REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 12183 OF 2016 DIRECTOR OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI & ANR. Appellants Versus M/S SAMSUNG HEAVY INDUSTRIES CO. LTD. ...Respondent JUDGMENT R.F. Nariman, J. 1. This appeal by Department revisits question as to taxability of income attributable to permanent establishment set up in fixed place in India, arising from Agreement for avoidance of double taxation of income and prevention of fiscal evasion with Republic of Korea ( DTAA ). Signature Not Verified Digitally signed by SUSHMA KUMARI BAJAJ Date: 2020.07.22 17:28:33 IST Reason: 1 2. On 28.02.2006, Oil and Natural Gas Company ( ONGC ) awarded turnkey contract to consortium comprising of Respondent/Assessee, i.e. Samsung Heavy Industries Co. Ltd. (a Company incorporated in South Korea), and Larsen & Toubro Limited, being contract for carrying out 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 Vasai East Development Project ( Project ). 3. On 24.05.2006, Assessee set up Project Office in Mumbai, India, which, as per Assessee, was to act as communication channel between Assessee and ONGC in respect of Project. Pre- engineering, survey, engineering, procurement and fabrication activities which took place abroad, all took place in year 2006. Commencing from November, 2007, these platforms were then brought outside Mumbai to be installed at Vasai East Development Project. Project was to be completed by 26.07.2009. 4. With regard to Assessment Year 2007-2008, Assessee filed Return of Income on 21.08.2007 showing nil profit, as loss of INR 23.5 2 lacs had allegedly been incurred in relation to activities carried out by it in India. 5. On 29.08.2008, show-cause notice was issued to Assessee by Income Tax authorities requiring it to show cause as to why Return of Income had been filed only at nil, which was replied to in detail by Assessee on 02.02.2009. Being dissatisfied with reply, draft Assessment Order was then passed on 31.12.2009 ( Draft Order ) by Assistant Director of Income Tax International Transactions at Dehradun ( Assessing Officer ). This Draft Order went into terms of agreement in great detail, and concluded that Project in question is single indivisible turnkey project, whereby ONGC was to take over project that is completed only in India. Resultantly, profits arising from successful commissioning of 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 learned Assessing Officer stating that, in that case, project was in two separate parts, unlike Project in present case. Referring then to Mumbai Project Office, Assessing Officer held: 3 It is evident from above that work relating to fabrication and procurement of material was very much part of contract for execution of work assigned by ONGC. work was wholly executed by PE in India and it would be absurd to suggest that PE in India was not associated with designing or fabrication of materials. 6. Having so held, Draft Order then went on to attribute 25% of revenues allegedly earned outside India (which totalled INR 113,43,78,960) as being income of Assessee exigible to tax, which came to INR 28,35,94,740. Dispute Resolution Panel, by its order dated 30.9.2010, after considering objections to Draft Order by Assessee, then held: Assessing Officer has given specific finding that assessee had project office in India, when it was given contract. assessee has not contested existence of Project office in India but it has only contested that project was used merely for preparatory and auxiliary activities. This submission of assessee does not hold merit because if it wanted to perform only preparatory and auxiliary activities then it could have opened liaison office. opening of project office clearly shows that 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 existence of PE. Considering nature of activities undertaken in India it is clear that PE existed in case of assessee. 7. It then confirmed finding contained in Draft Order that agreement was turnkey project which could not be split up, as result of which entire profit earned from Project would be earned 4 within India. Basing itself on data obtained from database Capital Line , Panel picked up four similar projects executed by companies outside India, and found average profit margin to be 24.7%, which, according to Panel, would therefore justify figure of 25% arrived at in Draft Order. Panel having dismissed Assessee s objections, Draft Order was made final by Assessing Officer on 25.10.2010. Assessee then filed appeal against Assessment Order before Income Tax Appellate Tribunal ( ITAT ). 