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TMI Blog2020 (9) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... es - Revenue or capital expenditure - HELD THAT:- As decided in SHARP BUSINESS SYSTEM [ 2012 (11) TMI 324 - DELHI HIGH COURT] on the identical facts and circumstances, holding that non- compete fees is not eligible for depreciation u/s 32 of the income tax act, further, the above decision has considered the decision of the honourable Delhi High Court in case of Pitney Bowse ( I) Pvt Ltd [ 2011 (11) TMI 372 - DELHI HIGH COURT] which is relied upon by the ld AR], we respectfully following that decision dismiss the alternative contentions of the assessee for the claim of depreciation. In view of this ground number [2] of the appeal of the assessee is dismissed. Deduction u/s 80HHC - Characterization of income - interest income earned treated as part of the business income - HELD THAT:- The explanation given by the assessee clearly shows that energy meters are supplied to various electricity boards throughout the country and the supplies are made against open tenders and bank guarantees furnished to buyers against earnest money/ performance guarantees. The letter of credits is opened to import the materials required for manufacturing. Therefore, such interest income is related t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of reimbursement of expenses is also not tenable. Thus, we do not find any infirmity in the order of the lower authorities. Disallowance of sales incentive in respect of Shaenshah Scheme - HELD THAT:- As decided in own case for assessment year 2006 07 provision is created on scientific basis. We, therefore, do not find anything illegal or irregular in the findings of the id. CIT(A) and no interference is warranted. We, therefore, dismiss the second ground of appeal of the Revenue. TDS u/s 195 - disallowance u/s 40(a) (i) - payment to various foreign entities towards testing fees and certification charges outside India - whether no income has accrued or arisen to them in India? - HELD THAT:- As considered the order of the coordinate bench in Assessment Year 2005-06 in assessee s own case [ 2012 (5) TMI 449 - DELHI HIGH COURT] wherein, payment with respect to CSA International USAis not held to be a fees for technical services according to article 12(4)(b) of the Act. Accordingly, the payment to CSA International USA on identically facts and circumstances cannot be disallowed u/s 40(a)(i) of the Act. With respect to payment made Kema Quality BB Netherland it is also cov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year in question and consequently disallowance made by the Assessing Officer under section 40(a)(ia) of the Act in respect of the transaction charges cannot be sustained. Before us, no evidences were produced before us that there was any bona fide belief for non-deduction of tax at source as revenue was constantly saying that the tax at sources are deductible on such payments. No evidences were produced before us that the assessee was under a bona fide belief that tax is not deductible on such testing charges - Not shown, even if there is a belief, whether the same was bona fide or not. The other decisions relied upon by the learned authorised representative all were related to the provisions of Section 201 of the income tax that where there is a specific exclusion for good and sufficient reasons for non-deduction of tax at source. Such provisions are absent under the provisions of Section 40 (a)(i) of the act. In view of this, this argument of the assessee is rejected. As we have refused to read the conditions prescribed u/s 40(a) (ia) of the act of disallowance at the rate of 30% in case the payment is made to a resident in Section 40(a) (i) of the act, the another argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, ground No. 2 of the appeal is allowed. - ITA No. 6072/Del/2010, ITA No. 6073/Del/2010, ITA No. 466/Del/2011 - - - Dated:- 25-8-2020 - Shri Amit Shukla, Judicial Member And Shri Prashant Maharishi, Accountant Member For the Assessee : Shri Rohit Jain, Adv, Ms. Deepashree Rao, CA, Shri Vibhu Gupta, CA For the Revenue : Shri Saras Kumar, Sr. DR ORDER PER PRASHANT MAHARISHI, A. M. 01. This is a bunch of three appeals of the same assessee for two Assessment Years, which were argued together by the parties; therefore, same is disposed off by this common order. ITA no 6072/Del/2010 for A Y 2004-05 [By Assessee] 02. ITA No 6072/Del/2010 for Assessment Year: 2004-05 is filed by the assessee against the order of the ld CIT(A)-XII, New Delhi dated 07.12.2010 raising following grounds of appeal:- 1. That on the facts and in the circumstances of the case and the legal position, the learned CIT (Appeals) has erred in confirming the interest of ₹ 280276/- paid to Syndicate Bank as capital nature as against revenue in nature claimed by the appellant company. 2 (i) That on the facts and in the circumstances of the case and the legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 5 lakhs. iv. Additions on accounts of increase in authorised capital of ₹ 41012/. 04. The ld AO also noted that the assessee has claimed deduction u/s 80HHC of the Act of ₹ 41,45,160/-. The ld AO computed interest income as income from other sources against interest income offered by the assessee as business income . The assessee was also not allowed netting of the interest paid against interest received. The ld AO also deducted 90% of the amount of ₹ 64,38,525/- received from another group concern for common office and infrastructure facilities. Thus, 80HHC claim of the assessee was substantially reduced. 05. Against this order, assessee preferred an appeal before the ld CIT (A). The ld CIT(A) upheld the following adjustment/ additions:- i. Additions of ₹ 2,80,276/- interest expenditure holding it to be capital in nature. ii. Disallowance of ₹ 5 lakh on non compete fees holding the same to be capital in nature iii. The deduction under section 80HHC was also decided by him with income from FDR and NSC amounting to ₹ 444195/- as income from other sources. Even netting of the interest was not allowed relying on the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereon of ₹ 189342/- is already capitalized. He further referred to page No. 6 of the paper book to show that total expenditure of ₹ 8 crores in three units was already capitalized up to March 15 2004. He further referred to sanction letter dated 26.02.2004 of Syndicate Bank wherein, it is specifically mentioned that originally project cost of ₹ 15 crores initially sanctioned by SBI. He therefore, submitted that the interest of above term loan was for the capital expenditure already incurred for purchase and set up of the plant and machinery and it was already put to use before 15.03.2004 i.e. the date on which the amount of loan from syndicate bank was received. He also referred to provision of section 36(1)(iii) of the Act to show that the expenditure is required to be capitalized till the date on which the asset was first put to use. He therefore, submitted that disallowances by the lower authorities are not justified. 08. The ld DR relied upon the orders of the lower authorities. 09. We have carefully considered the rival contentions and perused the orders of the lower authorities. The facts placed before us shows that loan from Syndicate Bank was for &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing of various lights and its components, accessories having factory at Gurgaon under brand name of polestar . That company offered exclusive manufacturing of lighting components etc for the assessee. The agreement shows that assessee in the name of its subsidiary company has acquired and now owns Intellectual property, technical, information relating to design, style, specifications and manufacturing process of this Polstar lighting to be manufactured. By that manufacturing agreement, GS Lightings P Ltd and its shareholders and some other persons also have undertaken to not to use the trademark etc relating to this product. During the continuation of this agreement and after termination thereof, GSl and those persons will not use brand name or product, which is identical to the trademark or trade name acquired by assessee. On expiry of the manufacturing agreement, GSL is further to move the appropriate authority for cancellation of in its name and get registration in the name of assessee s group of approval granted to it for manufacturing of the above product. The agreement also says that GSL do not have any right in the intellectual property right pertaining to that pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hows that the