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TMI Blog2020 (7) TMI 545X X X X Extracts X X X X X X X X Extracts X X X X ..... ocurement, fabrication, installation and modification at existing facilities, and start-up and commissioning of entire facilities covered under the 'Vasai East Development Project' ("Project"). 3. On 24.05.2006, the Assessee set up a Project Office in Mumbai, India, which, as per the Assessee, was to act as "a communication channel" between the Assessee and ONGC in respect of the Project. Pre-engineering, survey, engineering, procurement and fabrication activities which took place abroad, all took place in the year 2006. Commencing from November, 2007, these platforms were then brought outside Mumbai to be installed at the Vasai East Development Project. The Project was to be completed by 26.07.2009. 4. With regard to Assessment Year 2007-2008, the Assessee filed a Return of Income on 21.08.2007 showing nil profit, as a loss of INR 23.5 lacs had allegedly been incurred in relation to the activities carried out by it in India. 5. On 29.08.2008, a show-cause notice was issued to the Assessee by the Income Tax authorities requiring it to show cause as to why the Return of Income had been filed only at nil, which was replied to in detail by the Assessee on 02.02.2009. Being dissatis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of assessee." 7. It then confirmed the finding contained in the Draft Order that the agreement was a "turnkey" project which could not be split up, as a result of which the entire profit earned from the Project would be earned within India. Basing itself on data obtained from the database "Capital Line", the Panel picked up four similar projects executed by companies outside India, and found the average profit margin to be 24.7%, which, according to the Panel, would therefore justify the figure of 25% arrived at in the Draft Order. The Panel having dismissed the Assessee's objections, the Draft Order was made final by the Assessing Officer on 25.10.2010. The Assessee then filed an appeal against the Assessment Order before the Income Tax Appellate Tribunal ("ITAT"). 8. The decision of the ITAT on 30.08.2011 went into the establishment of the Project Office at Mumbai in much more detail than had been gone into either in the Draft Order or the Dispute Resolution Panel's decision. The ITAT referred to and relied upon an application dated 24.04.2006, which had been submitted by the Assessee to the Reserve Bank of India ("RBI") for opening the Project Office, which in turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... precedent, the assessee had to obtain insurance with respect to the entire project which has been in fact obtained by the assessee in India for which the assessee has received major payment during the year under consideration itself. The said policy has not been shown to be restricted only with regard to activities of the assessee outside India." 9. The ITAT thus confirmed the decisions of the Assessing Officer and the Dispute Resolution Panel that the contract was indivisible. It then went on to deal with the argument on behalf of the Assessee that the Project Office was only an auxiliary office, and did not involve itself in any core activity of business, as accounts that were produced would show that there was no expenditure which related to execution of the project. This argument was disposed of as follows: "The way the terms of the contract are described and the way the work on contract has to proceed clearly describe that in all the activities of contract there will be the role of Mumbai project office as the same has to work as a channel between assessee company and ONGC. If PE of the assessee exists within the meaning of Article 5.1 and 5.2 and assessee claims that desp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough the project office only, is perverse inasmuch as the same is based on selective and/or incomplete reference to the material on record, irrelevant considerations and incorrect appreciation of the role of the project office? (iii) Without prejudice, whether, on the facts and the circumstances of the case and in law, the Tribunal erred in not holding that even if the appellant had fixed place PE in India, no income on account of offshore activities, i.e. the operations carried out outside India (viz., designing, engineering, material procurement, fabrication, transportation activities) was attributable to the said PE, instead, in setting the issue to the file of the assessing officer? (iv) Without prejudice, whether, on the facts and circumstances of the case and in law, the Tribunal erred in not holding that even if the appellant had fixed place PE in India, no income could be brought to tax in India since the appellant had incurred overall losses in respect of the VED project? (v) Whether, on the facts and circumstances of the case, the contract was divisible/distinguishable pertaining to the activities associated with designing, fabrication and installation of platfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Co. Ltd. (supra) was correctly distinguished by the authorities, as that was a case where a turnkey project was in fact bifurcated into two parts, namely, a separate agreement as to design, manufacture, erection etc. culminating in another separate agreement relating to installation. On the facts of that case it was found that the permanent establishment was set up only at the stage of installation, i.e. long after the revenue had been earned from manufacture, design etc., and it was for that reason that it could not be brought to tax. He also sought to distinguish the judgment in M/s DIT (International Taxation), Mumbai v. M/s Morgan Stanley & Co. Inc., (2007) 7 SCC 1, and relied upon certain passages in a recent judgment reported as Asst. Director of Income Tax, New Delhi v. E-Funds IT Solution Inc. (2018) 13 SCC 294. He argued that the High Court judgment was cryptic and did not address any of the real issues that arose on the facts of this case. He further argued that it was completely incorrect to state that there was no finding that 25% of the gross revenue of the Assessee was attributable to the business carried out by the Project Office of the Assessee. On the contrary, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ICLE 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) 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. 