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Income Tax Appellate Tribunal, DELHI BENCH “D”, DELHI
ORDER
PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the Assessment Order dated 29.01.2025 passed u/s. 143(3) r.w.s 144C(13) of the Income Tax Act,1961(hereinafter referred to as ‘the Act’), for Assessment Year 2017-18.
The assessee in appeal has raised following grounds: “
1. On the facts and circumstances of the case and in law, the Order dated
29. January 2025 passed by Assistant Commissioner of Income-tax, International Tax, Circle 3(1)(1), Delhi (‘Ld. AO’) under Section 143(3) read with section 144C(13) of (A.Y.2022-23) the Act (hereinafter referred as ‘Assessment Order') is beyond limitation under Section 153 of the Act, bad in law and liable to be quashed.
2. On the facts and circumstances of the case and in law, the Ld. AO has erred in determining the income of the Appellant at INR 5,64,11,704 as against Nil income reported in the Return of income ('ROI') filed by the Appellant for the subject year.
On the facts and circumstances of the case and in law, the Assessment Order passed by Ld. AO is illegal, bad in law, passed in undue haste with preconceived mindset and violative of principles of natural justice. The findings of Ld.AO in the Assessment Order are based on mere conjecture, surmises and contrary to the material furnished on record.
4. On the facts and circumstances of the case and in law, both the Ld. AO and Hon’ble Dispute Resolution Panel – 2 (‘Hon’ble DRP’) erred in holding that the Appellant did not file reply to show cause notice issued by the Ld.AO without appreciating that the Appellant had duly filed its response on 29.03.2024 to the show cause notice issued by the Ld. AO.
5. On the facts and circumstance of the case and in law, the Ld. AO, in the Assessment Order, has erred in holding that the Appellant has a Permanent Establishment (‘PE’) in India without appreciating that no such finding was recorded in Draft Assessment Order dated 29 March 2024 passed by Ld. AO or the directions of Hon’ble DRP under section 144C(5) of the Act dated 27 December 2024.
6. On the facts and circumstance of the case and in law, the Ld. AO has erred in holding that Appellant constitutes PE in India on account of provision of manpower services in India for period exceeding 9 months.
7. On the facts and circumstance of the case and in law, the Ld. AO has erred in determining income of the Appellant at INR 5,64,11,704 by incorrectly applying Rule 10(1) of Income Tax Rules, 1962 and estimating profit at the rate of 25 percent of total receipts attributed to alleged PE of Appellant in India.
8. On facts and circumstances of the case and in law, the Ld.AO has erred in not appreciating that the receipts of the Appellant from its Indian customers are not chargeable to tax in India either as business income or as income from other sources under the provisions of the Act read with Double Taxation Avoidance Agreement between India and United Arab Emirates.
9. Incorrect levy of interest under section 234A, 234B, 234C and 234D of the Act On the facts and circumstances of the case and in law, Ld. AO has erred in levying interest of INR 31,11,758 under section 234A, 234B, 234C and 234D of the Act in (A.Y.2022-23) the Assessment Order. Even otherwise, the levy of interest is erroneous and excessive.
10. Initiation of penalty proceedings under section 270A of the Act On the facts and circumstances of the case and in law, the Ld. AO also erred in initiating penalty proceedings under section 270A of the Act mechanically on the additions.”
