Income Tax Appellate Tribunal - Ahmedabad
Skanska Cementation International ... vs Department Of Income Tax on 31 October, 2006
IN THE INCOME TAX APPELLATE TRIBUNAL,
AHMEDABAD "D" BENCH,
BEFORE DR. O. K. NARAYANAN, VP AND SHRI BHAVNESH
SAINI, J.M.
ITA No.46,47,48/AHD/2007
Assessment Year: 1998-99, 1999-2000 and 2000-01
Asstt. Commissioner of Income V/s Skanska Cementation
Tax, International Ltd.(Formerly
Circle-6, Old GEB Building, Kvaener Construction
Race Course Circle, International Ltd.) ,
Baroda C/o. C.C. Chokshi & Co.,
31, Nutan Bharat Society,
Alkapuri, Baroda
PAN No. AAACK 8447L
(Appellant) (Respondent)
ITA No.52, 53 and 54/AHD/2007
Assessment Year: 1998-99, 1999-2000 and 2000-01
Skanska Cementation V/s Asstt. Commissioner of
International Ltd.(Formerly Income Tax,
Kvaener Construction Circle-6, Old GEB Building,
International Ltd.) , Race Course Circle,
C/o. C.C. Chokshi & Co., Baroda
31, Nutan Bharat Society,
Alkapuri, Baroda
PAN No. AAACK 8447L
(Appellant) (Respondent)
ITA No.1665/AHD/2008
Assessment Year: 2000-01
TheADIT (Int. Taxn.), V/s Skanska Cementation
Ahmedabad, 4th floor, Nature International Ltd.(Formerly
View Building, Ashram Road, Kvaener Construction
Ahmedabad International Ltd.),(India
Project Office)
C/o. C.C. Chokshi & Co.,
31, Nutan Bharat Society,
Alkapuri, Baroda
PAN No. AAACK 8447L
(Appellant) (Respondent)
For Assessee: Shri S.N.Soparkar
For Department: Shri B. S. Gehlot, CIT.DR
2
ORDER
PER SHRI BHAVNESH SAINI, J.M.
This order shall dispose all the above cross appeals which are filed on the connected issues.
2. We have heard learned Representatives of both the parties, perused the findings of authorities below and considered the material available on record.
3. All the above appeals year wise are decided as under:
ITA No.46/Ahd/2007 ITA No.52/Ahd/2007Assessment Year: 1998-99
4. The cross appeals are directed against the order of CIT(Appeals)-VI , Baroda dated 31st October, 2006.
5. The departmental appeal is filed on the following grounds:
"1. The Learned Commissioner of Income Tax (Appeals) has erred in law in allowing 5% of total salary of Rs.82,07,238/- and 5% of expenses on air fares, visa charges and medical expenses aggregating to Rs.15,98,366/- on the basis of guess- work, 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. Rs.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 Rs.15,98,366, i.e. Rs.79,918, on guess-work, disregarding the fact that this expenditure was incurred by the sub-contractor and not by the assessee.3
5. The CIT(A) has erred on the facts and in the circumstances of the case in allowing electricity charges, house maintenance charges, mess food charges and wages of staff of Rs.13,97,050 even though the same were incurred by the sub-contractor and not by the assessee."
5.1 The assessee's appeal is filed on the following grounds:
"1. The learned C I T-A has erred in holding that the out of expenses of RS.1,22,94,128 reimbursed to Head Office only 5% of the expenses of Rs.82,07,238 in respect of salaries of expatriates and only 5% of the expenses of Rs.15,98,366 in respect of expenses like air fare, visa charges and medical expenses for the expatriates can be considered to be towards supervision. The learned C I T-A has also erred in considering that the sum of Rs.5,97,443 comprising of sundry expenses and hire charges (included in Rs.1,22,94,128) is the responsibility of the sub-contractor. The learned C I T-A has thus confirmed disallowance of Rs.1,18,03,848.
2. The learned C I T -A has erred in treating the expenses 'reimbursed to Head Office' as 'head office expenditure' covered by the provisions of section 44C of th4e Income Tax Act, 1961.
3. The learned C I T-A has erred in disallowing an amount of Rs.73,50-,283(representing sundry expenses, rent, traveling expenses, telephone and equipment hire charges, car hire charges and hiring charges for computers) expenses out of Rs.87,47,333 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.
4. The C I T-A failed to appreciate that the proceedings in the Impugned Order was limited to determining if the Appellants undertook any activities under the Principal Contract between Gujarat Chemical Port Terminal Company Limited ("owner" or "Employer") and the Appellants. In terms of the remand of the C I T-A came to the view that the Appellants were undertaking activities in terms of the Principal Contract, the consequence of such finding would be to allow the deductions claimed by the Appellants. In the present proceedings, the C I T-A has traversed beyond the scope of the remand proceedings. In respect of the finding that the Appellant did undertake activities under the Contract, the C I T- A 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 4 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. The facts of the case on this issue are that the assessee Skanska Cementation International Ld. (hereinafter called SCIL or contractor) is a non-resident assessee- company registered under the Laws of United Kingdon and derives income from civil construction. The assessee obtained a contract vide work order dated 29-9-1997 from Gujarat Chemical Port Terminal Co. Ltd. (GCPTCL or owner or Principal) for construction of a Liquid Chemical Handling Jetty at Dahej near Bharuch. The value of the contract is stated to be Rs.316.51 Crores. This amount includes both rupee value and amount expressed in foreign currency i.e. US Dollars. For the purpose of execution of the aforesaid contract, the assessee had established a project/site office ('PO') at Dahej after obtaining the requisite approval from the Reserve Bank of India. For completion of the project the assessee had given sub- contract to Skanska Cementation India Limited (formerly known as M/s. Trafalgar House Construction India Limited and M/s. Kvaerner Cementation India Limited) (hereinafter referred to as SCEM or sub contractor of KC India or KCIL/sub contractor) on 13-11-1997 for 5 carrying out the whole job on back to back basis. As per the terms of sub-contract, the assessee was to pay to Skanska Cementation India Ltd. 98% of the contract value in Indian Rupee and 76% of the contract in US Dollar. On overall position, approximately 91% of the total contract value was to be paid to sub-contractor. The sub- contractor company i.e. Skanska Cementation India Ltd. is registered in India and major share holding of it remains with the assessee company. The assessee thus gave sub-contract to Skanska Cementation India Ltd. Which is a group concern at 91% of the contract value, leaving a GP margin of about 9%. The assessee company was awarded another contract on 27-11-1998 by Lingtec USA for the construction of LNG Tanks at Dabhol, as per agreement dated 27-11-1998. The value of contract was US Dollar 11,82,11,097. This work was given on sub-contract to Punj Llyod (also referred as PLL), on G. P. margin of 20% being the difference between value of the contract and value of the sub-contract. The assessee company filed its return of income on 30-11-1998 declaring a total loss of Rs.1,10,07,028. For the Assessment Year 1998-99, assessment order u/s. 143(3) of the IT Act was passed on 28-3-2001 by rejecting books of accounts and estimating income at the rate of 6% of gross receipts. The said total income was Rs.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 Rs.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 6 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 Rs.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, air fares, car hire charges etc. The A O therefore, noted that the major expenditure is in respect of salary paid to Expatriate personnel. The assessee was asked to submit appointment letters and qualification etc. and nature of duties performed by the employees. The A O also noted that it was duty of the sub-contractor to execute and construct the project. The assessee's responsibility was limited to maintain an office for doing liaisoning with the contractee and the sub-contractor. The assessee has submitted site organogram for GCPTCL, Dahej which shows that these expatriate personnel were not only executing the project work but also holding key posts like technician project manager, technician planning manager, technician construction manager, technician commercial manager, technician site safety manager etc. The assessee submitted copies of appointment letters and copies of resumes of expatriate containing their qualifications and experience required to perform their assigned duties with destination. The A O therefore, noted that the foreign expatriates were working for the execution of Dahej Project. The assessee submitted that it has engaged expatriate personnel for the execution of Liquid Chemical Handling Jetty and the personnel were engaged to carry out various activities like engineering, planning, technical development and administrative functions etc. The A O however, found that the expenses also relate to the execution of the project and for organizing proper infrastructure for the purpose of executing the project. The A.O., therefore, noted that since the execution of the project was the sole responsibility of the sub contractor, these expenses pertain to them and not to the assessee. The A.O. further 7 noted that as per the agreement the sub contractor was responsible to do the execution work, therefore, these expenses were not incurred relating to the business of the assessee, these could not be allowed as deduction. The A.O. also noted that above payment of Rs.1,22,99,128/- were made by Head Office. The Head Office had made above payment and issued invoices to the Project Office of the assessee in India for which assessee was claiming deduction. The A.O., therefore, noted that in the case of non-resident, the Head Office Expenditures have to be computed in accordance with Section 44C of the I.T Act. The A. O. further noted that since assessee 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 Rs.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. Further, it was for the assessee to decide whether any expenditure should be incurred in the course of the business. The assessee 8 executed the main contract with GCPTCL for design and construction of Liquid Chemical Handling Jetty at Dahej in Gujarat. The assessee has substantially sub-contracted the work to be performed by the sub contractor. However, it had not assigned any portion of the contract. It was submitted that the assessee had never intended to assign or sub let the contract, therefore, no approval was sought as per clause 40 of the contract with the Principal. The relationship between the assessee and the sub contractor ever remained as contractor and sub contractor. Under an assignment of a contract, the assignor with the consent of project owner transfers all the rights, responsibilities, liabilities under the contract to the assignee. Accordingly, the assignor is absolved of all the rights, liabilities and responsibilities under the contract and the assignee steps into shoes of the contractor, so that in the event of any performance deficiency, the project owner may directly proceed against the assignee. It was prayed that in view of above the assessee retained all the rights, responsibilities and liabilities under the sub contract and liable to perform the principal contract. It was submitted that in the case of the assessee the fact that any or all parts of the work could be sub contracted was provided in the bid documents itself and as per its clauses the assessee shall remain entirely and solely responsible for the satisfactory completion of the works. Further, the letter of intent dated 28-11-1997 awarded by GCPTCL recognizes that the works in the contract were to be sub contracted. Clause -13 of the letter of intent (LOI) lists the sub contractors assigned for undertaking various works. The sub contractors include -
DESCRIPTION OF WORK NAME OF SUBCONTRACTOR
A. Engineering Consultant M/s. Soros Associates Inc. (USA)
i) Civil Work.
ii) Top sides (Piping, M/s. Soros Associates Inc. (USA)
Mechanical, Electrical
& instrumentation)
B. Construction activities M/s. Trafalgar House
i) Fabrication- Civil Construction (India) Ltd.
9
works
ii) Installation - Civil
works
a) Bund & RCC Approach M/s. Trafalgar House
Testle Construction (India) Ltd.
b) Steel approach Trestle &
jetty head M/s. Antara KOH (Ssingapore)
iii) Installation - Top sides
(Piping, Mechanical,
Electrical & Instrumentation 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 required to maintain its personnel in India for pre-commissioning and commissioning activities. Clause 4 of the letter of intent states that -
"SUPERVISORY PERSONNEL FOR PRE-COMMISSIONING & COMMISSINOING ACTIVITIES Contractor shall provide the services of Indian and Expatriate Supervisory personnel for pre-commissioning and commissioning 10 activities and charges for the same shall be paid to contractor on per day basis specified in Annexure VII enclosed for the number of personnel actually engaged for such activities as per requirement of owner".
6.2 It was also indicated as per clause of special conditions of the contract that in weekly and monthly project review meetings the contractors required to present the programme and the status of the work for highlighting the progress of the work. For this purpose also assessee was required to depute its personnel to attend the weekly review meetings and submit the periodical reports. The sub contract agreement also provides that it shall liaison and co-operate with the contractor on all the matters to ensure the execution of the work. Therefore, the execution of the work and supervisory role of the contractor was impressed upon.
6.3 It was submitted that A O has disallowed the expenses without examining the terms of the contract after considering review of the organogram prepared at the commencement of the project. It was submitted that all above expenses have been incurred by the assessee wholly and exclusively for the purpose of carrying on its business. The reasonableness of the expenditure cannot be determined by the A O and that unless the genuineness of the expenditure is under question, the necessity or business exigency to incur the expenditure cannot be challenged by the A O. The assessee placed reliance upon several decisions including the decision of the Hon'ble Supreme Court in the case of C I T Vs Panipat Woolen & General Mills 103 ITR 66 (SC) and Eastern Investments Vs C I T 20 ITR 1. It was contended that the genuineness of the expenditure incurred by the assessee has nowhere been challenged by the A O. The A O has only challenged the rationale for the payments being made to the sub contractor.
