9911796707
TMI Blog2020 (9) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... venue in nature claimed by the appellant company. 2 (i) That on the facts and in the circumstances of the case and the legal position, the learned CIT (Appeals) has erred; - in confirming the amount of Rs. 5 lacs paid to G.S Lighting Pvt. Ltd towards non-compete fee as capital expenditure as against revenue expenditure claimed by the appellant company. ' - in holding that the payment of non-compete fee has been made to prevent/eliminate competition whereas the same has been paid where the manufacturing facility were reserved for the appellant company and the same benefitted both the parties in view of the increase in the turnover in this line of business. (ii) Without prejudice to the ground no.2(i) above, the CIT (Appeals) has erred in not amortizing the non-compete fee over a period of agreement. 3 That on the facts and in the circumstances of the case and the legal position, the learned CIT (Appeals) has erred; - in not allowing the interest income earned at Rs . 4441951/- as part of business income as claimed by the appellant company. in not netting out the interest income from the interest paid since the interest income is inextricably connected with the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest was not allowed relying on the decision of the Hon'ble Delhi High Court in 16 DTR 339 and Hon'ble Madras High Court 221 CTR 196. iv. He further held that Rs. 3438525/- received from Crabtree India Ltd, sister concern of the assessee is pertaining to leasing out of premises and therefore he upheld the action of the ld AO adjusting 90% of the same while working out deduction u/s 80HHC. Thus, appeal of the assessee was partly allowed. Therefore, the assessee is aggrieved with the order of the ld CIT(A) and is in appeal before us. 06. Ground No. 1 of the appeal is with respect to additions of Rs. 2,80,276/- being interest paid by the assessee to Syndicate Bank held to be capital expenditure. Facts shows that the Assessee has taken term loan from Syndicate Bank and out of total interest paid of Rs. 4,69,918/- on that loan , Assessee capitalized interest payment of Rs. 1,89,342/- and claimed the balance expenditure of Rs. 2,80,276/- as revenue expenditure. The ld AO was of the view that as the production has not started i.e. assets are not put to use, cost of purchase of machinery and interest thereon needs to be capitalized. The contention of the assessee was that the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er sanction letter dated 26.02.2004. The above loan was partly utilized for capital expenditure i.e. purchase of plant and machinery, which have not been put to use till date and partly for assets already capitalized. Assessee stated that sum of Rs. 5.4 crores is the amount of loan utilized for which the asset are not put to use and therefore, interest relevant to that for 16 days was computed @8% amounting to Rs. 1,89,342/- was capitalized. This is in accordance with the proviso to section 36(1)(iii) of the Act. The assessee has claimed that Rs. 8 crores is already utilized by the assessee for purchase of plant and machinery and said capital asset were financed by the above loan of Syndicate Bank. Such amount of investment in plant and machinery was related to three different units of the assessee located at Faridabad, Noida and Alwar. According to that, the assessee has already invested a sum of Rs. 8,00,00,210/- in the plant and machinery ,which has already been 'put to use' prior to disbursement of the loan by Syndicate Bank. According to proviso to section 36(1)(iii) , interest is required to be capitalized if it is borrowed for acquisition of capital asset for the period from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, the assessee guaranteed minimum turnover of the above product and remuneration to the GSL. As per this agreement, all the employees and the technical representative of GSL factory would also remain as employee of the assessee. Along with this manufacturing agreement, the assessee also entered on the same date an assignment deed in favour of the one QRG Enterprise Ltd, which is also the group company [subsidiary] of the assessee. In this assignment deed along with GSL Lighting Ltd, partners of another partnership firm M/s. GS Electricals also joined. This agreement was entered in terms of memorandum of understanding entered into by the assessee on 01.08.2003 wherein, GSL Lighting and partnership firm agreed to assign all proprietary and ownership rights in the registered trade mark and design registration along with all common law rights including the goodwill to the QRG Enterprises. The assessee also entered on the same date i.e. 11.09.2003, a non competition agreement with GS Lighting Pvt. Ltd, Mr. Kishan Mehta (partner) of the GS Electronics and Director of this company and other shareholders whereby the assessee agreed to pay non compete fee of Rs. 5 lakh. This non compete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure as being 'capital in nature' for the reasons that i. In the relevant assessment year, the appellant made payment of Rs. 5 lacs on account of business necessity and commercial expediency in order to promote its existing business in the line of manufacturing and trading in lighting fixtures and fittings, by utilizing the manufacturing facility of GSL. ii. It is pertinent to mention here that on 11th August, 2003, three separate agreements were entered into with GSL: a) Assignment Deed between GSL and M/s. QRG Enterprises Limited, subsidiary of the appellant, for assigning of trademark/ brand "Pole Star" owned by GSL; b) Exclusive Manufacturing Agreement between appellant and GSL where under GSL agreed to exclusively manufacture products of the appellant at its factory at Gurgaon; c) Non-competition Agreement between appellant and GSL where under the appellant paid Rs. 5 lacs for GSL agreeing not to manufacture and market products using the brand "Pole Star" during the continuance of the exclusive manufacturing agreement referred in clause (b) above. iii. He referred to salient features of the Exclusive Manufacturing Agreement between the appellant and GSL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing commercial advantage in the form of continued manufacturing and supply by GSL, thereby ensuring smooth operations of the appellant. As a result of such payment, no enduring benefit in capital field and/ or no capital asset was brought into existence; on the contrary payment was for a bulk deal of GSL agreeing to enter into exclusive manufacturing agreement with the appellant. It is, thus, submitted that the amount paid to GSL was in the ordinary course of business and for carrying on the business more profitably and not for acquisition of any asset or any right of a permanent nature. In pursuance of the aforesaid agreements, the manufacturing facilities of GSL were exclusively reserved for manufacturing the appellant's products/orders. iv. Referring to manufacturing agreement, he submitted that Agreement was terminable by either of the parties after first 3 years of operation, after giving 12 months advance notice. The aforesaid expenditure, it is submitted, being incurred wholly and exclusively for the purpose of business is allowable as deduction under section 37(1) of the Act . Section 37 of the Act provides for deduction of expenses which are laid out or expended wholly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income Tax v. Hindustan Zinc Ltd. : 322 ITR 478 (Raj) iv. CIT v. Jai Parabolic Springs Ltd.: 306 ITR 42 (Delhi HC), v. CIT v. Salora International: 308 ITR 199/ 177 Taxman 456 (Del. HC) vi. CIT v. Pepsico India Holdings (P) Ltd.: ITA No.319,1185,1448,1822 & 2091 of 2010 vii. CIT v. Citi Financial Consumer Fin. Ltd: 335 ITR 29 (Delhi) viii. CIT v. Casio India Ltd.: 335 ITR 196 (Del.) ix. CIT v. Geoffrey Manners and Co. Ltd.: 315 ITR 134(Bom) x. CIT v. Liberty Group Marketing Division: 315 ITR 125 (P&H) xi. CIT v. Rakhra Technologies (P)Ltd.: 243 CTR 505(P&H) xii. DCIT v. Core Healthcare Limited: 308 ITR 263 (Gujarat HC) xiii. CIT v. Brilliant Tutorials (P) Limited: 292 ITR 399 (Mad.) v. In that view of the matter, payment of Rs. 5,00,000 described as non-compete fees in the agreements, did not result in an enduring advantage, would have to be