TaxTMI 
TaxTMI 
2018 (1) TMI 329
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the provisions of section 40(a)(i), the AO held that payments were made outside India for technical service fees, that tax was not create on such payment, that the payment made by the assessee was not allowable for the purpose of computing the taxable income. Finally, he made a disallowance of Rs. 10. 33 crore. 2.1. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA)and made elaborate submissions in that regard. It also relied upon certain case laws and the order of the tribunal in the case of Hazira Marine Engineering and Construction Management Private Ltd. for the AY. 2002-03, wherein similar issue was deliberated upon. After considering the available material, the FAA held that the assessee had deducted tax on such technical service out of which part payment of such tax was deposited within the time allowed u/s. 200 of the Act, that the AO had held that entire tax was not paid by the assessee and that amount in question was not deductible. He referred to proviso to the section 40(a)(i) and held that same would not be applicable if the assessee would either deduct tax or would be such tax, that even if one condition ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed at source during the year under considera - tion, that the AO had also admitted the fact of part payment. He had directed the AO to verify the fact about the claim made by the assessee that tax was deducted at source and was credited in the books of accounts. He had given a clear direction that if the claim was not found genuine about directing the tax and crediting in the books of accounts the AO could disallow the claim. Thus, the FAA has not allowed the expenditure incurred by the assessee-he had directed the AO to make necessary verification. While giving effect to the order of the FAA, the AO has not made any disallowance. This clearly shows that the assessee had made necessary entries in its books about the deduction of tax at source. It appears that while filing the appeal, the then AO had not verified the facts nor did he read the order of the FAA in right perspective. and that in a very routine and casual manner he has filed the appeal. Here, we would like to mention that in the case of Modi Olivetti Ltd. (supra), the Hon'ble Allahabad High Court has deal with the issue at length. The Department has raised following question before the Hon'ble Court: "(3) Wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uction and accordingly allowed the claim of the assessee with regard to royalty. 13. Learned counsel for the appellant submits that the provision of Section 40(a)(i) of the Act has not been complied with by the respondent-assessee and as such the Tribunal has erred in setting aside the addition in respect of royalty as made by the Assessing Officer and upheld by the CIT(A). 14. We have considered the arguments raised by learned counsel for the appellants and find that Section 40(a)(i) of the Act provides that royalty payable out side India shall not be deducted in computing the income chargeable under the head of "profits and gains of business or profession" on which tax has not been paid or deducted under Chapter XIII B. From the findings of the fact recorded by the ITAT in paragraph 26 of the order impugned, it is evident that the liability to pay royalty had accrued and was not contingent has held by the assessing officer, while making the provision the assessee had also made book entries in respect of tax deductible. Thus, out of two conditions as mentioned in Section 40(a)(i), namely, "tax has not been paid" or "deducted", one condition, namely, "not deducted....
X X X X Extracts X X X X
X X X X Extracts X X X X
....um shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted. Explanation : For the purposes of this sub-clause, - (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of Section 9; (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; ]. " Section 40(a)(i) as substituted by Finance (No. 2) Act, 2004:- "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", - (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 this Act, which is payable, - (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g the assess - ment proceedings, a reference was made to the transfer pricing officer(TPO)to determine the arms length price (ALP) of the professional fees paid to BOS. Vide his order dated 24. 05. 005, the TPO determined the access claim of expenses to the extent of Rs. 2, 70, 85, 337/- . The AO directed the assessee to file submissions with regard to order of the TPO. However, as per the AO, it did not furnish any explanation. As a result, the AO made an addition of Rs. 2. 70 crores holding that the same was allowable in the subsequent years. 3.1. Aggrieved by the order of the AO, the assessee made elaborate submissions before the FAA. After considering available material, he held that the only reason for disallowance was that the income in respect of Pre/Final-investment-decision(Pre-FID)was that the contract about the transaction was recognised later, that the assessee has entered into two independent agreements, that income receivable from Hazira LNG Private Ltd. (HLPL)against its invoice would not alter its liability incurred in respect of BOS, that the TPO had to decide the issue of arm's length price of the transaction, that he had to consider as to whether the contract ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nses were part of the total cost of contract, that equating these independent transactions was not in line with the principles of TP, that the assessee had offered the income for tax purposes as for the proportionate completion method of accounting, that it had recognized income of Rs. 12. 53 crores in the profit and loss account for the year under appeal, that the income was recognized by applying the percentage of profit margin ratio on total estimated cost of contract to total cost incurred during the year, that the receipt of Rs. 2. 13 crores for the entire project was known in advance, that the expenses for the project were estimated at Rs. 1, 89, 75, 78, 697/-, that profit margin ratio was profit/total expenditure(i. e. 11. 79%), that the total expenditure of Rs. 11, 20, 86, 256/- included the expenses of Rs. 5. 36 crores, that the income corresponding to the Pre-FID expendi - ture was already offered for taxation, that the mark up of 11. 79 % on cost was at arm's length, that the assessee has benchmarked the transaction with the result of external comparables, that the TPO had accepted the mark up, that there was no justification to restrict the claim of expenses in proporti....