116.4 It was further submitted that provisions of Section 44C of the IT Act are not applicable in this case, because assessee is tax resident in UK and is entitled to the benefit, if any, under the India - 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 non- discrimination 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 non- discrimination 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 IT Act. Head Office expenditure. It is stated that in order to qualify as the H O expenditure under Section 44C of the ACT, an essential condition is that the expenditure must be in the nature of the executive and general administration expenditure ( i.e. common overheads) incurred at the H O level outside India and allocated to projects in India. However, in the assessee's case, the expenditure has been incurred by the H O for supervisory personnel deputed to oversee the project execution in India, and in respect of guarantees, insurance, etc. that were required to be obtained as per the project terms and hence, represents expenses incurred specifically for the Dahej Project. As such, the assessee submits that the payment made to the H O in 12 respect of the aforesaid expenditure represents the reimbursement of the actual expenditure incurred for and on behalf of the project office in India. Accordingly, the said expenditure does not fall under the definition of Head Office expenditure for the purposes of Section 44C of the IT Act and hence the limits prescribed there under are not attracted. The assessee relied upon following decisions in support of the above contentions:
(i) C I T Vs Emirates Commercial Bank Ltd. 262 ITR 55 (Bom) in which Hon'ble Bombay High Court explaining the purpose and scope of Section 44 C has observed as under:
"That, the expenditure which is covered by Section 44C is of a common nature, which is incurred for the various branches or which is incurred for the head office and the branch. However, in this case, we are concerned with the expenditure exclusively incurred for the branch. In this case, there is a concurrent finding of fact recorded by the Commissioner (Appeals) as well as the Tribunal stating that the officers came from the head office at Abu Dhabi to Bombay to attend to the work of the Bombay branch and, in connection with that work, the expense was incurred. That, the expense was initially incurred by the head office which was recovered by the head office from the branch in India by raising a debit note. Therefore, the expense was incurred for the branch office in India. These are concurrent findings of fact. We do not wish to interfere with those findings. Hence, Section 44C has no application."
(ii) British Bank of Middle East Vs JCIT ( 4 SOT 122) ITAT, Mumbai) - In this case, following the decision of the Mumbai 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 13 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 Assessing Officer ought not to have assumed that no such expenditure is allowable as decided by ITAT. However, on perusal of the assessment order I notice that during the assessment proceedings (for giving effect to the Hon'ble ITAT order) the Assessing Officer had asked for details of expatriate personnel seconded for Dahej project alongwith their qualifications, nature or duties and nature of work actually performed, etc. and after examining these aspects and the organogram, he concluded that these personnel were actually executing the project which was the responsibility of the subcontractor.
4.3.1 At a macro level the position is that the parent company in U.K. posts the expatriates for Dahej project which the appellant company claims to be placed on behalf of them. It is also a fact that the personnel were recruited by another group concern. Further it is not clear whether the parent company did place other personnel directly with sub contractor also for this project. It is also relevant to note that SCEM was a fully quoted company with National Stock Exchange during the course of Dahej project.
4.3.2 The key issue here is whether as per terms of agreement between the appellant and the owner and appellant and the sub contractor whose responsibility it was to bear such expenses. It is argued by the appellant that the sub contractor's job was merely to execute the project whereas the appellant's duty was to 14 supervise the project and to see that the project is completed in time. It is a fact that the appellant and sub contractor belong to the same group and that the appellant roped in subcontractor as part of the initial bid for completion of project. The question is to be looked into in terms of what amounts to supervision vis-à-vis execution.
4.3.3 The key issue is what were the responsibilities and specific tasks actually performed by these expatriate personnel. As per back to back subcontract the entire responsibility of design, fabrication, planning and execution of works rested with the sub-contractor. ITAT had also observed that looking into the fact that as high as 91% of contract value was paid to the sub-contractor (K.C.India) by the assessee it was necessary to verify whether the expenditure incurred by Head Office for execution of Dahej project ad claimed by the appellant, was incurred for appellant's business.
4.3.4 During the course 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) 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 reiterated that the ultimate responsibility for the contract remained that of contractor and that even post subcontracting of work, the Contractor clearly needed to undertake various 15 activities in terms of the discharge of its obligations to remain entirely and solely responsible for the works under the Principal Contract. Further the liability to liquidated damages and exposure of the Contractor were wider than those of the Sub-Contractors. Thus the expenses on the expatriates were in fact, expensed wholly and exclusively for the purpose of business of the Contractor. The appellant had once again drawn my attention to the clauses of main contract as well as sub contract to impress that it was indeed the responsibility of the appellant to complete the task both in terms of quality and time and that the appellant parries additional risk in terms of higher liquidated damages(maximum to the extent of 15% of the total cost of the project as against 10% stipulated and receivable from sub contractor). It is also added that the Assessing Officer has overlooked the fact that not all the work is subcontracted to SCEM and there is also work subcontracted to Soros Associates Inc (USA) and Antara KOH (Singapore).
4.3.6 It is also submitted that the appellant has filed an appeal before the Hon'ble High Court against the Order of the Hon'ble Tribunal disallowing the expenses on account of collapse of steel piles. Therefore it is argued that the observations made in the Hon'ble Tribunal Order in the context of collapse of steel piles should not be relied upon as matter is subjudice. It is averred that sub contractor is a different taxable entity and the present appeal being an old matter the appellant expressed its inability to furnish details from its group concern to clarify the issues regarding supervision versus execution and the other above mentioned related queries.
4.3.7 Having considered the submissions of the appellant I notice that no clear evidence or details were submitted to show that the expatriates performed only supervision tasks. The fact had also been examined by Assessing Officer considering the experience of personnel, their terms of employment and positions held by them and after assessing all the details furnished by the assessee he came to a conclusion that these expatriates performed execution jobs. It has also been observed that in earlier 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 16 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 with SCEM to carry out these functions in isolation. No information was provided as to who signed the actual work measurement sheets on daily basis. It was admitted by appellant that lower level workers, technicians, etc. were provided by sub contractor but the overall control was vested in the expatriates posted for the project. 4.3.8 From the organogram it is seen that there are no senior engineers / managers on behalf of subcontractor to mange execution of the job but there were only supervisory staff thus the primary duty of these personnel posted to the project was to execute the project. Thus they were performing the task which essentially was the contractual responsibility of the sub contractor. It is also supported by the fact that these expats were available continuously and handled all day to day operational matters.
4.3.9 It is a known proposition that an assessee knows best about his business activities and also all the attendant facts are in its possession. In order to claim any business expenditure the appellant has to justify that the said expenditure was wholly and exclusively incurred for its business and the initial burden has not been discharged by the appellant.
In the case of CIT vs. Shahibag Entrepreneurs (P) Ltd. - 215 ITR SIO(Guj) it is held that assessee must satisfy the department of the purpose for which the amount is spent before becoming entitled to an allowance under section 37(1). Further in the case of L.H. Sugar Factory & Oil Mills (P) Ltd. vs. CIT - 125 ITR 293(SC) it is held that where an assessee claims a deduction the onus is on him to bring all material facts on record to substantiate his claim. In Sabalgarh Industries Ltd. vs. CIT - 46 ITR 978(AII) it is ruled that if an expenditure is partly deductible and partly not deductible it is for the assessee to show which part is deductible, and if he fails, the whole of the expenditure should be disallowed. In Sabalgarh Industries Ltd. vs. CIT - 46 ITR 978(AII) it is held 17 that mere production of vouchers in support of the claim for deduction of the expenditure would not prove the claim made by the assessee. It is his duty to prove payment especially when the ITO doubts the genuineness thereof.
In the case of Jaipur Electro (P) Ltd. vs. CIT - 134 CTR 237(Raj) it is observed that Assessing Officer has the right and duty to enquire into purpose of expenditure - the doctrine that 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 business of somebody else, or for some improper or oblique purpose outside the course of business. If the expense is incurred for fostering the business of another only or is made by way of distribution of profits or is wholly gratuitous or for some improper or oblique purpose outside the course of business, then the expense is not deductible - CIT vs. Chandulal Keshavlal & Co. - 38 ITR 601 (SC) 'Wholly' refers to quantum, and 'exclusively' refers to purpose. The expression 'wholly' has been used with reference to the quantum, while the expression 'exclusively' refers to the nature or the purpose of the activity in which the expenditure is incurred. If there is a dual purpose, then, it is obvious that the expenditure would not qualify for allowance, for, it will cease to be wholly and exclusively laid out for business purposes
- CIT vs. T.S. Hajee Moosa & Co. - 153 ITR 422(Mad.) Further in the case of CIT vs. Panipat Woollen & General Mills Co. Ltd. - 103 ITR 66(SC) it is ruled that test of commercial 18 expediency should give way to intention of parties and other factors. The test of commercial expediency cannot be reduced in the shape of a ritualistic formula, nor can it be put in a water tight compartment so as to be confined in a strait jacket. The test merely means that the Court will place itself in the position of a businessman and find out whether the expenses; incurred could be said to have been laid out for the purpose of the business or the transaction was merely a subterfuge for the purpose of sharing or dividing the profits ascertained in a particular manner. It seems that in the ultimate analysis the matter would depend on the intention of the parties as spelt out from the terms of the agreement or the surrounding circumstances, the nature or character of the trade or venture, the purpose for which the expenses are incurred and the object which is sought to be achieved for incurring those expenses.
4.3.10 It is admitted that in the present back to back contract, timely completion of the project as also quality of the work was delegated by way of sub contractor agreement and the duties of the appellant were performed through a lean project office to procure, collate the details and progress of work completed by the subcontractor for further discussions & with the owner. In the absence of any clear details the percentage 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.
4.3.12 However looking into terms of contract and sub contract, I am of the view that as project managers, engineers, these expatriates did perform to some extent 19 the supervision role which is inherent in such large project in terms of attending meetings and filing reports and interacting with the owner. But what % of their work formed supervision was for appellant to justify and substantiate and in the absence of verifiable details the alternative course is to assess the supervision content of the project based on available information. 4.3.13 In respect of plea of the appellant that it is contractor responsibility to complete the work as per agreement, I am of the view that stipulations in contract and subcontract agreements are one thing and how in substance the agreements are really operated is another aspect. Under the Income Tax Act what is to be seen is that in real sense and substantively how was the contract agreement actually implemented and what tasks were actually performed by appellant in terms of such contracts and whether such functions were within designated ambit of the contracts. Mere assertions and stipulations in contract agreements do not dictate allowability of expenses but the real implementation of the contract agreement in terms of the appellant's business imperatives would be the guiding factor in considering allowability of incurred expenses. 4.3.14 Next plea is that these personnel attended review weekly / monthly meetings filed various reports to the owner and this was part of the supervision assignment. It is observed that as per Clause-4 (1), of the subcontract titled 'provisions of documents and information' the "subcontractor shall submit to the contractor all documents and information relating to performance of the sub contract including drawings other documents requiring approval of engineers, all returns, accounts, notices, programmes, staff schedules, statement of construction method etc. to enable the contractor to comply with its obligation under the contract. In other words all the documents and information regarding the progress of work is to be supplied by subcontractor. Further as per 6th schedule to the subcontract providing of office accommodation at site including necessary secretarial services, consumables, photocopying facilities, fax, etc. is the responsibility of subcontractor. In other 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 20 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% of what has been claimed and this would cover expenses relating to liaisoning and coordinating the project work with the owner by expatriate personnel.
4.3.17 In view of the preceding paras 5% of salary expenses of Rs. 82,07,238 ie. Rs. 4,10,362 is allowed and the balance disallowance of Rs77,96,876 is confirmed. On the same analogy the other related expenses like .air fares, visa charges and medical expenses for these expatriates are allowed to the extent of 5% and thus out of total of 15,98,366, Rs.79,918 is allowed and the balance Rs.15,18,448 is confirmed.
4.3.18 Further bond/insurance & legal & professional fee of Rs.15,89,896 are disallowed as the appellant failed to clarify as to why this expenses be allowed when these were specifically the responsibility of SCEM and contractual obligation and such guarantees were executed by subcontractor.
4.3.19 Having regard to the provisions of section 44C and the judicial pronouncements I agree with the appellant that project specific expenses incurred in India would not fall within the ambit of section 44C. However in regard to recruitment & courier charges amounting to Rs.3,01,186 it could not be established in assessment or in appeal that such expenses were incurred specifically for Dahej project. These expenses are therefore restricted as per provisions of section 44C. 4.3.20 Apropos the plea of the appellant that section 44C is not applicable, it is seen that the said section was introduced to get over difficulties in scrutinising claims in respect of general administrative expenses incurred by the foreign head office in so far as such expenses stand related to their business or profession in India having regard to the fact that foreign companies operating through branches in India sometimes try to reduce incidence of tax in India by inflating their claims in respect of the head office expenses. In other words, section 44C seeks to impose a ceiling/restriction on head office expenses.
