The ADIT,(Intl.Taxn.), Ahmedabad V. M/s. Dalma Energy LLC, Baroda

ITA 1664/AHD/2008

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60199 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 16-02-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 13-05-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Double taxation relief; International transaction; Permanent establishment; Revenue expenditure; Capital expenditure; TDS
• Section: 37(1); 37; 28

Judgement Text

FIT FOR PUBLICATION SD/- SD/- (AM) (JM) , , , , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD , .. !', #$ # % BEFORE SHRI MUKUL KR.SHRAWAT, JUDICIAL MEMBER AND SHRI B.P.JAIN, ACCOUNTANT MEMBER APPEAL(S) BY SL. NO(S). ITA NO(S) ASSESSMENT YEAR(S) APPELLANT (S) RESPONDENT(S) 1. 1664/AHD/2008 2004-05 THE ADIT (INTL.TAXN.) AHMEDABAD M/S.DALMA ENERGY LLC 301-302, ANAND COMPLEX 2, ANAND NAGAR SOCIETY JETALPUR ROAD, BARODA PAN:AABCD8102E 2. 704/AHD/2011 2005-06 -DO-REVENUE -DO-ASSESSEE 3. 1228/AHD/2011 2006-07 REVENUE ASSESSEE 4. 697/AHD/2011 2005-06 ASSESSEE REVENUE 5. 892/AHD/2011 2006-07 ASSESSEE REVENUE REVENUE BY : SHRI G.S. SOURYAWANSHI, SR.D.R. ASSESSEE BY : SHRI MILIN MEHTA, A.R. '& ' ($/ // / DATE OF HEARING : 16/2/2012 *+, ' ($ / DATE OF PRONOUNCEMENT : 23/4/2012 #-/ O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : FOR ASSESSMENT YEAR 2004-05 ONLY REVENUE IS IN AP PEAL, AND FOR AYS 2005-06 & 2006-07,BOTH REVENUE & ASSESSEE ARE I N APPEALS ARISING FROM THE ORDER(S) OF THE LD.CIT(APPEALS)-XXI, AHMED ABAD/GANDHINAGAR RESPECTIVELY DATED 26/02/2008, 03/12/2010 & 27/01/2 011. IN REVENUES ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 2 - APPEALS, FOR ALL THE THREE YEARS, GROUND NO.1 IS IDENTICAL EXCEPT THE QUANTUM OF ADDITION INVOLVED; REPRODUCED BELOW:- 1. THE LEARNED CIT(A)-XXI, AHMEDABAD HAS ERRED IN LAW AND ON FACTS IN HOLDING THAT THE EXPENSES OF RS.44,07,400/ - (FOR A.Y. 2005-06 OF RS.1,05,38,866/- & FOR A.Y. 2006-07 OF RS.86,09,578) CLAIMED UNDER THE HEAD REPAIRS AND MAINTENANCE WERE IN NATURE OF REVENUE EXPENDITURE. THE LD.CIT(A) OVERLOOKED THE FACT THAT, THE NATURE AND QUANTUM OF EXPENDITURE IS IN THE NATURE OF GIVING BENEFIT OF E NDURING NATURE. 2. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDI 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 WA S NOTED BY THE A.O. THAT THE RETURN OF INCOME WAS FILED DECLAR ING A LOSS OF RS.(-)9,20,84,676/-, HOWEVER THE ASSESSMENT WAS FIN ALIZED ON LOSS OF RS.8,40,16,102/-. THE ASSESSEE-COMPANY HAS ACQUIRE D 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 EMIRATE S. WITH THIS FACTUAL BACKGROUND, IT WAS NOTED BY THE AO THAT A S UM 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. T HE EXPENDITURE WAS STATED TO BE INCURRED ON UPKEEP, SERVICING AND MAIN TENANCE OF DRILLING ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 3 - RIGS AND ITS AUXILIARY EQUIPMENTS. THE ASSESSEE HA S CLAIMED THE SAID EXPENDITURE AS REVENUE IN NATURE. THE AO WAS OF TH E VIEW THAT A SUBSTANTIAL REPAIR HAD UNDERTAKEN FOR RIG THROUGH W HICH THE EARNING CAPACITY OF THE RIG HAD INCREASED. ACCORDING TO AO , CONSIDERING THE QUANTUM OF THE REPAIR EXPENSES, THE SAME WILL NOT F ALL IN THE CATEGORY OF RECURRING EXPENSES AND THAT THE ASSESSEE HAD OBTAIN ED THE BENEFIT OF ENDURING NATURE. THE AO HAS THEREAFTER DISCUSSED T HE LEGAL POSITION IN RESPECT OF THE CAPITAL EXPENDITURE AND THE REVENUE EXPENDITURE. HE HAS FINALLY HELD THAT THE EXPENDITURE WAS INCURRED AS A PART OF PLANT & MACHINERY AND, THEREFORE, NOT A REVENUE EXPENDITURE BUT CAPITAL EXPENDITURE. THE SAME WAS CAPITALIZED BUT DEPRECIA TION WAS GRANTED CONSEQUENTLY THE BALANCE AMOUNT WAS TAXED. IN ALL T HE THREE YEARS, THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHO RITY. 3. THE LD.CIT(A) HAS CONSIDERED THE LEGAL AS WELL A S FACTUAL ASPECT OF THE CASE AND THEREAFTER ON RECEIVING THE COMMENTS O F THE AO IN THE FORM OF REMAND REPORT, HE HAS FINALLY HELD