TaxTMI 
TaxTMI 
2007 (3) TMI 302
X X X X Extracts X X X X
X X X X Extracts X X X X
....lant company together with JP Industries Ltd. was awarded a contract by National Hydro Electrical Power Corporation, Faridabad (NHPC), Haryana, on 18th July, 1999 for execution of planning, design and engineering review, site technical supervision, installation, testing and commissioning of electro-mechanical equipments for execution of 3 x 100 Chamera Hydro Electrical Project, Stage-II, Chamba, in Himachal Pradesh, India on turnkey basis under contract No, NH/Cont/CH-II/72002, dt. 18th July, 1999 (hereinafter referred to as Chamera project). The special conditions of contract were specified in document n, parts A, B and C. The project was financed by international funding agency, namely, European Development Corporation (EDC). The' company opened a project office at New Delhi and site office at Chamera (Chamba) in HP for the purposes of executing the contract No. NH/Cont/CH-II/2002, dt. 18th July, 1999. It established a permanent establishment (PE) in India after obtaining necessary approval from Reserve Bank of India. On application filed by the assessee under Section 6(6) of Foreign Exchange Management Act, 1999 (hereinafter referred to as FEMA), the Reserve Bank of India (h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y rectifying the mistake with regard to an addition of Rs. 32,42,301 by way of disallowance under Section 40(a)(i) of the Act with respect to the payment to Donell Consultant Inc., Canada, which he found was considered by the appellant itself as inadmissible expenditure and added back as per computation sheet filed with the return of income to arrive at the assessable income. The learned CIT(A) not only substantially upheld the basis of assessment but further enhanced the assessment by disallowing a sum of Rs. 85,08,852 in respect of guarantee and insurance expenses as such expenses were found not relating to Chamera project executed by appellant which are being agitated in assessee's appeal. The Revenue's appeal agitates the relief allowed by the learned CIT(A) on the issue connected with the salary of two expatriates. 3. With this background, we shall now deal with various grounds raised before us in the appeal of assessee. We have heard at length Mr. M.S. Syali, senior counsel appearing for and on behalf of Shri Tarandeep Singh, learned Counsel for assessee, and Mr. T.N. Chopra, learned special counsel appointed by Revenue authorities. 4. Ground No. 1 is that the impug....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... India and bills/invoices relating thereto have been raised through the PE in India. Since the assessee has established a PE in India, the income is taxable in India. Learned CIT(A) in para 8.8 of his order concluded and approved the action of the AO. He held that the AO was justified in rejecting the belated claim of the appellant for attribution and apportionment of profit. Learned CIT(A) held that the assessee established its PE in India with the approval of RBI on 16th Aug., 2000. The agreement for execution of Chamera project was made in India. The assessee has credited all contract receipts from Chamera project and deducted all contract expenses relating thereto in the P&L a/c in the books of accounts of PE in India as furnished to RBI. The auditors' report certifies that the accounts relate to project office of the Indian operations. This indicates that all activities were carried out through the PE in India. The contract receipts were received in Canada on behalf of the project office in India for the services rendered in India. The appellant has not substantiated the claim that the project proceeds have been included in the corporation result filed with Canadian tax au....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee seems to be entitled on the facts of the case even though the assessee might have omitted to claim refund or relief. He accordingly pleaded that the decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd. (supra) may not be roped in so as to avoid the claim. 5.3 Assailing the arguments of Mr. M.S. Syali, learned special counsel for Revenue, Shri Chopra, submitted that the contentions raised in this behalf are factually and legally unsustainable. Since the issue has now been decided by Hon'ble Supreme Court wherein it was held that no claim should be entertained which is not part of return or revised return. He submitted that though the AO and learned CIT(A) have examined the claim of assessee regarding attribution and apportionment of income between PE in India and Head Office in Canada, the decision of Hon'ble Supreme Court was not available at that point of time. Thus, the concession granted by AO should not be extended further and the claim of assessee should be rejected outright. 