The Asst. Director of Incometax (IT)-II, Hyderabad V. M/s Prysmian Cavi e Systemi Telecom S.RL. (formerly Pirelli Cavi e Systemi Telecom S.P.A) India Project Office, Hyderabad

ITA 199/HYD/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 98791 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2015
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 12-10-2015
• Assessment Year: 2001-2002
• Appeal Filed On: 06-02-2012
• Court: TRIBUNAL
• Department Lawyers: S K GUPTA; M SITARAM
• Keywords: Rejection of books of accounts; Double taxation relief; Permanent establishment; Advance ruling; Corroborative evidences; Onus to prove
• Section: 143(3); 234B; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 199/HYD/2012 ASSESSMENT YEAR: 2001-02 T HE ASST. DIRECTOR OF INCOME TAX, INTL. TXN-II, HYDERABAD VS M/S. PRYSMIAN CAVI E SYSTEMI TELECOM S.R.L. (FORMERLY PIRELLI CAVI E SYSTEMI TELECOM S.P.A) INDIA PROJECT OFFICE, HYDERABAD [PAN: AABCP2267Q] (APPELLANT) (RESPONDENT) I.T.A. NO. 245/HYD/2012 ASSESSMENT YEAR: 2001-02 PRYSMIAN C AVI E S I STEMI S.R.L. INDIA PROJECT OFFICE, (FORMERLY PRYSMIAN CAVI E SISTEMI TELECOM S.R.L) HYDERABAD [PAN: AABCP2267Q] VS DCIT, CIRCLE - 16(3), HYDERABAD (APPELLANT) (RESPONDENT) FOR REVENUE : S HRI S K GUPTA & M. SITA RAM, DR FOR ASSESSEE : SHR I P J PARDIWALLA WITH SHRI A.V. RAGHU RAM , AR S. DATE OF HEARING : 1 2 - 1 0 - 201 5 DATE OF PRONOUNCEMENT : 30 - 1 1 - 2015 O R D E R PER B. RAMAKOTAIAH, A.M. : THESE ARE CROSS APPEALS BY ASSESSEE AND REVENUE AG AINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-V , HYDERABAD, I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 2 -: DATED 29-11-2011. REVENUE HAS RAISED ONLY ONE GROU ND IN THEIR APPEAL ON THE APPLICABILITY OF RATE OF TAX AS APPLI CABLE TO A DOMESTIC COMPANY AS DIRECTED BY LD. CIT(A) CONTENDING THAT A SSESSEE IS A PROJECT OFFICE OF FOREIGN COMPANY. ASSESSEE HAS RA ISED SIX GROUNDS AND ONE ADDITIONAL GROUND IN ITS APPEAL. SINCE ADD ITIONAL GROUND IS ONLY OF LEGAL NATURE, THE SAME WAS ADMITTED. TH ESE ARE DEALT WITH IN THIS ORDER. 2. WE HAVE HEARD SHRI PARDIWALLA ALONG WITH SHRI RA GHU RAM FOR ASSESSEE AND SHRI S.K. GUPTA AND SHRI SITARAM, DRS OF REVENUE. 3. AT THE OUTSET, IT WAS INFORMED THAT MAJOR ISSUES ARE COVERED IN FAVOUR OF ASSESSEE BY THE ORDERS OF ITAT IN EARL IER AND LATER YEARS. 4. BRIEFLY STATED, ASSESSEE-COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE AND TRADING OF CABLES FOR TELECOM AND P OWER, FILED ITS RETURN OF INCOME FOR THE AY. 2001-02 ON 31-10-2001 DECLARING LOSS OF RS. 1,56,33,038/- AFTER SETTING OFF OF BROUGHT F ORWARD BUSINESS LOSS OF RS. 3,18,56,366/-. IN THIS CASE, ASSESSMEN T ORDER WAS PASSED U/S. 143(3) ON 29-03-2004, MAKING CERTAIN DI SALLOWANCES. SUBSEQUENTLY, THE CIT-IV, HYDERABAD PASSED AN ORDER U/S. 263 OF THE ACT DT. 13-03-2006 WHEREBY THE ORIGINAL ORDER W AS CANCELLED AND THE AO WAS DIRECTED TO BRING TO TAX OFF SHORE C ONTRACT RECEIPTS. ACCORDINGLY, THE AO COMPLETED THE ASSESSMENT U/S. 1 43(3) R.W.S. 263 ON 29-03-2006. FRESH ASSESSMENT ORDER US 143(3 ) R.W.S. 147 OF THE ACT WAS PASSED ON 20-12-2006 BY MAKING AN AD DITION TOWARDS ON SHORE CONTRACT RECEIPTS AMOUNTING TO RS. 1,54,46,987/- AND INCOME FROM ON SHORE SERVICE CONTRACTS AMOUNTIN G TO I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 3 -: RS. 9,42,246/-. LD. CIT(A) FOLLOWING HIS ORDER IN AY. 2003-04 HAS PARTLY CONFIRMED THE ASSESSMENT OF INCOME ON OFFSHO RE CONTRACTS AND REDUCED RATE OF INCOME