Hyundai Heavy Industries Co. Ltd, Mumbai V. DIT, New Delhi

ITA 2087/DEL/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3834 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 19-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 18-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GIRISH DAVE SPL
• Assessee Lawyers: CHARU KAPOOR S
• Keywords: Presumptive income; Business income; Transfer pricing; Double taxation relief; Principle of natural justice; Rule of consistency; Deemed to accrue or arise in india; Permanent establishment; Advance ruling; Question of law; Wrong claim; Corroborative evidences; Assessment record; Revised return; Revenue expenditure; TDS; Set aside
• Section: 143(3); 5(2); 260A; 143(1); 195; 147; 145; 263; 63; 144; 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : C : NEW DELHI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ITA NO.2086 & 2087/DEL/2009 ASSESSMENT YEAR : 2005-06 & 2006-07 HYUNDAI HEAVY INDUSTRIES CO. LTD., 301, 3 RD FLOOR, SARJAN PLAZA, 100, ANNIE BESANT ROAD, WORLI, MUMBAI 400 018. PAN : AAACH5727Q VS. DIT, INTERNATIONAL TAXATION-II, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI S.D. KAPILA, SHRI O.P. SAPRA, SHRI JEETAN NAGPAL & MS CHARU KAPOOR, ADVOCATES REVENUE BY : SHRI GIRISH DAVE, SPL. COUNSEL FOR THE DEPARTMENT. ORDER PER I.P. BANSAL, JUDICIAL MEMBER BOTH THESE APPEALS ARE FILED BY THE ASSESSEE. THEY ARE DIRECTED AGAINST THE TWO SEPARATE ORDERS DATED 18 TH MARCH, 2009 PASSED BY THE DIRECTOR OF INCOME-TAX, INTERNATIONAL TAXATION-II, NEW DELHI (HEREINAFTER REFERRED TO AS DIT) FOR ASSESSMENT YEAR 2005-06 AND 2006 -07 UNDER THE PROVISIONS OF SECTION 263 OF INCOME-TAX ACT, 1961 (THE ACT). GROUNDS OF APPEAL FOR BOTH THE YEARS READ AS UNDER:- ITA NOS.2086 & 2087/DEL/2009 2 ITA NO.2086/DEL/2009 1. THAT THE ASSESSMENT ORDER DATED 9.3.2007 PASSED BY THE AO U/S 143(3) FOR THE A.Y. 2005-06 BY WHICH THE IN COME OF THE APPELLANT HAD BEEN COMPUTED BY PROPER APPLICATIO N OF MIND COULD NOT BE HELD TO BE ERRONEOUS AND PREJUDI CIAL TO THE INTEREST OF REVENUE AND CONSEQUENTLY, THE IMPUGNED ORDER U/S 263 AS PASSED BY THE LD. DI (INTERNATIONAL TAXATION) II, NEW DELHI DESERVES TO BE CANCELLED. 2. THAT THE IMPUGNED ORDER DATED 18/3/09 AS PASSED BY DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)-II, NEW DELHI HOLDING THAT THE ASSESSMENT ORDER PASSED BY THE AO U/S 143(3) OF THE I.T. ACT FOR THE A.Y. 2005-06 WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE IS ARBITRARY, UNJUST AND ILLEGAL ON VARIOUS FACTUAL AND L EGAL GROUNDS INCLUDING THE FOLLOWING: A) THERE WAS NO FAILURE ON THE PART OF THE AO TO EXAMINE VARIOUS ASPECTS BEFORE PASSING THE ASSESSMENT ORDER U/S 143(3) DATED 9.3.2007. B) VARIOUS OBSERVATIONS MADE BY THE LD. DI IN THE IMPUGNED ORDER AS PASSED U/S 263 ARE EITHER INCORRECT OR ARE LEGALLY UNTENABLE PARTICULARLY THE FOLLOWING: (I) THE LD. DI IS INCORRECT IN HOLDING IN PARA 7.1 AT PAGE 15 OF THE IMPUGNED ORDER THAT ARTICLE 7(3) DOES NOT PROVIDE FOR FURTHER DEEMING THE INCOME @ 10% OF THE PROFITS COMPUTED AND THAT THERE WAS NOT BASIS AND JUSTIFICATION FOR THE SAME. (II) THE AO HAD ALLOWED THE LIABILITY OF THE EXPENSES ON WHICH TDS WAS MADE AS PER PROVISIONS OF THE ACT AND THE OBSERVATIONS OF THE LD. DI IN PARA 7.2 AT PAGES 15-16 OF THE IMPUGNED ORDER ARE INCORRECT AND UNTENABLE. (III) THE LD. DI IS INCORRECT IN OBSERVING VIDE PARA 7.3 AT PAGE 16 OF THE IMPUGNED ORDER THAT THE AO HAD NOT TAXED THE INCOME VIS-A-VIS THE RECEIPTS OF RS. 129,45,194,688/- FOR OUTSIDE INDIA OPERATIONS. THE FACT REMAINS THAT THE LD. AO AFTER DUE APPLICATION OF MIND AND HAVING REGARD TO THE SUPREME COURTS DECISION IN ISHIKAWAJHIMA HARIMAS CASE AND THE UTTARAKHAND HIGH COURTS DECISION IN THE ASSESSEES OWN CASE ARRIVED AT A CONSCIOUS DECISION THAT THE OUTSIDE INDIA REVENUES WERE NOT TAXABLE IN INDIA. (IV) THE LD. DI IS WRONG IN HOLDING IN PARA 7.4 AT P AGE 16-17 THAT THE METHOD ADOPTED IN THE PAST FOR COMPUTING THE TAXABLE INCOME OF THE APPELLANT WAS WRONG AND THAT THERE WAS GOOD AND SUFFICIENT ITA NOS.2086 & 2087/DEL/2009 3 WAS WRONG AND THAT THERE WAS GOOD AND SUFFICIENT REASON TO CHANGE THE SAME. (V) THE AO HAVING COMPUTED THE INCOME OF THE APPELLANT AFTER PROPER APPLICATION OF MIND ON ALL THE ASPECTS OF THE CASE, NO JUSTIFICATION SUBSISTED ON THE PART OF THE LD. DI VIDE PARA 7.5 TO DIRECT THE AO TO VERIFY THE EXPENSES OF RS. 966,45,41,565/- WHICH HAD BEEN DULY VERIFIED BY THE AO BEFORE PASSING THE IMPUGNED ASSESSMENT ORDER. (VI) FURTHER, THE ISSUE OF ESTIMATION OF INCOME FOR INSIDE INDIA ACTIVITIES IS SUBJECT MATTER OF APPEAL BEFORE THE COMMISSIONER OF INCOME TAX, APPEALS 1, DEHRADUN WHICH SHOWS THAT THE AO HAD APPLIED HIS MIND ON THIS ISSUE ALSO AND THEREFORE, FORM THIS ANGLE ALSO THE DIT HAD NO JURISDICTION ON SAME. (VII) THE LD. DI IS INCORRECT IN HOLDING VIDE PARA 7 .6 THAT VARIOUS CASE LAWS CITED BY THE APPELLANT WERE DISTINGUISHABLE ON FACTS WITHOUT SHOWING AS TO HOW THEY WERE DISTINGUISHABLE. C) THE ASSESSMENT ORDER HAVING BEEN PASSED AFTER MAKING PROPER ENQUIRIES, RELIANCE PLACED BY DI ON CASE LAWS QUOTED, PORTIONS OF WHICH HAD ALSO BEEN EXTRACTED BY HIM AT PAGES 18 & 19 WERE MISPLACED. ALL THOSE CASES HAD BEEN DECIDED WITH REFERENCE TO THE FACTS PREVAILING IN EACH CASE. IF LEGAL PROPOSITION AS LAID DOWN BY THE SUPREME COURT IN 243 ITR 83 IS FOLLOWED, THE IMPUGNED ORDER AS PASSED U/S 263 IS CLEARLY ILLEGAL AND VOID ABINITIO. D) VARIOUS OBSERVATIONS MADE BY THE LD. DI IN THE IMPUGNED ORDER U/S 263 ARE EITHER INCORRECT OR ARE LEGALLY UNTENABLE. 3. THAT THE APPELLANT RESERVES ITS RIGHT TO ADD, AMEND/MODIFY THE GROUNDS OF APPEAL. ITA NO.2087/DEL/2009 1. THAT THE ASSESSMENT ORDER DATED 05.10.2007 PASSED BY THE AO U/S 143(3) FOR THE A.Y. 2006-07 BY WHICH THE INCOME OF THE APPELLANT HAD BEEN COMPUTED BY PROPER APPLICATION OF MIND COULD NOT BE HELD TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE AND CONSEQUENTLY, THE IMPUGNED ORDER U/S 263 AS PASSED BY THE LD. DIREC TOR OF INCOME TAX (INTERNATIONAL TAXATION) II, (HEREINA FTER REFERRED TO AS DI) NEW DELHI DESERVES TO BE CANCELLED . 2. THAT THE IMPUGNED ORDER DATED 18/3/09 AS PASSED BY ITA NOS.2086 & 2087/DEL/2009 4 DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)-II, NEW DELHI HOLDING THAT THE ASSESSMENT ORDER PASSED BY THE AO U/S 143(3) OF THE I.T. ACT FOR THE A.Y. 2005-06 WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE IS ARBITRARY, UNJUST AND ILLEGAL ON VARIOUS FACTUAL AND L EGAL GROUNDS INCLUDING THE FOLLOWING: A) THERE WAS NO FAILURE ON THE PART OF THE AO TO EXAMINE VARIOUS ASPECTS BEFORE PASSING THE ASSESSMENT ORDER U/S 143(3) DATED 05.10.2007. B) VARIOUS OBSERVATIONS MADE BY THE LD. DI IN THE IMPUGNED ORDER AS PASSED U/S 263 ARE EITHER INCORREC T OR ARE LEGALLY UNTENABLE PARTICULARLY THE FOLLOWING: (I) THE LD. DI IS INCORRECT IN HOLDING IN PARA 7.1 AT PAGE 14 OF THE IMPUGNED ORDER THAT ARTICLE 7(3) DOES NOT PROVIDE FOR FURTHER DEEMING THE INCOME @ 10% OF THE PROFITS COMPUTED AND THAT THERE WAS NOT BASIS AND JUSTIFICATION FOR THE SAME. (II) THE AO HAD ALLOWED THE LIABILITY OF THE EXPENSES ON WHICH TDS WAS MADE AS PER PROVISIONS OF THE ACT AND THE OBSERVATIONS OF THE LD. DI IN PARA 7.2 AT PAGES 15 OF THE IMPUGNED ORDER ARE INCORRECT AND UNTENABLE. (III) THE LD. DI IS INCORRECT IN OBSERVING VIDE PARA 7.3 AT PAGE 16 OF THE IMPUGNED ORDER THAT THE AO HAD NOT TAXED THE INCOME VIS-A-VIS THE RECEIPTS OF RS. 778,46,65,202/- FOR OUTSIDE INDIA OPERATIONS. THE FACT REMAINS THAT THE LD. AO AFTER DUE APPLICATION OF MIND AND HAVING REGARD TO THE SUPREME COURTS DECISION IN ISHIKAWAJHIMA HARIMAS CASE AND THE UTTARAKHAND HIGH COURTS DECISION IN THE ASSESSEES OWN CASE ARRIVED AT A CONSCIOUS DECISION THAT THE OUTSIDE INDIA REVENUES WERE NOT TAXABLE IN INDIA. (IV) THE LD. DI IS WRONG IN HOLDING IN PARA 7.4 AT PAGE 16-17 THAT THE METHOD ADOPTED IN THE PAST FOR COMPUTING THE TAXABLE INCOME OF THE APPELLANT WAS WRONG AND THAT THERE WAS GOOD AND SUFFICIENT REASON TO CHANGE THE SAME. (V) THE AO HAVING COMPUTED THE INCOME OF THE APPELLANT AFTER PROPER APPLICATION OF MIND ON ALL THE ASPECTS OF THE CASE, NO JUSTIFICATION SUBSISTED ON THE PART OF THE LD. DI VIDE PARA 7.5 TO DIRECT THE AO TO VERIFY THE EXPENSES OF RS. 1,584,986,806/- WHICH HAD BEEN DULY VERIFIED BY THE AO BEFORE PASSING THE IMPUGNED ASSESSMENT ORDER. (VIII) FURTHER, THE ISSUE OF ESTIMATION OF INCOME FOR INSIDE INDIA ACTIVITIES IS SUBJECT MATTER OF APPEAL BEFORE THE COMMISSIONER OF INCOME TAX, APPEALS 1, ITA NOS.2086 & 2087/DEL/2009 5 DEHRADUN WHICH SHOWS THAT THE AO HAD APPLIED HIS MIND ON THIS ISSUE ALSO AND THEREFORE, FORM THIS ANGLE ALSO THE DIT HAD NO JURISDICTION ON SAME. (IX) THE LD. DI IS INCORRECT IN HOLDING VIDE PARA 7. 6 THAT VARIOUS CASE LAWS CITED BY THE APPELLANT WERE DISTINGUISHABLE ON FACTS WITHOUT SHOWING AS TO HOW THEY WERE DISTINGUISHABLE. C) THE ASSESSMENT ORDER HAVING BEEN PASSED AFTER MAKING PROPER ENQUIRIES, RELIANCE PLACED BY DI ON C ASE LAWS QUOTED, PORTIONS OF WHICH HAD ALSO BEEN EXTRACTED BY HIM AT PAGES 18 & 19 WERE MISPLACED. ALL THOSE CASES HAD BEEN DECIDED WITH REFERENCE TO THE FACTS PREVAILING IN EACH CASE. IF LEGAL PROPOSITION AS LA ID DOWN BY THE SUPREME COURT IN 243 ITR 83 IS FOLLOWED, THE IMPUGNED ORDER AS PASSED U/S 263 IS CLEARLY ILLEGAL AND VOID ABINITIO. D) VARIOUS OBSERVATIONS MADE BY THE LD. DI IN THE IMPUGNED ORDER U/S 263 ARE EITHER INCORRECT OR ARE LEGALLY UNTENABLE. 3. THAT THE APPELLANT RESERVES ITS RIGHT TO ADD, AMEND/MODIFY THE GROUNDS OF APPEAL. 2. THESE APPEALS WERE ARGUED TOGETHER BY THE LEARNED REPRESENTATIVES OF BOTH THE SIDES. THE ISSUES BEING IDENT ICAL, FOR THE SAKE OF CONVENIENCE BOTH THESE APPEALS ARE BEING DISPOSE D OF BY THIS CONSOLIDATED ORDER. 3. FOR ASSESSMENT YEAR 2005-06, THE ORDER IS STATED TO HA VE BEEN PASSED ON 9 TH MARCH, 2007 UNDER THE PROVISIONS OF SECTION 143 (3) OF THE ACT WHEREBY THE INCOME OF THE ASSESSEE WAS ASSESSED AT ` 39,09,21,550/- AGAINST THE RETURNED LOSS OF ` 928,05,6 4,624/-. THE RETURN OF INCOME WAS FILED ON 31 ST OCTOBER, 2005 WHICH WAS INITIALLY PROCESSED AND LATER ON ASSESSMENT PROCEEDINGS WERE INITIAT ED VIDE ISSUE OF NOTICE U/S 143 (2) DATED 21 ST AUGUST, 2006. THE ASSESSING OFFICER NOTICED THAT IN THE YEAR UNDER CONSIDERATION THE ASSESSEE CARRIED OUT FIVE CONTRACTS OUT OF WHICH NONE WAS NEW AND, THESE WERE EXECUTED PARTLY IN THE PRECEDING YEAR. IT WAS NOTIC ED THAT IN RESPECT OF ITA NOS.2086 & 2087/DEL/2009 6 HAL PROJECT THE ASSESSEE DID NOT CLAIM PE STATUS. THE PO SITION HAS BEEN SUMMARIZED BY THE ASSESSING OFFICER IN THE TABLE WH ICH IS ALSO BEING REPRODUCED FOR THE SAKE OF CONVENIENCE:- SL.NO. NAME OF THE PROJECT CONTRACT WITH REVENUES FOR INSIDE INDIA OPERATIONS IN (RS.) REVENUES FOR INSIDE INDIA OPERATION I/R OF WHICH ASSESSEE CLAIMS NO PE IN INDIA IN (RS.) REVENUES FOR OUTSIDE INDIA OPERATIONS IN (RS.) 1. MUMBAI HIGH BASSEIN PIPELINE PROJECT (MHB) ONGC 26,91,93,078 16,09,80,679 2. MUMBAI SOUTH PROCESS PLATFORM PROJECT (MSP) ONGC 224,24,60,505 509,94,17,763 3. MUMBAI URAN TURNKLINE (MUT) ONGC 293,06,47,269 763,57,28,505 4. GMR (O&M) GMR VASAVI 8,00,44,015 4,90,67,741 5. HAL HINDUSTAN AERONAUTI- CAL 4,70,835 TOTAL 5,52,23,44,867 470,835- 129,45,194,688 4. THUS, THE ASSESSING OFFICER NOTICED THAT INSIDE INDIA REVENUE OF THE ASSESSEE WERE ` 552,28,15,702/- AND OUTSIDE INDIA RE VENUES WERE ` 1294,51,94,688/-. THE ASSESSING OFFICER NOTICED THAT T HE ASSESSEE COMPANY HAS CLAIMED LOSS IN RESPECT OF MHB AND MUT PRO JECTS IN THE COMPUTATION OF INCOME FILED BY IT AND IN PARA 3 OF THE NOTES ANNEXED WITH THE SAID COMPUTATION, IT IS CLAIMED THAT BASED O N STAND ADOPTED BY TAX DEPARTMENT IN THE PAST YEARS, COMPANY RESERVES I TS RIGHT TO REDUCE SUB-CONTRACTORS COST, SALARY AND OTHER ITEMS FRO M REVENUES AND THEN APPLY DEEMED PROFIT RATE. THE ASSESSING OFFI CER ALSO NOTICED THAT AS PER ARGUMENTS OF LD. AR OF THE ASSESSEE DURING TH E COURSE OF PROCEEDINGS IS THAT THE COMPUTATION OF INCOME DONE BY THE ASSESSEE COMPANY IS BASED ON THE INDO-KOREAN TAX TREATY READ W ITH THE ITA NOS.2086 & 2087/DEL/2009 7 PROVISIONS OF THE SECTION 90 OF THE INCOME-TAX ACT, 1 961 (THE ACT). REFERENCE WAS MADE TO ARTICLE 7 (3) OF DOUBLE TAXATI ON AVOIDANCE AGREEMENT (DTAA) AS THE DEDUCTION ON ACCOUNT OF EXPE NSES IS CLAIMED BY THE COMPANY IN DETERMINING PROFITS ATTRIBUTABLE T O THE PE. IN THE ARGUMENT SUBMITTED, IT WAS STATED THAT THE ASSESSING OFFIC ER HAS ALLOWED THE EXPENSES TOWARDS SUB-CONTRACTORS COST, SALARY , ETC. AS TAKEN FROM GROSS REVENUES AND DEEMED PROFIT RATE WAS AP PLIED THEREAFTER IN EARLIER YEARS AND, THEREFORE, IF ALL E XPENSES ARE NOT ALLOWED, AT LEAST THE EXPENSES WHEREON TAX IS DEDUCTED SHOULD BE ALLOWED FOR THE YEAR UNDER CONSIDERATION. ON THESE SU BMISSIONS OF THE ASSESSEE, THE ASSESSING OFFICER VIDE PARA 5 HAS OBSERVED THAT THE ASSESSEES CLAIM OF ALL THE EXPENSES IS NOT TENABLE AS THE A SSESSEE DID NOT PRODUCE RELEVANT BOOKS OF ACCOUNT AND VOUCHERS FO R VERIFICATION. THE ASSESSEE DID NOT PRODUCE THE BOOKS OF ACCOUNT AS THE SAME WERE STATED TO BE MAINTAINED BY HEAD OFFICE OF THE COMPAN Y IN KOREA IN KOREAN LANGUAGE. THE BOOKS OF INDIAN PROJECTS WERE N OT PRODUCED FOR VERIFICATION AND, IN THESE CIRCUMSTANCES, THE ASSESSING OF FICER HAS ARRIVED AT A CONCLUSION THAT IT WILL BE IMPOSSIBLE TO HOLD THAT BOOKS OF ACCOUNT ARE PROPERLY MAINTAINED AND INCOME CAN BE D EDUCED THEREFROM. AS THE RELEVANT RECORD SUPPORTING THE ENTR IES WAS NOT COMPLETE AND CORRECT, THE BOOK RESULTS WERE NOT ACCEP TED BY THE ASSESSING OFFICER. SO AS IT RELATES TO THE CONTENTION OF THE ASSESSEE THAT THE COST RELATING TO SUB-CONTRACTORS, SALARY AND W AGES, ETC. ON WHICH TDS HAS BEEN MADE SHOULD BE REDUCED FROM THE GR OSS REVENUE, THE ASSESSING OFFICER HAS OBSERVED THAT SUCH CLAIM OF THE ASSESSEE CANNOT BE OUTRIGHTLY REJECTED. KEEPING IN VIEW THE PAST PRACTICE ADOPTED BY THE DEPARTMENT AND ALSO KEEPING IN VIEW A RTICLE 7(5) OF THE DTAA, HE REQUIRED THE ASSESSEE COMPANY TO FURNISH THE DE TAILS OF EXPENSES ON WHICH THE TDS WAS DEDUCTED. THE DETAILS OF SUCH EXPENSES WERE FURNISHED SHOWING THE TOTAL OF EXPENSES AT ` 171,19,73,490/-. THE ASSESSING OFFICER VERIFIED THOSE D ETAILS FROM TDS ITA NOS.2086 & 2087/DEL/2009 8 RETURNS AND FOUND THAT OUT OF THE SAID SUM TOTAL PAYME NTS OF ` 23,27,780/- WERE MADE TO NON-RESIDENT SUB-CONTRACTORS IN WHICH THE WORK WAS GOT DONE OUTSIDE INDIA BY THE RESPECTIVE FORE IGN SUB- CONTRACTOR AND HE FURTHER FOUND THAT A SUM OF ` 3,13 ,07,703/- COULD NOT BE VERIFIED. HE REQUIRED THE ASSESSEE TO EXPLAIN T HE SAME AND THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE EXPLAINED THAT THOSE PAYMENTS THOUGH ARE MADE TO NON-RESIDENT SUB-CONTRACTO RS, BUT, THOSE PAYMENTS ARE IN RESPECT OF WORK INSIDE INDIA CARRIED O UT BY THE ASSESSEE. THE ASSESSING OFFICER DENIED SUCH CLAIM OF THE ASSE SSEE ON THE GROUND OF SIMILAR STAND TAKEN BY THE DEPARTMENT I N PRECEDING YEAR. THE ASSESSING OFFICER REFERRED TO PARA 3 OF ARTICLE 7 O F DTAA WHICH PROVIDE THAT IN DETERMINING THE PROFITS OF PE, THE E XPENSES INCURRED FOR THE PURPOSE OF PE INCLUDING EXECUTIVE AND GENERAL AD MINISTRATION EXPENSES SHALL BE ALLOWED. HE, THEREFORE, OBSERVED THA T THE EXPENSES WHICH ARE VERIFIABLE FROM THE RESPECTIVE TDS FORMS AR E WORKED OUT TO ` 167,83,37,937/- AND ARE TO BE ALLOWED IN VIEW OF AR TICLE 7(3) READ WITH PARA 5 OF THE DTAA AND HE REPRODUCED BOTH THESE PARA S IN HIS ORDER. TAKING RECOURSE TO PARA NO.3 AND 4 OF ARTICLE 7 AND THE NOTE ANNEXED WITH THE STATEMENT OF INCOME FILED WITH THE RETURN O F INCOME AND ON THE BASIS OF STAND ADOPTED BY THE DEPARTMENT IN THE PA ST YEARS, LD. ASSESSING OFFICER HAS CONCLUDED THAT THE ASSESSEE HAS NO OBJE CTION TO BE ASSESSED ON THE LINES SIMILAR TO THOSE ADOPTED IN THE P AST YEARS I.E., BY ESTIMATING THE PROFIT RATE AT 10% OF THE TOTAL RE VENUE RELATING TO INSIDE INDIA ACTIVITY AS REDUCED BY THE EXPENSES VERIFI ABLE FROM TDS ANNUAL FORMS AND SUCH COMPUTATION WILL BE AS PROVIDED IN PARA 5 OF ARTICLE 7 OF DTAA WITH KOREA. 5. HE FURTHER REJECTED THE CLAIM OF THE ASSESSEE REGARD ING NON- TAXABILITY OF THE REVENUE AMOUNTING TO ` 4,70,835/- RELATING TO CONTRACT OF HAL PROJECT FOR THE REASONS MENTIONED BY THE ASSESSING OFFICER IN PARA 6 AND 6.1 AND THE SAID SUM WAS ADDED TO THE INCOM E OF THE ITA NOS.2086 & 2087/DEL/2009 9 ASSESSEE. IT IS IN THIS MANNER, THE ASSESSMENT CAME TO BE PA SSED BY TAKING THE GROSS RECEIPT FROM INSIDE INDIA WORKING OUT AT ` 552,28,15,702/- (` 5,52,23,44,867 + 4,70,835/-). H E HAS REDUCED THEREFROM SUB-CONTRACTORS COST AND SALARY EXPENDITURE VERIFIED FROM TDS RETURNS AMOUNTING TO ` 167,83,37,937/- AND BALAN CE INSIDE REVENUE WAS TAKEN AT ` 384,44,77,765/- AND 10% THERE OF WAS TAKEN AS ASSESSABLE INCOME FROM INSIDE REVENUE AMOUNTING TO ` 38, 44,47,776/- AND THE TAXABLE INCOME OF THE ASSESSEE HAS BEEN TAKEN AT ` 39,09,21,550/- WHICH INCLUDE INTEREST FROM CITI BANK AND INTEREST RECEIVED FROM INCOME-TAX DEPARTMENT AT ` 9,07,647/- AND ` 55,02,127/- RESPECTIVELY. IT IS AGAINST AFOREMENTIONE D ORDER PASSED BY LD. ASSESSING OFFICER, THE CIT HAS EXERCISED JURISDICTION U/S 263 OF THE ACT. COPY OF SHOW CAUSE NOTICE ISSUED BY DIT IS PLACED AT PAGE 164 OF THE PAPER BOOK. IN THE SHOW CAUSE NOTICE WHICH IS DAT ED 12 TH FEBRUARY, 2009, IT IS OBSERVED BY LD. DIT THAT THE ORDER PASSED B Y THE ASSESSING OFFICER APPEARS TO BE ERRONEOUS AND SO FAR AS IT IS PREJ UDICIAL TO THE INTEREST OF THE REVENUE FOR THE FOLLOWING REASONS:- I) DURING THE ASSESSMENT YEAR, YOU HAVE CLAIMED THE BENEFITS OF DTAA BETWEEN INDIA & SOUTH KOREA AND FILED THE ACCOUNTS. THE A.O. COMPUTED THE PROFIT AFTER DISALLOWING EXPENSES ON WHICH THE TAX WAS NOT DEDUCTED AT SOURCE. THE A.O. SHOULD HAVE APPLIED THE TAX RATE O F 41.82% ON THE BALANCE. THE A.O. ERRONEOUSLY APPLIED A 10% DEEMED PROFIT ON INCOME ALREADY COMPUTED AND THE THEN APPLIED THE TAX RATE. THE ORDER PASSED BY THE A.O. WITHOUT APPLICATION OF MIND OR WITHOUT MAKING PROPER INQUIRIES INTO THE FACTS AND WITHOUT CONSIDERING STATUTORY REGULATIONS APPLICABLE THEREON. II) DURING THE YEAR AN AMOUNT OF RS.129,45,194,688 HA S BEEN SHOWN AS OUTSIDE INDIA REVENUE. SINCE, THERE IS NO DISPUTE THAT THE ASSESSEE HAS PE IN INDIA, THIS REVENUE SHOULD HAVE BEEN BROUGHT TO TAX IN INDIA AS PER THE PROVISIONS OF DTAA BETWEEN INDIA & SOUTH KOREA. THE A.O. IN THE ASSESSMENT ORDER HAS NOT DISCUSSED THE TAXABILITY OF THE ABOVE AMOUNT AND HAS NOT BROUGHT TO TAX THE ABOVE REVENUE. THUS, THE CLAIMS OF THESE EXPENSES HAVE BEEN ALLOWED. THE ORDER PASSED BY THE A.O. WITH OUT APPLICATION OF MIND OR WITHOUT MAKING PROPER INQUIRIES ITA NOS.2086 & 2087/DEL/2009 10 INTO THE FACTS AND WITHOUT CONSIDERING STATUTORY REGULATIONS APPLICABLE THEREON. 6. IN RESPONSE TO THE AFOREMENTIONED SHOW CAUSE NOTICE, THE ASSESSEE SUBMITTED REPLY DATED 13 TH MARCH, 2009 COPY OF WHICH IS PLACED AT PAGES 165 TO 197 OF THE PAPER BOOK. 7. IN THE WRITTEN SUBMISSIONS, IT WAS POINTED OUT THAT T HE ASSESSEE HAS OPTED TO BE ASSESSED UNDER THE DTAA AND OPTION IS VEST ED WITH THE ASSESSEE TO BE ASSESSED AS SUCH. REFERENCE WAS MADE TO THE PROVISIONS OF SECTION 90(2) OF THE ACT. REFERENCE WA S ALSO MADE TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF UNIO N OF INDIA VS. AZADI BACHAO ANDOLAN 263 ITR 706 WHEREIN IT HAS BEEN HELD THAT THE PROVISIONS OF DTAA WOULD PREVAIL OVER THE PROVISIONS OF THE ACT. REFERENCE WAS ALSO MADE TO THE OFFICE NOTE APPENDED T O THE ASSESSMENT ORDER WHEREIN THE ASSESSING OFFICER HAD STATED TH AT ASSESSMENT IS COMPLETED AS PER ARTICLE 7 OF DTAA WITH KOR EA ESTIMATING THE PROFIT RATE AT 10% ON THE TOTAL REVEN UE RELATING TO INSIDE INDIA ACTIVITIES AS REDUCED BY EXPENSES VERIFIABLE FROM ANNUAL RETURNS OF TDS AND THIS WILL BE IN LINE WITH THE STAND TAKEN BY THE DEPARTMENT IN PRECEDING ASSESSMENT YEARS AS PROVIDED IN PARA 5 OF AR TICLE 7 OF DTAA. REFERENCE WAS ALSO MADE TO THE OBSERVATIONS OF T HE ASSESSING OFFICER CONTAINED IN PARA 4 AND 5 OF THE ASSESSMENT ORD ER TO SHOW THAT THE ASSESSING OFFICER HAD ELABORATELY DISCUSSED ALL THE ISSU ES AND THEREAFTER A CONSCIOUS DECISION WAS TAKEN BY THE ASSESSING OFFICER WHICH WAS IN LINE WITH THE STAND TAKEN BY THE DEPARTM ENT IN PRECEDING YEARS. REFERRING TO THE COMPUTATION MADE BY THE ASSESSI NG OFFICER IN THE ASSESSMENT ORDER WHILE ARRIVING AT GROSS RECEIPTS FROM INSIDE INDIA REVENUE AFTER REDUCING THE SUB-CONTRACTORS COST AND SA LARY EXPENDITURE AT ` 384,44,77,765/-, IT WAS SUBMITTED TH AT IN FACT THE ASSESSING OFFICER HAS DISALLOWED 73.64% OF THE EXPENSES CLA IMED BY THE ASSESSEE ON THE AMOUNT OF EXPENDITURE MADE BY IT WH ERE THE ASSESSEE WAS NOT UNDER AN OBLIGATION TO DEDUCT TDS ALTHO UGH THOSE ITA NOS.2086 & 2087/DEL/2009 11 EXPENSES WERE INCURRED FOR EXECUTING THE INSIDE INDIA ACTIVITIES OF THE CONTRACT. SUCH CALCULATION WAS DEMONSTRATED BY THE TABLES A TO D WHICH ARE REPRODUCED BELOW:- TABLE A : EXPENSES CLAIMED BY THE ASSESSEE IN RETUR N OF INCOME. GROSS REVENUES FOR INSIDE INDIA WORK A 552,23,44,86 7 NET LOSS AS PER RETURN OF INCOME B (928,05,64,624) EXPENSES AS CLAIMED BY THE ASSESSEE C [A-B] 1,480,2 9,09,491 TABLE B : BIFURCATION OF EXPENSES DONE BY THE A.O . TOTAL EXPENSES AS CLAIMED BY THE ASSESSEE A 1,480,29,09,491 BIFURCATED BY THE A.O. INTO: B (928,05,64,624) EXPENSES ON WHICH TDS HAS BEEN MADE AND DULY VERIFIED. B 167,83,37,937 EXPENSES ON WHICH TDS IS NOT REQUIRED TO BE MADE UNDER LAW/OTHERWISE NOT ALLOWED BY A.O. C [A-B] 1,312,45,71,554 (EG. MATERIAL COSTS, INSURANCE, ETC.) TABLE C : INCOME ATTRIBUTED TO THE PE BY THE A.O. GROSS REVENUES FOR INSIDE INDIA WORK 552,23,44,867 ADD: REVENUES FROM PROJECTS WHERE THE ASSESSEE CLAIMS NO PE 470,835 TOTAL REVENUES FOR INSIDE INDIA WORK A 552,28,15,70 2 LESS: EXPENSES FULLY ALLOWED ON THE BASIS OF TDS RETURNS B 167,83,37,937 BALANCE C[A-B] 384,44,77,765 IN RESPECT OF THE BALANCE EXPENSES STATED IN TABLE B PARA C ABOVE THE EXPENSES ATTRIBUTED TO THE PE IN INDIA BY THE A.O. D 346,00,29,989 INCOME ATTRIBUTABLE TO THE PE DETERMINED BY THE A.O. E[C-D] 38,44,47,776 TABLE D : EXPENSES DISALLOWED BY THE A.O. EXPENSES ON WHICH TDS IS NOT REQUIRED TO BE MADE. A 1,312,45,71,554 (EG. MATERIAL COSTS, INSURANCE, ETC.) (ITEM C TABLE B ABOVE) OUT OF THE ABOVE EXPENSES ALLOWED BY THE A.O. AS ATTRIBUTABLE TO THE PE IN INDIA (ITEM D IN TABLE C ABOVE) B 346,00,29,989 EXPENSES DISALLOWED BY THE A.O. C [A-B] 966,45,41,565 ITA NOS.2086 & 2087/DEL/2009 12 8. REFERRING TO THE AFOREMENTIONED TABLES, IT WAS POI NTED OUT THAT THE TOTAL CLAIM OF THE ASSESSEE OF SUCH NATURE OF EXPENSE S WERE 1312.45 CRORES, WHICH PERTAINS TO MATERIAL COST, INSURA NCE AND OTHER EXPENSES ON WHICH THERE WAS NO LIABILITY OF THE ASSESSEE TO DEDUCT TAX AT SOURCE. THE ASSESSING OFFICER WHILE COMPUTING THE PR OFIT ATTRIBUTABLE TO ASSESSEES PE IN INDIA HAS ALLOWED ONLY E XPENSES TO THE TUNE OF ` 346 CRORES. IN OTHER WORDS, ONLY 26.36% OF THE SAID EXPENSES WERE ALLOWED AND BALANCE 73.64% DISALLOWED. IT WAS F URTHER SUBMITTED THAT IF THE ACTION PROPOSED IN THE SHOW CAUSE NOTICE I S TAKEN, THEN, INCOME OF THE ASSESSEE FROM INSIDE INDIA OPERATION WOULD BE ASSESSED AT 384.44 CRORE AS AGAINST 38.44 CRORE ASSESSED BY THE ASSE SSING OFFICER. IT WAS SUBMITTED THAT WITHOUT PREJUDICE, EV EN IF FOR ARGUMENT SAKE IT WAS TO BE ACCEPTED THOUGH NOT ADMITTED THAT T HE LD. ASSESSING OFFICER HAD ERRED IN LAW IN ASSESSING THE INCOME AT 38. 44 CRORE UNDER THE DTAA, IT IS TO BE POINTED OUT THAT HAD THE ASSESSEE S INCOME BEEN COMPUTED U/S 44BB (1) OF THE ACT BY COMPLETELY IGNOR ING THE PROVISIONS OF DTAA, THE TOTAL INSIDE INDIA INCOME WOULD NOT HA VE EXCEEDED 55.22 CRORES [BEING 10% OF ` 552.23 CRORE (GROSS REVENUE)]. THUS, IT WAS SUBMITTED THAT BY NO YARDSTICK THE ASSESSEES INCOME CAN E XCEED ` 55.22 CRORES. 9. IT WAS SUBMITTED THAT THE ISSUE REGARDING TAXABILITY OF THE ASSESSEES INCOME U/S 44BB OF THE ACT WAS EXAMINED BY THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND T HE ASSESSEE HAD SUBMITTED WRITTEN SUBMISSIONS DATED 1 ST MARCH, 2007 WHICH WAS CONSIDERED BEFORE ARRIVING AT THE CONCLUSION THAT THE SAID SECTION WAS NOT APPLICABLE TO THE FACTS OF THE CASE AND THE PROVI SIONS OF DTAA WILL APPLY. REFERENCE WAS ALSO MADE TO PAST HISTORY OF THE I NCOME TAX ASSESSMENTS IN THE CASE OF THE ASSESSEE. IT WAS SUBMITTED THAT THE ASSESSEE IS BEING ASSESSED IN INDIA SINCE 1985 ONWARDS AND THE ASSESSEE HAS INVARIABLY BEEN FILING ITS AUDITED ACCOUNTS W ITH TAX ITA NOS.2086 & 2087/DEL/2009 13 RETURNS AND IN SOME YEARS IT HAS RETURNED LOSS FROM INSID E INDIA OPERATION. FOR ASSESSMENT 1990-91, THE DEPARTMENT AND THE ASSESSEE HAD AGREED BEFORE THE CIT (A) TO A PROPOSAL THAT BUSI NESS PROFIT FOR INSIDE INDIA OPERATION WOULD BE TAXED APPLYING THE D EEMED PROFIT RATE OF 10% AFTER ALLOWING DEDUCTIONS FOR SUB-CONTRACTORS COST AND SALARY COST ON WHICH TDS HAS BEEN DEDUCTED UNDER CHAPTER XVI IB READ WITH SECTION 40 OF THE ACT AND ARTICLE 7(3) OF THE CONVE NTION. IT WAS SUBMITTED THAT SUCH FACT IS FOUND MENTIONED IN CIT (A) S ORDER DATED 19 TH APRIL, 1995 FOR ASSESSMENT YEAR 1990-91 WHEREIN THE ASSE SSEE HAD STATED AS UNDER:- WITHOUT PREJUDICE TO THE ABOVE, IN ORDER TO BUY PEACE A ND AVOID LITIGATION, WE WOULD AGREE TO THE TAXATION AT THE PROFIT RATE OF 10% OF OUR CONTRACTUAL RECEIPTS FOR THE INSIDE INDIA OP ERATIONS AS REDUCED BY THE SUB CONTRACTORS COSTS AND THE SALARY PAID UNDER CHAPTER VII-B OF THE IT ACT, READ WITH SECTION 40 AND AR TICLE 7(3) OF THE CONVENTION. IN SUCH A CASE WE WOULD NOT PRESS FOR OTHER EXPENSES ON MARINE COST, MATERIAL, INSURANCE, TRANSPOR TATION, ETC. 10. THE REMARKS OF THE CIT (A) IN THE AFOREMENTIONED APPELLATE ORDER AT PAGE 9 WITH REGARD TO THIS ISSUE WERE AS UNDER:- WHEN THE A.O WAS GIVEN A COPY OF THIS WRITTEN SUBMISSI ON AND ASKED TO GIVE HIS COMMENTS ON THE SAME HE STATED BEFORE ME, ALREADY RECORDED IN THE APPEAL FILE, THAT IN VIEW OF TH IS WRITTEN SUBMISSION THE ASSESSMENT ORDER UNDER CONSIDERATION MA Y BE RESTORED BACK TO THIS FILE FOR BEING MADE DENOVO. 