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Income Tax Appellate Tribunal, DELHI
Before: SH. ANIL CHATURVEDI & SH. ANUBHAV SHARMA
The assessee has filed this appeal against the order dated 29.12.2017 in appeal no. 334/2016-17 passed by the Commissioner of Income Tax (Appeals)- 43, New Delhi (hereinafter referred to as the ‘Ld. FAA’) against assessment order dated 28.03.2006 passed by Dy. Director of Income Tax, Circle 2 (International Taxation), New Delhi (hereinafter referred to as the ‘Ld. AO) u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) for the assessment year 2003-04.
The facts in brief are the appellant, Wuhan Research Institute of Post & 2. Telecommunication, China (WRI) is into the business of manufacturing and sale of telecom related equipments. The Appellant was awarded a contract for supply, installation and commissioning of telecom system for LANCO project at Rajahmundry, A.P., India by Gas Authority of India Limited. The order was on “Single Point Total Responsibility of the Seller” basis and to execute the project, WRI set up a project office in India after taking approval of the Reserve Bank of India. The appellant claims that the contract was executed in the previous year relevant to the assessment year 2003-04. 2.1 The return of income for the A.Y. 2003-04 was filed by the appellant on 2.12.2003 declaring a total income of Rs. 54,43,112/- the case was selected for scrutiny and the Assistant Director of Incpme Tax, Circle 2(2), International Taxation, New Delhi completed the assessment by passing an order on 28.3.2006 under section 143(3) of the Income Tax Act, 1961 at taxable income of Rs. 99,15,289/-.
2.2 The Assessee has claimed that the parent company of the appellant deputed some of its personnel specifically for the project and some of them visited India for short durations to facilitate execution of the order. Salaries proportionate to the time devoted for the project amounting to Rs.16,86,128/- ( including for time spent in India by those employees) were charged to the project office by the Head Office Since the salaries paid to those employees proportionately for time spent in India were below taxable limits, no tax was payable in India and therefore no tax was deducted at source by the Appellant. 2.2.1 However, the Learned A.O. disallowed the entire expenses of Salaries of Rs. 16,86,128/- under section 40(a)(iii) of the Income Tax Act, 1961. 2.3. The Assessee has claimed that the Appellant engaged M/s. Ultro Technologies India Private Limited to help it in procuring and executing the order and paid commission of Rs. 19,33,872/- to it on agreed terms and conditions. The services were provided by the agent through out the term of execution of the project. 2.3.1 However, the Learned A.O. disallowed the entire expenses terming it as pre-project expenses. 2.4 The Assessee has claimed that the H.O. of the appellant claimed certain expenses amounting to Rs. 42,60,897/- incurred by it relating, to the project. The expenses were based on the audited statement of accounts sent by the H.O. to the appellant. Copy of the audited accounts as well as the details of the expenses were filed with the assessing office during the assessment proceedings of the case. 2.4.1 The Learned A.O. disallowed an amount of Rs. 8,52,179/- as 20% of the total expenses on adhoc basis assuming that such expenses would have been incurred for period prior to establishment of the project office. 2.5 Lastly the Assessee has claimed that the contract executed by the appellant included an amount of Rs.36,25,700/- paid to it towards Training fee which was in the nature of technical service fee and as such would have been taxed as provided in sub-clause(B) of clause (b) of subsection(1) of section 115A of the Act. The fact was brought to the notice of the Assessing Officer during the assessment proceedings of the case but no action was taken by the Learned A.O. on the issue.
The Ld. First Appellate Authority had allowed the challenge of disallowance of Rs. 16,86,128/- made by the AO however, the remaining grounds of challenge were rejected while partly allowing the appeal. So the assessee has raised following grounds of appeal before this Tribunal:- “1. That on the facts and in the circumstances of the case, the Learned ClT(Appeals)-43, New Delhi (hereinafter called as C1T(A) for short] erred in confirming the action of the AO in disallowing Rs. 19,33,872/- being commission paid by the appellant to M/s Ultro Technologies (India] Pvt. Ltd., treating the same as pre-project expenditure.
2. That on the facts and in the circumstances of the case, the Learned CIT(A] erred in confirming the action of the AO in disallowing an expenditure of Rs. 8,52,179/- out of Tour, Travelling and Conveyance expenses on ad-hoc basis and treating the same as preproject expenditure.
3. That without prejudice to the Ground at No. 2, the CIT(A] erred in confirming the disallowance made by the AO which is arbitrary, unjust and very excessive.
4. That on the facts and in the circumstances of the case, the Learned CIT(A] has erred in confirming the action of AO in not treating the training fee of Rs, 36,25,700/- which falls under the definition of technical service fee as taxable under sub-clause (B] of clause (b] of Section 115A(1] of the Act and taxing the same as business receipts of the appellant.
5. That the appellant craves liberty to add, amend, vary or modify any grounds of appeal whether before the hearing or during the course of hearing.”
Heard the counsels for the assessee and ld. Sr. DR for the revenue and perused the record.
Ground no 1.
