Key Takeaways: - Background of the Case - Contentions of the Department and Assessee - Principles and Precedents Governing the Rule of PE - Supreme Court's Verdict

1. PROJECT OFFICE FOR COMMUNICATION
PURPOSES: WILL IT CONSTITUTE A PE ?
DIT v. SAMSUNG HEAVY INDUSTRIES CO. LTD.
[2020] 117 taxmann.com 870 (SC)
CA Jugal Gala

2. RESEARCH CREDITS
Deepika S
Gracelin Lita P

3. LEGENDS USED
AO Assessment Order
AY Assessment Year
DTAA Double Taxation Avoidance Agreement
ITAT Income Tax Appellate Tribunal
PO Project Office
ONGC Oil and Natural Gas Corporation
SC Supreme Court
HC High Court
Hon’ble Honourable

4. PRESENTATION SCHEMA
Background and Facts of the
Case
History of the Case Issues and Contentions
Principles and Precedents
Governing the Rule of PE
SC’s Verdict Conclusion and Key Learnings

5. BACKGROUND AND FACTS OF
THE CASE

6. BACKGROUND
The concept of Permanent Establishment (PE) is used in DTAAs to
establish a country’s tax jurisdiction over a foreign company’s business
activities.
PE is a fixed place of business through which the business of an enterprise
is wholly or partly carried on.
Generally, a foreigner is not required to pay income tax on its business
profits unless it has a PE in the source country and the profits are
attributable to such PE.

7. FACTS OF THE CASE
Project Office for
communication
Assessee company
Installation and
commissioning
- In 2006, ONGC awarded a turnkey contract to a Samsung
Heavy Industries Co. Ltd. (Assessee – a South Korean
company), engaged in business of heavy engineering
- Assessee carried out co-ordination and communication
activities in India, design and engineering activities in
Malaysia, fabrication enquiry in Korea and Malaysia.
- On arrival of goods from Malaysia to India, installation
and commissioning activities are carried out in India at
Mumbai offshore.
- ONGC asked the assessee to open a project office in
Mumbai for the purpose of coordination and
communication between the parties to the contract
- On an admitted position that assessee had an
installation PE in India, assessee consistently offered tax
on “from inside India” activities like installation and
commissioning of the platform
- Accordingly, in the relevant year, assessee filed its return
of income showing loss in respect of installation PE.
Contd. in next slide

8. THE ISSUE
AO assessed the total income holding that “Project Office” is a fixed PE in India as it has a role to play in
design, fabrication, etc. of the platforms which was carried outside India
Accordingly, he held that incomes earned by assessee outside India are attributable to the PE in India by
way of project office for the contract.
The dispute revolves around the following:
• Whether the consideration received by the assessee, a foreign company, against “offshore supplies”
made by it from outside India is taxable in India, and if so, how much of the income can be attributed to
the PE from such business of supplies?

9. HISTORY OF THE CASE

10. BEFORE THE ASSESSING OFFICER
On audit of the Assessee’s filed returns, the AO held that
• The Project was a single indivisible “turnkey” project, whereby ONGC was to take over the
project completed only in India.
• Resultantly, the profits arising from the successful commissioning of the Project would also
arise only in India.
• The work relating to fabrication and procurement of material was part of the contract for
execution of work assigned by ONGC.
• The work was wholly executed by the permanent establishment (PE) of the Assessee in India.
• The AO attributed 25% of the revenue earned outside India, as the income of the Assessee,
which was taxable in India.
AO’s Draft Order
On appeal by the Assessee, the Dispute Resolution Panel (DRP) upheld the AO’s draft order and the
AO passed the final order pursuant to the directions received from the DRP.

11. BEFORE THE ITAT
• The ITAT referred to the Board resolution of the Assessee for setting up the Project Office in
Mumbai pursuant to ONGC’s request.
• The Board resolution indicated that the PO was set-up for co-ordination and execution of the
Project (the exact words of the Board Resolution will be discussed later in SC ruling)
• The ITAT held that this constituted a PE of the Assessee as it was integral to the performance
of the contract between it and ONGC.
• Accordingly, the ITAT confirmed the decision of the AO and the DRP.
• However, the ITAT remanded to the AO, the matter of the attribution of 25% of revenue earned
outside India as income of the Assessee, for fresh examination .
ITAT’s Ruling
Aggrieved by the ITAT’s order, the taxpayer filed an appeal before the Uttarakhand High Court (HC).
Aggrieved by the AO’s final order upon directions of the DRP, the taxpayer filed an appeal with the ITAT

12. BEFORE THE UTTARAKHAND HIGH COURT
• According to the DTAA, if an enterprise does not have a tax identity in India in the form of a
permanent establishment, it has no obligation to either submit any tax return with, or pay
any tax to India.
• Neither the AO nor the ITAT had recorded any evidence to justify that the Project Office of the
taxpayer is a PE in India.
• Held: The tax liability could not be fastened on the Assessee without establishing that the
same is attributable to the PE of the Assessee in India.
HC’s Ruling
Aggrieved by the HC’s ruling, the Revenue filed an appeal before the Supreme Court of India.
The issue which lies with the Hon’ble SC is that whether Assessee’s PO can be construed as PE in India.

13. CONTENTIONS OF BOTH THE
PARTIES

14. ASSESSEE’S CONTENTIONS
Mumbai PO was to merely act as a communication channel between Samsung and ONGC in respect of the
Project. Hence, the activities were preparatory & auxiliary in nature.
The Pre-engineering, survey, engineering, procurement and fabrication activities took place abroad in the
year 2006
The PO consisted of only two employees, neither of whom had any technical qualification whatsoever.
The accounts that were produced would show that the PO had not incurred any expenditure on execution
of the project
The burden of establishing that a foreign Assessee has a PE in India is on the tax authorities, and this
burden had not been discharged on the facts of the present case
•Without admitting that there is a PE in India through which the core business activity of the
Assessee was carried out, no taxable income can be attributed to it.
•This is because audited accounts that were produced showed that the project did not yield
any profit, but in fact resulted in only losses.

