Income Tax Appellate Tribunal - Delhi
Hyundai Heavy Industries Co. Ltd,, ... vs Assessee on 18 March, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : C : NEW DELHI
BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER
AND
SHRI A.K. GARODIA, ACCOUNTANT MEMBER
ITA No.2086 & 2087/Del/2009
Assessment Year : 2005-06 & 2006-07
Hyundai Heavy Industries Co. Vs. DIT,
Ltd., International Taxation-II,
301, 3rd Floor, Sarjan Plaza, New Delhi.
100, Annie Besant Road,
Worli,
Mumbai - 400 018.
PAN : AAACH5727Q
(Appellant) (Respondent)
Assessee by : Shri S.D. Kapila, Shri O.P. Sapra, Shri
Jeetan Nagpal & Ms Charu Kapoor,
Advocates
Revenue by : Shri Girish Dave, Spl. Counsel for the
Department.
ORDER
PER I.P. BANSAL, JUDICIAL MEMBER
Both these appeals are filed by the assessee. They are directed against the two separate orders dated 18th March, 2009 passed by the Director of Income-tax, International Taxation-II, New Delhi (hereinafter referred to as DIT) for assessment year 2005-06 and 2006-07 under the provisions of Section 263 of Income-tax Act, 1961 (the Act). Grounds of appeal for both the years read as under:-
2 ITA Nos.2086 & 2087/Del/2009 ITA No.2086/Del/20091. That the assessment order dated 9.3.2007 passed by the AO u/s 143(3) for the A.Y. 2005-06 by which the income of the appellant had been computed by proper application of mind could not be held to be erroneous and prejudicial to the interest of revenue and consequently, the impugned order u/s 263 as passed by the ld. DI (International Taxation) - II, New Delhi deserves to be cancelled.
2. That the impugned order dated 18/3/09 as passed by Director of Income Tax (International Taxation)-II, New Delhi holding that the assessment order passed by the AO u/s 143(3) of the I.T. Act for the A.Y. 2005-06 was erroneous and prejudicial to the interest of revenue is arbitrary, unjust and illegal on various factual and legal grounds including the following:
a) There was no failure on the part of the AO to examine various aspects before passing the assessment order u/s 143(3) dated 9.3.2007.
b) Various observations made by the ld. DI in the impugned order as passed u/s 263 are either incorrect or are legally untenable particularly the following:
(i) The ld. DI is incorrect in holding in para 7.1 at page 15 of the impugned order that Article 7(3) does not provide for further deeming the income @ 10% of the profits computed and that there was not basis and justification for the same.
(ii) The AO had allowed the liability of the expenses on which TDS was made as per provisions of the Act and the observations of the ld. DI in para 7.2 at pages 15-16 of the impugned order are incorrect and untenable.
(iii) The ld. DI is incorrect in observing vide para 7.3 at page 16 of the impugned order that the AO had not taxed the income vis-a-vis the receipts of Rs. 129,45,194,688/- for outside India operations.
The fact remains that the ld. AO after due application of mind and having regard to the Supreme Court's decision in Ishikawajhima Harima's case and the Uttarakhand High Court's decision in the assessee's own case arrived at a conscious decision that the outside India revenues were not taxable in India.
(iv) The ld. DI is wrong in holding in para 7.4 at page 16-17 that the method adopted in the past for computing the taxable income of the appellant was wrong and that there was good and sufficient 3 ITA Nos.2086 & 2087/Del/2009 was wrong and that there was good and sufficient reason to change the same.
(v) The AO having computed the income of the appellant after proper application of mind on all the aspects of the case, no justification subsisted on the part of the ld. DI vide para 7.5 to direct the AO to verify the expenses of Rs. 966,45,41,565/-
which had been duly verified by the AO before passing the impugned assessment order.
(vi) Further, the issue of estimation of income for inside India activities is subject matter of appeal before the Commissioner of Income Tax, Appeals 1, Dehradun which shows that the AO had applied his mind on this issue also and therefore, form this angle also the DIT had no jurisdiction on same.
(vii) The ld. DI is incorrect in holding vide para 7.6 that various case laws cited by the appellant were distinguishable on facts without showing as to how they were distinguishable.
c) The assessment order having been passed after making proper enquiries, reliance placed by DI on case laws quoted, portions of which had also been extracted by him at pages 18 & 19 were misplaced.
All those cases had been decided with reference to the facts prevailing in each case. If legal proposition as laid down by the Supreme Court in 243 ITR 83 is followed, the impugned order as passed u/s 263 is clearly illegal and void abinitio.
d) Various observations made by the ld. DI in the impugned order u/s 263 are either incorrect or are legally untenable.
3. That the appellant reserves its right to add, amend/modify the grounds of appeal.
ITA No.2087/Del/20091. That the assessment order dated 05.10.2007 passed by the AO u/s 143(3) for the A.Y. 2006-07 by which the income of the appellant had been computed by proper application of mind could not be held to be erroneous and prejudicial to the interest of revenue and consequently, the impugned order u/s 263 as passed by the ld. Director of Income Tax (International Taxation) - II, (hereinafter referred to as DI) New Delhi deserves to be cancelled.
2. That the impugned order dated 18/3/09 as passed by 4 ITA Nos.2086 & 2087/Del/2009 Director of Income Tax (International Taxation)-II, New Delhi holding that the assessment order passed by the AO u/s 143(3) of the I.T. Act for the A.Y. 2005-06 was erroneous and prejudicial to the interest of revenue is arbitrary, unjust and illegal on various factual and legal grounds including the following:
a) There was no failure on the part of the AO to examine various aspects before passing the assessment order u/s 143(3) dated 05.10.2007.
b) Various observations made by the ld. DI in the impugned order as passed u/s 263 are either incorrect or are legally untenable particularly the following:
(i) The ld. DI is incorrect in holding in para 7.1 at page 14 of the impugned order that Article 7(3) does not provide for further deeming the income @ 10% of the profits computed and that there was not basis and justification for the same.
(ii) The AO had allowed the liability of the expenses on which TDS was made as per provisions of the Act and the observations of the ld. DI in para 7.2 at pages 15 of the impugned order are incorrect and untenable.
(iii) The ld. DI is incorrect in observing vide para 7.3 at page 16 of the impugned order that the AO had not taxed the income vis-a-vis the receipts of Rs. 778,46,65,202/- for outside India operations.
The fact remains that the ld. AO after due application of mind and having regard to the Supreme Court's decision in Ishikawajhima Harima's case and the Uttarakhand High Court's decision in the assessee's own case arrived at a conscious decision that the outside India revenues were not taxable in India.
(iv) The ld. DI is wrong in holding in para 7.4 at page 16-17 that the method adopted in the past for computing the taxable income of the appellant was wrong and that there was good and sufficient reason to change the same.
(v) The AO having computed the income of the appellant after proper application of mind on all the aspects of the case, no justification subsisted on the part of the ld. DI vide para 7.5 to direct the AO to verify the expenses of Rs. 1,584,986,806/- which had been duly verified by the AO before passing the impugned assessment order.
(viii) Further, the issue of estimation of income for inside India activities is subject matter of appeal before the Commissioner of Income Tax, Appeals 1, 5 ITA Nos.2086 & 2087/Del/2009 Dehradun which shows that the AO had applied his mind on this issue also and therefore, form this angle also the DIT had no jurisdiction on same.
(ix) The ld. DI is incorrect in holding vide para 7.6 that various case laws cited by the appellant were distinguishable on facts without showing as to how they were distinguishable.
c) The assessment order having been passed after making proper enquiries, reliance placed by DI on case laws quoted, portions of which had also been extracted by him at pages 18 & 19 were misplaced. All those cases had been decided with reference to the facts prevailing in each case. If legal proposition as laid down by the Supreme Court in 243 ITR 83 is followed, the impugned order as passed u/s 263 is clearly illegal and void abinitio.
d) Various observations made by the ld. DI in the impugned order u/s 263 are either incorrect or are legally untenable.
3. That the appellant reserves its right to add, amend/modify the grounds of appeal.
2. These appeals were argued together by the learned representatives of both the sides. The issues being identical, for the sake of convenience both these appeals are being disposed of by this consolidated order.
3. For assessment year 2005-06, the order is stated to have been passed on 9th March, 2007 under the provisions of Section 143 (3) of the Act whereby the income of the assessee was assessed at ` 39,09,21,550/- against the returned loss of ` 928,05,64,624/-. The return of income was filed on 31st October, 2005 which was initially processed and later on assessment proceedings were initiated vide issue of notice u/s 143 (2) dated 21st August, 2006. The Assessing Officer noticed that in the year under consideration the assessee carried out five contracts out of which none was new and, these were executed partly in the preceding year. It was noticed that in respect of 6 ITA Nos.2086 & 2087/Del/2009 HAL project the assessee did not claim PE status. The position has been summarized by the Assessing Officer in the table which is also being reproduced for the sake of convenience:-
Sl.No. Name of the Contract Revenues for Revenues Revenues for project with inside India for inside outside India Operations in India operations in (Rs.) operation (Rs.) i/r of which assessee claims no PE in India in (Rs.)
1. Mumbai High ONGC 26,91,93,078 16,09,80,679 Bassein Pipeline Project (MHB)
2. Mumbai South ONGC 224,24,60,505 509,94,17,763 Process Platform Project (MSP)
3. Mumbai Uran ONGC 293,06,47,269 763,57,28,505 Turnkline (MUT)
4. GMR (O&M) GMR 8,00,44,015 4,90,67,741 Vasavi
5. HAL Hindustan 4,70,835 Aeronauti-
cal TOTAL 5,52,23,44,867 470,835- 129,45,194,688
4. Thus, the Assessing Officer noticed that inside India revenue of the assessee were ` 552,28,15,702/- and outside India revenues were ` 1294,51,94,688/-. The Assessing Officer noticed that the assessee company has claimed loss in respect of MHB and MUT projects in the computation of income filed by it and in para 3 of the notes annexed with the said computation, it is claimed that "based on stand adopted by tax department in the past years, company reserves its right to reduce sub-contractor's cost, salary and other items from revenues and then apply deemed profit rate." The Assessing Officer also noticed that as per arguments of Ld. AR of the assessee during the course of proceedings is that the computation of income done by the assessee company is based on the Indo-Korean Tax Treaty read with the 7 ITA Nos.2086 & 2087/Del/2009 provisions of the Section 90 of the Income-tax Act, 1961 (the Act). Reference was made to Article 7 (3) of Double Taxation Avoidance Agreement (DTAA) as the deduction on account of expenses is claimed by the company in determining profits attributable to the PE. In the argument submitted, it was stated that the Assessing Officer has allowed the expenses towards sub-contractor's cost, salary, etc. as taken from gross revenues and deemed profit rate was applied thereafter in earlier years and, therefore, if all expenses are not allowed, at least the expenses whereon tax is deducted should be allowed for the year under consideration. On these submissions of the assessee, the Assessing Officer vide para 5 has observed that the assessee's claim of all the expenses is not tenable as the assessee did not produce relevant books of account and vouchers for verification. The assessee did not produce the books of account as the same were stated to be maintained by head office of the company in Korea in Korean language. The books of Indian projects were not produced for verification and, in these circumstances, the Assessing Officer has arrived at a conclusion that it will be impossible to hold that books of account are properly maintained and income can be deduced therefrom. As the relevant record supporting the entries was not complete and correct, the book results were not accepted by the Assessing Officer. So as it relates to the contention of the assessee that the cost relating to sub-contractors, salary and wages, etc. on which TDS has been made should be reduced from the gross revenue, the Assessing Officer has observed that such claim of the assessee cannot be outrightly rejected. Keeping in view the past practice adopted by the department and also keeping in view Article 7(5) of the DTAA, he required the assessee company to furnish the details of expenses on which the TDS was deducted. The details of such expenses were furnished showing the total of expenses at ` 171,19,73,490/-. The Assessing Officer verified those details from TDS 8 ITA Nos.2086 & 2087/Del/2009 returns and found that out of the said sum total payments of ` 23,27,780/- were made to non-resident sub-contractors in which the work was got done outside India by the respective foreign sub- contractor and he further found that a sum of ` 3,13,07,703/- could not be verified. He required the assessee to explain the same and the authorized representative of the assessee explained that those payments though are made to non-resident sub-contractors, but, those payments are in respect of work inside India carried out by the assessee. The Assessing Officer denied such claim of the assessee on the ground of similar stand taken by the department in preceding year. The Assessing Officer referred to para 3 of Article 7 of DTAA which provide that in determining the profits of PE, the expenses incurred for the purpose of PE including executive and general administration expenses shall be allowed. He, therefore, observed that the expenses which are verifiable from the respective TDS forms are worked out to ` 167,83,37,937/- and are to be allowed in view of Article 7(3) read with para 5 of the DTAA and he reproduced both these paras in his order. Taking recourse to para No.3 and 4 of Article 7 and the note annexed with the statement of income filed with the return of income and on the basis of stand adopted by the department in the past years, ld. Assessing Officer has concluded that the assessee has no objection to be assessed on the lines similar to those adopted in the past years i.e., by estimating the profit rate at 10% of the total revenue relating to inside India activity as reduced by the expenses verifiable from TDS annual forms and such computation will be as provided in para 5 of Article 7 of DTAA with Korea.
5. He further rejected the claim of the assessee regarding non- taxability of the revenue amounting to ` 4,70,835/- relating to contract of HAL Project for the reasons mentioned by the Assessing Officer in para 6 and 6.1 and the said sum was added to the income of the 9 ITA Nos.2086 & 2087/Del/2009 assessee. It is in this manner, the assessment came to be passed by taking the gross receipt from inside India working out at ` 552,28,15,702/- (` 5,52,23,44,867 + 4,70,835/-). He has reduced therefrom sub-contractors' cost and salary expenditure verified from TDS returns amounting to ` 167,83,37,937/- and balance inside revenue was taken at ` 384,44,77,765/- and 10% thereof was taken as assessable income from inside revenue amounting to ` 38,44,47,776/- and the taxable income of the assessee has been taken at ` 39,09,21,550/- which include interest from Citi Bank and interest received from Income-tax Department at ` 9,07,647/- and ` 55,02,127/- respectively. It is against aforementioned order passed by ld. Assessing Officer, the CIT has exercised jurisdiction u/s 263 of the Act. Copy of show cause notice issued by DIT is placed at page 164 of the paper book. In the show cause notice which is dated 12th February, 2009, it is observed by ld. DIT that the order passed by the Assessing Officer appears to be erroneous and so far as it is prejudicial to the interest of the revenue for the following reasons:-
i) During the assessment year, you have claimed the benefits of DTAA between India & South Korea and filed the accounts. The A.O. computed the profit after disallowing expenses on which the Tax was not deducted at source. The A.O. should have applied the tax rate of 41.82% on the balance. The A.O. erroneously applied a 10% deemed profit on income already computed and the then applied the tax rate. The order passed by the A.O. without application of mind or without making proper inquiries into the facts and without considering statutory regulations applicable thereon.
ii) During the year an amount of Rs.129,45,194,688 has been shown as outside India revenue. Since, there is no dispute that the assessee has PE in India, this revenue should have been brought to tax in India as per the provisions of DTAA between India & South Korea. The A.O. in the assessment order has not discussed the taxability of the above amount and has not brought to tax the above revenue. Thus, the claims of these expenses have been allowed. The order passed by the A.O. without application of mind or without making proper inquiries 10 ITA Nos.2086 & 2087/Del/2009 into the facts and without considering statutory regulations applicable thereon."
6. In response to the aforementioned show cause notice, the assessee submitted reply dated 13th March, 2009 copy of which is placed at pages 165 to 197 of the paper book.
7. In the written submissions, it was pointed out that the assessee has opted to be assessed under the DTAA and option is vested with the assessee to be assessed as such. Reference was made to the provisions of Section 90(2) of the Act. Reference was also made to the decision of Hon'ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan 263 ITR 706 wherein it has been held that the provisions of DTAA would prevail over the provisions of the Act. Reference was also made to the office note appended to the assessment order wherein the Assessing Officer had stated that assessment is completed as per Article 7 of DTAA with Korea estimating the profit rate at 10% on the total revenue relating to inside India activities as reduced by expenses verifiable from annual returns of TDS and this will be in line with the stand taken by the department in preceding assessment years as provided in para 5 of Article 7 of DTAA. Reference was also made to the observations of the Assessing Officer contained in para 4 and 5 of the assessment order to show that the Assessing Officer had elaborately discussed all the issues and thereafter a conscious decision was taken by the Assessing Officer which was in line with the stand taken by the department in preceding years. Referring to the computation made by the Assessing Officer in the assessment order while arriving at gross receipts from inside India revenue after reducing the sub-contractors' cost and salary expenditure at ` 384,44,77,765/-, it was submitted that in fact the Assessing Officer has disallowed 73.64% of the expenses claimed by the assessee on the amount of expenditure made by it where the assessee was not under an obligation to deduct TDS although those 11 ITA Nos.2086 & 2087/Del/2009 expenses were incurred for executing the inside India activities of the contract. Such calculation was demonstrated by the tables A to D which are reproduced below:-
TABLE A : Expenses claimed by the Assessee in return of income. Gross revenues for inside India work A 552,23,44,867 Net Loss as per return of income B (928,05,64,624) Expenses as claimed by the Assessee C [A-B] 1,480,29,09,491 TABLE B : Bifurcation of expenses done by the A.O. Total expenses as claimed by the assessee A 1,480,29,09,491 Bifurcated by the A.O. into: B (928,05,64,624) Expenses on which TDS has been made and duly B 167,83,37,937 verified.
Expenses on which TDS is not required to be C [A-B] 1,312,45,71,554 made under law/otherwise not allowed by A.O. (eg. Material costs, insurance, etc.) TABLE C : Income attributed to the PE by the A.O. Gross revenues for inside India work 552,23,44,867 Add: Revenues from projects where the assessee 470,835 claims no PE Total revenues for inside India work A 552,28,15,702 Less: Expenses fully allowed on the basis of TDS B 167,83,37,937 returns Balance C[A-B] 384,44,77,765 In respect of the balance expenses stated in Table B para C above The expenses attributed to the PE in India by the D 346,00,29,989 A.O. Income attributable to the PE determined by the E[C-D] 38,44,47,776 A.O. TABLE D : Expenses disallowed by the A.O. Expenses on which TDS is not required to A 1,312,45,71,554 be made.
(eg. Material costs, insurance, etc.) (item C Table B above) Out of the above expenses allowed by the B 346,00,29,989 A.O. as attributable to the PE in India (item D in Table C above) Expenses disallowed by the A.O. C [A-B] 966,45,41,565 12 ITA Nos.2086 & 2087/Del/2009
8. Referring to the aforementioned tables, it was pointed out that the total claim of the assessee of such nature of expenses were 1312.45 crores, which pertains to material cost, insurance and other expenses on which there was no liability of the assessee to deduct tax at source. The Assessing Officer while computing the profit attributable to assessee's PE in India has allowed only expenses to the tune of ` 346 crores. In other words, only 26.36% of the said expenses were allowed and balance 73.64% disallowed. It was further submitted that if the action proposed in the show cause notice is taken, then, income of the assessee from inside India operation would be assessed at 384.44 crore as against 38.44 crore assessed by the Assessing Officer. It was submitted that without prejudice, even if for argument sake it was to be accepted though not admitted that the ld. Assessing Officer had erred in law in assessing the income at 38.44 crore under the DTAA, it is to be pointed out that had the assessee's income been computed u/s 44BB (1) of the Act by completely ignoring the provisions of DTAA, the total inside India income would not have exceeded 55.22 crores [being 10% of ` 552.23 crore (gross revenue)]. Thus, it was submitted that by no yardstick the assessee's income can exceed ` 55.22 crores.
9. It was submitted that the issue regarding taxability of the assessee's income u/s 44BB of the Act was examined by the Assessing Officer during the course of assessment proceedings and the assessee had submitted written submissions dated 1st March, 2007 which was considered before arriving at the conclusion that the said Section was not applicable to the facts of the case and the provisions of DTAA will apply. Reference was also made to past history of the income tax assessments in the case of the assessee. It was submitted that the assessee is being assessed in India since 1985 onwards and the assessee has invariably been filing its audited accounts with tax 13 ITA Nos.2086 & 2087/Del/2009 returns and in some years it has returned loss from inside India operation. For assessment 1990-91, the department and the assessee had agreed before the CIT (A) to a proposal that business profit for inside India operation would be taxed applying the deemed profit rate of 10% after allowing deductions for sub-contractors' cost and salary cost on which TDS has been deducted under Chapter XVIIB read with Section 40 of the Act and Article 7(3) of the Convention. It was submitted that such fact is found mentioned in CIT (A)'s order dated 19th April, 1995 for assessment year 1990-91 wherein the assessee had stated as under:-
"Without prejudice to the above, in order to buy peace and avoid litigation, we would agree to the taxation at the profit rate of 10% of our contractual receipts for the inside India operations as reduced by the sub contractors costs and the salary paid under Chapter VII-B of the IT Act, read with section 40 and article 7(3) of the Convention. In such a case we would not press for other expenses on marine cost, material, insurance, transportation, etc."
