ACIT, CHENNAI V. M/s. Saipem Aban Drilling Co. Pvt. Ltd., CHENNAI

ITA 543/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61171 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 14-05-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 25-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHRI ANIRUDH RAI
• Assessee Lawyers: T BANUSEKAR
• Keywords: Business income; Transfer pricing; Business expenditure; International transaction; Bonafide belief; Retrospective amendment; Additional evidence; Permanent establishment; Non-deduction of tax
• Section: 37(1); 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 543/MDS/2011 ASSESSMENT YEAR :2005-06 THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(1), CHENNAI - 600 034. (APPELLANT) V. M/S SAIPEMABAN DRILLING CO. PVT. LTD., JANPRIYA CREST, NO.96, PANTHEON ROAD, EGMORE, CHENNAI - 600 008. PAN : AAACS5065L (RESPONDENT) APPELLANT BY : SHRIANIRUDHRAI, CIT-DR RESPONDENT BY : SHRI T. BANUSEKAR, CA DATE OF HEARING : 14.05.2012 DATE OF PRONOUNCEMENT : 31.05.2012 O R D E R 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 THE REVENUE, ASSESSEE WAS ONLY OBLIGED TO CARRY OUT IMP ROVEMENT OF THE RIGS, WHEREAS, MAINTENANCE WAS THE RESPONSIBILITY O F THE LESSEE. REVENUE IS ALSO AGGRIEVED THAT AN AGREEMENT DATED 1 7.11.2004 WAS 2 I.T.A. NO. 543/MDS/11 NEVER PRODUCED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS WAS CONSIDERED BY LEARNED CI T(A). AS PER THE REVENUE, SUCH AGREEMENT WAS ONLY AN AFTER-THOUGHT. FURTHER, AS PER THE REVENUE, CIT(APPEALS) HAD ASKED FOR A REMAND RE PORT FROM THE A.O. ONLY WITH REGARD TO THE ADDITIONAL EVIDENCE BUT FAI LED TO APPRECIATE THAT THE COMMENTS OF THE ASSESSING OFFICER IN THE REMAND REPORT GIVEN WERE LIMITED ONLY TO ADDITIONAL EVIDENCE PRODUCED, AND C AME TO A ERRONEOUS CONCLUSION THAT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE WAS ACCEPTED IN SUCH REMAND REPORT. IN ANY CASE, AS PE R THE REVENUE, THE AMOUNT PAID WAS DISALLOWABLE UNDER SECTION 40(A)(I) OF INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT') AND THIS WAS ALSO POINTED OUT BY THE ASSESSING OFFICER IN THE REMAND REPORT. FURTHER, AS PER THE REVENUE, SERVICES RENDERED BY THE PARTY WERE IN THE NATURE OF TECHNIC AL SERVICES AND IRRESPECTIVE OF THE FACT WHETHER SUCH FOREIGN PARTY HAD A BUSINESS CONNECTION IN INDIA, THE SAME WAS TAXABLE IN INDIA. 