Income Tax Appellate Tribunal - Delhi
National Petroleum Construction Co., ... vs Assessee on 18 November, 2011
ITA NO. 5763/Del/2011
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "G", NEW DELHI
BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER
AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
I.T.A. No. 5763/Del/2011
A.Y. : 2008-09
M/s National Petroleum vs. Addl. Director of Income Tax,
Construction Company, Circle-2(1), (Intl. Taxation),
C/o Pricewaterhouse Coopers Pvt. Drum Shaped Building,
Ltd., Building NO. 10, Floor 17, New Delhi - 110 002
Tower-C, DLF Cyber City,
Gurgaon - 122002
(PAN: AAACN7799J)
(Appellant ) (Respondent )
Assessee by : Sh. C.S. Agarwal, Sr. Adv., Sh.
Pawan Kumar, Sh. Nitin Vaid, Sh.
Sandeep Nagpal & Sh. Anuj
Kansal, Adv.
Department by : Sh. Ashwani Kumar Mahajan, Sr.
D.R.
ORDER
PER SHAMIM YAHYA: AM This appeal by the Assessee is directed against the order of the Assessing Officer dated 18.11.2011 pertaining to assessment year 2008-09 passed under section 143(3)/144 of the I.T. Act, 1961.
2. The grounds raised read as under:-
1. That on the facts and circumstances of the case and in law, the impugned order passed under section 143(3) read with 144C of the Income-tax Act, 1961 ("the Act") is based upon assumptions, imaginations, whims and fancies, conjectures, surmises, preconceived notions and incorrect application of law and therefore liable to be quashed.
2. That on the facts and circumstances of the case and in law, the Learned Additional Director of Income-tax/ Deputy 1 ITA NO. 5763/Del/2011 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/ confirming the action of the Ld. AO, that the appellant is a tax resident of the United Aram Emirates ('UAE') and hence its income should be computed in accordance with the provisions of the Double Taxation Avoidance Agreement ('the Treaty'/ 'the DTAA') entered between India and UAE and only so much of the income as is attributable to the purported construction Permanent Establishment ('PE') in India could alone be taxed.
3.3 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 to ignore the consistent method of offering revenues followed by the appellant which was evolved by the assessing officer in initial assessment year i.e. AY 1997-98 and applied in subsequent assessment years.
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 the appellant has a fixed place PE in India under 2 ITA NO. 5763/Del/2011 Article 5 of the DTAA in the form of project office ('PO') in India.
4.1 On the facts and in the circumstances of the case and in law, the Ld. AO erred in ignoring the submissions of the appellant, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, that no business activity whatsoever are being undertaken by the project office in India and it (project office) is only used as communication channel and was set up in order to comply with contractual and exchange control requirements.
4.2 That the Ld. AO grossly erred in ignoring the law, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, that a PO in order to be constituted as PE as per Article 5(2)(C) of the treaty, the PO must fulfill the basic conditions set out in para 1 of Article 5 of the treaty i.e. it must be used for the purpose of business activities in India.
4.3 On the facts and in the circumstances of the case and in law, the Ld. AO erred in ignoring the facts and the DRP has further erred in upholding/ confirming the action of the Ld. AO, that the project office was manned by a few people who are mere graduates and not capable to undertake or assist others in undertaking installation activities in India.
4.4 That 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 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 3 ITA NO. 5763/Del/2011 (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 erred in ignoring the fact and legal position, and the DRP has further erred in upholding confirming tr. action of the Ld. AO, that if at all there could be a PE of the appellant in India, it could only be construction/assembly PE as per Article 5(2)(h)of the treaty as per the specific provisions of Article 5(2)(h) which override the general provisions of Article 5(1) of the treaty, subject to fulfillment of the duration test of 9 months which is not satisfied i appellant's case.
7. On the facts and in the circumstances of the case and in law, the Ld. AO erred i proposing, and the DRP has further erred in upholding confirming the action of the Ld.AO, that the appellant has a dependent agent PE in India in the form of M/s Arcadia Shipping Limited ('Arcadia') without appreciating the fact that Arcadia was a independent consultant, and not an agent of the appellant, and also that contracts awarded by ONGC were under the International competitive biddings which cannot be negotiated, secured, concluded by any person.
7.1 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, that Arcadia is providing similar and other services to many other companies and is earning substantial revenues from such other companies and hence cannot be treated as dependent agent.
7.2 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, that Arcadia is being remunerated at arm's length remuneration by the appellant and hence no further sum can be attributed to such alleged PE in India.
8. On the facts and in the circumstances of the case and in law, the Ld. AO erred in holding, and the DRP has further 4 ITA NO. 5763/Del/2011 erred in upholding/ confirming the action of the Ld. AO, that contract is a composite turnkey contract not a divisible contract.
