TMI Blog2010 (6) TMI 517X X X X Extracts X X X X X X X X Extracts X X X X ..... national waters was clearly connected with and consequent to sale of the rig, and necessary for fulfilling part of seller’s obligations under the sale contract - That finding is, of course, without prejudice to our understanding, based on the reasoning discussed earlier in this order, that even deferral of sale or receipt of sale consideration, on sale of PE or PE assets, does not influence the tax liability in connection with sale of PE or its assets - Appeal is dismissed - ITA No. 3036/Mum/07 - - - Dated:- 7-6-2010 - Shri Pramod Kumar (Accountant Member), And Shri R S Padvekar (Judicial Member) Appellant by : Shri S C Tiwari Respondent by : Shri Ajit Kumar Sinha ORDER Per Pramod Kumar: 1. This is an appeal filed by the assessee and is directed against the order dated 17th March 2006 passed by the Commissioner (Appeals) in the matter of assessment under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 , for the assessment year. 2. The assessee has raised as many as fifteen grounds of appeal, but as learned representatives fairly agree, these grounds of appeal are the only arguments in support of two main issues requiring our adjudication, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn for the relevant previous year, the assessee claimed a NIL taxable income, but as the assessee was not able to substantiate its claim for expenses incurred under various heads, the Assessing Officer estimated the income, under Rule 10 of the Income Tax Rules, on 10% of the total turnover. The income was accordingly assessed at Rs 1,52,99,720, vide order under section 143(3) dated 9th February 2001. 7. The matter, however, did not rest there. 8. On 2nd June 2004, in exercise of his powers under section 147 of the Act, the Assessing Officer reopened the assessment. While doing so, the Assessing Officer recorded the reasons of reopening as follows: The return was filed by the assessee on 30th November 1998, for the assessment year 1998-99, showing NIL total income. Assessment order under section 143(3) of the Income Tax Act, 1961, was passed on 09-02-2001, determining total income at Rs 1,52,99,720. On going through the records, it has been noticed that the assessee has discontinued its business operations in India from this assessment year. The assessee had a jack up rig which it had brought into India on which it was claiming depreciation. Further, it is seen that duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. The CIT(A) was of the view that such a non disclosure in the income tax return as also in the course of the assessment proceedings constituted lapse of the assessee and it amounted to concealing the relevant particulars. The CIT(A) also noted that as a result to the tax evasion petition having been received by the Assessing Officer, he had reasons to believe that capital gain on sale of jack up rig, which was an asset of the permanent establishment and on which depreciation was duly claimed by the assessee, has escaped assessment. The CIT(A) thus upheld the initiation of reassessment proceedings. The assessee is not satisfied by the stand so taken by the Assessing Officer as well as the CIT(A) , and is in appeal before us. 10. The main thrust of learned counsel s submissions before us is that while the assessee did not indeed mention, in its income tax return, about the fact of having sold the jack up rig, it did not amount to any failure on the part of the assessee inasmuch as the assessee did not have any obligation to inform the same to the Indian tax authorities. It is submitted that the assessee is a non resident, that the assessee did inform the tax authorities about th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d against the assessee, this transaction would have gone wholly unnoticed to the Indian tax authorities. The assessee was clearly at fault, was not operating in a fair and transparent manner, and did not discharge his obligations of giving full and complete disclosures in the income tax return. It was thus submitted that the case of the assessee is clearly covered by proviso to Section 147 which permits reopening of assessment even after the expiry of four years, from the end of the relevant assessment year, in a case in which the assessee fails to disclose fully and truly all material facts necessary for his assessment for that assessment year. In rejoinder, learned counsel for the assessee once again submits that the fact of the sale of rig was not relevant or necessary for assessee s tax assessment in India, nor was assessee under any obligation to disclose the same in its income tax return. We are thus urged to quash the reassessment proceedings. 