DIRECTOR OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI & ANR. versus M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD.

Citation: [2020] 6 S.C.R. 486 · Decided: 22-07-2020 · Supreme Court of India · Bench: R.F. NARIMAN · Disposal: Dismissed

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Judgment (excerpt)

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SUPREME COURT REPORTS
[2020] 6 S.C.R.
DIRECTOR OF INCOME TAX-II (INTERNATIONAL
TAXATION) NEW DELHI & ANR.
v.
M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD.
(Civil Appeal No. 12183 of 2016)
JULY 22, 2020
[R. F. NARIMAN, NAVIN SINHA AND B. R. GAVAI, JJ.]
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
[2020] 6 S.C.R. 486
486
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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
DIR. OF INCOME TAX-II (INTERNATIONAL 

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