8.1 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 the appellant during the course of hearing has misrepresented that there is outside and inside India bifurcation of the contract.
8.2 On the facts and in the circumstances of the case and in law, the Ld. AO erred in relying, and the 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 upholding confirming the action of the Ld. AO, that the title in the material /offshore supplies was transferred in India leading to taxability of entire contracts' revenues in India.
9.1 On the facts and in the circumstances of the case and in law, the Ld. AO erred in misinterpreting the contracts clauses and also erred in ignoring the intention of the parties to the contract, and the DRP has further erred in upholding confirming the action of the Ld. AO, that 5 ITA NO. 5763/Del/2011 constructive delivery of the fabricated platforms was made in Abu Dhabi though physical handing over of the platforms was done in India.
9.2 That without prejudice and in the alternative, on the facts and in the circumstances of the case and in law, the Ld. AO and the DRP failed to comprehend that even assuming that the appellant had delivered the platform in India (but constructed by it outside India), the same could not lead to taxability in India of income in respect of operations carried out in Abu Dhabi as per Article 7(1) of the Treaty.
10. 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 the entire profits from the work under the contract's arise in India and are liable to tax in India.
10.1 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 tax the entire outside India revenues by ignoring the attribution principles in accordance with Article 7(1) of the Treaty, which provide taxability of only as much income as is attributable to PE in India.
10.2 On the facts and in the circumstances of the case in law, the Assessing Officer erred in ignoring, and the DRP has further erred in upholding/confirming the action of the Assessing Officer, the principles of taxation laid down by the Hon'ble Apex Court reported in 291 ITR 482 in respect of turnkey contract where different parts of the contract are to be carried out in different tax jurisdictions leading to taxability of only revenues attributable to part of the contract performed in India.
10.3 On the facts and in the circumstances of the case and in law, the Ld. AO and the DRP failed to appreciate that (having regard to the facts and circumstances that it could not be disputed, indeed 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.
6ITA NO. 5763/Del/2011 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 has further erred in upholding/ confirming the action of the Ld. AO, in not applying the principles of attribution of income based on Arm's Length Principles (i.e. Function, asset and risk analysis of activities carried out in India) as per Article 7(2) of the treaty and the profit attribution study filed by the appellant in respect of 4WPP Contract with ONGC.
10.6 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 bifurcation of contract price in the contracts (agreed and accepted by ONGC, a Government undertaking) between activities carried out in India and operations carried out in Abu Dhabi while determining profits attributable to alleged PE of the appellant in India.
10.7 On the facts and in the circumstances of the case and in law, the Ld. AO and the DRP failed to appreciate the dictum of Hon'ble Apex Court in the case of Hyundai Heavy Industries Co. Ltd. reported in 291 ITR 482 and Mumbai Tribunal in the case of Roxon Oy : 103 TTJ 891 that even if it is assumed that offshore supply of fabricated platform forms an integral part of the installation activities, nothing out of offshore supply could tax in India so long as billing for installation work is made directly to the customer (in the instant case, billing is made directly to ONGC).
7ITA NO. 5763/Del/2011
11. 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 the provisions of section 44BB of the Act are not applicable to the appellant by ignoring the Apex Court judgment in the case of Hyundai Heavy Industries Co. Ltd. reported in 291 ITR 482 where installation of fabricated platform was held to be covered under section 44BB of the Act.
12. On the facts and in the circumstances of the case and in law, the Ld. AO erred in mechanically proposing in different part of the draft assessment order, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, that contract receipts are Fees for Technical Services 'CFTS') without placing any basis thereof whatsoever and despite the fact that there is no FTS clause in the India-UAE treaty and also, Explanation 2 to section 9(1)(vii) specifically excludes 'consideration for construction, assembly and 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.
8ITA NO. 5763/Del/2011 13.3 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 submissions of the appellant filed (on a without prejudice basis) on December 30, 2010 highlighting mean profit margin of 8.03% earned by some functionally compared companies.
13.4 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 expenses claimed by the appellant under article 7(3) of the treaty in its return of income in respect of which taxes have been withheld by the appellant, without giving opportunity to the appellant to justify the claim of expenses.
14. 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 tax reimbursement of actual insurance cost made by ONGC under the terms of the contract by ignoring the Judgement of Hon'ble Apex Court in the case of Emron Global Exploration and Production.
15. 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 tax amounts withheld by ONGC due to contract adjustments without giving any opportunity to the appellant to explain its case and justify the non-taxability.
16. 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 charge interest under Section 234B of the Act.
