TMI Blog2007 (3) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... rough or from any business connection in India. Thus, applying s. 5(2) r/w s. 9(1)(i) it can be held that the income accruing by way of execution of the Chamera project in India accrues in India and accordingly liable to tax in India. There was composite contract for rendering services in connection with setting up of Hydroelectric project. Even if it is considered that part of work in relation of such services was carried out out side India, the services are the same as rendered by the PE in India. It is also fact that the invoices were raised through the PE in India which are accounted for in the books of project office set up in India. The work executed has been effected through the PE in India. Thus, even if admitting that merely 30 per cent of the part A work as contained in document No. 2 to the agreement dt.18th July, 1999 is attributable to Head Office in Canada, since it is of the same or similar kind as effected through the PE in India, profit attributable to such transaction is also chargeable to tax in India. The contention of learned counsel for assessee would have been valid had the art. 7 of the DTAA would have been on the basis of OECD Model Convention. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Since the assessee raised the bill on 11th June, 2001 though pertaining to January till April, 2001, but since the payments were received prior to close of the accounts and audit thereof, instead of showing the work-in-progress the assessee has accounted for entire income in relation to work done between January and March, 2001 though claimed in the bill raised on 11th June, 2001. It is also to be noted that bill dt.11th June, 2001 also contains the period 1st April, 2001 till 30th April, 2001. Thus, the income for this period cannot be said to have been accrued before the close of the financial year on 31st March, 2001. It is settled law that tax is payable on accrual of income and not on the basis of entries made by the payer or deduction of tax on such credit to the account, rather the provision is otherwise. As per s. 199, credit for tax deducted at source is allowable in the year in which the income comprised in such certificate is assessable. Thus, the reverse is not the law. The AO has merely presumed that since the amount has been credited by NHPC and since the work pertaining to J.P Industries Ltd. has been completed, the work of assessee is also completed. In our op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y international funding agency, namely, European Development Corporation (EDC). The' company opened a project office at New Delhi and site office at Chamera (Chamba) in HP for the purposes of executing the contract No. NH/Cont/CH-II/2002, dt. 18th July, 1999. It established a permanent establishment (PE) in India after obtaining necessary approval from Reserve Bank of India. On application filed by the assessee under Section 6(6) of Foreign Exchange Management Act, 1999 (hereinafter referred to as FEMA), the Reserve Bank of India (hereinafter referred to as RBI) granted permission vide sanction letter dt. 16 Aug., 2000 to open project office at New Delhi and site office at Chamera, Distt. Chamba (Himachal Pradesh), to execute the contract subject, inter-alia, to the stipulation that the project office would submit annual audited accounts of its income and expenditure in India along with bank certificate evidencing receipt of income from the head office. For the asst. yr. 2001-02 under present appeal, the assessee company filed return of income on 31st Oct., 2001 declaring an income of Rs. 1,74,99,350. The said return is accompanied by computation of income as well as statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch are being agitated in assessee's appeal. The Revenue's appeal agitates the relief allowed by the learned CIT(A) on the issue connected with the salary of two expatriates. 3. With this background, we shall now deal with various grounds raised before us in the appeal of assessee. We have heard at length Mr. M.S. Syali, senior counsel appearing for and on behalf of Shri Tarandeep Singh, learned Counsel for assessee, and Mr. T.N. Chopra, learned special counsel appointed by Revenue authorities. 4. Ground No. 1 is that the impugned order framed in violation of principle of natural justice, is biased and mala fide. At the time of hearing, this ground was not pressed. We, therefore, do not adjudicate the same in detail but dismiss the same for want of prosecution. 5. Ground No. 2 with sub-grounds therein challenge denial of claim of appellant for attribution and apportionment of profit between Permanent Establishment (PE) in India and the Canadian Office (HO). 