DDIT(IT) 1(2) vs. CLOUGH PROJECTS INTERNATIONAL PTY. LTD, NEW DELHI

Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. आदेश / O R D E R

Per Amit Shukla, Judicial Member:

Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. a. engineering, procurement, installation and commissioning of 3 wellhead platforms (PH, PJ and STD); and b. modifications to the existing platforms and interfiled pipelines in the Panna, Mukta and Tapti fields located at Mumbai.

20. Accordingly in view of the above discussion, the profit rate of 10% shall be deemed to be profits on the aggregate payments received for the year under consideration. The assessee has received aggregate payment of Rs. 671560235/- (inside India operations) plus Rs. 2414568949/- (outside India operations) aggregating to Rs. 3086129184/-. Accordingly, profit of the assessee is computed at Rs. 30,86,12,918/- which is considered for charging of tax as per provisions of Act.

Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. Accordingly, the AO taxed the entire receipts and the rate of 10% as profit alongwith surcharge and education cess.

(2007) (291 ITR 482) (SC) and held that the same is to be excluded from taxability u/s 44BB because the same cannot be said to be attributable under Article 7(1) of India Australia DTAA. Thus, he directed the AO to include the income from Indian operations only to be taxed @ 10% u/s 44BB.

Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. 7. Ld. CIT(A) however upheld the action of AO in so far as rejecting the books of accounts is concerned and in favoring the provisions of 44BB and also rejected the claim of the assessee that it has no PE.

16. We find merit in the submissions made by Ld A.R with regard to the recomputation of income. We have noticed that the assessee had computed income by considering the receipts relating to Indian operations. Now the assessee has agreed with the view taken by the AO that the receipts relating to operations carried outside India relating to the project carried on in India also requires to be taken into account for determining the income of the assessee. In this view of the matter, the whole scenario relating to computation of income gets changed from the point of view of the assessee. However, we decline to give any direction to the AO in this regard with regard to the manner of computation of income and we leave it to the wisdom of the AO. The Ld A.R also submitted that the assessee would be in a position to furnish the accounts to the Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. satisfaction of the AO. Hence, in the interest of natural justice, we are of the view that the assessee may be provided with an opportunity to represent its case relating to determination of income before the AO. Accordingly we set aside the order passed by Ld CIT(A) on the issues relating to rejection of books of account and determination of income and restore them to the file of the AO with the direction to examine the same afresh. The assessee is also directed to furnish the financial statements and other documents as required under the law. After affording adequate opportunity of being heard to the assessee, the AO may decide the issues in accordance with the law.

17. We shall now take up the appeal filed for AY 2007-08 by the revenue. In this year also, the Ld CIT(A) held that the receipts relating to operations carried out outside India is not required to be considered for determining the income. We have set aside identical decision rendered by Ld CIT(A) in AY 2006-07 on the basis of the statement made at bar by Ld A.R in the preceding paragraphs. Consistent with the view taken in AY 2006-07, we set aside the order passed by Ld CIT(A) on this issue and confirm the view taken by the AO that the receipt relating to operations carried out outside India is required to be considered for determining income of the assessee. 18. The revenue has also taken a ground in not considering the foreign exchange gain as part of gross receipts. We notice that the Ld CIT(A) did not adjudicate the same, since he had held that the 8 & Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. receipts relating to operations carried outside India is not required to be considered. Now we have held that the receipts relating to operations carried outside India is required to be considered. Accordingly the foreign exchange gain relating thereto is also required to be taken into account for determining the income of the assessee. Accordingly we confirm the view taken by the AO on this issue. 19. The assessee has filed cross objection for AY 2007-08, wherein it is challenging the order of the AO in confirming the rejection of books of account and in estimating income u/s 44BB(1) of the Act. Identical issue was considered by us in AY 2006-07 in the preceding paragraphs and both the issues have been restored to the file of the AO for the reasons discussed therein. Consistent with the view taken therein we restore these issues to the file of the AO with similar directions. 20. We shall now take up the appeal filed by the revenue for AY 2008-09. In this year also, the Ld CIT(A) held that the receipts relating to operations carried out outside India is not required to be considered for determining the income. We have set aside identical decision rendered by Ld CIT(A) in AY 2006-07 on the basis of the statement given by Ld A.R in the preceding paragraphs. Consistent with the view taken in AY 2006-07, we set aside the order passed by Ld CIT(A) on this issue and confirm the view taken by the AO that the receipt relating to operations carried out outside India is required to be considered for determining income of the assessee.

Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd.

21. The revenue has also taken a ground in not considering the foreign exchange gain as part of gross receipts. We notice that the Ld CIT(A) did not adjudicate the same, since he had held that the receipts relating to operations carried outside India is not required to be considered. Now we have held that the receipts relating to operations carried outside India is required to be considered. Accordingly the foreign exchange gain relating thereto is also required to be taken into account for determining the income of the assessee. Accordingly we confirm the view taken by the AO on this issue.

