Hyundai Heavy Industries Co. Ltd. v. Director of IT (International Taxation)

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The Tax Publishers2012 TaxPub(DT) 0852 (Hyd-Trib) : (2011) 132 ITD 0385 : (2011) 058 DTR 0465 : (2011) 012 ITR (Trib) 0168 INCOME TAX ACT, 1961 --Revision under section 263--Erroneous and prejudicial orderLack of proper enquiry vis-a-vis AO adopting a possible view--For assessment year 2005-06, the order is stated to have been passed on 9-3-2007 under the provisions of section 143(3) whereby the income of the assessee was assessed at Rs. 39,09,21,550 against the returned loss of Rs. 9,28,05,64,624. The return of income was filed on 31-10-2005 which was initially processed and later on assessment proceedings were initiated vide issue of notice under section 143(2) dt. 21-8-2006. The assessing officer noticed that in the year under consideration the assessee carried out five contracts out of which none was new and, these were executed partly in the preceding year. It was noticed that in respect of HAL project the assessee did not claim PE status. The position has been summarized by the assessing officer in the table. The assessing officer noticed that inside India revenue of the assessee were Rs. 552,28,15,702 and outside India revenues were Rs. 12,94,51,94,688. The assessing officer noticed that the assessee-company has claimed loss in respect of MHB and MUT projects in the computation of income filed by it and in para 3 of the notes annexed with the said computation, it is claimed that 'based on stand adopted by tax department in the past years, company reserves its right to reduce sub-contractor's cost, salary and other items from revenues and then apply deemed profit rate.' The assessing officer also noticed that as per arguments of Authorised Representative of the assessee during the course of proceedings is that the computation of income done by the assessee-company is based on the Indo-Korean Tax Treaty read with the provisions of the section 90. Reference was made to Article 7(3) of Double Taxation Avoidance Agreement (DTAA) as the deduction on account of expenses is claimed by the company in determining profits attributable to the PE. In the argument submitted, it was stated that the assessing officer has allowed the expenses towards subcontractor's cost, salary, etc., as taken from gross revenues and deemed profit rate was applied thereafter in earlier years and, therefore, if all expenses are not allowed, at least the expenses whereon tax is deducted should be allowed for the year under consideration. On these submissions of the assessee, the assessing officer vide para 5 has observed that the assessee's claim of all the expenses is not tenable as the assessee did not produce relevant books of account and vouchers for verification. The assessee did not produce the books of account as the same were stated to be maintained by Head Office of the company in Korea in Korean language. The books of Indian projects were not produced for verification and, in these circumstances, the assessing officer has arrived at a conclusion that it will be impossible to hold that books of account are properly maintained and income can be deduced therefrom. As the relevant record supporting the entries was not complete and correct, the book results were not accepted by the assessing officer. So far as it relates to the contention of the assessee that the cost relating to sub-contractors, salary and wages, etc. on which TDS has been made should be reduced from the gross revenue, the assessing officer has observed that such claim of the assessee cannot be outrightly rejected. Keeping in view the past practice adopted by the Department and also keeping in view article 7(5) of the DTAA, he required the assessee-company to furnish the details of expenses on which the TDS was deducted. The details of such expenses were furnished showing the total of expenses at Rs. 171,19,73,490. The assessing officer verified those details from TDS returns and found that out of the said sum total payments of Rs. 23,27,780 were made to non-resident sub-contractors in which the work was got done outside India by the respective foreign subcontractor and he further found that a sum of Rs. 3,13,07,703 could not be verified. He required the assessee to explain the same and the Authorised Representative of the assessee explained that those payments though are made to non-resident sub-contractors, but, those payments are in respect of work inside India carried out by the assessee. The assessing officer denied such claim of the assessee on the ground of similar stand taken by the department in preceding year. The assessing officer referred to para 3 of article 7 of DTAA which provides that in determining the profits of PE, the expenses incurred for the purpose of PE, including executive and general administration expenses, shall be allowed. He, therefore, observed that the expenses which are verifiable from the respective TDS forms are worked out to Rs. 167,83,37,937 and are to be allowed in view of article 7(3) read with para 5 of the DTAA and he reproduced both these paras in his order. Taking recourse to para Nos. 3 and 4 of article 7 and the note annexed with the statement of income filed with the return of income and on the basis of stand adopted by the department in the past years, assessing officer has concluded that the assessee has no objection to be assessed on the lines similar to those adopted in the past years, i.e., by estimating the profit rate at 10 per cent of the total revenue relating to inside India activity as reduced by the expenses verifiable from TDS annual forms and such computation will be as provided in para 5 of article 7 of DTAA with Korea. He further rejected the claim of the assessee regarding non-taxability of the revenue amounting to Rs. 4,70,835 relating to contract of HAL Project for the reasons mentioned by the assessing officer in paras 6 and 6.1 and the said sum was added to the income of the assessee. It is in this manner, the assessment came to be passed by taking the gross receipt from inside India working out at Rs. 552,28,15,702 (Rs. 5,52,23,44,867 + Rs. 4,70,835). He has reduced therefrom sub-contractors' cost and salary expenditure verified from TDS returns amounting to Rs. 167,83,37,937 and balance inside revenue was taken at Rs. 384,44,77,765 and 10 per cent thereof was taken as assessable income from inside revenue amounting to Rs. 38,44,47,776 and the taxable income of the assessee has been taken at Rs. 39,09,21,550 which includes interest from Citi Bank and interest received from IT Department at Rs. 9,07,647 and Rs. 55,02,127 respectively. It is against aforementioned order passed by assessing officer, the Director of IT has exercised jurisdiction under section 263. In the show-cause notice which is dt. 12-2-2009, it is observed by Director of IT that the order passed by the assessing officer appears to be erroneous so far as it is prejudicial to the interest of the revenue Held: The assessing officer has assessed the assessee with the observations 'keeping in view the past practice adopted by the department on this issue as well as in view of article 7(5) of DTAA.' This fact was in the mind of the assessing officer while framing the assessment and it is, therefore, he had asked the assessee-company to furnish the details of expenses where TDS was deducted and on furnishing such details he has found that out of gross revenue a sum of Rs. 167,83,37,937 was excludible for the purpose of applying 10 per cent rate of income. Though the office note is not annexed with the assessment order, the assessee has produced the contents thereof which has not been disputed by the revenue. The note relating to assessment of inside India revenue has already been reproduced in para 45 of this