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TMI Blog2007 (5) TMI 288X X X X Extracts X X X X X X X X Extracts X X X X ..... ite Corporation (in short "NLC") and Ansaldo Energia SpA ? (vi) Charging of interest under s. 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 starting from different points on its circumference but all oriented towards the power of CIT(A) in respect of assumption of jurisdiction under s. 251 of the Act. Learned 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 I in the order of assessment is not adequate to confer jur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 [1999] 154 CTR (SC) 88 : [1999] 237 ITR 889 (SC) held that decision of another three Member Bench of the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 50 CTR (SC) 290 : [1986] 158 ITR 102 (SC) was rendered per incurium. Learned Departmental Representative submitted that on this factual backdrop the decisions rendered in the cases of CIT v. Shapoorji Pallonji Mistry, CIT v. Rai Bahadur Hardutroy Motilal Chamaria and CIT v. Nirbheram Daluram are to be considered. The first two decisions were rendered under the 1922 Act whereas the case of Nirbheram Daluram was rendered under the 1961 Act in which an Explanation was appended to s. 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd part of income from Contract I. 12. Hon'ble apex Court in the case of CIT v. Nirbheram Daluram made it clear that the powers of first appellate authority under s. 251 of the Act cannot be construed to be confined to the matters considered by the AO only. First appellate authority is entitled to direct additions in respect of items of income not considered by the AO. In the cases of Rai Bahadur Hardutroy 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 principles 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, learned Departmental Representative 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 CIT(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. Learned Departmental Representative 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20 per cent as per the prescription of s. 9(1)(vii) of the Act. In regards 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 fulfil the commitments in the eventuality of insolvency of subsidiary company. On this factual backdrop the profit rate was estimated at 15 per cent of 75 per cent of the activity said to be done in India, therefore, total net profit rate came to 11.25 per cent 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 per cent and the relevant portion is reproduced as under : "30.4. With respect to Contracts III and IV, ample justification is provided in the pre-pages as to why the appellant is to be taxed. In execution part, there are no two different concerns. Appellant completed the testing, commissioning and perfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or onshore supply and service, for which NLC did not agree initially but the issue was kept open. By letter dt. 18th Nov., 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 dt. 9th Feb., 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 It III and IV and no discount was given in Contract L If the contracts are different, then under what authority assessee could give discount in respect of Contracts III and IV ? 26. A perusal of conditional award letter filed at p. 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 cl. 4 of this award letter the consolidated price of DM 24,41,90,280 + 5,47,68,16,195 was given. This clearly shows that there is no force in the submission that separate prices have been given in Contracts HI and IV because originally only consolidated price was given. 27. Detailed submissions were made in respect of individual contracts and the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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. 29. Clause 4.2.10 at p. 334 of the paper book reads as under : "The delivery of equipment shall be held to be completed when all equipments 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 cl. 4.4.2 at p. 336 of the paper book which reads as under : "Delivery of all indigenous equipment as per Annex. II, steel structures including foundation bolts and inserts, tools and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce on behalf of the assessee why all these clauses were inserted in Contract I instead of Contracts III and IV ? Normally when contracts are independent, terms and conditions in respect of party A, for example, cannot be inserted in case of party B. 32. Clause 10.4 at pp. 381 and 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. 1) 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 and 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 (i.e. ASPL) after receiving equipment at the port handled the same and even did the customs clearing. We had specifically asked the learned counsel for the assessee whether ASPL. i.e. the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the quality of such civil works as well as undertaking to repair the same in case of defects etc. 35. Clause 10.48 relates to labour rules, provision of Minimum Wages Act, and 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 II which is supposed to be mainly for supervision of the erection of the plant and equipment. It was mainly contended while showing various clauses 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 otherwis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nent was exclusively reserved under Contract I. This means that basically Contract III should deal with only various plants and equipment procured in India or fabricated in India. 39. Now let us see cl. 10.2.1 at pp. 792 and 793 of the 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 the Contractor for incorporation in or manufacture of the indigenous equipment, the Contractor shall arrange the necessary import licence on his own." If Contract III 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 p. 798 of the paper book reads as under : "10.4 Customs clearan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pments/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 cl. 2.2 along with offer. Prime bidder must enter into consortium agreement with Principal Associated) 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 Group Leader shall be contractually bound to the Purchaser for the completion of the entire scope of work. The scope of work of Prime bidder shall be 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious other papers. Later on, on negotiation the contract was split into four parts under : (a) Contract I deals with offshore 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 1,97,90,000 (Rs. 6,40,000). (c) Contract III : on-shore supply of equipments for which sub-contract was given to ASPL, Bangalore (Contract Price Rs. 2,70,08,46,700). (d) Contract IV : Civil construction, erection, testing, commissioning, the execution of which was given to ASPL, Bangalore (Contract Price Rs. 2,77,53,29,495)." 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 the 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 gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereas in the present case the assessee claimed that there is no PE in India. The question whether there existed a composite contract was not examined by the Tribunal in the asst. yr. 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 v. CIT [1968] 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 (Decd.) v. State of Tamil Nadu [2002] 176 CTR (SC) 104 : (2002) 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 du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal in ITA No. 2313/Mds/2003 dt. 5th May, 2006. However, we are unable to agree with the estimation of profits made by the CIT(A). He has held that profit from Contract I could be estimated at 15 per cent because it involves sale of equipment, etc. and since only 75 per cent activity was attributed to India, therefore, the profit rate has been taken at 11.25 per cent and ultimately overall profit was taken at 7 per cent. 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 per cent of activity could have been done outside India particularly in view of the various clauses of Contract I indicating that many plants and equipments were fabricated in India also. We had asked the learned counsel for the assessee during the course of hearing to file the P L a/c, 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 p. 72 of the paper book showing net profit margin by different parties in similar power projects : "ANSALDO - Profit margins of simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra, project manager of the assessee entered the site on 20th Sept., 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 PE 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. Dy. Director of IT [2007] 106 TTJ (Mumbai) 889 : [2007] 105 ITD 97 (Mumbai) has held that PE is for a person and not for any activity alone. Therefore it can be said that the assessee had PE in India. 57. Next point relates to the question whether there existed any business connection of the assessee with NLC and ASPL. As per the prescription of s. 9(1) "all income accruing or arising, whether directly or indirectly through or from any business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s. 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. CIT [2005] 96 TTJ (Del)(SB) 1 : [2005] 95 ITD 269 (Del)(SB). Learned Departmental Representative tried to distinguish this decision with reference to the ratio laid down in the case of CIT v. Anjum M.H. Ghaswala [2001] 171 CTR (SC) 1 : (2001) 252 ITR 1 (SC), wherein apex Court held that s. 234B interest is mandatory. We find some force in the submission of the learned Departmental Representative that assessee had approached the deductor NLC to deduct the tax at lower rate and in turn NLC approached the Department to deduct the lower tax under s. 197. This means that tax deductible itself was reduced and only that portion of the tax could be reduced from the total tax which according to the assessee was deductible means the lower amount for which the assessee approached the NLC. As ..... X X X X Extracts X X X X X X X X Extracts X X X X
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