JDIT-OSD (IT) - 3(1), MUMBAI V. M/s. J RAY McDORMOTT EASTERN HEMISPHERE LTD., MUMBAI

ITA 1557/MUM/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1835 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 2 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Assessment Year: 2003-2004
• Appeal Filed On: 19-02-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S S RANA
• Assessee Lawyers: PARAG VYAS
• Keywords: Deemed to accrue or arise in india; Permanent establishment
• Section: 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L, MUMBAI. BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER. I.T.A. NO. 1 557/MUM/2007. ASSESSMENT YEAR : 2003-04. JOINT DIRECTOR OF J. RAY MCDORMOTT EASTERN INCOME TAX (OSD) VS. HEMISPHERE LTD. (INTERNATIONAL TAXATION)-3(1), C/O PRICEWAT ERHOUE COOPERS (P) LTD. MUMBAI. PWC HOUSE, PLOT 18/A, GURU NANAK ROAD (STATION ROAD), BANDRA (WEST), MUMBAI 400 050. PAN : AABCM1087F. APPELLANT RESPONDENT APPELLANT BY : SHRI S.S. RANA. RESPONDENT BY : SHRI PARAG VYAS. O R D E R PER J. SUDHAKAR REDDY, A.M. THIS IS AN APPEAL FILED BY THE REVENUE DIRECTED A GAINST THE ORDER OF THE CIT(APPEALS)-XXXIII, MUMBAI DATED 30-1 1-2006 FOR ASSESSMENT YEAR 2003-04. 2. FACTS IN BRIEF: THE ASSESSEE IS A COMPANY INCORPORATED IN MAURITI US. IT IS A TAX RESIDENT OF MAURITIUS AS DEFINED IN ARTICLE 4 O F DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) BETWEEN INDIA AND MAURIT IUS. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DESI GNING, FABRICATION, CONSTRUCTIONS AND INSTALLATION OF PLAT FORMS, DOCKS, PIPELINES, 2 JACKETS AND OTHER SIMILAR ACTIVITIES WHICH ARE USED IN THE EXPLORATION AND PRODUCTION OF MINERAL OIL. DURING THE PREVIOUS YEAR , THE ASSESSEE UNDERTOOK AND PERFORMED WITH ENGINEERING INDIA LTD. (EIL) CONTRACT FOR TRANSPORTATION AND INSTALLATION WORK UNDER N-11 AND N-12 WELL PLATFORMS PROJECTS OF ONGC LTD. THE ASSESSEE FILED ITS RETURN OF INCOME ON 27-5- 2004, DECLARING TOTAL INCOME OF RS.14,57,21,590/-. THE ASSESSEES CASE WAS THAT, IT EXECUTED TRANSPORTATION AND INSTALLATI ON WORK UNDER CONTRACT WITH ENGINEERS INDIA LTD. AND THAT OUT OF THE TOTAL REVENUE OF US$ 3,25,93,729, AN AMOUNT OF US$ 21,79,797 PERTAINS TO WORK OUTSIDE INDIA. THE ASSESSEE CONTENDED THAT THE RECEIPTS WHICH PERT AIN TO THE WORK CARRIED OUTSIDE INDIA CANNOT BE BROUGHT TO TAX IN VIEW OF E XPLANATION (A) TO SECTION 9(1)(I) OF THE INCOME TAX ACT. WITHOUT PREJ UDICE THE ASSESSEE SUBMITS THAT THE INCOME THAT PERTAINS TO WORK OUTSI DE