA.
He further submitted that in terms of article 5(2) (h) of the DTAA, the Installation PE would come into existence only if the construction or assembling activity continued for a period of nine months or more in India. He argued that the earliest date which could be considered for calculating the period would be the date when the barges with the fabricated platforms reached the work site, that is, on 19th November, 2006. Mr Aggarwal submitted that the pre-engineering and pre-construction surveys were carried out by an independent Indian company for a period of 9 days and 27 days respectively and the same did not entail assuming control over the work site. He argued that the activities of the independent sub-contractor could not be included for calculating the period of nine months under Article 5(2)(h) of the DTAA. He further submitted that the time taken for pre-bid activities, notification of award, signing of the contract and meetings with ONGC were irrelevant for calculating the existence of an Installation PE since such work did not result in acquiring control over a work site.
He further contended that the contracts in question were composite contracts and all activities were closely linked. Thus, the contract could not be split between the activities carried out overseas and activities carried out in India. He further contended that the ownership of the platforms and other material was transferred to ONGC only on ONGC issuing a certificate of completion and acceptance of work. Thus, the Assessee’s contention that the income from activities conducted in relation to design, procurement of material and fabrication of the platforms, was not attributable to the PE in India was erroneous.
Held by the Revenue
The ld counsel of the revenue submitted that the Assessee had filed a return admitting that it had a PE in India and in the circumstances, a contrary claim could not be made by the Assessee at the time of the Assessment. He relied upon the decision of the Supreme Court in the case of Goetze (India) Ltd. v. CIT: (2006) 284 ITR 323 (SC) in support of his contention. He further referred to the decision of the Supreme Court in Radhasoami Satsang v. Commissioner of Income Tax: (1992) 193 ITR 321 (SC) and contended that the Assessee cannot be permitted to depart from its consistent stand that had been sustained over the past several years.
He referred to The Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000 issued by the Reserve Bank of India as amended on 2nd July, 2003 and drew the attention of this Court to the definition of ‘project office’ which is defined as “a place of business to represent the interest of the foreign company executing a project in India but excludes a liaison office”. He contended that in the circumstances, the Assessee’s contention that the project office had no role to play in the execution of the project was contrary to the record.
He further submitted that the Project Office was only involved in preparatory and auxiliary activities and consisting of only three employees. He submitted that the reliance placed by the Assessee on the annual accounts of the PO was not justified as it did not include the cost of supplies and expenses which were incurred and recorded in the accounts of the head office. He pointed out that the value of fringe benefits was reported at Rs.13,45,071/- and, admittedly, payments to the extent of Rs.20,28,66,569/- were made in India on which TDS had been deducted and paid. He also pointed out that, admittedly, the TDS returns had been filed by the Project Office in India. He submitted that in the circumstances, the Assessee’s contention that the Project Office in India had only carried on preparatory and auxiliary activities was not sustainable.
Held by ITAT
The ITAT concurred with the AO and rejected the Assessee’s contention that it did not have a PE in India. The ITAT observed that the Assessee had itself shown the Project Office in Mumbai as its PE in India and the Assessee’s employees were present during the negotiation of the contracts in question. The ITAT further reiterated the DRP’s observation that the Assessee had not disputed that the employees of the Project Office also attended the kickoff meeting with ONGC. The ITAT also concurred with the DRP’s conclusion that it was not possible for the Assessee, a non-resident company, to execute a contract which lasted for approximately two years without having any place of business in India from where the project could be managed. Accordingly, the ITAT concluded that the Assessee’s Project Office in India was its PE.
However, the ITAT accepted the Assessee’s contention that the contract in question could be segregated into offshore and onshore activities and the Assessee’s income for the activities carried out outside India could not be attributed to its PE in India. Accordingly, it held that the profits attributable to design, procurement of material and fabrication could not be taxed in India.
