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2016 (9) TMI 1141 - ITAT MUMBAI

2016 (9) TMI 1141 - ITAT MUMBAI - TMI - Reopening of assessment - ‘reason to believe’ - income earned from the Navsari Project -Held that:- As no income has been earned from the Navsari Project which is a contract agreement dated 12th September, 2009. Hence in this year also the reopening u/s 147 is again based on wrong assumption of fact qua the income earned by the assessee in this year, therefore, our finding given in aforesaid appeal will apply mutatis mutandis in this year also. Accordingly .....

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passed under section 147 r.w.s. 143(3) r.w.s. 144C(13) in pursuance of direction given by the Dispute Resolution Panel -I (DRP) under section 144C(5) for the assessment years 2008-09 and 2009-10. Since the facts and issues involved in both the appeals are common, arising out of similar set of facts, therefore, same were heard together and are being disposed off by way of this consolidated order. 2. To understand the facts and implication thereof on the issues involved, we are taking-up the appe .....

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ed from ABB Limited and ABB Global Industries & Services Limited @ 40% (plus surcharge and education cess) instead of 10% as per DTAA; Lastly, the assessee has challenged the non giving of credit of tax deducted at source ( TDS ); levy of interest under section 234B and 234C; and initiation of penalty proceedings under section 271(1)(c) by the AO. 3. Before us, the Ld. Senior Counsel Mr. Perci J. Pardiwalla, submitted that in this case the reopening of assessment under section 147 vide notic .....

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al services from ABB Switzerland Ltd.; and Secondly, training fees received from Power Grid Corporation of India Ltd., both aggregating to ₹ 1,98,92,630/-. The assessee in India had entered into a contract with Power Grid Corporation of India Ltd. in respect of supply and installation of a project in connection with substation at New Delhi. The said project had three component; offshore supply; on shore supply and on-shore services. In the notes to the statement of total income, the assess .....

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/220kv sub-station package at New Delhi associated with High Capacity East-North Inter Connector-II Project. For offshore supply of equipment and material the company received CHF 2,257,509 and SEK 410 199 and for testing of the equipments and materials in Switzerland the company received CHF 700,000 from Power Grid. The company submits that since the sale is concluded outside India and same was on principal to principal basis, the amount received for offshore supply is not taxable in India. Att .....

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the following decisions wherein it was held that offshore supply is not taxable in India: 1. Ishikawajma-Harima Heavy Industries Ltd., Japan (288 ITR 108); 2. C1T v. Hyundai Heavy Industries Co. Ltd (291 ITR 482); 3. LG Cable Limited (ITA 4692/De112005) (Del). The testing fees of CHF 7,00,000 is part and parcel of supply contract. Before the equipment and material is supplied, the same is required to be tested for quality assurance. In view of the above the testing charges would also not liable .....

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loyees of ABB Swiss came to India for assisting ABB India in respect of onsite services being provided by ABB India to their customers. However, there is no consideration that is charged by ABB Swiss for these services . 4. Mr. Pardiwala pointed out that the assessee had disclosed the taxable income received from Power Grid Corporation of India Ltd to the extent of ₹ 16.83 lakhs. However for the amount received on account of offshore supply contract of ₹ 11,55,16,714/-, the assessee .....

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der section 147 by issuance of notice dated 25.03.2011 under section 148. The reasons recorded for reopening the assessment reads as under:- The e-return of income in the case was furnished on 29.09.2008 disclosing a total income of ₹ 1,98,92,630/-. The case was not selected for scrutiny assessment and no assessment order u/s 143(3) was passed in this case. It is seen that the assessee has not offered an income of ₹ 11,71,99,716/- received from M/s Power Grid Corporation of India Ltd .....

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re contract for supply of equipment and materials outside India on C/F port of disembarkation basis, in addition to training to be conducted outside India; b) Onshore supply contract for design, engineering, manufacture, testing at manufacturer s work, transportation and insurance and ex-works supply of all the equipment and materials including mandatory spares from within India and testing required for the complete execution of the project. c) On shore services contract which includes performan .....

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two contracts, which are for onshore supplies and onshore services in India, are to be executed by ABB Ltd an Indian company under supervision of the assessee. The assessee remains responsible for execution of full contract. It has provided a contract performance security and the risks in the execution of the contract are borne by the assessee. This shows that the equipment sale would not be completed till the satisfactory performance and delivery of the whole system to Power Grid. The assessee .....

