TMI Blog2011 (8) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... ity as income related to PE of the assessee to India. But we find no material on record to support such attribution particularly in absence of any reasoning or basis given for that. Necessary material in this respect has to be brought on record to arrive at a proper conclusion that what percentage will be appropriate to be attributed to the PE of the assessee in India during the year under consideration. - Matter remanded back to AO. - 5237 (DELHI) OF 2010 - - - Dated:- 30-8-2011 - G.E. VEERABHADRAPPA, I.P. BANSAL, JJ. ORDER I.P. Bansal, Judicial Member ‑ This is an appeal filed by the assessee. It is directed against the order passed by the Assessing Officer dated 25-10-2010 under section 143(3)/144C(13) of the Income-tax Act (the Act). The impugned assessment order has been passed by the Assessing Officer as per order passed by Dispute Resolution Panel-II, Delhi, dated 30-9-2010 for assessment year 2007-08. Grounds of appeal read as under:- 1. That on the facts and circumstances of the case and in law, the order passed by the Assessing Officer ( the ld. AO ) under section 143(3) read with section 144C of the Income-tax Act, 1961 ( the Act ) without af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oring the fact that activities like bidding for the contract, notification of award of contact, signing of the contract and pre-bidding surveys, being events earlier to the execution of the contract in India, could not lead to establishment of installation PE in India. 3.6 That on the facts and circumstances of the case and in law, the ld. AO erred in holding that the pre-engineering and pre-construction survey lead to establishment of PE even though these activities were carried out by independent sub-contractors. 4. That on the facts and circumstances of the case and in law, the ld. AO erred in holding that the contract with ONGC was not divisible in terms of activities to be performed in and outside India, and, therefore, the profit arising to the appellant from the activities performed outside India (designing, engineering and material procurement) was chargeable to tax in India. 4.1 That on the facts and circumstances of the case and in law, the ld. AO erred in holding that the consideration under the contract for the work carried out in India and outside India was neither identifiable nor divisible not appreciating that the contracting parties had themselves id ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yone Holdings Limited' and 'Dolphin Offshores Enterprises India Limited', without confronting the same to the appellant, and on that basis approving the rate of 25% applied by the AO to the contract receipts to arrive at the income from the offshore activities. In ignoring the global profit and loss account filed by the appellant which demonstrates the worldwide profit margin earned by the appellant and in not appreciating that in terms of Rule 10 of the Income-tax Rules the said margin could at most be applied to sales made to ONGC to the extent attributable to the PE, to determine the income of the appellant liable to tax in India. 8. That the ld. AO erred in giving lower credit of the tax deducted at source as claimed by the appellant in its return of income. 9. That the ld. AO erred in charging interest under section 234B of the Act, not appreciating that since the entire income of the appellant was subject to tax withholding, if such income were to be held chargeable to tax in India, the appellant was not liable to pay advance tax. 10. That the ld. AO erred on facts and in law in charging interest under section 234D of the Act. The above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Western Offshore site. 4. The above mentioned contract was on turnkey basis at ONGC's western offshore site. ONGC invited tenders for this work vide notice dated 30th June, 2005 in pursuance of which the aforementioned contract was awarded to the assessee company along with L T. 5. The assessee company and L T for carrying out this work had entered into a Memorandum of Understanding which is dated 15th October, 2005 copy of which is filed at page 272 of the paper book. The allocation of work between them as specified in the said Memorandum of Understanding was as under:- SAMSUNG : BCPA-2 Deck, Jacket, Building module including TG. Installation of all the structures (except modification) and insurance. L T : Booster Compressor Modules, HP Compressor Module, Bridges and Modification to existing facilities. 6. The above allocation was further revised by amendment to Memorandum of Understanding dated 16th November, 2005 a copy of which is placed at page 274 of the paper book and the revised allocation was as under:- SAMSUNG: BCPA-2 Deck, Jacket, Building module including TG, Bridges and modification to existing facilities. Installatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Contract shall include in general but not limited to Surveys (pre-engineering, pre-construction/pre-installation and post-installation), Design, Engineering, Procurement, Fabrication, Anti-corrosion Weight coating of risers and submarine pipe line spools, Load out, Tie down/sea fastening, Tow-out/Sail-out, Transportation, Installation, Hookup, Modifications on existing facilities, Testing, Pre-commissioning, Commissioning of entire facilities