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Issues Involved:
1. Validity of the CIT's order under Section 263. 2. Application of Article 7 of the DTAA between India and Italy. 3. Application of Section 44BB of the IT Act. 4. Consistency in the method of profit apportionment. 5. Determination of whether the AO's order was erroneous and prejudicial to the Revenue. Detailed Analysis: 1. Validity of the CIT's Order under Section 263: The assessee challenged the CIT's order under Section 263, arguing it was based on conjectures and surmises and lacked a proper finding that the AO's order was erroneous. The Tribunal found that the CIT had issued a notice under Section 263, indicating that the AO's assessment was erroneous and prejudicial to the Revenue. The CIT's order directed the AO to recompute the income after allowing reasonable expenses according to Article 7 of the DTAA between India and Italy. 2. Application of Article 7 of the DTAA between India and Italy: The assessee contended that the CIT erred by not following Article 7, Paragraph 5 of the DTAA, which states that profits of a PE should be determined by the same method year by year unless there is a good reason to change. The Tribunal noted that as per Article 7, Paragraphs 2, 3, and 5, profits attributable to a PE should be determined by allowing deductions for expenses incurred for the business of the PE, including executive and general administrative expenses. The Tribunal found no basis for the assessee's claim that only 10% of net receipts should be considered as income, as this would imply that 90% of net receipts were expenses without any detailed justification. 3. Application of Section 44BB of the IT Act: The CIT argued that the AO should have applied Section 44BB, which mandates assessing income at 10% of gross receipts for non-residents engaged in providing services or facilities in connection with the extraction of mineral oils. The assessee claimed that the AO had taken guidance from Section 44BB to determine the profit attributable to the PE. The Tribunal clarified that Section 44BB deems 10% of gross receipts as income, implying that 90% of gross receipts are expenses. The AO's approach of applying 10% to net receipts was not in line with Section 44BB or the DTAA. 4. Consistency in the Method of Profit Apportionment: The assessee argued that since the same method had been accepted by the Department since the assessment year 1998-99, the rule of consistency should apply. The Tribunal rejected this argument, stating that the method adopted was contrary to the provisions of the DTAA and the IT Act. The Tribunal emphasized that consistency cannot justify a method that is not in accordance with the law. 5. Determination of Whether the AO's Order Was Erroneous and Prejudicial to the Revenue: The Tribunal found that the AO's order lacked proper application of mind and did not provide a basis for accepting the assessee's claim that only 10% of net receipts should be considered as income. The CIT had given a concrete finding that the AO's order was erroneous and prejudicial to the Revenue due to the lack of proper estimation of expenses attributable to executive and general administrative expenses. The Tribunal upheld the CIT's order under Section 263, concluding that the AO's assessment was erroneous and prejudicial to the Revenue. Conclusion: The Tribunal dismissed the assessee's appeal, upholding the CIT's order under Section 263. The Tribunal found that the AO's assessment was not in accordance with the DTAA or the IT Act, and the CIT was justified in directing the AO to recompute the income after allowing reasonable expenses. The Tribunal emphasized the importance of proper application of mind and adherence to legal provisions in the assessment process.
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