Construction PE: Duration of preparatory activities included for determining PE existence
Cal Drive Marine Construction (Mauritius) Ltd (the “Applicant”), a company incorporated in Mauritius, entered into an contract with Hindustan Oil Exploration Company Ltd. (“HOEC”), an Indian company for laying and pre-commissioning pipelines under the sea for a lump sum consideration. As per the terms of the contract, the Applicant was involved in a whole range of services including transportation, installation construction, testing and handing over services. The scope of the contract required execution both within and outside the Indian territorial waters. In the period prior to the actual physical execution of the project, the project management team of the Applicant made intermittent visits to India for certain preparatory services such as paperwork, planning, surveys etc.
The Applicant approached the Authority for Advance Rulings (the “Authority”) to ascertain its tax liability in India with respect to the contract price received for the project in light of Article 5 of the India-Mauritius tax treaty.
Based on the activities proposed to be undertaken, the Authority concluded that the activities were covered within the description of construction and assembly project under para 2(i) of Article 5 of the India-Mauritius tax treaty.
The pertinent issue thereafter was the interplay between the provisions of para 1 of Article 5 which prescribes that a fixed place of business could qualify as a permanent establishment and para 2 of Article 5 which provides an inclusive definition for permanent establishment. The question was whether the general provisions of para 1 of Article 5 would override the specific provisions of para 2. The Authority undertook an in-depth analysis of the Article 5 and was of the view that para 1 and para 2 of Article 5 demanded a harmonious interpretation and that para 2 should be treated as complimentary to para 1.
The Authority observed that while the quintessential concept of a fixed place ran throughout Article 5, the enumeration in para 2 was explanatory and certificatory in nature. The Authority reiterated the well established principle that a specific provision would override a general provision. Hence, once para 2(i) of Article 5 was attracted, the minimum period test provided therein would have to be necessarily applied for determining the existence of a permanent establishment. In other words, in relation to a building site and construction/assembly project, the prescribed minimum period should be read into the expression ‘fixed place of business’ in para 1 while determining the existence of a permanent establishment.
Thereafter, in order to ascertain the tax liability of the Applicant, it was important to ascertain whether the Applicant would satisfy the time period test laid down in para 2(i) of Article 5 of the India-Mauritius tax treaty.
In this regard, the Applicant and the Revenue set out different contentions for calculation of the said time period. The Revenue contended that the effective date as of the agreement between the Applicant and HOEC was the starting date for calculation of the 9 month period prescribed under the India-Mauritius tax treaty. The Applicant, on the other hand, argued that the time of actual commencement of physical work should be considered as the starting point for the calculation of the said period.
The Authority struck down the contention of the Revenue citing the same as far-fetched. In this regard the Authority also observed that it would be too narrow a view to take if the commencement of active phase of construction and installation activities was held to be the starting point of the project. The Authority opined that the preparatory stages leading to the actual commencement of work such as gathering of equipment and arranging the infrastructure etc. could legitimately fall within the ambit of the project duration. The Authority made a reference to the commentaries of Arvid Skaar on ‘Permanent Establishment’, who opines that preparatory activities such as on-site planning should be included for the calculation of the time period, regardless of the actual start of work. However, Skaarpointed out there was a need to distinguish purely preliminary activities from preparatory work. Consequently, occasional short visits of contractor’s personnel for negotiations or doing some paper work in connection with the project or for taking the soil samples, broadly speaking, could not be said to trigger the start of the time-limit.
In light of the factual matrix of intermittent visits by the project management team to discuss the planning and contract (limited to 2-4 days each), the pre-construction survey and on-site monitoring of the shore approach activities along with the actual physical execution of the project, the Authority concluded that the time period would fall short of nine months. In light of these observations the Authority held that the Applicant had no permanent establishment in India within the meaning of para2(i) of Article 5 read with para 1 of Article 5 and consequently there arose no liability to pay tax in India.
This ruling is significant for its interpretation and detailed analysis of the scope and application of Article 5(1) and 5(2). The Authority rightly mandates the harmonious reading of the two provisions such that clause 2 is not rendered ineffectual and otiose. Further, the ruling makes an important observation with respect to ascertaining the time period of in case of construction and installation projects, providing that even preparatory activities for the project would be included for the calculation of the said period. This would be of significance to persons engaged in construction activities as even the initial time for undertaking preliminary or preparatory activities would be taken into considerations while determining the existence of a permanent establishment in India.