DIRECTOR OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI & ANR. versus  M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD.
[2020] 6 S.C.R. 486, Supreme Court of India, 2020
Outcome: Dismissed (Dismissed)
Segment: Ratio
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DIRECTOR OF INCOME TAX-II (INTERNATIONAL
TAXATION) NEW DELHI & ANR.
v.
M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD.
(Civil Appeal No. 12183 of 2016)
JULY 22, 2020
[R. F. NARIMAN, NAVIN SINHA AND B. R. GAVAI, JJ.]
Tax/Taxation – India-Korea Agreement for avoidance of
double taxation of income and the prevention of fiscal evasion
(DTAA) – Arts.5, 7 – Project Office whether a Permanent
Establishment (PE) in India – Taxability of income – ONGC awarded
turnkey contract to a consortium comprising of respondent-assessee,
incorporated in South Korea for carrying out work w.r.t the Vasai
East Development Project – Assessee set up a Project Office in
Mumbai – For the relevant assessment year, assessee’s return of
income showed nil profit alleging loss w.r.t activities carried out in
India – Assessment Order attributed 25% of the revenues allegedly
earned outside India as the income of assessee exigible to tax –
ITAT though set aside this finding, but remitted the matter to ascertain
profits attributable to the Mumbai project office – Appeal filed by
assessee, allowed by High Court – Held: For applicability of
Art.5(1), DTAA to fixed place PEs under double taxation avoidance
treaties, it should be an establishment “through which the business
of an enterprise” is wholly or partly carried on – Profits of the
foreign enterprise are taxable only where it carries on its core
business through a PE – It is only so much of its profits that
may be
taxed in the other State as is attributable to that PE – In the present
case, no PE was set up within the meaning of Art.5(1), 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 – Said Office would fall within Art.5(4)(e), DTAA, as it
was solely an auxiliary office, meant to act as a liaison office
between the assessee and ONGC.
Tax/Taxation – Double taxation avoidance treaty – Project
Office whether a Permanent Establishment (PE) in India – Onus to
prove – Held: Finding of ITAT thatas accounts are in the hands of
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assessee, the mere mode of maintaining accounts alone cannot
determine the character of permanent establishment, is perverse
and hence set aside – Equally, the finding that the onus is on assessee
and not on the tax authorities to first show that the project office at
Mumbai is a PE is in the teeth of the judgment in Asst. Director of
Income Tax, New Delhi v. E-Funds IT Solution Inc. reported as [2017]
10 SCR 157.
Dismissing the appeal, the Court
Held: 1.1 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.
[Para 23]
1.2 A reading of the Board Resolution would show that the
Project Office was established to coordinate and execute “delivery
documents in
connection with construction of offshore platform
modification of existing facilities for ONGC”. 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 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
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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 the judgment in 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. Therefore, 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, the Mumbai
Project Office, on the facts of the present case, would fall within
Article 5(4)(e) of the DTAA, inasmuch as the office is solely an
auxiliary office, meant to act as a liaison office between the
Assessee and ONGC. [Paras 27, 28]
Commissioner of Income Tax and Another v. Hyundai
Heavy Industries Co. Ltd., (2007) 7 SCC 422 : [2007]
7 SCR 288 ; M/s DIT (International Taxation), Mumbai
v. M/s Morgan Stanley & Co. Inc. (2007) 7 SCC 1 :
[2007] 8 SCR 52 ; Asst. Director of Income Tax, New
Delhi v. E-Funds IT Solution Inc. (2018) 13 SCC 294 :
[2017] 10 SCR 157 ;  Ishikawajma-Harima Heavy
Industries Ltd. v. Director of Income Tax,  Mumbai,
(2007) 3 SCC 481: [2007] 1 SCR 112 –
relied on.
Case Law Reference
[2007] 7 SCR 288
relied on
Para 5
[2007] 8 SCR 52
relied on
Para 13
[2017] 10 SCR 157
relied on
Para 13
[2007] 1 SCR 112
relied on
Para 20
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 12183
of 2016.
From the Judgment and Order dated 27.12.2013 of the High Court
of at Uttarakhand at Nainital in ITA No. 01 of 2012.
N. Venkataraman, ASG, S. A. Haseeb, Shekhar Vyas, Mrs. Anil
Katiyar, Advs. for the Appellants.
S. Ganesh, Sr. Adv., Bhargava V. Desai, Ms. Aditi Diwan, Advs.
for the Respondent.