2. SHORT FACTS APROPOS ARE THAT ASSESSEE, ENGAGED I N THE BUSINESS OF DRILLING, HAD LEASED OUT FOUR RIGS NUMBERED AS 101, 192, 201 AND 202 TO ONE M/S SAIPEM, SPA, ITALY. SUCH RIGS WERE BEING U SED BY THE SAID SAPEM, SPA, IN SAUDI ARABIA FOR DRILLING. ASSESSEE HAD IN ITS ACCOUNTS FOR THE RELEVANT PREVIOUS YEAR CHARGED A SUM OF ` 5,47,33,911/- AS REPAIRS AND MAINTENANCE. ASSESSING OFFICER CALLED FOR THE AGREEMENT ENTERED BY THE ASSESSEE WITH M/S SAIPEM, SPA, ITALY AND THE SAID 3 I.T.A. NO. 543/MDS/11 AGREEMENT DATED 12.8.99 WAS PRODUCED. AFTER STUDY OF AGREEMENT, ASSESSING OFFICER SOUGHT REASON WHY SUCH EXPENSES S HOWN UNDER THE HEAD REPAIRS AND MAINTENANCE SHOULD NOT BE DISALL OWED. REPLY OF THE ASSESSEE WAS THAT AS PER ARTICLE 8 OF THE AGREEMENT , EXPENSES HAD TO BE BORNE BY BOTH LESSOR AND LESSEE IN ACCORDANCE WI TH CONDITIONS STIPULATED THEREIN. WHILE NORMAL RIG MAINTENANCE E XPENSES WERE TO BE BORNE BY THE LESSEE, EXPENSES INCURRED FOR UPGRADAT ION OF OPERATING EFFICIENCY WAS TO BE BORNE BY THE LESSOR, BEING THE ASSESSEE. ACCORDING TO IT, IN ORDER TO KEEP PACE WITH THE LATEST DEVELO PMENT AND TECHNOLOGY, IMPROVEMENTS IN RIGS WERE REQUIRED AND ASSESSEE HAD TO SPEND MONEY FOR KEEPING THE RIGS IN FULL OPERATIVE CAPACITY. I N A NUTSHELL, ARGUMENT OF THE ASSESSEE WAS THAT EXPENSES WERE INCURRED FOR KE EPING THE OLD RIGS IN A FIT OPERATING CONDITION. HOWEVER, THE ASSESSI NG 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 HA D ENTERED INTO A FRESH AGREEMENT ON 5.2.2004. AS PER ARTICLE 8 OF T HIS REVISED AGREEMENT, THE DRILLING UNITS WERE UNDER THE COMPLE TE CONTROL AND POSSESSION OF THE LESSEE AND THE LESSEE WAS UNDER A N OBLIGATION TO MAINTAIN SUCH RIGS IN GOOD MECHANICAL ORDER AND OPE RATIVE EFFICIENCY. ONLY WHEN IMPROVEMENTS WERE MADE BY THE LESSEE WITH THE CONSENT OF LESSOR, THE LESSOR WAS BOUND TO REIMBURSE THE LESSE E, THE AMOUNTS 4 I.T.A. NO. 543/MDS/11 ACTUALLY SPENT FOR SUCH IMPROVEMENT AND THAT TOO ON LY AT THE TIME OF RE- DELIVERY. A.O. BASED ON AGREEMENT DATED 5.2.2004 E NTERED BY THE ASSESSEE WITH M/S SAIPEM, SPA, CAME TO A CONCLUSION THAT DURING THE LEASE PERIOD, THE DRILLING UNITS WERE IN FULL POSSE SSION AND CONTROL OF LESSEE WHO WAS TO MAINTAIN SUCH UNITS IN GOOD CONDI TION. THEREFORE, AS PER THE A.O., THE CLAIM OF EXPENSES UNDER THE HEAD REPAIRS AND MAINTENANCE, BY THE ASSESSEE WAS NOT WARRANTED SINC E THE SAME WAS, AS PER THE AGREEMENT, LIABILITY OF THE LESSEE ONLY. THE WHOLE OF THE CLAIM WAS THUS DISALLOWED. 3. IN ITS APPEAL BEFORE CIT(APPEALS), ARGUMENT OF T HE ASSESSEE WAS THAT THE AMOUNT OF ` 5,47,33,911/- DISALLOWED BY THE A.O. COMPRISED OF TWO DIFFERENT ITEMS ONE WAS PAYMENT TO M/S SAIPEM , SPA, ITALY ` 3,16,93,911/- AND THE OTHER WAS PAYMENT TO ONE M/S LAMECH ENGINEERS PVT. LTD. ` 2,30,40,000/-. THE LATTER PAYMENT WAS FOR SERVICE S OTHER THAN RIG MAINTENANCE AND A.O. HAD ERRONEOUSLY CONSIDERED THIS ALSO AS A PART OF THE RIG MAINTENANCE AMOUNT. INSOFAR AS THE PAYM ENT TO M/S SAIPEM, SPA, ITALY, WAS