M/s. DIC NCC JV, Hyderabad V. Addl.CIT, Range-6, Hyderabad

ITA 1649/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61922 (ITAT-HYDERABAD)
• Duration Of Justice: 9 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 15-09-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V SRINIVAS
• Assessee Lawyers: V SIVA KUMAR; C S SUBRAMANYAM
• Keywords: Depreciation; Double taxation relief; Opportunity of being heard; Maximum Marginal Rate; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.1649/HYD/2011 A.Y. 2006-07 M/S. DIC NCC (JV), HYDERABAD PAN: AAEFD 6619 A VS. ADDL. CIT, RANGE-6, HYDERABAD [APPELLANT] ITA NO.1671/H/2011 A.YR. 2006-07 [RESPONDENT] ACIT, CIR-6(1), V- M/S. DIC-NCC(JV), HYDERABAD. HYDE RABAD. PAN: AAEFD 6619 A APPELLANT BY: . S/SRI CS SUBRAMA NYAM & V.SIVAKUMAR RESPONDENT BY: SHRI V. SRINIVAS DATE OF HEARING: 25.04.2012 DATE OF PRONOUNCEMENT: 25-06-2012. O R D E R PER SAKTIJIT DEY, JM : THESE CROSS APPEALS ARE DIRECTED AGAINST ORDER DATE D 2-12-2010 OF THE CIT (A), GUNTUR PASSED IN ITA NO.0284/TR/CIT(A)/GNT/08-09 PERTAINING TO THE ASSES SMENT YEAR 2006-07. ITA NO.1649/HYD/2011 (ASSESSEES APPEAL): - 2. IN THIS APPEAL, THE ASSESSEE HAS RAISED 8 GROUND S. GROUND NOS. 1 AND 8 ARE GENERAL IN NATURE AND THEY DO NOT REQUIRE ANY ADJUDICATION. ITA NOS. 1649 & 1671/H/2011 M/S. DIC NCC (JV), HYDERABAD. =========================== 2 3. IN GROUND NOS.2 TO 6, THE ASSESSEE HAS BASICALLY CHALLENGED THE ESTIMATION OF PROFIT BY REJECTING TH E BOOKS OF ACCOUNTS. BRIEFLY, THE FACTS ARE, THE ASSESSEE IS A JOINT VENTURE COMPANY BETWEEN DAELIM INDUSTRIAL COMPANY (DIC IN SHORT) AND NAGARJUNA CONSTRUCTIONS CO. LTD. , (NCCL). IT WAS AWARDED A CONTRACT BY NATIONAL HIGH WAY AUTHORITY OF INDIA (NHAI) FOR DEVELOPMENT OF 247.7 KMS ROADS IN THREE PACKAGES IN THE STATE OF GUJARAT. T HE ASSESSEE JOINT VENTURE FOR THE ASSESSMENT YEAR UNDE R DISPUTE DISCLOSED A TOTAL CONTRACT RECEIPTS OF RS. 174.58 CRORES AND AFTER CLAIMING EXPENSES OF RS.159.78 CRO RES AND DEPRECIATION OF RS.7.05 CRORES DECLARED A TOTA L INCOME OF RS.8,14,92,286/-. DURING THE SCRUTINY ASSESSMENT PROCEEDINGS, THE AO AFTER EXAMINING THE BOOKS OF ACCOUNTS AND ALSO FINAL ACCOUNTS AS SUBMIT TED WITH THE RETURN OF INCOME FOUND THE EXPENSES TO BE ABNORMALLY HIGH. FROM THE TERMS OF SUB-CONTRACT AGREEMENT, IT WAS FOUND THAT THE ASSESSEE HAS DEDUC TED 10% OF THE GROSS VALUE OF THE CONTRACT AWARDED TO I T BY NHAI AND PASSED ON REMAINING TO THE SUB-CONTRACTOR. SUB-CONTRACT IS INCLUSIVE OF STATUTORY