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JUDGMENT KAPADIA, J.

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, `HHi'). Assesses is a non-resident foreign company incorporated in South Korea. On 12.3.85 it had entered into an agreement with oil and Natural Gas Company (for short, `ONGC') for designing, fabrication, hook-up and commissioning of South Basin 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 Basses in Field. In these civil appeals we are concerned with the assessment years 1987-88 and 1988-89. The assesses is incorporated under the laws of Republic of Korea. Its registered office is in Korea. As regards assessment year 1988-89, assesses filed its return of income on 3.8.1988. The return indicated `nil' income. In response to notices under Section 143(2) of the Income-tax Act, 1961 (for short `the Act'), the assesses 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 1.11.86 and got completed on 12.4.87 and, therefore, the duration of the Project was less than nine months; that it was entitled to exemption under Article 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 in 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, 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 assesses 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 account 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 Article 5(3) of CADT; that in any event the office of HHI in Bombay constituted a PE under Article 5(2)(c), and therefore, the claim of the assessee for exemption under Article 7 of the CADT was not maintainable. Therefore, the profits attributable to the PE were liable to be taxed in India in accordance with Article 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 produced 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 profit 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.

5. Aggrieved by the aforestated decision the assessee carried the matter in appeal to the Tribunal. It was held that the Department was right in invoking best judgment assessment. It was held that the question as to whether the PE existed in India or not was not material as no part of the income attributable to the Korean Operations was required to be taxed. It was further held that the PE did exist in India in terms of Article 5(3) of the CADT. On the point of computation of income regarding Indian Operations, it was held that Instruction No. 1767 was applicable. It was further held that Section 44 BB of the Act was also applicable and, therefore, the A.O. had erred in computing the income on the Indian Operations on only Accounting Principles without taking into account the provisions of Section 44BB as well as Instruction No. 1767. It was further held that profits from Indian Operations should be worked out at the rate of 3% and not at the rate of 10% as done by CIT(A). The Tribunal further held that the contract in question was divisible contract. According to the Tribunal, the work of fabrication in Korea was separate for from the work of installation and commissioning of platform in India; that the fabricated platform was handed over to ONGC in Korea in September 1987 and, therefore, before coming into existence of the PE of the assessee in India the work of fabrication was completed in Korea was not divisible. According to the Tribunal, the Installation PE came into existence only after the work in Korea got completed and, therefore, only the income from Indian Operations was attributable to the PE which was alone taxable in India. For the above reasons, the appeal filed by the assessee was allowed.

5. For the purpose of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by he same method year by year unless there is good and sufficient reason to the contrary.

6. Where income or profits include items of income which are dealt with separately in other articles of this Convention, then the provisions of those articles shall not be affected by the provisions of this article."

11. On reading Article 7 of the CADT, it is clear that the said Article is based on OECD Model Convention. Para (1) of Article 7 states the general rule that business profits of an enterprise of one Contracting State may not be taxed by the other Contracting State unless the enterprise carries on its business in the Other Contracting State through its PE. The said para 91) further lays down that only so much of the profits attributable to the PE is taxable. Para 91) of Article 7 further lays down that the attributable profit can be determined by the apportionment of the total profits of the assessee to its various parts OR on the basis of an assumption that the PE is a distinct and separate enterprise having its own profits and distinct from GE. Applying the above test to the facts of the present case, we find that profits earned by the Korean GE on supplies of fabricated platforms cannot be made attributable to its Indian PE as the installation PE came into existence only after the transaction stood materialized. The installation PE came into existence only on conclusion of the transaction giving rise to the supplies of the fabricated platforms. The Installation PE emerged only after the contract with ONGC stood concluded. It emerged only after the fabricated platform was delivered in Korea to the Agents of ONGC. Therefore, the profits on such supplies of fabricated platforms cannot be said to be attributable to the PE. There is one more reason for coming to the aforestated conclusion. In terms of para (1) of Article 7, 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 GE. Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the PE in India) and even if we assume that the supplies were an integral part, still no part of profits on such supplies can be attributed to the independent PE unless it is established by the Department that the supplies were not at arm's length price. No such taxability can arise in the present case as the sales were directly billed to the Indian Customer (ONGC). No such taxability can also arise in the present case as there was no allegation made by the Department that the price at which billing was done for the supplies included any element for services rendered by the PE. In the light of our above discussion, we are of the view that the profits that accrued to the Korean GE for the Korean operations were not taxable in India.

12. There is one more aspect to be discussed. The attraction rule implies that when an enterprise (GE) sets up a PE in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can tax all profits that the GE derives from the sources country-whether though PE or not. It is the act of setting out a PE which triggers the taxability of transactions in the source State. Therefore, unless the PE is set up, the question of taxability does not arise-Whether the transactions are direct or they are through the PE. In the case of a Turnkey Project, the PE is set up at the installation stage while the entire Turnkey Project, including the sale of equipment, is finalized before the installation stage. The setting up of PE, in such a case, is a stage subsequent to the conclusion of the contract. It is as a result of the sale of equipment that the installation PE comes into existence. However, this is not an absolute rule. In the present case, there was no allegation made by the Department that the PE came into existence even before the sale took place outside India. Similarly, in the present case, there was no allegation made by the Department. that the price at which ONGC was billed/invoiced by the assessee for supply of fabricated platforms included any element for services rendered by the PE. In the present case, we are concerned with assessment years 1987-88 and 1988-89. Therefore, we are not inclined to remit the matter to the adjudicating authority. We reiterate, in the circumstances, not all the profits of the assessee company from its business connection in India (PE) would be taxable in India, but only so much of profits having economic nexus with PE in India would be taxable in India. To this extent, we find no infirmity in the impugned judgment of the Tribunal. Accordingly, we are of the view that the Tribunal was right in holding that profits attributable to the Korean Operations was not taxable in view of Article 7 of CADT.