2018 (5) TMI 49 - AT - Income Tax

Uttarakhand High Court: Offshore supplies not taxable in India without PE involvement

Samsung Heavy Industries Co. Ltd. C/o Pricewaterhouse Cooopers P. Ltd. Versus DCIT (International Taxation) Gurgaon

The High Court of Uttarakhand reversed the Tribunal's decision, holding that there was no evidence to attribute offshore supplies to the Permanent ... Taxability of Outside India revenues in India - consideration received by the assessee, a foreign company, against an “offshore supplies” made by it from outside India taxability in India - how much of the income can be attributed to the Permanent Establishment from such business of supplies? - income from offshore supplies as attributed to its alleged PE - Held that:- AO did not bring on record any evidence or material in support of the contention that the office at Mumbai had any role to play in respect of offshore supplies made and, as such, such income could be attributed to such supplies being the profit which has been carried through the business from such alleged PE, and on the other hand the assessee claims to have placed on record its annual accounts, in support of the contention that the office at Mumbai had absolutely no role to play in respect of offshore supplies made and as such no income could be attributed to such supplies being the profit which has been carried through the business from such alleged PE but not properly considered by the authorities below In view of the observations of in assessee’s own case for the assessment year 2007-08 and also the decision in Carborandum Co. vs. CIT [1977 (4) TMI 2 - SUPREME Court] and National Petroleum Construction Company [2016 (2) TMI 47 - DELHI HIGH COURT], we are of the considered opinion that no income from offshore supplies could be attributed to its alleged PE in Mumbai. - Decided in favour of assessee Issues Involved:1. Taxability of consideration received by the assessee for offshore supplies made from outside India.2. Attribution of income to the Permanent Establishment (PE) in India.3. Role of the Project Office in Mumbai in offshore supplies.4. Burden of proof on Revenue to establish the involvement of PE in offshore supplies.Detailed Analysis:1. Taxability of Consideration Received for Offshore Supplies:The primary issue revolves around whether the consideration received by the assessee, a foreign company, for offshore supplies made from outside India is taxable in India. The assessee argued that offshore activities such as design, engineering, and fabrication were performed outside India, and hence, the income from these activities should not be taxed in India. The Tribunal initially held that the assessee had a PE in India but remanded the matter to the AO to ascertain the role of the PE in offshore supplies. The High Court of Uttarakhand reversed the Tribunal's decision, stating that there was no evidence to attribute offshore supplies to the PE in India.2. Attribution of Income to the Permanent Establishment (PE):The AO attributed 25% of the gross revenues from the VED project to the PE in India, asserting that the PE played a role in the offshore supplies. However, the High Court of Uttarakhand found no material evidence to support this attribution. The Tribunal, following the High Court's decision, concluded that without evidence of the PE's involvement in offshore supplies, no income could be attributed to the PE.3. Role of the Project Office in Mumbai in Offshore Supplies:The assessee maintained that the Project Office in Mumbai was only for coordination and communication and did not partake in core business activities related to offshore supplies. The Tribunal noted that the Project Office had only two employees who were not technically capable of handling offshore supply activities. The High Court emphasized that mere existence of a PE does not justify tax liability unless it is proven that the PE was involved in income-generating activities.4. Burden of Proof on Revenue:The burden to establish that the offshore supplies were carried out through the PE in India lies with the Revenue. The Tribunal referenced decisions from the Delhi High Court and the Supreme Court, emphasizing that the Revenue must provide material evidence to support its claims. In this case, the AO failed to bring any evidence to demonstrate the involvement of the Project Office in offshore supplies.Conclusion:The Tribunal, in light of the High Court's decision and the lack of evidence from the Revenue, allowed the appeal of the assessee. It held that no income from offshore supplies could be attributed to the PE in Mumbai, as there was no material evidence to support such attribution. The appeal was thus decided in favor of the assessee, concluding that the income from offshore supplies is not taxable in India through the alleged PE.Order Pronounced:The appeal of the assessee was allowed, and the order was pronounced in the Open Court on 25th April 2018.