11. IT WAS SUBMITTED THAT THE RATIONALE BEHIND THE AC CEPTANCE OF SUCH FORMULA IS THAT THE ASSESSEE HAS BEEN INCURRING HUGE LOSSES FOR INSIDE INDIA OPERATION IN SEVERAL YEARS WHICH ARE ALSO LIABLE TO BE CARRIED FORWARD UNDER CHAPTER VI TO BE SET OFF AGAIN ST INCOME IN SUBSEQUENT YEARS AND NO TAX WILL BE LEVIED. BY ADOPTI NG SUCH FORMULA, THE ASSESSEE SHOULD PAY TAX EVERY YEAR SINCE 10% OF THE G ROSS CONTRACTUAL RECEIPTS AS REDUCED BY SUB-CONTRACTORS COST AND SALARY COST WERE DETERMINED AS INCOME ATTRIBUTABLE TO THE PE . THEREFORE, EVEN IN THE YEARS OF LOSSES THE DEPARTMENT COULD RECOVE R TAX. FROM ITA NOS.2086 & 2087/DEL/2009 14 ASSESSEES POINT OF VIEW SUCH METHOD WAS ACCEPTABLE SINCE I T RESULTED IN AVOIDING LITIGATION ON SUCH ISSUE ALTHOUGH IT WILL, FASTEN A TAX LIABILITY YEAR AFTER YEAR. IT WAS SUBMITTED THAT SUCH PROCEDURE OF ASSESSMENT HAD BECOME A CONVENTION WHICH WAS BEING CONSISTENTLY F OLLOWED FROM YEAR TO YEAR FOR THE LAST 16 YEARS AND REFERENCE WAS M ADE TO PARA 5 OF ARTICLE 7 OF DTAA WHICH CASTS AN OBLIGATION ON THE DE PARTMENT TO FOLLOW THE METHOD OF ATTRIBUTION OF THE PROFITS TO PE YEAR AFTER YEAR UNLESS THERE IS A REASON ON THE CONTRARY. REFERRING TO PARA 4 AND 5 OF THE ASSESSMENT ORDER, IT WAS SUBMITTED THAT THE ASSESSING OFFICER WHILE ADOPTING SUCH FORMULA WAS GUIDED BY PAST PRACTICE ADOP TED BY HER PREDECESSORS FOR THE PURPOSE OF COMPUTING PROFITS ATTRI BUTABLE TO ASSESSEES PE IN INDIA. IT WAS SUBMITTED THAT SUCH FORMULA WAS ADOPTED FOR THE FIRST TIME BY THE DEPARTMENT ITSELF A S THE INCOME OF THE ASSESSEE WAS BEING ASSESSED UNDER SUCH FORMULA IN THE LAST 16 YEARS AND ALL ASSESSMENTS ARE MADE U/S 143 (3) OF THE ACT. IT WAS SUBMITTED THAT THOUGH THE PRINCIPLE OF RES JUDICATA MAY NOT BE APPLICABLE, BUT THE RULE OF CONSISTENCY HAS TO BE APPLIED AND REFERENCE WA S MADE TO THE FOLLOWING DECISIONS:- A) RADHASOAMI SATSANG VS. CIT 193 ITR 321 (SC) B) TARABEN RAMANBHAI PATEL AND OTHERS V. ITO 215 ITR 323 (GUJ) C) CIT VS. HINDUSTAN MOTORS LTD. 192 ITR 619 (CAL) D) SARDAR KEHAR SINGH VS. CIT 195 ITR 769 (CAL) E) DHANSIRAM AGARWALLA VS. CIT 217 ITR 4 (GAU) F) CIT V. GODAVARI CORPORATION LTD. 156 ITR 835 (M P) G) CIT V. ARG SECURITIES PRINTERS 264 ITR 276 (DEL) 12. REFERENCE WAS ALSO MADE TO THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. GIRDHARILAL 258 ITR 331 (RAJ.) WHEREIN IT WAS HELD THAT MERELY BECAUSE THE GROSS PROFIT SHOULD HAVE BEEN ESTIMATED AT A HIGHER FIGURE, COULD NOT BE A GROUND FOR EXERCISE OF JURISDICTION U/S 263. ITA NOS.2086 & 2087/DEL/2009 15 13. IT WAS SUBMITTED THAT THE POWER TO ESTIMATE INCOME IS VESTED WITH THE ASSESSING OFFICER AND REFERENCE WAS MADE TO THE DECISION OF KERALA HIGH COURT IN THE CASE OF CIT VS. NATHEKKATTU CONSTRUCTIONS 269 ITR 346 (KER.). IT WAS SUBMITTED THAT THE COMMISSIONER CANNOT INITIATE PROCEEDINGS WITH A VIEW TO START FISHING AND ROWING IN QUIRIES IN MATTERS OR ORDERS WHICH ARE ALREADY CONCLUDED. IT WAS SUBMITT ED THAT THE ORDER PASSED BY THE ASSESSING OFFICER WAS NEITHER ERRONEOUS NOR P REJUDICIAL TO THE INTEREST OF THE REVENUE, HENCE, THE POWER U/S 263 SHOULD NOT BE EXERCISED. REFERENCE WAS MADE TO THE DECISION OF HON BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. ADVANCE CONSTRUCTION COMPANY PVT. LTD. 275 ITR 30 (GUJ) 14. COMING TO THE SECOND ASPECT OF THE MATTER, WHICH IS REGARDING A SUM OF ` 1294,51,94,688/- IN RESPECT OF OUTSIDE INDIA REVENUE, IT WAS SUBMITTED THAT IT CANNOT BE SAID THAT THERE WAS NO DISP UTE ON THE ISSUE THAT THE ASSESSEE HAS A PE IN INDIA. IT WAS SUBMITTED THA T THE ASSESSEE HAS ALWAYS DISPUTED THE EXISTENCE OF PE IN INDIA IN RESP ECT OF PROJECTS WHEREIN THE DURATION IN INDIA IS LESS THAN 9 MONTHS STIP ULATED IN ARTICLE 5 (3) OF DTAA ALTHOUGH THE DEPARTMENT HAS CONSISTENTLY HELD THAT EVEN IN RESPECT OF SUCH PROJECTS THERE IS A PE IN INDIA. IT WAS SUBMITTED THAT AT THE FIRST APPELLATE STAGE ITSELF CIT (A) HAS HELD AL L ALONG THAT OFFICE IN MUMBAI IS NOT A PE AND, THEREFORE, WHERE THE DURATIO N OF A PROJECT DOES NOT EXCEED NINE MONTHS, THERE IS NO PE VIS-A-VIS SUCH P ROJECTS. IT WAS SUBMITTED THAT IN CERTAIN YEARS THE DEPARTMENTAL APPE ALS AGAINST CIT (A)S ORDER ON THE SAME ISSUE WERE DISMISSED BY ITAT ALSO. THUS, IT WAS SUBMITTED THAT THE OBSERVATION THAT THERE IS NO DISP UTE ON THE ISSUE OF EXISTENCE OF PE IN INDIA IS FACTUALLY INCORREC T. IT WAS SUBMITTED THAT FOR ASSESSMENT YEARS 1986-87 TO 1888-89 THE ITAT DE CISION ON THE ISSUE OF PE IN ASSESSEES FAVOUR HAS BEEN UPHELD BY UTTARAN CHAL HIGH COURT AND BY HONBLE SUPREME COURT. WHILE DISPOSING THE DEPARTMENTAL SLP FOR THOSE YEARS, HONBLE SUPREME COU RT HAS ONLY ITA NOS.2086 & 2087/DEL/2009 16 AFFIRMED THE ITATS FINDINGS THAT PE DID NOT EXIST IN INDIA IN TERMS OF ARTICLE 5(3) OF DTAA I.E., THE PROJECT DURATION WAS THE CRITERIA FOR DETERMINATION OF THE PE IN INDIA. SO AS IT RELATES T O ALLEGATION THAT THE ASSESSING OFFICER DID NOT DISCUSS ABOUT THE TAXABILITY OF OUTSIDE INDIA REVENUE IN THE ASSESSMENT ORDER, IT WAS SUBMITTED THAT IN PARA 2 OF THE ASSESSMENT ORDER THE ASSESSING OFFICER HERSELF HAS COMPUTED R EVENUES FOR OUTSIDE INDIA OPERATION. IT WAS SUBMITTED THAT TH E REASON FOR NOT BRINGING THE SUM TO TAX HAS BEEN GIVEN BY THE ASSESSING O FFICER IN THE OFFICE NOTE 2 APPENDED TO THE ASSESSMENT ORDER WHICH RE AD AS UNDER:- THE ASSESSEE HAS SHOWN THE FOLLOWING RECEIPTS FROM O UTSIDE INDIA OPERATION WHICH HAVE NOT BEEN OFFERED TO TAX IN I TS RETURN OF INCOME STATING THAT THE REVENUES WERE RECEIVED FROM ACTIVITIES PERFORMED OUTSIDE INDIA AND THEREFORE, REVEN UES EARNED OUT OF THESE ACTIVITIES ARE NOT ATTRIBUTABLE TO THE PE IN INDIA. S.NO. NAME COMPANY REVENUE FROM OUTSIDE INDIA OPERATION (USD) 1. GMR VASAVI DIESEL GENERATOR (O&M) GMR VASAVI 976,563 2. MHB PROJECT ONGC 3,583,466 3. MSP PROJECT ONGC 113,081,126 4. MUT PROJECT ONGC 173,237,671 THE LD. AR OF THE ASSESSEE HAS RELIED UPON THE JUDGME NT OF HONBLE HIGH COURT OF UTTARANCHAL IN ITS OWN CASE AS WE LL AS ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES CO. LTD. REPOR TED IN 288 ITR 408. THE REVENUES EARNED BY THE ASSESSEE ON THE ACCOUNT OF THE PROCUREMENT OF MATERIAL OUTSIDE INDIA IS NOT BROU GHT TO TAX IN VIEW OF THE HONBLE SUPREME COURT DECISION IN TH E CASE OF ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES CO. LTD. REPORTED IN 288 ITR 408 THOUGH THE DEPARTMENT HAS NOT ACCEPTED THE DECISI ON OF THE HONBLE UTTARANCHAL HIGH COURT REGARDING THE TAXABILI TY OF OUTSIDE INDIA OPERATION AT NIL AND HAS FILED SLP BEFOR E THE HONBLE SUPREME COURT. IN CASE THE HONBLE SUPREME C OURT DECIDES TO TAX THE OUTSIDE INDIA RECEIPTS IN THE CASE OF THE ASSESSEE ACTION SHALL BE TAKEN AS PER LAW. 15. REFERRING TO THE ABOVE OBSERVATIONS, IT WAS SUBMITT ED THAT THIS ISSUE WAS CLEARLY CONSIDERED BY THE ASSESSING OFFICER AND T HE ITA NOS.2086 & 2087/DEL/2009 17 ASSESSING OFFICER HAD APPLIED HIS MIND FOR ARRIVING AT A CONCLUSION THAT THE SAID RECEIPT COULD NOT BE BROUGHT TO TAX IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJHIM A HARIMA HEAVY INDUSTRIES COMPANY LTD. 288 ITR 408 (UK) AND ALSO THE DECISION OF UTTARAKHAND HIGH COURT IN THE CASE OF THE ASSESSEE. THE ASSESSING OFFICER WAS ALSO IN THE KNOWLEDGE THAT THE DEPARTMENT HAS FILED SLP AGAINST THE ORDER OF HONBLE UTTARAKHAND HIGH COURT AND IN CASE THE DECISION IS RECEIVED FROM HONBLE SUPREME COURT TO TA X OUTSIDE INDIA RECEIPTS, THEN, ACTION SHALL BE TAKEN AS PER LAW. 16. IT WAS FURTHER SUBMITTED THAT THE ASSESSING OFFICER H AD CONSIDERED THE ISSUE RELATING TO OUTSIDE INDIA REVENUE WHICH IS APPARENT FROM QUERY NO.7 GIVEN BY THE ASSESSING OFFICER TO THE ASSESSEE VIDE NOTICE ISSUED U/S 142 (1) DATED 21 ST AUGUST, 2006 AND THE QUERY OF THE ASSESSING OFFICER READ AS UNDER:- TO JUSTIFY YOUR CLAIM THAT AMOUNTS RECEIVED FOR OUTSIDE INDIA OPERATIONS AS MENTIONED IN PARA 8 OF NOTES TO COMPUTATION OF INCOME, ARE NOT LIABLE TO TAX IN INDIA. 17. IT WAS SUBMITTED THAT THE ASSESSEE HAD FILED DETAILED REPLY REGARDING NON-TAXABILITY OF OUTSIDE INDIA REVENUE AT PARA 7 OF THE REPLY DATED 31 ST AUGUST, 2006. 18. FURTHER, IT WAS SUBMITTED THAT THE ASSESSING OFFICER FURTHER RAISED QUERY REGARDING TAXABILITY OF OUTSIDE INDIA RE VENUE DURING THE COURSE OF HEARING ON 20 TH FEBRUARY, 2007 AS IS EVIDENCED FROM ORDER SHEET ENTRY OF THE SAID DATE AND THE ASSESSEES RESPONSE WAS GIVEN VIDE PARA 9 OF THE REPLY DATED 1 ST MARCH, 2007 AND THE SECOND REPLY DATED 1 ST MARCH, 2007. IT WAS FURTHER SUBMITTED THAT VIDE REP LY DATED 11 TH DECEMBER, 2006 THE ASSESSEE HAD SUBMITTED COPIES OF ALL INVOICES FOR OUTSIDE INDIA REVENUE AND THE SAME WERE DULY EXAM INED BY THE ASSESSING OFFICER AND BASED ON ALL THESE SUBMISSIONS THE ASSESSIN G OFFICER WAS SATISFIED THAT NO PART OF OUTSIDE INDIA REV ENUE WERE ITA NOS.2086 & 2087/DEL/2009 18 ATTRIBUTABLE TO THE PE IN INDIA AND, THEREFORE, COU LD NOT BE BROUGHT TO TAX IN INDIA. 19. IT WAS SUBMITTED THAT JURISDICTION U/S 263 COULD NO T BE INVOKED IN A CASE THE ISSUE ON WHICH SUCH POWERS ARE TO BE INVOKED WAS DELIBERATED AT LENGTH AND WAS DECIDED AFTER THE DUE APPLICATION OF MIND. REFERENCE IN THIS REGARD WAS MADE TO THE DECISI ONS IN THE CASE OF INFOSYS TECHNOLOGIES LTD. VS. JCIT (2006) 286 ITR (A T) 211 (BANG.) AND DHRUV N. SHAH VS. DCIT (2005) 273 ITR (AT) 59 (B OM). IT WAS SUBMITTED THAT IN ASSESSMENT YEAR 2002-03, LIKE IN EARLI ER YEARS IT WAS HELD THAT NO PART OF OUTSIDE INDIA REVENUE COULD BE TAXED IN INDIA. IN MARCH, 2008, THE DEPARTMENT ITSELF, WHILE FILING THE SECOND APPEAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03 DID NOT CONTE ST THE NON-TAXABILITY OF OUTSIDE INDIA REVENUE BEFORE ITAT AND, THUS, HAD EVIDENTLY ACCEPTED THE ASSESSEES CONTENTION IN THE LIGH T OF THE HONBLE SUPREME COURT DECISION. ADVERTING TO THE FA CTS OF THE YEAR UNDER CONSIDERATION, IT WAS SUBMITTED THAT THE ASSESSEE HA S BEEN DERIVING INCOME FROM FIVE CONTRACTS AS LISTED IN THE A SSESSMENT ORDER AND THIS FACT HAS ALSO BEEN ACKNOWLEDGED BY LEARNED ASSE SSING OFFICER THAT NO NEW CONTRACT WAS ENTERED INTO BY THE ASSESSEE. IN ALL THE PAST YEARS/SUBSEQUENT YEARS THE DEPARTMENT HAS ATTRIBUTED 1% OF THE OUTSIDE INDIA REVENUE TO THE PE IN INDIA AND BROUGHT THE SAME TO TAX IN RESPECT OF ALL THE REFERRED PROJECTS AND REFERENCE WA S MADE TO THE FOLLOWING TABLE:- PROJECT NAME OUTSIDE INDIA REVENUE IN PAST ASSESSMENT YEARS MSP A.Y. 2004-05 A.Y. 2006-07 MUT A.Y. 2006-07 MHB A.Y. 2006-07 GMR (O&M) A.Y. 1999-00 ONWARDS ITA NOS.2086 & 2087/DEL/2009 19 20. THE LD. CIT (A) HAVE REPEATEDLY HELD THAT NO PA RT OF OUTSIDE INDIA REVENUE IN RESPECT OF ABOVE MENTIONED PROJECTS CAN BE TAXED IN INDIA AND THE SAME WERE EXCLUDED FROM THE ASSESSEES TAXABLE IN COME. THUS, THE ISSUE OF TAXABILITY OF EVEN 1% OF OUTSIDE IND IA REVENUE BEING ATTRIBUTABLE TO PE FOR ALL THE ABOVE MENTIONED PROJ ECTS DID NOT FIND FAVOUR WITH THE CIT (A) IN PAST YEARS. IT WAS SUBMITTE D THAT THE ASSESSING OFFICER RELYING UPON THE UTTARANCHAL HIGH COU RT DECISION IN ASSESSEES OWN CASE FOR THE SAME YEAR, HAS EXCLUDED OUTSIDE INDIA REVENUE FROM TAXABLE INCOME AS STATED IN OFFICE NOTE- 2. IT WAS SUBMITTED THAT ON THE ISSUE OF TAXABILITY OF OUTSIDE IN DIA REVENUE, THE DECISIONS OF ITAT FOR THE AFOREMENTIONED YEARS HAS BEEN AFFIRMED BY HONBLE SUPREME COURT IN ASSESSEES OWN CASE AS REPORTED I N 291 ITR 482. IT WAS SUBMITTED THAT THE APEX COURT HAS HELD TH AT PROFIT ATTRIBUTABLE TO KOREAN OPERATION OF SUPPLY AND FABRI CATION OF PLATFORM ARE NOT TAXABLE IN INDIA. IT WAS OBSERVED THAT AS PER PROVISIONS OF ARTICLE 7 OF THE TAX TREATY ONLY SO MUCH OF THE PROF ITS AS ARE ATTRIBUTABLE TO PE IN INDIA ARE TAXABLE ON THE ASSUMP TION THAT THE PE IS A SEPARATE AND DISTINCT ENTITY. IT IS THE ACT OF SETTI NG OUT A PE WHICH TRIGGERS THE TAXABILITY OF TRANSACTIONS IN THE SOURCE ST ATE AND APPLYING THE AFOREMENTIONED TEST, IT WAS HELD THAT THE PROFITS EARNED BY THE FOREIGN ENTERPRISE ON THE SUPPLY OF FABRICATED PLATFO RM COULD NOT BE SAID TO BE ATTRIBUTABLE TO ITS INDIAN PE AS PE CAME IN TO EXISTENCE ONLY AFTER THE PLATFORM WAS SUPPLIED. THUS, IT WAS SUBMITTED THAT PROFIT ARISING ON SUPPLY OF PLATFORM COULD NOT BE ATTRIBUTED TO INDIAN PE. IT WAS FURTHER OBSERVED THAT EVEN IF IT WAS TO BE ASSUMED T HAT SUPPLIES IN KOREA WERE NECESSARY FOR THE PURPOSE OF INSTALLATION AN D FURTHER EVEN IF IT WAS TO BE ASSUMED THAT THE SUPPLIES WERE AN INTEGRAL PART OF INSTALLATION, NO PROFIT ON SUPPLY CAN BE ATTRIBUTED T O THE INDEPENDENT PE UNLESS IT IS ESTABLISHED THAT THE SUPPLIES WERE NOT AT ARMS LENGTH. IT WAS SUBMITTED THAT THE ASSESSING OFFICER FOR HOLDING T HAT NO PART OF OUTSIDE INDIA REVENUE WAS TAXABLE HAS RELIED UPON THE DECISION OF ITA NOS.2086 & 2087/DEL/2009 20 HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA HAR IMA HEAVY INDUSTRIES LTD. WHEREIN IT WAS HELD THAT PROFITS ARISING FROM OFFSHORE SUPPLY OF EQUIPMENTS AND OFFSHORE SERVICES BY FOREIGN CO MPANIES ARE NOT TAXABLE IN INDIA. IT WAS SUBMITTED THAT IN THE I MPUGNED YEAR ALSO THE FOLLOWING PROJECTS WERE ALL TURNKEY PROJECTS:- I) MUMBAI HIGH BASSEIN PIPE LINE PROJECT (MHB). II) MUMBAI SOUTH PROESS PLATFORM PROJECT (MSP) III) MUMBAI URAN TURNKLINE (MUT) IV) GMR (O & M) 21. THEREFORE, THE ASSESSING OFFICER WAS, AS A MATTER OF JUDICIAL DISCIPLINE, BOUND TO FOLLOW THE DECISION OF HONBLE U TTARAKHAND HIGH COURT WHICH HAD COME AT THE TIME OF FINALIZING THE ASSESSMENT FOR ASSESSMENT YEAR 2005-06 AND RELIANCE WAS PLACED ON THE D ECISION IN THE CASE OF GENERAL ELECTRIC INTERNATIONAL IN. VS. AC IT (INTERNATIONAL TAXATION) 287 ITR (AT) 43 (MUM) AND THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. G.M. MITTAL STAINLESS STEE L PVT. LTD. (2003) 263 ITR 255 (SC) WHEREIN IT WAS HELD THAT WHERE THE ASSESSING OFFICER FOLLOWED THE DECISION OF JURISDICTIONAL HIGH COURT, T HERE CAN BE NO BASIS FOR THE INTERFERENCE OF THE ASSESSMENT ORDER BEING PREJ UDICIAL TO THE INTEREST OF REVENUE. RELIANCE WAS ALSO PLACED ON THE DECISIONS IN THE CASE OF CIT VS. DHARMODAYAM & CO. (2001) 248 ITR 816 (SC) AND CIT VS. SAKTHI CHARITIES 244 ITR 226 (MAD). 22. SO FAR AS IT RELATES TO THE APPLICABILITY OF SECT ION 263, RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS:- I) CIT V. RATLAM COAL ASH COMPANY 171 ITR 141 (MP) II) CIT V. GOYAL PRIVATE FAMILY SPECIFIC TRUST 171 IT R 698 (ALL) III) CIT V. GABRIEL INDIA LTD. 203 ITR 108 (BOM) IV) CIT V. J.P. GOYAL HUF 247 ITR 555 (CAL). V) HARI IRON TRADING CO. V. CIT 263 ITR 437 (P&H) VI) MALABAR INDUSTRIAL CO. VS. CIT 243 ITR 83 (SC) VII) CIT V. MAX INDIA LIMITED 268 ITR 128 (P&H) ITA NOS.2086 & 2087/DEL/2009 21 23. THUS, IT WAS SUBMITTED THAT THE POWERS U/S 263 COULD NOT BE INVOKED ON THE ISSUES STATED IN THE SHOW CAUSE NOTICE. 24. LD. DIT, AFTER CONSIDERING ALL THESE WRITTEN SUBMI SSIONS OF THE ASSESSEE HAS CONCLUDED IN PARA 7.1 THAT IT IS AN UNDISPUTE D FACT THAT THE ASSESSEE HAS OPTED FOR TAXATION AS PER THE PROVISIONS O F THE TAX TREATY BETWEEN INDIAN AND KOREA AND DUE TO THIS FACT THE ASSESSING OFFICER HAS NOT CONSIDERED AND DECIDED THE TAXABILITY OF INCOME OF THE ASSESSEE UNDER THE PROVISIONS OF THE ACT. LD. DIT REFERR ED TO ARTICLE 7 WHICH REGULATE BUSINESS PROFIT ASSESSABLE UNDER THE DTAA. REFERRING TO PARA 3 OF ARTICLE 7, LD. DIT HAS OBSERVED THAT IT PROVIDES THAT DEDUCTION OF EXPENSES WHICH ARE INCURRED FOR THE PURP OSE OF PE INCLUDING EXECUTIVE AND GENERAL ADMINISTRATIVE EXPEN SES, WHICH ARE ALLOWED UNDER THE PROVISIONS OF DOMESTIC LAW OF THE CO NTRACTING STATE IN WHICH THE PE IS SITUATED. THEREFORE, ACCORDING TO LD. DIT, THE ASSESSING OFFICER WAS REQUIRED TO ALLOW THE DEDUCTION FO R THE EXPENSES INCURRED BY THE ASSESSEE AS PER PROVISIONS OF THE ACT AND INSTEAD OF DOING SO, THE ASSESSING OFFICER HAS FIRST DEDUCTED THE EXP ENSES FROM THE GROSS RECEIPTS AND LATER ON WENT ON TO DEEM THE IN COME @ 10% OF THE BALANCE AMOUNT. ACCORDING TO LD. DIT, PARA 3 O F ARTICLE 7 DOES NOT PROVIDE FOR FURTHER DEEMING THE INCOME @ 10% OF THE PROFIT COMPUTED AND THERE WAS NO BASIS OR JUSTIFICATION OF THE ACTION O F ASSESSING OFFICER FOR FURTHER DEEMING THE INCOME AFTER THE INCOME IS C OMPUTED AS PER PARA 3 OF ARTICLE 7. THEREFORE, THE ORDER OF THE A SSESSING OFFICER IS ERRONEOUS AS WELL AS PREJUDICIAL TO THE INTEREST OF THE REVENUE. REGARDING EXPENSES OF RS.167,83,37,937/- WHICH HAVE BE EN ALLOWED BY THE ASSESSING OFFICER, LD. DIT HAS OBSERVED THAT THE ASSESSIN G OFFICER HAS MENTIONED IN THE ORDER THAT THESE INCLUDE EXPENSES INCURRED IN INDIA FOR EARNING INSIDE REVENUE AND VERIFICATION WA S CARRIED OUT FROM RELEVANT TDS FORMS, HOWEVER, THE ASSESSING OFFICER HAS NO T VERIFIED THE ALLOWABILITY OF THOSE EXPENSES AS PER PROVISIONS OF THE A CT, PARTICULARLY ITA NOS.2086 & 2087/DEL/2009 22 THE BUSINESS PURPOSE AND ABSENCE OF PROPER VERIFICATION IN THIS REGARD HAS MADE THE ASSESSMENT ORDER ERRONEOUS AND PREJUDICIAL T O THE INTEREST OF REVENUE. 25. COMING TO THE AMOUNT RECEIVED BY THE ASSESSEE AS REV ENUE FROM OUTSIDE INDIA OPERATION, AMOUNTING TO ` 1294,51,94,6 88/-, HE OBSERVED THAT THESE ARE REGARDING THE PROJECTS WITH MHB, MSP, MUT AND GMR (O&M) AND WITH REGARD TO THOSE PROJECTS THE ASSESSEE HAS A LSO RECEIVED REVENUE FROM INSIDE INDIA OPERATION. THERE FORE, IT IS CLEAR THAT THE ASSESSEE HAD RECEIVED A COMPOSITE CONTRACT FOR THE W ORK TO BE PERFORMED IN INDIA AND ALSO RELATED WORK FROM OUTSIDE INDIA. THE ASSESSING OFFICER DID NOT MAKE INQUIRY REGARDING THE NA TURE AND SCOPE OF THE CONTRACTS, THE REASON FOR REVENUES FOR OUTSIDE I NDIA OPERATION, THE NATURE OF OUTSIDE INDIA OPERATIONS, THE DURATION OF PROJECTS IN INDIA, THE ROLE OF MUMBAI OFFICE OF THE COMPANY IN SUBMITTI NG THE TENDERS, NEGOTIATION OF CONTRACTS, THE SUBSEQUENT ROLE OF THE P E AND MUMBAI OFFICE IN EARNING THE REVENUE FROM THE ALLEGED OUTSI DE INDIA OPERATION. THE ASSESSING OFFICER DID NOT GATHER THE FACTS BEFORE PA SSING THE ORDER. THE ASSESSING OFFICER DID NOT INQUIRE INTO THE APPLICAB ILITY OF THE DECISION OF HONBLE SUPREME COURT IN ASSESSEES OWN CASE R EPORTED AS 291 ITR 481 FOR THE YEAR UNDER CONSIDERATION AND DUE TO THESE FACTS AND POSITION OF LAW, THE ORDER PASSED BY THE ASSESSING OFF ICER FOR NOT TAXING THE INCOME ON ACCOUNT OF OUTSIDE INDIA REVENU ES OF ` 1294,51,94,688/- IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. 26. ON THE OBSERVATIONS OF THE ASSESSING OFFICER PLACING RELIANCE UPON PARA 5 OF ARTICLE 7 OF THE TREATY AND ALSO THE CONTENTION OF THE ASSESSEE UPON THAT PROVISION STATING THAT THE DEPARTMENT IS ACCEPTING THE METHOD OF COMPUTATION OF INCOME FROM ASSESSMENT YEA R 1990-91 ONWARDS, LD. DIT OBSERVED THAT THE CLAIM OF THE ASSESSEE IS NOT ACCEPTABLE FOR THE SIMPLE REASON THAT PARA 5 OF ARTIC LE 7 REFERS TO ITA NOS.2086 & 2087/DEL/2009 23 DEDUCTION OF PROFITS BY THE SAME METHOD YEAR BY YEAR AND IT DOES NOT JUSTIFY THE ADOPTION OF A WRONG METHOD WHICH HAS BEEN ADOPTED IN EARLIER YEARS. ACCORDING TO LD. DIT, PARA 5 OF ARTI CLE 7 DOES NOT PROVIDE FOR ADOPTION OF A WRONG METHOD OF COMPUTATION OF IN COME YEAR AFTER YEAR. HE ALSO REFERRED TO CORRESPONDING PARA OF OECD MODEL TAX CONVENTION WHICH IS PARAGRAPH 6 AND COMMENTARY THERE ON READ AS UNDER:- THIS PARAGRAPH IS INTENDED TO LAY DOWN CLEARLY THAT A METHOD OF ALLOCATION ONE USED SHOULD NOT BE CHANGED MERELY BECA USE IN A PARTICULAR YEAR SOME OTHER METHOD PRODUCES MORE FAVOU RABLE RESULTS. ONE OF THE PURPOSES OF A DOUBLE TAXATION CON VENTION IS TO GIVE AN ENTERPRISE OF A CONTRACTING STATE SOME DEGREE OF CERTAINTY ABOUT THE TAX TREATMENT THAT WILL BE ACCORDED TO ITS PERMANENT ESTABLISHMENT IN THE OTHER CONTRACTING STATE AS WE LL AS TO THE PART OF IT IN ITS HOME STATE WHICH IS DEALING WI TH THE PERMANENT ESTABLISHMENT; FOR THIS REASON, PARAGRAPH 6 G IVES AN ASSURANCE OF CONTINUOUS AND CONSISTENT TAX TREATMENT. 27. REFERRING TO THE AFOREMENTIONED COMMENTARY, IT IS OBSERVED BY THE LD. DIT THAT THE AFOREMENTIONED PARA DOES NOT PR OVIDE SANCTITY TO THE CONTINUATION OF A WRONG METHOD AND SUCH METHOD D OES NOT GET SUPPORT FROM ANYWHERE. ACCORDING TO LD. DIT, EVEN I F A METHOD HAS BEEN ADOPTED IN EARLIER YEARS AND THERE ARE GOOD AND SUFFICIENT REASONS TO CHANGE THE SAME, THE SAME CAN BE CHANGED IF THAT METHOD FOR COMPUTATION OF INCOME IS NOT AS PER PROVISIONS OF T HE TAX TREATY. IT IS IN THIS MANNER, LD. DIT HAS REJECTED THE CONTENTION OF THE ASSESSEE. 28. HE ALSO REJECTED THE CONTENTION OF THE ASSESSEE T HAT THE ASSESSING OFFICER, IN FACT, HAS DISALLOWED THE EXPENSES OF ` 966,45,41,565/-, AS, ACCORDING TO HIM, SUCH DISALLOWAN CES HAS BEEN WORKED OUT BY THE ASSESSEE BY STATING THAT NOT ALL THE E XPENSES ARE ALLOWED BY THE ASSESSING OFFICER. HE FURTHER OBSERVED T HAT THIS CONTENTION OF THE ASSESSEE HAS NOT BEEN VERIFIED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. ITA NOS.2086 & 2087/DEL/2009 24 29. HE ALSO REJECTED THE LEGAL CONTENTION OF THE ASSESSE E REGARDING APPLICABILITY OF CERTAIN DECISIONS AS, ACCORDING TO LD . DIT, THERE EXIST SUFFICIENT MATERIAL TO INVOKE THE PROVISIONS OF SECTIO N 263. FINALLY, HE OBSERVED THAT HE IS OF THE OPINION THAT THERE IS A CLE AR FAILURE ON THE PART OF THE ASSESSING OFFICER TO EXAMINE ALL THE ASPECTS MENTIONED IN HIS ORDER. THEREFORE, THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO T HE INTEREST OF REVENUE. HE HAS SET ASIDE THE ASSESSMENT ORDER AND DIRECT ED THE ASSESSING OFFICER TO PASS FRESH ASSESSMENT ORDER IN ACCORDANCE WITH THE LAW AFTER GIVING DUE OPPORTUNITY TO THE ASSESSEE. THE ASSESSEE IS AGGRIEVED AND HAS FILED AFOREMENTIONED APPEAL FOR A. Y. 2005-06. 30. SIMILAR POWER HAS BEEN EXERCISED BY LD. DIT IN RE SPECT OF ASSESSMENT YEAR 2006-07. IT HAS BEEN THE CASE OF BOTH TH E PARTIES THAT MOST OF THE FACTS FOR THAT YEAR ARE IDENTICAL TO THE FACTS FOR ASSESSMENT YEAR 2005-06. HOWEVER, CERTAIN FACTS WERE STA TED TO BE DIFFERENT. THE FACTS WHICH ARE SIMILAR ARE NOT DESCRI BED FOR THE SAKE OF BREVITY. THE POWERS U/S 263 WERE INVOKED BY DIT AS PE R NOTICE DATED 8/10 TH DECEMBER, 2008 AND COPY OF SUCH NOTICE IS AVAILABLE AT PAGE 242 OF THE PAPER BOOK. IT IS THE CASE OF LD. AR OF T HE ASSESSEE THAT FOR THIS YEAR THERE IS NO ALLEGATION OF LD. DIT REGARDING NON-APPLICATION OF MIND BY THE ASSESSING OFFICER OR REGARDING IMPROPER INQ UIRY MADE BY THE ASSESSING OFFICER AS IT HAS BEEN ALLEGED FOR ASSESSMENT Y EAR 2005- 06. IT IS THE SUBMISSION OF LD. AR THAT THIS IS THE MOST VITAL DIFFERENCE IN THE FACTS RELATING TO ASSESSMENT YEAR 2006-07 WHEN THEY ARE COMPARED TO THE FACTS OF ASSESSMENT YEAR 2005-06. THE I NCOME OF THE ASSESSEE HAS BEEN ASSESSED BY THE ASSESSING OFFICER IN THE SAME MANNER AS IT WAS ASSESSED FOR ASSESSMENT YEAR 2005-06. THE SE COND VITAL DIFFERENCE POINTED OUT BY THE LD. AR FOR THE ASSESSMENT YEAR 2006-07 IS THAT THE JUDGEMENT OF HONBLE SUPREME COU RT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1988-89 AND 1989-90 WAS AVAI LABLE ITA NOS.2086 & 2087/DEL/2009 25 BEFORE THE ASSESSING OFFICER AT THE TIME OF COMPLETION OF THE ASSESSMENT PROCEEDINGS WHEREAS THE SAME WAS NOT AVAILABLE WITH THE ASSESSING OFFICER WHEN ASSESSMENT WAS COMPLETED FOR ASSESSMENT YEAR 2005-06 ALTHOUGH THE SAID DECISION WAS AVAILABLE WHEN LD. DIT HAS INITIATED THE PROCEEDINGS U/S 263 FOR BOTH THE YEA RS. 31. IT IS THE SUBMISSION OF LD. SPECIAL COUNSEL FOR THE REVENUE THAT BARRING THESE TWO DIFFERENCES IN THE FACTS FOR ASSESSMENT YEAR 2006-07, ALL OTHER FACTS ARE SIMILAR TO ASSESSMENT YEAR 2005-06. 32. IN THIS YEAR ALSO, SIMILAR SUBMISSIONS WERE MADE BY TH E ASSESSEE BEFORE LD. DIT AND LD. DIT NOT BEING SATISFIED, FOR T HE PRESENT YEAR ALSO HAS PASSED THE IMPUGNED ORDER BY HOLDING THAT THERE IS A CLEAR FAILURE ON THE PART OF THE ASSESSING OFFICER TO EXAMINE ALL THE ASPECTS MENTIONED IN HIS ORDER AND, ACCORDINGLY, THE SAID ASSESSM ENT ORDER IS ERRONEOUS AND IS PREJUDICIAL TO THE INTEREST OF REVENU E AND HE HAS SET ASIDE THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 2006-07 AND D IRECTED THE ASSESSING OFFICER TO PASS FRESH ORDER IN ACCORDANCE WI TH THE LAW AFTER GIVING DUE OPPORTUNITY TO THE ASSESSEE. THE ASSESSEE IS AGGRIEVED BY SUCH ORDER AND, HENCE, HAS FILED AFOREME NTIONED APPEAL FOR A.Y. 2006-07. 33. IT WAS SUBMITTED BY LD. AR THAT THE ASSESSEE IS A NON- RESIDENT COMPANY INCORPORATED IN SOUTH KOREA. SINCE 1985 IT HAS BEEN UNDERTAKING EXECUTION OF TURNKEY PROJECTS FOR DESIGNI NG, ENGINEERING, PROCUREMENT APART FROM HOOK-UP INSTALLATION AND COMM ISSIONING OF FACILITIES FOR ONGC, ETC., IN CONNECTION WITH EXPLOR ATION, EXTRACTION AND PRODUCTION OF MINERAL OIL IN THE NOTIFIED OFFSHORE W ATERS. DESIGNING, ENGINEERING, PROCUREMENT AND FABRICATION ARE CARRIE D OUT OUTSIDE INDIA. THEREAFTER, INSTALLATION AND COMMISSIONING WORK START I N INDIA ON ARRIVAL OF STRUCTURES IN INDIAN WATERS. THE CONTRACTS FOR VARI OUS PROJECTS FOR ONGC, THOUGH RELATING TO DIFFERENT WORKS, ARE STANDAR D CONTRACTS ITA NOS.2086 & 2087/DEL/2009 26 HAVING MATERIALLY SIMILAR TERMS. A STANDARD CONTRACT ENABLES THE ASSESSEE TO ENGAGE SUB-CONTRACTORS PARTICULARLY FOR MARI NE SPREAD VESSELS, PRE-ENGINEERING AND PRE-CONSTRUCTION SURVEYS OF THE SEA BED OF AN EARMARKED LOCATION. HOWEVER, THESE CONTRACTOR S AS WELL AS THE SUB-CONTRACTS HAVE TO BE APPROVED BY THE ONGC. IN TH E MAIN, THESE CONTRACTS PROVIDE FOR MILESTONE PAYMENTS ON COMPLETION OR PART COMPLETION OF SPECIFICALLY IDENTIFIED SEGMENT OF WORK UPON ITS ACCEPTANCE BY ONGC. SIMILARLY, THE CONTRACTS SEPARAT ELY PROVIDE FOR PRICE FOR WORK TO BE CARRIED OUT IN INDIA AND OUTSID E INDIA, BOTH IN RESPECT OF MATERIAL AND SERVICES. THE PAYMENTS ARE REL EASED BY THE ONGC AFTER VERIFYING THE COMPLETION OF THE STIPULATE D PART OF THE WORK TO THE SATISFACTION OF THE QUALIFIED EMPLOYEES/CONSULTA NTS APPOINTED FOR ON-SITE INSPECTION. THE INVOICES PRESENTED BY THE ASSESSEE ALONG WITH ACCEPTANCE CERTIFICATES ARE ACCORDINGLY SCRUTINIZED B EFORE RELEASING THE PAYMENTS. THE PAYMENTS FOR WORK DONE INSIDE INDIA AS DISTINGUISHED FROM PAYMENTS FOR WORK COMPLETED OUTSIDE INDIA ARE SEP ARATELY RELEASED BY ONGC. THIS IS BECAUSE THE ONGC HAS TO DEDUC T TAX AT SOURCE ON PAYMENTS FOR WORK DONE IN INDIA @ 4% + SURCH ARGE AND TDS OF 1% + SURCHARGE ON WORKS CARRIED OUT OUTSIDE INDIA I N ACCORDANCE WITH THE ORDERS OF THE ASSESSING OFFICER U/S 195 (2) OF T HE ACT. THE RECORD SHOWS THAT THE ASSESSING OFFICER CALLED FOR THE CO NTRACT DOCUMENTS AND INVOICES, ETC. AND DULY EXAMINED THEM. 34. THE ASSESSING OFFICER ASSESSED THE INCOME OF THE ASSESSEE I N THE FOLLOWING MANNER:- I) REVENUE FROM BUSINESS OPERATIONS OUTSIDE INDIA UNDER CONTRACTS WITH ONGC AND CONTRACT WITH GMR FOR PROJEC TS INVOLVING DESIGNING, ENGINEERING, PROCUREMENT OF MAT ERIAL, FABRICATION AND INSTALLATION OF STRUCTURES LIKE PLATFO RM AND SUB- MARINE PIPELINES, INSTALLATION AND COMMISSIONING IN ACCORDANCE WITH THE TERMS OF THE CONTRACTS FOLLOWIN G THE ITA NOS.2086 & 2087/DEL/2009 27 DECISION OF JURISDICTIONAL HIGH COURT CONFIRMING THE DECISION OF THE TRIBUNAL FOR ASSESSMENT YEAR 1986-87 AND 1987-88, THE ASSESSING OFFICER DID NOT ATTRIBUTE ANY PART OF PROFIT FROM SUCH REVENUE TO THE INSTALLATION PE. II) REVENUE FROM BUSINESS OPERATIONS CARRIED OUT INSIDE INDIA UNDER THESE CONTRACTS THE ASSESSING OFFICER HAS BROUGHT THESE TO TAX UNDER ART. 7(3) READ WITH ART. 7(5) OF THE TREATY IN ACCORDANCE WITH THE DECISIONS OF HIS PREDECESSORS WHICH W ERE SUSTAINED BY THE CIT(A) IN THE APPEALS FILED BY THE ASSE SSEE. III) REVENUE FROM OPERATIONS INSIDE INDIA UNDER A PRO JECT CONTRACTED WITH HINDUSTAN AERONAUTICS LTD. (HAL), WHI CH ACCORDING TO THE ASSESSEE IS NOT TAXABLE AND IT IS IN APP EAL AGAINST THE ORDER OF THE ASSESSING OFFICER TAXING THIS IN COME. IV) INTEREST RECEIVED FROM TAX DEPARTMENT ON REFUND /AND INTEREST ON DEPOSITS WITH BANKS, WHICH THE LEARNED ASSESSIN G OFFICER, AGREEING WITH ASSESSEE, HAS TAXED UNDER ART. 12 (2) OF THE TREATY. IT MAY BE NOTED THAT THE IMPUGNED ORDER OF THE DIT DISCUSSES ONLY ITEMS NO.