AS UNDER:- 2.3. I HAVE GONE THROUGH THE ASST.ORDER, WRITTEN S UBMISSIONS BY THE APPELLANT, THE REMAND REPORT AND THE REPLY OF T HE APPELLANT IN RESPONSE TO THE REMAND REPORT. I FIND FROM THE SUB MISSION OF THE COUNSEL OF THE APPELLANT THAT THE APPELLANT SUBMITT ED BEFORE THE AO ON 27-05-2005 THREE LEDGERS, I.E. REPAIR & MAIN TENANCE, ROUTINE, MAJOR AND CAMP. THE DIFFERENCE AS POINTED OUT BY THE AO IN HIS REPORT AS WELL AS IN THE ORDER IS ALSO FULLY RECONCILED AND THERE IS NO DISCREPANCY IN THE CLAIM VIS--VIS DEBI TED TO THE P&L A/C. THE DISCREPANCY IS PRIMARILY ON ACCOUNT OF CO NSIDERATION BY THE AO THE REPAIRS ON PLANT AND MACHINERY ONLY, WH EREAS THE FIGURE DEBITED TO THE P&L A/C. ALSO CONTAINED REPAI R EXPENDITURE INCURRED AT THE SITE AND ALL THE LEDGERS ON REPAIRS AND MAINTENANCE ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 4 - GIVE COMPLETE DETAILS RUNNING FROM PAGES 45 TO 59 A ND RE- CONCILIATION OF THE SAME WAS FILED BEFORE THE UNDER SIGNED, WHICH IS FULLY IN ORDER. THE REPAIRS AND MAINTENANCE IS ON ACCOUNT OF UPKEEP, SERVICING AND MAINTENANCE OF DRILLING RIG A ND ITS AUXILIARY EQUIPMENTS, SURVIVING OF ENGINES, SERVICI NG OF GENERATORS, REPAIR AND THREADING AND STRAIGHTENING OF BEND PIPES AND DRILL COLLARS, PAINTING OF EQUIPMENTS TO PROTEC T FROM RUST AND WATER. THE NATURE OF REPAIR AND MAINTENANCE IS REC URRING IN NATURE, WHICH ARISES AFTER SHORT SPAN OF TIME. I HAVE ALSO GONE THROUGH THE DETAILS OF EXPENDITURE CLAIMED UNDER TH E HEAD REPAIR AND MAINTENANCE AND I FIND THAT ALL THE EXPENSES AR E OF REVENUE NATURE AND ARE REQUIRED FOR MAINTENANCE OF DRILLING RIG AND VARIOUS MACHINERIES REQUIRED TO KEEP THE RIG AND OT HER MACHINERIES IN GOOD ORDER. THERE IS NO SINGLE INST ANCE 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.SOURYA WANSHI APPEARED AND CONTESTED THAT THE EXPENDITURE WAS INC URRED FOR ESTABLISHING THE PLANT & MACHINERY BEFORE THE BUSINESS WAS COMME NCED, 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 DE MONSTRATE 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 T HAT IT WAS WRONG ON THE ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 5 - PART OF THE DR TO ARGUE THAT THE IMPUGNED EXPENDITU RE RELATED PRIOR TO THE COMMENCEMENT OF THE OPERATION. 6. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES, WE ARE OF THE VIEW THAT THE AO HAS NOT CORRECTLY APPRECIATED THE NATUR E OF THE EXPENDITURE INCURRED. IT IS A LONG LIST OF REPAIRS AND MAINTEN ANCE HAVING SEVERAL ITEMS OF PECUNIARY IN NATURE AND SOME OF THE ITEMS, ALTHO UGH SUBSTANTIAL IN QUANTUM, BUT DO NOT REFLECT THAT AN ASSET HAD COME INTO EXISTENCE. WE HAVE BEEN INFORMED THAT THE EQUIPMENTS HAD ALREADY BEEN INSTALLED EARLIER AND THEREAFTER THE EXPENDITURE IN QUESTION WAS PURE LY TOWARDS REPAIRS AND MAINTENANCE OF THE SAME. THE EXPENDITURE WAS TOWAR DS PROCUREMENT OF STORES, SPARES, CONSUMABLES, ETC. THE SMALL ITEMS WERE STATED TO BE DRILLING CONSUMABLES, ELECTRICAL CONSUMABLES AND ME CHANICAL CONSUMABLES. THOSE CONSUMABLE ITEMS OTHERWISE ALSO DID NOT HAVE SUBSTANTIAL LIFE AND TO BE REPLACED FREQUENTLY. TH EREFORE, THE EXPENDITURE WAS PURELY TOWARDS UPKEEP AND MAINTENANCE OF DRILLI NG RIG AND AUXILIARY EQUIPMENTS. FURTHER, IT WAS INCORRECT ON THE PART OF THE REVENUE TO ALLEGE THAT THE IMPUGNED EXPENDITURE WAS INCURRED PRIOR TO THE COMMENCEMENT OF THE BUSINESS DUE TO THE REASON THAT ACQUISITION WAS PERFORMED ON 13/05/2003 AND AS PER THE DETAILS OF EXPENDITURE, P LACED IN THE COMPILATION, THE SAME WAS INCURRED SUBSEQUENTLY, I. E. AFTER THE DATE OF ACQUISITION. THE ISSUE OF SET UP OF BUSINESS HAS D ULY BEEN DECIDED BY A RESPECTED THIRD MEMBER DECISION IN THE CASE OF STYL ER INDIA (P) LTD. 113 ITD 55 (PUNE), WHEREIN IT WAS HELD THAT THE COMPANY WAS INCORPORATED FOR RENDERING ADVISORY AND CONSULTATIVE SERVICES IN THE FIELD OF AUTOMOBILES AND THE BUSINESS CAN BE SAID TO BE SET UP WHEN READY TO GIVE ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 