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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’, NEW DELHI
Before: SHRI N. K. SAINI & SMT. BEENA A. PILLAI
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘I-1’, NEW DELHI
BEFORE SHRI N. K. SAINI, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER I.T.A. No.2004/Del/2014 (Assessment Year 2009-10) National Petroleum Vs. DDIT, Circle 2(1), Consstruction Co., New Delhi C/o Nangia &Co., Suit 4A, Plaza M-6, Jasola, New Delhi GIR / PAN :AAACN7799J (Appellant) (Respondent)
Appellant by : Shri Amit Arora, CA Shri Suraj Nangia, CA Respondent by : Shri Amrendra Kumar, CIT DR
Date of hearing: 17.06.2016 Date of Pronouncement: 21.06.2016 ORDER PER BEENA A. PILLAI, JM:
The present appeal has been filed by the assessee against the order dated 17/01/2014 passed by DDIT Circle 2 (1), International taxation, New Delhi for assessment year 2009-10 on the following grounds of appeal:
“1. That the learned Dy. Director of Income Tax, Circle 2(1), Intl. Taxation, New Delhi has grossly. erred both on facts and in law in determining the income of the appellant at Rs. 39,40,98,560/- as against the income returned of Rs. 1,01,29,714/-.
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That, in framing the assessment, the learned DDIT has grossly erred in including in the total income, a sum aggregating to Rs.1,07,12,284/- stated to be income taxable in India on account of off shore supplies made, despite the fact, no such income accrued to the assessee or could be brought to tax under the provisions of section 9(1) read with Explanation-1 of the Income Tax Act, 1961 or under Article 7(2) of the DTAA between India and UAE. 2.1 That the aforesaid addition thus has been made on complete misconception of fact and law and by failing to appreciate that, functions performed by the project office were merely auxiliary in character and as such, there no PE in respect of the off shore supplies made, no income could be brought to tax either under the provisions of Income Tax Act or under the Double Taxation Avoidance Agreement as has been held by the Hon'ble Tribunal. for the immediately two preceding assessment years i.e. 2007-2008 and 2008-2009. 2.2 That, even otherwise in respect of the offshore supplies in respect of which no income was taxable, even on the assumption that, it could be held that the assessee was to be assessed then too, the margin of profit as computed in TP Attribution was 2.31% and any adjustment made in the said margin of profit by adopting 3.61% is not only arbitrary but is wholly unjustified. 3. That, further the learned DDIT has erred in making an adjustment of Rs.37,32,56,566/- as against the income returned of Rs.60,25,399/- on account of onshore activities undertaken for installation of platforms which income had been returned @10% of the receipt from such activities after deduction of expenditure on which tax at source had been deducted. The learned DDIT has failed to appreciate that, it had not been disputed by the assessee that the income arising out of onshore activities is taxable and even otherwise, adjustment of
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the aforesaid sum of Rs.37,32,56,566/- has wrongly been. computed as operating profit from the onshore activities has wrongly been adopted as Rs.22,74,000/- as against Rs.60,25,399/-. Hence, there being no justification to have enhanced the said income as offered on the basis of Article 7(6) of the DTAA, and as such, the enhancement made by adopting the average OP/OR of 21.91% in respect of 8 alleged comparables was highly arbitrary. 3.1 That, even otherwise in respect of on shore activities the Ld. DDIT erred in holding that the provisions of section 44BB are not applicable to the appellant. 4. That the learned TPO to whom the reference was made was furnished the TP attribution report merely to support that the income returned by the assessee in respect of onshore activities was the correct income and the same does not warrant any upward adjustment by making an addition by adopting a higher arbitrary percentage being average OP/OR in respect of alleged comparables. 5. The learned DDIT has arbitrarily concluded that, there existed a PE in India, despite the fact, the project office of the assessee had no role to play in respect of offshore supplies made by it from Abu- Dhabi to India in respect of the platforms, the erection and fabrication of which was carried out, outside India under the contract. He has failed to comprehend that even the title of the constructed platform was legally delivered at Abu Dhabi. 6. The learned DDIT has further failed to appreciate that, having accepted that there is no material change in the business model and the situation of the case, was not justified either on facts or in law in bringing to tax any income including of Rs.41,04,299/- being 1% of the receipts from offshore supplies which had been erroneously offered by the assessee in the return of income, when it had filed the return of income, thus
