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Income Tax Appellate Tribunal, MUMBAI BENCH “L”, MUMBAI
Before: SHRI G S PANNU & SHRI AMIT SHUKLA
आदेश ORDER �ी अिमत शु�ला, �या स: PER AMIT SHUKLA, JM:
The aforesaid appeals have been filed by the assessee against separate Final Assessment Order of even date 15.10.2012, passed under section 147 r.w.s. 143(3) r.w.s. 144C(13) in pursuance of direction given by the Dispute Resolution Panel –I (DRP) under section 144C(5) for the assessment years 2008-09 and 2009-10. Since the facts and issues involved in both the appeals are common, arising out of similar set of facts, therefore, same were heard together and are being disposed off by way of this consolidated order.
2 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 2. To understand the facts and implication thereof on the issues involved, we are taking-up the appeal for the assessment year 2008-09. In various grounds of appeal, the assessee has challenged: Firstly, initiation of reassessment proceedings under section 147; Secondly, treating the income from off shore supply to be taxable in India; Thirdly, treating the different contracts undertaken by the assessee to be one composite contract and on that basis taxing the entire revenue in the hands of the assessee under section 44BBB; Fourthly, taxing of fee for Technical services / royalty income received from ABB Limited and ABB Global Industries & Services Limited @ 40% (plus surcharge and education cess) instead of 10% as per DTAA; Lastly, the assessee has challenged the non giving of credit of tax deducted at source (‘TDS’); levy of interest under section 234B and 234C; and initiation of penalty proceedings under section 271(1)(c) by the AO.
Before us, the Ld. Senior Counsel Mr. Perci J. Pardiwalla, submitted that in this case the reopening of assessment under section 147 vide notice dated 25.03.2011 u/s 148 is itself is bad in law and accordingly, the entire proceedings as well as the impugned orders are void ab initio. Explaining the background of the case, he submitted that, assessee, ABB Switzerland Ltd. is a non-resident company, incorporated under the laws of Switzerland. The assessee, in the statement of total income filed along with the return of income in India under section 139(1) on 29.09.2008, had shown income from two streams, one from royalty/fees for technical services from ABB Switzerland Ltd.; and Secondly, training fees received from Power Grid Corporation of India Ltd., both aggregating to Rs.1,98,92,630/-. The assessee in India had entered into a contract with Power Grid Corporation of India Ltd. in respect of supply and installation of a project in connection with
3 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 substation at New Delhi. The said project had three component; offshore supply; on shore supply and on-shore services. In the notes to the statement of total income, the assessee had disclosed following information:
“As per Article 12(2) of the DTAA between India and “Switzerland Royalties and Fees for Technical Services" arising in India are taxable at 10% of the gross amount of royalties/fees. Accordingly, tax liability has been computed at the rate of 10%.
vide agreement dated 29 March 2005, the company entered into a contract with Power Grid Corporation of India Limited (“Power Grid”) for Off-shore supply of equipment and material from Switzerland for 400/220kv sub-station package at New Delhi associated with High Capacity East-North Inter Connector-II Project. For offshore supply of equipment and material the company received CHF 2,257,509 and SEK 410 199 and for testing of the equipments and materials in Switzerland the company received CHF 700,000 from Power Grid.
The company submits that since the sale is concluded outside India and same was on principal to principal basis, the amount received for offshore supply is not taxable in India. Attention in this connection is invited to circular No. 23 of 23 July 1969 issued by Central Board of Direct Taxes ("CBDT') where in it has been clarified that no liability will arise on accrual basis to the non-resident on the profits made by him where the transactions of sale between the two parties are on a principal to principal basis. The above position is also reiterated by Instruction No. 1829 dated 29 September 1989 issued by the CBDT.
The company in this connection also relies on the following
4 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 decisions wherein it was held that offshore supply is not taxable in India:
Ishikawajma-Harima Heavy Industries Ltd., Japan (288 ITR 108); 2. C1T v. Hyundai Heavy Industries Co. Ltd (291 ITR 482); 3. LG Cable Limited (ITA 4692/De112005) (Del). The testing fees of CHF 7,00,000 is part and parcel of supply contract. Before the equipment and material is supplied, the same is required to be tested for quality assurance. In view of the above the testing charges would also not liable to tax in India.
The company has received fees of CIIT 50,000 for imparting training in Switzerland to Power Grid. Equivalent INR 1,683,022 has been shown as liable to tax in this statement of total income.
