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TMI Blog2013 (5) TMI 469X X X X Extracts X X X X X X X X Extracts X X X X ..... s have been debited by the appellant and on which tax has been paid by the appellant. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of Rs. 1,56,61,303, paid as legal and professional charges. 4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of Rs. 8,95,350 under section 40A(3) r/w Rule 6DD. 5. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the charging of interests u/s 234A and 234B of the Act. 2. Facts in brief:- The assessee is a non-resident firm having its registered office in the State of Delawarean, U.S.A. and the place of business is Enron Corporation, Houston, Texas. The assessee had entered into a contract with Dabhol Power Corporation (for short "DPC") in connection with the responsibility for on-shore construction work and on-shore service in connection with Phase-II of DPC. It has a project office in India in connection with such project and has filed its return of income declaring an income of Rs. 9,99,54,090, from such contract receipts. The Assessing Officer noted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court in CIT v/s Gajapathy Naidu (A.), [1964] 53 ITR 114 (SC). He also relied upon the judgment of Hon'ble Supreme Court in Standard Triumph Motor Co. v/s CIT, [1993] 201 ITR 391 (SC), wherein the judgment of Madras High Court in Standard Triumph Motor Co. Ltd. (supra) was affirmed. 4. Regarding assessee's reliance on the AS-7, which is on accounting for construction contracts issued by the ICAI, he held that the assessee has used this concept only as a tool & device and means to achieve object of reducing its taxable profits. Accordingly, he treated the difference of Rs. 11,01,94,324, as taxable income of the assessee. 5. The Assessing Officer, alternatively and without prejudice, held that the provisions of section 145(3) are also applicable as it has been adopting the accounting policy in an arbitrary manner and it has not recognized the revenue based on invoices raised and accepted in pursuance of the contract agreement. After referring to the judgment of Hon'ble Supreme Court in CIT v/s British Paints India Ltd. [1991] 188 ITR 44 (SC) and host of other case laws, he held that the assessee's accounts are not reliable and accordingly he justified the addition. 6. Aggri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Appeals), though completely agreed with this contention of the Assessee, however, held that in support of this contention, the assessee has not filed any evidence to prove as to how much work was completed during the year under consideration and how much expenditures were carried out in the balance sheet as work-in-progress. In the absence of such details, it is not possible to calculate the profit of the assessee on the basis of percentage of completion method followed by the assessee. In support of its contention, the assessee has neither filed audited accounts nor audit report to prove that percentage of completion method has been followed by the assessee consistently. The assessee has only furnished certain photocopy of bills and some photocopy of invoices which do not support the entire contentions of the assessee. He held that unless details are provided by the assessee, its contentions cannot be accepted and, accordingly, he dismissed the assessee's plea on the ground raised before him. Aggrieved, the assessee is in further appeal before the Tribunal. 8. Before us, the learned Counsel for the assessee referred to the facts and contentions enumerated in the assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proved. Without any details, no actual profit can be determined. He further submitted that in the immediately preceding year, the Tribunal in assessee's own case has set aside this issue on the ground that invoices were not produced. Reference was made to Para-18 of the Tribunal order. 10. In the rejoinder, the learned Counsel for the assessee submitted that in the earlier year, invoices could not be produced whereas in this year all the invoices has been noted by the Assessing Officer from where he has actually noted the figures. Last year, the receipts were only Rs. 320 crores, whereas the cost was Rs. 149 crores. This year, the difference is only 2% and there is no rebuttal of the fact that the assessee has completed the project upto 42.48%. Thus, the decision of the Tribunal in earlier year cannot be held to be applicable to the facts in this year. 11. We have heard the rival contentions, perused the findings of the Assessing Officer as well as the Commissioner (Appeals) and the material available on record. The assessee entered into a contract with DPC for a contract sum which is partly in U.S. dollar and partly in INR. The Contract payments are pre-determined and on a perus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he proportion that costs incurred to date bear to the estimated total costs of the contract, by surveys which measure work performed and completion of a physical proportion of the contract work. 9.3 Progress payments and advances received from customers may not necessarily reflect the stage of completion and therefore cannot usually be treated as equivalent to revenue earned. 9.4 If the percentage of completion method is applied by calculating the proportion that costs to date bear to the latest estimated total costs of the contract, adjustments are made to include only those costs that reflect work performed. Examples of items which may need adjustment include: (i) the costs of materials that have been purchased for the contract but have not been installed or used during contract performance; and (ii) payments to subcontractors to the extent that they do not reflect the amount of work performed under the subcontract. 9.5 The application of the percentage of completion method is subject to a risk of error in making estimates. For this reason, profit is not recognised in the financial statements unless the outcome of the contract can be reliably estimated. If the outcome cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch a project. For e.g., in a given contract, if the estimated profit is taken at 10%, the cost is estimated in that proportion and the balance is taken or transferred to work- in-progress. Thus, we do not find any infirmity in the method of accounting i.e., percentage of completion method adopted by the assessee for recognizing the revenue. The basis given by the Assessing Officer to reject the Accounting Standard or the books of account cannot be upheld. 