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2013 (5) TMI 469 - AT - Income TaxAddition to income - whether CIT(A) and ITO erred in disregarding AS-7 issued by the ICAI and in relying upon section 145(3)? - assessee is a non-resident firm having its registered office in U.S.A. with place of business is Enron Corporation, Houston, Texas entered into a contract with Dabhol Power Corporation for on-shore construction work and on-shore service - Held that - There cannot be any basis to doubt the completion of the work in this year thus unable to understand as to what the Commissioner (Appeals) meant by that it is not possible to calculate the profit on the basis of percentage of completion method in the absence of any details . He has also doubted that the assessee has not consistently following percentage of completion method. This finding of the Commissioner (Appeals) cannot be upheld as in the assessment year 1999- 2000, it has been accepted by the Tribunal that the assessee has been following percentage of completion method as per AS-7. In the earlier year, the Tribunal has restored this issue to the file of AO as the assessee could not produce the invoice before the Assessing Officer. However, in the year under consideration, it has not been disputed by the AO that invoice has not been furnished. Thus, no basis for sustaining the addition and consequently set aside the impugned order passed by the Commissioner (Appeals) and allow the ground no.1, raised by the assessee. Disallowance of overheads of Enron Power Service B.V. pertaining to employees whose salaries have been debited by the assessee on which tax has been paid - Held that - For claiming any expenses under section 37(1) onus is upon the assessee to prove that the expenditure has been incurred only for its business purpose which can be discharged by way of some evidence. In the present case, the assessee has neither produced any agreement between the assessee and Enron Power Service, B.V., as to what kind of training and service have been provided to the employees of the assessee and what was the terms and conditions for making such payments. No details have been produced showing the nature of service rendered and the nature of reimbursement of expenses & reasoning given by the AO has not been rebutted with any kind of documentary evidence to support the claim. Hence, confirm the disallowance and accordingly, ground no.2, is treated as dismissed. Disallowance of legal and professional charges - Held that - From the findings recorded, it is seen that for expenditure aggregating to Rs. 1,56,61,303 out of Rs. 3,89,37,000, the assessee could not furnish even an iota of evidence in the form of bills or the nature of services rendered. It is also an admitted fact that no TDS has been deducted on such payments. In the absence of any details or evidence,no reason to tinker with the reasons and the conclusion drawn by the AO and the Commissioner (Appeals). Thus, the disallowance confirmed Thus, ground no.3, is treated as dismissed. Disallowance u/s 40A(3) r/w Rule-6DD - Held that - None of the circumstances, as enumerated in Rule-6DD, has been found to be applicable in assessee s case for making the cash payment exceeding Rs. 20,000, to the expatriate staff. Once the exceptions provided in Rule-6DD is not fulfilled in the present case, agreeing with the conclusion drawn by the AO which is based on audit report that such a cash expenditure is disallowable under section 40A(3). Accordingly, disallowance is hereby confirmed. Ground no.4, is thus treated as dismissed. Disallowance should be restricted to 42.8% i.e., the percentage of the work completed cannot be accepted as the entire expenditure has been claimed in the Profit & Loss account against the contract receipts disclosed in this year. Thus, this alternate plea is also rejected. Levy of interest under section 234A and 234B - assessee submitted that this issue is covered in favour of the assessee by the judgment Director Of Income Tax (International Taxation) v/s NGC Network Asia LLC, (2009 (1) TMI 174 - BOMBAY HIGH COURT), wherein held that when a duty is cast on the payer to deduct TDS, on failure of the payer to do so, no interest can be imposed on the payee assessee under section 234B - Held that - Restore this issue to the file of the AO to workout the tax liability after giving effect of this order and decide the chargeability of interest under section 234B in accordance with the judgment of Hon ble Jurisdictional High Court cited supra. Thus, this ground is treated as partly allowed for statistical purposes.
Issues Involved:
1. Addition of Rs. 11,01,94,324 based on revenue recognition. 2. Disallowance of Rs. 9,35,91,110 representing overheads of EPS-BV. 3. Disallowance of Rs. 1,56,61,303 paid as legal and professional charges. 4. Disallowance of Rs. 8,95,350 under section 40A(3) read with Rule 6DD. 5. Charging of interest under sections 234A and 234B of the Income Tax Act. Issue-wise Detailed Analysis: 1. Addition of Rs. 11,01,94,324 based on revenue recognition: The assessee, a non-resident firm, entered into a contract with Dabhol Power Corporation (DPC) and filed its return of income declaring Rs. 9,99,54,090 from contract receipts. The Assessing Officer (AO) noted that the billed amount was Rs. 595,01,51,900, but the assessee estimated revenue at Rs. 583,99,57,576, leading to a difference of Rs. 11,01,94,324. The AO rejected the assessee's contention of following the percentage of completion method as per Accounting Standard AS-7, stating that the assessee must recognize revenue on an accrual basis. The AO relied on judgments from Kerala High Court and the Supreme Court to support his stance. The Commissioner (Appeals) agreed with the AO, noting the lack of evidence from the assessee regarding the completion of work and expenditure details. However, the Tribunal found that the percentage of completion method under AS-7 is a recognized accounting standard and that the assessee had completed 42.48% of the work by 31st March 2000. Consequently, the addition of Rs. 11,01,94,324 was set aside, and the ground was allowed in favor of the assessee. 2. Disallowance of Rs. 9,35,91,110 representing overheads of EPS-BV: The assessee claimed Rs. 9,35,90,110 as indirect payroll overheads payable to Enron Power Service B.V., asserting it was a reimbursement of costs not subject to tax deduction at source under section 195. The AO disallowed the claim due to the absence of proof of services rendered, agreements, or invoices. The Commissioner (Appeals) upheld the AO's decision, noting the lack of evidence. The Tribunal confirmed the disallowance, emphasizing the necessity of documentary evidence to substantiate the claim, which the assessee failed to provide. 3. Disallowance of Rs. 1,56,61,303 paid as legal and professional charges: The AO required the assessee to produce details of legal and professional services rendered. The assessee provided partial details, leading the AO to allow only Rs. 2,12,75,697 out of Rs. 3,89,37,000 claimed, disallowing Rs. 1,56,61,303 due to lack of supporting evidence and non-deduction of tax. The Commissioner (Appeals) and the Tribunal upheld the disallowance, citing the absence of bills, details of services rendered, and TDS deduction. 4. Disallowance of Rs. 8,95,350 under section 40A(3) read with Rule 6DD: The AO disallowed Rs. 8,95,350 based on cash payments exceeding Rs. 20,000, as noted in the audit report. The assessee argued the payments were made to expatriate staff in remote locations without bank facilities. The Commissioner (Appeals) confirmed the disallowance, and the Tribunal upheld it, noting that none of the exceptions under Rule-6DD applied. 5. Charging of interest under sections 234A and 234B of the Income Tax Act: The assessee contested the levy of interest under sections 234A and 234B. The Tribunal referred to the judgment of the Bombay High Court in Director Of Income Tax (International Taxation) v/s NGC Network Asia LLC, which held that no interest can be imposed on the payee if the payer fails to deduct TDS. The issue was restored to the AO to determine the tax liability in accordance with the cited judgment. Conclusion: The Tribunal's order resulted in the partial allowance of the assessee's appeal, setting aside the addition of Rs. 11,01,94,324 and restoring the issue of interest under sections 234A and 234B to the AO, while confirming the disallowances of Rs. 9,35,91,110, Rs. 1,56,61,303, and Rs. 8,95,350.
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