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TMI Blog2013 (10) TMI 753X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions of the contract, it is revealed 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 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. Erection and fabrication can not be attributable to PE in India – Held that:- Reliance has been placed upon the judgment in the case of Ishikawajma-Harima Heavy Industries Ltd. vs DIT reported in [2007 (1) TMI 91 - SUPREME COURT]- Erection and fabrication cannot said to be attributable to PE in India. All the activities prior to installation and commissioning are carried out in UAE and thus having regard to Article 7 of the DTAA, no income can be attributed to the PE in India - Profits can be attributed to the PE in India only in respect of installation and commissioning activities. The profits attributable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmises, preconceived notions and incorrect application of law and therefore liable to be quashed. 2. That on the facts and circumstances of the case and in law, the Learned Additional Director of Income-tax/ Deputy Director of Income-tax/ Asstt. Director of Income-tax ('Ld. AO') has erred in making several incorrect factual findings in the draft assessment order as highlighted by the appellant in Appendix IV of the objections filed before the Dispute Resolution panel - II, New Delhi ('DRP') and the DRP has further erred in upholding/ confirming the action of the Ld. AO. 3. That on the facts and circumstances of the case and in law, the Ld. AO erred in proposing, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, to assess the income of the appellant at Rs.3,07,51,59,860 as against the returned income of Rs.33,32,41,100. 3.1 That in framing the assessment, the Ld. AO erred in proposing, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, that the appellant had entered into turnkey projects, and as such is to be assessed on the gross turnover and the net taxable income is estimated at @ 28.58% of such gross turnov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e mere graduates and not capable to undertake or assist others in undertaking installation activities in India. 4.4 That the Ld. AO erred in ignoring the fact, and the DRP has further erred in upholding confirming the action of the Ld. AO, that the activities carried out by the AO in India i.1 collection of information and its use as a communication channel, are mere] preparatory and auxiliary and cannot lead to establishment of PE in India in view ( Article 5(3) of the treaty. 4.5 On the facts and in the circumstances of the case and in law, the Ld. AO erred in ignoring the fact, and the DRP has further erred in upholding confirming the action of the LD. AO, that the activities like bidding for the contract, awarding of the contact, signing of the contract and site surveys cannot be said to result into formation of PE in India. 4.6 On the facts and in the circumstances of the case and in law, the Ld. AO erred in ignoring the legal position, and the DRP has further erred in upholding confirming the action (the Ld. AO, that there is a distinction between 'construction PE' within the meaning ( Article 5(2)(h) and the PE as defined under Article 5(1) of the Treaty, and as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant during the course of hearing has misrepresented that there is outside and inside India bifurcation of the contract. 8.2 On the facts and in the circumstances of the case and in law, the Ld. AO erred in relying, and the DRP has further erred in upholding/ confirming the action of the Ld. AO (without any valid justification), upon the purported statement (where in fact there was no statement recorded) of Shri S.K.Sachdeva, DGM (E)-PC 4WPP-II which was obtained in the course of assessment proceedings 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. 8.3 On the facts and in the circumstances of the case and in law, the Ld. AO erred in ignoring, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, the judgement of the Hon'ble Apex Court in the case of Ishikawajma Harima: 288 ITR 408 (SC) and Hyundai Heavy Industries Co. Ltd. reported in 291 ITR 482 in respect of separate treatment of different parts of a lum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract performed in India. 10.3 On the facts and in the circumstances of the case and in law, the Ld. AO and the DRP 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 till fabrication of platform which was completed outside India, could be brought to tax as provided in Article 7 of the Treaty. 10.4 On the facts and in the circumstances of the case and in law, the Ld. AO erred in proposing, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, that since the appellant carried risk in India till the final acceptance of the work by ONGC, entire contract receipts are taxable in India. While doing so, the Ld. AO grossly erred and the DRP has further erred in upholding/ confirming the action of the Ld. AO in ignoring the settled legal position that mere risk cannot lead to taxability in India. Even otherwise, the Ld. AO erred and the DRP has further erred in upholding/ confirming the action of the Ld. AO in misinterpreting the insurance policy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices 'CFTS') without placing any basis thereof whatsoever and despite the fact that there is no FTS clause in the India-UAE treaty and also, Explanation 2 to section 9(1)(vii) specifically excludes 'consideration for construction, assembly and mining projects' from the purview of FTS as defined in the Act. 13. On the facts and in the circumstances of the case and in law, the Ld. AO erred in proposing, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, to estimate 28.58% of the gross contract revenues as income taxable in India in the hands of the appellant, which is excessive, exorbitant and inconsistent with the accepted legal position. 13.1 On the facts and in the circumstances of the case and in law the Ld. AO erred, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, in estimating that the profits taxable in India took recourse from the average profit margin earned by some Indian companies. 13.2 On the facts and in the circumstances of the case and in law, the Ld. AO erred, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, to take recourse from the average profit margin earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case and in law, the Ld. AO erred in levying the interest u/s 234B of the Act while computing the total demand of Rs.166,04,94,579 without having specific directions/ recording the satisfaction in the assessment order. 17. On the facts and in the circumstances of the case and in law, the Ld. AO erred in ignoring and the DRP has further erred in upholding/ confirming the action of the Ld. AO to charge interest under Section 234D of the Act. 17.1 On the facts and in the circumstances of the case and in law, the Ld. AO erred in levying the interest u/s 234D of the Act without having specific directions/ recording the satisfaction in the assessment order. 