OBLIGATIONS LIKE LIQUIDITY DAMAGES, STATUTORY LEVIES, INSURANCE, AND DEDUCTION OF SALES TAX AND WORKS CONTRACT TAX, PAYM ENT OF ROYALTY AND ESTABLISHMENT OF FIELD LABS AND OTHER S TATUTORY COMPLIANCES ETC. AS PER THE TERMS OF THE SUB-CONTRA CT AGREEMENT, THE SUB-CONTRACTOR WAS RESPONSIBLE TO IN CUR ALL SUCH EXPENSES. THE SUB-CONTRACTOR HAS TO INCUR THE EXPENDITURE ON ACCOUNT OF SALARIES OF PROJECT MANA GER AND PROJECT CO-ORDINATOR OF JOINT VENTURE TOWARDS SUPERVISION OF WORK. IN CASE OF ANOTHER SUB-CONT RACT WITH AKP INFRASTRUCTURE, THE ASSESSEE AS PER THE TE RM OF ITA NOS. 1649 & 1671/H/2011 M/S. DIC NCC (JV), HYDERABAD. =========================== 3 THE CONTRACT IS ENTITLED TO 20% OF THE GROSS CONTRA CT RECEIPTS AS ITS SHARE OF PROFIT. FROM THE AFORESAI D FACTS, THE AO FOUND THAT IN THESE CASES OF SUB-CONTRACT IT SELF THE ASSESSEE IS RETAINING 10% TO 20% OF THE GROSS CONTR ACT VALUE AND PASSING ON THE REMAINING AMOUNT TO SUB- CONTRACTOR TO EXECUTE THE WORK. IT WAS ALSO FOUND BY THE AO THAT THE SUB-CONTRACT AGREEMENT NOWHERE PROVIDES FOR PAYMENT OF MANAGERS SALARY OF JOINT VENTURE WHICH IS PAID BY THE SUB-CONTRACTOR AS PER THE TERMS OF THE SUB-C ONTRACT AGREEMENT, IT IS THE RESPONSIBILITY OF THE SUB-CONT RACTOR TO COMPLETE THE WORK ASSIGNED TO IT BY THE JOINT VENTU RE AND HAND OVER COMPLETED WORK TO THE JOINT VENTURE WITHI N THE TIME SCHEDULE. IT WAS ALSO FOUND BY THE AO THAT TH E EXPENSES FOR LABOUR, PLANT AND MACHINERY MATERIALS OR OTHER EXPENSES INCLUDING WATER, POWER HAVE TO BE BO RNE BY THE SUB-CONTRACTOR. SUB-CONTRACTOR HAS ALSO TO BEAR MISC., EXPENSES LIKE INSURANCE, TAXES AND ROYALTY E TC., AND OTHER EXPENSES OF ALL STATUTORY COMPLIANCE. IT WAS FOUND BY THE AO THAT ON TOTAL CONTRACT RECEIPTS OF RS.174 .58 CRORES, SUB-CONTRACT PAYMENT SHOWN IN THE PROFIT AN D LOSS A/C IS RS.99.67 CRORES. 4. AS PER THE TERMS OF SUB-CONTRACT WITH DRAIPL FOR THE BILL OF RS.34 CRORES RAISED BY DRAIPL ASSESSEE S RECEIPT FROM NHAI IS RS.37.87 CRORES AND FOR RS.15. 20 CRORES RAISED BY AKP, ASSESSEES RECEIPT FROM NHAI AMOUNT TO RS.19 CRORES . 10% AND 20% ON THE AFORES AID AMOUNTS TOTALLING TO RS.3.84 CRORES AND RS.3.8O CRO RES RESPECTIVELY ARE DIRECT RECEIPTS OF THE ASSESSEE BE FORE MAKING PAYMENTS TO SUB-CONTRACTOR. THEREFORE, ACT UAL WORK EXECUTED BY THE ASSESSEE DURING THE FINANCIAL YEAR ITA NOS. 1649 & 1671/H/2011 M/S. DIC NCC (JV), HYDERABAD. =========================== 4 WAS AT RS.67.27 CRORES. AGAINST THE ACTUAL WORK EX ECUTED BY THE JOINT VENTURE OF RS.67.27 