2008 (9) TMI 975 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for deduction under section 80HHC for exports made from a third country.
2. Disallowance of Rs. 41,55,712 under section 40(a)(i) for non-deduction of tax at source on technical service charges.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80HHC for Exports Made from a Third Country:

The primary issue revolves around whether the assessee is eligible for a deduction under section 80HHC for goods exported from the USA to Bangladesh, bypassing India. The Assessing Officer (A.O.) disallowed the deduction, arguing that the goods must be exported from India to qualify under section 80HHC. The CIT(A) allowed the deduction, emphasizing that the main objective of section 80HHC is to augment foreign exchange, which the assessee achieved.

The CIT(A) relied on precedents like the Bombay High Court's decision in Bombay Burma Trading Corporation and the ITAT Mumbai's decision in S.M. Energy Teknik and Electronics Ltd., which supported the view that physical export from India is not a necessity for claiming deductions under section 80HHC.

However, the revenue argued that the deduction under section 80HHC is strictly for exports out of India, as per the definition provided in the Income-tax Act and the Foreign Trade (Development and Regulation) Act, 1992 (FTDR Act). The revenue cited various judgments including Sanjeev Malhotra vs. CIT and Laxmi Industries vs. CIT, which upheld the requirement of physical export from India.

The Tribunal, agreeing with the revenue, held that the term "export out of India" necessitates the goods leaving Indian territory. Since the goods in question never entered or left India, the transaction did not qualify as "export out of India." Thus, the assessee was not entitled to the deduction under section 80HHC. The Tribunal preferred to follow the High Court decisions over the ITAT decisions, setting aside the CIT(A)'s order and restoring the A.O.'s decision.

2. Disallowance of Rs. 41,55,712 under Section 40(a)(i) for Non-Deduction of Tax at Source on Technical Service Charges:

The second issue concerns the disallowance of Rs. 41,55,712 by the A.O. under section 40(a)(i) due to non-deduction of tax at source on payments made for technical service charges. The assessee argued that the payments were for training services provided outside India by foreign companies without a permanent establishment in India, thus not taxable in India under Article 7 of the DTAA between India and Germany.

The CIT(A) accepted the assessee's argument, noting that the payments were not for technical services as defined under section 9(1)(vii) but for training personnel to use imported products. The Tribunal upheld the CIT(A)'s decision, referencing the ITAT Delhi's ruling in DCIT vs. Parasrampuria Synthetics Ltd., which distinguished between rendering services using technical knowledge and charging fees for technical services.

The Tribunal concluded that since the payments were for training services and not for technical services as per the definition in section 9(1)(vii), the provisions of section 40(a)(i) were not applicable. Therefore, the disallowance was rightly deleted by the CIT(A).

Conclusion:

The appeal was partly allowed. The Tribunal denied the deduction under section 80HHC for exports from a third country but upheld the deletion of the disallowance under section 40(a)(i) for technical service charges.