ITA NO. 5168/Del/2010
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "E", NEW DELHI
BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER
AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
I.T.A. No. 5168/Del/2010
A.Y. : 2007-08
M/s National Petroleum vs. Addl. Director of Income Tax
Construction Company, (Intl. Taxation),
C/o Pricewaterhouse Coopers Pvt. Dehradun,
Ltd., Building NO. 10, Floor 17, 13-A, Subhash Road,
Tower-C, DLF Cyber City, Dehradun
Gurgaon 122002
(PAN: AAACN7799J)
(Appellant ) (Respondent )
Assessee by : Sh. C.S. Agarwal, Sr. Adv., Sh. R.P.
Mall, Adv., Sh. Nitin Vaid, Sh.
Anuj Kansal, Sh. Sandeep Nagpal
Department by : Sh. Ashwani Kumar Mahajan,
C.I.T.(D.R.)
ORDER
PER SHAMIM YAHYA: AM
This appeal by the Assessee is directed against the order of the
Assessing Officer dated 26.10.2010 pertaining to assessment year
2007-08 passed under section 143(3)/144 of the I.T. Act, 1961.
2. The grounds raised read as under:-
1. That the learned ('Ld') Assessing Officer ('AO') has grossly erred both on facts
and in law, in computing the income of the appellant company at Rs.
164,52,67,897/- against the declared income of Rs. 10,77,98,1661/-.
2. That in framing the assessment, the Ld. AO has erred in holding that the
appellant had entered into a turnkey project, and as such is to be assessed on
1
ITA NO. 5168/Del/2010
the gross turnover and the net taxable income is estimated by him @ 25% of
such gross turnover. In doing so, he has failed to appreciate that, the income
of the appellant, a Tax Resident of the United Arab Emirate ('UAE'), is to be
computed in accordance with the provisions of the Double Taxation Avoidance
Agreement ('Treaty') entered between India and UAE and only so much of the
income, as is attributable to the purported construction Permanent
Establishment ('PE') could alone be taxed in India.
3. That the Authorities below have failed to appreciate that, the appellant could
not be held to have any PE in India within the meaning of Article 5 (1) of the
treaty.
4. That learned A.O. has failed to comprehend that in fact, in the preceding
assessment years too since A Y 1997-98, there had been no finding that the
appellant had any PE when it had entered into a similar contract with ONGC,
and as such in the absence of surfacing any fresh evidence or material the
learned A.O. exceeded in his jurisdiction in holding that the appellant has a
P.E. in India and the entire receipts even for the activities undertaken and
completed outside India could be taxed in India and that too by arbitrarily
estimating such an income @25% of the gross value of supplies made from
outside India.
5. The findings recorded by the Ld. A.O. and that too, without giving any show
cause notice or confronting any fresh material according to law, is untenable
and thus the conclusion that the appellant has a P.E. in India or that the
purported/alleged project office of the appellant can be regarded as a P.E., is
vitiated finding both on facts and in law and could not be regarded as any
valid basis for framing the assessment.
6. That the Ld. A.O. has failed to appreciate that there is a distinction between
'construction PE' within the meaning of Article 5(2)(h) and the PE as defined
under Article 5(1) of the Treaty, and as such only such income as is
attributable to the construction PE could only be assessed to tax as had been
assessed in the preceding years.
7. That the Ld. DRP could not validly have upheld the proposed assessment
without either appreciating and correctly comprehending grounds NO.2, 3 & 4
of the grounds of objections raised before it and despite the fact that the Delhi
Bench of the Income Tax Appellate Tribunal ('ITAT') in identical circumstances
in the case of C.I.T. vs. M/s Hyndai Heavy Industries Co. Ltd. reported in 31
SOT 482 has held that merely, where an appellant is engaged in installation of
platform at High Seas (as is the case of appellant hereto), it could not be held
2
ITA NO. 5168/Del/2010
that the appellant had a PE in India in the form of project office in India, and it
can only have an installation PE as per the specific provisions of Article 5(2)(h)
which override the general provisions of Article 5(1) of the treaty, subject to
fulfillment of the duration test of 9 months which is not satisfied in appellant's
case.
8. That the authorities below erred in holding that the appellant has a dependent
agent PE in India in the form of M/s Arcadia Shipping limited ('Arcadia')
without appreciating the fact that Arcadia was an independent consultant, and
not an agent of the appellant, and also that contract awarded by ONGC was
under the International competitive biddings, awarded to lowest bidder which
cannot be negotiated, secured, concluded by any person.
9. That in framing the impugned assessment the learned AO has arbitrarily
ignored the provisions of Article 7(1), 7(2), 7(3) and 7(6) of the treaty and also
the principles laid down in the judgments of the Apex Court in the case CIT vs.
Hyundai Heavy Industries Co. Ltd. reported in 291 ITR 482 and also in the
case of Ishikawajima Harima Heavy Industries Vs. DIT reported in 288 ITR 408,
so as to conclude that any further income, more than what the appellant has
disclosed in the return of income, accrued to it.
10. That the Ld. AO had no valid justification on relying on the purported
statement (where in fact there was no statement recorded) of Shri
S.K.Sachdeva, DGM (E) - PC 4WPP-11 and that too without producing him for
the appellant's cross examination, in the absence of which the purported
statements cannot be a basis for recording adverse finding to conclude that
the contract is not a divisible contract and the revenues pertaining to outside
India operation are taxable in India.
11. That without prejudice and in the alternative, the Ld. AO has failed to
comprehend that even assuming that the appellant had delivered the
platform in India (but constructed by it outside India) the same could not be
made the basis to hold that any income accrued to it in India by mere fact
that the platform was supplied in India and for the work done outside India.
12. That the Ld. AO has erred in holding that since the appellant had (under the
same agreement under which it had supplied the platform erected by it),
installed the platform on Mumbai High Seas, an income arose even in respect
of value of supplies received by the appellant for the construction of the
platform erected by it outside India. In fact, no income in respect of supplies
made could be held to be an income which is taxable under the provisions of
the Treaty other than such income as may be attributable to the alleged PE.
3
ITA NO. 5168/Del/2010
13. That the Ld. AO has failed to appreciate that the appellant had completed the
Fabrication and erection of the platform supplied by it to INGC outside India
and that it had installed the said platform at Mumbai High, under the terms of
contract entered by it on 28.12.2005 and further that such a contract had
partially been executed in the financial year 2005-06, relevant to the
assessment year 2006-07, and partially executed in the instant year, against
which appellant company had received an amount of USD 14,68,22,480 in the
instant year and as such the adverse findings recorded are in disregard of the
factual matrix so as to hold that the appellant was liable to be assessed @
25% of the gross receipts, which presumptive rate of profit applied was
without providing any basis whatsoever and was thus perverse.
14. That the Ld. AO has further overlooked that, since the assessment year 1997-
98 (being the first assessment year), the appellant was being assessed to tax
under presumptive regime of taxation i.e. 10% of the net value of receipt for
work done in India (after claiming TDS verifiable expense) and 1 % of gross
receipt of work done outside India and as such there could be no justification
to hold that the appellant is liable to be assessed @ 25% gross receipt in India
in the instant year, more particularly when issuing a certificate under section
197 of the Act, it was directed that the income of the appellant be estimated
at a rate much lower than 25%.
15. That the Ld. AO has grossly erred in framing the assessment on the basis that
the appellant had handed over the platform in India and as such the entire
income accrued in India, overlooking the factual substratum and the
provisions of the treaty and the provisions of the contract entered by the
appellant with ONGC. The Ld. AO has grossly erred in reading the contract as
a whole and went wrong in construing a part of the contract and that too
wrongly.
16. The Ld. A.O. has further erred in holding that the contract entered into by the
appellant was a turnkey project, and as such, the entire income accrued to
the appellant in India. The aforesaid concept is contrary to the provisions of
Treaty which provide only as much income as is attributable to PE in India
could be brought to tax, even on an assumption which is without prejudice,
that the appellant had a P.E. in India.
17. That the authorities below grossly erred in ignoring the principles of taxation
laid down by the Hon'ble Apex Court in the case of Ishikawajrna Harirna's :
288 ITR 408 (SC) in respect of taxability of turnkey contract where different
parts of the contract are to be carried out in different tax jurisdictions.
4
ITA NO. 5168/Del/2010
18. That the Ld. AO has failed to appreciate that (having regard to the facts and
circumstances that it could not be disputed, indeed it has not been disputed
that the entire work of fabrication of platform supplied was completed outside
India) no such income in respect of work of fabrication of platform which was
completed outside India, could be brought to tax as provided in Article 7 of
the Treaty.
19. That the Ld. AO failed to appreciate that out of the total receipts of USD
14.68.22.480 a sum of USD 13,02,19,878 was specifically receivable in
respect of the construction, fabrication and erection of the platform supplied
by it to ONGC and as such no portion of such part of receipt included in the
contract could *have been brought to tax and no income could have arbitrarily
been estimated on such value of contract.
20. That the Ld. AO has further erred in failing to appreciate that the appellant
had offered to be assessed @ 1 % of such value of contract, even if it is held
that the mere activity of handing over of the 'physical possession' could be
held to have resulted in to an accrual of income in India, despite the fact in
law no income accrued, (which was the basis adopted in the preceding
assessment years), there was no basis to adopt arbitrarily a rate of profit of
25% on such gross receipts or change the method. The findings of the AO
were not only arbitrary but were highly perverse and were contrary to facts
and law.
21. That further the Ld. AO had grossly erred in arbitrarily estimating a profit rate
of 25% of the entire value of the work as income accruing and taxable in India
and no basis whatsoever for such an arbitrary rate of profit had been either
stated or confronted for its rebuttal to the appellant, thus the assessment
made is highly arbitrary and untenable.
22. That further the learned Dispute Resolution Panel CORP') while approving
such a rate of profit has further erred in supporting the rate of profit adopted
without confronting to the appellant for its rebuttal any material and
otherwise too without prejudice, the comparables or the basis stated by DRP
in its order of approval which is highly arbitrary and is wholly perverse. The
comparables stated by the learned DRP in its `directions' are entirely and
wholly inapplicable and projects the mindset and perverseness of the Ld. DRP.
Besides, in fact, no attempt whatsoever had been made to determine profit
attributable to the purported PE on the basis of functions, assets and risk
analysis and further the data furnished by the appellant in the form of `PE
5
ITA NO. 5168/Del/2010
Attribution Study' before the learned DRP has also been arbitrarily brushed
aside and ignored.
23. That the Assessing Officer has erred in holding that the consideration
towards design and engineering is covered as `fee for technical services'
without appreciating the fact that the provisions of the treaty treats fee for
technical services as business profits taxable under Article 7 of the Treaty.
24. Without prejudice and not admitting the existence of PE in the alternative, the
Ld. Assessing Officer /DRP ought to have applied section 44AB in respect of
the activities towards inside India activities i.e. installation of platform in
India, as held in the judgement of Hyndai Heavy Industries Co. Ltd. reported in
291 ITR 482.
25. That the directions of the Ld. DRP to the proposed order of assessment is not
only arbitrary but is also erroneous both on facts and in law. The DRP has
completely glossed over and has erred in disregarding the proposed written
submission and the written arguments, and thus gave directions to assess
the income at ` 164,52,67,897/- against the income declared of `
10,77,98,165/- without application of mind.
26. That in any case and without prejudice, it is being undisputed that it was
ONGC who was the payee under the contract and was liable to deduct tax at
source and therefore no interest u/s. 234B of the Act, was leviable as has
been held by the jurisdictional High court in its judgement in Sedco Forex
International vs. DCIT (reported in 264 ITR 320) and as such no interest could
be held as leviable.
27. That the Assessing Officer and the DRP have failed to appreciate that the
judgement of Apex Court in the case of Anjum M.H. Ghaswala reported in 252
ITR 1 has absolutely no application in a case of tax resident outside India
whose income was subject to deduction of tax at source and as such interest
levied u/s. 234B of the Act (which has not even been specified) is
unsustainable in law. The levy of such interest which remains unspecified
otherwise too deserves to be deleted.
28. That likewise, no interest u/s. 234C and 234D could have been levied.
29. That in fact there being no default u/s. 234C there could be no basis either
to hold the levy of interest or directing the same to be levied and as such,
unspecified interest deserves to be vacated, and more particularly when due
taxes were already deducted at source on returned income and interest is
leviable only on returned income.
6
ITA NO. 5168/Del/2010
30. That in fact there being no default u/s 234D there could be no basis either to
hold the levy of interest or directing the same to be levied and as such,
unspecified interest deserves to be vacated, and more particularly when no
refund was granted to the appellant either under section 143(1) or 143(3) of
the Act.
31. That the Ld. AO has failed to appreciate that, having granted a certificate to
ONGC to deduct tax at lower rate, i.e. 0.84% for outside India revenues and
4.39% for inside India revenues, it could not have applied a rate of profit of
25% and levy interest under section 2348 of the Act or any other provision of
the Act.
32. That the appellant could not have been fastened with a liability of interest as
the deductor had been granted the certificate to deduct at the lower rate of
tax i.e. @ 4.39% based upon the 10.50% of the gross revenue for work done
inside India and 0.84% based upon the 1 % of the gross revenues for work
done outside India and as such the interest levied of Rs. 31,55,74,162 is
entirely unwarranted in law.
Prayer:
It is therefore prayed that:
I. The assessment made on the directions by the learned ORP is not in
accordance with law but is arbitrary also.
II. In the alternative and without prejudice, no income could be said to have
been accrued or was taxable in India, in respect of supplies made of platform
erected and constructed by the appellant outside India.
III. That the application of net rate of profit @ 25% is highly arbitrary.
IV. That it was not a case of turnkey project and even assuming the same
no income arose, such value of contract which had been undertaken
outside India.
V. That no interest under any provision of section 234B, 234C or 234D of
the Act was leviable.
The above grounds of appeals are without prejudice to each other.
That the appellant craves leave to add, alter, amend or withdraw all or any
grounds or add any further grounds as may be considered necessary either
before or during the hearing of these grounds."
3. The brief facts of the case are stated as under:-
7
ITA NO. 5168/Del/2010
In this case return of income was filed on 31-l0-2007 for
A.Y. 2007-08 declaring total income at Rs. 10,77,98,165/-.
The nature of business is shown in the return as
"Fabrication and Installation of Onshore and Off-shore Oil
facilities and Sub-marine pipelines and pipelines quoting".
The assessee has, during the year, executed the following
project:
- MR/OW/MM/NHBS4WPP dated 28.12.2005.
