ADIT Intl. Taxation, v. Clough Engineering Ltd,

ITA 4771/DEL/2007 | 2003-2004
Pronouncement Date: 29-02-2012 | Result: Partly Allowed

Appeal Details

RSA Number 477120114 RSA 2007
Assessee PAN IZAIR1968M
Bench Delhi
Appeal Number ITA 4771/DEL/2007
Duration Of Justice 4 year(s) 2 month(s) 19 day(s)
Appellant ADIT Intl. Taxation,
Respondent Clough Engineering Ltd,
Appeal Type Income Tax Appeal
Pronouncement Date 29-02-2012
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 29-02-2012
Date Of Final Hearing 08-12-2016
Next Hearing Date 08-12-2016
Assessment Year 2003-2004
Appeal Filed On 10-12-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B NEW DELHI BEFORE SHRI G.D. AGRAWAL HONBLE PR ESIDENT AND SHRI SUDHANSHU SRIVASTAVA JUDICIAL MEM BER ITA NO. 4986/DEL/2007 ASSESSMENT YEAR: 2003-04 CLOUGH ENGINEERING LTD. VS ASSTT. COMMISSIO NER OF INCOME TAX LEVEL-2 22 MOUNT ST. PERTH (OSD) RAN GE 1 DEHRADUN. WEST AUSTRALIA AUSTRALIA. ITA NO. 4771/DEL/2007 ASSESSMENT YEAR: 2003-04 ASSTT. COMMISSIONER OF INCOME TAX VS CLOUGH E NGINEERING LTD. (OSD) RANGE 1 DEHRADUN. AUSTRALIA. (APPELLANT) (RESP ONDENT) APPELLANT BY : SHRI DAKSH S. BHARDWAJ ADV. RESPONDENT BY : SHRI ANUJ ARORA CIT DR ORDER PER SUDHANSHU SRIVASTAVA JM THESE ARE CROSS APPEALS PERTAINING TO AY 2003-04. 2. THE ASSESSEE IS A NON-RESIDENT COMPANY INCORPORA TED IN AUSTRALIA. THE RETURN WAS FILED AT AN INCOME OF RS . 1 49 15 800/- CLAIMING THE INCOME TAXABLE AS PER THE DOUBLE TAXAT ION AVOIDANCE AGREEMENT (DTAA) WITH AUSTRALIA. THE ASS ESSEE HAS BEEN EXECUTING TURNKEY CONTRACTS IN INDIA MAINLY O FFSHORE FOR INSTALLATION OF INFRASTRUCTURE FOR CARRYING OUT OIL EXPLORATION ACTIVITIES FOR COMPANIES SUCH AS ONGC CAIRN ENERGY ETC. DURING I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 2 THE RELEVANT PREVIOUS YEAR THE ASSESSEE EXECUTED A NOTHER CONTRACT WITH NIKO RESOURCES AND THE SCOPE OF WORK CONSISTED OF ENGINEERING PROCUREMENT INSTALLATION PRE-COMMISS IONING AND COMMISSIONING ASSISTANCE OF THE OFFSHORE AND ONSHOR E WORK AT HAZIRA . THE ASSESSEE RECEIVED RS. 73 36 73 348/- FOR THE W ORK EXECUTED OUTSIDE INDIA BUT PERTAINING TO THIS CONTR ACT. THE AO TREATED 2% OF SUCH RECEIPTS AS INCOME AND ASSESSMEN T WAS COMPLETED AT AN INCOME OF RS.15 26 89 530/- WITHOUT ALLOWING THE CARRY FORWARD OF THE LOSSES. THE ASSESSING OFF ICER HELD THAT THE ASSESSEE HAD A PERMANENT ESTABLISHMENT (PE) IN INDIA WITH RESPECT TO ITS HAZIRA OFFSHORE DEVELOPMENT PROJECT FOR NIKO RESOURCES LTD. HE THEREFORE TOOK AT 2% OF THE RECE IPT AS INCOME AND DID NOT ALLOW BENEFICIAL TREATMENT TO THE ASSES SEE IN TERMS OF THE PROVISIONS OF SECTION 90(2) OF THE INCOME TAX A CT 1961 WHICH PROVIDE THAT THE PROVISIONS OF THE INCOME TAX ACT T HAT ARE MORE BENEFICIAL TO THE ASSESSEE HAVE TO BE APPLIED WHERE DTAA EXISTS WITH THE NATIVE COUNTRY OF A NON-RESIDENT ASSESSEE. IT WAS THE ASSESSEES CONTENTION BEFORE THE ASSESSING OFFICER THAT SINCE THE ASSESSEE WAS ENGAGED IN THE BUSINESS IN CONNECTION WITH EXPLORATION AND PRODUCTION OF MINERAL OILS THE PRO VISIONS OF SECTION 44BB WERE APPLICABLE AND THEREFORE THE