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TMI Blog2008 (11) TMI 284X X X X Extracts X X X X X X X X Extracts X X X X ..... nding to the effect that the order of the AO is erroneous. 6. That the order of learned CIT under s. 263 is based on the change of opinion and not on the material from which it could be inferred that the order is prejudicial to the interests of the Revenue. 7. That the learned CIT has failed to appreciate that for the exercise of jurisdiction under s. 263, the order should not only be erroneous but also prejudicial to the interests of Revenue and the twin conditions. which do not exist in the present case renders the order passed under s. 263 void." 3. Briefly stated, the facts are that the assessee filed return of income on3rd Nov., 2003declaring income of Rs. 2,97,02,920. The return was processed under s. 143(1) on16th Jan., 2004on the returned income. Subsequently, the case was taken up for scrutiny and notice under s. 143(2) dt.27th April, 2004was served upon the assessee. Assessment was completed under s. 143(3) on16th July, 2004on returned income. It is noted by the AO in the assessment order that gross revenue receipt from M/s Jindal Drilling Industries Ltd. was Rs. 33,98,93,886 from which an amount of Rs. 4,28,64,684 was reduced by the assessee towards sub-contracto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this gross contractual revenue of Rs. 3,398.93 lakhs in line with the provisions of art. 7 of DTAA betweenIndiaandItalyand consequently, the company has offered net revenue of Rs. 2,970.29 lakhs and a deemed profit rate of 10 per cent was applied to work out profit of the assessee. It is also pointed out that break-up of sub-contractor cost of Rs. 428.64 lakhs was also submitted to the AO which included contractual payments, professional payment and salary payment. It was also pointed out that it was also brought to the notice of the AO that TDS was properly deducted and annual return of TDS was duly filed and copies of relevant Form Nos. 26C, 26J and 26A were also submitted along with this letter for ready reference. It was also submitted that in asst. yr. 2000-01 also, the assessment order was completed under s. 143(3) on the same basis and it was pointed out that relevant assessment order dt.21st Oct., 2002for asst. yr. 2000-01 is appearing on pp. 15 to 17 of the paper book. It was also submitted that notice under s. 263 issued by learned CIT, Dehradun is appearing on page No. 1 of the paper book and its reply is appearing on pp. 2 to 10 of the paper book. It was contended that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised that the view adopted by the AO is a possible view and hence it cannot be said that the assessment order is erroneous. It was submitted that while accepting the claim of the assessee regarding 10 per cent profit of net receipt, the AO has taken guidance from s. 44BB to determine the profit attributable to the PE and hence it is a possible view adopted by the AO and hence the assessment order is not erroneous. In support of this contention, reliance was placed on the following judicial pronouncements: (a) CIT vs. Max India Ltd. (2007) 213 CTR (SC) 266 : (2007) 295 ITR 282 (SC); (b) Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC); (c) CIT vs. Gabriel India Ltd. (1993) 114 CTR (Bom) 81 : (1993) 203 ITR 108 (Bom). 7. One more contention was raised by him that there is no definite finding of CIT that there is any error in the assessment order and hence the order of learned CIT is bad in law and cannot be upheld. In support of this contention, reliance was placed on the judgment of Hon'ble Delhi High Court rendered in the case of CWT vs. Prithvi Raj Co. (1991) 98 CTR (Del) 216 : (1993) 199 ITR 424 (Del) and also on the judgment of Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the AO has not given her view and she has simply accepted the return of income by accepting the claim of the assessee without making any inquiry and without applying her mind and hence this claim of the learned counsel is not acceptable. Regarding the contention that the order under s. 263 is not in line with notice issued under s. 263, it was submitted that the objection in the notice was regarding assessing the income of the assessee @ 10 per cent of net receipt and in the order of learned CIT also, same issue has been decided by restoring the matter back to the file of the AO and hence the basis of order under s. 263 is not different than the notice issued under s. 263. Regarding the Tribunal decision in the case of Peerless General Finance Investment Co. Ltd., it was submitted that in that case, in the order passed by learned CIT under s. 263, the CIT has given several grounds or logic which were not disclosed to the assessee during the proceedings under s. 263 and for this reason, it was held by the Tribunal that revision of the assessment order by CIT under s. 263 is not proper. It is submitted that in the present case, the grounds or logic adopted by learned CIT were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee regarding deduction of expenses of Rs. 428.64 lakhs is acceptable because these expenses are attributable to PE and payments were made after deducting TDS. Thereafter, the AO says that the claim of the assessee has been considered and the same is acceptable. Apart from discussing the issue regarding deduction of direct expenses of Rs. 428.64 lakhs, there is no discussion regarding acceptability of the claim of the assessee that income is to be assessed @ 10 per cent of such net receipt. In the computation of income also, there is no mention regarding the basis on which the assessee claims that the income