TaxTMI 
TaxTMI 
2011 (5) TMI 858
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....he appellant had been computed by proper application of mind could not be held to be erroneous and prejudicial to the interests of the Revenue and consequently, the impugned order under section 263 as passed by the learned Director of Income-tax (International Taxation)-II, New Delhi, deserves to be cancelled. 2. That the impugned order dated March 18, 2009 as passed by the Director of Income-tax (International Taxation)-II, New Delhi, holding that the assessment order passed by the Assessing Officer under section 143(3) of the Income-tax Act for the assessment year 2005-06 was erroneous and prejudicial to the interests of the Revenue is arbitrary, unjust and illegal on various factual and legal grounds including the following : (a) There was no failure on the part of the Assessing Officer to examine various aspects before passing the assessment order under section 143(3) dated March 9, 2007. (b) Various observations made by the learned Director of Incometax in the impugned order as passed under section 263 are either incorrect or are legally untenable particularly the following : (i) The learned Director of Income-tax is incorrect in holding in ....
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....n facts without showing as to how they were distinguishable. (c) The assessment order having been passed after making proper enquiries, reliance placed by the Director of Income-tax on case laws quoted, portions of which had also been extracted by him at pages 18 and 19 were misplaced. All those cases had been decided with reference to the facts prevailing in each case. If legal proposition as laid down by the Supreme Court in Malabar Industrial Co. v. CIT [2000] 243 ITR 83 (SC) is followed, the impugned order as passed under section 263 is clearly illegal and void ab initio. (d) Various observations made by the learned Director of Incometax in the impugned order under section 263 are either incorrect or are legally untenable. 3. That the appellant reserves its right to add, amend/modify the grounds of appeal. I. T. A. No. 2087/Del/2009 : 1. That the assessment order dated October 5, 2007 passed by the Assessing Officer under section 143(3) for the assessment year 2006-07 by which the income of the appellant had been computed by proper application of mind could not be held to be erroneous and prejudicial to the interests of the Revenue a....
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....and 17 that the method adopted in the past for computing the taxable income of the appellant was wrong and that there was good and sufficient reason to change the same. (v) The Assessing Officer having computed the income of the appellant after proper application of mind on all the aspects of the case, no justification subsisted on the part of the learned Director of Income-tax vide paragraph 7.5 to direct the Assessing Officer to verify the expenses of Rs. 15,84,986,806 which had been duly verified by the Assessing Officer before passing the impugned assessment order. (vi) Further, the issue of estimation of income for inside India activities is subject matter of appeal before the Commissioner of Income Tax (Appeals)-1, Dehradun, which shows that the Assessing Officer had applied his mind on this issue also and therefore, from this angle also the Director of Income-tax had no jurisdiction on the same. (vii) The learned Director of Income-tax is incorrect in holding vide paragraph 7.6 that various case laws cited by the appellant were distinguishable on facts without showing as to how they were distinguishable. (c) The assessment order having bee....
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.... 5,09,94,17,763 3. Mumbai Uran Turnkline (MUT) ONGC 2,93,06,47,269 7,63,57,28,505 4. GMR (O&M) GMR Vasavi 8,00,44,015 4,90,67,741 5. HAL Hindustan Aeronau-tical 4,70,835 Total 5,52,23,44,867 4,70,835 -2,94,51,94,688 4. Thus, the Assessing Officer noticed that inside India revenue of the assessee were Rs. 552,28,15,702 and outside India revenues were Rs.12,94,51,94,688. The Assessing Officer noticed that the assessee-company has claimed loss in respect of MHB and MUT projects in the computation of income filed by it and in paragraph 3 of the notes annexed with the said computation, it is claimed that "based on stand adopted by the tax Department in the past years, company reserves its right to reduce subcontractor's cost, salary and other items from revenues and then apply deemed profit rate". The Assessing Officer also noticed that as per arguments of learned authorised repres....
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....ere made to non-resident sub-contractors in which the work was got done outside India by the respective foreign subcontractor and he further found that a sum of Rs. 3,13,07,703 could not be verified. He required the assessee to explain the same and the authorised representative for the assessee explained that those payments though are made to non-resident sub-contractors, but, those payments are in respect of work inside India carried out by the assessee. The Assessing Officer denied such claim of the assessee on the ground of similar stand taken by the Department in the preceding year. The Assessing Officer referred to paragraph 3 of article 7 of the Double Taxation Avoidance Agreement which provide that in determining the profits of the permanent establishment, the expenses incurred for the purpose of the permanent establishment including executive and general administration expenses shall be allowed. He, therefore, observed that the expenses which are verifiable from the respective TDS forms are worked out to Rs. 1,67,83,37,937 and are to be allowed in view of article 7(3) read with paragraph 5 of the Double Taxation Avoidance Agreement and he reproduced both these paragraphs in....
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.... expenses on which the tax was not deducted at source. The Assessing Officer should have applied the tax rate of 41.82 percent on the balance. The Assessing Officer erroneously applied a 10 percent deemed profit on income already computed and the then applied the tax rate. The order passed by the Assessing Officer without application of mind or without making proper inquiries into the facts and without considering statutory regulations applicable thereon. (ii) During the year an amount of Rs. 1,29,45,194,688 has been shown as outside India revenue. Since, there is no dispute that the assessee has permanent establishment in India, this revenue should have been brought to tax in India as per the provisions of the Double Taxation Avoidance Agreement between India and South Korea. The Assessing Officer in the assessment order has not discussed the taxability of the above amount and has not brought to tax the above revenue. Thus, the claim of these expenses have been allowed. The order passed by the Assessing Officer without application of mind or without making proper inquiries into the facts and without considering statutory regulations applicable thereon. 6. In response t....
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.... Net loss as per return of income B (9,28,05,64,624) Expenses as claimed by the assessee C (A-B) 14,80,29,09,491 Table B : Bifurcation of expenses done by the Assessing Officer Total expenses as claimed by the assessee A 14,80,29,09,491 Bifurcated by the Assessing Officer into : B (9,28,05,64,624) Expenses on which TDS has been made and duly verified. B 1,67,83,37,937 Expenses on which TDS is not required to be made under law/(otherwise not allowed by the Assessing Officer) C (A-B) 13,12,45,71,554 (e.g., Material costs, insurance, etc.) Table C : Income attributed to the permanent establishment by the Assessing Officer Gross revenues for inside India work 5,52,23,44,867 Add : Revenues from projects where the assessee claims no permanent establishment 4,70,835 Total revenues for inside India work A 5,52,28,15,702 Less : Expenses fully allowed on the basis of TDS returns B 1,67....
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....es. 9. It was submitted that the issue regarding taxability of the assessee's income under section 44BB of the Act was examined by the Assessing Officer during the course of assessment proceedings and the assessee had submitted written submissions dated March 1, 2007 which was considered before arriving at the conclusion that the said section was not applicable to the facts of the case and the provisions of the Double Taxation Avoidance Agreement will apply. Reference was also made to the past history of the income-tax assessments in the case of the assessee. It was submitted that the assessee is being assessed in India since 1985 onwards and the assessee has invariably been filing its audited accounts with tax returns and in some years it has returned loss from inside India operation. For the assessment year 1990-91, the Department and the assessee had agreed before the Commissioner of Income-tax (Appeals) to a proposal that business profit for inside India operation would be taxed applying the deemed profit rate of 10 percent after allowing deductions for sub-contractors' cost and salary cost on which the TDS has been deducted under Chapter XVII-B read with section 40 ....