6 - CONSULTANCY TO ITS PROSPECTIVE CUSTOMERS. MERELY B ECAUSE NO ACTUAL AMOUNT WAS RECEIVED AS CONSULTATION CHARGES, IT WAS HELD THAT, IT COULD NOT BE SAID THAT THE BUSINESS WAS NOT SET UP. THER E WAS NO NECESSITY TO EMPLOY ENGINEERS BECAUSE THE DIRECTOR WAS COMPETENT TO RENDER ADVISORY SERVICES FOR SETTING UP THE BUSINESS. MEETING AND DISCUSSIONS, WAS THEREFORE AN INDICATION OF SETTING UP OF BUSINESS. FOLLOWING THE SAID VIEW AND CONSIDERING THE ENTIRETY OF THE EVIDENCES PLACE D ON RECORD, AS ALSO THE TOTALITY OF THE CIRCUMSTANCES, IT APPEARS THAT NO C APITAL ASSET HAD COME INTO EXISTENCE THROUGH WHICH THE ASSESSEE HAS OBTAI NED ENDURING BENEFIT. WE HEREBY ENDORSE THE VIEW TAKEN BY THE LD.CIT(A) T HAT THE EXPENDITURE IN QUESTION WERE IN FACT REVENUE IN NATURE. THE SA ID 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 RE ADS AS UNDER:- 2. THE LEARNED CIT(A)-XXI, AHMEDABAD, HAS ERRED I N 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 P RODUCE/FURNISH ANY DETAILS TO SUBSTANTIATE HIS CLAIM THAT THE EXPENDIT URE WAS INDEED INCURRED FOR THE OPERATION OF INDIAN PROJECT. 7.1. WE HAVE BEEN INFORMED THAT LD.CIT(A) HAS UPHEL D THE DISALLOWANCE AS MADE BY THE A.O. UNDISPUTEDLY, F OR A.Y. 2005-06 IN FACT THE ASSESSEE HAS CHALLENGED THE SAID DISALLOWA NCE AS ALSO THE VERDICT OF LD.CIT(A). IN VIEW OF THIS, THE ABOVE GROUND OF THE REVENUE HAS ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 7 - WRONGLY BEEN RAISED SINCE THERE OUGHT NOT TO BE ANY GRIEVANCE TO THE REVENUE. FOR ALL THE YEARS, REVENUES APPEALS AR E THEREFORE DISMISSED. 8. ASSESSEES 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 ASS ESSING OFFICER IN DISALLOWING HEAD OFFICE EXPENDITURE AMOUNTING TO RS.1,00,72,251/- (FOR A.Y. 2006-07 - RS.79,59,698 /-) ON THE GROUND THAT SUCH EXPENDITURE IS NOT ALLOWABLE U/S.3 7 OF THE ACT. 8.1. THE ASSESSEE WAS ASKED TO JUSTIFY THE CLAIM OF HEAD OFFICE EXPENDITURE IN THE LIGHT OF PROVISIONS OF SECTION 44C OF THE IT ACT. THE EXPENDITURE PERTAINS TO GENERAL ADMINISTRATIVE EXPENDITURE, SUCH AS, SALARY, TRAVELLING, ETC. THE ASSESSEE HAS SUBMITT ED THAT THE EXPENDITURE WAS NOT CLAIMED U/S.44C OF ITACT, BUT U/S.37 OF IT ACT. IT WAS SUBMITTED THAT THE ASSESSEES CLAIM IS ELIGIBLE AS PER INDIA U.A.E. DTAA. THE ASSESSEE HAS PLACED RELIANCE ON METCHEM CANADA INC. 100 ITD 251. AS PER AO, U/S.44C THE ASSESSEE WAS ENTI TLED ONLY FOR THE PRESCRIBED LIMIT OF EXPENDITURE. THERE WAS A DIS CUSSION OF ARTICLE 26 FOR THE PURPOSE OF NON-DISCRIMINATION CLAUSE OF INDIA - U.A.E. DTAA. ASSESSEES ARGUMENT WAS THAT THE PROVISIONS OF SECT ION 44C SHOULD NOT BE APPLIED AND THE HEAD OFFICE EXPENDITURE SHOULD BE A LLOWED IN FULL ON THE GROUND OF NON-DISCRIMINATION. HOWEVER, THE AO WA S NOT CONVINCED AND RESTRICTED THE CLAIM BY APPLYING THE PROVISIONS OF SECTION 44C OF IT ACT. THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE A UTHORITY. ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 8 - 9. LD.CIT(A) HAS OPINED THAT THE NON-DISCRIMINATION CLAUSE 26(2) OF DTAA WAS NOT APPLICABLE TO THE ASSESSEE AND THE EXP ENDITURE WAS RIGHTLY CONSIDERED U/S.44C OF IT ACT. LD. CIT(A) HAS SAID THAT EVEN IF THE EXPENSES ARE ALLOWABLE U/S.37(1) OF IT ACT, STILL T HE EXPENDITURE HAS TO BE RESTRICTED U/S.44C OF IT ACT. FOLLOWING THE BOMBAY HIGH COURT DECISION IN THE CASE OF AMERICAN BUREAU OF SHIPPING 263 ITR 590, IT WAS HELD THAT THE ASSESSEE WOULD NOT BE ELIGIBLE FOR ANY DED UCTION ON ACCOUNT OF HEAD OFFICE EXPENSES. THE ACTION OF THE AO WAS U PHELD. BEING AGGRIEVED NOW THE ASSESSEE IS FURTHER IN APPEAL. 