Commissioner Of Income Tax, Meerut And Anr v. M/S. Hyundai Heavy Industries Co. Ltd

A COMMISSIONER . OF INCOME TAX, MEER.UT ,· ' AND ANR. · MIS. HYUNDAI HEAVY INDUSTRIES CO. LID ... MAY 18,2007 B [SR KAPADIA AND B. SUDERSHAN REDDY, JJ.l · Income Tax Act, 1961-Sections 9, 44BB, 143 (2) & 144-Convetition for Avoidance of Double Taxation-Article 7-Contract entered into by Indian c company with assesseeforeign company for designing, fabrication, ·installation, and commis.sion' of an oil platform inlndia-Assessee declaring nil income-Notice issued by Re\ienu~Assessee contending that the contract is divisible into Indian operatio~ and foreign opera#om; · that income from Indian operations is not liable to tax as it did not have Permanent Establishment in India; and that the inco,,,e froni foreign operations. is not D liable to tax·.as. it is earned outside JndiO-:.Asses#ng Officer rejecting the content.ions and·made butjudgment assusment ·holding that the. contract iS not divisible and treated entire receipts periaining to Indian. operations and 2% of receipt.pertaining to foreign operati(ins. as income-Comm~sioner Appeals treatM· I% of receipts in r~pect of foreign. operations and· 10% of .. E .receipts relating to Indian· operations as income-c-Tribuna/ allowing the appeal of the assessee. and· held t~t the · contra~t is divisible. ~1Ul that the recei/Jts pertaining to foreign operations are n~t taxable; and that 10"/6 of . · receipts from Jndian-Operati~ns is taxab./e as inco~e-:-lfigh Court<f.ismissing the appeal of the Revenue· summarily-<.;orf\ectness of-Held on facts, Permane"1 Establishment cam(! into exisi~nce iii India ·after .designing and F. fabrication outside India and handing over thef4bricat~dplat/'orm to Iiidian company oulSide· India-Hence, profits .arising from ·actiVities :ouiside· India . are not /i'able to tax and)O% of the receipts !from Indian operation$ are liable to toX under the Acf. Respoildent-assessee, 'a non"'.resid~nt Jorelgn company entered lnto a G contracfWith an Iridian eompany ror designing,.rabricatio~s, illstall8tion and commisSion or an oii platform in India. The assessee filed lpcoine Tax ltenirnl .. for relevant iissesslilent years d~claring nil income: In response to notices issued by Revenue under. Section 143(2) ortbe Income. Tax Act, 1961, .the assessee replied contending that it did not have a Permanent EstabliShment (PE) in India and hence not assessable to tax in India under the Act and under A Article 7 of the Convention for Avoidance of Double Taxation (CADT); that the duration of the Indian operations of installation and commissioning was less than nine months; that the contract is divisible and hence the income ar aild fabrication activities carried outside India is not assessable to tax in India. Assessing Officer rejected the contentions and the accounts produced by the assessee and made best judgment assessments for the relevant assessment years on receipt basis. The Assessing Officer held that the Project extended beyond nine months; that the assessee had a PE in India; that the contract was not divisible; that since designing and fabrications of the platform had an application in India, a part of the income arising from the foreign operations was also taxable in India. The Assessing Officer treated the entire [c ]receipts pertaining to Indian operations and 2% of the receipts in respect of the foreign operations as income liable to tax. Commissioner of Income Tax (Appeals) dismissed the appeals preferred by the assessee and directed the Assessing Officer to treat 1 % of the receipts D in re5pect of the foreign operations and 10% of the receipts relating.to Indian operations as income liable to tax under the Act. ਮਈ 18, 2007 18 मई, 2007 288 ! 289 290 290 Income Tax Appellate Tribunal allowed the appeals preferred by the assessee holding that the contract was divisible; that the profits arising out of activities done outside India are not taxable in India; and treated 10% of E the receipts as income from Indian operations liable to income tax. The appeals filed by the Revenue before High Court under Section 260A of the Act was summarily dismissed. In appeals to this Court, the Revenue contended that the contract entered F into by the respondent-assessee with the Indian company was a composite contract; and that the activities done outside India are interliked with the activities Indian activities and hence the profits accruing to the assessee from activities performed outside India are also chargeable to tax in India under Section 9 (1) of the Income Tax Act, 1961. The respondent-assessee contended that the activities of designing and fabrication took place in the foreign State and the fabricated platforms were handed over to the agents of the Indian company outside India and hence it is not liable to income tax under the Act and under Article 7 CADT. Partly allowing the appeals, the Court 290 SUPREME COURT REPORTS [2007) 7 S.C.R. A ·HELD: 1.1. As per Article 7 of the Convention for Avoidance of Double Taxation (CADT), the profits earned by the respondent-non-resident foreign company assessee on the supplies of fabricated platforms outsides India cannot be made attributable to its Permanent Establishment (PE) in India since PE came into existence only after the fabricated platform was delivered outside · India