3. Shri Sachit Jolly, Sr. Advocate appearing on behalf of the assessee submits that the assessee is based in United Arab Emirates (UAE) and is a tax resident of UAE. The assessee is engaged in business of providing manpower, specialized work force/professionals to Oil, Gas and Energy Companies internationally. During the period relevant to assessment year under appeal, the assessee had entered into contract with Vedanta Ltd. and Reliance Industries Ltd. for supply of specialized manpower. The role of the company was limited to the identification of Indian technical experts who have requisite experience in the desired field. The assessee entered into agreement with Vedanta for supply of manpower, the said agreement is at page 223 to 283 of the paper book. The Assessing Officer (AO) without appreciating facts of the case and submissions of the assessee while passing the draft assessment order held the receipts on account of supply of manpower as ‘Income from Other Sources’ and made addition of the entire receipts i.e. Rs.62,56,46,817/-. Thereafter, the assessee filed objection before the Dispute Resolution Panel (DRP) highlighting that the draft Assessment Order was passed without providing adequate opportunity to the assessee. Nevertheless, on merits as well the assessee made submissions explaining the role and scope of work of the assessee to be carried out. The ld. Counsel asserted that the role of the assessee is limited to identification of Indian technical experts who have requisite experience only. The assessee is not involved in supervising or (A.Y.2022-23) controlling the work undertaken by such experts. The experts are not employees of the assessee and are providing the services to Indian customers as independent technical experts and not in the capacity of employees of the assessee. The company does not have any office and or place of business in India. The technical experts perform services and the customers location/oil rigs and are always under the control and supervision of the customer. Since, the manpower recommended/supplied by the assessee is not under the control of the assessee, therefore, it does not form services Permanent Establishment (PE). The ld. Counsel submitted that Reliance Industries Ltd. and Vedanta Ltd. had floated tenders for hiring of the technical staff including engineers. The assessee bid for the tenders. Referring to page 212 of the paper book (tender floated by Vedanta), the ld. Counsel submits that as per scope of work the assessee was only required to provide sufficient numbers of CV’s within one week. Selection of manpower is not under the control of the assessee, the assessee only provides the references of the persons who are experts in the requisite field. Referring to para 5 of the Terms and Conditions of the agreement at page 234 of the paper book, the ld. Counsel pointed that the customer/company reserves right to reject any member of the contractor (i.e. the assessee). The right to remove any workmen from service is the sole discretion of the customer. He thus, asserted that the AO has erred in coming to the conclusion that the assessee is rendering services beyond providing the manpower, which is contrary to the facts and documents on record. 3.1. The ld. Counsel further submits that the final assessment order suffers from jurisdictional issue as well. The AO while passing the draft Assessment Order gave no finding on the assessee having a PE in India. However, while passing the Final Assessment order, the AO merely on the assumptions held that the assessee has (A.Y.2022-23) PE in India. Thus, the AO has gone beyond the draft Assessment Order which is not permissible. In support of his submissions, he placed reliance on the decision rendering in the case of the PCIT vs. WOCO Motherson Advanced Rubber Technologies Ltd., 406 ITR 375 (Guj.).
Per contra, Shri M.S Nethrapal representing the department vehemently supporting the impugned assessment order submits that the assessee is having service PE in India. The assessee is not only supplying manpower but is also maintaining and supervising activities carried out by the manpower supplied by the assessee. The ld. DR referred to Clause 4 and 7 of the agreement to contend that the assessee is also providing equipment. He thus, prayed for upholding the impugned order.
Both sides heard, orders of the authorities below examined, the tender document and agreement placed in paper book and the decision on which the ld. Counsel for the assessee has placed reliance consider.
The first issue in appeal is, whether the assessee is simplicitor providing manpower to the Indian companies or the assessee is performing some more functions after providing CVs to the companies. Here it would be imperative to refer to the tender document in response to which the assessee has been allotted the contract for supply of manpower and also the Terms and Conditions of the agreement. A perusal of General Instructions to the bidders mentioned in the Tender document reveals that it is not only that the bidder has to provide CV’s but the service provider is also required to manage Contracts and Payrolls of professional and support staff provided by the company. Further, the tender binds the contractor to establish and maintain statutory documents as required (A.Y.2022-23) by Labour Laws and as per company requirement to meet the statutory compliances. Further, it was incumbent upon the contractor to submit the proof of salary disbursed along with the invoice. The tender document further requires the contractor to provide necessary insurance cover for all the personal deployed in the field. Any claim arising on account of damage, compensation or expenses payable in consequences of any accident or engine sustained by the workmen of the contractor or any of the person, the Company was not bound to entertain any such claim brought under the Workmen Compensation Act. All insurance and safety aspects pertaining to contractor employees shall be borne by the contractors. Thus, there are several other conditions which fasten the liability of the contractor to maintain the work force and manage, including statutory compliances.