INDIA, CANNOT BE ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT OF THE ASSESSEE IN INDIA, DURING THE YEAR UNDER CONSIDERATION. THE AO REJECTE D THE CONTENTION OF THE ASSESSEE AND HELD THAT THE INCOME IN QUESTION R ELATES TO AN AGREEMENT FOR WORK TO BE CARRIED OUT IN INDIA AND THAT SOURCE OF INCOME IS RELATED TO WORK TO BE CARRIED OUT IN INDIA. HE HELD THAT WHOLE OF THE RECEIPTS ARE TO BE TAXED IN INDIA. HE FURTHER OBSERVED THAT INCOME OF THE ASSESSEE FALLS UNDER THE PROVISIONS OF SECTION 44BB AND THAT THIS SECTION DOES NOT CONTEMPLATE SUCH DISTINCTION. AGGRIEVED, THE ASSESS EE CARRIED THE MATTER IN APPEAL ON VARIOUS GROUNDS. THE FIRST APPELLATE A UTHORITY GRANTED PART RELIEF. FURTHER AGGRIEVED, THE REVENUE IS IN APPEA L BEFORE US ON THE FOLLOWING GROUNDS : 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER, TO DELETE THE AMOUNTS RECEIVED FOR THE CONTRACT WORK DONE OUTSIDE INDIA, IGNORING THE FACT THAT THE SAID CONTRACT AMOUNT IS ATTRIBUTA BLE TO ITS PE IN INDIA. 3 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO DELETE THE INTEREST U/S 234-B OF THE I.T. ACT. 2. WE HAVE HEARD MR. S.S. RANA, LEARNED COUNSEL FO R THE ASSESSEE AND MR. PARAG VYAS, LEARNED DR. 3. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIR CUMSTANCES OF THE CASE AND A PERUSAL OF THE PAPERS ON RECORD AND THE ORDER OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAWS CITED, W E HOLD AS FOLLOWS. 4. THE UNDISPUTED FACT IN THIS CASE ARE THAT THE A SSESSEE HAD CARRIED OUT CERTAIN PORTION OF THE WORK UNDER THE C ONTRACT OUTSIDE INDIA. THE CIT(APPEALS) HAS EXTRACTED THE WORK AT PARA 3.1 1 PAGES 7 TO 10 OF HIS ORDER AND THE BIFURCATION OF THE WORK DONE OUTSIDE INDIA AND THE WORK DONE WITHIN COUNTRY ARE NOT DISPUTED. AS POINTED OU T BY THE LEARNED CIT(APPEALS), THE ONLY ISSUE IS WHETHER, THE RECEIP TS OF WORK DONE OUTSIDE INDIA, EVEN THOUGH IT IS CONNECTED WITH THE MAJOR PART OF THE CONTRACT, IS TAXABLE IN INDIA OR NOT. 5. THE PREPARATION OF DESIGNS IN THIS CASE IS DONE BY JEBEL ALI, DUBAI AND THE DOCUMENTS WERE TRANSMITTED TO EIL FRO M OUTSIDE THE COUNTRY. THE DISTANCE FROM JEBEL ALI TO INDIA IS 10 50 NAUTICAL MILES AND THE TRAVEL WITHIN INDIA IS ABOUT 100 NAUTICAL MILE S, WHICH MEANS 10% OF THE TOTAL TRANSPORTATION IS WITHIN THE COUNTRY. THE ASSESSEE IN THIS CASE FOLLOWED THE PROJECT COMPLETION METHOD TO RECOGNIZE CONTRACT REVENUES. THE REVENUES PERTAINING TO WORK CARRIED ON WITHIN I NDIA AND WORKS CARRIED ON OUTSIDE INDIA HAS BEEN DETERMINED BASED ON ACTUAL