10. FROM THE SIDE OF THE APPELLANT, LD.AR MR.MILIN MEHTA APPEARED AND ARGUED THAT AS PER ARTICLE 7 OF DOUBLE TAXATION AGREEMENT IN DETERMINING THE PROFITS OF A PERMANENT ESTABLISHMEN T, THERE SHALL BE ALLOWED AS DEDUCTION EXPENSES WHICH ARE INCURRED FO R THE PURPOSES OF THE BUSINESS OF THE PERMANENT ESTABLISHMENT, INCLUDING EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES , WHETHER IN THE STATE IN WHICH PE IS SITUATED OR ELSEWHERE. HE HAS ALSO PLACED RELIANCE ON ARTICLE 26 IN SUPPORT OF THE ARGUMENT OF NON-DISCRIMINATION AND INFORMED THAT TH E TAXATION ON PE SHALL NOT BE LESS FAVOURABLY LEVIED IN THAT OTHER C ONTRACTING 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 VS. ASST.CIT BEARING ITA NOS.1807 AND 1978/AHD/2006 & ITA NO.311 1/AHD/2007 FOR AYS 2002-03, 2003-04 & 2005-05 ORDER DATED 04/ 03/2011. ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 9 - 11. ON THE OTHER HAND, LD.SR.DR MR. G.S. SOURYAWANS HI 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 APPLIE D AND THE PROVISIONS OF SECTION 44C SQUARELY APPLIES ON THE FACTS OF THE CA SE. RELIANCE PLACED ON AMERICAN BUREAU OF SHIPPING 263 ITR 590 (BOM.). 12. WE HAVE HEARD BOTH THE SIDES AT SOME LENGTH. W E HAVE ALSO PERUSED THE SHORT COMPILATION FILED. THE ASSESSE ES STATUS AND THE RELATIONSHIP WITH THE HEAD OFFICE IS THAT THE DALMA ENERGY LLC IS SITUATED AT UNITED ARAB EMIRATES AND IN THE BUSINES S OF DRILLING OF OIL WELL. THERE WAS NO DISPUTE ABOUT THE BASIC FACT THAT THERE WERE CERTAIN HEAD OFFICE EXPENDITURE WHICH WERE ACCOUNTED FOR BY THE ASSESSEE IN THE BOOKS OF ACCOUNTS FOR THE YEARS UNDER CONSIDERATION . DUE TO THIS REASON, THE AO HAS INVOKED THE PROVISIONS OF SECTION 44C OF I.T.ACT , FOR READY REFERENCE REPRODUCED BELOW:- DEDUCTION OF HEAD OFFICE EXPENDITURE IN THE CASE O F NON- RESIDENTS: 44C. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONT AINED IN SECTIONS 28 TO 43A, IN THE CASE OF AN ASSESSEE, BEI NG A NON- RESIDENT, NO ALLOWANCE SHALL BE MADE, IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUS INESS OF PROFESSION, IN RESPECT OF SO MUCH OF THE EXPENDITU RE IN THE NATURE OF HEAD OFFICE EXPENDITURE AS IS IN EXCESS OF THE A MOUNT COMPUTED AS HEREUNDER, NAMELY; - (A) AN AMOUNT EQUAL TO FIVE PER CENT OF THE ADJUSTED TO TAL INCOME; OR (B) [***] ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 10 - (C) THE AMOUNT OF SO MUCH OF THE EXPENDITURE IN THE NAT URE OF HEAD OFFICE EXPENDITURE INCURRED BY THE ASSESSEE AS IS A TTRIBUTABLE TO THE BUSINESS OR PROFESSION OF THE ASSESSEE IN INDIA , WHICHEVER IS THE LEAST: PROVIDED THAT IN A CASE WHERE THE ADJUSTED TOTAL INCOME OF T HE ASSESSEE IS A LOSS, THE AMOUNT UNDER CLAUSE (A) SHA LL BE COMPUTED AT THE RATE OF FIVE PER CENT OF THE AVERAGE ADJUSTE D TOTAL INCOME OF THE ASSESSEE. 12.1. SECTION 44C HAS A NON-OBSTANTE CLAUSE, IT PRESCRIBES THAT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTIONS 28 TO 43A IN THE CASE OF AN ASSESSEE BEING A NON-RESIDENT, NO ALLOWANCE IS TO BE MADE IN COMPUTING THE INCOME CHARGEABLE UNDER THE P ROFITS AND GAINS IN RESPECT OF SO MUCH OF THE EXPENDITURE IN THE NATURE OF HEAD OFFICE EXPENDITURE AS LAID DOWN THEREIN. IN THE LIGHT O F THE ABOVE PROVISIONS OF IT ACT, OUR ATTENTION WAS DRAWN ON THE AGREEMENT BETWEEN THE GOVERNMENT OF THE REPUBLIC OF INDIA AND THE GOVERNM ENT OF UAE FOR THE AVOIDANCE OF DOUBLE TAXATION AND AS PER ARTICLE 7 THE BUSINESS PROFITS ARE TO BE TREATED AS UNDER:- ARTICLE-7 BUSINESS PROFITS 1. THE PROFITS OF AN ENTERPRISE OF A CONTRACTING STATE SHALL BE TAXABLE ONLY IN THAT S TATE UNLESS THE ENTERPRISE CARRIES ON BUSINESS IN THE OTHER CONTRAC TING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE ENTERPRISE CARRIES ON BUSINESS AS AFORESAID, THE PR OFITS OF THE ENTERPRISE MAY BE TAXED IN THE OTHER STATE BUT ONLY SO MUCH OF THEM AS IS ATTRIBUTABLE TO THAT PERMANENT ESTABLISH MENT. 2 3. IN DETERMINING THE PROFITS OF A PERMANENT ESTAB LISHMENT, THERE SHALL BE ALLOWED AS DEDUCTIONS EXPENSES WHICH ARE I NCURRED FOR THE PURPOSES OF THE BUSINESS OF THE PERMANENT ESTABLISH MENT, INCLUDING ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 11 - EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES SO IN CURRED, WHETHER IN THE STATE IN WHICH THE PERMANENT ESTABLI SHMENT IS SITUATED OR ELSEWHERE. 