DIRECTOR OF INCOME TAX-II (INTERNATIONAL TAXATION) NEW DELHI &amp; ANR Vs. M/S SAMSUNG HEAVY INDUSTRIES CO. LTD
as is attributable to that permanent establishment. 24. At this stage, it is important to go into some of the documents that were relied upon by the ITAT. The application submitted by the Assessee to the RBI dated 24.04.2006 for opening a project office, reads as follows: Letter dated 24 th April 2006 General Manager Reserve Bank of India Regional Office Mumbai Dear sir, Re: M/s Samsung Heavy Industries Co. Ltd. (SHI) Application for Registration of Project Office Our aforesaid client (SHI) has entered into contract with M/s Oil and Natural Gas Corporation Ltd. (ONGC) vide contract number MR/OW/MM/VED/O3/2005. Under the instructions of our above- referred client, we have to enclose following documents in connection with Registration of Project office in India: 1. Letter dated (…) on the letter head of the company for the details of the project as Notification FEMA 95/2003- RB dated 2 nd July, 2003 Foreign Exchange Management (Establishment in India of Branch or Office or other place of business) (Amendment) Regulations 2003 along with the copy of letter from ChoHung Bank for opening Bank account. 2. Copy of the POA in our favour and in favour of M/s Hemand Arora and Co., CA. 3. Certified copy of the POA in the name of the Mr. S.S. Park, who has signed the application. 4. Certified copy of the certificate of registration of the company in South Korea. 5. Certified copy of the notarised Board resolution for opening a Project office in India. 6. Certified copy of Extract of contract entered into by our client. Kindly take the above documents on record. Please take on record our clients Project office and register the same. If you require any clarification, please let us know… 25. The Board Resolution dated 03.04.2006 referred to in this letter reads as follows: MINUTES OF BOARD OF DIRECTORS MEETING OF SAMSUNG HEAVY INDUSTRIES CO. LTD. A meeting of the Board of Directors of Samsung Heavy Industries Co. Ltd. (the Company) was duly called and held on the 3 rd day of April 2006 at the office of the Company in Seoul the Republic of Korea, at which 3 of 3 Directors were present and acting throughout. Jing Wan Kim, President and CEO of Samsung Heavy Industries Co. Ltd. announced that the notice of meeting was duly given to all Directors and a quorum was present and the meeting was duly called to order and held. RESOLVED: 1. That the Company hereby open one project office in Mumbai, India for coordination and execution of Vasai East Development Project for Oil and Natural Gas Corporation Limited ( ONGC), India. 2. That the Company hereby does make and constitute Mr. Sangsoon Park Yard General Manager of the Company, as the Companys true and lawful representative with full power and authority for the purpose of establishing a project office and coordinating and executing delivery of documents in connection with construction of offshore platform modification of existing facilities for ONGC above. IN WITNESS WHEREOF, the President and Directors present at the meeting have hereunto affixed their names and seals on this 3rd day of April 2006. Sd/- Samsung Heavy Industries Co., Ltd. President and CEO Jing Wan Kim 26. Based on the letter given to RBI which contained this resolution, the RBI approval dated 24.05.2006 reads as follows: FEO, Mumbai CAD/080/04.02.2001/05-06 24th May, 2006 M/s Davesh K. Shah and Co., Chartered Accountants, 106, Banaji House, 361, Dr. D.N. Road, Flora Fountain, Mumbai 400 001. Dear sirs, Registration of Project Office – M/s Samsung Heavy Industries Co. Ltd. (SHI) Please refer to your letter dated 24 th April, 2006 on the captioned subject. In this connection, we advise having noted a Project Office in India in terms of provision contained in AP (Dir Series) Circular No.37 dated 15 th November 2003. 27. A reading of the Board Resolution would show that the Project Office was established to coordinate and execute delivery documents in connection with construction of offshore platform modification of existing facilities for ONGC . Unfortunately, the ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that the Mumbai office was for coordination and execution of the project itself. The finding, therefore, that the Mumbai office was not a mere liaison office, but was involved in the core activity of execution of the project itself is therefore clearly perverse. Equally, when it was pointed out that the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating that as accounts are in the hands of the Assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment. This is another perverse finding which is set aside. Equally the finding that the onus is on the Assessee and not on the Tax Authorities to first show that the project office at Mumbai is a permanent establishment is again in the teeth of our judgment in E-Funds IT Solution Inc. (supra). 28. Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the Assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC. This being the case, it is not necessary to go into any of the other questions that have been argued before us.
