Director Of Income Tax-Ii (International Taxation) New Delhi & Anr v. M/S. Samsung Heavy Industries Co. Ltd

486 SUPREME COURT REPORTS [2020] 6 S.C.R. ADIRECTOR OF INCOME TAX-II (INTERNATIONALTAXATION) NEW DELHI & ANR. M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD. B(Civil Appeal No. 12183 of 2016) JULY 22, 2020 [R. F. NARIMAN, NAVIN SINHA AND B. R. GAVAI, JJ.] Tax/Taxation – India-Korea Agreement for avoidance ofdouble taxation of income and the prevention of fiscal evasionC(DTAA) – Arts.5, 7 – Project Office whether a PermanentEstablishment (PE) in India – Taxability of income – ONGC awardedturnkey contract to a consortium comprising of respondent-assessee,incorporated in South Korea for carrying out work w.r.t the VasaiEast Development Project – Assessee set up a Project Office inDMumbai – For the relevant assessment year, assessee’s return ofincome showed nil profit alleging loss w.r.t activities carried out inIndia – Assessment Order attributed 25% of the revenues allegedlyearned outside India as the income of assessee exigible to tax –ITAT though set aside this finding, but remitted the matter to ascertainprofits attributable to the Mumbai project office – Appeal filed byEassessee, allowed by High Court – Held: For applicability ofArt.5(1), DTAA to fixed place PEs under double taxation avoidancetreaties, it should be an establishment “through which the businessof an enterprise” is wholly or partly carried on – Profits of theforeign enterprise are taxable only where it carries on its coreFbusiness through a PE – It is only so much of its profits that may betaxed in the other State as is attributable to that PE – In the presentcase, no PE was set up within the meaning of Art.5(1), DTAA, as theMumbai Project Office cannot be said to be a fixed place of businessthrough which the core business of the assessee was wholly or partlycarried on – Said Office would fall within Art.5(4)(e), DTAA, as itGwas solely an auxiliary office, meant to act as a liaison officebetween the assessee and ONGC. Tax/Taxation – Double taxation avoidance treaty – ProjectOffice whether a Permanent Establishment (PE) in India – Onus toprove – Held: Finding of ITAT thatas accounts are in the hands ofH assessee, the mere mode of maintaining accounts alone cannotdetermine the character of permanent establishment, is perverseand hence set aside – Equally, the finding that the onus is on assesseeand not on the tax authorities to first show that the project office atMumbai is a PE is in the teeth of the judgment in Asst. Director ofIncome Tax, New Delhi v. E-Funds IT Solution Inc. reported as [2017]10 SCR 157. Dismissing the appeal, the Court Held: 1.1 When it comes to “fixed place” permanentestablishments under double taxation avoidance treaties, thecondition precedent for applicability of Article 5(1) of the doubletaxation treaty and the ascertainment of a “permanentestablishment” is that it should be an establishment “throughwhich the business of an enterprise” is wholly or partly carriedon. Further, the profits of the foreign enterprise are taxable onlywhere the said enterprise carries on its core business through apermanent establishment. The maintenance of a fixed place ofbusiness which is of a preparatory or auxiliary character in thetrade or business of the enterprise would not be considered tobe a permanent establishment under Article 5. Also, it is only somuch of the profits of the enterprise that may be taxed in theother State as is attributable to that permanent establishment.[Para 23] 486 ए, 487 489 1.2 A reading of the Board Resolution would show that theProject Office was established to coordinate and execute “deliverydocuments in connection with construction of offshore platformmodification of existing facilities for ONGC”. The ITAT reliedupon only the first paragraph of the Board Resolution, and thenjumped to the conclusion that the Mumbai office was forcoordination 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 projectitself is clearly perverse. Equally, when it was pointed out thatthe accounts of the Mumbai office showed that no expenditurerelating to the execution of the contract was incurred, the ITATrejected the argument, stating that as accounts are in the handsof the Assessee, the mere mode of maintaining accounts alonecannot determine the character of permanent establishment. This Ais another perverse finding which is set aside. Equally the findingthat the onus is on the Assessee and not on the Tax Authoritiesto first show that the project office at Mumbai is a permanentestablishment is again in the teeth