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....ss there is a reason on the contrary. Referring to paragraphs 4 and 5 of the assessment order, it was submitted that the Assessing Officer while adopting such formula was guided by past practice adopted by her predecessors for the purpose of computing profits attributable to the assessee's permanent establishment in India. It was submitted that such formula was adopted for the first time by the Department itself as the income of the assessee was being assessed under such formula in the last 16 years and all assessments are made under section 143(3) of the Act. It was submitted that though the principle of res judicata may not be applicable, but the rule of consistency has to be applied and reference was made to the following decisions : (a) Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC) ; (b) Taraben Ramanbhai Patel v. ITO [1995] 215 ITR 323 (Guj) ; (c) CIT v. Hindusthan Motors Ltd. [1991] 192 ITR 619 (Cal) ; (d) Sardar Kehar Singh v. CIT [1992] 195 ITR 769 (Raj) ; (e) Dhansiram Agarwalla v. CIT [1996] 217 ITR 4 (Gauhati) ; (f) CIT v. Godavari Corporation Ltd. [1985] 156 ITR 835 (MP) ; and (g) CIT v. A. R. J. Sec....
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....in India is factually incorrect. It was submitted that for the assessment years 1986-87 to 1888-89 the Income-tax Appellate Tribunal decision on the issue of permanent establishment in the assessee's favour has been upheld by the Uttaranchal High Court and by the hon'ble Supreme Court. While disposing the Departmental special leave petition for those years, the hon'ble Supreme Court has only affirmed the Income-tax Appellate Tribunals findings that the permanent establishment did not exist in India in terms of article 5(3) of the Double Taxation Avoidance Agreement, i.e., the project duration was the criteria for determination of the permanent establishment in India. So as it relates to allegation that the Assessing Officer did not discuss about the taxability of outside India revenue's in the assessment order, it was submitted that in paragraph 2 of the assessment order the Assessing Officer herself has computed revenues for outside India operation. It was submitted that the reason for not bringing the sum to tax has been given by the Assessing Officer in the office note 2 appended to the assessment order which reads as under : "The assessee has shown the ....
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....ered the issue relating to outside India revenue which is apparent from query 7 given by the Assessing Officer to the assessee vide notice issued under section 142(1) dated August 21, 2006 and the query of the Assessing Officer read as under : "To justify your claim that amounts received for outside India operations as mentioned in paragraph 8 of notes to computation of income, are not liable to tax in India." 17. It was submitted that the assessee had filed detailed reply regarding non-taxability of outside India revenue at paragraph 7 of the reply dated August 31, 2006. 18. Further, it was submitted that the Assessing Officer further raised query regarding taxability of outside India revenue during the course of hearing on February 20, 2007 as is evidenced from order sheet entry of the said date and the assessee's response was given vide paragraph 9 of the reply dated March 1, 2007 and the second reply dated March 1, 2007. It was further submitted that vide reply dated December 11, 2006 the assessee had submitted copies of all invoices for outside India revenue and the same were duly examined by the Assessing Officer and based on all these submissions the Asses....
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....eals) in the past years. It was submitted that the Assessing Officer relying upon the Uttaranchal High Court decision in the assessee's own case for the same year, has excluded outside India revenue from taxable income as stated in office note 2. It was submitted that on the issue of taxability of outside India revenue, the decisions of the Income-tax Appellate Tribunal for the aforementioned years has been affirmed by the hon'ble Supreme Court in the assessee's own case as reported in CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC). It was submitted that the apex court has held that profit attributable to Korean operation of supply and fabrication of platform are not taxable in India. It was observed that as per the provisions of article 7 of the tax treaty only so much of the profits as are attributable to the permanent establishment in India are taxable on the assumption that the permanent establishment is a separate and distinct entity. It is the act of setting out a permanent establishment which triggers the taxability of transactions in the source state and applying the aforementioned test, it was held that the profits earned by the foreign enterp....
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....e following decisions : (i) CIT v. Ratlam Coal Ash Co. [1998] 171 ITR 141 (MP) ; (ii) CIT v. Goyal Private Family Specific Trust [1988] 171 ITR 698 (All) ; (iii) CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom) ; (iv) CIT v. J. P. Goal (HUF) [2001] 247 ITR 555 (Cal) ; (v) Hari Iron Trading Co. v. CIT [2003] 263 ITR 437 (P&H) ; (vi) Malabar Industrial Co. v. CIT [2000] 243 ITR 83 (SC) ; and (vii) CIT v. Max India Ltd. [2004] 268 ITR 128 (P&H). 23. Thus, it was submitted that the powers under section 263 could not be invoked on the issues stated in the show-cause notice. 24. The learned Director of Income-tax, after considering all these written submissions of the assessee has concluded in paragraph 7.1 that it is an undisputed fact that the assessee has opted for taxation as per the provisions of the tax treaty between India and Korea and due to this fact the Assessing Officer has not considered and decided the taxability of income of the assessee under the provisions of the Act. The learned Director of Income-tax referred to article 7 which regulate business profit assessable under the Double Taxation Avoidance ....
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....ues for outside India operation, the nature of outside India operations, the duration of projects in India, the role of the Mumbai office of the company in submitting the tenders, negotiation of contracts, the subsequent role of the permanent establishment and the Mumbai office in earning the revenue from the alleged outside India operation. The Assessing Officer did not gather the facts before passing the order. The Assessing Officer did not inquire into the applicability of the decision of the hon'ble Supreme Court in the assessee's own case reported as Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC) for the year under consideration and due to these facts and position of law, the order passed by the Assessing Officer for not taxing the income on account of outside India revenues of Rs. 12,94,51,94,688 is erroneous and prejudicial to the interests of the Revenue. 26. On the observations of the Assessing Officer placing reliance upon paragraph 5 of article 7 of the treaty and also the contention of the assessee upon that the provision stating that the Department is accepting the method of computation of income from the assessment year 1990-91 onwards, the learn....
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....according to the learned Director of Incometax, there exist sufficient material to invoke the provisions of section 263. Finally, he observed that he is of the opinion that there is a clear failure on the part of the Assessing Officer to examine all the aspects mentioned in his order. Therefore, the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. He has set aside the assessment order and directed the Assessing Officer to pass fresh assessment order in accordance with the law after giving due opportunity to the assessee. The assessee is aggrieved and has filed aforementioned appeal for the assessment year 2005-06. 30. Similar power has been exercised by the learned Director of Income-tax in respect of the assessment year 2006-07. It has been the case of both parties that most of the facts for that year are identical to the facts for the assessment year 2005-06. However, certain facts were stated to be different. The facts which are similar are not described for the sake of brevity. The powers under section 263 were invoked by the Director of Income-tax as per notice dated December 8/10, 2008 and copy of....
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....uthorised representative that the assessee is a non-resident company incorporated in South Korea. Since 1985 it has been undertaking execution of turnkey projects for designing, engineering, procurement apart from hook-up installation and commissioning of facilities for the ONGC, etc., in connection with exploration, extraction and production of mineral oil in the notified offshore waters. Designing, engineering, procurement and fabrication are carried out outside India. Thereafter, installation and commissioning work start in India on arrival of structures in Indian waters. The contracts for various projects for the ONGC, though relating to different works, are standard contracts having materially similar terms. A standard contract enables the assessee to engage sub-contractors particularly for "marine spread" vessels, pre-engineering and pre-construction surveys of the sea bed of an earmarked location. However, these contractors as well as the sub-contractors have to be approved by the ONGC. In the main, these contracts provide for milestone payments on completion or part completion of specifically identified segment of work upon its acceptance by the ONGC. Similarly, the contrac....