order. In the note, it has been mentioned by the assessing officer that the assessment is completed as per article 7 of DTAA with Korea estimating the profit rate at 10 per cent to the total revenues relating to inside India activities as reduced by expenses verifiable from annual returns of TDS. This is in line with the stand taken by the Department in preceding assessment years as provided in para 5 of article 7 of DTAA. The assessing officer has also reproduced para 5 of article 7 of DTAA in the assessment order. In view of these facts it was clear that it was not a case where assessing officer did not apply his mind on the issues subject-matter of revision proceedings. The assessing officer had applied his mind. He raised the queries and replies were given by the assessee and in presence of judicial pronouncements available in assessee's own case, he took a conscious decision of not taxing the revenue from outside India operations. Therefore, on the face of it, the order passed by the assessing officer could not be held to be erroneous so far as it was prejudicial to the interest of the revenue in respect of revenue relating to outside India. The law relating to exercise of power under section 263 is well settled. The pre-requisites for the exercise of jurisdiction by the CIT suo motu under section 263 is that the order of the assessing officer was erroneous in so far as it was prejudicial to the interest of the Revenue. Therefore, exercising (sic-power under section), authority has to satisfy itself of the twin conditions, namely, (i) the order of the assessing officer sought to be revised is erroneous; and (ii) it was prejudicial to the interests of the Revenue. If one of them is absentÃ¢â‚¬â€if the order of the assessing officer is erroneous, but was not prejudicial to the Revenue or if it is not erroneous, but prejudicial to the Revenue recourse cannot be had to section 263(1). Such provision cannot also be invoked to correct each and every type of mistake or error committed by the assessing officer, it is only when an order is erroneous that the section will be attractive. The assessment order passed will be erroneous if it is based on an incorrect assumption of fact or on an incorrect application of law. It will also be erroneous when assessment order is passed without applying the principles of natural justice or is passed without application of mind. The phrase 'prejudicial to the interest of revenue' being not defined in the Act should be understood in its ordinary meaning. It is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and such task has been entrusted to the revenue. If due to erroneous order of the assessing officer the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of Revenue. The phrase 'prejudicial to the interest of Revenue' has to be read in conjunction with an erroneous order passed by the assessing officer. Every loss of revenue as a consequence of an order of the assessing officer cannot be treated as prejudicial to the interest of revenue, e.g., when an assessing officer adopted one of the courses permissible in law and it has resulted in the loss of revenue, or where two views are possible and the assessing officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the assessing officer was unsustainable in law. Reference in this regard can be made to the decision of Hon'ble Supreme Court in the case of Malabar Industrial Company v. CIT. (Para 101) The assessing officer has also not assessed the assessee under the provisions of section 44BB so that it can be said that while reducing the subcontractor and salary cost he has acted against the provisions of section 44BB which will make the assessment order based on incorrect application of law amenable to revision. The assessing officer while framing the assessment is aware of the fact that according to option available to the assessee, the assessee has opted to be assessed under the provisions of DTAA. It is, therefore, the assessing officer has referred to the provisions of article 7 in the assessment order passed by him. Not only the assessing officer has mentioned about the applicable articles of DTAA to the assessee, but he has recorded the submissions of the assessee in para 4 that computation of income done by the assessee-company is based on the Indo-Korean tax treaty read with the provisions of section 90. What the assessing officer has done is that he has assessed the assessee according to the past history of the case and has allowed out of gross revenue a sum of Rs. 167,83,37,937 as sub-contractors cost and salary expenditure. This also has not been done in a routine manner. A finding of fact has been recorded by the assessing officer that he has verified all these payments from the TDS returns and after making verification in this regard, the assessing officer has given specific finding that out of gross payments made by the assessee to sub-contractors and salary amounting to Rs. 171,19,73,419, a sum of Rs. 23,27,780 was made to non-resident sub-contractors for works done outside India by respective foreign sub-contractors and a further sum of Rs. 3,13,07,703 could not be verified. He, therefore, reduced these two amounts from the gross amount claimed by the assessee and, in this manner, has arrived at a sum of Rs. 167,83,37,937 which has been reduced and on the balance revenue 10 per cent rate has been applied. The assessing officer ignored the book result of the assessee according to which it had filed return of loss at Rs. 928,05,64,624 and adopted a formula as per past history of the case of the assessee. The assessing officer has assessed the assessee with the observations 'keeping in view the past practice adopted by the department on this issue as well as in view of article 7(5) of DTAA.' This fact was in the mind of the assessing officer while framing the assessment and it is, therefore, he had asked the assessee-company to furnish the details of expenses where TDS was deducted and on furnishing such details he has found that out of gross revenue a sum of Rs. 167,83,37,937 was excludible for the purpose of applying 10 per cent rate of income. Though the office note is not annexed with the assessment order, the assessee has produced the contents thereof which has not been disputed by the Revenue. In the note it has been mentioned by the assessing officer that the assessment is completed as per article 7 of DTAA with Korea estimating the profit rate at 10 per cent to the total revenues relating to inside India activities as reduced by expenses verifiable from annual returns of TDS. This is in line with the stand taken by the department in preceding assessment years as provided in para 5 of article 7 of DTAA. The assessing officer has also reproduced para 5 of article 7 of DTAA in the assessment order. (Para 106) According to the mandate given in para 5 of article 7 for determining the profits attributable to the PE, the same method year by year is to be applied unless there is good and sufficient reason to the contrary. It has been demonstrated by the assessee that from year to year the Department has been adopting this formula. If it is so, then, it is incumbent on the department to show that there exist good and sufficient reason to take a contrary view. Apparently or impliedly, it has not been shown that there exist good and sufficient reasons to take a contrary opinion as is sought to be taken by Director of IT in the show-cause notice or in the order passed by him. Unless it is shown that there exist good and sufficient reasons to take a different view, such view is not permissible according to the provisions of DTAA. (Para 107) A cumulative reading of articles 7(3) and (5) will make it clear that for determining the profits of PE, the expenses which are incurred for the purpose of PE including executive