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TMI Blog1998 (2) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii)(3) of the double taxation agreement withJapan, no disallowance can be made under r. 5D, s. 40A(3), s. 40A(12), s. 37(2A) and s. 43B of the IT Act. 3.1. Ground No. 1 relating to deletion of the addition of Rs. 2,19,15,387 being the valuation on account of work-in-progress in respect of equipment supply : The respondent company Mitsubishi Industries Ltd. (MHIL), which is a foreign company, incorporated inJapan, has entered into a contract with National Thermal Power Corporation (NTPC) to construct the Auriya Gas Base Combined Cycle Plant at Divyapur in U.P. This was the first year of company s business inIndia. On total receipts of Rs. 28,14,59,000 the assessee has claimed expenses at Rs. 36,58,91,000 returning a net loss of Rs. 8,44,32,000. The assessment was completed by the AO vide assessment order under s. 143(3) dt.30th Sept., 1991at taxable profit of Rs. 3,08,80,570. The AO had inter alia, made an addition in respect of work-in-progress (WIP) relating to equipment supply (ES) to the tune of Rs. 3,61,24,600. The AO has discussed the facts relating to the aforesaid addition in paras 23 and 24 of the assessment order. He has observed that the assessee has not accounted f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uipment for which payments have been made but for which bills have not been raised such value would work out at Rs. 3,61,24,600 (Rs. 12,61,23,000 (-) 80 per cent of Rs. 11,24,98,000 = Rs. 3,61,24,600). Thus, the value of equipment for which payments have been made, for which bills have not been raised is estimated at Rs. 3,61,24,600 which will be reduced from the assessee s loss." 3.1. (i) The CIT(A) has discussed this point in para 4 to para 4.2 at pp. 9 to 11 of the order passed by him, relating to addition of Rs. 3,61,24,600 made on account of valuation of WIP in respect of ES and addition of Rs. 1,58,30,000 made in respect of valuation on account of WIP relating to inland transportation.Para4 and 4.1 deal with the first addition of Rs. 3,61,24,600. The said para 4 and 4.1 of the order of the CIT(A) are reproduced hereunder: "4. Grounds of appeal Nos. 4 and 5 relate to the additions of Rs. 3,61,24,600 and Rs. 1,58,30,000 being the valuation on account of WIP in respect of ES and Inland Transportation (IT). It is an admitted fact that the appellant company has not accounted for WIP in respect of the ES and IT. However, the appellant is disputing the valuation adopted by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2,19,15,387 on this account." 3.1. (ii) The learned senior Departmental Representative submitted that the assessee has admitted that the value of WIP relating to ES has not been taken into consideration while computing the taxable income of the year under consideration. This aspect was not contested on behalf of the assessee before the CIT(A). The assessee simply disputed the valuation of such WIP adopted by the AO. The assessee has also not preferred any appeal before the Tribunal in relation to an addition of Rs. 1,42,09,213 sustained by the CIT(A) out of the said addition of Rs. 3,61,24,600. Therefore, the question which is the subject-matter of consideration before the Tribunal relates only to the quantum of addition sustained by the CIT(A) to the extent of Rs. 2,19,15,387. He submitted that the CIT(A) while granting the aforesaid relief had taken into consideration the figures of the alleged net profit derived by the assessee in relation to ES in the execution of the said contract by considering the results not only of the year under consideration but also the figures pertaining to the subsequent years. It was pointed out by him that the said details and working submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the learned officer at 17.07 per cent. Without prejudice to this, the maximum gross margin can only be 1.25 per cent based on consideration of all sub-contractors including Texmaco. The learned officer thus erred in considering a margin of 20 per cent. Under cl. 3.10.6. of the contract, NTPC was required to make direct payments to sub-contractors to enable the sub-contractors to avail the deemed profit benefits. We have provided the break-up for costs and revenues between direct payments to sub-contractors and payments to MHIL in Annexure 4. As your honour will observe, revenues and costs for direct payments to sub-contractors are the same. The profit or loss, therefore, arises on the portion of work performed by MHIL. The percentage of gross profit to be applied can only be applied on the revenue related to work performed by MHIL. In Annexure 5 and 6, we have provided a computation of work in progress, depending on whether the profit margin is 17.07 per cent or 1.25 per cent. We request your honour to issue appropriate instructions to the learned officer to revalue the WIP as per the lower figures. 3.1. (iv) The learned lawyer further submitted that the CIT(A) confirmed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 57,494,752 . . . Additional . 19,328,793 . . . Total 83,154,778 89,823,545 (6,668,767) . Vijay Fire Main contract 23,000,000 22,026,090 . . . Additional . 3,067,662 . . . Total 23,000,000 25,093,752 (2,093,752) . Reva . 2,000,000 838,124 1,161,876 . Garlick . 5,000,000 2,048,800 2,951,200 . Paharpur . 3,530,000 2,000,000 1,530,000 . Lloyd . 4,800,000 14,049,967 (9,249,967) . WorthingtonPump . . 1,339,250 (1,339,250) . West Coast Engg. . . 3,020,856 (3,020,856) . Berger . . 1,936,071 (1,936,071) . Peico Electricals . . 