CONSIDERED, ARGUMENT OF THE ASSESSE E WAS THAT ONLY ORDINARY MAINTENANCE EXPENSES WERE TO BE BORNE BY T HE LESSEE WHEREAS, THE EXTRAORDINARY AND PLANNED MAINTENANCE, WHICH WAS OVER AND ABOVE THE ORDINARY MAINTENANCE, WAS THE RESPONS IBILITY OF THE LESSOR, I.E. ASSESSEE. AS PER THE ASSESSEE, THE RI GS WERE AGED 23-YEARS AND THERE WAS A NEED FOR COMPLETE OVERHAULING EVERY THREE YEARS, WHICH 5 I.T.A. NO. 543/MDS/11 INCLUDED RE-CERTIFICATION OF INSTRUMENTS AND CONTRO L EQUIPMENTS. THESE ACTIVITIES HAD TO BE CARRIED OUT IN ACCORDANCE WITH INTERNATIONAL STANDARDS, AND IT WAS NECESSARY THAT THIS WAS DONE BY THE ASSESSEE ITSELF, WHO WAS THE OWNER OF THE RIGS. ASSESSEE AL SO PRODUCED COPY OF AN AGREEMENT ENTERED BY IT WITH M/S SAIPEM, SPA, IT ALY FOR RIG MAINTENANCE, BEFORE THE CIT(APPEALS). IT WAS ALSO BROUGHT TO THE NOTICE OF CIT(APPEALS) THAT THE PAYMENTS WERE SUBJECT TO T RANSFER PRICING RULES AND TPO HAD ACCEPTED SUCH PAYMENTS TO BE AT ARM'S L ENGTH. 4. SINCE FRESH EVIDENCE WAS PRODUCED, CIT(APPEALS) SOUGHT A REMAND REPORT FROM THE A.O. IN THE REMAND REPORT DATED 18.11.2010, A.O. IT SEEMS ACCEPTED THE CLAIM OF THE ASSESSEE IN SOFAR AS THE PAYMENT TO M/S LAMECH ENGINEERS PVT. LTD. WAS CONCE RNED. AS PER THE CIT(APPEALS), WITH REGARD TO PAYMENT TO M/S SAIPEM, SPA, ITALY, ASSESSING OFFICER HAD NOT QUESTIONED THE CORRECTNES S OF THE CLAIM OF THE ASSESSEE. AGAIN AS PER THE CIT(APPEALS), THE ONLY QUESTION RAISED BY THE ASSESSING OFFICER IN THE REMAND REPORT WAS POSS IBLE DISALLOWANCE UNDER SECTION 40(A)(I) OF THE ACT, SINCE THE PAYMEN T WAS EFFECTED TO A NONRESIDENT WITHOUT DEDUCTING TAX AT SOURCE AS STI PULATED UNDER SECTION 195 OF THE ACT. ASSESSING OFFICER WAS OF THE OPINI ON THAT DECISION OF HONBLE APEX COURT IN THE CASE OF TRANSMISSION CORP ORATION OF A.P. LTD. V. CIT (239 ITR 587) APPLIED. THE A.O. ALSO MENTIO NED IN THE REMAND REPORT THAT THE AGREEMENT WITH M/S SAIPEM, SPA, ITA LY WAS SIGNED IN 6 I.T.A. NO. 543/MDS/11 INDIA AND THEREFORE, THE INCOME AROSE IN INDIA FOR M/S SAIPEM, SPA, ITALY. 5. ASSESSEE OBJECTED TO THE REMAND REPORT STATING T HAT 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 APPLICABL E SINCE THE PAYMENTS EFFECTED BY IT, CAME WITHIN THE EXEMPTION PROVIDED IN CLAUSE (B) OF SECTION 9(1)(VII) OF THE ACT. ACCORDING TO ASSESSE E, UNLESS A SUM PAID CHARGEABLE TO TAX IN INDIA, NO DEDUCTION WAS WARRAN TED 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 ASSE SSEE WAS IN THE COURSE OF ITS BUSINESS AND HENCE ALLOWABLE AS BUSIN ESS 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 UN DER SECTION 9(1)(I) OR UNDER SECTION 9(1)(VII) OF THE ACT. HENCE, AS PER THE CIT(APPEALS), ASSESSEE WAS NOT LIABLE FOR ANY DEDUCTION OF TAX AT SOURCE. IN THE RESULT, ASSESSING OFFICER WAS DIRECTED TO DELETE THE DISALL OWANCE. 