The order of the Bench was delivered by
B. Ramakotaiah, Accountant Member - These two cross-appeals are by Assessee and Revenue against the Orders of the CIT(A)-V, Hyderabad dated 29.12.2005. The issues in this appeal are with reference to reopening of assessment and consequent re-determination of incomes on the assessee's activities in India.
2. We have heard Ld. Counsel and Ld. DR in detail and perused the paper book filed in this regard.
3. The grounds raised by assessee (ITA.No.160/Hyd/2006) which are summarized and filed as revised grounds in the course of hearing are as under :
"1. (a) The learned CIT(A) erred in confirming the action of the A.O. in charging the amounts received by the appellant from the off-shore supply of equipment to tax in India.
He further erred in holding/observing as under :
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The dispute is only regarding the quantum of income to be taxed in India (para 5.3 page 5 of order) |
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All the three contracts viz Contract for Offshore supply, Onshore supply and Onshore services were to be treated as one composite contract (para 5.2 page 5 of order). |
(b) Without prejudice to the above, the learned CIT(A) erred in observing in para 5.11 page 10 of the order that the only aspects of the off-shore contract that can be related to the business operations of the project office are training in India, other services rendered and the signing of the contract in India.
He further erred in estimating the profit attributable to offshore contract at Rs.45,41,300/-
2. The learned CIT(A) erred in confirming the addition made by the A.O. in respect of the onshore contracts at Rs.58,70,409/-.
He erred in confirming the action of the A.O. in rejecting the books of accounts of the project office under section 145(3) of the ITA and in estimating the profits from the onshore contract at 10% of the gross receipts.
3. Each one of the above grounds of appeal is without prejudice to the other.
4. The appellant reserves the right to add, alter or amend the above grounds of appeal"
3.1. Assessee also filed additional grounds vide letter dated 02.11.2006 which are as under :
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The appellant submits that the reopening of assessment under section 147 of the ITA is contrary to the provisions of law, without jurisdiction and therefore ought to be set aside. |
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The appellant further submits that it had not been furnished the reasons on the basis of which the assessment was sought to be reopened. |
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Moreover a notice for initiating assessment proceedings under section 143(2) had not been issued to the appellant and the learned DCIT had therefore taken recourse under section 147 for the purposes of making a regular assessment. |
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The appellant submits that interest under section 234B at Rs.46,47,581/- and under section 234D of the ITA at Rs.6,49,558/- is not leviable. The DCIT may be directed to delete interest under section 234B and 234D. |
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Each one of the above grounds of appeal is without prejudice to the other. |
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The appellant reserves the right to amend, alter or add to the grounds of appeal." |
3.2 After discussion with the learned D.R. since additional grounds are legal and does not require any examination of facts, these are admitted.
4. Briefly stated, assessee company, Pirelli Cavi e Sistemi Telecom S.P.A. (Formerly Firelli 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.
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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. |
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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. |
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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. |
4.1 The 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. The A.O. held that all the three contracts are to be treated as a single or composite contract and for the reasons elaborated in the assessment order, held that the profit from the offshore contract was also taxable in India. The A.O. relied on the decision of the Authority for Advance Rulings in the case of Ishikawajima-Harima Heavy Industries Co. Ltd., In re [2004] 141 Taxman 669 and the provisions of DTAA between India and Italy for arriving at this finding. Consequent to the finding that offshore contract was taxable in India, A.O. proceeded to estimate the income of the assessee from the offshore contract at 5% of the gross contract value in the absence of production of the books of accounts and supporting evidence relating to the offshore contract No.1. Similarly, the income from onshore contract and onshore services contract was estimated at 10% of the contract value after recording a finding that the books of accounts of contract Nos.2 and 3 produced by the assessee were unreliable and need to be rejected.