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0885 dated 07/09/2009 read along with discount letter dated 07/01/2009. ABB Switzerland Limited, Switzerland under the terms of their proposal have requested POWERGRID to award the Off-shore Contract for the Project on them and have further proposed M/s. ABB Limited, 14, Masthura Road, Faridabad, Haryana, India (ABB) as their Assignee for the purpose of executing the On Shore Supply Contract and on Shore Services Contract and furnished ABB India's written unequivocal consent vide their lette .....

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Contract" and the "Third Contract' with ABB INDIA. Further, in the Contract documents, for "First Contract" the word "Contractor shall mean ABB-SA who had submitted the bid and shall for the purpose of "Second Contract and "Third Contract" include ABB the permitted Assignee of ABB-SA. Accordingly, without prejudice to the overall responsibility and the liability of ABB-SA for the execution of all three Contracts, the word Contractor wherever appearing .....

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vour of ABBI And whereas POWERGRID after examination of the proposal of ABB have agreed for awarding the total scope of work under three distinct Contracts, in the above manner, subject to overall responsibility for successful performance of the project resting with ABB and for award of the Off-Shore Contract to them. Thus, the Contractor for the project is the assessee i.e. M/s. ABS Switzerland. The parties doing on-shore supply and onshore service is ABB India Ltd, a sister concern of the asse .....

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to contract with its Indian Associate Enterprises (AE), the assessee requested the Powergrid Corporation to enter into contract with its Indian AE. While the assessee retained the off-shore supply, the other two aspects of the work was assigned to the Indian counterpart at its behest. However, as per the-agreement, the entire responsibility for installation and, commissioning, testing etc'. lies with the assessee only. The actual nature of contract is more important tool to arrive at the act .....

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rovisions of section 44BB is squarely applies. Also the assessee has a Permanent Establishment in the form of its AE and it also has an office in India. As per the provisions of section 44BBB, 10% of the Gross Receipts is income of the assessee. Thus the assessee failed to disclose income to the extent of ₹ 1,17,19,971/- I am satisfied that the income to the extent of ₹ 1,17,19,971/- has escaped assessment within the meaning of section 147 of the I.T. Act. Therefore notice u/s 148 is .....

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a conclusion that income from this contract has escaped assessment. However, the contract document which has been referred by him is dated 12th September, 2009 whereas, during the year, as disclosed by the assessee, the assessee had carried out the contract work on the basis of Contract Agreement dated 29th March, 2005. The entire premise of the AO in his reasons recorded is the contract document of year 2009, which admittedly does not relate to work carried out by assessee in this year nor any .....

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s, the jurisdiction to reopen the assessment under section 147 is based on the wrong presumption of facts. In the reasons , he has referred to contract of Navsari Project, whereas in this year the assessee had undertaken the project at New Delhi, which has been mentioned in the return of income. The income from Navsari contract has not even been brought to tax by the AO in his assessment order. This goes to show that there is variance of facts and material on which reasons have been recorded and .....

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and 62. This inter-alia means that, at the time of recording the reasons he did not even had the access to the contract, then how can he entertain reason to believe. Thus, the whole exercise of acquiring the jurisdiction by the AO is merely pretence and not based on any cogent material or foundational fact. In support of his contention, he strongly relied upon the order of the Hon ble Bombay High Court in the case of Prashant Joshi, reported in [2010] 324 ITR 154. In this case he pointed out tha .....

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lso referred and relied upon the decision of Hon ble Delhi High Court in the case of Oriental Insurance Co. vs. CIT, reported in [2015] 378 ITR 421 for the proposition that, if the factual foundation of the reasons is based on the wrong facts or is incorrect, then jurisdiction cannot be acquired to reopen the case under section 147. He further submitted that, before the AO the assessee vide its objection dated 29th June, 2011 had specifically pointing out to this fact which reads as under: At th .....

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plicable in the present case. During the financial year the company has received income from Power Grid on off-shore supply of equipment and material from Switzerland for 400/220kv sub-station package at New Delhi associated with High Capacity East- North Inter Connector-II Project. The contract has been entered into vide agreement dated 29 March 2005 . 7. Mr. Pardiwala pointed out that the AO, in the assessment order, has stated that, it is typographical error; however, the whole context of the .....