22. The assessee has filed cross objection for AY 2008-09, wherein it is challenging the order of the AO in confirming the rejection of books of account and in estimating income u/s 44BB(1) of the Act. Identical issue was considered by us in AY 2006-07 in the preceding paragraphs and both the issues have been restored to the file of the AO for the reasons discussed therein. Consistent with the view taken therein we restore these issues to the file of the AO with similar directions.

2. Mr. Chande for petitioner also submitted that the ITAT has not considered the cross objections filed by petitioners. 3. Both the counsel to a query posed by the court stated that if the court is inclined to remand the matter to ITAT only to consider the limited issue on the concession of petitioner recorded and the cross objections, there would be overlapping arguments which would also have a bearing in the appeals filed by petitioner in this court. Therefore, in our view, interest of justice will be meet if the order dated 6th October, 2017 be set aside and the entire matter be remanded to ITAT where the ITAT would consider afresh the appeal filed by the Revenue alongwith cross objections and pass such orders as it deems fit in accordance with law. 4. In view of the above, the order dated 6th October, 2017 in the Appeal and order dated 10th July, 2019 in the Miscellaneous Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. Application are set aside. The ITAT is requested to re-hear the appeal as well as the cross objections and dispose of the same on or before 31st January 2022. 5. We also clarify that we have not considered or made any observation on the merits of the case. Since the Writ Petition was disposed of, Income Tax Appeals were permitted to be withdrawn.

11. The total income computed by the AO for taxing the same u/s 44BB is as under:-

(a) Onshore (India) operations i) Revenue received Rs. 51,82,95,992 ii) AS 7 adjustment Rs. 15,32,64,234 67,15,60,235 (b) Offshore supply (addition) 2,41,45,68,949 Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd.

Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. 2. Date of completion - 31 December 2005 ii. PJ Platform 1. Jacket and Platform Mechanical Completion and Warranty Surveyor certification for Sail away (See Milestone no.4B) 2. Date of completion -16 January 2006 iii. STD Platform 1. Jacket and Platform Mechanical Completion and Warranty Surveyor certification for Sail away (See Milestone no.10) 2. Date of completion - 25 January 2006

Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. e. Consideration for the offshore work was negotiated and provided in the contract as under:- ITEM TOTAL OUTSIDE INIDA – USD 1.0 – Project Management (including 11,320,306 as Built Deliverables) 2.0- Engineering and Detailed 5,697,752 Design 3.0- Equipment and Materials 50,687,333 4.0- Fabrication 20,588,119 5.0- Installation 8,553,490 6.0- Hook Up & Commissioning - 7.0- As Built Deliverables Included in Project Management item 1.0 above TOTAL CONTRACT PRICE AT 96,847,000 AWARD 19. Annexure – ‘C’ contains the bifurcation of receipts outside India and inside India where the scope of Inside India work is as under:- a. After delivery at the installation site, viz. at Panna and Tapti the Assessee was to complete installation, host platform modification, pipe lay, hook up and commissioning of: i. the PH platform by 31 December 2005, Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. ii. PJ platform by 12 April 2006 and iii. the STD platform by 23 April 2006. b. The contract separately provided for consideration of the onshore installation and commissioning ITEM TOTAL INSIDE INIDA – USD 1.0 – Project Management (including as 2,893,806 Built Deliverables) 2.0- Engineering and Detailed Design - 3.0- Equipment and Materials 2,430,461 4.0- Fabrication - 5.0- Installation 25,570,925 6.0- Hook Up & Commissioning 4,926,808 7.0- As Built Deliverables TOTAL CONTRACT PRICE AT AWARD 35,822,000

22. There is no dispute that Rs. 241,45,68,949 was for the work done outside India. Not only has the Assessing Officer himself accepted this position in the assessment order, but the Ld. CIT(A)

Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. has also accepted that receipts of Rs. 241,45,68,949/- was for the work done outside India. The claim of the assessee is that, since purchase of material used for installation of platform was done outside India, the same is not attributable to the PE which is an installation PE for installation and commission of platforms for 3 well oil platforms for BGIL. The contention of the assessee before us has been that offshore supply cannot be taxed in the hands of Permanent Establishment as the PE comes into existence only after the oil well platforms were delivered to the PE in India for installation. Therefore, income of Rs. 241,45,68,949/- received by the assessee for offshore supply is not taxable in the hands of the PE as the same is not attributable to the installation activities carried out by the PE. The income attributable to offshore supply thus does not become taxable merely because the contract is an indivisible contract.

