ULO SYSTEMS LLC,NOIDA vs. DCIT (INTERNATIONAL TAXATION), DEHRADUN

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: ‘D’, NEW DELHI

BEFORE SMT. BEENA A PILLAI, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER

ITA No. 5279/Del/2011 AY: 2008-09 ITA No. 4849/Del/2012 AY: 2009-10 ITA No. 6018/Del/2013 AY: 2010-11 ITA No. 653/Del/2015 AY: 2011-12 ITA No. 317/Del/2016 AY: 2012-13 M/s ULO Systems LLC DCIT, C/o S.R.Batliboi & Co., International Taxation Golf View Corporate Tower B vs. Dehradun Near DLF Golf Course Sector 42 Gurgaon 122 002

PAN: AAACU5048F (Appellant) (Respondent)

Assessee by : Sh. Nageswar Rao, Adv. & Sh.Purushottam Anand, Adv. Department by : Sh. G.K.Dhall, CIT, DR.

Date of Hearing : 29/01/2019 Date of Pronouncement: 29/03/2019

ORDER PER BEENA A PILLAI, JUDICIAL MEMBER Present appeals have been filed by assessee against final assessment order dated 10/10/11, 16/07/12, 03/10/13,

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28/11/14 and 17/11/15 passed under section 143 (3) read with 144C(13) of Income Tax Act, 1961 (the Act) by Ld.DCIT (International Taxation), Circle-2, Dehra Dun for Assessment Years 2008-09, 2009-10, 2010-11, 2011-12 and 2012-13 on following grounds of appeal: ITA 5279/Del/11 AY: 2008-09 Based on the facts and circumstances of the case, ULO Systems LLC (hereinafter referred to as ‘the Appellant’) respectfully craves to prefer an appeal against the assessment order issued by the Asst. Director of Income-tax, (International Taxation), Dehradun (hereinafter referred to as the ‘Assessing Officer’) under section 143(3) read with section 144C (13) of the Income-tax Act, 1961 (‘the Act’) on the following grounds:

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4.3. Without prejudice to above, the arbitrary estimate of taxable income at 10 per cent of gross revenues made by the Ld.AO is unreasonable, excessive and ought to be reduced substantially. 5. Ground 5 5.1. Without prejudice to above, based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in fact, in making arbitrary estimate of taxable income at 10 per cent in case of services rendered in India. 5.2. Without prejudice to above, the arbitrary estimate of taxable income at 10 per cent of gross revenues made by the Ld.AO is unreasonable, excessive and ought to be reduced substantially. 5.3. Without prejudice to above ground, the learned Assessing Officer erred in not taxing income from services rendered in India as per provisions of section 44BB of the Act. 5.4. Without prejudice to above ground, the learned Assessing Officer erred in taxing income of the appellant as fees for technical services (FTS). 6. Ground 6 Based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in levying interest u/s 234B of the Act disregarding the fact that appellant is a non-resident and interest u/s 234B of the Act is not leviable to a non-resident assessee. 7. Ground 7 Based on the facts and circumstances of the case, the learned Assessing Officer erred in initiating penalty proceedings under section 271(1)(c) and section 271B of the Act. Each of the above grounds is without prejudice to one another. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable the Honorable Members to decide this appeal according to law.

ITA 4849/Del/12 AY: 2009-10 Based on the facts and circumstances of the case, ULO Systems LLC (hereinafter referred to as ‘the Appellant’) respectfully craves to prefer an appeal against the assessment order issued by the Deputy Commissioner of Income-tax, (International Taxation), Dehradun (hereinafter referred to as the ‘Assessing Officer’) under section

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143(3) read with section 144C (13) of the Income-tax Act, 1961 (‘the Act’) on the following grounds: 1. Ground 1 Based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in fact, in holding that the Appellant has a fixed place of business in India, which constitutes its Permanent Establishment (‘PE’) in India. 2. Ground 2 2.1. Based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in fact, in holding that the offshore supplies made by assessee outside India are chargeable to tax in India. 2.2. Based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in fact, in holding that the credit notes issued by the appellant are not eligible for deduction while computing the income of the appellant. 2.3. Without prejudice to the above, based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in fact, in making arbitrary estimate of taxable income at 10 percent of offshore supplies. 2.4. Without Prejudice to the above, the arbitrary estimate of taxable income at 10 percent of offshore supplies made by the learned Assessing Officer is unreasonable, excessive and ought to be reduced substantially. 3. Ground 3 3.1. Based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in fact, in making arbitrary estimate of taxable income at 10 percent in respect of services rendered in India. 3.2. Without Prejudice to the above, the arbitrary estimate of taxable income at 10 percent in respect of services rendered in India made by the learned Assessing Officer is unreasonable, excessive and ought to be reduced substantially. 3.3. Without prejudice to the above ground, the learned Assessing Officer erred in not taxing income from services rendered in India as per the provisions of section 44BB of the Act. 4. Ground 4 Based on the facts and circumstances of the case, the learned Assessing Officer erred in levying interest u/s 234B of the Act

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disregarding the fact that appellant is a non-resident and interest u/s 234B of the Act is not leviable to a non-resident assessee 5. Ground 5 Based on the facts and circumstances of the case, the learned Assessing Officer erred in initiating penalty proceedings under section 271 (1 )(c) and 271B of the Act. Each of the above grounds is without prejudice to one another. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable the Honorable Members to decide this appeal according to law.