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....s, which the learned Assessing Officer, agreeing with assessee, has taxed under article 12(2) of the treaty. It may be noted that the impugned order of the Director of Incometax discusses only items Nos. (i) and (ii) and there is not a whisper of any objection to the Assessing Officer's treatment of items No. (iii) and (iv) above. 35. It was submitted that the following sequence of relevant events will also be important to raise by the assessee in its appeal : S. No. Particulars Date 1. Return of income declaring net loss of Rs. 9,28,05,64,624 (computation in accordance with the Double Taxation Avoidance Agreement and section 90(2) of the Act.) 31-10-2005 2. Intimation under section 143(1) 28-2-2006 3. The judgment of the Uttaranchal High Court in the assessee's own case for the assessment years 1987-88 and 1988-89 (Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 450 (Uttaranchal) - See page 642/DPB-iv) 30-03-2006 (available with the Assessing Officer and the Director of Income-tax) 4. First notice under section 143(2) 21-8-2006 5. Assessment under section 143(3) and the offic....
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....the knowledge of the Director of Income-tax ? Yes. Refer the assessee's submissions dated 13-3-2009 filed with the Director of Income-tax pages 165-197 at pages 182, 183 and 187, Volume 1. Also see paragraph 6.2/page 12 of the Director of Income-tax's order. 9.2 Whether the Director of Income-tax considers the effect aforementioned decisions of the High Court and Supreme Court or the Tribunal's decision for 1990-91, 1991-92 and 1996-97 dated 11-5-2007 (page 288/Volume 3). No 10. ITAT order for 1994-95 and 1995-96 giving effect to Uttaranchal High Court order dated 4-12-2008. 9-10-2009 (page 393/DPB-II) 36. It was submitted that the issues dealt with by the Assessing Officer in the assessment order have been subject-matter of litigation between the assessee and the Department since the assessment year 1987-88 on which the decisions of appellate authorities were available to the Assessing Officer when he framed the impugned assessments and those decisions were considered by the Assessing Officer and the Director of Income-tax has failed to take into consideration those decisions while invoking jurisdiction unde....
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....cation) were completed prior to the arrival of structures and the "marine spread" and commencement of the installation operations, the revenue from the same would not be liable to tax in India. 38. It was submitted that the aforementioned decision of the Tribunal has been confirmed by the Uttaranchal High Court on March 30, 2006 and the hon'ble Supreme Court has also affirmed the said decision vide judgment pronounced on May 18, 2007. It was submitted that the Assessing Officer has followed the judgment of the Tribunal and the jurisdictional High Court for holding the issue in favour of the assessee in respect of income from operation carried on outside India and this fact is clear from the office note appended to the assessment order dated March 9, 2007. He submitted that history of litigation with the Department is described in annexure I to the written submissions and the office note attached by the Assessing Officer with the assessment order is annexed as annexure II and the note relating to non-taxability of receipt from outside India operation as recorded by the Assessing Officer in the office note and which has already been reproduced in paragraph 14 of this order. ....
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....06 reported as Deputy CIT v. Hyundai Heavy Industries Co. Ltd. [2009] 31 SOT 482 (Delhi), has held in favour of the assessee. He submitted that since the very reason given by the Director of Income-tax for setting aside the part of the assessment order is contrary to the decision of the hon'ble Supreme Court, therefore, the order passed by the learned Director of Income-tax on this issue is illegal and a nullity. 40. The learned authorised representative submitted that the learned Director of Income-tax while passing an order under section 263 has failed to consider the judgment of the jurisdictional High Court and office note appended to the assessment order. He also failed to consider the decision of the hon'ble Supreme Court in the assessee's own case which was brought to his notice and the history of litigation between the assessee and the Department since the assessment years 1987-88 and 1988-89 and reference was made to note No. 2 appended to the assessment order which has already been reproduced in paragraph 38 above. 41. He submitted that there is not even a whisper of allegation in the order passed by the learned Director of Income-tax that the price paid....
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....is clear from the assessment order and office note appended thereto that the Assessing Officer had fully applied her mind and had followed the judgments available with her at the time of passing the order. The learned Director of Income-tax has failed to consider the decision of the apex court and the jurisdictional High Court and has erroneously ignored to consider the office note and other material available on record and has caused the Assessing Officer of non-application of mind in attributing part of revenue from operation outside India to the permanent establishment in India. He submitted that it is undisputed fact that whenever the period of installation projects exceeds nine months, the assessee offers the income from the revenues received in respect of operations of installation permanent establishment in India which is in accordance with the article 5(3) read with article 7 of the treaty. This year also the assessee has admitted to have permanent establishment in terms of article 5(3) of the treaty for the projects executed with the ONGC and GMR as these projects were not new projects but were carried over from earlier years (paragraph 2 of the Assessing Officer). 43. ....
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.... a case where the assessment has been made after conducting proper inquiry and due application of mind, the onus will be on the Director of Income-tax to specifically establish that the order of the Assessing Officer is contrary to any statutory provision or judgment(s) of the jurisdictional High court or of the apex court. Only then it can be held that the order is erroneous in law. Similarly, in order to establish that the assessment order is prejudicial to the interests of the Revenue, it must be shown that the assessment order has resulted in loss of revenue. He submitted that it will be shown that the learned Director of Income-tax has not been able to satisfy either of the two conditions laid down in section 263 of the Act. At the outset, he submitted that the entire assessment has been set aside by the learned Director of Income-tax. He submitted that there is no whisper of any error committed by the Assessing Officer in regard to tax treatment of income from project for HAL and interest income and, therefore, to that extent the assessment order was neither erroneous nor prejudicial to the interests of the Revenue and invocation of power under section 263 with regard to whol....
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....e Agreement with Korea estimating the profit rate at 10 percent on the total revenues relating to inside India activities as reduced by expenses verifiable from annual returns of TDS. This is in line with the stand taken by the Department in preceding years as provided in paragraph 5 of the article 7 of the Double Taxation Avoidance Agreement." 46. He submitted that the Director of Income-tax did not comment whether adversely or otherwise in respect of reasoning given by the Department in suo motu offering the formula for computing the income in respect of operations inside India vide letter dated February 21, 1995 in respect of assessment proceedings for the assessment years 1993-94 and 1994-95. It was specifically brought to his notice as admitted by him at page 10 of the impugned order. The copy of such letter is placed at page 306 of paper book III which is a letter issued by the Assessing Officer of the assessee and it is dated February 21, 1995. The text of the said letter is as under : "Please refer to the discussion in regard to the above assessment years. Under the Double Taxation Avoidance Agreement your representatives, Shri D. Shah, FCA and Mr. I. H. Gim, G.....
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....was submitted that neither in the show-cause notice nor in the impugned order it has been held by the learned Director of Income-tax that the computation of income from operations inside India are erroneous not on the ground of applicability of section 44BB. He submitted that it is the mistaken allegation of the learned Director of Income-tax that the Assessing Officer had already determined taxable income after reducing gross receipts by the amount of payment to sub-contractors, etc. on which tax was deducted at source and the Assessing Officer should not have further estimated taxable income at 10 percent of the balance receipts. He submitted that if such view of the learned Director of Income-tax is adopted, then it would result in assessable income at 70 percent of the gross receipts as income from operations inside India. The learned Director of Income-tax has finally given up such stand taken in the show-cause notice. He himself could not come to any conclusion in regard to mode of computation of income from operation from inside India. He has simply set aside the assessment without giving any direction in this regard and left it to the Assessing Officer to make the fres....
