Receipts of NRI for contract executed outside India cannot be taxed under the special provisions if the same is not taxable under the general provisions of the Indian Tax Law

This Tax Alert summarizes a recent ruling of the Mumbai Income Tax Appellate Tribunal (ITAT) [2010- TII-41-ITAT-MUM-INTL] in the case of J Ray Mc Dermott Eastern Hemisphere Ltd. (Taxpayer). The ITAT held that receipts pertaining to transportation and installation contract executed by the Taxpayer outside India cannot be taxed under the special provisions, which provide for taxation of certain income of a non-resident on presumptive basis, if the income is not chargeable to tax under the general provisions of the Indian Tax Law (ITL).

Background and facts of the case

• The Taxpayer, a company tax resident of Mauritius, was engaged in the business of designing, fabrication, construction and installation of platforms, docks, pipelines, jackets and other similar activities which are used in the exploration and production of mineral oil.
• The Taxpayer undertook and executed a contract for transportation and installation work under certain well platforms projects to be used in mineral oil exploration viz. N-11 and N­12.
• While filing its tax return, the Taxpayer did not offer the receipts pertaining to activities carried on outside India for tax.
• The ITL contains special provisions for taxation of income arising to a non-resident for providing services used in mineral oil exploration. Under this provision, 10% of the gross receipts of the non-resident is deemed to be income chargeable to tax.
• The Tax Authority ruled that as the source of income is related to an agreement for work to be carried on in India, the whole of the receipts would be taxable under the ITL. Further, as income is computed on presumptive basis under the ITL, the distinction between activities carried on in India and those outside India is not relevant and the gross receipts would be taxable.
• The first appellate authority reversed the decision of the Tax Authority.
• Aggrieved, the Tax Authority appealed against the decision of the first appellate authority.

Contentions of the Taxpayer

• Income pertaining to installation and transportation activities carried on outside India is not taxable under the ITL.
• Alternatively, income pertaining to the above activities or work carried on outside India cannot be attributable to a permanent establishment (PE) in India.

Contentions of the Tax Authority

The entire receipt arising on execution of the contract for installation and transportation is attributable to the PE of the Taxpayer in India.

Ruling of the ITAT

• The ITAT upheld the decision of the first appellate authority. The ITAT held that only income which is reasonably attributable to operations carried on in India is taxable in India. Income computed on presumptive basis can be taxed in India only if such income is chargeable to tax under the general provisions of the ITL.
• The ITAT placed reliance on certain rulings (Saipem SPA v. DCIT [88 ITD 213] (Delhi ITAT) and Mc Dermott ETPM Inc. v. DCIT [92 ITD 385] (Mumbai ITAT))  rendered in a similar context wherein it had been held that before computing income on presumptive basis, it needs to be ensured that such income falls within the scope of total income as envisaged under the ITL.

Comments

In the case of a non- resident, the ITL provides for computation of income on a deemed basis as a percentage of the amount paid to a taxpayer on account of provision of services and facilities, supply of plant and machinery etc. to be used in prospecting for mineral oil in India. Generally, in such cases, a portion of the income from the execution of contracts could arise outside India and may not be taxable under the general provisions of the ITL.

The basis for taxation of the entire receipts pertaining to portions of the contract executed in and outside India has been a subject matter of litigation. In the case of CIT v. Halliburton Offshore Services Inc., the Uttarakhand High Court (HC) had ruled that the provision of the ITL envisaging computation of income on presumptive basis is a complete code in itself. The HC further ruled that the amount of income computed there under would be taxable in India, irrespective of such income falling within the scope of total income as envisaged under the ITL. However, in the present ruling, the Mumbai ITAT has relied on rulings by other benches of the ITAT and has held that the special provisions relating to presumptive basis of taxation do not override the general provisions that determine scope of total income of a non-resident.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These appeals are filed by the assessee and revenue pertaining to same assessee and involving common issues permeating through different years; therefore, for the sake of convenience these were heard together and are being disposed of by this consolidated order.

2. During the course of hearing, arguments were made by Shri Kanchun Kaushal, Authorised Representative (AR) on behalf of the Assessee and by Shri Jasbir Chauhan, Departmental Representative (CIT-DR) on behalf of the Revenue.

First we shall take up Revenue’s appeal in ITA No.4028/Mum/2002 for A.Y. 1998-99:

The grounds raised by the Revenue in its appeal are reproduced below:

“1.On the facts and circumstances of the case and in law, the learned CIT(A) erred in holding that for the computation of period of stay, both the contracts should be considered separately and accordingly, the stay of the appellant for any of the aforesaid contracts during the assessment year is not nine months without appreciating the fact that the first and the second phase of the contract with M/ s. Enron Oil & Gas was to be considered as one consolidated contract and that the aggregate duration of the period for executing the projects/ activities in India would constitute the P.E. in India.

2.On the facts and circumstances of the case and in law, the CIT(A) erred in holding that there is no P.E. in India in view of the Article 5 of the DTAA between India and Mauritius and that the actual technical operations and that preliminary commercial preparations and subsequent legal discussions were not to be included in the calculation of the duration period without appreciating the fact that the period without appreciating the fact that the periods spent in India on pre-job inspection on site, mobilization of personnel and vessels before the execution of the contract, demobilization of the personnel and vessels after the execution of the contracts, winding up activities, etc form the integral part of the contracts executed by the assessee in India and therefore, the same cannot be excluded for considering the duration period of the assessee’s activities in India.

3. On the facts and circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to delete the interest charged u/s. 234B of the I.T. Act, 1961.

4. The appellant prays that the order of the CIT(A) on the above grounds be set-aside and that of the AO restored.

5. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

3. Ground Nos. 1 & 2: The issue involved before us is whether for the purpose of determination of ‘Permanent Establishment’ (PE), the computation of period of stay of the different projects carried out by the assessee at different sites of the assessee company is to be combined together for determining the period of stay and aggregate duration of period is to be seen or duration of execution of each of the projects is to be examined separately to test the time limit of 9 months, as stipulated in Article 5 – Para 2(i) of Indo-Mauritius Double Taxation Avoidance Agreement (in short referred to as ‘DTAA’ or ‘Treaty’).

3.1. The brief facts noted from the perusal of the assessment order are that the assessee company filed its return of income showing total income at nil. The assessee company is a company incorporated in Mauritius, and belongs to Mc Dermott Group of companies. The assessee company was engaged in India in transportation, installation and construction of off-shore platforms for the purpose of mineral oil exploration. In the return of income filed by the assessee for the impugned year following note was given:

“Note: The company is incorporated in Mauritius and is a resident in Mauritius under the Income Tax Act of Mauritius and as defined in Article 4 of the Tax Treaty between India and Mauritius (“The Treaty”). Copy of the Tax Residence Certificate is enclosed herewith (Annexure A).

The company does not have a permanent establishment in India as defined in Article 5 of the Treaty.

The company was engaged in the execution of installation contracts in India. However, the project work (activities) in India are performed/ to be performed and the respective contracts are for a duration of less than 9 months as detailed herein after.

Contract (D-4522) with Enron Oil and Gas India which commenced on February 05,1997 was completed on May 19, 1997 as evidenced by completion certificate (Annexure B).

In view of the aforesaid, income under all the contracts is not taxable in India as stipulated in Article 7 of the Treaty.”

3.2. During the course of assessment proceedings, Ld. AO analysed the various contracts executed by the assessee company with M/s. Enron Oil and Gas India with different aspects and relying upon and following the assessment order for 1997-98, the work executed by the assessee at different locations was considered as one, and accordingly number of days for execution of all the projects were aggregated to determine the period of 9 months (inadvertently mentioned in the assessment order as 90 days). The AO also included the number of days estimated to have been spent for supervisory activities before the actual commencement of construction work. Accordingly, by treating all of the contracts executed in India as one, it was held that the assessee had a PE in India.

3.3. Being aggrieved, the assessee filed an appeal before Ld. CIT(A) wherein detailed submissions were filed by the Ld. Counsel. It was submitted that the assessee being resident of Mauritius is liable for tax in Mauritius and possessed the Tax Residency Certificate issued by the income tax authority of Mauritius. Accordingly, taxation of the assessee is governed by Double Taxation Avoidance Agreement (DTAA) between India and Mauritius. It was further submitted that the assessee has executed following contracts:

Contract No.	Contract with	Duration of work in India	Gross Revenue US$	Annexure
D4507	ENRON Oil and Gas India Ltd.	12 March 1996 to 22 November 1996	10,646,125	1
D4522	ENRON Oil and Gas India Ltd.	5 February 1997 to 19 May 1997	7,713,263	2

The assessee made detailed submissions that only contract carried out during the year was contract no.4522 and duration of the work was for less than 9 months, and therefore, assessee did not have PE (Permanent Establishment) in India during the year under consideration. After hearing the detailed submissions and perusing factual material placed on record, Ld. CIT(A) accepted the stand of the assessee and reversed that of the AO and held that in view of Article 5 (2)(i), the assessee did not have a PE in India during the year under consideration for any of its projects.

3.4. Being aggrieved, the Revenue has filed an appeal before the Tribunal, wherein it has been inter-alia contended in the grounds that working duration for all the project/activities should be aggregated for computing the threshold limit of 9 months, as prescribed under the treaty.

3.5. During the course of hearing Ld. DR submitted that AO was justified in holding that number of days spent on all the projects should be clubbed together for determination of period of stay in India. He relied upon the order of the AO on this issue. Per contra, Ld. Counsel pointed out that only one project was carried out during the year i.e. contract No.D4522. It was further brought to our notice that similar issue had came up before the Tribunal in immediate proceeding year i.e. A.Y. 1997-98 wherein this issue has been decided in favour of the assessee by the Tribunal. He therefore, requested that appeal of the revenue should be dismissed. In reply, Ld. DR fairly submitted that the issue involved in the appeal filed by the department was covered by the judgment of the Tribunal in assessee’s own case for A.Y. 1997-98.

3.6. We have gone through the order of the lower authorities, the order of the Tribunal for A.Y. 1997-98 as well as submissions made by both the sides before us. It is noted by us that similar issue came up before the Tribunal in assessee’s own case for A.Y. 1997-98 wherein the Tribunal decided this issue in favour of the assessee vide order dated 22.03.2010 in ITA No.8084/Mum/2004.

