Authority Tribunal
Horizontal Drilling International ... vs Commissioner Of Income-Tax on 26 September, 1997
Equivalent citations: [1999]237ITR142(AAR)
RULINGS A.A.R. No. 337 of 1997 Decided On: 26.09.1997 Appellants: Horizontal Drilling International S.A. Vs. Respondent: Commissioner of Income-tax Hon'ble Judges:
S. Ranganathan, J. (Chairman) and Subhash C. Jain, Member Counsels:
For Appellant/Petitioner/Plaintiff: S.P. Puri, Vijender Gupta and Vidur Puri, Chartered Accountants For Respondents/Defendant: Anuradha Bhatia, Deputy CIT Subject: Direct Taxation Acts/Rules/Orders:
Income Tax Act, 1961 - Section 9(1) RULING
1. The applicant, Horizontal Drilling International S. A., is a company incorporated in France. An extract from the Trade Register of the Commercial Court of Pontoise describes the company's business activity as comprising : "The undertaking and performance of public works contracts, more particularly drilling works of all kinds as well as laying underground cable pipes and pipelines ; manufacture and sale of drilling equipment, incorporation and acquisition of companies, holding, investment in marketable securities and any legal and financial arrangements." The bye-laws of the company in Article 2 describe the company's corporate purpose as under :
"The company's purpose both in France and in all countries, is the undertaking and performance of public works contracts more particularly drilling works of all sorts as well as the laying of pipes, cables, and underground pipelines, making available equipment and personnel concerning the said works, the manufacture of drilling equipment, training of personnel to use the said equipment and in general to carry out all commercial, industrial, financial, movable property or real property transactions whatsoever, that may be necessary or useful for carrying out and developing the company's business."
2. The applicant was awarded a contract by the Gas Authority of India Ltd. (GAIL for short), for installation of gas pipelines crossing under Yamuna river with optic fibre cable using horizontal drilling technique near Agra for a lump sum consideration of US $ 9,60,000. The contract is dated October 25, 1996, but was effective from October 15, 1996, and the work thereunder was to be completed by January 14, 1997. The works commenced with the import of the drilling rig on January 20, 1997, and its installation was completed on February 14, 1997. On the installation of the rig, 10 per cent, of the contracted amount had to be paid to the applicant. According to the completion certificate of May 8, 1997, produced by the applicant as clarified by a subsequent letter dated August 13, 1997, drilling started on February 6, 1997, and the work under the contract was completed on March 4, 1997. It is seen that the applicant had given a sub-contract to Larsen and Toubro Limited (L & T) on October 28, 1996, in respect of the works to be executed under the contract and paid the said firm a sum of US $ 2,10,000. Broadly speaking, while the applicant assumed full responsibility for the horizontal drilling activities, Larsen and Toubro was to be responsible for all local support activities, pipelines works and the design, engineering, procurement and installation of the optical fibre cable as per specifications.
3. The applicant has filed this application under Section 245Q(1) of the Income-tax Act, 1961 ("the Act"), seeking an advance ruling on the following question :
"Whether the applicant is liable for tax under the Income-tax Act, 1961, for the assessment year 1997-98 on the contract proceeds receivable from Gas Authority of India Ltd. (GAIL) under the contract agreement dated October 25, 1996, in the absence of any permanent establishment in India, in view of Articles 5 and 7 of the Double Taxation Avoidance Agreement between India and France ?"
4. The scope of the work to be executed by the applicant-company is described at great length under the contractual document (and the general and specific conditions of contract appended thereto). It is sufficient here to refer to a summary of the same as set out in annexure-"A" to the letter of award of the contract by GAIL to the applicant and further epitomised by the applicant, in its statement of facts. The contract comprised, inter alia, the following types of activities :
"9.1 Interpretation of data of hydrological, bathymetrieal and geo-technical surveys furnished by company, carrying out all surveys required for collecting data relevant to design and construction of the crossing performing all engineering and design calculations, preparation of all necessary construction drawings for company's approval.
9.2 Preparation of detailed construction method statement of calculations.
9.3 Pre-construction surveys and collection of all necessary data.
9.4 Supervision of related activities of company's appointed pipeline construction contractor and taking over pipe and cable conduit strings, 9.5 Making pipelines and fibre optic cable conduit bundle as per design approved by company (if applicable).
