M/s Prysmian Cavi e Systemi Telecom S.RL. (formerly Pirelli Cavi e Systemi Telecom S.P.A) India Project Office, Hyderabad V. The DCIT, Circle - 16(3), Hyderabad

ITA 242/HYD/2012

• Counselvise Citation: 24222514 RSA 2012
• Duration Of Justice: 2 year(s) 5 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 15-07-2014
• Assessment Year: 1998-1999
• Appeal Filed On: 15-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Assessee Lawyers: P J PARDIWALLA; MILIND THAK O R E
• Keywords: Reopening of assessment; Double taxation relief; Permanent establishment; Onus to prove
• Section: 234B; 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA.NO.242/HYD/2012 ASSESSMENT YEAR 1998-1999 M/S. PRYSMIAN CAVI E SISTEMI S.R.L. (FORMERLY PIRELLI CAVI E SISTEMI TELECOM S.P.A. (INDIA PROJECT OFFICE), HYDERABAD. PAN AABCP-2267-Q/P-231 VS. DCIT, CIRCLE 16(3) HYDERABAD. (APPELLANT) (RESPONDENT) ITA.NO.197/HYD/2012 ASSESSMENT YEAR 1998-1999 ADIT (IT)-II HYDERABAD. VS. M/S. PRYSMIAN CAVI E SISTEMI S.R.L., (FORMERLY PIRELLI CAVI E SYSTEMI TELECOM S.P.A.) INDIA PROJECT OFFICE, HYDERABAD. PAN AABCP-2267-Q (APPELLANT) (RESPONDENT) FOR ASSESSEE MR. P.J. PARDIWALLA & MR. MILIND THAKORE FOR REVENUE MR. P. SOMASEKHAR REDDY DATE OF HEARING 15.07.2014 DATE OF PRONOUNCEMENT 25.07.2014 ORDER PER BENCH THESE ARE CROSS APPEALS FOR A.Y. 1998-1999 BY ASSESSEE AND REVENUE AGAINST THE ORDER OF CIT(A)-V, HYDERABAD DATED 29.11.2011. 2 ITA.NO.242/HYD/2012 & ITA.NO.197/HYD/2012 M/S. PRYSMIAN CAVI E SYSTEMI TELECOM S.R.L. HYDERAB AD 2. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE COMP ANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND TRADI NG OF CABLES FOR TELECOM AND POWER. A NOTICE UNDER SECTIO N 148 WAS ISSUED ON THE BASIS OF THE INFORMATION RECEIVED IN THE LATER YEAR THAT ASSESSEE HAS RECEIVED CERTAIN PAYMENTS FROM PO WER GRID CORPORATION OF INDIA LTD., IT WAS THE SUBMISSION OF THE ASSESSEE THAT PROJECT OFFICE WAS ESTABLISHED DURING THE FINANCIAL YEAR 1998-99 AND INCOME OF THE ASSESSEE D OES NOT ARISE DURING THE A.Y. THERE IS ONLY ADVANCE RECEIVE D TOWARDS PAYMENT FOR OFF SHORE CONTRACTS AMOUNTING TO RS.9,0 9,64,258/- A.O. CONSEQUENT TO HIS FINDINGS IN OTHER ASSESSMENT YEARS, TREATED THE THREE CONTRACTS ENTERED BY THE ASSESSEE AS A SINGLE OR COMPOSITE CONTRACT AND HELD THAT OFF SHORE CONTR ACT WAS ALSO TAXABLE IN INDIA. HE ESTIMATED 5% OF THE OFF SHORE RECEIPTS AS INCOME. FOLLOWING HIS ORDERS IN A.Y. 2002-03 LD C IT(A) HELD THAT PROFITS FROM OFF SHORE CONTRACTS IS TO BE TAKE N AT 5% OF THE RECEIPTS AND 20% OF THIS PROFIT IS ATTRIBUTABLE TO THE INDIA BUSINESS OPERATIONS AND TO BE TAXED IN INDIA. 