Delhi High Court
Deputy Commissioner Of Income Tax vs Mitsubishi Heavy Industries Ltd. on 19 February, 1998
Equivalent citations: (1998)61TTJ(DEL)656
ORDER
B.M. Kothari, A.M .
This appeal by the revenue is directed against the order passed by the Commissioner(Appeals) on 4-12-1991 for assessment year 1988-89.
2. The revenue has raised the following grounds in this appeal :
"1. On the facts and in the circumstances of the case :
The learned Commissioner (Appeals) has erred in deleting the addition of Rs. 2,19,15,387 being the valuation on account of work-in-progress in respect of equipment supply.
The learned Commissioner (Appeals) has erred in deleting the addition of Rs. 1,58,30,000 in respect of inland transportation.
The learned Commissioner (Appeals) has erred in holding that the claim of the assessee-company in respect of construction of bridges amounting to Rs. 1,17,21,284 is of revenue nature.
The learned Commissioner (Appeals) has erred in allowing the head office expenses amounting to Rs. 3,86,16,155 in accordance with the provisions of Article III of the avoidance of double taxation agreement with Japan.
The learned Commissioner (Appeals) has erred in holding that in view of the articles (iii)(3) of the double taxation agreement with Japan, no disallowance can be made under rule 5D, section 40A(3), section 40A(12), section 37(2A) and section 43B of the Income Tax Act.
3.1 Ground No. 1relating to deletion of the addition of Rs. 2,19,15,387 being the valuation on account of work-in-progress in respect of equipment supply :
The respondent company Mitsubishi Industries Ltd. (MHIL), which is a foreign company, incorporated in Japan, has entered into a contract with National Thermal Power Corporation (NTPC) to construct the Auriya Gas Base Combined Cycle Plant at Divyapur in U.P. This was the first year of companys business in India. On total receipts of Rs. 28,14,59,000 the assessee has claimed expenses at Rs. 36,58,91,000 returning a net loss of Rs. 8,44,32,000. The assessment was completed by the assessing officer vide assessment order under section 143(3) dated 30-9-1991 at taxable profit of Rs. 3,08,80,570. The assessing officer had inter alia, made an addition in respect of work-in-progress (WIP) relating to equipment supply (ES) to the tune of Rs. 3,61,24,600. The assessing officer has discussed the facts relating to the aforesaid addition in paras 23 and 24 of the assessment order. He has observed that the assessee has not accounted for any work-in-progress. In the notes to the financial statements furnished with the return at item (ii) of note to summary of significant accounting policies, it has been stated that the company has not recognised work-in-progress. The assessing officer observed from the notes to consolidated financial statement of the Annual Report 1989 of MHIL that work-in-progress represents accumulated production cost of contract and other works in process. The assessing officer observed that the assessee has adopted different criteria for the Indian contract for the purposes of Indian income-tax distinct from the accounting system of the MHIL, Japan. The assessee has not recognised the value of work-in-progress in the financial statements in respect of the Indian contract, while it has accounted revenues on the basis of works certified by NTPC only while the amounts due to the suppliers and contractors have been accounted for on accrual basis. He was of the view that correct profits and loss of any business cannot be ascertained without accounting for the value of work-in-progress like the profits cannot be ascertained without accounting for the value of opening and closing stock in the case of any other trader. There was no opening work-in-progress as on 1-4-1988. Since the assessee has incurred substantial expenditure for equipment supply in execution of the aforesaid contract, the assessing officer was of the view that the value of work-in-progress relating to equipment supply at the end of the year ought to have been taken into consideration for computing the taxable income of the assessee. The assessing officer has worked out the amount representing the value of work-in-progress relating to equipment supply as per details given in para 25 of the assessment order. It will be worthwhile to reproduce the said para 25 of the assessment order :
"The assessee has stated that cost of civil works in progress was Rs. 7,57,000 but it has not precisely given the value of work in progress under inland transportation, equipment supply, etc. It is further seen that in the case of equipment supply the revenues have been shown at Rs. 11,24,98,000 while the expenses were Rs. 12,61,23,000. In the case of civil works against an expenditure of Rs. 5,02,70,000 the value of work done amounted to Rs. 7,60,97,000 (receipts + work-in-progress). This gives a gross profit rate of 34.46 per cent which does not appear to be excessive considering that the assessee has claimed overhead expenses of 23.11 per cent of receipts. Even if a modest gross profit rate of 20 per cent is taken as the basis for estimating the value of equipment for which payments have been made but for which bills have not been raised such value would work out at Rs. 3,61,24,600 (Rs.12,61,23,000 (-) 80 per cent of Rs. 11,24,98,000 = Rs. 3,61,24,600). Thus, the value of equipment for which payments have been made, for which bills have not been raised is estimated at Rs. 3,61,24,600 which will be reduced from the assessees loss."