11. We are unable to see legally sustainable merits in the arguments raised by the learned counsel. There is no dispute that the assessee was liable to be taxed in India in the relevant assessment year, and there is also no dispute t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losed all the material facts necessary for his assessment. As is specifically provided for in the proviso to Section 147, unless the assessee discloses fully and truly all material facts necessary for his assessment for that particular year , the assessee cannot claim protection of proviso to Section 147. In our humble understanding, there has been a lapse on the part of the assessee in full and complete disclosure of all the material facts and, accordingly, the assessee is not entitled to protection of proviso to Section 147 from reopening of assessment after the expiry of four years from end of the relevant previous year. As to the contentions raised about non taxability of such an income on sale of oil rig, all those fine points of law and facts are not to be settled, on merits, at the stage of initiating reassessment proceedings. What is to be seen at this stage is existence of reasons which have live link to an income escaping assessment, but not the established fact of escapement of income. In other words, at the point of time of initiating the reassessment proceedings, is existence, and not adequacy of reasons. As observed by the Hon ble Supreme Court, in the case of ACIT V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee on net basis and after claiming deduction for depreciation, as admissible under the Income Tax Act, 1961. On 24th April 1997, the assessee entered into an agreement with Foramer SA France, to sell the said jack up rig to the Foramer SA or its nominee. Pursuant to this agreement, the jack up rig was finally sold to Foramer s nominee Pride Global Limited a company based in Tortola, British Virgin Islands. On 19th September 1997, the assessee issued a bill of sale (bearing no. 109117; dated 19th September, 1997) in favour of Prider Global Limited. This bill was duly notarized by one Nigel Peter Ready, a London based notary public, who inter alia certified that the said bill of sale was signed and delivered as a deed in my presence by Claire Hamilton Horsley, the duly authorized attorney of Cartier Shipping Limited of Nicosia, Cyprus, under and by virtue of a power of attorney dated 12th September 1997 . On 15th September, 1997, London Offshore Consultants WLL the surveyors, boarded the rig and coordinated its move from Bombay High to the location designated for handover of this rig to the buyer. On 30th September, 1997, the assessee obtained a port clearance certificate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicable tax treaty, gains from alienation of moveable property forming part of the business property of a permanent establishment, including such gains from the alienation of such gains from the alienation of such a permanent establishment itself (alone or together with the whole enterprises) are taxable in the PE jurisdiction. It was thus held that under the domestic law as also under the applicable tax treaty, the assessee is liable to be taxed in respect of gains on sale of PE assets. The contentions of the assessee were thus rejected, and the capital gain of US $ 2,85,71,973, converted into Rs.102,94,48,187, being on sale of depreciable assets were taxed as short term capital gains of the assessee taxable in India. 13. Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the CIT(A), inter alia, questioning correctness of the aforesaid quantum addition of Rs 102,94,48,187. The CIT(A) but without any success. The CIT(A) confirmed the action of the Assessing Officer in principle and enhanced the quantum of addition to Rs 111,16,24,990, by observing as follows: 4.4 I have considered the arguments of the A.R. and I have also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication records of the rig as well as the inspection of rig at a location offshore Bombay in February 1997. However, the same is subject to the terms and conditions of this agreement. Para-6.1 requires the appellant to keep buyers well informed about the rig s itinerary and it reads as under:- 6.1 The Sellers shall keep the Buyers well informed of the Rig s itinerary and shall provide the Buyers in accordance with Clause 17 with notice of the estimated time of arrival at the intended place of delivery. When the rig is at the place of delivery and in every respect physically ready for delivery in accordance with this Agreement, the Seller shall give the Buyers a written notice of readiness for delivery. Para-6.2 provides for delivery in international waters. Para-6.4 provides a condition that if the rig becomes an actual, constructive or compromise total loss, agreement shall be null and void after the deposit along with the interest paid to the buyer. Para-8.6 provides for the documentation regarding delivery of rig. Para-11 clarifies that the rig is at the seller s risk until it was delivered to the buyer except for fair wear and tear of the rig. Clause-13 provides for the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e report of London Offshore Consultant. The appellant had given the rig on hire to ASM in year 1993. The lease was continuing. The fresh agreement was drawn on 16.4.1996 which was continuing. While the rig was being used in India by ASM, appellant entered into the agreement for sale in April, 1997, took the deposit in advance with a promise to deliver the rig in international waters. At the time of entering into agreement with Foramer S.A., rig was in India. At the time of drawing of sales bills dated 19.9.1997 rig was in India. Only for delivery purpose rig was detached from the Bombay High platform taken to international waters to claim that the sale is