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TMI Blog2019 (1) TMI 1720X X X X Extracts X X X X X X X X Extracts X X X X ..... e has raised the following grounds of appeal in ITA No. 1064/Del/2013:- "1. That the assessing officer erred on facts and in law in completing the assessment of the appellant for the relevant assessment year, determining loss at Rs. 24,64,15,670, as against the loss of Rs. 75,55,99,323 returned by the appellant. Re: Existence of Permanent Establishment: 2. That the assessing officer erred on facts and in law in holding, on the basis of orders passed in assessment years 2007-08 and 2008-09, that the appellant had fixed place of business in India in terms of Article 5(1) of India Korea Double Taxation Avoidance Agreement ("DTAA"/"the Treaty"), in the form of Project office in India and that the appellant had executed Vasai East Development Project of ONGC (VED Project) through such project office. 2.1 That the assessing officer erred on facts and in law in not appreciating that since the activities carried out by the project office in India were of preparatory and auxiliary nature, no fixed place PE in India, in any case, was constituted having regard to provisions of Article 5(4) of the Treaty. 2.2 That the assessing officer erred on facts and in law in alleging that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of PE of the appellant in India. 6. That the assessing officer erred on facts and in law in disallowing deduction of expenses totaling Rs. 2,55,57,055 invoking the provisions of section 40(a)(i)/(ia) of the Act. 6.1 That the assessing officer erred on facts and in law in holding as aforesaid, without even specifying the provision under which tax was deductible from barge hire charges. 6.2 That the assessing officer erred on facts and in law in not appreciating that payment made by the appellant, a non-resident, to a non-resident service provider was not subject to tax deduction at source under section 195 of the Act." 3. Brief facts of the case shows that assessee is a company Incorporated in South Korea and is a tax resident of South Korea. It is engaged in the business of heavy engineering and was awarded the Vasai East development Project by oil and natural gas Corp Ltd for the purpose of survey, design, engineering, procurement, fabrication, NT crores and weight coating, Load out, tie down, sea fastening, transportation, installation and modification at existing facilities and hook up, testing, pre-commissioning, start-up and commissioning of the entire facilities. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Co. Ltd. v. Addl. DIT (International Taxation) [2013] 40 taxmann.com 165/[2014] 61 SOT 35 (Delhi - Trib.) (URO) where the issue was decided in favour of the revenue. He therefore held that incomes earned by the assessee outside India are held to be attributable to the permanent establishment in India by way of project office for the contract. The learned AO further asked the details of expenses incurred for earning this income and also the audit report for the assessment year. Further in the decision of the coordinate bench of the assessee for earlier years of profit was deemed at the rate of 25% of the income by the learned assessing officer is not supported by any basis of working and therefore the matter was set aside to the file of the learned assessing officer for ascertaining to what extent the activities of the business carried out through its Mumbai project office for deciding the percentage of such attribution of outside Indian activity to Indian permanent establishment. On the basis of the audited accounts of the assessee the learned assessing officer test check basis examine them and found that assessee has made payment for barge hire charges to some parties on which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he impugned assessment order. Later on 16/02/2013 he came to know about this order from the various file and immediately handed over the assessment order to the appellant. On receipt of the above order the assessee immediately filed the appeal on 22/2/2013. The learned authorised representative vehemently stated that assessee has only an authorised officer in India who was not conversant with the tax matters and further the assessee is a non-resident and all the directors of the appellant are residing outside India which caused this delay. He further stated that the delay is not deliberate or on account of any Malafied. He stated that even otherwise the assessee is not benefited by filing a delayed appeal. Therefore it was prayed that the appeal be admitted and adjudicated on the merits of the case in the interest of justice. 8. The learned Commissioner of income tax Department representative (international taxation) vehemently opposed the application of the assessee for condonation of delay stating that the reasons stated by the assessee does not inspire any confidence and therefore the delay should not be condoned. 