However, in the return of income from the above projects,
the assessee has, as in earlier years, taken the plea that
their contracts with ONGC have two different and distinct
components-one, for designing, fabrication and supply of
material and the other for installation and commissioning of
the project. According to the assessee, the work relating to
the former is carried out exclusively in Abu Dhabi, and
hence no income relating to receipts for that part of the
contracts is liable to tax in India as the same is not
attributable to the PE in India. Later on, the assessee has
taken the plea in its written submission that they do not
have a P .E. in India. Assessee further contended that the
PE for the installation and commissioning also lasted for less
than 9 months. Therefore, in terms of DTAA between India
and U.A.E. no income can be attributed to India. The
returned income was, therefore, restricted to attributions
related to only installation and commissioning of the project
in India However, for the outside India work claimed by the
assessee, they have paid taxes after calculating 1 %
8
ITA NO. 5168/Del/2010
deemed profit rate on the alleged outside India revenues.
Assessee placed heavy reliance on the decision of the
Hon'ble Apex Court in the case of M/s Hundai Heavy
Industries for AYs. 87-88 and 88-89 and also on the
decision of the ITAT for earlier years in the case of M/s
Hundai Heavy Industries.
Assessing Officer further noted that assessee company
opened its office in India in 1990's and since then they are
regularly undertaking the execution of various projects in
India most of which have been related to the projects of
ONGC on seas. The office of NPCC is located in India and is
approved only as a project office. The assessee has an
agent in India by the name of M/s Arcadia Shipping Co. with
whom they have a contract since Dec. 26, 1994. As per the
assessee M/s Arcadia was an independent agent that does
not fit into the parameters of dependent agent PE.
Assessing Officer further opined that the decision of
Hyndai Heavy Industries Ltd. relied upon by the assessee
was not applicable on the facts of the present case. In the
background, the Assessing Officer opined that following
issues arises for consideration:-
(i) Whether the Mumbai office of NPCC constitutes a PE?
(ii) Whether Arcadia Shipping Ltd. is a Dependent Agent PE;
(iii) Whether the Project P.E. lasted for less than 9 months and
not during fabrication and procurement of material?
9
ITA NO. 5168/Del/2010
(iv) Whether the fabricated material was sold to ONGC in Abu
Dhabi before the PE in India came into existence?
(v) Whether the contract was divisible into two parts ,one for
supply of material and the other for installation and
commissioning?
Assessing Officer further referred to the agreement in this
regard in detail. Assessing Officer opined that the scope of
work detailed above clearly shows that the National Petroleum
Construction Company work under the contract begins not with
installation but pre-engineering and pre construction surveys.
Assessing Officer further noted that in the said contract there is
no stipulation of any sale or supply of material to ONGC. The
design, engineering, procurement and fabrication etc. are part of
the overall project. Assessing Officer further referred the clauses
of the contract which provide that the assessee contractor would
seek approval of the Company before start of every work
including fabrication and the Company would monitor rate of
progress through monthly progress reports. The contract further
stipulates that all Material, plant and labor will be provided by
the assessee contractor and the manner of execution of work will
be to the satisfaction of the company. The contract further
provides that from the time of commencement of the work to the
time of issue of certificate of completion and acceptance work
the assessee contractor shall be fully responsible for all works or
any part of them. The loss or damage, if any, shall be the
responsibility of the contractor.
10
ITA NO. 5168/Del/2010
From the above, Assessing Officer opined that this clearly
indicates that till the issue of completion certificate, entire risk for
the entire project or its any part shall lie with the assessee.
Assessing Officer further observed that the terms of the clause
clearly indicate that the milestone payments are only provisional
payments and these do not suggest that the contract is divisible
in as many parts as the payment schedule is broken into.
Assessing Officer further observed that the clause of customs
duty clearly shows that the payment of Customs Duty by the
assessee is on its own account. The clause of the agreement
further stipulated that ownership of material shall be
transferred to the ONGC, upon issue of certificate towards part
completion or completion and acceptance of entire work.
Assessing Officer observed that the main thrust of the argument
of the assessee is that it was not having any PE in India before
the work of fabrication got completed and the fabricated material
was imported in India. The installation PE was having the limited
task of installation and commissioning of the project. Thus, the
assessee's claim was that no part of profits in respect of off
shore supplies can be brought to tax in India. Assessing Officer
noted that the contention of the assessee was that it has a
project office in Mumbai since 1990, but it has been opened at
the instructions of ONGC because it was a mandatory
requirement for the execution of the contract. Assessing Officer
opined that the crucial fact is that the assessee has an office in
India which is a project office and therefore, clearly as per the
Treaty between India and UAE, the assessee has a P.E. in India.
11
ITA NO. 5168/Del/2010
Assessing Officer further observed that it was for the assessee
to prove that the activities of the Project Office are ancillary and
auxiliary so that the same can be taken in the exception clause of
the Treaty. Assessing Officer opined that by no stretch of
imagination, a Project Office can be involved in ancillary and
auxiliary activity. Assessing Officer further observed that in this
case the project was in existence even prior to the signing of the
contract with ONGC and after signing of the contract, the
assessee intimated RBI that it has a Project Office for the
execution of this contract. Assessing Officer further referred to
his enquiry with ONGC and certain documents were collected
from them. Referring to these documents, Assessing Officer
observed that it indicated that the assessee's Mumbai office and
M/s Arcadia the dependent agent Permanent Establishment has
also participated in biding process and was involved in
negotiation and finalization of the contract. Further, Assessing
Officer observed that these documents are not mere
correspondence but these indicate definite involvement of the
Mumbai Office and Arcadia Shipping Ltd. in the process of
negotiation of the contract. Further, Assessing Officer observed
that right from the stage of submission of tender document to the
date of kick off meeting when the technical work commences,
Mumbai office and Arcadia were actively involved in the process.
These can not be held to be a mere preparatory and auxiliary
activities as contended by assessee in his reply to the show
cause notice. Assessing Officer opined that marketing is a core
business function and it can not be termed as auxiliary activity.
The contract between the assessee and Arcadia Shipping Ltd.
12
ITA NO. 5168/Del/2010
itself says that Arcadia will provide assistance in obtaining works
and active representation, promotion and support of the
principal's activities in India and assistance in obtaining services
and facilities in India. Assessing Officer opined that it cannot
be said that assessee has no P.E. in existence other than the
Project Office. The Assessing Officer opined that assessee has a
project office for its project in India and also the dependent agent
M/s Arcadia. That it also has a PE in terms of article 5(2)(h) of
Indo UAE Treaty i.e. construction and installation PE. Assessing
Officer further observed that it was immaterial that the assessee
has one single PE for all the business functions or different PE's
for different functions.
Assessing Officer observed that assessee has wrongly advanced
claim in earlier years that its PE in India was only an installation
PE and therefore it fell within the meaning of para 3 of article 5.
Assessing Officer opined that fact of the matter was that the
assessee company undertook a business operation of carrying
out certain work for ONGC on turnkey basis which included pre
engineering surveys, designing, fabrication, procurement,
installation and commissioning etc. as defined in the scope of
work incorporated in the terms of the contract. The project office
was involved in installation and commissioning but that was only
a part of the business operation. Assessing Officer opined that
the other items of work were also executed by the assessee in
India through one agency or the other. The pre engineering
surveys and designing etc. were also done by the Project office
which operated through fixed place of business in India. The
13
ITA NO. 5168/Del/2010
surveys and designing were also done by persons located in
India. The assessee has undertaken detailed pre-engineering
surveys which was the first step after the contract was awarded
and the Project Manager had requested for N.E.D. passes for
their employees to execute that work.
Assessing Officer observed that the monitoring by ONGC was so
strong that the assessee company had to submit the periodical
progress reports to the ONGC and their officials approved every
stage of survey and designing. Assessing Officer further
observed that the PE of assessee by way of project office for the
project also lasted for more than 9 months. Assessing Officer
further referred to the date of contract and the completion /hand
over of the project and observed that project lasted for more than
the period stipulated in the DTAA. Therefore, the assessee had a
PE within the meaning of treaty.
Assessing Officer further observed that the procurement and
fabrication of material took place during the existence of the PE
in India. The terms of contract with ONGC do not stipulate any
sale of material to them. The preamble to the agreement as also
the scope of work stipulate manufacturing of platforms on a
turnkey basis. There may be various stages in executing the work
like survey, designing, fabrication procurement, and installation
and commissioning but these are mere stages of the total
project. The ONGC does not purchase any material from the
assessee. ONGC takes over the completed platform when all
parts of the work are executed.
14
ITA NO. 5168/Del/2010
In this regard, Assessing Officer referred to the clarification
given by the ONGC in their letter dated 11.12.2009. Referring to
the said letter the Assessing Officer observed that the documents
brings out in unequivocal terms that the ownership of the
fabricated material remains with the assessee contractor till the
completed project is handed over to the ONGC. The assessee has
been mainly relying upon the schedule of milestone payments
stipulated in the agreement where value of each item of work is
indicated, the currency in which the payment is to be made is
also indicated and the state of payment is equally stipulated. As
clarified by ONGC these milestone payments are in the nature of
`provisional progressive payments' pending completion of the
whole work.
Assessing Officer observed that the clause relating to insurance,
payment of custom duty, reimport in the case of loss / damage
etc. only reinforce the view. The assessee does the fabrication
work in Abu Dhabi but gets it transported at its own cost to India
and uses the same in the work undertaken by the it in terms of
the contract. Assessing Officer opined that it is no different
than using one's own material in an erection or construction
project. Assessing Officer further observed that there was no
sale of any material. The ownership of the material got
transferred only on the completion of the work which was also in
India. The deployment of men and material was in India. The
import was made by the assessee on its own account and the
customs duty was also paid by them on their own account. The
entire transportation was done at their own risk. Assessing
15
ITA NO. 5168/Del/2010
Officer further observed that assessee has not produced any
evidence of transfer of ownership to ONGC outside India.
From the above Assessing Officer observed that it is evident
from the above that the work relating to fabrication and
procurement of material was very much a part of the contract for
execution of work assigned by ONGC. The work was wholly
executed by PE in India and it would be absurd to suggest that PE
in India was not associated with the designing or fabrication of
materials. In fact designing is completely covered as Fees for
Technical Services. But since the assessee has undertaken it
through PE and it is part of consolidated contract, no separate
treatment is done and the same is taxed as one consolidated
contract under the head `business income'.
Assessing Officer further observed that company has
undertaken contract in India on turnkey basis and has executed
the contract in India. The title in goods as well as the constructed
platform is transferred once the Indian company accepts the
project as complete. This case has no comparison to a case of an
isolated supply contract which has been done outside India. This
is a clear cut case of a works contract executed in India where
the assessee has also obligation of fabricating and procuring
certain material to be used in the works. This is not a case of
ONGC purchasing material from the assessee but it is a turnkey
project where procurement of material is a part of the Contract
which has been done by the assessee who has brought it to India
and used it in the project where the material has been used is
handed over to ONGC after the completion of the project.
16
ITA NO. 5168/Del/2010
Assessing Officer further observed that there is absolutely no
basis for the suggestion that the works contract could be divided
into two parts, one for the supply of the material and the other
for installation and commissioning. This contract in question was
neither divisible nor can consideration for any activity under the
contract is liable for separate treatment. The assessee is seeking
to deny the role of its PE but has no answer to the fact that right
from survey to bidding to negotiation to signing to execution and
till acceptance test it has a presence in India through its
employees and a fixed place of business was available to it in the
form of a project office as well as the dependent agent M/S
Arcadia Shipping Ltd.
In view of the above, Assessing Officer held that the
assessee has executed the projects with ONGC on a turnkey
basis, The scope of the project included works relating to pre-
engineering surveys, designing, fabrication, procurement,
installation and commissioning of the project of laying of the
pipelines. All these obligations were part of "works", the scope of
which is well defined in the contract. The contract was not
divisible. The obligations and the risk of the assessee continued
till the completion of the work and grant of completion certificate
by ONGC. The PE in India existed for the entire duration of the
project which commenced with the Kick Off meting and ended
with the completion of the work. The dependent agent M/s
Arcadia acted as PE for the initial part and later the operational
part was executed by the project office and also by Arcadia
Shipping Ltd. The title in the goods passed in India and PE in India
utilized the material on its own account and on its own behalf.
17
ITA NO. 5168/Del/2010
Thus, the entire profits from the work under the contracts arise in
India and are liable to tax as such.
Assessing Officer further observed that it will not be out of
place to mention that business of the assessee was not covered
by the provisions of section 44BB of the Income Tax Act, 1961.
Sec. 44BB is applicable where the services are rendered in
connection with prospecting for or extraction and exploration of
mineral oil. The project is neither for prospecting of mineral oil
nor the assessee is rendering any service in the exploration of
mineral oil. What the assessee is doing is constructing a platform
which may be used by the contractee for exploration of oil but as
far as the assessee is concerned they are not rendering service in
connection with the exploration of mineral oil. Thus the
provisions of section 44BB are clearly inapplicable and the profit
is to be computed in accordance with the accounts maintained
for India operations and keeping in view the applicable provisions
of the Income Tax Act. Thereafter, Assessing Officer concluded
as under:-
"Various notices were issued to the assessee to
give the details of expenses incurred for the
Project undertaken by the assessee in India. The
assessee has neither got its accounts audited nor
has furnished any audited account. Therefore,
penalty proceedings under Sec. 271B are hereby
initiated. It has also not furnished the details of
any expenses. It 'has created its own method of
computation of income where it has bifurcated
its revenues into two parts one is for inside India
18
ITA NO. 5168/Del/2010
and another for outside India. From the inside
India revenue, sub-contractor cost has been
deducted and then, a 10% deeming profit rate
has been arrived. This method has no legal basis
and therefore, is hereby rejected. For work
outside India, they have taken 1% as the profits
attributable to India. This also has no legal basis
and therefore, is rejected. During the course of
assessment proceedings, time and again, the
assessee was asked to come forward with the
details of expenses incurred, which the assessee
did not produce. Even on the last date of
hearing, no details are furnished. In view of this,
the taxable income of the assessee was
proposed to be computed at Rs. 164,52,67,900/-.
The above action of the Assessing Officer was upheld by the DRP
who held that in absence of account, Assessing Officer is justified in
estimating the profit of the assessee at 25% of gross receipts
(including inside and outside India revenue).
4. Against the above order the Assessee is in appeal before us.
5. We have heard the rival contentions in light of the material
produced and precedents relied upon.
