HORIZONTAL DRILLING INTERNATIONAL S.A. Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE applicant, Horizontal Drilling International S. A., is a company incorporated in France. An extract from the Trade Register of the Commercial Court of Pontoise describes the company's business activity as comprising : "The undertaking and performance of public works contracts, more particularly drilling works of all kinds as well as laying underground cable pipes and pipelines ; manufacture and sale of drilling equipment, incorporation and acquisition of companies, holding, investment in marketable securities and any legal and financial arrangements." The bye -laws of the company in Article 2 describe the company's corporate purpose as under : "The company's purpose both in France and in all countries, is the undertaking and performance of public works contracts more particularly drilling works of all sorts as well as the laying of pipes, cables, and underground pipelines, making available equipment and personnel concerning the said works, the manufacture of drilling equipment, training of personnel to use the said equipment and in general to carry out all commercial, industrial, financial, movable property or real property transactions whatsoever, that may be necessary or useful for carrying out and developing the company's business."

(2.) THE applicant was awarded a contract by the Gas Authority of India Ltd. (GAIL for short), for installation of gas pipelines crossing under Yamuna river with optic fibre cable using horizontal drilling technique near Agra for a lump sum consideration of US $ 9,60,000. The contract is dated October 25, 1996, but was effective from October 15, 1996, and the work thereunder was to be completed by January 14, 1997. The works commenced with the import of the drilling rig on January 20, 1997, and its installation was completed on February 14, 1997. On the installation of the rig, 10 per cent, of the contracted amount had to be paid to the applicant. According to the completion certificate of May 8, 1997, produced by the applicant as clarified by a subsequent letter dated August 13, 1997, drilling started on February 6, 1997, and the work under the contract was completed on March 4, 1997. It is seen that the applicant had given a sub -contract to Larsen and Toubro Limited (L and T) on October 28, 1996, in respect of the works to be executed under the contract and paid the said firm a sum of US $ 2,10,000. Broadly speaking, while the applicant assumed full responsibility for the horizontal drilling activities, Larsen and Toubro was to be responsible for all local support activities, pipelines works and the design, engineering, procurement and installation of the optical fibre cable as per specifications.

(3.) THE applicant has filed this application under Section 245Q(1) of the Income -tax Act, 1961 ("the Act"), seeking an advance ruling on the following question : "Whether the applicant is liable for tax under the Income -tax Act, 1961, for the assessment year 1997 -98 on the contract proceeds receivable from Gas Authority of India Ltd. (GAIL) under the contract agreement dated October 25, 1996, in the absence of any permanent establishment in India, in view of Articles 5 and 7 of the Double Taxation Avoidance Agreement between India and France -