3.7. After discussing the law and facts of the case in detail in this regard, it was held by the Tribunal that for the purpose of computation of number days for examining threshold limit of 9 months, each of the building site or construction, or assembly project or supervisory activities in connection therewith is to be viewed independently on stand-alone basis and thus, no aggregation is required to be done for computing number of days. The relevant para of the ITAT’s order is reproduced below:

“In view of the above treaty provisions, it is unambiguous that a PE refers to a fixed place of business through which business of the enterprise is wholly or partly carried on, and includes, inter alia, “a building site or construction or assembly project, or supervisory activities connected therewith, where such site, project or supervisory activity continue for a period of more than nine months.”. In a way, thus, the permanence test for existence of a PE stands substituted, to this limited extent, by a duration test for certain types of business activities, i.e. building construction, construction or assembly project, or supervisory activity connected therewith. There is also a valid, and more holistic view of the matter, that this duration test does not really substitute permanence test but only limits the application of general principle of permanence test in as much as unless the activities of the specified nature cross the threshold time limit of nine months, even if there exists a PE under the general rule of Article 5(1), it will be outside the ambit of definition of PE by the virtue of Article 5(2)(i). Be that as it may, even a plain reading of Article 5(2)(i) would show that, for the purpose of computing the threshold time limit, what is to be taken into account is activities of a foreign enterprise on a particular site or a particular project, or supervisory activity connected therewith, and not on all the activities in a tax jurisdiction as whole. It is important to bear in mind the fact that the expressions used in the relevant definition clause are in singular, and there is no specific mention about aggregating the number of days spent on various sites, projects or activities, in other words, each of the building site, construction project, assembly project or supervisory activities in connection therewith is to be viewed on standalone basis. Broadly, the underlying rationale of this approach is that various business activities performed by one and same enterprise, none of which constitutes a PE, cannot lead to a PE, if combined. In our humble understanding, the very conceptual foundation of this approach rests on the assumption that various business activities of the enterprise in different locations are not so inextricably interconnected that these are essentially required to be viewed as a coherent whole. In a typical building site, assembly or installation project, or supervisory activities in connection therewith, each of site or project is an independent unit, and the approach to these types of PEs recognize this normal business practice. The unambiguous principle, underlying this approach, seems to be to view these business activities at different locations on standalone basis. It is also interesting to note that in certain treaties entered into by India, there is a specific departure from this rule as evident from the wordings used in definition clauses of corresponding PEs. Take for example, Article 5(2)(k) of India Australia tax treaty, which states that “The term ‘permanent establishment’ shall exclude 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 six months.” (emphasis supplied by us by underlining). In the case of India Thailand tax treaty, the definition for this type of permanent establishment, which finds place in Article 5 (2)(h) of the said treaty, is worded as a building site or construction or assembly project, or supervisory activities in connection therewith, where such site, project or activity continues for the same or a connected project for a period of periods aggregating to more than 183 days (emphasis supplied by us by underlining). Similar are the provisions in India’s tax treaties with Austria, Belgium, Bulgaria, Canada, China, Denmark, Italy, New Zealand, Norway, Spain, Turkey and USA. In all these cases, the relevant PE clauses are so worded that there is a specific mention for application of aggregation principle on all, or even connected, sites projects or activities for computation of threshold duration test. Even such an aggregation, when applicable, would require exclusion of double counting of day when more than one site or project exists on a day, or when work is carried out at two or more different places on a day, as multiple counting of common days would lead to an absurdity in as much as when work is carried on five sites together for one hundred days each, such a computation will lead to five hundred days in a year which is an impossibility. Therefore, when definition clause specifically provides for aggregation of time spent on various sites, projects or activities, the sum total of the time spent on such sites, projects or activities, except for parallel counting of days, is to be taken into account for applying the threshold time limit. However, when aggregation is not specifically provided for in the relevant PE definition clause, as in the present case, normally it cannot be open to us to infer the application of aggregation principle.”

3.8. Thus, though a clear principle was laid down by the Tribunal in the aforesaid order, but since facts were not properly thrashed out by the lower authorities in A.Y. 1997-98 in the first round, therefore the matter was sent back to the file of Ld. CIT(A) for examination of facts. Accordingly, Ld. CIT(A) decided the matter afresh vide his order dated 27.01.2011, wherein he held that if all the projects of the assessee are examined independently, each of them had work duration of less than 9 months and accordingly it was held that assessee did not have a PE in India.

3.9. The revenue filed an appeal against the order of Ld. CIT(A). The tribunal vide order dated 12.10.2012 in ITA No.2089/Mum/2011 for A.Y. 1997-98 upheld the order of the Ld. CIT(A), on facts also. Thus, the clear position emerging from the orders of the Tribunal in assessee’s own case is that each project of the assessee has to be considered separately for computing number of days of the work duration.

3.10. Coming back to the facts of the year before us, it is noted that only one project was carried out during the year i.e. contract number D4522, the duration of which was for 3 months only. Thus, in view of legal position as has been decided by the Tribunal in assessee’s own case as well as on the facts of the year before us, we find that the assessee had no PE in India in the year under consideration in terms of Article 5(2)(i) of the Act Indo-Mauritius treaty. Thus, we do not find any force in the ground raised by the Revenue and uphold the factual findings of Ld. CIT(A), respectfully following the order of the Tribunal for assessment year 1997-98. Thus, grounds raised by the Revenue are dismissed.

3.11. In the result appeal of the revenue is dismissed.

Now we shall take up assessee’s appeal in ITA No.4434/Mum/2002 for A.Y. 1998-99:

The assessee has raised following grounds of appeal:

1.1. On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) [CIT(A)] erred in upholding the action of the Assessing Officer (AO) that the India liaison office of McDermott ETPM East Inc., a separate legal entity, constituted a permanent establishment of your appellant in India.

On the facts and circumstance of the case, the CIT(A) ought to have held that your appellants have no permanent establishment in India.

1.2 Without prejudice to the above, the learned CIT(A) ought to have held that no income could be attributed to that permanent establishment, i.e. the Indian liaison office. 2. On the facts and circumstance of the case and in law, the CIT(A) erred in holding that insurance receipts were connected with the business of your appellant in India. and hence taxable under Section 44BB of the Income-tax Act.

3. On the facts and circumstance of the case and in law, the CIT(A) erred in upholding the action of the AO in levying tax on miscellaneous income.

4. Ground No.1.1: In this ground, the assessee is aggrieved with the action of Ld. CIT(A) in upholding the action of the AO that Indian liaison office of M/s McDermott ETPM East Inc., Dubai, a separate legal entity, constituted a permanent establishment of the assessee in India.

4.1. The brief facts in this regard are that a survey operation u/s 133A of the Act was carried out by the DCIT (TDS -1 Mumbai) at the office of Dubai, company on 10th August 2000, located at 412-413, Midas, Sahar, Plaza, Andheri (E), Mumbai. It was concluded by the AO on the basis of survey report that Liaison Office of the Dubai Company was kept by the assessee company for its business. The facts of the AO were based upon the basis of survey report claimed to be prepared on the basis of documents found during the course of survey. According to the AO, at the time of survey, no paper/evidence of activity of Dubai Company was found at the said premises. The papers and documents which were found there belonged to the assessee company. At the time of survey, the statements of employees and other persons present at the premises were recorded by the survey party. The AO stated that reading of the statements suggested that office premises were used exclusively for the business of the assessee company, and all the files and documents found at the office premises pertain to the project undertaken by the assessee at various sites. The survey team recorded the statement inter-alia of Mr. Arunabha Sen (Country Manager), Arun Tarkar (Areas logistic Manager), Mr. Lawrence Rodrigues (Accountant). On the basis of these statements and papers found during the course of survey in the form of invoices, correspondence, lease of employees etc., it was concluded by the AO that it was Liaison Office of the Company which was involved in the full-fledge business activities, and therefore it constituted PE of the assessee.

4.2. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A), wherein after analyzing assessment order and submissions of the assessee it was held by Ld. CIT(A) that the said office was exclusively used for the projects undertaken by the assessee company. It was further held that Mauritius address was only on paper as the assessee company did not have functional office in Mauritius. Thus, Ld. CIT(A) upheld the findings of Ld. CIT(A) and confirmed his action by holding that assessee had a PE in India during the year, and also upheld the action of the AO in assessing the income of the assessee u/s 44BB of the Act, 1961.

4.3. Being aggrieved, the assessee filed an appeal before the Tribunal.

4.4. Before us, Mr. Kanchan Kaushal (Ld. Counsel of the assessee) made detailed submissions on this issue. It has been submitted that Dubai Company is a separate legal entity and does have a PE in India and therefore it is assessed in India accordingly, and there is no dispute on that. It was submitted that the lower authorities have misread the documents collected during the course of survey and have misunderstood the facts of the case. It was further submitted that even after the invasive action of survey, the income tax department could not find any document or any other material which could show that any employee/person in the said office in India had authority to conclude the contracts. It was submitted that the details of employees/persons found at the office premises of Dubai Company would show that none of them was qualified or competent enough to make independent decisions for negotiations and concluding the contracts on behalf of the assessee company. He took us through the each and every document found during the course of survey which has been considered by the AO to hold that the said premises were used as fully functional office of the assessee company, and submitted that the AO as well as Ld. CIT(A) have not properly gone through these documents. It was further submitted by him that activities done by the assessee in this office were of the nature of back up and auxiliary services, and such services were specifically excluded in terms of Article 5(3)(e). He placed reliance upon the judgment of Hon’ble Delhi High Court in the case of U.A.E. EXCHANGE CENTRE LTD. vs. UOI 313 ITR 94 (Del.) and also upon the judgment of Hon’ble Supreme Court in the case of DIT vs. Morgan Stanley 292 ITR 416 (SC). He also submitted that survey operation was done u/s 133A which is distinct from the action done u/s 132(4) in terms of evidentiary value of the documents found during these operations. It was submitted that in case of survey, if any material is found, unless and until the said material is substantiated by the AO, it cannot be used against the assessee, unlike the material found during the course of search carried out u/s 132(4). In support of his arguments, he further placed reliance upon the judgments of Hon’ble Madras High Court in the case of CIT vs S Khader Khan Son 300 ITR 157 (Mad) which was subsequently affirmed by the Hon’ble Supreme Court of India vide order dated 20th September 2012 reported in 210 taxman 248 (SC).

4.5. Per contra, Ld. DR also took us through various documents found during the course of survey and submitted that the assessee’s case falls under Article 5(2)(c) of the treaty; he drew our attention upon various documents found during the course of survey to show that the assessee was carrying out substantive business operations from the said office premises. He relied upon the judgment of Hon’ble Karnataka High Court in the case of Jebon Corporation India Liaison Office vs. CIT 245 CTR 300.