treated as deductible revenue expenditure. Reliance in this regard is placed on the decision of the Hon'ble Supreme Court in the case of CIT vs Coal Shipments Pvt Ltd.: 82 ITR 902, where the assessee was a company engaged in the business of export of coal from India to Burma. Amongst the other exporters were Karan Chan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tition would constitute capital expenditure. It is only when the expenditure brings into existence a benefit of enduring nature would such a payment of non-compete fees be treated as capital expenditure and not otherwise It is further submitted that on reading the aforesaid decision of the apex Court in Coal Shipment (supra) in juxtaposition with the later decision of the Supreme Court in Empire Jute Mills (supra), it could be inferred that only when the expenditure incurred by the assessee brings into existence benefit of enduring nature in the capital field, would such payment of non-compete fees be treated as capital expenditure and not otherwise. If the expenditure so incurred is for carrying on business more efficiently and profitably, without addition to the profit earning apparatus, the same would be allowable revenue deduction, irrespective of the fact whether the benefit is enduring or ephemeral. Attention, in this regard, is invited to the following decisions, wherein while reconciling and following the aforementioned decisions of the apex Court, the Courts have, in the facts and circumstances of the case, held non-compete payments to be revenue expenditure. vii. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee pointed out, and we think rightly, that the length of time for which the competition was eliminated was important in the facts of that case, but that is not always so. What is more necessary to appreciate is the purpose of the payment and its intended object and effect. In CIT v. Coal Shipments P. Ltd. [1971] 82 ITR 902, the Supreme Court noted the contention of the Revenue to the effect that payments made to eliminate competition were capital expenditure. Rejecting this contention, it was held on page 909 of the Report as follows: "The case which has been set up on behalf of the Revenue is that, as the object of making the payments in question was to eliminate competition of a rival exporter, the benefit which enured to the respondent was of an enduring nature and, as such, the payment should be treated as capital expenditure. We find ourselves unable to accede to this contention because we find that the arrangement between the respondent and M/s. H.V. Low and Co. Ltd. was not for any fixed term but could be terminated at any time at the volition of any of the parties. Although an enduring benefit need not be of an ever-lasting character, it should not, at the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts, it must be held that the CIT (A) and the Tribunal did not err in concluding that the payment of non-compete fee by the Assessee was a business expenditure and not a capital expenditure."(emphasis supplied) In conclusion, the Hon'ble Delhi Court held that by making payment of non-compete fee the assessee did not acquire any capital asset and, therefore, such expenditure could not be treated as capital expenditure. The SLP filed by the Revenue against the aforesaid decision of the Hon'ble Delhi Court in CIT vs Eicher Ltd: SLP(Civil) 7005 of 2009 was dismissed by the Supreme Court vide order dated 20.03.2009 . he also submitted that to the same effect are the following decisions: - i. CIT vs. Lahoty Bros: 19 ITR 425 (Cal) ii. CIT vs. Nchanga Consolidated Copper Mines Ltd : 58 ITR 241 (PC) iii. Commissioner of Income-tax vs Late G D Naidu and Ors : [1987] 165 ITR 63 (Mad) iv. Asianet Communications Ltd. vs. CIT: 257 Taxman 473 (Mad) v. PCIT vs. Six Sigma Gases India Pvt. Ltd.: ITA No. 1259 of 2016 (Bom) DCIT vs McDowell & Co Ltd : 291 ITR 107 (Kar HC) vi. Champion Engineering Works Ltd vs Commissioner of Income-tax, Bombay City-I : [1971] 81 ITR 273 (Bom) vii. Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee's market presence and improved its potential to have better results in the market. The assessing officer further held that the non-compete payment made for a period of five years was for procuring an enduring benefit to the business and accordingly, disallowed the claim of the assessee. On appeal, the CIT (A) and Tribunal affirmed the order of the assessing officer. On further appeal, the High Court holding in favour of the assessee observed, as under: "19. It is not denied by the Revenue that U.Mohanrao was the Chairman and Managing Director of some of the companies which got merged with the assessee company. The said U.Mohanrao had access to all information starting from manufacturing process, knowhow to the clientele and the products, including the pricing of the products. By a process of amalgamation, the assessee had acquired the business of the amalgamating companies. However, for the fruitful exercise of its business as a business proposition, the assessee thought it fit to enter into a non-compete agreement with a person who had the knowledge of the entire operations, so as to get the full yield of the amalgamated company's business. In that context ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure. 15. He further stated that the judicial precedent cited by the ld Addll. CIT in his 144A direction and the ld CIT (A) in his order are neither distinguished nor challenged by the ld AR and therefore, same are accepted and therefore claim of the assessee that it is revenue expenditure cannot be allowed. 16. He further stated that the alternative submission of the assessee that depreciation on it should be allowed clearly shows that non compete fee paid is capital expenditure. He further submitted that the ld AR has cited the decision, however, none of them applies to the facts of the case. 17. With respect to the claim of depreciation on the same he submitted that it has to satisfy specified the conditions of section 32 of the Act and then only the depreciation on it, if eligible, can be allowed. He submitted that before us neither the ld AR has shown that how the non compete fees is an eligible asset for depreciation nor these contentions have been raised before the lower authorities. Therefore, it cannot be accepted now and allowed. 18. We have carefully considered the rival contention and perused the orders of the lower authorities. The facts show that appellant has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orce until 12 months advance notice of termination by either party. There is also a lock in period for three years for issue of such notice. Thus only after three years period, 12 months notice is required by either party to terminate it. iii. Third agreement, Simultaneously a non-compete agreement was also entered on the same date between the appellant on one part and GS Lightings Pvt. Ltd, Mr. Krishan Mehta himself and other shareholders of GSL Lightings Pvt. Ltd on the other part. According to that all the other parties representing GSL Lightings Pvt. Ltd , G S Electricals, Shareholders of GS Lighting Pvt Ltd were collectively referred to as "GSL". They also agreed to not to compete with respect to the product manufactured by GSL [naturally, as GSL was to manufacture for appellant] or appellant. It also prohibits them to carry out such business by forming any subsidiary or associated companies or a firm, which are to compete with the product manufactured by GSL or appellant. All existing shareholders and their family members also bound them to not to do any such activity. In consideration for doing so GSL and its shareholders authorized Mr. Krishan Mehta to receive considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be put to an end at any time. It is further held that how long the period of contemplated advantage should be in order to constitute an enduring benefit would depend upon the circumstances and facts of each individual case. Comparing the facts of that case with the case before us, it is apparent that payment of non compete fees was connected to acquisition of 'Polestar' brand and favour of QRG Enterprises. Therefore, it was a sale of the brand. The tenure of the manufacturing agreement was also till it gets cancelled i.e. Minimum 4 years. Even the notice period could not be given before the lock in time of three years. During the course of hearing bench asked a specific query to the counsel of the assessee that whether the agreement of manufacturing is ever terminated, if yes, when, ld AR did not produce any details / agreements etc. Assessee was also asked to produce the memorandum of Understanding referred to in various agreements, it was also not produced. Therefore, it is apparent that the object of making that payment is definitely for considerable length of time. In view of this, the decision in fact supports the case of the revenue. 