ITA 6018/Del/13 AY: 2010-11 Based on the facts and circumstances of the case, ULO Systems LLC (hereinafter referred to as ‘the Appellant’) respectfully craves to prefer an appeal against the assessment order issued by the Deputy Commissioner of Income-tax, (International Taxation), Dehradun (hereinafter referred to as the ‘Assessing Officer’) under section 143(3) read with section 144C (13) of the Income-tax Act, 1961 (‘the Act’) on the following grounds: 1. Ground 1 Based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in fact, in holding that the Appellant has a fixed place of business in India, which constitutes its Permanent Establishment (‘PE’) in India. 2. Ground 2 2.1. Based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in fact, in holding that the offshore supplies made by assessee outside India are chargeable to tax in India. 2.2. Without prejudice to the above, based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in fact, in making arbitrary estimate of taxable income at 10 percent of offshore supplies. 2.3. Without Prejudice to the above, the arbitrary estimate of taxable income at 10 percent of offshore supplies made by the learned Assessing Officer is unreasonable, excessive and ought to be reduced substantially.

ITA Nos. 5279/Del/11 and others ULO Systems LLC

ITA 653/Del/15 AY: 2011-12 Based on the facts and circumstances of the case, ULO Systems LLC (hereinafter referred to as ‘the Appellant’) respectfully craves to prefer an appeal against the assessment order issued by the Deputy Commissioner of Income-tax, (International Taxation), Dehradun (hereinafter referred to as the ‘Assessing Officer’) under section

ITA Nos. 5279/Del/11 and others ULO Systems LLC

143(3) read with section 144C (13) of the Income-tax Act, 1961 (‘the Act’) on the following grounds: 1. Ground 1 Based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in fact, in holding that the Appellant has a fixed place of business in India, which constitutes its Permanent Establishment (‘PE’) in India. 2. Ground 2 a. Based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in fact, in holding that the offshore supplies made by assessee outside India are chargeable to tax in India. b. Without prejudice to the above, based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in fact, in making arbitrary estimate of taxable income at 10 percent of offshore supplies. c. Without Prejudice to the above, the arbitrary estimate of taxable income at 10 percent of offshore supplies made by the learned Assessing Officer is unreasonable, excessive and ought to be reduced substantially. 3. Ground 3 a. Based on the facts and circumstances of the case, the learned Assessing Officer erred in law and in fact, in making arbitrary estimate of taxable income at 10 percent in respect of services rendered in India. b. Without Prejudice to the above, the arbitrary estimate of taxable income at 10 percent in respect of services rendered in India made by the learned Assessing Officer is unreasonable, excessive and ought to be reduced substantially. c. Without prejudice to the above ground, the learned Assessing Officer erred in not taxing income from services rendered in India as per the provisions of section 44BB of the Act. 4. Ground 4 Based on the facts and circumstances of the case, the learned Assessing Officer erred in initiating penalty proceedings under section 271 (1 )(c) of the Act for concealing the particulars of income by not disclosing the true receipts from supplies and by furnishing inaccurate particulars of income.

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On the facts and circumstances of the case and in law, the Ld.AO, as per the directions of DRP has: 1. Ground 1 : General ground erred in assessing total income at Rs.11,661,366 as against the returned income of Rs.3,604,019. 2. Ground 2 : Permanent Establishment (‘ PE’ ) erred in holding that the Appellant has a fixed place of business in India, which constitutes its PE in India under Article 5 of the India- UAE treaty. 3. Ground 3: Taxability of offshore supply of material 3.1. erred in holding that the offshore supplies made by the Appellant outside India are chargeable to tax in India. 3.2. Without prejudice to the above, erred in making arbitrary estimate of taxable income at 10 percent of revenues from offshore supplies. 3.3. Without prejudice to the above, arbitrary estimate of taxable income at 10 percent of revenues from offshore supplies made by the

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ld.AO is unreasonable, excessive and ought to be reduced substantially. 4. Ground 4: Taxability of grouting services 4.1. erred in making arbitrary estimate of taxable income at 10 percent in respect of grouting services rendered in India. 4.2. erred in making arbitrary estimate of taxable income at 10 percent in respect of grouting services rendered in India made by the Ld.AO is unreasonable, excessive and ought to be reduced substantially. 4.3. Without prejudice to the above, erred in not taxing income from grouting services rendered in India as per the provisions of section 44BB of the Act. 5. Ground 5: Taxability of interest on income-tax refund 5.1. erred in taxing interest on income-tax refund of Rs.89,557 for AY 2010-11 as business income. 5.2. Without prejudice to the above, even if it is held that the appellant constitutes a PE in India under Article 5 of the India-UAE tax treaty, such interest on income tax refund is not effectively connected to the PE. 6. Ground 6: Short grant of credit of Tax Deducted at Source (TDS): erred in granting TDS credit of Rs.3,054,742 only as against TDS credit of Rs.4,485,601 as claimed in the return of income. 7. Ground 7: Levy of interest under section 234B of the Act erred in levying interest u/s 234B of the Act disregarding the fact that appellant is a non-resident and interest u/s 234B of the Act is not leviable to a non-resident assessee. 8. Ground 8: erred in initiating penalty proceedings under section 271 (1 )(c) of the Act without appreciating that the appellant has neither concealed nor furnished any inaccurate particulars of income. 9. Ground 9: initiation of penalty proceedings u/s 271B of the Act erred in initiating penalty proceedings under section 271 B of the Act without appreciating that the appellant is not required to maintain books of accounts in India/get the accounts audited. The above grounds is without prejudice to one another.

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The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable the Honorable Members to decide this appeal according to law.”

