TMI Blog2012 (7) TMI 690X X X X Extracts X X X X X X X X Extracts X X X X ..... y : Shri Shaji P. Jacob Addl. C.I.T. O R D E R PER N.S.SAINI, ACCOUNTANT MEMBER: This is an appeal filed by the assessee against the order of the Commissioner of Income Tax(Appeals) XI,Chennai dated 16.12.2005 for Assessment Year 1999-2000. 2. This appeal of the assessee was decided by the Tribunal vide order dated 16.11.2007 in ITA No.410/Mds./2006. The assessee filed an appeal before the Hon ble Madras High Court against the said order of the Tribunal and the Hon ble Madras High Court admitted the following substantial question of law of its decision. 1. Whether on the facts and circumstances of the case, the Tribunal erred in not applying the ratio of the Honourable Apex Court in the case of Ishikawajima Harima Heavy Industries especially when the test laid down by the Apex Court namely (a) passing of property outside India (b) payment of consideration outside India Have been clearly 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e asked to inform what is the income on which tax was paid and also what is its proportion to the total receipts on all the four contracts Rs.l074 crores. They filed a statement on 30.09.05 wherein they have disclosed income offered to Income tax year-wise, from Asst. Years 1999-00 to 2004 -05. It is as follows:- SI.No. Asst. Year Amount disclosed for Incomet ax(Rs.) 1 1999-2000 2,769,350 2 2000 -2001 12,996,167 3 2001-2002 13,506,337 4 2002-2003 7,311,098 5 2003-2004 8,764,476 6 2004-2005 2,499,634 Total 47,847,062 Out of a total turnover of around Rs.l074 crores on this NLC contract, tax is sought to be paid on a meagre income of Rs.4.78 crores. (It works out to 0.5% of receipts). Receipts of Rs.1069 crores would not suffer tax at all. 29.2. Detailed examination of the issues involved i.e. nature and scope of work, terms of each contract, existence of permanent establishment, business connection, questionnaire and answers given by NLC, issues regarding the subsidiary company, DTAA provisions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d all risks which shall vast with the contractor till the successful commissioning as per this contract. It is not to be ignored that it is a turnkey package deal wherein from the beginning to the end it is the responsibility of the appellant till the plant and machinery is handed over to the NLC. For any failure on the part of the ASPL, the subsidiary company, the appellant is only responsible and its liability towards liquidated damages arises on all the four contracts. The appellant has also given the performance guarantee bond with respect to all the four contracts as obtained from Fin Meccannicca, Italy. Moreover, t he picture given with respect to ASPL (subsidiary company) in pre-pages shows clearly that It is only a facade created, as far as, this contract is concerned. The corporate veil is pierced and it is established that with regard to execution of all the contracts, the appellant company played the dominant role. There is unity of control, management vested in the appellant with respect to all the four contracts. The subsidiary company 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 appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not tenable. Appellant has also not disproved the statement of the NLC that they have not done the commissioning, testing and performance guarantee test and handed over the plant and machinery though it contests the same. But records show that the appellant undertook this activity. 29.4. These crucial facts emerged only during the course of the current appellate proceedings for these two assessment years. It is already on record that for the assessment year 2001-02, my predecessor had decided the appeal and the matter is now in further appeal before the Hon'ble ITAT, Chennai. These issues were not considered in the earlier order of the CIT ( A) for Asst. Year 2001-02. 29.5. All the relevant case law are duly considered by me. Based on the unique facts obtained in this case, the principles laid down in various case law are appl ied to the case on hand. 29.6. Under these circumstances, given these facts, I am of the considered opinion that the appellant is to be taxed on all the four contracts. Now, let me go into the method of deriving income. The entire nature of the contract, the terms involved and the conduct of the parts clearly show that only for tax purposes, the contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt establishment; or (e) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable bas is. 3. In the determination of the profits of a permanent establishment, there shall be allowed as deduction expenses which are incurred for the purposes of the business of the permanent establishment including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s around 6.92% according to the appellant. 30.3. By applying Article 7 and Rule 10, the Income Is to be estimated in the case of the appellant. 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and machinery which are the terms of contract IV. On this part of the activity also, the appellant is to bear the tax. This cannot be ignored. 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utside India (b) payment of consideration outside India Have been clearly 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 ITAT ? 