4.6. In rejoinder, the assessee has distinguished the judgment of Jebon Corporation India Liaison Office (supra) on facts and submitted that the documents impounded during the course of survey do not prove at all carrying out of any substantive business, and at the most, said office can be said to be a place for supply of information and doing similar activities which have preparatory or auxiliary character for the enterprise. It has been further submitted by him before concluding his arguments that the admitted case of the AO was that the assessee’s case falls under Article 5(2)(i), thereby, constituting PE on the basis of carrying out of work at building site or construction project etc., and therefore, since the assessee’s case specifically falls in the said article, it excludes the case of the assessee from being included under any other article, and therefore, the case of the assessee can not fall under article 5(2)(c) which determines the PE on the basis of existence of office. In support of his arguments, Ld. Counsel relied upon the judgment of DCIT v. Stock Engineering and Contractors BV 32 SOT 249 (ITAT Mumbai) wherein it was held that if two clauses of the Article are applicable upon the assessee in two factual situations, then the one which is more beneficial to the assessee would be applicable. It was further submitted by him that in assessee’s own case, Hon’ble Tribunal in assessment A.Y. 1997-98 inter-alia held that even if there exists a PE in the case of assessee under general rule of Article 5(1), it will be outside the ambit of definition of PE by virtue of Article 5(2)(i). It was submitted that since assessee’s case has been held to be covered by the Tribunal under article 5(2)(i), therefore, it cannot simultaneously fall in article 5(2)(c), as claimed by the AO.

4.7. We have gone through the submissions made by both the sides. We have also gone through the documents impounded during the course of survey. Before we deal with the alternative legal argument of the Ld. Counsel that whether the assessee’s case can simultaneously fall in Article 5(2)(c), when assessee’s case has already been held to be falling under Article 5(2)(i), we shall like to deal with and discuss hereunder the documents found during the course of survey.

4.8. It is noted that the AO himself did not go through all the documents impounded during the course of survey, but based his decision on the basis of facts brought on record by way of a gist/report of some of the documents found to be relevant by the survey team. Before us also, only gist/survey team’s report has been filed. Under these circumstances, we have no other option but to express our opinion on the basis of gist/report prepared by the survey officials. The said gist/report is enclosed at pages 1 to 26 of the paper book. According to our opinion, perusal of these papers suggests, that these were miscellaneous documents which were exchanged by persons who were coordinating the activities carried out at the site. There was a list of messages which were received and passed on further which included fax messages or other radio messages. There is also a list of the employees who were working in the project office. According to the AO, it shows that this office was used for the appointment and recruitment of employees.

4.9. We have gone through the gist/ survey report prepared by the survey team with regard to the documents found during the course of survey. In our opinion, none of the documents shows that any substantive business was done from the said office. We have also analysed each and every document upon which our attention was drawn by the Ld. CIT-DR. It is noted that at page no.3 of the Departmental Paper Book (DPB), there is an item no.46 described as faxing of Daily Progress Report of DB-6. Similarly, there is item no. 51 described as an information regarding movement of persons from Mumbai to project site and vice-versa. We find that these documents were prepared for the purpose of facilitating work at project site. Similarly, at page no.6 of DPB, there are items nos. 20 to 22 described as correspondence between Mr. Arun Tarkar, and Mr. D. Anjaih, of Narmada Offshore, by Fax No. 4033055 regarding octroi duty payment. We have gone through various other documents also, on the basis of which the impression gathered by us is that these documents have been maintained in routine while providing back office support services or coordination/facilitating point or services of auxiliary nature.

4.10. The Revenue has emphasized upon the statement of the persons recorded by the survey team who were available at the said office premises. Before we deal with their statements, we find it appropriate to describe hereunder the qualifications of these persons and roles performed by them, as narrated before us:

Name	Competence	Role performed
Arun Tarkar	Certificate of proficiency in communication	He was a logistic manager and his work involved obtaining clearance, coordination with principal in connection with logistic requirement and coordination with shipping agents
Lawrence Rodrigues	Administration	His work involved arranging for meetings, hotel arrangements, air ticket booking, payment of electrical maintenance and telephone bills etc.
Ravi Kumar	Clerk	He was a radio room clerk, His work involved sending and receiving faxes, maintaining fax files talking on radio, typing and paper filing etc.
Arunabha Sen	Country manager of MMEI	Arunabha Sen was not involved in any manner in the execution of the contract. Arunabha Sen was stationed in Jebel Ali (Dubai) and his period of stay in India for A.Y. 1998-99 is 27 days (Paper Book-I at page 133).

From the above particulars, it is clearly noted that the work performed by these persons was of the nature of providing back office operations and support services. Nothing has been brought before us to show that services provided by these persons were in any manner of a substantive nature which could be described as part of decision making process.

4.11. Now, we shall deal with the statements recorded by the survey team which has been vehemently relied upon by the Ld. DR before us. We have gone through all the statements and various questions and replies given by the aforesaid persons. The collective reading of various replies given by these persons suggest that the work which was being done from this office was that of providing back office support and coordination services. The immediate reference can be made to the reply given in response to question no. 36 by Mr. Arun Tarkar, wherein he expressly mentioned that coordination and liaisoning was done from this office. The question put to him and reply given by him are reproduced hereunder for the sake of ready reference:

“Q.No.36. Do you agree with me that Mumbai office i.e. 412-413, Midas, Sahar Plaza Complex, belong to/are employee of J Ray Mc Dermott Middle East Inc. previously known as Mc Dermott ETPM, East, Inc. but the same is being used to for the projects of J Ray Mc Dermott Middle East (Indian Ocean) Ltd.

Reply; Yes, the co-ordination and liasioning is being done through this office.”

(emphasis supplied)

4.12. We have gone through submissions of all other persons also. What we have been able to gather from the documents impounded during the course of survey and the information gathered 133(6) and 131 is that impugned premises were used as project office of the assessee company for providing requisite auxiliary services in the nature of back office support services. It is noted that despite carrying out an invasive action of survey, nothing could brought on record by the department to show that whether any contracts were negotiated and concluded by the aforesaid team of employees in India nor any such documents could be brought on record to show that the said office in India was in the decision making process or involved in doing substantive business in any other manner. In this regard, we find that Article 5(3) of the Indo- Mauritius treaty clearly lays down the situations where a set up shall not constitute permanent establishment. The said para is reproduced hereunder:

“3. Notwithstanding the preceding provisions of this article, the term “permanent establishment” shall be deemed not to include:

(a) the use of facilities solely for the purpose of storage or display of merchandise belonging to the enterprise ;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display ;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information for the enterprise ;

(e) the maintenance of a fixed place of business solely—

(i) for the purpose of advertising,

(ii) for the supply of information,

(iii) for scientific research, or

(iv) for similar activities,

which have a preparatory or auxiliary character for the enterprise.”

4.13. The perusal of the above Para shows that it clearly lays down that any fixed place maintained by the assessee for the purpose of supply of information or for similar activities which has a preparatory or auxiliary character for the enterprise shall not constitute a Permanent Establishment. On this issue, we can also have support of Hon’ble Supreme Court in the case of DIT vs. Morgan Stanley (supra); relevant portion of the said judgment is reproduced below:

“In our view, the second requirement of Article 5(1) of ‘DTAA is not satisfied as regards back office functions. We have examined the terms of the Agreement along with the advance ruling application made by MSCo inviting the AAR to give its ruling. It is clear from reading of the above Agreement/application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing IT enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a P.E. stood constituted, one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of the AAR that in the present case Article 5(1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of Article 5(1) is not attracted.”

4.14. Similar view has been expressed by the Hon’ble Delhi High Court in the case of U.A.E. EXCHANGE CENTRE LTD. vs UNION OF INDIA (supra), relevant portion of the judgment is reproduced below:

“…… the liability to tax under the DTAA between the UAE and India is governed by article 7. Paragraph (1) of article 7 of the DTAA provides that profits of an enterprise of a Contracting State shall be taxable only in that State, unless the enterprise carries on business, in the other State, through a permanent establishment situated therein. Under article 5 read with article 7, profits of all are liable to tax in India if an enterprise were to carry oil through permanent establishment, meaning thereby fixed place of business through which business of an enterprise is wholly or partly carried on. Under article 5(2)(c), amongst others, permanent establishment includes an office. However, article 5(3) which opens with a non obstante clause, is illustrative of instances where under the DTAA various activities have been deemed as ones which would not fall within the ambit of the expression “permanent establishment”. One such exclusionary clause is found in article 5(3)(e) which is: maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. The only activity of the petitioner’s liaison offices in India was to download information which was contained in the main servers located in the UAE based on which cheques were drawn in India whereupon the cheques were couriered or dispatched to the beneficiaries in India, keeping in mind the instructions of the NRI remitter. Such an activity could not be anything but auxiliary in character. The instant activity was in “aid” or “support” of the main activity. It fell within the exclusionary clause.”

4.15. Thus, analysis of the facts of the case of the assessee and relevant provisions of different Article of Indo-Mauritius Treaty read with the aforesaid judgments clearly suggest that the office maintained by the assessee was in the form of an auxiliary unit to provide back up support and other auxiliary services for the purpose of maintaining coordination and aid to the functioning of the project and therefore it does not constitute a PE.

4.16. The assessee has also raised another preliminary legal objection in this regard i.e. once the case of the assessee has been included in a particular clause i.e. Article 5(2)(i), then it shall not be included and cannot be considered in any other clause of the said Article for the purpose of determination of its PE. We have analysed this objection from another dimension. The admitted facts on record are that the only activities carried out by the assessee in India are through various construction projects meant for exploration and production of mineral oil, and further admitted facts are that no other business activities have been carried out which could be called as independent business activities yielding separate/ independent business profits. Thus, the aforesaid activity of the construction project needs to be considered primarily under Article 5(2)(i), which read as under:

“(i) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than nine months…… ”

4.17. It has been already held in the own case of the assessee by the Tribunal in A.Y. 2007-08 and by the AO as well as Ld. CIT(A) in impugned year that case of the assessee has to be examined in article 5(2)(i). In earlier years also, wherever the duration of the project has exceeded a period of 9 months, the same has been treated as permanent establishment in India and its corresponding income has been offered to tax and accepted by the AO also. Thus, there is no doubt that the case of the assessee falls in article 5(2)(i). Now, the next question that arises here for our consideration is that whether the case of the assessee can be examined in any other clause of article 5(2). The AO has suggested that assessee’s case may also fall simultaneously under article 5(2)(c) described as ‘office’.