9. We have carefully considered the rival contention and peruse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from this perspective, there was sufficient cause for condoning the delay in the institution of the appeal. The fact that it was the " State " which was seeking condonation and not a private party was altogether irrelevant. The doctrine of equality before law demands that all litigants, including the State as a litigant, are accorded the same treatment and the law is administered in an even-handed manner. There is no warrant for according a step-motherly treatment when the " State " is the applicant praying for condonation of delay. In fact, experience shows that on account of an impersonal machinery (no one in charge of the matter is directly hit or hurt by the judgment sought to be subjected to appeal) and the inherited bureaucratic methodology imbued with the note-making, file-pushing, and passing-on-the-buck ethos, delay on its part is less difficult to understand though more difficult to approve. In any event, the State which represents the collective cause of the community, does not deserve a litigant non grata status. The courts, therefore, have to be informed of the spirit and philosophy of the provision in the course of the interpretation of the expression " sufficient ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the audited accounts of the Project office available at Page 430 of Paperbook-3. The schedule categorically mentions that the employee remuneration was only to the extent of Rs. 28 Lakhs. The amount was paid to the two employees mentioned above. The accounts were duly placed before the assessing officer during the course of assessment proceedings. 2.4 It is further submitted that the assessee has consistently maintained that the Project office was merely carrying out communication and coordination activities, the assessing officer has brought no material on record to controvert the claim of the assessee. Reliance in this regard is placed on the decision of National Petroleum Construction Company [383 ITR 648] rendered by the Hon'ble Delhi High Court wherein it was held as under: "In absence of any material evidence to controvert the assessee's claim that its project office was only used as a communication channel, the same has to be accepted. Thus, the next aspect to be considered is whether acting as a communication channel would fall within the exception of clause (e) of paragraph 3 of article 5 of the DTAA. [Para 25]" 2.5 Your Honors are further, requested to take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts attributable to the PE is taxable. Para (l) of Article further lays down that the attributable profit can be determined by the apportionment of the total profits of the assessee to its various parts or on the basis of an assumption that the PE is a distinct and separate enterprise having its own profits and distinct from GE." 3. DISALLOWANCE UNDER SECTION 4o(a)(i)/ 4o(a)(ia) OF THE ACT. 3.1 The Ld. AO vide final assessment order passed under section 143(3)/i44C(i3) of the Act has disallowed the following expenses on the ground that barge hire charges have been paid to the following parties without deducting tax at source:- Logistics enterprise Pvt Ltd Rs. 9,75,000/- Teras Transporters Pte Ltd Rs. 2,45,54,555/- 3.2 The aforementioned expenses amounting to Rs. 9,75,000/- and Rs. 2,45,54,555/- were disallowed under Section 40(a)(ia) of the Act and section 40(a)(i) of the Act respectively. (A) Allowability of expenditure- payments made to Logistics enterprise Pvt Ltd 4.1 The Ld. AO has disallowed the payment made to Logistic Enterprise Pvt. Ltd towards barge hire charges under Section 4o(a)(ia) of the Act on account of non-deduction of tax at source. However, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Singapore ("DTAA"). 5.4 Charter and rental charges of the shipping business are specifically referred to in Article 8 of the Indo-Singapore DTAA. Hence, the same cannot be classified as royalty under Article 12 of the Indo-Singapore DTAA. The text of Article 8 of Indo-Singapore DTAA is reproduced as under: "ARTICLE 8 SHIPPING AND AIR TRANSPORT 1. Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State. 2. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency engaged in the operation of ships or aircraft 3. Interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 shall not apply in relation to such interest. 4. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic shall mean profits derived from the transportation by sea or air of passengers, mail, livestock or goods carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government of UAE would be applicable to the facts of the case, since it is more beneficial to the assessee. Article 8 of the DTAA, more particularly, sub-clause (2) clearly says that the profit from operation of the ship in international traffic will also include the charter or rental of ships incidental to such transportation. Therefore, this Tribunal is of the considered opinion that the profit arising to the non-resident company on charter of the vessel M.V. Thekkadi has to be taxed only in the UAE in view of the DTAA between Government of India and Government of UAE, more particularly, Article 8(1) of the DTAA. The material filed by the assessee clearly shows that the vessel M.V. Thekkadi was operated between Tuticorin Port to Mali Port in Maldives. Therefore, it operates in international traffic/waters." 