3. The term "permanent establishment" likewise encompasses a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than nine months. 4. Notwithstanding the preceding provisions of this article, the term "permanent establishment" shall be deemed not to include- (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gan Stanley Group, is an investment bank engaged in the business of providing financial advisory services, corporate lending and securities underwriting. One of the group companies of Morgan Stanley Group, namely, Morgan Stanley Advantages Services Pvt. Ltd. ("MSAS") entered into an agreement for providing certain support services to Morgan Stanley and Company. MSAS, being an Indian Company, was set up to support the main office functions in equity and fixed income research, account reconciliation and providing IT enabled services such as back office operation, data processing and support centre to Morgan Stanley and Company. Tackling the question as to whether a "fixed place" permanent establishment existed on the facts of that case under Article 5 of the India-US treaty - which is similar to Article 5 of the present DTAA - this Court held: "10. In our view, the second requirement of Article 5(1) of DTAA is not satisfied as regards back office functions. We have examined the terms of the Agreement along with the advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from reading of the above Agreement/application that MSAS in India would be engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany, as a result of which a "service" permanent establishment would stand established on this count. 19. The judgment in Hyundai Heavy Industries Co. Ltd. (supra) was heavily relied upon by Shri S. Ganesh and sought to be distinguished by Shri N. Venkataraman. The facts in Hyundai Heavy Industries Co. Ltd. (supra) made it clear that the turnkey contract entered into between Hyundai Heavy Industries Co. Ltd. and ONGC was divisible into two parts, and as a result the Court found: "16. On reading Article 7 of the CADT, it is clear that the said Article is based on OECD Model Convention. Para (1) of Article 7 states the general rule that business profits of an enterprise of one contracting State may not be taxed by the other contracting State unless the enterprise carries on its business in the other contracting State through its PE. The said Para (1) further lays down that only so much of the profits (sic as is) attributable to the PE is taxable. Para (2) of Article 7 further lays down that the attributable profit can be determined by the apportionment of the total profits of the assessee to its various parts OR on the basis of an assumption that the PE is a distinct and separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cause of the income itself, and thus there is no business connection. 85. Article 5.3 provides that a person is regarded as having a permanent establishment if he carries on construction and installation activities in a contracting State only if the said activities are carried out for more than six months. Para 6 of the Protocol to India-Japan Tax Treaty also provides that only income arising from activities wherein the permanent establishment has been involved can be said to be attributable to the permanent establishment. It gives rise to two questions, firstly, offshore services are rendered outside India; the permanent establishment would have no role to play in respect thereto in the earning of the said income. Secondly, entire services having been rendered outside India, the income arising therefrom cannot be attributable to the permanent establishment so as to bring within the charge of tax. 86. For attracting the taxing statute there has to be some activities through permanent establishment. If income arises without any activity of the permanent establishment, even under DTAA the taxation liability in respect of overseas services would not arise in India. Section 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent judgment of this Court, namely, E-Funds IT Solution Inc. (supra), concerned itself with the India-US Double Taxation Avoidance Agreement with similar provisions. Dealing with what was referred to as a "fixed place", permanent establishment, this Court held: "16. The Income Tax Act, in particular Section 90 thereof, does not speak of the concept of a PE. This is a creation only of the DTAA. By virtue of Article 7(1) of the DTAA, the business income of companies which are incorporated in the US will be taxable only in the US, unless it is found that they were PEs in India, in which event their business income, to the extent to which it is attributable to such PEs, would be taxable in India. Article 5 of the DTAA set out hereinabove provides for three distinct types of PEs with which we are concerned in the present case: fixed place of business PE under Articles 5(1) and 5(2)(a) to 5(2)(k); service PE under Article 5(2)(l) and agency PE under Article 5(4). Specific and detailed criteria are set out in the aforesaid provisions in order to fulfil the conditions of these PEs existing in India. The burden of proving the fact that a foreign assessee has a PE in India and must, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ient (SHI) has entered into contract with M/s Oil and Natural Gas Corporation Ltd. (ONGC) vide contract number MR/OW/MM/VED/O3/2005. 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 letter head of the company for the details of the project as Notification FEMA 95/2003-RB dated 2nd July, 2003 Foreign Exchange Management (Establishment in India of Branch or Office or other place of business) (Amendment) Regulations 2003 along with the copy of letter from ChoHung Bank for opening Bank account. 2. Copy of the POA in our favour and in favour of M/s Hemand Arora and Co., CA. 3. Certified copy of the POA in the name of the Mr. S.S. Park, who has signed the application. 4. Certified copy of the certificate of registration of the company in South Korea. 5. Certified copy of the notarised Board resolution for opening a Project office in India. 6. Certified copy of Extract of contract entered into by our client. Kindly take the above documents on record. Please take on record our client's Project office and register the same. If you require a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfortunately, 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. (supra). 28. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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