Supreme Court’s landmark ruling in the Samsung Heavy Industries case could have a positive effect on ease of doing business in India

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  • The Indian Supreme Court’s ruling in the Samsung Heavy Industries case could help other MNCs in understanding how to declare their income while undertaking certain projects in the country.
  • The Supreme Court also had some harsh words for the Income Tax Appellate Tribunal, terming its ruling against Samsung as ‘perverse’.
  • Experts suggest that the SC has gone beyond nomenclatures to understand the facts of the matter, and rule based on substance over form.
  • Check out the latest news and updates on Business Insider.
Ease of doing business has been a buzzword for a while now, but companies have often found themselves tangled in regulatory and bureaucratic web. However, the Supreme Court’s (SC) ruling in the Samsung Heavy Industries case could boost confidence of multinational companies (MNCs) in doing business in India.

It took 14 years for the Samsung subsidiary to get a ruling in the case, but it has likely cleared the path for many other MNCs looking to take up major business projects in the country.

Nangia Andersen, a tax advisory and professional services firm noted, “The Supreme Court has reinforced an important principle that instead of general perceptions and sweeping assumptions, tax liability can be imposed based on actual activities carried out by a taxpayer.”

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Also read: These are the common laws that you may be inadvertently breaking in India

What is the case about?

Samsung Heavy Industries entered into a turnkey contract with L&T for carrying out surveys, fabrication and more under the Vasai East Development Project.

To coordinate better, Samsung set up a project office in Mumbai and subsequently filed a nil income tax return in accordance with the India-South Korea Double Taxation Avoidance Agreement (DTAA).
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The Income Tax department, however, was dissatisfied with the return and issued a show-cause notice to Samsung. The case subsequently dragged on for nearly 15 years before being ruled in favour of Samsung in the Supreme Court.

A turnkey project is one wherein a company designs, constructs and then hands over a business facility to the buyer.

A DTAA is an agreement entered between two countries to avoid taxing the same income twice. Income earned by an assessee is taxed in accordance with the DTAA.
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Why is this ruling significant?

The SC ruling in favour of Samsung is significant as it provides clarity on the definition of a project office (PO) and permanent establishment (PE) under the India-South Korea DTAA. This will provide MNCs with a clear understanding of where they stand when it comes to these issues and improve the ease of doing business in India.

The SC went so far ahead to call the Income Tax Appellate Tribunal’s ruling against Samsung as ‘perverse’.

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“Principle of substance over form has been applied to arrive at this decision in favour of the taxpayer,” Nangia Andersen further added, noting the significance of the ruling.

Ritesh Kumar, executive director at IndusLaw, also welcomed the ruling, saying, “The Samsung PE ruling is very welcome, especially in these times of evolving national tax environment. It has taken into account the commercial contours of what constitutes the business of an enterprise in deciding the existence of a PE.”

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