SAMSUNG C & T CORPORATION,GURGAON vs. CIT (INTERNATIONAL TAXATION), NEW DELHI
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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI G.S. PANNU & SHRI SAKTIJIT DEY
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI
BEFORE SHRI G.S. PANNU, PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA No. 34/DDN/2019 Assessment Year: 2014-15
Samsung C & T Vs. CIT (1nternational Taxation)-3, Corporation, Room No. Dehradun 405, 4th Floor, E-2 Blcok, Pratyakshkar Bhawan, Civic Centre, J.L. Nehru Marg, New Delhi-1100 02
PAN :AAHCS4920M (Appellant) (Respondent)
Assessee by S/Shri Girish Dave & Tanzil Padvekar, Adv. & C.P. Singh, CA Department by Smt. Sapna Bhatia, CIT(DR) & Shri Sanjay Kumar, Sr. DR Date of hearing 26.12.2022 Date of pronouncement 24.03.2023 ORDER PER SAKTIJIT DEY: JUDICIAL MEMBER: Captioned appeal by the assessee arises out of an order dated
27.03.2019 of learned Commissioner of Income-Tax (International
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Taxation-3), New Delhi passed under Section 263 of the Income-Tax
Act, 1961 pertaining to assessment year 2014-15.
The grounds raised by the assessee are as under:
On the facts and in the circumstances of the case and in law, Ld. CIT has erred in invoking the jurisdiction under Section 263 of the Income-Tax Act, 1961 and in holding the assessment order dated 01.12.2016 as erroneous as well prejudicial to the interest of revenue on frivolous grounds.
On the facts and in the circumstances of the case and in law, the Order passed under Section 263 of Act by the CIT is void-ab-initio, without jurisdiction and untenable in law.
On the facts and in the circumstances of the case and in law, Ld. CIT erred in passing the order under Section 263 of the Act in gross violation of the principles of natural justice.
On the facts and in the circumstances of the case and in law, Ld. CIT has erred in directing the Assessing Officer to make enquiries regarding existence of PE which issue was already examined by the Ld. Assessing Officer to his satisfaction in the course of assessment proceedings.
On the facts and in the circumstances of the case and in law, Ld. CIT erred in directing the Ld. Assessing Officer to make verification of items contained in Paras (10) to (13) of his order which items were already examined by the Ld. Assessing Officer in the course of regular Assessment Proceedings.
On the facts and in the circumstances of the case and in law, the notices issued by Ld. CIT are vague, cryptic and
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confusing resulting into roving inquiries which is against the settled law in this regard.
Each of the grounds above is to the exclusion of each others.
The appellant craves the right to add, amend, alter, modify or substitute any of the grounds at the time of hearing.
Briefly, the facts are, the assessee is a non-resident corporate
entity incorporated in South-Korea and a tax-resident of South Korea.
On 01.10.2012 Delhi Metro Rail Corporation (DMRC) issued a tender
notice inviting bids for work of design verification, detail engineering,
supply, installation, testing and commissioning of Environmental
Control System (ECS) and Tunnel Verification System (TVS) for
underground stations of Line 6 and Line 7 of Delhi Mass Rapid
Transportation System Project Phase III. The assessee along with its
Indian subsidiary viz. Samsung C & T India Pvt. Ltd. (Samsung India)
formed a consortium to jointly bid for the work proposed by DMRC.
Being successful in the bid, DMRC awarded the work by executing
two separate contracts with the consortium partners on 21.10.2013.
Contract with the assessee was for offshore CIF supply of plant and
equipment to be made in foreign currency, including, design
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verification and engineering. Whereas, the contract with Samsung
India is for on shore supply and services to be paid in Indian currency
including customer clearance, transportation to site, erection,
installation, testing and commissioning of ESC and TVS including
integrated testing.
