ORDER
Garg, A.M.
1. This is an appeal by the revenue against the order of the CIT(A) for assessment year 1986-87. The only ground raised in this appeal reads as under :
“On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the D.C. was not justified in holding that assessee’s income is taxable in India. Further also erred in cancelling the assessment made under section 143(3) of the I.T. Act, 1961.”
2. The assessee, a non-resident company incorporated in the United Kingdom, received Rs. 1,58,48,719 from Mazagaon Dock Ltd. in pursuance of an agreement dated 2-4-1985 and Rs. 98,39,380 from Oil & Natural Gas Commission vide agreement dated 29-8-1985. Under both the agreements, the assessee undertook the work of inspection and repairing of submarine pipeline networks, used in connection with oil and gas exploration, extraction and production with the help of a vessel, Special Remotely Operated Vehicles (hereinafter referred to as ‘ROV’), which performed the submarine work. Relying upon article 7(1), read with article 5(2)(h) and (i) of the Double Taxation agreement, the Assessing Officer held that the profit arising from these receipts is taxable in India. The profit was estimated at the rate of 10 per cent of the receipts and was brought to tax.
3. In appeal before the CIT(A), the assessee referred to article 5 of the Double Taxation Agreement, (hereinafter referred to as ‘DTA’) which defined ‘Permanent Establishment’ as under :
“Article 5. Permanent Establishment –
(1) for the purpose of this convention the term ‘permanent establishment’ means a fixed place of business in which the business of the enterprise is wholly or partly carried on.”
On the basis of the above, the assessee pointed out that a ship cannot be considered a fixed place of business. The assessee stated that it was in the Indian shore for only 2 1/2 months and the only job was to undertake the repairs of pipelines. It was also pointed out that since the assessee was engaged in extraction, exploration of natural resources, it could not be treated to have a permanent establishment in India, both physically and also for the job. The CIT(A) held by accepting the assessee’s contention that it was not caught by any of the conditions of permanent establishment and, therefore, not liable to tax. Aggrieved, the revenue is in appeal before us.
4. The learned Departmental Representative, Shri D. K. Singh, submitted that remotely operated vehicles, positioning system, data acquisition and interface system used by the assessee were fixed places of business in terms of articles 5(1) of DTA. It is operating near the fixed place. It is also covered by clauses (h) and (i) of article 5(2) of DTA. He also submitted that period of operation for these clauses is not relevant and that it would be sufficient that it was a fixed place of business or a place or installation of structure used for extraction of natural resources. He also referred to clause (k) inserted by the 1994 amended treaty with U.K. He submitted that it is in indication of the DTA that period was no consideration for determining a fixed place of business or a permanent establishment.
5. The learned counsel for the assessee, Shri A. V. Sonde, on the other hand, submitted that the assessee was engaged only for inspection and repairs of pipelines, which is carried on with a moving vessel which cannot be said to be a fixed place of business, not it could be termed as a place or structure/installation used for extraction of natural gas, etc. Referring to article 5(2) of DTA he submitted that all insertions there are of fixed places and whenever temporary installation of structure is included, a period is prescribed, as in clause (j). As regards clause (k) of the 1994 amended treaty, he submitted that it came into force on 11-2-1994 and, therefore, does not govern the case of the assessee which pertains to the assessment year 1986-87.
6. The Oil & Natural Gas Commission of India (hereinafter referred to as ‘ONGC’) had invited tenders for hiring services for inspection and survey of submarine pipeline and awarded such a contract to Mazagaon Dock Ltd. (hereinafter referred to as ‘MDL’). Clause 1.4 of the agreement states that assessee has got the requisite expertise and fully qualified and experienced personnel and is willing to provide a vessel remotely operated vehicle (ROV), positioning system, data acquisition and interface system, necessary inspection equipments etc. and specialised personnel as required by ONGC as per its tender No. BOP/SP/SCON-OPS/IPL/83-84 cited above and had its offers for the same in response to MDL’s letter/telexes from time to time. ‘Operation’ is defined in clause 2.3 of the agreement to mean rendering the services at MDL’s/ONGC discretion as mentioned in scope of work in clause 3.0 to be read in conjunction with Annexure I. ‘Site’ is defined in the agreement as the location where the services are to be carried out, approved by MDL/ONGC for the purpose of the contract together with any other places designated in the contract as forming part of the site. Clause 2.7 defines ‘Mobilisation of the Contractor’ as performance by the Contractor of all those things necessary to be full ready to begin work at the site after successful completion or performance test as per Scope of Work. Mobilisation of the Contractor shall not be limited to the providing of all transport from point of origin to the place of work, all equipment and materials, all personnel, satisfaction of Government requirements, logistrical support and the setting up at site in a condition of full readiness to commence the work, but shall include performance test as per clause 3.1.14 ‘Demobilisation of the Contractor’ as per clause 2.8 means the removal of all things forming part of the mobilisation of the Contractor, including all temporary facilities, return of personnel and equipment to point of origin, and the clean up restoration of the site as required in this contract.
