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Income Tax Appellate Tribunal, DELHI BENCH ‘DB’, NEW DLEHI
Before: SHRI SAKTIJIT DEY & DR. B.R.R. KUMAR
PER SAKTIJIT DEY, J.M.:
Captioned appeals have been filed by the assessee challenging two separate orders of learned Commissioner of Income-tax (Appeals)-2, Noida, pertaining to assessment years 2011-12 and 2012-13.
Grounds raised by the assessee in both the appeals are identical.
The core issue arising for consideration in these two appeals is, whether in the relevant assessment years, the assessee had a Permanent Establishment (PE) in India in terms of article 5 of India Malaysia Double Taxation Avoidance Agreement (DTAA). The other issues raised by the assessee are the fallout of the aforesaid core issue and would merit consideration once it is held that the assessee has a PE in India.
Briefly, the facts relating to the core issue are, the assessee is a non- resident corporate entity incorporated in Malaysia and a tax resident of Malaysia. As stated, the assessee specializes in fabrication of all types of offshore and onshore structures and complexes used in extraction and exploration of mineral oil. The assessee along with a Singapore based company, viz., M/s. Swiber Offshore Construction Pte Ltd. (Swiber), formed a consortium and entered into two separate contracts with Oil & Natural Gas Commission (ONGC). The contracts are named as ‘wellhead platform contract’ and ‘process platform contract’. As per the terms of contracts, assessee was required to carry out design and engineering of platforms, material procurement in relation to platforms, fabrication of platforms and hook-up, testing and commissioning (HUC) of platforms.
Before the Assessing Officer, the assessee claimed that in the relevant assessment years under consideration, the assessee along with Swiber had undertaken work relating to execution of wellhead platform contract.
It was submitted that no activity in respect of HUC relating to process platform contracts was undertaken. It was submitted by the assessee, since, the assessee had no PE - either fixed place PE or installation PE, in India, the receipts from offshore activities such as procurement of materials and fabrication of platform, which were carried out outside India, are not taxable in India. The Assessing Officer, however, did not accept the claim of the assessee. Referring to the contract documents with ONGC and other materials, he observed that kick off date of the contract was 15.02.2010, whereon, the assessee has started its activity in India.
Therefore, according to the Assessing Officer, in terms of Article 5(3) of India Malaysia Treaty, the assessee had installation PE as it had a presence in India for a period exceeding nine months. Having held so, the Assessing Officer proceeded to attribute 25% of the gross revenue to the PE in India in assessment year 2011-12. Whereas, in respect of assessment year 2012-13, the Assessing Officer attributed 18.54% of the Revenue received from offshore supply of equipment and 10% of revenue from onshore activities to the PE. Accordingly, he passed the assessment orders. Against the assessment orders so passed, the assessee preferred appeals before ld. Commissioner (Appeals). After considering the submissions of the assessee with reference to the facts and materials on record, ld. Commissioner (Appeals) held as under :
• Assessee had both fixed placed PE and installation PE under Article-5(1) and Article-5(3)(a) respectively of India Malaysia
Treaty; • Revenue earned should be bifurcated between inside India activity and outside India activity; • For outside India activity, profit to the PE is attributable @ 18.54% of the gross revenue; • For inside India activity, revenue should be taxed @ 10%.
Before us, learned counsel appearing for the assessee has made elaborate submissions – both oral and in writing, contesting the decision of the departmental authorities regarding existence of PE in India.
