TaxTMI 
TaxTMI 
2007 (5) TMI 288
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....ies ? (v) Whether there exists business connection with Neyveli Lignite Corporation (in short "NLC") and Ansaldo Energia SpA ? (vi) Charging of interest under s. 234B of the Act. 3. Over and above at the time of hearing Shri Mistry raised the following additional ground : "The income earned by the appellant from the design and engineering services under Contract I with Neyveli Lignite Corporation should not be taxable as 'Fees for technical services' and accordingly, the Assessing Officer (AO) has erred in taxing the same and CIT(A) erred in upholding the action of the AO." 4. Apropos the first issue the various arguments raised before us by Shri Mistry resemble so many radii of a circle starting from different points on its circumference but all oriented towards the power of CIT(A) in respect of assumption of jurisdiction under s. 251 of the Act. Learned counsel for the assessee placed before us various precedents to buttress the claim. 5. At the outset it was pointed out that it is beyond the power of CIT(A) to consider enhancement in the context of an item which was not part of the assessment order or which was not processed by the AO. The mere stipulation in r....
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.... practice/custom to be followed by all Courts and at the same time has held that when a relevant statutory provision had not been brought to the notice of the Court or a vital point was not considered, it is the duty of the Court to review its earlier order and not to perpetuate the mistake. This is why even after this decision, a three Member Bench of Supreme Court in the case of UCO Bank v. CIT [1999] 154 CTR (SC) 88 : [1999] 237 ITR 889 (SC) held that decision of another three Member Bench of the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 50 CTR (SC) 290 : [1986] 158 ITR 102 (SC) was rendered per incurium. Learned Departmental Representative submitted that on this factual backdrop the decisions rendered in the cases of CIT v. Shapoorji Pallonji Mistry, CIT v. Rai Bahadur Hardutroy Motilal Chamaria and CIT v. Nirbheram Daluram are to be considered. The first two decisions were rendered under the 1922 Act whereas the case of Nirbheram Daluram was rendered under the 1961 Act in which an Explanation was appended to s. 251. As per this Explanation, CIT(A) may consider and decide any matter arising out of the proceedings in which the order appealed against was....
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....efore the AO. CIT(A) has only added the income from Contract III and Contract IV and part of income from Contract I. 12. Hon'ble apex Court in the case of CIT v. Nirbheram Daluram made it clear that the powers of first appellate authority under s. 251 of the Act cannot be construed to be confined to the matters considered by the AO only. First appellate authority is entitled to direct additions in respect of items of income not considered by the AO. In the cases of Rai Bahadur Hardutroy Motilal Chamaria and Shapoorji Pallonji, decisions were rendered under the 1922 Act. In the case of Kanpur Coal Syndicate, apex Court made it very clear that CIT(A) can do what the ITO can do. We therefore respectfully following the decisions of the Hon'ble Supreme Court in Nirbheram Daluram and Kanpur Coal Syndicate, decide this issue in favour of the Revenue and against the assessee. 13. Next issue relates to the observance of the principles of natural justice. At the outset it was contended by Shri Mistry that no opportunity for cross-examination was given to the assessee. In reply to this, learned Departmental Representative submitted that no request to cross-examine any specific person wa....
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....ieries Ltd. v. CIT [1962] 44 ITR 495 (SC) Hon'ble Supreme Court has held that s. 143(3) does not contemplate that with regard to every reason which the AO formulates for his order, the assessee must be given an opportunity to produce fresh evidence or fresh explanation, even in a case where the AO considered whatever materials the assessee produced in reply to notices issued to it or even independently of that notice. This argument also is bereft of any merit. 16. Next it was argued that all the papers relied on by the CIT(A) were not supplied to the assessee. This is factually incorrect statement. Learned counsel for the assessee did not give the details of the items said to be relied on by the CIT(A) and not given to the assessee. All the documents considered by the CIT(A) and annexed to his order were either furnished by the assessee or copy given to the assessee. Assessee is a party to such document. As such assessee cannot plead ignorance to such document. Learned Departmental Representative produced before us evidence for supply of the documents collected by the Department. 17. Next it was argued that assessee was not given opportunity to cross- examine NLC engineers. I....