6. We have considered rival submissions. We have also perused the decision of Hon'ble Supreme Court in Goetze (India) Ltd. (supra). The dispute regarding attribu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se effected through that PE. The provision of the OECD Model Convention and the provision of the Indo-Canada treaty vis-a-vis Articles 7(1) and 7(2) are absolutely pari materia barring only the contents of Article 7(1)(b). The contents of Article 7(1)(b) are factually not applicable in the facts of case as there are no sales of goods and merchandise of same or similar kind as those sold, or from other business activities of the same or similar kind as those effected through that PE. It is an admitted factual position that the Head Office has acted only through the PE. This is accepted by the AO at p. 31, para 24.4. The AO submits so before the CIT(A) in his written submissions during remand proceedings. The CIT(A) so records at pp. 16-17, para 6.6. There is no allegation of a direct transaction. Thus, Article 7(1)(b) factually not being applicable, the issue of apportionment is only to be tested vis-a-vis Article 7(1)(a) r/w Article 7(2). Article 7(3) only refers to computation of the attributed income and has no impact on the extent of attribution. But for Article 7(1)(b), 7(1)(a) and 7(2) are pari materia in absolute to the OECD Model Convention on treaties. Thus, the OECD comme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ut it is being cited only to show that even under the IT Act all incomes from all operations cannot be said to be taxed in India. There have been instances, where an assessee carries on manufacture, sale, export and import, but it is not possible to say that the place where the profits accrue to him is the place of sale. The profits received relate, firstly, to his business as a manufacturer, secondly, to his trading operations, and thirdly, to his business of import and export. Profit or loss has to be apportioned between these businesses in a business like manner and according to well established principles of accountancy. The mere fact that manufacture and sale are integrated is no ground not to split the profit and attribute. For this purpose, reliance was placed on following decisions: 1. Anglo French Textile Co. v. CIT (1954) 25 ITR 27 (SC) 2. CIT v. Ahmedbhai Umarbhai & Co. (1950) 18 ITR 472 (SC); 3. Provincial Treasurer of Manitoba v. WM. Wrigley Jr. Co. Ltd. (1951) 20 ITR 614 (PC); 4. International Harvester Co. of Canada Ltd. v. PTC and Ors. (1949) 17 ITR 58 (PC (Supp). Article 7(2) of the Indo-Canada treaty states that PE profits should be computed as if it were....
X X X X Extracts X X X X
X X X X Extracts X X X X
....admitted fact that the PE of the applicant came into existence only on 16th Aug., 2000 when permission was obtained from RBI for opening project office in India and the agreement with NHPC was signed on 18th July, 1999 when the PE was not in existence. Even otherwise, as per the provisions of Article 7(2) of the Indo-Canada treaty, PE and Head Office are to be treated as a functionally separate entity thus even though the contract was executed through the PE (as conduit) in India, it would not mean that all the profits or receipts are attributable to India. As per the provisions of Section 5, Expln. 1, income accruing or arising outside India shall not be deemed to be received in India by reason only of the fact that it is taken into account in a balance sheet prepared in India. Even as per provisions of Section 9(1)(i), where all the operations of the business of the non-resident are not carried out in India, the income of the business deemed to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. CBDT Circular No. 1 of 2004, dt. 2nd Jan., 2004 reported in (2004) 186 CTR (St) 45 : (2004) 265 ITR (St) 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion guidelines starting from the books maintained of the project [which are accepted both by AO/CIT(A)]. The integration of the activity does not rule out attribution. It is not a commercially impossible situation where such help is sourced to an independent party. Split is possible and so it should be done. The mere fact that the project is one does not make it impossible of functional division. Whether the Head Office acted on its own or acted as a conduit is of no relevance as a commonly accepted fact will be that the work done by Head Office or as outsourced by Head Office is not functionally the work of PE or attributable to that separate entity. Same accounts of the project as given to the income-tax with original return were given to FEMA and company law authorities too. But, accounting treatment has to be in consonance with the requirements of the relevant statute. The relevance too is to be understood in consonance with the terms of the relevant statute. FEMA and company law provisions do not deem the PE of an enterprise to be a functionally separate entity for the purpose of maintenance of books of accounts and such a functional bifurcation was not necessary. Without prej....
