M/s. Cobra Instalaciones Y Servicios S.A., New Delhi V. ADIT, New Delhi

ITA 6602/DEL/2013

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Cobra Instalaciones Y Servicios S.A, a Spanish company, appealed against the orders of the Commissioner of Income Tax (Appeals) which upheld the disallowances made by the Assistant Director of Income Tax on engineering services expenses claimed for Assessment Years 2005-06 and 2006-07. The company, part of a consortium with IRCON International Ltd. and Eliop S.A, was involved in a project with Delhi Metro Rail Corporation and had treated its project office in India as a Permanent Establishment (PE). The main contention was the disallowance of expenses due to non-deduction of withholding tax and lack of supporting documents for payments to the head office. The Tribunal found that the lower tax authorities had overemphasized the need for time log sheets, which were not critical given the nature of the work and the previous acceptance of the expenses by the TPO.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131212 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2018
• Appeal Filed By: Assessee
• Order Result: DismissedDismissed
• Bench Allotted: D
• Next Hearing Date: 06-02-2023
• Assessment Year: 2006-2007
• Appeal Filed On: 11-12-2013
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL

Judgement Text

Page | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “D”: NEW DELHI BEFORE SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER ITA No. 6601 & 6602/Del/2013 (Assessment Year: 2005-06 & 2006-07) Cobra Instalaciones Y Servicios S.A, A-287, New Friends Colony, New Delhi-110065 Vs. Asst. Director of Income Tax, Circle-1(1), Intl. Taxation, New Delhi (Appellant) (Respondent) PAN: AAACC3459Q Assessee by : Sh. Hiren Mehta, CA Revenue by: Sh. Sanjay Kumar, Sr. DR Date of Hearing 07/02/2023 Date of pronouncement 13/02/2023 O R D E R PER ANUBHAV SHARMA, J. M.: 1. These appeals have been preferred by the Assessee against the order dated 27.06.2013 of Ld. Commissioner of Income Tax (Appeals)-XXIX, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal No. 97 & 98 /2008-09 arising out of an appeal before it dated 29.12.2008 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ld AO, ADIT, Circle-1(1), Intl Taxation, New Delhi (hereinafter referred as the Ld. AO). 2. The facts in brief are that the appellant is a company incorporated under law's of Spain having its registered office at Madrid and hence non-resident for tax purpose. It is engaged in business of designing, engineering, erection, maintenance, installation of projects in field of power, telecommunications, ITA No. 6601 & 6602/Del/2013 Cobra Instalaciones Y Servicios S.A Vs ADIT Page | 2 irrigation arid sanitation. The appellant is executing a project in India as a part of consortium namely ICE consortium consisting of three partners viz. Appellant, M/s IRCON International Ltd. and M/s Eliop S.A. The said consortium has entered into a contract dated 15.06.2001 with Delhi Metro Rail Corporation (DMRC) for design, supply, installation, testing and commissioning of traction power, power supply, power distribution & SC A DA system for Metro Corridor and the contract is termed as S YS-2 contract. The role of Cobra in the contract is for design, sourcing of material, supervision of installation, testing and commissioning of DC track sub-station, track cabins, rigid catenary system, track earthing panels etc. Cobra has taken approval from RBI on 07.08.2001 to set-up a project office in India. The appellant has treated the project office as its PE in India. 3. 2.1 As for AY 2005-06, the appellant had filed return of income declaring therein NIL income on 29.10.2005. The appellant had claimed engineering services expenses to the tune of Rs. 117,984,347 as under: Engineering & Consultancy - INECO 22,270,820 Engineering & Consultancy - ENTRAC 32,230,075 Engineering fee to head office 63,483,452 117,984,347 4. These transactions were reported by the appellant in Form 3CEB as international transactions. TPO has accepted arm’s length nature of these expenses in his order dated 04.09.2008. During course of scrutiny assessment, the AO found that no tax has been deducted at source on payments made to INECO and ENTRAC and hence disallowed these u/s 40a(i). Further, the AO held that payments made to HO were not supported by requisite documents and hence disallowed these payments. In addition, the AO disallowed claim of the appellant under head office expenses to the tune of Rs. 49,98,291. The AO has made assessment at Nil income and has computed tax payable u/s 115JB. The appellant challenged these ITA No. 6601 & 6602/Del/2013 Cobra Instalaciones Y Servicios S.A Vs ADIT Page | 3 additions in appeal before Ld. CIT(A). As for Assessment Year 2006- 07, the appellant has filed return of income. The AO in his order u/s 143(3) made similar disallowances as made for Assessment Year 2005-06 and the appellant had challenged the disallowances in appeal before Ld. CIT(A). 5. The assessee is in appeal raising following grounds in ITA no 6601/Del/2013:- 1. That on the facts and circumstances of the case and in law, the order passed by CIT (A) is contrary to facts and bad in law. 2. That on the facts and circumstances of the case and in law, the CIT (A) was not justified in upholding disallowance of an amount of Rs.5,45,00,895/- by applying the provisions of Section 40(a) (i) on the plea that no withholding tax in respect of payments made to M/s Ineco & M/s Enotrac was made. 3. That on the facts and circumstances of the case and in law, the action of the CIT (A) in upholding disallowance of engineering expenses aggregating Rs.6,34,83,482/- paid to Head Office is arbitrary. 