9911796707
TMI Blog2012 (10) TMI 257X X X X Extracts X X X X X X X X Extracts X X X X ..... AE'), is to be computed in accordance with the provisions of the Double Taxation Avoidance Agreement ('Treaty') entered between India and UAE and only so much of the income, as is attributable to the purported construction Permanent Establishment ('PE') could alone be taxed in India. 3. That the Authorities below have failed to appreciate that, the appellant could not be held to have any PE in India within the meaning of Article 5(1) of the treaty. 4. That learned A.O. has failed to comprehend that in fact, in the preceding assessment years too since A Y 1997-98, there had been no finding that the appellant had any PE when it had entered into a similar contract with ONGC, and as such in the absence of surfacing any fresh evidence or material the learned A.O. exceeded in his jurisdiction in holding that the appellant has a P.E. in India and the entire receipts even for the activities undertaken and completed outside India could be taxed in India and that too by arbitrarily estimating such an income @25% of the gross value of supplies made from outside India. 5. The findings recorded by the Ld. A.O. and that too, without giving any show cause notice or confr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 288 ITR 408, so as to conclude that any further income, more than what the appellant has disclosed in the return of income, accrued to it. 10. That the Ld. AO had no valid justification on relying on the purported statement (where in fact there was no statement recorded) of Shri S.K. Sachdeva, DGM (E) - PC 4WPP-11 and that too without producing him for the appellant's cross examination, in the absence of which the purported statements cannot be a basis for recording adverse finding to conclude that the contract is not a divisible contract and the revenues pertaining to outside India operation are taxable in India. 11. That without prejudice and in the alternative, the Ld. AO has failed to comprehend that even assuming that the appellant had delivered the platform in India (but constructed by it outside India) the same could not be made the basis to hold that any income accrued to it in India by mere fact that the platform was supplied in India and for the work done outside India. 12. That the Ld. AO has erred in holding that since the appellant had (under the same agreement under which it had supplied the platform erected by it), installed the platform on Mumbai High Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey project, and as such, the entire income accrued to the appellant in India. The aforesaid concept is contrary to the provisions of Treaty which provide only as much income as is attributable to PE in India could be brought to tax, even on an assumption which is without prejudice, that the appellant had a P.E. in India. 17. That the authorities below grossly erred in ignoring the principles of taxation laid down by the Hon'ble Apex Court in the case of Ishikawajrna Harirna's : 288 ITR 408 (SC) in respect of taxability of turnkey contract where different parts of the contract are to be carried out in different tax jurisdictions. 18. That the Ld. AO has failed to appreciate that (having regard to the facts and circumstances that it could not be disputed, indeed it has not been disputed that the entire work of fabrication of platform supplied was completed outside India) no such income in respect of work of fabrication of platform which was completed outside India, could be brought to tax as provided in Article 7 of the Treaty. 19. That the Ld. AO failed to appreciate that out of the total receipts of USD 14.68.22.480 a sum of USD 13,02,19,878 was specifically receivabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services as business profits taxable under Article 7 of the Treaty. 24. Without prejudice and not admitting the existence of PE in the alternative, the Ld. Assessing Officer /DRP ought to have applied section 44AB in respect of the activities towards inside India activities i.e. installation of platform in India, as held in the judgement of Hyndai Heavy Industries Co. Ltd. reported in 291 ITR 482. 25. That the directions of the Ld. DRP to the proposed order of assessment is not only arbitrary but is also erroneous both on facts and in law. The DRP has completely glossed over and has erred in disregarding the proposed written submission and the written arguments, and thus gave directions to assess the income at Rs. 164,52,67,897/- against the income declared of Rs. 10,77,98,165/- without application of mind. 26. That in any case and without prejudice, it is being undisputed that it was ONGC who was the payee under the contract and was liable to deduct tax at source and therefore no interest u/s. 234B of the Act, was leviable as has been held by the jurisdictional High court in its judgement in Sedco Forex International v. DCIT (reported in 264 ITR 320) and as such no interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of profit @ 25% is highly arbitrary. IV. That it was not a case of turnkey project and even assuming the same no income arose, such value of contract which had been undertaken outside India. V. That no interest under any provision of section 234B, 234C or 234D of the Act was leviable. The above grounds of appeals are without prejudice to each other. That the appellant craves leave to add, alter, amend or withdraw all or any grounds or add any further grounds as may be considered necessary either before or during the hearing of these grounds." 