Hyundai gets tax breather from SC

NEW DELHI: In a judgement that will impact tax liability of foreign firms operating in India, the Supreme Court has held that Korea-based Hyundai Heavy Industries was not liable to pay tax on any profits arising outside India.

Deciding the issue of computation of profits accruing outside India, a bench comprising Justice S H Kapadia and Justice B Sudershan Reddy said that “only so much of profits having economic nexus with permanent establishment (PE) in India would be taxable in India.”

“Profits, if any, from the Korean operations (designing and fabrication) arose outside India, (and) hence (are) not taxable,” it said.

According to the court, the profits to be taxed in the source country were not the real profits but hypothetical profits which the PE would have earned if it was wholly independent of the parent company.

“As regards to the quantum of profits embedded in the Indian operations attributable to the Indian PE, we hold that the Commissioner of Income Tax (A) was right, in attributing the profits to the Indian PE at 10% of the gross receipts in respect of its activities performed in India. The same shall be taxable accordingly,” they said.

HHI, which had entered into a contract with ONGC for designing, fabrication and commissioning of South Bassein field central complex facilities at Bombay High in March 1985, had filed its return declaring nil income.

The company had argued it was not assessable to tax as it did not have a PE in India and was entitled to exemption under the Convention for Avoidance of Double Taxation.