2.1. ASSESSEE HAS RAISED THE GROUNDS OF TAXABILITY OF OFF SHORE CONTRACT IN GROUND NO.1, REOPENING OF ASSESSM ENT UNDER SECTION 147 IN GROUND NO.2, LEVY OF INTEREST UNDER SECTION 234B IN GROUND NO.3. AT THE OUTSET, IT IS FAIRLY ADMITT ED THAT GROUND NO.2 I.E., REOPENING OF ASSESSMENT IS COVERED AGAIN ST THE ASSESSEE WHEREAS, GROUND NO.1 IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDERS OF THE ITAT PASSED FOR THE A .Y. 2000- 2001 IN ITA.NO.160/H/06 AND ITA.NO.254/HYD/2006 DAT ED 28.05.2014. CONSEQUENTLY, INTEREST UNDER SECTION 23 4B IS ALSO MAY NOT SURVIVE. 3. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE ORDERS ON RECORD. THE ISSUE OF TAXABILI TY OF PROFITS 3 ITA.NO.242/HYD/2012 & ITA.NO.197/HYD/2012 M/S. PRYSMIAN CAVI E SYSTEMI TELECOM S.R.L. HYDERAB AD OF OFF SHORE CONTRACT WAS EXAMINED IN DETAIL BY THE COORDINATE BENCH OF THE TRIBUNAL IN A.Y. 2000-01 IN ITA.NO.160 /H/06 AND ITA.NO.254/HYD/2006 DATED 28.05.2014 AT PARA NO S.13 AND 14 WHICH IS AS UNDER : 13. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE FACTS AND RIVAL CONTENTIONS. THERE ARE TWO ISSU ES FOR CONSIDERATION IN THIS APPEAL ON OFF- SHORE CONTRACT . THE FIRST ISSUE IS ABOUT THE TAXABILITY OF THE INCOME STATED TO HAVE BEEN EARNED ON OFFSHORE CONTRACT IN INDIA AND SECON D ESTIMATION OF INCOME AT 5% BY THE A.O. WHICH WAS RE DUCED BY THE CIT(A) TO 20% OF WHAT WAS ESTIMATED BY THE A .O, THUS ESTIMATING AT 1% OF THE TOTAL CONTRACT AMOUNT. ADMI TTEDLY, ASSESSEE HAS ENTERED INTO THREE SEPARATE CONTRACTS WHICH WERE CLEARLY DISTINGUISHABLE. THERE IS NO DISPUTE W ITH REGARD TO TAXATION OF INCOME STATED TO HAVE BEEN EARNED ON ONSHORE SUPPLY CONTRACT AND ONSHORE SERVICE CONTRACT. THE O NLY ISSUE IS THE ACTION OF THE A.O. IN CONSIDERING THE OFFSHO RE SUPPLY CONTRACT ALSO FOR THE PURPOSE OF TAXATION IN INDIA. THERE ARE CERTAIN FACTUAL ERRORS COMMITTED BY THE LD. CIT(A) WHILE CONFIRMING THE ORDER. A) FIRST OF ALL, THE OFFSHORE CONTRACT WAS ENT ERED INTO IN THE MONTH OF FEBRUARY, 1998 WHEREAS INDIA PROJECT O FFICE WAS ESTABLISHED IN JUNE, 1998. THEREFORE, THERE IS NO CO- RELATION WITH REFERENCE TO SIGNING UP THE CONTRACT IN INDIA TO THE PE I.E., INDIA PROJECT OFFICE. EVEN THOUGH THES E