5.1 The assessee filed a return of income on 31st Oct., 2001 along with audited statement of accounts and other documents disclosing the income of the project office in India at Rs. 1,74,99,350. While filing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses relating thereto in the P L a/c in the books of accounts of PE in India as furnished to RBI. The auditors' report certifies that the accounts relate to project office of the Indian operations. This indicates that all activities were carried out through the PE in India. The contract receipts were received in Canada on behalf of the project office in India for the services rendered in India. The appellant has not substantiated the claim that the project proceeds have been included in the corporation result filed with Canadian tax authorities since the income is emanating from a source in India i.e. NHPC and services are also rendered in India. Even under Articles 7(1) and 7(2) of the DTAA between India and Canada, the contract proceeds attributable to PE in India are taxable in India. On the basis of conduct of assessee in filing return of income, audited accounts with the return, demonstrates that principle of attribution is not applicable. He accordingly rejected the claim of attribution of profit to the HO. 5.2 Learned Counsel for assessee, Shri Syali, submitted that the decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd. v. CIT (2006) 204 CTR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revised return. He submitted that though the AO and learned CIT(A) have examined the claim of assessee regarding attribution and apportionment of income between PE in India and Head Office in Canada, the decision of Hon'ble Supreme Court was not available at that point of time. Thus, the concession granted by AO should not be extended further and the claim of assessee should be rejected outright. 6. We have considered rival submissions. We have also perused the decision of Hon'ble Supreme Court in Goetze (India) Ltd. (supra). The dispute regarding attribution and apportionment of income was examined in detail by the AO as well as learned CIT(A). Since they have examined the issue, whether the Tribunal should reject the claim of assessee on the ground that since the claim was not made before AO by filing revised return, in our opinion, is only academic. Having entertained the claim of assessee for apportionment of income, the Tribunal is now called upon to hold whether such apportionment is factually and legally permissible or not. Thus, the issue is merely academic. Since neither the AO nor learned CIT(A) has refused to examine the claim made during course of assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24.4. The AO submits so before the CIT(A) in his written submissions during remand proceedings. The CIT(A) so records at pp. 16-17, para 6.6. There is no allegation of a direct transaction. Thus, Article 7(1)(b) factually not being applicable, the issue of apportionment is only to be tested vis-a-vis Article 7(1)(a) r/w Article 7(2). Article 7(3) only refers to computation of the attributed income and has no impact on the extent of attribution. But for Article 7(1)(b), 7(1)(a) and 7(2) are pari materia in absolute to the OECD Model Convention on treaties. Thus, the OECD commentary not only can be referred but becomes a mandate for a proper understanding of the position. OECD Model Tax Convention on income and on Capital Condensed Version 15th July, 2005 indicate that if an enterprise has a PE in other country, i.e., the answer to question No. 1 is in affirmative then the second question that Revenue authorities must ask themselves is what are the profits on which that PE should pay tax. The principle laid down in the second sentence of para 1 of Article 7 is that the right to tax does not extend to profits that the enterprise may derive from that State otherwise than through the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nciples of accountancy. The mere fact that manufacture and sale are integrated is no ground not to split the profit and attribute. For this purpose, reliance was placed on following decisions: 1. Anglo French Textile Co. v. CIT (1954) 25 ITR 27 (SC) 2. CIT v. Ahmedbhai Umarbhai Co. (1950) 18 ITR 472 (SC); 3. Provincial Treasurer of Manitoba v. WM. Wrigley Jr. Co. Ltd. (1951) 20 ITR 614 (PC); 4. International Harvester Co. of Canada Ltd. v. PTC and Ors. (1949) 17 ITR 58 (PC (Supp). Article 7(2) of the Indo-Canada treaty states that PE profits should be computed as if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. Distinction between Head Office and PE for the purpose of attribution of income is also recognized by Article 7(3) of the Indo-Canada DTAA. Along with this letter, claim through a revised computation total income was also submitted vide which assessee apportioned the gross project proceeds of Rs. 9.82 crores in the ratio of 80.37: 19.63 being the total expenses relatable to Head Office and PE 7.1 Ela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of Section 5, Expln. 