TaxTMI 
TaxTMI 
2017 (6) TMI 3
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....DWN 98/3 off-shore Kakinada (hereinafter referred to as "MA-D6 block").Under the contract Aker is in charge of the installation of manifolds, umbilical, flexible risers and flow lines and control systems in the D6 block] A portion of this contract had been subcontracted by Aker to the assessee. 3. The assessee filed its return of income on 31.03.2009 declaring taxable income of Rs. 39,63,29,420/-. During the course of assessment proceedings, the A.O observed that the assessee is performing in country services and out country services as per contract with Aker. The submission of the assessee that its in country services are taxable u/s 44BB of the Income-tax Act, 1961 and out country services are exempt since these are not fees for technical services under Article 13 of India-UK as these services do not make available any technical knowledge, experience, skill, know how etc. to Aker was accepted by the A.O. The A.O accordingly determined the profits and gains of business u/s 44BB of the Act at Rs. 39,63,29,420/- being 10% of gross Revenue and determined the total tax, surcharge, education cess, etc. at Rs. 16,73,69,914/-. 4. The DIT examined the assessment record and observed that....
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....rroneous order there has been loss of revenue the order of the Assessing Officer is clearly prejudicial to the interest of revenue. Though the words "prejudicial to the interest of revenue" have not been defined in the Act but it has been judiciously held they must mean that the orders of the assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State have not been realized or cannot realized. 5. He accordingly issued a notice u/s 263(1) of the Act to the assessee to explain as to why the order passed by the A.O should not be held as erroneous and prejudicial to the interest of the Revenue. 6. It was submitted by the assessee that the order passed by the A.O is not erroneous and prejudicial to the interest of revenue since the A.O has passed the order after conducting proper enquiries and due application of mind. It was argued that the A.O during the assessment proceedings had specifically asked the assessee to explain as to how the provisions of section 44BB of the Act are applicable in the case and as to why the receipts should not be taxed as fee for technical services. After examining the various details/informa....
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....ne, provisions of section 44BB of the Act is applicable to both off-shore and on-shore receipts and should be taxed accordingly. However, the A.O went on to tax only the inside India portion of receipts without brining to tax an amount of Rs. 1,66,24,94,023/- which had been shown as outside India revenue and had not been offered for taxation. Without proper enquiry, the A.O has accepted the claim of the assessee and as such, on this ground alone, the order of the A.O is erroneous. 10. Rejecting the various explanations given by the assessee and distinguishing the various decisions cited before him, the ld. DIT held that the order passed by the A.O is erroneous and prejudicial to the interest of the Revenue since the A.O has not adopted one of the possible views but has made wrong application of law. Further, the A.O has not made proper enquiries to determine the nature of services rendered by the assessee. The view taken by the A.O is an erroneous view and also prejudicial to the interest of the Revenue. In view of the above, the DIT cancelled the order passed by the A.O with the direction to make fresh assessment after conducting proper enquiries and after giving the assessee ade....
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....cal services ("FTS") within the meaning of section 9(1 )(vii) and was, therefore, not entitled to the beneficial provisions of section 44BB of the Act. 4. TAXABILITY OF BOTH IN-COUNTRY AND OUT-COUNTRY RECEIPTS 4.1 That on facts and circumstances of the case and in law, the DIT has erred in holding that both in-country as well as out-country receipts from the contract with Aker shall be taxable in India. 4.2 That on facts and circumstances of the case and in law, the DIT has erred in holding that the AO has not discussed the taxability of the out-country receipts and has not brought to tax the said receipts. 4.3 That on facts and circumstances of the case and in law, the DIT has erred in concluding that the contract with Aker was a composite works contract and receipts therefrom could not be dissected/ segregated into in-country and out-country receipts." 12. The ld. Counsel for the assessee referring to the notice issued by the ld. CIT u/s 263 of the Act, the details of which have already been reproduced in the preceding paras, submitted that the DIT initiated revisionary proceedings u/s 263 of the Act on the ground that the A.O did not go through the contract between the asse....
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....ubsea facilities services and the contractual receipts had been offered to tax u/s 44BB of the Act and justification regarding applicability of section 44BB of the Act in respect of contractual receipts had passed original assessment order u/s 143(3) of the Act accepting the income returned by the assessee relating to in country receipts u/s 44BB of the Act. The A.O had also accepted that receipts for out country services are not taxable in India in view of Article 13 of the India- UK DTAA. Since the assessee had filed relevant details/documents during the course of assessment proceedings itself, which clearly would be that all necessary facts/information were available before the A.O. Based on the appreciation of these details/documents, the A.O had passed original assessment order and therefore, it cannot be stated that there is no enquiry by the A.O. 15. He submitted that since the A.O in the instant case had conducted necessary enquiries before completing assessment, therefore, by no stretch of imagination it can be stated that no enquiry had been conducted by the A.O during the course of original assessment proceedings. Referring to various decisions, the ld. counsel for the ....
