TaxTMI 
TaxTMI 
2013 (10) TMI 753
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....ome-tax/ Deputy Director of Income-tax/ Asstt. Director of Income-tax ('Ld. AO') has erred in making several incorrect factual findings in the draft assessment order as highlighted by the appellant in Appendix IV of the objections filed before the Dispute Resolution panel - II, New Delhi ('DRP') and the DRP has further erred in upholding/ confirming the action of the Ld. AO. 3. That on the facts and circumstances of the case and in law, the Ld. AO erred in proposing, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, to assess the income of the appellant at Rs.3,07,51,59,860 as against the returned income of Rs.33,32,41,100. 3.1 That in framing the assessment, the Ld. AO erred in proposing, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, that the appellant had entered into turnkey projects, and as such is to be assessed on the gross turnover and the net taxable income is estimated at @ 28.58% of such gross turnover. 3.2 On the facts and in the circumstances of the case and in law, the Ld. AO while proposing to assess the income of the appellant erred in ignoring, and the DRP has further erred in upholding/ conf....
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....ng the action of the Ld. AO, that the activities carried out by the AO in India i.1 collection of information and its use as a communication channel, are mere] preparatory and auxiliary and cannot lead to establishment of PE in India in view ( Article 5(3) of the treaty. 4.5 On the facts and in the circumstances of the case and in law, the Ld. AO erred in ignoring the fact, and the DRP has further erred in upholding confirming the action of the LD. AO, that the activities like bidding for the contract, awarding of the contact, signing of the contract and site surveys cannot be said to result into formation of PE in India. 4.6 On the facts and in the circumstances of the case and in law, the Ld. AO erred in ignoring the legal position, and the DRP has further erred in upholding confirming the action (the Ld. AO, that there is a distinction between 'construction PE' within the meaning ( Article 5(2)(h) and the PE as defined under Article 5(1) of the Treaty, and as such on: such income as is attributable to the construction PE could only be assessed to tax as ha been assessed in the preceding years. 6.1 On the facts and in the circumstances of the case and in law, the Ld. AO ....
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....e DRP has further erred in upholding/ confirming the action of the Ld. AO (without any valid justification), upon the purported statement (where in fact there was no statement recorded) of Shri S.K.Sachdeva, DGM (E)-PC 4WPP-II which was obtained in the course of assessment proceedings without producing him for the appellant's cross examination, in the absence of which the purported statements cannot be a basis for recording adverse finding to conclude that the contract is not a divisible contract and the revenues pertaining to outside India operation are taxable in India. 8.3 On the facts and in the circumstances of the case and in law, the Ld. AO erred in ignoring, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, the judgement of the Hon'ble Apex Court in the case of Ishikawajma Harima: 288 ITR 408 (SC) and Hyundai Heavy Industries Co. Ltd. reported in 291 ITR 482 in respect of separate treatment of different parts of a lumpsum turnkey contract where the contract is to be carried out in different tax jurisdictions. 9. On the facts and in the circumstances of the case and in law, the Ld. AO erred in proposing, and the DRP has further erred in u....
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....ed it has not been disputed that the entire work of fabrication of platform supplied was completed outside India) no such income in respect of work till fabrication of platform which was completed outside India, could be brought to tax as provided in Article 7 of the Treaty. 10.4 On the facts and in the circumstances of the case and in law, the Ld. AO erred in proposing, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, that since the appellant carried risk in India till the final acceptance of the work by ONGC, entire contract receipts are taxable in India. While doing so, the Ld. AO grossly erred and the DRP has further erred in upholding/ confirming the action of the Ld. AO in ignoring the settled legal position that mere risk cannot lead to taxability in India. Even otherwise, the Ld. AO erred and the DRP has further erred in upholding/ confirming the action of the Ld. AO in misinterpreting the insurance policy which amply depicts that ONGC was the principal beneficiary who carried entire risks in India even before final acceptance of the work. 10.5 On the facts and in the circumstances of the case and in law, the Ld. AO erred, and the DRP h....
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....mining projects' from the purview of FTS as defined in the Act. 13. On the facts and in the circumstances of the case and in law, the Ld. AO erred in proposing, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, to estimate 28.58% of the gross contract revenues as income taxable in India in the hands of the appellant, which is excessive, exorbitant and inconsistent with the accepted legal position. 13.1 On the facts and in the circumstances of the case and in law the Ld. AO erred, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, in estimating that the profits taxable in India took recourse from the average profit margin earned by some Indian companies. 13.2 On the facts and in the circumstances of the case and in law, the Ld. AO erred, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, to take recourse from the average profit margin earned by some companies and in ignoring the submissions of the appellant that M/s Koch Chemicals and Engineers India are mere service companies and are also not functionally comparable. 13.3 On the facts and in the circumstances of the case and in la....