and general administrative expenses are to be allowed irrespective of their incurrence whether in the State in which the PE is situated or elsewhere which are allowed under the provisions of domestic law of the Contracting State in which the PE is situated and this has to be done by the same method year by year unless there is good and sufficient reason to the contrary. In other words, all the expenses which are incurred by the assessee for the purpose of its PE are to be allowed which include executive and general administrative expenses as are allowed under the provisions of domestic law. Under the provisions of domestic law, if the income is to be assessed under the head 'Business', then, all the expenses incurred wholly and exclusively for the purpose of business are allowable. The question of estimate will arise only if from the accounts and details maintained by the assessee the profit is not deducible. All along it has been the case of the assessee that it is not in a position to produce the books of accounts and in that circumstance the estimate of income is being made. This position existed throughout the history of the case of the assessee. But it does not mean that income of the assessee has to be assessed only as per provisions of section 44BB(1), i.e., the assessee should be assessed @ 10 per cent of the gross inside India revenue. If the assessee is able to establish that it does not have income of that magnitude, then, it is, open for the assessee to be assessed at a lower amount. This has so been demonstrated in the case of the assessee itself when even according to the fresh order passed in pursuance of the order passed by the learned Director of IT not only the department has reduced the expenses which are subject to TDS amounting to Rs. 167,83,37,937, but has further allowed a deduction of 35 per cent of material cost which has been computed at Rs. 360 crores and the department has assessed the assessee at lower income of Rs. 24.35 crores against originally assessed income of Rs. 38.44 crores. Thus, it cannot be said that the assessee was indeed assessable at 10 per cent of the gross revenue.. Therefore, the view adopted by the Director of IT in the show-cause notice itself was not a possible view which could be taken. If that was not the possible view, then, whether the view taken by the assessing officer was possible. The assessing officer has given the reasons for adopting a view which is in accordance with the past history of the case and which is in conformity with the Article 7(5) of the DTAA. Therefore, it can be held that the assessing officer has taken a possible view which is according to past history of the case and he has first reduced an amount of Rs. 167,83,37,937 representing the sub-contractors cost and salary expenditure upon which TDS was deducted and, then, applied the rate of 10 per cent to assess the income of the assessee. By adopting this method, the Revenue was able to collect income-tax from the assessee irrespective of the fact that whether or not the assessee has incurred heavy loss in the contracts executed by it. If the view of the assessing officer was a possible view, based on the past history of the assessee, then, Director of IT could not impose his view upon the assessing officer unless it is shown that the view adopted by him is a possible view to be logically taken in the case of the assessee. It has already been described that the view taken by Director of IT in his order and in the show-cause notice could not even be taken in the further proceedings when consequential order has been passed by the Department. Therefore, on this ground it cannot be said that Director of IT has rightly exercised his power under section 263 to set aside the assessment with a direction to the assessing officer to pass fresh assessment order. (Para 109) Though there is no discussion regarding non-taxation of the revenue for outside India operations in the assessment order, it has been brought on record by the counsel of the assessee that in the office note the assessing officer has given the reasons for not levying the tax on such revenue and such observations of the assessing officer in the office note are also reproduced in para 14 of this order. It has been observed by the assessing officer that the assessee has shown revenues from outside India operations which have not been offered to tax in the return of income stating that revenues were received from activities performed outside India and, therefore, the revenues earned out of these activities are not attributable to the PE in India. The assessing officer has quantified those revenues and has observed that the assessee has relied upon the judgment of High Court of Uttarakhand in assessee's own case as well as on the decision of Supreme Court in the case of Ishikawajima-Harima Heavy Industries Co. Ltd.. It is observed by the assessing officer that the revenues earned by the assessee on account of the procurement of the material outside India is not brought to tax in view of the decision of Supreme Court in the case of Ishikawajima Harima Heavy Industries Co. Ltd.. It is also observed that though the department has not accepted the decision of Hon'ble Uttarakhand High court regarding the taxability of outside India operations at nil and has filed SLP before the Supreme Court and in case the Hon'ble Supreme Court decides to tax the outside India receipts in the case of the assessee, action shall be taken as per law. From the above observations of the assessing officer, it is clear that during the course of assessment proceedings not only he has inquired about the taxability of these receipts from the assessee, but replies were also filed by the assessee and after due consideration thereof he has decided not to levy any tax upon that revenue. The assessing officer while holding the view that such receipts were not taxable in India apart from relying upon the decision of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Co. Ltd. has also relied upon the decisions of jurisdictional High Court in the case of the assessee itself wherein such receipts were held not taxable. Therefore, it has been demonstrated by the Authorised Representative of the assessee that even in the absence of any discussion in the assessment order there is material on record according to which the assessing officer had taken a conscious decision regarding non-taxability of the revenue from outside India operation, which, according to the argument of the assessee pertained to the activities performed outside India. It was argued before the assessing officer that the revenue related to the activities performed outside India which means that no part of that revenue related to any PE in India for that work and after satisfying itself with that contention of the assessee and relying upon the decision of Uttarakhand High Court in the case of the assessee itself, these revenues have been held to be not taxable. Now, according to the Director of IT, assessing officer has not gone into the questions which have been described earlier and, therefore, has committed an error in not levying the tax on such revenue. But, at the same time, it has also not been shown by Director of IT that there exist any material on record according to which it can be said that the assessee is factually incorrect in contending that no part of outside India revenue relates to its PE in India. The argument of both the parties in this regard have also been described in detail and are not needed to be repeated for the sake of brevity. But, it will be relevant to mention that in all the preceding years such revenue of the assessee has been held to be not taxable. It is not the case of the revenue that facts relating to revenue from outside India are in any way different for the year under