Income Tax Appellate Tribunal - Chennai
Ansaldo Energia Spa vs The Asst. Director Of Income Tax ... on 11 May, 2007
Equivalent citations: MIPR2008(2)358
ORDER
M.K. Chaturvedi, Vice President
1. This appeal by the assessee is directed against the order of CTT(A) and relates to the assessment year 2000-01.
2. Shri J.D. Mistry, learned Counsel for the assessee appeared before us. Department was represented by Shri Shaji P. Jacob. Shri Mistry neatly identified the issues involved in this case as under:
i) Whether conditions precedent for assuming jurisdiction to make enhancement under Section 25 l of the Income-tax Act, 1961 (in short 'the Act') did exist under the facts and circumstances of the case?
ii) Whether the order of CIT(A) was in conformity with the principles of natural justice?
iii) Whether ASPL was a facade created for the purpose of taxation, ex consequent its corporate veil be lifted for consolidating the four contracts?
iv) Whether there exists permanent establishment in India in relation to offshore supply activities?
v) Whether there exists business connection with Neyveli Lignite Corporation (in short 'NLCT) and Ansaldo Fnergia SpA?
vi) Charging of interest under Section 234B of the Act.
3. Over and above at the time of hearing Shri Mistry raised the following additional ground:
The income earned by the Appellant from the design and engineering services under Contract I with Neyveli Lignite Corporation should not be taxable as "Fees for Technical Services" and accordingly, the Assessing Officer (AO) has erred in taxing the same and CIT(A) erred in upholding the action of the AO.
4. Apropos the first issue, the various arguments raised before us by Shri Mistry resemble so many radii of a circle starling from different points on its circumference but all oriented towards the power of CIT(A) in respect of assumption of jurisdiction under Section 251 of the Act. 1.earned counsel for the assessee placed before us various precedents to buttress the claim.
5. At the outset it was pointed out that it is beyond the power of CIT(A) to consider enhancement in the context of an item which was not part of the assessment order or which was not processed by the AO. The mere stipulation in regard to contract 1 in the order of assessment is not adequate to confer jurisdiction. What is required is consideration of the relevant receipts from contract I from the point of view of taxability and not a mere incidental reference. He relied on the decisions of the apex court rendered in the case of CIT v. Shapoorji Pallonji Mistry 44 ITR 891 (SC) and in the case of CIT v. Rai Bahadur Hardutroy Motilal Chamaria 66 ITR 443(SC). It was stated that these decisions were not cited or brought to the notice of the Division Bench which decided the later case of CIT v. Nirbheram Daluram 224 ITR 610 (SC). As such this decision of the Supreme Court cannot be followed in preference to the earlier decisions. If there exists a difference between the decisions of the Hon'ble Supreme Court, then Full Bench decision is required to be followed in preference to the later Division Bench decision, for this proposition reliance was placed on the decision in the case of Union of India and Anr. v. Raghubir Singh 178 ITR 548 (SC).
6. Adverting to the powers of CIT(A) learned Counsel for the assessee contended that it can never be greater than the powers of the AO. The assessment order dated 27-02-2004 was an order under Section 148 of the Act. It is therefore sine qua non now to consider whether the AO would have had jurisdiction under Section 147. The reasons recorded for re-opening the assessment makes it abundantly clear that AO lacks jurisdiction under Section 147. If the CIT(A) assumes jurisdiction on the same count it would constitute an impermissible change of opinion. Indisputably assessment cannot be reopened under Section 147 on the basis of change of opinion.
7. Ld. D.R. submitted that the powers of CIT(A) are coterminous with that of AO. As such he can exercise all the powers of AO. Reference was made to various precedents. In the case of CIT v. Kanpur Coal Syndicate 53 II R 225(SC) it was held that CIT(A) can do what the ITO can do. He can also direct him to do what he failed to do. Referring to the case of Raghubir Singh, supra, it was stated that it is nowhere laid down in this case that earlier decision of the Bench of equal strength has to be necessarily followed and later decision has to be ignored. Apex court only discussed some healthy judicial practice/custom to be followed by all Courts and at the same time has held that when a relevant statutory provision had not been brought to the notice of the Court or a vital point was not considered, it is the duty of the Court to review its earlier order and not to perpetuate the mistake. This is why even after this decision, a three Member Bench of Supreme Court in the case of UCO Bank v. CIT 237 ITR 889 held that decision of another three Member Bench of the Supreme Court in the ease of State Bank of Travancore v. CIT 158 ITR 102 was rendered per incurium. Id. D.R. submitted that on this factual backdrop the decisions rendered in the cases of CIT v. Shapoorji Pallonji Mistry 44 II R 891, CIT v. Rai Bahadur Hardutroy Motilal Chamaria 66 ITR 443(SC) and CIT v. Nirbheram Daluram 224 ITR 610 (SC) are to be considered. The first two decisions were rendered under the 1922 Act whereas the case of Nirbheram Daluram was rendered under the 196] Act in which an Explanation was appended to Section 251. As per this Explanation, CIT(A) may consider and decide any matter arising out of the proceedings in which the order appealed against was passed. In view of this and considering the ratio laid down in the cases of CIT v. Kanpur Coal Syndicate 53 ITR 225(SC) and Jute Corporation of India Ltd. v. CIT 187 ITR 688(SC) Supreme Court in Nirbheram Daluram's case decided the issue in favour of the Revenue.
8. It was further submitted that CIT(A) did not add any income from totally new source. The dictionary meaning of the term "source" is "place of origin or place of issue". In this case the source of income was contract with Neyveli Lignite Corporation (in short 'NLC'). Assessee did offer income from contract II and part of contract I. Details regarding contract III and contract IV were also available before the AO. CIT(A) has only added income from contract III and contract IV as well as part of income from contract I.