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the addition of Rs.1,07,12,284/- in respect of offshore supplies and addition of Rs.37,32,56,566/- in respect of onshore activities is wholly unsustainable in law. 7. That the learned DDIT has failed to appreciate that the determination of ALP by the learned Assessing Officer was entirely erroneous as the provisions of section 92 of the Act were inapplicable as no international transactions had been entered by the assessee with any of AE and that the TP attribution report was furnished only to justify the estimate of the income declared by the assessee at arm's length. 8. In any case and without prejudice the learned TPO has erred in holding by citing non- comparable cases that the estimate of profit from offshore and onshore activities was under estimated. 9. On the facts and in the circumstances of the case and in law, the Ld. AO erred in levying the interest u/s 234B of the Act while computing the total demand of Rs.26,29,55,960/-. 9.1 Without prejudice to aforesaid, and without admitting that interest under section 234B is leviable, the Ld. AO erred in not granting credit of TDS of Rs.10,71,44,001/- before calculating interest under section 234B of the Act and thus the said interest as calculated at Rs.9,65,28,136/- has been calculated wrongly and excessively, and hence the demand thus raised is wholly erroneous. 10. That learned AO has grossly erred in not granting credit of TDS of Rs.10,71,44,001/- while determining the tax liability of the appellant and hence the demand thus raised is wholly erroneous. 11. On the facts and in the circumstances of the case and in law, the Ld. AO erred in mechanically proposing and the DRP has further erred in upholding/ confirming the action of the Ld. AO to initiate proceedings under section 271(1)(c) of the Act.
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It is therefore prayed that the addition made deserves to be deleted and it be held that, no income accrued to the assessee in respect of the offshore activities and in so far as the onshore activities, the margin of profit as disclosed by the assessee was fair and reasonable, which did not warrant any enhancement, and comparable adopted to determined the same was not a fair estimate of income and was highly arbitrary.”
The brief facts of the case as recorded by the Ld.TPO are as under:
2.1 The assessee is a tax resident of UAE and is eligible to opt for taxability of its income under the Indo-UAE Tax treaty (“the treaty”) as per the provisions of section 90 (2) of the income tax act, 1961. The income received by the assessee from its activities in India is in the nature of business income. The business income is to be taxed in accordance with article 7 of the treaty, which provides that such income would be taxable only in UAE, unless the assessee has a permanent establishment (PE) in India.
2.2 The assessee had entered into a contract with oil and natural gas Corporation limited (ONGC) wide agreement dated 23/11/2006 for carrying on work of surveys for Pre- engineering, pre-construction/pre-installation and post- installation, design, engineering, transportation, hook-up, testing, pre-commissioning, start-up and commissioning of entire facilities of C-series project on turnkey basis at ONGC’s Mumbai high asset, bassien and satellite asset in
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field offshore site. It has been submitted before the Ld.TPO that, the assessee has undertaken the fabrication of fully loaded platforms outside India after procuring materials and carrying out designing, engineering and fabrication activities.
2.3 The controversy involved in the present appeal principally relates to the taxability of income earned by the assessee in respect of the contract entered into with ONGC. According to the revenue, the income from the said contract is liable to be taxed in India as the assessee is stated to have a PE in India.
On the contrary as per the assessee the income from the contract in question is not taxable under the act by virtue of the double taxation avoidance agreement (DTAA) between India and UAE.