CRORES, AND PROPOR TIONATE EXPENSES OF RS.72.68 CRORES HAS BEEN CLAIMED BY THE ASSESSEE AND A FURTHER AMOUNT OF RS.7.05 CRORES WAS CLAIMED AS DEPRECIATION. AS A RESULT OF WHICH THE NET PROFIT SHOWN BY THE ASSESSEE COME TO RS.4.68% ONLY. THE A O FOUND THAT THE ASSESSEE HAS DEBITED HUGE AMOUNT OF CAPITAL AS WELL AS REVENUE EXPENDITURE TOWARDS PLAN T AND MACHINERY EXPENSES EVEN THOUGH THE SUB-CONTRACTOR H AS TO USE THEIR OWN PLANT AND MACHINERY. THE AO ALSO FOUND A QUALIFYING REPORT OF AUDITORS OF JOINT VENTURE AD DRESSED TO THE AUDITORS OF NCCL SUGGESTING THAT THE BALANCE SHEET AND PROFIT & LOSS A/C OF JOINT VENTURE HAS TO BE A NALYSED AND EXAMINED. ON THE BASIS OF THE AFORESAID FACTS, THE AO PROCEEDED TO REJECT THE BOOKS OF ACCOUNT U/S 145(3) OF THE ACT AND ESTIMATED THE PROFIT AT 15% ON TOTAL CONTRA CT RECEIPTS AND THEREAFTER ALLOW DEPRECIATION. THE AS SESSEE BEING AGGRIEVED FILED AN APPEAL BEFORE THE CIT (A). 5. THE CIT (A) AFTER CONSIDERING THE CONTENTIONS RA ISED BEFORE HIM BY THE ASSESSEE AND THE REASONING OF THE AO FOUND THAT THE JOINT VENTURE IS DEDUCTING GROSS VAL UE OF CONTRACT WORK FROM 10 TO 20% AND PASSING ON THE REMAINING AMOUNT TO THE SUB-CONTRACTOR. IN THIS PR OCESS, AT THE STAGE OF AWARDING WORK ITSELF TO THE SUB-CON TRACTOR, THE JOINT VENTURE IS MAKING PROFIT TO THE TUNE OF 1 0% TO 20%. THE CIT (A) THEREFORE AGREED WITH THE INFEREN CE DRAWN BY THE AO IN REJECTING THE BOOKS OF ACCOUNTS AND ESTIMATING THE PROFIT. HOWEVER, CONSIDERING THE VO LUME AND NATURE OF WORK, THE CIT (A) ESTIMATED THE PROFI T AT ITA NOS. 1649 & 1671/H/2011 M/S. DIC NCC (JV), HYDERABAD. =========================== 5 10% AND DIRECTED FOR ALLOWING DEPRECIATION AND INTE REST FROM PROFITS SO DETERMINED. 6. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD AND ALSO CONSIDERED THE WRITTEN SUBMISSIONS OF THE ASSESSEE. AS IS EVIDENT FROM TH E MATERIALS ON RECORD, THE ASSESSEE JOINT VENTURE HAS EXECUTED A MAJOR PORTION OF WORK AWARDED BY IT BY NHAI THROUGH SUB-CONTRACTOR. THE ASSESSEE JOINT VENTURE WAS DEDUCTING 10 TO 20% FROM THE GROSS VALUE OF WORK AN D PAYING THE REMAINING AMOUNT TO THE SUB-CONTRACTOR A T THE STAGE OF AWARDING WORK TO THE SUB-CONTRACTORS. THE REFORE, THE JOINT VENTURE IS MAKING PROFIT WITHOUT EXECUTIN G ANY WORK. THEREFORE CONSIDERING SUCH MODUS OPERENDI O F THE ASSESSEE, THE PROFIT DISCLOSED AT 4.68% IS ABNORMAL LY LOW COMPARED TO THE ACTUAL PROFIT DERIVED FROM SUCH TYP E OF WORK. THE AO HAS ALSO FOUND THAT THE ASSESSEE HAS INFLATED EXPENDITURE