214.3.21 The decision in the case of Metchem Canada Inc v DCIT (5 SOT 121) is most respectfully not followed as it appears that certain aspects of the commentary on treaty provisions as detailed in succeeding paras were not brought to the kind notice of Hon'ble ITAT.
Article 26(2) (Non-discrimination clause) is reproduced as under...
2. The taxation on a permanent establishment which an 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 not be imposed upon a foreign company from which an Indian company is immune.
A permanent establishment is subject to the domestic tax only on the income attributable to it, while the domestic enterprise engaged in the same activities is taxable on its worldwide income is not, in itself, a sufficient difference to deny equal treatment to the permanent establishment. There are cases where, however, the two enterprises are not similarly situated and the difference in treatment may be warranted. A foreign enterprise may be required to provide information in a reasonable manner that may be different from the information requirements imposed on a resident enterprise, because information may not be as readily available as from a domestic enterprise. One more important aspect of differentiation is that the permanent establishment is not a separate legal entity but only a part of the enterprise that has its head office in another State. Domestic enterprise constitutes a single entity all of whose activities are brought within the purview of the state. Thus, the situation of the permanent establishment is different from of the domestic enterprise. Paragraph 20 of the OECD 22 Commentary makes it clear that the phraseology of paragraph 3 recognises the practical difference between taxing a local resident company and taxing a permanent establishment of foreign company. It says "it is the result alone which counts, it being permissible to adapt the mode of taxation to the particular circumstances in which the taxation is levied".
In paragraph 23, it says:
...it was difficult to define clearly and completely the substance of the Principle of equal treatment and this fact has led to wide differences of opinion with regard to many implications of this principle. The main reason for difficulty seems to reside in the actual nature of the permanent establishment, which is not a separate legal entity but only a part of an enterprise that has its head office in another State. The situation of the permanent establishment is different from that of a domestic enterprise, which constitutes a single entity all of whose activities, with their fiscal implications, can be fully brought within the purview of the States where it is has its head office..."
Not all differences in tax treatment, either as between nationals of the two states, or between residents of the two States, 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'ble ITAT. Further it is a well known proposition of law that no part of the statute should be construed in a way to make it redundant as observed by Hon'ble Apex Court in CST & Ors.
Vs. Radhakrishna & Ors.- 2 SCC 249 in considering the validity of a statue the presumption is in favour of constitutionality and the burden is upon the 23 person who attacks it to show that there has been transgression of constitutional. The principle of harmonious construction also demands that one provision of the treaties/Act cannot be construed so as to defeat another provision and the provisions must be read together as part of one large scheme. 4.3.21.2. In the instant case the appellant failed to provide any details to establish that these expenses were indeed incurred only for Dahej project and thus on facts alone under the circumstances I am constrained to hold that these expenses' be subject to restriction under section 44C.
4.3.22. As regard the sundry expenses, car hire charges, computer charges and safety expenses amounting to Rs.5,97,443 it is noticed that the appellant has only referred to Part 2 of the sixth schedule titled "sub contractor facility' whereas the part 1 of the sixth schedule it is the sub contractors responsibility to provide following facility and services without charge to the contractor as per clause 28 of the agreement. These include hotel accommodation and transportation including air fare for contractors' management staff in connection with the operation of the contract. Further transport and travel expenses for domestic and office staff is also the responsibility of sub contractor. The part 1 of the sub contractor facility under sixth schedule reads as under;
"The subcontractor shall provide the following facilities and services without charge to the Contractor pursuant to Clause 28 of this Agreement.
1) Adequate furnished office accommodation on site at Dahej including all necessary secretarial services, maintenance, power, water, stationary, consumables, courier and photocopying facilities together with such telephone, radio or facsimile facilities and computing facilities, excluding laptops and digital plotter, as THCIL are able to provide at the site.
2) Hotel accommodation and transportation, including air-
fares, as may be required to be undertaken by the Contractor's management staff in connection with 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 24 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 necessary maintenance, power, water, utilities, consumables and foodstuff to a standard commensurate with that normally provided for. such staff employed by KCIL on overseas postings.
b) Laundry for the Contractor's staff, both resident and visiting, as may be required in connection with the Contract Works.
c) Local staff of a domestic nature in such numbers as are required to service and operate the living accommodation
d) Transportation for the Contractor's staff in the general vicinity of Gujarat including fuel, maintenance, motor vehicle insurance and drivers.
e) AH initial, final and leave air fares for the Contractor's residential and visiting staff."
Perusal of part 1 and part 2 of the sixth schedule reveal that transportation for contractor staff in the vicinity of Gujarat is the responsibility of contractor whereas all the other transport and travel expenses are to be borne by the sub contractor. In the instant case it has not been shown that these expenses related to travel in the vicinity of Gujarat. Therefore relying on part 1 of sixth schedule the travel, hire charges as well as the sundry expenses are held to be responsibility of the sub contractor and thus not allowable in the hands of the appellant. The disallowance on this count of Rs.5,97,443 is therefore, confirmed".
8. Learned Departmental Representative besides relying upon the grounds of departmental appeal, relied upon order of the A O. Learned D R referred to page 6 of the impugned order and submitted that earlier Tribunal observed that it was responsibility of K C India to incur the expenditure. He has referred to page 15 of the impugned order to highlight that the learned C I T(A) raised the Nine queries on 25 the issue. The learned Departmental Representative also relied upon the decision of Allahabad High Court in the case of Sabalgarh Industries Ltd. (supra) relied upon by the learned CIT(A) in his findings. Learned D R submitted that Section 44C applied in the case of the assessee because assessee was a non-resident foreign company. The learned D R submitted that the execution of the project was the responsibility of the sub contractor, therefore, the expenses pertain to them and not to the assessee. The assessee need not to spend any expenditure on the same. The learned D R submitted that the learned C I T (A) should not have allowed the deduction of even 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 to incur the expenditure for business purposes. He has submitted that as per the contract with the Principal, it was the liability and responsibility of the assessee to complete the work. He has submitted that A O has not disputed that 26 the expenditure was incurred for completion of the project. He has submitted that agreement with the Principal is different from the sub contractor and that assessee is liable for performance of the agreement with the Principal, however, sub contractor is not responsible to the Principal. He has referred to brief written submissions (Paper Book NO.1) and referred to page 69 which is site organogram for GCPTCL Dahej and demonstrated that the assessee was overall responsible for completion of the project and only with this purpose the assessee had to provide certain persons for performance of the agreement. He has referred to the submissions made therein at page 3 to 9 to highlight in the written submission ( WS/PB) that as per various clauses of the agreement, the assessee had to incur business expenditure for the purpose of completion of the Dahej Project. The relevant pages of the agreement are also filed from pages 10 to 16 in the same written submission/paper book in support of his contention which we shall refer to in this order. He has also referred to several decisions in the paper book on the case law which will also be referred to in this order. He has submitted that accounts of the assessee are audited as per requirement of the law and the genuineness of the same has not been disputed by the A O. He has submitted that Section 44C of the IT Act is not applicable in this case, because all the expenditures incurred for the business purposes in respect of the project in India at Dahej (Gujarat). He has submitted that since it was first year of the business and there was loss, therefore, the provision of Section 44C would not apply and relied upon decision of Hon'ble Bombay High Court in the case of C I T Vs Deutsche Bank A.G. 158 Taxman 37 (Bom). Apart from the case laws relied upon in the paper book, he has relied upon the decisions of Hon'ble Bombay High Court in the case of C I T Vs Emirates Commercial Bank Ltd. (supra) and order of the Mumbai Tribunal in the case of Metchem Canada Inc (supra) (also reported in 100 ITD 251). He has also relied upon following decisions: (i) 27 decision of Hon'ble Gujarat High Court 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) decision of Hon'ble Supreme Court in the case of S. A. Builders Ltd. Vs C I T 288 ITR 1 in which it was held that the expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on the ground of commercial expediency. It was further held that decision relating to Section 37 will also be applicable to section 36 (1) (iii) because in Section 37 also the expression used is "for the purpose of the business". "For the purpose of the business" includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also benefits thereby" and (iv) decision of the Hon'ble Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. Vs C I T 223 ITR 109, it was held - reversing the decision of the High Court, that this was not a case where the assessee was paying a bribe to any person nor a 28 case where the money was being contributed to any private fund or for illegal gratification By a voluntary scheme, which the District Collector was associated, the district welfare fund had been established for the benefit of the general public. The payment to such a fund which was openly made by all the millers and which fund was being used for public benefit could not be regarded as being opposed to public policy. Requiring payment to be made for a just cause which would entitle a businessman to obtain a licence or permit could not be regarded as being against public policy. The expenditure had been motivated purely by commercial consideration and was allowable as a deduction under section 37(1) of the Income-tax Act, 1961. What is to be seen is not whether it was compulsory for the assessee to make the payment or not but whether it was expended out of considerations of commercial expediency. As long as the payment is made for the purposes of the business, and the payment made is not by way of penalty for infraction of any law, the same would be allowable as a deduction. Learned Counsel for the assessee, therefore, submitted that the addition is clearly unjustified. In the alternate claim, he has submitted that reasonable expenditure may be allowed as deduction.
10. The learned D R in the rejoinder submitted that expenses can be examined by the A O as per sub contract. Specific production of the details of the expenses was called for. However, assessee 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 29 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 responsibility of the sub contractor, these expenses pertain to them and not to the assessee. However, the A O has not examined the point whether the assessee had no role to play in executing the principal contract and is no more required to undertake any activities or efforts in respect of the principal contract. The parties under the principal contract and the sub contract have set out their understanding of their commercial positions and their rights and liabilities under various clauses of the contract. It is clear whenever the contractor was the successful bidder, he would be entirely and solely responsible for the satisfactory completion of the work as per the contract. Copy of the contract agreement and letter of intent is filed in the paper book to show scope of the work as set out in the bidding documents is a cohesive indivisible package, the execution of which is the responsibility of the contractor. Clause 13(1) of the letter of intent dated 28-11-1997 along with its annexure constitutes the principal contract which deals in with the sub contractor and specifies "the contractor shall without prejudice to its responsibilities to execute the work as per the specification and time schedule engage the following sub contractors for the execution of works mentioned against each" (WS/PB - 18).It would, therefore, prove that all the works under the contract have not been sub contracted. The details mentioned in the above clause are reproduced at page 9- 30 10 of this order to show that M/s. Soros Associates Inc , USA is sub contracted work as an engineering consultant, KCIL is sub contracted the work for fabrication and installation of civil works. M/s. Antra Koho and M/s. ABAN Constructions were sub contracted the work for piping, mechanical, electrical and instrumentations. The A O has, therefore, made factual mistake in claiming that all the works under the principal contract has been sub contracted to the sub contractors. Under the general conditions of contract (WS/PB 28 -
32) at clause 40.0 (iv), it is specifically provided that the contractor's liability to the owner is not limited in respect of work sub contracted because the contractor shall be solely responsible for the quality, proper and expeditious execution of the works and the performance of all the conditions of the contract in all respect as if such sub-letting or sub-contracting had not taken 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 GCC in clause No. 101 to 108 PB 124 to 130, all issues of 31 facts and labour related compliances have to be made by the contractor. In clause 78 PB 112 and clause 80 PB 113 of the same GCC, the contractor is fully responsible in respect of quality of the work and the quality assurance programme and the contractor shall be liable for all actions and compensation in case of the inferior work. As per clause 82 PB 114 of the same GCC, in case of failure by the contractor to comply with any instructions under the principal contract, the owner has the right of assuming charge of the entire work and to place additional labour to conduct the work. The above features mentioned in the different clauses of the contract would prove the responsibility of the contractor even if it has entered into sub contract. The contractor is always responsible for performance of the contract towards the principal. As per clause 90 of the GCC (PB
118), the amount payable to the contractor was fixed, therefore, the contractor would always have a role to play in supervising all the works of the sub contractor so as to ensure that all works are done at the agreed cost. As per clause 29 of the same GCC (PB 93), the contractor would be liable for payment of liquidated damages, if there is any delay in completion of the project. As per clause 7 (2) of the sub contract (WS/PB 47) the contractor has like powers in a relation to the sub contract works as the owner has under the principal contract. The sub contractor has the obligation to comply with all the instructions of the contractor. The sub contractor is required to co- operate with the contractor. According to clause 13 of the sub contract (WS/PB 48) the sub contractor shall not assign the sub contract or any part thereof without the written consent of the contractor, it would show that the contractor has every right to go into the sub contract. According to clause 15 of the sub contract (WS/PB
49), the contractor may claim damages for non-completion of the project from the sub contractor. The above provisions in the sub contract clearly prove that the contractor had an active and continuous role to play even in respect of the work to be undertaken 32 by the sub contractor. The contractor cannot absolve from the liability towards the principal even if sub contract is given.
