This Tax Alert summaries a recent ruling of the Mumbai Income Tax Appellate Tribunal (Tribunal) [2010-TIOL-195-ITAT-MUM] in the case of Valentine Maritime Mauritius Ltd (Taxpayer), on the tax ability of certain contracts executed in India. The issue primarily focused on how the ‘duration test’ of nine months under the India-Mauritius Tax Treaty (Tax Treaty) should be applied for determining whether the Taxpayer has a permanent establishment (PE) under the Construction PE rule of the Tax Treaty.
Considering the facts of the case, the Tribunal held that the number of days relating to each of the contracts cannot be aggregated to determine the ‘duration test’, as the activities carried out therein are not inextricably interconnected or interdependent and do not form a coherent whole in conjunction with each other. The ‘duration test’ would need to be applied independently for each contract executed, for determining a PE. In view of the fact that under each of the contracts, the time duration did not exceed the threshold of nine months, the same was held not to constitute a PE under the Tax Treaty.
Background and facts of the case
The Taxpayer is a company incorporated in Mauritius, possessing a Mauritius tax residency certificate and is eligible for the Tax Treaty benefits. The Taxpayer is engaged in the business of marine and general engineering and construction. During the relevant tax year, the Taxpayer executed the following contracts in India:
|Particulars||Nature of activities||Duration|
|Contract 1||Replacement of a deck||100 days|
|Contract 2||Charter of a barge (for accommodation purposes)||137 days|
|Contract 3||Charter of a barge along with the provision of technical personnel||225 days|
Under the Tax Treaty, a PE is defined to mean a fixed place of business through which the business of a foreign enterprise is wholly or partly carried on (Fixed Place PE rule). It also includes a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activities continue for a period of more than nine months (Construction PE rule). Under the Tax Treaty, income in the nature of ‘business profits’ of a foreign enterprise (such as the Taxpayer) are taxable in India only if there exists a PE of the taxpayer in India.
Issue before the Tribunal:- The main issue before the Tribunal was whether the Taxpayer had a PE in India under the Construction PE Rule.
Ruling of the Tribunal
On the relationship between ‘fixed place PE’ and ‘construction PE’
On ‘fixed place PE’
On ‘duration test’ under the Construction PE rule :-The Tribunal held that only the activities of a foreign enterprise on a particular site/ project, or supervisory activity connected therewith, are to be taken into account and not all the activities in the country as a whole. The Tribunal’s reasoning and the key observations in this regard are as follows:
The Tribunal, thus, upheld the order of the first appellate authority which held that the duration of the three contracts cannot be aggregated for the purpose of determining the existence of a PE. Accordingly, it held that there was no PE of the Taxpayer in India.
India’s tax treaties are based on a combination of the OECD and the UN Model Tax Conventions. Although India is not a member of the OECD, the courts in India (as in the present case) have often referred to the OECD Commentary for interpreting India’s tax treaties to the extent that the language in a particular tax treaty is consistent with the text of the OECD Model Convention.
In determining the ‘duration test’ under the Construction PE rule under tax treaties, unless the treaties themselves provide for aggregation of contracts, doubts sometimes arise on the applicability of the aggregation principle. The present ruling provides useful guidance on the factors to be considered while applying the ‘duration test’. In addition to acknowledging the OECD test of ‘commercial and geographic coherency’, the Tribunal has provided additional guidance by holding that factors such as nature of activities, their interconnection and interrelationship and whether these activities are required to be essentially regarded as a coherent whole in conjunction with each other, would require consideration.