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The Judgment of the Court was delivered by
R. F. NARIMAN, J.
1. This 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”).
2. On 28.02.2006, the Oil and Natural Gas Company (“ONGC”)
awarded a “turnkey” contract to a consortium comprising of
theRespondent/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”, inter alia,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”).
3. On 24.05.2006, 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.
Pre-engineering, survey, engineering, procurement and fabrication
activities which took place abroad, all took place in the year 2006.
Commencing from November, 2007, these platforms were then brought
outside Mumbai to be installed at the Vasai East Development Project.
The Project was to be completed by 26.07.2009.
4. With regard to Assessment Year 2007-2008, the Assessee
filed
a Return of Income on 21.08.2007 showing nil profit, as a loss of INR
23.5 lacs had allegedly been incurred in relation to the activities carried
out by it in India.
5. On 29.08.2008, 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 Incomehad been filed only at nil, which was replied to in detail
by the Assessee on 02.02.2009. Being dissatisfied with the reply, a draft
Assessment Order was then passed on 31.12.2009 (“Draft Order”) 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
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from the successful commissioning of the Project would also arise only
in India. This Court’s judgment in Commissioner of Income Tax and
Another v. Hyundai Heavy Industries Co. Ltd., (2007) 7 SCC 422,
was distinguished by the learned Assessing Officer stating that, in that
case, the project was in two separate parts, unlike the Project in the
present case. Referring then to the Mumbai Project Office, the Assessing
Officer held:
“It is evident from the above that the work relating to fabrication
and procurement of material was very much a part of the contract
for execution of work assigned by ONGC. The work was wholly
executed by PE in India and it would be absurd to suggest that PE
in India was not associated with the designing or fabrication of
materials.”
6. Having so held, the Draft Order then went on to attribute 25%
of the revenues allegedly earned outside India (which totalled INR
113,43,78,960) as being the income of the Assessee exigible to tax, which
came to INR 28,35,94,740. The Dispute Resolution Panel, by its order
dated 30.9.2010, after considering objections to the Draft Order by the
Assessee, then held:
“The Assessing Officer has given a specific finding that the
assessee had a project office in India, when it was given the
contract. The assessee has not contested the existence of the
Project office in India but it has only contested that the project
was used merely for preparatory and auxiliary
activities.This
submission of the assessee does not hold merit because if it wanted
to perform only preparatory and auxiliary activities then it could
have opened a liaison office. The opening of a project office clearly
shows that the assessee was doing something more than what
would have been done through liaison office. In any case nature
and purport of activities undertaken in India determine the existence
of PE. Considering the nature of activities undertaken in India it is
clear that PE existed in the case of assessee.”
7. It then confirmed the finding contained in the Draft Order that
the agreement was a “turnkey” project which could not be split up, as a
result of which the entire profit earned from the Project would be earned
within India. Basing itself on data obtained from the database “Capital
Line”,the Panel picked up four similar projects executed by companies
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outside India, and found the average profit margin to be 24.7%, which,
according to the Panel, would therefore justify the figure of 25% arrived
at in the Draft Order. The Panel having dismissed theAssessee’s
objections, the Draft Order was made finalby the Assessing Officer on
25.10.2010.The Assessee then filed an appeal against the Assessment
Order before the Income Tax Appellate Tribunal (“ITAT”).
8. The decision of the ITAT on 30.08.2011 went into the
establishment of the Project Office at Mumbai in much more detail than
had been gone into either in the Draft Order or the Dispute Resolution
Panel’s decision. The ITAT referred to and relied upon an application
dated 24.04.2006, which had been submitted by the Assessee to the
Reserve Bank of India (“RBI”) for opening the Project Office, which
in turn referred to a Board Resolution of the Company dated 03.04.2006
for opening theProject Office in India. It further referred to
correspondence showing that one Mr. Sangsoon Park, the General
Manager of the Assessee Company,had been appointed as a
representative of the Company to sign documents for opening of
theProject Office and a bank account in India, and to look after operations
of the Project Office. After setting out the Board Resolution dated
03.04.2006 in detail, the ITAT concluded:
“70. It can be seen from all the above documents that the scope
of Mumbai Project Office has neither been restricted by the
assessee company itself or it has also not been
restricted by RBI
in any terms. This is relevant for the reason that in Hyundai Heavy
Industries case, it is a matter of record that project office opened
by the said assessee, according to permission given by the RBI,
was to work only as a liaison office and was not authorised to
carry on any business activity. This is the vital difference between
the two cases namely the case of the assessee and Hyundai Heavy
Industries case.