6. Ld. Counsel of the assessee, at the outset submitted that in the
pending appeal the assessee has formulated following `Broad issues'
for consideration and determination, which have been summarized as
under:-
19
ITA NO. 5168/Del/2010
i) Whether, the appellant has a permanent establishment in
India, in the form of:
a) Fixed place PE in the form of `office', as defined under
Article 5(2)(c) of the Double Taxation Avoidance
Agreement between India and UAE; or
b) "Installation PE" for the installation activities carried
out in India, as defined in Article 5(2)(h) of the said
DTAA: or
c) Whether M/s Arcadia Shipping Ltd., an independent
consultant engaged in providing support service under
an agreement dated 26.12.1994 constitutes on
`dependent agent PE' under Article 5(4) DTAA?
ii) If it is held that, appellant has a PE in India as
aforesaid i.e. either under Article 5(2)(c), 5(2)(h) or
5(4) of the DTAA, then what would be the income
attributable to PE to the assessed in India (since
appellant company is permanently domiciled in UAE
and is a tax resident of UAE? In other words, even if
appellant is held to have PE in India, how much
income could be held to be attributable under the
terms of DTAA to be assessed in the hands of the
appellant under Article 7(1) and 7(2) of the DTAA?
iii) Whether the tender floated and executed by the
assessee company was a turnkey contract despite the
fact that it cannot be regarded as a turnkey project
and even if it was a turnkey contract, whether the
entire income as estimated by the Revenue could be
assessed to tax in India and not only as much income
20
ITA NO. 5168/Del/2010
as is attributable to its alleged permanent
establishment.
iv) Whether without prejudice to the aforesaid,
computation of tax by the learned Assessing Officer is
correct and, in accordance with law?
v) Whether any interest u/s. 234B of the Act is leviable
on the appellant company especially where the
revenue had granted lower withholding tax order
directing ONGC to withhold tax at lower rate, i.e.
0.84% for outside India revenues and 4.39% for inside
India revenues?
7. Further submissions of the Ld. Counsel of the assessee are as
under:-
"It is submitted that the appellant company has a project
office since 1997 in India. It is further submitted that, it is an
undisputed fact that this project office was stated to be a PE for
assessment years 1997-98 to 2007-08. However, it is respectfully
submitted that this office was only used as a communication
channel and, is thus not a PE as defined in Article 5 (2) read with
Article 5(1) of the DTAA.
It is submitted that, it is not denied that, appellant is
involved in installation and commissioning of a fabricated
platform in India and if, in respect of a project the period of
installation activity exceeds beyond nine months, it would be
regarded as an Installation or Construction PE. However, since
the activity of the appellant in India in respect of 4WPP project
lasted only for four and a half months, it cannot be said to have
21
ITA NO. 5168/Del/2010
even an Installation PE in India within the meaning of Article
5(2)(h) of the DTAA.
Furthermore, the appellant cannot be said to have
dependent agent PE as the consultant appointed by the appellant
in India, M/s Arcadia Shipping Limited constitutes a dependent
agent PE in India is not an agent at all: Even if it is assumed that
M/s Arcadia is an agent, it is an agent of independent nature, as
per Article 5(5) of the DT AA, M/s Arcadia is independent from the
appellant legally and economically because Arcadia was acting in
the normal course of its business and receiving an arm's length
remuneration directly from ONGC. It is thus submitted that, M/s,
Arcadia cannot be held to be a dependent agent as per Article
5(4) of the DT AA. In fact, neither it has authority to conclude or
negotiate contracts on behalf of the appellant, nor, it habitually
secures orders for appellant because appellant is dealing with
ONGC which is a public sector undertaking awarding contracts
under the International Competitive Bids only and not based on
negotiations
It is also submitted that, despite the fact that, the subject
contract may be construed as an umbrella contract, yet it is a
divisible contract, since under the same contract, the
consideration for various activities have been stated separately
(Schedule C to the 4WPP contract at pages 1063 to 1081.
Furthermore, there is a complete bifurcation of the activities to
be carried out under the contract with consideration for each
specific activity (i.e. designing, procurement, fabrication supply,
installation and commissioning) assigned by ONGC which is an
independent party (and even a Government of India
22
ITA NO. 5168/Del/2010
undertaking). It is thus submitted that, for the purpose of
attribution of income, the contract cannot be regarded as a
composite contract leading to attribution of entire contract
revenues.
Not a Turnkey Contract
At the outset, it is submitted that the taxability of the
contract revenues depends upon the activities carried out in India
and not whether the contract is a turnkey or other contract, yet
the appellant submits that the relevant contract with ONGC,
though fashioned as turnkey but not a turnkey contract in spirit
and substance.
It is respectfully submitted that on a study of the 4WPP
contract, it would be appreciated that ONGC may terminate the
contract as per clause 8.2, 7.5.5 and or 7.4, and in the event of
termination of the contract under clause 8.3.1, it may be seen
that the appellant shall be eligible for the following amounts as
per clause 8.3.2.
"8.3.2 In the event of termination of the contract under
clause 8.3.1, the company (i.e. ONGC) shall pay to the
contractor (i.e. appellant) the following amount:
(a) The Contract price properly attributable to the parts of
the Works executed by the Contractor in accordance with
the Contract as at the date of Termination.
(b) The costs incurred by the Contractor in protecting the
Works pursuant to paragraph (a) of clause 8.3.1 above as
mutually agreed.
(c) Reasonable demobilization charges as may be
ascertained by the Company if contractor has
23
ITA NO. 5168/Del/2010
Constructional Plant and Equipment at offshore site at the
time the termination becomes effective.
(d) Cost of any materials or equipment already purchased
and/or ordered by the Contractor, the delivery of which the
Contractor must accept, such materials or equipment will
become property of the Company upon payment by the
Company of the actual Cost of the materials or equipment.
(e) All reasonable cost of cancelling/terminating any
subcontract(s)
(f) All reasonable cost on cancellation or orders for material,
etc., which the Contractor may have committed for the
project." (Emphasis supplied)"
From the aforesaid, it could be seen and appreciated
that it is the discretion of ONGC to take only the platform
erected by the appellant in Abu Dhabi as it has a right to
terminate on its own volition without having installation
thereof. The appellant, in such an event, will not be entitled
for any amount towards installation and commissioning but
will only be entitled for the contract price properly
attributable to the erection of fabricated platform (i.e.
design & engineering, material procurement and
fabrication) actually carried out by the appellant in
accordance with the Contract i.e. the pricing schedule
(Schedule C) and milestone payment formula (Schedule E)
given in the contract. Furthermore, it is significant to be
noted that, should the appellant contractor likewise
abandons the contract at any stage, it would not be bound
to refund any amount so received by it from ONGC in
24
ITA NO. 5168/Del/2010
respect of the work already executed by. it. In fact, had it
been a case of turnkey project, the appellant contractor
would be entitled to the entire value of contract, whether
executed or remains to be executed, if there was any
termination on the violation of the company i.e. ONGC.
Likewise, in case the appellant contractor abandons the
contract suo motto or otherwise, it would be liable to refund
the amount received by it from the company i.e. ONGC. It is
submitted here that there is a difference between a project
on turnkey basis. Though in the submission of the
appellant, it would have no effect when an income is to be
attributed having regard to Article 7(2) of DTAA which reads
as under:
" .... where an enterprise of an contracting state
carries on business in other contracting state through
a permanent establishment situated therein, there
shall in each contracting state be attributed to that
permanent establishment the profits which it might be
expected to make if it were a distinct and separate
enterprise engaged in the same or similar activities
under the same or similar conditions and dealing
wholly independently with the enterprise of which it is
a permanent establishment. "
The Hon'ble Apex Court in Ishikawajma-Harima Heavy
Industries Ltd. V. DIT reported in 288 ITR 408 has also held
that:
25
ITA NO. 5168/Del/2010
"Clause 1 of Article 7, thus, provides that if an income arises
in Japan (Contracting State), it shall be taxable in that
country unless the enterprise carries on business in the
other Contracting State (India) through a permanent
establishment situated therein. What is to be taxed is profit
of the enterprise in India, but only so much of them as is
directly or indirectly attributable to that permanent
establishment. All income arising out of the turnkey project
would not, therefore, be assessable in India, only because
the assessee has a permanent establishment. "
"In cases such as this, where different severable parts of the
composite contract is performed in different places, the
principle of apportionment can be applied, to determine
which jurisdiction can tax that particular transaction. This
principle helps determine, where the territorial jurisdiction
of a particular State lies, to determine its capacity to tax an
event. Applying it to composite transactions which have
some operations in one territory and some in others, is
essential to determine the taxability of various operations"
In support of the aforesaid submissions, the appellant
begs to clarify that, the appellant fabricated the platform in
Abu Dhabi and after fabrication, said platform is brought to
India with the help of its barges and is then the possession
is handed over to ONGC. It is significant fact to be noted
that before sailing the platform after fabrication, the same
is certified by ONGC through it's approved surveyor (Refer
to clause 4.9.6 of the contract. Hon'ble Bench's kind
26
ITA NO. 5168/Del/2010
attention is also invited to the fact that, as per the
insurance clause (7.1), the insurance policy though to be
taken by the appellant but ONGC is the joint beneficiary in
the policy. Besides, the insurance policy also demonstrates
that ONGC is the principal and NPCC is the contractor.
Furthermore, the insurance policy also exhibits that, in case
there is a loss suffered in the course of transportation the
payee of the insured amount would be ONGC and in case of
any damage or loss of work, the insurance claim can be
made by the assessee only if ONGC gives NOC in this
regard. These facts clearly show that ONGC had all times
vested interest in the work executed by the appellant
notwithstanding the ownership in the fabricated material,
even prior to bringing the material in India. It is thus clear
that so far the activities of construction of platform is
concerned, though physically the same is sailed through
barges, but the same is completed in and is constructively
handed over to ONGC in Abu Dhabi and as such the mere
physical handing over cannot be stated to be one where an
income could be attributed to the PE as alleged i.e. even if
there is a PE. The submissions of the appellant therefore is
that ONGC became defacto owner since the appellant
company erected the platform only to be delivered to ONGC
in respect of which it is also entitled to receive separate
consideration from ONGC, as is otherwise supported by
Annexure C of the contract. It is thus submitted that under
the contract, there are different phases of execution of
contract. The first phase was completed when it was
27
ITA NO. 5168/Del/2010
fabricated, erected and brought to India through its barges
to be physically supplied. The same was physically supplied
although the same was constructively supplied by it in Abu
Dhabi as is evident that the insurance premium was to be
borne by ONGC, who was the principal under the terms of
the Insurance policy.
It is also submitted that, since in the instant case, the
contract was not terminated when the fabricated platform
was ready to sail to India, same was installed by the
appellant in India. Thus in view of Article 7(1) and 7(2) of
the India UAE DTAA, only such income as is attributable to
PE (i.e. income pertaining to work executed by the PE in
India) could be brought to tax in India and no more.
Article 7 reads as under:
"1. The profits of an enterprise of a Contracting State shall
be taxable only in that State unless the enterprise carries
on business in the other Contracting State through a
permanent establishment situated therein. If the enterprise
carries on business as aforesaid, the profits of the
enterprise may be taxed in the other State but only so
much of them as is attributable to that permanent
establishment.
2. Subject to the provisions of paragraph 3, where an
enterprise of a Contracting State carries on business in the
other Contracting State through a permanent establishment
situated therein, there shall in each Contracting State be
attributed to that permanent establishment the profits
which it might be expected to make if it were a distinct and
28
ITA NO. 5168/Del/2010
separate enterprise engaged in the same or similar
activities under the same or similar conditions and dealing
wholly independently with the enterprise of which it is a
permanent establishment.
In other words the profits have to be attributed between the
two enterprises, one which carried on business outside India
and another which carries business in India.
In the instant case really there is no element of profit
because it is only a case of mere delivery.
3. In determining the profits of a permanent establishment,
there shall be allowed as deductions expenses which are
incurred for the purposes of the business of the permanent
establishment, including executive and general
administrative expenses so incurred, whether in the State in
which the permanent establishment is situated or
elsewhere.
4. In so far as it has been customary in a Contracting State
to determine the profits to be attributed to a permanent
establishment on the basis of an apportionment of the total
profits of the enterprise to its various parts, nothing in
paragraph 2 shall preclude that Contracting State from
determining the profits to be taxed by such an
apportionment as may be customary ; the methods of
apportionment adopted shall, however, be such that, the
result shall be in accordance with the principles contained in
this Article.
29
ITA NO. 5168/Del/2010
5. No profits shall be attributed to a permanent
establishment by reason of the mere purchase by the
permanent establishment of goods or merchandise for the
enterprise.
6. For the purposes of the preceding paragraphs, the profits
to be attributed to the permanent establishment shall be
determined by the same method year by year unless there
is good and sufficient reason to the contrary."
In nutshell the revenue's case is only that contract is
completed when installed platform is delivered at site in
India; assuming that to be so, it is submitted that all
activities prior to installation and commissioning of the
platform are carried out in UAE and thus having regard to
Article 7 of the DTAA, no income can be attributed to the
alleged PE in India. In other words, income attributable to
the alleged PE in India could not extend to the activities
carried outside India and had to be therefore confined to
incomes from activities carried out from the alleged PE. It is
reiterated that, even assuming that, the appellant has a PE,
the same cannot be in respect of erecting and fabricating
the platform in Abu Dhabi but could only be in respect of
installation and commissioning activities, which even
otherwise cannot be the case, since the period of
installation activities is less than 9 months in India.
The appellant in this context places strong reliance on
the following decisions Hyundai Heavy Industries Company
Limited reported in 291 ITR 482 (SC):
30
ITA NO. 5168/Del/2010
"The installation permanent establishment came into
existence only on conclusion of the transaction giving rise
to the supplies of the fabricated platforms. The installation
permanent establishment emerged only after the contract
with the ONGC stood concluded. It emerged only after the
fabricated platform was delivered in Korea to the agents of
the ONGC Therefore, the profits on such supplies of
fabricated platforms cannot be said to be attributable to the
permanent establishment."
Hyundai Heavy Industries Company Limited (ITA No 2290 &
2291 of DEL/2002 (lTAT) read with ITA No 42 of 2007 ( Utt
High Court ) following the Supreme Court judgement
reported in 291 ITR 482.
"It has been noted by the Hon'ble Apex Court that the
installation PE emerged only after the contract with
the ONGC stood concluded. It is also noted that it
emerged only after the fabricated platform was
delivered in Korea to the agents of ONGC and
therefore, the profits on such supplies were fabricated
platforms cannot be said to be said to be attributable
to P E. Thereafter, it is noted by the Hon'ble Apex
Court that there is one more reason for coming to this
conclusion. As per Their Lordships, in terms of para 1
of Article l, the profits to be taxed in the source
country were not the real profits but hypothetical
profits which the PE would have earned if it was wholly
independent of the GE and therefore, even if, it is
assumed that supplies were necessary for the purpose
31
ITA NO. 5168/Del/2010
of installation (activity of P E in India) and even is it
assumed that the supplies were integral part, still no
part of profit on such supplies can be attributed to the
independent P E unless it is established by the
department that the supplies were not at Arm's Length
Price and this is the basis on which it was held by the
Hon'ble Apex Court that the profits that accrued to the
Korean GE for the Korean operations were not taxable
in India. In the present two years also, nothing has
been brought on record to show and establish that
supplies were not at Arm's length price. Hence, even
after considering this argument of the Ld. DR of the
revenue that P E was in existence through out these
two years, we are of the considered opinion that as
per this judgement of Hon'ble Apex Court in the case
of the assessee itself for the assessment year 1987-88
and 1988-89, no profit is taxable on account of Korean
operation (designing and fabrication) because profits,
if any, from the Korean operations arose outside India.