5.10 Therefore, in light of the aforementioned judicial precedents, it is crystal clear that in absence of taxability of the rental / hiring charges paid to Teras Transporters Pte. Ltd in India, provisions of Section 195 of the Act would not be applicable and the assessee would not be required to deduct any taxes in India. Hence, no disallowance under Section 40(a)(i) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore he stated that on the basis of the little documents provided to the assessing Officer the learned assessing officer noted the functions carried out by the assessee during the year as compared to the functions during assessment year 2008 - 09. He further stated that no evidence was produced by the appellant either before the lower appellate authorities or before the coordinate bench to refute the same. He further analyzed the functions performed by the assessee for assessment year 2008 -09 vision of his 2009 - 10 and 2010 - 11. He further stated that no transfer pricing study report of the profit attribution study was furnished by the appellant for assessment year 2009 - 10. He further stated that appellant did not furnish any reply or other documents before the assessing officer consequent to the direction of the learned dispute resolution panel. Further with respect to the assessment year 2010 - 11, he further stated that even though the appellant furnished the profit attribution report after examining the same the learned assessing officer has observed that the functional analysis contained therein does not represent the correct picture of the project office in India as ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 of Article 7 of the said Agreement, it has been provided that profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. It, therefore, recognizes two tax identities of an enterprise. The said paragraph makes it clear that the profits of the enterprise may be taxed in the other State only so much of the same which is attributable to that permanent establishment. 5. Paragraph 2 of Article 7 is as follows :- "Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment." 6. In the event, an enterprise having a tax identity in one Contracting State for having a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has no obligation to either submit any tax return with, or pay any tax to India. The question still remains, whether it was right on the part of the Taxing Authority to assess incometax liability of the appellant as was assessed in the instant case. In other words, can it be said that the Agreement permitted the Indian Taxing Authority to arbitrarily fix a part of the revenue to the permanent establishment of the appellant in India? As aforesaid, appellant held out that a part of the revenue was received by it for doing certain work in India. It did not contend that even those works were done by or through its Project Office at Mumbai. On the other hand, there is not even a finding that 25 per cent of the gross revenue of the appellant was attributable to the business carried out by the Project Office of the appellant. One has to read Article 5 of the Agreement in order to understand what a permanent establishment is, in terms whereof "permanent establishment" means a fixed place of business through which business of an enterprise is wholly or partly carried on. In the instant case, according to the revenue, the Project Office of the appellant in Mumbai is the "permanent establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duce all the documents as decided by the learned assessing officer duly translated in English language along with the invoices and the nature of activities carried out by the assessee in accordance therewith. Accordingly ground number 4 and 5 of the appeal of the assessee is allowed with above direction. 20. Coming to the ground number 6 of the appeal of the assessee with respect to the disallowance under section 40 (a) (i) and (ia) of the act amounting to INR 25 557055/-. The 1st disallowances with respect to the payment made of INR 1 356923/- to M/s logistic enterprises private limited. The assessee has produced the copy of the debit note dated 3 is/6/2008 pertaining to the reimbursement of amount paid to month report in special economic John Ltd for M.V.Dolphin number 33 as instructed by the assessee. According to the above debit note it is crystal clear that the amount represents the reimbursement of the expenditure. As the above amount is reimbursement there is no requirement of tax deduction at source on the above sum. Even otherwise the assessee is a non-resident however the recipient of the income is a resident company. Therefore if the recipient company has incorporated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment order by assessing the income at Rs. 3,37,60,060 as against the returned loss of Rs. 6,00,88,170 based upon conjectures, surmises, preconceived notions and incorrect application of law. 1.1 While doing so, that the Ld. AO has erred merely mechanically relying upon the assessments framed in earlier years (i.e. AY 2007-08, 2008-09 and 2009-10) in respect of the Vasai East Development Project ('the contract' or 'VED'), without considering the detailed factual and legal submissions made by the appellant during the course of assessment proceeding. 