TMI Blog2011 (5) TMI 858X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of 10 percent to assess the income of the assessee. By adopting this method, the Revenue was able 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 was a possible view based on the past history of the assessee, then, the learned Director of Income-tax could 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 the learned Director of Income-tax in his order and in the show-cause notice could not even be taken in the further proceedings when consequential order has been passed by the Department. Therefore, on this ground it cannot be said that the learned Director of Income-tax 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. Assessability of income relating to outside India revenue - Though there is no discussion regarding non-taxation of the revenue for outside India operations in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and the decision of the hon'ble jurisdictional High Court in the assessee's own case and also the decision of the hon'ble Supreme Court in the case of Ishikawajima-harima Heavy Industries Ltd. [ 2007 (1) TMI 91 - SUPREME COURT] 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 make inquiry in relation to role of the permanent establishment, etc. It has already been observed that the permanent establishment, even if it existed, the revenue from outside India operation could not be taxed unless there is a nexus between the permanent establishment and the activity done and performed outside India and this is the crux of the decision of the hon'ble Supreme Court in the case of the assessee itself. Even the learned Director of Income-tax 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 erroneous so far as it is prejudicial to the interests of the Revenue in respect of revenue relating to outside India. Therefore, on both grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ularly the following : (i) The learned Director of Income-tax is incorrect in holding in paragraph 7.1 at page 15 of the impugned order that article 7(3) does not provide for further deeming the income at 10 percent of the profits computed and that there was no basis and justification for the same. (ii) The Assessing Officer had allowed the liability of the expenses on which the TDS was made as per provisions of the Act and the observations of the learned Director of Income-tax in paragraph 7.2 at pages 15 and 16 of the impugned order are incorrect and untenable. (iii) The learned Director of Income-tax is incorrect in observing vide paragraph 7.3 at page 16 of the impugned order that the Assessing Officer had not taxed the income vis-a-vis the receipts of Rs.1,29,45,194,688 from outside India operations. The fact remains that the learned Assessing Officer after due application of mind and having regard to the Supreme Court's decision in Ishikawajima-harima Heavy Industries Ltd.'s case [2007] 288 ITR 408 (SC) and the Uttaranchal High Court's decision in the assessee's own case in CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 450 (Uttaranchal) arrived at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently, the impugned order under section 263 as passed by the learned Director of Income-tax (International Taxation)-II (hereinafter referred to as the DIT), New Delhi, deserves to be cancelled. 2. That the impugned order dated March 18, 2009 as passed by the Director of Income Tax (International Taxation)-II, New Delhi holding that the assessment order passed by the Assessing Officer under section 143(3) of the Income-tax Act for the assessment year 2005-06 was erroneous and prejudicial to the interests of the Revenue is arbitrary, unjust and illegal on various factual and legal grounds including the following : (a) There was no failure on the part of the Assessing Officer to examine various aspects before passing the assessment order under section 143(3) dated October 5, 2007. (b) Various observations made by the learned Director of Incometax in the impugned order as passed under section 263 are either incorrect or are legally untenable particularly the following : (i) The learned Director of Income-tax is incorrect in holding in paragraph 7.1 at page 14 of the impugned order that article 7(3) does not provide for further deeming the income at 10 percent of the profits computed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtions of which had also been extracted by him at pages 18 and 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 Malabar Industrial Co. [2000] 243 ITR 83 (SC) is followed, the impugned order as passed under section 263 is clearly illegal and void ab initio. (d) Various observations made by the learned Director of Incometax in the impugned order under section 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 sides. The issues being identical, for the sake of convenience both these appeals are being disposed of by this consolidated order. 3. For the assessment year 2005-06, the order is stated to have been passed on March 9, 2007 under the provisions of section 143(3) of the Act whereby the income of the assessee was assessed at Rs. 39,09,21,550 against the returned loss of Rs. 9,28,05,64,624. The return of income was filed on October 31, 2005 which was initially processed and later on assessment proceedings were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as taken from gross revenues and deemed profit rate was applied thereafter in earlier years and, therefore, if all expenses are not allowed, at least the expenses whereon tax is deducted should be allowed for the year under consideration. On these submissions of the assessee, the Assessing Officer vide paragraph 5 has observed that the assessee's claim of all the expenses is not tenable as the assessee did not produce relevant books of account and vouchers for verification. The assessee did not produce the books of account as the same were stated to be maintained by the head office of the company in Korea in Korean language. The books of Indian projects were not produced for verification and, in these circumstances, the Assessing Officer has arrived at a conclusion that it will be impossible to hold that books of account are properly maintained and income can be deduced therefrom. As the relevant record supporting the entries was not complete and correct, the book results were not accepted by the Assessing Officer. So as it relates to the contention of the assessee that the cost relating to sub-contractors, salary and wages, etc., on which the TDS has been made should be reduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Double Taxation Avoidance Agreement with Korea. 5. He further rejected the claim of the assessee regarding non-taxability of the revenue amounting to Rs. 4,70,835 relating to contract of HAL project for the reasons mentioned by the Assessing Officer in paragraphs 6 and 6.1 and the said sum was added to the income of the assessee. It is in this manner, the assessment came to be passed by taking the gross receipt from inside India working out at Rs. 5,52,28,15,702 (Rs. 5,52,23,44,867 + 4,70,835). He has reduced therefrom sub-contractors' cost and salary expenditure verified from the TDS returns amounting to Rs. 1,67,83,37,937 and balance inside revenue was taken at Rs. 3,84,44,77,765 and 10 percent thereof was taken as assessable income from inside revenue amounting to Rs. 38,44,47,776 and the taxable income of the assessee has been taken at Rs. 39,09,21,550 which include interest from Citi Bank and interest received from the Income-tax Department at Rs. 9,07,647 and Rs. 55,02,127 respectively. It is against the aforementioned order passed by the learned Assessing Officer, the Commissioner of Income-tax has exercised jurisdiction under section 263 of the Act. Copy of show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Taxation Avoidance Agreement would prevail over the provisions of the Act. Reference was also made to the office note appended to the assessment order wherein the Assessing Officer had stated that assessment is completed as per article 7 of the Double Taxation Avoidance Agreement with Korea estimating the profit rate at 10 percent on the total revenue relating to inside India activities as reduced by expenses verifiable from annual returns of the TDS and this will be in line with the stand taken by the Department in the preceding assessment years as provided in paragraph 5 of article 7 of the Double Taxation Avoidance Agreement. Reference was also made to the observations of the Assessing Officer contained in paragraphs 4 and 5 of the assessment order to show that the Assessing Officer had elaborately discussed all the issues and thereafter a conscious decision was taken by the Assessing Officer which was in line with the stand taken by the Department in preceding years. Referring to the computation made by the Assessing Officer in the assessment order while arriving at gross receipts from inside India revenue after reducing the sub-contractors' cost and salary expenditure a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer while computing the profit attributable to the assessee's permanent establishment in India has allowed only expenses to the tune of Rs. 346 crores. In other words, only 26.36 percent of the said expenses were allowed and balance 73.64 percent disallowed. It was further submitted that if the action proposed in the show-cause notice is taken, then, income of the assessee from inside India operation would be assessed at Rs. 384.44 crores as against Rs. 38.44 crores assessed by the Assessing Officer. It was submitted that without prejudice, even if for argument sake it was to be accepted though not admitted that the learned Assessing Officer had erred in law in assessing the income at Rs. 38.44 crores under the Double Taxation Avoidance Agreement, it is to be pointed out that had the assessee's income been computed under section 44BB(1) of the Act by completely ignoring the provisions of the Double Taxation Avoidance Agreement, the total inside India income would not have exceeded Rs. 55.22 crores (being 10 percent of Rs. 552.23 crores (gross revenue)). Thus, it was submitted that by no yardstick the assessee's income can exceed Rs. 55.22 crores. 