In the present two years also, the only dispute is with
regard to payments made to non resident company
outside India for the work done outside India, as per
composite contract for designing, fabrication,
installation and commissioning of installation on a turn
key basis. As per above discussion, after considering
clause (a) of para-15 of the judgement of Hon'ble Apex
Court per directions of Hon 'ble Uttrakhand High Court,
we hold that in the facts and circumstances of the
32
ITA NO. 5168/Del/2010
case, profit, if any, from the Korean operations
(designing and fabrication) is not taxable in India
because the same has been arisen outside India.
Regarding clause (b) of para 15 of the judgement of
Hon'ble Apex Court, we find that in the previous two
years, there is no dispute regarding quantum of profit
embedded in the Indian operation attributable to
Indian P E of the assessee and hence this clause of
para 15 is not applicable in the present two years
which are before us. We, therefore find no reason to
interfere in the order of Ld CIT(A) in both these
years.".
The aforesaid proposition has also been followed by the
Mumbai Tribunal Roxon OY Vs DCIT (103 TTJ 891 (Mum).
"As far as art. 7(I)(a) is concerned, the profits attributable to
the supplies under the turnkey contract can be brought to
tax in India only when we are to hold that the profits
attributable to P E will include the profits on supplies under
the turnkey contract. In our humble understanding, such an
interpretation will be incorrect, for several reasons. Firstly, a
profit earned by an enterprise on supplies which are to be
used in a construction or installation P E for such supplies,
cannot be said to be attributable to the P E because P E
comes into existence after the transaction giving rise to
supplies materialized. The installation or construction P E, in
such a case, is a stage posterior to the conclusion of
transaction giving rise to the supplies. Such an installation
33
ITA NO. 5168/Del/2010
or construction P E can come into existence after the
contract for turnkey project, of which supplies are integral
part, is concluded."
Further more the Hon'ble Supreme Court had also affirmed
the above proposition in the case of Ishikawajma-Harima
Heavy Industries Ltd. vs DIT reported in 288 ITR408
" .... The fact that it has been fashioned as a turnkey
contract by itself may not be of much significance. The
contract may also be a turnkey contract, but the same by
itself would not mean that even for the purpose of taxability
the entire contract must be considered to be an integrated
one so as to make the assessee to pay tax in India. The
taxable events in execution of a contract may arise at
several stages in several years. The liability of the parties
may also arise at several stages. Obligations under the
contract are distinct ones. Supply obligation is distinct and
separate from service obligation. Price for each of the
component of the contract is separate. Similarly offshore
supply and offshore services have separately been dealt
with. Prices in each of the segment are also different.
The very fact that in the contract, the supply segment and
service segment have been specified in different parts of
the contract is a pointer to show that the liability of the
assessee there under would also be different.
The contract indisputably was executed in India. By entering
into a contact in India, although parts thereof will have to be
carried out outside India would not make the entire income
34
ITA NO. 5168/Del/2010
derived by the contractor to be taxable in India "
(Emphasis supplied)
Further the facts of cases before the Apex Court and in the
case of the appellant are identical and therefore, the ratio of
these judgements squarely applies to appellant's case as
well.
It is humbly submitted that despite the fact that
under the law, the appellant's income cannot be taxed in
India in view of the beneficial provisions of the DT AA as it
has no PE in India due to aforesaid reasons, the appellant,
however, keeping in mind the past trend where
presumptive rate of profit was applied and accepted by the
appellant and the revenue, the appellant, in the interest of
revenue, agreed to be taxed for the relevant assessment
year as in the past. It is submitted that the facts and
circumstances as prevalent in preceding years have remain
unchanged and, therefore applying the
rule of consistency, the income declared may be assessed
and, no more. Reliance in support of the aforesaid
proposition is placed on the judgement of Hon'ble Apex
Court in the case of Radha Saomi Satsang v CIT reported at
193 ITR 321. This view has also been expressed in the
following cases:
- (2001) 1 SCC 748 State of Andhra Pradesh v A.P.
Jaiswal
- 266 ITR 99 (SC) CIT v Berger Paints
- 217 ITR 4 (Gau) DhansiRam Aggarwalla v CIT
35
ITA NO. 5168/Del/2010
- 158 ITR 3 (Del) CIT V Shree Ram Memorial Foundation
- 245 ITR 492 (Del) CIT v Neo poly Pack
- 249 ITR 219 (SC) VOl v Kuomidini Narayan Dalal and
Another
- 249 ITR 221 (SC) VOl v Satish Panna Lal Shah
- 156 ITR 835 (MP) CIT v Godavari Corporation Ltd
- 260 ITR 417 (P&H) CIT V. Girish Mohan Ganeriwalia
- 308 ITR 161 (SC) CIT v J.K. Charitable Trust
- 2011-TIOL-48-HC-DEL-IT CIT vs Rajasthan Breweries
Ltd (see page 1118 -1121
We respectfully invite Hon'ble Bench's kind attention to a
recent judgement dated 31 st May, 2011 of the Hon'ble
Delhi Bench of the ITAT in the case of Hyundai Heavy
Industries Company Limited [ITA No, 2086 & 2087/Del/2009]
to support our submissions ,that even if it is assumed
(without admitting) that the appellant has PE in India, it
could only be held to be taxable only to the extent profits
attributable to PE in India as per Article 7(1) & 7(2) read
with Article 7(6) by following the consistent method of
presumptive taxation where only income derived
inside India can be taxed after reducing TDS verifiable
expenses and applying 10% presumptive profit rate on the
balance inside India receipts. In other words the profit
attributable to the activity of installation and commissioning
can alone be taxed and the income though declared by the
assessee even @ 1 % of the revenues generated outside
India on the fabrication of platform could not be taxed. The
36
ITA NO. 5168/Del/2010
appellant also places a reliance on the order of Hyundai
Heavy Industries ltd (ITA No 2086 & 2087/DeI/2009) where
similar view has been adopted.
It may be stated here that the agreement entered by the
assessee and that by Hyundai Heavy Industries are
absolutely identical and as ONGC enters into only standard
agreements, In other words terms of the agreement entered
by the assessee and the terms of agreement entered by
Hyundai Heavy Industries are absolutely identical. In the
case of the assessee, the situation is better as it has no PE
in India, whereas in the case of Hyundai a PE was
established in India.
It is respectfully submitted that the Hon'ble Bench would
appreciate that the aforesaid Hyundai Heavy case involved
similar issues where Hyundai had similar contract with
ONGC for fabrication of platform in Korea and installation
thereof in India on a turnkey basis. Under such contract,
Hyundai was offering inside India revenues under
presumptive income regime by reducing TDS verifiable
expenses and applying 10% presumptive income rate to the
balance inside India receipts. The assessment under section
143(3) was also been completed by accepting this
consistent method of attribution and computation. The
Director of Income tax, however, invoked power under
section 263 by holding that the assessment was erroneous
and prejudicial to the interest of revenues because the
contract under consideration was a turnkey contract and
37
ITA NO. 5168/Del/2010
the presumptive method has no legal basis. The Hon'ble IT
AT keeping in view the facts of the case (similar to the
appellant) and observing the consistent method of
presumptive regime of taxation, held that the power
exercised by the DIT under section 263 are bad in law
because as per Article 7(5) of India-Korea treaty the profits
attributable to PE shall be determined by the same method
followed from year by year i.e. on consistent basis.
It is submitted that the appellant has also filed its return of
income by following the presumptive method of taxation as
applied by the revenue authorities consistently from the
very beginning. Therefore, even if it is assumed (without
admitting) that the appellant has PE in India, only its inside
India revenues can be said to be attributable to PE in India
by applying the consistent presumptive method as per
Article 7(6) (synonymous to Article 7(5) of the India-Korea
DTAA) which is being used by the revenue (and accepted by
the appellant) from year to year.
It is also submitted that in the aforesaid Hyundai's
case, the revenues in respect of fabrication of platform i.e.
outside India activities was not offered to tax by Hyundai on
the ground that it is not attributable to PE in India. The DIT
while exercising its powers under section 263 also sought to
tax the outside India revenues as attributable to PE in India
because it was a turnkey contract completed in India. The
Hon'ble Bench however relied upon the judgement of
Hon'ble Supreme court in Hyundai's own case (291 ITR 482)
and the Delhi ITAT judgement in Hyundai's own case for AY
38
ITA NO. 5168/Del/2010
1994-95 & 1995-96 [ITA No. 2290 & 2291/Del/2002] and
held that even if there could be a PE, nothing out of outside
India activities i.e. design & engineering, material
procurement, fabrication and transportation, can be
attributable to PE in India.
In view of the above judgement which is squarely
applicable to the facts of the appellant, it is submitted that
under any circumstances appellant's outside India revenues
can not be taxed in India. Furthermore, even if it is held that
the appellant had PE in India, it could only be directed to
pay taxes on income attributable to PE in India which is its
inside India revenues based on the consistent presumptive
method which the appellant has already offered to tax in its
return of income."
8. Ld. Departmental Representative submitted as under:-
"The facts in brief are that the assessee is a company
incorporated under laws of UAE and is engaged in the
business of designing, engineering, procurement,
fabrication and installation of offshore platforms and laying
of pipelines etc. The assessee has entered into a contract
with ONGC dated 28.12.2005. In return of income filed on
31.10.2007, the assessee has declared its income at Rs.
10,77,98,165/-, wherein receipts from contract have been
bifurcated into two components, relating to (i) outside India
activity and (ii) inside India activity. The assessee has
declared income @ 1% of outside India revenue and 10% of
inside India revenue after claiming expenses on which TDS
has been made. The assessee has claimed that this formula
39
ITA NO. 5168/Del/2010
of declaring income was adopted by the AO in A.Y. 1997-98.
Subsequent to AY 1999-00, the assessee did not file audited
accounts but simply declared the taxable income on the
basis of above referred formula. The assessee has given a
chart of status of income declared and assessed from A.Y.
1997-98 onward on page 6 of its synopsis. The AO has
rejected bifurcation of income into two categories and has
worked out taxable income @ 25% of total receipts.
My submissions on various issues involved are as
under:
Rule of consistency:
It is seen that the assessee has declared its taxable
income with reference to scheme of taxation
envisaged u/s 44BB by declaring 10% of receipts after
claiming deduction for expenses in respect of which
TDS has been made. It is submitted that this approach
of assessee is not in accordance with provisions'
contained in section 44BB which is presumptive
taxation scheme wherein 10% of gross receipts is
deemed as taxable income and no deduction for any
expense is allowable out of gross receipts. The
assessee claims that provisions of section 44BB are
applicable to it and income has been declared as per
presumptive taxation scheme contained in section
44BB. But this claim of assessee is incorrect. If at all,
section 44BB is applicable to assessee's case then no
deduction of expenses is allowable even if tax has
been deducted at source in respect of those expenses.
40
ITA NO. 5168/Del/2010
The assessee has contended that the Department
should follow the rule of consistency as the
assessment has been similarly made since A.Y. 1997-
98 onward. But this claim of assessee is not legally
tenable because any formula or any agreement
whatsoever arrived at between the assessee and
department which is against the provision of law is not
enforceable under the law. The department is not
bound to follow and perpetuate the mistake which has
been committed in the past. Reliance is placed upon in
the case of Distributor (Baroda) Pvt. ltd., 155 ITR 120
(SC) wherein Hon'ble Apex Court has held that there is
not heroism in perpetuating a mistake.
Nature of Contract:
The basic contention of the assessee is that the
contract with ONGC is divisible into two parts, (i)
outside India activity consisting of designing,
fabrication and supply of platform, (ii) inside India
activity consisting of installation of said platform. This
contention of the assessee is not correct as the
contract is composite, turnkey & indivisible contract
which is evident from various clauses as mentioned
below:
(a) Clause 1.1.2 says certificate of completion and
acceptance means certificate issued by the company
stating that contractor has satisfactorily performed the
entire scope of work under the contract and scope of work
41
ITA NO. 5168/Del/2010
added subsequently in accordance with provisions of the
contract.
(b) Clause 1.1.3 says commissioning means completion of
all activities as defined in bidding document.
(c) Clause 2.1.1 is scope of work which shall include in
general but not limited to surveys (pre-engineering, pre-
construction, pre-installation and post installation), designs,
engineering, procurement, fabrication, anti-corrosion and
weight quoting and load out, tie down, sea fastening, tow
out, sale out, transportation, installation, sub-marine cabling
hook up of sub-marine cable, modification of existing
facilities, testing pre-commissioning, commissioning of
entire facilities as described in bidding document.
(d) 2.2.3 says that prior to taking up fabrication/installation
of any major component of work, the contractor shall
submit to company his proposed construction sequence and
procedures and obtain company's approval in writing.
(e) Clause 2.3.4:1 is regarding programme of work and says
that within 21 days after the award of work under this
contract or prior to kick of meeting whichever is earlier, the
contractor shall submit to the company for its approval a
detailed programme showing the sequence procedure and
method in which he proposes to carry out the works.
(f) Clause 2.3.5.1 says that the contractor shall supply to
the company an organization chart showing proposed
organization to be established by him for execution of the
work.
42
ITA NO. 5168/Del/2010
(g) Clause 3.1 says the company shall pay to the contractor
in consideration of satisfactory completion of works covered
by scope of work under the contract. Contract price of US$
189409310.
(h) Clause 3.2.1 says pending completion of whole works,
provisional progressive payment for part of the works
executed by the contractor shall be made by the company
on basis of said work completed and certified by the
company's representative as per agreed milestone formula.
This clause also says that the contractor shall open a
project office in India with permission of RBI.
(i) Clause 3.4.1.1 says custom duty for imported material
shall be paid and borne by the contractor.
(j) Clause 5.1.7.2 says contractor shall submit to company
for review and approval of all layout drawings, detailed
construction and approval drawings, designs specification,
detailed calculation and project specification etc. for the
work and other information required by the company prior
to issuance for construction.
(k) Clause 5.1.9.1 says that contractor shall furnish to the
company a complete list of all drawings which will be used.
(I) Clause 5.1.10 is regarding purchases and various sub
clauses show that company ONGC shall be having complete
control and monitoring over purchases made by the
contractor.
(m) Clause 5.2 is regarding sub-contracting and it says that
contractor shall not, except with prior approval of company,
sub-contract any part of the contract.
43
ITA NO. 5168/Del/2010
(n) Clause 5.2.3 is regarding approval to be obtained by the
contractor in respect of vendor list, material and equipment
to be purchased.