ACTIVITIES CARRIED OUT, AND AS ALREADY STATED THERE IS NO DISP UTE ON THIS FACT. 4 6. IN SUCH A SITUATION, IN OUR CONSIDERED OPINION THE FIRST APPELLATE AUTHORITY HAS RIGHTLY OBSERVED THAT SECTI ON 9(1)(I) EXPLANATION 1 PROVIDES THAT THE INCOME FROM BUSINESS DEEMED UNDER THIS CLAUSE TO ACCRUE OR ARISE IN INDIA, SHALL BE ONLY SUCH PART O F THE INCOME, AS IS REASONABLY ATTRIBUTABLE TO THE OPERATIONS CARRIED O UT IN INDIA. WE ALSO AGREE WITH THE FINDING THAT THE INCOME IN QUESTION SHOULD BE FIRST TAXABLE IN VIEW OF SECTION 5 OF THE ACT READ WITH SECTION 9 AND THAT SECTION 44BB CANNOT OVERRIDE SECTION 5 WHICH IS THE CHARGING SEC TION. THE DELHI B- BENCH OF THE TRIBUNAL IN THE CASE OF SAIPEM S.P.A. VS. DCIT IN THIRD MEMBER DECISION REPORTED IN 88 ITD 213 (T.M.) (DELH I) HELD AS FOLLOWS : SEC. 44BB IS NO DOUBT DESCRIBED AS A SPECIAL PRO VISION FOR COMPUTING PROFITS AND GAINS IN CONNECTION WITH THE BUSINESS OF EXPLORATION, ETC. OF MINERAL OILS BUT THE TERMS N OTWITHSTANDING ANYTHING TO THE CONTRARY REFER TO SS. 28 TO 41 AND AS SS. 43 TO 43A. IN OTHER WORDS, S. 44BB IS NO DOUBT A SPECIAL PROVI SION BUT ONLY WITH REFERENCE TO THE SYSTEM OF COMPUTATION OF THE TAXABLE INCOME, WHICH WAS EARLIER BEING DONE BY SS. 28 TO 41, ETC. IT CANNOT REPLACE, SUPERSEDE OR LEAN IN FAVOUR OF S. 5 WHICH IS THE CHARGING SECTION WHEREBY THE SCOPE OF TOTAL INCOME OF AN ASSESSEE WH ETHER IT BE OF A RESIDENT OR IT BE OF A NON-RESIDENT IS WORKED OUT. IT WOULD BE NECESSARY IN EVERY CASE WHETHER IT BE THAT OF A RES IDENT OR THT OF A NON-RESIDENT TO FIRST OF ALL DECIDE AS TO WHETHER A PARTICULAR RECEIPT OR AN ITEM OF INCOME IS LIABLE TO BE INCLUDED IN TH E TOTAL INCOME VIS--VIS S. 5 AND IF IT IS TO BE SO INCLUDED THEN THE QUESTION WOULD ARISE AS TO HOW THE TAXABLE PART THEREOF IS TO BE C OMPUTED AND AT THIS STAGE S. 44BB STEPS IN AND THE SAID SECTION HA VING REPLACED THE EARLIER SYSTEM OF COMPUTING THE INCOME WHICH WAS BY RESORT TO PROVISIONS OF SS. 28 TO 41, ETC. THE DECISION TAKEN BY THE AM RENDERS OTIOSE/REDUNDANT THE PROVISIONS OF S. 5 INA SMUCH AS ALL ASSESSEES ENGAGED IN THE BUSINESS OF EXPLORATION OF MINERAL OILS WOULD HAVE THEIR INCOME COMPUTED FOR TAXATION PURPO SES ONLY WITH REFERENCE TO S.44BB AND THE ENTIRE EXERCISE OF DECI DING THE QUESTION OF ACCRUAL OF INCOME OR THE PLACE OF ACCRUAL WOULD BECOME INOPERATIVE. THERE WOULD BE NO NEED TO REFER TO THE PROVISIONS OF S. 5 OR FOR THAT MATTER S. 9 IN CONSIDERING THE BACKGR OUND LEADING TO THE INTRODUCTION OF S. 44BB, THIS