71. There is a force in the contention of the ld. DR that the words
“That the company hereby open one project office in Mumbai,
India for coordination and execution of Vasai East Development
Project for Oil and Natural Gas Corporation (“ONGC”), India”
used by the assessee company in its resolution of Board of
Directors meeting dated 3rd April, 2006 makes it amply clear that
project office was opened for coordination and execution of
impugned project. In absence of any restriction put by the assessee
DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.
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in the application moved by it to RBI, in the resolutions passed by
the assessee company for the opening of the project office at
Mumbai and the permission given by RBI, it cannot be said that
Mumbai project office was not a fixed place of business of the
assessee in India to carry out wholly or partly the impugned
contract in India within the meaning of Article 5.1 of DTAA.
These documents make it clear that all the activities to be carried
out in respect of impugned contract will be routed through the
project office only. Pre-surveys were to be first conducted which
will determine the nature of the designing on the basis of which
pre-engineering and pre-designing was to be done with respect to
the entire project. The next main condition of the contract was
that, as a condition precedent, the assessee had to obtain insurance
with respect to the entire project which has been in fact obtained
by the assessee in India for which the assessee has received
major payment during the year under consideration itself. The
said policy has not been shown to be restricted only with regard
to activities of the assessee outside India.”
9. The ITAT thus confirmed the decisions of the Assessing Officer
and the Dispute Resolution Panel that the contract was indivisible. It
then went on to deal with the argument on behalf of the Assessee that
the Project Office was only an auxiliary office, and did not involve itself
in any core
activity of business, as accounts that were produced would
show that there was no expenditure which related to execution of the
project. This argument was disposed of as follows:
“The way the terms of the contract are described and the way
the work on contract has to proceed clearly describe that in all
the activities of contract there will be the role of Mumbai project
office as the same has to work as a channel between assessee
company and ONGC. If PE of the assessee exists within the
meaning of Article 5.1 and 5.2 and assessee claims that despite
there being PE in terms of clause 5.1 and 5.2, it falls under
exclusionary Article 5.4 then onus is on assessee to prove that
activities of its PE are in the nature of preparatory or auxiliary in
nature. No material has been brought on record by the assessee
to prove the said fact. The arguments put forward in this respect
are only by inference such as the accounts maintained by the
assessee in India through which it is the argument of the ld. Counsel
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of the assessee that it does not contain any expenditure relating to
execution of the contract. But such argument is not acceptable as
the maintenance of account is in the hands of assessee and mere
the mode of maintaining the accounts alone cannot determine the
character of PE as the role of PE only will be relevant to determine
what kind of activities it has carried on. As pointed out earlier the
way the contract has to proceed, Mumbai project office of the
assessee has to play a vital role in the execution of entire contract
and ifassessee wants to contend otherwise, the onus is on assessee
and not on the revenue.”
10. Having so held, the ITAT found that there was a lack of material
to ascertain as to what extent activities of the business were carried on
by the Assessee through the Mumbai Project Office, and therefore it
was considered just and proper to set aside the attribution of 25% of
gross revenue earned outside India – which was attributed as income
earned from the Mumbai project office – the matter being sent back to
the Assessing Officer to ascertain profits attributable to the Mumbai
project office after examining the necessary facts.An appeal from the
ITAT was filed in the High Court at Uttarakhand by the Assessee. Five
substantial questions of law were framed by the High Court in the appeal
as follows:
“(i) Whether, on the facts and in the circumstances of the case,
the Tribunal erred in law in holding that the appellant had a fixed
place
‘Permanent Establishment’ (PE) in India under Article 5(1)/
(2) of the Double Taxation Avoidance Agreement between India
and Korea (‘the Treaty’), in the form of project office in Mumbai?
(ii) Whether, on the facts and circumstances of the case and in
law, the finding of the Tribunal that the project office was opened
for co-ordination and execution of the VED project and all activities
to be carried out in relation to the said project were routed through
the project office only, is perverse inasmuch as the same is based
on selective and/or incomplete reference to the material on record,
irrelevant considerations and incorrect appreciation of the role of
the project office?
(iii) Without prejudice, whether, on the facts and the circumstances
of the case and in law, the Tribunal erred in not holding that even
if the appellant had fixed place PE in India, no income on account
DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.
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of offshore activities, i.e. the operations carried out outside India
(viz., designing, engineering, material procurement, fabrication,
transportation activities) was attributable to the said PE, instead,
in setting the issue to the file of the assessing officer?
