M/S KEPCO PLANT SERVICE & ENGINEERING CO LIMITED , MUMBAI V. COMMISSIONER OF INCOME TAX-(IT), MUMBAI, MUMBAI

ITA 1030/MUM/2022

AI Insights

The case involves appeals by M/s Kepco Plant Service & Engineering Co. Limited against the orders of the Commissioner of Income Tax (CIT), which set aside the assessment orders for the Assessment Years 2017-18 and 2018-19. The CIT had found the original assessments erroneous and prejudicial to the interest of the revenue, primarily due to inadequate inquiry into the taxability of offshore services and the proper attribution of income to the Permanent Establishment in India. The Tribunal agreed that the Assessing Officer had not conducted necessary inquiries but modified the CIT's directive regarding the taxation of certain payments to the Head Office, calling for a re-examination of this issue.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 113526 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I
• Next Hearing Date: 24-04-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 11-05-2022
• Other Referred Cases: Malabar Industrial Co. Ltd. vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Revision of order; Transfer pricing; Double taxation relief; International transaction; Earning of tax free income; Services rendered outside India; Difference of opinion; Change of opinion; TDS; Set aside; FORM 26AS
• Section: 263; 143(3); 142(1); 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL "I" BENCH, MUMBAI SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No. 1030/MUM/2022 (Assessment Year: 2017-18) & ITA No. 1056/MUM/2022 (Assessment Year: 2018-19) M/s Kepco Plant Service & Engineering Co. Limited, 106, Banaji House, 361 DR D N Road, Flora Fountain, Mumbai - 400001 [PAN: AACCK4722C] Commissioner of Income Tax (IT), Mumbai – 3, 16 th Floor, Air India Building, Nariman Point, Mumbai - 400021 ............. Vs ............. Appellant Respondent Appearance For the Appellant/Assessee For the Respondent/Department : : Shri P.J. Pardiwala, Sr. Advocate Shri Purushottam Tripurari Date Conclusion of hearing Pronouncement of order : : 25.04.2023 28.06.2023 O R D E R Per Rahul Chaudhary, Judicial Member: 1. These are 2 appeals pertaining to Assessment Years 2017-18 and 2018-19 preferred by the Appellant against the orders passed by the Ld. Commissioner of Income Tax (IT), Mumbai-3 [hereinafter referred to as ‘the CIT’]. Since the appeals involve identical issues the same were heard together and are being disposed by way of a common order. ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 2 ITA No. 1030/MUM/2022 (Assessment Year: 2017-18) 2. We would first take up appeal for the Assessment Year 2017-18 which has been preferred by the Appellant challenging the order, dated 14/03/2022, passed by the CIT under Section 263 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’], whereby the CIT had set aside the Assessment Order dated 30/05/2021, passed under Section 143(3) of the Act holding the same to be erroneous in so far as prejudicial to the interest of the Revenue. 3. The Appellant has raised following grounds of appeal: “1. Assumption of jurisdiction under section 263 of the Income- tax Act, 1961 is bad in law 1.1 On the facts and circumstances of the case and in law, the impugned Revision Order passed by Ld. CIT under section 263 of the Act, holding that the Assessment Order passed by the AO under section 143(3) of the Act is erroneous and prejudicial to the interest of the revenue, bad in law, illegal, non- est and ultra-vires the provisions of section 263 of the Act. 1.2 On the facts and circumstances of the case and in law, the Ld. CIT erred in holding that AO has failed to conduct proper verification and enquiry regarding offshore services rendered by the Appellant outside India and regarding the Appellant's claim under the Double Taxation Avoidance Agreement between India and Korea ("DTAA") of non-taxability of revenue from such off-shore services in India, without appreciating that the aspect of rendition of offshore services by the Appellant, and non-taxability thereof in India, was enquired into by the AO during the assessment proceedings and the claim of the Appellant was allowed by the AO after proper verification and application of mind. 1.3 On the facts and circumstances of the case and in law, the Ld. CIT erred by not appreciating that the TPO had concluded that the onshore domestic transactions of the Appellant were at arm's length. The Ld. CIT also erred in holding that reference of only domestic transaction to the TPO demonstrated non- application of mind by the AO, rendering the Assessment Order erroneous and prejudicial to the interest of the revenue. ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 3 1.4. That the assumption of jurisdiction by Ld. CIT under section 263 of the Act tantamount to a mere change of opinion by Ld. CIT based on surmises and conjectures, and hence, the impugned Revision Order is bad in law, illegal and ultra vires the provisions of section 263 of the Act. 2. On merits - Revenue pertaining to offshore services is not taxable in India 2.1. On the facts and circumstances of the case and in law, the impugned Revision Order is bad in law in as much as the findings of Ld. CIT therein are bad in law for they are perverse, contrary to the facts of the case, based on conjectures and surmises and founded on pre-meditated mind-set rather than on facts and evidence. 2.2 On the facts and circumstances of the case and in law, the Ld. CIT erred in holding that no offshore activities were performed by the Appellant and all the activities are performed on-shore by the Appellant through its employees or other personnel engaged in India, without any independent enquiry and verification and in ignorance of the evidence and submissions furnished by the Appellant in support of off-shore services. 2.3. On the facts and circumstances of the case and in law, the Ld. CIT erred in holding that offshore services rendered by the Appellant are provided at the project offices through the employees of the Appellant, constituting service permanent establishment ("PE") for the Appellant in India in terms of Article 5(3b) of the DTAA, and that entire offshore revenue towards such services was attributable to such PE under Article 7 of the DTAA, ignoring that the alleged service PE had no role to play in rendition of such offshore services. 2.4. On the facts and circumstances of the case and in law, the Ld. CIT erred in denying the DTAA benefits to the Appellant and concluding that revenue from off-shore services provided by the Appellant amounting to INR 44.35 crores was attributable to operations in India and hence taxable in India 3. Without prejudice, on the facts and circumstances of the case and in law, the Ld. CIT erred in arbitrary taxing the entire revenue from offshore services and attributing 100% of such offshore revenue to the project office(s) in India.” 4. The relevant facts in brief are that the Appellant, i.e. Kepco Plant Service & Engineering Co. Ltd [Formerly known as Korea Plant ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 4 Service & Engineering Co. Ltd] is tax resident of South Korea being a company incorporated as per the laws of South Korea. The Appellant was engaged, inter alia, in the operation and maintenance of power plants and had entered into a number of India companies engaged in generation of power (hereinafter referred to as ‘Indian Project Owners’) for operation and maintenance of power plants in India in the capacity of Operation & Maintenance Contractor. 5. For providing the operation & maintenance services, the Appellant had set up project offices in India (hereinafter referred to as the ‘Project Offices’) which, admittedly, constituted ‘Permanent Establishment’ of the Appellant in India in terms of Article 5 of the Double Taxation Avoidance Agreement between India and South Korea (hereinafter referred to as ‘Tax Treaty’). Therefore, the Project Offices, being Permanent Establishments, were required to be treated as an enterprises separate from the Korean - Head Office of the Appellant (hereinafter referred to as the ‘Head Office’) for the purpose of determining the income of the Appellant attributable to the Project Offices liable to tax in India as well as for the purpose of transfer pricing regulations. 6. The operation & maintenance agreements provided for (a) payment to the Project Offices for the scope of work performed by the Project Offices in India; and (b) for payment to the Head Office directly for offshore services. 7. During the relevant previous year, the Project Offices in India and the Head Office in Korea received following payments in terms of the four operation & maintenance contracts that Appellant had with ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 5 (i) Hindustan Zinc Limited [HZL], (ii) Vedanta Limited [VAL] [formerly known as Vedanta Aluminium Ltd. and Sesa Sterlite Limited], (iii) Gujarat Mineral Development Corporation Limited [GMDC] and (iv) Bhavnagar Energy Company Limited [BECL]. Particulars HZL Amount (INR) VAL Amount (INR) GMDC Amount (INR) BECL Amount (INR) Total Amount (INR) Onshore Activities 207,677,148 360,432,504 302,071603 88,066,610 958,247,865 Offshore Activities 122,105,199 160,817,620 71,385,700 - 354,30,519 Total 329,782,347 521,250,124 373,457,303 88,066,610 1,312,556,384 Onshore Activities 62.97% 69.15% 80.89% 100.00% 73.01% Offshore Activities 37.03% 30.85% 19.11% - 26.99% 8. The Appellant offered to tax the receipts by the Project Offices from Project Owners in the return of income for the Assessment Year 2017-18 filed on 31/10/2017 wherein loss of INR 13,08,29,406/- was declared. 