ORDER
V. Dongzathang, Senior V.P.
The present appeal before us filed by the assessee against the order dated 8-1-1999 of Commissioner (Appeals), Dehradun, pertains to the assessment year 1995-96.
2. The assessee is partnership firm consisting of Boskalis International BV. (BKI) and Holland Annemingamatt Shapig Netherland Incorporated on 24-11-1993, in Netherlands with limited liability.
3. The assessee-appellant had executed a sub-contract with Hyundai Heavy Industries Co. Ltd. (HHI) for dredging of a trench for laying Second Bassein Hazira Trunk Pipeline Project. Subsequently, the trench was to be back filled after the pipeline was laid in the trench.
4. For assessment year 1995-96, the appellant had filed a return of income, on a cash basis in respect of the payments of Rs. 605,926,973 received by it from HHI for the above contract. Based on the provisions of the India-Netherlands Double Tax Avoidance Agreement (DTAA) the appellant claimed it as non-taxable and had filed Nil income.
5.1. The assessing officer completed the assessment under section 143(3) and issued an assessment order, raising a demand of Rs, 57,320,631 (including interest under section 234B) on the payments received by the appellant during the year. The assessing officer in his order held that the payments received by the appellant are taxable in India since it maintained a Permanent Establishment (PE) in India based on the provisions of article 5, sub-article(2) of the treaty. According to him since the appellant had a project office in Bombay, it had a P.E. in India. Further, the assessing officer held that the provisions of article 5(3) would be applicable only if the provisions of article 5, sub-article (2) are not applicable. Based on this reasoning, the assessing officer has held that the appellant had a PE in India on the basis of the provisions of article 5(2) of the treaty.
5.2. The assessing officer further held that even under the provisions of sub-article (3) of article 5, the appellant has a P.E. in India since the activities carried on exceeded a period of six months as evident from the contract between the appellant and HHI and other related correspondences.
6. Being aggrieved by the order of the assessing officer, the assessee appellant filed an appeal before the learned Commissioner (Appeals) on the following grounds that the assessing officer erred :
(1) In taxing the revenues earned by the appellant in connection with its contract with HHI.
(2) In holding that the appellant maintained a P.E. in India in accordance with the provisions of the Indian Netherlands DTAA.
(3) In applying the tax rate applicable to a foreign company to the appellant v.o.f. instead of the tax rate applicable to a partnership firm.
(4) In levying interest under section 234B of the Act.
(5) In initiating penalty proceedings against the appellant under section 271(1)(c) of the Act for concealment of income and for furnishing inaccurate particulars of income.
7.1. The learned Commissioner (Appeals) disposed of ground Nos. 1 and 2 of the appeal of the assessee -appellant observing as follows :
“The written submission and arguments of the appellant have been considered. The appellant has not denied the facts that it had an office in Bombay headed by a manager as observed by the assessing officer in the assessment order. The nature of duties of this office have also not been brought out by the appellant in its written submission. The appellant has also not given any justification in support of its claim that this office at Bombay did not constitute a P.E. as per article 5(2) of the DTAA. In fact the appellant has completely ignored this aspect and has depended mainly on the argument that the project office at the work site could only be considered as P.E. The assessing officer in his assessment order has already considered this issue and has given a finding that the office at Bombay constitutes a P.E. for the purpose of article 5(2), The arguments given by the appellant against this finding are general in nature without bringing out any relevant facts for determination of the issue. Moreover, as pointed out by the assessing officer, there is no independent evidence that the project office at the work site came into existence only on 27-12-1993, when the dredging commenced and that it closed down on 8-6-1994, for the purpose of counting of the period of six months as per article 5(3) of the DTAA I, therefore, find no merit in appellant’s contention and the assessing officer has rightly held that article 5(2) was applicable in the case of the appellant and the income of the appellant was taxable in India. The contention of the appellant is therefore, rejected.”
7.2. The learned Commissioner (Appeals) while deciding ground No. 3 directed the assessing officer to consider the appellant’s claim as per law.
7.3. The appellant’s contention in support of ground No. 4 was rejected by the learned Commissioner (Appeals) confirming the assessing officer’s order that section 234B does not exclude an assessee whose income is subject to tax deduction at source and that section 234B provides for the method of calculation of interest on the amount of advance tax remaining unpaid.
