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TMI Blog2012 (7) TMI 690X X X X Extracts X X X X X X X X Extracts X X X X ..... arly satisfied ? 2. Whether on the facts and circumstances of the case, the Tribunal is right in holding that 75 percent of the offshore supply activities have happened in India given the fact that the entire manufacturing activity has happened outside India which has not been disputed by the Tribunal ?" The Honourable Madras High Court answered Question No.1 in favour of the Revenue and against the assessee. As regards Question No.2, the Honourable Madras High Court restored the matter back to the Tribunal for fresh consideration. Hence, we are proceeding to decide the second question as per the direction of the Hon'ble Madras High Court in Tax Case (Appeal) No.652 of 2011 order dated 05.02.2012. 3. Notice of hearing was sent to the assessee by registered post with acknowledgement due on 19.04.12 fixing the date of hearing on 16.05.12. The said notice was returned back by the postal authorities with the remark 'left'. 4. The Bench was of the view that the matter can be disposed of without the assistance of the assessee and therefore, proceeded to adjudicate the issue considering the materials available on record and the submissions of the Departmental Representative. &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t establishment, business connection, questionnaire and answers given by NLC, issues regarding the subsidiary company, DTAA provisions, along with case law, show that in the appellant's case there is justification to tax receipts from contract I and also receipts from Contract III & IV as per the enhancement notice (besides taxing receipts from Contract: II as Technical Fee). This case is not a simple case, where goods are sold outside the country and the matter ends there or wherein some incidental services are done onshore in India with respect to such goods sold. It is a case wherei n even according to contract I, several portions of Plant & Machinery are to be designed at each stage according to local requirements and supplied by the appellant to NLC over a period of years. If local supplies are not upto the mark, they are to be manufactured and imported into India. Designs and drawings are to be supplied even with respect to what is to be manufactured or fabricated in India. Thus it is an ongoing process which is linked to the permanent establishment located in NLC. In the name of ASPL, area is taken in NLC and the same is used by the appellant. Further according to the variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not bid for the contracts and the basis on which the value is fixed with respect to contract III & IV, is only known to the appellant. NLC, the contractee, would never have awarded the contracts III and IV to the subsidiary company had it not been for the letters filed by the appellant dated 8.8.97 and 1.9.98 and also agreeing for the single bidder responsibility all through the four contracts. Even while incurring losses, the subsidiary had to go ahead in the execution of the contract. Their premises were occupied by the appellant. According to letters dated 8.8.97 and 1.9.98, and also the questionnaires and replies from NLC, it is seen that contract is executed as a single contract under the unitary control and management of the appellant. Even reports are given by the Indian company for the appellant. The appellant has carried out testing, commissioning and performance guarantee tests and later handed over the machinery as stated by the NLC, though these operations are to be carried out by the Indian company, ASPL, according to contract IV. Thus, on contract IV, i.e. on testing and commissioning etc., it is the appellant who is to be taxed. Several operations are carried out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire nature of the contract, the terms involved and the conduct of the parts clearly show that only for tax purposes, the contract was split up. As far as NLC is concerned, the contact is awarded on a single bidder principle from beginning to end to the appellant. It has safeguarded its interest by incorporating such clauses in all the agreements and also by obtaining an undertaking in the form of letter dated 1.9.98 before awarding the contract. The appellant on a contract of around Rs.550 crores, after having taken all the responsibilities, would not leave the matter to inexperienced subsidiary and watch the progress silently. The preponderance of possibilities are only to be considered. The circumstances do not lie. As a prudent businessman, the appellant has had the control through the PE, managed the affairs all through to complete the project. This cannot be denied. The principles laid down in Sumati Dayal Vs. CIT 214 ITR 801 (SC) and CIT Vs. Durga Prasad More 82 ITR 540 (SC) are applicable to the facts of this case. All the surrounding circumstances are to be taken into consideration and by applying the test of human probabilities, proper conclusion is to be derived. Now t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be allowed as deduction expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establ ishment is situated or elsewher e" "10. Determination of income in the case of non-residents In any case in which the Assessing Officer is of opinion that the actual amount of the income accruing or arising to any nonresident person whether 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 or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment to Income-tax may be calculat ed:*- (i) at such percentage of the turnover so accruing or arising as the Assess ing Officer may consider to be reasonable, or (ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the part of the subsidiary contractor, the appellant is to take over. This being the fact, it is but natural that the consideration under contract takes care of all these eventualities and provides a cushion. It cannot be denied that there is no transfer pricing involved in fixing the value of each contract. The values of each contract are fixed unilaterally by the appellant. NLC and the subsidiary company had absolutely no say in the matter. The reports submitted in the case of the subsidiary company under Sec.92E do not deal with the fixation of value of each contract. These are routine certificates given in Form 3CEB and they are not relevant to the purpose on hand i.e. determination of value of each contract. They cannot be given much importance because only the reimbursement of expenditure ill considered mostly in these certificates. Be that as it may, irrespective of these considerations, it is but natural that with the single bidder responsibility upon its head, the appellant would not simply take up the responsibility without adequate consideration. There are various methods of estimating the income in the case of the appellant with respect to the contracts. If we are to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d both from the appellant and its subsidiary. This matter is now before an Arbitrator and no definite conclusion can be drawn at this stage. The appellant states that loss was incurred on two contracts. It also cited certain comparable cases where the profit is ranging between 5 to 9%. All these points are duly taken into consideration by me. It is my considered opinion that on the whole contract, i.e, Contract I, III and IV, a reasonable profit of 7% of the receipts can be taken as income of the appellant and subjected to tax. On contract II, it is already decided that the consideration should be brought to tax u/s 9(1)(vii) r.w.s 115A as fee for Technical Services. 