TaxTMI 
TaxTMI 
2025 (6) TMI 971
X X X X Extracts X X X X
X X X X Extracts X X X X
.... section 263 of the Income tax Act 1961 (hereinafter referred to as 'the Act'); 2. That on the facts and circumstances of the case and in law, the order passed by the Ld. CIT u/s 263 is bad in law in as much it does not fulfill the jurisdictional conditions envisaged by section 263 of the Act or Explanations appended thereto; 3. That on the facts and circumstances of the case and in law, the order passed by the Ld. CIT u/s 263 is against the settled legal dictum in as much that the Ld. CIT erred in not appreciating that: (a) It was not a case where no enquiry was made by the Ld. Assessing Officer, on the contrary, was a case where assessment order was passed after making detailed enquiries (b) That 263 proceedings cannot be initiated on a mere change of opinion (c) That where two views are possible and Assessing Officer has adopted one of the views, 263 does not lie (d) If two reasonable constructions of a taxing provision are possible, the construction that favours the assessee has to be adopted (e) Section 263 of the Income tax Act 1961 cannot be invoked for making fishing and roving enquiries or for reverific....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... at the time of hearing of the present appeal. 4. We next note that the learned CIT(IT)'s section 263 revision direction holding the Assessing Officer's assessment dated 30.12.2019; as erroneous one causing prejudice to the interest of the Revenue; reads as under: "5. Issues: The issues are primarily two-fold. First, whether the assessment order passed by the AO without calling for relevant details and making necessary verification/inquiry would require revision under section 263 of the Act being erroneous and prejudicial to the interest of revenue. Second, whether the income from offshore supplies are taxable in India under the provisions of Income-tax Act. Third, whether the income component of offshore supplies and services would not be taxable in India under Article 7 of the India- China DTAA based on functional analysis. Fourth, profit of the assessee company in India being engaged in turnkey power project contract is required to be determined as per special taxation regime under Section 44BBB of Income-tax Act. Fifth, whether there is an artificial splitting up of a single composite contract into offshore and onshore fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eding under section 263 of the Act in the instant case. The exercise of establishing the fact that there is a change in opinion is basically a two-fold process. There should an opinion by the AO at the first place with regard to taxability of income. In order to make this opinion, the AO need to gather all the relevant facts leading to assessment of the income. As discussed in aforesaid paragraphs, the AO has failed to call for relevant material facts and made necessary investigations/enquiry to ascertain their veracity during the course of assessment proceeding. Therefore, there could not be any opinion in this case. Accordingly, the change of opinion argument would not survive. Second, the change of opinion argument is only restricted to facts and does not extend to application of law position. This has been decided by several courts. Reliance may be placed on the decisions in the case of Vijay Kiran Hotels (P) Ltd. Vs CIT (P&H) reported in 196 ITR 336, Simran Farms Ltd. Vs CIT (MP) 300 ITR 270, Intellinet Technologies India Pvt. Ltd Vs ITO 5 ITR 96 (Bangalore, ITAT). The courts have held that the argument about two views are possible at the time of passing the assessment order, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r. It has been held that the Commissioner of Income-tax can also regards an assessment order to the erroneous where, on the circumstances of the case, he finds that it has been made in undue haste and without proper enquiry. It is incumbent on the Assessing Officer to investigate the facts stated I a return particularly when the circumstances suggest that the enquiry would have been necessary or prudent. Hence the word "erroneous" would also include a failure to make such an enquiry. Thus, assessment of private company without inquiring into genuineness and creditworthiness of shareholders would attract revision by the Commissioner. In such a case the order is erroneous, not because there is anything wrong with it if all facts stated in it are assumed to be correct but because it has been passed without making an enquiry or investigation which should have been made. Even where facts are disclosed by the assessee, the order of assessment can be revised if the correct provisions of law are not examined. The Mumbai Tribunal in the case of Arvee International Vs. Addl. CIT reported in 101 ITD 495 held that an order is erroneous if it is based on an incorrect facts or an incorrect appli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the point no.3.1 of the bid document is reproduced as under: "3.1 The scope of work covered under the Fibre Optic Cabling Package Package- IC shall include in following parts: The scope of this part shall include planning, design, engineering, supply, supervision of erection/installation of OPGW cable& associated items and documentation of: (a) 24 fibre OPGW cable: (b) 48 fibre OPGW cable (c) All associated hardware, fittings and accessories (Tension assembly. Suspension assembly, Vibration dampers, Reinforcing rods, Earthing clamps, Downlead clamps etc.) required for installation of OPGW cable. (d) Supply of Joint box for above OPGW cable (e) Fibre Optic approach cable including associated installation material (f) Fibre Optic Distribution Panels (FODP) For existing transmission lines, the Contractor has to carry out the detailed survey and collect the required data for preparation of drum schedule. The drum schedule shall be finalised based upon tower schedule / survey reports provided by POWERGRID. In case tower schedule is not available, standard drum schedule shall be used. Contractor may visit ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce, loading and transportation to site of all the goods and any other services specified in the Contract documents for port handling and custom clearance of supplies from abroad, inland transit insurance, loading and transportation to site, Supervision of Installation of all the goods and any other services specified in the Bidding Documents for Fibre Optic Cabling Package (Package-1C) associated with Jharkhand consultancy. 7.5 Therefore, it can be seen that the single composite contract is artificially segregated into two components: onshore and offshore. The artificial splitting is clear from the following paragraph from the contract: "Notwithstanding the award of work under two separate Contracts in the aforesaid manner, the Supplier shall be overall responsible to ensure the execution of both the Contracts to achieve successful completion and taking over of the Goods by the Purchaser as per the requirements stipulated in the respective Contract Documents. It is expressly understood and agreed by the Supplier that any default or breach under the Second Contract' shall automatically be deemed as a default or breach of this 'First Contract' also and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Contract Price USD 16,72,096.89 INR 30,24,400 *As discussed at para 1.2 of Attachment-D (PBD), the Indian Agent Commission (IAC) is USD1.0 The above contract price of SDGI is exclusive of Custom Duty and inclusive of all MA.COM FIT other Taxes & Duties except Octroi/Entry Tax. Taxes and Duties be additionally payable by POWERGRID as per the provisions of the Bidding Documents." The final contract price constitutes the contract price of both onshore and offshore. This is to be received by the assessee company. Has this been separate contracts, the prices for contracts would be separate. Moreover, the contractee is the same person that is the assessee company. 7.7 In view of the aforesaid discussions, it is established beyond doubt that the assessee company has been awarded a single composite contract in respect of a turnkey power project by Power Grid Corporations Ltd. This was artificially segregated in to two separate agreements: offshore and onshore subsequently with a primary intention to avoid payment of taxes. It may be pertinent to note here that the OECD in its final report on Action plan 6 relating to artif....
X X X X Extracts X X X X
X X X X Extracts X X X X
....indirectly, to the earning of income by the non-resident in his business. (c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of 'business connection' in India. The Andhra Pradesh High Court in the case of GVK Industries Ltd (228 ITR 564) held that to constitute a business activity there must be continuity of activity or operation of the non-resident with the Indian party. 8.3.1.2 Undoubtedly, the assessee company because of its contractual engagement for a power project in India, constitutes a business connection in India as there exists a real and intimate relation of the non-resident assessee in India. 8.3.1.3 Under Tax Treaty framework, taxing right is allocated to the contracting states based on categorization/characterization of income: Active or passive income. Generally, regarding passive income such as dividend, interest, Royalty and FTS or capital gains, both the contracting states have right to tax such income. However, in respect of active income (business income), the sou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a power project contract in India. Therefore, the assessee's activity in the form of a contract constitutes "business connection" in India. Hence, there is no need for establishing business connection on transactional basis. 8.3.2 "Permanent Establishment" threshold - 8.3.2.1 The PE threshold rule is a physical presence-based threshold. Under India-China DTAA Article 5 defines the expression "Permanent Establishment" (PE). The relevant portion is as under: "1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop: (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a warehouse in relation to a person providing storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the profits of an enterprise of a Contracting State shall be taxable only in that resident state. The source state may tax business profits if the enterprise carries on business in the Source State through a Permanent Establishment situated therein. The determination of profits of the PE would be the profit it might be expected to make if it were a 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. This shall be treated as profits directly attributable to that PE. In a simpler term, the arm's length profit would be the profit of the PE that is attributable to the PE. 8.4.3 However, Source state's taxing right is limited to only the profit that is attributable to that permanent establishment, whether directly or indirectly. The indirect attribution of profit is basically referring to attribution of additional profit by application of "force of attraction" clause. 