Case: NATIONAL PETROLEUM CONSTRUCTION COMPANY Vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(2), INTERNATIONAL TAXATION, NEW DELHI &amp; ANR

3. The Appellant, National Petroleum Construction Company, is a company incorporated under the laws of the United Arab Emirates (UAE) and is a tax resident of that country. The provisions of the Agreement for Avoidance of Double Taxation hereinafter referred to as the AADT between India and the UAE apply in determining the taxable income of the Appellant under the IT Act.          4. The Appellant is, inter alia, engaged in the fabrication of Petroleum Platforms, Pipelines and other equipment, installation of Petroleum Platforms, Submarine Pipelines, onshore and offshore oil facilities and coating of Pipelines.          5. Pursuant to different tender notices issued by ONGC from time to time, the Appellant submitted tenders, inter alia, for installation of Petroleum Platforms and submarine Pipelines. The tenders submitted by the Appellant were accepted and contracts were executed by and between the Appellant and ONGC. The first contract was executed by and between the Appellant and ONGC in the Financial Year 1996-97, corresponding to the Assessment Year 1997-98.          6. On 28th August 2005, the Appellant was awarded a contract termed as Contract No. MR/OW/MM/NHBS4WPP for Well Platform Project- II hereinafter referred to as LEWPP Contract pursuant to a global tender floated by ONGC in July 2005. This was the third contract between the Appellant and ONGC. Later on 23rd November 2006, the Appellant entered into another contract termed as Contract No. MR/OW/MM/C-Series/03/2006, hereinafter referred to as C-Series Contract, for C-Series Project.          7. The scope of work as described in the General Conditions of Contract for LEWPP Contract and C-Series Contract included Surveys (pre-engineering, pre-construction/pre-installation and post-installation), Design, Engineering, Procurement, Fabrication, Anticorrosion & Weight coating (in case of rigid pipeline), Load-out, Tie-down/Sea fastening, Tow-out/Sail-out, Transportation, Installation, Hook-up, Installation of submarine pipelines, Installation and hook-up of submarine cables, Modifications on existing facilities, Testing, Pre-commissioning, Commissioning of entire facilities as described in the bidding document.          8. The contracts referred to above included various activities. Whilst the activities relating to survey, installation and commissioning were done entirely in India, the platforms were designed, engineered and fabricated overseas - at Abu Dhabi.          9. The Appellant has been filing its Income Tax Returns from the Assessment Year 1997-98. The Appellants income has been computed on a presumptive basis by taxing the gross receipts pertaining to the activities in India, less verifiable expenses at the rate of 10% and the receipts pertaining to activities out of India at the rate of 1%.          10. The Appellant adopted the said basis for computing its assessable income and filed its returns for the Assessment Year 1999-2000 onwards. Accordingly the returns filed by the Appellant for the Assessment Years 2004-05, 2005-06 and 2006-07 were processed under Section 143(1) of the IT Act. However, the returns filed by the Appellant for Assessment Years 2007-08 and 2008-09, were not accepted by the Assessing Officer, hereinafter referred to as the AO.          11. The AO passed a Draft Assessment Order dated 31st December 2009 for the Assessment Year 2007-08 holding that the Appellant had a Fixed Place Permanent Establishment in India in the form of a Project Office at Mumbai. The AO further held that Arcadia Shipping Ltd. (ASL), agent of the Appellant had a Permanent Establishment in India, which constituted a Dependent Agent Permanent Establishment, hereinafter referred to as DAPE, of the Appellant.          12. With regard to the Appellants contention that the fabricated material was sold to ONGC outside India, the AO found that the contract was a turnkey and a composite contract and was not divisible as claimed by the Appellant. Accordingly, the AO held that the entire contractual receipts including the payments for activities performed outside India were taxable in India. The consideration received by the Appellant for design and engineering was held to be Fees for Technical Services, hereinafter referred to as the FTS. Since, the Appellant had not maintained separate books pertaining to the contract, the AO estimated the Appellants profit at 25% of the consideration received from ONGC.          13. The Appellant did not accept the Draft Assessment Order and filed its objections before the Dispute Resolution Panel hereinafter referred to as the DRP. The DRP held that Article 5 of the AADT provided an inclusive definition of Permanent Establishment (PE) and that the Appellants Project Office constituted a PE of the Appellant in India. The DRP concurred with the AO that ASL was a DAPE of the Assessee.          