ITA Nos. 5279/Del/11 and others ULO Systems LLC

attributable to PE and attribute profit on gross receipts from two activities @ 25%. 2.2. Aggrieved by order of Ld.AO, assessee preferred objections before DRP in respect of all assessment years under consideration. DRP based upon its observation for assessment year 2007-08 upheld stand taken by Ld.AO in respect of services from grouting and holding that income from these activities are taxable due to existence of PE in India under Article 5(1) of India UAE DTAA. The panel also took note of continuous nature of activities undertaken by assessee and confirmed view taken by Ld. AO that assessee had a PE in India. As regards rate of attribution at which gross receipts of assessee were to be brought to tax in India, panel disagreed that these can be taxed at 25%. However panel directed Ld.AO to attribute gross receipts of assessee @ 10% as profit of PE. 2.3. Ld.AO on receipt of directions from DRP passed final assessment order making additions as proposed in consonance to the same. 3. Aggrieved by final order of Ld. AO, assessee is in appeal before us in respect of all assessment years under consideration. Ground No. 1 is general in nature and therefore do not require any adjudication. Ground No. 2-3 has been raised against the view of Ld. AO regarding existence of PE in India 3.1. At the outset Ld.Counsel placed reliance upon order dated 21/12/2018 of this Tribunal in assessee’s own case for assessment year 2007-08 in ITA No. 5968/Del/2010. He submitted that Ld. AO

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as well as DRP followed assessment year 2007-08 which attained finality. It has been further submitted that issue stands squarely covered by this order. Ld.Counsel submitted that all contentions raised by Ld. CIT DR in written submissions are identical and have been considered by this Tribunal in that order. 3.2. Ld.Counsel submits that assessee do not have fixed place of PE in India available for its disposal for carrying on business in India and does not constitute a PE under Article 5 (1) of India UAE DTAA. He also submitted that, assessee do not have office/project office in India for executing contracts and accordingly does not have a PE in India as per provisions of Article 5 (2) (a) to (g) of India UAE DTAA. 3.3. By placing reliance on observation by this Tribunal in assessee’s own case for A.Y. 2007-08, Ld.Counsel submitted that activities of assessee falls under ‘Construction’ in Article 5 (2) (h) of the treaty, and therefore each construction or assembly project should continue for a period of more than 9 months in India in order to constitute a Construction PE. He submitted that, as activities carried on by assessee in contracts involve installation/construction activities, and since none of the projects have continued for more than 9 months as per Article 5 (2) (h) of treaty, assessee cannot be said to have a construction PE in India. 3.4. He submitted that all projects executed by assessee during each assessment year under consideration are unconnected with each other, and has been entered into with different parties, which are not related or connected in any manner. It has also been

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submitted that contracts are not arranged in any particular order or sequence and are not planned to happen one after other. It has been submitted that it is upon these facts, which are similar with that of assessment year 2007-08, this Tribunal in assessee’s own case deleted addition by holding that assessee do not have a PE under Article 5(1) & (2) in India, and therefore income derived by assessee from activities in India is not taxable by virtue of Article 7 of India UAE DTAA. 3.5. Ld.Counsel thus submits that work carried out by assessee in India falls under Article 5 (2) (h) of the treaty, and therefore to constitute a construction PE, duration test as specified therein must be satisfied. Placing reliance upon decision of Coordinate Bench of this Tribunal in assessee’s own case for assessment year 2007-08 (supra), Ld.Counsel submitted that assessee do not satisfy duration test, and therefore no PE in India could be constituted. He also submitted that this Tribunal in assessee’s own case for assessment year 2007-08 in para 12 of the order has held that there is no place for concept of Equipment PE in India, as per India UAE DTAA. He submitted that this Tribunal categorised complex activities carried on by assessee as ‘construction’ thereby applying Article 5 (2) (h) of the treaty. 4. On the contrary, Ld.CIT DR submitted that, grouting activity carried on by assessee do not fall into definition of ‘construction’ under Article 5 (2) (h) of the treaty. He submitted that equipment used by assessee constitutes its ‘place of business’, and therefore there is existence of ‘Equipment PE’ of assessee in India. He

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submitted that assessee therefore qualifies for PE in terms of article 5 (1) of the treaty. 4.1. Ld.CIT DR further submitted that, projects undertaken by assessee during years under consideration, were ongoing project and they were in continuance. Referring to page 58 and 73 of paper book, Ld.CIT DR submitted that, vessels are provided by contractors and equipments along with personnel are provided by assessee. He submitted that there is no evidence to support handover of contract when work is being completed. It has been submitted that whenever there is a demobilisation of equipment one phase of project ends, and personnel along with equipment are demobilised to another site. He submitted that action of grouting took place in phases and no books of accounts are maintained by assessee. He thus submitted that continuance of project in such phased manner constitutes PE in terms of Article 5 (2) of India UAE DTAA, and therefore amounts to PE in terms of Article 5 (1) of DTAA. 4.2. Ld. CIT DR raised following issues in respect of contracts placed in paper book: “4. No evidence to support or determine the handover of the contract. Whenever there is demobilization of equipment, one phase of the project ends and the personnel/equipment are demobilized. Last demobilization of equipment could be considered as handover of the contract. [p.84]Grouting operation is carried out in phases, [p.85] 5. No books of accounts maintained, [p.85] 6. Details of Daily Report submitted only in respect of BG [p.124-127 & 131-134] &Dolphin.

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4.3. He submitted that assessee failed to provide details called for

by Ld.AO in providing basis of computation of number of days of

each project, their project duration, copies of invoices of each

Project etc. In the absence of these details, assessee has even

otherwise not established that for how many days activities

continued in Indian territories.

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records placed before us.

5.1. Assessee is a tax resident of UAE, and is eligible to avail

benefits if any, under the India UAE DTAA for financial year

relevant to assessment years under consideration. Admittedly,

assessee entered into contracts with following parties during

preceding assessment year and assessment years under

consideration, the details tabulated by Ld.DR are as under.