9. After considering the various details and submissions we find that contracts I. II. Ill and IV were treated as part of a single composite contract, (here was no new source of income which was considered by the CIT(A). I Hon'ble Supreme Court in the case of CIT v. Sun Engineering Works P. Ltd. 198 ITR 297 (SC) has held that once an assessment is re-opened, the entire proceedings are open before the AO and he can bring to tax am income which escaped assessment. Therefore AO as well as CIT(A) need not restrict themselves to the issue on which the assessment was re-opened.
10. The powers of the CIT(A) are coterminous with those of the AC), lie has plenary powers in disposing of an appeal, lie can do what the AO could do and can also direct the latter to do what the latter failed to do. Appeal is merely the continuation of the original proceedings and unless some fetters are placed upon the powers of the CIT(A), he can exercise (he same powers as that of AO. There appears to be no reason as to why CTT(A) cannot modify the assessment order when such powers are expressly provided to him by the statute.
11. It is the duty of the CIT(A) to consider a matter placed before him in all its aspects. This is all the more so when the AO had failed to consider the matter in detail or in a proper manner. In the present case the issue was with regard to the taxability of income arising out of the contract with NLC. Assessee did offer income from contract II and part of contract I. Details in regard to contracts III and IV were also available before the AO. CIT(A) has only added the income from contract III and contract IV and part of income from contract I.
12. Hon'ble apex court in the case of CIT v. Nirbheram Daluram 224 II R 610 made it clear that the powers of first appellate authority under Section 251 of the Act cannot be construed to be con lined to die matters considered by the AO only, first appellate authority is entitled to direct additions in respect of items of income not considered be the AO In the cases of Rai Bahadur Ilardutroy Motilal Chamaria and Shapoorji Pallonji. decisions were rendered under the 1922 Act. In the case of Kanpur Coal Syndicate, apex court made it very clear that CIT(A) can do what the ITO can do. We therefore respectfully following the decisions of the Hon'ble Supreme Court in Nirbheram Daluram and Kanpur Coal Syndicate, decide this issue in favour of the Revenue and against the assessee.
13. Next issue relates to the observance of the piineiples of natural justice. At the outset it was contended by Shri Mistry that no opportunity for cross-examination was given to the assessee. In reply to this, Id. D.R. submitted that no request to cross-examine any specific person was made by the assessee. Questionnaires were issued to NLC and officials of NLC. NLC is a Government of India Undertaking. The Government concern made available the relevant records of the assessee to the lax Department. No information was gathered from any private individual. Nobody was examined by the Department. As such there was no question of allowing any cross-examination. Whatever written replies received from NLC were supplied to the assessee who in turn offered written replies to them. Reliance was placed on the decision of the Tribunal rendered in the case of GTC Industries Ltd. v. Asst. Commissioner of Income Tax 65 ITD 380 (Bom.). In this case ii was held that right to cross examine the witness who made adverse report, is not an invariable attribute of the requirement of the dictum, audi alteram partem. The principles of natural justice do not require formal cross-examination, formal cross-examination is a part of procedural justice. It is governed by the rules of evidence, and is the creation of Court. It is part of legal and statutory justice, and not a part of natural justice. Therefore, it cannot be laid down as a general proposition of law that revenue cannot rely on any evidence which has not been subjected to cross-examination. However, if a witness has given directly incriminating statement and the addition in the assessment is based solely or mainly on the basis of such statement, in that eventuality it is incumbent on the AO to allow cross-examination.
14. In the present case Revenue only used the records of a Government concern to find out the truth. No person was examined in individual capacity. The material gathered was supplied to the assessee. Assessee submitted his comments on the said material. Besides, these replies cannot be construed as directly incriminating statement. While discussing the merits Shri Mistry stated that all these replies are either in favour of the assessee or irrelevant or innocuous. As such there is no denial of natural justice on this count.
15. Next it was argued that the CIT(A) did not pinpoint as to which paper was relied upon and for what purpose it was used. It is abundantly clear from the records that in the enhancement notice CIT(A) pointed out all the relevant details and conclusion was.arrived at after considering the reply given by the assessee. In the case of Newton Chikli Collieries Ltd. v. CIT 44 ITR 495, 500 (SC) Hon'ble Supreme Court has held that Section 143(3) does not contemplate that with regard to every reason which the AO formulates for his order, the assessee must be given an opportunity to produce fresh evidence or fresh explanation, even in a case where the AO considered whatever materials the assessee produced in reply to notices issued to it or even independently of that notice. This argument also is bereft of any merit.
16. Next it was argued that all the papers relied on by the CIT(A) were not supplied to the assessee. This is factually incorrect statement. Learned Counsel for the assessee did not give the details of the items said to be relied on by the CTI'(A) and not given to the assessee. All the documents considered by the CIT(A) and annexed to his order were either furnished by the assessee or copy given to the assessee. Assessee is a party to such document. As such assessee cannot plead ignorance to such document. Ld. D.R. produced before us evidence for supply of the documents collected by the Department.
17. Next it was argued that assessee was not given opportunity to cross-examine NLC engineers. In the present case we find that the issue in dispute is in regard to the question who executed the contract in reality and who furnished the performance report. As such it is not relevant to cross-examine the NLC engineers on the technicality of the performance report.
18. Natural justice should always be used for the furtherance of the cause of justice. The palladium of justice requires, that law suits be not protracted, otherwise great oppression might be done under the colour and pretence of law. These loafty principles which are harbinger of justice cannot be used for dragging the justice in the labyrinth. We have examined the facts of the present case. In our opinion, there is no failure of natural justice.