20. The assessee also relied on the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... JV Partners] that neither the assessee nor any of its employees get into competing business. In those circumstances, it was held to be expenses out of "commercial expediency". In the present case manner of acquisition of business of 3rd parties with its manufacturing facilities and warding off the competition of all the concerned persons including the family members of the stake holders clearly shows that expense of the Non compete fees is capital in nature. Therefore, the facts are distinguishable. More so, in the present case the assessee has acquired an enduring benefit of a business. 23. Similarly all other decision relied upon by the assessee have distinguishing facts and hence same were considered while deciding the issue. The ld AR also did not distinguish the various decision relied up on by the lower authorities. 24. Though assessee has made a treatise of the judicial precedents on allowability of non compete fees as revenue expenditure, however he missed out Judicially binding precedent of the Hon Delhi High court in case of Sharp Business System Versus Commissioner Of Income Tax 27 Taxman.Com 50 (Delhi) which clearly covers the issue is squarely covered in favour of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us joint-venture partner to the extent of 26% was kept put out of the market for a period of 7 years. In this context, the decision in Blaze & Central (P) Ltd. v. CIT [1979] 120 ITR 33/1 Taxman 546 (Mad.), the decision of the Madras High Court is instructive. The assessee had entered into an agreement with one Saraswati Publicities by which the latter agreed to part with its business of film exhibition shots and not to compete with the assessee in business within a specified territory for nine years. The Supreme Court's decision in Coal Shipments (P.) Ltd. (supra) was relied upon and the High Court ruled that the assessee warded off business rivalry for nine years and also acquired business in a specified area and, therefore, the acquisition of business that generated income or the expenditure led out for fighting competition had to be treated as capital. The observations in Eicher Ltd. (supra) no doubt favour the assessee; however, this Court notices that the judgment recorded also noticed that "it is not clear how long the restrictive covenants was to last but it was neither permanent or epheramal. In that sense, the advantage was not of an enuring nature." This Court in anot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposition, also he referred to the decision of the Hon'ble Supreme Court in 225 ITR 802 and also on following decision stating that depreciation is an admissible allowance on non compete fees. He submitted Without prejudice to the aforesaid, that in the instance the aforesaid payment of non-compete fee is held to be capital in nature, then in alternate, the assessing officer may be directed to either allow depreciation or amortization on/ of the said amount in terms of the provision of the Act [Refer Madras Industrial Investment Corp 225 ITR 802 (SC)]. Reliance in this regard is placed on the following decisions wherein depreciation has been held to be admissible on non-compete fees: - i. Pitney Bowes India vs. CIT: 204 Taxman 333(Del) ii. Pentasoft Technologies Ltd vs. DCIT: 222 Taxman 209 (Mad) iii. CIT vs. Ingersoll Rand International India Ltd: 227 Taxman 176 (Kar) iv. PCIT vs. Sapa Extrusion India Pvt Ltd: ITA. No.680 of 2019 (Kar) v. PCIT vs. Ferromatic Milacron India (P.) Ltd.: 99 taxmann.com 154 (Guj) vi. PCIT vs. Piramal Glass Limited: ITA No. 556 of 2017 (Bom) vii. Vossloh Schwabe India Pvt. Ltd vs. DCIT: ITA No. 3566 of 2011 (Mum ITAT) Therefore it is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this Court in Hindustan Coca Cola Beverages (P.) Ltd. (supra) and the judgement of the Kerala High Court in B. Raveendran Pillai v. CIT [2011] 332 ITR 531 /[2010] 194 Taxman 477 . As would be evident from Section 32(1)(ii), depreciation can be allowed in respect of intangible assets. Parliament has spelt-out the nature of such assets by express reference to 'know-how', 'patents', 'copyrights', 'trademarks', 'licenses' and 'franchises'. So far as patents, copyrights, trademarks, licenses and franchises are concerned, though they are intangible assets, the law recognizes through various enactments that specific intellectual property rights flow from them. Licenses are derivative and often are the means of conferring such intellectual property rights. The enjoyment of such intellectual property right implies exclusion of others, who do not own or have license to such rights from using them in any manner whatsoever. Similarly, in the matter of franchises and know-how, the primary brand or intellectual process owner owns the exclusive right to produce, retail and distribute the products and the advantages flowing from such brand or intel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be "intangible asset". The nature of these rights mentioned clearly spell-out an element of exclusivity which enures to the assessee as a sequel to the ownership. In other words, but for the ownership of the intellectual property or know-how or license or franchise, it would be unable to either access the advantage or assert the right and the nature of the right mentioned or spelt-out in the provision as against the world at large or in legal parlance "in rem". However, in the case of a non-competition agreement or covenant, the advantage is a restricted one, in point of time. It does not necessarily - and not in the facts of this case, confer any exclusive right to carry-on the primary business activity. The right can be asserted in the present instance only against L&T and in a sense, the right "in personam". Indeed, the 7 years period spelt-out by the non-competing covenant brings the advantage within the public policy embedded in Section 27 of the Contract Act, which enjoins a contract in restraint of trade would otherwise be void. Another way of looking at the issue is whether such rights can be treated or transferred - a proposition fully supported by the controlling obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of manufacture of energy meters and other electrical items. The energy meters are supplied to various electricity boards throughout the country, 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. During the relevant assessment year, the appellant received an amount of Rs. 46,78,544, out of which interest income of Rs. 41,93,072 on FDRs pledged with banks towards margin money against bank guarantees / letter of credits and against public deposits. In this regard, it is submitted that interest income in the case of the appellant is inextricably connected with the business of the appellant; hence, it should be included in the profit of the business for claiming deduction under section 80HHC of the Act. Assessee supported its contentions by relying on decision of Honourable Supreme Court in the case of CIT vs Alfa Laval India Ltd.: 295 ITR 451, wherein it has been held that interest from customers is to be included as business profits for computation of deduction under section 80HHC of the Act. He also relied up on decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot also be considered as income derived from export of goods for the purpose of Section 80 HHC of the income tax act. He further stated that the various decisions relied upon by the learned authorised representative are related to the income derived from the industrial undertaking and there is difference between the wording is of Section 80 HH C and 80 HH and 80 I of the income tax act. He therefore submitted that there is no error in the order of the lower authorities in reducing 90% of interest income, which is provided in the Section itself to be excluded from the income derived from export of goods. 