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Income Tax Appellate Tribunal, DELHI BENCH ‘F’, NEW DELHI
Before: SHRI G. D. AGRAWAL, HON’BLE VICE PRESDIENT & SHRI KULDIP SINGH
Date of hearing: 28.12.2015 Date of Pronouncement: 05.02.2016 ORDER
PER KULDIP SINGH, JM:
The aforesaid bunch of appeals is being decided by way of consolidated order as common question for determination has been raised, to avoid repetition of discussion.
2 I.T.A.No.3834/Del/2009 I.T.A.Nos.53 & 1815/Del/2011 2. The appellant, DCIT Circle 4(1), New Delhi (hereinafter referred to as ‘the Revenue’), by filing the present appeals, sought to set aside the impugned orders dated 24.06.2009, 25.10.2010 and 31.01.2011 passed by Ld. CIT(A)s, New Delhi qua the Assessment Years 2006-07, 2007-08 & 2008-09 respectively on the grounds inter alia that:
A. I.T.A.No. 3834/Del/2009 (A.Y. 2006-07): “1. The order of the learned CIT(APPEALS) is erroneous & contrary to facts & law.
On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in law by deleting the addition of Rs. 6,51,62,584/-made by the AO being 10% of the turnover. The Ld CIT(A) did not appreciate the fact that the book of accounts of the assessee were rejected by the AO u/s 145(3) of the IT Act after pointing out specific defect.
3. On the facts and circumstance of the case in law the Ld CIT(A) has erred in deleting the addition of Rs. 5,20,56,831/- made by the AO u/s 40(a)(1) of the IT Act when no tax was deducted at source on commission paid in India to foreign bank.” B. (A.Y. 2007-08):
“That on the facts and circumstances of the case and in law the Ld. CIT(A) erred in deleting the addition of Rs.5,52,49,559/- made by the Assessing Officer u/s 40(a)(ia) of the I.T. Act, 1961. I.T.A.No. 1815/Del/2011 (A.Y. 2008-09): C.
“That the Ld. CIT(A) has erred in law as well as on facts and circumstances of the case in deleting ht addition of Rs.4,77,71,123/- made by the Assessing Officer u/s 40(a)(ia) of the I.T. Act, 1961.
Briefly stated, the facts of this case are: during the processing of return of income filed by the assessee qua Assessment Years 2006-07, 2007-08 & 2008-09, the cases were subjected to scrutiny and consequent 3 I.T.A.No.3834/Del/2009 I.T.A.Nos.53 & 1815/Del/2011 upon the notices issued u/ss 143(2) and 142(1) of the I.T. Act, 1961, Shri S. Bahl CA and Shri Yogesh Jagia, Advocate/ ARs attended the proceedings, filed reply and documents and discussed the case..
The assessee is into the business of trading of turbines and associated equipments and execution of turnkey projects. Assessing Officer after noticing certain defects in the accounts of assessee, issued show cause notice to which comprehensive reply has been filed, which have not been found acceptable by the Assessing Officer on the ground that the assessee might have been adopting the mercantile system of accounting and percentage completion method of accounting of projects for the last several years. But the Assessing Officer by assuming the powers, rejected the books of accounts and computed the income of the assessee. The Assessing Officer noted numerous negative adjustments of construction work and pointed out that the income recognized in first year can be utilized for the expenses of consequent year. In case of NTPC Sipat project, explanation of the assessee has also not been accepted by the Revenue on the ground that the company has not recognized the project income at desired percentage. The Assessing Officer also stated in the quantitative details in the notice to the accounts, purchase of only one bigger asset, sale of two units recorded by the assessee without any opening stock. Explanation rendered by the assessee has not been accepted by the A.O. on the ground that the selling price of Rs.1,96,32,550/- of the said assembly is less than its cost price of Rs.2,70,00,442/- irrespective of the quantity as claimed by the assessee company and even no stock records have been produced by the assessee to substantiate its claim. Hence, the Assessing Officer, by invoking the 4 I.T.A.No.3834/Del/2009 I.T.A.Nos.53 & 1815/Del/2011 provisions contained u/s 145 of the Act, taken the NP rate at 10% of Rs.65,16,25,838/- i.e. Rs.6,51,62,584/-. 4.1 The Assessing Officer disallowed the amount of Rs.5,20,56,831/- claimed by the assessee on account of bank guarantee issued by a foreign bank for and on behalf of holding assessee company on the ground that since no TDS was deducted on this payment, the same is liable to be disallowed. The Assessing Officer treated the bank guarantee commission paid by the assessee company as ‘interest’ on which, no advance tax deduction has been made in contravention to the provisions of Section 41(1)(a) of the Act and thereby disallowed the payment made by the assessee on account of bank guarantee commission. 4.2 The Assessing Officer assessed further income of the assessee at Rs.11,72,19,415/- (for the Assessment Year 2006-07), at Rs.17,00,240/- (for Assessment Year 2007-08) and at Rs.1,38,97,400/- (for Assessment Year 2008-09).