19. Next issue relates to the question: Whether Ansaldo Services Pvt. Ltd. (in short "ASPL"). the subsidiary company of the assessee was a facade created for the purpose of taxation, ex conseqnti its corporate veil be lifted for consolidating the four contracts?
20. We have heard the rival submissions in the light of material placed before us and precedents relied upon. Assessee, a non-resident company, was engaged in the business of setting up power plants. NLC went in for TS-I Expansion plan for setting up two units of 210 MW each thermal plants at Neyveli. NLC had given advertisement in leading newspapers calling for offers from a "single bidder" for the project. Assessee did offer its terms as a single bidder. Consequent upon the award of contract, assessee suggested to NLC for splitting up the contract into four separate contracts. Letter of award was suitably modified splitting the contract four in number. Contracts I and II were awarded to the assessee whereas contracts III and IV were awarded to ASPL at the specific directions of the assessee.
21. Assessee disclosed only income from contract II, that too 10% of gross receipts as income under Section 44BBB of the Act. Assessee did not disclose any income from the other three contracts. AO denied the benefit of Section 44BBB and brought to tax the sum under Section 9(1)(vii) treating it as technical fee. Assessee filed appeal thereagainst. CIT(A) noted that though the contract was split into four, it was a composite contract from beginning to end. The entire work was a single package and the overall responsibility was with the assessee only. In real sense it was only a composite contract.
22. CIT(A) did not tinker with the profits of the contract II. It was taxed @ 20% as per the prescription of Section 9(1)(vii) of the Act. In regard to the other contracts the CIT(A) estimated the profits. In respect of contract I it was noted that it involved sale of various plants and machinery. Besides assessee had also taken overall responsibility and was required to fulfill the commitments in the eventuality of insolvency of subsidiary company. On this (actual backdrop the profit rate was estimated at 15% of 75% of the activity said to be done in India, therefore, total net profit rate came to 11.25% on the whole of the contract. With respect to contracts III and IV assessee reflected loss as such lower profits were to be estimated. Pendency of some arbitration proceeding was also noted which could result in some more benefits to the assessee. Considering all this. CIT(A) vide para 30.4 of his order estimated the profit @ 7% and the relevant portion is reproduced as under:
30.4. With respect to contract III and IV, ample justification is provided in the prepages as to why the appellant is to be taxed. In execution part, there are no two different concerns' Appellant completed the testing, commissioning and performance guarantee test and handed over the plant and machinery which are the terms of contract IV. On this part of the activity also, the appellant is to hear the tax. This cannot be ignored It is also seen that the entire contract is a composite contract and the appellant and the subsidiary executed the same with common premises, common Managers, etc. for the purpose of NIC. the single bidder responsibility, clauses introduced in various agreements, ensured its interest. The through its agent, having common premises, common Managers etc. Bui only for tax purposes, the consideration is being split up. Now that there is ample justification to tax the appellant on all the four contracts, we can estimate the profit on the entire project taking into consideration the losses of contract III and IV and also profit attributable to permanent establishment. Section 44AD and Section 44BBB allow us to estimate income at 8% and 10% respectively. One more factor to be considered is the delay in execution of the project leading to recovery of liquidated damages collected both from the appellant and its subsidiary. This matter is now before an Arbitrator and no definite conclusion can be drawn at this stage. The appellant slates that loss was incurred on two contracts. It also cited certain comparable cases where the profit is ranging between 5 to 9%. All these points are duly taken into consideration by me. It is my considered opinion that on the whole contract, i.e. Contract I, III and IV, a reasonable profit of 7% of the receipts can be taken as income of the appellant and subjected to tax. On contract II. it is already decided that the consideration should be brought to tax Under Section 9(1)(vii) r.w.s. 115A as fee for Technical Services.
23. We have examined the advertisement for tender published in April. J997. The scope of the work is mentioned as "from the beginning to end". It was also stipulated that the prime bidder would enter into consortium with the business associates. It is seen that ASPL was not an associate at that time and ASPL did not have the necessary qualifications also. Assessee submitted the bid for the contract and ASPL was never part of any consortium. Assessee's share in ASPL was only 60% at that point of time. However, assessee had requested NLC to make ASPL also as contractor for on-shore supply and service, for which NLC did not agree initially bin the issue was kept open. By letter dated 18.11.1997 NLC specified the acceptable points and sought clarification. Even at this stage ASPL was not in picture. Assessee revised the price bid vide letter dated 9.2.1998 and even at this stage also ASPL was not in picture. Here it would be pertinent to note that assessee had given discount in respect of contracts II, 111 and IV and no discount was given in contract I. If the contracts are different, then under what authority assessee could give discount in respect of contracts III and IV?
24. A perusal of conditional award letter filed at page 3 of the paper book shows that conditional letter of award was issued in favour of the assessee only in which scope of the work is defined. It is further seen that in Clause 4 of this award letter the consolidated price of DM 244.190,280 + 5476,816,195 was given. This clearly shows that there is no force in the submission that separate prices have been given in contracts 111 and IV because originally only consolidated price was given.