34. We have carefully considered the rival contention and perused the orders of the lower authorities. A bare reading of cl. (baa) (1) of Section 80 HHC indicates that receipts by way of brokerage, commission, interest, rent, charges etc., formed part of gross total income being business profits. But, for the purposes of working out the formula and in order to avoid distortion of arriving export profits cl. (baa) stood inserted to say that although incentive profits and 'independent incomes' constituted part of gross total income, they had to be excluded from gross total incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational Jewellers: 335 ITR 144 (Del.) v. CIT v UK Bose: 212 Taxman 399 (Del.) vi. CIT v. Infosys Technologies Ltd: 352 ITR 74 (Karn) vii. CIT v. Gokkuldas Exports: 333 ITR 214 (Kar.) viii. Paramount Trading Corporation: 98 ITD 77 (Del.) (TM) He therefore submitted that CIT(A) erred in affirming the action of assessing officer in not reducing interest received against interest paid for computing `profits of the business' under Explanation (baa) to section 80HHC of the Act. 37. The learned departmental representative submitted that unless the interest income is held to be the income chargeable under the head business income then only net of interest paid on interest received can be considered for the purpose of netting of. He submitted that in this case the lower authorities have held that the above interest received by the assessee is not a business income but income from other sources therefore; the decision relied upon by the learned authorised representative who not apply. 38. We have carefully considered the rival contention on this issue and find that the assessee has received interest on margin money deposit for the purpose of letter of credit fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be reduced to the extent of 90% from profits of the business. 40. The assessee carried the above issue before the ld CIT(A) who held that the appellant had received this amount as a reimbursement of certain amounts which pertains to leasing out of premises to M/s. Crabtree India Ltd. He further held that income from leasing out of premises cannot be considered as business income of the appellant. 41. The ld AR submitted that it is a reimbursement of expenditure by an associated company, which does not have any separate infrastructure. He therefore, submitted that mere reimbursement of expenditure not resulting in any income therefore should not be excluded @90% for working out deduction. He submitted that once such receipt is netted with the expenditure debited in the profit and loss account the net result would be Nil income and therefore, the same should be excluded. 42. The ld DR vehemently submitted that the lease income could never be termed as the business income of the assessee. Therefore, the same is correctly excluded by the ld AO on the direction of the ld Addll. CIT u/s 144A of the Act. 43. We have carefully considered the rival contentions and perused the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing disallowances:- i. disallowance u/s 40 (a) (i) of Rs. 26,02,844/- of payment made to foreign parties without deducting tax u/s 195 of the income tax act ii. disallowance of Rs. 175,64,366/- being provision for scheme Shaenshah to provide incentive to the distributors of the assessee's product iii. claim of deduction u/s 80 IC of the income tax act made by the assessee of Rs. 645,962,957/- in the original return of income however assessee requested for adjustment of the above deduction to Rs. 654,050,969/- by excluding the loss of Rs. 4,488,012 of Baddi Unit - II by filing a letter dated 11 November 2009 along with the revised report in form number 10CCB ignored by the AO but allowed the deduction of Rs. 648,221,370/- iv. disallowance of amalgamation expenditure claimed by the assessee violator dated 11 November 2009 46. Assessee carried the matter before the learned CIT - A - LTU, New Delhi, who passed an order dated 15 November 2010 wherein:- i. Disallowance u/s 40 (a) (i) of Rs. 2602844/- was upheld ii. provision made for sales incentive in respect of Sahanshah scheme of Rs. 175,64,366/- was deleted while following his own order for assessment year 2006 - 07 ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be seen that all authorized dealers of the assessee are automatically enrolled at member of the scheme. 31. Ld. AO, however, disallowed the same by holding that the right does not get vested in dealer / distributor at any time before accumulation of minimum 60000 points and any extra points till next slab remain useless; that the accumulation of 6000 points itself is contingent on several events like continuing sales, continuing payments being made; and that the scheme itself is not perpetual, it can end any day and all points have'to be enchased within six months or get lapsed. 32 Ld: CIT (A), however, on a reappraisal of entire material before him reached a conclusion that the liability of the assessee on this score is not a contingent liability, but on the other hand, it is a contractual liability which may befall on the assessee during the assessment year to the extent of the rights accrued to the customers by earning the points. Ld. CIT(A) maintained that the distinction between the contingent liability which may or may not arise in future and the present liability which may have to be performed in the future. According to the Ld CIT(A) the liability incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal of the assessing officer. 52. In the result ITA number 466/del/2011 for assessment year 2007 - 08 is dismissed. 53. Now we come to the appeal of the assessee in ITA number 6073/del/2010 for assessment year 2007 - 08 wherein the assessee has taken following to 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 addition of Rs. 26,02,844/- u/s 40(a)(i) paid to various foreign entities towards testing fee/certification outside India, as no income has accrued/arisen in India. 2 (i) That on the facts and in the circumstances of the case and the legal position, the learned CIT (Appeals) has erred in confirming the action of the AO that the enhanced claim of deduction u/s 80IC of the appellant company is not tenable in law without filing of revised return of income. (ii) That on the facts and in the circumstances of the case and the legal position, the learned CIT (Appeals) has erred in adjusting the loss of Rs. 4488013/- in respect of Baddi unit no.2 while allowing the deduction u/s 80IC of Income Tax Act." 54. The first ground of appeal is with respect to the disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore is covered in technical services offered and received by the assessee. Since foreign entity is based in USA, article 12(4)(b) of DTAA with USA is relevant to show that the service and payment made are covered in "Fees for included services" as defined. It is produced below : "For purpose of this article, "Fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services including through the provision of services of technical or other personnel) if such services. (a) are ancillary and subsidiary to the application or enjoyment of the right property or information for which as payment described in paragraph 3 is received , or (b) made available technical knowledge, expenses, skill, know how , or processes or consist of the development and transfer of a technical plan or technical design Therefore, making available technical knowledge, experience is also covered in fees for included services. The testing report and certification are in nature of making available technical knowledge, experience and skill because the same is utilized in manufacturing and sale of product in business of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products. The copy of the said letter is also enclosed. The A.O. has invoked provisions of section 9(1 )(vii) read together with explanation 2 to the sub-section. The A.O. has contended that payment made in respect for fees for technical services has been utilized for the purpose of the business of the assessee in India and hence, It has further been submitted that the A.O. has