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TMI Blog2012 (7) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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. - I.T.A. No. 543/Mds/2011 - - - Dated:- 31-5-2012 - SHRI ABRAHAM P. GEORGE, SHRI CHALLA NAGENDRA PRASAD, JJ. Appellant by : ShriAnirudhRai, CIT-DR Respondent by : Shri T. Banusekar, CA ORDER PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : In this appeal filed by the Revenue, its grievance is that Commissioner of Income Tax (Appeals)-V, Chennai, by his order dated 27.12.2007, deleted a disallowance of ₹ 3,16,93,911/- claimed by the assessee as expenditure incurred on maintenance of rigs. As per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the rigs in full operative capacity. In a nutshell, argument of the assessee was that expenses were incurred for keeping the old rigs in a fit operating condition. However, the Assessing Officer was not impressed. According to him, assessee was earning lease rents for rigs leased out to M/s Saipem, SPA for their operations in Saudi Arabia. The agreement dated 12.8.99 had expired and assessee had entered into a fresh agreement on 5.2.2004. As per Article 8 of this revised agreement, the drilling units were under the complete control and possession of the lessee and the lessee was under an obligation to maintain such rigs in good mechanical order and operative efficiency. Only when improvements were made by the lessee with the consent of lessor, the lessor was bound to reimburse the lessee, the amounts actually spent for such improvement and that too only at the time of redelivery. A.O. based on agreement dated 5.2.2004 entered by the assessee with M/s Saipem, SPA, came to a conclusion that during the lease period, the drilling units were in full possession and control of lessee who was to maintain such units in good condition. Therefore, as per the A.O., the claim of expenses und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Transmission Corporation of A.P. Ltd. v. CIT (239 ITR 587) applied. The A.O. also mentioned in the remand report that the agreement with M/s Saipem, SPA, Italy was signed in India and therefore, the income arose in India for M/s Saipem, SPA, Italy. 5. Assessee objected to the remand report stating that M/s Saipem, SPA, Italy did not have any business connection in India. As per the assessee, Section 9(1) of the Act was not applicable since the payments effected by it, came within the exemption provided in clause (b) of Section 9(1)(vii) of the Act. According to assessee, unless a sum paid chargeable to tax in India, no deduction was warranted under Section 195 of the Act. 6. CIT(Appeals) was appreciative of the contention of the assessee. According to him, the expenses incurred by the assessee was in the course of its business and hence allowable as business expenditure. There was no finding by the A.O. that the claim was not genuine. Insofar as the disallowance under Section 40(a)(i) was concerned, CIT(Appeals) was of the opinion that the sums paid by the assessee to M/s Saipem, SPA, Italy, were not taxable either under Section 9(1)(i) or under Section 9( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a part of the payment was for technical services, assessee was obliged to deduct tax at source unless it obtained a certificate from the Assessing Officer for non-deduction of tax at source as stipulated under Section 195(2) of the Act. Having not done so, assessee was had failed in its duty and obligation to deduct tax at source. Therefore, the Assessing Officer could rely on Section 40(a)(i) of the Act for justifying the disallowance, in his remand report. 8. Per contra, A.R., supporting the order CIT(Appeals), submitted that the Assessing Officer never questioned the genuineness of the payment. Even in original assessment, genuineness was not questioned. But, the A.O. had only questioned the necessity for incurring such expenses. As per the A.R., the expenses were not of a regular nature, but for extensive repairs and maintenance of oil rigs resulting in complete overhauling. This could not be considered in the same vein as day-to day maintenance. Such overhauling work was done by M/s Saipem, SPA, Italy, outside India. M/s Saipem, SPA, Italy had no business connection in India. The earnings insofar as Saipem, SPA, Italy, was concerned was clearly a business income. Since M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rested solely on M/s Saipem, SPA, Italy and assessee was under no obligation to maintain the rigs. As against this, case of the assessee is that this was not regular maintenance but work done over and above such regular maintenance to keep the rigs in good condition. The order of TPO with regard to the international transactions entered by the assessee during the relevant previous year is placed at paper-book pages 20-21. The said order clearly mentions that there was no adjustment required to the values of international transaction entered by the assessee with M/s Saipem, SPA, Italy. The relevant para of the TPO order is reproduced for brevity:- 3. M/s SaipemAban Drilling Co. Ltd. (henceforth referred to as SADCO) is primarily engaged in onshore drilling services with a fleet of 4 Land rigs to its asset. The Company has so far executed contracts with Oil Natural Gas Commission Ltd and Shell India Production B.V. At present the company has leased out its rigs to SaipemS.p.A., for operations at Saudi Arabia for which the Company is earning lease rentals at the day rates duly approved by RBI. 4. The case was discussed with assessee s representative. After examining i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mechanical order and efficient operating conditions in accordance with best oilfield practice. Lessee is not entitled for indemnification for any improvements, which Lessee shall make to the rig. However, if the improvements are made with the written consent of SADCO, SADCO is bound to indemnify Lessee, an amount equal to the lesser of the total amount spent and the actual value of the improvements at the time of Redelivery. If during the time of the lease the rig requires any improvements additions or alterations the same shall be carried out by the Lessee at the cost of the Lessor provided the Lessee obtains an inspection certificate from third party. The said clause only states that the lessee was to maintain drilling units in good working and operating condition. However, lessee was under no obligation to carry out periodical overhauling. We are of the opinion that the business need of the expenditure could not have been questioned by the A.O. Expenditure was made wholly and exclusively for the purpose of business of the assessee. It had to be allowed under Section 37(1) of the Act. 11. This leaves us with the second question whether the amount has to be disallowed under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em, SPA, Italy from the assessee, even if a part thereof is considered as fees for technical services, would not attract Section 9(1)(vii) of the Act. 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. Explanation to Section 9 added by Finance Act 2010 with effect from 1.6.76 applies only to clauses (v), (vi) and (vii) of Section 9(1) of the Act and not to clause (i). Under these circumstances, if the assessee had reached an impression that it was not liable to deduction of tax at source on the payment effected by it to M/s Saipem, SPA, Italy, we cannot say it was not bonafide. Special Bench of this Tribunal in the case of ITO v. Prasad Production Ltd. (125 ITD 263), clearly held that where an assessee was under a bonafide belief that tax would not be deductible on whole or any part of the payment effected by it to a non-resident, then it was not obliged to deduct tax at source. Since assessee here had considered that the amount was one on which no tax was deductible at source, it was not obliged to get any certificate from Assessing Officer as specified ..... X X X X Extracts X X X X X X X X Extracts X X X X
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