ESTIMATION TO 10% ON SHO RE CONTRACTS. HE ALSO DIRECTED THE AO TO TAX ASSESSEE AT THE RATE APPLICABLE TO DOMESTIC COMPANY. THUS, BOTH THE PARTIES ARE AGGRI EVED. REVENUE APPEAL IN ITA NO. 199/HYD/2012 5. THE ONLY GROUND RAISED BY REVENUE IN THIS APPEAL IS ON THE RATE AS APPLICABLE TO DOMESTIC COMPANY. THIS ISSUE IS COVERED AGAINST REVENUE AND IN FAVOUR OF ASSESSEE IN THE OR DER OF ITAT. FOR THE SAKE OF RECORD, THE ORDER IN AY. 2000-01 IN ITA NO. 160 & 254/HYD/2006 DT. 28-05-2014 IS EXTRACTED HEREUNDER: 19. GROUND NO.2 PERTAINS TO ACTION OF LD. CIT(A) I N ALLOWING THE TAX RATE AS APPLICABLE TO DOMESTIC COMPANIES RA THER THAN AT HIGHER RATE AS APPLICABLE TO FOREIGN COMPANIES. A.O . IN HIS ORDER HAS ADOPTED THE TAX RATE AT 48% APPLICABLE TO FOREIGN C OMPANIES. LD. CIT(A) FOLLOWING HIS PREDECESSORS ORDER IN A.Y. 20 01-02 HELD THAT THE RATE OF TAX APPLICABLE TO THE ASSESSEE HAS TO B E SAME AS THAT OF DOMESTIC COMPANY PLACED IN SIMILAR CIRCUMSTANCES, F OLLOWING THE NON-DISCRIMINATION CLAUSE APPLICABLE TO FOREIGN COM PANIES UNDER DTAA. WE DO NOT SEE ANY REASON TO INTERFERE WITH T HE ORDER OF THE CIT(A) AS IT IS CORRECT ON THE INTERPRETATION OF PR OVISIONS OF DTAA. ACCORDINGLY, THIS GROUND IS REJECTED. 6. IN THE RESULT, REVENUE APPEAL IS DISMISSED. ASSESSEE APPEAL IN ITA NO. 245/HYD/2012: 7. ASSESSEE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL: 1. (A) THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER (AO) IN CHARGING THE AMOUNTS RECE IVED BY THE APPELLANT FROM THE OFF SHORE SUPPLY OF EQUIPMENT TO TAX IN INDIA. I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 4 -: HE FURTHER ERRED IN HOLDING/OBSERVING AS UNDER: (I) THE DISPUTE IS ONLY REGARDING THE QUANTUM OF INCOME TO BE TAXED IN INDIA. (II) ALL THE THREE CONTRACTS VIZ CONTRACT FOR OFFSHORE S UPPLY, ONSHORE SUPPLY AND ONSHORE SERVICES WERE TO BE TREA TED AS ONE COMPOSITE CONTRACT. (B) WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT (A) ERRED IN OBSERVING IN PARA 5.3 PAGE 3 OF THE ORDER IN ESTIMA TING THE PROFIT FROM OFFSHORE CONTRACTS TO BE TAKEN AT 5% OF RECEIPTS AND 20% OF THE PROFIT ATTRIBUTABLE TO INDIAN BUSINESS O PERATIONS AND IS TO BE TAXED IN INDIA. 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ESTIM ATION OF INCOME AT 10% OF ONSHORE CONTRACTS OF RS. 15,44,69, 574/- AND 20% ON ONSHORE CONTRACTS OF RS. 47,11,230/-. HE ERRED IN CONFIRMING THE ACTION OF THE AO IN REJE CTING THE BOOKS OF ACCOUNTS OF THE PROJECT OFFICE UNDER SECTI ON 145(3) OF THE ITA AND IN ESTIMATING THE PROFITS FROM THE ONSH ORE CONTRACT AT 10% OF THE GROSS RECEIPTS. 3. THE LEARNED CIT(A) ERRED IN NOT REJECTING THE CH ARGING OF INTEREST UNDER SECTION 234B OF THE ITA AT RS. 19,58 ,722/-. HE ERRED IN NOT APPRECIATING THAT THE APPELLANT IS A NON- RESIDENT COMPANY AND ANY SUM PAID TO THE NON-RESIDE NT COMPANY IS SUBJECT TO DEDUCTION OF TAX AT SOURCE UN DER SECTION 195 OF THE ITA. SINCE SECTION 234B APPLIES TO A PE RSON WHO IS LIABLE TO PAY ADVANCE TAX AND AS THE AMOUNTS PAID T O THE APPELLANT HAD ALREADY BEEN SUBJECTED TO DEDUCTION O F TAX AT SOURCE, THE APPELLANT WAS NOT LIABLE TO PAY ANY ADV ANCE TAX IN TERMS OF SECTION 209 OF THE ITA AND CONSEQUENTLY IN TEREST UNDER SECTION 234B OF THE ITA WAS NOT LEVIABLE IN T HE FACTS OF THE CASE. THE APPELLANT, IN THIS CONNECTION, RELIES UPON ON T HE FOLLOWING DECISIONS: (A) SEDCO FOREX INTERNATIONAL DRILLING INC. V. DCIT (72 ITD 415) (DEL); (B) MOTOROLA COMMUNICATIONS INC. V. DCIT (95 ITD 