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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य, राजे�� राजे�� केकेकेके अनुसार अनुसार/ Per Rajendra A.M.- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order,dated 12/12/2006,of the CIT (A)-IX, Mumbai, the Assessing Officer (AO) has filed the present appeal.Assessee-company,engaged in business of management services, filed its return of income on 31/10/2002,declaring total income of Rs.1.32 crore.The AO complet -ed the assessment,on30/03/2005,u/s.143(3)of the Act,determining its income at Rs.11.65 crores.
2.First ground of appeal is about deleting the disallowance made by the AO u/s.40(a)(i) of the Act.During the assessment proceedings,the AO observed that the assessee had paid technical service fees to Bouyhues Offshore,Paris (BOP)without paying the tax deducted at source on such payments.Referring to the provisions of section 40(a)(i), the AO held that payments were made outside India for technical service fees,that tax was not create on such payment, that the payment made by the assessee was not allowable for the purpose of computing the taxable income. Finally,he made a disallowance of Rs. 10.33 crore.
2.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA)and made elaborate submissions in that regard. It also relied upon certain case laws and the order of the tribunal in the case of Hazira Marine Engineering and Construction Management Private Ltd. for the AY. 2002-03,wherein similar issue was deliberated upon.After considering the available material,the FAA held that the assessee had deducted tax on such technical service out of which part payment of such tax was deposited within the time allowed
M/s.Hazaria Cryogenic Engineering and Construction Management Pvt. Ltd., u/s. 200 of the Act, that the AO had held that entire tax was not paid by the assessee and that amount in question was not deductible. He referred to proviso to the section 40(a)(i) and held that same would not be applicable if the assessee would either deduct tax or would be such tax,that even if one condition was fulfilled no disallowance could be made,that the proviso also supported the same proposition, that it referred to either payment for deduction, that if the assessee would not deduct or pay the amount during any preceding year and subsequently if it would deduct such sum in subsequent year then in such cases expenses would be allowed to be deducted in such subsequent year,that deduction of tax on payment of such tax deducted at source prior to the amendment were independent, that if one of the condition was satisfied no disallowance was called for, that the assessee had deducted tax at source, that no disallowance was called for.He further observed that the AO had raised serious doubts regarding the deduction of tax itself, that he had made a reference to the balance sheet of the assessee wherein there was no entry of outstanding tax deducted at source, that he had held that tax was deducted on such payments. Considering the observations of the AO, the FAA directed him to verify the claim made by the assessee that tax was deducted at source and was credited in the books of accounts. He further directed that if it was found that no tax was deducted at source and tax was found to be outstanding then the disallowance made would stand confirmed.
2.2.During the course of hearing before us,the Departmental Representative (DR) argued that the assessee paid the taxes in the subsequent AY.after about two months,that payment was not made in time,that the proviso talked of payment or deduction, that the FAA did not take notice of the conditions provided in the proviso. He referred to the case of Puthuthotam Estates(1943)Ltd. (127 ITR 481).The Authorised Representative (AR) referred to the demand notice issued by the AO u/s. 156 of the Act and to the order giving effect to the order of the FAA. He also relied upon the cases of Modi Olivetti Ltd(263 CTR 28) of the honorable Allahabad High Court and Hazira Marine Engineering and Construction Management Private Ltd.(ITA/7512/Mum/2005,AY.2002 -03,dated 31/05/2006).
2.3.We have heard the rival submissions and perused the material before us.We find the AO had made the disallowance u/s.40(a)(i) of the Act,that he held that assessee had not deducted tax at source for the payments made to the non-resident entity.The FAA has given a finding of fact that assessee had made part payment of the taxes deducted at source during the year under considera -
M/s.Hazaria Cryogenic Engineering and Construction Management Pvt. Ltd., tion,that the AO had also admitted the fact of part payment.He had directed the AO to verify the fact about the claim made by the assessee that tax was deducted at source and was credited in the books of accounts.He had given a clear direction that if the claim was not found genuine about directing the tax and crediting in the books of accounts the AO could disallow the claim.Thus,the FAA has not allowed the expenditure incurred by the assessee-he had directed the AO to make necessary verification.While giving effect to the order of the FAA,the AO has not made any disallowance.This clearly shows that the assessee had made necessary entries in its books about the deduction of tax at source.It appears that while filing the appeal,the then AO had not verified the facts nor did he read the order of the FAA in right perspective.and that in a very routine and casual manner he has filed the appeal.