The agreement between the assessee and Vedanta dated 15.03.2020 is at page 223 of the paper book. Similar condition has been reiterated in the contract agreement. Some of such conditions are reproduced herein below:- “8 HEALTH, SAFETY AND ENVIRONMENT 8.1. Safety The Contractor shall observe and comply with all laws, regulations, restrictions, guides and issued by any authority having jurisdiction in the respect of the Site relating to health, safely and environment 8.2 Compliance with Company HSE Requirements The Contractor shall observe and comply with the health, safety and environment requirements set out in the Scope of Work including, without limitation, the Company's HSE policy and guidelines for relevant part thereof) set out in the Scope of Work.
(A.Y.2022-23) 8.3 Obligations of Contractor 8.3.1 It shall be the Contractor's obligation to determine at all times whether the Services can be safely continued or undertaken including, without liming the generality of the foregoing, determining by the Contractor's own inspection that all Contractor's Equipment is loaded and/or stored in a proper and safe manner and that the Contractor's Equipment is in all respects suitable to undertake the Services in the then existing conditions. 8.32 The Contractor shall ensure that equipment of rubbish in any form originating from the Services will be collected promptly in a place at the Site suitable for ready and prompt removal there from. 8.4 Responsibility for Safety of Contractor Personnel 8.4.1 The Contractor shall throughout the duration of the Contract be responsible for the safety of the Contractors Personnel and agrees that the Contractor's Personnel. Whilst on the Sale, shall attend and conduct safety drills as may be directed by or on behalf of, the Company. 8.4.2 The Contractor shall hold regular meetings with the Contractor's Personnel to instruct and up-date them regarding compliance with the requirements of this Clause 8 (Health, Safety and Environment) and shall provide evidence of this to the Company on request. The Contractor shall at all times provide appropriate and adequate personal protective equipment and safety equipment to the Contractor's Personnel. 8.4.3. The Contractor shall have proper arrangements in place for the effective supervision of the execution of the Services by the Contractor's Personnel so as to ensure safe and proper execution of the Services Where the Services are being performed at an offshore location, the Contractor shall ensure that those members of the Contractor's Personnel working offshore have undergone sea survival training. 8.5 Contractor's Policy The Contractor will supply to the Company a copy of the Contractor's health, safety and environmental policy prior to commencement of the Services. The policy shall indicate how the responsibility for health, safety and environmental matters is allocated and shall specify by name one individual amongst the Contractor's Personnel with overall responsibility for such matters. The policy shall indicate in clear terms the practices, procedures and measures which the Contractor intends to follow or take to protect all resources at the Site, including men and materials during the carrying out of the Services. The policy shall also include details of the (A.Y.2022-23) emergency procedures to be followed in case of injury to any person, damage to any works, equipment or materials, and pollution to the environment. The policy shall be complementary to the Company's. HSE policy and guidelines referred to in Clause 82 (Compliance with Company HSE Requirement) and the other requirements set out in this Clause & (Health, Safety and Environment). 8.6 Compliance with Company's Instructions Without prejudice to the foregoing provisions of this Clause & (Health, Safety and Environment), the Contractor shall comply with all safety instructions of the Company consistent with the provisions of the Contract including, without limitation, the safely instructions of any of the Company's other contractors. Such instructions shall, it the Contractor so requires be confirmed in writing by the Company's Representative, so far as practicable. 8.7. Site Manager The Contractor acknowledges that the Company will have an installation or site manager at the Site (the "Site Manager"). The Site Manager shall have the general responsibility for matters affecting safety, emergency response, health or welfare and the maintenance of order and discipline, and in the discharge of that responsibility shall exercise authority over all personnel of Company, the Contractor's Personnel and the personnel of other contractors of the Company when present on or near the Site. The Contractor hereby acknowledges the authority of the Site Manager and shall ensure that the Contractor's Personnel shall recognize such authority and comply with all instructions (whether written, oral or otherwise) of the Site Manager. 