The assessee carried the matter before Ld. CIT(A) who has allowed the appeals vide impugned orders. Feeling aggrieved, the Revenue has come up before the Tribunal by way of present appeals.
We have heard both the authorized representatives, perused the material on record in the light of facts and circumstances of the case and orders of authorities below. Grounds No.1 and 2 of I.T.A.No. 3834/Del/2009 (A.Y. 2006-07): 7. Undisputedly, the assessee has been adopting mercantile system of accounting which has been accepted by the Revenue for completion of assessment u/s 143(3) of the Act qua the Assessment Years 2001-02, 2002-03, 2003-04, 2004-05, 2005-06, 2007-08, 2008-09, 2009-10, 2010- 11 and 2011-12 but disputed the same qua Assessment Year 2006-07, the 5 I.T.A.No.3834/Del/2009 I.T.A.Nos.53 & 1815/Del/2011 Assessment Year under consideration. The revenue generated for the turnkey projects by the assessee company have been accounted for on percentage completion method in accordance with accounting standard – 7 (AS-7) prescribed by Institute of Chartered Accountants of India and notified under Companies Act, 1956 read with the provisions of Section 145 of the I.T. Act, 1961 and notifications issued there under. 7.1 During the year under appeal the appellant company by following consistent accounting policy accounted the revenue on percentage completion method of the following projects undertaken during the year: S. Project Year of %age of %age of Estimated No. starting of profit for the profit up to profit at the project year 31.3.06 end of project. 1 Bali Mela Project 1997 19.20 19.20 19.20 2 Dahej INdogulf 2003 10.20 10.18 10.18 3 Corba R & M 2000 7.51 -6.05 -5.93 4 Cona Seema 2000 NIL 8.66 6.85 5 Sipat NTPC 2004 3.68 3.43 3.43 6 Barth NTPC 2005 Nil Nil 3.63 7 NTPC Singrauli 2005-06 22.66 22.66 22.66 RLA-2 8 OBRA ATPC 2001 nil 2.23 2.23 Overhauling 9 Patratu 2003 36.24 36.24 36.24 10 NTPC Singrauli 2004 nil 29.53 29.53 RLA-2 New 11 Loktak NHPC 05-06 Nil Nil 3.49 7.2 Assessing Officer during the assessment proceedings pointed out the discrepancy in the project accounting enumerated in the notice dated 09.06.2008, which are as under: “a) BALI MELA PROJECT: The project commenced in the year 1997 and advance was received in 1997 itself. The Cost was incurred of this project in the year 1998 onwards and during assessment year 2006-2007 negative 10.33 crore has been transferred from work in progress.
