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TMI Blog2009 (2) TMI 259X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure. There is no reason to disbelieve the auditor's certificate which was filed before the lower authorities. This is also corroborated by the provisions of s. 3.1.4 of the psc. Clause (ii) of this section refers to payments to be made to affiliates of the contractor. The parties to the PSC are bound to comply with the provisions contained in the PSC. Therefore, the assessee could only reimburse the actual expenditure incurred by the parent company. Accordingly, we are of the view that the payment by the assessee was by way of reimbursement of expenses. Whether any sum paid by way of reimbursement of expenses can be said to be income chargeable to tax in the hands of the recipient? - Various High Courts and the Benches of the Tribunal have held that no income can be said to accrue or arise from the sum received by way of reimbursement of expenses. Same view was taken by the Hon'ble Delhi High Court in Industrial Engineering Projects (P) Ltd.'s [ 1992 (7) TMI 38 - DELHI HIGH COURT] as well as the Hon'ble Calcutta High Court in Dunlop Rubber Co. Ltd.'s [ 1982 (2) TMI 24 - CALCUTTA HIGH COURT] . Similar view has also been taken by the Tribunal in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y it to its parent company. The orders of the CIT(A) are therefore set aside and consequently the additions sustained by him are deleted. The appeals of the assessee stand allowed. - Member(s) : K. C. SINGHAL., SHAMIM YAHYA. ORDER-K.C. SINGHAL, VICE PRESIDENT: Since common issues are involved in these appeals, the same are being disposed of by a common order for the sake of convenience. 2. Though various grounds have been raised in these appeals, the issue arising from these grounds is whether the lower authorities were justified in disallowing the expenditure under s. 40(a)(i) of the IT Act, 1961 (the Act for short) on the ground that the assessee failed to deduct tax at source under s. 195 of the Act. 3. Both the parties have agreed that the facts are almost similar in all the appeals. Therefore, for the sake of brevity the facts relating to the asst. yr. 1996-97 are being narrated herewith. 4. The assessee is a non-resident company incorporated at Australia engaged in prospecting for and production of mineral oils in India. The exploration and production activities are carried out by the assessee in various contract areas under the production sharing co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuous cost incurred before commercial production and the expenditure incurred by the assessee (whether before or after such commercial production) in respect of drilling or exploration activities or services. Therefore, such items of capital expenditure, which are not allowable under ss. 30 to 38 can be allowed under s. 42. This is made clear by the terms in lieu of and in addition to provided in s. 42. 3. Sec. 40(a)(i) was enacted to ensure that payments which are chargeable to tax and payable outside India are not paid without TDS to avoid loss of revenue. Since all the payments are time cost wages, they are sums chargeable to tax and as such, in the absence of TDS these payments call for disallowance under s. 40 (a)(i). 4. Sec. 42 does not have overriding application on s. 40(a)(i) and therefore even payments covered by s. 42 should fall within the ambit of s. 40(a)(i). 5. Sec. 42 is only a provision enabling special deductions and not a special provision for computation of income. Therefore, the payments covered by s. 42 are subject to application of s. 40(a)(i), which is the operative section enabling enforcement of s. 195. 6. Sec. 42 does not expressly provide that s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "I have considered the matter carefully with reference to the facts of the case and the law on the subject. I find the report of the AO furnished in compliance to the letter dt. 19th July, 2004 issued by this office discusses in detail the nature of the expenditure which is the subject-matter of disallowance. It also discusses at length the provisions of law and the justification for holding such expenditures relating to time cost as not mere reimbursement of expenditure as claimed by the appellant. The applicability of s. 40 (a)(i) to expenditure otherwise covered under s. 42 as also the issue that s. 40 is not subservient to the provisions as contained in s. 42. It has been rightly brought out that s. 42 does not have an overriding application over s. 40. It has also been rightly brought out that s. 42 is only a provision enabling special deduction and not a special provision for computation of income. Therefore the payments covered by s. 42 are subject to application of s. 40(a)(i). It is for such reasons that the disallowance made under s. 40(a)(i) has to be sustained. Accordingly it is held that the disallowance made by the AO under s. 40(a)(i) of Rs. 1,28,86,254 is confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in the case of CIT vs. Industrial Engineering Projects (P) Ltd. (l993) 109 CTR (Del) 73 : (l993) 202 ITR 1014 (Del) as well as the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Dunlop Rubber Co. Ltd. cited supra. Apart from the above High Court judgments he also relied on various decisions of the Tribunal in the case of Asstt. CIT vs. Enron Global Exploration Production Ltd. (ITA No. 861/Del/2005, dt. 24th Oct., 2008) [reported at (2009) 120 TTJ (Del) 774 : (2009) 17 DTR (Del) 115-Ed.]; in the case of Asstt. CIT vs. Enron Expats Services Inc. (ITA Nos. 4756 and 4757/Del/2005, dt. 9th Feb., 2007); in the case of Asstt. CIT vs. Enron Oil Gas Expat Services Inc. (ITA Nos. 857 and 858/Del/2005, dt. May, 2006); in the case of Dy. Director of IT (International Taxation) vs. BG Exploration Production India Ltd. 2009-TIOL-99-ITAT-Del, order dt. 18th Dec., 2008; and in the case of Saipem S.P.A. vs. Dy. CIT (2004) 86 TTJ (Del)(TM) 1 : (2004) 88 ITD 213 (Del)(TM). In view of the above decisions it was submitted that the provisions of s. 195 of the Act cannot be applied. The next contention raised by him is that the provisions of s. 44BB are not applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absence of the same, it was pleaded that the provisions of s. 195 became applicable. It was also pointed out by him that the assessee is deducting tax for and from the asst. yr. 2001-02 on similar payments. Since there is no change in law and the circumstances in the asst. yr. 2001-02, the assessee cannot argue now that it is not liable for TDS provisions and the consequent violation under s. 40(a)(i) of the Act. However in the written submissions filed after the hearing, he has also relied on the decision of the Hon'ble Madras High Court in the case of Ramanlal Kamdar vs. CIT 1976 CTR (Mad) 185 : (l977) 108 ITR 73 (Mad) and also on the decision of the Hon'ble Supreme Court in the case of CIT vs. East Coast Commercial Co. Ltd. (l967) 63 ITR 449 (SC) for the proposition that where the assessee has agreed then he can have no grievance if taxed as per his admission. 