1. Taxability of income attributable to a permanent establishment under a Double Taxation Avoidance Agreement — Turnkey contract — Establishment of a project office in India. (Para 1 , 2 , 3 )
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2020 Supreme(SC) 451
SUPREME COURT OF INDIA
R. F. Nariman, Navin Sinha, B.R. Gavai, JJ.
DIRECTOR OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI & ANR. – Appellants
Versus
M/S SAMSUNG HEAVY INDUSTRIES CO. LTD. – Respondent
Civil Appeal No. 12183 of 2016
Decided on : 22-07-2020
Advocates Appeared:
For the Appellant :N. Venkataraman, Anil Katiyar Advocates
For the Respondent:S. Ganesh, Bhargava V. Desai, Aditi Diwan, Advocates
For the Appellant :N. Venkataraman, Anil Katiyar Advocates
For the Respondent:S. Ganesh, Bhargava V. Desai, Aditi Diwan, Advocates
IMPORTANT POINT
Income Tax – Profits of foreign enterprise are taxable only where said enterprise carries on its core business through a permanent establishment.
Headnote:
Taxation – Income Tax – Article 5 of Agreement for avoidance of double taxation of income – Taxability of income attributable to a permanent establishment set up in a fixed place in India – When it comes to fixed place permanent establishments under double taxation avoidance treaties, condition precedent for applicability of Article 5(1) of double taxation treaty and ascertainment of a permanent establishment is that it should be an establishment through which business of an enterprise is wholly or partly carried on – Profits of foreign enterprise are taxable only where said enterprise carries on its core business through a permanent establishment – Maintenance of a fixed place of business which is of a preparatory or auxiliary character in trade or business of enterprise would not be considered to be a permanent establishment under Article 5 – It is only so much of profits of enterprise that may be taxed in other State as is attributable to that permanent establishment – In present case, no permanent establishment has been set up within meaning of Article 5(1) of DTAA, as Mumbai Project Office cannot be said to be a fixed place of business through which core business of Assessee was wholly or partly carried on – Mumbai Project Office, on facts of present case, would fall within Article 5(4)(e) of DTAA, inasmuch as office is solely an auxiliary office, meant to act as a liaison office between Assessee and ONGC – Appeal dismissed. (Paras 23, 28 and 29)
Facts of the case:
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).
Findings of Court:
Finding that 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 character of permanent establishment. This is another perverse finding which is set aside.
Result : Appeal dismissed.
Act Referred
Agreement for avoidance of double taxation of income and the prevention of fiscal evasion with the Republic of Korea: Art.5.1, Art.5.2, Art.5.4, Art.5(1), Art.5(2), Art.5(4)(e), Art.7(1), Art.7(2)
Income Tax Act: S.9, S.90(2), S.4(2)
Foreign Exchange Management (Establishment in India of Branch or Office or other place of business) (Amendment) Regulations 2003
Income Tax Act: S.9, S.90(2), S.4(2)
Foreign Exchange Management (Establishment in India of Branch or Office or other place of business) (Amendment) Regulations 2003
Legal Category Hierarchy
Table of Contents
2. Whether a project office constitutes a permanent establishment for core business execution or serves auxiliary liaison functions — Burden of proof for establishing permanent establishment. (Para 5 , 6 , 13 , 14 )
3. The project office lacked technical staff and incurred no execution expenditure; the board resolution limited its scope to coordinating delivery documents, rendering it an auxiliary establishment. (Para 24 , 25 , 27 , 28 )
4. A fixed place of business is not a permanent establishment if solely for preparatory or auxiliary activities; the burden of proving PE existence lies with the Revenue. (Para 23 , 27 , 28 )
5. Appeal dismissed — High Court judgment upheld. (Para 29 )
6. Who bears the burden of proving the existence of a permanent establishment in India for a foreign assessee?
The burden of proving that a foreign assessee has a permanent establishment in India, and must therefore suffer tax from the business generated from such establishment, rests initially with the Revenue. (Para 21 , 27 )
7. When does a fixed place of business not constitute a permanent establishment under a Double Taxation Avoidance Agreement?
A fixed place of business is not considered a permanent establishment if it is maintained solely for the purpose of activities that have a preparatory or auxiliary character in the trade or business of the enterprise. (Para 15 , 23 , 28 )
8. How is the distinction between a permanent establishment and a liaison office determined in the context of core business activities?
The distinction depends on whether the establishment is used to carry on the core business of the enterprise. An office that only coordinates documents and lacks technical staff or execution expenditure is an auxiliary liaison office. (Para 27 , 28 )
JUDGMENT
R. F. Nariman, J.
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 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", 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 Income had 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 from the successful commissioning of the Project would also arise only in India. This Court's judgment in Commissioner of Income Tax and Another vs. 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 assess