The tax deducted at source from the above payments on the basis of certificate under section 197 issued by the Income Tax authorities is claimed as refund.
Income from Royalty/fees for technical services is offered for tax on Cash basis.
During the Financial Year 2007-08, certain employees of ABB Swiss came to India for assisting ABB India in respect of onsite services being provided by ABB India to their customers. However, there is no consideration that is charged by ABB Swiss for these services”.
Mr. Pardiwala pointed out that the assessee had disclosed the taxable income received from Power Grid Corporation of India Ltd to the extent of Rs.16.83 lakhs. However for the amount received on account of offshore supply contract of
5 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 Rs.11,55,16,714/-, the assessee had clearly stated and disclosed that same was not offered to tax because the sale was materialized outside India on principal to principal basis and therefore, in view of CBDT’s Circular as well as decisions of Hon’ble Supreme Court. The said return of income was duly accepted under section 143(1), which had attained finality.
After filing of the return of income disclosing the offshore supply information and the reasons for not chargeable to tax in India, the assessee’s case was reopened under section 147 by issuance of notice dated 25.03.2011 under section 148. The “reasons recorded” for reopening the assessment reads as under:-
“The e-return of income in the case was furnished on 29.09.2008 disclosing a total income of Rs.1,98,92,630/-. The case was not selected for scrutiny assessment and no assessment order u/s 143(3) was passed in this case. It is seen that the assessee has not offered an income of Rs.11,71,99,716/- received from M/s Power Grid Corporation of India Ltd on which though TDS was done, but, it was not offered to tax. Only the Royalty/FTS received from the sister concern in India was offered to tax.
The assessee received a contract for installation and commissioning of a power project in India. The assessee has treated such receipts as exempt from tax in India. It is seen that the entire contract is divided into three parts – offshore supply contract, onshore supply contract and onshore services contract.
The scope of works comprises of:
a) Offshore contract for supply of equipment and materials outside India on C/F port of disembarkation basis, in addition to training to be conducted outside India;
6 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 b) Onshore supply contract for design, engineering, manufacture, testing at manufacturer’s work, transportation and insurance and ex-works supply of all the equipment and materials including mandatory spares from within India and testing required for the complete execution of the project.
c) On shore services contract which includes performance of all other activities in India inter-alia including port handling, port clearance, Inland transportation, insurance delivery on FOR destination site(s) basis, handling, storage, erection including associated civil works, testing and commissioning of equipment and materials including offshore equipment supplied including civil works, training in India etc.
d) Out of the above 3 contracts, the first contract i.e. offshore contract that is being directly executed by ABB Switzerland. The other two contracts, which are for onshore supplies and onshore services in India, are to be executed by ABB Ltd an Indian company under supervision of the assessee.
The assessee remains responsible for execution of full contract. It has provided a contract performance security and the risks in the execution of the contract are borne by the assessee. This shows that the equipment sale would not be completed till the satisfactory performance and delivery of the whole system to Power Grid.
The assessee is the contractor of the contract. The contract was awarded to the assessee. The responsibility for successful completion of project lies with the assessee. The contract documents states as under:
7 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 WHEREAS the Employer is desirous to get the works for 400kV/220kV Navasari (New) GIS Substation (hereinafter called the “Project”) executed by the Contractor, and invited bids for the same and has accepted the bid of ABB Switzerland Limited, Switzerland, submitted by them vide proposal ref. no. PTHS-V080885 dated 07/09/2009 read along with discount letter dated 07/01/2009. ABB Switzerland Limited, Switzerland under the terms of their proposal have requested POWERGRID to award the Off-shore Contract for the Project on them and have further proposed M/s. ABB Limited, 14, Masthura Road, Faridabad, Haryana, India (ABB) as their Assignee for the purpose of executing the On Shore Supply Contract and on Shore Services Contract and furnished ABB India's written unequivocal consent vide their letter ref PTHS-V080885 dated 16.12.2008 (enclosed in their bid) to work as Employer's independent Contractor, on the terms and conditions as laid clown in the Bidding Documents. WHEREAS the assignment proposed as above by ABB-SA has been accepted by POWERGRID, subject to the condition that ABB-SA shall be overall responsible and liable for the execution of all the three Contracts irrespective of the fact that POWERGRID will enter into the "First Contract" with them and the "Second Contract" and the "Third Contract' with ABB