5. Before the Ld. CIT(A) it was contended that —
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A.O. had not considered Clause No.7 "extent of the profit assessable u/s.9" of Board's Circular No.23 dated 23.07.1969 as per which the appellant was not taxable for the offshore supply contract which was concluded outside India. |
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As per the provisions of DTAA with Italy, the offshore contract income was not taxable in India since the same does not form part of the India Project Office. |
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The Authority for Advance Rulings in the case of Ishikawajima Harima Heavy Industries Co. Ltd. (supra) was in favour of the assessee while the A.O. had wrongly appreciated and applied the same in assessee's case. |
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The provisions of section 44BBB are not applicable to the assessee's case in respect of onshore supply and onshore services contract as the assessee's activities are not connected with setting up of a turnkey power project. |
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The A.O. was not justified in rejecting the books and estimating income u/s.145(3) in respect of onshore supply contract and onshore services contract. It was contended that tax audit was done, auditor's report was filed and all the supporting documents and vouchers for expenditure claims were produced during the assessment proceedings and, therefore, there was no justification for rejecting the book results. Further, the observation of the A.O. that expenditure relatable to offshore contract was debited in the onshore contract books was totally based on presumptions and assumptions and, therefore, could not be the basis for invoking the provisions of section 145(3) of the Act. |
6. After considering the assessee's contentions, the Ld. CIT(A) vide para 5 of his order upheld the Assessing Officer's contention that income from offshore contract also required to be taxed in India. In arriving at that conclusion, he relied on certain facts like signing of the agreement by the Indian Branch, undertaking installation work and also training the employees of PGCI in India. However, on the estimation of income when the A.O. estimated the income at 5% of the contract value, he considered only 20% of the same to be apportioned towards the profit attributable to the permanent establishment in India. Therefore, as against Rs.2.27 crores adopted by the A.O. CIT(A) confirmed the profit at Rs.45,41,300/- ie 1% of contract receipts. The assessee is aggrieved on this issue and raised revised ground No.1.
7. On the issue of onshore contracts and rejection of books of accounts, Ld. CIT(A) even though did not agree that the provisions of section 44BBB of I.T. Act are applicable to the facts of the case as the company has not entered into turnkey power project as per the provisions of the section, he accepted the A.O's contention of rejecting the books and estimated the income and approved estimation at 10% of the contract amount thereby, addition of Rs.58,70,409/- was upheld as against the loss returned by the assessee.
8. The next issue considered by the Ld. CIT(A) is with reference to the tax rate of 48% applied by the A.O. on the assessee's income determined. Following his predecessor's order in A.Y. 2001-02, he directed the A.O. to adopt tax rate applicable to a domestic company as against higher rate adopted in the assessment order. Assessee is aggrieved on confirmation of income on offshore contract as well as rejection of books of accounts and estimating the income on onshore contracts and reopening of assessment.
9. Revenue is aggrieved on reduction of estimation on the offshore contracts and adoption of domestic tax rate as against higher rate adopted by the A.O. in the cross-appeal.
10. As raised in additional grounds, assessee has contested the issue of reopening of assessment under section 147 which was not contested before the Ld. CIT(A). Even though, Ld. Counsel raised various issues like, reasons for reopening, satisfaction of the A.O. non issue of notice, reference to various notings made therein and relied on various case law contesting the issue, we are of the opinion that there is no merit in assessee's contentions on the issue of reopening. First of all, assessee has filed return of income on 30.11.2000 for A.Y. 2000-01 and this return was accepted under section 143(1) without any scrutiny. Notice under section 148 was issued on 29.03.2004 i.e., within 4 years from the end of the assessment order and even the assessment order was passed on 31.03.2005. Since scrutiny assessment has not been made earlier before reopening of the assessment, we are of the opinion that the principles laid down by the Hon'ble Supreme Court in the case of Asstt. CIT v. Rajesh Zhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 wherein it was held that intimation under section 143(1) cannot be treated as an order of assessment as there is no assessment the question of change of opinion does not arise. Further, what is required at the time of issue of notice under section 147 is, 'reason to believe' that income has escaped assessment but not the establishment of act of escapement of income. Since A.O. has formed an opinion on the basis of the subsequent assessments, considering the reasons recorded therein and the fact that the assessment was reopened within 4 years after processing the return under section 143(1), we are of the opinion that there is valid reasons in reopening the assessment. That may also the reason why the assessee has not contested the issue before the Ld. CIT(A). Therefore, there is no adjudication on this issue. The issue of non-issue of notice u/s 143(2) require examination of facts, therefore, not considered as it was raised as additional ground. In view of the above, the additional grounds raised by the assessee on this issue (addl Ground no 1) is accordingly rejected.
