BEFORE THE AUTHORITY FOR ADVANCE RULINGS(INCOME TAX), NEW DELHI

23rd Day of April, 2009

PRESENT

Mr Justice. P.V. Reddi (Chairman) Mr. A. Sinha (Member) Mr. Rao Ranvijay Singh (Member)

A.A.R. No. 748 of 2007

Name & address of the applicant: WorleyParsons Services Pty. Ltd. Level 7, 116 Miller Street, North Sydney NSW 2060 Australia.

Commissioner Concerned : Director of Income-tax,

(International Taxation)-II New Delhi. Present for the applicant : Mr. Pawan Kumar, FCA Mr. Rahul Garg, FCA Mr. Ravi Sharma, Adovcate Present for the applicant : Mr. Sanjeev Sharma, Addl. Commissioner of Income-tax, (International Taxation), Delhi.

R U L I N G [By Hon’ble Chairman]

1. The applicant is a Company incorporated in Australia and a

’tax resident’ of Australia. The Company is engaged in the business

of providing professional services to the energy and resource

industries including engineering, procurement and project

management services. The present application is filed seeking

advance ruling in connection with the six contracts entered into with

Oil and Natural Gas Corporation Ltd. (for short ONGC) during the

years 2001, 2002 and 2003. Six questions are formulated by the

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applicant. Questions (1) to (4) are identical though related to

different contracts. They are as follows:

Whether on the facts and circumstances of the case,

(a) the receipts of the applicant under Contract Nos. 1,2,3,

& 4 with ONGC are not in the nature of royalties as

defined in Article 12 of the DTAA between India and

Australia?

(b) The applicant does not have a PE in India in respect of

this contract?

(c) If answers to (a) & (b) above are in affirmative, the

receipts from this contract are not taxable in India?

Question No.5

In Qn.No.5 – which relates to contract no.(5), (a) & (b) are the

same as above.

Qn.No.5 (c) reads thus:

“If answers to (a) & (b) above are in affirmative, the

receipts from this contract are chargeable @15%.”

Question No.6

In Qn.No.6 – which relates to contract no.(6), (a) & (b) are the

same as above. (c) and (d) are as follows :

“(c) If answers to (a) & (b) above are in affirmative, only so

much of such receipts as are attributable to the said

PE are taxable in India as business profits?

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(d) The balance receipts of the applicant under this

contract, as are not attributable to such PE are not

taxable in India?” [

2. The material facts relating to the contracts, as stated in the

application, rejoinder and the affidavit filed along with it by the Group

Tax Manager of the company are as follows.

2.1. For targeting incremental recovery of oil and gas from its

Mumbai High North Offshore field, ONGC decided to take up for

implementation the Mumbai High North Water Injection-

Compression Platform (for short MNW Project). Under this project,

an integrated offshore platform with gas compression and water

injection facilities was to be installed and connected to the existing

BHL platform of ONGC in the same field. In order to reduce the

capital and operating expenses and the overall completion schedule

for the new platform, ONGC wanted a consultant to review the

technical and commercial bid documents (inviting bids from

contractors) for installation of the new platform and to give its

recommendations. The applicant became successful bidder for this

assignment. A contract was entered into in May 2001 with ONGC

and it is hereafter referred to as contract no.(1). Services to this

contract were carried out by the applicant in Australia. However, at

the stage of negotiations and to gather certain field level inputs, the

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applicant’s employees were in India for meetings in March and June

2001 for a total period of 7 days.

2.2. The contract for installation of offshore platform under the

MNW project was awarded by ONGC to Engineers India Ltd. for

February 2002. ONGC wanted consultants’ services for review of

detailed designs and engineering documents and gas optimization

of proposals that had been prepared. For this purpose bids were

invited and the applicant having became a successful bidder,

entered into a contract in April 2002 with ONGC. This contract is

hereafter referred to as contract no.(2). The scope of the contract

as given in clause (17) thereof consisted of providing back up

consultancy assistance for review of ONGC’s detailed design and

engineering documents through provision of required engineers.

Further, the engineers were also required to assist ONGC in review

and evaluation of various optimization and cost savings proposals.