9. In reply the learned counsel for the assessee drew our attention to the provisions of s. 195(2) to point out that it is for the assessee to take a decision whether the provisions of s. 195 are applicable or not. He referred to the decision of the Tribunal in the case of Maharashtra State Electricity Board vs. Dy. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -resident, not being a company or to a foreign company, then the deduction is allowable only if the assessee deducts the tax at source and pays the same in accordance with the provisions of s. 200 of the Act. According to the AO, the provisions of s. 195 are applicable since the sum paid by the assessee is chargeable to tax under the Act. What is chargeable to tax is the income of a person. Therefore, in our opinion, a sum can be said to be chargeable to tax only when it contains element of profit. If element of profit is embedded in any payment, then the assessee is bound to deduct the tax at source at the rate prescribed or at a lesser rate allowed by the AO. However, if there is no element of profit embedded in such payment then, in our opinion, it cannot be said that the sum so paid is chargeable to tax and consequently the provisions of s. 195 of the Act would not be applicable. 11. Right from the inception, the stand of the assessee is that the payments were made by way of reimbursement of the expenditure incurred by the parent company in connection with the activities carried on by the assessee. The auditors of the parent company have certified that such payments represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch was pleased to hold that sharing of expenses of the research utilized by the subsidiaries as well as the head office organization would not be income which would be assessable to tax. A similar view was taken in Stewarts Lloyds of India Ltd.'s case. We are in respectful agreement with the view expressed by the Delhi and Calcutta High Courts." The above observations also show that the same view was taken by the Hon'ble Delhi High Court as well as the Hon'ble Calcutta High Court. Similar view has also been taken by the Tribunal in the case of Enron Oil Gas International (ITA Nos. 857 to 860/Del/2005, dt. May, 2006). Accordingly, it is held that no income accrued or had arisen to the parent company from the payments by way of reimbursement of expenses. Hence, the provisions of s. 195 were not applicable to the facts of the present case. Consequently, the assessee was not required to deduct tax at source. Hence, the AO was not justified in disallowing the payments made by the assessee to its parent company by way of reimbursement of expenses. 13. The decisions relied on by the learned Departmental Representative are quite distinguishable for the reasons given hereafter. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble under the provisions of this Act' would mean the sum on which income-tax is leviable. It further held that the sum paid by the assessee to the non-resident may be the entire income or it may include the hidden income which may contain a fraction of the sum as taxable income. It is in this context that it was stated that even if a fraction of a sum is included as income then tax is to be deducted at source on the entire amount. But it nowhere says that if no income is embedded in such payment the provisions of s. 195 would apply. On the contrary it has been clearly stated by them that the sum chargeable under the provisions of the Act would mean only the sum on which income-tax is leviable. Since various Courts have held that reimbursement of expenses does not involve element of income, in our view, it could not be said that such sum would fall under the provisions of s. 195 of the Act. Therefore, the said decision of the Hon'ble Supreme Court does not help the Revenue. The decision of the Hon'ble Kerala High Court in the case of Cochin Refineries Ltd., is an authority for the proposition that if part of the payment is by way of reimbursement of expenses then such payment should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecisions relied upon by the learned Departmental Representative are distinguishable and therefore cannot be applied to the present case. 14. We also find force in the contention of the learned counsel for the assessee that income of the assessee is to be computed as per the special provisions of s. 42 of the Act and consequently no disallowance can be made by invoking the provisions of s. 40 (a)(i) of the Act. Though it is not a non obstante provision, yet it is a special provision relating to the computation of the income of an assessee engaged in the business of prospecting for or extracting or producing mineral oils in India. It is a settled legal provision that general provisions must give way to the special provisions. Reference can be made to the judgment of the Hon'ble Supreme Court in the case of CIT vs. Shahzada Nand Sons Ors. (1966) 60 ITR 392 (SC) as well as the judgment of the Hon'ble Madras High Court in the case of CIT vs. Copes Vulcan Inc. (1986) 57 CTR (Mad) 244 : (1987) 167 ITR 884 (Mad) wherein it was held that special provisions would prevail over the general provisions contained in the Act. Even the Board Circular No. 308, dt. 29th June, 1981 clarifies thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for deduction in the case of business of prospecting, extraction or production of mineral oils. As stated above, s. 42(1), inter alia, provides for deduction of certain expenses." "The above analysis shows that s. 42 provides for deduction for expenses provided such expenses/allowances are provided for in the PSC. The PSC in question provides for both capital and revenue expenditure. It also provides for a method in which the said expenses had to be accounted for. The said PSC is an independent accounting regime which includes tax treatment of costs, expenses, incomes, profits, etc. It prescribed a separate rule of accounting." "Therefore the PSC represented an independent regime. The shares of the Government and the contractors were also determined on that basis. Sec. 42 is inoperative by itself. It becomes operative only when it is read with the PSC. Expenses deductible under s. 42 had to be determined as per the PSC. This implied that expenses had to be accounted for only as contemplated by the PSC." "The said 'PSC accounting' obliterated the difference between capital and revenue expenditure. It made all kinds of expenditure chargeable to the P L a/c without reference ..... X X X X Extracts X X X X X X X X Extracts X X X X
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