7.4. As for ground No. 5, it was found to be of a consequential nature wherein the appellant had objected to initiation of penalty proceedings under section 271(1)(c) of the Act, and hence, the learned Commissioner (Appeals) held that no interference is called for.
8. Aggrieved by the order of the learned Commissioner (Appeals), the appeal is filed before the Tribunal by the assessee-appellant under section 250 of the Income Tax Act on the following grounds that the learned Commissioner (Appeals) erred ..
(1) In taxing the revenues earned in India by the appellant in connection with its contract with HHI.
(2) In holding that the appellant maintained a P.E. in India in accordance with the provisions of the India Netherlands DTAA.
(3) In levying interest under section 234B of the Income Tax Act.
9. We have gone through the record, the written submissions made by the assessee and the arguments advanced by the assessee and the revenue before the Commissioner (Appeals). We have also heard the counsel for the assessee appellant Shri M.S. Syali and Shri Rajnish Kumar the learned Departmental Representative at length. Having heard them we find that the following points arise for consideration :
(a) The interpretation of article 5, sub-clause (2) (3) and 4(e),
(b) What constitutes a P.E.,
(c) The time period of six months.,
(d) Office, preparatory or auxiliary.
10. A brief historical perspective of the case at this juncture would not be out of place here. India and the Kingdom of Netherlands entered into a treaty for the purpose of Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income and on capital (DTAA) on 21-1-1989, after the notification by both the contracting States of the completion of procedures required under their laws for bringing into force of the said Convention.
10.1 To recapitulate the brief facts of the case here, the assessee-appellant had entered into a sub-contract with HHI in pursuance of the main contract between HHI and ONGC. The sub-contract pertained to the dredging of a trench for laying a pipeline in the Second Bassein Hazira Trunk Pipeline Project.
Subsequently, the trench was to be back-filled after the pipeline was laid in the trench.
10.2. For assessment year 1995-96, the appellant had filed a return of income, on a cash basis, on 31-8-1995, in respect of the payments received by it from HHI for the above contract. The assessee- appellant had declared Nil income.
10.3. The assessee had adopted a stand that the revenues earned by it were in the nature of business profits and consequently, the taxability of the same was governed by the provisions of article 7 of DTAA.
10.4. Article 7 of the DTAA provides that business profits would be taxable in India only if the business is carried on through, and to the extent attributable to, a P.E. in India. The term P.E. is defined in article 5 of the DTAA :
“(1) For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of the enterprise is wholly or partly carried on.
(2) The term “permanent establishment” includes especially;
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, an oil or gas well, a quarry of any other place of extraction of natural resources;
(g) a warehouse in relation to a person providing storage facility for others;
(h) a premises used as a sales outlet;
(i) an installation or structure used for the exploration of natural resources provided that the activities continue for more than 183 days.
(3) A building site or construction, installation or assembly project constitutes a P.E. only where such site or project continues for a period of more than six months.
(4) Notwithstanding the preceding provisions of this article, the term “permanent establishment” shall be deemed not to include:
(a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing any another enterprise;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information for the enterprise;
(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information for scientific research, or for other activities which has a preparatory or auxiliary character, for the enterprise;
(f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paras (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character ……….”
As per article 5 sub-article (3) of the treaty, a construction, installation or assembly project constitutes a P.E. only where such site or project continues for a period of more than six months.
10.5. Going through the arguments of both parties before us and the finding of the learned Commissioner (Appeals) wherein on page 4 para 2.5 of the impugned order he observed as supra (para 7.1 of this order), we are of the view that the conclusion arrived at by the learned Commissioner (Appeals) are contrary to the facts and documentary evidence brought on record. The learned Commissioner (Appeals) erred in coming to the finding that there is no independent evidence that the project office at the work site came into existence only on 27-12-1993, when the dredging commenced and that it closed down on 8-6-1994. The above finding is contrary to the following facts :
(a) Copy of Milestone Certificate dated 8-6-1994 on page 54 of the paper book indicates that the completion of activity of demobilization of the plant and equipment has been accepted by the HHI as on 8-6-1994 evidencing completion of the contract;
(b) Perusal of copy of audited financial statements dated 30-11-1994, for the period December, 1993 to June, 1994 on pages 55-62 of the paper book filed before us indicate that the contract commenced on,27-12-1993 and was completed on 28-5-1994. The financial statement indicated that project office formally closed on 13-6-1994.