INDIA. Further, in the Contract documents, for "First Contract" the word "Contractor” shall mean ABB-SA who had submitted the bid and shall for the purpose of "Second Contract” and "Third Contract" include ABB the permitted Assignee of ABB-SA. Accordingly, without prejudice to the overall responsibility and the liability of ABB-SA for the execution of all three Contracts, the word Contractor wherever appearing in "Second Contract" and the "Third Contract" shall also mean ABS. Accordingly, the On-shore Services Contract and On-Shore Supply Contract awarded to ABS on the same terms and conditions as offered by ABB-SA to POWERGRID, such that the Scope of works shall be undertaken in three distinct Contracts as follows: An off-Shore Supply Contract, No. .. in favour of ABB a) An on-Shore Supply Contract, No. .. in favour of ABB-I b) ..... . An On-Shore Service Contract, No. . in favour of ABB- c) I And whereas POWERGRID after examination of the proposal of ABB have agreed for awarding the total scope of work under three distinct Contracts, in the above manner, subject
8 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 to overall responsibility for successful performance of the project resting with ABB and for award of the Off-Shore Contract to them. Thus, the Contractor for the project is the assessee i.e. M/s. ABS Switzerland. The parties doing on-shore supply and on- shore service is ABB India Ltd, a sister concern of the assessee. The arrangement is basically an attempt to evade taxes in India by adopting colourable devise The assessee got the entire contract an subcontracted the on-shore services to its Indian associate enterprises. The only difference is that instead of directly making the contract with the Indian Associate Enterprise (AE), the assessee requested the Powergrid Corporation to enter into contract with its Indian associate enterprises (AE). The assessee requested the Powergrid Corporation to enter into contract with its Indian Associate Enterprises (AE), the assessee requested the Powergrid Corporation to enter into contract with its Indian AE. While the assessee retained the off--shore supply, the other two aspects of the work was assigned to the Indian counterpart at its behest. However, as per the-agreement, the entire responsibility for installation and, commissioning, testing etc'. lies with the assessee only.
The actual nature of contract is more important tool to arrive at the actual nature of transactions. In this case, the assessee got the contract from a Government of India body i.e. The Power Grid Corporation of India Ltd. The project is an approved project. It is a turnkey project. Therefore, prima- fade, provisions of section 44BBB are applicable to the assessee. The assessee is engaged in the business of erection of plant of a power plant. All the conditions required to fulfill the conditions laid down in section 44BBB are fulfilled by the assessee.
Therefore, the provisions of section 44BB is squarely applies.
9 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 Also the assessee has a Permanent Establishment in the form of its AE and it also has an office in India.
As per the provisions of section 44BBB, 10% of the Gross Receipts is income of the assessee. Thus the assessee failed to disclose income to the extent of Rs.1,17,19,971/-
I am satisfied that the income to the extent of Rs.1,17,19,971/- has escaped assessment within the meaning of section 147 of the I.T. Act. Therefore notice u/s 148 is issued to the assessee”.
Mr. Pardiwala submitted that from the perusal of the “reasons recorded”, it can be seen that, AO in the first part highlights the scope of the contract work and draws a presumption that, assessee remains responsible for the execution of full contract including offshore supply of equipment which is part of the same contract, therefore, income has to be seen from a contract as a whole; and in the second part AO notes down the content of the contract document to come to a conclusion that income from this contract has escaped assessment. However, the contract document which has been referred by him is dated 12th September, 2009 whereas, during the year, as disclosed by the assessee, the assessee had carried out the contract work on the basis of Contract Agreement dated 29th March, 2005. The entire premise of the AO in his “reasons recorded” is the contract document of year 2009, which admittedly does not relate to work carried out by assessee in this year nor any income has been generated from this contract, therefore, on the basis of a different contract document, he cannot entertain ‘reason to believe’ that the whole of the amount from the project is taxable under section 44BBB, that is, @ 10% of the gross receipts of the income and consequently no income chargeable to tax can be said to have escaped assessment. Thus, the entire factual substratum on which the AO has entertained the ‘reasons to believe’ in his “reasons recorded” were incorrect. In other words, the jurisdiction to reopen
