Income Tax Appellate Tribunal - Mumbai
Valentine Maritime (Gulf) Llc, Mumbai vs Assessee
Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 1 of 21 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI L BENCH, MUMBAI Bef ore Shri Pramod Kumar and Smt P Madhavi Devi ITA No. 2879/Mum/05 Assessment year 2000-01 Valentine Maritime (Gulf ) LLC ................Appellant C/o Vinod Agnani, Chartered Accountants Montreal, B 31 Shatrinagar Andheri (West), Mumbai 400 053 Vs. Assistant Director of Income Tax ............. Respondent
- International Taxation, Circle 2(2),Mumbai ITA No. 3608/Mum/05 Assessment year 2000-01 Assistant Director of Income Tax
- International Taxation, Circle 2(2),Mumbai ................Appellant Vs. Valentine Maritime (Gulf ) LLC ............. Respondent C/o Vinod Agnani, Chartered Accountants Montreal, B 31 Shatrinagar Andheri (West), Mumbai 400 053 Assessee by : Shri Hiro Rai Revenue by : Smt Gunjan Mishra O R D E R Per Pramod Kumar:
1. These cross appeals are directed against the order dated 26 th March 2003 passed by the learned Commissioner (Appeals) in the matter of Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 2 of 21 assessment under section 143(3) of the Income Tax Act, 1961, (hereinafter referred to as 'the Act'), for the assessment year 2000-01. As these appeals involve interrelated issues, which arise on the same set of facts, and as these appeals were heard together, both the appeals are being disposed of by way of this consolidated order.
2. In the appeal filed by the assessee, the assessee has raised following grievances:
1. The learned CIT(A) erred on f acts and in law in taxing the earnings from two projects in Ind ia.
2. The CIT(A) erred in holding that the assessee has a 'permanent establishment' (PE) in India.
3. The CIT(A) erred in sustaining income @ 10% of gross contract receipts.
4. Alternatively, the CIT(A) has erred in not allowing part of reimbursement of expenses which was not the obligation of the assessee and not f orming part of contract receipts.
3. In the appeal filed by the Assessing Officer, the grievances raised are as follows:
1. On the f acts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the Assessing Officer, to work out the related amount of mobilization/ demobil ization charges pertaining to the transportation within continental shelf and exclusive economic zone of Ind ia, and take that much amount only f or computation of total income under section 44BB of the Income Tax Act, 1961, towards reimbursement of expenses.
Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 3 of 21
2. On the f acts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the interest charged under section 44B of the Income Tax Act, 1961, in this case.
4. In substance thus, all that we have to decide is whether or not the assessee can be said to have a permanent establishment in India in the relevant previous year, and, if so, whether or not the mobilization and demobilization expenses relating to work carried out beyond the Indian continental shelf and its EEZ (exclusive economic zone) can be brought to tax in India. As regards the assessee's grievance against taxability of reimbursement of expenses pertaining to mobilization and demobilization, the same was not pressed before us, and is dismissed as such.
