2007-VIL-320-ITAT-DEL
Equivalent Citation: TTJ 110, 013, [2007] 15 SOT 1 (DELHI)
Income Tax Appellate Tribunal DELHI
IT APPEAL NOS. 192 AND 206 (CHD.) OF 2005
Date: 30.03.2007
SNC-LAVALIN/ACRES INC.
Vs
ASSISTANT COMMISSIONER OF INCOME-TAX.
BENCH
Member(s) : N. V. VASUDEVAN., DEEPAK R. SHAH.
JUDGMENT
These cross-appeals by assessee and Revenue are directed against order of learned CIT(A), Palampur, dt.22nd Nov., 2004.
2. The appellant is a Canadian company incorporated under Canadian law and having its registered office atCanada, incorporated under Canada Business Corporation Act, and is liable to tax inCanada. It is a joint venture company which has been incorporated only for the execution of Chamera Hydro Electric Project-Stage II inIndia. Two companies namely, SNC Lavalin Inc., and ACRE Inc. have come together in the joint venture to form the appellant company. The appellant company is a wholly-owned subsidiary of SNC Lavalin Inc., which in turn is a wholly owned subsidiary of the principal holding company SNC Lavalin Group Inc. The status of the appellant under the IT Act, 1961 is that of a non-resident. The appellant company together with JP Industries Ltd. was awarded a contract by National Hydro Electrical Power Corporation, Faridabad (NHPC), Haryana, on 18th July, 1999 for execution of planning, design and engineering review, site technical supervision, installation, testing and commissioning of electro-mechanical equipments for execution of 3 x 100 Chamera Hydro Electrical Project, Stage-II, Chamba, in Himachal Pradesh, India on turnkey basis under contract No. NH/Cont/CH-II/2002, dt.18th July, 1999(hereinafter referred to as Chamera project). The special conditions of contract were specified in document II, parts A, Band C. The project was financed by international funding agency, namely, European Development Corporation (EDC). The company opened a project office atNew Delhiand 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) inIndiaafter obtaining necessary approval from Reserve Bank ofIndia. On application filed by the assessee under s. 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., 2000to open project office atNew Delhiand 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 inIndiaalong 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 on31st Oct., 2001declaring an income of Rs. 1,74,99,350. The said return is accompanied by computation of income as well as statement of accounts of the project office and the audit reports. The return was processed on22 July, 2002at the returned figure. During the course of scrutiny by the Assessing Officer (hereinafter referred to as the AO), the assessee filed a letter dt.26th Nov., 2003, whereby revised claim of income attributable toIndiahas been filed showing the revised income of project office at Rs. 27,99,115. According to the assessee, income attributable to project office inIndiawould be 19,63 per cent 01 the income as shown in the return. Subsequently, however, before the CIT(A), the claim was again revised and it was stated that ratio of expenses of the Indian project office may be adopted at 21.84 per cent. and income assessable liable to tax inIndiamay be modified accordingly. AO however rejected the claim of revision of income made under the letter without filing any revised return and held that income shown in the project office in the return on the basis of project accounts would form the basis of assessment. The claim of apportionment and attribution was thus rejected for the reasons detailed in para 23.3 to para 25.3 of the assessment order. Further, the AO made various additions on account of various disallowances and computed total taxable income of the appellant at Rs. 11,01,37,425 as against returned income of Rs. 1,74,99,350. He further charged interest under ss. 234B and 234C of the IT Act, 1961 (hereinafter referred to as the Act) and determined total demand at Rs. 6,51,61,036. In the meanwhile, the appellant moved an application under s. 154 of the Act. The AO vide order under s. 154 dt. 4th June, 2004 rectified the order under appeal and reduced the total taxable income to Rs. 1,06,84,67,698 by rectifying the mistake with regard to an addition of Rs. 32,42,301 by way of disallowance under s. 40(a)(i) of the Act with respect to the payment to Donell Consultant Inc., Canada, which he found was considered by the appellant itself as inadmissible expenditure and added back as per computation sheet filed with the return of income to arrive at the assessable income. The learned CIT(A) not only substantially upheld the basis of assessment but further enhanced the assessment by disallowing a sum of Rs. 85,08,852 in respect of guarantee and insurance expenses as such expenses were found not relating to Chamera project executed by appellant which 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 beha1f 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) inIndiaand the Canadian Office (HO).
5.1 The assessee filed a return of income on31st Oct., 2001along with audited statement of accounts and other documents disclosing the income of the project office inIndiaat Rs. 1,74,99,350. While filing the return, the assessee declared entire income from Chamera project as attributable to the PE inIndia. Later on, by a letter dt.26th Nov., 2003, the assessee submitted that the profit arising out of Chamera project is to be bifurcated between Head Office inCanadaand PE inIndia. It was claimed that only such profit as is attributable to the PE in India can be taxed in India in terms of s. 5(2) of the Act r/w s. 9(1)(i) of the Act and the agreement between India and Canada in terms of Double Tax Avoidance Agreement (in short DTAA). The AO held that the attribution principle will apply only when there is exceptional difficulty in determination of the true profit of the PE. He held that 100 per cent of the business activities are being effected through the PE and all the contract activities and proceeds are being routed through PE. He also held that all the bills and invoices are being raised by the appellant on NHPC under the signatures of Project Director. Mr. John Anderson, who is officer incharge of PE inIndia. The AO held that the question of attributing part of contract receipts to the PE inIndiaand partly to Head Office inCanadaarises only when income does not accrue or arise inIndia. In this case not only services are being rendered inIndiaand income also is accruing or arising inIndia, but the same is emanating from source, i.e., NHPC inIndia. He accordingly held that the claim of assessee that only 19.63 per cent of the contract proceeds can be considered as income accruing inIndiais not tenable. He accordingly rejected the contention of assessee that over 80 per cent of the contract receipts belong to Head Office and not to PE inIndiais wrong as most of the work relating to project inIndiaand bills/invoices relating thereto have been raised through the PE inIndia. Since the assessee has established a PE inIndia, the income is taxable inIndia. Learned CIT(A) in para 8.8 of his order concluded and approved the action of the AO. He held that the AO was justified in rejecting the belated claim of the appellant for attribution and apportionment of profit. Learned CIT(A) held that the assessee established its PE inIndiawith the approval of RBI on16th Aug., 2000. The agreement for execution of Chamera project was made inIndia. The assessee has credited all contract receipts from Chamera project and deducted all contract expenses relating thereto in the P&L a/c in the books of accounts of PE inIndiaas 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 P.E inIndia. The contract receipts were received inCanadaon behalf of the project office inIndiafor the services rendered inIndia. 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 inIndiai.e. NHPC and services are also rendered inIndia. Even under arts. 7(1) and 7(2) of the DTAA betweenIndiaandCanada, the contract proceeds attributable to PE inIndiaare taxable inIndia. 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. vs. CIT (2006) 204 CTR (SC) 182 : (2006) 284 ITR 323 (SC) will not come in the way of claim of assessee made by a simple letter instead of filing a revised return. He submitted that tile claim of attribution has been considered by AO as well as by learned CIT(A) on merits. The claim was not rejected on the ground that the claim was not made by filing revised return. Since claim has been examined in detail by AO as well as by CIT(A), merely on technical grounds, the claim should not be rejected. Prior to the decision of Hon'ble Supreme Court in Goetze (India) Ltd., the question whether a claim could be made without filing a revised return under s. 139(5) and only by way of a letter was held admissible, as held in following cases:
(i) Bharat Aluminium Co. Ltd., ITA No. 1818/Del/2004, order dt.6th Oct., 2004(Modification of claim by letter allowed);
(ii) Wipro Ltd. vs. Dy. CIT (2005) 96 TTJ (Bang) 211 : (2006) 5 SOT 805 (Bang);
(iii) CIT vs. Geo Industries (1998) 147 CTR (Mad) 426 : (1998) 234 ITR 541 (Mad) [inter alia following Instruction No. 14(XL-35) of 1955, dt.4th April, 1955]
(iv) Anchor Pressings (P) Ltd. vs. CIT (1986) 58 CTR (SC) 126 : (1986) 161 ITR 159 (SC) held that grant of relief was not dependant on a claim being made however facts in support of the Claim must be on record.