3. The brief facts of the case are stated as under:- In this case return of income was filed on 31-l0-2007 for A.Y. 2007-08 declaring total income at Rs. 10,77,98,165/-. The nature of business is shown in the return as "Fabrication and Installation of Onshore and Off-shore Oil facilities and Sub-marine pipelines and pipelines quoting". The assessee has, during the year, executed the following project: - MR/OW/MM/NHBS4WPP dated 28.12.2005. However, in the return of income from the above projects, the assessee has, as in earlier years, taken the plea that their contracts with ONGC have two different and distinct components-one, fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce? (v) Whether the contract was divisible into two parts, one for supply of material and the other for installation and commissioning? Assessing Officer further referred to the agreement in this regard in detail. Assessing Officer opined that the scope of work detailed above clearly shows that the National Petroleum Construction Company work under the contract begins not with installation but pre-engineering and pre construction surveys. Assessing Officer further noted that in the said contract there is no stipulation of any sale or supply of material to ONGC. The design, engineering, procurement and fabrication etc. are part of the overall project. Assessing Officer further referred the clauses of the contract which provide that the assessee contractor would seek approval of the Company before start of every work including fabrication and the Company would monitor rate of progress through monthly progress reports. The contract further stipulates that all Material, plant and labor will be provided by the assessee contractor and the manner of execution of work will be to the satisfaction of the company. The contract further provides that from the time of commencement of the work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith ONGC and after signing of the contract, the assessee intimated RBI that it has a Project Office for the execution of this contract. Assessing Officer further referred to his enquiry with ONGC and certain documents were collected from them. Referring to these documents, Assessing Officer observed that it indicated that the assessee's Mumbai office and M/s Arcadia the dependent agent Permanent Establishment has also participated in biding process and was involved in negotiation and finalization of the contract. Further, Assessing Officer observed that these documents are not mere correspondence but these indicate definite involvement of the Mumbai Office and Arcadia Shipping Ltd. in the process of negotiation of the contract. Further, Assessing Officer observed that right from the stage of submission of tender document to the date of kick off meeting when the technical work commences, Mumbai office and Arcadia were actively involved in the process. These can not be held to be a mere preparatory and auxiliary activities as contended by assessee in his reply to the show cause notice. Assessing Officer opined that marketing is a core business function and it can not be termed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than 9 months. Assessing Officer further referred to the date of contract and the completion /hand over of the project and observed that project lasted for more than the period stipulated in the DTAA. Therefore, the assessee had a PE within the meaning of treaty. Assessing Officer further observed that the procurement and fabrication of material took place during the existence of the PE in India. The terms of contract with ONGC do not stipulate any sale of material to them. The preamble to the agreement as also the scope of work stipulate manufacturing of platforms on a turnkey basis. There may be various stages in executing the work like survey, designing, fabrication procurement, and installation and commissioning but these are mere stages of the total project. The ONGC does not purchase any material from the assessee. ONGC takes over the completed platform when all parts of the work are executed. In this regard, Assessing Officer referred to the clarification given by the ONGC in their letter dated 11.12.2009. Referring to the said letter the Assessing Officer observed that the documents brings out in unequivocal terms that the ownership of the fabricated material remains wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project as complete. This case has no comparison to a case of an isolated supply contract which has been done outside India. This is a clear cut case of a works contract executed in India where the assessee has also obligation of fabricating and procuring certain material to be used in the works. This is not a case of ONGC purchasing material from the assessee but it is a turnkey project where procurement of material is a part of the Contract which has been done by the assessee who has brought it to India and used it in the project where the material has been used is handed over to ONGC after the completion of the project. Assessing Officer further observed that there is absolutely no basis for the suggestion that the works contract could be divided into two parts, one for the supply of the material and the other for installation and commissioning. This contract in question was neither divisible nor can consideration for any activity under the contract is liable for separate treatment. The assessee is seeking to deny the role of its PE but has no answer to the fact that right from survey to bidding to negotiation to signing to execution and till acceptance test it has a presence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neither got its accounts audited nor has furnished any audited account. Therefore, penalty proceedings under Sec. 271B are