taking place outside India. The examination of the sales agreement reveals that Clause-5 of the agreement clearly provides that the sale is outright and definite and subject to terms and conditions of the agreement. Further Clause-20 of the agreement provides that only the buyer shall have the exclusive right to bid the rig to clients / customers after the signing of agreement. The perusal of the agreement through these important clauses therefore clearly establishes that the buyer has obtained substantial right regarding the rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein may be created with the condition superadded that it shall cease to exist in case a specified uncertain event shall happen or in case a specified uncertain event shall not happen. Section 31 of the TP Act therefore, clearly applies to the case of appellant. Right has already been created in favour of the buyer by sales agreement, sale bill and the payment of purchase price and the deposit. This right in favour of buyer can be defeated only if there is a failure to deliver the rig. In this situation sale agreement would be void and the rig would revert back to the seller. The appellant s agreement for sale and subsequent issue of sale bill and receipt of purchase price and deposit money clearly establishes that the sale is complete subject to satisfaction of condition of delivery. Sale is not contingent on delivery. I am therefore of the view that the rig has been sold while it was an asset situated in India. 4.11 I agree with the AR that the taxability of income of non resident has to be first examined under the Income Tax Act and if found taxable, reference can be made to the DTAA for providing the tax relief. Decision of Hon ble Supreme Court in the case of Azadi Bachao ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appellant is covered by both these clauses. The appellant has a business connection in India since the rig has been operating in India from the year 1993 having been provided on hire basis to ASM. The appellant therefore, has a business connection which has also been accepted as the PE by appellant since A.Y. 1994-95 consistently. The business of appellant in India consisted of giving the rig on hire and therefore rig is intimately connected with the PE in India. Accordingly the gain on the sale of rig is income derived from the business connection in India and is also part of the income of PE. Therefore, the gain from the sale of rig is covered both under the income from any business connection and also transfer of capital assets situated in India. Clause (a) of Explanation I only provides that income in India should be taxable only in respect of operations carried out in India. The sale of rig is part of the business connection and the rig has been sold while it was being used by the PE as part of its business. It is therefore held that the gain arising from the sale of rig is covered by section 9(1)(i) under these two clauses. I therefore do not agree with the agreements of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the contracting state. In other words, whether the movable property is sold separately or the PE itself is sold, profit arising from such sale is taxable in the contracting states. Article 13(2) is therefore squarely applicable to the appellant. The rig constitutes the movable property of the PE accordingly capital gain arising on such sale of property is taxable in India. Procedure for computation of capital gain has not been specified in the DTAA. Accordingly, procedure of computation of capital gain as provided in the Income Tax Act shall comply. This is also clarified by Article 3(2), which provides that any term not defined in the DTAA, definition of term under the domestic law would prevail. Examination of the facts of the appellant reveal that the appellant in A.Y. 1994-95, 1995-96, 1996-97 and 1997-98 has availed depreciation and the rig was capital asset. Accordingly, profit from the sale of such capital asset is taxable u/s 45 r.w.s. 50. Section 50 provides that where an asset is found a part of any block of asset, if the full value of consideration received or accruing as a result of transfer exceeds the WDV of such block of assets after adjusting for the new assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the WDV of Rs.16,20,35,512, short term capital gain is computed at Rs 1,11,16,24,990. Addition made is thus confirmed and enhanced. 14. The assessee is aggrieved by the addition so confirmed and so enhanced by the CIT(A), and is in appeal before us. 15. The main thrust of learned counsel s arguments is that the sale of rig has taken place on 6th October 1997 since that is the date on which possession of rig was handed over to the buyer in international waters and that is the date on which payment was received from the buyer. It has been repeatedly emphasized that the references in the assessment order are for dates of agreement to sell and not the actual sale itself. Learned counsel has painstakingly taken us through various clauses of the agreement to demonstrate that the sale is completed on 6th October, 1997. It is also pointed out that, beyond any doubts or dispute, the rig has moved out of Indian territorial waters on 4th October 1997. Learned counsel has emphasized that