(v) Circular No. 14 (XL-35) of 1955, dt.4th April, 1955. Hon'ble Gujarat High Court in the case of Chokshi Metal Refinery vs. CIT (1977) 107 ITR 63 (Guj) considering above has held "it is incumbent on the ITOs to follow the circular of the Central Board of Revenue of 1955 to which we have referred above and to draw the attention of the assessee concerned to all the reliefs and refunds to which the assessee seems to be entitled on the facts of the case even though the assessee might have omitted to claim refund or relief."
He accordingly pleaded that the decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd. may not be roped in so as to avoid the claim.
5.3 Assailing the arguments of Mr. M.S. Syali, learned special counsel for Revenue, Shri Chopra, submitted that the contentions raised in this behalf are factually and legally unsustainable. Since the issue has now been decided by Hon'ble Supreme Court wherein it was held that no claim should be entertained which is not part of return or 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 inIndiaand Head Office inCanada, 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. 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 proceedings, though without filing revised return, it will be unjust on our part to dismiss this ground on technicalities. The decision of Hon'ble Supreme Court in Goetze (India) Ltd. could have been applied had the AO/CIT(A) refused to entertain the claim made without filing a revised return. However, since the claim has been examined in detail and since even the powers of Tribunal are not restricted as held in the very said case of Goetze (India) Ltd., we shall proceed to entertain the ground raised before us in this regard.
7. Advancing his arguments on the attribution of profit to Head Office inCanada, Shri Syali submitted that the assessee can choose to be governed by the provisions of DTAA if it is favourable to it. The assessee has exercised the option to be governed by the provisions of DTAA betweenIndiaandCanadain terms of s. 90(2) of the Act. Shri Syali further submitted that as per provisions of s. 5(2) of the Act, the income of non-resident can include only such income which is accruing or arising into or deemed to accrue or arise in India. Sec. 9(1)(i) provides that all incomes accruing or arising, whether directly or indirectly through or from any business connection inIndia, shall be deemed to accrue or arise inIndia. As per provisions of art. 7(1) of the Indo-Canada DTAA, business profits of an enterprise of a Contracting State shall be taxable only in India if the enterprise carries on business in the other Contracting State though a PE situated therein. If the enterprise carries business through a PE then it may be taxed in the other State but only so much of them as it is attributable to:
(a) the PE, and
(b) ..... from other business activities of the same or similar kind as those effected through that PE.
The provision of the OECD Model Convention and the provision of the Indo-Canada treaty vis-a-vis arts. 7(1) and 7(2) are absolutely pari materia barring only the contents of art. 7(1)(b). The contents of art. 7(1)(b) are factually not applicable in the facts of case as there are no sales of goods and merchandise of same or similar kind as those sold, or from other business activities of the same or similar kind as those effected through that PE. It is an admitted factual position that the Head Office has acted only through the PE. This is accepted by the AO at p. 31, para 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, art. 7(1)(b) factually not being applicable, the issue of apportionment is only to be tested vis-a-vis art. 7(1)(a) r/w art. 7(2). Article 7(3) only refers to computation of the attributed income and has no impact on the extent of attribution. But for art. 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 art. 7 is that the right to tax does not extend to profits that the enterprise may derive from that State otherwise than through the PE. This is of course subject to the restricted force of attraction stated in art. 7(1)(b) which still does not bring within the purview of tax all the profits. It only ropes in profits from direct transactions of same or similar kind, which, in this case are none. Based on the premise that in taxing the profits that a foreign enterprise derives fromIndia, the tax authorities ofIndiashould look at the separate sources of profit that the enterprise derives fromIndiaand should apply to each, the PE test. Article 7(2) contains a central directive that profit to be attributed even in dealings with head office should be as if instead of dealing with the head office, it was dealing with an entirely separate enterprise under condition prevailing in the market. This is not dispensed merely because the PE is a PE of the same organization as that of Head Office or of the Head Office itself. This view of the OECD commentary finds support from international cases decided by various Courts. The decisions referred to and relied upon are:
1. National Westminister Bank No. 95-7587.
2. Cudd Pressure Control.
These decisions bring out the attributes of the PE being a separate and distinct entity and their dictums are of course subject to the specific wordings of the relevant art. 7(3) of Indo-Canadian treaty. However, it is evident that but for the treatment given in art. 7(3), the result would have been as stipulated in these decisions. Thus, there is no warrant to ignore or not to apply attribution. Attribution is equally recognized by domestic law and the Hon'ble Courts inIndiaas per s. 9(1)(i) r/w Expln. (a) thereto. Reliance is not placed on this section to submit its applicability, as an option to be taxed under DTAA stands exercised, but it is being cited only to show that even under the IT Act all incomes from all operations cannot be said to be taxed inIndia. There have been instances, where an assessee carries on manufacture, sale, export and import, but it is not possible to say that the place where the profits accrue to him is the place of sale. The profits received relate, firstly, to his business as a manufacturer, secondly, to his trading operations, and thirdly, to his business of import and export. Profit or loss has to be apportioned between these businesses in a business like manner and according to well established principles 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. vs. CIT (1954) 25 ITR 27 (SC);
2. CIT vs. Ahmedbhai Umarbhai & Co. (1950) 18 ITR 472 (SC);
3. Provincial Treasurer ofManitobavs. WM. Wrigley Jr. Co. Ltd. (1951) 20 ITR 614 (PC);
4. International Harvester Co. of Canada Ltd. vs. PTC & 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 art. 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 Elaborating his arguments, Mr. Syali submitted that the issue is not what is the extent of attribution, but, whether at all attribution is to be examined and arrived at in the circumstances. Both the lower authorities have denied the application of attribution as such. The claim of the appellant that as per its working attribution should be about 21 per cent is rejected at the outset as there is in effect an alleged acquiescence in the matter. The acquiescence is said to be from the facts that:
(a) A project account was prepared in which all incomes and expenses were submitted for taxation. The accounts submitted clearly affirm its correctness in support of the income and expense, in its entirety, being considered inIndia.
(b) This means that at one point all incomes and expenses were accepted to be attributable to PE.
(c) Since work is done in India-all bills are raised through the PE, the entire contractual receipt has been subjected to TDS and there is no change in fact from the time the return was submitted, the assessee cannot retract from its stand.
(d) Claim for apportionment only emanates from the proposed action of applying ss. 44C and 40(a)(i) to the claim for expenses as originally made.
(e) There is no other activity of the company but to execute this project. The activities are integrated and hence inseparable. Activities are either by or through the PE and in any event, provisions of IT Act ensure that taxation will be inIndiaon touchstone of s. 5 of the IT Act.
7.2 It is further submitted that the reasons are factually and legally not tenable for the reasons that merely because contract for execution of Chamera hydroelectric project was made in India and was executed by the PE in India will not result in refusal of attribution as it is an admitted fact that the PE of the applicant came into existence only on 16th Aug., 2000 when permission was obtained from RBI for opening project office in India and the agreement with NHPC was signed on 18th July, 1999 when the PE was not in existence. Even otherwise, as per the provisions of art. 7(2) of the Indo-Canada treaty, PE and Head Office are to be treated as a functionally separate entity thus even though the contract was executed through the PE (as conduit) inIndia, it would not mean that all the profits or receipts are attributable toIndia. As per the provisions of s. 5, Expln. 1, income accruing or arising outsideIndiashall not be deemed to be received inIndiaby reason only of the fact that it is taken into account in a balance sheet prepared inIndia. Even as per provisions of s. 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., 2004reported in (2004) 186 CTR (St) 45 : (2004) 265 ITR (St) 23 and Circular No. 5 of 2004, dt.28th Sept., 2004reported 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 inIndiawill be liable to tax inIndia. 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 are not taking into cognizance the provisions of art. 7 of the Indo-Canada DTAA. Further, these reasons do not hold ground as:
- There is no estoppel against a statute.