FACTS WERE NOTED BY THE CIT(A). HOWEVER, THE LD. CIT(A) CONSID ERED THAT THERE IS A ROLE OF INDIAN PE IN ENTERING THE CONTRA CT ALSO. LD. CIT(A) CORRECTLY ANALYSED THE RULING IN THE CASE OF ISHAKA WAJIMA- HARIMA HEAVY INDUSTRIES CO. LTD. OF THE HON BLE SUPREME COURT IN COMING TO THE CONCLUSION THAT THE PROFIT SHALL BE DEEMED TO ACCRUE OR ARISE TO THE ASSESSEE IN INDIA ONLY SUCH PART OF PROFIT AS IS REASONABLE ATTRIBUTA BLE TO OPERATIONS CARRIED OUT IN INDIA. HE ALSO CORRECTLY ANALYSED THE ARTICLE 7 OF DTAA BETWEEN INDIA AND ITALY VIDE PARA 5.6 OF THE ORDER AND ALSO EXPLANATION TO SECTION-9. SIN CE INDIA PROJECT OFFICE HAS NO CONNECTION WITH ENTERING INTO CONTRACT, THAT ASPECT OF CONSIDERING PART OF CONTRACT HAS ACC RUING OR ARISING IN INDIA, HAVING SIGNED IN INDIA DOES NOT A PPLY TO PE AT ALL. B) THE SECOND ASPECT CONSIDERED BY THE LD. CIT(A ) IS WITH REFERENCE TO SECTION B(BPS) ABOUT THE INSTALLATION PART. THE SAID SECTION IN THE CONTRACT IS AS UNDER : 4 ITA.NO.242/HYD/2012 & ITA.NO.197/HYD/2012 M/S. PRYSMIAN CAVI E SYSTEMI TELECOM S.R.L. HYDERAB AD PIRELLI CONFIRMED THAT THE FIBRE OPTIC CABLE QUANTI TIES INDICATED IN THEIR OFFER ARE BASED ON LINK LENGTHS. PIRELLI CONFIRMED THAT THE UNIT PRICE OF THE PRICE SCHEDULES INCLUDES ALL THE INSTALLATION H ARDWARE, APPROACH CABLE, MIC CABLE AND ADDITIONAL LENGTH OF CABLE REQ UIRED TOWARDS SAG, SERVICE LOOPS, WASTE AND OTHER SUCH CONSIDERATIONS. AS CAN BE SEEN THAT THE ABOVE IT CONFIRMS THAT FIB RE OPTIC CABLE QUANTITIES INDICATED IN THEIR OFFER ARE BASED ON LINK LENGTHS. IT ALSO CONFIRMS THAT UNIT PRICE OF THE P RICE SCHEDULES INCLUDES ALL INSTALLATION, HARDWARE, APP ROACH CABLE ETC., REQUIRED TOWARDS SAG, SERVICE LOOPS, WA STE AND OTHER SUCH CONSIDERATIONS. THIS ONLY INDICATES THAT THE CABLE REQUIRED FOR VARIOUS SERVICES IN INDIA WERE ALSO IN CLUDED IN THE PRICE QUOTED BUT THAT DOES NOT INDICATE THE PRI CE QUOTED INCLUDES THE INSTALLATION COST, WHICH THE LD. CIT(A ) INTERPRETED WRONGLY. THE WORD INSTALLATION THERE IS NOT PERTAINING TO THE SERVICE OF INSTALLATION BUT INCLU SION OF LENGTH OF CABLE LINES REQUIRED FOR INSTALLATION ACTIVITY. THEREFORE, WE ARE OF THE OPINION THAT LD. CIT(A) ERRED IN CONSIDE RING THIS AS PART OF ONSHORE SUPPLY. C) THE THIRD ASPECT IS WITH REFERENCE TO PART OF TRAIN ING IMPARTED TO PERSONNEL IN INDIA. IT WAS EXPLAINED BY THE ASSESSEE THAT THIS TRAINING IS INCIDENTAL TO SUPPLY OF MATERIAL OFFSHORE