11. Coming to the merits of the issue, Ld. Counsel submitted that assessee has entered into three agreements with Power Grid Corporation and assessee ( PE- Project office) was only concerned with onshore activities on which assessee has incurred losses. Referring to the order of the A.O. and CIT(A) on the issue of offshore supply contract, Ld. Counsel submitted that assessee has entered into agreement much before the project office had come into operation. He referred to the findings in para 5.1, wherein the Ld. CIT(A) records that assessee had entered into three different contracts in February, 1998 for setting-up of Fibre Optic System in Hyderabad and business activity was permitted by the RBI w.e.f. 09.10.1998. He referred to the findings of the Ld. CIT(A) in that part that "as a result, the India Project Office of the assessee/appellant company came into existence for the purpose of executing two contracts i.e., onshore supply contract and (2) onshore service contract. It was the submission that even though Ld. CIT(A) records the same fact but while concluding the issue, he relied on the wrong assumption that the contract were signed after the Project Office was established in India. This being a factual error, the same also lead to wrong interpretation by the Ld. CIT(A). It was further submitted that the second aspect considered by the Ld. CIT(A) was with reference to agreement vide para 5.10 from Section-B(BPS). Referring to that agreement, it was the submission that the Perille confirmed the unit price of the price schedules includes all the installation, hardware, approach cable, MIC cable and additional length of cable required towards sag, service loops, waste and other such considerations. It was the submission that the Comma(,) between installation and hardware was misread by the Ld. CIT(A) to consider that assessee price also includes installation of the equipment whereas, the contract price was for supply of the cable required for installation. In view of the above, Ld. CIT(A) also considered the installation as part of the offshore contract, whereas, supply was only for the components requiring for laying down the cable work at Hyderabad.
11.1 Ld. Counsel referred to third aspect on which Ld. CIT(A) was misguided was on the issue of training. It was submitted that one aspect of offshore contract which was carried out in India was the training of the employees of PGCI. However, assessee has not undertaken any training in the impugned A.Y. Referring to the order of the CIT(A) wherein the facts were already informed to him, it was submitted that the training component in the contract was relevant only to the A.Y. 2002-03 and assessee also placed on record that this training part was outsourced to U.K. based company and the training was given not only in India but also Abroad. He referred to the facts placed before the CIT(A) and also grounds of appeal to submit that the receipts from training in India was Rs.57,60,269/- vide Bill dated 23.10.2001 whereas, the training was sub-contracted to Marketing Communications, U.K. who charged Rs.60,23,675/- for the same. More over it was incidental to the contract. Therefore, even on this training part, no profit element was there. Hence, there is no income was attributable to contract no 1 in India out of the training receipts which are part of offshore supply contract. It was submitted that according to the principles contained in section 9(1) of the I.T. Act and DTAA with Italy, it was submitted that only income attributable to Project Office should be taxable in India. Therefore, on the issue of offshore contract income, it was the submission that no part of the income arises in India and therefore, the findings of the Ld. CIT(A) are not correct. The Ld. Counsel went on to refer to the Judgment of the Hon'ble Supreme Court in the case ofIshikawajima Harima Heavy Industries Co. Ltd. (supra) and also the decision of the Hon'ble Delhi High Court in the case ofDIT v. LG Cable Ltd. [2011] 197 Taxman 100/9 taxmann.com 51 to submit that when under an offshore contract, equipment was found transferred outside India, necessarily taxable income also accrued outside India and hence, no portion of such income was taxable in India.