- Consent can never give jurisdiction which is not warranted by statute.
- "Project" and "PE" are two different concepts-and without prejudice, mere admission does not licence a course for power vested by statute in a direction, not warranted by the statute.
Reference to what is submitted with the return cannot survive as the basis after attention has been invited to the correct statutory entitlement/procedure applicable in the matter. Entries made in accounts cannot govern the ambit of taxation. It is indeed open to the assessee to show that entries are incorrect. Acquiescence or estoppel are rules of evidence which cannot govern or control the statute. Merely because an item was shown as income initially does not mean or prevent its retraction and correct taxation. Examples in jurisprudence are several on this concept. Two factors decisively indicate that all work was not done inIndia.
(a) The fact remains that the contract was entered into on18th July, 1999and the PE was established on16th Aug., 2000. With immediate effect of entering into of the contract, work as stated in part 'A' had started and its value as work-in-progress was indicated as opening work-in-progress in project accounts at Rs. 1,84,30,838.
(b) The AO and the CIT(A) admit that 30 per cent of the work was done outside India as held in p. 31 of order of AO in para 24 and in remand proceedings by letter of AO to CIT(A). These factors clearly show that all the work was not done inIndia. Extent of attribution i.e., whether it should be, 30 per cent as admitted but denied by AO or 80 per cent as claimed depends on application of attribution guidelines starting from the books maintained of the project [which are accepted both by AO/CIT(A)]. The integration of the activity does not rule out attribution. It is not a commercially impossible situation where such help is sourced to an independent party.Splitis possible and so it should be done. The mere fact that the project is one does not make it impossible of functional division. Whether the Head Office acted on its own or acted as a conduit is of no relevance as a commonly accepted fact will be that the work done by Head Office or 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 vs. 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 proceedings before CIT(A), it was attested by Ms. Sylvie Brossard, Vice President of the appellant company, that the project proceeds have been included in the returns filed with the Canadian IT authorities and it is confirmed that the entire proceeds have been so submitted. The allegation of the Departmental Representative that Canadian books of accounts and particulars regarding taxability inCanadawere called for by the AO is factually incorrect. Reference is invited to the submissions dt.13th Sept., 2004made by AO before the CIT(A), wherein AO has requested CIT(A) to call for following documents/information from the assessee:
- Global (Worldwide) accounts of the assessee company.
- Separate accounts of the head office inCanadaor any other branch etc.
- Copies of IT returns with complete sets of accounts and computation of income furnished to the Canadian and other Revenue authorities, if any
- How much of the income is shown in the return of income filed inCanadaon apportionment basis in the hands of HO for all the years right from asst. yr. 2000-01 onwards. In reply to this, a letter dt.27th Aug., 2004vide reference number CIT(A)/PLP/Appel/2004-05/553 was issued by CIT(A) to the assessee calling for these documents. In response to this letter, assessee filed a reply. Drawing attention to facts of the case, Mr. Syali submitted that the nature of work may be seen from copy of contract with NHPC. The main agreement for engineering and technical supervision was entered into between SNC Lavalin/Acres Inc. (as contractor) with NHPC. This agreement is accompanied by the following documents:
Document No. 1. General Conditions of Contract
Document No. II. Special Conditions of Contract
Part A-Planning, Design and Engineering
Part B-Site Technical Supervision
Part C-Supervision of Installation, Testing and
Commissioning of Electromechanical Equipment
Document No. III. Bill of Quantities
Planning, Design and Engineering Review
Site Technical Supervision
Supervision of Installation, Testing and
Commissioning of Electromechanical equipment
Document No. IV. Nil
Document No. V. Project Profile and Drawings
Assessee has submitted a co-ordinated 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 review of work carried out by the contractor (i.e., Jaiprakash Industries Ltd.) under Contract No. 1. Although the contract with NHPC was executed on 18th day of July, 1999, the undisputed fact is that the appellant established a PE inIndiaonly on16th Aug., 2000. Immediately after attaining the contract, work started inCanadaunder Part-A of the contract and thus major portion of Part-A was executed inCanadawithout any involvement of PE. Affidavit of Mr. Michel Silver, engineer employee of SNC-Lavalin/Acres Inc. affirming that during financial year 1999-2000, 36 Canadian personnel were seconded by. assessee for the purpose of execution of Chamera project. Out of these 36 personnel only 9 personnel visitedIndiafor a short duration. The description of work performed by various expats seconded by the assessee are enclosed at pp. 44 to 46 of the PB-I. During financial year 2000-01, 37 Canadian personnel were seconded by the assessee out of which 11 personnel made short visits toIndiaand 26 personnel never visitedIndiabut worked upon Chamera project inCanada. For execution of the Chamera project, PE of the assessee was only acting as a conduit between the Head Office and PE. Various correspondences have been enclosed in the paper book which depict the fact that review of all drawings and designs were undertaken by the Head Office inCanadaand all these drawings and designs were then submitted by the PE to NHPC. For executing this job the role of PE was limited to act as a conduit between the Head Office and NHPC. For denial of attribution of income to HO, the so-called limited force of attribution rules is being applied. The denial of attribution is also because a legally erroneous view is taken of art. 7(1)(b) or by resort to the provisions of the IT Act which admittedly are not being resorted to. Force of attraction may be restricted or complete. If it is complete all the profits of the Head Office are to be taxed as those of PE. However, if it is restrictive, only those profits that arise from the stated transactions are to be included in income attributable as are stated in the article. The Indo-Canada treaty does not embody complete force of attraction and hence profits other than those arising from what is stated in art. 7(1)(b) are not to be included. Article 7(1)(b) extends taxation by the State of the PE, i.e.,India, to direct activities 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 theContractingState. 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 inIndia. In fact, it is accepted by the Department that Head Office was acting through the PE inIndiaand all the drawings, reports, etc. were submitted to NHPC through the PE inIndia. This art. 7(1)(b) has no application on the facts and circumstances of the case of assessee. Mr. Syali, therefore, submitted that:
- Article 7(2) only applies to art. 7(1)(a).
- It has no application to art. 7(1)(b).
- Article 7(2) qualifies conceptually as to how PE is to be envisaged when attribution thereto is being considered. Since art. 7(1)(b) only deals with transactions of which and in which PE does not playa role, and applicability of art. 7(2) is ruled out. Apropos where a transaction is by or through PE, reference can only be made legitimately to arts. 7(1)(a) and 7(2).
- Any other construction shall negate the concepts expressly stated in art. 7(1)(a) r/w art. 7(2).
- Article 7(3) as it stands in Indo-Canada treaty only enlarges the scope of computation of income attributed under art. 7(1)(a) r/w art. 7(2). It has no role in determining attribution. It however emphasises and reinforces the distinction between PE and Head Office which is central to the said provisions.
- While arts. 7(1) and 7(2) of the DTAA attribute the profits to a PE, art. 7(3) computes what is attributable to the PE. Since computation always succeeds attribution, art. 7(3) will always be a fallout of the results obtained under art. 7(1) r/w art. 7(2). The claim for apportionment is based upon following facts:
1. Once a PE comes into existence in aContractingStatethe only fallout is that the profits of the enterprise are to the apportioned. Contract was entered into by NHPC directly with Head Office on18th July, 1999when PE was not into existence. All contractual proceeds were received by the Head Office of the assessee directly inCanada. Entire risk assumed by furnishing the performance guarantees was that of the HO. During the relevant asst. yr. 2001-02, only two expats were permanently stationed inIndialooking after affairs of the PE. That during the relevant assessment year, 37 personnel were deployed by the Head Office inCanadadirectly for the execution of the Chamera Hydroelectric Project-Stage II.