Learned counsel submitted, though, the Assessing Officer has alleged that the assessee had a project office in India, however, no evidence has been brought on record to demonstrate the nature of work executed by the project office. He submitted, the assessee has specifically brought to the notice of the departmental authorities that the project office was of the consortium partner, Swiber and not of the assessee. He submitted, no contrary fact has been brought on record by the Assessing Officer to rebut assessee’s claim. He submitted, though, the Assessing Officer has referred to a decision of the coordinate Bench regarding presence of equipment/vessel in India, however, he has not established on record the presence of any equipment or vessel of the assessee in India. He submitted, burden is entirely on the Revenue to prove beyond doubt that the alleged project office was involved in core activity of execution of the project. He submitted, without such a finding, it cannot be assumed that the project office established by the consortium partner is a fixed place PE of the assessee, through which it is carrying out its business. In support of this contention, he relied upon decision of Hon’ble Supreme Court in the case of DIT vs. Samsung Heavy Industries Co. Ltd., (2020)
117 taxmann.com 870(SC). Proceeding further, he submitted, as per the Memorandum of Understanding entered between the consortium partners, specific work to be undertaken by each of the Consortium partner have been specifically earmarked. He submitted, while, the assessee was responsible for design, engineering, procurement of material, fabrication and HUC work, the other consortium partner was responsible for other works. He submitted, apart from HUC work, rest of the work was executed by the assessee outside India and assessee’s employees visited India only for HUC work. Thus, he submitted, if at all, there is possibility of existence of installation PE of the assessee under Article 5 (3)(a).
He submitted, even, there is no installation PE in terms of Article 5(3)(a) of India Malaysia DTAA as the duration test of nine months’ activities is not satisfied. He submitted that duration test under Article 5(3)(a) is activity specific hence, it will get satisfied only in respect of specific activity, i.e., HUC. He submitted, the Assessing Officer has taken the commencement of duration test from kick off date and not the HUC date. He submitted, the date of kick off meeting is 15.02.2010, whereas, the date of contract is 26.02.2010. Thus, it cannot be assumed that before even the execution of the contract, the installation PE was in existence. He submitted, the kick off meeting has been defined in the contract as a meeting to discuss and finalize the work execution plan and procedure.
Thus, he submitted, prior to execution of contract, it cannot be assumed that the PE existed. In this context, he relied upon a decision of Hon’ble Delhi High court in the case of National Petroleum Construction Company v. DIT, (2016) 66 taxmann.com 16(Delhi). He submitted, as per the minutes of meeting held with ONGC on 5th April, 2010, it is specifically provided that an independent party, M/s. Furgro will start the survey work from 25.02.2010 using its own vessel, MV Flamboyan. He submitted, since the work of survey was sub-contracted to an independent party, it cannot be reckoned for initiation of duration test in terms of Article 5(3)(a). He submitted, the only activity undertaken by the assessee relevant for construing installation PE is the HUC, which was proposed to start from 18th December, 2010 but could only commence on 21st February, 2011. He submitted, even after commencement, there was stoppage of activity due to intervention of Monsoon period, during which no activity could be undertaken. He submitted, HUC activity could be initiated only when the right to access the site is available. He submitted, as per the terms of the contract, HUC activities were originally proposed to commence from 18.12.2010 and to be completed by 30.04.2011.
However, the activity actually commenced in India on 21.02.2011 and continued till 27.04.2011. Thereafter, the work was stopped due to monsoon period and the work again re-commenced on 27.11.2011 and was completed on 06.12.2011. Thus, he submitted, the total number of days, which could be attributed to the HUC activity in India, will aggregate to 76 days. Hence, the duration test of nine months is not satisfied. He submitted, installation site is not always available to the assessee, as ONGC has provided limited access to commence and proceed with the installation work in accordance with the contract. In this context, he drew our attention to clause 2.2.2 and 2.3.2 of the contract. He submitted, as
per the aforesaid clauses, the activities cannot be carried on the project site post the onset of monsoon hence, same would require demobilization of the contractor from the project site. Therefore, for a period of seven months from May to November, the assessee did not have access to the construction site and had demobilised its barges. To demonstrate the aforesaid factual position, ld. Counsel sought permission of the Bench to submit additional evidences through application dated 20.05.2019. In this context, he wanted to furnish the monthly progress reports and certificate of completion issued by ONGC. Thus, he submitted, there cannot be any installation PE under Article 5(3)(a) of India Malaysia DTAA as the duration of the activity was for less than nine months.
Learned departmental representative strongly relied upon the observations of the Assessing Officer and ld. Commissioner (Appeals).