0[ds]17. Some of the judgments of this Court have dealt with similar double taxation avoidance treaty provisions and therefore need to be mentioned at this juncture. In Morgan Stanley & Co. Inc. (supra), the Double Taxation Avoidance Agreement (1990) between India and the United States of America was construed. The facts in that case made it clear that the Morgan Stanley Group is one of the worlds largest diversifying financial services companies. Morgan Stanley and Company, which is a part of the Morgan Stanley Group, is an investment bank engaged in the business of providing financial advisory services, corporate lending and securities underwriting. One of the group companies of Morgan Stanley Group, namely, Morgan Stanley Advantages Services Pvt. Ltd. ( MSAS) entered into an agreement for providing certain support services to Morgan Stanley and Company. MSAS, being an Indian Company, was set up to support the main office functions in equity and fixed income research, account reconciliation and providing IT enabled services such as back office operation, data processing and support centre to Morgan Stanley and Company. Tackling the question as to whether a fixed place permanent establishment existed on the facts of that case under Article 5 of the India-US treaty – which is similar to Article 5 of the present DTAA – this Court held:10. In our view, the second requirement of Article 5(1) of DTAA is not satisfied as regards back office functions. We have examined the terms of the Agreement along with the advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from reading of the above Agreement/application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing IT enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a PE stood constituted one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of AAR that in the present case Article 5(1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of Article 5(1) is not attracted.xxx xxx xxx14. There is one more aspect which needs to be discussed, namely, exclusion of PE under Article 5(3). Under Article 5(3)(e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a PE. Article 5(3) commences with a non obstante clause. It states that notwithstanding what is stated in Article 5(1) or under Article 5(2) the term PE shall not include maintenance of a fixed place of business solely for advertisement, scientific research or for activities which are preparatory or auxiliary in character. In the present case we are of the view that the abovementioned back office functions proposed to be performed by MSAS in India falls under Article 5(3)(e) of DTAA. Therefore, in our view in the present case MSAS would not constitute a fixed place PE under Article 5(1) of DTAA as regards its back office operations.18. The Court then went on to hold that activities performed by stewards who were deployed by the American Company to work in India as employees of the Indian company were so employed merely to protect the American companies interests in a competitive world, by ensuring quality and confidentiality of services performed in India. It was therefore found that so far as stewardship was concerned, this activity would fall within Article 5(2)(l) of the US-India treaty, and therefore would be outside the term permanent establishment as defined. On the deputation of certain employees of the American Company to work as employees of the Indian Company, it was found, however, that the American Company was rendering services through its employees to the Indian Company, as a result of which a service permanent establishment would stand established on this count.23. 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.27. A reading of the Board Resolution would show that the Project Office was established to coordinate and execute delivery documents in connection with construction of offshore platform modification of existing facilities for ONGC . Unfortunately, the ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that the Mumbai office was for coordination and execution of the project itself. The finding, therefore, that the Mumbai office was not a mere liaison office, but was involved in the core activity of execution of the project itself is therefore clearly perverse. Equally, when it was pointed out that the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating that as accounts are in the hands of the Assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment. This is another perverse finding which is set aside. Equally the finding that the onus is on the Assessee and not on the Tax Authorities to first show that the project office at Mumbai is a permanent establishment is again in the teeth of our judgment in E-Funds IT Solution Inc. (supra).28. Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the Assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC. This being the case, it is not necessary to go into any of the other questions that have been argued before us.
### Instruction:
Judge the probable resolution of the case (approval (1) or disapproval (0)), and elaborate on this forecast by extracting and interpreting significant sentences from the proceeding.

### Input:
as is attributable to that permanent establishment. 24. At this stage, it is important to go into some of the documents that were relied upon by the ITAT. The application submitted by the Assessee to the RBI dated 24.04.2006 for opening a project office, reads as follows: Letter dated 24 th April 2006 General Manager Reserve Bank of India Regional Office Mumbai Dear sir, Re: M/s Samsung Heavy Industries Co. Ltd. (SHI) Application for Registration of Project Office Our aforesaid client (SHI) has entered into contract with M/s Oil and Natural Gas Corporation Ltd. (ONGC) vide contract number MR/OW/MM/VED/O3/2005. Under the instructions of our above- referred client, we have to enclose following documents in connection with Registration of Project office in India: 1. Letter dated (…) on the letter head of the company for the details of the project as Notification FEMA 95/2003- RB dated 2 nd July, 2003 Foreign Exchange Management (Establishment in India of Branch or Office or other place of business) (Amendment) Regulations 2003 along with the copy of letter from ChoHung Bank for opening Bank account. 2. Copy of the POA in our favour and in favour of M/s Hemand Arora and Co., CA. 3. Certified copy of the POA in the name of the Mr. S.S. Park, who has signed the application. 4. Certified copy of the certificate of registration of the company in South Korea. 5. Certified copy of the notarised Board resolution for opening a Project office in India. 