once the rig is moved out of India, upon termination of its contracts in India, it is of no concern to the Indian tax authorities as to what assessee does to the rig, and that the rig was not acquired from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate dated 15th October 1997 issued by the Cyprus High Commission, London, confirming that rig was removed from the Cyprus Register of Ships on 15th October 1997. It was also submitted that, as evident from the notice of delivery dated 6th October 1997 issued by Kennedy Marr Limited Shipping Offshore Specialists, a copy of which was placed at page of 7 of the paper book, the rig was ready for delivery on 6th October 1997. Learned counsel has also made references to the log maintained by the surveyor, i.e. London Offshore Consultants WLL, extracts from which were placed at pages 19 to 23 of the paper‐ book, which shows that the ship was moved out of Indian waters on 4th October 1997 and was delivered to the buyer on 6th October 1997 in international waters (at latitude 17 33.0 N longitude 69 25.0E ). It is again and again emphasized that the assessee is a non resident and, therefore, none of its income cannot be taxed in India unless it is accrues or arises in India, and that income on sale of a rig outside Indian territory, by no stretch of logic, can be said to have accrued or arises in India. Learned counsel did not dispute the facts, save and except for the date of sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities below. 17. In rejoinder, learned counsel once again reiterated his arguments and submitted that we must bear in mind the basic fact that the assessee is a non resident and that the asset has been sold by the non resident outside Indian territorial waters, and, as such, it cannot have any tax implications in India. We can not, according to the learned counsel, construe the provisions of the Income Tax Act in such a manner that in case a person ever does business in India, the Indian tax exposure will continue to haunt him forever in respect of disposal of his assets used in his former operations in India. 18 We have heard the rival contentions at length on this aspect of the matter as well, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 19. Hon ble Supreme Court has, in the case of CIT Vs Hyundai Heavy Industries Limited4, had an occasion to consider the scope of taxability of non residents, under the Indian Income Tax Act, in respect of profits of their permanent establishments in India. Their Lordships have, inter alia, made the following significant observations: 7. A short question which needs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in terms of the general provisions of the Income-tax Act. Therefore, ascertainment of a foreign enterprise's taxable business profits in India involves an artificial division between profits earned in India and profits earned outside India. 8. The Indian Income-tax Act, 1961 is concerned only with the profits earned in India and, therefore, a method is to be found out to ascertain the profits arising in India and the only way to do so is by treating the Indian PE as a separate profit centre vis-a-vis the foreign enterprise .. This demarcation is necessary in order to earmark the tax jurisdiction over the operations of a company. Unless the PE is treated as a separate profit centre, it is not possible to ascertain the profits of the PE which, in turn, constitutes profits arising to the foreign GE in India. The computation of profits in each PE (taxable jurisdiction) decides the quantum of income on which the source country can levy the tax. Therefore, it is necessary that the profits of the PE are computed as independent units. (Emphasis by underlining supplied by us) 20. The scheme of taxability of a non resident in respect of his operations in India by way of its branc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islated, the PE profit allocation, under the domestic tax legislation, has to be done, as Hon ble Supreme Court has very aptly observed in Hyundai s case5, on the basis of normal accounting principles and general provisions of the Act . Of course, once the PE profits are computed on such basis, the next step is to decide the head(s) of income under which such profits, wholly or in part, are taxable. 21. It follows, in our humble understanding, form the above observations that when we are examining taxability of a non resident in India, and such a non resident has operations in India through some other form of its presence in India, the non resident s such presence in India is to be treated as permanent establishment in India, and such a permanent establishment is to be treated as a hypothetically independent of the non resident. The operations of the PE are then to be viewed on standalone basis, in the light of the aforesaid fictional or hypothetical independence, from the point of view of taxability in India. The PE is to be treated as a separate profit centre vis‐ ‐vis the non resident, and the profits of such profit centre are to be computed on the basis of norma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to this provision inasmuch as (i) when all the operations of a business are not carried out in India, only such portion of income can treated as part of income