1, income accruing or arising outside India shall not be deemed to be received in India by reason only of the fact that it is taken into account in a balance sheet prepared in India. Even as per provisions of Section 9(1)(i), where all the operations of the business of the non-resident are not carried out in India, the income of the business deemed to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. CBDT Circular No. 1 of 2004, dt. 2nd Jan., 2004 reported in (2004) 186 CTR (St) 45 : (2004) 265 ITR (St) 23 and Circular No. 5 of 2004, dt. 28th Sept., 2004 reported in (2004) 191 CTR (St) 133 : (2004) 270 ITR (St) 31 pertaining to taxability of BPOs also state that only attributable profits pertaining to activities carried out in India will be liable to tax in India. The audited accounts enclosed along with the return of income are audited project accounts and do not depict the nature and extent of work done by the PE and HO. The objection of the Departmental Representative that project accounts should be adopted as the accounts of the PE is ill-founded as these accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as outsourced by Head Office is not functionally the work of PE or attributable to that separate entity. Same accounts of the project as given to the income-tax with original return were given to FEMA and company law authorities too. But, accounting treatment has to be in consonance with the requirements of the relevant statute. The relevance too is to be understood in consonance with the terms of the relevant statute. FEMA and company law provisions do not deem the PE of an enterprise to be a functionally separate entity for the purpose of maintenance of books of accounts and such a functional bifurcation was not necessary. Without prejudice and in alternative, it is also submitted that entries in books of accounts are not decisive to the taxability of a particular income. The accountants might have taken some other view but accountancy practice was not necessarily a good law as held in case of Tuticorin Alkali Chemicals v. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC). The allegation of the Department that project proceeds have not been included in the corporation results duly filed with the Canadian IT authorities is baseless as during the course of appellate proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IV. Nil Document No. V. Project Profile and Drawings Assessee has submitted a coordinated bid for the contract along with following parties: - Jaiprakash Industries Ltd. - SNC Lavalin/Acres (Transnational) Inc. - General Electric Canada International Inc. Under the General Contract Contractor shall mean M/s Jaiprakash Industries Ltd. The scope of work under the head Planning, Design Engineering Review shall mean the review of overall and detailed planning of the project, all necessary additional investigations, the basic and detailed design of the civil works preparation of Design Criteria Technical Specifications and Review of Design of all Electromechanical and Hydromechanical works, co-ordination of the design of the Electromechanical and Hydromechanical works with the design of the civil works and the studies as specified. The scope of Hydraulic Model Studies which is to be reviewed by the contractor is also specified. Appendix 1 of Document No. II explains the scope of work in detail. As per this, the contractor's (i.e., SNC Lavalin/Acres Inc.) scope of work shall include the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of an assessee which are not from the PE's own activities. Rather, they include those from direct transactions effected by the Head Office (or those from transactions effected by a PE situated in a third State) to the extent that such transactions are of the same or similar kind as those effected through the PE. Since this rule does not require all of the profits derived by the enterprise from sources in the State of the PE to be attributed to the PE, this arrangement is referred to as the restricted force of attraction principle. Thus, force of attraction rule gets activated when Head Office directly transacts with an enterprise of the Contracting State. This will not apply to the facts of the case under consideration as there are no direct activities of the HO. It is not the case of Department that any independent transaction was being carried out by the Head Office directly with any enterprise in India. In fact, it is accepted by the Department that Head Office was acting through the PE in India and all the drawings, reports, etc. were submitted to NHPC through the PE in India. This Article 7(1)(b) has no application on the facts and circumstances of the case of assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s actual expenditure incurred in India and outside India-throws considerable light on the extent of activity and constitutes reasonable criteria for attribution as done and submitted duly certified by auditors. Consideration itself has been split into Part A, Part B and Part C. Thus, a bifurcation of the consideration too is also available. Without prejudice to the above arguments, Mr. Syali submitted that if contention of appellant is not acceptable then, the taxation still has to be of the PE, the provisions of Section 44D r/w Section 115A will apply and the taxation will be restricted to 20 per cent of the income without resort to Section 40(a)(i) or Section 44C. 8. Mr. Chopra, special counsel for Revenue, submitted that the claim of attribution and apportionment of profit between project office in India, which is the PE of non-resident and the Head Office in Canada is not factually and legally correct. Shri Chopra submitted that the books of accounts are of the project office in India and computed net profit is also on the basis thereof. Return