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TMI Blog2017 (6) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... K DTAA provides that profits attributable to PE in India shall be only profits arising from activities carried out by the PE in India. Therefore, we find merit in the submission of the ld. counsel for the assessee that assessee’s income taxable in India shall only be so much of profits under contract as is attributable to the PE in India. See Carborandum Co vs CIT [1977 (4) TMI 2 - SUPREME Court ] Since in the instant case the A.O after considering the various submissions made by the assessee from time to time and has taken a possible view, therefore, merely because the DIT does not agree with the opinion of the A.O, he cannot invoke the provisions of section 263 to substitute his own opinion. It has further been held in several decisions that when the A.O has made enquiry to his satisfaction and it is not a case of no enquiry and the DIT/CIT wants that the case could have been investigated/ probed in a particular manner, he cannot assume jurisdiction u/s 263 of the Act. In view of the above discussion, we hold that the assumption of jurisdiction by the DIT u/s 263 of the Act is not in accordance with law. We, therefore, quash the same and grounds raised by the assessee are allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing reasons: i) 44 BB does not cover 'second-leg' contracts and this beneficial section is for assessees who are engaged in prospecting for or extraction or production of mineral oils and not for those engaged in providing technical services to contractors of those undertaking projects in oil exploration. ii) Assessee was thus not taxable under the presumptive provisions of sec 44BB in respect of income in the nature of FTS for a project not undertaken by the assessee, which is squarely covered under section 44DA and corroborated by clarificatory proviso to sec. 44BB and sec 44DA. iii) Further having wrongly allowed S 44BB on what are patently technical services, the AO went on to tax only the inside-India portion of receipts without bringing to tax an amount of ₹ 166,24,94,023/- which had been shown as outside-India revenue and has not been offered for taxation. iv) The AO in the assessment order has accepted the assessee s stand without going into the contract which clearly establishes that the contract is composite and Uttarakhand High Court in several cases has held that 44BB is applicable on both offshore and onshore receipts and should be taxed acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, revision u/s 263 of the Act is not permissible. It was submitted that where two views are possible and the A.O has adopted one of the possible views to which the ld. DIT does not agree, the issue cannot be a ground for invoking jurisdiction u/s 263 of the Act. 7. However, the ld. DIT was not satisfied with the explanation given by the assessee. According to him, as per the settled legal position, revision of an order is not possible where two views are possible and the A.O has adopted one of the two possible views. However, in the instant case, the A.O has not adopted one of the possible views but has made wrong application of law. According to him, the A.O in the instant case has not made proper enquiries to determine the nature of services rendered by the assessee. The assessee in the instant case has rendered services to Aker Installation FP AS [Aker] in relation to the commercial development of the MA D6 oil field in the Block No. KG DWN 98/3 offshore Kakinada, under the contract. According to him, the provisions of section 44BB does not cover the second-leg contracts and this beneficial section is for assessees who are engaged in prospecting for or extraction or pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DIT, the assessee is in appeal before us with the following grounds :- 1. That the order dated March 28, 2013 passed by the Director of Income Tax, International Taxation - II, New Delhi ( DIT ) under section 263(1) of the Income-tax Act, 1961 ( Act ) is without jurisdiction, void an initio and deserves to be quashed. 2. MAINTAINABILITY / VALIDITY OF REVISIONARY PROCEEDINGS 2.1 That on facts and circumstances of the case and in law the DIT has erred in initiating the proceedings under section 263 of the Act without appreciating that the Assessing Officer ( AO ) had passed the assessment order after detailed examination of facts in the Appellant s case and position of law. 2.2 That on facts and circumstances of the case and in law, the DIT has erred in invoking provisions of section 263 of the Act without appreciating that the view adopted by the A.O in the course of assessment, regarding taxability of receipts from the contract with Aker Installation FP AS ( Aker ) was a possible view and, therefore, the order was not erroneous and prejudicial to the interest of the revenue. 2.3 That on facts and circumstances of the case and in law, the DIT has erred in invoking p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the course of assessment proceedings had specifically analyzed the contract before concluding that the case of the assessee falls within the ambit of specific provisions of section 44BBB of the Act. Thus, the basic premise for initiation of revisionary proceedings is incorrect. 