5.2. Revenue is derived by assessee in relation to activities carried out under various contracts executed by assessee with parties in

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India, is in the nature of business profits, and amounts received thereunder would have to be examined under Article 7 of India UAE DTAA. Article 7 of the treaty provides that business profits earned by a resident of UAE shall be taxable in India, only if, such resident carries on business in India through a PE, as defined under Article 5 of the treaty, situated in India. 5.3. The issue that arises in all these appeals filed by assessee is, whether there is a PE in India from grouting activities carried on by assessee and alternatively, applicability of section 44 BB of the Act, to the income earned by assessee from grouting activities. Assessee has also earned receipts in connection with offshore supplies made to Indian customers and attribution of such income provided existence of PE is established. 5.4. On perusal of order passed by this Tribunal in assessee’s own case for assessment year 2007-08 (supra), it is observed that existence of equipment PE alleged by Revenue has been rejected by observing as under: “12. The DRP was of the opinion that the equipment of the assessee was in India for at least 264 days on which work for execution of construction was carried on. Thus, the assessee has equipment PE in India. This finding of the DRP finds no place in India UAE DTAA and the concept ‘Equipment PE” in India is no where mentioned. The DRP further observed that even movables placed of business may constitute a PE even if they are temporary in location but permanent in time. A place of business would constitute a PE even if it exists only for a very short period, if time and nature of business is such

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that it is carried on for that period of time. The DRP is of the opinion that the assessee should be allowed benefit of limitation clause only when such activities are vocational but when such activities are carried on from year to year regularly and periodically, then it does raise presumption that it is being done deliberately to avoid establishment of PE in India. 13. In our considered opinion, it is a settled principle of interpretation in view of Vienna Convention of 1969, that DTAA needs to be interpreted “ uberrimae fidie” which means ‘with utmost good faith’. It means that the assessing officer/DRP are rewriting DTAA. The contention of the learned DR that the assessee deliberately manipulated length of projects to always keep it under 270 days is an ill-placed allegation only. 14. In our current understanding of the facts, the observation by the assessing officer/the DRP that grouting is not a simple masonry work and involves complex aspect does not take it out of the construction activities as mentioned in article 5 (2) (h) of the India UAE DTAA because there is no bifurcations of simple and complex missionaries/construction work under article 5 (2) (h) and any further classification (as done by the revenue) would amount to rewriting DTAA. 17. There are a few other DTAA’s, namely, Australia, Thailand, Canada, USA, Denmark etc where relevant PE clauses are so worded that there is a specific mention for application of aggregation principle on all, or even connected, sites, project or activities for computation of threshold duration test. Thus whereas, India UAE DTAA uses

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Cingular expressions ‘building, site or construction or assembly project’ and, therefore, in our understanding, aggregation of different projects is not allowed by conscious legislative scheme. 18. Before us, the Ld. DR referred to records of several assessment years and on that basis, alleged that in the absence of reliable and authentic details regarding number of days spent in India article 5 (1) will apply instead of article 5 (2) (h). We would like to mention here that the DRP has concluded that 264 days were spent in India during assessment year 2007-08. In our considered opinion, the Ld. DR, at this stage, cannot improve the findings of the DRP. 19. Another objection of the Ld. DR was that the assessee indulged in ongoing projects and, therefore, it cannot be said that the state is less than 9 months. We are of the opinion that the establishment of PE in India is in respect of each assessment year only. Moreover there is no bar in carrying on the activities year after year. The determination of existence of PE in India is to be made by reference to provision in DTAA. In our considered opinion the Ld. DR was trying to set up a new case which is not permissible by the decision of the special bench of the tribunal in case of Mahindra and Mahindra vs DCIT (2009) 313 ITR (80) 263. The Ld. DR also contended that the matter should be sent back to the assessing officer for the determination of the period of stay in India. 20. In our considered opinion, multiple opportunities are not permissible to any authority to experiment in setting up case as held by the Hon’ble Gujarat High Court in the case of Rajesh Babubhai the Damania 251 ITR 541. Considering the facts of the case in totality, in

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the light of India UAE DTAA, we are of the considered opinion that there is no PE in India for the year under consideration. First grievances accordingly, allowed.” 5.5. At this stage it is necessary to analyse scope of work carried out by assessee within Indian territories under contract with all contractors entered into by assessee for years under consideration. We refer to agreement placed at page 171-188 of paper book. In the agreement, work performed by assessee has been more particularly explained in schedule at page 185 as under: “work to be performed under this agreement. In connection with the project the utilisation of specialised grouting equipment and bulk cement storage vessels to store a part of the required materials and including the specialised personnel to operate the equipment to perform the prescribed requirement of mixing and pumping cementitious grout. To include for all the testing of the grout materials and reporting on tested materials” 5.6. On perusal of submissions made by assessee before DRP placed on record, it is observed that contract of grouting with other parties involve similar/identical activities carried on by assessee, within territories of India. None of these activities in our opinion seemingly indicate to be construction activity. 5.7. Further, as per contracts entered into by assessee with various parties, assessee is to ensure personnel and equipments. It has been submitted that equipments and personnel come to India as and when they required by main contractor. Assessee performs work and goes back till, the next requirement of Main Contractor.

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The equipment and personnel are therefore demobilised and placed off site, once the work gets over. 5.8. Article 7 of India UAE DTAA provides that business profits earned by a resident of UAE shall be taxable in India only if such resident carries on business in India through a permanent establishment as defined under Article 5 of the treaty situated in India. 5.9. From these arguments advanced by Ld.Counsel, he admits before us that there is Construction PE of assessee in India. 6. We shall analyse Article 5 (2) (h) of the treaty, to the specific activity carried out by assessee, in case of assessee for Assessment Years under consideration in light of observations made by Coordinate bench of this Tribunal for assessment year 2007-08 (supra). “Article- 5(2)(h) (2) The term "permanent establishment" includes especially: (h) a building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months ;” Article 5(2) uses the word 'include', which means, only the places specified therein are to be treated as PE, the list of such PEs is not exhaustive. According to Klaus Vogel in his book on Double Taxation Conventions, A Commentary to OECD-UN and US Model Convention for Avoidance of Double Taxation on Income and Capital, at page 306 in para 73 (b) defines “building site or construction or installation project” as;

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“Building site or construction project includes the construction of buildings, Sewer systems, bridges or canals, excavating and dredging and laying of pipelines.” 6.1. Thus, activity carried on by assessee does not fall under category of Construction project, as sub-sea activities that can be treated as ‘Construction” are “laying of pipe-lines and excavating and dredging” Taking into consideration specific activity of grouting carried out by assessee for, Main Contractors in Indian territories, being pipelines and cable crossing, pipeline and cable stabilisation, Pipeline cable protection, stabilisation and protection of various subsea structures, Anti-scour protection etc., cannot be held to be ‘Construction’, under sub clause (h) of clause (2) of Article 5 of India UAE treaty. Assessee has not been able to establish before authorities below and before us, how the activities carried out by it, amounts to construction or assembly project to fall under Article 5 (2) (h) of the treaty for years under consideration. 6.2. Further, in order to bring any other establishment which is not specifically mentioned in Article 5(2), requirements laid down in Article 5(1) are to be satisfied. The two conditions that need to be satisfied are: (a) existence of a fixed place of business; and (b) through that place business of an enterprise is wholly or partly carried out.

