When a foreign enterprise undertakes any work in India involving construction, assembly, installation or commissioning of any building or project or supervisory activities in connection therewith, a question arises whether such activities create the foreign enterprise’s Permanent Establishment (PE) in India or not. The foreign enterprise will be liable to tax in India only if the PE exists.
Normally, all the tax treaties contain a definition of PE. PE generally means a fixed place of business. It includes a construction site and installation project provided such activities last more than the specified time. For example, as per Article-5 of Indo-Mauritius tax treaty: “A building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activities continue for a period of more than nine months” will constitute a PE. In other words, if the activities are for less than nine months, there will be no PE.
This issue has recently been discussed in case of Cal Dive Marine Const. (Mauritius) Ltd. 182 Taxman 124 (AAR).
A Mauritian company entered into an agreement with an Indian company for laying pipelines under the Indian Ocean. The Mauritian Company’s scope of work includes services to be executed partly outside India and partly within Indian territorial waters.
Based on the above facts the Mauritian Company approached the Authority for Advance Ruling (AAR) to decide its tax liability in India.
The AAR debated at length whether the activities of Mauritian company in India would constitute a Permanent Establishment within the meaning of Indo-Mauritius tax treaty.
The relevant dates for deciding this issue are as underDate of signing of agreement: 04.12.2007
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Intermittent visits of project management Intermittent visits of project management: April ’08 to September ’08
A visit of PM TeamA visit of PM Team: January ’09 to February ’09
Commencement of logistic services: September 2008.
Pre-construction surveyPre-construction survey : November ’08
Entry into sea waters to lay pipeline: 09.02.2009
The expected date of completion: 31.03.2009
The foreign company submitted that the project commences only on 09.02.2009 when the actual work would start. In that case, the period of project is much less than 9 months. On the other hand, the department argues that starting point of limit should be reckoned from the date of signing of the contract. If this view is accepted then the duration of project would be more than 9 months.
The AAR observed that the argument that the starting point of time-limit has to be reckoned from the date of signing the contract seems to be far-fetched. The project commencement cannot in the absence of any definite indicia be equated to be contract signing date.
On the other hand, it would be too narrow a view to take if the commencement of active phase of construction / installation is held to be the starting point. The preparatory stages leading to the actual commencement of the work such as gathering the equipment and arranging the infrastructure for carrying out the work in full swing should legitimately fall within the ambit of the project duration.
In fact the correct legal position is that which strikes a balance between the extreme and narrow views. Accordingly, preparatory work for starting the project has to be distinguished from purely preliminary activities. Occasional short visits for negotiations or doing some paper work in connection with the project or for taking the soil samples, broadly speaking, will not trigger the start of the time-limit.
It is implicit in the very concept of PE and the expression ‘fixed place of business’ that it should be in existence for a fairly long time and merely carrying on some activities intermittently or for a short while do not impress the place with the character of a fixed place through which the business of the enterprise is carried on.
In view of the above, in the instant case, the starting point cannot be earlier than October, 2008.
(The author is a Partner in S S Kothari Mehta & Co)