5. The assessee before us is a tax resident of Abu Dhabi, the United Arab Emirates. Even though the Assessing Officer declined the treaty benefits on the ground that the assessee did not pay have any actual tax liability in the UAE, the CIT(A) has granted the treaty benefits, and the Assessing Officer has not challenged these findings of the CIT(A). There is thus no dispute about admissibility of India UAE Double Tax Convention 1. There is also no dispute that in terms of Article 5(2)(h) of the India UAE Double 1 ( 205 ITR Statutes 49) Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 4 of 21 Tax Convention, a PE can, inter alia, can be said to include "(h) a building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months". The first question we have to thus determine whether or not the PE, under this treaty provision, can exist on the facts of the present case. The relevant material facts, for adjudication on this issue, are as follows. In the relevant financial period, the assessee carried out two projects for a company by the name of Saipem UK, pertaining to Jamnagar Refinery Complex. One of these contracts ( i.e. C 98/09) was for certain installation work of equipments, and the other contract (i.e. C 98/08) was for accommodation and hook support for Saimpan's project on high seas at Jamnagar. The first contract was for a period of 8 months and 4 days, while the period for the second contract was 8 months and 24 days. When overlapping days are excluded, the period of these two contracts, taken together, works out to 294 days which is in excess of threshold limit of nine months in the India UAE tax treaty. The Assessing Officer was of the view that these two contracts were executed in the same geographical area, i.e. Jamnagar, for the same party, i.e. Saipem UK, are, therefore, requires to be viewed as geographically and commercially coherent. Accordingly, for the purpose of determining the PE duration threshold, as per the Assessing Officer, the time spent on these two contracts was to be Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 5 of 21 aggregated. The Assessing Officer held that since this period is more than nine months, the assessee can be said to have a permanent establishment, under Article 5(2)(i) of the India UAE tax treaty, in India. Aggrieved, assessee carried the matter in appeal but without any success. The CIT(A), inter alia, held that " since these contracts are with the same entity, in connection with the same Jamnagar Refinery Complex, they are commercially and geographically coherent and would be treated as a single unit for the purpose of applying the test of PE". The assessee is not satisfied and is in appeal before us.
6. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
7. Vide our order of even date, in the case of ADIT Vs Valentine Maritime (Mauritius) Limited, we have observed as follows :
7. The first issue that we must address ourselves to is whether or not, on the facts and in the circumstances of the case, the assessee can be said to have a PE in India. Article 5 (2)(i) of the Indo Mauritius tax treaty, which is broadly the same as Article 5(3)(a) of UN Model Convention - except mainly for replacement of 'six months' duration test by 'nine months' duration test, and for includ ing it in paragraph 5(2).The relevant extracts from Article 5 of India Mauritius tax treaty are as follows:-
Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 6 of 21 Article 5 - Permanent Establishment
1. For the purpose of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of enterprise is wholly or partly carried on.
2. The term 'permanent establishment' shall include:
.............
.............
..............
(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.
....................................
....................................
8. 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 inasmuch 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). To that extent, the construction PE clause could also be viewed as an arbitrary degree of permanency that is required for any fixed place of business PE. Save and except for this additional yardstick for the degree of permanence, the normal PE definition would apply. One of the arguments taken by the learned Departmental Representative was that since two contracts with Arcadia Shipping ( i.e. C 99/05 and C 99/07) are for the period of 137 days and 99 days respectively and Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 7 of 21 since only contract (i.e. C 99/07) had some installation work while the other contract (i.e. C 99/05) was only for providing accommodation barges, the assessee can be said to have a fixed place of business for substantial duration and it should, therefore, be held that the assessee had a PE under Article 5(1) as a 'fixed place of business'. It is difficult to understand, much less approve, rationale of this argument. Firstly, in order to be treated as a PE, a fixed place of business must be a fixed place of business through which the business of the assessee is wholly or partly carried on. It is not the business of the assessee to provide accommodation on the barge and providing accommodation is the only activity carried on at the barge, if that can be treated as a fixed place of business. The business of the assessee is giving barge on hire and that activity is cannot be, and is certainly not, carried out at the barge so hired out. When business of the enterprise is not even carried out at this fixed place, there cannot be any basis for holding a barge to be a permanent establishment of the enterprise. In the case of McDermott Industries (Aust) Pty Ltd Vs Commissioner of Federal Taxation 2 , even a barge was held to be a permanent establishment but then it was a case where in terms of Australia Singapore Double Tax Convention, under Article 4(3), an enterprise of a Contracting State is deemed to have a permanent establishment and to carry on trade or business through that permanent establishment in the other Contracting State if , inter alia, "substantial equipment is being used in that other State by, for or under contract with the enterprise." As learned counsel rightly points out, it is only in the event of the tax treaty having such a specific provision that a barge could be treated, by itself, a permanent establishment, but then no such provisions exist in the India Mauritius tax treaty. Learned counsel has also invited our attention to the fact that in the said case, the Australian Federal Court did not even see need to address the issue of treating barge as a permanent establishment under the basic rule, i.e. Article 5(1) in the present context. This also shows, as we have noted above, that by no stretch of logic, when an assessee is in the business of hiring out the barges, a barge so hired out cannot be viewed as a place of carrying on its business, which, as we understand, is limited to, qua that barge, the barge having been so hired out. Secondly, treating a project site as PE under the main rule, i.e. Article 5(1), cannot be without taking into account the provisions of Article 5(2)(i) because in the case of an construction, installation or project site, as we have noted above, what is given in Article 5(2)(i) is a test of permanence, howsoever arbitrary as it may be, for the purpose of Article 5(1). Article 5(1) and Article 5(2)(i) of the India Mauritius tax 2 Full bench judgment by Federal Court of Australia - reported as 2005 ATC 4398 - referred to in 'Principles and Practice of Double Taxation Agreements' by Prof Robert Deutsch at page 150 (published by BNA International , UK) Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 8 of 21 treaty, in such cases, are required to read together rather than read on standalone basis. The argument of the learned Departmental Representative is thus devoid of any legally sustainable merits.