7. NOW BEFORE US, LEARNED D.R., STRONGLY ASSAILING THE ORDER OF CIT(APPEALS), SUBMITTED THAT ASSESSEE HAD NEVER FIL ED THE AGREEMENT 7 I.T.A. NO. 543/MDS/11 DATED 17.11.2004 BEFORE THE A.O. AND AS PER THE LEA RNED D.R., CIT(APPEALS) RELIED ON SUCH AGREEMENT, FOR ALLOWING THE CLAIM OF THE ASSESSEE. AS PER LEARNED D.R., THE ORIGINAL AGREEM ENT PLACED BY THE ASSESSEE BEFORE THE A.O. WAS ONE DATED 5.2.2004 AND AS PER THIS AGREEMENT, IT WAS CLEAR THAT THE LESSEE BEING M/S S AIPEM, SPA, ITALY WAS OBLIGED TO MAINTAIN THE RIGS. CIT(APPEALS) HAD ADMITTED AS EVIDENCE, THE AGREEMENT DATED 17.11.2004 FOR THE AL LEGED PLANNED AND EXTRAORDINARY MAINTENANCE WHICH, AS PER THE LEARNED D.R., WAS ENTERED BY THE ASSESSEE WITH M/S SAIPEM, SPA, ITALY, AS AN AFTERTHOUGHT. AS PER THE LEARNED D.R., THE SUBSEQUENT AGREEMENT DATED 17 .11.2004, OUGHT NOT HAVE BEEN CONSIDERED BY THE CIT(APPEALS) SINCE ASSESSEE HAD NOT ADDUCED ANY REASON WHY IT COULD PRODUCE BEFORE THE A.O. IN ANY CASE, AS PER THE LEARNED D.R., THE PAYMENT EFFECTED BY TH E ASSESSEE FELL WITHIN THE AMBIT OF TECHNICAL SERVICES AND BY VIRTUE OF SE CTION 9(1)(VII) OF THE ACT, INCOME ON ACCOUNT OF TECHNICAL SERVICES HAD TO BE DEEMED AS ACCRUING OR ARISING IN INDIA FOR THE NON-RESIDENT A SSESSEE, IRRESPECTIVE OF THE FACT THAT WHETHER SUCH NON-RESIDENT WAS HAVING PERMANENT ESTABLISHMENT IN INDIA OR NOT. AS PER LEARNED D.R. , CIT(APPEALS) DID NOT CONSIDER THE AMENDMENT AND ADDITIONS OF EXPLANATION TO SECTION 9(1) OF THE ACT, WITH RETROSPECTIVE EFFECT. IN ANY CASE, L EARNED D.R. SUBMITTED THAT WHETHER ANY PART OF THE WORK DONE BY M/S SAIPE M, SPA, ITALY, FOR WHICH PAYMENT WAS EFFECTED BY THE ASSESSEE AS REPAI RS AND 8 I.T.A. NO. 543/MDS/11 MAINTENANCE WOULD INCLUDE FEE FOR TECHNICAL SERVICE S, HAD NOT BEEN VERIFIED BY THE CIT(APPEALS). IF ANY FEE FOR TECHN ICAL SERVICES WAS INCLUDED, THEN ASSESSEE OUGHT HAVE DEDUCTED TAX AT SOURCE BEFORE MAKING PAYMENT TO THE NON-RESIDENT. LEARNED D.R. P OINTED OUT THAT AGREEMENT DATED 17.11.2004 RELIED ON BY LEARNED CIT (APPEALS) FOR GIVING RELIEF TO THE ASSESSEE INCLUDED IN ITS SCOPE , WORK SUCH AS TESTING, RE-CERTIFICATION OF VARIOUS EQUIPMENTS INCLUDING PR EPARATION OF RELEVANT DOCUMENTATIONS. SUCH ACTIVITIES WERE NOTHING BUT R ENDERING OF TECHNICAL SERVICES. SINCE ATLEAST 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-DEDU CTION OF TAX AT SOURCE AS STIPULATED UNDER SECTION 195(2) OF THE ACT. HAV ING NOT DONE SO, ASSESSEE WAS HAD FAILED IN ITS DUTY AND OBLIGATION TO DEDUCT TAX AT SOURCE. THEREFORE, THE ASSESSING OFFICER COULD REL Y 