AND EVEN IF IT WERE TO BE CONSIDERED AS PA RT OF PE OPERATIONS, ASSESSEE HAS NOT EARNED ANY INCOME AS EXPLAINED EARLIER. FURTHER AS NO PROFIT WAS EARNED ON THE SAID ACTIVITY IN INDIA, NO INCOME CAN BE DEEMED TO ACCRUE OR ARISE IN INDIA. WE ARE OF THE OPINION THAT THE LD. CIT(A) WRONGLY CONSIDERED ALL THE THREE ASPECTS IN CONFIRM ING THE ESTIMATION AT 1% ON THE OFFSHORE CONTRACTS. 14. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT INCOME FROM THE OFFSHORE CONTRACT IS TAXABLE O NLY TO THE EXTENT OF PROFITS ATTRIBUTABLE TO THE OPERATIONS IN INDIA WHICH ARE CLEARLY DEFINED IN THE INCOME TAX ACT AS WELL A S THE DTAA BETWEEN INDIA AND ITALY. ORDINARILY, BOTH FIND ING AS TO THE OPERATIONS IN INDIA AS WELL AS DETERMINATION OF PROFITS ATTRIBUTABLE TO SUCH OPERATIONS ARE MATTER OF FACT. THE BURDEN OF PROOF OF INDIA OPERATIONS IN THE CASE OF A NON- RESIDENT WERE GENERALLY LIE ON THE REVENUE AS IT WA S CONTENDED THAT NO PART OF THE OFFSHORE CONTRACT WAS EXECUTED IN INDIA. SINCE THE LD. CIT(A) ELABORATELY DISCUSSE D THE LEGAL PRINCIPLES AND ARRIVED AT A CORRECT CONCLUSIONS VID E PARA 11 THAT INDIA PROJECT OFFICE IS LIABLE UNDER THE INCOM E TAX AND THE DTAA BETWEEN INDIA AND ITALY ONLY TO THE EXTENT OF PROFIT ATTRIBUTABLE TO THE BUSINESS OPERATIONS CARRIED OUT BY THE PERMANENT ESTABLISHMENT IN INDIA. THIS POSITION DOE S NOT 5 ITA.NO.242/HYD/2012 & ITA.NO.197/HYD/2012 M/S. PRYSMIAN CAVI E SYSTEMI TELECOM S.R.L. HYDERAB AD CHANGE EVEN IF ALL THE THREE CONTRACTS SIGNED BY TH E PARENT COMPANY ARE TREATED TO BE SINGLE OR COMPOSITE CONTR ACT. THE CABLES ARE MANUFACTURED OUTSIDE INDIA AND PROCUREME NT OF CABLES OUTSIDE INDIA FALL BEYOND PURVIEW AND JURISD ICTION OF THE PROVISIONS OF INCOME TAX ACT. THEREFORE, WE ARE OF THE OPINION THAT SINCE THE OFFSHORE CONTRACT IS ONLY FO R PROCUREMENT OF CABLES THAT TOO OUTSIDE INDIA AND TH E TRAINING PROVIDED IN INDIA IS INCIDENTAL TO THE CONTRACT NO. 1 I.E., OFFSHORE CONTRACT AND FURTHER AS THERE IS NO PROFIT EARNED ON SUCH TRAINING ALSO, WE ARE OF THE OPINION THAT NO P ART OF THE INCOME CAN BE ATTRIBUTABLE TO THE PE. WE PLACE REL IANCE ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CA SE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES CO. LTD. (SUPR A) AND ALSO THE DECISION OF THE HONBLE DELHI HIGH COURT I N THE CASE OF L.G. CABLES LIMITED 197 TAXMAN 100 THAT WHEN UND ER AN OFFSHORE CONTRACT, EQUIPMENT WAS FOUND TRANSFERRED