9. The case of the Appellant was selected for scrutiny under the following parameters: Reason Description Underlying Information Elements Large refund Value Claim of Refund Claim Part B - TTI of ITR High ratio of refund to TDS Part B - TTI of ITR High ratio of refund to Refund TDS relating to Section Claim 195 1. TDS credit under Section 195 in 26AS, 2. Part B - TTI of ITR 10. During the Assessment proceedings, notices under Section 142(1) were issued by the Assessing Officer and response thereto, the Appellant filed replies furnishing the required details, documents and reconciliation statements. ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 6 11. Since the Project Office and the Head Office were to be considered as separate enterprises, the Assessing Officer was of the view that the contractual terms between the Project Offices and the Project Owners were determined by the contract between the Project Owner and the Head Office, and therefore, according to the Assessing Officer the transactions between the Indian Project Owners and the Project Offices were in the nature of deemed international transactions. Accordingly, the transaction between the Project Office and the Project Owners were referred to the Transfer Pricing Officer (TPO) by the Assessing Officer for the determination of the Arm’s Length Price (ALP). The TPO it’s order, dated 28/01/2021, passed under Section 92CA(3) of the Act did not propose any transfer pricing adjustment. The Assessing Officer completed the assessment vide order, dated 30/05/2021, passed under Section 143(3) of the Act accepting returned income as the assessed income of the Appellant. 12. Subsequent, on perusal of the record the CIT was of the view that the Assessing Officer had failed to carry out necessary inquiry/verification in relation to parameters on account of which the case of the Appellant was selected for scrutiny. The CIT was of the view that the Assessing Officer had not made proper enquiry about the total receipts not being disclosed in the Profit & Loss Account, Tax Treaty benefits claimed, offshore services rendered and the attribution of income out of Indian operations to the Permanent Establishment of the Appellant in India. Therefore, the CIT issued notice under Section 263(1) of the Act on 28/01/2022 requiring the Appellant to show cause why the assessment order, dated 30/05/2021, should not be set aside as being erroneous in so far as prejudicial to the interest of Revenue. The relevant extract of ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 7 the aforesaid notice issued under Section 263(1) of the Act reads as under: "2 In the above case, the return of income was filed on 31/10/2017 declaring total loss of Rs. 13,08,29,406/-. Subsequently, the assessment order under Section 143(3) of the Act was passed on 30/05/2021 accepting the returned loss. 3. The case was selected for scrutiny under the CASS parameters. One of the CASS reason for selection for scrutiny was 'Low income (including exempt income and agricultural income) in comparison to high loans/advances/Investment in shares appearing in balance sheet'. 3.1 It is observed on, examination of records, that the assessee has reported gross receipts as per profit and loss account at Rs. 95,82,47,865/-. On verification of Form 26AS it is observed that the total receipts of the assessee is of Rs 144,98,13,271/-. Thus the assessee has not disclosed the full revenue in the Profit & Loss account. As per accounting policy mentioned in notes forming part of the statement of accounts of the assessee company, the mercantile system of accounting is being followed by the company and income & expenditure is recognized on accrual basis. The assessee should have claimed the DTAA benefits separately, if at all available. The AO has not made any enquiry or verification as to why full receipts have not been disclosed in the P&L account. 