9. Coming back to the provisions of Article 5(2)(i), 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. The locations are thus separate places of business, and activities at different locations are, therefore, required to be viewed on standalone basis. 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.
10. 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 3, which states that "The term 'permanent establ ishment' 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) f or more than six months." (emphasis supplied by us by underlining). In the case of India Thailand tax treaty 4, the definition for this type of permanent establishment, which finds place in Article 5 (2)(h) of the said treaty, is worded as " a 3 194 ITR Stat 241 4 161 ITR Stat 82 Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 9 of 21 build ing 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 f or 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 5, Belgium 6, Bulgaria 7, Canada 8, China 9, Denmark 10, Italy 11, New Zealand 12, Norway 13, Spain 14, Turkey 15 and USA 16. In these remarkably large number of 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. There are thus two types of provisions in the construction PE clauses - one set of cases in which treaties provide for aggregation of time spent on various projects, and other set of cases in which treaties donot provide for such an aggregation of time spent on different projects. Even such an aggregation, when applicable, would require exclusion of double counting of days 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 inasmuch 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 the 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. Revenue has laid lot of emphasis on the fact that while in Indo UK Double Taxation Avoidance Agreement 17, there is a specific mention in the protocol to record the agreement "to apply the 'more than six month test' separately to each site or project which has no connection with any other site or project and to each of the connected sites and projects", 5 251 ITR Stat 97 6 247 ITR Stat 39 7 220 ITR Stat 30 8 229 ITR Stat 44 9 214 ITR Stat 160 10 180 ITR Stat 1 11 220 ITR Stat 3 12 166 ITR Stat 90 13 169 ITR Stat 15 14 214 ITR Stat 197 15 224 ITR Stat 145 16 187 ITR Stat 102 17 (1994) 206 ITR (Statue) 235 Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 10 of 21 there is no such provision in the India Mauritius tax treaty and it is not open to us to infer the said provision. We are not impressed by this argument. The provisions set out in protocol to the tax treaties need not necessarily be substantive provisions, and these can also be, and often are, merely clarificatory provisions 'ex abundanti cautela'. What is stated in the said protocol to Indo UK tax treaty is nothing other than what is anyway within the scope of the construction PE clause, as analyzed in the OECD Model Convention Commentary (adopted by the UN Model Convention Commentary as well) - an analysis, with which we are in considered agreement. The protocol provision is merely clarificatory in nature and is apparently set out as a measure of abundant caution. The absence of similar protocol clarification in other tax treaties entered into by India would not, therefore, warrant a different interpretation of the treaty provision.