X X X X Extracts X X X X
X X X X Extracts X X X X
....upervision of Installation, Testing and Commissioning of Electromechanical Equipment Document No. III. Bill of Quantities Planning, Design and Engineering Review Site Technical Supervision Supervision of Installation, Testing and Commissioning of Electromechanical equipment Document No. IV. Nil Document No. V. Project Profile and Drawings Assessee has submitted a coordinated bid for the contract along with following parties: - Jaiprakash Industries Ltd. - SNC Lavalin/Acres (Transnational) Inc. - General Electric Canada International Inc. Under the General Contract "Contractor" shall mean M/s Jaiprakash Industries Ltd. The scope of work under the head "Planning, Design & Engineering Review" shall mean the review of overall and detailed planning of the project, all necessary additional investigations, the basic and detailed design of the civil works preparation of Design Criteria & Technical Specifications and Review of Design of all Electromechanical and Hydromechanical works, co-ordination of the design of the Electromechanical and Hydromechanical works with the design of the civil works and the studies as specified. The scope of Hydraulic Model Studies which....
X X X X Extracts X X X X
X X X X Extracts X X X X
....complete force of attraction and hence profits other than those arising from what is stated in Article 7(1)(b) are not to be included. Article 7(1)(b) extends taxation by the State of the PE, i.e., India, to direct activities of an assessee which are not from the PE's own activities. Rather, they include those from direct transactions effected by the Head Office (or those from transactions effected by a PE situated in a third State) to the extent that such transactions are of the same or similar kind as those effected through the PE. Since this rule does not require all of the profits derived by the enterprise from sources in the State of the PE to be attributed to the PE, this arrangement is referred to as the restricted force of attraction principle. Thus, force of attraction rule gets activated when Head Office directly transacts with an enterprise of the Contracting State. This will not apply to the facts of the case under consideration as there are no direct activities of the HO. It is not the case of Department that any independent transaction was being carried out by the Head Office directly with any enterprise in India. In fact, it is accepted by the Department that Hea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sonnel visited India for a short duration. The necessary capital required for day-to-day functioning of the PE was provided by the Head Office via telegraphic transfers. The expenditure ratio that is actual expenditure incurred in India and outside India-throws considerable light on the extent of activity and constitutes reasonable criteria for attribution as done and submitted duly certified by auditors. Consideration itself has been split into Part A, Part B and Part C. Thus, a bifurcation of the consideration too is also available. Without prejudice to the above arguments, Mr. Syali submitted that if contention of appellant is not acceptable then, the taxation still has to be of the PE, the provisions of Section 44D r/w Section 115A will apply and the taxation will be restricted to 20 per cent of the income without resort to Section 40(a)(i) or Section 44C. 8. Mr. Chopra, special counsel for Revenue, submitted that the claim of attribution and apportionment of profit between project office in India, which is the PE of non-resident and the Head Office in Canada is not factually and legally correct. Shri Chopra submitted that the books of accounts are of the project office in In....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y out the task of allocation of income even after the assessee has itself filed the return of income on the basis of audited accounts of the project office in India appears to be absurd and irrational. The AO called upon the assessee to produce the books of account of the Head Office and also to indicate as to what version of its operations in India has been presented before the Canadian tax authorities. The response of the assessee was totally non-co-operative during the assessment proceedings. This is what the assessee stated with regard to its Canadian income: In para 4.1 there is no provision of law that a non-resident before he makes a claim for exclusion of income for operations carried outside India or profits attributable to Canadian office, must furnish proof of payment of such taxes in home country. Attention is invited to Madras High Court decision in CIT v. VR. Section R.M. Firm and Ors. (1994) 120 CTR (Mad) 427 : (1994) 208 ITR 400 (Mad) where it was held that the Tribunal was correct in directing the ITO to allow the benefit of double taxation relief without insisting upon the production of a certificate from the Malaysian Revenue authorities to show that the M....