2009-VIL-347-ITAT-DEL

Equivalent Citation: [2009] 31 SOT 482 (DELHI)

Income Tax Appellate Tribunal DELHI

IT APPEAL NOS. 2530 AND 2975 (DELHI) OF 2006, 264, 265, 2824 AND 4692 (DELHI) OF 2007 AND 105 AND 1407 (DELHI) OF 2008

Date: 29.05.2009

DEPUTY COMMISSIONER OF INCOME-TAX, (OSD), RANGE-1, DEHRADUN

Vs

HYUNDAI HEAVY INDUSTRIES CO. LTD.

BENCH

A.D. JAIN AND P.M. JAGTAP, JJ.

JUDGMENT

A.D. Jain, Judicial Member. - These are eight department appeals for assessment years 1997-98 to 2002-03 respectively. Since common issues have been raised in all these appeals, these appeals have been taken up together and are being decided by this common order for the sake of convenience, the facts are being taken from ITA No. 265/Delhi/07. The issue as to whether the learned CIT(A) has erred in directing the Assessing Officer to re-compute the total income of the assessee after excluding revenues from outside India operation, is the issue common in the following appeals :—

1. ITA No. 265/Delhi/07 for assessment year 1997-98

2. ITA No. 264/Delhi/07 for assessment year 2000-01

3. ITA No. 2824/Delhi/07 for assessment year 2001-02

4. ITA No. 2530/Delhi/06 for assessment year 2003-04

5. ITA No. 2975/Delhi/2007 for assessment year 2004-05

The question as to whether the learned CIT(A) erred in directing the Assessing Officer to exclude revenues in respect of the assessee’s projects, holding that the assessee did not have a PE in India concerning these projects, has been raised in the following appeals :—

1. ITA No. 105/Delhi/08 for assessment year 1998-99

2. ITA No. 4692/Delhi/07 for assessment year 1999-2000

3. ITA No. 1407/Delhi/2008 for assessment year 2002-03

4. ITA No. 2530/Delhi/2006 for assessment year 2003-04

5. ITA No. 2975/Delhi/07 for assessment year 2004-05

2. The assessee is a non-resident foreign company incorporated in South Korea. During the year under consideration, the assessee executed contracts with M/s. ONGC, M/s. Mazagaon Dock Ltd., M/s. Command Petroleum and M/s. Indian Oil Corporation Ltd. While working out the taxable income, the Assessing Officer took into account the total inside India revenue of the assessee at Rs. 1,84,50,32,018 and after reducing sub- contractors cost and salary expenditure of Rs. 83,32,140, income was estimated at the rate of 10 per cent on revenue of Rs. 101,18,01,878 i.e., at Rs. 10,11,80,188. Outside India receipts of the assessee at Rs. 1,37,84,39,047 were also taxed at the rate of 1 per cent, at Rs. 13,78,439. In the return of income, the assessee claimed that in respect of its three projects, i.e., B-121 Well Platform Project, HX-HY Platform Project and Second Oil Terminal Gulf of Kutch Project (IOCL), the assessee did not have a permanent establishment (PE) in India under the provisions of the Agreement for Avoidance of Double Taxation (‘DTAA’ for short) between India and South Korea; and that, therefore, the revenue in respect of each of these projects were not being offered for taxation. The Assessing Officer, however, rejected the assessee’s claim observing that the assessee NRC had not included the revenues of the said projects, claiming that the duration of each of these projects lasted less than 10 months and that, therefore, the revenues relating thereto was not assessable in accordance with Para 3 of Article 5 of DTAA between India and South Korea; that it had been claimed that the assessee’s activities were of installation project, construction, assembly etc., for which, duration of project, a specified period was must, so as to hold existence of PE; that the assessee had furnished certificates from the MDL only in respect of the B-121 Well Platform Project, which project as per the said certificate, commences on 20-10-1996 and was completed on 3-1-1997; that no evidence had been filed regarding the determination of the completion period of the other two projects; that the assessee had been maintaining an office at World Trade Centre, Cuffe Parade, Bombay right from 1983; that this was a full-fledged office manned by senior officers of assessee NRC; that it had executed several projects in India during the said period i.e., from the date of its opening office till date; that several projects were still in hand, that so, the assessee’s case would fall under Para 2 of Article 5 of DTAA and not under Para 3 thereof as claimed; that the assessee’s case was also covered under Para 1 since that office might be taken as a fixed place of business; that it could not be ruled out that the assessee had conducted some business from the said office; that the assertion on behalf of the assessee that Para 3 of Article 5 of the DTAA was more specific than paras 1 & 2 thereof and that so para 3 had an overriding effect over paras 1 & 2, was also not tenable; that so as to establish the existence or otherwise of a PE, para 1 was to be referred to first, as it can gave the definition of PE as a fixed place of business; that Para 2 gave an inclusive definition and envisaged a certain location which might also constitute a PE irrespective of as to whether a fixed place of business was in existence or not; that similarly, Para 3 further widened the scope of PE to encompass a building site, a construction assembly or installation project or supervisory activity in connection, therewith but only if such project due for more than a specified period, the correct interpretation would be to consider as to whether there was any fixed place of business or, alternatively, whether there was a place of management, branch or an office etc.; that further, if the case did not fall in paras 1 & 2 of Article 5 of DTAA, even the building site, a construction assembly etc., might constitute a PE provided they existed for a specified number of days; that the assessee’s case being covered under paras 1 & 2 of Article 5 of DTAA, the provisos of Para 3 thereof became inapplicable; that it was not correct to say that Para 3 superseded paras 1 & 2. It was in this manner that the Assessing Officer rejected the assessee’s contention and included the revenues relating to the aforesaid three projects for determination of total income, which was taken at 10 per cent in respect of India operation and 1 per cent in respect of outside India operation.