as described in the bidding documents. Included among these functions, but not limited to these are : (a) Carry out all engineering and design requirements to completely design and engineer these facilities including all safety studies. (b) Provide purchasing, expediting, inspection, handling and transportation of all materials and equipment. (c) Prepare and issue purchase specifications after obtaining approval from the Company where required, for all equipment as well as obtaining vendor certified prints, instructions, parts lists, etc. (d) Prepare and issue all engineering, purchasing and construction schedules for approval of Company. (e) Supervision monitoring and progress reporting during design engine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaking the Works shall cover all the Contractor's obligations and all matters and things necessary for proper execution and maintenance of the Works in accordance with the Contract and for Complying with any instructions which the Company's Representative may issue in accordance with in connection therewith and of any proper and reasonable measures which the Contractor takes in the absence of specific instructions from the Company's Representative. 13. Clause 2.3.5.1 states an obligation cast upon the contractor to supply to ONGC within 21 days of the effective date of commencement of work or prior to kick off meeting, whichever is earlier, an organization chart showing the proposed organization to be established by the contractor for execution and the work including the identities and curriculum vitae of the key personnel to be deployed and any revision or alteration to such organization chart was to be promptly informed to the assessee company. 14. The Clause 3 describe the payments. Under clause 3.1 contract price has been described as under:- The Company shall pay to the Contractor in consideration of satisfactory completion of all the works covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank of India for opening Project Office in India (in the case of foreign Contractor). 16. In Clause 3.3 under the head 'Performance guarantee' the contractor is under an obligation to furnish to ONGC a bank guarantee within two weeks from the date of signing of the contract of equivalent amount of 10% of the contract price. Clause 3.5 describe the adjustment to the contract price which, for the year under consideration, is not relevant as no such exigency has been shown to be happened. 17. During the year under consideration, as per letter dated 24th May, 2006 of the RBI, Mumbai, the project office is opened on 24th May, 2006. The assessee furnished the return of income in accordance with Article 7 of Double Taxation Avoidance Agreement (DTAA) between India and Korea. The assessee offered the revenue of ₹ 23,73,45,563 on account of aforementioned contract. However, the return of income was filed at nil showing loss of ₹ 23,50,939. The Assessing Officer required the assessee to show cause as to why the return of income was filed at nil. In response to such show cause notice, it was stated by the assessee that the business of the assessee company is gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed the said amount to the assessee. He found that TDS on pre-engineering and survey was belatedly made, therefore, he excluded the expenses of ₹ 35,18,206 on the ground of application of section 40(a)(ia) of the Act. It was also noticed that the Assessing Officer had disallowed the said amount and the Assessing Officer has calculated the income of the assessee from inside India activity at a loss of ₹ 23,33,939 in the following manner:- Income from business or profession Income as per P/L A/c - 6129944 Add: Provision for taxation Provision for FBT 35319 Provision for Deferred Tax Liability 16967 Depreciation computed under Schedule XIV of the Companies Act 236561 Disallowance under section 40( a )( i ) 3759997 Disallowance under section 40A(3) 4100 Disallowance as discus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract must be considered to be an integrated one so as to make the assessee to pay tax in India. The taxable events in execution of a contract may arise at several stages in several years. The supply obligations is distinct and separate from service obligation. The price for each of component of contract is separate. Similarly, offshore supply and offshore services have separately been dealt with. The prices in each of the segment are different. The very fact that in the contract the supply segment and service segment have been specified in different parts of the contract is a pointer to show the liability of the assessee thereunder is also different. The contract undisputedly was executed in India. By entering into a contract in India although parts thereof will be carried out outside India will not make the entire income derived by the assessee to be taxable in India. It was submitted that only such part of income as was attributable to the operations carried out in India would be taxable in India. The interpretation of the treaty should be made in accordance with the OECD model and reference was made to the commentary written by Klaus Vogel vide which the second sentence of Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acting the taxing statute, there has to be some activity through permanent establishment. If income arises, without any activity of the permanent establishment, even under the DTAA the taxation liability in respect of overseas services would not arise in India Section 9 spells out the extent to which the income of the non-resident would be liable to tax in India. Section 9 has a direct territorial nexus. 