11.2 Coming to the issue of onshore contracts, Ld. Counsel submitted that confirmation of income at 10% is not warranted as assessee has furnished books of accounts, audited reports and A.O. was only to see Indian books of accounts and not required to examine the foreign books of accounts. It was further submitted that A.O. nor Ld. CIT(A) established any debiting of expenses of foreign unit in India accounts and clearly referred to the notes to the accounts of P & L account. It was further submitted that Project Office being part of head office and assessee being same, there are head office accounts for transfer of various funds and other reimbursements, but that does not mean that expenditure incurred on behalf of head office was claimed in the Project Office of assessee's P & L account. Since no adjustments are required, losses incurred by the assessee should have been accepted and there is no need for rejection of books of accounts.
11.3 Coming to the levy of interest under section 234B raised in additional ground, it was submitted that there is no need to levy interest under the provisions and relied on the decision of Hon'ble Bombay High Court in the case of DIT (International Taxation) v. NGC Network Asia LLC [2009] 313 ITR 187 and also decision of Special Bench of ITAT in the case ofMotorola Inc. v. Dy. CIT [2005] 95 ITD 269/147 Taxman 39 (Delhi)
12. Learned D.R. however, relied on the facts as stated by the A.O. and also the Ld. CIT(A). He also referred to the contracts and relied on the judgment of Coordinate Bench at Delhi in the case of Posco Engg.& Construction Co. Ltd. v. Addl. DIT (International Taxation) [2014] 42 taxmann.com 500 with reference to tax of offshore contract. He also relied on the decision of Madras High Court in the case of Ansaldo Energia SPA v. ITAT [2009] 310 ITR 237/178 Taxman 57 and decision of Authority for Advanced Rulings in the case of Roxar Maximum Reservoir Performance WLL, in re [2012] 349 ITR 189/207 Taxman 293/21 taxman.com 128 (AAR). He also relied on the case law discussed by the Ld. CIT(A) to submit that offshore contract income was estimated correctly. With reference to onshore contracts, learned D.R. relied on the action of the A.O. and Ld. CIT(A) in rejection of the books of accounts and estimation of income.
13. We have considered the issue and examined the facts and rival contentions. There are two issues for consideration in this appeal on off- shore contract. The first issue is about the taxability of the income stated to have been earned on offshore contract in India and second estimation of income at 5% by the A.O. which was reduced by the CIT(A) to 20% of what was estimated by the A.O, thus estimating at 1% of the total contract amount. Admittedly, assessee has entered into three separate contracts which were clearly distinguishable. There is no dispute with regard to taxation of income stated to have been earned on onshore supply contract and onshore service contract. The only issue is the action of the A.O. in considering the offshore supply contract also for the purpose of taxation in India. There are certain factual errors committed by the Ld. CIT(A) while confirming the order.