10. The remarks of the CIT (A) in the aforementioned appellate order at page 9 with regard to this issue were as under:-
"When the A.O was given a copy of this written submission and asked to give his comments on the same he stated before me, already recorded in the appeal file, that in view of this written submission the assessment order under consideration may be restored back to this file for being made denovo."
11. It was submitted that the rationale behind the acceptance of such formula is that the assessee has been incurring huge losses for inside India operation in several years which are also liable to be carried forward under Chapter VI to be set off against income in subsequent years and no tax will be levied. By adopting such formula, the assessee should pay tax every year since 10% of the gross contractual receipts as reduced by sub-contractors cost and salary cost were determined as income attributable to the PE. Therefore, even in the years of losses the department could recover tax. From 14 ITA Nos.2086 & 2087/Del/2009 assessee's point of view such method was acceptable since it resulted in avoiding litigation on such issue although it will, fasten a tax liability year after year. It was submitted that such procedure of assessment had become a convention which was being consistently followed from year to year for the last 16 years and reference was made to para 5 of Article 7 of DTAA which casts an obligation on the department to follow the method of attribution of the profits to PE year after year unless there is a reason on the contrary. Referring to para 4 and 5 of the assessment order, it was submitted that the Assessing Officer while adopting such formula was guided by past practice adopted by her predecessors for the purpose of computing profits attributable to assessee's PE in India. It was submitted that such formula was adopted for the first time by the department itself as the income of the assessee was being assessed under such formula in the last 16 years and all assessments are made u/s 143 (3) of the Act. It was submitted that though the principle of res judicata may not be applicable, but the rule of consistency has to be applied and reference was made to the following decisions:-
a) Radhasoami Satsang vs. CIT 193 ITR 321 (SC)
b) Taraben Ramanbhai Patel and Others v. ITO 215 ITR 323 (Guj)
c) CIT vs. Hindustan Motors Ltd. 192 ITR 619 (Cal)
d) Sardar Kehar Singh vs. CIT 195 ITR 769 (Cal)
e) Dhansiram Agarwalla vs. CIT 217 ITR 4 (Gau)
f) CIT v. Godavari Corporation Ltd. 156 ITR 835 (MP)
g) CIT v. ARG Securities Printers 264 ITR 276 (Del)
12. Reference was also made to the decision of Hon'ble Rajasthan High Court in the case of CIT vs. Girdharilal 258 ITR 331 (Raj.) wherein it was held that merely because the gross profit should have been estimated at a higher figure, could not be a ground for exercise of jurisdiction u/s 263.
15 ITA Nos.2086 & 2087/Del/200913. It was submitted that the power to estimate income is vested with the Assessing Officer and reference was made to the decision of Kerala High Court in the case of CIT vs. Nathekkattu Constructions 269 ITR 346 (Ker.). It was submitted that the Commissioner cannot initiate proceedings with a view to start fishing and rowing inquiries in matters or orders which are already concluded. It was submitted that the order passed by the Assessing Officer was neither erroneous nor prejudicial to the interest of the revenue, hence, the power u/s 263 should not be exercised. Reference was made to the decision of Hon'ble Gujarat High Court in the case of CIT vs. Advance Construction Company Pvt. Ltd. 275 ITR 30 (Guj)
14. Coming to the second aspect of the matter, which is regarding a sum of ` 1294,51,94,688/- in respect of outside India revenue, it was submitted that it cannot be said that there was no dispute on the issue that the assessee has a PE in India. It was submitted that the assessee has always disputed the existence of PE in India in respect of projects wherein the duration in India is less than 9 months stipulated in Article 5 (3) of DTAA although the department has consistently held that even in respect of such projects there is a PE in India. It was submitted that at the first appellate stage itself CIT (A) has held all along that office in Mumbai is not a PE and, therefore, where the duration of a project does not exceed nine months, there is no PE vis-a-vis such projects. It was submitted that in certain years the departmental appeals against CIT (A)'s order on the same issue were dismissed by ITAT also. Thus, it was submitted that the observation that there is no dispute on the issue of existence of PE in India is factually incorrect. It was submitted that for assessment years 1986-87 to 1888-89 the ITAT decision on the issue of PE in assessee's favour has been upheld by Uttaranchal High Court and by Hon'ble Supreme Court. While disposing the departmental SLP for those years, Hon'ble Supreme Court has only 16 ITA Nos.2086 & 2087/Del/2009 affirmed the ITAT's findings that PE did not exist in India in terms of Article 5(3) of DTAA i.e., the project duration was the criteria for determination of the PE in India. So as it relates to allegation that the Assessing Officer did not discuss about the taxability of outside India revenue in the assessment order, it was submitted that in para 2 of the assessment order the Assessing Officer herself has computed revenues for outside India operation. It was submitted that the reason for not bringing the sum to tax has been given by the Assessing Officer in the office note 2 appended to the assessment order which read as under:-
"The assessee has shown the following receipts from outside India operation which have not been offered to tax in its return of income stating that the revenues were received from activities performed outside India and therefore, revenues earned out of these activities are not attributable to the PE in India.
S.No. Name Company Revenue from
outside India
operation (USD)
1. GMR Vasavi Diesel GMR Vasavi 976,563
Generator (O&M)
2. MHB Project ONGC 3,583,466
3. MSP Project ONGC 113,081,126
4. MUT Project ONGC 173,237,671
The ld. AR of the assessee has relied upon the judgment of Hon'ble High Court of Uttaranchal in its own case as well as on the decision of Hon'ble Supreme Court in the case of Ishikawajima - Harima Heavy Industries Co. Ltd. reported in 288 ITR 408. The revenues earned by the assessee on the account of the procurement of material outside India is not brought to tax in view of the Hon'ble Supreme Court decision in the case of Ishikawajima-Harima Heavy Industries Co. Ltd. reported in 288 ITR 408 though the department has not accepted the decision of the Hon'ble Uttaranchal High Court regarding the taxability of outside India operation at NIL and has filed SLP before the Hon'ble Supreme Court. In case the Hon'ble Supreme Court decides to tax the outside India receipts in the case of the assessee action shall be taken as per law."
15. Referring to the above observations, it was submitted that this issue was clearly considered by the Assessing Officer and the 17 ITA Nos.2086 & 2087/Del/2009 Assessing Officer had applied his mind for arriving at a conclusion that the said receipt could not be brought to tax in view of the decision of the Hon'ble Supreme Court in the case of Ishikawajhima Harima Heavy Industries Company Ltd. 288 ITR 408 (UK) and also the decision of Uttarakhand High Court in the case of the assessee. The Assessing Officer was also in the knowledge that the department has filed SLP against the order of Hon'ble Uttarakhand High Court and in case the decision is received from Hon'ble Supreme Court to tax outside India receipts, then, action shall be taken as per law.
16. It was further submitted that the Assessing Officer had considered the issue relating to outside India revenue which is apparent from query No.7 given by the Assessing Officer to the assessee vide notice issued u/s 142 (1) dated 21st August, 2006 and the query of the Assessing Officer read as under:-
"To justify your claim that amounts received for outside India operations as mentioned in para 8 of notes to computation of income, are not liable to tax in India."
17. It was submitted that the assessee had filed detailed reply regarding non-taxability of outside India revenue at para 7 of the reply dated 31st August, 2006.
18. Further, it was submitted that the Assessing Officer further raised query regarding taxability of outside India revenue during the course of hearing on 20th February, 2007 as is evidenced from order sheet entry of the said date and the assessee's response was given vide para 9 of the reply dated 1st March, 2007 and the second reply dated 1st March, 2007. It was further submitted that vide reply dated 11th December, 2006 the assessee had submitted copies of all invoices for outside India revenue and the same were duly examined by the Assessing Officer and based on all these submissions the Assessing Officer was satisfied that no part of outside India revenue were 18 ITA Nos.2086 & 2087/Del/2009 attributable to the PE in India and, therefore, could not be brought to tax in India.
19. It was submitted that jurisdiction u/s 263 could not be invoked in a case the issue on which such powers are to be invoked was deliberated at length and was decided after the due application of mind. Reference in this regard was made to the decisions in the case of Infosys Technologies Ltd. vs. JCIT (2006) 286 ITR (AT) 211 (Bang.) and Dhruv N. Shah vs. DCIT (2005) 273 ITR (AT) 59 (Bom). It was submitted that in assessment year 2002-03, like in earlier years it was held that no part of outside India revenue could be taxed in India. In March, 2008, the department itself, while filing the second appeal in assessee's own case for assessment year 2002-03 did not contest the non-taxability of outside India revenue before ITAT and, thus, had evidently accepted the assessee's contention in the light of the Hon'ble Supreme Court decision. Adverting to the facts of the year under consideration, it was submitted that the assessee has been deriving income from five contracts as listed in the assessment order and this fact has also been acknowledged by learned Assessing Officer that no new contract was entered into by the assessee. In all the past years/subsequent years the department has attributed 1% of the outside India revenue to the PE in India and brought the same to tax in respect of all the referred projects and reference was made to the following table:-
Project name Outside India revenue in past
assessment years
MSP A.Y. 2004-05
A.Y. 2006-07
MUT A.Y. 2006-07
MHB A.Y. 2006-07
GMR (O&M) A.Y. 1999-00 onwards
19 ITA Nos.2086 & 2087/Del/2009
20. The ld. CIT (A) have repeatedly held that no part of outside India revenue in respect of above mentioned projects can be taxed in India and the same were excluded from the assessee's taxable income. Thus, the issue of taxability of even 1% of outside India revenue being attributable to PE for all the above mentioned projects did not find favour with the CIT (A) in past years. It was submitted that the Assessing Officer relying upon the Uttaranchal High Court decision in assessee's own case for the same year, has excluded outside India revenue from taxable income as stated in office note-2. It was submitted that on the issue of taxability of outside India revenue, the decisions of ITAT for the aforementioned years has been affirmed by Hon'ble Supreme Court in assessee's own case as reported in 291 ITR
482. It was submitted that the Apex Court has held that profit attributable to Korean operation of supply and fabrication of platform are not taxable in India. It was observed that as per provisions of Article 7 of the Tax Treaty only so much of the profits as are attributable to PE in India are taxable on the assumption that the PE is a separate and distinct entity. It is the act of setting out a PE which triggers the taxability of transactions in the source state and applying the aforementioned test, it was held that the profits earned by the foreign enterprise on the supply of fabricated platform could not be said to be attributable to its Indian PE as PE came into existence only after the platform was supplied. Thus, it was submitted that profit arising on supply of platform could not be attributed to Indian PE. It was further observed that even if it was to be assumed that supplies in Korea were necessary for the purpose of installation and further even if it was to be assumed that the supplies were an integral part of installation, no profit on supply can be attributed to the independent PE unless it is established that the supplies were not at arm's length. It was submitted that the Assessing Officer for holding that no part of outside India revenue was taxable has relied upon the decision of 20 ITA Nos.2086 & 2087/Del/2009 Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. wherein it was held that profits arising from offshore supply of equipments and offshore services by foreign companies are not taxable in India. It was submitted that in the impugned year also the following projects were all turnkey projects:-
i) Mumbai High Bassein Pipe Line Project (MHB).
ii) Mumbai South Proess Platform Project (MSP)
iii) Mumbai Uran Turnkline (MUT)
iv) GMR (O & M)
21. Therefore, the Assessing Officer was, as a matter of judicial discipline, bound to follow the decision of Hon'ble Uttarakhand High Court which had come at the time of finalizing the assessment for assessment year 2005-06 and reliance was placed on the decision in the case of General Electric International In. vs. ACIT (International Taxation) 287 ITR (AT) 43 (Mum) and the decision of Hon'ble Supreme Court in the case of CIT vs. G.M. Mittal Stainless Steel Pvt. Ltd. (2003) 263 ITR 255 (SC) wherein it was held that where the Assessing Officer followed the decision of jurisdictional High Court, there can be no basis for the interference of the assessment order being prejudicial to the interest of revenue. Reliance was also placed on the decisions in the case of CIT vs. Dharmodayam & Co. (2001) 248 ITR 816 (SC) and CIT vs. Sakthi Charities 244 ITR 226 (Mad).
22. So far as it relates to the applicability of Section 263, reliance was placed on the following decisions:-
i) CIT v. Ratlam Coal Ash Company 171 ITR 141 (MP)
ii) CIT v. Goyal Private Family Specific Trust 171 ITR 698 (All)
iii) CIT v. Gabriel India Ltd. 203 ITR 108 (Bom)
iv) CIT v. J.P. Goyal HUF 247 ITR 555 (Cal).
v) Hari Iron Trading Co. v. CIT 263 ITR 437 (P&H)
vi) Malabar Industrial Co. vs. CIT 243 ITR 83 (SC)
vii) CIT v. Max India Limited 268 ITR 128 (P&H)
21 ITA Nos.2086 & 2087/Del/2009
23. Thus, it was submitted that the powers u/s 263 could not be invoked on the issues stated in the show cause notice.
24. Ld. DIT, after considering all these written submissions of the assessee has concluded in para 7.1 that it is an undisputed fact that the assessee has opted for taxation as per the provisions of the tax treaty between Indian and Korea and due to this fact the Assessing Officer has not considered and decided the taxability of income of the assessee under the provisions of the Act. Ld. DIT referred to Article 7 which regulate business profit assessable under the DTAA. Referring to para 3 of Article 7, ld. DIT has observed that it provides that deduction of expenses which are incurred for the purpose of PE including executive and general administrative expenses, which are allowed under the provisions of domestic law of the contracting state in which the PE is situated. Therefore, according to ld. DIT, the Assessing Officer was required to allow the deduction for the expenses incurred by the assessee as per provisions of the Act and instead of doing so, the Assessing Officer has first deducted the expenses from the gross receipts and later on went on to deem the income @ 10% of the balance amount. According to Ld. DIT, para 3 of Article 7 does not provide for further deeming the income @ 10% of the profit computed and there was no basis or justification of the action of Assessing Officer for further deeming the income after the income is computed as per para 3 of article 7. Therefore, the order of the Assessing Officer is erroneous as well as prejudicial to the interest of the revenue.
Regarding expenses of Rs.167,83,37,937/- which have been allowed by the Assessing Officer, Ld. DIT has observed that the Assessing Officer has mentioned in the order that these include expenses incurred in India for earning inside revenue and verification was carried out from relevant TDS forms, however, the Assessing Officer has not verified the allowability of those expenses as per provisions of the Act, particularly 22 ITA Nos.2086 & 2087/Del/2009 the business purpose and absence of proper verification in this regard has made the assessment order erroneous and prejudicial to the interest of revenue.
25. Coming to the amount received by the assessee as revenue from outside India operation, amounting to ` 1294,51,94,688/-, he observed that these are regarding the projects with MHB, MSP, MUT and GMR (O&M) and with regard to those projects the assessee has also received revenue from inside India operation. Therefore, it is clear that the assessee had received a composite contract for the work to be performed in India and also related work from outside India. The Assessing Officer did not make inquiry regarding the nature and scope of the contracts, the reason for revenues for outside India operation, the nature of outside India operations, the duration of projects in India, the role of Mumbai office of the company in submitting the tenders, negotiation of contracts, the subsequent role of the PE and Mumbai office in earning the revenue from the alleged outside India operation. The Assessing Officer did not gather the facts before passing the order. The Assessing Officer did not inquire into the applicability of the decision of Hon'ble Supreme Court in assessee's own case reported as 291 ITR 481 for the year under consideration and due to these facts and position of law, the order passed by the Assessing Officer for not taxing the income on account of outside India revenues of ` 1294,51,94,688/- is erroneous and prejudicial to the interest of revenue.
26. On the observations of the Assessing Officer placing reliance upon para 5 of article 7 of the treaty and also the contention of the assessee upon that provision stating that the department is accepting the method of computation of income from assessment year 1990-91 onwards, ld. DIT observed that the claim of the assessee is not acceptable for the simple reason that para 5 of Article 7 refers to 23 ITA Nos.2086 & 2087/Del/2009 deduction of profits by the same method year by year and it does not justify the adoption of a wrong method which has been adopted in earlier years. According to Ld. DIT, para 5 of Article 7 does not provide for adoption of a wrong method of computation of income year after year. He also referred to corresponding para of OECD Model Tax Convention which is paragraph 6 and commentary there on read as under:-
"This paragraph is intended to lay down clearly that a method of allocation one used should not be changed merely because in a particular year some other method produces more favourable results. One of the purposes of a double taxation convention is to give an enterprise of a Contracting State some degree of certainty about the tax treatment that will be accorded to its permanent establishment in the other Contracting State as well as to the part of it in its home State which is dealing with the permanent establishment; for this reason, paragraph 6 gives an assurance of continuous and consistent tax treatment."
27. Referring to the aforementioned commentary, it is observed by the ld. DIT that the aforementioned para does not provide sanctity to the continuation of a wrong method and such method does not get support from anywhere. According to Ld. DIT, even if a method has been adopted in earlier years and there are good and sufficient reasons to change the same, the same can be changed if that method for computation of income is not as per provisions of the tax treaty. It is in this manner, ld. DIT has rejected the contention of the assessee.
28. He also rejected the contention of the assessee that the Assessing Officer, in fact, has disallowed the expenses of ` 966,45,41,565/-, as, according to him, such disallowances has been worked out by the assessee by stating that not all the expenses are allowed by the Assessing Officer. He further observed that this contention of the assessee has not been verified by the Assessing Officer in the assessment order.
24 ITA Nos.2086 & 2087/Del/200929. He also rejected the legal contention of the assessee regarding applicability of certain decisions as, according to Ld. DIT, there exist sufficient material to invoke the provisions of Section 263. Finally, he observed that he is of the opinion that there is a clear failure on the part of the Assessing Officer to examine all the aspects mentioned in his order. Therefore, the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of revenue. He has set aside the assessment order and directed the Assessing Officer to pass fresh assessment order in accordance with the law after giving due opportunity to the assessee. The assessee is aggrieved and has filed aforementioned appeal for A.Y. 2005-06.
30. Similar power has been exercised by Ld. DIT in respect of assessment year 2006-07. It has been the case of both the parties that most of the facts for that year are identical to the facts for assessment year 2005-06. However, certain facts were stated to be different. The facts which are similar are not described for the sake of brevity. The powers u/s 263 were invoked by DIT as per notice dated 8/10th December, 2008 and copy of such notice is available at page 242 of the paper book. It is the case of Ld. AR of the assessee that for this year there is no allegation of Ld. DIT regarding non-application of mind by the Assessing Officer or regarding improper inquiry made by the Assessing Officer as it has been alleged for assessment year 2005-
06. It is the submission of ld. AR that this is the most vital difference in the facts relating to assessment year 2006-07 when they are compared to the facts of assessment year 2005-06. The income of the assessee has been assessed by the Assessing Officer in the same manner as it was assessed for assessment year 2005-06. The second vital difference pointed out by the Ld. AR for the assessment year 2006-07 is that the judgement of Hon'ble Supreme Court in assessee's own case for assessment year 1988-89 and 1989-90 was available 25 ITA Nos.2086 & 2087/Del/2009 before the Assessing Officer at the time of completion of the assessment proceedings whereas the same was not available with the Assessing Officer when assessment was completed for assessment year 2005-06 although the said decision was available when Ld. DIT has initiated the proceedings u/s 263 for both the years.
31. It is the submission of Ld. Special Counsel for the revenue that barring these two differences in the facts for assessment year 2006-07, all other facts are similar to assessment year 2005-06.
32. In this year also, similar submissions were made by the assessee before ld. DIT and Ld. DIT not being satisfied, for the present year also has passed the impugned order by holding that there is a clear failure on the part of the Assessing Officer to examine all the aspects mentioned in his order and, accordingly, the said assessment order is erroneous and is prejudicial to the interest of revenue and he has set aside the assessment order for assessment year 2006-07 and directed the Assessing Officer to pass fresh order in accordance with the law after giving due opportunity to the assessee. The assessee is aggrieved by such order and, hence, has filed aforementioned appeal for A.Y. 2006-07.
33. It was submitted by Ld. AR that the assessee is a non-resident company incorporated in South Korea. Since 1985 it has been undertaking execution of turnkey projects for designing, engineering, procurement apart from hook-up installation and commissioning of facilities for ONGC, etc., in connection with exploration, extraction and production of mineral oil in the notified offshore waters. Designing, engineering, procurement and fabrication are carried out outside India. Thereafter, installation and commissioning work start in India on arrival of structures in Indian waters. The contracts for various projects for ONGC, though relating to different works, are standard contracts 26 ITA Nos.2086 & 2087/Del/2009 having materially similar terms. A standard contract enables the assessee to engage sub-contractors particularly for "Marine Spread"
vessels, pre-engineering and pre-construction surveys of the sea bed of an earmarked location. However, these contractors as well as the sub-contracts have to be approved by the ONGC. In the main, these contracts provide for milestone payments on completion or part completion of specifically identified segment of work upon its acceptance by ONGC. Similarly, the contracts separately provide for price for work to be carried out in India and outside India, both in respect of material and services. The payments are released by the ONGC after verifying the completion of the stipulated part of the work to the satisfaction of the qualified employees/consultants appointed for on-site inspection. The invoices presented by the assessee along with acceptance certificates are accordingly scrutinized before releasing the payments. The payments for work done inside India as distinguished from payments for work completed outside India are separately released by ONGC. This is because the ONGC has to deduct tax at source on payments for work done in India @ 4% + surcharge and TDS of 1% + surcharge on works carried out outside India in accordance with the orders of the Assessing Officer u/s 195 (2) of the Act. The record shows that the Assessing Officer called for the contract documents and invoices, etc. and duly examined them.