6 I.T.A.No.3834/Del/2009 I.T.A.Nos.53 & 1815/Del/2011 (b) DAHEJ INDO - GULF:Considerable variation In profit declared over the past year existed i.e. from 1.8% to 10.20%. (c) KOBRA R & M PROJECT:Project commenced in the year 2000 and in some year profit and in some year losses has been declared without any basis. (d) KONASEEMA:The project started in the year 2000 and likely to be completed in 2006-2007. No profit has been declared in this year and entire profit was declared in the previous years. (e) SIPAT NTPC: It seems that WIP figures are merely adjusted to reflect desired percentage of profit or loss without any basis. No explanation regarding nature and manner of attribution of the general exp to project exist. (f) BRAH - NTPC: No revenue has been recognized whereas entire cost of Rs. 6.55 crore has been taken to WIP. (g) OTHER SMALL PROJECTS: No uniform policy for recognition of revenue existed and merely suitability of the assessee existed. (h) Discrepancy 10 accounting of closing inventory of bridge) assembly 7.3 Ld. D.R. challenging the impugned order, contended that when no invoice has been raised by the assessee company to show the loss, the assessment adopted by the Assessing Officer is as per law and relied upon the order passed by the Assessing Officer to support of his argument. 7.4 However, on the other hand, Ld. A.R. contended that when in assessee’s own cases, factum of maintaining books of accounts in accordance with AS-7, has been duly accepted by the revenue in Assessment Year 2001-02 to 2011-12 (except Assessment Year 2006-07), the question of adopting best judgement assessment by the Assessing Officer does not arise. The assessee company on the basis of books of accounts maintained in the ordinary course of business in accordance with the accepted accounting method showing different profits in percentage, the Assessing Officer has arbitrarily rejected the books of accounts and 7 I.T.A.No.3834/Del/2009 I.T.A.Nos.53 & 1815/Del/2011 calculated the profits @ 10% before whom the complete books of accounts were produced. Even rule of consistency has not been followed by the Assessing Officer in passing the impugned order. 7.5 However, on the other hand, Ld. CIT(A) had deleted the addition of Rs.6,51,62,584/- made by the Assessing Officer being 10% of the turnover by adopting best judgement assessment u/s 145(3) of the Act. 7.6 Now, the first question arises for determination is, “as to whether Ld. CIT(A) has erred in quashing the best judgement assessment made by the Assessing Officer by rejecting the books of accounts of the assessee.” 7.7 In the backdrop of the aforesaid facts and circumstances, argument addressed by the Ld. A.Rs. of the parties, orders passed by the tax authorities below and case law relied upon, we are of the considered view that there is no illegality or perversity in the findings returned by Ld. CIT(A) on ground No.1 & 2 for the following reasons: i) that when the Revenue has already accepted the accounting method being adopted by the assessee for completion of assessment u/s 143(3) qua the Assessment Years 2001-02 to 2011-12 (except Assessment Year 2006-07), no reason has come out on record to break the rule of consistency laid down by the Hon'ble Supreme Court in Radhaswami Satsang Vs CIT (1992), 193 ITR 321 (S.C.); ii) that the objection raised by the Assessing Officer in rejecting the books of accounts that “there is no justification for incoherent recognition of revenue and the profit of the different projects has been varied from year to year without any basis, discrepancy in accounting of the closing inventory of bridge assembly and no basis for allocating contract project overhead expenses”, is not sustainable because the percentage completion 8 I.T.A.No.3834/Del/2009 I.T.A.Nos.53 & 1815/Del/2011 method used by the assessee, has been duly accepted by the Revenue, in the preceding Assessments completed u/s 143(3) of the Act; iii) that the scrutiny of the project accounts made by the assessee lying a pages 110 of the Paper Book, goes to prove that the profits have been calculated in the projects of Ballimella, Dahej, Barh-NTPC, NTPC- Singrauli RSA-2 and RSA-2 New, Kobra ATPS, Patratu etc. and due to loss in the projects of Kobra ATPS and Konaseema, loss has been accounted for as per AS07, so in these circumstances, there was no occasion for Assessing Officer to adopt the best judgement assessment method; iv) that the Assessing Officer rejected the books of account to adopt the best judgement assessment on the ground of discrepancy discussed at page 2 of