2024 (1) TMI 264 - AT - Income Tax

Disallowance of claim u/s 42 - claim rejected on the ground that as per the section 42 of the Act, only those deductions are allowable which are specifically provided in the agreement entered into between the assessee and the Central Government and in the agreement entered into by the assessee with the Government, no such provision has been made to allow any deduction falling within the domain of section 42 - HELD THAT - In light of the above observations made by ITAT in assessee s own case for A.Y. 2007-08 and and 2008-09 in 2023 (5) TMI 1003 - ITAT AHMEDABAD held that Product Sharing Contracts (PSCs) entered into between the assessee and the Government of India did not include a clause pertaining to section 42 and therefore deduction under this section could not be allowed to the assessee. Decided against assessee. Depreciation u/s 32 on Oil wells - DR considering oil- well house as building instead of Plant and Machinery for the purpose of allowance of depreciation - HELD THAT - We hold that the oil wells are eligible for depreciation as Plant Machinery and the Assessing Officer is directed to re-compute the depreciation on oil wells on opening WDV. With respect to additions made during the year, the A.O. may call for necessary details from the assessee to ascertain the nature of additions made and allow depreciation as per the above directions. Disallowance of deduction u/s 80IB(9) for Dholka Oil field - whether each well operated by the assessee is a separate undertaking eligible for deduction under Section 80IB(9)? - HELD THAT - Since the issue whether the Explanation to section 80IB(9) would operate retrospectively or not is pending adjudication before the Hon ble Supreme Court, following the decision of the assessee s own case for assessment year 2001-02, 2002-3 and 2005-06 at this juncture, we are refraining from adjudicating ground nos. 3 4 and restore the matter back to the file of Assessing Officer to decide the issue in accordance with the directions of the Hon ble Supreme Court decision in Commissioner of Income Tax ors. Versus Gujarat State Petroleum Corporation Ltd. 2015 (11) TMI 1685 - SC ORDER as referred to above. Depreciation on goodwill - depreciation on any other commercial right or intangible assets under Section 32 - HELD THAT - As in light of the directions given by the ITAT Ahmedabad for assessee s own case for A.Y. 2007-08 2023 (5) TMI 1003 - ITAT AHMEDABAD the matter is being restored to the file of Assessing Officer for carrying out necessary verification to examine firstly, whether or not depreciation is allowable on the aforesaid asset and under which categorically the assessee is claiming depreciation on the same i.e. as depreciation on goodwill or as depreciation on any other commercial right or intangible assets under Section 32 of the Act and secondly, the Assessing Officer is also directed to examine the necessary supporting documents in justification for assessee s claim of depreciation. Accordingly, this issue is set-aside to the file of Ld. AO, with the aforesaid direction. TDS u/s 195 - Disallowance on reimbursement of expenses paid to Head Office u/s 40(a)(ia) - non-deduction of tax at source - HELD THAT - AO do not comply with the direction given by DRP and has not examined whether Article 12 of the Tax Treaty or Article 15 relating to independent personal services would be attracted in the instant set of facts. We observe that even the assessee apart from furnishing self-declaration filed by the individual consultants to whom the payments were disbursed by the JTI Head Office on behalf of the assessee, did not furnish any conclusive evidence to show that the individual consultants were tax residents of USA In the interest of justice the matter being restored to the file of the Assessing Officer to examine whether the correct Article to be applied in the instant facts should be Article 12 relating to fee for technical services / fee for included services or Article 15 relating to independent personal services of the DTAA between India and USA. Further, we are also of the considered view that merely filing of self-declaration by the individual consultants is not adequate proof of residency and accordingly, the assessee is directed to file necessary supporting documents to prove the tax residency of the individual residency of the individual consultants to whom the payments were made by JIT Head Office on behalf of the assessee. Depreciation on opening WDV of expenditure held to be of capital nature in the assessment proceedings - HELD THAT - We are in agreement with the Ld. Counsel for the assessee that the depreciation may be allowed to the expenditure which has been held to be capital expenditure as per directions given by the ITAT in assessee s own case for A.Y. 2007-08. Accordingly, the