(2020) 426 ITR 1 (SC)
Income deemed to accrue or arise in India; double taxation relief
No. The burden is on the Revenue to show that the office carried on the core business rather than acting as a communication channel. Attribution must reflect the functions actually performed in India.
Does a project office opened for a turnkey contract automatically become a permanent establishment to which the profits of the whole contract can be attributed?
A Korean company, in consortium with an Indian company, was awarded a turnkey contract by an Indian oil company for the development of an offshore facility. The contract covered design, engineering, procurement, fabrication, installation and commissioning, with substantial elements performed outside India. The Korean company opened a project office in Mumbai, described in its Reserve Bank application as a communication channel between the company and the Indian oil company. The office had two personnel, neither of whom was shown to be engaged in the core design or fabrication work, and its accounts showed no significant activity. The Assessing Officer treated the project office as a permanent establishment and attributed a fixed percentage of the total contract revenue — covering both offshore and onshore elements — to it.
The Tribunal upheld the existence of a permanent establishment. The Uttarakhand High Court took a different view on aspects of the matter. The appeal came before the Supreme Court, which addressed both the existence of a permanent establishment and the basis of attribution.
For the assessee
The project office was a liaison and coordination facility, as its own Reserve Bank application and its accounts showed. The design and fabrication work was carried on in Korea. No core business was conducted through the Mumbai office, so it was not a permanent establishment; and in any event a percentage of global contract revenue is not a permissible measure of what an office of that character could have earned.
For the Revenue
The project office was opened specifically for this contract and existed throughout its performance. Its purpose was to enable the contract to be executed in India, which is the taxpayer's business, and the profits of the contract are therefore attributable to it.
The Court held that the burden of establishing a permanent establishment rests on the Revenue, and that it had not been discharged. It examined the material and found that the project office's role was coordination and communication; the accounts disclosed no meaningful trading activity, only two personnel were stationed there, and nothing showed that the core activities of design, engineering or fabrication had been carried out through it. A description in the Reserve Bank application as a communication channel, while not conclusive, was consistent with the other evidence. The Court reiterated that a fixed place becomes a permanent establishment only where the business of the enterprise is carried on wholly or partly through it, and an office performing auxiliary coordination does not meet that description. On attribution, the Court held separately that profits may be attributed to a permanent establishment only for the activities genuinely carried out through it, and that adopting an ad hoc percentage of total contract revenue — embracing offshore supply and offshore services having no connection with the Indian office — was without basis. Both the finding of a permanent establishment and the attribution were accordingly set aside.
Important for turnkey and EPC contracts split between offshore supply and onshore services, which continue to be tested under Section 9 of the IT Act 2025. It constrains both the finding of a permanent establishment and the quantum of any attribution, and the burden-of-proof holding is frequently decisive where the Revenue relies on the mere existence of a project office.