WAS NEVER THE INT ENTION OF THE LEGISLATURE AND PROVISIONS OF SS. 5 AND 9 WERE ALWA YS MEANT TO 5 OPERATE AND REMAIN EFFECTIVE ON THE STATUTE BOOK. S EC. 5 IS THE CHARGING PROVISION AND NO INCOME CAN BE BROUGHT TO TAX UNLESS IT FALLS WITHIN THE SCOPE OF THE SAID SECTION AND THE USE OF THE EXPRESSION SUBJECT TO OTHER PROVISIONS OF THE ACT IN S. 5 WOULD MEAN THAT IF ANY OTHER SECTION OPERATES TO EXCLUDE FROM THE TOTAL INCOME OF ANY PERSON ANY INCOME, WHICH OTHERWISE FA LLS WITHIN THE BROAD FRAMEWORK OF HIS TOTAL INCOME AS LAID DOWN IN S. 5 SUCH SECTION WOULD PREVAIL. TO EMPHASIS, THE PROVISIONS OF S. 44AB VIS- -VIS THE LEGISLATIVE INTENT ONLY MEAN THAT THEE RE PLACE THE SYSTEM OF COMPUTATION OF INCOME EARLIER ENVISAGED BY APPLI CATION OF THE PROVISIONS OF SS. 28 TO 41 AND SS. 43 AND 43A, BUT THE PROVISIONS OF S. 5, WHICH IS THE CHARGING SECTION WOULD REMAIN IN TACT AND THESE BY NO MAXIM OF INTERPRETATION WOULD BE SUPERSEDED BY T HE PROVISIONS OF S. 44BB. AS PER CIRCULAR NO. 495, DT. 22 ND SEPT., 1987, S. 44BB WAS NO DOUBT DESCRIBED AS A SPECIAL PROVISION FOR C OMPUTING PROFITS AND GAINS IN CONNECTION WITH THE BUSINESS OF EXPLOR ATION OF MINERAL OIL BUT THESE WERE A MEASURE OF SIMPLIFICATION PROV IDING FOR DETERMINATION OF INCOME OF SUCH TAXPAYERS AT 10 PER CENT OF THE AGGREGATE OF A CERTAIN AMOUNT JINDAL DRILLING LEA SING (ITA NO. 6452/BOM/1991 DT. 30 TH APRIL, 1998) AND DY. CIT VS. SONAL OFF- SHORE DRILLING INC. (ITA NO. 7414/B/1994, DT. 29 TH OCT., 2002) APPROVED ; NIPPON KOKAN KK & ORS. (ITA NO. 3413/DEL/1988, DT . 20 TH JUNE, 1990), SEDCO FOREX INTERNATIONAL DRILLING IN C. (ITA NOS. 1426 TO 1430/D/1995, DT. 27 TH NOV., 2001 AND SEDCO FOREX INTERNATIONAL DRILLING INC. V. DY. CIT (2000) 67 TT J (DEL) 670; (2000) 72 ITD 415 (DEL) OVERRULED ; CIT VS. AJAX PRODUCTS LTD. (1965) 55 ITR 741 (SC), CWT VS. ELLIS BRIDGE GYMKHA NA (1977) 143 CTR (SC) 138; (1998) 229 ITR 1 (SC), CIT VS. E. Y. KHAMBATY (1986) 50 CTR (BOM) 275 : (1986) 159 ITR 203 (BOM), DY. CIT VS. NAGARJUNA INVESTMENT TRUST LTD. (1972) 66 TTJ (HYD)(SB) 33 : (1988) 65 ITD 17 (HYD)(SB), CIT VS. MOTHER INDIA REFRINGERATION AIRWYS LTD. (2002) 175 CTR (DE L) 98 APPLIED. 