(c) Copy of letter dated 28-12-1993, from the appellant to HHI on pages 65 of paper book confirming that the date of commencement of dredging activity was 27-12-1993.
(d) Copy of letter dated 28-12-1993, from HHI to assessee-appellant accepting the confirmation of date of commencement of dredging activity.
10.6 In the face of the above documentary evidence filed before the department, we have come to the conclusion that the P.E. commenced from 27-12-1993 and ended on 12-6-1994. Moreover, the sub-contract dated 7-2-1994 (pages 91 to 94) itself stipulates the commencement and completion of the contract vide clause 9 thereof. Appendix ‘A’ (page 52) stipulates that the trench back filling will have to be completed before the monsoon season 1994. Under clause 9(1)(iii) a separate rate is provided if the trench back filling is to be carried on after the monsoon season. Clause 4.3.3. provides for severability. In case where, any provision or condition of the sub-contract is prohibited or rendered invalid or non- enforceable, the sub-contract will not be rendered invalid.
10.7. As per assessing officer, the period of six months is to be counted from arrival of the first Dredger on 16-12-1993 (page 63). Even then, as per documents on record (pages 72/73/85), the plant and machinery was completely demobilized by the 12-6-1994. In such an event, the period of six months is not completed. The project not having continued for a period of more than six months, there is no P.E. in India. Even if the period is taken till 13-6-1994, six months do not expire. Counted from 16-12-1993, the six months expire on 15-6-1994.
10.8. Independent evidence is on record in the form of certificates issued by Hyundai, supporting the averment that no work was carried on beyond 8-6-1994, and that there was complete demobilization of the plant and machinery by 12-6-1994. All these documents are enclosed with the letter dt. 29-12-1997 filed before the assessing officer, (pages 96-97) and before the first appellate authority (pages 137 to 140), and the petition filed under section 154 (pages 147 to 151).
10.9. The stand of the appellant is supported by an order passed by the assessing officer under section 197 (pages 72, 73 of the paper book), whereby after due deliberations, no objection certificate was granted to the assessee to remit the amounts received abroad without deduction of tax at source.
10.10. Even without recourse to article 5(4) if it be construed, that there is repugnancy between articles 5(2) and article 5(3), the two provisions have to be harmonised and read together in the light of the decision of the Supreme Court in Sultana Begum (1997) 1 SSC 373;
“………….. Even assuming that there is any conflict between the two provisions the maxim generalia specialibus non derogant .” The general provision must yield to the special provision.
10.11. The rule of construction relevant to the present enquiry is expressed in the maxim “generalia specialibus non derogant” meaning where there is a conflict between a general or special provision, the latter shall prevail. A special provision shall always prevail over the general provision. This rule of interpretation has been upheld in various judgments. In Forbes Forbes Campbell & Co. Ltd. v. CIT (1994) 206 ITR 495 (Bom) it was held that :
“It is a well-settled principle of interpretation that statute must be read as a whole and every provision must be construed with reference to the context and other clauses in the statute so as to make a consistent enactment of the whole statute. It is equally well-settled that the sub-sections or sub-clauses must be read as parts of an integral whole and as being interdependent and an attempt should be made in construing them to reconcile them if it is reasonably possible to do so, and to avoid repugnancy. If there are two conflicting provisions in the same section or clause, the courts should find out which of the two provisions is more general and which is more specific and construe the more general one as to exclude the more specific. The principle is expressed in the maxims : generalia specialibus non derogant and general bus specially derogant. If a special provision is made on a certain subject-matter, that matter is excluded from the general provision”.
