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TMI Blog2014 (6) TMI 368X X X X Extracts X X X X X X X X Extracts X X X X ..... provided in India is incidental to the contract No.1 i.e., offshore contract and further as there is no profit earned on training, no part of the income can be attributable to the PE – Relying upon ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. Versus DIRECTOR OF INCOME-TAX [2007 (1) TMI 91 - SUPREME COURT] - when under an offshore contract, equipment was found transferred outside India, necessarily taxable income also accrued outside India - no portion of such income was taxable in India – thus, the order of the CIT(A) in restriction of the addition to 1% of the total contract is set aside – Decided in favour of Assessee. Onshore contracts - Rejection of books of account u/s 145(3) of the Act – Held that:- CIT(A) came to correct conclusion that provisions of section 44BBB are not applicable to the assessee as work of India Project Office does not relate to any turnkey power project - he confirmed the action of the AO in invoking the provisions of section 145(3) on the reason of incorrect method of accounting and partly debiting the expenses of offshore contracts - Even though there seems to be merit in contentions, it is very difficult to examine them at this point of time in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business operations of the project office are training in India, other services rendered and the signing of the contract in India. He further erred in estimating the profit attributable to offshore contract at Rs.45,41,300/- 2. The learned CIT(A) erred in confirming the addition made by the A.O. in respect of the onshore contracts at Rs.58,70,409/-. He erred in confirming the action of the A.O. in rejecting the books of accounts of the project office under section 145(3) of the ITA and in estimating the profits from the onshore contract at 10% of the gross receipts. 3. Each one of the above grounds of appeal is without prejudice to the other. 4. The appellant reserves the right to add, alter or amend the above grounds of appeal 3.1. Assessee also filed additional grounds vide letter dated 02.11.2006 which are as under : 1. The appellant submits that the reopening of assessment under section 147 of the ITA is contrary to the provisions of law, without jurisdiction and therefore ought to be set aside. The appellant further submits that it had not been furnished the reasons on the basis of which the assessment was sought to be reopened. Moreover a notice for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the income from offshore contract No.1 was not taxable in India. The A.O. held that all the three contracts are to be treated as a single or composite contract and for the reasons elaborated in the assessment order, held that the profit from the offshore contract was also taxable in India. The A.O. relied on the decision of the Authority for Advance Rulings in the case of Ishikawajima-Harima Heavy Industries Co. Ltd. and the provisions of DTAA between India and Italy for arriving at this finding. Consequent to the finding that offshore contract was taxable in India, A.O. proceeded to estimate the income of the assessee from the offshore contract at 5% of the gross contract value in the absence of production of the books of accounts and supporting evidence relating to the offshore contract No.1. Similarly, the income from onshore contract and onshore services contract was estimated at 10% of the contract value after recording a finding that the books of accounts of contract Nos.2 and 3 produced by the assessee were unreliable and need to be rejected. 5. Before the Ld. CIT(A) it was contended that (a) A.O. had not considered Clause No.7 extent of the profit assessable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the provisions of section 44BBB of I.T. Act are applicable to the facts of the case as the company has not entered into turnkey power project as per the provisions of the section, he accepted the A.O s contention of rejecting the books and estimated the income and approved estimation at 10% of the contract amount thereby, addition of Rs.58,70,409/- was upheld as against the loss returned by the assessee. 8. The next issue considered by the Ld. CIT(A) is with reference to the tax rate of 48% applied by the A.O. on the assessee s income determined. Following his predecessor s order in A.Y. 2001-02, he directed the A.O. to adopt tax rate applicable to a domestic company as against higher rate adopted in the assessment order. Assessee is aggrieved on confirmation of income on offshore contract as well as rejection of books of accounts and estimating the income on onshore contracts and reopening of assessment. 9. Revenue is aggrieved on reduction of estimation on the offshore contracts and adoption of domestic tax rate as against higher rate adopted by the A.O. in the cross-appeal. 