9.6 Installation of pipeline and optical fibre cable conduit below the river bed by horizontal directional drilling and pulling pipeline and optical fibre cable conduit bundle together through the drilled hole or separately by two independent drilling operations, installation to the correct profile as per approved drawings.
9.7 Inspection of corrosion coating of drilled pipe and repair of defects.
9.8 Optic fibre cable :
9.8.1 Design and detail engineering, 9.8.2 Procurement/manufacture and supply of the optic fibre cable, 9.8.3 Supply of suitable jointing pits at both ends of cable, 9.8.4 Pulling of the fibre optic cable through the conduit, 9.8.5 Testing of the optical fibre cable.
9.9 Restoration and clean-up, etc. 9.10 Preparation of as-built drawings and other records, etc. 9.11 All other works not specifically listed herein, but required as per specifications, drawings, provisions of contract document, calculation and construction method statements leading to successful completion of works."
5. GAIL moved an application dated July 27, 1996 under Section 195 of the Act before the Income-tax Officer, Ward 23(10), New Delhi, seeking a "no objection certificate" for remittance to the applicant of the first payment of $ 96,000 due to it under the contract. The applicant had desired the remittance to be made without any deduction of tax at source, claiming that the payment was in the nature of business profits of the recipient and that since the recipient was not maintaining any permanent establishment (PE) in India, the payment was not chargeable to tax in India. Reliance for this claim was placed on Article 7(1) read with Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and France. The Income-tax Officer, however, took the view that the payment made to the applicant was in the nature of "fees for technical services" within the meaning of Article 13 of the DTAA and directed GAIL that tax at the rate of 20 per cent, should be deducted from the remittance of $ 96,000. This order of the Assessing Officer was made on January 2, 1997.
6. It is in these circumstances that the applicant filed the present application reiterating the contentions which had been put forward by GAIL before the Assessing Officer. Briefly, the applicant's contention is that the consideration paid cannot be treated as payment made in consideration for services of managerial, technical or consultancy nature within the meaning of Article 13 of the DTAA. Article 13 being out of the picture, it is contended that receipts of the applicant constitute business profits, and under Article 5 of the DTAA, business profits of a non-resident can be taxed in India only if the non-resident has a permanent establishment in India. Article 5(3) of the DTAA which defines permanent establishment specifically states (see [1994] 209 ITR (St.) 130, 134) :
"A building site or construction, installation or assembly project constitutes a permanent establishment only where such site or project continues for a period of more than six months."
7. In the present case, the whole duration of the project did not exceed three months from the date of importation of the rig till the completion of the contract. The applicant, therefore, has no permanent establishment in India and, therefore, its business profits are not liable to tax in India.
8. The question before the authority is, therefore, a very short question as to whether the payment made to the applicant under the contract can be said to be a payment made in consideration for services of a managerial, technical or consultancy nature. Shri S. P. Puri, appearing for the applicant, contended that a comprehensive view has to be taken of the entire contract executed by GAIL for the applicant which was in the nature of a turnkey project. He points out that the company has great expertise in the field of horizontal drilling. This was a very sophisticated type of work which involved the use of special equipment and technical knowledge. He draws attention to the letter of award and the scope of the work as set out in the annexure to the said letter and the detailed specifications which are attached to the contract. He points out that the applicant had to import equipment and particularly units of the drilling rig for the purpose of executing this contract. It had to provide the optical fibre pipe, other accessories for installation, corrosion coating, protection of underground utilities, bending, hydrostatic testing, fencing and the like. Though the drilling rig and some of the equipment are taken back by the applicant, the optical fibre pipe and spare parts utilised for executing the contract became the property of GAIL. The contract provided stiff penalties for any failure on its part to execute and complete the contract within the time specified therefor. The applicant had also to indemnify the owner against claims that may arise out of any failure by it to comply with the obligations under the contract. It was the responsibility of the applicant to ensure that the works were executed in most proper and workmanlike manner with the quality of material and workmanship in strict accordance with the specifications. It had to provide a performance guarantee before embarking on the contract and, upon completion of the works, the guarantee was construed as the contractor's warranty for the work done by him or for the works supplied and their performance as per the specifications under the contract to be in force for a period of 12 months. Shri Puri argues that what the applicant had done was to execute a contract for the Indian company and that it should be treated as a whole and the payment made under the contract cannot be dissected into various types of services for which payment was made by GAIL. It is emphasised that under the contract, no technical know-how is made over to the Indian company. All that had happened was that the pipes provided by the GAIL were placed underground by the applicant and carried several feet below the earth from one side of the river to the other side. The entire contract was completed at the risk of the applicant. Risks arising out of the pipes encountering rocky terrain or by drilling being done through soft earth resulting in the caving in of the earth had to be faced by the assessee. It is not a case of the applicant rendering services to GAIL in some piece of work the latter had undertaken ; it is a case of a project executed for GAIL by the applicant. Counsel submits that the definition of technical services under the DTAA should be read as covering payments made for services rendered qua services and not payments made in lump sum for the execution of a turnkey contract. Shri Puri also relies on the definition of the expression "fees for technical services" contained in Explanation 2 to Section 9(1)(vii) of the Act as well as paragraph 3 of Article 5 which ropes in "a construetion, installation or assembly project" within the definition of a permanent establishment only when the period of the activities exceed 180 days. Reading Articles 5, 7 and 13 together in the light of the provisions of the Act, it is submitted by Shri Puri that the payment made to the applicant does not fall under Article 13(4). The payments constitute business receipts in the hands of the applicant which could be brought to tax only if the applicant has a permanent establishment in India and that not being the case here, because of the duration for a permanent establishment set out in paragraph 3 of Article 5, the profits received by the applicant are not taxable.
