National Petroleum Construction Company v. Director Of Income Tax (International Taxation

IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 29.01.2016 + ITA 143/2013 NATIONAL PETROLEUM CONSTRUCTION COMPANY ..... Appellant Through Mr C.S. Aggarwal, Senior Advocate with Mr Prakash Kumar and Mr Pawan Kumar, Advocate. versus DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) ..... Respondent Through Mr N.P. Sahni, Senior Standing Counsel with Mr Nitin Gulati, Advocate. WITH + ITA 533/2013 DIRECTOR OF INCOME TAX - II (INTERNATIONAL TAXATION) ..... Appellant Through Mr Rahul Chaudhary, Senior Standing Counsel with Mr Ruchir Bhatia, Advocate. versus NATIONAL PETROLEUM CONSTRUCTION COMPANY ..... Respondent Through Mr C.S. Aggarwal, Senior Advocate with Mr Prakash Kumar and Mr Pawan Kumar, Advocate. WITH + ITA 144/2013 NATIONAL PETROLEUM CONSTRUCTION COMPANY ..... Appellant Through Mr C.S. Aggarwal, Senior Advocate with Mr Prakash Kumar and Mr Pawan Kumar, Advocate. versus DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) ..... Respondent Through Mr N.P. Sahni, Senior Standing Counsel with Mr Nitin Gulati, Advocate. AND + ITA 795/2014 –DIRECTOR OF INCOME TAX II (INTERNATIONAL TAXATION) ..... Appellant Through Mr Rahul Chaudhary, Senior Standing Counsel with Mr Ruchir Bhatia, Advocate. versus M/S NATIONAL PETROLEUM CONSTRUCTION CO. ..... Respondent Through Mr C.S. Aggarwal, Senior Advocate with Mr Prakash Kumar and Mr Pawan Kumar, Advocate. CORAM:JUSTICE S.MURALIDHAR JUSTICE VIBHU BAKHRU JUDGMENT VIBHU BAKHRU, J 1.These appeals have been filed under Section 260A of the Income Tax Act, 1961 (hereafter the ‘Act’) calling into question orders dated 5[th] October, 2012 and 31[st] January, 2013 passed by the Income Tax Appellate Tribunal (hereafter the ‘ITAT’) in ITA No. 5168/Del/2010 and ITA No. 5763/Del/2011 respectively. The said appeals were filed by the Assessee assailing the assessment orders dated 26[th] October, 2010 and 18[th] November, 2011 for the assessment years (AY) 2007-08 & 2008-09 respectively. Whilst ITA No. 143/2013 and 144/2013 have been preferred by the Assessee, ITA 795/2014 and 533/2013 have been preferred by the Revenue. 2.The controversy involved in the present appeals principally relates to the taxability of income earned by the Assessee in respect of a contract entered into by it with ONGC Limited, a public sector enterprise (hereafter ‘ONGC’).The aforesaid contract entailed designing, engineering, procurement, fabrication of fully loaded offshore platform and its installation, testing and commissioning at an offshore facility of ONGC. According to the Revenue, the income from the said contract is liable to be taxed in India as the Assessee is stated to have a Permanent Establishment (PE) in India. According to the Assessee, its income from the contract in question is not taxable under the Act by virtue of the Double Taxation Avoidance Agreement between India and United Arab Emirates (UAE) (hereafter referred to as the ‘DTAA’). The Assessee claims that it does not have a PE in India and further, in any event, the income from fabrication and supply of platform is not taxable as the same pertains to the Assessee’s activities outside India. 3.Whilst the ITAT had rejected the Assessee’s contention that it does not have a PE in India, it accepted the Assessee’s contention that the contractual receipts from ONGC were separable and the amount received for fabrication and supply of platform outside India was not taxable under the Act. This has led both the Assessee and the Revenue to assail the orders passed by the ITAT. 4.These appeals were admitted and the following questions of law were framed in the appeals preferred by the Assessee (ITA 143/2013 and 144/2013):- 3.Whilst the ITAT had rejected the Assessee’s contention that it does not have a PE in India, it accepted the Assessee’s contention that the contractual receipts from ONGC were separable and the amount received for fabrication and supply of platform outside India was not taxable under the Act. This has led both the Assessee and the Revenue to assail the orders passed by the ITAT. 4.These appeals were admitted and the following questions of law were framed in the appeals preferred by the Assessee (ITA 143/2013 and 144/2013):- “1. Whether the Income Tax Appellate Tribunal was correct in holding that the appellant had a fixed place of business or permanent establishment in India as defined in Article 5(2)(c) of the Double Taxation Avoidance Agreement between India and UAE. holding that the appellant had a fixed place of business or permanent establishment in India as defined in Article 5(2)(c) of the Double Taxation Avoidance Agreement between India and UAE. 2. Whether the Income Tax Appellate Tribunal was justified and correct in holding that the installation permanent establishment under Article 5(2)(h) of the Double Taxation Avoidance Agreement between India and UAE is not dependent on the date of actual start of execution of the contract but had come into existence on the date of award of contract? and correct in holding that the installation permanent establishment under Article 5(2)(h) of the Double Taxation Avoidance Agreement between India and UAE is not dependent on the date of actual start of execution of the contract but had come into existence on the date of award of contract? 