13. Referring to the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd reported in 243 ITR 83 [SC], he submitted that the ld. CIT can revise an order of assessment u/s 263 of the Act only if it is erroneous and prejudicial to the interest of the Revenue. The twin conditions, namely (a) order is erroneous and (b) prejudicial to the interest of the Revenue must be cumulatively satisfied before the ld. CIT can seek to exercise revisionary jurisdiction u/s 263 of the Act. For the above proposition, he also relied on the following decisions: a) CIT Vs. Max India Limited reported in 268 ITR 128 [P H] b) CIT V. Arvind Jewellers: 259 ITR 502 (Guj.) [SLP of the Revenue dismissed in 266 ITR (St.) 101.] c) Vimgi Investment (P) Limited: 290 ITR 505 (Del) d) CIT vs. Vikash Polymers: 194 Taxman 57 (Del) e) CIT v. Hindustan Coca Cola Beverages (P) Ltd.: 331 ITR 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee submitted that where an issue has been examined by the A.O, the ld. CIT cannot set aside the assessment merely because according to the ld. CIT enquiry should have been conducted in a particular manner and/or further enquiries ought to have been conducted by the A.O. He submitted that no jurisdiction u/s 263 of the Act can be assumed merely on the basis of inadequate enquiries and the ld. CIT cannot substitute his opinion in place of that of the A.O as to the manner and form in which enquiries should have been conducted during the course of assessment proceedings. 16. Referring to various decisions including that of the Jurisdictional High Court of Delhi in the case of DIT Vs. Jyoti Foundation reported at 357 ITR 388 [Del], he submitted that before setting aside an assessment as erroneous and prejudicial to the interest of the Revenue, the ld. CIT must record prima facie finding on merits, pointing out the error in the assessment and how the same has caused prejudice to the interest of the Revenue. Referring to the order of the ld. CIT, he submitted that there is no firm/definitive finding by the ld. DIT on the issue as to how the order passed by the A.O is erroneous and pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in such activities. 19. Referring to the following decisions, he submitted that the scope of section 44BB of the Act is wide and includes consideration for any services of whatever nature rendered by a non resident entity in connection with the prospecting for, or extraction or production of mineral oil in India: - Geofizyka Torun Sp zoo [2010] 320 ITR 268 [AAR] - ACIT Vs. Paradigm Geophysical Private Limited [2008] 117 TTJ 812 - Lloyd Helicopters International Pty Ltd [2001] 249 ITR 162 - Seabird Exploration FZLLC [2010] 320 ITR 286 - Wavefield Inseis Asa [2009] 320 ITR290 - McDermott International Inc. Vs. DCIT [1994] 49 ITD 590 [Del] 20. The ld. counsel for the assessee referring to the exclusions as per the proviso to section 44BB submitted that the proviso specifically excludes cases where provisions of section 42 or 44D or 115A or 293 A of the Act are applicable for the purpose of computing income in accordance with those sections. 21. He submitted that provisions of section 42 of the Act applies to companies engaged in the business of prospecting for, or extraction or production of mineral oil, in relation to which it has entered into an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of oil and natural gas would be chargeable to tax under the provisions of section 44BB and not section 44D of the Act. 24. He submitted that the amendment brought out by the Finance Act, 2010, in Section 44BB and 44DA of the Act amounts to substantial change in the scheme of taxation of income arising to non residents engaged in the business of prospecting/extraction of mineral oils. Such a substantial amendment can take effect prospectively and cannot have retrospective operation. He referred to the decision of the Hon'ble Uttarakhand High Court in the case of B.J. Services Vs. DDIT reported in 339 ITR 169 wherein it has been held that the above amendment made by the Finance Act, 2010 would apply prospectively from A.Y 2011-12 and onwards. He submitted that the above decision of the Single Judge has been confirmed by the Division Bench of the Hon'ble Uttarakhand High Court vide order dated 28.05.2013. 25. Referring to the decision of the Hon'ble Delhi High Court in the case of DIT Vs. OHM Ltd reported in 352 ITR 406, he submitted that the Hon'ble High Court in the said decision has held that income received from services rendered in connection with providing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t service provider not merely engaged in the business of providing services or facilities in connection with prospecting, extraction or production of mineral oils but providing such services / facilities to a person / entity engaged in such activities. The said section does not distinguish between the main contractor or a sub-contractor. If the intention of the Legislature was to restrict the benefit of section 44BB of the Act to the main contractor only, then, the words after the assessee engaged in the business of providing services or facilities in connection therewith or supplying plant and machinery on hire' ought to have been omitted. Hence, where the provision does not create any discrimination between the person who actually does the activity of prospecting for or extraction or production, and the person who renders services in connection therewith, the section cannot be narrowly construed. 29. Referring to the following decisions, he submitted that provisions of section 44BB of the Act are applicable to the assessee, being a second level contractor/ sub-contractor: a) Oil Natural Gas Corporation Ltd. vs. CIT: 376 ITR 306 (SC) b) Louis Dreyfus Armateures S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablishment in India. 32. The ld. counsel for the assessee drew the attention of the Bench to Paragraph (9) of Article 7 of the India-UK DTAA which provides as under: 9. Where profits include items of income which are dealt with separately in other Articles of this convention, then the provisions of those Articles shall not be affected by the provisions of this Article. 33. The ld. counsel for the assessee submitted that the taxability of the receipts by way of technical services rendered by the assessee had therefore, to be considered under Article 13 of the India-UK DTAA which reads as under: 6 The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and transfer of any technical plan or design within the meaning of article 12(3)(g) of the DTAA. The consideration would continue to be viewed as business profits under article 7 of the treaty and since the assessee had no PE in India, the business profits could not be taxed in India. Therefore, the order of the Commissioner (Appeals) deserved to be upheld. 