expenditure incurred by the assessee is capital in nature. The ld AO based on the above direction disallowed the above sum. 12. On appeal, ld CIT(A) further strengthened views of the ld AO and Addl. CIT by referring to the decision of the Hon ble Supreme Court in 27 ITR 34 and of Hon. Punjab High court in 35 ITR 576. He further held that manufacturing agreement could be terminated only after three years of operation after giving a 12 months advance notice. Thus, there is no doubt that the advantage flowing to assessee is for a considerably long time and resulting in enduring benefit. He also held that it is a payment to eliminate competition by payment to rival firm for certain period by paying it every year in form of manufacturing agreement consideration. For this proposition he relied upon 221 ITR 199, 87 ITR 691, 143 ITR 822 and 139 ITR 581 and 102 ITD 356. The assessee is aggrieved with the above finding and raised this ground before us. 13. The ld AR Shri Rohit Jain, advocate, raised contentions relying on plethora of judicial precedents to submit that non compete fees is a revenue expenditure. His submission is that the assessing officer and CIT(A) have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the factory premises of GSL, thereby resulting in commercial/ business advantage in the form of assured supplies. In continuance of the said agreement, the appellant also entered into a noncompetition agreement with GSL where under GSL was, during the continuance of the exclusive manufacturing agreement (with no specific time limit being prescribed in the said agreement), barred from manufacturing products with the brand name Pole Star . The said non-competition agreement, it is emphatically reiterated, specifically provided that the same shall continue to be in operation only till the tenure of the exclusive manufacturing agreement. Therefore, payment under non-competition agreement was in essence part and parcel of the exclusive manufacturing agreement, which was entered into merely to derive commercial advantage in the form of assured manufacturing and supply from GSL. In case exclusive manufacturing agreement was to be terminated by the parties, for whatever reason, non-competition agreement would also stand terminated. Thus, life/tenure of the non-competition agreement was dependent upon the life/ tenure of the exclusive manufacturing agreement. In view of the aforesaid, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Co. Ltd. vs. CIT [124 ITR 1], laid down the test for determining as to what constitutes capital expenditure in the following terms: ...It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The ratio deciendi laid down in the aforesaid judgment has been reiterated by the Honourable Supreme Court in CIT v. Associated Cement Companies Ltd.: [172 ITR 257], and again in the case of Alembic Chemical Works Co. Ltd. v. CIT: [177 ITR 377]. He also referred to several decisions to the same effect as i. CIT vs. Madras Auto Service (P) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge by eliminating competition over some length of time, the said expenditure would be in the nature of capital expenditure. On the other hand, where there was no certainty of the duration of the advantage and the same could be put to an end any time, such expenditure would not be in the nature of capital expenditure but revenue expenditure. Hon. Supreme Court held that how long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the facts and circumstances of each case. The Court made the following important observations in this regard: Although we agree that payment made to ward off competition in business to a rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time, the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case. vi. It would, therefore, be seen that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction. The appeal by the Revenue was dismissed by the Tribunal. On further appeal to the Hon ble Court, it was contended on behalf of the Revenue that the sum of ₹ 4 crores paid to Mr. Vishwanathan was capital expenditure and not allowable as deduction. The Revenue placed reliance upon decision of the Supreme Court in Assam Bengal Cement (supra) and decision of the Allahabad High Court in Neel Kamal Talkies vs CIT : 87 ITR 691 (All). Per contra, it was contended on behalf of the assessee that no new asset was created by the assessee, nor any new profit making apparatus was acquired by the assessee by making the payment of ₹ 4 crores to Mr. Vishwanathan. The Court after considering the aforesaid decisions and the decision of the Supreme Court in CIT vs Coal Shipment (supra) held that the length of time over which competition was eliminated was an important factor but not the decisive factor. The High Court, while concurring with the view expressed by the Supreme Court in Coal Shipment (supra) held that the purpose and the intended object of the payment was the most important test for determining whether expenditure was capital or revenue in nature. The relevant ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case. It is quite clear from the above that to decide whether an expenditure of this nature is a capital expenditure or not would depend on the facts of the case. However, it is necessary to know whether the advantage derived by the payer is of an enduring nature, and for this one of the considerations is the length of time for which the non-compete agreement would operate although that is not decisive. While the length of time for which competition is eliminated may not strictly be decisive in all cases, yet, at the same time, it should not be so brief as to virtually be transitory. .. .. .. He submitted that applying all these principles to the present case, a few facts stand out quite clearly. The Assessee did not acquire any capital asset by making the payment of non-compete fee. It merely eliminated competition in the two-wheeler business, for a while. From the record, it is not clear how long the restrictive covenant was to last, but it was neither permanent nor ephemeral. In that sense, the advantage was not of an enduring nature. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or indirectly any of the specified products and shall not deal with the said products in any manner or advise, assist, aid, either directly or indirectly, any competitor or any other person in either establishing, managing, promoting or developing the business of the said products or any product similar thereto. The agreement also provided that the said employee shall not act as a Consultant or use any knowhow, design or drawings directly or indirectly and refrain from disclosing or divulging any information relating to the knowhow, trade practices, etc. The agreement was to be effective for a period of five years from the date of the agreement. Pursuant thereto, a non-compete agreement was entered into between the assessee and the said employee, placing covenant on the employee to not to, in any manner, assist any third party, or sell or render advise or act as a Consultant in respect of the specified products. This agreement was also effective for a period of five years. The amount of non-compete fees paid by assessee to such employee of amalgamating companies was claimed as deduction in the year of payment. However, the assessing officer rejected the claim of the assessee on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment described as non-compete fee did not bring into existence any capital asset or advantage of enduring benefit in the capital field and, therefore, such expenditure cannot be treated as capital expenditure. On the other hand, as explained above, the expenditure only helped in maintaining profitability of the business/ assets/ apparatus already in existence and therefore, was revenue expenditure allowable as deduction under section 37(1) of the Act. It is submitted that on application of the tests laid down by the Supreme Court, the payment in question was clearly on revenue account and an admissible business deduction. 