4.18. In our considered opinion, so long as the assessee is engaged in India in the business of aforesaid construction project only, it’s case can be examined only under Article 5(2)(i); because that happens to be the most proximate clause under which it could be examined and has been rightly done so all along in all preceding years by the Revenue also. Thus, the issue of determination of its ‘PE’ through any other clause does not arise unless and until any other activity is taken up by the assessee which is having an independent identity or economic substance and yielding separate business profits. In other words, if the impugned ‘office’ is found to be engaged in doing any independent business leading to earning of separate income and profit base, only then its status as ‘PE’ could be examined article 5(2)(c). In the facts of the case before us no such material has been brought on record nor any such pleading has been raised by the AO or Ld. CIT(A) or even by Ld. DR before us. The office found to be existed in the aid of the project(s) of the assessee. Thus, the determination of the projects being ‘PE’ or otherwise could be examined only Article 5(2)(i) and nowhere else.

4.19. We find support from another judgment in the case of National Petroleum Construction Co. v. DIT (International Taxation) in ITA No.143/2013 and others, order dated 29.01.2016, wherein Hon’ble High Delhi Court got an occasion to analyse law on this issue at great length while determining the PE of the said company in terms of Double Taxation Avoidance Agreement between India and United Arab Emirates (UAE). The said company was engaged in executing contract with the ONGC Ltd. entailing designing, engineering, procurement, fabrication, installation and commissioning of offshore platforms at offshore facility of ONGC. The said company claimed that it did not have its ‘PE’ in India. The claim of the said company was rejected by the Revenue inter-alia on the ground that the said company had a project office in India which was not any ancillary or auxiliary activity. It was inter-alia contended by the revenue that pre-bid survey was conducted through the project office which was directly connected with the contract in question and thus it amounted to doing substantive business. Therefore, in the context of these facts Hon’ble High Court analysed provisions of Article 5 of Indo-UAE treaty to find out whether the PE of the said company would be determined as per Article 5(2)(h) of Indo UAE DTAA to determine an ‘Installation PE’ based upon the work duration of main activity of the assessee or the PE shall be determined on the basis of project office of the said company in terms of Article 5(2)(c). Hon’ble High Court held that its project office shall not determine ‘PE’ of the said company in India; relevant observations of the high court are reproduced below:

“24. 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 Assessee 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. The said persons were only engaged in collecting information from ONGC or ASL and transmitting the same to the Assessee’s office in Abu Dhabi and similarly transmitting communications from Assessee’s office in Abu Dhabi to ONGC and ASL. It is claimed that the abovenamed three employees were simple graduates and were not capable for participating in the execution of the work undertaken. The DRP had observed that Sh. M.N. Shah, Sh. M. Karkera, Sh. C.G. Pillai, Sh. P.K.G. Nair and Sh. R.L. Kulkarni, who were employees of the Project Office of the Assessee, had attended the kick-off meeting with ONGC on 16th December, 2005 and had also signed the minutes of that meeting. The DRP had proceeded on the basis that this fact was not disputed. The ITAT had also concurred with the aforesaid finding. However, it is seen that the Assessee had repeatedly pointed out that persons named were not employees of the Project Office. Further, there is no material which would support the findings that Sh. M.N. Shah, Sh. M. Karkera, Sh. C.G. Pillai, Sh. P.K.G. Nair and Sh. R.L. Kulkarni were employees at the Project Office.

25. 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. Thus, the next aspect to be considered is whether acting as a communication channel would fall within the exception of clause (e) of paragraph 3 of Article 5 of the DTAA.

26. 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”.

27. A Division Bench of this Court in UAE Exchange Centre Limited (supra) considered a case where a UAE based enterprise maintained a liaison office in India and the only activity of that office was to download information contained in the main servers located in UAE on the basis of which cheques were drawn on banks in India. The said cheques were couriered or dispatched tothe beneficiaries in India keeping in mind the instructions of the remitters. This Court held that the said activity was only in aid and support of the main activity of the Assessee in that case and, thus, such activity was auxiliary in 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.

28. The Black’s Law Dictionary defines the word ‘auxiliary ‘ to mean as “aiding or supporting, subsidiary”. The word ‘auxiliary’ owes its origin to the Latin word ‘auxiliarius ‘ (from auxilium meaning ‘help’). 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.

29. 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.”

4.20. Similarly in the case of ACIT v. Radware Ltd. ( ITAT Delhi in ITA No.3099/Del/2009 order dated 21.01.2016), similar view has been taken with the following observations:

“8.1. We observe that the decision of the Jurisdictional High Court in the case of UAE Exchange Centre Limited (supra) covers the issue which needs to be considered in the present appeal. We have observed from the findings of the ld. CIT(A) that the assessee has been involved in supplying the literature relating to marketing and sales without any participation in actual sales activity. The Israeli company is selling the products to the distributors as per the requirements directly from Israel, and also makes efforts to services and maintain products used within the territory, which are sold directly by the Israeli company. The Israeli company further sells to the distributors within the territory not being the assessee and that these distributors further resale the products to ultimate customers independently. 8.2. The Liaison office only provides certain servicing of the equipments to the distributors for which the expenses are reimbursed by the Israeli company. The Liaison office in India is merely in the nature to facilitate the contract between the distributors and the Israeli company. The distribution contract, per se at page _____ of the paper book, do not result into any generation of income and, therefore, the activities of the assessee have to be definitely considered to be proprietary and auxiliary in nature. The ld. AR has brought to our notice RBI approval, at page 10 of the paper book, which has been received by the assessee, for the purposes of undertaking liaison activities and to act as a communication channel between the parties in India and the Israeli company.

8.3. Moreover, the AO has relied upon the judgment of the authorities of advance ruling in the case of UAE Exchange Centre Limited reported in (2004) 268 ITR 9 AAR which has been reversed by the jurisdictional High Court in the case of UAE Exchange Centre Limited (supra).

8.4. In view of the foregoing discussion, we conclude that the assessee does amount to a PE in India, and are of the considered opinion that the assessee is a liaison office and are providing services which are proprietary or auxiliary in nature. We, therefore, do not find any infirmity with the findings of the ld. CIT(A).”

4.21. In the case Cal Dive Marine Construction (Mauritius) Ltd. v. Director of Income-tax (International Taxation), Chennai 182 taxmann.com 124 it was observed by the Authority for Advance Ruling, New Delhi while addressing an identical issue in the context of Indo-Mauritius tax treaty that:

“Once clause (i) is attracted, the minimum period test will have to be necessarily applied. The fact that the applicant may have a project office or a workshop for the purpose of carrying out the contractual work does not bring the establishment of the applicant within the other clauses of para 2 to the exclusion of clause (i). On the other hand, clause (i) being a specific provision dealing with construction or assembly project, that provision prevails over the other clauses of para 2 of article 5 which are general in nature. In other words, an office or workshop, if it is established as a part of or incidental to the execution of a construction or assembly project, it is clause (i) alone that comes into play. That is the only way to reconcile and avoid conflict between overlapping items/expressions contained in para 2 of article 5.”

4.22. In the case of Kreuz Subsea Pte. Ltd.vs Deputy Director of Income-tax (International Taxation) 58 taxmann.com 371, Mumbai Bench of the ITAT decided the identical issue on similar lines wherein the issue before the Bench was that if two provisions of an Article may be applicable for determination of PE of an assessee then in what manner the provisions should be applied. Following observations of the Hon’ble Bench are usefully on the issue.

“Article 5(3) is a specific provision dealing with ‘Service PE’, on account of construction, installation or assembly project. if it continues for a period of more than 183 days in any fiscal year. The installation activity includes erection/setting up machine, equipments and testing and commissioning of such machines and equipments. Installation also relates to a construction of a project. Article 5(6) whereas envisages that, if an enterprise is “furnishing services” in the contracting state through its employees for a period of 90 days or more, then it is deemed to have Service PE, except for the services referred to in para 4 and 5. The threshold period under this para is 90 days and more; or if such activities are performed for a related enterprise, then period of more than 30 days. The Article 5(6) explicitly provides that it applies to “services” other than those covered by Article 5(4) and 5(5), however, the said article is silent as regards its relationship with Article 5(3). Thus, Article 5(6) cover various services which are not covered by para 4 and 5 of Article 5 and technical services as defined in Article 12. What kind of services have been contemplated in para 6 of Article 5 have not been elaborated in the treaty or elsewhere. In contradistinction, para 3 of Article 5 is very specific and therefore, such specific activities cannot be read into para 6 of Article 5. There cannot be a overlapping of activities carried out within the ambit of Article 5(3) and furnishing of services as stated in Article 5(6). Both should be read independent of each other, or else there was no requirement of enshrining separate provisions. If the activities relating to construction or installation are specifically covered under Article 5(3), then one need not to go in Article 5(6). Thus, the activity of the assessee which is purely installation services has to be scrutinized under Article 5(3) only and not within Article 5(6).”

4.23. In the case of CIT vs. M/s. BKI/HAM (in ITA No.34 of 2007 order dated 14.10.2011), a similar issue arose before Hon’ble High Court of Uttarakhand wherein Hon’ble High Court was called upon to determine the effect and interplay of various para’s of Article 5 of DTAA between India and Netherlands for determining the PE of the said assessee in India, keeping in view the precedence of specific provision viz-a-viz general provision of Article 5. After analyzing the provisions of the treaty, Hon’ble High Court held as under:

“A perusal of Article 5(1) of the treaty indicates that a “PE” means a fixed place of business through which the business of the enterprise is wholly or partly carried on. Article 5(2) of the treaty includes a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, a warehouse in relation to a person providing storage facilities for others, a premises used as a sales outlet, an installation or structure used for exploration of natural resources provided that the activities continue for more than 183 days. Article 5(3) provides that a building site or construction, installation or assembly project constitutes a PE only where such site or project continues for a period of more than six months.

In the light of the aforesaid provisions, the learned counsel for the assessee (sic appellant—Revenue) submitted that the assessee had a PE under the provision of art. 5(2) and had an office at Bombay and, consequently, had a PE which has not been considered by the appellate authority as well as by the Tribunal. The learned counsel for the appellant(Revenue) submitted that in view of the fact that the assessee had an office at Bombay, the provision of art. 5(3) was immaterial.

