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TMI Blog2012 (5) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... ng assessment year 2004-05, i.e. the lead asst. year, were that the assessee is a foreign company. Vide an order u/s.143(3) dated 29/12/2006, it was noted by the A.O. that the return of income was filed declaring a loss of Rs. (-) 9,20,84,676/-, however the assessment was finalized on loss of Rs. 8,40,16,102/-. The assessee-company has acquired the Energy Division of Essar Oil Ltd. The assessee-company is in business in Oman, Qatar, Saudi Arabia and also in India. The company had acquired the said Division on 13/05/2003 and having its Project Office in India for providing rigs for oil drilling. However, Dalma Energy LLC, the assessee, is registered as a limited liability company having its registered office at Abu Dhabi, United Arab Emirates. With this factual background, it was noted by the AO that a sum of Rs. 44,75,485/-was incurred towards repairs and maintenance. It is worth to mention that the figure of disallowance as mentioned by the Revenue in the ground of appeal for A.Y. 2004-05 is incorrect. The expenditure was stated to be incurred on upkeep, servicing and maintenance of drilling rigs and its auxiliary equipments. The assessee has claimed the said expenditure as revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enance and I find that all the expenses are of revenue nature and are required for maintenance of drilling Rig and various machineries required to keep the Rig and other machineries in good order. There is no single instance where the expenditure is of capital in nature, which requires to be capitalized. In view of the above narrated facts, the claim of the appellant is allowed as revenue expenditure." 4. From the side of the Revenue, ld. Sr. DR Mr. Souryawanshi appeared and contested that the expenditure was incurred for establishing the plant & machinery before the business was commenced, hence, rightly disallowed. 5. From the side of the respondent-assessee, the ld. AR Mr. Milin Mehta appeared and informed that the business was commenced on 13/05/2003. He has drawn our attention on the list of the expenditure incurred placed on record on pages 63 onwards to demonstrate that the said list starts only from 13/05/2003 onwards. He has emphasized that repairs and expenditure have actually been incurred after the start of the operation at the site. He has therefore pleaded that it was wrong on the part of the DR to argue that the impugned expenditure related prior to the commencemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said view is hereby confirmed and this common ground, in all the three years, of the Revenue is hereby dismissed. 7. The Revenue for A.Y. 2005-06 has raised Ground No.2 in respect of Head Office expenditure. This ground reads as under:- "2. The learned CIT(A)-XXI, Ahmedabad, has erred in law and on facts in allowing the Head Office expenditure of Rs. 1,00,72,251/- u/s.37(1), overlooking the facts that the assessee failed to produce/furnish any details to substantiate his claim that the expenditure was indeed incurred for the operation of Indian Project. 7.1 We have been informed that ld. CIT(A) has upheld the disallowance as made by the A.O. Undisputedly, for A.Y. 2005-06 in fact the assessee has challenged the said disallowance as also the verdict of ld. CIT(A). In view of this, the above ground of the Revenue has wrongly been raised since there ought not to be any grievance to the Revenue. For all the years, Revenue's appeals are therefore dismissed. 8. Assessee's appeals for AYs 2005-06 & 2006-07 The Common ground No.1 reads as under: 1. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the Assessing Officer i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favourably levied in that other contracting state, then the taxation levied on enterprises of that contracting state carrying on the same activities in the same circumstances or under the same condition. He has placed strong reliance on Metchem Canada Inc. 100 ITD 251. He has also placed reliance on a Special Bench decision, Ahmedabad Bench "D" in the case of Shri Rajeev Sureshbhai Gajwani v. Asst. CIT bearing ITA Nos.1807 and 1978/Ahd/2006 & ITA No.3111/Ahd/2007 for AYs 2002-03, 2003-04 & 2005-05 order dated 04/03/2011. 11. On the other hand, ld. Sr. DR Mr. G.S. Souryawanshi appeared and placed reliance on the orders of the AO and CIT(A). He has argued that the non-discrimination clauses are not to be applied and the provisions of section 44C squarely applies on the facts of the case. Reliance placed on American Bureau of Shipping 263 ITR 590 (Bom.). 12. We have heard both the sides at some length. We have also perused the short compilation filed. The assessee's status and the relationship with the Head Office is that the Dalma Energy LLC is situated at United Arab Emirates and in the business of drilling of oil well. There was no dispute about the basic fact that there were cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere. 4. Insofar as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph (2) shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the methods of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article." 