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....ite contract. 24. CIT(A) did not tinker with the profits of the Contract II. It was taxed @ 20 per cent as per the prescription of s. 9(1)(vii) of the Act. In regards to the other contracts the CIT(A) estimated the profits. In respect of Contract I it was noted that it involved sale of various plants and machinery. Besides assessee had also taken overall responsibility and was required to fulfil the commitments in the eventuality of insolvency of subsidiary company. On this factual backdrop the profit rate was estimated at 15 per cent of 75 per cent of the activity said to be done in India, therefore, total net profit rate came to 11.25 per cent on the whole of the contract. With respect to Contracts III and IV assessee reflected loss as such lower profits were to be estimated. Pendency of some arbitration proceeding was also noted which could result in some more benefits to the assessee. Considering all this, CIT(A) vide para 30.4 of his order estimated the profit @ 7 per cent and the relevant portion is reproduced as under : "30.4. With respect to Contracts III and IV, ample justification is provided in the pre-pages as to why the appellant is to be taxed. In execution part....
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....cent at that point of time. However, assessee had requested NLC to make ASPL also as contractor for onshore supply and service, for which NLC did not agree initially but the issue was kept open. By letter dt. 18th Nov., 1997 NLC specified the acceptable points and sought clarification. Even at this stage ASPL was not in picture. Assessee revised the price bid vide letter dt. 9th Feb., 1998 and even at this stage also ASPL was not in picture. Here it would be pertinent to note that assessee had given discount in respect of Contracts It III and IV and no discount was given in Contract L If the contracts are different, then under what authority assessee could give discount in respect of Contracts III and IV ? 26. A perusal of conditional award letter filed at p. 3 of the paper book shows that conditional letter of award was issued in favour of the assessee only in which scope of the work is defined. It is further seen that in cl. 4 of this award letter the consolidated price of DM 24,41,90,280 + 5,47,68,16,195 was given. This clearly shows that there is no force in the submission that separate prices have been given in Contracts HI and IV because originally only consolidated price ....
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....o.b. basis outside India, then why he was required to look for raw materials in India and why specifications were provided therein ? This only shows that some of the equipments were to be fabricated in India by the assessee even under Contract I for which even raw material was to be procured in India. 29. Clause 4.2.10 at p. 334 of the paper book reads as under : "The delivery of equipment shall be held to be completed when all equipments including special tools and tackles and consumables and drawings/documentations have been supplied by the Contractor. Mandatory spares shall be delivered along with the last consignment of the equipment of the Unit No. 1". It was emphasized by the learned counsel for the assessee that delivery was completed outside India once goods were handed over f.o.b. on the ship abroad whereas this clause clearly shows that delivery was really not completed. This is further clear from cl. 4.4.2 at p. 336 of the paper book which reads as under : "Delivery of all indigenous equipment as per Annex. II, steel structures including foundation bolts and inserts, tools and tackles for the plant and equipment shall be completed on FOR site basis as given b....
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....as applicable and make good at the Contractor's own cost for the damage or loss by way of repairs and/or replacement of the portion of the 'Works' damaged or lost for the timely commissioning of the equipment/completion of the works....." Reading of these clauses shows that the contracts are clearly overlapping because Indian contractor (i.e. ASPL) had nothing to do with the items to be supplied under Contract I. Even if Indian Contractor has undertaken to carry out the insurance on behalf of the assessee why all these clauses were inserted in Contract I instead of Contracts III and IV ? Normally when contracts are independent, terms and conditions in respect of party A, for example, cannot be inserted in case of party B. 32. Clause 10.4 at pp. 381 and 382 of the paper book regarding the customs clearance reads as under : "The Indian Contractor shall be responsible for the expeditious clearance of imported materials consigned (under Contract No. 1) to Indian port. In the event, the materials are unloaded at ports other than specified by the Contractor, the Contractor shall be responsible to clear the consignments from that port and transport the same to NLC store/site. All....
