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M/S LEA INTERNATIONAL LIMITED Vs. ASSISTANT DIRECTOR OF INCOME TAX
September, 20th 2014
$~4
*       IN THE HIGH COURT OF DELHI AT NEW DELHI

+                 INCOME TAX APPEAL NO. 17/2014

                                      Date of decision: 3rd September, 2014

        M/S LEA INTERNATIONAL LIMITED
                                                            ..... Appellant
                           Through:Mr.Ved Jain & Mr. Pranjal Srivastava,
                           Advocates.

                           versus

        ASSISTANT DIRECTOR OF INCOME TAX
                                                         ..... Respondent
                           Through: Mr. Sanjeev Sabharwal, Sr. Advocate
                           with Mr. Ruchir Bhatia & Ms. Swati Thapa,
                           Advocates.

        CORAM:
        HON'BLE MR. JUSTICE SANJIV KHANNA
        HON'BLE MR. JUSTICE V. KAMESWAR RAO

SANJIV KHANNA, J. (ORAL):

        M/s Lea International Limited, a non-resident, has filed this appeal

under Section 260A of the Income Tax Act, 1961 (Act, for short) against

the order of the Income Tax Appellate Tribunal (Tribunal, for short) dated

11th July, 2013 upholding levy of penalty for concealment of income under

Section 271(1)(c) of the Act.

2.      The appeal in question pertains to Assessment Year 2005-06.

3.      The respondent-assessee a foreign company based in Canada was,

during the relevant period, engaged in providing engineering consultancy

service for design, supervision, transportation, planning and project

ITA No. 17/2014                                                       Page 1 of 9
management in the field of roads and highways, urban development,

transportation, planning, water resources and railways.

4.      The appellant-assessee had received Rs.2,29,583/- under a contract

with Asian Development Bank (ADB), for providing consultancy service.

In the return of income, the aforesaid amount was claimed as exempt from

tax. We shall be referring to the return of income and the reason as to why

the said receipt was claimed to be exempt from tax subsequently. By

assessment order dated 15th May, 2007, the Assessing Officer held that

Rs.2,29,583/- was not exempt and was added to the return income.

Subsequently, notice under Section 271(1)(c) of the Act was issued and

penalty was imposed in respect of two additions, including addition of

Rs.2,29,583/-,which was claimed to be exempt. The aforesaid order of

penalty has been upheld by the Commissioner of Income Tax (Appeals)

and by the Tribunal in the impugned order.

5.      It is an undisputed position that the agreement between the

appellant-assessee and ADB dated 23rd November, 2004 provided as

under:-





                  "Section 12.02. ADB has obtained the confirmation
                  of the Government that:
                  (a)The Consultant and the personnel shall have the
                  status of experts performing missions for ADB
                  and that they shall be entitled to the privileges,
                  exemptions and immunities conferred upon such
                  experts by the provisions of the Agreement
                  Establishing the Asian Development Bank; and

ITA No. 17/2014                                                        Page 2 of 9
                    that without limiting the generality of those
                    provisions, the Government confirms that:
            (i)                except where ADB shall otherwise
                    agree, the Consultant, and the personnel shall be
                    immune from legal process with respect to all acts
                    performed by them in their capacity as
                    Consultants in connection with the Technical
                    Assistance;
            (ii)                 the personnel and their families (if they
                    are not citizens or nationals of the recipient country)
                    shall be exempt from immigration restrictions, alien
                    registration requirements and national service
                    obligations of the recipient country;
            (iii)                the Consultant and the personnel (if they
                    are not citizens or nationals of the recipient country)
                    may bring into the recipient country reasonable
                    amounts of foreign currency for the purpose of the
                    Technical Assistance and may withdraw from the
                    recipient country similar amounts of foreign
                    currency together with any amounts earned therein
                    by the Consultant and the personnel in connection
                    with the Technical Assistance; and
            (iv)                  the personnel and their families (if they
                    are not citizens or nationals of the recipient country)
                    may bring into the recipient country reasonable
                    amounts of foreign currency for their personal use
                    and may withdrew similar amounts of foreign
                    currency from the recipient country;
                    (b) The Government shall:
           (i)                  promptly provide the personnel and
                    their families with any entry and exit visas,
                    residence permits, foreign exchange permits and
                    travel documents required for their stay in the
                    recipient country;
           (ii)                 promptly provide the Consultant and
                    the personnel with work permits and other
                    documents necessary to enable them to perform
                    their work on the Technical Assistance; and
           (iii)               promptly clear through customs any
                    equipment, materials or supplies required for the
                    Technical Assistance, any personal effects and
                    household goods of the personnel and their
                    families.
                    (c)   The Government shall exempt the Consultant