The submission of the learned counsel for the appellant is patently erroneous and misconceived. The Tribunal in the asst. yr. 1995-96 as well as the appellate authority in the asst. yr. 1994-95 have categorically given a finding of fact that the entire duration of the contract was from 27th Dec., 1993 till 26th June, 1994, i.e., less than six months. Article 5(3) of the treaty provided that in order to constitute a PE such site or project should continue for a period of more than six months. Such site or project, in our opinion, is provided under art. 5(2) of the treaty and, therefore, the site or project provided under art. 5(2) should continue for a period of more than six months in order to constitute a PE. Since a categorical finding of fact has been given by the appellate authority that the contract was for less than six months, it becomes absolutely clear that the assessee did not have a PE in India as per art. 5(3) of the treaty. The Court is of the opinion that art. 5(3) provides a specific provision which covers the provision of art. 5(2) of the treaty. The Court is of the opinion that the specific provision would prevail over the general provision. Consequently, the Court is of the opinion that no PE was constituted by the assessee in India during the assessment year in question.”

4.24. In view of the facts of this case and judgments discussed by us above it can be held that PE of the assessee should be determined, keeping in view work carried out at its project sites. We have already held that on the basis of facts before us the work duration was less than 9 months. Thus, in our view, since the project of the assessee did not have work duration of more than 9 months during the year as per the facts brought before us as discussed in detail in earlier part of the order, an activity of the maintenance of back-up cum support office ‘simpliciter’ shall not constitute ‘PE’ of the assessee. Ground No.1.1. is allowed.

5. Ground No.1.2: In this ground, the Assessee has contended that Ld CIT(A) ought to have held that no income can be attributed to that permanent establishment, i.e. the Indian liaison office. Since ground no.1.1 has been decided in favour of the assessee holding that the assessee did not have a PE in India, this ground becomes infructuous and therefore dismissed.

6. Ground No.2: In this ground, the assessee has raised the grievance with regard to action of Ld. CIT(A) in holding that insurance receipts were taxable u/s 44BB of the Income Tax Act 1961.

6.1. During the course of assessment proceedings, it was noted by the AO that assessee had shown income under the head other income at US$ 2,793,063/- equivalent to Rs.10,98,79,098/- being the amount of insurance claim received. The details of the said receipts as mentioned in the assessment order by the AO are that the insurance claim was received outside India in respect of loss suffered by assessee when the leg pile of TPP Jacket located in Tapti Field offshore India met refusal during the installation works. It was submitted by the assessee that as the claim was received outside India and was towards the reimbursement of cost incurred by the assessee, therefore, it was not offered to tax in India. But AO was not satisfied with the claim of the assessee. It was noted by him that since assessee company had executed contracts only in India since its inception and at no further place, and therefore, the impugned amount relates to and has nexus with the Indian operations. It was further held by him that since the assessee company had a PE in India, thus, amount was taxable in India. It was also held by AO that as per Article 21(2) of Indo-Mauritius Treaty, items of income which are not expressly dealt with in any of the articles of the Treaty, then the provisions of Article 7 would apply for such a case. It was further noted by AO that since insurance claim receipts have not been dealt with in any of the Articles of the Treaty, therefore, article 7 will apply on such items of income. The AO also refused to grant benefit of any expenses on the ground that all the allowable expenses have been considered while determining the profits u/s 44BB of the Act.

6.2. Being aggrieved, the assessee filed appeal before the Ld. CIT(A). The Ld. CIT(A), assessee made detailed submissions reiterating its stand as was taken before AO. It was submitted that complete details were given to the AO. The said amount was received outside India and it was received on account of loss suffered by the assessee pertaining to Tapti Field located beyond 12 nautical miles from the coastal line. The amount was received under the insurance policy by way of reimbursement of cost incurred in the said project. After considering the submissions of the assessee Ld. CIT(A) held that the said amount was business income as per article 7 of the Treaty, and could be taxed only u/s 44BB. The insurance claim receipt was connected with the business of the assessee company in India and was reimbursement of the damage/loss/cost incurred by the assessee company, and therefore, it should be taxed u/s 44BB.

6.3. Being aggrieved, the assessee filed appeal before the tribunal contending that Ld. CIT(A) ought to have held impugned receipts as not taxable in India. It is noted by us that the revenue is not aggrieved with the action of Ld. CIT(A). During the course of hearing before us Ld. Counsel of the assessee submitted that the impugned receipts are part of business receipts and its taxability can be examined u/s 44BB read with Article 7 of Indo-Mauritius Treaty, it is further submitted that since it is part of business receipts it can be brought to tax only subject to the provisions of Article 7, which are in turn subject to Article 5 of the treaty and provide for existence of PE as a mandatory condition for taxing any amount in India under Article 7. In other words, it was submitted by the Ld. Counsel that since assessee had no PE in India during the year under consideration therefore, this amount could not have been brought to tax in India. Lastly, it was submitted by him that the impugned receipts were received on account of reimbursement of costs incurred by the assessee in earlier years, and thus, it is recovery of those expenses which were never claimed by the assessee in the return of income, and therefore, amount recovered now cannot be brought to tax.

6.4. In this regard, the Ld. DR has contended that even if it is held that assessee has no PE in India, the impugned amount shall be taxable u/s 44BB in view of the judgment of Hon’ble Uttrakhand High Court in the case of CIT Vs. M/s Halliburton Offshore Service Inc.

6.5. We have gone through the judgment relied upon by the Ld. DR, arguments made by the Ld. Counsel, facts of the case as well as orders passed by the lower authorities. The facts brought before us clearly suggest that impugned amount is recovery of the expenses/cost incurred by the assessee with respect to the operations carried out in the impugned projects in the territorial jurisdiction of India. Thus, clearly speaking these receipts are part and parcel of the business operations of the assessee carried out in India. Thus, taxability of the impugned receipts has to be examined as per section 44BB as well as Article 7 of the Indo-Mauritius Treaty which deals with taxability of business profits. Article 7 clearly lays down that existence of PE in India is a mandatory condition for taxing business profits of residents of Mauritius in India.

6.6. We have also gone through the judgment of Hon’ble Uttarkhand High Court relied upon by the Ld. DR in the case of CIT Vs. M/s Halliburton Offshore Service Inc.(supra). In the said judgment, it has been held by the Hon’ble High Court that aggregate amount received by a non-resident assessee is chargeable to tax u/s 44BB @ of 10% without any deductions, like freight and transportation charges. Section 44BB taxes the income on deemed basis. It has nowhere been held in the said judgment that miscellaneous receipts shall be taxable u/s 44BB whether the assessee has PE or no PE in India. Thus, the said judgment is having altogether different facts and appears to have been misread by the Ld. DR and does not lay down any such issue as was canvassed by the Ld. DR before us.

6.7. Thus, in view of the aforesaid legal position, we hold that the said amount can be brought to tax only if the assessee has a PE in India for the concerned project. But the facts brought before us were not complete and clear. Further, there is no clarity as to the fact whether impugned receipts were with regard to which project and pertain to which period and whether the said project constituted a PE in the impugned period or not. The assessee has admitted the legal position that in case work duration of a project exceeds 9 months, then income from the said project would be liable to be taxed u/s 44BB. Therefore, we remit this issue back to the file of the AO to examine complete and correct facts. If these receipts pertain to project which did not constitute any PE in India then these receipts would not be taxable. In the case said project constituted a PE in India at the relevant point of time then AO is required to find out further whether the expenses/cost (for which recovery has been made by way of impugned insurance claim) were claimed as expenses or not. In case no claim was made of the expenses, then recovery thereof cannot be brought to tax at this stage. In other words, if the impugned expenses were originally an item of balance and were not debited in the profit and loss account, then their recovery shall not give rise to any income much less a taxable income. Thus, with these directions and observations, we send this issue back to the file of the AO who shall give adequate opportunity of hearing to the assessee and shall decide this issue afresh after considering all the facts and circumstances of the case. The assessee is free to raise all the legal and factual issues before the AO. This ground may be treated as partly allowed for statistical purposes.

7. Ground No.3: This ground is general and no arguments were made and therefore, it is dismissed.

We shall take up now the assessee’s appeal in ITA No.5302/Mum/2004 for A.Y. 2000-01:

The assessee has raised following grounds:

1. The learned Commissioner of Income-tax (Appeals) [‘CIT(A)’] erred in upholding the action of the Assessing Officer (‘AO’) in charging to tax u/s 44BB the receipts from all the contracts on the ground that the appellant had a permanent establishment in India ignoring the fact that the duration of work performed in India under each of the contract did not exceed 9 months. The learned CIT(A) erred in holding that the appellant had a permanent establishment in India following the CIT(A)’s order for assessment year 1997­1998 ignoring the fact that the order was pending for disposal on the date of passing the order for the subject year.

7. The CIT(A) erred in upholding the contention of the AO that the liaison office of J. Ray McDermott Middle East Inc., a separate legal entity, constituted permanent establishment of the appellant and that any profit could have been attributed to the PE.

3. Without prejudice to the grounds 1 & 2, the learned CIT(A) ought to have held that no income could be attributed to that permanent establishment.

Without prejudice to the above, the CIT(A) ought to have held that only the proportion of income attributable to that permanent establishment may be taxed in India.

4. The CIT(A) erred in upholding the action of the AO in taxing the miscellaneous and other income amounting to US$ 15,915.”

8. Ground Nos. 1, 2 and 3: It is noted that Ld. CIT(A) has followed his own order for A.Y. 1998-99 while disposing these grounds, therefore, we direct the AO to follow our order for A.Y. 1998-99 and verify number of days of work duration and other requisite facts with regard to the project carried out by the assessee during the impugned financial year for determination of its PE in India. Accordingly, these grounds may be treated as allowed in terms of our directions and decisions given in A.Y. 1998-99.

9. Ground No.4: In this ground the assessee has challenged the action of lower authorities in bringing to tax amount received by the assessee primarily on account of discount earned, exchange gain and miscellaneous income

9.1. In our considered view, these receipts are part and parcel of the operations carried out by the assessee on its projectd and therefore, these should be treated as part of business profits liable to be taxed u/s 44BB subject to provisions of Article 7 and Article 5 of Indo-Mauritius Treaty.

9.2. We have decided an identical issue in ground no 2 of A.Y. 1998-99 ( in the assessee’s appeal) wherein the issue was sent back to the file of the AO for verification of facts for determination of PE of the related projects. We find it appropriate to send this issue also back to the file of the AO. The AO shall verify the requisite facts taking guidance from our order of A.Y. 1998-99 and the directions contained therein shall apply mutatis mutandis. With these directions, the issue is restored back to the file of the AO. This ground is allowed for statistical purposes.

