ITAT lay down principles on ‘splitting of turnkey contracts’, role of PE and taxability of profits from offshore supply

Samsung Heavy Industries Co. Ltd. Vs ADIT (International Taxation)- It is held that the turnkey contract is not divisible and therefore, the offshore supply and offshore services can be attributed to the Indian permanent establishment; as the project office was opened for coordination and execution of project, the same is held to be a fixed place PE.

Whether assessee’s arguments that all the activities carried out by the project office till the completion of fabrication work were of preparatory and auxiliary in nature can be accepted?

The contention of the assessee that, no PE would come into existence unless the fabrication work was completed; and no business activity was carried out through this office which had obtained permission from RBI to operate only as a liaison office, is not acceptable as the board resolution makes it clear that the project office was opened with the sole intention of carrying out the business activity of the assessee and also such office cannot be termed as a liaison office as no restriction of any sort was imposed by the RBI. The project office is the fixed place through which assessee has been wholly or partly carrying out its business as per Article 5(1) of DTAA. The decision of the Supreme Court in the case of Hyundai Heavy Industries Ltd. (291 ITR 482) is distinguishable to the facts of the case as in that case the assessee was having no other place of business in India prior to fabrication work, which was completed outside India.  Article 5(1) defines a PE for the purpose of DTAA as a fixed place through which business of  an enterprise is wholly or partly carried out. Article 5(2) widens the meaning of PE in addition  to what has been said in Article 5(1). Article 5(3) of DTAA uses the words “ likewise encompasses” and these items are, a building site; a construction; assembly or installation project or supervisor activity in connection therewith but only in a case where such site/ project or activity continue for a period of more than nine months. So, it has further enhanced the term “permanent establishment” to these entities. It will be wrong to say that Article 5(3) is an exclusionary clause, restricting the scope of Article 5(1). Therefore, Article 5(3) only extends the scope of PE as per Article 5(1) of DTAA and it cannot be read in isolation. The terms of the contract and the way the contract has to proceed clearly describe that in all activities there will be role of the project office as a channel between the assessee and ONGC.It can be adequately inferred from the contract that the project office played vital role in execution of the contract.  No material has been brought on record to show that project office did not play any role in execution of execution of the contract. Hence, the assessee’s arguments that all the activities carried out by the project office till the completion of fabrication work were of preparatory and auxiliary in nature cannot be accepted.