9. It was sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behind the acceptance 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 against income in subsequent years and no tax will be levied. By adopting such formula, the assessee should pay tax every year since 10 percent of the gross contractual receipts as reduced by subcontractors cost and salary cost were determined as income attributable to the permanent establishment. Therefore, even in the years of losses the Department could recover tax. From the assessee's point of view such method was acceptable since it 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 followed from year to year for the last 16 years and reference was made to paragraph 5 of article 7 of the Double Taxation Avoidance Agreement which casts an obligation on the Department to follow the method of attribution of the profits to the permanent establishment year after year unless there is a reason on the contrary. Referring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue that the assessee has a permanent establishment in India. It was submitted that the assessee has always disputed the existence of permanent establishment in India in respect of projects wherein the duration in India is less than 9 months stipulated in article 5(3) of the Double Taxation Avoidance Agreement although the Department has consistently held that even in respect of such projects there is a permanent establishment in India. It was submitted that at the first appellate stage itself the Commissioner of Incometax (Appeals) has held all along that office in Mumbai is not a permanent establishment and, therefore, where the duration of a project does not exceed nine months, there is no permanent establishment vis-a-vis such projects. It was submitted that in certain years the Departmental appeals against the Commissioner of Income-tax (Appeals)'s order on the same issue were dismissed by the Income-tax Appellate Tribunal also. Thus, it was submitted that the observation that there is no dispute on the issue of existence of the permanent establishment in India is factually incorrect. It was submitted that for the assessment years 1986-87 to 1888-89 the Income-tax Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Supreme Court decides to tax the outside India receipts in the case of the assessee's action shall be taken as per law. 15. Referring to the above observations, it was submitted that this issue was clearly considered by the Assessing Officer and the 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 hon'ble Supreme Court in the case of Ishikawajima-harima Heavy Industries Ltd. [2007] 288 ITR 408 (SC) and also the decision of the Uttarakhand High Court in the case of the assessee. The Assessing Officer was also in the knowledge that the Department has filed special leave petition against the order of the hon'ble Uttarakhand High Court and in case the decision is received from the hon'ble Supreme Court to tax outside India receipts, then, action shall be taken as per law. 16. It was further submitted that the Assessing Officer had considered the issue relating to outside India revenue which is apparent from query 7 given by the Assessing Officer to the assessee vide notice issued under section 142(1) dated August 21, 2006 and the query of the Assessing Officer read as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as attributed one percent of the outside India revenue to the permanent establishment in India and brought the same to tax in respect of all the referred projects and reference was made to the following table : Project name Outside India revenue in past assessment years MSP Assessment year 2004-05 Assessment year 2006-07 MUT Assessment year 2006-07 MHB Assessment year 2006-07 GMR (O M) Assessment year 1999-2000 onwards 20. The learned Commissioner of Income-tax (Appeals) have repeatedly held that no part of outside India revenue in respect of the above mentioned projects can be taxed in India and the same were excluded from the assessee s taxable income. Thus, the issue of taxability of even 1 percent of outside India revenue being attributable to the permanent establishment for all the above mentioned projects did not find favour with the Commissioner of Income-tax (Appeals) in the past years. It was submitted that the Assessing Officer relying upon the Uttaranchal High Court decision in the assessee's 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 India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the time of finalising the assessment for the assessment year 2005-06 and reliance was placed on the decision in the case of General Electric International Inc. v. Asst. CIT (International Taxation) [2006] 287 ITR (AT) 43 (Mumbai) and the decision of the hon'ble Supreme Court in the case of CIT v. G. M. Mittal Stainless Steel P. Ltd. [2003] 263 ITR 255 (SC) wherein it was held that where the Assessing Officer followed the decision of the jurisdictional High Court, there can be no basis for the interference of the assessment order being prejudicial to the interests of the Revenue. Reliance was also placed on the decisions in the case of CIT v. Dharmodayam Co. [2001] 248 ITR 816 (SC) and CIT v. Sakthi Charities [2000] 244 ITR 226 (Mad). 22. So far as it relates to the applicability of section 263, reliance was placed on the following decisions : (i) CIT v. Ratlam Coal Ash Co. [1998] 171 ITR 141 (MP) ; (ii) CIT v. Goyal Private Family Specific Trust [1988] 171 ITR 698 (All) ; (iii) CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom) ; (iv) CIT v. J. P. Goal (HUF) [2001] 247 ITR 555 (Cal) ; (v) Hari Iron Trading Co. v. CIT [2003] 263 ITR 437 (P H) ; (vi) Malabar Industrial Co. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the Act, particularly the business purpose and absence of proper verification in this regard has made the assessment order erroneous and prejudicial to the interests of the Revenue. 25. Coming to the amount received by the assessee as revenue from outside India operation, amounting to Rs. 12,94,51,94,688, 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 also received revenue from inside India operation. Therefore, it is clear that the assessee had received a composite contract for the work to be performed in India and also related work from outside India. The Assessing Officer did not make inquiry regarding the nature and scope of the contracts, the reason for revenues for outside India operation, the nature of outside India operations, the duration of projects in India, the role of the Mumbai office of the company in submitting the tenders, negotiation of contracts, the subsequent role of the permanent establishment and the Mumbai office in earning the revenue from the alleged outside India operation. The Assessing Officer did not gather the facts before passing the order. The Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same can be changed if that method for computation of income is not as per the provisions of the tax treaty. It is in this manner, the learned Director of Income-tax has rejected the contention of the assessee. 28. He also rejected the contention of the assessee that the Assessing Officer, in fact, has disallowed the expenses of Rs. 9,66,45,41,565, as, according to him, such disallowances has been worked out by the assessee by stating that not all the expenses are allowed by the Assessing Officer. He further observed that this contention of the assessee has not been verified by the Assessing Officer in the assessment order. 29. He also rejected the legal contention of the assessee regarding applicability of certain decisions as, according to the learned Director of Incometax, there exist sufficient material to invoke the provisions of section 263. Finally, he observed that he is of the opinion that there is a clear 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 the interests of the Revenue. He has set aside the assessment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax and the learned Director of Income-tax not being satisfied, for the 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 assessment order is erroneous and is prejudicial to the interests of the Revenue and he has set aside the assessment order for the assessment year 2006-07 and directed the Assessing Officer to pass fresh order in accordance with the law after giving due opportunity to the assessee. The assessee is aggrieved by such order and, hence, has filed the aforementioned appeal for the assessment year 2006-07. 