DIRECTOR OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI & ANR.versusM/S. SAMSUNG HEAVY INDUSTRIES CO. LTD.

486                      [2020]REPORTS
               SUPREME COURT    6 S.C.R. 486                 [2020] 6 S.C.R.


A           DIRECTOR OF INCOME TAX-II (INTERNATIONAL
                   TAXATION) NEW DELHI & ANR.
                                         v.
              M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD.
B                        (Civil Appeal No. 12183 of 2016)
                                  JULY 22, 2020
         [R. F. NARIMAN, NAVIN SINHA AND B. R. GAVAI, JJ.]
             Tax/Taxation – India-Korea Agreement for avoidance of
      double taxation of income and the prevention of fiscal evasion
C
      (DTAA) – Arts.5, 7 – Project Office whether a Permanent
      Establishment (PE) in India – Taxability of income – ONGC awarded
      turnkey contract to a consortium comprising of respondent-assessee,
      incorporated in South Korea for carrying out work w.r.t the Vasai
      East Development Project – Assessee set up a Project Office in
D     Mumbai – For the relevant assessment year, assessee’s return of
      income showed nil profit alleging loss w.r.t activities carried out in
      India – Assessment Order attributed 25% of the revenues allegedly
      earned outside India as the income of assessee exigible to tax –
      ITAT though set aside this finding, but remitted the matter to ascertain
      profits attributable to the Mumbai project office – Appeal filed by
E
      assessee, allowed by High Court – Held: For applicability of
      Art.5(1), DTAA to fixed place PEs under double taxation avoidance
      treaties, it should be an establishment “through which the business
      of an enterprise” is wholly or partly carried on – Profits of the
      foreign enterprise are taxable only where it carries on its core
F     business through a PE – It is only so much of its profits that may be
      taxed in the other State as is attributable to that PE – In the present
      case, no PE was set up within the meaning of Art.5(1), 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 – Said Office would fall within Art.5(4)(e), DTAA, as it
G
      was solely an auxiliary office, meant to act as a liaison office
      between the assessee and ONGC.
            Tax/Taxation – Double taxation avoidance treaty – Project
      Office whether a Permanent Establishment (PE) in India – Onus to
      prove – Held: Finding of ITAT thatas accounts are in the hands of
H
                                        486
 DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.              487
            M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD.


assessee, the mere mode of maintaining accounts alone cannot              A
determine the character of permanent establishment, is perverse
and hence set aside – Equally, the finding that the onus is on assessee
and not on the tax authorities to first show that the project office at
Mumbai is a PE is in the teeth of the judgment in Asst. Director of
Income Tax, New Delhi v. E-Funds IT Solution Inc. reported as [2017]
                                                                          B
10 SCR 157.
      Dismissing the appeal, the Court
      Held: 1.1 When it comes to “fixed place” permanent
establishments under double taxation avoidance treaties, the
condition precedent for applicability of Article 5(1) of the double       C
taxation treaty and the ascertainment of a “permanent
establishment” is that it should be an establishment “through
which the business of an enterprise” is wholly or partly carried
on. Further, the profits of the foreign enterprise are taxable only
where the said enterprise carries on its core business through a
permanent establishment. The maintenance of a fixed place of              D
business which is of a preparatory or auxiliary character in the
trade or business of the enterprise would not be considered to
be a permanent establishment under Article 5. Also, it is only so
much of the profits of the enterprise that may be taxed in the
other State as is attributable to that permanent establishment.           E
[Para 23]
       1.2 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”. The ITAT relied            F
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 clearly perverse. Equally, when it was pointed out that         G
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           H
488            SUPREME COURT REPORTS                      [2020] 6 S.C.R.