3. Whether the income Tax Appellate Tribunal was right in holding that Arcadia Shipping Ltd. was a dependent agent permanent establishment of the appellant in India under Article 5 of the Double Taxation Avoidance Agreement between India and UAE. holding that Arcadia Shipping Ltd. was a dependent agent permanent establishment of the appellant in India under Article 5 of the Double Taxation Avoidance Agreement between India and UAE. 4. Whether the Income Tax Appellate Tribunal has not attributed and determined the taxable income under installation and commissioning; whether the said issue/question has remained undecided and the effect thereof. attributed and determined the taxable income under installation and commissioning; whether the said issue/question has remained undecided and the effect thereof. 5. Whether the order of the Income Tax Appellate Tribunal violates and is contrary to Article 7(6) of the Double Taxation Avoidance Agreement between India and UAE.”violates and is contrary to Article 7(6) of the Double Taxation Avoidance Agreement between India and UAE.” 5.The following questions of law were framed in the appeals preferred by the Revenue (ITA 795/2014 and 533/2013):- “1. Did the ITAT fall into error in holding that the assessee's contract with the ONGC was divisible in the circumstances of the case; contract with the ONGC was divisible in the circumstances of the case; 2. Did the ITAT erred in law in holding that no income accrued to the assessee on account of offshore supplies it made; accrued to the assessee on account of offshore supplies it made; 3. In case question no.(2) is answered in favour of the Revenue, the appropriate margin of profit attributed, i.e. 25% and 28%.”Revenue, the appropriate margin of profit attributed, i.e. 25% and 28%.” 6.Briefly stated, the aforesaid questions arise in the backdrop of the following facts:- 6.1The Assessee is a company incorporated under the laws of UAE and is a the Revenue (ITA 795/2014 and 533/2013):- “1. Did the ITAT fall into error in holding that the assessee's contract with the ONGC was divisible in the circumstances of the case; contract with the ONGC was divisible in the circumstances of the case; 2. Did the ITAT erred in law in holding that no income accrued to the assessee on account of offshore supplies it made; accrued to the assessee on account of offshore supplies it made; 3. In case question no.(2) is answered in favour of the Revenue, the appropriate margin of profit attributed, i.e. 25% and 28%.”Revenue, the appropriate margin of profit attributed, i.e. 25% and 28%.” 6.Briefly stated, the aforesaid questions arise in the backdrop of the following facts:- 6.1The Assessee is a company incorporated under the laws of UAE and is a tax resident of that country. The Assessee is, inter alia, engaged in fabrication of petroleum platforms, pipelines and other equipment and in addition, the Assessee also undertakes contracts for installation of petroleum platforms, submarine pipelines and pipeline coating at various sites. In the course of its business, the appellant tendered for and entered into contracts with ONGC for the installation of petroleum platforms and submarine pipelines. The first such contract was entered into by the Assessee during the previous year 1996-97 relevant to the AY 1997-98. On 28[th] August, 2005, the Assessee was awarded a contract for 4 Well Platform Project-II (termed as Contract No. MR/OW/MM/NHBS4WPP and hereafter referred to as ‘4WPP Contract’). The Assessee had tendered for the aforesaid contract pursuant to a global tender floated by ONGC in July, 2005. This was the third contract between the Assessee and ONGC. Subsequently, the Assessee entered into another contract for C-Series Project (termed as Contract No. MR/OW/MM/C-Series/03/2006, hereafter referred to as ‘C-Series Contract’) on 23[rd] November, 2006. 6.2The scope of work as described in the “General Conditions of Contract” of both the 4WPP Contract and C-Series Contract included “Surveys (pre-engineering, pre-construction/pre-installation and post-installation), Design, Engineering, Procurement, Fabrication, Anticorrosion & Weight coating (in case of rigid pipeline, Load-out, Tie-down/Sea fastening Tow-out/Sail-out, Transportation, Installation, Hook-up, Installation of submarine pipelines, installation and hook-up of submarine cables, Modifications on existing facilities, Testing, Pre-commissioning, Commissioning of entire facilities as ”described in the bidding document. 