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....e cumulatively satisfied for claiming taxability under this deeming section: a) The recipient of income should be non-resident; b) The non-resident should be engaged in the business of provisions of services or facilities or should supply plant and machinery on hire; c) The services rendered or the plant and machinery provided on hire should be used in connection with prospecting extraction and production of mineral oil; and d) The income from services rendered should not be taxable under the provisions of section 42, or section 44AD or section 115A or section 293 of the Act. 18. He submitted that the provision of section 44BB of the Act is a special, specific and exclusive provision providing for deemed/presumptive basis of taxation in case of non residents providing, inter alia services of facility in connection with prospecting for or exploration or production of mineral oils 2013 in India. The words 'in connection with' are of the widest amplitude and would include services or facilities provided by a non resident to a person who is engaged in exploration or production of mineral oil. It is not necessary that the person providing such services or facility must be engaged i....
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....in the D6 block and the associated engineering necessary for the installation of facilities in the first oil phase of the MA D6 oil field development. Accordingly, the services rendered by the assessee in India in connection with exploration, extraction and production of mineral oil are taxable in terms of section 44BB of the Act. 23. The ld. counsel for the assessee also referred to the provisions of section 44DA read with section 9(1)(vii) of the Act. Referring to Instruction No. 1862 dated 28.02.1998 issued by the CBDT he submitted that as per the said Instruction, the mining project or like project would include rendering of services like imparting of training for carrying out drilling operation in connection with extraction of mineral oil. Referring to the decision of the Hon'ble Supreme Court in the case of Oil and Natural Gas Corporation Limited Vs. CIT reported in 376 ITR 306, the ld. counsel for the assessee submitted that the Hon'ble Supreme Court in the said decision has held that payments for providing various services in connection with imparting training and carrying out drilling operations for exploration of and extraction of oil and natural gas would be cha....
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.... Vs. Addl DIT : ITA No. 5977/DEL/2010 27. The ld. counsel for the assessee submitted that in the absence of retrospective operation of amended proviso to section 44BB of the Act, payments received in relation to in country services i.e. the activities carried out in India has to be taxed under the said section and not under section 44DA of the Act. Without prejudice to the aforesaid argument that services in the case of the assessee do not qualify as fee for technical services within the meaning of the Act, he submitted that the provisions of section 44DA also do not apply to the assessee's case because section 44DA only covers payments in the nature of 'royalties' or 'fees for technical services' by a Government or an Indian concern to a non resident company. However, in the instant case, payment has been received by the assessee from another non-resident company, i.e. Aker and, therefore, section 44DA is rendered inapplicable. 28. The ld. counsel for the assessee submitted that the provisions of section 44BB are applicable to second level contractors. He submitted that section 44BB of the Act, inter-alia, envisages a non-resident service provider not merely engaged in the busin....
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....India-UK DTAA In terms of section 90(2) of the Act, provisions of the Act are overridden by the provisions of the DTAA, to the extent more beneficial to the non-resident assessee. In the present case, the assessee is a resident of UK and entitled to claim benefit under the Indo-UK DTAA. (b) Article 7 of the Indo-UK DTAA The assessee's income taxable in India shall only be so much of profits under the contract as is attributable to the PE in India. Referring to Article 7(1) and 7(2) of the India-UK DTAA, he submitted that profits attributable to PE in India shall be only profits arising from activities carried out by the PE in India. For the above proposition, he relied on the following judicial precedents: a) Carborandum Co vs CIT [1977] 108 ITR 335 (SC))- b) CIT vs. Hyundai Heavy Industries: 291 ITR 482 (SC) 31. He submitted that the ratio decidendi laid down by the Supreme Court squarely applies to the instant case since the out-country scope of the work under the Contract had been performed by the appellant from outside of India and without the intervention of the said permanent establishment in India. 32. The ld. counsel for the assessee drew the attention of the Bench ....
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....ticle 7 and would not go out of the same. Such items of income which do not fall under any other provision of the double tax treaty, would continue to be viewed as business profits covered by article 7. Fees for technical services is essentially business profit, since the rendering of such services is the business of the non-resident. In order to take out an item of income from the business profits, it is necessary under article 7(7) that there should be some other provision in the treaty dealing specifically with the item of income sought to be taken out from the business profits. If there is no other provision in the treaty or if the provision made in the treaty is not found applicable or to cover the item of income sought to be taken out from the business profits, for whatever reason, then it follows that the particular item of income should continue to remain under article 7. 17. Therefore, the amount received by the assessee-company from RIL under the contract did not represent consideration for any technical services rendered by RIL, or consisted of the development and transfer of any technical plan or design within the meaning of article 12(3)(g) of the DTAA. The considera....
