Permanent establishment and profit attribution under the India-Korea DTAA, with section 234B interest discussed for non-residents.

A project office opened for coordination and execution of a composite turnkey contract can constitute a fixed place permanent establishment under Article 5(1) of the India-Korea DTAA, and the exclusion for preparatory or auxiliary activities in Article 5(4) will not apply where the office performs substantive business functions. Once a permanent establishment exists, offshore profits must be attributed on the basis of actual activities and evidence; an ad hoc 25% attribution lacks support without proper fact-finding. The text also notes the principle that interest under section 234B is generally not leviable on a non-resident where tax was deductible at source, subject to recomputation on the cited authorities.

---

---

Issues: (i) Whether the assessee's Mumbai project office constituted a permanent establishment in India under Article 5(1) of the India-Korea DTAA and whether Article 5(4) excluded it. (ii) Whether the offshore revenue could be attributed to the permanent establishment and whether the ad hoc attribution of 25% was sustainable. (iii) Whether interest under section 234B was chargeable in the case of a non-resident where tax was deductible at source.

Issue (i): Whether the assessee's Mumbai project office constituted a permanent establishment in India under Article 5(1) of the India-Korea DTAA and whether Article 5(4) excluded it.

Analysis: The contract, read as a whole, was a composite turnkey arrangement extending from surveys, design, engineering and procurement to installation and commissioning. The Board resolution, RBI registration documents and power of attorney showed that the project office was opened for co-ordination and execution of the project in India. The Court treated the project office as a fixed place of business through which business was carried on and held that Article 5(3) dealing with construction or installation projects did not override the general rule in Article 5(1). The assessee failed to show that the project office was confined to preparatory or auxiliary functions within Article 5(4).

Conclusion: The Mumbai project office was a permanent establishment in India and the exclusion in Article 5(4) did not apply; this issue was decided against the assessee.

Issue (ii): Whether the offshore revenue could be attributed to the permanent establishment and whether the ad hoc attribution of 25% was sustainable.

Analysis: Having held that a permanent establishment existed, the Court found that attribution of profits required factual determination of the activities actually carried on through the permanent establishment. The record did not contain material to justify the figure of 25% adopted by the Assessing Officer, and no adequate basis was shown for the attribution percentage.

Conclusion: The question of attribution of offshore profits was remitted to the Assessing Officer for fresh determination after proper fact-finding; this issue was not finally decided on merits.

Issue (iii): Whether interest under section 234B was chargeable in the case of a non-resident where tax was deductible at source.

Analysis: The assessee's contention was that, where tax was required to be withheld at source from payments to a non-resident, liability to pay advance tax did not arise. The Court accepted the principle that such interest would not be leviable in the assessee's case, but directed reconsideration in light of the cited authorities while recomputing the tax effect.

Conclusion: The levy of interest under section 234B was held to be not chargeable in principle, and the matter was restored for consequential consideration.

Final Conclusion: The assessee succeeded only to the limited extent of getting the attribution and consequential interest issues sent back for fresh determination, while the finding that the Mumbai project office constituted a permanent establishment in India was upheld.

Ratio Decidendi: A project office opened and used for co-ordination and execution of a composite contract can constitute a fixed place permanent establishment under Article 5(1) of the DTAA, and the specific rule for installation projects does not exclude the operation of the general fixed-place rule where the facts establish such business activity; profit attribution must then be based on evidence and cannot be made on an ad hoc percentage without material.

---