also relied in the decision of Delhi Bench of ITAT in the case of ITO vs. Sinar Mas Pulp & Paper (India) Ltd. 85 TTJ 794 (Del.). The facts of the said case are not applicable to the appellant company. In the said case, it was held that the payment made for getting the project report was the payment made for professional services and TDS was liable to be deducted. In the said case, project report was prepared to raise a loan in the international market for the project to be set-up in India and thus was to be utilized in India. In case of the appellant company, the services were neither rendered in India nor utilized in India. Since, the said services are rendered and utilized outside India and payment has also been received by the foreign entities outside India, the case of the assessee is squarely covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 9(1 )(vii) and no income can be deemed to accrue or arise in India. In section 9 of the Income-tax Act, for the Explanation occurring after sub-section (2), the following Explanation has been substituted by the Finance Act, 2010 with effect from the 1st day of June, 1976:- "Explanation. - For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not, - (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India." In the case of the appellant company, insertion of the above explanation to section 9(2), does not affect the taxability of the said services, since in the case of appellant company the services have been rendered and utilized outside India. Reliance has been placed on the following decisions: (i) Maharishi Housing development Finance Corporation Ltd. v. ACIT (ITA No. 222 of 2009) (ii) Van Oord ACZ India (P) Limited. V. CIT (ITA No. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, and therefore, squarely fell in the definition of "fees for technical services in Explanation 2 to sec. 9(i)(vii) In view of the discussion above it is very clear that the payment made by the resident as fees for technical services being utilized in business of India will lead to income being deemed to accrue or arise India. Since the fees has been paid for obtaining technical services for the purpose of the business the appellant and has also been utilized for the purpose of manufacturing and sale of the product in the business of the appellant, therefore, the provisions of section 195 will be applicable to the payment made by the appellant. I am in agreement with the views of the assessing officer that deduction of Rs. 3199076/- is not allowable. The disallowance made by the AO is upheld. This ground of appeal is dismissed." The facts remaining the same in view of the findings in the appellate order for A.Y. 2006-07 discussed above, this ground of appeal is dismissed." 58. Thus, the addition was confirmed. Aggrieved the assessee is in appeal before us. 59. The ld AR submitted that as far as payment to testing agencies in Netherland and USA are concerned, they are alread ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. Thus, the Treaty stipulates the 'place of performance' test to be satisfied in order to determine taxability of 'fees for technical services'. In other words, by additionally providing that the services should be provided "by a resident of a Contracting State in the other Contracting State", the DTAA has restricted the meaning of 'fees for technical services' to only services performed in India, for India to have taxation rights based on "place of performance" test. Accordingly, on literal interpretation of Article 12(4) of the DTAA, it follows that payment by an Indian payer for services to a Chinese resident, which are not performed in India, even though the services may be of managerial, technical or consultancy nature, would not be taxable in India. In the instant case, it was submitted that the testing and certification activities were undertaken by the entity(ies) in China and hence not taxable in India in view of overriding Article 12(4) of the DTAA. ii. He also submitted that payments are not in the nature of 'Fee for technical services'. He submitted that the testing/certification services rendered by the aforesaid foreign entities was even otherwise not in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltancy services". b) Reference is also made to the decision of the Hon'ble Delhi High Court in the case of DIT vs. Panalfa Autoelektrik Ltd: 272 CTR 117, wherein the Court explained the meaning of the words "managerial", "technical" and "consultancy" services, covered within the scope of FTS under section 9(1)(vii) of the Act. Relevant extracts of the decision are as under: "24. The OECD Report on e-commerce titled, Tax Treaty Characterization Issues arising from e-commerce: Report to Working Party No.1 of the OECD Committee on Fiscal Affairs dated 01st February 2001, has elucidated:- 'Technical services 39. For the Group, services are of technical nature when special skills or knowledge related to a technical field are required for the provision of such services. Whilst techniques related to applied science or craftsmanship would generally correspond to such special skills or knowledge, the provision of knowledge acquired in fields such as arts or human sciences would not. As an illustration, whilst the provisions of engineering services would be of a technical nature, the services of a psychologist would not. 40. The fact that technology is used in providing a service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ............... Consultancy services 45. For the Group, "consultancy services" refer to services constituting in the provision of advice by someone, such as a professional, who has special qualifications allowing him to do so. It was recognised that this type of services overlapped the categories of technical and managerial services to the extent that the latter types of services could well be provided by a consultant.' We broadly agree with the aforesaid observations............. 25. Thus, the technical services consists of services of technical nature, when special skills or knowledge relating to technical field are required for their provision, managerial services are rendered for performing management functions and consultancy services relate to provision of advice by someone having special qualification that allow him to do so." (emphasis supplied) c) In an earlier decision, the Madras High Court in the case of Skycell Communications Ltd. V. DCIT: 251 ITR 53 (Mad), while elaborately explaining the aforesaid concept of rendering of technical service, observed as under: "5 . ......... 'Fees for technical service' is not defined in section 194J. Explanation (b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the railway or the airline for having used it for travelling from one destination to another. When a person travels by bus, it cannot be said that the undertaking which owns the bus service is rendering technical service to the passenger and, therefore, the passenger must deduct tax at source on the payment made to the bus service provider for having used the bus. The electricity supplied to a consumer cannot, on the ground that generators are used to generate electricity, transmission lines to carry the power, transformers to regulate the flow of current, meters to measure the consumption, be regarded as amounting to provision of technical services to the consumer resulting in the consumer having to deduct tax at source on the payment made for the power consumed and remit the same to the revenue. 9. Satellite television has become ubiquitous and is spreading its area and coverage, and covers millions of homes. When a person receives such transmission of television signals through the cable provided by the cable operator, it cannot be said that the home owner who has such a cable connection is receiving a technical service for which he is required to deduct tax at source on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re law states that the intensity per unit area on the surface varies ins inversely proportional to the square of distance between the source and surface. Whereas the cosine law indicates the intensity of light on a surface of a fixed area varies with the incident angle. In fact, the intensity falls off as the cosine of the angle. Photometric Testing involves testing the amount, colour, quality and spatial distribution of light emitted from lamps, LEDs and luminaires. (b) Insofar as payment to German company is concerned, the same was made for certification based on a CB-Test Certificate [refer invoices at pages 81]. It may be appreciated that no technical service has been availed by the appellant. The recipients have merely done quality testing and certification of goods. 