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....rdingly submitted that both on merits as well as on legal grounds, the order passed u/s 263 by the DIT being illegal has to be quashed. 37. The ld. DR, on the other hand, heavily relied on the order of the DIT. He submitted that the DIT has passed a 30 page speaking order and has assumed jurisdiction u/s 263 of the Act on several grounds/aspects. He submitted that even if one of the grounds/aspects taken by the CIT/DIT satisfies the requisite conditions, the appeal of the assessee fails. Referring to page 2 of the order passed u/s 263 of the Act, the ld. DR submitted that the A.O has not brought to tax outside India Revenue of about 166.26 crores which has been addressed by the DIT at pages 18 to 21 of his order passed u/s 263 of the Act. Referring to page 19 of the order passed u/s 263 of the Act, the ld. DR submitted that the DIT has noted that this is without prejudice to the finding that entire receipts/income should have been assessed as FTS received by the assessee by applying provisions of section 44BB (1) of the Act. Referring to the provisions of section 44BB of the Act, he submitted that as per the said provision, even so called outside India Revenue needs to be brought ....
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....at the order of the A.O is erroneous. Referring to the decision of the Hon'ble Madhya Pradesh High Court in the case of Arjun Singh & Ors [2000] 246 ITR 363 [MP], he submitted that the orders cannot be passed mechanically in order to discharge statutory obligation. He submitted that since the A.O has not conducted proper enquiry and has merely accepted the submissions made by the assessee, therefore, the order has become erroneous as well as prejudicial to the interest of the Revenue and therefore, the DIT has correctly assumed jurisdiction u/s 263 of the Act. 40. The ld. DR submitted that the above is only one aspect of the several aspects taken up by the Ld. DIT to illustrate that all the principles laid by the Hon'ble SC in Malabar Industrial have been followed and met by the Ld. DIT for assuming jurisdiction u/s 263. He submitted that this should suffice in defeating the challenge to the order u/s 263. 41. He submitted that the ld DIT at page 14 - 15 of her order has relied on the decision of the Hon'ble Uttarakhand High Court in the case of ONGC Foramer France reported in 299 ITR 438 wherein the relevant activities were held as FTS as against being covered u/s 44BB a....
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....) for exploration of oil with respect to contract area identified as Panna and Mukta fields. The PSC was laid before both Houses of the Parliament and was approved in terms of section 42 of the Act. The assessee, an American company which was an affiliate of EOGIL, earned revenues under its contract with EOGIL for providing expatriate technicians for the Indian operations of EOGIL. In terms of the PSC, the assessee rendered services on cost-to-cost basis and received only reimbursement of actual expenses through debit notes. The assessee filed nil return of income since it did not earn any element of profit from provisions of such services and, in any case, its income was not taxable in India in view of Article 7(3) of the Indo US DTAA. The assessing officer alleged that the said payments were taxable in terms of section 44BB of the Act. The Tribunal decided in favour of the assessee. 44. On an appeal filed by the department before the High Court, the Court held that if a non-resident is assessed under the provisions of the DTAA, then, provisions of section 44BB of the Act cannot be invoked by the assessing officer. He drew the attention of the Bench to the following observations ....
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....ble in the instant case since the assessee has entered into a contract with Aker, which is a non-resident company for the purposes of the Act. 47. He submitted that the ld. DIT during the course of the proceedings under section 263 of the Act erred in holding that the invoices do not state whether the payment is for in-country or out-country receipts. He submitted that on the contrary the invoices clearly state the said fact and such invoices were duly submitted by the assessee before the assessing officer vide submission dated December 16, 2010 and duly formed part of record before CIT. 48. The ld. counsel for the assessee accordingly submitted that the impugned order passed by the DIT under section 263 of the Act is without judicious appreciation of the facts of the case and position in law, therefore, should be quashed. 49. We have considered the rival arguments made by both the sides, perused the orders of the A.O and the ld. DIT and the paper book filed on behalf of the assessee. We have also considered the various decisions cited by both the sides. We find the assessee, in the instant case, is a company incorporated under the laws of the United Kingdom and engaged in the b....
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....sdiction u/s 263 of the Act could be exercised by the DIT if, and only if, the order passed by the A.O is found to be erroneous as well as prejudicial to the interest of the Revenue. 52. It is also the submission of the ld. counsel for the assessee that adequate enquiries were conducted by the A.O during the course of original assessment proceedings. The DIT has no power to assume jurisdiction u/s 263 of the Act and he cannot substitute his own opinion in place of that of the A.O. It is also the submission of the ld. counsel for the assessee that as per the provision of section 44BB of the Act, the following conditions are required to be cumulatively satisfied for claiming taxability under the deeming provisions: a) The recipient of income should be non-resident; b) The non-resident should be engaged in the business of provisions of services or facilities or should supply plant and machinery on hire; c) The services rendered or the plant and machinery provided on hire should be used in connection with prospecting extraction and production of mineral oil; and d) The income from services rendered should not be taxable under the provisions of section 42, or section 44AD or sectio....