On behalf of the assessee in regard to ground no. 1, three fold arguments were raised. The first being that the copies of bill filed in the paper book (page no. 24 and 25) show that the bills were raised on 10.07.2002. Thus, the same is pertaining to the relevant assessment year 2003-04. It was further submitted that the bills mention that in response to agreement dated 25.03.2002 the debit note has been prepared by the Gas Authority of India Ltd. It was submitted that this bill is after the contract received from GAIL Ltd. So, the same cannot be alleged to be pre-operative expenses. Lastly, Ld. Counsel for the assessee relied judgment of Hon’ble Rajasthan High Court in Additional Commissioner of Income Tax vs. FARASOL Ltd. 63 ITR 364 to contend that as the contract was in the nature of single transaction and expenditure has been claimed by the assessee to be expenditure incurred in connection with the contract. The said expenditure cannot be considered preliminary expenses. Ld. Sr. DR submitted that assessee failed to establish the expenses were wholly and substantially necessary for the business and he relied the findings of ld. Tax Authorities below. 5.1 In regard to this ground it can be observed that the agreement dated 25.03.2002 with the said service provider M/s. Ultro Technologies (India) Pvt. Ltd. has not been filed with the paper book while agreement dated 01.01.2002 with GAIL Ltd. has been placed on record at page no. 26 to 31 of the paper book. However, the same has no reference of any intermediary or agency being involved in grant of the work order. 5.2 Therefore, the agreement dated 25.03.2002 was relevant piece of evidence to understand what was the nature of services and for which period of those services the commission was paid to M/s. Ultro Technologies (India) Pvt. Ltd.. During hearing the Bench has sought the agreement however, the Ld. Counsel for the assessee stated at Bar that as the agreement pertains to such of far of period of 2002, the same is not available and cannot be produced before the Bench. That being so the findings of Ld. AO or Ld. First Appellate Authority that the expenses were pre project expenditure cannot be interfered. 5.3 Rather the Assessee has claimed that the it engaged M/s. Ultro Technologies India Private Limited to help it in procuring and executing the order but it is strange that the agreement with GAIL Ltd. was executed on 01.01.2002 while the debit note for commission has been raised by Ultro Technologies (India) Pvt. Ltd, in terms of agreement dated 25.03.2002. So, the onus was on the assessee to establish what were the agreed terms and conditions or services which were provided by the agent during the term of execution of the project but the same is not established. Thus, the law relied is distinguishable on matter on record and there is no substance in the ground 1 to differ with the findings of Ld. Tax Authorities below. The same is determined against the appellant. Ground No. 2 and 3
In regard to these grounds Ld. Counsel for the assessee submitted that without any substantive reasoning arbitrarily the ld. AO had made disallowance to the extent of 20% of the expenditure relating it to period prior to the setting of PO in India. In this context, Ld. Sr. DR has relied the findings of ld. Tax Authorities below.
6.1 In regard to this addition of travel and conveyance expenses there appears to be no justification to estimate 20% of the expenses being related to pre-operative period. The Ld. FAA has observed that assessee has not given any substantive evidence to refute or reject the estimation made by the Ld. AO while confirming the disallowance. While the ld. AO observed in his assessment order that the complete details of Tour, Travelling & Conveyance expenses are not available. Therefore, when it is not possible to verify if the expenditure were incurred after the establishment of project office or before the establishment of project office, then there is no justification to proportionately appropriate 20% of the expenditure to prior period expenditure. The same being merely whimsical and sustaining it the Ld. FAA has also erred therefore in regard to these grounds the order of ld. Tax Authorities below cannot be sustained and the grounds are allowed.
GROUND NO. 4
In regard to this ground it was submitted on behalf of assessee by the Ld. Counsel that the ld. Tax Authorities below have erred in invoking provisions of Section 44DA of the Act as the same came into operation from 31.03.2003 only. However, Ld. Sr. DR submitted that the ld. AO had made additions only on 3 counts and no addition was made in regard to present ground. It was clarified on behalf of the assessee that before the ld. First Appellate Authority it was put up in statement of facts that the contract executed by the appellant included an amount of Rs. 36,25,700/- paid to it towards training fee which was in the nature of technical service fee for the purpose of sub clause (B) of Clause (b) of Section 115 A(1) of the Act however has not considered it.
7.1 In regard to this ground, the bench is of considered opinion that as assessee claims this ground was raised before the Ld. AO who failed to determine while passing the assessment order and Ld. First Appellate Authority has invoked the provisions of Section 44 DA of the Act which had come into effect prospectively from 21.03.2003 only therefore, for the relevant assessment year 2003-04 the same was not applicable. Consequently this ground deserves to be allowed for statistical purposes only with the direction to the Ld. AO to consider the claim of assessee with regard to exemption of training fee income of Rs. 36,25,700/- and to that extent the ground is allowed and issue is restored to the file of the Ld. AO.
As a consequence of aforesaid discussion, the appeal of assessee is partly allowed.
Order pronounced in open court on this 07 day of April, 2022.