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....that the Assessing Officer should have allowed only such payments to the sub-contractor on which tax was deducted at source and imposed tax on balance amount of revenue from operations inside India. This allegation is factually incorrect. The Assessing Officer also called for and examined all the invoices raised by the assessee on the ONGC and release of payment of the ONGC after duly verifying achievement certificates issued by its technical consultants. (Pages 208 to 210 and pages 217 to 219 of the Volume II). The learned Director of Income-tax has chosen to ignore the voluminous information furnished with the Assessing Officer starting pages 8 to 163/volume I-2005-06. These comprise notes to return of income, computation of income, audited statement of operations giving detailed items of expenditure on material, labour, consumables, depreciation and miscellaneous expenses for each project separately. The assessee also separately furnished each and every invoice raised on the ONGC (vide submission dated December 11, 2006 at pages 223/Paper Book, Volume II). It is thus most unfair on the part of the Director of Income-tax to allege that the Assessing Officer did ....
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....e duration of the projects in India. (v) The Assessing Officer has not enquired into the role of Mumbai office of the company in submitting the tenders, negotiation of the contracts. (vi) The Assessing Officer has not enquired into the subsequent role of the permanent establishment a Mumbai office in earning the revenues from the alleged outside India operations. (vii) The Assessing Officer has not gathered the facts at all before passing the order. (viii) The Assessing Officer has also not enquired into the applicability of the decision of the hon'ble apex court in the assessee's own case, reported in Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC) for the year under consideration. (ix) Due to these facts and position of law, the order passed by the Assessing Officer by not existing the income on account of revenues of Rs. 12,94,51,94,688 is erroneous and prejudicial to the interests of the Revenue. Our comments: All the allegations contained in this sub-paragraph of the impugned order have been made by the Director of Income-tax suo motu for the first time and without giving any notice or opportunity....
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.... ONGC projects (MHB, MSP & MUT) and the GMR project were admittedly for a duration of more than 9 months and, therefore, constituted the installation permanent establishment in terms of the article 5(3) of the treaty for which income was assessed by the Assessing Offi-cer as income from operations of the installation permanent establishment inside India. Further, the Assessing Officer had specifically called for the contracts for examination which clearly give the duration of the project (for instance, pages 167 to 170 of MUT contract). (d) Role of Mumbai office (d) This issue was squarely covered by the decision of the Income-tax Appellate Tribunal, Uttaranchal High Court and the Supreme Court against the Department. This aspect was considered and the assessee's explanation was accepted and has also been referred to in the office note. (page 210, -Volume II, Paper Book). (e) Subsequent role of the permanent establishment in Mumbai office for outside operations. (e) The perusal of the contracts shows that the project office was part of the installation permanent establishment. Further, its auxiliary and -supporting role is clearly brought out in clau....
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....bsequently reported in CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 450 (Uttaranchal). (11) The Tribunal judgment for the assessment years 1986-87 to 1988-89 (12) Ref. Commissioner of Income-tax (Appeals) orders for 2004-05-2005-06 deleting attribution of outside operations. (13) Section 44BB does not prevail over article 7(3) of the treaty. P. 214 (14) Distinct demarcation between operations outside India and operations within India under the contracts. P. 215 Letter dated 15-9-2006. P. 217-219 Project wise details and revenues together with copies of -contracts. P. 220 Letter dated 8-12-06 section 90(2) explained. P. 223 Copies of 4 contracts and all invoices raised on the ONGC for all operations under the contracts (both outside and inside India) together with on-site satisfactory achievement certificates which the assessee must obtain from the experts appointed by the ONGC for supervising real-time all works under the contracts. P. 224-251 Copies of invoices giving project-wise and milestone-wise. P. 252 Letter dated 14-12-2006-....
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....inside India activities cannot in any case exceed the amount taxable under section 44BB of the Act. (Ref. page 173/Volume I). It is submitted that the very basis of the Director of Income-tax holding the assessment to be erroneous is not that the Assessing Officer did not apply the provisions of section 44BB of the Act, but that the Assessing Officer misapplied the provisions of article 7(3) read with article 7(5) of the Indo-Korean Double Taxation Avoidance Agreement. It is for this reason that the decision of the Tribunal in Saipem S. P. A. v. CIT [2009] 27 SOT 531 (Delhi) at 536 (page 436 at 441/DPB-III) is distinguishable. (a) The last three sentences of paragraph 2 of article 7 of the Indo-Italian treaty are not applicable to the Indo-Korean treaty as the treaty with Korea does not contain any such limitation. Relevant extracts of article 7 of the Indo-Italian and Indo-Korean treaty are placed at page 962-964/DPB-VI and 181-198 respectively. (b) The proposition laid down by the apex court in Azadi Bachao Andolan's case [2003] 263 ITR 706 (SC) that the provisions of the treaty have to be given a liberal interpretation and not literal inte....
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....gly, the said assessment order is erroneous in so far as it is prejudicial to the interests of the Revenue. Hence, I hereby set aside the assessment order under section 143(3) for the assessment year 2005-06 and direct the Assessing Officer to pass fresh assessment in accordance with law, after giving due opportunities to the assessee." (emphasis supplied). Our comments : It is significant to note that the Director of Income-tax does not hold that the order is erroneous in law or prejudicial to the Revenue in respect of the income from operations inside India. He holds the assessment order to be erroneous solely for the reason that the assessment order has been passed without application of mind and without making proper enquiry. Apart from the fact this allegation is factually incorrect (paragraphs 1014 (supra)) the assessment has not been cancelled for the reason given in the show-cause notice. It is the Director of Incometax who has not considered the material available on record. A scrutiny of the objective material on record clearly establishes application of mind and proper enquiry made by the Assessing Officer. Hence, the very basis for se....
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.... of Income-tax to consider or distinguish the judgment as also earlier years' assessments and appellate orders in the assessee's own case, which were duly considered by the Assessing Officer, renders the order under section 263 illegal and void. (viii) The Director of Income-tax cannot substitute his own opinion for the opinion of the Assessing Officer. This is specially so when the Director of Income-tax does not cite any authority or provision of law in support of his opinion, whereas the Assessing Officer followed the orders of the Commissioner of Income-tax (Appeals) for earlier years, which had become final. (ix) If the assessment order is passed without application of mind or on wrong assumption of facts or of law, it would not be sustainable in law. On the other hand, the order under section 263 would be illegal if such an allegation is contradicted by the material available on record. (x) The learned Director of Income-tax cannot justify the validity of the order under section 263 on a new ground or a ground/reason other reason given in the show-cause notice without putting the assessee on notice. (xi) The Departmental representat....
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....ted that the Assessing Officer adopted a formula as per past history of the case and that formula was adopted for the following reasons : (a) It would always result in positive income, whereas that may not be in the other mode of computation, and (b) Letter of February 10, 1995 from the Assessing Officer that since the sub-contractor paid full amount of tax, the profit embedded in such payments was already passed on to the sub-contractors. 49. The learned Director of Income-tax is not permitted to substitute a different mode of estimating income by adopting alternate route of estimating expenses to be allowed against undisputed revenue from operations inside India. As per the well-settled law, he cannot substitute his superior opinion if the view taken by the Assessing Officer is permissible in law. He submitted that for the assessment year 2005-06 even as per revised assessment order passed by the Assessing Officer in pursuance of the order under section 263 has resulted in lower assessment. He has summarised the position of the original assessment vis-a-vis the revised assessment as under : "(Rs. in crores) Revised assessment in purs....