Assessing Officer is directed to grant depreciation to the assessee on expenditure held to be capital in nature, in accordance with law. Nature of expenses - preliminary drilling expenses - HELD THAT - It would be useful to reproduce the relevant extracts of the ITAT in assessee s own case for A.Y. 2007-08 2023 (5) TMI 1003 - ITAT AHMEDABAD nature of expenses incurred by the assessee coupled with the fact that the Department has not brought anything on record to show that any capital asset of enduring nature was brought into existence, the claim of the assessee on expenses incurred on preliminary drilling expenditure is hereby allowed. Disallowance of subscription charges on the ground that no technical services has been made available - HELD THAT - We observe that the ITAT in various cases have held that payments towards subscription fees for access to specified online data base could not be considered as fees for technical services , support may be drawn from the following judicial precedents which have upheld the above proposition of law like Elsevier Information Systems GmbH 2019 (5) TMI 405 - ITAT MUMBAI , TIS Two Administration (Singapore) Pte. Ltd. ( 2010 (4) TMI 860 - ITAT MUMBAI ), De Beers India Minerals P. Ltd. 2012 (5) TMI 191 - KARNATAKA HIGH COURT , ADANI PORT- INFRASTRUCTURE PVT. LTD. AND DHOLERA PORT LTD., 2014 (9) TMI 352 - ITAT AHMEDABAD - Thus we are of the considered view that the DRP has not erred in holding that the aforesaid payments towards subscription charges do not qualify as fee for technical services. TDS u/s 195 - disallowance of training expenses - whether training and travelling etc. would not qualify as technical services in terms of the Act or the DTAA ? - HELD THAT - On going through the facts of the instant case, on a preliminary perusal of the expenses (training expenses), the same prima facie seem to qualify as payment for technical services . Further, we observe that the DRP, while allowing the appeal of the assessee has not given in specific finding on merits as to why payment for providing training services do not qualify as fee for technical services under the Act read with the Treaty. Accordingly, in the interest of justice, the matter is being restored to the file of AO to give detailed findings as to the nature of expenses and the assessee is also directed to file necessary details and also provide break-up as payment in support of its contention that the aforesaid payment do not qualify as fee for technical services under the Income Tax Act read with the DTAA. Disallowing reimbursement of expenses paid to Head Office under Section 40(a)(ia) - HELD THAT - DRP is directed to give a finding as to whether the aforesaid services qualify as fee for technical services under the Income Tax Act read with India-USA Tax Treaty, since from perusal of the contents of the order passed by DRP, no specific findings has been given by DRP on this issue. Accordingly, the matter is being restored to the file of DRP with the aforesaid directions. Allowability of audit expenses - assessee s Head Office had taken services of RPS of USA in relation to Dholka Oil Fields Reserve Audit - whether the payment towards such audit fees qualifies as fee for technical services under the Act read with the Treaty.? - HELD THAT - We observe that in the instant facts, payment was made by the assessee carrying out of reserve audit of Dholka Unit. Looking into the facts of the instant case, we are of the considered view that in the instant case, no technology has been made available to the assessee during the course of providing of aforesaid audit services , which is a mandate of Article 12 of the India-USA DTAA for any services to qualify as fee for technical services / fee for included services under the India-USA Tax Treaty. In our considered view, DRP has correctly observed that looking into the instant facts and nature of services for which payment was made by the assessee viz. audit services, there can be no inference that any technology was made available to the assessee, looking into the nature of services availed by the assessee. It is also not the allegation of the Department that RPS, USA has a permanent establishment or fixed placed of business in India so that the income erred by RPS USA should be taxable under Article 7 of the India-USA Tax Treaty as business profits in India. In the case of ACIT vs. BSR and Company 2016 (5) TMI 356 - ITAT MUMBAI ITAT held that different types of professional services rendered to an Indian company by overseas companies outside India in relation to audit, taxation, transfer-pricing, information technology, background checks, etc would be independent personal services; since these overseas companies had no fixed base or PE in India, payment made to them would not be chargeable to tax in India.