hereby initiated. It has also not furnished the details of any expenses. It 'has created its own method of computation of income where it has bifurcated its revenues into two parts one is for inside India and another for outside India. From the inside India revenue, sub-contractor cost has been deducted and then, a 10% deeming profit rate has been arrived. This method has no legal basis and therefore, is hereby rejected. For work outside India, they have taken 1% as the profits attributable to India. This also has no legal basis and therefore, is rejected. During the course of assessment proceedings, time and again, the assessee was asked to come forward with the details of expenses incurred, which the assessee did not produce. Even on the last date of hearing, no details are furnished. In view of this, the taxable income of the assessee was proposed to be computed at Rs. 164,52,67,900/-. The above action of the Assessing Officer was upheld by the DRP who held that in absence of account, Assessing Officer is justified in estimating the profit of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee are as under:- "It is submitted that the appellant company has a project office since 1997 in India. It is further submitted that, it is an undisputed fact that this project office was stated to be a PE for assessment years 1997-98 to 2007-08. However, it is respectfully submitted that this office was only used as a communication channel and, is thus not a PE as defined in Article 5 (2) read with Article 5(1) of the DTAA. It is submitted that, it is not denied that, appellant is involved in installation and commissioning of a fabricated platform in India and if, in respect of a project the period of installation activity exceeds beyond nine months, it would be regarded as an Installation or Construction PE. However, since the activity of the appellant in India in respect of 4WPP project lasted only for four and a half months, it cannot be said to have even an Installation PE in India within the meaning of Article 5(2)(h) of the DTAA. Furthermore, the appellant cannot be said to have dependent agent PE as the consultant appointed by the appellant in India, M/s Arcadia Shipping Limited constitutes a dependent agent PE in India is not an agent at all: Even if it is assume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Contract price properly attributable to the parts of the Works executed by the Contractor in accordance with the Contract as at the date of Termination. (b) The costs incurred by the Contractor in protecting the Works pursuant to paragraph (a) of clause 8.3.1 above as mutually agreed. (c) Reasonable demobilization charges as may be ascertained by the Company if contractor has Constructional Plant and Equipment at offshore site at the time the termination becomes effective. (d) Cost of any materials or equipment already purchased and/or ordered by the Contractor, the delivery of which the Contractor must accept, such materials or equipment will become property of the Company upon payment by the Company of the actual Cost of the materials or equipment. (e) All reasonable cost of cancelling/terminating any subcontract(s). (f) All reasonable cost on cancellation or orders for material, etc., which the Contractor may have committed for the project." (Emphasis supplied)" From the aforesaid, it could be seen and appreciated that it is the discretion of ONGC to take only the platform erected by the appellant in Abu Dhabi as it has a right to terminate on its own volition with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributable to that permanent establishment. All income arising out of the turnkey project would not, therefore, be assessable in India, only because the assessee has a permanent establishment." "In cases such as this, where different severable parts of the composite contract is performed in different places, the principle of apportionment can be applied, to determine which jurisdiction can tax that particular transaction. This principle helps determine, where the territorial jurisdiction of a particular State lies, to determine its capacity to tax an event. Applying it to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations" In support of the aforesaid submissions, the appellant begs to clarify that, the appellant fabricated the platform in Abu Dhabi and after fabrication, said platform is brought to India with the help of its barges and is then the possession is handed over to ONGC. It is significant fact to be noted that before sailing the platform after fabrication, the same is certified by ONGC through it's approved surveyor (Refer to clause 4.9.6 of the contract. Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In other words the profits have to be attributed between the two enterprises, one which carried on business outside India and another which carries business in India. In the instant case really there is no element of profit because it is only a case of mere delivery. 3. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only on conclusion of the transaction giving rise to the supplies of the fabricated platforms. The installation permanent establishment emerged only after the contract with the ONGC stood concluded. It emerged only after the fabricated platform was delivered in Korea to the agents of the ONGC Therefore, the profits on such supplies of fabricated platforms cannot be said to be attributable to the permanent establishment." Hyundai Heavy Industries Company Limited (ITA No 2290 & 2291 of DEL/2002 (ITAT) read with ITA No 42 of 2007 (Utt High Court) following the Supreme Court judgement reported in 291 ITR 482. "It has been noted by the Hon'ble Apex Court that the installation PE emerged only after the contract with the ONGC stood concluded. It is also noted that it emerged only after the fabricated platform was delivered in Korea to the agents of ONGC and therefore, the profits on such supplies were fabricated platforms cannot be said to be said to be attributable to P E. Thereafter, it is noted by the Hon'ble Apex Court that there is one more reason for coming to this conclusion. As per Their Lordships, in terms of para 1 of Article l, the profits to be taxed in the source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIT (103 TTJ 891 (Mum). "As far as art. 7(1)(a) is concerned, the profits attributable to the supplies under the turnkey contract can be brought to tax in India only when we are to hold that the profits attributable to P E will include the profits on supplies under the turnkey contract. In our humble understanding, such an interpretation will be incorrect, for several reasons. Firstly, a profit earned by an enterprise on supplies which are to be used in a construction or installation P E for such supplies, cannot be said to be attributable to the P E because P E comes into existence after the transaction giving rise to supplies materialized. The installation or construction P E, in such a case, is a stage posterior to the conclusion of transaction giving rise to the supplies. Such an installation or construction P E can come into existence after the contract for turnkey project, of which supplies are integral part, is concluded." Further more the Hon'ble Supreme Court had also affirmed the above proposition in the case of Ishikawajma-Harima Heavy Industries Ltd. v. DIT reported in 288 ITR408 " .... The fact that it has been fashioned as a turnkey contract by itself may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99 (SC) - Dhansi Ram Aggarwalla v CIT 217 ITR 4 (Gau.) - CIT v. Shree Ram Memorial Foundation 158 ITR 3 (Del) - CIT v Neo poly Pack 245 ITR 492 (Del) - VOl v Kuomidini Narayan Dalal and Another 249 ITR 219 (SC) - VOl v Satish Panna Lal Shah 249 ITR 221 (SC) - CIT v Godavari Corporation Ltd 156 ITR 835 (MP) - CIT v. Girish Mohan Ganeriwalia 260 ITR 417 (P&H) - CIT v J.K. Charitable Trust 308 ITR 161 (SC) - CIT v. Rajasthan Breweries Ltd 2011-TIOL-48-HC-DEL-IT (see page 1118 -1121 We respectfully invite Hon'ble Bench's kind attention to a recent judgement dated 31 st May, 2011 of the Hon'ble Delhi Bench of the ITAT in the case of Hyundai Heavy Industries Company Limited [ITA No, 2086 & 2087/Del/2009] to support our submissions, that even if it is assumed (without admitting) that the appellant has PE in India, it could only be held to be taxable only to the extent profits attributable to PE in India as per Article 7(1) & 7(2) read with Article 7(6) by following the consistent method of presumptive taxation where only income derived inside India can be taxed after reducing TDS verifiable expenses and applying 10% presumptive profit rate on the balance in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is assumed (without admitting) that the appellant has PE in India, only its inside India revenues can be said to be attributable to PE in India by applying the consistent presumptive method as per Article 7(6) (synonymous to Article 7(5) of the India-Korea DTAA) which is being used by the revenue (and accepted by the appellant) from year to year. It is also submitted that in the aforesaid Hyundai's case, the revenues in respect of fabrication of platform i.e. outside India activities was not offered to tax by Hyundai on the ground that it is not attributable to PE in India. The DIT while exercising its powers under section 263 also sought to tax the outside India revenues as attributable to PE in India because it was a turnkey contract completed in India. The Hon'ble Bench however relied upon the judgement of Hon'ble Supreme court in Hyundai's own case (291 ITR 482) and the Delhi ITAT judgement in Hyundai's own case for AY 1994-95 & 1995-96 [ITA No. 2290 & 2291/Del/2002] and held that even if there could be a PE, nothing out of outside India activities i.e. design & engineering, material procurement, fabrication and transportation, can be attributable to PE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are applicable to it and income has been declared as per presumptive taxation scheme contained in section 44BB. But this claim of assessee is incorrect. If at all, section 44BB is applicable to assessee's case then no deduction of expenses is allowable even if tax has been deducted at source in respect of those expenses. The assessee has contended that the Department should follow the rule of consistency as the assessment has been similarly made since A.Y. 1997-98 onward. But this claim of assessee is not legally tenable because any formula or any agreement whatsoever arrived at between the assessee and department which is against the provision of law is not enforceable under the law. The department is not bound to follow and perpetuate the mistake which has been committed in the past. Reliance is placed upon in the case of Distributor (Baroda) Pvt. ltd., 155 ITR 120 (SC) wherein Hon'ble Apex Court has held that there is not heroism in perpetuating a mistake. Nature of Contract: The basic contention of the assessee is that the contract with ONGC is divisible into two parts, (i) outside India activity consisting of designing, fabrication and supply of platform, (ii) in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the contractor shall open a project office in India with permission of RBI. (i) Clause 3.4.1.1 says custom duty for imported material shall be paid and borne by the