2. All these employees worked under the supervision of the Head Office which can be seen from the fact that out of 37 personnel, 26 personnel never visitedIndiaand only 11 personnel visitedIndiafor a short duration. The necessary capital required for day-to-day functioning of the PE was provided by the Head Office via telegraphic transfers. The expenditure ratio that is 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 s. 44D r/w s. 115A will apply and the taxation will be restricted to 20 per cent of the income without resort to s. 40(a)(i) or s. 44C.
8. Mr. Chopra, special counsel for Revenue, submitted that the claim of attribution and apportionment of profit between project office inIndia, which is the PE of non-resident and the Head Office inCanadais not factually and legally correct. Shri Chopra submitted that the books of accounts are of the project office inIndiaand 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 any further claim of apportionment or attribution of income would still remain an issue. Shri Chopra submitted that a few facts may be noted here. The appellant SNC-Lavalin Acres Inc.,Canada, is a corporation under Canada Business Corporation Act and is liable to tax inCanada. It is a joint venture company which has been incorporated only for the execution of Chamera Hydroelectric Project-Stage II inIndia. Two companies, namely, SNC-Lavalin Inc. and ACRE Inc. have come together in the joint venture to form the appellant company. The appellant company is a wholly owned subsidiary of SNC-Lavalin Inc., which in turn is a wholly owned subsidiary of the holding principal company, SNC-Lavalin Group Inc. The assessee company entered into an agreement for planning, design, engineering review and supervision of installation, testing and commissioning of electro-mechanical equipment with NHPC on18th July, 1999, and set up a project office inIndiafor the execution of the project after getting permission from the RBI. Books of account in respect of the project office have been maintained and audited and on the basis of such books of account return of income has been filed showing the income at Rs. 1,74,99,350. Subsequently, on26th Nov., 2003, the assessee filed a letter before the AO coming up with what it called "Computation of revised total assessable income based on attribution of profit to the PE". The assessee has bifurcated the expenses debited in the books of the project office into two parts-project office and HO, and as per the working arrived at the percentage of expenses for Indian branch to total expenses at 19.63 per cent of the total expenses and the receipts credited to the project office amounting to Rs. 9,82,06,599 has thus been divided into two parts in the ratio 19.63 : 89.37 and allocated the proportional amount to the project office and prepared a revised account and arrived at the net profit of the Head Office at Rs. 22,99,115. The assessee claimed before the AO that the revised computation of income is in accordance with the provisions of arts. 7(1), 7(2) and 7(3) of the Indo-Canada tax treaty. The request of the assessee calling upon the AO to carry out the task of allocation of income even after the assessee has itself filed the return of income on the basis of audited accounts of the project office inIndiaappears to be absurd and irrational. 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 inIndiahas 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 outsideIndiaor 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 vs. VR. S.R.M. Firm & Others (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 given in an entirely different context of facts. In the said case, the assessee did not maintain a PE inIndiain respect of the rubber estates owned inMalaysia. The finding regarding non-existence of PE inIndiais based on facts and material in the context of DTAA betweenMalaysiaandIndia. It was in the background of the above that the Court held that there was no need for production of a certificate from the Malaysian Revenue authorities to show that the Malaysian income of the assessee has already suffered tax.
8.1 Shri Chopra thereafter submitted that before the learned CIT(A), the AO vide his letter dt.13th Sept., 2004made a prayer that the assessee may be required to furnish the following information to have a clear picture of its operations:
(i) Global (worldwide) accounts of the assessee company.
(ii) Separate accounts of the Head Office inCanadaor any other branch, etc.
(iii) Copies of IT returns with complete sets of accounts and computation of income furnished to the Canadian and other Revenue authorities.
(iv) How much of the income is shown in the return of income filed inCanadaon apportionment basis of Head Office for all the years right from asst. yr. 2000-01 onwards.
(v) Whether any tax credit is claimed for the whole or any part of the TDS paid by the assessee inIndiaagainst its tax liability inCanadaor elsewhere? If so, the complete details thereof. Before the CIT(A), the assessee furnished vide its letter dt.14th Sept., 2004audited global balance sheet and financial report of SNC-Lavalin Group Inc. as well as a P&L a/c of the Head Office under the heading "Canadian office P&L a/c (Direct project proceeds and expenses) for the year ended31st March, 2001". This P&L a/c bears the date10th Sept., 2004. The P&L a/c appears to have been made much after the completion of the impugned assessment. The assessee company did not produce any books of account of the Canadian Head Office before the learned CIT(A). Sec. 594 of the Companies Act makes it incumbent upon a foreign company to furnish world accounts as well as Indian business accounts duly audited by a practising Chartered Accountant inIndia. The statutory requirements relating to maintenance of accounts by the foreign companies as per the provisions of the Companies Act have been elobarately explained by the Hon'ble AAR in its ruling in XYZ, In re (1998) 148 CTR (AAR) 417 : (1998) 234 ITR 335 (AAR) while upholding the applicability of MAT provisions contained under s. 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 conformity with s. 6(6) of FEMA represent the profits which are liable to tax in India. The project accounts reflect on the credit side, amounts received from the NHPC for the services rendered as per the agreement, whereas on the debit side, expenses incurred for the execution of the project inIndiahave been shown. Thus, the net profits which are arrived at, represent the profits of the project office inIndia. The project office is the PE of the assessing company as per art. 5 of the Indo-Canada tax treaty and the profits attributable to the PE are the profits as reflected in the project accounts. There is therefore no occasion for further attribution or apportionment between the head office and the project office in the assessment year.
8.3 Shri Chopra submitted that the argument of the learned counsel rather reinforces the contention of the Revenue that the project office accounts represent the Indian profits in accordance with art. 7 of the Indo-Canada tax treaty and are therefore liable to be assessed inIndia. After drawing up the accounts of the project office and debiting all expenses incurred by the project office on arm's length basis, there is no occasion for any further exercise of apportionment and attribution.
8.4 As regards reliance on the decisions of Hon'ble Supreme Court in Anglo French Textile Co. Ltd. vs. CIT and CIT vs. Ahmedbhai Umarbhai & Co., Shri Chopra submitted that both these decisions laid down that when different business operations are carried out by a business entity in various tax jurisdictions like manufacturing activity in one territory and sale of the products at another territory, profits of the entire business arising to the assessee engaged in these operations would need to be bifurcated on rational principles of commercial accounting. The proposition is unexceptional and well-settled. However, when separate accounts are maintained in the various tax jurisdictions, that is, for the manufacturing operation in one jurisdiction and sale in the other jurisdiction, profits arising in the various jurisdictions would necessarily have to be adopted on the basis of such separate accounts. Even after maintaining the separate accounts for the various branches, there would be no occasion for carrying out any further exercise of apportionment of aggregate profits of the assessee. In the instant 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 inIndia.
8.5 As regards reliance on the decision of CIT vs. 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 inIndiais 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 inIndia. In fact, the attempt of the assessee to retract from the facts, stated in the return under solemn affirmation, by filing a mere letter before the AO is, on the basis of this decision, legally unsustainable. The decision rather runs contrary to the stand of the appellant on the issue.