Here,we would like to mention that in the case of Modi Olivetti Ltd.(supra),the Hon’ble Allahabad High Court has deal with the issue at length.The Department has raised following question before the Hon’ble Court: “(3) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in deleting the ddisallowance's of Rs.49,37,042/- on account of provisions for royalty, ignoring the provisions of Section 40(a)(i) of the Income Tax Act, 1961?” The Hon’ble Court discussed the issue as under: 12. The Assessing Officer disallowed and added back to the income of the assessee Rs.49,37,042/- on account of royalty as unascertained liability. The Assessing Officer rejected the explanation of the assessee. The provision for royalty was made at Rs.47,70,089/- which is exclusive R&D Cess of Rs.1,66,953/-. The aggregate of both the amount is Rs.49,37,042/- is shown in the balance sheet. The CIT(A) upheld the addition made by the Assessing Officer. The ITAT found that in the books of account relevant to the Assessment Year 1991-92, the assessee had made a provision for royalty payable for the period 1.1.1990 to 31.3.1991 at Rs.47,70,089/- and R&D Cess at Rs.1,66,953/-. The tax deductible on this payment amounting to Rs.14,31,028/- was duly shown as deduction in the books of account on 31.3.1991. Later on, the actual amount payable to the collaborator in terms of the collaboration agreement was worked out at Rs.44,77,151/- and R&D cess at Rs.1,56,700/-. This amount was paid in the previous year relevant to the A.Y. 1992-93 i.e. in November, 1991. At the time of making payment, tax deductible on this payment namely a sum of Rs. 13,43,145/- was duly deposited to the credit of the Central Government within the time specified under the provisions to Chapter XVII B of the Act. After considering the facts of the case and the provision of Section 40(a)(i) of the Act as it existed at the relevant point of time, the ITAT came to the conclusion that as per provisions of Section 40(a)(i) the Tax has to be deducted or paid under Chapter XVII-B and only then the deduction can be claimed in computing the income chargeable under the head “Profits and gains of business or profession” which stands satisfied in the present case inasmuch as the liability to pay royalty had accrued and it was not contingent as held by the Assessing Officer. The quantification had taken place at a later point of time. While making such provision the assessee also made book entires in respect of tax deductible and thus satisfied the condition of deduction and accordingly allowed the claim of the assessee with regard to royalty.
M/s.Hazaria Cryogenic Engineering and Construction Management Pvt. Ltd.,
Learned counsel for the appellant submits that the provision of Section 40(a)(i) of the Act has not been complied with by the respondent-assessee and as such the Tribunal has erred in setting aside the addition in respect of royalty as made by the Assessing Officer and upheld by the CIT(A).