7. SIMILARLY THE MUMBAI D-BENCH OF THE TRIBUNAL IN THE CASE OF MCDERMOTT ETPM INC. VS. DCIT IN ITA NO. 2897/MUM/19 96, ORDER DATED 14 TH SEPT., 2004 REPORTED IN 92 ITD 385 (MUMBAI) HELD A S FOLLOWS : THAT THE ASSESSEE CAN BE CHARGED ONLY IN ACCORDAN CE WITH S. 9, IS UNDISPUTED. AND AS PER EXPLN. (A) TO S. 9(1)(I), WH ERE PART OF THE 6 OPERATIONS OF BUSINESS ARE CARRIED OUT OUTSIDE INDI A, ONLY PART OF THE INCOME REASONABLY ATTRIBUTABLE TO OPERATIONS CARRIE D ON IN INDIA SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA. THE US E OF THE WORD SHALL IN THE SAID EXPLANATION IS UNEQUIVOCALLY IN DICATIVE OF THE LEGISLATIVE MANDATE CONTAINED THEREIN. THE EXPLANAT ION, IN NO UNCERTAIN TERMS, ENVISAGES ONLY SUCH TYPE OF INCOME TO BE DEEMED TO ACCRUE OR ARISE IN INDIA, UNDER S. 9(1)(I). THUS , THE INCOME PRESENTLY UNDER CONSIDERATION CANNOT BE SAID TO BE DEEMED INCOME JUST BECAUSE EITHER THE AGREEMENT WAS SIGNED IN IND IA OR THE INCOME HAS BEEN RECEIVED IN INDIA. THE REQUIREMENTS OF THE EXPLANATION TO S. 9(1)(I) HAVING NOT BEEN MET, THE INCOME IS NOT D EEMED INCOME. SINCE THE INCOME IN QUESTION CANNOT EVEN BE CONSTRU ED TO BE DEEMED INCOME OF THE ASSESSEE. SINCE THE INCOME IN QUESTION CANNOT EVEN BE CONSTRUED TO BE DEEMED INCOME OF THE ASSESSEE, THERE IS NO TAXABLE INCOME TO BE COMPUTED AND SO S . 44BB IS INAPPLICABLE. ONLY A PART OF MOBILISATION/DEMOBILIS ATION WORK, WHICH IS ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT BY THE ASSESSEE IN INDIA, IS TAXABLE IN INDIA. THE SERVICES RENDERED B Y THE ASSESSEE ARE NOT COVERED BY THE NOTIFICATION BEARING NO. GSR-304 (E), DT. 31 ST MARCH, 1983 SAIPEM SPA VS. DY. CIT (2004) 86 TTJ (DEL) 1 FOLLOWED. 8. SIMILAR ARE THE DECISIONS IN THE FOLLOWING CASE S: 1. ACIT VS. JINDAL DRILLING ITA NO. 6452/BOM/91 2. DCIT VS. SONAT OFFSHORE DRILLING ITA NO. 7414/BOM/9 4 (APPROVED BY THE BOMBAY HIGH COURT (INCOME TAX APPE AL NO. 508 OF 2007) VIDE ORDER DATED 16 TH SEPT., 2008. 3. TRANSOCEAN OFFSHORE INC VS. DCIT ITA NO. 05/DEL/200 2 4. ACIT VS. ENRON GLOBAL EXPLORATION & PRODUCTION LTD. 5. R & B FALCON DRILLING CO. VS. ACIT. 9. IN VIEW OF THE ABOVE DISCUSSION, WE UPHOLD THE ORDER OF THE FIRST APPELLATE AUTHORITY AND DISMISS GROUND NO. 1 OF THE REVENUE. 9. GROUND NO. 2 IS REGARDING THE DELETION OF INTE REST UNDER SECTION 234B OF THE ACT. WE HOLD THAT THE LEVY OF INTEREST IS 7 CONSEQUENTIAL IN NATURE. WE SET ASIDE THE ISSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. ORDER PRONOUNCED ON THIS 30 TH DAY OF APRIL, 2010. SD/- SD/- (N.V. VASUDEVAN)) (J. SUDHAKAR REDDY) JUDICIAL MEMBER. ACCOUNTANT MEMBER. MUMBAI, DATED : 30 TH APRIL, 2010. COPY FORWARDED TO : 1. APPELLANT. 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, L-BENCH. (TRUE COPY) BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI BENCHES, MUMBAI. WAKODE