(1.) THESE three appeals viz., ITA. No. 916/Hyd./2006, ITA. No. 246/Hyd./2012 and ITA No. 244/hyd/2012 are by assessee against the orders of CIT under section 263 and consequential order passed by the A.O. thereon and against CIT(A). Ld. CIT invoked the jurisdiction under section 263 and vide order dated 13.03.2006 set aside the issue to the file of A.O. to ascertain the actual income which is taxable in India on off -shore contract receipts in accordance with law by resorting to the provisions of Rule 10 of the Income Tax Rules, if necessary.
(2.) ASSESSEE is aggrieved on the order of the Ld. CIT and raised detailed grounds which were abridged later and all the grounds pertain to the issues of jurisdiction and direction of the Ld. CIT in bringing to tax the profits of off -shore contracts.
(3.) BRIEFLY stated, assessee company, Prysmian Cavi e Sistemi Telecom S.P.A. (Formerly Pirelli Cavi e Sistemi S.P.A.) Milan, Italy had entered into three different contracts with Power Grid Corporation of India Limited (PGCI) on February 6, 1998 for setting up a Fiber Optic system for Southern Region. a. Off -shore supply contract Number C -50901 -9/546/I for all works to be performed in countries outside India covering, inter alia, the offshore supply of equipments required for the complete execution of the Project.
b. On -shore supply contract Number C -50901 -S859 -9/547/II for the supply of equipments from within India required for the complete execution of the Project.
c. On -shore services contract Number C -50901 -S858 -9/548/III for all the services including port clearance (in case of supplies from Offshore) inland transit insurance, handling and transportation to site, unloading at site, storage, preservation, insurance, erection, installation, testing, commissioning and integration at site of the complete Fiber Optic System including associated civil works etc., cables and other electrical and mechanical c. auxiliary systems for complete execution of the project.
3.1. Assessee obtained requisite permission from RBI for execution of onshore supply contract and onshore services contract with PGCI. The Registrar of Companies NCT of Delhi and Haryana had issued a certificate for the establishment of Place of Business in India to Pirelli Cavi e Systemi S.P.A. Milan Italy. The assessee offered income only from the contracts No. 2 and 3 relating to onshore supplies and onshore services contract while maintaining that the income from offshore contract No. 1 was not taxable in India. Assessee filed return of income declaring loss of Rs. ( -) 1,56,33,038/ - for the impugned year. In the scrutiny order passed under section 143(3) dated 29.03.2004, A.O. examined the assessee's accounts and disallowed various expenditure thereby, determining the taxable income at Rs. 1,58,54,605/ - and raised demands accordingly. This order of the A.O. was subject matter of appeal before the Ld. CIT(A) (appeal thereon was separately dealt with). In the meantime, Ld. CIT issued a show cause notice to the assessee why the receipts on off -shore contracts should not be brought to tax. Ld. CIT mainly relied on the ruling given by the Authority for Advanced Rulings in the case of Ishikawajima Harima Heavy Industries Co. Ltd., : (2004) 271 ITR 193. After considering the detailed submissions of the assessee and analyzing the terms of agreement, Ld. CIT summarized the issues as under: 2. IN the case of the assessee it is not merely sale of fibre optic by Pirelli but supply of fibre optic, laying of the said fibre optic cables was awarded by Power Grid, to Pirelli by way of contract. Therefore, the assessee's supply of cables from abroad is not sale of goods simpliciter by a non -resident. Hence, it cannot be said that since the sale took place outside India, no income arises in India. In the present case, the contract is a composite one (as evidenced from the sanction letter of Ministry of Power, Global Tender invitation by Power Grid, Bidding document, Pre bid tender document final tender document submitted by the assessee and even as per the contract agreements entered by Pirelli). Therefore, it is sine qua non that the supply of cables by Pirelli outside India is a part of a composite contract involving various operation within India and hence income from such sale shall be deemed to accrue or arise in India, through or from a business connection in India. 3. IN the present case procurement of fibre optic cable etc., was done abroad, laying of cables, testing, commissioning was done in India. Without procurement of fibre optic etc., there was no question of laying cables, testing etc., by Pirelli in India. In otherwords, procurement of cables is a pre condition to the laying of cables. Therefore, profit that arises on procurement of the cables is totally attributable to the Indian project which has done laying of cables, testing etc.,
There is a business connection in India. The contract was awarded in India and the project is situated in India. The contract was signed in India and the business was done in India as is evident from the sanction letter of the Ministry of Power, Global tender, tender documents submitted by the assessee. Income from off shore supply would be governed by Article 7 of the Treaty which deals with business profits. There is no denying the fact that the assessee has been in India since 1998 -99 and has been offering its business income from on shore supply and on shore services. The off shore supply is also inextricably linked to the permanent establishment. The Power Grid certainly could not have ordered the purchase for supply material mentioned in the off shore supply contract alone. Had the assessee supplied the material alone (i.e., off shore supply) it may be mere sale simpliciter and in such a case the assessee's argument that there is no income taxable in India is acceptable. But that is not the case here. The assessee is responsible for survey, procurement, erection, commissioning, training of staff, maintenance for certain period of the telephone cables and system in its entirety and also to give performance guarantee which involves bringing in equipment, material, spare parts and men etc., In this type of turn key project, the off shore supply cannot be treated as a sale of goods so the bifurcation of price is not proper. Though the entire income of the assessee is deemed to accrue in India by virtue of section 9(1) but in view of the Explanation appended to clause (i) of sub section 1, only such part of income as is reasonably attributable to the operations carried out in India alone is taxable.
In the light of above discussion, I hold that the income as is reasonably attributable to the operations carried out in India relatable to the Off shore contract is liable to tax in India. The A.O. is directed to ascertain the actual income which is taxable in India on the off shore contract receipts in accordance with law by resorting to the provisions of Rule 10 of the Income Tax Rules, if necessary.
4. Aggrieved on the above order of Ld. CIT, it was the submission of the Ld. Counsel that the ruling of the Authority for Advanced Rulings was reversed by the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Co. Ltd., vs. Director of Income Tax : (2007) 288 ITR 408 (SC). Further, Ld. Counsel referred to the Order of the Coordinate Bench in ITA. No. 160 and 254/Hyd./2006 dated 28.05.2014 for A.Y. 2000 -01 wherein similar issue was decided by the Tribunal holding that under an off shore contract where equipment was found transferred outside India necessary taxable income also accrued outside India and hence, no portion of such income was taxable in India. Accordingly, it was submitted that orders of Ld. CIT are not correct. Learned D.R. reiterated the contentions and referred to the order of the Coordinate Bench of the Delhi Tribunal in the case of Pasco Engineering & Construction Co. Ltd., ITA. No. 5787/Del/2013 dated 26.02.2014 with reference to tax of offshore contract. He also relied on the decision of Madras High Court in the case of Ansaldo Italian Spa : 310 ITR 237 and decision of Authority for Advanced Rulings in the case of Roxar Maximum Reservoir Performance WLL, in RE : (2012) 349 ITR 189 (AAR). He also relied on the case law discussed by the Ld. CIT to submit that offshore contract income was to be taxed.;