6.3The said contracts included various activities. Whilst the activities relating to survey, installation and commissioning were done entirely in India, the platforms were designed, engineered and fabricated overseas - at Abu Dhabi. A tabular statement indicating the activities carried out in India and overseas as asserted by the Assessee, is reproduced below:- Activity Inside India (i.e. Outside India (Abu Installation and Dhabi) (i.e. Commissioning) Fabrication) Survey (Pre-Engineering, √Pre-construction / Pre-installation Design & Engineering√Procurementof material √Fabrication √Load out, Tie down, tow-Partly Partly out and transportation of √√fabricated structure to IndiaInstallation, submarine √cable layingHook-up, testing, pre-√commissioningStartup&commissioning√6.4The Assessee has been filing its Income Tax Returns for the AYs commencing from 1997-98. The Assessee’s income under the Act has been computed on a presumptive basis by taxing the gross receipts pertaining to the activities in India less verifiable expenses at the rate of 10% and the receipts pertaining to activities outside India at the rate of 1%. The Assessee also adopted the said basis for computing its assessable income and filed its returns for AY 1999-00 onwards accordingly. The returns filed by the Assessee for AY 2004-05, 2005-06 and 2006-07 were processed under Section 143(1) of the –Act. However, the returns filed by the Assessee for AY 2007-08 and 2008-09 commencing from 1997-98. The Assessee’s income under the Act has been computed on a presumptive basis by taxing the gross receipts pertaining to the activities in India less verifiable expenses at the rate of 10% and the receipts pertaining to activities outside India at the rate of 1%. The Assessee also adopted the said basis for computing its assessable income and filed its returns for AY 1999-00 onwards accordingly. The returns filed by the Assessee for AY 2004-05, 2005-06 and 2006-07 were processed under Section 143(1) of the –Act. However, the returns filed by the Assessee for AY 2007-08 and 2008-09 –which are involved in the present appeals were not accepted by the Assessing Officer (hereafter ‘AO’). Proceedings before the AO/DRP 7.The AO passed a draft assessment order dated 31[st] December, 2009 under Section 144(5) of the Act for the AY 2007-08. The AO held that the Assessee had a Fixed Place PE in India in the form of a Project Office at Mumbai. The AO further held that Arcadia Shipping Ltd. (ASL) constituted a Dependent Agent PE (hereafter also referred to as ‘DAPE’) of the Assessee in India. In addition, the AO held that the Assessee also had a Installation/Construction PE in India. 7.1Insofar as the Assessee’s contention that the fabricated material was sold to ONGC outside India is concerned, the AO held that the contract was a turnkey and a composite contract and was not divisible as claimed by the Assessee. Accordingly, he held that the entire contractual receipts including the activities performed outside India were taxable in India. The consideration received by the Assessee for design and engineering was held to be Fees for Technical Services (hereafter 'FTS'). Since, the Assessee had not maintained separate books pertaining to the contract, the AO estimated the Assessee’s profit to be 25% of the consideration received from ONGC. The Assessee’s contention that it should be taxed by applying provisions of Section 44BB of the Act was rejected as the AO held that the activities carried out by the Assessee were not covered under that Section. 8.The Assessee did not accept the Draft Assessment Order and filed its objections before the Dispute Resolution Penal (‘DRP’). The DRP held that Article 5 of the DTAA provided an inclusive definition of ‘Permanent Establishment’ (PE) and that the Assessee’s Project Office constituted a PE of the Assessee in India. The DRP reasoned that: (i) the Assessee itself had shown the Project Office as its PE in the earlier years as well as in the AY 2007-08 and had subsequently sought to change its stand on the basis of the ITAT’s judgment in the case of DCIT v Hyundai Heavy Industries Limited; (ii) the Assessee had informed the Reserve Bank of India that its Project Office was for the purposes of undertaking the project with ONGC and this established that the Project Office was established to undertake the project and not any ancillary or auxiliary activity; (iii) before submitting the bid, Assessee undertook a pre-bid survey and the Assessee’s communication to ONGC indicated that the Assessee had familiarized itself with the Marine Sea, Land-surface and sub-surface, metrological, oceanographic, climatological and environmental conditions which may exist in the installation area. Further, the Assessee had also familiarized itself with other aspects of the project. This, according to the DRP, indicated that the pre-bid survey was conducted through the Project Office which was directly connected with the contract in question; (iv) during the period of negotiation of the contract, employees of the Assessee had attended the meeting with ONGC on 16[th] December, 2005 and this included the employees of the Project Office. The DRP observed that the Assessee had not disputed that the concerned persons were employees of its project; the Assessee’s communication to ONGC indicated that the Assessee had familiarized itself with the Marine Sea, Land-surface and sub-surface, metrological, oceanographic, climatological and environmental conditions which may exist in the installation area. Further, the Assessee had also familiarized itself with other aspects of the project. This, according to the DRP, indicated that the pre-bid survey was conducted through the Project Office which was directly connected with the contract in question; (iv) during the period of negotiation of the contract, employees of the Assessee had attended the meeting with ONGC on 16[th] December, 2005 and this included the employees of the Project Office. The DRP observed that the Assessee had not disputed that the concerned persons