of income has been filed disclosing the income as per books of accounts, hence it is beyond one's comprehension as to how an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational. The AO called upon the assessee to produce the books of account of the Head Office and also to indicate as to what version of its operations in India has been presented before the Canadian tax authorities. The response of the assessee was totally non-co-operative during the assessment proceedings. This is what the assessee stated with regard to its Canadian income: In para 4.1 there is no provision of law that a non-resident before he makes a claim for exclusion of income for operations carried outside India or profits attributable to Canadian office, must furnish proof of payment of such taxes in home country. Attention is invited to Madras High Court decision in CIT v. VR. Section R.M. Firm and Ors. (1994) 120 CTR (Mad) 427 : (1994) 208 ITR 400 (Mad) where it was held that the Tribunal was correct in directing the ITO to allow the benefit of double taxation relief without insisting upon the production of a certificate from the Malaysian Revenue authorities to show that the Malaysian income of the assessees had already actually suffered tax. The decision of Madras High Court relied upon by the assessee for deliberately withholding information has however been give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... XYZ, In re (1998) 148 CTR (AAR) 417 : (1998) 234 ITR 335 (AAR) while upholding the applicability of MAT provisions contained under Section 115JA of the Act to the foreign company. In the instant case, furnishing of world accounts as per the aforesaid statutory requirements has not been fulfilled. Whatever be the position under the Canadian laws, it was obligatory on the assessee company to furnish the world accounts by virtue of the provisions of the Companies Act. This statutory requirement has not been complied with by the assessee company. Mr. Chopra further submitted that the contention regarding apportionment of the profits of the project office is at variance with the facts of the case and does not merit acceptance. Apart from the basic legal infirmity that no revised return has been filed and the claim for revision has been made on the basis of a letter filed before the AO after a lapse of two years from the filing of the return, it is submitted that the accounts of the project office maintained by the assessee company, which have been audited as per the provisions of the Companies Act, 1956 as well as IT Act. 1961 and statement of such accounts also furnished to RBI in conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, since the project office in India has maintained the accounts in India in respect of execution of the project, profits arrived at in its books are liable to be treated as the profits of the project office, that is, the profits of the PE in India without any further apportionment. The contention on behalf of the assessee company for apportionment is not in consonance with the realities of the situation. There is in fact no occasion for any apportionment after the project accounts have been maintained in India. 8.5 As regards reliance on the decision of CIT v. Tata Chemicals Ltd. (1974) 94 ITR 85 (Bom) in support of claim of apportionment, Shri Chopra submitted that no assistance is being derived on behalf of the assessee from the proposition laid down by the Hon'ble Bombay High Court in this decision. In this decision their Lordships held that whether the income is attributable to the operations carried out in India is always a question of fact. The filing of the return of income on the basis of audited accounts of the project office amply establishes the fact regarding the income accruing in India. In fact, the attempt of the assessee to retract from the facts, stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits that it allows to be attributed to the PE are not strictly limited to those resulting from PE's own activities. Rather, they include those from direct transactions effected by the head office in the other Contracting State to the extent that such transactions are of the same or similar kind as those effected through the PE. This principle is referred to as the 'restricted force of attraction' principle since it does not bring within its purview all of the profits derived by the enterprise from sources in the State of the PE to be attributed to the PE. Prof. Klaus Vogel in his well reputed treatise on Double Taxation Conventions has given a similar exposition of the principle. As against the aforesaid enlarged ambit of Article 7(1) in UN Convention, the scope of corresponding para of article in OECD Model Convention is restricted to profits derived through the PE in that State. 