IN COME SHOULD I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 3 HAVE BEEN WORKED OUT U/S 44BB OF THE ACT. IT WAS T HE ASSESSEES CONTENTION THAT NO WORK HAD BEEN DONE IN INDIA IN R ESPECT OF THE CONTRACT FOR NIKO RESOURCES LTD. AND ALL THE WORK I N RESPECT OF WHICH INVOICES HAD BEEN RAISED AND AMOUNTS HAVE BEE N RECEIVED HAS BEEN CARRIED OUT TOTALLY OUTSIDE INDIA. HOWEVER THE ASSESSING OFFICER DID NOT AGREE WITH THE CONTENTIONS OF THE A SSESSEE AND HELD THAT THE ASSESSEE WAS ASSESSABLE UNDER ARTICLE VII OF DTAA BETWEEN INDIA AND AUSTRALIA AND ACCORDINGLY THE AM OUNT OF RS. 1 46 73 467/- WAS ADDED TO THE INCOME OF THE ASSESS EE. 2.1 FURTHER THE ASSESSEE HAD OFFERED INTEREST IN COME ON INCOME TAX REFUND AND BANK INTEREST FOR BEING TAXED @15% AS PER THE RETURN OF INCOME. IT WAS THE CONTENTION OF THE ASSESSEE THAT PARA 2 OF ARTICLE XI OF DTAA BETWEEN INDIA AND AUST RALIA PROVIDED THAT THE TAX SHALL NOT EXCEED 15% OF GROSS AMOUNT O F INTEREST. HOWEVER THE ASSESSING OFFICER HELD THAT THE ASSESS EE HAD DERIVED INTEREST INCOME ON REFUND OF TDS MADE OUT OF BUSINE SS RECEIPTS AS ALSO THE INTEREST FROM BANK WAS ON BUSINESS FUND S. THE ASSESSING OFFICER HELD THAT THE INTEREST INCOME WAS THEREFORE DIRECTLY CONNECTED WITH THE BUSINESS RECEIPTS AND W AS THEREFORE ASSESSABLE UNDER ARTICLE VII OF INDO AUSTRALIA DTAA AS BUSINESS INCOME TO BE SUBJECTED TO NORMAL RATE OF TAX. I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 4 2.2 AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO T HE LD. CIT (A) WHO REJECTED THE ASSESSEES GROUND THAT THE INTERES T INCOME SHOULD NOT BE TREATED AS BUSINESS INCOME DIRECTLY C ONNECTED WITH PERMANENT ESTABLISHMENT (PE). THE LD. CIT(A) HOWE VER DELETED AN ADDITION OF RS. 1 46 73 467/- BY HOLDING THAT PE HAS TO BE RECKONED PROJECT WISE AND SINCE THE ACTIVITIES WITH REFERENCE TO THE NIKO CONTACT WERE CARRIED OUT COMPLETELY OUTSID E INDIA THERE WAS NO TAX LIABILITY WITH REGARD TO THESE OVERSEAS SERVICES. NOW BOTH THE DEPARTMENT AS WELL AS THE ASSESSEE HAVE AP PROACHED THE ITAT AND HAVE RAISED THE FOLLOWING GROUNDS:- ITA 4986/DEL/2007 FILED BY THE ASSESSEE: 1. THAT ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW THE COMMISSIONER OF INCOME TAX (APPEAL) [HEREINAFTER REFERRED TO AS CIT (A)] HAS ERRED IN TREATING THE INTEREST INCOME AS BUSINESS INCOME DIRECTLY CONNECT ED WITH PERMANENT ESTABLISHMENT AND TAXING THE SAME. CIT (A ) HAS THEREBY ERRED IN IGNORING THE PROVISIONS OF TAX TRE ATY BETWEEN INDIA AND AUSTRALIA. 2. THAT ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT (A) HAS ERRED IN REJECTING GROUND O F YOUR APPELLANT INTEREST GRANTED BY DEPARTMENT AND WITHDR AWN IN SUBSEQUENT YEAR SHOULD NOT BE TAXED IN GRANTING OF INTEREST. 3. THAT ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT (A) HAS ERRED IN UPHOLDING THE LEVY OF INTEREST UNDER SECTION 234D OF THE ACT. I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 5 ITA NO. 4771/DEL/2007 FILED BY THE REVENUE: 1. THE LEARNED CIT (APPEALS) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS. L 46 73 467/- IN RESPECT OF HAZIRA PROJECT BY HOLDING THAT THE WORK IN RESPECT OF THIS PROJECT WAS PERFORMED OUTSIDE INDIA WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAD A PE IN INDIA AND THE CONTRACT IS FOR COMPOSITE WORK AND ONLY PART PORTION OF CONTRACT WAS CARRIED OUTSIDE I NDIA BY SUB CONTRACTING THAT PART TO SUB CONTRACTOR. 