Calcutta High Court
Director Of Income Tax ... vs M/S. Van Oord Atlanta Bv on 7 February, 2023
O-62
IN THE HIGH COURT AT CALCUTTA
SPECIAL JURISDICTION (INCOME TAX)
ORIGINAL SIDE
ITA/254/2008
DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)
VS.
M/S. VAN OORD ATLANTA BV
BEFORE :
THE HON'BLE JUSTICE T.S. SIVAGNANAM
And
THE HON'BLE JUSTICE HIRANMAY BHATTACHARYYA
Date : 7th February, 2023
Appearance :
Mr. Om Narain Rai, Adv.
....for appellant
Mr. J.P. Khaitan, Sr. Adv.
Ms. Sanjukta Gupta, Adv.
Ms. Swapna Das, Adv.
...for the respondent
The Court : This appeal filed by the revenue under Section 260A of the
Income Tax Act (the Act) is directed against the order dated August 24, 2007
passed by the Income Tax Appellate Tribunal, `C' Bench, Kolkata (Tribunal) in
I.T.A Nos.1517 and 1518/Kol/2007 for the assessment years 2000-01 and
2001-02 and ITA No.1515/Kol/2007 for the assessment year 2001-02.
The appeal was admitted on 29th July, 2008 to decide the following
substantial question of law :-
"Whether on the facts and in the circumstances of the case the
Learned Tribunal erred in holding that there was no `Permanent
Establishment' (PE) of the assessee in India and the contractual receipts
are not chargeable to tax in India."
We have heard Mr. Om Narain Rai, learned counsel appearing for the
appellant and Mr. J.P. Khaitan, learned senior counsel appearing for the
respondent/assessee.
The only question which arises for consideration in this appeal is whether
the project office of the respondent/assessee which functioned for a period of
about 153 days could be construed as a `permanent establishment' and whether
the respondent/assessee could be subjected to proceedings under the Income
Tax Act, 1961. The Assessing Officer was of the view that the selling of the
dredger which was brought from Netherlands to the waterways outside West
Bengal did not necessarily mean the closure of the project office in India.
Further, the approval of the Reserve Bank of India is mandatory for closure of
the project office and the bank accounts reveal that the project office was
operating till 31st March, 2000. The said order was affirmed by the
Commissioner of Income Tax (Appeals). Challenging the same the assessee filed
appeal before the Tribunal.
The nature of transaction which was the subject matter of appeal would be
covered by the agreement for avoidance for double taxation and prevention of
physical evasion with Netherlands. Article 5 of the said agreement deals with
`permanent establishment'. Paragraph 2 of Article 5 defines the term
`permanent establishment. Paragraph 3 of Article 5 states that a complete site
or construction, installation or assembly project constitutes a permanent
establishment only where such site or project continues for a period of more
than six months. Paragraph 4 of Article 5 commences with a non obstante
clause stating that notwithstanding the preceding provisions of Article 5 the
term `permanent establishment' shall be deemed not to include and there are six
clauses in paragraph 4 of which clause (e) would be relevant for case on hand,
which states that maintenance of fixed place of business solely for the purpose
of advertising, for the supply of information, for scientific research or for other
activities which had preparatory or auxiliary character for the enterprise would
not fall within the definition of a permanent establishment. Taking note of
Article 5 of the agreement with Netherlands, the learned Tribunal examined the
facts of the case and found that the activities of the project office of the
respondent/assessee in West Bengal was auxiliary in character. The project
office was in operation from 26th February, 1999 to 29th July, 1999, that is, for a
period of 153 days only, which the Tribunal found, was much less than the
period of six months, as stipulated in Article 5(3).
Therefore, the learned Tribunal held that there was no valid reason for
treating the project office of the assessee as a permanent establishment. The
view taken by the learned Tribunal cannot be faulted, more so, because of the
recent decision of the Hon'ble Supreme Court in the case of Director of Income
Tax-II (International Taxation) New Delhi & Anr. vs. Samsung Heavy Industries
Company Limited, (2020) 7 SCC 347 = (2020) 426 ITR 1. In the said case, the
question which arose for consideration before the Hon'ble Supreme Court as to
the taxability of the income attributable to a permanent establishment set u p in
a fixed place in India arising from the agreement for avoidance for double
taxation of income and prevention of physical evasion with the republic of Korea.
The language in the said agreement is in pari meteria with the agreement with
Netherlands.
The Hon'ble Supreme Court after referring to various decisions in
paragraph 26 held as follows :-
"26. A reading of the aforesaid judgments makes it clear that when it
comes to "fixed place" permanent establishments under double taxation avoidance
treaties, the condition precedent for applicability of Article 5(1) of the double
taxation treaty and the ascertainment of a "permanent establishment" is that it
should be an establishment "through which the business of an enterprise" is
wholly or partly carried on. Further, the profits of the foreign enterprise are
taxable only where the said enterprise carries on its core business through a
permanent establishment. What is equally clear is that the maintenance of a fixed
place of business which 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. Also, it is only so much of the profits of the
enterprise that may be taxed in the other State as is attributable to that permanent
establishment."
As held by the Hon'ble Supreme Court in the above quoted paragraph, the
condition precedent for applicability of Article 5 of the double taxation treaty and
ascertainment of permanent establishment is that it should be an establishment
through which business of an enterprise is wholly or party carried on. Further,
the profits of the foreign enterprise are taxable only where the said enterprise
carries on its core business through a permanent establishment. Further, it was
held that maintenance of a fixed place of business which 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 of the said treaty.
The facts of the said case were also more or less identical to the case on hand
and ultimately the Hon'ble Supreme Court held that the Mumbai office of the
said assessee had only two employees and neither of whom was qualified to
perform in core activity of the assessee and on facts, the Hon'ble Supreme Court
found that the project office of the said assessee would fall within Article 5(4(e) of
the agreement inasmuch as the office is solely and auxiliary office, meant to act
as a liaison office between the assessee and ONGC. In the case on hand, the
factual position has been analyzed by the learned Tribunal and has recorded a
finding that the office in West Bengal was only auxiliary in character. In other
words, the activities carried out from the said office in West Bengal was auxiliary
in character. Thus, the view taken by the learned Tribunal finds support from
the decision of the Hon'ble Supreme Court in Samsung Heavy Industries Limited
(supra).
For the above reasons, the appeal filed by the revenue is dismissed and
the substantial question of law is answered against the revenue.
(T.S. SIVAGNANAM, J.)
(HIRANMAY BHATTACHARYYA, J.)
SN/CS.