9. On the other hand, Smt. Anuradha Bhatia, appearing for the Department contrasts the definition in Section 9(1)(vii) of the Act with that contained in Article 13(4) and submits that the latter does not exclude services rendered in a project of the type referred to in Section 9(1)(vii) of the Act. She also submits that the nature of the work done in this case is not analogous to a contract of construction, assembly, installation or mining or "like project", whatever that expression may mean, and urges that the payment in this case would be "fees for technical services" within the meaning of the Act. In any event, it is submitted that whatever may be the position under the Act, so far as the DTAA is concerned, this should be treated as a payment made in consideration of services rendered by the applicant to GAIL. GAIL supplies the pipelines ; it does not have the expertise to lay these pipelines underground particularly below the water-line of a river and it has sought the services of the applicant for this purpose. It is not denied that under the contract, the applicant does provide managerial, technical and consultancy services to GAIL. Attention is drawn to paragraph 4.2 of the annexures to the letter of award which shows that the work done is entirely of a technical nature and paragraph 22.1 of the special conditions of contract which show that the various types of drawings and completion documents have to be handed over to GAIL. Emphasis is also laid on the language of Article 2 of the DTAA which includes, as part of the applicant's business activities, the imparting of training to foreign personnel. In sum, it is submitted that in the present case there has been nothing but a payment for the services rendered by the applicant and that, since the applicant has no permanent establishment in India, these profits are not assessable under Article 7 but are assessable under Article 13. It is, therefore, contended that the Assessing Officer was right in directing GAIL to deduct tax at 20 per cent, from the advance remitted to the applicant and that, indeed, the applicant is liable to tax, at 20 per cent, on the entire receipts from the contract as "fees for technical services", at 20 per cent, by virtue of Article 13(2) of the DTAA.
10. The question raised by the applicant is not free from difficulty as Article 13(4) of the DTAA defines--as, indeed, do the corresponding Articles of a large number of double tax avoidance agreements entered into by India with several other countries as well--"fees for technical services" as meaning "payments of any kind to any person"--other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15--in consideration for services of a managerial, technical or consultancy nature. Considered in isolation, this definition is very comprehensive and covers all cases where such services are rendered by one of the parties to a contract and payments in consideration therefor are made by the other. The submission made by the applicant, however, is that this definition should not be interpreted so widely and liberally, as one can hardly visualise any case of any payment without services of some kind or other being the quid pro quo therefor. It is submitted that the consideration paid by one party to another for the supply of an Article cannot be strait jacketed into this definition merely because any transaction, in final analysis, can be broken down into a number of items of services rendered by one party to the other. For instance, where a party pays to another the price of an Article, say, a ship, it cannot reasonably be said that the payment is "fees for technical services" and has been made in consideration of the services of constructing a ship and making it available to the vendee. Extending the analogy, it is said that the consideration paid for a project involving installation assembly or the like would be the price paid for such project and cannot be termed a "fee for technical services".