The work involved desk-top review of workings prepared by a third

party in Worley’s facilities in Australia. As the work entrusted to the

applicant required inputs from the field and the ONGC staff, the

employees of the applicant came to India and stayed for duration of

39 days in all in the financial year 2002-03. The applicant states

that the services for this contract were thus provided partly from

Australia and partly in India in the year 2002-03. However, in the

succeeding year, the work was carried out only from Australia.

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2.3. Contracts No. 3 to 6 relate to Mumbai High South Offshore

Field (for short ‘MHS) development. ONGC prepared a scheme to

implement seven separate packages for developing Integrated

Process-cum-Gas Compressor Platform, several well platforms,

drilling of new wells and new pipeline segments of 245 kms.

Package I related to installation of ZA platforms and

associated works. In connection therewith, Contract No. 3 was

entered into. The applicant had to review the existing design

philosophy, study the adequacy of existing processing facilities and

also conduct study to arrive at optimum requirement of additional

compression and other facilities. This involved review of the

engineering documentation prepared by third party and based on

the adequacy checks for optimization, the applicant was to give its

recommendation and make the presentation to the senior

management of ONGC. As the work required interaction with

ONGC officials, the employees of the applicant were in India for 17

days in the year 2003-04 for the purpose of this contract.

Package 2 of MHS development scheme related to

construction of a process platform and package 4 related to

construction of 5 well platforms. In connection therewith, Contract

No.4 was entered into. Under the Contract, the applicant was

required to undertake (i) pre-award activities viz. pre-bid survey,

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preparation of bid package and evaluation of bids for Package 2; (ii)

reviewing bid package for well platforms and associated pipelines

falling under package 4 and (iii) maintaining and reviewing Brawn

Field bid package work entrusted to an Indian Consultant. The

applicant’s employees were present in India for the purpose of this

contract for 42 days in the year 2002-03 and 17 days in the next

year.

2.4. Contract No.5 related to Part 2 of package I of MHS

Scheme. Under this contract, the applicant was to carry out the

work of designing the new process platform including process

engineering, top side lay out, designing structural configuration for

steel, conducting material study and electrical design and to work

out cost optimization for the scheme. Thus, the applicant had

developed and transferred the technical design to ONGC. Under

this contract, the employees of the applicant were present in India

for 22 days in the year 2002-03 for reviewing the documents and

providing clarifications.

2.5. Contract No. 6: Pursuant to the tender floated by ONGC for

obtaining the consultancy services to review the designs and

documents prepared by Hyundai Heavy Industries for the installation

of process platform, this contract was entered into. The scope of

work required the applicant to undertake review of documents

prepared by HHI during the designing, engineering and procurement

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phase of the MHS Process Platform Project. The employees of the

applicant were present in India in connection with this contract for 90

days in the year 2003-04 and 13 days in the next year.

3. The applicant contends that the services under various

contracts except contract no. 5 cannot be brought within the sweep

of ‘royalties’ as defined in Art. XII.3 of the Double Taxation

Avoidance Agreement (hereinafter referred to as ‘DTAA’ or ‘Treaty’),

that there was no permanent establishment in India except in

relation to Contract no.6 and that royalty income in respect of the

contract no. 5 has to apportioned in such a manner that only income

attributable to the Indian operations is taxed in India. Though

initially in the application the applicant conceded to pay tax at 15 per

cent on the royalty income under Contract no. 5, the above

contention was raised drawing support from the decision of the

Supreme Court in Ishikawajima – Harima Heavy Industries Ltd. v.

DIT [268 ITR 408].

4. The Revenue has disputed the propositions advanced by the

applicant and contends that the payments made by ONGC under

Contract nos. 1 to 6 are in the nature of royalties within the meaning

of clause (g) of Art. XII.3 of DTAA, and therefore, taxable in India in

view of the Art. XII.2 read with Section 9(1)(vi)/(vii) of the Income-tax

Act, 1961. It is also contended that all the contracts which pertained

to the two projects of Mumbai High should be seen together in order

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to ascertain whether a service PE as contemplated by Art. V(3)(c) is

attracted. The principle of force of attraction as embodied in Art.

VII.3 has also been put forward in support of its stand. It is

contended that the royalty income as a whole is liable to be taxed

and it cannot be apportioned in the manner suggested by the

applicant. The decision in Ishikawajima, it is pointed out, is

distinguishable and cannot be called in aid by the applicant.