(I) AND (II) AND THERE IS NOT A WHISPER OF ANY OBJECTION TO THE ASSESSING OFFICERS TREATMENT OF ITEMS NO. (III) A ND (IV) ABOVE. 35. IT WAS SUBMITTED THAT THE FOLLOWING SEQUENCE OF RE LEVANT EVENTS WILL ALSO BE IMPORTANT TO RAISE BY ASSESSEE IN ITS APPEAL: - S.NO. PARTICULARS DATE 1. RETURN OF INCOME DECLARING NET LOSS OF `9,28,05,64,624/- (COMPUTATION IN ACCORDANCE WITH DTAA AND SEC. 90(2) OF THE ACT.) 31.10.2005 2. INTIMATION U/S 143(1) 28.02.2006 3. JUDGMENT OF UTTARANCHAL HIGH COURT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1987-88 AND 1988-89 (291 ITR 450 SEE P. 642/DPB-IV) 30-03-2006 (AVAILABLE WITH ASSESSING OFFICER & DIT) 4. FIRST NOTICE U/S 143(2) 21.08.2006 5. ASSESSMENT U/S 143(3) AND THE OFFICE NOTE 09.03.2007. THE OFFICE NOTE WAS ITA NOS.2086 & 2087/DEL/2009 28 OF ASSESSING OFFICER APPENDED TO THE ASSESSMENT ORDER. SPECIFICALLY BROUGHT TO THE NOTICE OF DIT (PARA 62 AT P. 13 OF DITS ORDER) BUT HE IGNORES IT. 5.1 WHETHER ASSESSING OFFICER CONSIDERS THE JUDGMENT DELIVERED BY HONBLE UTTARANCHAL HIGH COURT IN ASSESSEES CASE. YES, AS EVIDENCED FROM THE OFFICE NOTE (REF P.7 VOL.-1) 6. JUDGMENT OF SUPREME COURT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1987-88 AND 1988-89 (291 ITR 482-SEE P.35/DPB- 1). AVAILABLE WITH THE DIT (BUT NOT THE ASSESSING OFFICER) AT THE TIME OF ISSUING SHOW-CAUSE NOTICE. 6.1 WHETHER ASSESSING OFFICER MAKES ANY REFERENCE TO THE DEPARTMENTS APPEAL PENDING IN THE SUPREME COURT. YES. THE ASSESSING OFFICER NOTES THE PENDENCY OF REVENUES SLP BEFORE THE HONBLE SUPREME COURT IN THE OFFICE NOTE. 7. JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1994-95 & 1995-96 (P.398/DPB-II) 04.12.2008 (AVAILABLE WITH THE DIT). 8. SHOW CAUSE NOTICE ISSUED BY DIT 12.02.2009(VOL.- 1 PG. 164) 8.1 WHETHER THE DIT REFERS TO THE JUDGMENTS OF HIGH COURT AND SUPREME COURT IN RESPECT OF ASSESSMENT YEAR 1987-88 AND 1988-89 AND THAT OF HIGH COURT IN RESPECT OF ASSESSMENT YEAR 1994-95 & 1995-96 IN HIS NOTICE U/S 263? NO 8.2 WHETHER DIT AT ALL REFERS TO THE SUPREME COURT JUDGMENT IN HIS ORDER U/S 263. THE ONLY TIME HE DOES SO IS IN PARA 7.3 OF HIS ORDER WHERE HE ERRONEOUSLY HOLDS THAT THE ASSESSING OFFICER DID NOT CONSIDER APEX COURT DECISION IN 291 ITR 482 WHILE IGNORING THE OFFICE NOTE OF THE ASSESSING OFFICER. THE JUDGMENT WAS PRONOUNCED BY THE APEX COURT MUCH AFTER THE ASSESSING OFFICER HAD PASSED THE ORDER. 9. DATE OF IMPUGNED ORDER U/S 263 18.03.2009 9.1 WHETHER DURING THE COURSE OF PROCEEDINGS U/S 263, THE ASSESSEE BRINGS THE AFORESAID DECISIONS TO THE KNOWLEDGE OF THE DIT? YES. REFER ASSESSEES SUBMISSIONS DATED 13.03.2009 FILED WITH THE DIT PAGES 165-197 AT PP 182, 183 AND 187 VOL. 1. ALSO SEE PARA 6.2/PG. 12 OF DITS ORDER. 9.2 WHETHER DIT CONSIDERS THE EFFECT AFOREMENTIONED DECISIONS OF THE HIGH COURT AND SUPREME COURT OR THE TRIBUNALS DECISION FOR 90-91, 91-92 AND 96-97 DT. 11.5.2007 (P. 288/VOL. 3). ..NO 10. ITAT ORDER FOR 1994-95 & 1995-96 GIVING EFFECT TO UTTARANCHAL HIGH COURT ORDER DT. 4.12.2008. 9.10.2009 (P. 393/DPB-II) ITA NOS.2086 & 2087/DEL/2009 29 36. IT WAS SUBMITTED THAT THE ISSUES DEALT WITH BY THE A SSESSING OFFICER IN THE ASSESSMENT ORDER HAVE BEEN SUBJECT MATTER OF LITIGATION BETWEEN THE ASSESSEE AND THE DEPARTMENT SINCE THE ASSESSMENT YEAR 1987-88 ON WHICH THE DECISIONS OF APPELLATE AUTHORITI ES WERE AVAILABLE TO THE ASSESSING OFFICER WHEN HE FRAMED THE IMPUGNED ASSE SSMENTS AND THOSE DECISIONS WERE CONSIDERED BY THE ASSESSING OFFICE R AND DIT HAS FAILED TO TAKE INTO CONSIDERATION THOSE DECISIONS WH ILE INVOKING JURISDICTION U/S 263. HE SUBMITTED THAT THE FOLLOWING ISSUES WERE SUBJECT MATTER OF DISPUTE BETWEEN THE ASSESSEE AND DEPART MENT IN EARLIER YEARS ON SIMILAR FACTS AND CONTRACTS WITH ONGC. I) WHETHER THE ONGC CONTRACTS ARE DIVISIBLE IN TWO PARTS AS THE CONTRACTS THEMSELVES IDENTIFY PAYMENTS FOR OPERATIONS OUTS IDE INDIA SEPARATELY FROM PAYMENTS FOR OPERATIONS INSIDE INDIA A ND THE INVOICES ON ONGC ARE CLEARED BY IT ACCORDINGLY.? II) WHETHER THE MUMBAI LIAISON OFFICE AND PROJECT OFFI CES FALL WITHIN THE EXCLUSIONARY PROVISION OF ART. 5(4) OF THE TREATY AS THEY RENDER AUXILIARY SERVICES. III) EVEN IF MUMBAI LIAISON OFFICE AND THE PROJECT OF FICES, IS ASSUMED TO BE THE FIXED PLACES OF BUSINESS IN INDIA UNDER ART. 5 (1) AND (2) OF THE TREATY, WHETHER THE SPECIAL PROVISION RELATING TO INSTA LLATION PROJECTS UNDER ART. 5(3) WOULD PREVAIL OVER THE GENERA L PROVISIONS OF PARAGRAPHS (1) AND (2) OF ART. 5. IV) WHETHER ANY PART OF REVENUE IN RESPECT OF OPERATION S PERFORMED BY THE ASSESSEE OUTSIDE INDIA CAN BE ATTRIBUTED TO THE INSTALL ATION IN PE IN INDIA. V) WHETHER THE INSTALLATION PE IN INDIA COMMENCES FROM THE DATE OF ARRIVAL OF THE STRUCTURES AND THE MARINE SPREAD IN NO TIFIED INDIAN WATERS FOR INSTALLATION. ITA NOS.2086 & 2087/DEL/2009 30 VI) EVEN IF AN INSTALLATION PE COMES INTO EXISTENCE AND ASSUMING THAT THE OPERATIONS OUTSIDE INDIA HAVE A NEXUS WITH THE OPERA TIONS OF THE INSTALLATION PE, WOULD ANY PART OF REVENUES FROM OPERA TIONS OUTSIDE INDIA BE ATTRIBUTABLE TO THE PE IN INDIA IN ABSENCE OF A NY ALLEGATION THAT THE PRICE FOR SUCH OPERATIONS IS NOT AT ARMS LENGTH. 37. IT WAS SUBMITTED THAT SO AS IT RELATES TO THE ISSUE RE GARDING INCOME FROM OPERATIONS CARRIED OUT OUTSIDE INDIA, THI S ISSUE FOR THE FIRST TIME CAME BEFORE THE TRIBUNAL IN APPEALS RELATING TO ASSESSMENT YEAR 1987-88 AND 1988-89 WHEREIN THE TRIBUNAL HAS HELD AS UNDER:- A) THE ASSESSEE IS COVERED BY ARTICLE 5(3) OF THE TREATY AND, THEREFORE, SPECIAL PROVISION RELATING TO INSTALLATION PE UNDER ART. 5(3) WOULD PREVAIL OVER THE GENERAL PROVISION CONTAIN ED IN ARTICLE 5(1) AND (2) OF THE TREATY. B) SINCE THE OPERATIONS OUTSIDE INDIA (OPERATIONS RELATI NG TO DESIGNS, PROCUREMENT AND FABRICATION) WERE COMPLETED PRIOR TO THE ARRIVAL OF STRUCTURES AND THE MARINE SPREAD AND COMMENCEMENT OF THE INSTALLATION OPERATIONS, THE REVENUE FROM THE SAME WOULD NOT BE LIABLE TO TAX IN INDIA. 38. IT WAS SUBMITTED THAT THE AFOREMENTIONED DECISION OF THE TRIBUNAL HAS BEEN CONFIRMED BY UTTARANCHAL HIGH COUR T ON 30 TH MARCH, 2006 AND THE HONBLE SUPREME COURT HAS ALSO AFFIRMED THE SAID DECISION VIDE JUDGEMENT PRONOUNCED ON 18 TH MAY, 2007. IT WAS SUBMITTED THAT THE ASSESSING OFFICER HAS FOLLOWED THE JUD GEMENT OF THE TRIBUNAL AND JURISDICTIONAL HIGH COURT FOR HOLDING T HE ISSUE IN FAVOUR OF THE ASSESSEE IN RESPECT OF INCOME FROM OPERATION CARRIED ON OUTSIDE INDIA AND THIS FACT IS CLEAR FROM THE OFFICE NOTE APP ENDED TO THE ASSESSMENT ORDER DATED 9 TH MARCH, 2007. HE SUBMITTED THAT HISTORY OF LITIGATION WITH THE DEPARTMENT IS DESCRIBED IN ANNEXU RE-I TO THE WRITTEN SUBMISSIONS AND THE OFFICE NOTE ATTACHED BY THE ASSESSING O FFICER WITH THE ASSESSMENT ORDER IS ANNEXED AS ANNEXURE-II AND THE NO TE RELATING ITA NOS.2086 & 2087/DEL/2009 31 TO NON-TAXABILITY OF RECEIPT FROM OUTSIDE INDIA OPER ATION AS RECORDED BY THE ASSESSING OFFICER IN THE OFFICE NOTE AND WHICH HAS A LREADY BEEN REPRODUCED IN PARA 14 OF THIS ORDER. 39. WITH REGARD TO OBJECTIONS OF THE DIT REGARDING E XISTENCE OF PE IN INDIA, IT WAS SUBMITTED BY LD. AR THAT THE ASSESSEE HAS CL ARIFIED THE POSITION THAT IT HAS BEEN HELD RIGHT UPTO THE APEX CO URT THAT THE ASSESSEE HAS ONLY INSTALLATION PE UNDER ARTICLE 5 (3) OF DTAA AND THE ASSESSEE HAS ALWAYS DISPUTED THAT KEEPING IN VIEW THE PROV ISIONS OF ARTICLE 5 (3) OF THE TREATY, ARTICLE 5 (1) AND (2) ARE NOT APPLICABLE. IN THE YEAR UNDER CONSIDERATION AND EARLIER YEARS THE ASSE SSEE HAS ADMITTED TO INSTALLATION PE FOR ALL ONGC CONTRACTS AS THE INSTALLATION PROJECTS WERE SPREAD OVER MORE THAN 9 MONTHS AS PER ART ICLE 5 (3) OF THE TREATY FOR ALL THE THREE ONGC PROJECTS AND THE G MR PROJECTS. HE SUBMITTED THAT THE FINDING OF DIT THAT THE IMPUGNED CONTRACTS ARE COMPOSITE CONTRACTS IS CONTRARY TO THE CLEAR OBSERVATIO NS OF HONBLE SUPREME COURT IN ASSESSEES OWN CASE WHEN IN THE CONTEXT OF SIMILAR CONTRACTS FOR PROJECTS WITH ONGC THAT THE CONTRACT WA S IN TWO PARTS, ONE FOR FABRICATION OF THE PLATFORM AND THE OTHER I NSTALLATION AND COMMISSIONING OF THE SAID PLATFORM. REFERENCE IN THIS REGARD WAS MADE TO THE OBSERVATIONS OF HONBLE SUPREME COURT IN ASSESSEES CASE AT PAGE 485 OF THE 291 ITR. IT IS ALSO EVIDENT FROM THE ORDER OF THE DIT HIMSELF WHEN HE ACCEPTS THE FACT AND TREAT THE INCOME FROM OPERATIONS OUTSIDE INDIA AND INCOME FROM OPERATION INSIDE IND IA SEPARATELY AND INDEPENDENTLY OF EACH OTHER. HE SUBMITTED THAT THOUGH LD. DIT HAS ACCEPTED THAT ONGC CONTRACT WOULD BE A TURNKEY CONT RACT, BUT HE DOES NOT FOLLOW THE DICTUM OF HONBLE SUPREME COURT AS OB SERVED AT PAGE 493 OF THE REPORT IN THE CASE OF TURNKEY PROJECT, T HE PE IS SAID TO BE AT THE INSTALLATION STAGE WHILE THE ENTIRE TURNKEY PROJE CT INCLUDING THE SAME EQUIPMENT, IS FINALIZED BEFORE THE INSTALLATION ST AGE. THEREFORE, HE SUBMITTED THAT THE ORDER PASSED BY DIT IS ERRONEOUS A ND NOT THAT OF ITA NOS.2086 & 2087/DEL/2009 32 ASSESSING OFFICER. HE SUBMITTED THAT FOLLOWING THE SAID OBSERVATIONS OF HONBLE SUPREME COURT THE TRIBUNAL IN ASSESSEES OWN CA SE FOR ASSESSMENT YEAR 2005-06 REPORTED AS 31 SOT 482, HAS HELD IN FAVOUR OF THE ASSESSEE. HE SUBMITTED THAT SINCE THE VERY REASON GIVEN BY DIT FOR SETTING ASIDE THE PART OF ASSESSMENT ORDER IS CONTRARY TO THE DECISION OF HONBLE SUPREME COURT, THEREFORE, THE OR DER PASSED BY LD. DIT ON THIS ISSUE IS ILLEGAL AND A NULLITY. 40. LD. AR SUBMITTED THAT LD. DIT WHILE PASSING AN ORD ER U/S 263 HAS FAILED TO CONSIDER THE JUDGEMENT OF JURISDICTIONAL HI GH COURT AND OFFICE NOTE APPENDED TO THE ASSESSMENT ORDER. HE ALSO FAILED T O CONSIDER THE DECISION OF HONBLE SUPREME COURT IN ASSESSEES OWN CASE W HICH WAS BROUGHT TO HIS NOTICE AND THE HISTORY OF LITIGATION B ETWEEN THE ASSESSEE AND THE DEPARTMENT SINE ASSESSMENT YEAR 1987-88 AND 1988 -89 AND REFERENCE WAS MADE TO THE NOTE NO.2 APPENDED TO THE ASSESSMENT ORDER WHICH HAS ALREADY BEEN REPRODUCED IN PARA 38 A BOVE. 41. HE SUBMITTED THAT THERE IS NOT EVEN A WHISPER OF A LLEGATION IN THE ORDER PASSED BY LD. DIT THAT THE PRICE PAID BY THE ON GC FOR OPERATION OUTSIDE INDIA WAS NOT AT ARMS LENGTH OR THAT IT INCLU DED THE PRICE OF SERVICES RENDERED BY THE PE IN INDIA. LD. DIT WAS AWA RE OF THE DECISION OF HONBLE SUPREME COURT IN ASSESSEES OWN CASE, BUT HE C HOSE TO IGNORE IT. IN THIS VIEW OF THE MATTER, EVEN IF THE PE IN INDIA IS INEXTRICABLY LINKED WITH THE PROCUREMENT AND FABRIC ATION, ETC., OUTSIDE INDIA, NO PROFIT CAN BE ATTRIBUTED TO THE PE IN IND IA. REFERENCE WAS MADE TO THE DECISION OF ITAT IN ASSESSEES OWN CASE FOR ASSE SSMENT YEAR 1994-95 AND 1995-96 VIDE WHICH THE EFFECT TO U TTARANCHAL HIGH COURT DECISION DATED 4 TH SEPTEMBER, 2008 WAS GIVEN AND THE TRIBUNAL, FOLLOWING THE DECISION OF HONBLE SUPREME COURT HAS H ELD THAT EVEN ASSUMING THAT SUPPLIES WERE NECESSARY FOR THE PURPOSE OF A CTIVITIES OF PE IN INDIA AND EVEN IF SUPPLIES WERE INTEGRAL PART, NO PART OF PROFITS ON ACCOUNT OF OFFSHORE ACTIVITIES COULD BE ATTRIBUTED TO PE AS UNDISPUTEDLY, ITA NOS.2086 & 2087/DEL/2009 33 OF THE DESIGNATED WORK (DESIGNING, ENGINEERING, FABRI CATION AND SUPPLY) WAS CARRIED OUTSIDE INDIA AND BEFORE THE DATE OF ARRI VAL OF THE STRUCTURE IN INDIA. THUS, IT WAS PLEADED THAT REVENUE FROM OUT SIDE INDIA OPERATIONS IN ANY CASE IS NON-TAXABLE IN INDIA AS THERE IS NO ALLEGATION THAT THE PRICE AT WHICH BILLING WAS DONE WAS NOT AT A RMS LENGTH. REFERENCE IN THIS REGARD WAS MADE TO THE FOLLOWING DE CISIONS OF ITAT THE COPIES OF WHICH ARE ALSO FURNISHED IN THE PAPER BO OK AS UNDER:- I) DCIT VS. HYUNDAI HEAVY INDUSTRIES CO. LTD. IN ITA NOS.2460 TO 2462/DEL/2005 (ASSESSMENT YEARS 1990-91 & 1991-92) A ND IN ITA NO.4307/DEL/2002 (ASSESSMENT YEAR 1996-97) CONSOLI DATED ORDER DATED 11 TH MAY, 2007. II) JCIT VS. HYUNDAI HEAVY INDUSTRIES CO. LTD. IN ITA NOS.1753 & 1754/DEL/99, ASSESSMENT YEAR 1993-94, ORDER DATED 3 RD MARCH, 2004. III) DCIT (OSD) VS. M/S HYUNDAI HEAVY INDUSTRIES CO. LTD. IN ITA NOS 265, 4692,264,2824/DEL/2007, ITA NOS.2530 & 2975/DE L/2006, ITA NOS.106 & 1407/DEL/2008, ASSESSMENT YEARS 1997-98 TO 2004-05 42. IT WAS SUBMITTED THAT IT IS CLEAR FROM THE ASSESSMENT ORDER AND OFFICE NOTE APPENDED THERETO THAT THE ASSESSING OFFICER HAD FULLY APPLIED HER MIND AND HAD FOLLOWED THE JUDGEMENTS AVA ILABLE WITH HER AT THE TIME OF PASSING THE ORDER. LD. DIT HAS FAILED TO CONSIDER THE DECISION OF APEX COURT AND JURISDICTIONAL HIGH COURT AND HAS ERRONEOUSLY IGNORED TO CONSIDER THE OFFICE NOTE AND O THER MATERIAL AVAILABLE ON RECORD AND HAS CAUSED THE ASSESSING OFFICER OF NON- APPLICATION OF MIND IN ATTRIBUTING PART OF REVENUE FROM OPERATION OUTSIDE INDIA TO THE PE IN INDIA. HE SUBMITTED THAT IT IS UNDISPUTED FACT THAT WHENEVER THE PERIOD OF INSTALLATION PROJECTS EXC EEDS NINE MONTHS, THE ASSESSEE OFFERS THE INCOME FROM THE REVENUES RECEIVED IN RESPECT OF OPERATIONS OF INSTALLATION PE IN INDIA WHICH IS IN ACCORDANCE WITH THE ARTICLE 5 (3) READ WITH ARTICLE 7 OF THE TREATY. T HIS YEAR ALSO THE ASSESSEE HAS ADMITTED TO HAVE PE IN TERMS OF ARTICLE 5 ( 3) OF THE TREATY ITA NOS.2086 & 2087/DEL/2009 34 FOR THE PROJECTS EXECUTED WITH ONGC AND GMR AS THESE P ROJECTS WERE NOT NEW PROJECTS BUT WERE CARRIED OVER FROM EARLIER YEARS (PARA 2 OF ASSESSING OFFICER). 43. COMING TO THE ISSUE RELATING TO INCOME FROM OPERA TION INSIDE INDIA, IT WAS SUBMITTED BY LD. AR THAT THE CIT (A) HA S DISMISSED THE APPEALS OF THE ASSESSEE AND SUSTAINED STAND OF THE ASSESSING OF FICER RIGHT UPTO THE ASSESSMENT YEAR 2004-05 HOLDING THAT THE ASSESSING OFFICER HAD RIGHTLY COMPUTED THE INCOME UNDER ARTIC LE 7(3) OF THE INDO- KOREAN DTAA BY ESTIMATING TAXABLE INCOME AT 10% OF T HE INDIAN RECEIPTS AFTER REDUCING IT BY THE AMOUNT OF EXPENDIT URE ON SUB- CONTRACTORS, ETC. ON WHICH TAX WAS DEDUCTED AT SOURCE. THE SAID ORDERS OF CIT (A) WERE NOT INITIALLY ACCEPTED BY THE ASSESSEE AND THE MATTER WAS AGITATED IN APPEAL IN ITAT, BUT THE GROUNDS RELAT ING TO THAT ISSUE WAS NOT PRESSED AND THE DEPARTMENT ALSO DID NOT FILE AN Y CROSS APPEAL OR CROSS OBJECTION ON THESE ISSUES IN THE ITAT. REFERENC E WAS MADE TO PAGES 766-929 OF THE PAPER BOOK-VI. IT WAS SUBMITTED T HAT ACCORDING TO LD. DIT AS ARTICLE 7(3) OF THE TREATY WAS INVOKED BY THE ASSESSING OFFICER, HE SHOULD HAVE ALLOWED A DEDUCTION FROM GRO SS RECEIPTS ONLY THOSE EXPENSES ON WHICH THE TAX WAS DEDUCTED AT SOURCE, THE BALANCE AMOUNT SHOULD HAVE BEEN ASSESSED AS INCOME. THE ACTION OF THE ASSESSING OFFICER IN ESTIMATING TAXABLE INCOME @ 10% OF THE BALANCE WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE R EVENUE. HE SUBMITTED THAT FROM THESE OBSERVATIONS OF LD. DIT, THE FOLLOWING QUESTION AROSE FROM THE ORDER OF THE ASSESSING OFFICER:- I) WHETHER THE ASSESSING OFFICER IS JUSTIFIED IN REJEC TING THE CLAIM OF LOSS MADE BY THE ASSESSEE? II) WHETHER .THE ASSESSING OFFICER IS JUSTIFIED IN REJ ECTING THE ACCOUNTS ON THE GROUND THAT BOOKS OF A/C AND VOUCHERS I N ORIGINAL HAVE NOT BEEN PRODUCED? III) WHETHER, THE ASSESSING OFFICER COULD MAKE A BEST JUDGMENT U/S 145(3) READ WITH SECTION 144 OF THE ACT IN TERMS OF ARTIC LE 7 OF THE INDO-KOREAN DTAA. ITA NOS.2086 & 2087/DEL/2009 35 IV) WHETHER .THE ASSESSING OFFICER WAS JUSTIFIED IN ES TIMATING PROFIT BY APPLYING RATE OF 10%ON GROSS RECEIPTS AFTER REDUCIN G BY THE ACCOUNT OF PAID TO SUBCONTRACTORS ETC. ON WHICH TAX WAS DEDUCTED AT SOURCE? 44. IT WAS SUBMITTED THAT IN A CASE WHERE ASSESSMENT HAS BE EN MADE AFTER CONDUCTING PROPER INQUIRY AND DUE APPLIC ATION OF MIND, THE ONUS WILL BE ON THE DIT TO SPECIFICALLY ESTABLISH THAT THE ORDER OF THE ASSESSING OFFICER IS CONTRARY TO ANY STATUTORY PROVISION O R JUDGEMENT (S) OF JURISDICTIONAL HIGH COURT OR OF APEX COURT. O NLY THEN IT CAN BE HELD THAT THE ORDER IS ERRONEOUS IN LAW. SIMILARLY, IN ORDER TO ESTABLISH THAT THE ASSESSMENT ORDER IS PREJUDICIAL TO THE INTEREST OF REVENUE, IT MUST BE SHOWN THAT ASSESSMENT ORDER HAS RESULTED IN LOSS OF R EVENUE. HE SUBMITTED THAT IT WILL BE SHOWN THAT LD. DIT HAS NO T BEEN ABLE TO SATISFY EITHER OF THE TWO CONDITIONS LAID DOWN IN SECTI ON 263 OF THE ACT. AT THE OUTSET, HE SUBMITTED THAT THE ENTIRE ASSESSMENT HA S BEEN SET ASIDE BY LD. DIT. HE SUBMITTED THAT THERE IS NO WHISPE R OF ANY ERROR COMMITTED BY THE ASSESSING OFFICER IN REGARD TO TAX TRE ATMENT OF INCOME FROM PROJECT FOR HAL AND INTEREST INCOME AND, THEREFORE, TO THAT EXTENT THE ASSESSMENT ORDER WAS NEITHER ERRONEOUS NOR PRE JUDICIAL TO THE INTEREST OF REVENUE AND INVOCATION OF POWER U/S 2 63 WITH REGARD TO WHOLE ASSESSMENT WAS BAD IN LAW ACCORDING TO THE FOLLOWI NG DECISIONS:- I) STAR DRUGS & RESEARCH LTD. (2010) 42 DTR 343 (CHEN AI) (TM) II) KWAL PRO EXPORTS VS. ACIT 297 ITR (AT) 49 (JODHP UR) III) COLORCRAFT VS. ITO 303 ITR (AT) 07 (MUMBAI) IV) SICAL LOGISTICS 34 DTR 350 (CHENNAI) (TM) V) CIT VS. KABRA (GK) 211 ITR 336 (AP) VI) KARTAR SINGH VS. RAMESHWARI KELA (COPY OF DECISI ON PLACED AT PAGE 426-429 DPB III) 45. HE SUBMITTED THAT AS PER PRACTICE FOLLOWED BY THE DEPARTMENT IN PAST YEARS, FOR THIS YEAR ALSO THE ASSESSING OFFICER HAS REJ ECTED THE ACCOUNTS REGARDING INSIDE INDIA OPERATION OF THE ASSESSEE AND HAS MADE BEST JUDGEMENT ASSESSMENT U/S 145(3) READ WITH SECTI ON 144 OF THE ACT AND SUCH ACTION OF THE ASSESSING OFFICER HAS BEEN UPHELD BY ITA NOS.2086 & 2087/DEL/2009 36 THE APPELLATE AUTHORITIES RIGHT UPTO THE APEX COURT. LD. DIT ALSO DOES NOT COMMENT ADVERSELY ON SUCH ACTION OF THE ASSESSING OFF ICER AND HAS, IN FACT, APPROVED HIS ACTION OF REJECTION OF BOO KS OF ACCOUNT AND APPLICABILITY OF PROVISIONS OF SECTION 145 (3). LD. DIT DID NOT CONSIDER THE ORDERS OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSME NT YEAR 1990-91, 1991-92, 1996-97 AND ASSESSMENT YEAR 1993-94 A ND THESE ORDERS WERE PASSED BY THE TRIBUNAL AFTER THE ASSESSMENT FO R THE YEAR UNDER CONSIDERATION AND THESE ORDERS WERE AVAILABLE TO DIT AT THE TIME OF PASSING THE IMPUGNED ORDER U/S 263. THE DIT ALSO DI D NOT CONSIDER THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT IN ASSE SSEES OWN CASE WHICH WAS SPECIFICALLY BROUGHT TO HIS NOTICE AND, ON T HE OTHER HAND, THE ASSESSING OFFICER HAS DULY TAKEN NOTE OF THE SAID JUDGEME NT IN THE OFFICE NOTE. LD. DIT ALSO DID NOT CONSIDER THE DECISI ONS OF CIT (A) AND THEIR ACCEPTANCE BY THE DEPARTMENT IN EARLIER YEARS RIGHT UPTO ASSESSMENT YEAR 2004-05. HE SUBMITTED THAT OFFICE NOTE NO.I CLEARLY DEMONSTRATE THAT THE MODUS ADOPTED BY THE ASSESSING OFFIC ER FOR ASSESSMENT OF INSIDE INDIA OPERATIONS AND WHICH READ AS UN DER:- 1. ASSESSMENT HAS BEEN COMPLETED AS PER ARTICLE 7 OF DTAA WITH KOREA ESTIMATING THE PROFIT RATE AT 10% ON THE TOTAL REVENUES RELATING TO INSIDE INDIA ACTIVITIES AS REDUCED BY EXPENSES VERIFIABLE FROM ANNUAL RETURNS OF TDS. THI S IS IN LINE WITH THE STAND TAKEN BY THE DEPARTMENT IN PRECEDING A. YEA RS AS PROVIDED IN PARA 5 OF ARTICLE 7 OF DTAA. 46. HE SUBMITTED THAT DIT DID NOT COMMENT WHETHER AD VERSELY OR OTHERWISE IN RESPECT OF REASONING GIVEN BY THE DEPARTM ENT IN SUO MOTO OFFERING THE FORMULA FOR COMPUTING THE INCOME IN RE SPECT OF OPERATIONS INSIDE INDIA VIDE LETTER DATED 21 ST FEBRUARY, 1995 IN RESPECT OF ASSESSMENT PROCEEDINGS FOR ASSESSMENT YEARS 1993-94 AND 1994- 95. IT WAS SPECIFICALLY BROUGHT TO HIS NOTICE AS ADMITTED B Y HIM AT PAGE 10 OF THE IMPUGNED ORDER. THE COPY OF SUCH LETTER IS PL ACED AT PAGE 306 OF PAPER BOOK III WHICH IS A LETTER ISSUED BY THE ASSESSIN G OFFICER OF THE ITA NOS.2086 & 2087/DEL/2009 37 ASSESSEE AND IT IS DATED 21 ST FEBRUARY, 1995. THE TEXT OF THE SAID LETTER IS AS UNDER:- PLEASE REFER TO THE DISCUSSION IN REGARD TO THE ABOVE ASST. YEARS. UNDER THE DTAA YOUR REPRESENTATIVES SHRI D. SH AH, FCA, AND MR. I.H. GIM, G.M. (F&A) APPEARED AND STATED THAT TH EY ARE FILING REVISED RETURNS FOR THE INSIDE INDIA PORTION, C LAIMING THE SUBCONTRACT COST AS EXPENSES UNDER THE MAIN CONTRACT WITH ONGC. SO, IT WAS AGREED THAT THE SUB-CONTRACT COST AS AFO RESAID WILL BE CONSIDERED AGAINST THE INSIDE INDIA PORTION, S UBJECT TO TAX DEDUCTION THEREON U/S 195/197, AND ALLOW THE TAXING OF THE BALANCE AT 10% DEEMED PROFIT RATE TO AVOID DOUBLE TAXING OF THE SAME AMOUNT IN YOUR HAND AND THE HANDS OF THE SUBCONTRA CTOR UNDER ART.7 OF THE CONVENTION. THE APPLICABILITY OF THE SAID ARRANGEMENT IS BEING ACCEPTED BY YOUR REPRESENTATIVE AN D ACCORDINGLY YOU ARE CONTEMPLATING TO REVISE THE RETURNS FOR THE ABOVE ASSESSMENT YEAR. AS REGARD THE OUTSIDE INDIA WO RK WE CANNOT ACCEPT YOUR STAND. YOU ARE REQUESTED TO FILE FUR THER DETAILS IN A FORTNIGHTS TIME TO COMPLETE THE ASSESSMENT. DATE OF HEARING 14.3.95. 47. IT WAS SUBMITTED THAT SUB-CONTRACTORS (PRIMARILY, N ON-RESIDENT COMPANIES) WERE ENGAGED ONLY FOR CARRYING OUT SURVEY, ETC. AND FOR LEASING OF DREDGER AND OTHER SPECIALIZED VESSELS FOR MAR INE SPREAD. ON THE OTHER HAND, THE MAJOR PORTION OF EXPENDITURE IN CURRED IN INDIA WAS ON PURCHASE OF MATERIAL INCLUDING CONSUMABLES FOR INSTA LLING THE WORKS AT THE SITE. SUCH FACT HAS BEEN DULY RECOGNIZED BY T HE DEPARTMENT AND, THEREFORE, THE FORMULA DEVISED BY THE DEPARTMEN T IS IN ORDER TO ENSURE THAT THE INCOME WOULD ALWAYS BE TAXABLE. REFE RENCE IN THIS REGARD WAS MADE TO PARA 3 AND PARA 5 OF THE IMPUGNED ASSESSMENT ORDER. IT WAS SUBMITTED THAT A CONSCIOUS DECISION HAS B EEN TAKEN BY THE DEPARTMENT RIGHT UPTO ASSESSMENT YEAR 2004-05 AND O N THIS ISSUE ASSESSEES APPEAL WERE ALSO DISMISSED BY THE CIT (A). IT W AS SUBMITTED THAT EVEN PRESENTLY, THE DEPARTMENTS STAND R EMAINS UNCHANGED AND THE FORMULA HAS BEEN APPLIED ONLY BY E STIMATING VARYING PERCENTAGE OF BALANCE EXPENDITURE ARRIVED A T AFTER ALLOWING PAYMENT TO SUB-CONTRACTORS, ETC., SUBJECT TO TDS. HE SUBMITTED THAT LD. DIT HAS ALSO IGNORED THE ORDERS OF ITAT FOR ASSESSMENT YEA R 1987-88 ITA NOS.2086 & 2087/DEL/2009 38 AND 1988-89 WHICH WAS CONFIRMED BY THE HONBLE APEX COURT HOLDING THAT EVEN UNDER ARTICLE 7(3) THE ASSESSING OFFICER AFTE R REJECTING THE ACCOUNTS HAD RIGHTLY MADE BEST JUDGEMENT ASSESSMENT AS PER SECTION 145 (3) OF THE ACT. IT WAS SUBMITTED THAT NEITHER IN THE SHOW CAUSE NOTICE NOR IN THE IMPUGNED ORDER IT HAS BEEN HELD BY LD. DIT THAT THE COMPUTATION OF INCOME FROM OPERATIONS INSIDE INDIA AR E ERRONEOUS NOT ON THE GROUND OF APPLICABILITY OF SECTION 44BB. HE SU BMITTED THAT IT IS THE MISTAKEN ALLEGATION OF LD. DIT THAT THE ASSESSING OF FICER HAD ALREADY DETERMINED TAXABLE INCOME AFTER REDUCING GR OSS RECEIPTS BY THE AMOUNT OF PAYMENT TO SUB-CONTRACTORS, ETC. ON WHI CH TAX WAS DEDUCTED AT SOURCE AND THE ASSESSING OFFICER SHOULD NOT H AVE FURTHER ESTIMATED TAXABLE INCOME @ 10% OF THE BALANCE RECEIP TS. HE SUBMITTED THAT IF SUCH VIEW OF THE LD. DIT IS ADOPTED, THEN IT WOULD RESULT IN ASSESSABLE INCOME @ 70% OF THE GROSS RECEIPTS AS I NCOME FROM OPERATIONS INSIDE INDIA. LD. DIT HAS FINALLY GIV EN UP SUCH STAND TAKEN IN THE SHOW CAUSE NOTICE. HE HIMSELF COULD NOT COME TO ANY CONCLUSION IN REGARD TO MODE OF COMPUTATION OF INCOM E FROM OPERATION FROM INSIDE INDIA. HE HAS SIMPLY SET ASIDE THE ASSESSMENT W ITHOUT GIVING ANY DIRECTION IN THIS REGARD AND LEFT IT TO T HE ASSESSING OFFICER TO MAKE THE FRESH ASSESSMENT IN ACCORDANCE WITH THE LAW W ITHOUT INDICATING AS TO WHICH AND AS TO WHAT LAW HE DESIRES TH E ASSESSING OFFICER TO APPLY. HE SUBMITTED THAT, THEREFORE, THE ORDER PASSED BY THE LD. DIT IS ILLEGAL IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GABRIEL INDIA LTD. 203 ITR 108. HE SUBMITTED THAT THE ALLEGATIONS LEVELLED BY LD. DIT PARA-WISE ARE DE ALT WITH AS FOLLOWS:- ALLEGATIONS AS PER PARA 7.1 OF THE IMPUGNED ORDER:- I) IT IS UNDISPUTED FACT THAT THE ASSESSEE HAS OPTED FOR TA XATION AS PER THE PROVISIONS OF INDO-KOREAN TREATY. THE INCO ME THEREFORE, HAS TO BE DETERMINED IN ACCORDANCE WITH ARTIC LE 7(3) OF THE TREATY. II) THEREFORE, THE AO WAS NOT REQUIRED TO ALLOW EXPENS ES AS PER THE PROVISION OF THE ACT. ITA NOS.2086 & 2087/DEL/2009 39 III) THE AO DEDUCTED EXPENSES FROM THE GROSS RECEIPTS AND DEEMED INCOME @ 10% OF THE BALANCE. IV) THIS IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST O F INCOME. OUR COMMENTS : :: : IT IS SETTLED LAW THAT ONCE THE AO REJECTS THE ACCOUNTS U/S 145(3) OF THE ACT HE CAN ONLY MAKE BEST JUDGMENT ASSESSMENT ON A REASONABLE BASIS KEEPING IN VIEW THE PAST HISTORY OF TH E CASE AND OTHER SURROUNDING CIRCUMSTANCES. IT IS ALSO SETTLED LAW THAT IN MAKING AN ESTIMATE OF INCOME IN A BEST JUDGMENT ASSESSMENT, THE ALLOWANCE OR DISALLOWANCE OF EXPENSES U/S 28 TO 40 OF THE ACT LOSE RELEVANCE. FURTHER, THERE IS NO FOR MULA PRESCRIBED IN LAW FOR MAKING A BEST JUDGMENT ESTIMATE O F INCOME. IT IS ALSO SETTLED LAW THAT THE PROVISIONS OF A TAX TREATY MUST BE CONSTRUED LIBERALLY AND NOT LITERALLY. DETAILED LEGAL SUBMISSIONS IN THIS REGARD ARE MADE IN PARAGRAPHS 16 -30 (INFRA). 