12. The general rule is that contracts are executed strictly in terms of 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 executing the project to the satisfaction of the principal. The assessee is under contractual obligation to ensure that the project is executed in terms of the technical specifications agreed upon between the parties. The assessee is responsible for quality assurance of the project and adherence to the timeframe in executing the project. The sub contract has not diluted the contractual relation between the assessee-contractor and the principal. The contractual relationship in respect of the sub contract is between the assessee and the sub contractor but there is no probity of contract between the principal and the sub contractor appointed by the assessee. The sub 33 contractor is not responsible to the principal on account of non- performance of the contract or unsatisfactory performance of the contract or for similar breach of contractual obligation. In case of any breach by the sub contractor, the assessee is liable to the principal. The respective contract and sub contract have been executed within the framework of the above defined legal relationship. Irrespective of sub contracting any work, the assessee-contractor remains entirely and solely responsible for the work under the principal contract. Assessee is therefore, expected to perform operationally as well as financially along with the sub contractor to execute the project work. This being so, the arguments of the Revenue that t he assessee- company is not liable to incur expenses for and on behalf of the project is not sustainable. In spite of the involvement of the sub contractor, the assessee-company is still bound to incur expenses for various functions expressly assigned to it as per the contract. In addition to such specific commitments, the assessee has to incur expenses for engaging qualified people for technical supervision to ensure the quality execution of the project. For this purpose, assessee-company had deputed its expatriate technicians for supervising the activity carried on by the sub contractor to ensure timely completion of the contract as per standard and specification of the contract. There is no distinction between execution or supervision business expenditure in law because Section 37 of the IT Act provides for deduction of the expenditure if the same are laid out or expended wholly and exclusively for the purpose of business. Considering overall supervision of the project by the assessee 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.
34David & 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 should incur that expenditure. The expenses from the point of view of the businessman is to be considered.
13. The learned CIT(A) considering submission of the assessee rightly noted that the Assessing Officer ought not to have assumed that no such expenditure is allowable as per earlier order of the Tribunal. This finding of the learned CIT(A) has not been challenged in the grounds of appeal. The Assessing Officer did not verify any expenditure as per order of the Tribunal and merely rejected the claim of the assessee that it was the responsibility of the sub contractor to incur the expenditure. The genuineness of the expenditure have not been disputed in the first round proceedings as well as in the present proceedings by the Assessing Officer. The Assessing Officer did not dispute the expenses incurred for completion of the project by the assessee. All the disallowed expenses agitated in these appeals have been incurred by the assessee-company wholly and exclusively for the purpose of executing the contract. The Revenue has no case that the expenses incurred and claimed by the assessee-company were incurred for the purposes other than for the purpose of the Dahej Project. The assessee has incurred all the expenditure relating to Dahej Project 35 only as per the contract. The nexus between the expenses incurred by the assessee-company and the execution of the project has not been questioned by the Revenue authorities. The Revenue has no case that same item of expenditure have been claimed by way of deduction both by the assessee-company and the sub contractor, resulting in duplication of claims. There is no such case of any duplication of claims in respect of project expenses accounted either by the assessee-company or by the sub contractor. When there is no case of duplication of the expenses, when all the expenses have been incurred by the assessee-company exclusively for the execution of the project in terms of the contract and the sub contract justifying incurring of the expenditure in the hands of the assessee- company, we find that there is no reason to disallow any portion of the expenditure claimed by the assessee-company on the ground that the assessee-company was not expected to incur expenditure. Once we come to the finding that assessee is justified in incurring expenditure in its own account, in addition to payments made to the sub contractor, for 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.
3614. 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 shown loss income, therefore, deduction u/s 44C of the IT Act was taken at Nil. It may be noted that in order to qualify as the Head Office expenditure u/s 44C of the Act, the essential condition is that the expenditure must be in the nature of executing and general administration expenses i.e. common overheads incurred at the Head Office level outside India and allocated to the projects in India. However, in the case of t he assessee we find that the expenditure has been incurred by the Head Office for supervisory personnel deputed to oversee the project executed in India and in respect of guarantees, sundry expenses, insurance, fare, traveling and legal expenses etc. that was required to be incurred as per the project terms and hence the expenditure was incurred specifically for the Dahej Project in India. Therefore, such expenditure would not fall under the definition of Head Office expenditure for the purpose of Section 44C of the IT Act, therefore, the limit prescribed under such provision would not be attracted in the case of the assessee. Our findings are fortified by the judgment of the Hon'ble Bombay High Court in the case of C I T Vs Emirates Commercial Bank Ltd. (supra) and Tribunal decision in the case of British Bank of Middle East and American Bureau of Shipping (supra) relied upon by the assessee. Therefore, provisions of section 44C of the IT Act would not apply in the case of the assessee.
15. In the facts and circumstances of the case, we find that the disallowances made by the authorities below are not justified. We, therefore, set aside the orders of authorities below and entire addition is deleted. As a result, appeal of the assessee on these grounds is allowed and the departmental appeal is dismissed.
3716. Now we take up ground No.5 in the departmental appeal and ground No.3 in the appeal of the assessee. Regarding disallowance of the expenditure of Rs.87,47,333/- made by the A O on account of sundry expenses, rent, traveling expenses, car hiring expenses, telephone expenses, equipment hire charges, electricity charges, house maintenance, food charges, salary and hire charges of computers. The learned C IT (A) however, allowed the claim of the assessee in a sum of Rs.13,97,050/- and restricted the addition to Rs.73,50,283/-. The Revenue as well as assessee are in appeal. Briefly, the facts on this issue are that during the year under consideration, the assessee had reimbursed SCIL(sub contractor) , a sum of Rs.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 Rs.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 assessee laid out and expended the expenditure wholly and exclusively for the purpose of the business. The said expenses reimbursed to the sub contractor should not be disallowed. It was submitted that the A O overlooked the fact that the expenses 38 relating to personnel of the assessee had been specifically provided in part 2 of Schedule 6 to the sub contract agreement and the assessee had contractually agreed to bear the same with the sub contractor. The learned C I T (A) reproduced 6th Schedule in the impugned order. The learned C I T(A) considering the fact that the expenditure are to be borne by sub contractor confirmed the disallowance of Rs.73,50,283/-. However, for electricity charges, house maintenance, mess food charges and wages to the staff amounting to Rs.13,97,050/- were found to be covered by part 2 of 6th Schedule and accordingly addition was deleted.
17. Learned D R relied upon order of the A O and submitted that it was the responsibility of the sub contractor to incur the expenditure, therefore, the learned C I T (A) should not have allowed part deduction. On the other hand, learned Counsel of the assessee reiterated the submission made before the authorities below and submitted that the issue is same which is considered on the other grounds of appeal and the order in that case may be followed.
18. We have considered rival submissions and material available on record and find that the issue is squarely covered by our earlier order on issue No.1 in which we have deleted the entire addition. The learned C I T (A) without considering 6th Schedule in proper perspective restricted the addition because it was the duty of the assessee to provide facility and services at its own cost for the completion of the project. Considering our earlier finding in this order and by following the same, we set aside the orders of authorities below and delete the entire addition of Rs.84,47,333/-. As a result, departmental stands dismissed. Appeal of the assessee on this issue is allowed.
3919. As a result, departmental appeal in ITA No.46/Ahd/2007 is dismissed. The appeal of assessee in ITA No.52/Ahd/2007 is allowed.
ITA No.47/Ahd/2007 ITA No.53/Ahd/2007Assessment Year :1999-2000
20. Both the cross appeals are directed against the order of the leaned Learned Commissioner of Income Tax (Appeals)-VI, Baroda dated 21-10-2006 for Assessment Year 1999-2000.
21. The Assessing Officer made the addition of Rs.5,31,21,689/- on account of disallowance of Head Office expenses. The A O also made the addition by disallowing Rs.1,76,74,225/- on account of Head Office expenses u/s 44C of the IT Act. The A O also disallowed Rs.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 Rs.2,71,35,886/- i.e. Rs.13,56,792/- and balance of Rs.2,57,79,092/- was confirmed. On the same analogy, the other expenses were allowed at 5% and the balance Rs.63,42,007/- was confirmed. Similarly, addition of Rs.1,12,93,497/- was confirmed . Section 44C was also applied. The addition of Rs.64,34,386/- was also confirmed. However, in regard to recruitment and finance charges amounting to Rs.1,70,17,156/-, it was noted that the same could not be established in assessment or in appeal that such expenses were incurred specifically for Dahej Project. These expenses were, therefore, restricted as per provisions of Section 44C of the IT Act. The Learned Commissioner of Income Tax (Appeals) however, deleted the addition of Rs.22,38,550/-. As 40 regards addition of Rs.1,65,95,402/- is concern, the Learned Commissioner of Income Tax (Appeals) allowed the appeal of the assessee to the extent of Rs.21,90,835/- as pre part 2 of 6th Schedule and balance of Rs.1,44,04,568/- was disallowed. The Revenue is in appeal on five grounds of appeal challenging (I) the orders of C I T(A) in allowing 5% deduction out of total salary of Rs.2,71,35,886/- i.e. Rs.13,56,794/-, (2) challenging the finding on recruitment charges of Rs.18,92,764/-, (3) challenging the deletion of addition of Rs.22,38,550/- and (4) challenging the deletion of addition of Rs.21,90,835/- on account of electricity, mess food charges and wages to staff. The assessee is similarly in appeal challenging that (1) the learned Commissioner of Income Tax (Appeals) has erred in holding that out of expenses of Rs.5,31,21,689/-reimbursed to Head Office only 5% of the expenses of Rs.2,71,35,886/- in respect of salaries of expatriates and 5% of the expenses of Rs.66,76,639/- in respect of expenses like air fare for the expatriates can be considered to be towards supervision. The Learned C I T(A) has also erred in considering the sum of Rs.64,34,386/- comprising of sundry expenses of Rs.61,22,903/- and computer expenses of Rs.3,11,483/- (included in Rs.5,31,21,689/-) as the responsibility of the sub contractor. The learned C I T (A) has thus confirmed the disallowance of Rs.5,14,32,063/-, (2) The learned C I T(A) has erred in treating the expenses amounting to Rs.1,70,17,156/- (comprising of finance charges of Rs.1,51,24,392/- and recruitment expenses of Rs.18,92,764/-) 'reimbursed to Head Office' for Dahej Project as 'head office expenditure' covered by the provisions of Section 44C of the Income Tax Act, 1961 and (3) the learned C I T(A) has erred in disallowing an amount of Rs.1,44,04,368(representing sundry expense, rent, traveling expenses, telephone and part of equipment hire charges) expenses out of Rs.1,65,95,403/- that have been reimbursed to Kvaerner Cementation India Ltd. Pursuant to the provisions of Sixth Schedule of sub contract Agreement dated 18- 41 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 allowed and the departmental appeal in ITA No.47/2007 is dismissed.
ITA No.48/Ahd/2007 ITA No.54/Ahd/2007Assessment Year: 2000-2001
24. Both the cross appeals are directed against the order of Learned Commissioner of Income Tax (Appeals)- VI, Baroda dated 31-10-2006 for Assessment Year 2000-2001.
25. The learned Counsel for the assessee did not press ground No.8 in the appeal of the assessee. Same is dismissed. Ground No.10 is for charging of the interest u/s 234B of the IT Act, which according to learned Counsel for the assessee is consequential in nature. Ground Nos. 5 and 6 in the appeal of the assessee are 42 general, argumentated and connected with ground Nos. 1 to 4, therefore, no specific findings are required on the same.
26. The departmental appeal is filed on the following grounds:
"1. The C I T(A) has erred in law in allowing 5% of total salary of Rs.3,53,95,387/-, i.e. Rs.17,69,769/- on the basis of guess-work, when the assessee has failed to establish the veracity of the claim.
2. The C I T(A) 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. The C I T(A) has erred in law and on the facts and in the circumstances of the case in holding that the provisions of section 44C of the I T Act, 1961 are applicable to Courier, Printing & Recruitment charges of Rs.10,19,683/- and Personal taxes of Rs.1,09,70,601/-, disregarding the fact that this expenditure was incurred by the sub-contractor and not by the assessee.