5. First we shall address the question whether the receipts

earned by the applicant under various contracts are in the nature of

royalties as defined in Art. XII.3 of DTAA between India and

Australia. The relevant extracts of para 3 are given below:

“3. The term “royalties” in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for :

(a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right;

(b) the use of, or the right to use, any industrial, commercial or scientific equipment;

(c) the supply of scientific, technical, industrial or commercial knowledge or information;

(d) the rendering of any technical or consultancy services (including those of technical or other personnel) which are ancillary and subsidiary to the application or enjoyment of any such property or right as is mentioned in sub-paragraph (a), or any such equipment as is mentioned in sub-paragraph (b) or any such knowledge or information as is mentioned in sub-paragraph (c);

(e) the use of, or the right to use :

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(i) motion picture films; (ii) films or video tapes for use in connection

with television; or (iii) tapes for use in connection with radio

broadcasting;

(f) total or partial forbearance in respect of the use or supply of any property or right referred to in sub-paragraphs (a) to (e); or

(g) the rendering of any services (including those of technical or other personnel), which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design; (emphasis supplied).

but that term does not include payments or credits……………….”

5.1. In the DTAA, there is no separate provision dealing with ‘fee

for technical services’, whereas in the Income-tax Act, 1961, income

from royalties and fee for technical services are separately dealt

with under section 9(1)(vi) and (vii) respectively. Art.XII of the

DTAA, is a veritable combination of both royalties and f.t.s. which

are treated separately under domestic law. The Income-tax Act

defines, ‘fees for technical services’ as any consideration including

lumpsum consideration for the rendering of any managerial,

technical or consultancy services (including the provision of services

of technical or other personnel). The concept of technical services

liable to tax under the DTAA is not as wide as that contained in the

corresponding provision in I.T.Act. There are two limbs in clause (g)

Art.12.3 of DTAA: (i) rendering of services which make available

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(emphasis supplied) technical knowledge, experience, skills, know-how

or processes, (ii) transfer of a technical plan or design. The

question argued before us is whether one of the two limbs of (g) is

attracted in the instant case. Of course, attention was focused more

on the first part of clause (g). It is well settled that whenever there is

conflict between the provision contained in the Treaty and the

corresponding provision in the domestic law the provision in the

Treaty will prevail unless the domestic law provision is more

beneficial to the assessee. This is the specific principle embodied

in Section 90(2) of I.T.Act. In the case of UOI vs. Azadi Bachao

Andolan*, the legal position in this regard has been stated by the

Supreme Court thus:

“A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the Legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections “subject to the provisions” of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income-tax and

* 2003, 263 ITR 723

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ascertainment of total income, to the extent of inconsistency with the terms of the DTAC.

6. Therefore, we have to consider in the first instance whether

irrespective of the wider concept of f.t.s in the domestic law, the

definition in clause (g) of Article XII.3 which has been relied upon by

both sides covers the facts of the present case. It is clear from a

reading of clause (g) that mere rendering of technical services is not

sufficient to attract that clause. The services should be such that

make available to the recipient of services technical knowledge,

skills, know-how, etc. possessed or deployed by the provider of

services. The expert knowledge, skills etc. behind the service

should be imparted to the other contracting party. The essence of

clause (g) is what is compendiously referred to as transfer of

technical know-how. A provision similar to clause (g) has been

interpreted by this Authority in a recent case of Intertek Services

India (P) Ltd. (307 ITR 418) (AAR)

“Rendering of service and making use of service go together. They are two sides of the same coin. But clause (c) of article 13(4)* does not stop at that. It carves out a qualification thereto by employing the words “which make available technical experience, skill, know-how or processes”. Rendering technical or consultancy service is followed by a relative pronoun “which” and it has the effect of qualifying the services. That means, the technical or consultancy service rendered should be of such a nature that “makes available” to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-

* of DTAA between India and U.K

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how in future on his own without the aid of the service provider. By making available the technical skills or know-how, the recipient of the service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. In other words, to fit into the terminology “make available”, the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and a lot of technical knowledge and experience of the service provider would have gone into it. But that is not enough to fall within the description of services which make available the technical knowledge, etc The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the provider. Taking some examples, the training given to a commercial aircraft pilot or training the staff in particular skills such as software development would fall within the ambit of the said expression in clause (c). Supposing, a prescription and advice is given by the doctor after examining the patient and going through the clinical reports. The service rendered by the doctor cannot be said to have made available to the patient, the knowledge and expertise possessed by the doctor. On the other hand, if the same doctor teaches or trains students on the aspects of diagnosis or techniques of surgery, that will amount to making available the technical knowledge and experience of the doctor. “

6.1. The Authority also referred to the MOU appended to the

India-US DTAA which explains the scope of the expression ‘make

available’ in the context of technical services in the following words:

“Generally speaking, technology will be considered ‘made available’ when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph (4)(b).”