to the agents of the Indian company. Therefore the profits on such B supplies of fabricated platforms cannot be said to be attributable to the. PE. [Para 11] [298-D, E, FJ 1.2. In terms of Article 7 CADT, the profits to be taxed in the source country were not the real profits but hypothetical profits which the PE would c [have earned. ][If ][it was wholly independent ][of ][the foreign company. Therefore, ]even if the supplies were necessary for the purpose of installation activity of the PE in India and were an integral part, still no party of the profits on such supplies can be attributed to the independant PE unless it is established by the Revenue that the supplies were not at Arm's length price. No such taxability can arise as the sales were directly billed to the India company. No D such taxablility can also arise as there was no allegation made by the Revenue that the price at which billing was done for the supplies included any element for services rendered by the PE. Hence, the profitS that accrued to the assessee outside India were not taxable in India. [Para 11) [298-F-H; 299-A] 1.3. The PE is set up at the installation stage while the entire Turkey E project, including the sale of equipment is finalized before the installation stage. There was no allegations made by the Revenue that the PE came into existence even before the sale took place outside India; Similarly, there was no allegation made by the Department that the price at which the Indian · Company was billed, invoiced by the assessee for supply of fabricated platforms F [included ][any ][element ][for ][services ][rendered ][by ][the ][PE. ][Not ][all ][the ][profits ][of ]the assessee company from its business connection in India (PE) would be taxable in India, but only so much of profits having economic nexus with PE in India would be taxable in India. Accordingly, the profits attributable to operations outside India was not taxable in view of Article 7 CADT. [Para 12] (299-C, D, E, F] 1.4. Under Instruction No. 1767 issued by CBDT, in cases where ·the sales take place outside, only 10% of the gross receipts in respect of the activities ofinstallation, commissioning etc. performed in India will be taxable. In view ofthe stand taken by the assessee that is income from Indian operations be computed under Section 44BB of the Act or under Instruction No. 1767 issued by CBDT, CIT (A) was right in computing the taxable profits at 10% of the gross receipts in respect of the activities of installation, commissioning A etc. performed in India. (Para 13) (300-D, E] CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2734 of2007. From the Final Judgment and Order dated 30.03.2006 of the High Court of Judicature of Uttranchal at Nainital in Income Tax Appeal No. 474 of2001. B WITH C.A. No. 2735/2007. G.E. Vahanvati, S.G., Dr. RG. Padia, Sr. Adv., Vikram Gulati, Laxmi Iyengar, c Hrishikesh Barauh, B.V. Balaram Das for the Appellants. Soli J. Sorabjee, Sr. Adv., Ajay Vohra, O.P. Sapra, Vinay Yaish, Preteesh Kaput and Sandeep S. Karhail Kavita Jha for the Respondent. The Judgment of the Court was delivered by KAPADIA, J. l. 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, Mis .Hyundai Heavy Industries Co. Ltd. (for short, 'HHi'). E Assesses is a non-resident foreign company incorporated in South Korea. On 12.3.85 it had entered into an agreement with oil and Natural Gas Company (for short, 'ONGC') for designing, fabrication, hook-up and commissioning of South Basin 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 Basses in Field. In these civil appeals we are concerned with the assessment years 1987-88 and 1988-89. The assesses is incorporated under the laws of Republic of Korea. Its registered office is in Korea. As regards assessment year 1988-89, assesses filed its return of income on 3.8.1988. The return indicated 'nil' income. In response to notices under Section 143(2) of the Income-tax Act, G 1961 (for short 'the Act'), the assesses 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 l.l l.86 and got completed on 12.4.87 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 H [2007)7 S;C.R. 292 294 A [Double Taxation (for short, 'CADT'); that ][in ][the alternative it ][was ][liable ][to. ]be assessed on the basis of· the accounts annexed to the retilrn:s; that the . accounts were based on the Completed Contract Method in its worldwide accounts; that the accounts of its PE can be accepted in the Completed Contract Method basis ; that it was maintaining income· and expenditure account of its PE in India; that the abo.ve contract was divisible irito two B types of operations-one being fabrication in Korea and the other consisting of installation in India nnd , therefore, any income arising from the activity of fabrication in Korea was not assessable to tax 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 . c [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. It was further contended that the assesses had included the revenues relating to installation (Indian Act~vity} in the p~ofit 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 : D 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 . Korea relating to the Indian Project and debited to the Korean book of accounts'. All the above contentions were rejected by the A.0; it was held that the duration of the Project cons