ITA No. 17/2014                                                               Page 3 of 9
                    and the personnel from, or bear the cost of, any
                    taxes, duties, fees or other impositions levied
                    under the laws and regulations in effect in the
                    territories of the recipient country or of any
                    political subdivision or agency thereof in respect
                    of:
            (i)                 any payments made in connection
                    with the carrying out of the Technical Assistance
                    to the Consultant or the personnel (except where
                    the recipient country has reserved the right to tax
                    its nationals pursuant to Article 58.2 of the
                    Agreement Establishing the Asian Development
                    Bank);
            (ii)                any equipment, materials and supplies
                    which have been brought into the territories of the
                    recipient country which are to become the
                    property of the Government;
            (iii)                any equipment, materials and supplies
                    which have been brought into the territories of the
                    recipient country (except by Consultants or personnel
                    who are citizens or nationals of the recipient country)
                    for the purpose of carrying out the Technical
                    Assistance and which will be consumed therein or
                    subsequently withdrawn therefrom; and
            (iv)                  any personal effects of the personnel and
                    their families (if they are not citizens or nationals of
                    the recipient country) which, having been brought
                    into the territories of the recipient country will be
                    consumed therein or subsequently withdrawn
                    therefrom."


6.      The agreement records that the Government of India had agreed and

affirmed to provide and make available to the consultant, i.e., the

appellant-assessee free of charges several facilities, services, equipment,

material documents, information etc.              Sub-clause (iii) of clause (b),

stipulated that the Government shall exempt or bear cost of any taxes, etc.

in India.

7.      The explanation and the stand of the appellant-assessee was that

ITA No. 17/2014                                                                Page 4 of 9
relying upon the aforesaid clauses, income or receipt of Rs.2,29,583/- was

treated as exempt from tax. The aforesaid explanation has been rejected by

the Tribunal on the ground that the application for exemption under

Section 10(8A) of the Act was filed by the appellant-assessee with the

Additional Secretary, Department of Economic Affairs, Ministry of

Finance, Government of India, on 20th November, 2006, but the return of

income was filed on 29th October, 2005 and notice for scrutiny assessment

under Section 143(2) was issued on 25th October, 2006. In other words, the

said application under Section 10(8A) dated 20th November, 2006 was filed

subsequent and post filing of the return and issue of notice. This showed

lack of bona fides on the part of the appellant-assessee.

8.      The appellant-assessee has placed on record copy of the letter dated

20th November, 2006, which was filed with the Additional Secretary,

Department of Economic Affairs, Ministry of Finance, Government of

India. The said letter for the sake of convenience is reproduced below:-



                  "LEA International Ltd.
                  Transportation and Management consultant
                  Consulting Engineers

                                              Dated: 20th November, 2006



                  To,
                  The Addl. Secretary,
                  Department of Economic Affairs,
                  Ministry of Finance, Government of India, North Block,
ITA No. 17/2014                                                            Page 5 of 9
                  New Delhi

                  Re: Approval u/s 10(8A) of the Income Tax Act, 1961


                  Sir,

                  The applicant, M/s Lea International Limited, Canada
                  had entered into an agreement with M/s Asian
                  Development Bank on 23rd November, 2004 for
                  rendering technical consultancy services in relation to
                  "North Eastern Region Urban Development Project".
                  Appendices 4 of the said agreement enlists the Specific
                  assurances of the Government. section 12.02 of the
                  appendix 4 provides that- "The government shall exempt
                  the Consultant and the personnel from, or bear the cost
                  of, any taxed, duties, fees or other impositions levied
                  under the laws and regulations in effect in the territories
                  of the recipient country or of any political subdivision
                  or agency thereof in respect of "(i) any payments made
                  in connection with the carrying out of the Technical
                  Assistance to the Consultant or the personnel (except
                  where the recipient country has reserved the right to tax
                  its nationals pursuant to Article 56.2 of the Agreement
                  'Establishing           the    Asian       Development Bank);
                  (ii)........;(iii).......... and (iv)............;"
                  The applicant was under bona-fide belief its income is
                  exempt from Indian Income Tax on the basis of section
                  12.02 of the appendix 4 of the agreement entered into
                  with ADB. Of late, the applicant has been advised by its
                  tax consultant that section 10(8A) of the Income Tax
                  Act, 1961 deals with such income and to be eligible for
                  exemption under this section, the agreement for
                  engagement of the consultant should be approved by
                  your office, being the designated prescribed authority
                  under this section for being eligible for the exemption
                  from the Income Tax Act, 1961. The copy of the
                  agreement with ADB is enclosed herewith for, your
                  kind perusal and record.