34. The Assessing Officer assessed the income of the assessee in the following manner:-
i) Revenue from business operations outside India under contracts with ONGC and contract with GMR for projects involving designing, engineering, procurement of material, fabrication and installation of structures like platform and sub-
marine pipelines, installation and commissioning in accordance with the terms of the contracts - following the 27 ITA Nos.2086 & 2087/Del/2009 decision of jurisdictional High Court confirming the decision of the Tribunal for assessment year 1986-87 and 1987-88, the Assessing Officer did not attribute any part of profit from such revenue to the installation PE.
ii) Revenue from business operations carried out inside India under these contracts - the Assessing Officer has brought these to tax under Art. 7(3) read with Art. 7(5) of the treaty in accordance with the decisions of his predecessors which were sustained by the CIT(A) in the appeals filed by the assessee.
iii) Revenue from operations inside India under a project contracted with Hindustan Aeronautics Ltd. (HAL), which according to the assessee is not taxable and it is in appeal against the order of the Assessing Officer taxing this income.
iv) Interest received from Tax Department on refund /and interest on deposits with Banks, which the learned Assessing Officer, agreeing with assessee, has taxed under Art. 12(2) of the treaty.
It may be noted that the impugned order of the DIT discusses only items no.(i) and (ii) and there is not a whisper of any objection to the Assessing Officer's treatment of items no. (iii) and (iv) above.
35. It was submitted that the following sequence of relevant events will also be important to raise by assessee in its appeal:-
S.No. Particulars Date
1. Return of income declaring net loss of 31.10.2005
`9,28,05,64,624/- (Computation in
accordance with DTAA and Sec. 90(2) of
the Act.)
2. Intimation u/s 143(1) 28.02.2006
3. Judgment of Uttaranchal High Court in 30-03-2006 (available with
assessee's own case for assessment year Assessing Officer & DIT)
1987-88 and 1988-89 (291 ITR 450 - see
p. 642/DPB-iv)
4. First Notice u/s 143(2) 21.08.2006
5. Assessment u/s 143(3) and the office note 09.03.2007. The office note was 28 ITA Nos.2086 & 2087/Del/2009 of Assessing Officer appended to the specifically brought to the notice assessment order. of DIT (para 62 at P. 13 of DIT's order) but he ignores it.
5.1 Whether Assessing Officer considers the Yes, as evidenced from the judgment delivered by Hon'ble office note (Ref p.7 Vol.-1) Uttaranchal High Court in assessee's case.
6. Judgment of Supreme Court in assessee's Available with the DIT (but not own case for assessment year 1987-88 the Assessing Officer) at the and 1988-89 (291 ITR 482-See P.35/DPB- time of issuing show-cause
1). notice.
6.1 Whether Assessing Officer makes any Yes. The Assessing Officer reference to the Department's appeal notes the pendency of pending in the Supreme Court. Revenue's SLP before the Hon'ble Supreme Court in the office note.
7. Judgment of the jurisdictional High Court 04.12.2008 (Available with the in the assessee's own case for DIT).
assessment year 1994-95 & 1995-96
(P.398/DPB-II)
8. Show cause notice issued by DIT 12.02.2009(Vol.-1 pg. 164)
8.1 Whether the DIT refers to the judgments No
of High Court and Supreme Court in
respect of assessment year 1987-88 and
1988-89 and that of High Court in respect
of assessment year 1994-95 & 1995-96 in
his notice u/s 263?
8.2 Whether DIT at all refers to the Supreme The only time he does so is in
Court judgment in his order u/s 263. para 7.3 of his order where he erroneously holds that the Assessing Officer did not consider Apex Court decision in 291 ITR 482 while ignoring the office note of the Assessing Officer. The judgment was pronounced by the Apex Court much after the Assessing Officer had passed the order.
9. Date of impugned order u/s 263 18.03.2009 9.1 Whether during the course of proceedings Yes. Refer assessee's u/s 263, the assessee brings the aforesaid submissions dated 13.03.2009 decisions to the knowledge of the DIT? filed with the DIT pages 165-197 at pp 182, 183 and 187 vol. 1.
Also see para 6.2/pg. 12 of DIT's order.
9.2 Whether DIT considers the effect .....No......
aforementioned decisions of the High Court and Supreme Court or the Tribunal's decision for 90-91, 91-92 and 96-97 dt.
11.5.2007 (p. 288/Vol. 3).
10. ITAT order for 1994-95 & 1995-96 giving 9.10.2009 (p. 393/DPB-II) effect to Uttaranchal High Court order dt.
4.12.2008.
29 ITA Nos.2086 & 2087/Del/200936. It was submitted that the issues dealt with by the Assessing Officer in the assessment order have been subject matter of litigation between the assessee and the department since the assessment year 1987-88 on which the decisions of appellate authorities were available to the Assessing Officer when he framed the impugned assessments and those decisions were considered by the Assessing Officer and DIT has failed to take into consideration those decisions while invoking jurisdiction u/s 263. He submitted that the following issues were subject matter of dispute between the assessee and Department in earlier years on similar facts and contracts with ONGC.
i) Whether the ONGC contracts are divisible in two parts as the contracts themselves identify payments for operations outside India separately from payments for operations inside India and the invoices on ONGC are cleared by it accordingly.?
ii) Whether the Mumbai Liaison Office and project offices fall within the exclusionary provision of Art. 5(4) of the treaty as they render auxiliary services.
iii) Even if Mumbai Liaison Office and the project offices, is assumed to be the fixed places of business in India under Art. 5(1) and (2) of the treaty, whether the special provision relating to installation projects under Art. 5(3) would prevail over the general provisions of paragraphs (1) and (2) of Art. 5.
iv) Whether any part of revenue in respect of operations performed by the assessee outside India can be attributed to the installation in PE in India.
v) Whether the installation PE in India commences from the date of arrival of the structures and the 'Marine spread' in notified Indian waters for installation.
30 ITA Nos.2086 & 2087/Del/2009vi) Even if an installation PE comes into existence and assuming that the operations outside India have a nexus with the operations of the installation PE, would any part of revenues from operations outside India be attributable to the PE in India in absence of any allegation that the price for such operations is not at arm's length.
37. It was submitted that so as it relates to the issue regarding income from operations carried out outside India, this issue for the first time came before the Tribunal in appeals relating to assessment year 1987-88 and 1988-89 wherein the Tribunal has held as under:-
a) the assessee is covered by article 5(3) of the treaty and, therefore, special provision relating to installation PE under Art.
5(3) would prevail over the general provision contained in article 5(1) and (2) of the treaty.
b) Since the operations outside India (operations relating to designs, procurement and fabrication) were completed prior to the arrival of structures and the 'Marine Spread' and commencement of the installation operations, the revenue from the same would not be liable to tax in India.
38. It was submitted that the aforementioned decision of the Tribunal has been confirmed by Uttaranchal High Court on 30th March, 2006 and the Hon'ble Supreme Court has also affirmed the said decision vide judgement pronounced on 18th May, 2007. It was submitted that the Assessing Officer has followed the judgement of the Tribunal and jurisdictional High Court for holding the issue in favour of the assessee in respect of income from operation carried on outside India and this fact is clear from the office note appended to the assessment order dated 9th March, 2007. He submitted that history of litigation with the department is described in Annexure-I to the written submissions and the office note attached by the Assessing Officer with the assessment order is annexed as Annexure-II and the note relating 31 ITA Nos.2086 & 2087/Del/2009 to non-taxability of receipt from outside India operation as recorded by the Assessing Officer in the office note and which has already been reproduced in para 14 of this order.
39. With regard to objections of the DIT regarding existence of PE in India, it was submitted by Ld. AR that the assessee has clarified the position that it has been held right upto the Apex Court that the assessee has only Installation PE under Article 5 (3) of DTAA and the assessee has always disputed that keeping in view the provisions of Article 5 (3) of the Treaty, Article 5 (1) and (2) are not applicable. In the year under consideration and earlier years the assessee has admitted to "Installation PE" for all ONGC contracts as the installation projects were spread over more than 9 months as per Article 5 (3) of the treaty for all the three ONGC projects and the GMR projects. He submitted that the finding of DIT that the impugned contracts are composite contracts is contrary to the clear observations of Hon'ble Supreme Court in assessee's own case when in the context of similar contracts for projects with ONGC that the contract was "in two parts, one for fabrication of the platform and the other installation and commissioning of the said platform." Reference in this regard was made to the observations of Hon'ble Supreme Court in assessee's case at page 485 of the 291 ITR. It is also evident from the order of the DIT himself when he accepts the fact and treat the income from operations "outside India" and income from operation "inside India" separately and independently of each other. He submitted that though ld. DIT has accepted that ONGC contract would be a turnkey contract, but he does not follow the dictum of Hon'ble Supreme Court as observed at page 493 of the report "in the case of turnkey project, the PE is said to be at the installation stage while the entire turnkey project including the same equipment, is finalized before the installation stage." Therefore, he submitted that the order passed by DIT is erroneous and not that of 32 ITA Nos.2086 & 2087/Del/2009 Assessing Officer. He submitted that following the said observations of Hon'ble Supreme Court the Tribunal in assessee's own case for assessment year 2005-06 reported as 31 SOT 482, has held in favour of the assessee. He submitted that since the very reason given by DIT for setting aside the part of assessment order is contrary to the decision of Hon'ble Supreme Court, therefore, the order passed by Ld. DIT on this issue is illegal and a nullity.
40. Ld. AR submitted that ld. DIT while passing an order u/s 263 has failed to consider the judgement of jurisdictional High Court and office note appended to the assessment order. He also failed to consider the decision of Hon'ble Supreme Court in assessee's own case which was brought to his notice and the history of litigation between the assessee and the department sine assessment year 1987-88 and 1988-89 and reference was made to the note No.2 appended to the assessment order which has already been reproduced in para 38 above.
41. He submitted that there is not even a whisper of allegation in the order passed by Ld. DIT that the price paid by the ONGC for operation outside India was not at arm's length or that it included the price of services rendered by the PE in India. Ld. DIT was aware of the decision of Hon'ble Supreme Court in assessee's own case, but he chose to ignore it. In this view of the matter, even if the PE in India is inextricably linked with the procurement and fabrication, etc., outside India, no profit can be attributed to the PE in India. Reference was made to the decision of ITAT in assessee's own case for assessment year 1994-95 and 1995-96 vide which the effect to Uttaranchal High Court decision dated 4th September, 2008 was given and the Tribunal, following the decision of Hon'ble Supreme Court has held that even assuming that supplies were necessary for the purpose of activities of PE in India and even if supplies were integral part, no part of profits on account of offshore activities could be attributed to PE as undisputedly, 33 ITA Nos.2086 & 2087/Del/2009 of the designated work (designing, engineering, fabrication and supply) was carried outside India and before the date of arrival of the structure in India. Thus, it was pleaded that revenue from outside India operations in any case is non-taxable in India as there is no allegation that the price at which billing was done was not at arm's length. Reference in this regard was made to the following decisions of ITAT the copies of which are also furnished in the paper book as under:-
i) DCIT vs. Hyundai Heavy Industries Co. Ltd. in ITA Nos.2460 to 2462/Del/2005 (Assessment years 1990-91 & 1991-92) and in ITA No.4307/Del/2002 (Assessment year 1996-97) - consolidated order dated 11th May, 2007.
ii) JCIT vs. Hyundai Heavy Industries Co. Ltd. in ITA Nos.1753 & 1754/Del/99, assessment year 1993-94, order dated 3rd March, 2004.
iii) DCIT (OSD) Vs. M/s Hyundai Heavy Industries Co. Ltd. in ITA Nos 265, 4692,264,2824/Del/2007, ITA Nos.2530 & 2975/Del/2006, ITA Nos.106 & 1407/Del/2008, Assessment years 1997-98 to 2004-05
42. It was submitted that it is clear from the assessment order and office note appended thereto that the Assessing Officer had fully applied her mind and had followed the judgements available with her at the time of passing the order. Ld. DIT has failed to consider the decision of Apex Court and jurisdictional High Court and has erroneously ignored to consider the office note and other material available on record and has caused the Assessing Officer of non- application of mind in attributing part of revenue from operation outside India to the PE in India. He submitted that it is undisputed fact that whenever the period of installation projects exceeds nine months, the assessee offers the income from the revenues received in respect of operations of installation PE in India which is in accordance with the article 5 (3) read with article 7 of the treaty. This year also the assessee has admitted to have PE in terms of Article 5 (3) of the treaty 34 ITA Nos.2086 & 2087/Del/2009 for the projects executed with ONGC and GMR as these projects were not new projects but were carried over from earlier years (para 2 of Assessing Officer).
43. Coming to the issue relating to income from operation inside India, it was submitted by Ld. AR that the CIT (A) has dismissed the appeals of the assessee and sustained stand of the Assessing Officer right upto the assessment year 2004-05 holding that the Assessing Officer had rightly computed the income under Article 7(3) of the Indo- Korean DTAA by estimating taxable income at 10% of the Indian receipts after reducing it by the amount of expenditure on sub- contractors, etc. on which tax was deducted at source. The said orders of CIT (A) were not initially accepted by the assessee and the matter was agitated in appeal in ITAT, but the grounds relating to that issue was not pressed and the department also did not file any cross appeal or cross objection on these issues in the ITAT. Reference was made to pages 766-929 of the paper book-VI. It was submitted that according to Ld. DIT as Article 7(3) of the treaty was invoked by the Assessing Officer, he should have allowed a deduction from gross receipts only those expenses on which the tax was deducted at source, the balance amount should have been assessed as income. The action of the Assessing Officer in estimating taxable income @ 10% of the balance was erroneous and prejudicial to the interest of the revenue. He submitted that from these observations of Ld. DIT, the following question arose from the order of the Assessing Officer:-
i) Whether the Assessing Officer is justified in rejecting the claim of loss made by the assessee?
ii) Whether .the Assessing Officer is justified in rejecting the accounts on the ground that books of a/c and vouchers in original have not been produced?
iii) Whether, the Assessing Officer could make a best judgment u/s 145(3) read with section 144 of the Act in terms of Article 7 of the Indo-Korean DTAA.35 ITA Nos.2086 & 2087/Del/2009
iv) Whether .the Assessing Officer was justified in estimating profit by applying rate of 10%on gross receipts after reducing by the account of paid to subcontractors etc. on which tax was deducted at source?
44. It was submitted that in a case where assessment has been made after conducting proper inquiry and due application of mind, the onus will be on the DIT to specifically establish that the order of the Assessing Officer is contrary to any statutory provision or judgement
(s) of jurisdictional High court or of Apex Court. Only then it can be held that the order is erroneous in law. Similarly, in order to establish that the assessment order is prejudicial to the interest of revenue, it must be shown that assessment order has resulted in loss of revenue. He submitted that it will be shown that ld. DIT has not been able to satisfy either of the two conditions laid down in section 263 of the Act. At the outset, he submitted that the entire assessment has been set aside by ld. DIT. He submitted that there is no whisper of any error committed by the Assessing Officer in regard to tax treatment of income from project for HAL and interest income and, therefore, to that extent the assessment order was neither erroneous nor prejudicial to the interest of revenue and invocation of power u/s 263 with regard to whole assessment was bad in law according to the following decisions:-
i) Star Drugs & Research Ltd. (2010) 42 DTR 343 (Chenai) (TM)
ii) Kwal Pro Exports vs. ACIT 297 ITR (AT) 49 (Jodhpur)
iii) Colorcraft vs. ITO 303 ITR (AT) 07 (Mumbai)
iv) Sical Logistics 34 DTR 350 (Chennai) (TM)
v) CIT vs. Kabra (GK) 211 ITR 336 (AP)
vi) Kartar Singh vs. Rameshwari Kela (copy of decision placed at page 426-429 DPB III)
45. He submitted that as per practice followed by the department in past years, for this year also the Assessing Officer has rejected the accounts regarding inside India operation of the assessee and has made best judgement assessment u/s 145(3) read with Section 144 of the Act and such action of the Assessing Officer has been upheld by 36 ITA Nos.2086 & 2087/Del/2009 the appellate authorities right upto the Apex Court. Ld. DIT also does not comment adversely on such action of the Assessing Officer and has, in fact, approved his action of rejection of books of account and applicability of provisions of Section 145 (3). Ld. DIT did not consider the orders of the Tribunal in assessee's own case for assessment year 1990-91, 1991-92, 1996-97 and assessment year 1993-94 and these orders were passed by the Tribunal after the assessment for the year under consideration and these orders were available to DIT at the time of passing the impugned order u/s 263. The DIT also did not consider the judgement of the jurisdictional High Court in assessee's own case which was specifically brought to his notice and, on the other hand, the Assessing Officer has duly taken note of the said judgement in the office note. Ld. DIT also did not consider the decisions of CIT (A) and their acceptance by the department in earlier years right upto assessment year 2004-05. He submitted that office note No.I clearly demonstrate that the modus adopted by the Assessing Officer for assessment of inside India operations and which read as under:-
"1. Assessment has been completed as per article 7 of DTAA with Korea estimating the profit rate at 10% on the total revenues relating to Inside India activities as reduced by expenses verifiable from annual returns of TDS. This is in line with the stand taken by the Department in preceding A. years as provided in para 5 of Article 7 of DTAA."
46. He submitted that DIT did not comment whether adversely or otherwise in respect of reasoning given by the department in suo moto offering the formula for computing the income in respect of operations inside India vide letter dated 21st February, 1995 in respect of assessment proceedings for assessment years 1993-94 and 1994-95. It was specifically brought to his notice as admitted by him at page 10 of the impugned order. The copy of such letter is placed at page 306 of paper book III which is a letter issued by the Assessing Officer of the 37 ITA Nos.2086 & 2087/Del/2009 assessee and it is dated 21st February, 1995. The text of the said letter is as under:-
"Please refer to the discussion in regard to the above asst. years. Under the DTAA your representatives Shri D. Shah, FCA, and Mr. I.H. Gim, G.M. (F&A) appeared and stated that they are filing revised returns for the Inside India portion, claiming the subcontract cost as expenses under the main contract with ONGC. So, it was agreed that the sub-contract cost as aforesaid will be considered against the Inside India portion, subject to tax deduction thereon u/s 195/197, and allow the taxing of the balance at 10% deemed profit rate to avoid double taxing of the same amount in your hand and the hands of the subcontractor under art.7 of the Convention. The applicability of the said arrangement is being accepted by your representative and accordingly you are contemplating to revise the returns for the above assessment year. As regard the outside India work we cannot accept your stand. You are requested to file further details in a fortnight's time to complete the assessment. Date of hearing 14.3.95."
47. It was submitted that sub-contractors (primarily, non-resident companies) were engaged only for carrying out survey, etc. and for leasing of dredger and other specialized vessels for marine spread. On the other hand, the major portion of expenditure incurred in India was on purchase of material including consumables for installing the works at the site. Such fact has been duly recognized by the department and, therefore, the formula devised by the department is in order to ensure that the income would always be taxable. Reference in this regard was made to para 3 and para 5 of the impugned assessment order. It was submitted that a conscious decision has been taken by the department right upto assessment year 2004-05 and on this issue assessee's appeal were also dismissed by the CIT (A). It was submitted that even presently, the department's stand remains unchanged and the formula has been applied only by estimating varying percentage of balance expenditure arrived at after allowing payment to sub-contractors, etc., subject to TDS. He submitted that ld. DIT has also ignored the orders of ITAT for assessment year 1987-88 38 ITA Nos.2086 & 2087/Del/2009 and 1988-89 which was confirmed by the Hon'ble Apex Court holding that even under Article 7(3) the Assessing Officer after rejecting the accounts had rightly made best judgement assessment as per section 145 (3) of the Act. It was submitted that neither in the show cause notice nor in the impugned order it has been held by ld. DIT that the computation of income from operations inside India are erroneous not on the ground of applicability of section 44BB. He submitted that it is the mistaken allegation of ld. DIT that the Assessing Officer had already determined taxable income after reducing gross receipts by the amount of payment to sub-contractors, etc. on which tax was deducted at source and the Assessing Officer should not have further estimated taxable income @ 10% of the balance receipts. He submitted that if such view of the ld. DIT is adopted, then it would result in assessable income @ 70% of the gross receipts as income from operations inside India. ld. DIT has finally given up such stand taken in the show cause notice. He himself could not come to any conclusion in regard to mode of computation of income from operation from inside India. He has simply set aside the assessment without giving any direction in this regard and left it to the Assessing Officer to make the fresh assessment "in accordance with the law" without indicating as to which and as to what law he desires the Assessing Officer to apply. He submitted that, therefore, the order passed by the ld. DIT is illegal in view of the decision of Hon'ble Bombay High Court in the case of CIT vs. Gabriel India Ltd. 203 ITR 108. He submitted that the allegations levelled by ld. DIT para-wise are dealt with as follows:-
"Allegations as per Para 7.1 of the impugned order:-
i) It is undisputed fact that the assessee has opted for taxation as per the provisions of Indo-Korean treaty. The income therefore, has to be determined in accordance with Article 7(3) of the treaty.
ii) Therefore, the AO was not required to allow expenses as per the provision of the Act.39 ITA Nos.2086 & 2087/Del/2009
iii) The AO deducted expenses from the gross receipts and deemed income @ 10% of the balance.
iv) This is erroneous and prejudicial to the interest of income.