8. decision of ITAT on 30.08.2011 went into establishment of Project Office at Mumbai in much more detail than had been gone into either in Draft Order or Dispute Resolution Panel s decision. ITAT referred to and relied upon application dated 24.04.2006, which had been submitted by Assessee to Reserve Bank of India ( RBI ) for opening Project Office, which in turn referred to Board Resolution of Company dated 03.04.2006 for opening Project Office in India. It further referred to correspondence showing that one Mr. Sangsoon Park, General Manager of Assessee Company, had been appointed as representative of Company to sign documents for opening of Project Office and bank account in India, 5 and to look after operations of Project Office. After setting out Board Resolution dated 03.04.2006 in detail, ITAT concluded: 70. It can be seen from all above documents that scope of Mumbai Project Office has neither been restricted by assessee company itself or it has also not been restricted by RBI in any terms. This is relevant for reason that in Hyundai Heavy Industries case, it is matter of record that project office opened by said assessee, according to permission given by RBI, was to work only as liaison office and was not authorised to carry on any business activity. This is vital difference between two cases namely case of assessee and Hyundai Heavy Industries case. 71. There is force in contention of ld. DR that words That company hereby open one project office in Mumbai, India for coordination and execution of Vasai East Development Project for Oil and Natural Gas Corporation ( ONGC ), India used by 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 assessee in application moved by it to RBI, in resolutions passed by assessee company for opening of project office at Mumbai and permission given by RBI, it cannot be said that Mumbai project office was not fixed place of business of assessee in India to carry out wholly or partly impugned contract in India within meaning of Article 5.1 of DTAA. These documents make it clear that all activities to be carried out in respect of impugned contract will be routed through project office only. Pre-surveys were to be first conducted which will determine nature of designing on basis of which pre-engineering and pre-designing was to be done with respect to entire project. next main condition of contract was that, as condition precedent, assessee had to obtain insurance with respect to entire project which has been in fact obtained by assessee in India for which assessee has received major payment during 6 year under consideration itself. said policy has not been shown to be restricted only with regard to activities of assessee outside India. 9. ITAT thus confirmed decisions of Assessing Officer and Dispute Resolution Panel that contract was indivisible. It then went on to deal with argument on behalf of Assessee that Project Office was only auxiliary office, and did not involve itself in any core activity of business, as accounts that were produced would show that there was no expenditure which related to execution of project. This argument was disposed of as follows: way terms of contract are described and way work on contract has to proceed clearly describe that in all activities of contract there will be role of Mumbai project office as same has to work as channel between assessee company and ONGC. If PE of assessee exists within 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 exclusionary Article 5.4 then onus is on assessee to prove that activities of its PE are in nature of preparatory or auxiliary in nature. No material has been brought on record by assessee to prove said fact. arguments put forward in this respect are only by inference such as accounts maintained by assessee in India through which it is argument of ld. Counsel of assessee that it does not contain any expenditure relating to execution of contract. But such argument is not acceptable as maintenance of account is in hands of assessee and mere mode of maintaining accounts alone cannot determine character of PE as role of PE only will be relevant to determine what kind of activities it has carried on. As pointed out earlier way contract has to proceed, 7 Mumbai project office of assessee has to play vital role in execution of entire contract and if assessee wants to contend otherwise, onus is on assessee and not on revenue. 10. Having so held, ITAT found that there was lack of material to ascertain as to what extent activities of business were carried on by Assessee through Mumbai Project Office, and therefore it was considered just and proper to set aside attribution of 25% of gross revenue earned outside India which was attributed as income earned from Mumbai project office matter being sent back to Assessing Officer to ascertain profits attributable to Mumbai project office after examining necessary facts. appeal from ITAT was filed in High Court at Uttarakhand by Assessee. Five substantial questions of law were framed by High Court in appeal as follows: (i) Whether, on facts and in circumstances of case, Tribunal erred in law in holding that appellant had fixed place Permanent Establishment (PE) in India under Article 5(1)/(2) of Double Taxation Avoidance Agreement between India and Korea ( Treaty ), in form of project office in Mumbai? (ii) Whether, on facts and circumstances of case and in law, finding of Tribunal that project office was opened for co-ordination and execution of VED project and all activities to be carried out in relation to said project were routed through project office only, is perverse inasmuch as same is based on selective and/or incomplete reference to material on record, irrelevant considerations and incorrect appreciation of role of project office? 