INCOME TAX ACT, 1961

Tax deduction at source- Applicability of section 195-Disallowance under section 40(a)(i)-Profits earned under section 44BB

Assessee was a non-resident company incorporated at Australia engaged in prospecting for and production of mineral oils in India. The exploration and production activities were carried out by assessee in various contract areas under the production sharing contract (PSC), a multi-party agreement between the assessee, the other joint venture partners and the Government of India. Such agreements were approved by the Parliament as per the requirements of the provisions of section 42. AO found that assessee had made certain payments to its non-resident parent company in respect of the expenditure incurred by the parent company in connection with the business activity carried on by the assessee in India. These amounts were claimed as revenue expenditure by assessee in computing its income. The assessing officer proposed to disallow the above deduction under section 40(a)(i) on the ground that the assessee failed to deduct the tax at source under section 195. Held:Even capital expenditure was allowable as deduction under section 42 itself showed that it was overriding the provisions of section 37. Thus, the scheme of the Act made it cleared that the provisions of section 42 would prevail over general provisions of computing the income contained in sections 30 to 38. Hence, the provisions of section 40 could not be invoked where the income was to be computed under section 42. There was no dispute that the payment was made by the assessee as per the provisions of the PSC. Particular reference could be made to section 3.1.4 of the PSC. Therefore, assessee was entitled to deduction in respect of payment made by it to its parent company.

Income Tax Act, 1961 Section 195

Case Law Analysis:Cairn Energy Indian (P.) Ltd. v. Asstt. CIT [2009] 126 TTJ 226 (CHENNAI)

Decision: In favour of Assessee.
A.Y. 1996-97 to 1999-2000

Cairn Energy India (P) Ltd. v. Asstt CIT