2013 (12) TMI 1594 - HC - Income Tax

Money received attributable to within India activities - P.E. in India - Held that - One has to read Article 5 of the Agreement in order to understand what a permanent establishment is in terms whereof permanent establishment means a fixed place of business through which business of an enterprise is wholly or partly carried on. In the instant case according to the revenue the Project Office of the appellant in Mumbai is the permanent establishment of the appellant in India through which it carried on business during the relevant assessment year and 25 per cent of the gross receipt is attributable to the said business. Neither the Assessing Officer nor the Tribunal has made any effort to bring on record any evidence to justify the same. That being the situation we allow the appeal set aside the judgment and order under appeal as well as the assessment order in so far as the same relates to imposition of tax liability on the 25 per cent of the gross receipt upon the appellant in the circumstances mentioned above and observe that the questions of law formulated by us while admitting the appeal have not in fact arisen on the facts and circumstances of the case but the real question was whether the tax liability could be fastened without establishing that the same is attributable to the tax identity or permanent establishment of the enterprise situate in India and the same we think is answered in the negative and in favour of the appellant.

Summary

Issues:
Assessment of tax liability on foreign company for income received under contract with Indian company for outside India activities.

Analysis:
The judgment revolves around the tax liability of a foreign company for income received under a contract with an Indian company for activities outside India. The appellant, a foreign company, filed its return showing nil income for the Assessment Year 2007-08, claiming to have incurred a loss due to expenses related to inside and outside India activities. The Assessing Officer disallowed some deductions and brought 25% of the revenue allegedly for outside India activities within the Indian tax network. The Tribunal upheld this decision, leading to the present appeal.

The Court focused on the tax identity of the appellant in India and abroad, highlighting the absence of a mechanism in the Agreement for avoidance of double taxation to apportion tax liability. The Agreement recognizes two tax identities of an enterprise and specifies that profits attributable to a permanent establishment in another state may be taxed in that state. However, it lacks guidance on attributing income to specific tax entities.

The Court emphasized that the revenue was generated through dealings with O.N.G.C. and not the appellant's tax identities. The appellant, being a resident of Korea, has tax identities in both countries. By submitting a return in India, the appellant acknowledged its tax identity in India. The Court analyzed the definition of permanent establishment and concluded that the Taxing Authority could not arbitrarily fix tax liability without establishing the revenue's attribution to the Indian tax identity.

Ultimately, the Court allowed the appeal, setting aside the tax liability imposed on 25% of the revenue. It clarified that tax liability must be linked to the tax identity or permanent establishment in India, which was not established in this case. The judgment highlighted the necessity of establishing the attribution of income to a specific tax entity for tax liability determination.