COMMISSIONER OF INCOME TAX, MEERUT AND ANR. vs. M/S. HYUNDAI HEAVY INDUSTRIES CO. LTD

CIVIL APPEAL No. 2734/2007Supreme Court[2007] 7 S.C.R. 28818 May 2007Bench: 2 JudgesAuthor: S.H. KAPADIA, B. SUDERSHAN REDDY COMMISSIONER OF14 pages
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What did the Supreme Court hold?

The Supreme Court held that profits arising from activities outside India, specifically designing and fabrication, are not taxable in India. The PE came into existence only after the fabricated platform was delivered outside India. Therefore, profits from these supplies cannot be attributed to the PE. The Court reasoned that under Article 7 of the CADT, only hypothetical profits a wholly independent PE would have earned are taxable, and the Revenue failed to establish that the supplies were not at arm's length price or that the billing included any element for services rendered by the PE. Regarding Indian operations, the Court held that 10% of the gross receipts from installation and commissioning activities performed in India are taxable. This was based on the assessee's own contention to compute income under Section 44BB or CBDT Instruction No. 1767, which stipulates 10% of gross receipts for such activities when sales occur outside India. The Court found the CIT(A)'s estimation of 10% to be correct and set aside the Tribunal's decision to reduce it further.

What were the facts?

The assessee, a non-resident foreign company, entered into a contract with an Indian company for the design, fabrication, installation, and commissioning of an oil platform in India. The assessee declared nil income. The Assessing Officer (AO) rejected the assessee's contentions that it had no Permanent Establishment (PE) in India and that the contract was divisible, treating the entire receipts from Indian operations and 2% of foreign operations receipts as taxable income. The Commissioner (Appeals) directed that 1% of foreign operations receipts and 10% of Indian operations receipts be treated as taxable income. The Tribunal allowed the assessee's appeal, holding the contract divisible and taxable only on 10% of Indian operations receipts. The High Court summarily dismissed the Revenue's appeal.

What were the issues?

1. Whether profits arising from activities outside India (designing and fabrication) are taxable in India, considering the existence of a Permanent Establishment (PE) in India and Article 7 of the Convention for Avoidance of Double Taxation (CADT)? - Assessee's contention: The contract is divisible. Income from foreign operations (designing and fabrication) is not taxable in India as it was earned outside India and the PE was established only at the installation stage. - Revenue's contention: The contract is composite and interlinked. Profits from activities outside India are chargeable to tax in India under Section 9(1) of the Income Tax Act, 1961, as they are linked to Indian activities. 2. What is the quantum of profits attributable to the Indian PE from Indian operations (installation and commissioning)? - Assessee's contention: Income from Indian operations should be computed under Section 44BB of the Act or under Instruction No. 1767 issued by CBDT. - Revenue's contention: The AO's assessment of 2% of foreign operations and entire Indian operations receipts was appropriate, later modified by CIT(A) to 1% and 10% respectively. The Tribunal reduced it further without valid reasons.

Which sections of the Income-tax Act were involved?

Section 9,Section 44BB,Section 143(2),Section 260A

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A COMMISSIONER OF INCOME TAX, MEER.UT AND ANR. · . ,· ' MIS. HYUNDAI HEAVY INDUSTRIES CO. LID ... MAY 18,2007 B [SR KAPADIA AND B. SUDERSHAN REDDY, JJ.l · Income Tax Act, 1961-Sections 9, 44BB, 143 (2) & 144-Convetition for Avoidance of Double Taxation-Article 7-Contract entered into by Indian c company with assesseeforeign company for designing, fabrication, ·installation, and commis.sion' of an oil platform inlndia-Assessee declaring nil income-Notice issued by Re\ienu~Assessee contending that the contract is divisible into Indian operatio~ and foreign opera#om; · that income from Indian operations is not liable to tax as it did not have Permanent Establishment in India; and that the inco,,,e froni foreign operations. is not D liable to tax·.as. it is earned outside JndiO-:.Asses#ng Officer rejecting the content.ions and·made butjudgment assusment ·holding that the. contract iS not divisible and treated entire receipts periaining to Indian. operations and 2% of receipt.pertaining to foreign operati(ins. as income-Comm~sioner Appeals treatM· I% of receipts in r~pect of foreign. operations and· 10% of .. E .receipts relating to Indian· operations as income-c-T

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