10.12. Similarly, in Meteor Satellite Ltd. v. ITO (1979) 121 ITR 311 (Guj), this principle was followed. Again, in Union of India & Anr. v. Indian Fisheries (P) Ltd. (1965) 57 ITR 331 (SC) it was held at page 334 :
“The effect of these statutory provisions is inter alia that an unsecured creditor, must prove his debts and all unsecured debts are to be paid pari passu. Therefore, once the claim of the department has to be proved and is proved in the liquidation proceedings, the department cannot by exercising the right under section 49E of the Income Tax Act get priority over the other unsecured creditors, If we were to read section 49E in the way suggested by the learned Additional Solicitor General, it would be defeating the very object underlying sections 228 and 229 of the Companies Act, 1913. If there is an apparent conflict between two independent provisions of law, the special provision must prevail. Section 49E is a general provision applicable to all assessees and in all circumstances; sections 228 and 229 deal with the proof of debts and their payment in liquidation. In our opinion section 49E can be reconciled with sections 228 and 229 by holding that section 49E applies when insolvency rules do not apply.”
10.13. In CIT v. Indian Molasses Co. (P) Ltd. (1989) 176 ITR 473 (Cal), it was held that when there is a general enactment as well as a special enactment in respect of the same head in a statute, the particular or special enactment would override the general enactment.
Consequently, it is clear that wherever there is a particular enactment and a general enactment in the same statute and the latter taken in its most comprehensive sense would override the former, the particular enactment must be operative and the general enactment must be taken to affect only the other parts of statute to which it properly apply.
10.14 The P.E. at Bombay was of a preparatory or auxiliary character as envisaged in article 5(4)(e) is borne out by the definition in Webster’s Dictionary, Edition page 68
“Auxiliary
Cross References
Ancillary
“Subsidiary” is synonymous with “auxiliary”. Baker v. Fenley 128 S.W 2d 295. 298, 233 MoApp. 998.
“Ancillary” means “subordinate” or “auxiliary” to the principal. Steele v. Connecticut General Life Ins. Co. 52 N. Y.S. 373, 379, 31 App. Div. 389.
Word “auxiliary” means helping or aiding; living support; subsidiary or additional supplementary power; a helper or aid; a confederate; and ally as in Texas & Pac. Motor Transport Co. v. U.S.D.C. Tex. 87 D. Supp. 107, 112″
Looking at the definition in Black’s Dictionary Edition at page 123, auxiliary is defined as :
“Auxiliary, Aiding, attendant on; ancillary (g.v.); as, an auxiliary bill in equity, an auxiliary receiver. Synonymous with “subsidiary”. Baker v. Fenley 233 MO App. 998, 128 S. W. 2d 295, 298. ”
The RBI imposed the following conditions while allowing the assessee to establish its office at Bombay :
(i) The operation of the office in India will be restricted exclusively to execution of the contract as approved by the Government of India;
(ii) The office in India shall not enter into any new contract nor shall it engage itself in any activity or a trading, commercial or industrial nature other than what may be necessary for the execution of the aforesaid contract, without prior permission of the RBI;
(iii) The office in India will meet all the expenses in India only from out of the inward remittances received from head office through normal banking channel or the rupee amounts to be received under the contract;
(iv) The office in India shall not borrow or lend any money from/to any person in India without prior permission of the RBI;
(v) The office, in India shall not acquire, hold (otherwise than by way of lease for a period not exceeding five years), transfer or dispose of any immovable property in India, without obtaining prior permission of the RBI under section 31 of the Foreign Exchange Regulation Act, 1973;
(vi) The office in India will submit to us annual audited accounts of its income and expenditure in India along with bank certificates evidencing receipt of funds from the head office.
Now looking at the conditions imposed by RBI, the office at Bombay is only a support office for facilitating the performance of the contract.
10.15. Looking at it from another angle, the basic ingredients of the terms “permanent establishment” under article 5 are :
the existence of an enterprise;
its carrying on a business;
for the latter, the existence of a place of business which is fixed; and
through which the business is carried on.
In the present case, the second ingredient is completely missing as the office at Bombay is clearly a support office existing solely for the purpose of facilitating the performance of the contract and is not carrying on any business at all. This is evident from a perusal of the RBI’s conditions of approval submitted before us.
10.16. Sub-article 4(e) of article 4 clearly says that :
Notwithstanding the preceding provisions this article, the terms (permanent establishment’ shall be deemed not to include :
(e) the maintenance of a fixed place of business solely for the purpose of carrying on , for the enterprise, any other activity of a preparatory or auxiliary character;
There are two different requirements to be distinguished in this connection :
the character of the activity exercised by the place of business; it must be preparatory of auxiliary;
the object of such activity, it must be solely in favour of the enterprise to which the place of business belongs; it must, therefore, not aim at directly benefiting any third party as well.
