AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2010 (3) TMI 1199
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....arned Commissioner of Income Tax (Appeals) has erred in law in allowing 5% of total salary of ₹ 82,07,238/- and 5% of expenses on air fares, visa charges and medical expenses aggregating to ₹ 15,98,366/- on the basis of guesswork, when the assessee has failed to establish the veracity of the claim 2. The Learned Commissioner of Income Tax (Appeals) has erred in law in ignoring the well-established tenet that the onus of providing primary facts and primary evidence with regard to the expenses claimed in Profit & Loss account rests entirely on the assessee. 3. On the facts and in the circumstances of the case the C I T(A) has erred in allowing 5% of salary ofRs.82,07,238/-, i.e. ₹ 4,10,362, on guess-work, disregarding the fact that this expenditure was incurred by the sub-contractor and not by the assessee. 4. On the facts and in the circumstances of the case the CIT(A) has erred in allowing 5% of expenses towards air fare , visa charges and medical expenses of ₹ 15,98,366, i.e. ₹ 79,918, on guess-work, disregarding the fact that this expenditure was incurred by the sub-contractor and not by the assessee. 5. The CIT(A) has erred on the facts and ....
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....ctivities under the Contract, the C I TA has still not allowed the entire deductions claimed by the Appellants. 5. The C I T -A has in passing the Impugned Order reinvented the entire case of the Department. In the original proceedings the case of determination was that the Appellants do not undertake any of the activities under the Principal Contract and are therefore not entitled to claim deductions of the aforesaid expenses. The C I T -A has in the present proceedings found that the Appellants undertook activities under the Contract but has now swung to the other extreme by claiming that the Appellants in fact undertook some part of the role and activities of the sub-contractors under the Sub- Contract viz. the Appellant and Kvaerner Cementation India Limited. It is impermissible in law for the C I T- A to: a. traverse beyond the scope of the remand order and b. to re-invent the case of the Department in the course of the remand proceedings." 6. Ground Nos. 1 to 4 in departmental appeal and ground Nos. 1, 2, 4 and 5 in the appeal of the assessee are on the common issue for disallowance of the several expenditures like salary, air fares, visa charges and medical expenses.....
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....accounts and estimating income at the rate of 6% of gross receipts. The said total income was ₹ 9,57,330. The assessee filed an appeal before the C I T(A) , Baroda against the said order of the A O. The learned C I T(A) upheld the rejection of books of account by the A O. However, the C I T(A) directed not to estimate the profit and deleted the additions made by the Assessing Officer and directed the AO to make lump sum disallowance of ₹ 10 lakhs. Aggrieved by the above order of the learned C I T(A), the department preferred an appeal before the ITAT. The appeal NO.ITA 2955/Ahd/2002 filed by the department and the appeal ITA No.2924/Ahd/2002 filed by the assessee for the A Y 1998-99 were disposed off by the Hon'ble ITAT in its consolidated order dated 25-8- 2005, partly setting aside the orders for A Y 1998-99 to 2000-01 to the file of the Assessing Officer. The A O completed the assessment proceedings vide order dated 27-12-2005. It was noticed by the A O that the USD 319329 (equivalent to ₹ 1,22,94,128) expenses were debited for Dahej Project under the head salary, visa charges, computer charges, sundry expenses, bonds/insurance, legal and professional fees,....
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....essee has shown loss in the return of income, therefore, deduction u/s 44 C of the I.T Act will be nil. The A. O. accordingly made the addition of ₹ 1,22,94,128/-. 6.1. The addition was challenged before the learned C I T(A) and the assessee referred to various observations of earlier orders of ITAT in which the matter was restored to the A O for proper examination of the issue and it was submitted that the A O has misconstrued the general observations of the Tribunal. It was submitted that the issue was to be decided by the A O on merits on the basis of the material and submission of the assessee. It was further submitted that above expenses have been incurred wholly and exclusively for the purpose of assessee's business. The assessee relied upon decisions in the case of Sassoon J. David & Co. Pvt. Ltd. Vs C I T 118 ITR 261 and C I T Vs Malayalam Plantations Ltd. 53 ITR 140. It was submitted that in order that the expenditure qualifies as expenditure incurred wholly and exclusively for the purpose of business, it is not required to conclusively demonstrate that the expenditure was incurred out of compelling necessity, but was incurred for the purpose of assessee's business.....
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....(Ssingapore) M/s. Aban Constructions By referring to the clauses of the agreement it was stated that work shall be sub contracted without prejudice to the contractor's responsibilities to execute the work as per the specification and the time schedule and in the event of any failure on the part of any of the sub contractors engaged by the contractor, the contractor shall do all the needful as may be required so as to ensure completion of the total works within the contracted time schedule. It was emphasized in the agreement that the contractor was fully responsible for the work to be performed under the contract. The assessee bore significant risk under the contract for completion of the contract. It was, therefore, imperative for the assessee to supervise the performance of the execution of the work by the sub contractors. For this purpose, the assessee had deputed its expatriate technicians primarily for supervising and superintending the activities carried out by the sub contractors, to ensure that the same was being carried out as per the contract standards, specifications and time lines. Apart from above, even as per the terms of the contract itself GCPTCL, the assessee was ....
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....a - UK tax treaty. Reliance was placed on the decision of ITAT, Mumbai Bench in the case of Metchem Canada Inc Vs DCIT ( 5 SOT 121) wherein ITAT has held that limitation on deduction of the head office expenditure as stipulated by Section 44C would be hit by the nondiscrimination clause in the India - Canada tax treaty and that on a plain reading of the provisions of Article 24(2) of India-Canada tax treaty, the restriction on admissibility of administrative overheads of a PE of a Canadian company constitutes discrimination against such a PE vis-à-vis a domestic Indian entity because no such restriction is applicable for deduction of head office or controlling office overheads of an Indian entity. Asserting that articles relating to nondiscrimination in India-UK tax treaty and those in India-Canada tax treaty read with Article 24(3) of OECD Model are similarly the ratio of the decision in the case of Metchem would therefore apply in pari material to the assessee. As an alternate plea it is voiced that the provision of Section 44C of the Act is not applicable in assessee's case, as the nature of expenses incurred are outside the purview of the provisions of Section 44C of the....
