M/S KEPCO PLANT SERVICE & ENGINEERING CO LIMITED ,MUMBAI vs. COMMISSIONER OF INCOME TAX-(IT), MUMBAI, MUMBAI

Per contra, the Ld. Departmental Representative submitted that the 17. CIT has correctly pointed out that the Assessing Officer had failed to make any enquiry in relation to the payments made by the Indian Project Owners to the Head Office. Reference was made by the Assessing Officer to the TPO only in respect of domestic payments made to the Project Office, and the foreign payments made to the Head Office were not examined either by the TPO or by the Assessing Officer. Once the details of the payments for offshore services were furnished by the Appellant, the Assessing Officer was duty bound to make necessary enquiry/verification regarding the payments made to the Head Office which were not routed through Profit & Loss Account to the Appellant. Keeping in view, the parameters on which the case was selected to scrutiny, the Assessing Officer was required to reconcile the amount of tax deducted at source for which refund was sought and the receipts offered to tax in India. However, the Assessing Officer without application of mind relied upon the order passed by the TPO while ITA No.1030//Mum/2022 (Assessment Year 2017-18) (Assessment Year: 2018-19) accepting the returned income as assessed income. Further, placing reliance on paragraph 4.3 to 5.8 of the order passed by the CIT, he submitted that all the maintenance activities and necessary services were provided in India and no part of the services were performed outside in India. Even during the proceedings before the CIT, the Appellant had failed to provide any proof that any offshore services were rendered. Therefore, the entire payments made by the Indian Project Owners to the Head Office were liable to tax in India. Thus, the CIT was justified in setting aside the Assessment Order as being erroneous insofar as prejudicial to the interest of revenue and also directing the assessing officer to tax foreign payments of INR 44.35 Crores in India. On the strength of the aforesaid, Learned Departmental Representative submitted that the order passed by the CIT under Section 263 of the Act be sustained.

We have heard the rival submissions and perused the material on 19. record.

ITA No.1030//Mum/2022 (Assessment Year 2017-18) (Assessment Year: 2018-19) quantum of income earned through operations in India and offered to tax; (c) quantum of income claimed to be exempt during the year under consideration under any provisions of the Act or the concerned Tax Treaty. We have gone through the aforesaid notices and reply including the Annexure 3 (placed at page 448 of the paper-book) giving details of income reconciliation with Form 26AS, and Annexure 9 (placed at page 449 of the paper-book) giving details of reconciliation of income as per income tax and the income as per service tax. While the Assessing Officer has called for the details, the material on record does not shown application of mind to the same. We agree with the Revenue that there were no follow- up queries by the Assessing Officer reflecting any inquiry or investigation into nature or scope of offshore services was not made by the Assessing Officer.

The details submitted by the Appellant (relevant extract reproduced 21. herein below), showed that around 27% of the total payments were made directly by the Indian Project Owner to Head Office. Particulars HZL VAL GMDC BECL Total Amount Amount Amount Amount Amount (INR) (INR) (INR) (INR) (INR) Total Receipts 329,782,347 521,250,124 373,457,303 88,066,610 1,312,556,384 Onshore Activities 62.97% 69.15% 80.89% 100.00% 73.01% Offshore Activities 37.03% 30.85% 19.11% - 26.99% The Appellant was providing operation and maintenance serviced 22. for power plants in India requiring presence of substantial (if not all) key personnel on-site in India requiring involvement of Project Office. The payments for off-shore services made by the Indian Project Owners directly to the Head Office, as a percentage of total payments, ranged from ‘Nil’ in case of BECL to 37% in case of HZL.