8.8 Reliance by learned Counsel for the assessee to the discussion draft on the attribution of profits to PE dt. 2nd Aug., 2004 issued by the OECD and quoted extensively from the said discussion paper for explaining the scope and ambit of Article 7(1) is meaningless without taking into a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts of the PE should normally be accepted by the taxation authorities in case these represent the real facts of the situation. It appears that the accounts maintained by the PE as per the OECD commentary should be adopted as the basis of taxation in the local tax jurisdictions. In the instant case of the assessee, the approach adopted is in conformity with the practice recommended in the OECD commentary, whereas it is the assessee company which is coming up with the plea for rejection of the project accounts and adopting a hypothetical and unrealistic basis for computing the profits of the project office. After maintaining the books of the project office and getting them audited, and filing a return on the basis thereof, the assessee cannot be heard to say that an artificial method, which is not in conformity with the provisions of the DTAA as well as accepted principles of commercial accounting, should be adopted. 8.11 Shri Chopra further submitted that para 2 of Article 7 is subject to the provisions of para 3. Para 3 pertains to deduction of expenses while computing the profits which are liable under the tax jurisdiction of the other Contracting States. This para in Indo-Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 56,66,033 (iii) Purchase of software ' Rs. 2,03,761 (iv) Computer repair and maintenance Rs. 10,86,321 The aforesaid expenses are, inter alia, subject- matter of disallowance confirmed by the learned CIT(A) and being assailed by the appellant vide ground Nos. 4, 7, 8 and 11. 8.13 Insofar as applicability of Article 7(3) is concerned, disallowance of the aforesaid deductions deserves to be upheld since the payments are covered under the prohibition contained under Article 7(3) above. Apart from the prohibition contained under Article 7(3), the deductions are also barred by virtue of Section 40(a)(i) since these payments have been made without deduction of tax at source. As indicated earlier, the assessee, while computing the income of the Project Office, disallowed a sum of Rs. 32,61,432, being payments made to Donel Consultants without deduction of TDS. On similar grounds the aforesaid amounts are covered for disallowance under Section 40(a)(i) and have been rightly disallowed by the AO and confirmed by the learned CIT(A). 8.14 With rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvolved in this regard is M/s Jai Prakash Industries Ltd. of India. It is the contention of the assessee that even prior to setting up of the PE in India, the work pursuant to the agreement commenced but the same was executed by raising the bills after the PE was established. That is why value of the work done prior to setting up of the PE is reflected as opening work-in-progress and claimed as expenditure on debit of P L a/c. In this backdrop of facts, we shall examine whether the claim of assessee for exclusion of the profit as is not attributable to the PE in India is outside the scope of taxation in India. 9.1 Section 5(2) provides that subject to the provisions of this Act, the total income of a person who is a non-resident shall include all income from whatever source derived which (a) is received or deemed to be received in India; (b) accrues or arises or is deemed to accrue or arise to him in India. Section 9(1) provides that following income shall be deemed to accrue or arise in India. Clause (i) of Section 9(1) provides that all income accruing or arising directly or indirectly through or from any business connection in India. Thus, applying Section 5(2) r/w Section 9( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis provided that the result shall be in accordance with the principles laid down in this article. 3. In the determination of the profits of a PE, there shall be allowed those deductible expenses which are incurred for the purposes of the business of the PE including executive and general administrative expenses, whether incurred in the State in which the PE is situated or elsewhere as are in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than as a reimbursement of actual expenses) by the PE to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights of by way of commission or other charges, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the PE. Likewise, no account shall be taken in the determination of the profits of a PE, for amounts taken in the determination of the profits of a PE, for amounts charged (otherwise than towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablishment. UN Model Double Taxation Convention OECD Model Double Taxation Convention (a) that permanent establishment; (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on it that other State of the same or similar kind as those effected through that permanent establish-ment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 2. Subject to the provisions of para- graph 3, where an enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head office of the enterprise or any of its other offices. Comparing the clause (1) of article 7 of DTAA between India and Canada, we find that the same is based on UN Model Convention and not on OECD Model Convention. As per UN Model Convention, not only the profits as is attributable to that permanent establishment is taxable but even the profits