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Before: Shri H.S. Sidhu & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: The appeals for A.Yrs. 2004-05 & 2005-06 in & 1365/Del./2011 arise at the instance of assessee out of separate orders dated 03.01.2011 of ld. CIT(A), Ghaziabad, raising following common grounds :
“1.1. The learned CIT(A) erred in confirming the action of the learned AO of attributing to project office in India [and making an addition to income] profit on a presumptive basis on off shore sales made directly to GAIL on FOB basis, from outside India ignoring the facts and circumstances. 1.2. The learned CIT(A) should have deleted the whole of the addition to income on account of off-shore sales made directly to GAIL on FOB basis, from outside India once it has been agreed that the contract with GAIL is divisible.”
The appeal for A.Y. 2007-08 in ITA No. 5833/Del./2010 is also directed by assessee against the order u/s. 144C/143(3) dated 12.10.2010 of DDIT (Intl. Taxation), Noida on the following grounds : “1). That the lower authorities have erred in making the addition of Rs.1,02,59,131/- on the offshore supplies of the plant and machinery, thereby applying the presumptive rate of profit @ 10% provided u/s. 44BB and 44BBB of the Income-tax Act, 1961. 2). That in the absence of any economic connection between the PE and the Offshore supply of the plant and machinery of Rs.10,25,91,309/-, the addition of Rs.1,02,59,131/- as made by the Assessing Officer, thereby applying the presumptive rate of profit @ 10% as provided u/s. 44BB and 44BBB of the IT act, is arbitrary, unjust, bad in law and at any rate very excessive. 3). That the assessee denied its liability to pay interest charged u/s. 234B of the IT Act in the computation form at Rs.9,06,131/-.” -1365/Del./11, 5833/Del./10 & 5586/Del./12 3
ITA No. 5586/Del./2012 for A.Y. 2007-08 is filed at the instance of Revenue against the order dated 06.08.2012 of ld. CIT(A), Noida, challenging the penalty imposed u/s. 271(1)(c) of the IT Act on the following grounds : “1. Whether on the facts and circumstances of the case, the CIT(A) has erred in holding that the assessee’s claim that profit on the portion of offshore receipts of contract is not taxable and is merely a difference of opinion and it does not come within the purview of furnishing of inaccurate particulars of income in respect of off-shore portion of receipts, even though the assessee had deliberately not filed particulars of off shore supply of material in its return of income. 2). Whether on the facts and circumstances of the case, the CIT(A) has erred in appreciating that the department has filed an appeal in the assessee’s case for the A.Y. 2002-03 on the issue of taxability of off shore supply which is pending before the Hon’ble High Court. 3). Whether on the facts and circumstances of the case, the CIT(A) has erred in cancelling the penalty levied by the Assessing Officer u/s. 271(1)(c) of the Income Tax Act, 1961.”
As emerged out of the aforesaid grounds of appeals and the facts attending to the present cases, we find that in all the three appeals of the assessee, the solitary issue which needs adjudication is whether the sales made by the non-resident Canadian assessee on FOB basis under a contract are liable to tax in India or not? The only difference is that the appeals for the Assessment Years 2004-05 and 2005-06 have been filed by the assessee against the order of CIT (Appeals) wherein the CIT (Appeals) has allowed the relief to the assessee after following the judgment of the ITAT in the case of the appellant for the Assessment Year 2002-03 wherein the Hon’ble ITAT held that though the FOB supplies made outside India are not taxable but because the contract has been signed in India, hence 20% of the global profits relating to such supplies is taxable in India, whereas in Assessment Year 2007-08, the -1365/Del./11, 5833/Del./10 & 5586/Del./12 4 assessee has filed the appeal directly before the ITAT against the order of AO and DRP u/s. 144C/143(3) of the IT Act on the same issue. For the sake of convenience, the facts for the Assessment Year 2005-06 in are being discussed.
The facts leading to appeal for assessment year 2005-06 are that the assessee, Global Thermoelectric Inc (hereinafter referred to as “Global”) is a non-resident foreign company incorporated in Canada and the assessee had executed a contract for Gas Authority of India Ltd. (GAIL) for supply, installation and commissioning of Captive Power Generation System for GAIL’s Vizag-Secunderabad LPG Pipe Line. The total value of the contract was US Dollars 36,06,710. This contract was to be executed in two separate parts. The first part of the contract was for a value of US Dollar 19,01,447 and related to the supply of equipments/services to GAIL directly by Global, Canada. These equipments were manufactured in Canada and the title in the said equipment was claimed to have been passed to GAIL at port of shipment in Canada. The second part of the contract was for a value of US Dollar 17,05,263 which was to be executed in India and for the execution of the same, Global had established a Project Office in India.
The assessee filed return of income on 31st October 2005 declaring an income of Rs.21,61,298/- from second part of the contract.
In the assessment order, the AO has taken a view that in respect of supply of equipments, the same was a part of a contract including erection and -1365/Del./11, 5833/Del./10 & 5586/Del./12 5 commissioning and hence the offshore supply of equipments towards this turnkey contract is taxable in India. Applying the rates as provided in Sections 44BB and 44BBB which deal with the Presumptive Taxation of Income of certain Non-resident assessees, the AO assessed 10% of total value of supply contract at Rs.23,26,739/- as assessable in addition to income returned by the assessee. The assessee pointed out before the AO that in Assessment Year 2002-03, on the similar issue, the Hon’ble Tribunal vide order dated 12th May 2006 in 2005 held that the provision of Section 44BB of the IT Act does not apply to the assessee’s case and the profit on the offshore supplies of the equipments, which were made at Vancouver Port, Canada is not chargeable to tax in India, but because the considerable part of contract and planning thereof has been done by the assessee in India, hence following the decision of Delhi Special Bench in the case of Motorola, 20% of profits on the sale of offshore supplies of equipments should be treated to have accrued in India and profits in this respect should be determined on the basis of global profit ratio. However, the AO did not accept the assessee’s contention because the Department had already filed an appeal against the order of ITAT in Allahabad High Court.
