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TMI Blog2016 (5) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... e to prove that the technical services were not utilised for its business activities of production in India, but it is further necessary for the assessee to show that the technical services were utilised in a business carried on outside India. The meaning of the term source of income in section 9(1)(vi)/(vii) of the Act has been a subject matter of dispute since over some time. It is not the payer of income but the location of the manufacturing activity and concluding of the export contract from India that will determine the source of income. Further the assessee needs to specifically demonstrate that the technical services were utilised in a business carried on outside India in order to fall under the exception. Under the above facts and circumstances, the Hon’ble Delhi High Court in the above case has held that the assessee’s case does not fall within the second exception provided in Section 9(1)(vii)(b) of the Act. Accordingly, respectfully following the decision of the Hon’ble Delhi High Court in the case of CIT v. Havells India Ltd. (2011 (5) TMI 530 - ITAT DELHI ), we hold that the FTS paid to KEMA Netherlands and CESI, Italy, TDS is, therefore, deductible under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the assessee is misplaced in moving the Cross Objections; therefore, same should be dismissed being time barred 240 days and the cross objections filed by the assessee should not be admitted. 3. We have heard both sides, perused the materials on record and gone through the orders of authorities below. In this case, the ld. CIT(A) has passed the first appellate order on 11.01.2013 for both the assessment years 2003-04 and 2004-05, wherein, challenging the jurisdiction of reopening of assessment under section 147 of the Act has been quashed by the ld. CIT(A) and held to be valid and dismissed the ground raised by the assessee. Against the order of the ld. CIT(A), the assessee has not preferred any appeals before the Tribunal. Aggrieved by the order of the ld. CIT(A) on other issue, the Revenue has filed appeals for both the assessment years with regard to the issue of deletion of disallowance under section 40(a)(i) of the Act. The appeals filed by the Revenue were posted for hearing on 24.06.2013 and notices were issued to both the parties. Though there was no representation from assessee s side on the date of hearing fixed on 24.06.2013, but when the hearing of the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble High Court dismissed the appeal filed by the assessee and confirmed the order of this Tribunal since the assessee had not taken proper plea to show sufficient cause for condoning the delay in filing the appeal . In the present case, the negligent attitude of the assessee cannot be taken care to preserve the right of filing its cross objections since the assessee has slept over for 240 days and not explained sufficient cause to condone the delay in filing the cross objections. Therefore, the affidavits filed for condonation of delay stand dismissed and accordingly, both the cross objections filed by the assessee are dismissed. 4. The only common ground raised in both the appeals of the Revenue for the assessment years 2003-04 and 2004-05 is with regard to deletion of disallowance under section 40(a)(i) of the Income Tax Act, 1961 [ Act in short] in respect of payment to non-residents for the purpose of testing charges. For the assessment year 2001-02, the Revenue has raised two grounds viz., (1) the ld. CIT(A) erred in holding that the reassessment proceedings are invalid and (2) deletion of disallowance made by the Assessing Officer of ₹.41,73,000/- claimed under VRS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer on 31.10.2008. The assessment under section 143(3) r.w.s. 147 of the Act was completed on 19.12.2008 by making an addition of ₹.41,73,000/- and revised the loss to the extent of ₹.2,79,48,783/-. 8. On appeal, after considering the submissions of the assessee and facts of the case, the ld. CIT(A) has observed that the reopening of assessment under section 147 of the Act beyond 4 years from the end of the relevant assessment year was bad in law and held that the assessment order passed under section 143(3) r.w.s. 147 of the Act dated 19.12.2008 is invalid and quashed by allowing the ground raised by the assessee. 9. Aggrieved, the Revenue is in appeal before the Tribunal. 