10. As raised in additional grounds, assessee has contested the issue of reopening of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that assessee has entered into agreement much before the project office had come into operation. He referred to the findings in para 5.1, wherein the Ld. CIT(A) records that assessee had entered into three different contracts in February, 1998 for setting-up of Fibre Optic System in Hyderabad and business activity was permitted by the RBI w.e.f. 09.10.1998. He referred to the findings of the Ld. CIT(A) in that part that as a result, the India Project Office of the assessee/appellant company came into existence for the purpose of executing two contracts i.e., onshore supply contract and (2) onshore service contract. It was the submission that even though Ld. CIT(A) records the same fact but while concluding the issue, he relied on the wrong assumption that the contract were signed after the Project Office was established in India. This being a factual error, the same also lead to wrong interpretation by the Ld. CIT(A). It was further submitted that the second aspect considered by the Ld. CIT(A) was with reference to agreement vide para 5.10 from Section-B(BPS). Referring to that agreement, it was the submission that the Perille confirmed the unit price of the price schedules ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi High Court in the case of L.G. Cables Limited 197 taxman 100 to submit that when under an offshore contract, equipment was found transferred outside India, necessarily taxable income also accrued outside India and hence, no portion of such income was taxable in India. 11.2. Coming to the issue of onshore contracts, Ld. Counsel submitted that confirmation of income at 10% is not warranted as assessee has furnished books of accounts, audited reports and A.O. was only to see Indian books of accounts and not required to examine the foreign books of accounts. It was further submitted that A.O. nor Ld. CIT(A) established any debiting of expenses of foreign unit in India accounts and clearly referred to the notes to the accounts of P L account. It was further submitted that Project Office being part of head office and assessee being same, there are head office accounts for transfer of various funds and other reimbursements, but that does not mean that expenditure incurred on behalf of head office was claimed in the Project Office of assessee s P L account. Since no adjustments are required, losses incurred by the assessee should have been accepted and there is no need for re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion with reference to signing up the contract in India to the PE i.e., India Project Office. Even though these facts were noted by the CIT(A). however, the Ld. CIT(A) considered that there is a role of Indian PE in entering the contract also. Ld. CIT(A) correctly analysed the ruling in the case of Ishaka Wajima- Harima Heavy Industries Co. Ltd. of the Hon ble Supreme Court in coming to the conclusion that the profit shall be deemed to accrue or arise to the assessee in India only such part of profit as is reasonable attributable to operations carried out in India. He also correctly analysed the Article 7 of DTAA between India and Italy vide para 5.6 of the order and also Explanation to section-9. Since India Project Office has no connection with entering into contract, that aspect of considering part of contract has accruing or arising in India, having signed in India does not apply to PE at all. B) The second aspect considered by the Ld. CIT(A) is with reference to section B(BPS) about the installation part. The said section in the contract is as under : PIRELLI confirmed that the fibre optic cable quantities indicated in their offer are based on link lengths. PIRELLI con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taly only to the extent of profit attributable to the business operations carried out by the permanent establishment in India. This position does not change even if all the three contracts signed by the parent company are treated to be single or composite contract. The cables are manufactured outside India and procurement of cables outside India fall beyond purview and jurisdiction of the provisions of Income Tax Act. Therefore, we are of the opinion that since the offshore contract is only for procurement of cables that too outside India and the training provided in India is incidental to the contract No.1 i.e., offshore contract and further as there is no profit earned on such training also, we are of the opinion that no part of the income can be attributable to the PE. We place reliance on the Judgment of the Hon ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Co. Ltd. (supra) and also the decision of the Hon ble Delhi High Court in the case of L.G. Cables Limited 197 taxman 100 that when under an offshore contract, equipment was found transferred outside India, necessarily taxable income also accrued outside India and hence, no portion of such income was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at authorities are justified in estimating income on onshore contracts. Revised ground no 2 is rejected. 16. Next ground (Addl. Ground 2) is on levy of interest u/s 234B, 234D. It was the contention that interest under section 234B and 234D are not warranted on the facts of the case. Ld. Counsel relied on the decision of the Hon ble Bombay High Court in the case of DIT (IT) vs. NGC Network Asia LLC Bombay 313 ITR 187 for the proposition that assessee is covered by the provisions of TDS there is no need to levy interest under section 234B. Likewise, he also questioned the levy of interest under section 234D stating that the said provisions are not applicable to the impugned assessment year. 16.1. After considering the rival contentions, we are of the opinion that levy of interest under section 234B and 234D are to be re-examined by the A.O. As seen from the assessment order, there was tax deducted at source to an extent of Rs.22,41,403/-. Therefore, once the amounts are covered by the TDS, question of levy of interest under section 234B on non-payment of advance tax should not arise. The principles laid down by the Hon ble Bombay High Court in the case of NGC Network Asia LLC ..... X X X X Extracts X X X X X X X X Extracts X X X X
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