Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income-Tax vs Alasthom Exports. (Alsthom Exports Vs. ... on 5 November, 1998
ORDER
B.M. Kothari, A.M.
1. The Revenue has raised the following ground in their appeal against the order dt. 13th September, 1990, for asst. yr. 1987-88 :
"On the facts and in the circumstances of the case, the learned CIT(A) has erred in law in directing the AO to allow 50 per cent of the salary claimed at Rs. 12,80,930 without appreciating the facts and material on records."
2. The assessee has submitted the following grounds in the cross-objections arising out of the same order of the CIT(A) :
"1. The learned CIT(A) erred in law and on facts by restricting the allowances to 50 per cent of salary claimed at Rs. 12,80,930.
2. The learned CIT(A) erred in disallowing 10 per cent of the staff welfare expenses on estimate at Rs. 8,305.
3. The learned CIT(A) erred in disallowing 10 per cent of the miscellaneous expenses on estimate at Rs. 20,868."
3. The assessee-company is a French non-resident company having a permanent establishment (PE) in India, manufacturing gas turbine. The company was awarded a contract by DESU on 16th September, 1985, for unloading, custom clearance, handling, transportation to site, erection storage, setting to work of imported equipment and engineering design, manufacture, inspection, testing at works, packing, transportation of Indian equipment, receipt, storage at site, insurance, erection, civil works, setting to work, testing, commissioning and commercial operation of complete plant and equipment right from receipt of fuel at sight upto the gantry of going feeders of the DESU system, supervision of plant during warranty period, etc. The head office is in France at Belfort. The work-in-hand was performed through the technicians deputed from time to time under a project manager duly backed up by a team of experts in Belfort (France) who provided drawings designs, co-ordination and back-up services, etc. In all there was one project manager along with 50 technicians who were in India to perform the work. Apart from this, there were 4 technical staff members who were allocated, worked and devoted major part of their time in France for the DESU project.
4. The main issue involved in the present appeal relates to allowability of expenses incurred in France on account of salary of these 4 technical staff members of the foreign company. The assessee in response to a show-cause notice issued by the AO had submitted that the head office of the said foreign company had debited DESU Project with French Franc 5,94,189 equivalent to Rs. 12,80,930 being cost of salary, allowances of the persons who were deputed to co-ordinate the DESU Project in India. The names and salary payments made to these 4 employees by the foreign company in France are as under :
French Franc
(i) Mr. Nami 1,92,647
(ii) Mr. Khoudja 1,60,617
(iii) Mr. Deloye 1,60,617
(iv) Mr. Paschaki 80,308
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5,94,189
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4.1. The assessee claimed that such expenses are reasonably allocable to the permanent establishment in India and are allowable as deduction as per art. III(3) of the Double Taxation Treaty between India and France. A certificate was also filed before the AO confirming that these 4 persons were exclusively looking after the work of DESU Project while serving in the foreign company in France. The AO observed that during the course of discussions, it came to light that the assessee had also undertaken certain projects in Pakistan to which the same persons were co-ordinating the work. The assessee did not produce any further evidence to show that these 4 persons were exclusively working for the DESU Project. The AO, therefore, allowed deduction of only 10 per cent of the salaries paid to these 4 persons in France.
4.2. The CIT(A) after taking into consideration the entire relevant facts and material, came to the conclusion that 50 per cent of the total expenditure of Rs. 12,89,030 incurred for payment of salary to these 4 persons is reasonably allocable to the activities relatable to the Indian Project.
4.3. The Revenue is aggrieved by the aforesaid findings of the CIT(A).
4.4. The learned Departmental Representative submitted that the burden lies on the assessee to prove that these 4 persons working in France were exclusively deployed for looking after the DESU Project in India. Mere submission of the certificate of auditors of the foreign company or auditors of the Indian branch cannot justify deduction in respect of entire amount of the said expenditure. He relied upon the reasons mentioned in the assessment order and urged that the order of the AO should be restored.
4.5. The learned counsel for the assessee strongly supported the order of the CIT(A). He further submitted that there is no question of bifurcation of the said expenditure incurred in France which is reasonably allocable to the Indian Projects. The auditors of the foreign company have duly certified that the expenses debited to the Indian branch represent amounts incurred which properly relate to the Indian branch operations. The head office of the foreign company issued a debit note in respect of salary of French Francs 5,94,189 on 18th May, 1987.
A copy of the said debit note has been placed at p. 8 of the paper book. The copy of auditors certificate and Annexure-D have also been placed at pp. 9-10 of the paper book. He strongly urged that the grounds raised by the assessee in its C.O. for deletion of the balance amount of disallowance of 50 per cent of salary paid to these 4 persons should be accepted and the ground raised by the Revenue in this regard should be rejected.
5. We have carefully considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned Departmental authorities. We have also gone through the various documents submitted in the compilation, to which our attention was drawn during the course of hearing.