2. THAT THE LD.CIT (APPEALS) HAS ERRED IN LAW AND ON FACTS IN RELYING UPON THE DECISION OF HONBLE SUPRE ME COURT IN THE CASE OF HYUNDAI HEAVY INDUSTRIES THE W ORK WAS CARRIED OUT BEFORE THE PE WAS CREATED WITH IS NOT THE CASE IN THE CASE OF THE ASSESSEE COMPANY. 3. THAT THE LD.CIT(APPEALS) HAS ERRED IN LAW AND O N FACTS IN ALLOWING SET OF LOSS FOR A.Y. 2001-02 ON T HE BASIS THAT THE ORDER U/S 263 PASSED BY CIT HAS BEEN CANCE LLED BY THE 1TAT A DECISION WHICH HAS NOT BEEN ACCEPTED BY THE DEPARTMENT. 4. THAT THE LD. CIT (APPEALS) HAS ERRED IN LAW AN D ON FACTS IN CANCELLING THE INTEREST CHARGED U/S 234B. 2.3 A SPECIAL BENCH WAS CONSTITUTED ON 7.10.2010 TO DECIDE GROUND NO. 1 OF THE ASSESSEES APPEAL. THE QUESTIO N WAS AS UNDER:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE INTEREST ON INCOME TAX REFUND AND FIXED DEPOS ITS WITH THE BANK IS LIABLE TO TAX WITH REFERENCE TO AR TICLE 7 READ WITH PARAGRAPH NO. 4 OF ARTICLE 11 OR PARA NO. 2 OF ARTICLE 11 OF INDO-AUSTRALIA DOUBLE TAXATION AVOID ANCE AGREEMENT? I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 6 2.4 THE SPECIAL BENCH DECIDED THE QUESTION AS UNDER :- 11.4. THUS WE ARE AGAIN LEFT WITH THE FUNDAMENTAL QUESTION AS TO WHETHER THE DEBT CLAIM IN THIS CASE CAN BE SA ID TO BE EFFECTIVELY CONNECTED WITH THE PE. WE HAVE ALREA DY HELD THAT THE CLAIM IS CONNECTED WITH THE PE IN THE SENSE THAT IT HAS ARISEN ON ACCOUNT OF TAX DEDUCTIO N AT SOURCE FROM THE RECEIPTS OF THE PE. HOWEVER IT IS ALSO A FACT THAT PAYMENT OF TAX IS THE RESPONSIBILITY OF T HE FOREIGN COMPANY. THE SAME IS DETERMINED AFTER COMPUTATION OF ITS INCOME AND THE TAX FORUM NOT AN EXPENDITURE FOR EARNING THE INCOME BUT AN ITEM OF APPROPRIATION OF PROFIT. THEREFORE EVEN IF THE DEB T IS CONNECTED WITH THE RECEIPTS OF THE PE IT CANNOT BE SAID TO BE EFFECTIVELY CONNECTED WITH SUCH RECEIPTS BECA USE THE RESPONSIBILITY TO PAY THE TAX LIES ON THE SHOUL DERS OF THE ASSESSEE COMPANY FROM THE FINAL PROFIT ASCERTAI NED AS ON THE LAST DATE OF THE PREVIOUS YEAR AND ON CLO SING THE BOOKS OF ACCOUNT. IT IS FOR THE COMPANY TO PAY THE TAX FROM ANY SOURCE AVAILABLE WITH IT. IT SO HAPPEN ED IN THIS CASE THAT THE TAX GOT AUTOMATICALLY DEDUCTED F ROM THE RECEIPTS OF THE PE BY OPERATION OF LAW. SUCH COLLECTION OF TAX BY FORCE OF LAW WOULD NOT ESTABLI SH EFFECTIVE CONNECTION OF THE INDEBTEDNESS WITH THE P E AS ULTIMATELY IT IS ONLY THE APPROPRIATION OF PROFIT O F THE ASSESSEE COMPANY. HOWEVER WE MAY ADD THAT WE DO NOT VENTURE TO SAY THAT THE INTEREST INCOME HAS TO BE NECESSARILY BUSINESS INCOME IN THE NATURE FOR ESTABLISHING THE EFFECTIVE CONNECTION WITH THE PE BECAUSE THAT WOULD RENDER PROVISION CONTAINED IN PARAGRAPH 4 OF ARTICLE XI REDUNDANT. THUS THERE MA Y BE CASES WHERE INTEREST MAY BE TAXABLE UNDER THE AC T