10. Rival submissions of the parties have been considered carefully in the light of the materials and the case laws referred to. The question for our consideration is whether the assessee is entitled to deduction in respect of payment made by the assessee to its parent company by way of reimbursement of expenses incurred by the. parent company in connection with the activities carried on by the assessee. The claim of the assessee has been rejected under section 40(a)(i) 0f the Act on the sole ground that the assessee failed to deduct the tax at source in respect of the aforesaid payments. Let us now first examine the stand of the Revenue. The provisions of section 40(a)(i) of the Act are being reproduced below:-
“40. Notwithstanding anything to the contrary in sections 30 to 38 the following amounts shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession’.-
(a) in the case of any assessee—
(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,- ‘
(A) outside India, or
(B) in India to a non resident, not being a company or to a foreign company.
on which tax is deductible at source under Chapter XV|I-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section(l) of section 200.”
Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section(l) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Explanation.- …….. …….. …….. ‘.…….. …….. …….. “
A perusal of the above provisions clearly reveals that if any sum is paid by an assessee by way of any interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India or in India to a non resident, not being a company or to a foreign company, then the deduction is allowable only if the assessee deducts the tax at source and pays the same in accordance with the provisions of section 200 of the Act. According to the Assessing Officer, the provisions of section 195 are applicable since the sum paid by the assessee is chargeable to tax under the Act. What is chargeable to tax is the income of a person. Therefore, in our opinion, a sum can be said to be chargeable to tax only when it contains element of profit. If element of profit is embedded in any payment, then the assessee is bound to deduct the tax at source at the rate prescribed or at a lesser rate allowed by the Assessing Officer. However, if there is no element of profit embedded in such payment then, in our opinion, it cannot be said that the sum so paid is chargeable to tax and consequently the provisions of section 195 of the Act would not be applicable.
11. Right from the inception, the stand of the assessee is that the payments were made by way of reimbursement of the expenditure incurred by the parent company in connection with the activities carried on by the assessee. The auditors of the parent company have certified that such payments represented the actual expenditure. There is no reason to disbelieve the auditor’s certificate which was filed before the lower authorities. This is also corroborated by the provisions of section 3.1.4 of the PSC. Clause(ii) of this section refers to payments to be made to affiliates of the contractor. It provides “charges shall be equal to the actual cost of providing their services, shall not include any element of profit and The parties to the PSC are bound to comply with the provisions contained in the PSC. Therefore, the assessee could only reimburse the actual expenditure incurred by the parent company. Accordingly, we are of the view that the payment by the assessee was by way of reimbursement of expenses.
14. We also find force in the contention of the learned counsel for the assessee that income of the assessee is to be computed as per the special provisions of section 42 of the Act and consequently no disallowance can be made by invoking the provisions of section 40(a)(i) of the Act. Though it is not a non obstante provision, yet it is a special provision relating to the computation of the income of an assessee engaged in the business of prospecting for or extracting or producing mineral oils in India. It is a settled legal provision that general provisions must give way to the special provisions. Reference can be made to the judgment of the Hon’ble Supreme Court in the case of CIT vs. Shahzada Nand and Sons and Others, 60 ITR 392 as well as the judgment of the Hon’ble Madras High Court in the case of CIT vs. Cores Vulcan Inc., 167 ITR 884 wherein it was held that special provisions would prevail over the general provisions contained in the Act. Even the Board Circular No.308 dated 29-6- 1981 clarifies this position. Para 11.1 of the said Circular reads as under:-
“11.1 Section 42 provides the machinery for securing flexible deductions in respect of expenses and allowances, etc., admissible in determining the profits and gains of any business consisting of the prospecting for, or extraction or production of, mineral oils. The provision of this section can be invoked only where the Central Government has entered into an agreement wit the person concerned for prospecting for, or extraction or production of, mineral oils and the Central Government is a participant in such business. Section 42 further provides that the agreement between the Central Government and the person concerned may make provisions in relation to the expenditure by way of infructuous or abortive exploration or expenditure incurred on drilling or exploration activities and depletion allowance and where such provisions are made, the expenditure or allowance shall be computed in accordance with the agreement and not in accordance with the general provisions of the Income-tax Act.”
The above circular makes it clear beyond doubt that general provisions of the Act would not apply for computing the income of such assessee and the income would have to be computed in accordance with the special provisions of section 42 of the Act. The circular being binding on the tax authorities, it cannot be contended by the Revenue that the provisions of section 42 would not prevail over the general provisions.
15. Further, the scope of section 42 has been recently analysed by the Hon’ble apex court in the case of CIT vs. Enron Oil and Gas India Ltd., cited supra, wherein their Lordships observed as under:-
“Section 42 of the 1961 Act was enacted to ensure that where the structure of the PSC was at variance with the accounting principles generally used for ascertaining taxable income, the provisions of the PSC would prevail. Section 42 provides for deduction of expenditure incurred on prospecting for or extraction or production of mineral oil whereas section 44BB contains special provisions for computing profits and gains in connection with the business of exploration or extraction or production of mineral oils. The head note itself indicates that section 42 is a special provision for deduction of expenditure incurred on prospecting, extraction or production of mineral oils.”(Para 16)
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“Analysing section 42(1), it becomes clear that the said section is a special provision for deduction in the case of business of prospecting, extraction or production of mineral oils. As stated above, section 42(1), inter alia, provides for deduction of certain expenses.” (Para 18)
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“The above analysis shows that section 42 provides for deduction for expenses provided such expenses/allowances are provided for in the PSC. The PSC in question provides for both capital and revenue expenditure. It also provides for a method in which the said expenses had to be accounted for. The said PSC is an independent accounting regime which includes tax treatment of costs, expenses, incomes, profits, etc. It prescribed a separate rule of accounting.” (Para 20)
“Therefore the PSC represented an independent regime. The shares of the Government and the contractors were also determined on that basis. Section 42 is inoperative by itself. It becomes operative only when it is read with the PSC. Expenses deductible under section 42 had to be determined as per the PSC.
This implied that expenses had to be accounted for only as contemplated by the PSC. (Para 22)
“The said ‘PSC accounting’ obliterated the difference between capital and revenue expenditure. It made all kinds of expenditure chargeable to the profits and loss account without reference to their capital or revenue nature. But for the PSC accounting there would have been disputes as to whether the expenses were of revenue or capital nature. In view of the special accounting procedure prescribed by the PSC, Accounting Standard 11 had to be ruled out.”
The above observations make it clear that: (i) section 42, being a special provision, is a code by itself for computing the income from business of providing for, or production of mineral oil in India, (ii) it provides that the assessee would be entitled to deduct any expense which is referred to in the PSC, whether capital or revenue in nature. If the expenditure claimed as deduction is in accordance with the provisions of PSC then it has to be allowed as per the decision of the Hon’ble apex court, The fact that even capital expenditure is allowable as deduction under section 42 itself shows that it overrides the provisions of section 37 of the Act. Thus, the scheme of the Act makes it clear that the provisions of section 42 would prevail over general provisions of computing the income contained in sections 30 to 38. Hence, in our opinion, the provisions of section 40 cannot be invoked where the income is to be computed under section 42 of the Act. There is no dispute that the payment was made by the assessee as per the provisions of the PSC. Particular reference can be made to section 3.1.4 of the PSC. Therefore, in our view, the assessee is entitled to deduction in respect of payment made by it to its parent company.