17. PARA 7.2 OF THE ORDER ALLEGATION : - THE AO HAS ONLY MENTIONED THAT EXPENSES OF RS. 167.83 CRORE HAVE BEEN INCURRED IN INDIA FOR EARNING INSIDE INDI A REVENUE AND VERIFICATION WAS MADE FROM TDS FORMS AND NOT FROM BUS INESS PURPOSE POINT OF VIEW. OUR COMMENTS : - THIS ALLEGATION HAS BEEN MADE WITHOUT GIVING THE ASSESS EE ANY OPPORTUNITY AND WITHOUT REFERENCE TO ASSESSMENT RECORDS. THIS ALLEGATION ALSO CONTRADICTS THE SHOW CAUSE NOTICE WHEREI N THE DIT HIMSELF CATEGORICALLY STATES THAT THE AO SHOULD HAVE ALLOWED ONLY SUCH PAYMENTS TO THE SUB-CONTRACTOR ON WHICH TAX WAS DEDUCTED AT SOURCE AND IMPOSED TAX ON BALANCE AMOUNT OF REVENUE FROM OPERATIONS INSIDE INDIA. THIS ALLEGATIO N IS FACTUALLY INCORRECT. THE AO ALSO CALLED FOR AND EXAMINED ALL THE INVOICES RAISED BY THE ASSESSEE ON THE ONGC & RELEASE OF PAYMENT OF ONGC AFTER DULY VERIFYING ACHIEVEMENT CERTIFICATES ISSUED BY ITS TE CHNICAL CONSULTANTS. (PG. 208-210 & PG. 217-19 OF THE VOL. II ) THE LD. DIT HAS CHOSEN TO IGNORE THE VOLUMINOUS INFOR MATION FURNISHED WITH THE AO STARTING PAGE 8 TO 163/VOL. I 20 05-06. THESE COMPRISE NOTES TO RETURN OF INCOME, COMPUTATION OF INCOME, AUDITED STATEMENT OF OPERATIONS GIVING DETAILED I TEMS OF EXPENDITURE ON MATERIAL, LABOUR, CONSUMABLES, DEPRECI ATION AND MISCELLANEOUS EXPENSES FOR EACH PROJECT SEPARATELY. THE ASSESSEE ALSO SEPARATELY FURNISHED EACH AND EVERY IN VOICE RAISED ON ONGC (VIDE SUBMISSION DT. 11.12.2006 AT PAG ES ITA NOS.2086 & 2087/DEL/2009 40 223/PB VOL. II). IT IS THUS MOST UNFAIR ON THE PART OF THE DIT TO ALLEGE THAT THE AO DID NOT EXAMINE THE EXPENSES INCURRED FOR THE PURPOSE OF THE PROJECTS. DIT SEEMS TO BE UNAWARE THAT AS PER THE TERMS OF THE CONTR ACT, THE ONGC WILL APPOINT HIGHLY QUALIFIED CONSULTANTS TO CA RRY OUT REAL-TIME INSPECTION AT SITE AND PAYMENTS WOULD BE RELEA SED ONLY AFTER RECEIVING THE SATISFACTORY COMPLETION CERTIFIC ATE FROM THEM. (PLEASE SEE CLAUSE 5.5 READ WITH CLAUSE 5.10 O F THE CONTRACTS WITH ONGC). THE LD. DIT HAS CHOSEN TO IGNORE THE VOLUMINOUS INFO RMATION FURNISHED WITH THE A.O. STARTING PAGE 8 TO 163/VOL.I 2 005-06. THESE COMPRISE NOTES TO RETURN OF INCOME, COMPUTATION OF INCOME, AUDITED STATEMENT OF OPERATIONS GIVING DETAILED I TEMS OF EXPENDITURE ON MATERIAL, LABOUR, CONSUMABLES, DEPRECI ATION AND MISCELLANEOUS EXPENSES FOR EACH PROJECT SEPARATELY. THE ASSESSEE ALSO SEPARATELY FURNISHED EACH AND EVERY IN VOICE RAISED ON ONGC (VIDE SUBMISSIONS DT. 11.12.2006 AT PA GES 223/PAPER-BOOK VOL.II) IT IS THUS MOST UNFAIR ON THE P ART OF THE DIT TO ALLEGE THAT THE A.O. DID NOT EXAMINE THE EXPENSES INCURRED FOR THE PURPOSE OF THE PROJECTS. DIT SEEMS TO BE UNAWARE THAT AS PER THE TERMS OF THE CONTR ACT, THE ONGC WILL APPOINT HIGHLY QUALIFIED CONSULTANTS TO CA RRY OUT REAL-TIME INSPECTION AT SITE AND PAYMENTS WOULD BE RELEA SED ONLY AFTER RECEIVING THE SATISFACTORY COMPLETION CERTIFICATE FR OM THEM (PLEASE SEE CLAUSE 5.5 READ WITH CLAUSE 5.10 OF THE C ONTRACTS WITH ONGC). 18. PARA 7.3 OF THE ORDER ALLEGATION OF THE DIT :- THE A.O. IN THE ORDER HAS MENTIONED THAT AN AMOUNT OF RS.129,45,194,688/- IS RECEIVED BY THE ASSESSEE AS R EVENUES FOR OUTSIDE INDIA OPERATION. THIS IS WITH REGARD TO THE PRO JECTS WITH MHB, MSP, MUT AND GMR (O&M) AND WITH REGARD TO THESE P ROJECTS THE ASSESSEE HAS ALSO RECEIVED REVENUES FROM INSIDE INDIA OPERATIONS. I) THE CONTRACTS ARE COMPOSITE CONTRACTS FOR THE WORK TO B E PERFORMED IN INDIA AND OUTSIDE INDIA. II) THE A.O. HAS NOT ENQUIRED INTO THE NATURE AND SCOPE OF THE CONTRACTS. III) THE A.O. HAS NOT ENQUIRED INTO THE REASON FOR REV ENUES FOR OUTSIDE INDIA OPERATIONS . IV) THE A.O. HAS NOT ENQUIRED INTO THE NATURE OF OUTSIDE INDIA OPERATIONS, THE DURATION OF THE PROJECTS IN INDIA. ITA NOS.2086 & 2087/DEL/2009 41 V) THE A.O. HAS NOT ENQUIRED INTO THE ROLE OF MUMBAI O FFICE OF THE COMPANY IN SUBMITTING THE TENDERS, NEGOTIATION OF THE CONTR ACTS. VI) THE A.O. HAS NOT ENQUIRED INTO THE SUBSEQUENT ROLE OF THE PE AN MUMBAI OFFICE IN EARNING THE REVENUES FROM THE ALL EGED OUTSIDE INDIA OPERATIONS. VII) THE A.O. HAS NOT GATHERED THE FACTS AT ALL BEFORE P ASSING THE ORDER. VIII) THE A.O. HAS ALSO NOT ENQUIRED INTO THE APPLICAB ILITY OF THE DECISION OF THE HONBLE APEX COURT IN THE ASSESSEES OWN CASE, REPORTED IN 291 ITR 482 FOR THE YEAR UNDER CONSIDERATI ON. IX) DUE TO THESE FACTS AND POSITION OF LAW, THE ORDER PA SSED BY THE A.O. BY NOT EXISTING THE INCOME ON ACCOUNT OF REVENUES OF RS.129,45,194,688/- IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. OUR COMMENTS :- ALL THE ALLEGATIONS CONTAINED IN THIS SUB PARA OF THE IM PUGNED ORDER HAVE BEEN MADE BY THE DIT SUO MOTU FOR THE FIRST TIME AND WITHOUT GIVING ANY NOTICE OR OPPORTUNITY OF ANY KIND TO TH E ASSESSEE. FOR THIS REASON ALONE, THESE ALLEGATIONS NEED TO BE REJECTED. SINCE THE ORDER TO SET-ASIDE THE ASSESSMENT H AS BEEN MADE ONLY ON THE BASIS OF THESE ALLEGATIONS, THE IMPUG NED ORDER SHOULD BE STRUCK DOWN. HOWEVER, TO SET THE RECORD STRAI GHT, IT IS SUBMITTED THAT THESE ALLEGATIONS ARE NOT ONLY NOT BORNE OUT FROM THE RECORD, BUT THESE ARE ALSO CONTRADICTED BY THE MATERIA L AVAILABLE ON RECORD. THE CHART BELOW EXPLAINS THE CO RRECT POSITION:- THE ALLEGATIONS OF THE DIT THE ALLEGATIONS OF THE DIT THE ALLEGATIONS OF THE DIT THE ALLEGATIONS OF THE DIT OUR COMMENTS OUR COMMENTS OUR COMMENTS OUR COMMENTS 1) THE CONTRACT IS COMPOSITE CONTRACT AND THEREFORE THE A.O. SHOULD HAVE CONSIDERED REVENUES OF RS.129 CRORES FROM OUTSIDE INDIA OPERATIONS. THIS OBSERVATION IS CONTRARY TO THE DECISIONS OF THE ITAT, UTTARANCHAL HIGH COURT AND THE SUPREME COURT, WHICH WERE PART OF THE RECORD AND WERE AVAILABLE WITH THE DIT. 2) THE A.O. HAS NOT ENQUIRED INTO:- A) THE CONTACT A) IT IS APPARENT THAT THE LD. DIT HAS NOT LOOKED INTO THE MATERIAL AVAILABLE ON RECORD. ON 31.8.2006 THE ASSESSEE PRODUCED COPY OF ALL THE CONTRACTS FOR EXAMINATION OF THE A.O. IT ALSO FURNISHED PROJECT- WISE STATEMENT OF OPERATIONS, AND THE A.O. CONSIDERED THE SCOPE OF WORK AND TERMS OF THE CONTRACT (PG.208-210 OF VOL.II P.B) THEREAFTER, ON 15.9.2006, THE A.O. ONCE AGAIN FURNISHED PROJECT-WISE DETAILS AND REVENUES AND PRODUCED COPY OF ITA NOS.2086 & 2087/DEL/2009 42 CONTRACT (PG.215-219 OF VOL.II P.B.). ON 8.12.2006, AS REQUIRED BY THE A.O, THE ASSESSEE FILED BULKY COPIES OF FOUR CONTRACTS AND ALL INVOICES RAISED ON ONGC FOR ALL OPERATIONS UNDER THE CONTRACTS (BOTH OUTSIDE AND INSIDE INDIA). B) NATURE OF OUTSIDE OPERATIONS B) PARAGRAPH 2 OF THE OFFICE NOTE OF THE A.O. WHICH IS PART OF THE RECORD CLEARLY CONTRADICTS THIS ALLEGATION (PG.7/VOL.1 P.B.). FOLLOWING THE JURISDICTIONAL HIGH COURT DECISION, THE A.O. DID NOT TAX THE INCOME FROM OUTSIDE INDIA OPERATIONS THOUGH GIVING ITS BREAKUP PROJECT-WISE AND FURTHER NOTING AND THE A.O. ALSO RECORDED THE NOTE THAT IN CASE THE SUPREME COURT OVERRULES THE HIGH COURT ORDER, APPROPRIATE ACTION U/S 147 WOULD BE TAKEN. C) DURATION OF PROJECTS C) ALL THE THREE ONGC PROJ ECTS (MHB, MSP & MUT) AND THE GMR PROJECT WEE ADMITTEDLY FOR A DURATION OF MORE 9 MONTHS AND, THEREFORE, CONSTITUTED INSTALLATION PE IN TERMS OF THE ARTICLE 5 (3) OF THE TREATY FOR WHICH INCOME WAS ASSESSED BY THE A.O. AS INCOME FROM OPERATIONS OF THE INSTALLATION PE INSIDE INDIA. FURTHER, THE A.O. HAD SPECIFICALLY CALLED FOR THE CONTRACTS FOR EXAMINATION WHICH CLEARLY GIVE THE DURATION OF THE PROJECT (FOR INSTANCE, P.167-170 OF MUT CONTRACT). D) ROLE OF MUMBAI OFFICE D) THIS ISSUE WAS SQUARELY COVERED BY THE DECISION OF THE ITAT, UTTARANCHAL HIGH COURT & THE SUPREME COURT AGAINST THE DEPARTMENT. THIS ASPECT WAS CONSIDERED AND ASSESSEES EXPLANATION WAS ACCEPTED AND HAS ALSO BEEN REFERRED TO IN THE OFFICE NOTE. (PG.210 VOL.II P.B.) E) SUBSEQUENT ROLE OF PE IN MUMBAI OFFICE FOR OUTSIDE OPERATIONS. E) THE PERUSAL OF THE CONTRACTS SHOWS THAT THE PROJECT OFFICE WAS PART OF INSTALLATION PE. FURTHER, ITS AUXILIARY AND SUPPORTING ROLE IS CLEARLY BROUGHT OUT IN CL.5.3.11 OF THE CONTRACTS WITH ONGC WHICH WERE DULY EXAMINED BY THE A.O. (PG.251 VOL.PB). ITA NOS.2086 & 2087/DEL/2009 43 F) THE A.O. HAS NOT GATHERED FACTS AT ALL BEFORE PASSING THE ORDER. F) THIS IS A SERIOUS ALLEGATION AND IT IS FALSE IN FACE OF THE MATERIAL ON RECORD, WHICH THE DIT HAS OBVIOUSLY NOT LOOKED INTO. THE ALLEGATION IS BASELESS UNSUBSTANTIATED AND VAGUE. G) THE A.O. HAS NOT CONSIDERED SUPREME COURT JUDGMENT IN 29 ITR 482. G) THIS ALLEGATION IS ABSURD IN VIEW OF THE FACT THAT THE SUPREME COURT PRONOUNCED THE JUDGMENT ON 18.5.2007, WHEREAS THE ASSESSMENT ORDER WAS PASSED ON 9.3.2007 (MORE THAN 2 MONTHS EARLIER). ON THE OTHER HAND, IT IS THE DIT WHO HAS IGNORED THE APEX COURT DECISION. 19. SUMMARY OF MATERIAL WHICH IS ON RECORD AND WH ICH WAS SUMMARY OF MATERIAL WHICH IS ON RECORD AND WHICH WA S SUMMARY OF MATERIAL WHICH IS ON RECORD AND WHICH WA S SUMMARY OF MATERIAL WHICH IS ON RECORD AND WHICH WA S EXAMINED BY THE A.O. IS GIVEN BELOW: EXAMINED BY THE A.O. IS GIVEN BELOW: EXAMINED BY THE A.O. IS GIVEN BELOW: EXAMINED BY THE A.O. IS GIVEN BELOW:- -- - (PGS 25-257/VOL.I & VOL.II). RETURN OF INCOME ACCOMPANIED PROJECT-WISE AND DULY A UDITED STATEMENT OF OPERATIONS FILED ALONG WITH FORM 3CB AND FO RM 3CD. P.200/VOL.II ORDER SHEET ENTRIES DT.14.12.06 P.201/II 10-1-07, 20.2.07 P.205 A.O. SEEKS JUSTIFICATION OF EXPENSES AND RAISES VARIOUS QUERIES VIDE LETTER DT. 21.8.06. P.208 ASSESSEES REPLY DT. 31.8.06 FURNISHES & EXPLAINS: 1) COPIES OF CONTRACTS 2) PROJECT WISE STATEMENT OF OPERATIONS P.209 3) DETAILS OF EXPENDITURE 4) OUTSIDE REVENUE WHY NOT TAXABLE JUSTIFICATION. P-210 5) SCOPE OF WORK TERMS OF CONTRACT 6) MILESTONE PAYMENTS 7) ALL COMMUNICATIONS WITH ONGC FROM BIDDING STAGE & THEREAFTER ALWAYS WITH HEAD OFFICE IN KOREA. 8) THAT THERE WAS NO CHANGE IN FACTS AND IN TERMS OF ONGC CONTRA CTS AND THE DECISION OF CIT (A) FOR A.Y. 1992- 93 DELETING OUTSIDE INDIA REVENUES WAS ACCEPTED BY THE DEPARTMENT AND NO APPEAL WAS FILED IN THE TRIBUNAL. 9) KOREAN TAX CERTIFICATE REFERENCE TO 10) UTTARANCHAL HIGH COURT DECISION FOR A.Y. 1986- 87 TO 1988- 89 ALREADY AVAILABLE WITH A.O. AT THAT TIME AND SUBSEQUENTLY REPORTED IN 291 ITR 450. 11) TRIBUNAL JUDGEMENT FOR A.Y. 1986-87 TO 88-89 12) REF. CIT (A) ORDERS FOR 2004-05- 06 DELETING ATTRIBUTION OF OUTSIDE OPERATIONS. 13) SEC.44BB DOES NOT PREVAI L OVER ART.7(3) OF THE TREATY. P.214 14) DISTINCT DEMARCATION BETWEEN OPERATIONS OUTSIDE INDIA & OPERATIONS WITHIN INDIA UNDER THE CONTRACTS. P.215 LETTER DATED 15.9.06. P.217-219 PROJECT WISE DETAILS AND REVENUES TOGETHER WITH ITA NOS.2086 & 2087/DEL/2009 44 COPIES OF CONTRACTS. P.220 LETTER DATED 8.12.06 SECTION 90(2) EXPLAINED. P.223 COPIES OF 4 CONTRACTS AND ALL INVOICES RAISED ON ONGC FOR ALL OPERATIONS UNDER THE CONTRACTS (BOTH OUTSIDE AND INSIDE INDIA) TOGETHER WITH ON- SITE SATISFACTORY ACHIEVEMENT CERTIFICATES WHICH THE ASSESSEE MUST OBTAIN FROM THE EXPERTS APPOINTED BY ONGC FOR SUPERVISING REAL-TIME ALL WORKS UNDER THE CONTRACTS. P.224-251 COPIES OF INVOICES GIVING PROJECT WISE & MILESTONE-WISE. P.252 LETTER DT.14.12.2006 W.R.T. APPLICABILITY OF ART. 5 (3) OF THE TREATY BASED ON TRIBUNAL DECISIONS. P.254 LETTER DT. 1.3.2007 CITING UTTARANCHAL HIGH COURT JUDGMENT IN THE ASSESSEES OWN CASE P.255-256 LETTER DATED 1.3.2007 (2 ND LETTER) ON TAXABILITY OF INSIDE INDIA ACTIVITIES UNDER PROVISIONS OF THE TREATY OF P.255-56 VERIFIES THAT FACTS & CONTRACTS ARE SAME AND WITH SIMILAR TERMS. IN VIEW OF THE FACTUAL POSITION STATED ABOVE, IT IS OBVIO US THAT THE DIT HAS MADE THE ALLEGATIONS WITHOUT REFERRING TO MATERIA L ON RECORD INCLUDING OFFICE NOTE AVAILABLE TO HIM AT THE TIME OF PASSING THE IMPUGNED ORDER. AS HELD BY PUNJAB & HARYANA HIGH COURT IN HARI IRON TRADING CO. (263 ITR 437) THE EXPRESSION RECORD HAS BEEN DEFINED IN CLAUSE (B) OF THE EXPLANATION SO AS TO INCLUDE ALL RECORDS RELATING TO AN Y PROCEEDINGS AVAILABLE AT THE TIME OF EXAMINATION BY THE COMMISSIONER. IT IS NOT ONLY THE ASSESSMENT ORDER BUT TH E ENTIRE RECORD WHICH HAS TO BE EXAMINED BEFORE ARRIVING AT A CONCLUSION AS TO WHETHER THE ASSESSING OFFICER HAD EXAMINED ANY I SSUE OR NOT. (EMPHASIS SUPPLIED). SIMILAR VIEW HAS ALSO BEEN TAKEN BY THE HIGH COURT OF ALLAHABAD IN VINOD KUMAR BHATIA (211 ITR 253) AT P.563-566/DPB- IV & J.K. GULATI (269 ITR 71, PG.602/DPB-IV). 20. PARA 7.4 OF THE IMPUGNED ORDER . THE DIT HOLDS THAT ART.7(5) HAS BEEN ERRONEOUSLY APPLI ED BY THE A.O. THIS ISSUE IS DISCUSSED LATER UNDER THE HEAD BEST JUD GEMENT VIS- A-VIS ART.7(3) OF THE TREATY. AT PRESENT, SUFFICE IT TO SA Y THAT STRICTLY LITERAL INTERPRETATION OF THE PROVISIONS OF TAX TRE ATY AS MADE BY THE DIT IS CONTRARY TO SETTLED LAW ON INTERPRETATIO N OF TREATIES. 21. PARA 7.5 OF THE IMPUGNED ORDER :- ITA NOS.2086 & 2087/DEL/2009 45 I) THE DIT REJECTS THE ASSESSEES CONTENTION THAT THE ASSESSMENT ORDER IS NEITHER ERRONEOUS AND NOR PREJUDICIAL TO REVENUE. THE LD. DIT DOES NOT GIVE AN Y REASON OR BASIS FOR HOLDING THAT THE JUDGMENT ESTIMATING INCOME IS NOT SUSTAINABLE IN LAW. II) THE DIT ALSO DOES NOT DEAL WITH THE ALTERNATE SUBMISSION THAT THE INCOME FOR INSIDE INDIA ACTIVITIES CANNOT IN ANY CASE EXCEED THE AMOUNT TAXABLE U/S 44BB OF THE ACT. (REF. PG.173/VOL.I). IT IS SUBMITTED THAT THE VERY BASIS OF DIT HOLDING THE ASS ESSMENT TO BE ERRONEOUS IS NOT THAT THE A.O. DID NOT APPLY PROVIS IONS OF S.44BB OF THE ACT, BUT THAT THE A.O. MISAPPLIED THE PROVIS IONS OF ARTICLE 7(3) READ WITH ART. 7(5) OF THE INDO-KOREAN DTA A. IT IS FOR THIS REASON THAT THE DECISION OF THE TRIBUNAL IN SAIPAM S CASE 27 SOT 531 AT 536, P.436 AT 441/DPB.III) IS DISTINGUISHAB LE. A) THE LAST THREE SENTENCES OF PARA 2 OF ART.7 OF INDO- ITALIAN TREATY ARE NOT APPLICABLE TO THE INDO-KOREAN TREATY AS THE TREATY WITH KOREA DOES NOT CONTAIN ANY SUCH LIMITATION. RELEVANT EXTRACTS OF ART.7 OF THE INDO-ITALIAN AND INDO- KOREAN TREATY ARE PLACED AT PG.962-964/DPB VI AND 181 - 198 RESPECTIVELY. B) THE PROPOSITION LAID DOWN BY THE APEX COURT IN AZAD I BACHAO ANDOLANS CASE THAT THE PROVISIONS OF THE TREATY HAVE TO BE GIVEN A LIBERAL INTERPRETATION AND NOT LITERAL INTERPRETATION, WHICH WAS NOT BROUGHT TO THE NOTICE OF THE BENCH IN SAIPEMS CASE. THUS, ART.7(3) READ WITH ART. 7(5) OF THE INDO-KOREAN TREATY MUST BE CONSTRUED LIBERALLY AN D ON THE LINES SUGGESTED BY PROF. KLAUS VOGEL AND THE OE CD COMMENTARY ON CORRESPONDING ART. 7(4) OF THE OECD MODEL. C) LASTLY, THE JURISDICTIONAL UTTARAKHAND HIGH COURT HAS IN RECENT JUDGMENT IN THE CASE OF ENRON EXPAT SERVICES INC . REPORTED IN 327 ITR 626 HAS HELD THAT ONCE THE ASSESSEE HAS OPTED TO BE ASSESSED UNDER THE DTAA, SEC.44BB WOUL D NOT APPLY TO IT. INDEED THE LD. DIT HAS ALSO NOT INVOKE D SECTION 44BB EITHER IN THE SHOW CAUSE NOTICE OR IN THE IMPUGNED ORDER. IN FACT, THE LD. DIT SPECIFICALLY RE FUSED TO APPLY S.44BB (PARA 15 AT PG.10, SUPRA). III) AS THE REVISED ASSESSMENT BASED ON HIS, OR RATHE R LACK OF ANY DIRECTION REVEALS THAT INCOME FROM OPERATION IN INDIA HAS BEEN ASSESSED AT A FIGURE LESSER THAN THE ORIGINAL ASSESSMENT. THUS, THE ACTION OF THE A.O. WAS NOT EVEN PREJUDICIAL TO REVENUE. D) THE LD. DIT HAS NOT CONSIDERED THE DEPARTMENTS LETTER DT.10.2.1995 ON THE BASIS OF WHICH THE INCOME FROM ITA NOS.2086 & 2087/DEL/2009 46 OPERATIONS INSIDE INDIA HAVE BEEN COMPUTED CONSISTENTLY SINCE A.Y. 1993-94, WHICH HAS ALSO BEEN UPHELD BY TH E CIT (A). WITHOUT POINTING OUT ANY CHANGE IN FACTS OF THE CAS E AND WITHOUT POINTING OUT ANY PROVISION OF LAW OR ANY JUDGMENT OF HIGH COURT OR APEX COURT, THE CIT WAS NOT CORRECT IN HOLDING THE ASSESSMENT MADE BY THE A.O. ERRONEOUS. THIS PROPOSITION IS FULLY SUPPORTED BY A RECENT JUDGMENT OF DELHI HIGH COURT IN ESCORTS LTD. REPORTED IN 51 DTR 321 (P.748/DPB-V). 22. PARA 8 OF THE IMPUGNED ORDER :- THE DIT SETS ASIDE THE ASSESSMENT ORDER SOLELY ON THE TW IN GROUNDS OF NON-APPLICATION OF MIND BY THE A.O. AND AB SENCE OF PROPER ENQUIRY. THE DIT HOLDS THAT THERE IS A CLEAR FAILURE ON THE PAR T OF THE A.O. TO EXAMINE ALL ASPECTS MENTIONED IN THIS ORDER BEFORE P ASSING THE ORDER; ACCORDINGLY, THE SAID ASSESSMENT ORDER IS ERRO NEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF REVENUE. HE NCE, I HEREBY SET ASIDE THE ASSESSMENT ORDER U/S 143(3) FOR A.Y. 200 5-06 AND DIRECT THE A.O. TO PASS FRESH ASSESSMENT IN ACCORDANCE WITH LAW, AFTER GIVING DUE OPPORTUNITIES TO THE ASSESSEE (EMPHASI S SUPPLIED). OUR COMMENTS IT IS SIGNIFICANT TO NOTE THAT THE DIT DOES NOT HOLD THAT THE ORDER IS ERRONEOUS IN LAW OR PREJUDICIAL TO REVENUE IN RESPEC T OF THE INCOME FROM OPERATIONS INSIDE INDIA. HE HOLDS THE AS SESSMENT ORDER TO BE ERRONEOUS SOLELY FOR THE REASON THAT THE ASS ESSMENT ORDER HAS BEEN PASSED WITHOUT APPLICATION OF MIND AND WITHOUT MAKING PROPER ENQUIRY. APART FROM THE FACT THIS ALLEGATION IS FACTUALLY INCORREC T [PARAS 10- 14 (SUPRA)] THE ASSESSMENT HAS NOT BEEN CANCELLED FOR THE REASON GIVEN IN THE SHOW-CAUSE NOTICE. IT IS THE DIT WHO HAS NOT CONSIDERED THE MATERIAL AVAILABLE ON RECORD. A SCRUTIN Y OF THE OBJECTIVE MATERIAL ON RECORD CLEARLY ESTABLISHES APPLI CATION OF MIND AND PROPER ENQUIRY MADE BY THE A.O. HENCE, THE VERY BASIS FOR SETTING ASIDE THE ASSESSMENT IS ILLEGAL AND NON EXI STENT. LEGAL SUBMISSIONS :- 23. THE PRINCIPLES OF LAW GOVERNING THE DITS JURI SDICTION UNDER SECTION 263, IN THE CONTEXT OF FACTS OF THIS CASE, ARE SE T OUT BELOW:- I) THE PROCEEDINGS U/S 263 ARE QUASI-JUDICIAL PROCE EDINGS:- THE CIT MUST RECORD SATISFACTION THAT THE ORDER OF THE A.O. IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE ITA NOS.2086 & 2087/DEL/2009 47 REVENUE. BOTH THE CONDITIONS MUST BE FULFILLED. SUCH A SATISFACTION MUST BE BASED ON OBJECTIVE FACTS OR CORRECT APPLICATION OF LAW AND NOT SURMISE AND SUSPICION. II) IF IT IS ESTABLISHED THAT THE A.O. FULLY APPLIED HIS MIND AND TOOK A LEGALLY POSSIBLE VIEW, THE DIT CANNOT SUBSTITUTE HIS SUPERIOR VIEW AND SET ASIDE THE ASSESSMENT WITHOUT ESTABLISHING THAT THE VIEW TAKEN BY THE A.O. WAS CONTRARY TO STATUTORY PROVISION OR A JUDGMENT OF JURISDICTIONAL HIGH COURT/APEX COURT. III) THE DIT MUST ESTABLISH THE ALLEGATION OF NON-APPLI CATION OF MIND BY THE A.O. OR ABSENCE OF PROPER ENQUIRY FRO M THE MATERIAL AVAILABLE ON RECORDS. IN OTHER WORDS, THE DIT MUST SHOW AS TO HOW THE A.O. ASSUMED FACTS WRONGLY OR APPLIED LAW INCORRECTLY. IV) IF THE DIT ABANDONS THE GROUND ON WHICH NOTICE WAS ISSUED TO THE ASSESSEE AND WITHOUT COMING TO ANY CONCLUSION GIVES AN ADVERSE DIRECTION ON ALTOGETHER DIFFERENT GROUND WITHOUT GIVING THE ASSESSEE A NOTICE. SUCH A DIRECTION CANNOT BE SUSTAINED AS IT WAS MADE IN BREACH OF PRINCIPLE OF NATURAL JUSTICE. V) THAT THE DIT CANNOT TAKE A DECISION ADVERSE TO THE ASSESSEE WITHOUT PUTTING THE ASSESSEE ON NOTICE REGARDING GROUNDS ON WHICH SUCH DECISION IS REACHED . FAILURE TO GRANT PROPER OPPORTUNITY TO THE ASSESSEE VITIATES THE ADVERSE FINDINGS. VI) THE DIT MUST CONSIDER ALL RELEVANT EVIDENCE AND MATERIAL EVIDENCE ON RECORD OR FOUND DURING SUBSEQUE NT ENQUIRY BEFORE CANCELING THE ASSESSMENT. FOR THE PURPOSE OF SECTION 263, RECORD INCLUDES OFFICE NO TE APPENDED TO THE ASSESSMENT ORDER. FAILURE TO CONSIDER THE MATERIAL AVAILABLE ON RECORD WOULD VITIATE THE FINDINGS OF THE DIT. VII) FAILURE ON THE PART OF THE DIT TO CONSIDER OR DISTI NGUISH THE JUDGMENT AS ALSO EARLIER YEARS ASSESSMENTS AND APPELLATE ORDERS IN THE ASSESSEES OWN CASE, WHICH WE RE DULY CONSIDERED BY THE A.O., RENDERS THE ORDER U/S 26 3 ILLEGAL AND VOID. VIII) THE DIT CANNOT SUBSTITUTE HIS OWN OPINION FOR THE OPINION OF THE A.O. THIS IS SPECIALLY SO WHEN THE DI T DOES NOT CITE ANY AUTHORITY OR PROVISION OF LAW IN SUPP ORT OF HIS OPINION, WHEREAS THE A.O. FOLLOWED THE ORDERS OF THE CIT (A) FOR EARLIER YEARS, WHICH HAD BECOME FINA L. IX) IF THE ASSESSMENT ORDER IS PASSED WITHOUT APPLICATIO N OF MIND OR ON WRONG ASSUMPTION OF FACTS OR OF LAW, IT WOU LD NOT BE SUSTAINABLE IN LAW. ON THE OTHER HAND, THE ORDER U/S 263 WOULD BE ILLEGAL IF SUCH AN ALLEGATION IS CONTRADICTED BY THE MATERIAL AVAILABLE ON RECORD. X) THE LD. DIT CANNOT JUSTIFY THE VALIDITY OF ORDER U/S 263 ON A NEW GROUND OR A GROUND/REASON OTHER REASON GIVE N ITA NOS.2086 & 2087/DEL/2009 48 IN THE SHOW CAUSE NOTICE WITHOUT PUTTING THE ASSESSEE ON NOTICE. XI) THE DR OR, WITH RESPECT, EVEN THE HONBLE TRIBUNAL CANNOT UPHOLD THE ORDER U/S 263 ON A GROUND OTHER THAN THAT WHICH FORMED THE BASIS OF THE ORDER PASSED BY THE DIT U/S 263 OF THE ACT. XII) CIT CANNOT TAKE RECOURSE TO REVISIONAL POWERS UND ER SECTION 263 OF A FRESH INFERENCE OF TRANSACTIONS WHICH HAVE BEEN CARRIED ON BY THE ASSESSEE AND ACCEPTED BY THE REVENUE FOR SEVERAL YEARS AND THE A.O. HAS TAKEN THE CONSISTENT VIEW. CIT VS. ESCORTS LTD. 51 DTR 321 (DEL. HIGH COURT) AT PG.748/DPB-V. 48. HE SUBMITTED THAT INTERPRETATION OF ARTICLE 7(3) READ WITH 7(5) OF THE TREATY HAS BEEN LITERALLY ADOPTED BY THE DIT IN SHOW CAUSE NOTICE AND INTERPRETING SO HE HAS ARRIVED AT A CONCLUSION THA T ONLY SUCH EXPENSES ON WHICH TAX WAS DEDUCTED AT SOURCE SHOULD BE A LLOWED AS DEDUCTION FROM INDIAN REVENUE. HOWEVER, IN THE IMP UGNED ORDER HE HAS GIVEN NO SUCH DIRECTION, THEREFORE, THE VERY BASIS ON WHICH DIT INVOKED SECTION 263 IS ERRONEOUS AND HAS CEASED TO EXIST. IT WAS SUBMITTED THAT PROVISIONS OF ARTICLE 7(3) DOES NOT WARR ANT LITERAL INTERPRETATION AND REFERENCE IN THIS REGARD WAS MADE TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF AZADI BACHAO AN DOLAN 263 ITR 706 (SC), THE ADVANCE RULING IN CAL DIVE 315 ITR 34 4 AND THE COMMENTARY OF KLAUS VOGAL. HE SUBMITTED THAT LD. DIT IS NOT RIGHT IN STATING THAT ESTIMATE OF INCOME MADE BY THE ASSESSING OFF ICER IS CONTRARY TO ANY STATUTORY PROVISION OR JUDGEMENT OF J URISDICTIONAL OR APEX COURT AND, THEREFORE, ERRONEOUS IN LAW. HE SUB MITTED THAT AS PER THE DECISION OF HONBLE PUNJAB HIGH COURT IN THE CASE OF VINOD KUMAR BHATIA 211 ITR 253,THE FIGURE OF 10% ON THE B ASIS OF PAYMENTS RECEIVED BY THE ASSESSEE IS NOT ACCORDING TO ANY FORMULA PROVIDED FOR IN LAW. IT WAS A CONVENIENT METHOD OF WORKING OUT T HE PROFIT AND, THUS, IT WAS HELD THAT THE TRIBUNAL WAS CLEARLY RIGHT IN HO LDING THAT THERE WAS NO RIGID FORMULA FOR WORKING OUT THE NET INCOME OF THE ASSESSEE. HE, THEREFORE, SUBMITTED THAT LD. DIT HAS NO POWER TO SAY THAT MODE OF COMPUTATION OF INCOME IS AGAINST RULES AND REGULATION S. HE ITA NOS.2086 & 2087/DEL/2009 49 SUBMITTED THAT THE ASSESSING OFFICER ADOPTED A FORMULA A S PER PAST HISTORY OF THE CASE AND THAT FORMULA WAS ADOPTED FOR T HE FOLLOWING REASONS:- A) IT WOULD ALWAYS RESULT IN POSITIVE INCOME, WHEREAS THAT MAY NOT BE IN THE OTHER MODE OF COMPUTATION AND B) LETTER OF 10.2.95 FROM THE AO THAT SINCE THE SUBCONTRAC TOR PAID FULL AMOUNT OF TAX, THE PROFIT EMBEDDED IN SUCH PAYMENTS WAS ALREADY PASSED ON TO THE SUB-CONTRACTORS. 49. LD. DIT IS NOT PERMITTED TO SUBSTITUTE A DIFFERENT MOTE OF ESTIMATING INCOME BY ADOPTING ALTERNATE ROUTE OF ESTI MATING EXPENSES TO BE ALLOWED AGAINST UNDISPUTED REVENUE FROM OPERATI ONS INSIDE INDIA. AS PER WELL SETTLED LAW, HE CANNOT SUBSTITUTE HIS SUPERIO R OPINION IF THE VIEW TAKEN BY THE ASSESSING OFFICER IS PERMISSIBLE IN LAW. HE SUBMITTED THAT FOR ASSESSMENT YEAR 2005-06 EVEN AS PER RE VISED ASSESSMENT PASSED BY THE ASSESSING OFFICER IN PURSUANCE OF ORD ER U/S 263 HAS RESULTED IN LOWER ASSESSMENT. HE HAS SUMMARIZED TH E POSITION OF THE ORIGINAL ASSESSMENT VIS-A-VIS THE REVISED A SSESSMENT AS UNDER:- (RS. IN CRORES) REVISED ASSTT. IN ORIGINAL ASSTT. PURSUANT TO ORDER U/S 263 GROSS REVENUE 552.28 552.28 LESS : I) EXPENSES SUBJECT TO TDS 167.83 (-)167.83 II) 35% OF MATERIAL COST 360.00 (-)427.83 384.35 III) NET INCOME FROM OPERATIONS INSIDE INDIA 24.35 (10% OF BALANCE)38.44 50. REFERRING TO THE AFOREMENTIONED FACTUAL POSITION , HE SUBMITTED THAT EVEN AFTER DIRECTIONS GIVEN BY LD. DIT, THE ASSESSI NG OFFICER HAS ALLOWED 35% OF THE MATERIAL COST APART FROM THE EXPE NSES SUBJECT TO TDS AND WHICH HAS RESULTED IN LOWER ASSESSMENT THAN THE A SSESSMENT MADE BY THE ASSESSING OFFICER. HE SUBMITTED THAT THE PR OVISIONS OF ITA NOS.2086 & 2087/DEL/2009 50 SECTION 44BB ITSELF COULD NOT EVEN BE APPLIED BY THE ASSESSING OFFICER IN THE REVISED ASSESSMENT WHICH HAS BEEN APPROVED BY DRP AND WHILE ASSESSING THE INCOME OF THE ASSESSEE NO GUIDANCE HAS BEEN TA KEN FROM SECTION 44BB OF THE ACT. HE SUBMITTED THAT CON TRACTORS COST ON WHICH TDS HAS BEEN DEDUCTED, ACCORDING TO DEPARTMENT HAS NO ELEMENT OF PROFIT ATTRIBUTABLE TO THE PAYMENTS MADE TO SUB-CONTRACTORS ON WHICH THE TAX IS DEDUCTED AT SOURCE. HE SUBMITTED THAT ESTIMATE OF ALLOWANCE OF EXPENDITURE ON MATERIAL HAS ALSO TO BE A LLOWED BECAUSE WITHOUT SUBSTANTIAL EXPENDITURE ON PURCHASE AND TRANSPO RT OF MATERIAL AND THE CONSUMABLE CONSTRUCTION, INSTALLATION WORK OF SUCH MAMMOTH CONTRACTS CANNOT BE PERFORMED. HE SUBMITTED THAT THE INVOICES OF LOCAL PURCHASES OF MATERIAL ARE DULY ACCEPTED BY THE ONGC A ND THESE WERE ALREADY PRODUCED BEFORE THE ASSESSING OFFICER DURING TH E COURSE OF ASSESSMENT PROCEEDINGS. THE ESTIMATE OF EXPENDITURE WILL LEAD TO ARBITRARINESS IN MAKING ESTIMATE OF ALLOWANCE OF EXPEN DITURE ON ACCOUNT OF MATERIAL AS IT WILL VARY FROM YEAR TO YEA R WITHOUT ANY BASIS OR REASON FROM 0 TO 55 AND SUCH ESTIMATE WILL BE ARBIT RARY AND ILLEGAL. HE SUBMITTED THAT THE PAYMENTS MADE TO SUB-CONTRACTORS ON WHICH TDS WAS DEDUCTED HAS NO ELEMENT OF PROFIT AND, THEREF ORE, DIT COULD NOT TERM THE ACTION OF THE ASSESSING OFFICER AS ERRONEOU S PARTICULARLY IN VIEW OF THE FACT THAT LD. ASSESSING OFFICER HAS FOLLOWED ARTICLE 7(5) OF THE TREATY READ WITH OECD COMMENTARY WHICH HAS BEEN RELIED UPON BY LD. DIT HIMSELF. HE SUBMITTED THAT IN FACT THERE IS N O PROVISION OF LAW WHICH LAYS DOWN THE MANNER IN WHICH FAIR ESTIMATE OF PROFIT IN A BEST JUDGEMENT ASSESSMENT CAN BE MADE. THEREFORE, ONE METHO D WAS ADOPTED BY THE DEPARTMENT WHICH WAS APPLIED BY THE A SSESSING OFFICER AND THAT CANNOT BE HELD TO BE ERRONEOUS. REFERENCE WAS MADE TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF BRIJ BHUSHAN LAL PARDUMAN KUMAR VS. CIT 115 ITR 524 WHEREIN A QUESTION AROSE BEFORE HONBLE SUPREME COURT THAT WHETHER FLAT NET PROFIT RATE SHOULD BE APPLIED TO GROSS TURNOVER OF THE CONTRACTOR OR TO GRO SS TURNOVER NET OF ITA NOS.2086 & 2087/DEL/2009 51 COST OF MATERIAL SUPPLIED BY THE EMPLOYER. IN ORDER TO DECIDE THE SAID CONTROVERSY, THE HONBLE SUPREME COURT POSED TO ITSELF A QUESTION, WHICH IS THE ACID TEST AND OBSERVATIONS OF THEIR LORDSH IPS WERE AS UNDER:- IT WILL APPEAR CLEAR FROM WHAT HAS BEEN SAID ABOVE TH AT THE AUTHORITY MAKING A BEST JUDGMENT ASSESSMENT MUST MAKE AN HONEST AND FAIR ESTIMATE OF THE INCOME OF THE ASSESSEE A ND THOUGH ARBITRARINESS CANNOT BE AVOIDED IN SUCH ESTIMATE THE SAME MUST NOT BE CAPRICIOUS BUT SHOULD HAVE A REASON-A BLE NEXUS TO THE AVAILABLE MATERIAL AND THE CIRCUMSTANCES OF THE CASE. IT IS WITH REFERENCE TO THESE PRINCIPLES THAT THE Q UESTION RAISED BEFORE US WILL HAVE TO BE CONSIDERED AND LOOK ING AT IT FROM THAT POINT OF VIEW THE REAL QUESTION IS WHETHER THE TURNOVE R REPRESENTED BY THE COST OF THE STORES/MATERIAL SUPPLIED B Y THE M.E.S. DEPARTMENT INVOLVES ANY ELEMENT OF PROFIT HAVING REGARD TO THE TERMS AND CONDITIONS ON WHICH SUCH SUPPLY IS MAD E? IF IT DOES, THEN THE COST OF SUCH STORES/MATERIAL WILL HAVE TO BE TAKEN INTO ACCOUNT, BUT IF IT DOES NOT, SUCH COST WILL HAVE TO B E EXCLUDED . 