TaxTMI 
TaxTMI 
2011 (9) TMI 666
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.... Dispute Resolution Panel ('DRP') erred in directing the learned Assistant Director of Income-tax (International Taxation) - 1(2) ('ADIT') has erred in enhancing the assessment, pursuant to such directions of Hon'ble DRP, to impute profit for the year of Rs.1,05,03,587 on estimated basis which was not a variation proposed in the draft order passed by the learned ADIT under section 144C(1) of the Income-tax Act, 1961 ('the Act') It is, therefore, prayed that the direction issued by the Hon'ble DRP under section 144C of the Act and consequent enhancement by the learned ADIT on the variation not proposed in the draft assessment order should be treated as invalid, bad in law and to that extent the enhancement so made be ordered to be deleted. Without prejudice to Ground No. 1 above, 2. On the facts and in the circumstances of the case and in law, the learned ADIT has erred in estimating 20% of the total contract price as revenue of the year on an arbitrary basis and has also erred in applying an ad hoc rate of 8% as profit margin thereon, thereby charging to tax net profit of Rs.1,05,03,587 for the Assessment Year 2006-07. It is prayed that the aforesaid estimation of profi....
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....07 it was awarded a contract by Reliance Industries Ltd. (RIL) for undertaking dredging and site filling related worked near Gadimoga village in Andhra Pradesh. A.Y. 2006-07 is the first year of assessee's operation in India. For the purpose of execution of the project the company set up a project office in India and since the duration of the project undertaken has exceeded six months, there was a permanent establishment in terms of Article 7 of Indo-Belgium Tax Treaty. During the relevant year assessee filed its return of income declaring a total loss of Rs. 31,22,11,230/-. In the draft order the DDIT has proposed the following adjustments: - (a) Depreciation on temporary structure Rs. 43.29 lakhs (b) Provision for future losses Rs. 32.86 crores (c) Disallowance of expenses Rs. 22.10 lakhs (d) Unexplained cash credit Rs. 12.21 crores (e) Foreign Exchange loss Rs. 52,48 lakhs 5. Assessee made objections to the proposed variations and the Dispute Resolution Panel (DRP) - I vide directions dated 16.09.2010 accepted the objection-1 relating to depreciation on temporary structure, objection No. 3 - disallowance of expenses and objection No. 4 - unexplai....
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....Ltd. in Writ Appeal No. 1010 of 2011 dated 5th July 2011. 9. The learned D.R., however, supported the order of the DRP to submit that the A.O. proposed restriction of the loss and the DRP directed part of the claim to be treated as profit and to be considered for work-in-progress. It was his submission that the directions are not at variance. 10. After considering the arguments of the learned counsel and the learned D.R. we are of the opinion that the DRP's direction in taxing 20% of the gross contract receipt at 8% is at variance with the proposed draft order by the A.O. disallowing the future loss claimed. The disallowance of future loss claimed is contested by the assessee in ground No. 5, which we intend to deal later separately. For the purpose of these grounds, the issue of estimation of profit at 8% was not before the A.O. when he proposed the draft order. As seen from the draft order the A.O. has made a reference to section 92CA(1) of the I.T. Act to the Additional Commissioner of Income Tax, Transfer Pricing-1(2) who did not propose any adjustment to the value of international transaction. After this the A.O. has proposed disallowance of depreciation on temporary str....
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....s not an issue before the A.O., so in our view the DRP has erred in directing the A.O. to estimate the profit and determining profit at Rs. 1,03,03,587/-. 12. Coming to the provisions of law, section 144C is as under: - "144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. (2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,- (a) file his acceptance of the variations to the Assessing Officer; or (b) file his objections, if any, to such variation with,- (i) the Dispute Resolution Panel; and (ii) the Assessing Officer. (3) The Assessing Officer shall complete the assessment on the basis of the draft order, if- (a) the assessee intimates to the Assessing Officer the acceptance of the ....
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....months from the end of the month in which the draft order is forwarded to the eligible assessee. (13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received. (14) The Board may make rules for the purposes of the efficient functioning of the Dispute Resolution Panel and expeditious disposal of the objections filed under sub-section (2) by the eligible assessee. (15) For the purposes of this section,- (a) "Dispute Resolution Panel" means a collegium comprising of three Commissioners of Income-tax constituted by the Board for this purpose; (b) "eligible assessee" means,- (i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and (ii) any foreign company." 13. Section 144C of the Income-tax Act, 19....