4. Notice u/s 142(1) of the Act dated 15.10 2019 was issued by the AO to the assessee, the relevant portion of which is reproduced as under: “11. Details along with quantum of income claimed to be exempt during the year under consideration under any provisions of the Act or the concerned DTAA Kindly furnish supporting documentary evidence of the same." 5. The assessee vide submission dated 22.10.2019 has submitted copies of contract agreement of contract agreement. The assessee claimed to have provided services rendered outside India', however, the nature of services as well as whether the services were actually applied in India was not properly examined by the assessing officer. Further, the attribution of income of PE was not done by the assessing officer. The AO has passed the order without conducting proper enquiry and without proper verification of facts. The AO was required to ascertain the income attributable to the assessee in India. No application of mind in this regard has been made and the extent of income to the PE has not been attributed. The AO has passed the order allowing relief claimed by the assessee under DTAA ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 8 without enquiring into the allowability of the said claim with respect to offshore services performed, if any. 5.1 The explanation 2 of section 263 of the Act is reproduced as under. “Explanation 2-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner, 1. the order is passed without making inquiries or verification which should have been made, 2. the order is passed allowing any relief without inquiring into the claim." 5.2 (i) It is observed that The AO has not verified the extent of services performed by the assessee through its PE in India. The AO has not attributed the income assessable in the hands of the PE in India. (ii) The AO has not enquired into the eligibility of the DTAA benefits claimed by the assessee. Therefore the order passed by the AO is erroneous and prejudicial to the interest of the revenue as per sub clause (a) and (b) of the Explanation 2 to section 263. 6. In view of the above, the assessment order has been passed by the AO without making enquiry or verification regarding difference of receipts as perform 26AS and P&L Account and allowing relief under DTAA without enquiring into the claim of the assessee. Thus the assessment order concluded on 30.05.2021 u/s 143(3)of the Act is erroneous as well as prejudicial to the interest of revenue which is proposed to be revised. Hence you are requested to show cause as to why it should not be revised u/s 263 of the Income-tax Act, 1961. 7. You are hereby accorded an opportunity of being heard on 07.02.2022 at 2:30 PM. either in person or through an authorised representative in this regard, or produce or cause to be produced, at the said time, any documents/accounts or any other evidence on which you would like to rely in support of your submissions." 13. In response, the Appellant filed written submission vide letter dated 17.02.2022. The gist of the submission has been reproduced in Paragraph 3 of the order impugned which reads as under: ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 9 “3. In response to the notice giving them an opportunity of being heard ......................, written submission, vide letter dated 17.02.2022 was also filed. The gist of the written submissions is as under: 1. The case of the assessee has been assessed in India for past several years and the non-taxability of offshore portion of revenue has been scrutinized on year-on-year basis. 2. The nature of content of the contracts is the same in A.Y. 2017-18 as it was in A.YS. 2011-12 to 2015-16. The erstwhile assessing officers have examined the applicability of treaty benefits and subsequently allowed relief to the assessee. 3. The assessee relied upon the decision of Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT regarding non applicability of section 263 stating that the assessment order dated 02.09.2021 is neither erroneous nor prejudicial to the interest of revenue as the AO has made complete enquiry into all aspects. 4. The assessee relied upon various judicial pronouncements and submitted that the AO while passing assessment order dated 30.05.2021 has made diligent enquiry into all aspects and there is no justification to revise the assessment order.” 14. However, the CIT was not convinced. The CIT noted that despite making consistent losses from Indian operations, the Appellant was expanding work in India. Nearly one third of the total payments were made by the Indian Project Owners directly to the Head Office and the same were not reflected in the Profit & Loss Account of Indian operations. Further, on perusal of operation and maintenance responsibility matrix of the operation & maintenance contract with VAL, the CIT formed a view that all major activities were carried out in India and the cost related thereto was debited to Profit & Loss Account of Indian operations. Despite this the ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 10 contract with VAL provided for payment of pre-determined amount of USD 1,46,35,000/- to Head Office towards mobilization, interim fee and 5 years operation & maintenance contract in India without specifying scope of offshore work. Though the Appellant had filed submission, dated 17/02/2022, giving list/scope of offshore services, the CIT concluded that the operation & maintenance were to be