8 (iii) Without prejudice, whether, on facts and circumstances of case and in law, Tribunal erred in not holding that even if appellant had fixed place PE in India, no income on account of offshore activities, i.e. operations carried out outside India (viz., designing, engineering, material procurement, fabrication, transportation activities) was attributable to said PE, instead, in setting issue to file of assessing officer? (iv) Without prejudice, whether, on facts and circumstances of case and in law, Tribunal erred in not holding that even if appellant had fixed place PE in India, no income could be brought to tax in India since appellant had incurred overall losses in respect of VED project? (v) Whether, on facts and circumstances of case, contract was divisible/distinguishable pertaining to activities associated with designing, fabrication and installation of platforms and, if so, whether activities pertaining to designing and fabrication took place in any part of India? 11. By impugned judgment dated 27.12.2013, High Court found that order of Assessing Officer had been confirmed by ITAT, and concerned itself only with following question: In other words, can it be said that Agreement permitted India Taxing Authority to arbitrarily fix part of revenue to permanent establishment of appellant in India? 12. High Court held that question as to whether Project Office opened at Mumbai cannot be said to be permanent establishment within meaning of Article 5 of DTAA would be of no consequence. High Court then held that there was no finding that 9 25% of gross revenue of Assessee outside India was attributable to business carried out by Project Office of Assessee. According to High Court, neither Assessing Officer nor ITAT made any effort to bring on record any evidence to justify this figure. This being position, appeal of Assessee was allowed in following terms: 10. That being situation we allow appeal, set aside judgment and order under appeal as well as assessment order insofar as same relates to imposition of tax liability on 25% of receipt upon appellant in circumstances mentioned above, and observe that questions of law formulated by us, while admitting appeal, have not, in fact, arisen on facts and circumstances of case, but real question was, whether tax liability could be fastened without establishing that same is attributable to tax identity or permanent establishment of enterprise situate in India and same, we think, is answered in negative and in favour of appellant. 13. Shri N. Venkataraman, learned Additional Solicitor General appearing for Appellants, has read to us in copious detail Draft Order, Dispute Resolution Panel Order, ITAT judgment and impugned High Court judgment. He argued that facts of present case would show, as was correctly held by all authorities and Tribunal, that Project, being turnkey project, was one and indivisible, and entire revenue earned would therefore be taxable in India. He said that 10 judgment in Hyundai Heavy Industries Co. Ltd. (supra) was correctly distinguished by authorities, as that was case where turnkey project was in fact bifurcated into two parts, namely, separate agreement as to design, manufacture, erection etc. culminating in another separate agreement relating to installation. On facts of that case it was found that permanent establishment was set up only at stage of installation, i.e. long after 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 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 recent judgment reported as Asst. Director of Income Tax, New Delhi v. E- Funds IT Solution Inc. (2018) 13 SCC 294. He argued that High Court judgment was cryptic and did not address any of real issues that arose on facts of this case. He further argued that it was completely incorrect to state that there was no finding that 25% of gross revenue of Assessee was attributable to business carried out by Project Office of Assessee. On contrary, he referred to all documents that ITAT had looked at to show that Project 11 Office at Mumbai was not mere liaison office, but was vitally connected with core business of Assessee and that therefore, in absence of figures given by Assessee, best-judgment assessment had to be made of profits attributable to such permanent establishment. That best-judgment assessment, though made in Draft Order and Dispute Resolution Panel Order, has been set aside by ITAT, resulting in remand to Assessing Officer. There was nothing wrong, therefore, with ITAT judgment, which should not have been interfered with by High Court without answering single substantial question of law raised before it. 14. Shri S. Ganesh, learned Senior Advocate appearing on behalf of Respondent/Assessee, relied heavily upon Articles 5 and 7 of DTAA, and argued that Project Office in Mumbai consisted of only two employees, neither of whom had any technical qualification whatsoever. Secondly, accounts that were produced would show that Project Office had not incurred any expenditure on execution of project. He read to us in copious detail documents relied upon by ITAT, and argued that ITAT had come to perverse finding that Project Office had been set up not merely as liaison office but as office 12 through which core activities of Assessee were carried out. He further argued, that in any case, burden of establishing that foreign Assessee has permanent establishment in India is on tax authorities, which burden had not