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6.2. Viewed from the above angle we do not think that the

applicant has made available to ONGC any technical knowledge,

experience, skill or know-how possessed by it. The services

broadly are:

CONTRACT NO.1

Review of technical & commercial bid document of proposed Mumbai High North Water Injection-cum-Compression Platform (MNW) project.

CONTRACT NO.2

Assisting in review of various detailed design/engineering documents and cost optimization during detailed engineering phase of MNW project.

CONTRACT NO.3

Review the existing design philosophy, study adequacy of existing facilities, conduct study of optimum requirement of additional compression and other facilities.

CONTRACT NO.4

Undertaking (i) Package 2 (Pre award activities including bid package preparation for Process Platform) of Mumbai High South Redevelopment Scheme. (MSW project) (ii) Package 4 (review of bid package of 5 well platforms) and (iii) Monitoring, vetting & incorporation of Brown-field bid package work (to be carried out by Indian Consultant JBTI) of Mumbai High South Redevelopment Scheme.

CONTRACT NO.6

Review the documents prepared by Hyundai Heavy Industries (HHI) for design and procurement stage of MHS Process Platform Project (MHS Project).

6.3. By undertaking such services, the applicant no doubt

furnished to ONGC valuable information or inputs of technical nature

in order to proceed with the work relating to the two projects. The

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reports/recommendations furnished by the applicant undoubtedly

have a technical content which in turn helped ONGC in many ways.

ONGC derived benefit from the use of end-product, namely,

reports/recommendations provided by the applicant. From that it

does not follow that technical knowledge of the applicant and the

inputs deployed by the applicant for preparing those reports are

acquired or applied by the applicant. It cannot be said that the

recipient of the service, namely, ONGC will get equipped with the

knowledge and expertise of the service provider and be able to

make use of it in future, independent of the service provider. It is

also relevant to notice that reports are project/contract-specific and

can hardly be of any use to the applicant once the particular contract

comes to an end. The Revenue’s representative has argued that

the ‘make available’ criterion is satisfied in the instant case for the

reason that the review and report would help or assist ONGC to

make use of the information while interacting with the bidders and

preparing tender documents in so far as the Contract no.(1) is

concerned. For the reasons stated supra we cannot accept this

argument which proceeds on a misinterpretation of the phrase

‘make available’. It is not a case where any technology has been

made available to ONGC. Though ONGC has benefited by the

advisory services rendered by the applicant. A failed attempt was

also made by the Departmental Representative to invoke the

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second link by contending that the work done by the applicant

amounts to development of technical plan. It is contended that the

expression ‘technical plan or design’ ought not to be construed in a

narrow sense. But it includes the technical data and specifications

contained in the report and in respect of Contracts (2), (3) and (5),

the work involved modification of designs prepared by third parties.

The technical plan or design was transferred to the ONGC after

making value additions and imposed from a technical angle, it is

contended. However widely the expression ‘technical plan or

design’ is understood, we are unable to hold that in the instant

case, any technical plan or design was evolved by the applicant and

transferred to ONGC.

6.4. Assuming that the applicant has furnished certain designs in

modification of the designs prepared by the third party or the ONGC,

the essence of the transaction is not development and transfer of a

technical design or plan but consists of rendering services which

would technically help the other contracting party, namely, ONGC.

In this context, the counsel for the applicant has drawn our attention

to clause (v) of the Agreement relating to the ownership and

confidentiality clauses contained in clauses (v) and (vi) of the

Agreement. The applicant submits that the ownership of all the

documents remains with ONGC and that the applicant shall ensure

confidential handling of all matters pertaining to plans, policies and

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other information relating to the project and that the consultants

shall not prepare articles or photographs relating to the services

and/or the project or facilities or installations. Reliance has been

placed on the decision of ITAT Bangalore Bench in the case of ITO

vs. De Beers India Minerals (P) Ltd*. In that case the question

arose whether the respondent company was liable to deduct tax at

source on the payments made to a foreign company for conducting

air-borne geo-physical survey and providing report for locating the

potentials parts for the exploration of diamonds. The learned

members of the Tribunal observed thus:

“ ‘Fugro’ has surveyed, collected and processed the data on behalf of De Beers. There is no doubt that ‘Fugro’ performed the services using substantial knowledge and expertise but such technical experience, skill or knowledge has not been made available to ‘De Beers’.”