10 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 the assessment under section 147 is based on the wrong presumption of facts. In the ‘reasons’, he has referred to contract of Navsari Project, whereas in this year the assessee had undertaken the project at New Delhi, which has been mentioned in the return of income. The income from Navsari contract has not even been brought to tax by the AO in his assessment order. This goes to show that there is variance of facts and material on which ‘reasons’ have been recorded and in the assessment order which has been passed in pursuance thereof. No addition has been made on the basis of the contract referred to in the ‘reasons recorded,’ hence the reasons are completely germane from the addition as well as the assessment. Further, from the records it can be seen that, the assessee vide letter dated 21.10.2011, in response to the show cause notice has furnished the copy of the contract of before the AO. This is evident from said letter appearing in paper book at pages 61 and 62. This inter-alia means that, at the time of recording the ‘reasons’ he did not even had the access to the contract, then how can he entertain reason to believe. Thus, the whole exercise of acquiring the jurisdiction by the AO is merely pretence and not based on any cogent material or foundational fact. In support of his contention, he strongly relied upon the order of the Hon’ble Bombay High Court in the case of Prashant Joshi, reported in [2010] 324 ITR 154. In this case he pointed out that the Hon’ble Bombay High Court has taken note of decision of Hon’ble Supreme Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd, reported in [2007] 291 ITR 500 (SC) and held that the first and foremost condition is that conditions laid down in section 147 should be fulfilled. Not only that, they have taken note of Explanation 2(b) to section 147 and held that, under the main provision of section 147 existence of the belief has to be seen which is a foundation for reopening. He also referred and relied upon the decision of Hon’ble Delhi High Court in the case of Oriental Insurance Co. vs. CIT, reported in [2015] 378 ITR 421 for the proposition that, if the factual foundation of the ‘reasons is based on the wrong facts or is incorrect, then jurisdiction cannot be acquired
11 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 to reopen the case under section 147. He further submitted that, before the AO the assessee vide its objection dated 29th June, 2011 had specifically pointing out to this fact which reads as under: “At the outset, we would like to clarify that in the reasons for reopening provided to us, your goodself has referred to 400kV/220kV Navasri (New) GIS Substation contract. However, 400kV/220kV Navasari (New) GIS Substation contract was entered on 12 September 2009 and not in this financial year. The agreement on the basis of which your goodself has formulated the belief that income has escaped assessment was entered in the assessment year 2010-11 and not in the assessment year 2008-09 and hence not applicable in the present case.
During the financial year the company has received income from Power Grid on off-shore supply of equipment and material from Switzerland for 400/220kv sub-station package at New Delhi associated with High Capacity East- North Inter Connector-II Project. The contract has been entered into vide agreement dated 29 March 2005”.
Mr. Pardiwala pointed out that the AO, in the assessment order, has stated that, it is typographical error; however, the whole context of the contract agreement which has been incorporated by him pertains to contract for Navsari Project only. He did not even have the New Delhi Project contract with him at the time of recording the “reasons” and, therefore, to presume that, he by mistake took note of Navsari project contract is absolutely baseless. Thus, he submitted that, the entire reopening is based on wrong presumption of facts and the “reasons recorded” on factually incorrect facts do not meet the requirement of law and same should be quashed. Finally, on similar proposition, he relied upon the following three decisions of the Tribunal:
12 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 (i) Addl. DIT vs. Black Batch Piachird Inc.; ITA No.3934/M/2007, order dated 10.07.2013; (ii) H V Transmissions Ltd vs. ITO in ITA No.2230/M/2010, order dated 07.10.2011; and (iii) Delta Airlines Inc. vs. ITO in ITA 3476/Mum/2008 order dated 30.11.2012.
On the other hand, the Ld. DR strongly relying upon the order of the DRP on this score submitted that, here in this case, the return has been accepted under section 143(1) and no scrutiny assessment has been passed under section 143(3), therefore, in view of the Explanation 2 to section 147 there is deemed case for reopening. This is a clear cut case of under statement of income by the assessee. The mentioning of Navsari Project of September 2009 is only a mistake otherwise the prima facie conclusion drawn by the AO in his “reasons recorded” are correct and the entertainment of ‘reason to believe’ about the escapement of income has been correctly done by the AO. The facts remains that, Powergrid Corporation of India Ltd has deducted TDS for the entire payment and despite that income has not been offered for tax by the assessee on whole of income received. The first part of the ‘reasons’ itself was sufficient to reopen the case dehors the agreement. It is an admitted fact that the assessee has not applied for non deduction of TDS under section 195. Thus, the entire foundational fact and the belief do exists in this case for reopening the assessment under section 147, because, what is required to be looked into is the prima facie material and based on that, whether any ‘reason to believe’ can be entertained. Here in case this limb of section 147 stands satisfied.
