ADIT vs. Valentine Maritime (Mauritius) (ITAT Mumbai)

To compute the PE ‘duration test’ under Art. 5 (2) of the DTAA, different project sites can be aggregated only if the test of interconnection and interrelationship is satisfied

Article 5(2)(i) of the India-Mauritius DTAA defines “permanent establishment” to include “a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than nine months“. The assessee, a Mauritius company, executed three contracts in India. While the period of each contract was less than 183 days, cumulatively they exceeded that period. The question arose whether in determining whether the assessee had a PE in India, the period of all contracts could be aggregated. HELD:

(i) Though there is a PE under Article 5(1) (“fixed place of business”), a ‘construction, installation or project site’ cannot fall under this if the period specified in Article 5(2)(i) is not satisfied. Article 5(2)(i) is a test of ‘permanence’ for purposes of Article 5(1) and both are required to be read together;

(ii) For computing the threshold time limit under Article 5(2)(i), the activities of a foreign enterprise on a particular site or a particular project etc have to be seen and not on all the activities in a tax jurisdiction as whole. Each building site, construction project, assembly project or supervisory activities in connection therewith has to be viewed on a standalone basis. This is on the assumption that the different business activities are not so inextricably interconnected that they are required to be viewed as a coherent whole;

(iii) In certain DTAAs (e.g. India-Australia), the relevant PE clauses specifically require application of the aggregation principle on all sites, projects or activities for computation of threshold duration test. However, even such aggregation requires exclusion of double counting of days when more than one site or project exists on a day, or when work is carried out at two or more different places on a day. However, when aggregation is not specifically provided for in the relevant PE definition clause, it is not open to infer the application of the aggregation principle;

(iv) The principle that the duration test applies to each individual site or project is subject to two exceptions. The first is where the assessee has artificially split the contract so as to avoid the duration test. However, the onus to show that the contracts have been split to avoid the duration test is on the revenue and has to be supported with reasons and not by vague and generalized allegations. The second is when the activities are so inextricably interconnected or interdependent that these are required to be viewed as a coherent whole. In applying this test, it is not relevant whether the activities are carried out for the same principal or different principals. What is relevant is the nature of activities, their interconnection and interrelationship and whether these activities are required to be essentially regarded as a coherent whole in conjunction with each other;

(v) On facts, as there was no finding that the three contracts were inextricably interconnected, interdependent or could only be seen only as a coherent whole in conjunction with each other, the duration of the projects could not be aggregated for the purposes of ascertaining whether or not there was a PE.