|DATE:||(Date of pronouncement)|
|DATE:||June 11, 2010 (Date of publication)|
|Click here to download the judgement (cartier_shipping_PE_assets_profit.pdf)|
Despite cessation of PE, gains on transfer of PE asset taxable under Act and DTAA
The assessee, a Mauritian tax resident, owned a jack-up rig used for drilling of mineral oil. The rig was given on charter basis to an Indian company which in turn leased it to ONGC for operations in Indian territorial waters. On 24.4.1997, the assessee entered into an agreement with Foramer SA, France, to sell the jack-up rig. On 15.9.1997, the surveyors boarded the rig and coordinated its move from Bombay High to the hand-over location outside India. On 19.9.1997, the assessee issued a bill of sale in favour of the purchaser. On 30.9.1997, the assessee obtained a port-clearance certificate and started moving the rig. The rig was handed over outside India to the buyer on 6.10.1997. The charter agreement was terminated on 3.10.1997. The assessee informed the AO of the termination of the charter and that it had discontinued business operations in India and moved the rig outside territorial waters though it did not mention the fact of sale of the rig. The AO reopened the assessment u/s 147 and took the view that as depreciation had been allowed on the rig, the difference between the sale consideration and WDV (Rs. 102 crores) was a short-term capital gain. This was confirmed by the CIT(A). In appeal to the Tribunal, the assessee argued that since sale of the rig had taken place on 6.10.1997 outside India, it had no tax implications in India and that the reopening was invalid. HELD dismissing the appeal:
(i) The argument that as the sale of the rig took place outside India and was not taxable in India, the assessee was under no obligation to disclose the fact of sale is not acceptable. The law requires even details of exempt income to be disclosed in the return. As the assessee was taxable in India in respect of its PE, it was under an obligation to share all the facts relevant to the PE – whether in respect of business profits or other head of income. The question whether the gains were taxable or not could be determined only after examination of relevant facts which the assessee was duty bound to share. As there was a failure to disclose material facts, the reopening was valid;
(ii) On merits, under the Act, when a non-resident has operations in India through a presence in India, such presence is to be treated as a “permanent establishment” (“PE”) in India. The PE is to be treated as hypothetically independent of the non-resident . The assets of the PE are also to be recognized as such and the profit or gains on sale of assets of the PE have to be treated as profits of the PE. The gains or losses on sale of PE assets have to be treated as “accruing or arising in India” irrespective of whether the assets were sold in India or outside India. The income can also be deemed to have accrued or arisen in India u/s 9(1)(i) as the rig was part of a “business connection” and “an asset or source of income” in India (principles laid down in Hyundai Heavy Industries 291 ITR 482 followed);
(iii) Under Article 13(2) of the DTAA, gains on alienation of moveable assets of the PE (or the PE itself) are taxable in the country in which such PE is located;
(iv) The argument that the gains on transfer of PE/PE assets are taxable only if the PE exists is not acceptable because then the provision for taxability of gains on PE/ PE assets in the source country will be rendered redundant. The provisions can also then be avoided by simply deferring the transfer till the closure of the PE. This will lead to absurdity (Van Oord Dredging 105 ITD 97 referred to – PE’s business profits can be taxed even if received after closure of the PE);
(v) On facts, the argument that the sale of the rig took place on 6.10.1997 outside India and after termination of the charter is not correct because the record shows that the rig was first sold and as a consequence the charter was terminated and the rig was moved to international waters for delivery to the buyer. It was not a case where the business came to an end, the rig was moved to international waters and then, by an unconnected event, the rig was sold.
Obiter: It is ironical that while the Supreme Court has been proactive in recognizing the cross-border concept of PE even in the context of domestic tax legislation, the legislature is yet to lay down profit allocation rules for such PEs in the domestic legislation.
Valentine Maritime (Mauritius) (ITAT Mumbai) (aggregation of contracts for PE duration test), Epcos AG (ITAT Pune) (no PE in rendering services to subsidiary) and Permanent Establishment and the Attribution of Profits.