25. Detailed submissions were made in respect of individual contracts and the learned Counsel for the assessee had brought to our attention the scope of each contract and price for each contract as well as other terms and conditions. His main emphasis was that each contract could have been executed independently. He had referred to the Board's Instructions No. 1829 in which it is provided that in case of power projects whatever is executed outside cannot be taxed in India and in this regard he had also relied on the decision of Ishikawajima-Harima Heavy Industries Ltd. v. DIT 288 ITR 408 (SC). But the analysis of the contracts does not show the things in which they were sought to be demonstrated by the learned Counsel for the assessee. Pages 264 to 470 of the paper book contain the copy of the contract I. The recital clause at page 274 reads as under:
And Whereas the 'Principal Contractor' has been entrusted with entire turnkey responsibility in respect of the implementation of the complete work relating to the 'package1, on single-bidder responsibility basis and it has also been agreed that the Package will be executed under four separate Contracts, as has been suggested by the 'Principal Contractor' and agreed to by the 'Purchaser';
The above clause clearly shows that contract was split at the suggestion of the assessee for the convenience of the assessee because as far as NLC is concerned it still fixed the responsibility on the assessee only.
26. Clause 2.1.2 at page 309 of the paper book reads as under:
Raw Materials As far as possible the Contractor should consider the standard steel sections and plates available in India. In case the Contractor uses raw material other than the Indian Standard, he should clearly indicate the Indian equivalent of the same and approval: from the Purchaser is to be obtained for use of such raw materials.
Analysis of the raw materials, wherever made available, shall be treated as guiding figures only. The Contractor shall take samples and test them in laboratories in India and/or abroad as may be required at his own cost & time, and fully satisfy himself of the suitability of the raw materials for the purpose of the plant & equipment offered by him. The Contractor must furnish the test results to NLC.
If the assessee was to supply components on f.o.b. basis outside India, then why he was required to look for raw materials in India and why specifications were provided therein? This only shows that some of the equipments were to be fabricated in India by the assessee even under contract I for which even raw material was to be procured in India.
27. Clause 4.2.10 at age 334 of the paper book reads as under:
The delivery of equipment shall be held to be completed when all equipment including special tools and tackles and consumables and drawings/documentations have been supplied by the Contractor. Mandatory spares shall be delivered along with the last consignment of the equipment of the Unit No. 1.
It was emphasized by the learned Counsel for the assessee that delivery was completed outside India once goods were handed over f.o.b. on the ship abroad whereas this clause clearly shows that delivery was really not completed. This is further clear from Clause a4.4.2 at page 336 of the paper book which reads as under:
Delivery of all indigenous equipment as per Annexure-II, steel structures including foundation bolts and inserts, tools & tackles for the Plant and Equipment shall be completed on FOR site basis as given below :
This clause clearly shows that some of the equipments were to be manufactured or fabricated at site and delivery would be completed accordingly. These clauses clearly show that it is not correct to say that all the equipments came from outside India and their supply was completed outside India when the same was supplied on f.o.b. basis.
28. Item (c) of Clause 6.5.2 at page 355 of the paper book which deals with "Supply of Plant and Equipment" reads as under:
c) ** Receipt of equipment 15% Verification and certia-
at site (Quantity/tonnage fication, by Purchaser
basis) or the Consultant, or
the equipment received
and stored at site.
This clause again shows the fact that the delivery of foreign components in respect of contract I were not completed outside India but many equipments etc. were to be received and fabricated in India only.
29. Clauses 10 3 deals with Insurance and Clauses 10 3 1 10 3 2 at page 376 of the paper book read as under:
10.3.1. The Indian Contractor shall arrange, secure and maintain marine, inland transit, storage and erection insurance as may be necessary and for all such amounts to protect the interest of the Purchaser against all risks as detailed herein. The form and the limit of such insurance as defined herein together with the under-writer thereof in each case shall be acceptable to the Purchaser. However, irrespective of such acceptance, the responsibility to maintain insurance at all times during the execution of Package shall be that of the Contractor alone. The Indian Contractor's failure in this regard shall not relieve him of any of his contractual responsibilities and obligations.
10.3.2 Any loss or damage to the equipment during handling, transporting, storage and erection, till such time the plant is provisionally taken over by the Purchaser, shall be to the account of the Indian Contractor. The Indian Contractor shall be responsible for preferring of all claims as applicable and make good at the Contractor's own cost for the damage or loss by way of repairs and/or replacement of the portion of the 'Works' damaged or lost for the timely commissioning of the equipment/completion of the works....
30. Reading of these clauses shows that the contracts are clearly overlapping because Indian contractor (ie ASPL) had nothing to do with the items to be supplied under contract I. Even if Indian contractor has undertaken to carry out the insurance on behalf of the assessee why all these clause were inserted in contract I instead of contracts III and IV? Normally when contracts are independent, terms and conditions in respect of part)' A, for example, cannot be inserted in case of party B.
31. Clause 10.4 at page 381 & 382 of the paper book regarding the Customs clearance reads as under:
The Indian Contractor shall be responsible for the expeditious clearance of imported materials consigned (under Contract No. I) to Indian port. In the event, the materials are unloaded at ports other than specified by the Contractor, the Contractor shall be responsible to clear the consignments from that port and transport the same to NLC store/site. All costs and expenses including port rent, port handling, demurrage & wharfage are deemed to be included in the Contract Price under port etc. The above clause clearly shows that in fact all through the assessee was responsible for handling of the equipment. That is why the Indian contractor (ie ASPL) after receiving equipment at the port handled the same and even did the custom clearing. We had specifically asked the learned Counsel for the assessee whether ASPI. i.e. the Indian Contractor has done customs clearing for any other person. The answer was "No". This means ASPL is not expert in customs clearing and if ASPL was independent party, then why it was handling the equipment which was dispatched by the assessee on f.o.b. basis abroad? from this it is obvious that contracts were split only for the convenience of the assessee and_for no other purpose. If contract I was really independent and separate, then after delivery of the equipment on f.o.b. basis at the Port of Genova (Italy) NLC itself would have handled the equipment at the Indian Port or appointed an independent clearing agent.