ON ACCOUNT OF EXPENSES INCURRE D TOWARDS REPAIRS AND MAINTENANCE OF PLANT AND MACHIN ERY AND PAYMENT OF SALARIES. IT IS ALSO A FACT FOUND O N RECORD THAT THE ASSESSEES FINAL ACCOUNTS WERE QUALIFIED B Y A REPORT OF AN AUDITOR WHICH RAISES A DOUBT REGARDING CORRECTNESS OF THE ACCOUNTS. UNDER THE CIRCUMSTANCE S, THE AO, IN OUR OPINION, WAS JUSTIFIED IN REJECTING THE BOOKS OF ACCOUNT AND ESTIMATING PROFIT. THE CIT (A) HOWEVER CONSIDERING THE FACT THAT THE PROFIT ESTIMATED AT 1 5% IS ON HIGHER SIDE REDUCED THE SAME TO 10% AND DIRECTED T O DEDUCT THERE FROM DEPRECIATION AND INTEREST. IT IS SEEN THAT IN CASE OF M/S KRISHNAMOHAN CONSTRUCTIONS, HYDERABAD IN ITA NOS. 380 AND 381/HYD/94, THE THIRD MEMBER DECISION OF ITAT, HYDERABAD BENCH HAS HELD ITA NOS. 1649 & 1671/H/2011 M/S. DIC NCC (JV), HYDERABAD. =========================== 6 ESTIMATION OF PROFIT IN SUCH TYPE OF CASES AT 12.5% TO BE REASONABLE AND THEREAFTER ALLOWED DEPRECIATION. CONSIDERING THE TOTALITY OF FACTS AND CIRCUMSTANCES OF THE CASE AND KEEPING IN VIEW THE 3 RD MEMBER DECISION OF THIS BENCH, WE CONSIDER IT REASONABLE TO DIRECT ESTIMATI ON OF PROFIT AT 10% OF THE GROSS RECEIPTS WITHOUT ALLOWIN G ANY FURTHER DEDUCTION TOWARDS DEPRECIATION AND INTEREST . 7. IN GROUND NO.7, THE ASSESSEE HAS CHALLENGED THE ORDER PASSED BY THE REVENUE AUTHORITIES HOLDING THE STATUS OF THE JOINT VENTURE AS AN AOP AND CHARGING TAX AT THE MAXIMUM MARGINAL RATE. 8. AT THE TIME OF ASSESSMENT PROCEEDINGS, THE AO FOUND FROM THE AUDIT REPORT AS WELL AS THE RETURN O F INCOME, THE ASSESSEE HAS MENTIONED THE STATUS OF JO INT VENTURE AS A FIRM. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE DID NOT PRODUCE ANY DOCUM ENT TO SHOW THE EXISTENCE OF PARTNERSHIP BETWEEN THE CONSTITUENTS OF THE JOINT VENTURE. THE AO THEREFORE HELD THE STATUS OF THE JOINT VENTURE AS AOP AND CHARGE T AX AT THE MAXIMUM MARGINAL RATE SO FAR AS ONE OF THE CONSTITUENTS OF THE JOINT VENTURE IS CONCERNED, DAE LIM INDUSTRIAL COMPANY BY TREATING IT AS A FOREIGN COMP ANY. THE ASSESSEE BEING AGGRIEVED OF THE ORDER SO PASSED BY THE AO FILED AN APPEAL BEFORE THE CIT (A). THE CIT (A) ALSO UPHELD THE ACTION OF THE AO. 9. THE LEARNED AR CONTENDED BEFORE US THAT EVEN ASSUMING THAT THE STATUS OF THE JOINT VENTURE AS AO P, THE ITA NOS. 1649 & 1671/H/2011 M/S. DIC NCC (JV), HYDERABAD. =========================== 7 AO COULD NOT HAVE IMPOSED TAX AT MAXIMUM MARGINAL R ATE OF 40% IN VIEW OF ARTICLE-25 (4) OF DTAA BETWEEN IN DIA AND KOREA. THE ASSESSEE IN THIS