Tax Insights
from India Tax & Regulatory Services
www.pwc.in
No PE where threshold limit under Article 5(2)(i) of Indo-Mauritius treaty not met for each project independently
May 13, 2016
In brief
In a recent decision, the Mumbai Income-tax Appellate Tribunal (Tribunal) inter alia held that income arising to a Mauritius company from installation of platforms under independent projects/
contracts in India was not taxable in the absence of the taxpayer’s permanent establishment (PE) in India. The Tribunal held that the 9-month threshold for constitution of PE under Article 5(2)(i) of India-Mauritius Double Taxation Avoidance Agreement (the tax treaty) was not met for each project independently.
In detail
Facts
The taxpayer1 was
incorporated in, and a tax resident of, Mauritius. In India, it was engaged in transportation, installation and construction of off- shore platforms for mineral oil exploration. The
taxpayer, in absence of a PE, filed nil return for the assessment year (AY) 1998- 99.
The taxpayer executed two contracts in India, from March 1996 to November 1996 and from February 1997 to May 1997.
The Tax Officer (TO) assessed the taxpayer on the basis that it had a PE in India under Article 5(2)(c) (in form of Liaison Office
1 ITA No. 4028/Mum/2002
(LO) of the taxpayer’s group company) and Article 5(2)(i) (Construction PE) of the tax treaty. He
aggregated the period of installation activities under the two contracts to allege existence of Construction PE. Furthermore, relying on the report of a survey carried out under section 133A of the Income-tax Act, 1961 (the Act), concluded that the LO premises were used exclusively for the taxpayer’s business and therefore the LO was a Fixed Place PE.
Accordingly, the TO
determined the PE’s taxable income under section 44BB of the Act.
The company appealed before the Commissioner of Income-tax (Appeals) [CIT(A)] who, after perusal
2 The Tribunal’s decision, covering 8 years, dealt with other issues too,
of the facts and
submissions, held that the taxpayer did not have a construction PE under Article 5(2)(i) of the tax treaty. However, the CIT(A) upheld the TO’s argument that the taxpayer had a Fixed Place PE since the LO was exclusively used for the taxpayer’s projects.
The Revenue and the taxpayer both preferred appeals before the Tribunal.
Major2 issues before the Tribunal
Should the taxpayer’s independent activities under each contract be aggregated for determining the 9-month threshold period under Article 5(2)(i) of the tax treaty?
which we have not considered in this insight.
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Did the LO of the taxpayer’s group company constitute a PE under Article 5(2)(c) of the tax treaty?
Taxpayer’s contentions Construction PE
The taxpayer had carried out only one contract during the relevant year for which the work duration was under 9 months. The Tribunal’s order in the taxpayer’s own case for the AY 1997-98 was relied upon.
LO as PE
The lower tax authorities had misread and misunderstood the documents collected during the survey.
None of the LO employees were qualified and competent to conclude contracts. There was no material to support that the LO employees had any authority to conclude
contracts.
The LO merely provided back up and auxiliary services, which were specifically excluded in terms of Article 5(3)(e)3 of the tax treaty.
Since the taxpayer was engaged in installation/
construction activity, a PE could exist only under 5(2)(i), as it was more specific, and not under Article 5(2)(c) of the tax treaty. Thus, a PE could not exist under two Articles for the same activity4.
Revenue’s contentions Construction PE
The number of days spent on all projects should be clubbed
3 UAE Exchange Centre Limited v. UOI [2009] 313 ITR 94 (Delhi); DIT v. Morgan Stanley [2007] 292 ITR 416 (SC)
4 Dy DIT v. Stock Engineering and Contractors BV [2009] 32 SOT 249 (Mumbai-ITAT)
together for applying the 9- month threshold period.
LO as fixed place PE
The Revenue relied on documents collected during survey to show that the taxpayer was carrying out substantial business operations from the LO5.
The Tribunal’s decision Construction PE
Following its own order for an earlier year, the Tribunal held that since each project
duration in India was less than 9 months, the taxpayer did not have a construction PE in India.
Article 5(1) of the tax treaty lays down the general rule regarding existence of a PE.
However, Article 5(2)(i) substitutes and limits the permanence test with the duration test. Thus, even if there exists a PE under the general rule of Article 5(1), it would be outside the ambit of definition of PE by virtue of Article 5(2)(i).
A plain reading of Article 5(2)(i) showed that the activities of a foreign
enterprise on a particular site or a particular project, or supervisory activity connected therewith, had to be taken into account, and not all activities in a tax jurisdiction as a whole.
There was no specific mention about aggregating the number of days spent on various sites, projects or activities. Each building site, construction or assembly project or
supervisory activities in connection therewith had to be viewed on standalone basis.
5 Jebon Corporation India Liaison Office v.
CIT [2011] 245 CTR 300 (Karnataka)
6 Australia, Austria, Belgium, Bulgaria, Canada, China, Denmark, Italy, New Zealand, Norway, Spain, Turkey and USA
7 National Petroleum Construction Company v. DIT (ITA no.
However, certain tax treaties6 with India provided for aggregation of days to
compute the threshold period.
Thus, the aggregation principle could not be read into tax treaties which did not specifically provide for the same. Even when aggregating days, double counting of days (when more than one site or project existed, or when work was carried out at two or more different places on a single day) had to be excluded.
LO as PE
The tax authorities had not appreciated the survey documents completely.
Furthermore, none of the documents show that the employees of the LO negotiated or concluded contracts for the taxpayer, or that substantive business was carried out from the LO. The survey documents depicted the situation that the LO merely provided co-ordination, liaison, and back office support activities. Such
activities were preparatory and auxiliary in nature, and did not constitute PE under Article 5(2)(c) read with Article 5(3)(e)3.
The taxpayer did not carry on any other activity (having an independent identity or economic substance and yielding separate business profits) other than the installation/ construction project. Therefore, the taxpayer’s case needed to be considered only under Article 5(2)(i) and not under any other clause7.
143/2013)(Delhi); Cal Dive Marine Construction (Mauritius) Limited [2009]
182 taxmann.com 124 (AAR); Kreuz Subsea Pte. Limited v. DDIT [2015] 58 taxmann.com 371 (Mumbai-ITAT); BKI/
Ham (ITA No. 34 of 2007)(Utt.)
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The takeaways
This is a welcome decision which has thrown light on the
interpretation of PE rules.
The Tribunal has clarified that where taxpayers have multiple projects, each project ought to be tested for the threshold of duration test. Furthermore, where, under specific tax treaties, the period is to be aggregated, overlap days had to be excluded
while computing the threshold period.
The Tribunal has also reinforced the principle that where a specific PE is alleged (like construction PE) then it ought to be tested only under that specific paragraph, and not under the general provisions.
Let’s talk
For a deeper discussion of how
this issue might affect your business, please contact:
Tax & Regulatory Services – Direct Tax
Gautam Mehra, Mumbai +91-22 6689 1154
[email protected] Rahul Garg, Gurgaon +91-124 330 6515 [email protected]
Tax Insights
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