269) (SB) (DEL); I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 5 -: (C) MADRAS FERTILISERS LTD., (149 ITR 703) (MAD); (D) CIT V. RANOLI INVESTMENT (P) LTD (235 ITR 433) (GUJ ); (E) J.K. TRANSFORMERS AND SWITCHGEARS V. ITO (151 TAXMAN 50) (ASR) 4. THE LEARNED CIT(A) ERRED IN NOT REJECTING THE CH ARGING OF INTEREST UNDER SECTION 234D OF THE ITA AT RS. 14,31 ,587/-. THE APPELLANT SUBMITS THAT INTEREST UNDER SECTION 2 34D CANNOT BE CHARGED IN RESPECT OF ASSESSMENT YEAR PRIOR TO C OMING INTO FORCE OF THE PROVISIONS OF SECTION 234D. SINCE, TH E PROVISIONS CAME INTO EFFECT FROM 1 JUNE, 2003 THEY WOULD NOT A PPLY TO THE CURRENT ASSESSMENT YEAR. THE APPELLANT RELIES UPON THE DECISION IN GLAXO SMITHKLINE ASIA PVT. LTD., VS. AC IT (97 TTJ 108) (DEL). GROUND NOS. 5 & 6 ARE GENERAL IN NATURE. 8. THE FACTS LEADING TO THE ABOVE GROUNDS ARE THAT ASSESSEE HAD ENTERED INTO THREE DIFFERENT CONTRACTS WITH POWER G RID CORPORATION OF INDIA LIMITED (PGCI) ON FEBRUARY 6, 1998 FOR SET TING UP A FIBER OPTIC SYSTEM FOR SOUTHERN REGION. A. OFF-SHORE SUPPLY CONTRACT NUMBER C-50901-9/546/I FOR ALL WORKS TO BE PERFORMED IN COUNTRIES OUTSIDE INDI A COVERING, INTER ALIA, THE OFFSHORE SUPPLY OF EQUIPM ENTS REQUIRED FOR THE COMPLETE EXECUTION OF THE PROJECT. B. ON-SHORE SUPPLY CONTRACT NUMBER C-50901-S859- 9/547/II FOR THE SUPPLY OF EQUIPMENTS FROM WITHIN I NDIA REQUIRED FOR THE COMPLETE EXECUTION OF THE PROJECT. C. ON-SHORE SERVICES CONTRACT NUMBER C-50901-S858- 9/548/III FOR ALL THE SERVICES INCLUDING PORT CLEAR ANCE (IN CASE OF SUPPLIES FROM OFFSHORE) INLAND TRANSIT I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 6 -: INSURANCE, HANDLING AND TRANSPORTATION TO SITE, UNLOADING AT SITE, STORAGE, PRESERVATION, INSURANCE , ERECTION, INSTALLATION, TESTING, COMMISSIONING AND INTEGRATION AT SITE OF THE COMPLETE FIBER OPTIC SYS TEM INCLUDING ASSOCIATED CIVIL WORKS ETC., CABLES AND O THER ELECTRICAL AND MECHANICAL C. AUXILIARY SYSTEMS FOR COMPLETE EXECUTION OF THE PROJECT. 9. THE ASSESSEE OBTAINED REQUISITE PERMISSION FROM RBI FOR EXECUTION OF ONSHORE SUPPLY CONTRACT AND ONSHORE SE RVICES CONTRACT WITH PGCI. THE REGISTRAR OF COMPANIES NCT OF DELHI AND HARYANA HAD ISSUED A CERTIFICATE FOR THE ESTABLISHMENT OF P LACE OF BUSINESS IN INDIA TO PIRELLI CAVI E SYSTEMI S.P.A. MILAN ITA LY. THE ASSESSEE OFFERED INCOME ONLY FROM THE CONTRACTS NO.2 AND 3 R ELATING TO ONSHORE SUPPLIES AND ONSHORE SERVICES CONTRACT WHIL E MAINTAINING THAT THE INCOME FROM OFFSHORE CONTRACT NO.1 WAS NOT TAXABLE IN INDIA. THE AO HELD THAT ALL THE THREE CONTRACTS ARE TO BE TREATED AS A SINGLE OR COMPOSITE CONTRACT AND FOR THE REASONS ELABORATED IN THE ASSESSMENT ORDER, HELD THAT THE PROFIT FROM THE OFFSHORE CONTRACT WAS ALSO TAXABLE IN INDIA. THE AO RELIED O N THE DECISION OF THE AUTHORITY FOR ADVANCE RULINGS IN THE CASE OF IS HIKAWAJIMA- HARIMA HEAVY INDUSTRIES CO. LTD. AND THE PROVISIONS OF DTAA BETWEEN INDIA AND ITALY FOR ARRIVING AT THIS FINDIN G. CONSEQUENT TO THE FINDING THAT OFFSHORE CONTRACT WAS TAXABLE IN I NDIA, AO PROCEEDED TO ESTIMATE THE INCOME OF THE ASSESSEE FR OM THE OFFSHORE CONTRACT AT 5% OF THE GROSS CONTRACT VALUE IN THE A BSENCE OF PRODUCTION OF THE BOOKS OF ACCOUNTS AND SUPPORTING EVIDENCE RELATING TO THE OFFSHORE CONTRACT NO.1. SIMILARLY, THE INCOME FROM ONSHORE CONTRACT AND ONSHORE SERVICES CONTRACT WAS ESTIMATED AT 10% OF THE CONTRACT VALUE AFTER RECORDING A FINDING THAT THE BOOKS I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 7 -: OF ACCOUNTS OF CONTRACT NOS.2 AND 3 PRODUCED BY THE ASSESSEE WERE UNRELIABLE AND NEED TO BE REJECTED. 