51. AFTER ANALYZING THE TRANSACTION INVOLVING THE SUP PLY OF MATERIAL BY THE EMPLOYER, IT WAS HELD BY HONBLE SUPREME COUR T AS UNDER:- THEREFORE, SINCE NO ELEMENT OF PROFIT WAS INVOLVED I N THE TURNOVER REPRESENTED BY THE COST OF STORES/MATERIAL SUPPL IED BY THE M.E.S. TO THE ASSESSEE-FIRMS, THE INCOME OR PROFITS DERIVED BY THE ASSESSEE FIRMS FROM SUCH CONTRACTS WILL HAVE TO BE DETERMINED ON THE BASIS OF THE VALUE OF THE CONTRACTS REPRESENTED BY THE CASH PAYMENTS RECEIVED BY THE ASSESS EE- FIRMS FROM THE M.E.S. DEPARTMENT EXCLUSIVE OF THE COST O F THE MATERIAL/STORES RECEIVED FOR BEING USED, FIXED OR INC ORPORATED IN THE WORKS UNDERTAKEN BY THEM. 52. HE SUBMITTED THAT IT IS NOT EVEN THE CASE OF DIT T HAT ANY ELEMENT OF PROFIT WAS INVOLVED IN THE PAYMENTS MADE BY THE ASSE SSEE TO SUB- CONTRACTORS FOR MARINE SPREADS, ETC., ON WHICH TDS WAS DEDUCTED AND IN THE ABSENCE OF SUCH ALLEGATION, LD. DIT WAS NOT JUST IFIED IN NOT APPROVING THE MODE OF COMPUTATION ADOPTED BY THE ASSE SSING OFFICER. 53. IT WAS FURTHER SUBMITTED THAT LD. DIT HAS NO JURISD ICTION TO DISTURB THE BEST JUDGEMENT ESTIMATE OF PROFIT ATTRIBUTABLE TO THE INSTALLATION OF PE IN INDIA MADE BY THE ASSESSING OFFICER WITHOUT POINT ING OUT AS TO ITA NOS.2086 & 2087/DEL/2009 52 HOW THE ESTIMATE IS ARBITRARY AND BASELESS. AS PER WELL SETTLED LAW, BEST JUDGEMENT ESTIMATE OF INCOME CANNOT BE INTERFERE D WITH UNLESS IT IS SHOWN TO BE UNFAIR, ARBITRARY AND NOT MADE ON THE BASIS OF MATERIAL AVAILABLE ON RECORD WHICH INCLUDE PAST HISTORY OF THE CASE. IN THE ABSENCE OF SUCH MATERIAL, THE EXERCISE OF POWER OF DIT U/S 263 WERE WRONG. 54. SO AS IT RELATES TO ALLEGATION OF NON-APPLICATION OF MIND BY THE ASSESSING OFFICER, IT WAS SUBMITTED BY THE LD. AR THAT LD . DIT WHILE HOLDING SO HAS IGNORED THE DETAILED QUERIES RAISED BY T HE ASSESSING OFFICER AND THE EXPLANATION ALONG WITH EVIDENCE FIL ED BY THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS AS NOTED IN TH E ORDER SHEET ENTRIES THE COPY OF WHICH IS FURNISHED AT PAGES 19 9-202 OF THE VOL.III OF THE PAPER BOOK AND ALSO LETTER DATED 21 ST AUGUST, 2006 ADDRESSED TO THE ASSESSEE. HE ALSO IGNORED ASSESSEES WRITTEN SUBMISSIONS FILED WITH THE ASSESSING OFFICER ON VARIOUS DATE S VIZ., 31 ST AUGUST, 2006, 8 TH DECEMBER, 2006, 14 TH DECEMBER, 2006 AND 1 ST MARCH, 2007 WHEREIN ALL THE ASPECTS OF THE CASE WERE DULY EXP LAINED TOGETHER WITH SUPPORTING EVIDENCE, COPIES OF INVOICES RAISED DUR ING THE YEAR ALONG WITH MILESTONE ACHIEVEMENT CERTIFICATES ISSUED RE AL TIME AT SITE ISSUED BY CONSULTANTS/AGENTS OF ONGC IN SUPPORT OF WORK D ESCRIBED IN THE INVOICE. THE SHOW CAUSE NOTICE ISSUED BY LD. DIT I S EXTREMELY VAGUE AND GENERAL, THE ASSESSING OFFICER PASSED THE ASSESSMEN T ORDER AFTER DUE APPLICATION OF MIND AND AFTER CONDUCTING PROPER INQUIRY AND THIS ACT OF THE ASSESSING OFFICER IS DEMONSTRATED IN THE O FFICIAL NOTE SIGNED AND APPENDED WITH THE ASSESSMENT ORDER. HE SUBMIT TED THAT ALLEGATION OF DIT THAT THE ASSESSING OFFICER DID NOT CO NSIDER HONBLE SUPREME COURT DECISION IN THE CASE OF THE ASSESSEE IN RESP ECT OF ASSESSMENT YEAR 2005-06 IS NOT TRUE AS THE SAID DECISION CA ME AFTER PASSING OF THE ORDER BY THE ASSESSING OFFICER AS THE JUDGE MENT IS DATED 18 TH MAY, 2007 AND THE ASSESSMENT WAS COMPLETED ON 9 TH MARCH, 2007. ITA NOS.2086 & 2087/DEL/2009 53 HE SUBMITTED THAT RULE 10 OF IT RULES, 1962 DEALS WITH THE DETERMINATION OF INCOME IN THE CASE OF NON-RESIDENTS. UNDER RULE 10 (III), THE ASSESSING OFFICER HAS POWER TO COMPUTE INCOME OF A NON- RESIDENT IN A MANNER AS HE MAY DEEM SUITABLE. SUCH PO WER OF THE ASSESSING OFFICER IS VERY WIDE AND REFERENCE HAS BEEN MAD E TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ELLE RMAN LINES LTD. VS. CIT 82 ITR 913 (SC). 55. IT WAS SUBMITTED THAT IF ASSESSMENT ORDER HAS BEEN PASSE D AFTER DUE APPLICATION OF MIND THEN REVISION AUTHORITY CANN OT ALLEGE FOR NON- APPLICATION OF MIND ONLY BECAUSE OF THE REASON THAT I N THE TEXT OF THE ASSESSMENT ORDER THE ASSESSING OFFICER DID NOT DISCUSS SUCH APPLICATION OF MIND AND REFERENCE WAS MADE TO THE FO LLOWING DECISIONS:- 1. TAWARI COLONISERS PVT. LTD. (P. 582-591/DPB-IV) 2. SANJAY KUMAR JAIN (P. 592-601/DPB-IV) 3. RATLAM COAL 171 ITR 141 MP (P. 22/DPB-I) 4. GOYAL FAMILY TRUST 171 ITR 698 ALL. (P. 25/DPB-I) 5. JP SRIVASTAV & SONS. 111 ITR 326 (P. 321/DPB-II) 56. HE SUBMITTED THAT LD. DIT HAS PLACED RELIANCE UPO N THE DECISION OF HONBLE ALLAHABAD HIGH COURT IN THE CASE OF JAGDI SH KUMAR GULATI 269 ITR 71 (ALL). HE SUBMITTED THAT THIS DECISION EVE N FAVOUR THE CASE OF THE ASSESSEE. IN THAT CASE, THE ASSESSING OFFICER HAD AP PENDED OFFICE NOTE TO THE ASSESSMENT ORDER THAT BECAUSE OF LI MITATION HE WAS COMPLETING ASSESSMENT IN HASTE WITHOUT CONDUCTING PROPER INQUIRY AND ON THE BASIS OF THAT OFFICE NOTE THE COURT HAD HELD T HAT THE RECORD SHOWED THAT THE ASSESSING OFFICER HAD NOT CONDUCTED PROP ER INQUIRY AND, THEREFORE, LD. DIT WAS JUSTIFIED IN CANCELING TH E ASSESSMENT WHEREAS IN THE CASE OF THE ASSESSEE OFFICE NOTE FOR BOTH THE YEARS CLEARLY DEMONSTRATE APPLICATION OF MIND BY THE ASSESSIN G OFFICER AND REASONS ARE STATED THAT SECTION 44BB IS NOT FOLLOWED IN THE BEST JUDGEMENT ASSESSMENT MADE BY HIM. SIMILARLY, HE SUBMITT ED THAT ITA NOS.2086 & 2087/DEL/2009 54 OBSERVATIONS IN THE CASES OF MALABAR INDUSTRIAL CO. 243 ITR 83 (SC) (SUPRA) AND SESHASAYEE PAPER & BOARD LTD. 242 ITR 490 (MAD) (SUPRA) SUPPORT THE CASE OF THE ASSESSEE. 57. LD. AR REFERRED TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SUNBEAM AUTO LTD. 227 CTR 133 (DEL) T O SUBMIT THAT THERE IS A DIFFERENCE BETWEEN LACK OF INQUIRY AND INADEQUATE INQUIRY AND WHERE THERE IS A CASE OF INADEQUATE INQUIRY, POWE R U/S 263 COULD NOT BE EXERCISED. 58. LD. AR ALSO PLEADED FOR LACK OF OPPORTUNITY PROV IDED BY THE LD. DIT. HE HAS SUMMARIZED HIS CONTENTION AS UNDER:- THE DLT'S ORDER SETTING ASIDE THE ASSESSMENT AND ORDER FRESH ASSESSMENT IS BAD IN LAW AND DESERVES TO BE QUASHED F OR THE FOLLOWING REASONS:- 1) THE DLT HAS FAILED TO SUBSTANTIATE HIS ALLEGATION THAT TH E ASSESSMENT ORDER WAS PASSED BY THE AO WITHOUT CONDUCTING PROPER ENQUIRIES AND WITHOUT APPLICATION OF MIND. 2) ALLEGATIONS MADE BY THE DLT WITHOUT GIVING NOTICE TO THE ASSESSEE TO THAT EFFECT AND OTHER ALLEGATIONS WHICH ARE C ONTRARY TO MATERIAL AVAILABLE TO RECORD HAVE RESULTED IN ILLEGA L AND ARBITRARY CONCLUSIONS LEADING TO ILLEGAL DIRECTIONS CO NTAINED IN ARAGRAPH 8 OF THE DLT'S ORDER. 3) THE ORDER HAS BEEN PASSED IN BREACH OF PRINCIPLES OF NATURAL JUSTICE AND THEREFORE IT IS A NULLITY. 4) THE LD. DLT HAS FAILED TO SUBSTANTIATE THE ALLEGATION TH AT THE ASSESSMENT ORDER IS ERRONEOUS IN LAW AND PREJUDICIAL TO THE INTEREST OF REVENUE. 5) REGARDING ALLEGATION IN RELATION TO COMPUTATION OF IN COME FROM OPERATION INSIDE INDIA, THE DIT HAS HIMSELF ABAN DONED THE STAND TAKEN IN THE SHOW-CAUSE NOTICE AS NO DIRECTION IN THIS REGARD HAS BEEN GIVEN. 6) THE LD. DLT FAILED TO CONSIDER THE JUDGMENT OF THE APEX COURT IN 291 ITR' 482 AND MADE AN ABSURD ALLEGATION TH AT THE AO SHOULD HAVE CONSIDERED THAT JUDGMENT. 7) FURTHER, DESPITE THE FACT THAT THERE WAS NO CHANGE IN THE FACTUAL MATRIX THIS YEAR, THE DLT MISERABLY FAILED TO PO INT OUT AS ITA NOS.2086 & 2087/DEL/2009 55 TO WHY & HOW THE AO WAS WRONG IN FOLLOWING THE ITAT AN D JURISDICTIONAL HIGH COURT, WHICH DECISIONS WERE SUBSE QUENT TO PASSING OF THE ASSESSMENT ORDER, BUT PRIOR TO DITS ORD ER, WERE ALSO CONFIRMED BY THE SUPREME COURT. 8) BOTH IN RESPECT OF INCOME FROM OPERATIONS INSIDE IN DIA AS ALSO OUTSIDE INDIA, THE DLT FAILED TO CONSIDER THE 'OFF ICE NOTE' OF THE AO, WHICH IS PART OF RECORDS. 9) THE DIT HAS NOT SAID A WORD AS TO HOW THE COMPUTATION OF INCOME AND TAX LEVIED ON INCOME FROM HAL AND GMR PRO JECT AND INTEREST ON I. T. REFUND WAS ERRONEOUS AND PREJUDICIA L TO REVENUE. 10) THE DIT ERRED IN SETTING ASIDE THE ASSESSMENT ORDER EVEN THOUGH HE IS TOTALLY SILENT ON INCOME FROM HAL PROJECT A ND INTEREST ON IT REFUND; HIS FINDING IN RESPECT OF INCOM E FROM OPERATIONS OUTSIDE INDIA IS CONTRARY TO THE JUDGMENT OF THE APEX COURT IN 291 LTR 482; AND HE HAS HIMSELF ABA NDONED THE OBJECTION GIVEN IN THE ONLY SHOW-CAUSE NOTICE REGAR DING INCOME FROM OPERATIONS IN INDIA. I) II) IT IS SUBMITTED THAT ON THE FOLLOWING ISSUES THE ORD ER OF THE DLT MAY BE QUASHED:- I) INCOME FROM HAL PROJECT WHERE THE AO HAS HELD AGAI NST THE ASSESSEE AND THE IMPUGNED ORDER U/S 263 IS TOTALLY SILENT ON THIS ISSUE. THE ASSESSEE IS ALSO IN APPEAL AGAINST THE ORDER OF THE AO, WHICH IS PENDING WITH THE CIT(A). II) TAXING INTEREST ON INCOME-TAX REFUND UNDER THE TREA TY. THE IMPUGNED ORDER IS TOTALLY SILENT ON THIS ISSUE. III) INCOME FROM REVENUE EARNED FROM OPERATION OUTSID E INDIA, WHICH THE OFFICE NOTE OF THE AO MAKES IT CLEAR W AS DONE ON THE BASIS OF THE ORDER OF THE JURISDICTIONAL HI GH COURT ON THIS ISSUE AND WHICH WAS SUBSEQUENTLY UPHELD BY THE APEX COURT. THE LD. OIT NOT ONLY FAILED TO CONSIDER THE OFFICE NOTE BUT ALSO THE APEX COURT DECISION. THE DLT'S ORDER ON' THIS ISSUE MAY BE QUASHED. IV) ON THE ISSUE OF INCOME FROM OPERATIONS INSIDE IN DIA, THE LD. DLT, HAS MADE PATENTLY INCORRECT ALLEGATION OF N ON- APPLICATION OF MIND AND OF PROPER ENQUIRIES NOT HAVIN G BEEN MADE BY THE AO. HE IS ALSO INCORRECTLY APPLIED L AW BY CONSTRUING PROVISIONS OF AN INTERNATIONAL TREATY LITERALL Y AND IGNORING THE ASSURANCE CONTAINED IN PARAGRAPH 5 OF AR TICLE 7 OF INDO- KOREAN DTAA. ABOVE ALL, THE LD. DLT MISERABLY FAILED TO ESTABLISH TH AT THE ASSESSMENT ORDER CAUSED AS ANY LOSS OF REVENUE. ON TH E OTHER HAND, THE REVISED ASSESSMENT RESULTED IN UNDER ASSESSM ENT OF INCOME FROM OPERATIONS INSIDE INDIA BY ABOUT RS. 14 C RORES. THE REVISED ASSESSMENT HAS BECOME FINAL AS THE ORP (OF WH ICH DLT ITA NOS.2086 & 2087/DEL/2009 56 WAS ALSO A MEMBER) HAS CONFIRMED THE REVISED ASSESSM ENT. IN ABSENCE OF LOSS OF REVENUE, THE CONDITION OF THE OR DER BEING PREJUDICIAL TO REVENUE IS ALSO NOT SATISFIED. 12) IT IS NOW WELL SETTLED THAT IN A CASE WHERE TWO OR MORE ISSUES ARE INVOLVED AND THE CIT SETS ASIDE THE ENTIRE ASSESSME NT THE TRIBUNAL AGREES WITH CIT ON ONE ISSUE BUT DOES NOT AGR EE WITH THE OTHER, IT MAY MODIFY THE ORDER U/S 263 BY LIMITING S ETTLING ASIDE OF THE ASSESSMENT ORDER ONLY IN RESPECT OF ISSUE ON WHICH IT AGREES WITH THE CIT. THE RELEVANT DECISION PLACED PA RA OF THE SUBMISSIONS. 59. ON THE OTHER HAND, LD. SPECIAL COUNSEL APPEARING ON BEHALF OF THE REVENUE SUBMITTED THAT THE ISSUES RAISED FOR AND ON BEHA LF OF THE ASSESSEE IN BRIEF ARE AS UNDER:- 1. THE DIT HAS SET ASIDE ENTIRE ASSESSMENT ORDER WHICH ALSO TAKES INTO ACCOUNT INCOME FROM THE PROJECT HAL AND INTE REST ON REFUND FROM INCOME TAX DEPARTMENT AS WELL INTEREST ON DE POSITS. THERE IS NO WHISPER ABOUT THESE TWO ITEMS OF INCOME IN THE REVISIONARY ORDER. 2. ORDER OF THE DIT HAS BEEN CHALLENGED WITH REGARD TO HIS DECISION ON INCOME FROM OPERATIONS OUTSIDE OUTSIDE OUTSIDE OUTSIDE INDIA FOR REASONS: (I) THE DIT FAILED TO CONSIDER THE DECISION IN RESPEC T OF INSTALLATION PE UNDER ARTICLE 7(3) OF THE DTAA BETWEEN INDIA AND KOREA, IN APPELLANTS OWN CASE FOR EARLIER YEARS RENDERED BY THE ITAT, HONBLE JURISDICTIONAL HIGH COURT AND HONBL E APEX COURT, BY WHICH IT WAS HELD THAT NO INCOME IS ATTRIBUTABLE TO THE INSTALLATION PE ON THE OPERATIONS OUTSIDE INDIA AS THE INSTALLATION PE CAME INTO EXISTENCE SUBSEQUENT TO THE SE RVICES RENDERED AND SUPPLIES MADE FROM OUTSIDE INDIA, AND (II) THE DIT EXPECTED THE AO TO DO IMPOSSIBLE WHILE HO LDING ORDER OF THE AO ERRONEOUS FOR FAILURE TO CONSIDER THE JUDGMENT OF DATED 18.5.2007 OF THE HONBLE APEX COURT AND THIS WAS NOT POSSIBLE AS THE AO PASSED ASSESSMENT ORDER FOR THE A.Y . 2005- 06 ON 09.03.2007. 3. IT IS FURTHER ARGUED THAT THE DIT HAS WRONGLY SET ASID E THE ORDER OF THE AO EVEN IN RESPECT OF THE INCOME FROM OPE RATIONS INSIDE INSIDE INSIDE INSIDE INDIA FOR FOLLOWING REASONS: A. THE AO FOLLOWED WHAT WAS BEING DONE IN THE PAST YEARS AND ON THE SAME BASIS AS WAS BEING ADOPTED BY TH E DEPARTMENT. B. THE FORMULA AS CONTAINED IN LETTER DATED 01.02.1995 WAS PROPOSED BY THE DEPARTMENT AND THE ASSESSEE ACCEPTED THE SAME THOUGH THE APPELLANT CONTENDS THAT INITIALLY IT DID NOT AGREE BUT LATER ON IT AGR EED BY ACCEPTING THE ORDERS OF THE CIT(APPEALS) ON THIS ISS UE. C. THE DIT FAILED TO CONSIDER THE ORDERS OF THE HONBL E BENCH OF THE ITAT IN APPELLANTS OWN CASE FOR THE ITA NOS.2086 & 2087/DEL/2009 57 ASSESSMENT YEARS 1990-91, 1991-92, AND 1996-97 AS WE LL FOR THE ASSESSMENT YEAR 1993-94, WHICH WERE AVAILABLE TO HIM IN THE COURSE OF THE REVISIONARY PROCEEDING U/S 2 63 OF THE ACT. D. THE DIT DID NOT CONSIDER THE OFFICE NOTE RECORDED BY THE AO AS A FOOT-NOTE TO THE ASSESSMENT ORDER. E. THE DIT IGNORED THE ORDER OF THE ITAT FOR THE ASSESSMENT YEARS 1986-87 AND 1987-88 WHICH WAS CONFIRMED BY THE HONBLE APEX COURT HOLDING THAT EVEN UNDER ARTICLE 7(3) OF THE INDO-KOREAN TAX TREATY, THE A O AFTER REJECTING THE ACCOUNTS HAD RIGHTLY MADE BEST- JUDGMENT ASSESSMENT AS PER SEC. 145(3) OF THE ACT. 4. THE DIT HAS NOT CONSIDERED THE INFORMATION AVAILABL E ON THE RECORD OF THE CASE WHILE ADJUDICATING THE ISSUES. 5. THE DIT HAS NOT CITED ANY JUDICIAL AUTHORITY OR PROV ISION OF LAW TO HOLD THE ORDER OF THE AO ERRONEOUS. 6. THE DIT ERRED IN IGNORING RULE 10 OF THE I.T. RUL ES, 1962 WHICH DEALS WITH THE DETERMINATION OF INCOME IN THE CASE OF NON- RESIDENTS, IN PARTICULAR, CLAUSE (III) OF THE SAID RUL E WHICH ENABLES AN AO TO COMPUTE INCOME IN A MANNER AS HE MAY DEEM SU ITABLE. 7. THE DIT ERRED IN CONSTRUING THE PROVISION OF AN IN TERNATIONAL TAX TREATY LITERALLY. 8. IN THE FRESH ASSESSMENT ORDER WHICH WAS ISSUED AS A DRAFT ORDER BY THE AO, THE INCOME COMPUTED IS LESS ON THE REV ENUE FROM INSIDE INDIA OPERATIONS AND WHICH ORDER HAS BEE N APPROVED BY THE DRP U/S 144C OF THE ACT AND OF WHICH THE DIT HIM SELF IS ONE OF THE CONSTITUENT MEMBERS. 9. THE DIT FAILED TO ISSUE FRESH SHOW CAUSE TO THE APP ELLANT ON CERTAIN ISSUES INCORPORATED IN HIS FINAL ORDER FOR WH ICH NO NOTICE WAS GIVEN TO THE APPELLANT AND THEREBY HIS ORDER IS VIO LATIVE OF THE PRINCIPLES OF NATURAL JUSTICE. 60. HE SUBMITTED THAT AS ON DATE THERE ARE FOUR SETS OF APPELLATE ORDERS AVAILABLE IN THE CASE OF THE ASSESSEE AS PER HISTORY OF THE CASE OF THE ASSESSEE. BROADLY, HE SUBMITTED THAT THESE FOUR SE TS OF ORDERS ARE AS UNDER:- I) THE FIRST SET OF ORDERS STARTS FROM ASSESSMENT YEAR 1986- 87, 87-88 AND 1988-89 WHICH YEARS WENT UPTO HONBLE SUPREME COURT OF INDIA. II) THE SECOND SET OF ORDERS RELATES TO ASSESSMENT YEARS 1994-95 AND 1995-96 WHICH WAS DECIDED BY THE TRIBUNA L VIDE ORDER DATED 17 TH OCTOBER, 2009 ON REMISSION OF MATTER FROM ITA NOS.2086 & 2087/DEL/2009 58 HONBLE UTTARAKHAND HIGH COURT TO THE ITAT IN ITA N OS. 42 AND 43 OF 2007. III) THE THIRD SET OF ORDERS RELATE TO 8 APPEALS IN R ESPECT OF ASSESSMENT YEAR 1997-98 TO 2004-05. IV) FOURTH SET OF ORDERS IS ORDERS OF ITAT DATED 3 RD MARCH, 2004 RELATING TO ASSESSMENT YEAR 1993-94 WHICH IS REPORTED AS 4 SOT 715. 61. REFERRING TO THE FIRST SET OF ORDERS, IT WAS SUBMITT ED BY HIM THAT THE CLAIM OF THE ASSESSEE COMPANY IS THAT IT HAD ENTERED INTO AN AGREEMENT WITH ONGC ON 12 TH MARCH, 1985 FOR SOUTH BASSEIN FIELD CENTRAL COMPLEX FACILITY (THE OBJECT FOR PROVISION O F SERVICES, NAMELY, DESIGN, ENGINEERING, FABRICATION, INSTALLATION, COMMI SSIONING AND OUTSIDE INDIA WORK OF THE DESIGNING, ENGINEERING AND FABRICATION). IT WAS CLAIMED BY THE ASSESSEE THAT THERE IS NO PE IN TERMS O F ARTICLE 5 OF THE TAX TREATY AND THE BUSINESS INCOME EARNED BY IT CA NNOT BE ASSESSED TO TAX UNDER ARTICLE 7 OF THE TREATY IN THE AB SENCE OF PE. IT WAS FURTHER THE CLAIM OF THE ASSESSEE THAT INDIAN OPERAT ION CONTINUED FROM 1 ST NOVEMBER, 1986 TO 12 TH APRIL, 1987 FOR A PERIOD LESS THAN 9 MONTHS AND, THUS, THERE WAS NO PE IN TERMS OF TAX TREAT Y. THE FINDING OF THE ASSESSING OFFICER IN THIS REGARD IS THAT THERE WAS A PE AND HE ASSESSED 2% OF THE RECEIPTS RELATING TO OUTSIDE INDIA ACT IVITIES AND SO FAR AS IT RELATES TO ACTIVITIES INSIDE INDIA, THE ASSESSING OFFICER ASSESSED THE SAME @ 10% VIDE ASSESSMENT COMPLETED ON 8 TH JUNE, 1992 UNDER THE PROVISIONS OF DTAA. HE SUBMITTED THAT CIT (A) HEL D THAT THE ASSESSEE DID NOT MAINTAIN SEPARATE BOOKS FOR EACH PROJECT . IT HAD A PE IN INDIA AS INDIAN OPERATION EXTENDED BEYOND 9 MONTH S. THE ASSESSEE HAS A PROJECT OFFICE IN BOMBAY WHICH HAD A CLOSE LINK WITH THE OPERATIONS. HOWEVER, THE CIT (A) REDUCED THE INCOME FROM OUTSIDE INDIA ACTIVITY @ 1% OF THE RECEIPTS. IN RESPECT OF A CTIVITIES INSIDE INDIA, HE UPHELD THE APPLICABILITY OF 10% TAKING THE PRINC IPLE EXPLAINED IN BOARD INSTRUCTION NO. 1767 DATED 1 ST JULY, 1987. ITAT REDUCED THE ITA NOS.2086 & 2087/DEL/2009 59 INCOME IN RESPECT OF ACTIVITIES INSIDE INDIA @ 3%. WI TH REGARD TO ACTIVITIES OUTSIDE INDIA, IT DELETED THE ADDITION BY HOLDING THAT NO INCOME ACCRUED IN INDIA IN RESPECT OF ACTIVITIES ADMI TTEDLY CARRIED ON IN KOREA. THE TRIBUNAL UPHELD THE APPLICABILITY OF SE CTION 145 OF THE ACT AND ALSO HELD THAT COMPUTATION CAN BE MADE UNDER REL EVANT PROVISIONS OF THE ACT READ WITH GUIDELINES CONTAINED IN INSTRUCT ION NO.1767. THE HONBLE UTTARAKHAND HIGH COURT VIDE ITS ORDER DATED 30 TH MARCH, 2006 IN ITA NOS.448 AND 473 TO 475 OF 2001 REPORTED IN 29 1 ITR 450 (UTTARAKHAND) DISMISSED THE APPEALS OF THE DEPARTMENT A ND HELD THAT ITAT WAS RIGHT IN REJECTING THE ARGUMENT OF THE COMP ANY OF APPLICABILITY OF ZERO PROFIT ON INDIAN OPERATION. THE COURT ALSO CONFIRMED THE FINDINGS OF ITAT WITH REGARD TO WORKIN G OF PROFITS @ 3% FROM INDIAN OPERATION. IT WAS FURTHER HELD THAT THE ITAT WAS RIGHT IN HOLDING THAT A SPECIFIC PROVISION WOULD OVERRIDE THE GENERAL PROVISION. THE MATTER WAS FINALLY DECIDED BY THE HONBLE SUPREM E COURT IN THE DECISION DATED 18 TH MAY, 2007REPORTED AS 291 ITR 481. THE COURT HELD THAT THE INSTALLATION PE EMERGED ONLY AFTER THE CONT RACT WITH ONGC STOOD CONCLUDED. IT EMERGED ONLY AFTER THE FABRICAT ION PLATFORM WAS DELIVERED IN KOREA TO THE AGENCIES OF ONGC. THEREFO RE, THE PROFIT ON SUCH SUPPLIES OF FABRICATED PLATFORM CANNOT BE SAID TO BE ATTRIBUTABLE TO THE PE AND, THUS, IT WAS HELD THAT THE PROFITS THAT ACCRUED TO THE KOREAN OPERATIONS WERE NOT TAXABLE IN INDIA. IT WAS FURTHER OBSERVED THAT IN THE CASE OF TURNKEY PROJECT, THE PE IS SET UP AT THE INSTALLATION STAGE WHILE THE ENTIRE TURNKEY PROJECT INCLUDING THE SALE OF EQUIPMENT IS FINALIZED BEFORE THE INSTALLATION STAGE. THE SETTIN G UP OF PE IN SUCH A CASE IS A STAGE SUBSEQUENT TO THE CONCLUSION OF THE CONTR ACT. IT IS A RESULT OF SALE OF EQUIPMENT THAT THE INSTALLATION PE C OMES INTO EXISTENCE. HOWEVER, THIS IS NOT AN ABSOLUTE RULE. IN THE PRESENT CASE, THERE WAS NO ALLEGATION MADE BY THE DEPARTMENT THAT THE PE CAME INTO EXISTENCE EVEN BEFORE THE SALE TOOK PLACE OUTSIDE INDI A. SIMILARLY, IN THE PRESENT CASE, THERE WAS NO ALLEGATION MADE BY THE DEPARTMENT ITA NOS.2086 & 2087/DEL/2009 60 THAT THE PRICE AT WHICH ONGC WAS BILLED/INVOICED BY THE ASSESSEE FOR SUPPLY OF FABRICATED PLATFORM INCLUDED ANY ELEMENT F OR SERVICES RENDERED BY THE PE. HE SUBMITTED THAT THUS, THE HON BLE SUPREME COURT HAS HELD THAT IN THE CIRCUMSTANCES NOT ALL THE P ROFITS OF THE ASSESSEE COMPANY FROM ITS BUSINESS CONNECTION IN INDIA (PE) WOULD BE TAXABLE IN INDIA, BUT ONLY SO MUCH OF THE PROFITS HAV ING ECONOMIC NEXUS BETWEEN PE IN INDIA WOULD BE TAXABLE IN INDIA. ON THE QUANTUM OF TAXABLE PROFITS ATTRIBUTABLE TO INDIAN PE OF THE ASSESSE E RELATING TO WORK OF INSTALLATION AND COMMISSIONING OF THE PLATFORM S, HONBLE SUPREME COURT FOR THE REASONS RECORDED BY IT HELD THA T THEY WERE TAXABLE @ 10% OF THE PAYMENTS RELATING TO THE SAID SER VICES/FACILITIES CARRIED ON IN BOMBAY HIGH AND THE REASONS BY THE COUR TS WERE AS UNDER:- 1. FIRSTLY, THE ACCOUNTS SUBMITTED BY THE ASSESSEE WERE REJECTED AND THE A.O. HAD TO INVOKE THE PROVISIONS OF S ECTION 145 OF THE ACT BY WAY OF BEST JUDGEMENT ASSESSMENT. 2. SECONDLY, THE ASSESSEE THEMSELVES CONTENDED THAT THE A.O. SHOULD HAVE COMPUTED THE INCOME RELATING TO INDIAN OPERATIONS UNDER SECTION 44BB OR UNDER INSTRUCTION NO. 1767 ISSUED BY THE CBDT DATED 1.7.1987. 3. THIRDLY, CHAPTER IV OF THE ACT CONTAINS PROVISIONS F OR PRESUMPTIVE TAXATION OF BUSINESS INCOME IN CERTAIN CASE S AS PRESCRIBED IN SECTIONS 44B, 44BB AND 44BBA AND 44BBB OF THE ACT. IN THE PRESENT CASE, A.O. HAS REJECTED THE ACCOUNTS AND THAT HAS NOT BEEN CHALLENGED. MOREOVER, THE ASSESSEE A PPEARED BEFORE THE DEPARTMENT AND SUBMITTED THAT ITS INCOME FROM INDIAN OPERATIONS BE COMPUTED UNDER SECTION 44BB OR UN DER INSTRUCTION NO.1767 ISSUED BY CBDT. UNDER THE SAID IN STRUCTION, IN CASES WHERE THE SALES TAKES PLACE OUTSIDE, AS IN THI S CASE, ONLY 10% OF THE GROSS RECEIPTS IN RESPECT OF THE ACTIVITI ES OF INSTALLATION, COMMISSIONING, ETC. PERFORMED IN INDIA W ILL BE TAXABLE. IN VIEW OF THE STAND TAKEN BY THE ASSESSEE, THE COURT HELD THAT THE CIT (A) WAS RIGHT IN COMPUTING THE TAXABLE P ROFITS AT 10% OF THE GROSS RECEIPTS IN RESPECT OF SUCH ACTIVITI ES IN INDIA. TO THIS EXTENT, THE DECISION OF THE ITAT WAS REVERSED. 4. FOURTHLY, ONCE THE PROVISIONS OF SECTION 44BB OF THE ACT APPLY, TWO CONCLUSIONS FOLLOW. THE FIRST IS THAT 10% O F THE RECEIPTS BY THE FOREIGN RESIDENT IS CHARGEABLE TO TAX AN D THE OTHER CONCLUSION IS THAT 90% OF THE RECEIPTS OF THAT FOREI GN ITA NOS.2086 & 2087/DEL/2009 61 RESIDENT AS WELL AS RECEIPTS/GAINS OTHER THAN THOSE MENTI ONED IN SECTION 44BB IS ALSO NOT CHARGEABLE TO TAX, AND 5. LASTLY, UNDER THE CONCEPT OF CONTRACT ACCOUNTS, TWO METHODS EXIST FOR ASCERTAINING PROFIT FOR CONTRACTS, NAME LY, COMPLETED CONTRACT METHOD AND PERCENTAGE OF COMPLETION METHOD. IN THE PRESENT CASE, THE A.O. HAS REJECTED THE COMPLETED CONTRACT METHOD WHICH IS NOT CHALLENGED. AFTER MAKING OBSERVATIONS ON THE DEFICIENCY ON THE PART OF THE ASSESSEE THAT IF FAILED TO PROVIDE DETAILS TO THE A.O., H ONBLE APEX COURT HELD THAT WHEN THE ASSESSEE DOES NOT GIVE PARTICULARS THEN CIT (A) WAS RIGHT IN ESTIMATING THE PROF ITS OF THE ASSESSEE AT 10% OF THE GROSS RECEIPTS IN RESPECT OF THE ACTIVITIES OF INSTALLATION, HOOK-UP, AND COMMISSIONING PERFORMED BY THE INDIAN PE IN BOMBAY HIGH. 62. THE CONCLUSION OF THE DECISION AS CARRIED IN PARA 15 OF THE JUDGEMENT WAS AS UNDER:- (A) IN THE FACTS AND CIRCUMSTANCES OF THE CASE, PROFITS , IF ANY, FROM THE KOREAN OPERATIONS (DESIGNING AND FABRICATION) AROSE OUTSIDE INDIA, HENCE, NOT TAXABLE. (B) AS REGARDS THE QUANTUM OFF PROFITS EMBEDDED IN THE INDIAN OPERATIONS ATTRIBUTABLE TO THE INDIAN PE OF THE ASS ESSEE, WE HOLD THAT THE CIT (A) WAS RIGHT, IN THE FACTS AND THE CIRCUMSTANCES OF THIS CASE, IN ATTRIBUTING THE PROFITS OF THE INDIAN PE AT 10% OF THE GROSS RECEIPTS IN RESPECT OF ITS ACTIVITI ES OF INSTALLATION, COMMISSIONING, ETC. PERFORMED IN INDIA. THE SAME SHALL BE TAXABLE ACCORDINGLY. 63. HE SUBMITTED THAT WITH REGARD TO THE SECOND SET OF ORDERS, THE MATTER WAS REMITTED BY HONBLE UTTARAKHAND HIGH COUR T TO THE ITAT FOR DECIDING THE SAME AFRESH. CONSEQUENTLY THE ORDER HAS B EEN PASSED BY ITAT WHICH IS DATED 17 TH OCTOBER, 2009 WHEREBY THE APPEALS FILED BY THE REVENUE HAVE BEEN DISMISSED AND IT IS HELD THAT NO INTERFERENCE WAS CALLED FOR IN THE ORDER OF THE CIT (A) FOR THE F OLLOWING REASONS:- 1. AFTER CONSIDERING CLAUSE (A) OF PARA 15 OF THE JU DGMENT OF HONBLE APEX COURT AS PER DIRECTION OF HONBLE UTTARAKH AND 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 ARISEN OUTSIDE INDIA, AND ITA NOS.2086 & 2087/DEL/2009 62 2. REGARDING CLAUSE (B) OF PARA 15 OF THE JUDGMENT OF HONBLE APEX COURT, WE FIND THAT IN THE PRESENT TWO YEARS, THERE I S NO DISPUTE REGARDING THE QUANTUM OF PROFIT EMBEDDED IN THE INDIAN OPERATIONS ATTRIBUTABLE TO INDIAN PE OF THE ASSESSEE AND HENCE THIS CLAUSE OF PARA 15 IS NOT APPLICABLE IN THE PRESEN T TWO YEARS WHICH ARE BEFORE US. 64. SO AS IT RELATES TO THIRD SET OF ORDERS WHICH ARE I N RESPECT OF ASSESSMENT YEAR 1997-98 TO 2004-05,HE SUBMITTED THAT FIR STLY, THE QUESTION DECIDED WAS WHETHER ARTICLE 5(3) OF DTAA WIL L HAVE PRECEDENCE OVER ARTICLE 5(1) AND 5(2) AND IT WAS HEL D THAT PROVISIONS OF ARTICLE 5(3) OF DTAA ARE MORE SPECIFIC AS COMPARED TO THOSE OF ARTICLES 5(1) AND 5(2) AND SO THE PROVISIONS OF ARTICLE 5(3) WI LL TAKE PRECEDENCE OF THOSE ARTICLE 5(1) AND 5(2) AND IT WAS HELD THAT N O PE OF THE ASSESSEE COULD BE HELD TO BE IN EXISTENCE IN INDIA UNTIL THE ASSESSEE BEGAN ITS PROJECT OF INSTALLATION ACTIVITIES CONNECTE D THEREWITH, AS PER ARTICLE 5(3). IT WAS HELD THAT ALL THE DESIGNATED WO RK OF THE ASSESSEE OUTSIDE INDIA WAS CARRIED MUCH BEFORE THE DATES OF ARR IVALS OF THE STRUCTURE IN INDIA. PERTINENTLY, THE DURATION OF EA CH OF THE PROJECTS WAS LESS THAN 10 MONTHS. THE CERTIFICATES IN THIS REGARD WE RE DULY FURNISHED. MERE CORRESPONDENCE FROM THE ASSESSEES MUMBAI OFFICE IS OF NO CONSEQUENCE IN HOLDING THE OFFICE OF THE ASSESSEE AS PE IN INDIA. IT ALSO DOES NOT MAKE ANY DIFFERENCE IF THIS OFFICE I. E., THE PROJECT OFFICE REMAINED IN EXISTENCE FOR A NUMBER OF YEARS AND IT WA S MANNED BY SENIOR OFFICIALS OF THE ASSESSEE. FOR EACH FRESH CONTRACT , PERMISSION WAS REQUIRED TO BE SOUGHT FROM THE RBI FOR OPENING A PROJECT OFFICE. SUCH PERMISSION IS GRANTED SUBJECT TO LIMITATION. THESE LIMITATIONS ARE STRINGENT AND, IN THIS MANNER, IT WAS HELD THAT MUMBAI OFFICE CANNOT BE TERMED TO BE PE OF THE ASSESSEE IN INDIA. ON THE EXCLUSI ON OF REVENUES FROM OUTSIDE INDIA OPERATION, THE TRIBUNAL CONCLUDED THE MATTER IN FAVOUR OF THE ASSESSEE WITH THE FOLLOWING OBSERVATIONS:- 12. THE ISSUE OF EXCLUSION OF REVENUES FROM OUTSIDE INDIA OPERATION IS COVERED BY NOT ONLY SUPREME COURT JUDGMEN T IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 1987-88 AND 1988-89 ITA NOS.2086 & 2087/DEL/2009 63 (SUPRA) BUT ALSO THE TRIBUNAL ORDER FOR ASSESSMENT YEA R 1989-90 AND THE CIT (A)S ORDER FOR ASSESSMENT YEAR 1992-93. FOR ASSESSMENT YEARS 2005-06 AND 2006-07, THE ASSESSING O FFICER HIMSELF DID NOT BRING TO TAX THE OUTSIDE INDIA RECEIPT. COPIES OF THESE ASSESSMENT ORDERS ARE BEFORE US AT PAGES 99 TO 10 4 AND 105 TO 109 RESPECTIVELY OF THE ASSESSEES PAPER BOOK. 65. HE SUBMITTED THAT SO FAR AS IT RELATES TO EXCLUSION OF REVENUES FROM INSIDE INDIA OPERATION, THE FINDINGS ARE RECORDE D IN PARA 13 OF THE ORDER. IN RESPECT OF THESE ASSESSMENT YEARS, THE TRIBUNAL HAS CONCLUDED THAT INSIDE INDIA OPERATION IN THE ABSENCE OF PE IN INDIA COULD NOT BE TAXED AND HE HAS TABULATED THE POSITION IN THE FOLLOWING TABLE:- S.NO. A.Y. PROJECTS INVOLVED REMARKS 1. 2000-01 B-55 CRMP IOCL BHN PROJECT COMPLETED IN LESS THAN 9 MONTHS, HENCE NO PE 2. 1997-98, 2000-01, 2003-04 AND 2004- 05 B-55 HX-HY IOCL B-121 FOR THE ASSESSMENT YEAR 1997-98, PROJECT IN LESS THAN 9 MONTHS, HENCE NO PE 3. 