Being aggrieved by the order of the AO, the assessee filed an appeal before the CIT (Appeals) who, after following the judgment of the ITAT in Assessment Year 2002-03, held that the profits of FOB supplies are not taxable in India but because the ITAT in Assessment Year 2002-03 had directed to sustain the addition to the extent of 20% of profits on sale of offshore supplies of equipment should be treated to have accrued in India and -1365/Del./11, 5833/Del./10 & 5586/Del./12 6 profits in this respect should be determined on the basis of global profit ratio; hence he also made the similar directions by observing as under:
“Respectfully following the order of Hon’ble ITAT, referred to above, the issue raised in ground of appeal No. 1 is decided accordingly. The addition of Rs.23,26,739/- would be modified to the extent that the Assessing Officer would work out the profit by taking 20% profit on sale of off-shore equipments; the profit in this respect to be determined on the basis of global profit ratio, after verification of the details and statistics to be submitted by the assessee in this respect.”
It is this order of ld. of CIT (Appeals), which has been assailed by the assessee by means of this appeal.
We have heard the submissions of both the parties and have gone through the entire material available on record. During the course of hearing, the assessee has brought to the notice of the Bench that in Assessment Year 2002-03, the Department as well as the assessee both had approached the Hon’ble Allahabad High Court. The Department had filed the appeal against the order of ITAT where the ITAT held that profit on FOB supplies is not chargeable to tax in India and profit in relation thereto cannot be determined @ 10% as provided u/s 44BB of the IT Act, whereas the assessee had filed appeal against the order of ITAT in respect of sustaining the addition to the extent of 20% of the profits on sale of offshore supply of equipments. Both the appeals of the Department and the assessee were registered as Income Tax Appeal No. 80/2007 and 429/2011 respectively which have been decided in favour of the assessee and against the Revenue and therefore, the issue -1365/Del./11, 5833/Del./10 & 5586/Del./12 7 involved in the appeals of the assessee for A.Yrs. 2004-05, 2005-06 and 2007- 08 are covered in favour of the assessee by the decision of Hon’ble High Court.
Having considered the issue in the light of aforesaid decision of Hon’ble jurisdictional High Court, we find that the Hon’ble Allahabad High Court vide its order dated 30th November 2016 disposed of the aforesaid appeals. In Income Tax Appeal No. 80/2007, which is the departmental appeal, the Hon’ble Allahabad High Court, after following the Supreme Court judgment in the case of Ishika Vazima-Harima Heavy Industries Ltd. vs. Director of Income Tax, Mumbai in 288 ITR 408 , [2007] 3 SCC 481, held that the contract was a divisible contract and the equipments which were manufactured and supplied outside India on FOB basis, the assessee was not liable to pay any tax in India as there was no element of sale at all in India and then dismissed the departmental appeal. The assessee’s appeal being Income Tax Appeal No. 429/2011 was also decided in terms of department’s appeal vide order of even date, wherein the Hon’ble High Court held that none of the profits in respect of supplies made on FOB basis is chargeable to tax in India. During the course of hearing, the ld. DR also agreed that the case is covered by the Allahabad High Court judgment. Therefore, laying our hands on the decisions of Hon’ble Allahabad High Court, we hold that on sale of offshore supplies made on FOB basis outside India, no profit is chargeable to tax in India. Since the facts and issue involved in all the three appeals of the assessee are identical, therefore, the above decision will equally apply to all these three appeals of assessee for A.Yrs. 2004-05, 2005-06 and 2007-08. Accordingly, the appeals of the assessee deserve to be allowed. -1365/Del./11, 5833/Del./10 & 5586/Del./12 8
Adverting to the appeal of the Revenue pertaining to penalty u/s. 271(1)(c) of the Act for A.Y. 2007-08, we observe that as already discussed above, the only addition made by the AO was in respect of the profits determined in respect of FOB supplies, thereby applying the rate of 10% as provided u/s 44BB of the IT Act. Based on this addition, a penalty of Rs.32 lakhs was, accordingly levied u/s. 271(1)(c) of the Act against the assessee vide order dated 29th April 2011.
As already explained, the addition made by the AO and sustained by the DRP in respect of profits on offshore supplies was that because in Assessment Year 2002-03, the Department had filed an appeal before the Hon’ble Allahabad High Court which shows that the Department has not accepted the order of ITAT for Assessment Year 2002-03.
Now the departmental appeal filed before the Hon’ble Allahabad High Court for Assessment Year 2002-03 has been dismissed by the Allahabad High Court vide judgment dated 30th November 2016 and even in the assessee’s appeal in relation to the maintenance of addition to the extent of 20% of the profits on FOB supplies, the issue has also been decided in favour of assessee. Since, we have already deleted the addition made on these counts relying on the decision of Hon’ble jurisdictional High court, we are of the considered opinion that the assessee cannot be deemed to have concealed the particulars of income with respect to profit on FOB supplies during the Assessment Year 2007-08. Besides, the department did not initiate any penalty on the similar addition made in A.Y. 2002-03, and the penalty imposed for A.Y. 2004-05, -1365/Del./11, 5833/Del./10 & 5586/Del./12 9 stood cancelled by ld. CIT(A) vide order dated 27th April 2009,which has been accepted by the Department and no further appeal against the order of CIT (Appeals) was filed by Revenue. In presence of all these facts, the penalty imposed by the AO has rightly been deleted by the ld. CIT(A). Accordingly, the appeal of the Revenue, being devoid of merit, is bound to fail.