of the judgment in E-FundsIT Solution Inc. Though it was pointed out to the ITAT that therewere only two persons working in the Mumbai office, neither ofBwhom was qualified to perform any core activity of the Assessee,the ITAT chose to ignore the same. Therefore, no permanentestablishment has been set up within the meaning of Article 5(1)of the DTAA, as the Mumbai Project Office cannot be said to bea fixed place of business through which the core business of theCAssessee was wholly or partly carried on. Also, the MumbaiProject Office, on the facts of the present case, would fall withinArticle 5(4)(e) of the DTAA, inasmuch as the office is solely anauxiliary office, meant to act as a liaison office between theAssessee and ONGC. [Paras 27, 28] DCommissioner of Income Tax and Another v. HyundaiHeavy Industries Co. Ltd., (2007) 7 SCC 422 : [2007]7 SCR 288 ; M/s DIT (International Taxation), Mumbaiv. M/s Morgan Stanley & Co. Inc. (2007) 7 SCC 1 :[2007] 8 SCR 52 ; Asst. Director of Income Tax, NewDelhi v. E-Funds IT Solution Inc. (2018) 13 SCC 294 :E[2017] 10 SCR 157 ; Ishikawajma-Harima HeavyIndustries Ltd. v. Director of Income Tax, Mumbai,(2007) 3 SCC 481: [2007] 1 SCR 112 – relied on. GFrom the Judgment and Order dated 27.12.2013 of the High Courtof at Uttarakhand at Nainital in ITA No. 01 of 2012. N. Venkataraman, ASG, S. A. Haseeb, Shekhar Vyas, Mrs. AnilKatiyar, Advs. for the Appellants. S. Ganesh, Sr. Adv., Bhargava V. Desai, Ms. Aditi Diwan, Advs.Hfor the Respondent. The Judgment of the Court was delivered by R. F. NARIMAN, J. 1. This appeal by the Department revisits the question as to thetaxability of income attributable to a “permanent establishment” set upin a fixed place in India, arising from the ‘Agreement for avoidance ofdouble taxation of income and the prevention of fiscal evasion’ with theRepublic of Korea (“DTAA”). 2. On 28.02.2006, the Oil and Natural Gas Company (“ONGC”)awarded a “turnkey” contract to a consortium comprising oftheRespondent/Assessee,i.e. Samsung Heavy Industries Co. Ltd. (aCompany 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 atexisting facilities, and start-up and commissioning of entire facilitiescovered under the ‘Vasai East Development Project’ (“Project”). 489 490 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 communicationchannel” between the Assessee and ONGC in respect of the Project.Pre-engineering, survey, engineering, procurement and fabricationactivities which took place abroad, all took place in the year 2006.Commencing from November, 2007, these platforms were then broughtoutside 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 fileda Return of Income on 21.08.2007 showing nil profit, as a loss of INR23.5 lacs had allegedly been incurred in relation to the activities carriedout by it in India. 5. On 29.08.2008, a show-cause notice was issued to the Assesseeby the Income Tax authorities requiring it to show cause as to why theReturn of Incomehad been filed only at nil, which was replied to in detailby the Assessee on 02.02.2009. Being dissatisfied with the reply, a draftAssessment Order was then passed on 31.12.2009 (“Draft Order”) bythe Assistant Director of Income Tax International Transactions atDehradun (“Assessing Officer”).This Draft Order went into the termsof the agreement in great detail, and concluded that the Project in questionis a single indivisible “turnkey” project, whereby ONGC was to takeover a project that is completed only in India. Resultantly,profits arising Afrom the successful commissioning of the Project would also arise onlyin India. This Court’s judgment in Commissioner of Income Tax andAnother v. Hyundai Heavy Industries Co. Ltd., (2007) 7 SCC 422,was distinguished by the learned Assessing Officer stating that, in thatcase, the project was in two separate parts, unlike the Project in thepresent case. Referring then to the Mumbai Project Office, the AssessingBOfficer held: “It is evident from the above that the work relating to fabricationand procurement of material was very much a part of the contractfor execution of work assigned by ONGC. The work was whollyexecuted by PE in India and it would be absurd to suggest that PECin India was not associated with the designing or fabrication ofmaterials.” 