It has been submitted by the Ld.AR that the issue now stands settled by the decision of Hon’ble jurisdictional High Court in assessee’s own case for assessment year’s 2007-08 and 2008-09 wide order dated 29/01/2016 in ITA No. 143, 144 & 533/2013 and 795/2014. The decision of Hon’ble jurisdictional High Court is also reported in (2016) 66 Taxman.com 16. The Ld. A.R. submitted that ground No. 1 is general in nature and therefore does not require to be adjudicated upon. He submitted that this issue raised in ground numbers
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2,3,4,5,6,7 and 8 have been adjudicated by the Hon’ble jurisdictional High Court in assessee’s own case.
On the contrary the Ld.DR submitted that the contracts in question were composed contracts and all activities were closely linked with each other. He submitted that the ownership of the platforms and other materials was transferred to ONGC on issuing the completion certificate and acceptance of work. The Ld.DR placed reliance upon the decisions of the Hon’ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd VS DIT reported in (2007) 288 ITR 408 and of the Tribunal in case of DIT vs. Hyundai Heavy Industries Co Ltd reported in (2009) 31 SOT 482 (ITAT[Del]).
5.1 He further submitted that assessee’s income is neither a taxable in UAE nor in India and it is a tax evading mechanism instituted by the assessee. The Ld. D.R. vehemently submitted that the assessee must be categorized either as service PE, installation PE or fixed place PE. The Ld. D.R. submitted that the assessee has exceeded the minimum period of 9 months and therefore has to be recognised as having a PE.
We have perused the facts of the present case for the year under consideration and the facts that has been brought out by the Hon’ble High Court in assessee’s own
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case in National Petroleum Construction Co. Vs. DIT (International taxation) (supra).
6.1 The Hon’ble High Court had framed and decided the following questions of law:
“1. Whether the Income Tax Appellate Tribunal was correct in holding that the appellant had a fixed place of business or permanent establishment in India as defined in Article 5(2)(c) of the Double Taxation Avoidance Agreement between India and UAE. 2. Whether the Income Tax Appellate Tribunal was justified and correct in holding that the installation permanent establishment under Article 5(2)(h) of the Double Taxation Avoidance Agreement between India and UAE is not dependent on the date of actual start of execution of the contract but had come into existence on the date of award of contract? 3. Whether the income Tax Appellate Tribunal was right in holding that Arcadia Shipping Ltd. was a dependent agent permanent establishment of the appellant in India under Article 5 of the Double Taxation Avoidance Agreement between India and UAE. 4. Whether the Income Tax Appellate Tribunal has not attributed and determined the taxable income under installation and commissioning; whether the said issue/question has remained undecided and the effect thereof. . 5. Whether the order of the Income Tax Appellate Tribunal violates and is contrary to Article 7(6) of the Double Taxation Avoidance Agreement between India and UAE." It has been submitted by the Ld. ARs that the Hon’ble court wide the above said judgment has held as under:
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“24. It is the Assessee's case that its office at Mumbai was opened only to comply with contractual requirements and the exchange control regulations and was used only as a communication channel and not for the execution of the Contracts. The Project Office was only used for the purposes of correspondence and as a communication channel; apart from that, the Project Office had no role to play in the execution of the activities under the Contracts and no other business of the Assessee was carried on through the Project Office. The Project Office was manned by three employees; (i) Ravi K. Prabhakar; (ii) Pavithran; (iii) Vijayan. While Ravi K. Prabhakar was designated as a Logistics Coordinator, Pavithran and Vijayan were employed as Office Assistants. The said persons were only engaged in collecting information from ONGC or ASL and transmitting the same to the Assessee's office in Abu Dhabi and similarly transmitting communications from Assessee's office in Abu Dhabi to ONGC and ASL. It is claimed that the abovenamed three employees were simple graduates and were not capable for participating in the execution of the work undertaken. The DRP had observed that Sh. M.N. Shah, S~. M. Karkera, Sh. C.G. Pillai, Sh. P.K.G. Nair and Sh. R.L. Kulkarni, who were employees of the Project Office of the Assessee, had attended the kick-off meeting with ONGC on 16th December, 2005 and had also signed the minutes of that meeting. The DRP had proceeded on the basis that this fact was not disputed. The IT AT had also concurred with the aforesaid finding. However, it is seen that the Assessee had repeatedly pointed out that persons named were not employees of the Project Office. Further, there is no material which would support the findings that Sh. M.N. Shah, Sh. M. Karkera, Sh. C.G. Pillai, Sh. P.K.G. Nair and Sh. R.L. Kulkarni were employees at the Project Office. 25. In our view, in absence of any material, observations made with regard to the employees of