2001-02 ----- CRMP ------ BHN NO PE 66. HE SUBMITTED THAT FOURTH SET OF ORDER IS DATED 3 RD MARCH, 2004 PASSED BY THE TRIBUNAL IN RESPECT OF ASSESSMENT YEARS 1993- 94 AND THE SAID DECISION IS REPORTED AS 4 SOT 715. HE SUBMITTED TH AT IN THAT ORDER THE OBSERVATIONS OF THE TRIBUNAL IN PARA 18 TO 27 ARE IMPORTANT AND THE FINAL CONCLUSION OF ITAT WAS AS FOLLOWS:- THE ASSESSEE DID NOT HAVE PE IN INDIA AND THAT THE OUTSI DE INDIA WORKS WERE MOSTLY CARRIED OUT FROM KOREA ITSELF. THE D EPARTMENT HAS NOT BEEN ABLE TO CONTROVERT THIS FACTUAL FINDING. 67. REFERRING TO PARA 9, HE SUBMITTED THAT THE TRIBU NAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE ON THE OBSERVATIONS THAT CI T (A) HAD PLACED RELIANCE ON THE ORDER OF HIS PREDECESSOR FOR ASSE SSMENT YEAR ITA NOS.2086 & 2087/DEL/2009 64 1992-93 AND THE DEPARTMENT DID NOT PREFER APPEAL AG AINST THAT ORDER OF THE CIT(A). HE FURTHER SUBMITTED THAT IN PARA NO .24, THE TRIBUNAL HAS OBSERVED THAT EVEN AS PER GUIDELINES OF CBDT ORDER NO. 1767 DATED 1 ST JULY, 1987, THE DEPARTMENT WAS REQUIRED TO MAKE THOR OUGH PROBE AND INVESTIGATION TO ASCERTAIN AS TO WHAT WAS THE NATURE OF THE ESTABLISHMENT OF THE ASSESSEE IN INDIA FOR CARRYING OUT T HE PROJECTS IN QUESTION AND FOR THAT PURPOSE AN INQUIRY WAS NEEDED TO BE MADE REGARDING THE TERMS OF THE RELEVANT CONTRACTS AND THE ACTIVITIES CARRIED OUT BY THE ASSESSEE IN RESPECT THERETO AND THE DEPARTMEN T DID NOT CARRY SUCH INQUIRY ITSELF AND IT DID NOT REQUIRE THE ASSESSEE TO GIVE DETAILS IN RESPECT THEREOF. AS AGAINST THAT, ASSESSEE HAD OBTAINED AND FILED CERTIFICATES FROM TAX AUTHORITIES OF KOREAN GOV ERNMENT AS WELL AS FROM ONGC ABOUT THE ACTIVITIES CARRIED OUT BY THE ASSE SSEE. SIMILARLY, HE ALSO REFERRED TO THE PARAS 25, 26 AND 27 OF THE AF OREMENTIONED ORDER. HE SUBMITTED THAT THE CLEAR MANDATE OF THE T RIBUNAL WAS THAT THE DEPARTMENT DID NOT MAKE ANY INQUIRY. 68. IN THE FACTS HE SUBMITTED THAT IT WILL BE RELEVAN T TO EXAMINE THE QUESTION WHETHER AN ASSESSING OFFICER CAN ENTER INTO AN AGREEMENT WITH THE ASSESSEE TO BIND THE DEPARTMENT IN PERPETUITY TO ADOPT A FORMULA DEVISED BY HIM AND THE ASSESSEE. HE SUBMITTED TH AT THE SITUATION IN THE PRESENT CASE IS MORE THAN INTRIGUING A S THE FORMULA EVEN IGNORES THE RULE LAID DOWN BY HONBLE APEX COUR T THOUGH SUBSEQUENT TO THE ORDER PASSED BY THE ASSESSING OFFICER. H E SUBMITTED THAT IF THE ARGUMENT OF THE ASSESSEE IS TO BE ACCEPTED THAT THIS FORMULA REQUIRES TO BE ADOPTED FOR ALL THE TIME TO COME, TILL APPELLANT REMAINED ENGAGED INTO THE BUSINESS, THEN, TH ERE WILL BE NO END TO THE MATTER. HE SUBMITTED THAT EVEN ACCORDING TO THE RULE OF CONSISTENCY SUCH CASE OF THE ASSESSEE CANNOT BE ACCEPTED. HE SUBMITTED THAT IF THE RULE OF CONSISTENCY IS SEEN IN THE LIGHT OF THE INDIAN LAW, THEN, IT CAN BE SAID THAT MANDATE GIVEN IN SECTION 44BB IS ITA NOS.2086 & 2087/DEL/2009 65 TO COMPUTE PROFIT @ 10% IS A LAW WHICH CANNOT BE GIV EN A GO BY JUST FOR THE SAKE OF MAINTENANCE OF CONSISTENCY. HE, IN TH IS REGARD, REFERRED TO THE DECISION OF ITAT DELHI IN THE CASE OF DSD INDU STRIEANLAGEN GMBH VS. DY. DIRECTOR OF INCOME TAX 129 TTJ 84 (DEL). HE SUBMITTED THAT RULE OF CONSISTENCY ALONE CANNOT BE DECISIVE, THE NATURE OF EXPENSES WAS ALSO AN IMPORTANT QUESTION OF LAW AND REFERENCE WAS MA DE TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. OSWAL AGRO MILLS LTD. 313 ITR 24 (SC). HE FURTHER SUBMITTED THA T EVEN DEVIATION IS PERMISSIBLE FROM THE CONSISTENT METHOD WHERE THERE IS IN SUFFICIENCY IN THE PROBATIVE AND PROBABLE VALUE OF THE EXPENDITURE INCURRED AND, FOR THIS PURPOSE, HE RELIED UPON THE DECISION OF HONBLE D ELHI HIGH COURT IN THE CASE OF SAGA DEPARTMENTAL STORES LTD. VS. CIT 325 ITR 324 (DEL). HE SUBMITTED THAT IN THE CHANGED CIRCUMSTANCES IT IS PO SSIBLE TO DIFFER FROM AN EARLIER VIEW AND REFERENCE WAS MADE TO THE D ECISION OF MUNICIPAL CORPORATION OF CITY OF THANE, PETITIONER VS. M/S VIDYUT METALLICS LTD. & ANR., RESPONDENT (2007) 8 SCC 688. 69. HE SUBMITTED THAT IF IT IS SEEN IN THE LIGHT OF TH E OECD MODEL CONVENTION AND OTHER COMMENTARIES, ACCORDING TO OPIN ION EXPRESSED BY LATE PROF. KLAUS VOGEL ON PARA 6 OF ARTICLE 7, I S IN PARI MATERIA WITH THE PARA 5 OF INDO-KOREAN DTAA. REFERENCE IN THIS R EGARD WAS MADE TO THE RELEVANT PORTION OF THE COMMENTARY OF KLAUS V OGEL WHICH IS PLACED AT PAGE 138 OF THE PAPER BOOK. 70. HE SUBMITTED THAT MEANING OF THE WORD ERRONEOUS AS EXISTED IN SECTION 263 HAS BEEN EXPLAINED BY JURISDICTIONAL HIGH COURT IN THE CASE OF DUGGAL & COMPANY VS. CIT 220 ITR 456 (DEL) WHEREI N IT HAS BEEN HELD THAT CIT CAN REGARD AN ORDER ERRONEOUS ON THE G ROUND THAT IN THE CIRCUMSTANCES OF THE CASE THE ASSESSING OFFICER SHOULD HAVE MADE FURTHER INQUIRIES BEFORE ACCEPTING THE STATEMENT MADE BY THE ASSESSEE IN HIS RETURN. SIMILAR RATIO HAS BEEN LAID DOWN IN T HE CASE OF RAJALAXMI MILLS LTD. VS. ITO 121 ITD 343 (CHENNAI) (SB). HE SUB MITTED THAT IN ALL ITA NOS.2086 & 2087/DEL/2009 66 THE AFOREMENTIONED DECISIONS THE MANDATES OF THE COURT WAS BASED ON THE FACT THAT THE DEPARTMENT DID NOT MAKE INQUIRIES. HE REFERRED TO THE DECISION OF DELHI HIGH COURT IN THE CASE OF CIT VS. SU NBEAM AUTO LTD. 189 TAXMAN 436 (DEL) TO SUBMIT THAT IN A CASE WHERE T HE ASSESSING OFFICER HAS ACCEPTED WITHOUT OBTAINING THE DETAILS AN D WITHOUT CONDUCTING FURTHER INQUIRY, AS ASSESSMENT HAD BEEN COMPL ETED IN ROUTINE MATTER WITHOUT APPLICATION OF MIND, THE COM MISSIONER WAS JUSTIFIED IN HOLDING THAT ASSESSMENT ORDER WAS ERRONEOUS A ND PREJUDICIAL TO THE INTEREST OF REVENUE. FOR THIS PUR POSE, LD. AR ALSO PLACED RELIANCE ON THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF SMT. RENU GUPTA VS. CIT, 301 ITR 0045 (RAJ). HE SUBMITTED THAT DOCTRINE OF MERGER IS NOT APPLICABLE TO THE FAC TS OF THE CASE AND HE PLACED RELIANCE ON THE FOLLOWING DECISIONS:- I) AERENS INFRASTRUCTURE AND TECHNOLOGY LTD. VS. CIT ( 2004) 271 ITR 15 (DEL) II) CIT VS. PRINTERS HOUSE (1998) 233 ITR 666 (DEL) III) CIT VS. GANESH STEEL INDUSTRIES (2009) 184 TAXMA N 220 (P&H) IV) PANCHAMAN TRADERS VS. CIT (2010) 191 TAXMAN 264 (KER.)/(2010) 323 ITR 334 (KER.) 71. HE SUBMITTED THAT POWER OF REVISION HAS BEEN HELD TO BE CORRECTLY EXERCISED IN A CASE WHERE A CONTRACTOR EARL IER ASSESSED @ 10% WAS REQUIRED TO BE ASSESSED BY THE COMMISSIONER ON THE FULL AMOUNT RECEIVED AS AN ARBITRATION AWARD IN RESPECT OF SOME CONTRACT AND HE REJECTED THE ORDER OF ASSESSING OFFICER WHERE HE HAD ASSESSED ONLY 10% OF THE AMOUNT OF ARBITRATION AWARD AND REF ERENCE IN THIS REGARD WAS MADE TO THE DECISION IN THE CASE OF VEDICAT TU ENGINEERING COMPANY VS. CIT 302 ITR 142 (KER.) 72. HE SUBMITTED THAT FAILURE OF THE ASSESSEE TO PRODUCE DOCUMENTS, ETC. MAY INVITE ADVERSE INFERENCE AND HE IN THIS REGA RD REFERRED TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF C IT VS. MOTOR ITA NOS.2086 & 2087/DEL/2009 67 GENERAL FINANCE LTD.. 254 ITR 449 (DEL) AND MOTOR G ENERAL FINANCE LTD. VS. CIT 267 ITR 381 (SC) WHEREIN IT WAS HELD THAT SINC E THE ASSESSEE HAD NOT PRODUCED MATERIAL DESPITE OPPORTUNITIES GIVEN BY THE ASSESSING OFFICER, AN ADVERSE INFERENCE IN TERMS OF SECTI ON 114 OF INDIAN EVIDENCE ACT WAS TO BE DRAWN. 73. HE FURTHER SUBMITTED THAT INSTRUCTION NO.1767 DAT ED 14 TH JULY, 1987 WAS APPLICABLE ONLY FOR A PERIOD OF THREE YEARS BEGINNING FROM ASSESSMENT YEAR 1987-88 AND NOT BEYOND THAT. 74. REPLYING TO THE ARGUMENTS SUBMITTED BY LD. AR, HE SUBMITTED THAT WHEN THE ASSESSING OFFICER PASSED ASSESSMENT ORDER FOR ASSESSMENT YEAR 2005-06, HE HAD BENEFIT OF THE FOLLOWIN G ORDERS PASSED BY ITAT AND HIGH COURT:- I) ORDER DATED 30.8.1999 OF THE ITAT IN RESPECT OF A.Y . 1986-87 TO 1988-89 II) ORDER DATED 3.3.2004 OF THE ITAT IN RESPECT OF A.Y . 1993-94 III) ORDER DATED 19.5.2006 OF THE ITAT IN RESPECT OF A .Y. 1994-95 & 1995-96. IV) ORDER DATED 30.3.2006 OF HONBLE HIGH COURT IN RE SPECT OF A.Y. 1986-87 TO 1988-89 75. HE SUBMITTED THAT THE ASSESSING OFFICER FAILED TO FO LLOW OBSERVATIONS/REMARKS MADE BY THE ITAT TO FIND OUT WHET HER IT WAS PE IN RESPECT OF MUMBAI OFFICE OR THAT INSTALLATION PE R ENDERED ANY SERVICES IN RESPECT OF OPERATION OUTSIDE INDIA SO AS TO T AX REVENUE FROM OUTSIDE INDIA OPERATION AS BEING ATTRIBUTABLE TO PE I N INDIA. THE REVENUES FROM OUTSIDE INDIA OPERATIONS WERE BEING CONSI STENTLY TAXED BY THE DEPARTMENT @ 1% OF THE GROSS RECEIPTS UPTO ASSESSME NT YEAR 2004-05 AND THE ASSESSING OFFICER, FOR THE FIRST TIME, I N ASSESSMENT YEAR 2005-06, WITHOUT ASSIGNING ANY REASON FAILED TO F OLLOW THE EARLIER ORDERS. HE FAILED TO EXAMINE THE ISSUES CONCERNING THE CLAIM OF THE ITA NOS.2086 & 2087/DEL/2009 68 ASSESSEE REGARDING REVENUE FROM OUTSIDE INDIA OPERATIONS THOUGH THE FACTS WERE ALTOGETHER DIFFERENT FROM THE FACTS OF EAR LIER YEARS. THE ASSESSING OFFICER HAS RECORDED IN PARA 2 OF THE OFFICE N OTE THAT THE DEPARTMENT HAS NOT ACCEPTED THE DECISION OF HONBLE H IGH COURT AND THE APPEAL IS FILED IN HONBLE SUPREME COURT. IT IS FURTHER RECORDED THAT IN CASE THE HONBLE SUPREME COURT DECIDES TO TAX THE OUTSIDE INDIA RECEIPTS IN THE CASE OF THE ASSESSEE, THE ACTION SHALL BE TAKEN AS PER LAW. THUS, HE SUBMITTED THAT THE ASSESSING OFFICER FAILE D TO MAKE INQUIRIES WHICH WERE REQUIRED TO BE MADE. HE SUBMITT ED THAT REVENUE FROM INSIDE INDIA OPERATION WAS TAXED @ 20% BY THE ASSE SSING OFFICER FOR ASSESSMENT YEARS 1986-87 TO 1988-89 WHICH WAS REDUCED BY THE CIT (A) @ 10% OF THE GROSS RECEIPTS AND FURTHER REDUCE D TO 3% OF THE GROSS RECEIPTS BY THE ITAT IN ORDER DATED 30 TH AUGUST, 1999. 76. REPLYING TO THE FIRST ISSUE RAISED BY THE ASSESSEE THAT LD. DIT HAS SET ASIDE THE ENTIRE ASSESSMENT ORDER WHICH SWEEPS THE INCO ME FROM THE PROJECT HAL, LD. SPECIAL COUNSEL SUBMITTED THAT INCOME FROM INTEREST AND HAL PROJECT IS DISCUSSED BY THE ASSESSING OFFIC ER IN PARA 6, 6.1 AND 7 OF THE ASSESSMENT ORDER AND HE HAS REJECTED THE EXPLANATION OF THE ASSESSEE IN REGARD TO HAL PROJECT. LD. AR SUBMITTED THAT THE ENTIRE CASE OF THE ASSESSEE REVOLVES AROUND TWO STREAMS OF REVENUE BEING INSIDE AND OUTSIDE INDIA OPERATIONS AND ON THESE ASPECTS LD. DIT HAS FOUND THAT ORDER OF ASSESSING OFFICER IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. 77. WITH REGARD TO THE OBJECTION OF THE ASSESSEE REGARD ING ASSESSIBILITY OF THE REVENUE FROM OPERATION OUTSIDE IND IA, HE SUBMITTED THAT THE HONBLE SUPREME COURT IN THE CASE OF THE ASSE SSEE ITSELF OBSERVED THAT THERE WAS NO ALLEGATION MADE BY THE DEP ARTMENT THAT THE PE CAME INTO EXISTENCE EVEN BEFORE THE SALE TOOK PLACE OUTSIDE INDIA. THERE WAS NO ALLEGATION MADE BY THE DEPARTME NT THAT THE PRICE AT WHICH ONGC WAS BILLED/INVOICED BY THE ASSESSEE FOR SUP PLY OF ITA NOS.2086 & 2087/DEL/2009 69 FABRICATED PLATFORM INCLUDING ANY ELEMENT FOR SERVIC ES RENDERED BY THE PE AND IT IS IN THESE CIRCUMSTANCES THE OUTSIDE INDIA RE VENUE WERE NOT HELD TO BE TAXABLE AND THE MATTER WAS NOT REMITTED B ACK. HE SUBMITTED THAT IN THE LIGHT OF THESE OBSERVATIONS OF TH E HONBLE SUPREME COURT THE ASSESSING OFFICER HAS GROSSLY FAILED TO EXAMINE THE ACTIVITIES OF THE PE IN THE YEARS UNDER CONSIDERATION AS THERE WAS NO DISPUTE THAT PE EXISTED IN THESE YEARS. HE SUBMITTED TH AT IN EARLIER YEARS THE EXISTENCE OF INSTALLATION PE ITSELF WAS IN QUE STION AND THE DEPARTMENT WAS ONLY MAKING ITS CASE ON THE BASIS OF PRESE NCE OF THE PROJECT OFFICE IN MUMBAI. HE CONTENDED THAT ONCE P E WAS AN ADMITTED FACT, THEN, IT WAS THE DUTY OF THE ASSESSING OFFICER TO ASCERTAIN THE ACTIVITIES OF SUCH PE. THE ASSESSING OFFICER WAS REQUIRED TO MAKE INQUIRIES IN RESPECT OF PROJECT OFFICE AT MUMBAI EVEN AS PER AFOREMENTIONED ORDER OF THE TRIBUNAL IN RESPECT OF A SSESSMENT YEAR 1993-94. 78. IT WAS FURTHER SUBMITTED THAT LD. DIT IS NOT WRONG IN CONSIDERING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF THE ASSESSEE, THOUGH THE ASSESSING OFFICER WHEN PASSED ORDER FOR ASSESSMENT YEAR 2005-06 HAD NO BENEFIT OF DECISION OF HONBLE SUPREM E COURT AS IT WAS RENDERED MUCH LATER TO THE DATE OF THE ASSESSMENT. IT WAS POINTED OUT THAT NEVERTHELESS, THE ASSESSING OFFICER HAD THE BENEFIT OF AT LEAST THE ORDER OF THE CIT (A) WHICH WAS FOLLOWED BY ITAT AND, THUS, POWERS U/S 263 WERE RIGHTLY INVOKED. 79. IN RESPONSE TO THE ARGUMENT OF THE ASSESSEE THAT THE ASSESSING OFFICER WAS CORRECT IN FOLLOWING THE METHOD ADOPTED IN PAST YEARS FOR ASSESSING THE INCOME OF THE ASSESSEE AS PER LETTER DATED 1 ST FEBRUARY, 1995 PROPOSED BY THE DEPARTMENT DURING THE COURSE OF PROCEEDINGS BEFORE THE CIT (A), IT WAS SUBMITTED BY LD. SPECIAL C OUNSEL THAT AS PER LETTER DATED 13 TH MARCH, 2009 FILED BY THE ASSESSEE BEFORE DIT DURING THE COURSE OF PROCEEDINGS U/S 263, IT WAS MENTIONED IN PARA 11 OF THE ITA NOS.2086 & 2087/DEL/2009 70 SAID LETTER THAT FOR ASSESSMENT YEAR 1990-91 THE DEPARTM ENT AND THE ASSESSEE HAD AGREED BEFORE CIT (A) FOR A PROPOSAL OF APP LICATION OF DEEMED PROFIT RATE OF 10% AFTER ALLOWING THE SUB-CON TRACTOR COST AND SALARY ON WHICH TDS HAS BEEN DEDUCTED READ WITH SECTIO N 40 OF THE ACT AND ARTICLE 7 OF THE CONVENTION AND THE SAID FACT HA S BEEN MENTIONED BY THE CIT (A) IN HIS ORDER DATED 19 TH APRIL, 1995 FOR ASSESSMENT YEAR 1990-91 AND THE ASSESSEE HAD STATED BEFORE THE CIT (A) THAT HE ACCEPT SUCH PROPOSAL WITHOUT PREJUDICE AND IN ORDER T O BUY PEACE AND TO AVOID LITIGATION. IN SUCH A CASE, THE ASSESSEE WILL N OT PRESS FOR OTHER EXPENSES OF MARINE COST, MINERAL INSURANCE AND TRANSPOR TATION, ETC. WITH REGARD TO THESE SUBMISSIONS, WHEN THE COMMENTS WERE CALLED UPON FROM ASSESSING OFFICER, HE MENTIONED THAT THE ASSESSME NT ORDER UNDER CONSIDERATION MAY BE RESTORED BACK FOR FRAMING IT DENOVO. HE SUBMITTED THAT NOW THE ASSESSEE CANNOT ALLEGE THAT THE D EPARTMENT MADE THIS OFFER WHICH WAS HESITATINGLY AGREED. HE SUBM ITTED THAT IT CAN BE SEEN THAT THE ASSESSEE ITSELF INITIALLY OFFERED TH E REVENUE FROM INSIDE OPERATION TO BE TAXED IN TERMS OF SECTION 44BB OF THE ACT AND NOT UNDER DTAA BETWEEN INDIA AND KOREA AND AS THIS FA CT HAS BEEN RECORDED IN THE DECISION OF HONBLE SUPREME COURT IN PARA 13 OF THE JUDGEMENT DATED 19 TH MAY, 2007. HE SUBMITTED THAT IT APPEARS THAT IT IS AT A LATER STAGE, AFTER HAVING REALIZED THAT IT MA Y BE REQUIRED TO PAY MORE TAX IF IT OPTS FOR APPLICATION OF SECTION 44BB AS WAS DONE FOR ASSESSMENT YEARS 1986-87 TO 1988-89, THE ASSESSEE CHANGED IT S STAND TO BE ASSESSED UNDER THE RELEVANT TAX TREATY AND THUS, T HE ASSESSEE NOW CANNOT CLAIM THAT THE SAME BASIS BE ALLOWED TO BE CONTINUED IN PERPETUITY EVEN WHEN THE FACTS AND CIRCUMSTANCES CHANG ED OVER THE YEARS. 80. IN RESPONSE TO THE ARGUMENTS OF THE LD. COUNSEL OF THE ASSESSEE THAT LD. DIT HAS FAILED TO CONSIDER THE ORDER OF ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1990-91, 1991-92 AND 1996-97 AS WELL AS FOR ITA NOS.2086 & 2087/DEL/2009 71 ASSESSMENT YEAR 1993-94 WHICH WERE AVAILABLE TO HIM DUR ING THE COURSE OF PROCEEDINGS U/S 263 OF THE ACT, LD. SPECIAL COUNSEL SUBMITTED THAT THE MANNER IN WHICH THOSE ASSESSMENTS WERE FRAMED HA S BEEN MADE CLEAR IN THE AFOREMENTIONED ARGUMENTS AND THERE WAS NOTHING TO CONSIDER FOR THE DIT AND DIT IS NOT SUPPOSED TO LOOK IN TO THESE DETAILS. IN THE REVISION PROCEEDINGS WHAT HE IS EXPECTED TO EXA MINE IS THE ASSESSMENT ORDER MADE BY THE ASSESSING OFFICER AND ITS MERIT S IN ORDER TO DETERMINE THAT WHETHER SUCH ORDER FALLS WITHIN THE AMBIT OF SECTION 263. 81. IN RESPONSE TO THE ARGUMENTS OF THE LD. AR OF THE ASSESSEE THAT LD. DIT DID NOT CONSIDER OFFICE NOTE RECORDED BY THE ASSESSING OFFICER, IT WAS SUBMITTED BY LD. SPECIAL COUNSEL THAT LD. DIT H AS RECORDED IN HIS ORDER THAT HE HAS EXAMINED THE RECORDS OF THE CASE AND , THEREFORE, THE ALLEGATION OF LD. AR THAT HE DID NOT EXAMINE THE OF FICE NOTE IS WITHOUT ANY BASIS. HE SUBMITTED THAT OFFICE NOTE PARAS 1-3 AN D 3.1, PARA 1 DEALS WITH THE METHOD ADOPTED FOR THE ASSESSMENT OF REVE NUE FROM INSIDE INDIA OPERATION WHICH IS BASED ON THE STAND TAKE N BY THE DEPARTMENT IN THE PRECEDING ASSESSMENT YEARS AS PROVIDED IN PARA 5 OF ARTICLE 7 OF DTAA. PARA 2 DEALS WITH THE REVENUES FR OM OPERATION OUTSIDE INDIA AND IN THE END THE ASSESSING OFFICER HIMSEL F RECORDS THAT IN CASE OF HONBLE SUPREME COURT DECIDE TO TAX OUTSID E INDIA RECEIPTS, THEN, ACTION SHALL BE TAKEN AS PER LAW. HE SUBMITTED THAT LD. DIT IN HIS REVISION ORDER HAS CONSIDERED OFFICE NOTE FOR BOTH THE YEARS AND HAS COME TO THE CONCLUSION THAT ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER IS ERRONEOUS AS WELL AS PREJUDICIAL TO THE INTE REST OF THE REVENUE. 82. IN RESPONSE TO ARGUMENTS OF THE LD. COUNSEL OF THE ASSESSEE THAT DIT HAS IGNORED THE ORDERS OF ITAT FOR ASSESSMENT YEAR 19 86-87 AND 1987-88 WHICH HAVE BEEN CONFIRMED BY HONBLE SUPREM E COURT HOLDING THAT EVEN UNDER ARTICLE 7 (3) OF THE TREATY , THE ASSESSING ITA NOS.2086 & 2087/DEL/2009 72 OFFICER AFTER REJECTING THE ACCOUNTS HAD RIGHTLY MAD E BEST JUDGEMENT ASSESSMENT AS PER SECTION 145 (3) OF THE ACT. HE SUBMITT ED THAT IN FACT THE ASSESSING OFFICER IS TO BE FAULTED FOR THAT LAP SE. THE ITAT FOR THOSE ASSESSMENT YEARS HAD HELD THAT REVENUE FROM INSIDE I NDIA OPERATIONS WERE TO BE TAXED @ 3% OF THE GROSS RECEIPTS AND THOSE FINDINGS WERE REVERSED BY THE HONBLE APEX COURT AND THE ORDER OF THE CIT (A) WAS RESTORED FOR TAXING THE INCOME FROM INSIDE INDIA OPERATIONS @ 10%. AS REGARDS THE INCOME FROM OUTSIDE INDIA OPERA TION, THE FINDINGS OF THE ITAT WERE UPHELD IN THE CONTEXT OF F ACTS AND CIRCUMSTANCES OF THE CASE AND HONBLE SUPREME COURT HA S NOT LAID DOWN AN OMNIBUS RULING THAT IN ALL SITUATIONS SUCH AN INCOME IS NOT EXIGIBLE TO TAX. THE DECISION WAS BASED ON THE FACT F OUND FOR THOSE ASSESSMENT YEARS AND THE FACTS FOR THE YEARS UNDER CONSIDER ATION ARE ALTOGETHER DIFFERENT FOR THE REASON THAT FOR THE PRE SENT YEARS THERE IS NO DISPUTE THAT PE WAS EXISTING. THE ONLY INQUIRY WHI CH WAS LEFT TO BE DONE WAS IN THE CONTEXT OF THE JUDGEMENT OF THE HON BLE SUPREME COURT TO FIND OUT WHETHER THIS PE HAS RENDERED ANY SER VICE AND TO ASCERTAIN WHETHER THE INCOME FROM THE ACTIVITIES OUTSI DE INDIA COULD BE ATTRIBUTED TO THE SAID PE ON ACCOUNT OF ANY NEXUS OF SUCH AN ACTIVITY WITH THE SAID PE. THE ASSESSING OFFICER HAD FAILED TO M AKE SUCH INQUIRIES AND IT IS WHAT HAS BEEN NOTICED BY THE LD. D IT. 83. WITH REGARD TO THE ARGUMENT OF LD. AR THAT LD. DIT DID NOT CONSIDER THE INFORMATION AVAILABLE ON RECORD, WHILE ADJUDICATING THE ISSUE, IT WAS SUBMITTED BY LD. SPECIAL COUNSEL THAT SUCH AN ALLEGATION IS WITHOUT ANY BASIS. LD. DIT HAS CATEGORICALLY RECORD ED THIS FACT THAT HE HAS EXAMINED THE RECORD OF THE CASE AND HE HAS PASSED THE DETAILED ORDER THEREAFTER. 84. HE SUBMITTED THAT AS PER ARGUMENT OF THE LD. AR, LD. DIT HAS ERRED IN IGNORING RULE 10 OF IT RULES, 1962 WHICH DE ALS WITH THE DEDUCTION OF INCOME IN CASE OF NON-RESIDENTS, IN PARTI CULAR, CLAUSE (III) ITA NOS.2086 & 2087/DEL/2009 73 OF THE SAID RULE WHICH ENABLE AN ASSESSING OFFICER TO CO MPLETE INCOME IN A MANNER AS HE MAY DEEM SUITABLE, IT WAS SUBMITTED T HAT THERE IS NO REFERENCE TO THE APPLICABILITY OF THESE RULES IN THE ASSESSMENT ORDER BY THE ASSESSING OFFICER. THE ASSESSEE HAS EXERCISED ITS OPTION TO BE BASED IN THE TERMS OF DTAA BETWEEN INDO-KOREAN AND IF IT IS SO, THERE IS NO RATIONALE OF APPLICABILITY OF THESE RULES. 85. IN RESPONSE TO THE ARGUMENT OF LD. AR THAT LD. DI T HAS ERRED IN CONSIDERING THE PROVISIONS OF INTERNATIONAL TAX TREATY LITERALLY, IT WAS SUBMITTED BY LD. SPECIAL COUNSEL THAT LD. DIT HAS NOT GONE INTO THIS ASPECT AT ALL AND THE ORDER PASSED BY THE ASSESSING OFFICE R HAS BEEN FOUND TO BE ERRONEOUS IN VIEW OF THE FINDINGS RECORDE D BY THE LD. DIT IN PARAS 7.1 AND 7.3 AT PAGES 15 AND 16 OF HIS ORDER. TH EREFORE, HIS ORDER CANNOT BE SAID TO BE LEGALLY UNTENABLE. 86. IN RESPONSE TO THE ARGUMENT OF LD. AR OF THE ASSESSEE THAT IN THE FRESH ASSESSMENT ORDER ISSUED AS A DRAFT ORDER, THE ASSESSING O FFICER HAS COMPUTED THE INCOME OF THE ASSESSEE AT LESSER AMOUNT F ROM INSIDE INDIA OPERATION AND SUCH ORDER OF THE ASSESSING OFFICER HAS BEEN APPROVED BY THE DRP U/S 144C OF THE ACT OF WHICH LD. DIT HIMSELF IS ONE OF THE MEMBERS. HE SUBMITTED THAT IF SUCH LOGIC OF TH E ASSESSEE IS ACCEPTED, THEN, BY SAME LOGIC THE UPWARD REVISION IN RESPECT OF REVENUE FROM OUTSIDE INDIA OPERATION IN THE FRESH ASSESSM ENT ORDER SHOULD BE CONFIRMED. IT WAS SUBMITTED THAT THE SCOPE O F THE PRESENT APPEAL SHOULD BE RESTRICTED TO THE FACTS AND CIRCUMSTAN CES EXISTING AT THE TIME OF REVISION BY THE LD. DIT AND NOT TAKING I NTO CONSIDERATION THE DEVELOPMENT IN SUBSEQUENT PROCEEDINGS AND THE REASON FO R DOING SO IS THAT THERE ARE CERTAIN CONTENTIONS RAISED BY THE ASSESSEE WHICH ARE IN CONFLICT WITH THE CONTENTIONS BEING RAISED IN THE COU RSE OF THE PRESENT APPEAL. AT THIS STAGE THE REVENUE WOULD NOT LIKE TO PREJUDICE THE CASE OF THE ASSESSEE ON THIS GROUND IN THE MANNER THAT THE ASSE SSEE IS ITA NOS.2086 & 2087/DEL/2009 74 SEEKING TO PREJUDICE THE CASE OF REVENUE BY RAISING TH E ISSUE OF FRESH ASSESSMENT PROCEEDINGS PURSUANT TO ORDER U/S 263 OF THE AC T. 87. WITH REGARD TO THE ARGUMENT OF LD. AR THAT DIT HAS FAILED TO ISSUE FRESH SHOW CAUSE NOTICE TO THE ASSESSEE ON CERTAIN ISSUES IN CORPORATED IN HIS FINAL ORDER FOR WHICH NO NOTICE WAS GIVEN TO T HE ASSESSEE AND, THEREFORE, HIS ORDER IS VIOLATIVE OF PRINCIPLES OF NAT URAL JUSTICE IT WAS SUBMITTED THAT THERE WAS NO NECESSITY OF ISSUING SUCH SHOW CAUSE NOTICE AS THE ASSESSEE WAS GIVEN FULL OPPORTUNITY TO MEE T OUT HIS CASE AND IN FACT NO SUCH GROUND HAS ALSO BEEN TAKEN IN THE GROUNDS OF APPEAL FILED BY THE ASSESSEE AND, IN THIS MANNER, LD. SP ECIAL COUNSEL HAS CONCLUDED THE ARGUMENTS ON BEHALF OF THE REVENUE. 88. IN REJOINDER, LD. COUNSEL OF THE ASSESSEE SUBMITTED T HAT LD. SPECIAL COUNSEL OF THE REVENUE IS INCORRECT IN CONTEN DING THAT THE ASSESSEE HAS A PE IN INDIA. HE SUBMITTED THAT THE REAL Q UESTION IS THAT WHETHER THE ASSESSEE HAS AN INSTALLATION PE IN THE TERMS O F ARTICLE 5 (3) OF THE DTAA. HE SUBMITTED THAT FOR THE ASSESSMENT YEARS 1986-87 TO 1988-89, THE TRIBUNAL IN ITS ORDER REGARDING EXISTENC E OF PE IN PARAS 44 AND 45 HAS HELD AS UNDER:- A) SPECIFIC PROVISION OF ARTICLE 5(3) OF THE DTAA PRE VAILS OVER GENERAL PROVISIONS OF ARTICLE 5(1) & 5(2). B) AS REGARDS EXISTENCE OF PE, THE ASSESSEE HAS NOT FU RNISHED ANY PROOF WHICH WOULD SHOW THAT THE INDIAN PORTION WAS COMP LETED WITHIN 9 MONTHS IN ORDER TO ESCAPE THE EXISTENCE OF INSTA LLATION PE UNDER ARTICLE 5(3) OF THE DTAA. C) ONCE THE BOOKS ARE FOUND TO BE UNRELIABLE AND THE A O REJECTS THE ACCOUNTS IT UPHELD APPLICATION OF PROVISIONS OF SEC . 145. D) COMPUTATION OF INCOME ON ESTIMATE BASIS SHOULD BE MA DE AT 3% OF GROSS RECEIPTS. 89. HE SUBMITTED THAT UTTARAKHAND HIGH COURT HAS CON FIRMED THE ORDER OF THE ITAT. THE ASSESSING OFFICER DID NOT APPLY 3% RATE OF GROSS ITA NOS.2086 & 2087/DEL/2009 75 RECEIPTS BECAUSE THE FORMULA OFFERED TO THE ASSESSEE EARL IER IN 1995 AND ACCEPTED BY THE ASSESSEE WOULD YIELD MUCH HIGHER TA XABLE INCOME FROM OPERATIONS INSIDE INDIA. HE IN THIS REGARD REFER RED TO A CHART PLACED AT ANNEXURE III ACCORDING TO WHICH IF THE RA TE OF 3% IS APPLIED AS PER ITAT DECISION, THEN, TAX PAID/PAYABLE BY THE ASSESSE E WILL COME TO ` 6.93 CRORE AGAINST ` 16.08 CRORE LEVIED BY THE ASSESSI NG OFFICER VIDE ASSESSMENT ORDER DATED 9 TH MARCH, 2007. HE SUBMITTED THAT EVEN IN THE ASSESSMENT FRAMED IN PURSUANCE OF ORDER U/S 263 THE T AX LEVIED ON INSIDE INDIA REVENUE IS ONLY A SUM OF ` 10.22 CRORE WH ICH IS LESS THAN THE TAX LEVIED BY THE ASSESSING OFFICER IN HIS ORDER DAT ED 9 TH MARCH, 2007. 90. HE FURTHER SUBMITTED THAT THE DISPUTE ON THE SAME ISSUE AGAIN AROSE IN ASSESSMENT YEARS 1994-95 AND 1995-96 AND THE TRI BUNAL AFTER CONSIDERING THE SIMILAR PLEA OF LD. DR THAT DURING TH OSE YEARS THE INSTALLATION PE HAD CAME INTO EXISTENCE HAS HELD THAT NO PROFIT FROM OPERATIONS OUTSIDE INDIA WAS ATTRIBUTABLE TO THE PE AND AFTER CONSIDERING THE DECISION OF APEX COURT IN THE CASE OF THE ASSESSEE ITSELF, THE TRIBUNAL HAS HELD THAT IN THE FACTS AND C IRCUMSTANCES OF THE CASE PROFIT EARNED, IF ANY, FROM THE KOREAN OPERATIO NS (DESIGNING AND FABRICATION) IS NOT TAXABLE IN INDIA BECAUSE THE SAME HAS ARISEN OUTSIDE INDIA. HE SUBMITTED THAT THE ASSESSING OFFICER DID NOT HAVE THE BENEFIT OF HONBLE SUPREME COURT DECISION AND AS AGAI NST THAT LD. DIT WAS HAVING BEFORE HIM THE SAID DECISION OF HONBLE SUP REME COURT AND LD. DIT DID NOT DISCUSS THAT DECISION IN HIS ORDER AND T HERE IS NO ALLEGATION IN THE ORDER OF THE DIT THAT THE CONSIDER ATION FOR SUPPLIES, PROCUREMENT AND FABRICATION OUTSIDE INDIA WAS NOT AT ARMS LENGTH PRICE OR THAT THE PRICE PAID BY ONGC/GMR FOR OPERAT IONS OUTSIDE INDIA INCLUDES ANY ELEMENT FOR THE ACTIVITY OF PE IN INDIA . HE SUBMITTED THAT IN THE ABSENCE OF ANY SUCH ALLEGATION LD. SPECIAL COU NSEL IS PRECLUDED FROM JUSTIFYING THE SETTING ASIDE OF THE ASSESSMENT ORDER IN RESPECT OF ITA NOS.2086 & 2087/DEL/2009 76 INCOME FROM OPERATIONS OUTSIDE INDIA BY RAISING ALTOGE THER A NEW ISSUE AND REFERENCE IN THIS REGARD WAS PLACED ON THE DECISIO N OF THE TRIBUNAL IN THE CASE OF KAVAL PRO EXPORTS 297 ITR (AT) 49. HE SUBMITTED THAT PERUSAL OF NOTICE U/S 263 WILL SHOW THAT LD. DIT HAS SET ASIDE THIS PART OF ASSESSMENT ORDER SOLELY ON THE GROUND OF NON-APPLICAT ION OF MIND BY THE ASSESSING OFFICER AS, ACCORDING TO HIM, THE ASSESSING OF FICER DID NOT CONSIDER THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF THE ASSESSEE. IT WAS SUBMITTED THAT THE SAID DECISION OF HONB LE SUPREME COURT WAS PRONOUNCED MUCH LATER FROM THE DATE OF ASSESSM ENT ORDER. HE SUBMITTED THAT IN THE OFFICE NOTE THE ASSESSING OFFIC ER HAS CLEARLY RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES CO. LTD (SUPRA) AND DECISION OF HONBLE UTTARAKHAND HIGH COURT IN THE CASE OF THE ASSE SSEE ITSELF AND LD. DIT HAS FAILED TO POINT OUT AS TO HOW THE ASSESSING O FFICER HAS ERRED IN FOLLOWING THOSE DECISIONS. 