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....bai High Court in Emirates Commercial Bank's case (supra), the Mumbai ITAT has observed that Section 44 C is not applicable where India specific expenses are involved. (iii) American Bureau of Shipping Vs Income Tax Officer (19 ITD 793) (ITAT, Mumbai) - In this case the ITAT, Mumbai Bench has held that the traveling expenses which were specifically incurred on account of Indian branch could not be in the nature of Head Office expenses. 6.5 It was, therefore, prayed that provisions of Section 44C of the IT Act are not attracted in the case of the assessee and that the addition made by the A O be deleted. 7. The Learned Commissioner of Income Tax (Appeals) considering the submissions of the assessee and material on record allowed the appeal of the assessee partly. The findings of the Learned Commissioner of Income Tax (Appeals) in paras 4.3 to 4.3.22 are reproduced as under: 4.3 "I have carefully considered the arguments of Assessing Officer and the submissions of the appellant, the contract and sub contract agreements, the facts of the case, assessment records and various judicial pronouncements cited above. At the outset, I am in agreement with the plea of appellant that the ....
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....ourse of appellant proceedings following questions were specifically addressed to the appellant in order to arrive at a conclusion about the work actually performed by these personnel. (1) What were the specific jobs performed by these expatriates? (2) Were the jobs overlapped with the functions performed by the supervisory cadre of the subcontractor ? (3) If yes what is the degree of overlap? (4) What were the division of work between the expatriates and the operating cadre of sub contractor? (5) What value was added by these people if execution was with sub contractor and how was the value addition measured? (6) Were they not performing execution functions as per organogram? (7) Who signed the day to day work measurement sheets? (8) What if these expatriates were not there? Could the job had not been managed? (9) Since in respect of part of work ie installation of steel piles it was concluded by ITAT that as the design , fabrication, planning was responsibility of subcontractor and the loss on collapse of piles was not allowed to appellant by ITAT, why in respect of other components of the project the same conclusion be not reached? 4.3.5 In response thereto it is reite....
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.... appeal proceedings it was admitted in statement of fact that the expenditure on expatriates were incurred for providing proper infrastructure for purposes of executing the project. Vide submission dated 18.12,2000 before the Assessing Officer it has also been stated by the assessee that the company was engaging expatriates personnel for execution of the project and that the personnel were engaged in carrying out various activities like engineering, planning, technical development and administrative functions, etc. It is also a fact that these personnel were holding key posts such as managers, project directors, technicians, etc. as evidenced by the site organogram and it could not be shown that the nature of functions performed by the sub contractor were indeed different from those performed by the expatriates. It is admitted that the appellant operated in India merely through a project office and back to back contract was entered right from the date of issuance of Letter of Intent in favour of another group concern. The appellant could not establish that the duties performed by them were in fact only supervisory in nature and that sufficient skill and experience was available wit....
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....t the businessman is the best judge of business expediency does not affect the right, and duty, of the assessing authorities to know whether it was incurred for business purposes and not for other extraneous considerations In the case of Ramanand Sagar vs. DCIT - 255 ITR 134(Bom.) it is held that the mere fact that the payment has been made under a contract is not conclusive of the expenditure being laid out wholly and exclusively for the purposes of the business. Once doubts arise about the bona fide nature of the payment, it is necessary to look into all the necessary circumstances such as relationship of the payee to the assessee, the general standards of similar expenditure in comparable business, the true worth of the services or goods in question and so forth. It is also open to the Assessing Officer to question the reality of the expenditure, i.e. the true nature of payment, the true consideration for it and so forth. The expenditure must not be unreasonable and out of proportion and this was indicated as one of the negative tests for disallowability of expenditure u/s. 37 as held in CIT vs. Navsari Cotton & Silk Mills Ltd - 135 ITR 546(Guj) Purpose should not be to foster....
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....centage of supervision attributable to the personnel has to be at best estimated. The profit and loss account under the head 'Expenses under Sub contract' shows only work charges and no separate details of supervision or personnel costs were charged by the appellant. Thus there appears to be little doubt that these personnel performed the execution job which was the primary responsibility of the sub contractor. It is also seen that the personnel posted were posted by the parent company for Dahej project and in the larger scheme of things when all these companies are the group concerns it is fairly easy to assign these personnel to any task and to allocate the expenditure according to overall business strategy of parent company. 4.3.11 Another plea of the appellant that there were other sub contractors apart from SCEM and this aspect was not considered by the Department was examined. However no details of expenses for supervision of works of other sub contractors were ever filed either in assessment or in appeal or before ITAT. Neither it is shown to have been so charged to the profit & loss account. Thus the plea has no material bearing on the issue at hand and is rejected....
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....words in terms of compilation of reports and coordinating the matter with the owner majority of the tasks are in the realm of subcontractor. 4.3.15 Another plea of the appellant, that as per clause 4 of letter of intent it was contractor responsibility to provide supervisory personnel in case the owner demands it, has been examined. It is seen that as per LOI cost of such personnel is to be borne by the owner and it has been admitted in appeal that no such supervisory staff was posted. In any case, even if, the cost if any were to accrue it would not have been on appellant's count. Thus the plea of the appellant lacks force. 4.3.16 Considering all the facts and in view of available, incomplete information, I have no choice but to make a fair guess about expenditure on supervision tasks which was the domain of the appellant for purposes of claim of expenditure under the Act. Considering that functions performed by these expatriates appear to be primarily for execution of the project and supervision work was merely incidental and also the fact that only 9% of receipt is accrued to appellant from back to back contract, I estimate such expenditure on account of supervision as 5% ....