12.2 So the legal controversy is whether the administrative expenses be allowed to the extent attributable to run the business of P.E. or to be restricted U/s 44C of the Act. The objective for the introduction of section 44C was to get over of the difficulty in scrutinizing and verifying claims in respect of general administrative expenses incurred by the foreign head office insofar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenditure would not be disallowed. It was clarified that the language of section of 44C clearly postulates that the general administrative expenses should be incurred not only in connection with the business in India but also business outside India. In other words, as per the Hon'ble Court, a part of the expenditure at least must not be attributable to the business operations carried on in India. But where an assessee does not have any business overseas and the entire operations are carried out by it in this country only, the question of allocating a part of expenditure to the business carried on in India cannot arise. 12.4 We have narrated few of the decisions of the Hon'ble Courts on this subject to give emphasis that the general principle of allowability of an expenditure cannot be overlooked and that the accepted principle is that only those expenditure can be allowed which are attributable to the business activity as well as laid out wholly and exclusively for the purposes of the business. Keeping this recognised principle in mind, in our considered opinion, in all these decisions the provisions of section 37(1) have also be simultaneously discussed by the Courts. This a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for 2004-05 but for the years under consideration, i.e. A.Ys. 2005-06 & 2006-07. At this juncture, at the most we can direct the AO to verify the fact about the allocation of the common administrative expenditure whether for the year under consideration have also been allocated on the same pattern as it was accepted being at arm's length price by the TPO for A.Y. 2004-05. We order accordingly. 14. To conclude the legal aspect of this issue, we have already reproduced Article 7 (in para 12.1 above) and on careful perusal, we have noted that in determining the profits of a PE the expenses which are incurred for the purposes of the business of the said PE, including general administrative expenses is to be allowed. At this stage of argument, we have categorically raised a question that if executive and general administrative expenses of a PE is to be allowed having been incurred for the purposes of the business of a PE, then what is the utility of the introduction of section 44C of the IT Act. Ld. AR Mr. Milin Mehta has answered that keeping in mind the controversy an amendment took place in the Articles and vide a protocol amending the agreement between the Government of the Republ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The applicability of non-discrimination clauses happened to be the subject of controversy due to a conflicting view adopted by the Tribunal Benches in the reported decisions of Automated Security Clearance 118 TTJ 619 (Pune), on one hand, and the view taken in the case of Metchem Canada Inc. 99 TTJ 702(Mum.), on the other hand. Because of the conflicting views expressed by the Tribunal, a Special Bench was formed and vide ITAT Special Bench "D" Ahmedabad order dated 04/03/2011 in the case of Shri Rajeev Sureshbhai Gajwani v. Asst. CIT (supra), the view taken in the case of Metchem Canada (supra) was upheld. The Respected Special Bench has opined that section 90(2) of the Act provides that where the Central Government has entered into an agreement with the Government of any other country for avoidance of double taxation, then the provisions of the Act shall apply to the extent, they are more beneficial to the person. According to the Special Bench, the said provision has made it obligatory in respect of a person to whom DTAA applies hence the assessment is to be made accordingly, but if any provision of the Act is more beneficial to the person then that shall be granted under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he action of AO in considering an amount of Rs. 1,15,09,775/- as income of the current year. 15.1 It was found that the Revenue amounting to Rs. 1,01,58,327/-receivable from Cairn India Pvt. Ltd. of earlier years was not recognized in any of the previous year and even during the year under consideration on the ground that the same was disputed. The AO has noticed that as per Schedule XIV - notes to the accounts, the said claim was confirmed by Cairn India Pvt. Ltd. On the other hand, as per the assessee, the claim was still under dispute and the claim was not recognized by the said party. The AO has referred AS-9 in respect of "Revenue Recognition" issued by ICAI and thereupon held that an amount of Rs. 1,15,09,775/-(after conversion of USD 256134.5 x Indian Rupees) is to be added back in the year under consideration. It is worth to note that the final payment was received from the said party in the F.Y. 2006-07 as per the TDS certificate given by the assessee and that fact has also been noted by the AO. 16. The matter was carried before the first appellate authority. Ld. CIT(A) has held that the realization was almost a certainty as there was no pending dispute. According to him ..... X X X X Extracts X X X X X X X X Extracts X X X X
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