32. Clauses 10.9.5, 10.9.5.1 and 10.9.5.2. at pages 389 and 390 of the paper book read as under:
10.9.5. Indigenous Materials 10.9.5.1. The consignee for both rail and road despatches shall be clearly marked as : Neyveli Lignite Corporation Ltd., First Thermal Power Station Expansion, Neyveli-607 807, Tamil Nadu.
* * * * * * * * * * * * * * * * * * * * * * * * * * 10.9.5.2. By Wagons In case of despatch of materials in railway wagons, the Contractor shall ensure that the following is observed by them and their Subcontractors.
33. The above clause shows that some indigenous material was involved and it was to be dispatched either by road or by wagons and procedure for handling the same was detailed in these clauses (we are not reproducing further details as the are not relevant) This only again-goes to show that definitely some activities in terms of procurement and fabrication of equipments were to be carried out in India also.
34. Clause 10.34.12 at page 428 of the paper book reads as under:
10.34.12 Defect liability for Civil Works:
a) The Contractor Guarantees that within one year from the date of work completion certificate or in the event more than one certificate having been issued by the Purchaser from the respective date so certified, the contract work shall not show any sign of defects, cracks, settlements disfiguration, shrinkage, leakage, dampness or any other faults....
The above clause clearly shows that contractor was also required to do some civil works which could be done only at the site. This is totally in contradiction of the main submission that under contract I the assessee had only supplied plant and equipment and that too on f.o.b. basis at the Genova Port. If assessee had not done any civil work there was no need to take liability for the quality of such civil works as well as undertaking to repair the same in case of defects etc.
35. Clauses 10.48 relate to Labour rules, provision of Minimum Wages Act, & payment of Wages. Reporting of accidents to labour, provision of Workmen's Compensation Act. provisions of Apprentices Act. Labour Returns. Labour Camps. Sanitary arrangements. Medical facilities at site etc. We are unable to understand that if the contracts were separate why all these terms and conditions under contract I were entered into when assessee was only to supply plant and equipment on f.o.b. basis outside India. These clauses only show that the assessee was very much involved in erection of the plant.
36. Pages 471 to 674 of the paper book contain copy of the contract 11 which is supposed to be mainly for supervision of the erection of the plant and equipment. It was manly contended while showing various clause of contract I that title of the plant and equipment supplied on f.o.b. basis had passed on to NLC when plant and equipment were delivered to the shipping carrier on behalf of NLC and assessee was no more responsible for the same. However, following clauses in contract II show otherwise:
10.55 Transfer of Titles 10.55.1 Imported Portion Title of ownership and property to all imported equipment, materials, (including imported components to be further processed in India), drawings and documents to be delivered by the Contractor in terms of the contract shall pass to the Purchaser in accordance with the INCOTERMS 1990 and transfer of ownership and property to the Purchaser shall be simultaneous at the time of delivery to the carrier, provided however, such passing of title of ownership and property to the purchaser shall not in any way absolve, or dilute of diminish the responsibility and obligations of the Contractor under this Contract including loss or damages and all risks, which shall vest with the Contractor till the successful commissioning as per this Contract.
10.55.2. Indian Portion The title of ownership and property to all goods materials equipment etc originating in India shall pass to the Purchaser as per the terms and conditions of this contract after the Contractor as effected the dispatch of the same to "Ncyveli first Thermal Power Plant A'C Contractor" and the Contractor has prepared necessary documentation for handing over the same to NLC's authorized representative, provided however, such passing of titles of ownership and property to the Purchaser shall not in anyway absolved, dilute or diminish the responsibility and obligations of the Contractor under this Contract including loss or damage and all risks which shall vest with the Contractor till the successful commissioning as per this Contract.
Moreover, Clause 10.55.2, supra, again makes it clear that some Indian portion of the equipment was also involved which again negates the submission that contract I exclusively deals with foreign element of the plant and equipment.
37. We further fail to understand why all these clauses were inserted in contract II which deals only with erection and supervision. The only conclusion which can be reached is that though the assessee tried to segregate the contracts by re-drafting one contract, but failed to remove all the clauses successfully.
38. Pages 676 to 880 of paper book contain the copy of the contract III which is supposed to have been awarded to ASPI. and executed by ASPL. All through it was contended that contracts III and IV are in respect of Indian component of various plan! and equipment as foreign component was exclusively reserved under contract I. This means that basically contract 111 should deal with only various plant and equipment procured in India or fabricated in India.
39. Now let us see Clause 10.2.1 at pages 792 and 793 of (he paper book. It is as under:
10.2.1. Import Licence As per Export & Import Policy of India, 1992-1997, there is no physical barrier but only a tariff barrier in the way of import of any new capital goods except if the item of import is included in the Negative List or as provided in the policy/under any law. However, if required the Contractor shall arrange necessary import licence with the assistance of the Purchaser. However, for any portion of the supplies to be imported by (he Contractor for incorporation in or manufacture of the indigenous equipment, the Contractor shall arrange the necessary import licence on his own.
If contract 111 was dealing only with Indian portion of the equipment, then there was no need to refer to any import licence etc. because anything to be procured abroad would have been part of the contract I.
40. Clause 10.4 regarding Customs Clearance at page 798 of the paper book reads as under:
10.4 Customs, Clearance The Indian Contractor shall be responsible for the expeditious clearance of imported materials consigned (under Contract No. D to Indian port. In the event, the materials are unloaded at ports other than specified by the Contractor, the Contractor shall be responsible to clear the consignments from that port and transport the same to NLC store/site. All costs and expenses including port rent, per handling demurrage & wharfage are deemed to be included in the Contract Price under port etc. This clause clearly shows that ASPL specifically look the responsibility of getting the goods cleared despite the fact that it had no expertise in customs clearing. This only shows that the assessee involved its own people in handling the goods because assessee itself was responsible for everything.
