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TMI Blog2012 (5) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue expenditure? 3. Whether expenditure of Rs. 92,67,841/- incurred by the Assessee on fully convertible debenture issue is revenue expenditure or capital expenditure? 3. We are concerned with the assessment year 2005-06. The assessee is a company engaged in the manufacture of switch gears, energy meters, cables and wires, electrical fans, compact florescent lamp and related components. It also trades in luminaires, lighting fixtures and exhaust fans. 4. As regards first substantial question of law, the brief facts are as follows. The assessee paid a sum of Rs. 14,71,095/- to M/s. CSA International, Chicago, Illinois, USA for the purpose of obtaining witness testing of AC contractor as part of CB report and KEMA certification. The US Company had specialised knowledge and facilities for carrying out the type of testing and the necessary certification, which was required by the assessee. In the course of the assessment proceedings, the Assessing Officer noticed that the assessee had not deducted tax at source under Section 195 of the Act from the amount paid to the US Company. He accordingly proposed to disallow the payment by invoking Section 40(a)(ia) of the Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment made by the assessee to the US Company was for obtaining technical services for the purpose of its business and such services were utilised in the manufacture and sale of the assessee's products. He accordingly agreed with the Assessing Officer that Section 195 of the Act was applicable. He, therefore, held that the amount was rightly disallowed under Section 40(a)(ia) for not being subjected to deduction of tax. 7. The assessee carried the matter in further appeal to the Tribunal in ITA No. 1300/Del/2010. Several contentions were raised before the Tribunal on behalf of the assessee. The principal contentions were: - (a) That Section 9(l)(vii)(b) of the Act exempted from tax the fees for technical services if they were paid for services which were utilised by the assessee in a business or profession carried on outside India or for the purpose of making or earning any income from any source outside India. Since the assessee was making exports to other countries, the fees for technical services were paid for the purpose of making or earning income from a source outside India and hence the payment was not chargeable to tax in India. There was thus no liability to deduct tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not denied that the utilisation of the testing and certification was in respect of the exports. In view of the above findings, the Tribunal deleted the disallowance made under Section 40(a)(ia) of the Act. 9. It is against the aforesaid decision of the Tribunal that the Revenue has come in appeal before this Court. It appears to us on a reading of the orders of the departmental authorities and the order of the Tribunal that there is no dispute that the amount paid by the assessee to the US Company represented "fees for technical services" within the meaning of Section 9(l)(vii)(b) of the Act. In fact, to the specific query put by us in the course of the hearing to the learned counsel for the assessee, he frankly stated that he could not dispute this position, having regard to the wide definition of "fees for technical services" in the aforesaid provision. If that is so, the only question which we are required to examine is (a) whether the fees were payable in respect of services utilised in a business or profession carried on by the assessee outside India or (b) they were paid for the purposes of making or earning any income from any source outside India. In either of these two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales and, hence, the source for royalty is the sales outside India. Since the source for royalty is from the source situate outside India, the royalty paid on export sales is not taxable. The Appellate Tribunal was therefore correct in holding that the royalty on export sales is not taxable within the meaning of section 9(1)(vi) of the Income-tax Act." 11. The judgment of the Madras High Court certainly supports the contention of the learned counsel for the assessee. In an earlier judgment in CIT v. Anglo French Textiles Ltd. [1993] 199 ITR 785, a Division Bench of the Madras High Court had occasion to consider a somewhat similar question arising under Section 9 of the Act. In that case the assessee was a company incorporated under the French laws which were applicable to possessions in Pondicherry in India. It had a textile mill in Pondicherry and its activity consisted in the manufacture of yarn and textiles as well as export of textiles from Pondicherry. The entire business operations were confined to the territory of Pondicherry. After the merger of Pondicherry with India in August, 1962, the Income Tax Act was extended to Pondicherry w.e.f. 1.4.1963. Till then, the French law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mport entitlements constituted a source of income within the meaning of Section 9 of the Act as to deem the import entitlements as having accrued or arising in India." This earlier judgment of the Madras High Court does not appear to have been brought to the notice of the Division Bench which decided the later case. The observations of the Madras High Court in the earlier case, which we have quoted above, clearly suggest that the export activity or export sales were the source of the import entitlements and the export activity took place in Pondicherry and it was only on fulfilment of the export activity that a right to receive the import entitlement/incentive accrued in favour of the assessee. Since the export activity was fulfilled in Pondicherry, the source of income was located in Pondicherry. Applying this judgment to the facts before us in the present case, we have to conclude that the export activity having taken place or having been fulfilled in India, the source of income was located in India and not outside. Moreover, just as in the Madras case it was held that the mere fact that the import entitlements which had their source in Bombay, did not