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(APPEA LS), SUBMITTED THAT THE ASSESSING OFFICER NEVER QUESTIONED THE GENUINEN ESS OF THE PAYMENT. EVEN IN ORIGINAL ASSESSMENT, GENUINENESS WAS NOT QU ESTIONED. BUT, THE A.O. HAD ONLY QUESTIONED THE NECESSITY FOR INCURRIN G SUCH EXPENSES. AS PER THE A.R., THE EXPENSES WERE NOT OF A REGULAR NA TURE, BUT FOR EXTENSIVE REPAIRS AND MAINTENANCE OF OIL RIGS RESUL TING IN COMPLETE OVERHAULING. THIS COULD NOT BE CONSIDERED IN THE S AME VEIN AS DAY-TO- 9 I.T.A. NO. 543/MDS/11 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 SAIPE M, SPA, ITALY, WAS CONCERNED WAS CLEARLY A BUSINESS INCOME. SINCE M/S SAIPEM, SPA, ITALY, WAS NOT HAVING BUSINESS CONNECTION IN INDIA, SUCH AMOUNTS EARNED BY IT WERE NOT TAXABLE IN INDIA. EXPLANATION TO SE CTION 9 ADDED BY FINANCE ACT 2010 WITH EFFECT FROM 1.6.1976 WOULD NO T APPLY TO SECTION 9(1)(I). FURTHER, AS PER LEARNED A.R., THE AMOUNTS PAID TO M/S SAIPEM, SPA, ITALY, WAS SUBJECTED TO TRANSFER PRICING ANALY SIS MADE BY THE TPO AND TPO HAD HELD THAT THE PAYMENTS WERE ON ARM'S LE NGTH BASIS. THE AGREEMENTS WERE CONTINUING ONES, FOR THE RIGS UNDER LEASE, AND FOR NO OTHER YEARS, SUCH A DISALLOWANCE WAS EVER MADE. EV EN FOR SUBSEQUENT YEAR, NO SUCH DISALLOWANCE WAS MADE BY THE A.O. AND RELIANCE WAS PLACED ON THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 2007-08 PLACED AT PAPER-BOOK PAGES 95 TO 98. A.R. ALSO BROUGHT TO OU R NOTICE THAT THE TPO FOR THE IMPUGNED ASSESSMENT YEAR IN HIS REPORT DATED 29 TH OCTOBER, 2008, PLACED AT PAPER-BOOK PAGES 20-21, HAD HELD TH AT NO ADJUSTMENT WAS NECESSARY TO THE VALUE OF INTERNATIONAL TRANSAC TION ENTERED BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR. AS PER THE A.R., IN FORM NO.3CEB FILED BY THE ASSESSEE FOR THE IMPUGNED ASSE SSMENT YEAR, PLACED AT PAPER-BOOK PAGES 47 TO 54, THE IMPUGNED A MOUNT WAS INCLUDED AND CONSIDERED. SINCE M/S SAIPEM, SPA, IT ALY WAS DOING THE 10 I.T.A. NO. 543/MDS/11 PERIODICAL MAINTENANCE, ASSESSEE HAD ENTRUSTED THE OVERHAULING WORK ALSO TO M/S SAIPEM, SPA, ITALY, WHO WAS HAVING CUST ODY OF RIGS. IN ANY CASE, ACCORDING TO HIM, SINCE SAME AMOUNT HAS BEEN ALLOWED IN SUBSEQUENT YEARS, THOUGH THE RULE OF RES JUDICATA D ID NOT APPLY, CONSISTENCY HAD TO BE MAINTAINED. 9. AD LIBITUM, LEARNED D.R. STATED THAT IN THE REMA ND REPORT, ASSESSING OFFICER HAD NOT GIVEN ANY COMMENTS REGARD ING GENUINENESS OF THE EXPENDITURE AND THERE WAS NOTHING IN THE REM AND REPORT WHICH WENT ADVERSE TO THE ORIGINAL ASSESSMENT. 10. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THE FIRST QUESTION TO BE ANSWERED IS WHETHER THE SU M OF ` 3,16,93,911/- PAID BY THE ASSESSEE TO M/S SAIPEM, SPA, ITALY, COU LD BE CONSIDERED AS BUSINESS EXPENDITURE OF THE ASSESSEE. THAT THE AMO UNT WAS PAID TO M/S SAIPEM, SPA, ITALY, HAS NOT BEEN DISPUTED BY THE AS SESSING OFFICER. AS PER THE ASSESSING OFFICER, DURING THE PERIOD OF LEA SE, THE SAID SAIPEM, SPA, ITALY HAD THE CONTROL OVER THE RIGS AND WAS OB LIGED TO MAINTAIN THE RIGS SO AS TO KEEP IT FIT MECHANICALLY. THEREFORE, AS PER THE A.O., THE RESPONSIBILITY OF UPKEEPING AND MAINTENANCE RESTED SOLELY ON M/S SAIPEM, SPA, ITALY AND ASSESSEE WAS UNDER NO OBLIGA TION TO MAINTAIN THE RIGS. AS AGAINST THIS, CASE OF THE ASSESSEE IS THAT THIS WAS NOT REGULAR MAINTENANCE BUT WORK DONE OVER AND ABOVE SU CH REGULAR 11 I.T.A. NO. 543/MDS/11 MAINTENANCE TO KEEP THE RIGS IN GOOD CONDITION. TH E 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 ADJUS TMENT REQUIRED TO THE VALUES OF INTERNATIONAL TRANSACTION ENTERED BY THE ASSESSEE WITH M/S SAIPEM, SPA, ITALY. THE RELEVANT PARA OF THE TPO O RDER IS REPRODUCED FOR BREVITY:- 3. M/S SAIPEMABAN DRILLING CO. LTD. (HENCEFORTH REFERRED TO AS SADCO) IS PRIMARILY ENGAGED IN ONSHO RE DRILLING SERVICES WITH A FLEET OF 4 LAND RIGS TO ITS ASSET. THE COMPANY HAS SO FAR EXECUTED CONTRACTS WITH OIL & NAT URAL GAS COMMISSION LTD AND SHELL INDIA PRODUCTION B.V. AT PRESENT THE COMPANY HAS LEASED OUT ITS RIGS TO SAIP EMS.P.A., FOR OPERATIONS AT SAUDI ARABIA FOR WHICH THE COMPAN Y IS EARNING LEASE RENTALS AT THE DAY RATES DULY APPROVE D BY RBI. 4. THE CASE WAS DISCUSSED WITH ASSESSEES REPRESENTATIVE. AFTER EXAMINING INTERNATIONAL TRANS ACTIONS, NO ADJUSTMENT IS CONSIDERED NECESSARY TO THE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE. ACCORDINGLY, THE INTERNATIONAL TRANSACTIONS REFERRE D, ARE ACCEPTED TO BE AT ARM'S LENGTH PRICE. IT IS HEREBY CLARIFIED THAT THE FINDINGS AND DISCUSSIONS MADE IN THIS ORDER ARE APPLICABLE ONLY IN RESPECT OF REFERENCE R ECEIVED FOR ASSESSMENT YEAR 2005-06 AND NOT FOR ANY OTHER ASSESSMENT YEAR. HENCE, THE PAYMENTS EFFECTED BY THE ASSESSEE FOR TH E MAINTENANCE, TO M/S SAIPEM, SPA, ITALY, WERE NOT CONSIDERED EXCESSI VE. THE ONLY ISSUE IS WHETHER SUCH PAYMENTS WERE FOR THE BUSINESS PURP OSE OF THE ASSESSEE. IT IS NOT DISPUTED THAT ASSESSEE WAS OWN ING THE FOUR RIGS. THERE IS ALSO NO DISPUTE THAT THE PAYMENTS WERE MAD E TO M/S SAIPEM, 12 I.T.A. NO. 543/MDS/11 SPA, ITALY, TOWARDS PLANNED AND EXTRAORDINARY MAINT ENANCE ACTIVITIES OF THOSE RIGS. THE FACT THAT SUCH RIGS WERE OLD HAS A LSO NOT BEEN DISPUTED BY THE REVENUE. THAT OLD RIGS REQUIRE PERIODICAL O VERHAULING FOR KEEPING THEM IN WORKING CONDITION, IS A FACT WHICH CANNOT B E OVERLOOKED. SUCH EXTRAORDINARY MAINTENANCE DONE PERIODICALLY CANNOT BE TREATED ON PAR WITH REGULAR DAILY MAINTENANCE. ASSESSEES