8.6 Addressing his arguments on scope and ambit of art. 7 of Indo-Canadian treaty and applicability of limited force of attraction rule, Shri Chopra submitted that it is significant to note that art. 7 of the Indo-Canada tax treaty is based on UN Model Convention and not on OECD Model Convention. This basic distinction has been lost sight of by the appellant while he rested his contentions entirely on the OECD Model Convention. UN Model contains the "force of attraction" principle whereby profits of an enterprise in the otherContractingStatewould not be limited to the PE but would comprise of the following three constituents:
(a) Profits attributable to PE,
(b) Profits from the sales of goods and merchandise of the same or similar kind as those sold through that PE, and
(c) Profits from other business activities of the same or similar kind as those effected through that PE. The constituents (b) and (c) above are missing in OECD Model Convention and the principle that is the basis of art. 7 of the said model is the principle of attribution which lays down that "the right to tax does not extend to profits that the enterprise may derive from that State otherwise than through the PE". A reference to the actual provisions of art. 7 would bring out the position as explained above.
8.7 In the UN Commentary (l1th Jan., 2001), it has been observed at p. 46, while elaborating para 1 of art. 7, "However, after discussion, it was proposed that the 'force of attraction' rule should be limited so that it would apply to sales of goods or merchandise and other business activities in the following manner: If an enterprise has a PE in the other Contracting State for the purpose of selling goods or merchandise, sales of the same or similar kind may be taxed in that State even if they are not conducted through the PE; a similar rule applies if the PE is used for other business activities and the same or similar activities are performed without any connection with the PE." Thus, it would be seen that art. 7(1) in UN Convention is much wider in scope as compared with corresponding article in OECD Convention since the profits 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 otherContractingStateto 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 art. 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., 2004issued by the OECD and quoted extensively from the said discussion paper for explaining the scope and ambit of art. 7(1) is meaningless without taking into account the most fundamental distinction between the corresponding art. 7(1) in the UN and OECD Model Conventions whereby UN Model is based on restricted force of attraction principle whereas no such principle is applicable in the OECD Model. Therefore, the submissions of the learned counsel based on the approaches suggested in the discussion paper for determination of the profits of the PE are entirely irrelevant and do not apply to the Indo-Canada treaty. Learned counsel dwelt upon at length on the two approaches, namely, Relevant business activity approach and functionally separate entity approach suggested in the discussion paper. Both these approaches discussed in the OECD discussion draft are based on exclusion of attraction rule for determining profits of the PE. Since this rule forms the very basis of the Indo-Canada treaty, modeled on UN Convention, the arguments of the learned counsel are without merit and deserve to be rejected.
8.9 Shri Chopra submitted that if the restricted force of attraction principle is applied to the facts of the instant case, the claim of the assessee for an apportionment of profits of the project office would in any case fall to the ground. It is relevant to mention here that the assessee company was formed only for the execution of Chamera project and no other contract was executed. Therefore, if any profits are to be attributed to the Head Office, the same would pertain to execution of the project inIndiaand would be covered by the extended sweep of art. 7(1) in the Indo-Canada tax treaty. Such profits would therefore liable to be taxed inIndia. Without prejudice to the abovementioned stand of the Revenue, the contention of the learned counsel based on apportionment of profits, even if any such profits pertain to the Head Office, would be of no avail in view of attraction rule in art. 7(1).
8.10 Para 2 of art. 7 of DTAA contains the central directive on which allocation of profits to a PE is intended to be based. The para is substantially similar in both the conventions, namely, UN and OECD. In the OECD commentary, it has been observed that the trading accounts of PE which are commonly available in well run business organizations will be used by the taxation authorities concerned to ascertain the profit properly attributable to that establishment. The commentary further observes that such trading accounts 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 art. 7 is subject to the provisions of para 3.Para3 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-Canada treaty is also modeled on the corresponding para in the UN Model Convention. Para 7(3) stipulates that the following expenses would be allowed, while computing the profits attributable to the PE:
(a) Executive and general administration expenses as are in conformity with the domestic tax laws of the State;
(b) Reimbursement of actual expenses incurred by the Head Office in respect of payments on account of royalties, fees or other similar payments;
(c) In case of a banking enterprise, any payment made by way of interest on moneys lent by the Head Office to the PE. However, deduction in respect of the above is restrictive inasmuch as the para debars deduction in respect of:
(i) any payments made by the PE to the Head Office by way of royalties, fees or other similar payments for use of patents, know-how or other rights,
(ii) any payment made by way of commission or other charges or specific services performed.
(iii) any payment made by PE to Head Office for management.
8.12 With regard to deduction of expenses while determining the profits of the PE, learned counsel has placed reliance on the judgment of Federal Court of Appeal, Canada in case of Cudd Pressure Control Inc. vs. Her Majesty, the Queen. In this case it has been held that, while determining the profits of the PE inCanada, notional rent for use of equipment given by the Head Office would be deductible. This decision based on Canada-US Tax Convention, which does not apply in the instant case since the corresponding provisions in Indo-Canada Treaty applicable in the present case are entirely different. Deduction of expenses, notional or otherwise, would be governed by the express and specific stipulations contained under the art. 7(3) of the Indo-Canada Tax Treaty which would govern the deduction of expenses. The decision renders no assistance whatsoever to appellant's case. Payments made by the project office to the Head Office would have to be considered in the light of the aforesaid provisions of art. 7(3). The various expenses debited in the project office would indicate that following expenses are on account of payments made to Head Office:
(i) Cost of personnel allocated by = Rs. 2,63,02,407
Head Office
(ii) Travelling expenses in r/o = Rs. 56,66,033
aforesaid personnel
(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 art. 7(3) is concerned, disallowance of the aforesaid deductions deserves to be upheld since the payments are covered under the prohibition contained under art. 7(3) above. Apart from the prohibition contained under art. 7(3), the deductions are also barred by virtue of s. 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 s. 40(a)(i) and have been rightly disallowed by the AO and confirmed by the learned CIT(A).
8.14 With regard to expenses, namely, cost of personnel and computers, etc. the assessee company entered into an agreement with its parent company, namely, SNC-Lavalin Inc. on 31st Aug., 1999 whereunder technical personnel were seconded to assessee company on time usage basis for rendering services for execution of Chamera project. The assessee company undertook to pay the travelling as well as boarding and lodging cost of such personnel. Further, hiring, maintenance and repair cost, etc. have been incurred by the service provider. The aforesaid expenses paid by the head office have been borne by the project office. These expenses are clearly of the nature of fees for included services covered under art. 12(4). The technical services rendered by SNC-Lavalin Inc. through these personnel comprise development and transfer of a technical plan or technical design.
8.15 Learned counsel for assessee has placed reliance on the decision of Mumbai Bench of the Tribunal in National Organic Chemical Industries Ltd vs. Dy. CIT (2005) 96 TTJ 765 (Mumbai) and argued that the words "make available" used in the article indicate that not only the services should be technical in nature but should be such as to result in making available the technology to person receiving the technical services in question. The test laid down by the Tribunal is fully satisfied in the present case. Payment for fees for included services to SNC-Lavalin Inc. made without deduction of tax at source would attract the provisions of s. 40(a)(i) of the Act and has been rightly disallowed by the AO and sustained by the CIT(A). He accordingly pleaded that the entire income of the project office inIndiais to be taxed inIndiaas per art. 7(1), 7(2) and 7(3) of DTAA betweenIndiaandCanada.
9. We have heard the counsel at length. We have considered rival submissions, relevant facts and various case law cited. The appellant entered into an agreement on18th July, 1999with NHPC which was executed inIndia. As noted in para 2 above, the appellant company is a joint venture company incorporated only for the execution of the said Chamera project. Except the execution of said Chamera project, the appellant company has not executed any other contract either inIndiaor outsideIndia. The whole of the activity pertains to only execution of the Chamera project signed on18th July, 1999. The other contractor involved in this regard is M/s Jai Prakash Industries Ltd. ofIndia. It is the contention of the assessee that even prior to setting up of the PE inIndia, 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 inIndiais outside the scope of taxation inIndia.