3.1.(i) The Commissioner(Appeals) has discussed this point in para 4 to para 4.2 at pp. 9 to 11 of the order passed by him, relating to addition of Rs. 3,61,24,600 made on account of valuation of work-in-progress in respect of equipment supply and addition of Rs. 1,58,30,000 made in respect of valuation on account of work-in-progress relating to inland transportation. Paras 4 and 4.1 deal with the first addition of Rs. 3,61,24,600. The said paras 4 and 4.1 of the order of the Commissioner(Appeals) are reproduced hereunder :
"4. Grounds of appeal Nos. 4 and 5 relate to the additions of Rs. 3,61,24,600 and Rs. 1,58,30,000 being the valuation on account of work-in-progress in respect of equipment supply and Inland Transportation (IT). It is an admitted fact that the appellant company has not accounted for work-in-progress in respect of the equipment supply and IT. However, the appellant is disputing the valuation adopted by the assessing officer in respect of work-in-progress in respect of equipment supply and Inland Transportation the arguments in this regard are quoted below :
In Annexure 3, we have provided a total break-up of revenues and actual cost paid/payable to the various sub-contractors for equipment supply. The working clearly shows that MHIL has earned a profit margin of 1.25 per cent on the sum total of all sub-contracted work for equipment supply. If the work performed by various sub-contractors in the relevant year is considered, there is a negative margin (gross loss) of 17.07 per cent. Revenues earned by MHIL on sub-contracted work performed by Texmaco in the subsequent years results in a significant change in the profit margin. Thus, the gross margin should have been considered by the learned officer at 17.07 per cent. Without prejudice to this, the maximum gross margin can only be 1.25 per cent based on consideration of all sub-contractors including Texmaco. The learned officer thus erred in considering a margin of 20 per cent. Under clause 3.10.6 of the contract, NTPC was required to make direct payments to sub-contractors to enable the sub-contractors to avail the deemed profit benefits. We have provided the break-up for costs and revenues between direct payments to sub-contractors and payments to MHI in Annexure 4. As your honour will observe, revenues and costs for direct payments to sub-contractors are the same. The profit or loss, therefore, arises on the portion of work performed by MHI. The percentage of gross profit to be applied can only be applied on the revenue related to work performed by MHI.
4.1 I have considered the facts of the case and arguments of the learned counsel. In my opinion, valuation of work-in-progress in respect of equipment supply and Inland Transportation made by the assessing officer is not reasonable. Obviously, the appellant company cannot derive any profit out of the payments made to sub-contractors which are being paid directly by the NTPC as per 3.10.6 of the contract. Further, when the overall gross margin of the appellant is only 1.25 per cent there is no justification for applying a gross profit rate of 20 per cent to evaluate work-in-progress. Therefore, by applying overall gross margin by 1.25 per cent on the portion of work performed by the appellant company which excludes the payments to sub-contractors directly by the NTPC, the value of work-in-progress in respect of equipment supply will come to Rs. 4,42,09,213. The appellant company will, therefore, get a relief of Rs. 2,19,15,387 on this account."
3.1. (ii) The learned senior Departmental Representative submitted that the assessee has admitted that the value of work-in-progress relating to equipment supply has not been taken into consideration while computing the taxable income of the year under consideration. This aspect was not contested on behalf of the assessee before the Commissioner (Appeals). The assessee simply disputed the valuation of such work-in-progress adopted by the assessing officer. The assessee has also not preferred any appeal before the Tribunal in relation to an addition of Rs. 1,42,09,213 sustained by the Commissioner (Appeals) out of the said addition of Rs. 3,61,24,600. Therefore, the question which is the subject-matter of consideration before the Tribunal relates only to the quantum of addition sustained by the Commissioner (Appeals) to the extent of Rs. 2,19,15,387. He submitted that the Commissioner (Appeals) while granting the aforesaid relief had taken into consideration the figures of the alleged net profit derived by the assessee in relation to equipment supply in the execution of the said contract by considering the results not only of the year under consideration but also the figures pertaining to the subsequent years. It was pointed out by him that the said details and working submitted on behalf of the assessee showing that the assessee had derived gross margin of profit of only 1.25 per cent on equipment supply was neither properly examined by the Commissioner (Appeals) nor the assessing officer had any adequate and reasonable opportunity to examine the correctness of such working submitted before the Commissioner (Appeals). The learned senior Departmental Representative submitted that the assessing officer had worked out the value of work-in-progress by taking Gross Profit rate of 20 per cent on the basis of profit rate of 34.46 per cent shown by the assessee in the civil works, as explained in para 25 of the assessment order. The Commissioner (Appeals) ought to have accepted the value so determined by the assessing officer rather than accepting the chart submitted before the Commissioner (Appeals) showing alleged profit rate of 1.25 per cent. He strongly urged that the order of the Commissioner (Appeals) in relation to this ground should be set aside and that of the assessing officer should be restored.
3.1.(iii) The learned counsel for the assessee invited our attention towards the written submissions dated 29-11-1991, submitted before the Commissioner (Appeals). A copy of the said written submissions has been place at pp. 54 to 59 of the paper-book. The submissions made by the assessee before the Commissioner (Appeals) are reproduced hereunder :"Ground No. 4
MHIL had incurred a total cost of Rs. 12,61,23,000 on supply of equipment. Against this, the company had invoiced an amount of Rs. 11,24,98,000 to NTPC. The assessing officer has computed work in progress on un-billed revenues of Rs. 3,61,24,600 on the ground that there must be a gross profit of 20 per cent on equipment supply, since there is a profit margin of 34.46 per cent on civil works. We agree with the learned officer that there is some work in progress.
However, based on reasons given below, we disagree with the computation prepared by the officer valuing work in progress at Rs. 3,61,24,600.
In annexure 3, we have provided a total break-up of revenues and actual cost paid/payable to the various sub-contractors for equipment supply. The working clearly shows that MHIL has earned a profit margin of 1.25 per cent on the sum total of all sub-contracted work for equipment supply. If the work performed by various sub-contractors in the relevant year is considered, there is a negative margin (gross loss) of 17.07 per cent. Revenues earned by MHIL on sub-contracted work performed by Texmaco in the subsequent years results in a significant change in the profit margin. Thus, the gross margin should have been considered by the learned officer at 17.07 per cent. Without prejudice to this, the maximum gross margin can only be 1.25 per cent based on consideration of all sub-contractors including Texmaco. The learned officer thus erred in considering a margin of 20 per cent.