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....oneous (b) the order must be prejudicial to the interest of the Revenue must be fulfilled. In the instant case, ground for which the DIT assumed jurisdiction u/s 263 of the Act are that provisions of section 44BB of the Act does not cover second leg contract and the said section is not application to sub-contracts engaged in providing technical services to contractors for those undertaking projects in oil exploration, that income received by the assessee was clearly covered u/s 44DA of the Act and hence not taxable u/s 44BB of the Act and that the A.O has not taxed out country receipts and that contract was a composite one and the A.O in the order did not discuss the taxability of the total receipts with regard to the admitted PE of the assessee in India. 57. From the various decisions filed by the assessee in the paper book, we find it has been held in various decisions that section 44BB of the Act are applicable to second level contractor/sub-contractor. We find the Delhi Bench of the Tribunal in the case of Louis Dreyfus Armateures SAS [supra] has held as under: "60. A reading of the aforesaid judicial precedence clarify that sec. 44BB does not distinguish between the main con....
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....on of mineral oils and therefore taxable u/s 44BB of the Act." 58. The various other decisions relied on by the ld. counsel for the assessee also support the proposition that the provision of section 44BB of the Act are held to be applicable to the tax payer being a second leg contractor/sub-contractor. Further, it has been held in various decisions including the decision of the Hon'ble Delhi High Court in the case of DIT Vs. OHM Ltd. reported in 352 ITR 406 that the services rendered in relation to extraction and production of mineral oil are taxable u/s 44BB of the Act. 59. So far as the receipts of out-country services as taxable in India is concerned, we find in terms of section 90(2) of the Act, provisions of the Act are over ridden by the provisions of DTAA to the extent more beneficial to the non-resident assessee. Article 7(1) and 7(2) of the Indo-UK DTAA provides that profits attributable to PE in India shall be only profits arising from activities carried out by the PE in India. Therefore, we find merit in the submission of the ld. counsel for the assessee that assessee's income taxable in India shall only be so much of profits under contract as is attributable to ....
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....n "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the CIT to pass orders under s. 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open. In Gabrial India Ltd. (supra), law on this aspect was discussed in the following manner : "........From a reading of sub-s. (1) of section, it is clear that the power of suo motu revision can be exercised by the CIT only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the ITO is 'erroneous insofar as it is prejudicial to the interests of the Revenue'. It is not an arbitrary or unchartered power. It can be exercised only on fulfilment of the requirements laid down in sub-s. (1). The consideration of the CIT as to whether an order is erroneous insofar as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the CIT acting in a reasonable manner ....
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....the facts of the present case in the light of the powers of the CIT set out above. The ITO in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the ITO on being satisfied with the explanation of the assessee. Such decision of the ITO cannot be held to be 'erroneous' simply because in his order he did not make an elaborate discussion in that regard.........." 13. When we examine the matter in the light of the aforesaid principle, we find that the AO had called for explanation on this very item, from the assessee and the assessee had furnished his explanation vide letter dt. 26th Sept., 2002. This fact is even taken note of by the CIT himself in para 3 of his order dt. 3rd Nov., 2004. This order also reproduces the reply of the respondent in para 3 of the order in the following manner : " The tools and dyes have a very short life and can produce upto maximum 1 lakh permissible shorts and have to be replaced thereafter to retain the accuracy. Most of the parts man....
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....of the assessee is questioned. However, that basis of the order vanishes in thin air when we find that this very accounting practice, followed for number of years, had the approval of the IT authorities. Interestingly, even for future assessment years, the same very accounting practice is accepted. 62. We find the Hon'ble Delhi High Court in the case of CIT Vs. Anil Kumar reported in 335 ITR 83 has held that where it was discernible from record that the A.O has applied his mind to the issue in question, the ld. CIT cannot invoke section 263 of the Act merely because he has different opinion. Relevant observation of the High Court reads as under: 63. We find the Hon'ble Delhi High Court in the case of Vikas Polymer reported in 341 ITR 537 has held as under: "We are thus of the opinion that the provisions of s. 263 of the Act, when read as a composite whole make it incumbent upon the CIT before exercising revisional powers to : (i) call for and examine the record, and (ii) give the assessee an opportunity of being heard and thereafter to make or cause to be made such enquiry as he deems necessary. It is only on fulfilment of these twin conditions that the CIT may pass an o....