attributable to sales in other Contracting State of same or similar kind as sold through that permanent establishment are also taxable. Compared with OECD MC, it extends primary taxation by the State of the permanent establishment, viz., the profits that it allows to be attributed to the permanent establishment are not strictly limited to those resulting from the permanent establishment's own activities. Rather, they include those from direct transactions effected by the head office, though in the State of the permanent establishment (or those from transactions effected by a permanent establishment situated in a third State) to the extent that such transactions are of the same or similar kind as those effected through the permanent establishment. According to clauses (b) and (c) of the second sen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DTAA, broadly the principle of attributions are acceptable yet in view of clause (b) of sub-article (1) of article 7 of DTAA between India and Canada, no part of the profit from the execution of Chamera Project can be excluded while computing the profit of the appellant non-resident in India. Accordingly, Ground No. 2 raised in this regard is to be dismissed. 10. At this juncture we also need to discuss and decide the alternate contention raised on behalf of the assessee which is contained in ground No. 11.1 before us. It is the contention of appellant that the assessee has option not to be governed by the provisions of DTAA and may be taxed as per the provisions of the IT Act. It is contended that since what is received by the assessee from the execution of Chamera project can be described as fees for technical services as defined in Expln. 2 in Section 9(1)(vii) of the Act, the income be computed as per the provisions of Section 44D of the Act and the tax may be charged as per Section 115A of the Act. 10.1 Learned Counsel for assessee has contended that since the entire project is now over and to avoid any controversy as regards taxability of various expenses, the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: Where the Central Government has entered into an agreement with the Government of any country outside India under Sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. It is settled law that provisions of DTAA shall override the provisions of IT Act if the assessee chooses to be governed by the provisions of treaty. However, the option is with the assessee to choose whether it wants to be governed by the provisions of treaty or not. Since the assessee in the alternate has raised a claim that it does not want to be governed by the provisions of treaty between India and Canada but as per the provisions of IT Act, there can be no bar to apply the provisions of IT Act while computing the income of non-resident. As per Section 5(2) of the Act, all the income received or deemed to be received or accruing or arising or deemed to accrue to arise in India to the non-resident, is chargeable to tax in India. As per Section 9(1)(i), all income accruing or arising directly or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluding obtaining adequate insurance cover for shipment . Reading the aforesaid, it is clear that the services of the assessee are technical services as defined in Expln. 2 to Section 9(1)(vii) of the Act. The assessee also does not dispute that the services are technical services. As per Section 44D while computing the income by way of fees for technical services, no deduction in respect of any expenditure or allowance is to be allowed. As per Section 115A(1)(b), where the total income of a foreign company includes any income by way of fees for technical services received from an Indian concern, the amount of income-tax on the income by way of fees for technical services shall be 20 per cent where such fees for technical services are received in pursuance of an agreement made after 31st May, 1997. Since admittedly the assessee received fees for technical services as defined in Expln. 2 to Section 9(1)(vii), the same can be taxed as per the provisions of Section 44D r/w Section 115A of the Act. Since the assessee has chosen to be governed by the provisions of the IT Act, the AO shall compute the income as per Section 44D r/w Section 115A of the Act. Thus, the alternate plea rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f accounting, the assessee was liable to declare, if not the invoice value, at least the value of work-in-progress. Since the expenses incurred in this regard have been accounted for under the principles of accounting though the same receipts are accounted in the subsequent year, the same is to be brought to tax in the applicable year only. He accordingly made an addition of Rs. 3.24 crores. The same was confirmed by learned CIT(A). He held that major part of the work for which progressive bill was made had been performed by the appellant during the year and the amount had become legally due to the appellant. Any amount which becomes legally due on completion of work would prima facie be deemed as its income to be assessed during relevant assessment year. Since the amount was legally due to the appellant, the same was accordingly taxable in the