11. It seems indeed difficult to formulate precisely the line of distinction which the applicant seeks to draw for excluding some types of payments, as those in the present ease, from the definition of Article 13. But, after deep consideration, the Authority agrees with the applicant's counsel that a limitation of some kind or the other has to be read into the terms of what otherwise would be a very wide definition. In coming to this conclusion, the Authority would like to draw some guidance from the terms of paragraph 6 of Article 13 which excludes the application of the rule of taxability outlined in paragraphs 1 and 2 of the Article to cases where the recipient and beneficial owner of the fees in question carries on business in the State in which they arise through a permanent establishment situated therein. This provision indicates that where the payment to the non-resident arises out of the latter's business and may have been made, in a loose sense of the term, in lieu of services rendered in the course of business (including services of technical, managerial or consultancy nature), they should be treated as its receipts of business, the chargeability of which would fall under Article 7 of the DTAA and depend on the existence of a permanent establishment of the non-resident in the source country. To such receipts, the provisions of Article 7 and not Article 13, will, it may be pointed out, apply. One has, therefore, to consider the provisions of Article 7 which bring to charge in India the business profits arising to a non-resident but only where he has a permanent establishment in India. The expression permanent establishment has been defined in Article 5 and it includes, by para. 3 extracted earlier, "a building site or construction, installation or assembly project" but only where such site or project continues for a period of more than six months. The authority is of the opinion that, in the present case, the applicant is carrying out a project for the installation of underground pipelines for the GAIL. If this project had lasted beyond six months, the profits arising to the applicant therefrom would have been chargeable to tax in India by virtue of Article 7 as part of its business profits. Of that, there can be no doubt, but in the present case, the project has not lasted that long-long enough for it to be considered as its permanent establishment in India. The resultant inference would be that its profits cannot be charged as "business profits" in view of the absence of a permanent establishment in India.
12. The Department would have it, however, that the applicant's receipts should nevertheless be taxed under Article 13. The argument is that Article 13 is excluded only where the payments arise in the course of a business with a permanent establishment in India and that it Would continue to be applicable even where the receipts arise in the course of the business of the non-resident which escape chargeability under Article 7 because of the absence of a permanent establishment. Construed literally and in isolation, Article 13 may be capable of that interpretation, but the authority is of the view that it is not the proper way to harmonise the provisions of Articles 7 and 13. Paragraph 6 of Article 13 intends to take out of its purview items that would be normally and more appropriately assessable under other specific Articles such as Article 7 or Article 15. It seems to the Authority that it would not be correct to charge such profits under Article 13 in cases like the present where there is an establishment of the nature envisaged in Article 5, only chargeability under Article 7 fails because the duration of such establishment does not extend beyond the period stipulated in Article 5(3). To read the Clauses thus would result in an anomaly that the business profits of a non-resident which are intended to be chargeable only where the non-resident has a permanent establishment in India would become chargeable to tax even where it has no permanent establishment, merely by labelling them as consideration for technical services. There will also be the anomaly that such receipts would become taxable on their gross amount without any deductions for expenses laid out for earning them (such as the sum of $ 2,10,000 paid by the applicant to Larsen and Toubro in this case), a deduction which would have been available had the charge been made under Article 7. Thus, if the contract in this case had lasted for six months or more, tax in India could have been charged only on the net receipts whereas, because of the shorter duration, this benefit will be lost to the applicant on the interpretation suggested by the Department. It is difficult to read these implications into the wordings of the two Articles.
13. In the above situation, a more apposite construction would appear to be to read the two Articles harmoniously and include within the definition in paragraph 4 of Article 13, only payments made in consideration for services qua services and correlated thereto and excluding from its purview payments made in consideration of the execution of a construction or installation project or the like referred to in paragraph 3 of Article 5.
14. That the concept of a "fee for technical services" has to be read subject to such an inherent limitation built into it can also be seen from the definition of the expression contained in Explanation 2 to Section 9(1)(vii) of the Act which reads as under :
". . . 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'."
15. No doubt this is a special statutory definition and cannot be straigh-away imported into the DTAA. But even so, there must be a rationale for the exclusion, which can only be, that consideration for projects of the nature mentioned, cannot be equated to consideration for services rendered in the course of their execution.
16. In this view of the matter, the Authority pronounces the following ruling on the question posed by the applicant :
Ruling Question Answer Whether the applicant is liable for tax under the Income-tax Act, 1961, for the assessment year 1997-98 on the contract proceeds receivable from Gas Authority of India Ltd. (GAIL) under the contract agreement dated October 25, 1996, in the absence of any permanent establishment in India, in view of articles 5 and 7 of the Double Taxation Avoidance Agreement between India and France ?"
No