In 2006, The Oil and Natural Gas Company (ONGC) awarded a turnkey contract\u00a0\u00a0\u00a0 to a consortium comprising of Larsen & Toubro Limited (L&T) and Samsung Heavy Industries Co. Ltd (Samsung), a company incorporated in South Korea, for carrying out complete work for Vasai East Development Project (VEDP). Samsung, the assessee, then set up a project office in Mumbai for coordinationand execution of work for the turnkey project via a Board Resolution. Subsequently,\u00a0\u00a0\u00a0 in AY 2007-08, Samsung filed a NIL return in accordance with India-South Korea DTAA. Disagreeing with the return, the Income Tax Department issued a show cause notice to the assessee, post which a draft assessment order that was passed which went into the terms of the agreement in great detail, and concluded that\u00a0\u00a0\u00a0 the Project in question was a single indivisible \u201cturnkey\u201d project, whereby ONGC was to take over a project that was completed only in India. Resultantly, profits arising from the successful commissioning of the Project would also arise only\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 in India. The AO held that the work relating to fabrication and procurement of material was very much a\u00a0 part of\u00a0 the contract for execution of\u00a0 work assigned \u00a0by\u00a0 ONGC. The work was wholly executed by\u00a0 a\u00a0 Permanent Establishment (PE)\u00a0 in India and it would be absurd to suggest that PE in India was not associated\u00a0\u00a0\u00a0 with the designing or fabrication of materials. The Assessing officer went on to attribute 25% of the revenues allegedly earned outside India as being the income\u00a0\u00a0 of the assessee eligible to tax.<\/p>\n
The application to Dispute Resolution Panel (DRP) was dismissed as the DRP concurred with the AO and held that the nature of activities undertaken by Samsung in India showed that it had a PE in India.<\/p>\n
The matter then moved to ITAT where after referring to Samsung\u2019s Board resolution and its application to RBI for opening the Project office, the ITAT concluded that the Project office was Samsung\u2019s fixed place PE in India, to<\/p>\n
\u00a0<\/p>\n
\u00a0<\/p>\n
carry out the contract wholly or partly, as under article 5(1), DTAA.\u00a0 Assessee\u00a0 had argued before the ITAT that the project office was not involved in any core business activity and that the Project office was just an auxiliary office. Books\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 of Accounts that were maintained by the Samsung which did not show any expenditure related to the ONGC turnkey project were also produced before the ITAT. The ITAT rejecting these arguments observed that the terms in the contract, and the way in which the work was executed,\u00a0 showed that the project office had\u00a0\u00a0\u00a0 a vital role to be played in the execution of the entire contract by acting has a channel between ONGC and Samsung Heavy Industries Co. Ltd Korea. The ITAT also held that onus was on the Assessee to prove that the activities undertaken\u00a0\u00a0\u00a0\u00a0 by its Indian PE are auxiliary or preparatory in nature. Since the onus was not discharged, the Project office fell under article 5(4), of the Tax Treaty. ITAT further held that the mode of maintaining accounts alone cannot determine the character of the PE.<\/p>\n
The assessee then challenged the ITAT\u00a0 order before the High Court which ruled\u00a0\u00a0\u00a0 in the favour of\u00a0 the\u00a0 assessee. The\u00a0 High court noted that there was\u00a0 no\u00a0 finding on record that the\u00a0 revenue had been earned or\u00a0 said to\u00a0 have been on\u00a0 account\u00a0 of India activity of the Project office. It also observed that the DTAA did not permit the Tax Authorities to arbitrarily fix a part of\u00a0 the\u00a0 revenue to\u00a0 the\u00a0 PE\u00a0 of the assessee in India. Lastly, the High court also noted that neither the AO nor\u00a0\u00a0\u00a0\u00a0 the ITAT established or had made any effort to bring on record any evidence to justify that the business was actually carried out by the project office and that\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25 percent of the gross revenue is attributable to such Project office. The revenue then challenged the decision of the High Court before the Supreme Court.<\/p>\n
\u00a0<\/p>\n
The issue before the Supreme court was with regard to taxability of income attributable to a \u201cpermanent establishment\u201d set up in a fixed place in India, arising from the India-Korea DTAA.<\/p>\n
\u00a0<\/p>\n