as are reasonably attributable to operations carried out in India; (ii) when non residents operations are confined to buying goods from India for exports, income on sale of such goods are not taxable in India; (iii) when non resident is engaged in business of news agency, publishing newspapers, magazines and journals, no income can be deemed to accrue or arise in India only because he is collecting news and views from India for transmission out of India; and (iv) when non resident is, subject to certain conditions, shooting a cinema film in India, no part of income is to be deemed to accrue or arise in India. Barring these situations, which are set out in Explanation to 1 and which are relevant for our purposes, all other incomes accruing or arising, directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India, are deemed to accrue or arise in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Contracting State in which such property is situated 2.Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a contracting State has in the other contracting state or of movable property pertaining to a fixed base available to a resident of a contract State in the other contracting state for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State. 3. Notwithstanding the provisions of paragraph 2 of this Article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of the Article shall be taxable only in that State. 5. For the purpose of this Article the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxability of income from such assets. The PE profits were taxable in India, and the PE profits were in respect of income generated by chartering of the rig. It is thus clear that the profits on sale of the rig are also taxable in India. This is the clear mandate of Article 13(2) as also the scheme of taxability of gains on alienation of assets pertaining to a PE in India. 25. It is also interesting to note that it was open to the assessee to opt for taxability of barge hire, on gross basis, and that precisely was the case of the Assessing Officer in original assessments for all these assessment years. In such a situation, perhaps Article 13(2) would have had no application. However, assessee disputed the taxability on gross basis and carried the matter in appeals before this Tribunal. It was a result of the directions of the Tribunal that the assessee was allowed depreciation on the rig, which was claimed to have written down value of Rs 51,21,12,236 as on 1st April 1993. It did suit the assessee at that point of time because, as against a tax liability on gross basis of receipts, the assessee was able to show losses in India operations. The assessee has thus claimed losses whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), any income or gain attributable to a permanent establishment during its existence is taxable in the Contracting State where such permanent establishment is situated even if the payments are deferred until such permanent establishment has ceased to exist (emphasis supplied by us by underlining), even without this clause, which is no more than clarificatory in nature, the position remains the same. In the case of Van Oord Dredging Marine Contractors BV Vs DDIT8, a co ordinate bench of this Tribunal has held the even business profits of the assessee, which accrued to the PE, can be taxed when received in a later year in which PE ceased to exist. The deferral of receipt, therefore, is clearly tax neutral. 26. In view of the above discussions, in our considered view, the gains on sale of rig, which was a PE asset on which depreciation was claimed all along, is taxable in India under the Income Tax Act, 1961 as also under Article 13(2) of the India Mauritius tax treaty. 27. A lot of emphasis is placed by the learned counsel on the contention that since sale of rig has taken place on 6th October 1997 and outside Indian territorial waters, it has no tax implications in India. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial to show that this invoice is not acted upon. On the contrary, we have noted that this sales invoice was duly notarized by one Nigel Peter Ready, a London based notary public, who inter alia certified that the said bill of sale was signed and delivered as a deed in my presence by Claire Hamilton Horsley, the duly authorized attorney of Cartier Shipping Limited of Nicosia, Cyprus, under and by virtue of a power of attorney dated 12th September 1997 . It cannot, therefore, be said that this invoice date has no relevance or that it could simply be brushed aside. The assessee has also filed copies of some bank advices in support of the contention that the balance consideration was made only on 6th October 1997, i.e. after the delivery of the rig was given, but neither these advices show the name of the assessee, nor, in any event, the date of payment has to be necessarily taken as date of sale. We had also asked the assessee to file a copy of the agreement terminating arrangements with Amer Ship Management Limited, Bombay, so as to ascertain the circumstances in which the contract was terminated and its linkage with the sale, but, despite our specific requisition to that effect, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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