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.... the learned Director of Income-tax himself. He submitted that in fact there is no provision of law which lays down the manner in which fair estimate of profit in a best judgment assessment can be made. Therefore, one method was adopted by the Department which was applied by the Assessing Officer and that cannot be held to be erroneous. Reference was made to the decision of the hon'ble Supreme Court in the case of Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC) wherein a question arose before the hon'ble Supreme Court that whether flat net profit rate should be applied to the gross turnover of the contractor or to gross turnover net of cost of material supplied by the employer. In order to decide the said controversy, the hon'ble Supreme Court posed to itself a question, which is the acid test and observations of their Lordships were as under (page 530) : "It will appear clear from what has been said above that the authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such estimate the same must not be capricious but should have a reasonable ne....
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....g Officer, it was submitted by the learned authorised representative that the learned Director of Income-tax while holding so has ignored the detailed queries raised by the Assessing Officer and the explanation along with evidence filed by the assessee during the course of assessment proceedings as noted in the order sheet entries the copy of which is furnished at pages 199 to 202 of the volume III of the paper book and also letter dated August 21, 2006 addressed to the assessee. He also ignored the assessee's written submissions filed with the Assessing Officer on various dates, viz., August 31, 2006, December 8, 2006, December 14, 2006 and March 1, 2007 wherein all the aspects of the case were duly explained together with supporting evidence, copies of invoices raised during the year along with milestone achievement certificates issued real time at site issued by consultants/ agents of the ONGC in support of work described in the invoice. The show-cause notice issued by the learned Director of Income-tax is extremely vague and general, the Assessing Officer passed the assessment order after due application of mind and after conducting proper inquiry and this act of the Assess....
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....see office note for both years clearly demonstrate application of mind by the Assessing Officer and reasons are stated that section 44BB is not followed in the best judgment assessment made by him. Similarly, he submitted that observations in the cases of Malabar Industrial Co. [2000] 243 ITR 83 (SC) and CIT v. Seshasayee Paper and Boards Ltd. [2000] 242 ITR 490 (Mad) support the case of the assessee. 57. The learned authorised representative referred to the decision of hon'ble Delhi High Court in the case of CIT v. Sunbeam Auto Ltd. [2011] 332 ITR 167 (Delhi) ; 227 CTR 133 to submit that there is a difference between "lack of inquiry" and "inadequate inquiry" and where there is a case of inadequate inquiry, power under section 263 could not be exercised. 58. The learned authorised representative also pleaded for lack of opportunity provided by the learned Director of Income-tax. He has summarized his contention as under : "The Director of Income-tax's order setting aside the assessment and order fresh assessment is bad in law and deserves to be quashed for the following reasons : (1) The Director of Income-tax has failed to substantiate his allegati....
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....ontrary to the judgment of the apex court in Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC) and he has himself abandoned the objection given in the only show-cause notice regarding income from operations in India. (11) It is submitted that on the following issues the order of the Director of Income-tax may be quashed : (i) The income from HAL project where the Assessing Officer has held against the assessee and the impugned order under section 263 is totally silent on this issue. The assessee is also in appeal against the order of the Assessing Officer, which is pending with the Commissioner of Income-tax (Appeals). (ii) Taxing interest on income-tax refund under the treaty. The impugned order is totally silent on this issue. (iii) The income from revenue earned from operation outside India, which the office note of the Assessing Officer makes it clear was done on the basis of the order of the jurisdictional High Court on this issue and which was subsequently upheld by the apex court. The learned Director of Income-tax not only failed to consider the office note but also the apex court decision. The Director of Income-tax's order o....
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....Korea, in the appellant's own case for earlier years rendered by the Incometax Appellate Tribunal, the hon'ble jurisdictional High Court and the hon'ble apex court, by which it was held that no income is attributable to the 'installation permanent establishment' on the operations outside India as the 'installation permanent establishment' came into existence subsequent to the services rendered and supplies made from outside India, and (ii) The Director of Income-tax expected the Assessing Officer to do impossible while holding order of the Assessing Officer erroneous for failure to consider the judgment dated May 18, 2007 of the hon'ble apex court and this was not possible as the Assessing Officer passed the assessment order for the assessment year 2005-06 on March 9, 2007. (3) It is further argued that the Director of Income-tax has wrongly set aside the order of the Assessing Officer even in respect of the income from operations inside India for following reasons : (a) The Assessing Officer followed what was being done in the past years and on the same basis as was being adopted by the Department. (b) The formula....
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....for which no notice was given to the appellant and thereby his order is violative of the principles of natural justice." 60. He submitted that as on date there are four sets of appellate orders available in the case of the assessee as per history of the case of the assessee. Broadly, he submitted that these four sets of orders are as under : (i) The first set of orders starts from the assessment years 1986-87, 1987-88 and 1988-89 which years went up to the hon'ble Supreme Court of India. (ii) The second set of orders relates to the assessment years 1994-95 and 1995-96 which was decided by the Tribunal vide order dated October 17, 2009 on remission of matter from the hon'ble Uttarakhand High Court to the Income-tax Appellate Tribunal in I. T. A. Nos. 42 and 43 of 2007. (iii) The third set of orders relate to 8 appeals in respect of the assessment years 1997-98 to 2004-05. (iv) The fourth set of orders is orders of the Income-tax Appellate Tribunal dated March 3, 2004 relating to the assessment year 1993-94 which is reported as Hyundai Heavy Industries Co. Ltd. [2004] 4 SOT 715 (Delhi). 61. Referring to the first set of orders, it was....
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....001 reported in Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 450 (Uttaranchal) dismissed the appeals of the Department and held that the Income-tax Appellate Tribunal was right in rejecting the argument of the company of applicability of zero profit on Indian operation. The court also confirmed the findings of the Income-tax Appellate Tribunal with regard to working of profits at 3 percent from Indian operation. It was further held that the Income-tax Appellate Tribunal was right in holding that a specific provision would override the general provision. The matter was finally decided by the hon'ble Supreme Court in the decision dated May 18, 2007 reported as Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC). The court held that the installation permanent establishment emerged only after the contract with the ONGC stood concluded. It emerged only after the fabrication platform was delivered in Korea to the agencies of the ONGC. Therefore, the profit on such supplies of fabricated platform cannot be said to be attributable to the permanent establishment and, thus, it was held that the profits that accrued to the Korean operations were not taxable in India. It was furt....
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.... appeared before the Department and submitted that its income from Indian operations be computed under section 44BB or under Instruction No. 1767 issued by the Central Board of Direct Taxes. Under the said Instruction, in cases where the sales takes place outside, as in this case, only 10 percent of the gross receipts in respect of the activities of installation, commissioning, etc., performed in India will be taxable. In view of the stand taken by the assessee, the court held that the Commissioner of Income-tax (Appeals) was right in computing the taxable profits at 10 percent of the gross receipts in respect of such activities in India. To this extent, the decision of the Income-tax Appellate Tribunal was reversed. 4. Fourthly, once the provisions of section 44BB of the Act apply, two conclusions follow. The first is that 10 percent of the receipts by the foreign resident is chargeable to tax and the other conclusion is that 90 percent of the receipts of that foreign resident as well as receipts/gains other than those mentioned in section 44BB is also not chargeable to tax, and 5. Lastly, under the concept of contract accounts, two methods exist for ascertaining....
