Commissioner Of Income Tax (It& Tp), Kolkata v. M/S. Van Oord Atlanta B.v

OD-3 ITA/121/2019 IN THE HIGH COURT AT CALCUTTASPECIAL JURISDICTION (INCOME TAX)ORIGINAL SIDE COMMISSIONER OF INCOME TAX (IT& TP), KOLKATA -Versus- M/S. VAN OORD ATLANTA B.V. BEFORE :THE HON’BLE JUSTICE T.S. SIVAGNANAMAndTHE HON’BLE JUSTICE HIRANMAY BHATTACHARYYADate : 14[th] March, 2023 Appearance :Mr. Smarajit Roychowdhury, Adv....for the appellant Mr. J. P. Khaitan, Sr. Adv.Ms. Swapna Das, Adv.Ms. Sanjukta Gupta, Adv....for the respondent. The Court : This appeal filed by the revenue underSection 260A of the Income Tax Act, 1961 (the ‘Act’ forbrevity) is directed against the order dated 20[th] November,2018 passed by the Income Tax Appellate Tribunal, “C” Bench,Kolkata (the Tribunal) in ITA No.1063/Kol/2009 for theassessment year 2003-04. The appeal was admitted on 2[nd] September, 2019 on thefollowing substantial question of law: (i)Whether on the facts and in the circumstancesof the case the learned Tribunal erred inholding that there was no PermanentEstablishment (PE) of the assessee in Indiaand the recovery of bad debts written off inearlier years was not taxable in India ? We have heard Mr. Smarajit Roychowdhruy, learnedstanding counsel for the appellant/revenue and Mr. J. P.Khaitan, learned senior counsel assisted by Ms. Swapna Das andMs. Sanjukta Gupta, learned Advocates for the respondent/assessee. The above referred substantial question of law wasconsidered by this Court in ITA/254/2008 and by judgment dated7[th] February, 2023 the appeal filed by the revenue wasdismissed. The operative portion of the judgement reads asfollows: “ * * * * * * * * *The only question which arises for consideration in this appeal is whether the projectoffice of the respondent/assessee which functionedfor a period of about 153 days could be construed asa `permanent establishment’ and whether therespondent/assessee could be subjected to proceedingsunder the Income Tax Act, 1961. The AssessingOfficer was of the view that the selling of thedredger which was brought from Netherlands to thewaterways outside West Bengal did not necessarilymean the closure of the project office in India. Further, the approval of the Reserve Bank of India ismandatory for closure of the project office and thebank accounts reveal that the project office wasoperating till 31[st] March, 2000. The said order wasaffirmed by the Commissioner of Income Tax (Appeals).Challenging the same the assessee filed appeal beforethe Tribunal. The nature of transaction which was the subjectmatter of appeal would be covered by the agreementfor avoidance for double taxation and prevention ofphysical evasion with Netherlands. Article 5 of thesaid agreement deals with `permanent establishment’.Paragraph 2 of Article 5 defines the term `permanentestablishment. Paragraph 3 of Article 5 states thata complete site or construction, installation orassembly project constitutes a permanentestablishment only where such site or projectcontinues for a period of more than six months.Paragraph 4 of Article 5 commences with a nonobstante clause stating that notwithstanding thepreceding provisions of Article 5 the term `permanentestablishment’ shall be deemed not to include andthere are six clauses in paragraph 4 of which clause(e) would be relevant for case on hand, which statesthat maintenance of fixed place of business solelyfor the purpose of advertising, for the supply ofinformation, for scientific research or for otheractivities which had preparatory or auxiliarycharacter for the enterprise would not fall withinthe definition of a permanent establishment. Takingnote of Article 5 of the agreement with Netherlands,the learned Tribunal examined the facts of the case and found that the activities of the project officeof the respondent/assessee in West Bengal wasauxiliary in character. The project office was inoperation from 26[th] February, 1999 to 29[th] July, 1999,that is, for a period of 153 days only, which theTribunal found, was much less than the period of sixmonths, as stipulated in Article 5(3). and found that the activities of the project officeof the respondent/assessee in West Bengal wasauxiliary in character. The project office was