6. Certified copy of Extract of contract entered into by our client. Kindly take the above documents on record. Please take on record our clients Project office and register the same. If you require any clarification, please let us know… 25. The Board Resolution dated 03.04.2006 referred to in this letter reads as follows: MINUTES OF BOARD OF DIRECTORS MEETING OF SAMSUNG HEAVY INDUSTRIES CO. LTD. A meeting of the Board of Directors of Samsung Heavy Industries Co. Ltd. (the Company) was duly called and held on the 3 rd day of April 2006 at the office of the Company in Seoul the Republic of Korea, at which 3 of 3 Directors were present and acting throughout. Jing Wan Kim, President and CEO of Samsung Heavy Industries Co. Ltd. announced that the notice of meeting was duly given to all Directors and a quorum was present and the meeting was duly called to order and held. RESOLVED: 1. That the Company hereby open one project office in Mumbai, India for coordination and execution of Vasai East Development Project for Oil and Natural Gas Corporation Limited ( ONGC), India. 2. That the Company hereby does make and constitute Mr. Sangsoon Park Yard General Manager of the Company, as the Companys true and lawful representative with full power and authority for the purpose of establishing a project office and coordinating and executing delivery of documents in connection with construction of offshore platform modification of existing facilities for ONGC above. IN WITNESS WHEREOF, the President and Directors present at the meeting have hereunto affixed their names and seals on this 3rd day of April 2006. Sd/- Samsung Heavy Industries Co., Ltd. President and CEO Jing Wan Kim 26. Based on the letter given to RBI which contained this resolution, the RBI approval dated 24.05.2006 reads as follows: FEO, Mumbai CAD/080/04.02.2001/05-06 24th May, 2006 M/s Davesh K. Shah and Co., Chartered Accountants, 106, Banaji House, 361, Dr. D.N. Road, Flora Fountain, Mumbai 400 001. Dear sirs, Registration of Project Office – M/s Samsung Heavy Industries Co. Ltd. (SHI) Please refer to your letter dated 24 th April, 2006 on the captioned subject. In this connection, we advise having noted a Project Office in India in terms of provision contained in AP (Dir Series) Circular No.37 dated 15 th November 2003. 27. A reading of the Board Resolution would show that the Project Office was established to coordinate and execute delivery documents in connection with construction of offshore platform modification of existing facilities for ONGC . Unfortunately, the ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that the Mumbai office was for coordination and execution of the project itself. The finding, therefore, that the Mumbai office was not a mere liaison office, but was involved in the core activity of execution of the project itself is therefore clearly perverse. Equally, when it was pointed out that the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating that as accounts are in the hands of the Assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment. This is another perverse finding which is set aside. Equally the finding that the onus is on the Assessee and not on the Tax Authorities to first show that the project office at Mumbai is a permanent establishment is again in the teeth of our judgment in E-Funds IT Solution Inc. (supra). 28. Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the Assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC. This being the case, it is not necessary to go into any of the other questions that have been argued before us.

### Response:
0

### Explanation:
of the present DTAA – this Court held:10. In our view, the second requirement of Article 5(1) of DTAA is not satisfied as regards back office functions. We have examined the terms of the Agreement along with the advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from reading of the above Agreement/application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing IT enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a PE stood constituted one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of AAR that in the present case Article 5(1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of Article 5(1) is not attracted.xxx xxx xxx14. There is one more aspect which needs to be discussed, namely, exclusion of PE under Article 5(3). Under Article 5(3)(e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a PE. Article 5(3) commences with a non obstante clause. It states that notwithstanding what is stated in Article 5(1) or under Article 5(2) the term PE shall not include maintenance of a fixed place of business solely for advertisement, scientific research or for activities which are preparatory or auxiliary in character. In the present case we are of the view that the abovementioned back office functions proposed to be performed by MSAS in India falls under Article 5(3)(e) of DTAA. Therefore, in our view in the present case MSAS would not constitute a fixed place PE under Article 5(1) of DTAA as regards its back office operations.18. The Court then went on to hold that activities performed by stewards who were deployed by the American Company to work in India as employees of the Indian company were so employed merely to protect the American companies interests in a competitive world, by ensuring quality and confidentiality of services performed in India. It was therefore found that so far as stewardship was concerned, this activity would fall within Article 5(2)(l) of the US-India treaty, and therefore would be outside the term permanent establishment as defined. On the deputation of certain employees of the American Company to work as employees of the Indian Company, it was found, however, that the American Company was rendering services through its employees to the Indian Company, as a result of which a service permanent establishment would stand established on this count.23. 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.27. A reading of the Board Resolution would show that the Project Office was established to coordinate and execute delivery documents in connection with construction of offshore platform modification of existing facilities for ONGC . Unfortunately, the ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that the Mumbai office was for coordination and execution of the project itself. The finding, therefore, that the Mumbai office was not a mere liaison office, but was involved in the core activity of execution of the project itself is therefore clearly perverse. Equally, when it was pointed out that the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating that as accounts are in the hands of the Assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment. This is another perverse finding which is set aside. Equally the finding that the onus is on the Assessee and not on the Tax Authorities to first show that the project office at Mumbai is a permanent establishment is again in the teeth of our judgment in E-Funds IT Solution Inc. (supra).28. Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the Assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC. This being the case, it is not necessary to go into any of the other questions that have been argued before us.