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....clause (b) of paragraph 15 of the judgment of the hon'ble apex court, we find that in the present two years, there is no dispute regarding the quantum of profit embedded in the Indian operations attributable to the Indian permanent establishment of the assessee and hence this clause of paragraph 15 is not applicable in the present two years which are before us." 64. So as it relates to the third set of orders which are in respect of the assessment years 1997-98 to 2004-05, he submitted that firstly, the question decided was whether article 5(3) of the Double Taxation Avoidance Agreement will have precedence over article 5(1) and 5(2) and it was held that provisions of article 5(3) of the Double Taxation Avoidance Agreement are more specific as compared to those of article 5(1) and 5(2) and so the provisions of article 5(3) will take precedence of those article 5(1) and 5(2) and it was held that no permanent establishment of the assessee could be held to be in existence in India until the assessee began its project of "installation activities connected therewith" as per article 5(3). It was held that all the designated work of the assessee outside India was carried much befor....
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.... assessment year 1997-98, project in less than 9 months, hence no permanent establishment 3. 2001-02 ........ CRMP ........ BHN No permanent establishment 66. He submitted that the fourth set of the order is dated 3rd March, 2004 passed by the Tribunal in respect of the assessment year 1993-94 and the said decision is reported as Hyundai Heavy Industries Co. Ltd. [2004] 4 SOT 715 (Delhi). He submitted that in that order the observations of the Tribunal in paragraphs 18 to 27 are important and the final conclusion of the Income-tax Appellate Tribunal was as follows : "The assessee did not have the permanent establishment in India and that the outside India works were mostly carried out from Korea itself. The Department has not been able to controvert this factual finding." 67. Referring to paragraph 9, he submitted that the Tribunal decided the issue in favour of the assessee on the observations that the Commissioner of Income-tax (Appeals) had placed reliance on the order of his predecessor for the assessment year 1992-93 and the Department did not prefer appeal against that order of the Commissio....
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....s also an important question of law and reference was made to the decision of the hon'ble Supreme Court in the case of CIT v. Oswal Agro Mills Ltd. [2009] 313 ITR 24 (SC). He further submitted that even deviation is permissible from the consistent method where there is insufficiency in the probative and probable value of the expenditure incurred and, for this purpose, he relied upon the decision of the hon'ble Delhi High Court in the case of Saga Departmental Stores Ltd. v. CIT (Appeals) [2010] 325 ITR 324 (Delhi). He submitted that in the changed circumstances it is possible to differ from an earlier view and reference was made to the decision of Municipal Corporation of City of Thane v. Vidyut Metallics Ltd. [2007] 8 SCC 688 ; [2009] 20 VST 680 (SC). 69. He submitted that if it is seen in the light of the OECD Model Convention and other commentaries, according to the opinion expressed by late Prof. Klaus Vogel on paragraph 6 of article 7, is in pari materia with the paragraph 5 of the Indo-Korean Double Taxation Avoidance Agreement. Reference in this regard was made to the relevant portion of the commentary of Klaus Vogel which is placed at page 138 of the paper book. ....
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....08] 302 ITR 142 (Ker). 72. He submitted that failure of the assessee to produce documents, etc., may invite adverse inference and he in this regard referred to the decision of the hon'ble Delhi High Court in the case of CIT v. Motor General Finance Ltd. [2002] 254 ITR 449 (Delhi) and Motor General Finance Ltd. v. CIT [2004] 267 ITR 381 (SC) wherein it was held that since the assessee had not produced material despite opportunities given by the Assessing Officer, an adverse inference in terms of section 114 of the Indian Evidence Act was to be drawn. 73. He further submitted that instruction No. 1767 dated July 14, 1987 was applicable only for a period of three years beginning from the assessment year 1987-88 and not beyond that. 74. Replying to the arguments submitted by the learned authorised representative, he submitted that when the Assessing Officer passed the assessment order for the assessment year 2005-06, he had benefit of the following orders passed by the Income-tax Appellate Tribunal and the High Court : (i) Order dated August 30, 1999 of the Income-tax Appellate Tribunal in respect of the assessment years 1986-87 to 1988-89. (ii) Order dat....
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....AL project is discussed by the Assessing Officer in paragraphs 6, 6.1 and 7 of the assessment order and he has rejected the explanation of the assessee in regard to HAL project. The learned authorised representative submitted that the entire case of the assessee revolves around two streams of revenue being inside and outside India operations and on these aspects the learned Director of Income-tax has found that order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue. 77. With regard to the objection of the assessee regarding assessability of the revenue from operation outside India, he submitted that the hon'ble Supreme Court in the case of the assessee itself observed that there was no allegation made by the Department that the permanent establishment came into existence even before the sale took place outside India. There was no allegation made by the Department that the price at which the ONGC was billed/invoiced by the assessee for supply of fabricated platform including any element for services rendered by the permanent establishment and it is in these circumstances the outside India revenue were not held to be taxable and the matter ....
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....ection 40 of the Act and article 7 of the Convention and the said fact has been mentioned by the Commissioner of Income-tax (Appeals) in his order dated April 19, 1995 for the assessment year 1990-91 and the assessee had stated before the Commissioner of Income-tax (Appeals) that he accept such proposal without prejudice and in order to buy peace and to avoid litigation. In such a case, the assessee will not press for other expenses of marine cost, mineral insurance and transportation, etc. With regard to these submissions, when the comments were called upon from the Assessing Officer, he mentioned that the assessment order under consideration may be restored back for framing it de novo. He submitted that now the assessee cannot allege that the Department made this offer which was hesitatingly agreed. He submitted that it can be seen that the assessee itself initially offered the revenue from inside operation to be taxed in terms of section 44BB of the Act and not under the Double Taxation Avoidance Agreement between India and Korea and as this fact has been recorded in the decision of the hon'ble Supreme Court in paragraph 13 of the judgment dated May 19, 2007. He submitted th....
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....ted that the learned Director of Income-tax in his revision order has considered office note for both years and has come to the conclusion that the assessment order passed by the Assessing Officer is erroneous as well as prejudicial to the interests of the Revenue. 82. In response to arguments of learned counsel for the assessee that the Director of Income-tax has ignored the orders of the Income-tax Appellate Tribunal for the assessment years 1986-87 and 1987-88 which have been confirmed by the hon'ble Supreme Court holding that even under article 7(3) of the treaty, the Assessing Officer after rejecting the accounts had rightly made best judgment assessment as per section 145(3) of the Act. He submitted that in fact the Assessing Officer is to be faulted for that lapse. The Income-tax Appellate Tribunal for those assessment years had held that revenue from inside India operations were to be taxed at 3 percent of the gross receipts and those findings were reversed by the hon'ble apex court and the order of the Commissioner of Income-tax (Appeals) was restored for taxing the income from inside India operations at 10 percent As regards the income from outside India operat....
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....y learned special counsel that the learned Director of Income-tax has not gone into this aspect at all and the order passed by the Assessing Officer has been found to be erroneous in view of the findings recorded by the learned Director of Income-tax in paragraphs 7.1 and 7.3 at pages 15 and 16 of his order. Therefore, his order cannot be said to be legally untenable. 86. In response to the argument of the learned authorised representative for the assessee that in the fresh assessment order issued as a draft order, the Assessing Officer has computed the income of the assessee at lesser amount from inside India operation and such order of the Assessing Officer has been approved by the Dispute Resolution Panel under section 144C of the Act of which the learned Director of Income-tax himself is one of the members. He submitted that if such logic of the assessee is accepted, then, by same logic the upward revision in respect of revenue from outside India operation in the fresh assessment order should be confirmed. It was submitted that the scope of the present appeal should be restricted to the facts and circumstances existing at the time of revision by the learned Director of Incom....