were employees of its project; (v) the minutes of the kick-off meeting clearly mentioned that the review of engineering documents would be done in Mumbai. Thus, all the negotiation and approval was done in Mumbai after the hard copy of the design was received by ONGC; (vi) that the contract lasted for approximately two years and it was not possible for a contract of this magnitude to be executed without the Assessee having a fixed place of business in India; (vii) the Assessee’s office in India provided a fixed place for the employees of the Assessee visiting India for execution of the project from time to time and it was not necessary that the permanent employees at the Project Office be directly involved in the execution of the project; 8.1Insofar as ASL is concerned, the DRP concurred with the AO that ASL was a DAPE of the Assessee for the reasons stated below: (i) that ASL was actively involved in the project since pre-bid meetings, hard core marketing and business development till finalization of the contract; (ii) that the communications issued by the Assessee as well as ASL to ONGC expressly stated that ASL represented the Assessee as its Agent; (iii) that the address of the employees of the Assessee was mentioned as ASL’s address in the application to the Ministry of Home Affairs. 8.2The DRP rejected the Assessee’s contention that it had an Installation PE as described under Article 5(2)(h) of the DTAA for a duration of less than nine months and, therefore, the same could not be considered as a PE of the Assessee in terms of the DTAA. The DRP held that since the Assessee had contended that payments for engineering, procurement of material and fabrication could not be treated as FTS as being a part of the consideration for installing the platform, the Assessee could not treat those activities as separable for the purposes of limiting the duration of its PE in India and/or splitting the income between that arising overseas and in India. The DRP, accordingly, held that the Installation PE of the Assessee came into existence at the stage of commencement of the contract. The DRP observed that pre-engineering or pre-–design survey which was claimed to be done by a sub-contractor employed by –the Assessee was an integral part of the contract and the time spent by the sub- contractor would also constitute the time spent by the Assessee under the DTAA. Thus, the DRP reasoned that the existence of a PE would commence from the date the sub-contractor started his job at the site of ONGC. 8.3The DRP rejected the contention that the contract was a divisible contract between that arising overseas and in India. The DRP, accordingly, held that the Installation PE of the Assessee came into existence at the stage of commencement of the contract. The DRP observed that pre-engineering or pre-–design survey which was claimed to be done by a sub-contractor employed by –the Assessee was an integral part of the contract and the time spent by the sub- contractor would also constitute the time spent by the Assessee under the DTAA. Thus, the DRP reasoned that the existence of a PE would commence from the date the sub-contractor started his job at the site of ONGC. 8.3The DRP rejected the contention that the contract was a divisible contract and the income of the Assessee for the activities done outside India was not taxable under the Act. The DRP held that the title in the goods passed to ONGC in India and on the said basis distinguished the judgment of the Supreme Court in the case of Commissioner of Income Tax & Anr. v. Hyundai Heavy Industries:(2007) 291 ITR 482 (SC) where platforms were delivered to the agents of ONGC in Korea. For the same reason, the DRP also held that CBDT Instruction No. 1767 was not applicable to the facts of the present case. 8.4The DRP also concurred with the AO that the payment in respect of drawings and design were FTS and in the event it was held that the Assessee did not have a PE in India, the aforesaid payment would be taxable under the Act as FTS. The DRP also rejected the Assessee’s contention that Section 44BB of the Act was applicable. It held that the contract in question was a turnkey contract in the nature of a works contract and could not be considered as a contract for services as envisaged under Section 44BB of the Act. 8.5As regards the computation of profit is concerned, the DRP held that since the Assessee had neither produced any accounts nor submitted any basis to substantiate its claim as to the profit margin adopted by the AO, the same was required to be estimated. The DRP, thereafter, noted the profit margins of four other companies which were taken as comparable to the Assessee and found that the average profit margin of those companies was 24.7%. On that basis, the DRP held that the profit margin of 25% of gross receipts estimated by the AO was justified. 