3. Before the learned CIT(A), the assessee contended, inter alia, that the B-121 Well Platform Complex contract commenced on 20-10-96 and it was completed on 3-1-1997 i.e., for 2 months and 14 days; that the HX-HY Well Platform Project commenced on 12-1-1997 and it was completed on 14-5-1997; and that IOCL Project contract document clarify that the completion time for completion of the work was for 42 weeks only inclusive of monsoon period; whereas the actual contractual period is less than 9 months. Para 3 was a specific provision and would override the general provisions contained in para 1 & 2; that every project has a separate PE and its taxable profit is to be determined separately for each of such PEs; that the situs has to be India; that the work carried on outside the taxable territory of India was to be taxed as per Article 7 of the DTAA in the state in which the assessee was resident i.e., in South Korea; that only income is taxable in India that is attributable to a PE situated in India; that in the assessee’s case all the designated outside India work took place much before the dates of arrival of structures in India unless PE taken its project of cutting installation activities; that the Assessing Officer had gone wrong in observing that the project office of the assessee in Mumbai was the assessee’s PE; and that, therefore, the revenues relating to the three projects could not be brought to tax and the Assessing Officer had erred in doing so. The assessee placed reliance on the first appellate order in the assessee’s case for assessment year 2003-04, in which, the assessee’s claim of no PE in respect of CRMP project were not taxable in India. Reliance was also placed on the ITAT decision in assessee’s own case for assessment years 1986-87 to 1988-89.

4. By virtue of the impugned order, holding in favour of the assessee, the CIT(A) observed that the issue had been considered by the ITAT in assessee’s own case for assessment years 1986-87 to 1988-89 and it had been held that Article 5(3) of the DTAA, being a more specific provision would override Article 5(2) thereof. It was observed that these observations of the Tribunal had been confirmed by the Uttaranchal High Court. Regarding the Mumbai office of the assessee, the CIT(A) observed that the RBI had granted it project specific approval and it was to render coordination activity; that as per Article 5 of the DTAA, the basic requirement for a PE was the existence of an enterprise being a fixed place of business through which business of the enterprise was carried out; that the Assessing Officer had not brought anything on record to establish that the assessee’s Mumbai office was its fixed place of business through which the assessee was carrying out business; that, therefore, it was clear that the Mumbai office of the assessee was not carrying out business of the assessee and it was only a preparatory or auxiliary office, which could not be termed as a PE in India as per Article 5(4)(e) of the DTAA. The learned CIT(A) further took into consideration the first appellate order dated 20-7-2006 in the assessee’s case for assessment year 2003-04 wherein it has been held that the Assessing Officer was not right in passing the revenue of CRMP as the assessee did not have a PE in India with regard to this project. The ld. CIT(A) held that the facts in respect of the three projects under consideration for assessment year 1997-98 were the same as those before the CIT(A) for assessment year 2003-04.