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....145. (d) Computation of income on estimate basis should be made at 3 percent of gross receipts. 89. He submitted that the Uttaranchal High Court has confirmed the order of the Income-tax Appellate Tribunal. The Assessing Officer did not apply 3 percent rate of gross receipts because the formula offered to the assessee earlier in 1995 and accepted by the assessee would yield much higher taxable income from operations inside India. He in this regard referred to a chart placed at annexure III according to which if the rate of 3 percent is applied as per the Income-tax Appellate Tribunal decision, then, tax paid/ payable by the assessee will come to Rs. 6.93 crores against Rs. 16.08 crores levied by the Assessing Officer vide assessment order dated March 9, 2007. He submitted that even in the assessment framed in pursuance of order under section 263 the tax levied on inside India revenue is only a sum of Rs. 10.22 crore which is less than the tax levied by the Assessing Officer in his order dated March 9, 2007. 90. He further submitted that the dispute on the same issue again arose in the assessment years 1994-95 and 1995-96 and the Tribunal after considering the similar....
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....ctor of Income-tax has failed to point out as to how the Assessing Officer has erred in following those decisions. 91. With regard to the income from operation of the permanent establishment inside India, it was submitted by the learned authorised representative that special counsel for the Revenue is construing the provisions of article 7 literally which is not permissible as per decision relied upon by him while submitting his arguments. He submitted that even according to the OECD commentary, in a case where the accounts of the permanent establishment are not reliable, the tax authority should make a fair estimate of profit. He submitted literal construction of article 7(3) even does not support the contention of the learned Director of Income-tax raised in the notice under section 263 that only such expenses on which tax has been deducted at source should be allowed and this is evident from the later order passed in pursuance of order under section 263 where the Dispute Resolution Panel has approved deduction of further 35 percent of the claim of such expenditure which, in fact, has resulted in under-assessment of income of Indian permanent establishment by Rs. 14 crores. ....
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....n pointed out in paragraph 30. The arguments of the learned authorised representative for the assessment year 2006-07 almost remained the same and it was contended that the Assessing Officer had opted for one view out of the alternatives available to him and, therefore, based on plethora of case laws touching upon this issue the learned Director of Income-tax could not have invoked jurisdiction under section 263. Against this argument, learned special counsel for the assessee submitted that this argument of the assessee lacks substance and is totally fallacious. He submitted that it has not been explained that on which issue the Assessing Officer had two alternatives available with her out of which one could be considered as plausible view. He submitted that such contention seems to arose from the fact that the Assessing Officer considered the applicability of section 44BB of the Act in the context of the decision of the hon'ble Supreme Court in the assessee's own case for the assessment years 1986-87 to 1988-89. If it is so, then, it may be emphasised that the assessee had opted to be assessed under the provisions of India-Korea tax treaty, therefore, section 44BB was othe....
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....by paragraph. He submitted that it is a simple case of cut and paste, therefore, the assessment order passed by the Assessing Officer cannot be said to be with a due application of mind. He submitted that recording the facts in office note only tantamounts to a ritual performance which does not indicate application of mind. 98. With regard to the argument of the learned authorised representative that the Assessing Officer has acted upon the formula adopted by the Revenue in the past years, it was submitted by learned special counsel that this is totally a false claim of the assessee. During the course of hearing of the appeals, the assessee did not raise this issue, hence, this argument of the assessee should be rejected. 99. It is in this manner, both parties concluded their arguments for both years. 110. We have carefully considered the rival submissions in the light of the material placed before us. By the impugned orders, the learned Director of Income-tax has held that the assessment orders passed by the Assessing Officer are erroneous as well as prejudicial to the interests of the Revenue. He, therefore, has set aside the impugned assessments and asked the Assessing ....
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.... the interests of the Revenue. If one of them is absent if the order of the Assessing Officer is erroneous, but is not prejudicial to the Revenue or if it is not erroneous, but prejudicial to the Revenue -recourse cannot be had to section 263(1) of the Act. Such provision cannotalso be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that section will be attractive. The assessment order passed will be erroneous if it is based on an incorrect assumption of fact or on an incorrect application of law. It will also be erroneous when assessment order is passed without applying the principle of natural justice or is passed without application of mind. The phrase "prejudicial to the interests of the Revenue" being not defined in the Act should be understood in its ordinary meaning. It is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and such task has been entrusted to the Revenue. If due to erroneous order of the Assessing Officer the Revenue is losing tax lawfully payable by a person, it will certainly be pr....
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....d to be prejudicial to the interests of the Revenue. 103. If the facts of the present case are seen in the light of the aforementioned judicial pronouncements, then, it has to be examined that whether or not, according to the facts of the case the Assessing Officer has assessed the assessee on an incorrect assumption of facts or on an incorrect application of law so as to hold that the order of the Assessing Officer was erroneous. 104. We will first examine the stand of the Assessing Officer relating to taxation of income from inside India revenue. It has already been pointed out that the facts relating to both years are similar except that according to the arguments of the learned authorised representative there are two differences in the facts which has already been described in the above part of this order. But basically facts relating to both years remained the same. The Assessing Officer has worked out revenues for inside India operations at Rs. 5,52,23,44,864 for which there is no dispute. What the Assessing Officer has done to compute income from such revenue is that he has first deducted sub-contractors cost and salary expenditure from the gross revenue to arrive at a....
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....earned Assessing Officer that he has verified all these payments from the TDS returns and after making verification in this regard, the Assessing Officer has given specific finding that out of gross payments made by the assessee to sub-contractors and salary amounting to Rs.1,71,19,73,419, a sum of Rs. 23,27,780 was made to non-resident sub-contractors for works done outside India by respective foreign sub-contractors and a further sum of Rs. 3,13,07,703 could not be verified. He, therefore, reduced these two amounts from the gross amount claimed by the assessee and, in this manner, has arrived at a sum of Rs. 1,67,83,37,937 which has been reduced and on the balance revenue 10 percent rate has been applied. The Assessing Officer ignored the book result of the assessee according to which it had filed return of loss at Rs. 9,28,05,64,624 and adopted a formula as per past history of the case of the assessee. The Assessing Officer has assessed the assessee with the observations "keeping in view the past practice adopted by the Department on this issue as well as in view of article 7(5) of the Double Taxation Avoidance Agreement". This fact was in the mind of the Assessing Officer while....
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....reement. 108. Now, the question will be, as argued by the learned special counsel for the assessee, a mistake in perpetuity has been committed by the Assessing Officer by taking a view that after reduction of sub-contractors cost and salary expenditure on which the TDS was deducted, on the balance, whether it was legally permissible to apply 10 percent rate or it should have been applied on the gross revenue. It has already been mentioned that it is neither the case of the assessee nor the case of the Assessing Officer that the provisions of section 44BB are applicable. It is also not the case of the learned Director of Income-tax that the provisions of section 44BB could be applied even when the assessee has opted to be assessed under the provisions of the Double Taxation Avoidance Agreement. If one goes by strict application of such section 44BB(1), then, of course, there will be no scope for, firstly, reduction of sub-contractors cost and salary expenditure on which the TDS deducted and then apply the 10 percent on the balance of the revenue. But, if the provisions of the Double Taxation Avoidance Agreement are applied, then, there is no provision which authorise the Departme....