14. The DRP observed that pre-engineering or pre- design survey, claimed to be done by a sub-contractor employed by the Appellant, was an integral part of the contract and the time spent by the sub- contractor would also constitute the time spent by the Appellant in India in computing residence in India for over nine months during the Assessment Year, in terms of the AADT.          15. The DRP rejected the contention that the contract was a divisible contract and the income of the Appellant for the activities done outside India was not taxable under the IT Act.          16. The Appellant filed an appeal against the order of the assessment passed by the AO before the Income Tax Appellate Tribunal hereinafter referred to as the ITAT. The ITAT concurred with the AO and rejected the Appellants contention that it did not have a PE in India. The ITAT also concurred with the AO that the establishment of ASL in India was a DAPE of the Appellant.          17. The ITAT, however, accepted the Appellants contention that the contract could be segregated into offshore and onshore activities and the Appellants income for the activities carried on out of India could not be attributed to its PE in India.          18. The ITAT rejected the Appellants contention that the tax payable should be computed as per the formula adopted in the preceding years, i.e. 10% of the receipts attributable to activities in India, less expenses in India and 1% of the receipts attributable to activities carried on overseas.          19. By a judgment and order dated 29th January 2016, in the Appeal being ITA No. 143 of 2013, filed by the Appellant and other related Appeals filed by the Revenue, the Division Bench of the High Court of Delhi concurred with the view of the ITAT that consideration for activities carried on overseas could not be attributed to the Appellants PE in India. The Court observed that it was not disputed that invoices raised by the Appellant specifically indicated whether the work was done outside India or in India. Thus, even though the contracts might be turnkey contracts, the value of the work done outside India was segregable.          20. Two contracts were concluded by and between the Appellant and ONGC, one dated 30th September 2016, hereinafter referred to as LEWPP Contract, and the other dated 7th February 2018, hereinafter referred to as the R-series Contract, which have led to this Appeal. The Appellant received payments for work done under the said two contracts in the Previous/Financial Year 2019-20 corresponding to the Assessment Year 2020-21.          21. By a judgment and order dated 9th May 2017 in Writ Petition being Writ Petition (C) No. 2117 of 2017, the High Court of Delhi set aside a Certificate dated 31st January 2017 issued by the Respondent No.1 under Section 197 of the IT Act, requiring deduction of TDS at the rate of 4% on all payments made by ONGC to the Appellant for activities out of India and in India in respect of the contract dated 30th September 2016. The R-series Contract was executed after the judgment of the High Court dated 9th May 2017, referred to above. The High Court had no occasion to consider the R-series contract.          22. On or about 8th May 2019, the Appellant applied for a certificate under Section 197 of the IT Act for deduction of Nil tax on payments received from ONGC for activities carried on outside India, in the Financial Year 2019-20 in relation to the aforesaid contracts.          23. The Respondent, Income Tax Authorities raised queries on its portal, to which the Appellant responded by a letter dated 21st May 2019 addressed to the Respondent No.1. On further query from the Income Tax Department, the Appellant filed a reply on 13th June 2019 pointing out that no income from activities outside India could be brought to tax in India. The Appellant also submitted a table showing the similarities between the contracts forming the subject-matter of the decision of the High Court and the contracts in the year under consideration, that is, the Financial Year 2019-20.          