2015 (3) TMI 792 - AT - Income Tax

Applicability of section 44BB on assessee's income - allocation of expenses incurred by assessee for the services rendered to BGEPIL - whether assessee has been able to provide primary evidence in respect of various types of services allegedly rendered to BGEPIL for which it claimed to have received reimbursement from BGEPIL? - assessee is a non-resident company and is AE of M/s BGEPIL - Held that - Once it is accepted that global cost allocation policy exist in a case of group of size like B.G. Group, then it cannot be denied that the debit notes raised are towards services rendered. Now the core issue that remains for consideration is whether the whole amount claimed to be reimbursement should be accepted or not. On this count, admittedly the assessee has not been able to establish one to one nexus between the services rendered and alleged reimbursement. There are also no comparable cases which obviously could not be there. Thus, in sum and substance the position as it emerges is that inspite of there being a global cost allocation policy, the existence of which is not doubted by revenue, the assessee failed to substantiate its claim regarding allocation of expenses incurred by it for the services rendered to BGEPIL. It has not been able to substantiate its claim as to what common expenses had been incurred; how those were allocated to assessee; and why those needed to be allowed as deduction from Indian operations. It is settled law that unless the assessee is able to substantiate its claim the deduction cannot be allowed. In this regard we may refer to the decision of Hon ble Supreme court in the case of CIT Vs. Calcutta Agency Ltd. (1950 (12) TMI 4 - SUPREME Court) wherein it has been held that the burden of proving the necessary facts in order to entitle the assessee to claim exemption u/s 10(2)(xv) was on the assessee but the necessary facts had not been established by the assessee at any stage of the proceedings and the High Court was in error in applying the principles of Mitchell s case on the assumption of facts which were not proved. Consequently the assessee was not entitled to the deduction claimed. In view of above discussion, keeping in view the entire conspectus of the cases, we are of the opinion that it would be fair to tax the assessee s receipts u/s 44BB, as has been done in past also. In this regard we find ourselves in agreement with the ld. counsel for the assessee that in AY 2003- 04, the department while preferring appeal before Hon ble High Court has itself taken a ground that the assessee s receipts are taxable u/s 44BB and the ITAT erred in deciding that the receipt are not taxable u/s 44BB. We are conscious of the fact that earlier we have observed that merely because in AY 2004-05 assessee agreed for its receipts being taxed u/s 44BB, cannot operate as estoppels against it for pleading that the entire receipts were in the nature of reimbursement. However, considering the fact that assessee is not able to substantiate its claim, as has been extensively demonstrated by ld. Cit(DR) in his submissions and the assessee has only given a general writ e up for the benefits derived by BGEPIL, we are of the considered opinion that no fruitful purpose would be served by restoring the matter to the file of AO for examining the assessee s claim again as that would be a futile exercise particularly because assessee has clearly stated that it is not possible to have one to tone nexus of the expenses with the services rendered. Thus the only possible course is to invoke section 44BB because B.G.I. provide services to BGEPIL, which was engaged in prospecting the mineral oils. We direct accordingly.

Issues Involved:
1. Violation of principles of natural justice
2. Taxability of receipts and disallowance of expenses
3. Application of Section 44BB of the Income Tax Act
4. Classification of receipts as fees for technical services under DTAA
5. Existence of a Permanent Establishment (PE) in India
6. Requirement to maintain books of accounts and get the same audited under Section 44AB
7. Levy of interest under Sections 234B and 234C
8. Initiation of penalty proceedings under Sections 271B and 271(1)(c)

Detailed Analysis:

1. Violation of Principles of Natural Justice:
The appellant argued that the AO/DRP denied an opportunity to be heard, ignored submissions and information, and did not provide sufficient time to justify and furnish additional details. However, these grounds were not pressed during the hearing and thus dismissed.

2. Taxability of Receipts and Disallowance of Expenses:
The appellant, a non-resident company, received payments from BGEPIL under various heads but did not reflect these in its return of income, claiming they were reimbursements. The AO rejected this claim due to lack of evidence, non-maintenance of books of accounts, and absence of proof of actual services rendered. The AO treated the entire receipt as income. The DRP upheld this view, noting insufficient evidence of services rendered and failure to maintain books of accounts as required under Section 44AB.

3. Application of Section 44BB of the Income Tax Act:
The appellant contended that its income should be governed under Section 44BB, which pertains to the business of providing services or facilities in connection with the extraction or production of mineral oils. The Tribunal, considering the appellant's inability to substantiate its claims and the nature of its services to BGEPIL, directed that the receipts be taxed under Section 44BB.

4. Classification of Receipts as Fees for Technical Services under DTAA:
The appellant argued that the receipts should not be classified as fees for technical services under Article 13 of the India-UK DTAA, as the services did not make available any technical knowledge, experience, skill, know-how, or processes. This ground was dismissed as academic since it did not arise out of the AO's order.

5. Existence of a Permanent Establishment (PE) in India:
The appellant disputed the existence of a PE in India. However, assuming a PE existed, it argued that only income directly attributable to the PE should be taxable. This ground was not pressed during the hearing and thus dismissed.

6. Requirement to Maintain Books of Accounts and Get the Same Audited under Section 44AB:
The AO/DRP held that the appellant was required to maintain books of accounts and get them audited under Section 44AB, as its receipts exceeded the threshold. The appellant's failure to do so led to the disallowance of its claims.

7. Levy of Interest under Sections 234B and 234C:
The appellant contested the levy of interest under Sections 234B and 234C, arguing that as a non-resident whose income is subject to tax deduction at source, these interests were not applicable. This ground was dismissed.

8. Initiation of Penalty Proceedings under Sections 271B and 271(1)(c):
The AO/DRP initiated penalty proceedings under Sections 271B for not getting the accounts audited and under Section 271(1)(c) for concealment of income and furnishing inaccurate particulars. These grounds were dismissed as premature.

Conclusion:
The Tribunal partly allowed the appeal, directing that the appellant's receipts be taxed under Section 44BB, considering the nature of services provided to BGEPIL and the appellant's failure to substantiate its claims with adequate evidence. The decision emphasized the necessity for the appellant to maintain proper documentation and comply with statutory requirements to substantiate its claims for reimbursements.

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