of the assessee is to be assessed at the rate of 10 per cent. In the two clauses of art. 7 of DTAA reproduced by the AO in the assessment order, it is stated that in determination of the profits of PE, there shall be allowed as deduction expenses which are incurred for the purpose of business of PE. On the basis of these clauses of art. 7 of DTAA, we can understand the decision of the AO regarding allowing of deduction of Rs. 428.64 lakhs but on what basis, he has accepted the claim of the assessee that the income of the assessee is only 10 per cent of such net receipt, is not u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above paras of art. 7 of DTAA, we find that in determination of profit of PE, deduction has to be allowed of the expenses which are incurred for the purposes of business of the PE including executive and general administrative expenses so incurred whether inIndiaor elsewhere. In view of these paras of art. 7, allowing of deduction of expenses incurred for the purpose of PE is proper but we find no basis to accept the claim of the assessee that income of the PE is only 10 per cent of net receipt after deducting the direct expenses incurred by the assessee on account of contractual payments, professional payment and salary payment. If this is accepted, it amounts to accept that 90 per cent of such net receipt is expenses incurred by the assessee on account of executive and general administrative expenses and that too without any detail thereof. This is not acceptable because we find that as per para 2 of art. 7 of DTAA as reproduced above, it is permissible that if correct profits of PE is incapable of determination or there are exceptional difficulties in doing so, the profit of PE may be estimated on reasonable basis but then it has to be shown that profit of PE is not ascertainab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment order is after proper application of mind on the basis of material available on record. Hence this objection of the assessee is rejected. 14. Now, we examine the second objection. In this regard, we have to see as to whether the grounds set out by CIT in the notice issued by him under s. 263 and in the order passed by him under s. 263 are same or different. If these are different, whether the order passed by CIT under s. 263 is valid or not. 15. We first deal with the first aspect i.e. whether the grounds set out by the CIT in notice under s. 263 and in the order under s. 263 are same or different. For this purpose, we reproduce the notice under s. 263 of the Act issued by the CIT as appearing on p. 1 of the paper book. "F. No. CIT/DDN/Tech/263/20/2006-07/1860 Office of the CIT, Dehradun. Dt. 22nd March, 2007 . To M/s Saipem S.P.A. C/o Nangia Company, 75/7,Rajpur Road. Dehradun. Sub: Show-cause notice for initiation of action under s. 263 of the IT Act, 1961, for the asst. yr. 2003-04-Regarding. Please refer to the subject mentioned above. Vide this office letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our case will be disposed of as per law. Sd/- (Y.S. Rawat) CIT, Dehradun." 16. Now we reproduce the last para of the order of CIT under s. 263 to see the grounds on which the order is passed by CIT under s. 263: "I have considered the explanation and submission of the assessee however by allowing 90 per cent of the deduction on net receipt after incurring expenses on which IDS was made appears to be excessive or more than reasonable. The AO should have applied his mind on reasonable basis could have allowed some expenses as mentioned in para 3 of art. 7. The AO has not brought anything on records to estimate properly the expenses attributable to executive and general administrative as per para 3 of art. 7 and I am of the opinion that the deduction allowed by the AO as per para 3 of art. 7 appears to be excessive and hence to this extent the assessment made by the AO is prejudicial to the interest of Revenue as there is no proper application of mind. The assessment is set aside and to be redone by the AO by allowing only reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and gets his accounts audited and furnishes a report of such audit as required under s. 44AB, and thereupon the AO shall proceed to make an assessment of the total income or loss of the assessee under sub-s. (3) of s. 143 and determine the sum payable by or refundable to the assessee. Explanation: For the purposes of this section,- (i) 'plant' includes ship, aircraft, vehicles, drilling units, scientific apparatus and equipment used for the purposes of the said business, (ii) 'mineral oil' includes petroleum and natural gas." 18. From the above we find that as per notice issued by CIT under s. 263, he is objecting to applying 10 per cent rate to net contractual receipt instead of gross contractual receipt for working out income of the assessee. We find that although there is no mention of s. 44BB in the assessment order or in the computation filed by the assessee but learned CIT has referred to s. 44BB probably for the reason that estimation of income @ 10 per cent is provided for in s. 44BB and there is no such clause in DTAA between India and Italy and hence it is presumed by learned CIT that 10 per cent rate adopted was as per s. 44BB. Before us also, it was submitted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objection is for allowing excess deduction of expenses as under: ------------------------------------------------------------ As per AO As per CIT Amount in Amount in (Rs.) (Rs.) ------------------------------------------------------------ (a) Gross receipt 33,98,93,838 33,98,93,838 (b) Expenses allowed by AO before applying 10% rate 