UNDER THE RESIDUARY HEAD AND YET BE EFFECTIVELY CONNECTED WITH THE PE. THE BANK INTEREST IN THIS CA SE IS AN EXAMPLE OF EFFECTIVE CONNECTION BETWEEN THE PE A ND THE INCOME AS THE INDEBTEDNESS IS CLOSELY CONNECTED WITH THE FUNDS OF THE PE. HOWEVER THE SAME CANNOT BE SAID IN RESPECT OF INTEREST ON INCOME-TAX REFUND. S UCH INTEREST IS NOT EFFECTIVELY CONNECTED WITH PE EITHE R ON THE BASIS OF ASSET TEST OR ACTIVITY TEST. ACCORDING LY IT IS HELD THAT THIS PART OF INTEREST IS TAXABLE UNDER PARAGRAPH NO. 2 OF ARTICLE XL THUS THE GROUND REFERRED TO THE SPECIAL BENCH IS PARTLY ALLOWED. TH E DIVISION BENCH SHALL DISPOSE OFF THE APPEAL IN CONFORMITY WITH THIS ORDER. I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 7 2.5 SUBSEQUENT TO THE ORDER OF THE SPECIAL BENCH A DIVISION BENCH OF THE ITAT DELHI DISPOSED OF BOTH THE APPEAL S VIDE ORDER DATED 29/02/2012 PARTLY ALLOWING BOTH THE APPEALS F OR STATISTICAL PURPOSES. 2.6 HOWEVER THE ASSESSEE MOVED MISCELLANEOUS APPLI CATIONS AGAINST THE ORDER DATED 29/02/2012 PASSED BY THE IT AT WHICH WERE ALLOWED AND THE ORDER WAS RECALLED VIDE ORDER DATED 31/12/2013 IN MA NOS. 88 AND 89/DEL/2012. 2.7 NOW THESE APPEALS HAVE COME UP FOR HEARING BEFO RE THIS BENCH. 2.8 AT THE OUTSET LD. DR SUBMITTED THAT IT HAS BE EN THE DEPARTMENTS CONTENTION DURING EARLIER HEARINGS THA T THE REVENUE HAS ALREADY FILED AN APPEAL BEFORE THE HON'BLE HIGH COURT OF UTTARAKHAND AGAINST THE ORDER OF THE SPECIAL BENCH AND THE SAME STOOD ADMITTED AND THEREFORE THE SAID APPEAL SHOULD BE REFERRED TO A LARGER BENCH. THE LD. AR OPPOSED THE DEPARTMENTS PLEA. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CARE FULLY PERUSED THE RELEVANT MATERIAL PLACED ON RECORD. IT IS OUR C ONSIDERED OPINION THAT A LARGER BENCH COULD BE CONSTITUTED IN SOME OTHER I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 8 CASE BUT IT MAY NOT BE OPEN TO CONSTITUTE A LARGER BENCH IN THE SAME CASE AND THE SAME APPEAL AS IT IS NOT OPEN TO THE TRIBUNAL TO REVIEW ITS OWN JUDGEMENT. THEREFORE LOOKING INT O THE FACTS AND CIRCUMSTANCES OF THE CASE WE DEEM IT FIT THAT THE ASSESSEE BE PERMITTED TO PRESS ITS GROUND OF APPEAL PERTAINING TO INTEREST ON INCOME TAX REFUNDS BEFORE US. 3. ON GROUND NO. 1 OF THE ASSESSEES APPEAL THE LD . AR RELIED ON THE DECISION OF THE SPECIAL BENCH IN THE ASSESSE ES OWN CASE AS REFERRED TO ABOVE. GROUND NO.2 WAS NOT PRESSED BY THE ASSESSEE AND THE SAME IS DISMISSED AS NOT PRESSED. 3.1 IN RESPONSE THE LD. CIT DR PLACED RELIANCE ON THE JUDGMENT OF THE UTTARAKHAND HIGH COURT IN THE CASE OF PRIDE FORAMER SAS REPORTED IN (2013) 40 TAXMANN.COM 100 (UTTARAKHAND HIGH COURT). 3.2 ON THE DEPARTMENTS GROUND CHALLENGING THE DEL ETION OF ADDITION OF RS.1 46 73 467/- IN RESPECT OF THE HAZI RA PROJECT LD. CIT DR SUBMITTED THAT LD. CIT(A) HAS HELD THAT THE ACTIVITY FELL UNDER CLAUSE 2 WHEREAS THE ASSESSING OFFICER HAS HE LD IT TO BE UNDER CLAUSE (III)(B) WHICH WAS AFTER CORRECT APPRE CIATION OF FACTS I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 9 ON RECORD. LD. CIT DR SUBMITTED THAT IT WAS A DEEM ED PE IN TERMS OF ARTICLE 5(3)(B) OF THE DTAA. IT WAS SUBMI TTED THAT IT IS ONLY THE ASSESSEES CLAIM THAT NO ACTIVITY REGARDIN G THE PROJECT WAS CARRIED OUT IN INDIA BUT THE SAME IS NOT SUBSTA NTIATED FROM THE RECORDS. 