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.... enterprise of a Contracting State has in the other Contracting State shall not be less favorably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in the same circumstances or under the same conditions. This provisions shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which an enterprise of the other Contracting State has in the first-mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first-mentioned Contracting State, nor as being in conflict with the provisions of paragraph 4 of Article 7 of this Convention. The expression 'taxation..... shall not be less favourably levied" means, in the context of the Indian Income-tax Act, levy of income-tax on the income of an enterprise, that the charging section and the computation section should not be so drafted as to place a foreign company in a less favourable position than the Indian company carrying on the same activities - Advance Ruling application No. P-16 of 1998, in re (1999) 102 Taxman 377 (AAR-New Delhi) and that a tax should no....
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....es, are violations of this national treatment standard. Rather, the national treatment obligation of this Articles applies only if the nationals or residents of the two States are comparably situated. Each of the relevant paragraphs of the Article provides that two persons that are comparably situated must be treated similarly. Although the actual words differ from paragraph to paragraph (e.g. paragraph 1 refers to two nationals "in the same circumstances," paragraph 2 refers to two enterprises "carrying on the same activities" and paragraph 4 refers to two enterprises that are "similar"), the common underlying premise is that if the difference in treatment is directly related to a tax relevant difference in the situations of the domestic and foreign persons being compared, that difference is not to be treated as discriminatory (e.g. if one person is taxable in a Contracting State on worldwide income and the other is not, or tax may be collectible from one person at a later stage, but not from the other, distinctions in treatment would be justified under paragraph 1). 3.3.21.1 These aspects were perhaps not brought before the kind notice of Hon'b....
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.... the operation 'of the Contract, in accordance with Kvaerner standards. 3) Administrative management of the contractor's office and living accommodation, transport, travel, domestic and office staff, etc. 4) Assistance to the contractor in the management of its financial accounts. 5) Assistance to the contractor in obtaining all necessary visas, licences, permits and customs clearance in connection with the execution of the contract works and the entry and exit of the contractor's staff into and out of India. 6) Access to the site and all other locations necessary for the contractor to carry out the contract works. Part 2 of the sixth schedule reads as under; "SIXTH SCHEDULE: SUBCONTRACTOR'S FACILITIES The following facilities and services will be provided by the Contractor at its own cost, however the administration of such facilities and services, shall be undertaken by the Subcontractor at no cost to the Contractor. a) Suitable furnished air - conditioned living accommodation located in the general vicinity of Gujarat, for the Contractor's staff, both resident and visiting as may be required in connection with the Contract Works, including all ne....
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.... 5% of the expenditure in the matter. 9. On the other hand, learned Counsel for the assessee reiterated the submissions made before the authorities below. He has submitted that the Tribunal in the first round proceedings restored the matter to the file of the A O for examination, therefore, such finding cannot be read against the assessee. He has submitted that learned C I T (A) agreed with the submission of the assessee that the A O ought not to have assumed that no such expenditure is allowable as per decision of the ITAT and that the department has not challenged such findings of the learned C I T(A). He has submitted that department has not made out any case that assessee ought not to have spent the amount. He has submitted that now, the A O has made the case of execution or supervision for completion of the sub contract which is not permissible because ultimately it was the responsibility of the assessee to complete the agreement for the Principal. He has submitted that all expenditures are spent by the assessee wholly and exclusively for the purpose of business for the project in Gujarat. There is no distinction in law between execution or supervision or business necessity t....
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....urt in the case of C I T Vs Raipur Manufacturing Co. Ltd. 84 ITR 508 in which the company paid to the liquidator the amount as per agreement to avoid disputes and claimed deduction. The Income Tax Officer held that it was purely an ex-gratia payment and rejected the claim of the assessee. The finding of the Tribunal was that the payment was made by the assessee company to buy peace and to see that the employees were contended and that there was no disturbance in the smooth working of the factory because of strike, stoppage of work, or rowdyism in the mill premises and the Tribunal allowed the deduction. On reference, Hon'ble High Court held that the Tribunal was justified in holding that assessee was entitled for deduction of the expenditure laid out wholly and exclusively for the purpose of assessee company's business, (ii) decision of Hon'ble Gujarat High Court in the case of C I T Vs City Ahmedabad Spinning & Weaving Manufacture Company 207 ITR 427 in which it was held that once it is found that an expenditure was bona fide incurred and that same was related to business activity, then it would become deductible as the same is permitted by the provisions of law, (iii) dec....
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....ssee has not discharged its onus to prove genuineness of the expenditure. 11. We have considered rival submissions and material on record. The facts of the case as noted above are not in dispute that the assessee company being the contractor obtained the contract work from the Principal i.e. Gujarat Chemical Port Terminal Company Ltd. (GCPTCL/owner) for construction of a Liquid Chemical Handling Jetty at Dahej. For the purpose of execution of the aforesaid contract, the assessee had established project/site office at Dahej. For completion of the project assessee had given sub contract to Skanska Cementation India Ltd. for carrying out the job. The issue in the present appeal is relating to principal contract and the sub contract entered into between the Principal and the assessee AND the assessee and the sub contractor. The A O proceeded on the basis that expenses incurred by the contractor outside India and the expenses reimbursed to the sub contractor are not deductible expenses because the contractor had passed on all the liabilities and responsibilities on the sub contractor under the principal contract. The A O therefore, held that as the execution of the project was the sole....
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....aken place and as if such work had been done directly by the contractor. The above clause, therefore, would prove that the assessee is solely responsible for the work and all the obligations shall have to be discharged towards the principal. The assessee was required to furnish the security and bank guarantee towards the timely performance of the work. It will also prove that in case of non-performance of the agreement by the assessee, it shall be liable for forfeiture of the security. Clause 9 of the letter of intent (WS/PB 17) required the contractor to set out the site organization which indicated that personnel of the contractor will play a supervisory role even in respect of site activities. As per Clause 4 of the same letter of intent the contractor is to provide the services of Indian and expatriate personnel for pre-commissioning and commissioning activities. As per clause 84.3, page 114 of the paper book on the general conditions of the contract (GCC) provides for care of work and the contractor has to take full responsibility for the care of the work and in case of any damage, loss or injury, the contractor must at its own cost repair and make good the same. In the same G....