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ting to maintenance of accounts by the foreign companies as per the provisions of the Companies Act have been elaborately explained by the Hon'ble AAR in its ruling in XYZ, In re (1998) 148 CTR (AAR) 417 : (1998) 234 ITR 335 (AAR) while upholding the applicability of MAT provisions contained under Section 115JA of the Act to the foreign company. In the instant case, furnishing of world accounts as per the aforesaid statutory requirements has not been fulfilled. Whatever be the position under the Canadian laws, it was obligatory on the assessee company to furnish the world accounts by virtue of the provisions of the Companies Act. This statutory requirement has not been complied with by the assessee company. Mr. Chopra further submitted that the contention regarding apportionment of the profits of the project office is at variance with the facts of the case and does not merit acceptance. Apart from the basic legal infirmity that no revised return has been filed and the claim for revision has been made on the basis of a letter filed before the AO after a lapse of two years from the filing of the return, it is submitted that the accounts of the project office maintained by the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....counts for the various branches, there would be no occasion for carrying out any further exercise of apportionment of aggregate profits of the assessee. In the instant case, since the project office in India has maintained the accounts in India in respect of execution of the project, profits arrived at in its books are liable to be treated as the profits of the project office, that is, the profits of the PE in India without any further apportionment. The contention on behalf of the assessee company for apportionment is not in consonance with the realities of the situation. There is in fact no occasion for any apportionment after the project accounts have been maintained in India. 8.5 As regards reliance on the decision of CIT v. Tata Chemicals Ltd. (1974) 94 ITR 85 (Bom) in support of claim of apportionment, Shri Chopra submitted that no assistance is being derived on behalf of the assessee from the proposition laid down by the Hon'ble Bombay High Court in this decision. In this decision their Lordships held that whether the income is attributable to the operations carried out in India is always a question of fact. The filing of the return of income on the basis of audited acc....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Thus, it would be seen that Article 7(1) in UN Convention is much wider in scope as compared with corresponding article in OECD Convention since the profits that it allows to be attributed to the PE are not strictly limited to those resulting from PE's own activities. Rather, they include those from direct transactions effected by the head office in the other Contracting State to the extent that such transactions are of the same or similar kind as those effected through the PE. This principle is referred to as the 'restricted force of attraction' principle since it does not bring within its purview all of the profits derived by the enterprise from sources in the State of the PE to be attributed to the PE. Prof. Klaus Vogel in his well reputed treatise on Double Taxation Conventions has given a similar exposition of the principle. As against the aforesaid enlarged ambit of Article 7(1) in UN Convention, the scope of corresponding para of article in OECD Model Convention is restricted to profits derived through the PE in that State. 8.8 Reliance by learned Counsel for the assessee to the discussion draft on the attribution of profits to PE dt. 2nd Aug., 2004 issued by t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... authorities concerned to ascertain the profit properly attributable to that establishment. The commentary further observes that such trading accounts of the PE should normally be accepted by the taxation authorities in case these represent the real facts of the situation. It appears that the accounts maintained by the PE as per the OECD commentary should be adopted as the basis of taxation in the local tax jurisdictions. In the instant case of the assessee, the approach adopted is in conformity with the practice recommended in the OECD commentary, whereas it is the assessee company which is coming up with the plea for rejection of the project accounts and adopting a hypothetical and unrealistic basis for computing the profits of the project office. After maintaining the books of the project office and getting them audited, and filing a return on the basis thereof, the assessee cannot be heard to say that an artificial method, which is not in conformity with the provisions of the DTAA as well as accepted principles of commercial accounting, should be adopted. 