30.5. The subsidiary company paid no taxes on Contract III and IV, hence no deduction is to be allowed from out of the ultimate demand that may arise on account of enhancement / clubbing of income. 30.6. In view of the above findings, I have re-examined the findings given with regard to turnkey power project and supervisory services vis-a-vis the claim of sec 44BBB. The findings given with regard to enhancement notice are in no way inconsistent with the findings given rejecting the claim of the appellant that the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Tribunal that the Tribunal had asked the assessee to give certain figures. But the assessee did not do so. The Tribunal then confirmed the conclusion of CIT(Appeals) that 75% of the profits of Contract I is taxable. No reason has been given for fixing the percentage. So we are remitting the matter to the Tribunal to assess the percentage of taxable profit properly, bearing in mind the findings we have confirmed. Both the parties may be heard and documents received for the limited purpose of enabling the Tribunal to work out the percentage. The Tribunal after hearing the submissions shall fix the percentage and give reasons therefore and pass appropriate orders, on any date, within a period of 4 weeks from the date of receipt of a copy of this order." 3. In compliance with the direction of the Hon'ble High Court of Madras passed in the appeal under section 260A, the case was fixed for hearing but was adjourned to 24.04.2007 as original file was not received and on receiving file from the Hon'ble High Court, case was fixed for hearing by proposing the date when Shri Nishant Takkar, the ld. Counsel for the assessee appeared and sought adjournment to move the High Court for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the rate of 20% was applied, which came to be confirmed by the Tribunal in ITA No.2313/Mds,/03 dated 05.05.2009 and since the assessee was unable to produce any documentary evidence or material on record despite specific direction issued by the Hon'ble High Court, so the plea raised in the arguments therefore, may be dismissed and order of the ld. Commissioner of Income Tax(Appeals) may be confirmed. 4. We have heard both the sides considered the material on record as well as orders of authorities below and direction issued by Hon'ble High Court. No fresh material or evidence has been brought on record by the ld. Counsel for the assessee in terms of direction issued by the Hon'ble High Court in this regard and ld. Departmental Representative has relied upon the order of the ld. Commissioner of Income Tax(Appeals) with respect to estimation of income. Since specific direction has been issued by the Hon'ble High Court to assessee the percentage of taxable profit properly bearing in mind the findings the Hon'ble High Court has confirmed and to hear both the sides and by receiving documents for limited purpose of enabling the Tribunal to work out the percentage and give reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant. With respect to contract I, primarily two factors are to be taken into consideration. Firstly, contract I involves sale of portions of Plant and Machinery where cost is clearly ascertainable. Profit margin is normally fixed over these parts or plant and machinery. The mark up can be identified. Even with respect to designs and drawings, based on past experience, price is determinable with a mark up. Hence, there is no question of loss arising on account of sale of these items. Moreover, the price with respect to contract- I and Contract II are likely to be loaded higher to take care of other responsibilities and risks that the appellant is to bear with respect to contract III and IV on account of single bidder responsibility taken upon itself. If not for this, no prudent businessman would take over the overall responsibilities and functions which have been elaborately discussed above. In case of insolvency or failure on the part of the subsidiary contractor, the appellant is to take over. This being the fact, it is but natural that the consideration under contract takes care of all these eventualities and provides a cushion. It cannot be denied that there is no transfer pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is also seen that the entire contract is a composite contract and the appellant and the subsidiary executed the same with common premises, common Managers, etc. For the purpose of NLC, the single bidder responsibility, clauses introduced in various agreements, ensured its interests. The appellant safeguarded its interest by conducting the affairs through its agent, having common premises, common Managers etc. But only for tax purposes, the consideration is being split up. Now that there is ample justification to tax the appellant on all the four contracts, we can estimate the profit on the entire project taking into consideration the losses of contract III and IV and also profit attributable to Permanent Establishment. Sec 44AD and Sec 44BBB allow us to estimate income at 8% and 10% respectively. One more factor to be considered is the delay in execution of the project leading to recovery of liquidated damages collected both from the appellant and its subsidiary. This matter is now before an Arbitrator and no definite conclusion can be drawn at this stage. The appellant states that loss was incurred on two contracts. It also cited certain comparable cases where the profit is ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has held that profit from contract I could be estimated at 15% because it involves sale of equipment etc. and since only 75% activity was attributed to India, therefore, the profit rate has been taken at 11.25% and ultimately overall profit was taken at 7%. We are of the opinion that activities which are not conducted in India cannot be taxed in India. We agree with the estimate made by the Commissioner of Income Tax(Appeals) that only 25% of activity could have been done outside India particularly in view of the various clauses of contract I indicating that many plant and equipment were fabricated in India also. We had asked the leaned counsel or the assessee during the course of hearing to file the profit and loss account etc. of the subsidiary and other comparative figures. But the only thing supplied is the chart showing the net profit margin. We find that the assessee has given the following chart at page 72 of the paper book showing net profit margin by different parties in similar power projects. ANSALDO - Profit margins of similar companies for the year 2002. Sales (INR crores) Net profit (INR crores) Net profit % Alstom Projects India Ltd. 1131,65 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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