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....f the stipulations incorporated therein, unless it is proved otherwise. In the present case, there is nothing available on record to show that the principal, the assessee-contractor and the sub contractor had acted differently from the terms of the contract. When it is so, we have to see that the assessee-contractor had incurred expenditure in its own account as well as made payments to sub contractors and again the sub contractor incurred expenditure on the basis of terms and conditions of the agreements executed by them. The reason for the apprehension of the A O is that he has been overwhelmed by the terms of the contracts between the contractor and the sub contractor. The A O has thus overlooked the overall responsibility and contractual obligations of the assessee-contractor in the light of the principal contract entered into between the assessee-contractor and the principal - contractee. The A O gave undue stress to the sub contract agreement and ignored the essential traits of the contract agreement. In the light of the above, we found that assessee as a contractor for constructing the jetties and other related works, has assumed a wholesome contractual responsibility of ex....
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....essee and that it has to perform operational functions, the assessee has to incur expenditure in executing the project. Once incurring of expenditure in the hands of the assessee is warranted by the facts and circumstances of the case and further induced by the contractual obligations, it is not permissible to question the legitimacy of incurring expenditure by the assessee-company. In the case of Sassoon J. David & Co. (supra), it was held that wholly and exclusively does not mean necessarily. In the case of C I T Vs Malayalam Plantation Ltd. (supra), it was held the term for the purpose of business is wider in scope. The learned Counsel for the assessee relied upon decisions in the case of C I T Vs Raipur Manufacturing Co. Ltd., C I T Vs City Ahmedabad Spinning & Weaving Manufacture Company, S. A. Builders Ltd. Vs C I T and Sri Venkata Satyanarayana Rice Mill Contractors Co. Vs C I T (supra) clearly support the case of the assessee for allowance of deduction. Hon'ble Supreme Court in the case of C I T Vs Dhanarajgiri Narasinginji 91 ITR 544 held that it is not open to the Revenue Department to prescribe what expenditure an assessee should incur and in what circumstances he sh....
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.... the purpose of executing the project, the legality and legitimacy of the claim made by the assessee shall have to be accepted. The assessee has maintained proper accounts after classifying the expenses incurred by it. The assessee has maintained details of quantum work executed by the sub contractor along with the corresponding payment made to it. The expenses incurred at the Head Office of the assessee-company abroad have been properly accounted and audited and consolidated in the global accounts of the assessee-company. Since all expenses are incurred for the project at Dahej in India therefore, there is no ground to reject the claim of the assessee for want of evidence and lack of verification. It is, therefore, beyond doubt that the expenses are in fact, expenses wholly and exclusively incurred for the purpose of business of the assessee company - contractor. 14. We may also note that the claim of the assessee for deduction of the expenditure has been disallowed with aid of Section 44C of the IT Act by observing that the expenses pertain to the Head Office and the assessee being non-resident company, the deduction could be allowed u/s 44C of the IT Act. Since assessee has sho....
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....the year under consideration, the assessee had reimbursed SCIL(sub contractor) , a sum of ₹ 87,47,333/- in respect of the expenditure incurred by the latter on the assessee's behalf. The said expenditure inter alia includes reimbursement of expenditure on account of accommodation of expatriate personnel of the assessee, traveling expenses of the expatriates, telephone, food expenses of the expatriates etc. The A O has disallowed reimbursements amounting to ₹ 87,47,333/-. In making the disallowance the A O has held that since the entire contract has been subcontracted, it is the responsibility of the subcontractor to incur all the expense in connection with the execution of the project and hence the expenditure pertains to the business of the subcontractor and not to that of the assessee. Further, the A O has also held that the expenses are voluntary in nature and hence are not allowable in the hands of the assessee. The assessee challenged the addition before learned C I T (A) and it was submitted that employees had been deputed to supervise the execution of the contract to safeguard its own interest under the contract. Genuineness of the expenses are not disputed. The ....
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....31,21,689/- on account of disallowance of Head Office expenses. The A O also made the addition by disallowing ₹ 1,76,74,225/- on account of Head Office expenses u/s 44C of the IT Act. The A O also disallowed ₹ 1,65,95,402/- on account of expenditure incurred by the sub contractor and claimed by the assessee. The issues are same and identical as are considered in the assessment year 1998-99 in ITA No.46/Ahd/2007 and ITA No.52/Ahd/2007. The assessee made same submissions before the learned Commissioner of Income Tax (Appeals). The learned Commissioner of Income Tax (Appeals) allowed 5% of the deduction out of the addition of ₹ 2,71,35,886/- i.e. ₹ 13,56,792/- and balance of ₹ 2,57,79,092/- was confirmed. On the same analogy, the other expenses were allowed at 5% and the balance ₹ 63,42,007/- was confirmed. Similarly, addition of ₹ 1,12,93,497/- was confirmed . Section 44C was also applied. The addition of ₹ 64,34,386/- was also confirmed. However, in regard to recruitment and finance charges amounting to ₹ 1,70,17,156/-, it was noted that the same could not be established in assessment or in appeal that such expenses were incurred....
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....f sub contract Agreement dated 18- 12-1998 entered into between the assessee and Kvaerner Cementation India Ltd. By holding that these expenses are the responsibility of the sub contractor. On ground Nos. 4 and 5 the above additions are challenged. On the last ground, assessee challenged charging of the interest u/s 234B of the IT Act. 22. The learned representatives of both the parties submitted that all the issues in the cross appeals are similar as have been considered in assessment year 1998-99 and requested that the order in that assessment year may be followed in this year also. 23. On consideration of the submissions of the parties and findings of authorities below, we are of the view that all the grounds of appeals in cross appeals are similar and identical as are considered and argued by both the parties in Assessment Year 1998-99 in ITA Nos. 46/Ahd/2007 and ITA No.52/Ahd/2007. Therefore, following the same order and relying upon the same reasons for decision in the Assessment Year 1998-99 above, we set aside the orders of authorities below and delete the entire additions. Charging of interest is consequential. As a result, appeal of the assessee in ITA No.53/Ahd/2007 is....