18. On the facts and in the circumstances of the case and in law, the Ld. AO erred in ignoring, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, in mechanically proposing to initiate the proceedings under section 271A of the Act. 19. On the facts and in the circumstances of the case and in law, the Ld. AO erred in mechanically proposing, and the DRP has further erred in upholding/ confirming the action of the Ld. AO, to initiate the proceedings under section 271B of the Act. 20. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 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 India and UAE, the assessee has a P.E. in India. Assessing Officer further observed that it was for the assessee to prove that the activities of the Project Office are ancillary and auxiliary so that the same can be taken in the exception clause of the Treaty. Assessing Officer further opined that by no stretch of imagination, a Project Office can be involved in ancillary and auxiliary activity. Assessing Officer further observed that in this case the project was in existence even prior to the signing of the contract with 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 has also referred to his enquiry with ONGC and certain documents were collected from them. Referring to these documents, Assessing Officer observed that it transpired that the assessee's Mumbai office and M/s Arcadia the dependent agent Permanent Establishment has also participated in biding process and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract 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. Assessee has claimed that assessee has a project office since 1997 in India. Further, assessee had admitted that this project office was stated to be a PE for assessment years 1997-98 to 2007-08. However, the assessee has claimed 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. Assessee has further submitted that it is not denied that the assessee 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 assessee 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 assessee claimed that assessee cannot be said to have dependen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted 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 kick off meeting and each and every detail was discussed about the project. The assessee has not disputed that the concerned persons were the employees of its Project Office. Further, we find that assessee is a non-resident and has entered into a contract which has lasted for approximately 2 years. It is not possible that the contract of this magnitude can be executed without the assessee having any fixed place of business in India from where it can manage its work for this period of time. Thus, from the above, it is clear that the project office in India was assessee's PE. 11.2 The assessee has denied that M/s Arcadia Shipping is an agent of NPCC. It has laid emphasis that Arcadia is a consultant. It has been claimed by the assessee that M/s Arcadia Shipping was involved in gathering the information and assisting the assessee in representations, obtaining works, promotion support and services and facilities. In this regard we find considerable cogency in the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and completed in April, 2007 which is a period of more than 2 years. ii) Assessee has project site at its disposal from the very beginning when the contract was awarded. iii) Duration period starts from survey activity. 11.4 The assessee on the other hand has claimed that assessee has no such PE. Assessee has submitted that assessee carried out and completed the entire fabrication and erection work as the separate part of the contract executed by outside India. It has further been submitted that assessee has constructively delivered the platforms outside India and physically delivered the same in India through its own barges by its employees. Assessee has further contended that even if the assessee carried out installation activities in India, yet to hold an installation PE, the condition that the installation period exceeded 9 months need to be satisfied. It has been submitted that the Assessing Officer overlooked the fact that installation activity could only have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 of work progress. We agree with the Revenue's contention that assessee already had a PE in India, even before the notification of award of contract as the site of ONGC was made available for surveys etc. Thus we hold that assessee has a installation PE in India. 12. Whether the contract is divisible? Tax liability of the assessee. 13. Assessing Officer has observed that procurement and fabrication of material took place during the existence of 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. Assessing Officer opined that the ONGC does not purchase any material from the assessee. ONGC takes over the completed platform when all parts of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 India activity consisting of designing, fabrication and supply of platform, (ii) inside India activity consisting of installation of said platform. Referring to the various clauses of the contract, Ld. Departmental Representative submitted that the contention of the assessee is not correct as the contract is composite, turnkey indivisible contract. For this purpose, the Ld. Departmental Representative referred to the various clauses of the contract. Referring to these clauses, the Ld. Departmental Representative submitted that it can be reasonably inferred that the contract is composite turnkey contract wherein ONGC wants a fully installed offshore platform. ONGC does not want the assessee to supply various components and equipments independently. Further, the Ld. Departmental Representative referred to the decision of the ITAT in the case of Samsung Heavy Industry Co. ltd. VS. ADIT. He claimed that similar contract was entered into in this case and the ITAT has held that cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rminate 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 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. Furthermore, it has been mentioned that if the assessee contractor likewise abandons the contract at any stage, it would not be bound to refund of any amount so received by it from ONGC in respect of the work already executed by it. In fact, had it been a case of turnkey project, the assessee contractor would be entitled to the entire value of contract, whether executed or remains to be executed, if there was any termination on the volition of the company i.e. ONGC. Likewise, in case the assessee contractor abandons the contract suo motto or otherwise, it would be liable to refund the amount received by it from the company. Further, in this regard assessee has referred the Hon'ble Apex Court decision in the case of Ishikawajma-Harima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 profit which it might be expected to make if it were 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. 