Under clause 3.10.6 of the contract, NTPC was required to make direct payments to sub-contractors to enable the sub-contractors to avail the deemed profit benefits. We have provided the break-up for costs and revenues between direct payments to sub-contractors and payments to MHIL in Annexure 4. As your honour will observe, revenues and costs for direct payments to sub-contractors are the same. The profit or loss, therefore, arises on the portion of work performed by MHIL. The percentage of gross profit to be applied can only be applied on the revenue related to work performed by MHIL.
In Annexures 5 and 6, we have provided a computation of work in progress, depending on whether the profit margin is 17.07 per cent or 1.25 per cent.
We request your honour to issue appropriate instructions to the learned officer to revalue the work-in-progress as per the lower figures.
3.1. (iv) The learned lawyer further submitted that the Commissioner(Appeals) confirmed the addition to the extent of Rs. 1,42,09,213 by computing the value of work-in-progress relating to equipment supply as per details mentioned below :
Computation of work-in-progress in respect of Equipment Supply :
Total Revenue Total cost 11,24,98,000 12,61,23,000 Less : Payment made directly by NTPC 6,57,60,960 6,57,60,960 4,67,37,040 6,03,62,040 Less : g.p. margin 1.25 per cent 5,84,213 Revenue reduced by gross profit margin 4,61,52,827 Work-in-progress (excess of total cost over revenues reduced by gross profit margin 1,42,09,213 3.1. (v) The learned lawyer also contended that if the work performed by various sub-contractors in the relevant year is considered, there is a gross loss of 17.07 per cent as against the gross profit rate of 20 per cent on equipment supply estimated by the assessing officer while computing the value of such work-in-progress. However, revenues earned by MHIL on sub-contract work performed in the subsequent years resulted in an overall gross margin of 1.25 per cent. The Commissioner (Appeals) has adopted such maximum possible gross margin relating to equipment supply while sustaining the addition to the aforesaid extent and granting the relief of the balance amount of Rs. 2,19,15,387. Such a view taken by the Commissioner (Appeals) hardly warrants any disbelief or suspicion or any interference by the Tribunal.
3.1. (vi) The learned counsel also invited our attention towards a chart showing comparison of contracted revenues with cost relating to equipment supply giving details of the aforesaid percentage of gross loss of 17.07 per cent relating to work performed in the relevant year and also the overall gross margin of 1.25 per cent which was the basis adopted by the Commissioner(Appeals). A photocopy of the said chart placed at page 78 of the paper-book is annexed herewith :
(Photocopy of the chart placed at page 78 of the paper-book is annexed as page No. 9 of this order).
MITSUBISHI HEAVY INDUSTRIES LIMITED COMPARISON OF CONTRACTED REVENUE WITH COST EQUIPMENT SUPPLY Party Revenues Cost Margin % of Revenue Blue Star Main contract 12,000,000 10,236,077 Additional 2,298,392 Total 12,000,000 12,534,469 (534,469) Crompton Greaves STG Transformer 15,000,000 13,000,000 220 KV Switchyard 68,154,778 57,494,752 Additional 19,328,793 Total 83,154,778 89,823,545 (6,668,767) Vijay Fire Main contract 23,000,000 22,026,090 Additional 3,067,662 Total 23,000,000 25,093,752 (2,093,752) Reva 2,000,000 838,124 1,161,876 Garlick 5,000,000 2,048,800 2,951,200 Paharpur 3,530,000 2,000,000 1,530,000 Lloyd 4,800,000 14,049,967 (9,249,967) Worthington Pump 1,339,250 (1,339,250) West Coast Engg.
3,020,856 (3,020,856) Berger 1,936,071 (1,936,071) Peico Electricals 2,671,870 (2,671,870) Triveni 8,190,080 8,094,137 95,943 Chemicals & Associates 2,408,196 (2,408,196) Total excluding Texmaco 141,674,858 165,859,037 (24,184,179) (17.07) Texmaco (Work performed in subsequent year) Total 88,476,220 61,424,158 27,052,062 Total 230,151,078 227,283,195 2,867,883 1.25 3.1. (vii) The learned counsel further submitted that the written submissions dated 29-11-1001 along with the aforesaid charts were submitted before the Commissioner (Appeals) on the date of hearing fixed before him on that date. He further submitted that the assessing officer was not present before the Commissioner(Appeals) on the said date of hearing. But he made a categorical statement at Bar that the said chart and the written submissions were telephonically communicated to the assessing officer on that day. It is therefore, incorrect on the part of the learned senior Departmental Representative to state that the assessing officer did not have an opportunity to give his comments in relation to the aforesaid chart.
3.1. (viii) The learned counsel thus strongly supported the order of the Commissioner(Appeals).
3.1. (ix) We have considered the submissions made by the learned representatives of the parties and have gone through all the relevant documents submitted in the compilation to which our attention was drawn during the course of hearing.
3.1. (x) The auditors of the assessee-company in their audit report dated 31-10-1989 (page 62 and page 63 of the paper-book) have given a qualified report reading as under :
"The company has not recognised work-in-progress in these financial statements.
In our opinion, except for the matter referred to in the preceding paragraph, the accompanying financial statements give true and fair view of the assets and liabilities of the Indian operations under the Auraiya GCCP contract of Mitsubishi HEAVY Industries Ltd. at 31-3-1989 and its revenues and expenses for the period from inception on 3-9-1987 to 31-3-1989, in accordance with the accounting policies describe in Note 2 to the financial statements."
3.1. (xi) The relevant notes to the financial statements annexed with the audited balance sheet (page 66 of the paper-book) are reproduced as hereunder :
"Revenues :
Revenues are recorded based on work certified by NTPC. Claims by the company are recognised upon realisation.
Expenses :
The company expenses all costs incurred during the period and, accordingly, work-in-progress is not recognised in the financial statements. Claims against the company are recognised upon payment."
It is an undisputed fact that the assessee has not taken into consideration the value of work-in-progress while declaring its income/loss in the return of income. The assessee in the written submissions dated 29-11-1991 submitted before the Commissioner(Appeals) has also specifically inter alia, stated as under :
"We agree with the learned officer that there is some work-in-progress". It is therefore, clear that the assessee has admitted that the appropriate value of work-in-progress relating to equipment supply is liable to be added in the computation of taxable income. The assessee had simply disputed the valuation of such work-in-progress adopted by the assessing officer. It is further pertinent to repeat that the addition sustained by the Commissioner(Appeals) to the extent of Rs. 1,42,09,213 has been accepted by the assessee and no further cross-appeal or cross-objection has been submitted by the assessee against such confirmation of the part amount of addition sustained by the Commissioner(Appeals).
3.1. (xii) The Commissioner(Appeals) has granted the relief of Rs. 2,19,15,387 on this account by basing his decision on the chart submitted before him by the assessee showing that the gross margin in relation to such equipment supply comes to only 1.25 per cent. The photocopy of the aforesaid chart has already been made a part of this order. A careful perusal of the said chart clearly indicates that the Commissioner(Appeals) has accepted the gross profit rate of 1.25 per cent without application of mind and without examining the correctness of the said chart. Let us examine some of the items appearing in the said chart. For instance, the chart shows that cost incurred by the assessee in relation to equipment supply includes payments made to the following suppliers against which no revenues have been booked :
Comparison of contracted revenues with COST EQUIPMENT Supply Name of the party Cost Worthington Pump 13,39,250 West Coast Engg.
30,20,856 Berger 19,36,071 Peico Electricals 26,71,870 Chemicals & Associates 24,08,196 The aforesaid details show that the assessee had claimed expenditure in relation to the payments made to these suppliers either directly or through NTPC but the invoices for such equipment supply had not been debited to NTPC in the relevant year nor the corresponding revenue was recognised. The value of such material for which the corresponding revenue has not been recognised in the relevant accounting year, will also have to be taken into consideration for arriving at an overall profit rate derived by the assessee in relation to equipment supply made in the course of execution of the contract with NTPC. In order to arrive at the correct figures of the value of work-in-progress, it may also be necessary to carefully examine the contract executed between the NTPC and MHIL. It will have to be ascertained whether payment of all such material which has been shown in the aforesaid chart are covered by clause 3.10.6 of the said agreement. The said clause provides that NTPC will make payments, on MHIL's behalf, to MHIL's sub-contractors for the specified items of supply and upto the amounts as identified in Appendix VI as per procedure agreed to between NTPC and MHIL. A detailed scrutiny of the cost of entire equipment supply will have to be made with a view to find out as to which are those specified items covered by clause 3.10.6 of the said agreement for which payments have directly been made by NTPC of the sub-vendors on behalf of MHIL. The procedure for billing or revenue recognition of the remaining items of equipments, will also have to be ascertained. It would have been appropriate on the part of the Commissioner(Appeals) to have sent a copy of the written submissions dated 29-11-1991 along with all the charts to the assessing officer with the direction to examine the correctness and relevance of such figures for working out the correct value of work-in-progress relating to equipment supply instead of granting the relief of Rs. 2,19,15,387 by straightaway accepting the assessees contention that the gross margin on equipment supply comes to 1.25 per cent. It will also be relevant to mention here that the hearing of this appeal was fixed before the Commissioner(Appeals) on 29-11-1991. The order has been passed by him on 4-11-1991. It is impossible to agree with the submissions made by the learned counsel for the assessee that the assessing officer was granted a reasonable opportunity to comment on these figures, which were purportedly communicated to the assessing officer on telephone by the Commissioner(Appeals). It is humanly impossible for any assessing officer to give his comments pursuant to telephonic communication relating to such complicated facts and figures submitted by the assessee before the Commissioner(Appeals). We are, therefore, of the considered opinion that the order passed by the Commissioner(Appeals) in relation to this ground should, be set aside and the matter should be restored back to the Commissioner(Appeals) for deciding the same afresh after supplying a copy of the written submissions dated 29-11-1991 along with all the charts to the assessing officer and after allowing the assessing officer to submit his detailed comments thereon. The assessing officer for giving his comments thereon will be at liberty to call for necessary details and documents from the assessee in this regard so that he could properly examine the correctness and relevance of such details relating to valuation of work-in-progress in respect of equipment supply. The Commissioner(Appeals) will thereafter decide the aforesaid issue afresh in accordance with the provisions of law and after providing reasonable opportunity to both sides. It may also be worthwhile to add that so far as the addition sustained by the Commissioner(Appeals) to the extent of Rs. 1,42,09,213 is concerned, the same has achieved finality as assessee has not filed any further appeal or cross-objection against the said confirmation of the part amount of the said addition.
3.2 Ground No. 2Relating to deletion of the addition of Rs. 1,58,30,000 in respect of work-in-progress relating to Inland transportation.
The nature of the aforesaid addition made by the assessing officer is similar as that of addition made on account of work-in-progress relating to equipment supply.