35. The ld. counsel for the assessee submitted that since the in country and out country receipts are to be considered as business profits, taxation thereof has to be governed by Article 7 of the paragraph of DTAA. He submitted that considering that out-country scope of the Contract was performed before setting up of the permanent establishment in India and / or without the intervention of the said permanent establishment, income from such out-country works was not attributable to such PE and could not, therefore, be taxed under Article 7(1) of the India-UK DTAA. Taxability of in country receipts which are admittedly attributable to the PE are determined in terms provisions of Article 7 of India-UK DTAA, as per the local laws, viz, section 44BB of the Act. He submitted that the view taken by the assessing officer in (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of section 44BB of the Act, he submitted that as per the said provision, even so called outside India Revenue needs to be brought to tax. For the above proposition, he relied on the decision of the Hon'ble Uttarakhand High Court in the case of R B Falcon Drilling Co. reported in 181 Taxman 62 [Utt.HC]. He also relied on the decision of the Hon'ble Uttarakhand High Court in the case of Sedco Forex reported in 299 ITR 238 [Utt.HC]. 38. He accordingly submitted that in view of the above judgments, the wording of section 44BB of the Act are clear regarding taxability of outside India revenue due to the following: a. Section 5 and section 9 both are aimed at the income for the taxability under section 4 of the Act, while section 44BB does not take into account the income for calculating the aggregate amount to calculate 10 per cent, profits and gains. b. Profits and gains is a type of income to be taxed under a legal fiction, i.e., at 10 per cent, of the amount specified in sub-section (2) of section 44BB. c. Section 44BB is a special provision relating to the non resident assessee who is providing services and facilities in connection with, or supply of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d High Court in the case of ONGC Foramer France reported in 299 ITR 438 wherein the relevant activities were held as FTS as against being covered u/s 44BB as well as the clarificatory amendment brought in S.44BB. Similar to this case law, the Ld. DIT has also carried out analysis of the contract at page 6-7 of the 263 order. He submitted that the ld DIT has relied on the judgement of Uttrakhand HC in the case of Rolls Royce P. Ltd. wherein the relevant activities were held as FTS as against being covered u/s 44BB). As regards the nature of amendment (retrospective or otherwise), the Ld DIT had relied on the relevant extracts of the Finance Bill 2010 and the Hon ble SC judgement in the case of Sedco Forex International Drill Inc reported in [2005] 149 TAXMAN 352 (SC). As regards that reliance of the ld. counsel for the assessee on the decision of the Hon ble Supreme Court in case of ONGC 306 to argue that second-leg contractors are covered u/s 44BB is concerned, he submitted that the judgement came only on 1 July 2015 much after the date of initiation of proceedings u/s 263. Further, perusal of the judgement shows that this aspect of second-leg contractors was neither specifical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he DTAA, then, provisions of section 44BB of the Act cannot be invoked by the assessing officer. He drew the attention of the Bench to the following observations of the Hon'ble High Court: 20. Sub-section (2) of section 90 of the Act clearly states that where there is a Double Taxation Avoidance Agreement, the provisions of the Act can be applied only to the extent to which such provisions are more beneficial to the assessee as compared to the Double Taxation Avoidance Agreement and in the exercise of the powers conferred by the above section 90 of the Act, the Central Government entered into an agreement for avoidance of double taxation of income with the United States of America. We find force in the argument of learned counsel for the assessees that section 44BB of the Act invoked by the Assessing Officer, had no application, once the assessees were to be assessed under the provisions of the Double Taxation Avoidance Agreement. 23. The submission of the learned counsel for the revenue that the matter is covered against the assessees by the decisions in CIT v. Halliburton Offshore Services Inc. s case (supra) and Sedco Forex International Inc. s case (supra) is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered the various decisions cited by both the sides. We find the assessee, in the instant case, is a company incorporated under the laws of the United Kingdom and engaged in the business of installation of subsea facilities necessary for the first phase of D6 Block Development. It filed its return of income for the impugned A.Y on 31.03.2009 declaring taxable income of ₹ 39,63,29,420/- under the provisions of section 44BB of the Act on presumptive basis @ 10% of gross revenue. Since according to the assessee the activities performed were in connection with prospecting for or exploration or production of mineral oils in India, the above income was in respect of in country receipts. The A.O, after considering the various submissions made by the assessee from time to time, passed order u/s 143(3) of the Act. We find the DIT, New Delhi, initiated proceedings u/s 263 of the Act on the ground that the A.O has accepted the assessee s stand without going into the contract which, according to him, clearly established that services rendered by the assessee were technical in nature and accordingly both in country and out country receipts were in nature of fees for technical services [F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection with prospecting extraction and production of mineral oil; and d) The income from services rendered should not be taxable under the provisions of section 42, or section 44AD or section 