contractor. (j) Clause 5.1.7.2 says contractor shall submit to company for review and approval of all layout drawings, detailed construction and approval drawings, designs specification, detailed calculation and project specification etc. for the work and other information required by the company prior to issuance for construction. (k) Clause 5.1.9.1 says that contractor shall furnish to the company a complete list of all drawings which will be used. (l) Clause 5.1.10 is regarding purchases and various sub clauses show that company ONGC shall be having complete control and monitoring over purchases made by the contractor. (m) Clause 5.2 is regarding sub-contracting and it says that contractor shall not, except with prior approval of company, sub-contract any part of the contract. (n) Clause 5.2.3 is regarding approval to be obtained by the contractor in respect of vendor list, material and equipment to be purchased. (o) Clause 5.4.1 is regarding pre-engineering, pre-construction, pre installation service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance the big contracts so that the contractor does not have financial constraint. For this, the reliance is placed on Hon'ble Supreme Court's decision in case of Hindustan Shipyard v. State of Andhra Pradesh 6 SCC 579 (SC) (copy attached as Annexure-(i). In that case, the assessee was engaged in activity of building ships for different clients. Hon'ble court has discussed various relevant clauses of the agreement. The agreement between the builder and the customer Great Eastern Shipping Co. Ltd. talks about the contract price of Rs. 5,50,00,000 per vessel to be paid in various installments. Clause 5 of Article 7 laid down that title and risk of the vessels shall pass to the owner upon acceptance when delivery of vessel is affected. Article 15 provides that on payment of first installment property and vessel will pass to the owner. Article 17 provides that builder shall take insurance at its own cost in joint name of the builder and the owner. Hon'ble Supreme Court has held that it is a contract for sale of completely manufactured ship to be delivered after successful trials in all respect and to the satisfaction of the buyer. It is a contract for sale of made to o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue assigned to offshore supplies. In present case, there is only one contract and ironically assessee wants to artificially bifurcate it into two components which even ONGC did not want. Therefore, in view of discussion above, it is submitted that the contract is composite one and not divisible into Outside India activity and inside India activity as claimed by the assessee and transfer of ownership passed from assessee to ONGC in India only after successful installation of the platform. Section 19 to 23 of Sale of Goods Act 1930 provides rules about the time when property passes from seller to buyer. Section 21 says where there is a contract for sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into deliverable state, the property does not pass until such thing is done and buyer has notice thereof. Definition of specific goods is given in section 2(14) and goods in deliverable state are defined in section 2(3) of Sale of Goods Act. In the present case, contract is for the sale of fully functioning platform. Therefore, unless the assessee installs the various components and makes them a functional platform which is a del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing its return of income accepting that there is a PE in India. In all the earlier assessment years, the return was accepted u/s 143(1). For the assessment year under consideration when the case was selected for scrutiny, the assessee changed its position and contended that there is no PE in India. The facts as mentioned above indicate that it is the assessee who has not followed the rule of consistency as prescribed by Hon'ble Supreme Court in Radha Soami Satsang case 193 ITR 32 (SC). Under similar facts, Hon'ble ITAT Delhi in case of Samsung Heavy Industry has held that there existed fixed place PE in India. Hon'ble ITAT Delhi has discussed the facts regarding project office in Samsung's case in para 66 to 72. In that case also the assessee company had passed a resolution regarding existence of project office in India to which RBI has given its permission. However, in the present case, the requirement of law at the relevant point of time was that the assessee company was required to just give intimation to RBI regarding opening and address of the project office and it amounts to automatic approval of the RBI. The assessee company has given said intimation vide l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it is clear that paragraph 2 does not override paragraph 1. Regarding the duration parameter, guidance can be had from OECD commentary. In paragraph 19 of commentary on article 5 (copy attached as Annexure-V), it has been mentioned that the site exists from the date from which the contractor begins his work, including any preparatory work, in the country where the construction is to be established, e.g. if he installs a planning office for the construction. In general, it continues to exist until the work is completed or permanently abandoned. This commentary further says that If an enterprise (general contractor) which has undertaken the performance of a comprehensive project subcontracts parts of such a project to other enterprises (subcontractors), the period spent by a subcontractor working on the building site must be considered as being time spent by the general contractor on the building project. The subcontractor himself has a permanent