consideration as compared to preceding years. At least, no material has been brought on record by the revenue to show that facts relating to income from outside India operations are in any way different in the years under consideration as compared to the preceding years. Rather, in the footnote the assessing officer while observing that the revenue is not being taxed has clearly stated that the same is not being taxed on the basis of the decision of jurisdictional High Court in the case of the assessee for preceding years. (Para 111) In view of these facts, it is clear that it is not a case where assessing officer did not apply his mind on the issues subject-matter of revision proceedings. The assessing officer had applied his mind. He raised the queries and replies were given by the assessee and in presence of judicial pronouncements available in assessee's own case he took a conscious decision of not taxing the revenue from outside India operations. He was aware of the fact that Department has preferred further appeal in Apex Court. In this view of the situation, the assessing officer did not have other alternative except not to tax the outside India revenue but to write a footnote to the assessment order describing therein the facts and circumstances in which he has taken such decision. It is also not a case of either 'lack of inquiry' or 'inadequate inquiry' as Director of IT himself has not brought on record any material to suggest that the facts relating to the years under consideration were in any way different from the facts of the cases of preceding years where this issue was decided in favour of the assessee. (Para 112) It may also be pointed out here that when the assessing officer passed the assessment order for assessment year 2005-06, he was having with him the decision of jurisdictional High Court in the case of the assessee which is dt. 30-3-2006 and is reported as CIT & Anr. v. Hyundai Heavy Industries Co. Ltd. In that decision jurisdictional High Court in the case of the assessee itself for assessment years 1986-87, 1987-88, 1988-89 and 1989-90 had' upheld the order of the Tribunal vide which it was ruled that the assessee is not liable to be taxed in respect of activities admittedly carried on in Korea. However, it was held that the appeals were concluded by the Tribunal by a finding of fact. The said decision of the jurisdictional High Court was further appealed before Supreme Court and Supreme Court rendered the decision on 18-5-2007 which is reported as CIT & Anr. v. Hyundai Heavy Industries Co. Ltd.. In that decision, it was confirmed by Supreme Court that the Tribunal was right in holding that no part of the income attributable to Korean operation could be taxed in India as before the coming into existence of the PE in India the work of fabrication was completed in Korea and the fabricated platform was handed over to the ONGC. To that extent, the decision of the Tribunal was upheld The decision of the Tribunal was only reversed on the ground that the Tribunal committed an error to reduce the net profit rate on Indian operations from 10 per cent to 3 per cent. The applicability of 10 per cent rate was specifically upheld on the ground of the fact that the assessee appeared before the Department and submitted that its income from Indian operations be computed under section 44BB or under Instruction No. 1767 issued by the CBDT.' Therefore, in view of the stand taken by the assessee, it was held that the Commissioner (Appeals) was right in computing the taxable profits at 10 per cent of the gross receipts in respect of activities of installation, commissioning, etc., performed in India and the Tribunal did not give any reason for reducing the fate from 10 per cent to 3 per cent. Reference in this regard can be made to the observations of Hon'ble Supreme Court in para 13 of the said decision. However, the facts of the present case are clear. The assessee has not submitted that its income in respect of Indian operation should be assessed either under section 44BB of the Act or under the Instruction No. 1767 issued by the CBDT. The case of the assessee is clear that it should be assessed under the provisions of DTAA. Therefore, the mandate in the case of the assessee even upto the decision of Apex Court is that no part of income attributable to Korean operations could be taxed in India as before the coming into existence of the PE in India the work of fabrication was completed in Korea and fabricated platform handed over to the ONGC. No material has been brought on record by Director of IT to controvert the finding of fact that work of fabrication was completed in Korea and the fabricated platform was handed over to the ONGC. This position has time and again been accepted by the Tribunal. (Para 113) In the present years, there is no material on record to suggest that the outside India revenue does not belong to Korean operation performed outside India and also that the transactions entered into by the assessee with ONGC is not at arm's length. There is no material on record to suggest that PE has any nexus with the fabrication work done outside India the supply of which was handed over offshore. The assessing officer while framing the assessment for the year under consideration was well aware of the decision of the Tribunal and the decision of jurisdictional High Court in assessee's own case and also the decision of Supreme Court in the case of Ishikawajhima Harima Heavy Industries Company Ltd. and after considering all these decisions he did not impose tax on the revenue relating to outside India operation and his such view cannot be held to be erroneous simply for the reason that he did not make inquiry in relation to role of PE, etc. It has already been observed that PE, even if it existed, the revenue from outside India operation could not be taxed unless there is a nexus between the PE and the activity done and performed outside India and this is the crux of the decision of Supreme Court in the case of the assessee itself. Even Director of IT could not point out any such nexus in his order. Therefore, on the face of it, the order passed by the assessing officer cannot be held to be erroneous so far as it is prejudicial to the interest of the Revenue in respect of revenue relating to outside India. Therefore, on both the grounds the assessment orders passed by the assessing officer is neither erroneous nor prejudicial to the interest of Revenue. The powers under section 263 have been invoked without jurisdiction as the necessary ingredients to invoke the same are absent. Therefore, the impugned orders passed by Director of IT was quashed in respect of both the years under consideration and the appeals filed by the assessee are allowed in the manner aforesaid. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 0852 (Hyd-Trib) : (2011) 132 ITD 0385 : (2011) 058 DTR 0465 : (2011) 012 ITR (Trib) 0168

INCOME TAX ACT, 1961

