M/S KSS ENGINEERING LTD.,,MUMBAI vs. DCIT (INTERNATIONAL TAXATION), NEW DELHI

The brief facts as culled out from the impugned order are that the assessee is a non-resident company incorporated in Malaysia and is a tax resident of Malaysia. The assessee- company is mainly engaged in the business of providing integrated manned & unmanned subsea services provider to the Oil and Gas Industry worldwide, with in-house project management and installation expertise. It had earned revenue of Rs.166,47,88,964/- from contract with ONGC in India for installation of certain specific items like pipelines, subsea pipelines, crossing, spools, subsea cable, etc. During the year, the assessee was awarded following five contracts:-

The Assessing Officer, first of all required the assessee as to why receipts from ONGC contracts should not be treated as Fees for technical services (FTS) under the Income Tax Act. In response, the assessee gave a very detailed submission contending that its activity being in the nature of construction; assembly; mining, etc. and hence it falls outside the purview of FTS. Assessee’s detailed submissions in this regard have been incorporated by the Assessing Officer from pages 2 to 8 of the assessment order. The second issue raised by the Assessing Officer was whether there is a Permanent Establishment (PE) of the assessee in India in terms of India-Malaysia Double Taxation Avoidance Agreement (DTAA). The assessee in response, after explaining the nature of all the contracts, submitted that they are carrying on subsea installation activities and it did not had any office or project office in India for executing the above mentioned contracts. Therefore, it cannot be said that the assessee had any PE in India in terms of Article 5(1) and 5(2) of the DTAA. So far as the applicability of Article 5(2) (j), which specifically envisages that any installation or construction project is carried out in India for a period exceeding 9 months, then it shall constitute a PE, the assessee submitted that threshold period of 9 months applies only to individual installation project and activity and every contract has to be considered as a separate project. In this regard, detailed submissions were made and judicial decisions were relied upon, which have been incorporated by the Assessing Officer from pages 11 to 13 of the assessment order. However, the Assessing Officer held that activities of the assessee does constitute a PE in India in terms of Article 5(1) of the India- Malaysia tax treaty and, therefore, the income of the assessee has to be computed u/s. 44AB of the Act by virtue of applicability of Article 7. Accordingly, he computed the income by taking 10% of the gross receipts u/s. 44AB of the Act.

The Ld. DRP, after analyzing the scope of work done under various contracts as well as Article 5(1) of the India- Malaysia tax treaty, as was discussed in orders of the earlier years of the DRP, came to the conclusion that the assessee had a PE in India, because it had a fixed place of business in the form of barge through which it carried out its activities and, therefore, there is a PE in terms of para 1 of Article 5 and under Para 1 there is no requirement of time period beyond which PE will come into existence. Apart from that, the DRP also held that the assessee had a PE in terms of Article 5(2)(j) and also under Article 5(3)(a) & 5(3)(b).

Before us, the ld. counsel for the assessee, Shri Nageshwar Rao submitted that the Assessing Officer and the DRP have mainly referred and relied upon the order of the preceding assessment years without even taking into consideration that this year all the relevant details, as was required, had been filed which have not been considered at all. He pointed out that the reference of various clauses of Article 5 of DTAA made by the DRP, it can be seen that they have drawn conclusions based on reference to amended DTAA which was applicable to a different period, i.e., which came into effect from 1/4/2013 and not applicable for the years under consideration. While considering the applicability of Article 5(1), they have completely ignored the specific Article 5(2)(j) and concluded that barge is an independent fixed place of business. The DRP and Assessing Officer while rejecting the assessee’s contention have incorrectly presumed that evidence to show entry and exit of barge into Indian territorial waters and project completion certificate was not filed. In fact, this has been duly filed vide letter dated 28/9/2015 before the Assessing Officer and it was also filed before the DRP as well as certificate from Mumbai Customs Authorities for barge’s entry and exit. Apart from that, the Departmental authorities have incorrectly considered the date of contract as starting date of activities and have also further erred in clubbing the time spent on different contract, which is contrary to various decisions of the Courts. He also pointed out that against the DRP order, a rectification application under Rule 13 was also filed highlighting the mistake that firstly, the decision of DRP was based on DTAA, which came into force from subsequent date; and secondly, there is incorrect presumption that evidence to show the project completion and entry and exit of barge have not been filed. The DRP has rejected the said petition on the ground that it is beyond the scope of Rule 13. He also brought to our notice that in assessment year 2011-12, the Tribunal has restored back the entire issue to the file of the Assessing Officer for de-novo adjudication after accepting the additional evidence with regard to the details of project completion and entry and exit of barge. In that year, these evidences were filed for the first time before the Tribunal, however, in the impugned assessment year, these details have been filed not only before the Assessing Officer but also before the DRP. Thus, the order of the DRP, without considering this vital piece of evidence, vitiates the entire order and, therefore, the final assessment order passed in pursuance of such DRP direction, cannot be sustained.

On the other hand, the Ld. D.R. submitted that like in earlier years, the matter should be restored back to the file of the Assessing Officer if the evidences, which have been filed, have not been considered by the Assessing Officer or the DRP.