3.3 LD. CIT D.R. ALSO FILED WRITTEN SUBMISSIONS TO BRING OUT THE IMPORT OF THE PHRASE IN CONNECTION WITH. THE SAME IS BEING REPRODUCED FOR A READY REFERENCE:- PHRASE IN CONNECTION WITH 1. DURING THE RELEVANT PERIOD THE ARTICLE 5 (3) OF IND IA- AUSTRALIA DTAA READ AS UNDER: '3. AN ENTERPRISE SHALL BE DEEMED TO HAVE A PERMANE NT ESTABLISHMENT IN ONE OF THE CONTRACTING STATES AND TO CARRY ON BUSINESS THROUGH THAT PERMANENT ESTABLISHMENT IF: (A) . (B) IT CARRIES ON ACTIVITIES IN THAT STATE IN CONNE CTION WITH THE EXPLORATION FOR OR EXPLOITATION OF NATURAL RESOURCES IN THAT STATE; OR THE PHRASE IN CONNECTION WITH HAS AN EXPANSIVE MEANING AND IS SAME AS HAVING TO DO WITH OR IN RELATION TO. IN OTHER WORDS A SLIGHTLY REMOTE CO NNECTION MAY SUFFICE FOR BEING COVERED UNDER RELEVANT PROVIS IONS. 2. THIS NEEDS TO BE CONTRASTED WITH THE PHRASE USED OR TO BE USED WHICH EMPHASIZES THAT THERE HAS TO BE A DI RECT OR CLOSE NEXUS. I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 10 3. THE SCOPE AND AMBIT OF THE WORDS IN CONNECTION WITH HAS BEEN EXPLAINED BY THE AAR IN ITS DECISION IN GE OFIZYKA TORUN SP.ZO.O IN RE [2010] 186 TAXMAN 213 (AAR) RELEVANT PORTION OF WHICH IS REPRODUCED BELOW: 6.1 THE EXPRESSION IN CONNECTION WITH IS IMPORTANT AND HAS TO BE CONSTRUED TO HAVE EXPANSIVE MEANING. WHILE EXPLAINING THE MEANING OF SIMILAR AND INTERCHANGEABLE EXPRESSIONS VIZ. 'PERTAINING TO' AND 'IN RELATION TO' THE SUPREME COURT OBSERVED IN THE CASE OF DOYPACK SYSTEMS (P.) LTD. V. UNION OF INDIA 1988 (36) ELT201 48. THE EXPRESSION IN RELATION TO (SO ALSO PER TAINING TO) IS A VERY BROAD EXPRESSION WHICH PRESUPPOSES ANOTHER SUBJECT-MATTER. THESE ARE WORDS OF COMPREHENSIVENESS WHICH MIGHT BOTH HAVE A DIRECT SIGNIFICANCE AS WELL AS AN INDIRECT SIGNIFICANCE DEPENDING ON THE CONTEXT SEE STATE WAKF BOARD V. ABDUL AZIZ AIR 1968 MAD. 79 81 PARAGRAPHS 8 AND 10 FOLLOWING AND APPROVING NITAI CHARAN BAGCHI V. SURESH CHANDRA PAUL 66 C.W.N. 767 SHYAM LAI V. M. SHAYAMLAL AIR 1933 ALL. 649 AND 76 CORPUS JURIS SECUNDUM 621. ASSUMING THAT THE INVESTMENTS IN SHARES AND IN LANDS DO NOT FORM PART OF THE UNDERTAKINGS BUT ARE DIFFERENT SUBJECT-MATTERS EVE N THEN THESE WOULD BE BROUGHT WITHIN THE PURVIEW OF T HE VESTING BY REASON OF THE ABOVE EXPRESSIONS. IN THIS CONNECTION REFERENCE MAY BE MADE TO 76 CORPUS JURIS SECUNDUM AT PAGES 620 AND 621 WHERE IT IS STATED TH AT THE TERM RELATE IS ALSO DEFINED AS MEANING TO BR ING INTO ASSOCIATION OR CONNECTION WITH. IT HAS BEEN CL EARLY MENTIONED THAT RELATING TO HAS BEEN HELD TO BE EQUIVALENT TO OR SYNONYMOUS WITH AS TO CONCERNING WITH AND PERTAINING TO. THE EXPRESSION PERTAINING TO IS AN EXPRESSION OF EXPANSION AND NOT OF CONTRACTIO N.' (P. 219) 6.2 IN THE DECISION OF BRITISH COLUMBIA APPELLATE COURT VANCOUER IN NANAIMO COMMUNITY HOTEL LTD. V. CANADA [1944] 4 DLR 638 WHICH AROSE UNDER THE EXCISE PROFI TS I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 