                  In view of the above, we request you to kindly approve
                  the agreement with retrospective effect.

                  Preyed accordingly,

                  Your truly,
                  For Lea International Limited

ITA No. 17/2014                                                              Page 6 of 9
                  (Authorised Signatory)
                  Encl : As above"

9.      We have already quoted above the relevant clauses of the agreement

between the appellant-assessee, a non-resident and ADB and the factum

that the Government of India had agreed to certain terms and conditions,

including the condition relating to payment of taxes. The letter dated 20 th

November, 2006 no doubt was written after filing of the return and post

issue of notice under Section 143(2), but it records that the appellant-

assessee was under the bona fide belief that the receipt was exempt on the

basis of Section 12.02 of the appendix 4 of the agreement between them

and ADB, referring to the obligation of the Government of India.

Subsequently, on the advice given by the tax consultants, the application

under Section 10(8A) was being moved. The letter clearly stated the

reason and cause why the application was moved on 20 th November, 2006

and not earlier. The appellant-assessee had given an intelligible and cogent

explanation in this regard, which was not considered and examined or even

noticed by the Tribunal. The surrounding and attending circumstances

indicate and establish that the said explanation was genuine and correct. In

this connection, we may notice that in the return of income itself, the

appellant-assessee had taken care and caution to reveal and state full and

material facts. In the computation of assessable income, the appellant-

assessee had specifically disclosed that consultancy fee of Rs.2,29,583/-

ITA No. 17/2014                                                     Page 7 of 9
had been treated as exempt under the Act and a specific note 3.2 in

schedule 8 of the balance sheet was recorded. The said note reads as

under:-

                  "3.2 Consultancy/Technical            fees      includes
                  Rs.112,55,025 in respect of contract TA 4348-IND
                  North Eastern Region Urban Development Project,
                  wherein it is provided in the agreement that income
                  resulting from this project is exempt with reference to
                  the provisions of the agreement establishing the Asian
                  Development Bank (The Charter), the firm and each
                  of its consultants is an expert performing a mission for
                  the ADB and as such is entitled to the immunities,
                  privileges, and exemptions set forth in article 55 & 56
                  of the charter. The related expenses of Rs.110,25,445
                  have been included under respective heads of
                  expenditure. Resultant net profit of Rs.229,583 has
                  been claimed as exempt under the Income Tax Act,
                  1961."





10.     The said note does not refer to Section 10(8A), but refers to the

agreement and the stance and stand of the appellant-assessee. This clearly

shows that the subsequent application dated 20th November, 2006 was

pursuant to the legal advice, but earlier the receipt in question was claimed

as exempt in view of the terms and conditions set out in the agreement

between the appellant-assessee and the ADB. The said stand was thus

specifically mentioned in note 3.2. Looked from this light, it is apparent

that the issue involved interpretation of the agreement between the

appellant-assessee and ADB. The assessee had taken due care and caution

to mention all relevant facts in the return of income without any attempt to


ITA No. 17/2014                                                              Page 8 of 9
conceal or withhold information or details. No reference was made to

Section 10(8A) of the Act in the said notes. May be the appellant-assessee

was wrong in his understanding of law and wrong legal advice was given

to him, but this does not mean or shows that the appellant-assessee had not

acted bond fidely in view of the aforesaid factual matrix. The Tribunal has

also recorded that the application filed on 20th November, 2006 has not

been disposed of, which also means that the application had not been

rejected. Whatever be the situation, we do not think it is a fit case for

imposition of penalty under Section 271(1)(c) of the Act and as the

appellant-assessee had been able to explain the reason and cause why the

said income was claimed as exempt and the said reason and cause was

bona fide and it cannot be a case of the Revenue that all material facts and

particulars were not placed before the Assessing Officer.

11.     The question of law is accordingly answered in favour of the

appellant-assessee and against the respondent-Revenue.       The appeal is

disposed of. No costs.


                                      SANJIV KHANNA, J.


                                      V. KAMESWAR RAO, J.
        SEPTEMBER 03, 2014
        VKR




ITA No. 17/2014                                                     Page 9 of 9

 
 
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