A     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 the judgment in E-Funds
      IT Solution Inc. Though it was pointed out to the ITAT that there
      were only two persons working in the Mumbai office, neither of
B
      whom was qualified to perform any core activity of the Assessee,
      the ITAT chose to ignore the same. Therefore, 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
C     Assessee was wholly or partly carried on. Also, 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. [Paras 27, 28]
D           Commissioner of Income Tax and Another v. Hyundai
            Heavy Industries Co. Ltd., (2007) 7 SCC 422 : [2007]
            7 SCR 288 ; M/s DIT (International Taxation), Mumbai
            v. M/s Morgan Stanley & Co. Inc. (2007) 7 SCC 1 :
            [2007] 8 SCR 52 ; Asst. Director of Income Tax, New
            Delhi v. E-Funds IT Solution Inc. (2018) 13 SCC 294 :
E           [2017] 10 SCR 157 ; Ishikawajma-Harima Heavy
            Industries Ltd. v. Director of Income Tax, Mumbai,
            (2007) 3 SCC 481: [2007] 1 SCR 112 – relied on.
                               Case Law Reference
      [2007] 7 SCR 288                  relied on              Para 5
F     [2007] 8 SCR 52                   relied on              Para 13
      [2017] 10 SCR 157                 relied on              Para 13
      [2007] 1 SCR 112                  relied on              Para 20
             CIVIL APPELLATE JURISDICTION: Civil Appeal No. 12183
      of 2016.
G            From the Judgment and Order dated 27.12.2013 of the High Court
      of at Uttarakhand at Nainital in ITA No. 01 of 2012.
             N. Venkataraman, ASG, S. A. Haseeb, Shekhar Vyas, Mrs. Anil
      Katiyar, Advs. for the Appellants.
             S. Ganesh, Sr. Adv., Bhargava V. Desai, Ms. Aditi Diwan, Advs.
H     for the Respondent.
 DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.                   489
            M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD.


      The Judgment of the Court was delivered by                               A
      R. F. NARIMAN, J.
       1. This appeal by the Department revisits the question as to the
taxability of income attributable to a “permanent establishment” set up
in a fixed place in India, arising from the ‘Agreement for avoidance of
double taxation of income and the prevention of fiscal evasion’ with the       B
Republic of Korea (“DTAA”).
       2. On 28.02.2006, the Oil and Natural Gas Company (“ONGC”)
awarded a “turnkey” contract to a consortium comprising of
theRespondent/Assessee,i.e. Samsung Heavy Industries Co. Ltd. (a
Company incorporated in South Korea), and Larsen & Toubro Limited,             C
being a contract for carrying out the “Work”, inter alia,of surveys, design,
engineering,procurement, 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,       D
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              E
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    F
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 Incomehad been filed only at nil, which was replied to in detail
by the Assessee on 02.02.2009. Being dissatisfied with the reply, a draft
                                                                               G
Assessment Order was then passed on 31.12.2009 (“Draft Order”) by
the Assistant Director of Income Tax International Transactions at
Dehradun (“Assessing Officer”).This Draft Order went into the terms
of the agreement in great detail, and concluded that the Project in question
is a single indivisible “turnkey” project, whereby ONGC was to take
over a project that is completed only in India. Resultantly,profits arising    H
490            SUPREME COURT REPORTS                           [2020] 6 S.C.R.


A     from the successful commissioning of the Project would also arise only
      in India. This Court’s judgment in Commissioner of Income Tax and
      Another v. Hyundai Heavy Industries Co. Ltd., (2007) 7 SCC 422,
      was distinguished by the learned Assessing Officer stating that, in that
      case, the project was in two separate parts, unlike the Project in the
      present case. Referring then to the Mumbai Project Office, the Assessing
B
      Officer held:
            “It is evident from the above that the work relating to fabrication
            and procurement of material was very much a part of the contract
            for execution of work assigned by ONGC. The work was wholly
            executed by PE in India and it would be absurd to suggest that PE
C           in India was not associated with the designing or fabrication of
            materials.”
            6. Having so held, the Draft Order then went on to attribute 25%
      of the revenues allegedly earned outside India (which totalled INR
      113,43,78,960) as being the income of the Assessee exigible to tax, which
D     came to INR 28,35,94,740. The Dispute Resolution Panel, by its order
      dated 30.9.2010, after considering objections to the Draft Order by the
      Assessee, then held:
            “The Assessing Officer has given a specific finding that the
            assessee had a project office in India, when it was given the
E           contract. The assessee has not contested the existence of the
            Project office in India but it has only contested that the project
            was used merely for preparatory and auxiliary activities.This
            submission of the assessee does not hold merit because if it wanted
            to perform only preparatory and auxiliary activities then it could
F           have opened a liaison office. The opening of a project office clearly
            shows that the assessee was doing something more than what
            would have been done through liaison office. In any case nature
            and purport of activities undertaken in India determine the existence
            of PE. Considering the nature of activities undertaken in India it is
            clear that PE existed in the case of assessee.”
G
             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
H
 DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.                  491
   M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD. [R. F. NARIMAN, J.]