Our comments::
It is settled law that once the AO rejects the accounts u/s 145(3) of the Act he can only make best judgment assessment on a reasonable basis keeping in view the past history of the case and other surrounding circumstances. It is also settled law that in making an estimate of income in a best judgment assessment, the allowance or disallowance of expenses u/s 28 to 40 of the Act lose relevance. Further, there is no formula prescribed in law for making a best judgment estimate of income. It is also settled law that the provisions of a tax treaty must be construed liberally and not literally. Detailed legal submissions in this regard are made in paragraphs 16-30 (infra).
17. Para 7.2 of the Order Allegation: -
The AO has only mentioned that expenses of rs. 167.83 crore have been incurred in India for earning inside India revenue and verification was made from TDS forms and not from business purpose point of view.
Our comments: -
This allegation has been made without giving the assessee any opportunity and without reference to assessment records. This allegation also contradicts the show cause notice wherein the DIT himself categorically states that the AO should have allowed only such payments to the sub-contractor on which tax was deducted at source and imposed tax on balance amount of revenue from operations inside India. This allegation is factually incorrect.
The AO also called for and examined all the invoices raised by the assessee on the ONGC & release of payment of ONGC after duly verifying achievement certificates issued by its technical consultants. (Pg. 208-210 & Pg. 217-19 of the Vol. II) The ld. DIT has chosen to ignore the voluminous information furnished with the AO starting page 8 to 163/Vol. I - 2005-06. These comprise notes to return of income, computation of income, audited statement of operations giving detailed items of expenditure on material, labour, consumables, depreciation and miscellaneous expenses for each project separately. The assessee also separately furnished each and every invoice raised on ONGC (vide submission dt. 11.12.2006 at pages 40 ITA Nos.2086 & 2087/Del/2009 223/PB Vol. - II). It is thus most unfair on the part of the DIT to allege that the AO did not examine the expenses incurred for the purpose of the projects.
DIT seems to be unaware that as per the terms of the contract, the ONGC will appoint highly qualified consultants to carry out real-time inspection at site and payments would be released only after receiving the satisfactory completion certificate from them. (Please see clause 5.5 read with clause 5.10 of the Contracts with ONGC).
"The Ld. DIT has chosen to ignore the voluminous information furnished with the A.O. starting page 8 to 163/Vol.I - 2005-06. These comprise notes to return of income, computation of income, audited statement of operations giving detailed items of expenditure on material, labour, consumables, depreciation and miscellaneous expenses for each project separately. The assessee also separately furnished each and every invoice raised on ONGC (vide submissions dt. 11.12.2006 at pages 223/PAPER-BOOK Vol.II) It is thus most unfair on the part of the DIT to allege that the A.O. did not examine the expenses incurred for the purpose of the projects.
DIT seems to be unaware that as per the terms of the contract, the ONGC will appoint highly qualified consultants to carry out real-time inspection at site and payments would be released only after receiving the satisfactory completion certificate from them (Please see clause 5.5 read with clause 5.10 of the Contracts with ONGC).
18. Para 7.3 of the order Allegation of the DIT:-
The A.O. in the order has mentioned that an amount of Rs.129,45,194,688/- is received by the assessee as revenues for outside India operation. This is with regard to the projects with MHB, MSP, MUT and GMR (O&M) and with regard to these projects the assessee has also received revenues from inside India operations.
i) The contracts are composite contracts for the work to be performed in India and outside India.
ii) The A.O. has not enquired into the nature and scope of the contracts.
iii) The A.O. has not enquired into the reason for revenues for outside India operations.
iv) The A.O. has not enquired into the nature of outside India operations, the duration of the projects in India.41 ITA Nos.2086 & 2087/Del/2009
v) The A.O. has not enquired into the role of Mumbai Office of the company in submitting the tenders, negotiation of the contracts.
vi) The A.O. has not enquired into the subsequent role of the PE an Mumbai office in earning the revenues from the alleged outside India operations.
vii) The A.O. has not gathered the facts at all before passing the order.
viii) The A.O. has also not enquired into the applicability of the decision of the Hon'ble Apex Court in the assessee's own case, reported in 291 ITR 482 for the year under consideration.
ix) Due to these facts and position of law, the order passed by the A.O. by not existing the income on account of revenues of Rs.129,45,194,688/- is erroneous and prejudicial to the interest of the revenue.
Our comments:-
All the allegations contained in this sub para of the impugned order have been made by the DIT suo motu for the first time and without giving any notice or opportunity of any kind to the assessee. For this reason alone, these allegations need to be rejected. Since the order to set-aside the assessment has been made only on the basis of these allegations, the impugned order should be struck down. However, to set the record straight, it is submitted that these allegations are not only not borne out from the record, but these are also contradicted by the material available on record. The chart below explains the correct position:-
The allegations of the DIT Our Comments
1) The contract is composite This observation is contrary to contract and therefore the A.O. the decisions of the ITAT, should have considered revenues Uttaranchal High Court and the of Rs.129 crores from outside Supreme Court, which were part India operations. of the record and were available with the DIT.
2) The A.O. has not enquired a) It is apparent that the Ld. into:- DIT has not looked into the material available on record. On
a) the contact 31.8.2006 the assessee produced copy of all the contracts for examination of the A.O. It also furnished project-
wise statement of operations, and the A.O. considered the scope of work and terms of the contract (Pg.208-210 of Vol.II P.B) Thereafter, on 15.9.2006, the A.O. once again furnished project-wise details and revenues and produced copy of 42 ITA Nos.2086 & 2087/Del/2009 contract (Pg.215-219 of Vol.II P.B.). On 8.12.2006, as required by the A.O, the assessee filed bulky copies of four contracts and all invoices raised on ONGC for all operations under the contracts (both outside and inside India).
b) Nature of outside b) Paragraph 2 of the 'Office operations Note' of the A.O. which is part of the record clearly contradicts this allegation (Pg.7/Vol.1 P.B.).
Following the jurisdictional high court decision, the A.O. did not tax the income from outside India operations though giving its breakup project-wise and further noting and the A.O. also recorded the note that in case the Supreme Court overrules the High Court order, appropriate action u/s 147 would be taken.
c) Duration of projects c) All the three ONGC projects (MHB, MSP & MUT) and the GMR project wee admittedly for a duration of more 9 months and, therefore, constituted installation PE in terms of the Article 5 (3) of the treaty for which income was assessed by the A.O. as income from operations of the installation PE inside India. Further, the A.O. had specifically called for the contracts for examination which clearly give the duration of the project (for instance, P.167-170 of MUT contract).
d) Role of Mumbai Office d) This issue was squarely covered by the decision of the ITAT, Uttaranchal High Court & the Supreme Court against the Department. This aspect was considered and assessee's explanation was accepted and has also been referred to in the office note. (Pg.210 Vol.II P.B.)
e) Subsequent Role of PE in e) The perusal of the contracts Mumbai office for outside shows that the Project Office was operations. part of installation PE. Further, its auxiliary and supporting role is clearly brought out in Cl.5.3.11 of the contracts with ONGC which were duly examined by the A.O. (Pg.251 Vol.PB).43 ITA Nos.2086 & 2087/Del/2009
f) The A.O. has not gathered f) This is a serious allegation and facts at all before passing the it is false in face of the material order. on record, which the DIT has obviously not looked into. The allegation is baseless unsubstantiated and vague.
g) The A.O. has not g) This allegation is absurd in considered Supreme Court view of the fact that the judgment in 29 ITR 482. Supreme Court pronounced the judgment on 18.5.2007, whereas the assessment order was passed on 9.3.2007 (more than 2 months earlier). On the other hand, it is the DIT who has ignored the Apex Court decision.
19. Summary of material which is on record and which was examined by the A.O. is given below:-
below:- (Pgs 25-257/Vol.I & Vol.II).
Return of income accompanied project-wise and duly audited statement of operations filed along with Form 3CB and Form 3CD.
P.200/Vol.II Order sheet entries dt.14.12.06
P.201/II 10-1-07, 20.2.07
P.205 A.O. seeks justification of expenses and raises
various queries vide letter dt. 21.8.06.
P.208 Assessee's Reply dt. 31.8.06 - Furnishes &
explains:
1) Copies of contracts
2) Project wise statement of operations
P.209 3) Details of expenditure
4) Outside revenue - why not taxable -
justification.
P-210 5) Scope of work - Terms of contract
6) Milestone payments
7) All communications with ONGC from bidding
stage & thereafter always with Head Office in
Korea.
8) That there was no change in facts and in terms
of ONGC contracts and the decision of CIT (A) for A.Y. 1992-93 deleting outside India revenues was accepted by the Department and no appeal was filed in the Tribunal.
9) Korean Tax Certificate - Reference to
10) Uttaranchal High Court decision for A.Y. 1986-87
to 1988-89 already available with A.O. at that
time and subsequently reported in 291 ITR 450.
11) Tribunal judgement for A.Y. 1986-87 to 88-89
12) Ref. CIT (A) orders for 2004-05-06 deleting
attribution of outside operations.
13) Sec.44BB does not prevail over Art.7(3) of the
treaty.
P.214 14) Distinct demarcation between operations
outside India & Operations within India under the contracts.
P.215 Letter dated 15.9.06. P.217-219 Project wise details and revenues together with 44 ITA Nos.2086 & 2087/Del/2009 copies of contracts. P.220 Letter dated 8.12.06 section 90(2) explained. P.223 Copies of 4 contracts and all invoices raised on ONGC for all operations under the contracts
(both outside and inside India) together with on- site satisfactory achievement certificates which the assessee must obtain from the experts appointed by ONGC for supervising real-time all works under the contracts.
P.224-251 Copies of invoices giving project wise & milestone-wise.
P.252 Letter dt.14.12.2006 - w.r.t. applicability of Art. 5 (3) of the treaty based on Tribunal Decisions.
P.254 Letter dt. 1.3.2007 citing Uttaranchal High Court judgment in the assessee's own case P.255-256 Letter dated 1.3.2007 (2nd letter) on taxability of inside India activities under provisions of the treaty of P.255-56 - verifies that facts & contracts are same and with similar terms.
In view of the factual position stated above, it is obvious that the DIT has made the allegations without referring to material on 'record' including 'Office Note' available to him at the time of passing the impugned order.
As held by Punjab & Haryana High Court in Hari Iron Trading Co. (263 ITR 437) "The expression "record" has been defined in clause (b) of the Explanation so as to include all records relating to any proceedings available at the time of examination by the Commissioner. It is not only the assessment order but the entire record which has to be examined before arriving at a conclusion as to whether the Assessing Officer had examined any issue or not." (emphasis supplied).
Similar view has also been taken by the High Court of Allahabad in Vinod Kumar Bhatia (211 ITR 253) at P.563-566/DPB-IV & J.K. Gulati (269 ITR 71, Pg.602/DPB-IV).
20. Para 7.4 of the impugned order.
The DIT holds that Art.7(5) has been erroneously applied by the A.O. This issue is discussed later under the head 'best judgement vis- a-vis Art.7(3) of the treaty. At present, suffice it to say that strictly literal interpretation of the provisions of tax treaty as made by the DIT is contrary to settled law on interpretation of treaties.
21. Para 7.5 of the impugned order:-
45 ITA Nos.2086 & 2087/Del/2009i) The DIT rejects the assessee's contention that the assessment order is neither erroneous and nor prejudicial to revenue. The Ld. DIT does not give any reason or basis for holding that the judgment estimating income is not sustainable in law.
ii) The DIT also does not deal with the alternate submission that the income for inside India activities cannot in any case exceed the amount taxable u/s 44BB of the Act. (Ref. Pg.173/Vol.I).
It is submitted that the very basis of DIT holding the assessment to be erroneous is not that the A.O. did not apply provisions of s.44BB of the Act, but that the A.O. misapplied the provisions of Article 7(3) read with Art. 7(5) of the Indo-Korean DTAA. It is for this reason that the decision of the Tribunal in Saipam's case 27 SOT 531 at 536, P.436 at 441/DPB.III) is distinguishable.
a) The last three sentences of para 2 of Art.7 of Indo-Italian treaty are not applicable to the Indo-Korean treaty as the treaty with Korea does not contain any such limitation.
Relevant extracts of Art.7 of the Indo-Italian and Indo- Korean Treaty are placed at Pg.962-964/DPB VI and 181- 198 respectively.
b) The proposition laid down by the apex court in Azadi Bachao Andolan's case that the provisions of the treaty have to be given a liberal interpretation and not literal interpretation, which was not brought to the notice of the Bench in Saipem's case. Thus, Art.7(3) read with Art.7(5) of the Indo-Korean treaty must be construed liberally and on the lines suggested by Prof. Klaus Vogel and the OECD Commentary on corresponding Art. 7(4) of the OECD model.
c) Lastly, the jurisdictional Uttarakhand High Court has in recent judgment in the case of Enron Expat Services Inc. reported in 327 ITR 626 has held that once the assessee has opted to be assessed under the DTAA, sec.44BB would not apply to it. Indeed the Ld. DIT has also not invoked section 44BB either in the show cause notice or in the impugned order. In fact, the Ld. DIT specifically refused to apply S.44BB (para 15 at Pg.10, supra).
iii) As the revised assessment based on his, or rather lack of any direction reveals that income from operation in India has been assessed at a figure lesser than the original assessment. Thus, the action of the A.O. was not even prejudicial to revenue.
d) The Ld. DIT has not considered the Departments letter dt.10.2.1995 on the basis of which the income from 46 ITA Nos.2086 & 2087/Del/2009 operations inside India have been computed consistently since A.Y. 1993-94, which has also been upheld by the CIT (A). without pointing out any change in facts of the case and without pointing out any provision of law or any judgment of High Court or Apex Court, the CIT was not correct in holding the assessment made by the A.O. erroneous. This proposition is fully supported by a recent judgment of Delhi High Court in Escorts Ltd. reported in 51 DTR 321 (P.748/DPB-V).
22. Para 8 of the impugned order:-
The DIT sets aside the assessment order solely on the twin grounds of non-application of mind by the A.O. and absence of 'proper' enquiry.
The DIT holds that 'there is a clear failure on the part of the A.O. to examine all aspects mentioned in this order before passing the order; accordingly, the said assessment order is erroneous in so far as it is prejudicial to the interest of revenue. Hence, I hereby set aside the assessment order u/s 143(3) for A.Y. 2005-06 and direct the A.O. to pass fresh assessment in accordance with law, after giving due opportunities to the assessee" (emphasis supplied).
Our Comments It is significant to note that the DIT does not hold that the order is erroneous in law or prejudicial to revenue in respect of the income from operations inside India. He holds the assessment order to be erroneous solely for the reason that the assessment order has been passed without application of mind and without making proper enquiry.
Apart from the fact this allegation is factually incorrect [paras 10- 14 (supra)] the assessment has not been cancelled for the reason given in the show-cause notice. It is the DIT who has not considered the material available on record. A scrutiny of the objective material on record clearly establishes application of mind and proper enquiry made by the A.O. Hence, the very basis for setting aside the assessment is illegal and non existent.
Legal submissions:-
23. The principles of law governing the DIT's jurisdiction under section 263, in the context of facts of this case, are set out below:-
i) The proceedings u/s 263 are quasi-judicial proceedings:-
The CIT must record satisfaction that the order of the A.O. is erroneous and prejudicial to the interest of the 47 ITA Nos.2086 & 2087/Del/2009 Revenue. Both the conditions must be fulfilled. Such a satisfaction must be based on objective facts or correct application of law and not surmise and suspicion.
ii) If it is established that the A.O. fully applied his mind and took a legally possible view, the DIT cannot substitute his superior view and set aside the assessment without establishing that the view taken by the A.O. was contrary to statutory provision or a judgment of jurisdictional High Court/Apex Court.
iii) The DIT must establish the allegation of non-application of mind by the A.O. or absence of proper enquiry from the material available on records. In other words, the DIT must show as to how the A.O. assumed facts wrongly or applied law incorrectly.
iv) If the DIT abandons the ground on which notice was issued to the assessee and without coming to any conclusion gives an adverse direction on altogether different ground without giving the assessee a notice.
Such a direction cannot be sustained as it was made in breach of principle of natural justice.
v) That the DIT cannot take a decision adverse to the assessee without putting the assessee on notice regarding grounds on which such decision is reached. Failure to grant proper opportunity to the assessee vitiates the adverse findings.
vi) The DIT must consider all relevant evidence and material evidence on record or found during subsequent enquiry before canceling the assessment. For the purpose of Section 263, 'record' includes 'Office Note' appended to the assessment order. Failure to consider the material available on record would vitiate the findings of the DIT.
vii) Failure on the part of the DIT to consider or distinguish the judgment as also earlier years' assessments and appellate orders in the assessee's own case, which were duly considered by the A.O., renders the order u/s 263 illegal and void.
viii) The DIT cannot substitute his own opinion for the opinion of the A.O. This is specially so when the DIT does not cite any authority or provision of law in support of his opinion, whereas the A.O. followed the orders of the CIT (A) for earlier years, which had become final.
ix) If the assessment order is passed without application of mind or on wrong assumption of facts or of law, it would not be sustainable in law. On the other hand, the order u/s 263 would be illegal if such an allegation is contradicted by the material available on record.
x) The Ld. DIT cannot justify the validity of order u/s 263 on a new ground or a ground/reason other reason given 48 ITA Nos.2086 & 2087/Del/2009 in the show cause notice without putting the assessee on notice.
xi) The DR or, with respect, even the Hon'ble Tribunal cannot uphold the order u/s 263 on a ground other than that which formed the basis of the order passed by the DIT u/s 263 of the Act.
xii) CIT cannot take recourse to revisional powers under section 263 of a fresh inference of transactions which have been carried on by the assessee and accepted by the Revenue for several years and the A.O. has taken the consistent view. CIT vs. Escorts Ltd. 51 DTR 321 (Del. High Court) at Pg.748/DPB-V."
48. He submitted that interpretation of Article 7(3) read with 7(5) of the treaty has been literally adopted by the DIT in show cause notice and interpreting so he has arrived at a conclusion that only such expenses on which tax was deducted at source should be allowed as deduction from Indian revenue. However, in the impugned order he has given no such direction, therefore, the very basis on which DIT invoked section 263 is erroneous and has ceased to exist. It was submitted that provisions of Article 7(3) does not warrant literal interpretation and reference in this regard was made to the decision of Hon'ble Supreme Court in the case of Azadi Bachao Andolan 263 ITR 706 (SC), the Advance Ruling in Cal Dive 315 ITR 344 and the commentary of Klaus Vogal. He submitted that ld. DIT is not right in stating that estimate of income made by the Assessing Officer is contrary to any statutory provision or judgement of jurisdictional or Apex Court and, therefore, "erroneous in law." He submitted that as per the decision of Hon'ble Punjab High Court in the case of Vinod Kumar Bhatia 211 ITR 253,the figure of 10% on the basis of payments received by the assessee is not according to any formula provided for in law. It was a convenient method of working out the profit and, thus, it was held that the Tribunal was clearly right in holding that there was no rigid formula for working out the net income of the assessee. He, therefore, submitted that ld. DIT has no power to say that mode of computation of income is against "rules and regulations." He 49 ITA Nos.2086 & 2087/Del/2009 submitted that the Assessing Officer adopted a formula as per past history of the case and that formula was adopted for the following reasons:-
a) It would always result in positive income, whereas that may not be in the other mode of computation and
b) Letter of 10.2.95 from the AO that since the subcontractor paid full amount of tax, the profit embedded in such payments was already passed on to the sub-contractors.
49. Ld. DIT is not permitted to substitute a different mote of estimating income by adopting alternate route of estimating expenses to be allowed against undisputed revenue from operations inside India. As per well settled law, he cannot substitute his superior opinion if the view taken by the Assessing Officer is permissible in law. He submitted that for assessment year 2005-06 even as per revised assessment passed by the Assessing Officer in pursuance of order u/s 263 has resulted in lower assessment. He has summarized the position of the original assessment vis-a-vis the revised assessment as under:-
"(Rs. In crores) Revised asstt. In Original asstt.