15. REVENUE’S CONTENTIONS
The project was a single indivisible “turnkey” project (which could not be split up), whereby ONGC was to
take over a project that is completed only in India.
Resultantly, profits arising from the successful commissioning of the Project would also arise only in India
The Assessee had not contested the existence of the PO in India but it had only contested that the project
was used merely for preparatory and auxiliary activities.
However, PO has a sense of permanence attributed to it. If it was only for the purpose of preparatory and
auxiliary activities, they could have established a liaison office.
Therefore, the PO must be construed as PE, thus attracting tax liability on the Assessee’s income.

16. PRINCIPLES AND PRECEDENTS
GOVERNING THE RULE OF
PERMANENT ESTABLISHMENT

17. OVERVIEW OF INDIA-KOREA DTAA
•Purpose of advertising,
•The supply of information,
•For the purpose of scientific research
•For the purpose of any other activity, if it has a preparatory or auxiliary character.
Permanent Establishment means a fixed place of business through which the business of an enterprise is
wholly or partly carried on.
PE excludes fixed place of business solely for the following purposes:
Article 5(1)
Article 5(4)(e)

18. CIT v. HYUNDAI HEAVY INDUSTRIES CO. LTD.
– [2007] 7 SCC 422
Profits earned by the Korean company 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 platforms.
The installation PE emerged only after the contract with ONGC stood concluded.
It emerged only after the fabricated platform was delivered in Korea to the agents of ONGC.
Therefore, the profits on such supplies of fabricated platforms cannot be said to be attributable to the PE.
The facts in this case dealt with a turnkey contract entered into between Hyundai Heavy Industries Co. Ltd. (a
Korean company) and ONGC wherein, there was a separate agreement as to design, manufacture, erection
etc. culminating in another separate agreement relating to installation and commissioning of the platform
The Court held that:

19. DIT v. MORGAN STANLEY & CO. [2007] 7 SCC 1
One of the group companies of Morgan Stanley Group, Morgan Stanley Advantages Services (MSAS), an
Indian Company, entered into an agreement for providing certain support services to Morgan Stanley and
Company, a US Company
MSAS was set up to support the main office by providing IT enabled services such as back office
operations, data processing and support centre to Morgan Stanley and Company
According to the DTAA between US and India, the maintenance of a fixed place of business solely for
advertisement, scientific research or for activities which are preparatory or auxiliary in character is not a
PE – back office operations performed by MSAS were construed to be preparatory / auxiliary in nature
Activities performed by stewards who were deployed by the US Company to work in India as employees
of the Indian company were so employed merely to protect the American companies’ interests – hence
service PE did not exist

20. ADIT v. E- FUNDS IT SOLUTION INC. [2018] 13 SCC 294
In this case, it was held that 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 on the Revenue.

21. ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD v. DIT
[2007] 3 SCC 481
The Court discussed the principle of PE
• The distinction between the existence of a business connection and the income accruing
or arising out of such business connection is clear and explicit.
• PE’s non-involvement in the transaction excludes it from being a part of the cause of
the income itself, and thus there is no business connection.
• For attracting the taxing statute there has to be some activities through PE. If income
arises without any activity of PE then even under DTAA the taxation liability in respect of
overseas services would not arise in India.

22. SC’s VERDICT

23. DISCUSSION
The condition precedent for applicability of Article 5(1) of the 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 out
Profits of a foreign enterprise are taxable in a country only where the said enterprise carries on its core
business through a Permanent Establishment in that country.
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 PE under Article 5 of the India-Korea DTAA
Based on the principles and precedents, the Court observed that:

24. APPLICATION TO FACTS
• Held that the ITAT order was perverse based on selective reading of documents submitted by
the taxpayer foreign company.
• Referring to the Assessee’s Board Resolution accompanying the application to RBI for opening
of the PO, the Court noted that the PO was established to coordinate and execute “delivery
documents in connection with construction of offshore platform modification of existing
facilities for ONGC”
• The SC also noted that only two people were working in the PO, neither of whom were
qualified to perform any core activity for the assessee and opined that ITAT should not have
ignored the finding

25. FINAL RULING
The Assessee’s PO was solely an auxiliary office for liaisoning between the taxpayer and ONGC, and was
not involved in the core activity of execution of the project itself.
The Revenue has failed to do away with its burden of proving that the PO at Mumbai is a permanent
establishment.
Therefore, no fixed place PE was established because the Assessee’s PO activities would fall within Article
5(4)(e) of DTAA between India and Korea i.e., preparatory and auxiliary activities.
- Fixed place PE is constituted only when core business activities are carried out in India
- Having held that, the other questions with regard to assumptive attribution was kept
aside
Therefore, the Court confirmed the Uttarakhand HC’s judgment in favour of the Assessee and held that :

26. CONCLUSION

27. KEY LEARNINGS
The principle related to carrying on of ‘Core Business Activity’ is of prime Importance for establishing Fixed Place
PE.
There have been companies avoiding tax by claiming that they carry out preparatory and auxiliary activities, while
actually carrying out core business activities through their Liaison/ project/ branch offices.
The Hon’ble Supreme Court in this case has granted a genuine benefit under the DTAA to the Assessee after
taking note of the fact that the activities of the PO were actually in the nature of preparatory and auxiliary and
had no part to play in the core business function of offshore supplies
The Appeal by the Revenue against the decision of the Hon’ble High Court was dismissed.

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