--Revision under section 263--Erroneous and prejudicial orderLack of proper enquiry vis-a-vis AO adopting a possible view--For assessment year 2005-06, the order is stated to have been passed on 9-3-2007 under the provisions of section 143(3) whereby the income of the assessee was assessed at Rs. 39,09,21,550 against the returned loss of Rs. 9,28,05,64,624. The return of income was filed on 31-10-2005 which was initially processed and later on assessment proceedings were initiated vide issue of notice under section 143(2) dt. 21-8-2006. The assessing officer noticed that in the year under consideration the assessee carried out five contracts out of which none was new and, these were executed partly in the preceding year. It was noticed that in respect of HAL project the assessee did not claim PE status. The position has been summarized by the assessing officer in the table. The assessing officer noticed that inside India revenue of the assessee were Rs. 552,28,15,702 and outside India revenues were Rs. 12,94,51,94,688. The assessing officer noticed that the assessee-company has claimed loss in respect of MHB and MUT projects in the computation of income filed by it and in para 3 of the notes annexed with the said computation, it is claimed that 'based on stand adopted by tax department in the past years, company reserves its right to reduce sub-contractor's cost, salary and other items from revenues and then apply deemed profit rate.' The assessing officer also noticed that as per arguments of Authorised Representative of the assessee during the course of proceedings is that the computation of income done by the assessee-company is based on the Indo-Korean Tax Treaty read with the provisions of the section 90. Reference was made to Article 7(3) of Double Taxation Avoidance Agreement (DTAA) as the deduction on account of expenses is claimed by the company in determining profits attributable to the PE. In the argument submitted, it was stated that the assessing officer has allowed the expenses towards subcontractor's cost, salary, etc., as taken from gross revenues and deemed profit rate was applied thereafter in earlier years and, therefore, if all expenses are not allowed, at least the expenses whereon tax is deducted should be allowed for the year under consideration. On these submissions of the assessee, the assessing officer vide para 5 has observed that the assessee's claim of all the expenses is not tenable as the assessee did not produce relevant books of account and vouchers for verification. The assessee did not produce the books of account as the same were stated to be maintained by Head Office of the company in Korea in Korean language. The books of Indian projects were not produced for verification and, in these circumstances, the assessing officer has arrived at a conclusion that it will be impossible to hold that books of account are properly maintained and income can be deduced therefrom. As the relevant record supporting the entries was not complete and correct, the book results were not accepted by the assessing officer. So far as it relates to the contention of the assessee that the cost relating to sub-contractors, salary and wages, etc. on which TDS has been made should be reduced from the gross revenue, the assessing officer has observed that such claim of the assessee cannot be outrightly rejected. Keeping in view the past practice adopted by the Department and also keeping in view article 7(5) of the DTAA, he required the assessee-company to furnish the details of expenses on which the TDS was deducted. The details of such expenses were furnished showing the total of expenses at Rs. 171,19,73,490. The assessing officer verified those details from TDS returns and found that out of the said sum total payments of Rs. 23,27,780 were made to non-resident sub-contractors in which the work was got done outside India by the respective foreign subcontractor and he further found that a sum of Rs. 3,13,07,703 could not be verified. He required the assessee to explain the same and the Authorised Representative of the assessee explained that those payments though are made to non-resident sub-contractors, but, those payments are in respect of work inside India carried out by the assessee. The assessing officer denied such claim of the assessee on the ground of similar stand taken by the department in preceding year. The assessing officer referred to para 3 of article 7 of DTAA which provides that in determining the profits of PE, the expenses incurred for the purpose of PE, including executive and general administration expenses, shall be allowed. He, therefore, observed that the expenses which are verifiable from the respective TDS forms are worked out to Rs. 167,83,37,937 and are to be allowed in view of article 7(3) read with para 5 of the DTAA and he reproduced both these paras in his order. Taking recourse to para Nos. 3 and 4 of article 7 and the note annexed with the statement of income filed with the return of income and on the basis of stand adopted by the department in the past years, assessing officer has concluded that the assessee has no objection to be assessed on the lines similar to those adopted in the past years, i.e., by estimating the profit rate at 10 per cent of the total revenue relating to inside India activity as reduced by the expenses verifiable from TDS annual forms and such computation will be as provided in para 5 of article 7 of DTAA with Korea. He further rejected the claim of the assessee regarding non-taxability of the revenue amounting to Rs. 4,70,835 relating to contract of HAL Project for the reasons mentioned by the assessing officer in paras 6 and 6.1 and the said sum was added to the income of the assessee. It is in this manner, the assessment came to be passed by taking the gross receipt from inside India working out at Rs. 552,28,15,702 (Rs. 5,52,23,44,867 + Rs. 4,70,835). He has reduced therefrom sub-contractors' cost and salary expenditure verified from TDS returns amounting to Rs. 167,83,37,937 and balance inside revenue was taken at Rs. 384,44,77,765 and 10 per cent thereof was taken as assessable income from inside revenue amounting to Rs. 38,44,47,776 and the taxable income of the assessee has been taken at Rs. 39,09,21,550 which includes interest from Citi Bank and interest received from IT Department at Rs. 9,07,647 and Rs. 55,02,127 respectively. It is against aforementioned order passed by assessing officer, the Director of IT has exercised jurisdiction under section 263. In the show-cause notice which is dt. 12-2-2009, it is observed by Director of IT that the order passed by the assessing officer appears to be erroneous so far as it is prejudicial to the interest of the revenue Held: The assessing officer has assessed the assessee with the observations 'keeping in view the past practice adopted by the department on this issue as well as in view of article 7(5) of DTAA.' This fact was in the mind of the assessing officer while framing the assessment and it is, therefore, he had asked the assessee-company to furnish the details of expenses where TDS was deducted and on furnishing such details he has found that out of gross revenue a sum of Rs. 167,83,37,937 was excludible for the purpose of applying 10 per cent rate of income. Though the office note is not annexed with the assessment order, the assessee has produced the contents thereof which has not been disputed by the revenue. The note relating to assessment of inside India revenue has already been reproduced in para 45 of this order. In the note, it has been mentioned by the assessing officer that the assessment is completed as per article 7 of DTAA with Korea estimating the profit rate at 10 per cent to the total revenues relating to inside India activities as reduced by expenses verifiable from annual returns of TDS. This is in line with the stand taken by the Department in preceding assessment years as provided in para 5 of article 7 of DTAA. The assessing officer has also reproduced para 5 of article 7 of DTAA in the assessment order. In view of these facts it was clear that it was not a case where assessing officer did not apply his mind on the issues subject-matter of revision proceedings. The assessing officer had applied his mind. He raised the queries and replies were given by the assessee and in presence of judicial pronouncements available in assessee's own case, he took a conscious decision of not taxing the revenue from outside India operations. Therefore, on the face of it, the order passed by the assessing officer could not be held to be erroneous so far as it was prejudicial to the interest of the revenue in respect of revenue relating to outside India.