7. Clause 3 of the agreement provides for the scope of work as under :
“3.1 To inspect/survey all the sections of submarine pipelines listed in Annexure-I to record under mentioned parameters.
3.1.1 To plot the course of the pipeline based on the international spheroid and corresponding universal Trans-Meridian system.
3.1.2 To record the burial depth of the pipe-line to an accuracy of +/- 15 cm. of depth of bury.
3.1.3 To record free spanning sections.
Measure length and height of the free span.
3.1.4 To record trench profile at an interval of every 50 meters. In case of free spanning the trench profile should be taken at shorter intervals so as to cover at least three points of free span.
3.1.5 To record pipe crossings and condition of supports, etc.
3.1.6 To report any damage to the protective coatings, or other incidental damages.
3.1.7 Wherever damages to the protective coating are detected, wall thickness and C.P. measurements of the exposed pipeline are to be made.
3.1.8 Continuous recording of current density along pipelines is to be done.
3.1.9 Grading of Anode wear with reference to the original dimensions (original dimensions shall be provided at the time of inspection/survey) wherever unburied.
3.1.10 Continuous video recording of pipe and its trench.
3.1.11 To take still coloured photographs of debris, crossovers, damages, anodes and section of interest.
3.1.12 To submit reports (daily reports and final report) on mutually agreed format/system so as to relate the given information/report/events with time, date and location. In addition to all the above data, the final report must include summary, general comments on the operations, sequence of main events, any findings/recommendations and charts summarising the pipeline condition for all the sections referred to in kilometers posts.
Two copies of preliminary report are to be submitted prior to demobilisation of the spread and 5 copies of final report are to be submitted within 3 weeks after demobilisation of spread from ONGC field.
3.1.13 Volume of Inspection Work
The anticipated volume of inspection work which constitutes the total inspection programme may be divided into three categories :
(i) Inspection of trunkline before shore approach.
(ii) Inspection of trunkline in the shore approach area.
(iii) Inspection of flowlines in the Bombay High North and South.
The total trunkline length which are included in categories (i) and (ii) is 342 Km and pipe length included under category (iii) i.e. flowlines is around 100 Km. The expected number of pipe crossings are around eleven out of which three are on trunkline and eight on flowlines. Details of pipelines are given in Annexure-I.
MDL reserves the right to increase or decrease the volume of work.
3.1.14 Performance Acceptance Test
The contractor will be required to give a performance test of the spread to satisfy MDL/ONGC with the capability of the spread to perform the scope of work. For this, the contractor will be required to carry out inspection/survey of 5 Km of buried pipeline at a mutually agreed location and to provide the complete data as specified in the scope of work. Subject to performance of this inspection/survey to the satisfaction of MDL/ONGC further job will be carried out. In case of unsatisfactory performance MDL shall have the option either to ask the contractor to repeat the test or to terminate the contract without any liability to MDL. This test will be treated as part of mobilisation cost and this cost is payable only on satisfactory performance of the test. In case of satisfactory performance of the test, the said 5 KM length of pipe need not be re-inspected and the test report will be incorporated in the final report without any extra cost.”
8. Clause 5.1 of the agreement specifies the period of Agreement as under :
“5.1 The contractor hereby agrees to let and MDL hereby agrees to hire the services to be provided by the contractor as per scope of Work Clause 3.0 to be completed before 31.1.1986 beyond which article 5.3 shall be invoked.”
9. Article 5.3 reads as under :
“5.3 Default of Contractor/Non-Availability of services
It is the intention of the parties herein that the work will be completed as per the scope of work before 31-1-1986. In the event, that the Contractor fails to fulfil the commitment, then MDL may at its option –
(a) terminate this Agreement without being liable to pay any charges whatsoever except for the payments due for the work completed upto that stage and the mob/demob charts due as per this contract, or
(b) accept the services of the contractor after application of liquidated damages (and not by way of penalty) at a daily rate of 5% of the operating rate (comprising equipment & personnel) for the first 15 days of delay and at a daily rate of 10% of the operating rate thereafter.”