16.1 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 levy the interest u/s 234B without appreciating the fact that the entire income of the appellant, being a non resident, is subject to tax deduction under section 195 of the Act and hence provisions of section 234B of the Act are not applicable.
9ITA NO. 5763/Del/2011 16.2 On the facts and in the circumstances of the case and in law, the Ld. AO erred in levying the interest u/s 234B of the Act while computing the total demand of Rs.166,04,94,579 without having specific directions/ recording the satisfaction in the assessment order.
17. 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 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 of appeals are independent of, and without prejudice to each other.
That the appellant craves leave to add, alter, amend or withdraw all or any grounds herein or add any further grounds as may be considered necessary either before or during the hearing of these grounds.
3. At the outset, ld. Counsel of the assessee submitted that tribunal has already adjudicated the assessee's appeal for A.Y. 2007-08. He 10 ITA NO. 5763/Del/2011 further submitted that the issues involved in the present appeal and those involved in the appeal for assessment year 2007-08 are similar. However, he submitted that in the said order there are mistakes committed by the Tribunal. He submitted that an application for rectification of mistakes in the said case has already been filed. However, he submitted that the outcome of the misc. application in this case need not be awaited and adjudication for assessment year 2008-09 be done.
4. Ld. Departmental Representative on the other hand submitted that there is no change in the facts and circumstances of the case. The Tribunal has already passed an order for assessment year 2007-
08. Since the facts are identical, the said order should be followed.
5. We have carefully considered the submissions and perused the records. We find that in this case the issues involved are identical to that involved in assessment year 2007-08. The tribunal after considering the issues in that case has held as under:-
"10. Whether the assessee has PE in India.
11. We find that Assessing Officer has observed that the main thrust of the argument of the assessee is that it was not having any PE in India before the work of fabrication got completed and the fabricated material was imported in India. The installation PE was having the limited task of installation and commissioning of the project. Hence, it is the assessee's claim was no part of profits in respect of off shore supplies can be brought to tax in India. Assessing Officer further noted that assessee had a project office in Mumbai since 1990, but the same was claimed to have been opened at the instruction of ONGC, because it was a 11 ITA NO. 5763/Del/2011 mandatory requirement for the execution of the contract. Assessing Officer opined that the crucial fact is that the assessee has an office in India which is a project office and therefore, clearly as per the Treaty between India and UAE, the assessee has a P.E. in India. Assessing Officer 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 contract. Further, Assessing Officer observed that right from the stage of submission of tender document to the date of kick off 12 ITA NO. 5763/Del/2011 meeting when the technical work commences, Mumbai office and Arcadia were actively involved in the process. These can not be held to be a mere preparatory and auxiliary activities as contended by assessee. Marketing is a core business function and it can not be termed as auxiliary activity. The contract between the a ssessee and Arcadia Shipping Ltd. itself says that Arcadia will provide assistance in obtaining works and active representation, promotion and support of the principal's activities in India and assistance in obtaining services and facilities in India. Thus, Assessing Officer held that it cannot be said that assessee has no P.E. in existence other than the Project Office. The Assessing Officer opined that assessee has a project office for its project in India and also the dependent agent M/s Arcadia. Further, assessee was found to be having a PE in terms of article 5(2)(h) of Indo UAE Treaty i.e. construction and installation PE. Assessing Officer further observed that it was immaterial that the assessee has one single PE for all the business functions or different PE's for different functions. Assessing Officer further observed that project office was not only involved in installation and commissioning but that was only a part of the business operation. Assessing Officer opined that the other items of work were also executed by the assessee in India through one agency or the other. The pre engineering surveys and designing etc. were also done by the Project office which operated through fixed place of business in India. The surveys and designing were also done by persons located in 13 ITA NO. 5763/Del/2011 India. The assessee has undertaken detailed pre- engineering surveys which was the first step after the contract was awarded and the Project Manager had requested for N.E.D. passes for their employees to execute that work. Assessing Officer further observed that the PE of the assessee by way of office for the project also last for more than 9 months. He referred to the date of contract and the completion /hand over of the project and observed that project lasted for more than the period stipulated in the DTAA. Hence, he treated the assessee has a PE within the meaning of treaty.
Assessee has claimed that assessee has a project office since 1997 in 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 14 ITA NO. 5763/Del/2011 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 submitted that M/s Arcadia is independent from the assessee legally and economically because Arcadia was acting in the normal course of its business and receiving an arm's length remuneration directly from ONGC. Hence, it has been claimed that M/s Arcadia cannot be held to be a dependent agent as per Article 5(4) of the DTAA. In fact, neither it has authority to conclude or negotiate contracts on behalf of the appellant, nor, it habitually secures orders for appellant because appellant is dealing with ONGC which is a public sector undertaking awarding contracts under the International Competitive Bids only and not based on negotiations.