10. We have heard both sides, perused the materials on record and gone through the orders of authorities below. In this case, original assessment under section 143(3) of the Act was completed on 29.01.2004. In the return of income, the assessee had claimed a sum of ₹.4,79,09,000/- towards payment of VRS launched during the various financial years prior to the assessment year. The Assessing Officer restricted the allowance of ₹.88,07,800/- being 1/5th of 4,40,39, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvalid and quashed the reassessment after considering the provisions of the Act as well as various judicial precedents. Thus, we find no infirmity in the order passed by the ld. CIT(A) with regard to reopening of assessment. Once the assessment order under section 143(3) r.w.s. 147 of the Act was held to be invalid and quashed by the ld. CIT(A), the addition made in the reassessment order has no legs to stand. Under the above facts and circumstances, the appeal filed by the Revenue stands dismissed. I.T.A. Nos. 662 663/Mds/2014 [AY: 2003-04 2004-05] 13. The only common ground raised in both the appeals of the Revenue is with regard to deletion of disallowance under section 40(a)(i) of the Act in respect of payment to non-resident for the purpose of testing charges. 14. The Assessing Officer has observed from the financial statement filed by the assessee that the assessee has made payment of ₹.1,01,37,434/- for the purpose of testing charges to the non-residents in foreign currency without deducting TDS under section 195 of the Act. Hence, the assessee was show-caused to explain as to why the same should not be disallowed as per the provisions of section 40(a)(i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny's Circuit Breakers and components, thereby make these products saleable in export markets. For the above purpose, the assessee has paid ₹.1,01,37,434/- towards testing charges and claimed deduction of the expenditure. However, the Assessing Officer has observed that the assessee has not deducted TDS under section 195 of the Act towards the payment for the purpose of testing charges to the nonresidents in foreign currency and therefore, disallowed the same and added to the total income of the assessee. On appeal, the ld. CIT(A) mainly by following the decision of the Delhi Benches of ITAT in the case of Havells India Ltd. v. Addl. CIT (supra), observed that the assessee s case is squarely covered by the exception provided in clause (b) of section 9(1)(vii) of the Act and held that no income has accrued or arisen in India on these transactions and therefore TDS is not deductible and allowed the ground raised by the assessee. 18. Against the decision of the Delhi Benches of the ITAT in the case of Havells India Ltd. v. Addl. CIT (supra), the Department has preferred an appeal before the Hon ble Delhi High Court and the Hon ble High Court in the case of CIT v. Havells I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount of ₹.14,71,095/- fell to be disallowed. The Assessing Officer also referred to Article 12(4)(b) of the agreement for the avoidance of double taxation entered into between India and USA and observed that the payment was also covered under the said article as fees for included services as defined therein. According to the Assessing Officer, the testing report and certification represented technical services which made available technical knowledge, experience and skill to the assessee because they were utilized in the manufacture and sale of the products in the business of the assessee. In this view of the matter the Assessing Officer disallowed the amount of ₹.14,71,095/- under Section 40(a)(ia) of the Act. 6. The assessee appealed to the CIT (Appeals) against the disallowance. The CIT (Appeals) referred to the judgment of the Kerala High Court in Cochin Refineries Ltd. v. CIT, (1996) 222 ITR 354 and held that the 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 Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and certification has been applied by the assessee for its manufacturing activity within India. (c) The CIT (Appeals) has not specifically met the contention of the assessee, raised before him, that the technical services were rendered by the US Company outside India and the assessee has also utilised them outside India and the payment was also received by the US Company outside India. The assessee s contention was that the technical services were utilised for the purpose of making or earning any income from any source outside India and was therefore covered by the second exception made in Section 9(1)(vii)(b) of the Act. (d) The assessee has been able to show that the testing and certification were necessary for the export of its products and that these were actually utilised for such export and were not utilised for the business activities of production in India. The assessee has thus discharged its burden, whereas the Revenue has not been able to show to the contrary and they have 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with Section 9(1)(vi) which was concerned with payment of royalty by a person resident in India to a non-resident. Though that provision was concerned with royalty, the exceptions provided from taxability of the royalty income in the hands of the non-resident are the same as in the case of fees for technical services dealt with in Section 9(1)(vii)(b) of the Act. In that case the resident company paid royalty to a West German company. The royalty was payable on export sales effected by the resident-assessee. The question before the High Court was whether the Tribunal was right in law in holding that the royalty on export sales was not taxable within the meaning of Section 9(1)(vi) of the Act. The High Court held as