Facts of the Case

  • The Respondent, Bellsea Ltd., was engaged in installation-related activities in India.
  • The Revenue challenged ITAT orders for AY 2008-09 and 2009-10.
  • The Revenue argued that activities began before the contract date (September 2007).
  • The contract effectively commenced on 4 January 2008, and the project was completed by September 2008.
  • The total duration of actual project activity did not exceed 12 months.

Issues Involved

  1. Whether pre-contract preparatory activities can be included for calculating the duration of PE.
  2. Whether the assessee constituted a Permanent Establishment (PE) in India under Article 5(2)(g).
  3. Whether income earned from the project is taxable in India under Article 7.

Petitioner’s Arguments (Revenue)

  • The ITAT erred in ignoring that activities started prior to contract execution.
  • Preparatory work and employee presence before contract date should be counted.
  • The duration exceeded 12 months when such activities are considered.
  • The assessee failed to disclose complete details of employees’ presence in India.

Respondent’s Arguments (Assessee)

  • Activities prior to contract were purely preparatory and related to tendering.
  • No installation or project execution began before 4 January 2008.
  • Preparatory activities cannot be treated as PE-triggering activities.
  • Total project duration remained below 12 months; hence no PE arises.

Court Findings / Order

  • The Court upheld ITAT’s findings and dismissed the appeals.
  • It held that:
    • Preparatory activities (such as surveys, bidding, and data collection) do not constitute project execution.
    • PE under Article 5(2)(g) arises only when actual project activities commence at the site.
    • The relevant period starts from 4 January 2008, not earlier.
    • The project duration did not exceed 12 months, hence no PE exists.
  • Consequently:
    • No income was taxable in India under Article 7.
    • No substantial question of law arose.

Important Clarification

  • Preparatory or auxiliary activities prior to contract execution cannot be counted for determining PE duration.
  • PE duration begins only when substantive business operations at the project site commence.
  • Burden of proof lies on Revenue to establish that the threshold period has been exceeded.
  • Activities unrelated to actual execution at the site (e.g., travel, surveys, bidding) are excluded from PE computation.

Sections  Involved

  • Article 5(2)(g) – India-Cyprus Double Taxation Avoidance Agreement (DTAA) (Permanent Establishment – Installation/Construction Projects)
  • Article 7 – Business Profits under DTAA
  • Concept of Permanent Establishment (PE)

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

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.