4. The C I T (A) has erred on the facts and in the circumstances of the case in allowing head office expenditure of Rs.1,42,06,670/- for the Dabhol project, disregarding the provisions of section 44C, which have been invoked by the Assessing Officer as these expenses were clearly debited in the books of account of t he assessee as head office reimbursement.
5. The C I T(A) has erred on the facts and in the circumstances of the case in allowing electricity8m mess food charges & wages to staff of RS.13,23,790/- even though the same were incurred by the sub-contractor and not by t he assessee."
27. The appeal of the assessee on ground Nos. 1 to 4 read as under:
"1. The learned C IT-A has, erred in holding that out of expenses of Rs.4,83,71,219 reimbursed to Head Office only 5% of the expenses of Rs.3,53,95,387 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 43 learned C I T-A has erred in disallowing an amount of Rs.29,94,382 (comprising of sundry expenses of Rs.2,07,585, traveling expenses of Rs.24,10,860, care hire charges of Rs.3,75,937) expenses out of Rs.68,63,514 (included Rs.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 Rs.4,62,49,535/-.
2. The learned C I T-A has erred in holding that out of expenses of Rs.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 Rs.10,19,683 (comprising of courier charges of Rs.2,85,322, printing charges of Rs.62,456 and recruitment charges of Rs.6,71,095) 'reimbursed to Head Office' for Dahej Project as 'head office expenditure' covered by the provisions of section 44C of the Income Tax Act,, 1961 (the Act).
4. The learned C I T-A has erred in disallowing an amount of Rs.55,39,324 (comprising of sundry expenses of Rs.5,76,168, rent of Rs.8,35,001, traveling expenses of Rs.16,43,941, telephone expenses of Rs.4,03,884, part of equipment hire charges of Rs.2,98,499 and care hire charges of expatriates of Rs.20,07,396) expenses out of Rs.68,63,514 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."
28. The learned representatives of both the parties submitted that all the grounds in departmental appeal and ground no.1 to 4 in the appeal of the assessee as above 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.
29. On consideration of the submissions of the parties and findings of authorities below, we are of the view that all the grounds in 44 departmental appeal and ground no.1 to 4 in the appeal of the assessee as above 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 above in these grounds. As a result, appeal of the assessee in ITA No.54/Ahd/2007 on ground no.1 to 4 is allowed and the departmental appeal in ITA No.48/2007 on all 5 grounds is dismissed.
30. Ground No.7 in the appeal of the assessee reads as under:
"7. The learned CIT(A) has erred in confirming action of the learned Assessing Officer of making disallowance of Rs.1,42,85,226 u/s 40(a) (i) of the Act."
31. The facts on this issue are that the Head Office incurred expenditure in respect of professional and consultancy fees 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 45 40(a)(i) has a very wide scope where apart from specific item, phrase "or other sum chargeable under this Act" has been incorporated in the section which obviously makes very wide.
Assessee's claim by his submission dated 26/12/05 that the payments were the reimbursement to head office UK, so not liable for TDS is not correct. The assessee has received the services of these non-residents and made payment through head office. As per Income Tax Act and DT A provisions, it is the responsibility of assessee to deduct tax for the payment of fees for technical services for services related business activities related to India. The invoices received by company Head Office UK were sent to Indian office, which in turn made the payment/remittance to head office and head office made payments to these parties. It is clear that payments were made by the assessee through its head office to the parties and no TDS was deducted. Payment by Indian office to head office UK were against the invoices received for professional/consultancy services which were related to the business operation of the assessee. The assessee has supported his argument by the decision in the case of Decta Vs. CIT, 237 ITR 190. In this case assistant provided by Decta to Indian companies was not treated as fees for technical services because court held that it was merely implementation an agreement between the British Government and the Indian Government under which the former extends, through DECTA, all kinds of assistance to Indian companies for developing their products, their export potential and their export markets in Europe and other countries in the West. The facts of this case and the facts related to Assessee Company are different and the said decision is not applicable in the case of the assessee.
Alternatively, it is also necessary to mention here that since the Dahej Project was sub-contracted back-to-back basis to Skanska Cementation India Ltd. So as per sub-contract agreement and in the direction of ITAT also, it was the responsibility of sub-contractor to appropriately design and execute the sub-contract work. These payments were related to technical support and services for the execution of the project and as per subcontract act it was the responsibility of sub contractor, not of the assessee. Therefore, expenditure related to these services if the assessee has made voluntary payment therefore cannot 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 46 issue I hold that amount of Rs.1,42,85,226/- is disallowed. (Addition Rs.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 non- residents, 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 non- residents, as per section 90 of the Act, have the option to be taxed as per the provision of the tax treaty with India to the extent the said provisions are more beneficial. Accordingly, since the payments have been made to consultants based in the United Kingdom, the provisions of the India-UK tax treaty, shall apply to the extent the same are more beneficial. As per the India-UK tax treaty, the above payments will be regarded as FTS if the service rendered inter alia 'makes available' technical knowledge, skill, etc. or involve transfer of technical plan or technical design. On the same basis, it is submitted that the services provide by the foreign consultants do not make available any technical knowledge/skill, etc. to the assessee and hence the fees paid do not constitutes FTS liable to tax in India. Accordingly, since there is no income chargeable to tax in India, the provisions of section 195 are not attracted in the case of payments made to the foreign consultants, as a corollary, no disallowance under section 40(1) (i) is warranted in the assessee's case and the 47 same ought to be deleted. Reliance was placed on Raymond Limited Vs DCIT (80 TTJ 120) (Mumbai ITAT).
32. The Learned Commissioner of Income Tax (Appeals) considering the submission of the assessee noted that consultancy charges were paid to various foreign firms namely Beracley Consulting, Trett Consulting, Arthur Anderson, CMC Ltd., etc. These consultation charges are in respect of design and consultation for utilization for Dahej Project in India and it was responsibility of the sub contractor. In view of definition of technical fees under section 9
(a) (vii), Explanation 2, the place where the services is rendered is not material. It is only the place where the service is utilized that should be relevant. He has relied upon decision in the case of Wallace Pharmaceutical Pvt. Ltd. 278 ITR 97 (AAR) and dismissed the appeal of the assessee.
33. The learned Counsel for the assessee reiterated the submissions made before the authorities below. He has submitted that all the payments under consideration are reimbursement of expenses incurred by the then KCI Ltd. For the purpose of Dahej Project in India, so there is no income element and therefore, there was no obligation to deduct tax at source u/s 195 of the IT Act while making payments to non-residents. He has submitted that payee is not in India and no income accrued 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).
4834. 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 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 the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 :
Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub- section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Explanation.--For the purposes of this sub-clause,--49
(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;"
of 35.1 Section 195. [(1) the Act provides "Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest [***] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" [***]) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :
[Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode :] [Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.] Explanation.--For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.]"50
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 accordance with proposals approved by the Central Government before that date.] Explanation [2].--For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction , assembly, mining or like 51 project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".]"
36. Hon'ble Bombay High Court in the case of Clifford Chance Vs DCIT 221 CTR 1 (supra) held that Section 9 (1) (vii) ( c ) of the Act envisages two conditions to be fulfilled, services, which are source of income sought to be taxed in India must be (i) utilized in India and (ii) rendered in India. Thus the income of the assessee for services rendered in India and utilized in India as disclosed by the assessee in its return is only chargeable to tax in India to the exclusion of income from services rendered out of India.
37. Hon'ble Karnataka High Court in the case of Jindal Thermal Power Company Ltd. Vs DCIT 225 CTR 220 held " amount paid by the assessee to non-resident company for rendering technical services for commissioning of a power plant in India did not attract tax liability as the technical services were in the nature of theoretical formulation which could be rendered wholly offshore and outside India: however, 'start-up services' and 'overall responsibility' involve executory part of the contract which took place in India and therefore, assessee was required to effect TDS out of remuneration paid towards these services."
38. The assessee pleaded before the authorities below that all the payments were made to several parties outside India for reimbursement of expenses incurred by the then KCIL (UK) (sub- contractor) for the purpose of Dahej Project so there was no element of income. The assessee also claimed that due to the above fact, there was no obligation of the assessee to deduct tax at source u/s 195 while making payments to non-residents. A O has not brought any evidence or material on record that the recipients who got 52 payments through sub contractor were liable to tax in India. A O has also not brought about their status for receiving the payments. No efforts have 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 the profit & loss account, the same would show that these expenditures were spent by the assessee for itself for the purposes of its business. The A O has also not brought any evidence on record that the payees have any permanent establishments or business connection in India. In the case of Mahabir Commercial Company Ltd. Vs C I T 86 ITR 417 (SC), the Appellate Tribunal held that the sales took place in Pakistan and the income therefrom accrued to the appellant there. ON a reference the High Court held that, having regard to clauses (7 and (9) of the contract which provided respectively for non-acceptance of the documents and claim by the buyer in respect of quality or excess moisture and gave an option to the buyer to accept the goods with allowances or cancel the contract 53 in respect of the whole or part of the shipment, unconditional appropriation of the goods took place in India, notwithstanding the c.i.f terms, and the profits from the sales accrued in India. On appeal to the Supreme Court: Held, reversing the decision of the High Court, that the sales took place in Pakistan and therefore the profits derived therefrom arose outside India. There was nothing in the agreement which envisaged the property in goods being in the appellant even after the value of the invoice had been paid by the bank under the letter of credit in Pakistan. The condition in clause (7) was a condition where the buyers failed or refused to perform the contract altogether by not accepting the documents or in not paying against the documents. Even under clause (9) the condition was not a condition of the transfer of property.
Under the c. i. f. contract prima facie the property in the goods passes once the documents are tendered by the seller to the buyer or his agent as required under the contract. But, where the seller retains control over the goods by obtaining a bill of lading in his name or to his order, the property in the goods does not pass to the buyer until he endorses the bill to the buyer and delivers the documents to him. If however the seller's dealing with the bill of lading is only to secure the contract price not with the intention of withdrawing the goods from the contract, and he does nothing inconsistent with an intention to pass the property, the property may pass either forthwith subject to the seller's lien or conditional on performance by the buyer of his part 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 54 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 subsidiary could not be regarded as the agent of the non-resident company so as to attract the provisions of section 42(3). The assessee-company did not derive any income from business connection in India chargeable to tax under section 42."
The Hon'ble Madras High Court in the case of C I T Vs Fried Krupp Industries 128 ITR 27 (Mad.) held that - "there were no operation in India which wee attributable to the foreign company which could give rise to any profits being earned in India. The terms of agreement made it clear that none of the three types of activities of the foreign company resulted in business connection in India:
(i) The supply of machinery was to be on f.o.b. terms. The part played by the foreign company ended with putting the machinery on board and there was no operation by that company in India so as to envisage a business connection;
(ii) The supply of spare parts was also to be on f.o.b. terms, and, as in India to constitute business connection; and
(iii) So far as the deputation of the foreign personnel for erection machinery is concerned, such personnel became employees of th4e Indian company and the foreign company was not responsible or the erection of the machinery as such. It was not like a turnkey project where the responsibility of th4e foreign company 55 would continue till the machinery is actually run and proves its performance.
Thus, there was absolutely no operation in India which would give rise to a tax liability in India as far as the foreign company was connected and Tribunal was, therefore, right in its conclusion." Learned C I T(A) relied upon the decision in the case of Wallace Pharmaceutical Pvt. Ltd. (supra) in which applicant was a Indian Company and tax resident of India. Penser is tax resident of USA but operating internationally. It was found from facts that Penser has rendered consultancy services in India, therefore, consultancy fees was held to be deemed income of Penser in India. The facts of this case are therefore, clearly distinguishable from the facts of this case. Considering the facts on this issue and in the absence of specific finding and material brought on record by the A O, we do not find any justification to sustain the findings of authorities below. We accordingly set aside the orders of authorities below and delete the entire disallowance. As a result, ground No.7 in the appeal of the assessee is allowed.