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....3,95,387 in respect of salaries of expatriates and 5% of the expenses of 70,38,304 in respect of expenses like medical, air fare and visa charges for the expatriates can be considered to be towards supervision. The learned C I T-A has erred in disallowing an amount of ₹ 29,94,382 (comprising of sundry expenses of ₹ 2,07,585, traveling expenses of ₹ 24,10,860, care hire charges of ₹ 3,75,937) expenses out of ₹ 68,63,514 (included ₹ 4,83,71,219) that have been reimbursed to Kvaerner Cementation India Limited pursuant to the provisions of Sixth Schedule of Sub-contract Agreement dated 18th December 1998 entered into between the appellant and Kvaerner Cementation India Limited by holding that these expenses are the responsibility of the sub-contractor. The learned C I T-A has thus confirmed disallowance of ₹ 4,62,49,535/-. 2. The learned C I T-A has erred in holding that out of expenses of ₹ 1,09,70,601 in respect of personal taxes of expatriates only 5% of the expenses can be considered to be towards supervision. 3. The learned C I T-A has erred in treating the expenses amounting to ₹ 10,19,683 (comprising of courier charges of &....
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....s on behalf of the assessee. The assessee reimbursed the Head Office in respect of the same. The A O disallowed the same under Section 40 (a) (i) by holding that no tax was deducted at source in respect of the same. The A O has dealt with the issue on page 26 of the impugned order. The relevant portion is reproduced below: "…. As per section 9(1)(vii) ( c ) amount of fees paid by way of professional and consultancies fees by a non-resident in respect of services utilized in business or profession by such person for the purpose of making or earning any income from any source in India is income deemed to be accrued for arise in India. From the details submitted by the assessee, it is clear that the parties who raised the invoices to KCIL, UK have rendered services for Dahej project. The services were utilized by 'this project. Therefore, on these payments, it is the responsibility of the assessee to deduct tax at source. Section 40(a)(i) provides disallowance of any interest, royalty, fees paid for technical services or other sum chargeable under the income tax act which payable outside India on which tax has not been paid or deducted under chapter XVII-B. Section 40(a)(i) ha....
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....nnot be allowed as expenditure in the hands of the assessee because the same cannot be held to be business expenditure of the assessee. On the basis of the above facts and information submitted by the assessee and after reexamined the whole issue I hold that amount of ₹ 1,42,85,226/- is disallowed. (Addition ₹ 1,42,85,226/-)" 31.1. The A O has held that since the payments constituted "Fees for Technical' ('TFS') services under section 9(1)(vii) of the Act, the assessee was obliged to deduct tax at source in respect of the above payments. Since no tax had been withheld, the provisions of section 40(a) (i) were attracted. 31.2 The assessee challenged the addition before the learned Commissioner of Income Tax (Appeals) and it was submitted by the assessee that the obligation to withhold tax is cast under section 195 of the Act whereby any person responsible for paying to nonresidents, any interest or any other sum chargeable under the Act is required to deduct tax at source. Thus, the primary condition for attracting the tax withholding implications is that the payment should be chargeable to tax under the Act. However, it is submitted that nonresidents, as per section ....
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....ed in India and that there is no permanent establishment in India. Therefore, for reimbursement of the expenses the provisions of section 40(a) (1) of the IT Act cannot be invoked in the case of the assessee. He has relied upon 310 ITR 237 (Mad.), 221 CTR-1 (Bom.) and 225 CTR 220 (Karnataka). On the other hand, learned Departmental Representative relied upon orders of the authorities below and referred to page 32 to 37 of the order of the C I T (A) and also relied upon the decision in the case of Wallace Pharmaceutical Pvt. Ltd. (supra) relied upon by the learned C I T(A). 34. We have considered rival submissions and material available on record. The relevant provisions in the Act on this issue are reproduced as under: 35. Section 40(a) (i) of the Act provides "Notwithstanding anything to the contrary in sections 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) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under th....
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....yee and the provisions of this section shall apply accordingly.]" 35. Section 9 (1) (vii) of the Act provides that the following incomes shall be deemed to accrue or arise in India:--- "income by way of fees for technical services payable by- (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : [Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.] [Explanation 1.-For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in....
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....ve been made to prove as to how the payment in question was liable to tax under the provisions of Income Tax Act. Unless the income was chargeable to tax, there would be no tax liabilities to deduct tax as per provisions of Section 195 (1) of the IT Act. The A O has also not properly examined the provisions of DTA agreement with UK for the purpose of appreciating the issue. According to the assessee the amount is paid by the UK payer to UK payees, therefore, there was no reason to deduct TDS. The reimbursement of the expenses to the sub contractor for further payment to others was not appreciated in the light of the relevant provisions and how these expenses were considered as fees for technical services is also not considered by the A O. As regards the reimbursement of the expenses to t he sub contractor, A O disallowed certain expenses treating the same to be liability of the sub contractor on other issues which have already been decided in favour of the assessee. The A O has not specifically considered this issue from the point of view that if the amounts are reimbursed to the sub contractor for and on behalf of the assessee and are taken into consideration by the assessee in th....
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....t of the contract. Even though the property in the goods may pass to the buyer when the documents are handed over, the buyer may yet retain the right to examine and repudiate the goods but this right generally which a buyer has in a c. i. f. contract does not by itself indicate that the property in the goods has not passed to him." In the case of C I T Vs Gulf Oil (Great Britain) Ltd. 108 ITR 874 (Bom) the Hon'ble Bombay High Court held, "on the facts that the contracts were made in U. K. as the indents placed by the Indian company were accepted in U. K. The contracts were also executed outside India because once the goods were put on ship there was no reservation of right of disposal in the goods by the non-resident. Pursuant to the indents the products were not merely supplied by the non-resident company but actually sold to the Indian subsidiary at c. i. f. prices. The Indian company effected sales of the products on its own account in India and was taxed on the profits so made by it on its turnover in India. It was, therefore, clear that the transactions between the non-resident company and the Indian subsidiary were on a principal to principal basis and the Indian subsidi....