3.2. (i) The assessing officer has made the addition of Rs. 1,58,30,000 on account of work-in-progress relating to Inland Transportation not taken into consideration by the assessee while disclosing its income/loss. The facts discussed by assessing officer in para 30 are reproduced hereunder :
"Work in progress under inland transportation The assessee has incurred cost of Rs. 4,45,18,000 on inland transportation and shown revenues at Rs. 1,94,83,000 and transportation charges recoverable against payments already made were not accounted for as works in progress. Out of Rs. 4,45,18,000, Rs. 92,05 lakh has already been disallowed vide paras 26,27,28 & 29 supra giving a balance of Rs. 3,53,13,000 against which receipts accounted for are only Rs. 1,94,83,000 still leaving a balance of Rs. 1,58,30,000. The assessee has explained that this difference is due to the time-lag between incurring of expenditure and receipt of revenue. It has also claimed that it has incurred a higher expenditure than contracted receipts in respect of inland transportation. The assessees contention can be verified only after the contract is completed and final payments are made. For the purpose of the present assessment therefore, in the absence of any details of the amounts receivable with reference to payments already made on the last date of the previous year, the same are taken on the basis of no profit and no loss and would therefore, amount to Rs. 1,58,30,000 as amounts receivable. Thus, this amount of Rs. 1,58,30,000 would be reduced from the assessees loss on account of the value of transportation for which payments have been made by the assessee-company but for which bills have not been raised."
3.2. (ii) The Commissioner(Appeals) in para 4.2 has given the following findings :
"4.2 Similarly, with regard to the work-in-progress in respect of Inland Transportation after considering the difference between the revenue and cost worked out by the assessee for the period ending 31-3-1989, 31-3-1990 and 31-3-1991 when the project was completed, there is only a surplus of Rs. 44,98,300 in the year ended 31-3-1991. For the earlier two periods there is no surplus revenues over cost. I will, therefore, confirm the addition on account of work-in-progress in respect of the Inland Transportation only to the extent of Rs. 44,98,300. The appellant will get a relief of Rs. 1,13,31,700."
3.2. (iii) The assessee has accepted the said addition partly sustained by the Commissioner(Appeals) to the extent of Rs. 44,98,300 as no further appeal or cross-objection have been submitted by the assessee before the Tribunal.
3.2. (iv) The learned senior Departmental Representative relied upon the reasons mentioned in the assessment order. He submitted that the Commissioner(Appeals) has erred in reducing the said addition from Rs. 1,58,30,000 to only Rs. 44,98,300 by taking into consideration the net surplus in Inland Transportation for the period upto 31-3-1991, when the project was completed. He has ignored the fact that a scrutiny in relation to transport expenses was necessary with a view to find out whether the credits or revenue of inland transportation had a direct nexus with the expenses for Inland Transportation incurred by the assessee. The Inland Transportation might have been incurred for the assessee for execution of erection portion of the contract, civil, structural and architectural portion of the contract and such expenses for Inland Transportation could be charged from NTPC along with running bills of the contracts in question. It is not known whether revenue recognised in the Inland Transportation covers reimbursement of all the Inland Transportation expenses incurred by the assessee. Such a conclusion was derived by the Commissioner(Appeals) without granting any reasonable and proper opportunity to the assessee. He, therefore, urged that the order of the Commissioner(Appeals) should be set aside and that of the assessing officer should be restored.
3.2. (v) The learned counsel for the assessee submitted that the assessing officer has himself mentioned that the assessees contention can be verified only after the contract is completed and final payments are made. The Commissioner(Appeals) has granted relief only after taking into consideration the relevant figures of revenue and expenses relating to Inland Transportation upto the completion of the contract. The learned counsel also submitted that the correctness of the books of accounts has not been doubted by the Revenue authorities. Making an addition on account of value of work-in-progress and rejection of the books of accounts are two different things. He placed reliance on the judgment Samaj Kalyan Parishad v. ITO (1989) 30 ITD 211 (Del-Trib) (SB) to support this contention. He also invited our attention towards the detailed analysis of total revenues and cost relating to Inland Transportation on the basis of which the Commissioner(Appeals) had computed the value of such work-in-progress at Rs. 44,98,300. The details so furnished at page 94 is reproduced hereunder :
Analysis of total revenue and cost in land Transportation 31st March, 1989 31st March, 1990 31st March, 1991 Total Revenues 1,94,83,302 2,45,92,970 47,72,332 4,88,48,424 Cost 4,45,17,615 2,66,86,697 2,74,032 7,14,78,344 Difference 2,50,34,313 20,93,907 44,98,300 2,26,29,920 The learned counsel thus strongly supported the order of the Commissioner(Appeals).
3.2. (vi) We have carefully considered the submissions made by the learned representatives of the parties and have gone through all the relevant documents submitted in the compilation to which our attention was drawn during the course of hearing.