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 Rs.26,03,24,147 in respect of camp units, Rs.2,57,14,870 in respect of camp equipment, Rs.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 56 claim to allow the deduction of Rs.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 office units 3,582,111
Total 302,621,297
In other words, the above expenditure included amongst other expenditure on construction of temporary housing units, storage tanks, sewage and drainage plants, construction of temporary roads etc. The A O has held that the above expenditure is capital expenditure since the amounts have been expended on creating a permanent structure of enduring nature. The A O has granted depreciation in respect of expenditure held to be capital in nature. Further, he has granted depreciation in respect of the temporary office units at the rate 100 percent. The assessee submitted that the project site at Dahej was located in a remote area, away from any city. Accordingly, to provide proper accommodation to its deputed employees, the assessee decided to set up temporary structures for their housing, sanitation, etc. This apart from saving travel time for the expatriates (who would otherwise have had to travel a long distance each day to get to the project site) also enabled the assessee to save the expenses on their hotel stay and conveyance. The assessee submitted that it is a normal practice in construction/infrastructure industry to provide onsite accommodation facilities to the employees engaged in the project execution. The project site of Dahej was located 60 Kms. Away from the nearest town where basic housing facilities existed. It, therefore, became 57 imperative for the contractor to provide temporary dwelling units onsite since making to and from trips daily from the nearest town was not reasonable. Such units were essentially meant to remain in existence only till the time the project would continue and thereafter, contractual obligations had to be dismantled as per clauses 15.3 and 17.1 of the contract between the assessee and Lingtec. Thus such units do not constitute any asset but are expenses solely incurred for the purpose of facilitating the business of the contractor. In this regard, the assessee relied on the following judgments:
(i) Empire Jute Co. Ltd. Vs C I T 124 ITR 1 (SC)
(ii) Bombay Steam Navigation Co. (P) Ltd. Vs C I T 56 ITR
52
(iii) Indian Ginning & Pressing Co. Ltd. Vs C I T 252 ITR 577 (Gujarajt)
(iv) Madras Auto Service (P) Ltd. Vs C I T 233 ITR 468 (SC)
(v) C I T Vs Associated Cement Companies Ltd. 172 ITR 257 (SC) The only benefit that was derived by the incurring the aforesaid expenditure was the 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 58 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 to be considered as capital assets, the same can, at best, be treated as 'temporary structures' as defined in Appendix I to the Income-tax Rules, 1962. The assessee should accordingly be entitled to depreciation at the rate 100 percent of the costs of camp units. In support of its contention that the camp units, equipments, etc. may be regarded as temporary units, the assessee wished to rely on the following decisions:
(i) Ram Prakash Contractor (93 Taxman 167) Jaipur Tribunal
(ii) Industrial Cables (India) Ltd. (254 ITR 267) (Punjab and Haryana High Court) Further, it was submitted that the A O has erred in so far as he has been inconsistent on the tax treatment being accorded in respect of various expenditures. Whereas the A O has granted 100% depreciation on temporary office units, he has not accorded the same treatment in respect of the camp units. This is notwithstanding that the camp units had also been setup on the same land as the temporary office units such land did not belong to the assessee and as per the undertaking given by the assessee to Lingtec, both these structures were to be dismantled on completion of the contract. The assessee humble submitted that the treatment accorded by the A O should be consistent of the same set of facts, and hence 100 percent depreciation should be allowed in respect of the camp units as well.
41. The learned C I T(A) considering the submission of the assessee held that expenditure is capital in nature and allowed only depreciation at the lower rate. The findings of the learned C I T (A) on this issue are reproduced as under:
"8.6.4.1 I have considered the contentions of the appellant and also the arguments of the Assessing Officer. It is submitted by the appellant that expenditure incurred by appellant for erection of temporary structure should be fully 59 allowed as these are revenue in nature and these expenditure were incurred to provide proper accommodation to its deputed employees at project site at Dabhol which was located in a remote area and that such expenditure saved travel time and also the expenditure on hotel stay. Further the said expenditure was essential till the time the project continued and that as per contractual obligation between the appellant and Lingtec the said structures were to be dismantled after the project was completed. An additional plea was advanced by the appellant that treatment 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 Rs.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 complete with bathroom shower and lounge v. Kitchen unit with canteen area vi. Recreation unit vi. Sewage treatment plant vii. Swimming pool ix. Temporary office facilities comprises of site office unit and its extension.
8.6.4.4. I have considered the submissions of the appellant as well as the argument of the Assessing Officer. The appellant had amortized Rs.5.26 crores on the opening of WDV of Rs.30.26 crores on camp unit, camp equipment, 60 furniture and fixtures and temporary office units in its books. Part of the expenditure in clearing the site and development of site roads is decidedly capital in nature as has been decided in the case of C I T Vs Gwalior Rayon - 196 ITR 149 (SC). Further the expenditure has been incurred to bring into existence assets of enduring nature and facilities such as swimming pool, sewage plant, kitchen area, site roads, recreation facilities and also built in air conditioning units etc. are a pointer in that direction. The enduring benefits need not be everlasting but could be at least for the duration of the project which is such a huge infrastructure project could stretch for years. Therefore the expenditure is held as capital in nature.
8.6.4.5 The second issue is whether these works can be terms as temporary in nature and as per Appendix I to the Income Tax Rules qualify 100% rate of depreciation. Under the head temporary structure the legislature has given an example of wooden structure and by giving such an example it has been made clear that life span of such structure is short otherwise it could fall under other categories of building. 8.6.4.6 Rate of 100% presupposes that life of such structure is less than a year. In the case of Triveni Engineering Works Vs DCIT - 86 TTJ 32 (Delhi) it has been held that to determine the nature of structure one has to look into the nature of material used in such construction. In that case expenditure were incurred on aluminum structure, aluminum partition and doors and door paneling which were held not eligible for 100% depreciation for the reason that life span of aluminum structure is more than wooden partition work. 8.6.4.7 In the instant case I find that type of construction and material used comprised of aluminum, iron, concrete, asbestos, fiber glass, etc. and thus by no stretch of imagination, these structures could be held akin to temporary wooden structures. The 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% : Rs. 5807256
Site Office @10% : Rs. 358211
Rs.32197882"
61
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 essentially meant to remain in existence only till the time the project would continue and thereafter it has to be dismantled. Therefore, such units do not constitute any asset but are expenses solely incurred for the purpose of facilitating the business of the contractor/assessee. He has relied upon following decisions:
(i) Empire Jute Company Ltd. Vs C I T 124 ITR 1 (SC) in which the members bidding themselves to work their looms for limited hours every week. One member purchasing loom hours from other member. Price paid was considered revenue expenditure.
(ii) Bombay Steam Navigation Company Pvt. Ltd. Vs C I T 56 ITR 52 (SC) in which the company taken over assets and allotting shares for part of price. Interest on balance of price was considered business expenditure and allowable deduction.
(iii) Indian Ginning & Pressing Company Ltd. Vs C I T 252 ITR 577 (Gujarat) in which assessee was having business assets namely godown which was used for the children of female employees. It was put to use for administrative office. Expenditure was incurred on the same for business purpose was held to be allowable deduction as revenue expenditure.
(iv) Madras Auto Service Ltd. Vs C I T 233 ITR 468 (SC) in which assessee taking premises on lease for 39 years. Premises demolished and new building constructed. New building belonging to the lesser but the assessee having user for it at very low rent. The assessee did not acquire any capital asset but used for business 62 advantage. The amount spent on construction was deductible as revenue expenditure.
(v) C I T Vs Premier Cotton Spinning Mills Ltd. 223 ITR 440 (Kerala) in which expenses lying for road, water tanks, drainage etc. were allowed as revenue expenditure.
(vi) South Eastern Coalfield Ltd. Vs C I T 260 ITR 1 in which expenditure incurred on widening of the road, street lights etc. for welfare of the employees was allowed as revenue expenditure.
(vii) DCIT Vs Sun Pharmaceutical Ltd. (judgment of Gujarat High Court dated 23rd March, 2009) (WS/PB 243) in which lease rent paid at nominal rate was considered as business expenditure.
Learned Counsel for the assessee, therefore, submitted that the above expenditure may be allowed as revenue expenditure and in the alternate submission submitted that since it was a temporary structure therefore, 100% depreciation may be allowed as allowed by the A O and relied upon several 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.
63The decisions relied upon by learned Counsel for the assessee clearly support the case of the assessee for allowing deduction on the expenses being revenue in nature. Hon'ble Supreme Court in the case of C I T Vs Tamilnadu Police Housing Corporation , 313 ITR (ST) 28, dismissed the departmental appeal in which assessee did not in construction building on leasehold land, acquired a capital asset but had only put up a construction of the building for business advantage, with the result that the entire construction cost was admissible as revenue expenditure. Considering the facts and circumstances noted above, in the light of the above decisions, it is clear that the amounts spent by the assessee on erection of the temporary structure, equipments, furniture and fixtures etc. at the site unit are revenue expenditure and the same shall have to be allowed as deduction. We accordingly set aside the orders of authorities below and delete the entire addition. In view of the above finding, there is no need to consider the alternate submission of the learned Counsel for the assessee for grant of depreciation. As a result, ground NO.9 of the appeal of the assessee is allowed.
44. As a result, departmental appeal in ITA No.48/Ahd/2007 is dismissed and the appeal of the assessee in ITA NO.54/Ahd/2007 is allowed partly.
ITA No.1665/Ahd/2008A. Y. 2000-01
45. This appeal by Revenue is directed against the order of Learned Commissioner of Income Tax (Appeals)-XXI, Ahmedabad dated 25.02.2008 for Assessment Year 2000-01, challenging the cancellation of penalty under section 271(1)(c) of the IT Act on the following grounds.
"1. The ld CIT(A)-XXI, Ahmedabad has erred in law in holding that the order passed u/s. 271(1)(c) r.w.s. 274 of the Act is bad in law and hence void ab initio having being passed beyond time prescribed u/s.275 of the Act.64
Ld CIT(A) has erred in deciding that subsection 275(1A) is not applicable in present case as the AO's order dropping the penalty is before the ITAT's order and before the effective date of application of provision of section 275(1 A). Section 275(1A) is inserted by Taxation Laws (amendment) Act -2006 w.e.f.
13/07/2006. Ld CIT(A) failed to appreciate that as on 13/07/2006, appeal was pending before the CIT(A) against the AO's order dated 06/01/2006 which is part of original order dated 12/03/2003 and section 275(1A) is clearly applicable in present case and AO's has rightly levied penalty within the time limit prescribed under section 275(1 A) of the Act.
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 re- adjudicate 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. The ld CIT(A)-XXI, Ahmedabad has erred in law and facts in holding that the AO has erred in passing the penalty order taking income determined vide order dated Jan 6, 2006 notwithstanding the fact that no mention of initiation of penalty with regard to additions was made in the said order. Ld CIT(A) failed to appreciate that penalty u/s 271(1 )(c) was initiated on all the issues in the assessment order dated 12/03/2003 and order dated 06/01/2006 is only to give effect to Hon"ble ITAT's direction.65
5. The ld CIT(A)-XXI, Ahmedabad has erred in law and facts in holding that the AO has erred in passing the penalty order taking income determined vide order dated January 6,2006 ignoring that many items which have been considered for levy of penalty did not find any mention in the notice dated March 12,2003. Ld CIT(A) failed to appreciate that penalty u/s 271(l)(c) was initiated on all the issues in the assessment order dated 12/03/2003 and order dated 06/01/2006 is only a modification to give effect to Hon'ble ITAT's direction and not the original order.
6 The ld CIT(A)-XXI, Ahmedabad has erred in holding that penalty proceedings are void ab-inito because AO failed to record his satisfaction before initiating the penalty u/s 271(c). Ld CIT(A) failed to appreciate that that no separate satisfaction is required to be recorded before initiating penalty proceedings.
7. On the facts and in circumstances of the case. The ld CIT(A)-XXI, Ahmedabad ought to have upheld the order of the Assessing officer.
8. It is therefore prayed that the order of the ld CIT(A) may be cancelled and that of Assessing Officer may be restored to the above extent."
46. The Learned Commissioner of Income Tax (Appeals) decided the appeal of the assessee which was directed against the order dated 31st May 2007 passed u/s. 271(1)(c) r.w.s 274 of the I.T. Act passed by the ACIT, Circle-6, Baroda levying a penalty of Rs.20,00,00,000.
Following were the grounds of appeal before Learned Commissioner of Income Tax (Appeals):-
1. The order passed u/s. 271(1)(c) read with section 274 of the Act is bad in law and hence, void ab initio having being passed beyond time prescribed u/s. 275 of the Act.
2. The learned AO has erred in disregarding the order passed by his predecessor on March 30, 2005 dropping the penalty proceedings in this very case.66
3. The learned 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 (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 Rs. 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 off relief allowed by CIT (A) vide his order dated October 31, 2006 of Rs.1,77,03,128) notwithstanding the fact that following items which have been considered for levy of penalty did not find any mention in the notice dated March 12, 2003 which is the basis for levy of penalty.
Particulars of additions Amount (Rs.)
Head office expenses (Dahej Project) 4,83,71,219
Expenditure incurred by head office 1,82,55,408
Expenditure incurred by sub-Contractor 68,63,514
67
Expenditure debited in P&L belonging to 1,09,70,601 sub-contractor Addition in respect of issue related to 18,17,33,526 Dabhol project.
