The
Background
The Taxpayer was a company incorporated in
In the same year, the Taxpayer set up a PO in
In relation to the Taxpayer's assessment for the financial year 2006-07 (Relevant FY), the Assessing Officer (AO) held that the India PO constituted the Taxpayer's fixed place PE under Article 5(1) of the India-Korea Tax Treaty (Tax Treaty). Basis this conclusion, the AO held that profits from Offshore Activities were associated with the PE in
The Taxpayer appealed against the AO's order before the
- based on the application submitted by the Taxpayer to the
Reserve Bank of India (RBI) for opening the Project Office and the Taxpayer's board minutes, it was held that no restrictions were placed by the RBI or the Taxpayer's board of directors on the PO's activities and that the PO was therefore entitled to carry on business activities inIndia ; -
a board resolution of the Taxpayer in 2006 stated, inter alia, that the Taxpayer was opening a PO in
India for coordination and execution of the project, thereby making it clear that all the Project activities were to be routed through the PO only; -
the Taxpayer had contended that the contract with
ONGC was divisible in terms of activities to be performed inside and outsideIndia , and therefore, profit arising to the Taxpayer from Offshore Activities was not chargeable to tax inIndia . However, on a detailed reading of the contract terms, it was held that the Project was an indivisible project and accordingly, Project revenues earned by the Taxpayer outsideIndia would be considered as income accruing inIndia and therefore taxable inIndia to the extent attributable to the Taxpayers' PE; and - the Taxpayer had contended that the accounts of the PO showed that no expenditure relating to the execution of the contract was incurred by it. The Tribunal rejected this argument, stating that as accounts were in the hands of the Taxpayer, the mere mode of maintaining accounts alone cannot determine the character of the PE.
Aggrieved, the Taxpayer appealed before the
Aggrieved by the HC's order, the tax authorities filed an appeal before the SC.
Ruling
The SC held that the PO did not constitute the Taxpayer's PE in
SC laid emphasis on the fact that under the Tax Treaty, profits of a foreign enterprise are taxable in
Referring to the documents relied upon by the lower appellate authorities, the SC held that the board resolution of 2006, when read in entirety, showed that the PO was established to coordinate and execute 'delivery documents in connection with construction of offshore platform modification of existing facilities for
The SC also set aside the Tribunal's finding relating to the Taxpayer's accounts being inconclusive of the scope of activities carried on by the PO.
Relying on its own judgment in
Finally, considering that that there were only two people working in the PO, with neither of being qualified to perform any core activity of the Taxpayer, the SC held that it was clear that no fixed place PE was constituted under Article 5(1) of the Tax Treaty as the PO could not be said to be a fixed place of business through which core business of the Taxpayer was wholly or partly carried on. Therefore, the SC held that it was unnecessary to go into any of the other questions argued before the SC (such as whether the Project contract was a divisible contract or a composite contract).
The SC also held that the PO would fall within Article 5(4)(e) of the Tax Treaty, as the office was solely carrying out auxiliary activity that was meant to act as a liaison office between the Taxpayer and
Comments
The taxability of income earned by foreign entities from Engineering, Procurement and Construction (EPC) contracts carried out on turnkey basis has seen significant litigation in
It is a settled position that determination of PE is a mixed question of facts and law. The ruling reiterates this principle by calling out the lack of factual basis in answering the question on PE. It is, therefore, critical to evaluate the scope of activities actually carried out in
SC in this ruling has emphasized a very important principle that unless 'core business activities' are carried on in
This ruling also reiterates an important principle that burden of proving that a foreign entity has a PE in
Additionally, in relation to tax treaties to which the provisions of the Multilateral Instrument (MLI) regarding specific activity-based exemption apply, it will be important to examine whether a particular activity in the exclusion clause of PE (advertising, storage, delivery, etc) is indeed 'preparatory or auxiliary' in nature.
Lastly, one cannot overemphasize the importance for the Taxpayer to maintain adequate and accurate documentation on an ongoing basis in order to substantiate its position against any future challenges from the Tax Authorities.
Originally published by Khaitan & Co,
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