(iv) Without prejudice, whether, on the facts and circumstances
of the case and in law, the Tribunal erred in not holding that even
if the appellant had fixed place PE in India, no income could be
brought to tax in India since the appellant had incurred overall
losses in respect of the VED project?
(v) Whether, on the facts and circumstances of the case, the
contract was divisible/distinguishable pertaining to the activities
associated with designing, fabrication and installation of platforms
and, if so, whether the activities pertaining to designing and
fabrication took place in any part of India?”
11. By the impugned judgment dated 27.12.2013, the High Court
found that the order of the Assessing Officer had been confirmed by the
ITAT, and concerned itself only with the following question:
“In other words, can it be said that the Agreement permitted the
India Taxing Authority to arbitrarily fix a part of the revenue to
the permanent establishment of the appellant in India?”
12. 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. This being the position, the appeal of the Assessee was allowed
in the following terms:
“10. That being the situation we allow the appeal, 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 in the circumstances
mentioned above, and observe that the questions of law formulated
by us, while admitting the appeal, have not, in fact, arisen on the
facts and circumstances of the case, but the real question was,
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whether the tax liability could be fastened without establishing
that the same is attributable to the tax identity or permanent
establishment of the enterprise situate in India and the same, we
think, is answered in the negative and in favour of the appellant.”
13. Shri N. Venkataraman, learned Additional Solicitor General
appearing for the Appellants, has read to us in copious detail the Draft
Order, the Dispute Resolution Panel Order, the ITAT judgment and the
impugned High Court judgment. He argued that the facts of the present
case would show, as was correctly held by all the authorities and the
Tribunal, that the Project, being a “turnkey” project, was one and
indivisible, and the entire revenue earned would therefore be taxable in
India. He said that the judgment in Hyundai Heavy Industries Co.
Ltd. (supra) was correctly distinguished by the authorities, as that was
a case where a turnkey project was in fact bifurcated into two parts,
namely, a separate agreement as to design, manufacture, erection etc.
culminating in another separate agreement relating to installation.On the
facts of that case it was found that the permanent establishment was set
up only at the stage of installation, i.e.long after the revenue had been
earned from manufacture, design etc., and it was for that reason that it
could not be brought to tax.He also sought to distinguish the judgment in
M/s DIT (International Taxation), Mumbai v. M/s Morgan Stanley
& Co. Inc., (2007) 7
SCC 1, and relied upon certain passages in a
recent judgment reported asAsst. Director of Income Tax, New Delhi
v. E-Funds IT Solution Inc. (2018) 13 SCC 294. He argued that the
High Court judgment was cryptic and did not address any of the real
issues that arose on the facts of this case. He further argued that it was
completely incorrect to state that there was no finding that 25% of the
gross revenue of the Assessee was attributable to the business carried
out by the Project Office of the Assessee. On the contrary, he referred
to all the documents that ITAT had looked at to show that the Project
Office at Mumbai was not a mere liaison office, but was vitally connected
with the core business of the Assessee and that therefore, in the absence
of figures given by the Assessee, a “best-judgment” assessment had to
be made of profits attributable to such permanent establishment. That
best-judgment assessment, though made in the Draft Order and the
Dispute Resolution Panel Order, has been set aside by ITAT, resulting in
a remand to the Assessing Officer. There was nothing wrong, therefore,
with the ITAT judgment, which should not have been interfered with by
DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.
M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD. [R. F. NARIMAN, J.]
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the High Court without answering a single substantial question of law
raised before it.
14. Shri S. Ganesh, learned Senior Advocate appearing on behalf
of the Respondent/Assessee, relied heavily upon Articles 5 and 7 of the
DTAA, and argued that the Project Office in Mumbai consisted of only
two employees, neither of whom had any technical qualification
whatsoever. Secondly, the accounts that were produced would show
that the Project Office had not incurred any expenditure on execution of
the project. He read to us in copious detail the documents relied upon by
the ITAT, and argued that the ITAT had come to a perverse finding that
the Project Office had been set up not merely as a liaison office but as
an office through which core activities of the Assessee were carried
out. He further argued, that in any case, the burden of establishing that
a foreign Assessee has a permanent establishment in India is on thetax
authorities, which burden had not been discharged on the facts of the
present case. He then relied heavily on Hyundai Heavy Industries
Co. Ltd. (supra) to state that the facts in the present case were similar
to the facts in that case, which would therefore apply on all fours to this
case. He then arguedthat even assuming that there is a permanent
establishment in India through which the core business activity of the
Assessee was carried out, no taxable income can be attributed to it, as
audited accounts that
were produced showed that the project did not
yield any profit, but in fact resulted in only losses.