11. There is unanimity in OECD and UN Model Convention Commentaries that the duration test "applies to each individual site or project". In paragraph 18 of the OECD Model Convention Commentary 18 to Article 5, it is specifically stated so. UN Model Convention Commentary 19, in paragraph 11 of its commentary on Article 5, However, this replacement of or modification of - whichever way one views it, permanence test for existence of PE, by test of minimum length of time - as in the situation before us, has left scope of abuse of these provisions such as by artificially splitting the contracts, each covering a period of less than threshold limit and each attributed to different company owned by the same group. Recognizing this fact, the OECD Commentary, deal ing with the twelve month test for construction assembly and project site prescribed in the OECD Model Convention, observes that, "apart from the fact that such abuses may, depending on the circumstances, fall under the application of legislative or judicial anti avoidance rules, countries concerned with this issue may adopt solutions in the framework of bilateral negotiations". The OECD Commentary further recognizes that a building site should be regarded as a single unit, even if it is based on several contracts, provided it forms a coherent whole commercially and geographically, and that in a situation in which the very nature of construction or installation project may be such that the contractors activity is to be relocated continuously or at least from time to time (e.g. construction of roads and canals, dredging of waterways or laying of pipelines), the activities performed at each particular spot in a single project must be regarded as a single unit. In other words, OECD Commentary refers to the situations, in the second category, in which 18 OECD Model Tax Convention on Income and Capital, 1992 (as updated in 2005) 19 UN Model Tax Convention between Developed and Developing Countries, 2001 Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 11 of 21 aggregation principle is to be applied even in the absence of specific treaty provisions to that effect, or, to put it more appropriately, the situations in which different locations of activities of an enterprise, in the other contracting state, are required to be viewed as one place of business. The exercise of aggregation of time spent on various locations is only a logical consequence of those various locations being viewed as one place of business. A view can indeed be taken that a road or canal construction, or dredging of waterways or pipeline, is a single place of business for the enterprise, even if work is relocated periodically, because that a road, canal, waterways or canal have geographical unity in the sense these are one linear point on a map, as well as commercial unity- given the nature of the business of the enterprise, it is a single site and a single place of business. It is this approach that is true justification for the aggregation to be applied, if at all one considers these progressive relocations to be distinct sites, for time spent on difference sites. Therefore, so far as geographical coherence is concerned, what is to be really seen is whether different places of activities, of an enterprise in the other contracting state, are one place of business or different places of business. If one comes to the conclusion that these are different places of business, matter ends here. However, if these places are seen as one place of business, the next thing to be ascertained, i.e. commercial coherence, is whether the work done at these sites constitutes one business venture, consisting of one or more contracts, or different business ventures altogether.
12. There are two important issues, therefore, that we need to deal with at this stage - first, as to who has the onus to show that the contracts are artificially split, or otherwise the affairs are so arranged, so as to circumvent the duration test; and - second, what are the circumstances in which the aggregation principle is to be applied, even in the absence of specific provisions to that effect in a tax treaty, so as to give a reasonable meaning to definition of a PE in respect of building, construction, or assembly project or supervisory activity in connection therewith. In our considered views, these are only two sets of circumstances in which time on each set of relevant business activity by an enterprise, in the other Contracting State, is to be aggregated.
