TMI Blog2009 (12) TMI 852X X X X Extracts X X X X X X X X Extracts X X X X ..... Mangalore Refinery and Petrochemicals Limited (MRPL). 2.1 The assessee company filed its original return of income for assessment year 1996-97 on November 30, 1996, reporting a net taxable loss of Rs.135,257,667/-, under the above contracts, based on the provisions of the Agreement for avoidance of double taxation entered into between India and Japan (the treaty). The audit of the financials for the HBJ contract was under progress at the time of filing the original return of income and a copy of the unaudited financial statements was filed along with the return. Later, the assessee filed arevised return on February 18, 1997, enclosing the audited financial statements and the tax audit report in respect of the HBJ contract. In the revised return, the total loss under the head profits and gains from business and profession was recomputed at Rs.45,851,657/-. 2.2 The Joint Commissioner of Income-tax, Special Range-12 completed the summary assessment under section 143(1)(a) of the Income-tax Act, 1961, on the original return accepting the loss reported. Subsequently, the case was selected for scrutiny. The Assessing Officer completed the assessment and passed an order u/s 143(3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es before us submitted that ground No. 1b relating to disallowance under Rule 6D in respect of domestic traveling expenses and ground No. 2 are misconceived and the Revenue should not have taken these grounds, for the reason that the first appellate authority had in fact decided these issues against the assessee. In view of these submissions, we dismiss ground No. 1b and ground No.2 of the Revenue s appeal as misconceived. 8. We now take up ground No. 1a and 1c. 8.1 Coming to ground No. 1a being 20% disallowance of foreign currency spent and ground No.1c being estimated disallowance under Rule 6D out of traveling expenses incurred outside India, both the parties submitted before us that the issue is clearly covered in assessee s favour by the decision of the E Bench of ITAT, Mumbai in ITA No. 4053/Mum/99 for the assessment year 1994-95 order dated 8 th June, 2005. The Tribunal at para 7 page 3 of that order observed that this is not a case where the assessee has not furnished the particulars and details of expenses at all. Looking at the facts of the case, the Tribunal observed that the assessee was a non resident company, maintaining its head office account in Japan and under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e employee. Mr. Pardiwalla further supported the order of the CIT(Appeals) by referring to article 7(3) of the convention between Government of Japan for avoidance of double taxation and the prevention physical evasion with respect to tax on income and submitted that this article entitles the assessee to claim deduction of expenses incurred for the purpose of permanent establishment. He further referred to protocol to the DTAA with Japan dated 7 th March, 1989 specifically to paragraph 7, wherein it is stated that deductions in respect of executive and general administration as referred to in the said paragraph are to be allowed in accordance with the domestic law of India and submitted that the term executive and general administrative expenses have to be understood as in sub-clause (iv) to section 44C. He pointed out that the head office expenditure means executive and general administrative expenditure incurred by the assessee outside India. 11. After hearing the rival contentions, we are unable to persuade ourselves to accept the contention of Mr.Pardiwalla that the disallowance in question u/s 37(5) could not have been made in view of the double taxation agreement with J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para 7 of the protocol read with clause 3 of Article 7 of the Convention with Japan is not correct. In our humble opinion, rental expenditure in question falls within the ambit of executive and general administrative expenses and to the extent they are incurred within the country, the allowance or otherwise will be governed to the domestic law. Thus, this argument,in our humble opinion, has to be rejected. 14. Coming to the argument that section 37(4) applies only when the accommodation in question is used for the purpose of housing guests, we find that the Hon ble Madras High Courtin the case of CIT, Tamil Nadu-III vs. Aruna Sugars Ltd. 123 ITR 619 at page 623 held as follows: Thus, in our opinion, where a guest house is maintained, either in the principal place of business or in a place where the factory is located, for the Directors and other employees of the company, who have to visit it for the purpose of Company s business, then any expenditure incurred for the maintenance of such accommodation cannot be brought within the scope of s. 37(3). Further, in such a case, an occasional stay by a person who visits the factory for the purpose of its business cannot also be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite invoices. 17.1 After hearing rival contentions, we find that the payment in question was made to one General Electrical Technical Services Co. The payment pertains to two invoices. In fact, for the subsequent assessment year, an amount of US $ 4,38,299 was paid to the same party and was allowed as expenditure.. The assessee had provided the Nos. of the invoices raised by General Electrical Technical Services Co., but for some reasons could not produce the copy of the invoices. The first appellate authority considered the fact that the total sub contractor cost was Rs.6,48,48,040/- and the assessee was successful in furnishing copies of invoices of 90% of the cases and only in the case of 10% it had expressed difficulty in producing the same. He further observed that the accounts were audited and that the payments were made by way of cheques, Tax Deducted at Source and detailed break up of the sub contractor s cost, detailed scope of work was provided. On these circumstances, the first appellate authority was of the opinion that in view of the circumstantial evidence the claim of the assessee has to be allowed. We fully agree with these findings and uphold the same. 17.2 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent covered in clause (a) and clause (b) of section 10(6A), such payment cannot be treated as income. Thus, we uphold this finding of the first appellate authority and dismiss this ground of the Revenue. 19. In the result, the appeal of the Revenue is dismissed. 