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....llowed. 39. The ground NO.9 in the appeal of the assessee reads as under: "9. (1) The learned C I T (A) has erred in withdrawing the depreciation on temporary office units from 100% allowed by the learned Assessing Officer to 10% without giving the mandatory notice for making enhancement as stipulated in section 251 (2) of the Act. (2) The learned C I T (A) has erred in not accepting the appellant's claim to either allow by way of revenue expenditure or allow by way of 100% depreciation the claim for deduction of ₹ 26,03,24,147 in respect of camp units, ₹ 2,57,14,870 in respect of camp equipment, ₹ 1,30,00,169 in respect of camp furniture and fixtures. Without prejudice to (1) above, the learned C I T-A erred in not accepting appellant's claim to allow the deduction of ₹ 35,82,111 in respect of temporary office units." 40. The facts on this ground are that the assessee had erected certain temporary structures at its project site to house its employees deputed to the project. The total expenditure included expenditure on: Particular Amount (INR) Camp units 260,324,147 Camp equipments 25,714,870 Camp Furniture and fixtures 13,000,169 Temporary off....
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....savings in revenue expenditure that the assessee would have otherwise incurred for transport and accommodation of the employees. The ratio laid down in the cases of Indian Ginning & Pressing Co. Ltd. Vs C I T, Madras Auto Services (P) Ltd. and Associated Cement Companies Ltd. (supra), therefore, is squarely applicable to the assessee's case. It was therefore submitted that the expenses incurred by the assessee are wholly revenue in nature. Further, it was stated that the assessee was under an obligation to vacate the land on the completion of the project and dismantle the camp units. In view of this, it was submitted that the expenses on camp units have been incurred by the assessee only for the purpose of facilitating the conduct of its business and it was nowhere the intention of the assessee to bring into existence any asset of enduring nature. Accordingly, the assessee prayed that the expenditure incurred by the assessee on the provision of infrastructure namely camp units, etc. should be regarded as revenue in nature and thus, allowable in the hands of the assessee in the year of incurrence in full. Without prejudice to the above, it was stated that even if the camp units are ....
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....nt in the books of accounts of a particular expenditure would not dictate the tax treatment as the accounting entries in the books of accounts are occasioned by diverse set of consideration and that h4e tax treatment of such expenditure has to be determined with reference to provisions of Income Tax Act. 8.6.4.2 The Assessing Officer on the other hand at para 16.2 of the assessment order has mentioned that the assessee had amortised the infrastructure expenditure of ₹ 5.26 crores in his books on structures and furniture and fixtures and these structures provided enduring benefits to the appellant and thus he treated the expenditure as capital in nature and save for site office for which depreciation @ 100% was allowed, for balance appropriate depreciation rates were applied. 8.6.4.3. In appeal before me the appellant was asked to provide the details of the infrastructure. It has been stated that the facilities included following works i. Infrastructure work relating to clearing of designated site. ii. Plinth work, electrical cabling, drainage facilities, site road, fencing. iii. Imported two bed room accommodation unit iv. Locally supplied two men/single man unit comple....
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....e Assessing Officer is therefore justified in applying the appropriate rates of 10% for the camp units and 15% for camp equipment and furniture and fixture. 8.6.4.8 As regards the plea that Assessing Officer has himself treated the site office as temporary in nature and allowed 100% depreciation whereas for similar other structures differential treatment was give, I am in agreement with appellant and looking into nature of structure and the material used and Appendix - I of Income Tax Rules, in my view appropriate depreciation rate would be 10%. The depreciation allowable is thus worked as under. Camp Unit @ 10% : Rs.26032415 Furniture and fixture @15% : ₹ 5807256 Site Office @10% : ₹ 358211 Rs.32197882" 42. The learned Counsel for the assessee reiterated the submission made before the authorities below and submitted that it was the responsibility of the assessee to remove the temporary structures on completion of the project. He has referred to Para 15.3 of the agreement for the project (WS/PB - 56). He has, therefore, submitted that since it was the contractual obligation to clear the site, therefore, the structure was temporary in nature. Such units were ess....
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....al decisions in support of the contention. On the other hand, learned Dr relied upon orders of authorities below. 43. We have considered the rival submission and material on record. The facts as noted above are not in dispute. The assessee raised these temporary structures at the project site for the purpose of business and welfare of the employees. As per the clause 15(3) of the agreement with the principal (supra), the assessee was required to clear the site on completion of the project. The above facts, therefore, show that all the structures were temporary in nature and were meant for the business of the assessee till the project continued. It was obligation of the assessee to remove the temporary structure from the site on completion of the project. There is no question of generating any asset in favour of the assessee or getting any enduring benefit. The temporary structure therefore, would not constitute any asset, the same are expenses wholly and exclusively incurred for the purpose of facilitating the business of the assessee. The decisions relied upon by learned Counsel for the assessee clearly support the case of the assessee for allowing deduction on the expenses bein....
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....2. The ld CIT(A)-XXI, Ahmedabad has erred in law and facts in holding that the AO has erred in disregarding the order passed by his predecessor on March 30, 2005 dropping the penalty proceedings in this very case. Ld CIT(A) failed to appreciate that as per section 275(1A), even if order imposing dropping of penalty is passed before the order of CIT(A) is received, an order imposing for the imposition of penalty may be passed on the basis of assessment as revised by giving effect to such order of the Commissioner (Appeals) and in present case the penalty is levied on the basis of CIT(A)'s order dated 25/08/2005. 3. The ld CIT(A)-XXI, Ahmedabad has erred in law and facts in holding that the AO has erred in levying penalty despite the fact that the order dated March 12, 2003 no longer survived in the eyes of law in view of directions of ITAT setting aside the order of the lower authorities. Ld CIT(A) failed to appreciate that Hon'ble ITAT has not set aside the order of authority below it with a direction to readjudicate the certain issues. Hon'ble ITAT has set aside only some issues to the file of the Assessing officer to adjudicate afresh and not the entire order. 4. Th....