1.2 Also, the Ld. AO ignored the decision of Hon'ble High Court of Uttarakhand dated December 27, 2013 in the case of appellant itself for AY 2007-08 ('the High Court order') wherein Hon'ble High Court set aside the order of the Hon'ble Income Tax Appellate Tribunal ('ITAT') and the assessment order in relation to attribution of outside India revenues to the alleged PE of the appellant in India. 2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in concluding that the appellant has a fixed place 'Permanent Establishment' ("PE") in India u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat on the facts and in the circumstances of the case and in law, the Ld. AO has erred in charging to tax the entire outside India revenues by ignoring the attribution in accordance with Article 7(1) and Article 7(2) of the Treaty. 5.2 That the Ld. AO has erred in ignoring the High Court order wherein it has been held that whether the project office of the appellant is a PE or not is of no consequence as far as attribution of revenue in relation to outside India activities is concerned, in the absence of any evidence to justify that the appellant was carrying any business activity through the PO. 6. That on the facts and in the circumstances of the case, the Ld. AO has erred in ignoring the expenses which resulted into net loss in respect of operations outside India in accordance with Article 7(3) of the Treaty. 6.1 Without admitting that the appellant is liable to tax in India, the Ld. AO has erred in not following the directions of Hon'ble DRP wherein it directed the ld. AO to apply the principles of attribution of income based on Arm's Length Principles (i.e. Function, asset and risk analysis of activities carried out in India) as per Article 7(2) of the Treaty whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. That the Ld. AO has erred in mechanically initiating proceedings under section 271(1) (c) of the Act." 25. The facts relating to that appeal shows that assessee filed its return of income on 8/10/2010 at the loss of INR 6 0086170. The draft assessment order was passed on 30/3/2013 on the identical facts and circumstances determining the total income of the assessee at INR 6 5206270/-. In the similar circumstances and the fact the learned assessing officer has attributed the income at the rate of 25% of INR 3 27043527/- being INR 8 1760881/- from outside India activities holding that assessee has a permanent establishment in India in the form of a project office and the profit as attributable to the same. In this year also the assessee failed to substantiate the various expenditure with respect to the profit attributable to the permanent establishment. Further the assessee has incurred and expenditure of INR 21 7660 7783 under the head construction expenses and the assessee could only filed copies of the bills on a simple basis and therefore the learned assessing officer disallowed 20% of the above expenses being INR 4 3533556 on a dock basis. On the objection before the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly ground number 1 - 6 of the appeal of the assessee is partly allowed with above direction.
28. With respect to ground number 7 of the adhoc disallowance of INR 1 2087351 of the expenditure incurred under the head construction expenses for which the assessee could not produce the bills, in the interest of the justice 1 more opportunities given to the assessee to produce the necessary bills as submitted by the learned authorised representative before the assessing officer. The learned assessing officer may examine the details in the bills produced by the assessee, if any, and then decide the whole issue afresh. Accordingly ground number 7 -8 of the appeal of the assessee are set aside to the file of the learned assessing officer. Accordingly these grounds are allowed with above direction.
29. Ground number 9 - 11 of the appeal of the assessee are general in nature and therefore in absence of any specific arguments, there dismissed.
30. Accordingly appeal of the assessee for assessment year 2010 - 11 is partly allowed for statistical purposes.
31. Accordingly appeal of the assessee for assessment year 2009 - 10 and 2010 - 11 is partly allowed for statistical purposes. X X X X Extracts X X X X X X X X Extracts X X X X
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