14. The ld DR vehemently supported the orders of the lower authorities and submitted that assessee has entered into an agreement to get the product manufactured as Havells Polstar in specified number of years and also paid a sum of ₹ 5 lakhs which is not only to GSL but to the partner of GS Electricals and shareholders of GSL Electrical as per non compete fee agreement coupled with the fact that the assessee has also invested 24% in the capital of the above company. These facts cannot be looked into isolation but clearly shows that it is a purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd on 11.08.2003. Thus, by the assignment deed the partnership firm along with their partners and GS Lightings Pvt. Ltd conveyed all its rights in the above trademark of Polstar to QRG Enterprises. Thus, the assignee i.e. QRG Enterprises Ltd became full owner of the brand Polstar . The details of design and trademark are part of the annexure 2 and 3 of the assignment deed. ii. Second agreement was entered into as Manufacturing agreement on 11.09.2003 between appellant and GS Lightings Pvt. Ltd. According to that, GS Lights during the continuation of this agreement agreed to manufacture exclusively the Polstar Brand accessories for the appellant. In that agreement, reference of acquisition of trademark and design in favour of the QRG was mentioned. As per para No. 4 of the agreement, the GSL and its shareholders undertook not to use the above trademark during the continuation of this agreement and even after the termination thereof. The action was also taken by GSL to withdraw approval granted to it even on the expiry of the termination of the agreement for manufacturing of the above products. The manufacturing agreement further divested GSL with any right in the above P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore, it cannot be said that the non compete fees is merely to obtain the manufacturing facilities. The assessee in sum in substance acquired the whole Polstar business of the GSL and warding off the competition of the appellant for a long time. [ Minimum being 4 years] The assessee relied upon the decision of the Hon ble Supreme Court in CIT Vs. Coal Shipment Pvt. Ltd 82 ITR 902 to support his contention. The facts in that case shows that assessee entered into an arrangement with another company engaged in the same line of shipping business to prohibit that company for export of coal to Burma during the agreement. However, that company also to assist assessee in procurement of coal for shipment to Burma. The assessee carried on coal shipping business and would pay specified amount per ton of coal shipped to Burma. Incidentally, the last coal shipment was made in June 1954 and the arrangement ended. The non compete fee paid was hooked to the volume of the coal shipped to Burma. The Hon ble Supreme Court has categorically held that the payment made to ward off competition in business to a rival dealer would constitute capital expenditure, if the object of making that pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent case, the appellant s advantage is not for a while but for long period. Thus, the facts of that case are distinguishable. 21. The assessee also relied on the decision of the Hon ble Madras High Court in Carborandum Universal Limited Vs. JCIT 226 Taxmann 268. The facts of that case was with respect to non compete fees paid to an ex manager who was chairman and managing director of one of the amalgamating company. The assessee paid the above sum to a person who had enjoyed knowledge of the entire operation. In that particular case there were no acquisition of any brand or other intellectual property right as well as the non compete fees was not paid to the company and all other stakeholder as in the present case. 22. The assessee also relied upon the decision of the CIT Vs. Max India Ltd. In ITA No. 193/ 2013 dated 06.08.2018 of Hon ble Punjab and Haryana High Court, in that particular case the non compete expenses paid to an ex-employee restraining him in doing particular business for a particular time. The Hon ble Court held that since on the issue whether the expenditure was revenue or capital in nature, two opinions were possible and therefore, the view taken by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the ruling in Empire Jute Co. Ltd. ( supra) and Alembic Chemical Works Co. Ltd. (supra) have emphasized that a single test, i.e. whether the payment results in an enduring benefit cannot be conclusive in a decision as to whether an expenditure qualifies as one falling or in the capital field. Those decisions have emphasized the need to shift from an narrower field to a broader one, to ascertain the real nature of the advantage which a tax-payer would derive. The test now well-settled is one of ascertaining whether from the commercial angle, the advantage results in a capital field or does the expenditure fall legitimately within the revenue field. The decisions such as Madras Auto Service (P) Ltd. ( supra) have no doubt emphasized that the length or duration of the benefit accruing to the assessee may at times be irrelevant. In that case, the Court was concerned with the duration of the lease. At the same time, even while accepting the contentions of the assessee, the Supreme Court had cautioned that if an advantage accrues in a short span of time or is epheramal , it cannot be considered a capital benefit qualifying as a capital expenditure. Necessarily, therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be seen is that the arrangement is to endure for a substantial period, i.e. 7 years. Coupled with the fact that the L T has its own presence in consumer goods sector and would be, if it chooses - able to put up an effective competition for business engaged in by the assessee, there is no doubt that the amount is to ensure a certain position in the market by keeping-out L T. Applying the test indicated in the Empire Jute Co. Ltd. ( supra), Alembic Chemical Works Co. Ltd. (supra) and Coal Shipments (P.) Ltd. ( supra), this Court is the opinion that the deduction cannot be claimed as a revenue expenditure; it clearly falls within the capital field. The first two questions are, therefore, answered against the assessee and in favour of the Revenue. 25. In view of the decision of the honourable jurisdictional High Court that non compete fees paid by the assessee is a capital expenditure, respectfully following the same, we also hold that the non compete fee paid by the assessee of ₹ 5 lakhs has correctly been held to be capital expenditure by the lower authorities. Accordingly, this ground of appeal is dismissed holding that, in the facts and circumstances of this case, non com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed now and allowed. 28. We have carefully considered the rival contention and perused the orders of the lower authorities. This claim has been raised by the assessee before the ITAT for the first time. However the issue is also covered against the assessee by the decision of the honourable Delhi High Court in Sharp Business System Versus Commissioner Of Income Tax (Supra) wherein in para number 11 13 the honourable High Court considered the alternative argument on identical facts and circumstances and has a held as Under:- Q. Nos. 2 and 3 In Tangible Asset 11. This question arose as a direct sequel to the appellant's alternative submission that if the expenditure is treated as a conferring capital advantage, necessarily they are depreciable. The appellant claims for depreciation of know-how , patents , copyrights , trademarks , licenses , franchises or other business or commercial rights of similar nature being intangible assets acquired on or after 1st day of April 1998. Arguing by analogy, learned counsel for the appellant relied upon the judgment of the Supreme Court in Techno Shares Stocks Ltd. (supra) where the issue was whether the contention of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the following observations: Before concluding we wish to clarify that our present judgment is strictly confined to the right to membership conferred upon the membership under the BSE Membership Card during the relevant assessment years. We hold that the said right to membership is business or commercial activity which gives a non-defaulting continuing membership and right to access Exchange and to participate therein and in that sense it is a license or akin to a license, in terms of Section 32(1)(ii). 12. It is, therefore, apparent that the ruling in Techno Shares Stocks Ltd. ( supra) was concerned with an extremely limited controversy, i.e. depreciability of stock exchange membership. This Court observes that such nature was held to be akin to a license because it enable the member, for the duration of the membership, to access the Stock Exchange. Undoubtedly, it conferred a business advantage and was an asset which and was clearly an intangible asset. The question here, however, is whether a non-compete right of the kind acquired by the assessee against L T for seven years amounts to a depreciable intangible asset. As discussed earlier, each of the species of right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t non- compete fees is not eligible for depreciation u/s 32 of the income tax act, further, the above decision has considered the decision of the honourable Delhi High Court in case of Pitney Bowse ( I) Pvt Ltd 204 taxman 333 (Delhi),[ which is relied upon by the ld AR], we respectfully following that decision dismiss the alternative contentions of the assessee for the claim of depreciation. In view of this ground number [2] of the appeal of the assessee is dismissed. 