outside India, and found the average profit margin to be 24.7%, which,        A
according to the Panel, would therefore justify the figure of 25% arrived
at in the Draft Order. The Panel having dismissed theAssessee’s
objections, the Draft Order was made finalby the Assessing Officer on
25.10.2010.The Assessee then filed an appeal against the Assessment
Order before the Income Tax Appellate Tribunal (“ITAT”).
                                                                              B
       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           C
in turn referred to a Board Resolution of the Company dated 03.04.2006
for opening theProject Office in India. It further referred to
correspondence showing that one Mr. Sangsoon Park, the General
Manager of the Assessee Company,had been appointed as a
representative of the Company to sign documents for opening of                D
theProject Office and a bank account in India, and to look after operations
of the Project Office. After setting out the Board Resolution dated
03.04.2006 in detail, the ITAT concluded:
      “70. It can be seen from all the above documents that the scope
      of Mumbai Project Office has neither been restricted by the             E
      assessee company itself or it has also not been restricted by RBI
      in any terms. This is relevant for the reason that in Hyundai Heavy
      Industries case, it is a matter of record that project office opened
      by the said assessee, according to permission given by the RBI,
      was to work only as a liaison office and was not authorised to
      carry on any business activity. This is the vital difference between    F
      the two cases namely the case of the assessee and Hyundai Heavy
      Industries case.
      71. There is a force in the contention of the ld. DR that the words
      “That the company hereby open one project office in Mumbai,
      India for coordination and execution of Vasai East Development          G
      Project for Oil and Natural Gas Corporation (“ONGC”), India”
      used by the assessee company in its resolution of Board of
      Directors meeting dated 3rd April, 2006 makes it amply clear that
      project office was opened for coordination and execution of
      impugned project. In absence of any restriction put by the assessee     H
492            SUPREME COURT REPORTS                           [2020] 6 S.C.R.


A           in the application moved by it to RBI, in the resolutions passed by
            the assessee company for the opening of the project office at
            Mumbai and the permission given by RBI, it cannot be said that
            Mumbai project office was not a fixed place of business of the
            assessee in India to carry out wholly or partly the impugned
            contract in India within the meaning of Article 5.1 of DTAA.
B
            These documents make it clear that all the activities to be carried
            out in respect of impugned contract will be routed through the
            project office only. Pre-surveys were to be first conducted which
            will determine the nature of the designing on the basis of which
            pre-engineering and pre-designing was to be done with respect to
C           the entire project. The next main condition of the contract was
            that, as a condition 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
D
            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
E     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
F           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 despite
            there being PE in terms of clause 5.1 and 5.2, it falls under
G           exclusionary Article 5.4 then onus is on assessee to prove that
            activities of its PE are in the nature of preparatory or auxiliary in
            nature. No material has been brought on record by the assessee
            to prove the said fact. The arguments put forward in this respect
            are only by inference such as the accounts maintained by the
            assessee in India through which it is the argument of the ld. Counsel
H
 DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.                  493
   M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD. [R. F. NARIMAN, J.]