The Tribunal also held that the payments to ‘Fugro’ cannot be

considered to be payments for technical, plan and design much

less, for the development and transfer of them. ‘Fugro’ is engaged

in providing services relating to collection and processing of data

which always belonged to ‘De Beers’. The purpose of agreement

was for provision of services and not for supply or transfer of

technical plan or design. It was observed that “the reports and

maps are only an additional mode of report of data and cannot be

construed as technical plan or design”. It was also held that the

* 2008, 113 TTJ 101

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ownership of information and data would always with the respondent

company and there was no transfer of property of any technical plan

or design. The line of approach of ITAT commends to us as a

correct approach. The development and transfer of technical

plan/design is involved only in Contract no.(5) and that is the

admitted case of the applicant.

6.5. In the course of arguments, there was a passing reference to

clause (c) of Art.12.3 according to which “the supply of scientific,

technical or commercial knowledge or information constitutes

royalty”. Though clause (c) is apparently couched in wide terms, it

is a moot point whether the information/data furnished by the

applicant falls within the scope of this clause. However, the

corresponding provision in the Income-tax Act is differently worded

and going by such definition. The work undertaken by the applicant

cannot possibly be brought within the sweep of that definition.

Clause (ii) to Explanation 2 of section 9(1)(vi) speaks of “imparting

of any information concerning the technical, industrial, commercial

or scientific knowledge, experience or skill”. It is only imparting of

such information that constitutes royalty under the domestic law and

in view of the fact that there is no such ‘imparting’ of any information

concerning technical know-how. The Revenue refrained from

invoking this clause or the corresponding provision in the Treaty.

We need not therefore deal with this aspect any further.

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7. Now, we come to the second question which centers around

the permanent establishment. At the outset, we may note the

undisputed fact that the applicant did not carry on its business

activities in India from any fixed place. There was no place of

management, branch, office or workshop. Therefore, there was no

PE within the meaning of para 1 or 2 of art.(v). Hence, the only

question debated before us turns on the applicability of para 3 of

Art.V which is a deeming provision. Clause (c) of Art.V.3 deals with

what is popularly known as ‘Service PE’. It reads thus :

“3. An enterprise shall be deemed to have a PE in one of the contracting states and to carry on business through that PE if (a) ……………… (b) ……………… (c) it furnishes services, including managerial services

and those mentioned in sub-paragraph (3)(h) to (k) of Article 12 but not those services in respect of which payments or credits that are royalties as defined in Article 12 are made, within one of the Contracting States through employees or other personnel, but only if those services are furnished within that State :

(i) for a period or periods aggregating to more than

90 days within any 12-month period;

7.1 We are not concerned with sub-clause (ii). Clause (c)

excludes from the purview of PE the services that give rise to

royalties under Art.XII (other than those mentioned in sub-

paragraphs (h) to (k)). Hence, Contract No.5 under which the

payments received by the applicant were in the nature of royalties

cannot be taken into account for the purpose of counting the number

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of days or for any other purpose under clause (c). It is the

contention of the applicant that each contract should be viewed

separately in order to judge the existence of deemed PE under

clause (c) of art. XII.3. In any case, it is submitted that Contracts 1 &

2 which relate to MNW project cannot be clubbed with Contracts 3,

4, & 6 which relate to MHS/MSP project. It is only in respect of

Contract No.6 that the applicant concedes that there was PE within

the meaning of clause (c) of para 3 in as much as the personnel of

the applicant were present in India in connection with that contract

for more than 90 days. In regard to remaining contracts, it is

submitted that the employees of the applicant stayed in India for a

duration far less than 90 days. The learned representative of the

Revenue contends otherwise and submits that for the purpose of

calculating the number of days specified in clause (c), all the

Contracts i.e. 1, 2, 3,4 and 6 should be seen together.