This sub-article lists a number of business activities which are treated as exceptions to the general definition laid down in sub-article (2) of article 5 and which are not P.E. even if the activity is carried on through a fixed place of business. This is laid down explicitly in the case of the exception mentioned in sub-article (4)(e) which actually amounts to a general restriction of the scope of the definition contained in sub-article (2) of article 5.
11. Sub-article (3) of article 5 further goes on to state that a building site or construction, installation or assembly project constitutes a P.E. only where such site or project continues for a period of more than six months.
11.1. A P.E. begins to exist when the enterprise commences to carry on its business through a fixed place of business. This is the case once the enterprise prepares the activity for which the facility is permanently to be used. The same principles apply when determining the points of time at which a P.E. ceases to exist. If the enterprise ends its business activities for good, its PE will also cease to exist.
11.2. Looking at the plethora of documents filed before us and the documents already referred to earlier, the duration of the activities under the sub-contract did not exceed a period of six months and accordingly, P.E. would not have been established.
11.3. Here, we may refer to the assessment order where the assessing officer on page 4 observes :
“Moreover, it is seen that the assessee has been offering all documentary evidence in support of completion of contract by showing demobilization of dredging equipment and completion of dredging work only. No mention is being made of completion of back filling works, which as narrated above always follows the dredging activity, and back filling activity had not been completed till 8-6-1994, as mentioned above. It, therefore, appears that the department has been misled by not presenting the fact of completion of back filling works and demobilization of equipment involved in back filling, at any stage. Time Schedule of back filling activities clearly indicates that a minimum period of 9.5 weeks is involved in completing back filling work. Completion of both the activities under the contract must have therefore, gone well past six months. Condition in para 3 of article 5 is of no help, as well, to the assessee-firm.”
11.4. To this, the assessee’s reply has been noted by the learned Commissioner (Appeals) in the impugned order page 3 para 2.3 :
”Regarding “back filling” activities the appellant has stated that the dredgers were demobilized and as such back filling activities were partially completed upto 8-6-1994, after which the operations were wound up and no other activity was undertaken. It is also stated that since the contract was not completed, the appellant did not receive any revenue for the back-filling activities not undertaken by the appellant. It is also stated that the project office for this work was closed on 12-6-1994. The appellant has also stated that confirmation from HHI that no back-filling activities or any other activities were carried out by the appellant under the contract from 8-6-1994, have also been filed. The claim of the appellant, therefore, is that there was no P. E. as per article 5(3) beyond six months.”
11.5. Before us also, the learned counsel of assessee-appellant argued that the contract was one of severability and had only been partially performed. Looking at the documents placed before us, it has been shown that the dredgers HAM 218, JOJa and SI, 35 were required to carry out the activities of back-filling. As per the letter dated 18-12-1993 from the Gujarat Maritime Board, Dredger HV Johanna Johanna Jacob sailed on 27-5-1994. Further, the letter, dated 12th May from HHI to the assessee back-filing appellant confirms HHI’s consent for demobilization of the dredgers HAM 218 and SL 35. It was urged before us that since the above dredgers had been demobilized, it would not be possible for the assessee to carry out any further activities without the abovementioned dredgers.
11.6. The assessee’s contention was that the back-filling activities were partially completed upto 8-6-1994 after which the operations were wound up and no other activities were undertaken. Since the contract was not completed, the assessee had received payments for completed back-filling activities and not for that part of the contract which was left incomplete.
11.7. Furthermore, the project office set up for executing the above contract was also closed on 13-6-1994, which further clearly indicates that the assessee-appellant had wound up its entire operations in India by that date.
12. Based on the above reasoning, we have come to the conclusion that the assessee-appellant did not come under the purview of article 5, sub-article (2) and the appeal of the assessee-appellant is allowed to that extent.
13. The third and the last ground before us of levying of interest under section 234B of the Income Tax Act need not be gone into as it would be rendered redundant after allowing of the assessee- appellant’s claim in ground Nos. 1 and 2.
14. In the result, the assessee’s appeal is allowed.