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First of all, the offshore contract was entered into in the month of February, 1998 whereas India Project Office was established in June, 1998. Therefore, there is no co-relation with reference to signing up the contract in India to the PE i.e., India Project Office. Even though these facts were noted by the CIT(A). however, the Ld. CIT(A) considered that there is a role of Indian PE in entering the contract also. Ld. CIT(A) correctly analysed the ruling in the case of Ishika Wajima- Harima Heavy Industries Co. Ltd. (supra) of the Hon'ble Supreme Court in coming to the conclusion that the profit shall be deemed to accrue or arise to the assessee in India only such part of profit as is reasonable attributable to operations carried out in India. He also correctly analysed the Article 7 of DTAA between India and Italy vide para 5.6 of the order and also Explanation to section-9. Since India Project Office has no connection with entering into contract, that aspect of considering part of contract has accruing or arising in India, having signed in India does not apply to PE at all. |
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The second aspect considered by the Ld. CIT(A) is with reference to section B(BPS) about the 'installation' part. The said section in the contract is as under : |
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"PIRELLI confirmed that the fibre optic cable quantities indicated in their offer are based on link lengths. PIRELLI confirmed that the Unit price of the price schedules includes all the installation, hardware, approach cable, MIC cable and additional length of cable required towards sag, service loops, waste and other such considerations." |
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As can be seen that the above it confirms that fibre optic cable quantities indicated in their offer are based on link lengths. It also confirms that unit price of the 'price schedules' includes all installation, hardware, approach cable etc., required towards sag, service loops, waste and other such considerations. This only indicates that the cable required for various services in India were also included in the price quoted but that does not indicate the price quoted includes the installation cost, which the Ld. CIT(A) interpreted wrongly. The word 'Installation' there is not pertaining to the service of installation but inclusion of length of cable lines required for installation activity. Therefore, we are of the opinion that Ld. CIT(A) erred in considering this as part of onshore supply. |
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The third aspect is with reference to part of training imparted to personnel in India. It was explained by the assessee that this training is incidental to supply of material offshore and even if it were to be considered as part of PE operations, assessee has not earned any income as explained earlier. Further as no profit was earned on the said activity in India, no income can be deemed to accrue or arise in India. We are of the opinion that the Ld. CIT(A) wrongly considered all the three aspects in confirming the estimation at 1% on the offshore contracts. |
14. There is no dispute with reference to the fact that income from the offshore contract is taxable only to the extent of profits attributable to the operations in India which are clearly defined in the Income Tax Act as well as the DTAA between India and Italy. Ordinarily, both finding as to the operations in India as well as determination of profits attributable to such operations are matter of fact. The burden of proof of India operations in the case of a non-resident were generally lie on the Revenue as it was contended that no part of the offshore contract was executed in India. Since the Ld. CIT(A) elaborately discussed the legal principles and arrived at a correct conclusions vide para 11 that India Project Office is liable under the Income Tax and the DTAA between India and Italy only to the extent of profit attributable to the business operations carried out by the permanent establishment in India. This position does not change even if all the three contracts signed by the parent company are treated to be single or composite contract. The cables are manufactured outside India and procurement of cables outside India fall beyond purview and jurisdiction of the provisions of Income Tax Act. Therefore, we are of the opinion that since the offshore contract is only for procurement of cables that too outside India and the training provided in India is incidental to the contract No.1 i.e., offshore contract and further as there is no profit earned on such training also, we are of the opinion that no part of the income can be attributable to the PE. We place reliance on the Judgment of the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Co. Ltd. (supra) and also the decision of the Hon'ble Delhi High Court in the case of LG Cable Ltd. (supra) that when under an offshore contract, equipment was found transferred outside India, necessarily taxable income also accrued outside India and hence, no portion of such income was taxable in India. Therefore, we set aside the order of the CIT(A) in restricting the addition to 1% of the total contract that was done by him in para 5.12. Assessee gets complete relief from this and therefore, revised ground Nos. 1 raised by the assessee on this is allowed.
15. The next issue for consideration is about estimation of income under the provisions of section 145(3) on the two onshore contracts on the ground that some part of offshore contract expenses were accounted in the books of India Project Office and therefore, it was not possible for determining the true profit of the assessee. Ld. CIT(A) after analyzing the issue in para 6.4 upheld estimation at 10% of the contract price received during the year. It was the contention that the commercial invoices for all the three contracts are raised by Head Office in Italy and India Project Office as accounted income and expenditure pertaining to onshore supply contract and onshore services contract as these are carried out in India and are taxable in India. It was also further submitted that remittance by Power Grid Corporation of India in foreign currencies other than Indian rupees were made directly to Head Office but the same are accounted pertaining to onshore supply and service contracts as per the stipulation of RBI. It was further submitted that financial statements submitted indicate that holding company has not made any profit from the operations during the years under review. Ld. CIT(A) came to correct conclusion that provisions of section 44BBB are not applicable to the assessee as work of India Project Office does not relate to any turnkey power project. However, he confirmed the action of the A.O. in invoking the provisions of section 145(3) on the reason of incorrect method of accounting and partly debiting the expenses of offshore contracts. Even though there seems to be merit in contentions, it is very difficult to examine them at this point of time in view of afflux of time. Cconsidering the facts as examined by the A.O. and Ld. CIT(A), we are of the opinion that estimation of income at 10% on the contracts relating to onshore supply and services is reasonable on the facts of the case. ITAT is generally estimating incomes from 10 % to 12.5% in main contractors cases. Since assessee undertook on contract basis the estimation at 10% is reasonable. Therefore, we are of the opinion that authorities are justified in estimating income on onshore contracts. Revised ground no 2 is rejected.