Now we shall take up assessee’s appeal in ITA No.2226/Mum/2009 for A.Y. 2000-01 (Penalty Appeal):

10. This appeal pertains to levy of penalty u/s 271(1)(c).

10.1. It is noted that the issues involved in the quantum appeal have either been allowed in the quantum appeal or these have been sent back to the file of the AO for verification of requisite facts. Thus, penalty is deleted on those additions which have been deleted in the quantum appeal. For the remaining issues which have been sent back to the file of AO, the penalty order does not survive as on date, and therefore, the same is set aside. The AO is free to initiate and levy the penalty as per law, if and as and when any addition is made in the fresh assessment order as may be passed by the AO, in pursuance to our directions. As a result, this appeal is partly allowed.

Now, we shall take up assessee’s appeal in ITA No.2309/Mum/2006 for A.Y. 2002-03:

11. It is noted that Ld. CIT(A) has followed his order for A.Y. 1998-99 in deciding the issues raised before us, and therefore, we direct the AO to verify requisite facts and follow our order for A.Y. 1998-99 and accordingly, these grounds may be treated as partly allowed for statistical purposes.

11.1. The grounds with regard to levy of interest u/s 234D are consequential and dismissed.

We shall now take up assessee’s appeal in ITA No.2227/Mum/2009 (Penalty appeal)

12. This penalty appeal is identical to penalty appeal of A.Y. 2000-01 and accordingly, AO is directed to follow our order for A.Y. 2000-01 in ITA No.2226/Mum/09

Now, we shall take up assessee’s appeal in ITA No.8720/Mum/2010 for A.Y. 2004-05

The assessee has raised following grounds:

Ground No. 1:

1.1. On the facts and circumstances of the case and in law, the Deputy Director of Income-tax (International Taxation) – 3(1), Mumbai (‘the DDIT’) erred in issuance of notice under section 148 of the Income-tax Act, 1961 (‘the Act’) and completing the assessment at an income of Rs. 14,88,60,060.

1.2 The Appellant prays that the reassessment proceedings be held to be bad-in-law and therefore liable to be quashed.

Ground No. 2

2.1. On the facts and circumstances of the case, the DDIT erred in holding that Rs. 5,16,72,024 under the contract D5073 and Rs. 1,32,01,471 under the contract D5094 is taxable as income of the Appellant by holding that the Appellant has a Permanent Establishment (“PE”) in India.

2.2 On the facts and circumstances of the case, the DDIT erred in not appreciating that duration of each contract D5073 and D5094 did not exceed nine months in accordance with Article 5(2)(1) of the Double-Tax Avoidance Agreement between India and Mauritius (“DTAA “) and erred in holding that the aggregate duration of all the contracts would be considered for constituting PE in India.

The Appellant prays that it be held that the Appellant does not have a PE in India and therefore the income of Rs. 5,16,72,024 under the contract D5073 and Rs. 132,01,471 under the contract D5094 is not chargeable to tax.

Ground No. 3

On the facts and circumstances of the case, the Dispute Resolution Panel-1 erred in holding that the Appellant has a PE in India under Article 5(1) of the DTAA ignoring the provisions of Article 5(2) of the DTAA.

The Appellant prays that it be held that Article 5(1) is not applicable to the Appellant and without prejudice, the Appellant does not have a PE in India under Article 5(1) of the DTAA.

Ground No. 4

On the facts and circumstances of the case and in law, the DDIT erred in holding that the Liaison Office (LO) of another group company J. Ray McDermott Middle East, Inc. (JRMMEI”) constitutes PE of the Appellant and accordingly erred in including Rs. 6,48,73,495 as income of the Appellant.

The Appellant prays that it be held that LO of JRMMEI cannot constitute PE of the Appellant.

Ground No. 5

Without prejudice to Ground No.4 above, on the facts and circumstances of the case, the DDIT erred in attributing the total contractual revenues from contracts D5073 and D5094 amounting to Rs. 6,48,73,495 as the profits attributable to the PE in India.

Ground No. 6

On the facts and circumstances of the case, the DDIT erred in considering disputed amount of Rs. 2,03,94,702 pertaining to the contract with Engineers India Ltd. – the Contractor as income of the Appellant.

The Appellant prays that the aforesaid addition be deleted.

Ground No. 7:

On the facts and circumstances of the case and in law, the DDIT erred in levying interest under section 234A and 234B of the Act.

The Appellant prays that the aforesaid levy be deleted. Ground No. 8:

On the facts and in the circumstances of the case, the DDIT has erred in initiating penalty under section 271(1)(c) of the Act and in holding that the Appellant has concealed particulars of its income and has furnished inaccurate particulars of its income which led to penalty under the said section.

The Appellant prays to direct the DDIT to drop the penalty proceeding under section 271(1)(c) of the Act. Ground No. 9

The Appellant craves leave to add to, alter, and / or amend all or any of the above Grounds of Appeal

13. Ground Nos. 2, 3, 4 & 5: It is noted that while deciding these issues in the assessment order, the AO has referred to and relied upon the assessment orders for A.Ys. 1998-99, 1999-00 & 2002-03. The DRP did not bring anything new while upholding the assessment order.

13.1. These grounds are identical to the grounds disposed by us in our order for A.Y. 1998-99, therefore, decisions and directions contended in our order for A.Y. 1998-99 shall apply mutatis mutandis on this year also, and the AO is directed to verify requisite facts and follow our order for A.Y. 1998-99, accordingly, these grounds may be treated as allowed in terms of our directions as contained in our order for A.Y. 1998-99.

14. Ground No.6: In this ground, the assessee is aggrieved with the action of lower authorities in bringing to tax amount of the invoice raised to M/s Engineers India Ltd., which was not accepted by the said company.

14.1. During the course of hearing it was submitted by the Ld. Counsel that the said amount was brought to tax by the AO without discussing and brining complete facts on record and without giving adequate opportunity of hearing to the assessee. Before the Ld. DRP also the action of Ld. AO was endorsed and upheld without discussing the facts properly. It was submitted that law was applied in a blind-folded manner without examining the issue properly. Further, the reliance was placed on the judgment of Hon’ble Bombay Bench in the case of Deep Drilling (I) Pte. Ltd. v. ADIT 21 taxmann.com 486 (Mumbai) wherein it was held that merely making a claim of income with a customer without any enforceable right does not result into any income. On the other hand, Ld. DR relied upon the orders of the lower authorities and did not raise any serious objection if this issue was sent back to the file of the AO.

14.2. We have gone through the orders of the lower authorities. It is noted that an invoice was raised to M/s Engineer India Ltd. for an amount of US$ 4649,955/-equivalent to Rs. 2,03,94,702/-. This amount was not included in the income by the assessee since the invoice was neither been accepted by the said company and nor the same has been paid. The AO included this amount in the income of the assessee on the ground that assessee was following mercantile system of accounting.

14.3. We have carefully examined the stands taken by both the parties. It is an accepted proposition that under mercantile system of accounting any income or expenses is taken into consideration on the basis of its accrual irrespective of its actual receipt or payment, as a case may be. But, what is important is that income/expense must first be accrued. If an income does not even get accrued, the same cannot be brought to tax merely on unilateral action taken by the assessee by mere issuing of an invoice. It is noted from the facts before us that invoice raised by the assessee has not been even accepted by the said party. There is nothing to show that whether the work for which invoice was raised has been accomplished or not and was accepted as such by the said company. Under such circumstances, there are serious doubts if at all if accrual of the income has taken place. The law in this regard is well settled law that mere making of a claim of income which does not give rise to any enforceable right does not result into any income. Though the position of law in this regard is clear, but in absence of complete facts before us we are not able to conclude this issue at this stage. We find that both of the lower authorities had dealt with this issue in highly surreptious and non-speaking manner. Under these circumstances, we find it appropriate to send this issue back to the file of the AO who shall take guidance from the observations given by us in this order as well as other judgments as may be placed by the assessee before the AO. The assessee shall also bring on record complete facts with regard to the subsequent developments that might have taken place with regard to realization of the amount of the invoices from the said party, for which AO shall grant adequate opportunity of hearing. The AO shall decide this issue afresh after taking into account all the facts and circumstances. The assessee is free to raise all legal and factual issues pertaining to this ground before the AO. This ground may be treated as partly allowed for statistical purposes.

15. Ground No.7: This ground deals with levy of interest; the same is dismissed being consequential.

16. Ground No.8 is with regard to initiation of proceedings and the same is dismissed being premature.

17. Ground No.9: This ground is general and does not require any adjudication and therefore dismissed.

18. Ground No.1 is with regard to challenging the validity of reopening u/s 147/148 of the act. Since we have decided the grounds on merits, therefore, accepting the request of the parties we treat this ground as infructuous at this stage.

19. As a result this appeal may be treated as partly allowed.

Now, we shall take up assessee’s appeal in ITA No.8717/Mum/2010 for A.Y. 2005-06 involving following grounds:

Ground No. 1:

1.1. On the facts and circumstances of the case and in law, the Deputy Director of Income-tax (International Taxation) – 3(1), Mumbai (‘the DDIT’) erred in issuance of notice under section 148 of the Income-tax Act, 1961 (‘the Act’) and completing the assessment at an income of Rs. 14,04,70,150.

1.2 The Appellant prays that the reassessment proceedings be held to be bad-in-law and therefore liable to be quashed.

Ground No. 2

2.1. On the facts and circumstances of the case, the DDIT erred in holding that Rs. 7,35,60,175 under the contract D5095 Rs. 3,07,41,431 under the contract D5094 and Rs.3,46, 19,754 under the contract D5097 is taxable as income of the Appellant by holding that the Appellant has a Permanent Establishment (“PE”) in India under Article 5(2)(i) of the DTAA India and Mauritius.

2.2 On the facts and circumstances of the case, the DDIT erred in not appreciating that duration of each contract D5095 and D5094 & D5097 did not exceed nine months in accordance with Article 5(2)(1) of the Double-Tax Avoidance Agreement between India and Mauritius (“DTAA”) and erred in holding that the aggregate duration of all the contracts would be considered for constituting PE in India.

2.3. The Appellant prays that it be held that the Appellant does not have a PE in India and therefore the income of Rs. 7,35,60,175 under the contract D5095 and Rs. 3,07,41,431 under the contract D5094 and Rs.3,46,19,754 under the contract D5097 is not chargeable to tax.

