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2016 (6) TMI 728

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..... ed Commissioner (Appeals) against the order passed under section 195(2) in the case of ONGC is not maintainable. The learned Commissioner (Appeals), in our view, was not competent under the provisions of section 246A of the Act to entertain such an appeal. We, therefore, set aside the impugned order passed by the learned Commissioner (Appeals) and restore the order of the Assessing Officer under section 195(2). - Decided in favour of revenue - ITA no.5418/Mum./2013 - - - Dated:- 8-6-2016 - SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER For The Revenue : Dr. Dipak Ripote For The Assessee : Shri Yogesh Thar ORDER PER SAKTIJIT DEY, J.M. Instant appeal by the Department is directed against the order dated 1st May 2013, passed by the learned Commissioner (Appeals) 11, Mumbai, for the assessment year 2013 14. 2. Grounds raised by the Department are as under: 1. On the facts and in the circumstances of the case and in law, the Id. CIT(A) has erred in adjudicating the appeal filed by M/s Abu Dhabi Ship Building PJSC who is not Applicant of the application u/s 195(2). The application was filed by ONGC. 2. On the facts .....

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..... The contract was signed in India The ship would be delivered in India complete in all respect in sea worthy stage. The cost of transportation /delivery to India would be borne by the consortium. The imports , clearance responsibility is on the contractor (consortium). The liability of insurance also lies on the consortium. The contract also allows hiring of Local Indian subcontractors for the work of contractor. The registration of vessels with director general of Shipping has to be done by the contractor before delivery. Inspection service repair work before delivery would also be the responsibility of the contactor. During the guarantee period the personnel of contractor may visit the vessel for checking and carrying out remedial work of facilities equipment, all such expenses would be borne by the contractor. The consortium has appointed an Indian agent to whom 2% agency commission (para 3.1 of the agency agreement) would provided, who would work on behalf of the Non Resident. Further the details regarding agent of the Non Resident are also provided in the contract. The participation of Indian agen .....

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..... the ONGC vide letter dated 8th November 2012. In response to the said letter, it was submitted that percentage of profit accruing arising out of the contract cannot be disclosed as it is confidential. However, it was submitted that there would be net loss of 10%. It was further submitted that the payee would not be subject to tax in India due to the treaty benefit of India and UAE. It was submitted that Abu Dhabi Ship Building PJSC being a leading partner of the consortium, the treaty applicable would be Indo UAE. The Assessing Officer, however, did not accept the claim of ONGC. He noted that ONGC has entered into a contract with consortium and not with the Abu Dhabi Ship Building PJSC. He observed, consortium not being a member of any treaty country, the benefit of treaty of either country to which the consortium members belong as resident would not be available to the consortium. For such conclusion, the Assessing Officer relied upon some decisions of the Authority for Advance Ruling (AAR). As far as the claim of the applicant that no P.E. of the consortium is in India, the Assessing Officer countered it by stating that the Indian agent of consortium will constitute P.E. Further .....

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..... ersonnel to visit ONOC. Arrange meetings with ONOC. Providing services in all pre tendering post tendering services. It is supposed to provide all administrative Logistic support in India. 5. The Assessing Officer observed, scope of work of the Indian agent of the consortium and the quantum of agency commission goes to show that the Indian agent will constitute a P.E. of the non resident. The Assessing Officer observed that as the treaty benefit would not be available for consortium, the profit attributable to its activities in India would be taxable in India. In this context, it was observed by the Assessing Officer that the claim of 10% loss by the assessee not being supported by any evidence will not be accepted. The Assessing Officer further went on to observe that in the absence of details provided by the assessee, the income assessable in India has to be estimated. Accordingly, the Assessing Officer concluded that 20% out of the total contract value of $ 2,02,81,194, is attributable to Indian activity. Thus, the Assessing Officer worked out the profit attributable to Indian part of the activity as 10% which worked out to $ 4,05,622 which according to .....

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..... as done anywhere in India and as per the terms of the contract the vessels are to be supplied complete in all respect. It was submitted, ONGC was all through examining the construction of the vessels at various stages and it has to be fully completed including TPI and classification clearances before they are accepted by ONGC at Abu Dhabi Shipyard, UAE, and thereafter they are finally shifted to Mumbai. Thus, it is ONGC which is to be completely satisfied with the workmanship and seaworthiness of the vessels at the Abu Dhabi Shipyard. It was submitted, as per the terms of the contract the construction of the vessels and its completion and testing was totally made and done outside India. Not even a single part of the vessels was manufactured and constructed in India. Therefore, section 9 of the Income Tax Act, 1961 will have no application to the assessee. The assessee has no business connection in India, hence, no part of the income from the sale of vessels from the assessee to ONGC can be brought to tax in India. It was submitted, property in the vessels passed to ONGC at Abu Dhabi while making final payment towards the cost of vessels as per the payments schedule. Thus, it was su .....

