S. 263 CIT can revise AO’s order of taxing receipt as ordinary income instead of taxing it u/s. 44BB

HIGH COURT OF UUTTARAKHAND

M-I Overseas Ltd.

Versus

Director of Income-tax, International Taxation-II

IT APPEAL NO. 25 OF 2012

OCTOBER 3, 2012

JUDGMENT

Barin Ghosh, CJ.

The assessee, appellant herein, though has its situs outside India, but has a permanent establishment in India. It has provided services in India in consideration of payments made to it by its Indian customers. For the assessment year 2006-2007, assessee filed its return of income disclosing therein that it has made taxable income of Rs. 6,18,35,432/-. Notice under Section 143(2) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) was issued to the appellant. In response to the notice, assessee informed the Assessing Officer that it has received gross revenue of Rs. 158 and odd crores on account of its Indian operations. It held out that of such gross revenue, Rs. 61 and odd crores it received on account of providing services or facilities in connection with prospecting for extraction or production of mineral oils. It submitted that it received Rs. 40 lacs and odd on account of reimbursement revenue and the remaining Rs. 96 crores and odd on account of materials supplied to its Indian customers, which supplies were effected outside India and the purchaser acquired title to those supplies outside India. It, therefore, submitted that in terms of Section 44BB of the Act, the taxable income of the appellant would be Rs. 6,18,35,432/-. It submitted that since Rs. 40 lacs and odd were received on account of reimbursement revenue, the same are not taxable. It contended that though goods/materials worth Rs. 96 and odd crores were sold to Indian customers, but since such sale stood completed outside India, the same cannot be included in taxable income of the appellant in India. Considering the judgment of this Court rendered in the case of CIT v. Halliburton Offshore Services Inc. [2008] 300 ITR 265, the Assessing Officer held that reimbursement revenue is includible in the taxable income of the appellant. The Assessing Officer took note of the fact that goods/materials worth Rs. 96 and odd crores were supplied by the assessee to its Indian customers, but such sale stood completed outside India, inasmuch as, the purchaser of such goods/materials acquired title therein outside India. Despite that, the Assessing Officer held that 2 per cent of Rs. 96 and odd crores would be taxable income of the assessee in India. In order to do so, the Assessing Officer took recourse to Section 9(1)(i) of the Act read with Rule 10 of the Income Tax Rules, 1962 (hereinafter referred to as ‘the Rules’). Subsequent to the said assessment, power under Section 263 of the Act was exercised. The reason for exercising such power appears to be not bringing receipt of the revenue of the assessee from Indian customers to the tune of Rs. 96 and odd crores on account of sale of goods/materials outside India under Section 44BB of the Act and for adding the same in the taxable income of the assessee under Section 9(1)(i) of the Act read with Rule 10 of the Rules. The matter was, then, taken before the Tribunal by the appellant. The Tribunal held against the appellant principally on the ground that under a contract entered by the appellant with O.N.G.C., payments were made both for providing service as well as for providing goods/materials, and that, the object of Section 44BB of the Act is to determine the taxable income at a fixed rate in respect of services rendered or facilities provided in connection with prospecting for extraction or production of mineral oils. Therefore, as it appears to us, the Tribunal held that it was required to be seen, whether the provisions of Section 44BB are attracted in respect of goods / materials sold by the assessee to O.N.G.C. worth Rs. 96 and odd crores. In the present appeal, it has been contended by the appellant that exercise of power under Section 263 of the Act, in the instant case, was not permissible, inasmuch as, there is no error in the order of the Assessing Officer and there is no prejudice to the revenue. It was submitted that in the absence of either of them, exercise of power under Section 263 of the Act is not permissible.

2. The dispute is, whether 2 per cent of Rs. 96 and odd crores would be the taxable income of the assessee for the relevant assessment year or whether the same would be 10 per cent thereof. Assessment of 2 per cent of Rs. 96 and odd crores, as the taxable income of the appellant, appears to be totally erroneous. The learned counsel for the appellant correctly submitted that it may be possible that the assessee, being aggrieved by assessment of 2 per cent of Rs. 96 and odd crores as its taxable income, has preferred appeal, in respect whereof he has no specific knowledge or it may also be possible that in order to avoid unnecessary expenditure and wastage of time, assessee/appellant has not taken any step in respect of increase of the taxable income of the assessee for the relevant assessment year by 2 per cent of Rs. 96 and odd crores. It was submitted that if anyone is aggrieved for 2 per cent additional tax liability of the assessee, as determined by the Assessing Officer, it was the assessee alone and no one else. The same cannot be claimed to have caused any prejudice to the revenue.

3. A look at the assessment order, in respect whereof power under section 263 of the Act was exercised, would amply make it clear that the Assessing Authority did not at all make any endeavour to ascertain, whether Rs. 96 and odd crores were received by the assessee for and in respect of services rendered by the assessee or the same was received only by way of sale price of goods/materials sold by the assessee, may be outside India. There is no finding of fact that generation of revenue to the tune of Rs. 96 and odd crores by way of sale of goods/materials outside India had nothing to do with the services rendered. There is no finding that the revenue received in respect of that service contract, in connection whereof Rs. 96 and odd crores were received by the assessee, could be segregated from the service part or not. There was, therefore, failure on the part of the Assessing Officer to ascertain whether Rs. 96 and odd crores revenue would or can come under Section 44BB of the Act.

4. That being the situation, both the limbs of Section 263 of the Act stands satisfied, namely, there was error in the order of Assessing Authority, and that, the error caused prejudice to the revenue.

5. We, accordingly, dismiss the appeal without admitting the same.