2020 (7) TMI 545 - SC - Income Tax

Income accrued in India - Taxability of income attributable to a permanent establishment - fixed place in India, arising from the Agreement for avoidance of double taxation of income and the prevention of fiscal evasion with the Republic of Korea ( DTAA ) - to what extent activities of the business were carried on by the Assessee through the Mumbai Project Office? - High Court held that the question as to whether the Project Office opened at Mumbai cannot be said to be a permanent establishment within the meaning of Article 5 of the DTAA would be of no consequence AND there was no finding that 25% of the gross revenue of the Assessee outside India was attributable to the business carried out by the Project Office of the Assessee - HELD THAT - A reading of the Board Resolution would show 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 . Unfortunately, the ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that the Mumbai office was for coordination and execution of the project itself. The finding, therefore, that the Mumbai office was not a mere liaison office, but was involved in the core activity of execution of the project itself is therefore clearly perverse. Equally, 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 permanent establishment. This is another perverse finding which is set aside. Equally the finding that the onus is on the Assessee and not on the Tax Authorities to first show that the project office at Mumbai is a permanent establishment is again in the teeth of our judgment in E-Funds IT Solution Inc. 2017 (10) TMI 1011 - SUPREME COURT Though it was pointed out to the ITAT 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 ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC. This being the case, it is not necessary to go into any of the other questions that have been argued before us. Appeal against the impugned High Court judgment is therefore dismissed.

Summary

Issues Involved:
1. Taxability of income attributable to a "permanent establishment" in India under the Double Taxation Avoidance Agreement (DTAA) with the Republic of Korea.
2. Classification of the Project Office in Mumbai as a "permanent establishment."
3. Attribution of income to the "permanent establishment."
4. Validity of the 25% revenue attribution by the Assessing Officer.
5. Whether the Project Office was engaged in core business activities or merely auxiliary activities.

Detailed Analysis:

1. Taxability of Income Attributable to a "Permanent Establishment":
The primary issue in this case was whether the income earned by the Assessee from a turnkey project awarded by ONGC was taxable in India under the DTAA with the Republic of Korea. The DTAA provisions, particularly Articles 5 and 7, were central to determining if the Mumbai Project Office constituted a "permanent establishment" and, if so, what portion of the income could be attributed to it for tax purposes.

2. Classification of the Project Office in Mumbai:
The Assessee set up a Project Office in Mumbai, claiming it was merely a communication channel. However, the Assessing Officer and the Dispute Resolution Panel (DRP) concluded that the Project Office was a "permanent establishment" under Article 5 of the DTAA. The ITAT supported this view, noting that the Project Office was involved in coordination and execution activities beyond mere liaison work. The High Court, however, found no substantial evidence to support the claim that 25% of the gross revenue was attributable to the Project Office, leading to the Supreme Court's examination of whether the Project Office was indeed a "permanent establishment."

3. Attribution of Income to the "Permanent Establishment":
The Assessing Officer attributed 25% of the gross revenue earned outside India to the Project Office, arguing it was part of an indivisible turnkey project. The DRP and ITAT upheld this view, but the High Court disagreed, stating there was no concrete evidence to justify this attribution. The Supreme Court examined whether the Project Office's activities justified such attribution under the DTAA.

4. Validity of the 25% Revenue Attribution:
The High Court found that neither the Assessing Officer nor the ITAT provided adequate evidence to justify attributing 25% of the gross revenue to the Project Office. The Supreme Court also scrutinized this attribution, considering whether the Project Office's activities warranted such a significant portion of the revenue being taxed in India.

5. Core Business Activities vs. Auxiliary Activities:
The Assessee argued that the Project Office was only engaged in auxiliary activities and not core business functions. The ITAT dismissed this claim, but the Supreme Court found this conclusion to be perverse, noting that the Project Office was primarily for coordination and not for executing the core business activities of the Assessee. The Supreme Court emphasized that the burden of proving the existence of a "permanent establishment" lies with the tax authorities, which they failed to discharge adequately.

Conclusion:
The Supreme Court concluded that the Mumbai Project Office did not constitute a "permanent establishment" under Article 5(1) of the DTAA, as it was not involved in the core business activities of the Assessee. The Project Office was deemed to fall under the auxiliary activities outlined in Article 5(4)(e) of the DTAA. Consequently, the appeal against the High Court judgment was dismissed, affirming that no taxable income could be attributed to the Project Office in India.