Activities relating to installation of pipe lines by a marine vessel are treated as ‘construction and assembly’ and results into PE if carried on for more than nine months under the India Mauritius tax-treaty

GIL Mauritius Holdings Ltd Vs ADIT

ITAT Delhi

 ITA No. 5686(Del)/2010

Dated- 16 September, 2011

(AY- 2007- 08)

Facts- The taxpayer is a tax resident of Mauritius. BG Exploration & Production India Ltd (BG) is a co-venturer with ONGC Ltd and Reliance Industries Ltd, who are party to the production sharing agreement for Panna, Mukta and South Tapti contract areas. These three co-venture rs nominated BG to get work carried out through the taxpayer regarding offshore transportation and installation of pipe line. The taxpayer entered into an agreement with BG to carry out work towards the said activity. The taxpayer was of the view that the work undertaken by it falls under assembly or installation work under Article 5(2)(i) of the tax treaty and the said work has not been carried out for more than nine months.

Accordingly, it did not have a PE in India. However, the AO  held that the taxpayer has a PE under Article 5(1) of the tax treaty. The AO did not examine Article 5(2)(i) of the tax treaty. The Dispute Resolution Panel (DRP) rejected the taxpayer’s contentions and held that the taxpayer has a PE in India in view of the decision of Fugro Engineering B.V. v. ACIT [2008] 122 TTJ 655 (Del) . The DRP held that in the absence of profit and loss account, the AO has rightly estimated the income at the rate 25 percent of the total revenue.

Ruling of the Delhi Tribunal -The words “construction‟and “assembly‟appearing in Article 5(2)(i) have not been defined in the DTAA. The dictionary meaning of “assemble‟is to fit or join together, as the parts of machine and, therefore, the word “assembly” means the act or process of fitting together the parts of a machine, etc., especially where such parts are machine-made in great numbers so as to be inter-changeable. The act of the taxpayer of putting together pieces of pipe lines in a desired manner would be considered as “assembling”and therefore is carrying on the business of assembling pipelines. On the interplay of paragraph (1) and (2) of Article 5 of the DTAA, if it is construed that if the vessel of the taxpayer is held to be constituting a fixed place PE under paragraph (1) of Article 5 without taking into consideration the threshold specified under paragraph 5(2)(i) of 9 months, then the said paragraph would become otiose for the reason that all construction or assembly projects will have a fixed place of business. Paragraph (1) and (2) of Article 5 of the DTAA have to be construed harmoniously and thus if the construction/ assembly activities of the taxpayer did not last for more than 9 months as specified under paragraph 5(2)(i), it could not be said to have a PE in India.