8.11 Shri Chopra further submitted that para 2 of Article 7 is subject to the provisions of para 3. Para 3 pertains to dedu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enses in r/o aforesaid personnel Rs. 56,66,033 (iii) Purchase of software ' Rs. 2,03,761 (iv) Computer repair and maintenance Rs. 10,86,321 The aforesaid expenses are, inter alia, subject- matter of disallowance confirmed by the learned CIT(A) and being assailed by the appellant vide ground Nos. 4, 7, 8 and 11. 8.13 Insofar as applicability of Article 7(3) is concerned, disallowance of the aforesaid deductions deserves to be upheld since the payments are covered under the prohibition contained under Article 7(3) above. Apart from the prohibition contained under Article 7(3), the deductions are also barred by virtue of Section 40(a)(i) since these payments have been made without deduction of tax at source. As indicated earlier, the assessee, while computing the income of the Project Office, disallowed a sum of Rs. 32,61,432, being payments made to Donel Consultants without deduction of TDS. On similar grounds the aforesaid amounts are covered for disallowance under Section 40(a)(i) and have been rightly disallowed by the AO and confirmed by the learned CIT(A). 8.14 With regard to expenses, namely, cost of personnel and computers, etc. the assessee company entered into ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee that even prior to setting up of the PE in India, the work pursuant to the agreement commenced but the same was executed by raising the bills after the PE was established. That is why value of the work done prior to setting up of the PE is reflected as opening work-in-progress and claimed as expenditure on debit of P&L a/c. In this backdrop of facts, we shall examine whether the claim of assessee for exclusion of the profit as is not attributable to the PE in India is outside the scope of taxation in India. 9.1 Section 5(2) provides that subject to the provisions of this Act, the total income of a person who is a non-resident shall include all income from whatever source derived which (a) is received or deemed to be received in India; (b) accrues or arises or is deemed to accrue or arise to him in India. Section 9(1) provides that following income shall be deemed to accrue or arise in India. Clause (i) of Section 9(1) provides that all income accruing or arising directly or indirectly through or from any business connection in India. Thus, applying Section 5(2) r/w Section 9(1)(i) it can be held that the income accruing by way of execution of the Chamera project in India accr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ermination of the profits of a PE, there shall be allowed those deductible expenses which are incurred for the purposes of the business of the PE including executive and general administrative expenses, whether incurred in the State in which the PE is situated or elsewhere as are in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than as a reimbursement of actual expenses) by the PE to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights of by way of commission or other charges, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the PE. Likewise, no account shall be taken in the determination of the profits of a PE, for amounts taken in the determination of the profits of a PE, for amounts charged (otherwise than towards reimbursement of actual expenses), by the PE to the Head Office of the enterprise or any of its other offices, by way o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that permanent establishment; or (c) other business activities carried on it that other State of the same or similar kind as those effected through that permanent establish-ment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 2. Subject to the provisions of para- graph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble. Compared with OECD MC, it extends primary taxation by the State of the permanent establishment, viz., the profits that it allows to be attributed to the permanent establishment are not strictly limited to those resulting from the permanent establishment's own activities. Rather, they include those from direct transactions effected by the head office, though in the State of the permanent establishment (or those from transactions effected by a permanent establishment situated in a third State) to the extent that such transactions are of the same or similar kind as those effected through the permanent establishment. According to clauses (b) and (c) of the second sentence of article 7(1), UN MC, the profits from such direct transactions as are capable of being attributed to a permanent establishment are those from sales, in the State of the permanent establishment, of goods or merchandise of the same or similar kind as those sold through the permanent establishment or profits from other business activities in that State of the same or similar kind as those effected through the permanent establishment. Since this rule does not require all of the profits derived by the enterpris....