41. When we look at the notice inviting tender for Main Plant Package (AOl) (International Competitive Bidding) Re-tender under the head "Overall scope of the work" it is mentioned as under:
The scope of services under the specification shall include design. engineering, manufacture, supply and delivery at the site of Plant and Equipment. Technological Steel Structure, Civil and Building Structural work. Storage and preservation. Handling at site. Comprehensive Insurance, erection. painting, start-up. trial run, testing, commissioning and Performance Guarantee lest. Guarantee and Warranty for 2 x 210 MW Expansion of Thermal Power Station-1 and hand over to the purchaser an operating plant and package shall include Plant and Equipment and facilities within the defined limits....
Under the caption "Qualifying Requirement for the Bidders:" it was made clear that:
tender is open to any single bidder called prime bidder who is a manufacturer of-
a) Lignite fired Steam Generator and/or
b) Steam Turbine and/or
c) Generator The above machine(s) manufactured by the Prime bidder should have each been rated for Unit capacity of 200 MW or above in a Thermal Power Plant.
If some bidder is a manufacturer of only any one or two of the items stated in para 2.1, he shall enter into association with other manufacturer(s) called "Principal Associate(s) by the remaining item(s).
Prime bidder and his Principal Associate(s) jointly or separately must have designed, manufactured, supplied, erected, tested and commissioned at least two numbers of their equipments/systems as listed in para 2.1 above in Thermal Power Plant having unit capacity of 200 MW or above and these should have been a successful operation for not less than 2 years on the original scheduled date of tender opening.
Prime bidder must indicate Principal Associate(s) under Clause 2.2 along with offer. Prime bidder must enter into consortium agreement with Principal Associate(s) which shall be submitted before the issue of letter of Award and shall be valid till the completion of all contractual obligations of the Prime bidder with purchaser.
2.5 Contract will be entered into with Prime bidder and he as a Croup leader shall be contractually bound to the Purchaser for the completion of the entire scope of work. I he scope of work of Prime bidder shall he on the basis of single bidder responsible. The Prime bidder shall be solely responsible and liable for all technical management and all other services required to complete entire scope of work detailed in tender specification.
This makes it abundantly clear that NLC invited tender from a single bidder. The norm set out was for a composite contract. Animus is clearly manifested in the notice inviting tender.
42. We have also noted that conditional letter of award dated 10-08-98 was awarded to the assessee only and not to assessee and ASPL. Offer made by the assessce, correspondence with assessee and discussion between the assessee and NLC are part and parcel of this award. ASPL was not a party at all till that time. NLC accepted assessee's offer for the design, engineering, manufacture, supply, complete erection, testing at site and commissioning of main plant package. Separate contracts were concluded as per the desire of the assessee. However, responsibility for the total performance from start to successful commissioning and full compliance with the specification for the performance of the equipments, vests with the assessee. Assessee vide its letter dated 1.9.1998 to NLC confirmed that its subsidiary ASPL will execute the contracts with full knowledge and expertise for the proper and timely implementation of the works under Ansaldo Energia management, control and full financial support, liven for failure of contracts III and IV assessee gave unconditional guarantee. Liquidated damage was payable on aggregate price of four contracts.
43. In the eventuality of dissolution, liquidation or bankruptcy of ASPL responsibility was on the assessee to execute the contract. Mr. Zara. Project Manager of the assessee signed all periodical reports, though it was the duty of ASPL as per Contract III. Though Mr. Zara was one of the Directors of ASPL. these reports were signed as Project Manager of assessee and not as Director of ASPL. Hven where sub-contractors of ASPI. correspond to ASPL it was handled by Mr. Zara under the designation "Project Manager". Performance Guarantee Test was conducted by the assessee although it was the work of ASPL.
44. The total project cost was Rs. 1.074 crores. Assessee declared only less than Rs. 43 crores as its receipt attributable to the Permanent Establishment (TK" for short) in India. This constitutes less than 4% of the total contract price whereas liquidated damage to be borne by the assessee was 17.5% of the aggregate contract price which works out to Rs. 184 crores. It is palpable from the perusal of the price schedule of contract II that no consideration was earmarked for guaranteeing the whole project.
45. Originally parties intended to enter into a turnkey contract. This intention is demonstrated with reference to the lender documents and various other papers. Later on. on. negotiation the contract was split into four parts as under:
a) Contract 1 deals will) Off-shore supply of equipments covering designing and engineering (Contract Price DM 224.400.28).
b)Contract II deals with Supervision of erection, testing and commissioning (Contract Price DM 19.790.000 (Rs. 640.000). e) Contract 111 : On-shore supph of equipments for which sub-contract was given to ASPL., Building (Contract Price Rs. 2700.846.700).
d) Contract IV: Civil construction, erection, testing, commissioning, the execution of which was given to ASPL, Bangalore (Contract Price Rs. 2775,329,495).