ITA No.1030//Mum/2022 (Assessment Year 2017-18) (Assessment Year: 2018-19) Further, the reason/ parameter for which the case of the Appellant was selected for scrutiny was that high portion of tax deducted at source was being claimed as refund by the Appellant. All the aforesaid facts and circumstances warranted scrutiny into the nature and scope of offshore services provided under each contract and the basis of allocation of payments between the onshore and offshore services. The fact that Indian operations were making losses was another reason that should have prompted the Assessing Officer to make further inquiry/verification into the scope of onshore and offshore and the bifurcation of payments. While the domestic payments were inquired into by the Assessing Officer and TPO, the payments made directly by the Indian Project Office were accepted at the threshold without making any inquiry or verification. The fact that the payments made by the Indian Project owners to the Project Offices are found by the TPO to be at arm’s length does not lead to an automatic conclusion that payments made directly to the Head Office were for offshore services or that the offshore services were actually rendered. The contention on behalf of the Appellant is based upon the presumption that the arm’s length price was the actual agreed price for onshore services. The aforesaid presumption may not hold good in all cases as the actual agreed price (which would generally remain same over the term of the contract), may come out to be more or less than arm’s length price (which may change over years depending upon benchmarking methodology). Thus, the overall facts and circumstances of the case (including the nature of parameter for scrutiny selection, and the details/information furnished by the Appellant) were such that warranted further enquiry/investigation into the nature, scope and payment for offshore services made ITA No.1030//Mum/2022 (Assessment Year 2017-18) (Assessment Year: 2018-19) directly by the Indian Project Owners to the Head Office. However, we find that the Assessing Officer made reference to TPO only in respect of domestic payments made by the Indian Project Owners to the Project Offices. The TPO carried out inquiry/investigation as per the reference which was limited to determining the ALP of the domestic payments made by the Indian Project Owners to the Project Offices. Though, in response to notice dated 19/02/2020, the Appellant had, vide letter dated 24/02/2020, provided to the TPO copies of Contracts/Agreements executed with Indian Project Owners and the details and bifurcation of offshore and onshore activities. The foreign payments made directly by the Indian Project Owners to Head Office, and the nature/scope of offshore services were not examined either by the TPO or by the Assessing Officer during the assessment proceedings. The TPO, vide order dated 28/01/2021, accepted the domestic payments made by the Indian Project Owners to Project Offices to be at arm’s length and thereafter, on 30/05/2021 the Assessing Officer passed Assessment Order under Section 143(3) of the Act accepting the retuned income as assessed income. It is clear that after initial query, no further follow-up query or information was sought by the Assessing Officer. In our view, the Assessing Officer should have enquired into both the payments made to Project Offices as well as the Head Office. On perusal of notice issued by the Assessing Officer and reply filed by the Appellant, it is clear that only the issue pertaining to domestic payments made by the Indian Project Owners to the Project Offices were examined by the Assessing Officer and by the TPO.

According to Explanation 2 to Section 263 of the Act assessment 23. order is deemed to be erroneous in so far as prejudicial to the (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) interest of the Revenue in case in the opinion of CIT such assessment order has been passed allowing any relief without enquiring into the claim. The issue that needs to be examined is whether the Assessing Officer carried out necessary enquiry/investigation while passing the assessment order. When the material on record reflects that the assessment proceedings were concluded without enquiry/investigation into the scope of services provided by the Head Office, apportionment of payments between Project Office and Head Office as per contract, and the consequent payments made by the Indian Project Owners directly to the Head Office, the question of inferring with these issues would have been examined by the Assessing Officer/TPO during the assessment proceedings does not arise. Therefore, the judicial precedents relied by both the sides relating to computation/allowance/disallowance of deduction do not apply to the facts of the present case. Further, the contention raised by the Appellant that the payments made by the Indian Project Owners to the Head Office were not liable to tax in India also required inquiry/verification. In the present case, the relief under the provisions of tax treaty has been granted to the Appellant without inquiring into the nature and scope of offshore services. The Assessing Officer has also failed to make necessary enquiry/verification regarding the income attributable to the Project offices in India. In our view, the CIT had jurisdiction to exercise power of revision under Section 263 of the Act since Assessing Officer had failed to carry out necessary enquiry and verification warranted in the facts and circumstances of the present case triggering provisions of Explanation 2 to Section 263 of the Act. Thus, we concur with the CIT that the Assessment Order, dated ITA No.1030//Mum/2022 (Assessment Year 2017-18) (Assessment Year: 2018-19) 30/05/2021, passed under section 143(3) of the Act was erroneous insofar as prejudicial to the interest of Revenue, and therefore, we hold that the CIT was justified in setting aside the same. However, we do find merit in the contention advanced by the Ld. Senior Counsel for the Appellant that CIT was not justified in concluding that the payments made by the Indian Project Owners to the Head Office were liable to tax in India as the Appellant was never confronted with that issue leading to violation of principles of natural justice. On perusal of notice, dated 28.01.2022 issued under Section 263(1) of the Act we find that the Appellant was asked to show cause why the Assessment Order should not be set- aside being erroneous insofar as prejudicial to the interest of revenue on account of failure of the Assessing Officer to carry out necessary enquiry/investigation. Therefore, we concur with the Ld. Senior Counsel for the Appellant that the directions issued by the CIT to the Assessing Officer to the effect that the payments made by the Indian Project Owners directly to the Head Office should be brought to tax and that the benefit of tax treaty should be denied to the Appellant were issued in violation of principles of natural justice. Therefore, to this extent we modify the directions issued by the CIT by directing the Assessing Officer to examine the issue of taxability of payments made by the Indian Project Owners directly to the Head Office in Korea afresh as per the provisions of the Act and Tax Treaty, after taking into account the observations made by the CIT and after giving the Appellant opportunity of being heard. With the aforesaid modification, the order passed by the CIT is confirmed. Thus, Ground No.3 raised by the Appellant is allowed in terms of the aforesaid and accordingly, Ground No. 2 is dispose off as being infructuous. Ground No. 1 raised by the Appellant is ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) dismissed.

In result, both the appeals preferred by the Assessee are partly allowed. Order pronounced on 28.06.2023.