22. Thereafter, the Assessing Officer made various inquiries from the assessee regarding the activities carried on by the assessee which are listed at page 13 of the assessment order. The Assessing Officer also called for information from ONGC and from the information so received, he found that the assessee had actively participated in the bidding process, pre-bid meetings, negotiations and submissions of the tender documents/process of award of contract. He observed that the project office of the assessee at Mumbai was always in existence, actively involved right from the kick off meeting which was held on 15th February, 2006. In the minutes of the kick off meeting, it was mentioned that the ONGC has informed the assessee that the need to open project office in India is necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vy reliance on the decision of Hyundai Heavy Industries Ltd. (supra) and he noted that the assessee in that case had opened its office in India some times in 1983 and since then the assessee was regularly taking the execution of various projects in India most of which were related to projects of ONGC on high-sea. The said office of that assessee was approved only as a liaison office and was not permitted to undertake any business activity on behalf of the assessee. However, there was dispute with the income-tax department in this regard. According to the department, the said liaison office had crossed the bound of liaison office and undertook the business activities for and on behalf of the assessee. He also referred to the observations of the Apex Court from the said decision in which they have observed that the contract in that case was in two parts; one was for fabrication of the plat-form and the other was for installation and commissioning of the said plat-form in South Bassein Field. It was further noted by the Apex Court that the Indian operations consisting of installation and commissioning commenced on 11th November, 1986 and were completed on 12th April, 1987. It was note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) The contract was in two parts, one for fabrication of platform and the other for installation. (ii) The installation PE in India came into existence only after the conclusion of the contract for supply of fabricated platforms. (iii) The installation PE in India came into existence only after the conclusion of the contract for supply of fabricated platforms. (iv) There was no allegation by the department that the PE came into existence before the sale took place. (v) The sale of fabricated platform took place outside India. 26. Comparing the aforementioned facts with the case of the assessee, ld. Assessing Officer has held that the facts of the case of the assessee are materially different from the facts of aforementioned case. The Assessing Officer referred to the various terms of the agreement entered into by the assessee with the ONGC. He first referred to the scope of the work which did not include any sale or supply of material to ONGC and has observed that the contract in the present case does not begin with the installation, but begin with pre-engineering and pre-construction service. The effective date of commencement of work is 24-1-2006. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of contract with ONGC did not stipulate any sale of material to them. The preamble and the scope of work stipulates various works at the Vasai East Development Project. There may be various stages in executing the work like survey, designing, fabrication, procurement and installation and commissioning but these are mere stages of the total project. The ONGC does not purchase any material from the assessee. ONGC takes over the completed work when all parts of the work are executed. The ownership of the fabricated material remained with the contractor till the complete project was handed over to the ONGC. It is observed by the AO that main reliance of the assessee is on schedule of milestone payments which stipulates value of each item, the currency in which such payment is to be made and also the stage of payment. He observed that as clarified by ONGC, these milestone payments are in the nature of Provisional Progressive Payments pending completion of whole work as per clause 3.2 of the agreement. The letter of clarification obtained from ONGC states that such arrangement is done with a view to provide adequate liquidity of the funds to the contractor and it has been fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cuted in India where the assessee has also the obligation of fabrication and procurement of certain material to be used in the work. If assessee's version is accepted, it will amount to accepting the fact that if a builder is given a contract to construct flats as per agreed terms and the builder imports certain design and material, he claims that a portion of his income is exempt from tax on the ground that supply is under a separate and divisible contract. He has given an example of a contract for construction of a house where contractor carries on survey of the site, makes drawing and designs, procures material and brings it to the site and does the construction work and hand over the house to the owner and in that case he cannot be said to have sold bricks, iron rods, cement, wooden door, tiles etc. but he is constructing the house and handing over the same to the owner. The procurement of material has no relevance to location from where it has been brought. The contractor may import it or procure it locally. Procurement itself means buying it from third party and thus, there was no basis on which it could be said that contract could be divided into two parts. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re disallowed by the AO. The AO further observed that the assessee has debited a sum of ₹ 52,13,79,129 on account of contractor's cost in respect of which TDS has not been deducted. He has further found that out of material cost, the value of steel material has not been given and keeping in view all these facts, he has estimated the income of the assessee at the rate of 25% of the revenue allegedly earned by the assessee outside India at ₹ 113,43,78,960 and has computed the income from such revenue at ₹ 28,35,94,740. In this manner, the assessment of the assessee has been framed. The assessee is aggrieved, hence has filed the aforementioned appeal. 30. After narrating the facts, it was submitted by learned AR that as per Article 7(1) of the DTAA between India and Korea, business profits of Korean enterprise can be taxed in India only if Korean enterprise carries on a business in India through a PE situated in India. Thus, he submitted that existence of PE in India is a sine qua non to bring into tax Korea entity in India. He further submitted that Article 5(1) and (2) define permanent establishment and as per provisions of Article 5(1) unless core business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the disposal of the fixed place of business or with the cessation of any activity through it, that is when all acts and measures connected with the former activities of the permanent establishment are terminated (winding up current business transactions, maintenance and repair of facilities). 32. He also referred to the decision of Delhi Tribunal in the case of R B Falcon Offshore Ltd. v. Asstt. CIT in ITA Nos. 389/Delhi/2005 and 4752-4753/Delhi/2005 to contend that mere existence of an office is not sufficient to hold that such office constituted PE of the non-resident in India and it must be demonstrated that evidence that 'business of the non-resident' is wholly or partly carried on through such 'place of management' 'office' or 'branch'. Reference in this regard was made to para 9 of the said order. 33. He further referred to Article 5(4) of DTAA and contended that fixed place of business in India carrying on the work which is of preparatory or auxiliary in nature vis-a-vis business of non-resident would not be construed as resulting in PE in India. He submitted that according to the facts of the case, the assessee along with the L T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , salary, etc. and no technical work was carried out by the project office. 36. It was further submitted that the project office was to act only as a communication channel between the ONGC and the assessee for the purpose inter alia, recovering invoices received by the head office on ONGC and passing them on to ONGC, recurring milestone completion certificates from ONGC and transmitting the same to head office, arranging security clearance as and when required for personnel and equipment. He submitted that there is no evidence on record to suggest that the project office had undertaken anything apart from acting as an interface between the assessee and ONGC. He submitted that even if it is admitted that some activity was undertaken from the project office, the said activity being preparatory and auxiliary in nature vis-a-vis the scope of the overall project which included inter alia all design, engineering, fabrication and installation, the project office cannot be treated as PE of the assessee in India in view of the clear mandate of Article 5 (4) of DTAA. 37. Then, Ld. AR referred to the provisions of Article 5(3) and his contention is that the same being special provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see was undisputedly in the nature of an installation project, therefore, mere existence of project office is not sufficient to constitute PE. Installation PE can be said to have come into existence only if installation activity had commenced during the relevant previous year. He submitted that on the facts, in the present case, the fabrication, design and engineering of the platform and jacket was sub-contracted to Aker Malaysia and the said activity was carried on outside and reference in this regard was made to pages 323 to 325 of the paper book and also 568 onwards of the paper book II where invoices and completion certificate issued by ONGC have been placed. He submitted that jackets after fabrication outside India started arriving in India only in November, 2007 and, therefore, the installation activity could not be said to have commenced prior thereto. As installation PE having not come into existence during the relevant previous year, no part of income is liable to be taxed in India. Therefore, the Assessing Officer is wrong in applying the provisions of section 5(1) of DTAA to hold that the assessee had fixed place PE in India during the relevant previous year in the form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and execution of Vasai East Development Project for ONGC. That the co. hereby does make, constitute and MR. SangSoon Park Yard General manager of the co., as the company's true and lawful representative with full power and authority of the purpose of establishing a project office and co-ordinating and executing delivery documents in connection with construction of offshore platform and modification of existing facilities for ONGC above. 