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e quashed. Finally, on similar proposition, he relied upon the following three decisions of the Tribunal: (i) Addl. DIT vs. Black Batch Piachird Inc.; ITA No.3934/M/2007, order dated 10.07.2013; (ii) H V Transmissions Ltd vs. ITO in ITA No.2230/M/2010, order dated 07.10.2011; and (iii) Delta Airlines Inc. vs. ITO in ITA 3476/Mum/2008 order dated 30.11.2012. 8. On the other hand, the Ld. DR strongly relying upon the order of the DRP on this score submitted that, here in this case, the return has .....

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een correctly done by the AO. The facts remains that, Powergrid Corporation of India Ltd has deducted TDS for the entire payment and despite that income has not been offered for tax by the assessee on whole of income received. The first part of the reasons itself was sufficient to reopen the case dehors the agreement. It is an admitted fact that the assessee has not applied for non deduction of TDS under section 195. Thus, the entire foundational fact and the belief do exists in this case for re .....

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ation 2 to section 147 has been dealt in detail by the Hon ble Bombay High Court in the case of Prashant Joshi (supra). Thus, there cannot be deemed case for reopening once the foundational fact itself has been found to be incorrect. Lastly, on the issue that, first part of the reason itself is sufficient, he submitted that the first part merely refers to the scope of work for the contract and the factum of TDS. Nothing turns out from these facts. The AO s ultimate reason to believe that income .....

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ee who is a non-resident company incorporated under the laws of Switzerland, has undertaken a contract work for installation of substation at New Delhi, vide agreement dated 29th March, 2005. In the return of income, the assessee had disclosed income mainly from two streams, firstly, royalty/ FTS and secondly, training fees received form Powergrid Corporation of India Ltd. in pursuance of the project of installing of substation package at New Delhi. In the return of income the assessee had duly .....

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duly processed and accepted under section 143(1), therefore, the said income stood assessed in the aforesaid manner and had attained finality. After the completion of assessment in this manner the case has been sought to be reopened u/s 147 by issuance of notice dated 05.03.2011 u/s 148. From the perusal of the reasons recorded as incorporated above, it is seen that, the first part consists of information that assessee had received an income of ₹ 11,71,99,716/- from Powergrid Corporation .....

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onshore services and to demonstrate that the income from the project is one, AO has extracted a contract document in the reasons and thereafter, he concludes that it is one turn-key project, therefore, entire income is taxable in India in view of the provision of section 44BBB of the Income-tax Act. The contract document extracted therein is the substratum of AO s belief which refers to a project of Navsari substation, which has been entered into on 12th September, 2009. This contract, admitted .....

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an acquire jurisdiction to reopen the case under section 147 only when he has reason to believe that any income chargeable to tax has escaped assessment. Such reason to believe must be based on tangible material and cogent facts having live-link-nexus with the income escaping assessment. If a wrong fact or material is the foundation for entertaining the reason to believe then the whole edifice on which reasons to believe has been entertained collapses and falls in the realm of suspicion, pretenc .....

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seen that it must be base on cogent and relevant material and is rational belief entertained in a good faith. 11. Before us, the Ld. DR has submitted that, in view of Explanation 2 clause (b) wherein, if it is noticed by the AO that the assessee has understated the income then it is a deemed case of escapement of assessment and further here it is a case of assessment under section 143(1) therefore, principle laid down by the Hon ble Supreme Court in the case of CIT vs. Rajesh Jhaveri Stock Broke .....

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been dealt by the Hon ble jurisdictional High Court in the case of Prashant Joshi (supra) after considering the ratio of the Hon ble Supreme Court and clause (b) of Explanation (2) to section 147. The relevant observation of Their Lordships is reproduced hereunder:- 16. Counsel for the Revenue submitted before the Court that in the present case, no assessment has taken place and at the stage of s. 143(1), there is only an intimation. Reliance is sought to be placed on the judgment of the Suprem .....

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opinion, as contended did not arise. The judgment of the Supreme also emphasises what is meant by the expression "reason to believe" and the nature of the belief that is to be formed by the AO that the income for any assessment year has escaped assessment. The Supreme Court held that at the stage of the issuance of a notice under s. 148, the AO must have reason to believe that income has escaped assessment and at that stage an established fact that income has escaped assessment is not .....

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pression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is 'reason to believe', but not established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materi .....