4,28,64,684 (c) Balance 29,70,29,202 33,98,93,886 (d) Less deduction of expenses to the extent of 90% 26,73,26,282 30,59,04,498 (e) Net income 2,97,02,920 3,39,89,388 Total expenses allowed (b + d) 31,01,90,966 30,59,04,498 ------------------------------------------------------------ From the above, we find that in the notice issued by CIT, his objection is to allowing of deduction for expenses to the extent of Rs. 31,01,90,986 allowed by the AO as against Rs. 30,54,04,498 allowable as per him. In this order under s. 263, learned CIT has directed the AO to allow deduction of expenses on reasonable basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses so incurred, whether inIndiaor elsewhere. As per these provisions of art. 7 of DTAA, there is no scope of allowing of direct expenses and then further deduction of 90 per cent of net contractual receipt and assessing the income to the extent of 10 per cent of net contractual receipt. If the income of the assessee is to be determined as per the provisions of these paras of art. 7 of DTAA betweenIndiaandItaly, deduction has to be allowed of expenses incurred by the assessee for the purpose of business of the PE. Regarding direct expenses, deduction is already claimed by the assessee and allowed to the extent of Rs. 428.64 lakhs and now further deduction has to be allowed on account of executive and general administrative expenses which cannot be allowed to the extent of 90 per cent of net contractual receipt i.e. gross contractual receipt minus direct expenses. If the assessee feels that the provisions of IT Act, 1961 are more beneficial then we find that in terms of the provisions of s. 90(2), provisions of IT Act, 1961 shall apply to the extent they are more beneficial to the assessee and hence the assessee had the option of adopting the provisions of s. 44BB in preferenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest of Revenue. By the same logic, even if the AO in earlier years has accepted a claim of the assessee, which is not as per law, such assessment order cannot be a basis to accept similar claim in subsequent year by applying the rule of consistency. Hence, we hold that this objection is also not valid. 25. The last objection is that there is no definite finding of learned CIT that there is any error in the assessment order. In this regard, we find that it is clearly stated by learned CIT in last para of his order that allowing 90 per cent of the deduction of net receipt after expenses on which IDS was deducted, appears to be excessive or more than reasonable. Learned CIT further says that the AO has not applied his mind for allowing expenses on reasonable basis as mentioned in para 3 of art. 7 and the AO has not brought anything on record to estimate properly the expenses attributable to executive and general administrative expenses as per para 3 of art. 7. Learned CIT has also observed that deduction allowed by the AO is excessive and hence to this extent, the assessment made by the AO is prejudicial to the interest of Revenue as there is no proper application of mind. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1922 was that the ITO did not apply his mind to the claim of the assessee as contained in Part D of the return. In Part D of the return, the claim of the assessee was that receipt of Rs. 1 lakh is of capital nature and not arising from any business, profession or occupation, it is also not taxable as capital gains on account of aggregate capital loss of Rs. 21.09 lakhs brought forward from earlier years. In this case, learned CIT held that the assessment order is erroneous because there is no application of mind by the AO regarding this claim of the assessee. Under these facts, it was held by Hon'ble Allahabad High Court that the approach of the CIT is erroneous. It is held that the failure of the ITO to deal with the claim of the assessee in the assessment order may be an error but erroneous order by itself is not enough to give jurisdiction to the. CIT to revise it under s. 33B because it is also to be shown that the order was prejudicial to the interest of Revenue. It is also held that without going into the merits of the claim of the assessee, it was not possible for the CIT to say that the order of the ITO has caused any prejudice to the interest of Revenue, in the present ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where only part of activities are undertaken by PE there is need to estimate the gross receipt attributable to PE after examining the nature and character of the activities which are undertaken by PE and which are not undertaken by PE. Thereafter, the expenses incurred by the PE are deducted from that part of gross receipt which are held to be attributable to PE. In the present case, the assessee itself has deducted direct expenses of PE from gross contractual receipts meaning thereby that the assessee itself has accepted that the entire receipt is attributable to PE and hence we find no merit in this contention of learned Authorised Representative of the assessee that only to the extent of 10 per cent of net contractual receipt profit was attributable to the PE and the balance profit was attributable to the entity which is not part of PE. In view of this finding of us, it cannot be said that the view adopted by the AO was a possible view because we have noted above that in the present case, the assessee and the AO has applied the provisions of art. 7 of DTAA and also the provisions of s. 44Ba which is not as per law and hence it cannot be said that the view adopted by the AO was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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