provided onsite in India, and key personnel were required to be project sites in India. The CIT noted that the Assessing Officer had passed the assessment order without proper application of mind and completely ignoring the payments made by the Project Owners to Head Office. Further, according to CIT the Assessing Officer also failed to make proper inquiry which was warranted. The Assessing Officer failed to examine the scope of onshore services and also to verify the corresponding commensurate payment for the same. The Assessing Officer merely relied upon the findings of the TPO in relation to transactions between Project Owners of the Project Offices in India. Thus, CIT concluded that there was lack of proper inquiry/verification, on account of which the provisions of Explanation 2 to Section 263 of the Act were attracted. Thus, vide order, dated 14/03/2022, CIT concluded that the Assessment Order, dated 30/05/2021, passed by the Assessing Officer was erroneous in so far as prejudicial to the interest of Revenue. Further, according to the CIT all the activities of operation & maintenance were carried out in India and therefore, the CIT concluded that payments of INR 44.35 Crores were taxable in India and directed the Assessing Officer to deny Tax Treaty benefits to the Appellant in respect of the same while passing the order giving effect. 15. Being aggrieved, by the order dated 14/03/2022, passed by the CIT ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 11 in exercise of power of revision under Section 263 of the Act, the Appellant has preferred the present appeal. 16. The Ld. Senior Counsel for the Appellant appearing in the appeal took us through the various notice issued under Section 142(1) of the Act during the assessment proceedings and replies filed by the Appellant in response thereto (placed at page 433 to 466 of the paper-book) to show that the relevant enquiry/verification was made by the Assessing Officer. He submitted that all the relevant details and documents including copy of the agreement and reconciliation statements were filed by the Appellant during the course of assessment proceedings. He vehemently contended that once the payments made by the Indian Project Owners to the Project Offices were treated as arm’s length by the TPO, it could be inferred that the payments made by the Indian Project Owners to the Head Office had been examined and the same were also at arm’s length. The scope of services provided by the Project Office to the Project Owners was examined by the TPO and the payments made by the Project Owners for the same to Project Office was also found to be at Arm’s Length. Therefore, no further inquiry/investigation was required by the Assessing Officer. He further submitted that, in any case, the payments made by the Indian Project Owners to the head office were not liable to tax in India. In earlier years also similar payments were examined during the assessment proceedings and no additions were made. The payments made to the Head Office were for offshore services provided by the Head Office directly to the Indian Project Owners as per the applicable contract terms and therefore, remittance was directly made to the Head Office by the Indian Project Owners. The Ld. Senior Counsel refuted the finding by the CIT that all operation ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 12 and maintenance services were provided in India and/or that all key personnel were on project site in India. He submitted that since the payments for offshore services were not attributable to Project Office, and therefore, not liable to tax in India, the Appellant was justified in not routing the aforesaid payments through the Profit & Loss Account for Indian operations. He submitted that the assessment proceedings were concluded after due verification enquiry by the assessing officer. On the basis of the aforesaid, the Ld. Senior Counsel for the Appellant submitted that the assessment order passed by the Assessing Officer was neither erroneous nor prejudicial and therefore, the order by the CIT under Section passed under section 263 of the Act be set-aside. 