5. Aggrieved by the above observation of the CIT(A), department is now before us.

6. The ld. DR, challenging the order under appeal, urged that the ld. CIT(A) has erred in directing the Assessing Officer to re-compute the total income of the assessee after excluding revenues from outside India operation, oblivious of the fact that the projects were turnkey projects and all the activities related to projects in India and that so, the source of income was in India; that the office maintained by the assessee at Mumbai was a full-fledged office manned by senior officers; that this office had excluded several projects in India and several projects were still in hand at the relevant time; that it is unbelievable that the activities performed concerning the three projects under consideration are totally unconnected with the said office; that it was this office which comprised a PE of the assessee in India; that since the assessee was having a PE in India, it was open to supervise and watch the progress of all the activities of the contracts from the PE itself; that the learned CIT(A) wrongly overlooked the correspondence with the income-tax authorities for obtaining withholding orders under section 195(2) of the Act etc., and the correspondence with the ONGC in this regard; that this correspondence was from the said Mumbai office of the assessee; that in fact it was this office which was the executing brain behind all the three contracts in question; that it was, therefore, that the Assessing Officer concluded and rightly so, that this Mumbai office of the assessee constitute the assessee’s PE in India in terms of Para 2(c) of Article 5 of the DTAA between India and South Korea; that the ld. CIT(A) has erred in basing his order on the earlier year’s order of the ITAT and that of the CIT(A) in assessee’s own case since the facts therein are not in pari materia with those doing the rounds for the year under consideration; that the ld. CIT(A) has erroneously held Para 3 of Article 5 of the DTAA to override paras 1 & 2 thereof, even though the case of the assessee fell in paras 1 & 2 rather than in para 3; and that looking at from any angle, the order of learned CIT(A) is unsustainable in the eye of law which be ordered to be cancelled and that of the Assessing Officer be revived on accepting the appeal filed by the department.

7. The learned counsel for the assessee, on the other hand, has, relying strongly on the order under appeal, observed that no fault whatsoever can be found with the well reasoned and detailed order passed by the ld. CIT(A); that as explained before the authorities below, all the three projects of the assessee lasted for periods less than 9 months each; that this being so, the revenues relating to all the three projects were assessable in India in keeping with Para 3 of Article 5 of DTAA between India and South Korea; that it was rightly held by the ld. CIT(A) that the assessee did not have any permanent establishment in India; that the Mumbai office of the assessee cannot, in any manner, be termed as the assessee’s PE in India; that as per Article 5(3) of the DTAA, the term "permanent establishment" encompass a building site, a construction, assembly or an installation project or supervisory activities in connection therewith, but where such site project activities continued for a period of more than 9 months; every project has a separate PE and its taxable profit is to be determined separately for each PE, the situs of the assessee has to be in India; that any work relating to designing, engineering, fabrication, transportation, labour etc. carried outside India is to be taxed as per Article 7 of DTAA in South Korea where the assessee-company is a resident; that the assessee was not having any PE in India until it began project of "installation activities connected therewith" in keeping with Article 3 of the DTAA; that the project office of the assessee at Mumbai could not be treated as the assessee’s PE in India, in terms of Para 2(c) of Article 5 of the DTAA; that the specific provisions of Article 5(3) of the DTAA unassailably override those of Paras 1 & 2 of Article 5 of the DTAA, which legal position the learned CIT(A) has rightly followed as settled by the ITAT in the assessee’s own case for earlier years i.e., assessment years 1986-87 to 1988-89, which stand affirmed by the Hon’ble Uttaranchal High Court; that besides, this position has been maintained in the Tribunal order for assessment years 1994-95 and 1995-96 and the CIT(A)’s order for assessment years 1992-93 and 1996-97; that moreover, the Assessing Officer himself would not controvert the said legal position that it was activities falling clearly within the territorial jurisdiction of India comprising its taxable territories, which could be brought to tax under the Income-tax Act and he merely went by his assumption of the assessee project office in Mumbai being the assessee’s PE in India; that the actual factual position, on the contrary, was entirely different inasmuch as for other three contracts, the assessee-company had to seek permission from the RBI for opening a project office, the grant of which permission was subject to limitations imposed by the RBI, which included the limitation that the operation of the office in India would be restricted exclusively to execution of the contract as approved by the Government of India and that the office shall not enter into any new contract nor engaged itself in any activity of a trading, commercial or industrial nature other than what might be necessary for the execution of the contract without prior permission of the RBI; that even the Hon’ble Supreme Court has confirmed this issue in favour of the assessee in the assessee’s own case for assessment years 1987-88 and 1988-89 in CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482  (SC); that moreover, the Assessing Officer himself repeated his aforesaid action for assessment years 2005-06 and 2006-07; that the CIT(A)’s order for assessment year 1992-93 pertinently has attained finality since it was not taken up in appeal before the Tribunal; that as such the appeal filed by the department carry no force and same be dismissed outright.