10. BEFORE CIT(A), IT WAS CONTEND THAT: (A) AO HAD NOT CONSIDERED CLAUSE NO.7 EXTENT OF TH E PROFIT ASSESSABLE U/S.9 OF BOARDS CIRCULAR NO.23 DATED 2 3-07- 1969 AS PER WHICH THE APPELLANT WAS NOT TAXABLE FOR THE OFFSHORE SUPPLY CONTRACT WHICH WAS CONCLUDED OUTSID E INDIA. (B) AS PER THE PROVISIONS OF DTAA WITH ITALY, THE OFFSHORE CONTRACT INCOME WAS NOT TAXABLE IN INDIA SINCE THE SAME DOES NOT FORM PART OF THE INDIA PROJECT OFFICE. (C) THE AUTHORITY FOR ADVANCE RULINGS IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES CO. LTD. WAS I N FAVOUR OF THE ASSESSEE WHILE THE AO HAD WRONGLY APP RECIATED AND APPLIED THE SAME IN ASSESSEES CASE. (D) THE PROVISIONS OF SECTION 44BBB ARE NOT APPLIC ABLE TO THE ASSESSEES CASE IN RESPECT OF ONSHORE SUPPLY AN D ONSHORE SERVICES CONTRACT AS THE ASSESSEES ACTIVIT IES ARE NOT CONNECTED WITH SETTING UP OF A TURNKEY POWER PROJEC T. (E) AO WAS NOT JUSTIFIED IN REJECTING THE BOOKS AND ESTIMATING INCOME U/S.145(3) IN RESPECT OF ONSHORE SUPPLY CONTRACT AND ONSHORE SERVICES CONTRACT. IT WAS CONT ENDED THAT TAX AUDIT WAS DONE, AUDITORS REPORT WAS FILED AND ALL THE SUPPORTING DOCUMENTS AND VOUCHERS FOR EXPENDITU RE CLAIMS WERE PRODUCED DURING THE ASSESSMENT PROCEEDI NGS AND, THEREFORE, THERE WAS NO JUSTIFICATION FOR REJE CTING THE I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 8 -: BOOK RESULTS. FURTHER, THE OBSERVATION OF THE AO TH AT EXPENDITURE RELATABLE TO OFFSHORE CONTRACT WAS DEBI TED IN THE ONSHORE CONTRACT BOOKS WAS TOTALLY BASED ON PRESUMP TIONS AND ASSUMPTIONS AND, THEREFORE, COULD NOT BE THE BA SIS FOR INVOKING THE PROVISIONS OF SECTION 145(3) OF THE AC T. 11. AFTER CONSIDERING ASSESSEES CONTENTIONS, THE L D. CIT(A) UPHELD THE AOS CONTENTION THAT INCOME FROM OFFSHOR E CONTRACT WAS ALSO REQUIRED TO BE TAXED IN INDIA. IN ARRIVING AT THAT CONCLUSION, HE RELIED ON CERTAIN FACTS LIKE SIGNING OF THE AGRE EMENT BY THE INDIAN BRANCH, UNDERTAKING INSTALLATION WORK AND AL SO TRAINING THE EMPLOYEES OF PGCI IN INDIA. HOWEVER, ON THE ESTIMAT ION OF INCOME WHEN THE AO ESTIMATED THE INCOME AT 5% OF THE CONTR ACT VALUE, HE CONSIDERED ONLY 20% OF THE SAME TO BE APPORTIONED T OWARDS THE PROFIT ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT IN INDIA. ON THE ISSUE OF ONSHORE CONTRACTS AND REJECTION OF BOO KS OF ACCOUNTS, LD. CIT(A) EVEN THOUGH DID NOT AGREE THAT THE PROVISIONS OF SECTION 44BBB OF THE ACT ARE APPLICAB LE TO THE FACTS OF THE CASE AS THE COMPANY HAS NOT ENTERED IN TO TURNKEY POWER PROJECT AS PER THE PROVISIONS OF THE SECTION, HE ACCEPTED THE AOS CONTENTION OF REJECTING THE BOOKS AND ESTI MATED THE INCOME AND APPROVED ESTIMATION AT 10% OF THE CONTRA CT AMOUNT THEREBY, ADDITION WAS UPHELD AS AGAINST THE LOSS RETURNED BY THE ASSESSEE. ASSESSEE IS AGGRIEVED ON CONFIRMATION OF INCOME ON OFFSHORE CONTRACT AS WELL AS REJECTION OF BOOKS OF ACCOUNTS AND ESTIMATING THE I NCOME ON ONSHORE CONTRACTS. I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 9 -: 12. AS STATED EARLIER, THESE ISSUES ARE COVERED IN FAVOUR OF ASSESSEE. THE DETAILED ORDER WAS PASSED IN AY. 200 0-01 IN ITA NOS. 160 & 254/HYD/2006 DT. 28-05-2014, WHEREIN THE ISSUES ARE DEALT WITH AS UNDER: 13. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE FACTS AND RIVAL CONTENTIONS. THERE ARE TWO ISSUES FOR CON SIDERATION IN THIS APPEAL ON OFF- SHORE CONTRACT. THE FIRST ISSUE IS A BOUT THE TAXABILITY OF THE INCOME STATED TO HAVE BEEN EARNED ON OFFSHOR E CONTRACT IN INDIA AND SECOND ESTIMATION OF INCOME AT 5% BY THE A.O. WHICH WAS REDUCED BY THE CIT(A) TO 20% OF WHAT WAS ESTIMATED BY THE A.O, THUS ESTIMATING AT 1% OF THE TOTAL CONTRACT AMOUNT. ADMITTEDLY, ASSESSEE HAS ENTERED INTO THREE SEPARATE CONTRACTS WHICH WERE CLEARLY DISTINGUISHABLE. THERE IS NO DISPUTE WITH R EGARD TO TAXATION OF INCOME STATED TO HAVE BEEN EARNED ON ONSHORE SUP PLY CONTRACT AND ONSHORE SERVICE CONTRACT. THE ONLY ISSUE IS THE ACTION OF THE A.O. IN CONSIDERING THE OFFSHORE SUPPLY CONTRACT ALSO FO R THE PURPOSE OF TAXATION IN INDIA. THERE ARE CERTAIN FACTUAL ERRORS COMMITTED BY THE LD. CIT(A) WHILE CONFIRMING THE ORDER. A) FIRST OF ALL, THE OFFSHORE CONTRACT WAS ENT ERED INTO IN THE MONTH OF FEBRUARY, 1998 WHEREAS INDIA PROJECT OFFIC E WAS ESTABLISHED IN JUNE, 1998. THEREFORE, THERE IS NO C O-RELATION WITH REFERENCE TO SIGNING UP THE CONTRACT IN INDIA TO TH E PE I.E., INDIA PROJECT OFFICE. EVEN THOUGH THESE FACTS WERE NOTED BY THE CIT(A). HOWEVER, THE LD. CIT(A) CONSIDERED THAT THERE IS A ROLE OF INDIAN PE IN ENTERING THE CONTRACT ALSO. LD. CIT(A) CORRECTLY ANALYSED THE RULING IN THE CASE OF ISHAKA WAJIMA- HARIMA HEAVY INDUSTRI ES CO. LTD. OF THE HONBLE SUPREME COURT IN COMING TO THE CONCLUSI ON THAT THE PROFIT SHALL BE DEEMED TO ACCRUE OR ARISE TO THE AS SESSEE IN INDIA ONLY SUCH PART OF PROFIT AS IS REASONABLE ATTRIBUTA BLE TO OPERATIONS CARRIED OUT IN INDIA. HE ALSO CORRECTLY ANALYSED TH E ARTICLE 7 OF DTAA BETWEEN INDIA AND ITALY VIDE PARA 5.6 OF THE ORDER AND ALSO EXPLANATION TO SECTION-9. SINCE INDIA PROJECT OFFIC E HAS NO CONNECTION WITH ENTERING INTO CONTRACT, THAT ASPECT OF CONSIDERING PART OF CONTRACT HAS ACCRUING OR ARISING IN INDIA, HAVING SIGNED IN INDIA DOES NOT APPLY TO PE AT ALL. B) THE SECOND ASPECT CONSIDERED BY THE LD. CIT(A) IS WITH REFERENCE TO SECTION B(BPS) ABOUT THE INSTALLATION PART. TH E SAID SECTION IN THE CONTRACT IS AS UNDER : PIRELLI CONFIRMED THAT THE FIBRE OPTIC CABLE QUANT ITIES INDICATED IN THEIR OFFER ARE BASED ON LINK LENGTHS. PIRELLI CONF IRMED THAT THE UNIT I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 10 - : PRICE OF THE PRICE SCHEDULES INCLUDES ALL THE INSTA LLATION, HARDWARE, APPROACH CABLE, MIC CABLE AND ADDITIONAL LENGTH OF CABLE REQUIRED TOWARDS SAG, SERVICE LOOPS, WASTE AND OTHER SUCH CO NSIDERATIONS. AS CAN BE SEEN THAT THE ABOVE IT CONFIRMS THAT FIB RE OPTIC CABLE QUANTITIES INDICATED IN THEIR OFFER ARE BASED ON LINK LENGTHS. IT ALSO CONFIRMS THAT UNIT PRICE OF THE PRICE SCHEDUL ES INCLUDES ALL INSTALLATION, HARDWARE, APPROACH CABLE ETC., REQUIR ED TOWARDS SAG, SERVICE LOOPS, WASTE AND OTHER SUCH CONSIDERATIONS. THIS ONLY INDICATES THAT THE CABLE REQUIRED FOR VARIOUS SERVI CES IN INDIA WERE ALSO INCLUDED IN THE PRICE QUOTED BUT THAT DOES NOT INDICATE THE PRICE QUOTED INCLUDES THE INSTALLATION COST, WHICH THE LD . CIT(A) INTERPRETED WRONGLY. THE WORD INSTALLATION THERE IS NOT PERTAINING TO THE SERVICE OF INSTALLATION BUT INCLUSION OF LENGTH OF CABLE LINES REQUIRED FOR INSTALLATION ACTIVITY. THEREFORE, WE A RE OF THE OPINION THAT LD. CIT(A) ERRED IN CONSIDERING THIS AS PART O F ONSHORE SUPPLY. C) THE THIRD ASPECT IS WITH REFERENCE TO PART OF TRAIN ING IMPARTED TO PERSONNEL IN INDIA. IT WAS EXPLAINED BY THE ASSESSEE THAT THIS TRAINING IS INCIDENTAL TO SUPPLY OF MATER IAL OFFSHORE AND EVEN IF IT WERE TO BE CONSIDERED AS PART OF PE OPER ATIONS, ASSESSEE HAS NOT EARNED ANY INCOME AS EXPLAINED EARLIER. FUR THER AS NO PROFIT WAS EARNED ON THE SAID ACTIVITY IN INDIA, NO INCOME CAN BE DEEMED TO ACCRUE OR ARISE IN INDIA. WE ARE OF THE OPINION THAT THE LD. CIT(A) WRONGLY CONSIDERED ALL THE THREE ASPECTS IN CONFIRM ING THE ESTIMATION AT 1% ON THE OFFSHORE CONTRACTS. 14. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT INCOME FROM THE OFFSHORE CONTRACT IS TAXABLE ONLY T O THE EXTENT OF PROFITS ATTRIBUTABLE TO THE OPERATIONS IN INDIA WHI CH ARE CLEARLY DEFINED IN THE INCOME TAX ACT AS WELL AS THE DTAA B ETWEEN INDIA AND ITALY. ORDINARILY, BOTH FINDING AS TO THE OPERA TIONS IN INDIA AS WELL AS DETERMINATION OF PROFITS ATTRIBUTABLE TO SU CH OPERATIONS ARE MATTER OF FACT. THE BURDEN OF PROOF OF INDIA OPERAT IONS IN THE CASE OF A NON-RESIDENT WERE GENERALLY LIE ON THE REVENUE AS IT WAS CONTENDED THAT NO PART OF THE OFFSHORE CONTRACT WAS EXECUTED IN INDIA. SINCE THE LD. CIT(A) ELABORATELY DISCUSSED T HE LEGAL PRINCIPLES AND ARRIVED AT A CORRECT CONCLUSIONS VIDE PARA 11 T HAT INDIA PROJECT OFFICE IS LIABLE UNDER THE INCOME TAX AND THE DTAA BETWEEN INDIA AND ITALY ONLY TO THE EXTENT OF PROFIT ATTRIBUTABLE TO THE BUSINESS OPERATIONS CARRIED OUT BY THE PERMANENT ESTABLISHME NT IN INDIA. THIS POSITION DOES NOT CHANGE EVEN IF ALL THE THREE CONTRACTS SIGNED BY THE PARENT COMPANY ARE TREATED TO BE SINGLE OR C OMPOSITE CONTRACT. THE CABLES ARE MANUFACTURED OUTSIDE INDIA AND PROCUREMENT OF CABLES OUTSIDE INDIA FALL BEYOND PUR VIEW AND JURISDICTION OF THE PROVISIONS OF INCOME TAX ACT. T HEREFORE, WE ARE OF THE OPINION THAT SINCE THE OFFSHORE CONTRACT IS ONL Y FOR PROCUREMENT OF I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 11 - : CABLES THAT TOO OUTSIDE INDIA AND THE TRAINING PROV IDED IN INDIA IS INCIDENTAL TO THE CONTRACT NO.1 I.E., OFFSHORE CONT RACT AND FURTHER AS THERE IS NO PROFIT EARNED ON SUCH TRAINING ALSO, WE ARE OF THE OPINION THAT NO PART OF THE INCOME CAN BE ATTRIBUTABLE TO T HE PE. WE PLACE RELIANCE ON THE JUDGMENT OF THE HONBLE SUPREME COU RT IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES CO. LTD. (S UPRA) AND ALSO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF L.G. CABLES LIMITED 197 TAXMAN 100 THAT WHEN UNDER AN OF FSHORE CONTRACT, EQUIPMENT WAS FOUND TRANSFERRED OUTSIDE I NDIA, NECESSARILY TAXABLE INCOME ALSO ACCRUED OUTSIDE IND IA AND HENCE, NO PORTION OF SUCH INCOME WAS TAXABLE IN INDIA. THE REFORE, WE SET ASIDE THE ORDER OF THE CIT(A) IN RESTRICTING THE AD DITION TO 1% OF THE TOTAL CONTRACT THAT WAS DONE BY HIM IN PARA 5.12. A SSESSEE GETS COMPLETE RELIEF FROM THIS AND THEREFORE, REVISED GR OUND NOS. 1 RAISED BY THE ASSESSEE ON THIS IS ALLOWED. 15. THE NEXT ISSUE FOR CONSIDERATION IS ABOUT ESTIM ATION OF INCOME UNDER THE PROVISIONS OF SECTION 145(3) ON TH E TWO ONSHORE CONTRACTS ON THE GROUND THAT SOME PART OF OFFSHORE CONTRACT EXPENSES WERE ACCOUNTED IN THE BOOKS OF INDIA PROJECT OFFICE AND THEREFORE, IT WAS NOT POSSIBLE FOR DETERMINING THE TRUE PROFIT OF THE ASSESSEE. LD. CIT(A) AFTER ANALYZING THE ISSUE IN PARA 6.4 UPHELD ESTIMATION AT 10% OF THE CONTRACT PRICE RECEIVED DURING THE YEAR. IT WAS THE CONTENTION THAT THE COMMERCIAL INVOICES FOR ALL THE THREE CONTRACTS ARE RAISED BY HEAD OFFICE IN ITALY AND INDIA PROJEC T OFFICE AS ACCOUNTED INCOME AND EXPENDITURE PERTAINING TO ONSH ORE SUPPLY CONTRACT AND ONSHORE SERVICES CONTRACT AS THESE ARE CARRIED OUT IN INDIA AND ARE TAXABLE IN INDIA. IT WAS ALSO FURTHER SUBMITTED THAT REMITTANCE BY POWER