6. Having so held, the Draft Order then went on to attribute 25% of the revenues allegedly earned outside India (which totalled INR113,43,78,960) as being the income of the Assessee exigible to tax, whichDcame to INR 28,35,94,740. The Dispute Resolution Panel, by its orderdated 30.9.2010, after considering objections to the Draft Order by theAssessee, then held: “The Assessing Officer has given a specific finding that theassessee had a project office in India, when it was given theEcontract. The assessee has not contested the existence of theProject office in India but it has only contested that the projectwas used merely for preparatory and auxiliary activities.Thissubmission of the assessee does not hold merit because if it wantedto perform only preparatory and auxiliary activities then it couldFhave opened a liaison office. The opening of a project office clearlyshows that the assessee was doing something more than whatwould have been done through liaison office. In any case natureand purport of activities undertaken in India determine the existenceof PE. Considering the nature of activities undertaken in India it isclear that PE existed in the case of assessee.”G 7. It then confirmed the finding contained in the Draft Order thatthe agreement was a “turnkey” project which could not be split up, as aresult of which the entire profit earned from the Project would be earnedwithin India. Basing itself on data obtained from the database “CapitalLine”,the Panel picked up four similar projects executed by companiesH 491 outside India, and found the average profit margin to be 24.7%, which,according to the Panel, would therefore justify the figure of 25% arrivedat in the Draft Order. The Panel having dismissed theAssessee’sobjections, the Draft Order was made finalby the Assessing Officer on25.10.2010.The Assessee then filed an appeal against the AssessmentOrder before the Income Tax Appellate Tribunal (“ITAT”). 8. The decision of the ITAT on 30.08.2011 went into theestablishment of the Project Office at Mumbai in much more detail thanhad been gone into either in the Draft Order or the Dispute ResolutionPanel’s decision. The ITAT referred to and relied upon an applicationdated 24.04.2006, which had been submitted by the Assessee to theReserve Bank of India (“RBI”) for opening the Project Office, whichin turn referred to a Board Resolution of the Company dated 03.04.2006for opening theProject Office in India. It further referred tocorrespondence showing that one Mr. Sangsoon Park, the GeneralManager of the Assessee Company,had been appointed as arepresentative of the Company to sign documents for opening oftheProject Office and a bank account in India, and to look after operationsof the Project Office. After setting out the Board Resolution dated03.04.2006 in detail, the ITAT concluded: “70. It can be seen from all the above documents that the scopeof Mumbai Project Office has neither been restricted by theassessee company itself or it has also not been restricted by RBIin any terms. This is relevant for the reason that in Hyundai HeavyIndustries case, it is a matter of record that project office openedby the said assessee, according to permission given by the RBI,was to work only as a liaison office and was not authorised tocarry on any business activity. This is the vital difference betweenthe two cases namely the case of the assessee and Hyundai HeavyIndustries 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 DevelopmentProject for Oil and Natural Gas Corporation (“ONGC”), India”used by the assessee company in its resolution of Board ofDirectors meeting dated 3[rd] April, 2006 makes it amply clear thatproject office was opened for coordination and execution ofimpugned project. In absence of any restriction put by the assessee Ain the application moved by it to RBI, in the resolutions passed bythe assessee company for the opening of the project office atMumbai and the permission given by RBI, it cannot be said thatMumbai project office was not a fixed place of business of theassessee in India to carry out wholly or partly the impugnedcontract in India within the meaning of Article 5.1 of DTAA.BThese documents make it clear that all the activities to be carriedout in respect of impugned contract will be routed through theproject office only. Pre-surveys were to be first conducted whichwill determine the nature of the designing on the basis of whichpre-engineering and pre-designing was to be done with respect toCthe entire project. The next main condition of the contract wasthat, as a condition precedent, the assessee had to obtain insurancewith respect to the entire project which has been in fact obtainedby the assessee in India for which the assessee has receivedmajor payment during the year under consideration itself. Thesaid policy has not been shown to be restricted only with regardDto activities of the assessee outside India.”