We have considered the arguments raised by learned counsel for the appellants and find that Section 40(a)(i) of the Act provides that royalty payable out side India shall not be deducted in computing the income chargeable under the head of “profits and gains of business or profession” on which tax has not been paid or deducted under Chapter XIII B. From the findings of the fact recorded by the ITAT in paragraph 26 of the order impugned, it is evident that the liability to pay royalty had accrued and was not contingent has held by the assessing officer, while making the provision the assessee had also made book entries in respect of tax deductible. Thus, out of two conditions as mentioned in Section 40(a)(i), namely, “tax has not been paid” or “deducted”, one condition, namely, “not deducted” do not exist inasmuch as the tax has been deducted and therefore, the provision of Section 40(a)(i) will not be attracted. The aforesaid interpretation is also supported by the proviso to section 40(a)(i) which provides that where the tax has been paid or deducted in any subsequent year then the amount of royalty shall be allowed as deduction in computing the income of previous year in which such tax has been paid or deducted. Thus, the use of two words, namely, “paid” or “deducted” do not carry the same meaning. 15. In the present case the tax has been deducted and thus in that event the provision of Section 40(a)(i) stands satisfied. This provision of Section 40(a)(i) was substituted by Finance Act (No.2), of 2004 which puts the condition that where 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, then the royalty shall not be deducted in computing the income chargeable under the head “Profits and gains of business of profession”. Thus, subsequent amendment making specific provision of deduction and payment thereof in the previous year or in the subsequent year was not available under Section 40(a)(i) as it existed during the relevant assessment year i.e. Assessment Year 1991-92. For convenience of interpretation the provision of Section 40(a)(i) as existed at the relevant point of time i.e. during the assessment year 1991-92 and as substituted by Finance ( No.2) Act , 2004 are reproduced below : - Section 40(a)(i) as existed during the A.Y. 1991-92:- 40. Notwithstanding anything to the contrary in section 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 outside India, on which tax has not been paid or deducted under Chapter XVII-B: Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted. Explanation : For the purposes of this sub-clause,- (A) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of Section 9; (B) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; ].” Section 40(a)(i) as substituted by Finance (No.2) Act, 2004:- “Notwithstanding anything to the contrary in sections 30 to (38), the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,-
M/s.Hazaria Cryogenic Engineering and Construction Management Pvt. Ltd., (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,- (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.”
In view of the discussion made above we are of the view that since the assessee has deducted the tax during the previous year relevant to the assessment year in question i.e. A.Y. 1991-92, the conditionality of Section 40(a)(i) stands satisfied. The finding of the Assessing Officer that the royalty as claimed by the Assessee- Respondent was unascertained liability, has been found to be incorrect by the ITAT. Under the circumstances, we find no error in the impugned order of the ITAT. In result the Question No. 3 is answered in negative i.e. in favour of the assessee and against the revenue.” We also find that in the case of Hazira Marine Engineering and Construction Management Private Ltd.(supra),the Tribunal has adjudicated the similar issue in favour the assessee. Considering the above,we hold that the proviso to section 40(a)(i)is not having retrospective effect and is not applicable for the year under appeal,that there was no default on behalf of the assessee in deducting or paying the tax as per the provisions prevalent at that point of time.As far as cases relied upon by the DR is concerned,we would like to mention that they lay down general principles,they do not deal with the issue on hand. Words “or” as well as “and’ can have two different meanings.But,do decide the matter before us,the case of Puthuthotam Estates(1943)Ltd. (supra),cited by the DR is of no help.Considering these facts,we decide ground no.1 against the AO. 3.Next ground of appeal is about deleting the disallowance of Rs.2.70 crores.During the assess - ment proceedings,a reference was made to the transfer pricing officer(TPO)to determine the arms length price (ALP) of the professional fees paid to BOS.Vide his order dated 24.05.005,the TPO determined the access claim of expenses to the extent of Rs.2,70,85,337/- .The AO directed the assessee to file submissions with regard to order of the TPO.However,as per the AO,it did
M/s.Hazaria Cryogenic Engineering and Construction Management Pvt. Ltd., not furnish any explanation.As a result, the AO made an addition of Rs.2.70 crores holding that the same was allowable in the subsequent years. 3.1.Aggrieved by the order of the AO,the assessee made elaborate submissions before the FAA. After considering available material,he held that the only reason for disallowance was that the income in respect of Pre/Final-investment-decision(Pre-FID)was that the contract about the transaction was recognised later,that the assessee has entered into two independent agreements, that income receivable from Hazira LNG Private Ltd.(HLPL)against its invoice would not alter its liability incurred in respect of BOS,that the TPO had to decide the issue of arm’s length price of the transaction,that he had to consider as to whether the contract was as per the prevailing uncontrolled transactions or not,that he was not justified in making the disallowance,that the assessee was following percentage completion method of accounting,that in that method proporti -onate estimate of income as well as expenses has to be made,that the contract with the associated enterprise(AE)was at arm’s length.Finally,he deleted the addition made by the AO.