115A or section 293 of the Act. 53. According to him, proviso to section 44BB of the Act substantially excludes those cases where provisions of section 42 or 44DD or 115A or 293A of the Act are applicable for the purpose of computation of income in accordance with those sections. It is also his submission that the amendment brought out by the Finance Act, 2010 in section 44BB and 44DA of the Act amounts to substantial change in the scheme of taxation of income arising to non residents engaged in the business of prospecting and extraction of mineral oil. Such a substantial amendment can be taken prospectively and cannot have retrospective operation. It is also his submissions that the provisions of section 44BB are applicable to second level contractors and receipts for out country services are not taxable in India in view of Article 13 of the India- UK DTAA. Since the A.O while framing the assessment has taken a possible view, therefore, merely because the DIT does not agree with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Bench of the Tribunal in the case of Louis Dreyfus Armateures SAS [supra] has held as under: 60. A reading of the aforesaid judicial precedence clarify that sec. 44BB does not distinguish between the main contractor or a sub-contractor as has been interpreted by the AO and the DRP. The conclusions of the A.0 and the DRP are erroneous on account of the reason that the provision clearly envisages the non-resident assessee to be engaged in the business of supplying plant and machinery on hire. The only condition imposed, to say. is that such plant and machinery has to be used or should be used for the purposes of prospecting or extraction or production of mineral oils. The language in section 44BB in our view is clear so also the Legislative intention. It is a trite law that has already held by the Hon'ble Supreme Court in B. Parmannand v.Mohan Koikal [2011] 4 SCC 266 that the language employed in a statute is the determinative factor of the Legislative intend. It is well settled principle of law that the Court cannot read anything into a statutory vision which is plan and unambiguous . If the legislatures intention as contended by the Revenue was to restrict the benefit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arried out by the PE in India. Therefore, we find merit in the submission of the ld. counsel for the assessee that assessee s income taxable in India shall only be so much of profits under contract as is attributable to the PE in India. The Hon'ble Supreme Court in the case of Carborandum Co vs CIT [supra] has held that if, however, all the operations are not carried out in India, the profits and gains of the business deemed to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in India. 60. Similar view has been taken by the Hon'ble Supreme Court in the case of CIT Vs. Hyundai Heavy Industries Co. Ltd reported in 291 ITR 482 [SC]. So far as the allegation of the ld. DIT that the A.O has not gone through the contract is concerned, we find the assessee has filed details including the copy of the contract before the A.O who, after analyzing the same has accepted the returned income. 61. We find the A.O in the instant case, after going through the various details filed by the assessee has taken a possible view. It has been held in various decisions that where the A.O ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the CIT acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The CIT cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induces repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. [see Parashuram Pottery Works Co. Ltd. vs. ITO 1977 CTR (SC) 32 : (1977) 106 ITR 1 (SC) at p. 10]................ From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondent in para 3 of the order in the following manner : The tools and dyes have a very short life and can produce upto maximum 1 lakh permissible shorts and have to be replaced thereafter to retain the accuracy. Most of the parts manufactured are for the automobile industries which have to work on complete accuracy at high speed for a longer period. Since it is an ongoing procedure, a company had produced 10,75,000 sets whose selling rates is inclusive of the reimbursement of the dyes cost. The purchase orders indicating the costing include the reimbursement of dyes cost are being produced before your Honour. Since the sale rate includes the reimbursement of dye cost and to have the matching effect, the cost of the dyes has been claimed as a revenue expenditure. 14. This clearly shows that the AO had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dyes and tools is to be treated as revenue expenditure or not. It appears that since the AO was satisfied with the aforesaid explanation, he accepted the same. The CIT in his impugned order even accepts this in the following words : AO accepted the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal powers to : (i) call for and examine the record, and (ii) give the assessee an opportunity of being heard and thereafter to make or cause to be made such enquiry as he deems necessary. It is only on fulfilment of these twin conditions that the CIT may pass an order exercising his power of revision. Minutely examined, the provisions of the section envisage that the CIT may call for the records and if he prima facie considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interest of the Revenue, he may after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify. The twin requirements of the section are manifestly for a purpose. Merely because the CIT considers on examination of the record that the order has been erroneously passed so as to prejudice the interest of the Revenue will not suffice. The assessee must be called, his explanation sought for and examined by the CIT and thereafter if the CIT still feels that the order is erroneous and prejudicial to the interest of the Revenue, the CIT may pass re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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