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TMI Blog2013 (5) TMI 639X X X X Extracts X X X X X X X X Extracts X X X X ..... ments disallowed - Held that:- CIT(A) has decided this issue against the assessee and resultantly there was no occasion for the Revenue to challenge the same as it is simple and plain that when deduction has been allowed on account of loss arising on revaluation of investments in earlier years, the subsequent write back of the same amount cannot escape taxation. Therefore, hold that the amount is chargeable to tax. However, the A.O. is directed to ensure that the same amount is not taxed twice in the assessment for the current year. Benefit on account of unmatured forex contracts as on 31.03.2000 credited to the Profit and loss account for the year under appeal is chargeable to tax. Deduction on account of mobilization of India Millennium Deposit issued by the State Bank of India - whether be treated as fees for technical services? - A.O. held that the provisions of section 40(a)(i) read with section 195 were applicable - Held that:- It was SBI who came out with IMD issue with SBI Capital Markets Ltd. as Advisor and Lead arranger. The services rendered by the arrangers or sub-arrangers were only a small part of the management of the IMD issue. It is further significant to not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd category by relying on the ratio decidendi of Madras Industrial (1997 (4) TMI 5 - SUPREME Court) thereby by allowing amortization over the period of deposit. The expenditure has no relation whatsoever with the life of long term deposits received by the assessee bank from SBI. As this expenditure is revenue in nature and not a deferred revenue expenditure, the same has to be allowed as deduction in entirety in the year of incurring itself without spreading it over the term of deposit. Thus the deduction should be allowed in the year under consideration. The AO is directed to ensure that no allowance of the unamoritzed expenditure is allowed in subsequent years. The ground raised by the assessee in this regard is accordingly allowed. - ITA No.9596/Mum/2004, ITA No.214/Mum/2005, CO No.305/Mum/2006 - - - Dated:- 22-5-2013 - Shri R. S. Syal, AM And Shri Vivek Varma, JM,JJ. For the Petitioner : Shri Mahesh Kumar [CIT-DR] Shri A. K. Jain [CIT-DR] For the Respondent : Shri Madhur Agarwal ORDER Per R. S. Syal (AM) :- These two cross appeals - one by the assessee and the other by the Revenue - and a cross objection by the assessee arise out of the order passed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Ground no.1 of the Revenue's appeal is against granting full exemption to interest income of Rs. 4.54 crore u/s 10(15)(iv)(h) of the Act. It is seen that similar issue arose in the assessee's appeals for assessment years 1998-99 to 2000-2001. In the order passed by the tribunal for such years, a copy of which has been placed on record, exemption u/s 10(15) has been granted on the gross amount of interest. At the same time, section 14A has also been held to be applicable by the tribunal. Adverting to the facts of the instant year, we find that the Assessing Officer made disallowance on account of interest and operating expenses on pro-rata basis. Insofar as the disallowance of interest is concerned, it is an admitted position that the assessee's capital and free reserves are far in excess of the amount invested in securities earning interest free income. That being the position, there cannot be any disallowance on account of interest paid for making investment in such securities. Similar view has been canvassed in the afore-noted tribunal order passed in assessee's onw case. As regards the operating expenses, the Tribunal in earlier years has directed to sustain disallowance a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matrix of this issue is that the assessee claimed deduction of Rs. 13.88 crore on account of mobilization of India Millennium Deposit (hereinafter called "IMD") issued by the State Bank of India, by giving following note to its computation of income :- "The bank has earned commission on collection and mobilization of deposits for the State Bank of India under its India Millenium Deposit Scheme (IMD). The bank has also incurred expenses including Sub-arrangers fees for this purpose. The net amount has been amortised in the books of accounts. In the return of income the entire amount has been taken into account for the purpose of computing the total income." 10. On being called upon to furnish details of the same, the assessee stated that State Bank of India (SBI) appointed it as (i) Arranger for mobilizing the deposits from the eligible depositors under the IMD programme; and (ii) Collecting bank for receiving and handling application forms. For rendering the above services, SBI paid Arranger fee as per the approved structure of 0.5% to 1.5% of the amount of deposits mobilized by it and commission of 0.25% on the amounts collected by the designated branches of the assessee- bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 14.87 crore was not allowable on this score. Without prejudice to his above discussed two view points, he further noticed that the net expenditure of Rs. Rs. 14.87 crore was amortized over a period of 60 months with a deduction of Rs. 99.16 lakh for the current year. In his opinion, only such sum of Rs. 99.16 lakh was deductible in the light of the judgment of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Limited v. CIT [(1997) 225 ITR 802 (SC)]. In the final computation of total income, the Assessing Officer made disallowance of Rs. 26.75 crore. In the first appeal, the assessee explained the nature of services rendered by Arrangers / Sub-arrangers and collecting banks. By highlighting certain other important facets of the case, the assessee contended that the amount paid to various sub-arrangers was in the nature of `Brokerage/commission' and not `Fees for technical services'. The learned CIT(A) got convinced with the assessee's contention in this regard and held that the amount paid to sub-arrangers was in the nature of commission/brokerage/incentives and not `Fees for technical services' (FTS) u/s 9(1)(vii). Consequently, there was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest ..... or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force...'