TMI Blog2014 (8) TMI 837X X X X Extracts X X X X X X X X Extracts X X X X ..... activity - Against the claim of the assessee that there is absolutely no material to even remotely suggest that Indian offices had any role to play in the offshore activities of designing, fabricating, procurement of equipment and supply - The project has been managed and executed from Indian offices of the assessee - The procurement, fabrication, designing, services, if any, rendered from outside India have been compensated by Indian PEs - The body and sale of the ONGC project lies in India and it had role in all the activities, if any, carried outside India. Burden to prove – Fabrication and designing services were rendered from outside India or not - Held that:- The primary burden of proof is on the assessee to justify that fabrication and designing services were rendered from outside India - It should have submitted the details of all the expenses and location and incurring the expenses against the so called receipts on account of “imported components” - This receipt has gone in the hands of the assessee without justifying the expenses against the same and profits earned - in absence of providing the basic information of activities, the assessee could not claimed that revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived by the Appellant for carrying out its obligations outside India was assessable to tax in India. It was not appreciated that as the entire operations were carried out Outside India, no part of the said consideration was assessable to tax in India. Ground 4 The AO has erred in making an additional depreciation hoc disallowance of 25% of the overall expenses incurred by the Appellant and the DRP has erred in not issuing any directions in respect thereof. Ground No. 5 The DRP/AO erred in making ad-hoc disallowance of 50% of material cost, 40% of Plant Cost, 50% of Office cost, 100% of legal cost and thus arriving at a total profit @ 25%. Ground 6 The DRP/AO has erred in making adjustment in the international transactions undertaken by the Appellant, by holding that its not at arm s length and have therefore erroneously made an adjustment to the total income of the appellant. Ground 7 Without prejudice to the above, the DRP/AO has erred in not giving correct effect to the proviso to section 92C(2) of the IT Act. Ground No. 8 The DRP/AO have erred in law in not considering the offshore revenues considered taxable at a deemed profitability rate of 25% as a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pportunity of being heard and violation of principle of natural justice (Objection I); Proposing to tax revenues earned from outside India operations and thereby attributing the same to the PE as taxable income of the assessee Objection II); Proposing to disallow 25% of overall expenses on ad ad hoc basis (Objection III); Proposing to disallow 100% of head office expenses (Objection IV); Proposing to adopt deemed profitability rate of 25% on an inappropriate basis (Objection V); Proposing disallowance recommended by TPO and accepted by the ld A.O. (Objection VI); Proposing to charge interest u/s. 234B and 234C (Objection VII); and Proposing to initiate penalty proceedings under sec. 271(1)(c) of the Act (Objection VII) 4. The assessee also placed reliance on several decisions in support but could not succeed, hence, the present appeal before the ITAT. 5. The ground No. 1 is general in nature whereas ground Nos. 2 to 8 are connected. In ground No.9, interest levied under sec. 234B and 234C of the Income-tax Act, 1961 has been questioned and in ground No. 10, initiation of penalty proceedings under sec. 271(1)(c) of the Income-tax Act, 1961. 6. In support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (c) 11.25% Proportionate Operating Revenue (d)=b*c 273056982 Operating cost (only AE) (e) 292036530 Actual Operating Loss (f)=d-e (18,979,548.00) Arm s Length Profit G=a*d 21,544,196.00 Adjustment (Arms length Actual Price) H=g.f 40,523,744.00 8. Regarding the addition on account of receipts from outside Indian operation, learned AR submitted that the assessee a foreign company had entered into a contract with ONGC on 06.01.2005 (page 52 of P.B.I). As per the Preamble of the Contract, ONGC was desirous of carrying out works of survey, design engineering, procurement, fabrication, transportation installation, life of some marine pipeline, platform installation and modification of existing platform etc. The preamble itself stipulated that the project was on a turn key basis. The assessee company undertakes the work of engineering, designing, procurement and fabrication of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere fabricated or procured outside India and the price payable by ONGC to the assessee company in relation thereto. It is not an ad hoc or afterthought bifurcation of prices but schedule form part of the contract and it is an agreed understanding between the parties that the part listed as imported components are to be fabricated/procured outside India. The project office in India had no role to play except to get these platforms installed and decided before the same is handed over to the contractee. 10. Learned AR submitted further that the work contract could not be completed due to some dispute that the ONGC had got terminated in 2007. Thereupon CEL and ONGC entered into a settlement and mutual relations agreement on 08.12.2009. By virtue of this settlement, ONGC took the delivery of work done up to the date of dispute from location outside India. This fact was brought to the notice of the Assessing Officer which has been reproduced by the Assessing Officer in the assessment order (page No. 533, third part of P.B.I ). In this case, ONGC took possession of the goods fabricated/procured on as is where is basis . 