8.8 Emergency Notwithstanding any other provisions of this Clause 8 (Health, Safety and Environment), the Company shall be entitled in the event of any emergency (including, without limitation, in the event of a well blowing out, catching fire or otherwise getting beyond control), with immediate effect, to direct the Contractors Personnel as it considers fit and to use as it considers fit all or part of the Contractor's Equipment. 8.9. Reporting 8.9.1 The Contractor shall immediately inform the Company in writing when an incident or accident occurs (including, without limitation, any fatality, lost time incident, medical treatment case, first aid case near miss or any other (A.Y.2022-23) toss related incident in any way connected with the Services, whether or not it may affect any operations of the Company or the operations of others working on behalf of the Company, and shall maintain accurate records therefore Any fatality or major accident or incident shall be reported to the Company within 24 hours of occurrence. The Contractor shall also submit a monthly report in respect of all incidents or accidents in anyway connected with the Services detailing, without limitation, the nature of such incident or accident, the extent of last time, the reasons for the incident or accident and future preventive measures which will be taken by the Contractor. 8.9.2 In addition to the foregoing, the Contractor shall promptly conduct incident investigations on all fatalities or major accidents or incidents and submit a report with its findings, conclusions, recommendations and actions taken or planned to the Company within one week from the date of occurrence of such fatality or major accident or incident Company shall be entitled to join the Contractor in its investigation of the matter of carry cut its own independent investigation. In either case, the Company's role in any such investigation shall not relieve the Contractor of its obligation to conduct its own investigation and to submit its report to the Company within the stipulated time.
REPRESENTATIVES 9.1. Company's Representative 9.1.1. The Company's Representatives shall act in full charge of the Services and shall have full authority to liaise with the Contractor's Representative(s) to resolve all day to day matters which may arise between the Contractor and the Company. 9.1.2. The Company's Representatives) small monitor the performance of the Services and shall have the authority necessary to enforce the provisions of this Contract 9.1.3 The Company's Representatives) shall be entitled to inspect the Services and all documentation relating thereto at any time. 9.1.4 The Contractor shall direct at matters relating to the Contract to the Company's Representatives) and shall act only in accordance with the instructions of the Company's Representative(s). 9.2 Contractor's Representative The Contractor's Representatives) shall act in full charge of the Services and shall have full authority to liaise with the Company's Representatives)
(A.Y.2022-23) to resolve all day to day matters which may arise between the Contractor and the Company. 9.3 Change of Representatives Either Party may. (a) revoke the appointment of any person appointed as that Party's representative and may appoint another person as representative in his/her place; or (b) appoint any person to be an additional representative for a stated purpose. No such revocation or appointment shall be effective until notice of it is given to the other Party. 9.4 Bases 9.4.1 The Company will maintain an office base in India for the purposes of the Contract. 9.4.2 Unless otherwise agreed in writing by the Company, the Contractor will maintain both an office base in India and an operational base at the Site sufficient to manage the Services for the purposes of the Contract.”
The above Terms and Conditions clearly indicate that as per agreement the scope of work is not limited to forwarding of CV’s of the experts but the assessee is also required to perform various other functions including supervision, statutory compliances and to ensure safety of the employees which are hired through the contractor. The ld. Counsel for the assessee during his submissions has referred to same very agreement and pointing to Clause 5 has submitted that the company reserves the right to reject any member of contractor’s personnel prior to commencement of service and has right to remove from service after commencement. The covenants of the agreement cannot be read selectively. The agreement has to be read and accepted as whole and not in piecemeal.