4. That on the facts and circumstances of the case and in law, the set off of brought forward business losses allowed in the assessment order by the A.O. & upheld by the CIT (A) is not correct.” 6. The assessee is in appeal raising following grounds in ITA no 6602/Del/2013:- “1. That on the facts and circumstances of the case and in law, the order passed by CIT (A) is contrary to facts and bad in law. 2. That on the facts and circumstances of the case and in law, the CIT (A) was not justified in upholding disallowance of an amount of Rs.3,42,24,888/- by applying the provisions of Section 40(a) (i) on the plea that no withholding tax in respect of payments made to M/s Ineco & M/s Enotrac and M/s. Hilton Engineering BV was made. 3. That on the facts and circumstances of the case and in law, the set off of brought forward business losses allowed in the assessment order by the A.O. & upheld by the CIT (A) is not correct.” 7. Heard and perused the record. ITA No. 6601 & 6602/Del/2013 Cobra Instalaciones Y Servicios S.A Vs ADIT Page | 4 8. At the time of argument, it was submitted that in regard to disallowance of Engineering Expenses for non-deduction of withholding taxes by applying the provision of section 40A(i), vide letter dated 04.08.2022 the ld AR has not pressed the ground in respective appeals, Further, regarding the disallowances of Head Office expenses issue has been decided by CIT(A) in favour of the assessee against which the Revenue has not filed any appeal. So that is redundant. The only issue now contested before us is with regard to disallowances of engineering expenses paid by the assessee to its head office. 9. It was submitted on behalf of the assessee that the ld Tax Authorities Below have arbitrarily stressed upon furnishing of actual time sheets in regard to engineers engaged to provide the services by the head office to the assessee PE. It was submitted in regard to assessment year 2005-06, the ld TPO had examined the transaction including engineering expenses and once, the ld TPO had made the adjustment the ld AO was required to accept the same. Reliance in this regard was also placed on the provision of section 92CA(4) of the Act which has come in effect from 01.04.2007 to contend that AO was bound to compute the income as ALP decided by the ld TPO. 10. It was submitted that the debit notes raised by the head office carry the complete particulars of the employees and work done. It was submitted that the Tax Authorities below have arbitrarily gone into the questions of business expediency on one of the elements of debit note. The ld counsel also stressed on the fact that if engineering expenses are not considered as any genuine or inflated it would directly affect the profitability of the business and which for the year 2005-06 would jump to 31.62% from 20.47% and 42.08% for Assessment Year 2006-07 from 29.07%. It was submitted that the Tax Authorities below have fallen to appreciate that engineering work was essential to the work done by the PE and as engineers are ITA No. 6601 & 6602/Del/2013 Cobra Instalaciones Y Servicios S.A Vs ADIT Page | 5 deputed on several projects the time log sheets were not of much relevance. 11. On the other hand the ld DR supported the findings of ld. Tax Authorities below. It was submitted that it was very much in domain of the AO to examine the genuineness of the transaction beyond the limit of TPO. 12. Giving thoughtful consideration to the matter on record the bench is of considered opinion that the sheets attached with debits noted available at pages 124 to 144 of Paper book, Volume-3 for Assessment Year 2005-06 and pages 103-114 of Paper Book, Volume-3 for Assessment Year 2006-07 establish that the name of the employees along with the nature of duties and number of hours apportioned have been have been made part of the debit note. The ld. Tax Authorities below have over stressed on non-production of time log sheets without finding any shortcoming and fallacy into the information already available and provided. The bench is of considered opinion that to discredit an expense questioning whether it was duly and exclusively for the purpose of business of PE the information that was available should be considered deficient before questioning intention of the assessee to not have produced time log sheet. 13. Further when the Tax Authorities below are not questioning that execution of projects as PE then discrediting one of the expenses of the nature of engineering expenses crucial to the accomplishment of the project was not justified. Particularly in regard to Assessment Year 2005-06 when transactions were reported to be at arm’s length by the ld TPO and the ld TPO study included examination of engineering services than that all the more required material reasons to discredit the debit note for lack of corroboration. The bench is of considered opinion that findings of the ld Tax Authorities below in regard to the disallowance of engineering expenses cannot be sustained. The ground no 3 in ITA no ITA No. 6601 & 6602/Del/2013 Cobra Instalaciones Y Servicios S.A Vs ADIT Page | 6 6601/Del/2013 stands allowed in that appeal. There is no specific ground on this issue in ITA no 6602/Del/2013. 14. Therefore, the appeal ITA no 6601/Del/2013, is allowed partly and ITA no 6602/Del/2013 is dismissed. Order pronounced in the open court on 13/02/2023. -Sd/- -Sd/- (N. K. BILLAIYA) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 13/02/2023 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi