TMI Blog2014 (8) TMI 312X X X X Extracts X X X X X X X X Extracts X X X X ..... d procurement of cables outside India fall beyond purview and jurisdiction of the provisions of Income Tax Act. The offshore contract is only for procurement of cables that too outside India and the training provided in India is incidental to the contract No.1 i.e., offshore contract and further as there is no profit earned on training, no part of the income can be attributable to the PE - when under an offshore contract, equipment was found transferred outside India, necessarily taxable income also accrued outside India - no portion of such income was taxable in India – thus, the order of the CIT(A) in restriction of the addition to 1% of the total contract is set aside – Decided in favour of Assessee. - ITA.No.916/Hyd/2006, ITA.No.246/Hyd/2012, ITA.No.244/Hyd/2012 - - - Dated:- 25-7-2014 - Shri B. Ramakotaiah And Smt. Asha Vijayaraghavan,JJ. For the Petitioner : Mr. P.J. Pardiwalla Mr. Milind Thakore For the Respondent : Mr. P. Somasekhar Reddy ORDER Per Bench These three appeals viz., ITA.No.916/Hyd/2006, ITA.No.246/Hyd/2012 and ITA No.244/hyd/2012 are by assessee against the orders of CIT under section 263 and consequential order passed by the A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned year. In the scrutiny order passed under section 143(3) dated 29.03.2004, A.O. examined the assessee's accounts and disallowed various expenditure thereby, determining the taxable income at ₹ 1,58,54,605/- and raised demands accordingly. This order of the A.O. was subject matter of appeal before the Ld. CIT(A) (appeal thereon was separately dealt with). In the meantime, Ld. CIT issued a show cause notice to the assessee why the receipts on off-shore contracts should not be brought to tax. Ld. CIT mainly relied on the ruling given by the Authority for Advanced Rulings in the case of Ishikawajima Harima Heavy Industries Co. Ltd., (2004) 271 ITR 193. After considering the detailed submissions of the assessee and analyzing the terms of agreement, Ld. CIT summarized the issues as under : 1. In the case of the assessee it is not merely sale of fibre optic by Pirelli but supply of fibre optic, laying of the said fibre optic cables was awarded by Power Grid, to Pirelli by way of contract. Therefore, the assessee's supply of cables from abroad is not sale of goods simplicitor by a non-resident. Hence, it cannot be said that since the sale took place outside India, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial, spare parts and men etc., In this type of turn key project, the off shore supply cannot be treated as a sale of goods so the bifurcation of price is not proper. Though the entire income of the assessee is deemed to accrue in India by virtue of section 9(1) but in view of the Explanation appended to clause (i) of sub section 1, only such part of income as is reasonably attributable to the operations carried out in India alone is taxable. In the light of above discussion, I hold that the income as is reasonably attributable to the operations carried out in India relatable to the Off shore contract is liable to tax in India. The A.O. is directed to ascertain the actual income which is taxable in India on the off shore contract receipts in accordance with law by resorting to the provisions of Rule 10 of the Income Tax Rules, if necessary. 4. Aggrieved on the above order of Ld. CIT, it was the submission of the Ld. Counsel that the ruling of the Authority for Advanced Rulings was reversed by the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Co. Ltd., vs. Director of Income Tax (2007) 288 ITR 408 (SC). Further, Ld. Counsel referred to the Or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reas India Project Office was established in June, 1998. Therefore, there is no co- relation with reference to signing up the contract in India to the PE i.e., India Project Office. Even though these facts were noted by the CIT(A). however, the Ld. CIT(A) considered that there is a role of Indian PE in entering the contract also. Ld. CIT(A) correctly analysed the ruling in the case of Ishaka Wajima- Harima Heavy Industries Co. Ltd. of the Hon'ble Supreme Court in coming to the conclusion that the profit shall be deemed to accrue or arise to the assessee in India only such part of profit as is reasonable attributable to operations carried out in India. He also correctly analysed the Article 7 of DTAA between India and Italy vide para 5.6 of the order and also Explanation to section-9. Since India Project Office has no connection with entering into contract, that aspect of considering part of contract has accruing or arising in India, having signed in India does not apply to PE at all. B) The second aspect considered by the Ld. CIT(A) is with reference to section B(BPS) about the 'installation' part. The said section in the contract is as under : PIRELLI confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct conclusions vide para 11 that India Project Office is liable under the Income Tax and the DTAA between India and Italy only to the extent of profit attributable to the business operations carried out by the permanent establishment in India. This position does not change even if all the three contracts signed by the parent company are treated to be single or composite contract. The cables are manufactured outside India and procurement of cables outside India fall beyond purview and jurisdiction of the provisions of Income Tax Act. Therefore, we are of the opinion that since the offshore contract is only for procurement of cables that too outside India and the training provided in India is incidental to the contract No.1 i.e., offshore contract and further as there is no profit earned on such training also, we are of the opinion that no part of the income can be attributable to the PE. We place reliance on the Judgment of the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Co. Ltd. (supra) and also the decision of the Hon'ble Delhi High Court in the case of L.G. Cables Limited 197 taxman 100 that when under an offshore contract, equipment was foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IV vide order dated 13.03.2006 wherein the assessment order was set aside and directed the A.O. to pass fresh assessment order. 11. Vide ITA.No.916/Hyd/2006 of the same date hereinabove, we have set aside the order of Ld. CIT passed under section 263, consequently, the original assessment order passed by the A.O. comes to life and gets restored. Ld. CIT(A) has to adjudicate the appeal preferred by the assessee on the additions made in the assessment order dated 29.03.2004. We are of the opinion that the appeal before the Ld. CIT(A) which was dismissed as not maintainable should be restored for adjudication on merits. Therefore, we set aside the order of the Ld. CIT(A) dated 29.11.2011 and restore the appeal before him afresh with a direction to the Ld. CIT(A) to consider the appeal on merits. Assessee's grounds are treated as allowed accordingly. 12. In the result, ITA.No.244/Hyd/2012 of the assessee is allowed for statistical purposes. 13. To sum-up, ITA.No.916/Hyd/2006 and ITA.No.246/Hyd/2012 of the assessee are allowed and ITA.No.244/Hyd/2012 of the assessee is allowed for statistical purposes. Order pronounced in the open Court on 25.07.2014. - - TaxTMI - TM ..... 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