13. As for the cases of alleged treaty abuse, alleged artificial splitting of contracts, or other alleged modes of maneuverings to enter into sham arrangements to defeat the provisions of treaty, the onus must lie on the revenue authorities to establish the factual elements embedded in such allegations. It is only elementary that no one is expected to prove a negative. Hon'ble Supreme Court, in the case of K Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 12 of 21 P Varghese Vs Income Tax Officer 20 , has observed that "...to throw the burden of showing that there is no understatement of consideration, on the assessee, would be to cast an impossible burden upon him to establish a negative, namely, that he did not receive any consideration beyond that declared by him". By the same analogy, an assessee cannot be expected to demonstrate that contracts are not artificially split, that the affairs are not so contrived so as to circumvent the duration test or that there is no maneuvering so as to abuse the treaty provisions. It is, therefore, for the revenue authorities to establish, beyond a reasonable degree of doubt, that there is an abuse of treaty provisions by so artificially contriving the affairs as to wrongfully entitle the assessee to treaty benefits. No doubt, in order to enable the revenue authorities to discharge this onus, the assessee must comply with reasonable requisitions of the revenue authorities and truthfully share the information available with him, but the exercise to establish treaty abuse is to be conducted by the revenue authorities. Unless that exercise is conducted, it cannot be open to disregard the claim of the assessee by simply making vague and generalized claims about artificial splitting of contracts and about the sham arrangements to defeat the treaty provisions. In the case before us, no such exercise is carried out. In the orders of the authorities below, a reference is made to the contracts having been awarded by one entity - directly or indirectly, and the fact that the work is carried out at the same place but these facts, by themselves, does not put the case in the category in which treaty provisions are abused by artificial arrangements, and, for that reason alone, the time spent on all the activities is required to be aggregated. The aggregation of time spent on various activities, on account of artificial splitting of contract by the assessee or other modes of treaty abuse, can not thus apply unless the reasons embedded in this approach are established by the revenue. That is not the situation before us.
14. In our considered view, the only other situation in which aggregation of time spent of various activities is to be done is when the activities are so inextricably interconnected or interdependent that these are essentially required to be viewed as a coherent whole.
14. The test of 'commercial and geographical coherence' thus does find a mention in the OECD Commentary but interestingly, this test refers to such a degree of coherence that the different units, taken together, form a 'coherent whole - geographically and commercially". That is almost the same thing as different units being viewed as one 20 (1981) 131 ITR 597 Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 13 of 21 place of business. That cannot be equated with mere commercial and geographical coherence simpl icitor in the normal course of business situations. The ambiguity of commercial and geographical coherence test apart, this test is not of universal application nor can it be construed as a conclusive test. There could be activities, such as construction of roads, which may or may not be geographically coherent but yet, according to the OECD Model Convention Commentary and in accordance with the fundamental rationale of construction PE concept, the time spent on progressive relocations is required to be aggregated. Similarly, there can be situations in which location of projects may be geographically the same, and yet as these are completely independent projects, the aggregation of time spent on the two projects may not be justified for that reason, as in the case of Sumitomo Corporation Vs DCIT 21 where even though the situs of activities were at different parts of the same factory "viz. assembly floor, paint shop and weld shop", yet the Tribunal came to the conclusion that "it cannot be said that all contracts put together formed a coherent whole - commercially or geographically". On a conceptual note also, merely because different construction, project or supervisory activities are being carried out at nearby physical locations, these activities, for this reason alone, are not required to be seen in conjunction with each other. A construction site or project site inherently lacks permanence, in strict sense of that word, since construction, assembly, project or supervisory activity are supposed to continue for a limited time only i.e. till the objective is achieved, and it is perhaps for this reason that the fictional PE for these types of activities is created so as to meet the situations when no PE taxation is triggered under the basic rule. According to this school of thought, this fictional PE comes into existence because even though the nature of business carried out at these locations could be legitimately viewed as lacking permanence, once 'duration of activities test' is satisfied, nothing further needs to be established so far requirement of 'permanence' is concerned. This deeming fiction is to be applied for each construction or project site or supervisory activity in connection therewith. This deeming fiction, like all deeming fictions, is to be applied strictly. As an enterprise working in the other Contracting State, the