(2007) 291 ITR 482 (SC)
Income deemed to accrue or arise in India; double taxation relief
No. A permanent establishment cannot be attributed profits from activities completed before it came into existence. Only the income arising from the Indian installation activity is taxable, computed as though the permanent establishment were a distinct enterprise.
Where an installation permanent establishment comes into existence only when erection work begins in India, can profits from the earlier offshore fabrication and supply be attributed to it?
A Korean company contracted to fabricate and install an offshore platform for an Indian oil company. The fabrication was carried out entirely in Korea and the completed structure was delivered to the Indian company, with title passing outside India. Thereafter the Korean company carried out installation and commissioning at the Indian site, for which it established a presence in India that constituted an installation permanent establishment under the treaty. The Revenue attributed a share of the profits on the entire contract, including the offshore fabrication and supply, to the Indian permanent establishment.
The matter proceeded through the appellate stages to the High Court and came before the Supreme Court, which addressed the point in time at which such a permanent establishment comes into existence and the consequences for attribution.
For the assessee
The permanent establishment came into existence only when the installation activity began in India. The fabrication had by then been completed abroad and title to the platform had already passed outside India. Profits earned before the permanent establishment existed cannot be attributed to it, since it played no part in earning them.
For the Revenue
The contract was a single obligation to deliver an installed platform, and the profit on it should be apportioned to the Indian operations. The fabrication was undertaken for the purpose of the Indian project and its profit is properly connected with the Indian presence.
The Court held that an installation permanent establishment comes into being only when the installation activity commences in India, and that profits cannot be attributed to it in respect of a period before it existed. It emphasised that the attribution exercise proceeds on the hypothesis that the permanent establishment is a distinct and separate enterprise dealing independently with the head office: on that footing, one asks what profits the Indian establishment would have earned for the functions it performed. The offshore fabrication had been carried out by the head office in Korea and completed before the Indian activity began, with title passing outside India; the Indian establishment contributed nothing to it and would have earned nothing from it as an independent enterprise. Only the installation and commissioning carried out in India fell to be attributed, and the profit on that activity was to be computed by reference to the functions performed, assets used and risks assumed in India. The Court rejected a global apportionment of contract profits as inconsistent with the separate enterprise hypothesis.
Governs the taxation of composite offshore and onshore contracts under Sections 9 and 159 of the IT Act 2025, alongside Ishikawajima-Harima on divisibility and Samsung Heavy Industries on the burden of establishing a permanent establishment and the impermissibility of ad hoc attribution. The temporal point — that the permanent establishment must exist before profits can be attributed to it — is distinctive to this case.