been discharged on facts of present case. He then relied heavily on Hyundai Heavy Industries Co. Ltd. (supra) to state that facts in present case were similar to facts in that case, which would therefore apply on all fours to this case. He then argued that even assuming that there is permanent establishment in India through which core business activity of Assessee was carried out, no taxable income can be attributed to it, as audited accounts that were produced showed that project did not 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 relevant provisions of DTAA. relevant provisions of Article 5 of aforesaid treaty reads as follows: ARTICLE 5 - Permanent establishment 1. For purposes of this Convention, term permanent establishment means fixed place of business through which business of enterprise is wholly or partly carried on. 2. term permanent establishment shall include especially (a) place of management; (b) branch; (c) office; (d) 13 factory; (e) workshop; and (f) mine, oil or gas well, quarry or any other place of extraction of natural resources. 3. term permanent establishment likewise encompasses building site, construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activities continue for period of more than nine months. 4. Notwithstanding preceding provisions of this article, term permanent establishment shall be deemed not to include (a) use of facilities solely for purpose of storage, display or delivery of goods or merchandise belonging to enterprise; (b) maintenance of stock of goods or merchandise belonging to enterprise solely for purpose of storage, display or delivery; (c) maintenance of stock of goods or merchandise belonging to enterprise solely for purpose of processing by another enterprise; (d) maintenance of fixed place of business solely for purpose of purchasing goods or merchandise or for collecting information, for enterprise; (e) maintenance of fixed place of business solely for purpose of advertising, supply of information, scientific research or any other activity, if it has preparatory or auxiliary character in trade or business of enterprise; (f) maintenance of fixed place if business solely for any combination of activities mentioned in sub-paragraphs (a) to (e) of this paragraph, provided that overall activity of fixed place of business resulting from this combination is of preparatory or auxiliary character. 14 16. Article 7(1) and 7(2) of DTAA, which are also of some significance, read as follows: ARTICLE 7 - Business profits 1. profits of enterprise of Contracting State shall be taxable only in that State unless enterprise carries on business in other Contracting State through permanent establishment situated therein. If enterprise carries on business as aforesaid profits of enterprise may be taxed in other State but only so much of them as is attributable to that permanent establishment. 2. Subject to provisions of paragraph (3), where enterprise of Contracting State carries on business in other Contracting State through permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment profits which it might be expected to make if it were distinct and separate enterprise engaged in same or similar activities under same or similar conditions and dealing wholly independently with enterprise of which it is permanent establishment. 17. Some of judgments of this Court have dealt with similar double taxation avoidance treaty provisions and therefore need to be mentioned at this juncture. In Morgan Stanley & Co. Inc. (supra), Double Taxation Avoidance Agreement (1990) between India and United States of America was construed. facts in that case made it clear that Morgan Stanley Group is one of world s largest diversifying financial services companies. Morgan Stanley and 15 Company, which is part of Morgan Stanley Group, is investment bank engaged in business of providing financial advisory services, corporate lending and securities underwriting. One of group companies of Morgan Stanley Group, namely, Morgan Stanley Advantages Services Pvt. Ltd. ( MSAS ) entered into agreement for providing certain support services to Morgan Stanley and Company. MSAS, being Indian Company, was set up to support 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 question as to whether fixed place permanent establishment existed on facts of that case under Article 5 of India-US treaty which is similar to Article 5 of present DTAA this Court held: 10. In our view, second requirement of Article 5(1) of DTAA is not satisfied as regards back office functions. We have examined terms of Agreement along with advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from reading of above Agreement/application that MSAS in India would be engaged in supporting 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 decide whether PE stood constituted one has to undertake what 16 is called as functional and factual analysis of each of activities to be undertaken by establishment. It is from that point of view, we are in agreement with ruling of AAR that in present case Article 5(1) is not applicable as said MSAS would be performing in India only back office operations. Therefore to extent of above back office functions second part of Article 5(1) is not attracted. xxx xxx xxx 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 which are preparatory or auxiliary in character which are carried out at fixed place of business will not constitute PE. Article 5(3) commences with non obstante clause. It states that notwithstanding what is stated in Article 5(1) or under Article 5(2) term PE shall not include maintenance of fixed place of business solely for advertisement, scientific research or for activities which are preparatory or auxiliary in character. In present case we are of view that 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 present case MSAS would not constitute fixed place PE under Article 5(1) of DTAA as regards its back office operations. 