For the assessment year under dispute, assessee filed its return of
income on 28.11.2014 declaring nil income. The reason being,
according to the assessee, for offshore supply of plant and equipment
having been made outside Indian Territory and transfer of title over
goods having taken place overseas outside India no taxable event has
happened in India. Hence, the income earned from offshore supply of
plant and equipment is not taxable in India. Further, to get a clear
picture on taxability of the amount received against offshore supply of
plant and equipment, the assessee sought an advance ruling from the
Authority for Advance Ruling (AAR) by filing an application on
24.12.2013. Vide order dated 05.10.2015 the AAR admitted the
application of the assessee. Be that as it may, during pendency of
application before the AAR, the Assessing Officer initiated assessment
proceedings under Section 143(3) of the Act by issuing notices under
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Section 142(1) and 143(2) seeking/calling for various information and
details as well as explanation of the assessee on various issues. In
response to the queries raised by the Assessing Officer, the assessee
furnished the necessary details as well as submissions from time to
time. Ultimately, the Assessing Officer completed the assessment
under Section 143(3) of the Act vide order dated 01.12.2016 accepting
the income returned by the assessee. Subsequent to the completion of
assessment, learned CIT, in exercise of powers conferred under
Section 263 of the Act, called for and examined the assessment record
and while doing so was of the view that the assessment order is
erroneous and prejudicial to the interest of the Revenue as the
Assessing Officer has not carried out necessary inquiries and
investigation on certain issues. Accordingly, she issued a show-cause-
notice, purportedly, under Section 263 of the Act to the assessee
seeking response on the following four issues:
a) Why shouldn’t Contract A (Offshore supply ) & Contract B (Onshore services ) be regarded as one composite contract and assessment be framed accordingly.
b) That in light of the GSA why shouldn’t the presence of business PE be presumed to be in India and the income be brought to tax accordingly.
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c) That why shouldn’t the Surety Commission and other such receipts be brought to ax in India.
d) That why shouldn’t Transfer Pricing adjustment be crried out in respect of the transactions with M/s. Samsung C & T India P Ltd. and M/s. Samsung C & T Corporation India P. Ltd.
In response to the show-cause-notice, the assessee furnished its
reply with supporting details. Further, in course of revisionary
proceedings, learned CIT issued couple more notices seeking further
clarifications/details from the assessee.
After considering the submissions of the assessee, learned CIT
opined that assumption of jurisdiction for initiating proceedings under
Section 263 of the Act is valid as the assessment order passed is
erroneous and prejudicial to the interest of the Revenue due to lack of
proper inquiry by the Assessing Officer. In this context, she observed,
while completing the assessment, the Assessing Officer has failed to
examine the following:
i) Existence of Permanent Establishment (PE) and the role and involvement of PE in offshore supply of plant and equipment. According to learned CIT, both the contracts relating to offshore supply of plant and equipment and onshore services and supply are interlinked in the sense that
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non-execution of one of the contracts will have a direct impact on the other;
ii). The books of accounts of Samsung India reveal that the Indian subsidiary has been paying salary to assessee’s personnel located in India. This is suggestive of the fact that for executing the DMRC Project, the assessee is maintaining a fixed place of business through a project office which constitutes a PE under Article 5 of India- Korea Double Taxation Avoidance Agreement (DTAA). Therefore, profit earned from the project should be attributed to the PE;
iii) Though, the assessee offered an amount of Rs.39,84,88,792 as FTS and paid tax under Section 115A of the Act, however, from the financial statement by Samsung India with the Ministry of Corporate Affairs available in the website of the Ministry, it was found that the actual receipts of the assessee was to the tune of Rs.41,86,43,064. Thus, there is a difference of Rs.2,01,54,272 between the receipts shown by the assessee in the return of income and actual receipts as per books of accounts of Samsung India;
iv) The Assessing Officer failed to examine whether the receipts of more than Rs. 4,00,00,000 on account of surety was offered to tax; &
v ) The Assessing Officer failed to examine whether the assessee had any transaction with its Indian AEs and accordingly failed to examine the case from the point of view of transfer pricing issue.