3.2. (vii) In our view, the Commissioner(Appeals) has erred in granting relief to the tune of Rs. 1,13,31,700 out of the addition of Rs. 1,58,30,000 made by the assessing officer in this regard. Before taking into consideration the expenses and revenue relating to Inland Transportation pertaining to the subsequent years, it was necessary on the part of the Commissioner(Appeals) to have ascertained the nature of revenue relating to Inland Transportation recorded in subsequent years. He ought to have examined as to whether the revenue recorded in the subsequent years relating to Inland Transportation had any nexus with the transport expenses incurred in the year under consideration. The system of recognising revenue relating to Inland Transportation also ought to have been examined keeping in view the relevant terms of contract the system of preparing invoices for Inland Transportation, and all other relevant factors. The tax is leviable on income of the previous year relating to the assessment year under consideration. During the year under consideration, the assessee had incurred cost of Rs. 4,45,18,000 on Inland Transportation. Out of this, the assessing officer disallowed 92.05 lakh separately vide paras 26 to 29 of the assessment order. That left a balance of Rs. 3,53,13,000 against which receipts accounted for in the year under consideration was only Rs. 1,94,83,000. The balance amount of Rs. 1,58,30,000 was part of the net cost, incurred by the assessee under the head Inland Transportation relating to execution of the said contract. The amount in question which forms part of the cost of execution of contract/work-in-progress had to be recovered from NTPC in accordance with the system of billing in confirmity with the terms of the contract. The nature of cost incurred under the head "Inland Transportation", the nature of revenue recognised under this head, the system of billing, the relevant terms and conditions of the contract, had to be carefully examined by the Commissioner (Appeals) before accepting the figures as given by the assessee before him. The chart of such revenue and cost relating to Inland Transportation submitted before the Commissioner(Appeals) was also not supplied to the assessing officer and no reasonable opportunity was given to him by the Commissioner (Appeals) before placing reliance on the same. We are, therefore, of the considered opinion that the order passed by the Commissioner (Appeals) in relation to this ground should also be set aside and the same should be restored back to the Commissioner (Appeals) for passing a fresh order after providing adequate and reasonable opportunity to the assessee as well as to the assessing officer in the like manner as has been directed in relation to ground No. 1. This issue is also, therefore, restored back to the Commissioner (Appeals) for passing a fresh order in accordance with the provisions of law.
3.3. Ground No. 3relating to allowing deduction in respect of construction of bridges amounting to Rs. 1,17,21,284 as revenue expenditure.
The assessing officer has discussed the facts relating to this point in paras 26 to 29 at PP. 15 to 17 of the assessment order.
3.3. (i) The assessee debited an expenditure of Rs. 92.05 lakh on construction of bridges for transportation of goods from Khandla port under the head Inland Transportation. A further sum of Rs. 25,16,284 was spent on the civil works in regard to the construction of these bridges. The assessee claimed the aforesaid expenditure as revenue expenditure. It was stated by the assessee vide letter dated 5-8-1991 that this temporary bridge was washed away by floods and another bridge was constructed. Subsequently, vide letter dated 28-8-1991, submitted to the assessing officer, it was submitted that the said expenditure has been incurred towards civil works attributable to the construction of bridges, maintenance and removal of bypass or debtour, upgrading and maintenance of roads, and removing and restoration of the miscellaneous obstacles on the way to site from Khandla. It was further stated on behalf of the assessee that bridges constructed on a temporary basis which were subsequently demolished did not result in any benefit of enduring nature and such an expenditure was necessary business expenditure for carrying out the execution of contract work. It was also submitted that such temporary construction, even if it is treated as capital expenditure will be eligible for grant of depreciation at the rate of Rs. 100 per cent. The assessing officer treated the said expenditure as of a capital nature and disallowed the same in view of the judgment of Honble Allahabad High Court in the case of CIT v. Bazpur Co-operative Sugar Factory Ltd. (1983) 142 ITR 1 (All).
3.3. (ii) the Commissioner(Appeals) held that the bridge over river Yamuna was constructed by the assessee-company for the transportation of over-dimensional consignment to the work site without which the project could not have been completed. It is also clear from the certificate of the Uttar Pradesh Public Works Department that the bridge over river Yamuna and the bypass roads constructed for the said transportation were of temporary nature and were to be demolished after the necessary use. The Commissioner(Appeals) considered the judgments of the Honble Supreme Court in the case of Bombay Steam Navigation Co. (P) Ltd. v. CIT (1965) 56 ITR 52 (SC), judgment in the case of Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC) and judgment in the case of Bikaner Gypsum Ltd. v. CIT (1991) 187 ITR 39 (SC). He further observed that the assessee had to incur expenditure on the construction of bypass road and temporary bridge on river Yamuna for the purposes of carrying on its business because without incurring this expenditure it could not have transported the relevant machinery to the work site for the execution of the project. The assessee had to demolish the bridges after the use of the transportation and, therefore, no benefit of enduring nature or capital asset was acquired by the assessee. He, therefore, deleted the said addition.
3.3. (iii) The learned Departmental Representative relied upon the reasons mentioned in the assessment order. The learned counsel for the assessee supported the order of the Commissioner (Appeals).
3.3. (iv) We have carefully gone through the orders of the learned departmental authorities and have considered the submissions made by the learned representatives.
3.3. (v) In our view, the Commissioner (Appeals) has rightly directed the assessing officer to grant deduction in respect of the aforesaid expenditure of Rs. 1,17,21,284. The expenditure incurred by the assessee for construction of temporary bridges and bypass roads was a necessary expenditure, without which it was impossible for the assessee-company to transport the required machinery and other material to the work site. Such finding of facts recorded by the Commissioner (Appeals) has not been disputed by the learned Senior Departmental Representative before us. The assessee had to demolish the bridge after its use for transportation of the required material. The assessee had no right, title or interest whatsoever over the said bridge or over the bypass roads. The certificate issued by the U.P. Public Works Department also confirms the fact that the bridge and bypass roads constructed for the said transportation were of temporary nature. The assessee, therefore, neither acquired any capital asset nor derived any benefit of enduring nature by incurring such expenditure. The expenditure was incurred because of a business necessity and, therefore, is clearly allowable as a revenue expenditure. The allowability of such expenditure is fully supported by the aforesaid judgments referred to in the order of the Commissioner (Appeals). We, therefore, do not find any justification to interfere with the view taken by the Commissioner(Appeals) in relation to ground No. 3.
3.4. Ground No. 4relating to allowing of Head Office Expenses amounting to Rs. 3,86,16,155 in accordance with the provisions of article III of the avoidance of double taxation agreement (DTA) with Japan.