18. Court then went on to hold that activities performed by stewards who were deployed by American Company to work in India as employees of Indian company were so employed merely to protect American companies interests in competitive world, by 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 US-India treaty, and therefore would be 17 outside term permanent establishment as defined. On deputation of certain employees of American Company to work as employees of Indian Company, it was found, however, that American Company was rendering services through its employees to Indian Company, as result of which service permanent establishment would stand established on this count. 19. judgment in Hyundai Heavy Industries Co. Ltd. (supra) was heavily relied upon by Shri S. Ganesh and sought to be distinguished by Shri N. Venkataraman. facts in Hyundai Heavy Industries Co. Ltd. (supra) made it clear that turnkey contract entered into between Hyundai Heavy Industries Co. Ltd. and ONGC was divisible into two parts, and as result Court found: 16. On reading Article 7 of CADT, it is clear that said Article is based on OECD Model Convention. Para (1) of Article 7 states general rule that business profits of enterprise of one contracting State may not be taxed by other contracting State unless enterprise carries on its business in other contracting State through its PE. said Para (1) further lays down that only so much of profits (sic as is) attributable to PE is taxable. Para (2) of Article 7 further lays down that attributable profit can be determined by apportionment of total profits of assessee to its various parts OR on basis of assumption that PE is distinct and separate enterprise having its own profits and distinct from GE. 18 17. Applying above test to facts of present case, we find that profits earned by Korean GE on supplies of fabricated platforms cannot be made attributable to its Indian PE as installation PE came into existence only after transaction stood materialised. installation PE came into existence only on conclusion of transaction giving rise to supplies of fabricated platforms. installation PE emerged only after contract with ONGC stood concluded. It emerged only after fabricated platform was delivered in Korea to agents of ONGC. Therefore, profits on such supplies of fabricated platforms cannot be said to be attributable to PE. 18. There is one more reason for coming to aforestated conclusion. In terms of Para (1) of Article 7, profits to be taxed in source country were not real profits but hypothetical profits which PE would have earned if it was wholly independent of GE. Therefore, even if we assume that supplies were necessary for purposes of installation (activity of PE in India) and even if we assume that supplies were integral part, still no part of profits on such supplies can be attributed to independent PE unless it is established by Department that supplies were not at arm's length price. No such taxability can arise in present case as sales were directly billed to Indian customer (ONGC). No such taxability can also arise in present case as there was no allegation made by Department that price at which billing was done for supplies included any element for services rendered by PE. 19. In light of our above discussion, we are of view that profits that accrued to Korean GE for Korean operations 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 similar double 19 taxation treaty agreement entered into between Japan and India, stating as follows: 84. distinction between existence of business connection and income accruing or arising out of such business connection is clear and explicit. In present case, permanent establishment's non-involvement in this transaction excludes it from being part of cause of income itself, and thus there is no business connection. 