7.2 Before proceeding further, we may mention that in a recent

ruling given in the case of the applicant in AAR No.747 of 2007, this

Authority has taken the view while interpreting art.XII.3 of the Treaty

that each agreement therein should be separately considered. But,

that was in the context of a different provision with different

language. Art.XII.4 transposes royalty income into business income

in the circumstances stated therein. Art.XII.4 speaks of a situation

where a person beneficially entitled to royalties carries on business

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in the other contracting state (in which the royalties arise) through a

PE situated therein and the services are effectively connected with

such PE. While interpreting this provision and considering the

expression “effectively connected”, this Authority held that the

services falling within the scope of each agreement shall be

effectively connected to PE which was a fixed place therein and it is

not enough that the services in one of the agreements only was

connected with the PE. The inter-connection between the royalty

generating services in each of the agreements and the PE was

stressed. We would like to clarify that the ratio of the said ruling

cannot be made applicable to the present case where a different

provision and a different issue concerning the existence of PE calls

for consideration.

7.3. In order to see whether clause (c) of Art.V.3 applies, the

question to be asked and answered is whether the foreign

enterprise furnished services in India to the other contracting party

i.e. ONGC for an aggregate period of more than 90 days in a span

of 12 months. The expression ‘furnishing of services’ should

legitimately include doing activities or operations which are integral

or contributory to the provision of services. In fact, there is no

dispute on this point. The point of controversy, as already noted, is

whether the word ‘services’ should be confined to a single contract

where there is more than one with the same party and the number

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of days specified in sub-clause (i) of clause (c) should be counted

Contract-wise. On the facts of the present case, we do not find any

warrant to understand the expression ‘services’ in such a truncated

manner. Firstly, various contracts involving rendering of services in

India were with one party, namely, ONGC. Secondly, the contracts

related to redevelopment of Bombay High South and North off-shore

Oil Fields aimed at stepping up the recovery of oil and gas. The

activities in connection with the contracts were to be carried out in

and around Mumbai. Moreover, broadly, the nature of work and

services are of the same pattern. Thus, from geographical and

commercial point of view, the services cannot be dissociated from

each other for the purposes of Art.V.3(c). It is reasonable to take

the view that the duration of the totality of services furnished under

various contracts between the same parties during the 12 month

period has to be taken into account. If so, the yardstick of 91 days

stands satisfied.

7.4. Now, we will get into some details to identify the particular

contracts which give rise to the deemed PE under clause (c) of

Art.V.3. Going by the facts and figures furnished by the applicant,

we find that during the financial year 2002-03 the applicant’s

employees visited India to carry out the activities in connection with

Contracts 2,3 and 4 as follows :

Contract No.2 - 39 days (April, May, November and December, 2002)

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Contract No.3 - 17 days (May to June 2002) Contract No.4 - 42 days in 2002-03 (July to Sept., 2002; and March, 2003; 17 days in 2003-04)

Contracts 2,3 and 4 were effective from April 2002 and July 2002 respectively.

Thus, during 2002-03, the total number of days in which the

services have been furnished in respect of Contracts 2 to 4 comes

to 98 days. We have not taken into account Contract No.6 for the

reason that the said contract was effective from July 2003 and the

visits were only from August 2003 onwards and they continued upto

October 2004. By the effective date of commencement of that

Contract, it is fairly clear that the works entrusted under Contracts

No.2,3 and 4 were completed and there was no occasion for the

applicant’s employees to undertake any activities in Mumbai in the

year 2003-04. Thus, even if Contract No.6 is left out, the services

furnished under Contracts 2 to 4 by virtue of the visits of the

applicant’s employees during the year 2002-03 were for more than

90 days.

7.5. Coming to Contract No.1, it stands on a different footing. The

Contract was effective from 12th March 2001. The applicant’s

personnel came to India in March and October 2001 for 7 days. The

work thereunder was completed and the report submitted by July

2001. By that time, none of the other contracts commenced and it

22

cannot therefore be bracketed with other contracts and be deemed

to be a part of the PE.

7.6. Contract No.5 should be left out of consideration because, as

admitted by the applicant, it is a clear case of royalty-related

services which cannot be brought within the purview of clause (c) of

Art.V(3).

7.7. As regards Contract No.6, there is no dispute about the

existence of PE in view of the number of days the applicant’s

personnel worked in India.