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For this, it is necessary to understand whether assessee has a place of business in India available at its disposal for carrying on its business. OECD model Convention 2010 refers to the term ‘place of business’ as under: “The OECD model Convention 2010 clarifies that, for the purpose of existence of a fixed place P, the term ‘place of business’ covers any premises, facilities or installations used for carrying on the business of the enterprise. Thus, the place of business, generally should be intangible form (such as an office, a factory, and equipment, etc)” OECD model Convention 2010, as well as UN model Convention 2011, defines key features for determining ‘place of business’ as under:  may include premises, facilities, installations, equipment, etc;  may be owned, rented or otherwise at the Enterprises disposal;  need not be for Enterprises exclusive use; and  generally, human element is not relevant. In other words, such a place of business may comprise of an equipment (for instance, a computer server) and need not be manned with the Enterprises personnel. 6.3. In the book, Klaus Vogel on Double Taxation Conventions A Commentary to OECD-UN-and US model Convention for Avoidance of Double Taxation on Income and Capital defines at page 285, a ‘place of business’ has been held as under:

“A place, though normally a particular portion of space, must be read in the light of its being used to define ‘establishment’. A ‘place of 23

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business’, therefore means all the tangible assets used for carrying on the business”

6.4. Before us, Ld.Counsel did not argue, on as to whether equipments ‘through’ which, assessee carried out its business activity, constituted fixed place PE under Article 5 (1) of India UAE treaty for assessment years under consideration. Instead, he placed reliance upon observations of this Tribunal for assessment year 2007-08 in assessee’s own case regarding applicability of Article 5 (2) (h) of treaty, and that activities carried out by assessee amounts to ‘construction’ and since duration test of each contract is not satisfied, as per requirement under sub clause (h) of clause 2 of Article 5, no PE could be made out. 6.5. On the basis of discussion hereinabove we have already rejected submission of Ld.Counsel. There is no dispute that, assessee’s equipments as well as Personnel, were stationed on the vessel of Main Contractor, for carrying out grouting. It is also an admitted fact that equipment is the main place of business to assessee. Further, on analysis of the Clause 7.4 of agreement between assessee and Dolphin, relevant to assessment year 2008- 09, provides free of charge, food and accommodation to the personnel on-board of offshore vessel. 6.6. It cannot be denied that the ‘vessel’, on which equipments were placed and personnel was stationed, as fixed place of business through which business is carried on by assesse. Thus in our view ingredients required under Article 5(1) of DTAA stands satisfied.

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6.7. For every assessment year under consideration assessee, has a fair amount of permanence through its personnel and its equipments, within territorial limits of India, to perform its business activity for Contractors with whom it has entered into agreements. 6.8. Having regard to OECD commentary and Klaus Vogel's commentary on general principles applicable that as long as presence is in a physically defined geographical area, permanence in such fixed place could be relative having regard to the nature of business, it is hereby held that the equipment along with the personnel on vessel of the contractor itself constitutes a fixed place of assessee’s business in India. We draw our support from decision of Hon’ble Supreme Court in case of Formula One world Championship Ltd vs CIT (international taxation)-3, Delhi reported in (2017) 18 Taxmann.com 347. 6.9. On perusal of draft assessment order, as well as DRP order, we have observed certain discrepancies. For instance for assessment year 2009-10 Ld.AO held that assessee has a PE in India in the form of equipment. However DRP proceeded by observing that Ld.AO treated income from grouting services as fees for technical services. In our opinion, findings of DRP to this extent is incorrect, as Ld.AO has never treated income earned by assessee from contracto’s to be FTS. 6.10. Assessee placed heavy reliance on the order passed by Coordinate bench in its own case for assessment year 2007-08. We very carefully perused the same to follow the view taken therein, however we fail to do so in view of the fact that existence of a fixed

ITA Nos. 5279/Del/11 and others ULO Systems LLC

place PE has been decided in that case holding that ‘equipment’ cannot be held as fixed place of business. This observation of the Coordinate bench in assessee’s own case is not in accordance with decision of Hon’ble Supreme Court in case of Formula One World Championship Ltd vs CIT (International Taxation)-3, Delhi (supra) wherein, Hon’ble Supreme Court observed as under: “25. Some of the examples of fixed place of business given by Baker are the following: The place of business must be fixed and permanent. Thus, a shed which had been rented for thirteen years for storing and preparing hides was held to constitute a PE [Transvaal Associated Hide & Skin Merchants (Pty.) Ltd. v. Collector Tax Botswana [1967] 29 SATC 97]. Similarly, a writer's study has been held to constitute a PE [Georges Simenon v. Commissioner of Interval Revenue [1965] 44 TC (US) 20]. A stand at a trade fair, occupied regularly for three weeks a year, through which the enterprise obtained contracts for a significant part of its annual sales, has also been held to constitute a PE [Josepn Fowler v. M.N.R [1990] 90 DTC 1834]. A temporary restaurant operated in a mirror tent at a Dutch flower show for a period of seven months was held to constitute a PE1. An office, workshop and storeroom for the maintenance of aircraft, which were leased out by the enterprise, has been held to constitute a PE2. 26. On the other hand, possession of a mailing address in a state – without an office, telephone listing or bank account – has been held not to constitute a PE [Commissioner of Internal Revenue v. Consolidated Premium Iron Ores [1959] 265 F 2d 320]. The mere supply of skilled labour to work in a country did not give rise to a PE of the company supplying the labour [Tekniskil (Sendirian) Berhal v. CIT [1996] 88 Taxman 439/222 ITR 551 (AAR - Delhi)]. A drilling rig which, although anchored while in operation, was moved to a new site every few months, has been held not to constitute a PE3. Similarly, a remotely operated vessel which was used to inspect and repair submarine pipelines was held not to constitute a PE because a moving vessel is not a fixed place of business [Dy. CIT v. Subsea Offshore Ltd. [1998] 66 ITD 296 (Mum.)].

