By Ajay R. Singh, Advocate
Director of Income Tax (IT) vs. Doosan
Heavy Industries & Construction Co.
[ Income tax Appeal no. 670 of 2014, dt : 04/10/2016 (Bombay High
Court)].
[Director of Income Tax (IT) vs. Doosan
Heavy Industries & Construction Co,. [ITA No. 3930/MUM/2006, 3897/MUM/2006,
746/MUM/2007; Bench : L ; dated 19/07/2013; AYs: 2000-2001, 2003-2004. Mum.
ITAT ]
The Assessee is a Project Contractor. It
awarded a contract by Kondapalli Power Corporation Ltd.(KPCL), Andhra Pradesh
to set up a power plant on a turnkey basis. Further, KPCL had awarded an
onshore contract to the Assessee for supply of goods and services along with
the commissioning of the plant. KPCL also awarded an offshore supply contract
to Hanjung DCM Co. Ltd. (Hanjung) for supply of equipment valued at US$ 103
million. The equipment valued at US$ 103 million was supplied by Hanjung and
taken delivery of outside India by the Assessee for and on behalf of KPCL. The
aforesaid equipment was lost during its transit after the Assessee took
delivery from Hanjung. As the insurance claim was not honoured, the Assessee
filed a suit against the Insurance Company for recovery of US$ 103 million. The
regular assessment proceeding was completed for the subject A.Y. u/s. 143(3).
A reopening notice was issued by the
Assessing Officer for the subject A.Y. and the reasons to believe that income
chargeable to tax has escaped assessment u/s. 147 of the Act. During the course
of assessment proceedings, it was noticed that there was another contract
titled “Offshore Equipment Supply Contract” also dated 1st February,
1998 entered into between M/s. Lanco Kondapalli Power Private Limited and M/s.
Hanjung DCM Co. Ltd. (Hanjung). The AO had reason to believe that income of US$
51.5 million chargeable to tax has escaped assessment. Issue notice u/s. 148.
The assessee during the assessment
proceedings consequent to reopening notice dated 26th March 2004
submitted that the same is without jurisdiction and, therefore, must be
quashed. Nevertheless, the AO proceeded on the basis that in the suit filed by
the Assessee in the Secunderabad Court against the Insurance Company it had
claimed to have supplied equipment valued at US$ 103 million which was lost.
The Assessing Officer placed reliance on
para 5 of the plaint, which reads as under :
“ 5. MAIN SUPPLY CONTRACT “
Under the terms
of contract dated 15th February 1998 (“Supply Contract”) between
Plaintiff and LKPL, Plaintiff agreed to supply equipment, materials and design
for the construction of LKPL’s combined cycle power plant at Kondapalli IDA,
Andhra Pradesh in India (the “Kondapalli Project”). The value of this Supply
Contract was about US$ 103 million.” It was on the aforesaid basis that the AO
sought to justify his reasons to believe that income chargeable to tax has
escaped assessment and, therefore, proceeded to hold even on merits against the
Assessee.
On appeal, the CIT(A) examined all the
facts. These facts included not only the suit as filed but also the terms of
the contract and scope of work, in particular the responsibility of the parties
there under. Based on this examination, the CIT(A) concluded that in terms of
its obligation to insure the goods/equipment during transit, the appellant had
taken out an Insurance policy as a contractor with KPCL as the principal. Based
on this policy coupled with the plaint as filed, the CIT(A) observed that the
plaint has to be read as a whole. So read, the nature of the relationship
between the parties as described in paragraph 4 thereof, which, as extracted in
the order, reads as under :
“4. A brief reference to the parties
involved in relation to the subject matter of this suit is as follows :
a. Lanco Kondapalli Power Pvt. Limited (formerly a public limited
company) (‘LKPL’) is the owner of the Kondapalli Power Project.
b. Plaintiff is the EPC
contractor for the Kondapalli Power Project, and an assured under the policy
issued by Defendant.
i. Encon Services Limited (‘Encon’) is the subcontractor of Plaintiff
for transportation of the GT & GTG from Kakinada to Machilipatnam.
j. Seaways Shipping Limited
(‘SSL’) was appointed by Encon for inland transportation of GT & GTG from
Kakinada to Machilipatnam, and was the character of ‘Jala Hamsa’ and ‘AmethiI’.
n. Aistom are the suppliers of the GT & GTC, from whom Plaintiff
arranged to procure the replacement equipment for ensuring completion of the
project.”
The CIT(A) came to the conclusion that on
the basis of the words used in para 5 of the plaint, it cannot be established
that the assessee had supplied (as owner) the equipment, material and design,
and that the word “supply” only refers to the responsibilities of the assessee
for setting up of the power project as per the onshore contract. The reasons as
recorded do not therefore suggest any link between the material found by him and
his conclusion that there was reason to believe that the income chargeable has
escaped assessment. He, therefore, concluded that there was no reason to form a
belief that income chargeable to tax has escaped assessment.
On appeal by the Revenue, the Tribunal, by
the impugned order, confirmed the finding of the CIT(A).
The Hon. High Court observed that at the
stage of a notice of reopening, the AO does not have to “establish” that any
income has escaped assessment. However the AO must simply be shown to have
formed an opinion, which, in turn, is supported by reasons. The reasons
themselves must be based on some material. A minimum requirement one would
expect in the face of this scheme of things is that the material used by the AO
for forming his opinion must have some bearing or nexus with escapement of
income. If not, the reopening notice would be clearly without jurisdiction. In
the present case, the material used by the AO for purportedly forming this
opinion is the description of the assessee of itself as “a supplier” of the
equipment in an EPC contract, which inter alia required it to take offshore
delivery of the equipment from a foreign vendor and supply and install the same
onshore. Mere description as a “supplier” in a suit by the assessee against the
insurance company claiming an insurance claim for loss of equipment, when the
assessee insured the equipment jointly with the purchaser, can possibly have no
connection with the escapement of any income arising out of sale of the
equipment. Since that was the only material used by the AO for issuance of the
reopening notice, the notice is without any legal basis or justification. In
these circumstances, the order of the coordinate bench for Assessment Years
1999-2000 and 2002-2003 also supports the Respondent’s contention that they
were not suppliers of the equipment and no income assessable to tax has escaped
assessment. It’s obligation was to insure the goods/equipment during transit
done by it either on its own or through a subcontractor.
The Hon. High Court also found that, the
contract provided that the contractor, i.e. Assessee will provide/arrange at
its own cost in the joint name of the owner and contractor a comprehensive
insurance cover to the project, including any damage to the goods during transit.
It was in that context that the Assessee had made a claim for insurance. Taking
into account the concurrent findings of fact arrived at by the CIT(A) and by
the Tribunal, and that nothing has been shown to indicate that the finding is
perverse the appeal was dismissed.
