DIT (International Tax) v. Samsung Heavy Industries Pvt Ltd
- On February 28, 2006, the Oil and Natural Gas Company (ONGC) awarded a contract to a consortium comprising of a South-Korean company (the Respondent/Assessee) and Larsen & Toubro Ltd. for carrying out the work of surveys, design, engineering, procurement, fabrication, installation and modification at existing facilities, and start-up and commissioning of entire facilities covered under the 'Vasai East Development Project' (Project)
- Thereafter, on May 24, 2006, the Respondent set up a Project Office in Mumbai (PO), which was supposed to act as a communication channel between the consortium and ONGC. The work commenced in the same year and was slated to be completed by July 26, 2009.
- The Respondent filed a return for AY 2007-08 income, showing nil profit and a loss of INR 23.5 Lakhs which had, according to him, already been incurred due to activities carried out by it in India. The revenue thereafter issued a show-cause notice to the Respondent, requiring it to show-cause as to why the return of income was filed at nil. Dissatisfied with the Respondents reply, a Draft Assessment Order (DAO) dated December 31, 2009 was issued by the Asst. Director of Income Tax, International Transactions (AO) at Dehradun whereby it was held that the work carried out by the Respondent in India and the profits resulting from it would arise only in India. The DAO attributed 25% of the revenues allegedly earned outside India as being the income of the Respondent eligible to tax, which came up to INR 28,35,94,740.
- The Dispute Resolution Panel (DRP), by its Order dated September 30, 2010, after considering objections to the DAO by Assessee, confirmed the finding contained in the DOA that the agreement was a single indivisible 'turnkey' project, as a result of which the entire profit earned from the Project would be earned in India. In view of the same, the DAO was finalized on October 25, 2010, which was challenged before Income Tax Appellate Tribunal (ITAT).
- The ITAT vide its Order dated August 30, 2011 confirmed the decisions of the AO and DRP that the contract was indivisible and also found that there was a lack of material on record to ascertain as to what extent activities of the business were carried on by the Respondent through the PO, and therefore it was considered just and proper to set aside the attribution of 25% of gross revenue earned outside India. The ITAT remanded the matter back to the AO to ascertain profits attributable to the PO after examining the necessary facts. This order was challenged by the Respondent before the High Court of Uttarakhand (HC).
- Vide Order dated December 27, 2013 the HC held that the PO cannot be said to be a permanent establishment as per Article 5 of the Double Taxation Avoidance Agreement. It was further held that neither the AO nor the ITAT made any effort to bring on record any evidence to justify the finding that 25% of the gross revenue of the Respondent outside India was attributable to the business carried out by the Respondent's PO. In view of the above, Respondent's Appeal was allowed (Impugned Order).
- The impugned order was challenged by the Revenue before Supreme Court (SC) by way of Civil Appeal and the ruling of the Apex Court is summarized hereunder.
Issue at hand?
- Taxability of income attributable to a permanent establishment (PE) set up in a fixed place in India, arising from 'Agreement for avoidance of double taxation of income and prevention of fiscal evasion' with South Korea (DTAA).
Decision of the Court
The issue of PE has been a subject matter of debate before the Courts and Tribunals in most international transactions. This judgement of the SC brings forth more clarity on the existence of the PE or otherwise and will instil confidence of the multi-national companies to do business in India. This decision comes as a relief for the corporate taxpayers and is a firm reiteration of the fact that the initial burden lies on the revenue department, and not the assessee, to prove that there exists a PE of the foreign enterprise in India, before moving further to determine the Indian tax liability of that enterprise.
- SC examined Articles 5 and 7 of DTAA, which pertain to PE and business profits, respectively. Thereafter, SC placed its reliance on its decision in matters of Morgan Stanley & Co. Inc1 , Hyundai Heavy Industries Co Ltd2 , Ishikawajima-Harima Heavy Industries Ltd3 and E-Funds IT Solution Inc4 and held that a 'fixed place' PE (as under Article 5(1)) of a foreign enterprise in India exists only when the establishment is one through which the business of the enterprise is wholly or partly carried on. However, if an enterprise simply maintains a fixed place of business in India which is auxiliary or preparatory in nature in the business or trade of the enterprise, then it is not a PE as per Article 5(4)(e) of the DTAA. It was further held that the profits of the foreign enterprise will be taxable in India only when the enterprise does its core business through an India PE and only those profits which are attributable to the PE can be taxed in India.
- The SC noted that the ITAT's conclusion that the PO was established for the core activity of coordination and execution of the entire project, was based only on the first paragraph of the Board Resolution, which basically stated that the Assessee would open a PO in Mumbai for coordination and execution of the aforesaid project. Therefore, the same was deemed to be set aside as it was perverse. It was further noted that as per the second paragraph of the said Board Resolution, the purpose of the PO was to coordinate and execute delivery of certain documents only.
- The SC dismissed the Appeal on the grounds that the accounts of the Mumbai PO were not enough to determine the character of a PE. Further, the ITAT's finding that the onus lay on the Assessee to show that the Mumbai PO is a PE, was in the teeth of judgment laid down in E-Funds IT Solutions.
- The SC also noted that the ITAT had ignored a particular argument of the Assessee – that there were only two people working in the PO and both were not qualified to carry out any core activity of the Petitioner. Hence, the SC held that the PO is not a fixed place PE of Assessee, under Article 5(1) of the DTAA and would instead be covered by Article 5(4)(e) of DTAA because the PO was meant to be a liaison office between ONGC and the Assessee and, thus, was an auxiliary office.
- In view of the above, the impugned Order was dismissed, and the appeal was allowed.
1 (2007) 7 SCC 1
2 (2007) 7 SCC 422
3 (2007) 3 SCC 481
4 (2018) 13 SCC 294
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