Judgment

S.H. KAPADIA, J.- Leave granted.

2. These civil appeals filed by the Department concern computation of the profits of the Indian permanent establishment (for short “PE”) of the Korean company, M/s. Hyundai Heavy Industries Co. Ltd. (for short “HHI”). The assessee is a non-resident foreign company incorporated in South Korea.

On 12-3-1985 it had entered into an agreement with Oil and Natural Gas Company (for short "ONGC") for designing, fabrication, hook-up and commissioning of South Bassein Field Central Complex Facilities in Bombay High. In short, the contract was in two parts, one was for fabrication of platform and the other was installation and commissioning of the said platform in South Bassein Field. In these civil appeals we are concerned with Assessment Years 1987-1988 and 1988-1989. The assessee is incorporated under the laws of Republic of Korea. Its registered office is in Korea. As regards Assessment Year 1988-1989, the assessee filed its return of income on 3-8-1988. The return indicated “nil” income.

3. In response to notices under Section 143(2) of the Income Tax Act, 1961 (for short “the Act”), the assessee stated that it did not have a PE in India and, therefore, it was not assessable to tax in India; that its Indian operations consisting of installation and commissioning of the platform commenced in the taxable territory of India on 1-11-1986 and got completed on 12-4-1987 and, therefore, the duration of the project was less than nine months; that it was entitled to exemption under Article 7 of the Convention for Avoidance of Double Taxation (for short “CADT”); that in the alternative it was liable to be assessed on the basis of the accounts annexed to the returns; that the accounts were based on the completed contract method in its worldwide accounts; that the accounts of its PE can be accepted on the completed contract method basis; that it was maintaining income and expenditure account of its PE in India; that the above contract was divisible into two types of operations - one being fabrication in Korea and the other consisting of installation in India and, therefore, any income arising from the activity of fabrication in Korea was not assessable to tax in India and to that extent the revenues receivable under the above contract in respect of the activity of fabrication should be excluded from the profit and loss account together with the expenditure relating to the activity of fabrication.

4. It was further contended that the assessee had included the revenues relating to installation (Indian activity) in the profit and loss account and the expenditure relating to that activity was debited on the matching principle basis. It was further contended that the profit and loss account consisted of two parts - the Korean and the Indian part; that the Korean part recorded the entire revenue/income received in Korea as also the expenditure incurred in b Korea relating to the Indian project and debited to the Korean book of accounts.

5. All the above contentions were rejected by the AO. It was held that the duration of the project consisting of installation and commissioning extended beyond nine months, that the project constituted a PE of the assessee in India c in terms of Article 5(3) of CADT; that in any event the office of HHI in Bombay constituted a PE under Article 5(2)(c) and, therefore, the claim of the assessee for exemption under Article 7 of the CADT was not maintainable. Therefore, the profits attributable to the PE were liable to be taxed in India in accordance with Article 7 of the CADT. The AO also rejected the completed contract method as well as the accounts submitted by d the assessee on the ground that the assessee had failed to produce the relevant books of accounts in respect of the profit and loss account; that they had refused to produce books of accounts maintained in Korea; and that they had failed to produce the accounting details pertaining to the activities/operations carried out b