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2009 (2) TMI 259 - AT - Income TaxDisallowance of expenditure u/s. 40(a)(i) - failed to deduct tax at source u/s. 195 - expenditure incurred by the parent company in connection with the business activity carried on by the assessee in India - assessee is a non-resident company incorporated at Australia engaged in prospecting for and production of mineral oils in India - exploration and production activities are carried out by the assessee in various contract areas under the production sharing contract (PSC), a multi-party agreement between the assessee, the other joint venture partners and the Government of India - agreements approved by the Parliament as per the requirements of the provisions of s. 42 - stand of the assessee is that the payments were made by way of reimbursement of the expenditure incurred by the parent company in connection with the activities carried on by the assessee - HELD THAT:- The auditors of the parent company have certified that such payments represented the actual expenditure. There is no reason to disbelieve the auditor's certificate which was filed before the lower authorities. This is also corroborated by the provisions of s. 3.1.4 of the psc. Clause (ii) of this section refers to payments to be made to affiliates of the contractor. The parties to the PSC are bound to comply with the provisions contained in the PSC. Therefore, the assessee could only reimburse the actual expenditure incurred by the parent company. Accordingly, we are of the view that the payment by the assessee was by way of reimbursement of expenses. Whether any sum paid by way of reimbursement of expenses can be said to be income chargeable to tax in the hands of the recipient? - Various High Courts and the Benches of the Tribunal have held that no income can be said to accrue or arise from the sum received by way of reimbursement of expenses. Same view was taken by the Hon'ble Delhi High Court in Industrial Engineering Projects (P) Ltd.'s [1992 (7) TMI 38 - DELHI HIGH COURT] as well as the Hon'ble Calcutta High Court in Dunlop Rubber Co. Ltd.'s [1982 (2) TMI 24 - CALCUTTA HIGH COURT]. Similar view has also been taken by the Tribunal in the case of Enron Oil & Gas International [2008 (10) TMI 258 - ITAT DELHI-G]. Accordingly, it is held that no income accrued or had arisen to the parent company from the payments by way of reimbursement of expenses. Hence, the provisions of s. 195 were not applicable to the facts of the present case. Consequently, the assessee was not required to deduct tax at source. Hence, the AO was not justified in disallowing the payments made by the assessee to its parent company by way of reimbursement of expenses. We also find force in the contention of the ld counsel for the assessee that income of the assessee is to be computed as per the special provisions of s. 42 and consequently no disallowance can be made by invoking the provisions of s. 40 (a)(i). Though it is not a non obstante provision, yet it is a special provision relating to the computation of the income of an assessee engaged in the business of prospecting for or extracting or producing mineral oils in India. It is a settled legal provision that general provisions must give way to the special provisions. Scope of s. 42 has been recently analysed by the Hon'ble apex Court in the case of CIT vs. Enron Oil & Gas India Ltd.[2008 (9) TMI 3 - SUPREME COURT], From the observations held; It is clear that: (i) Sec. 42, being a special provision, is a code by itself for computing the income from business of providing for, or production of mineral oil in India, (ii) it provides that the assessee would be entitled to deduct any expense which is referred to in the PSC, whether capital or revenue in nature. If the expenditure claimed as deduction is in accordance with the provisions of PSC then it has to be allowed as per the decision of the Hon'ble apex Court. The fact that even capital expenditure is allowable as deduction u/s. 42 itself shows that it overrides the provisions of s. 37. Thus, the scheme of the Act makes it clear that the provisions of s. 42 would prevail over general provisions of computing the income contained in ss. 30 to 38. Hence, in our opinion, the provisions of s. 40 cannot be invoked where the income is to be computed u/s. 42. There is no dispute that the payment was made by the assessee as per the provisions of the PSC. Particular reference can be made to s. 3.1.4 of the PSC. Therefore, in our view, the assessee is entitled to deduction in respect of payment made by it to its parent company. The orders of the CIT(A) are therefore set aside and consequently the additions sustained by him are deleted. The appeals of the assessee stand allowed.
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