3.4. (i) The assessee claimed deduction for head office expenses amounting to Rs. 3,86,16,155 being 13.72 per cent of the gross receipts in respect of the Indian contract on the basis of the ratio of selling, general and administrative expenses recorded in the consolidated accounts of the company for the year ending 31-3-1989. The assessee claimed that in view of article III(3) of the DTA with Japan, the provisions of section 44C are not applicable. The assessee placed reliance on the decision of the Commissioner (Appeal), Bombay, dated 11-7-1990 in case of Nippon Kokan, K.K. The assessing officer rejected the said contention and held that the matter would be governed by section 44C of Income Tax Act, 1961. The assessing officer examined the assessees claim with reference to terms and conditions prescribed in section 44C and disallowed the entire claim of Rs. 3,86,16,155.
3.4. (ii) The Commissioner(Appeals) examined the relevant article III of DTA, Japan. He also considered the decision of Tribunal, Jaipur in the case of Degramont International involving consideration of a similar article contained in the corresponding DTA in that case. After considering the said decision, the learned Commissioner(Appeals) gave the following findings in para 6.1 of the order passed by him :
"6.1 The provisions of article III of agreement for avoidance of double taxation with Japan are also on the same lines as those mentioned by the Tribunal in its judgments. The learned counsel also drew my attention to a commentary relating to the article III of the India Japan Double Taxation Avoidance Treaty issued by Organisation for Economic Co-operation for Development (OECD) to which India is a signatory. According to this commentary it is mentioned that in the case of general administration expenses incurred at the head office of the enterprises, it may be appropriate to take into account a proportionate part based on the ratio that the permanent establishments turnover (or perhaps gross profits) bears to that of the enterprise as a whole. Further, in view of the amendment made in section 90 of the Income Tax Act by Finance (No. 2) Act, 1991 with retrospective effect from 1-4-1972, it is provided that where the Central Government has entered into an agreement with the government of any country outside India for granting relief of tax or for avoidance of double taxation, then the provision of Income Tax Act shall apply to the non-resident assessee to whom such agreement applies to the extent they are more beneficial to that assessee. Accordingly, I will direct the assessing officer to allow head office expenses pertaining to the Indian project not under the provisions of section 44C of the Income Tax Act but according to the article III of the DTA treaty by allocating head office expenses proportionately on the basis of the turnover of the Indian project vis-a-vis the total global project and give consequential relief to the appellant."
3.4. (iii) The learned senior Departmental Representative contended that the assessee has a permanent establishment in India. There is nothing in article III(3) to exclude the applicability of section 44C of Income Tax Act, 1961. He further submitted that the definition of "permanent establishment" given in article (2)II(1)(i) of DTA means a fixed place of business in which the business of an enterprise is carried on. The fixed place of business shall include a branch, an office, a factory, a workshop, etc., but it does not include the head office. He submitted that the Commissioner(Appeals) has erred in directing the assessing officer to allow proportionate expenses of the head office as attributable to permanent establishment in India. He relied upon the reasoning mentioned in the assessment order. The learned Senior Departmental Representative submitted that the order of the Commissioner(Appeals) should be set aside and that of the assessing officer should be restored.
3.4. (iv) The learned counsel for the assessee submitted that the provisions of DTA will override the provisions contained in Income Tax Act. He contended that there is no dispute about the fact that the assessee has a permanent establishment in India. The relevant DTA with Japan contained inter alia the following clause in article III(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."
As regards reasonably allocable expenses attributable to the contract carried out by the assessee in India, the learned lawyer invited our attention towards the notes to the financial statements annexed with the auditors report appearing at page 67 of the paper-book, which is reproduced hereunder :
"Head office overheads are allocated to the Auraiya GCCP contract in proportion to the world wide turnover of the company, as certified by the head office auditors in Japan."
He thus, strongly supported the order of the Commissioner (Appeals) and relied upon the reasons mentioned in the said order.
3.4. (v) We have carefully considered the submissions made by the learned representatives of the parties and have gone through the orders of the departmental authorities, the relevant provision of the Income Tax Act, 1961, as also the various clauses of the DTA with Japan.
3.4. (vi) On a careful consideration of the entire relevant material, we are of the considered opinion that the Commissioner (Appeals) has rightly directed the assessing officer to allow head office expenses pertaining to the Indian project not under the provisions of section 44C of Income Tax Act but according to article III of the DTA by allocating head office expenses proportionately on the basis of the turnover of the Indian project vis-a-vis the total global project and grant consequential relief to the assessee. We do not find any justification to interfere with the view taken by the Commissioner(Appeals) in relation to this ground. Hence, ground No. 4 raised by the revenue is rejected.
3.5. Ground No. 5relates to the finding given by the Commissioner(Appeals) holding that in view of article III(3) of DTA with Japan, no disallowance can be made under rule 6D, section 40A(3), section 40A(12), section 37(2A) and section 43B of Income Tax Act, 1961.
3.5. (i) The learned senior Departmental Representative submitted that there is no express provision in the DTA excluding the applicability of these provisions of Income Tax Act, 1961 relating to allowability of the various expenses subject to certain limitations and fulfillment of conditions prescribed in the respective sections of Income Tax Act, 1961. The provision of section 90(2) does not in any manner indicate that the various provisions contained in the Income Tax Act governing the allowability of expenses subject to limitations and conditions prescribed in the respective section will not apply in a case where the assessee is governed by the DTA with any other country. He submitted that the view taken by the Commissioner(Appeals) should be set aside and that of the assessing officer should be restored.