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore us. It is the contention of appellant that the assessee has option not to be governed by the provisions of DTAA and may be taxed as per the provisions of the IT Act. It is contended that since what is received by the assessee from the execution of Chamera project can be described as "fees for technical services" as defined in Expln. 2 in Section 9(1)(vii) of the Act, the income be computed as per the provisions of Section 44D of the Act and the tax may be charged as per Section 115A of the Act. 10.1 Learned Counsel for assessee has contended that since the entire project is now over and to avoid any controversy as regards taxability of various expenses, the income may be computed as per the IT Act in consonance with provisions of Section 44D r/w Section 115A of the Act. He further submitted that on reading the terms of contract which proves that the services of assessee were in respect of planning, designing and engineering review, site technical supervision, supervision of installation, testing and commissioning of electromechanical equipments, it amounts to rendering technical services and hence, since the assessee has option not to be governed by the provisions of DTAA and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....treaty. However, the option is with the assessee to choose whether it wants to be governed by the provisions of treaty or not. Since the assessee in the alternate has raised a claim that it does not want to be governed by the provisions of treaty between India and Canada but as per the provisions of IT Act, there can be no bar to apply the provisions of IT Act while computing the income of non-resident. As per Section 5(2) of the Act, all the income received or deemed to be received or accruing or arising or deemed to accrue to arise in India to the non-resident, is chargeable to tax in India. As per Section 9(1)(i), all income accruing or arising directly or indirectly through or from any business connection in India is deemed to accrue or arise in India. Undoubtedly, the income from execution of Chamera project is arising from the business connection in India as such project is to be executed in India. The assessee has even established an office for execution of such project in India also through which the entire execution is carried out. It can, therefore, be held that as per Section 9(1)(i) r/w Section 5(2) of the IT Act, the income from execution of Chamera project is taxable ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of fees for technical services received from an Indian concern, the amount of income-tax on the income by way of fees for technical services shall be 20 per cent where such fees for technical services are received in pursuance of an agreement made after 31st May, 1997. Since admittedly the assessee received fees for technical services as defined in Expln. 2 to Section 9(1)(vii), the same can be taxed as per the provisions of Section 44D r/w Section 115A of the Act. Since the assessee has chosen to be governed by the provisions of the IT Act, the AO shall compute the income as per Section 44D r/w Section 115A of the Act. Thus, the alternate plea raised on behalf of the assessee is accepted and the AO is directed to compute the tax liability in consonance with the above finding. 11. Ground No. 3 is regarding addition made to the tune of Rs. 3,24,28,301 as alleged under statement of contractual proceeds. 11.1 The AO noted that in the P&L a/c, the contract receipt from NHPC has been declared at Rs. 9,82,06,589. The assessee also claimed credit for tax deducted at source. The AO noted that the income as comprised in the TDS certificate is Rs. 13,04,85,252. He accordingly noted that th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ring the year and the amount had become legally due to the appellant. Any amount which becomes legally due on completion of work would prima facie be deemed as its income to be assessed during relevant assessment year. Since the amount was legally due to the appellant, the same was accordingly taxable in the year. 11.2 Learned Counsel for assessee submitted that the appellant is following percentage completion method of accounting. Following this method, revenue from contract is recognized on work done and certified by the client/invoiced as per the terms of contract. The work done is not invoiced till the contract reaches such invoicable stage. Before taking over any part of the work into use, the contractee, i.e., NHPC is to issue a certificate of completion in respect of such part of the work in accordance with the procedure set out in Article 26 of the agreement between assessee and NHPC. As per Article 28 of the said agreement, final acceptance certificate is to be issued by the NHPC. So far as running bill Nos. 1 to 5 are concerned, the amount is not in dispute. Running bill No. 6, dt. 11th June, 2001 pertains to the work done during January, 2001 till 30th April, 2001. Subs....