8. We have heard the parties and have perused the material placed before us. The facts are not in dispute. The issue is as to whether the ld. CIT(A) was right in annulling the action of the Assessing Officer in taxing the outside India receipts of the assessee with regard to the three projects in question and directing the Assessing Officer to re-compute the total income of the assessee, but to exclude revenues from outside India operation.

9. The assessee is a non-resident foreign company incorporated in South Korea. There is a DTAA between India and South Korea. Article 5 thereof is relevant for our purposes. For ready reference, it is reproduced as under :—

"5(1). For the purpose 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."

10. The dispute is as to whether the case of the assessee falls under Article 5(3) as claimed by the assessee and as accepted by the ld. CIT(A) or under Articles 5(1) and 5(2), as held by the Assessing Officer. The connected issue is as to whether Mumbai office of the assessee constituted its PE in India for the purpose of bringing to tax PE in India. As per Articles 5(1) and 5(2), a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried out. The factual position that the assessee did not have any such fixed place of business other than its Mumbai office, remains uncontroverted. According to Article 5(2), "permanent establishment" shall include, especially, inter alia, office. The Assessing Officer was of the opinion that the Mumbai office of the assessee was the situs of its operation comprising its permanent establishment in India. For arriving at this conclusion, the Assessing Officer relied on the fact that it was unacceptable that the activities of work performed by the assessee under its three projects were totally inter-connected with this office. It was observed that this office of the assessee comprised its PE in India. It was observed that the assessee was, as of a necessity, bound to supervise and watch the progress of all the activities of its three projects from this PE itself. The Assessing Officer noted that there were numerous instances of correspondence by the assessee with the income-tax authorities in India for obtaining withholding orders under section 195(2) of the Act and the correspondence with ONGC. It was also taken note of that the Mumbai office of the assessee was headed by senior officers of the assessee and that it had been functional for a number of years; and that it was this office which was the brain behind the execution of the contract entered into by the assessee.

11. For our purposes, it is to be seen as to whether the provisions of Article 5(3) are indeed specific as compared to those of Articles 5(1) and 5(2), so as to override the provisions contained in Articles 5(1) and 5(2). According to Article 5(3), a permanent establishment encompasses a building site, a construction assembly or an installation project or supervisory activity in connection therewith but only where such site, project or activities continued for a period of more than 9 months. The Tribunal, it is seen, has decided this issue in favour of the assessee and this lis has since attained finality, not resting at the Tribunal stage but culminating before the Hon’ble Supreme Court in Hyundai Heavy Industries Co. Ltd. (supra). Therein the Hon’ble Supreme Court held, inter alia, that where the permanent establishment of the assessee came to exist in India after fabrication but before installation, the profits relating to fabrication in South Korea were not taxable. The Assessing Officer in the present case has not been able to show otherwise. A project office cannot be treated as a PE, as has been held in favour of the assessee. For assessment year 1995-96, the Tribunal held that PE begins to exist when the enterprise commences its business through a fixed place of business. Obviously, PE is attached to the situs of the business place in accordance with Article 5(3) of the DTAA. That being so, the provisions of Article 5(3) of the DTAA are more specific as compared to those of Articles 5(1) and 5(2) and so, the provisions of Article 5(3) take precedence over those of Articles 5(1) and 5(2). No PE of the assessee could be held to be in existing in India until the assessee began its project of "installation activities connected therewith", as per Article 5(3). Undisputedly, all the designated work of the assessee outside India was carried much before the dates of arrivals of structure in India. Pertinently, the duration of each of the projects was of less than 10 months, in keeping with Article 5(3) of the DTAA. The assessee duly furnished certificates in this regard. As regards the B-121 Well Platform Project, the same commenced on 20-10-1996 and was completed on 3-1-1997. The HX-HY Well Platform Project commenced on 12-1-1997 and was completed on 14-5-1997. The actual contractual period was of less than 9 months. Therefore, mere correspondence from the assessee’s Mumbai office is of no consequence in holding office of the assessee PE in India. It also does not make any difference if this office, i.e., the project office remained in existence for a number of years and it was manned by senior officers of the assessee. Pertinently and as has rightly been taken into consideration for deciding in favour of the assessee, for each fresh contract, permission has to be sought from the RBI for opening a project office. Such permission is granted subject to limitations. These limitations are stringent. These limitations include the limitation that the office in India shall not enter into any new contract, nor shall it engage itself in any activity of a trading, commercial or industrial nature other than what may be necessary for the execution of the contract, without prior permission of the RBI. The project office is to restrict its operation exclusively to execution of the contract as approved by the Government of India. It is to meet all the expenses in India only from out of the inward remittances received from the head office through normal banking channels or the rupee amounts to be received under the contract. It is not to borrow or lend any money from/to any person in India without prior permission of the RBI. It is not to acquire or hold, transfer or dispose of any immovable property in India without prior RBI permission, i.e., it cannot deal in immovable Indian property. It is to submit to the RBI annual audited accounts of its income and expenditure in India along with bank certificates evidencing receipt of funds from the head office. The project office, thus, undisputedly did not carry out any such activity as prohibited by the RBI from being carried out without its prior permission.

