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Director of Income Tax-II (International Taxation), New Delhi v. M/S Samsung Heavy Industries Co. Ltd.

Civil Appeal · 2020 INSC 460Decided 22 Jul 2020
Civil Appeal No. 12183 of 2016
Justice Rohinton Fali Nariman · Justice Navin Sinha · Justice B.R. Gavai

Background

Samsung Heavy Industries, a South Korean company, was part of a consortium that won a turnkey contract from ONGC for an offshore oil project, and set up a small "Project Office" in Mumbai with only two non-technical staff to coordinate with ONGC. The Indian tax authorities treated this Mumbai office as a "permanent establishment" and taxed 25% of the company's entire offshore revenue (design, engineering, fabrication work done outside India) as attributable to it. The Income Tax Appellate Tribunal agreed the office was more than a mere liaison office but sent the case back to determine exact profits attributable to it, while the Uttarakhand High Court set aside the tax demand for lack of evidentiary basis, leading the tax department to appeal to the Supreme Court.

Decision Breakdown

The Supreme Court held that the Tribunal's finding, that the Mumbai office was involved in core project execution, was "perverse" because it relied on only one line of the company's board resolution while ignoring the rest, and improperly placed the burden of disproving a permanent establishment on the taxpayer rather than requiring the tax department to first prove one existed, contrary to the Court's own precedent in E-Funds IT Solution Inc. Examining the actual documents (RBI application, board resolution, staffing), the Court found the Mumbai office had only two unqualified employees, incurred no project-execution expenditure, and functioned merely as a communication/auxiliary channel between the company and ONGC: squarely falling within the DTAA's exclusion for "preparatory or auxiliary" offices. The Court therefore held no permanent establishment existed in India at all, and dismissed the department's appeal (though for different reasons than the High Court had given).

Lesson Learnt

For international companies, a small coordination or liaison office in India does not automatically become a taxable "permanent establishment": the tax department bears the burden of proving the office was genuinely involved in core business execution, not merely auxiliary communication functions.

Official source (sci.gov.in)View Judgment (PDF)

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