ITA Nos. 5279/Del/11 and others ULO Systems LLC

ITA Nos. 5279/Del/11 and others ULO Systems LLC

contracted with a German company to produce salad dressings in the name of and in accordance with the recipe of the Swiss company. No employees of the Swiss company were present at the production facility to supervise production5. The Bundestinanzhof has also held that a scene painter who was commissioned to carry out a work in France for six weeks, and given special rooms for the purpose, did not have a fixed base at those premises. (iv) The Administrative Court of Appeal of Paris has held that a German travel agency did not have a PE in France6. A travel agency in Paris had made an office available to the German company from time to time, and the manager of the German company had a flat in Paris; the Court held that the German company had no PE at its disposal in France. (v) The Brussels Court of Appeal has held that a German resident engaged in the transportation of vehicles had a PE in Belgium7. The taxpayer had an office 3m by 6m at his disposal on the premises of his principal supplier in Belgium, together with telephone and telex, where the taxpayer and four of his staff worked. 29. According to Philip Baker, the aforesaid illustrations confirm that the fixed place of business need not be owned or leased by the foreign enterprise, provided that is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises. 30. Interpreting the OECD Article 5 pertaining to PE, Klaus Vogel has remarked that insofar as the term 'business' is concerned, it is broad, vague and of little relevance for the PE definition. According to him, the crucial element is the term 'place'. Importance of the term 'place' is explained by him in the following manner: "In conjunction with the attribute 'fixed', the requirement of a place reflects the strong link between the land and the taxing powers of the State. This territorial link serves as the basis not only for the distributive rules which are tied to the existence of PE but also for a considerable number of other distributive rules and, above all,

ITA Nos. 5279/Del/11 and others ULO Systems LLC

for the assignment of a person to either Contracting State on the basis of residence (Article 1, read in conjunction with Article 4 OECD and UN MC)." 31. We would also like to extract below the definition to the expression 'place' by Vogel, which is as under: "A place is a certain amount of space within the soil or on the soil. This understanding of place as a three-dimensional zone rather than a single point on the earth can be derived from the French Version ('installation fixe') as well as the term 'establishment'. As a rule, this zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical equipment above the soil may quality as a PE only if they are fixed on the soil. This requirement, however, stems from the term 'fixed' rather than the term 'place', given that a place (or space) does not necessarily consist of a piece of land. On the contrary, the term 'establishment' makes clear that it is not the soil as such which is the PE but that the PE is constituted by a tangible facility as distinct from the soil. This is particularly evident from the French version of Article 5(1) OECD MC which uses the term 'installation' instead of 'place'. The term 'place' is used to define the term 'establishment'. Therefore, 'place' includes all tangible assets used for carrying on the business, but one such tangible asset can be sufficient. The characterization of such assets under private law as real property rather than personal property (in common law countries) or immovable rather than movable property (in civil law countries) is not authoritative. It is rather the context (including, above all, the terms 'fixed'/'fixe'), as well as the object and purpose of Article 5 OECD and UN MC itself, in the light of which the term 'place' needs to be interpreted. This approach, which follows from the general rules on treaty interpretation, gives a certain leeway for including movable property in the understanding of 'place' and, therefore, the assume a PE once such property has been 'fixed' to the soil. For example, a work bench in a caravan, restaurants on permanently anchored river boats, steady oil rigs, or a

ITA Nos. 5279/Del/11 and others ULO Systems LLC

transformator or generator on board a former railway wagon qualify as places (and may also be 'fixed'). In contrast, purely intangible property cannot qualify in any case. In particular, rights such a participations in a corporation, claims, bundles of claims (like bank accounts), any other type of intangible property (patents, software, trademarks etc.) or intangible economic assets (a regular clientele or the goodwill of an enterprise) do not in themselves constitute a PE. They can only form part of PE constituted otherwise. Likewise, an internet website (being a combination of software and other electronic data) does not constitute tangible property and, therefore, does not constitute a PE. Neither does the mere incorporation of a company in a Contracting State in itself constitute a PE of the company in that State. Where a company has its seat, according to its by-laws and/or registration, in State A while the POEM is situated in State B, this company will usually be liable to tax on the basis of its worldwide income in both Contracting States under their respective domestic tax law. Under the A-B treaty, however, the company will be regarded as a resident of State B only (Article 4(3) OECD and UN MC). In the absence of both actual facilities and a dependent agent in State A, income of this company will be taxable only in State B under the 1st sentence of Article 7(1) OECD and UN MC. There is no minimum size of the piece of land. Where the qualifying business activities consist (in full or in part) of human activities by the taxpayer, his employees or representatives, the mere space needed for the physical presence of these individuals is not sufficient (if it were sufficient, Article 5(5) OECD MC and Article 5(5)(a) UN MC and the notion of agent PEs were superfluous). This can be illustrated by the example of a salesman who regularly visits a major customer to take orders, and conducts meetings in the purchasing director's office. The OECD MC Comm. has convincingly denied the existence of a PE, based on the implicit understanding that the relevant geographical unit is not just the chair where the salesman sits, but the entire office of the customer, and the office is not at the disposal of the enterprise for which the salesman is working."