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....s section referred to as the draft order) to the assessee 1 The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereinafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee 2 On receipt of the draft order, the assessee may forward his objections, if any, to such variation to the Income-tax Officer, within seven days of the receipt by him of the draft order or within such further period not exceeding fifteen days as the Income-tax Officer may allow on an application made to him in this behalf 2 On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order: - (a) file his acceptance of the variations to the Assessing Officer; or (b) file his objections, if any, to such variation with, (i) the Dispute Resolution Panel; and (ii) the Assessing Officer. ....
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....ng of the assessment order. Provided that no directions which are prejudicial to the assessee shall be issued under this sub-section before an opportunity is given to the as to be heard. 11 No direction under sub-section (5) shall be issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the as or the interest of the Revenue, respectively. 5 Every direction issued by the Inspecting Assistant Commissioner under sub-section (4) shall be binding on the Income-tax Officer 10 Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer. 13 Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received. 6 For the purposes of sub-section (1), the Board may, having regard to the proper and efficient managem....
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....ions are received, the Assessing Officer shall forward the draft order together with the objections to the Deputy Commissioner and the Deputy Commissioner shall, after considering the draft order and the objections and after going through (wherever necessary) the record relating to the draft order, issue, in respect of the matters covered by the objections, such directions as he thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment" The judicial precedence laid by decided cases by the Courts in connection with interpretation of jurisdiction and powers of IAC under section 144B should apply with equal force to the interpretation of section 144C owing to similarity between the two provisions. In the context of section 144B, various judicial precedents have held that the review mechanism which section 144B provides for is limited only to the additions proposed by the A.O. and objected by the assessee. Further, enhancement of the assessment as a result of the directions issued by the Inspecting Assistant Commissioner under section 144B(4) on the items not covered by the draft order would be invalid to the extent "it was not covered by the draf....
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.... as a result of the direction issued by the IAC under section 144B(4) on the items not covered by the draft assessment order would be invalid to the extent "it was not covered by the draft". In the facts the circumstances of the case, the fact that it was deleted on appeal by the CIT is quite irrelevant." In view of the above judicial precedents on the powers of supervisory authority, since the similar provisions were incorporated in the new section 144C with reference to draft orders, the principles are equally applicable. 15. This issue whether the DRP has power to issue directions at variance to the proposed draft order was also decided in the case of another foreign company M/S GE India Technology Centre (P.) Ltd. by way of Writ Appeal before the Hon'ble Karnataka High Court. In Writ Appeal No. 1010 of 2011 dated 5th July 2011, the Hon'ble High Court has elaborately discussed the issue and came to the conclusion that the DRP cannot go beyond the proposed draft order. The facts in the above referred case are that the assessee declared income of Rs. 2,12,18,961/- and this case was selected for scrutiny. Under section 92CA of the Act the matter was referred to TPO for determ....
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.... provisions of section 92C and Section 144C. The directions issued by the DRP under section 144C is binding on the assessing officer and against the said order of the assessing officer a direct appeal to the Income-Tax Appellate Tribunal. Wherefore we have to look into the proposed draft order in the present case to find out as to whether the directions issued by the DRP as per direction No.(iv) culled out above is valid and binding or not. It is clear from the proposed draft order that the appellant had claimed exemption of Rs.32,58,26,375/-. The proposed draft order annexed to the proposed draft referable to excess claimed under section 10A in a sum of Rs.44,49,280/- is arrived in the draft proposal order as follows: - ANNEXURE DEDUCTION U/S 10A PARTICULARS Rs. Total turnover of the undertaking (A) 305,31,27,853 Export turnover of the undertaking 305,31,27,853 Less: Communication Expenses Travel Expenses in foreign currency 3,25,98,610 90,92,976 Adjusted Export turnover (B) 304,14,36,267 Profit of the Undertaking (C) 32,58,26,375 Exemption u/Section 10A (D - B/A x ....
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....to the P & L Account of the above amount and the A.O. proposed disallowance of the above loss vide para 5 of the draft order on the reason that the expenses were contingent upon occurrence or non-occurrence of certain events and assessee itself has classified it as a provision for future losses. The contingent liability did not constitute expenditure as the same cannot be subject matter of deduction and the expenditure which is deductible for this purpose is only those liabilities which are not contingent. By holding this, assessee disallowed the provisions for future losses and in doing so relied upon the case law regarding liability under Income Tax Act determined in the following cases: - (i) CIT v. Nainital Bank Ltd. [1966] 62 ITR 638 (SC) (ii) Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC) (iii) M.P. Financial Corpn. v. CIT [1986] 26 Taxman 42 (MP) (iv) Mysore Kirlosker Ltd. v. CIT [1987] 166 ITR 836/30 Taxman 467 (Kar.) 18. It was assessee's contention before the DRP (vide Appendix 3 of the objection raised before the DRP) that paragraph 35 of AS-7 mandates that when it is probable that total ....