46. It is a fact that ASPL never carried out any major projects. Its total turnover till financial year 1998-99 was only Rs. 3.23 crores. Its share capital was only Rs. 30 lakhs. But it was awarded the contract of total project cost of Rs. 550 crores. Loans were obtained on (he guarantee given by the assessee. ASPL did not have its own capital to execute the contract. Works like handing over of machinery etc. were done by the assessee though it was the duty of ASPL as per the contract. Even for contracts III and IV assessee gave unconditional guaranty. Assessee agreed to pay liquidated damages in respect of the work done by ASPL. The over all picture which emerges makes it clear that though contracts were split into 4 parts, the intention of parties was very clear that these are to be executed on the pattern of composite contract. ASPL did not participate in the bidding process of tender. It was not eligible to bid. Il had no adequate finance and job experience. It could not have obtained the contract direct!) from NLC. It did not negotiate with NLC in regard to the extent and scope of work and price. It did not figure in the conditional Letter of Award dated 10-08-1998. It only worked under the umbra of the assessee with the capital of Rs. 31 lakhs with brought forward losses of Rs. 63 crores as on 31-03-1999. It had no sufficient staff to execute. When this contract of Rs. 550 crores was entered into, ASPL had only 17 engineers. It was fully controlled by Mr. Zara, Project Manager of the assessee.
47. The mere fact that ASPL was assessed to tax is not a reason alliunde to which assessee could be exonerated from the payment of rightful tax dues, Hon'ble Supreme Court in the cases of ITO v. Ch. Atchaiah 218 1TR 239(SC) and S.P. Jaiswal v. CIT 224 ITR 619(SC) has held that the right person has to be assessed even if some other person has already filed returns and paid taxes thereon.
48. Hon'ble jurisdictional High Court rendered judgment in the case of assessee's own case reported in 261 ITR 476 (Mad.). It begins with the following words:
The petitioner is a foreign company registered in Italy. The petitioner had entered into contracts with the Neyveli Lignite Corporation, the second respondent. It is claimed that the contracts were on Turnkey basis for implementation of a comprehensive power project for the second respondent.
49. Our attention was also invited on the order of the Tribunal rendered in assessee's own case for the assessment year 2001-02. The question raised before the Tribunal in that case was whether the receipt from contract 11 is to be assessed under Section 44BBB or Section 9(1)(vii) of the Act The issue in the present appeal is whether all the 4 contracts could be treated as one composite contract. For the assessment year 2001-02 assessee admitted permanent establishment in India whereas in the present case the assessee claimed that there is no permanent establishment in India. The question whether there existed a composite contract was not examined by the Tribunal in the assessment year 2001-02. This question was neither raised nor examined. As such the decision rendered for that year is not relevant for deciding the issue. Hon'ble Supreme Court in the case of M.M. Ipoh and Ors. v. CIT 67 ITR 106 (SC) has held that the doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for assessment in one year binding in another year. In the case of Padmasundara Rao (Deed.) v. State of Tamil Nadu 255 ITR 147(SC) it was held that Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases.
50. For the purpose of ascertaining the intention of parties, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. ' It is the duty of the court to construe the contract according to the intention of the parties. 1 he law of contract is intended to ensure that what has been promised shall be performed, and in the event of breach party at default shall compensate the other. To achieve this task a contract must he capable of being executed independently. We-have examined all the factual details. It was found that tender was invited on turnkey basis as a lumpsum contract. Analysis of various clauses of Contracts I. II. Ill & IV shows that contract is basically one consolidated contract only Clauses in respect of performance guarantee bond and liquidated damages make it abundantly clear that the entire responsibility of execution of contract was with the assessee only from beginning to end. Mr. Zara, the Project manager of the assessee was present in India all through the execution of the contract. Site office was made available to the assessee in the name of ASPL. Assessee was required to ensure the quality of local product. Activities done by ASPL were part and parcel of main package contract awarded on single bidder basis. Assessee claimed before the Hon'ble High Court that contracts were on turnkey basis for implementation of a comprehensive power project. Before the Tax department the assessee changed its stand as per the prompting of the situation. It is axiom, canonised in the dictum: allegans contraria non est audiendus. Me is not to be heard who alleges things contradictory to each other. It expresses, in other language, the trite saying of Lord Kenyon, that a man shall not be permitted "to blow hot and cold" with reference to the same transaction, or insist, at different times, on the truth of each two conflicting allegations, according to the promptings of his private interest. Taking into consideration the entire conspectus of the case, we are of the opinion that ASPL was a facade created for the purpose of taxation, ex consequent, its corporate veil be lifted for consolidating the four contracts.
51. In the light of the aforesaid discussion it is obvious that the contract in question was a composite contract, as such corporate veil was required to be lifted. We agree with the conclusion of the CIT(A) that as far as contract II is concerned, the same was treated to provide certain technical services on which profit rate of 20% was applied which was confirmed by the Tribunal in ITA No. 23 13/Mds/03 dated 5-5-2006. However, we are unable to agree with the estimation of profits made by the CIT(A). Me has held that profit from contract I could be estimated at 15% because it involves sale of equipment etc. and since only 75% activity was attributed to India, therefore, the profit rate has been taken at 11.25% and ultimately over all profit was taken at 7%. We are of the opinion that activities which are not conducted in India cannot be taxed in India. We agree with the estimate made by the CIT(A) that only 25% of activity could have been done outside India particularly in view of the various clauses of contract I indicating that many plant and equipment were fabricated in India also. We had asked the learned Counsel for the assessee during the course of hearing to file the profit and loss account etc. of the subsidiary and other comparative figures. But the only thing supplied is the chart showing the net profit margin. We find that the assessee has given the following chart at page 72 of the paper book showing net profit margin by different parties in similar power projects:
ANSALDO - Profit margins of similar companies for the year 2002.
