2014 (6) TMI 368 - AT - Income Tax

Reduction of estimation on the offshore contracts - Adoption of domestic tax rate as against higher rate Held that - The burden of proof of India operations in the case of a non-resident were generally lie on the Revenue as it was contended that no part of the offshore contract was executed in India - CIT(A) elaborately discussed the legal principles and arrived at a correct conclusions vide para 11 that India Project Office is liable under the Income Tax and the DTAA between India and Italy only to the extent of profit attributable to the business operations carried out by the permanent establishment in India - This position does not change even if all the three contracts signed by the parent company are treated to be single or composite contract - The cables are manufactured outside India and procurement of cables outside India fall beyond purview and jurisdiction of the provisions of Income Tax Act. The offshore contract is only for procurement of cables that too outside India and the training provided in India is incidental to the contract No.1 i.e., offshore contract and further as there is no profit earned on training, no part of the income can be attributable to the PE Relying upon ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. Versus DIRECTOR OF INCOME-TAX 2007 (1) TMI 91 - SUPREME COURT - when under an offshore contract, equipment was found transferred outside India, necessarily taxable income also accrued outside India - no portion of such income was taxable in India thus, the order of the CIT(A) in restriction of the addition to 1% of the total contract is set aside Decided in favour of Assessee. Onshore contracts - Rejection of books of account u/s 145(3) of the Act Held that - CIT(A) came to correct conclusion that provisions of section 44BBB are not applicable to the assessee as work of India Project Office does not relate to any turnkey power project - he confirmed the action of the AO in invoking the provisions of section 145(3) on the reason of incorrect method of accounting and partly debiting the expenses of offshore contracts - Even though there seems to be merit in contentions, it is very difficult to examine them at this point of time in view of afflux of time thus, estimation of income at 10% on the contracts relating to onshore supply and services is reasonable - ITAT is generally estimating incomes from 10 % to 12.5% in main contractors cases - assessee undertook on contract basis the estimation at 10% is reasonable Decided against Assessee. Levy of interest u/s 234B, 234D of the Act Held that - Levy of interest u/s 234B and 234D are to be re-examined by the AO - once the amounts are covered by the TDS, question of levy of interest u/s 234B on non-payment of advance tax should not arise Relying upon DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) Versus NGC NETWORK ASIA LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT AO is directed to verify whether the income that has been taxed is covered by the provisions of TDS and if so, not to charge interest u/s 234B of the Act - Decided in favour of Assessee.

Summary

Issues Involved:
1. Reopening of assessment under section 147.
2. Taxability of income from offshore supply contract.
3. Estimation of income from onshore supply and services contracts.
4. Levy of interest under sections 234B and 234D.
5. Tax rate applicable to foreign companies under DTAA.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessee contested the reopening of assessment under section 147, arguing it was contrary to law and without jurisdiction. The Tribunal held that the reopening was valid as the original return was accepted under section 143(1) without scrutiny, and the notice under section 148 was issued within four years. It was noted that the principles laid down by the Supreme Court in Rajesh Zhaveri Stock Brokers Pvt. Ltd. vs. ACIT applied, where it was held that intimation under section 143(1) is not an order of assessment and does not preclude reopening. The Tribunal rejected the additional ground raised by the assessee on this issue.

2. Taxability of Income from Offshore Supply Contract:
The assessee argued that income from the offshore supply contract was not taxable in India as it was concluded outside India. The Tribunal found factual errors in the CIT(A)'s order, noting that the offshore contract was signed before the establishment of the India Project Office. The Tribunal held that the offshore contract was for procurement of cables outside India and that the training provided in India was incidental and did not result in profit. Relying on the Supreme Court's decision in Ishikawajima-Harima Heavy Industries Co. Ltd. and the Delhi High Court's decision in L.G. Cables Limited, the Tribunal concluded that no income from the offshore contract was attributable to the PE in India. Consequently, the Tribunal set aside the CIT(A)'s order and allowed the assessee's appeal on this issue.

3. Estimation of Income from Onshore Supply and Services Contracts:
The assessee contested the rejection of books of accounts and the estimation of income at 10% of the contract value. The Tribunal upheld the CIT(A)'s decision, noting that the books of accounts were unreliable and the estimation at 10% was reasonable. The Tribunal emphasized that the estimation was justified given the facts and circumstances, and it aligned with the general practice of estimating income in similar cases. The Tribunal rejected the assessee's revised ground on this issue.

4. Levy of Interest under Sections 234B and 234D:
The assessee argued that interest under sections 234B and 234D was not warranted. The Tribunal directed the AO to re-examine the levy of interest under section 234B, considering the tax deducted at source (TDS) and the principles laid down by the Bombay High Court in DIT (IT) vs. NGC Network Asia LLC. For section 234D, the Tribunal instructed the AO to verify the applicability based on the Supreme Court's decision in CIT vs. Reliance Energy Ltd. The Tribunal allowed the additional ground for statistical purposes.

5. Tax Rate Applicable to Foreign Companies under DTAA:
The Revenue contested the CIT(A)'s decision to apply the tax rate applicable to domestic companies instead of the higher rate for foreign companies. The Tribunal upheld the CIT(A)'s decision, affirming that the non-discrimination clause under the DTAA required the same tax rate for foreign companies as for domestic companies in similar circumstances. The Tribunal rejected the Revenue's ground on this issue.

Conclusion:
The Tribunal partly allowed the assessee's appeal, providing relief on the offshore contract income issue and directing re-examination of interest levies. The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on the tax rate and estimation of income from onshore contracts.