      of the assessee that it does not contain any expenditure relating to    A
      execution of the contract. But such argument is not acceptable as
      the maintenance of account is in the hands of assessee and mere
      the mode of maintaining the accounts alone cannot determine the
      character of PE as the role of PE only will be relevant to determine
      what kind of activities it has carried on. As pointed out earlier the
                                                                              B
      way the contract has to proceed, Mumbai project office of the
      assessee has to play a vital role in the execution of entire contract
      and ifassessee wants to contend otherwise, the onus is on assessee
      and not on the revenue.”
       10. Having so held, the ITAT found that there was a lack of material
                                                                              C
to ascertain as to what extent activities of the business were carried on
by the Assessee through the Mumbai Project Office, and therefore it
was considered just and proper to set aside the attribution of 25% of
gross revenue earned outside India – which was attributed as income
earned from the Mumbai project office – the matter being sent back to
the Assessing Officer to ascertain profits attributable to the Mumbai         D
project office after examining the necessary facts.An appeal from the
ITAT was filed in the High Court at Uttarakhand by the Assessee. Five
substantial questions of law were framed by the High Court in the appeal
as follows:
      “(i) Whether, on the facts and in the circumstances of the case,        E
      the Tribunal erred in law in holding that the appellant had a fixed
      place ‘Permanent Establishment’ (PE) in India under Article 5(1)/
      (2) of the Double Taxation Avoidance Agreement between India
      and Korea (‘the Treaty’), in the form of project office in Mumbai?
      (ii) Whether, on the facts and circumstances of the case and in         F
      law, the finding of the Tribunal that the project office was opened
      for co-ordination and execution of the VED project and all activities
      to be carried out in relation to the said project were routed through
      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     G
      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
                                                                              H
494             SUPREME COURT REPORTS                           [2020] 6 S.C.R.


A           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
B           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
C           contract was divisible/distinguishable pertaining to the activities
            associated with designing, fabrication and installation of platforms
            and, if so, whether the activities pertaining to designing and
            fabrication took place in any part of India?”
            11. By the impugned judgment dated 27.12.2013, the High Court
D     found that the order of the Assessing Officer had been confirmed by the
      ITAT, and concerned itself only with the following question:
            “In other words, can it be said that the Agreement permitted the
            India Taxing Authority to arbitrarily fix a part of the revenue to
            the permanent establishment of the appellant in India?”
E             12. The 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. The High Court then held that there was no finding
      that 25% of the gross revenue of the Assessee outside India was
F     attributable to the business carried out by the Project Office of the
      Assessee. According to the High Court,neither the Assessing Officer
      nor the ITAT made any effort to bring on record any evidence to justify
      this figure. This being the position, the appeal of the Assessee was allowed
      in the following terms:
            “10. That being the situation we allow the appeal, set aside the
G
            judgment and order under appeal as well as the assessment order
            insofar as the same relates to imposition of tax liability on the
            25% of the 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
H           facts and circumstances of the case, but the real question was,
 DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.                 495
   M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD. [R. F. NARIMAN, J.]


      whether the tax liability could be fastened without establishing       A
      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.”
        13. Shri N. Venkataraman, learned Additional Solicitor General
appearing for the Appellants, has read to us in copious detail the Draft     B
Order, the Dispute Resolution Panel Order, the ITAT judgment and the
impugned High Court judgment. He argued that the facts of the present
case would show, as was correctly held by all the authorities and the
Tribunal, that the Project, being a “turnkey” project, was one and
indivisible, and the entire revenue earned would therefore be taxable in
India. He said that the judgment in Hyundai Heavy Industries Co.             C
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     D
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 asAsst. Director of Income Tax, New Delhi           E
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       F
out by the Project Office of the Assessee. On the contrary, he referred
to all the documents that ITAT had looked at to show that the Project
Office at Mumbai was not a mere liaison office, but was vitally connected
with the core business of the Assessee and that therefore, in the absence
of figures given by the Assessee, a “best-judgment” assessment had to
be made of profits attributable to such permanent establishment. That        G
best-judgment assessment, though made in the Draft Order and the
Dispute Resolution Panel Order, has been set aside by ITAT, resulting in
a remand to the Assessing Officer. There was nothing wrong, therefore,
with the ITAT judgment, which should not have been interfered with by
                                                                             H
496            SUPREME COURT REPORTS                           [2020] 6 S.C.R.