30. Ground number [3] of the appeal of the assessee is against the order of the learned CIT A in not allowing the interest income earned amounting to ₹ 44,41,951 as part of the business income claimed by the appellant company. The learned assessing officer found that assessee has claimed that interest income of ₹ 4,441,951 which represented interest received on margin money deposited with the banks as business income of the assessee. The learned assessing officer held that interest income received from the bank FDRs and National savings certificates is chargeable under the head income from other sources and cannot be held to be business income . Furthermore, the learned assessing officer also red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. Asstt. CIT: 142 ITD 157(Ahd.) 32. He further submitted in following decisions it has been held that interest income earned on delayed or overdue payment from customers is assessable as profits and gains from business for computing deduction under Chapter VI-A of the Act: i. CIT v. Govinda Choudhury and Sons.: 203 ITR 881 (SC) ii. CIT vs. Jindal Polyester And Steel Ltd.: 221 Taxman 30 (All) iii. Nirma Industries Ltd. v. DCIT: 283 ITR 402 (Guj) (SLP dismissed/rejected): iv. CIT v. Madras Motors Ltd: 257 ITR 60 (Mad): 80HH and 80I v. CIT v. Rane (Madras) Ltd.: 238 ITR 377 (Mad): 80I vi. CIT v. Indo Matsushita Carbon Co. Ltd.: 286 ITR 201 (Mad): 80HH vii. Tata Sponge Iron Ltd. v. CIT: 292 ITR 175 (Orissa): 80HH viii. JCIT v. Sidheshwari Paper Udyog Ltd.: 94 ITD 187 (Del. Trib.) (TM): 80IA 145 taxman 22 ix. Joyco India P. Ltd. v. ITO: [2009] 122 TTJ 940 (Del. Trib.): 80IA x. G. S. C. Toughened Glass P. Ltd.: 13 SOT 668 (Del. Trib.) xi. Kirloskar Electrodyne Ltd. v. DCIT: 87 ITD 264 (Pune Trib.) xii. Asst. CIT v. Biotech Medicals P. Ltd.: 119 ITD 143 (Hyd Trib.) 17 xiii. CIT vs Universal Pipes (P) Ltd.: 211 Taxman 420 (Gauhati) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction u/s 80 HHC of the income tax act. 35. The next argument of the assessee is that if interest income is not considered as a income derived from export of goods then at least net of the interest received of the interest paid by the assessee should be excluded at the rate of 90% for working out deduction u/s 80 HHC of the act. The claim of the assessee can be summarized that interest received should be directed to be netted off against interest paid to bank on overdraft facility. In the present case, against interest income of ₹ 46.78 lakhs, the appellant incurred interest expenditure of ₹ 14.07 cr [refer pg. 76 of PB]. For the purpose of computing `profits of the business under Explanation (baa) to section 80HHC of the Act, the concept of netting of interest income with interest expenditure has been upheld in the case of ACG Associated Capsules (P.) Ltd. v. CIT: 343 ITR 89 (SC), it has been held that 90% of only net interest or net rent, which has been included in the profits of business of assessee as computed under the head Profits and Gains of Business or Profession , is to be deducted under clause (1) of Explanation (baa) to section 80HHC for determining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after net of the interest received and paid for the purpose of working out of the deduction u/s 80 HHC of the act. Accordingly, this issue is allowed in favour of the assessee. 39. The next issue in the 3rd ground is with respect to deduction of ₹ 90% of the amount of ₹ 6438525/- received from M/s Crabtree India Ltd towards common office and infrastructure facilities provided. The assessee claimed the same to be in the nature of reimbursement of expenses incurred by the appellant. Therefore, the contention was that 90% of the same cannot be reduced while working out deduction u/s 80HHC of the Act. During the course of assessment proceedings in Schedule 11 AO noted that assessee has received ₹ 6438525/- from M/s. Crabtree India Ltd on account of reimbursement of common office and infrastructure facilities availed by the such company from the assessee company. The ld AO asked the assessee to show that how the above sum can be profits of the business . The assessee submitted that miscellaneous receipt shown under the head other income are connected with the business of the assessee company and therefore, they have taken as a profit of the business for calculati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised a query to the ld AR that how the assessee shows this is a reimbursement of rent paid or any other expenditure. We also asked the ld AR who denied that it is rent. As the ld CIT (A) has giving categorical finding that the above amount of receipt is rent from Crabtree by the assessee and the same finding has not been controverted by the appellant, we are not inclined to interfere with the finding of the lower authorities. Even otherwise, the assessee has neither produced the debit note issued to the Crabtree detailing what kinds of expenditures were reimbursed. The copy of the agreement is also entered into at the fag end of the accounting year. In absence of any detail of expenditure incurred, which was reimbursed by Crabtree to the assessee, the argument of reimbursement of expenses is also not tenable. Thus, we do not find any infirmity in the order of the lower authorities. Accordingly, ground No. 3 of the appeal is partly allowed. 44. In the result the appeal of the assessee in ITA no 6072/Del/2010 for A Y 2004-05 is partly allowed. ITA no 466/Del/2011 [ By AO] ITA No 6073/Del/2011 [By Assessee] AY 2007-08 45. For assessment year 2007 08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that this issue is squarely covered in favour of the assessee by the order of the coordinate bench for assessment year 2006 07 wherein the order of the learned CIT (A), which was relied upon by the learned CIT - A in this year has been upheld. 50. We have carefully considered the rival contention and perused the orders of the lower authorities. The issue of disallowance of sales incentive with respect to the above scheme is decided by the coordinate bench in assessee s favour for assessment year 2006 07 in ITA no 5530/Del/2010 dated 30/9/2019 as Under:- 30. Second ground of the appeal of the Revenue relates to the deletion of the addition made on account of the provision for sale incentive 'Sahenshah Scheme . Brief facts of this aspect are that the assessee had launched a sales incentive scheme for the authorized dealer under the name Shahen shah Scheme. As per the scheme on every payment of ₹ 300/- made by the customers within 90 days the customers would earn one point and one point was equal to ₹ 1/-. The customers could request for redemption of these point for their holiday package in India and abroad. The points accumulated are communicated to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2006 at page no. 46 and 47 of the paper book. The details of the customers clearly established that none of the customers in respect of whom the provision has been created earned any points below 6000. This meets the first objection of the id. AO, though the assessee seriously disputed such observation. of the id. AO that the customer acquires the right of redemption out of accumulation of 6000 points. 35. Further about the uncertainty of the scheme, the unutilized points can be null and void only 6 months after the closer of the scheme and till such time there is no question of lapse of points. Till the scheme wound up, the liability of the assessee exists and the assessee shall discharge their liability as and when the performance was demanded by the customers. The ratio of outflow of funds with the quantum of provision is an irrelevant consideration so long as the expected or anticipated liability of the assessee is made on scientific basis. 