11.1 Upon careful consideration, we find that The assessee itself had shown the Project Office as its PE in India in earlier years as well as in the year under consideration. The assessee has changed its stand that it has no PE in the form of Mumbai Project office during the course of assessment proceedings. Further, assessee has in its letter to RBI stated that the Mumbai Office is its Project Office for the project undertaken with ONGC. The plea of the assessee is that this was done only to comply with the statutory requirement and that the Mumbai office had no role to play in the execution of the present contract. Assessing Officer 15 ITA NO. 5763/Del/2011 and DRP has given a finding that letter written to the RBI establishes beyond doubt that the Project Office was set up to undertake the project and not to undertake ancillary and auxiliary activity. As per the definition of permanent establishment in the treaty between India and UAE, the Project Office is a PE unless it is involved in ancillary and auxiliary activity. The assessee has not produced any evidence, to stake its claim in the exclusionary clause of the Treaty's provision. In fact, the Project Office has been approved by RBI to undertake the entire project. Before submitting the bid, the assessee has undertaken pre-bid survey of the site. It is important to note that the bid cannot be submitted unless the site is surveyed. The Assessing Officer and DRP had given a finding that assessee had got pre-bid survey conducted through the Project Office which is directly connected with the ONGC project. During the period of negotiation of the contract, employees of assessee company attended the meeting with ONGC. This was a kick off meeting and each and every detail was discussed about the project. 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 16 ITA NO. 5763/Del/2011 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 correspondence indicate M/s Arcadia is an agent. It is further noted from the documents obtained by the Assessing Officer that in the application to the ministry of Home Affairs the address of employees of NPCC was given as ARCADIA Shipping. From the perusal of the documents related to pre-bid meeting gathered by the AO from ONCG, it is noted that the employees of ARCADIA were attending pre-bid conferences and other meetings on behalf of NPCC. We further find considerable cogency in the Assessing Officer's arguments that M/s Arcadia Shipping is wholly and exclusively for work of NPCC, which is a precondition for dependent agent permanent establishment. The AO has supported his argument with some documentary evidence. The Assessing Officer and DRP have also referred to para of 17 ITA NO. 5763/Del/2011 the contract between NPCC and ARCADIA. In these documents assessee has categorically been referred to as the principal which automatically implies a principal agent relationship with the person who is authorized to act wholly and exclusively on behalf of the Principal which in this case is Arcadia Shipping. Further, it has been pointed out by the Assessing Officer that in the kick-off meeting dated 16.12.2005, Mr M.N. Shah of ARCADIA attended the meeting on behalf of NPCC. Also ARCADIA received tender documents as agent of NPCC, as per letter dated July 16, 2005. These activities are core business activities. The contract between NPCC and ARCADIA and the minutes of the meeting reflecting ARCADIA's presence in core business meetings, show that ARCADIA was engaged in hard core business development activity for NPCC in India and was not merely assisting in collecting of information as claimed by the assessee. In the background of aforesaid discussion, we hold that ARCADIA Shipping Limited a Dependent agent PE.
11.3 The Assessing Officer observed that assessee also has PE in terms of Article 5(2)(h) of Indo UAE Treaty i.e. construction and installation PE. The Assessing Officer further observed assessee has wrongly advanced claim in earlier years that its PE in India was only an installation PE and therefore it fell within the meaning of para 3 of article
5. We find that Assessing Officer has also held installation / construction PE for the following reasons:-18
ITA NO. 5763/Del/2011
i) Contract was awarded in November, 2005 and completed in April, 2007 which is a period of more than 2 years.
ii) Assessee 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 erred when it had 19 ITA NO. 5763/Del/2011 been observed by them that the contract was entered in November, 2005 and completed in April, 2007 and further, the project site was as its disposal from the very beginning since the contract was awarded and the assessee undertook the survey activity. The assessee has claimed that activities of the assessee in India in respect of the project lasted only 4½ months.
11.5 Ld. Departmental Representative submitted that it is the claim of the assessee that installation activity continued for a period of less than 9 months, therefore, there is no installation PE in India. In this regard, assessee has calculated the period starting from date of entry into India of barges. As per Article 5 of the relevant DTAA, it has been mentioned that PE includes (h) a building site or construction or assembly project or supervisory activities in connection therewith but only where such site project or activity continues for a period of more than nine months. Ld. Departmental Representative has referred to OECD Commentary in this regard and has claimed as per the Commentary of the OECD it is clear that duration for installation PE has to be considered from the date when the contractor establishes office for the purpose. Here, in this case project office has been established vide letter dated 24.01.2006. Further, the commentary says that if the contractor sub-contract parts of the Project to somebody else, the periods spent by the sub-contractor must be considered as being time spent by the main contractor itself. In the present case, the assessee has sub-contracted 20 ITA NO. 5763/Del/2011 pre-engineering and pre-construction surveys. So the assessee started working for the contract with establishment of project office and pre-engineering/pre- construction surveys. Therefore, Ld. Departmental Representative contended that duration of installation PE has to be counted since the establishment of office itself in India which exceeds more than 9 months period prescribed under the article of DTAA.