85. Article 5.3 provides that person is regarded as having permanent establishment if he carries on construction and installation activities in contracting State only if said activities are carried out for more than six months. Para 6 of Protocol to India-Japan Tax Treaty also provides that only income arising from activities wherein permanent establishment has been involved can be said to be attributable to permanent establishment. It gives rise to two questions, firstly, offshore services are rendered outside India; permanent establishment would have no role to play in respect thereto in earning of said income. Secondly, entire services having been rendered outside India, income arising therefrom cannot be attributable to permanent establishment so as to bring within charge of tax. 86. For attracting taxing statute there has to be some activities through permanent establishment. If income arises without any activity of permanent establishment, even under DTAA taxation liability in respect of overseas services would not arise in India. Section 9 spells out extent to which income of non- resident would be liable to tax in India. Section 9 has direct territorial nexus. Relief under double taxation treaty having regard to provisions contained in Section 90(2) of Income Tax Act would arise only in event taxable income of assessee arises in one contracting State on basis of accrual of income in another contracting State on basis of residence. Thus, if appellant had income that accrued in India and is liable to tax because in its State all residents (sic) it was entitled to relief 20 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 question of seeking assessment of such income in India on basis of Double Taxation Treaty would arise. 87. In cases such as this, where different severable parts of composite contract are performed in different places, principle of apportionment can be applied, to determine which fiscal jurisdiction can tax that particular part of transaction. This principle helps determine, where territorial jurisdiction of particular State lies, to determine its capacity to tax event. Applying it to composite transactions which have some operations in one territory and some in others, it is essential to determine taxability of various operations. 88. Therefore, in our opinion, concepts of profits of business connection and permanent establishment should not be mixed up. Whereas business connection is relevant for purpose of application of Section 9; concept of permanent establishment is relevant for assessing income of non-resident under DTAA. There, however, may be case where there can be overlapping of income; but we are not concerned with such situation. entire transaction having been completed on high seas, profits on sale did not arise in India, as has been contended by appellant. Thus, having been excluded from scope of taxation under Act, application of Double Taxation Treaty would not arise. Double Taxation Treaty, however, was taken recourse to by appellant only by way of alternate submission on income from services and not in relation to tax of offshore supply of goods. 21. recent judgment of this Court, namely, E-Funds IT Solution Inc. (supra), concerned itself with India-US Double Taxation Avoidance 21 Agreement with similar provisions. Dealing with what was referred to as fixed place , permanent establishment, this Court held: 16. Income Tax Act, in particular Section 90 thereof, does not speak of concept of PE. This is creation only of DTAA. By virtue of Article 7(1) of DTAA, business income of companies which are incorporated in US will be taxable only in US, unless it is found that they were PEs in India, in which event their business income, to extent to which it is attributable to such PEs, would be taxable in India. Article 5 of DTAA set out hereinabove provides for three distinct types of PEs with which we are concerned in present case: fixed place of business PE under Articles 5(1) and 5(2)(a) to 5(2)(k); service PE under Article 5(2)(l) and agency PE under Article 5(4). Specific and detailed criteria are set out in aforesaid provisions in order to fulfil conditions of these PEs existing in India. burden of proving fact that foreign assessee has PE in India and must, therefore, suffer tax from business generated from such PE is initially on Revenue. With these prefatory remarks, let us analyse whether respondents can be brought within any of sub-clauses of Article 5. 22. Dealing with support services rendered by Indian Company to American Companies, it was held that outsourcing of such services to India would not amount to fixed place permanent establishment under Article 5 of aforesaid treaty, as follows: 22. This report would show that no part of main business and revenue earning activity of two American companies is carried on through fixed business place in India which has been put at their disposal. It is clear from above that Indian company only renders support services which enable assessees in turn to render services to their clients abroad. This outsourcing of work 22 to India would not give rise to fixed place PE and High Court judgment is, therefore, correct on this score. 23. reading of aforesaid judgments makes it clear that when it comes to fixed place permanent establishments under double taxation avoidance treaties, condition precedent for applicability of Article 5(1) of double taxation treaty and ascertainment of permanent establishment is that it should be establishment through which business of enterprise is wholly or partly carried on. Further, profits of foreign enterprise are taxable only where said enterprise carries on its core business through permanent establishment. What is equally clear is that maintenance of fixed place of business which is of preparatory or auxiliary character in trade or business of enterprise would not be considered to be permanent establishment under Article 5. Also, it is only so much of profits of enterprise that may be taxed in other State as is attributable to that permanent establishment. 