11. Regarding the attribution of income, the learned AR s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing losses. It was also backed by certificate from the auditors. He submitted that the history of the case shows that the assessee company was assessed to tax for assessment years 2004-05 and 2005-06 where the Assessing Officer took the profit from outside India activities at 1%/2% of the receipts. The same has been confirmed by the Learned CIT(Appeals). Neither the revenue nor the assessee is in appeal. There is no justifiable reason for assessing the income at 25% of receipt from outside India activities without having any material to justify the same. He submitted that the TP audit conducted by the TPO had decided the income arising from international transactions by applying comparables in treaty level profit earned by other companies. The arm s length profit margin determined by the Assessing Officer comes to 7.89%. Without going into the merits of these profit margins, it is submitted that an independent entity would earn a profit of not more than 7.89% of the total receipts. The A.O. has taken totally a unreasonable stand, inasmuch as, that while he holds 7.89% profit margin in an open market scenario as reasonable, he goes wild in assessing the profit at 25% of the turnov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer at page Nos. 3 to 34 of the assessment order and DRP in objections 2 to 5 have dealt with the issue of taxation (so called) receipts from outside India operations. He pointed out that during the course of assessment proceedings, the Assessing Officer had asked the assessee to furnish the copy of account in respect of outside India activities along with the copies of accounts of the same, supporting vouchers, books of accounts etc. (page 531 of the P.B). In response to query that the payment consideration has no relevance with regard to location of activities performed, the assessee submitted that, even though payment consideration has no relevance with regard to location of activity that does not mean that all the activities are carried out in India (page 532, P.B.I). Therefore, the assessee had admitted that payment consideration has no relevance to location of activities performed. Accordingly, whether the price is shown as imported components or Indian components has no relevance to location of operation. All operations carried out are in regard to project in India. It is important to highlight the facts which without doubt demonstrates that the claim of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ads as: Works means all things or tasks, which the Contractor is, or may be, required to do to comply with its Contract obligations. It includes everything required to provide and complete a full functioning GS-15-1 Well platform, Pipelines (both rigid and flexible), Sub Sea control system and Control Umbilical (Offshore and Onshore), Sub Sea manifold, Sub Sea Christmas Trees, Modification of existing platform GS-15-4, Onshore Oil and Gas processing Facilities, Gas Compression facilities and Oil Pumping Facilities etc. at offshore fields G-1 and G-15 in Krishna Godavari Basin located off the East Coast of India and Onshore facilities at Odalarevu, Near Amlapuram, Andhra Pradesh. The works are more fully described in the Bidding Documents. Annexure-B are the Bidding Documents (pages 205 to 269, PB-1). Page 209 states that all materials required for the completion of the complete scope of work shall be the responsibility of the bidder. Prices were negotiated in India (Pages 236 and 237, PB-1). Page 265 of the PB-1 is letter dated 30.11.2004 issued by the ONGC Notifying the Award of Contract. It states that ONGC places its notification of award of Contract for execution of entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hanges in relation to or in connection therewith including insurance risk of weather, Construction Plant and Equipment breakdown and Site Conditions etc. per provisions of the contract, shall be deemed to be included in the Contract price. Payment shall be made in the currency or currencies given in the Schedule of Prices for the work executed as per the procedure set forth in clause 3.2 . 10. Clause 3.2.2 of the Contract (page 101, PB-1) concerns payment procedure and reads as: The contractor shall submit its invoices once in each month along with four copies for the work completed and certified by Company's representative as per the agreed milestone formula provided in the Contract at Annexure-F, with all required supporting documents and details of the said work to the Company's representative for certification of the said invoice, at Company's Rajahmundry office for approval of the amount payable and any payment thereafter . 11. Clause 5.2.3 of the Contract Agreement (pages 115 and 116, PB-1) concerns Conditions for Procurement/Selection of Makers and Vendors. This indicates that whatever plants/equipments/materials are procured for the works covered under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT in the case of Hyundai Heavy Industries Co. ltd to argue that the letter obtained by the assessing officer from the ONGC has no relevance. That decision is distinguishable on facts and does not in any way support the claim 0 f the assessee for the following reasons: In paragraph 30 of the order, the Hon'ble lATA has given reasons for not taking any cognizance to the letter of GM, ONGC. No such situations like replying to the letter next day have been pointed by the assessee. Letter of Mr. Srinivasan in that case had mentioned that contract ownership gets transferred to ONGC on completion of particular segment, namely, platform pipeline, top side modifications etc. as per scope of work and its acceptance by ONGC. In the present case there is no segment wise transfer of ownership and it has not been demonstrated by the assessee that any part of contract was accepted by ONGC outside India. Clause 6.3.1.1 of the Contract (Page 155) states that the Schedule Completion Date for entire works covered under the contract is 15.04.2006. Further, Clause 5.10.2 (page 133) provides that, If the company is satisfied that the entire works have been completed as specified in the Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee were rejected by the AO and amount has been taxed in the assessment order. There is no documentary evidence to prove that any operations were carried outside India that were distinct and divorced from the contract executed in India. 17. In clause (viii) of Part G of the submission, the assessee has relied on the sample copies of the invoices (pages 420 to 452 of PB-1) received from third parties to indicate that the activities were done outside India. The revenue had offered detailed comments on these invoices during the hearing before Hon'ble tribunal and some of these are: Pages 435 to 440 are invoices of Oceaneering Multi Flex UK, for ONGC G1 and GS 15 Field Development Project (Manufacture of Subsea Umbilical and assorted Accessories). Pages 441 to 452 are invoices of Tube Developments Limited, Glasgow for supply of SEAMLESS BEV ENDS to Clough Engineering for ONGC G1 and G1S Fields Development Project. 