SKP Tax Alert
2 July 2015 | Volume 8 Issue 12
Mumbai ITAT says Service Permanant Establishment cannot be constituted for installation projects with separate clauses and 180 day thresholds in the tax treaty

Background
Recently, the Mumbai Income Tax Appellate Tribunal (Mumbai ITAT) in the case of Kreuz Subsea Pte Ltd vs Deputy Director of Income tax (International Taxation) 3 (1) Mumbai (IT APPEAL NO. 1876 (MUM.) OF 2014),  has held that the activities which are related to construction or installation for certain projects are specifically covered under Article 5(3) (installation Permanent Establishment(PE)) of the India-Singapore  Double Taxation Avoidance Agreement (DTAA) instead of Article 5(6) (Service PE). In the present case, since Article 5(3) (for installation activities) being more specific than Article 5(6) (for Service PE), the former has to be considered. Further, it has also been held that the threshold of 183 days must be considered on a standalone basis for each project and not on an aggregate basis of all the projects  taken together.
 
Facts of The Case
  • Kreuz Subsea Pte Ltd (taxpayer); a company incorporated in Singapore is a tax resident of Singapore. It is mainly engaged in the business of integrated subsea installation services.
  • During the previous year 2009-10, the taxpayer had undertaken installation and construction activities for the following three projects in India:
Contract with the Company No. of days spent on the project
Swiber-BG Hydra Project
 
56 days (1 April 2009 to 26 May 2009)
Swiber-BG Gas Lift Project
 
109 days (27 October 2009 to 12 February 2010)
 
Allseas 102 days (1 April to 11 July 2009)
  • The taxpayer also submitted project completion certificates of the above mentioned projects before the Assessing Officer (AO) along with the description of the work involved in each project.
  • The tax officer contended that for one of the projects - Swiber-BG Hydra project, since the number of days spent exceeded 183 days, the PE of the taxpayer was constituted in India according to Article 5(3) of the tax treaty between India and Singapore. Accordingly, 10% of the revenue from all the projects was considered taxable in India.  
  • When the taxpayer appealed to the Dispute Resolution Panel (DRP), the DRP observed that the presence of employees for various projects exceeds 90 days. Therefore, the DRP in its direction to the AO mentioned that Article 5(6) of the India-Singapore DTAA would be applicable and not Article 5(3). Accordingly, the taxpayer would constitute a 'fservice PE' instead of an 'installation PE'. Aggrieved with this finding, the taxpayer appealed before the Mumbai Tribunal. 
Taxpayer's Contention
  • Provisions of Article 5(6) of the DTAA was not applicable in the instant case as it envisaged "furnishing of services" whereas the taxpayer was "purely engaged in installation and construction activity" for which a particular provision of Article 5(3) was specified in the India-Singapore DTAA.
  • In case of PE, in connection with construction, installation or assembly if there is no geographical coherence between the various projects, project-wise activities have to be assessed on a standalone basis. Thus, for counting the number of days, each project has to be examined separately and not by aggregating the number of days spent on various projects.  
  • For the Swiss-BG Hydra project, the taxpayer contended that the number of days have to be calculated from the date on which the preparatory work for installation activity had commenced and not from the date of signing of the contract.
Tax Authorities' Contention
  • Tax authorities relied on the DRP's findings and contended that a host of activities carried out  for installation falls within the ambit of "furnishing of services" as stipulated in Article 5(6) of the India-Singapore DTAA and hence service PE was triggered. Article 5(6) prescribes the threshold of 90 days and since the number of days spent on each project exceeds 90 days, the PE was established and the income was taxable in India.
  • In addition to the above principle contention, the view taken by the AO was advanced on grounds that, for counting the number of days, days spent on all the projects should be aggregated.  
  • Lastly, it contended that the counting for number of days should begin from the day the contract was signed.
Tribunal's Observations
  • After perusal of all three projects, the ITAT concluded that the projects were in relation to subsea installation and construction activity and not for the provision of any equipment, manpower supply or for furnishing of any kind of services. Thus, the entire contract was for pure installation.
  • The ITAT distinguished the Article 5(3) and Article 5(6) of India-Singapore DTAA as follows:
    • The provisions in Article 5(3) specifically deal with 'service PE' on account of construction, installation or assembly project, if it continues for a period of over 183 days in any fiscal year. The installation activity includes erection or setting up machines/equipment and testing and commissioning of such machines and equipment. It also relates to the construction of a project.
    • Article 5(6) envisages that there is deemed service PE if the enterprise is furnishing services in a contracting state through its employees for a period aggregating to over 90 days in any fiscal year. Also, the threshold limit of 90 days is replaced by 30 days if such activities are performed for a related enterprise.
    • Article 5(6) explicitly provides that it applies to 'services' other than those covered under Article 5(4) or 5(5) and technical services defined in Article 12. However, the Article 5(6) is silent regarding its relationship with Article 5(3).
    • However, there cannot be overlapping of activities carried out within the ambit of Article 5(3) and furnishing of services as stated in Article 5(6). 
    • Both the articles have to be read independent of each other as otherwise there would be no requirement of providing separate provisions in the India-Singapore DTAA. 
    • Since the activity of the taxpayer was purely installation services, it would be specifically covered only under Article 5(3) and not within Article 5(6). 
    • Further, the ITAT held that the unconnected or independent projects cannot be taken together and should be considered on a standalone basis even though different contracts may have been entered into by the same customer with the same contractor. 
Thus, the Tribunal held that since the number of days for completion of each project and the number of days of stay by personnel for each project did not exceeded 183 days, any PE was not created.
SKP's Comments
  • The above decision is a welcome decision for differentiating the installation PE as per Article 5(3) from deemed service PE as per Article 5(6) of the India-Singapore DTAA. It brings out the clarity on how to differentiate between Article 5(3) and Article 5(6) of the India-Singapore DTAA. 
  • It also clarifies that for the purpose of counting the number of days spent on the independent projects, days for each project/activity has to be calculated on standalone basis and not in aggregation. It clearly lays down that if the activities are related to construction or installation, then they are specifically covered under Article 5(3) only and not under Article 5(6) of India-Singapore DTAA. 
  • It further reinforces the principle laid down in earlier rulings that the commencement of the contract date would be reckoned from the preparatory activities leading to the performance of the contract of the core business activity and not from the date of signing of the contract.

SKP
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