4. INSOFAR AS IT HAS BEEN CUSTOMARY IN A CONTRACTI NG STATE TO DETERMINE THE PROFITS TO BE ATTRIBUTED TO A PERMANE NT ESTABLISHMENT ON THE BASIS OF AN APPORTIONMENT OF THE TOTAL PROFI TS OF THE ENTERPRISE TO ITS VARIOUS PARTS, NOTHING IN PARAGRA PH (2) SHALL PRECLUDE THAT CONTRACTING STATE FROM DETERMINING TH E PROFITS TO BE TAXED BY SUCH AN APPORTIONMENT AS MAY BE CUSTOMARY; THE METHODS OF APPORTIONMENT ADOPTED SHALL, HOWEVER, BE SUCH TH AT THE RESULT SHALL BE IN ACCORDANCE WITH THE PRINCIPLES CONTAINE D IN THIS ARTICLE. 12.2. SO THE LEGAL CONTROVERSY IS WHETHER THE A DMINISTRATIVE EXPENSES BE ALLOWED TO THE EXTENT ATTRIBUTABLE TO R UN THE BUSINESS OF P.E. OR TO BE RESTRICTED U/S 44C OF THE ACT. THE OBJECT IVE FOR THE INTRODUCTION OF SECTION 44C WAS TO GET OVER OF THE DIFFICULTY IN SCRUTINIZING AND VERIFYING CLAIMS IN RESPECT OF GENERAL ADMINISTRATI VE EXPENSES INCURRED BY THE FOREIGN HEAD OFFICE INSOFAR AS SUCH EXPENSES CAN BE RELATED TO THE BUSINESS IN INDIA HAVING REGARDED TO THE FACT THAT FOREIGN COMPANIES OPERATING THROUGH BRANCHES IN INDIA, SOMETIMES TRY TO REDUCE THE INCIDENCE IN TAX IN INDIA BY INFLATING THEIR CLAIMS IN RESPECT OF HEAD OFFICE EXPENSES. ON READING THIS SECTION, AN INTERPRETATI ON IS POSSIBLE THAT WHERE AN ASSESSEE DOES NOT HAVE ANY BUSINESS OVERSE AS AND THE ENTIRE OPERATIONS ARE CARRIED OUT IN INDIA ONLY, THE QUEST ION OF ALLOCATING A PART OF THE EXPENDITURE TO THE BUSINESS CARRIED ON IN IN DIA CANNOT ARISE. BUT IF THERE IS OVERSEAS BUSINESS AND THE EXPENDITURE IS I N THE NATURE OF HEAD OFFICE EXPENDITURE, THEN NATURALLY THE EXPENDITURE WHICH ARE NOT ENTIRELY ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 12 - FOR THE PE IN INDIA BUT ALSO PERTAINS TO THE FOREIG N ENTERPRISE HEAD OFFICE, THEN SHOULD BE RESTRICTED UNDER THE ACT. 12.3. THIS INTERPRETATION IS VISIBLE IN THE CASE OF CIT VS. EMIRATES COMMERCIAL BANK LTD. 262 ITR 55 (BOM.), WHEREIN THE HONBLE COURT HAS FINELY ELABORATED THE PROVISIONS OF SECTI ON 44C AND THEREUPON OPINED THAT THIS SECTION IS APPLICABLE IN THE CASES OF THOSE NON-RESIDENTS WHO CARRY ON BUSINESS IN INDIA THROUGH THEIR BRANCH ES. THE SAID SECTION WAS INTRODUCED TO GET OVER DIFFICULTIES IN SCRUTINI ZING CLAIMS IN RESPECT OF GENERAL ADMINISTRATIVE EXPENSES INCURRED BY THE FOR EIGN HEAD OFFICE INSOFAR AS SUCH EXPENSES STAND RELATED TO THEIR BUS INESS IN INDIA HAVING REGARD TO THE FACT THAT FOREIGN COMPANIES OPERATING THROUGH BRANCHES IN INDIA SOMETIMES TRY TO REDUCE INCIDENCE OF TAX IN I NDIA BY INFLATING THEIR CLAIMS IN RESPECT OF THE HEAD OFFICE EXPENSES. THEREFORE THE EXPENDITURE WHICH ARE COVERED U/S.44C ARE THOSE EXP ENDITURE WHICH ARE COMMON IN NATURE AND FOUND TO BE INCURRED BY TH E HEAD OFFICE AND SIMULTANEOUSLY BY THE BRANCH. HOWEVER, IN THAT CASE, THERE WAS A CONCURRENT FINDING OF FACT THAT THE EXPENSES WERE E XCLUSIVELY INCURRED FOR THE BRANCH OFFICE IN INDIA. DUE TO THAT REASON, IT WAS HELD THAT SECTION 44C WAS NOT APPLICABLE ON THOSE FACTS. THERE WAS A DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF RUPENJULI TEA CO .LTD. VS. CIT 186 ITR 301(CAL.) WHICH CAN BE SAID TO BE AN ORDER THROUGH WHICH FO R THE FIRST TIME THE APPLICABILITY OF THE PROVISIONS OF SECTION 44C WAS ADDRESSED ON THE QUESTION THAT WHERE THE ENTIRE BUS INESS OPERATION OF NON-RESIDENT COMPANY IF CONFINED TO INDIA, THEN IN THAT SITATION, PROVISIONS OF SECTION 44C WOULD NOT BE APPLICABLE A ND THAT THE ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 13 - EXPENDITURE WOULD NOT BE DISALLOWED. IT WAS CLARI FIED THAT THE LANGUAGE OF SECTION OF 44C CLEARLY POSTULATES THAT THE GENER AL ADMINISTRATIVE EXPENSES SHOULD BE INCURRED NOT ONLY IN CONNECTION WITH THE BUSINESS IN INDIA BUT ALSO BUSINESS OUTSIDE INDIA. IN OTHER W ORDS, AS PER THE HONBLE 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 OPERATION S 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 HONBLE COURTS ON THIS SUBJECT TO GIVE EMPHASIS THAT