establishment at the site if his activities there last more than twelve months. From the above commentary of OECD, it is clear that duration for installation PE has to be considered from the date when the contractor establishes office f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, commentary of OECD as referred (supra) applies. In view of discussions (supra), it is evident that installation activity continued in India for more than 9 months and, therefore, installation PE exists. Applicability of section 44BB In synopsis from page 99 to 104, the assessee has argued that provisions of section 44BB are applicable to inside India activity of the contract. The assessee has taken ground of appeal no. 24 in this regard. Here, in this regard, it is submitted that section 44BB does not apply to the nature of activities done by the assessee. Section 44BB(1) is reproduced as under: (1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, of extraction or production of, mineral oils, a sum equal to ten per cent. of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... monstrated that contract is indivisible turnkey project and the entire receipts are for the purpose of successful installation of off-shore platform. It has also been demonstrated that since section 44BB is not applicable to the assessee, therefore, profits from this contract has to be determined under Rule 10 because the assessee has not produced any books of account. Therefore, approach of the AO is correct. Without prejudice, even if it is argued that section 44BB is applicable then whole of the receipts without allowing deduction in respect of any expenditure has to be considered for presumptive taxation. The assessee has relied upon the CBDT's instruction no. 1767. Here, it is submitted that this instruction applies in a situation where sale takes place outside India. In the present case, it has been demonstrated supra that transfer of property has taken place in India. Therefore, this instruction has no application in present case. The assessee has also contended that Explanation 1A to section 9(1)(i) applies to outside India activity component of its contract. Here, it is submitted that without admitting, even if section 44BB is at all applicable in assessee's case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submitted that Hon'ble C-Bench of ITAT Delhi' decision in case of Hyundai Heavy Industries Co. Ltd. is not applicable to present case." 9. We have carefully considered the submissions and perused the records. Our adjudication on the issues raised in the appeal is as under:- 10. Whether the assessee has PE in India. 11. We find that Assessing Officer has observed that the main thrust of the argument of the assessee is that it was not having any PE in India before the work of fabrication got completed and the fabricated material was imported in India. The installation PE was having the limited task of installation and commissioning of the project. Hence, it is the assessee's claim was no part of profits in respect of off shore supplies can be brought to tax in India. Assessing Officer further noted that assessee had a project office in Mumbai since 1990, but the same was claimed to have been opened at the instruction of ONGC, because it was a mandatory requirement for the execution of the contract. Assessing Officer opined that the crucial fact is that the assessee has an office in India which is a project office and therefore, clearly as per the Treaty between Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l that the assessee has one single PE for all the business functions or different PE's for different functions. Assessing Officer further observed that project office was not only involved in installation and commissioning but that was only a part of the business operation. Assessing Officer opined that the other items of work were also executed by the assessee in India through one agency or the other. The pre engineering surveys and designing etc. were also done by the Project office which operated through fixed place of business in India. The surveys and designing were also done by persons located in India. The assessee has undertaken detailed pre-engineering surveys which was the first step after the contract was awarded and the Project Manager had requested for N.E.D. passes for their employees to execute that work. Assessing Officer further observed that the PE of the assessee by way of office for the project also last for more than 9 months. He referred to the date of contract and the completion /hand over of the project and observed that project lasted for more than the period stipulated in the DTAA. Hence, he treated the assessee has a PE within the meaning of treaty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only to comply with the statutory requirement and that the Mumbai office had no role to play in the execution of the present contract. Assessing Officer and DRP has given a finding that letter written to the RBI establishes beyond doubt that the Project Office was set up to undertake the project and not to undertake ancillary and auxiliary activity. As per the definition of permanent establishment in the treaty between India and UAE, the Project Office is a PE unless it is involved in ancillary and auxiliary activity. The assessee has not produced any evidence, to stake its claim in the exclusionary clause of the Treaty's provision. In fact, the Project Office has been approved by RBI to undertake the entire project. Before submitting the bid, the assessee has undertaken pre-bid survey of the site. It is important to note that the bid cannot be submitted unless the site is surveyed. The