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....vying penalty despite the fact that the order dated March 12, 2003 no longer survived in the eyes of law in view of directions of ITAT setting aside the order of the lower authorities (reproduced in para 8 of statement of facts) which covered both the grounds on which the penalty was initiated. 4. The learned AO has erred in levying penalty specifically mentioning in his order dated May 31, 2007 as under: "....It is clear from the assessment order that penalty proceedings u/s.271(1)(c) were initiated for concealment of income and furnishing of inaccurate particulars of income in respect of all the issues which were raised and on the basis of which additions and disallowances were made in the assessment order dated 12.03.2003..." 5. The learned AO has erred in passing the impugned order taking income determined vide order dated January 6, 2006 (net off relief allowed by CIT(A) vide his order dated October 31, 2006 of ₹ 1,77,03,128) notwithstanding the fact that no mention of initiation of penalty with regard to additions was made in the said order. 6. The learned AO has erred in passing the impugned order taking income determined vide order dated January 6, 2006 (net ....
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....ection 274 of the Act was issued. 46.1. The assessee filed an appeal to the CIT(A) with regard to the aforesaid two items. The CIT(A) vide his order dated February 23, 2004 held as under: A. Reducing the rate of 6% of the total receipts taken by the AO to estimate the net profit to 1.80% of the total receipts. B. Deletion of the addition made of ₹ 1,42,85,226 u/s. 40(a)(i) of the Act. An order u/s. 271(1)(c) of the Act was passed or March 30, 2005 by the AO dropping the penalty proceedings initiated under section 271(1)(c) of the Act. Appeals were preferred to the ITAT by the assessee as well as the department. The ITAT passed a consolidated order dated August 25, 2005 for A.Ys. 1998-99 to 2001-02. 46.2. The Assessing Officer passed an order on January 6, 2006 to give effect to the ITAT's directions. He re-determined the income at ₹ 18,24,34,770. He gave a go-bye to the earlier finding of his predecessor which had resulted in the rejection of the book results. He arrived at the income of ₹ 18,24,34,770 by making individual additions in respect of seven items mentioned in the order dated January 6, 2006 to the returned loss. After making adjustments in respec....
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....2461 or section 246A or an appeal to the Appellate Tribunal under section 253, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which the order of the Commissioner (Appeals) or as the case may be, the Appellate Tribunal is received by the Chief Commissioner or Commissioner, whichever period expires later; Provided that in a case where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner (Appeals) under section 246 or section 246A, and the Commissioner (Appeals) passes the order on or after the 1st day of June, 2003 disposing of such appeal, an order imposing penalty shall be passed before the expiry of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed, or within one year from the end of the financial year in which the order of the Commissioner (Appeals) is received by the Chief Commissioner or Commissioner, whichever is later; (b) in a case, where the relevant assessment or other order is the subject-matt....
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.........,; and (iii)......" 1.2 In response to the then learned AO's notice dated May 21, 2007 read with notice dated March 12, 2OO3, we had vide our submissions dated May 24, 2007 submitted that in the light of provisions of section 275(1) of the Act no order imposing penalty u/s. 274 r.w.s. 271(1)(c) of the Act could be passed. The then learned AO vide his order levying penalty dated May 31, 2007held as under, "2.5 I have considered the submission of the assesses. The contention 1 of the assessee that in view of the facts of the case and provisions of section 275(1), no order imposing penalty u/s.274 r.w.s. 271(1)(c) of the Act can be passed is without any substance. It does not hold any ground because considering the facts of the case and the provisions of sections of section 275(1) and the section 275(1A) inserted by the Taxation Laws (Amendment) Act, 2006 which received the assent of the President on 13.07.2006, the penalty in this case can be levied......." 1.3 Based on above, we have to submit that in our case, the penalty proceedings were originally initiated vide notice dated March 12, 2003 for the levy of penalty u/s. 274 r.w.s. 271(1)(c) of the Act co....
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....the expiry of the financial year in which the proceedings in the course of which action for imposition of penalty has been initiated, are completed or within one year from the end of the financial year in which order of Commissioner (Appeals) is received. Further, under the existing provisions contained in clause (b) of subsection (1) of said section, in a case where the relevant assessment or other is the subject-matter of revision under section 263 or section 264, the penalty order shall be passed before the expiry of six months from the end of the month in which such order of revision is passed. It is proposed to amend the said section so as to provide that in a case where the relevant assessment or other is the subject-matter of an appeal to the Commissioner (Appeals) under section 246 or section 246A or an appeal to The Appellate Tribunal under section 253 or an appeal to the High Court under section 260A or an appeal to the Supreme Court under section 261 or revision under section 263 or section 264 and an order imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for the imposition of penalty is passed before the order of the Commissioner (App....
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....s also been decided by the Hon'ble ITAT on August 25 2005. Based on this, on May 31, 2007, being the date on which order levying penalty of ₹ 20 crores was passed, no order envisaged in the section 275 of the Act could be said to be pending before any of the authorities mentioned in the section 275 of the Act. Even at the cost of repetition, we may reiterate the sequence of events (as are relevant to the issue under reference) very briefly so as to bring home the point that the relevant assessment or other order could only be assessment order passed on March 12, 2003 and no other order. Sr. No. Particulars Authority passing the order Date of order Section under which the order passed. 1 Regular assessment order AO March 12, 2003 143(3) 2 Order in respect of appeal against AO's order passed u/s.143(3) CIT(A) February 23, 2004 250 3 Order in respect of appeals by the appellant as well as by the department against the CIT(A)'s order in respect of appellant against AO's order passed u/s. 143(3). ITAT August 25, 2005 254 4 Order giving effect to the ITAT's directions. AO January 6, 2006 Order giving effect to the ITAT's directions. 5 Order in....