11 TAX ACT 1940 THE FOLLOWING PASSAGE IS INSTRUCTIVE OF THE REAL IMPORT OF THE PHRASE 'IN CONNECTION WITH': 'MR. CUNLIFEE ARGUES THAT THAT SECTION PRESUPPOSES THAT AN ASSESSMENT HAS BEEN MADE AND THAT AS I UNDERSTAND HIM THE WORDS 'IN CONNECTION WITH' MEAN 'CONSEQUENT UPON.' I DO NOT THINK THAT IS THE CORRE CT CONSTRUCTION TO BE PUT UPON THESE WORDS. ONE OF THE VERY GENERALLY ACCEPTED MEANINGS OF 'CONNECTION ' I S 'RELATION BETWEEN THINGS ONE OF WHICH IS BOUND UP W ITH OR INVOLVED IN ANOTHER'; OR AGAIN 'HAVING TO DO WIT H'. THE WORDS INCLUDE MATTERS OCCURRING PRIOR TO AS WEL L AS SUBSEQUENT TO OR CONSEQUENT UPON SO LONG AS THEY AR E RELATED TO THE PRINCIPAL THING. THE PHRASE 'HAVING TO DO WITH' PERHAPS GIVES AS GOOD A SUGGESTION OF THE MEANING AS COULD BE HAD. I THINK SECTION 66 IS SUFF ICIENT TO OUST THE JURISDICTION OF THIS COURT TO DEAL WITH A DECISION ON WHICH AN ASSESSMENT IS SUBSEQUENTLY MADE. ' 4.IN THAT CASE THE COURT WAS WITH INTERPRETING SEC TION 66 OF THE INCOME WAR TAX ACT WHICH READS AS UNDER: '66. SUBJECT TO THE PROVISIONS OF THIS ACT THE EXCHEQUER COURT SHALL HAVE EXCLUSIVE JURISDICTION T O HEAR AND DETERMINE ALL QUESTIONS THAT MAY ARISE IN CONNECTION WITH ANY ASSESSMENT MADE UNDER THIS ACT. ' 3.4 LD. CIT DR SUBMITTED THAT IN VIEW OF THESE JU DICIAL PRECEDENTS ON THE SCOPE OF THE WORDS IN CONNECTION WITH THE ASSESSEES CLAIM REGARDING THE APPLICABILITY OF PRO VISIONS OF INDO- AUSTRALIA DTAA WAS NOT ACCEPTABLE. LD. CIT DR ALSO SUBMITTED THAT THE DEPARTMENTS GROUND REGARDING SET OFF OF L OSSES MAY BE RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR D UE VERIFICATION AND EXAMINATION. I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 12 3.5 IN RESPONSE THE LD. AR PLACED RELIANCE ON THE ORDER OF THE LD. CIT(A) AND SUBMITTED THAT THE LD. CIT(A) HAS GI VEN A CONCRETE FINDING THAT FROM THE INVOICES IT WAS CLEAR THAT T HE ENGINEERING SERVICES WERE SUB-CONTRACTED TO A SINGAPORE BASED C OMPANY AND THAT THE SERVICES WERE PROVIDED IN SINGAPORE ONLY. LD. AR SUBMITTED THAT THE LD. CIT (A) HAS GIVEN THE FINDIN G THAT AS PER THE CONTRACT THE WORK IN RESPECT OF THE HAZIRA PRO JECT WAS PERFORMED OUTSIDE INDIA THE ASSESSING OFFICER WAS NOT RIGHT IN TREATING 2% OF THE RECEIPTS AS INCOME. 3.6 LD. AR FURTHER SUBMITTED THAT THE ASSESSEE WAS IN THE BUSINESS OF SETTING UP INFRASTRUCTURE FOR EXPLORATI ON OF OIL WHICH CONSISTED OF ONLY LAYING THROUGH THE PIPELINES AND THEREFORE THE ASSESSEES CASE WOULD NOT FALL WITHIN THE AMBIT OF THE PHRASE IN CONNECTION WITH. LD. AR ALSO SUBMITTED THAT EXPLA NATION (1) TO SECTION 9 PROVIDED THAT PROFIT ATTRIBUTABLE ONLY TO ACTIVITIES IN INDIA HAS TO BE TAXED IN INDIA AND SINCE THERE WAS NO ACTIVITY IN INDIA WITH REGARD TO THE SAID PROJECT IN THE YEAR U NDER CONSIDERATION NO INCOME/PROFIT CAN BE ATTRIBUTABL E TO THE SAID PROJECT FOR THE SAID YEAR. LD. AR ALSO REFERRED TO ARTICLE VII OF THE I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 13 DTAA TO EMPHASISE HIS CONTENTION. 