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hen an intimation has been issued under s. 143(1), the AO is competent to initiate reassessment proceedings provided that the requirements of s. 147 are fulfilled. In such a case as well, the touchstone to be applied is as to whether there was reason to believe that income had escaped assessment. Xxxx xxxx xxxx xxxxx xxxx xxxxx xxxx xxx xxx xxx xxx xxx 18. For all these reasons, it is evident that there was absolutely no basis for the first respondent to form a belief that any income chargeable .....

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l. (b) to Expln. 2, the AO must notice that the assessee has understated his income or has claimed excessive loss, deduction, allowance or relief in the return. The taking of such notice must be consistent with the provisions of the applicable law. The act of taking notice cannot be at the arbitrary whim or caprice of the AO and must be based on a reasonable foundation. The sufficiency of the evidence or material is not open to scrutiny by the Court but the existence of the belief is the sine qu .....

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resaid decision of Hon ble jurisdictional High Court clearly answers the objections raised by the Ld. DR. 12. Further, we find that, Hon ble Delhi High Court in the case of Oriental Insurance Co. vs CIT (supra) have held that, if the reason entertained by the AO to reopen the assessment is based on incorrect facts then the entire exercise of reopening is bad in law. Here in this case also, the reason to believe that assessee s income has escaped assessment was without any factual basis , that is .....

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t income has escaped assessment is based on palpably erroneous reasons sans any tangible material or information, therefore, such a reopening based on such wrong assumption of fact has to be quashed at the threshold in view of Hon ble Delhi High Court. Accordingly, we agree with the argument of Senior Counsel and hold that in the present case reasons recorded do not meet the requirement of law and do not confer the jurisdiction to reopen the case under section 147 and accordingly entire proceedi .....

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n the case was furnished on 25.09.2009 disclosing a total income of ₹ 2,02,40,140/-. The case was not selected for scrutiny assessment and no assessment order u/s 143(3) was passed in this case. It is seen that the assessee has not offered an income of ₹ 17,26,161/- received from M/s Power Grid Corporation of India Ltd on which though TDS was done, but it was not offered to tax. Only the Royalty/FTS received from the sister concern in India was offered to tax. The assessee received a .....

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pply contract for design, engineering, manufacture, testing at manufacturer s work, transportation and insurance and ex-works supply of all the equipment and materials including mandatory spares from within India and testing required for the complete execution of the project. g) On shore services contract which includes performance of all other activities in India inter-alia including port handling, port clearance, Inland transportation, insurance delivery on FOR destination site(s) basis, handl .....

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see remains responsible for execution of full contract. It has provided a contract performance security and the risks in the execution of the contract are borne by the assessee. This shows that the equipment sale would not be completed till the satisfactory performance and delivery of the whole system to Power Grid. The assessee is the contractor of the contract. The contract was awarded to the assessee. The responsibility for successful completion of project lies with the assessee. The contract .....

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o award the Off-shore Contract for the Project on them and have further proposed M/s. ABB Limited, 14, Masthura Road, Faridabad, Haryana, India (ABB) as their Assignee for the purpose of executing the On Shore Supply Contract and on Shore Services Contract and furnished ABB India's written unequivocal consent vide their letter ref PTHS-V080885 dated 16.12.2008 (enclosed in their bid) to work as Employer's independent Contractor, on the terms and conditions as laid clown in the Bidding Do .....

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ABB-SA who had submitted the bid and shall for the purpose of "Second Contract and "Third Contract" include ABB the permitted Assignee of ABB-SA. Accordingly, without prejudice to the over all responsibility and the liability of ABB-SA for the execution of all three Contracts, the word Contractor wherever appearing in "Second Contract" and the "Third Contract" shall also mean ABB. Accordingly, the On-shore Services Contract and On-Shore Supply Contract awarded .....

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ree distinct Contracts, in the above manner, subject to overall responsibility for successful performance of the project resting with ABB and for award of the Off-Shore Contract to them. Thus, the Contractor for the project is the assessee i.e. M/s. ABS Switzerland. The parties doing on-shore supply and onshore service is ABB India Ltd, a sister concern of the assessee. The arrangement is basically an attempt to evade taxes in India by adopting colourable devise The assessee got the entire contr .....

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its Indian AE. While the assessee retained the off-shore supply, the other two aspects of the work was assigned to the Indian counterpart at its behest. However, as per the-agreement, the entire responsibility for installation and, commissioning, testing etc'. lies with the assessee only. The actual nature of contract is more important tool to arrive at the actual nature of transactions. In this case, the assessee got the contract from a Government of India body i.e. The Power Grid Corporati .....

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