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the Project Office being present at the meeting cannot be sustained. Similarly, there is also no material that the employees of the Project Office had participated in review of the engineering documents done in Mumbai or had participated in the discussions or approval of the designs submitted to ONGC. In absence of any material evidence to controvert the Assessee's claim that its Project Office was only used as a communication channel, the same has to be accepted. Thus, the next aspect to be considered is whether acting as a communication channel would fall within the exception of clause (e) of paragraph 3 of Article 5 of the DT AA. 26. The language of sub-para (e) of paragraph 3 of Article 5 of the DT AA is similar to the language of sub-para (e) of paragraph 4 of Article 5 of the Model Conventions framed by OECD, United Nations as well as the United States of America. The rationale for excluding a fixed place of business maintained solely for the purposes of carrying on activity of a preparatory or auxiliary character has been explained by Professor Dr. Klaus Vogel. In his commentary on "Double Taxation Conventions, Third Edition", he states that "It is recognised that such a place of business may well contribute to the productivity of the enterprise, but the services it performs are so remote from the actual realisation of profits that it is difficult to allocate any profit to the fixed place of business in question. Examples are fixed places of business solely for the purpose of advertising or for the supply of information or for scientific research or for the servicing of a patent or a know-how contract, if such activities have a preparatory or auxiliary character". 29. In view of the above, the activity of the assessee’s project office in Mumbai would clearly fall within the exclusionary clause of article 5 (3) (e) of the DTAA and, therefore cannot be construed as the assessee is PE in India.
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We are also unable to accept Mr Sahni's contention that in view of the decision in the case of Goetze (India) Ltd. (supra), the Assessee was not entitled to contend that it had no PE in India for several reasons. First and foremost, in the present case, the Assessee's return was not accepted and the AO questioned the attribution of income to the Assessee's PE. In such circumstances, it would be open for the Assessee to point out that its office in India did not carry out any activities to which any income from the project could be attributed. In order to determine the Assessee's income attributable to its Project Office at Mumbai, it was necessary to examine the role played by the Assessee's Project Office and its involvement with the activities to be conducted under the contracts. In view of the nature of the enquiry, it would always be open for the Assessee to explain that the Project Office was only involved as a communication channel and was not involved in any of the main activities required for execution of the contracts. Secondly, the decision in the case of Goetze (India) Ltd. (supra) does not fetter the Appellate Authority from considering the claim made by an Assessee. The limitation as expressed is only with regard to the AO. 32. It is also relevant to state that the exclusionary clause of Article 5(3)(e) would apply equally to a place of business falling within the Article 5(2)(h) as it would be an office falling within the scope of Article 5(2)(c) of the DTAA. Thus, the Assessee also cannot be stated to have a permanent .establishment under Article 5(2)(h) of the DT AA. In this view, although it is not necessary to consider the second question, nonetheless, we consider it appropriate to do so. 33. In terms of clause (h) of paragraph 2 of Article 5 of the DTA.A, "a building site or construction or assembly project or supervisory activities in connection therewith" would also constitute a PE of an enterprise subject to that site, project or activity continuing for a
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period of atleast nine months. Clearly, the purpose of the said clause is also to include a building site or a construction or an assembly project as a PE by itself. On a plain reading, a PE constituted by a building site or a construction or an assembly project, would commence on the commencement of activities relating to the project or site. The said clause is also to be read harmoniously with paragraph 1 of Article 5 of the DT AA which necessarily entails a fixed place of business from which the business of an enterprise is carried on. Thus, a building site or an assembly project could be construed as a fixed place of business only when an enterprise commences its activity at the project site. An activity which may be related or incidental to the project but which is not carried out at the site in the source country would clearly not be