TaxTMI 
TaxTMI 
TaxTMI 
2009 (2) TMI 259
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....r the production sharing contract (PSC), a multi-party agreement between the assessee, the other joint venture partners and the Government of India. Such agreements are approved by the Parliament as per the requirements of the provisions of s. 42 of the Act. 5. In the course of the assessment proceedings it was found by the AO that the assessee had made certain payments to its non-resident parent company in respect of the expenditure incurred by the parent company in connection with the business activity carried on by the assessee in India. Such payments amounted to Rs. 1,28,86,249 in the asst. yr. 1996-97. In other years such payments amounted to Rs. 88,21,155, Rs. 1,52,50,528 and Rs. 33,53,172 in the asst. yrs. 1997-98 to 1999-2000 respectively. These amounts were claimed as revenue expenditure by the assessee in computing its income. The AO proposed to disallow the above deduction under s. 40(a)(i) of the Act on the ground that the assessee failed to deduct the tax at source under s. 195 of the Act. The explanation of the assessee before the AO was as under: "1. The various expenditures listed in the annexure are all covered by s. 42 of the IT Act, 1961 and the terms 'made in ....
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....y provide that s. 40(a)(i) is not applicable to deductions covered under s. 42. 7. The contention of the assessee is that the recharges by the parent company were made at cost and therefore no tax was deducted at source. The assessee has not adduced any evidence to prove this contention for these payments may be income or income hidden or otherwise embedded therein." In view of the above reasonings the AO disallowed the aforesaid amounts while computing the total income of the assessee. 6. The matter was carried in appeal before the CIT(A), before whom various submissions were made. The first contention was that the provisions of s. 40 are subservient to the provisions of s. 42 of the Act. Being a disallowance provision, the section should be interpreted strictly and, therefore, the scope of application of the provisions of s. 40 would have to be restricted only to those provisions over which the overriding effect of the section is specifically provided for. Since s. 40 has an overriding effect only in respect of deductions under ss. 30 to 38, the same could not be applied to the special provisions of s. 42. According to the assessee, its case was governed by the provisions of s....
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....54 is confirmed. This ground of appeal is dismissed." Aggrieved by the same the assessee is in further appeal before the Tribunal. 7. The learned counsel for the assessee has reiterated the contentions raised before the CIT(A) as well as before the AO and therefore the same need not be repeated in detail. The learned counsel for the assessee has relied on the recent decision of the Hon'ble Supreme Court in the case of CIT vs. Enron Oil & Gas India Ltd. (2008) 218 CTR (SC) 641 : (2008) 12 DTR (SC) 186 : (2008) 305 ITR 75 (SC) for the proposition that s. 42 of the Act is a special provision for computing the income in respect of the business of prospecting, extraction or production of mineral oils. Thus, it is a complete code by itself. In view of the same, it has been contended that the provisions of s. 40 could not be applied for making the disallowance. Proceeding further, he also referred to various decisions of High Courts and the Tribunal in support of the contention that reimbursement of expenses does not involve profit element and therefore the provisions of s. 195 cannot be applied. In order to buttress his argument, he also drew our attention to s. 3.1.4 of the profit sha....
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....applicable since neither the payment was received by the parent company in India nor any services were rendered in India. Alternatively it has been pleaded that in respect of the asst. yrs. 1998-99 and 1999-2000 tax has been paid in the subsequent year and therefore deduction should be allowed in the year of payment. The assessee has also raised a ground challenging the validity of the notice issued under s. 148 in respect of the asst. yr. 1999-2000. However, this ground was given up by him. Lastly it was stated by him that the assessee had filed written submissions at pp. 1 to 19A of paper book No. II, which may be considered while disposing of the appeal. 8. On the other hand, the learned Departmental Representative has strongly relied on the orders of the lower authorities. However he relied on the decisions of the Chennai Benches of the Tribunal in the case of Alstom Ltd. vs. Dy. CIT [reported at (2005) 95 TTJ (Chennai) 139-Ed.] and in the case of Frontier Offshore Exploration (India) Ltd. as well as the decision of the Hon'ble Supreme Court in the case of Transmission Corporation of A.P. Ltd. vs. CIT (l999) 155 CTR (SC) 489 : (1999) 239 ITR 587 (SC) for the proposition that t....