11.6 We have carefully considered the submissions, we find that assessee's plea is that PE existed only after barges landed in India is not correct. We agree with the contention that PE existed since the notification of award as the site was available to the assessee since then, for surveys at various stages of work progress. We agree with the Revenue's contention that assessee already had 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, 21 ITA NO. 5763/Del/2011 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 till the completed project is handed over to the ONGC. Assessing Officer noted that the assessee has been mainly relying upon the schedule of milestone payments stipulated in the agreement where value of each item of work is indicated, the currency in which the payment is to be made is also indicated and the rate of payment is equally stipulated. Assessing Officer found that as clarified by ONGC these milestone payments are in the nature of 'provisional progressive payments' pending completion of the whole work. Assessing Officer further observed that the clause relating to insurance, payment of custom duty, re- import in the case of loss / damage etc. only reinforce the view. Assessing Officer further observed that there is no sale of any material. The ownership of the material got transferred only on the completion of the work which was also in India. The deployment of men and material was in India. The import was made by the assessee on its own account and the customs duty was also paid by them on 22 ITA NO. 5763/Del/2011 their own account. The entire transportation was done at their own risk. Assessing Officer observed that it is evident that work relating to fabrication and procurement of material was very much a part of the contract for execution of work assigned by ONGC. Assessing Officer further observed that the assessee company had undertaken the contract in India on turnkey basis and executed the contract in India. The title in goods as well as the constructed platform is transferred once the Indian company accepts the project as complete. Assessing Officer further observed that this is a clear cut case of a works contract executed in India where the assessee has also obligation of fabricating and procuring certain material to be used in the works. Assessing Officer further observed that assessee is wrong in stating that the works contract could be divided into two parts, one for the supply of the material and the other for installation and commissioning. He observed that the contract in question is neither divisible nor can consideration for any activity under the contract is liable for separate treatment.
14. In this regard, Ld. Departmental Representative has submitted that the basic contention of the assessee is that the contract with ONGC is divisible into two parts, (i) outside India activity consisting of designing, fabrication and supply of platform, (ii) inside 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 23 ITA NO. 5763/Del/2011 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 decision in the case of Vodafone, contract has to be read as a whole and purpose for which the contract is entered into by the parties is to be ascertained from the term of the contract.
15. The assessee in this regard has submitted that the subject contract may be construed as an umbrella contract, yet it is a divisible contract, since under the same contract, the consideration for various activities have been stated separately. Furthermore, there is a complete bifurcation of the activities to be carried out under the contract with consideration for each specific activity. Assessee submitted 24 ITA NO. 5763/Del/2011 that though the relevant contract with ONGC, though fashioned as turnkey but not a turnkey contract in spirit and substance. It has been further submitted that on study of the said contract, it would be appreciated that ONGC may terminate the contract, as per clause 8.2, 7.5.5 and or 7.4, and in the event of termination of the contract, assessee shall be eligible for the following amounts:-
(a) Contract price properly attributable to the parts of the Works executed by the Contractor in accordance with the Contract as at the date of Termination.
(b) The costs incurred by the Contractor in protecting the Works pursuant to paragraph (a).
(c) Reasonable demobilization charges as may be ascertained by the Company if contractor has Constructional Plant and Equipment at offshore site at the time the termination becomes effective.
(d) Cost of any materials or equipment already purchased and/or ordered by the Contractor, the delivery of which the Contractor must accept, such materials or equipment will become property of the Company upon payment by the Company of the actual Cost of the materials or equipment.
(e) All reasonable cost of cancelling/terminating any subcontracts.