In rejoinder, Mr. Pardiwala submitted that, TDS was deducted @ 2.5% and assessee had claimed the credit of TDS on the income shown in India. In any case, deductibility of TDS by the payer does not lead to inference of taxability of the payee. Further,
13 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 Explanation 2 to section 147 has been dealt in detail by the Hon’ble Bombay High Court in the case of Prashant Joshi (supra). Thus, there cannot be deemed case for reopening once the foundational fact itself has been found to be incorrect. Lastly, on the issue that, first part of the reason itself is sufficient, he submitted that the first part merely refers to the scope of work for the contract and the factum of TDS. Nothing turns out from these facts. The AO’s ultimate ‘reason to believe’ that income chargeable to tax has escaped the assessment is based on contract of 12TH September 2009 which is a entirely a different contract, admittedly not applicable in the impugned year, because in this year the assessee has undertaken a contract for agreement dated 29th March, 2005 and income has been derived from this contract.
We have heard the rival submissions and perused the relevant finding given in the impugned orders qua the legal issue of validity of reopening under section 147. The assessee who is a non-resident company incorporated under the laws of Switzerland, has undertaken a contract work for installation of substation at New Delhi, vide agreement dated 29th March, 2005. In the return of income, the assessee had disclosed income mainly from two streams, firstly, royalty/ FTS and secondly, training fees received form Powergrid Corporation of India Ltd. in pursuance of the project of installing of substation package at New Delhi. In the return of income the assessee had duly stated that, so far as the income from offshore supply is concerned, the same is not taxable in India because, the sale was concluded outside India on principal to principal basis, and relied upon CBDT circular and Supreme Court decisions. Regarding other limbs of the project, the assessee has not disputed the tax liability and offered it for tax in return of income. The disclosure made in the return of income in this regard has already been incorporated above. The said return of income has been duly processed and accepted under section 143(1), therefore, the said income stood assessed in the aforesaid manner and had
14 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 attained finality. After the completion of assessment in this manner the case has been sought to be reopened u/s 147 by issuance of notice dated 05.03.2011 u/s 148. From the perusal of the “reasons recorded” as incorporated above, it is seen that, the first part consists of information that assessee had received an income of Rs.11,71,99,716/- from Powergrid Corporation of India Ltd. on which TDS has been deducted but same has not been offered for tax. This factum alone that TDS has been deducted does not lead to any inference that income from outsource supply to the assessee is taxable in India, especially when the sale has been concluded outside India on principal to principal basis. The second part of the “reasons” refers to the contract for project of installation which has been stated to be divided into three parts, viz., onshore supply; offshore supply; and onshore services and to demonstrate that the income from the project is one, AO has extracted a contract document in the “reasons” and thereafter, he concludes that it is one turn-key project, therefore, entire income is taxable in India in view of the provision of section 44BBB of the Income-tax Act. The contract document extracted therein is the substratum of AO’s belief which refers to a project of Navsari substation, which has been entered into on 12th September, 2009. This contract, admittedly, was not the source of the income for the assessee in this year, albeit from AY 2010-11 and the agreement on which assessee had carried out its contract work in this year is dated 29th March, 2009, that to be for installation of substation at New Delhi. Thus, the entire premise for entertaining ‘reason to believe’ is the contract agreement entered into September, 2009 and not the agreement which was the source of income in the impugned assessment year. It is well settled and trite law that AO can acquire jurisdiction to reopen the case under section 147 only when he has “reason to believe” that any income chargeable to tax has escaped assessment. Such ‘reason to believe’ must be based on tangible material and cogent facts having live-link-nexus with the income escaping assessment. If a wrong fact or material is the foundation for entertaining the ‘reason to believe’
15 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 then the whole edifice on which reasons to believe has been entertained collapses and falls in the realm of suspicion, pretence or surmises. A bona fide reasonable belief based on cogent material and information is a pre-condition that clothes the AO with power to reopen the assessment which otherwise has attained finality due to lapse of time. Not only the ‘reasons to believe’ must have direct nexus with formation of opinion of AO but it must also be based on a foundational fact and material. The Courts have held that, though sufficiency of material and belief entertained by the AO may not be gone into but it has to be seen that it must be base on cogent and relevant material and is rational belief entertained in a good faith.
