2012 (7) TMI 16 - AT - Income Tax

Expenditure incurred on maintenance of rigs leased out - revenue or capital expenditure - assessee, engaged in the business of drilling, leased out four rigs to M/s Saipem, SPA, Italy, being used by the said Sapem, SPA, in Saudi Arabia for drilling - Held that - It is not disputed that assessee was owning the four rigs, and payments were made to M/s Saipem, SPA, Italy, towards planned and extraordinary maintenance activities of those rigs. The fact that such rigs were old has also not been disputed by the Revenue. That old rigs require periodical overhauling for keeping them in working condition, is a fact which cannot be overlooked. Assessee s concern that unless such extraordinary maintenance or planned maintenance or overhauling was done, life of the rigs and life of the workmen rendering services in such rigs, would be jeopardized, appears to be well justified. Assessee, being the owner of the asset, it was in its own interest, that the assets were maintained properly. Hence, the same is allowed as business expenditure. Dis-allowance u/s 40(a)(ia) on account of non deduction of tax at source - Held that - Insofar as business of leasing of rigs was concerned, it was carried on by the assessee outside India. Income received by M/s Saipem, SPA, Italy from the assessee, even if a part thereof is considered as FTS, would not attract Section 9(1)(vii). Since M/s Saipem, SPA, Italy was not having any business connection in India, the business income earned by the said company will not fall within the ambit of Section 9(1)(i) also. There being no failure on the part of the assessee for not deducting tax at source, it could not be fastened with the rigours of Section 40(a)(i) - Decided in favor of assessee.

Issues Involved:
1. Disallowance of expenses for maintenance of rigs.
2. Admissibility of additional evidence.
3. Applicability of Section 40(a)(i) of the Income-tax Act, 1961.
4. Classification of services as technical services under Section 9(1)(vii) of the Act.
5. Business connection and tax liability in India.

Issue-wise Detailed Analysis:

1. Disallowance of expenses for maintenance of rigs:
The Revenue's primary grievance was the deletion of a disallowance amounting to Rs. 3,16,93,911/- claimed by the assessee as expenditure for rig maintenance. The Revenue argued that the responsibility for maintenance lay with the lessee, not the assessee. The Assessing Officer (A.O.) disallowed the claim, stating that the lessee, M/s Saipem, SPA, Italy, was responsible for maintaining the rigs as per the agreement dated 5.2.2004. The CIT(A) found that the expenses were necessary for extraordinary and planned maintenance, which was the lessor's responsibility. The Tribunal upheld the CIT(A)'s decision, stating that the expenses were incurred to keep the rigs in full operative capacity, and were thus allowable as business expenditure under Section 37(1) of the Act.

2. Admissibility of additional evidence:
The Revenue contended that the agreement dated 17.11.2004, which was not produced during the assessment proceedings, was considered by the CIT(A) as an afterthought. The CIT(A) admitted the agreement as additional evidence and sought a remand report from the A.O. The Tribunal noted that the A.O. did not dispute the genuineness of the payment in the remand report and accepted the assessee's claim regarding the payment to M/s Lamech Engineers Pvt. Ltd. The Tribunal found no fault in the CIT(A)'s consideration of the additional evidence.

3. Applicability of Section 40(a)(i) of the Income-tax Act, 1961:
The Revenue argued that the payment made to M/s Saipem, SPA, Italy, was disallowable under Section 40(a)(i) for non-deduction of tax at source. The CIT(A) held that the sums paid were not taxable under Section 9(1)(i) or Section 9(1)(vii) of the Act, and hence no tax deduction at source was required. The Tribunal agreed, stating that since the services were utilized for business carried on outside India, the payments did not attract Section 9(1)(vii). The Tribunal also noted that the assessee's belief that no tax was deductible was bonafide, and thus, Section 40(a)(i) was not applicable.

4. Classification of services as technical services under Section 9(1)(vii) of the Act:
The Revenue claimed that the services rendered by M/s Saipem, SPA, Italy, were technical services and taxable in India. The Tribunal observed that the agreement listed activities such as testing, re-certification, and documentation, which could be considered technical services. However, it concluded that since the services were utilized for business carried on outside India, they did not fall under Section 9(1)(vii)(b).

5. Business connection and tax liability in India:
The Revenue contended that M/s Saipem, SPA, Italy, had a business connection in India, making the income taxable in India. The Tribunal found that M/s Saipem, SPA, Italy, did not have any business connection in India, and the payments were for services utilized outside India. Therefore, the income was not taxable in India under Section 9(1)(i). The Tribunal also noted that the Explanation to Section 9, added by Finance Act 2010 with effect from 1.6.1976, did not apply to Section 9(1)(i).

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the disallowance, finding that the expenses were business-related and allowable under Section 37(1). It also concluded that the payments did not attract Section 40(a)(i) or Section 9(1)(vii), and there was no obligation for tax deduction at source. The appeal filed by the Revenue was dismissed.

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