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..... ount. Therefore, services rendered by TEIL are only confined to assisting the assessee for the tender and its acceptance. TEIL has no obligation or duty to perform in the matter of construction of the vessels and its supply to ONGC. The contract is between the two principals. It was submitted, even going by the Explanation 2 to section 9(1), defining the term fee for technical services , the payment received by the assessee cannot be treated as FTS as the definition of FTS does not include consideration for any construction, assembling, mining or like project undertaken by the recipient or consideration which could be income of the recipient chargeable under the head salaries . 7. The learned Commissioner (Appeals) after considering the submissions of the assessee and examining the materials on record including the assessment order observed as per the scope and terms of agreement. ONGC has awarded contract for delivery of nine new ISVs made as per specification of ONGC. Complete work related to design and construction of the vessels is done outside India though, the vessels were delivered in India after trial and inspection. Thus, according to the learned Commissioner (App .....

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..... learned Commissioner (Appeals) referring to different clauses of the agreement between the assessee and ONGC and other facts and material on record observed that the entire work relating to the construction of the vessels was done outside India. Therefore, the consideration of 20% of the gross receipt towards income accruing in India is without any basis but merely on an estimate. He observed, as per the agreement the vessels fitted with all equipments designed by the assessee as per drawings, specification of technical information and to the satisfaction of the representative of ONGC are to be delivered in seaworthy state complete in all respect in India at Mumbai. Before the delivery static and dynamic control testing is to be done and vessels are to be handed over to the ONGC at the designated shipyard. The delivery of all the nine vessels is to be completed on/or before 2nd October 2013, i.e., within 20 months from the date of contract. The contractor is under obligation to complete and rectify all protocol defects arising within the warranty period of 12 months from the date of issue of certificate of completion and acceptance of the work and taking delivery of vessels by the .....

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..... reject the vessels but it has right only for the removal of the defect either by the assessee or at the cost of the assessee. Thus, it was observed by the learned Commissioner (Appeals) that property in vessels passes to ONGC when they were handed over to the representative of ONGC after trial at shipyard of the assessee, though, the vessels remained in possession of the assessee till final delivery at Mumbai. Further referring to Explanation 2 of section 9(1)(vii), the learned Commissioner (Appeals) observed that as the project for which the payment was made is for construction of ships it is covered under exception provided under Explanation 2 to section 9(1)(vii). While coming to such conclusion, the learned Commissioner (Appeals) referred to a number of judicial precedents. Thus, on the basis of the aforesaid analysis, the learned Commissioner (Appeals) finally concluded that no income taxable in India is earned by the assessee in connection with supply of nine ISVs constructed to the specification of the ONGC. Accordingly, upholding the claim of the assessee he allowed the appeal. Being aggrieved of the aforesaid order of the learned Commissioner (Appeals), the Department is .....

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..... a. Learned Departmental Representative submitted, the obligation for deduction of tax was by the payer ONGC and not by the assessee. He submitted, as per the agreement between the ONGC and the consortium, it is the consortium which was required to apply for no deduction certificate and only if they fail then ONGC will apply. Therefore, primary duty was of the assessee to apply for no deduction certificate. The learned Departmental Representative submitted, at the stage of issuance of certificate under section 195(2), the liability of assessee under the Indian Income Tax Act, cannot be determined as such certificate is to be issued on prima facie verification, hence, is not final. He submitted, the final tax liability is decided in assessment proceedings. Therefore, whether income has accrued to the assessee in India and assessee s liability to tax under the Income Tax Act, cannot be determined at this stage until it is examined in an assessment proceedings. Thus, it was submitted that the order passed by the learned Commissioner (Appeals) deserves to b e set aside. 9. Learned Authorised Representative strongly supporting the order of the learned Commissioner (Appeals) submitted .....

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..... horised Representative submitted the decision is not applicable as it is not an authority to support the Department s view that order under section 195(2) is not appealable. As far as the merits of the issue is concerned, learned Authorised Representative submitted that the contention of the Department that the assessee had a business connection under section 9(1)(i) in India on the premise that the contract was signed in India the ship was delivered in India, registration of vessels have to be done in India and some products like fuel was purchased from Indian suppliers does not establish business connection. He submitted, only because the contract was signed in India it cannot be said that there is a business connection in India. For such proposition, he relied upon the following decisions: i) Ishikawajma Harima Heavy Industries Ltd. v/s Director of I.T., 158 Taxman 259 (SC); and ii) D T v/s Ericson A.B., 343 ITR 470 (Del.) 12. Learned Authorised Representative submitted, merely because the assessee had purchased some utilities from Indian entities, it cannot be said to have business connection in India. He submitted, an entity may import goods from many foreign entitie .....