Pursuant to order u/s 263
Gross Revenue 552.28 552.28
Less:
i) Expenses subject to TDS 167.83 (-)167.83
ii) 35% of material cost 360.00 (-)427.83 384.35
iii) Net income from operations
Inside India 24.35 (10% of balance)38.44"
50. Referring to the aforementioned factual position, he submitted that even after directions given by ld. DIT, the Assessing Officer has allowed 35% of the material cost apart from the expenses subject to TDS and which has resulted in lower assessment than the assessment made by the Assessing Officer. He submitted that the provisions of 50 ITA Nos.2086 & 2087/Del/2009 Section 44BB itself could not even be applied by the Assessing Officer in the revised assessment which has been approved by DRP and while assessing the income of the assessee no guidance has been taken from Section 44BB of the Act. He submitted that contractor's cost on which TDS has been deducted, according to department has no element of profit attributable to the payments made to sub-contractors on which the tax is deducted at source. He submitted that estimate of allowance of expenditure on material has also to be allowed because without substantial expenditure on purchase and transport of material and the consumable construction, installation work of such mammoth contracts cannot be performed. He submitted that the invoices of local purchases of material are duly accepted by the ONGC and these were already produced before the Assessing Officer during the course of assessment proceedings. The estimate of expenditure will lead to arbitrariness in making estimate of allowance of expenditure on account of material as it will vary from year to year without any basis or reason from 0 to 55 and such estimate will be arbitrary and illegal. He submitted that the payments made to sub-contractors on which TDS was deducted has no element of profit and, therefore, DIT could not term the action of the Assessing Officer as erroneous particularly in view of the fact that ld. Assessing Officer has followed article 7(5) of the treaty read with OECD commentary which has been relied upon by ld. DIT himself. He submitted that in fact there is no provision of law which lays down the manner in which fair estimate of profit in a best judgement assessment can be made. Therefore, one method was adopted by the department which was applied by the Assessing Officer and that cannot be held to be erroneous. Reference was made to the decision of Hon'ble Supreme Court in the case of Brij Bhushan Lal Parduman Kumar vs. CIT 115 ITR 524 wherein a question arose before Hon'ble Supreme Court that whether flat net profit rate should be applied to gross turnover of the contractor or to gross turnover net of 51 ITA Nos.2086 & 2087/Del/2009 cost of material supplied by the employer. In order to decide the said controversy, the Hon'ble Supreme Court posed to itself a question, which is the acid test and observations of their lordships were as under:-
"It will appear clear from what has been said above that the authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such estimate the same must not be capricious but should have a reason-able nexus to the available material and the circumstances of the case. It is with reference to these principles that the question raised before us will have to be considered and looking at it from that point of view the real question is whether the turnover represented by the cost of the stores/material supplied by the M.E.S. department involves any element of profit having regard to the terms and conditions on which such supply is made? If it does, then the cost of such stores/material will have to be taken into account, but if it does not, such cost will have to be excluded".
51. After analyzing the transaction involving the supply of material by the employer, it was held by Hon'ble Supreme Court as under:-
"Therefore, since no element of profit was involved in the turnover represented by the cost of stores/material supplied by the M.E.S. to the assessee-firms, the income or profits derived by the assessee firms from such contracts will have to be determined on the basis of the value of the contracts represented by the cash payments received by the assessee- firms from the M.E.S. department exclusive of the cost of the material/stores received for being used, fixed or incorporated in the works undertaken by them."
52. He submitted that it is not even the case of DIT that any element of profit was involved in the payments made by the assessee to sub- contractors for marine spreads, etc., on which TDS was deducted and in the absence of such allegation, ld. DIT was not justified in not approving the mode of computation adopted by the Assessing Officer.
53. It was further submitted that Ld. DIT has no jurisdiction to disturb the best judgement estimate of profit attributable to the installation of PE in India made by the Assessing Officer without pointing out as to 52 ITA Nos.2086 & 2087/Del/2009 how the estimate is arbitrary and baseless. As per well settled law, best judgement estimate of income cannot be interfered with unless it is shown to be unfair, arbitrary and not made on the basis of material available on record which include past history of the case. In the absence of such material, the exercise of power of DIT u/s 263 were wrong.
54. So as it relates to allegation of non-application of mind by the Assessing Officer, it was submitted by the ld. AR that ld. DIT while holding so has ignored the detailed queries raised by the Assessing Officer and the explanation along with evidence filed by the assessee during the course of assessment proceedings as noted in the order sheet entries the copy of which is furnished at pages 199-202 of the Vol.III of the paper book and also letter dated 21st August, 2006 addressed to the assessee. He also ignored assessee's written submissions filed with the Assessing Officer on various dates viz., 31st August, 2006, 8th December, 2006, 14th December, 2006 and 1st March, 2007 wherein all the aspects of the case were duly explained together with supporting evidence, copies of invoices raised during the year along with milestone achievement certificates issued real time at site issued by consultants/agents of ONGC in support of work described in the invoice. The show cause notice issued by ld. DIT is extremely vague and general, the Assessing Officer passed the assessment order after due application of mind and after conducting proper inquiry and this act of the Assessing Officer is demonstrated in the official note signed and appended with the assessment order. He submitted that allegation of DIT that the Assessing Officer did not consider Hon'ble Supreme Court decision in the case of the assessee in respect of assessment year 2005-06 is not true as the said decision came after passing of the order by the Assessing Officer as the judgement is dated 18th May, 2007 and the assessment was completed on 9th March, 2007.
53 ITA Nos.2086 & 2087/Del/2009He submitted that Rule 10 of IT Rules, 1962 deals with the determination of income in the case of non-residents. Under Rule 10
(iii), the Assessing Officer has power to compute income of a non- resident in a manner as he may deem suitable. Such power of the Assessing Officer is very wide and reference has been made to the decision of Hon'ble Supreme Court in the case of Ellerman Lines Ltd. vs. CIT 82 ITR 913 (SC).
55. It was submitted that if assessment order has been passed after due application of mind then revision authority cannot allege for non- application of mind only because of the reason that in the text of the assessment order the Assessing Officer did not discuss such application of mind and reference was made to the following decisions:-
1. Tawari Colonisers Pvt. Ltd. (P. 582-591/DPB-IV)
2. Sanjay Kumar Jain (P. 592-601/DPB-IV)
3. Ratlam Coal 171 ITR 141 MP (P. 22/DPB-I)
4. Goyal Family Trust 171 ITR 698 All. (P. 25/DPB-I)
5. JP Srivastav & Sons. 111 ITR 326 (P. 321/DPB-II)
56. He submitted that Ld. DIT has placed reliance upon the decision of Hon'ble Allahabad High Court in the case of Jagdish Kumar Gulati 269 ITR 71 (All). He submitted that this decision even favour the case of the assessee. In that case, the Assessing Officer had appended "office note" to the assessment order that because of limitation he was completing assessment in haste without conducting proper inquiry and on the basis of that office note the court had held that the record showed that the Assessing Officer had not conducted proper inquiry and, therefore, ld. DIT was justified in canceling the assessment whereas in the case of the assessee office note for both the years clearly demonstrate application of mind by the Assessing Officer and reasons are stated that Section 44BB is not followed in the best judgement assessment made by him. Similarly, he submitted that 54 ITA Nos.2086 & 2087/Del/2009 observations in the cases of Malabar Industrial Co. 243 ITR 83 (SC) (supra) and Seshasayee Paper & Board Ltd. 242 ITR 490 (Mad) (supra) support the case of the assessee.
57. Ld. AR referred to the decision of Hon'ble Delhi High Court in the case of CIT vs. Sunbeam Auto Ltd. 227 CTR 133 (Del) to submit that there is a difference between 'lack of inquiry' and 'inadequate inquiry' and where there is a case of inadequate inquiry, power u/s 263 could not be exercised.
58. Ld. AR also pleaded for lack of opportunity provided by the ld. DIT. He has summarized his contention as under:-
"The DlT's order setting aside the assessment and order fresh assessment is bad in law and deserves to be quashed for the following reasons:-
1) The DlT has failed to substantiate his allegation that the assessment order was passed by the AO without conducting proper enquiries and without application of mind.
2) Allegations made by the DlT without giving notice to the assessee to that effect and other allegations which are contrary to material available to record have resulted in illegal and arbitrary conclusions leading to illegal directions contained in aragraph 8 of the DlT's order.
3) The order has been passed in breach of principles of natural justice and therefore it is a nullity.
4) The Ld. DlT has failed to substantiate the allegation that the assessment order is erroneous in law and prejudicial to the interest of revenue.
5) Regarding allegation in relation to computation of income from operation inside India, the DIT has himself abandoned the stand taken in the show-cause notice as no direction in this regard has been given.
6) The Ld. DlT failed to consider the judgment of the Apex Court in 291 ITR' 482 and made an absurd allegation that the AO should have considered that judgment.
7) Further, despite the fact that there was no change in the factual matrix this year, the DlT miserably failed to point out as 55 ITA Nos.2086 & 2087/Del/2009 to why & how the AO was wrong in following the ITAT and jurisdictional high court, which decisions were subsequent to passing of the assessment order, but prior to DIT's order, were also confirmed by the Supreme Court.
8) Both in respect of income from operations inside India as also outside India, the DlT failed to consider the 'Office Note' of the AO, which is part of records.
9) The DIT has not said a word as to how the computation of income and tax levied on income from HAL and GMR project and interest on I. T. refund was erroneous and prejudicial to revenue.
10) The DIT erred in setting aside the assessment order even though he is totally silent on income from HAL project and interest on IT refund; his finding in respect of income from operations outside India is contrary to the judgment of the Apex Court in 291 lTR 482; and he has himself abandoned the objection given in the only show-cause notice regarding I) income from operations in India.
II) It is submitted that on the following issues the order of the DlT may be quashed:-
i) Income from HAL project where the AO has held against the assessee and the impugned order u/s 263 is totally silent on this issue. The assessee is also in appeal against the order of the AO, which is pending with the CIT(A).
ii) Taxing interest on income-tax refund under the treaty.
The impugned order is totally silent on this issue.
iii) Income from revenue earned from operation outside India, which the Office Note of the AO makes it clear was done on the basis of the order of the jurisdictional High Court on this issue and which was subsequently upheld by the Apex Court. The Ld. OIT not only failed to consider the Office Note but also the Apex Court decision. The DlT's order on' this issue may be quashed.
iv) On the issue of income from operations inside India, the Ld. DlT, has made patently incorrect allegation of non- application of mind and of proper enquiries not having been made by the AO. He is also incorrectly applied law by construing provisions of an international treaty literally and ignoring the assurance contained in paragraph 5 of Article 7 of Indo- Korean DTAA.
Above all, the Ld. DlT miserably failed to establish that the assessment order caused as any loss of revenue. On the other hand, the revised assessment resulted in under assessment of income from operations inside India by about Rs. 14 crores. The revised assessment has become final as the ORP (of which DlT 56 ITA Nos.2086 & 2087/Del/2009 was also a member) has confirmed the revised assessment.
In absence of loss of revenue, the condition of the order being prejudicial to revenue is also not satisfied.
12) It is now well settled that in a case where two or more issues are involved and the CIT sets aside the entire assessment the Tribunal agrees with CIT on one issue but does not agree with the other, it may modify the order u/s 263 by limiting settling aside of the assessment order only in respect of issue on which it agrees with the CIT. The relevant decision placed para of the submissions. "
59. On the other hand, ld. Special Counsel appearing on behalf of the revenue submitted that the issues raised for and on behalf of the assessee in brief are as under:-
1. The DIT has set aside entire assessment order which also takes into account income from the Project 'HAL' and interest on refund from Income tax Department as well interest on deposits.
There is no whisper about these two items of income in the revisionary order.
2. Order of the DIT has been challenged with regard to his decision on income from operations outside India for reasons:
(i) The DIT failed to consider the decision in respect of 'Installation PE' under Article 7(3) of the DTAA between India and Korea, in appellant's own case for earlier years rendered by the ITAT, Hon'ble Jurisdictional High Court and Hon'ble Apex Court, by which it was held that no income is attributable to the 'Installation PE' on the operations outside India as the 'Installation PE' came into existence subsequent to the services rendered and supplies made from outside India, and
(ii) The DIT expected the AO to do impossible while holding order of the AO erroneous for failure to consider the judgment of dated 18.5.2007 of the Hon'ble Apex Court and this was not possible as the AO passed assessment order for the A.Y. 2005-
06 on 09.03.2007.
3. It is further argued that the DIT has wrongly set aside the order of the AO even in respect of the income from operations inside India for following reasons:
a. The AO followed what was being done in the past years and on the same basis as was being adopted by the Department.
b. The formula as contained in letter dated 01.02.1995 was proposed by the Department and the assessee accepted the same though the appellant contends that initially it did not agree but later on it agreed by accepting the orders of the CIT(Appeals) on this issue.
c. The DIT failed to consider the orders of the Hon'ble Bench of the ITAT in appellant's own case for the 57 ITA Nos.2086 & 2087/Del/2009 assessment years 1990-91, 1991-92, and 1996-97 as well for the assessment year 1993-94, which were available to him in the course of the revisionary proceeding u/s 263 of the Act.
d. The DIT did not consider the 'Office Note' recorded by the AO as a foot-note to the assessment order.
e. The DIT ignored the order of the ITAT for the assessment years 1986-87 and 1987-88 which was confirmed by the Hon'ble Apex Court holding that even under Article 7(3) of the Indo-Korean Tax Treaty, the AO after rejecting the accounts had rightly made best- judgment assessment as per sec. 145(3) of the Act.
4. The DIT has not considered the information available on the 'record' of the case while adjudicating the issues.
5. The DIT has not cited any judicial authority or provision of law to hold the order of the AO erroneous.
6. The DIT erred in ignoring Rule 10 of the I.T. Rules, 1962 which deals with the determination of income in the case of Non- residents, in particular, clause (iii) of the said Rule which enables an AO to compute income in a manner as he may deem suitable.
7. The DIT erred in construing the provision of an international tax treaty literally.
8. In the fresh assessment order which was issued as a draft order by the AO, the income computed is less on the revenue from inside India operations and which order has been approved by the DRP u/s 144C of the Act and of which the DIT himself is one of the constituent members.
9. The DIT failed to issue fresh show cause to the appellant on certain issues incorporated in his final order for which no notice was given to the appellant and thereby his order is violative of the principles of natural justice."
60. He submitted that as on date there are four sets of appellate orders available in the case of the assessee as per history of the case of the assessee. Broadly, he submitted that these four sets of orders are as under:-
i) the first set of orders starts from assessment year 1986-
87, 87-88 and 1988-89 which years went upto Hon'ble Supreme Court of India.
ii) The second set of orders relates to assessment years 1994-95 and 1995-96 which was decided by the Tribunal vide order dated 17th October, 2009 on remission of matter from 58 ITA Nos.2086 & 2087/Del/2009 Hon'ble Uttarakhand High Court to the ITAT in ITA nos. 42 and 43 of 2007.
iii) The third set of orders relate to 8 appeals in respect of assessment year 1997-98 to 2004-05.
iv) Fourth set of orders is orders of ITAT dated 3rd March, 2004 relating to assessment year 1993-94 which is reported as 4 SOT
715.
61. Referring to the first set of orders, it was submitted by him that the claim of the assessee company is that it had entered into an agreement with ONGC on 12th March, 1985 for South Bassein field Central complex facility (the object for provision of services, namely, design, engineering, fabrication, installation, commissioning and outside India work of the designing, engineering and fabrication). It was claimed by the assessee that there is no PE in terms of Article 5 of the tax treaty and the business income earned by it cannot be assessed to tax under Article 7 of the treaty in the absence of PE. It was further the claim of the assessee that Indian operation continued from 1st November, 1986 to 12th April, 1987 for a period less than 9 months and, thus, there was no PE in terms of tax treaty. The finding of the Assessing Officer in this regard is that there was a PE and he assessed 2% of the receipts relating to outside India activities and so far as it relates to activities inside India, the Assessing Officer assessed the same @ 10% vide assessment completed on 8th June, 1992 under the provisions of DTAA. He submitted that CIT (A) held that the assessee did not maintain separate books for each project. It had a PE in India as Indian operation extended beyond 9 months. The assessee has a project office in Bombay which had a close link with the operations. However, the CIT (A) reduced the income from outside India activity @ 1% of the receipts. In respect of activities inside India, he upheld the applicability of 10% taking the principle explained in Board Instruction No. 1767 dated 1st July, 1987. ITAT reduced the 59 ITA Nos.2086 & 2087/Del/2009 income in respect of activities inside India @ 3%. With regard to activities outside India, it deleted the addition by holding that no income accrued in India in respect of activities admittedly carried on in Korea. The Tribunal upheld the applicability of Section 145 of the Act and also held that computation can be made under relevant provisions of the Act read with guidelines contained in Instruction No.1767. The Hon'ble Uttarakhand High Court vide its order dated 30th March, 2006 in ITA Nos.448 and 473 to 475 of 2001 reported in 291 ITR 450 (Uttarakhand) dismissed the appeals of the department and held that ITAT was right in rejecting the argument of the company of applicability of zero profit on Indian operation. The court also confirmed the findings of ITAT with regard to working of profits @ 3% from Indian operation. It was further held that the ITAT was right in holding that a specific provision would override the general provision. The matter was finally decided by the Hon'ble Supreme Court in the decision dated 18th May, 2007reported as 291 ITR 481. The Court held that the installation PE emerged only after the contract with ONGC stood concluded. It emerged only after the fabrication platform was delivered in Korea to the agencies of ONGC. Therefore, the profit on such supplies of fabricated platform cannot be said to be attributable to the PE and, thus, it was held that the profits that accrued to the Korean operations were not taxable in India. It was further observed that in the case of turnkey project, the PE is set up at the installation stage while the entire turnkey project including the sale of equipment is finalized before the installation stage. The setting up of PE in such a case is a stage subsequent to the conclusion of the contract. It is a result of sale of equipment that the installation PE comes into existence. However, this is not an absolute rule. In the present case, there was no allegation made by the department that the PE came into existence even before the sale took place outside India. Similarly, in the present case, there was no allegation made by the department 60 ITA Nos.2086 & 2087/Del/2009 that the price at which ONGC was billed/invoiced by the assessee for supply of fabricated platform included any element for services rendered by the PE. He submitted that thus, the Hon'ble Supreme Court has held that in the circumstances not all the profits of the assessee company from its business connection in India (PE) would be taxable in India, but only so much of the profits having economic nexus between PE in India would be taxable in India. On the quantum of taxable profits attributable to Indian PE of the assessee relating to work of installation and commissioning of the platforms, Hon'ble Supreme Court for the reasons recorded by it held that they were taxable @ 10% of the payments relating to the said services/facilities carried on in Bombay High and the reasons by the Courts were as under:-
"1. Firstly, the accounts submitted by the assessee were rejected and the A.O. had to invoke the provisions of Section 145 of the Act by way of best judgement assessment.
2. Secondly, the assessee themselves contended that the A.O. should have computed the income relating to Indian operations under section 44BB or under Instruction No. 1767 issued by the CBDT dated 1.7.1987.
3. Thirdly, Chapter IV of the Act contains provisions for presumptive taxation of business income in certain cases as prescribed in Sections 44B, 44BB and 44BBA and 44BBB of the Act. In the present case, A.O. has rejected the accounts and that has not been challenged. Moreover, the assessee appeared before the department and submitted that its income from Indian operations be computed under section 44BB or under Instruction No.1767 issued by CBDT. Under the said Instruction, in cases where the sales takes place outside, as in this case, only 10% of the gross receipts in respect of the activities of installation, commissioning, etc. performed in India will be taxable. In view of the stand taken by the assessee, the Court held that the CIT (A) was right in computing the taxable profits at 10% of the gross receipts in respect of such activities in India. To this extent, the decision of the ITAT was reversed.
4. Fourthly, once the provisions of section 44BB of the Act apply, two conclusions follow. The first is that 10% of the receipts by the foreign resident is chargeable to tax and the other conclusion is that 90% of the receipts of that foreign 61 ITA Nos.2086 & 2087/Del/2009 resident as well as receipts/gains other than those mentioned in section 44BB is also not chargeable to tax, and "
5. Lastly, under the concept of Contract Accounts, two methods exist for ascertaining profit for contracts, namely, "Completed Contract Method" and "Percentage of Completion Method." In the present case, the A.O. has rejected the Completed Contract Method which is not challenged. After making observations on the deficiency on the part of the assessee that if failed to provide details to the A.O., Hon'ble Apex Court held that when the assessee does not give particulars then CIT (A) was right in estimating the profits of the assessee at 10% of the gross receipts in respect of the activities of installation, hook-up, and commissioning performed by the Indian PE in Bombay High."
62. The conclusion of the decision as carried in para 15 of the judgement was as under:-
"(a) In the facts and circumstances of the case, profits, if any, from the Korean operations (designing and fabrication) arose outside India, hence, not taxable.