Thus, on the aforesaid premises, she ultimately concluded that
the assessment order passed is erroneous and prejudicial to the interest
of Revenue and accordingly cancelled and set aside the assessment
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with a direction to make a proper enquiry on the issue enumerated in
the revision order and frame a fresh assessment order.
Before us, learned counsel appearing for the assessee submitted,
none of the issues on which learned CIT has held the assessment order
to be erroneous and prejudicial to the interest of the Revenue are valid
issues for invoking jurisdiction under Section 263 of the Act. He
submitted, the amount received against offshore supply of plant and
equipment cannot be made taxable in India, as, in terms of the
contract, the material and equipments were supplied to DMRC from
outside India and the sale consideration was paid to the assessee
outside India in foreign currency. Thus, he submitted, the sale
transaction having completed outside the territory of India, the income
is not taxable in India. He submitted, the conclusion drawn by the
revisionary authority that two separate and independent contract
entered by DMRC for offshore supply of material and equipment and
onshore services and supply, installation, commissioning etc. is a
composite contract is not based on material on record. He submitted,
when the contractee has entered into two separate and distinct
contracts, one for offshore supply and the second one for onshore
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services, both cannot be clubbed together to consider as a single
contract. He submitted, the scope of work under both the contracts is
well defined and has to be performed by the concerned entities.
Therefore, the offshore supply contract has no link with the contract
for onshore services, supply, installation, commissioning etc. He
submitted, for getting a clarity on this particular issue, the assessee
had filed application seeking a ruling from AAR and the AAR had
admitted the application of the assessee.
Drawing out attention to section 153(1)(vii), of the Act, he
submitted, the Assessing Officer should not have proceeded to
complete the assessment as the assessment was not getting barred by
limitation in view of exception provided in the aforesaid provision.
Proceeding further, he submitted, while commenting upon the
application filed by the assessee before AAR, the Assessing Officer in
his reply dated 04.03.2014 had observed that the contracts awarded by
the DMRC to the consortium is composite contract which has been
divided to two contracts with the intention of claiming tax benefit. He
submitted, in a further report dated 18.12.2017, the Joint
Commissioner of Income Tax with reference to proceedings before
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AAR pointed out that despite the pendency of proceedings before
AAR, assessment has been completed. He submitted, after receiving
the report of the JCIT, the CIT in letter dated 18.12.2017 forwarded
the report of the JCIT and also intimated that notice under Section 263
of the Act has been issued to revise the assessment order. Thus, he
submitted, when the proceeding was pending before the CIT on the
issue of taxability of receipts from offshore supply of plants and
equipments, proceedings under Section 263 of the Act could not have
been initiated.
Without prejudice, learned counsel submitted, in course of
assessment proceedings, the Assessing Officer had conducted
necessary inquiry with regard to the nature and character of receipts
from offshore supply of plants and equipment by calling for copies of
contracts, invoices raised and various other details. In this context, he
drew our attention to notice dated 13.07.2016 issued under Section
142(1) of the Act. He submitted, in response to the notice issued, the assessee furnished his reply on 12th October, 2016 with all the details
called for. He submitted in the reply, the assessee had very clearly and
categorically submitted that it is a non-resident company and its entire
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control and management is situated outside India. He submitted, after
considering the nature of contract, various other details and the
submissions of the assessee, the Assessing Officer completed the
assessment accepting the claim of the assessee. Thus, he submitted, it
cannot be said that the assessment order is erroneous and prejudicial to
the interest of the Revenue for non-examination of taxability of
amounts received towards offshore supply of plants and equipment
having reference to the PE. He submitted, in any case of the matter,
taxability of amounts received towards offshore supply of
goods/material is a highly debatable issue in view of the decision of
the Hon'ble Supreme Court in case of Ishikawajma-Harima Heavy
Industries Pvt. Ltd. 288 ITR 408 (S.C) AIR [2007] 929. He submitted,
Hon'ble Supreme Court while examining identical nature of dispute
has held that offshore supply of plant and equipment, wherein, title
over goods was transferred outside India cannot be made taxable in
India. He submitted, keeping in view the ratio laid down by the