24. By the said letter dated 13th June 2019, the Appellant pointed out that for over two and half months since the start of the Financial Year 2019-20, no certificates had been issued to the Appellant under Section 197 of the IT Act as a result of which the Appellant was suffering undue hardship as its cash flow was being hampered. The Appellant, therefore, requested the Respondent No.1 to issue certificate at the earliest. On 17th June 2019, the Appellant submitted activity-wise key dates for each platform under the R-Series and LEWPP Contracts to the Respondent No.1.          25. By letter dated 22nd June 2019, addressed to the Respondent No.1, the Appellant answered further queries. However, in view of the financial crunch faced by the Appellant, the Appellant requested :         The Applicant humbly submits that since it is facing financial hardship as the first quarter of FY 2019-20 has come to an end and it is yet to have the lower withholding tax certificate, the Applicant (without prejudice to its legal position), is willing to offer a concession to have the certificate at the tax rate of 4% plus applicable surcharge and cess for the entire contractual revenues, which is in line with the recently concluded assessment proceedings for AY 2016-17 in Applicants own case, where your goodself concluded that the entire contractual revenues were chargeable to tax under Section 44BB of the Act at an effective tax rate of 4% plus applicable surcharge and cess.          In light of the above, it is our humble request to your goodself to kindly issue the certificate at your earliest convenience.         26. The Appellant contends that a certificate of Nil TDS, for payments received in respect of activities outside India, should have been issued to the Appellant, in deference to decisions rendered by various Appellate Authorities from the Assessment Years 2007-08 to 2015-16, opining that income in respect of activities out of India was not taxable in India and as also the judgments of the Delhi High Court referred to above.          27. In the Assessment Year 2018-19, the Respondent had followed the same approach as in the Assessment Year 2017-18 and issued a certificate dated 10th April 2018 under Section 197 of the Act for Nil TDS in respect of payments for activities outside India. This direction was in respect of both LEWPP Contract as well as R-Series Contract.          28. However, in departure from the position taken in the previous years, the Respondent No.1 issued a certificate dated 26th June 2019 under Section 197(1) of the IT Act for the Financial Year 2019-2020 corresponding to the Assessment Year 2020-2021 directing ONGC to deduct TDS at the rate of 4% on receipts in respect of activities both outside and inside India.          29. The Appellant filed a Writ Petition under Article 226 of the Constitution of India being Writ Petition (C) No.8527 of 2019, inter alia, challenging the said certificate dated 26th June 2019. The Writ Petition has been dismissed by the judgment and order impugned in this Court.          30. Mr. Ganesh appearing on behalf of the Appellant forcefully argued that the Respondent No.1 had erred in law in not granting Nil rate TDS to the Appellant for the financial year 2019-20 under Section 197 of the IT Act.          31. Mr. Ganesh argued that Appellant was assessed for Assessment Years 2007-08, 2008-09 and 2009-10 in respect of contracts similar to the above noted contracts and was held not to be taxable in India. Even though the Assessing Authority had, from the Assessment Year 2007-08 taken the view that revenue in respect of activities outside India were taxable in India, the ITAT being the Appellate Authority, held to the contrary. The Appellate Authority had all along taken the stand that the Appellant has no Permanent Establishment in India and no such income from activities outside India would be chargeable to tax in India.          32. Mr. Ganesh relied upon the judgment rendered by the High Court in the Appellants own case in respect of the Assessment Years 2007-08 and 2008-09 which is reported in (2016) 383 ITR 648.  The Delhi High Court analyzed the contract of the Appellant with Respondent ONGC and held that the project office of the Appellant did not constitute a Fixed Base Permanent Establishment under the provisions of the Double Taxation Avoidance Agreement. The question of splitting profits arising from the contract into two categories, that is, profits attributable to India and profits attributable to overseas activities did not arise. The judgment was followed in respect of appeal of the Respondent for the Assessment Year 2009-10. Mr. Ganesh argued that R-Series and LEWPP Contracts relevant to the Assessment Year in question that is Assessment Year 2020-21 corresponding to the Previous Year 2019-20, are identical to the contracts considered by the Appellate Authority in Appellants own case in relation to the Assessment Years 2007-08, 2008-09 and 2009-10.          