the order, primarily on the ground that assessee company has not been following consistent method of accounting for recognition of revenue; v) that the Assessing Officer has primarily rejected the books of accounts on three grounds inter alia; “1. there is no justification for incoherent recognition of revenue and the profit of the different projects has been varied from year to year without any basis, 2. discrepancy in accounting of the closing inventory of bridge assembly and 3. no basis for allocating contract project overhead expenses” vi) that perusal of the project accounts lying at page 110 of the Paper Book, makes it clear that the consistent profits have been estimated in the project of Ballimella, Dahej, Barh-NTPC, NTPC-Singrauli RSA-2 and RSA-2 New, Kobra ATPS, Patratu etc. and the accounts of Kobra ATPS and Konaseema project prepared as per AS-7, which has been duly accepted by the Revenue during the preceding year while completing the 9 I.T.A.No.3834/Del/2009 I.T.A.Nos.53 & 1815/Del/2011 assessment u/s 143(3) of the Act. Furthermore, the assessee company had come up before the Assessing Officer qua the alleged discrepancy in closing inventory leading to different profits of different projects only due to typographical error of the auditors and the said typographical error has been rectified vide certificate of auditors lying at page 447 of the Paper Book. When the different allocation of projects in the head of expenses to various projects has been brought on record, the profits earned estimated on the basis of percentage completion method already accepted by the Revenue, the discrepancy which have been made the basis for rejecting the books of accounts, assumes no significance. vii) that Ld. CIT(A) in para 26 & 27 of the impugned order has comprehensively explained the discrepancies on the basis of which the Assessing Officer has rejected books of accounts because of improper appreciation of percentage completion method in accordance with AS-7. Operative paras 26 & 27 of the impugned order are reproduced as under for ready reference:- “26. I have perused the assessment order and found that the Ld. Assessing Officer rejected the books of accounts and deemed the taxable income @ 10% of the gross receipts because of discrepancies noticed and Pointed out in the show cause notice dated 9m June, 2008 primarily in connection with the project accounting. As per Ld. Assessing Officer the appellant -has been declaring profit without any basis with a considerable variation as found in Dahej lndogulf Project wherein the profit declared over the past year was 1.8% and now it is 10.20%. Whereas in Kobra R & M Project the project was commenced in the year 2000 and in some of the year profit has been declared and some of the year losses has been declared without any basis. In Kona Seema though the project started in the year 2000 and was likely to be completed in 2006-2007 the entire profit was declared in the previous year only. In Brah - NTPC no revenue has been recognized in the year though the cost of Rs. 6.55 crore has been taken to PWIP. Ld. 10 I.T.A.No.3834/Del/2009 I.T.A.Nos.53 & 1815/Del/2011 Assessing Officer also pointed out discrepancy in accounting of closing inventory of bridge assembly in the audit report.
The Ld. Assessing Officer further pointed out that in the detail of project work-in-progress (PWIP) furnished by assessee during the assessment proceedings several negative adjustments / additions have been made. He further pointed out that in Kona Seema Project exchange difference of Rs. 2.27 crore was offered to taxation in the year 2000 which has been negated with the project cost otherwise incurred by the assessee in the subsequent years and which is difficult to accept while following percentage completion method of mercantile accounting. The Ld. Assessing Officer pointed out that the assessee failed to provide basis of allocation of direct project overhead cost while accounting the project cost and because of these discrepancies the appropriate profit of the company cannot be ascertained from the books of accounts and hence the same has been rejected by invoking the provisions of section 145(3) of Act and the income was assessed @ 10% of the gross receipts.”
7.8 So, in view of what has been discussed above, when error committed by the Assessing Officer because of wrong appreciation of percentage completion method, has been rectified by Ld. CIT(A), no ground is made out to interfere into the findings returned by Ld. CIT(A). Hence, grounds No.1 & 2 are determined against the Revenue.
