- (1.) Leave granted.
(2.) These civil appeals filed by the Department concern computation of the profits of the Indian permanent establishment (for short, "PE") of the Korean company, M/s. Hyundai Heavy Industries Co. Ltd. (for short, 'HHT'). Assessee is a non-resident foreign company incorporated in South Korea. On 12.03.1985 it had entered into an agreement with Oil and Natural Gas Company (for short, 'ONGC') for designing, fabrication, hook-up and commissioning of South Bassein Field Central Complex Facilities in Bombay High. In short, the contract was in two parts, one was for fabrication of platform and the other was installation and commissioning of the said platform in South Bassein Field. In these civil appeals we are concerned with the assessment years 1987-88 and 1988-89. The assessee is incorporated under the laws of Republic of Korea. Its registered office is in Korea. As regards assessment year 1988-89, assessee filed its return of income on 3.08.1988. The return indicated 'nil' income. In response to notices u/s. 143(2) of the Income-tax Act, 1961 (for short, 'the Act') the assessee stated that it did not have a PE in India and, therefore, it was not assessable to tax in India; that its Indian Operations consisting of installation and commissioning of the platform commenced in the taxable territory of India on 1.11.1986 and got completed on 12.04.1987 and, therefore, the duration of the Project was less than nine months; that it was entitled to exemption under Art. 7 of the Convention for Avoidance of Double Taxation (for short, 'CADT'); that in the alternative it was liable to be assessed on the basis of the accounts annexed to the returns; that the accounts were based on the Completed Contract Method in its worldwide accounts; that the accounts of its PE can be accepted on the Completed Contract Method basis ; that it was maintaining income and expenditure account of its PE in India; that the above contract was divisible into two types of operations - one being fabrication in Korea and the other consisting of installation in India and, therefore, any income arising from the activity of fabrication in Korea was not assessable to tax in India and to that extent the revenues receivable under the above contract in respect of the activity of fabrication should be excluded from the profit and loss account together with the expenditure relating to the activity of fabrication. It was further contended that the assessee had included the revenues relating to installation (Indian Activity) in the profit and loss account and the expenditure relating to that activity was debited on the Matching Principle Basis. It was further contended that the profit and loss consisted of two parts - the Korean and the Indian part; that the Korean part recorded the entire revenue/income received in Korea as also the expenditure incurred in Korea relating to the Indian Project and debited to the Korean book of accounts. All the above contentions were rejected by the A.O. It was held that the duration of the Project consisting of installation and commissioning extended beyond nine months, that the project constituted a PE of the assessee in India in terms of Art. 5(3) of CADT; that in any event the office of HHI in Bombay constituted a PE under Art. 5(2)(c) and, therefore, the claim of the assessee for exemption under Art. 7 of the CADT was not maintainable. Therefore, the profits attributable to the PE were liable to be taxed in India in accordance with Art. 7 of the CADT. The A. O. also rejected the Completed Contract Method as well as the accounts submitted by the assessee on the ground that the assessee had failed to produce the relevant books of accounts in respect of the profit and loss account; that they had refused to produce books of accounts maintained in Korea; and that they had failed to produce the accounting details pertaining to the activities/operations carried out by its PE in India. For the said reasons the accounts were rejected by the A.O. Therefore, the assessment was made for each of the two assessment years on receipt basis. On the question of quantum of assessment, the A. O. held that income from designing, fabrication, procurement of material etc. was partly attributable to the PE of the assessee in India on the ground that designing, fabrication and procurement of material were activities having nexus/linkage to the ultimate activity of installation and commissioning of platform in Bombay High and, therefore, income to that extent from the Korean Operations was taxable in India. According to the A.O., the contract was not divisible. According to the A.O., the contract was in respect of the Turnkey Project; that the consideration in the contract was of lump sum price; that even when the fabricated structure was delivered for transportation to the representative of ONGC the accounts between the parties remained to be settled; and since designing and fabrication of the platform had an application in Bombay High, (where the platform was to be come into operation), a part of the profits arising even from Korean operations was taxable in India as such portion of the profits was attributable to the work of installation and commissioning of the platform in Bombay High. Accordingly the A. O. estimated the net profits of the assessee under the contract at 20% of the gross receipts. Consequently, the A. O. taxed the entire revenue relatable to the Indian Operations and he taxed 2% of the contract revenue in respect of the Korean Operations.
(3.) Aggrieved by the aforestated decision the asseesee carried the matter in CIT (A) who took the view that the assessee did not maintain separate books of accounts for each Project; that they were asked to submit an extract from the consolidated accounts and income and expenditure statement for the Indian Operations which they failed to submit; that the assessee had its PE in India as their Indian Operations extended beyond nine months and also in view of the fact that they had a Project Office in Bombay; that such an office in Bombay had a close link with the operations, namely, installation and commissioning of the platform; accommodation platform and flare platform and that each of these platforms constituted the total project under the contract. It was further held by CIT (A) that the activity of designing and fabrication on one hand and the activity of installation and commissioning of the platforms on the other had constituted one integrated activity. He further found that the schedule in the contract indicated payment of lump sum price. Under the schedule, the assessee was to be paid U.S. $ 41.73 lakhs for Indian Operations. According to CIT (A), the contract was required to be read in entirety. It was a Turnkey Contract. It included designing, fabrication, installation and commissioning of the platform in Bombay High and on the reading of the entire contract it was clear that payment of lump sum amount was for the entire operations commencing from designing of platform right upto the work of commissioning of the platforms. Therefore, according to CIT (A), the contract was indivisible for the purposes of attributing the profits to the PE in India. Further, according to CIT (A), designing and fabrication of platforms, as an activity, did have an element of income embedded in the said activity of designing and fabrication which had nexus with the activity of installation and commissioning of the platform attributable to the PE in Bombay High. According to CIT (A), although the consideration paid by the ONGC was a composite payment it cannot be said that no part of the income from the Korean Operations was at all attributable to the PE in Bombay High. For the aforestated reasons, the CIT (A) held that though the actual receipt on fabrication operations in Korea was not taxable under the Income-tax Act, the work of designing and engineering of platforms was taxable under the CADT read with Sec. 9(1) of the Act.;