Hon'ble Supreme Court, the view taken by the Assessing Officer can
be considered to be a plausible view. He submitted, as regards the
issue relating to PE, the assessee has clarified the position in course of
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assessment proceedings. He submitted, once it is established that there
is no PE of the assessee in India, the offshore supply cannot be linked
to any PE. As regards, the allegation of learned CIT that the Assessing
Officer has not examined whether the receipts of Rs.4,00,00,000 on
account of surety commission were offered to tax or not, learned
counsel for the assessee submitted, in reply dated 12.02.2018 to the
notice issued under Section 263 of the Act, the assessee had very
clearly and categorically submitted that the surety commission
amounting to Rs.4,04,15,466 was reported in Form 3CEB as corporate
guarantee and offered to tax in the return of income. Thus, he
submitted, the allegation of the revisionary authority on the issue is
contrary to facts on record. As regards the allegation of learned CIT
that the Assessing Officer has not examined whether the transactions
with related parties are subject to transfer pricing adjustment, learned
counsel submitted that in Form 3CEB report, that transaction with the
AE has been reported and there is no transaction with M/s. Samsung C
& T Corporation India Pvt. Ltd. during the year. As regards the
allegation of the revisionary authority that Indian subsidiary has been
paying salary to the personnel of the assessee based in India, learned
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counsel submitted, this issue was never put to the assessee either in the
show cause notice or in course of hearing. Thus, he submitted, the
order passed under Section 263 of the Act on such an issue is without
jurisdiction. As regards the allegation of the learned CIT regarding the
difference in the receipts offered to tax as FTS and the actual FTS
received by the assessee as per the information available in the
financial of the subsidiary with the Ministry of Corporate Affairs
website, learned counsel submitted, the issue was never confronted to
the assessee either in the show cause notice issued under Section 263
of the Act or in course of the revisionary proceedings. Thus, he
submitted, powers under Section 263 of the Act having been
erroneously exercised,, the revision order should be declared as
invalid and the assessment order be restored.
Strongly supporting the observations of the learned CIT in the
revision order, learned Departmental Representative submitted that
even during the pendency of proceeding before AAR, the Assessing
Officer can proceed with the assessment and complete assessment, as,
the exception provided under Section 245RR applies only to the
resident applicant. Proceeding further, She submitted, as per
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Explanation 2(a) to section 263 of the Act, the revisionary authority
can revise the assessment order, if, he is of the opinion that the order
was passed without making inquiry or verification which should have
been made. She submitted, while entering into contracts with DMRC,
a composite contract has been artificial split to two to derive
maximum tax benefit. She submitted, though, the assessee was very
much part of execution of both the contracts, since, the contracts are
interlinked, the Assessing Officer has not examined the taxability of
receipts of offshore supply of equipment by making necessary
inquiries and investigation. She submitted, even, whether a PE is in
existence or not has not been inquired into by the Assessing Officer by
calling for necessary documentary evidences. Thus, she submitted, for
not making proper inquiry on these issues, the assessment order is
erroneous and prejudicial to the interest of the Revenue.
As regards the other issues raised in the revision order, learned
Departmental Representative relied upon the observations of the
learned CIT.
We have considered rival submissions and perused material on
record.
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As discussed earlier, learned CIT has considered the assessment
order to be erroneous and prejudicial to the interest of Revenue on
four broad issues. However, the major issue relates to non-
consideration of taxability of receipts from offshore supply of
material/equipment in India having regard to the fact whether they are
linked to the PE of the assessee, if any, in India.
Learned CIT has observed that the Assessing Officer while
completing the assessment has not properly examined and enquired
into either the issue of taxability of receipts from offshore supply
keeping in perspective the fact that the contracts entered into by
DMRC for offshore supply and onshore services in reality is
composite contract and secondly, whether the offshore supply can be
linked to the PE of the assessee in India. Though, we have discussed
the facts earlier, however, at the cost of repetition, we must reiterate
that DMRC has executed two distinct and separate contracts with the
assessee and a subsidiary in India viz. Samsung C & T India Pvt. Ltd.
