SC turns down I-T Department’s appeal in Samsung Heavy Engineering's case

The Supreme Court has rejected the Income-Tax Department’s appeal in a case of Samsung Heavy Engineering on the question of whether a project office of the company constitutes a permanent establishment (PE) under Double Taxation Avoidance Agreement (DTAA) between India and South Korea or not.

Experts termed this ruling as landmark judgement as it brings forth more clarity on definition of project office and PE and will help multinational companies to do business here.

The case here talks about awarding a turnkey contract in 2006 to a consortium comprising Korea-based Samsung Heavy Industries and Larsen & Toubro Limited. This contract was for carrying out the work 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’. In order to set up a communication channel, Samsung set up a project office in Mumbai. Some activities under the contract took place abroad and then assembled here to be used in the project.

Following the tax law here for its project office, Korean company filed Income Tax Return for Assessment Year 2007-08 showing NIL profit and loss allegedly been incurred in relation to the activities carried out by it in India.

Dissatisfied with the return, the IT Department issued show cause notice. The matter moved from the Dispute Resolution Panel (DRP) to the Income Tax Appellate Tribunal to the High Court which ruled in the favour of company. Aggrieved by the high court order, the Income-Tax Department appealed in the Supreme Court. After nearly five years, the apex court finally disposed the matter.

According to apex court, the appeal by the I-T Department revisits the question as to the taxability of income attributable to a PE 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 Republic of Korea (DTAA)

Rakesh Nangia, Chairman, Nangia Andersen India, termed the ruling as interesting and where till second-level appellate authority (i.e. ITAT), a factual finding was made that the taxpayer foreign company constituted PE in India, from where project was executed and thus revenues earned by taxpayer foreign company from the project was taxed in India, applying deemed profit.

Initially, income tax was charged on deemed/assumed profit of 25 per cent by tax officer, upheld by the DRP, which was sent back for reconsideration by ITAT, partially allowing the taxpayer’s appeal. On appeal to the high court also, the Uttarakhand High Court allowed taxpayer foreign company’s appeal only on the point that arbitrary profit rate of 25 per cent applied by tax authorities without examining whether the same is attributable to activities of the PE in India (i.e. Project Office) could not be sustained.

Nangia said, the apex court has not gone by nomenclatures and after perusal of all the relevant factual documents, has even rejected factual findings of ITAT (which is generally considered as final fact-finding authority under income-tax provisions).

“The Supreme Court has reinforced an important principle that instead of general perceptions and sweeping assumptions (that a project office would generally execute a project), tax liability can be imposed based on actual activities carried out by a taxpayer. Thus, principle of substance over form has been applied to arrive at this decision in favour of the taxpayer,” he said.