In a recent decision in ADIT (Int’l taxation) v. Valentine Maritime (Mauritius) Ltd., ITAT Mumbai has thrown some light on the computation of PE “Duration test” under art. 5(2)(i) of the India-Mauritius tax treaty. In the present dispute the assesse, a Mauritian entity engaged in the business of marine and general engineering and construction had executed three contracts in the India. The duration of these contracts individually were less than “nine months” however if the contracts were taken cumulatively then the entire period would exceed the “nine month” threshold limit under Art. 5(2)(i) of the Indo- Mauritian Tax treaty.
The issue before the tribunal was whether the duration of the projects in the present dispute shall be taken cumulatively or separately. The contention of the revenue was that unlike the India UK DTAA, the India- Mauritius treaty does not specifically incorporate the provision that for the purposes of applying the “Duration test” each project site is to be considered separately. Thus, the revenue contended that under Art. 5(2)(i) of the India Mauritius tax treaty the duration of project sites are to be construed cumulatively and if such a period exceeds nine months then the assesse shall be deemed to be having a permanent establishment in India (PE). As a starting point it is first important to reproduce Art. 5(2)(i) of the India- Mauritius treaty:
Article 5 - Permanent Establishment
1. For the purpose of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of enterprise is wholly or partly carried on.
2. The term 'permanent establishment' shall include:
(i) 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.
On a plain reading of the above quoted provision it is clear that Art 5(1) lays down a general test of “permanence” for establishing an entity as a PE. On the other hand Art 5(2)(i) lays down a specific “duration test” for establishing a building site, construction or assembly project as a PE. In the present dispute the tribunal has laid down the scope and application of this “duration test”. The tribunal while rejecting the contention of the revenue stated that under art. 5(2)(i) the “duration test” is to be applied to individual projects separately and not cumulatively. The apposite part of the judgment is reproduced as under:
“In other words, each of the building site, construction project, assembly project or supervisory activities in connection therewith is to be viewed on standalone basis. Broadly, the underlying rationale of this approach is that various business activities performed by one and same enterprise, none of which constitutes a PE, cannot lead to a PE, if combined. In our humble understanding, the very conceptual foundation of this approach rests on the assumption that various business activities of the enterprise in different locations are not so inextricably interconnected that these are essentially required to be viewed as a coherent whole. The locations are thus separate places of business, and activities at different locations are, therefore, required to be viewed on standalone basis. In a typical building site, assembly or installation project, or supervisory activities in connection therewith, each of site or project is an independent unit, and the approach to these types of PEs recognize this normal business practice.”- Para. 9
The court also rejected the argument of the revenue that since the India- Mauritius treaty does not specifically exclude (like the India UK treaty) the application of the “duration test” to all projects taken cumulatively, it would necessarily mean that the duration of the projects should be tabulated together inorder to ascertain whether an entity qualifies to be a PE. The court stated as under:
“The provisions set out in protocol to the tax treaties need not necessarily be substantive provisions, and these can also be, and often are, merely clarificatory provisions 'ex abundanti cautela'. What is stated in the said protocol to Indo UK tax treaty is nothing other than what is anyway within the scope of the construction PE clause, as analyzed in the OECD Model Convention Commentary (adopted by the UN Model Convention Commentary as well) - an analysis, with which we are in considered agreement. The protocol provision is merely clarificatory in nature and is apparently set out as a measure of abundant caution. The absence of similar protocol clarification in other tax treaties entered into by India would not, therefore, warrant a different interpretation of the treaty provision.”- Para. 10
The tribunal further lays down two grounds under which the aggregation principle (duration of all the project sites taken together in computing the threshold duration) can be applied. Firstly, where the contracts have been artificially divided inorder to reap the benefits of the tax treaty. The onus of showing such an artificial division would be on the revenue. Secondly, when there is an inextricable interconnection and interdependence between the project sites so that they form a coherent whole. The test of “interconnection and interdependence” is an expanded version of the test laid down in the OECD commentary i.e. “coherent whole- geographically and commercially” test.
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