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....ign of defects, cracks, settlements disfiguration, shrinkage, leakage, dampness or any other faults........." The above clause clearly shows that contractor was also required to do some civil works which could be done only at the site. This is totally in contradiction of the main submission that under Contract I the assessee had only supplied plant and equipment and that too on f.o.b. basis at the Genova port. If assessee had not done any civil work there was no need to take liability for the quality of such civil works as well as undertaking to repair the same in case of defects etc. 35. Clause 10.48 relates to labour rules, provision of Minimum Wages Act, and payment of wages. Reporting of accidents to labour, provision of Workmen's Compensation Act. provisions of Apprentices Act, labour returns, labour camps, sanitary arrangements, medical facilities at site, etc. We are unable to understand that if the contracts were separate why all these terms and conditions under Contract I were entered into when assessee was only to supply plant and equipment on f.o.b. basis outside India. These clauses only show that the assessee was very much involved in erection of the plant. 36....
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....ich deals only with erection and supervision. The only conclusion which can be reached is that though the assessee tried to segregate the contracts by redrafting one contract, but failed to remove all the clauses successfully. 38. Pages 676 to 880 of paper book contain the copy of the Contract III which is supposed to have been awarded to ASPL and executed by ASPL. All through it was contended that Contracts HI and IV are in respect of Indian component of various plant and equipment as foreign component was exclusively reserved under Contract I. This means that basically Contract III should deal with only various plants and equipment procured in India or fabricated in India. 39. Now let us see cl. 10.2.1 at pp. 792 and 793 of the paper book. It is as under : "10.2.1 Import licence As per Export & Import Policy of India, 1992-1997, there is no physical barrier but only a tariff barrier in the way of import of any new capital goods except if the item of import is included in the negative list or as provided in the policy/under any law. However, if required the Contractor shall arrange necessary import licence with the assistance of the Purchaser. However, for any portion ....
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.... machine(s) manufactured by the Prime bidder should have each been rated for unit capacity of 200 MW or above in a thermal power plant. If some bidder is a manufacturer of only any one or two of the items stated in para 2.1, he shall enter into association with other manufacturer(s) called 'Principal Associate(s)' by the remaining item(s). Prime bidder and his Principal Associate(s) jointly or separately must have designed, manufactured, supplied, erected, tested and commissioned at least two numbers of their equipments/systems as listed in para 2.1 above in thermal power plant having unit capacity of 200 MW or above and these should have been a successful operation for not less than 2 years on the original scheduled date of tender opening. Prime bidder must indicate Principal Associate(s) under cl. 2.2 along with offer. Prime bidder must enter into consortium agreement with Principal Associated) which shall be submitted before the issue of letter of award and shall be valid till the completion of all contractual obligations of the Prime bidder with purchaser. 2.5 Contract will be entered into with Prime bidder and he as a Group Leader shall be contractually bound to th....
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....eceipt attributable to the PE in India. This constitutes less than 4 per cent of the total contract price whereas liquidated damage to be borne by the assessee was 17.5 per cent of the aggregate contract price which works out to Rs. 184 crores. It is palpable from the perusal of the price schedule of Contract II that no consideration was earmarked for guaranteeing the whole project. 45. Originally parties intended to enter into a turnkey contract. This intention is demonstrated with reference to the tender documents and various other papers. Later on, on negotiation the contract was split into four parts under : (a) Contract I deals with offshore supply of equipments covering designing and engineering (Contract Price DM 224,400.28). (b) Contract II deals with supervision of erection, testing and commissioning (Contract Price DM 1,97,90,000 (Rs. 6,40,000). (c) Contract III : on-shore supply of equipments for which sub-contract was given to ASPL, Bangalore (Contract Price Rs. 2,70,08,46,700). (d) Contract IV : Civil construction, erection, testing, commissioning, the execution of which was given to ASPL, Bangalore (Contract Price Rs. 2,77,53,29,495)." 46. It is a fa....