Before us, the Ld. DR has submitted that, in view of Explanation 2 clause (b) wherein, if it is noticed by the AO that the assessee has understated the income then it is a deemed case of escapement of assessment and further here it is a case of assessment under section 143(1) therefore, principle laid down by the Hon’ble Supreme Court in the case of CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd., reported in [2007] 291 ITR 500 is fully applicable. First of all, the Hon’ble Supreme Court in the said case has held that, at the stage of issuance of notice under section 148, the AO must have ‘reason to believe’ that income chargeable to tax has escaped the assessment and at that stage established fact that income has escaped assessment is not required. However, the basic condition which needs to be satisfied is, whether there is any reason to believe or not. This precise issue has been dealt by the Hon’ble jurisdictional High Court in the case of Prashant Joshi (supra) after considering the ratio of the Hon’ble Supreme Court and clause (b) of Explanation (2) to section 147. The relevant observation of Their Lordships is reproduced hereunder:-
“16. Counsel for the Revenue submitted before the Court that in the present case, no assessment has taken place and at the stage of s. 143(1), there is only an intimation.
16 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 Reliance is sought to be placed on the judgment of the Supreme Court in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 210 CTR (SC) 30 : (2007) 291 ITR 500 (SC). The judgment of the Supreme Court in Rajesh Jhaveri (supra) has noticed the difference between the expression 'intimation and 'assessment' and the Supreme Court held that in the scheme of things an intimation under s. 143(1)(a) cannot be treated as an order of assessment. The Supreme Court held that there being no assessment under s. 143(1)(a), the question of a change of opinion, as contended did not arise. The judgment of the Supreme also emphasises what is meant by the expression "reason to believe" and the nature of the belief that is to be formed by the AO that the income for any assessment year has escaped assessment. The Supreme Court held that at the stage of the issuance of a notice under s. 148, the AO must have reason to believe that income has escaped assessment and at that stage an established fact that income has escaped assessment is not required. The Supreme Court held thus "Sec. 147 authorises and permits the AO to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word 'reason' in the phrase 'reason to believe' would mean cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is 'reason to believe', but not established fact of escapement of income. At the stage of issue of notice, the
17 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the AO is within the realm of subjective satisfaction." The Supreme Court held that so long as the ingredients of s. 147 are fulfilled, the AO is free to initiate proceedings under s. 147 and failure to take steps under s. 143(3) will not render him powerless to initiate reassessment proceedings even when an intimation under s. 143(1) had been issued. In other words, when an intimation has been issued under s. 143(1), the AO is competent to initiate reassessment proceedings provided that the requirements of s. 147 are fulfilled. In such a case as well, the touchstone to be applied is as to whether there was reason to believe that income had escaped assessment. Xxxx xxxx xxxx xxxxx xxxx xxxxx xxxx xxx xxx xxx xxx xxx 18. For all these reasons, it is evident that there was absolutely no basis for the first respondent to form a belief that any income chargeable to tax has escaped assessment within the meaning of the substantive provisions of s. 147. Explanation 2 to s. 147 creates a deeming fiction of cases where income chargeable to tax has escaped assessment. Clause (b) deals with a situation where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return. For the purpose of cl. (b) to Expln. 2, the AO must notice that the assessee has understated his income or has claimed excessive loss, deduction, allowance or relief in the return. The taking of such notice must be consistent with the provisions of the
18 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 applicable law. The act of taking notice cannot be at the arbitrary whim or caprice of the AO and must be based on a reasonable foundation. The sufficiency of the evidence or material is not open to scrutiny by the Court but the existence of the belief is the sine qua non for a valid exercise of power. In the present case, having regard to the law laid down by the Supreme Court it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. The reasons which have been recorded could never have led a prudent person to form an opinion that income had escaped assessment within the meaning of s. 147. In these circumstances, the petition shall have to be allowed by setting aside the notice under s. 148”.
Thus, the aforesaid decision of Hon’ble jurisdictional High Court clearly answers the objections raised by the Ld. DR.