36. On perusing the details of the sales and the points earned by the customers, we are satisfied that the provision is created on scientific basis. We, therefore, do not find anything illegal or irregular in the findings of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services were rendered outside India for the purpose of export outside India and therefore no income as accrued to those foreign entities in India. It was submitted that the products are being tested and certified by the various agencies outside India to enable the assessee company to export its products, as it is the requirement of importing countries to get the products tested by designated agencies in their own countries. Thus, the contention of the assessee is that such fees for technical services are paid for services rendered outside India and has been utilized for the export business outside India. Same are outside the purviews of section 9(1)(vii) and shall not be chargeable to tax in India. 56. The ld AO rejected the contention of the assessee and held that the above payment are chargeable to tax in India in terms of provision of section 9(1)(vii) of the Act as they fall into the definition of fees for technical services . With respect to the applicability of Double Taxation Avoidance Agreement, also he held that it also satisfied the make available criteria of technical services. Therefore, the sum was disallowed. 57. On appeal before the ld CIT(A) he confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellate proceedings, the appellant has submitted that the A.O. has made an addition of ₹ 2602844/- u/s 40(a)(i) on account of non deduction of TDS. The assessee company has paid testing charges to various foreign entities for the purpose of certification of electrical products manufactured by the company. The details of such expenses are as under :- M/s KEMA Quality B.V., Netherland 248218/- M/s CSA International, Chicago Illinois, USA. 1568212/- M/s Hangzhou Zhejiang University, China 46956/- M/s Hongkong Sensing Trade Co. Ltd., China 95981/- M/s VDE Prufund Zertifizierungs Institute, Germany 611490/- M/s Zhejiang Dongshun Electronic app. Group .China 30987/- Total 2602844/- The aforesaid entities are authorized for certification of products for export which are mandatory for selling of the products in USA, Europe, Middle East Countries, China, South African Countr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal services has been rendered outside India and has been utilized for the purpose of making or earning any income from any source outside India, such payments would fall outside the purview of section 9(1 )(vii) and will not be deemed to accrue or arise in India. The A.O. has erred while stating that the payment made in the instant case has been utilized for the business purpose in India while the same has not been utilized for the assessee s business in India since in Indian market, the KEMA, CSA and other agencies, as stated in para 2.01 above, certification are not required and the same are necessary for the company s products to be sold outside India. Reliance has been placed on the decision of Hon ble Supreme Court the case of Ishikawajima-Harima Heavy Industries Ltd. vs. Director of Income Tax [2007] 158 Taxman 259 (SC), wherein it was held that For section 9(1 )(vii) to be applicable, it is necessary that services provided by a non - resident assessee under a contract should not only be utilized within India, but should also be rendered in India or should have such a live link with India that entire income from fees, etc., becomes taxable in India; thus, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the appellant, the findings of the AO and the facts on record. This ground of appeal on similar facts was decided by my appellate order for A.Y. 2006-07 against the appellant by making the following observations: I have considered the submissions of the appellant, the findings of the AO and the facts on records. The appellant had made payment of ₹ 3199076/- to M/s CSA International Chicago, USA and other foreign entities for the purpose of certification of electrical products manufactured by the appellant. The appellant while making the payment to M/s CSA International had not deducted any TDS . The AO has observed that the testing report and certification are in the nature of making available technical knowledge and experience and the same is used in manufacturing and sale of product in the business of the appellant. In view of the above the AO was of the opinion that section 195 was applicable on the payment made by the appellant to the foreign company and since no deduction was made, therefore, under provisions of section 40(a)(i) , ;an amount of ₹ 3199076/- was liable to be added to the income of the appellant. Explanation 2 to sub section (b) of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1817430/- are related to payment made to USA and Netherland and therefore, same is covered in favour of the assessee. 60. With respect to the balance payment of ₹ 785414/- he submitted that those are made to China and Germany. With respect to this payment his arguments are summarized as under :- i. He referred to DTAA between India and China and submitted that in terms of Article 12 of the DTAA/ Treaty, the meaning of fees for technical services is restricted to only services performed in India, for India to have taxation rights based on place of performance test. The relevant extract of Article 12 is reproduced as under: 1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations, which reads as under: (vii) income by way of fees for technical services payable by- *** *** *** (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India The expression fees for technical services has been defined in Explanation 2 to clause (vii) of section 9(1) of the Act, as under: Explanation 2 - For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries . For any payment to fall within the garb of the expression FTS under section 9(1)(vii) of the Act, the following conditions should be cumulatively satisfied: (i) Payment is for rendering of services by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services that are not, themselves, technical (e.g. offering online gambling services through the internet). 41. In that respect, it is crucial to determine at what point the special skill or knowledge is used. Special skill or knowledge may be used in developing or creating inputs to a service business. The fee for the provision of a service will not be a technical fee, however, unless that special skill or knowledge is required when the service is provided to the customer. For example, special skill or knowledge will be required to develop software and data used in a computer game that would subsequently be used in carrying on the business of allowing consumers to play this game on the internet for a fee. Similarly, special skill or knowledge is used to create a troubleshooting database that customers will pay to access over the Internet. In these examples, however, the relevant special skill or knowledge is not used when providing the service for which the fee is paid, i.e. allowing the consumer to play the computer game or consult the troubleshooting database. 42. Many categories of e-commerce transactions similarly involve the provision of the use of, or access to, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o what would constitute technical service to render it technical service . The meaning of the word technical as given in the New Oxford Dictionary is adjective. 1 of or relating to, a particular subject, art or craft or its techniques: technical terms (especially of a book or article) requiring special knowledge to be understood: a technical report. 2 of involving, or concerned with applied and industrial sciences: an important technical achievement. 3 resulting from mechanical failure: a technical fault and 4 according to a strict application or interpretation of the law or the rules: the arrest was a technical violation of the treaty. 6. Having regard to the fact that the term is required to be understood in the context in which it is used, fee for technical services could only be meant to cover such things technical as are capable of being provided by way of service for a fee. The popular meaning associated with technical is involving or concerning applied and industrial science . 