TAX LAW

Director Of Income Tax-II (International Taxation) New

Delhi and Another
V.
Samsung Heavy Industries Co. Ltd.

Submitted by: Submitted to:

Sapna Aggarwal Ms. Gunjan Ahuja

Enrolment no- 12417703520 Assistant Professor
Course – BBA LLB VSLLS, VIPS
Class – VII-M

Vivekananda Institute of Law and Legal Studies (VSLLS)

VIVEKANANDA INSTITUTE OF PROFESSIONAL STUDIES

2023
Case Name: Director Of Income Tax-II (International Taxation) New Delhi and Another V.
Samsung Heavy Industries Co. Ltd.
Court: Supreme Court
Decided on: July 22, 2020
Relevant Act: Income Tax Act, 1961
Relevant Provisions: Section 9

Facts

The case revolves around the establishment of a project office by Samsung Heavy Industries
Co. Ltd. in Mumbai and its implications under the India-South Korea Double Taxation
Avoidance Agreement (DTAA). Samsung set up the Mumbai project office with the primary
purpose of coordinating and executing the Vasai East Development Project for Oil and Natural
Gas Corporation Limited (ONGC) in India. The controversy arose when tax authorities
contended that the Mumbai office constituted a "permanent establishment" under Article 5 of
the DTAA, alleging active involvement in core business activities related to the project. The
High Court ruled against Samsung, considering the Mumbai office as a permanent
establishment for tax purposes, based on its perceived involvement in core business activities.
Samsung appealed to the Supreme Court, challenging the characterization of the Mumbai office
as a permanent establishment.

Issue

1. Whether the Mumbai project office qualifies as a Permanent Establishment under Article
5(1) of the DTAA?
2. Whether the nature of activities conducted by the Mumbai office constituted the core
business activities of the Assesses?
3. Whether taxable income be attributed to Permanent Establishment if it existed and engaged
in core activities?

Petitioners Arguments

1. The Income Tax authorities argued that the project undertaken by Samsung Heavy
Industries Co. Ltd. in India, specifically the Vasai East Development Project, constituted a
"turnkey" project.
2. The Assessing Officer contended that the entire project, from surveys to commissioning,
was indivisible, and the profits arising from the successful commissioning of the project
would be earned only in India.
3. The petitioner relied on the judgment in Commissioner of Income Tax v. Hyundai Heavy
Industries Co. Ltd. to distinguish the present case, asserting that in the Hyundai case, the
project was in two separate parts, unlike the current project.

Respondents Arguments

1. Samsung contended that the Mumbai project office had a limited role and was not engaged
in core business activities. The activities were primarily focused on the coordination and
execution of document delivery related to the Vasai East Development Project for Oil and
Natural Gas Corporation Limited (ONGC).
2. Respondent pointed out that the Mumbai office had a minimal staff of two individuals,
neither of whom possessed qualifications to perform core business activities. This fact
further supported the argument that the office was not involved in substantial business
operations.
3. The approval obtained from the Reserve Bank of India (RBI) was likely cited to
substantiate Respondent's claim that the Mumbai office was established for specific
purposes and did not qualify as a permanent establishment engaged in the core business
activities.
4. Respondent contended that the burden of establishing that a foreign assessed has a
permanent establishment in India was placed on the tax authorities, and that burden had not
been discharged.

Judgement

The Supreme Court referred to its previous decisions on permanent establishment and held that
to constitute a “fixed place permanent establishment” under DTAA, the condition precedent is
that it should be an establishment “through which the business of an enterprise” is wholly or
partly carried on. The Supreme Court observed that maintenance of a fixed place of business
that is of a preparatory or auxiliary character in the trade or business of the enterprise would
not be considered to be a permanent establishment under Article 5.

The court held that no permanent establishment is triggered in the instant case on the following
reasons:
The Board of Directors Resolution shows that the project office was established to coordinate
and execute the delivery of documents in connection with the construction of offshore platform
modification of existing facilities for ONGC. The court held that ITAT looked at only the first
paragraph of the BOD Resolution and jumped to the conclusion. The SC held that the finding
of ITAT is perverse. It was further held that the finding of the ITAT that the mode of
maintaining accounts alone cannot determine the character of permanent establishment is a
perverse finding. The Hon’ble court contented that the onus is on the tax authorities to
demonstrate that the respondent has a permanent establishment and there were only two
persons working in the project office and neither of them was qualified to perform any core
activity of the respondent. Thus, the project office is solely an auxiliary office and falls within
Article 5(4)(e) of DTAA.

Case Analysis

The court's decision to set aside the tax liability imposed on 25% of the Assess's gross revenue
outside India reflects a cautious approach to the attribution of tax obligations. The court rightly
emphasized the importance of establishing a clear link between income and the permanent
establishment (PE) in India. By questioning the lack of evidence justifying the arbitrary 25%
figure, the court demonstrated a commitment to ensuring that tax assessments are grounded in
substantive and verifiable allocations.

The court's focus on the factual context of the case, rather than strictly adhering to formulated
questions of law, underscores a pragmatic approach. Courts often seek to address the immediate
legal issues arising from the specific circumstances presented, and in this instance, the court
found that the questions of law did not squarely apply to the case.

However, it may be argued that the court's scrutiny of whether the Project Office constituted a
PE might be too stringent. If the office was genuinely involved in coordinating and executing
the project, it could be considered a fixed place of business as per Article 5 of the Double
Taxation Avoidance Agreement (DTAA) between India and Korea.

In essence, the court's decision aligns with the principles of tax law that demand a robust
connection between the income and the activities within a jurisdiction. However, the
interpretation of whether the Project Office qualified as a PE and the court's avoidance of
broader legal questions could be points of contention.