OUTSIDE INDIA, NECESSARILY TAXABLE INCOME ALSO ACCRUED OUTS IDE INDIA AND HENCE, NO PORTION OF SUCH INCOME WAS TAXABLE IN INDIA. THEREFORE, WE SET ASIDE THE ORDER OF THE CIT(A) IN RESTRICTING THE ADDITION TO 1% OF THE TOTAL CONTRACT THAT WAS D ONE BY HIM IN PARA 5.12. ASSESSEE GETS COMPLETE RELIEF FROM TH IS AND THEREFORE, REVISED GROUND NOS. 1 RAISED BY THE ASSE SSEE ON THIS IS ALLOWED. 3.1. ACCORDINGLY, THERE IS NO BASIS FOR TAXING 1% OF THE CONTRACT RECEIPTS AS INCOME IN INDIA AND THEREFORE, ORDER OF CIT(A) STANDS MODIFIED AND GROUND NO.1 OF THE ASSES SEE IS ALLOWED. 4. GROUND NO.2 PERTAINING TO REOPENING OF ASSESSMENT IS HELD AGAINST THE ASSESSEE IN A.Y. 200 0-01 IN ITA.NO.160/H/06 AND ITA.NO.254/HYD/2006 DATED 28.05 .2014 AT PARA NO.10. THE RELEVANT OBSERVATIONS OF THE COORDI NATE BENCH ON THE ISSUE IS AS UNDER : 10. AS RAISED IN ADDITIONAL GROUNDS, ASSESSEE HAS CONTESTED THE ISSUE OF REOPENING OF ASSESSMENT UNDER SECTION 147 WHICH WAS NOT CONTESTED BEFORE THE LD. CIT(A). EVEN THOUGH, LD. COUNSEL RAISED VARIOUS ISS UES LIKE, REASONS FOR REOPENING, SATISFACTION OF THE A. O. NON ISSUE OF NOTICE, REFERENCE TO VARIOUS NOTINGS MADE THEREIN AND RELIED ON VARIOUS CASE LAW CONTESTING THE ISSUE , WE ARE OF THE OPINION THAT THERE IS NO MERIT IN ASSESS EES 6 ITA.NO.242/HYD/2012 & ITA.NO.197/HYD/2012 M/S. PRYSMIAN CAVI E SYSTEMI TELECOM S.R.L. HYDERAB AD CONTENTIONS ON THE ISSUE OF REOPENING. FIRST OF ALL , ASSESSEE HAS FILED RETURN OF INCOME ON 30.11.2000 F OR A.Y. 2000-01 AND THIS RETURN WAS ACCEPTED UNDER SEC TION 143(1) WITHOUT ANY SCRUTINY. NOTICE UNDER SECTION 1 48 WAS ISSUED ON 29.03.2004 I.E., WITHIN 4 YEARS FROM THE END OF THE ASSESSMENT ORDER AND EVEN THE ASSESSMENT ORDER WAS PASSED ON 31.03.2005. SINCE SCRUTINY ASSESSMENT HAS NOT BEEN MADE EARLIER BEFORE REOPENI NG OF THE ASSESSMENT, WE ARE OF THE OPINION THAT THE PRIN CIPLES LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF RAJESH ZHAVERI STOCK BROKERS PVT. LTD. VS. ACIT 291 ITR 500 (SC) WHEREIN IT WAS HELD THAT INTIMATION UNDER SECTION 143(1) CANNOT BE TREATED AS AN ORDER OF ASSESSMENT AS THERE IS NO ASSESSMENT THE QUESTION OF CHANGE OF OP INION DOES NOT ARISE. FURTHER, WHAT IS REQUIRED AT THE TI ME OF ISSUE OF NOTICE UNDER SECTION 147 IS, REASON TO BE LIEVE THAT INCOME HAS ESCAPED ASSESSMENT BUT NOT THE ESTABLISHMENT OF ACT OF ESCAPEMENT OF INCOME. SINCE A.O. HAS FORMED AN OPINION ON THE BASIS OF THE