42. Ld. DR further referred to page 323 of the paper book which is a letter dated 25th May, 2006 and which is an approval from RBI regarding such project office. He submitted that this approval indicates that there is a project office opened in Mumbai for carrying on and execution of contract with ONGC. Therefore, she submitted that project office is PE under Article 5(1) of DTAA and he referred to the Article 5 (1) of DTAA which read as under:- For the purposes of this convention, the term 'permanent establishment' means a fixed place of business through which business of enterprise is wholly or partly carried on. 43. Therefore, ld. DR submitted that there are two requirements for existence of PE under Article 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appointed a lawful representative for co-ordination with ONGC. He submitted that in view of such positive evidence which amounts to self-admission on the part of the assessee, what else will be required to be proved the existence of PE by the AO. He submitted that ld. AR has also not led any evidence to establish that the positive assertion by board of directors was incorrect or was not meant to be so. The terms of contract clearly indicate that there will be continuous co-ordination between ONGC and the assessee which is required at all the stages of execution of contract. 45. He referred to para 2.3.4.1 of the contract which says that the company and the contractor shall discuss and agree upon the work procedures to be followed for effective execution of the work. Referring to Para 2.3.5.1 of contract, he submitted that the contractor shall authorise the supervisor or his representative to receive directions and instructions from the company's representatives or engineer's representatives. He submitted that as mentioned earlier, the resolution of the board of directors has appointed a representative for the purposes of co-ordination with ONGC. Ld. DR further referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Supreme Court in the case of Hyundai Heavy Industries Ltd. (supra), Ld. DR submitted that such contention of assessee's counsel is against the principles contained in Article 5 of DTAA which is regarding permanent establishment. He submitted that according to scheme of Article 5, fixed place PE under Article 5(1) is the primary form of permanent establishment which comes into existence if two conditions are fulfilled. Such fixed place PE is based on 'permanence test' and it is irrespective of kind of business of the assessee. He submitted that there can be certain kind of business which do not require a fixed place for its execution and, thus, the assessee may claim that as there is no fixed place PE, its income cannot be taxed. To take care of such situations, Article 5(3) relaxes permanence test for building, construction or installation projects and has laid down 'duration test' for PE to exist. He submitted that Article 5(3) does not preclude Article 5(1) and hence it cannot be said that there cannot be a fixed place PE in case of kinds of businesses mentioned in Article 5(3). He submitted that it will be pertinent that only income attributable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment or not. It is act of setting up of permanent establishment which triggers the taxability of transactions in source state. Therefore, unless permanent establishment is set up, the question of taxability does not arise - whether transactions are direct or through permanent establishment. In case of turnkey project, permanent establishment is set up at installation stage while entire turnkey project including sale of equipment is finalized before installation stage. The setting up of permanent establishment in such a case is a stage subsequent to conclusion of contract. It is as result of sale of equipment that the installation permanent establishment comes into existence. However, this is not an absolute rule. In present case, there was no allegation made by department that permanent establishment came into existence even before sale took place outside India . 