Offshore supply income and deputed employee accommodation: ITAT principles on taxability, disallowance, and section 234B interest

Foreign travel expenditure supported by reasonable particulars was not disallowable, and Rule 6D did not apply to travel outside India. Rent for accommodation provided to deputed employees was treated as employment-related residential accommodation, not guest house expenditure, so sections 37(4) and 37(5) were inapplicable. Payments supported by cheque trail, TDS, audited accounts and surrounding evidence were not disallowed merely for incomplete invoices, and tax paid by the Indian concern under the foreign company agreement was not taxable under section 10(6A). Offshore supply income under a CIF contract completed outside India did not accrue in India, and rejection of regularly maintained books with estimation under Rule 10 was unwarranted. The domestic tax rate applied, but section 234B interest was not leviable where tax was fully subject to TDS.

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Issues: (i) Whether disallowance of foreign travel expenditure and application of Rule 6D could be sustained, and whether rent for accommodation provided to deputed employees was hit by section 37(4) or section 37(5); (ii) Whether disallowance for want of invoices and taxation of tax paid by the Indian concern on behalf of the foreign company under section 10(6A) were justified; (iii) Whether profit from offshore supply under the MRPL contract could be taxed in India and whether the books of account could be rejected with estimation under Rule 10; (iv) Whether the tax rate should be 48% under the Act instead of 35% under the India-Japan treaty, and whether interest under section 234B was chargeable.

Issue (i): Whether disallowance of foreign travel expenditure and application of Rule 6D could be sustained, and whether rent for accommodation provided to deputed employees was hit by section 37(4) or section 37(5).

Analysis: The foreign travel disallowance and the Rule 6D objections relating to travel outside India were held to be covered against the Revenue on the basis that the expenditure was supported by reasonable particulars and that Rule 6D had no application to travel outside India. On the accommodation issue, the rental expenditure was treated as part of executive and general administrative expenditure, but the accommodation provided to employees on deputation was not regarded as a guest house facility for the purpose of section 37(4). The employees were posted at the place of work and the accommodation was also treated as a perquisite in their hands, so section 37(5) was not attracted.

Conclusion: The disallowances under Rule 6D and sections 37(4) and 37(5) were not sustainable and were deleted.

Issue (ii): Whether disallowance for want of invoices and taxation of tax paid by the Indian concern on behalf of the foreign company under section 10(6A) were justified.

Analysis: The invoice-related disallowance was rejected because the payments were supported by cheque payments, tax deduction at source, audited accounts, invoice particulars, and surrounding evidence, even though copies of all invoices were not produced. As to section 10(6A), the foreign company's agreement fell within the relevant statutory conditions, and tax paid by the Indian concern in terms of that agreement did not constitute taxable income merely because the return showed a loss.

Conclusion: The addition for want of invoices and the inclusion of tax paid by the Indian concern were rightly deleted.

Issue (iii): Whether profit from offshore supply under the MRPL contract could be taxed in India and whether the books of account could be rejected with estimation under Rule 10.

Analysis: The offshore supply contract was separate and was executed on CIF basis from outside India, with title and payment passing outside India. Applying the principle that only income attributable to operations carried out in India can be taxed, the offshore supply consideration was held not to accrue or arise in India. The contract was not taxed merely because it formed part of a broader project arrangement. Since the books were regularly maintained, audited, and supported by ledgers and break-up details, rejection of books was held to be arbitrary. In the absence of a valid rejection of books, estimation under Rule 10 was also unsustainable.

Conclusion: The offshore supply income was not taxable in India and the rejection of books with estimation of profit was not justified.

Issue (iv): Whether the tax rate should be 48% under the Act instead of 35% under the India-Japan treaty, and whether interest under section 234B was chargeable.

Analysis: The treaty-based claim to a lower rate was rejected and the higher domestic rate was applied. However, where the income was fully subject to tax deduction at source and the assessee had a lower deduction certificate, interest under section 234B was held not chargeable.

Conclusion: The tax rate under the Act was correctly applied, while interest under section 234B was not leviable.

Final Conclusion: The Revenue's appeals failed on the substantive additions and the assessee's rate challenge also failed, with only the interest issue decided in the assessee's favour in the connected matter.

Ratio Decidendi: Offshore supply income under a CIF contract completed outside India does not accrue or arise in India, and expenditure on accommodation for deputed employees is not disallowable as guest house expenditure when it is part of residential employment arrangements and is taxed as a perquisite.

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