33. It was submitted by the learned authorised representative that the assessee is a non-resident company incorporated in South Korea. Since 1985 it has been undertaking execution of turnkey projects for designing, engineering, procurement apart from hook-up installation and commissioning of facilities for the ONGC, etc., in connection with exploration, extraction and production of mineral oil in the notified offshore waters. Designing, engineering, procurement and fabrication are carried out outside Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. (ii) Revenue from business operations carried out inside India under these contracts-the Assessing Officer has brought these to tax under article 7(3) read with article 7(5) of the treaty in accordance with the decisions of his predecessors which were sustained by the Commissioner of Incometax (Appeals) in the appeals filed by the assessee. (iii) Revenue from operations inside India under a project contracted with the Hindustan Aeronautics Ltd. (HAL), which according to the assessee is not taxable and it is in appeal against the order of the Assessing Officer taxing this income. (iv) Interest received from the tax Department on refund /and interest on deposits with banks, which the learned Assessing Officer, agreeing with assessee, has taxed under article 12(2) of the treaty. It may be noted that the impugned order of the Director of Incometax discusses only items Nos. (i) and (ii) and there is not a whisper of any objection to the Assessing Officer's treatment of items No. (iii) and (iv) above. 35. It was submitted that the following sequence of relevant events will also be important to raise by the assessee in its appeal : S. No. Particulars Date 1. Return of income declar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [2007] 291 ITR 482 (SC) while ignoring the office note of the Assessing Officer. The judgment was pronounced by the apex court much after the Asses---sing Offi-cer had passed the order. 9. Date of impugned order under section 263 18-3-2009 9.1 Whether during the course of proceedings under section 263, the assessee brings the aforesaid decisions to the knowledge of the Director of Income-tax ? Yes. Refer the assessee s submissions dated 13-3-2009 filed with the Director of Income-tax pages 165-197 at pages 182, 183 and 187, Volume 1. Also see paragraph 6.2/page 12 of the Director of Income-tax s order. 9.2 Whether the Director of Income-tax considers the effect aforementioned decisions of the High Court and Supreme Court or the Tribunal s decision for 1990-91, 1991-92 and 1996-97 dated 11-5-2007 (page 288/Volume 3). No 10. ITAT order for 1994-95 and 1995-96 giving effect to Uttaranchal High Court order dated 4-12-2008. 9-10-2009 (page 393/DPB-II) 36. It was submitted that the issues dealt with by the Assessing 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt under article 5(3) would prevail over the general provision contained in article 5(1) and (2) of the treaty. (b) Since the operations outside India (operations relating 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 the Uttaranchal High Court on March 30, 2006 and the hon'ble Supreme Court has also affirmed the said decision vide judgment pronounced on May 18, 2007. It was submitted that the Assessing Officer has followed the judgment of the Tribunal and the jurisdictional High Court for holding the 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 appended to the assessment order dated March 9, 2007. He submitted that history of litigation with the Department is described in annexure I to the written submissions and the office note attached by the Assessing Officer with the assessment order is annexed as annexure II and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that of the Assessing Officer. He submitted that following the said observations of the hon'ble Supreme Court the Tribunal in the assessee's own case for the assessment year 2005-06 reported as Deputy CIT v. Hyundai Heavy Industries Co. Ltd. [2009] 31 SOT 482 (Delhi), has held in favour of the assessee. He submitted that since the very reason given by the Director of Income-tax for setting aside the part of the assessment order is contrary to the decision of the hon'ble Supreme Court, therefore, the order passed by the learned Director of Income-tax on this issue is illegal and a nullity. 40. The learned authorised representative submitted that the learned Director of Income-tax while passing an order under section 263 has failed to consider the judgment of the jurisdictional High Court and office note appended to the assessment order. He also failed to consider the decision of the hon'ble Supreme Court in the assessee's own case which was brought to his notice and the history of litigation between the assessee and the Department since the assessment years 1987-88 and 1988-89 and reference was made to note No. 2 appended to the assessment order which has alrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24/Del/2007, I. T. A. Nos. 2530 and 2975/Del/2006, I. T. A. Nos. 106 and 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 judgments available with her at the time of passing the order. The learned Director of Income-tax has failed to consider the decision of the apex court and the jurisdictional High Court and has erroneously ignored to consider the office note and other 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 permanent establishment in India. He submitted that it is undisputed fact that whenever the period of installation projects exceeds nine months, the assessee offers the income from the revenues received in respect of operations of installation permanent establishment in India which is in accordance with the article 5(3) read with article 7 of the treaty. This year also the assessee has admitted to have permanent establishment in terms of article 5(3) of the treaty for the projects execut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he account of paid to sub-contractors, etc., on which tax was deducted at source ? 44. It was submitted that in a case where the assessment has been made after conducting proper inquiry and due application of mind, the onus will be on the Director of Income-tax to specifically establish that the order of the Assessing Officer is contrary to any statutory provision or judgment(s) of the jurisdictional High court or of the apex court. Only 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 interests of the Revenue, it must be shown that the assessment order has resulted in loss of revenue. He submitted that it will be shown that the learned Director of Income-tax has not been able to satisfy either of the two conditions laid down in section 263 of the Act. At the outset, he submitted that the entire assessment has been set aside by the learned Director of Income-tax. He submitted that there is no whisper of any error committed by the Assessing Officer in regard to tax treatment of income from project for HAL and interest income and, therefore, to that extent the assessment order was neither erroneou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er article 7 of the Double Taxation Avoidance Agreement with Korea estimating the profit rate at 10 percent on the total revenues relating to inside India activities as reduced by expenses verifiable from annual returns of TDS. This is in line with the stand taken by the Department in preceding years as provided in paragraph 5 of the article 7 of the Double Taxation Avoidance Agreement. 46. He submitted that the Director of Income-tax did not comment whether adversely or otherwise in respect of reasoning given by the Department in suo motu offering the formula for computing the income in respect of operations inside India vide letter dated February 21, 1995 in respect of assessment proceedings for the assessment years 1993-94 and 1994-95. It was specifically brought to his notice as admitted by him at page 10 of the impugned order. The copy of such letter is placed at page 306 of paper book III which is a letter issued by the Assessing Officer of the assessee and it is dated February 21, 1995. The text of the said letter is as under : Please refer to the discussion in regard to the above assessment years. Under the Double Taxation Avoidance Agreement your representatives, Shri D. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 the learned Director of Income-tax that the computation of income from operations inside India are erroneous not on the ground of applicability of section 44BB. He submitted that it is the mistaken allegation of the learned Director of Income-tax that the Assessing Officer had already determined taxable income after reducing gross receipts by the amount of payment to sub-contractors, etc. on which tax was deducted at source and the Assessing Officer should not have further estimated taxable income at 10 percent of the balance receipts. He submitted that if such view of the learned Director of Income-tax is adopted, then it would result in assessable income at 70 percent of the gross receipts as income from operations inside India. The learned Director of Income-tax has finally given up such stand taken in the show-cause notice. He himself could not come to any conclusion in regard to mode of computation of income from operation from inside India. He has simply set aside the assessment without giving any direction in this regard and left it to the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich tax was deducted at source and imposed tax on balance amount of revenue from operations inside India. This allegation is factually incorrect. The Assessing Officer also called for and examined all the invoices raised by the assessee on the ONGC and release of payment of the ONGC after duly verifying achievement certificates issued by its technical consultants. (Pages 208 to 210 and pages 217 to 219 of the Volume II). The learned Director of Income-tax has chosen to ignore the voluminous information furnished with the Assessing Officer starting pages 8 to 163/volume I-2005-06. These comprise notes to return of income, computation of income, audited statement of operations giving detailed items of expenditure on material, labour, consumables, depreciation and miscellaneous expenses for each project separately. The assessee also separately furnished each and every invoice raised on the ONGC (vide submission dated December 11, 2006 at pages 223/Paper Book, Volume II). It is thus most unfair on the part of the Director of Income-tax to allege that the Assessing Officer did not examine the expenses incurred for the purpose of the projects. The Director of Income-tax seems to be unaw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer has not enquired into the subsequent role of the permanent establishment a Mumbai office in earning the revenues from the alleged outside India operations. (vii) The Assessing Officer has not gathered the facts at all before passing the order. (viii) The Assessing Officer has also not enquired into the applicability of the decision of the hon'ble apex court in the assessee's own case, reported in Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC) for the year under consideration. (ix) Due to these facts and position of law, the order passed by the Assessing Officer by not existing the income on account of revenues of Rs. 12,94,51,94,688 is erroneous and prejudicial to the interests of the Revenue. Our comments: All the allegations contained in this sub-paragraph of the impugned order have been made by the Director of Income-tax suo motu for the first time and without giving any notice or opportunity of any kind to the assessee . For this reason alone, these allegations need to be rejected. Since the order to set aside the assessment has been made only on the basis of these allegations, the impugned order should be struck down. However, to set the record strai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t inside India. Further, the Assessing Officer had specifically called for the contracts for examination which clearly give the duration of the project (for instance, pages 167 to 170 of MUT contract). (d) Role of Mumbai office (d) This issue was squarely covered by the decision of the Income-tax Appellate Tribunal, Uttaranchal High Court and the Supreme Court against the Department. This aspect was considered and the assessee s explanation was accepted and has also been referred to in the office note. (page 210, -Volume II, Paper Book). (e) Subsequent role of the permanent establishment in Mumbai office for outside operations. (e) The perusal of the contracts shows that the project office was part of the installation permanent establishment. Further, its auxiliary and -supporting role is clearly brought out in clause 5.3.11 of the contracts with the ONGC which were duly examined by the Assessing Officer (page 251, Volume . . ., Paper Book). (f) The Assessing Officer 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 Director of Income-tax has obviously not looked into. The allegation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -06 section 90(2) explained. P. 223 Copies of 4 contracts and all invoices raised on the 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 the ONGC for supervising real-time all works under the contracts. P. 224-251 Copies of invoices giving project-wise and milestone-wise. P. 252 Letter dated 14-12-2006 with reference to applicability of article 5(3) of the treaty based on the Tribunal decisions. P. 254 Letter dated 1-3-2007 citing the Uttaranchal High Court judgment in the assessee s own case. P. 255-256 Letter dated March 1,-2007 (second letter) on taxability of inside India activities under provisions of the treaty of pages 255-256 verifies that facts and contracts are same and with similar terms. In view of the factual position stated above, it is obvious that the Director of Income-tax has made the allegations without referring to material on 'record' including 'office note' available to him at the time of passing the impugned order. As held by the Punjab and Haryana High Court in Hari Iron Trading Co. v. CIT [2003] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indo-Italian and Indo-Korean treaty are placed at page 962-964/DPB-VI and 181-198 respectively. (b) The proposition laid down by the apex court in Azadi Bachao Andolan's case [2003] 263 ITR 706 (SC) 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 Saipem S. P. A.'s case [2009] 27 SOT 531 (Delhi). Thus, article 7(3) read with article 7(5) of the Indo-Korean treaty must be construed liberally and on the lines suggested by Prof. Klaus Vogel and the OECD commentary on corresponding article 7(4) of the OECD model. (c) Lastly, the jurisdictional Uttarakhand High Court has in recent judgment in the case of CIT v. Enron Expat Services Inc. reported in [2010] 327 ITR 626 (Uttarkhand) has held that once the assessee has opted to be assessed under the Double Taxation Avoidance Agreement, section 44BB would not apply to it. Indeed the learned Director of Income-tax has also not invoked section 44BB either in the showcause notice or in the impugned order. In fact, the learned Director of Income-tax specifically refused to apply section 44BB (paragraph 15 at page 10, supra). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered the material available on record. A scrutiny of the objective material on record clearly establishes application of mind and proper enquiry made by the Assessing Officer. Hence, the very basis for setting aside the assessment is illegal and non existent. Legal submissions : The principles of law governing the Director of Income-tax's jurisdiction under section 263, in the context of facts of this case, are set out below : (i) The proceedings under section 263 are quasi-judicial proceedings : The Commissioner of Income-tax must record satisfaction that the order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue. both 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 Assessing Officer fully applied his mind and took a legally possible view, the Director of Income-tax cannot substitute his superior view and set aside the assessment without establishing that the view taken by the Assessing Officer was contrary to the statutory provision or a judgment of the jurisdictional High Court/apex court. (iii) The Directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause notice without putting the assessee on notice. (xi) The Departmental representative or, with respect, even the hon'ble Tribunal cannot uphold the order under section 263 on a ground other than that which formed the basis of the order passed by the Director of Income-tax under section 263 of the Act. (xii) The Commissioner of Income-tax cannot take recourse to revisional powers under 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 Assessing Officer has taken the consistent view. CIT v. Escorts Ltd. [2011] 338 ITR 435 (Delhi) ; [2011] 51 DTR 321 (Delhi) at page 748/DPB-V. 48. He submitted that interpretation of article 7(3) read with article 7(5) of the treaty has been literally adopted by the Director of Income-tax in show-cause notice and interpreting so he has arrived at a conclusion that only such expenses on which tax was deducted at source should be allowed as deduction from Indian revenue. However, in the impugned order he has given no such direction, therefore, the very basis on which the Director of Income-tax invoked section 263 is erroneous and has ceased to exist. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed assessment in pursuant to -order under section 263 Original -assessment Gross revenue 552.28 552.28 Less : (i) Expenses subject to TDS 167.83 (ii) 35 percent of material cost 360.00 ( ) 527.83 ( ) 167.83 (iii) Net income from operations inside India 24.35 384.45 (10 percent of balance) 38.44 50. Referring to the aforementioned factual position, he submitted that even after directions given by the learned Director of Income-tax, the Assessing Officer has allowed 35 percent of the material cost apart from expenses subject to the TDS and which has resulted in lower assessment than the assessment made by the Assessing Officer. He submitted that the provisions of section 44BB itself could not even be applied by the Assessing Officer in the revised assessment which has been approved by the Dispute Resolution Panel and while assessing the income of the assessee no guidance has been taken from section 44BB of the Act. He submitted that contractor's cost on which the TDS has been deducted, according to the 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 expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and looking at it from that point of view the real question is whether the turnover represented by the cost of the stores/material supplied by the M. E. S. department involves any element of profit having regard to the terms and conditions on which such supply is made ? 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 be excluded. 51. After analysing the transaction involving the supply of material by the employer, it was held by the hon'ble Supreme Court as under (page 533) : Therefore, since no element of profit was involved in the turnover represented by the cost of stores/material supplied by the M. E. S. to the assessee-firms, the income or profits derived by the assesseefirms 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 assessee-firms from the M.E.S. department exclusive of the cost of the material/stores received for being used, fixed or incorporated in the works undertaken by them. 52. He submitted that it is not even the case of the Director of Income-tax that any element of profit was involved in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsider the hon'ble Supreme Court decision in the case of the assessee in respect of the assessment year 2005-06 is not true as the said decision came after passing of the order by the Assessing Officer as the judgment is dated May 18, 2007 and the assessment was completed on March 9, 2007. He submitted that rule 10 of the Income-tax 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 power of the Assessing Officer is very wide and reference has been made to the decision of the hon'ble Supreme Court in the case of Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913. 55. It was submitted that if the assessment order has been passed after due application of mind then revision authority cannot allege for non-application of mind only because of the reason that in the text of the assessment order the Assessing Officer did not discuss such application of mind and reference was made to the following decisions : 1. Tawari Colonisers P. Ltd. (page 582-591/DPB-IV) ; 2. Sanjay Kumar Jain (page 592-601/DPB-IV) ; 3. CIT v. Ratlam Coal As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rary to material available to record have resulted in illegal and arbitrary conclusions leading to illegal directions contained in paragraph 8 of the Director of Income-tax's order. (3) The order has been passed in breach of principles of natural justice and therefore it is a nullity. (4) The learned Director of Income-tax has failed to substantiate the allegation that the assessment order is erroneous in law and prejudicial to the interests of the Revenue. (5) Regarding allegation in relation to computation of income from operation inside India, the Director of Income-tax has himself abandoned the stand taken in the show-cause notice as no direction in this regard has been given. (6) The learned Director of Income-tax failed to consider the judgment of the apex court in Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC) and made an absurd allegation that the Assessing Officer should have considered that judgment. (7) Further, despite the fact that there was no change in the factual matrix this year, the Director of Income-tax miserably failed to point out as to why and how the Assessing Officer was wrong in following the Income-tax Appellate Tribunal and the jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in paragraph 5 of article 7 of the IndoKorean Double Taxation Avoidance Agreement. Above all, the learned Director of Income-tax miserably failed to establish that the assessment order caused as any loss of revenue. On the other hand, the revised assessment resulted in under assessment of income from operations inside India by about Rs. 14 crores. The revised assessment has become final as the Dispute Resolution Panel (of which the Director of Income-tax was also a member) has confirmed the revised assessment. In absence of loss of revenue, the condition of the order being prejudicial to the Revenue is also not satisfied. (12) It is now well settled that in a case where two or more issues are involved and the Commissioner of Income-tax sets aside the entire assessment the Tribunal agrees with the Commissioner of Income-tax on one issue but does not agree with the other, it may modify the order under section 263 by limiting settling aside of the assessment order only in respect of issue on which it agrees with the Commissioner of Income-tax. The relevant decision placed paragraph of the submissions. 59. On the other hand, learned special counsel appearing on behalf of the Revenue su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessment year 1993-94, which were available to him in the course of the revisionary proceeding under section 263 of the Act. (d) The Director of Income-tax did not consider the 'office note' recorded by the Assessing Officer as a footnote to the assessment order. (e) The Director of Income-tax ignored the order of the Incometax Appellate Tribunal for the assessment years 1986-87 and 1987-88 which was confirmed by the hon'ble apex court holding that even under article 7(3) of the Indo-Korean tax treaty, the Assessing Officer after rejecting the accounts had rightly made best judgment assessment as per section 145(3) of the Act. (4) The Director of Income-tax has not considered the information available on the 'record' of the case while adjudicating the issues. (5) The Director of Income-tax has not cited any judicial authority or provision of law to hold the order of the Assessing Officer erroneous. (6) The Director of Income-tax erred in ignoring rule 10 of the Income-tax Rules, 1962 which deals with the determination of income in the case of non-residents, in particular, clause (iii) of the said rule which enables an Assessing Officer to compute income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her the claim of the assessee that Indian operation continued from November 1, 1986 to April 12, 1987 for a period less than 9 months and, thus, there was no permanent establishment in terms of tax treaty. The finding of the Assessing Officer in this regard is that there was a permanent establishment and he assessed 2 percent of the receipts relating to outside India activities and so far as it relates to activities inside India, the Assessing Officer assessed the same at 10 percent vide assessment completed on June 8, 1992 under the provisions of the Double Taxation Avoidance Agreement. He submitted that the Commissioner of Income-tax (Appeals) held that the assessee did not maintain separate books for each project. It had a permanent establishment in India as Indian operation extended beyond 9 months. The assessee has a project office in Bombay which had a close link with the operations. However, the Commissioner of Income-tax (Appeals) reduced the income from outside India activity at one percent of the receipts. In respect of activities inside India, he upheld the applicability of 10 percent taking the principle explained in Board Instruction No. 1767 dated July 1, 1987. The In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale took place outside India. Similarly, in the present case, there was no allegation made by the Department that the price at which the ONGC was billed/invoiced by the assessee for supply of fabricated platform included any element for services rendered by the permanent establishment. He submitted that thus, the hon'ble Supreme Court has held that in the circumstances not all the profits of the assessee-company from its business connection in India (PE) would be taxable in India, but only so much of the profits having economic nexus between permanent establishment in India would be taxable in India. On the quantum of taxable profits attributable to Indian permanent establishment of the assessee relating to work of installation and commissioning of the platforms, the hon'ble Supreme Court for the reasons recorded by it held that they were taxable at 10 percent of the payments relating to the said services/facilities carried on in the Bombay High and the reasons by the courts were as under : 1. Firstly, the accounts submitted by the assessee were rejected and the Assessing Officer had to invoke the provisions of section 145 of the Act by way of best judgment assessment. 2. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permanent establishment in the Bombay High. 62. The conclusion of the decision as carried in paragraph 15 of the judgment was as under (page 496 of 291 ITR) : (a) In the facts and circumstances of the case, profits, if any, from the Korean operations (designing and fabrication) arose outside India, hence, they are not taxable. (b) As regards the quantum off profits embedded in the Indian operations attributable to the Indian permanent establishment of the assessee, we hold that the Commissioner of Income-tax (Appeals) was right, in the facts and the circumstances of this case, in attributing the profits to the Indian permanent establishment at 10 percent of the gross receipts in respect of its activities 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 the hon'ble Uttarakhand High Court to the Income-tax Appellate Tribunal for deciding the same afresh. Consequently the order has been passed by the Income-tax Appellate Tribunal which is dated October 17, 2009 whereby the appeals filed by the Revenue have been dismissed and it is held that no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, in this manner, it was held that Mumbai office cannot be termed to be the permanent establishment of the assessee in India. On the exclusion 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 the Supreme Court judgment in the assessee's own case for the assessment years 1987-88 and 1988-89 (supra) but also the Tribunal order for the assessment year 1989-90 and the Commissioner of Income-tax (Appeals)'s order for the assessment year 1992-93. For the assessment years 2005-06 and 2006-07, the Assessing Officer himself did not bring to tax the outside India receipt. Copies of these assessment orders are before us at pages 99 to 104 and 105 to 109 respectively of the assessee's Paper Book. 65. He submitted that so far as it relates to exclusion of revenues from inside India operation, the findings are recorded in paragraph 13 of the order. In respect of these assessment years, the Tribunal has concluded that inside India operation in the absence of the permanent establishment in India could not be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Department did not make any inquiry. 68. In the facts he submitted that it will be relevant 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 that the situation in the present case is more than intriguing as the formula even ignores the rule laid down by the hon'ble apex court though subsequent to the order passed by the Assessing Officer. He 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, there 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 to compute profit at 10 percent is a law which cannot be given a go by just for the sake of maintenance of consistency. He, in this regard, referred to the decision of the Income-tax Appellate Tribunal, Delhi, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an assessment had been completed in routine matter without application of mind, the Commissioner was justified in holding that the assessment order was erroneous and prejudicial to the interests of the Revenue. For this purpose, the learned authorised representative also placed reliance on the decision of the hon'ble Rajasthan High Court in the case of Smt. Renu Gupta v. CIT [2008] 301 ITR 45 (Raj). He submitted that doctrine of merger is not applicable to the facts of the case and he placed reliance on the following decisions : (i) Aerens Infrastructure and Technology Ltd. v. CIT [2004] 271 ITR 15 (Delhi) ; (ii) CIT v. Printers House [1998] 233 ITR 666 (Delhi) ; (iii) CIT v. Ganesh Steel Indus [2010] 325 ITR 99 (P H) ; [2009] 184 Taxman 220 ; and (iv) Panchaman Traders v. CIT [2010] 323 ITR 334 (Ker) ; 191 Taxman 264. 71. He submitted that the power of revision has been held to be correctly exercised in a case where a contractor earlier assessed at 10 percent 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 the Assessing Officer where he had assessed only 10 percent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the issues concerning the claim of the assessee regarding revenue from outside India operations though the facts were altogether different from the facts of the earlier years. The Assessing Officer has recorded in paragraph 2 of the office note that the Department has not accepted the decision of the hon'ble High Court and the appeal is filed in the hon'ble Supreme Court. It is further recorded that in case the hon'ble 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 failed to make inquiries which were required to be made. He submitted that revenue from inside India operation was taxed at 20 percent by the Assessing Officer for the assessment years 1986-87 to 1988-89 which was reduced by the Commissioner of Income-tax (Appeals) at 10 percent of the gross receipts and further reduced to 3 percent of the gross receipts by the Income-tax Appellate Tribunal in the order dated August 30, 1999. 76. Replying to the first issue raised by the assessee that the learned Director of Income-tax has set aside the entire assessment order which sweeps the income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed order for the assessment year 2005-06 had no benefit of the decision of the hon'ble Supreme 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 Commissioner of Income-tax (Appeals) which was followed by the Income-tax Appellate Tribunal and, thus, powers under section 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 February 1, 1995 proposed by the Department during the course of proceedings before the Commissioner of Income-tax (Appeals), it was submitted by learned special counsel that as per letter dated March 13, 2009 filed by the assessee before the Director of Income-tax during the course of proceedings under section 263, it was mentioned in paragraph 11 of the said letter that for the assessment year 1990-91 the Department and the assessee had agreed before the Commissioner of Income-tax (Appeals) for a proposal of application of deemed profit rate of 10 percent after allowing the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the revision proceedings what he is expected to examine is the assessment order made by the Assessing Officer and its merits in order to determine that whether such order falls within the ambit of section 263. 81. In response to the arguments of the learned authorised representative for the assessee that the learned Director of Income-tax did not consider office note recorded by the Assessing Officer, it was submitted by learned special counsel that the learned Director of Income-tax has recorded in his order that he has examined the records of the case and, therefore, the allegation of the learned authorised representative that he did not examine the office note is without any basis. He submitted that office note paragraphs 1-3 and 3.1, paragraph 1 deals with the method adopted for the assessment of revenue from inside India operation which is based on the stand taken by the Department in the preceding assessment years as provided in paragraph 5 of article 7 of the Double Taxation Avoidance Agreement. Paragraph 2 deals with the revenue from operation outside India and in the end the Assessing Officer himself records that in case of the hon'ble Supreme Court decide to tax out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax did not consider the information available on record, while adjudicating the issue, it was submitted by learned special counsel that such an allegation is without any basis. The learned Director of Income-tax has categorically recorded 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 learned authorised representative, the learned Director of Income-tax has erred in ignoring rule 10 of the Income-tax Rules, 1962 which deals with the deduction of income in case of non-residents, in particular, clause (iii) of the said rule which enable an Assessing Officer to complete income in a manner as he may deem suitable, it was submitted that 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 the Double Taxation Avoidance Agreement between Indo-Korean and if it is so, there is no rationale of applicability of these rules. 85. In response to the argument of the learned authorised representative that the learned Director of Income-tax has erred in considering the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel has concluded the arguments on behalf of the Revenue. 