91. WITH REGARD TO INCOME FROM OPERATION OF PE INSID E INDIA, IT WAS SUBMITTED BY LD. AR THAT SPECIAL COUNSEL OF THE REVEN UE IS CONSTRUING THE PROVISIONS OF ARTICLE 7 LITERALLY WHICH IS NOT PER MISSIBLE AS PER DECISION RELIED UPON BY HIM WHILE SUBMITTING HIS ARGUM ENTS. HE SUBMITTED THAT EVEN ACCORDING TO THE OECD COMMENTARY , IN A CASE WHERE THE ACCOUNTS OF PE ARE NOT RELIABLE, THE TAX A UTHORITY SHOULD MAKE A FAIR ESTIMATE OF PROFIT. HE SUBMITTED LITERAL CONSTRUCTION OF ARTICLE 7(3) EVEN DOES NOT SUPPORT THE CONTENTION OF LD. DIT RAISED IN THE NOTICE U/S 263 THAT ONLY SUCH EXPENSES ON WHICH TAX HAS BEEN DEDUCTED AT SOURCE SHOULD BE ALLOWED AND THIS IS EVIDEN T FROM THE LATER ORDER PASSED IN PURSUANCE OF ORDER U/S 263 WHERE DRP HA S APPROVED DEDUCTION OF FURTHER 35% OF THE CLAIM OF SUCH EXPEND ITURE WHICH, IN FACT, HAS RESULTED IN UNDER-ASSESSMENT OF INCOME OF INDIA N PE BY ` 14 CRORE. ITA NOS.2086 & 2087/DEL/2009 77 92. HE SUBMITTED THAT IN A CASE WHERE THE ASSESSEE DID NO T OPT FOR APPLICATION OF SECTION 44BB AND HAS ACCEPTED THE MOD E OF ESTIMATION OF THE PROFIT OF THE PE AS OFFERED BY THE ASSESSING OFFI CER VIDE LETTER DATED 20 TH FEBRUARY, 1995, THE AFOREMENTIONED DECISION OF HON BLE APEX COURT WILL NOT HAVE APPLICATION SO AS IT RELATES TO ESTIMATE 10% INCOME OF THE REVENUE RELATING TO INSIDE INDIA. 93. HE SUBMITTED THAT THIS FACT IS CLEAR FROM THE ORDE R OF THE TRIBUNAL IN RESPECT OF ASSESSMENT YEAR 1994-95 AND 1995-96 WHICH ORDER HAS BEEN PASSED BY THE TRIBUNAL WHILE GIVING EFFECT TO TH E DIRECTIONS OF HONBLE JURISDICTIONAL HIGH COURT AND HE INVITED OUR ATTENTION TOWARDS THE FOLLOWING OBSERVATIONS FROM THE SAID ORDER:- REGARDING CLAUSE (B) OF PARA 15 OF THE JUDGEMENT OF HONBLE APEX COURT, WE FIND THAT IN THE PRESENT TWO YEARS, THERE I S NO DISPUTE REGARDING QUANTUM OF PROFIT EMBEDDED IN THE IND IAN OPERATION ATTRIBUTABLE TO INDIAN PE OF THE ASSESSEE AND H ENCE THIS CLAUSE OF PARA 15 IS NOT APPLICABLE IN THE PRESE NT TWO YEARS WHICH ARE BEFORE US. WE, THEREFORE, FIND NO REASON TO INTERFERE IN THE ORDER OF LD. CIT (A) IN BOTH YEARS. 94. HE, THEREFORE, CONTENDED THAT THE FACTS FOR THE PRESENT YEARS ARE ALSO SAME. THE ASSESSEE DID NOT OPT FOR APPLICATION OF S ECTION 44BB. IT OPTED FOR APPLICATIONS OF PROVISION OF DTAA AND ESTIMA TION WAS AGREED TO BE DONE AS PER FORMULA ADOPTED BY THE DEPARTMENT TO ASSESS SUCH INCOME IN RESPECT OF EARLIER YEARS. HENCE, HE SUBMITT ED THAT THE ISSUE IS COVERED BY THE AFOREMENTIONED DECISION OF THE TRIB UNAL FOR ASSESSMENT YEAR 1994-95. HE SUBMITTED THAT THE SAID DECI SION OF THE TRIBUNAL RENDERED IN RESPECT OF ASSESSMENT YEAR 1994-95 AND 1995-96 HAS BEEN ACCEPTED BY THE DEPARTMENT AS NO FURTHER APP EAL HAS BEEN FILED BY THE DEPARTMENT. 95. HE SUBMITTED THAT WHILE SUBMITTING THE ARGUMENTS I T HAS ALREADY BEEN MADE CLEAR THAT THERE IS NO CONFLICT BETWEEN AR TICLE 7(3) OF THE DTAA AND THE PROVISIONS OF SECTION 145 (3) OF THE ACT . ITA NOS.2086 & 2087/DEL/2009 78 96. IT HAS ALREADY BEEN POINTED OUT THAT ACCORDING T O THE ARGUMENTS OF LD. AR, THE FACTS RELATING TO ASSESSMENT YEAR 2006-07 ARE SIMILAR EXCEPT TWO DIFFERENCES WHICH HAVE BEEN POINTED OUT I N PARA 30. THE ARGUMENTS OF LD. AR FOR ASSESSMENT YEAR 2006-07 ALMOST RE MAINED THE SAME AND IT WAS CONTENDED THAT THE ASSESSING OFFICER HAD OPTED FOR ONE VIEW OUT OF THE ALTERNATIVES AVAILABLE TO HIM AN D, THEREFORE, BASED ON PLETHORA OF CASE LAWS TOUCHING UPON THIS ISSUE LD. DI T COULD NOT HAVE INVOKED JURISDICTION U/S 263. AGAINST THIS ARGUME NT, LD. SPECIAL COUNSEL OF THE ASSESSEE SUBMITTED THAT THIS ARGUMENT OF TH E ASSESSEE LACKS SUBSTANCE AND IS TOTALLY FALLACIOUS. HE SUBMITTED THAT IT HAS NOT BEEN EXPLAINED THAT ON WHICH ISSUE THE ASSESSING OFFICER HAD TWO ALTERNATIVES AVAILABLE WITH HER OUT OF WHICH ONE COU LD BE CONSIDERED AS PLAUSIBLE VIEW. HE SUBMITTED THAT SUCH CONTENTION SEEM S TO AROSE FROM THE FACT THAT THE ASSESSING OFFICER CONSIDERED THE APPLICABILITY OF SECTION 44BB OF THE ACT IN THE CONTEXT OF THE DECISI ON OF HONBLE SUPREME COURT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1986 -87 TO 1988-89. IF IT IS SO, THEN, IT MAY BE EMPHASIZED THAT THE ASSESSEE HAD OPTED TO BE ASSESSED UNDER THE PROVISIONS OF INDIA-KOREA TAX TREATY, THEREFORE, SECTION 44BB WAS OTHERWISE INAPPLICABLE. HE REFERRED TO THE ASSESSMENT PROCEEDINGS AS NOTED IN THE ORDER SHEETS AND CON TENDED THAT THE ASSESSMENT PROCEEDINGS WERE CARRIED ON IN TWO ST AGES, FIRST, IN THE MONTH OF MARCH, 2007 AND, THEREAFTER, IN THE MO NTHS OF SEPTEMBER AND OCTOBER, 2007. ON 18 TH MARCH, 2007 THE ASSESSING OFFICER ASKED ABOUT THE APPLICABILITY OF SECTION 44BB OF THE ACT, HOWEVER, ON THE VERY DATE A LETTER IS AVAILABLE EXPLAINING THIS ISSUE. DURI NG THE SECOND PHASE OF PROCEEDINGS IN THE MONTH OF SEPTEMBER, 2007 ON 21 ST SEPTEMBER, 2007 THE ASSESSING OFFICER AGAIN ASKED THE ASSE SSEE AS TO WHY ITS INCOME SHOULD NOT BE ASSESSED U/S 44BB OF THE ACT. THE ASSESSING OFFICER NEVER CONSIDERED THE LETTER DATED 19 TH OCTOBER, 2007 AND CLOSED THE HEARING ON 24 TH SEPTEMBER, 2007. HE SUBMITTED THAT IF ITA NOS.2086 & 2087/DEL/2009 79 THE ASSESSEE INTENDS TO CONTEND THAT ARTICLE 7(3) OF THE TREATY ALLOWS THE DEDUCTION OF EXPENSES, THEN, ALL EXPENSES COULD HAV E BEEN CLAIMED BY THE ASSESSEE WHICH IS NOT DONE AS THE ASSESSING OFFICER SOU GHT TO INVOKE THE BEST JUDGEMENT ASSESSMENT IN THE ABSENCE OF DE TAILS AND ACCOUNTS MAINTAINED BY THE PE. IF THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 144 OF THE ACT, THEN, IT IS OPEN FOR HER TO EXAMINE WHETHER APPLICATION OF SECTION 44BB WOULD BE MORE A PPROPRIATE OR THE MANNER IN WHICH THE ASSESSMENTS WERE GETTING COMPLETED I N THE PAST. AT THIS JUNCTURE, THE JUDGEMENT OF HONBLE APEX COUR T WAS AVAILABLE WITH THE ASSESSING OFFICER AND SHE COULD EXAMINE THE ASSESSA BILITY OF THE INCOME FROM BOTH THE ANGLES. THIS HAVING NOT BEE N DONE, THE ASSESSING OFFICER HAS COMMITTED AN ERROR FOR WHICH THE D IT WAS JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 263. 97. ANOTHER ARGUMENT OF THE LD. AR WAS THAT THE ASSESSIN G OFFICER HAD APPLIED HER MIND AFTER MAKING PROPER INQUIRIES. ON THIS ARGUMENT, LD. SPECIAL COUNSEL SUBMITTED THAT THIS PROPOSITION LAI D DOWN BY LD. AR IS ABSURD IF ONE LOOK AT THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER. HE SUBMITTED THAT IT HAS ALREADY BEEN SUBMIT TED THAT ORDER FOR ASSESSMENT YEAR 2006-07 IS IN VERBATIM THE SAME AND COMPA RISON IN THIS REGARD HAS BEEN FILED IN THE SHAPE OF A CHART. E XCEPT THAT DIFFERENCE IN FIGURES, ETC., THE ASSESSING OFFICER HAS AD OPTED THE WORDINGS OF ASSESSMENT ORDER WORD BY WORD, SENTENCE BY SEN TENCE AND PARA BY PARA. HE SUBMITTED THAT IT IS A SIMPLE CA SE OF CUT AND PASTE, THEREFORE, THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER CANNOT BE SAID TO BE WITH A DUE APPLICATION OF MIND. HE SUBMITTED THAT RECORDING THE FACTS IN OFFICE NOTE ONLY TANTAMOUNTS T O A RITUAL PERFORMANCE WHICH DOES NOT INDICATE APPLICATION OF M IND. 98. WITH REGARD TO THE ARGUMENT OF LD. AR THAT THE ASSESSING OFFICER HAS ACTED UPON THE FORMULA ADOPTED BY THE REVENUE IN THE PAST YEARS, IT WAS SUBMITTED BY LD. SPECIAL COUNSEL THAT THIS IS TOT ALLY A FALSE CLAIM ITA NOS.2086 & 2087/DEL/2009 80 OF THE ASSESSEE. DURING THE COURSE OF HEARING OF THE AP PEALS, THE ASSESSEE DID NOT RAISE THIS ISSUE, HENCE, THIS ARGUMENT OF T HE ASSESSEE SHOULD BE REJECTED. 99. IT IS IN THIS MANNER, BOTH THE PARTIES CONCLUDED T HEIR ARGUMENTS FOR BOTH THE YEARS. 100. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS IN THE LIGHT OF THE MATERIAL PLACED BEFORE US. BY THE IMPUGNED ORDE RS, LD. DIT HAS HELD THAT THE ASSESSMENT ORDERS PASSED BY THE ASSESSING OFFICE R ARE ERRONEOUS AS WELL AS PREJUDICIAL TO THE INTEREST OF REV ENUE. HE, THEREFORE, HAS SET ASIDE THE IMPUGNED ASSESSMENTS AND ASKED THE ASSESSING OFFICER TO RE-DETERMINE THE QUESTION REGARDING TAXABILITY OF RECEIPT OF THE ASSESSEE FROM INSIDE INDIA REVENUE AS WELL AS FROM OUTSIDE INDIA REVENUE. HE HAS ASSAILED THE ACTION OF T HE ASSESSING OFFICER IN THE IMPUGNED ASSESSMENT ORDERS REGARDING INSID E INDIA REVENUE ON THE GROUND THAT THE ASSESSING OFFICER HAD CO MMITTED AN ERROR IN FIRST REDUCING THE EXPENSES TOWARDS SUB-CONTRAC TORS COST, SALARIES, ETC. FROM THE GROSS INSIDE INDIA REVENUE AND, THEN, APPLIED THE RATE OF 10% ON THE BALANCE REVENUE. ACCORDING TO S HOW CAUSE NOTICE ISSUED BY LD. DIT, HE WAS OF THE OPINION THAT NO FURTH ER REDUCTION ON ACCOUNT OF ESTIMATION OF INCOME FROM INSIDE INDIA REV ENUE WAS PERMISSIBLE. THE ASSESSING OFFICER SHOULD HAVE ASSESSED THE B ALANCE INSIDE INDIA REVENUE AS THE INCOME OF THE ASSESSEE. SO FA R AS IT RELATES TO REVENUE RELATING TO OUTSIDE INDIA OPERATIONS, IT I S THE CASE OF THE LD. DIT THAT THE ASSESSING OFFICER HAS NOT PROPERLY EXAMINED THE CASE OF THE ASSESSEE TO BRING THAT REVENUE CHARGEABLE TO TAX IN INDIA. AS AGAINST THAT, IT IS THE CASE OF THE ASSESSEE THAT POWER U/ S 263 HAS WRONGLY BEEN EXERCISED BY LD. DIT. ALL THESE ISSUES WER E PROPERLY EXAMINED BY THE ASSESSING OFFICER DURING THE COURSE OF A SSESSMENT PROCEEDINGS. PROPER DETAILS WERE SUBMITTED AS CALLED F OR BY THE ASSESSING OFFICER. THE ASSESSING OFFICER HAD TAKEN A CONSCI OUS ITA NOS.2086 & 2087/DEL/2009 81 DECISION IN MAKING THE ASSESSMENT AS PER HISTORY OF THE CA SE OF THE ASSESSEE AND, THEREFORE, THE ORDER PASSED BY THE ASSESSING OF FICER COULD NEITHER BE CALLED AS ERRONEOUS NOR AS PREJUDICIA L TO THE INTEREST OF REVENUE. THE FACTS IN DETAIL HAVE ALREADY BEEN DESCR IBED IN THE ABOVE PART OF THIS ORDER. WE ARE CALLED UPON TO EXAMINE W HETHER OR NOT LD. DIT HAS RIGHTLY EXERCISED HIS POWERS U/S 263 TO SET ASIDE THE IMPUGNED ASSESSMENTS. 101. THE LAW RELATING TO EXERCISE OF POWER U/S 263 IS WELL SETTLED. THE PREREQUISITES FOR THE EXERCISE OF JURISDICTION BY THE C OMMISSIONER SUO MOTO U/S 263 IS THAT THE ORDER OF THE ASSESSING OFFICER IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF THE REVE NUE. THEREFORE, EXERCISING AUTHORITY HAS TO SATISFY ITSELF OF THE TWIN C ONDITIONS, NAMELY, (I) THE ORDER OF THE ASSESSING OFFICER SOUGHT TO BE REVI SED IS ERRONEOUS; AND (II) IT IS PREJUDICIAL TO THE INTERESTS OF THE REV ENUE. IF ONE OF THEM IS ABSENT IF THE ORDER OF THE ASSESSING OFFICER IS ERRONEO US, BUT IS NOT PREJUDICIAL TO THE REVENUE OR IF IT IS NOT ERRONEOUS, BUT PREJUDICIAL TO THE REVENUE RECOURSE CANNOT BE HAD TO SECTION 263 (1) OF THE ACT. SUCH PROVISION CANNOT ALSO BE INVOKED TO CORRECT EACH AND EVERY TYPE OF MISTAKE OR ERROR COMMITTED BY THE ASSESSING OFFICER, IT IS ONLY WHEN AN ORDER IS ERRONEOUS THAT THE SECTION WILL BE ATTRACTIV E. THE ASSESSMENT ORDER PASSED WILL BE ERRONEOUS IF IT IS BASED ON AN INC ORRECT ASSUMPTION OF FACT OR ON AN INCORRECT APPLICATION OF LAW. IT WILL ALSO BE ERRONEOUS WHEN ASSESSMENT ORDER IS PASSED WITHOUT APPLYING THE PRINCIPLE OF NATURAL JUSTICE OR IS PASSED WITHOUT APPLI CATION OF MIND. THE PHRASE PREJUDICIAL TO THE INTEREST OF REVENUE B EING NOT DEFINED IN THE ACT SHOULD BE UNDERSTOOD IN ITS ORDINARY MEANING. IT IS OF WIDE IMPORT AND IS NOT CONFINED TO LOSS OF TAX. THE SCHEME OF THE ACT IS TO LEVY AND COLLECT TAX IN ACCORDANCE WITH THE PROVISIO NS OF THE ACT AND SUCH TASK HAS BEEN ENTRUSTED TO THE REVENUE. IF DUE TO ERRONEOUS ORDER OF THE ASSESSING OFFICER THE REVENUE IS LOSING TAX LAWFULLY PAYABLE ITA NOS.2086 & 2087/DEL/2009 82 BY A PERSON, IT WILL CERTAINLY BE PREJUDICIAL TO THE INTEREST OF REVENUE. THE PHRASE PREJUDICIAL TO THE INTEREST OF REVENUE H AS TO BE READ IN CONJUNCTION WITH AN ERRONEOUS ORDER PASSED BY THE ASSESSIN G OFFICER. EVERY LOSS OF REVENUE AS A CONSEQUENCE OF AN ORDER OF T HE ASSESSING OFFICER, CANNOT BE TREATED AS PREJUDICIAL TO THE INT EREST OF REVENUE, E.G., WHEN AN ASSESSING OFFICER ADOPTED ONE OF THE COURSES PERM ISSIBLE IN LAW AND IT HAS RESULTED IN THE LOSS OF REVENUE, OR WHER E TWO VIEWS ARE POSSIBLE AND THE ASSESSING OFFICER HAS TAKEN ONE VIEW WITH WHICH THE COMMISSIONER DOES NOT AGREE, IT CANNOT BE TREATED AS AN ERRONEOUS ORDER PREJUDICIAL TO THE INTEREST OF THE REVENUE UNL ESS THE VIEW TAKEN BY THE ASSESSING OFFICER IS UNSUSTAINABLE IN LAW. REFEREN CE IN THIS REGARD CAN BE MADE TO THE DECISION OF HONBLE SUPREM E COURT IN THE CASE OF MALABAR INDUSTRIAL COMPANY VS. CIT (SUPRA). 102. IN THE CASE OF CIT VS. SUNBEAM AUTO LTD 227 CTR 133 (DEL) IT HAS BEEN HELD THAT THERE IS A DISTINCTION BETWEEN LACK OF INQUIRY AND INADEQUATE INQUIRY. IF THERE IS AN INQUIRY, EVEN INADEQUATE, THAT WOULD NOT BY ITSELF GIVE OCCASION TO THE CIT TO PASS AN ORDER U/S 263, MERELY BECAUSE HE HAS A DIFFERENT OPINION IN THE MATT ER. SUCH A COURSE OF ACTION IS OPEN ONLY IN CASES OF LACK OF INQU IRY. THE CONTENTION OF THE REVENUE THAT THE ASSESSING OFFICER DI D NOT CONSIDER AS TO WHETHER THE EXPENDITURE IN QUESTION WAS CAPITAL OR REVENUE EXPENDITURE CANNOT BE ACCEPTED ALTHOUGH APPARENTLY THE ASSESSMENT ORDER DOES NOT GIVE ANY REASON FOR ALLOWING THE ENTIR E EXPENDITURE AS REVENUE EXPENDITURE, THAT BY ITSELF WOULD NOT BE IND ICATIVE OF THE FACT THAT THE ASSESSING OFFICER DID NOT APPLY HIS MIND TO THE ISSUE. THE ASSESSING OFFICER IS NOT REQUIRED TO GIVE DETAILED REASON S IN RESPECT OF EACH AND EVERY ITEM OF DEDUCTION IN THE ASSESSMENT ORDE R. THE ASSESSING OFFICER HAVING CALLED FOR EXPLANATION REGARD ING THE SAID ITEM AND THE ASSESSEE HAD FURNISHED ITS EXPLANATION, THEN, IT CANNOT BE SAID THAT IT IS A CASE OF LACK OF INQUIRY. EVEN CIT WAS NO T CLEAR AS TO WHETHER ITA NOS.2086 & 2087/DEL/2009 83 THE SAID EXPENDITURE WAS TO BE TREATED AS CAPITAL OR R EVENUE EXPENDITURE AND IN THESE FACTS IT WAS HELD THAT THE VI EW TAKEN BY THE ASSESSING OFFICER WAS ONE OF THE POSSIBLE VIEWS AND ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER COULD NOT BE HELD TO BE P REJUDICIAL TO THE INTEREST OF REVENUE. 103. IF THE FACTS OF THE PRESENT CASE ARE SEEN IN THE L IGHT OF THE AFOREMENTIONED JUDICIAL PRONOUNCEMENTS, THEN, IT HAS TO BE EXAMINED THAT WHETHER OR NOT, ACCORDING TO THE FACTS OF THE C ASE THE ASSESSING OFFICER HAS ASSESSED THE ASSESSEE ON AN INCORRECT ASSUMPTION O F FACTS OR ON AN INCORRECT APPLICATION OF LAW SO AS TO HOLD T HAT THE ORDER OF THE ASSESSING OFFICER WAS ERRONEOUS 104. WE WILL FIRST EXAMINE THE STAND OF THE ASSESSING OFF ICER RELATING TO TAXATION OF INCOME FROM INSIDE INDIA REVENUE. IT HAS ALREADY BEEN POINTED OUT THAT THE FACTS RELATING TO BOTH THE YEAR S ARE SIMILAR EXCEPT THAT ACCORDING TO THE ARGUMENTS OF LD. AR THERE ARE TWO DIFFERENCES IN THE FACTS WHICH HAS ALREADY BEEN DESCRIBED IN THE ABOV E PART OF THIS ORDER. BUT BASICALLY FACTS RELATING TO BOTH THE YEAR S REMAINED THE SAME. THE ASSESSING OFFICER HAS WORKED OUT REVENUES FOR INSIDE INDIA OPERATIONS AT ` 552,23,44,864/- FOR WHICH THERE IS N O DISPUTE. WHAT THE ASSESSING OFFICER HAS DONE TO COMPUTE INCOME FROM SUC H REVENUE IS THAT HE HAS FIRST DEDUCTED SUB-CONTRACTORS COST AND SAL ARY EXPENDITURE FROM THE GROSS REVENUE TO ARRIVE AT A NET FIGURE OF `384,44,77,765/- (INCLUDING REVENUE FROM HAL). HE HAS APPLIED 10% RATE UPON THE BALANCE AMOUNT AND, THUS, COMPUTED THE INCOME OF THE ASSESSEE FROM REVENUES FROM INSIDE INDIA OPERATION AT `38 ,44,47,776/-. ACCORDING TO THE LD. DIT, THIS MADE THE ORDER OF THE ASSESSING OFFICER ERRONEOUS AS HE SHOULD NOT HAVE ALLOWED FURTHER REDUCT ION OF 90% OF THE BALANCE AMOUNT AFTER REDUCING SUB-CONTRACTORS COST AND SALARY EXPENDITURE OF ` 167,83,37,937/- FROM THE GROSS REVE NUE. IN OTHER WORDS, AFTER REDUCING THE SUB-CONTRACTOR COST AND SALAR Y, ETC., THE ITA NOS.2086 & 2087/DEL/2009 84 ENTIRE BALANCE AMOUNT SHOULD HAVE BEEN ASSESSED AS INCOME OF THE ASSESSEE FROM INSIDE INDIA OPERATIONS. 105. IT IS NOT EVEN THE CASE OF LD. DIT THAT THE ASSESSIN G OFFICER SHOULD HAVE APPLIED THE PROVISIONS OF SECTION 44BB AND, THUS, THE ASSESSEE SHOULD HAVE BEEN ASSESSED AT 10% OF THE GROSS REVENUE OF ` 552,28,15,702/- AS HE HAS NOT DIRECTED THE ASSESSING OFFI CER TO APPLY THE PROVISIONS OF SECTION 44BB. 106. THE ASSESSING OFFICER HAS ALSO NOT ASSESSED THE ASSESSEE UN DER THE PROVISIONS OF SECTION 44BB OF THE ACT SO THAT IT C AN BE SAID THAT WHILE REDUCING THE SUB-CONTRACTOR AND SALARY COST HE A S ACTED AGAINST THE PROVISIONS OF SECTION 44BB WHICH WILL MAKE THE ASSE SSMENT ORDER BASED ON INCORRECT APPLICATION OF LAW AMENABLE TO RE VISION. THE ASSESSING OFFICER WHILE FRAMING THE ASSESSMENT IS AWARE OF T HE FACT THAT ACCORDING TO OPTION AVAILABLE TO THE ASSESSEE, THE ASSESSEE HAS OPTED TO BE ASSESSED UNDER THE PROVISIONS OF DTAA. IT IS, THEREFORE, THE ASSESSING OFFICER HAS REFERRED TO THE PROVISIONS OF ARTICL E 7 IN THE ASSESSMENT ORDER PASSED BY HIM. NOT ONLY THE ASSESSING OFFIC ER HAS MENTIONED ABOUT THE APPLICABLE ARTICLES OF DTAA TO THE ASSESSEE, BUT HE HAS RECORDED THE SUBMISSIONS OF THE ASSESSEE IN PARA 4 TH AT COMPUTATION OF INCOME DONE BY THE ASSESSEE COMPANY IS BA SED ON THE INDO-KOREAN TAX TREATY READ WITH THE PROVISIONS OF SE CTION 90 OF THE ACT. WHAT THE ASSESSING OFFICER HAS DONE IS THAT HE HAS ASSE SSED THE ASSESSEE ACCORDING TO THE PAST HISTORY OF THE CASE AND HAS ALLOWED OUT OF GROSS REVENUE A SUM OF ` 167,83,37,937/- AS SUB-CONTR ACTORS COST AND SALARY EXPENDITURE. THIS ALSO HAS NOT BEEN DONE IN A ROUTINE MANNER. A FINDING OF FACT HAS BEEN RECORDED BY THE LD. ASSESSING OFFICER THAT HE HAS VERIFIED ALL THESE PAYMENTS FROM T HE TDS RETURNS AND AFTER MAKING VERIFICATION IN THIS REGARD, THE ASSE SSING OFFICER HAS GIVEN SPECIFIC FINDING THAT OUT OF GROSS PAYMENTS MADE BY THE ASSESSEE TO SUB-CONTRACTORS AND SALARY AMOUNTING TO ` 171, 19,73,419/- ITA NOS.2086 & 2087/DEL/2009 85 , A SUM OF ` 23,27,780/- WAS MADE TO NON-RESIDENT SUB-C ONTRACTORS FOR WORKS DONE OUTSIDE INDIA BY RESPECTIVE FOREIGN SUB-CONT RACTORS AND A FURTHER SUM OF ` 3,13,07,703/- COULD NOT BE VERIFIED . HE, THEREFORE, REDUCED THESE TWO AMOUNTS FROM THE GROSS AMOUNT CLAIMED BY THE ASSESSEE AND, IN THIS MANNER, HAS ARRIVED AT A SUM OF ` 167,83,37,937/- WHICH HAS BEEN REDUCED AND ON THE BA LANCE REVENUE 10% RATE HAS BEEN APPLIED. THE ASSESSING OFFICER IGNORE D THE BOOK RESULT OF THE ASSESSEE ACCORDING TO WHICH IT HAD FILED R ETURN OF LOSS AT ` 928,05,64,624/- AND ADOPTED A FORMULA AS PER PAST HIST ORY OF THE CASE OF THE ASSESSEE. THE ASSESSING OFFICER HAS ASSESSED THE ASSESSEE WI TH THE OBSERVATIONS KEEPING IN VIEW THE PAST PRACTICE AD OPTED BY THE DEPARTMENT ON THIS ISSUE AS WELL AS IN VIEW OF ARTICLE 7 (5) OF DTAA. THIS FACT WAS IN THE MIND OF THE ASSESSING OFFICER WHILE FRAMING THE ASSESSMENT AND IT IS, THEREFORE, HE HAD ASKED THE ASSESSEE CO MPANY TO FURNISH THE DETAILS OF EXPENSES WHERE TDS WAS DEDUCTED A ND ON FURNISHING SUCH DETAILS HE HAS FOUND THAT OUT OF GROSS RE VENUE A SUM OF ` 167,83,37,937/- WAS EXCLUDIBLE FOR THE PURPOSE OF A PPLYING 10% RATE OF INCOME. THOUGH THE OFFICE NOTE IS NOT ANNEXED WI TH THE ASSESSMENT ORDER, THE ASSESSEE HAS PRODUCED THE CONTENTS THEREOF WH ICH HAS NOT BEEN DISPUTED BY THE REVENUE. THE NOTE RELATING TO ASSESSMENT OF INSIDE INDIA REVENUE HAS ALREADY BEEN REPRODUCED IN P ARA 45 OF THIS ORDER. IN THE NOTE IT HAS BEEN MENTIONED BY THE ASSESSI NG OFFICER THAT THE ASSESSMENT IS COMPLETED AS PER ARTICLE 7 OF DTAA WIT H KOREA ESTIMATING THE PROFIT RATE AT 10% TO THE TOTAL REVEN UES RELATING TO INSIDE INDIA ACTIVITIES AS REDUCED BY EXPENSES VERIFIABL E FROM ANNUAL RETURNS OF TDS. THIS IS IN LINE WITH THE STAND TAKEN B Y THE DEPARTMENT IN PRECEDING ASSESSMENT YEARS AS PROVIDED IN PARA 5 OF AR TICLE 7 OF DTAA. THE ASSESSING OFFICER HAS ALSO REPRODUCED PARA 5 O F ARTICLE 7 OF DTAA IN THE ASSESSMENT ORDER WHICH READ AS UNDER:- 5. FOR THE PURPOSES OF THE PRECEDING PARAGRAPHS, THE PROFITS TO BE ATTRIBUTED TO THE PERMANENT ESTABLISHMENT SHALL BE ITA NOS.2086 & 2087/DEL/2009 86 DETERMINED BY THE SAME METHOD YEAR BY YEAR UNLESS THERE IS GOOD AND SUFFICIENT REASON TO THE CONTRARY. 107. ACCORDING TO THE MANDATE GIVEN IN PARA 5 OF AR TICLE 7, FOR DETERMINING THE PROFITS ATTRIBUTABLE TO THE PERMANEN T ESTABLISHMENT, THE SAME METHOD YEAR BY YEAR IS TO BE APPLIED UNLESS TH ERE IS GOOD AND SUFFICIENT REASON TO THE CONTRARY. IT HAS BEEN DE MONSTRATED BY THE ASSESSEE THAT FROM YEAR TO YEAR THE DEPARTMENT HAS BEEN ADOPTING THIS FORMULA. IF IT IS SO, THEN, IT IS INCUMBENT ON THE DE PARTMENT TO SHOW THAT THERE EXIST GOOD AND SUFFICIENT REASON TO TAKE A CONTRARY VIEW. APPARENTLY OR IMPLIEDLY IT HAS NOT BEEN SHOWN THAT TH ERE EXIST GOOD AND SUFFICIENT REASONS TO TAKE A CONTRARY OPINION AS IS SOUGHT TO BE TAKEN BY LD. DIT IN THE SHOW CAUSE NOTICE OR IN THE O RDER PASSED BY HIM. UNLESS IT IS SHOWN THAT THERE EXIST GOOD AND SUFFIC IENT REASONS TO TAKE A DIFFERENT VIEW, SUCH VIEW IS NOT PERMISSIBLE ACC ORDING TO THE PROVISIONS OF DTAA. 108. NOW, THE QUESTION WILL BE, AS ARGUED BY LD. SPEC IAL COUNSEL OF THE ASSESSEE, A MISTAKE IN PERPETUITY HAS BEEN COMMITTED BY THE ASSESSING OFFICER BY TAKING A VIEW THAT AFTER REDUCTION OF SUB- CONTRACTORS COST AND SALARY EXPENDITURE ON WHICH TDS W AS DEDUCTED, ON THE BALANCE, WHETHER IT WAS LEGALLY PERMISSIBLE TO APPLY 10% RATE OR IT SHOULD HAVE BEEN APPLIED ON THE GROSS REVENUE. IT HAS ALREADY BEEN MENTIONED THAT IT IS NEITHER THE CASE OF THE ASSESSEE NOR THE CASE OF THE ASSESSING OFFICER THAT THE PROVISIONS OF SECTION 44BB ARE APPLICABLE. IT IS ALSO NOT THE CASE OF LD. DIT THAT P ROVISIONS OF SECTION 44BB COULD BE APPLIED EVEN WHEN THE ASSESSEE HAS OPTED T O BE ASSESSED UNDER THE PROVISIONS OF DTAA. IF ONE GOES BY STRI CT APPLICATION OF SUCH SECTION 44BB(1), THEN, OF COURSE , THERE WILL BE NO SCOPE FOR, FIRSTLY, REDUCTION OF SUB-CONTRACTORS COST A ND SALARY EXPENDITURE ON WHICH THE TDS DEDUCTED AND THEN APPL Y THE 10% ON THE BALANCE OF THE REVENUE. BUT, IF THE PROVISIONS O F DTAA ARE APPLIED, THEN, THERE IS NO PROVISION WHICH AUTHORIZE THE DEPAR TMENT TO MAKE ITA NOS.2086 & 2087/DEL/2009 87 ESTIMATE OF 10% OF THE GROSS REVENUE. IF SUCH CONTENTI ON OF THE REVENUE IS ACCEPTED, THEN, THERE WILL BE NO DIFFEREN CE IN THE ASSESSMENTS TO BE MADE UNDER THE PROVISIONS OF DTAA AND UN DER THE PROVISIONS OF DOMESTIC LAW. THE PROVISIONS OF DTAA ARE NOT SPEAKING ABOUT THE APPLICATION OF 10% NET PROFIT RATE ON THE GROSS REVENUE. TAKING THE CASE FOR ASSESSMENT YEAR 2005-06, AS POINTED O UT EARLIER, THE RETURN IS FILED AT A LOSS OF ` 928,05,64,624/-. T HE ACCOUNTS OF THE ASSESSEE HAVE BEEN REJECTED ON THE GROUND OF NON-PRODUC TION OF BOOKS. THE ASSESSEE HAS ALSO ACCEPTED THE ESTIMATION OF IN COME. ARTICLE 7(3) POINT OUT THE MODE OF DETERMINATION OF PROFIT RELATING TO PERMANENT ESTABLISHMENT WHICH READ AS UNDER:- 3. IN THE DETERMINATION OF THE PROFITS OF A PERMANENT ESTABLISHMENT, THERE SHALL BE ALLOWED AS DEDUCTIONS EXP ENSES WHICH ARE INCURRED FOR THE PURPOSES OF THE PERMANENT ESTABLISHMENT INCLUDING EXECUTIVE AND GENERAL ADMINISTR ATIVE EXPENSES SO INCURRED, WHETHER IN THE STATE IN WHICH THE PERMANENT ESTABLISHMENT IS SITUATED OR ELSEWHERE, WHICH ARE ALLOWED UNDER THE PROVISIONS OF THE DOMESTIC LAW OF THE CONTRACTING STATE IN WHICH THE PERMANENT ESTABLISHMENT IS SITUATED. 109. THE ARTICLE 7 (5) HAS ALREADY BEEN REPRODUCED I N PARA 106 OF THIS ORDER. A CUMULATIVE READING OF ARTICLE 7(3) AND (5 ) WILL MAKE IT CLEAR THAT FOR DETERMINING THE PROFITS OF PERMANENT ESTABLI SHMENT (PE), THE EXPENSES WHICH ARE INCURRED FOR THE PURPOSE OF PERMANE NT ESTABLISHMENT INCLUDING EXECUTIVE AND GENERAL ADMINIST RATIVE EXPENSES ARE TO BE ALLOWED IRRESPECTIVE OF THEIR INCUR RENCE WHETHER IN THE STATE IN WHICH THE PE IS SITUATED OR ELSEWHERE WHI CH ARE ALLOWED UNDER THE PROVISIONS OF DOMESTIC LAW OF THE CONTRACTIN G STATE IN WHICH THE PERMANENT ESTABLISHMENT IS SITUATED AND THIS HAS TO B E DONE BY THE SAME METHOD YEAR BY YEAR UNLESS THERE IS GOOD AND SU FFICIENT REASON TO THE CONTRARY. IN OTHER WORDS, ALL THE EXPE NSES WHICH ARE INCURRED BY THE ASSESSEE FOR THE PURPOSE OF ITS PERMANENT ESTABLISHMENT ARE TO BE ALLOWED WHICH INCLUDE EXECUTI VE AND GENERAL ITA NOS.2086 & 2087/DEL/2009 88 ADMINISTRATIVE EXPENSES AS ARE ALLOWED UNDER THE PROVISI ONS OF DOMESTIC LAW. UNDER THE PROVISIONS OF DOMESTIC LAW, IF THE INCOME IS TO BE ASSESSED UNDER THE HEAD BUSINESS, THEN, ALL THE EXPEN SES INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BU SINESS ARE ALLOWABLE. THE QUESTION OF ESTIMATE WILL ARISE ONLY I F FROM THE ACCOUNTS AND DETAILS MAINTAINED BY THE ASSESSEE THE PROFIT IS NOT DEDUCIBLE. ALL ALONG IT HAS BEEN THE CASE OF THE ASSESSEE THAT IT IS NOT IN A POSITION TO PRODUCE THE BOOKS OF ACCOUNTS AND IN THAT CIRCUMSTANCE THE ESTIMATE OF INCOME IS BEING MADE. THIS POSITION EXISTED THROUGH OUT THE HISTORY OF THE CASE OF THE ASSESSEE. BUT IT DOES NOT MEAN THAT I NCOME OF THE ASSESSEE HAS TO BE ASSESSED ONLY AS PER PROVISIONS OF SECTION 4 4BB(1) OF THE ACT I.E., THE ASSESSEE SHOULD BE ASSESSED @ 10% OF TH E GROSS INSIDE INDIA REVENUE. IF THE ASSESSEE IS ABLE TO ESTABLISH THAT IT DOES NOT HAVE INCOME OF THAT MAGNITUDE, THEN, IT IS OPEN FOR THE ASSESSEE TO BE ASSESSED AT A LOWER AMOUNT. THIS HAS SO BEEN DEMONSTRAT ED IN THE CASE OF THE ASSESSEE ITSELF WHEN EVEN ACCORDING TO THE FR ESH ORDER PASSED IN PURSUANCE OF THE ORDER PASSED BY THE LD. DIT N OT ONLY THE DEPARTMENT HAS REDUCED THE EXPENSES WHICH ARE SUBJECT T O TDS AMOUNTING TO ` 167,83,37,937/-, BUT HAS FURTHER ALLO WED A DEDUCTION OF 35% OF MATERIAL COST WHICH HAS BEEN COMPUTED AT `360 CRORES AND THE DEPARTMENT HAS ASSESSED THE ASSESSEE AT LOWER INCOME OF ` 24 .35 CRORE AGAINST ORIGINALLY ASSESSED INCOME OF ` 38.44 CROR E. THUS, IT CANNOT BE SAID THAT THE ASSESSEE WAS INDEED ASSESSABLE AT 10% OF THE GROSS REVENUE. THEREFORE, THE VIEW ADOPTED BY THE LD . DIT IN THE SHOW CAUSE NOTICE ITSELF WAS NOT A POSSIBLE VIEW WHICH COULD BE TAKEN. IF THAT WAS NOT THE POSSIBLE VIEW, THEN, WHETHER THE VIEW TAKEN BY THE ASSESSING OFFICER WAS POSSIBLE. THE ASSESSING OFFICER HAS GIVE N THE REASONS FOR ADOPTING A VIEW WHICH IS IN ACCORDANCE WIT H THE PAST HISTORY OF THE CASE AND WHICH IS IN CONFORMITY WITH T HE ARTICLE 7(5) OF THE DTAA. THEREFORE, IT CAN BE HELD THAT THE ASSESSING OFFICER HAS TAKEN A POSSIBLE VIEW WHICH IS ACCORDING TO PAST HISTORY OF THE CASE AND ITA NOS.2086 & 2087/DEL/2009 89 HE HAS FIRST REDUCED AN AMOUNT OF ` 167,83,37,937/- R EPRESENTING THE SUB-CONTRACTORS COST AND SALARY EXPENDITURE UPON WHICH TDS WAS DEDUCTED AND, THEN, APPLIED THE RATE OF 10% TO ASSESS T HE INCOME OF THE ASSESSEE. BY ADOPTING THIS METHOD, THE REVENUE WAS A BLE TO COLLECT INCOME-TAX FROM THE ASSESSEE IRRESPECTIVE OF THE FACT THAT WHETHER OR NOT THE ASSESSEE HAS INCURRED HEAVY LOSS IN THE CONTRACTS EXECUTED BY IT. IF THE VIEW OF THE ASSESSING OFFICER W AS A POSSIBLE VIEW BASED ON THE PAST HISTORY OF THE ASSESSEE, THEN, LD. DIT C OULD NOT IMPOSE HIS VIEW UPON THE ASSESSING OFFICER UNLESS IT IS SHOWN THAT THE VIEW ADOPTED BY HIM IS A POSSIBLE VIEW TO BE LOGICALLY TAKEN IN THE CASE OF THE ASSESSEE. IT HAS ALREADY BEEN DESCRIBED THAT THE VIEW TAKEN BY LD. DIT IN HIS ORDER AND IN THE SHOW CAUSE NOTICE COUL D NOT EVEN BE TAKEN IN THE FURTHER PROCEEDINGS WHEN CONSEQUENTIAL O RDER HAS BEEN PASSED BY THE DEPARTMENT. THEREFORE, ON THIS GROUND I T CANNOT BE SAID THAT LD. DIT HAS RIGHTLY EXERCISED HIS POWER U/S 263 TO SET ASIDE THE ASSESSMENT WITH A DIRECTION TO THE ASSESSING OFFICER TO PASS FRESH ASSESSMENT ORDER. 