20. ITA No. 1326/Mum/2001.: (A.Y. : 1997-98) In this appeal filed by the Revenue for assessment year 1997-98, following grounds have been raised: 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that profit in respect of offshore supply contract to MRPL cannot be taxed in India. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deciding that A.O. should have computed profit or loss of the assessee in respect of projects executed in India on the basis of financial results shown by assessee and not be resorting to estimation by applying Rule 10 of the I.T. Rules. 21. Mr. Narender Singh, the learned DR vehemently contends that the income earned by the assessee in respect of offshore supply contract, is intricately related and connected with contract of execution of work in respect of Mangalore Refin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se in favour of the Revenue. Subsequently as this decision of the Authority for Advance Rulings which was reported in 271 ITR 193 (AAR) was reversed by the Hon ble Supreme Court, the Bench recalled the matter for fresh consideration. He further relied on the following case laws : : Motorala Inc. vs. CIT ITA No. 1318/Mum/2001 ITA No. 4107 4108/Mum/2002. He supported the order of the first appellate authority. 23. Coming to the second ground of rejection of books, the learned counsel for the assessee took this Bench to para 7 of the CIT(Appeals) order and relied upon the same. He pointed out that the AO agrees that the assessee had produced the cash book but wondered how he could come to a conclusion that ledgers are not maintained. He pointed out that the assessee was maintaining the books of account in a similar fashion for more than a decade and that the same were audited and the assessee had also pro duced all necessary evidence before the AO. Mr. Pardiwalla further submitted that there is no basis for the assessee to estimate the income at 20%. Referring to Rule 10 he pointed out that the AO has not applied or even admitted to apply this rule and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port licenses and approvals, (2) Obtaining all other approvals of the Government of India and its agencies as required, and (3) Customs Clearance. ARTICLE 7- DELIVERY OF OFF-SHORE EQUIPMENT AND MATERIALS: a) SUPPLIER shall procure Off-shore Equipment and Materials from sources outside India, based on the approved list of vendors included in Exhibit G. SUPPLIER has the sole right of selection of the vendors to the extent the selection is made from the vendors in the list approved by the Parties hereto. OWNER shall have the right to visit the works of the vendors selected by SUPPLIER during manufacture of the Off-shore Equipment and Materials for inspection under Paragraph e. below. SUPPLIER shall expeditiously ship Off-shore Equipment and Materials to OWNER for delivery on CIF New Mangalore Port, Bombay Port or Indian International airport basis (as interpreted under INCOTERMS 1990 Edition) 1990 Edition) in accordance with the schedule as set out in Exhibit E. With respect to the unloading of Off-shore Equipment and Materials, the Contract Price set out in Article 4 includes any cost for unloading the cargo from the vessel up to the point where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country. (5) There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said to be involved in the transaction, the aforementioned provision will have no application. The permanent establishment cannot be equated to a business connection, since the former is for the purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and the latter is for the application of section 9 of the Income- tax Act. (6) Clause (a) of Explanation 1 to section 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India are taxable in India. (7) The existence of a permanent establishment would not constitute sufficient business connection , and the permanent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to the taxing entire income attributable to the permanent establishment. (8) There exists a difference between the exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, it can be precisely seen that when the assessee made offshore supply of equipment to BPL on CIF Bombay basis against the stated consideration, the property in the equipment passed on to BPL on the port of Germany itself. It is trite law that income accrues at the place where the title to goods passes to the buyers on the payment of price. Our view is fortified by the judgment of the Hon ble Supreme Court in Seth Pushalal Mansighka (P) Ltd. Vs. CIT (1967) 66 ITR 159 (SC). As it is the case of of fshore supply of equipment, it is axiomatic that this transaction got completed outside India. Thus no income accrued to the assessee in India towards this transaction. 30. Similar decision has been taken by the L Bench of the Tribunal in ITA No. 4107 4108/Mum/2002 in the case of M/s Xelo Pry Limited, order dated 22 nd June, 2009. In this case, after considering the CBDT Circular No. 23 dated 23-07-1969, Circular No. 786 dated 7-2-2000 and Instruction No. 1829 dated 21-9-1989 at para 16 and 17, it is held as follows : 16. On going through the CBDT s view in the above Instruction, it is abundantly clear that no part of income can be deemed to accrue or arise in India d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ority that the rejection of books of accounts was arbitrary and uncalled for. The first appellate authority rightly observed that the AO has not explained why the correctness and completeness of the accounts of the assessee are suspect. We uphold these findings. 34. Coming to application of Rule 10, the same does not arise as we have already held that the rejection of books of account was bad in law. In any event, the requirements of Rule 10 have not been applied by the AO. Be it as may, the AO has no basis for estimating the profit at 20%. For all these reasons, we dismiss this ground of the Revenue. 35. In the result, the appeal of the Revenue is dismissed. 36. ITA No. 3520/Mum/2005 ITA No.200/Mum/2003 (Cross Appeal for assessment year 1998-99) The assessee s appeal is on the sole issue of tax rate. The ground reads as follows : Based on the facts and circumstances of the case, the Appellant respectfully submits that the learned Commissioner of Income-tax (Appeals)-XXXI has erred in disposing the appeal filed by the Appellant vide an order under Section 250 of the Income-tax Act, 1961 ( Act ), on the following grounds. In confirming the tax rate of 48 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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