8.5 Legal position under Indian DTAAs: whether FAR analysis is approved 8.5.1 Arm's Length principle is the basis of allocation ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... DTAAS. The relevant portion is reproduced as under: 1. India reserves the right to use the previous version of Article 7, i.e., the version that was included in the Model Tax Convention immediately before the 2010 update, subject to its positions on that previous version (see annex below). It does not agree with the approach to the attribution of profits to permanent establishments in general that is reflected in the revised Articles in its Commentary and in the consequential changes to the Commentary on other Aritcles..." 8.5.4 The UN Expert committee also rejected the functionally separate entity approach for attribution of PE's profit as it was in direct conflict with provision of Article 7(3) of UN model and Indian DTAAs which provides for computation mechanism and also with force of attraction clause. For instance under India- China DTAA, the sub-article 4 of Article 7 provides as under: "4. In determining the profits of a permanent establishment, there shall be allowed as deduction expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er project, the arm's length profit to be attributed to this PE would be what the independent party carrying out turnkey power project would earn irrespective of where the function is performed, asset used or risk assumed. 8.6.3 The wording used in DTAAs as "is limited to only the profit that is attributable to that permanent establishment" and section 9(1)(a) of the Income-tax Act as only such part of the income as is reasonably attributable to the operations carried out in India" refers to determination of the arm's length profit in respect of the business activities carried on by the non-resident in India only. For instance, the non-resident may be a full-fledged manufacturer of pharmaceutical goods. In India, it only distributes the goods through its PE. The relevant business activities in this case is distribution of goods. Therefore, while attributing profit to PE in India, the arm's length profit relating to distribution activities of pharmaceutical goods is to be adopted only. On the other hand, under functionally separate entity approach, the profit of PE would be based on functions carried out in India. In this case, the PE's activity is marketing....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ccruing or arising to any non-resident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment to income-tax may be calculated: i. at such percentage of the turnover so accruing or arising as the [Assessing Officer] may consider to be reasonable, or ii. on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business, or iii. in such other manner as the [Assessing Officer] may deem suitable." 9.3 The legal mandate is that the profit attributable to the PE should be the Arm's length profit. The Rule 10 of the Income-tax Rule that deals with the mechanism for determination of PE's profit intends to replicate the desired result th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dary legislation as a general principle, business profit in turnkey power projects would be carried out under section 44BBB of the Act. 10. Summary: 1. Non-resident's business profit for its activities in India is required to be determined by following Arm's length principle in view of Article 7 of Indian DTAAS Including India-China DTAA. 2. Attribution of profit to PE under Article 7 and Income allocation under Article 9 between the Associated Enterprises Indian DTAAs, even though follow Arm's length principle, are not identical. 3. There is no legal basis to attribute profit to PE under Article 7 of Indian DTAAs on the basis of function performed, assets used or risk assumed. 4. FAR analysis is the basis for allocation of income only with regard to AEs under the scope of Article 9 of Indian DTAAS. 5. The rejection of functionally separate entity approach (FAR analysis) by India is because of the fact that Indian DTAAs also adopts force of attraction wherein profit from sales and provisions of services are also captured in the tax base. 6. Indian DTAAs adopt formulary apportionment for determination of arm&....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s connection in India. The income from offshore component of supplies or services is taxable in India as the assessee's activity in the instant case creates a business connection in India because of its contractual engagement in India. 11.3 Further it is ascertained that the profit attributable to the PE in India would be carried out under Arms' length principle. Accordingly, the arm's length profit of the PE in the instant case would be what the independent party carrying out a similar contractual work (turnkey power project in India) under similar conditions would earn. While carrying out this exercise, transfer pricing analysis on the basis of functions, assets and risk is not to be considered as India it has no legal basis under the Indian DTAAs and also under the provisions of Income-tax Act. FAR analysis to allocate income is adopted only for transactions between related parties (AEs) falling under the scope of Article 9 of India DTAAS. As far as profit attribution to PE is concerned, Article 7 comes into play. India adopts relevant business entity approach to attribute arm's length profit to PE instead of a functionally separate entity approach based....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e under section 9(1)(i) of the Act provides that all that all income accruing or arising, whether directly or indirectly, through or from any business connection in India is chargeable to tax. Therefore, the source rule of non-resident under Income-tax act has provided to capture income of extra-territorial nature one a business connection is established. In this case, the assessee has a business connection in India. In order to negate the effect of the said ration for other passive income, an Explanation below sub-section (2) to Section 9 of the Income-tax Act was inserted vide Finance Act, 2010. As per the said provision, the place of rendering of services is not important. The services shall be taxed where the services are utilized. Under the EPC contracts, therefore, offshore services are held to be taxable in India as the services are utilized in the project situated in India. Even though, offshore supplies are not expressly covered by the said provision, there is no dispute that the supplies are also utilized in the project situated India. In case of EPC contracts the supplies and services are inseparable. Therefore, segregation of supplies from services for tax purposes is u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t (as is contended) the earlier court misconstrued a statute, or ignored a rule of construction, is no ground for impugning the authority of the precedent. A precedent on the construction of a statute is as much binding as any other, and the fact that it was mistaken in its reasoning does not destroy its binding force." 11.6 It is pertinent to mention here that the Hon'ble Supreme Court in the case of Distributors (Baroda) Ltd. Vs CIT [1985] 155 ITR 120/22 Taxman 49 (SC) has dealt similar issue. The Hon'ble Apex Court held that "to perpetuate an error is no heroism. To rectify it is the compulsion of the judicial conscience." This ratio of the Hon'ble Supreme Court has been applied in several cases. Therefore, following the decision of a legally wrong order under the pretext of uniformity and legal consistency is undesirable. The Hon'ble Apex Court in the case of Union of India & Anr VsRaghubir Singh (178 ITR 548) had reiterated the same ratio. It held that, if the previous decision is plainly erroneous, there is a duty of the Court to review it and not perpetuate the mistake i.e. a vital point was not considered or when an relevant statutory provision had ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf. This section overrides all independent sections under chapter IV dealing with profits and gains from business or profession" from section 28 to 44AA in case of conflict. 11.9 The tax base for the purposes of Section 44BBB of the Act is all amount that is paid or payable, in or outside India, and amount received or deemed to be received in India by the non-resident company. By reference to " whether in or out of India, the section ascertains that all payment: onshore and offshore would form the tax base. By reference to paid or payable, it intends to apply mercantile system and cash system of accounting in determining the tax base. Once the tax base is determined, the arms' length profit would be equal to ten per cent of the aggregate of the amounts specified in subsection (1). 11.9.1 Accordingly, there exists no ambiguity that the offshore component of income would be taken in computing the tax base for the purpose of determining profit. In the instant case, the r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uipments which form subject matter of learned CIT(IT)'s revision direction and held as taxable in India under the presumptive scheme of section 44BBB of the Act. The above statutory provision admittedly provides that such an income is taxable in case the former entity concerned is engaged in the business of civil construction or erection of plant and machinery or testing or commissioning thereof, in connection with a "turnkey" power project, as the case may be. 6. It is therefore evident that de-hors the technical aspect of the Assessing Officer's alleged failure in not having carried out detailed inquiries, the key question which arises before us herein is regarding applicability of section 44BBB in the assessee's case herein. We wish to clarify here that the assessee and its twin "PSU" clients had separately arrived at offshore supplies and "onshore" services/supervision agreement involving varying sums wherein contract award (at page 110 of the paper-book II) had duly provided for all works of offshore contract to be performed outside India including design, engineering, testing or commissioning etc. Our attention is further invited to page 151 in paper-book II indicating the....