(A.Y.2022-23) 9. The next question is taxability of receipts in lieu of services rendered in relation to the agreement discussed above. It is not in dispute that the assessee is based in UAE and is tax resident of UAE. The said receipts are taxable in India if they are held to be Business Income and it is established that the assessee has PE in India. In so far as assessee having PE in India is concerned, a perusal of the draft Assessment Order reveals the AO has not given any finding on the same and has treated entire receipts as ‘Income from Other Sources’. The assessee filed objections inter-alia alleging insufficient opportunity to make submissions and put forth its arguments. The DRP directed the AO to consider/examine submission filed by the assessee before the DRP.
After directions of the DRP, the AO re-examined the issue. The Assessing Officer while passing the Final Assessment order re-characterized receipts of the assessee as business income under India-UAE DTAA and also held that the assessee has PE in India. The AO attributed 25% of the total receipts to the PE and taxed the same at rate of 40%. As a result, the addition of Rs. 62,56,46,817/- made in the Draft Assessment Order was reduced to Rs.5,64,11,704/-.
The ld. counsel for the assessee objected to the findings of AO in final assessment order in holding that the assessee has PE in India. The primary objection of the ld. Counsel is that the Assessing Officer has gone beyond his jurisdiction in holding that the assessee has PE in India. In draft assessment order the Assessing Officer recoded that, “In the absence of any response being furnished by the assessee with regard to existence of Permanent Establishment as well as the real nature of business income, the evaluation of the same cannot be (A.Y.2022-23) done on merits. …………….Therefore, the whole receipts are considered as ‘Income from other sources”. While passing the Final Assessment Order the AO re- characterized receipts as ‘Business Income’ and also held that the assessee has PE in India. Relevant excerpts from directions of the DRP in pursuance of which the AO has passed Final Assessment Order are as under:- “(vii) Based on the above facts, at this stage, the Panel upholds the DAO passed by the AO. The AO is directed to consider/examine the submissions filed by the assessee and further elaborate on his findings/observations, and pass a speaking final order in his regard. The AO is further directed not to make any further enquiry with the assessee in view of section 144C(13) of the IT Act. Ground of objection number 2 is accordingly disposed off.” A perusal of the DRP directions would show that the DRP has not given any findings qua assessee having PE in India or that the receipts are to be treated as ‘Business Income’. In fact, the DRP in para 6(vii) of the directions upholds the draft assessment order. Thus, findings of the AO in draft assessment order holding receipts as ‘Income from Other Source’ was accepted by the DRP. The DRP only directed the AO to further elaborate his findings/observations after considering/examining submissions of the assessee. The direction of the DRP nowhere expresses that the AO has to re-examine the issue or give fresh findings. The directions of DRP are only to elaborate the findings/observations already given. In other words, the DRP only wanted the AO to reinforce his findings and not de-novo examine the issue. In fact, if assessment order is seen juxtapose to directions of the DRP, the findings recorded by the AO in final assessment order are in violation of the DRP directions.
We agree with the contentions of ld. Counsel that the Assessing Officer has exceeded his jurisdiction while passing the Final Assessment order. In the case of PCIT vs. Woco Motherson Advanced Rubber Technologies Ltd. (supra), the (A.Y.2022-23) Hon’ble High Court held that the additions not proposed in the draft assessment order cannot be made by the Assessing Officer in Final Assessment Order. Though in the present case there is no enhancement of income but that does not mean that the Assessing Officer has unbridled power to suo moto make variation in final assessment order, which sometimes may even result in reduction of tax liability. Thus, findings of the AO in holding that the assessee has PE in India is beyond jurisdiction, hence, liable to be quashed.
In the result, assessment order is quashed, and appeal of the assessee is allowed.
In the result, appeal of the assessee is allowed in the terms aforesaid. Order pronounced in the open court on Tuesday the 04th day of November, 2025.