18. All the above invoices indicate that the assessee has made purchases from third parties in Singapore and UK and payments have been made. These might be made to order purchases. The payments are for purchases of materials for the project. These ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of project in India. * Assessee has not manufactured any platforms (as was in case of Hyundai) outside India. It has only incurred expenses to import the materials. By not accounting receipts (imported components) and expenses in Indian project office accounts, the assessee has not deducted tax out of payments to non-residents that it was required to do. * In fact, whole of the receipts on account of imported components have gone unaccounted far as project in India is concerned. 22. The assessee in clause (ix) of Part G has submitted that, after Settlement and Mutual Agreement on 8 December 2009, the ONGC took possession of goods fabricated/procured on as is where is basis and title in goods, as a matter of fact, did not pass in India as alleged by AO. In this regard, the Revenue's submits that, as the ONGC took possession of goods after agreement dated 8. I 2009, therefore, not relevant for AY 2006-07 before the Hon'ble Tribunal. During the relevant year the assessee brought materials in India and was used in execution of project. 16. On the issue of what are the operations carried outside India whether compensated appropriately, the Ld. CIT(DR) made f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ineering and Integrated Solutions Pte Ltd- ₹ 22,63,416) (kindly refer to page 1 of PB-2 filed by the assessee). 26. The assessee has also claimed that the work of engineering, design and fabrication was also carried outside India. However, neither the agreement provides for carrying on of these activities outside India nor the assessee has demonstrated by submission of any documentary evidence in this regard. On the other hand, page 9 of the PB-1 (Accounts of Indian operations) shows that the assessee has claimed sub contractor charges of ₹ 1,088,139,947; consultancy charges of 15,590,911; and divisional Corp overhead of ₹ 107, 491,471 out of receipts of Indian component. Further, it availed various logistics services and services of personnel in regard to detailed design and payments have been made by Indian PE. If the price of imported component was taken out and out and has not been disclosed in the accounts then there is no justification to claim these payments as deduction from Indian PE accounts. 27. Without prejudice to the above, If the work of engineering and design is carried outside India then the corresponding consideration is taxable as fee for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parately compensated by Indian PE. 18. Learned CIT(DR) submitted further that the decisions relied upon by the learned AR are having distinguishable facts and ratios, hence these are not applicable to the facts of the present case. He submitted that in the case of Ishikawajima-Harima Heavy Ind. Co. Ltd. (supra), the contract was divisible in four parts (offshore supply, offshore services, on-shore supply and onshore services). In that case, the offshore supply was made from outside India on CFR basis and property was to be passed to the owner on high seas whereas in the case of assessee, the contract is one and not divisible. In the case of LG Cable Ltd. (supra), the assessee was awarded two contracts, first for offshore services and the second for offshore supply of equipment and offshore services. In the case of National Petroleum Construction Co. (supra), the ITAT found that the contract was divisible and it was the discretion of the ONGC to take only the platform erected by the assessee in Abu Dhabi, as it has the right to terminate the contract but its own collusion, without having installation thereof. In the case of Hyundai Heavy Ind. Co. Ltd. (supra), the scope of work h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned CIT(DR) submitted that the assessee had international transaction of ₹ 29.20,36,530 in respect of accounts that were prepared by the assessee considering only revenue from Indian components. In respect of imported components, the assessee has not accounted the same in Indian accounts. During the year, operating revenue of ₹ 2,47,11,60,712 has been shown that is including receipt of ₹ 1,24,68,82,868 on account of Indian components. However, the so called outside Indian revenue (imported components) revenue was ₹ 2,24,55,97,453. This is about ₹ 100 crores more than the Indian components revenue . One more aspect needs to be considered that whether the assessee had maintained any account in regard to revenue , it received on account of supply of so called imported components and further whether supplies had on any account formed part of accounts maintained for Indian components. This is not explained by the assessee. He submitted that the non-submission of the accounts as was requested by the Assessing Officer, may kindly be considered while attributing profits on account of imported components of the price. 22. Considering above submissions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee claimed that revenue should prove what role the Indian offices had in regard to those unproved activities outside India. 24. Regarding the settlement agreement with the ONGC, the submissions of the Learned CIT(DR) remained that the passing of title after the settlement agreement does not affect the taxability of the revenue for importing components because firstly new classes on title and assignment came into operation after agreement of 8.12.2009 and does not affect the taxation of payment received for the period ending 31.3.2006 for which materials were already used in the project. He submitted further that the settlement agreement and lifting of material by ONGC was in terms of settlement agreement and does not in any way can be called as sale outside India, because there was no agreement to sell the material as such without a settlement and mutual release agreement settles all matters between parties. The settlement agreement was arrived in India. ONGC took over the material as per settlement agreement and was not a purchase outside India. The settlement agreement provides information on projects supplies (who were third parties) who provided project material equipmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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