Held by High Court
High Court held that Paragraph 1 of Article 5 provides an overarching general definition of the expression ‘Permanent Establishment’ (PE). It defines a PE to mean a fixed place of business through which the business of an enterprise is wholly or partially carried on. It is clear from the aforesaid definition that the expression ‘Permanent Establishment’ entails (a) a fixed place of business; and (b) business of the enterprise being carried on wholly or partially through the said fixed place of business. These two conditions must necessarily be satisfied for the existence of a PE. In addition, the word permanent in the term ‘Permanent Establishment’ indicates that there should be some degree of permanency attached to the fixed place of business before the same can be construed as a PE of an enterprise. The word permanent does not imply for all times to come but merely indicates a place which is not temporary, interim, short-lived or transitory. In Re. P. No. 24 of 1996: (1999) 237 ITR 798 (AAR), the Authority for Advance Ruling referred to Baker’s “Double Taxation Conventions and International Tax Law, second edition”, wherein the author had cited the decision in Henriksen v. Grafton Hotel Limited: (1943) 11 ITR (E.C.) 10 (CA) and explained that the expression “permanent” is relative and not synonymous with “everlasting”; the AAR ruled that it was used only in “contradistinction to something fleeting, transitory, temporary or casual”.
It is clear from the plain language of paragraph 1 of Article 5 as well as Article 5(3)(e) of the DTAA that the functions performed at an office maintained by an enterprise would be vital to determine whether the office could be construed to be the PE of that enterprise for the purposes of the DTAA. First of all, the business of an enterprise must be carried on, wholly or partially, through the office in question; secondly, the business activity carried on must not be that of a preparatory or auxiliary character. It is the Assessee’s case that its office at Mumbai was opened only to comply with contractual requirements and the exchange control regulations and was used only as a communication channel and not for the execution of the Contracts. The Project Office was only used for the purposes of correspondence and as a communication channel; apart from that, the Project Office had no role to play in the execution of the activities under the Contracts and no other business of the Asse.p;.[ssee was carried on through the Project Office. The Project Office was manned by three employees; (i) Ravi K. Prabhakar; (ii) Pavithran; (iii) Vijayan. While Ravi K. Prabhakar was designated as a Logistics Coordinator, Pavithran and Vijayan were employed as Office Assistants.
In our view, in absence of any material, observations made with regard to the employees of the Project Office being present at the meeting cannot be sustained. Similarly, there is also no material that the employees of the Project Office had participated in review of the engineering documents done in Mumbai or had participated in the discussions or approval of the designs submitted to ONGC. In absence of any material evidence to controvert the Assessee’s claim that its Project Office was only used as a communication channel, the same has to be accepted.
Whether acting as a communication channel would fall within the exception of clause (e) of paragraph 3 of Article 5 of the DTAA.
The language of sub-para (e) of paragraph 3 of Article 5 of the DTAA is similar to the language of sub-para (e) of paragraph 4 of Article 5 of the Model Conventions framed by OECD, United Nations as well as the United States of America. The rationale for excluding a fixed place of business maintained solely for the purposes of carrying on activity of a preparatory or auxiliary character has been explained by Professor Dr. Klaus Vogel. In his commentary on “Double Taxation Conventions, Third Edition”, he states that “It is recognised that such a place of business may well contribute to the productivity of the enterprise, but the services it performs are so remote from the actual realisation of profits that it is difficult to allocate any profit to the fixed place of business in question. Examples are fixed places of business solely for the purpose of advertising or for the supply of information or for scientific research or for the servicing of a patent or a know-how contract, if such activities have a preparatory or auxiliary character”.
In DIT (International Taxation) v. Morgan Stanley & Company Inc.: (2007) 292 ITR 416 (SC), the Supreme Court held that the back office operations carried on at an office would fall within the exclusionary clause of Article 5(3)(e) of the Treaty between India and United States which is also identically worded as Article 5(3)(e) of the DTAA. Further the Oxford Dictionary defines the word ‘auxiliary’ to mean “providing supplementary or additional help and support”. In the context of Article 5(3)(e) of the DTAA, the expression would necessarily mean carrying on activities, other than the main business functions, that aid and support the Assessee. In the context of the contracts in question, where the main business is fabrication and installation of platforms, acting as a communication channel would clearly qualify as an activity of auxiliary character – an activity which aids and supports the Assessee in carrying on its main business. In view of the above, the activity of the Assessee’s Project Office in Mumbai would clearly fall within the exclusionary clause of Article 5(3)(e) of the DTAA and, therefore, cannot be construed as the Assessee’s PE in India.
Accordingly, appeal disposed of.