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Wednesday, 03 February 2016 12:32

Permanent Establishment (PE) - Project office used as communication channel falls within the exception of clause (e) of paragraph 3 of Article 5 of the DTAA and cannot be construed as the Assessee’s PE in India - Delhi High Court Featured

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If the Project Office is only used as a communication channel, it cannot be construed as the Assessee’s PE in India 


1. The controversy involved in the present appeals principally relates to the taxability of income earned by the Assessee in respect of a contract entered into by it with ONGC Limited, a public sector enterprise

2. The aforesaid contract entailed designing, engineering, procurement, fabrication of fully loaded offshore platform and its installation, testing and commissioning at an offshore facility of ONGC

3. According to the Revenue, the income from the said contract is liable to be taxed in India as the Assessee is stated to have a Permanent Establishment (PE) in India

4. According to the Assessee, its income from the contract in question is not taxable under the Act by virtue of the Double Taxation Avoidance Agreement between India and United Arab Emirates (UAE)

5. The Assessee claims that it does not have a PE in India and further, in any event, the income from fabrication and supply of platform is not taxable as the same pertains to the Assessee’s activities outside India

6. Whilst the ITAT had rejected the Assessee’s contention that it does not have a PE in India, it accepted the Assessee’s contention that the contractual receipts from ONGC were separable and the amount received for fabrication and supply of platform outside India was not taxable under the Act. This has led both the Assessee and the Revenue to assail the orders passed by the ITAT

7. Assessee is a company incorporated under the laws of UAE and is a tax resident of that country. The Assessee is, inter alia, engaged in fabrication of petroleum platforms, pipelines and other equipment and in addition, the Assessee also undertakes contracts for installation of petroleum platforms, submarine pipelines and pipeline coating at various sites

8. In the course of its business, the appellant tendered for and entered into contracts with ONGC for the installation of petroleum platforms and submarine pipelines

9. The said contracts included various activities. Whilst the activities relating to survey, installation and commissioning were done entirely in India, the platforms were designed, engineered and fabricated overseas - at Abu Dhabi

10. The Assessee has been filing its Income Tax Returns for the AYs commencing from 1997-98

11. The Assessee’s income under the Act has been computed on a presumptive basis by taxing the gross receipts pertaining to the activities in India less verifiable expenses at the rate of 10% and the receipts pertaining to activities outside India at the rate of 1%

12. The Assessee also adopted the said basis for computing its assessable income and filed its returns for AY 1999-00 onwards accordingly

13. The returns filed by the Assessee for AY 2004-05, 2005-06 and 2006-07 were processed under Section 143(1) of the Act. However, the returns filed by the Assessee for AY 2007-08 and 2008-09 – which are involved in the present appeals – were not accepted by the AO

14. The AO passed a draft assessment order dated 31st December, 2009 under Section 144(5) of the Act for the AY 2007-08. The AO held that the Assessee had a Fixed Place PE in India in the form of a Project Office at Mumbai. The AO further held that Arcadia Shipping Ltd. (ASL) constituted a Dependent Agent PE (hereafter also referred to as ‘DAPE’) of the Assessee in India. In addition, the AO held that the Assessee also had a Installation/Construction PE in India

15. Insofar as the Assessee’s contention that the fabricated material was sold to ONGC outside India is concerned, the AO held that the contract was a turnkey and a composite contract and was not divisible as claimed by the Assessee. Accordingly, he held that the entire contractual receipts including the activities performed outside India were taxable in India. The consideration received by the Assessee for design and engineering was held to be Fees for Technical Services (hereafter 'FTS'). Since, the Assessee had not maintained separate books pertaining to the contract, the AO estimated the Assessee’s profit to be 25% of the consideration received from ONGC. The Assessee’s contention that it should be taxed by applying provisions of Section 44BB of the Act was rejected as the AO held that the activities carried out by the Assessee were not covered under that Section

16. The Assessee did not accept the Draft Assessment Order and filed its objections before the Dispute Resolution Penal (‘DRP’). The DRP held that Article 5 of the DTAA provided an inclusive definition of ‘Permanent Establishment’ (PE) and that the Assessee’s Project Office constituted a PE of the Assessee in India

17. AO passed an assessment order dated 26th October, 2010 under Section 143(3) read with Section 144C of the Act

18. Aggrieved by the assessment order, the Assessee preferred an appeal before the ITAT

19. The ITAT concurred with the AO and rejected the Assessee’s contention that it did not have a PE in India

20. However, the ITAT accepted the Assessee’s contention that the contract in question could be segregated into offshore and onshore activities and the Assessee’s income for the activities carried out outside India could not be attributed to its PE in India. Accordingly, it held that the profits attributable to design, procurement of material and fabrication could not be taxed in India

21. The ITAT rejected the Assessee’s contention that the tax payable should be computed as per the formula adopted in the preceding years (i.e. 10% of the receipts attributable to activities in India less expenses in India and 1% of the receipts attributable to activities carried out overseas). The ITAT also did not accept the Assessee’s contention that Section 44BB of the Act was applicable


Permanent Establishment (PE)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....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...Thus, the first question framed in the Assessee’s appeals is answered in the negative, that is, in favour of the Assessee and against the Revenue.... 

In view of the conclusion that the Assessee did not have a PE in India during the AYs 2007-08 and 2008-09, no income of the Assessee from the projects in question can be attributed to the Assessee’s PE. The assessment orders dated 26th October, 2010 and 18th November, 2011 for the AYs 2007-08 and 2008-09 respectively as well as the corresponding orders passed by the ITAT in the corresponding appeals are set aside. 

Cases referred to

1. CIT v. BKI/HAM: (2012) 347 ITR 570 (Uttarakhand)

2. Cal Dive Marine Construction (Mauritius)Ltd., In Re: (2009) 315 ITR 334 (AAR)

3. UAE Exchange Centre Limited v. UOI: (2009) 313 ITR 94 (Del)

4. IAC v. Mitsui &. Co. Ltd.: (1991) 39 ITD 59 (ITAT[Del])

5. Goetze (India) Ltd. v. CIT: (2006) 284 ITR 323 (SC)

6. Radhasoami Satsang v. Commissioner of Income Tax: (1992) 193 ITR 321 (SC)

7. Ishikawajima-Harima Heavy Industries Ltd. v. DIT: (2007) 288 ITR 408 (SC)

8. Re. P. No. 24 of 1996: (1999) 237 ITR 798 (AAR)

9. Henriksen v. Grafton Hotel Limited: (1943) 11 ITR (E.C.) 10 (CA)

10. DIT (International Taxation) v. Morgan Stanley & Company Inc.: (2007) 292 ITR 416 (SC) 

Additional Info

Read 3251 times Last modified on Saturday, 13 February 2016 14:50

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1 comment

  • Comment Link Amit Wednesday, 03 February 2016 16:28 posted by Amit

    Very detailed order on High Court. Permanent Establishment is discussed thoroughly.

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