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Supreme Court of India
Director Of Income Tax -Ii New … vs M/S Samsung Heavy Industries Co. … on 22 July, 2020Author: Rohinton Fali Nariman
Bench: Rohinton Fali Nariman, Navin Sinha, Hon’Ble Ms. Banerjee
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 12183 OF 2016
DIRECTOR OF INCOME TAX-II
(INTERNATIONAL TAXATION)
NEW DELHI & ANR. …Appellants
Versus
M/S SAMSUNG HEAVY INDUSTRIES
CO. LTD. …Respondent
JUDGMENT
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”).
Signature Not Verified
Digitally signed by
SUSHMA KUMARI
BAJAJ
Date: 2020.07.22
17:28:33 IST
Reason:
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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
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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 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:
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“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
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within India. Basing itself on data obtained from the database “Capital
Line”, the Panel picked up four similar projects executed by companies
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 the Assessee’s
objections, the Draft Order was made final by 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 the Project
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 the Project Office and a bank account in India,
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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 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
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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 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,
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Mumbai project office of the assessee has to play a vital role in the
execution of entire contract and if assessee 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?
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(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
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
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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, 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
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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 as Asst. 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
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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 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
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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 the tax
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 argued that 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
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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
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.
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16. Article 7(1) and 7(2) of the DTAA, which are also of some significance,
read as 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.
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
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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
decide whether a PE stood constituted one has to undertake what
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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 xxx xxx
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
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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
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.
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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
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
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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
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
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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 Avoidance
21
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 place permanent 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
22
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
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 application submitted by the Assessee to
the RBI dated 24.04.2006 for opening a project office, reads as follows:
“Letter dated 24th April 2006
23
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.
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…”
24
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 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/-
25
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 existing
facilities for ONGC”. Unfortunately, the ITAT relied upon only the first
paragraph of the Board Resolution, and then jumped to the conclusion
26
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
27
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.
…………………..………………J.
(R. F. Nariman)
……………..……………………J.
(Navin Sinha)
……………..……………………J.
(B.R. Gavai)
New Delhi.
22nd July, 2020
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