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* 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
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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
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(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/-
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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
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