The contract with the assessee is for offshore supply of plant and
equipments. Whereas, the contract with the Indian subsidiary is for
onshore services. In so far as the offshore supply contract is
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concerned, factually, there is no dispute that the goods have been
supplied from outside India and the transfer of title over the goods
passed in favour of DMRC outside India. Even, the payments for
offshore supply of plant and equipment were made in foreign currency
through letter of credits and received by the assessee in Korea. Copies
of the invoices, bill of lading and bill of entry demonstrate that goods
have been consigned directly to DMRC from Korea. Thus, facts and
material on record, prima facie, establish that offshore supply of plants
and equipments concluded outside the territory of India. It is observed,
the assessee had moved an application before AAR seeking a ruling
on taxability of receipts under offshore supply contract. The specific
issue admitted by the AAR is whether offshore and onshore services
contract can be treated as composite contract. While the issue was
pending before AAR, the Assessing Officer proceeded to complete the
assessment under Section 143(3) of the Act, though, he was conscious
of the fact that the issue relating to taxability of offshore receipts from
offshore supply contract is pending before AAR. Probably, the
Assessing Officer proceeded to complete the assessment under a
misconception that the assessment is getting barred by limitation,
17 ITA No.34/DDN./2019
being oblivious to the exception provided under Section 153(1)(vii) of
the Act. Be that as it may, the report of the Assessing Officer in
response to the application filed by the assessee before AAR is
suggestive of the fact that the Assessing Officer was very much aware
of the issue relating to taxability of the receipts from offshore supply
contract. However, while completing the assessment under Section
143(3) of the Act, the Assessing Officer did not bring to tax the
receipts from offshore supply of plants and equipments. This can be
for two reasons, firstly, the issue was pending before the AAR and
secondly because of the ratio laid down by the Hon'ble Supreme Court
in case of Ishikawajma-Harima Heavy Industries Pvt. Ltd. 288 ITR
408 (S.C) and various other decisions following the ratio laid down by
the Hon'ble Supreme Court.
It is further observed, in course of assessment proceedings, the
Assessing Officer had issued a notice under Section 142(1) of the Act
seeking the following details/evidences:
Copies of Contracts entered into during the relevant period or already in force. Please explain the nature of activities involved under the contracts.
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Copies of balance sheet and profit and loss account/statement of computation of income as disclosed in the Income Tax Return. Please produce books of accounts maintained by you.
Details of gross receipts along with the evidences thereof viz copy of invoices raised and statement thereof.
Details of other incomes entered by you.
Details of other income earned by you but not offered for taxation by way of any reason. Please state the reason thereof.
Copies of order u/s. 195 and 197 of I.T. Act, 1961 issued in your case.
Details of expenses involved in execution of articles/works.\
Details of mob-demob, reimbursements received by you.
Details of payments made to NR’s for which no TDS has been made.
Details of payments made to NR’s (by whatever name called) even in the form of reimbursements related to the projects carried by you in India. Give details of Service Tax payments receipts and explain why the same has not been offered to tax and also why the service tax be not brought to tax.
Details of Associated enterprises/subsidiaries in India.
Details of work executed by associated enterprises/subsidiaries.
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Please note that the above details are called for all the payments made by you whether in India or abroad in respect of the contracts/agreements executed by you in India. Details to be filed along with documentary evidence wherever necessary.
As could be seen from the aforesaid notice, the Assessing
Officer made detailed inquiry by calling for the copies of contract
invoices, the nature of work executed under the contract, details of
AEs and subsidiaries in India, details of work executed by
AEs/subsidiaries.