7. In the modern day world, almost every facet of one s life is linked to science and technology inasmuch as numerous things used or relied upon in every day life is the result of scien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical service referred to in section 9(1)(vii) contemplates rendering of a service to the payer of the fee. Mere collection of a fee for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services. (emphasis supplied) To put it simply, technical services mean services of technical nature, when special skills or knowledge relating to technical field are required for their provision. Similarly, the word consultancy means giving some sort of consultation de hors the performance or the execution of any work. It is only when some consideration is given for rendering some advice or opinion etc. that the same falls within the scope of consultancy services . The word `consultancy excludes actual execution . The word managerial means performing management functions in an organization i.e. head and brain of the organization. It is undisputed that the activities undertaken by the foreign entities do not fall within the ambit of consultancy or managerial services. If at all, it needs to be determined whether the activity undertaken by such entities falls within the ambit of technical servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Mumbai Bench of the Tribunal in the case of Siemens Ltd vs CIT: [2013] 142 ITD 1 (Mumbai Trib.) wherein assessee made payment to a laboratory located in Germany for carrying out certain tests of the circuit breakers manufactured by it in order to establish that the design and the product meet the requirement of the international standards. The assessee claimed that as the said tests were carried out by sophisticated machines without human intervention, the services did not constitute fees for technical services as defined in section 9(1)(vii) of the Act. However, the assessing officer CIT(A) rejected the claim of the assessee on the ground that the services were technical in nature and would qualify as fees for technical services under section 9(1)(vii) of the Act. On second appeal, the Tribunal held that as per Explanation 2 to section 9(1)(vii) of the Act, if any human renders any technical skill or service or makes available any such service through aid of any machine, equipment or any kind of technology, then such a rendering of services can be inferred as 'technical services', as in such a situation, there is a constant human endeavor and involve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.E. in the manufacturing process of its goods it cannot be treated as any technical services rendered by the A.E. Therefore, we do not find any material or facts either discovered by the A.O. or otherwise available on record to show that assessee has paid the testing fee for acquiring any technical knowledge or receiving any technical services from the A.E. Thus, the payments of testing fee to the A.E. is not fee for technical services. Since A.E. of the assessee is not giving any permanent establishment in India, therefore, the said receipt/income in the hands of the A.E. is not taxable in India and consequently, the assessee was under obligation to deduct TDS at source. In that view of the matter, it is submitted that the assessee was not required to deduct tax at source on payment of testing charges and disallowance under section 40(a)(i) of the Act, in this regard, is not called for. Accordingly, there was no default on the part of the appellant in not deducting tax at source from such payments, so as to warrant any disallowance under section 40(a)(i) of the Act. 61. He further raised several alternative contentions without prejudice to the primary contention of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble at source, disallowance made under section 40(a)(ia) of the Act could not be sustained for non-deduction of tax at source. He also referred to following decisions to support his above argument: i. CIT vs. Nestle India Ltd: 243 ITR 435 (Del. HC) ii. CIT vs. ITC Ltd: 263 CTR 241 (All) iii. ACIT vs. M/s. UBS Securities India Pvt. Ltd.: iv. ITA No. 6451 of 2011 (Del) - Bharti Airtel Ltd. vs. ACIT: MA No. 27 and 28 of 2017 (Del Tri.) v. DCIT vs. Satellite Television Asian Region Ltd: 23 taxmann.com 100 (Mum Tri.) vi. ACIT vs. Priyasha Meven Finance Ltd: ITA No. 115/Mum/2012 (Mum) vii. DCIT vs. Anant Investment ITA No. 6428/Mum/2010 (Mum) viii. CMS (India) Operations Maintenance Co. (P.) Ltd: 19 taxmann.com 139 (Chen Tri.) ix. Infotech Enterprises Ltd. vs. ACIT: 41 taxmann.com 364 (Hyd Tri.) x. Cyient Ltd vs. DCIT: 58 taxmann.com 70 (Hyd. Trib.) In view of the above, it is submitted that since the appellant was, in any case, under bonafide belief that tax was not deductible at source on the transaction under consideration, no fault can be found in not deducting the tax at source and consequently, disallowance under Section 40(a)(i) of the Act i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years. (emphasis supplied) The aforesaid amendment, it may be noted, is curative in nature, being introduced to reduce the undue hardship caused to assessee on disallowance of entire amount of expenditure. Accordingly, the same would, have retrospective operation. 64. He further referred to the decision of the Larger Bench of the Supreme Court in the case of CIT vs. Gold Coin Health Food (P) Limited: 304 ITR 308, wherein Their Lordships, while analyzing the principles regarding retrospective operation of statutes categorically observed, The presumption against retrospective operation is not applicable to declaratory statutes In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. Reliance in this regard is placed on the following decisions, where the Courts/Tribunals have, in context with second proviso to section 40(a)(ia) of the Act inserted by Finance Act, 2012, held that the amendment being declaratory and curative in nature, should be given retrospective effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aty is designed to primarily seek parity in eligibility for deduction between payments made to the residents and non-residents and any pre conditions for deductibility which are harsher than payments made to the residents, are ineffective in law by the virtue of such non-discrimination clause: i. CIT vs. Herbalife International India (P.) Ltd: 384 ITR 276 (Delhi HC) ii. Mitsubishi Corporation India Private Limited vs. ACIT: 5147/Del/2010 (Del. ITAT) iii. Rajeev Sureshbhai Gajwani Vs ACIT: 137 TTJ 1 (Ahmedabad ITAT) iv. DCIT vs. Gupta Overseas [ITA No. 257/Agr/2013 (Agra ITAT) In view of the aforesaid, it is emphatically reiterated that amendment in section 40(a) (ia) of the Act, being clarificatory and retrospective in nature should equally apply to section 40(a) (i) of the Act. Being so, it is submitted that disallowance, if at all, should be directed to be restricted only to 30% of the expenditure claimed in the year under consideration. 67. However, the Ld Authorised Representative was fair enough to state that the issue of payment to agents in China, as far as it relates to the issue of provision of such services in India is clearly covered against the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t LED can be regarded as a point source (typically 2 m or longer). Photometric Light. Photometric lights use data provided by lighting manufacturers in the form of IES or EULUMDAT format photometry files. These files contain photometric measurements of a light's intensity in different directions, as well as information about the size of the actual luminous surface. Undoubtedly, these are the certification for assistance to exporters in international market. This is an international process of testing and certification wherein the specialized will provide the knowledge and guidance the exporters need for electric and electronic products for the areas international market. These testing are done by accredited companies who are specialized and certified to do that and are carrying the mandatory mark and Mark of the certification for the respective products. When the products are exported and sold in the market to which the certification belongs to, they must carry along with the product the certificate. These accredited laboratories are conducting testing and provide the assessee with the certification body test reports so that the product can obtain necessary mark of the cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson. Further, the assessee has entered into an agreement with these accredited agencies for certification, which lays down the process of the certification as well as the respective liabilities. One such agreement is placed at page number 108 of the paper book. (Page number 93 -108 of the paper book of assessee). 73. Assessee has contended that Further, such testing is, the assessee understands, done through machines not involving any human intervention in testing (viz., photometric testing and CB Testing); the same, therefore, do not, constitute technical service warranting deduction of tax at source. 