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Company. Sales Net Profit Net Profit
(INR crores) (INR crores) %
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Alstom Projects India Ltd. 1131.65 78.94 6.98% Bharat Heavy Llectricals Ltd. 7465.90 662.83 8.88% Larsen & Toubro Ltd. 8166.61 400.48 4.90% Arithmetic mean 6.92%
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Taking into consideration of the entire conspectus of the case, we direct the AO to tax the profit at 7% in the context of contract I, III and IV. However, in regard to contract I 7% profit shall be taken in relation to 75% receipts only, as balance receipts can be attributed towards activities conducted outside India.
52. Next issue relates to the question whether there exists a permanent establishment in India in relation to off-shore supply activities.
53. We have heard the rival submissions. The definition of '"permanent establishment" is contained under Article 5(2)(j) of the DTAA. As per the definition, permanent establishment shall include a building site or construction installation or assembly project or supervisory activities in connection therewith where such site, project or activity together with such other sites projects or activities, if any continue for a period of more than six months or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a project not exceeding six months and the charges payable for the project of supervisory activities exceed 10 per cent of the sale of machinery and equipment.
54. It was argued on behalf of the assessee that in comes within the ken of the second limb of the definition. Since the supervisory charges payable is less than 10% of the sale price of machinery, there was no permanent establishment in India.
55. We have already taken a view that the contract in question was a composite contract. Assessee was executing the entire project. Assessee was in India for a term exceeding 6 months and hence it has permanent establishment in India. Assessee had common site office, residential premises for ASPL. Assessee had absolute control and management for all 4 contracts. Mr. Zara, Project Manager of the assessee entered the site on 20-09-1998 and stayed all through. Project Manager and Site Manager of the assessee carried out managerial and other activities continuously for a period of 4-5 years. Project head office and project site office situated in India constitute permanent establishment in India. Therefore, business profits attributable to actual operations conducted in India would be exigible to tax.
56. The assessee was engaged in several activities such as unloading, transportation, storage of equipments, fusing together of Indian equipments with foreign products, supply of fuel, changing of designs and drawings, ensuring quality of products etc. Tribunal in the case of Van Oord Dredging & Marine Contractors BV v. DDIT 105 ITD 97(Mum.) has held that permanent establishment is for a person and not for any activity alone. Therefore it can be said that the assessee had permanent establishment in India.
57. Next point relates to the question whether there existed any business connection of the assessee with NIC and ASPL. As per the prescription of Section 9(1) "all income accruing or arising, whether directly or indirectly through or from any business connection in India..." shall be deemed to accrue or arise in India. Income attributable to the operations carried out in India is exigible to lax in India. The meaning of the expression "business connection" is not restricted bv the definition of business contained in Section 2(13) of the Act because that definition is enumerative and not exhaustive. Business connection has not been defined in the Act. It is not equivalent to carrying on a business. The matter in which one has a right of interference comes within the ambit of the expression "business connection". A business connection involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in India which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in India.
58. Assessee was required to inter-act, monitor and co-ordinate with more than 20 contractors to execute the work of the project. As per contract I supplies were on going process at different stages depending on local availability. Management and control of the subsidiary was vested with the assessee. Testing, commissioning and performance guarantee tests and handing over the machinery and finalizing the contractual obligation make it very clear that there existed a business connection. ASPL took technical advice and availed supervisory assistance from the assessee during the entire period. Mr. Xara, Project Manager submitted all periodical reports which were submitled by ASPL as per contracts III and IV. During the relevant period 60% of holding in ASPL was with the assessee (In March 2002 it was enhanced to 99.99%). Control, management and financing part of ASPL was by the assessee. On the basis of guarantee given by the assessee only, banks in India have advanced money to ASPL. The assessee was under obligation to see that the entire package was executed properly with utmost precision. Hence there existed business connection with ASPL.
59. In regard to the additional ground we have treated the whole contract with NLC as a composite one with single bidder responsibility. As such there is no question of bifurcation of this part of the receipt for which services were utilised in India.
60. Last issue relates to the charging of interest under Section 234B of the Act.
61. We have heard the rival submissions. Learned Counsel for the assessee submitted that assessee received only income on which tax was deductible. As such there was no liability to pay advance tax. Hence no interest is chargeable under Section 234B. To buttress this proposition, reliance was placed on the decision of the Special Bench of the Tribunal rendered in the case of Motorola Inc. v. Dy. Commissioner of Income Tax 95 ITD 269(Del)(SB). Ld. D.R. tried to distinguish this decision with reference to the ratio laid down in the case of CIT v. Anjum M.h. Ghaswala 252 ITR 1, wherein apex court held that 234B interest is mandatory.
62. We find some force in the submission of the Id. D.R. that assessee had approached the deductor NIC to deduct the tax al lower rate and in turn NLC1 approached the Department to deduct the lower tax under Section 197. This means that tax deductible itself was reduced and only that portion of the tax could be reduced from the total lax which according to the assessee was deductible means the lower amount for which the assessee approached the NLC. As per the prescription of Section 209 computation of advance tax is to be made alter reducing the amount of income-tax which could be deductible source.
63. Therefore we are of the view that interest under Section234b which is of mandatory nature can be charged only on the amount which is payable by the assessee after reducing the amount of tax which was deductible (in this case the lower amount as per the request of the assessee). Therefore, we set aside the order of the CIT(A) and remit the matter back to the file of the AO with a direction to re-work the interest as per the observations made by us.
64. We have examined all the factual details which were available before the Revenue authorities and admitted at the time of hearing. However, those details which were filed after the hearing was over viz. affidavit of Mr. Zara, Project Manager, etc. were not considered.
65. Before we part with this matter, we would like to categorically observe that the various decisions cited by the parties have been duly considered. In case some of them do not find a mention in the order, it does not mean that the same have been overlooked.
66. In the result, appeal of the assessee stands partly allowed.