(f) All reasonable cost on cancellation or orders for material, etc., which the Contractor may have committed for the project 25 ITA NO. 5763/Del/2011 From the aforesaid, it has been stated that it is the discretion of ONGC to take only the platform erected by the assessee in Abu Dhabi as it has a right to terminate on its own volition without having installation thereof. The assessee, in such an event, will not be entitled for any amount towards installation and commissioning but will only be entitled for the contract price properly attributable to the erection of fabricated platform, actually carried out by 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 26 ITA NO. 5763/Del/2011 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 submitted that it is significant to note that before sailing the platform after fabrication, the same is certified by ONGC through it's approved surveyor. Furthermore, as per the insurance policy though to be taken by the assessee but ONGC is the joint beneficiary in the policy. Furthermore, insurance policy also exhibits that, in case there is a loss suffered in the course of transportation the payee of the insured amount would be ONGC. Hence, it was submitted that so far as the activities of construction of plat forms is concerned, though physically the same is sailed through barges, but the same is completed in and is constructively handed over to ONGC in Abu Dhabi. The submissions of the assessee therefore is that ONGC became defacto owner since the assessee company erected the platform only to be delivered to ONGC in respect of which it is also entitled to receive separate consideration from ONGC. It is thus submitted that under the contract, there are different phases of execution of contract. The first phase was completed when it was fabricated, erected and brought to India through its barges to be physically supplied. The same was physically supplied although the same was constructively supplied by it in Abu 27 ITA NO. 5763/Del/2011 Dhabi. It has further been submitted that income attributable to the alleged 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 alleged PE. It has been claimed by the assessee that even assuming that the assessee had a PE, the same cannot be in respect of erecting and fabricating the platform in Abu Dhabi but could only be in respect of installation and commissioning activities. In this regard assessee has relied upon Article 7(1) & 7(2) of India UAE DTAA.
Article 7 reads as under:-
"1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business a aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each 28 ITA NO. 5763/Del/2011 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 appellant and the revenue, the assessee, in the interest of revenue, agreed to be taxed for the relevant assessment year as in the past. It has further been submitted that the facts and circumstances as prevalent in preceding years have remain unchanged and, 29 ITA NO. 5763/Del/2011 therefore applying the rule of consistency, the income declared may be assessed and, no more. It has further been submitted that a decision rendered by the ITAT, Delhi on 31st May, 2011 in respect of the Hyundai Heavy Industries Company Limited [ITA No, 2086 & 2087/Del/2009] also supports the assessee's submissions that even if it is assumed that without admitting that the assessee has PE in India, it could only be held to be taxable only to the extent profits attributable to PE in India.
17. Upon careful consideration, we are of the considered opinion that the contract may be construed as an umbrella contract yet is a divisible contract since under the same contract, the consideration for various activities have been stated separately. Further a perusal of the terms and conditions of the contract reveal that it is the discretion of ONGC to take only the platform erected by the assessee in Abu Dhabi, as it has a right to terminate on its own volition, without having installation thereof. The assessee in such an event, will not be entitled for any amount towards installation and commissioning but will be entitled for the contract price properly attributable to the erection of fabricated platform actually carried out by the assessee in accordance with the contract i.e. the pricing schedule (Schedule C) and milestone payment formula (Schedule E) given in the contract. Further it has been mentioned that if the assessee contractor likewise abandons the contract at any stage, it will not be bound to refund of any amount so 30 ITA NO. 5763/Del/2011 received from by it from ONGC in respect of the work already executed by it.
17.1 We agree with the contention that the segregation of the contract revenues into offshore and onshore activities was made and agreed upon between the contracting parties i.e. ONGC and the assessee at the stage of awarding the subject contracts and not after awarding the contract. The contract has been awarded to the assessee by ONGC under International Competitive Bidding (ICB) process based on the contract revenues and its bifurcation. Furthermore, the total contract consideration under the contract has been earmarked 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:-
31ITA NO. 5763/Del/2011
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 activity carried out in Abu Dhabi and India.
iii) The invoices issued by the appellant to
ONGC specifically mention the
consideration for outside India activity and inside India activity in accordance with the pricing schedule. Such invoices have been duly accepted / confirmed by ONGC and payment made thereon.
iv) The Annexure-E of the contracts provides milestone payment formula based on which ONGC has made payment to NPCC from time to time.
v) Insurance cover taken by NPCC on the
fabricated platform. The insurance cover
explicitly shows that material procurement and fabrication work has been carried out in Abu Dhabi.
vi) The Surveyors report issued at the time of
load out of fabricated platform at Abu
32
ITA NO. 5763/Del/2011
Dhabi port. These reports amply
demonstrate that NPCC had fabricated the platforms in its Abu Dhabi yard.
17.3 We further find that turnkey contracts means where a contractor has to complete the contract as a whole i.e. from the stage of procurement of material, erection, construction, fabrication and supply thereof. However, where the terms of the contract provide that either party can withdraw or abandon the contract, the company or the contractor has not to make entire payments under the terms of the contract or refund the amounts received, which will accrue only on the completion of the contract, cannot be regarded as a turnkey contract. Hence, we agree with the contention that even if the contract is a turnkey contract, it does not lead to taxability of the entire contract revenues in India but only as much of the profits as is attributable to the PE India can be taxed in India.