33. The Delhi High Court issued notice to the Revenue Authorities, in response to which a counter affidavit was filed enumerating the grounds and reasons justifying the issuance of the impugned certificate.          34. After hearing the parties at length, the High Court held that an administrative decision was subject to judicial review under Article 226 of the Constitution of India only on grounds of perversity, patent illegality, irrationality, want of power to take the decision and procedural irregularity. Judicial review is directed not against the decision but the decision making process. The High Court did not find any such arbitrariness in the approach of the concerned Respondents in the exercise of their jurisdiction, that called for interference under Article 226 of the Constitution of India. The High Court found that the reasons in the note-sheet could not be said to be so fallacious, unfair or unreasonable that they required intervention of the High Court.          35. The High Court further observed and held:         18. Sub Section (1) of Section 195 of the Act provides that any person responsible for paying to a non-resident, any sum chargeable to tax under the provisions of the Act, shall, at the time of credit of such income to the account of the payee, or at the time of the payment thereof in cash or by the issue of a cheque or draft or any other mode, whichever is earlier, deduct income-tax thereon at the rates enforced.          ***          24. … As of now, we are not concerned with a regular assessment proceeding but, with determination of rate of tax deduction. On perusal of reasons, it becomes manifest that during the course of enquiry under Section 197 of the Act, the petitioner was asked to furnish the details regarding the scope and nature of the aforenoted contracts. Revenue contends that for the R-series contracts, the petitioner has made contradictory statement regarding commissioning period and period of as-built documentation etc. Petitioner, in its submission dated 22.06.2019, contends that commissioning work is not undertaken by them for the R-series contracts, and the same is to be performed by ONGC. Without going into the question as to whether the petitioners stand is contradictory, we may note that the Assessing Officer while exercising its power under Section 197, during the course of the enquiry, cannot undertake an exhaustive exercise to determine this issue conclusively. We find force in the submissions of Mr. Raghvendra Kumar Singh that the question as to whether the petitioner has constituted a PE, cannot possibly be undertaken in the enquiry having regard to the time frame permissible under law for deciding the application under Section 197 of the Act. The reasons shown to us also take note of the fact that in the immediate preceding years i.e., AY- 2016-17 and AY- 2017-18, for which regular assessment has been completed, petitioner has been held to have a Permanent Establishment (PE) in India, and its total income from the contracts with ONGC have been held to be taxable under the IT Act. Section 44BB of the Act is applied, and 10% of the contractual receipts were considered as business profits. The rate of tax being 40%, a certificate was, accordingly, issued @ 4%. For the other assessment years as well, assessment has been completed and appeal is pending before the appellate authorities. The Petitioner, obviously, disputes the finding of the Respondent as erroneous and misplaced, on the ground that for AY- 2015-16, the first appellate authority-following the decision of this Court in petitioners own case, has held that the petitioner has no PE in India. Be that as it may, for AY-2016-17 and 2017-18, this question has been determined against the petitioner. It is well-settled proposition that in tax jurisprudence, the principle of res judicata is not applicable to income tax proceedings... [Ref: New Jehangir Vakil Mills Co. Ltd. v. CIT: [1963] 49 ITR 137 (SC) (Full bench)]. It is well settled that in matters of taxation there is no question of res judicata because each years assessment is final only for that year and does not govern later years, because it determines only the tax for a particular period. [Ref: Instalment Supply (P) Ltd. v. Union of India : AIR 1962 SC 53  (Constitution bench)].          ***          27. In the present case, there cannot be any dispute that existence of PE is required to be determined by law for each year separately on the basis of the scope, extent, nature and duration of activities in each year. In this regard, the contracts in question i.e. R-series contracts dated 07.02.2018 and LEWPP series contracts dated 30.09.2016 would have to be taken into consideration. Concededly, this Court in its decision dated 09.05.2017 did not have the occasion to consider the R-series contract dated 07.02.2018. The Court only considered the contract dated 30.09.2016 as noted in para -1 of the said decision. There is thus, a distinguishing feature - the R-series contract has not been considered by this Court in its order dated 09.05.2017. Moreover, in the instant case, the reasons record that the two contracts are indivisible, and the petitioner cannot divide the contractual receipts in two categories viz. inside India and Outside India services. The installation PE will come into existence, if project or activity continues for a period of more than 9 months under Indo-UAE DTAA. This question of fact will have to be determined separately for each assessment year, and we are informed that for AY-2016-17 and AY-2017-18, the determination is presently against the petitioner. We cannot accept the petitioners contention that the assessment proceedings for the AYs 2007-08, 2008-09 and 2009-10 have already determined this question in favour of the petitioner and there is no change in any circumstances. This question would require to be determined and finding of the fact would have to be arrived at, by a careful consideration of terms of contract, determination whereof cannot be undertaken in the proceedings under Section 197 of the Act.          ***          29. Further, the petitioners contention that under each of the contracts, the installation activities were completed in less than 9 months, and that the scope of R-series contracts, did not include commissioning activities, are all factual aspects which cannot be examined while exercising judicial review over the decision of the respondent under Section 197 of the Act.          30. The petitioner has relied upon the judgments in Ishikawajima- Harima Heavy Industries: [2007] 288 ITR 408 (SC) and Hyundai Heavy Industries: [2007] 291 ITR 482 (SC) , which do not appear to be applicable to the facts of the present case. In Ishikawajima (supra), the Supreme Court held that for a non-resident entity to be taxed in India, it should carry on business through a permanent establishment in India, and income taxed is on the basis of extent appropriate to the part played by permanent establishment in those transactions, and that only such part of the income, as is attributable to the operations carried out in India can be taxed in India. In the said case, a clear distinction could be identified between onshore and offshore activities. In the present case, the respondents contend that no such distinction is clearly identifiable from the contracts in question. Further, the said cases (Ishikawajima (supra) and Hyundai heavy Industries (supra)) relate to assessment proceedings, whereas, in the present case, we are concerned with proceedings for grant of certificate under section 197. The scope of enquiry and investigation in both these proceedings is different, especially after the introduction of Explanation 2 to section 195 and at the stage of section 197 proceedings, the question of existence of permanent establishment is not required to be gone into. Therefore, having regard to the aforesaid provision, we cannot direct the Revenue to hold that the petitioner does not have a PE and give the consequent effect of such finding while deciding an application under Section 197 of the Act. Determination of all these questions would have to be undertaken during the course of regular assessment.          ***          32. ...However, we cannot ignore the fact that Petitioner took categorical stand and prevailed upon the revenue to accept the declaration made in the said communication. Although the declaration was qualified, yet, since the petitioner requested the respondent to deduct the tax @ 4% + applicable surcharge & cess for the entire contractual revenues, revenue was justified in accepting the same and the petitioner cannot be permitted to resile there from, once the department has accepted petitioners proposal.