. Section 5(2) of the Act provides that the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which - (a) is received or deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Section 9 of the Act explains the incomes which are deemed to accrue or arise in India. Circular No.786 dated 07.02.2000 states that commission paid to non-resident agents is not chargeable to tax in India as they operate outside the country and no part of income arises in India. In view of this Circular, it is clear that if the amount paid to such non-resident sub-arrangers assumes the character of commission / brokerage, then it would not be chargeable to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the assessee that it is a consideration for any construction or assembly etc. In that view of the matter, we need to concentrate on determining as to whether such payment made to sub-arrangers can be described as a consideration for "managerial" or "technical" or "consultancy services". In order to appreciate the true character of payment made to sub-arrangers, it is of paramount importance to consider the exact nature of services rendered by them, which are extracted hereunder from the impugned order:- "(a) Arranger / sub-arranger * Canvassing for the IMD amongst the NRIs in the country through the branches. * Explaining to the potential customers, the salient features of IMD. * If necessary, printing own marketing material. * Distributing the stationery and other printed material. * Assisting the customers in filling the application. * Obtaining necessary documentation. * Ensuring that the local laws are complied with. * Forwarding to the collecting banker, the duly filled in application forms. (b) Collecting Banks. * Ensuring that each cheque/draft is made in favour of `SBI, NRI branch, Mumbai a/c IMD' and payable in US/UK or Germany for USD, GBP a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sibilities on touchstone of Explanation 2 to section 9(1)(vii) for ascertaining as to whether they fall within the purview of managerial or technical or consultancy services. 15. The learned Departmental Representative was fair enough to candidly accept, and rightly so, that the activities done by the sub-arrangers were not in the nature of "consultancy services". In that view of the matter, we are left with examining as to whether the services rendered by the sub-arrangers can be construed as managerial or technical. Firstly we espouse `technical services'. In order to bring a particular service within the purview of `technical service', it is sine qua non that some sort of technical knowledge or technical skill or technical education must be essentially required for doing the activity. If the work does not require any technical knowledge, qualification or experience, then the same cannot be designated as rendering of a `technical service'. On a pointed query, the learned Departmental Representative could not elaborate as to how and what sort of technical knowledge or qualification or expertise was required for discharging the functions as sub-arranger or collecting bank. From t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s discussed in the order, were related to : "... all the aspects of bringing out the Euro issues including the fixing of the price of the issue, analyzing the accounting results and resource basis of the company with a view to find out the strengths and weakness of the company, presenting them in a proper format, updating the accounting results of the assessee in tune with the international audit practices, getting them printed, putting up road shows and in totality marketing the issue successfully". Even a cursory glance at the services rendered in the case of Mahindra Mahindra (supra) gives a fair idea of `management of the GDR issue'. The activities of the lead managers exended to all the aspects of the GDR issue. If the lead managers in that case had outsourced one or more activities from some outside party, was it possible to contend or accept that such outside party, doing separate activity incapable of independently achieving the desired overall result, was also manager to the issue. The answer is ostensibly in the negative. If execution of sub-activities of the overall activity are considered as managing the activity independently, then even a peon carrying cheque for dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sub- arrangers. Further in some cases, the sub-arrangers themselves subscribed to IMDs for which they got the requisite fees. Viewed from any angle, the said sum of Rs. 26.75 crore cannot be considered as fees for `managerial services'. 20. The AO seems to have been swayed by the designation of `fees' given to sub-arrangers in adopting a view that it was a fees for technical services. It goes without saying that the nomenclature of a transaction does not change its true character. It is the real essence and character of a transaction which needs to be looked into. On examination of all the relevant facts obtaining in this case, we have no hesitation in concluding that it was simply a commission or brokerage paid by the assessee to its sub-arrangers. The fact that it was characterized as "fees", is of no consequence. 21. We, therefore, sum up our conclusion by holding that the amount paid by the assessee to the non-residents sub-arrangers is not a fees for managerial or technical or consultancy services. Hence, the same cannot be brought within the ambit of `fees for technical services' as per section 9(1)(vii) of the Act. If this payment is not fees for technical services b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in the first year. The Tribunal accepted this position by holding that the entire discount of Rs. 3 lakh be allowed in one go as expenditure incurred for the purpose of business. The Hon'ble High Court refused to grant deduction for Rs. 2,87,500 representing the unamortized part of the discount on debentures. When the matter came up before the Hon'ble Summit Court, it was found that though the liability was incurred in the accounting year but such liability was continuing one which stretched over a period of 12 years. It, therefore, held that the deduction of only Rs. 12,500 was allowable. It is in the backdrop of the ratio emanating from this judgment, that the learned CIT(A) held that the unamortized expenditure of Rs. 13.88 crore was not deductible in the current year which was required to be spread over the remaining period of 5 years. 23. At this stage, it would be relevant to note the judgment of the Hon'ble Supreme Court in India Cement Limited v. CIT [(1966) 60 ITR 52 (SC)], in which it has been held that the expenditure incurred in raising a loan is a revenue expenditure liable to be allowed in the year of its incurring. 24. Broadly, there may be three types of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of incurring as per the ratio decidendi of India Cements (supra). The authorities below have wrongly matched it with the second category by relying on the ratio decidendi of Madras Industrial (supra) thereby by allowing amortization over the period of deposit. The expenditure has no relation whatsoever with the life of long term deposits received by the assessee bank from SBI. As this expenditure is revenue in nature and not a deferred revenue expenditure, the same has to be allowed as deduction in entirety in the year of incurring itself without spreading it over the term of deposit. We, therefore, set aside the impugned order on this score and direct that the deduction should be allowed for Rs. Rs. 14.87 crore in the year under consideration. The AO is directed to ensure that no allowance of the unamoritzed expenditure is allowed in subsequent years. The ground raised by the assessee in this regard is accordingly allowed. 25. In view of our decision on the cross appeals filed by the assessee as well as the Revenue, the cross objection filed by the assessee has become academic. 26. In the result, the cross appeals are partly allowed and the cross objection is dismissed. Orde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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