Facts of the Case

The present appeals were filed by the Revenue challenging the orders of the Income Tax Appellate Tribunal (ITAT) for Assessment Years 2008-09 and 2009-10. The core issue revolved around whether the respondent assessee, Bellsea Ltd., had constituted a Permanent Establishment (PE) in India under Article 5(2)(g) of the India-Cyprus Double Taxation Avoidance Agreement (DTAA).

The assessee had entered into a contract for installation activities in India. The Revenue contended that the duration of the project exceeded twelve months if preparatory activities undertaken prior to the contract date were included.

 

Issues Involved

  1. Whether preparatory activities conducted prior to the execution of the contract can be considered for determining the threshold period under Article 5(2)(g) of the India-Cyprus DTAA.
  2. Whether the duration of the assessee’s activities in India exceeded twelve months, thereby constituting a Permanent Establishment (PE).
  3. Whether the findings of the ITAT were perverse in excluding pre-contract activities for PE determination.

 

Petitioner’s Arguments (Revenue)

  • The ITAT erred in concluding that the threshold period of twelve months was not exceeded.
  • Activities of the assessee allegedly commenced in September 2007, prior to the formal contract date.
  • The assessee failed to disclose details of employees’ presence in India before the contract, thereby avoiding application of Article 5(2)(g).
  • Preparatory and preliminary activities should be included while computing the duration for determining PE.

 

Respondent’s Arguments (Assessee – Bellsea Ltd.)

  • Activities prior to the contract were merely preparatory and auxiliary in nature, undertaken for tendering purposes.
  • No installation or project-related activity had commenced before the contract date.
  • The actual execution of the project began only after 4th January 2008.
  • The total duration of project-related activities did not exceed twelve months; hence, no PE was constituted in India.

Court’s Findings / Order

  • The Delhi High Court upheld the ITAT’s findings and dismissed the appeals filed by the Revenue.
  • It was held that preparatory activities such as site visits, surveys, and tender-related work cannot be treated as commencement of project activities.
  • The Court affirmed that the relevant period for determining PE begins only when actual business operations at the project site commence.
  • The Revenue failed to provide material evidence proving that the project exceeded the twelve-month threshold.
  • Consequently, no Permanent Establishment was constituted, and the income of the assessee was not taxable in India under Article 7 of the DTAA.

Important Clarifications

  • Preparatory or auxiliary activities conducted before contract award are excluded from PE duration calculation.
  • The threshold period of 12 months under Article 5(2)(g) is strictly activity-based and must relate to actual project execution.
  • The burden of proof lies on the Revenue to establish that the threshold duration has been exceeded.
  • Reliance was placed on the precedent in National Petroleum Construction Company vs Director of Income Tax (International Taxation), 2016 SCC OnLine Del 571, clarifying that PE commences only when on-site business activities begin.

Sections  Involved

  • Article 5(2)(g) – India-Cyprus DTAA (Permanent Establishment)
  • Article 7 – Business Profits under DTAA
  • Principles relating to Permanent Establishment under international taxation

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/MMH15112022ITA902019_185628.pdf

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