A     the High Court without answering a single substantial question of law
      raised before it.
             14. Shri S. Ganesh, learned Senior Advocate appearing on behalf
      of the Respondent/Assessee, relied heavily upon Articles 5 and 7 of the
      DTAA, and argued that the Project Office in Mumbai consisted of only
B     two employees, neither of whom had any technical qualification
      whatsoever. Secondly, the accounts that were produced would show
      that the Project Office had not incurred any expenditure on execution of
      the project. He read to us in copious detail the documents relied upon by
      the ITAT, and argued that the ITAT had come to a perverse finding that
      the Project Office had been set up not merely as a liaison office but as
C     an office through which core activities of the Assessee were carried
      out. He further argued, that in any case, the burden of establishing that
      a foreign Assessee has a permanent establishment in India is on thetax
      authorities, which burden had not been discharged on the facts of the
      present case. He then relied heavily on Hyundai Heavy Industries
D     Co. Ltd. (supra) to state that the facts in the present case were similar
      to the facts in that case, which would therefore apply on all fours to this
      case. He then arguedthat even assuming that there is a permanent
      establishment in India through which the core business activity of the
      Assessee was carried out, no taxable income can be attributed to it, as
      audited accounts that were produced showed that the project did not
E     yield any profit, but in fact resulted in only losses.
             15. Having heard learned counsel for both parties, it is important
      to first set out the relevant provisions of the DTAA. The relevant
      provisions of Article 5 of the aforesaid treaty reads as follows:

F           “ARTICLE 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—
G           (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
H
DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.                497
  M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD. [R. F. NARIMAN, J.]


    supervisory activities in connection therewith, but only where such    A
    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   B
    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
    (c) the maintenance of a stock of goods or merchandise belonging
    to the enterprise solely for the purpose of processing by another
    enterprise;
    (d) the maintenance of a fixed place of business solely for the
    purpose of purchasing goods or merchandise or for collecting           D
    information, for the enterprise;
    (e) the maintenance of a fixed place of business solely for the
    purpose of advertising, the supply of information, scientific
    research or any other activity, if it has a preparatory or auxiliary
    character in the trade or business of the enterprise;
                                                                           E
    (f) the maintenance of a fixed place if business solely for any
    combination of activities mentioned in sub-paragraphs (a) to (e)
    of this paragraph, provided that the overall activity of the fixed
    place of business resulting from this combination is of a
    preparatory or auxiliary character.
                                                                           F
    16. Article 7(1) and 7(2) of the DTAA, which are also of some
    significance, readas follows:
    “ARTICLE 7 - Business profits –
    1. The profits of an enterprise of a Contracting State shall be
    taxable only in that State unless the enterprise carries on business   G
    in the other Contracting State through a permanent establishment
    situated therein. If the enterprise carries on business as aforesaid
    the profits of the enterprise may be taxed in the other State but
    only so much of them as is attributable to that permanent
    establishment.                                                         H
498            SUPREME COURT REPORTS                           [2020] 6 S.C.R.


A           2. Subject to the provisions of paragraph (3), where an enterprise
            of a Contracting State carries on business in the other Contracting
            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
B
            similar activities under the same or similar conditions and dealing
            wholly independently with the enterprise of which it is a permanent
            establishment.”
             17. Some of the judgments of this Court have dealt with similar
      double taxation avoidance treaty provisions and therefore need to be
C     mentioned at this juncture. In Morgan Stanley & Co. Inc. (supra), the
      Double Taxation Avoidance Agreement (1990) between India and the
      United States of America was construed. The facts in that case made it
      clear that the Morgan Stanley Group is one of the world’s largest
      diversifying financial services companies. Morgan Stanley and Company,
D     which is a part of the Morgan 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
E     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
F     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
G           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 in supporting the front office functions
            of MSCo in fixed income and equity research and in providing IT
            enabled services such as data processing support centre and
            technical services as also reconciliation of accounts. In order to
H
 DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.                     499
   M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD. [R. F. NARIMAN, J.]