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. He specifically relied on the decision of the Bombay High Court in the case of DIT vs. TUV Bayren (India) Ltd.: ITA No.1304 of 2013, where similar tes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; either in the nature of managerial or technical or consultancy services and therefore, it was held that the same does not fall within the ambit of section 9(1)(vii) of the Act. He also relied up on decision of Delhi Bench of the Tribunal, in the case of ACIT vs Gates India (P) Ltd: [2017] 189 TTJ 473 (Del Trib.) held as under: "13. We have considered the rival contentions as well as relevant material on record. The assessee has paid testing fee to its A.E. GRC-US in respect of testing of its rubber hose. The A.E. has raised debit note on the assessee in respect of costs/expenses incurred by the A.E. in respect of testing of the product of the assessee. Therefore, it is not a case of any research and development facility provided by the A.E. to the assessee but it is simply a case of testing of the product of the assessee for quality purpose so as to meet the international standards and the requirement of exports. The assessee has explained that rubber hose pipes manufactured by the assessee are being used in mining process and therefore, there are certain standards of quality which are required to be met by the product of the assessee. Thus the testing of the product at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act and, therefore, the assessee was liable to deduct tax at source while crediting the transaction charges to the account of the stock exchange. However, since both the Revenue and the assessee were under the bona fide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault can be found with the assessee in not deducting the tax at source in the assessment 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. We make it clear that we have arrived at the above conclusion in the peculiar facts of the present case, where both the Revenue and the assessee right from the insertion of section 194J in the year 1995 till 2005 proceeded on the footing that the assessee is not liable to deduct tax at source and in fact immediately after the assessment year in question, i.e., from the assessment year 2006-07 the assessee has been deducting tax at source while crediting the transaction charges to the account of the stock exchange. 33. The question raised in the appeal is answered accordingly and the appeal is disposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f non-deduction or non-payment of tax deducted at source (TDS) from certain payments made to residents, the entire amount of expenditure on which tax was deductible is disallowed under section 40(a)(ia) for the purposes of computing income under the head "Profits and gains of business or profession". The disallowance of whole of the amount of expenditure results into undue hardship. In order to reduce the hardship, it is proposed that in case of non-deduction or non-payment of TDS on payments made to residents as specified in section 40(a)(ia) of the Act, the disallowance shall be restricted to 30% of the amount of expenditure claimed. Further, existing provisions of section 40(a)(ia) of the Act provides that certain payments such as interest, commission, brokerage, rent, royalty fee for technical services and contract payment made to a resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time specified under the said section. Chapter XVII-B of the Act mandates deduction of tax from certain other payments such as salary, directors fee, which are currently not specified under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld, it is respectfully submitted, have retrospective application. Specific reliance in this regard is placed on the following decisions, where it has been held that amendment to section 40(a)(ia) of the Act restricting the disallowance to 30% of expenditure, being clarificatory/ curative in nature, is applicable retrospectively: - i. Prabhatam Advertising Pvt. Ltd. vs. DCIT: ITA No.5798 of 2014 (Del) - Smt. Kanta Yadav vs. ITO: ITA No. 6312/Del/2016 (Del) ii. RH International Ltd. vs. ITO: ITA No. 6724 of 2018 (Del) iii. Sh. Rajendra Yadav vs. ITO: ITA No. 895/JP/2012 (Jaipur) iv. Smt.Sonu Khandelwal vs. ITO: ITA No. 597/JP/2013 (Jaipur) v. Siddi Vinayak Sarees vs. ITO: 2056 of 2018 (Kol) In view of the aforesaid, it is emphatically reiterated that amendment in section 40(a)(ia) of the Act, being clarificatory/ curative in nature, is applicable retrospectively. 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. 65. He submitted that terms of DTAA provides that residents of foreign country shall not be subjected in India to any taxation or any requirement con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al services according to article 12(4)(b) of the Act. Accordingly, the payment to CSA International USA of Rs. 1568212/- 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 of Rs. 248218/- is also covered in favour of the assessee at para No. 9 of the order of the coordinate bench in assessee's own case for Assessment Year 2006-07. 71. With respect to the payment to 3 different parties of China amounting to Rs. 173924/- and Rs. 611490/- paid to VDEPZI, Germany are required to be tested for this year. 72. The brief nature of the services could also be gathered from the various documents such as bills of the parties placed at page No. 57 onwards. These are the country specific certifications. The Kema Certification Quality Control Certification is mandatory with CE Sample for sale in European Union and similarly CSA Quality certifications are mandatory for sale in USA. As assessee in his written arguments have referred about the nature of services refereeing to a website which shows that Photometric Testing provides a comprehensive laboratory service for testing the amount, colour, quality and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... izations who are issuing certificates are up-to-date in their knowledge and technical skills with respect to the fast developments in the technological standards in its latest development. Thus, it is obvious that only properly accredited third parties have the objectivity required to issue test results that can be used for official purposes. They possess specialized knowledge of the local situation for which the certification is sought. The various certificates produced before us shows that the certificate has been issued and the product has been certified after the typed test according to the standards issued by the standardization committee, inspection of the product location, examination of the documents and comparison of the specification with the agreement with the number i.e code. So far as the electrical products are concerned, it certifies the related current, range of instantaneous tripping over current, related voltage, related short-circuit capacity, related service short-circuit capacity, the class of limiting the energy, the safety distance, method of mounting, degree of protection against moisture and verification of insulating material. It also keep the test results ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2005 - 06 by this decision. 