9.1 Sec. 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. Sec. 9(1) provides that following income shall be deemed to accrue or arise inIndia. Clause (i) of s. 9(1) provides that all income accruing or arising directly or indirectly through or from any business connection inIndia. 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 inIndiaaccrues inIndiaand accordingly liable to tax inIndia. However, as per s. 90(2), where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax or for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of this Act and the provisions of DTAA apply and if the provisions of DTAA are more beneficial to the assessee, they shall override the provisions of IT Act. The assessee in terms of s. 90(2) has chosen to be governed by the provisions of DTAA betweenIndiaandCanada.Indiahas signed agreement for avoidance of double taxation withCanadaon6th May, 1997which was notified on15th Jan., 1998. It is not in dispute that the appellant has set up a PE within the meaning of art. 5 of the said DTAA. Article 7 of DTAA prescribes the mode of computing business profits with which we are concerned in this appeal. Article 7 is extracted herein:
"Business Profits:
The profits of an enterprise of aContractingStateshall be taxable only in that State unless the enterprise carries on business in the otherContractingStatethrough a PE situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to:
(a) that PE; and
(b) sales of goods and merchandise of the same or similar kind as those sold, or from other business activities of the same or similar kind as those effected through that PE.
2. Subject to the provisions of para, where an enterprise of a Contracting State carries on business in the other Contracting State through a PE situated therein, there shall in each Contracting State be attributed to that PE 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 PE. In any case, where the correct amount of profits attributable to a PE is incapable of determination or the ascertainment thereof presents exceptional difficulties, the profits attributable to the PE may be estimated on a reasonable 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 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, or by way of commission or other charges for specific services performed for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices."
[Sub-cls. (4), (5), (6) and (7) of art. 7 not being relevant for the purpose of deciding the controversy herein, they are not reproduced].
9.2 Much reliance has been placed by learned counsel for assessee that the DTAA betweenIndiaandCanadais based on OECD Model Double Taxation Convention and hence, as per the commentary on such Model Double Taxation Convention, the profit accruing in aContractingStateotherwise than through the PE cannot be taxed. We are unable to accept such contention. In respect of the various treaties, broadly three models are adopted, namely,
(i) GECD Model
(ii) UN Model
(iii) US Model
USModel Conventions are entered into byUSA. However, other countries adopt either GECD Model or UN Model. For the sake of comparison, art. 7 in both the Models i.e. UN Model and GECD Model are projected side by side so as to make effective comparison:
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UN Model Double Taxation Convention OECD Model Double Taxation
Convention
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Article 7-Business Profits Article 7-Business Profits
1. The profits of an enterprise of 1. The profits of an
a Contracting State shall be taxable enterprise of a
only in that State unless the Contracting State shall
enterprise carries on business in be taxable only in that
the other Contracting State through State unless the
a PE situated therein. If the enterprise carries on
enterprise carries on business as business in the other
aforesaid, the profits of the Contracting State through
enterprise may be taxed in the a PE situated therein.
other State but only so much of If the enterprise carries
them as is attributable to on business as aforesaid,
the profits of the
(a) that PE; enterprise may be taxed
in the other State but
(b) sales in that other State of only so much of them as
goods or merchandise of the same or is attributable to that
similar kind as those sold through PE.
that PE; or
(c) other business activities
carried on in that other State of
the same or similar kind as those
effected through that PE.
2. Subject to the provisions of 2. Subject to the
para 3, where an enterprise of a provisions of para 3,
Contracting State carries on where an enterprise of
business in the other Contracting a Contracting State
State through PE situated therein, carries on business in
there shall in each Contracting the other Contracting
State be attributed to that PE the State through a PE
profits which it might be expected situated therein, there
to make if it were a distinct and shall in each
separate enterprise engaged in the Contracting State be
same or similar activities under attributed to that PE
the same or similar conditions and the profits which it
dealing wholly independently with might be expected to
the enterprise of which it is a PE. 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 PE.
3. In the determination of profits 3. In determining the
of a PE, there shall be allowed as profits of a PE, there
deductions, expenses which are shall be allowed as
incurred for the purposes of the deductions expenses which
business of the PE including are incurred for the
executive and general administrative purposes of the PE,
expenses so incurred, whether in including executive and
the State in which the PE is general administrative
situated or elsewhere. However, no expenses so incurred,
such deduction shall be allowed in whether in the State in
respect of amounts, if any, paid which the PE is situated
(otherwise than towards or elsewhere.
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 or other
rights, or by way of commission,
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
charged (otherwise than towards
reimbursement of actual expenses),
by the PE to the head office of
the enterprise or any of its other
officers, by way of royalties,
fees or other similar payments in
return for the use of patents or
other rights, or by way of
commission 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 head office of
the enterprise or any of its
other offices.
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Comparing the cl. (1) of art. 7 of DTAA betweenIndiaandCanada, we find that the same is passed on UN Model Convention and not on OECD Model Convention. As per UN Model Convention, not only the profit as is attributable to that PE is taxable but even the profits attributable to sales in other Contracting State of same or similar kind as sold through that PE are also taxable. Compared with OECD Model Convention, it extends primary taxation by the State of the PE, viz. the profits that it allows to be attributed to the PE are not strictly limited to those resulting from the PE's own activities. Rather, they include those from direct transactions effected by the head office, though in the State of the PE (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. According to cls. (b) and (c) of the second sentence of art. 7(1) UN Model Convention, the profits from such direct transactions as are capable of being attributed to a PE are those from sales, in the State of the PE, of goods or merchandise of the same or similar kind as those sold through the PE or profits from other business activities in that State 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. It may also be noted that the reference to sale of goods or merchandise in cl. (b) of art. 7(1) shall also mean to include rendering of services also. Applying the above principle as well as on interpretation of art. 7(1) of DTAA, not only the profit attributable to the PE but also that attributable to rendering of same or similar services as rendered through PE shall also be taxable. In the present case, 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 outsideIndia, the services are the same as rendered by the PE inIndia. It is also fact that the invoices were raised through the PE inIndiawhich are accounted for in the books of project office set up inIndia. The work executed has been effected through the PE inIndia. 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, 1999is attributable to Head Office inCanada, since it is of the same or similar kind as effected through the PE inIndia, profit attributable to such transaction is also chargeable to tax inIndia. 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, the fact remains that the same is not so and in view of cl. (b) of sub-art. (1) of art. 7 of DTAA, whole of the profit in respect of Chamera project is to be taxed inIndia. Thus, though in view of s. 5(2) r/w s. 9(1)(i) of the Act, and also r/w art. 7(1) of the DTAA, broadly the principles of attributions are acceptable yet in view of cl. (b) of sub-art. (1) of art. 7 of DTAA betweenIndiaandCanada, no part of the profit from the execution of Chamera project can be excluded while computing the profit of the appellant non-resident inIndia. 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 s. 9(1)(vii) of the Act, the income be computed as per the provisions of s. 44D of the Act and the tax may be charged as per s. 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 income may be computed as per the IT Act in consonance with provisions of s. 44D r/w s. 115A of the Act. He further submitted that on reading the terms of contract which proves that the services of assessee were in respect of planning, designing and engineering review, site technical supervision, supervision of installation, testing and commissioning of electromechanical equipments, it amounts to rendering technical services and hence, since the assessee has option not to be governed by the provisions of DTAA and also exercises the option to be governed by the provisions of IT Act in India, provisions of s. 44D r/w s. 115A may be applied for computing the tax liability of assessee.