Further, he submitted, before the departmental authorities, the assessee had not furnished any documentary evidence to demonstrate that the conditions of Article 5(3)(a) of India Malaysia DTAA are satisfied. He submitted, even, Article 5 of the DTAA does not provide for exclusion of monsoon period. He submitted that once, the personnel of the assessee arrived in India in connection with the work, the date of such arrival shall be taken as the kick off date for Article 5(3)(a) of the Treaty. As regards assessee’s contention that the survey work was conducted by an independent contractor, ld. DR submitted that such sub-contractor is employed by the assessee. However, as per the terms of the contract, it is the responsibility of the assessee to carry out the pre-construction/pre- installation survey. In this context, he drew our attention to clause 5.4.1 of the wellhead platform contract. Thus, he submitted, assessee’s claim that it was not involved in the survey work and further, monsoon period should be excluded is unacceptable. He submitted, since, the assessee has started its activity from the kick off date of 15.02.2010 and completed the work after a duration of nine months, it had a installation PE in India.
We have considered rival submissions in the light of decisions relied upon and perused the materials on record. Undisputedly, the assessee along with another non-resident entity, viz., Swiber, had formed a consortium to enter into contracts with ONGC for certain works relating to oil exploration. It is the case of the assessee that in the relevant assessment years under dispute, only wellhead platform contract was undertaken, under which the assessee was assigned the work of HUC activities, which is offshore activity. Whereas, the other onshore activities are to be carried out by the other consortium partner. The first issue, which arises for consideration, is whether the assessee had a fixed place PE in India in terms of Article 5(1) of the Tax Treaty. On reading of Article 5(1), it is seen that PE means a fixed place of business, through which the business of an enterprise is wholly or partly carried on. Further, Article 5(2) encompasses within the fold of PE , a place of management, a branch, an office, a factory, a workshop, a sales outlet, a warehouse in relation to a person providing storage facilities for others, a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. Thus, if we provide a contextual meaning to PE in terms of Article 5(1) and 5(2) of the Treaty, it is to be noted that the assessee had no fixed place of business, through which it carries on its business wholly or partly in India. Further, the assessee has no such place or establishment in India in terms of Article 5(2). The departmental authorities have alleged that the assessee had a project office in India, which has to be construed as PE. Whereas, the assessee has contested the aforesaid conclusion of the departmental authorities by contending that the project office is of other consortium partner, who is entrusted with onshore activity. The aforesaid claim of the assessee has not been controverted by the Revenue by bringing on record any cogent material. It is trite law, the burden is entirely on the Revenue to establish existence of fixed place PE. In the facts of the present appeal, the Revenue has failed to discharge such burden.
Therefore, we hold that Revenue’s stand that the assessee had a fixed place PE in India is not borne out on record. Accordingly, we hold that the assessee had no fixed place PE in India in terms of Article 5(1).
Next issue, which arises for consideration is, whether the assessee has an installation PE in India in terms of Article 5(3)(a) of the Tax Treaty. In this context, the contention of the assessee is, the kick of date of 15.02.2010 cannot be considered to be the commencement date of nine months’ period as the assessee actually commenced its work of HUC activities on 21.02.2011 and the work got completed on 06.12.2011.
Assessee had further claimed that during the monsoon period, no work could be undertaken hence, it has to be excluded from the period of nine months as provided under Article 5(3)(a) of the Tax Treaty. From the facts on record, it emanates that the kick off date for the work undertaken by the assessee was 15.02.2010. Whereas, the contracts were executed on 26.02.2010. As per assessee’s own admission the work got completed on 06.12.2011. Thus, even assuming that kick off date cannot be taken as the date of commencement, however, the date of contract on 26.02.2010 would be relevant. As per the terms of the contact, the assessee was required to undertake pre-construction/pre-installation survey. It is the say of the assessee that such work was entrusted to a sub-contractor, who undertook such work of survey. Therefore, the period of survey has to be excluded. Assessee itself has stated that HUC work was originally proposed to commence on 18.12.2010, however, the activities actually commenced in India on 21.02.2011.