Ground No.3 of I.T.A.No. 3834/Del/2009 (A.Y. 2006-07) and Ground No.1 of I.T.A.Nos. 53 and 1815/Del/2011 (A.Yrs. 2007-08 & 2008-09): Undisputedly, assessee company claimed Rs.5,20,56,831/-, Rs.5,52,49,559/- and Rs.4,77,71,123/- on account of bank guarantee commission having been paid to a foreign bank on behalf of holding company of the assessee qua Assessment Years 2006-07, 2007-08 & 2008-09 respectively and the same have been disallowed by the Assessing 11 I.T.A.No.3834/Del/2009 I.T.A.Nos.53 & 1815/Del/2011 Officers u/s 40(a)(1) of the Act because of non deduction of tax at source (TDS) paid in India. 8.1 The Assessing Officer after declaring the bank guarantee commission paid by the assessee company in India to a foreign bank as interest u/s 2(28A) of the Act, disallowed the same u/s 40(a)(1) of the Act but his decision has been reversed by Ld. CIT(A) vide impugned order, which is now under challenge before the Tribunal. 8.2 Undisputedly, VTB bank is a foreign bank situated outside the territorial jurisdiction of India having no PE in India nor having nay business connections in India VTB bank makes the Canara Bank to issue bank guarantee by tendering its own counter guarantee meaning thereby the contract for providing bank guarantee has been entered into between the appellant company and VTB Bank Russia; that VTB Bank has rendered all the services from outside India; that he assessee company has paid bank guarantee commission to a non resident bank i.e. VTB Bank, Russia having no PE in India. 8.3 Now, the first question arises for determination is, ‘as to whether the assessee company was liable to deduct the tax at source (TDS) on bank guarantee commission paid in India to VTB Bank, a foreign bank.’ Since, the Assessing Officer by invoking provisions contained u/s 40(a)(1) of the Act, disallowed the amount paid by the assessee company as bank guarantee commission to a foreign bank treating the same as interest, we would have to decide first, “as to whether the bank guarantee commission paid by the assessee company to a foreign bank can be treated as interest under the Act making it obligatory for the assessee company to deduct the tax at source (TDS)?’ For finding out the answer to the aforesaid question, we are required to decide first, ‘as to whether the assessee 12 I.T.A.No.3834/Del/2009 I.T.A.Nos.53 & 1815/Del/2011 company was liable to deduct the tax at source (TDS) on bank guarantee commission paid in India to VTB Bank, a foreign bank’. 8.4 When the assessee company has placed on record for perusal of the revenue authorities cogent material that it has paid bank guarantee commission to a foreign bank, the Assessing Officer could not lay hands on any material to treat the bank guarantee commission as interest or deemed interest alleged to be paid by the assessee company to the foreign bank. Moreover, there is no dispute that the assessee company has not borrowed any funds form VTB Bank, Russia on which, it was required to pay the interest. Section 2(28A) of the Act defines the ‘interest’ paid in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized. On the other hand, ‘commission’ is a specified sum in terms of percentage to be paid to an agent or salesman for services rendered. Since in this case, VTB Bank, Russia got bank guarantee issued by Canara Bank by tendering its own counter guarantee and charged the commission thereon irrespective of the fact that the bank guarantee has been utilized or not, we are of the considered view that by any stretch of imagination even the bank guarantee commission cannot be treated as interest as decided by the Assessing Officer. 8.5 Now, the next question arises for determination is, ‘as to whether assessee company was liable to deduct the tax at source on the bank guarantee commission paid to VTB bank u/s 195 of the Act’. 8.6 In order to find out the answer to the aforesaid question, first of all, it is required to be decided, ‘as to whether sum payable on account of 13 I.T.A.No.3834/Del/2009 I.T.A.Nos.53 & 1815/Del/2011 bank guarantee commission by the assessee company to VTB bank is chargeable to tax under the Act?’ When the Revenue authorities have failed to lay hands on any cogent material that the bank guarantee commission paid by the assessee company paid on account of business transaction between assessee company and VTB bank particularly in the face of the fact that VTB bank has no PE in India, the question of attracting provision contained u/s 195 of the Act does not arise. In other words, when the assessee company has directly made the payments to VTB bank, Russia through its banker in India, no income can be said to have accrued or arisen in India to the VTB bank u/s 4, 5 and 9 of the Act. So, in the given circumstances, Assessee Company was not liable to deduct the tax at source on the bank guarantee commission paid to a foreign bank. Finding no illegality or perversity in the findings returned by the Ld. CIT(A) on this issue, Ground No.3 of (Assessment Year 2006-07) and Ground No.1 of and 1815/Del/2011 (Assessment Years 2007-08 & 2008-09) are determined against the Revenue.
As a sequel to the discussion made in the preceding paras on the grounds raised by the appellant, the aforesaid appeals are hereby dismissed. Order pronounced in the open court on 05th Feb., 2016. 10.