2,671,870 (2,671,870) . Triveni . 8,190,080 8,094,137 95,943 . Chemicals Associates . . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tements. Claims against the company are recognised upon payment." It is an undisputed fact that the assessee has not taken into consideration the value of WIP while declaring its income/loss in the return of income. The assessee in the written submissions dt.29th Nov., 1991submitted before the CIT(A) has also specifically inter alia, stated as under: "We agree with the learned officer that there is some WIP". It is therefore, clear that the assessee has admitted that the appropriate value of WIP relating to ES is liable to be added in the computation of taxable income. The assessee had simply disputed the valuation of such WIP adopted by the AO. It is further pertinent to repeat that the addition sustained by the CIT(A) to the extent of Rs. 1,42,09,213 has been accepted by the assessee and no further cross-appeal or cross-objection has been submitted by the assessee against such confirmation of the part amount of addition sustained by the CIT(A). 3.1. (xii) The CIT(A) has granted the relief of Rs. 2,19,15,387 on this account by basing his decision on the chart submitted before him by the assessee showing that the gross margin in relation to such ES comes to only 1.25 per cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A) to have sent a copy of the written submissions dt. 29th Nov., 1991 along with all the charts to the AO with the direction to examine the correctness and relevance of such figures for working out the correct value of WIP relating to ES instead of granting the relief of Rs. 2,19,15,387 by straightaway accepting the assessee s contention that the gross margin on ES comes to 1.25 per cent. It will also be relevant to mention here that the hearing of this appeal was fixed before the CIT(A) on29th Nov., 1991. The order has been passed by him on4th Nov., 1991. It is impossible to agree with the submissions made by the learned counsel for the assessee that the AO was granted a reasonable opportunity to comment on these figures, which were purportedly communicated to the AO on telephone by the CIT(A). It is humanly impossible for any AO to give his comments pursuant to telephonic communication relating to such complicated facts and figures submitted by the assessee before the CIT(A). We are, therefore, of the considered opinion that the order passed by the CIT(A) in relation to this ground should, be set aside and the matter should be restored back to the CIT(A) for deciding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already made on the last date of the previous year, the same are taken on the basis of no profit and no loss and would therefore, amount to Rs. 1,58,30,000 as amounts receivable. Thus, this amount of Rs. 1,58,30,000 would be reduced from the assessee s loss on account of the value of transportation for which payments have been made by the assessee-company but for which bills have not been raised." 3.2. (ii) The CIT(A) in para 4.2 has given the following findings: "4.2 Similarly, with regard to the WIP in respect of IT after considering the difference between the revenue and cost worked out by the assessee for the period ending 31st March, 1989, 31st March, 1990 and 31st March, 1991 when the project was completed, there is only a surplus of Rs. 44,98,300 in the year ended31st March, 1991. For the earlier two periods there is no surplus revenues over cost. I will, therefore, confirm the addition on account of WIP in respect of the IT only to the extent of Rs. 44,98,300. The appellant will get a relief of Rs. 1,13,31,700." 3.2. (iii) The assessee has accepted the said addition partly sustained by the CIT(A) to the extent of Rs. 44,98,300 as no further appeal or cross-objection h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal Revenues 1,94,83,302 2,45,92,970 47,72,332 4,88,48,424 Cost 4,45,17,615 2,66,86,697 2,74,032 7,14,78,344 Difference 2,50,34,313 20,93,907 44,98,300 2,26,29,920 The learned counsel thus strongly supported the order of the CIT(A). 3.2. (vi) We have carefully considered the submissions made by the learned representatives of the parties and have gone through all the relevant documents submitted in the compilation to which our attention was drawn during the course of hearing. 3.2. (vii) In our view, the CIT(A) has erred in granting relief to the tune of Rs. 1,13,31,700 out of the addition of Rs. 1,58,30,000 made by the AO in this regard. Before taking into consideration the expenses and revenue relating to IT pertaining to the subsequent years, it was necessary on the part of the CIT(A) to have ascertained the nature of revenue relating to IT recorded in subsequent years. He ought to have examined as to whether the revenue recorded in the subsequent years relating to IT had any nexus with the transport expenses incurred in the year under consideration. The system of recog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orks in regard to the construction of these bridges. The assessee claimed the aforesaid expenditure as revenue expenditure. It was stated by the assessee vide letter dt.5th Aug., 1991that this temporary bridge was washed away by floods and another bridge was constructed. Subsequently, vide letter dt. 28th Aug., 1991, submitted to the AO, it was submitted that the said expenditure has been incurred towards civil works attributable to the construction of bridges, maintenance and removal of bye-pass or debtour, upgrading and maintenance of roads, and removing and restoration of the miscellaneous obstacles on the way to site from