5.1. The head office of the appellant company had sent a debit note in relation to salary of these four persons with following description :
"Debit Note Personnel exclusively working in France for the civil work planning and co-ordination of erection and commissioning of gas turbine of DESU.
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Name NB month Rate Net salary Total cost
paid in FF
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(1) Namy 12 45.49 11,000 1,92,647
(2) Khoudja 12 48.72 9,000 1,60,617
(3) Deloye 12 48.72 9,000 1,60,617
(4) Paschali 6 48.72 9,000 80,308
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Total in FF 5,94,189"
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5.2. A certificate dt. 4th June, 1987, from auditors of the foreign company has also been placed on record at p. 9 along with an annexure containing statement of expenses pertaining to Indian branch operation for the year ended on 31st December, 1986 has also been attached. This includes salary and social charges paid to co-ordination staff at FF 5,94,189. The auditors have certified that they have reviewed the statement of expenses pertaining to Indian branch operation by inspecting on a test basis, supporting documentation maintained by Alsthom Export. They have further expressed their opinion that the statement of expenses represents amount incurred, which properly relates to the Indian branch operation. This certificate was issued for justification of costs incurred in France with respect to the gas turbine contract with DESU. The auditors of the Indian branch of the appellant company have mentioned in their audit report that the expenses incurred by head office pertaining to Indian operations have been included in the accounts on the basis of debit notes of head office and its statement of expenses as certified by the head office auditors vide their report dt. 4th June, 1987.
5.3. The relevant art. III(3) of double taxation agreement between India and France is reproduced hereunder :
"Art. II(3) : In determining the industrial or commercial profits of a permanent establishment, there shall be allowed as deductions all expenses, wherever incurred reasonably allocable to such permanent establishment, including executive and general administrative expenses so allocable."
5.4. There is no dispute that the appellant foreign company had a permanent establishment in India in the relevant year. Therefore, the appellant company is entitled to deduction of all expenses, wherever incurred which are reasonably allocable, to such permanent establishment. Ordinarily, the certificate of foreign auditors of the foreign company as well as the auditors of the Indian branch should be accepted as a valid basis for ascertaining as to what is the amount of expenditure reasonably allocable to such permanent establishment of a foreign enterprise in India. However, in the present case, it appears that after submission of the said certificate of the auditors along with audited statements, the AO had discussed the matter with the representative of the appellant company who attended the hearings before the AO. During the course of discussions, it came to light that the appellant company had also undertaken some projects in Pakistan and the abovenamed 4 persons were co-ordinating the work of project at Pakistan. Such finding has been given by the AO in the assessment order on the basis of discussions with the assessee's representative during the course of assessment proceedings. This finding given by the AO in the assessment order has not been specifically challenged either before the CIT(A) or before the Tribunal. In case this finding given by the AO is not correct, an affidavit ought to have been submitted on behalf of the assessee-company for challenging the findings so given by the AO. No such evidence in the form of an affidavit or letter has been submitted by the assessee before the CIT(A) or before the Tribunal stating that the abovenamed 4 persons exclusively worked for the Indian project during the period for which salary paid to them has been allocated, for the Indian project and these persons did not look after any work of project at Pakistan during the same period. In the absence of any such evidence, the CIT(A) was right in making an estimate of the amount of expenditure incurred on salary of these 4 persons which is reasonably allocable for the Indian project. The AO had estimated 10 per cent of the total amount of salary paid to them as reasonably allocable to the Indian project. The learned CIT(A) after taking into consideration the entire relevant facts and material, came to the conclusion that it would be just and proper to allocate 50 per cent of the total expenditure of Rs. 12,89,030 as reasonably allocable to the Indian project. In the absence of some statutory or other formula, any finding on the question of apportionment of expenses, in such a situation, involves some element of guess work. The endeavour can only be to be just and fair. The CIT(A) after taking into consideration all the relevant facts and evidence and after a careful consideration thereof, has arrived at the conclusion of treating 50 per cent amount of such expenditure as reasonably allocable to the Indian project. We do not find any infirmity in such just and reasonable apportionment made by the learned CIT(A). In our view, the order passed by the CIT(A) in relation to this ground is most reasonable and justified. Therefore, the ground raised by the Revenue as well as the ground raised by the assessee in their C.O. in relation to the aforesaid point have no merit.
6. The assessee has also raised their grievance against confirmation of disallowance of only 10 per cent out of his staff welfare expenses and 10 per cent out of miscellaneous expenses.
7. After considering the submissions made by the learned representatives of the parties and after going through the orders of the learned Departmental authorities, we are of the view that the order passed by the CIT(A) in relation to these grounds raised by the assessee in their C.O. is also most reasonable and justified. We do not find any justification to interfere with the view taken by the CIT(A) in relation to this ground of C.O. also.
8. In the result, the Revenue's appeal as well as the C.O. submitted by the assessee are dismissed.