3.2.During the course of hearing before us,the DR relied upon the order of the AO and argued that the expenses should be restricted to the income offered for taxation,that the TPO had rejected the transfer pricing study of the assessee,that the order of the FAA was non-speaking.
The AR stated that the role of the TPO was to determine the ALP of the International Transac- tions,that he had not passed any order in that regard, that order passed by him was not a valid order,that the assessee has entered into two different agreements,that the assessee was awarded a contract by HLPL,that HLPL was constructing a plant consisting of LNG tank and terminal,that HLPL had entered into a contract with the assessee on 22/02/2002, that the assessee had to render the management contract services as per the agreement, that management fee under the management contract would be earned by the assessee by way of progressive monthly payment, that for executing the project the assessee had entered into agreement with BOS, that during the negotiation HLPL requested the assessee to start work pre-final investment decision in order to commence the project, that Pre-FID activities were carried out from October 2001 to January 2002, that the activity were partly carried out outside India by BOS,that an invoice of Rs.5.36 crores was raised by BOS for the services rendered to the assessee,later on a new entity was came into existence, on incorporation of the appellant company services rendered by BOS were ratified,that the Pre-FID expenses flew in to the value of expenses rendered under the manage -
M/s.Hazaria Cryogenic Engineering and Construction Management Pvt. Ltd., ment contract,that the expense was part and parcel of the total cost of project,that Pre-FID income and Pre-FID expenses were two independent events, that pre-fid income was just a mile - stone/point in time specified for that purpose of raising the invoice,that it was independent of the expenses incurred, that it was not a reimbursement of pre-fid expenses,that Pre-FID expenses were part of the total cost of contract, that equating these independent transactions was not in line with the principles of TP,that the assessee had offered the income for tax purposes as for the proportionate completion method of accounting,that it had recognized income of Rs.12.53 crores in the profit and loss account for the year under appeal,that the income was recognized by applying the percentage of profit margin ratio on total estimated cost of contract to total cost incurred during the year,that the receipt of Rs.2.13 crores for the entire project was known in advance,that the expenses for the project were estimated at Rs.1,89,75,78,697/-,that profit margin ratio was profit/total expenditure(i.e.11.79%),that the total expenditure of Rs.11,20,86,256/- included the expenses of Rs.5.36 crores,that the income corresponding to the Pre-FID expendi - ture was already offered for taxation,that the mark up of 11.79 % on cost was at arm’s length, that the assessee has benchmarked the transaction with the result of external comparables,that the TPO had accepted the mark up,that there was no justification to restrict the claim of expenses in proportion to the extent of income (i.e.2.65 crores), that the whole sum of Rs.5.36 crores of Pre-FID expenses along with 11.79 % of mark up had been offered for tax.
3.3.We have heard the rival submissions and perused the material before us.We find that the assessee had entered in to two separate contracts,that one contract was about fees to be received by it,that the other one was about expenses to be incurred,that the AO mixed those two contracts that he had not doubted the incurring of expenditure,that he was of the opinion that expenditure was to be allowed in the next assessment year,that TPO had not found any defect in the method of determining the ALP of the international transaction(IT)entered in to by the assessee,that mark up of 11.79% has not be doubted by him.It appears that the TPO,while passing order u/s.92 of the Act,took over the role of the AO.As per the provisions of the Act the only role assigned to the TPO is to find out as to whether the IT is at arm’s length or not.He is not supposed to take decision about accounting policy to be followed by the assessee,nor he should comment upon as how to compute income if an assessee follows a particular method of accounting.In the case before us,the assessee is following project completion method and showing the income from the project accordingly.Expenditure incurred by it have to considered for arriving at the taxable 7
M/s.Hazaria Cryogenic Engineering and Construction Management Pvt. Ltd., income of the year under appeal.There in nothing on record to negate the finding of fact given by the FAA that income corresponding to the Pre-FID expenditure was offered for taxation.So,in our opinion,there is no need to interfere with his order.Confirming the same,we decide second ground of appeal against the AO.