110. NOW, WE COME TO THE ISSUE RELATING TO ASSESSABILITY OF INCOME RELATING TO OUTSIDE INDIA REVENUE. THE STRESS OF LD. D IT IS THAT THE ASSESSEE HAD RECEIVED A COMPOSITE CONTRACT FOR WORK TO B E PERFORMED IN INDIA AND ALSO RELATED WORK FROM OUTSIDE INDIA. T HE ASSESSING OFFICER DID NOT INQUIRE INTO THE NATURE AND SCOPE OF THE CONTRACT, THE REASONS FOR REVENUE FOR OUTSIDE INDIA OPERATIONS, THE N ATURE OF OUTSIDE INDIA OPERATIONS, THE DURATION OF PROJECTS IN INDIA, THE ROLE OF MUMBAI OFFICE OF THE COMPANY IN SUBMITTING THE TENDERS, NEGO TIATION OF THE CONTRACTS, THE SUBSEQUENT ROLE OF THE PE AND MUMBAI OF FICE IN EARNING THE REVENUES FROM THE ALLEGED OUTSIDE INDIA OPERATION . IT IS THE CASE OF LD. DIT THAT THE ASSESSING OFFICER DID NOT GATHER THE F ACTS AT ALL BEFORE PASSING THE ORDER. THE ASSESSING OFFICER HAS ALSO NOT INQU IRE INTO THE APPLICABILITY OF THE DECISION OF HONBLE SUPREME COU RT IN ASSESSEES ITA NOS.2086 & 2087/DEL/2009 90 OWN CASE FOR THE YEAR UNDER CONSIDERATION AND, THEREF ORE, THE ORDER PASSED BY THE ASSESSING OFFICER BY NOT TAXING THE INCOME ON ACCOUNT OF REVENUE OF ` 1294,51,94,688/- IS ERRONEOUS AND PRE JUDICIAL TO THE INTEREST OF THE REVENUE. 111. THOUGH THERE IS NO DISCUSSION REGARDING NON-TAXATI ON OF THE REVENUE FOR OUTSIDE INDIA OPERATIONS IN THE ASSESSMENT OR DER, IT HAS BEEN BROUGHT ON RECORD BY THE LD. COUNSEL OF THE ASSESSE E THAT IN THE OFFICE NOTE THE ASSESSING OFFICER HAS GIVEN THE REASONS FO R NOT LEVYING THE TAX ON SUCH REVENUE AND SUCH OBSERVATIONS OF THE ASSE SSING OFFICER IN THE OFFICE NOTE ARE ALSO REPRODUCED IN PARA 14 OF THIS ORDER. IT HAS BEEN OBSERVED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS SHOWN REVENUE FROM OUTSIDE INDIA OPERATION WHICH HAVE NOT BEEN OFFERED TO TAX IN THE RETURN OF INCOME STATING THAT REVENUES WER E RECEIVED FROM ACTIVITIES PERFORMED OUTSIDE INDIA AND, THEREFORE, TH E REVENUES EARNED OUT OF THESE ACTIVITIES ARE NOT ATTRIBUTABLE TO THE P E IN INDIA. THE ASSESSING OFFICER HAS QUANTIFIED THOSE REVENUES AND HAS OBSE RVED THAT THE ASSESSEE HAS RELIED UPON THE JUDGEMENT OF HONBLE HI GH COURT OF UTTARANCHAL IN ASSESSEES OWN CASE AS WELL AS ON THE DECISIO N OF HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES CO. LTD. (SUPRA). IT IS OBSERVED BY THE ASSESSIN G OFFICER THAT THE REVENUES EARNED BY THE ASSESSEE ON ACCOUNT OF THE PR OCUREMENT OF THE MATERIAL OUTSIDE INDIA IS NOT BROUGHT TO TAX IN V IEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES CO. LTD. (SUPRA). IT IS ALSO OBSERVED THAT TH OUGH THE DEPARTMENT HAS NOT ACCEPTED THE DECISION OF HONBLE U TTARAKHAND HIGH COURT REGARDING THE TAXABILITY OF OUTSIDE INDIA OPER ATIONS AT NIL AND HAS FILED SLP BEFORE THE HONBLE SUPREME COURT AND IN C ASE THE HONBLE SUPREME COURT DECIDES TO TAX THE OUTSIDE INDIA RECEIP TS IN THE CASE OF THE ASSESSEE, ACTION SHALL BE TAKEN AS PER LAW. FROM THE ABOVE OBSERVATIONS OF THE ASSESSING OFFICER, IT IS CLEAR THAT DU RING THE COURSE ITA NOS.2086 & 2087/DEL/2009 91 OF ASSESSMENT PROCEEDINGS NOT ONLY HE HAS INQUIRED ABOUT THE TAXABILITY OF THESE RECEIPTS FROM THE ASSESSEE, BUT REPLI ES WERE ALSO FILED BY THE ASSESSEE AND AFTER DUE CONSIDERATION THEREO F HE HAS DECIDED NOT TO LEVY ANY TAX UPON THAT REVENUE. THE ASSESSING OFFICER WHILE HOLDING THE VIEW THAT SUCH RECEIPTS WERE NOT TA XABLE IN INDIA APART FROM RELYING UPON THE DECISION OF HONBLE SUPR EME COURT IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES CO. LTD. (SUPRA) HAS ALSO RELIED UPON THE DECISIONS OF JURISDICTIONAL HIGH C OURT IN THE CASE OF THE ASSESSEE ITSELF WHEREIN SUCH RECEIPTS WERE HELD NOT TA XABLE. THEREFORE, IT HAS BEEN DEMONSTRATED BY THE LD. AR OF THE ASSESSEE THAT EVEN IN THE ABSENCE OF ANY DISCUSSION IN THE ASSESSMENT ORD ER THERE IS MATERIAL ON RECORD ACCORDING TO WHICH THE ASSESSING OFF ICER HAD TAKEN A CONSCIOUS DECISION REGARDING NON-TAXABILITY OF THE R EVENUE FROM OUTSIDE INDIA OPERATION, WHICH, ACCORDING TO THE ARG UMENT OF THE ASSESSEE PERTAINED TO THE ACTIVITIES PERFORMED OUTSIDE IN DIA. IT WAS ARGUED BEFORE THE ASSESSING OFFICER THAT THE REVENUE RE LATED TO THE ACTIVITIES PERFORMED OUTSIDE INDIA WHICH MEANS THAT NO PART OF THAT REVENUE RELATED TO ANY PE IN INDIA FOR THAT WORK AN D AFTER SATISFYING ITSELF WITH THAT CONTENTION OF THE ASSESSEE AND RELYING UPON THE DECISION OF UTTARAKHAND HIGH COURT IN THE CASE OF THE ASSESSEE ITSELF, THESE REVENUES HAVE BEEN HELD TO BE NOT TAXABLE. NOW , ACCORDING TO THE LD. DIT, ASSESSING OFFICER HAS NOT GONE INTO THE QUE STIONS WHICH HAVE BEEN DESCRIBED EARLIER AND, THEREFORE, HAS COMMI TTED AN ERROR IN NOT LEVYING THE TAX ON SUCH REVENUE. BUT, AT THE SAM E TIME, IT HAS ALSO NOT BEEN SHOWN BY LD. DIT THAT THERE EXIST ANY MATERI AL ON RECORD ACCORDING TO WHICH IT CAN BE SAID THAT THE ASSESSEE IS FA CTUALLY INCORRECT IN CONTENDING THAT NO PART OF OUTSIDE INDI A REVENUE RELATES TO ITS PE IN INDIA. THE ARGUMENT OF BOTH THE PARTIES IN THIS REGARD HAVE ALSO BEEN DESCRIBED IN DETAIL AND ARE NOT NEEDED TO B E REPEATED FOR THE SAKE OF BREVITY. BUT, IT WILL BE RELEVANT TO MENTIO N THAT IN ALL THE PRECEDING YEARS SUCH REVENUE OF THE ASSESSEE HAS BEEN HELD TO BE NOT ITA NOS.2086 & 2087/DEL/2009 92 TAXABLE. IT IS NOT THE CASE OF THE REVENUE THAT FACT S RELATING TO REVENUE FROM OUTSIDE INDIA ARE IN ANY WAY DIFFERENT FOR THE YEAR UNDER CONSIDERATION AS COMPARED TO PRECEDING YEARS. AT LEAST NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE REVENUE TO SHOW THA T FACTS RELATING TO INCOME FROM OUTSIDE INDIA OPERATIONS ARE IN ANY WA Y DIFFERENT IN THE YEARS UNDER CONSIDERATION AS COMPARED TO THE PRECEDING YEARS. RATHER, IN THE FOOT NOTE THE ASSESSING OFFICER WHILE OB SERVING THAT THE REVENUE IS NOT BEING TAXED HAS CLEARLY STATED THAT THE SAME IS NOT BEING TAXED ON THE BASIS OF THE DECISION OF JURISDICTIO NAL HIGH COURT IN THE CASE OF THE ASSESSEE FOR PRECEDING YEARS. 112. IN VIEW OF THESE FACTS IT IS CLEAR THAT IT IS NOT A CASE WHERE LD. A.O. DID NOT APPLY HIS MIND ON THE ISSUES SUBJECT MATTER OF R EVISION PROCEEDINGS. THE A.O. HAD APPLIED HIS MIND. HE RAISED THE QUERRIES AND REPLIES WERE GIVEN BY THE ASSESSEE AND IN PRESENCE OF JUD ICIAL PRONOUNCEMENTS AVAILABLE IN ASSESSEES OWN CASE HE TOOK A CONSCIOUS DECISION OF NOT TAXING THE REVENUE FROM OUTSIDE INDIA OPERATIONS. HE WAS AWARE OF THE FACT THAT DEPARTMENT HAS PREFERRED F URTHER APPEAL IN APEX COURT. IN THIS VIEW OF THE SITUATION, IN OUR OPI NION, THE A.O. DID NOT HAVE OTHER ALTERNATIVE EXCEPT NOT TO TAX THE OUTSIDE INDIA REVENUE BUT TO WRITE A FOOT NOTE TO THE ASSESSMENT ORDER DESCRIBING THEREIN THE FACTS AND CIRCUMSTANCES IN WHICH HE HAS TAKEN SUCH DECISI ON. IT IS ALSO NOT A CASE OF EITHER LACK OF INQUIRY OR INADEQUAT E INQUIRY AS LD. DIT HIMSELF HAS NOT BROUGHT ON RECORD ANY MATERIAL TO SUGG EST THAT THE FACTS RELATING TO THE YEARS UNDER CONSIDERATION WERE I N ANY WAY DIFFERENT FROM THE FACTS OF THE CASES OF PRECEDING YEA RS WHERE THIS ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE. 113. IT MAY ALSO BE POINTED OUT HERE THAT WHEN THE A SSESSING OFFICER PASSED THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 2005-06, HE W AS HAVING WITH HIM THE DECISION OF HONBLE JURISDICTIONA L HIGH COURT IN THE CASE OF THE ASSESSEE WHICH IS DATED 30 TH MARCH, 2006 AND IS REPORTED ITA NOS.2086 & 2087/DEL/2009 93 AS 291 ITR 450. IN THAT DECISION HONBLE JURISDICTION AL HIGH COURT IN THE CASE OF THE ASSESSEE ITSELF FOR ASSESSMENT YEARS 1986-87, 198 7-88, 1988-89 AND 1989-90 HAD UPHELD THE ORDER OF THE TRI BUNAL VIDE WHICH IT WAS RULED THAT THE ASSESSEE IS NOT LIABLE TO BE TAXED IN RESPECT OF ACTIVITIES ADMITTEDLY CARRIED ON IN KOREA. HOWEVER, IT WAS HELD THAT THE APPEALS WERE CONCLUDED BY THE TRIBUNAL BY A FINDING OF FACT. THE SAID DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT WAS FURTHER APPEALED BEFORE HONBLE SUPREME COURT AND HONBLE SUPREME CO URT RENDERED THE DECISION ON 18 TH MAY, 2007 WHICH IS REPORTED AS 291 ITR 482 (SC). IN THAT DECISION, IT WAS CONFIRMED BY HONBLE SUPREME COURT THAT THE TRIBUNAL WAS RIGHT IN HOLDING THAT NO PART OF THE IN COME ATTRIBUTABLE TO KOREAN OPERATION COULD BE TAXED IN INDIA AS BEFORE T HE COMING INTO EXISTENCE OF THE PERMANENT ESTABLISHMENT IN INDIA THE WORK OF FABRICATION WAS COMPLETED IN KOREA AND THE FABRICATE D PLATFORM WAS HANDED OVER TO THE ONGC. TO THAT EXTENT, THE DECISIO N OF THE TRIBUNAL WAS UPHELD. THE DECISION OF THE TRIBUNAL WAS ONLY REV ERSED ON THE GROUND THAT THE TRIBUNAL COMMITTED AN ERROR TO REDU CE THE NET PROFIT RATE ON INDIAN OPERATIONS FROM 10% TO 3%. THE APPLI CABILITY OF 10% RATE WAS SPECIFICALLY UPHELD ON THE GROUND OF THE FAC T THAT THE ASSESSEE APPEARED BEFORE THE DEPARTMENT AND SUBMITTED TH AT ITS INCOME FROM INDIAN OPERATIONS BE COMPUTED U/S 44BB OR UNDER INSTRUCTION NO.1767 ISSUED BY THE CENTRAL BOARD OF DIR ECT TAXES. THEREFORE, IN VIEW OF THE STAND TAKEN BY THE ASSESSEE, I T WAS HELD THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) WAS RIGHT IN C OMPUTING THE TAXABLE PROFITS AT 10% OF THE GROSS RECEIPTS IN RESPECT OF ACTIVITIES OF INSTALLATION, COMMISSIONING, ETC., PERFORMED IN INDIA AND THE TRIBUNAL DID NOT GIVE ANY REASON FOR REDUCING THE RATE FROM 1 0% TO 3%. REFERENCE IN THIS REGARD CAN BE MADE TO THE OBSERVATI ONS OF HONBLE SUPREME COURT IN PARA 13 OF THE SAID DECISION. HOWEV ER, THE FACTS OF THE PRESENT CASE ARE CLEAR. THE ASSESSEE HAS NOT SUBMITTED THAT ITS INCOME IN RESPECT OF INDIAN OPERATION SHOULD BE ASSESSED EITHER U/S ITA NOS.2086 & 2087/DEL/2009 94 44BB OF THE ACT OR UNDER THE INSTRUCTION NO.1767 ISSUE D BY THE CENTRAL BOARD OF DIRECT TAXES. THE CASE OF THE ASSESSEE IS CLEAR THAT IT SHOULD BE ASSESSED UNDER THE PROVISIONS OF DTAA. THEREFORE, THE MANDATE IN THE CASE OF THE ASSESSEE EVEN UPTO THE DECISION OF HONBL E APEX COURT IS THAT NO PART OF INCOME ATTRIBUTABLE TO KOREAN OPE RATIONS COULD BE TAXED IN INDIA AS BEFORE THE COMING INTO EXISTENCE OF THE PERMANENT ESTABLISHMENT IN INDIA THE WORK OF FABRICATION WAS COM PLETED IN KOREA AND FABRICATED PLATFORM HANDED OVER TO THE ONGC. N O MATERIAL HAS BEEN BROUGHT ON RECORD BY LD. DIT TO CONTROVERT TH E FINDING OF FACT THAT WORK OF FABRICATION WAS COMPLETED IN KOREA AND THE FABRICATED PLATFORM WAS HANDED OVER TO THE ONGC. THIS POSITION H AS TIME AND AGAIN BEEN ACCEPTED BY THE TRIBUNAL. 114. IT WILL ALSO BE RELEVANT HERE TO MENTION THAT A FTER THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF THE ASSESSEE 291 IT R 482 (SC), SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE HON BLE UTTARAKHAND HIGH COURT (JURISDICTIONAL HIGH COURT) IN RESPECT OF ASSESSMENT YEARS 1994-95 AND 1995-96 AND VIDE DECISION DATED 4 TH DECEMBER, 2008 IN ITA NOS.42 AND 43 OF 2007, THE MATTER WAS REMANDED BA CK TO THE TRIBUNAL AS THE HONBLE SUPREME COURT IN EARLIER CASE HAD HELD THAT HONBLE HIGH COURT HAD ERRED IN HOLDING THAT NO SUBST ANTIAL QUESTION OF LAW AROSE. FOR THE SAKE OF COMPLETENESS THE OBSERVATION S OF THEIR LORDSHIPS FROM THE SAID DECISION OF HONBLE HIGH COURT ARE REPRODUCED BELOW:- THESE APPEALS PERTAIN TO ASSESSMENT YEAR 1994-95 AND 1995- 96. IN BOTH THE APPEALS FOLLOWING SUBSTANTIAL QUESTION ARISES TO BE CONSIDERED: WHETHER THE HONBLE ITAT WAS LEGALLY CORRECT IN HOLDING THAT NO PORTION OF THE PAYMENT MADE TO THE NRC OUTSIDE INDIA FOR THE WORK DONE OUTSIDE INDIA UNDER THE COMPOSITE CONTRACT FOR DESIGNING FABRICATION, INSTALLATION AND COMMISSIONING OF INSTALLATIONS ON A TURNKEY BASIS PROVIDING FOR PAYMENT TO BE MADE ON MILESTONE BASIS IS LIABLE TO BE TAXED IN INDIA? ITA NOS.2086 & 2087/DEL/2009 95 5. IN THE SIMILAR FACTS AND CIRCUMSTANCES, THE MATTER WENT UPTO THE SUPREME COURT AGAINST THE DIVISION BENCH OF THIS COURT BETWEEN THE SAME PARTIES RELATING TO PREVIOUS ASSESSMENT YEARS, WHICH IS REPORTED AS CIT V. HYUNDAI HEAVY INDUSTRIES CO. LTD. (2007) 291 ITR 482. WHILE AFFIRMING THE JUDGMENT OF THIS COURT, THE HONBLE APEX COURT HAS OBSERVED AS UNDER:- BEFORE CONCLUDING, WE MAY POINT OUT THAT THE HIGH COURT HAD ERRED IN HOLDING THAT NO SUBSTANTIAL QUESTION OF LAW AROSE IN THIS CASE UNDER SECTION 260A OF THE AC T. IN OUR VIEW, SUBSTANTIAL QUESTIONS OF LAW DID ARISE. WE DID NOT REMIT THE MATTER TO THE HIGH COURT, PARTICULARLY, WHEN THE APPEAL IS IN RESPECT OF THE ASSESSMENT YEARS 1987-88 AND 1988-89. 6. THEREFORE, IN VIEW OF THE TWO ANSWERS GIVEN IN CLA USE (A) AND (B) OF PARAGRAPH 15 OF THE AFORESAID JUDGMENT, THE MATTER IS REMITTED TO THE ITAT FOR DECIDING THE SAME AFRESH IN THE LIGHT OF CLAUSE (A) AND (B) OF PARAGRAPH 15 OF CIT VS. HYUND AI HEAVY INDUSTRIES CO. LTD. (2007) 291 ITR 482 (SC) APPLYING THE AFORESAID LAW ON THE FACTS OF THE PRESENT CASE, IN CASE TWO ISSUES ARE ARISING IN THE FACTS OF THE PRESENT CASE, BUT IF NO ISSUE ARISES , THE ITAT SHALL CLOSE THE PROCEEDING. THE ORDER DATED 19.5.200 6 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL IN ITA NO.2291/DEL/ 2002 FOR A.Y. 1995-96 AND THE ORDER DATED 19.5.2006 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL IN ITA NO.2290/DEL/200 2 FOR A.Y. 1994-95 ARE SET ASIDE. 7. CONSEQUENTLY, PRESENT INCOME TAX APPEALS ARE ALLOW ED. NO ORDER AS TO COSTS. 115. TO COMPLY WITH THE DIRECTIONS GIVEN BY HONBLE JURISDICTIONAL HIGH COURT, THE TRIBUNAL HAD DECIDED THE ISSUE VIDE ITS ORD ER DATED 9 TH OCTOBER, 2009 IN ITA NOS.2290 & 2291/DEL/2002 AND TH E RELEVANT OBSERVATIONS OF THE TRIBUNAL AS CONTAINED IN PARA 6 AR E AS UNDER:- 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE GON E THROUGH THE MATERIAL AVAILABLE ON RECORD AND THE JUDGME NT OF HONBLE UTTRAKHAND HIGH COURT AND ALSO THE RELEVANT JUDG MENT OF HONBLE APEX COURT RENDERED IN THE CASE OF THE ASSE SSEE ITSELF FOR A.Y. 1987-88 & 1988-89. HONBLE UTTRAKHAND HIGH COURT HAS DIRECTED THE TRIBUNAL TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF CLAUSE (A) & (B) OF PARAGRAPH 15 OF THE SUPREME COUR T JUDGMENT IN THE CASE OF THE ASSESSEE ITSELF AS REPORTED IN 291 I TR 482. FOR THE PURPOSE OF DECIDING THE ISSUE AFRESH IN THE LIGHT O F THIS JUDGMENT OF HONBLE APEX COURT CITED ABOVE, WE HAVE TO SEE ITA NOS.2086 & 2087/DEL/2009 96 AND EXAMINE THE FACTS OF THE PRESENT YEAR AS ALSO THE FA CTS IN A.Y.1987-88& 1988-89. WE FIND THAT FOR THIS PURPOSE, PARA NO. 11 OF THIS JUDGMENT OF HONBLE APEX COURT IS ALSO RELE VANT FOR CONSIDERATION, AS PER WHICH, IT HAS BEEN NOTED BY THE H ONBLE 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 DELIVERE D IN KOREA TO THE AGENTS OF ONGC AND THEREFORE, THE PROFITS ON SUCH SUPPLIES WERE FABRICATED PLATFORMS CANNOT BE SAID TO BE ATTRIBUTABLE TO THE PE. THEREAFTER, IT IS NOTED BY THE HON BLE APEX COURT THAT THERE IS ONE MORE REASON FOR COMING TO TH IS 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 GE AND THEREFORE, E VEN IF, IT IS ASSUMED THAT THE SUPPLIES WERE NECESSARY FOR THE PURPOS E OF INSTALLATION (ACTIVITY OF THE PE IN INDIA) AND EVEN IF I T IS ASSUMED THAT THE SUPPLIES WERE INTEGRAL PART, STILL NO PART OF PRO FIT ON SUCH SUPPLIES CAN BE ATTRIBUTED TO THE INDEPENDENT PE UNLESS I T IS ESTABLISHED BY THE DEPARTMENT THAT THE SUPPLIES WERE NOT AT ARMS LENGTH PRICE AND THIS IS THE BASIS ON WHICH IT WAS HELD BY THE HONBLE 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 THE SUPPLIES WERE NOT A T ARMS LENGTH PRICE. HENCE, EVEN AFTER CONSIDERING THIS ARGU MENT OF THE LD. DR OF THE REVENUE THAT PE WAS IN EXISTENCE THROUGH O UT THESE TWO YEARS, WE ARE OF THE CONSIDERED OPINION THAT AS PE R THIS JUDGMENT OF HONBLE APEX COURT IN THE CASE OF THE ASSES SEE ITSELF FOR A.Y. 1987-88 & 1988-89. NO PROFIT IS TAXABL E ON ACCOUNT OF KOREAN OPERATION (DESIGNING & 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 TURNKEY BASIS. AS PER ABOVE DISCUSS ION, AFTER CONSIDERING CLAUSE (A) OF PARA-15 OF THE JUDGMENT OF HONBLE APEX COURT AS PER DIRECTION OF HONBLE UTTRAKHAND HIGH COURT, WE HOLD THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE, PROFIT, IF ANY, FROM THE KOREAN OPERATIONS (DESIGNING & FABRICA TION) IS NOT TAXABLE IN INDIA BECAUSE THE SAME HAS ARISEN OUTSIDE I NDIA. REGARDING CLAUSE (B) OF PARA 15 OF THE JUDGMENT OF HO NBLE APEX COURT, WE FIND THAT IN THE PRESENT TWO YEARS, THERE IS NO DISPUTE REGARDING QUANTUM OF PROFIT EMBEDDED IN THE INDIAN OPE RATION ATTRIBUTABLE TO INDIA PE OF THE ASSESSEE AND HENCE THIS C LAUSE OF PARA 15 IS NOT APPLICABLE IN THE PRESENT TWO YEARS WHIC H ARE BEFORE US. WE, THEREFORE, FIND NO REASON TO INTERFERE IN THE ORDER OF LD. CIT(A) IN BOTH THESE YEARS. ITA NOS.2086 & 2087/DEL/2009 97 116. THE TRIBUNAL IN THE AFOREMENTIONED CASE, RELYIN G UPON THE DECISION OF HONBLE SUPREME COURT RENDERED IN RESPECT OF ASSESSMENT YEARS 1987-88 AND 1988-89, HAS HELD THAT THERE WAS NO QUESTION OF LEVYING ANY TAX ON THE REVENUE EARNED BY THE ASSESSEE I N RESPECT OF OUTSIDE INDIA OPERATION NOT ONLY FOR THE REASON THAT THE SAID PROFIT HAS AROSE OUTSIDE INDIA, BUT THE TRANSACTION ITSELF HAS NOT BEEN SHOWN TO BE BEYOND ARMS LENGTH PRICE. IN THE PRESENT YEARS ALSO TH ERE IS NO MATERIAL ON RECORD TO SUGGEST THAT THE OUTSIDE INDIA R EVENUE DOES NOT BELONG TO KOREAN OPERATION PERFORMED OUTSIDE INDIA A ND ALSO THAT THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ONGC IS NOT AT ARMS LENGTH. THERE IS NO MATERIAL ON RECORD TO SUGGEST THA T PE HAS ANY NEXUS WITH THE FABRICATION WORK DONE OUTSIDE INDIA TH E SUPPLY OF WHICH WAS HANDED OVER OFFSHORE. 117. IT IS THE CASE OF LD. AR THAT LD. DIT WHEN ISSUED THE SHOW CAUSE NOTICE WAS HAVING THE BENEFIT OF THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF THE ASSESSEE. WITHOUT PROPERLY APPRECIAT ING THE SAID DECISION, HE HAS INVOKED HIS POWER U/S 263 INCORRECTLY IN RESPECT OF REVENUE RELATING TO OUTSIDE INDIA OPERATION DESPITE T HE CATEGORICAL FINDINGS GIVEN BY HONBLE APEX COURT THAT NO PART OF SUCH INCOME COULD BE TAXED IN INDIA. THEIR LORDSHIPS OF HONBLE SUPREM E COURT WHILE DECIDING THE SAID ISSUE, AFTER ANALYZING THE PROVISIONS OF ARTICLE 7, HAVE COME TO THE CONCLUSION THAT THE TRIBUNAL WAS RIGHT IN UPHOLDING THAT THE PROFIT ATTRIBUTABLE TO THE KOREAN OPERATIONS WER E NOT TAXABLE IN VIEW OF ARTICLE 7 OF THE TREATY AND SUCH OBSERVATIONS ARE REPRODUCED BELOW:- 11. ON READING ARTICLE 7 OF THE CADT, IT IS CLEAR THAT THE SAID ARTICLE IS BASED ON THE OECD MODEL CONVENTION. PARAGR APH (1) OF ARTICLE 7 STATES THE GENERAL RULE THAT BUSINESS PROFITS OF AN ENTERPRISE OF ONE CONTRACTING STATE MAY NOT BE TAXED BY THE OTHER CONTRACTING STATE UNLESS THE ENTERPRISE CARRIES ON I TS BUSINESS IN THE OTHER CONTRACTING STATE THROUGH ITS PERMANE NT ESTABLISHMENT. THE SAID PARAGRAPH (1) FURTHER LAYS DO WN THAT ONLY SO MUCH OF THE PROFITS ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT IS TAXABLE. PARAGRAPH (1) OF ARTICLE 7 F URTHER LAYS ITA NOS.2086 & 2087/DEL/2009 98 DOWN THAT THE ATTRIBUTABLE PROFIT CAN BE DETERMINED BY THE APPORTIONMENT OF THE TOTAL PROFITS OF THE ASSESSEE TO ITS VA RIOUS PARTS OR ON THE BASIS OF AN ASSUMPTION THAT THE PERMANENT ESTABLISHMENT IS A DISTINCT AND SEPARATE ENTERPRISE HAVIN G ITS OWN PROFITS AND DISTINCT FROM THE GE. APPLYING THE ABOV E TEST TO THE FACTS OF THE PRESENT CASE, WE FIND THAT THE PROFITS EAR NED BY THE KOREAN GE ON SUPPLIES OF FABRICATED PLATFORMS CANN OT BE MADE ATTRIBUTABLE TO ITS INDIAN PERMANENT ESTABLISHMENT AS THE INSTALLATION PERMANENT ESTABLISHMENT CAME INTO EXISTENCE O NLY AFTER THE TRANSACTION STOOD MATERIALIZED. THE INSTALLATION PERMANENT ESTABLISHMENT CAME INTO EXISTENCE ONLY ON CONCLUSION OF THE TRANSACTION GIVING RISE TO THE SUPPLIE S OF THE FABRICATED PLATFORMS. THE INSTALLATION PERMANENT ESTABLI SHMENT EMERGED ONLY AFTER THE CONTRACT WITH THE ONGC STOOD CONCLU DED. IT EMERGED ONLY AFTER THE FABRICATED PLATFORM WAS DELIVE RED IN KOREA TO THE AGENTS OF THE ONGC. THEREFORE, THE PROFITS ON SUCH SUPPLIES OF FABRICATED PLATFORMS CANNOT BE SAID TO BE A TTRIBUTABLE TO THE PERMANENT ESTABLISHMENT. THERE IS ONE MORE REASO N FOR COMING TO THE AFORESAID CONCLUSION. IN TERMS OF PARAG RAPH (1) OF ARTICLE 7, THE PROFITS TO BE TAXED IN THE SOURCE COUNTRY W ERE NOT THE REAL PROFITS BUT HYPOTHETICAL PROFITS WHICH THE PERMA NENT ESTABLISHMENT WOULD HAVE EARNED IF IT WAS WHOLLY INDE PENDENT OF THE GE. THEREFORE, EVEN IF WE ASSUME THAT THE SUPPL IES WERE NECESSARY FOR THE PURPOSES OF INSTALLATION (ACTIVITY OF THE PERMANENT ESTABLISHMENT IN INDIA) AND EVEN IF WE ASSUM E THAT THE SUPPLIES WERE AN INTEGRAL PART, STILL NO PART OF PRO FITS ON SUCH SUPPLIES CAN BE ATTRIBUTED TO THE INDEPENDENT PERMANENT ESTABLISHMENT UNLESS IT IS ESTABLISHED BY THE DEPARTMENT TH AT THE SUPPLIES WERE NOT AT ARMS LENGTH PRICE. NO SUCH TA XABILITY CAN ARISE IN THE PRESENT CASE AS THE SALES WERE DIRECTL Y BILLED TO THE INDIAN CUSTOMER (ONGC). NO SUCH TAXABILITY AN ALSO ARISE IN THE PRESENT CASE AS THERE WAS NO ALLEGATION MADE BY THE DEPARTMENT THAT THE PRICE AT WHICH BILLING WAS DONE FOR TH E SUPPLIES INCLUDED ANY ELEMENT FOR SERVICES RENDERED BY THE PERMANENT ESTABLISHMENT. IN THE LIGHT OF OUR ABOVE DISC USSION, WE ARE OF THE VIEW THAT THE PROFITS THAT ACCRUED TO THE KORE AN GE FOR THE KOREAN OPERATIONS WERE NOT TAXABLE IN INDIA. 12. THERE IS ONE MORE ASPECT TO BE DISCUSSED. THE ATTR ACTION RULE IMPLIES THAT WHEN AN ENTERPRISE (GE) SETS UP A PER MANENT ESTABLISHMENT IN ANOTHER COUNTRY, IT BRINGS ITSELF WITHIN THE FISCAL JURISDICTION OF THAT OTHER COUNTRY TO SUCH A DEGREE THAT SU CH OTHER COUNTRY CAN TAX ALL PROFITS THAT THE GE DERIVES FROM THE SOURCE COUNTRY WHETHER THROUGH A PERMANENT ESTABLISHME NT OR NOT. IT IS THE ACT OF SETTING UP A PERMANENT ESTABLISHMENT WHICH TRIGGERS THE TAXABILITY OF TRANSACTIONS IN THE SOURCE STATE. THEREFORE, UNLESS THE PERMANENT ESTABLISHMENT IS SET UP, THE QUESTION OF TAXABILITY DOES NOT ARISE WHETHER THE TRANSA CTIONS ARE DIRECT OR THEY ARE THROUGH A PERMANENT ESTABLISHMENT. IN THE CASE OF A TURNKEY PROJECT, THE PERMANENT ESTABLISHMEN T IS ITA NOS.2086 & 2087/DEL/2009 99 SET UP AT THE INSTALLATION STAGE WHILE THE ENTIRE TURNKEY PR OJECT, INCLUDING THE SALE OF EQUIPMENT IS FINALIZED BEFORE TH E INSTALLATION STAGE. THE SETTING UP OF THE PERMANENT ESTABLISHMENT, IN SUCH A CASE, IS A STAGE SUBSEQUENT TO THE CONCLUSION OF THE CONTRACT. IT IS AS A RESULT OF THE SAL E OF EQUIPMENT THAT THE INSTALLATION PERMANENT ESTABLISHMENT COM ES INTO EXISTENCE. HOWEVER, THIS IS NOT AN ABSOLUTE RULE. IN THE PRESENT CASE, THERE WAS NO ALLEGATION MADE BY THE DEPAR TMENT THAT THE PERMANENT ESTABLISHMENT CAME INTO EXISTENCE EVEN BEFORE THE SALE TOOK PLACE OUTSIDE INDIA. SIMILARLY, IN THE PRESENT CASE, THERE WAS NO ALLEGATION MADE BY THE DEPAR TMENT THAT THE PRICE AT WHICH ONGC WAS BILLED/INVOICED BY THE ASSESSEE FOR SUPPLY OF FABRICATED PLATFORMS INCLUDED ANY ELEMENT FOR SERVICES RENDERED BY THE PERMANENT ESTABLIS HMENT. IN THE PRESENT CASE, WE ARE CONCERNED WITH THE ASSESSME NT YEARS 1987-88 AND 1988-89. THEREFORE, WE ARE NOT IN CLINED TO REMIT THE MATTER TO THE ADJUDICATING AUTHORITY. WE REITERATE, IN THE CIRCUMSTANCES, NOT ALL THE PROFITS OF THE ASSESSEE CO MPANY FROM ITS BUSINESS CONNECTION IN INDIA (PE) WOULD BE TA XABLE IN INDIA, BUT ONLY SO MUCH OF PROFITS HAVING ECONOMIC NE XUS WITH THE PERMANENT ESTABLISHMENT IN INDIA WOULD BE TAXABLE IN INDIA. TO THIS EXTENT, WE FIND NO INFIRMITY IN THE IMPUGNED JUD GMENT OF THE TRIBUNAL. ACCORDINGLY, WE ARE OF THE VIEW THAT THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE PROFITS ATTRIBUTABLE TO THE KOR EAN OPERATIONS WERE NOT TAXABLE IN VIEW OF ARTICLE 7 OF THE CADT. 118. THE ASSESSING OFFICER WHILE FRAMING THE ASSESSMENT FOR THE YEAR UNDER CONSIDERATION WAS WELL AWARE OF THE DECISION OF THE TRIBUNAL AND THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE AND ALSO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJHIMA HARIMA HEAVY INDUSTRIES COMPANY LTD. (SUPRA) AND AFTER CONSIDERING ALL THESE DECISIONS HE DID NOT IMPOSE TAX ON THE REVENUE RELATING TO OUTSIDE INDIA OPERATION AND HIS SUCH VIEW CANNOT BE HELD TO BE ERRONEOUS SIMPLY FOR THE REASON THAT HE DID NOT MAK E INQUIRY IN RELATION TO ROLE OF PE, ETC. IT HAS ALREADY BEEN OB SERVED THAT PE, EVEN IF IT EXISTED, THE REVENUE FROM OUTSIDE INDIA OPERATION COULD NOT BE TAXED UNLESS THERE IS A NEXUS BETWEEN THE PE AND THE ACTIVITY DONE AND PERFORMED OUTSIDE INDIA AND THIS IS THE CRUX OF THE DE CISION OF HONBLE SUPREME COURT IN THE CASE OF THE ASSESSEE ITSELF. EVEN L D. DIT COULD NOT POINT OUT ANY SUCH NEXUS IN HIS ORDER. THEREFORE, ON THE FACE OF IT, THE ORDER PASSED BY THE ASSESSING OFFICER CANNOT BE HELD TO BE ITA NOS.2086 & 2087/DEL/2009 100 ERRONEOUS SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF THE REVENUE IN RESPECT OF REVENUE RELATING TO OUTSIDE INDIA. 119. THEREFORE, ON BOTH THE GROUNDS THE ASSESSMENT ORDER S PASSED BY THE ASSESSING OFFICER IS NEITHER ERRONEOUS NOR PREJUDICIA L TO THE INTEREST OF REVENUE. THE POWERS U/S 263 HAVE BEEN INVOKED WIT HOUT JURISDICTION AS THE NECESSARY INGREDIENTS TO INVOKE THE SAME ARE ABSEN T. THEREFORE, WE QUASH THE IMPUGNED ORDERS PASSED BY LD. D IT IN RESPECT OF BOTH THE YEARS UNDER CONSIDERATION AND THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED IN THE MANNER AFORESAID. 120. BEFORE PARTING, WE MAY MENTION HERE THAT WE HA VE ALREADY DISCUSSED IN DETAIL THE ARGUMENTS SUBMITTED BY BOTH THE PARTIES WHICH WERE PLACED ON RECORD IN THE SHAPE OF SYNOPSIS. WHILE DECIDING THE ISSUE WE HAVE CAREFULLY CONSIDERED ALL THOSE ARGUMENTS. FOR THE SAKE OF BREVITY WE MAY NOT HAVE DISCUSSED EACH AND EVERY AR GUMENT AND DECISION RELIED UPON BY BOTH THE PARTIES AS THE SAME EI THER MAY NOT BE RELEVANT TO DECIDE THE ISSUES RAISED IN THE PRESENT APPE ALS OR THE VIEW EXPRESSED THEREIN ALREADY EXISTS IN THE DECISIONS TAKEN I NTO CONSIDERATION WHILE DECIDING THE PRESENT APPEALS. NON -DISCUSSION OF THOSE ARGUMENTS AND THE DECISIONS DO NOT MEAN THAT THEY WERE NOT TAKEN INTO CONSIDERATION WHILE DECIDING THE PRESENT A PPEALS. 121. IN THE RESULT, BOTH THE APPEALS FILED BY THE ASSESSE E ARE ALLOWED IN THE MANNER AFORESAID. THE ORDER PRONOUNCED IN THE OPEN COURT ON 31.05.201 1. SD/- SD/- [A.K. GARODIA] [I.P. BANSAL] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED, 31.05.2011. DK ITA NOS.2086 & 2087/DEL/2009 101 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY BY ORDER, DEPUTY REGISTRAR, ITAT, DELHI BENCHES