CLOUGH ENGINEERING LTD. Vs. ADDITIONAL DIRECTOR OF INCOME TAX
INCOME TAX APPELLATE TRIBUNAL
Clough Engineering Ltd.
ADDITIONAL DIRECTOR OF INCOME TAX
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I.C.Sudhir, Member (J) -
(1.) THE assessee has questioned orders of the authorities below on the following grounds:
"Based on the facts and in the circumstances of the case and in law, the appellant respectfully submits that the Dispute Resolution Panel (DRP) has erred in upholding the findings of the Dy. Director of IT (International Taxation), Dehradun ('AO'), as per the draft assessment order, and issued directions to the AO for passing the order under s. 143(3) r/w s. 144C(13) of the IT Act, 1961 ('Act') ('assessment order') on the following grounds:
Ground 1 - -The DRP/AO erred in passing the impugned order in gross violation of the statutory provision as well as the principle of natural justice and fair hearing without appreciating that such gross violation rendered the impugned order null and void.
Ground 2 - -The DRP/AO has erred in observing that the appellant has misrepresented the facts and mislead the IT authorities by ignoring documents and facts available on record and not providing any facts and evidences to make the remarks.
Ground 3 - -The DRP/AO erred in taking the view that consideration of Rs. 2,24,55,97,453 received by the appellant for carrying out its obligations outside India was assessable to tax in India. It was not appreciated that as the entire operations were carried out outside India, no part of the said consideration was assessable to tax in India.
Ground 4 - -The AO has erred in making an ad hoc disallowance of 25 per cent of the overall expenses incurred by the appellant and the DRP has erred in not issuing any directions in respect thereof.
Ground No. 5 - -The DRP/AO erred in making ad hoc disallowance of 50 per cent of material cost, 40 per cent of plant cost, 50 per cent of office cost, 100 per cent of legal cost and thus arriving at a total profit @ 25 per cent.
Ground 6 - -The DRP/AO has erred in making adjustment in the international transactions undertaken by the appellant, by holding that it is not at arm's length and has therefore erroneously made an adjustment to the total income of the appellant.
Ground 7 - -Without prejudice to the above, the DRP/AO has erred in not giving correct effect to the proviso to s. 92C(2) of the IT Act.
Ground No. 8
(i) The DRP/AO has erred in law in not considering the offshore revenues considered taxable at a deemed profitability rate of 25 per cent as a part of operating income, while making the transfer pricing adjustment considering 7.8 per cent as the arm's length operating margin, essentially leading to additions based on arm's length rate of 7.89 per cent as well as deemed profitability of 25 per cent of operating revenues as taxable profits;
(ii) The DRP/AO has erred in making an adjustment which is more than the value of the international transactions undertaken by the appellant which should have been restricted to the proportionate value of the international transaction of the appellant.
Ground 9 - -The DRP has erred in not providing any directions to the AO to delete the interest levied by the AO under ss. 234B and 234C of the Act.
Ground 10 - -The DRP/AO has erred in initiating/confirming initiation of penalty proceedings under s. 271(1)(c) of the Act."
We have heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.
(2.) THE facts in brief are that assessee company is a non -resident company incorporated in and a tax -resident of Australia. It is eligible to claim benefit under India Australia tax treaty (in short tax treaty) as per s. 90(2) of the IT Act, 1961. The assessee (CEL) entered into a contract with ONGC on 6th Jan., 2005 for installation of infrastructure in the form of platform and pipelines for ONGC. For the purpose of execution of the Indian operations of the aforesaid contract, a project office was set up by the assessee in India. For the asst. yr. 2006 -07, the assessee had filed its return of IT on 29th Nov., 2006 declaring total income of Rs. 35,70,010 in respect of permanent establishment (PE) in India. Along with its return of income, the assessee had also filed an accountant's report in Form No. 3CEB and a tax audit report in Form No. 3CD (in accordance with s. 92E and s. 44AB of the Act respectively). The AO, however, proposed that the revenue of Rs. 2,24,55,97,443 earned by the assessee in respect of operations undertaken outside India are attributable to the assessee's AE taxable in India. Further, to determine the portion of the taxable income, the AO adopted a deemed profitability rate of 25 per cent on an ad hoc basis. The assessee objected the above action of the AO before the DRP on the following basis:
"Denial of opportunity of being heard and violation of principle of natural justice (Objection I);
Proposing to tax revenues earned from outside India operations and thereby attributing the same to the PE as taxable income of the assessee (Objection II);
Proposing to disallow 25 per cent of overall expenses on ad hoc basis (Objection III);
Proposing to disallow 100 per cent of head office expenses (Objection IV);
Proposing to adopt deemed profitability rate of 25 per cent on an inappropriate basis (Objection V);
Proposing disallowance recommended by TPO and accepted by the learned AO (Objection VI);
Proposing to charge interest under ss. 234B and 234C (Objection VII); and
Proposing to initiate penalty proceedings under s. 271(1)(c) of the Act (Objection VII)."
The assessee also placed reliance on several decisions in support but could not succeed, hence, the present appeal before the Tribunal.
(3.) THE ground No. 1 is general in nature whereas ground Nos. 2 to 8 are connected. In ground No. 9, interest levied under ss. 234B and 234C of the IT Act, 1961 has been questioned and in ground No. 10, initiation of penalty proceedings under s. 271(1)(c) of the IT Act, 1961.;
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