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....e order of March 12, 2003 wherein the direction for the initiation of penalty proceedings was given. In our case, the time limit would have to be calculated with reference to the proviso appearing below clause (a) of sub-section (1) of section 275 or the Act. The order passed by the learned CIT(A) on October 31, 2006 was only in respect of the appellant's appeal to the learned CIT(A) against the learned AO's order dated January 6, 2006 which gave effect to the directions of the Hon'ble ITAT vide its order dated August 25, 2005. (v) We may further add that even in respect of the notices issued by the then learned AO in connection with the penalty proceedings under section 271(1)(c) r.w.s. 274 of the Act reference is made of the original (first) notice issued on March 12, 2003. In other words, when the notice of March 12, 2003 was issued, it could not be said to have visualized the additions that were going to be made after the passing of the relevant assessment order dated March 12 2003 which would amount to linking the issue of penalty with the additions yet to be made in the subsequent orders. This would be absurd since it would amount to issuance of notice for levy o....
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..... 275 of the Act. The exhaustive submissions are mentioned from page No. 7 to 15 of our paper book. The learned AO has not touched any of our submissions but has merely relied upon his predecessor's order. Since the learned AO has not brought out any new issue, we have not repeated the submissions made vide our paper book containing detailed submissions of 25th September, 2007 for the sake of brevity. The same are reiterated and relied upon here also." The appellant vide its additional submissions dated 13th February, 2008 has submitted as under. "1. It is submitted that, invocation of the period of limitation should be strictly construed. The period of limitation under Section 275 of the Act cannot be invoked beyond the period prescribed by the said Section......" In this regard the appellant has relied upon the following decisions. The decision on of the Hon'ble Supreme Court in the case of Director of Inspection of Income-tax (investigation) v. Pooran Mall & Sons [1974] 96 ITR 390 The decision of the Hon'ble Supreme Court in the case of Sulochana Amma v. Narayanan Nair, 1995 (77) ELT 785 (SC) The appellant has further submitted during the course of....
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....before the ITAT passed the order on 25-08-2005. In view of this, the appellant's argument that the provisions of section 275(1A) of the Act can not be invoked since the AO's order dropping the penalty proceedings is passed after the CIT(A)'s order and not before., Moreover, the AO's order dropping the penalty is before the ITAT's order before the effective date of application of the provisions of section 275(1A) Act, Provisions of section 275(1A) of the Act is not applicable. I am in complete agreement with the appellant's argument that the relevant assessment or other order referred to in section 275 of the Act can be none other than the regular assessment order passed on 12th March, 2003, This is based on the fact that the penalty proceedings were initiated vide notice dated March 12, 2003 for the levy of penalty u/s. 274 r.w.s. 271(1)(c) of the Act consequent to the order passed u/s. 143(3) of the Act on March 12, 2003. Proviso to clause (a) of sub-section (1) of section 275 of the Act would be applicable since the CIT(A) passed his order on February 23, 2004 i.e. much after the date of June 1, 2003 stipulated in the proviso for the passing of the order by ....
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.... noted the penalty is imposed on the basis of the earlier assessment order which no longer survived in the eyes of the law which was set aside by the Tribunal on two issues for which no penalty is imposed, therefore, penalty is invalid. The Learned Commissioner of Income Tax (Appeals) also held that when the original assessment order is altered and modified by the higher appellate authorities, Assessing Officer was not justified in imposing penalty on the basis of the earlier order dated 12.03.2003. Learned Commissioner of Income Tax (Appeals) also noted that the Assessing Officer in the final order dated 6.01.2006 has failed to initiate the penalty proceedings therefore, penalty could not be imposed on the basis of such assessment order. The Learned Commissioner of Income Tax (Appeals) on the basis of the merits, further noted that the notice was issued on the basis of earlier additions made which no longer survived but the penalty is imposed on the basis of subsequent assessment order dated 6.01.2006 without giving any notice or initiation of the penalty proceedings under section 271(1)(c) of the I.T.Act therefore, penalty order is bad in law. The Learned Commissioner of Income T....
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....made vide assessment order dated 6.01.2006. He has submitted that revenue department heavily relied upon provisions of section 275 (1A) of the I.T.Act but the aforesaid provisions is inserted in the Act by the Taxation Laws (Amendment) Act, 2006 with effect from 13.07.2006 and the penalty was dropped prior to the above provisions as well as subsequent to the decision of the Tribunal. Therefore, such provisions cannot be used against the assessee. He has submitted that the Assessing Officer in the earlier assessment proceedings, made the addition on account of claim of loss on collapse of steel piles in a sum of ₹ 14,37,78,195/- but penalty is dropped later on and on the remaining additions made in the assessment order dated 6.01.2006, no show cause notice is issued to the assessee and that the penalty order is bad in law. He has submitted that assessee is in appeal in High Court on the issue of loss on Steel piles and appeal is admitted. On the other issues on merits, the Cross appeals are pending for adjudication before the Tribunal, which have been heard along with the present appeal. He has therefore, submitted that on estimate of expenses, no penalty is imposable under se....
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....ngs were dropped prior to passing the order by the Tribunal. We may also note that penalty proceedings were initiated vide notice dated 12.03.2003 consequent to the assessment order passed under section 143(3) on dated 12.03.2003. Proviso to clause (a) of sub section (1) of section 275 of the Act would be applicable because the Learned Commissioner of Income Tax (Appeals) passed the order on 23.02.2004 i.e. much after the date of 1.06.2003 mentioned in the proviso for passing of the order by the Learned Commissioner of Income Tax (Appeals). In this view of the matter, the order levying the penalty under section 271(1)(c) should have been passed on or before 31.03.2005 considering that the order of the Learned Commissioner of Income Tax (Appeals) passed on 23.02.2004 and was received by the CCIT on 27.02.2004 as mentioned in the impugned order. The Assessing Officer has however, passed the penalty order on 31.05.2007 which is clearly time barred and void ab-initio. It appears that the Assessing Officer considered the subsequent order of the Learned Commissioner of Income Tax (Appeals) dated 31.10.2006 for the purpose of determining the time limit of 6 months referred to in section 2....