The Supreme Court while quashing the order of the ITAT, held that the office of Samsung Heavy Industries at Mumbai, India which is established merely for the sake of communication is not covered under the character of Permanent Establishment (PE) under India-Korea Double Taxation Avoidance Agreement (DTAA).
The Oil and Natural Gas Company (ONGC) awarded a “turnkey” contract to a consortium comprising the Respondent/Assessee, Samsung Heavy Industries Co. Ltd. which is a Company incorporated in South Korea, is 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’.
The assessee company 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.
The issue raised in this case was whether the Project Office in Mumbai, India set up as a communication channel between the Assessee and ONGC was a mere liaison office, or was involved in the core activity of execution of the project itself as a Permanent Establishment (PE).
The AO held that the work relating to fabrication and procurement of material was very much a part of the contract for execution of work assigned by ONGC. The work was wholly executed by 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 ITAT confirmed the decisions of the AO and the Dispute Resolution Panel that the contract was indivisible. It then went on to deal with the argument on behalf of the Assessee that the Project Office was only an auxiliary office, and did not involve itself in any core activity of the business, as accounts that were produced would show that there was no expenditure which related to the execution of the project.
It clear that 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.
It was contended by the assessee 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 three-judge bench of Justice R. F. Nariman, Justice Navin Sinha and Justice B.R. Gavai concluded that no permanent establishment has been set up within the meaning of Article 5(1) of the Double Taxation Avoidance Agreement (DTAA), as the Mumbai Project Office cannot be said to be a fixed place.
“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 a permanent establishment,” the Supreme Court observed.
Subscribe Taxscan Premium to view the Judgment