16. In this regard, assessee has placed strong reliance on the decisions of the Hyundai Heavy Industries Company Limited reported in 291 ITR 482 (SC) (Supra). Furthermore, it has been submitted that the proposition laid down in the aforesaid case has been followed by the Mumbai, Tribunal in Roxonoy Vs DCIT (103 TTJ 891 (Mum). It has further been submitted that the Hon'ble Apex Court had also affirmed the above proposition in the case of Ishikawajma-Harima Heavy Industries Ltd. vs DIT reported in 288 ITR408. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 bifurcation. Furthermore, the total contract consideration under the contract has been earmarked towards each of the activities like design and engineering, material procurement, fabrication and installation. The scope of work under the contract involves sequential activities like design and engineering, material procurement, fabrication, transportation, installation and commissioning. The contract provides separate payments to the assessee on the basis of work of design, engineering, procurement and fabrication. All these operations have been carried out and completed outside India. Every progress under the contract is inspected and finally accepted by ONGC or its authorized agents outside India, and only then, the assessee received the payments as per specified milestones from ONGC outside India. 17.2 Furthermore, we agree that the bifurcation of revenues as inside India revenues and outside India revenues is also evident from the following:- i) Conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that under the contract there are different phases of execution of contract. The first phase was completed when it was fabricated, erected and brought to India through its barges, to be physically supplied. Thus, we agree with the contention of the assessee that income attributed to 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 PE. Thus we opine that assessee did not have a PE in respect of erection and fabricating the platform in Abu Dhabi. The assessee had a PE in respect of installation and commissioning. In this context, the Apex Court decision in the case of Hyundai Heavy Industries Co. Ltd. 291 ITR 482 (SC) is relevant. The same is reproduced hereunder:- "The installation permanent establishment came into existence only on conclusion of the transaction giving rise to the supplies of the fabricated platforms. The installation permanent estab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '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 Court in the case of the assessee itself for the assessment year 1987-88 and 1988- 89, no profit is taxable on account of Korean operation (designing and fabrication) because profits, if any, from the Korean operations arose outside India. In the present two years also, the only dispute is with regard to payments made to non resident company outside India for the work done outside India, as per composite contract for designing, fabrication, installation and commissioning of installation on a turn key basis. As per above discussion, after considering clause (a) of para-15 of the judgement of Hon'ble Apex Court per directions of Hon'ble Uttrakhand High Court, we hold that in the facts and circumstances of the case, profit, if any, from the Korean operations (designing and fabrication) is not taxable in India because the same has been arisen outside India. Regarding clause (b) of para 15 of the judgement of Hon'ble Apex Court, we find that in the previous two years, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 contact in India, although parts thereof will have to be carried out outside India would not make the entire income derived by the contractor to be taxable in India" 17.5 In our considered opinion, the ratio emanating from the above case laws is applicable on the facts of the present case. We hold that erection and fabrication cannot said to be attributable to PE in India. All the activities prior to installation and commissioning are carried out in UAE and thus having regard to Article 7 of the DTAA, no income can be attributed to the PE in India. Thus, in the background of the aforesaid discussions, we hold that the profits can be attributed to the PE in India only in respect of installation and commissioning activities. The profits attributable to the supplies i.e. erection and fabrication of the platforms cannot be brought to tax in India. 17.6 We find that assessee has contended that taxability of the assessee should be the same as in preceding years. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 extraction or production of, mineral oils. In our opinion, the assessee is not in the business of providing services, neither any plant or machinery has been supplied on hire basis. The assessee is under the contract engaged in successful installation of off-shore platform. This activity cannot be characterized as facility provided by the assessee. Thus, we hold that business activity of the assessee does not fall within the meaning of section 44BB. 20. Interest u/s. 234B, 234C 234D 21. Assessee has pleaded that no interest under the provision of section 234B of the Act is leviable. On this issue DRP has held the Hon'ble Apex Court has held that levy of interest u/s. 234B of the Act was mandatory in the case of C.I.T. vs. Anjuman G. Ghaswala 252 ITR 1. In this regard assessee has submitted that NPCC is a non-resident foreign company and accordingly, its entire income is liable for tax deduction under section 195 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case are identical to those adjudicated by the tribunal in assessee's own case cited above, we do not find any need to deviate from the above said order as it is not the case that the same order has been reversed from the higher forum. Accordingly, based on the above order, we hold as under:- i) Whether the assessee has PE in India The assessee's project office in India was assessee's PE. M/s Arcadia Shipping Ltd. is a dependent agent PE. Assessee has installation PE in India. ii) Whether the contract is divisible? Tax liability of the assessee. 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. The erection and fabrication cannot be said to be attributable to PE in India. All the activities prior to installation and commissioning are carried out in UAE and thus having regard to Article 7 of the DTAA, no income can be attributed to the PE in India. The profits attributable to the supplies i.e. erection and fabrication of the platforms cannot be brought to tax in India. iii) Applicability of provision of Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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