The Supreme Court has held that profits from designing and fabrication of an Indian project done outside the country is not taxable.
Partly allowing the appeal of the Commissioner of Income Tax in the case of M/s Hyundai Heavy Industries Co Ltd (HHI), the court ruled that the assessing authorities were right in attributing the profits to the Indian permanent establishment (PE) at 10 per cent of the gross receipts in respect of its activities of installation, commissioning etc performed in India. That would be taxable.
HHI is a non-resident foreign company incorporated in South Korea. It had entered into an agreement with ONGC for designing, fabrication, hook-up and commissioning of a unit in Bombay High.
The revenue authorities did not accept its return as nil income. It argued that it did not have a PE in India and therefore it was not assessable to tax in India. It further contended that it was entitled to exemption under Article 7 of the Convention for Avoidance of Double Taxation. The further argument of the company was that the contract in question was divisible into two types of operations -- one being fabrication in Korea and the other consisting of installation in India. Therefore any income arising from the activity of fabrication in Korea was not assessable in India.
The Supreme Court accepted the latter view.
The judgment explained that the Income-Tax Act concerned only with profits earned in India and therefore, a method has to be found out to ascertain the profits arising in India.
The only way to do so is by treating the Indian PE as a separate profit centre vis-a-vis the foreign enterprise (Korean, in this case). This demarcation is necessary in order to earmark the jurisdiction over the operations of a company.
Unless the PE is treated as a separate profit centre, it is not possible to ascertain the profits of the PE which, in turn, constitutes profits arising to the foreign company in India.
The computation of profits in each PE decides the quantum of income on which the source country can levy the tax. Therefore, the profits of the PE must be computed as independent units, the Supreme Court said.