situs of performing the activities, which triggers this fictional PE, is not necessarily a factor which is even controlled by the enterprise. It cannot thus have much bearing on the business model of the enterprise, and, therefore, on the question whether or not the enterprise is carrying on the business through the PE. As for the 'commercial coherence', there is hardly any consensus on its 21 114 ITD 61 Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 14 of 21 connotations either. Prof Arvid Skaar, a well known Norwegian international tax scholar, in his book "Permanent Establishment - Erosion of a Tax Treaty Principle 22" suggests that "it can normally be assumed that projects conducted under the same contract, i.e. the same document, will be considered a coherent whole" and expresses dissatisfaction about lack of clarity on the issue by adding that " apart from the assumption that one contract is one project, the identification rules of commentaries are sparse and obscure". There are quite diversified opinions on the connotations of 'coherent whole' or 'commercial coherence'. On one end of the spectrum, there is a decision of the Belgian Cour' d Appel Anvers, 23 ET 387 (1983) 23 which seems to suggest that 'the same ordering party' will constitute commercial coherence, on the other end of the spectrum, there is also a decision by a coordinate bench of this Tribunal in the case of Sumitomo Corporation Vs DCIT 24 wherein this theory is impliedly rejected and it is held that even when contracts are relating to different areas of manufacture of cars but these contracts are independent and not capable on bringing in a coherent whole, 'mere commonality of principal cannot be sufficient'. The views expressed by the Tribunal are also on the same lines as expressed by Arvid A Skaar in his book "Permanent Establishment - Erosion of a Tax Treaty Principle" 25, wherein he has questioned the school of thought advocated by Klaus Vogel as also the Belgian ruling mentioned above, and observed as follows:
The significance of identical clients has been particularly emphasized by German tax treaty commentators. To be a coherent whole, according to Vogel, the tasks have to be performed at the same place and for the same client. In the present author's opinion, this position seems to presuppose that the creators of the commentaries agreed upon a specific criterion though they used an ambiguous one in the text of the commentaries. However, under treaty interpretation based on Vienna Convention, the intentions of the contracting parties are considered to be expressed in the treaty text. If the relatively precise criterion 'identical client' was intended, this would have been probably indicated by using a less ambiguous term than 'commercially coherent whole'.......
22 Third Indian Reprint, 2009, published by Kluwer Law International - at page 355 23 referred to in Klaus Vogel on Double Taxation Conventions (Third Edition) - page 308 24 supra 25Third Indian Reprint, 2009, published by Kluwer Law International -atPage 365 Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 15 of 21
15. In the case of Sumitomo Corporation Vs DCIT 26, as we have noted earlier, a co ordinate bench of this Tribunal has also impliedly rejected the emphasis on commonality of principal. While doing so, the Tribunal has, inter al ia, observed as follows:
79. Article 5 (4) 27 replaces the permanence element for existence of PE by the test of minimum length of time. In a case where there are several sites where supervision is going on in a country, the rule is that the test of minimum period should be determined for each individual site or installation project. Klaus Vogel in his commentary on Double Taxation Conventions, at page 308, has following to say on this aspect :
"The question whether there is a PE in a specific contracting state or not should be considered separately for each activity performed in that State i.e. for each individual place of business existing there as well. In this connection, the place where individual activity is performed may very well be relocated, for instance, where a road is being constructed in stages. If, in contrast, all building sites maintained in one State are treated as one single PE, this would in effect tantamount to force of attraction principle. Moreover, this would violate the principle that various business activities performed by one and same enterprise, none of which constitutes a PE, cannot lead to a PE, if combined."
This above rule is , however, subject to exceptions viz. where each building site or installation site forms a coherent whole in the other country and is operated at one place and by the same ordering party. The thrust of learned counsel for the revenue has been on this exception to the rule. We have already highlighted the fact that each purchase order was independent and did not complement each other. The MUL YE 2 project would not stand concluded with the execution of these purchase orders. The assessee was not the only person rendering these supervisory services. The sites were located at different places viz. assembly floor, paint shop and weld shop. It cannot be said that all contracts put together formed a coherent whole - commercially or geographically. Even purchase orders relate to different areas of manufacture of 26 supra 27 of Indo Japan tax treaty ( 182 ITR Stat 380 ) as was applicable in that case Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 16 of 21 car........ As already stated, perusal of purchase orders clearly indicate that the various contracts were independent and were not capable of bringing in a coherent whole commercially. Mere commonality of principal cannot be sufficient in this regard. .......