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....ances of the case and in law, the Ld. AO erred in ignoring and the DRP has further erred in upholding/ confirming the action of the Ld. AO to charge interest under Section 234D of the Act. 17.1 On the facts and in the circumstances of the case and in law, the Ld. AO erred in levying the interest u/s 234D of the Act without having specific directions/ recording the satisfaction in the assessment order. 18. On the facts and in the circumstances of the case and in law, the Ld. AO erred in ignoring, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, in mechanically proposing to initiate the proceedings under section 271A of the Act. 19. On the facts and in the circumstances of the case and in law, the Ld. AO erred in mechanically proposing, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, to initiate the proceedings under section 271B of the Act. 20. On the facts and in the circumstances of the case and in law, the Ld. AO erred in mechanically proposing and the DRP has further erred in upholding/ confirming the action of the Ld. AO to initiate proceedings under section 271(1) (c) of the Act. The above grounds ....
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....ficer further observed that it was for the assessee to prove that the activities of the Project Office are ancillary and auxiliary so that the same can be taken in the exception clause of the Treaty. Assessing Officer further opined that by no stretch of imagination, a Project Office can be involved in ancillary and auxiliary activity. Assessing Officer further observed that in this case the project was in existence even prior to the signing of the contract with ONGC and after signing of the contract, the assessee intimated RBI that it has a Project Office for the execution of this contract. Assessing Officer has also referred to his enquiry with ONGC and certain documents were collected from them. Referring to these documents, Assessing Officer observed that it transpired that the assessee's Mumbai office and M/s Arcadia the dependent agent Permanent Establishment has also participated in biding process and was involved in negotiation and finalization of the contract. Further, Assessing Officer observed that these documents are not mere correspondence but these indicate definite involvement of the Mumbai Office and Arcadia Shipping Ltd. in the process of negotiation of the contrac....
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.... India. Further, assessee had admitted that this project office was stated to be a PE for assessment years 1997-98 to 2007-08. However, the assessee has claimed that this office was only used as a communication channel and, is thus not a PE as defined in Article 5 (2) read with Article 5(1) of the DTAA. Assessee has further submitted that it is not denied that the assessee is involved in installation and commissioning of a fabricated platform in India and if, in respect of a project the period of installation activity exceeds beyond nine months, it would be regarded as an Installation or Construction PE. However, since the activity of the assessee in India in respect of 4WPP project lasted only for four and a half months, it cannot be said to have even an Installation PE in India within the meaning of Article 5(2)(h) of the DTAA. Furthermore, the assessee claimed that assessee cannot be said to have dependent agent PE in the shape of consultant appointed by the assessee in India, M/s Arcadia Shipping Limited. It has been claimed that even if it is assumed that M/s Arcadia is an agent, it is an agent of independent nature, as per Article 5(5) of the DTAA. It has been further submitt....
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.... The assessee has not disputed that the concerned persons were the employees of its Project Office. Further, we find that assessee is a non-resident and has entered into a contract which has lasted for approximately 2 years. It is not possible that the contract of this magnitude can be executed without the assessee having any fixed place of business in India from where it can manage its work for this period of time. Thus, from the above, it is clear that the project office in India was assessee's PE. 11.2 The assessee has denied that M/s Arcadia Shipping is an agent of NPCC. It has laid emphasis that Arcadia is a consultant. It has been claimed by the assessee that M/s Arcadia Shipping was involved in gathering the information and assisting the assessee in representations, obtaining works, promotion support and services and facilities. In this regard we find considerable cogency in the Assessing Officer's finding that M/s Arcadia is also a PE of assessee as it was actively involved in the project since pre-bidding meetings, hard core marketing and business development and till finalization of the contract. Assessing Officer as well as DRP have given a finding that letters and co....
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....ee has project site at its disposal from the very beginning when the contract was awarded. iii) Duration period starts from survey activity. 11.4 The assessee on the other hand has claimed that assessee has no such PE. Assessee has submitted that assessee carried out and completed the entire fabrication and erection work as the separate part of the contract executed by outside India. It has further been submitted that assessee has constructively delivered the platforms outside India and physically delivered the same in India through its own barges by its employees. Assessee has further contended that even if the assessee carried out installation activities in India, yet to hold an installation PE, the condition that the installation period exceeded 9 months need to be satisfied. It has been submitted that the Assessing Officer overlooked the fact that installation activity could only have begun when the erected platform was physically delivered in India and the same was commissioned. Thus, the period to determine whether it was beyond 9 months, would be form the date of physical receipt of platform in India till the same is commissioned and thus the authorities had grossly er....