      decide whether a PE stood constituted one has to undertake what            A
      is called as a functional and factual analysis of each of the activities
      to be undertaken by an establishment. It is from that point of
      view, we are in agreement with the ruling of AAR that in the
      present case Article 5(1) is not applicable as the said MSAS would
      be performing in India only back office operations. Therefore to
                                                                                 B
      the extent of the above back office functions the second part of
      Article 5(1) is not attracted.
      xxx xxxxxx
      14. There is one more aspect which needs to be discussed, namely,
      exclusion of PE under Article 5(3). Under Article 5(3)(e) activities       C
      which are preparatory or auxiliary in character which are carried
      out at a fixed place of business will not constitute a PE. Article
      5(3) commences with a non obstante clause. It states that
      notwithstanding what is stated in Article 5(1) or under Article
      5(2) the term PE shall not include maintenance of a fixed place of
      business solely for advertisement, scientific research or for              D
      activities which are preparatory or auxiliary in character. In the
      present case we are of the view that the abovementioned back
      office functions proposed to be performed by MSAS in India falls
      under Article 5(3)(e) of DTAA. Therefore, in our view in the
      present case MSAS would not constitute a fixed place PE under              E
      Article 5(1) of DTAA as regards its back office operations.”
       18. The Court then went on to hold that activities performed by
stewards who were deployed by the American Company to work in
India as employees of the Indian company were so employed merely to
protect the American companies’ interests in a competitive world, by             F
ensuring quality and confidentiality of services performed in India. It
was therefore found that so far as stewardship was concerned, this
activity would fall within Article 5(2)(l) of the US-India treaty, and
therefore would be outside the term “permanent establishment” as
defined. On the deputation of certain employees of the American
Company to work as employees of the Indian Company, it was found,                G
however, that the American Company was rendering services through
its employees to the Indian Company, 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         H
500            SUPREME COURT REPORTS                           [2020] 6 S.C.R.


A     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
B           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
C           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 enterprise
            having its own profits and distinct from GE.
D           17. Applying the above test to the facts of the present case, we
            find that profits earned by the Korean GE on supplies of fabricated
            platforms cannot be made attributable to its Indian PE as the
            installation PE came into existence only after the transaction stood
            materialised. The installation PE came into existence only on
E           conclusion of the transaction giving rise to the supplies of the
            fabricated platforms. The installation PE emerged only after the
            contract with ONGC stood concluded. It emerged only after the
            fabricated platform was delivered in Korea to the agents of ONGC.
            Therefore, the profits on such supplies of fabricated platforms
            cannot be said to be attributable to the PE.
F
            18. There is one more reason for coming to the aforestated
            conclusion. In terms of Para (1) of Article 7, the profits to be
            taxed in the source country were not the real profits but
            hypothetical profits which the PE would have earned if it was
            wholly independent of the GE. Therefore, even if we assume that
G           the supplies were necessary for the purposes of installation
            (activity of the PE in India) and even if we assume that the supplies
            were an integral part, still no part of profits on such supplies can
            be attributed to the independent PE unless it is established by the
            Department that the supplies were not at arm’s length price. No
H           such taxability can arise in the present case as the sales were
 DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.                       501
   M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD. [R. F. NARIMAN, J.]


      directly billed to the Indian customer (ONGC). No such taxability            A
      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 PE.
      19. 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          B
      were not taxable in India.”
      20. In Ishikawajma-Harima Heavy Industries Ltd. v. Director
of Income Tax, Mumbai, (2007) 3 SCC 481, this Court went into a
similar double taxation treaty agreement entered into between Japan
and India, stating as follows:                                                     C
      “84. The distinction between the existence of a business connection
      and the income accruing or arising out of such business
      connection is clear and explicit. In the present case, the permanent
      establishment’s non-involvement in this transaction excludes it from
      being a part of the cause of the income itself, and thus there is no         D
      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             E
      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          F
      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        G
      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 spells out the extent to which the income of non-
      resident would be liable to tax in India. Section 9 has a direct
                                                                                   H
502            SUPREME COURT REPORTS                            [2020] 6 S.C.R.