Further, we find that, Hon’ble Delhi High Court in the case of Oriental Insurance Co. vs CIT (supra) have held that, if the reason entertained by the AO to reopen the assessment is based on incorrect facts then the entire exercise of reopening is bad in law. Here in this case also, the ‘reason to believe’ that assessee’s income has escaped assessment was without any factual basis , that is, was based on wrong material and facts. The entire foundational fact which has been taken into account by the AO for reopening is based on wrong fact and material which do not have any live-link nexus with escapement of income. It has been admitted even by the AO in the assessment order that it was a mistake which he has treated to be a typographical mistake. In our view, it is not a typographical mistake, albeit it is palpably incorrect assumption of fact. Here admittedly ‘reason to believe’ that income has escaped assessment is based on palpably erroneous reasons sans any tangible material or information,
19 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 therefore, such a reopening based on such wrong assumption of fact has to be quashed at the threshold in view of Hon’ble Delhi High Court. Accordingly, we agree with the argument of Senior Counsel and hold that in the present case “reasons recorded” do not meet the requirement of law and do not confer the jurisdiction to reopen the case under section 147 and accordingly entire proceedings under section 148 is held as void ab initio and same is hereby quashed. Consequently, the entire proceeding initiated by notice u/s 148 is held as null and void and therefore, the entire discussion on merits has been rendered purely academic hence, no adjudication is required. Accordingly the appeal of the assessee is treated as allowed.
In AY 2009-10 also, exactly similar “reasons” have been recorded, which for the sake of ready reference is reproduced hereunder:-
“The e-return of income in the case was furnished on 25.09.2009 disclosing a total income of Rs.2,02,40,140/-. The case was not selected for scrutiny assessment and no assessment order u/s 143(3) was passed in this case. It is seen that the assessee has not offered an income of Rs.17,26,161/- received from M/s Power Grid Corporation of India Ltd on which though TDS was done, but it was not offered to tax. Only the Royalty/FTS received from the sister concern in India was offered to tax.
The assessee received a contract for installation and commissioning of a power project in India. The assessee has treated such receipts as exempt from tax in India. It is seen that the entire contract is divided into three parts – offshore supply contract, onshore supply contract and onshore services contract.
The scope of works comprises of:
20 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 e) Offshore contract for supply of equipment and materials outside India on C/F port of disembarkation basis, in addition to training to be conducted outside India;
f) Onshore supply contract for design, engineering, manufacture, testing at manufacturer’s work, transportation and insurance and ex-works supply of all the equipment and materials including mandatory spares from within India and testing required for the complete execution of the project.
g) On shore services contract which includes performance of all other activities in India inter-alia including port handling, port clearance, Inland transportation, insurance delivery on FOR destination site(s) basis, handling, storage, erection including associated civil works, testing and commissioning of equipment and materials including offshore equipment supplied including civil works, training in India etc.
h) Out of the above 3 contracts, the first contract i.e. offshore contract that is being directly executed by ABB Switzerland. The other two contracts, which are for onshore supplies and onshore services in India, are to be executed by ABB Ltd an Indian company under supervision of the assessee.
The assessee remains responsible for execution of full contract. It has provided a contract performance security and the risks in the execution of the contract are borne by the assessee. This shows that the equipment sale would not be completed till the satisfactory performance and delivery of the whole system to Power Grid.
The assessee is the contractor of the contract. The contract was awarded to the assessee. The responsibility for
21 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 successful completion of project lies with the assessee. The contract documents states as under:
WHEREAS the Employer is desirous to get the works for 400kV/220kV Navasari (New) GIS Substation (hereinafter called the “Project”) executed by the Contractor, and invited bids for the same and has accepted the bid of ABB Switzerland Limited, Switzerland, submitted by them vide proposal ref. no. PTHS-V080885 dated 07/09/2009 read along with discount letter dated 07/01/2009. ABB Switzerland Limited, Switzerland under the terms of their proposal have requested POWERGRID to award the Off-shore Contract for the Project on them and have further proposed M/s. ABB Limited, 14, Masthura Road, Faridabad, Haryana, India (ABB) as their Assignee for the purpose of executing the On Shore Supply Contract and on Shore Services Contract and furnished ABB India's written unequivocal consent vide their letter ref PTHS-V080885 dated 16.12.2008 (enclosed in their bid) to work as Employer's independent Contractor, on the terms and conditions as laid clown in the Bidding Documents. WHEREAS the assignment proposed as above by ABB-SA has been accepted by POWERGRID, subject to the condition that ABB-SA shall be overall responsible and liable for the execution of all the three Contracts irrespective of the fact that POWERGRID will enter into the "First Contract" with them and the "Second Contract" and the "Third Contract' with ABB INDIA. Further, in the Contract documents, for "First Contract" the word "Contractor” shall mean ABB-SA who had submitted the bid and shall for the purpose of "Second Contract” and "Third Contract" include ABB the permitted Assignee of ABB-SA. Accordingly, without prejudice to the over all responsibility and the liability of ABB-SA for the execution of all three Contracts, the word Contractor wherever appearing in "Second Contract" and the "Third Contract" shall also mean ABB. Accordingly, the On-shore Services Contract and On-Shore Supply Contract awarded to ABS on the same terms and conditions as offered by ABB-SA to POWERGRID, such that the Scope of works shall be undertaken in three distinct Contract as follows: a) An off-Shore Supply Contract, No. .. in favour of ABB ……. b) An on-Shore Supply Contract, No. .. in favour of ABB-I ...... c) An On-Shore Service Contract, No. ..in favour of
22 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 ABB-I ……. And whereas POWERGRID after examination of the proposal of ABB have agreed for awarding the total scope of work under three distinct Contracts, in the above manner, subject to overall responsibility for successful performance of the project resting with ABB and for award of the Off-Shore Contract to them. Thus, the Contractor for the project is the assessee i.e. M/s. ABS Switzerland. The parties doing on-shore supply and on- shore service is ABB India Ltd, a sister concern of the assessee. The arrangement is basically an attempt to evade taxes in India by adopting colourable devise The assessee got the entire contract an subcontracted the on-shore services to its Indian associate enterprises. The only difference is that instead of directly making the contract with the Indian Associate Enterprise (AE), the assessee requested the Powergrid Corporation to enter into contract with its Indian associate enterprises (AE). The assessee requested the Powergrid Corporation to enter into contract with its Indian Associate Enterprises (AE), the assessee requested the Powergrid Corporation to enter into contract with its Indian AE. While the assessee retained the off--shore supply, the other two aspects of the work was assigned to the Indian counterpart at its behest. However, as per the-agreement, the entire responsibility for installation and, commissioning, testing etc'. lies with the assessee only.
The actual nature of contract is more important tool to arrive at the actual nature of transactions. In this case, the assessee got the contract from a Government of India body i.e. The Power Grid Corporation of India Ltd. The project is an approved project. It is a turn key project. Therefore, prima-fade, provisions of section 44BBB are applicable to the assessee. The assessee is engaged in the business of erection of plant of a power plant. All the conditions required
23 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 to fulfill the conditions laid down in section 44BBB are fulfilled by the assessee.
There is one more receipt of Rs.3,80,009/- received from M/s Gujrat Paguthan Energy Corporation Pvt Ltd the TDS on such receipts was made but it was not offered to tax.
Therefore, the provisions of section 44BB is squarely applies. Also the assessee has a Permanent Establishment in the form of its AE and it also has a office in India.
As per the provisions of section 44BBB, 10% of the Gross Receipts is income of the assessee. Thus the assessee failed to disclose income to the extent of Rs.2,98,769/-.
I am satisfied that the income to the extent of Rs.2,98,769/- has escaped assessment within the meaning of section 147 of the I.T. Act. Therefore notice u/s 148 is issued to the assessee”.
In this year also, admittedly, no income has been earned from the Navsari Project which is a contract agreement dated 12th September, 2009. Hence in this year also the reopening u/s 147 is again based on wrong assumption of fact qua the income earned by the assessee in this year, therefore, our finding given in aforesaid appeal will apply mutatis mutandis in this year also. Accordingly, we hold that, the entire reopening under section 147 is bad in law and hence the appeal of the assessee is treated as allowed.
In the result, both the appeal of the assessee stands allowed.
24 ABB Switzerland Ltd. ITA No. : 7527/Mum/2012 ITA No. : 7528/Mum/2012 Order pronounced in the open court on 15th June, 2016
Sd/- Sd/- (जी.एस. प�ू) (अिमत शु�ला) लेखा सद�य �याईक सद�य (G S PANNU) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Date: 15th June, 2016 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT(A) –Concerned/DRP-I, Mumbai. 4) The CIT/DIT Concerned__, Mumbai. 5) िवभागीय �ितिनिध “एल“, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “L” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, मुंबई Dy./Asstt. Registrar I.T.A.T., Mumbai
*च�हान व.िन.स *Chavan, Sr.PS