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....turnkey basis for implementation of a comprehensive power project for the second respondent." 49. Our attention was also invited on the order of the Tribunal rendered in assessee's own case for the asst. yr. 2001-02. The question raised before the Tribunal in that case was whether the receipt from Contract II is to be assessed under s. 44BBB or s. 9(1)(vii) of the Act. The issue in the present appeal is whether all the 4 contracts could be treated as one composite contract. For the asst. yr. 2001-02 assessee admitted PE in India, whereas in the present case the assessee claimed that there is no PE in India. The question whether there existed a composite contract was not examined by the Tribunal in the asst. yr. 2001-02. This question was neither raised nor examined. As such the decision rendered for that year is not relevant for deciding the issue. Hon'ble Supreme Court in the case of M.M. Ipoh v. CIT [1968] 67 ITR 106 (SC) has held that the doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for assessment in one year binding in another year. In the case of Padmasundara Rao (Decd.) v. State of Tamil Nadu [2002] 176 CT....
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....e are of the opinion that ASPL was a facade created for the purpose of taxation, ex consequents its corporate veil be lifted for consolidating the four contracts. 51. In the light of the aforesaid discussion it is obvious that the contract in question was a composite contract, as such corporate veil was required to be lifted. We agree with the conclusion of the CIT(A) that as far as Contract II is concerned, the same was treated to provide certain technical services on which profit rate of 20 per cent was applied which was confirmed by the Tribunal in ITA No. 2313/Mds/2003 dt. 5th May, 2006. However, we are unable to agree with the estimation of profits made by the CIT(A). He has held that profit from Contract I could be estimated at 15 per cent because it involves sale of equipment, etc. and since only 75 per cent activity was attributed to India, therefore, the profit rate has been taken at 11.25 per cent and ultimately overall profit was taken at 7 per cent. We are of the opinion that activities which are not conducted in India cannot be taxed in India. We agree with the estimate made by the CIT(A) that only 25 per cent of activity could have been done outside India particula....
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.... outside India. 52. Next issue relates to the question whether there exists a PE in India in relation to offshore supply activities. 53. We have heard the rival submissions. The definition of 'PE' is contained under art. 5(2)(j) of the DTAA. As per the definition, PE shall include a building site or construction installation or assembly project or supervisory activities in connection therewith where such site, project or activity together with such other sites projects or activities, if any continue for a period of more than six months or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a project not exceeding six months and the charges payable for the project of supervisory activities exceed 10 per cent of the sale of machinery and equipment. 54. It was argued on behalf of the assessee that it comes within the ken of the second limb of the definition. Since the supervisory charges payable are less than 10 per cent of the sale price of machinery, there was no PE in India. 55. We have already taken a view that the contract in question was a composite contract. Assessee was executing the entire project. Asse....
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....han 20 contractors to execute the work of the project. As per Contract I supplies were on-going process at different stages depending on local availability. Management and control of the subsidiary was vested with the assessee. Testing, commissioning and performance guarantee tests and handing over the machinery and finalizing the contractual obligation make it very clear that there existed a business connection. ASPL took technical advice and availed supervisory assistance from the assessee during the entire period. Mr. Zara, project manager submitted all periodical reports which were submitted by ASPL as per Contracts III and IV. During the relevant period 60 per cent of holding in ASPL was with the assessee. In March 2002 it was enhanced to 99.99 per cent. Control management and financing part of ASPL was by the assessee. On the basis of guarantee given by the assessee only, banks in India have advanced money to ASPL. The assessee was under obligation to see that the entire package was executed properly with utmost precision. Hence there existed business connection with ASPL. 59. In regard to the additional ground we have treated the whole contract with NLC as a composite one....