A           territorial nexus. Relief under a double taxation treaty having regard
            to the provisions contained in Section 90(2) of the Income Tax
            Act would arise only in the event a taxable income of the assessee
            arises in one contracting State on the basis of accrual of income
            in another contracting State on the basis of residence. Thus, if the
            appellant had income that accrued in India and is liable to tax
B
            because in its State all residents (sic) it was entitled to relief from
            such double taxation payable in terms of Double Taxation Treaty.
            However, so far as accrual of income in India is concerned,
            taxability must be read in terms of Section 4(2) read with Section
            9, whereupon the question of seeking assessment of such income
C           in India on the basis of Double Taxation Treaty would arise.
            87. In cases such as this, where different severable parts of the
            composite contract are performed in different places, the principle
            of apportionment can be applied, to determine which fiscal
            jurisdiction can tax that particular part of the transaction. This
D           principle helps determine, where the territorial jurisdiction of a
            particular State lies, to determine its capacity to tax an event.
            Applying it to composite transactions which have some operations
            in one territory and some in others, it is essential to determine the
            taxability of various operations.
E           88. Therefore, in our opinion, the concepts of profits of business
            connection and permanent establishment should not be mixed up.
            Whereas business connection is relevant for the purpose of
            application of Section 9; the concept of permanent establishment
            is relevant for assessing the income of a non-resident under
            DTAA. There, however, may be a case where there can be
F           overlapping of income; but we are not concerned with such a
            situation. The entire transaction having been completed on the
            high seas, the profits on sale did not arise in India, as has been
            contended by the appellant. Thus, having been excluded from the
            scope of taxation under the Act, the application of the Double
G           Taxation Treaty would not arise. The Double Taxation Treaty,
            however, was taken recourse to by the appellant only by way of
            an alternate submission on income from services and not in relation
            to the tax of offshore supply of goods.”
            21. A recent judgment of this Court, namely, E-Funds IT Solution
H     Inc. (supra), concerned itself with the India-US Double Taxation
 DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.                   503
   M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD. [R. F. NARIMAN, J.]


Avoidance Agreement with similar provisions. Dealing with what was             A
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            B
      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       C
      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, therefore, suffer tax from the business generated from such        D
      PE is initially on the Revenue. With these prefatory remarks, let
      us analyse whether the respondents can be brought within any of
      the sub-clauses of Article 5.”
       22. Dealing with ‘support services’ rendered by an Indian
Company to American Companies, it was held that the outsourcing of             E
such services to India would not amount to a fixed placepermanent
establishment under Article 5 of the aforesaid treaty, as follows:
      “22. This report would show that no part of the main business
      and revenue earning activity of the two American companies is
      carried on through a fixed business place in India which has been        F
      put at their disposal. It is clear from the above that the Indian
      company only renders support services which enable the assessees
      in turn to render services to their clients abroad. This outsourcing
      of work to India would not give rise to a fixed place PE and the
      High Court judgment is, therefore, correct on this score.”
                                                                               G
       23. A reading of the aforesaid judgments makes it clear that when
it comes to “fixed place” permanent establishments under double taxation
avoidance treaties, the condition precedent for applicability of Article
5(1) of the double taxation treaty and the ascertainment of a “permanent
establishment” is that it should be an establishment “through which the
                                                                               H
504             SUPREME COURT REPORTS                           [2020] 6 S.C.R.