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....ood water discharge volume in Godavari River on 6th and 7th August were 2.6 and 2.8 million cusecs respectively (9 to 10 times of normal flood discharge). As a result of this flow of extra ordinary flood water discharge very high current was generated in Godavari River (up to 15 knots). Due to this, some of the equipment mounted on Assurancetourix could not hold ground through the anchor and got drifted into sea. While a frame was retrieved, the floating line was lost and booster was found near Kolkatta after 1 month (i.e. approximately 800 nautical miles away from their actual location). 20. It was the contention that assessee made provision of future losses amounting to Rs. 32,86,17,293/- as assessee expects to incur loss on the said project. It was further submitted that assessee has suffered loss on completion of work and the loss was also returned in the return filed for the subsequent year which was also verifiable by the A.O. However, the DRP in its order rejected the contentions as under: - "objection No 2:- This objection relates to disallowance of future loss of Rs. 32,86,17,293. It is claimed by the assessee that it is following percentage project completion method....
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....commercial accounting should be applied so long as they are not in conflict with any express provisions of the relevant statute. 22. The learned D.R., however, objected to the fact of application of AS-7 to assessee's case contesting that assessee is not involved in construction contract and so the principles do not apply and also referred to various provisions of accounting standard, which was placed on record in the paper book. 23. The learned counsel objected to the draft Accounting Standard relied on by the learned D.R. to submit that it was applicable from 1st April 2011 and placed AS-7 as applicable to assessee in the relevant year on record and referred to various guidelines therein to submit that assessee is covered by the guidelines of AS-7. The term building site or construction or installation project, as per the commentary to Article 5 of OECD also included laying of pipe lines and excavating and dredging in its definition. It was further submitted that A.O. has never objected to the fact of assessee being in 'construction contract' and objection to application of AS-7 was not either before the A.O. or before the DRP so as to raise the objection in the course of a....
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....s Engg. India (P.) Ltd. (supra) the Mumbai Tribunal has held that the provision for foreseeable losses under AS-7 is an allowable expenditure. In the facts of this case, the assessee who also prepared financial statements as per the provisions of AS -7 had claimed provision for foreseeable losses for A.Y. 2002-03 and A.Y. 2003-04 of Rs. 18,73,568/- and Rs. 5,83,038/- respectively. After analyzing the legal and factual position on the subject, the Tribunal allowed the claim of the appellant holding that such a provision is an allowable expense. The relevant extract of the decision is extracted below: - "Having regard to the above legal and factual discussions, and following the decision of the ITAT in the case of Mazagaon Dock Ltd. (supra) and Metal Box Co. of India Ltd. (supra) and decision of the Hon'ble Delhi High Court in the case of CIT v. Woodward Governor India Pvt. Ltd. [2007] 294 ITR 451 (Delhi), the contention of the assessee regarding allowability of foreseeable loss is accepted in principle." The decision of Mumbai Tribunal in the case of Mazagaon Dock Ltd. (supra) was also in favour of allowing future losses. In this case, assessee, as per method of accounting in ....
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....ss expenditure. The Apex Court held that the amounts paid by the bank were expenditure laid out for the purpose of business and hence the same was an allowable expense. ii. In Madras Industrial Investment Corpn. Ltd.'s case (supra), the Hon'ble Supreme Court was concerned with allowability of discount on debentures. The Apex Court held that proportionate discount on debentures was allowable as expenditure on pro-rata basis over different accounting period. iii. In M.P. Financial Corpn.'s case (supra), the court was concerned with the same issue raised before the Apex Court in the case of madras Industrial Investment Corporation Ltd., i.e. allowability of discount on debentures. The Court held that while the entire amount of discount was not allowable deduction, the discount had to be spared out proportionately over the number of years for which the bonds were issued and the proportionate amount of discount would be allowed expenditure. iv. In Mysore Kirlosker Ltd.'s case (supra), the issue which was raised before the Court was whether donation given by the assessee can be claimed under section 37(1). In this case, assessee company had promoted a trust which had....