10. The taxability of the assessee non-resident is to be seen with reference to Double Taxation Agreement, which in this case is with the U.K. dated 6-4-1981. Article 7(4) which determines the taxability, reads as under :
“(4)(a). In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses of the enterprise which are incurred for the purposes of the permanent establishment, including only those executive and general administrative expenses incurred, whether in the State in which the permanent establishment is situated or elsewhere, which are allowed under the provisions of the domestic law of the Contracting State in which the permanent establishment is situated :
Provided that where the law of the Contracting State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or over-ridden by any convention between that Contracting State and a third State which enters into force after the date of entry into force of this Convention, the competent authority of that Contracting State shall notify the competent authority of the other Contracting State of the terms of the corresponding paragraph in the congention with that third State immediately after entry into force of that convention and, if the competent authority of the other Contracting State so requests, the provisions of this sub-paragraph shall be amended by protocol to reflect such terms.
(b) However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise, or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise by way of interest or moneys lent to the permanent establishment. Likewise, no account shall be taken in the determination of the profits of a permanent establishment of amounts charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for the management, or except in the case of banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices.”
Permanent Establishment is defined in Article 5 of the Double Taxation Agreement, which reads as under :
“Article-5. Permanent establishment. – (1) For the purposes of this convention, the term ‘permanent establishment’ means a fixed place of business in which the business of the enterprise is wholly or partly carried on.
(2) The term ‘Permanent Establishment’ shall include especially –
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) premises used as a sales outlet or for receiving or soliciting orders;
(g) a warehouse in relation to a person providing storage facilities for others;
(h) a mine, quarry or other place of extraction of natural resources;
(i) an installation or structure used for the exploration of natural resources;
(j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than six months or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceeded 10 per cent of the sale price of the machinery and equipment.”
11. There is no dispute that the income of the assessee is from business and, therefore, article 7 of DTA would govern the taxability, which provides that such profits are generally taxable in U.K., the assessee being an enterprise of that Contracting State. An exception, however, is carved out, i.e. if the business is carried on through a permanent establishment situated in India, the profits attributable to such permanent establishment are to be taxed in India. Therefore, one can conclude that unless the assessee has a permanent establishment, its profits from business are taxable only in the U.K. and not in India. What is permanent establishment is defined in article 5 of the DTA. It means a fixed place of business wherein the assessee’s business is carried on wholly or partly. Certain places are specifically included in the term “permanent establishment”, and they have been reproduced earlier. On a bare reading of the same it seems to be evident that permanent establishment denotes some place of fixed nature with permanency, and it does not include in its ambit a moving vessel which operates near a fixed place and which does not belong to the assessee.
The Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146/15 Taxman 72 has held the permanent establishment to connote a projection of the foreign enterprise itself into the territory of the taxing State in a substantial and enduring form : (vide F.E. Koch’s Book on the Double Taxation Conventions published by Stevens & Sons, London, 1947, Vol. I, at p. 51, quoting Mitchell B. Caroll before the sub-committee of the committee of U.S. Senate Foreign Relations). It is common practice for an enterprise which carries on trade or business in one country to expand its operations, without incorporation or further incorporation into another country, for it then has a branch there, or a permanent establishment which can be regarded as having sufficient presence in that country to make them taxable there in the same manner as the residents of that country. (Harvey Mc. Gregor, Old Exemptions – New Credits. The Rights of Permanent Establishment under the DTA between U.K and U.S.A. – 1 [British Tax Review (1977) pt. 6, p.327]. Their Lordships have further held as under :
“In our opinion, the words ‘permanent establishment’ postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country.”
12. A similar view has also been taken in Inez De Amodia 39 TC 894. In Consolidated Iron Ores Ltd 28 TC 127 it was held that there must be a continuous or regular business activity. Assessee’s vessel being in India only for 2 1/2 months cannot be said to be of enduring continuity nor could it be said in this case that there was a virtual projection of the assessee into the soil of India. Delhi Bench of the Tribunal in Boudier Christian v. ITO [1993] 46 ITD 114 held that where the foreign company provided only technical services but did not itself carry on drilling, it was not a case of a permanent establishment. In the present case also, the assessee provided services for inspection of tubes and did not in connection with extraction of oil, etc.
13. For the details discussions aforesaid, we hold that there was no permanent establishment of the assessee in India within the meaning of Article 5 of DTA and, therefore, its profits would be taxable in U.K only by virtue of Article 7 of DTA. The order of the CIT(A), therefore, does not call for any interference and is accordingly upheld.
14. In the result, the appeal is dismissed.