CONCERN THAT UNLESS SUCH EXTRAORDINARY MAINTENANCE OR PLANNED MAINTENANCE OR OVERHAULING WAS DONE, LIFE OF THE RIGS AND LIFE OF THE WORKMEN REND ERING SERVICES IN SUCH RIGS, WOULD BE JEOPARDIZED, APPEARS TO BE WELL JUST IFIED. ASSESSEE, BEING THE OWNER OF THE ASSET, IT WAS IN ITS OWN INTEREST, THAT THE ASSETS WERE MAINTAINED PROPERLY. THEREFORE, IRRESPECTIVE OF TH E AGREEMENTS AND IRRESPECTIVE OF WHETHER IT WAS PRODUCED BEFORE THE A.O. OR NOT, CLAIM OF THE ASSESSEE COULD NOT HAVE BEEN REJECTED. WE ARE OF THE OPINION THAT THE A.O. SHOULD NOT HAVE PUT HIMSELF IN THE SHOES O F THE ASSESSEE TO DECIDE WHETHER SUCH EXPENSES WERE NECESSARY. ASSES SEE, IN ITS BUSINESS INTEREST, WOULD HAVE FOUND IT EXPEDIENT TO HAVE THE PERIODIC OVERHAULING DONE BY M/S SAIPEM, SPA, ITALY, SINCE T HE SAID COMPANY WAS ALREADY HAVING CUSTODY OF RIGS UNDER THE LEASE AGREEMENT. NO DOUBT, AS PER ORIGINAL AGREEMENT, M/S SAIPEM, SPA, ITALY WAS TO DO THE DAILY MAINTENANCE. THE CLAUSE RELIED ON BY THE A.O . FOR MAKING DISALLOWANCE, IS REPRODUCED HEREUNDER:- 13 I.T.A. NO. 543/MDS/11 THE DRILLING UNITS DURING THE CONTRACT PERIOD SHALL BE IN FULL POSSESSION OF THE LESSEE AND UNDER LESSEES COMPLET E CONTROL IN EVERY RESPECT LESSEE SHALL MAINTAIN THE DRILLING UN ITS IN GOOD MECHANICAL ORDER AND EFFICIENT OPERATING CONDITIONS IN ACCORDANCE WITH BEST OILFIELD PRACTICE. LESSEE IS NOT ENTITLE D FOR INDEMNIFICATION FOR ANY IMPROVEMENTS, WHICH LESSEE SHALL MAKE TO TH E RIG. HOWEVER, IF THE IMPROVEMENTS ARE MADE WITH THE WRITTEN CONSE NT OF SADCO, SADCO IS BOUND TO INDEMNIFY LESSEE, AN AMOUNT EQUAL TO THE LESSER OF THE TOTAL AMOUNT SPENT AND THE ACTUAL VALUE OF T HE IMPROVEMENTS AT THE TIME OF REDELIVERY. IF DURING THE TIME OF T HE 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 EXCLUSIVE LY 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 SECTION 40(A)(I) OF THE ACT FOR NON-DEDUCTION OF TAX AT SOURCE. NO DOUBT, THE PERIODIC MAINTENANCE AGREEMENT, RELIED ON BY THE ASSESSEE, PLACED AT PAPER-BOOK VOL.II PAGE 4 7, LIST THE ACTIVITIES INVOLVING EXTRAORDINARY MAINTENANCE AS UNDER:- INSPECT, REPAIR WHEN REQUIRED, TEST AND RE-CERTIFY HANDLING AND TUBULAR EQUIPMENT 14 I.T.A. NO. 543/MDS/11 INSPECT, REPAIR WHEN REQUIRED, TEST AND RE-CERTIFY WELL CONTROL EQUIPMENT AND ACCESSORIES INSPECT, REPLACE WHEN REQUIRED, TEST AND RE-CERTIFY INSTRUMENTATION AND SAFETY DEVICES INSPECT, REPAIR WHEN REQUIRED, TEST AND RE-CERTIFY MAIN GENERATORS AND ELECTRICAL MOTORS INSPECT, REPAIR WHEN REQUIRED, TEST AND RE-CERTIFY DRILLING MACHINES SUCH AS TOP DRIVE, ROTARY TABLE, MUD PUMPS , DRAWWORKS, ETC. PREPARE AND FILE THE RELEVANT DOCUMENTATION. TESTING AND RE-CERTIFICATION WORK