Ground No. 3

3.1. On the facts and circumstances of the case, the Dispute Resolution Panel-1 erred in holding that the Appellant has a PE in India under Article 5(1) of the DTAA ignoring the provisions of Article 5(2) of the DTAA.

3.2. The Appellant prays that it be held that Article 5(1) is not applicable to the Appellant and without prejudice, the Appellant does not have a PE in India under Article 5(1) of the DTAA.

Ground No. 4

4.1. On the facts and circumstances of the case and in law, the DDIT erred in holding that the Liaison Office (LO) of another group company J. Ray McDermott Middle East, Inc. (JRMMEI”) constitutes PE of the Appellant and accordingly erred in including Rs. 13,89,21,358 as income of the Appellant.

4.2 The Appellant prays that it be held that LO of JRMMEI cannot constitute PE of the Appellant.

Ground No. 5

5.1. Without prejudice to Ground No.4 above, on the facts and circumstances of the case, the DDIT erred in attributing the total contractual revenues from contracts D5094, D5094 & D5097 amounting to Rs. 13,89,21,358 as the profits attributable to the PE in India.

5.2 Without prejudice to Ground no.2 and 3 above, on the facts and circumstances of the case, DDIT has erred in holding that revenues of US$67,20,000/- and US$ 14,02,830 from contracts D5095 and D5097 respectively pertaining to the work carried outside India are related to the work carried out in India and accordingly chargeable to tax in India.

5.3 The appellant prays that it be held that only the profits attributable to the operations carried out in India should be taxed in India.

Ground No. 6

6.1. On the facts and circumstances of the case, the DDIT erred in considering disputed amount of Rs. 28,63,192 pertaining to the Change orders in the contract with Larsen & Tubro- the Contractor as income of the Appellant.

6.2 The Appellant prays that the aforesaid addition be deleted.

Ground No. 7:

7.1. On the facts and circumstances of the case and in law, the DDIT erred in levying interest under section 234A, 234B and 234D of the Act.

7.2 The Appellant prays that the aforesaid levy be deleted. Ground No. 8:

8.1. On the facts and in the circumstances of the case, the DDIT has erred in initiating penalty under section 271(1)(c) of the Act and in holding that the Appellant has concealed particulars of its income and has furnished inaccurate particulars of its income which led to penalty under the said section.

8.2 The Appellant prays to direct the DDIT to drop the penalty proceeding under section 271(1)(c) of the Act. Ground No. 9

The Appellant craves leave to add to, alter, and / or amend all or any of the above Grounds of Appeal

20. It is noted that grounds raised by the assessee in this appeal are identical to the grounds raised in A.Y. 2004-05 except ground no.5. Thus, AO is directed to follow our order for AY 2004-05 for all the grounds except ground no 5 which is disposed as under.

20.1. During the course of hearing, it has been unanimously submitted by both the parties that the issue raised in ground no 5 was also covered with the decision of the Tribunal as well as High Court in assessee’s own case for A.Y. 2003-04.

20.2. We have gone through order of the lower authorities and find that the issue is covered as on date by the order of the tribunal as well as High Court for A.Y. 2003-04. The Tribunal in its order for A.Y. 2003-04 dated 30.04.2010 in ITA NO.1557/Mum/2007 decided this issue in favour of the assessee and held as under:

“4. The undisputed facts in this case are that the assessee had carried out certain portion of the work under the contract outside India. The CIT (Appeals) has extracted the work at para 3.11 pages 7 to 10 of his order and the bifurcation of the work done outside India and the work done within country are not disputed. As pointed out by the learned CIT(Appeals), the only issue is whether, the receipts of work done outside India, even though it is connected with the major part of the contract, is taxable in India or not.

5. The preparation of designs in this case is done by Jebel Ali, Dubai and the documents were transmitted to EIL from outside the country. The distance from Jebel Ali to India is 1050 nautical miles and the travel within India is about 100 nautical miles, which means 10% of the total transportation is within the country. The assessee in this case followed the project completion method to recognize contract revenues. The revenues pertaining to work carried on within India and works carried on outside India has been determined based on actual activities carried out, and as already stated there is no dispute on this fact.

6. In such a situation, in our considered opinion the first appellate authority has rightly observed that section 9(1)(i) Explanation 1 provides that the income from business deemed under this clause to accrue or arise in India, shall be only such part of the income, as is reasonably attributable to the operations carried out in India. We also agree with the finding that the income in question should be first taxable in view of section 5 of the Act read with section 9 and that section 44BB cannot override section 5 which is the charging section. The Delhi B Bench of the Tribunal in the case of Saipem S.P.A. vs. DCIT in Third Member decision reported in 88 ITD 213 (T.M.) (Delhi) held as follows :

“ Sec. 44BB is no doubt described as a “Special provision for computing profits and gains in connection with the business of exploration, etc. of mineral oils” but the terms “Notwithstanding anything to the contrary” refer to ss. 28 to 41 and as ss. 43 to 43A. In other words, s. 44BB is no doubt a special provision but only with reference to the system of computation of the taxable income, which was earlier being done by ss. 28 to 41, etc. It cannot replace, supersede or “lean” in favour of s. 5 which is the charging section whereby the scope of total income of an assessee whether it be of a resident or it be of a non-resident is worked out. It would be necessary in every case whether it be that of a resident or that of a non-resident to first of all decide as to whether a particular receipt or an item of income is liable to be included in the total income vis-à-vis s. 5 and if it is to be so included then the question would arise as to how the taxable part thereof is to be computed and at this stage s. 44BB steps in and the said section having replaced the earlier system of computing the income which was by resort to provisions of ss. 28 to 41, etc. The decision taken by the AM renders otiose/redundant the provisions of s. 5 inasmuch as all assessees engaged in the business of exploration of mineral oils would have their income computed for taxation purposes only with reference to s.44BB and the entire exercise of deciding the question of accrual of income or the place of accrual would become inoperative. There would be no need to refer to the provisions of s. 5 or for that matter s. 9 In considering the background leading to the introduction of s. 44BB, this was never the intention of the legislature and provisions of ss. 5 and 9 were always meant to operate and remain effective on the statute book.

Sec. 5 is the charging provision and no income can be brought to tax unless it falls within the scope of the said section and the use of the expression “subject to other provisions of the Act” in s. 5 would mean that if any other section operates to exclude from the total income of any person any income, which otherwise falls within the broad framework of his total income as laid down in s. 5 such section would prevail. To emphasis, the provisions of s. 44AB vis- à-vis the legislative intent only mean that thee replace the system of computation of income earlier envisaged by application of the provisions of ss. 28 to 41 and ss. 43 and 43A, but the provisions of s. 5, which is the charging section would remain intact and these by no maxim of interpretation would be superseded by the provisions of s. 44BB. As per Circular No. 495, dt. 22nd Sept., 1987, s. 44BB was no doubt described as a special provision for computing profits and gains in connection with the business of exploration of mineral oil but these were a measure of simplification providing for determination of income of such taxpayers at 10 per cent of the aggregate of a certain amount – Jindal Drilling Leasing (ITA No. 6452/Bom/1991 dt. 30th April, 1998) and Dy. CIT vs. Sonal Offshore Drilling Inc. (ITA No. 7414/B/1994, dt. 29th Oct., 2002) approved; Nippon Kokan KK & Ors. (ITA No. 3413/Del/1988, dt. 20th June, 1990), Sedco Forex International Drilling Inc. (ITA Nos. 1426 to 1430/D/1995, dt. 27th Nov., 2001 and Sedco Forex International Drilling Inc. v. Dy. CIT (2000) 67 TTJ (Del) 670; (2000) 72 ITD 415 (Del) overruled; CIT vs. Ajax Products Ltd. (1965) 55 ITR 741 (SC), CWT vs. Ellis Bridge Gymkhana (1977) 143 CTR (SC) 138; (1998) 229 ITR 1 (SC), CIT vs. E.Y. Khambaty (1986) 50 CTR (Bom) 275 : (1986) 159 ITR 203 (Bom), Dy. CIT vs. Nagarjuna Investment Trust Ltd. (1972) 66 TTJ (Hyd)(SB) 33 : (1988) 65 ITD 17 (Hyd)(SB), CIT vs. Mother India Refringeration Airways Ltd. (2002) 175 CTR (Del) 98 applied. ”

7. Similarly the Mumbai D-Bench of the Tribunal in the case of McDermott Etpm Inc. vs. DCIT in ITA No. 2897/Mum/1996, order dated 14th Sept., 2004 reported in 92 ITD 385 (Mumbai) held as follows :

“That the assessee can be charged only in accordance with s. 9, is undisputed, and as per Expln. (a) to s. 9(1)(i), where part of the operations of business are carried out outside India, only part of the income reasonably attributable to operations carried on in India shall be deemed to accrue or arise in India. The use of the word ‘shall’ in the said Explanation is unequivocally indicative of the legislative mandate contained therein. The Explanation, in no uncertain terms, envisages only such type of income to be deemed to accrue or arise in India, under s. 9(1)(i). Thus, the income presently under consideration cannot be said to be deemed income just because either the agreement was signed in India or the income has been received in India. The requirements of the Explanation to s. 9(1)(i) having not been met, the income is not deemed income. Since the income in question cannot even be construed to be deemed income of the assessee. Since the income in question cannot even be construed to be deemed income of the assessee, there is no taxable income to be computed and so s. 44BB is inapplicable. Only a part of mobilisation/demobilisation work, which is attributable to the operations carried out by the assessee in India, is taxable in India. The services rendered by the assessee are not covered by the notification bearing No. GSR-304 (E), dt. 31st March, 1983 – Saipem SPA vs. Dy. CIT (2004) 86 TTJ (Del) TM 1 followed.

8. Similar are the decisions in the following cases:

1. ACIT vs. Jindal Drilling ITA No. 6452/Bom/91

2. DCIT vs. Sonat Offshore Drilling ITA No. 7414/Bom/94 (Approved by the Bombay High Court (Income Tax Appeal No. 508 of 2007) vide order dated 16th Sept., 2008.

3. Transocean Offshore Inc Vs. DCIT ITA No. 05/Del/2002

4. ACIT vs. Enron Global Exploration & Production Ltd.

5. R & B Falcon Drilling Co. vs. ACIT.

9. In view of the above discussion, we uphold the order…”

20.3. The revenue filed an appeal before the Hon’ble High Court wherein the appeal of the revenue was dismissed by the Hon’ble Bombay High Court vide order dated 18th March 2014 in ITA No. 1328/Mum/2011 by observing as under:

“4. The department as also the assessee proceeded on the undisputed position that the assessee is a non-resident based in Mauritius. It has a permanent establishment in India. The income from the permanent establishment is assessable as business income. It is in such circumstances that we do not find that any substantial question of law with regard to status of the assessee or having a permanent establishment or not will arise for consideration.