THE GENERAL PRIN CIPLE OF ALLOWABILITY OF AN EXPENDITURE CANNOT BE OVERLOOKED AND THAT THE AC CEPTED PRINCIPLE IS THAT ONLY THOSE EXPENDITURE CAN BE ALLOWED WHICH AR E ATTRIBUTABLE TO THE BUSINESS ACTIVITY AS WELL AS LAID OUT WHOLLY AND EX CLUSIVELY 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 ASPECT IS BUTTRESSED BY THE FACT THAT WHILE DECIDING THE CASE OF CIT VS. DEUTSCHE BANK A.G. 284 ITR 463 THE HONBLE BOMBAY HIGH COURT HAS HELD THAT THOUGH THE PROVISIONS OF SECTION 44C OVERRIDES THE PROVISIONS OF SECTION 37 BUT IN CASE THE WORKING OF SECTION 44C FAILS, THEN CONSEQUENTLY IF THE EXPENDITURE IS ATTRIBUTABLE TO THE BUSINESS IN INDIA, THEN THE ASSESSEE WOULD BECOME ENTITLE FOR FULL DED UCTION U/S.37(1) OF IT ACT. RATHER, IN THE CASE OF METCHEM CANADA INC. 100 ITD 251 (MUM.) THE TRIBUNAL HAS FINALLY HELD THAT THE HEAD OFFICE EXPENSES TO THE ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 14 - EXTENT THE SAME COULD BE FAIRLY ALLOCABLE TO THE PE WOULD BE ADMISSIBLE AS DEDUCTION U/S.37(1) OF IT ACT. THIS CASE HAS BE EN RELIED UPON BY THE APPELLANT AND, THEREFORE IN THE LIGHT OF THE DISCUS SION MADE HEREINABOVE, WE ARE NOT ACCEPTING THE VIEW EXPRESSED BY THE LD.C IT(A) THAT THE PROVISIONS OF SECTION 37(1) BECAME REDUNDANT IN VIE W OF THE RESTRICTIONS U/S.44C OF IT ACT. IN OUR HUMBLE OPINION, CLAUSE (C) OF SECTION 44C HAS ALSO INDICATED THE SAME PRINCIPLE THAT THE AMOUNT O F SO MUCH OF THE EXPENDITURE BEING IN THE NATURE OF HEAD OFFICE EXPE NDITURE IF ATTRIBUTABLE TO THE BUSINESS OF THE ASSESSEE IN INDIA, THEN REQU IRED TO BE CONSIDERED FOR THE ALLOWANCE OF THE SAME, HOWEVER SUBJECT TO A CEI LING OF UPPER LIMIT AS PRESCRIBED UNDER SECTION 44C OF IT ACT. THE NEXT PL ANK OF ARGUMENT IS AS FOLLOWS. 13. LD.AR. MR.MILIN MEHTA HAS DRAWN OUR ATTENTI ON ON AN ACCEPTED FACT THAT VIDE FORM NO.3CEB, I.E. REPORT FURNISHED IN RESPECT OF INTERNATIONAL TRANSACTION, IT WAS DULY INFORMED TO THE REVENUE DEPARTMENT ABOUT THE ALLOCATION OF COMMON ADMINIST RATIVE EXPENSES. AS PER ANNEXURE-5, THE ASSESSEE HAS FURNISHED THE D ETAILS OF THE TRANSACTION WITH THE ASSOCIATED ENTERPRISE, I.E. DA LMA ENERGY, UAE AND THE IMPUGNED AMOUNT AS PER BOOKS WAS AT RS.44,07,40 0/- WHICH WAS DISTRIBUTED IN THE RATIO OF TURNOVER AND IN VIEW OF THE DRAFT GUIDELINES OF OECD ON TRANSFER PRICING AND THEREFORE CONTESTED TH AT THE ALLOCATION WAS AT ARMS LENGTH PRICE. INTERESTINGLY, WHEN THE M ATTER WAS REFERRED U/S.92CA(1) THE ISSUE OF COMPUTATION OF INTERNATION AL TRANSACTION WHETHER OR NOT AT ARMS LENGTH PRICE WAS CONSIDERED THEN VI DE ORDER U/S.92CA(3) DATED 29/09/2006 ,THE ALP OF THE TRANSACTION AS REP ORTED BY THE ASSESSEE, ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 15 - WAS ACCEPTED BY THE TPO-IV WEST ZONE INDIA. BECAUS E OF THIS PECULIAR SITUATION, LD.AR HAS ARGUED THAT THE SAME METHOD WA S ADOPTED NOT ONLY 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 DIR ECT THE AO TO VERIFY THE FACT ABOUT THE ALLOCATION OF THE COMMON ADMINISTRAT IVE EXPENDITURE WHETHER FOR THE YEAR UNDER CONSIDERATION HAVE ALSO BEEN ALLOCATED ON THE SAME PATTERN AS IT WAS ACCEPTED BEING AT ARMS LENG TH 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 SA ID PE, INCLUDING GENERAL ADMINISTRATIVE EXPENSES IS TO BE ALLOWED. AT THIS STAGE OF ARGUMENT, WE HAVE CATEGORICALLY RAISED A QUESTION THAT IF EXECUT IVE AND GENERAL ADMINISTRATIVE EXPENSES OF A PE IS TO BE ALLOWED HA VING 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 AM ENDMENT TOOK PLACE IN THE ARTICLES AND VIDE A PROTOCOL AMENDING THE AG REEMENT BETWEEN THE GOVERNMENT OF THE REPUBLIC OF INDIA AND THE GOVERNM ENT OF THE UNITED ARAB EMIRATES VIDE NOTIFICATION NO.282/2007 DATED 2 8/11/2007 WHICH IS EFFECTIVE FROM 1 ST DAY OF APRIL-2008, PARAGRAPH 3 OF ARTICLE 7 (BUSIN ESS PROFITS) HAS BEEN REPLACED BY THE FOLLOWING:- ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 16 - 3. IN DETERMINING THE PROFITS OF A PERMANENT