17. Per contra, the Ld. Departmental Representative submitted that the CIT has correctly pointed out that the Assessing Officer had failed to make any enquiry in relation to the payments made by the Indian Project Owners to the Head Office. Reference was made by the Assessing Officer to the TPO only in respect of domestic payments made to the Project Office, and the foreign payments made to the Head Office were not examined either by the TPO or by the Assessing Officer. Once the details of the payments for offshore services were furnished by the Appellant, the Assessing Officer was duty bound to make necessary enquiry/verification regarding the payments made to the Head Office which were not routed through Profit & Loss Account to the Appellant. Keeping in view, the parameters on which the case was selected to scrutiny, the Assessing Officer was required to reconcile the amount of tax deducted at source for which refund was sought and the receipts offered to tax in India. However, the Assessing Officer without application of mind relied upon the order passed by the TPO while ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 13 accepting the returned income as assessed income. Further, placing reliance on paragraph 4.3 to 5.8 of the order passed by the CIT, he submitted that all the maintenance activities and necessary services were provided in India and no part of the services were performed outside in India. Even during the proceedings before the CIT, the Appellant had failed to provide any proof that any offshore services were rendered. Therefore, the entire payments made by the Indian Project Owners to the Head Office were liable to tax in India. Thus, the CIT was justified in setting aside the Assessment Order as being erroneous insofar as prejudicial to the interest of revenue and also directing the assessing officer to tax foreign payments of INR 44.35 Crores in India. On the strength of the aforesaid, Learned Departmental Representative submitted that the order passed by the CIT under Section 263 of the Act be sustained. 18. In rejoinder, the Ld. Senior Counsel for the Appellant submitted that the Appellant was never put to notice about the issue of taxability of payments made by the Indian Project Owners to the Head Office. The proceedings under Section 263 of the Act were initiated for the reason that the Assessing Officer has failed to carry out the necessary enquiry/verification and therefore, the PCIT exceeded his jurisdiction in holding that payments made by the Indian Project Office to the Head Office were liable to tax in India, without confronting the Appellant. 19. We have heard the rival submissions and perused the material on record. 20. On perusal of the record we find that during the assessment proceedings, notice, dated 15/10/2019, was issued under Section ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 14 142(1) of the Act whereby the Appellant was directed to provide, int.er alia, the following information/details – (a) True copy of all the contract agreements with respect to your operations in India, (b) Details along with quantum of all income earned through operations in India during the previous year, whether offered to tax or not, (c) Details along with quantum of income claimed to be exempt during the previous year under any provisions of the Act or the Tax Treaty along supporting documentary evidence of the same, (d) Reconciliation statement of the income returned with the income corresponding to credit of TDS claimed as per the return of income and in accordance with the AIR. The Appellant was also asked to submit copies of all TDS certificates for verification of the claim of credit, and (e) the Breakup of party-wise total receipt with supporting evidence with details of taxed paid thereon. Thereafter vide notice, dated 14/11/2019, issued under Section 142(1) of the Act the Appellant was directed to provide Net Profitability Rates for the last three years along with the reasons for the massive losses in the business for the current year and the earlier year. Thereafter, vide notice, dated 21/11/2019, issued under Section 142(1) of the Act the Appellant was directed to provide (a) reason for higher ratio of refund to TDS along with supporting documentary evidence, (b) the reasons for claim of large value of refund along with supporting documentary evidence, and (c) reasons why the Permanent Establishment of the Appellant in India was showing losses along with documentary evidence. Vide reply letter dated 26/11/2009, the Appellant, giving reference to notice dated 14/11/2019, 21/11/2019 and 23/11/2019, furnished following details/information – (a) quantum of all income earned through your operations in India during the year under consideration; (b) ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 15 quantum of income earned through operations in India and offered to tax; (c) quantum of income claimed to be exempt during the year under consideration under any provisions of the Act or the concerned Tax Treaty. We have gone through the aforesaid notices and reply including the Annexure 3 (placed at page 448 of the paper-book) giving details of income reconciliation with Form 26AS, and Annexure 9 (placed at page 449 of the paper-book) giving details of reconciliation of income as per income tax and the income as per service tax. While the Assessing Officer has called for the details, the material on record does not shown application of mind to the same. We agree with the Revenue that there were no follow- up queries by the Assessing Officer reflecting any inquiry or investigation into nature or scope of offshore services was not made by the Assessing Officer. 