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..... Dy. CIT (2004) 83 TTJ (Mumbai) 325 in support of the proposition that the provisions of s. 195 could not be applied. It was also submitted that the decision of the AAR referred to by the learned Departmental Representative is not on the issue. 10. Rival submissions of the parties have been considered carefully in the light of the materials and the case laws referred to. The question for our consideration is whether the assessee is entitled to deduction in respect of payment made by the assessee to its parent company by way of reimbursement of expenses incurred by the parent company in connection with the activities carried on by the assessee. The claim of the assessee has been rejected under s. 40(a)(i) of the Act on the sole ground that the assessee failed to deduct the tax at source in respect of the aforesaid payments. Let us now first examine the stand of the Revenue. The provisions of s. 40(a)(i) of the Act are being reproduced below: "40. Notwithstanding anything to the contrary in ss. 30 to 38 the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession': (a) in the case of any assessee- (i) ....
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.... the actual expenditure. There is no reason to disbelieve the auditor's certificate which was filed before the lower authorities. This is also corroborated by the provisions of s. 3.1.4 of the psc. Clause (ii) of this section refers to payments to be made to affiliates of the contractor. It provides "charges shall be equal to the actual cost of providing their services, shall not include any element of profit and........". The parties to the PSC are bound to comply with the provisions contained in the PSC. Therefore, the assessee could only reimburse the actual expenditure incurred by the parent company. Accordingly, we are of the view that the payment by the assessee was by way of reimbursement of expenses. 12. Now the question arises whether any sum paid by way of reimbursement of expenses can be said to be income chargeable to tax in the hands of the recipient. Various High Courts and the Benches of the Tribunal have held that no income can be said to accrue or arise from the sum received by way of reimbursement of expenses. Recently the Hon'ble Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft cited supra, has held as under: "That leaves us with the last con....
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....on of the Chennai Benches of the Tribunal in the case of Alsthom Ltd. cited supra, is no more in operation, since it was set aside by the Hon'ble Madras High Court vide order dt. 11th Feb., 2008. The judgment is reported in Areva T&D India Ltd. vs. ITO (2008) 218 CTR (Mad) 128 : (2008) 10 DTR (Mad) 82 : (2008) 299 ITR 76 (Mad). Even otherwise it is not an authority for the proposition that reimbursement of expenditure does not involve element of profit. The decision of the Tribunal in the case of Frontier Offshore Exploration (India) Ltd. is an authority for the proposition that where an element of profit is involved in the sum paid by the assessee, then tax has to be deducted at source on the entire gross amount and not on the portion of the profit embedded in the payment. That decision cannot be applied to the present case since no element of profit was there in the payment by way of reimbursement of expenses. The decision of the Chennai Benches of the Tribunal in the case of Poompuhar Shipping Corpn. Ltd. cited supra, is an authority for the proposition that it is for the AO to determine whether any sum is chargeable to tax or not and it is not for the assessee to decide suo mot....
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....treated as part of the main payment. In that case the main payment was on account of fees for technical services, while part of the payment was not relating to reimbursement of expenses. Therefore it was contended that the part payment representing reimbursement of expenses should not be considered as fees for technical services. It is in that context that it was held that the entire amount should be treated as fees for technical services. That judgment does not help the Revenue for two reasons. Firstly, in the present case the entire amount was by way of reimbursement of expenses. Secondly, even assuming that reimbursement of expenses was held to be part of income then the view favourable to the assessee expressed by the other High Courts has to be applied in the absence of any decision of the jurisdictional High Court, as held by the apex Court in the case. of CIT vs. Vegetable Products Ltd. 1973 CTR (SC) 177 : (1973) 88 ITR 192 (SC). The other decisions, i.e., the decision of the Hon'ble Madras High Court in the case of Ramanlal Kamdar, and the decision of the Hon'ble apex Court in the case of East Coast Commercial Co. Ltd., also do not help the Revenue. The Hon'ble Supreme Cour....
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..... Para 11. 1 of the said circular reads as under: "11.1 Sec. 42 provides the machinery for securing flexible deductions in respect of expenses and allowances, etc., admissible in determining the profits and gains of any business consisting of the prospecting for, or extraction or production of mineral oils. The provision of this section can be invoked only where the Central Government has entered into an agreement with the person concerned for prospecting for or extraction or production of mineral oils and the Central Government is a participant in such business. Sec. 42 further provides that the agreement between the Central Government and the person concerned may make provisions in relation to the expenditure by way of infructuous or abortive exploration or expenditure incurred on drilling or exploration activities and depletion allowance and where such provisions are made, the expenditure or allowance shall be computed in accordance with the agreement and not in accordance with the general provisions of the IT Act." The above circular makes it clear beyond doubt that general provisions of the Act would not apply for computing the income of such assessee and the income would ha....