GRID CORPORATION OF INDIA IN FO REIGN CURRENCIES OTHER THAN INDIAN RUPEES WERE MADE DIRECTLY TO HEAD OFFICE BUT THE SAME ARE ACCOUNTED PERTAINING TO ONSHORE SUPPLY AND SERVICE CONTRACTS AS PER THE STIPULATION OF RBI. IT WAS FUR THER SUBMITTED THAT FINANCIAL STATEMENTS SUBMITTED INDICATE THAT HOLDIN G COMPANY HAS NOT MADE ANY PROFIT FROM THE OPERATIONS DURING THE YEARS UNDER REVIEW. LD. CIT(A) CAME TO CORRECT CONCLUSION THAT PROVISIONS OF SECTION 44BBB ARE NOT APPLICABLE TO THE ASSESSEE AS WORK OF INDIA PROJECT OFFICE DOES NOT RELATE TO ANY TURNKEY POWER PROJECT. HOWEVER, HE CONFIRMED THE ACTION OF THE A.O. IN INVOKING THE PROVISIONS OF SECTION 145(3) ON THE REASON OF INCORRECT METHOD OF ACCOUNTING AND PARTLY DEBITING THE EXPENSES OF OFFSHORE CONTRACTS. EVEN THOUGH THERE SEEMS TO BE MERIT IN CONTENTIONS, IT IS VERY DIFFICULT TO EXAMINE THEM AT THIS POINT OF TIME IN VIEW OF AFFLUX OF TIM E. CONSIDERING THE FACTS AS EXAMINED BY THE A.O. AND LD. CIT(A), WE AR E OF THE OPINION THAT ESTIMATION OF INCOME AT 10% ON THE CONTRACTS R ELATING TO ONSHORE SUPPLY AND SERVICES IS REASONABLE ON THE FACTS OF T HE CASE. ITAT IS GENERALLY ESTIMATING INCOMES FROM 10 % TO 12.5% IN MAIN CONTRACTORS CASES. SINCE ASSESSEE UNDERTOOK ON CONT RACT BASIS THE ESTIMATION AT 10% IS REASONABLE. THEREFORE, WE ARE OF THE OPINION I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 12 - : THAT AUTHORITIES ARE JUSTIFIED IN ESTIMATING INCOME ON ONSHORE CONTRACTS. REVISED GROUND NO 2 IS REJECTED. 16. NEXT GROUND (ADDL. GROUND 2) IS ON LEVY OF INTERES T U/S 234B, 234D. IT WAS THE CONTENTION THAT INTEREST UND ER SECTION 234B AND 234D ARE NOT WARRANTED ON THE FACTS OF THE CASE . LD. COUNSEL RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH C OURT IN THE CASE OF DIT (IT) VS. NGC NETWORK ASIA LLC BOMBAY 313 ITR 187 FOR THE PROPOSITION THAT ASSESSEE IS COVERED BY THE PROVISI ONS OF TDS THERE IS NO NEED TO LEVY INTEREST UNDER SECTION 234B. LIK EWISE, HE ALSO QUESTIONED THE LEVY OF INTEREST UNDER SECTION 234D STATING THAT THE SAID PROVISIONS ARE NOT APPLICABLE TO THE IMPUGNED ASSESSMENT YEAR. 16.1. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE A RE OF THE OPINION THAT LEVY OF INTEREST UNDER SECTION 234B AN D 234D ARE TO BE RE-EXAMINED BY THE A.O. AS SEEN FROM THE ASSESSMENT ORDER, THERE WAS TAX DEDUCTED AT SOURCE TO AN EXTENT OF RS.22,41 ,403/-. THEREFORE, ONCE THE AMOUNTS ARE COVERED BY THE TDS, QUESTION OF LEVY OF INTEREST UNDER SECTION 234B ON NON-PAYMENT OF ADVANCE TAX SHOULD NOT ARISE. THE PRINCIPLES LAID DOWN BY THE H ONBLE BOMBAY HIGH COURT IN THE CASE OF NGC NETWORK ASIA LLC (SUP RA) ARE EQUALLY APPLICABLE TO THE FACTS OF THE CASE. A.O. IS DIRECT ED TO VERIFY WHETHER THE INCOME THAT HAS BEEN TAXED IS COVERED BY THE PR OVISIONS OF TDS AND IF SO, NOT TO CHARGE INTEREST UNDER SECTION 234 B OF THE ACT. 16.2. AS FAR AS INTEREST UNDER SECTION 234D IS CONC ERNED, THIS ALSO REQUIRES TO BE EXAMINED BY THE A.O. KEEPING IN MIND THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CI T VS. RELIANCE ENERGY LTD. SPL. LEAVE TO APPEAL (CIVIL) NOS. 14013 /2013 DATED 30.09.2013 AS THE ORDERS ARE PASSED AFTER 01.06.200 3. ASSESSING OFFICER IS DIRECTED TO EXAMINE AND DECIDE ACCORDING LY. WITH THIS DIRECTIONS, ADDITIONAL GROUND-2 IS CONSIDERED AS AL LOWED FOR STATISTICAL PURPOSES. 