(b) As regards the quantum off profits embedded in the Indian operations attributable to the Indian PE of the assessee, we hold that the CIT (A) was right, in the facts and the circumstances of this case, in attributing the profits of the Indian PE at 10% of the gross receipts in respect of its activities of installation, commissioning, etc. performed in India. The same shall be taxable accordingly."
63. He submitted that with regard to the second set of orders, the matter was remitted by Hon'ble Uttarakhand High Court to the ITAT for deciding the same afresh. Consequently the order has been passed by ITAT which is dated 17th October, 2009 whereby the appeals filed by the revenue have been dismissed and it is held that no interference was called for in the order of the CIT (A) for the following reasons:-
"1. After considering Clause (a) of Para 15 of the judgment of Hon'ble Apex Court as per direction of Hon'ble Uttarakhand 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 arisen outside India, and 62 ITA Nos.2086 & 2087/Del/2009
2. Regarding Clause (b) of Para 15 of the judgment of Hon'ble Apex Court, we find that in the present two years, there is no dispute regarding the quantum of profit embedded in the Indian operations attributable to Indian PE of the assessee and hence this clause of para 15 is not applicable in the present two years which are before us."
64. So as it relates to third set of orders which are in respect of assessment year 1997-98 to 2004-05,he submitted that firstly, the question decided was whether Article 5(3) of DTAA will have precedence over Article 5(1) and 5(2) and it was held that provisions of Article 5(3) of DTAA are more specific as compared to those of Articles 5(1) and 5(2) and so the provisions of Article 5(3) will take precedence of those Article 5(1) and 5(2) and it was held that no PE of the assessee could be held to be in existence in India until the assessee began its project of "installation activities connected therewith," as per Article 5(3). It was held that all the designated work of the assessee outside India was carried much before the dates of arrivals of the structure in India. Pertinently, the duration of each of the projects was less than 10 months. The certificates in this regard were duly furnished. Mere correspondence from the assessee's Mumbai office is of no consequence in holding the office of the assessee as PE in India. It also does not make any difference if this office i.e., the Project Office remained in existence for a number of years and it was manned by senior officials of the assessee. For each fresh contract, permission was required to be sought from the RBI for opening a project office. Such permission is granted subject to limitation. These limitations are stringent and, in this manner, it was held that Mumbai office cannot be termed to be PE of the assessee in India. On the exclusion of revenues from outside India operation, the Tribunal concluded the matter in favour of the assessee with the following observations:-
"12. The issue of exclusion of revenues from outside India operation is covered by not only Supreme Court judgment in assessee's own case for assessment years 1987-88 and 1988-89 63 ITA Nos.2086 & 2087/Del/2009 (supra) but also the Tribunal order for assessment year 1989-90 and the CIT (A)'s order for assessment year 1992-93. For assessment years 2005-06 and 2006-07, the Assessing Officer himself did not bring to tax the outside India receipt. Copies of these assessment orders are before us at pages 99 to 104 and 105 to 109 respectively of the assessee's paper book."
65. He submitted that so far as it relates to exclusion of revenues from inside India operation, the findings are recorded in para 13 of the order. In respect of these assessment years, the Tribunal has concluded that inside India operation in the absence of PE in India could not be taxed and he has tabulated the position in the following table:-
S.No. A.Y. Projects Involved Remarks
1. 2000-01 B-55 CRMP IOCL BHN Project
completed in
less than 9
months, hence
no PE
2. 1997-98, B-55 HX-HY IOCL B-121 For the
2000-01, assessment year
2003-04 1997-98, project
and 2004- in less than 9
05 months, hence
no PE
3. 2001-02 ----- CRMP ------ BHN No PE
66. He submitted that fourth set of order is dated 3rd March, 2004 passed by the Tribunal in respect of assessment years 1993-94 and the said decision is reported as 4 SOT 715. He submitted that in that order the observations of the Tribunal in para 18 to 27 are important and the final conclusion of ITAT was as follows:-
"the assessee did not have PE in India and that the outside India works were mostly carried out from Korea itself. The department has not been able to controvert this factual finding."
67. Referring to para 9, he submitted that the Tribunal decided the issue in favour of the assessee on the observations that CIT (A) had placed reliance on the order of his predecessor for assessment year 64 ITA Nos.2086 & 2087/Del/2009 1992-93 and the department did not prefer appeal against that order of the CIT(A). He further submitted that in para No.24, the Tribunal has observed that even as per guidelines of CBDT order No.1767 dated 1st July, 1987, the department was required to make thorough probe and investigation to ascertain as to what was the nature of the establishment of the assessee in India for carrying out the projects in question and for that purpose an inquiry was needed to be made regarding the terms of the relevant contracts and the activities carried out by the assessee in respect thereto and the department did not carry such inquiry itself and it did not require the assessee to give details in respect thereof. As against that, assessee had obtained and filed certificates from tax authorities of Korean Government as well as from ONGC about the activities carried out by the assessee. Similarly, he also referred to the paras 25, 26 and 27 of the aforementioned order. He submitted that the clear mandate of the Tribunal was that the department did not make any inquiry.
68. In the facts he submitted that it will be relevant to examine the question whether an Assessing Officer can enter into an agreement with the assessee to bind the department in perpetuity to adopt a formula devised by him and the assessee. He submitted that the situation in the present case is more than intriguing as the formula even ignores the rule laid down by Hon'ble Apex Court though subsequent to the order passed by the Assessing Officer. He submitted that if the argument of the assessee is to be accepted that this formula requires to be adopted for all the time to come, till appellant remained engaged into the business, then, there will be no end to the matter. He submitted that even according to the rule of consistency such case of the assessee cannot be accepted. He submitted that if the rule of consistency is seen in the light of the Indian law, then, it can be said that mandate given in Section 44BB is 65 ITA Nos.2086 & 2087/Del/2009 to compute profit @ 10% is a law which cannot be given a go by just for the sake of maintenance of consistency. He, in this regard, referred to the decision of ITAT Delhi in the case of DSD Industrieanlagen Gmbh vs. Dy. Director of Income Tax 129 TTJ 84 (Del). He submitted that rule of consistency alone cannot be decisive, the nature of expenses was also an important question of law and reference was made to the decision of Hon'ble Supreme Court in the case of CIT vs. Oswal Agro Mills Ltd. 313 ITR 24 (SC). He further submitted that even deviation is permissible from the consistent method where there is insufficiency in the probative and probable value of the expenditure incurred and, for this purpose, he relied upon the decision of Hon'ble Delhi High Court in the case of Saga Departmental Stores Ltd. vs. CIT 325 ITR 324 (Del). He submitted that in the changed circumstances it is possible to differ from an earlier view and reference was made to the decision of Municipal Corporation of City of Thane, Petitioner vs. M/s Vidyut Metallics Ltd. & Anr., Respondent (2007) 8 SCC 688.
69. He submitted that if it is seen in the light of the OECD Model Convention and other commentaries, according to opinion expressed by late Prof. Klaus Vogel on para 6 of Article 7, is in pari materia with the para 5 of Indo-Korean DTAA. Reference in this regard was made to the relevant portion of the commentary of Klaus Vogel which is placed at page 138 of the paper book.
70. He submitted that meaning of the word 'erroneous' as existed in Section 263 has been explained by jurisdictional High Court in the case of Duggal & Company vs. CIT 220 ITR 456 (Del) wherein it has been held that CIT can regard an order erroneous on the ground that in the circumstances of the case the Assessing Officer should have made further inquiries before accepting the statement made by the assessee in his return. Similar ratio has been laid down in the case of Rajalaxmi Mills Ltd. vs. ITO 121 ITD 343 (Chennai) (SB). He submitted that in all 66 ITA Nos.2086 & 2087/Del/2009 the aforementioned decisions the mandates of the court was based on the fact that the department did not make inquiries. He referred to the decision of Delhi High Court in the case of CIT vs. Sunbeam Auto Ltd. 189 Taxman 436 (Del) to submit that in a case where the Assessing Officer has accepted without obtaining the details and without conducting further inquiry, as assessment had been completed in routine matter without application of mind, the Commissioner was justified in holding that assessment order was erroneous and prejudicial to the interest of revenue. For this purpose, Ld. AR also placed reliance on the decision of Hon'ble Rajasthan High Court in the case of Smt. Renu Gupta vs. CIT, 301 ITR 0045 (Raj). He submitted that doctrine of merger is not applicable to the facts of the case and he placed reliance on the following decisions:-
i) Aerens Infrastructure and Technology Ltd. vs. CIT (2004) 271 ITR 15 (Del)
ii) CIT vs. Printers House (1998) 233 ITR 666 (Del)
iii) CIT vs. Ganesh Steel Industries (2009) 184 Taxman 220 (P&H)
iv) Panchaman Traders vs. CIT (2010) 191 Taxman 264 (Ker.)/(2010) 323 ITR 334 (Ker.)
71. He submitted that power of revision has been held to be correctly exercised in a case where a contractor earlier assessed @ 10% was required to be assessed by the Commissioner on the full amount received as an arbitration award in respect of some contract and he rejected the order of Assessing Officer where he had assessed only 10% of the amount of arbitration award and reference in this regard was made to the decision in the case of Vedicattu Engineering Company vs. CIT 302 ITR 142 (Ker.)
72. He submitted that failure of the assessee to produce documents, etc. may invite adverse inference and he in this regard referred to the decision of Hon'ble Delhi High Court in the case of CIT vs. Motor 67 ITA Nos.2086 & 2087/Del/2009 General Finance Ltd.. 254 ITR 449 (Del) and Motor General Finance Ltd.
vs. CIT 267 ITR 381 (SC) wherein it was held that since the assessee had not produced material despite opportunities given by the Assessing Officer, an adverse inference in terms of Section 114 of Indian Evidence Act was to be drawn.
73. He further submitted that Instruction No.1767 dated 14th July, 1987 was applicable only for a period of three years beginning from assessment year 1987-88 and not beyond that.
74. Replying to the arguments submitted by ld. AR, he submitted that when the Assessing Officer passed assessment order for assessment year 2005-06, he had benefit of the following orders passed by ITAT and High Court:-
i) Order dated 30.8.1999 of the ITAT in respect of A.Y. 1986-87 to 1988-89
ii) Order dated 3.3.2004 of the ITAT in respect of A.Y. 1993-94
iii) Order dated 19.5.2006 of the ITAT in respect of A.Y. 1994-95 & 1995-96.
iv) Order dated 30.3.2006 of Hon'ble High Court in respect of A.Y. 1986-87 to 1988-89
75. He submitted that the Assessing Officer failed to follow observations/remarks made by the ITAT to find out whether it was PE in respect of Mumbai office or that installation PE rendered any services in respect of operation outside India so as to tax revenue from outside India operation as being attributable to PE in India. The revenues from outside India operations were being consistently taxed by the department @ 1% of the gross receipts upto assessment year 2004-05 and the Assessing Officer, for the first time, in assessment year 2005-06, without assigning any reason failed to follow the earlier orders. He failed to examine the issues concerning the claim of the 68 ITA Nos.2086 & 2087/Del/2009 assessee regarding revenue from outside India operations though the facts were altogether different from the facts of earlier years. The Assessing Officer has recorded in para 2 of the office note that the department has not accepted the decision of Hon'ble High Court and the appeal is filed in Hon'ble Supreme Court. It is further recorded that in case the Hon'ble Supreme Court decides to tax the outside India receipts in the case of the assessee, the action shall be taken as per law. Thus, he submitted that the Assessing Officer failed to make inquiries which were required to be made. He submitted that revenue from inside India operation was taxed @ 20% by the Assessing Officer for assessment years 1986-87 to 1988-89 which was reduced by the CIT (A) @ 10% of the gross receipts and further reduced to 3% of the gross receipts by the ITAT in order dated 30th August, 1999.
76. Replying to the first issue raised by the assessee that Ld. DIT has set aside the entire assessment order which sweeps the income from the project 'HAL', Ld. Special Counsel submitted that income from interest and HAL project is discussed by the Assessing Officer in para 6, 6.1 and 7 of the assessment order and he has rejected the explanation of the assessee in regard to HAL project. Ld. AR submitted that the entire case of the assessee revolves around two streams of revenue being inside and outside India operations and on these aspects ld. DIT has found that order of Assessing Officer is erroneous and prejudicial to the interest of revenue.
77. With regard to the objection of the assessee regarding assessibility of the revenue from operation outside India, he submitted that the Hon'ble Supreme Court in the case of the assessee itself observed that there was no allegation made by the department that the PE came into existence even before the sale took place outside India. There was no allegation made by the department that the price at which ONGC was billed/invoiced by the assessee for supply of 69 ITA Nos.2086 & 2087/Del/2009 fabricated platform including any element for services rendered by the PE and it is in these circumstances the outside India revenue were not held to be taxable and the matter was not remitted back. He submitted that in the light of these observations of the Hon'ble Supreme Court the Assessing Officer has grossly failed to examine the activities of the PE in the years under consideration as there was no dispute that PE existed in these years. He submitted that in earlier years the existence of installation PE itself was in question and the department was only making its case on the basis of presence of the project office in Mumbai. He contended that once PE was an admitted fact, then, it was the duty of the Assessing Officer to ascertain the activities of such PE. The Assessing Officer was required to make inquiries in respect of project office at Mumbai even as per aforementioned order of the Tribunal in respect of assessment year 1993-94.
78. It was further submitted that ld. DIT is not wrong in considering the decision of Hon'ble Supreme Court in the case of the assessee, though the Assessing Officer when passed order for assessment year 2005-06 had no benefit of decision of Hon'ble Supreme Court as it was rendered much later to the date of the assessment. It was pointed out that nevertheless, the Assessing Officer had the benefit of at least the order of the CIT (A) which was followed by ITAT and, thus, powers u/s 263 were rightly invoked.
79. In response to the argument of the assessee that the Assessing Officer was correct in following the method adopted in past years for assessing the income of the assessee as per letter dated 1st February, 1995 proposed by the department during the course of proceedings before the CIT (A), it was submitted by Ld. Special Counsel that as per letter dated 13th March, 2009 filed by the assessee before DIT during the course of proceedings u/s 263, it was mentioned in para 11 of the 70 ITA Nos.2086 & 2087/Del/2009 said letter that for assessment year 1990-91 the department and the assessee had agreed before CIT (A) for a proposal of application of deemed profit rate of 10% after allowing the sub-contractor cost and salary on which TDS has been deducted read with section 40 of the Act and Article 7 of the Convention and the said fact has been mentioned by the CIT (A) in his order dated 19th April, 1995 for assessment year 1990-91 and the assessee had stated before the CIT (A) that he accept such proposal without prejudice and in order to buy peace and to avoid litigation. In such a case, the assessee will not press for other expenses of marine cost, mineral insurance and transportation, etc. With regard to these submissions, when the comments were called upon from Assessing Officer, he mentioned that the assessment order under consideration may be restored back for framing it denovo. He submitted that now the assessee cannot allege that the department made this offer which was hesitatingly agreed. He submitted that it can be seen that the assessee itself initially offered the revenue from inside operation to be taxed in terms of Section 44BB of the Act and not under DTAA between India and Korea and as this fact has been recorded in the decision of Hon'ble Supreme Court in para 13 of the judgement dated 19th May, 2007. He submitted that it appears that it is at a later stage, after having realized that it may be required to pay more tax if it opts for application of Section 44BB as was done for assessment years 1986-87 to 1988-89, the assessee changed its stand to be assessed under the relevant tax treaty and thus, the assessee now cannot claim that the same basis be allowed to be continued in perpetuity even when the facts and circumstances changed over the years.
80. In response to the arguments of the Ld. Counsel of the assessee that ld. DIT has failed to consider the order of ITAT in assessee's own case for assessment year 1990-91, 1991-92 and 1996-97 as well as for 71 ITA Nos.2086 & 2087/Del/2009 assessment year 1993-94 which were available to him during the course of proceedings u/s 263 of the Act, ld. Special Counsel submitted that the manner in which those assessments were framed has been made clear in the aforementioned arguments and there was nothing to consider for the DIT and DIT is not supposed to look into these details. In the revision proceedings what he is expected to examine is the assessment order made by the Assessing Officer and its merits in order to determine that whether such order falls within the ambit of Section
263.
81. In response to the arguments of the Ld. AR of the assessee that Ld. DIT did not consider office note recorded by the Assessing Officer, it was submitted by ld. Special Counsel that Ld. DIT has recorded in his order that he has examined the records of the case and, therefore, the allegation of Ld. AR that he did not examine the office note is without any basis. He submitted that office note paras 1-3 and 3.1, para 1 deals with the method adopted for the assessment of revenue from inside India operation which is based on the stand taken by the department in the preceding assessment years as provided in para 5 of Article 7 of DTAA. Para 2 deals with the revenues from operation outside India and in the end the Assessing Officer himself records that in case of Hon'ble Supreme Court decide to tax outside India receipts, then, action shall be taken as per law. He submitted that ld. DIT in his revision order has considered office note for both the years and has come to the conclusion that assessment order passed by the Assessing Officer is erroneous as well as prejudicial to the interest of the revenue.
82. In response to arguments of the ld. Counsel of the assessee that DIT has ignored the orders of ITAT for assessment year 1986-87 and 1987-88 which have been confirmed by Hon'ble Supreme Court holding that even under Article 7 (3) of the treaty, the Assessing 72 ITA Nos.2086 & 2087/Del/2009 Officer after rejecting the accounts had rightly made best judgement assessment as per Section 145 (3) of the Act. He submitted that in fact the Assessing Officer is to be faulted for that lapse. The ITAT for those assessment years had held that revenue from inside India operations were to be taxed @ 3% of the gross receipts and those findings were reversed by the Hon'ble Apex Court and the order of the CIT (A) was restored for taxing the income from inside India operations @ 10%. As regards the income from outside India operation, the findings of the ITAT were upheld in the context of facts and circumstances of the case and Hon'ble Supreme Court has not laid down an omnibus ruling that in all situations such an income is not exigible to tax. The decision was based on the fact found for those assessment years and the facts for the years under consideration are altogether different for the reason that for the present years there is no dispute that PE was existing. The only inquiry which was left to be done was in the context of the judgement of the Hon'ble Supreme Court to find out whether this PE has rendered any service and to ascertain whether the income from the activities outside India could be attributed to the said PE on account of any nexus of such an activity with the said PE. The Assessing Officer had failed to make such inquiries and it is what has been noticed by the ld. DIT.
83. With regard to the argument of Ld. AR that ld. DIT did not consider the information available on record, while adjudicating the issue, it was submitted by Ld. Special Counsel that such an allegation is without any basis. Ld. DIT has categorically recorded this fact that he has examined the record of the case and he has passed the detailed order thereafter.
84. He submitted that as per argument of the Ld. AR, ld. DIT has erred in ignoring Rule 10 of IT Rules, 1962 which deals with the deduction of income in case of non-residents, in particular, clause (iii) 73 ITA Nos.2086 & 2087/Del/2009 of the said rule which enable an Assessing Officer to complete income in a manner as he may deem suitable, it was submitted that there is no reference to the applicability of these rules in the assessment order by the Assessing Officer. The assessee has exercised its option to be based in the terms of DTAA between Indo-Korean and if it is so, there is no rationale of applicability of these rules.
85. In response to the argument of Ld. AR that ld. DIT has erred in considering the provisions of international tax treaty literally, it was submitted by Ld. Special Counsel that ld. DIT has not gone into this aspect at all and the order passed by the Assessing Officer has been found to be erroneous in view of the findings recorded by the ld. DIT in paras 7.1 and 7.3 at pages 15 and 16 of his order. Therefore, his order cannot be said to be legally untenable.
86. In response to the argument of Ld. AR of the assessee that in the fresh assessment order issued as a draft order, the Assessing Officer has computed the income of the assessee at lesser amount from inside India operation and such order of the Assessing Officer has been approved by the DRP u/s 144C of the Act of which ld. DIT himself is one of the members. He submitted that if such logic of the assessee is accepted, then, by same logic the upward revision in respect of revenue from outside India operation in the fresh assessment order should be confirmed. It was submitted that the scope of the present appeal should be restricted to the facts and circumstances existing at the time of revision by the ld. DIT and not taking into consideration the development in subsequent proceedings and the reason for doing so is that there are certain contentions raised by the assessee which are in conflict with the contentions being raised in the course of the present appeal. At this stage the revenue would not like to prejudice the case of the assessee on this ground in the manner that the assessee is 74 ITA Nos.2086 & 2087/Del/2009 seeking to prejudice the case of revenue by raising the issue of fresh assessment proceedings pursuant to order u/s 263 of the Act.
87. With regard to the argument of Ld. AR that DIT has failed to issue fresh show cause notice to the assessee on certain issues incorporated in his final order for which no notice was given to the assessee and, therefore, his order is violative of principles of natural justice it was submitted that there was no necessity of issuing such show cause notice as the assessee was given full opportunity to meet out his case and in fact no such ground has also been taken in the grounds of appeal filed by the assessee and, in this manner, ld. Special Counsel has concluded the arguments on behalf of the revenue.
