TMI Blog2016 (9) TMI 1141X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appeal for the assessment year 2008-09. In various grounds of appeal, the assessee has challenged: Firstly, initiation of reassessment proceedings under section 147; Secondly , treating the income from off shore supply to be taxable in India; Thirdly , treating the different contracts undertaken by the assessee to be one composite contract and on that basis taxing the entire revenue in the hands of the assessee under section 44BBB; Fourthly , taxing of fee for Technical services / royalty income received 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied that no liability will arise on accrual basis to the non-resident on the profits made by him where the transactions of sale between the two parties are on a principal to principal basis. The above position is also reiterated by Instruction No. 1829 dated 29 September 1989 issued by the CBDT. The company in this connection also relies on 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 to tax in India. The company has received fees of CIIT 50,000 for imparting training in Switzerland to Power Grid. Equivalent INR 1,683,022 has been shown as liable to tax in this statement of total income. 7. The tax deducted at source from the above payments on the basis of certificate under section 197 issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore 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 performance of all other activities in India inter-alia including port handling, port clearance, Inland transportation, insurance delivery on FOR destination site(s) basis, handling, storage, erection including associated civil works, testing and commissioning of equipment and materials including offshore equipment supplied including civil works, training in India etc. d) Out of the above 3 contracts, the first contract i.e. offshore contract that is being directly executed by ABB Switzerland. The other 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaken in three distinct Contracts as follows: a) An off-Shore Supply Contract, No. .. in favour of ABB b) An on-Shore Supply Contract, No. .. in favour of ABB-I ..... . c) An On-Shore Service Contract, No. . in favour 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 assessee. The arrangement is basically an attempt to evade taxes in India by adopting colourable devise The assessee got the entire contract an subcontracted the on-shore services to its Indian associate enterprises. The only difference is that instead of directly making the contract with the Indian Associate Enterprise (AE), the assessee requested the Powergrid Corporation to enter into contract with its Indian associate enterprises (AE). The assessee re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise 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 income has been generated from this contract, therefore, on the basis of a different contract document, he cannot entertain reason to believe that the whole of the amount from the project is taxable under section 44BBB, that is, @ 10% of the gross receipts of the income and consequently no income chargeable to tax can be said to have escaped assessment. Thus, the entire factual substratum on which the AO has entertained the reasons to believe in his reasons recorded were incorrect. In other words, 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 in the assessment order w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assessment year 2010-11 and not in the assessment year 2008-09 and hence not applicable 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 contract agreement which has been incorporated by him pertains to contract for Navsari Project only. He did not even have the New Delhi Project contract with him at the time of recording the reasons and, therefore, to presume that, he by mistake took note of Navsari project contract is absolutely baseless. Thus, he submitted that, the entire reopening is based on wrong presumption of facts and the reasons recorded on factually incorrect facts do not meet the requirement of law and same should be quashed. Finally, on similar proposition, he relied upon the following three decisions of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO s ultimate reason to believe that income chargeable to tax has escaped the assessment is based on contract of 12TH September 2009 which is a entirely a different contract, admittedly not applicable in the impugned year, because in this year the assessee has undertaken a contract for agreement dated 29th March, 2005 and income has been derived from this contract. 10. We have heard the rival submissions and perused the relevant finding given in the impugned orders qua the legal issue of validity of reopening under section 147. The assessee 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 stated that, so far as the income from offshore supply is concerned, the same is not taxable in India because, the sale was concluded outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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, pretence or surmises. A bona fide reasonable belief based on cogent material and information is a pre-condition that clothes the AO with power to reopen the assessment which otherwise has attained finality due to lapse of time. Not only the reasons to believe must have direct nexus with formation of opinion of AO but it must also be based on a foundational fact and material. The Courts have held that, though sufficiency of material and belief entertained by the AO may not be gone into but it has to be 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 notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word 'reason' in the phrase 'reason to believe' would mean cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression 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 materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the AO is within the realm of subjective satisfaction. The Supreme Court held that so long as the ingredients of s. 147 are fulfilled, the AO is free to initiate proceedings under s. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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, was based on wrong material and facts. The entire foundational fact which has been taken into account by the AO for reopening is based on wrong fact and material which do not have any live-link nexus with escapement of income. It has been admitted even by the AO in the assessment order that it was a mistake which he has treated to be a typographical mistake. In our view, it is not a typographical mistake, albeit it is palpably incorrect assumption of fact. Here admittedly reason to believe that 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 requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first contract i.e. offshore contract that is being directly executed by ABB Switzerland. The other 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 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 documents states as under: WHEREAS the Employer is desirous to get the works for 400kV/220kV Navasari (New) GIS Substation (hereinafter called the Project ) executed by the Contractor, and invited bids for the same and has accepted the bid of ABB Switzerland Limited, Switzerland, submitted by them vide proposal ref. no. PTHS-V080885 dated 07/09/2009 read along with discount letter dated 07/01/2009. ABB Sw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The arrangement is basically an attempt to evade taxes in India by adopting colourable devise The assessee got the entire contract an subcontracted the on-shore services to its Indian associate enterprises. The only difference is that instead of directly making the contract with the Indian Associate Enterprise (AE), the assessee requested the Powergrid Corporation to enter into contract with its Indian associate enterprises (AE). The assessee requested the Powergrid Corporation to enter into 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 actual nature of transactions. In this case, the assessee got the contract from a Government of India body i.e. The Power Grid Corporation of India Ltd. The project is an approved project. It ..... X X X X Extracts X X X X X X X X Extracts X X X X
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