REGARD REFERRED TO ARTICLE 25(4) OF THE DTAA WITH KOREA WHICH IS EXTRACTED HEREUNDER:- ENTERPRISES OF A CONTRACTING STATE, THE CAPITAL OF WHICH IS WHOLLY OR PARTLY OWNED OR CONTROLLED, DIRECTLY OR INDIRECTLY, BY ONE OR MORE RESIDENTS OF THE OTHER CONTRACTING STATE, SHALL NOT BE SUBJECTED IN THE FIRST MENTIONED CONTRACTING STATE TO ANY TAXATION OR ANY REQUIREMENT CONNECTED THEREWITH WHICH IS OTHER OR MORE BURDENSOME THAN THE TAXATION AND CONNECTED REQUIREMENTS TO WHICH OTHER SIMILAR ENTERPRISES OF THAT FIRST MENTIONED STATE ARE OR MAY BE SUBJECTED. 10. WE HAVE HEARD THE PARTIES ON THIS ISSUE. IT IS CLEAR FROM THE ORDERS OF THE REVENUE AUTHORITIES THAT THE ASSESSEE HAS FAILED TO PRODUCE ANY EVIDENCE TO SHOW THE EXISTENCE OF PARTNERSHIP BETWEEN THE MEMBERS OF THE JOINT VENTURE. IN THIS EVENTUALITY, THE CONCLUSION OF RE VENUE AUTHORITIES IN TREATING THE JOINT VENTURE AS AOP CA NNOT BE FAULTED. HOWEVER, IT IS SEEN FROM THE ARTICLE25(4) OF DTAA BETWEEN INDIA AND KOREA EXTRACTED HEREINABOVE THAT THE AFORESAID ARTICLE PROVIDES THAT THE FOREIGN COMPANY SHOULD NOT BE SUBJECTED TO TAX WHICH IS MORE BURDENSOME TH AN TAX IMPOSED ON SIMILAR ENTITIES OF THE CONCERNED ST ATE. WE FIND FORCE IN THE CONTENTIONS OF THE LEARNED AR FOR THE ASSESSEE. HOWEVER, IT HAS ALSO TO BE SEEN WHETHER S UCH NATURE OF INCOME IS WITHIN THE PURVIEW OF DTAA BETW EEN INDIA AND KOREA. SINCE THE CIT (A) HAS NOT AT ALL ITA NOS. 1649 & 1671/H/2011 M/S. DIC NCC (JV), HYDERABAD. =========================== 8 CONSIDERED THIS ISSUE WE RESTORE THIS ISSUE ONLY TO THE FILE OF CIT (A) WHO SHALL DECIDE THE SAME AFTER GIVING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ITA NO.1671/HYD/2011 (REVENUES APPEAL):- 12. THE REVENUE HAS CHALLENGED REDUCTION IN ESTIMAT ION OF PROFIT FROM 15% TO 10%. IN VIEW OF OUR FINDING IN ASSESSEES APPEAL MENTIONED SUPRA, GROUNDS RAISED B Y THE REVENUE ARE REJECTED. 13. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE WHILE APPEAL BY THE REVENUE IS HEREBY DISMISSED. ORDER WAS PRONOUNCED IN THE COURT ON 25 -6-2012. SD/- SD/-(CHANDRA POOJARI) ACCOUNTANT MEMBER SD/- SD/-(SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 25 TH JUNE, 2012 COPY FORWARDED TO: 1. M/S. DIC-NCC (JV), 41, NAGARJUNA HILLS, PUNJAGUT TA, HYDERABAD. 2. THE ASSTT. CIT/ADDL. CIT, CIRCLE-6(1)/RAANGE-6, HYDERABAD. 3. THE CIT(A), GUNTUR. 4. THE CIT-I, AP, HYDERABAD 5. THE DR A BENCH, ITAT, HYDERABAD. JMR* ITA NOS. 1649 & 1671/H/2011 M/S. DIC NCC (JV), HYDERABAD. =========================== 9 `