(0) Clause 5.4.1 is regarding pre-engineering, pre-
construction, pre installation service. (p) Clause 5.4.3 is
regarding post installation survey
(q) Clause 5.10 says certificate of completion and
acceptance of works or part of works shall be issued by the
company subject to provisions of clause 5.10.1 to 5.10.5.
(r) Clause 5.11.3.1 says that it shall be sole responsibility of
the contractor to get the materials, equipments and other
things required for the works to be cleared from all govt.
agencies including custom/excise and to pay such duties.
(s) Clause 7.1.1 says ownership of material shall be
transferred to the company upon date of issuance of
certificate towards part completion or completion and
acceptance of works.
(t) Clause 7.3.1 says that contractor will be responsible and
liable to take insurance policies against all the risks.
(u) Clause 11.1 says that contractor shall provide detailed
planning package, live project data for continuous
monitoring by the company.
(v) Clause 11.2 is regarding progress reports to be furnished
by the contractor for monitoring by the company.
From the various clauses of the contract it can be
reasonably inferred that the contract is composite turnkey
contract wherein ONGC wants a fully installed offshore
platform. ONGC does not want the assessee to supply
44
ITA NO. 5168/Del/2010
various components and equipments independently. The
contract is not for sale of goods. This contract is for a work
which is installation of offshore platform. The assessee has
argued that fabrication and supply of platform is separate
from installation of the platform and hence the contract can
be split into two components, i.e., outside India activity
comprising designing, engineering & fabrication of platform
and inside India activity comprising installation of such
fabricated platform. The assessee has emphasized that
price of each and every component has been mentioned
and paid as per milestone formula and delivery and
ownership of fabricated platform was transferred to ONGC
outside India. The assessee has further argued that the fact
that it was responsible for paying custom duty and taking
insurance policy does not mean that risk did not pass to
ONGC. These contentions of the assessee are incorrect.
Firstly, the payments made under milestone formula are
just provisional progressive payments as mentioned in
clause 3.2.1 of the contract and these are not the final price
of the items concerned. Such interim payments are made to
finance the big contracts so that the contractor does not
have financial constraint.
For this, the reliance is placed on Hon'ble Supreme Court's
decision in case of Hindustan Shipyard VS. State of Andhra
Pradesh 6SCC 579 (SC) (copy attached as Annexure-i). In
that case, the assessee was engaged in activity of building
ships for different clients. Hon'ble court has discussed
various relevant clauses of the agreement. The agreement
45
ITA NO. 5168/Del/2010
between the builder and the customer Great Eastern
Shipping Co. Ltd. talks about the contract price of Rs
5,50,00,000 per vessel to be paid in various installments.
Clause 5 of Article 7 laid down that title and risk of the
vessels shall pass to the owner upon acceptance when
delivery of vessel is affected. Article 15 provides that on
payment of first installment property and vessel will pass to
the owner. Article 17 provides that builder shall take
insurance at its own cost in joint name of the builder and
the owner. Hon'ble Supreme Court has held that it is a
contract for sale of completely manufactured ship to be
delivered after successful trials in all respect and to the
satisfaction of the buyer. It is a contract for sale of made to
order goods. 65% of the price paid before the trial is
intended to finance the builder to share a part of burden
involved in the investments made by the builder towards
building of ship. It is a sought of advance payment of price.
Regarding transfer of property in the vessel, Hon'ble
Supreme Court has said that insurance cover is to be
obtained by the builder and entire risk remains with the
builder which would not have been so if the property in
vessel had already passed to the owner. The court further
says that Article 15 which talks about passing of property in
vessel on payment of first installment is a piece of artistic
drafting. Applying the ratio of this decision, it can be
reasonably said that the property in platform passed to
ONGC only after its successful installation subject to
satisfaction of ONGC and provisional payments made under
46
ITA NO. 5168/Del/2010
milestone formula are in the nature of advance payments
only.
Further, Hon'ble Delhi ITAT in the case of Samsung Heavy
Industry Co. ltd. VS. AOIT has held on similar facts that
contract is of composite nature. The terms of contract in
Samsung Heavy Industry case and in the present case are
essentially similar. The finding of Hon'ble ITAT is given in
para 60 to 65 wherein various clauses of the contract have
been examined and ultimately in para 65, Hon'ble ITAT has
given a finding that contract obtained by assessee from
ONGC is a composite contract.
Further, AAR in a recent decision, namely, Roxor Maximum
Reservoir Performance WLL has, following the ratio given
by Hon'ble Apex court in Vodafone case, held that contract
has to be read as a whole and purpose for which the
contract is entered into by the parties is to ascertain from
the term of the contract. A similar "look at" rather than
"look through" approach has been adopted by the AAR in a
subsequent decision in case of Alstom Transport SA. The
principle of 'look at' and not 'look through' has been applied
by Hon'ble ITAT Kolkata in case of Dongfang Electric
Corporation vs DDlT ITA No. 833/KoI/2011 wherein Hon'ble
ITAT has gone a step further by saying in para 11 of its
order that principle of 'look at' is to be applied in a situation
where there are two separate contracts; one for offshore
supply of goods and second for onshore services where
value assigned to onshore services is unreasonable as
compared to value assigned to offshore supplies. In present
47
ITA NO. 5168/Del/2010
case, there is only one contract and ironically assessee
wants to artificially bifurcate it into two components which
even ONGC did not want.
Therefore, in view of discussion above, it is submitted that
the contract is composite one and not divisible into Outside
India activity and inside India activity as claimed by the
assessee and transfer of ownership passed from assessee
to ONGC in India only after successful installation of the
platform.
Section 19 to 23 of Sale of Goods Act 1930 provides rules
about the time when property passes from seller to buyer.
Section 21 says where there is a contract for sale of specific
goods and the seller is bound to do something to the goods
for the purpose of putting them into deliverable state, the
property does not pass until such thing is done and buyer
has notice thereof. Definition of specific goods is given in
section 2(14) and goods in deliverable state are defined in
section 2(3) of Sale of Goods Act. In the present case,
contract is for the sale of fully functioning platform.
Therefore, unless the assessee installs the various
components and makes them a functional platform which is
a deliverable state, the property in goods does not pass to
ONGC. Therefore, the contention of the assessee that
property in goods has passed to ONGC outside India is not
legally tenable.
48
ITA NO. 5168/Del/2010
This position has also been admitted by ONGC as is evident
from their letter mentioned on page 36 of assessment
order. In point no. 4 and 6, it has been clarified that during
progress of work, ownership of goods remained with
contractor.
From discussion supra, it is clear that contention of the
assessee that transfer of ownership has occurred outside
India and only installation activity has been done in India is
not correct.
Fixed Place PE:
The AO has dealt with this issue in para 20 of his order. Vide
letter dated 24.01.2006, the assessee has intimated RBI
about the address of their project office and nature of
project undertaken. This letter talks about contract
agreement dated 29.12.2005 with ONGC for carrying work
of service, design, engineering, procurement, fabrication
and anti-corrosion, weight quoting, lead out, tied down, toe
out, transportation, installation, hook-up installation, sub-
marine pipelines, installation of sub-marine cables,
modification on existing platform, testing, pre-
commissioning, commissioning. The work under the above
contract is due to be completed by April 19.02.2007.
Further, the said letter gave address of project office as
07.01.2006, 7th Floor, Midas Sahar Plaza, Kondivila, M.V.
Road, Andheri East, Mumbai-110059. The assessee has
contended that this project office existed since 1990's and it
has been opened at the instruction of ONGC only. The
49
ITA NO. 5168/Del/2010
above referred letter clearly shows that the assessee
company has a project office in Mumbai for the purpose of
present contract with ONGC and it is immaterial whether it
was a requirement under the contract to open a project
office or not. The taxability of assessee is triggered when
there is a fixed place PE in India.
It is pertinent to note that contract is dated 28.12.2005 so
the first AY was 2006-07 wherein the assessee has accepted
the existence of PE and filed its return of income. The
assessment year under consideration, i.e., 2007-08 is a
second year of the said contract. In this assessment year
also, the assessee has accepted in its return of income that
there exist a PE in India. Perusal of the chart given by the
assessee on page 6 of synopsis indicates that assessee has
been filing its return of income accepting that there is a PE
in India. In all the earlier assessment years, the return was
accepted u/s 143(1). For the assessment year under
consideration when the case was selected for scrutiny, the
assessee changed its position and contended that there is
no PE in India. The facts as mentioned above indicate that it
is the assessee who has not followed the rule of consistency
as prescribed by Hon'ble Supreme Court in Radha Soami
Satsang case 193 ITR 32 (SC).
Under similar facts, Hon'ble ITAT Delhi in case of Samsung
Heavy Industry has held that there existed fixed place PE in
India. Hon'ble ITAT Delhi has discussed the facts regarding
project office in Samsung's case in para 66 to 72. In that
case also the assessee company had passed a resolution
50
ITA NO. 5168/Del/2010
regarding existence of project office in India to which RBI
has given its permission. However, in the present case, the
requirement of law at the relevant point of time was that
the assessee company was required to just give intimation
to RBI regarding opening and address of the project office
and it amounts to automatic approval of the RBI. The
assessee company has given said intimation vide letter
dated 24.01.2006.
The assessee has also argued that the nature of activities
done through the said project office is just ancillary and
auxiliary in nature. In this regard, it is submitted that
various clauses of contract showed that there is an absolute
monitoring of each and every stage of work by ONGC and
for this presence of project office was required. Clauses
2.3.4.1,2.3.5.1,5.1.7.2,5.1.8,5.1.9, 11.1 & 11.2 show that
there is a continuous monitoring of ONGC of each stage of
work. Exactly similar clauses were there in contract
between Samsung Heavy Industry and ONGC. Hon'ble ITAT
in para 7 has held that the nature of activities done through
project office are vital and essential for carrying out.of a
contract and they are not in nature of ancillary and auxiliary
activities.
Installation PE:
The AO has discussed the existence of installation PE in
para 24 of his order. The main contention of the assessee is
that since the installation activity continued for a period of
less than 9 months, therefore, there is no installation PE in
India. The assessee has calculated the period starting from
51
ITA NO. 5168/Del/2010
date of entry into India of barges. The article 5 of relevant
DTAA has been reproduced on para 30 of synopsis of the
assessee. Paragraph 2 of article 5 says that PE includes (h)
a building site or construction or assembly project or
supervisory activities in connection therewith but only
where such site project or activity continues for a period of
more than nine months. Here, it is pertinent to note that
paragraph 2 gives inclusive definition which means that it
gives certain examples which could be treated as PE. This
paragraph is not 'notwithstanding' paragraph 1 of article 5
which means that the examples quoted in paragraph 2 have
to satisfy the criteria of PE contained in paragraph 1,
otherwise it will be absurd to interpret that an office under
(c) will be PE without satisfying the parameters of
paragraph of article 5. So according to paragraph 2,
anything mentioned from (a) to (i) will be fixed place PE if
they fulfill conditions mentioned in paragraph 1. In the
present case, project office falls in entry (c) which fulfills the
parameters of paragraph 1. Further, according to (h)
installation site will be PE if it fulfills activity parameter of
duration of 9 months. Here, duration test supplements the
test provided in paragraph 1. Therefore, it is clear that
paragraph 2 does not override paragraph 1. Regarding the
duration parameter, guidance can be had from OECD
commentary. In paragraph 19 of commentary on article 5
(copy attached as Annexure-V), it has been mentioned that
the site exists from the date from which the contractor
begins his work, including any preparatory work, in the
52
ITA NO. 5168/Del/2010
country where the construction is to be established, e.g. if
he installs a planning office for the construction. In general,
it continues to exist until the work is completed or
permanently abandoned. This commentary further says that
If an enterprise (general contractor) which has undertaken
the performance of a comprehensive project subcontracts
parts of such a project to other enterprises (subcontractors),
the period spent by a subcontractor working on the building
site must be considered as being time spent by the general
contractor on the building project. The subcontractor
himself has a permanent establishment at the site if his
activities there last more than twelve months.
From the above commentary of OECD, it is clear that
duration for installation PE has to be considered from the
date when the contractor establishes office for the purpose.
Here, in this case project office has been established vide
letter dated 24.01.2006. Further, the commentary says that
if the contractor sub-contract parts of the Project to
somebody else, the periods spent by the sub-contractor
must be considered as being time spent by the main
contractor itself. In the present case, the assessee has sub-
contracted pre-engineering and pre-construction surveys.
Pre-engineering survey started on 27.02.2006 whereas pre-
construction survey started on 25th April 2006. So on the
whole, the assessee started working for the contract with
establishment of project office and pre-engineering/pre-
construction surveys, it has been demonstrated supra that
53
ITA NO. 5168/Del/2010
the contract is for installation of off-shore platform only and
for nothing else. Therefore, it can be concluded that
duration of installation PE has to be counted since the
establishment of office itself in India which exceeds more
than 9 months period prescribed under the article of DTAA.
The assessee has argued that provisions of article 5 relating
to installation PE overrides the provisions relating to fixed
place PE and has relied upon various case laws. In BKI Ham
case, Hon'ble Uttrakhand High Court has held that for
installation PE, a minimum prescribed period under article
has to be satisfied. However, in that case the issue before
Hon'ble High Court was an office under article 5(2) vs.
installation PE under article 5(3). In that case, there was no
fixed place PE involved. In any case, Hon'ble court has
never said that fixed place PE and installation PE cannot co-
exist. In GIL Mauritius case, Hon'ble ITAT has held that for
installation PE to exist, duration test has to be satisfied.
Even in this case, there did not exist fixed place PE as the
assessee was working on moving ship which did not satisfy
permanence test. Regarding sub-contracting part of the job,
the assessee has relied on Pintsch Bamag case. However, in
this case, vital facts were that whole of the work was sub-
contracted and the main contractor did not do anything and
on the basis of these facts AAR held that activities of sub-
contractor cannot be counted in the hands of main
contractor. In the present case, the facts are totally
different as only pre-engineering/preconstruction survey
were sub-contracted and rest of the project was undertaken
54
ITA NO. 5168/Del/2010
by the assessee itself. To this situation, commentary of
OECD as referred (supra) applies. In view of discussions
(supra), it is evident that installation activity continued in
India for more than 9 months and, therefore, installation PE
exists.
Applicability of section 44BB
In synopsis from page 99 to 104, the assessee has argued
that provisions of section 44BB are applicable to inside India
activity of the contract. The assessee has taken ground of
appeal no. 24 in this regard. Here, in this regard, it is
submitted that section 44BB does not apply to the nature of
activities done by the assessee. Section 44BB(1) is
reproduced as under:
(1) Notwithstanding anything to the contrary contained in
sections 28 to 41 and sections 43 and 43A, in the case of an
assessee, being a non-resident, engaged in the business of
providing services or facilities in connection with, or
supplying plant and machinery on hire used, or to be used,
in the prospecting for, of extraction or production of,
mineral oils, a sum equal to ten per cent. of the aggregate
of the amounts specified in sub-section (2) shall be deemed
to be the profits and gains of such business chargeable to
tax under the head "Profits and gains of business or
profession":
Provided that this sub-section shall not apply in a case
where the provisions of section 42 or section 44D or section
115A or section 293A apply for the purposes of computing
55
ITA NO. 5168/Del/2010
profits or gains or any other income referred to in those
sections.