9.Thereafter, the AO passed an assessment order dated 26[th] October, 2010 under Section 143(3) read with Section 144C of the Act. Proceedings before the ITAT 10.Aggrieved by the assessment order, the Assessee preferred an appeal before the ITAT. The ITAT concurred with the AO and rejected the Assessee’s contention that it did not have a PE in India. The ITAT observed that the Assessee had itself shown the Project Office in Mumbai as its PE in India and the Assessee’s employees were present during the negotiation of the contracts in question. The ITAT further reiterated the DRP’s observation that the Assessee had not disputed that the employees of the Project Office also attended the kick-off meeting with ONGC. The ITAT also concurred with the DRP’s conclusion that it was not possible for the Assessee, a non-resident company, to execute a contract which lasted for approximately two years without having any place of business in India from where the project could be managed. Accordingly, the ITAT concluded that the Assessee’s Project Office in India was its PE. 10.1The ITAT concurred with the AO that ASL was a DAPE of the Assessee. The ITAT concurred with the finding of the AO/DRP that ASL was working wholly and exclusively for the Assessee. The ITAT held that ASL’s presence in the business meetings also indicated that ASL was engaged in the hard core business development activity of the Assessee in India and its role was not limited merely for collecting information as claimed by the Assessee. business in India from where the project could be managed. Accordingly, the ITAT concluded that the Assessee’s Project Office in India was its PE. 10.1The ITAT concurred with the AO that ASL was a DAPE of the Assessee. The ITAT concurred with the finding of the AO/DRP that ASL was working wholly and exclusively for the Assessee. The ITAT held that ASL’s presence in the business meetings also indicated that ASL was engaged in the hard core business development activity of the Assessee in India and its role was not limited merely for collecting information as claimed by the Assessee. 10.2The ITAT rejected the Assessee’s contention that its Installation PE existed only when the barges carrying the platforms entered the territorial waters of India. It concurred with the AO’s decision that the Assessee had a PE in India even prior to the notification of award of the contract. 10.3However, the ITAT accepted the Assessee’s contention that the contract in question could be segregated into offshore and onshore activities and the Assessee’s income for the activities carried out outside India could not be attributed to its PE in India. Accordingly, it held that the profits attributable to design, procurement of material and fabrication could not be taxed in India. The ITAT rejected the Assessee’s contention that the tax payable should be computed as per the formula adopted in the preceding years (i.e. 10% of the receipts attributable to activities in India less expenses in India and 1% of the receipts attributable to activities carried out overseas). The ITAT also did not accept the Assessee’s contention that Section 44BB of the Act was applicable. Submissions on behalf of the Assessee 11.Mr C.S. Aggarwal, learned Senior Counsel appearing for the Assessee submitted that the Assessee had established the Project Office only to comply with the contractual requirements and the applicable exchange control regulations. The Project Office merely acted as a communication channel between the Assessee and ONGC and apart from that, it had no other role to play. He pointed out that the addresses of the project offices in the past were different and the said project offices had been established only for the contracts entered into earlier. He submitted that, therefore, the existence of the Assessee’s project offices in the past could not be linked to the Project Office established for the purpose of the contracts in question. He argued that the AO erred in holding that the Assessee had carried its business in India through a PE by alluding to the project offices established by the Assessee in respect of prior contracts. 11.1Mr Aggarwal submitted that the only activity carried out by the Assessee in India was the installation and commissioning of the platforms which was carried out by the Assessee’s employees at the offshore site with the help of barges. He submitted that the pre-engineering and pre-construction surveys were done by an independent third party, M/s Fugro-Geonics Pvt. Ltd., an Indian company which was engaged on a principal-to-principal basis. He contended that the finding that the Project Office was involved in pre-bid meetings and/or survey and/or kick-off and/or review meetings was erroneous as these meetings were attended by the Assessee’s employees from Abu Dhabi and the Project Office was not involved. 11.2Mr Aggarwal contended that the Project Office acted as Assessee’s backoffice for liaison, coordination and collection of information from ONGC. as these meetings were attended by the Assessee’s employees from Abu Dhabi and the Project Office was not involved. 