13. SINCE THE ISSUES IN THIS YEAR ARE SAME AS DEALT WITH ABOVE, WE DIRECT THE AO ACCORDINGLY. WE SET ASIDE THE ORDER O F THE CIT(A) IN RESTRICTING THE ADDITION TO 1% OF THE TOTAL OFF SHO RE CONTRACT RECEIPTS THAT WAS DONE BY HIM. ASSESSEE GETS COMPLETE RELIEF FROM THIS AND THEREFORE, GROUND NOS. 1 RAISED BY THE ASSESSEE ON THIS IS ALLOWED. WITH REFERENCE TO ON SHORE CONTRACT RECEIPTS, WE AR E OF THE OPINION THAT ESTIMATION OF INCOME AT 10% ON THE CONTRACTS R ELATING TO I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 13 - : ONSHORE SUPPLY AND SERVICES IS REASONABLE ON THE FA CTS OF THE CASE. SINCE ASSESSEE UNDERTOOK ON CONTRACT BASIS THE ESTI MATION AT 10% IS REASONABLE. THEREFORE, WE ARE OF THE OPINION TH AT AUTHORITIES ARE JUSTIFIED IN ESTIMATING INCOME ON ONSHORE CONTRACTS . GROUND NO 2 IS REJECTED . GROUND NO. 3 ON LEVY OF INTEREST IS SET ASIDE TO A O TO EXAMINE THE SAME AS DIRECTED IN OTHER YEAR ABOVE. G ROUND NO 3 IS ALLOWED FOR STATISTICAL PURPOSES. 14. ASSESSEE HAS RAISED THE FOLLOWING ADDITIONAL GR OUND: 1.THE CIT(A) HAVING REJECTED THE ACCOUNTS IN TERMS OF SECTION 145(3) OF THE INCOME TAX ACT, 1961 AND HAVING HELD THAT THE APPELLANTS PROFITS HAVE TO BE ESTIMATED AT THE RAT E OF 10% OF THE GROSS RECEIPT FROM THE ONSHORE WORK, OUGHT TO HAVE CONSEQUENTIALLY HELD THAT THE INCOME ORIGINALLY DECLARED IN THE RET URN OF INCOME UNDER THE HEAD PROFIT AND GAINS OF BUSINESS AND PR OFESSION OF RS. 3,18,56,193 AND THE ADDITION OF RS. 3,15,88,581 MAD E BY THE ASSESSING OFFICER TO THE INCOME DECLARED IN THE RET URN OF INCOME IN THE ASSESSMENT ORDER DATED 20 MARCH 2004, BE DELETE D. 15. AFTER CONSIDERING THE RIVAL CONTENTIONS AND PER USING THE ORDER IN EARLIER AND LATER YEARS, WE ARE OF THE OPINION T HAT THERE IS MERIT IN ASSESSEES CONTENTIONS. ASSESSEE OFFERED INCOME S IN THE IMPUGNED YEAR ON THE COMPLETION OF CONTRACTS AND SE T OFF TO LOSSES OF EARLIER YEARS, WHEREAS INCOMES ARE BEING ESTIMAT ED AT 10% IN ALL THE YEARS ON GROSS RECEIPTS. SINCE INCOMES ARE BEI NG TAXED ON ESTIMATE BASIS, AO HAS TO FOLLOW THE CONSISTENT MET HOD OF ESTIMATION OF INCOME IN THIS YEAR ALSO. CONSEQUENT LY, THE RETURNED INCOME BASED ON THE BOOKS OF ACCOUNT SHOULD NOT BE CONSIDERED. AO IS DIRECTED TO EXAMINE THE RECORD AND DELETE THE INCOMES OFFERED BY ASSESSEE ON THE ABOVE CONTRACT WORKS, IF THE SAM E WAS INCLUDED AGAIN. THE OTHER INCOMES IF ANY, HOWEVER, ARE TO B E CONSIDERED IN THE YEAR OF ACCRUAL/RECEIPT AS OFFERED BY ASSESSEE. THE ADDITIONAL GROUND IS ALLOWED FOR STATISTICAL PURPOSES. AO IS DIRECTED TO I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 14 - : COMPUTE THE INCOME ACCORDINGLY. ASSESSEES APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 16. IN THE RESULT, REVENUES APPEAL IN ITA NO. 199/ HYD/2012 IS DISMISSED AND ASSESSEES APPEAL IN ITA NO. 245/HYD/ 2012 IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH NOVEMBER, 2015 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEM BER HYDERABAD, DATED 30 TH NOVEMBER, 2015 TNMM I.T.A. NOS. 199/HYD/2012 & 245 /HYD/2012 :- 15 - : COPY TO : 1. ASST. DIRECTOR OF INCOME TAX, INTL. TXN-II, 6 TH FLOOR, C- BLOCK, IT TOWERS, HYDERABAD. 2. M/S. PRYSMIAN CAVI E SYSTEMI TELECOM S.R.L. (FOR MERLY PIRELLI CAVI E SYSTEMI TELECOM S.P.A) INDIA PROJECT OFFICE, 5-7-64/EWSH-128, GR. FLOOR, A.P.H.B. COLONY, MOULA ALI, HYDERABAD. 3. PRYSMIAN CAVI E SISTEMI S.R.L INDIAN PROJECT OFF ICE, H.NO. 5-7-64, EWHS-128, GROUND FLOOR, APHB COLONY, MOULALI, HYDERAB AD. 4. DCIT, CIRCLE-16(3), AAYAKAR BHAVAN, HYDERABAD. 5 . CIT (APPEALS) - V , HYDERABAD. 6. THE DIT (INTERNATIONAL TAXATION), HYDERABAD. 7. D.R. ITAT, HYDERABAD. 8. GUARD FILE.