15. Having heard learned counsel for both parties, it is important
to first set out the relevant provisions of the DTAA. The relevant
provisions of Article 5 of the aforesaid treaty reads as follows:
“ARTICLE 5 - Permanent establishment –
1. For the purposes of this Convention, the term “permanent
establishment” means a fixed place of business through which
the business of an enterprise is wholly or partly carried on.
2. The term “permanent establishment” shall include especially—
(a) a place of management; (b) a branch; (c) an office; (d) a
factory; (e) a workshop; and (f) a mine, an oil or gas well, a
quarry or any other place of extraction of natural resources.
3. The term “permanent establishment” likewise encompasses a
building site, a construction, assembly or installation project or
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supervisory activities in connection therewith, but only where such
site, project or activities continue for a period of more than nine
months.
4. Notwithstanding the preceding provisions of this article, the
term “permanent establishment” shall be deemed not to include—
(a) the use of facilities solely for the purpose of storage, display
or delivery of goods or merchandise belonging to the enterprise;
(b) the maintenance of a stock of goods or merchandise belonging
to the enterprise solely for the purpose of storage, display or
delivery;
(c) the maintenance of a stock of goods or merchandise belonging
to the enterprise solely for the purpose of processing by another
enterprise;
(d) the maintenance of a fixed place of business solely for the
purpose of purchasing goods or merchandise or for collecting
information, for the enterprise;
(e) the maintenance of a fixed place of business solely for the
purpose of advertising, the supply of information, scientific
research or any other activity, if it has a preparatory or auxiliary
character in the trade or business of the enterprise;
(f) the maintenance of a fixed place if business solely for any
combination of activities mentioned in sub-paragraphs (a) to (e)
of this paragraph, provided that the overall activity of the fixed
place of business resulting from this combination is of a
preparatory or auxiliary character.
16. Article 7(1) and 7(2) of the DTAA, which are also of some
significance, readas follows:
“ARTICLE 7 - Business profits –
1. The profits of an enterprise of a Contracting State shall be
taxable only in that State unless the enterprise carries on business
in the other Contracting State through a permanent establishment
situated therein. If the enterprise carries on business as aforesaid
the profits of the enterprise may be taxed in the other State but
only so much of them as is attributable to that permanent
establishment.
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2. Subject to the provisions of paragraph (3), where an enterprise
of a Contracting State carries on business in the other Contracting
State through a permanent establishment situated therein, there
shall in each Contracting State be attributed to that permanent
establishment the profits which it might be expected to make if it
were a distinct and separate enterprise engaged in the same or
similar activities under the same or similar conditions and dealing
wholly independently with the enterprise of which it is a permanent
establishment.”
17. Some of the judgments of this Court have dealt with similar
double taxation avoidance treaty provisions and therefore need to be
mentioned at this juncture. In Morgan Stanley & Co. Inc. (supra), the
Double Taxation Avoidance Agreement (1990) between India and the
United States of America was construed. The facts in that case made it
clear that the Morgan Stanley Group is one of the world’s largest
diversifying financial services companies. Morgan Stanley and Company,
which is a part of the Morgan Stanley Group, is an investment bank
engaged in the business of providing financial advisory services, corporate
lending and securities underwriting.One of the group companies of
Morgan Stanley Group, namely, Morgan Stanley Advantages Services
Pvt. Ltd. (“MSAS”) entered into an agreement for providing certain
support services to Morgan Stanley and Company. MSAS, being an
Indian Company,
was set up to support the main office functions in equity
and fixed income research, account reconciliation and providing IT enabled
services such as back office operation, data processing and support centre
to Morgan Stanley and Company. Tackling the question as to whether a
“fixed place” permanent establishment existed on the facts of that case
under Article 5 of the India-US treaty – which is similar to Article 5 of
the present DTAA – this Court held:
“10. In our view, the second requirement of Article 5(1) of DTAA
is not satisfied as regards back office functions. We have examined
the terms of the Agreement along with the advance ruling
application made by MSCo inviting AAR to give its ruling. It is
clear from reading of the above Agreement/application that MSAS
in India would be engaged in supporting the front office functions
of MSCo in fixed income and equity research and in providing IT
enabled services such as data processing support centre and
technical services as also reconciliation of accounts. In order to
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decide whether a PE stood constituted one has to undertake what
is called as a functional and factual analysis of each of the activities
to be undertaken by an establishment. It is from that point of
view, we are in agreement with the ruling of AAR that in the
present case Article 5(1) is not applicable as the said MSAS would
be performing in India only back office operations. Therefore to
the extent of the above back office functions the second part of
Article 5(1) is not attracted.