The law relating to exercise of power under section 263 is well settled. The pre-requisites for the exercise of jurisdiction by the CIT suo motu under section 263 is that the order of the assessing officer was erroneous in so far as it was prejudicial to the interest of the Revenue. Therefore, exercising (sic-power under section), authority has to satisfy itself of the twin conditions, namely, (i) the order of the assessing officer sought to be revised is erroneous; and (ii) it was prejudicial to the interests of the Revenue. If one of them is absentÃ¢â‚¬â€if the order of the assessing officer is erroneous, but was not prejudicial to the Revenue or if it is not erroneous, but prejudicial to the Revenue recourse cannot be had to section 263(1). Such provision cannot also be invoked to correct each and every type of mistake or error committed by the assessing officer, it is only when an order is erroneous that the section will be attractive. The assessment order passed will be erroneous if it is based on an incorrect assumption of fact or on an incorrect application of law. It will also be erroneous when assessment order is passed without applying the principles of natural justice or is passed without application of mind. The phrase 'prejudicial to the interest of revenue' being not defined in the Act should be understood in its ordinary meaning. It is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and such task has been entrusted to the revenue. If due to erroneous order of the assessing officer the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of Revenue. The phrase 'prejudicial to the interest of Revenue' has to be read in conjunction with an erroneous order passed by the assessing officer. Every loss of revenue as a consequence of an order of the assessing officer cannot be treated as prejudicial to the interest of revenue, e.g., when an assessing officer adopted one of the courses permissible in law and it has resulted in the loss of revenue, or where two views are possible and the assessing officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the assessing officer was unsustainable in law. Reference in this regard can be made to the decision of Hon'ble Supreme Court in the case of Malabar Industrial Company v. CIT. (Para 101) The assessing officer has also not assessed the assessee under the provisions of section 44BB so that it can be said that while reducing the subcontractor and salary cost he has acted against the provisions of section 44BB which will make the assessment order based on incorrect application of law amenable to revision. The assessing officer while framing the assessment is aware of the fact that according to option available to the assessee, the assessee has opted to be assessed under the provisions of DTAA. It is, therefore, the assessing officer has referred to the provisions of article 7 in the assessment order passed by him. Not only the assessing officer has mentioned about the applicable articles of DTAA to the assessee, but he has recorded the submissions of the assessee in para 4 that computation of income done by the assessee-company is based on the Indo-Korean tax treaty read with the provisions of section 90. What the assessing officer has done is that he has assessed the assessee according to the past history of the case and has allowed out of gross revenue a sum of Rs. 167,83,37,937 as sub-contractors cost and salary expenditure. This also has not been done in a routine manner. A finding of fact has been recorded by the assessing officer that he has verified all these payments from the TDS returns and after making verification in this regard, the assessing officer has given specific finding that out of gross payments made by the assessee to sub-contractors and salary amounting to Rs. 171,19,73,419, a sum of Rs. 23,27,780 was made to non-resident sub-contractors for works done outside India by respective foreign sub-contractors and a further sum of Rs. 3,13,07,703 could not be verified. He, therefore, reduced these two amounts from the gross amount claimed by the assessee and, in this manner, has arrived at a sum of Rs. 167,83,37,937 which has been reduced and on the balance revenue 10 per cent rate has been applied. The assessing officer ignored the book result of the assessee according to which it had filed return of loss at Rs. 928,05,64,624 and adopted a formula as per past history of the case of the assessee. The assessing officer has assessed the assessee with the observations 'keeping in view the past practice adopted by the department on this issue as well as in view of article 7(5) of DTAA.' This fact was in the mind of the assessing officer while framing the assessment and it is, therefore, he had asked the assessee-company to furnish the details of expenses where TDS was deducted and on furnishing such details he has found that out of gross revenue a sum of Rs. 167,83,37,937 was excludible for the purpose of applying 10 per cent rate of income. Though the office note is not annexed with the assessment order, the assessee has produced the contents thereof which has not been disputed by the Revenue. In the note it has been mentioned by the assessing officer that the assessment is completed as per article 7 of DTAA with Korea estimating the profit rate at 10 per cent to the total revenues relating to inside India activities as reduced by expenses verifiable from annual returns of TDS. This is in line with the stand taken by the department in preceding assessment years as provided in para 5 of article 7 of DTAA. The assessing officer has also reproduced para 5 of article 7 of DTAA in the assessment order. (Para 106) According to the mandate given in para 5 of article 7 for determining the profits attributable to the PE, the same method year by year is to be applied unless there is good and sufficient reason to the contrary. It has been demonstrated by the assessee that from year to year the Department has been adopting this formula. If it is so, then, it is incumbent on the department to show that there exist good and sufficient reason to take a contrary view. Apparently or impliedly, it has not been shown that there exist good and sufficient reasons to take a contrary opinion as is sought to be taken by Director of IT in the show-cause notice or in the order passed by him. Unless it is shown that there exist good and sufficient reasons to take a different view, such view is not permissible according to the provisions of DTAA. (Para 107) A cumulative reading of articles 7(3) and (5) will make it clear that for determining the profits of PE, the expenses which are incurred for the purpose of PE including executive and general administrative expenses are to be allowed irrespective of their incurrence whether in the State in which the PE is situated or elsewhere which are allowed under the provisions of domestic law of the Contracting State in which the PE is situated and this has to be done by the same method year by year unless there is good and sufficient reason to the contrary. In other words, all the expenses which are incurred