constitute a source of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the person who make payment for the export sales as the source located outside India from which assessee earned profits. The export contracts obviously are concluded in India and the assessee's products are sent outside India under such contracts. The manufacturing activity is located in India. The source of income is created at the moment when the export contracts are concluded in India. Thereafter the goods are exported in pursuance of the contract and the export proceeds are sent by the importer and are received in India. The importer of the assessee's products is no doubt situated outside India, but he cannot be regarded as a source of income. The receipt of the sale proceeds emanate from him from outside India. He is, therefore, only the source of the monies received. The income component of the monies or the export receipts is located or situated only in India. We are making a distinction between the source of the income and the source of the receipt of the monies. In order to fall within the second exception provided in Section 9(1)(vii)(b) of the Act, the source of the income, and not the receipt, should be situated outside India. That condition is not satisfied in the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee in the present case since the contention here is that the source of income is the export sales and the export sales are located outside India. 15. For these reasons we are unable to hold that the assessee's case falls under the second exception provided in Section 9(1)(vii)(b) of the Act. In other words, we are unable to accept that the fees for technical services were paid by the assessee to the US company for the purpose of making or earning any income from any source outside India. 16. The result of our discussion is that the fees for technical services are taxable in the hands of the US Company under the provisions of the Act. The question to be considered then would be whether there is anything in the agreement for avoidance of double taxation between India and USA which would exempt or reduce the burden of taxation in respect of the fees for technical services received by the US Company. This aspect of the matter has not been examined by the Tribunal, though raised before it by the assessee, since there was no occasion for the Tribunal to do so on account of the view it took regarding the taxability of the fees for technical services under the Act. It is axi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Appeals), there was no provision in the Act permitting the allowance of the expenses mentioned above during the construction period or during the period before the assets were first put to use. He noted that the assessee was not able to substantiate the contention that it was only a case of expansion of the existing business and was not able to lead evidence regarding interlacing and interdependence between the existing and new units. He further noted that in the accounts the assessee had capitalised the expenses. In this view of the matter he upheld the disallowance. 19. The assessee carried the matter in further appeal before the Tribunal. The Tribunal examined the director's report, the financial statements and the notes appended thereto etc. and found that there was complete interlacing and intermingling of the funds of the assessee in all its units besides there being a common management. The Tribunal also referred to the judgment of this Court in CIT v. Monnet Industries Ltd. [2009] 221 CTR 266 and applying this decision to the facts found, it held that the expenditure was revenue in nature having been incurred for the expansion of the existing business and accordingly dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Coopers (P) Ltd. 5332500/- (ii) Paid to M/s. Wadia Chandy & Co. 639450/- (iii) Payment M/s. KPMG India Pvt. Ltd. 4,88,768/- Total 64,60,718/- 22. In addition to the aforesaid expenditure, the assessee also paid interest of Rs. 28,07,123/- on the debentures in the relevant previous years. The aggregate of all the four items of expenditure came to Rs. 92,67,841/-. 23. The above expenditure was claimed as revenue expenditure in the return of income. The Assessing Officer was of the view that the debenture issue was in fact an issue of equity share capital to the Mauritius Company and accordingly the entire expenditure should be disallowed as capital expenditure. In support of this conclusion he referred to the board resolution in which it was stated that the FCDs would be converted into equity shares on or before 12.6.2006 and these shares would be issued to the Mauritius Company. It was also mentioned in the resolution that the Mauritius Company would be entitled to bonus shares in the ratio of 1:1 and they will be allotted at the time of conversion of the debentures. According to the Assessing Officer, this actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is connection may be made to the leading judgment of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52. The question before us however, is whether it is a debenture issue or an issue of share capital involving the strengthening of the capital base of the company. Though it prima facie appears that there are sufficient facts to indicate that what was contemplated was an issue of shares to the Mauritius Company under the Investor Agreement which would result in strengthening of the assessee's capital base, having regard to the judgments cited on behalf of the assessee, in which it has been held that despite indications to the effect that the debentures are to be converted in the near future into equity shares, the expenditure incurred should be allowed as revenue expenditure on the basis of the factual position obtaining at the time of the debenture issue, we are not inclined to take a different view. The following cases have been cited on behalf of the assessee in support of the view that even in such a situation the expenditure is allowable as revenue expenditure: - (i) CIT v. East India Hotels Ltd. [2001] 252 ITR 860 (Cal.) (ii) CIT v. ITC Hotels ..... X X X X Extracts X X X X X X X X Extracts X X X X
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