xxx xxxxxx
14. There is one more aspect which needs to be discussed, namely,
exclusion of PE under Article 5(3). Under Article 5(3)(e) activities
which are preparatory or auxiliary in character which are carried
out at a fixed place of business will not constitute a PE. Article
5(3) commences with a non obstante clause. It states that
notwithstanding what is stated in Article 5(1) or under Article
5(2) the term PE shall not include maintenance of a fixed place of
business solely for advertisement, scientific research or for
activities which are preparatory or auxiliary in character. In the
present case we are of the view that the abovementioned back
office functions proposed to be performed by MSAS in India falls
under Article 5(3)(e) of DTAA. Therefore, in our view in the
present case MSAS would not constitute a fixed place PE under
Article 5(1) of DTAA as regards its back office operations.”
18. The Court then went on to hold that activities performed by
stewards who were
deployed by the American Company to work in
India as employees of the Indian company were so employed merely to
protect the American companies’ interests in a competitive world, by
ensuring quality and confidentiality of services performed in India. It
was therefore found that so far as stewardship was concerned, this
activity would fall within Article 5(2)(l) of the US-India treaty, and
therefore would be outside the term “permanent establishment” as
defined. On the deputation of certain employees of the American
Company to work as employees of the Indian Company, it was found,
however, that the American Company was rendering services through
its employees to the Indian Company, as a result of which a
“service”permanent establishment would stand established on this count.
19. The judgment in Hyundai Heavy Industries Co. Ltd.(supra)
was heavily relied upon by Shri S. Ganesh and sought to be distinguished
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by Shri N. Venkataraman.The facts in Hyundai Heavy Industries
Co. Ltd. (supra) made it clear that the turnkey contract entered into
between Hyundai Heavy Industries Co. Ltd. and ONGC was divisible
into two parts, and as a result the Court found:
“16. On reading Article 7 of the CADT, it is clear that the said
Article is based on OECD Model Convention. Para (1) of Article
7 states the general rule that business profits of an enterprise of
one contracting State may not be taxed by the other contracting
State unless the enterprise carries on its business in the other
contracting State through its PE. The said Para (1) further lays
down that only so much of the profits (sic as is) attributable to the
PE is taxable. Para (2) of Article 7 further lays down that the
attributable profit can be determined by the apportionment of the
total profits of the assessee to its various parts OR on the basis of
an assumption that the PE is a distinct and separate enterprise
having its own profits and distinct from GE.
17. Applying the above test to the facts of the present case, we
find that profits earned by the Korean GE on supplies of fabricated
platforms cannot be made attributable to its Indian PE as the
installation PE came into existence only after the transaction stood
materialised. The installation PE came into existence only on
conclusion of the transaction giving rise to the supplies of the
fabricated platforms. The
installation PE emerged only after the
contract with ONGC stood concluded. It emerged only after the
fabricated platform was delivered in Korea to the agents of ONGC.
Therefore, the profits on such supplies of fabricated platforms
cannot be said to be attributable to the PE.
18. There is one more reason for coming to the aforestated
conclusion. In terms of Para (1) of Article 7, the profits to be
taxed in the source country were not the real profits but
hypothetical profits which the PE would have earned if it was
wholly independent of the GE. Therefore, even if we assume that
the supplies were necessary for the purposes of installation
(activity of the PE in India) and even if we assume that the supplies
were an integral part, still no part of profits on such supplies can
be attributed to the independent PE unless it is established by the
Department that the supplies were not at arm’s length price. No
such taxability can arise in the present case as the sales were
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directly billed to the Indian customer (ONGC). No such taxability
can also arise in the present case as there was no allegation made
by the Department that the price at which billing was done for the
supplies included any element for services rendered by the PE.
19. In the light of our above discussion, we are of the view that
the profits that accrued to the Korean GE for the Korean operations
were not taxable in India.”
20. In Ishikawajma-Harima Heavy Industries Ltd. v. Director
of Income Tax, Mumbai, (2007) 3 SCC 481, this Court went into a
similar double taxation treaty agreement entered into between Japan
and India, stating as follows:
“84. The distinction between the existence of a business connection
and the income accruing or arising out of such business
connection is clear and explicit. In the present case, the permanent
establishment’s non-involvement in this transaction excludes it from
being a part of the cause of the income itself, and thus there is no
business connection.