ITA Nos. 5279/Del/11 and others ULO Systems LLC

ITA Nos. 5279/Del/11 and others ULO Systems LLC

The OECD view can hardly be reconciled with the two court cases. All three examples do indeed shed some light onto the method how the relative standards for the control threshold should be designed. While the OECD MC Comm. suggests that it is sufficient to require not more than the type and extent of control necessary for the specific business activity which the taxpayer wants to exercise in the source State, the Canadian and Indian decisions advocate for stricter standards for the control threshold. The OECD MC shows a paramount tendency (though no strict rule) that PEs should be treated like subsidiaries (cf. Article 24(3) OECD and UN MC), and that facilities of a subsidiary would rarely been unusable outside the office hours of one of its customers (i.e. a third person), the view of the two courts is still more convincing. Along these lines, a POB will usually exist only where the taxpayer is free to use the POB: - at any time of his own choice; - for work relating to more than one customer; and - for his internal administrative and bureaucratic work. In all, the taxpayer will usually be regarded as controlling the POB only where he can employ it at his discretion. This does not imply that the standards of the control test should not be flexible and adaptive. Generally, the less invasive the activities are, and the more they allow a parallel use of the same POB by other persons, the lower are the requirements under the control test. There are, however, a number of traditional PEs which by their nature require an exclusive use of the POB by only one taxpayer and/or his personnel. A small workshop (cf. Article 5(2)(e) OECD and UN MC) of 10 or 12 square meters can hardly be used by more than one person. The same holds true for a room where the taxpayer runs a noisy machine." 33. OECD commentary on Model Tax Convention mentions that a general definition of the term 'PE' brings out its essential characteristics, i.e. a distinct "situs", a "fixed place of business". This definition, therefore, contains the following conditions: 32

ITA Nos. 5279/Del/11 and others ULO Systems LLC

- the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment. - this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence; - the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in oneway or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. 34. The term "place of business" is explained as covering any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. It is clarified that a place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. Further, it is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A certain amount of space at the disposal of the enterprise which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is required. Thus, where an enterprise illegally occupies a certain location where it carries on its business, that would also constitute a PE. Some of the examples where premises are treated at the disposal of the enterprise and, therefore, constitute PE are: a place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot (e.g. for the storage of dutiable goods). Again the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise. At the same time, it is also clarified that the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of that enterprise. 35. The OECD commentary gives as many as four examples where location will not be treated at the disposal of the enterprise. These are: 33

ITA Nos. 5279/Del/11 and others ULO Systems LLC

(a) The first example is that of a salesman who regularly visits a major customer to take orders and meets the purchasing director in his office to do so. In that case, the customer's premises are not at the disposal of the enterprise for which the salesman is working and therefore do not constitute a fixed place of business through which the business of that enterprise is carried on (depending on the circumstances, however, paragraph 5 could apply to deem a permanent establishment to exist). (b) Second example is that of an employee of a company who, for a long period of time, is allowed to use an office in the headquarters of another company (e.g. a newly acquired subsidiary) in order to ensure that the latter company complies with its obligations under contracts concluded with the former company. In that case, the employee is carrying on activities related to the business of the former company and the office that is at his disposal at the headquarters of the other company will constitute a permanent establishment of his employer, provided that the office is at his disposal for a sufficiently long period of time so as to constitute a "fixed place of business" (see paragraphs 6 to 6.3) and that the activities that are performed there go beyond the activities referred to in paragraph 4 of the Article. (c) The third example is that of a road transportation enterprise which would use a delivery dock at a customer's warehouse every day for a number of years for the purpose of delivering goods purchased by that customer. In that case, the presence of the road transportation enterprise at the delivery dock would be so limited that that enterprise could not consider that place as being at its disposal so as to constitute a permanent establishment of that enterprise. (d) Fourth example is that of a painter, who, for two years, spends three days a week in the large office building of its main client. In that case, the presence of the painter in that office building where he is performing the most important functions of his business (i.e. painting) constitute a permanent establishment of that painter. 34

ITA Nos. 5279/Del/11 and others ULO Systems LLC

ITA Nos. 5279/Del/11 and others ULO Systems LLC

by assessee thereby constituting PE in India and its income is taxable as per Article 5 (1) of DTAA. 6.13. Accordingly Ground No. 1-2 for assessment year 2009- 10, Ground No. 1-2 for assessment year 2010-11, assessment year 11-12 and Ground No-2-3 for assessment year 2012-13 stands dismissed. 7. Ground No. 4-5 for assessment year 2008-09, is raised by assessee against addition made by Ld.AO towards offshore supplies as chargeable to tax in India. 7.1. We have already held hereinabove that assessee has PE in India, offshore supplies are to be directly attributable to activities of PE in India through business connection in India in terms of section 9 (1) (i) of the Act. The alternate plea raised by assessee regarding applicability of special provision of section 44 BB of the Act, would be applicable for computing profit and gains in connection with business of exploration etc., of mineral oils or engaged in business of providing services or facilities in connection with or supplying plant and machinery on hire used or to be used in prospecting for or extraction or production of mineral oils. Hon’ble Supreme Court in case of ONGC Gas Corpn. Ktd., Vs.CIT reported in (2015) 59 taxmann.com 1, held as under:

“13............ Viewed thus, it is the proximity of the works contemplated under an agreement, executed with a non- resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act. The test of pith and substance of the 36

ITA Nos. 5279/Del/11 and others ULO Systems LLC

agreement commends to us as reasonable for acceptance. Equally important is the fact that the CBDT had accepted the said test and had in fact issued a circular as far back as 22.10.1990 to the effect that mining operations and the expressions “mining projects” or “like projects” occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non- resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the works covered under each of the said contracts as culled out by the appellants and placed before the Court is correct. The said details are set out below.