year. 11.2 Learned Counsel for assessee submitted that the appellant is following percentage completion method of accounting. Following this method, revenue from contract is recognized on work done and certified by the client/invoiced as per the terms of contract. The work done is not invoiced till the contract reaches such invoicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Ltd. (1992) 108 CTR (Cal) 140 : (1993) 202 TTR 492 (Cal); 2. CIT v. Kerala State Drugs Pharmaceuticals Ltd. (1991) 192 ITR 1 (Ker); 3. CIT v. Rehmat Khan (1995) 127 CTR (Raj) 384 : (1995) 213 ITR 134 (Raj). He accordingly pleaded that since the value of work was excluded subsequent to the close of relevant financial year, the same cannot be added to the income for this year. 11.3 Learned Counsel for Revenue, on the other hand, strongly relied upon orders of authorities below. He submitted that the assessee is following percentage completion method of accounting. Though the assessee is showing opening work-in-progress, no amount is shown in the closing stock as work-in-progress. He further submitted that as per p. 61A of paper book I, filed by the assessee which indicates that the assessee has submitted five bills for an amount of Rs. 10,29,84,431, the fifth bill being dt. 29th Jan., 2001 related to the work done till December, 2000. No bills for the work done for January, February and March, 2001 have been sent to the NHPC. As against the aggregate amount of Rs. 10,29,84,431 in the five bills sent by the assessee, payment received against these bills aggreg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Counsel, in response to specific queries from the Bench, stated that since the books of account of the project office had been closed and audited on 29th Oct., 2001, amount of Rs. 3.09 crores released by the NHPC out of the provision has been credited in the books and the remaining amount of provision had not been accounted for in the absence of any such adjustment made till 29 Oct., 2001 when the accounts were closed. The argument appears to be factually incorrect inasmuch as adjustment out of ad hoc provision against the seventh bill dt. 22nd July, 2001 has been made for an amount of Rs. 1,68,16,185 before the closure of accounts, that is, 29th Oct., 2001. Even on the basis of argument of the learned Counsel this amount has not been credited as on 31st March, 2001. From the aforesaid facts it is manifestly clear that the amount of Rs. 3,24,28,301 for which provision has been made by the NHPC by 31st March, 2001 on account of the work done by the assessee and bill not raised represents the suppression of receipts for the assessment year under reference. The assessee has neither accounted for this amount as receipts nor shown any work-in-progress on 31st March, 2001. This clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerning the crystallisation of right to receive the income as per the mercantile system of accounting. The whole issue cannot be viewed in a purely legalistic manner. The accrual of income as per principles of accounting has to be judged according to the facts and circumstances of the case. In the instant case, since the owner, that is, NHPC has acknowledged its liability to make the payment to the assessee by making a provision in its books of account as on 31st March, 2001, it amounts to crystallisation of liability of NHPC outstanding in favour of the assessee. There is no dispute with regard to the amount payable by NHPC and in fact the subsequent events establish the undisputed nature of the accrued receipt by the assessee inasmuch as payments have actually been made by NHPC in the subsequent year. This is therefore a clear case of suppression of receipts and the addition of Rs. 3,24,28,301 sustained by the learned CIT(A) is fully justified. 11.5. We have considered rival submissions and relevant facts. We have also perused the case law cited. The whole of the addition is made on the basis of amount provided by NHPC in its accounts for the work done and deducting tax on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted, the work of assessee is also completed. In our opinion, this presumption is not based on facts established in this regard. The assessee raised the running bill from month to month on the basis of work to be executed by it and not on the basis of work completed by J.P. Industries. Since the value of work done is also part of the invoices raised in subsequent year and which is accounted as income in the subsequent year, we find that the assessee is following proper method of accounting for such contract receipts based on percentage completion method. We accordingly do not find any justification to treat the income accruing in subsequent year as income of the . year under appeal. We accordingly delete the addition of Rs. 3,24,28,301 as alleged under statement of contract proceeds. 12. Ground Nos. 4, 5, 7, 8 and 9 relate to disallowance of various expenses as under: (a) Cost of personnel Rs. 2,63,02,407 (b) Opening work-in-progress Rs. 1,84,30,838 (c) Computer repair and maintenance Rs. 10,86,321 (d) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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