12. Now, coming to the findings of the Commissioner (Appeals), we find that the assessee has categorically stated in the financial statements that it has completed 42.48% of the work on the projects undertaken by it up to 31st March 2000. This has not been disputed by the Assessing Officer and he has also accepted that the assessee has completed the work to the extent of Rs. 583,99,57,576 (approximately). Thus, there cannot be any basis to doubt the completion of the work in this year. We are unable to understand as to what the Commissioner (Appeals) meant by that "it is not possible to calculate the profit on the basis of percentage of completion method in the absence of any details". He has also doubted that the assessee has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the above part of this order will be more than 20%. However, in the interest of justice, we consider it just necessary to restore this issue to the file of AO with direction to allow another opportunity to the assessee to place on record all the invoices on the basis of which assessee had been receiving payments from EDC in respect of "OnCon IWA". If the entire payment received by assessee during the year is in respect of said agreement and is in respect of work done under that agreement then the project having completed more than 20% will be liable to be assessed to that extent during the year under consideration and appropriate assessment will be done by the AO with regard to year under consideration. We direct accordingly. 19. We may mention here that consideration of entire payments made by EDC to the assessee during the year under consideration is in no way improvement upon the case of the A.O as the said question has been raised ITA NO. 5376/MUM/2003(A.Y.1999-2000) by the A.O in the assessment order itself and the fact remains that no material has been placed on record by the assessee that the entire payment of Rs. 320,14,19,720/- made by EDC to assessee did not pertain t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee. There are no invoices or agreements to support these amounts. This system of charging overheads is a worldwide policy of Enron Group of companies and is followed for all projects globally. These expenses are recorded through entry in journal vouchers. The Assessing Officer observed that since the assessee has not provided any proof to the effect that the services has been rendered to the assessee by Enron Power Service B.V., and also the persons who have rendered the services and also no names have been furnished. In the absence of such details, he observed that the following situations will emerge:- (i) EPS, BV has actually provided technical or consultancy services to the assessee through its employees or technicians and therefore, the payments have been made. In such a situation, either it will be technical fees in the hands of EPS, BV or business income and such income will be taxable in India and subject to tax deducted at source. (ii) The employees or technicians of EPS, BV were sent to India and the salaries received by them would be subject to tax deducted at sources in India, It also appears that no services are rendered at all. Therefore, the said expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. Before us, the learned Counsel for the assessee submitted that though there is no evidence, however, such nature of expenses cannot be disallowed as it is part and parcel of assessee's business because training is required to be given to the employees for conducting the business in India which has been provided by Enron Power Servic B.V. Alternatively, he submitted that since the invoice is raised on the basis of works done, the expenditure to the same proportion can be allowed which are debited in the books of account. 18. Per contra, the learned Departmental Representative submitted that for claiming the deduction of expenses debited in the Profit & Loss Account, the onus is upon the assessee to prove that the same has been incurred for the purpose of business. The Assessing Officer as well as the Commissioner (Appeals) has given a very detail finding as to why such an expenditure cannot be allowed in the absence of any agreement, bills or any such evidence, therefore, the findings of the Commissioner (Appeals) should be confirmed. 19. We have heard the rival contentions and perused the findings of the Assessing Officer as well as of the Commissioner (Appeals) and the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above against which TDS has been deducted along with the photocopy of bills. It also furnished the details of services rendered by Arther & Andersen and Pricewaterhouse as required by the Assessing Officer. From these details, the Assessing Officer noted that in respect of some of the payments, no bills or any supporting documents have been filed by the assessee to substantiate the expenditure even no tax has been deducted on the same. Accordingly, he allowed the assessee's claim to the extent of bills produced against which tax has been deducted. Thus, out of the total claim of Rs. 3,89,37,000, he allowed legal and professional charges for a sum of Rs. 2,12,75,697, and the balance sum of Rs. 1,56,61,303, was disallowed on the following reasons:- a. The claim is not substantiated by any supporting documentary evidence. b. It is not known as to what was the actual nature of services rendered and the business exigency of the payments claimed to have been made for professional services is also not explained. In the absence of any supporting details, it is not possible to establish that the amounts are expended wholly and exclusively for the Assessee's business. c. No tax has been d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 3CD, held that 20% of the payment which aggregated to Rs. 8,95,350, is disallowed. 27. Before the Commissioner (Appeals), the assessee made the same submissions as were made before the Assessing Officer. The Commissioner (Appeals), however, confirmed the disallowance on the ground that the same has been done as per the working of the auditor. 28. Before us, the learned Counsel for the assessee, reiterating the submissions made before the authorities below and submitted that looking to the nature of payment and the business requirement in which it has to be paid, the disallowance under section 40A(3) of the Act could not have been made. The learned Departmental Representative, on the other hand, relied upon the findings of the Assessing Officer and the Commissioner (Appeals). 29. After carefully considering the rival submissions and the findings of the Assessing Officer and the Commissioner (Appeals), we find that none of the circumstances, as enumerated in Rule-6DD, has been found to be applicable in assessee's case for making the cash payment exceeding Rs. 20,000, to the expatriate staff. Once the exceptions provided in Rule-6DD is not fulfilled in the present case, we agree ..... X X X X Extracts X X X X X X X X Extracts X X X X
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