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... completion method of accounting. Though the assessee is showing opening work-in-progress, no amount is shown in the closing stock as work-in-progress. He further submitted that as per p. 61A of paper book I, filed by the assessee which indicates that the assessee has submitted five bills for an amount of Rs. 10,29,84,431, the fifth bill being dt. 29th Jan., 2001 related to the work done till December, 2000. No bills for the work done for January, February and March, 2001 have been sent to the NHPC. As against the aggregate amount of Rs. 10,29,84,431 in the five bills sent by the assessee, payment received against these bills aggregates to Rs. 6,72,53,779. The details of payments received are duly indicated in Annex. I to the assessment order. Thus, there is short payment till December, 2000 by the NHPC to the extent of Rs. 3.57 crores. In the next accounting year relevant to asst. yr. 2002-03, the assessee sent the sixth bill on 11th June, 2001 for an amount of Rs. 3,97,35,059. Against this bill assessee has shown a credit of Rs. 3.09 crores on the ground that adjustment out of ad hoc provision made by the NHPC was made for this amount. From the aforesaid facts it would appear tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2001 has been made for an amount of Rs. 1,68,16,185 before the closure of accounts, that is, 29th Oct., 2001. Even on the basis of argument of the learned Counsel this amount has not been credited as on 31st March, 2001. From the aforesaid facts it is manifestly clear that the amount of Rs. 3,24,28,301 for which provision has been made by the NHPC by 31st March, 2001 on account of the work done by the assessee and bill not raised represents the suppression of receipts for the assessment year under reference. The assessee has neither accounted for this amount as receipts nor shown any work-in-progress on 31st March, 2001. This clearly runs contrary to the "matching" principle of accounting which is a fundamental postulate of true and fair accounts. Contentions on behalf of assessee are entirely misconceived inasmuch as the NHPC has already acknowledged its liability to make the payment to the contractor as on 31st March, 2001 by making a provision in its books of accounts and also deducting tax on such provision and depositing the same into the Government Treasury. Acknowledgement of outstanding liability in favour of the contractor is quite unambiguous and unequivocal and is to be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee. There is no dispute with regard to the amount payable by NHPC and in fact the subsequent events establish the undisputed nature of the accrued receipt by the assessee inasmuch as payments have actually been made by NHPC in the subsequent year. This is therefore a clear case of suppression of receipts and the addition of Rs. 3,24,28,301 sustained by the learned CIT(A) is fully justified. 11.5. We have considered rival submissions and relevant facts. We have also perused the case law cited. The whole of the addition is made on the basis of amount provided by NHPC in its accounts for the work done and deducting tax on such liability. It is also presumed that since the work of assessee is to be carried out after the other contractor, namely, J.P. Industries Ltd. completes its part of work and since J.P. Industries Ltd. has completed its part of work, the work of assessee would also have been completed. In our opinion, the whole premise is not on sound legal situation. So far as running bill Nos. 1 to 5 are concerned, there is no dispute about recognizing the income in respect thereof. As regards amount credited by NHPC, it is seen that the assessee has accounted for the same b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ingly do not find any justification to treat the income accruing in subsequent year as income of the . year under appeal. We accordingly delete the addition of Rs. 3,24,28,301 as alleged under statement of contract proceeds. 12. Ground Nos. 4, 5, 7, 8 and 9 relate to disallowance of various expenses as under: (a) Cost of personnel Rs. 2,63,02,407 (b) Opening work-in-progress Rs. 1,84,30,838 (c) Computer repair and maintenance Rs. 10,86,321 (d) Travelling expenses Rs. 56,66,033 (e) Engineering software Rs. 2,03,761 In respect of all these expenses, the AO held that they are in the nature of Head Office expenses covered under Section 44C of the Act. He also held that since the payments are made without deducting tax at source, in view of Section 40(a)(i), the amount cannot be allowed. The same was approved by learned CIT(A). 12.1 Learned Counsel for assessee submitted that since the assessee has made alternate plea to be governed by the provisions of IT Act in India and not by provisions of DTAA, since the tax is to be levied in accordance with the provisions of Section 44D r/w Section 115A or the Act, the claim for deduction of expenses has become infru....