S. No. Civil Work covered under the contract Appeal No. 1. 4321 Drilling of exploration wells and carrying out seismic surveys for exploratory drilling. 2. 740 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 3. 731 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 4. 1722 Furnishing supervisory staff with expertise in operation and management of Drilling unit. 5. 729 Capping including subduing of well, fire fighting. 6. 738 Capping including subduing of well, fire fighting. 7. 1528 Analysis of data to prepare job design, procedure for execution and details regarding monitoring. 8. 1532 Study for selection of enhanced Oil Recovery processes and conceptual design of Pilot Tests. 9. 1520 Engineering and technical support to ONGC in implementation of Cyclic Steam Stimulation in Heavy Oil Wells.

ITA Nos. 5279/Del/11 and others ULO Systems LLC

ITA Nos. 5279/Del/11 and others ULO Systems LLC

verification of reliability of control systems in the drilling rig. 33. 2008 Expert advice on the device to clean insides of a pipeline. 34. 2795 Feasibility study of rig to assess its remaining useful life and to carry out structural alterations. 35. 925 Engineering analysis of rig. 36. 1519 Imparting training on cased hold production log evaluation and analysis. 37. 1533 Training on well control. 38. 1518 Training on implementation of Six Sigma concepts. 39. 1516 Training on implementation of Six Sigma concepts. 40. 6023 Training on Drilling project management. 41. 2796 Training in Safety Rating System and assistance in development and audit of Safety Management System. 42. 1239 To develop technical specification for 3D Seismic API modules of work and to prepare bid packages. 43. 1527 Supply supervision and installation of software which is used for analysis of flow rate of mineral oil to determine reservoir conditions. 44. 1523 Supply, installation and familiarization of software for processing seismic data.

The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil.”

7.2. From the records placed before us, we do not see this issue has neither been dealt with/analysed by Ld.AO/DRP, nor has Ld.Counsel brought out before us as to whether contracts entered into by assessee which are inextricably connected with prospecting or production of Mineral Oil.

7.3. Accordingly we set aside this issue to Ld.AO for determining applicability of sec.44BB having regards to ratio laid down by

ITA Nos. 5279/Del/11 and others ULO Systems LLC

Hon’ble Supreme Court in case of ONGC Gas Corpn.Ltd. vs. CIT(supra). In the event the contracts are inextricably connected with prospecting or production of Mineral Oil, benefit must be granted to assessee under section 44 BB of the Act.

7.4. Accordingly ground 4-5 for assessment year 2008-09 raised by assessee stands allowed for statistical purposes. 8. It has been submitted by both sides that facts and circumstances of case are identical and similar in all assessment years under consideration. 8.1. Accordingly Ground 3 for assessment year 2009-10, 2010- 11, 2011-12 and Ground No. 4 for assessment year 2012-13 raised by assessee stands allowed for statistical purposes. 9. Ground No.6 for assessment year 2008-09 has been raised by assessee on levying interest under section 234B of the Act. 9.1. It is observed that assessee is an overseas entity and in the appeal filed by it for the assessment years under consideration the ground has been raised to delete interest levied under section 234B of the Act. 9.2. We find force in submissions of assessee as Hon’ble Delhi High Court in case of Sedco Forex International Drilling Co. Ltd vs. DCIT, reported in (2003) 134 Taxman 109, held that, “when duty is cast on the payer to pay tax at source, on failure, no interest can be imposed on the payee-assessee.” 9.3. Respectfully following the decision of Hon’ble Delhi High Court in case of Sedco Forex International Drilling Co. Ltd vs. DCIT (supra), we are inclined to delete the interest levied under section 234B of the Act.

ITA Nos. 5279/Del/11 and others ULO Systems LLC

9.4. Accordingly we allow this ground of appeal raised by assessee for assessment year 2008-09. 10. It has been submitted by both sides that facts and circumstances of case are identical and similar in all assessment years under consideration. 10.1. Accordingly, Ground No. 4 for assessment year 2009- 10 and Ground No. 7 for assessment year 2012-13 stands allowed. 10.2. It is observed that this ground has not been raised by assessee in other intermediary assessment years. 11. Ground No. 7 for assessment year 2008-09 is in respect of levy of penalty under section 271 (1) (c) and section 271B of the Act. It is observed that this ground is consequential in nature and therefore do not require any adjudication. 11.1. Similar issue has been raised by assessee for assessment year 2009-10 being Ground No. 5, for assessment year 2010-11 being Ground No. 5-6, for assessment year 2011-12 ground No. 4-5 and for assessment year 2012-13 being Ground No. 8-9. 11.2. Assessee raised issue regarding taxing interest on income tax refund received by assessee as business income for assessment year 2010-11 being Ground No. 4 and for assessment year 2012-13 being Ground No. 5. 11.3. Further Ground No. 6 for assessment year 2012-13 is in respect of short grant of credit of TDS. 11.4. Ld.Counsel did not argue in respect of these grounds and submitted that they are not pressed.

ITA Nos. 5279/Del/11 and others ULO Systems LLC

11.5. Accordingly, we dismiss these grounds as not pressed. 12. In the result appeals filed by assessee stands partly allowed as indicated above. Order pronounced in Open Court on 29th March, 2019.

Sd/- Sd/- ( PRASHANT MAHARISHI) (BEENA A PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dt. 29th March, 2019

 Gmv Copy forwarded to: - 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT - TRUE COPY -

By Order,

ASSISTANT REGISTRAR ITAT Delhi Benches

ITA Nos. 5279/Del/11 and others ULO Systems LLC

Date Draft dictated on 18.03.19 20.03.19 26.03.19

Draft placed before author 18.03.19 20.03.19 22.03.19 26.03.19 Draft proposed & placed before the second member Draft discussed/approved by Second Member. Approved Draft comes to the Sr.PS/PS Kept for pronouncement on 29/03/19 & Order uploaded on : File sent to the Bench Clerk Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order.