7.8. In the light of the above discussion, a PE must be deemed to

be in existence within the meaning of clause (c) of Art.V.(3) of DTAA

in so far as Contracts 2 to 4 and 6 are concerned and the business

income therefrom will have to be computed in accordance with

Art.VII of DTAA. The receipts under Contract No.1 are not taxable

at all in view of our finding that during the period of currency of

Contract, there was no PE at all.

8. The learned Departmental Representative has endeavored to

bring the case of the applicant within clause (b) of para 1 of Art.VII

which declares inter alia that the profits attributable either to the PE

or other business activities of the same or similar kind as those

carried on through the PE are liable to be taxed. Clause (b) of

Art.VII.1 gives effect to the principle of ‘force of attraction’ in a

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limited way. This argument which is raised as an alternative

argument in case the existence of PE is ruled out, is pressed into

service to attribute to the PE admittedly arising under contract No.6

not only the profits under the said Contract but also the profits

attributable to other Contracts (other than Contract No.5). However

in the view we have taken, there is no need to deal with this

argument which turns on the applicability of clause (b) of Art.VII.1.

9. There remains the contention of the applicant that the

royalty income arising from Contract No.5 can be subjected to

tax only to the extent of income attributable to the operations in

India and the principle of apportionment has to be applied.

This plea which was not originally raised in the application has

been advanced on the strength of the decision of the Supreme

Court in Ishikiwajima-Harima Heavy Industries Ltd. vs. DITT

* in

the rulings given in AAR Nos.747 and 748 of 2007. We have

adverted to the same argument and elaborately discussed the

ratio and implications of the judgment in Ishikiwajima case and

held that if part of the activities and services were rendered in

India, the test of territorial nexus is satisfied and the income

deemed to arise under section 9(1)(vi) of the IT Act under a

single indivisible contract cannot be apportioned in the manner

* (2007), 288 ITR 408 (SC)

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suggested by the applicant. Having regard to the facts relating

to Contract No.5, the rulings of this Authority in AAR 747 and

748 would apply with equal force. As noticed earlier, the

contract “essentially involved the development and transfer of

technical plan and design to ONGC for MHS re-development

scheme”. It is the specific case of the applicant that in order to

execute this contract, its employees were present in India for

22 days in the year 2002-03 for on-the-spot study, reviewing

the documents and providing clarifications. The transfer of

plan/design indisputably took place in India. Though the bulk

of the work connected with preparation of plan/design and

study report was done from Australia, there is sufficient

territorial nexus with India and the profits derived from this

contract are liable to be taxed under Section 5(2) read with

section 9(1)(vi) of the IT Act on gross basis at 15%. It is not

permissible to split up such royalty income by allocating part of

it to the work done in Australia.

10. In the result, the questions are answered as follows:-

Question Nos.1 to 4

(a) The answer is in the affirmative. The amounts

received by the applicant under Contract Nos. 1,2,3

and 4 are not in the nature of royalties;

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(b) At the time when Contract No.1 was entered into and

implemented, the applicant did not have a PE in

India. However, as regards the other three Contracts

(no. 2, 3 & 4) as well as Contract No.6, PE must be

deemed to exist in view of para 3(c) of Art.V of DTAA.

(c) Receipts under Contracts 2,3 and 4 are liable to be

taxed as business income under the Income-tax Act

but only to the extent attributable to PE and in

accordance with Art.VII.

Question No. 5

(a) The amount received under Contract No.5 is royalty

income.

(b) The existence or otherwise of PE is irrelevant

especially in view of the fact that the applicant has

not invoked para 4 of Art.XII.

(c) Answer is in the affirmative. The applicant is liable to

be charged on royalty income on gross basis at the

rate of 15%.

Question No. 6

All the answers are in the affirmative. That means the

receipts are not in the nature of royalties, the applicant has a

PE in India in respect of Contract No.6 and thirdly only so

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much of receipts as are attributable to the PE are taxable in

India as business profits.

Sd/- Sd/- Sd/- (A. Sinha) (P.V. Reddi) (Rao Ranvijay Singh) Member Chairman Member

F.No. AAR/748/2007 Dated …………..

This copy is certified to be a true copy of the Ruling and is sent to:

1.The applicant 2. The Director of Income-tax (International Taxation)-II, Delhi.

(Batsala Jha Yadav) Addl. Commissioner of Income-tax,AAR

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