88. In rejoinder, learned counsel for the assessee submitted that the learned special counsel for the Revenue is incorrect in contending that the assessee has a permanent establishment in India. He submitted that the real question is that whether the assessee has an installation permanent establishment in the terms of article 5(3) of the Double Taxation Avoidance Agreement. He submitted that for the assessment years 1986-87 to 1988-89, the Tribunal in its order regarding existence of the permanent establishment in paragraphs 44 and 45 has held as under : (a) The specific provision of article 5(3) of the Double Taxation Avoidance Agreement prevails over general provisions of article 5(1) and (2). (b) As regards the existence of permanent establishment, the assessee has not furnished any proof which would show that the Indian portion was completed within 9 months in order to escape the existence of installation permanent establishment under article 5(3) of the Double Taxation Avoidance Agreement. (c) Once the books are found to be unreliable and the Assessing Officer rejects the accounts it upheld application of the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that in the absence of any such allegation learned special counsel is precluded from justifying the setting aside of the assessment order in respect of income from operations outside India by raising altogether a new issue and reference in this regard was placed on the decision of the Tribunal in the case of Kwal Pro Exports v. Asst. CIT [2008] 297 ITR (AT) 49 (Jodhpur). He submitted that the perusal of notice under section 263 will show that the learned Director of Income-tax has set aside this part of the assessment order solely on the ground of nonapplication of mind by the Assessing Officer as, according to him, the Assessing Officer did not consider the decision of the hon'ble Supreme Court in the case of the assessee. It was submitted that the said decision of the hon'ble Supreme Court was pronounced much later from the date of the assessment order. He submitted that in the office note the Assessing Officer has clearly relied upon the decision of the hon'ble Supreme Court in the case of Ishikawajima-harima Heavy Industries Ltd. [2007] 288 ITR 408 (SC) and decision of the hon'ble Uttarakhand High Court in the case of the assessee itself and the learned Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned Commissioner of Income-tax (Appeals) 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 section 44BB. It opted for applications of provision of the Double Taxation Avoidance Agreement and estimation was agreed to be done as per formula adopted by the Department to assess such income in respect of earlier years. Hence, he submitted that the issue is covered by the aforementioned decision of the Tribunal for the assessment year 1994-95. He submitted that the said decision of the Tribunal rendered in respect of the assessment years 1994-95 and 1995-96 has been accepted by the Department as no further appeal has been filed by the Department. 95. He submitted that while submitting the arguments it has already been made clear that there is no conflict between article 7(3) of the Double Taxation Avoidance Agreement and the provisions of section 145(3) of the Act. 96. It has already been pointed out that according to the arguments of the learned authorised representative, the facts relating to the assessment year 2006-07 are similar except two differences which have been pointed out in paragraph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e whether application of section 44BB would be more appropriate or the manner in which the assessments were getting completed in the past. At this juncture, the judgment of the hon'ble apex court was available with the Assessing Officer and she could examine the assessability of the income from both angles. This having not been done, the Assessing Officer has committed an error for which the Director of Income-tax was justified in invoking the provisions of section 263. 97. Another argument of the learned authorised representative was that the Assessing Officer had applied her mind after making proper inquiries. On this argument, learned special counsel submitted that this proposition laid down by the learned authorised representative is absurd if one look at the assessment order passed by the Assessing Officer. He submitted that it has already been submitted that order for the assessment year 2006-07 is in verbatim the same and comparison in this regard has been filed in the shape of a chart. Except that difference in figures, etc., the Assessing Officer has adopted the wordings of assessment order word by word, sentence by sentence and paragraph by paragraph. He submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erly examined by the Assessing Officer during the course of assessment proceedings. Proper details were submitted as called for by the Assessing Officer. The Assessing Officer had taken a conscious decision in making the assessment as per history of the case of the assessee and, therefore, the order passed by the Assessing Officer could neither be called as erroneous nor as prejudicial to the interests of the Revenue. The facts in detail have already been described in the above part of this order. We are called upon to examine whether or not the learned Director of Income-tax has rightly exercised his powers under section 263 to set aside the impugned assessments. 101. The law relating to exercise of power under section 263 is well settled. The prerequisites for the exercise of jurisdiction by the Commissioner suo motu under section 263 is that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. Therefore, exercising authority has to satisfy itself of the twin conditions, namely, (i)the order of the Assessing Officer sought to be revised is erroneous ; and (ii) it is prejudicial to the interests of the Revenue. If one of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent opinion in the matter. Such a course of action is open only in cases of lack of inquiry . The contention of the Revenue that the Assessing Officer did 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 entire expenditure as revenue expenditure, that by itself would not be indicative of the fact that the Assessing Officer did not apply his mind to the issue. The Assessing Officer is not required to give detailed reasons in respect of each and every item of deduction in the assessment order. The Assessing Officer having called for explanation regarding 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 the Commissioner of Income-tax was not clear as to whether the said expenditure was to be treated as capital or revenue expenditure and in these facts it was held that the view taken by the Assessing Officer was one of the possible views and the assessment order passed by the Assessing Officer could not be held to be prejudicial to the interests of the Revenue. 103. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 44BB which will make the assessment order based on incorrect application of law amenable to revision. The Assessing Officer while framing the assessment is aware of the fact that according to option available to the assessee, the assessee has opted to be assessed under the provisions of the Double Taxation Avoidance Agreement. It is, therefore, the Assessing Officer has referred to the provisions of article 7 in the assessment order passed by him. Not only the Assessing Officer has mentioned about the applicable articles of the Double Taxation Avoidance Agreement to the assessee, but he has recorded the submissions of the assessee in paragraph 4 that computation of income done by the assessee-company is based on the IndoKorean Tax Treaty read with the provisions of section 90 of the Act. What the Assessing Officer has done is that he has assessed the assessee according to the past history of the case and has allowed out of gross revenue a sum of Rs. 1,67,83,37,937 as sub-contractors cost and salary expenditure. This also has not been done in a routine manner. A finding of fact has been recorded by the learned Assessing Officer that he has verified all these payments from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be 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 paragraph 5 of article 7, for determining the profits attributable to the permanent establishment, the same method year by year is to be applied unless there is good and sufficient reason to the contrary. It has been demonstrated 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 Department to show that there exist good and sufficient reason to take a contrary view. Apparently or impliedly it has not been shown that there exist good and sufficient reasons to take a contrary opinion as is sought to be taken by the learned Director of Income-tax in the show-cause notice or in the order passed by him. Unless it is shown that there exist good and sufficient reasons to take a different view, such view is not permissible according to the provisions of the Double Taxation Avoidance Agreement. 108. Now, the question will be, as argued by the learned special counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shment is situated. 