ESTA BLISHMENT, THERE SHALL BE ALLOWED AS DEDUCTIONS EXPENSES WHICH ARE I NCURRED FOR THE PURPOSES OF THE BUSINESS OF THE PERMANENT ESTABLISH MENT, INCLUDING EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES SO IN CURRED, WHETHER IN THE STATE IN WHICH THE PERMANENT ESTABLI SHMENT IS SITUATED OR ELSEWHERE, IN ACCORDANCE WITH THE PROVISIONS OF AND SUBJECT TO THE LIMITATIONS OF THE TAX LAWS OF THAT STATE. (EMPHASIS GIVEN) 14.1. IN VIEW OF THE AFORESAID AMENDMENT, NOW THE A DMITTED LEGAL POSITION IS THAT THE ADMISSIBILITY OF EXPENDITURE I S TO BE GOVERNED BY ARTICLE 7 (3) OF THE TREATY UP TO THE DATE FROM WHI CH THE NEW AMENDED PROVISIONS OF THE TREATY SHALL BE APPLICABLE I.E. W.E.F. 1.4.2008. IT CAN, INTER ALIA, BE SUMMED-UP THAT THE CONTRACTING STAT ES HAVE KEPT IN MIND THE PROVISIONS OF THE TAX LAWS OF THE CONTRACTING S TATES AND TO AVOID ANY CONFLICT IN THE PROVISIONS OF THE TAX LAWS VIS--VI S THE PROVISIONS OF TREATY, AS ALSO TO STREAMLINE THE APPLICABLE PROVIS IONS OF LAW, IT WAS DECIDED TO INCORPORATE THAT, FOR THE PURPOSES OF DE TERMINING THE PROFITS OF A PERMANENT ESTABLISHMENT, THERE SHALL BE ALLOWED D EDUCTION OF EXPENSES INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE PE RMANENT ESTABLISHMENT INCLUDING GENERAL ADMINISTRATIVE EXPENSES BUT IN AC CORDANCE WITH THE PROVISIONS AND ALSO SUBJECT TO THE LIMITATIONS OF T HE TAX LAWS OF THAT STATE. THEREFORE BY THIS AMENDMENT IN THE ARTICLE THE APP LICABILITY OF PROVISIONS OF SECTION 44C HAS BEEN ENFORCED, NEVERT HELESS WITH EFFECT FROM 1 ST DAY OF APRIL-2008. 14.2. FINALLY, WE ARE LEFT WITH THE QUESTION OF NON -DISCRIMINATION CLAUSES AS PER ARTICLE 26 OF THE TREATY. UNDISPUTEDLY, THE NATIONALS OF A CONTRACTING STATE SHALL NOT BE SUBJECTED TO IN THE OTHER CONTRACTING STATE ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 17 - ANY TAXATION WHICH IS MORE BURDENSOME THAN THE TAXA TION TO WHICH NATIONAL OF THAT OTHER STATE IN THE SAME CIRCUMSTAN CES AND OTHER SAME CONDITIONS ARE SUBJECTED TO. FURTHER ARTICLE 26(2 ) ALSO PRESCRIBES THAT THE TAXATION OF A PERMANENT ESTABLISHMENT SHALL NOT BE LESS FAVOURABLY LEVIED IN THAT OTHER CONTRACTING STATE THAN THE TAXATION L EVIED ON THE ENTERPRISE OF THAT CONTRACTING STATE. 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 DEC ISIONS 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 EXPRE SSED BY THE TRIBUNAL, A SPECIAL BENCH WAS FORMED AND VIDE ITAT SPECIAL BENCH D AHMEDABAD ORDER DATED 04/03/2011 IN THE CASE OF SHR I RAJEEV SURESHBHAI GAJWANI VS. 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 G OVERNMENT OF ANY OTHER COUNTRY FOR AVOIDANCE OF DOUBLE TAXATION, THE N THE PROVISIONS OF THE ACT SHALL APPLY TO THE EXTENT, THEY ARE MORE BENEFI CIAL TO THE PERSON. ACCORDING TO THE SPECIAL BENCH, THE SAID PROVISION HAS MADE IT OBLIGATORY IN RESPECT OF A PERSON TO WHOM DTAA APPL IES HENCE THE ASSESSMENT IS TO BE MADE ACCORDINGLY, BUT IF ANY PR OVISION OF THE ACT IS MORE BENEFICIAL TO THE PERSON THEN THAT SHALL BE GR ANTED UNDER THE ACT, MEANING THEREBY TREATY OVERRIDE THE ACT PHRASE US ED THEREIN. ARTICLE 26(2) PROVIDES THAT EXCEPT WHERE THE PROVISIONS OF PARAGRAPH(3) OF ARTICLE 7 (BUSINESS PROFITS) APPLY, THE TAXATION OF A PE OF AN ENTERPRISE OF ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 18 - A CONTRACTING STATE SHALL NOT BE LESS FAVOURABLE. THE RESPECT BENCH HAS EXAMINED THE DECISION OF MUMBAI TRIBUNAL OF METCHEM CANADA(SUPRA) AND HELD THAT THE CRUX OF THE DECISION IS THAT REST RICTION PLACED ON THE DEDUCTION OF HEAD OFFICE EXPENSES UNDER SECTION 44C WILL NOT BE APPLICABLE IN THE CASE OF A CANADIAN CO. IN VIEW OF ARTICLE 24 CONTAINED IN THE TREATY BETWEEN INDIA AND CANADA. SO ARRIVED AT THE DECISION THAT FOR THE REASON THAT ARTICLE 24 OF THE TREATY WILL HAVE PRECEDENCE OVER ARTICLE 7, WHICH CONTAIN DEDUCTIONS OF GENERAL NATURE, AND IF PROVISIONS IN THE ACT COME IN CONFLICT WITH THE TREATY, THE PROVISION S OF THE ACT