3.7 ON THE ISSUE OF SET OFF OF LOSSES THE LD. AR SUBMITTED THAT THE ASSESSEE HAD NO OBJECTION IN THE ISSUE BEING SE T ASIDE TO THE FILE OF THE ASSESSING OFFICER FOR VERIFICATION AND ADJUDICATION. 4.0 WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE PRODUCED THE MATERIAL ON RECORD. AS FAR AS GROUND NO. 1 OF T HE ASSESSEES APPEAL IS CONCERNED IT IS SEEN THAT THE SPECIAL BE NCH HAS DISPOSED OF THE ISSUE IN PARAGRAPH 11.4 OF ITS ORDE R BY OBSERVING .....HOWEVER WE MAY ADD THAT WE DO NOT VENTURE T O SAY THAT THE INTEREST INCOME HAS TO BE NECESSARILY BUSINESS INCO ME IN THE NATURE FOR ESTABLISHING THE EFFECTIVE CONNECTION WI TH THE PE BECAUSE THAT WOULD RENDER PROVISION CONTAINED IN PA RAGRAPH 4 OF ARTICLE XI REDUNDANT. THUS THERE MAY BE CASES WHER E INTEREST MAY BE TAXABLE UNDER THE ACT UNDER THE RESIDUARY HE AD AND YET BE EFFECTIVELY CONNECTED WITH THE PE. THE BANK INTE REST IN THIS CASE IS AN EXAMPLE OF EFFECTIVE CONNECTION BETWEEN THE P E AND THE INCOME AS THE INDEBTEDNESS IS CLOSELY CONNECTED WIT H THE FUNDS OF THE PE. HOWEVER THE SAME CANNOT BE SAID IN RESPECT OF INTEREST ON INCOME TAX REFUND. SUCH INTEREST IS NOT EFFECTIVELY CONNECTED WITH PE EITHER ON THE BASIS OF ASSET TEST OR ACTIVITY TE ST. ACCORDINGLY IT I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 14 IS HELD THAT THIS PART OF INTEREST IS TAXABLE UNDER PARAGRAPH NO. 2 OF ARTICLE XI. 4.01 ACCORDINGLY IN VIEW OF THE DECISION OF THE SPECIAL BENCH AS AFORESAID REPRODUCED WE ALLOW GROUND NO. 1 OF THE ASSESSEES APPEAL. GROUND NO. 2 OF THE ASSESSEES APPEAL HAS N OT BEEN PRESSED BY THE ASSESSEE AND THE SAME IS DISMISSED A S NOT PRESSED. AS FAR AS GROUND NO. 3 OF THE ASSESSEES A PPEAL IS CONCERNED IT CHALLENGES THE LEVY OF INTEREST UNDER SECTION 234D OF THE ACT. AS THIS GROUND IS CONSEQUENTIAL NO AD JUDICATION IS CALLED FOR. 4.02 IN THE RESULT THE ASSESSEES APPEAL STANDS P ARTLY ALLOWED. 4.1 AS FAR AS THE DEPARTMENTS APPEAL IS CONCERNED GROUND NUMBERS 1 AND 2 CHALLENGE THE DELETION OF ADDITION OF RS. 14 673 467/- IN RESPECT OF THE HAZIRA PROJECT. A PE RUSAL OF THE IMPUGNED ORDER SHOWS THAT THE LD. CIT APPEALS HAS G IVEN THE RELEVANT FINDING IN PARAGRAPH 3.2 OF THE IMPUGNED O RDER WHICH READS AS UNDER: I HAVE GONE THROUGH THE ORDER OF THE AO AND THE SUBMISSIONS OF THE AR VERY CAREFULLY. THE APPELLANT IS A CONTRACTOR WITH REFERENCE TO THE CONTRACT ENTERED W ITH I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 15 M/S NIKO RESOURCES. THE TECHNICAL REQUIREMENTS IN THE FORM OF DESIGN ENGINEERING SPECIFICATION ETC HAVE BEEN PROVIDED BY M/S NIKO RESOURCES TO THE APPELLANT WHO HAS TO EXECUTE THE CONTRACT AS PER THE SPECIFICATIO NS. IT IS AN ADMITTED FACT THAT ALL THE ACTIVITIES WITH RE FERENCE TO NIKO CONTRACT WERE CARRIED OUT BY THE APPELLANT COMPLETELY OUTSIDE INDIA. EVEN THE INSIDE INDIA ACTIVITIES DID NOT COMMENCE BEFORE 2004 AND THE APPELLANT HAD NOT ESTABLISHED ANY OFFICE/PLACE OF BUSINESS IN INDIA IN RELATION TO NIKO CONTRACT IN F Y 2002 03. IT IS A SETTLED POSITION THAT PE HAS TO BE RE CKONED PROJECT WISE. DURING THE PREVIOUS YEAR ENDING ON 31.03.2003 APPELLANT HAS UNDERTAKEN ONLY A PART OF THE ACTIVITY RELATING TO DESIGNING AND THIS WORK WA S CARRIED OUT ENTIRELY OUTSIDE INDIA. THE SUPREME COU RT JUDGEMENT IN THE CASE OF ISHIKAMA HEAVY INDUSTRIES LTD 271 ITR 193 HAS HELD THAT IN ORDER TO ATTRACT T HE TAXING PROVISIONS OF I.T. ACT THERE HAS TO BE SOME ACTIVITIES CONDUCTED TO PERMANENT ESTABLISHMENT (PE ). THERE WOULD BE NO TAX LIABILITY WITH REGARD TO OVER SEAS SERVICES EVEN UNDER THE DTAA. FROM THE INVOICES IT IS CLEAR THAT ENGINEERING SERVICES WERE SUB CONTRACTED TO A SINGAPORE-BASED COMPANY AND SERVICES WERE PERFORMED IN SINGAPORE ONLY. AS THE WORK IN RESPECT OF HAZIRA PROJECT WAS PERFORMED OUTSIDE INDIA THE AO WAS NOT RIGHT IN TR EATING 2% OF THE RECEIPTS AS INCOME. RELIANCE IS ALSO PLAC ED ON THE DECISION OF SUPREME COURT IN THE CASE OF CIT VE RSUS HYUNDAI INDUSTRIES CO LTD 291 ITR 482 (SC). THE AO IS DIRECTED TO DELETE THE ADDITION OF RS. 14 673 467/- . 4.1.1 THIS FINDING OF FACT BY THE LD. CIT APPEALS C OULD NOT BE NEGATED BY THE DEPARTMENT. THEREFORE WE FIND NO RE ASON TO INTERFERE WITH THE FINDINGS OF THE LD. CIT APPEALS AND WE UPHOLD HIS ADJUDICATION ON THIS ISSUE. ACCORDINGLY GROUND NUMBERS 1 AND 2 OF THE DEPARTMENTS APPEAL ARE DISMISSED. I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 16 4.2 AS FAR AS GROUND NO. 3 OF THE DEPARTMENTS APPE AL IS CONCERNED BOTH THE PARTIES HAVE GIVEN THEIR CONSEN T THAT THIS GROUND MAY BE RESTORED TO THE FILE OF THE AO. ACCOR DINGLY THIS ISSUE IS RESTORED TO THE FILE OF THE AO FOR EXAMINI NG THE ISSUE AFRESH IN LIGHT OF THE AVAILABLE RECORDS AND AFTER GIVING DUE OPPORTUNITY TO THE ASSESSEE. THIS GROUND STANDS ALL OWED FOR STATISTICAL PURPOSES. 4.3 AS FAR AS GROUND NO. 4 CHALLENGING THE CANCELLA TION OF INTEREST U/S 234B OF THE ACT IS CONCERNED IT IS SE EN THAT THE LD. CIT (A) HAS OBSERVED CORRECTLY THAT SINCE THE ENTIR E INCOME OF THE ASSESSEE WAS SUBJECT TO DEDUCTION OF TAX AT SOURCE THE ASSESSEE HAD NO LIABILITY TO PAY ADVANCE TAX. THE LD. CIT (A ) HAS PLACED RELIANCE OF THE JUDGMENT OF THE HONBLE UTTARAKHAND HIGH COURT IN THE CASE OF CIT VS. SEDCO FOREX INTERNATIONAL DR ILLING CO. REPORTED IN 264 ITR 320 AND ALSO ON ANOTHER JUDGMEN T OF THE UTTARAKHAND HIGH COURT IN THE CASE OF CIT VS. HALIB URTON OFFSHORE SERVICES REPORTED IN 271 ITR 395 WHILE DIR ECTING THE AO TO DELETE THE INTEREST. WE DO NOT FIND ANY REASON T O INTERFERE ON THIS ISSUE AS THE DEPARTMENT COULD NOT COUNTER THE STAND OF THE LD. CIT (A) WITH ANY JUDGMENT TO THE CONTRARY OR BR ING ON RECORD ANY FACT WHICH COULD PROVE THAT THE FINDING OF THE LD. CIT (A) WAS I.T.A. NO. 4986 & 4771/DEL/2007 ASSESSMENT YEAR 2003-04 17 ERRONEOUS. THEREFORE THIS GROUND ALSO STANDS DISMI SSED. 4.4 IN THE RESULT THE DEPARTMENTS APPEAL STANDS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. 5. IN THE FINAL RESULT THE ASSESSEES APPEAL STAND S PARTLY ALLOWED WHEREAS THE DEPARTMENTS APPEAL STANDS PART LY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 13.4.2017. SD/- SD/- ( G.D. AGRAWAL) (SUDHANSHU SRIVASTAVA) PRESIDENT JUDICIAL ME MBER DT. 13 TH APRIL 2017 GS COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER ASSTT. REGISTRAR