2. The Hon ble High Court has finally concluded that the first question so formulated does not arise for consideration and as regards second question the matter has been remitted back to the Tribunal as par para 41, which reads as under: 41. As regards the second question it is purely a question of fact. The Tribunal held that only 25% of the profits of Contract No. I can be said to have arisen off-shore and outside the taxable territory. The Tribunal did not take note of and could not have taken note of the fact that 20% of the profits of Contract No. I has been offered to tax, since that is an event that took place subsequent to the order of the Tribunal. We find in paragraph NO. 51 in the order of the Tribunal that the Tribunal had asked the assessee to give certain figures. But the assessee did not do so. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court. So we have no alternative, but to consider the arguments taken by the ld. Counsel for the assessee that that no part of income can be attributable to income earned in India and without prejudice to this, the assessee s counsel submitted that only one or two persons were employed, who have been sending information about sending equipment so at the most their salary to the extent of Rs.5,000/- to Rs.6,000/- per month out of projects could be attributed for the purpose of taxing the same in India and nothing more. Whereas, the ld. DR strongly pleaded that the attitude of the assessee s counsel has not changed and he also has not brought any material record as was done in earlier proceedings at the time of hearing of appeal by this Bench in first round and the Hon ble High Court has already upheld in principle that contract in question was composite contract, as such corporate veil was required to be lifted. Therefore, conclusion as drawn by the ld. CIT(A) , as far as contract too is concerned, the same was treated to provide certain technical services, profit at 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntracts with NLC in relation to the offshore supply; Without prejudice to the above, the Company made net profits of 2.67 percent and 3.69 percent in its worldwide accounts; and Without prejudice to the above, the margin of the comparable companies in India is 6. 92 percent. Without prejudice to the above, the competitor for the NLC project, BHEL, made a profit of only 8.88 percent." The appellant submitted certain audit reports which are highly qualified. The report also states that the auditors are not responsible for establishing the nature and scope of the procedures enumerated in the report. The entire comments of the auditors shows that the responsibility vested with the appellant only for the details contained in the statements. There is no scope to verify the accounts with respect to Contract I, II or the overall accounts of the appellant. This was also pointed out to the AR. The average profit in comparable cases is around 6.92% according to the appellant. 30.3. By applying Article 7 and Rule 10, the Income Is to be estimated in the case of the appellant. With respect to contract I, primarily two factors are to be taken into consideration. Firstly, contract I involves sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on contract III and IV and bring to tax the same. The other method would be to consider all the four contracts as a whole and estimate the overall profit at a particular percentage taking the specific features of each contract. Offset is to be given with respect to contract I due to the fact that only income attributable to PE can only be taxed in India. With respect to contract III and IV, a lower profit is to be estimated since appellant claims that it resulted in loss. The fact that arbitration proceedings are in progress is also to be taken note of. The overall percentage on the whole contract can be estimated and brought to tax. 30.4. With respect to contract III and IV, ample justification is provided in the prepages as to why the appellant is to be taxed. In execution part, there are no two different concerns. Appellant completed the testing, commissioning and performance guarantee test and handed over the plant and machinery which are the terms of contract IV. On this part of the activity also, the appellant is to bear the tax. This cannot be ignored. It is also seen that the entire contract is a composite contract and the appellant and the subsidiary executed the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the grounds of appeal of the appel lant need no alteration. 6. The assessee except filing chart showing net profit margin by different parties in similar power projects, did not file profit and loss account etc. of the subsidiary and other comparative figures as was asked by the Tribunal at the time of hearing in first round. However, considering the figures given in the chart so filed during hearing before the Tribunal in first round, the Tribunal concluded to hold as per para 51 of its order as under: 51. In the light of the aforesaid discussion it is obvious that the contract in question was a composite contract, as such corporate veil was required to be lifted. We agree with the conclusion of the Commissioner of Income Tax(Appeals) that as far as contract II is concerned, the same was treated to provide certain technical services on which profit rate of 20% was applied which was confirmed by the Tribunal in ITA No.2313/Mds./03 dated 5.5.06. However, we are unable to agree with the estimation of profits made by the Commissioner of Income Tax(Appeals). He has held that profit from contract I could be estimated at 15% because it involves sale of equipment etc. and since o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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