16. Next ground (Addl. Ground 2) is on levy of interest u/s 234B, 234D. It was the contention that interest under section 234B and 234D are not warranted on the facts of the case. Ld. Counsel relied on the decision of the Hon'ble Bombay High Court in the case of NGC Network Asia LLC (supra) for the proposition that assessee is covered by the provisions of TDS there is no need to levy interest under section 234B. Likewise, he also questioned the levy of interest under section 234D stating that the said provisions are not applicable to the impugned assessment year.
16.1 After considering the rival contentions, we are of the opinion that levy of interest under section 234B and 234D are to be re-examined by the A.O. As seen from the assessment order, there was tax deducted at source to an extent of Rs.22,41,403/-. Therefore, once the amounts are covered by the TDS, question of levy of interest under section 234B on non-payment of advance tax should not arise. The principles laid down by the Hon'ble Bombay High Court in the case of NGC Network Asia LLC(supra) are equally applicable to the facts of the case. A.O. is directed to verify whether the income that has been taxed is covered by the provisions of TDS and if so, not to charge interest under section 234B of the Act.
16.2 As far as interest under section 234D is concerned, this also requires to be examined by the A.O. keeping in mind the decision of Hon'ble Supreme Court in the case of CIT v. Reliance Energy Ltd. [2013] 358 ITR 371/[2014] 220 Taxman 89 (Mag.)/[2013] 40 taxmann.com 116 as the Orders are passed after 01.06.2003. Assessing Officer is directed to examine and decide accordingly. With this directions, additional ground-2 is considered as allowed for statistical purposes.
17. In the result, ITA.No.160/Hyd/2006 of the assessee is partly allowed for statistical purposes.
ITA.No.254/Hyd/2006 - A.Y. 2000-01 (Revenue Appeal) :
18. This is Revenue appeal against the Order of the CIT(A)-V, Hyderabad dated 29.12.2005. Revenue in Ground No.1 contesting the action of the Ld. CIT(A) in restricting the estimation of profit from offshore contract at 20% on 5% estimated by the A.O. This issue was elaborately discussed in assessee's appeal and it was held that no income can be attributed to the offshore contract. Therefore, there is no merit in Revenue's contentions raised in this ground. Accordingly, Ground No.1 is rejected.
19. Ground No.2 pertains to action of Ld. CIT(A) in allowing the tax rate as applicable to domestic companies rather than at higher rate as applicable to foreign companies. A.O. in his order has adopted the tax rate at 48% applicable to foreign companies. Ld. CIT(A) following his predecessor's order in A.Y. 2001-02 held that the rate of tax applicable to the assessee has to be same as that of domestic company placed in similar circumstances, following the non-discrimination clause applicable to foreign companies under DTAA. We do not see any reason to interfere with the order of the CIT(A) as it is correct on the interpretation of provisions of DTAA. Accordingly, this ground is rejected.
20. In the result, Revenue appeal is dismissed.
21. To sum-up, ITA.No.160/Hyd/2006 of the Assessee is partly allowed and ITA.No.254/Hyd/2006 of the Revenue is dismissed.
The order pronounced in the open court on July 16, 2014