Assessing Officer and DRP had given a finding that assessee had got pre-bid survey conducted through the Project Office which is directly connected with the ONGC project. During the period of negotiation of the contract, employees of assessee company attended the meeting with ONGC. This was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out by the Assessing Officer that in the kick-off meeting dated 16.12.2005, Mr M.N. Shah of ARCADIA attended the meeting on behalf of NPCC. Also ARCADIA received tender documents as agent of NPCC, as per letter dated July 16, 2005. These activities are core business activities. The contract between NPCC and ARCADIA and the minutes of the meeting reflecting ARCADIA's presence in core business meetings, show that ARCADIA was engaged in hard core business development activity for NPCC in India and was not merely assisting in collecting of information as claimed by the assessee. In the background of aforesaid discussion, we hold that ARCADIA Shipping Limited a Dependent agent PE. 11.3 The Assessing Officer observed that assessee also has PE in terms of Article 5(2)(h) of Indo UAE Treaty i.e. construction and installation PE. The Assessing Officer further observed assessee has wrongly advanced claim in earlier years that its PE in India was only an installation PE and therefore it fell within the meaning of para 3 of article 5. We find that Assessing Officer has also held installation / construction PE for the following reasons:- (i) Contract was awarded in November, 2005 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at duration for installation PE has to be considered from the date when the contractor establishes office for the purpose. Here, in this case project office has been established vide letter dated 24.01.2006. Further, the commentary says that if the contractor sub-contract parts of the Project to somebody else, the periods spent by the sub-contractor must be considered as being time spent by the main contractor itself. In the present case, the assessee has sub-contracted pre-engineering and pre-construction surveys. So the assessee started working for the contract with establishment of project office and pre-engineering/pre-construction surveys. Therefore, Ld. Departmental Representative contended that duration of installation PE has to be counted since the establishment of office itself in India which exceeds more than 9 months period prescribed under the article of DTAA. 11.6 We have carefully considered the submissions, we find that assessee's plea is that PE existed only after barges landed in India is not correct. We agree with the contention that PE existed since the notification of award as the site was available to the assessee since then, for surveys at various stages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it is evident that work relating to fabrication and procurement of material was very much a part of the contract for execution of work assigned by ONGC. Assessing Officer further observed that the assessee company had undertaken the contract in India on turnkey basis and executed the contract in India. The title in goods as well as the constructed platform is transferred once the Indian company accepts the project as complete. Assessing Officer further observed that this is a clear cut case of a works contract executed in India where the assessee has also obligation of fabricating and procuring certain material to be used in the works. Assessing Officer further observed that assessee is wrong in stating that the works contract could be divided into two parts, one for the supply of the material and the other for installation and commissioning. He observed that the contract in question is neither divisible nor can consideration for any activity under the contract is liable for separate treatment. 14. In this regard, Ld. Departmental Representative has submitted that the basic contention of the assessee is that the contract with ONGC is divisible into two parts, (i) outside Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act as at the date of Termination. (b) The costs incurred by the Contractor in protecting the Works pursuant to paragraph (a). (c) Reasonable demobilization charges as may be ascertained by the Company if contractor has Constructional Plant and Equipment at offshore site at the time the termination becomes effective. (d) Cost of any materials or equipment already purchased and/or ordered by the Contractor, the delivery of which the Contractor must accept, such materials or equipment will become property of the Company upon payment by the Company of the actual Cost of the materials or equipment. (e) All reasonable cost of cancelling/terminating any subcontracts. (f) All reasonable cost on cancellation or orders for material, etc., which the Contractor may have committed for the project From the aforesaid, it has been stated that it is the discretion of ONGC to take only the platform erected by the assessee in Abu Dhabi as it has a right to terminate on its own volition without having installation thereof. The assessee, in such an event, will not be entitled for any amount towards installation and commissioning but will only be entitled for the contract price properly attr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cally supplied. The same was physically supplied although the same was constructively supplied by it in Abu Dhabi. It has further been submitted that income attributable to the alleged PE in India could not extend to the activities carried outside India and had to be therefore confined to incomes from activities carried out from the alleged PE. It has been claimed by the assessee