12. The issue of exclusion of revenues from outside India operation is covered by not only Supreme Court judgment in assessee’s own case for assessment years 1987-88 and 1988-89 (supra), but also the Tribunal order for assessment year 1989-90 and the CIT(A)’s order for assessment year 1992-93. For assessment years 2005-06 and 2006-07, the Assessing Officer himself did not bring to tax the outside India receipt. Copies of these assessment orders are before us at pages 99 to 104 and 105 to 109 respectively of the assessee’s paper book.

13. The question as to whether the ld. CIT(A) erred in directing the Assessing Officer to exclude the revenues amounting to Rs. 68,49,972 in respect of B-121, HX HY, B-55 and IOCL projects of the assessee, holding that the assessee did not have a PE in India in respect of these projects, following the CIT(A)’s order for assessment years 1997-98, 2000-01, 2003-04 and 2004-05. The inside India receipts were deleted regarding the assessee’s three contracts, namely, B-121, HX-HY and IOCL by the CIT(A) vide his order for assessment year 1997-98 holding that there was no PE since all these projects had been completed in less than 9 months. Against this order of the CIT(A), the department did not file any appeal before the Tribunal. Pertinently, all these three contracts were executed in assessment year 1997-98 and during assessment year 1998-99 only the balance amount due had been received. For assessment year 2000-01, the CIT(A) held the balance amounts received by the assessee regarding its B-55, CRMP, IOCL and BHN project to be not taxable, there being no PE, since these projects had been completed within a period of less than 9 months. Again, the department preferred not to file any appeal before the Tribunal. Similarly, for assessment year 2001-02, the CIT(A) held that there was no PE for the CRMP and BHN projects of the assessee and so, the balance receipts received during that year were held as not taxable. Once more, the department allowed the matter to rest at that stage, accepting the CIT(A)’s order, is not in dispute that the CRMP project of the assessee was also completed within a period of 9 months, in assessment year 2000-01. The receipts of this project were deleted by the CIT(A), which action of the CIT(A) was not appealed against by the department. This also remained the position for assessment year 2001-02.

14. For the above discussion, the Assessing Officer to our minds, merely clutched at straws in observing that this office was the assessee’s PE in India. In fact, there was no reason to hold so.

15. In view of the detailed discussion above, we are unable to persuade ourselves to concur with the grievance raised by the department. The order passed by the ld. CIT(A) is well versed inasmuch as it has followed the earlier years orders in assessee’s case passed by the CIT(A) and the Tribunal. Besides, it is a detailed order. Finding no error therein, we uphold the same.

16. Our above observations shall, mutatis mutandis, apply to the rest of the appeals also, the facts therein remaining the same, as noted at the beginning of this order.

17. In the result, all the appeals of the department are dismissed.

 

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