It is clear that section 44BB applies in two situations,
(i) when non-resident is engaged in the business of
providing services or facilities in connection with, OR
(ii) supplying plant and machinery on hire used or to
be used, in the prospecting for, of extraction or production
of, mineral oils.
The assessee is not in the business of providing services,
neither any plant or machinery has been supplied on hire
basis. The assessee is under the contract engaged in
successful installation of off-shore platform. Even in this
case, activity cannot be characterized as facility provided
by the assessee. For providing facility, it is pre-requisite that
facility should exist, because unless a facility exists, it can
not be provided. The assessee is required to install platform
as per requirement of ONGC. It is not a case of standard
pre-existing platform being provided by the assessee.
Therefore, business activity of the assessee does not fall
within the purview of section 44BB. Further, the assessee
has argued that section 44BB is applicable to inside India
activity. Here, it is submitted that section 44BB does not
distinguish between inside India activity and outside India
activity and it prescribes taxation on gross basis. Section
does not provide for any deduction of expenses even if TDS
has been made thereon but interestingly the assessee has
claimed deduction of such expenses and offered 10% of
56
ITA NO. 5168/Del/2010
income on the balance receipt which is not as per provisions
of section 44BB. Therefore, even assessee has not followed
the provisions contained in section 44BB itself.
Attribution of profits to the PE
AO has determined 25% of the total receipts as profits
attributable to PE. DRP has considered the profitability of
various comparables and came to the conclusion that 25%
rate is applied by the AO is reasonable. The contention of
the assessee is that contract is divisible into two parts and
has offered 1% of revenue pertaining to outside India
activity and 10% of revenue pertaining to inside India
activity (after claiming expenses w.r.t. which the TDS has
been made) as income.
From the discussions supra, it is demonstrated that contract
is indivisible turnkey project and the entire receipts are for
the purpose of successful installation of off-shore platform.
It has also been demonstrated that since section 44BB is
not applicable to the assessee, therefore, profits from this
contract has to be determined under Rule 10 because the
assessee has not produced any books of account.
Therefore, approach of the AO is correct. Without prejudice,
even if it is argued that section 44BB is applicable then
whole of the receipts without allowing deduction in respect
of any expenditure has to be considered for presumptive
taxation. The assessee has relied upon the CBDT's
instruction no. 1767. Here, it is submitted that this
instruction applies in a situation where sale takes place
outside India. In the present case, it has been demonstrated
57
ITA NO. 5168/Del/2010
supra that transfer of property has taken place in India.
Therefore, this instruction has no application in present
case. The assessee has also contended that Explanation 1A
to section 9(1)(i) applies to outside India activity component
of its contract. Here, it is submitted that without admitting,
even if section 44BB is at all applicable in assessee's case,
it talks about taxation of gross receipt and, therefore, no
portion of receipts can be carved out applying the
provisions of above said explanation.
Further, it has been conclusively demonstrated above that
sale or transfer of property has taken place in India. Sale is
the most vital stage of transaction where profits embedded
in goods manufactured are realized. Even if, hon'ble bench
is inclined to agree to assessee's contention that substantial
activities have been done outside India, yet profits have to
be attributed to PE which arise out of sale made in India.
Hon'ble Supreme Court in case of Anglo French Textile Co.
Ltd. that profits have to apportioned where manufacturing
and sale take place in different tax jurisdictions.
Applicability of Hon'ble C-Bench of ITAT Delhi' decision in
case of Hyundai Heavy Industries Co. ltd. ITA. No.
5231/Del/2010:
During last hearing, the assessee's counsel has furnished
copy of Hon'ble C-Bench of ITAT Delhi' decision in case of
Hyundai Heavy Industries Co. Ltd. and contended that ratio
of that decision should be applied in present case. In this
regard, it is submitted that in case of Hyundai Heavy
58
ITA NO. 5168/Del/2010
Industries Ltd., section 44BB was applicable. Even this has
been admitted by assessee as per para 23.10 of synopsis
wherein relevant para from Supreme Court's order in case
of Hyundai heavy Industries Ltd. has been reproduced.
Further, in para 33, Hon'ble ITAT has held that contract is
divisible in Hyundai case. In present case, it has been
demonstrated that contract is single, indivisible and
turnkey. When Hyundai case was heard by Hon'ble ITAT C-
bench, benefit of Vodafone case of Supreme Court and
other cases of AAR and ITAT Kolkata was not available. Now,
in view of Hon'ble Supreme Court's decision in case of
Vodafone, it can not be said that present contract is
divisible. Further, in para 36, Hon'ble ITAT in Hyundai case
has said that during the year under consideration, the
contract has been completed and receipts during the year
are just carried over payments. It has been held that since
90% of payments have been taxed earlier as per agreed
formula, AO can not assess 10% by adopting a different
method. This is not the situation in present case. In present
case, major payments have been received during the year
under consideration.
59
ITA NO. 5168/Del/2010
In view of these facts, it is submitted that Hon'ble C-Bench
of ITAT Delhi' decision in case of Hyundai Heavy Industries
Co. Ltd. is not applicable to present case."
9. We have carefully considered the submissions and perused the
records. Our adjudication on the issues raised in the appeal is as
under:-
10. Whether the assessee has PE in India.
11. We find that Assessing Officer has observed that the main thrust
of the argument of the assessee is that it was not having any PE in
India before the work of fabrication got completed and the fabricated
material was imported in India. The installation PE was having the
limited task of installation and commissioning of the project. Hence, it
is the assessee's claim was no part of profits in respect of off shore
supplies can be brought to tax in India. Assessing Officer further
noted that assessee had a project office in Mumbai since 1990, but
the same was claimed to have been opened at the instruction of
ONGC, because it was a mandatory requirement for the execution of
the contract. Assessing Officer opined that the crucial fact is that the
assessee has an office in India which is a project office and therefore,
clearly as per the Treaty between India and UAE, the assessee has a
P.E. in India. Assessing Officer further observed that it was for the
assessee to prove that the activities of the Project Office are ancillary
and auxiliary so that the same can be taken in the exception clause of
the Treaty. Assessing Officer further opined that by no stretch of
imagination, a Project Office can be involved in ancillary and auxiliary
activity. Assessing Officer further observed that in this case the
60
ITA NO. 5168/Del/2010
project was in existence even prior to the signing of the contract with
ONGC and after signing of the contract, the assessee intimated RBI
that it has a Project Office for the execution of this contract. Assessing
Officer has also referred to his enquiry with ONGC and certain
documents were collected from them. Referring to these documents,
Assessing Officer observed that it transpired that the assessee's
Mumbai office and M/s Arcadia the dependent agent Permanent
Establishment has also participated in biding process and was
involved in negotiation and finalization of the contract. Further,
Assessing Officer observed that these documents are not mere
correspondence but these indicate definite involvement of the Mumbai
Office and Arcadia Shipping Ltd. in the process of negotiation of the
contract. Further, Assessing Officer observed that right from the stage
of submission of tender document to the date of kick off meeting when
the technical work commences, Mumbai office and Arcadia were
actively involved in the process. These can not be held to be a mere
preparatory and auxiliary activities as contended by assessee.
Marketing is a core business function and it can not be termed as
auxiliary activity. The contract between the a ssessee and Arcadia
Shipping Ltd. itself says that Arcadia will provide assistance in
obtaining works and active representation, promotion and support of
the principal's activities in India and assistance in obtaining services
and facilities in India. Thus, Assessing Officer held that it cannot be
said that assessee has no P.E. in existence other than the Project
Office. The Assessing Officer opined that assessee has a project office
for its project in India and also the dependent agent M/s Arcadia.
Further, assessee was found to be having a PE in terms of article
5(2)(h) of Indo UAE Treaty i.e. construction and installation PE.
61
ITA NO. 5168/Del/2010
Assessing Officer further observed that it was immaterial that the
assessee has one single PE for all the business functions or different
PE's for different functions. Assessing Officer further observed that
project office was not only involved in installation and commissioning
but that was only a part of the business operation. Assessing Officer
opined that the other items of work were also executed by the
assessee in India through one agency or the other. The pre
engineering surveys and designing etc. were also done by the Project
office which operated through fixed place of business in India. The
surveys and designing were also done by persons located in India. The
assessee has undertaken detailed pre-engineering surveys which was
the first step after the contract was awarded and the Project Manager
had requested for N.E.D. passes for their employees to execute that
work. Assessing Officer further observed that the PE of the assessee
by way of office for the project also last for more than 9 months. He
referred to the date of contract and the completion /hand over of the
project and observed that project lasted for more than the period
stipulated in the DTAA. Hence, he treated the assessee has a PE
within the meaning of treaty.
Assessee has claimed that assessee has a project office since
1997 in India. Further, assessee had admitted that this project office
was stated to be a PE for assessment years 1997-98 to 2007-08.
However, the assessee has claimed that this office was only used as a
communication channel and, is thus not a PE as defined in Article 5 (2)
read with Article 5(1) of the DTAA. Assessee has further submitted that
it is not denied that the assessee is involved in installation and
commissioning of a fabricated platform in India and if, in respect of a
project the period of installation activity exceeds beyond nine months,
62
ITA NO. 5168/Del/2010
it would be regarded as an Installation or Construction PE. However,
since the activity of the assessee in India in respect of 4WPP project
lasted only for four and a half months, it cannot be said to have even
an Installation PE in India within the meaning of Article 5(2)(h) of the
DTAA. Furthermore, the assessee claimed that assessee cannot be
said to have dependent agent PE in the shape of consultant appointed
by the assessee in India, M/s Arcadia Shipping Limited. It has been
claimed that even if it is assumed that M/s Arcadia is an agent, it is an
agent of independent nature, as per Article 5(5) of the DTAA. It has
been further submitted that M/s Arcadia is independent from the
assessee legally and economically because Arcadia was acting in the
normal course of its business and receiving an arm's length
remuneration directly from ONGC. Hence, it has been claimed that M/s
Arcadia cannot be held to be a dependent agent as per Article 5(4) of
the DTAA. In fact, neither it has authority to conclude or negotiate
contracts on behalf of the appellant, nor, it habitually secures orders
for appellant because appellant is dealing with ONGC which is a public
sector undertaking awarding contracts under the International
Competitive Bids only and not based on negotiations.
11.1 Upon careful consideration, we find that The assessee itself had
shown the Project Office as its PE in India in earlier years as well as in
the year under consideration. The assessee has changed its stand
that it has no PE in the form of Mumbai Project office during the
course of assessment proceedings. Further, assessee has in its letter
to RBI stated that the Mumbai Office is its Project Office for the project
undertaken with ONGC. The plea of the assessee is that this was done
only to comply with the statutory requirement and that the Mumbai
office had no role to play in the execution of the present contract.
63
ITA NO. 5168/Del/2010
Assessing Officer and DRP has given a finding that letter written to the
RBI establishes beyond doubt that the Project Office was set up to
undertake the project and not to undertake ancillary and auxiliary
activity. As per the definition of permanent establishment in the treaty
between India and UAE, the Project Office is a PE unless it is involved in
ancillary and auxiliary activity. The assessee has not produced any
evidence, to stake its claim in the exclusionary clause of the Treaty's
provision. In fact, the Project Office has been approved by RBI to
undertake the entire project. Before submitting the bid, the assessee
has undertaken pre-bid survey of the site. It is important to note that
the bid cannot be submitted unless the site is surveyed. The Assessing
Officer and DRP had given a finding that assessee had got pre-bid
survey conducted through the Project Office which is directly
connected with the ONGC project. During the period of negotiation of
the contract, employees of assessee company attended the meeting
with ONGC. This was a kick off meeting and each and every detail
was discussed about the project. The assessee has not disputed that
the concerned persons were the employees of its Project Office.
Further, we find that assessee is a non-resident and has entered into a
contract which has lasted for approximately 2 years. It is not possible
that the contract of this magnitude can be executed without the
assessee having any fixed place of business in India from where it can
manage its work for this period of time. Thus, from the above, it is
clear that the project office in India was assessee's PE.
11.2 The assessee has denied that M/s Arcadia Shipping is an agent
of NPCC. It has laid emphasis that Arcadia is a consultant. It has been
claimed by the assessee that M/s Arcadia Shipping was involved in
gathering the information and assisting the assessee in
64
ITA NO. 5168/Del/2010
representations, obtaining works, promotion support and services and
facilities. In this regard we find considerable cogency in the Assessing
Officer's finding that M/s Arcadia is also a PE of assessee as it was
actively involved in the project since pre-bidding meetings, hard core
marketing and business development and till finalization of the
contract. Assessing Officer as well as DRP have given a finding that
letters and correspondence indicate M/s Arcadia is an agent. It is
further noted from the documents obtained by the Assessing Officer
that in the application to the ministry of Home Affairs the address of
employees of NPCC was given as ARCADIA Shipping. From the perusal
of the documents related to pre-bid meeting gathered by the AO from
ONCG, it is noted that the employees of ARCADIA were attending pre-
bid conferences and other meetings on behalf of NPCC. We further
find considerable cogency in the Assessing Officer's arguments that
M/s Arcadia Shipping is wholly and exclusively for work of NPCC, which
is a precondition for dependent agent permanent establishment. The
AO has supported his argument with some documentary evidence.
The Assessing Officer and DRP have also referred to para of the
contract between NPCC and ARCADIA. In these documents assessee
has categorically been referred to as the principal which automatically
implies a principal agent relationship with the person who is authorized
to act wholly and exclusively on behalf of the Principal which in this
case is Arcadia Shipping. Further, it has been pointed out by the
Assessing Officer that in the kick-off meeting dated 16.12.2005, Mr
M.N. Shah of ARCADIA attended the meeting on behalf of NPCC. Also
ARCADIA received tender documents as agent of NPCC, as per letter
dated July 16, 2005. These activities are core business activities. The
contract between NPCC and ARCADIA and the minutes of the meeting
65
ITA NO. 5168/Del/2010
reflecting ARCADIA's presence in core business meetings, show that
ARCADIA was engaged in hard core business development activity for
NPCC in India and was not merely assisting in collecting of information
as claimed by the assessee. In the background of aforesaid discussion,
we hold that ARCADIA Shipping Limited a Dependent agent PE.