Thus, even if we take the originally proposed commencement date of December 18, 2010 and the final completion date as 06.12.2011, then also, nine months’ period provided under Article 5(3)(a) is exceeded.
Even, accepting assessee’s claim that HUC actually commenced on 21.02.2011, if we take the date of completion as 06.12.2011, it is more than nine months. Therefore, even, going by assessee’s claim of date of commencement and date of completion, the duration exceeds nine months’ period. In this context, assessee’s claim is, the monsoon period has to be excluded as there was complete stoppage of activities and the assessee had to demobilise his personnel and equipments.
Pertinently, before the departmental authorities the assessee had not furnished any documentary evidence, whatsoever, to establish such claim. Clause 1.1.28 defines monsoon season to means that portion of the year between 16th May through 15th October (both days inclusive) when monsoon storms and high seas are of such frequency and intensity at offshore site location that construction work cannot be scheduled with any assurance. Clause 2.3.2 defines weather conditions. As per the said clause, the contractor is liable to bear all costs and delays due to adverse weather conditions. Further, in case the contractee requests the contractor to demobilize during monsoon season instead of requesting the contractor to continue the work during monsoon season, the cost of such additional mobilization/demobilization shall be borne by the company. In other words, it means that if the stoppage of work during monsoon season is due to the request of ONGC, the assessee shall not be liable to bear any cost. Assessee has not brought on record any material before the departmental authorities to demonstrate whether the work was actually stopped during monsoon period and if stopped, whether on its own decision or at the request of ONGC. At the stage of Tribunal, the assessee has furnished additional evidences in support of its claim that during monsoon season, the personnel and equipments were demobilised and the work was stopped. Admittedly, these evidences were not before the departmental authorities. Hence, there is no factual verification regarding assessee’s claim with reference to such additional evidences. It also requires verification whether during monsoon break, as claimed by the assessee, men and machinery were actually demobilised and whether they were located in India or have gone to their country of residence.
Clause 2.2.2 defines access to installation site. As per the said definition, upon receipt of request from the contractor intimating commencement of installation/construction at offshore site, the contractee shall give to the contractor access to such site as may be necessary to enable the contractor to commence and proceed with the construction/installation work. In view of the aforesaid condition, it has to be seen, on which date the assessee requested ONGC for access to installation site and when such access was provided to the assessee.
Ascertainment of these facts are crucial to determine the duration test of nine months to construe installation PE in terms of Article 5(3)(a) of the Tax Treaty. Since, all these evidences have not been brought on record or even if some documents have been brought on record, but that is only at the stage of tribunal by way of additional evidences, we are of the view that the Assessing Officer must be given a fair opportunity to go through such additional evidences and conduct factual verification to ascertain assessee’s claim of stoppage of work and demobilisation of personnel and equipments during monsoon period. Only when complete set of facts are brought on record, the legal proposition as laid down in the judicial precedents cited before us by the assessee can be applied.
Therefore, though, we admit the additional evidences furnished by the assessee before us, however, considering the fact that they were not furnished before the departmental authorities, we deem it appropriate to restore the issue relating to existence of installation PE to the file of Assessing Officer for de novo adjudication after verifying all facts and materials brought on record or to be brought on record by the assessee including the additional evidences. While doing so, the Assessing Officer must apply duration test of nine months strictly abiding by the ratio laid down by Hon’ble jurisdictional High court in the case of National Petroleum Construction Company (supra) and other decisions, which may be brought to his notice by the assessee. Needless to mention, assessee must be provided reasonable opportunity of being heard before deciding the issue.
As regards the issue of taxability of offshore supplies, it is fully dependent on the outcome of the existence or otherwise of installation PE. Therefore, this issue is also restored back to the Assessing Officer for adjudicating afresh after providing due opportunity of being heard to the assessee.
All other residuary issues, being consequential to the issue of existence or otherwise of PE in India, are also restored back to the Assessing Officer for deciding afresh depending upon the decision to be taken in respect of existence or otherwise of PE. Accordingly, grounds are allowed for statistical purposes.
In the result, appeals are allowed for statistical purposes.
Order pronounced in the open court on 22/05/2023.