11.2Mr Aggarwal contended that the Project Office acted as Assessee’s backoffice for liaison, coordination and collection of information from ONGC. Mr Aggarwal relied upon the decisions inCIT v. BKI/HAM: (2012) 347 ITR 570 (Uttarakhand);Cal Dive Marine Construction (Mauritius)Ltd., In Re:(2009) 315 ITR 334 (AAR); andDIT v. Hyundai Heavy Industries Co. Ltd.:(2009) 31 SOT 482(ITAT[Del]) in support of his contention that the Assessee’s activity of installation and commissioning of platforms could be examined only in the light of the provisions of Article 5(2)(h) of the DTAA. Mr Aggarwal relied on the decision ofUAE Exchange Centre Limited v. UOI:(2009) 313 ITR 94 (Del) andIAC v. Mitsui &. Co. Ltd.: (1991) 39 ITD 59 (ITAT[Del]) in support of its contention that the back office function of collection of information was specifically excluded from the purview of PE by virtue of Article 5(3)(d) and 5(3)(e) of the DTAA. 11.3Mr Aggarwal further contended that in terms of article 5(2)(h) of the DTAA, the Installation PE would come into existence only if the construction or assembling activity continued for a period of nine months or more in India. He argued that the earliest date which could be considered for calculating the period would be the date when the barges with the fabricated platforms reached the work site, that is, on 19[th] November, 2006. Mr Aggarwal submitted that the pre-engineering and pre-construction surveys were carried out by an independent Indian company for a period of 9 days and 27 days respectively and the same did not entail assuming control over the work site. He argued that the activities of the independent sub-contractor could not be included for calculating the period of nine months under Article 5(2)(h) of the DTAA. He further submitted that the time taken for pre-bid activities, notification of award, signing of the contract and meetings with ONGC were irrelevant for calculating the existence of an Installation PE since such work did not result in acquiring control over a work site. 11.4Mr Aggarwal also disputed the finding that ASL was a DAPE of the Assessee in India. He submitted that ASL was an independent entity and carried out substantial business activities other than those related to the Assessee. Mr Aggarwal also submitted that although the ITAT had accepted the Assessee’s contention that only income from activities carried out in India was attributable to the PE, it had failed to adjudicate the quantum of the profits assessable to tax under the Act. He referred to the decision of the Supreme Court in Hyundai Heavy Industries (supra) in support of his contention that a profit margin of 10% was appropriate for installation and commissioning of platforms in India. Mr Aggarwal further submitted that the comparable companies selected by the DRP for justifying a profit margin of 25% / 28.58% was erroneous as the said alleged comparable companies were engaged in providing engineering services while the Assessee was engaged in construction and installation of pipelines and platforms. He submitted that the alleged comparable companies were functionally different and the ITAT had failed to consider the Assessee’s submission in this regard. 11.5Mr Aggarwal argued that the Assessee had estimated its taxable income on a consistent basis which had been adopted by the Assessee, which was accepted by the AO and there was no material on record which would justify a departure from the consistent methodology accepted earlier. He argued that the computation of presumptive profit was based on CBDT Instruction No.1767 and principles which were approved by the Supreme Court in Hyundai Heavy Industries (supra) and, thus, had a sound legal basis. Submissions on behalf of the Revenue and installation of pipelines and platforms. He submitted that the alleged comparable companies were functionally different and the ITAT had failed to consider the Assessee’s submission in this regard. 11.5Mr Aggarwal argued that the Assessee had estimated its taxable income on a consistent basis which had been adopted by the Assessee, which was accepted by the AO and there was no material on record which would justify a departure from the consistent methodology accepted earlier. He argued that the computation of presumptive profit was based on CBDT Instruction No.1767 and principles which were approved by the Supreme Court in Hyundai Heavy Industries (supra) and, thus, had a sound legal basis. Submissions on behalf of the Revenue 12.Mr Sahni, Senior Standing Counsel appearing for the Revenue controverted the contentions advanced by Mr Aggarwal. He submitted that the Assessee had filed a return admitting that it had a PE in India and in the circumstances, a contrary claim could not be made by the Assessee at the time of the Assessment. He relied upon the decision of the Supreme Court in the case of Goetze (India) Ltd. v. CIT: (2006) 284 ITR 323 (SC) in support of his contention.He further referred to the decision of the Supreme Court in Radhasoami Satsang v. Commissioner of Income Tax: (1992) 193 ITR 321 (SC) and contended that the Assesseecannot be permitted to depart from its consistent stand that had been sustained over the past several years. 12.1Mr Sahni next referred to The Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000 issued by the Reserve Bank of India as amended on 2[nd] July, 2003 and drew the attention of this Court to the definition of 'project office' which is defined as “a place of business to represent the interest of the foreign company executing a project in India but excludes a liaison office”. He contended that in the circumstances, the Assessee’s contention that the project office had no role to play in the execution of the project was contrary to the record. 