Khandla. It was further stated on behalf of the assessee that bridge constructed on a temporary basis which were subsequently demolished did not result in any benefit of enduring nature and such an expenditure was necessary business expenditure for carrying out the execution of contract work. It was also submitted that such temporary construction, even if it is treated as capital expenditure will be eligible for grant of depreciation @Rs. 100 per cent. The AO treated the said expenditure as of a capital nature and disallowed the same in view of the judgment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee had to demolish the bridge after its use for transportation of the required material. The assessee had no right, title or interest whatsoever over the said bridge or over the bye-pass roads. The certificate issued by the U.P. Public Works Department also confirms the fact that the bridge and bye-pass roads constructed for the said transportation were of temporary nature. The assessee, therefore, either acquired any capital asset nor derived any benefit of enduring nature by incurring such expenditure. The expenditure was incurred because of a business necessity and, therefore, is clearly allowable as a revenue expenditure. The allowability of such expenditure is fully supported by the aforesaid judgments referred to in the order of the CIT(A). We, therefore, do not find any justification to interfere with the view taken by the CIT(A) in relation to ground No. 3. 3.4. Ground No. 4 relating to allowing of Head Office Expenses amounting to Rs. 3,86,16,155 in accordance with the provisions of art. III of the avoidance of double taxation agreement (DTA) withJapan. 3.4. (i) The assessee claimed deduction for head office expenses amounting to Rs. 3,86,16,155 being 13.72 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining to the Indian project not under the provisions of s. 44C of the IT Act but according to the art III of the DTA treaty by allocating head office expenses proportionately on the basis of the turnover of the Indian project vis-a-vis the total global project and give consequential relief to the appellant." 3.4. (iii) The learned senior Departmental Representative contended that the assessee has a permanent establishment inIndia. There is nothing in art. III(3) to exclude the applicability of s. 44C of IT Act, 1961. He further submitted that the definition of "permanent establishment" given in art. (2)II(1)(i) of DTA means a fixed place of business in which the business of an enterprise is a carried on. The fixed place of business shall include a branch, an office, a factory, a workshop, etc., but it does not include the head office. He submitted that the CIT(A) has erred in directing the AO to allow proportionate expenses of the head office as attributable to permanent establishment inIndia. He relied upon the reasoning mentioned in the assessment order. The learned Senior Departmental Representative submitted that the order of the CIT(A) should be set aside and that of the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve submitted that there is no express provision in the DTA excluding the applicability of these provisions of IT Act, 1961 relating to allowability of the various expenses subject to certain limitations and fulfilment of conditions prescribed in the respective sections of IT Act, 1961. The provisions of s. 90(2) does not in any manner indicate that the various provisions contained in the IT Act governing the allowability of expenses subject to limitations and conditions prescribed in the respective section will not apply in a case where the assessee is governed by the DTA with any other country. He submitted that the view taken by the CIT(A) should be set aside and that of the AO should be restored. 3.5. (ii) The learned counsel for the assessee strongly supported the order of the learned CIT(A). He invited our attention towards the DTA with Japan for the year 1991-92 as well as DTA made with other countries like UK and France, etc. He pointed out that whenever the two contracting States while entering into DTA wanted to provide that deduction for expenses will be allowed in accordance with the provisions of the IT Act of the State where the permanent establishment is located, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the relevant provisions contained in IT Act, 1961. We however, find that in art. XI(1) it has been clearly provided as under: "Article XI : The laws in force in either of the contracting States will continue to govern the taxation of income in the respective contracting States except where provisions to the contrary are made in the present agreement." In view of the aforesaid clause, the provisions of IT Act, 1961, relating to computation of taxable income will apply in the case of the assessee except where the provisions contained in the DTA are contrary to the conditions specifically mentioned in the IT Act. Therefore, the CIT(A) was not justified in deleting the aforesaid disallowances on the ground that all these provisions will not be applicable in the case of the assessee. 3.5. (vi) The provisions of s. 90(2) inserted by the Finance (No. 2) Act, 1991, with retrospective effect from1st April, 1972will also not in any manner support the view taken by the CIT(A). The scope and effect of the said retrospective amendment has been explained in the Circular No. 621, dt.19th Dec., 1991, which is reproduced hereunder: "Taxation of foreign companies and other non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X
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