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Director of Income Tax II (International Taxation) V/s M/s Samsung Heavy Industries Co. Ltd.
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Director of Income Tax II (International Taxation) V/s M/s Samsung Heavy Industries Co. Ltd.
Director of Income Tax II (International Taxation) V/s M/s Samsung Heavy Industries Co. Ltd.

Facts of the Case

This appeal has been filed before the Honorable Supreme Court pursuing to the dismissal against the department with regard to the tax liability of the PE (Permanent Establishment) with regard to DTAA (Double Taxation Avoidance Agreement). On the day of 28/06/2020, the government company i.e. ONGC (Oil and Natural Gas Company) has awarded a turnkey contract to a consortium which includes the companies like Samsung Heavy Industries Ltd which is a company incorporated in South Korea and a company called Larsen & Turbo Limited. The contract awarded was for carrying out the work like 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’.

On the day of 24th May, 2006 the Respondent set up an office in the city of Mumbai as per the submission made by the respondent the said office was a channel or medium of communication between ONGC and the company for any update or information regarding the project. The company carried out activities like Pre-engineering, survey, engineering procurement and fabrication abroad and later the completion of the activities were done by 2006 and the platforms were brought by the company to India after commencing the work in November, 2007 for the purpose of installing the same at the Vasai East Development Project. The said project was to be completed by the date 26th July, 2009. The Assessee, respondent herein filed an income tax return for the assessment year of 2007-2008 with submission made by the respondent that company made no profit while the company incurred the loss of 23.5 lacs in INR, the loss was pertaining to the activities carried by the respondent in India. On 28th August, 2008 a show-cause notice was issued by the Income Tax Authorities to the Assessee for filing in reply as to what why the profit submission was made nil in the return filed to which the Respondent filed a reply but the Authorities were dissatisfied and so this matter.

Issues of the Case

  1. Taxability question in the matter is valid or invalid?
  2. Should the question of law in the matter herein be revisited?
  3. Should the tax liability be attributable to the PE of the respondent?
  4. Whether the contract is divisible or distinguishable vide the relating activities?


The Honorable Court after hearing the matter at length and considering the argument made by the learned counsels observes that the court is of the opinion that applying the principles of the double taxation avoidance agreement it is clear that the business transaction and income will be distinguished between the PE and business conducted therefore excludes it from the part of income. The court further stated that for any activity to be taken within the range of taxation there should be any activity from the PE where such income arises out of India which in this matter it fails so no tax liability will be applicable. The court finds it is extremely important for justice to distinguish the interpretation regarding the business entity and permanent establishment so as to apply the respective section from the Act. This court referring to earlier precedents state that for any tax to be applied to any permanent established by terming such PE as a fixed place of business need to comply with the applicability mentioned in the treaty whereas in this case, it is a clear resolution that the company or PE has no business place India, one of the conditions specified by the treaty is the company offshore should carry out fully or in part any business transaction out of such establishment and there should be income raised on the part of conducting such business in the territory of the establishment.

The tax liability falls on the establishment only if such income raised from the office is relating core business activity of the offshore company and there is income from such activity. The court hereby sadly reiterates that by looking at the Board Resolution submitted by way of the document to this court that the office was just medium or channel for coordinating of any modification or dispute regarding the project with ONGC in the country, and unfortunately the Income Tax Appellate Tribunal read the first paragraph of the Board Resolution decided the matter by concluding the office was fixed place of business of the offshore company (Respondent) which states that the place will be established to implement and execute the project. This court find in the paramount interest of justice it is important to set aside the decision of the Appellate Tribunal rejecting the argument regarding the account maintenance cannot be understood as a sole character of the PE. Deciding the onus for proving the character of tax liability the court decides should be on the tax authorities but on the respondent. The Court find is absolutely in unsatisfactorily on the part of the Income Tax Appellate Tribunal to set aside an understanding of the two parties involved in working of the PE were no way had the mental acumen to carry out the core business activity of the company.

This judgment states that many questions evolving out the basic facts and the advance should be ruled out as with correction of the view provided by this court. The impugned order will be dismissed by the reason stated by this court accordingly.

Case No.: CA 12183 of 2016

Date:  22/07/2020

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