A. Kalyanasindharam, Accountant Member -
(1.) THE assessee, is a non-resident, carrying on contracts works for various concerns in connection with Bombay High Off-shore Oil Rigs, has filed these appeals. For the assessment year 1984-85, the appeals are against the order of the Commissioner of Income-tax (CIT) passed under Section 263 of the Income-tax Act, 1961 and against the order of CIT(A) arising out of the reversionary proceedings. THE appeals for the assessment years 1985-86 & 1986-87 are arising from the order of CIT(A). THE appeals involve the common issue that relate to the non-applicability of the notification issued dated 31-3-1993 to its activities. THE alternative claim is that, Section 44BB of the Act which overrides the provisions of Section 28 to 41 of the Act, does not permit adding of the taxes paid on its behalf as its receipts for arriving at its taxable income. THE second related alternative claim is that, the grossing up of the tax to the receipts should be done once only, the probable Surtax liability could not have been treated as perquisite and that, the assessee could not have been burdened with tax on such assumed figures. THE last of the common issue is that, the cash system of accounting adopted by it for accounting its income should not have been disturbed.
(2.) The brief facts of the case are brought out below. In the previous year relevant to the assessment year under appeal, it had receipts for contract works which are stated to be tax-protected, which have been taxed on cash receipt basis through ONGC as agent of the assessee, and therefore were not included for direct assessment on the assessee. In addition to the above, the assessee had receipts from six other contracts, of which only the contract with Nippon Steel Corpn., Japan is stated to be not tax-protected. The engineering contracts were for Mazagon Dock Ltd. Nos. D2827, D2318 & D2332. Sumitomo Heavy Ind. No. D2206, Nippon Steel Corpn. No. D2329, and Nippon Kokan KK Japan No. D2301. The contracts are turnkey projects that included fabrication, installation, hook-up, commissioning, modification and transportation of various platforms, so sub-contracted by the above parties, who had entered those contracts with ONGC. Some of these works are noted as carried out of India, but, works like hook-up, installation, commissioning, etc., of various platforms, structures are stated to be carried in India.
The assessee had initially filed its return for accounting of the profits on completed contract basis, which has been modified to cash receipt basis. This started with the initiation of the proceedings under Section 263 of the Act and the assessment proceedings for the assessment years 1985-86 and 1986-87. The assessee had agreed before the Commissioner of Income-tax (CIT) for the assessment being made on cash basis by applying Section 44BB of the Act, but, had objected to the treating of the taxes paid by the main contractor on certain contracts as part of its profits, because, Section 44BB did not provide for any such addition unlike what is provided for in Section 28(1)(iv) of the Act. It had raised an alternative plea that, if at all grossing up of the taxes paid to the receipts shown is to be upheld, then, it should be done initially, and the rate of profit of 10% is to be applied.
The order of CIT under Section 263 is a short one and the same is reproduced below for the sake of facility :
1. The assessee filed its return on 30-10-1986. The assessment was made on 3-7-1987. In the return the assessee was showing receipts on the basis of completed contracts. On that basis the return showed loss. The proceedings were filed on the basis of the return on 3-7-1987.
2. Considering that the assessments were being framed in this case on the basis of cash receipts in the relevant year. It was found that there are large numbers of contracts which receipts were not shown in this year on receipt basis. Some such contracts are : Contract Nos. 2206, 2229, 2301, 2318 & 2332. Out of these contracts, contract No. 2329 was non-tax protected and the rest were contracts to which tax was protected by various companies (not ONGC).
3. In response to the notice Shri Hingwala attended and stated that he has no objection for inclusion of the receipts that escaped from the original return on the basis of cash payments. Accordingly the proceedings filed vide letter dated 3-7-1987 are cancelled and the Assessing Officer is directed to frame the assessment after looking into the accounts and receipts of these contracts into account. During the course of the proceedings before him the Assessing Officer should also consider Shri Hingwala's request that there should not be any grouping of tax in the tax protected contracts in view of the overriding provisions of Section 44BB; if there is any grossing, it should be done on a single stage basis; the single stage grouping should be by applying a rate of 10% and wherever possible the tax may be recovered from the customers because of lapse of long period after the original receipts.
(3.) THE filing of proceedings vide order dated 3-7-1987 is cancelled.
4. THE Assessing Officer (AO) in the proceedings consequent to the direction of the CIT, noting that, the system of accounting adopted by the assessee as "cash system" had in regard to the six contracts for which the assessee had shown receipts in the previous year, observed that, some part of the works though done out of India, it should be treated as part of the composite contract because, the project was a turnkey one on lump basis, in the nature of sale of goods/machinery in India and on that basis calculated 10% as income from profits under Section 44BB of the Act. He concluded that, 10% of receipts for work done in India plus 1% (10% of receipts for works done out of India) are liable for inclusion under Section 44BB of the/Act.
On the claim of inapplicability of Section 28(iv) of the Act to the taxes paid by the main contractor, he observed that, though Section 44BB overrides the provisions of Section 28 to 41, the suggestion in Section 28(iv) for treatment of perquisites could be considered, because, that section again only talks of computation of income from profits from business. He proceeded to take into account the actual receipts as the starting point of computation.
On the contract No. D2332, which was in respect of technical services and royalty for imparting information, he considered separately because, the rates of taxation were 40% & 20% respectively and calculated the tax by converting the US Dollar into Indian rupees. On the contract No. D2229, he considered the receipts in India and outside India, converted it into Indian rupees, applied 10% & 1% to them and determined the total income, applying the tax rate, determined the amount of tax. On the tax protected contracts, he applied the same formula, with the only addition of tax perquisite and the Surtax perquisite and calculating the amount of tax payable on the aggregate of the three amounts. He adopted the same lines for the assessment years 1985-86 & 1986-87.;