76. One more argument has been taken by the assessee that according to the understanding of the assessee, the services are provided by the machines and it does not involve human intervention. Therefore it fails the test of being a technical services and hence relying on the decision of the honourable Supreme Court in case of CIT versus Bharti cellular Ltd (2011) 330 ITR 239 (assessee) wherein in para number six of that decision the honourable Supreme Court dealt with this issue. Now this aspect of the matter has further been dealt by the honourable Supreme Court in CIT versus Kotak securities Ltd and other connected appeals (2016) 383 ITR 1 (SC) wherein the honourable Supreme Court noted in para number six of that decision noting that as 'managerial and consultancy services' and therefore necessarily 'technical services' would obviously involves services rendered by human efforts. This has been the consistent view taken by the courts including Hon Supreme court in Bharti cellular Ltd (supra). However, it cannot be lost sight of those modern-day scientific and technological developments maintained to blur the specific human element in an otherwise full ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock exchange/National stock exchange to its broker for a provision of facilities of a faceless screen-based transaction, a constant upgradation of the services made available and surveillance of the essential parameters connected with the trade including those of a particular/single transaction that would lead credence to its authenticity as provided for by the stock exchange. All these services were fully automated and were available to all the members of the stock exchange in respect of every transaction that is entered into. There was nothing special, exclusive or customized service that is rendered by the stock exchange. It was held that technical services like managerial and consultancy services would denote seeking of services to cattle to the special needs of the consumer user as may be felt necessary and the making of the same available by the service provider. It was held that it is the above feature i.e. a specialized feature that would distinguish or identify a service provided from a facility offered. While the former especially an exclusive to the seekers of the service, the letter, even if termed as a service, is available to all and would therefore stand out in the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it is a specialized facility provided to the assessee for testing of its goods exported in that particular country. In view of this, the argument of the assessee that these are standard facilities does not hold water and is rejected. 78. Further assessee has raised an argument with respect to article 12 (4) of the Double Taxation Avoidance Agreement between India and China, where a specific argument is raised that the services have not been rendered or performed in India and therefore they are not 'fees for technical services' as per the agreement, and hence same is not taxable as per DTAA. This argument of the assessee has been covered against the assessee by decision of coordinate bench in Ashapura Minichem Ltd. v. Assistant Director of Income-tax *, International Taxation 1(1), Mumbai [2010] 40 SOT 220 (Mumbai)/[2010] 131 TTJ 291 (Mumbai) where in t has been held as under :- " 3. The basic thrust of assessee's contentions is that, since no part of the testing services was rendered in India, the Chinese company did not have any tax liability in India in respect of the bauxite testing charges. By way of a detailed note, it is submitted that in order to attract taxability und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical services in the India China tax treaty has an additional requirement of 'place of performance' in the source country, to be satisfied before it can be taxed as fees for technical services in the source country. He takes us through the provisions of Indo China tax treaty, China Pakistan Tax Convention, India Israel Tax Convention, India South Africa Tax Convention and India Germany Tax Convention. He does all this to highlight that India China tax treaty is unique in its wordings and its scope - so far as the taxability of fees for technical services is concerned. When his attention was invited to the deeming fiction under article 12(6) of the treaty, which requires the 'fees for technical services' as deemed to have arisen in the State of which payer is resident, learned counsel submitted that 'fees for technical services', for the purpose of article 12(6), cannot have any other meaning than the meaning assigned under article 12(4) and, under article 12(4), place of performance test is to be satisfied before FTS can be taxed in the source State. It is repeatedly emphasized that article 12(6) can come into play only when the 'fees for technical services' meets the definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision of article 12(6) is quite clear and categorical, and we are urged to give it a sensible and reasonable meaning which makes the provision workable rather than making the provision redundant. It is submitted that when payment is made to a Chinese enterprise is made by an Indian enterprise, the 'fees for technical services' is deemed to have arisen in India. In case we are to proceed on the basis that such deeming provision can only be invoked when the services by Chinese enterprise are rendered in India, this deeming clause will be rendered meaningless, as one cannot deem something which exists in reality anyway. Whichever way we examine the issue - whether under the Income-tax Act, 1961 of under the India China tax treaty, according to the learned Departmental Representative, the payment for tasting fees is liable to be taxed in India. We are thus urged to confirm the findings of the authorities below and decline to interfere in the matter. 4. We have given our careful consideration to the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 5. As regards the taxability under the domestic l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act, and observed as follows : "The Apex Court had occasion to consider the above question in the case of Ishikawajima Harima [2007] 288 ITR 408 (SC), wherein, while interpreting the provisions of section 9(1)(vii)( c) of the Act, the Supreme Court held as under (page 444) : 'Section 9(1)(vii)( c) of the Act states that 'a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India, or for the purposes of making or earning any income from any source of India'. Reading the provision in its plain sense, as per the Apex Court it requires two conditions to be met-the services which are the source of the income that is sought to be taxed, has to be rendered in India, as well as utilized in India, to be taxable in India. Both the above conditions have to be satisfied simultaneously. Thus for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India. In the above judgment, the Apex Court observed that (page 444) : 'Section 9(1)(vii) of the Act must be read with se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng or earning any income from any source in India. It is thus, evident that section 9(1)(vii)( c), read in its plain, envisages the fulfilment of two conditions : services, which are source of income sought to be taxed in India must be (i) utilized in India, and (ii) rendered in India. In the present case, both these conditions have not been satisfied simultaneously." 8. It is thus clear that the judgment of Hon'ble Bombay High Court in Clifford Chance's case (supra) rests on the legal premises that, under section 9(1)(vii), "services, which are source of income sought to be taxed in India, must be (i) utilized in India; and (ii) rendered in India" and the conceptual premises that "territorial nexus for the purpose of determining the tax liability is an internationally accepted principle". Learned counsel has laid lot of emphasis on these two principles. 9. The legal proposition canvassed by the learned counsel, however, does no longer hold good in view of retrospective amendment with effect from 1-6-1976 in section 9 brought out by the Finance Act, 2010. Under the amended Explanation to section 9(1), as it exists on the statute now, it is specifically stated that the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource rule is an integral part of the taxation system and any double jeopardy, due to inherent clash of source and residence rule, to a taxpayer is relieved only through the specified relief mechanism under the treaties and the domestic law. It is thus fallacious to proceed on the basis that territorial nexus to a tax jurisdiction being sine qua non to taxability in that jurisdiction is a normal international practice in all tax systems. This school of thought is now specifically supported by the retrospective amendment to section 9. 