11.3 The Assessing Officer observed that assessee also has PE in
terms of Article 5(2)(h) of Indo UAE Treaty i.e. construction and
installation PE. The Assessing Officer further observed assessee has
wrongly advanced claim in earlier years that its PE in India was only
an installation PE and therefore it fell within the meaning of para 3 of
article 5. We find that Assessing Officer has also held installation /
construction PE for the following reasons:-
i) Contract was awarded in November, 2005 and
completed in April, 2007 which is a period of
more than 2 years.
ii) Assessee has project site at its disposal from the
very beginning when the contract was awarded.
iii) Duration period starts from survey activity.
11.4 The assessee on the other hand has claimed that assessee has
no such PE. Assessee has submitted that assessee carried out and
completed the entire fabrication and erection work as the separate
part of the contract executed by outside India. It has further been
submitted that assessee has constructively delivered the platforms
outside India and physically delivered the same in India through its
own barges by its employees. Assessee has further contended that
even if the assessee carried out installation activities in India, yet to
hold an installation PE, the condition that the installation period
66
ITA NO. 5168/Del/2010
exceeded 9 months need to be satisfied. It has been submitted that
the Assessing Officer overlooked the fact that installation activity
could only have begun when the erected platform was physically
delivered in India and the same was commissioned. Thus, the period
to determine whether it was beyond 9 months, would be form the date
of physical receipt of platform in India till the same is commissioned
and thus the authorities had grossly erred when it had been observed
by them that the contract was entered in November, 2005 and
completed in April, 2007 and further, the project site was as its
disposal from the very beginning since the contract was awarded and
the assessee undertook the survey activity. The assessee has claimed
that activities of the assessee in India in respect of the project lasted
only 4 months.
11.5 Ld. Departmental Representative submitted that it is the claim of
the assessee that installation activity continued for a period of less
than 9 months, therefore, there is no installation PE in India. In this
regard, assessee has calculated the period starting from date of entry
into India of barges. As per Article 5 of the relevant DTAA, it has been
mentioned that PE includes (h) a building site or construction or
assembly project or supervisory activities in connection therewith but
only where such site project or activity continues for a period of more
than nine months. Ld. Departmental Representative has referred to
OECD Commentary in this regard and has claimed as per the
Commentary of the OECD it is clear that duration for installation PE has
to be considered from the date when the contractor establishes office
for the purpose. Here, in this case project office has been established
vide letter dated 24.01.2006. Further, the commentary says that if the
contractor sub-contract parts of the Project to somebody else, the
67
ITA NO. 5168/Del/2010
periods spent by the sub-contractor must be considered as being time
spent by the main contractor itself. In the present case, the assessee
has sub-contracted pre-engineering and pre-construction surveys. So
the assessee started working for the contract with establishment of
project office and pre-engineering/pre-construction surveys.
Therefore, Ld. Departmental Representative contended that duration
of installation PE has to be counted since the establishment of office
itself in India which exceeds more than 9 months period prescribed
under the article of DTAA.
11.6 We have carefully considered the submissions, we find that
assessee's plea is that PE existed only after barges landed in India is
not correct. We agree with the contention that PE existed since the
notification of award as the site was available to the assessee since
then, for surveys at various stages of work progress. We agree with
the Revenue's contention that assessee already had a PE in India, even
before the notification of award of contract as the site of ONGC was
made available for surveys etc. Thus we hold that assessee has a
installation PE in India.
12. Whether the contract is divisible? Tax liability of the assessee
13. Assessing Officer has observed that procurement and fabrication
of material took place during the existence of PE in India. The terms
of contract with ONGC do not stipulate any sale of material to them.
The preamble to the agreement as also the scope of work stipulate
manufacturing of platforms on a turnkey basis. There may be various
stages in executing the work like survey, designing, fabrication
procurement, and installation and commissioning but these are mere
stages of the total project. Assessing Officer opined that the ONGC
68
ITA NO. 5168/Del/2010
does not purchase any material from the assessee. ONGC takes over
the completed platform when all parts of the work are executed. In this
regard, Assessing Officer referred to the clarification given by the
ONGC. Referring to the same, the Assessing Officer observed that
the documents bring out in unequivocal terms that the ownership of
the fabricated material remains with the assessee contractor till the
completed project is handed over to the ONGC. Assessing Officer
noted that the assessee has been mainly relying upon the schedule of
milestone payments stipulated in the agreement where value of each
item of work is indicated, the currency in which the payment is to be
made is also indicated and the rate of payment is equally stipulated.
Assessing Officer found that as clarified by ONGC these milestone
payments are in the nature of `provisional progressive payments'
pending completion of the whole work. Assessing Officer further
observed that the clause relating to insurance, payment of custom
duty, re-import in the case of loss / damage etc. only reinforce the
view. Assessing Officer further observed that there is no sale of any
material. The ownership of the material got transferred only on the
completion of the work which was also in India. The deployment of
men and material was in India. The import was made by the assessee
on its own account and the customs duty was also paid by them on
their own account. The entire transportation was done at their own
risk. Assessing Officer observed that it is evident that work relating
to fabrication and procurement of material was very much a part of the
contract for execution of work assigned by ONGC. Assessing Officer
further observed that the assessee company had undertaken the
contract in India on turnkey basis and executed the contract in India.
The title in goods as well as the constructed platform is transferred
69
ITA NO. 5168/Del/2010
once the Indian company accepts the project as complete. Assessing
Officer further observed that this is a clear cut case of a works
contract executed in India where the assessee has also obligation of
fabricating and procuring certain material to be used in the works.
Assessing Officer further observed that assessee is wrong in stating
that the works contract could be divided into two parts, one for the
supply of the material and the other for installation and
commissioning. He observed that the contract in question is neither
divisible nor can consideration for any activity under the contract is
liable for separate treatment.
14. In this regard, Ld. Departmental Representative has submitted
that the basic contention of the assessee is that the contract with
ONGC is divisible into two parts, (i) outside India activity consisting of
designing, fabrication and supply of platform, (ii) inside India activity
consisting of installation of said platform. Referring to the various
clauses of the contract, Ld. Departmental Representative submitted
that the contention of the assessee is not correct as the contract is
composite, turnkey & indivisible contract. For this purpose, the Ld.
Departmental Representative referred to the various clauses of the
contract. Referring to these clauses, the Ld. Departmental
Representative submitted that it can be reasonably inferred that the
contract is composite turnkey contract wherein ONGC wants a fully
installed offshore platform. ONGC does not want the assessee to
supply various components and equipments independently. Further,
the Ld. Departmental Representative referred to the decision of the
ITAT in the case of Samsung Heavy Industry Co. ltd. VS. ADIT. He
claimed that similar contract was entered into in this case and the
ITAT has held that contract obtained by the assessee from ONGC is a
70
ITA NO. 5168/Del/2010
composite contract right from the surveys of pre-engineering,
preconstruction, pre-installation, designs, engineering, procurement
etc. Further Ld. Departmental Representative submitted that from
the ratio emanating from the Hon'ble Apex Court decision in the case
of Vodafone, contract has to be read as a whole and purpose for which
the contract is entered into by the parties is to be ascertained from the
term of the contract.
15. The assessee in this regard has submitted that the subject
contract may be construed as an umbrella contract, yet it is a divisible
contract, since under the same contract, the consideration for various
activities have been stated separately. Furthermore, there is a
complete bifurcation of the activities to be carried out under the
contract with consideration for each specific activity. Assessee
submitted that though the relevant contract with ONGC, though
fashioned as turnkey but not a turnkey contract in spirit and
substance. It has been further submitted that on study of the said
contract, it would be appreciated that ONGC may terminate the
contract, as per clause 8.2, 7.5.5 and or 7.4, and in the event of
termination of the contract, assessee shall be eligible for the following
amounts:-
(a) Contract price properly attributable to the parts of the
Works executed by the Contractor in accordance with the
Contract as at the date of Termination.
(b) The costs incurred by the Contractor in protecting the
Works pursuant to paragraph (a).
(c) Reasonable demobilization charges as may be
ascertained by the Company if contractor has Constructional
71
ITA NO. 5168/Del/2010
Plant and Equipment at offshore site at the time the termination
becomes effective.
(d) Cost of any materials or equipment already purchased
and/or ordered by the Contractor, the delivery of which the
Contractor must accept, such materials or equipment will become
property of the Company upon payment by the Company of the
actual Cost of the materials or equipment.
(e) All reasonable cost of cancelling/terminating any
subcontracts.
(f) All reasonable cost on cancellation or orders for material,
etc., which the Contractor may have committed for the project
From the aforesaid, it has been stated that it is the
discretion of ONGC to take only the platform erected by the
assessee in Abu Dhabi as it has a right to terminate on its own
volition without having installation thereof. The assessee, in such
an event, will not be entitled for any amount towards installation
and commissioning but will only be entitled for the contract price
properly attributable to the erection of fabricated platform,
actually carried out by the assessee in accordance with the
Contract i.e. the pricing schedule (Schedule C) and milestone
payment formula (Schedule E) given in the contract.
Furthermore, it has been mentioned that if the assessee
contractor likewise abandons the contract at any stage, it would
not be bound to refund of any amount so received by it from
ONGC in respect of the work already executed by it. In fact, had it
been a case of turnkey project, the assessee contractor would be
entitled to the entire value of contract, whether executed or
remains to be executed, if there was any termination on the
72
ITA NO. 5168/Del/2010
volition of the company i.e. ONGC. Likewise, in case the assessee
contractor abandons the contract suo motto or otherwise, it
would be liable to refund the amount received by it from the
company. Further, in this regard assessee has referred the
Hon'ble Apex Court decision in the case of Ishikawajma-Harima
Heavy Industries Ltd. vs. DIT reported in 288 ITR 408. Assessee
has further submitted that assessee fabricated the platform in
Abu Dhabi and after fabrication, said platform is brought to India
with the help of its barges and then the possession is handed
over to ONGC. In this regard, it has been submitted that it is
significant to note that before sailing the platform after
fabrication, the same is certified by ONGC through it's approved
surveyor. Furthermore, as per the insurance policy though to be
taken by the assessee but ONGC is the joint beneficiary in the
policy. Furthermore, insurance policy also exhibits that, in case
there is a loss suffered in the course of transportation the payee
of the insured amount would be ONGC. Hence, it was submitted
that so far as the activities of construction of plat forms is
concerned, though physically the same is sailed through barges,
but the same is completed in and is constructively handed over
to ONGC in Abu Dhabi. The submissions of the assessee
therefore is that ONGC became defacto owner since the assessee
company erected the platform only to be delivered to ONGC in
respect of which it is also entitled to receive separate
consideration from ONGC. It is thus submitted that under the
contract, there are different phases of execution of contract. The
first phase was completed when it was fabricated, erected and
brought to India through its barges to be physically supplied. The
73
ITA NO. 5168/Del/2010
same was physically supplied although the same was
constructively supplied by it in Abu Dhabi. It has further been
submitted that income attributable to the alleged PE in India
could not extend to the activities carried outside India and had to
be therefore confined to incomes from activities carried out from
the alleged PE. It has been claimed by the assessee that even
assuming that the assessee had a PE, the same cannot be in
respect of erecting and fabricating the platform in Abu Dhabi but
could only be in respect of installation and commissioning
activities. In this regard assessee has relied upon Article 7(1) &
7(2) of India UAE DTAA.
Article 7 reads as under:-
"1. The profits of an enterprise of a Contracting State shall
be taxable only in that State unless the enterprise
carries on business in the other Contracting State
through a permanent establishment situated therein.
If the enterprise carries on business a aforesaid, the
profits of the enterprise may be taxed in the other
State but only so much of them as is attributable to
that permanent establishment.
2. Subject to the provisions of paragraph 3, where an
enterprise of a Contracting State carries on business
in the other Contracting State through a permanent
establishment situated therein, there shall in each
Contracting State be attributed to that permanent
establishment the profit which it might be expected to
make if it were distinct and separate enterprise
74
ITA NO. 5168/Del/2010
engaged in the same or similar activities under the
same or similar conditions and dealing wholly
independently with the enterprise of which it is a
permanent establishment.
16. In this regard, assessee has placed strong reliance on the
decisions of the Hyundai Heavy Industries Company Limited reported
in 291 ITR 482 (SC) (Supra). Furthermore, it has been submitted that
the proposition laid down in the aforesaid case has been followed by
the Mumbai, Tribunal in Roxonoy Vs DCIT (103 TTJ 891 (Mum). It has
further been submitted that the Hon'ble Apex Court had also affirmed
the above proposition in the case of Ishikawajma-Harima Heavy
Industries Ltd. vs DIT reported in 288 ITR408. Assessee has further
submitted that though the assessee's income cannot be taxed in India
in view of the beneficial provisions of the DTAA as it has no PE in India
due to aforesaid reasons, the assessee, however, keeping in mind the
past trend where presumptive rate of profit was applied and accepted
by the appellant and the revenue, the assessee, in the interest of
revenue, agreed to be taxed for the relevant assessment year as in the
past. It has further been submitted that the facts and circumstances
as prevalent in preceding years have remain unchanged and, therefore
applying the rule of consistency, the income declared may be assessed
and, no more. It has further been submitted that a decision rendered
by the ITAT, Delhi on 31st May, 2011 in respect of the Hyundai Heavy
Industries Company Limited [ITA No, 2086 & 2087/Del/2009] also
supports the assessee's submissions that even if it is assumed that
without admitting that the assessee has PE in India, it could only be
held to be taxable only to the extent profits attributable to PE in India.
75
ITA NO. 5168/Del/2010
17. Upon careful consideration, we are of the considered opinion
that the contract may be construed as an umbrella contract yet is a
divisible contract since under the same contract, the consideration for
various activities have been stated separately. Further a perusal of
the terms and conditions of the contract reveal that it is the discretion
of ONGC to take only the platform erected by the assessee in Abu
Dhabi, as it has a right to terminate on its own volition, without having
installation thereof. The assessee in such an event, will not be entitled
for any amount towards installation and commissioning but will be
entitled for the contract price properly attributable to the erection of
fabricated platform actually carried out by the assessee in accordance
with the contract i.e. the pricing schedule (Schedule C) and milestone
payment formula (Schedule E) given in the contract. Further it has
been mentioned that if the assessee contractor likewise abandons the
contract at any stage, it will not be bound to refund of any amount so
received from by it from ONGC in respect of the work already executed
by it.
17.1 We agree with the contention that the segregation of the contract
revenues into offshore and onshore activities was made and agreed
upon between the contracting parties i.e. ONGC and the assessee at
the stage of awarding the subject contracts and not after awarding
the contract. The contract has been awarded to the assessee by ONGC
under International Competitive Bidding (ICB) process based on the
contract revenues and its bifurcation. Furthermore, the total
contract consideration under the contract has been earmarked
towards each of the activities like design and engineering, material
procurement, fabrication and installation. The scope of work under the
contract involves sequential activities like design and engineering,
76
ITA NO. 5168/Del/2010
material procurement, fabrication, transportation, installation and
commissioning. The contract provides separate payments to the
assessee on the basis of work of design, engineering, procurement
and fabrication. All these operations have been carried out and
completed outside India. Every progress under the contract is
inspected and finally accepted by ONGC or its authorized agents
outside India, and only then, the assessee received the payments as
per specified milestones from ONGC outside India.