12.2Mr Sahni also controverted the Assessee’s stand that the Project Office was only involved in preparatory and auxiliary activities and consisting of only three employees. He submitted that the reliance placed by the Assessee on the annual accounts of the PO was not justified as it did not include the cost of supplies and expenses which were incurred and recorded in the accounts of the head office. He pointed out that the value of fringe benefits was reported at Rs.13,45,071/- and, admittedly, payments to the extent of Rs.20,28,66,569/- were made in India on which TDS had been deducted and paid. He also pointed out that, admittedly, the TDS returns had been filed by the Project Office in India. He submitted that in the circumstances, the Assessee’s contention that the Project Office in India had only carried on preparatory and auxiliary activities was not sustainable. 12.3Mr Sahni next referred to the 4WPP Contract which specifically provided that the contractor would be responsible for deployment, transportation, accommodation and catering of all labour, local or expatriates, and would be responsible for obtaining all necessary permits and visas from the all concerned authorities. The contractor (the Assessee) was also responsible for all statutory compliances under the Income Tax Act, Customs Act, FEMA etc. and this also indicated that the role of the Assessee’s PO in India was not limited only to auxiliary or preparatory activities. Project Office in India had only carried on preparatory and auxiliary activities was not sustainable. 12.3Mr Sahni next referred to the 4WPP Contract which specifically provided that the contractor would be responsible for deployment, transportation, accommodation and catering of all labour, local or expatriates, and would be responsible for obtaining all necessary permits and visas from the all concerned authorities. The contractor (the Assessee) was also responsible for all statutory compliances under the Income Tax Act, Customs Act, FEMA etc. and this also indicated that the role of the Assessee’s PO in India was not limited only to auxiliary or preparatory activities. 12.4Insofar as the issue relating to the duration of the Installation PE is concerned, Mr Sahni referred to the terms of the 4WPP Contract which specifically recorded that the notice of award dated 29[th] November, 2005 would be the effective commencement of this contract. He pointed out that the scope of the work included surveys (pre-engineering, pre-construction/pre-installation and post-installation) and annexure D and E to the 4WPP Contract mentioned the dates and the milestone payments, the same also clearly indicated that activities/works relating to pre-engineering survey/inspection of existing facilities was to commence as earlier as 3[rd] December, 2005. The milestone payment formula also included payments for such activities. He, thus, submitted that the duration of the Assessee’s Installation PE would also commence with the commencement of the contract. In support of the said contention, Mr Sahni also referred to the text of “Klaus Vogel on Double Taxation Conventions, Third Edition”, which provided that the minimum period for considering a construction site/project as a PE of an enterprise would begin when the enterprise starts to perform business activities on the spot in connection with the building site or construction or assembly of the project and any interruptions in the minimum period should also be included for determining the minimum period. He also referred to the extracts from the commentary by A. Skaar in support of his contention that time spent on onsite planning would also be included in computing the duration while considering whether a PE of an enterprise existed. 12.5Mr Sahni next urged that ASL was appointed as the sole and exclusive agent and under the terms of the consultancy agreement had agreed not to represent a competitor of the Assessee or act in a manner detrimental to the Assessee’s interest. ASL had also participated in the pre-bid meeting held on 23[rd] August, 2005 and the kick-off meeting held on 16[th] December, 2005. He contended that in the circumstances, ASL constituted a DAPE of the Assessee in India. He further submitted that ASL had no discretionary powers and was acting at the instance of the Assessee and in the circumstances, even though ASL had substantial revenue from other activities, it could not be construed as an independent agent as far as the project in question was concerned. 12.6In regard to the issue of attribution of income, Mr Sahni contended that 12.6In regard to the issue of attribution of income, Mr Sahni contended that Article 7(6) of the DTAA envisaged that the profits attributable to a PE would be determined by the same method year by year; but, the said clause also permitted a departure from the principle for good and sufficient reason. He submitted that in the present case, the AO as well as the DRP had provided detailed reasons for not following the method of computing the income as adopted in the earlier years. He submitted that the DRP had referred to comparable companies and the Assessee had not produced any material to justify its claim that a separate profit margin be adopted. Mr Sahni also submitted that reference to the CBDT Instruction No. 1767 was misplaced. He argued that (a) the said instruction was not applicable to the relevant assessment year; (b) the profit margin of 1% was applicable to outside India revenues in cases where the sale took place outside India on FOB basis; and (c) that the said instruction envisaged calculating profit margin at 10% of the gross revenues from operations in India without any deduction. In the circumstances, the DRP had rightly applied Rule 10 of the Income Tax Rules, 1962 to calculate the profits of the Assessee. 