10.2 The learned Departmental Representative strongly objected to the same. He submitted that though this alternate plea was raised before CIT(A), no arguments were addressed on this behalf. The profits accruing to the project office have been offered for taxation as business profits as per the return of income filed by the assessee and the assessee has shown the business profits of the project office as PE as per art. 7 of Indo-Canada tax treaty. The assessment has been made by the AO on the basis of books of account of the PE inIndia. No claim has been made regarding the nature of the profits being covered under art. 12 of DTAA for assessments in the hands of the PE. No such determination or finding has been recorded by the Revenue. The assessee has shown the profits of the PE and the same have been assessed accordingly in conformity with art. 7 of the above treaty. Such profits in the hands of the non-resident company are liable to be taxed at the rate applicable to such nonresident companies and not the special rate of 20 per cent as per s. 115A r/w s. 44D. Needless to say, in case of fee for technical services, flat rate of 20 per cent is applied on the total receipts without deductions of expenses. No claim has been made by the assessee for application of the said special tax regime and no such claim has been adjudicated by the Revenue. The Revenue has proceeded on the basis of the return filed by the assessee and business profits of the PE shown therein. He accordingly pleaded that this alternate plea cannot now be considered by the Revenue authorities.
10.3 We have considered rival submissions. Sub-s. (2) of s. 90 provides as under:
"Where the Central Government has entered into an agreement with the Government of any country outsideIndiaunder sub-s. (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 betweenIndiaandCanadabut 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 s. 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 s. 9(1)(i), all income accruing or arising directly or indirectly through or from any business connection inIndiais deemed to accrue or arise inIndia. Undoubtedly, the income from execution of Chamera project is arising from the business connection inIndiaas such project is to be executed inIndia. The assessee has even established an office for execution of such project inIndiaalso through which the entire execution is carried out. It can, therefore, be held that as per s. 9(1)(i) r/w s. 5(2) of the IT Act, the income from execution of Chamera project is taxable inIndia. The assessee entered into an agreement with NHPC on18th July, 1999. Clause 1 of the agreement dt.18th July, 1999provides that the assessee, referred as contractor therein, is retained to execute planning, designing, engineering review, site technical supervision, supervision of installation, testing and commissioning of electromechanical equipment for the project. The annexure to the agreement contained in document No. 2 defines the scope of work as under:
"The scope of work under the head 'Planning, Design and 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 and technical specifications and review of design of all electromechanical and hydromechanical works with the design of the civil works and the studies required for these purposes as specified in the scope of work Appendix 1 hereto. The scope of Hydraulic Model Studies which is to be reviewed by the contractor is given in Appendix 2. The scope of work under the head 'Site Technical Supervision' shall mean the provision of experts for the review of site planning and scheduling, geological work at site, tunneling and hydromechanical equipment erection, testing and commissioning as specified in the scope of work, Appendix I. The scope of work under contract supervision of installation, testing and commissioning of electromechanical equipment covers the technical supervision for erection, testing, commissioning and performance testing of electromechanical equipment as per approved drawings, manuals and specifications including revisions and amendments thereto supplied by the contractor and undertaking the liability of safe delivery of the equipment to the port of deliver in India including 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 s. 9(1)(vii) of the Act. The assessee also does not dispute that the services are technical services. As per s. 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 s. 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 s. 9(1)(vii), the same can be taxed as per the provisions of s. 44D r/w s. 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 s. 44D r/w s. 115A of the Act. Thus, the alternate plea raised on behalf of the assessee is accepted and the AO is directed to compute the tax liability in consonance with the above finding.
11. Ground No. 3 is regarding addition made to the tune of Rs. 3,24,28,301 as alleged under statement of contractual proceeds.
11.1 The AO noted that in the P&L a/c, the contract receipt from NHPC has been declared at Rs. 9,82,06,589. The assessee also claimed credit for tax deducted at source. The AO noted that the income as comprised in the TDS certificate is Rs. 13,04,85,252. He accordingly noted that there is variation of Rs. 3.22 crores. Before the AO, it was submitted that the assessee is issuing running bill Nos. 1 to 5 which pertained upto the date of 31st March, 2001. The gross amount in this regard is Rs. 6.71 crores. Running bill No. 6 is dt.11th June, 2001which also includes work done upto31st March, 2001. The total value of remaining amount considered in TDS certificate is Rs. 6.33 crores. Tax is deducted on the basis of amount credited to the account of payee and not on the basis of work done by the assessee. Since the work done as per running bill No. 6, dt.11th June, 2001was approved before finalization of accounts and the payment in this regard was also received, the work to the extent related to the relevant financial year was accounted for. This amount was Rs. 3,09 crores. The balance sum pertained to financial year relevant to asst. yr. 2002-03. The said amount is accounted for in the subsequent year and offered for taxation. Merely because the tax is deducted by NHPC in asst. yr. 2001-02, it cannot be considered as contract receipts pertaining to asst. yr. 2001-02. The contention of assessee was not accepted by the AO. The AO held that even the part of the work as contained in invoice No. 6, dt.11th June, 2001has been accounted for in the financial year 2000-01. The amount of Rs. 3.24 crores credited by NHPC is not ad hoc provision but actual payment for the work done till 31st March, 2001. The work has not only been done but has been checked and verified by the representative of the payer. He accordingly held that the amount of work had been performed till31st March, 2001but only invoiced subsequently. A work though not fully completed and invoiced, the cost of work-in-progress completed till the end of the year, cannot be deemed to be nil. Since the assessee is following mercantile system of 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 stage. Before taking over any part of the work into use, the contractee, i.e., NHPC is to issue a certificate of completion in respect of such part of the work in accordance with the procedure set out in art. 26 of the agreement between assessee and NHPC. As per art. 28 of the said agreement, final acceptance certificate is to be issued by the NHPC. So far as running bill Nos. 1 to 5 are concerned, the amount is not in dispute. Running bill No.6, dt.11th June, 2001pertains to the work done during January, 2001 till30th April, 2001. Subsequent bill Nos. 7, 8, 9 pertain to the work carried out after April, 2001. In respect of work carried out during January to April, 2001, as per invoice No. 6, dt.11th June, 2001, the total amount is Rs. 3.94 crores. Since the invoice No. 6 was approved prior to close of the accounts for the relevant year, the assessee accounted for the work executed upto31st March, 2001and the work carried out between April, 2001 and30th April, 2001amounting to Rs. 84.95 lacs wag not accounted during this year. NHPC has made the provisions in its accounts for the work likely to have been executed and accordingly, on the basis of such accounting entry, tax was also deducted. However, it is an established law that merely because tax is deducted during the year, the income comprised therein cannot be said to have been accrued. In this regard, even the NHPC was contacted by the AO to ascertain correct facts. NHPC has clarified that the provision was made based on the work carried out by other contractor, namely, J.P. Industries Ltd. and assuming that since J.P. Industries Ltd. has carried out its part of the work, similar part of the work by assessee would also have been completed. Thus, the provision in the accounts by NHPC can in noway determine the value of work executed by the assessee. The assessee is raising periodic bills wherein even the period for which the bill relates is also mentioned. Admittedly, bill No. 6, dt.11th June, 2001comprises of the period January, 2001 till30th April, 2001. Since the assessee is following a proper method of accounting consistently, the same cannot be disturbed so as to estimate further value of work excluded. He also submitted that merely raising of the bill cannot be treated as accrual of income. For this purpose, he relied upon following decisions:
1. CIT vs. Bharat Petroleum Corpn. Ltd. (1992) 108 CTR (Cal) 140 : (1993) 202 ITR 492 (Cal);
2. CIT vs. Kerala State Drugs & Pharmaceuticals Ltd. (1991) 192 ITR 1 (Ker);
