Director of Income Tax-ii (International Taxation) New Delhi & Anr. Vs. M/s Samsung Heavy Industries Co. Ltd. - (Supreme Court) (22 Jul 2020)

Profits of the foreign enterprise are taxable only where the said enterprise carries on its core business through a permanent establishment

MANU/SC/0534/2020

Direct Taxation

Present appeal by the Department revisits the question as to the taxability of income attributable to a “permanent establishment” set up in a fixed place in India, arising from the ‘Agreement for avoidance of double taxation of income and the prevention of fiscal evasion’ with the Republic of Korea (“DTAA”). The Oil and Natural Gas Company ("ONGC") awarded a "turnkey" contract to a consortium comprising of the Respondent/Assessee, i.e. Samsung Heavy Industries Co. Ltd. (a Company incorporated in South Korea), and Larsen & Toubro Limited, being a contract for carrying out the "Work", of surveys, design, engineering, procurement, fabrication, installation and modification at existing facilities, and start-up and commissioning of entire facilities covered under the 'Vasai East Development Project' ("Project").

The Assessee set up a Project Office in Mumbai, India, which, as per the Assessee, was to act as "a communication channel" between the Assessee and ONGC in respect of the Project. With regard to Assessment Year 2007-2008, the Assessee filed a Return of Income showing nil profit.

A show-cause notice was issued to the Assessee by the Income Tax authorities requiring it to show cause as to why the Return of Income had been filed only at nil, which was replied to in detail by the Assessee. Being dissatisfied with the reply, a draft Assessment Order was then passed by the Assistant Director of Income Tax International Transactions at Dehradun ("Assessing Officer"). This Draft Order went into the terms of the agreement in great detail, and concluded that the Project in question is a single indivisible "turnkey" project, whereby ONGC was to take over a project that is completed only in India. Resultantly, profits arising from the successful commissioning of the Project would also arise only in India. The Draft Order then went on to attribute 25% of the revenues allegedly earned outside India as being the income of the Assessee exigible to tax.

The High Court held that, the question as to whether the Project Office opened at Mumbai cannot be said to be a "permanent establishment" within the meaning of Article 5 of the DTAA would be of no consequence. The High Court then held that, there was no finding that 25% of the gross revenue of the Assessee outside India was attributable to the business carried out by the Project Office of the Assessee. According to the High Court, neither the Assessing Officer nor the ITAT made any effort to bring on record any evidence to justify this figure. The High Court set aside the judgment and order under appeal as well as the assessment order insofar as the same relates to imposition of tax liability on the 25% of the receipt upon the Appellant.

When it comes to “fixed place” permanent establishments under double taxation avoidance treaties, the condition precedent for applicability of Article 5(1) of the double taxation treaty and the ascertainment of a “permanent establishment” is that it should be an establishment “through which the business of an enterprise” is wholly or partly carried on. Further, the profits of the foreign enterprise are taxable only where the said enterprise carries on its core business through a permanent establishment. The maintenance of a fixed place of business which is of a preparatory or auxiliary character in the trade or business of the enterprise would not be considered to be a permanent establishment under Article 5. Also, it is only so much of the profits of the enterprise that may be taxed in the other State as is attributable to that permanent establishment.

A reading of the Board Resolution would show that, the Project Office was established to co-ordinate and execute “delivery documents in connection with construction of offshore platform modification of existing facilities for ONGC”. Unfortunately, the ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that, the Mumbai office was for coordination and execution of the project itself. The finding, therefore, that the Mumbai office was not a mere liaison office, but was involved in the core activity of execution of the project itself is therefore clearly perverse. Equally, when it was pointed out that, the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating that as accounts are in the hands of the Assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment. This is another perverse finding which is set aside. Equally the finding that, the onus is on the Assessee and not on the Tax Authorities to first show that the project office at Mumbai is a permanent establishment is again in the teeth of judgment in Assistant Director of Income Tax v. E-Funds IT Solution Inc.

Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the Assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC. The appeal against the impugned High Court judgment is therefore dismissed.

Tags : PROJECT OFFICE   TAXABILITY   INCOME  

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