109. The article 7(5) has already been reproduced in paragraph 107 of this order. A cumulative reading of article 7(3) and (5) will make it clear that for determining the profits of the permanent establishment (PE), the expenses which are incurred for the purpose of permanent establishment including executive and general administrative expenses are to be allowed irrespective of their incurrence whether in the State in which the permanent establishment is situated or elsewhere which are allowed under the provisions of domestic law of the contracting State in which the permanent establishment is situated and this has to be done by the same method year by year unless there is good and sufficient reason to the contrary. In other words, all the expenses which are incurred by the assessee for the purpose of its permanent establishment are to be allowed which include executive and general administrative expenses as are allowed under the provisions of domestic law. Under the provisions of the domestic law, if the income is to be assessed under the head Business , then, all the expenses incurred wholly and exclusively for the purpose of business are allowable. The questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of the Assessing Officer was a possible view based on the past history of the assessee, then, the learned Director of Income-tax could 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 the learned Director of Income-tax in his order and in the show-cause notice could not even be taken in the further proceedings when consequential order has been passed by the Department. Therefore, on this ground it cannot be said that the learned Director of Income-tax has rightly exercised his power under section 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 the learned Director of Income-tax is that the assessee had received a composite contract for work to be performed in India and also related work from outside India. The Assessing Officer did not inquire into the nature and scope of the contract, the reasons for revenue for outside India operations, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed special leave petition before the hon'ble Supreme Court and in case the hon'ble Supreme Court decides to tax the outside India receipts 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 during the course of assessment proceedings not only he has inquired about the taxability of these receipts from the assessee, but replies were also filed by the assessee and after due consideration thereof he has decided not to levy any tax upon that revenue. The Assessing Officer while holding the view that such receipts were not taxable in India apart from relying upon the decision of the hon'ble Supreme Court in the case of Ishikawajima-harima Heavy Industries Ltd. [2007] 288 ITR 408 (SC) has also relied upon the decisions of the jurisdictional High Court in the case of the assessee itself wherein such receipts were held not taxable. Therefore, it has been demonstrated by the learned authorised representative for the assessee that even in the absence of any discussion in the assessment order there is material on record according to which the Assessing Officer had taken a conscious decision rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own case he took a conscious decision of not taxing the revenue from outside India operations. He was aware of the fact that the Department has preferred further appeal in the apex court. In this view of the situation, in our opinion, the Assessing Officer 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 decision. It is also not a case of either lack of inquiry or inadequate inquiry as the learned Director of Income-tax himself has not brought on record any material to suggest that the facts relating to the years under consideration were in any way different from the facts of the cases of the preceding years where this issue was decided in favour of the assessee. 113. It may also be pointed out here that when the Assessing Officer passed the assessment order for the assessment year 2005-06, he was having with him the decision of the hon'ble jurisdictional High Court in the case of the assessee which is dated March 30, 2006 and is reported as Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 450 (Uttaranchal). In that decision the h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Double Taxation Avoidance Agreement. Therefore, the mandate in the case of the assessee even up to the decision of the hon'ble apex court is that no part of income attributable to Korean operations could be taxed in India as before the coming into existence of the permanent establishment in India the work of fabrication was completed in Korea and fabricated platform handed over to the ONGC. No material has been brought on record by the learned Director of Income-tax to controvert the finding of fact that work of fabrication was completed in Korea and the fabricated platform was handed over to the ONGC. This position has time and again been accepted by the Tribunal. 114. It will also be relevant here to mention that after the decision of the hon'ble Supreme Court in the case of the assessee Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC), similar issue came up for consideration before the hon'ble Uttarakhand High Court (jurisdictional High Court) in respect of the assessment years 1994-95 and 1995-96 and vide decision dated December 4, 2008 in I. T. A. Nos. 42 and 43 of 2007, the matter was remanded back to the Tribunal as the hon'ble Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peals are allowed. No order as to costs. 115. To comply with the directions given by the hon'ble jurisdictional High Court, the Tribunal had decided the issue vide its order dated October 9, 2009 in I. T. A. Nos. 2290 and 2291/Del/2002 and the relevant observations of the Tribunal as contained in paragraph 6 are as under : 6. We have heard the rival submissions and have gone through the material available on record and the judgment of the hon'ble Uttarakhand High Court and also the relevant judgment of the hon'ble apex court rendered in the case of the assessee itself for the assessment years 1987-88 and 1988-89. The hon'ble Uttarakhand High Court has directed the Tribunal to decide the issue afresh in the light of clauses (a) and (b) of paragraph 15 of the Supreme Court judgment in the case of the assessee itself as reported in Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC). For the purpose of deciding the issue afresh in the light of this judgment of the hon'ble apex court cited above, we have to see and examine the facts of the present year as also the facts in the assessment years 1987-88 and 1988-89. We find that for this purpose, paragraph 11 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the above discussion, after considering clause (a) of paragraph 15 of the judgment of the hon'ble apex court as per the direction of the hon'ble Uttarakhand 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. Regarding clause (b) of paragraph 15 of the judgment of the hon'ble apex court, we find that in the present two years, there is no dispute regarding quantum of profit embedded in the Indian operation attributable to India permanent establishment of the assessee and hence this clause of paragraph 15 is not applicable in the present two years which are before us. We, therefore, find no reason to interfere in the order of the learned Commissioner of Income-tax (Appeals) in both these years. 116. The Tribunal in the aforementioned case, relying upon the decision of the hon'ble Supreme Court rendered in respect of the 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 in respect of outside India operation not only for the reason th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case, we find that the profits earned by the Korean general enterprise on supplies of fabricated platforms cannot be made attributable to its Indian permanent establishment as the installation permanent establishment came into existence only after the transaction stood materialised. The installation permanent establishment came into existence only on conclusion of the transaction giving rise to the supplies of the fabricated platforms. The installation permanent establishment emerged only after the contract with the ONGC stood concluded. It emerged only after the fabricated platform was delivered in Korea to the agents of the ONGC. Therefore, the profits on such supplies of fabricated platforms cannot be said to be attributable to the permanent establishment. There is one more reason for coming to the aforesaid conclusion. In terms of paragraph (1) of article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the permanent establishment would have earned if it was wholly independent of the GE. Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the permanent es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case, we are concerned with the assessment years 198788 and 1988-89. Therefore, we are not inclined to remit the matter to the adjudicating authority. We reiterate, in the circumstances, not all the profits of the assessee-company from its business connection in India (PE) would be taxable in India, but only so much of profits having economic nexus with the permanent establishment in India would be taxable in India. To this extent, we find no infirmity in the impugned judgment of the Tribunal. Accordingly, we are of the view that the Tribunal was right in holding that the profits attributable to the Korean operations were not taxable in view of article 7 of the Convention for Avoidance of Double Taxation. 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 the hon'ble jurisdictional High Court in the assessee's own case and also the decision of the hon'ble Supreme Court in the case of Ishikawajima-harima Heavy Industries Ltd. [2007] 288 ITR 408 (SC) and after considering all these decisions he did not impose tax on the revenue relating to outside India operation and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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