88. In rejoinder, ld. Counsel of the assessee submitted that ld. Special Counsel of the revenue is incorrect in contending that the assessee has a PE in India. He submitted that the real question is that whether the assessee has an installation PE in the terms of Article 5 (3) of the DTAA. He submitted that for the assessment years 1986-87 to 1988-89, the Tribunal in its order regarding existence of PE in paras 44 and 45 has held as under:-
a) Specific provision of Article 5(3) of the DTAA prevails over general provisions of Article 5(1) & 5(2).
b) As regards existence of PE, the assessee has not furnished any proof which would show that the Indian portion was completed within 9 months in order to escape the existence of installation PE under article 5(3) of the DTAA.
c) Once the books are found to be unreliable and the AO rejects the accounts it upheld application of provisions of sec. 145.
d) Computation of income on estimate basis should be made at 3% of gross receipts.
89. He submitted that Uttarakhand High Court has confirmed the order of the ITAT. The Assessing Officer did not apply 3% rate of gross 75 ITA Nos.2086 & 2087/Del/2009 receipts because the formula offered to the assessee earlier in 1995 and accepted by the assessee would yield much higher taxable income from operations inside India. He in this regard referred to a chart placed at Annexure III according to which if the rate of 3% is applied as per ITAT decision, then, tax paid/payable by the assessee will come to ` 6.93 crore against ` 16.08 crore levied by the Assessing Officer vide assessment order dated 9th March, 2007. He submitted that even in the assessment framed in pursuance of order u/s 263 the tax levied on inside India revenue is only a sum of ` 10.22 crore which is less than the tax levied by the Assessing Officer in his order dated 9th March, 2007.
90. He further submitted that the dispute on the same issue again arose in assessment years 1994-95 and 1995-96 and the Tribunal after considering the similar plea of Ld. DR that during those years the installation PE had came into existence has held that no profit from operations outside India was attributable to the PE and after considering the decision of Apex Court in the case of the assessee itself, the Tribunal has held that in the facts and circumstances of the case profit earned, if any, from the Korean operations (designing and fabrication) is not taxable in India because the same has arisen outside India. He submitted that the Assessing Officer did not have the benefit of Hon'ble Supreme Court decision and as against that Ld. DIT was having before him the said decision of Hon'ble Supreme Court and Ld. DIT did not discuss that decision in his order and there is no allegation in the order of the DIT that the consideration for supplies, procurement and fabrication outside India was not at arm's length price or that the price paid by ONGC/GMR for operations outside India includes any element for the activity of PE in India. He submitted that in the absence of any such allegation Ld. Special Counsel is precluded from justifying the setting aside of the assessment order in respect of 76 ITA Nos.2086 & 2087/Del/2009 income from operations outside India by raising altogether a new issue and reference in this regard was placed on the decision of the Tribunal in the case of Kaval Pro Exports 297 ITR (AT) 49. He submitted that perusal of notice u/s 263 will show that Ld. DIT has set aside this part of assessment order solely on the ground of non-application of mind by the Assessing Officer as, according to him, the Assessing Officer did not consider the decision of Hon'ble Supreme Court in the case of the assessee. It was submitted that the said decision of Hon'ble Supreme Court was pronounced much later from the date of assessment order. He submitted that in the office note the Assessing Officer has clearly relied upon the decision of Hon'ble Supreme Court in the case of Ishikawajima - Harima Heavy Industries Co. Ltd (supra) and decision of Hon'ble Uttarakhand High Court in the case of the assessee itself and Ld. DIT has failed to point out as to how the Assessing Officer has erred in following those decisions.
91. With regard to income from operation of PE inside India, it was submitted by Ld. AR that Special Counsel of the Revenue is construing the provisions of Article 7 literally which is not permissible as per decision relied upon by him while submitting his arguments. He submitted that even according to the OECD commentary, in a case where the accounts of PE are not reliable, the tax authority should make a fair estimate of profit. He submitted literal construction of Article 7(3) even does not support the contention of Ld. DIT raised in the notice u/s 263 that only such expenses on which tax has been deducted at source should be allowed and this is evident from the later order passed in pursuance of order u/s 263 where DRP has approved deduction of further 35% of the claim of such expenditure which, in fact, has resulted in under-assessment of income of Indian PE by ` 14 crore.
77 ITA Nos.2086 & 2087/Del/200992. He submitted that in a case where the assessee did not opt for application of Section 44BB and has accepted the mode of estimation of the profit of the PE as offered by the Assessing Officer vide letter dated 20th February, 1995, the aforementioned decision of Hon'ble Apex Court will not have application so as it relates to estimate 10% income of the revenue relating to inside India.
93. He submitted that this fact is clear from the order of the Tribunal in respect of assessment year 1994-95 and 1995-96 which order has been passed by the Tribunal while giving effect to the directions of Hon'ble jurisdictional High Court and he invited our attention towards the following observations from the said order:-
"Regarding clause (b) of para 15 of the judgement of Hon'ble Apex Court, we find that in the present 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 years."
94. He, therefore, contended that the facts for the present years are also same. The assessee did not opt for application of Section 44BB. It opted for applications of provision of DTAA and estimation was agreed to be done as per formula adopted by the department to assess such income in respect of earlier years. Hence, he submitted that the issue is covered by the aforementioned decision of the Tribunal for assessment year 1994-95. He submitted that the said decision of the Tribunal rendered in respect of assessment year 1994-95 and 1995-96 has been accepted by the department as no further appeal has been filed by the department.
95. He submitted that while submitting the arguments it has already been made clear that there is no conflict between Article 7(3) of the DTAA and the provisions of Section 145 (3) of the Act.
78 ITA Nos.2086 & 2087/Del/200996. It has already been pointed out that according to the arguments of Ld. AR, the facts relating to assessment year 2006-07 are similar except two differences which have been pointed out in para 30. The arguments of Ld. AR for assessment year 2006-07 almost remained the same and it was contended that the Assessing Officer had opted for one view out of the alternatives available to him and, therefore, based on plethora of case laws touching upon this issue Ld. DIT could not have invoked jurisdiction u/s 263. Against this argument, Ld. Special Counsel of the assessee submitted that this argument of the assessee lacks substance and is totally fallacious. He submitted that it has not been explained that on which issue the Assessing Officer had two alternatives available with her out of which one could be considered as plausible view. He submitted that such contention seems to arose from the fact that the Assessing Officer considered the applicability of Section 44BB of the Act in the context of the decision of Hon'ble Supreme Court in assessee's own case for assessment year 1986-87 to 1988-89. If it is so, then, it may be emphasized that the assessee had opted to be assessed under the provisions of India-Korea Tax Treaty, therefore, Section 44BB was otherwise inapplicable. He referred to the assessment proceedings as noted in the order sheets and contended that the assessment proceedings were carried on in two stages, first, in the month of March, 2007 and, thereafter, in the months of September and October, 2007. On 18th March, 2007 the Assessing Officer asked about the applicability of Section 44BB of the Act, however, on the very date a letter is available explaining this issue. During the second phase of proceedings in the month of September, 2007 on 21st September, 2007 the Assessing Officer again asked the assessee as to why its income should not be assessed u/s 44BB of the Act. The Assessing Officer never considered the letter dated 19th October, 2007 and closed the hearing on 24th September, 2007. He submitted that if 79 ITA Nos.2086 & 2087/Del/2009 the assessee intends to contend that Article 7(3) of the treaty allows the deduction of expenses, then, all expenses could have been claimed by the assessee which is not done as the Assessing Officer sought to invoke the best judgement assessment in the absence of details and accounts maintained by the PE. If the Assessing Officer invoked the provisions of Section 144 of the Act, then, it is open for her to examine whether application of Section 44BB would be more appropriate or the manner in which the assessments were getting completed in the past. At this juncture, the judgement of Hon'ble Apex Court was available with the Assessing Officer and she could examine the assessability of the income from both the angles. This having not been done, the Assessing Officer has committed an error for which the DIT was justified in invoking the provisions of Section 263.
97. Another argument of the ld. AR was that the Assessing Officer had applied her mind after making proper inquiries. On this argument, ld. Special Counsel submitted that this proposition laid down by Ld. AR is absurd if one look at the assessment order passed by the Assessing Officer. He submitted that it has already been submitted that order for assessment year 2006-07 is in verbatim the same and comparison in this regard has been filed in the shape of a chart. Except that difference in figures, etc., the Assessing Officer has adopted the wordings of assessment order word by word, sentence by sentence and para by para. He submitted that it is a simple case of cut and paste, therefore, the assessment order passed by the Assessing Officer cannot be said to be with a due application of mind. He submitted that recording the facts in office note only tantamounts to a ritual performance which does not indicate application of mind.
98. With regard to the argument of Ld. AR that the Assessing Officer has acted upon the formula adopted by the revenue in the past years, it was submitted by Ld. Special Counsel that this is totally a false claim 80 ITA Nos.2086 & 2087/Del/2009 of the assessee. During the course of hearing of the appeals, the assessee did not raise this issue, hence, this argument of the assessee should be rejected.
99. It is in this manner, both the parties concluded their arguments for both the years.
100. We have carefully considered the rival submissions in the light of the material placed before us. By the impugned orders, ld. DIT has held that the assessment orders passed by the Assessing Officer are erroneous as well as prejudicial to the interest of revenue. He, therefore, has set aside the impugned assessments and asked the Assessing Officer to re-determine the question regarding taxability of receipt of the assessee from inside India revenue as well as from outside India revenue. He has assailed the action of the Assessing Officer in the impugned assessment orders regarding inside India revenue on the ground that the Assessing Officer had committed an error in first reducing the expenses towards sub-contractors cost, salaries, etc. from the gross inside India revenue and, then, applied the rate of 10% on the balance revenue. According to show cause notice issued by ld. DIT, he was of the opinion that no further reduction on account of estimation of income from inside India revenue was permissible. The Assessing Officer should have assessed the balance inside India revenue as the income of the assessee. So far as it relates to revenue relating to outside India operations, it is the case of the Ld. DIT that the Assessing Officer has not properly examined the case of the assessee to bring that revenue chargeable to tax in India. As against that, it is the case of the assessee that power u/s 263 has wrongly been exercised by ld. DIT. All these issues were properly examined by the Assessing Officer during the course of assessment proceedings. Proper details were submitted as called for by the Assessing Officer. The Assessing Officer had taken a conscious 81 ITA Nos.2086 & 2087/Del/2009 decision in making the assessment as per history of the case of the assessee and, therefore, the order passed by the Assessing Officer could neither be called as erroneous nor as prejudicial to the interest of revenue. The facts in detail have already been described in the above part of this order. We are called upon to examine whether or not ld. DIT has rightly exercised his powers u/s 263 to set aside the impugned assessments.
101. The law relating to exercise of power u/s 263 is well settled. The prerequisites for the exercise of jurisdiction by the Commissioner suo moto u/s 263 is that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue. Therefore, exercising authority has to satisfy itself of the twin conditions, namely,
(i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent - if the order of the Assessing Officer is erroneous, but is not prejudicial to the revenue or if it is not erroneous, but prejudicial to the revenue - recourse cannot be had to Section 263 (1) of the Act. Such provision cannot also be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the Section will be attractive. The assessment order passed will be erroneous if it is based on an incorrect assumption of fact or on an incorrect application of law. It will also be erroneous when assessment order is passed without applying the principle of natural justice or is passed without application of mind. The phrase "prejudicial to the interest of revenue" being not defined in the Act should be understood in its ordinary meaning. It is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and such task has been entrusted to the revenue. If due to erroneous order of the Assessing Officer the revenue is losing tax lawfully payable 82 ITA Nos.2086 & 2087/Del/2009 by a person, it will certainly be prejudicial to the interest of revenue. The phrase "prejudicial to the interest of revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interest of revenue, e.g., when an Assessing Officer adopted one of the courses permissible in law and it has resulted in the loss of revenue, or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law. Reference in this regard can be made to the decision of Hon'ble Supreme Court in the case of Malabar Industrial Company vs. CIT (supra).
102. In the case of CIT vs. Sunbeam Auto Ltd 227 CTR 133 (Del) it has been held that there is a distinction between "lack of inquiry" and "inadequate inquiry." If there is an inquiry, even inadequate, that would not by itself give occasion to the CIT to pass an order u/s 263, merely because he has a different opinion in the matter. Such a course of action is open only in cases of "lack of inquiry." The contention of the revenue that the Assessing Officer did not consider as to whether the expenditure in question was capital or revenue expenditure cannot be accepted although apparently the assessment order does not give any reason for allowing the entire expenditure as revenue expenditure, that by itself would not be indicative of the fact that the Assessing Officer did not apply his mind to the issue. The Assessing Officer is not required to give detailed reasons in respect of each and every item of deduction in the assessment order. The Assessing Officer having called for explanation regarding the said item and the assessee had furnished its explanation, then, it cannot be said that it is a case of lack of inquiry. Even CIT was not clear as to whether 83 ITA Nos.2086 & 2087/Del/2009 the said expenditure was to be treated as capital or revenue expenditure and in these facts it was held that the view taken by the Assessing Officer was one of the possible views and assessment order passed by the Assessing Officer could not be held to be prejudicial to the interest of revenue.
103. If the facts of the present case are seen in the light of the aforementioned judicial pronouncements, then, it has to be examined that whether or not, according to the facts of the case the Assessing Officer has assessed the assessee on an incorrect assumption of facts or on an incorrect application of law so as to hold that the order of the Assessing Officer was erroneous
104. We will first examine the stand of the Assessing Officer relating to taxation of income from inside India revenue. It has already been pointed out that the facts relating to both the years are similar except that according to the arguments of Ld. AR there are two differences in the facts which has already been described in the above part of this order. But basically facts relating to both the years remained the same. The Assessing Officer has worked out revenues for inside India operations at ` 552,23,44,864/- for which there is no dispute. What the Assessing Officer has done to compute income from such revenue is that he has first deducted sub-contractors cost and salary expenditure from the gross revenue to arrive at a net figure of `384,44,77,765/- (including revenue from HAL). He has applied 10% rate upon the balance amount and, thus, computed the income of the assessee from revenues from inside India operation at `38,44,47,776/-. According to the Ld. DIT, this made the order of the Assessing Officer erroneous as he should not have allowed further reduction of 90% of the balance amount after reducing sub-contractors cost and salary expenditure of ` 167,83,37,937/- from the gross revenue. In other words, after reducing the sub-contractor cost and salary, etc., the 84 ITA Nos.2086 & 2087/Del/2009 entire balance amount should have been assessed as income of the assessee from inside India operations.
105. It is not even the case of ld. DIT that the Assessing Officer should have applied the provisions of Section 44BB and, thus, the assessee should have been assessed at 10% of the gross revenue of ` 552,28,15,702/- as he has not directed the Assessing Officer to apply the provisions of Section 44BB.
106. The Assessing Officer has also not assessed the assessee under the provisions of Section 44BB of the Act so that it can be said that while reducing the sub-contractor and salary cost he as acted against the provisions of Section 44BB which will make the assessment order based on incorrect application of law amenable to revision. The Assessing Officer while framing the assessment is aware of the fact that according to option available to the assessee, the assessee has opted to be assessed under the provisions of DTAA. It is, therefore, the Assessing Officer has referred to the provisions of Article 7 in the assessment order passed by him. Not only the Assessing Officer has mentioned about the applicable articles of DTAA to the assessee, but he has recorded the submissions of the assessee in para 4 that computation of income done by the assessee company is based on the Indo-Korean Tax Treaty read with the provisions of Section 90 of the Act. What the Assessing Officer has done is that he has assessed the assessee according to the past history of the case and has allowed out of gross revenue a sum of ` 167,83,37,937/- as sub-contractors cost and salary expenditure. This also has not been done in a routine manner. A finding of fact has been recorded by the Ld. Assessing Officer that he has verified all these payments from the TDS returns and after making verification in this regard, the Assessing Officer has given specific finding that out of gross payments made by the assessee to sub-contractors and salary amounting to ` 171,19,73,419/-
85 ITA Nos.2086 & 2087/Del/2009, a sum of ` 23,27,780/- was made to non-resident sub-contractors for works done outside India by respective foreign sub-contractors and a further sum of ` 3,13,07,703/- could not be verified. He, therefore, reduced these two amounts from the gross amount claimed by the assessee and, in this manner, has arrived at a sum of ` 167,83,37,937/- which has been reduced and on the balance revenue 10% rate has been applied. The Assessing Officer ignored the book result of the assessee according to which it had filed return of loss at ` 928,05,64,624/- and adopted a formula as per past history of the case of the assessee. The Assessing Officer has assessed the assessee with the observations "keeping in view the past practice adopted by the department on this issue as well as in view of Article 7 (5) of DTAA." This fact was in the mind of the Assessing Officer while framing the assessment and it is, therefore, he had asked the assessee company to furnish the details of expenses where TDS was deducted and on furnishing such details he has found that out of gross revenue a sum of ` 167,83,37,937/- was excludible for the purpose of applying 10% rate of income. Though the office note is not annexed with the assessment order, the assessee has produced the contents thereof which has not been disputed by the revenue. The note relating to assessment of inside India revenue has already been reproduced in para 45 of this order. In the note it has been mentioned by the Assessing Officer that the assessment is completed as per Article 7 of DTAA with Korea estimating the profit rate at 10% to the total revenues relating to inside India activities as reduced by expenses verifiable from annual returns of TDS. This is in line with the stand taken by the department in preceding assessment years as provided in para 5 of Article 7 of DTAA. The Assessing Officer has also reproduced para 5 of Article 7 of DTAA in the assessment order which read as under:-
"5. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be 86 ITA Nos.2086 & 2087/Del/2009 determined by the same method year by year unless there is good and sufficient reason to the contrary."
107. According to the mandate given in para 5 of Article 7, for determining the profits attributable to the permanent establishment, the same method year by year is to be applied unless there is good and sufficient reason to the contrary. It has been demonstrated by the assessee that from year to year the department has been adopting this formula. If it is so, then, it is incumbent on the department to show that there exist good and sufficient reason to take a contrary view. Apparently or impliedly it has not been shown that there exist good and sufficient reasons to take a contrary opinion as is sought to be taken by ld. DIT in the show cause notice or in the order passed by him. Unless it is shown that there exist good and sufficient reasons to take a different view, such view is not permissible according to the provisions of DTAA.
108. Now, the question will be, as argued by Ld. Special Counsel of the assessee, a mistake in perpetuity has been committed by the Assessing Officer by taking a view that after reduction of sub- contractors cost and salary expenditure on which TDS was deducted, on the balance, whether it was legally permissible to apply 10% rate or it should have been applied on the gross revenue. It has already been mentioned that it is neither the case of the assessee nor the case of the Assessing Officer that the provisions of Section 44BB are applicable. It is also not the case of Ld. DIT that provisions of Section 44BB could be applied even when the assessee has opted to be assessed under the provisions of DTAA. If one goes by strict application of such Section 44BB(1), then, of course, there will be no scope for, firstly, reduction of sub-contractors cost and salary expenditure on which the TDS deducted and then apply the 10% on the balance of the revenue. But, if the provisions of DTAA are applied, then, there is no provision which authorize the department to make 87 ITA Nos.2086 & 2087/Del/2009 estimate of 10% of the gross revenue. If such contention of the revenue is accepted, then, there will be no difference in the assessments to be made under the provisions of DTAA and under the provisions of domestic law. The provisions of DTAA are not speaking about the application of 10% net profit rate on the gross revenue. Taking the case for assessment year 2005-06, as pointed out earlier, the return is filed at a loss of ` 928,05,64,624/-. The accounts of the assessee have been rejected on the ground of non-production of books. The assessee has also accepted the estimation of income. Article 7(3) point out the mode of determination of profit relating to permanent establishment which read as under:-
"3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, which are allowed under the provisions of the domestic law of the contracting State in which the permanent establishment is situated."