MENTIONED IN THE ABOVE LIST COULD FALL UNDER TECHNICAL SERVICES. A.O. HAD RELIED ON SEC TION 9(1)(VII) OF THE ACT IN THE REMAND REPORT, FOR CONCLUDING THAT ASSESSEE WAS OBLIGED TO DEDUCT TAX AT SOURCE. WE ARE REPRODUCING THIS SECTION HER EUNDER:- (VII) INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE BY - (A) THE GOVERNMENT; OR (B) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE FEES AR E PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINE SS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA; OR (C) A PERSON WHO IS A NON-RESIDENT, WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINE SS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA OR FO R THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE IN INDIA. CLAUSE (B) CLEARLY IMPLIES THAT IF THE FEE WAS PAYA BLE IN RESPECT OF SERVICES UTILIZED IN THE BUSINESS OR PROFESSION CAR RIED ON BY A PERSON OUTSIDE INDIA, THEN SUCH INCOME BY WAY OF SUCH FEES , COULD NOT BE CONSIDERED AS FEE FOR TECHNICAL SERVICES. HERE, UN DISPUTEDLY, THE SERVICE OF PERIODICAL MAINTENANCE WAS CARRIED OUT BY M/S SA IPEM, SPA, AT SAUDI 15 I.T.A. NO. 543/MDS/11 ARABIA AND THE SERVICE OF M/S SAIPEM, SPA, ITALY WA S UTILIZED BY THE ASSESSEE FOR A BUSINESS CARRIED ON BY IT OUTSIDE IN DIA. INSOFAR AS BUSINESS OF LEASING OF RIGS WAS CONCERNED, IT WAS C ARRIED ON BY THE ASSESSEE OUTSIDE INDIA. THE FOUR RIGS LEASED OUT T O M/S SAIPEM, SPA, ITALY, WAS OWNED BY THE ASSESSEE. THEREFORE, THE I NCOME RECEIVED BY M/S SAIPEM, SPA, ITALY FROM THE ASSESSEE, EVEN IF A PART THEREOF IS CONSIDERED AS FEES FOR TECHNICAL SERVICES, WOULD NO T 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 E ARNED 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 ASSE SSEE HAD REACHED AN IMPRESSION THAT IT WAS NOT LIABLE TO DEDUCTION OF T AX AT SOURCE ON THE PAYMENT EFFECTED BY IT TO M/S SAIPEM, SPA, ITALY, W E CANNOT SAY IT WAS NOT BONAFIDE. SPECIAL BENCH OF THIS TRIBUNAL IN TH E 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 F ROM ASSESSING OFFICER AS 16 I.T.A. NO. 543/MDS/11 SPECIFIED IN SECTION 195(2) OF THE ACT. THERE BEIN G 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) OF THE ACT. 12. WE ARE, THEREFORE, OF THE OPINION THAT CIT(APPE ALS) WAS WELL JUSTIFIED IN DELETING THE DISALLOWANCE. NO INTERFE RENCE IS CALLED FOR. 13. IN THE RESULT, APPEAL FILED BY THE REVENUE IS D ISMISSED. THE ORDER WAS PRONOUNCED IN THE COURT ON THURSDAY, THE 31 ST OF MAY, 2012, AT CHENNAI. SD/- SD/- (CHALLANAGENDRA PRASAD) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 31 ST MAY, 2012. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-V, CHENNAI-34 (4) CIT, CHENNAI-III, CHENNAI (5) D.R. (6) GUARD FILE