Reasoning:
36. It is well settled that the obligation to deduct TDS is limited to appropriate proportion of income chargeable to tax under the IT Act that forms part of the gross sum of money payable to the non-resident. A person paying any sum to a non-resident is not liable to deduct any tax at source if such sum is not chargeable to tax under the IT Act, as held by this Court in G E India Technology Centre Pvt. Ltd. v. Commissioner of Income Tax and Another (2010) 327 ITR 456 (SC) .37. The High Court rightly held that the question of whether the Appellant had PE, could not possibly be undertaken in an enquiry for issuance of Certificate under Section 197 of the IT Act, having regard to the time-frame permissible in law for deciding an application, more so, when regular assessment had been completed in respect of the immediate preceding year and the Appellant found to be taxable under the IT Act at 10% of the contractual receipts. The Assessing Authority found that the Appellant had PE in India in the concerned Assessment Years. The appeal of the Appellant is possibly pending disposal.38. As held by the High Court, it is well settled that the principle that res judicata is not applicable to income tax proceedings because assessment for each year is final only for that year and does not cover later years.39. Whether the Appellant had PE or not, during the Assessment Year in question, is a disputed factual issue, which has to be determined on the basis of the scope, extent, nature and duration of activities in India. Whether project activity in India continued for a period of more than nine months, for taxability in India in terms of the AADT, is a question of fact, that has to be determined separately for each Assessment Year.40. It may be true, that for a non-resident entity to be taxed in India, it should carry on business through a Permanent Establishment in India, as held by this Court in Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai (2007) 288 ITR 408 (SC) and Commissioner of Income Tax and Anr. v. Hyundai Heavy Industries Co. Ltd. (2007) 291 ITR 482 (SC) . However, the judgments would only be attracted if there were a definite finding that the Appellant did not have any PE in India during the Assessment Year in question, which as stated above, would also depend on the duration and scope of the activities in India. The nature, extent and the duration of work done in India, could vary from year to year.41. It is reiterated that in the immediately preceding Assessment Year, the Assessing Authority proceeded to assess the Appellant on the basis that it did have a Permanent Establishment (PE) in India. Moreover, as rightly held by the High Court, Ishikawajima-Harima Heavy Industries (supra) and Hyundai Heavy Industries (supra) related to assessment proceedings whereas this case pertains to issuance of certificate under Section 197 of the IT Act. The scope of enquiry and investigation in proceedings for grant of Certificate under Section 197 of the IT Act is different from the scope of assessment proceedings. The High Court rightly declined to direct the Revenue to hold that the Appellant did not have PE in India.42. By its letter dated 22nd June 2019, referred to above, the Appellant made a request to the Revenue for issuance of Certificate under Section 197(1) of the IT Act permitting deduction of TDS at the rate of 4% plus applicable surcharge and cess, for all contractual receipts, in line with assessment proceedings for the Assessment Year 2016-2017 without prejudice to its legal position, since the Appellant had been facing financial hardship and urgently required funds. On 26th June 2019, the Respondent No.1 issued the impugned Certificate directing ONGC to deduct TDS at the rate of 4% for all sums receivable in respect of activities both outside and inside India.43. The impugned Certificate being as per the request of the Appellant, it is not open to the Appellant to make a volte-face and challenge the impugned Certificate.44. It may be true that the letter of request dated 22nd June 2019, of the Appellant, referred to above, for issuance of a Certificate under Section 197 of the IT Act, for TDS at the rate of 4% on all receipts was without prejudice to the rights in law and contentions of the Appellant. Such a request without prejudice to the rights and contentions of the Appellant would not operate as estoppel against the Appellant in any Assessment Proceedings, Appellate proceedings or any other proceedings. However, the impugned Certificate having been issued as per the Appellants own request, the Appellant is estopped from questioning the impugned Certificate by initiation of proceedings under Article 226 of the Constitution of India. The Appellant itself made a request for Certificate for TDS at the rate of 4% on all receipts.45. There is no such infirmity in the reasoning of the High Court which calls for interference of this Court under Article 136 of the Constitution of India. As rightly held by the High Court, since the Appellant requested issuance of Certificate for deduction of TDS at 4% of taxable value it is not for the Appellant to challenge the certificate. Moreover, it appears that in the final assessment for one or two preceding Assessment Years it was found that the Appellant did have PE in India. Appeals are pending. In any event, Tax deducted at source is adjustable against the tax, if any, ultimately assessed as payable by the Assessee and any excess tax deducted is refundable with interest. Interference is not warranted at this stage.46. Moreover, in course of hearing, Counsel for the Revenue handed us a Draft Assessment Order, issued in respect of the Assessment Year in question, that is 2020-21, holding that the Appellant had PE in India and was liable to tax in India under the IT Act.