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D.C.I. T-9 (2) , Mumbai Versus M/s. Hazaria Cryogenic Engineering And Construction Management Pvt. Ltd.

2018 (1) TMI 329 - ITAT MUMBAI

Disallowance u/s. 40(a)(i) - Held that:- We hold that the proviso to section 40(a)(i)is not having retrospective effect and is not applicable for the year under appeal, that there was no default on behalf of the assessee in deducting or paying the tax as per the provisions prevalent at that point of time. As far as cases relied upon by the DR is concerned, we would like to mention that they lay down general principles, they do not deal with the issue on hand. Words “or” as well as “and’ can have .....

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es to be incurred, that the AO mixed those two contracts that he had not doubted the incurring of expenditure, that he was of the opinion that expenditure was to be allowed in the next assessment year, that TPO had not found any defect in the method of determining the ALP of the international transaction(IT) entered in to by the assessee, that mark up of 11. 79% has not be doubted by him. - It appears that the TPO, while passing order u/s. 92 took over the role of the AO. As per the provisi .....

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at the taxable income of the year under appeal. There in nothing on record to negate the finding of fact given by the FAA that income corresponding to the Pre-FID expenditure was offered for taxation. So, in our opinion, there is no need to interfere with his order. Confirming the same, we decide second ground of appeal - I.T.A./2124/Mum/2007 - Dated:- 3-1-2018 - Sh. Rajendra, Accountant Member And Ravish Sood, Judicial Member For The Revenue : Shri Jayant Kumar, DR For The Assessee : Shri Keta .....

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about deleting the disallowance made by the AO u/s. 40(a)(i) of the Act. During the assessment proceedings, the AO observed that the assessee had paid technical service fees to Bouyhues Offshore, Paris (BOP)without paying the tax deducted at source on such payments. Referring to the provisions of section 40(a)(i), the AO held that payments were made outside India for technical service fees, that tax was not create on such payment, that the payment made by the assessee was not allowable for the p .....

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ble material, the FAA held that the assessee had deducted tax on such technical service out of which part payment of such tax was deposited within the time allowed u/s. 200 of the Act, that the AO had held that entire tax was not paid by the assessee and that amount in question was not deductible. He referred to proviso to the section 40(a)(i) and held that same would not be applicable if the assessee would either deduct tax or would be such tax, that even if one condition was fulfilled no disal .....

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sfied no disallowance was called for, that the assessee had deducted tax at source, that no disallowance was called for. He further observed that the AO had raised serious doubts regarding the deduction of tax itself, that he had made a reference to the balance sheet of the assessee wherein there was no entry of outstanding tax deducted at source, that he had held that tax was deducted on such payments. Considering the observations of the AO, the FAA directed him to verify the claim made by the .....

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at the FAA did not take notice of the conditions provided in the proviso. He referred to the case of Puthuthotam Estates(1943)Ltd. (127 ITR 481). The Authorised Representative (AR) referred to the demand notice issued by the AO u/s. 156 of the Act and to the order giving effect to the order of the FAA. He also relied upon the cases of Modi Olivetti Ltd(263 CTR 28) of the honorable Allahabad High Court and Hazira Marine Engineering and Construction Management Private Ltd. (ITA/7512/Mum/2005, AY. .....

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AO to verify the fact about the claim made by the assessee that tax was deducted at source and was credited in the books of accounts. He had given a clear direction that if the claim was not found genuine about directing the tax and crediting in the books of accounts the AO could disallow the claim. Thus, the FAA has not allowed the expenditure incurred by the assessee-he had directed the AO to make necessary verification. While giving effect to the order of the FAA, the AO has not made any dis .....

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raised following question before the Hon ble Court: (3) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in deleting the ddisallowance's of ₹ 49, 37, 042/- on account of provisions for royalty, ignoring the provisions of Section 40(a)(i) of the Income Tax Act, 1961? The Hon ble Court discussed the issue as under: 12. The Assessing Officer disallowed and added back to the income of the assessee ₹ 49, 37, 042/- on account of royalty as unas .....

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period 1. 1. 1990 to 31. 3. 1991 at ₹ 47, 70, 089/- and R&D Cess at ₹ 1, 66, 953/-. The tax deductible on this payment amounting to ₹ 14, 31, 028/- was duly shown as deduction in the books of account on 31. 3. 1991. Later on, the actual amount payable to the collaborator in terms of the collaboration agreement was worked out at ₹ 44, 77, 151/- and R&D cess at ₹ 1, 56, 700/-. This amount was paid in the previous year relevant to the A. Y. 1992-93 i. e. in Nov .....