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....ss", then, all the expenses incurred wholly and exclusively for the purpose of business are allowable. The question of estimate will arise only if from the accounts and details maintained by the assessee the profit is not deducible. All along it has been the case of the assessee that it is not in a position to produce the books of account and in that circumstance the estimate of income is being made. This position existed throughout the history of the case of the assessee. But it does not mean that income of the assessee has to be assessed only as per the provisions of section 44BB(1) of the Act, i.e., the assessee should be assessed at 10 percent of the gross inside India revenue. If the assessee is able to establish that it does not have income of that magnitude, then, it is open for the assessee to be assessed at a lower amount. This has so been demonstrated in the case of the assessee itself when even according to the fresh order passed in pursuance of the order passed by the learned Director of Income-tax not only the Department has reduced the expenses which are subject to the TDS amounting to Rs. 1,67,83,37,937, but has further allowed a deduction of 35 percent of material c....
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....did not inquire into the nature and scope of the contract, the reasons for revenue for outside India operations, the nature of outside India operations, the duration of projects in India, the role of Mumbai office of the company in submitting the tenders, negotiation of the contracts, the subsequent role of the permanent establishment and Mumbai office in earning the revenues from the alleged outside India operation. It is the case of the learned Director of Income-tax that the Assessing Officer did not gather the facts at all before passing the order. The Assessing Officer has also not inquired into the applicability of the decision of the hon'ble Supreme Court in the assessee's own case for the year under consideration and, therefore, the order passed by the Assessing Officer by not taxing the income on account of revenue of Rs. 12,94,51,94,688 is erroneous and prejudicial to the interests of the Revenue. 111. Though there is no discussion regarding non-taxation of the revenue for outside India operations in the assessment order, it has been brought on record by learned counsel for the assessee that in the office note the Assessing Officer has given the reasons for not....
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....sessment order there is material on record according to which the Assessing Officer had taken a conscious decision regarding non-taxability of the revenue from outside India operation, which, according to the argument of the assessee pertained to the activities performed outside India. It was argued before the Assessing Officer that the revenue related to the activities performed outside India which means that no part of that revenue related to any permanent establishment in India for that work and after satisfying itself with that contention of the assessee and relying upon the decision of the Uttarakhand High Court in the case of the assessee itself, these revenues have been held to be not taxable. Now, according to the learned Director of Income-tax, the Assessing Officer has not gone into the questions which have been described earlier and, therefore, has committed an error in not levying the tax on such revenue. But, at the same time, it has also not been shown by the learned Director of Income-tax that there exist any material on record according to which it can be said that the assessee is factually incorrect in contending that no part of outside India revenue relates to its....
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....ated March 30, 2006 and is reported as Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 450 (Uttaranchal). In that decision the hon'ble jurisdictional High Court in the case of the assessee itself for the assessment years 1986-87, 1987-88, 1988-89 and 1989-90 had upheld the order of the Tribunal vide which it was ruled that the assessee is not liable to be taxed in respect of activities admittedly carried on in Korea. However, it was held that the appeals were concluded by the Tribunal by a finding of fact. The said decision of the hon'ble jurisdictional High Court was further appealed before the hon'ble Supreme Court and the hon'ble Supreme Court rendered the decision on May 18, 2007 which is reported as Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC). In that decision, it was confirmed by the hon'ble Supreme Court that the Tribunal was right in holding that no part of the income attributable to Korean operation could be taxed in India as before the coming into existence of the permanent establishment in India the work of fabrication was completed in Korea and the fabricated platform was handed over to the ONGC. To that extent, the decision of the Tri....
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....ecember 4, 2008 in I. T. A. Nos. 42 and 43 of 2007, the matter was remanded back to the Tribunal as the hon'ble Supreme Court in the earlier case had held that the hon'ble High Court had erred in holding that no substantial question of law arose. For the sake of completeness the observations of their Lordships from the said decision of the hon'ble High Court are reproduced below : "These appeals pertain to the assessment years 1994-95 and 199596. In both appeals following substantial question arises to be considered : 'Whether the hon'ble Income-tax Appellate Tribunal was legally correct in holding that no portion of the payment made to the NRC outside India for the work done outside India under the composite contract for designing fabrication, installation and commissioning of installations on a turnkey basis providing for payment to be made on milestone basis is liable to be taxed in India ?' 5. In the similar facts and circumstances, the matter went up to the Supreme Court against the Division Bench of this court between the same parties relating to the previous assessment years, which is reported as CIT v. Hyundai Heavy Industr....
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....hon'ble apex court cited above, we have to see and examine the facts of the present year as also the facts in the assessment years 1987-88 and 1988-89. We find that for this purpose, paragraph 11 of this judgment of the hon'ble apex court is also relevant for consideration, as per which, it has been noted by the hon'ble apex court that the installation permanent establishment emerged only after the contract with the ONGC stood concluded. It is also noted that it emerged only after the fabricated platform was delivered in Korea to the agents of the ONGC and therefore, the profits on such supplies were fabricated platforms cannot be said to be attributable to the permanent establishment. Thereafter, it is noted by the hon'ble apex court that there is one more reason for coming to this conclusion. As per their Lordships, in terms of paragraph 1 of article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the permanent establishment would have earned if it was wholly independent of the general enterprise and therefore, even if, it is assumed that the supplies were necessary for the purpose of installation (act....
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.... respect of the assessment years 1987-88 and 1988-89, has held that there was no question of levying any tax on the revenue earned by the assessee in respect of outside India operation not only for the reason that the said profit has arose outside India, but the transaction itself has not been shown to be beyond the arm's length price. In the present years also there is no material on record to suggest that the outside India revenue does not belong to Korean operation performed outside India and also that the transactions entered into by the assessee with the ONGC is not at the arm's length. There is no material on record to suggest that the permanent establishment has any nexus with the fabrication work done outside India the supply of which was handed over offshore. 117. It is the case of the learned authorised representative that the learned Director of Income-tax when issued the show-cause notice was having the benefit of the decision of the hon'ble Supreme Court in the case of the assessee. Without properly appreciating the said decision, he has invoked his power under section 263 incorrectly in respect of revenue relating to outside India operation despite....
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....othetical profits which the permanent establishment 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 permanent establishment 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 permanent establishment unless it is established by the Department that the supplies were not at the 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 permanent establishment. 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 permanent establishment in another country, it ....
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....o the decision of the hon'ble Supreme Court in the case of Ishikawajima-harima Heavy Industries Ltd. [2007] 288 ITR 408 (SC) and after considering all these decisions he did not impose tax on the revenue relating to outside India operation and his such view cannot be held to be erroneous simply for the reason that he did not make inquiry in relation to role of the permanent establishment, etc. It has already been observed that the permanent establishment, even if it existed, the revenue from outside India operation could not be taxed unless there is a nexus between the permanent establishment and the activity done and performed outside India and this is the crux of the decision of the hon'ble Supreme Court in the case of the assessee itself. Even the learned Director of Income-tax could not point out any such nexus in his order. Therefore, on the face of it, the order passed by the Assessing Officer cannot be held to be erroneous so far as it is prejudicial to the interests of the Revenue in respect of revenue relating to outside India. 119. Therefore, on both grounds the assessment orders passed by the Assessing Officer is neither erroneous nor prejudicial to the intere....