16. The two situations, referred to in the OECD Model Convention Commentary and which have been incorporated in UN Model Convention Commentary as well, are thus essentially illustrative in nature, and the common thread, and the highest common factor, in both these situations is that in both the cases the activities are so inextricably interconnected that these cannot be viewed in isolation but only in conjunction with each other. The test of 'geographical coherence' and 'commercial coherence', in isolation with the larger picture of all the units forming part of a 'coherent whole', is not only a somewhat vague test with little consensus on its scope, and which can at best be loosely defined, but it is also somewhat unworkable in practical situations. In US Model Convention's Technical Explanation 28, reference to "commercial and geographical coherence" is substituted by reference to the contracts or projects being " interdependent -both commercially and geographically", and the said commentary, inter alia, states that "a series of contracts or projects by a contractor that are interdependent both commercially and geographically are to be treated as a single project for purposes of applying the twelve month (duration) threshold test". The 'interdependence' test is something that can perhaps be applied with lesser ambiguity vis-à-vis 'cohesion' test simplicitor, and lesser ambiguity is certainly preferable. In any event, the highest common factor in both the examples set out in the OECD and UN Commentary is this 'interdependence' or 'interconnection'. In view of the discussions above, we are of the considered view that the true test must lie in examining whether or not the activities performed by the enterprise in various projects or sites are interconnected and have to be necessarily regarded as a coherent whole. Unless the activities are of such a nature as to be viewed only in conjunction and as a coherent whole, in our humble understanding, there is no justification in aggregation of time spent on various business activities, sites or projects of the enterprise. In this view of the matter, strictly speaking, it is not really relevant whether the activities so carried out by the enterprise are for the same principal or different principals. The relevant considerations, in our considered view, are the nature of activities, their interconnection and interrelationship and whether these activities are required to be 28 Technical Explanation to US Model Income Tax Convention -1996 Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 17 of 21 essentially regarded as a coherent whole in conjunction with each other.
17. It is thus clear that the justification for aggregation of time spent by the assessee on different project sites, for applying threshold of duration test, is not sustainable. Neither the work having been carried out for the same principal is sufficient to justify the aggregation of time spent on all the projects, nor the fact that this work was carried out in the same area, which is a huge geographical area anyway, is sufficient to invoke that exercise. Even if these projects are commercially coherent in the sense that these projects are for the same organization directly or through a sub contractor, and geographically coherent in the sense that these are on nearby locations, these two factors would not necessarily mean that these projects are to be necessarily seen as a coherent whole - geographically and commercially. The true test, as we have noted above, is in interconnection and independence - in addition to geographical proximity and commercial nexus. There is no finding, nor even a suggestion, by any of the authorities below to the effect that the three contracts are inextricably interconnected, interdependent or can only be seen only as a coherent whole in conjunction with each other. As a matter of all the three contracts are for three different purposes- for charter of accommodation barge, for use of barge in domestic are and for replacement of decks. None of these contracts are such that these can be viewed as interconnected or interdependent. The CIT(A) was thus quite justified in holding that the duration of these projects cannot be aggregated for the purposes of ascertaining whether or not the permanent establishment of the assessee can be said to have existed in India. It is an admitted position that unless the time spent on these different contracts is aggregated, the threshold limit of nine months, as laid down in Article 5(2)(i), cannot be satisfied. In view of these discussions, and bearing in mind entirety of the case, we hold that the CIT(A) was quite justified in holding that the assessee did not have a permanent establishment in India.
18. Learned counsel, however, fairly accepts that so far as the question of the consideration for barge hire being treated as 'royalty' is concerned, the same is now covered against the assessee in view of Pumpuhar Shipping Corporation Limited Vs ITO 29 To that extent, therefore, the order of the Assessing Officer is to be restored. He, however, relies upon the order of the CIT(A).
29 (109 ITD 226).
Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 18 of 21
19. We, therefore, hold that while the assessee did not have a permanent establishment in India, and accordingly its business profits cannot be brought to tax, so far as the hire for barges is concerned, the taxability under section 44BB is upheld and confirmed. As regards levy of interest under section 234 B and C, learned representatives agree that the issue is now covered in favour of the assessee by a large number of decisions of the Tribunal, including Special Bench decision in the case of Motorola Inc Vs DCIT 30 which has since been approved by the Hon'ble jurisdictional High Court in the case of DIT Vs NGC Network LLC 31.