In response to the queries raised by the Assessing Officer, the
assessee furnished a detailed reply with supporting evidences. In so far
as receipts from offshore supply contract, the assessee specifically
submitted that the transfer of goods having taken place outside the
territory of India, receipts are not taxable. Thus, the allegation of
learned CIT that the Assessing Officer has not examined the issue is
not borne out from the facts and material on record. In any case of the
matter, whether the receipts from offshore supply contract are taxable
in India or contracts are in the nature of composite contract or whether
such receipts are linked to the PE are highly debatable issues which
cannot be considered for exercising jurisdiction under Section 263 of
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the Act. Even, on the issue of existence or otherwise of PE in India,
not only before the Assessing Officer, but, in reply to the notice issued
under Section 263 of the Act, the assessee had categorically submitted
that it has no PE in India. Except making vague allegation that the
assessee has a project office in India which is in the nature of PE,
learned CIT has not demonstrated how it fits into the definition of PE
as per the treaty. Even assuming that there is a PE, unless, the offshore
supplies made are with active involvement of the PE, profit in relation
to such contract cannot be attributed to the PE. Therefore, merely on
conjecture, surmises and suspicion, PE cannot be established.
In so far as the issue of taxability of surety commission is
concerned, facts on record clearly establish that the assessee had
offered the surety commission to tax in the return of income.
Therefore, the allegation of learned CIT in this regard is completely
unfounded. In so far as the allegation made regarding non-
examination of transaction with Indian subsidiary from the point of
view of transfer pricing, it is observed that in the year under
consideration, the assessee has reported the transaction with Indian
AEs in Form 3CEB. In the said report, the assessee has claimed the
21 ITA No.34/DDN./2019
transaction to be at arm’s length. Learned CIT has not demonstrated
even remotely how the transactions are not at arm’s length. From the
following observations of learned CIT in paragraph 13 of the order, “it
is further observed from the record that there was possibility of the
assessee of having transaction with its AEs”, it appears that learned
CIT was totally oblivious of the fact that the assessee has furnished
report in Form 3CEB reporting the transaction with the AEs.
Therefore, the observations of learned CIT are in the nature of roving
and fishing inquiry without examining the facts and material on
record. In so far as the allegation of learned CIT that there is
difference in the quantum of FTS offered to tax by the assessee and
actually received and further that the Indian subsidiary M/s. Samsung
C & T India Pvt. Ltd. was paying salary to the personnel of the
assessee based in India, it is observed, these allegations were neither
made in the first show cause notice issued under Section 263 of the
Act dated 11.12.2017 nor they are part of subsequent notices issued by
the learned CIT on 31.01.2019 and 12.02.2019. Though, learned CIT
is empowered to consider fresh issues in course of proceedings under
Section 263 of the Act, even, if they are not part of the show cause
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notice issued under Section 263 of the Act, however, it is trite law,
learned CIT has to issue fresh show cause notice to the assessee
confronting the fresh issues on which the revisionary authority seeks
to revise the assessment order. This is not the case in the present
appeal.
It is also relevant to observe, at the time of exercise of
jurisdiction under Section 263 of the Act on the date of issuance of
show cause notice i.e. on 11.12.2017, admittedly, proceedings before
AAR was pending on the issue of taxability of receipts from offshore
supply contract. That being the case, learned CIT being conscious of
the fact that proceeding is pending before AAR should not have
initiated proceedings under Section 263 of the Act as two parallel
proceedings on the same issue, cannot be initiated at a given point of
time.
Thus, on overall analysis of facts and material on record and in
view of discussion made in the foregoing paragraphs, we are inclined
to conclude that the assessment order passed cannot be held to be
erroneous and prejudicial to the interest of the Revenue in the given
facts and circumstances of the case. Therefore, exercise of powers
23 ITA No.34/DDN./2019
under Section 263 of the Act in the facts of the present appeal is
invalid. Therefore, we are inclined to set aside the impugned order
passed under Section 263 of the Act and restore the assessment order.
In the result, the appeal is allowed as indicated above. Order pronounced in the open court on 24th March, 2023.
Sd/- Sd/- ( G.S. PANNU ) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 24th March, 2023. Mohan Lal