3.5. (ii) The learned counsel for the assessee strongly supported the order of the learned Commissioner(Appeals). He invited our attention towards the DTA with Japan for the year 1991-92 as well as DTA made with other countries like UK and France, etc. He pointed out that whenever the two contracting States while entering into DTA wanted to provide that deduction for expenses will be allowed in accordance with the provisions of the Income Tax Act of the State where the permanent establishment is located, it has been so specifically provided in the DTA. In the present case, the learned lawyer contended that the relevant DTA pertaining to the year under consideration clearly provides in article III(3) that in determining the industrial or commercial profits of a permanent establishment, there shall be allowed as deduction all expenses, wherever incurred reasonably allocable to such permanent establishment. This clearly shows that the entire expenditure incurred by the assessee which is attributable to the permanent establishment in India ought to have been allowed in full by the assessing officer and the provisions of section 40A(3), 40A(12), 37(2A), rule 6D providing for certain disallowances or limitations of allowable expenses will not apply.
3.5. (iii) We have carefully considered the submissions made by the learned representatives of the parties and have perused the orders of the learned departmental authorities as well as other documents to which our attention was drawn during the course of hearing.
3.5. (iv) The Commissioner(Appeals) while granting this relief has relied upon the article III(3) of DTA with Japan and on section 90(2) inserted by the Finance (No. 2) Act, 1991 with retrospective effect from 1-4-1972. The relevant article III(3) of DTA has already been reproduced in earlier part of this order. The provisions of section 90(2) are reproduced hereunder :
"Agreement with foreign countries"
Where the Central Government has entered into an agreement with the government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee."
3.5. (v) Article III(3) in the relevant DTA relating to the year under consideration only provides that 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. It does not expressly provide that the provisions of the domestic Indian income-tax law governing the allowability of various expenses will not apply while computing the taxable income liable to tax in India. It also does not specifically provide that allowability of various expenses will be subject to limitation and conditions prescribed in the relevant provisions contained in Income Tax Act, 1961. We however, find that in article XI(1) it has been clearly provided as under :
"Article XI : The laws in force in either of the contracting States will continue to govern the taxation of income in the respective contracting States except where provisions to the contrary are made in the present agreement."
In view of the aforesaid clause, the provisions of Income Tax Act, 1961, relating to computation of taxable income will apply in the case of the assessee except where the provisions contained in the DTA are contrary to the conditions specifically mentioned in the Income Tax Act. Therefore, the Commissioner(Appeals) was not justified in deleting the aforesaid disallowances on the ground that all these provisions will not be applicable in the case of the assessee.
3.5. (vi) The provisions of section 90(2) inserted by the Finance (No. 2) Act, 1991, with retrospective effect from 1-4-1972 will also not in any manner support the view taken by the Commissioner(Appeals). The scope and effect of the said retrospective amendment has been explained in the Circular No. 621, dated 19-12-1991, which is reproduced hereunder :
"Taxation of foreign companies and other non-resident taxpayers43. Tax treaties generally contain a provision to the effect that the laws of the two contracting States will govern the taxation of income in the respective States except when express provision to the contrary is made in the treaty. It may so happen that the tax treaty with a foreign country may contain a provision giving concessional treatment to any income as compared to the position under the Indian law existing at that point of time. However, the Indian law may subsequently be amended, reducing the incidence of tax to a level lower than what has been provided in the tax treaty.
43.1 Since the tax treaties are intended to grant tax relief and not put residents of a contracting country at a disadvantage vis-a-vis other taxpayers, section 90 of the Income Tax Act has been amended to clarify that any beneficial provision in the law will not be denied to a resident of a contracting country merely because the corresponding provision in the tax treaty is less beneficial."
The provisions of section 90(2) will, therefore, be applicable with retrospective effect to ensure that any beneficial provision in the Income Tax law will not be denied to a resident of a foreign country, merely because of a corresponding provision in the tax treaty, which is less beneficial. Such a provision cannot lead to the conclusion that the various provisions contained in Income Tax Act such as section 40A(3), 40A(12), 37(2A), 43B and rule 6D will not apply in the case of the assessee while determining the allowable expenditure. The reliance placed by the learned counsel for the assessee on the DTA executed with Japan for the year 1991-92 or the DTA executed with other countries does not in any manner support his contention. The DTA executed with Japan pertaining to 1991-92 contains a specific clause (7) reading as under :
"With reference to para. (3) of article 7 of the convention, it is understood that in India the deductions in respect of the executive and general administrative expenses as referred to in the said paragraph shall be allowed in accordance with the domestic law of India, but such deductions shall in no case be less than what are allowable under the Indian Income Tax Act as effective on the date of signature of this convention."
Such a specific clause simply clarifies that the deduction shall be allowed in accordance with the domestic law of India but such deductions shall in no case be less than what are allowable under Income Tax Act. Likewise, the DTA with UK also clearly provides that the deduction for expenses incurred for the purposes of business of the permanent establishment shall be allowed under the provisions of and subject to the limitation of the domestic law of the contracting state in which the permanent establishment is situated. Such a specific clause in the DTA clearly specifies the same aspect that the provisions of domestic law will apply unless there is a contrary provision in the DTA. In view of the aforesaid facts and discussion, we are of the considered opinion, that the Commissioner(Appeals) has erred in directing the assessing officer to delete the disallowances made under the aforesaid provisions on the ground that these provisions will not apply in the case of the assessee. The order of the Commissioner(Appeals) is, therefore, set aside in relation to this ground, and various disallowances made by the assessing officer under the aforesaid provisions are restored. Hence, ground No. 5 of the revenue is allowed.
4. In the result, the revenues appeal is treated as allowed for statistical purposes.