by the assessee for the purpose of its PE are to be allowed which include executive and general administrative expenses as are allowed under the provisions of domestic law. Under the provisions of domestic law, if the income is to be assessed under the head 'Business', then, all the expenses incurred wholly and exclusively for the purpose of business are allowable. The question of estimate will arise only if from the accounts and details maintained by the assessee the profit is not deducible. All along it has been the case of the assessee that it is not in a position to produce the books of accounts and in that circumstance the estimate of income is being made. This position existed throughout the history of the case of the assessee. But it does not mean that income of the assessee has to be assessed only as per provisions of section 44BB(1), i.e., the assessee should be assessed @ 10 per cent of the gross inside India revenue. If the assessee is able to establish that it does not have income of that magnitude, then, it is, open for the assessee to be assessed at a lower amount. This has so been demonstrated in the case of the assessee itself when even according to the fresh order passed in pursuance of the order passed by the learned Director of IT not only the department has reduced the expenses which are subject to TDS amounting to Rs. 167,83,37,937, but has further allowed a deduction of 35 per cent of material cost which has been computed at Rs. 360 crores and the department has assessed the assessee at lower income of Rs. 24.35 crores against originally assessed income of Rs. 38.44 crores. Thus, it cannot be said that the assessee was indeed assessable at 10 per cent of the gross revenue.. Therefore, the view adopted by the Director of IT in the show-cause notice itself was not a possible view which could be taken. If that was not the possible view, then, whether the view taken by the assessing officer was possible. The assessing officer has given the reasons for adopting a view which is in accordance with the past history of the case and which is in conformity with the Article 7(5) of the DTAA. Therefore, it can be held that the assessing officer has taken a possible view which is according to past history of the case and he has first reduced an amount of Rs. 167,83,37,937 representing the sub-contractors cost and salary expenditure upon which TDS was deducted and, then, applied the rate of 10 per cent to assess the income of the assessee. By adopting this method, the Revenue was able to collect income-tax from the assessee irrespective of the fact that whether or not the assessee has incurred heavy loss in the contracts executed by it. If the view of the assessing officer was a possible view, based on the past history of the assessee, then, Director of IT could not impose his view upon the assessing officer unless it is shown that the view adopted by him is a possible view to be logically taken in the case of the assessee. It has already been described that the view taken by Director of IT in his order and in the show-cause notice could not even be taken in the further proceedings when consequential order has been passed by the Department. Therefore, on this ground it cannot be said that Director of IT has rightly exercised his power under section 263 to set aside the assessment with a direction to the assessing officer to pass fresh assessment order. (Para 109) Though there is no discussion regarding non-taxation of the revenue for outside India operations in the assessment order, it has been brought on record by the counsel of the assessee that in the office note the assessing officer has given the reasons for not levying the tax on such revenue and such observations of the assessing officer in the office note are also reproduced in para 14 of this order. It has been observed by the assessing officer that the assessee has shown revenues from outside India operations which have not been offered to tax in the return of income stating that revenues were received from activities performed outside India and, therefore, the revenues earned out of these activities are not attributable to the PE in India. The assessing officer has quantified those revenues and has observed that the assessee has relied upon the judgment of High Court of Uttarakhand in assessee's own case as well as on the decision of Supreme Court in the case of Ishikawajima-Harima Heavy Industries Co. Ltd.. It is observed by the assessing officer that the revenues earned by the assessee on account of the procurement of the material outside India is not brought to tax in view of the decision of Supreme Court in the case of Ishikawajima Harima Heavy Industries Co. Ltd.. It is also observed that though the department has not accepted the decision of Hon'ble Uttarakhand High court regarding the taxability of outside India operations at nil and has filed SLP before the Supreme Court and in case the Hon'ble Supreme Court decides to tax the outside India receipts in the case of the assessee, action shall be taken as per law. From the above observations of the assessing officer, it is clear that during the course of assessment proceedings not only he has inquired about the taxability of these receipts from the assessee, but replies were also filed by the assessee and after due consideration thereof he has decided not to levy any tax upon that revenue. The assessing officer while holding the view that such receipts were not taxable in India apart from relying upon the decision of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Co. Ltd. has also relied upon the decisions of jurisdictional High Court in the case of the assessee itself wherein such receipts were held not taxable. Therefore, it has been demonstrated by the Authorised Representative of the assessee that even in the absence of any discussion in the assessment order there is material on record according to which the assessing officer had taken a conscious decision regarding non-taxability of the revenue from outside India operation, which, according to the argument of the assessee pertained to the activities performed outside India. It was argued before the assessing officer that the revenue related to the activities performed outside India which means that no part of that revenue related to any PE in India for that work and after satisfying itself with that contention of the assessee and relying upon the decision of Uttarakhand High Court in the case of the assessee itself, these revenues have been held to be not taxable. Now, according to the Director of IT, assessing officer has not gone into the questions which have been described earlier and, therefore, has committed an error in not levying the tax on such revenue. But, at the same time, it has also not been shown by Director of IT that there exist any material on record according to which it can be said that the assessee is factually incorrect in contending that no part of outside India revenue relates to its PE in India. The argument of both the parties in this regard have also been described in detail and