ARE APPLICABLE ONLY TO THE EXTENT THEY ARE MORE BENEFIC IAL TO THE ASSESSEE; IF NOT, THE PROVISIONS OF THE TREATY SHALL PREVAIL. L ATER ON, IN THE SAID DECISION, THE RESPECTED SPECIAL BENCH HAS AGAIN ADD RESSED A QUESTION WHETHER THE PROVISIONS CONTAINED IN PARAGRAPH 2 OF ARTICLE 26 WOULD OVERRIDE THE DISTINCTION MADE BETWEEN THE RESIDENT PERSON ON ONE HAND AND THE NATIONALS OF THE OTHER COUNTRY OF NON-RESID ENTS. HENCE WHILE DEALING WITH THE OTHER DECISION OF THE AUTOMATED SE CURITY CLEARANCE(SUPRA), IT WAS HELD THAT THE SAID DIVISIO N BENCH (PUNE) HAS ERRED IN COMING TO THE CONCLUSION THAT THE ASSESSEE WAS NOT ENTITLED TO DEDUCTION U/S.80HHE. ALTHOUGH WE HAVE NOW DISCUSS ED THE QUESTION OF NON-DISCRIMINATION AS RAISED BY THE APPELLANT IN TH IS APPEAL IN THE LIGHT OF THE SPECIAL BENCH DECISION, BUT FOR THE REASON THAT WE HAVE ALREADY PRONOUNCED IN FOREGOING PARAS THAT THE ALLOCATION O F THE ADMINISTRATIVE EXPENSES BEING HELD BY THE REVENUE DEPARTMENT AT AL P THEREFORE ALLOCATION IS TO BE EXAMINED AND IF NEED BE, AN ADJ USTMENT IS REQUIRED BEING ATTRIBUTABLE TO THE BUSINESS OF THE PE IN IND IA, HENCE THE QUESTION OF APPLICABILITY OF ARTICLE 26 (NON-DISCRIMINATION CLA USES) NEED NOT TO BE ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 19 - ADDRESSED AND WE KEEP THE CONTROVERSY ALIVE AND LEA VE IT OPEN AT PRESENT. RESULTANTLY, THIS GROUND OF THE ASSESSEE IS ALLOWED PRO TANTO. 15. NOW WE ARE LEFT WITH GROUND NO.2 IN ASSESSEES APPEAL FOR A.Y. 2006-07 (ITA NO.892/AHD/2011), REPRODUCED BELOW:- 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN FACT AND IN LAW IN CONFIRMING THE 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 YEA RS WAS NOT RECOGNIZED IN ANY OF THE PREVIOUS YEAR AND EVEN DURING THE YEA R 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 RECOG NIZED BY THE SAID PARTY. THE AO HAS REFERRED AS-9 IN RESPECT OF R EVENUE 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 APPELL ATE AUTHORITY. LD.CIT(A) HAS HELD THAT THE REALIZATION WAS ALMOST A CERTAINTY AS THERE ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 20 - WAS NO PENDING DISPUTE. ACCORDING TO HIM, THE INCO ME HAD ALREADY ARISEN IN THE YEAR UNDER CONSIDERATION. THE ACTION OF THE AO WAS CONFIRMED. 17. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES, WE ARE OF THE VIEW THAT ONCE THE ADMITTED FACTUAL POSITION IS THAT THE PAYMENT IN QUESTION HAS ACTUALLY BEEN RECEIVED IN THE F.Y. 2006-07, I.E. A. Y. 2007-08 AND THAT FACT HAS BEEN NOTED BY THE AO HIMSELF, INTER ALIA, FURTHER REAFFIRMED BY LD.AR THAT IN THE NEXT FINANCIAL YEAR IT WAS DULY R ECOGNIZED IN THE BOOKS OF ACCOUNTS, WE ARE OF THE VIEW THAT NO USEFUL PURP OSE WOULD BE SERVED TO DISTURB THE ACCOUNTS BECAUSE THE SAME AMOUNT CANNOT BE TAXED IN TWO ASSESSMENT YEARS SIMULTANEOUSLY. AT THE MOST, WE C AN DIRECT THE AO TO VERIFY THE CORRECTNESS OF THE CLAIM AND IF FOUND CO RRECT, THEN NEED NOT DISTURB THE FINALIZED POSITION OF ACCOUNTS. WITH T HESE DIRECTIONS, THIS GROUND OF THE ASSESSEE MAY BE TREATED AS ALLOWED BU T FOR STATISTICAL PURPOSES. 18. IN THE RESULT, REVENUES APPEALS ARE DISMISSE D AND ASSESSEES APPEAL FOR A.Y. 2005-06 IS ALLOWED AND A.Y. 2006-0 7 IS PARTLY ALLOWED. SD/- S D/- ( .. !' ) ( ) #$ ( B.P. JAIN ) ( MUKUL KR. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL ME MBER AHMEDABAD; DATED 23/ 04 /2012 .(..', .'../ T.C. NAIR, SR. PS PRONOUNCED BY THE NOMINATED MEMBER SD/- SD/- 23.4.12 (AM) (JM) ANIL CHATURVEDI MKS ITA N OS.1664/A/08,704,1228/A/11 (BY REVENUE) AND ITA NOS.697 & 892/AHD/2011 (BY ASSESSEE) THE ADIT VS. DALMA ENERGY LLC ASST.YEARS -2004-05 TO 2006-07 - 21 - #- ' /0 1#0, #- ' /0 1#0, #- ' /0 1#0, #- ' /0 1#0,/ COPY OF THE ORDER FORWARDED TO : 1. 23 / THE APPELLANT 2. /423 / THE RESPONDENT. 3. 5 / CONCERNED CIT 4. 5() / THE CIT(A)-XXI, AHMEDABAD/GANDHINAGAR 5. 089 /' , , / DR, ITAT, AHMEDABAD 6. 9: ;& / GUARD FILE. #-' #-' #-' #-' / BY ORDER, 40 / //TRUE COPY// < <<