85. Article 5.3 provides that a person is regarded as having a
permanent establishment if he carries on construction and
installation activities in a contracting State only if the said activities
are carried out for more than six months. Para 6 of the Protocol
to India-Japan Tax Treaty also provides that only income arising
from activities wherein the permanent establishment has been
involved can be said to be attributable to the permanent
establishment. It gives rise to two
questions, firstly, offshore
services are rendered outside India; the permanent establishment
would have no role to play in respect thereto in the earning of the
said income. Secondly, entire services having been rendered
outside India, the income arising therefrom cannot be attributable
to the permanent establishment so as to bring within the charge of
tax.
86. For attracting the taxing statute there has to be some activities
through permanent establishment. If income arises without any
activity of the permanent establishment, even under DTAA the
taxation liability in respect of overseas services would not arise in
India. Section 9 spells out the extent to which the income of non-
resident would be liable to tax in India. Section 9 has a direct
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territorial nexus. Relief under a double taxation treaty having regard
to the provisions contained in Section 90(2) of the Income Tax
Act would arise only in the event a taxable income of the assessee
arises in one contracting State on the basis of accrual of income
in another contracting State on the basis of residence. Thus, if the
appellant had income that accrued in India and is liable to tax
because in its State all residents (sic) it was entitled to relief from
such double taxation payable in terms of Double Taxation Treaty.
However, so far as accrual of income in India is concerned,
taxability must be read in terms of Section 4(2) read with Section
9, whereupon the question of seeking assessment of such income
in India on the basis of Double Taxation Treaty would arise.
87. In cases such as this, where different severable parts of the
composite contract are performed in different places, the principle
of apportionment can be applied, to determine which fiscal
jurisdiction can tax that particular part of the transaction. This
principle helps determine, where the territorial jurisdiction of a
particular State lies, to determine its capacity to tax an event.
Applying it to composite transactions which have some operations
in one territory and some in others, it is essential to determine the
taxability of various operations.
88. Therefore, in our opinion, the concepts of profits of business
connection and permanent
establishment should not be mixed up.
Whereas business connection is relevant for the purpose of
application of Section 9; the concept of permanent establishment
is relevant for assessing the income of a non-resident under
DTAA. There, however, may be a case where there can be
overlapping of income; but we are not concerned with such a
situation. The entire transaction having been completed on the
high seas, the profits on sale did not arise in India, as has been
contended by the appellant. Thus, having been excluded from the
scope of taxation under the Act, the application of the Double
Taxation Treaty would not arise. The Double Taxation Treaty,
however, was taken recourse to by the appellant only by way of
an alternate submission on income from services and not in relation
to the tax of offshore supply of goods.”
21. A recent judgment of this Court, namely, E-Funds IT Solution
Inc. (supra), concerned itself with the India-US Double Taxation
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Avoidance Agreement with similar provisions. Dealing with what was
referred to as a “fixed place”, permanent establishment, this Court held:
“16. The Income Tax Act, in particular Section 90 thereof, does
not speak of the concept of a PE. This is a creation only of the
DTAA. By virtue of Article 7(1) of the DTAA, the business income
of companies which are incorporated in the US will be taxable
only in the US, unless it is found that they were PEs in India, in
which event their business income, to the extent to which it is
attributable to such PEs, would be taxable in India. Article 5 of
the DTAA set out hereinabove provides for three distinct types of
PEs with which we are concerned in the present case: fixed place
of business PE under Articles 5(1) and 5(2)(a) to 5(2)(k); service
PE under Article 5(2)(l) and agency PE under Article 5(4). Specific
and detailed criteria are set out in the aforesaid provisions in order
to fulfil the conditions of these PEs existing in India. The burden
of proving the fact that a foreign assessee has a PE in India and
must, therefore, suffer tax from the business generated from such
PE is initially on the Revenue. With these prefatory remarks, let
us analyse whether the respondents can be brought within any of
the sub-clauses of Article 5.”
22. Dealing with ‘support services’ rendered by an Indian
Company to American Companies, it was held that the outsourcing of
such services to India would not amount to a fixed
placepermanent
establishment under Article 5 of the aforesaid treaty, as follows:
“22. This report would show that no part of the main business
and revenue earning activity of the two American companies is
carried on through a fixed business place in India which has been
put at their disposal. It is clear from the above that the Indian
company only renders support services which enable the assessees
in turn to render services to their clients abroad. This outsourcing
of work to India would not give rise to a fixed place PE and the
High Court judgment is, therefore, correct on this score.”