We have heard the rival submissions and also perused the relevant finding given in the impugned orders and material referred to before us. The core issue in this appeal is, whether the assessee has a PE in India in terms of Article 5(1) or Article 5(2)(j) of India-Malaysia tax treaty. The assessee’s case before us is that, whether the assessee has PE in India or not has to be seen with reference to the specific provision of ‘Installation PE’ clause under Article 5(2)(j) of the India-Malaysia DTAA. The assessee had carried out installation activities under 5 contracts entered into in assessment year 2012-13 with ONGC and its main contention has been that threshold period of 9 months, as prescribed under Article 5(2)(j) of India-Malaysia tax treaty has not exceeded the period of each contracts. The commencement and completion of the project during the relevant assessment year has been stated to be as under:- Sl. Contracting Contract Date of Date of No. of Party Reference No. Commencement Completion days No. of the project of the project 1985/1CP- Afcons - 1 R/OPLC/AGJV/I 01/04/11 15/05/11 45 Gunanusa JV KSS/01 Swiber Offshore SOC/KSS/080 2 Construction Pte 01104/11 05/06/11 66 910-001 Ud-MHNRD Consortium of Subcon/LMS/p 3 09/02111 26/05/11 107 VML and VMML Kb/095/10 Consortium of CO907/PR/11/5 4 16/10/11 25/11/11 41 VML and VMML 37-AC Consortium of C1004/PR/11/2 5 26/01/12 20/05/12 116 VML and VMML 73/02-AC

To prove that duration of each contract is less than 9 months, the assessee had filed evidences of entry and exit of barge/vessels into Indian territorial water and project completion certificate. These details, which have been filed by the assessee, have not been considered either by the Assessing Officer or by the DRP and the DRP had decided this issue on the premise that the said details have not been filed. Apart from that, another main contention of the assessee has been that it did not had any office or project office in India for executing the above mentioned contracts and, therefore, they cannot be any fixed place PE in India in terms of Article 5(1) of India-Malaysia tax treaty. The only Article, which can be said to be relevant is, Article 5(2)(j) of India-Malaysia tax treaty which provides that PE shall include – “a building site or construction, installation or assembly project which exists for more than nine months”. Thus, it has been contented that whether the assessee constitutes a PE in India has to be seen in terms of this Article only, because admittedly assessee is doing installation activities only. This major contention of the assessee that when a specific definition of PE given in Article 5(2)(j) is applicable then same needs to be examined from that angle, has not been examined at all. In fact while dealing with the issue of PE, we find that neither the DRP nor the Assessing Officer has examined the applicability of Article 5(2)(j), albeit DRP has made reference to the amended article which is not applicable in the years under consideration. The assessee has explained its case with specific reference to various evidences filed; specially project completion certificate and entry and departure of barge/vessels in the Indian territorial waters. This is the most crucial evidences to examine as to whether threshold period of 9 months had exceeded or not. Apart from that, there are various judicial precedence, as to whether every single project is to be examined independently or not for the purpose of determination of duration and length of period for the purpose of PE in India. All these matters have not been analysed properly by the DRP as well as by the AO, therefore, it needs to be examined afresh. Thus, we are of the opinion that like in the earlier assessment year, the issue of determination of PE should be restored back to the file of the Assessing Officer, who shall consider all these evidences and material on record and decide the matter afresh. The assessee would be at liberty to raise all the objections and produce any such material or evidence in support of its contention. The Assessing Officer shall decide the issue after giving due opportunity of hearing to the assessee.

Accordingly, the appeal in is allowed for statistical purposes.

Now we will take up the Revenue’s appeal in wherein the Revenue has raised the following ground:-

As regards chargeability of interest u/s. 234B of the Act, we find that the DRP has relied upon the decision of the Hon’ble Delhi High Court in the case of DIT vs. GE Packaged Power Inc, 373 ITR 65. This decision has been further

Now we will take up the assessee’s appeal in for assessment year 2013-14, wherein exactly similar grounds, have been raised in assessment year 2012-13, have been raised by the assessee. For the sake of ready reference, the grounds of appeal are reproduced as under:- That the DRP has:- 1. erred in assessing total income at INR 3,48,26,853 as against the returned income of Nil; 2. erred in holding that Appellant constituted a PE in India under India-Malaysia Double Taxation Avoidance Agreement ('DT AA'); 3. erred in stating that a barge constitutes a fixed place PE under Article 5(1) of the India - Malaysia DTAA. 4. erred in misinterpreting provisions of DTAA to hold existence of a PE by applying the provisions of Article 5(1) and concluding that the Appellant constituted PE in India without applying the specific provisions of Article 5(2)0) of the prevalent Tax Treaty; 5. failed to consider details and documents furnished (ie evidence regarding project commencement and completion

At the outset, it has been admitted by both the parties that so far as the issue raised in grounds No.1 to 6 are concerned, the same are identical to the grounds raised by the assessee in assessment year 2012-13 and similar facts are permeating in this year also, therefore, in view of our directions given in the aforesaid appeal, the issues raised in these grounds are remanded back to the file of the Assessing Officer to decide the same afresh after giving due opportunity to the assessee and considering the material evidences filed by the assessee. Thus, grounds No.1 to 6 are allowed for statistical purposes.

So far as the issue of levy of interest u/s. 234A is concerned, no argument has been placed before us, therefore, the same is dismissed. As regards levy of interest u/s. 234B, we have already held in the appeal for assessment year 2012-13 in the Revenue’s appeal that interest u/s. 234B cannot be levied in the light of the decision of the Hon’ble jurisdictional High Court (supra) and also the fact that payment made to the assessee are subject to tax deduction u/s. 195 of the Act. Accordingly, ground No.8 is allowed.

Ground No.9 is premature; therefore, the same is dismissed.

In the result, the appeal of the assessee in Revenue in is dismissed and appeal of the assessee in ITA No.462/DEL/2017 is partly allowed for statistical purposes.