24. At this stage, it is important to go into some of documents that were relied upon by ITAT. application submitted by Assessee to RBI dated 24.04.2006 for opening project office, reads as follows: Letter dated 24th April 2006 23 General Manager Reserve Bank of India Regional Office Mumbai Dear sir, Re: M/s Samsung Heavy Industries Co. Ltd. (SHI) 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 instructions of our above- referred client, we have to enclose following documents in connection with Registration of Project office in India: 1. Letter dated ( ) on letter head of company for details of 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 copy of letter from ChoHung Bank for opening Bank account. 2. Copy of POA in our favour and in favour of M/s Hemand Arora and Co., CA. 3. Certified copy of POA in name of Mr. S.S. Park, who has signed application. 4. Certified copy of certificate of registration of company in South Korea. 5. Certified copy of notarised Board resolution for opening Project office in India. 6. Certified copy of Extract of contract entered into by our client. Kindly take above documents on record. Please take on record our client s Project office and register same. If you require any clarification, please let us know 24 25. 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. meeting of Board of Directors of Samsung Heavy Industries Co. Ltd. (the Company ) was duly called and held on 3rd day of April 2006 at office of Company in Seoul Republic of Korea, at which 3 of 3 Directors were present and acting throughout. Jing Wan Kim, President and CEO of Samsung Heavy Industries Co. Ltd. announced that notice of meeting was duly given to all Directors and quorum was present and meeting was duly called to order and held. RESOLVED: 1. That 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. 2. That Company hereby does make and constitute Mr. Sangsoon Park Yard General Manager of Company, as Company s true and lawful representative with full power and authority for purpose of establishing project office and coordinating and executing delivery of documents in connection with construction of offshore platform modification of existing facilities for ONGC above. IN WITNESS WHEREOF, President and Directors present at meeting have hereunto affixed their names and seals on this 3rd day of April 2006. Sd/- 25 Samsung Heavy Industries Co., Ltd. President and CEO Jing Wan Kim 26. Based on letter given to RBI which contained this resolution, RBI approval dated 24.05.2006 reads as follows: FEO, Mumbai CAD/080/04.02.2001/05-06 24th May, 2006 M/s Davesh K. Shah and Co., Chartered Accountants, 106, Banaji House, 361, Dr. D.N. Road, Flora Fountain, Mumbai 400 001. Dear sirs, Registration of Project Office M/s Samsung Heavy Industries Co. Ltd. (SHI) Please refer to your letter dated 24th April, 2006 on captioned subject. In this connection, we advise having noted Project Office in India in terms of provision contained in AP (Dir Series) Circular No.37 dated 15th November 2003. 27. reading of Board Resolution would show that Project Office was established to coordinate and execute delivery documents in connection with construction of offshore platform modification of existing facilities for ONGC . Unfortunately, ITAT relied upon only first paragraph of Board Resolution, and then jumped to conclusion 26 that Mumbai office was for coordination and execution of project itself. finding, therefore, that Mumbai office was not mere liaison office, but was involved in core activity of execution of project itself is therefore clearly perverse. Equally, when it was pointed out that accounts of Mumbai office showed that no expenditure relating to execution of contract was incurred, ITAT rejected argument, stating that as accounts are in hands of Assessee, mere mode of maintaining accounts alone cannot determine character of permanent establishment. This is another perverse finding which is set aside. Equally finding that onus is on Assessee and not on Tax Authorities to first show that project office at Mumbai is permanent establishment is again in teeth of our judgment in E-Funds IT Solution Inc. (supra). 28. Though it was pointed out to ITAT that there were only two persons working in Mumbai office, neither of whom was qualified to perform any core activity of Assessee, ITAT chose to ignore same. This being case, it is clear, therefore, that no permanent establishment has been set up within meaning of Article 5(1) of DTAA, as Mumbai Project Office cannot be said to be fixed place 27 of business through which core business of Assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, Mumbai Project Office, on facts of present case, would fall within Article 5(4)(e) of DTAA, inasmuch as office is solely auxiliary office, meant to act as liaison office between Assessee and ONGC. This being case, it is not necessary to go into any of other questions that have been argued before us. 29. appeal against impugned High Court judgment is therefore dismissed, but for reasons stated by us. .. J. (R. F. Nariman) .. J. (Navin Sinha) .. J. (B.R. Gavai) New Delhi. 22nd July, 2020 28 Director of Income-tax-II (International Taxation) New Delhi & Anr. v. Samsung Heavy Industries Co. Ltd