48. He submitted that the fact as found by the Hon'ble Supreme Court was that the contract of the assessee in that case with ONGC is divisible into two parts, one is fabrication and sale of platform and the other is its installation. The sale of fabricated platform occurred in Korea. In view of these facts, Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 72 to 78 of paper book wherein in para 11 ITAT has held that provisions of Article 5(3) are specific and therefore they will override the provisions of Article 5(1) and 5(2). He referred to the observations of the Tribunal in para 11 on page 492 where it was observed by the Tribunal that the Assessing Officer was not able to show that PE of the assessee existed in India before fabrication and, in this manner, the ITAT, following the decision of Hon'ble Supreme Court has held that profits before fabrication stage could not be taxed because there exist no PE before installation stage. He contended that Hon'ble Supreme Court in the case of Hyundai Heavy Industries Ltd. (supra) has nowhere held that Article 5(3) takes precedence over Article 5(1) and 5(2) and such observations of ITAT is not even supported by OECD commentary in paragraph 3 of Article 5. He also contended that in the last line of para 11 on page 493 it has been observed by the ITAT that project office in that case did not carry out any commercial activity as these were prohibited by the RBI. So, ld. DR contended that the facts of the case of the assessee are vitally different from the case of Hyundai Heavy I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term 'execution' has been used only with reference to delivery of documents. He submitted that in any case, the personnel deputed at the project office were not technical persons and were not capable of carrying out any work for which the assessee was engaged by ONGC under the contract. He submitted that no evidence has been placed by the Assessing Officer or by the ld. CIT (DR) to demonstrate that the project office was involved in executing the VED project. The nature and quantum of expenses incurred by the project office, on the other hand, amply demonstrate that no work in relation to the project was executed by the project office and it was only acting as a communication channel between the assessee and the ONGC. 53. With reference to the contention of Ld. DR that the business of the assessee was carried on through Project Office for which the reliance was placed by Ld. DR on various clauses of the contract agreement, it was submitted by Ld. AR that such argument of Ld. DR is erroneous inasmuch as those clauses only authorized the assessee through its representatives to co-ordinate with ONGC regarding the work to be performed by the assessee under the agreement. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal in the case of Hyundai Heavy Industries Ltd. (supra). He submitted that the interpretation sought to be conveyed by ld. DR that Article 5 (1) is not overridden by Article 5(3) even in the case of an Installation project would render the duration test under Article 5(3) otiose and, therefore, such an argument of learned DR should not be accepted. 55. Referring to the decision of Hon'ble Supreme Court in the case of Hyundai Heavy Industries Ltd. (supra) ld. AR submitted that normally it is a result of sale of equipment that the installation PE comes into existence but this is not an absolute rule. He submitted it has not been appreciated by Ld. DR that the aforesaid observations of the Hon'ble Supreme Court were not in the context of the issue of fixed place PE vis-a-vis installation PE. It was observed by the court that in a turnkey project, the PE is set up at the installation stage while the entire turnkey project, including the sale of equipment is finalized before the installation stage. However, the aforesaid may not be the case if the Department demonstrates that PE comes into existence even before the sale took place outside India, e.g., in a contract for only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included any element for services rendered by the PE. In the light of our above discussion, we are of the view that the profits that accrued to the Korean GE for the Korean operations were not taxable in India. 56. Thus, it was submitted by the Ld. AR that the project office of the assessee did not constitute PE of assessee in India and, therefore, the Assessing Officer has erred in bringing to tax revenues relating to outside India activity carried out by the assessee. 57. In this manner, both the parties concluded their arguments. 58. We have carefully considered the rival submissions in the light of the material placed before us. We have carefully gone through the contract entered into between the assessee and L T on the one part and ONGC on the other part in pursuance of which the revenue has been received by the assessee. We have also carefully gone through the papers/documents referred to by both the parties during the course of hearing and referred by them in the synopsis filed for their arguments. It is the main case of learned AR that though the existence of PE in India is sine qua non to tax the assessee in India, but the assessee does not have a PE in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iming that no part of its income is taxable in India despite the fact that assessee has PE in India in the shape of Mumbai Project Office; no further proof was required to be submitted by the Assessing Officer as the onus will be on the assessee to prove to the contrary; various clauses of the contract will show that the contract is indivisible and the revenue received by the assessee in pursuance of such contract was taxable in India right from the beginning to the extent profit attributable to such PE; the decision in the case of Hyundai Heavy Industries Ltd. (supra) cannot be applied to the case of the assessee as there is material difference in the facts of that case and the facts of the case of the assessee; in the case of the assessee, Mumbai Project Office having come into existence, the PE was established under Article 5(1), therefore, one does not need to go to the provisions of Article 5(3) as the case of the assessee falls under Article 5(1) which has equal force. Therefore, it is the case of the revenue that the assessee is liable to pay tax on the revenue received/receivable by it in respect of the contract with ONGC to the extent the profit is attributable to PE in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m price and the contractor shall be bound to keep the same firm and without escalation on any ground whatsoever until completion of the entire work against the contract. 