3. CIT vs. 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., 2001related 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 aggregates to Rs. 6,72,53,779. The details of payments received are duly indicated in Annex. I to the assessment order. Thus, there is short payment till December, 2000 by the NHPC to the extent of Rs. 3.57 crores. In the next accounting year relevant to asst. yr. 2002-03, the assessee sent the sixth bill on11th June, 2001for an amount of Rs. 3,97,35,059. Against this bill assessee has shown a credit of Rs. 3.09 crores on the ground that adjustment out of ad hoc provision made by the NHPC was made for this amount. From the aforesaid facts it would appear that upto March, 2001, the assessee has short accounted for the receipts in the books of account to the extent of Rs. 3.57 crores. Further, for the period January, February, and March, 2001, the assessee has credited the receipt for an amount of Rs. 3.09 crores which was included in the sixth bill dt.11th June, 2001. Total receipts accounted for by the assessee thus aggregate to Rs. 6,72,53,779 plus Rs. 3,09,52,807 = Rs. 9,82,06,589. From the above facts it appears that no bills have been raised by the assessee for the last quarter of the year, that is, January, February, and March, 2001. On making inquiries from NHPC, it came to light that NHPC made a provision of Rs. 6,33,79,108 in its books of accounts on31st March, 2001with the narration "liability provided for work done but not claimed by SNC". However, TDS has been deducted and deposited in the financial year 2000-01 itself. AO specifically called upon the NHPC to clarify the position. AO's letter dated26th Aug., 2003is placed at p. 56 of DPB. In this letter details of bill-wise adjustment of the total provision of Rs. 6,33,79,108 have been given. NHPC furnished the necessary clarification vide letter dated5th Sept., 2003which is placed in the DPB at p. 55. The NHPC clarified that "Hence, the liability against work done as per contract-02 has been provided on the basis of works executed and claimed by M/s Jai Prakash Industries Ltd. under contracts-01 and 03". These facts clearly indicated that the work has been completed by the assessee by31st March, 2001and on that basis provision has been made in the books of accounts of NHPC. The provision has thereafter been adjusted out of the subsequent bills sent by the assessee and details of adjustment are available at p. 56 of the DPB. During the course of hearing before the Hon'ble Bench, learned 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, 2001has 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 on31st 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 by31st March, 2001on 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 on31st March, 2001. This clearly runs contrary to the "matching" principle of accounting which is a fundamental postulate of true and fair accounts. Contentions on behalf of assessee are entirely misconceived inasmuch as the NHPC has already acknowledged its liability to make the payment to the contractor as on31st March, 2001by making a provision in its books of accounts and also deducting tax on such provision and depositing the same into the Government Treasury. Acknowledgement of outstanding liability in favour of the contractor is quite unambiguous and unequivocal and is to be construed as accrual of income in consonance with the principle of real income. This is not a case where the liability to the assessee is being disputed or the right to receive the payment is inchoate. The facts are that the assessee did not raise bills for the work done during January, February, and March, 2001 and the NHPC made provision in its books on the basis of the work done by the assessee. It is relevant to note here that specific time schedules are laid down for specific segments of work to be performed by the assessee as well as Jai Prakash Industries in connection with the Chamera project. The drawings, designs and technical reports, which precede the actual implementation by carrying out the construction and installation, etc. by Jai Prakash Industries have got to be prepared first and thereafter the allotted assignments to Jai Prakash Industries could be performed. NHPC has certified the following vide its letter dt.5th Sept., 2003placed in the DPB at p. 55 to which reference has earlier been made:
"Hence, the liability against work done as per Contract-02 has been provided on the basis of works executed and claimed by M/s Jai Prakash Industries Ltd. under Contract-01 and Contract-03".
These facts amply demonstrate that work has been performed by31st March, 2001and provision by the NHPC in its books amounting to Rs. 6.33 crores has been made on the basis thereof. This amount represents the accrual of receipt to the assessee by31st March, 2001and revenue, to this extent, should have been recognized in the project accounts in conformity with the principles of accounting. The assessee however failed to account the accrual of receipt or the work-in-progress as on31st March, 2001.
11.4 Shri Chopra submitted that the decisions cited by the learned counsel laid down a legal proposition 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 on31st 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 such liability. It is also presumed that since the work of assessee is to be carried out after the other contractor, namely, J.P. Industries Ltd. completes its part of work and since J.P. Industries Ltd. has completed its part of work, the work of assessee would also have been completed. In our opinion, the whole premise is not on sound legal situation. So far as running bill Nos. 1 to 5 are concerned, there is no dispute about recognizing the income in respect thereof. As regards amount credited by NHPC, it is seen that the assessee has accounted for the same by invoice Nos. 6, 7, 8 and 9 raised in subsequent years. However, invoice No. 6 pertains to the period January, 2001 till April, 2001. Invoice Nos. 7, 8 and 9 admittedly pertain to the work done after the end of relevant financial year. This is evident from the invoice raised by the assessee. As per the terms of contract, the invoice can be raised provided the work completed has reached billable stage. Accordingly, in respect of work done upto31st March, 2001, invoice NO.6 which contains a sum of over Rs. 3.94 crores, a sum of Rs. 3.09 crores has been accounted for. The credit by NHPC or deduction of tax by NHPC cannot be concluded as accrual of income in favour of assessee. 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, 2001also contains the period1st April, 2001till30th April, 2001. Thus, the income for this period cannot be said to have been accrued before the close of the financial year on31st 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 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) Travelling expenses Rs. 56,66,033
(e) Engineering software Rs. 2,03,761
In respect of all these expenses, the AO held that they are in the nature of Head Office expenses covered under s. 44C of the Act. He also held that since the payments are made without deducting tax at source, in view of s. 40(a)(i), the amount cannot be allowed. The same was approved by learned CIT(A).
12.1 Learned counsel for assessee submitted that since the assessee has made alternate plea to be governed by the provisions of IT Act in India and not by provisions of DTAA, since the tax is to be levied in accordance with the provisions of s. 44D r/w Sec. 115A or the Act, the claim for deduction of expenses has become infructuous as s. 44D prohibits allowance in respect of any expenses while computing the income by way of fees for technical services.
12.2 The learned Departmental Representative submitted the since such plea was never raised earlier, the question regarding allowability or otherwise of the expenses may be determined in accordance with law and as per art. 7(3) of DTAA betweenIndiaandCanada.
12.3 Since while deciding ground No. 2, it has been held that the option to be governed by either the provisions of the IT Act or by the provisions of DTAA is to be used by the assessee and since the assessee has exercised the option to be governed by the provisions of IT Act and since it has been held that the tax liability has to be computed as per s. 44D r/w s. 115A of the Act, these grounds have become infructuous as while computing the income from fees for technical services under s. 44D(b), no deduction in respect of any expenditure or allowance is permissible. Accordingly, all these above grounds are dismissed.
13. Ground No. 6 is against upholding disallowance of Rs. 26,93,281 towards exchange for fluctuation loss. Ground No. 10 is against disallowance of Rs. 85,08,852 by way of guarantee commission which was disallowed during the appellate proceedings in exercise of power available to CIT(A) under s. 251(1)(a) of the Act.
13.1 Since it has been held that the income is to be computed on gross receipt basis by way of fees for technical services, the question of deductibility or otherwise of the various expenses do not arise. Accordingly, ground Nos. 6 and 10 are dismissed.
14. Ground No. 12 is against charging of interest under ss. 234B and 234C of the Act. Since the assessee does not deny its liability to pay advance tax, charging of interest under ss. 234B and 234C being mandatory in nature, is only consequential to the computation of income. Accordingly, interest is chargeable as per provisions of law. The AO shall charge interest in accordance with law.
In the result, the appeal of assessee is partly allowed.
15. In the appeal of Revenue, the issue agitated is relief allowed by CIT(A) in respect of salary of expatriate employees stationed inIndiafor execution of the Chamera project. Since the allowability of the expenses is now a non-issue in view of our discussion in para 12, since the tax liability is to be computed under s. 44D r/w s. 115A of the Act, this ground has become infructuous and hence dismissed.
In the result, the appeal of assessee is partly allowed whereas the appeal of Revenue is dismissed.
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