are not needed to be repeated for the sake of brevity. But, it will be relevant to mention that in all the preceding years such revenue of the assessee has been held to be not taxable. It is not the case of the revenue that facts relating to revenue from outside India are in any way different for the year under consideration as compared to preceding years. At least, no material has been brought on record by the revenue to show that facts relating to income from outside India operations are in any way different in the years under consideration as compared to the preceding years. Rather, in the footnote the assessing officer while observing that the revenue is not being taxed has clearly stated that the same is not being taxed on the basis of the decision of jurisdictional High Court in the case of the assessee for preceding years. (Para 111) In view of these facts, it is clear that it is not a case where assessing officer did not apply his mind on the issues subject-matter of revision proceedings. The assessing officer had applied his mind. He raised the queries and replies were given by the assessee and in presence of judicial pronouncements available in assessee's own case he took a conscious decision of not taxing the revenue from outside India operations. He was aware of the fact that Department has preferred further appeal in Apex Court. In this view of the situation, the assessing officer did not have other alternative except not to tax the outside India revenue but to write a footnote to the assessment order describing therein the facts and circumstances in which he has taken such decision. It is also not a case of either 'lack of inquiry' or 'inadequate inquiry' as Director of IT himself has not brought on record any material to suggest that the facts relating to the years under consideration were in any way different from the facts of the cases of preceding years where this issue was decided in favour of the assessee. (Para 112) It may also be pointed out here that when the assessing officer passed the assessment order for assessment year 2005-06, he was having with him the decision of jurisdictional High Court in the case of the assessee which is dt. 30-3-2006 and is reported as CIT & Anr. v. Hyundai Heavy Industries Co. Ltd. In that decision jurisdictional High Court in the case of the assessee itself for assessment years 1986-87, 1987-88, 1988-89 and 1989-90 had' upheld the order of the Tribunal vide which it was ruled that the assessee is not liable to be taxed in respect of activities admittedly carried on in Korea. However, it was held that the appeals were concluded by the Tribunal by a finding of fact. The said decision of the jurisdictional High Court was further appealed before Supreme Court and Supreme Court rendered the decision on 18-5-2007 which is reported as CIT & Anr. v. Hyundai Heavy Industries Co. Ltd.. In that decision, it was confirmed by Supreme Court that the Tribunal was right in holding that no part of the income attributable to Korean operation could be taxed in India as before the coming into existence of the PE in India the work of fabrication was completed in Korea and the fabricated platform was handed over to the ONGC. To that extent, the decision of the Tribunal was upheld The decision of the Tribunal was only reversed on the ground that the Tribunal committed an error to reduce the net profit rate on Indian operations from 10 per cent to 3 per cent. The applicability of 10 per cent rate was specifically upheld on the ground of the fact that the assessee appeared before the Department and submitted that its income from Indian operations be computed under section 44BB or under Instruction No. 1767 issued by the CBDT.' Therefore, in view of the stand taken by the assessee, it was held that the Commissioner (Appeals) was right in computing the taxable profits at 10 per cent of the gross receipts in respect of activities of installation, commissioning, etc., performed in India and the Tribunal did not give any reason for reducing the fate from 10 per cent to 3 per cent. Reference in this regard can be made to the observations of Hon'ble Supreme Court in para 13 of the said decision. However, the facts of the present case are clear. The assessee has not submitted that its income in respect of Indian operation should be assessed either under section 44BB of the Act or under the Instruction No. 1767 issued by the CBDT. The case of the assessee is clear that it should be assessed under the provisions of DTAA. Therefore, the mandate in the case of the assessee even upto the decision of Apex Court is that no part of income attributable to Korean operations could be taxed in India as before the coming into existence of the PE in India the work of fabrication was completed in Korea and fabricated platform handed over to the ONGC. No material has been brought on record by Director of IT to controvert the finding of fact that work of fabrication was completed in Korea and the fabricated platform was handed over to the ONGC. This position has time and again been accepted by the Tribunal. (Para 113) In the present years, there is no material on record to suggest that the outside India revenue does not belong to Korean operation performed outside India and also that the transactions entered into by the assessee with ONGC is not at arm's length. There is no material on record to suggest that PE has any nexus with the fabrication work done outside India the supply of which was handed over offshore. The assessing officer while framing the assessment for the year under consideration was well aware of the decision of the Tribunal and the decision of jurisdictional High Court in assessee's own case and also the decision of Supreme Court in the case of Ishikawajhima Harima Heavy Industries Company Ltd. and after considering all these decisions he did not impose tax on the revenue relating to outside India operation and his such view cannot be held to be erroneous simply for the reason that he did not make inquiry in relation to role of PE, etc. It has already been observed that PE, even if it existed, the revenue from outside India operation could not be taxed unless there is a nexus between the PE and the activity done and performed outside India and this is the crux of the decision of Supreme Court in the case of the assessee itself. Even Director of IT could not point out any such nexus in his order. Therefore, on the face of it, the order passed by the assessing officer cannot be held to be erroneous so far as it is prejudicial to the interest of the Revenue in respect of revenue relating to outside India. Therefore, on both the grounds the assessment orders passed by the assessing officer is neither erroneous nor prejudicial to the interest of Revenue. The powers under section 263 have been invoked without jurisdiction as the necessary ingredients to invoke the same are absent. Therefore, the impugned orders passed by Director of IT was quashed in respect of both the years under consideration and the appeals filed by the assessee are allowed in the manner aforesaid.