7. The learned AO has erred in passing the impugned order taking income determined vide order dated January 6, 200o (net off relief allowed by CIT(A) vide his order dated October 31, 2006 of Rs. 1,77,03,128) notwithstanding the fact that the effect of the direction of CIT(A) contained in para 8.6.3.6 (pages 53 and 54) of the CIT(A)'s order dated October 31, 2006, was yet to be given, outcome of which could have a substantial effect on the income and consequently on penalty.
The Learned Commissioner of Income Tax (Appeals) noted the brief facts of the case in the impugned order that assessee is a company incorporated under the laws of United Kingdom, is mainly in the business of civil construction. The assessee had been awarded a contract in November, 1997 for the construction of a liquid chemical handling jetty at Dahej by M/s. Gujarat Chemical Port Terminal Company Limited; while another contract was awarded by Lingtec, USA for construction of LNG tanks at Dabhol in November, 1998. Return of income was filed on 28th November, 2000 declaring loss of Rs.23,31,81,901. The Assessing Officer passed the assessment order dated March 12, 2003 u/s. 143(3) of the Act determining total income at Rs.18,36,04,833. He rejected the book results by invoking section 145 of the Act and estimated the net profits at 6% of the total receipts. This resulted in an income of Rs.16,93,19,607. He also made further disallowance of Rs.1,42,85,226 u/s. 40(a)(i) of the Act. In this very order dated March 12, 2003, it was mentioned by the AO that penalty proceedings u/s. 271(1)(c) of the Act were also being 68 initiated for the concealment of income and for furnishing of inaccurate particulars of income. A notice dated March 12, 2003 u/s. 271(l)(c) read with section 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 Rs. 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 Rs.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 Rs.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 respect of deductions u/s. 44C of the Act, the aforesaid income was re-determined at Rs.18,24,34,770. The assessee preferred an appeal to the CIT(A) against the order of January 6, 2006. The CIT(A) decided the appeal vide his order dated October 31, 2006. The Assessing Officer passed an order on November 10, 2006 giving 69 partial effect to the CIT(A)'s order. The effect of the direction of the CIT(A) regarding batching plant's operating cost contained in para 8.6.3.6 (pages 53 and 54) of the order dated October 31, 2006 was not given in the, order dated November 10, 2006. Appeals to the ITAT have been filed by the assessee as well as the department on January 3, 2007.
46.3 The Assessing Officer passed the order u/s. 271(1)(c) r.w.s 274 of the Act and levied a penalty of Rs. 20,00,00,000. He worked out the amount of penalty leviable on the basis of the order dated January 6, 2006 and after making an adjustment of Rs.1,77,03,128 towards the relief allowed by the CIT(A), thus, considering the net amount of Rs.40,65,54,561 as the amount liable to levy of penalty. Feeling aggrieved by the order of the Assessing Officer dated May 31, 2007 levying penalty under section 271(1)(c) of the I.T.Act, the assessee preferred appeal before Learned Commissioner of Income Tax (Appeals). The copies of the submissions of the Assessee made from time to time were sent to the AO for his comments who vide his report dated 23 January, 2008 submitted his report. As noted above, assessee raised several legal and factual issues before Learned Commissioner of Income Tax (Appeals) for quashing of the penalty order. The first issue considered by the Learned Commissioner of Income Tax (Appeals) is as under:-
1. The order passed u/s. 271 (1)(c) read with section 274 of the Act is bad in law and hence void ab initio having being passed beyond time prescribed u/s. 275 of the Act.
The assessee vide his submissions dated 25th September, 2007 has submitted before Learned Commissioner of Income Tax (Appeals) which is reproduced as under:-
1.1 "Section 275 of the Act is reproduced below for your honour's ready reference.70
Bar of limitation for imposing penalties.--(1) No order imposing a penalty under this Chapter shall be passed--
(a) in a case where the relevant assessment or other order is the subject matter of an appeal to the Commissioner (Appeals) under section 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-matter of revision under section 263, after the expiry of six months from the end of the month in which such order or revision is passed;
(c) in any other case, 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 action for imposition of penalty is initiated, whichever period expires later.
(1A) 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 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 (Appeals) or the Appellate Tribunal or the High Court or the Supreme Court is received by the Chief 71 Commissioner or the Commissioner or the order of revision under section 263 or sect/on 264 is passed, an order imposing or enhancing or reducing or cancelling penalty or dropping the proceedings 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) or, the Appellate Tribunal or the High Court, or the Supreme Court or order of revision under section 263 or section 264:
Provided that no order of imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for the imposition of penalty shall be passed--
(a) unless the assessee has been heard, or has been given a reasonable opportunity of being heard ;
(b) after the expiry of six months from the end of the month in which the order of the commissioner (Appeals) or the Appellate Tribunal or the High Court or the Supreme Court is received by the Chief Commissioner or the Commissioner or the order of revision under section 263 or section 264 is passed:
Provided further that the provisions of sub-section (2) of section 274 shall apply in respect of the order imposing or enhancing or reducing penalty under this sub-section.
(2)........
Explanation.--In computing the period of Imitation for the purposes of this section, --
(i)....,...;
(ii)......,; 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......."
721.3 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 consequent to the order passed u/s, 143(3) of the Act on March 12, 2003, The order passed on March 12, 2003 is the relevant assessment or other order referred to in section 275 of the Act. The then learned CIT(A) decided our appeal against this order dated March 12, 2003 vide his order dated February 23, 2004.
1.4 In our case, proviso to clause (a) of sub-section (1) of section 275 of the Act would be relevant since the then learned CIT(A) passed his appellate 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 the CIT(A).
1.5 In view of above the order imposing the penalty ought to have been passed on or before March 31, 2005. This is based on the presumption that the order of the then learned CIT(A) passed on February 23, 2004 would have been received by the Chief Commissioner of Income Tax on or before March 31, 2004, since as per the Form No. 36 filed by the department in respect of its appeal to the Hon'ble ITAT against the order of the then learned CIT(A)passed on February 23, 2004, the date of communication of the order appealed against is mentioned as February 27, 2004 against the item No. 9 of the Form No. 36.
1.6 With regard to the then learned AO's contention that in view of the insertion of sub-section (1A) to section 275 of the Act penalty can be levied in the instant case, we have to submit that even sub-section (1A) of section 275 of the Act would not have any application in view of the following observations which are without prejudice to each other:
(i) Sub-section (1A) of the section 275 of the Act is inserted by the Taxation Laws (Amendment) Act, 2006 w.ef. July 13, 2006, and hence can not have any retrospective application. Relevant extract from the notes on clauses explaining the insertion of the sub-section (1A) to section 275 of the Act is reproduced below for your honour's ready reference.
"Clause 15 seeks to amend section 275 of the Income-tax Act relating to bar of limitation for imposing penalties.73
Under the existing provisions contained in the proviso to clause (a) of sub-section (1) of said section, in a case where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner(Appeals), and he passes the order on or after 1st 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 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 (Appeals) or the Appellate Tribunal or the High Court or the Supreme Court is received by the Chief Commissioner or the Commissioner or the order of revision under section 263 or section 264 is passed, an order imposing or enhancing or reducing or canceling penalty or passed on the basis of assessment as revised by giving effect to such order of the Commissioner (Appeals) or the Appellate Tribunal or the High Court or the Supreme Court or order of revision under section 263 or section 264. It is further proposed to provide that no order of imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for the imposition of penalty shall be passed after the expiry of six months from the end of the month in which the order of the Commissioner (Appeals) or the Appellate tribunal or the High Court or the Supreme Court is 74 received by the Chief Commissioner or the Commissioner or the order of revision under section 263 or section 264 is passed This amendment will take effect from the date on which the Bill receives the assent of the President."
(ii) Your honour would kindly notice from the highlighted portion that the amendment was to take effect from the date on which the Taxation Laws (Amendment) Bill, 2006 received the assent of the President which in the instant case is July 13, 2006. Based on the above, we have to submit that the insertion of sub-section (1A) of section 275 of the Act can not have any retrospective application. Strong reliance in this regard is placed on the decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax v. Varas International (P.) Ltd. [(2006) 154 Taxman 331], which has effectively held that for an amendment to a statute to be construed as being retrospective, the amended provision should itself indicate either in terms or by necessary implication that it is to operate retrospectively.
(iii) The relevant assessment or other order referred to in the said sub-section is the regular assessment order passed on March 12 2003 wherein the proceedings for the initiation of penalty u/s. 271(1)(c) r.w.s. 274 of the Act have been initiated. The appeal was tiled to the then learned CIT(A) against this order dated March 12, 2003 which was decided by the then learned CIT(A) vide his order dated February 23, 2004. An appeal to the Hon'ble ITAT by the appellant as well as by the department has 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 Rs.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. Particulars Authority Date of Section
No. passing order under which
the order the order
passed.
1 Regular assessment AO March 12, 143(3)
75
order 2003
2 Order in respect of CIT(A) February 250
appeal against AO's 23, 2004
order passed
u/s.143(3)
3 Order in respect of ITAT August 25, 254
appeals by the 2005
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).
4 Order giving effect to AO January 6, Order giving
the ITAT's directions. 2006 effect to the
ITAT's
directions.
5 Order in respect of CIT(A) October 143(3) r.w.s.
the appellant's appeal 31, 2006 254
against the AO's order
dated January 6,
2006 giving effect to
the ITAT's directions
6 Order giving partial AO November Order giving
effect to the CIT(A)'s 10, 2006 effect to the
directions Learned
Commission
er of Income
Tax
(Appeals)'s
directions
7 Order levying penalty AO May 31, 271(1)(c)
of Rs.20 crores 2007 r.w.s. 274
From the above table, your honour would kindly appreciate that except the order dated March 12, 2003 mentioned at Sr. No. 1 above, there was no other order which could be said to be an order referred to in the section 275 of the Act. We may further add that it was only in this order dated March 12, 2003 that the direction for the initiation of the penalty proceedings was given. No other order contained such a direction to initiate penalty proceedings u/s 271(1)(c) of the Act.
(iv) In other words, it is submitted that it was only up to the stage of the passing of the order by the Hon'ble ITAT on August 25, 2005 that the order of March 12, 2003 could be said to have any relevance. However, as stated earlier, for the purpose of applicability of the proviso appearing below clause (a) of subsection (1) of section 275 of the Act, the only relevant order is the order passed by the then learned CIT(A) on February 76 23, 2004 since it dealt with the issues arising out of the order of March 12, 2003 wherein the direction for initiation of penalty proceedings was given. The proviso referred to above mentions of the orders of the CIT(A) only, and, therefore, even the Hon'ble ITAT's order would not have any relevance. It appears from the date of the order passed by the then learned AO on May 31, 2007 levying the penalty of Rs.20 crores that the department seems to be taking false shelter of sub-section (1A) of section 275 of the Act by considering the order dated October 31, 2006 passed by the learned CIT(A) as the relevant order (assuming without admitting that the order of the learned CIT(A) passed on October 31, 2006 was received by the Chief Commissioner of Income Tax on or before November 30, 2006) for calculating the time limit of six months available as per sub-section (1A) of section 275 of the Act. This is also incorrect since the order passed by the learned CIT(A) on October 31, 2006 would not be an order relevant for the purpose of applicability of the limitation since it had nothing to do with the issues raised in the 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 of penalty pre-maturely (without any basis) and that too for an unknown amount.
77(vi) We may also add that we have not been provided with any opportunity of being heard as envisaged in clause (a) of the proviso appearing below sub- section (1A) of section 275 of the Act indicating that the penalty was sought to be levied on a sum of Rs. 40,65,54,561. Copy of the notice dated May 21, 2007 along with the notice dated March 12, 2003 referred to therein purporting to give fresh opportunity of being heard............. From the enclosed notices, your honour would kindly appreciate that there was no reference to the sum of Rs.40,65,54,561 intended to be considered for the levy of penalty in question of Rs.20 crores. In fact, the reference to the notice dated March 12, 2003 in the notice dated May 21, 2007 is an ample proof that the notice dated March 12, 2003 could never have visualized that the department was going to make an addition of Rs. 40,65,54,561.
In view of above, the order passed u/s. 271(1)(c) read with section 274 of the Act is bad in law and hence void ab initio having being passed beyond time prescribed u/s. 275 of the Act,"
The AO in his remand report commented as under.
"1) Assessee has taken the ground that the order passed is beyond the time limit prescribed u/s. 275 of the I.T. Act.