17.4 We find considerable cogency in the assessee's submission that the assessee fabricated the platform in Abu Dhabi and after fabrication the said platform was brought to India with the help of its barges and then the possession is handed over to ONGC. In this regard, it is worth noting that before sailing the platform after fabrication, the same is certified by ONGC through it's approved surveyor. Furthermore, as per the insurance policy though to be taken by the assessee, but ONGC is the joint beneficiary. Further, insurance policy also exhibits 33 ITA NO. 5763/Del/2011 that, in case there is a loss suffered in the course of transportation the payee of the insured amount would be ONGC. Thus, we find that under the contract there are different phases of execution of contract. The first phase 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 34 ITA NO. 5763/Del/2011 cannot be said to be attributable to the permanent establishment."
"In cases such as this, where different severable parts of the composite contract is performed in different places, the principle of apportionment can be applied, to determine which jurisdiction can tax that particular transaction. This principle helps determine, where the territorial jurisdiction of a particular State lies, to determine its capacity to tax an event. Applying it to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations"
In Hyundai Heavy Industries Company Limited (ITA No 2290 & 2291 of DEL/2002 (lTAT) read with ITA No 42 of 2007 (Utt. HC) following the Supreme Court judgement reported in 291 ITR 482 following was held:-
"It has been noted by the Hon'ble Apex Court that the installation PE 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 ONGC and therefore, the profits on 35 ITA NO. 5763/Del/2011 such supplies were fabricated platforms cannot be said to be said to be attributable to P.E. 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 para 1 of Article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the PE would have earned if it was wholly independent of the PE and therefore, even if, it is assumed that supplies were necessary for the purpose of installation (activity of PE in India) and even is it assumed that the supplies were integral part, still no part of profit on such supplies can be attributed to the independent PE unless it is established by the department that the supplies were not at Arm's Length Price and this is the basis on which it was held by the Hon'ble Apex Court that the profits that accrued to the Korean GE for the Korean operations were not taxable in India. In the present two years also, nothing has been brought on record to show and establish that supplies were not at Arm's length price. Hence, even after considering this argument of the Ld. DR of the revenue that PE was in existence through out these two years, we are of the considered opinion that as per this judgement of Hon'ble Apex Court in the case of the assessee 36 ITA NO. 5763/Del/2011 itself for the assessment year 1987-88 and 1988- 89, no profit is taxable 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."37
ITA NO. 5763/Del/2011 The aforesaid proposition has also been followed by the Mumbai Tribunal Roxon OY Vs DCIT (103 TTJ 891 (Mum).
"As far as art. 7(1)(a) is concerned, the profits attributable to the supplies under the turnkey contract can be brought to tax in India only when we are to hold that the profits attributable to PE will include the profits on supplies under the turnkey contract. In our humble understanding, such an interpretation will be incorrect, for several reasons. Firstly, a profit earned by an enterprise on supplies which are to be used in a construction or installation PE for such supplies, cannot be said to be attributable to the PE because PE comes into existence after the transaction giving rise to supplies materialized. The installation or construction PE, in such a case, is a stage posterior to the conclusion of transaction giving rise to the supplies. Such an installation or construction P E can come into existence after the contract for turnkey project, of which supplies are integral part, is concluded. "
Further more the Hon'ble Supreme Court had also affirmed the above proposition in the case of Ishikawajma-Harima Heavy Industries Ltd. vs DIT reported in 288 ITR408 38 ITA NO. 5763/Del/2011 " .... The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one so as to make the assessee to pay tax in India. The taxable events in execution of a contract may arise at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones. Supply obligation is distinct and separate from service obligation. Price for each of the component of the contract is separate. Similarly offshore supply and offshore services have separately been dealt with. Prices in each of the segment are also different.
The very fact that in the contract, the supply segment and service segment have been specified in different parts of the contract is a pointer to show that the liability of the assessee there under would also be different.
The contract indisputably was executed in India. By entering into a contact in India, although parts thereof will have to be carried out outside India would not make the entire income derived by the contractor to be taxable in India"
39ITA NO. 5763/Del/2011 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 simply declared the taxable income on the basis of above referred formula.
17.7 It has been submitted that the facts and circumstances, as prevalent in the preceding years, have remained unchanged and therefore, applying the rule of consistency, the income declared may be assessed and no more. In this regard, assessee has placed reliance upon 40 ITA NO. 5763/Del/2011 catena of case laws. We find that the above said contention is not sustainable.