17.2 Furthermore, we agree that the bifurcation of revenues as
inside India revenues and outside India revenues is also evident from
the following:-
i) Consideration for various activities has been
mentioned separately in the 4WPP contract as inside
India and outside India as is evident from the
Annexure-C (Contract price scheduled and rental rates
schedule) of the contract.
ii) The scope of work as mentioned in the contract has
been clearly bifurcated into the activity carried out in
Abu Dhabi and India.
iii) The invoices issued by the appellant to ONGC
specifically mention the consideration for outside
India activity and inside India activity in accordance
with the pricing schedule. Such invoices have been
duly accepted / confirmed by ONGC and payment
made thereon.
iv) The Annexure-E of the contracts provides milestone
payment formula based on which ONGC has made
payment to NPCC from time to time.
77
ITA NO. 5168/Del/2010
v) Insurance cover taken by NPCC on the fabricated
platform. The insurance cover explicitly shows that
material procurement and fabrication work has been
carried out in Abu Dhabi.
vi) The Surveyors report issued at the time of load out of
fabricated platform at Abu Dhabi port. These reports
amply demonstrate that NPCC had fabricated the
platforms in its Abu Dhabi yard.
17.3 We further find that turnkey contracts means where a
contractor has to complete the contract as a whole i.e. from the stage
of procurement of material, erection, construction, fabrication and
supply thereof. However, where the terms of the contract provide
that either party can withdraw or abandon the contract, the company
or the contractor has not to make entire payments under the terms of
the contract or refund the amounts received, which will accrue only on
the completion of the contract, cannot be regarded as a turnkey
contract. Hence, we agree with the contention that even if the
contract is a turnkey contract, it does not lead to taxability of the
entire contract revenues in India but only as much of the profits as is
attributable to the PE India can be taxed in India.
17.4 We find considerable cogency in the assessee's submission that
the assessee fabricated the platform in Abu Dhabi and after
fabrication the said platform was brought to India with the help of its
barges and then the possession is handed over to ONGC. In this
regard, it is worth noting that before sailing the platform after
fabrication, the same is certified by ONGC through it's approved
surveyor. Furthermore, as per the insurance policy though to be taken
78
ITA NO. 5168/Del/2010
by the assessee, but ONGC is the joint beneficiary. Further, insurance
policy also exhibits that, in case there is a loss suffered in the course of
transportation the payee of the insured amount would be ONGC. Thus,
we find that under the contract there are different phases of execution
of contract. The first phase was completed when it was fabricated,
erected and brought to India through its barges, to be physically
supplied. Thus, we agree with the contention of the assessee that
income attributed to PE in India could not extend to the activities
carried outside India and had to be therefore confined to incomes from
activities carried out from the PE. Thus we opine that assessee did
not have a PE in respect of erection and fabricating the platform in Abu
Dhabi. The assessee had a PE in respect of installation and
commissioning. In this context, the Apex Court decision in the case of
Hyundai Heavy Industries Co. Ltd. 291 ITR 482 (SC) is relevant. The
same is reproduced hereunder:-
"The installation permanent establishment came
into existence only on conclusion of the
transaction giving rise to the supplies of the
fabricated platforms. The installation permanent
establishment emerged only after the contract
with the ONGC stood concluded. It emerged only
after the fabricated platform was delivered in
Korea to the agents of the ONGC. Therefore, the
profits on such supplies of fabricated platforms
cannot be said to be attributable to the
permanent establishment."
"In cases such as this, where different severable
parts of the composite contract is performed in
79
ITA NO. 5168/Del/2010
different places, the principle of apportionment
can be applied, to determine which jurisdiction
can tax that particular transaction. This principle
helps determine, where the territorial jurisdiction
of a particular State lies, to determine its
capacity to tax an event. Applying it to
composite transactions which have some
operations in one territory and some in others, is
essential to determine the taxability of various
operations"
In Hyundai Heavy Industries Company Limited (ITA No 2290
& 2291 of DEL/2002 (lTAT) read with ITA No 42 of 2007 (Utt. HC)
following the Supreme Court judgement reported in 291 ITR 482
following was held:-
"It has been noted by the Hon'ble Apex Court that the
installation PE emerged only after the contract with the
ONGC stood concluded. It is also noted that it emerged only
after the fabricated platform was delivered in Korea to the
agents of ONGC and therefore, the profits on such supplies
were fabricated platforms cannot be said to be said to be
attributable to P.E. Thereafter, it is noted by the Hon'ble
Apex Court that there is one more reason for coming to this
conclusion. As per Their Lordships, in terms of para 1 of
Article 7, the profits to be taxed in the source country were
not the real profits but hypothetical profits which the PE
would have earned if it was wholly independent of the PE
and therefore, even if, it is assumed that supplies were
necessary for the purpose of installation (activity of PE in
80
ITA NO. 5168/Del/2010
India) and even is it assumed that the supplies were integral
part, still no part of profit on such supplies can be attributed
to the independent PE unless it is established by the
department that the supplies were not at Arm's Length Price
and this is the basis on which it was held by the Hon'ble
Apex Court that the profits that accrued to the Korean GE
for the Korean operations were not taxable in India. In the
present two years also, nothing has been brought on record
to show and establish that supplies were not at Arm's length
price. Hence, even after considering this argument of the
Ld. DR of the revenue that PE was in existence through out
these two years, we are of the considered opinion that as
per this judgement of Hon'ble Apex Court in the case of the
assessee itself for the assessment year 1987-88 and 1988-
89, no profit is taxable on account of Korean operation
(designing and fabrication) because profits, if any, from the
Korean operations arose outside India. In the present two
years also, the only dispute is with regard to payments
made to non resident company outside India for the work
done outside India, as per composite contract for designing,
fabrication, installation and commissioning of installation on
a turn key basis. As per above discussion, after considering
clause (a) of para-15 of the judgement of Hon'ble Apex
Court per directions of Hon'ble Uttrakhand High Court, we
hold that in the facts and circumstances of the case, profit,
if any, from the Korean operations (designing and
fabrication) is not taxable in India because the same has
been arisen outside India. Regarding clause (b) of para 15 of
81
ITA NO. 5168/Del/2010
the judgement of Hon'ble Apex Court, we find that in the
previous two years, there is no dispute regarding quantum
of profit embedded in the Indian operation attributable to
Indian PE of the assessee and hence this clause of para 15
is not applicable in the present two years which are before
us. We, therefore find no reason to interfere in the order of
Ld CIT(A) in both these years."
The aforesaid proposition has also been followed by the
Mumbai Tribunal Roxon OY Vs DCIT (103 TTJ 891 (Mum).
"As far as art. 7(1)(a) is concerned, the profits attributable
to the supplies under the turnkey contract can be brought
to tax in India only when we are to hold that the profits
attributable to PE will include the profits on supplies under
the turnkey contract. In our humble understanding, such an
interpretation will be incorrect, for several reasons. Firstly, a
profit earned by an enterprise on supplies which are to be
used in a construction or installation PE for such supplies,
cannot be said to be attributable to the PE because PE
comes into existence after the transaction giving rise to
supplies materialized. The installation or construction PE, in
such a case, is a stage posterior to the conclusion of
transaction giving rise to the supplies. Such an installation
or construction P E can come into existence after the
contract for turnkey project, of which supplies are integral
part, is concluded. "
Further more the Hon'ble Supreme Court had also affirmed
the above proposition in the case of Ishikawajma-Harima Heavy
Industries Ltd. vs DIT reported in 288 ITR408
82
ITA NO. 5168/Del/2010
" .... The fact that it has been fashioned as a turnkey
contract by itself may not be of much significance. The
contract may also be a turnkey contract, but the same by
itself would not mean that even for the purpose of taxability
the entire contract must be considered to be an integrated
one so as to make the assessee to pay tax in India. The
taxable events in execution of a contract may arise at
several stages in several years. The liability of the parties
may also arise at several stages. Obligations under the
contract are distinct ones. Supply obligation is distinct and
separate from service obligation. Price for each of the
component of the contract is separate. Similarly offshore
supply and offshore services have separately been dealt
with. Prices in each of the segment are also different.
The very fact that in the contract, the supply segment
and service segment have been specified in different parts
of the contract is a pointer to show that the liability of the
assessee there under would also be different.
The contract indisputably was executed in India. By
entering into a contact in India, although parts thereof will
have to be carried out outside India would not make the
entire income derived by the contractor to be taxable in
India"
17.5 In our considered opinion, the ratio emanating from the
above case laws is applicable on the facts of the present case. We
hold that erection and fabrication cannot said to be attributable to PE
in India. All the activities prior to installation and commissioning are
carried out in UAE and thus having regard to Article 7 of the DTAA, no
83
ITA NO. 5168/Del/2010
income can be attributed to the PE in India. Thus, in the background
of the aforesaid discussions, we hold that the profits can be attributed
to the PE in India only in respect of installation and commissioning
activities. The profits attributable to the supplies i.e. erection and
fabrication of the platforms cannot be brought to tax in India.
17.6 We find that assessee has contended that taxability of the
assessee should be the same as in preceding years. Earlier assessee
has declared income @1% of outside India revenue & 10% of inside
India revenue after claiming expenses on which TDS has been made.
Assessee has claimed that this formula of declaring income was
adopted by the Assessing Officer in A.Y. 1997-98. Subsequent to A.Y.
1999-2000, the assessee did not file audited accounts but simply
declared the taxable income on the basis of above referred formula.
17.7 It has been submitted that the facts and circumstances, as
prevalent in the preceding years, have remained unchanged and
therefore, applying the rule of consistency, the income declared may
be assessed and no more. In this regard, assessee has placed
reliance upon catena of case laws. We find that the above said
contention is not sustainable.
17.8 We agree with the contention of the Ld. Departmental
Representative that any formula or any agreement whatsoever arrived
at between the assessee and department which is against the
provision of law is not enforceable under the law. The Revenue is not
bound to follow and perpetuate the mistake which has been
committed in the past. In this regard, the case of Distributor (Baroda)
84
ITA NO. 5168/Del/2010
Pvt. Ltd., 155 ITR 120 (SC) may be referred where Hon'ble Apex Court
has held that there is no heroism in perpetuating a mistake
18. Applicability of provision of Section 44BB
19 We find that assessee has argued that provisions of section 44BB
are applicable to the inside India activity of the contract. The relevant
provision is as under:-
"(1) Notwithstanding anything to the contrary contained in
sections 28 to 41 and sections 43 and 43A, in the case of an
assessee, being a non-resident, engaged in the business of
providing services or facilities in connection with, or
supplying plant and machinery on hire used, or to be used,
in the prospecting for, of extraction or production of,
mineral oils, a sum equal to ten per cent. of the aggregate
of the amounts specified in sub-section (2) shall be deemed
to be the profits and gains of such business chargeable to
tax under the head "Profits and gains of business or
profession":
Provided that this sub-section shall not apply in a case
where the provisions of section 42 or section 44D or section
115A or section 293A apply for the purposes of computing
profits or gains or any other income referred to in those
sections."
19.1 From the above, it is evident that section 44BB applies in
two situations,
(i) when non-resident is engaged in the business of
providing services or facilities in connection with, OR
85
ITA NO. 5168/Del/2010
(ii) supplying plant and machinery on hire used or to
be used, in the prospecting for, of extraction or production
of, mineral oils.
In our opinion, the assessee is not in the business of providing
services, neither any plant or machinery has been supplied on hire
basis. The assessee is under the contract engaged in successful
installation of off-shore platform. This activity cannot be characterized
as facility provided by the assessee. Thus, we hold that business
activity of the assessee does not fall within the meaning of section
44BB.
20. Interest u/s. 234B, 234C & 234D
21. Assessee has pleaded that no interest under the provision of
section 234B of the Act is leviable. On this issue DRP has held the
Hon'ble Apex Court has held that levy of interest u/s. 234B of the Act
was mandatory in the case of C.I.T. vs. Anjuman G. Ghaswala 252 ITR
1. In this regard assessee has submitted that NPCC is a non-resident
foreign company and accordingly, its entire income is liable for tax
deduction under section 195 of the Act. Thus, ONGC, payer/deductor,
had made payments to NPCC after deducting taxes in pursuyance of
withholding tax certificate issued by the income tax authorities. In
this background, it has been submitted that NPCC was not liable to pay
advance tax and could not have committed any default in paying
advance tax. Hence, it has been argued that NPCC cannot be made
86
ITA NO. 5168/Del/2010
liable to pay tax u/s. 234B of the Act. In this regard, assessee has
also placed reliance upon the several case laws:-
- D.I.T. vs. General Electric International Inc. 323 ITR st 46 (SC)
- National Petroleum Construction Company vs. JCIT, Spl. Range
Dehradun in I.T.A. No. 1772/Del/2001
- C.I.T. vs. Sedco Forex International Drilling Co. Ltd. 264 ITR 320
(Uttaranchal)
- Judgement of Delhi High Court in the case of D.I.t. vs. Jacabs Civil
Inc. in I.T.A. No. 491 of 2008.
- D.I.T. vs. NGC Network Asia LLC 313 ITR 187 (Bom).
- Motorola Inc. vs. DCIT 95 ITD 269 (Del.)
- D.I.T. vs. NGC Network Asia LLC 32 ITR 46.
- Xelo Pty Ltd. vs. DDIT 32 SOT 338 (Mum).
22. We have carefully considered the submissions and perused the
records. We find that section 234B of the Act is attracted where in
any financial year an assessee is liable to pay advance tax under sec.
208 and he has failed to pay such tax or where the advance tax paid
by the assessee under sec. 210 is less than 90% of the assessed tax.
Similarly, section 234C is attracted wherein in any financial year, an
assessee is liable to pay advance tax under section 208 and he failed
to pay such tax or the advance tax paid by the assessee and its
current income on or before the specified dates is less than the
specified percentage of the tax due on returned income. In this
regard, assessee's contention is that its entire income is subject to tax
at source under section 195 of the Act. The payer has also taken
87
ITA NO. 5168/Del/2010
certificate from the Assessing Officer under section. 195(2) of the Act
and thus, there was no liability to pay the advance tax under section
208 of the Act and in the absence of any liability, Sec. 234B and 234C
could not be applied. The above is also supported by the case laws
referred by the ld. Counsel of the assessee hereinabove. As regards
interest under section 234D, no arguments were advanced, it will be
consequential.
23. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 05/10/2012.
Sd/- Sd/-
JAIN]
[A.D. JAIN] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date 05/10/2012
"SRBHATNAGAR"
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY
By Order,
Assistant Registrar,
ITAT, Delhi Benches
88
|