20. In view of the above discussions, and for the reasons set out above, the order of the Assessing Officer is partly restored and, to that extent, grievance of the Assessing Officer is upheld.
8. We have noted, and it has also been agreed to by the parties, that the provisions of the India UAE tax treaty are materially identical. Article 5 (2), inter alia, provides that the term 'permanent establishment' shall include specially "(h) a building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months". As far as issue before us is concerned, this materially the same as Article 5(2)(i) of India Mauritius tax treaty. In the present case also, there is no finding that there is any interdependence and interconnection between the two contracts, or that these contracts are such that they can only be viewed as a coherent whole and not in isolation with each other. In fact Article 5(2)(i) clarifies the same further by providing for 'same' or 'connected' project, as it states that PE will include "(i) the furnishing of 30 (95 ITD SB 269) 31 (2009 TIOL 43 HC MUM IT) Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 19 of 21 services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period". The word 'connected' is not defined anywhere in the India UAE tax treat but, contextual meaning of that term, which is of paramount importance, would include connection in terms of the nature of work carried out. The connection would not arise only because these are carried out at the nearby geographical location or for the same person, but there has to be something in the nature of work that must be connected. It would imply that the aggregation of time spent on different projects can only arise for connected projects. On the contrary, these two contracts are of different nature inasmuch as while one contract is for barge hire, the other one is for installation work. On these facts, and in view of our analysis of legal position in the case of Valentine Maritime (Mauritius) Limited 32 extracted above, we are of the considered view that the authorities below clearly erred in holding that the assessee had a PE on the facts of the present case. However, so far as barge hire is concerned, taxability of the same under section 44BB has been conceded by the assessee and is, accordingly, upheld.
32 supra Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 20 of 21
9. That leaves us with the question of taxability in respect of mobilization and demobilization expenses. We have noted that the CIT(A) has given relief only in respect of the amount relatable to work carried out beyond the continental shelf and exclusive economic zone. There is no dispute that application of Indian Income Tax Act, 1961, vide notification No. GSR 304 (E) extends to the continental shelf and EEZ only. In case, therefore, the assessee, which is a foreign company, has rendered services to another foreign company beyond the said area, and consideration for the same can be identified, the same is not liable to be taxed in India. The CIT(A) has only followed Third Member decision of this Tribunal in the case of Saipem Vs DCIT 33. We see no infirmity in these directions of the CIT(A) and we decline to interfere in respect of the same. So far as this issue is concerned, we see no reasons to interfere in the matter.
10. To sum up, while we hold that the assessee did not have a 'permanent establishment' in India, we also hold that the amount received by the assessee as barge hire was rightly brought to tax by the Assessing Officer.
To this extent, the order of the CIT(A) stands modified. However, as regards directions of the CIT(A) to the effect that any receipt for services rendered outside India's continental shelf and economic zone are not 33 ( 88 ITD TM 213) Valentine Maritime (Gulf ) LLC Assessment 2000-01- cross appeals Page 21 of 21 taxable in India, on the facts of the present case, we confirm the same.
11. In the result, the appeal of the assessee is partly allowed in the terms indicated above, the appeal of the Assessing Officer is dismissed.
Pronounced in the open court today on 5 TH day of April 2010.
Sd/- Sd/- (P Madhavi Devi) (Pramod Kumar) Judicial Member Accountant Member Mumbai; 5 TH day of April, 2010 Copy forwarded to : 1. The appellant 2. The respondent
3. Director of Income Tax (International Taxation), Mumbai
4. Commissioner (Appeals) , Mumbai
5. Departmental Representative, L bench, Mumbai
6. Guard File True Copy By Order Assistant Registrar Income Tax Appellate Tribunal Mumbai benches, Mumbai