Project office used as auxiliary office for liaison not a PE unless core business is carried on therefrom – SC
ABCAUS Case Law Citation:
ABCAUS 3339 (2020) (07) SC
Important case law relied upon by the parties:
Commissioner of Income Tax and Another v. Hyundai Heavy Industries Co. Ltd., (2007) 7 SCC 422
M/s DIT (International Taxation), Mumbai v. M/s Morgan Stanley & Co. Inc., (2007) 7 SCC 1,
Asst. Director of Income Tax, New Delhi v. E-Funds IT Solution Inc. (2018) 13 SCC 294.
Shikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai, (2007) 3 SCC 481
The present case involved the question of the taxability of income attributable to a “permanent establishment” set up in a fixed place in India, arising from the ‘Agreement for avoidance of double taxation of income and the prevention of fiscal evasion’.
The assessee was a company incorporated in Foreign Country. It was allotted a “turnkey”contract by ONGC in a consortium.
The Assessee set up a Project Office in India to act as “a communication channel” between the Assessee and ONGC in respect of the Project.
All pre-engineering, survey, engineering, procurement and fabrication activities took place abroad and later during the relevant assessment year these platforms were brought to India to be installed at the project.
The assessee filed return of Income showing nil profit, as a loss allegedly been incurred in relation to the activities carried out by it in India.
However, the Assessing Officer (AO) was of the view that the project was a single indivisible “turnkey” project, whereby ONGC was to take over a project that is completed only in India. The AO did not agree with the submission that project was used merely for preparatory and auxiliary activities and held that the assessee had a project office in India. Resultantly, profits arising from successful commissioning of the project would also arise only in India.
Accordingly, the AO attributed 25% of the revenues allegedly earned outside India as being the income of the assessee exigible to tax.
The Dispute Resolution Panel (DRP) confirmed the finding of the AO as per Draft Order that the agreement was a “turnkey” project which could not be split up, as a result of which the entire profit earned from the Project would be earned within India.
The Income Tax Appellate Tribunal (ITAT) too confirmed the decisions of the Assessing Officer and the DRP that the contract was indivisible.
The assessee had contened that the Project Office was only an auxiliary office, and did not involve itself in any core activity of business as there was no expenditure related to execution of the project.
According to the Tribunal there was lack of material to ascertain as to what extent activities of the business were carried on by the assessee through the Project Office, and therefore it set aside the attribution of 25% of gross revenue and the matter was remitted to AO to ascertain profits attributable to the project office.
Against the order of the Tribunal, the assessee approached the Hon’ble High Court.
However, the Hon’ble High Court dealt with only the question of arbitrary fixing of part of income to the permanent establishment in India.
The Hon’ble High Court allowed the appeal of the assessee and held that tax liability could not be fastened without establishing that the same was attributable to the permanent establishment situated in India.
Aggrieved by the judgment of the Hon’ble High Court, the Revenue challenged it before the Hon’ble Supreme Court.
Project office used as auxiliary office not PE
Relying on number of judicial precedents, the Hon’ble Supreme Court stated that regarding “fixed place” permanent establishments under double taxation avoidance treaties, it should be an establishment “through which the business of an enterprise” is wholly or partly carried on.
The Hon’ble Supreme Court observed that under relevant DTAA the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
Also the term “permanent establishment” not include the maintenance of a fixed place of business solely for the purpose of advertising, the supply of information, scientific research or any other activity, if it has a preparatory or auxiliary character in the trade or business of the enterprise.
The Hon’ble Supreme Court stated that 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.
The Hon’ble Supreme Court pointed out that the Board Resolution submitted to RBI for registration of the Project Office showed 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 Hon’ble Supreme Court opined that the finding of the ITAT that the Project office was not a mere liaison office, but was involved in the core activity of execution of the project itself was clearly perverse.
The Hon’ble Supreme Court also set aside the finding of the ITAT mere mode of maintaining accounts alone could not determine the character of permanent establishment, being a perverse finding.
Further the Hon’ble Supreme Court also held that the finding of the ITAT that the onus is on the assessee and not on the Tax Authorities to first show that the project office is a permanent establishment was against its judgment.
Also, the Tribunal went into error by ignoring the fact that there were only two persons working in the Project office and neither of whom was qualified to perform any core activity of the Assessee.
Accordingly the Hon’ble Supreme Court held that no permanent establishment had been set up within the meaning of Articles of the DTAA, as the Project Office could not be said to be a fixed place of business through which the core business of the assessee was wholly or partly carried on.
Also it was held that the Project office was not a PE in as much as it was solely an auxiliary office, meant to act as a liaison office between the assessee and ONGC.
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