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hapter XVII-B and only then the deduction can be claimed in computing the income chargeable under the head Profits and gains of business or profession which stands satisfied in the present case inasmuch as the liability to pay royalty had accrued and it was not contingent as held by the Assessing Officer. The quantification had taken place at a later point of time. While making such provision the assessee also made book entires in respect of tax deductible and thus satisfied the condition of ded .....

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provides that royalty payable out side India shall not be deducted in computing the income chargeable under the head of profits and gains of business or profession on which tax has not been paid or deducted under Chapter XIII B. From the findings of the fact recorded by the ITAT in paragraph 26 of the order impugned, it is evident that the liability to pay royalty had accrued and was not contingent has held by the assessing officer, while making the provision the assessee had also made book ent .....

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allowed as deduction in computing the income of previous year in which such tax has been paid or deducted. Thus, the use of two words, namely, paid or deducted do not carry the same meaning. 15. In the present case the tax has been deducted and thus in that event the provision of Section 40(a)(i) stands satisfied. This provision of Section 40(a)(i) was substituted by Finance Act (No. 2), of 2004 which puts the condition that where tax is deductible at source under Chapter XVII B, and such tax h .....

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as it existed during the relevant assessment year i. e. Assessment Year 1991-92. For convenience of interpretation the provision of Section 40(a)(i) as existed at the relevant point of time i. e. during the assessment year 1991-92 and as substituted by Finance ( No. 2) Act , 2004 are reproduced below : - Section 40(a)(i) as existed during the A. Y. 1991-92:- 40. Notwithstanding anything to the contrary in section 30 to [38], the following amounts shall not be deducted in computing the income cha .....

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subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted. Explanation : For the purposes of this sub-clause, - (A) royalty shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of Section 9; (B) fees for technical services shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; ]. Section 40(a)(i) as substituted by Finance (No. 2) Act, 20 .....

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to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of Section 200; Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under .....

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w that since the assessee has deducted the tax during the previous year relevant to the assessment year in question i. e. A. Y. 1991-92, the conditionality of Section 40(a)(i) stands satisfied. The finding of the Assessing Officer that the royalty as claimed by the Assessee- Respondent was unascertained liability, has been found to be incorrect by the ITAT. Under the circumstances, we find no error in the impugned order of the ITAT. In result the Question No. 3 is answered in negative i. e. in f .....

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point of time. As far as cases relied upon by the DR is concerned, we would like to mention that they lay down general principles, they do not deal with the issue on hand. Words or as well as and can have two different meanings. But, do decide the matter before us, the case of Puthuthotam Estates(1943)Ltd. (supra), cited by the DR is of no help. Considering these facts, we decide ground no. 1 against the AO. 3. Next ground of appeal is about deleting the disallowance of ₹ 2. 70 crores. Du .....

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holding that the same was allowable in the subsequent years. 3.1. Aggrieved by the order of the AO, the assessee made elaborate submissions before the FAA. After considering available material, he held that the only reason for disallowance was that the income in respect of Pre/Final-investment-decision(Pre-FID)was that the contract about the transaction was recognised later, that the assessee has entered into two independent agreements, that income receivable from Hazira LNG Private Ltd. (HLPL) .....

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ntract with the associated enterprise(AE)was at arm s length. Finally, he deleted the addition made by the AO. 3.2. During the course of hearing before us, the DR relied upon the order of the AO and argued that the expenses should be restricted to the income offered for taxation, that the TPO had rejected the transfer pricing study of the assessee, that the order of the FAA was non-speaking. The AR stated that the role of the TPO was to determine the ALP of the International Transactions, that h .....

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the assessee by way of progressive monthly payment, that for executing the project the assessee had entered into agreement with BOS, that during the negotiation HLPL requested the assessee to start work pre-final investment decision in order to commence the project, that Pre-FID activities were carried out from October 2001 to January 2002, that the activity were partly carried out outside India by BOS, that an invoice of ₹ 5. 36 crores was raised by BOS for the services rendered to the a .....

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dependent of the expenses incurred, that it was not a reimbursement of pre-fid expenses, that Pre-FID expenses were part of the total cost of contract, that equating these independent transactions was not in line with the principles of TP, that the assessee had offered the income for tax purposes as for the proportionate completion method of accounting, that it had recognized income of ₹ 12. 53 crores in the profit and loss account for the year under appeal, that the income was recognized .....

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the Pre-FID expendi - ture was already offered for taxation, that the mark up of 11. 79 % on cost was at arm s length, that the assessee has benchmarked the transaction with the result of external comparables, that the TPO had accepted the mark up, that there was no justification to restrict the claim of expenses in proportion to the extent of income (i. e. 2. 65 crores), that the whole sum of ₹ 5. 36 crores of Pre-FID expenses along with 11. 79 % of mark up had been offered for tax. 3. 3. .....

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