Duration of each contract is to be taken into consideration separately for determining whether or not any PE was constituted

IN THE ITAT MUMBAI BENCH ‘L’

Deputy Commissioner of Income-tax, Circle 3(1), Mumbai

versus

J. Ray McDerrmott Eastern Hemisphere Ltd.

IT APPEAL NO. 2089 (MUM.) OF 2011

[ASSESSMENT YEAR 1997-98]

OCTOBER 12, 2012

ORDER

R.S. Syal, Accountant Member

This appeal by the Revenue arises out of the order passed by the Commissioner of Income-tax (Appeals) on 27.01.2011 in relation to the assessment year 1997-1998.

2. The only ground raised by the Revenue is against the direction of the learned CIT(A) to delete the amount received from contract work done in India ignoring the fact that the said contract amount was attributable to its Permanent Establishment (PE) in India.

3. Briefly stated the facts of the case are that the assessment order in this case was passed on 24.03.2000 determining total income at Rs. 7.15 crore against the income declared by the assessee at Rs. Nil. The learned CIT(A) vide his order dated 30.03.2004 came to hold that the duration of work in India exceeded 9 months and the period for all the contracts should be taken together under Article 5 of Indo-Mauritius treaty to constitute the PE of the assessee in India. The action of the A.O. in taxing the income u/s 44BB was confirmed. The assessee preferred appeal before the Tribunal which came to be disposed off vide its order dated 22.03.2010 in ITA No.8084/Mum/ 2004 (since reported as J Ray McDermatt Eastern Hemisphere Ltd. v. Jt. CIT [2010] 39 SOT 240 (Mum.). The Tribunal restored the matter to the file of the learned CIT(A) with the following directions :-

“Having held that aggregation of time spent on each of the contracts in India is not required, this nevertheless to be examining whether time spent on a specific contract is more than nine months or not. The CIT(A) ought to have examined this aspect of the matter and given her findings on duration of each project site. We, therefore, consider it necessary to remit the matter for the limited purposes of adjudication on this aspect of the matter. Even as we do so, it is necessary to point out that what is required to be ascertained is the time spent on the contract and it is nothing to do with the dates on which invoices are raised for advances and for demonization’s and sail outs. As the UN Model Convention Commentary, incorporating OECD Model Convention Commentary, puts it, “a site exists from the date on which the contractor begins his work, including any preparatory work, in the country where the construction is to be established, e.g. if he installs a planning office for the construction” and that “in general, it continues to exist until the work is completed or permanently abandoned”. These commentaries further added that “a site should not be regarded as ceasing to exist when work is temporarily discontinued”. These observations very appropriately set out the right principles in the light of which the duration of a site is to be ascertained for the purpose of applying threshold limit of duration test. The date on which invoice is raised for mobilization advance, as adopted by the Assessing Officer in this case, is also not decisive for the purpose of determining the duration of the PE. On what date a requisition is made for advance has nothing to do with actual work, or incidental preparatory work preceding, and thus forming integral part of, the actual core work, at site. Similar sail out barge is an activity which takes place after the work at site comes to an end. The date on which sail out of barge starts or is completed is essentially a date subsequent to abandoning the work at the site.

This date is also not, therefore, relevant for the purpose of deciding the date on which activity at site comes to an end. It is also important to bear in mind the fact that the dates of commencement and completion of work set out in the contracts are only indicative of plans and cannot be substituted for the actual dates of commencement of work and completion of work – as evidenced by the material on record. The work schedule set out in the contract cannot, therefore be decisive of date of commencement and completion of work at site. What is already required to be seeing, as we have elaborated above, is the duration for which the work actual or preparatory is carried out at site.”

4. The learned CIT(A), in the fresh proceedings pursuant to the order passed by the Tribunal, came to hold that the duration of work in India in respect of each contract did not exceed 9 months and hence the assessee did not have any PE in India. It is this finding of the learned CIT(A) against which the Revenue is aggrieved in the present appeal.

5. We have heard the rival submissions and perused the relevant material on record. No material has been placed on record to indicate that the earlier order passed by the Tribunal in assessee’s own case on 22.03.2010 was assailed before the Hon’ble Bombay High Court. It shows that the said order has attained finality. We will, therefore, proceed to examine the implementation of the direction given to the learned CIT(A) by the Tribunal in its order. It can be observed from the afore-quoted direction of the Tribunal that the learned first appellate authority was required to examine and determine the duration in respect of three contracts independently and not on a consolidated basis. It was further directed to count the period of say in India by considering the actual date of commencement and completion of the contracts and not what has been mentioned in the agreements. The Tribunal further held that the date on which invoice was raised is not decisive for the purpose of determining the duration of the PE and similarly on what date requisition was made for advance has also nothing to do with the actual work at site. The Tribunal also held that a site exists from the date on which the contractor begins his work, including any preparatory work, in the country where the construction is to be established and continues to exist until the work is completed or permanently abandoned. Further the date on which sail out of barge starts or is completed is essentially a date consequent to abandoning the work at site. The learned CIT(A) has tabulated the actual date of commencement and completion along with duration in respect of three contracts distinctly as under:-

6. From the above chart it is apparent insofar as first contract is concerned, the duration is 8 months 11 days. The learned CIT(A) has recorded a categorical finding that no preparatory work was done by the assessee in this regard as the construction designs were provided by the third party through independent contracts. The learned Departmental Representative could not controvert the finding given by the learned CIT(A) in this regard. Thus it becomes apparent that the duration in respect of first contract is only 8 months and 11 days, which is less than 9 months as per Article 5 of the Indo-Mauritius DTAA to constitute permanent establishment. The duration of second contract as per the above table is only 10 days and the third contract is 3 months and 14 days. Patently such duration is less than the prescribed period of 9 months. No material has been placed on record by the ld. DR to show that there is any infirmity in the impugned order in recording the starting or completion dates or the computation of duration in respect of such two contracts. Since the duration in both these contracts is less than nine months, obviously the mandate of article 5 can not be activated.

7. However, the learned Departmental Representative contended that the learned CIT(A) erred in considering the dates of commencement and actual date of completion by entertaining certain fresh material for the first time without confronting it to the Assessing Officer. It was therefore, requested that the matter may be sent back to the AO for verification of such facts. In response to it, the learned AR submitted that no additional material worth the name was placed before the learned CIT(A). He drew our attention towards the order passed by the learned CIT(A) in the first round dated 30.03.2004 in which there is a reference to the duration of work in respect of these three contracts independently. This contention of the ld. DR is not capable of acceptance. Be that as it may, there is no ground in the appeal about the violation of rule 46A of the I.T Rules, 1962.

8. From the above discussion it follows that the direction given by the Tribunal in the first round was confined to examining the duration in respect of each contract for determining whether or not any PE was constituted in terms of Article 5 of the DTAA between India and Mauritius. Such direction has been acted upon by the learned CIT(A), who after examination of the relevant material came to hold that for all the three contracts, the duration is less than 9 months. Once it is found that the duration in respect of each contract is less than 9 months, it will not constitute PE in terms of Article 5 of the DTAA with Mauritius. In the absence of any PE there cannot be any question of taxability of business profit as per Article 7. We, therefore, uphold the impugned order.

9. In the result, the appeal is dismissed.