74. For assessment year 2005 06 in assessee s own case the issue was before the honourable Delhi High Court in 21 taxmann.com 476 (352 ITR 376). In para number nine of such order the honourable High Court in the first line itself has held that It appears to us on 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 (1) (viib) of the act. In fact, to the specific query put hon Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... human intervention and still the particular activity or technical analysis may fall into the definition of technical services . Further in para number [4] of that decision of the honourable Delhi High Court recording the facts of the case clearly noted that that the US company had specialized knowledge and facilities for carrying out the type of testing and necessary certification, which was required by the assessee. Even otherwise, the assessee has merely expressed an understanding without pointing out anything else that testing services does not require human intervention. The honourable High Court in assessee s own case for assessment year 2005 06 has categorically held with respect to the US company that US company had specialized knowledge and facilities for carrying out the type of testing and the necessary certification, which was required by the assessee for the purpose of its goods to be exported in a specified country. The natures of services have also been referred to by us in earlier paragraph. In view of the above facts, the argument of the assessee that it does not require human intervention, remains merely an assertion and even otherwise the honourable Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y approach the service provider for such assistance or services. The honourable court also noted that the assessee online trading (BOM) system for which the charges have been paid by the appellant are common services that every member of the stock exchanges necessarily required to avail of to carry out trading in securities in the exchange. The honourable Supreme Court also noted that the view taken by the honourable High Court that a member of the stock exchange has an option of trading through an alternative mode is not correct. A member who wants to conduct his daily business in the stock exchange has no option but to avail such services. Each and every transaction by a member in will have to use services provided by the stock exchange for which a member is compulsorily required to pay an additional charge. That feature of the services provided by the stock exchange would make some kind of a facility provided by the stock exchange for transacting business rather than a technical services provided to one of Section of the member of stock exchange to deal with special situation. Thus, the honourable Supreme Court held that there is no exclusivity of the services rendered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court judgment in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 1 and of Hon ble jurisdictional High Court s judgment in the case of Clifford Chance v. Dy. CIT [2009] 318 ITR 2372 (Bom.). As far as taxability under the domestic law is concerned, learned counsel primarily relies upon his exhaustive written submissions filed before us. Coming to the taxability under the applicable treaty provisions, it is submitted that even in terms of the provisions of article 12 of India China tax treaty, taxability of royalty can only arise when not only the services are used in India but also rendered in India. According to the learned counsel, the only other situation in which impugned receipt can be taxed in India, under article 7 of the applicable tax treaty provisions, is when the said income is earned in the course of business carried on by the assessee in India though a permanent establishment in India. Learned counsel submits that it is not even the case of the revenue that the Chinese company had any permanent establishment in India, and, therefore, the business profits of the Chinese company cannot be taxed under article 7 of the tax treaty. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 12(6). When it is pointed out by us that this approach will render article 12(6) meaningless, since, in such a case, deeming clause to the effect that services are deemed to have arisen in the other Contracting State can only be invoked when services are performed in that other Contracting State - something which is patently absurd, learned counsel submits that if words of the treaty result in an absurdity, at best, to that extent, it is to be treated as unworkable. We cannot change the entire complexion of treaty provision in the name of making a segment thereof workable. Learned counsel thus urges us to hold that, in terms of the provisions of the applicable tax treaty, the payment in question were not liable to be taxed in India. Learned Departmental Representative, on the other hand, relies upon the orders of the authorities below, takes us through the same, and urges us to confirm the same. As far as taxability under the domestic law is concerned, it is submitted that in case we are to proceed on the basis that the royalties or fees for technical services can only be taxed in India only when not only the services are utilized in India, but also rendered in India, the sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried on by such person outside India or for the purposes of making or earning any income from any source outside India will be deemed to accrue or arise in India. There is also no dispute that the fees received by the assessee is covered by the scope of fees for technical services under Explanation 2 to section 9(1)(vii) which provides that for purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel). There is also no dispute that the exclusion clause set out in the said definition is not attracted. 6. The case of the assessee, however, is that since the services are not rendered in India, the provisions of section 9(1)(vii) cannot be invoked. The main support for this proposition is assessee s reliance on the Hon ble Bombay High Court s judgment in the case of Clifford Chance (supra). It is, therefore, necessary to deal with this case in some detail. 7. In the case of Clifford Chance (supra) the appellant, an English law firm, was rendering legal services in connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt although is subjected to tax, the global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DTA. What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act subject to the compliance with 90 days rule. As per the above judgment of the apex court, the interpretation with reference to the nexus to tax territories also assumes significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavour should, thus, be made to construe the taxability of a non-resident in respect of income derived by it. Having regard to the internationally accepted principle and the DTAA, no extended meaning can be given to the words income deemed to accrue or arise in India as expressed in section 9 of the Act. Section 9 incorporates various heads of income on which tax is sought to be levied by the Republic of India. Whatever is payable by a resident to a non-resident by way of fees for services, thus, would not always come within the purview of section 9(1)(vii) of the Act. It must have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or business connection in India; or (b) the non-resident has rendered services in India. It is thus no longer necessary that, in order to attract taxability in India, the services must also be rendered in India. As the law stands now, utilization of these services in India is enough to attract its taxability in India. To that effect, recent amendment in the statute has virtually negated the judicial precedents supporting the proposition that rendition of services in India is a sine qua non for its taxability in India. 10. The concept of territorial nexus, for the purpose of determining the tax liability, is relevant only for a territorial tax system in which taxability in a tax jurisdiction is confined to the income earned within its borders. Under this system, any foreign income that is earned outside of its borders is not taxed by the tax jurisdiction, but then apart from tax heavens, the only prominent countries that are considered territorial tax systems are France, Belgium, Hong Kong and the Netherlands, and in those countries also this system comes with certain anti abuse riders. In other major tax systems, the source and residence rules are concurrently followed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is whether or not the income earned by the Chinese company is liable to be taxed in India under article 12 of the India China tax treaty. 13. Article 12 of the India China tax treaty provides as follows : Royalties and fees for technical services 1.Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2.However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties of fees for technical services. 3.The term royalties as used in this Article means payment of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any parent, trade mark design or model, plan secret formula or process, or for the use of, or th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement. 14. A plain reading of the above treaty provisions show that under article 12(4) shows that what is covered by the basic definition of the expression fees for technical services is the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State. In other words, technical services being provided by resident of one of the Contracting State in the other Contracting State is what will be covered by the basic rule under article 12(4). The expression provision of services is not defined or elaborated anywhere in the tax treaty. The argument of the learned counsel is that provision of services should be construed as rendition of services , but we will come to that aspect a little later. 15. It is also important to take note of the deeming fiction under article 12(6) of the treaty. This article, inter alia, provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the basic provisions of article 12(4), which is confined to services having been rendered in the Source State, there is no occasion of invoking article 12(6). It is submitted that the deeming provision for article 12(6) is confined to what is already covered by royalties and fees for technical services which are neatly defined in article 12(4) and it does not seek to extend the scope of the said basic definition. It is only after 12(4) is satisfied that the deeming fiction can be invoked. He invites our attention to corresponding article of China Pakistan tax treaty, i.e., article 13, which does not have any such deeming fiction but which provides that the term fees for technical services , as used in this article, means any consideration (including any lump sum consideration) for the provision of rendering of any managerial, technical or consultancy services by a resident of one of the Contracting State in the other Contracting State . It is pointed out that in China Pakistan tax treaty, there is no additional source rule, i.e., deeming fiction, for the fees for technical services, even though there is a deeming fiction of source rule for royalties . It is thus poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing, this contrast shows that the India China tax treaty intends to follow the source rule, while China Pakistan tax treaty gives up the source rule for fees for technical services. The difference between these two clauses can hardly be missed, and it becomes all the more clear when one takes into account the fact that while there is a deeming fiction clause in article 12(6) of India China tax treaty, taking care of the situations in which payments are made by persons not resident in the other Contracting State, though they have a permanent establishment or fixed base in the other Contracting State, there is no such corresponding clause in China Pakistan tax treaty. It is thus clear, from the material placed before us, that while India China tax treaty follows the source rule in the matter of fees for technical services, Pakistan China tax treaty does not do so. That s a conscious choice by the respective Governments, and just because China Pakistan have negotiated a bilateral tax treaty in a particular manner, it does not mean that India China tax treaty should also be construed on the same basis. 18. We have also noted that any other meaning being assigned to the scope expre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ganised composition instead of precision drafting. Therefore, the words employed in the treaty are to be given a general meaning - general to lawyers and general to layman alike. u When a tax treaty does not define a term employed in it, and the context of the treaty so requires, it can be given a meaning different from domestic law meaning thereof. The meaning of the undefined terms in a tax treaty should be determined by reference to all of the relevant information and all on the relevant context. There cannot, however, be any residual presumption in favour of a domestic law meaning of a treaty term. (Emphasis supplied) 19. In view of the above, a literal interpretation to a tax treaty, which renders treaty provisions unworkable and which is contrary to the clear and unambiguous scheme of the treaty, has to be avoided. In any case, even on merits, we are of the considered view that the scope of the expression provision for services is much wider in scope that the expression provision for rendering of services and will cover the services even when these are not rendered in the other Contracting State, as long as these services are used in the other Contracting State. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore us that the assessee was under a bona fide belief that tax is not deductible on such testing charges. It is also not shown, even if there is a belief, whether the same was bona fide or not. The other decisions relied upon by the learned authorised representative all were related to the provisions of Section 201 of the income tax that where there is a specific exclusion for good and sufficient reasons for non-deduction of tax at source. Such provisions are absent under the provisions of Section 40 (a)(i) of the act. In view of this, this argument of the assessee is rejected. 80. The learned authorised representative submitted that a provision of Section 40 (a) (ia) has undergone changes over a period of time. This Section relate to payment to a resident. It is submitted that the disallowance according to the amendment made with effect from 1 April 2015 restricted the disallowance at the rate of 30% of the sum payable. Therefore, according to the learned authorised representative, disallowance should be restricted in case of a payment made to a non-resident also at the rate of 30% while applying the provisions of Section 40 (a) (i) of the act. We find that the legislature th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e related to payment made to USA and Netherland and we confirm the disallowance of ₹ 7,85,444/- for payments made to Testing agencies in China and Germany. Accordingly, ground No. 1 of the appeal is partly allowed. 84. Ground No. 2 is with respect to the claim of the assessee of deduction u/s 80IC of the Act. The facts show that in the return of income assessee has claimed deduction of ₹ 645962957/- u/s 80IC of the Act. The assessee also supported it by filing audit report in the form 10CCB along with tax audit report. During the course of hearing on 11.11.2009 the assessee filed a revised report in the form No. 10CCB wherein, deduction was increased by ₹ 4488012/- at ₹ 650450969/-. The AO noted that assessee has not filed any revised return but has claimed the enhanced deduction by filing the letter. The reason for such revision in the claim was found that the assessee had suffered loss of ₹ 4488012/- in its unit No. 2 of Badi, Hamichal Pradesh. At the time of filing of original report in the audit report the assessee reduced the profit eligible for deduction u/s 80IC of Badi Unit No. 1 by the loss of Unit NO. 2 of Badi. Both the units are undisput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts taken together u/s 80IC. During the course of hearing, assessee might have come to know that the loss incurred in one eligible units is not require to reduce the profit of another eligible unit. It was found that if the eligible unit incurs a loss, it is to be ignored for computing deduction u/s 80IC of the Act. Therefore, the assessee filed a letter before the ld AO claiming enhanced amount of deduction. The ld AO rejected the same following the decision of the Hon ble Supreme Court in 284 ITR 393. On appreciation of the facts narrated, in the orders of the lower authorities, it is an admitted fact that assessee did not revise its return of income. The decision of the Hon ble Supreme Court in Goetz India Ltd though applies to the ld AO but does not apply to the appellate authorities. The decisions cited by the ld AR are clearly support the above view. Thus, according to us the ld CIT (A) should have considered the claim of the assessee, though not made by the revised return. As it is a simple arithmetic calculation and there is no dispute about the sum involved, we direct the ld AO to allow the claim of the assessee u/s 80IC of the Act to the extent of profit earned by Unit No. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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