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....ad a PE in India, even before the notification of award of contract as the site of ONGC was made available for surveys etc. Thus we hold that assessee has a installation PE in India. 12. Whether the contract is divisible? Tax liability of the assessee. 13. Assessing Officer has observed that procurement and fabrication of material took place during the existence of PE in India. The terms of contract with ONGC do not stipulate any sale of material to them. The preamble to the agreement as also the scope of work stipulate manufacturing of platforms on a turnkey basis. There may be various stages in executing the work like survey, designing, fabrication procurement, and installation and commissioning but these are mere stages of the total project. Assessing Officer opined that the ONGC does not purchase any material from the assessee. ONGC takes over the completed platform when all parts of the work are executed. In this regard, Assessing Officer referred to the clarification given by the ONGC. Referring to the same, the Assessing Officer observed that the documents bring out in unequivocal terms that the ownership of the fabricated material remains with the assessee contractor ....
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....e India activity consisting of installation of said platform. Referring to the various clauses of the contract, Ld. Departmental Representative submitted that the contention of the assessee is not correct as the contract is composite, turnkey & indivisible contract. For this purpose, the Ld. Departmental Representative referred to the various clauses of the contract. Referring to these clauses, the Ld. Departmental Representative submitted that it can be reasonably inferred that the contract is composite turnkey contract wherein ONGC wants a fully installed offshore platform. ONGC does not want the assessee to supply various components and equipments independently. Further, the Ld. Departmental Representative referred to the decision of the ITAT in the case of Samsung Heavy Industry Co. ltd. VS. ADIT. He claimed that similar contract was entered into in this case and the ITAT has held that contract obtained by the assessee from ONGC is a composite contract right from the surveys of pre-engineering, preconstruction, pre- installation, designs, engineering, procurement etc. Further Ld. Departmental Representative submitted that from the ratio emanating from the Hon'ble Apex Court dec....
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....the assessee in accordance with the Contract i.e. the pricing schedule (Schedule C) and milestone payment formula (Schedule E) given in the contract. Furthermore, it has been mentioned that if the assessee contractor likewise abandons the contract at any stage, it would not be bound to refund of any amount so received by it from ONGC in respect of the work already executed by it. In fact, had it been a case of turnkey project, the assessee contractor would be entitled to the entire value of contract, whether executed or remains to be executed, if there was any termination on the volition of the company i.e. ONGC. Likewise, in case the assessee contractor abandons the contract suo motto or otherwise, it would be liable to refund the amount received by it from the company. Further, in this regard assessee has referred the Hon'ble Apex Court decision in the case of Ishikawajma-Harima Heavy Industries Ltd. vs. DIT reported in 288 ITR 408. Assessee has further submitted that assessee fabricated the platform in Abu Dhabi and after fabrication, said platform is brought to India with the help of its barges and then the possession is handed over to ONGC. In this regard, it has been submitte....
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....ent situated therein, there shall in each Contracting State be attributed to that permanent establishment the profit which it might be expected to make if it were distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 16. In this regard, assessee has placed strong reliance on the decisions of the Hyundai Heavy Industries Company Limited reported in 291 ITR 482 (SC) (Supra). Furthermore, it has been submitted that the proposition laid down in the aforesaid case has been followed by the Mumbai, Tribunal in Roxonoy Vs DCIT (103 TTJ 891 (Mum). It has further been submitted that the Hon'ble Apex Court had also affirmed the above proposition in the case of Ishikawajma-Harima Heavy Industries Ltd. vs DIT reported in 288 ITR408. Assessee has further submitted that though the assessee's income cannot be taxed in India in view of the beneficial provisions of the DTAA as it has no PE in India due to aforesaid reasons, the assessee, however, keeping in mind the past trend where presumptive rate of profit was applied and accepted by the appel....