construed as a PE as it would not comply with the essential conditions as stated in paragraph 1 of Article 5 of the DTAA. It is necessary to understand that a building site or a construction assembly project does not necessarily require an attendant office; the site or the attendant office in respect of the site/project itself would constitute a fixed place of business once an Assessee commences its work at site. Thus, for clause (h) of paragraph 2 of Article 5 to be applicable, it is essential that the work at site or the project commences - it is not relevant whether the work relates to planning or actual execution -of construction works or assembly activities. Preparatory work at site such as construction of a site office, a planning office or preparing the site itself would also be counted towards the minimum duration of a PE under Article 5(2)(h) of DTAA. In a given case, establishment of an office or any work which directly serves the operations at site may also be construed as a part of the building site, or construction or assembly project. The essence of a PE under Article 5(2)(h) is a building site or a construction or assembly project and the activities of an enterprise relating thereto in the source country.
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The aforesaid passage also clearly indicates that the duration of a permanent establishment would commence with the performance of business activities in connection with the building site or assembly project. 36. The activities at site carried on by any contractor through a sub-contractor would not count towards the duration of the contractor's PE, as in that case, the construction site or project cannot be construed as a fixed place of business of the contractor and would fail one of the essential tests of paragraph 1 of Article 5 of the DTAA. This, of course, would not hold good if the contractor's office or establishment in the source country (i.e. where the site/project is located) is also involved alongwith the sub-contractor. 39. In the facts of the present case, where admittedly the Assessee did not have access to the site during the period from 21.05.2006 till 19.11.2006, the same clearly cannot be construed as its PE under Article 5(2)(h) of DTAA. If the period during which the Assessee did not have access to the site in question is excluded, the aggregate period would be less than nine months and this would exclude the applicability of Article 5(2)(h) of DTAA. It is implicit in the expression 'Permanent Establishment' that there should be some degree of permanency of the fixed place of business before it can be construed as a PE of the Assessee. Thus, although a building site or a construction has been recognised as a PE, the same is conditional on the site/project representing an enterprise's fixed place of business - through which the business of the enterprise is carried on - for a minimum period of nine months. In the facts, where an enterprise is not granted access to the site for a long duration and carries on no activity at site during that period, the site could hardly be construed as the fixed place of business of an Assessee during that period.
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In view of our conclusion that the Assessee did not have a permanent establishment in India, the question of attributing any income of the Assessee to the PE does not arise, However, the ITAT has erroneously held that the Assessee has a PE in India. Although the ITAT has held so, it has not quantified the income attributable to the PE. Thus, the answer to question no.4 framed in the Assessee's appeal is answered in favour of the Assessee and against the Revenue. …………. 60. In the present case, the consideration of various activities has been specified in the contract in question. Annexure C (contract price schedule and rental rates schedule) specifically assigns value to various activities. It is also not disputed that the invoices raised by the assessee specifically mentioned the work done outside India as well as in India. Thus, even though the contracts in question may be turnkey contracts the value of the work done outside India is a ascertainable. There is also no material to indicate that the work done outside India included any input from the assessee is PE in India. The ITAT had considered the contract and in view of the fact that the consideration for various activities such as design and engineering, material procurement, fabrication, transportation, installation and commissioning had been separately specified, the Tribunal rightly held that the consideration for the activities carried on overseas could not be at attributable to assessee is PE in India.” 6.2 From the above extracts of the relevant Paras of the judgment passed by Hon’ble High Court it is clear that the Hon’ble High Court has agreed to the contention of the assessee that it does not have a PE in India. Further the Hon’ble High Court has held that since there is no PE in India the receipts from the contract with ONGC is also not
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taxable in India – the question of attribution does not arise.