12.7In respect of the Revenue’s appeals, Mr Sahni contended that the contracts in question were composite contracts and all activities were closely linked. Thus, the contract could not be split between the activities carried out overseas and activities carried out in India. He further contended that the ownership of the platforms and other material was transferred to ONGC only on ONGC issuing a certificate of completion and acceptance of work. Thus, the Assessee’s contention that the income from activities conducted in relation to design, procurement of material and fabrication of the platforms, was not attributable to the PE in India was erroneous. 12.8Mr Sahni sought to distinguish the decisions of the Supreme Court in the cases of Ishikawajima-Harima Heavy Industries Ltd. v. DIT: (2007) 288 ITR 408 (SC)and Hyundai Heavy Industries (supra) by contending that whilst the situs of transfer of properties in those cases was outside India; in the present case, possession of the platforms was handed over to ONGC in India. Reasoning and Conclusion 13.The first three questions framed in the appeals preferred by the Assessee (ITA 143/2013 and 144/2013) relate to the existence of an Assessee’s PE in India in terms of Article 5 of the DTAA. The other two questions relate to the attribution of income to the Assessee’s PE. Thus, at the threshold, it would be necessary to refer to the text of Article 5 of the DTAA for ascertaining whether the Assessee had a PE in India during the relevant period. Article 5 of the DTAA is reproduced as under:- “1. For the purposes of this Agreement, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term “permanent establishment” includes especially : (a)a place of management; (b)a branch; (c)an office; (d)a factory ; (e)a workshop ; (f)a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ; place of extraction of natural resources ; (g)a farm or plantation ; (h)a building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months ; supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months ; 2. The term “permanent establishment” includes especially : (a)a place of management; (b)a branch; (c)an office; (d)a factory ; (e)a workshop ; (f)a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ; place of extraction of natural resources ; (g)a farm or plantation ; (h)a building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months ; supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months ; (i)the furnishing of services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period. services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period. 3. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include : (a)the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise ; display or delivery of goods or merchandise belonging to the enterprise ; (b)the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery ; belonging to the enterprise solely for the purpose of storage, display or delivery ; (c)the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; belonging to the enterprise solely for the purpose of processing by another enterprise ; (d)the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ; for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. 4. Notwithstanding the provisions of paragraphs (1) and (3), where a person - other than an agent of independent status to whom paragraph (5) applies - is acting on behalf of an enterprise and has, and habitually exercises in a Contracting State an authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to the purchase of goods or merchandise for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of independent status within the meaning of this paragraph.” 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of independent status within the meaning of this paragraph.” 14.Paragraph 1 and paragraph 2 to the extent of sub-paras (a) to (e) of Article 5 of the DTAA are identical to paragraph 1 and 2 of Article 5 of the Model Conventions framed by OECD, United States and United Nations. Sub-paras (h) and (i) of paragraph 2 of Article 5 of the DTAA specifically includes a building site or an assembly project and furnishing of services within the definition of a ‘Permanent Establishment’. The subject matter of clauses (h) and (i) are partly covered under paragraph 3 of Article 5 of the said Model Conventions and the same would be referred to while considering the second question which specifically relates to Article 5(2)(h) of the DTAA. 15.In order to determine whether an enterprise has a PE within the meaning of Article 5 of the DTAA, it would be necessary to consider the scheme of Article 5. Paragraph 1 of Article 5 provides an overarching general definition of the expression ‘Permanent Establishment’ (PE). It defines a PE to mean a fixed place of business through which the business of an enterprise is wholly or partially carried on. It is clear from the aforesaid defini