5. The appeal is clearly devoid of any merits and therefore, it is dismissed.

6. It is dismissed even with regard to the question framed for paragraph no. 14(b). we find that the consistent understanding and approach of the parties as is now confirmed by the Hon’ble Supreme Court of India as well in the case of Commissioner of Income Tax & Anr Vs. Hyundai Heavy Industries Co. Ltd, (2007) 291 ITR 482 that it is only the income of the business as is reasonably attributed to the operation carried out in India which as is reasonably attributed to the operation carried out in India which can be said to be covered by sub-section(1) of section 9 the Income Tax Act, 1961. In the present case, as a finding it has been concurrently held that the receipts in US dollars mentioned in paragraph 4.2 of the Commissioner of Income Tax (Appeals) are not taxable. The only aspect that would be said to be covered is the one in paragraph nos.4 and 4.1 of the order of the Commissioner of Income Tax (Appeals). The Tribunal therefore was right in upholding this order and equally directing deletion of the interest under section 234B of the Income Tax Act, 1961.

7. We do not find that from the factual exercise undertaken by both the authorities, any substantial question of law arises for determination and consideration.

8. The appeal is therefore, devoid of any merits and is dismissed.”

Thus, respectfully following the order of the Tribunal and Hon’ble High Court for A.Y. 2003-04, we decide this issue in favour of the assessee and accordingly ground no.5 is allowed.

If income of the assessee is required to be brought to tax here in India with respect to any project, then the same can be done so in accordance with the aforesaid orders of the tribunal as well as high court. Therefore, without prejudice to our decision on other grounds, the AO is directed to follow our order for A.Y. 2004-05 in ITAT No.8720/Mum/2010.

21. As a result the appeal may be treated as partly allowed.

Now we shall take assessee’s appeal in ITA No.8718/Mum/2010 for A.Y. 2007-08, involving following grounds:

I. Ground No. 1:

1.1. On the facts and circumstances of the case and in law, the Deputy Director of Income-tax (International Taxation) – 3(1), Mumbai (‘the DDIT’) erred in holding that Rs. 18,87,60,455 under the contract D5680 taxable as income of the appellant by holding that the appellant has a Permanent Establishment in India under Article 5(2)(i) of the Double Tax Avoidance Agreement between India and Mauritius(DTAA).

1.2. On the facts and circumstances of the case, the DDIT erred in not appreciating that durations of each contracts D5680 did not exceed nine months in accordance with Article 5(2)(i) of the DTAA and erred in holding that the aggregate duration of all the contract would be considered for constituting PE in India.

1.3. The Appellant prays that it be held that the Appellant does not have a PE in India and therefore the income of Rs. 1,85,41,153 under the contract D5680 is not chargeable to tax in India.

II Ground No.2

2.1 On facts and circumstances of the case, the Dispute Resolution Panel-1 (“DRP”) erred in holding that the Appellant has a PE in India under Article 5(1) of the DTAA ignoring the provisions of Article 5(2) of the DTAA.

2.2 The Appellant prays that it be held that Article 5(1) is not applicable to the Appellant and without prejudice, the Appellant does not have a PE in India under Article 5(1) of the DTAA.

III. Ground No.3

3.1 On the facts and circumstances of the case and in law, the DDIT erred in holding that the LO of another group company J. Ray McDermott Middle East, Inc. (“JRMMEI”) constitutes PE of the Appellant and accordingly erred in including Rs.9,64,54,393 as income of the Appellant.

3.2 The Appellant prays that it be held that LO of JRMMEI cannot constitute PE of the Appellant.

IV. Ground no.4

4.1 Without prejudice to Ground No.3 above, on the facts and circumstances of the case, the DDIT erred in attributing the total contractual revenues from contract D5680 of Rs. 18,87,60,455 as the profits attributable to the PE in India.

4.2. Without prejudice to ground no.1 and 2 above, on the facts and circumstances of the case, the DDIT erred in holdig that revenues of US$ 14,550,000 in respect of contract D5680 pertaining to the work carried outside India is related to the work carried out in India and accordingly chargeable to tax in India.

4.2 The Appellant prays that it be held that only the profits attributable to the operations carried out in India should be taxed in India.

V Ground No. 5

5.1 On the facts and circumstances of the case and in law, the DDIT erred in levying interest under section 234D of the Act.

5.2. The appellant prays that the aforesaid levy be deleted

VI Ground No. 6

6.1 On the facts and in the circumstances of the case, the DDIT has erred in initiating penalty under section 271(1)(c) of the Act and in holding that the Appellant has concealed particulars of its income and has furnished inaccurate particulars of its income which led to penalty under the said section.

6.2 The appellant prays to direct the DDIT to drop the penalty proceeding under section 271(1)(C) of the Act.

VII Ground No.7

7.1 The appellant craves leave to add to, alter, and/or amend all or any of the above grounds of appeal.”

22. It is noted that grounds raised in this appeal are identical to grounds raised by the assessee for A.Ys. 2004-05 & 2005­06. Thus, our order for these years applies mutatis mutandis to the grounds raised in this year and accordingly AO is directed to follow the same.

23. As a result the assessee’s appeal may be treated as partly allowed.

Now we shall take up Revenue’s appeal in ITA No. 7083/Mum/2010 For A.Y. 2006-07

The revenue has filed this appeal on following grounds:

“1. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in directing the Assessing Officer to delete the amounts received for the contract work done outside India, ignoring the fact that the said contract amount is attributable to its PE in India.

2. The Appellant prays that the order of the Ld. CIT (Appeal) on the above grounds be set aside and that of the Assessing Officer restored.

3. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

24. It is noted that the grounds raised by the revenue is identical to ground no.5 of A.Y. 2005-06. Since we have already decide this issue in favour of the assessee by relying upon the order of the Tribunal and High Court for A.Y. 2003­04, therefore, in this year also we do not find any force in the grounds raised by the revenue, as not distinction has been made by the either party on law or on facts. Thus, we dismiss the grounds raised by the revenue.

24. As a result appeal of the revenue is dismissed.

Now we shall take up assessee’s appeal in ITA No.7855/Mum/2011 for A.Y. 2008-09 involving following grounds:

“Ground No. 1:

1.1. On the facts and circumstances of the case and in law, the Deputy Director of Income-tax (International Taxation) – 3(1), Mumbai (‘the DDIT’) erred in holding that Rs. 1,85,41,153 under the contract D5680 taxable as income of the appellant by holding that the appellant has a Permanent Establishment in India under Article 5(2)(i) of the Double Tax Avoidance Agreement between India and Mauritius(DTAA).

1.2. On the facts and circumstances of the case, the DDIT erred in not appreciating that durations of each contracts D5680 and D5725 did not exceed nine months in accordance with Article 5(2)(i) of the DTAA and erred in holding that the aggregate duration of all the contract would be considered for constituting PE in India.

1.3. The Appellant prays that it be held that the Appellant does not have a PE in India with respect to the contracts D5680 and D5725 and therefore the income of Rs. 1,85,41,153 under the contract D5680 and Rs. 7,79,13,240 under the contract D5725 are not chargeable to tax in India.

Ground No.2

2.1 On facts and circumstances of the case, the Dispute Resolution Panel-1 (“DRIP”) erred in holding that the Appellant has a PE in India under Article 5(1) of the DTAA ignoring the provisions of Article 5(2) of the DTAA.

2.2 The Appellant prays that it be held that Article 5(1) is not applicable to the Appellant and without prejudice, the Appellant does not have a PE in India under Article 5(1) of the DTAA.

2.3. Without prejudice to the above, on the facts and in the circumstances of the case, the DRP has erred in considering the applicability of Article 5(1) of the DTAA in the Appellant’s case, which was not an item proposed by the draft order passed under section 144C. 2.4 The Appellant prays that it be held that the powers of the DRIP are restricted to confirm, reduce or enhance the variation as proposed in the draft assessment order and accordingly, the DRIP directions are to be with reference to the objections to the variations proposed in the draft order.

Ground No.3

3.1 On the facts and circumstances of the case and in law, the DDIT erred in holding that the LO of another group company J. Ray McDermott Middle East, Inc. (“JRMMEI”) constitutes PE of the Appellant and accordingly erred in including Rs.9,64,54,393 as income of the Appellant.

3.2 The Appellant prays that it be held that LO of JRMMEI cannot constitute PE of the Appellant.

Ground no.4

4.1 Without prejudice to Ground No.3 above, on the facts and circumstances of the case, the DDIT erred in attributing the total contractual revenues from contract D5680 of Rs. 1,85,41,153 and from contract D5725 of Rs. 7,79,13,240 as the profits attributable to the LO as RE in India.

4.2 The Appellant prays that it be held that only the profits attributable to the LO as being RE should be taxed in India.

V Ground No. 5

5.1 On the facts and circumstances of the case and in law, the DDIT erred in not following the Appellant’s own order of the Hon’ble Mumbai Tribunal for AY 1997­98 and of the Commissioner of Income-tax (Appeals) for AY 2006-07 wherein it has been held that the duration of each contract should be considered separately for constituting RE in accordance with Article 5(2)(i) of the DTAA.

5.2 The Appellant prays that the DDIT be directed to follow the Appellant’s own Orders for AY 1997-98 and AY 2006-07.

VI Ground No. 6

6.1 On the facts and in the circumstances of the case, the DDIT has erred in initiating penalty under section 271(1)(c) of the Act and in holding that the Appellant has concealed particulars of its income and has furnished inaccurate particulars of its income which led to penalty under the said section.

VII Ground No.7

7.1 The appellant craves leave to add to, alter, and/or amend all or any of the above grounds of appeal.”

26. It is noted by us that the grounds raised by the assessee in this year grounds are identical to the grounds raised in earlier years. The unanimous stand of both the parties before us was that the grounds of this year can be disposed on the basis of orders of the earlier years. Accordingly, we direct the AO to follow our order of earlier years to decide these grounds.

27. As a result appeal is treated as partly allowed.

28. In the result, appeals filed by the assessee and revenue are partly allowed for statistical purposes.

Order pronounced in the open court on 6th May, 2016.