In DIT (International Taxation), Mumbai v. M\/s Morgan Stanley & Co. Inc., [2007] 7 SCC 1, <\/em><\/strong>went on to hold that activities performed by\u00a0 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\u2019 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 outside the term \u201cpermanent establishment\u201d as defined. On the deputation of certain employees of the American Company to work as employees\u00a0 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 \u201cservice\u201d permanentestablishment would stand established on this count.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n In ADIT v. E-Funds IT Solution Inc. [2018] 13 SCC 294, <\/em><\/strong>the Court while dealing with \u2018support services\u2019 rendered by an Indian Company to American Companies, 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.<\/p>\n \u00a0<\/p>\n Supreme Court held that when it comes to \u201cfixed place\u201d 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 \u201cpermanent establishment\u201d is that it should be an establishment \u201cthrough which the business\u00a0 of an enterprise\u201d 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.<\/p>\n The Supreme Court upheld the High Courts\u2019 decision and ruled that the project office of Samsung Korea\u00a0 did not constitute a PE in India in terms of Article 5 of\u00a0\u00a0 the Tax Treaty given the nature of the activities carried out by such Project Office.<\/p>\n To\u00a0 determine the nature of activities and auxiliary nature of the Project office,\u00a0\u00a0 the Supreme court delved deeper into the documents relied upon by ITAT and looked at various other factors which the ITAT\u00a0 had either ignored or dismissed.\u00a0\u00a0\u00a0\u00a0 It observed that the Board Resolution submitted to RBI for registration of the Project office showed that it was established to co-ordinate and execute \u201cdelivery\u00a0 of documents in connection with construction of offshore platform modification\u00a0\u00a0\u00a0 of existing facilities for ONGC\u201d. The Court held that ITAT\u00a0 wrongly jumped to\u00a0 the conclusion that the Mumbai office was for coordination and execution of the project itself and 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. Further when the Assessee pointed out\u00a0 that the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT\u00a0 rejected the argument, stating\u00a0 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\u00a0 as per the Court was another perverse finding.<\/p>\n The Court relied on the fact that the accounts of the Project office showed no expenditure incurred in relation to execution of the contract, and that the only\u00a0\u00a0 two people employed in the Project office were not qualified to carry out any\u00a0core activity of the Assessee. The Court thus dismissed the department appeal.\u00a0\u00a0 (AY. 2007-08) (CA No. 12183 of 2016 dt. 24-07-2020).<\/p>\n \u00a0<\/p>\n Editorial<\/em><\/strong>: This Supreme Court decision has spelled a wave of relief\u00a0 for\u00a0 the Tax\u00a0 payers (especially MNC\u2019s) and iterates an important principle that instead\u00a0 \u00a0of general perceptions and sweeping assumptions (that a project office would generally execute a project), a deep, factual enquiry into the determination of existence of the PE is required and tax liability to be imposed based on actual activities carried out by a taxpayer. Also, the supreme court has clearly underlined the fact that the initial burden lies on the Indian Revenue, and not the assessee,\u00a0\u00a0\u00a0\u00a0 to prove that there is a PE of the foreign enterprise in India, before moving further\u00a0\u00a0 \u00a0to determine the Indian tax liability of that enterprise.<\/p>\n Reference can also be drawn to the following judgements; Ishikawajma-Harima Heavy Industries Ltd. [2007] 288 ITR 408 (SC), LG Cable Ltd. (2011) 237 CTR<\/em><\/strong><\/p>\n 438 (Delhi) HC)<\/em><\/strong><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u201cLook at the sparrows; they do not know what they will do in the next moment. Let us literally live from moment to moment.\u201d<\/em><\/p>\n – Mahatma Gandhi\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":" S. 9(1)(i): Income deemed to accrue or arise in India – Business connection \u2013 Income attributable to permanent establishment \u2013 For applicability of article 5(1) of DTAA it should be an establishment through which business of an enterprise is wholly or partly carried on and further profits of foreign enterprise are taxable only where said enterprise carries on its ‘core business’ through PE – Project office in India cannot be construed as fixed place as no core activity took place from its office in India Deletion of addition by the High Court is affirmed – DTAA- India – Republic of Korea [ Art.5 (1), 7 ]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-13282","post","type-post","status-publish","format-standard","hentry","category-income-tax-act"],"acf":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9S2Rw-3se","jetpack-related-posts":[],"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13282","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/comments?post=13282"}],"version-history":[{"count":1,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13282\/revisions"}],"predecessor-version":[{"id":13283,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13282\/revisions\/13283"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/media?parent=13282"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/categories?post=13282"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/tags?post=13282"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Held<\/h3>\n
Samsung Heavy Industries Co. Ltd. v. DIT (IT) & Anr. (2014) 221 Taxman 315\/265 CTR 109\/98 DTR 89 (Uttarakhand)(HC), affirmed<\/h4>\n