A     business of an enterprise” is wholly or partly carried on. Further, the
      profits of the foreign enterprise are taxable only where the said enterprise
      carries on its core business through a permanent establishment. What is
      equally clear is that the maintenance of a fixed place of business which
      is of a preparatory or auxiliary character in the trade or business of the
      enterprise would not be considered to be a permanent establishment
B
      under Article 5. Also, it is only so much of the profits of the enterprise
      that may be taxed in the other State as is attributable to that permanent
      establishment.
             24. At this stage, it is important to go into some of the documents
      that were relied upon by the ITAT. The applicationsubmitted by the
C     Assessee to the RBI dated 24.04.2006 for opening a project office, reads
      as follows:
            “Letter dated 24th April 2006
            General Manager
            Reserve Bank of India
D
            Regional Office
            Mumbai
            Dear sir,
            Re: M/s Samsung Heavy Industries Co. Ltd. (SHI)
E           Application for Registration of Project Office
            Our aforesaid client (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
F           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
G
                     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.
H
 DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.                 505
   M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD. [R. F. NARIMAN, J.]


         3.   Certified copy of the POA in the name of the Mr. S.S.          A
              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.                             B

         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      C
      any clarification, please let us know…”
        25. The Board Resolution dated 03.04.2006 referred to in this
letter reads as follows:
      “MINUTES OF BOARD OF DIRECTORS’ MEETING OF
      SAMSUNG HEAVY INDUSTRIES CO. LTD.                                      D
      A meeting of the Board of Directors of Samsung Heavy Industries
      Co. Ltd. (the “Company”) was duly called and held on the 3 rd day
      of April 2006 at the office of the Company in Seoul the Republic
      of Korea, at which 3 of 3 Directors were present and acting
      throughout.                                                            E
      Jing Wan Kim, President and CEO of Samsung Heavy Industries
      Co. Ltd. announced that the notice of meeting was duly given to
      all Directors and a quorum was present and the meeting was duly
      called to order and held.
      RESOLVED:                                                              F

         1. That the Company hereby open one project office in
            Mumbai, India for coordination and execution of Vasai East
            Development Project for Oil and Natural Gas Corporation
            Limited (“ONGC”), India.
                                                                             G
         2. That the Company hereby does make and constitute Mr.
            Sangsoon Park Yard General Manager of the Company, as
            the Company’s true and lawful representative with full power
            and authority for the purpose of establishing a project office
            and coordinating and executing delivery of documents in
                                                                             H
506            SUPREME COURT REPORTS                          [2020] 6 S.C.R.


A                 connection with construction of offshore platform
                  modification of existing facilities for ONGC above.
            IN WITNESS WHEREOF, the President and Directors present
            at the meeting have hereunto affixed their names and seals on
            this 3rd day of April 2006.
B           Sd/-
            Samsung Heavy Industries Co., Ltd.
            President and CEO
            Jing Wan Kim”
            26. Based on the letter given to RBI which contained this
C
      resolution, the RBI approval dated 24.05.2006 reads as follows:
            “FEO, Mumbai CAD/080/04.02.2001/05-06
                                                                24th May, 2006

D
            M/s Davesh K. Shah and Co.,
            Chartered Accountants,
            106, Banaji House,
            361, Dr. D.N. Road,
            Flora Fountain,
E           Mumbai 400 001.


            Dear sirs,


F           Registration of Project Office – M/s Samsung Heavy Industries
            Co. Ltd. (SHI)


            Please refer to your letter dated 24th April, 2006 on the captioned
            subject. In this connection, we advise having noted a Project Office
G           in India in terms of provision contained in AP (Dir Series) Circular
            No.37 dated 15th November 2003.”
            27. 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
H
 DIR. OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI v.                     507
   M/S. SAMSUNG HEAVY INDUSTRIES CO. LTD. [R. F. NARIMAN, J.]


existing facilities for ONGC”. Unfortunately, the ITAT relied upon only          A
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
                                                                                 B
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        C
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          D
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              E
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.                                 F
      29. The appeal against the impugned High Court judgment is
therefore dismissed, but for the reasons stated by us.


Divya Pandey                                                 Appeal dismissed.
                                                                                 G




                                                                                 H