SUBSEQUEN T ASSESSMENTS, CONSIDERING THE REASONS RECORDED THERE IN AND THE FACT THAT THE ASSESSMENT WAS REOPENED WITHI N 4 YEARS AFTER PROCESSING THE RETURN UNDER SECTION 143 (1), WE ARE OF THE OPINION THAT THERE IS VALID REASONS IN R EOPENING THE ASSESSMENT. THAT MAY ALSO THE REASON WHY THE ASSESSEE HAS NOT CONTESTED THE ISSUE BEFORE THE LD. CIT(A). THEREFORE, THERE IS NO ADJUDICATION ON THIS ISSUE. THE ISSUE OF NON-ISSUE OF NOTICE U/S 143(2) REQUIRE EXAMINATION OF FACTS, THEREFORE, NOT CONSIDERED AS IT WAS RAISED AS ADDITIONAL GROUND. IN VIEW OF THE ABOVE, THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE ON THIS I SSUE (ADDL GROUND NO 1) IS ACCORDINGLY REJECTED. 4.1. FURTHER, EVEN THOUGH THE GROUND IS REJECTED, IT BECOMES ACADEMIC ONLY AS WE HAVE ALREADY HELD THAT ASSESSEES OFF SHORE CONTRACT RECEIPTS ARE NOT TAXA BLE IN INDIA. THEREFORE, GROUND NO.2 OF THE ASSESSEE IS TREATED A S ACADEMIC IN NATURE. 5. GROUND NO.3 IS CONSEQUENTIAL IN NATURE. SINCE MAIN ADDITION ITSELF WAS DELETED, THERE IS NO LEVY OF INTEREST UNDER SECTION 234B ON THE FACTS OF THE CASE. THEREF ORE, GROUND NO.3 OF THE ASSESSEE IS ALSO CONSIDERED AS ALLOWED. 7 ITA.NO.242/HYD/2012 & ITA.NO.197/HYD/2012 M/S. PRYSMIAN CAVI E SYSTEMI TELECOM S.R.L. HYDERAB AD 6. IN THE RESULT, ITA.NO.242/HYD/2012 OF THE ASSESSEE IS PARTLY ALLOWED. ITA.NO.197/HYD/2012 A.Y. 1998-1999 (REVENUE APPEA L) : 7. THIS APPEAL FILED BY REVENUE IS AGAINST THE REL IEF GRANTED BY THE LD. CIT(A) RESTRICTING THE ESTIMATIO N OF INCOME AT 1% AS AGAINST 5% ASSESSED BY THE A.O. SINCE, ASS ESSEES APPEAL IS ALLOWED ON THE ISSUE OF TAXABILITY OF OFF SHORE CONTRACT, THERE IS NO MERIT IN THE REVENUE GROUNDS. ACCORDINGLY, REVENUE APPEAL IS DISMISSED. 8. TO SUM-UP, ITA.NO.242/HYD/2012 OF THE ASSESSEE IS PARTLY ALLOWED AND ITA.NO.197/HYD/2012 OF THE RE VENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25.07.2014. SD/- SD/- (ASHA VIJAYARAGHAVAN) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 25 TH JULY, 2014 VBP/- COPY TO : 1. M/S. PRYSMIAN CAVI E SISTEMI S.R.L., (FORMERLY P IRELLI CAVI E SYSTEMI TELECOM S.P.A.) INDIA PROJECT OFFICE, H .NO.5-7-64, EWHS-128, GROUND FLOOR, APHB COLONY, MOULALI, HYDERABAD. PAN AABCP-2267-Q 2. DCIT, CIRCLE-16(3), AYAKAR BHAVAN, HYDERABAD. 3. CIT (OSD) & CIT-IV, HYDERABAD 4. CIT(A)-V, HYDERABAD. 5. ADIT (INTERNATIONAL TAXATION), HYDERABAD 6. ADDL.CIT, RANGE-16, HYDERABAD 7. D.R. ITAT, A BENCH, HYDERABAD.