Tax/Taxation – India-Korea Agreement for avoidance of double taxation of income and the prevention of fiscal evasion (DTAA) – Arts.5, 7 – Project Office whether a Permanent Establishment (PE) in India – Taxability of income – ONGC awarded turnkey contract to a consortium comprising of respondent-assessee, incorporated in South Korea for carrying out work w.r.t the Vasai East Development Project – Assessee set up a Project Office in Mumbai – For the relevant assessment year, assessee’s return of income showed nil profit alleging loss w.r.t activities carried out in India – Assessment Order attributed 25% of the revenues allegedly earned outside India as the income of assessee exigible to tax – ITAT though set aside this finding, but remitted the matter to ascertain profits attributable to the Mumbai project office – Appeal filed by assessee, allowed by High Court – Held: For applicability of Art.5(1), DTAA to fixed place PEs under double taxation avoidance treaties, it should be an establishment “through which the business of an enterprise” is wholly or partly carried on – Profits of the foreign enterprise are taxable only where it carries on its core business through a PE – It is only so much of its profits that may be taxed in the other State as is attributable to that PE – In the present case, no PE was set up within the meaning of Art.5(1), 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 – Said Office would fall within Art.5(4)(e), DTAA, as it was solely an auxiliary office, meant to act as a liaison office between the assessee and ONGC.
Tax/Taxation – Double taxation avoidance treaty – Project Office whether a Permanent Establishment (PE) in India – Onus to prove – Held: Finding of ITAT thatas accounts are in the hands of assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment, is perverse and hence set aside – Equally, the finding that the onus is on assessee and not on the tax authorities to first show that the project office at Mumbai is a PE is in the teeth of the judgment in Asst. Director of Income 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” 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 “permanent establishment” 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 its core business through a permanent establishment. 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. [Para 23]
1.2 A reading of the Board Resolution would show that the Project Office was established to coordinate and execute “delivery documents in connection with construction of offshore platform modification of existing facilities for ONGC”. The ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that the Mumbai office was for coordination 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 project itself is clearly perverse. Equally, when it was pointed out that the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating 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 is another perverse finding which is set aside. Equally 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 permanent establishment is again in the teeth of the judgment in E-Funds IT Solution Inc. Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the Assessee, the ITAT chose to ignore the same. Therefore, no permanent establishment 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 present 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. [Paras 27, 28]
Commissioner of Income Tax and Another v. Hyundai Heavy Industries Co. Ltd., (2007) 7 SCC 422 : [2007]
7 SCR 288 ; M/s DIT (International Taxation), Mumbai v. M/s Morgan Stanley & Co. Inc. (2007) 7 SCC 1 : [2007] 8 SCR 52 ; Asst. Director of Income Tax, New Delhi v. E-Funds IT Solution Inc. (2018) 13 SCC 294 : [2017] 10 SCR 157 ; Ishikawajma-Harima Heavy
Industries Ltd. v. Director of Income Tax, Mumbai, (2007) 3 SCC 481: [2007] 1 SCR 112 – relied on.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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