inoperation from 26[th] February, 1999 to 29[th] July, 1999,that is, for a period of 153 days only, which theTribunal found, was much less than the period of sixmonths, as stipulated in Article 5(3). Therefore, the learned Tribunal held that therewas no valid reason for treating the project officeof the assessee as a permanent establishment. Theview taken by the learned Tribunal cannot be faulted,more so, because of the recent decision of theHon’ble Supreme Court in the case of Director ofIncome Tax-II (International Taxation) New Delhi &Anr. vs. Samsung Heavy Industries Company Limited,(2020) 7 SCC 347 = (2020) 426 ITR 1. In the saidcase, the question which arose for considerationbefore the Hon’ble Supreme Court as to the taxabilityof the income attributable to a permanentestablishment set u p in a fixed place in Indiaarising from the agreement for avoidance for doubletaxation of income and prevention of physical evasionwith the republic of Korea. The language in the saidagreement is in pari meteria with the agreement withNetherlands. The Hon’ble Supreme Court after referring tovarious decisions in paragraph 26 held as follows :-“26. A reading of the aforesaid judgmentsmakes it clear that when it comes to “fixed place”permanent establishments under double taxationavoidance treaties, the condition precedent forapplicability of Article 5(1) of the double taxation treaty and the ascertainment of a “permanentestablishment” is that it should be an establishment“through which the business of an enterprise” iswholly or partly carried on. Further, the profits ofthe foreign enterprise are taxable only where thesaid enterprise carries on its core business througha permanent establishment. What is equally clear isthat the maintenance of a fixed place of businesswhich is of a preparatory or auxiliary character inthe trade or business of the enterprise would not beconsidered to be a permanent establishment underArticle 5. Also, it is only so much of the profits ofthe enterprise that may be taxed in the other Stateas is attributable to that permanent establishment.”As held by the Hon’ble Supreme Court in theabove quoted paragraph, the condition precedent forapplicability of Article 5 of the double taxationtreaty and ascertainment of permanent establishmentis that it should be an establishment through whichbusiness of an enterprise is wholly or party carriedon. Further, the profits of the foreign enterpriseare taxable only where the said enterprise carries onits core business through a permanent establishment.Further, it was held that maintenance of a fixedplace of business which is of a preparatory orauxiliary character in the trade or business of theenterprise would not be considered to be a permanentestablishment under Article 5 of the said treaty.The facts of the said case were also more or lessidentical to the case on hand and ultimately theHon’ble Supreme Court held that the Mumbai office ofthe said assessee had only two employees and neither of whom was qualified to perform in core activity ofthe assessee and on facts, the Hon’ble Supreme Courtfound that the project office of the said assesseewould fall within Article 5(4(e) of the agreementinasmuch as the office is solely and auxiliaryoffice, meant to act as a liaison office between theassessee and ONGC. In the case on hand, the factualposition has been analyzed by the learned Tribunaland has recorded a finding that the office in WestBengal was only auxiliary in character. In otherwords, the activities carried out from the saidoffice in West Bengal was auxiliary in character.Thus, the view taken by the learned Tribunal findssupport from the decision of the Hon’ble SupremeCourt in Samsung Heavy Industries Limited (supra). For the above reasons, the appeal filed bythe revenue is dismissed and the substantial questionof law is answered against the revenue.” For the above reasons, the appeal filed bythe revenue is dismissed and the substantial questionof law is answered against the revenue.” In the light of the above decision, the substantialquestion of law framed for consideration is answered againstthe revenue and the appeal (ITA/121/2019) stands dismissed. (T.S. SIVAGNANAM, J.) (HIRANMAY BHATTACHARYYA, J.)