Madras High Court upholds tax demand against Vedanta over payments to foreign parent company

The Madras High Court on June 2 upheld tax demands against Vedanta Limited, successor-in-interest to Cairn India Limited, over payments made to its non-resident parent company in connection with oil exploration operations [Vedanta Vs ACIT]

A Division Bench of Justices G Jayachandran and R Sakthivel dismissed three tax appeals filed by Vedanta and upheld an order of the Income Tax Appellate Tribunal (ITAT).

Court held "As a result, the substantial questions of law are answered against the appellant/assessee. Consequently, the common order of the Income Tax Appellate Tribunal is upheld."

The case involved the issue of whether payments made by Cairn India to its Australian parent company Cairn Energy Asia Limited towards expenses incurred for business activities in India, were mere reimbursements or payments chargeable to tax.

Cairn India became part of Vedanta through a corporate acquisition and later merger.

In this case, the original assessee was Cairn Energy India Limited / Cairn India Limited, which was involved in the Ravva oil and gas project.

The judgment recorded that Vedanta Limited as the successor-in-interest to Cairn India Limited and hence Vedanta became the appellant in the tax appeals.

The dispute related to assessment years 1998-99, 1999-2000 and 2000-01. The assessing officer found that Cairn India had made payments to its non-resident parent company and third parties without deducting tax at source.

The company argued that the payments were made on a cost-to-cost basis under a production sharing contract (PSC) and did not contain any profit element. It said that since the payments were only reimbursements, there was no income chargeable to tax in India and therefore no obligation to deduct tax at source under Section 195 of the Income Tax Act.

However, the Income Tax Department contended that the payments were in the nature of fees for technical services or normal service charges. It argued that the assessee should have either deducted tax at source or approached the assessing officer under Section 195(2) for determination of the taxable portion.

The company was held liable for tax and interest under Sections 201(1) and 201(1A) of the Income Tax Act.

For assessment year 1998-99, the short deduction was computed at ₹75.99 lakh with interest of ₹41.92 lakh. For assessment year 1999-2000, the short deduction was ₹70.28 lakh with interest of ₹29.77 lakh. For assessment year 2000-01, the short deduction was ₹13.62 lakh with interest of ₹3.88 lakh.

The Court noted that the assessee had claimed payments under heads such as time cost wages, consultant cost reimbursement, financing documentation drafting, IT and communication, taxation consultants and international travel expenses.

However, it found that the company had failed to substantiate the alleged reimbursements with particulars or break-up details.

“A consolidated amount claimed as deduction under the head ‘Reimbursement of Expenses’ to the non-resident parent company under the PSC is impermissible,” the Court held.

The Bench said that where a production sharing contract restricts reimbursement to a cost-to-cost basis, Section 44BB of the Income Tax Act may not apply. However, if an assessee makes a consolidated claim of expenses under the head reimbursement without break-up details, relief cannot be granted unless the taxability is determined under Section 195(2).

“The ‘arm’s length’ principle laid down in Article 1.8 of PSC is not a Rule of Presumption,” the Court said.

The Court also rejected Vedanta’s alternative argument based on the Double Taxation Avoidance Agreement (DTAA) between India and Australia.

It held that during the relevant assessment years, double taxation relief was restricted to foreign governments and could not be invoked by private parties in the manner claimed by the assessee.

“The alternate plea to take umbrage under DTAA is a misconceived claim made to defeat the legal right of the Revenue,” the Court said.

Hence, it answered all questions of law against Vedanta and dismissed the appeals.

Senior Advocate Srinath Sridevan appeared for Vedanta along with advocates MV Swaroop, Gayathri, B Devadharshini, Hredai, Thivakkaran Rajagopalan and Sankar.

Senior Standing Counsel B Ramana Kumar appeared for the Income Tax Department along with Junior Standing Counsel Avinash Krishnan Ravi.

[Read Judgment]