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....armarked towards each of the activities like design and engineering, material procurement, fabrication and installation. The scope of work under the contract involves sequential activities like design and engineering, material procurement, fabrication, transportation, installation and commissioning. The contract provides separate payments to the assessee on the basis of work of design, engineering, procurement and fabrication. All these operations have been carried out and completed outside India. Every progress under the contract is inspected and finally accepted by ONGC or its authorized agents outside India, and only then, the assessee received the payments as per specified milestones from ONGC outside India. 17.2 Furthermore, we agree that the bifurcation of revenues as inside India revenues and outside India revenues is also evident from the following:- i) Consideration for various activities has been mentioned separately in the 4WPP contract as inside India and outside India as is evident from the Annexure-C (Contract price scheduled and rental rates schedule) of the contract. ii) The scope of work as mentioned in the contract has been clearly bifurcated into the activi....
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....se was completed when it was fabricated, erected and brought to India through its barges, to be physically supplied. Thus, we agree with the contention of the assessee that income attributed to PE in India could not extend to the activities carried outside India and had to be therefore confined to incomes from activities carried out from the PE. Thus we opine that assessee did not have a PE in respect of erection and fabricating the platform in Abu Dhabi. The assessee had a PE in respect of installation and commissioning. In this context, the Apex Court decision in the case of Hyundai Heavy Industries Co. Ltd. 291 ITR 482 (SC) is relevant. The same is reproduced hereunder:- "The installation permanent establishment came into existence only on conclusion of the transaction giving rise to the supplies of the fabricated platforms. The installation permanent establishment emerged only after the contract with the ONGC stood concluded. It emerged only after the fabricated platform was delivered in Korea to the agents of the ONGC. Therefore, the profits on such supplies of fabricated platforms cannot be said to be attributable to the permanent establishment." "In cases such as this,....
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....on account of Korean operation (designing and fabrication) because profits, if any, from the Korean operations arose outside India. In the present two years also, the only dispute is with regard to payments made to non resident company outside India for the work done outside India, as per composite contract for designing, fabrication, installation and commissioning of installation on a turn key basis. As per above discussion, after considering clause (a) of para-15 of the judgement of Hon'ble Apex Court per directions of Hon'ble Uttrakhand High Court, we hold that in the facts and circumstances of the case, profit, if any, from the Korean operations (designing and fabrication) is not taxable in India because the same has been arisen outside India. Regarding clause (b) of para 15 of the judgement of Hon'ble Apex Court, we find that in the previous two years, there is no dispute regarding quantum of profit embedded in the Indian operation attributable to Indian PE of the assessee and hence this clause of para 15 is not applicable in the present two years which are before us. We, therefore find no reason to interfere in the order of Ld CIT(A) in both these years." The aforesaid pro....
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....e derived by the contractor to be taxable in India" 17.5 In our considered opinion, the ratio emanating from the above case laws is applicable on the facts of the present case. We hold that erection and fabrication cannot said to be attributable to PE in India. All the activities prior to installation and commissioning are carried out in UAE and thus having regard to Article 7 of the DTAA, no income can be attributed to the PE in India. Thus, in the background of the aforesaid discussions, we hold that the profits can be attributed to the PE in India only in respect of installation and commissioning activities. The profits attributable to the supplies i.e. erection and fabrication of the platforms cannot be brought to tax in India. 17.6 We find that assessee has contended that taxability of the assessee should be the same as in preceding years. Earlier assessee has declared income @1% of outside India revenue & 10% of inside India revenue after claiming expenses on which TDS has been made. Assessee has claimed that this formula of declaring income was adopted by the Assessing Officer in A.Y. 1997-98. Subsequent to A.Y. 1999-2000, the assessee did not file audited accounts but....
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.... providing services, neither any plant or machinery has been supplied on hire basis. The assessee is under the contract engaged in successful installation of off-shore platform. This activity cannot be characterized as facility provided by the assessee. Thus, we hold that business activity of the assessee does not fall within the meaning of section 44BB. 20. Interest u/s. 234B, 234C & 234D 21. Assessee has pleaded that no interest under the provision of section 234B of the Act is leviable. On this issue DRP has held the Hon'ble Apex Court has held that levy of interest u/s. 234B of the Act was mandatory in the case of C.I.T. vs. Anjuman G. Ghaswala 252 ITR 1. In this regard assessee has submitted that NPCC is a non-resident foreign company and accordingly, its entire income is liable for tax deduction under section 195 of the Act. Thus, ONGC, payer/deductor, had made payments to NPCC after deducting taxes in pursuyance of withholding tax certificate issued by the income tax authorities. In this background, it has been submitted that NPCC was not liable to pay advance tax and could not have committed any default in paying advance tax. Hence, it has been argued that NPCC cannot....