The Ld.AR submitted that there exist identical facts for the year under consideration. Respectfully following the decision of Hon’ble Jurisdictional High Court, we are of the considered view that the assessee does not have a PE in India and the revenue from the contract cannot be taxed accordingly the ground numbers 2, 3, 4, 5, 6, 7, 8 raised by the assessee stand allowed.
Ground No. 9:
The ld.AR submits that this issue has been dealt by Hon'ble High Court in the case of DIT VS. GE Packaged Power Inc. reported in 373 ITR 65, wherein the Hon'ble High Court held as under: “21. A Court's task is to unravel the legislative intent, if it is not discernable. Where, however, the provisions are clear, the Court's duty is to administer the law in its terms. It is bound to adhere to its precedents; yet its devotion to a previous holding cannot blind it to the clear terms of the statute, wherever found. If Alcatel Lucent USA Inc (supra) is correct and is to be applied in all situations, there would be dissimilar and asymmetrical results entirely dependent on the facts presented in each case. It is unclear what would be the outcome where the payee is, in fact, under the bona fide belief that it does not have a PE, or how the payer is to discern that a payee's assertion is intended to defeat the law. This Court therefore, notes that this precise question was addressed in Samsung Electronics Co. Ltd. (supra) by the Supreme Court, while remitting the
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matter for reconsideration by the High Court. The Court perceptively held that:
"Hence, apart from Section 9(1), Sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying tax deduction at source provisions. Reference to ITO (TDS) under Section 195(2) or 195(3) either by the non-resident or by the resident payer is to avoid any future hassles for both resident as well as non resident. In our view, Sections 195(2) and 195(3) are safeguards. The said provisions are of practical importance. This reasoning of ours is based on the decision of this Court in Transmission Corporation (supra) in which this safeguard. From this it follows that where a person responsible for deduction is fairly certain then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof."
This Court, therefore, holds that Jacobs Civil Incorporated/Mitsubishi Corporation (supra) applies in such situations; Alcatel Lucent USA Inc (supra) can be explained as a decision turning upon its facts; its seemingly wide observations, limited to the circumstances of the case. This Court, therefore, holds that the view taken by ITAT was correct; the primary liability of deducting tax (for the period concerned, since the law has undergone a change after the Finance Act, 2012) is that of the payer. The payer will be an assessee in default, on failure to discharge the obligation to deduct tax, under Section 201 of the Act.
8.1 Respectfully following the decision of this tribunal in GE packaged power Inc. (Supra), we are inclined to allow the ground of appeal raised by the assessee.
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Ground No. 10
Assessee has also raised an issue that the AO did not give credit to the TDS paid. The Ld.AR has submitted that the AO may be directed to grant appropriate credit of TDS as claimed by the assessee in its return.
9.1 We accordingly direct the AO to grant credit of TDS in accordance with law. Accordingly this ground raised by the assessee stands statistically allowed.
Ground No. 11
The Ld. A.R. submits that this ground is not pressed accordingly we do not adjudicate the same.
In the result the appeal filed by the assessee stands allowed.
Order pronounced in open court on 21st June, 2016.
Sd./- Sd./- (N. K. SAINI) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Date: 21.06.2016 Sp. Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi. 5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy. By Order (ITAT, New Delhi)
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S.No. Details Date Initials Designation 1 Draft dictated on Sr. PS/PS 2 Draft placed before author Sr. PS/PS Draft proposed & placed before 3 JM/AM the Second Member Draft discussed/approved by 4 AM/AM Second Member Approved Draft comes to the 21/6/16 5 Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement 21/6 Sr. PS/PS 7 File sent to Bench Clerk 21/6 Sr. PS/PS Date on which the file goes to 8 Head Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order