that even assuming that the assessee had a PE, the same cannot be in respect of erecting and fabricating the platform in Abu Dhabi but could only be in respect of installation and commissioning activities. In this regard assessee has relied upon Article 7(1) & 7(2) of India UAE DTAA. Article 7 reads as under:- "1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business a aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only the platform erected by the assessee in Abu Dhabi, as it has a right to terminate on its own volition, without having installation thereof. The assessee in such an event, will not be entitled for any amount towards installation and commissioning but will be entitled for the contract price properly attributable to the erection of fabricated platform actually carried out by the assessee in accordance with the contract i.e. the pricing schedule (Schedule C) and milestone payment formula (Schedule E) given in the contract. Further it has been mentioned that if the assessee contractor likewise abandons the contract at any stage, it will not be bound to refund of any amount so received from by it from ONGC in respect of the work already executed by it. 17.1 We agree with the contention that the segregation of the contract revenues into offshore and onshore activities was made and agreed upon between the contracting parties i.e. ONGC and the assessee at the stage of awarding the subject contracts and not after awarding the contract. The contract has been awarded to the assessee by ONGC under International Competitive Bidding (ICB) process based on the contract revenues and its bifur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w or abandon the contract, the company or the contractor has not to make entire payments under the terms of the contract or refund the amounts received, which will accrue only on the completion of the contract, cannot be regarded as a turnkey contract. Hence, we agree with the contention that even if the contract is a turnkey contract, it does not lead to taxability of the entire contract revenues in India but only as much of the profits as is attributable to the PE India can be taxed in India. 17.4 We find considerable cogency in the assessee's submission that the assessee fabricated the platform in Abu Dhabi and after fabrication the said platform was brought to India with the help of its barges and then the possession is handed over to ONGC. In this regard, it is worth noting that before sailing the platform after fabrication, the same is certified by ONGC through it's approved surveyor. Furthermore, as per the insurance policy though to be taken by the assessee, but ONGC is the joint beneficiary. Further, insurance policy also exhibits that, in case there is a loss suffered in the course of transportation the payee of the insured amount would be ONGC. Thus, we find tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Hon'ble Apex Court that there is one more reason for coming to this conclusion. As per Their Lordships, in terms of para 1 of Article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the PE would have earned if it was wholly independent of the PE and therefore, even if, it is assumed that supplies were necessary for the purpose of installation (activity of PE in India) and even is it assumed that the supplies were integral part, still no part of profit on such supplies can be attributed to the independent PE unless it is established by the department that the supplies were not at Arm's Length Price and this is the basis on which it was held by the Hon'ble Apex Court that the profits that accrued to the Korean GE for the Korean operations were not taxable in India. In the present two years also, nothing has been brought on record to show and establish that supplies were not at Arm's length price. Hence, even after considering this argument of the Ld. DR of the revenue that PE was in existence through out these two years, we are of the considered opinion that as per this judgement of Hon'ble Apex Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position in the case of Ishikawajma-Harima Heavy Industries Ltd. v. DIT reported in 288 ITR 408 ".... The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one so as to make the assessee to pay tax in India. The taxable events in execution of a contract may arise at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones. Supply obligation is distinct and separate from service obligation. Price for each of the component of the contract is separate. Similarly offshore supply and offshore services have separately been dealt with. Prices in each of the segment are also different. The very fact that in the contract, the supply segment and service segment have been specified in different parts of the contract is a pointer to show that the liability of the assessee there under would also be different. The contract indisputably was executed in India. By entering into a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide India activity of the contract. The relevant provision is as under:- "(1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, of extraction or production of, mineral oils, a sum equal to ten per cent. of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession": Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections." 19.1 From the above, it is evident that section 44BB applies in two situations, (i) when non-resident is engaged in the business of providing services or facilities in connection with, OR (ii) supplying plant and machinery on hire used or to be used, in the prospecting for, of e ..... 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