Ita/254/2008 Director Of Income Tax (International Taxation v. M/S. Van Oord Atlanta Bv

O-62 IN THE HIGH COURT AT CALCUTTASPECIAL JURISDICTION (INCOME TAX)ORIGINAL SIDE ITA/254/2008DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)VS.M/S. VAN OORD ATLANTA BV BEFORE : THE HON’BLE JUSTICE T.S. SIVAGNANAM AndTHE HON’BLE JUSTICE HIRANMAY BHATTACHARYYADate : 7[th ]February, 2023 Appearance :Mr. Om Narain Rai, Adv.….for appellantMr. J.P. Khaitan, Sr. Adv.Ms. Sanjukta Gupta, Adv.Ms. Swapna Das, Adv.…for the respondent The Court : This appeal filed by the revenue under Section 260A of theIncome Tax Act (the Act) is directed against the order dated August 24, 2007passed by the Income Tax Appellate Tribunal, `C’ Bench, Kolkata (Tribunal) inI.T.A Nos.1517 and 1518/Kol/2007 for the assessment years 2000-01 and2001-02 and ITA No.1515/Kol/2007 for the assessment year 2001-02. The appeal was admitted on 29[th] July, 2008 to decide the followingsubstantial question of law :- “Whether on the facts and in the circumstances of the case theLearned Tribunal erred in holding that there was no `Permanent Establishment’ (PE) of the assessee in India and the contractual receiptsare not chargeable to tax in India.” We have heard Mr. Om Narain Rai, learned counsel appearing for theappellant and Mr. J.P. Khaitan, learned senior counsel appearing for therespondent/assessee. The only question which arises for consideration in this appeal is whetherthe project office of the respondent/assessee which functioned for a period ofabout 153 days could be construed as a `permanent establishment’ and whetherthe respondent/assessee could be subjected to proceedings under the IncomeTax Act, 1961. The Assessing Officer was of the view that the selling of thedredger which was brought from Netherlands to the waterways outside WestBengal did not necessarily mean the closure of the project office in India.Further, the approval of the Reserve Bank of India is mandatory for closure ofthe project office and the bank accounts reveal that the project office wasoperating till 31[st] March, 2000. The said order was affirmed by theCommissioner of Income Tax (Appeals). Challenging the same the assessee filedappeal before the Tribunal. The nature of transaction which was the subject matter of appeal would becovered by the agreement for avoidance for double taxation and prevention ofphysical evasion with Netherlands. Article 5 of the said agreement deals with`permanent establishment’. Paragraph 2 of Article 5 defines the term`permanent establishment. Paragraph 3 of Article 5 states that a complete siteor construction, installation or assembly project constitutes a permanent establishment only where such site or project continues for a period of morethan six months. Paragraph 4 of Article 5 commences with a non obstanteclause stating that notwithstanding the preceding provisions of Article 5 theterm `permanent establishment’ shall be deemed not to include and there are sixclauses in paragraph 4 of which clause (e) would be relevant for case on hand,which states that maintenance of fixed place of business solely for the purposeof advertising, for the supply of information, for scientific research or for otheractivities which had preparatory or auxiliary character for the enterprise wouldnot fall within the definition of a permanent establishment. Taking note ofArticle 5 of the agreement with Netherlands, the learned Tribunal examined thefacts of the case and found that the activities of the project office of therespondent/assessee in West Bengal was auxiliary in character. The projectoffice was in operation from 26[th] February, 1999 to 29[th] July, 1999, that is, for aperiod of 153 days only, which the Tribunal found, was much less than theperiod of six months, as stipulated in Article 5(3). Therefore, the learned Tribunal held that there was no valid reason fortreating the project office of the assessee as a permanent establishment. Theview taken by the learned Tribunal cannot be faulted, more so, because of therecent decision of the Hon’ble Supreme Court in the case of Director of IncomeTax-II (International Taxation) New Delhi & Anr. vs. Samsung Heavy IndustriesCompany Limited, (2020) 7 SCC 347 = (2020) 426 ITR 1. In the said case, thequestion which arose for consideration before the Hon’ble Supreme Court as tothe taxability of the income attributable to a permanent establishment set u p in a fixed place in India arising from the agreement for avoidance for doubletaxation of income and prevention of physical evasion with the republic of Korea.The language in the said agreement is in pari meteria with the agreement withNetherlands. The Hon’ble Supreme Court after referring to various decisions inparagraph 26 held as follows :- “26. A reading of the aforesaid judgments makes it clear that when itcomes to “fixed place” permanent establishments under double taxation avoidancetreaties, the condition precedent for applicability of Article 5(1) of the doubletaxation treaty and the ascertainment of a “permanent establishment” is that itshould be an establishment “through which the business of an enterprise” iswholly or partly carried on. Further, the profits of the foreign enterprise aretaxable only where the said enterprise carries on its core business through apermanent establishment. What is equally clear is that the maintenance of a fixedplace of business which is of a preparatory or auxiliary character in the trade orbusiness of the enterprise would not be considered to be a permanentestablishment under Article 5. Also, it is only so much of the profits of theenterprise that may be taxed in the other State as is attributable to that permanentestablishment.” As held by the Hon’ble Supreme Court in the above quoted paragraph, thecondition precedent for applicability of Article 5 of the double taxation treaty andascertainment of permanent establishment is that it should be an establishmentthrough which business of an enterprise is wholly or party carried on. Further,the profits of the foreign enterprise are taxable only where the said enterprisecarries on its core business through a permanent establishment. Further, it washeld that maintenance of a fixed place of business which is of a preparatory orauxiliary character in the trade or business of the enterprise would not be considered to be a permanent establishment under Article 5 of the said treaty.The facts of the said case were also more or less identical to the case on handand ultimately the Hon’ble Supreme Court held that the Mumbai office of thesaid assessee had only two employees and neither of whom was qualified toperform in core activity of the assessee and on facts, the Hon’ble Supreme Courtfound that the project office of the said assessee would fall within Article 5(4(e) ofthe agreement inasmuch as the office is solely and auxiliary office, meant to actas a liaison office between the assessee and ONGC. In the case on hand, thefactual position has been analyzed by the learned Tribunal and has recorded afinding that the office in West Bengal was only auxiliary in character. In otherwords, the activities carried out from the said office in West Bengal was auxiliaryin character. Thus, the view taken by the learned Tribunal finds support fromthe decision of the Hon’ble Supreme Court in Samsung Heavy Industries Limited(supra). For the above reasons, the appeal filed by the revenue is dismissed andthe substantial question of law is answered against the revenue. (T.S. SIVAGNANAM, J.) (HIRANMAY BHATTACHARYYA, J.)