21. The details submitted by the Appellant (relevant extract reproduced herein below), showed that around 27% of the total payments were made directly by the Indian Project Owner to Head Office. Particulars HZL Amount (INR) VAL Amount (INR) GMDC Amount (INR) BECL Amount (INR) Total Amount (INR) Total Receipts 329,782,347 521,250,124 373,457,303 88,066,610 1,312,556,384 Onshore Activities 62.97% 69.15% 80.89% 100.00% 73.01% Offshore Activities 37.03% 30.85% 19.11% - 26.99% 22. The Appellant was providing operation and maintenance serviced for power plants in India requiring presence of substantial (if not all) key personnel on-site in India requiring involvement of Project Office. The payments for off-shore services made by the Indian Project Owners directly to the Head Office, as a percentage of total payments, ranged from ‘Nil’ in case of BECL to 37% in case of HZL. ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 16 Further, the reason/ parameter for which the case of the Appellant was selected for scrutiny was that high portion of tax deducted at source was being claimed as refund by the Appellant. All the aforesaid facts and circumstances warranted scrutiny into the nature and scope of offshore services provided under each contract and the basis of allocation of payments between the onshore and offshore services. The fact that Indian operations were making losses was another reason that should have prompted the Assessing Officer to make further inquiry/verification into the scope of onshore and offshore and the bifurcation of payments. While the domestic payments were inquired into by the Assessing Officer and TPO, the payments made directly by the Indian Project Office were accepted at the threshold without making any inquiry or verification. The fact that the payments made by the Indian Project owners to the Project Offices are found by the TPO to be at arm’s length does not lead to an automatic conclusion that payments made directly to the Head Office were for offshore services or that the offshore services were actually rendered. The contention on behalf of the Appellant is based upon the presumption that the arm’s length price was the actual agreed price for onshore services. The aforesaid presumption may not hold good in all cases as the actual agreed price (which would generally remain same over the term of the contract), may come out to be more or less than arm’s length price (which may change over years depending upon benchmarking methodology). Thus, the overall facts and circumstances of the case (including the nature of parameter for scrutiny selection, and the details/information furnished by the Appellant) were such that warranted further enquiry/investigation into the nature, scope and payment for offshore services made ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 17 directly by the Indian Project Owners to the Head Office. However, we find that the Assessing Officer made reference to TPO only in respect of domestic payments made by the Indian Project Owners to the Project Offices. The TPO carried out inquiry/investigation as per the reference which was limited to determining the ALP of the domestic payments made by the Indian Project Owners to the Project Offices. Though, in response to notice dated 19/02/2020, the Appellant had, vide letter dated 24/02/2020, provided to the TPO copies of Contracts/Agreements executed with Indian Project Owners and the details and bifurcation of offshore and onshore activities. The foreign payments made directly by the Indian Project Owners to Head Office, and the nature/scope of offshore services were not examined either by the TPO or by the Assessing Officer during the assessment proceedings. The TPO, vide order dated 28/01/2021, accepted the domestic payments made by the Indian Project Owners to Project Offices to be at arm’s length and thereafter, on 30/05/2021 the Assessing Officer passed Assessment Order under Section 143(3) of the Act accepting the retuned income as assessed income. It is clear that after initial query, no further follow-up query or information was sought by the Assessing Officer. In our view, the Assessing Officer should have enquired into both the payments made to Project Offices as well as the Head Office. On perusal of notice issued by the Assessing Officer and reply filed by the Appellant, it is clear that only the issue pertaining to domestic payments made by the Indian Project Owners to the Project Offices