17.8 We agree with the contention of the Ld. Departmental Representative that any formula or any agreement whatsoever arrived at between the assessee and department which is against the provision of law is not enforceable under the law. The Revenue is not bound to follow and perpetuate the mistake which has been committed in the past. In this regard, the case of Distributor (Baroda) Pvt. Ltd., 155 ITR 120 (SC) may be referred where Hon'ble Apex Court has held that there is no heroism in perpetuating a mistake
18. Applicability of provision of Section 44BB 19 We find that assessee has argued that provisions of section 44BB are applicable to the inside India activity of the contract. The relevant provision is as under:-
"(1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a non-
resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, of extraction or production of, mineral oils, a sum equal to ten per cent. of the aggregate of the amounts 41 ITA NO. 5763/Del/2011 specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession":
Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections."
19.1 From the above, it is evident that section 44BB
applies in two situations,
(i) when non-resident is engaged in the
business of providing services or facilities in connection with, OR
(ii) supplying plant and machinery on hire used or to be used, in the prospecting for, of extraction or production of, mineral oils.
In our opinion, the assessee is not in the business of 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 42 ITA NO. 5763/Del/2011 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 be made liable to pay tax u/s. 234B of the Act. In this regard, assessee has also placed reliance upon the several case laws:-
- D.I.T. vs. General Electric International Inc. 323 ITR st 46 (SC)
- National Petroleum Construction Company vs. JCIT, Spl. Range Dehradun in I.T.A. No. 1772/Del/2001
- C.I.T. vs. Sedco Forex International Drilling Co. Ltd.
264 ITR 320 (Uttaranchal) 43 ITA NO. 5763/Del/2011
- Judgement of Delhi High Court in the case of D.I.t. vs. Jacabs Civil Inc. in I.T.A. No. 491 of 2008.
- D.I.T. vs. NGC Network Asia LLC 313 ITR 187 (Bom).
- Motorola Inc. vs. DCIT 95 ITD 269 (Del.)
- D.I.T. vs. NGC Network Asia LLC 32 ITR 46.
- Xelo Pty Ltd. vs. DDIT 32 SOT 338 (Mum).
22. We have carefully considered the submissions and perused the records. We find that section 234B of the Act is attracted where in any financial year an assessee is liable to pay advance tax under sec. 208 and he has failed to pay such tax or where the advance tax paid by the assessee under sec. 210 is less than 90% of the assessed tax. Similarly, section 234C is attracted wherein in any financial year, an assessee is liable to pay advance tax under section 208 and he failed to pay such tax or the advance tax paid by the assessee and its current income on or before the specified dates is less than the specified percentage of the tax due on returned income. In this regard, assessee's contention is that its entire income is subject to tax at source under section 195 of the Act. The payer has also taken certificate from the Assessing Officer under section. 195(2) of the Act and thus, there was no liability to pay the advance tax under section 208 of the Act and in the absence of any liability, Sec. 234B and 234C could not be applied. The above is also supported by the case laws referred by the ld. Counsel of the assessee hereinabove.
44ITA NO. 5763/Del/2011 As regards interest under section 234D, no arguments were advanced, it will be consequential.
23. In the result, the appeal filed by the assessee is partly allowed."
6. Since the facts in the present case are identical to those adjudicated by the tribunal in assessee's own case cited above, we do not find any need to deviate from the above said order as it is not the case that the same order has been reversed from the higher forum. Accordingly, based on the above order, we hold as under:-
i) Whether the assessee has PE in India The assessee's project office in India was assessee's PE. M/s Arcadia Shipping Ltd. is a dependent agent PE. Assessee has installation PE in India.
ii) Whether the contract is divisible? Tax liability of the assessee Even if the contract is a turnkey contract, it does not lead to taxability of the entire contract revenues in India but only as much of the profits as is attributable to the PE India can be taxed in India. The erection and fabrication cannot be 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. The profits attributable to the supplies i.e. erection and fabrication of the platforms cannot be brought to tax in India.
45ITA NO. 5763/Del/2011
iii) Applicability of provision of Section 44BB The assessee's business activity does not fall within the meaning of section 44BB.
iv) Interest u/s. 234B, 234C & 234D There was no liability to pay advance under section 208 of the Act and in the absence of any liability, Section 234B and 234C cannot be applied. As regards the interest u/s. 234D no arguments were advanced, which will be consequential.
7. In the result, the appeal filed by the Assessee is partly allowed.
Order pronounced in the open court on 31/1/2013.
Sd/-
Sd/- Sd/-
Sd/-
[I.C. SUDHIR]
SUDHIR] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date 31/1/2013
"SRBHATNAGAR"
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY
By Order,
Assistant Registrar,
ITAT, Delhi Benches
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