23. A reading of the aforesaid judgments makes it clear that 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
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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. What is
equally clear is that 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.
24. At this stage, it is important to go into some of the documents
that were relied upon by the ITAT. The applicationsubmitted by the
Assessee to the RBI dated 24.04.2006 for opening a project office, reads
as follows:
“Letter dated 24th April 2006
General Manager
Reserve Bank of India
Regional Office
Mumbai
Dear sir,
Re: M/s Samsung Heavy Industries Co. Ltd. (SHI)
Application for Registration of Project Office
Our aforesaid client (SHI) has entered into contract with M/s Oil
and Natural Gas Corporation Ltd. (ONGC) vide contract number
MR/OW/MM/VED/O3/2005. Under the instructions of our
above-referred client, we have to enclose following documents in
connection with Registration of Project office in India:
1.
Letter dated (…) on the letter head of the company for
the details of the project as Notification FEMA 95/2003-
RB dated
2nd July, 2003 Foreign Exchange Management
(Establishment in India of Branch or Office or other place
of business) (Amendment) Regulations 2003 along with
the copy of letter from ChoHung Bank for opening Bank
account.
2.
Copy of the POA in our favour and in favour of M/s
Hemand Arora and Co., CA.
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3.
Certified copy of the POA in the name of the Mr. S.S.
Park, who has signed the application.
4.
Certified copy of the certificate of registration of the
company in South Korea.
5.
Certified copy of the notarised Board resolution for
opening a Project office in India.
6.
Certified copy of Extract of contract entered into by our
client.
Kindly take the above documents on record. Please take on record
our client’s Project office and register the same. If you require
any clarification, please let us know…”
25. The Board Resolution dated 03.04.2006 referred to in this
letter reads as follows:
“MINUTES OF BOARD OF DIRECTORS’ MEETING OF
SAMSUNG HEAVY INDUSTRIES CO. LTD.
A meeting of the Board of Directors of Samsung Heavy Industries
Co. Ltd. (the “Company”) was duly called and held on the 3rd day
of April 2006 at the office of the Company in Seoul the Republic
of Korea, at which 3 of 3 Directors were present and acting
throughout.
Jing Wan Kim, President and CEO of Samsung Heavy Industries
Co. Ltd. announced that the notice of meeting was duly given to
all Directors and a quorum was present and the meeting was duly
called to order and held.
RESOLVED:
1. That the Company hereby open one project office in
Mumbai, India for coordination and execution of Vasai East
Development Project for Oil and Natural Gas Corporation
Limited (“ONGC”), India.
2. That the Company hereby does make and constitute Mr.
Sangsoon Park Yard General Manager of the Company, as
the
Company’s true and lawful representative with full power
and authority for the purpose of establishing a project office
and coordinating and executing delivery of documents in
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connection with construction of offshore platform
modification of existing facilities for ONGC above.
IN WITNESS WHEREOF, the President and Directors present
at the meeting have hereunto affixed their names and seals on
this 3rd day of April 2006.
Sd/-
Samsung Heavy Industries Co., Ltd.
President and CEO
Jing Wan Kim”
26. Based on the letter given to RBI which contained this
resolution, the RBI approval dated 24.05.2006 reads as follows:
“FEO, Mumbai CAD/080/04.02.2001/05-06
24th May, 2006
M/s Davesh K. Shah and Co.,
Chartered Accountants,
106, Banaji House,
361, Dr. D.N. Road,
Flora Fountain,
Mumbai 400 001.
Dear sirs,
Registration of Project Office – M/s Samsung Heavy Industries
Co. Ltd. (SHI)
Please refer to your letter dated 24th April, 2006 on the captioned
subject. In this connection, we advise having noted a Project Office
in India in terms of provision contained in AP (Dir Series) Circular
No.37 dated 15th November 2003.”
27. A reading of the Board Resolution would show that the Project
Office was established to coordinate and execute”delivery documents
in connection with construction of offshore platform modification of
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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 our judgment in E-Funds IT Solution Inc. (supra).
28. 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, inasmuch as the office is solely an
auxiliary office, meant to act as a liaison office between the Assessee
and ONGC. This being the case, it is not necessary to go into any of the
other questions that have been argued before us.
29. The appeal against the impugned High Court judgment is
therefore dismissed, but for the reasons stated by us.
Divya Pandey
Appeal dismissed.