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..... ion in India, learned Authorised Representative submitted, the registration of vessels in India is merely to comply with regulatory requirement in India, hence, cannot result in business connection in India. As far as allegation of the Department that TEIL is a dependent agent, hence, has to be treated as P.E. of the assessee since 0.5% of the project value has been paid to the agent, the learned Authorised Representative submitted, TEIL is an independent agent and does not work exclusively for the assessee or the consortium. He submitted, TEIL provides agency services to various entities in various countries such as China, Romania, Kazakhstan, Spain, UAE, etc. Hence, TEIL is an independent agent acting in the ordinary course of business and not working mainly or wholly for the assessee. Therefore, in view of first proviso to Explanation 2 to section 9(1)(i), such agent does not constitute business connection. He submitted TEIL has no authority to conclude contracts on behalf of the assessee. TEIL also neither maintains a stock of goods or merchandise on behalf of the assessee. That being the case, agency relationship with the TEIL does not result in either a business connection un .....

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..... (Appeals) deserves to be upheld. 13. We have considered the submissions of the parties and perused the material available on record as well as the decisions relied upon by both the Counsels. At the outset, we propose to deal with the preliminary objection raised by the Department with regard to maintainability of appeal filed by the respondent assessee purportedly u/s 246A. It is the contention of the learned D.R. that the order passed u/s 195(2), is not an appealable order u/s 246A as there is no mention of such an order u/s 246A. 14. It is also the contention of the learned Departmental Representative that the only provision under which the order under section 195(2) can be challenged before the learned Commissioner (Appeals) is under section 248 of the Act. Before deciding the preliminary issue raised by the Department on the maintainability of the appeal filed by the assessee before the first appellate authority, it is necessary to look into some of the statutory provisions which has relevance to the issue at hand. Section 195 of the Act mandates that a person responsible for paying to a non resident or a foreign company any interest or any other sum chargeable under the .....

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..... under section 197. Therefore, against the order passed under section 195(2) the payer / deductor i.e., ONGC could have filed an appeal under section 248 before the learned Commissioner (Appeals) provided the conditions laid down therein are fulfilled. However, no such appeal, as it appears, has been filed by the ONGC before the learned Commissioner (Appeals). On the contrary, one of the constituents i.e., Abu Dhabi Ship Building PJSC, the respondent before us, filed an appeal before the learned Commissioner (Appeals) challenging the order under section 195(2). The issue before us is whether the appeal filed by Abu Dhabi Ship Building PJSC, before the learned Commissioner (Appeals) is maintainable under section 246A. As already stated herein before on a careful reading of section 246A, we find that an order passed under section 195(2) is not mentioned as an appealable order. It is the contention of the learned Authorised Representative appearing for the assessee that the expression an order against the assessee where the assessee denies his liability to be assessed under this Act used in clause (a) of section 246A(1) enables the assessee to file appeal against the order under s .....

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..... he assessee is to deny its liability to be assessed under the Act in such proceedings and claim refund of the amount deducted at source from its receipts / income. As far as the decisions relied upon by the learned Authorised Representative regarding the maintainability of appeal under section 246A, on a careful analysis of the decisions, it is noticed that in all these cases, the orders demanding tax or determining liability were directly against the assessee, hence, in that context, the Courts held that appeal before the learned Commissioner (Appeals) is maintainable. However, in the present case, as already stated, the order appealed against before the learned Commissioner (Appeals) was not against the assessee but against ONGC under section 195(2) of the Act. For the sake of completeness, we think it appropriate to deal in nutshell with few of the decisions relied upon by the learned Authorised Representative. 16. In the case of M. Pyngrope (supra), the assessee had filed return of income under section 139 declaring certain income. The Assessing Officer processed the return of income under section 143(1) of the Act and determined the tax payable. Against the order under sect .....

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..... f the learned Commissioner (Appeals) or the Tribunal in disposing of the appeal. Facts of the case are, the Assessing Officer made an assessment in the name of an Association Of Persons (AOP). The said AOP filed an appeal before the learned Commissioner (Appeals) claiming that instead of assessing the income at its hand, the Assessing Officer should have assessed the income in the hands of the individual members. Though, the learned Commissioner (Appeals) dismissed the appeal of the assessee. On further appeal before the Tribunal it held that, though, the Income Tax Officer had the power to assess the income of the AOP as such or in the alternative on the individual members thereof in respect of their proportionate shares in the income but the Tribunal had no power under the Act to direct the ITO to exercise his power in one way or other. When the matter went in reference to the High Court, the High Court held that the Appellate Tribunal has jurisdiction to give directions to appropriate authority to cancel the assessment made on the AOP and make a fresh assessment on the members of that association independently. Thus, as could be seen, the issue in the aforesaid decision was in r .....

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