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TMI Blog2007 (5) TMI 196X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 Convention for Avoidance of Double Taxation (for short, "the CADT") ; that in the. alternative it was liable to be assessed on the basis of the accounts annexed to the returns; that the accounts were based on the completed contract method in its worldwide accounts; that the accounts of its permanent establishment can be accepted on the completed contract method basis; that it was maintaining an income and expenditure account of its permanent establishment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 representative of ONGC; the accounts between the parties remained to be settled; and since designing and fabrication of the platform had an application in Bombay High (where the platform was to be come into operation), a part of the profits arising even from Korean operations was taxable in India as such portion of the profits was attributable to the work of installation and commissioning of the platform in Bombay High. Accordingly the Assessing Officer estimated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) of the Act. On the question of quantum of profits embedded in the Korean operations, the Assessing Officer was of the view that since the assessee had invoked article 7 of the CADT, the assessee was not entitled to compute its income under section 44BB or under Instruction No. 1767 dated July 1, 1987 issued by the Central Board of Direct Taxes as urged on behalf of the assessee. On this point, the Commissioner of Income-tax (Appeals) took the view that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 to the assessee's permanent establishment in India. In order to answer the above question we are required to analyse the scheme of the Act. Under section 4 of the Act it is the total income of every "person" which is taxable. A foreign company which is not wholly controlled or managed in India is a non-resident so far as its residential status is concerned. Section 5(2) of the Act lays down that as far as a non-resident assessee is concerned the scope of total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmanent 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 case where the Government of India has entered into a tax treaty with a foreign country (Korea, in the present case) then in relation to an assessee to whom such tax treaty applies, the provisions of the Act shall apply only to the extent to which the provisions thereof are more beneficial to the assessee. Now, coming to the present case, the main argument advanced on behalf of the Department was that the assessee was in receipt of consideration which formed part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntracting 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 establishment is situated or elsewhere, which are allowed under the provisions of the domestic law of the Contracting State in which the permanent establishment is situated. 4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 5. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 operations were not taxable in India. There is one more aspect to be discussed. The attraction rule implies that when an enterprise (GE) sets up a permanent establishment in another country, it brings itself within the fiscal jurisdiction of that other country to such a degree that such other country can tax all profits that the GE derives from the source country-whether through a permanent establishment or not. It is the act of setting up a permanent establishment which trigger ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 percentage of his total turnover or gross receipts. If the assessee agrees to be taxed on presumed income, he is not required to maintain books of account. If, however, he claims that his income is less than the presumed figure, he is required to support his claim by producing books of account. In the present case, as indicated above, the Assessing Officer has rejected the accounts submitted by the assessee. This has not been challenged. Moreover, the assessee appeared before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. To this extent we set aside the impugned decision of the Tribunal. Before concluding, we may point out that the High Court had erred in holding that no substantial question of law arose in this case under section 260A of the Act. In our view substantial questions of law did arise. We did not remit the matter to the High Court, particularly, when the appeal is in respect of the assessment years 1987-88 and 1988-89. For the aforestated reasons, we hold as follows: (a) In the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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