TMI Blog2007 (5) TMI 196X X X X Extracts X X X X X X X X Extracts X X X X ..... al Gas Company (for short, "ONGC") for designing, fabrication, hook-up and commissioning of South Bassein Field Central Complex Facilities in Bombay High. In short, the contract was in two parts, one was for fabrication of the platform and the other was installation and commissioning of the said platform in South Bassein Field. In these civil appeals we are concerned with the assessment years 1987-88 and 1988-89. The assessee is incorporated under the laws of the Republic of Korea. Its registered office is in Korea. As regards the assessment year 1988-89, the assessee filed its return of income on August 3, 1988. The return indicated "nil" income. In response to notices under section 143(2) of the Income-tax Act, 1961 (for short, "the Act"), the assessee stated that it did not have a permanent establishment in India and, therefore, it was not assessable to tax in India; that its Indian operations consisting of installation and commissioning of the platform commenced in the taxable territory of India on November 1, 1986, and got completed on April 12, 1987, and, therefore, the duration of the project was less than nine months; that it was entitled to exemption under article 7 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; that they had refused to produce books of account maintained in Korea; and that they had failed to produce the accounting details pertaining to the activities/operations carried out by its permanent establishment in India. For the said reasons the accounts were rejected by the Assessing Officer. Therefore, the assessment was made for each of the two assessment years on receipt basis. On the question of quantum of assessment, the Assessing Officer held that income from designing, fabrication, procurement of material etc. was partly attributable to the permanent establishment of the assessee in India on the ground that designing, fabrication and procurement of material were activities having nexus/linkage to the ultimate activity of installation and commissioning of the platform in Bombay High and, therefore, income to that extent from the Korean operations was taxable in India. According to the Assessing Officer, the contract was not divisible. According to the Assessing Officer, the contract was in respect of the turnkey project; that the consideration in the contract was of a lump sum price; that even when the fabricated structure was delivered for transportation to the represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entire operations commencing from designing of the platform right up to the work of commissioning of the platforms. Therefore, according to the Commissioner of Income-tax (Appeals), the contract was indivisible for the purposes of attributing the profits to the permanent establishment in India. Further, according to the Commissioner of Income-tax (Appeals), designing and fabrication of platforms, as an activity, did have an element of income embedded in the said activity of designing and fabrication which had nexus with the activity of installation and commissioning of the platform attributable to the permanent establishment in Bombay High. According to the Commissioner of Income-tax (Appeals), although the consideration paid by the ONGC was a composite payment it cannot be said that no part of the income from the Korean operations was at all attributable to the permanent establishment in Bombay High. For the aforestated reasons, the Commissioner of Income-tax (Appeals) held that though the actual receipt on fabrication operations in Korea was not taxable under the Income-tax Act, the work of designing and engineering of platforms was taxable under the CADT read with section 9(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act. According to the Tribunal, the work of fabrication in Korea was separate from the work of installation and commissioning of platform in India; that the fabricated platform was handed over to the ONGC in Korea in September 1987 and, therefore, before the coming into existence of the permanent establishment of the assessee in India the work of fabrication was completed in Korea and, therefore, the income arising to the assessee from the work of fabrication in Korea was not divisible. According to the Tribunal, the installation permanent establishment came into existence only after the work in Korea got completed and, therefore, only the income from the Indian operations was attributable to the permanent establishment which was alone taxable in India. For the above reasons, the appeal filed by the assessee was allowed. Aggrieved by the aforestated decisions of the Income-tax Appellate Tribunal, the matter was carried in appeal to the High Court under section 260A of the Act which appeal was summarily dismissed. Hence, these civil appeals are filed by the Department. A short question which needs to be answered in the present case is what are the profits reasonably attributable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in terms of the general provisions of the Income-tax Act. Therefore, ascertainment of a foreign -enterprise's taxable business profits in India involves an artificial division between profits earned in India and profits earned outside India. The Indian Income-tax Act, 1961 is concerned only with the profits earned in India and, therefore, a method is to be found out to ascertain the profits arising in India and the only way to do so is by treating the Indian permanent establishment as a separate profit centre vis-a-vis the foreign enterprise (the Korean GE, in the present case). This demarcation is necessary in order to earmark the tax jurisdiction over the operations of a company. Unless the permanent establishment is treated as a separate profit centre, it is not possible to ascertain the profits of the permanent establishment which, in turn, constitutes profits arising to the foreign GE in India. The computation of profits in each permanent establishment (taxable jurisdiction) decides the quantum of income on which the source country can levy the tax. Therefore, it is necessary that the profits of the permanent establishment are computed as independent units. However, in a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3) where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manent establishment. There is one more reason for coming to the aforestated conclusion. In terms of paragraph (1) of article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the permanent establishment would have earned if it was wholly independent of the GE. Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the permanent establishment in India) and even if we assume that the supplies were an integral part, still no part of profits on such supplies can be attributed to the independent permanent establishment unless it is established by the Department that the supplies were not at arm's length price. No such taxability can arise in the present case as the sales were directly billed to the Indian customer (ONGC). No such taxability can also arise in the present case as there was no allegation made by the Department that the price at which billing was done for the supplies included any element for services rendered by the permanent establishment. In the light of our above discussion, we are of the view that the profits that accrued to the Korean GE for the Korean operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anent establishment of the assessee relating to the work of installation and commissioning of the platforms in Bombay High, we are of the view that, for the reasons mentioned hereinafter, profits arising from the activities of installation and commissioning were taxable at 10 per cent. of the payments relating to the said services/facilities carried out in Bombay High. Firstly, in the present case it is important to note that the accounts submitted by the assessee were rejected and the Assessing Officer had to invoke the provisions of the Act by way of best judgment assessment. Secondly, in the present case, the assessee themselves contended in the assessment proceedings that the Assessing Officer should have computed the income relating to Indian operations under section 44BB or under Instruction No. 1767 issued by the Central Board of Direct Taxes dated July 1, 1987. Thirdly, it is important to note that Chapter IV of the Act contains provisions for presumptive taxation of business income in certain cases as prescribed in sections 44B, 44BB, 44BBA and 44BBB of the Act. In the scheme of presumptive taxation, the assessee is presumed to have earned income at the rate of a certain p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected the completed contract method which is not challenged. Therefore, we have to fall back on the percentage of completion method under which reasonable profit is calculated on the basis of the value of the work certified and the profit attributable to the work certified. For example, if the value of the work certified is 1/4 or more but less than 1/2 of the contract price, then a certain percentage of the profit accruing to the certified work is taken to the profit and loss account. In the present case, the assessee has not given these details, particularly, regarding the value of the work duly certified. If the contract is almost complete, then profit is normally estimated by charging the actual cost and the costs estimated for completing the remaining contract to the contract account. This procedure is called as procedure of contract costing. When the assessee does not give the particulars abovementioned then the Commissioner of Income-tax (Appeals) was right in estimating the profits of the assessee at 10 per cent. of the gross receipts in respect of the activities of installation, hook-up and commissioning performed by the Indian permanent establishment in Bombay High. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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