The assessee, a non-resident company, incorporated in Korea, had entered into an agreement with ONGC for designing, fabrication, hook-up and commissioning of some platform in Bombay High. The said contract was in two parts. One was for fabrication of platform hi Korea and the other was installation and commissioning of said platform in Bombay High. The assessee filed its return declaring nil income and during the assessment proceedings submitted, inter alia, that it did not have a Permanent Establishment (PE) in India and, therefore, it was not assessable to tax hi India; that its Indian operations consisting of installation and commissioning of the platform were completed within the duration of less than nine months; that it was entitled to exemption under article 7 of the Convention for Avoidance of Double Taxation (CADT); that in the alternative, it was liable to be assessed on the basis of the accounts annexed to the returns, which were based on the completed contract method in its worldwide accounts; that the contract in question was divisible into two types of operations, one being fabrication in Korea and the other consisting of installation in India and therefore any income arising from the activity of fabrication in Korea was not assessable to tax in India and to that extent, the revenues receivable under the said contract in respect of said fabrication activity should be excluded from the profit and loss Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. account together with the expenditure relating to that fabrication activity. The Assessing Officer held that as duration of the project consisting of installation and commissioning extended beyond nine months, the project constituted a PE of the assessee in India in terms of article 5(3) of CADT; that in any event the office of the assessee in Bombay constituted a PE under article 5(2)(c) and, therefore, the claim of the assessee for exemption under article 7 of the CADT was not maintainable. Therefore, the Assessing Officer held that the profits attributable to the PE were liable to be taxed in India in accordance with article 7. The Assessing Officer also rejected the Completed Contract Method as well as the accounts submit-ted by the assessee on the ground that the assessee had failed to produce the relevant books of account that it had refused to produce books of account maintained in Korea; and that it had failed to produce the accounting details pertaining to the activities/operations carried out by its PE in India. For the said reasons, the accounts were rejected by the Assessing Officer. On the question of quantum of assessment, the Assessing Officer held that income from designing, fabrication, procurement of material, etc., was partly attributable to the PE of the assessee in India on the ground that designing, fabrication and procurement of material were activities having nexus/linkage to the ultimate activity of installation and commissioning of platform in Bombay High and, therefore, income to that extent from the Korean operations was taxable in India. According to the Assessing Officer, the contract was not divisible; the contract was in respect of the Turnkey Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. Project; that the consideration in the contract was of lump sum price; that even when the fabricated structure was delivered for transportation to the representative of ONGC the accounts between the parties remained to be settled; and since designing and fabrication of the platform had an application in Bombay High (where the platform was to come into operation), a part of the profits arising even from Korean operations was taxable in India as such portion of the profits was attributable to the work of installation and commissioning of the platform in Bombay High. Accordingly, the Assessing Officer taxed the entire revenue relatable to the Indian operations after estimating the net profit under the contract at 20 percent of the gross receipts and he also taxed 2 per cent of the contract revenue in respect of Korean operations.

9. Now, coming to the present case, the main argument advanced on behalf of the Department was that the assessee was in receipt of consideration which formed part of execution of Turnkey Project with ONGC; that there was one integrated contract; that the contract was not divisible in terms of separate activities and, therefore, the Tribunal had erred in holding that profits accruing to the assessee from activities performed outside India were not Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. chargeable to tax in India. According to the Department, the work of designing and fabrication under the Turnkey Project was totally interlinked with installation and commissioning and, therefore, there was no merit in the assessee's claim in respect of receipts attributable to the activates performed outside India as not chargeable to tax in India. According to the Department, the assessee was required to execute turnkey work, that is, to supply certain equipments and install the same in India. According to the Department, the supply of fabricated platform was essentially linked to installation of the platform in the Bombay High. Thus, according to the Department, there was a business connection and the supplies were linked to the Project in Bombay High. For this reason, according to the Department, the consideration received by the assessee for supplies form outside India were taxable in India in terms of Section 9(1) of the Act. On the other hand, the assessee placed reliance on Article 7 of the CADT and submitted that on completion of the work of fabricated of platforms the same were handed over to the Agents of the ONGC in Korea and, therefore, the assessee was not liable to be taxed in respect of the profits attributable to the operations of designing and fabrication in Korea. In this connection, the assessee placed reliance on Article 7 of CADT. 24. Thereafter, the Hon’ble Apex Court observed and held as under:-

Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd.

Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the PE in India) and even if we assume that the supplies were an integral part, still no part of profits 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. No such taxability can arise in the present case as the sales were directly billed to the Indian Customer (ONGC). No such taxability can also arise in the present case as there was no allegation made by the Department that the price at which billing was done for the supplies included any element for services rendered by the PE. In the light of our above discussion, we are of the view that the profits that accrued to the Korean GE for the Korean operations were not taxable in India.

Others CO No. 09/Mum/2011 & Others M/s Clough Projects International Pty. Ltd. 28. In the result, all the appeals filed by revenue and CO’s filed by the assessee are treated as dismissed.