Summary

Issues Involved:
1. Disallowance of claim under Section 42.
2. Depreciation on oil wells and oil field equipment.
3. Deduction under Section 80IB(9) for Dholka Oil field.
4. Depreciation on goodwill.
5. Disallowance under Section 40(a)(ia) for professional fees.
6. Disallowance on reimbursement of expenses to Head Office.
7. Depreciation on opening WDV of expenditure held to be of capital nature.
8. Disallowance of preliminary drilling expenses.
9. Disallowance of subscription charges.
10. Disallowance of training expenses.
11. Depreciation on certain assets at 60% being Plant & Machinery.
12. Depreciation on expenditure capitalized in AY 2007-08.
13. Disallowance of audit expenses.

Summary of Judgment:

1. Disallowance of claim under Section 42:
The Supreme Court dismissed the petition filed by the assessee, holding that product sharing contracts did not include a clause pertaining to Section 42, thus denying the deduction under this section. Consequently, ITAT Ahmedabad dismissed this ground based on the Supreme Court's decision.

2. Depreciation on oil wells and oil field equipment:
The ITAT ruled that oil wells should be considered as "Plant & Machinery" eligible for depreciation at 60%, following the Gujarat High Court's decision in Niko Resources Ltd. The AO was directed to re-compute depreciation accordingly.

3. Deduction under Section 80IB(9) for Dholka Oil field:
The matter was restored to the AO to decide in accordance with the Supreme Court's pending decision on whether each well constitutes a separate undertaking eligible for deduction under Section 80IB(9).

4. Depreciation on goodwill:
The issue was restored to the AO for verification to determine whether depreciation on goodwill or "any other commercial right" under Section 32 is allowable, following ITAT's directions in the assessee's own case for A.Y. 2007-08.

5. Disallowance under Section 40(a)(ia) for professional fees:
The assessee's ground was dismissed as not pressed since the tax was deducted and paid in A.Y. 2010-11, and the expenditure was allowed in that year.

6. Disallowance on reimbursement of expenses to Head Office:
The AO was directed to examine whether the correct Article of the DTAA should be applied and to verify the tax residency of the individual consultants, as mere self-declaration was deemed insufficient.

7. Depreciation on opening WDV of expenditure held to be of capital nature:
The AO was directed to grant depreciation on capital expenditure as per ITAT's directions in the assessee's own case for A.Y. 2007-08.

8. Disallowance of preliminary drilling expenses:
Following ITAT's decision in the assessee's own case for A.Y. 2007-08, the preliminary drilling expenses were allowed as revenue expenditure.

9. Disallowance of subscription charges:
The ITAT upheld that payments for subscription fees to data bases do not qualify as "fees for technical services," based on various judicial precedents.

10. Disallowance of training expenses:
The matter was restored to the AO to determine the nature of expenses and whether they qualify as "fee for technical services" under the Act and the DTAA, as the DRP did not provide specific findings on merits.

11. Depreciation on certain assets at 60% being Plant & Machinery:
Following the decision for A.Y. 2009-10, the AO was directed to allow depreciation at 60% for oil field equipment.

12. Depreciation on expenditure capitalized in AY 2007-08:
The AO was directed to grant depreciation on expenditure held to be capital in nature, in accordance with ITAT's directions for A.Y. 2007-08.

13. Disallowance of audit expenses:
The DRP correctly held that payment for reserve audit services did not qualify as "fee for technical services" under the India-USA DTAA, as no technology was "made available" to the assessee.

Conclusion:
The appeals filed by the Assessee were partly allowed for statistical purposes, and the appeals filed by the Department were also partly allowed for statistical purposes.