M/S. KSS ENGINEERING LTD.,MUMBAI vs. ACIT, NEW DELHI

The present appeal has been filed by the assessee against the order passed by ACIT (International Taxation) 2(1)(2), New Delhi u/s 143(3) read with section 144C of the I.T. Act, vide order dated 07.01.2015.

Brief facts of the case as recorded by the ld. Assessing Officer are as under: Return of income was filed by the assessee on 29/09/2012 declaring total income as NIL. The return was selected for scrutiny assessment. During the course of the assessment proceedings, the assessee had submitted that the assessee company is incorporated in Malaysia. During the relevant assessment year the assessee was awarded a contract by Consortium of Valentine Maritime Limited (VML) and Valentine Maritime Mauritius Limited (VMML) for installation of pipeline crossing and free span corrections for MHN pipeline. The ld. Assessing Officer noted that the major scope of work of the assessee involved; • providing appropriate resources and material to perform the work, • performing pipeline crossing, • installing approximately 120 submarine pipeline crossings and 5 submarine pipeline free span corrections, • performing as-built post installation; • submitting as-built drawings of the completed installation for each crossing location with video recordings. The said project started on 09/02/2011 and the assessee had earned revenue’s amounting to Rs. 19,21,43,700/- from the said project.

During the course of the assessment proceedings, the assessee was required to show cause as to why the receipts during the year should not be treated as Fees for Technical Services (FTS) under the Income Tax Act, 1961. It was submitted by the assessee at the time of assessment proceedings that the contract was for execution of the works contract and not for rendering technical services. The assessee submitted before the ld. Assessing Officer that income received for executing works contract should not be treated as FTS. The assessee submitted that its income is not cheargable to tax in India as it has no permanent establishment(PE) in India in accordance with the provisions of Article 5(2)(j) of the India- Malasia Tax Treaty. The ld.AO worked out the assessee’s income at Rs.1,92,14,370/-, being 10% of the gross receipts u/s.44BB and taxed the same by holding as under; “4. The submissions filed by the assessee are duly considered. The assessee has undertaken a contract for instillation of submarine pipeline crossings and submarine pipeline free span corrections. This contract is executed in India. The main contract was awarded by an Indian concern i.e. ONGC, which is the primary source of receipts of assessee. This establish a clearcut business connection of the assessee in India as per section 9(1) (i) of the Act. The assessee is carrying out its activities through a barge on which the crew of the assessee is situated. Article 5(1) of the India-Malasia DTAA provides that the ‘permanent establishment’ means a fixed place of business of an enterprise is wholly or partly carried on. Accordingly to constitute a PE, the assessee should have a fixed place available to it for performing its business activities and it is not necessary that ‘fixed place’ means a place fixed to the ground. Hence, if a business is carried out in a specific location through a ship, then such ship will also be treated as ‘permanent establishment’. Accordingly the barge of the assessee from which it carries on its business activities shall constiture PE of the assessee under Article 5(1) of the India- Malsia DTAA.”

Aggrieved by the draft assessment order the assessee filed its objection before the DRP. Before the DRP, the assessee placed reliance on the rolling of Global Industries Asia Pacific Pvt. Limited (AAR No. 936/2010), wherein it was held that even if the part of the income of the assessee falls under royalties “Fees for Technical Services”, there is no scope to assess such receipts under these heads, once it is held that the income is from its oil exploration and production activities as envisaged u/s 44BB. The assessee contended before the DRP that the provisions of Article 5(2)(j) being specific provision will have an overriding effect over the general provisions contained in Article 5(1). However, the ld. Assessing Officer held that the PE of the assessee came into existence upon the event of starting work and the assessee’s case does not fall in the purview of Article 5(2)(j). The ld. DRP held as under: 5.4 “Various clauses of the subcontract show that the subcontract is indivisible with the main contract between ONGC and the Consortium of VML and VMML and the revenue received by the assessee in pursuance of such subcontract was taxable in India right from the beginning to the extent profit attributable to such PE. In the case of the assessee, the PE was established under Article 5(1), therefore, one does not need to go to the provisions of Article 5(2) as the assessee fails to establish that when the ship/barge was brought into India and when the same departed from India with the help of Certificate of competent Authorities including Custom Authority. Therefore, it can be said that on which specific day the assessee came to India and left India. To examine the contention of the assessee, it is necessary to dwell upon the terms of the contract to find out whether the contract was divisible one. The nature of work of the assessee started from the survey to be done with regard to the activity of pre-engineering, pre and post installation and it include design, engineering, procurement, fabrication, and corrosion and weight coating, load out, the down/sea fastening, tow out/sail out, transportation, installation, modifications at existing facilities, hook up testing, etc. Thus, it can be seen that the contract obtained by the Consortium of VML and VMML from ONGC and thereafter subcontract by the assessee is a composite contract starting right from surveys of pre-engineering, pre- construction/pre-installation, design engineering procurement etc. till the startup and commissioning of the entire facilities. Even post-installation, the assessee is required to do all work covered by warrantee and falling in warrantee period.”

We have gone through the records and the orders passed by the authorities below. The assessee brought to our notice that, the DRP has held in para 5.3 of their order as under; “From the above submission of the assessee, it is clear that the assessee has accepted that it has PE as per the provisions of Article 5(1); however, it has no PE as per the provisions of Article 5(2)(j).” The assessee submits that there was no such admission on behalf of the assessee.

The DRP in para 5.4 of their order, makes a categorical finding that the assessee failed to establish as to when the ship/barge was brought into India and when the same departed from India, when the help of certificate of competent authorities including custom authority, vide para 5.4 of their order.

In lieu of the above finding of DRP, the ld. AR, has filed documents under Rule 29 of the Act. In our considered opinion, these documents would be necessarily to be adjudicated upon, to establish as to whether, the assessee is a PE in India or not. As these documents has not been filed before the DRP, or before ld. AO, they have not had an opportunity to verify and adjudicate upon the same. We therefore set aside the issue to the ld. Assessing Officer de novo for fresh adjudication, with all objections and contentions kept open for both the parties. In lieu of the above discussion, we set aside the matter back to the files of the ld. Assessing Officer.