were examined by the Assessing Officer and by the TPO. 23. According to Explanation 2 to Section 263 of the Act assessment order is deemed to be erroneous in so far as prejudicial to the ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 18 interest of the Revenue in case in the opinion of CIT such assessment order has been passed allowing any relief without enquiring into the claim. The issue that needs to be examined is whether the Assessing Officer carried out necessary enquiry/investigation while passing the assessment order. When the material on record reflects that the assessment proceedings were concluded without enquiry/investigation into the scope of services provided by the Head Office, apportionment of payments between Project Office and Head Office as per contract, and the consequent payments made by the Indian Project Owners directly to the Head Office, the question of inferring with these issues would have been examined by the Assessing Officer/TPO during the assessment proceedings does not arise. Therefore, the judicial precedents relied by both the sides relating to computation/allowance/disallowance of deduction do not apply to the facts of the present case. Further, the contention raised by the Appellant that the payments made by the Indian Project Owners to the Head Office were not liable to tax in India also required inquiry/verification. In the present case, the relief under the provisions of tax treaty has been granted to the Appellant without inquiring into the nature and scope of offshore services. The Assessing Officer has also failed to make necessary enquiry/verification regarding the income attributable to the Project offices in India. In our view, the CIT had jurisdiction to exercise power of revision under Section 263 of the Act since Assessing Officer had failed to carry out necessary enquiry and verification warranted in the facts and circumstances of the present case triggering provisions of Explanation 2 to Section 263 of the Act. Thus, we concur with the CIT that the Assessment Order, dated ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 19 30/05/2021, passed under section 143(3) of the Act was erroneous insofar as prejudicial to the interest of Revenue, and therefore, we hold that the CIT was justified in setting aside the same. However, we do find merit in the contention advanced by the Ld. Senior Counsel for the Appellant that CIT was not justified in concluding that the payments made by the Indian Project Owners to the Head Office were liable to tax in India as the Appellant was never confronted with that issue leading to violation of principles of natural justice. On perusal of notice, dated 28.01.2022 issued under Section 263(1) of the Act we find that the Appellant was asked to show cause why the Assessment Order should not be set- aside being erroneous insofar as prejudicial to the interest of revenue on account of failure of the Assessing Officer to carry out necessary enquiry/investigation. Therefore, we concur with the Ld. Senior Counsel for the Appellant that the directions issued by the CIT to the Assessing Officer to the effect that the payments made by the Indian Project Owners directly to the Head Office should be brought to tax and that the benefit of tax treaty should be denied to the Appellant were issued in violation of principles of natural justice. Therefore, to this extent we modify the directions issued by the CIT by directing the Assessing Officer to examine the issue of taxability of payments made by the Indian Project Owners directly to the Head Office in Korea afresh as per the provisions of the Act and Tax Treaty, after taking into account the observations made by the CIT and after giving the Appellant opportunity of being heard. With the aforesaid modification, the order passed by the CIT is confirmed. Thus, Ground No.3 raised by the Appellant is allowed in terms of the aforesaid and accordingly, Ground No. 2 is dispose off as being infructuous. Ground No. 1 raised by the Appellant is ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 20 dismissed. In result, both the appeals preferred by the Assessee are partly allowed. Order pronounced on 28.06.2023. Sd/- Sd/- (Prashant Maharishi) Accountant Member (Rahul Chaudhary) Judicial Member म ुंबई Mumbai; दिन ुंक Dated : 28.06.2023 Alindra, PS ITA No.1030//Mum/2022 (Assessment Year 2017-18) ITA No.1056/Mum/2022 (Assessment Year: 2018-19) 21 आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त/ The CIT 4. प्रध न आयकर आय क्त / Pr.CIT 5. दिभ गीय प्रदिदनदध, आयकर अपीलीय अदधकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file. आिेश न स र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सह यक पुंजीक र /(Dy./Asstt. Registrar) आयकर अपीलीय अदधकरण, म ुंबई / ITAT, Mumbai