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Director of Income Tax & Anr. v. M/s Samsung Heavy Industries

CASE :Director of Income Tax-II (International Taxation) New Delhi & Anr. v. M/s Samsung Heavy Industries Co. Ltd.,

CITATION: Civil Appeal No. 12183 of 2016

DATE OF ORDER: 22 July 2020

FORUM : Supreme Court of India

CORAM : Rohinton Fali Nariman J., Navin Sinha J., B.R. Gavai J.

BRIEF FACTS

On 28.02.2006, the ONGC awarded a “turnkey” contract to a consortium comprising of the Respondent/Assessee, i.e. Samsung Heavy Industries Co. Ltd. (a Company 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 at existing facilities, and start-up and commissioning of entire facilities covered under the ‘Vasai East Development Project’ (‘Project’).

On 24.05.2006, the Assessee set up a Project Office in Mumbai, India, which, as per the Assessee, was to act as “a communication channel” between the Assessee and ONGC in respect of the Project. Pre-engineering, survey, engineering, procurement and fabrication activities which took place abroad, all took place in the Financial Year 2006-2007.

During the next Financial Year 2007-2008, these platforms were then brought outside Mumbai to be installed at the Vasai East Development Project. The Project was to be completed by 26.07.2009. With regard to Assessment Year 2007-2008 (relevant to the Financial Year 2006-07), the Assessee filed a Return of Income on 21.08.2007 showing nil profit, as a loss had allegedly been incurred in relation to the activities carried out by it in India.

ASSESSMENT

The case of the Assessee was picked up for scrutiny and the Assistant Director of Income Tax International Transactions at Dehradun (‘Assessing Officer’) passed a draft assessment order concluding that:

• The Project in question is a single indivisible “turnkey” project, work relating to fabrication & procurement of material was very much a part of the contract for execution of work assigned by ONGC.
• The Assessee had a Permanent Establishment (‘PE’) in India and it would be absurd to suggest that PE in India was not associated with the designing or fabrication of materials.
• The work was wholly executed by PE of the Assessee in India. Therefore, 25% of the revenues allegedly earned outside India were liable to tax in India. Objections against the draft assessment order filed by the Assessee before the Dispute Resolution Panel were dismissed.

APPEAL BEFORE APPELLATE TRIBUNAL

Appellate Tribunal dismissed the appeal of the Assessee on the issue of existence of PE and held as under:

• After examining the documents on record returned factual finding that the scope of Mumbai Project Office was neither been restricted by the Assessee company itself or by RBI in any terms.
• Project Office was opened for coordination and execution of the Project. In absence of any restriction put by the Assessee (i) in the application moved by it to RBI, (ii) in the resolutions passed by the Assessee company for the opening of the Project Office at Mumbai, and (iii) the permission given by RBI; it cannot be said that Mumbai Project Office was not a fixed place of business of the Assessee in India to carry out wholly or partly the contract in India. Pre-surveys were to be first conducted which determined the nature of the designing on the basis of which pre-engineering and pre-designing was to be done with respect to the Project.
• The way the terms of the contract are described and the way the work on contract has to proceed clearly describe that in all the activities of contract there will be the role of Mumbai Project Office as the same has to work as a channel between Assessee and ONGC.
• Since PE of the Assessee exists within the meaning of Article 5.1 and 5.2, the onus is on Assessee to prove that activities of its PE are in the nature of preparatory or auxiliary in nature. No material has been brought on record by the Assessee to prove the said fact.
• Mere the mode of maintaining the accounts alone cannot determine the character of PE as the role of PE only will be relevant to determine what kind of activities it has carried on.
• However, Appellate Tribunal granted relief to the Assessee by setting aside the issue of attribution of income to the Assessing Officer as there was a lack of material to ascertain as to what extent activities of the business were carried on by the Assessee through the Mumbai Project Office.

APPEAL BEFORE THE HON’BLE HIGH COURT –

• Assessee filed appeal before the Hon’ble High Court. By judgment, dated 27.12.2013, the High Court found that the order of the Assessing Officer had been confirmed by the Appellate Tribunal, and concerned itself only with the following question: “In other words, can it be said that the Agreement permitted the India Taxing Authority to arbitrarily fix a part of the revenue to the permanent establishment of the appellant in India?”
• The High Court, allowed the appeal of the Assessee holding, inter alia, as under: “10. That being the situation we allow the appeal, set aside the judgment and order under appeal as well as the assessment order insofar as the same relates to imposition of tax liability on the 25% of the receipt upon the appellant in the circumstances mentioned above, and observe that the questions of law formulated by us, while admitting the appeal, have not, in fact, arisen on the facts and circumstances of the case, but the real question was, whether the tax liability could be fastened without establishing that the same is attributable to the tax identity or permanent establishment of the enterprise situate in India and the same, we think, is answered in the negative and in favour of the appellant.”

SLP BEFORE THE HON’BLE SUPREME COURT

Revenue challenged the High Court’s decision. However, Revenue’s appeal was dismissed by the Hon’ble Supreme Court based on the following reasoning:

The condition precedent for applicability of Article 5(1) of the Agreement for Avoidance of Double Taxation of Income and the Prevention of Fiscal Evasion with the Republic of Korea (‘DTAA’) and the ascertainment of a PE is that it should be an establishment “through which the business of an enterprise” is wholly or partly carried on. Further, the profits of the foreign enterprise are taxable only where the said enterprise carries on through a permanent establishment its core business (and not business of preparatory or auxiliary character). Only so much of the profits of the enterprise that may be taxed in the other State as is attributable to that permanent establishment.

The burden of proving the fact that a foreign Assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. The finding that the onus is on the Assessee and not on the Tax Authorities to first show that the Project Office at Mumbai is a PE is again in the teeth of our judgment in E-Funds IT Solution Inc. On examination of the documents it is clear that the finding of the Appellate Tribunal to the effect that Mumbai Project Office was not a mere liaison office but was involved in the core activity of execution of the Project itself is perverse. Appellate Tribunal ignored the fact that only two persons working in the Mumbai Project Office and neither of whom was qualified to perform any core activity of the Assessee. No PE has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, the Mumbai Project Office, on the facts of the case, would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC.

The profits earned by the Korean GE on supplies of fabricated platforms cannot be made attributable to its Indian PE as the installation PE came into existence only on conclusion of the transaction giving rise to the supplies of the fabricated. In terms of Para (1) of Article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the PE would have earned if it was wholly independent. Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the PE in India) and even if it is assumed that the supplies were an integral part, still no part of profits on such supplies can be attributed to the independent PE unless it is established by the Revenue that the supplies were not at arm’s length price. There are no allegations made by the Revenue that the price at which billing was done for the supplies included any element for services rendered by the PE.

The concepts of profits of business connection and PE should not be mixed up. Whereas business connection is relevant for the purpose of application of Section 9 of the Income Tax Act, 1961; the concept of PE is relevant for assessing the income of a non-resident under DTAA. There, however, may be a case where there can be overlapping of income. The entire transaction (of sale of supplies) having been completed on the high seas, the profits on sale did not arise in India. Thus, having been excluded from the scope of taxation under the Act, the application of the DTAA would not arise. The DTAA, however, was taken recourse to by the Appellant only by way of an alternate submission on income from services and not in relation to the tax of offshore supply of goods.