11. It is thus clear that Hon'ble Bombay High Court's judgment in the case of Clifford Chance ( supra) is no longer good law, as there have been amendments in law in consonance with the school of thought discussed above and these amendment unambiguously negate the principle of territorial nexus which is the under structure of line of reasoning adopted by the Hon'ble Courts above. It is no longer necessary that, in order to invite taxability under section 9(1)(vii) of the Act, the services must be rendered in the Indian tax jurisdiction. In our considered view, Therefore, the income of the Chinese company, by way of impugned receipt of fees for techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of article 7 or article 14, as the case may be, shall apply. 6.Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the Government of that Contracting State, a political sub-division a local authority thereof or a resident of that Contracting State. Where, however the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contacting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base then such royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 7.Where by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g made by a resident of another country who is carrying out such business or profession in the first country. In these situations, even though the payment is not received from a resident of the first country, the true source of earning is located in the first country. Second limb of article 12(6) takes care of such situations and makes the manifestation of source rule even more unambiguous. It provides that even when person making the payment is not resident of the other contracting state but the payment is being made by him in connection with a permanent establishment or fixed base in the other Contracting State, such royalties and fees for technical services will be deemed to have accrued in the other Contracting State. In such a situation, the true source jurisdiction will be that other contracting state even though the payment may be made from outside both the Contracting States, and, therefore, the income is deemed to have accrued in that other Contracting State. 16. When we put it to the learned counsel that in view of the deeming fiction of article 12(6), it is not really necessary to go into the broader question about the merits of his arguments on the scope of article 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... line of arguments either. Whether a particular income is to be covered by the benefits of a tax treaty or not is essentially a decision at the level of the Governments and it depends on several considerations - all of which do not necessarily reflect sound taxation or sound economic policies. Just because India does not seek a source taxation right in tax treaty with Saudia Arabia, or because Pakistan gives up a source taxation right in tax treaty with China, it cannot influence as to what is the scope of India China tax treaty. It is not at desirable to be influenced with what has been decided in other tax-treaties entered into by the Contracting States. As regards the references to India Israel and India Saudia Arabaia tax treaties, therefore, these are tax treaties with different countries and whatever is decided in these tax treaties does not influence the scope of tax treaty before us. As far as China Pakistan tax treaty is concerned, we have noted that while China Pakistan tax treaty refers to "provision of rendering of any managerial, technical or consultancy services (emphasis supplied by us)", India China tax treaty refers to "provision of services of managerial, techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an agreement and not taxing statute, even though it is an agreement about how taxes are to be imposed. The principles adopted in the interpretation of statutory legislation are not applicable in interpretation of treaties. uA tax treaty is to be interpreted in good faith in accordance with the ordinary meaning given to the treaty in the context and in the light of its objects and purpose. uA tax treaty is required to be interpreted as a whole, which essentially implies that the provisions of the treaty are required to be construed in harmony with each other. u The words employed in the tax treaties not being those of a regular Parliamentary draughtsman, the words need not examined in precise grammatical sense or in literal sense. Even departure from plain meaning of the language is permissible whenever context so requires, to avoid the absurdities and to interpret the treaty ut res magis valeat quam pereat, i.e., in such a manner as to make it workable rather than redundant. u A literal or legalistic meaning must be avoided when the basic object of the treaty might be defeated or frustrated insofar as particular items under consideration are concerned. Words are to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) and decline to interfere in the matter." Therefore, respectfully following the decision of the coordinate bench we also reject this argument of the assessee and hold that Article 12 (4) of India China DTAA does not provide that services should be rendered in India to qualify as 'Fees for Technical services'. 79. The next argument of the assessee was that assessee was under a bona fide belief for non-deduction of tax at source on these testing charges paid to the foreign parties. On careful consideration of the argument of the assessee which is emanating from para number 32 of the decision of the honourable Bombay High Court in case of Kotak securities Ltd (340 ITR 333), wherein the honourable High Court held that since both the Revenue and the assessee were under the bona fide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault can be found with the assessee in not deducting the tax at source in the assessment 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 befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not deserve any consideration. Even otherwise, both are different provisions to be applied in different situations. Undoubtedly, both the provisions are applicable with respect to the resident assessee only, who is the payer. Therefore, there are two different conditions one for 'payment made by a resident to a non-resident' [u/s 40(a) (i) and another by 'a resident to a resident' [ u/s 40 (a) (ia)]. In view of this, we do not find there is any discriminatory treatment given to a non-resident entity. In fact a non resident assessee is not at all concerned with above payments and its disallowance in the hands of a resident payer. Therefore, there is no discrimation with respect to nationality. Decisions cited by ld AR does not support the contentions raised on this issue. Thus, this argument of the learned AR is also rejected. 82. The ld AR fairly agreed that in DTAA between India and China and India and Germany, in Article 12 of those treaties, there is no condition of 'make available' for taxation of 'Fees For technical services'. No other articles of DTAA were referred or pressed up on. 83. In view of this with respect to the payment to China based agents and Germany based ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld have allowed the claim of the assessee as the decision of the Hon'ble Supreme Court applies only to the ld AO and not the appellate authorities. He vehemently relied upon the several judicial precedents. 86. On merits, he submitted that the exclusion of the loss of the eligible unit against the income of another eligible unit cannot be net off against each other as deduction u/s 80IC of the Act is allowable with respect to each eligible industrial undertaking. He relied upon the several judicial precedents. Thus, according to him deduction claimed by the revised letter before the ld AO should have been allowed to the assessee. 87. The ld DR vehemently supported the orders of the lower authorities. He submitted that the assessee should have filed the revised return if it wanted to claim the share deduction. 88. We have carefully considered the rival contention and perused the orders of the lower authorities. Undoubtedly, the assessee had two eligible units, profit of which is eligible for deduction u/s 80IC of the Act. These two units are Unit No. 1 and Unit No. 2 at Badi, Himachal Pradesh. At the time of filing of the original return of income, the assessee found that it ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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