109. The Article 7 (5) has already been reproduced in Para 106 of this order. A cumulative reading of Article 7(3) and (5) will make it clear that for determining the profits of permanent establishment (PE), the expenses which are incurred for the purpose of permanent establishment including executive and general administrative expenses are to be allowed irrespective of their incurrence whether in the State in which the PE is situated or elsewhere which are allowed under the provisions of domestic law of the contracting State in which the permanent establishment is situated and this has to be done by the same method year by year unless there is good and sufficient reason to the contrary. In other words, all the expenses which are incurred by the assessee for the purpose of its permanent establishment are to be allowed which include executive and general 88 ITA Nos.2086 & 2087/Del/2009 administrative expenses as are allowed under the provisions of domestic law. Under the provisions of domestic law, if the income is to be assessed under the head "business", then, all the expenses incurred wholly and exclusively for the purpose of business are allowable. The question of estimate will arise only if from the accounts and details maintained by the assessee the profit is not deducible. All along it has been the case of the assessee that it is not in a position to produce the books of accounts and in that circumstance the estimate of income is being made. This position existed throughout the history of the case of the assessee. But it does not mean that income of the assessee has to be assessed only as per provisions of Section 44BB(1) of the Act i.e., the assessee should be assessed @ 10% of the gross inside India revenue. If the assessee is able to establish that it does not have income of that magnitude, then, it is open for the assessee to be assessed at a lower amount. This has so been demonstrated in the case of the assessee itself when even according to the fresh order passed in pursuance of the order passed by the Ld. DIT not only the department has reduced the expenses which are subject to TDS amounting to ` 167,83,37,937/-, but has further allowed a deduction of 35% of material cost which has been computed at `360 crores and the department has assessed the assessee at lower income of ` 24.35 crore against originally assessed income of ` 38.44 crore. Thus, it cannot be said that the assessee was indeed assessable at 10% of the gross revenue. Therefore, the view adopted by the ld. DIT in the show cause notice itself was not a possible view which could be taken. If that was not the possible view, then, whether the view taken by the Assessing Officer was possible. The Assessing Officer has given the reasons for adopting a view which is in accordance with the past history of the case and which is in conformity with the Article 7(5) of the DTAA. Therefore, it can be held that the Assessing Officer has taken a possible view which is according to past history of the case and 89 ITA Nos.2086 & 2087/Del/2009 he has first reduced an amount of ` 167,83,37,937/- representing the sub-contractors cost and salary expenditure upon which TDS was deducted and, then, applied the rate of 10% to assess the income of the assessee. By adopting this method, the revenue was able to collect income-tax from the assessee irrespective of the fact that whether or not the assessee has incurred heavy loss in the contracts executed by it. If the view of the Assessing Officer was a possible view based on the past history of the assessee, then, Ld. DIT could not impose his view upon the Assessing Officer unless it is shown that the view adopted by him is a possible view to be logically taken in the case of the assessee. It has already been described that the view taken by Ld. DIT in his order and in the show cause notice could not even be taken in the further proceedings when consequential order has been passed by the department. Therefore, on this ground it cannot be said that ld. DIT has rightly exercised his power u/s 263 to set aside the assessment with a direction to the Assessing Officer to pass fresh assessment order.
110. Now, we come to the issue relating to assessability of income relating to outside India revenue. The stress of Ld. DIT is that the assessee had received a composite contract for work to be performed in India and also related work from outside India. The Assessing Officer did not inquire into the nature and scope of the contract, the reasons for revenue for outside India operations, the nature of outside India operations, the duration of projects in India, the role of Mumbai office of the company in submitting the tenders, negotiation of the contracts, the subsequent role of the PE and Mumbai Office in earning the revenues from the alleged outside India operation. It is the case of Ld. DIT that the Assessing Officer did not gather the facts at all before passing the order. The Assessing Officer has also not inquire into the applicability of the decision of Hon'ble Supreme Court in assessee's 90 ITA Nos.2086 & 2087/Del/2009 own case for the year under consideration and, therefore, the order passed by the Assessing Officer by not taxing the income on account of revenue of ` 1294,51,94,688/- is erroneous and prejudicial to the interest of the revenue.
111. Though there is no discussion regarding non-taxation of the revenue for outside India operations in the assessment order, it has been brought on record by the ld. Counsel of the assessee that in the office note the Assessing Officer has given the reasons for not levying the tax on such revenue and such observations of the Assessing Officer in the office note are also reproduced in para 14 of this order. It has been observed by the Assessing Officer that the assessee has shown revenue from outside India operation which have not been offered to tax in the return of income stating that revenues were received from activities performed outside India and, therefore, the revenues earned out of these activities are not attributable to the PE in India. The Assessing Officer has quantified those revenues and has observed that the assessee has relied upon the judgement of Hon'ble High Court of Uttaranchal in assessee's own case as well as on the decision of Hon'ble Supreme Court in the case of Ishikawajima - Harima Heavy Industries Co. Ltd. (supra). It is observed by the Assessing Officer that the revenues earned by the assessee on account of the procurement of the material outside India is not brought to tax in view of the decision of Hon'ble Supreme Court in the case of Ishikawajima - Harima Heavy Industries Co. Ltd. (supra). It is also observed that though the department has not accepted the decision of Hon'ble Uttarakhand High Court regarding the taxability of outside India operations at nil and has filed SLP before the Hon'ble Supreme Court and in case the Hon'ble Supreme Court decides to tax the outside India receipts in the case of the assessee, action shall be taken as per law. From the above observations of the Assessing Officer, it is clear that during the course 91 ITA Nos.2086 & 2087/Del/2009 of assessment proceedings not only he has inquired about the taxability of these receipts from the assessee, but replies were also filed by the assessee and after due consideration thereof he has decided not to levy any tax upon that revenue. The Assessing Officer while holding the view that such receipts were not taxable in India apart from relying upon the decision of Hon'ble Supreme Court in the case of Ishikawajima - Harima Heavy Industries Co. Ltd. (supra) has also relied upon the decisions of jurisdictional High Court in the case of the assessee itself wherein such receipts were held not taxable. Therefore, it has been demonstrated by the Ld. AR of the assessee that even in the absence of any discussion in the assessment order there is material on record according to which the Assessing Officer had taken a conscious decision regarding non-taxability of the revenue from outside India operation, which, according to the argument of the assessee pertained to the activities performed outside India. It was argued before the Assessing Officer that the revenue related to the activities performed outside India which means that no part of that revenue related to any PE in India for that work and after satisfying itself with that contention of the assessee and relying upon the decision of Uttarakhand High Court in the case of the assessee itself, these revenues have been held to be not taxable. Now, according to the Ld. DIT, Assessing Officer has not gone into the questions which have been described earlier and, therefore, has committed an error in not levying the tax on such revenue. But, at the same time, it has also not been shown by Ld. DIT that there exist any material on record according to which it can be said that the assessee is factually incorrect in contending that no part of outside India revenue relates to its PE in India. The argument of both the parties in this regard have also been described in detail and are not needed to be repeated for the sake of brevity. But, it will be relevant to mention that in all the preceding years such revenue of the assessee has been held to be not 92 ITA Nos.2086 & 2087/Del/2009 taxable. It is not the case of the revenue that facts relating to revenue from outside India are in any way different for the year under consideration as compared to preceding years. At least no material has been brought on record by the revenue to show that facts relating to income from outside India operations are in any way different in the years under consideration as compared to the preceding years. Rather, in the foot note the Assessing Officer while observing that the revenue is not being taxed has clearly stated that the same is not being taxed on the basis of the decision of jurisdictional High Court in the case of the assessee for preceding years.
112. In view of these facts it is clear that it is not a case where ld. A.O. did not apply his mind on the issues subject matter of revision proceedings. The A.O. had applied his mind. He raised the querries and replies were given by the assessee and in presence of judicial pronouncements available in assessee's own case he took a conscious decision of not taxing the revenue from outside India operations. He was aware of the fact that department has preferred further appeal in Apex Court. In this view of the situation, in our opinion, the A.O. did not have other alternative except not to tax the outside India revenue but to write a foot note to the assessment order describing therein the facts and circumstances in which he has taken such decision. It is also not a case of either "lack of inquiry" or "inadequate inquiry" as ld. DIT himself has not brought on record any material to suggest that the facts relating to the years under consideration were in any way different from the facts of the cases of preceding years where this issue was decided in favour of the assessee.
113. It may also be pointed out here that when the Assessing Officer passed the assessment order for assessment year 2005-06, he was having with him the decision of Hon'ble jurisdictional High Court in the case of the assessee which is dated 30th March, 2006 and is reported 93 ITA Nos.2086 & 2087/Del/2009 as 291 ITR 450. In that decision Hon'ble jurisdictional High Court in the case of the assessee itself for assessment years 1986-87, 1987-88, 1988-89 and 1989-90 had upheld the order of the Tribunal vide which it was ruled that the assessee is not liable to be taxed in respect of activities admittedly carried on in Korea. However, it was held that the appeals were concluded by the Tribunal by a finding of fact. The said decision of the Hon'ble jurisdictional High Court was further appealed before Hon'ble Supreme Court and Hon'ble Supreme Court rendered the decision on 18th May, 2007 which is reported as 291 ITR 482 (SC). In that decision, it was confirmed by Hon'ble Supreme Court that the Tribunal was right in holding that no part of the income attributable to Korean operation could be taxed in India as before the coming into existence of the permanent establishment in India the work of fabrication was completed in Korea and the fabricated platform was handed over to the ONGC. To that extent, the decision of the Tribunal was upheld. The decision of the Tribunal was only reversed on the ground that the Tribunal committed an error to reduce the net profit rate on Indian operations from 10% to 3%. The applicability of 10% rate was specifically upheld on the ground of the fact that "the assessee appeared before the department and submitted that its income from Indian operations be computed u/s 44BB or under instruction No.1767 issued by the Central Board of Direct taxes." Therefore, in view of the stand taken by the assessee, it was held that the Commissioner of Income-tax (Appeals) was right in computing the taxable profits at 10% of the gross receipts in respect of activities of installation, commissioning, etc., performed in India and the Tribunal did not give any reason for reducing the rate from 10% to 3%. Reference in this regard can be made to the observations of Hon'ble Supreme Court in para 13 of the said decision. However, the facts of the present case are clear. The assessee has not submitted that its income in respect of Indian operation should be assessed either u/s 94 ITA Nos.2086 & 2087/Del/2009 44BB of the Act or under the instruction No.1767 issued by the Central Board of Direct Taxes. The case of the assessee is clear that it should be assessed under the provisions of DTAA. Therefore, the mandate in the case of the assessee even upto the decision of Hon'ble Apex Court is that no part of income attributable to Korean operations could be taxed in India as before the coming into existence of the permanent establishment in India the work of fabrication was completed in Korea and fabricated platform handed over to the ONGC. No material has been brought on record by Ld. DIT to controvert the finding of fact that work of fabrication was completed in Korea and the fabricated platform was handed over to the ONGC. This position has time and again been accepted by the Tribunal.
114. It will also be relevant here to mention that after the decision of Hon'ble Supreme Court in the case of the assessee 291 ITR 482 (SC), similar issue came up for consideration before the Hon'ble Uttarakhand High Court (jurisdictional High Court) in respect of assessment years 1994-95 and 1995-96 and vide decision dated 4th December, 2008 in ITA Nos.42 and 43 of 2007, the matter was remanded back to the Tribunal as the Hon'ble Supreme Court in earlier case had held that Hon'ble High Court had erred in holding that no substantial question of law arose. For the sake of completeness the observations of their lordships from the said decision of Hon'ble High Court are reproduced below:-
"These appeals pertain to assessment year 1994-95 and 1995-
96. In both the appeals following substantial question arises to be considered:
"Whether the Hon'ble ITAT was legally correct in holding that no portion of the payment made to the NRC outside India for the work done outside India under the composite contract for designing fabrication, installation and commissioning of installations on a turnkey basis providing for payment to be made on milestone basis is liable to be taxed in India?"95 ITA Nos.2086 & 2087/Del/2009
5. In the similar facts and circumstances, the matter went upto the Supreme Court against the Division Bench of this Court between the same parties relating to previous assessment years, which is reported as CIT v. Hyundai Heavy Industries Co. Ltd. (2007) 291 ITR 482. While affirming the judgment of this Court, the Hon'ble Apex Court has observed as under:-
"Before concluding, we may point out that the High Court had erred in holding that no substantial question of law arose in this case under section 260A of the Act. In our view, substantial questions of law did arise. We did not remit the matter to the High Court, particularly, when the appeal is in respect of the assessment years 1987-88 and 1988-89."
6. Therefore, in view of the two answers given in Clause (a) and (b) of Paragraph 15 of the aforesaid judgment, the matter is remitted to the ITAT for deciding the same afresh in the light of Clause (a) and (b) of Paragraph 15 of CIT vs. Hyundai Heavy Industries Co. Ltd. (2007) 291 ITR 482 (SC) applying the aforesaid law on the facts of the present case, in case two issues are arising in the facts of the present case, but if no issue arises, the ITAT shall close the proceeding. The order dated 19.5.2006 passed by the Income Tax Appellate Tribunal in ITA No.2291/Del/2002 for A.Y. 1995-96 and the order dated 19.5.2006 passed by the Income Tax Appellate Tribunal in ITA No.2290/Del/2002 for A.Y. 1994-95 are set aside.
7. Consequently, present Income Tax Appeals are allowed. No order as to costs."
115. To comply with the directions given by Hon'ble jurisdictional High Court, the Tribunal had decided the issue vide its order dated 9th October, 2009 in ITA Nos.2290 & 2291/Del/2002 and the relevant observations of the Tribunal as contained in para 6 are as under:-
"6. We have heard the rival submissions and have gone through the material available on record and the judgment of Hon'ble Uttrakhand High Court and also the relevant judgment of Hon'ble Apex Court rendered in the case of the assessee itself for A.Y. 1987-88 & 1988-89. Hon'ble Uttrakhand High Court has directed the Tribunal to decide the issue afresh in the light of clause (a) & (b) of paragraph 15 of the Supreme Court judgment in the case of the assessee itself as reported in 291 ITR 482. For the purpose of deciding the issue afresh in the light of this judgment of Hon'ble Apex Court cited above, we have to see 96 ITA Nos.2086 & 2087/Del/2009 and examine the facts of the present year as also the facts in A.Y.1987-88& 1988-89. We find that for this purpose, para No. 11 of this judgment of Hon'ble Apex Court is also relevant for consideration, as per which, it has been noted by the Hon'ble Apex Court that the installation 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 such supplies were fabricated platforms cannot be said to be attributable to the PE. 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 GE and therefore, even if, it is assumed that the supplies were necessary for the purpose of installation (activity of the PE in India) and even if it is 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 arms 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 the supplies were not at arms 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 judgment of Hon'ble Apex Court in the case of the assessee itself for A.Y. 1987-88 & 1988-89. no profit is taxable on account of Korean operation (designing & 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 turnkey basis. As per above discussion, after considering clause (a) of Para-15 of the judgment of Hon'ble Apex Court as per direction 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 & fabrication) is not taxable in India because the same has arisen outside India. Regarding clause (b) of para 15 of the judgment of Hon'ble Apex Court, we find that in the present two years, there is no dispute regarding quantum of profit embedded in the Indian operation attributable to India 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."97 ITA Nos.2086 & 2087/Del/2009
116. The Tribunal in the aforementioned case, relying upon the decision of Hon'ble Supreme Court rendered in respect of assessment years 1987-88 and 1988-89, has held that there was no question of levying any tax on the revenue earned by the assessee in respect of outside India operation not only for the reason that the said profit has arose outside India, but the transaction itself has not been shown to be beyond arm's length price. In the present years also there is no material on record to suggest that the outside India revenue does not belong to Korean operation performed outside India and also that the transactions entered into by the assessee with ONGC is not at arm's length. There is no material on record to suggest that PE has any nexus with the fabrication work done outside India the supply of which was handed over offshore.
117. It is the case of Ld. AR that Ld. DIT when issued the show cause notice was having the benefit of the decision of Hon'ble Supreme Court in the case of the assessee. Without properly appreciating the said decision, he has invoked his power u/s 263 incorrectly in respect of revenue relating to outside India operation despite the categorical findings given by Hon'ble Apex Court that no part of such income could be taxed in India. Their Lordships of Hon'ble Supreme Court while deciding the said issue, after analyzing the provisions of Article 7, have come to the conclusion that the Tribunal was right in upholding that the profit attributable to the Korean operations were not taxable in view of Article 7 of the treaty and such observations are reproduced below:-
"11. On reading article 7 of the CADT, it is clear that the said article is based on the OECD Model Convention. Paragraph (1) of article 7 states the general rule that business profits of an enterprise of one Contracting State may not be taxed by the other Contracting State unless the enterprise carries on its business in the other Contracting State through its permanent establishment. The said paragraph (1) further lays down that only so much of the profits attributable to the permanent establishment is taxable. Paragraph (1) of article 7 further lays 98 ITA Nos.2086 & 2087/Del/2009 down that the attributable profit can be determined by the apportionment of the total profits of the assessee to its various parts or on the basis of an assumption that the permanent establishment is a distinct and separate enterprise having its own profits and distinct from the GE. Applying the above test to the facts of the present case, we find that the profits earned by the Korean GE on supplies of fabricated platforms cannot be made attributable to its Indian permanent establishment as the installation permanent establishment came into existence only after the transaction stood materialized. The installation permanent establishment came into existence only on conclusion of the transaction giving rise to the supplies of the fabricated platforms. The installation permanent establishment emerged only after the contract with the ONGC stood concluded. It emerged only after the fabricated platform was delivered in Korea to the agents of the ONGC. Therefore, the profits on such supplies of fabricated platforms cannot be said to be attributable to the permanent establishment. There is one more reason for coming to the aforesaid conclusion. In terms of paragraph (1) of article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the permanent establishment would have earned if it was wholly independent of the GE. Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the permanent establishment in India) and even if we assume that the supplies were an integral part, still no part of profits on such supplies can be attributed to the independent permanent establishment unless it is established by the Department that the supplies were not at arm's length price. No such taxability can arise in the present case as the sales were directly billed to the Indian customer (ONGC). No such taxability an also arise in the present case as there was no allegation made by the Department that the price at which billing was done for the supplies included any element for services rendered by the permanent establishment. In the light of our above discussion, we are of the view that the profits that accrued to the Korean GE for the Korean operations were not taxable in India.
12. There is one more aspect to be discussed. The attraction rule implies that when an enterprise (GE) sets up a permanent establishment in another country, it brings itself within the fiscal jurisdiction of that other country to such a degree that such other country can tax all profits that the GE derives from the source country - whether through a permanent establishment or not. It is the act of setting up a permanent establishment which triggers the taxability of transactions in the source State. Therefore, unless the permanent establishment is set up, the question of taxability does not arise - whether the transactions are direct or they are through a permanent establishment. In the case of a turnkey project, the permanent establishment is 99 ITA Nos.2086 & 2087/Del/2009 set up at the installation stage while the entire turnkey project, including the sale of equipment is finalized before the installation stage. The setting up of the permanent establishment, in such a case, is a stage subsequent to the conclusion of the contract. It is as a result of the sale of equipment that the installation permanent establishment comes into existence. However, this is not an absolute rule. In the present case, there was no allegation made by the Department that the permanent establishment came into existence even before the sale took place outside India. Similarly, in the present case, there was no allegation made by the department that the price at which ONGC was billed/invoiced by the assessee for supply of fabricated platforms included any element for services rendered by the permanent establishment. In the present case, we are concerned with the assessment years 1987-88 and 1988-89. Therefore, we are not inclined to remit the matter to the adjudicating authority. We reiterate, in the circumstances, not all the profits of the assessee company from its business connection in India (PE) would be taxable in India, but only so much of profits having economic nexus with the permanent establishment in India would be taxable in India. To this extent, we find no infirmity in the impugned judgment of the Tribunal. Accordingly, we are of the view that the Tribunal was right in holding that the profits attributable to the Korean operations were not taxable in view of Article 7 of the CADT."
118. The Assessing Officer while framing the assessment for the year under consideration was well aware of the decision of the Tribunal and the decision of Hon'ble jurisdictional High Court in assessee's own case and also the decision of Hon'ble Supreme Court in the case of Ishikawajhima Harima Heavy Industries Company Ltd. (supra) and after considering all these decisions he did not impose tax on the revenue relating to outside India operation and his such view cannot be held to be erroneous simply for the reason that he did not make inquiry in relation to role of PE, etc. It has already been observed that PE, even if it existed, the revenue from outside India operation could not be taxed unless there is a nexus between the PE and the activity done and performed outside India and this is the crux of the decision of Hon'ble Supreme Court in the case of the assessee itself. Even Ld. DIT could not point out any such nexus in his order. Therefore, on the face of it, the order passed by the Assessing Officer cannot be held to be 100 ITA Nos.2086 & 2087/Del/2009 erroneous so far as it is prejudicial to the interest of the revenue in respect of revenue relating to outside India.
119. Therefore, on both the grounds the assessment orders passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of revenue. The powers u/s 263 have been invoked without jurisdiction as the necessary ingredients to invoke the same are absent. Therefore, we quash the impugned orders passed by Ld. DIT in respect of both the years under consideration and the appeals filed by the assessee are allowed in the manner aforesaid.
120. Before parting, we may mention here that we have already discussed in detail the arguments submitted by both the parties which were placed on record in the shape of synopsis. While deciding the issue we have carefully considered all those arguments. For the sake of brevity we may not have discussed each and every argument and decision relied upon by both the parties as the same either may not be relevant to decide the issues raised in the present appeals or the view expressed therein already exists in the decisions taken into consideration while deciding the present appeals. Non-discussion of those arguments and the decisions do not mean that they were not taken into consideration while deciding the present appeals.
121. In the result, both the appeals filed by the assessee are allowed in the manner aforesaid.
The order pronounced in the open court on 31.05.2011.
Sd/- Sd/-
[A.K. GARODIA] [I.P. BANSAL]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated, 31.05.2011.
dk
101 ITA Nos.2086 & 2087/Del/2009
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order,
Deputy Registrar,
ITAT, Delhi Benches