63. In para 15 the payment procedure has been described under clause 3.2 and it has clearly been mentioned that the payments pending the completion of whole work are provisional progressive payments for the part of the work executed by the contractor on the basis of completion and certificate issued by the ONGC representative in accordance with the milestone payment formula provided in the bidding document. The payment as per mile stone formula does not in any manner indicative of the consideration of the work completed by that point of time so as to make the said payment relatable to the respective part of the work contract to say that the payment made is only for that part of work. Therefore, on the basis of payment schedule mentioned in mile stone formula cannot be interpreted to be payment made by ONGC to the assessee relating to the work on completion of which payment is released as it has been clearly mentioned in this clause that it is only in the shape of provisional progressive payment. What is material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the contractor for execution and work including the identities and curriculum vitae of the key personal to be deployed and any revision or alteration to such organization chart was also to be promptly informed by the assessee company. As a condition precedent, the assessee company was required to open a project office in India before the commencement of the activity of the contractor. It will be relevant here to describe the contents of the application submitted by the assessee to RBI for opening the project office which is dated 24-4-2006, a copy of which is also placed at page 316 of the paper book which read as under: - General Manager Reserve Bank of India Regional Office April 24, 2006 Mumbai Dear Sir, Re: M/s Samsung Heavy Industries Co. Ltd. (SHI) Application for registration of Project Office Our aforesaid client (SHI) has entered into contract with M/s Oil and Natural Gas Corporation Ltd. (ONGC) vide contract number MR/OW/MM/VED/03/2005. Under the instructions of our above-referred client, we have to enclose following documents in connection with Registration of Project office in India: (1) Letter dated ( .) on the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing Resolution of the Board of Directors of Samsung Heavy Industries Co. Ltd. ( SHI ) was passes at a time of the Board meeting held on April 3, 2006 and has been duly recorded in the Minute Book of the said Company: Resolved: SHI a Corporation duly organized and existing under laws of the Republic of Korea, and with its principal business office at 11th Floor, KIPS Bld., 647-9, YoksamDong, Kangnam-Ku, Seoul, Korea, 135-080, that the opening Mumbai project office and Bank account in India for Vasai East Development Project with Oil and Natural Gas Corporation Limited, India ( ONGC ). Resolved further, that Mr. SangSoon Park is fully authorized to the opening of Project Office and Bank Account in India for ONGC Project. In Witness Whereof, I have hereunder set my hand on this 3rd April in 2006. Samsung Heavy Industries Co. Ltd. SAMSUNG HEAVY INDUSTRIES CO. LTD. 647-9, Yoksam-Dong, KangnamKu, Seoul, Korea, 135-080 68. Minutes of the Board of Directors meeting of the assessee company held for opening of Mumbai Project Office in India is placed at page 321 which read as under: - MINUTES OF BOARD OF DIRECTORS' MEETING OF SAMSUNG HEAVY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that project office opened by the said assessee, according to permission given by RBI, was to work only as a liaison office and was not authorized to carry on any business activity. This is the vital difference between the two cases namely the case of the assessee and Hyundai Heavy Industries case. 71. There is a force in the contention of ld. DR that the words That the Company hereby open one project office in Mumbai, India for co-ordination and execution of Vasai East Development Project for Oil and Natural Gas Corporation Limited ( ONGC ), India used by the assessee company in its resolution of Board of Directors meeting dated 3rd April, 2006 makes it amply clear that project office was opened for co-ordination and execution of impugned project. In absence of any restriction put by the assessee in the application moved by it to RBI, in the resolutions passed by the assessee company for the opening of the project office at Mumbai and the permission given by RBI, it cannot be said that Mumbai project office was not a fixed place of business of the assessee in India to carry out wholly or partly the impugned contract in India within the meaning of Article 5.1 of