under: - As far as royalty on export sales is concerned, that amount is also exempt under section 9(1)(vi) of the Income-tax Act. Though the royalty was paid by a resident in India, it cannot be said that it was deemed to have accrued or arisen in India as the royalty was paid out of the export sales 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 sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the Textile Commissioner and, therefore, the income arose within the taxalite territories. This argument was rejected by the Madras High Court by holding that the right to receive the import entitlements arose when the export commitment was fulfilled by the assessee in Pondicherry, though such amount was subsequently ascertained or quantified . It was also argued on behalf of the Revenue before the High Court that the import entitlement should be regarded as a source of income in the taxable territories and under Section 9(1) of the Act, the income arising out of the encashment of the import entitlements should be deemed to accrue or arise in the taxable territories. This argument was also rejected by the Madras High Court which held: - Equally, it is difficult to regard the import entitlements as a source of income which should be looked at from a practical view-point and not merely as an abstract legal concept. We are, therefore, unable to agree with the contention of the learned counsel for the Revenue that the import 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommittee (supra) as to what is a source of income have been approved by the Supreme Court in CIT v. Lady Kanchanbai, (1970) 77 ITR 123. The location or situs of a source of income is another aspect. The third aspect is the accrual of the income. Though it is true, as held by Kania, C.J., speaking for a Constitution Bench of the Supreme Court in CIT v. Ahmedbhai Umarbhai, (1950) 18 ITR 472 (SC) at page 479, that the place where the source of income is located may not necessarily be the place where the income also accrues, that question is not material in the present case because herein we are concerned only with the question as to the location of the source. The real question is whether the export sales proceeds received from goods manufactured and exported from India constitute a source inside or outside India. To decide the same we have to take a pragmatic and a practical view and not approach the question from a theoretical perspective. 13. Section 9(i)(vii)(b) contemplates a source located outside India. It is difficult to conceptualise the place/situs of the person who make payment for the export sales as the source located outside India from which assessee earned profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vity but also arose because of the sales of the products and if necessary a bifurcation of the income should be made on this basis and that portion of the income which is attributable to the export sales should qualify for the second exception. This argument is only a limb of the main contention that the income arises from the export sales and the source of the income is located outside India. We have already expressed our difficulty in accepting that argument. It is true that the profits arise both from the manufacturing activity and from the sale. There are several authorities dealing with this question in the context of cases where an assessee had its manufacturing facility in British India but sold the goods outside British India. In such cases, it has been held that the profits arose both from manufacture and the sales and that part of the profit which arises from sales outside British India would be exempt from tax: See Anglo French Textiles Co. Ltd. v. CIT, (1953) 23 ITR 101 (SC); CIT v. Ahmedbhai Umarbhai Co. (supra). But these cases are not of any assistance to the assessee in the present case since the contention here is that the source of income is the export sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the importer of the assessee s products is situated outside India, he is only the source of the monies received and he cannot be regarded as a source of income. 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 and this condition is not satisfied in the present case. 20. The assessee s case does not even fall under the first exception, since in order to get the benefit of the first exception it is not sufficient for the assessee to prove that the technical services were not utilised for its business activities of production in India, but it is further necessary for the assessee to show that the technical services were utilised in a business carried on outside India. 21. The meaning of the term source of income in section 9(1)(vi)/(vii) of the Act has been a subject matter of dispute since over some time. In keeping with few other judicial precedents, the Hon ble Delhi High Court has laid down that it is not the payer of income but the location of the manufacturing activity and concluding of the export contract from India that will determine the source ..... X X X X Extracts X X X X X X X X Extracts X X X X
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