This ground has been dealt with by the A.O. in the para 2.5 of the penalty order and keeping in view of provision of sec 275(1) and sec 275(1A), the penalty order passed is within the time limit prescribed and is not barred by limitation, "
"4.1 Without prejudice to the above section 275(1A) is inserted by the Taxation Law Amendment Act 2006, an order imposing penalty can be passed within 6 month from the end of month in which the order is received by the commissioner even if the order regarding imposing or enhancing or reducing or canceling penalty or dropping the penalty proceedings have been passed."
The appellant, vide its submissions dated January 31, 2008, in response to AO's remand report has submitted as under.
"1.1 We have vide our submissions dated 25th September, 2007 with regard to the Ground No.1 of our appeal made various submissions to bring home the 78 point that that the order passed u/s. 271(1)(c) r.w.s. 274 of the Act is baa in law and hence void ab initio having been passed beyond time prescribed u/s. 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 hearing of appeal that the AO has in his order dated 12-03-2003 mentioned following items as having been included in the imputed profit of 6%.
- Loss on collapse of still piles Rs.14,37,78,195 - Non availability of vouchers Rs. 12,24,099 - Donation Rs. 1,28,499 - Disallowance u/s.40(a)(i) Rs. 1,42,85,226
However while passing the order dated 31-05-2007 out of the aforesaid four items following two items only were included along with other items (which were never mentioned in the order dated 12-03-2003) for the purpose of penalty:
- Loss on collapse of still piles Rs.14,37,78,195
- Disallowance u/s.40(a)(i) Rs. 1,42,85,226 In other words, the AO has not mentioned the following two items which were considered in the order dated 12-03-2003 as being included in the imputed profit of 6%.79
- Non availability of vouchers Rs.12,24,099
- Donation Rs. 1,28,499
The appellant has further argued that in the order dated 31-05- 2007 the learned AO added five more following items.
- Head office expenses(Dahej Project) Rs.4,83,71,219
- Expenditure incurred by head office Rs.1,82,55,408
- Expenditure incurred by sub-contractor Rs.68,63,514
- Expenditure debited in P& L belonging
to Sub-contractor Rs.1,09,70,601
- Addition related to Dabhol project Rs.18,17,33,526
Based on above, the appellant has argued that the order dated 31-05-2007 passed by the learned AO after set aside by AO giving effect to the ITAT's direction is completely a new order and is on new basis. Moreover, in the order dated 12-03-2003 book results were rejected while in the order dated 31-05-2007 book results have been accepted".
46.4. The Learned Commissioner of Income Tax (Appeals) considering the submissions of appeal and material available on record held that the penalty order is bad in law and is void ab initio.
His findings are reproduced as under:-
"I have carefully considered the submissions of the appellant as well as AO's comments, I hold as under.
I have gone through the arguments of the appellant and written as well as oral submissions made from time to time.
As regards, appellant's argument that the order dated 31-05- 2007 passed by the AO being a new order for the reasons mentioned above, I have noted that the AO has dropped the penalty proceedings vide his order dated 30.03.2005 after the CIT(A) has passed the order on 23.02.2004 but 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 80 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 the CIT(A). In view of this, the order imposing the penalty ought to have been passed on or before March 31, 2005 considering that the order of the CIT(A) passed on February 23, 2004 was received by the Chief Commissioner of Income tax on February 27, 2004.
The AO seems to have considered the order of the CIT(A) passed on 31st October, 2006 as the basis for determining the time limit of six months referred to in proviso to sub-section (1A) of section 275 of the Act. The action of the AO in considering the aforesaid order of the CIT(A) is not correct since the said order of the CIT(A)is in respect of the appeal filed by the appellant against the order dated January 6, 2006 which was passed to give effect to the directions of the ITAT contained in the consolidated order dated August 25, 2005.
The aforesaid order of the CIT(A) had nothing to do with the initiation of penalty and hence cannot form the basis of determining the time limit.
I agree with the appellant's arguments that sub-section (1A) of the section 275 of the Act is inserted by the taxation Laws (Amendment) Act, 2006 w.e.f. July 13, 2006 and hence can not have any retrospective application. The appellant has correctly established this by reproducing from clause 15 from notes on clauses explaining the insertion of the sub-section (1A) to section 275 of the Act.
In view of above, I am inclined to hold that the impugned order passed u/s. 271(1)(c) r.w.s. 274 of the Act is bad in law and void ab initio.
47. The Learned Commissioner of Income Tax (Appeals) as regards the other issues noted the submissions of the assessee, findings of the Assessing Officer and ultimately held on several issues that penalty is not leviable in the matter. Learned Commissioner of Income Tax (Appeals) considering the judgements of the Supreme Court in the case of UOI Vs. Food Specialities Ltd. 97 ELT 402 and Premier Cable Company Ltd. Vs. UOI 134 ELT 615 held that once an order of the Assessing Officer dropping the penalty 81 proceedings vide order dated 30.03.2005 is neither challenged nor revised, it attained the final appeal and no different view could be taken in the matter. It was open to the Assessing Officer to initiate penalty proceeding while given appeal effect to the direction of the ITAT in his order dated 6.01.2006 but the Assessing Officer failed to do so. Learned Commissioner of Income Tax (Appeals) also 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 Tax (Appeals) on the issue of batching plant expenses noted that the addition is modified and was subjected to verification by the Assessing Officer therefore, on such matter of disallowance of expenditure, penalty cannot be imposed. The learned Commissioner of Income Tax (Appeals) also noted that the notices for imposition of the penalty were issued on 12.03.2003 and 23.07.2004 and thereafter, only one letter is issued calling explanation of the assessee and penalty was dropped on 30.03.2005 82 and thereafter, no subsequent notices issued to the assessee. Therefore, penalty is void ab initio. The Learned Commissioner of Income Tax (Appeals) ultimately considering various issues and after giving findings of the same, set aside the penalty order and deleted the entire penalty. Appeal of the assessee accordingly allowed. The Revenue is in appeal on the above grounds.
48. Learned Departmental Representative relied upon the order of Assessing Officer levying the penalty. He has submitted that Assessing Officer rightly imposed the penalty on the basis of the findings of the Tribunal and the provisions of section 275(1A) squarely applies to the case of the assessee because the original proceedings were pending for penalty before the Assessing Officer. Learned Departmental Representative submitted that the Learned Commissioner of Income Tax (Appeals) has not decided the appeal on merits. He has submitted that Assessing Officer dropped the penalty proceedings because of the appeals pending before the Tribunal. He has submitted that since penalty matter was pending, therefore, Learned Commissioner of Income Tax (Appeals) was not justified in canceling the penalty.
49. On the other hand learned Counsel of assessee has reiterated the submissions made before authorities below and referred to the several dates of different orders and submitted that the Assessing Officer dropped the proceedings under section 271(1)(c) of the I.T.Act on 30.03.2005 and no fresh penalty proceedings are initiated, therefore, Learned Commissioner of Income Tax (Appeals) was justified in cancelling the penalty. He has submitted that the Assessing Officer in the later assessment order dated 6.01.2006 did not initiate the penalty proceedings under section 271(1)(c) of the Act and no satisfaction has been recorded in the assessment order therefore, penalty cannot be levied on the basis of additions made 83 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 Rs.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 section 271(1)(c) of the Act. He has submitted that since the assessee disclosed all the particulars of income, therefore, it is not a case of concealment of particulars of income or filing inaccurate particulars of income. He has submitted that Learned Commissioner of Income Tax (Appeals) rightly deleted the penalty in the matter.
50. We have considered the rival submissions and bestowed our careful consideration and do not find any justification to interfere with the order of the Learned Commissioner of Income Tax (Appeals) in canceling the penalty. The facts and the dates of various orders of assessment, Learned Commissioner of Income Tax (Appeals) and the Tribunal are not in dispute. It is admitted that that the Assessing Officer dropped the penalty proceedings under section 271(1)(c) of 84 the Act on 30.03.2005. The Assessing Officer initiated the penalty proceedings in the assessment order dated 12.03.2003 under section 143(3) on the issue of estimate of net profit and disallowance under section 40(a)(i) of the I.T.Act. The Learned Commissioner of Income Tax (Appeals) decided the appeal on 23.02.2004 and reduced the net profit to 1.8% from 6% adopted by the Assessing Officer and also deleted the addition under section 40(a)(i) of the I.T.Act. The issue of claim of loss on collapse of steel piles was subject matter in earlier assessment order on which addition is confirmed but the Assessing Officer dropped the penalty proceedings on the entire matter on 30.03.2005. The Cross appeals of the assessee and revenue have been decided by the Tribunal on 25.08.2005. The Assessing Officer passed the order as per direction of the Tribunal on 6.01.2006 on which no penalty proceedings under section 271(1)(c) of the Act have been initiated. It would show that the Assessing Officer dropped the penalty proceedings vide order dated 30.03.2005 after the order passed by the Learned Commissioner of Income Tax (Appeals) dated 23.02.2004 but before order of ITAT dated 25.08.2005. Learned Commissioner of Income Tax (Appeals) was therefore justified in holding that the provisions of section 275(1A) of the Act cannot be invoked since the Assessing Officer's order dropping the penalty proceeding is passed after the Learned Commissioner of Income Tax (Appeals)'s order and not before. The provisions of section 275(1A) of the Act is not applicable in this case because penalty proceedings 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 85 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 275(1A) of the I.T.Act but such is not the correct matter because the order of the Learned Commissioner of Income Tax (Appeals) has nothing to do with the initiation of the penalty. We may also note that the provisions of section 275(1A) of the I.T.Act have been inserted in the statute by the Taxation Laws (amendment) Act, 2006 w.e.f. 13.07.2006, therefore, the same cannot have any retrospective effect. The Learned Commissioner of Income Tax (Appeals) was therefore, justified in holding that the impugned order is bad in law and void ab initio because the penalty order should have been passed on or before 31.03.2005 which is not so in the matter.
51. In view of the above findings, there is no need to give further finding in the matter, however, for the finality of the matter, we may also note that the earlier assessment order was not in force which is the basis of initiation of the penalty proceedings because it was set aside by the Tribunal except on the issue of loss on steel piles on which also the matter is stated to be subjudice before Hon'ble High Court. The second assessment order dated 6.01.2006 does not find mention initiation of penalty proceedings under section 271 (1)(c) of the I.T. Act. Section 271(1)(c) of the I.T. Act provides for 86 penalty if the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, may direct that such persons shall pay by way of penalty. The language of the above section clearly provides that the initiation of the proceedings for penalty should be made in the course of proceedings under this Act and the satisfaction of the Assessing Officer should also be discernable from such proceedings. However in this case, there is nothing in the order dated 6.01.2006. The Assessing Officer could have initiated the fresh penalty proceedings after receipt of the order of the Tribunal, but Assessing Officer did not do so. No review of the order is permitted under the I.T. Act by the Assessing Officer. The additions now made by the Assessing Officer in the order dated 6.01.2006 are not part of the show cause notice and no fresh notice is issued for initiating the penalty proceedings against the assessee. The result would be that the Assessing Officer dropped the proceedings for penalty on 30.03.2005 and thereafter, did not initiate the penalty proceedings. Therefore, Learned Commissioner of Income Tax (Appeals) was justified in deciding the issue in favour of the assessee and against the revenue department. We may also note that substantial additions on merits have been deleted in this order while considering the cross appeals on merits. Therefore, nothing survives in favour of the revenue for levy of the penalty. Considering the facts and circumstances, in the light of the findings of the Learned Commissioner of Income Tax (Appeals), we are of the view , Learned Commissioner of Income Tax (Appeals) was justified in canceling the penalty under section 271(1)(c) of the I.T.Act. We do not find any merit in the departmental appeal, the same is accordingly dismissed.
8752. In view of above discussion, Departmental Appeal in ITA 1665/ahd/2008 is dismissed.
53 No other points is argued or pressed by both the parties.
54. As a result, all the departmental appeals are dismissed. However, appeals of the Assessee in ITA No.52, 53/Ahd/2007 are allowed and Appeal of Assessee in ITA No.54/Ahd/2007 is partly allowed.
Order pronounced in the open court on 5th March, 2010.
Sd/- Sd/-
(Dr. O. K. NARAYANAN) (BHAVNESH SAINI)
VICE PRESIDENT JUDICIAL MEMBER
Date : 05/03/2010
Lakshmikant/Paras
Copy of the order forwarded to :
1. The Respondent
2. The DCIT, (Appellant).
3. The CIT concerned
4. The CIT(A)-III, Ahmedabad.
5. The DR, ITAT,
6. Guard File
BY ORDER
//True Copy//
DY.R/AR, ITAT, AHMEDABAD