DTAA. These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and execution of project and no restriction has been imposed by RBI on the working of project office. Thus, in the case of present assessee, the fixed place PE has come into existence in the shape of Mumbai project office on the day when assessee was permitted by RBI to open its such office. Such project office is PE within the meaning of Article 5.1 of DTAA as the assessee has wholly or partly carried out its business activity through it. 73. Here, it has been the case of the assessee that article 5.3 has to be read in isolation. This argument of the assessee cannot be accepted in view of above discussion. This proposition is also not supported by the provisions contained in DTAA. To explain and properly understand it will be relevant to reproduce the provisions of article 5 which defines permanent establishment :- ARTICLE 5 Permanent establishment 1. For the purposes of this Convention, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term permanent establishment shall include especially- (a) a place of management; (b) a branch; (c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irtue of that paragraph. 6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. 7. The fact that a company which is a resident of a Contracting controls or is controlled by a company which is a resident of the other Contracting State, or which caries on business in that other State (whether through a permanent establishment or otherwise) shall not of itself constitute either company a permanent establishment of the other. 74. Article 5.1 describes that for the purpose of DTAA, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Article 5.2 states that the term permanent establishment shall include especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop and (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. Article 5.2 has en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chasing goods or merchandise or for collecting information for the enterprise; (e) 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; and (f) the maintenance of fixed place if business solely for any combination of activities mentioned in sub-paragraphs (a) to (e) provided that overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. The other clauses are not relevant for the purpose of the present case as it is not even the case of assessee that its Mumbai project office cannot be considered to be permanent establishment in the light of Article 5.5, 5.6 and 5.7. 77. Here, to contest the taxability of outside India revenue, it is the main case of the assessee that its Mumbai project office cannot held to be permanent establishment within the meaning of Article 5.1 and 5.2 as its Mumbai project office does not have any role to play in the business activity of the assessee company either wholly or partly. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been brought on record by the assessee to prove the said fact. The arguments put forward in this respect are only by inference such as the accounts maintained by the assessee in India through which it is the argument of ld. Counsel of the assessee that it does not contain any expenditure relating to execution of the contract. But such argument is not acceptable as the maintenance of account is in the hands of assessee and mere the mode of maintaining the accounts alone cannot determine the character of PE as the role of PE only will be relevant to determine that what kind of activities it has carried on. As pointed out earlier the way the contract has to proceed, Mumbai project office of the assessee has to play a vital role in the execution of entire contract and if assessee wants to contend otherwise, the onus is on assessee and not on the revenue. No material has been brought on record by the assessee to show that its Mumbai office does not have any role to play in the execution of contract, therefore, the argument of the assessee cannot be accepted that the Mumbai project office has carried out only preparatory or auxiliary activities so as to bring the PE of the assessee un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e it is found that the liability was that of the payer and the payer has defaulted in deducting the tax at source, the department can take action against the payer under the provisions of section 201 of the Act and compute the amount accordingly. If the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments, the non-resident is not absolved from payment of taxes thereupon. In such a case, the non-resident is liable to pay tax but the question to payment of advance tax would not arise. Therefore, it would be impermissible for the revenue to charge any interest under section 234B of the Act. For raising such contention reliance has been placed on the following decisions: (1) Director of Income-tax v. Jacabs Civil Incorporated etc. 330 ITR 578 (Delhi), (2) CIT v. Sedco Forex International Drilling Co. Ltd. 264 ITR 320. The copies of these decisions are enclosed by the assessee in the paper book at pages 207 to 212 and 202 to 206 respectively. 80. In this view of the situation, we find that interest under section 234B shall not be chargeable in the case of assessee. It is seen that though this issue was raised by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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