DCIT 10(2), MUMBAI V. GUJARAT RECLAIM & RUBBER PRODUCTS P.LTD, MUMBAI

ITA 169/MUM/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3631 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-04-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 20-03-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 09-01-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DEEPAK K SINHA
• Assessee Lawyers: MANJU SI SODIA; B V JHHAVERI
• Keywords: Capital asset; Recovery proceedings; Depreciation; Business expenditure; Source of fund; Services rendered outside India; Proportionate interest; Retrospective amendment; Permanent establishment; Question of law; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 14A; 194C

Judgement Text

ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 1 OF 28 IN THE INCOME TAX APPELLATE TRIBUNAL 'K' BENCH, MUMBAI BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER & SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO.8868/MUM/2010 (ASSESSMENT YEAR: 2007-08) GUJARAT RECLAIM & RUBBER PRODUCTS LTD., KOHINOOR CITY COMMERCIAL-1, 510, 5 TH FLOOR, WING, KIROL ROAD KAMANI, OFF LBS MARG, KURLA(W), MUMBAI 400070 PAN: AAACG 1890 M VS. ADDITIONAL CIT, 10(2) AAYAKAR BHAVAN, MK ROAD, MUMBAI 400020 (APPELLANT) (RESPONDENT) ITA NO.8789/MUM/2011 (ASSESSMENT YEAR: 2008-09) GUJARAT RECLAIM & RUBBER PRODUCTS LTD., KOHINOOR CITY COMMERCIAL-1, 510, 5 TH FLOOR, WING, KIROL ROAD KAMANI, OFF LBS MARG, KURLA(W), MUMBAI 400070 PAN: AAACG 1890 M VS. DY. CIT, 10(2) AAYAKAR BHAVAN, MK ROAD, MUMBAI 400020 (APPELLANT) (RESPONDENT) ITA NO.169/MUM/2012 (ASSESSMENT YEAR: 2008-09) DY. CIT, 10(2) AAYAKAR BHAVAN, MK ROAD, MUMBAI 400020 VS. GUJARAT RECLAIM & RUBBER PRODUCTS LTD., KOHINOOR CITY COMMERCIAL-1, 510, 5 TH FLOOR, WING, KIROL ROAD KAMANI, OFF LBS MARG, KURLA(W), MUMBAI 400070 PAN: AAACG 1890 M (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI B.V.JHHAVERI & MS.MANJU SISODIA DEPARTMENT BY: SHRI DEEPAK K. SINHA, DR DATE OF HEARING: 20/03/2013 DATE OF PRONOUNCEMENT: 19/04/2013 ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 2 OF 28 O R D E R PER BENCH. THESE ARE APPEALS BY ASSESSEE AND REVENUE IN AY 20 07-08 AND 2008-09. THE APPEAL IN 2007-08 IS BY ASSESSEE A GAINST THE ORDERS OF THE CIT (A-22 MUMBAI DATED 25.10.2010, WH EREAS THE CROSS APPEALS FOR THE AY 2008-09 ARE AGAINST THE OR DER OF THE CIT (A)-21 MUMBAI DATED 10.10.2011. SINCE THE ISSUES AR E COMMON IN ALL THE APPEALS, THESE ARE CONSIDERED TOGETHER. GRO UNDS RAISED BY ASSESSEE IN AY 2007-08 ARE AS UNDER: ITA NO.8868/MUM/2010 AY 2007-08: 1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOME TAX (A) ERRED IN DIRECTING THE ASSESSING OFFICER TO CARRY OUT THE RECTIFICATION U/S.154 OF THE ACT INSTEAD OF DECIDING ON MERIT IN RESPECT OF ADDITIONS OF RS.14,24,448/- BEING EXCISE DUTY ON OPENING STOCK ON THE MISTAKEN PRESUMPTION THAT THE SAID AMOUNT IS CLAIMED TWICE I N THE RETURN, THOUGH THE FULL FACTS IN RESPECT OF THE SAME WERE AVAILABLE BEFORE THE CIT(A). THE CIT(A) OUGHT TO HAVE DECIDED THE MATTER ON THE MERIT. 2) WITHOUT PREJUDICE TO ABOVE, AO HAS WRONGLY MADE ADDITION OF RS.14,24,448/- BEING EXCISE DUTY ON OPENING STOCK ON THE PRESUMPTION THAT THE SAME HAS BEEN CLAIMED TWICE. 3) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE COMMISSIONER OF INCOME TAX (A) ERRED IN CONFIRMING ADDITION ON ACCOUNT OF COMMISSION PAYMENTS OF RS.17,29,389/- UNDER SECTION 40(A)(I) WITHOUT CONSIDERING THE FACT THAT THE SAID PAYMENTS ARE NOT COVERED U/S. 40(A)(I) OF THE ACT AND 1 OR NO TAX WAS REQUIRED TO BE DEDUCTED. 4) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOME TAX (A) ERRED IN CONFIRMING ADDITION ON ACCOUNT OF OCEAN FREIGHT EXPENSES OF RS.58,82,475/- UNDER SECTION 40(A)(I) WITHOUT CONSIDERING THE FACT THAT THE SAID PAYMENTS ARE NOT COVERED U/S. 40(A)(I) OF THE ACT AND 1 OR NO TAX ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 3 OF 28 WAS REQUIRED TO BE DEDUCTED. 5) WITHOUT PREJUDICE TO ABOVE AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ER RED IN RELYING ON CIRCULAR NO.7 OF 2009, WHICH HAS COME IN TO EFFECT ONLY PROSPECTIVELY AND HENCE QUESTION OF DISALLOWANCE U/S.40(A)(I) DOES NOT ARISE. 6) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE COMMISSIONER OF INCOME TAX(A) ERRED IN CONFIRMI NG ADDITION OF LEGAL & PROFESSIONAL EXPENSES OF RS.6,00,0001- THOUGH THESE EXPENSES WERE OF REVENUE NATURE AND NOT OF CAPITAL NATURE. 7) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO CARRY OUT THE RECTIFICATION U/S.1S4 OF THE ACT INST EAD OF DECIDING ON MERIT IN RESPECT OF REPAIR & MAINTENANCE (COMPUTER SOFTWARE EXPENSES) OF RS.9,85,864/- THOUGH THESE EXPENSES WERE NOT CLAIMED IN PROFIT AND LOSS ACCOUNT AND WERE IN FACT BEEN CAPITALISED AND THEREFORE THERE WAS NO QUESTION OF DISALLOWING THE SAID EXPENSES. IN FACT, THOUGH THE CIT(A) DECIDED ON THE MERIT, IT WAS WRONGLY DIRECTED TO CARRY RECTIFICATI ON U/S.154 OF THE ACT INSTEAD OF ALLOWING THE SAME. 8) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO CARRY OUT THE RECTIFICATION U/S.154 OF THE ACT INST EAD OF DECIDING ON MERIT IN RESPECT OF REPAIR & MAINTENANCE (OFFICE RENOVATION EXPENSES) OF RS.3,60,845/- THOUG H THESE EXPENSES WERE NOT CLAIMED IN PROFIT & LOSS ACCOUNT AND WERE IN FACT BEEN CAPITALISED AND THEREFORE THERE WAS NO QUESTION OF DISALLOWING THE SAID EXPENSES. IN FACT, THOUGH THE CIT(A) DECIDED ON THE MERIT, IT WAS WRONGLY DIRECTED TO CARRY RECTIFICATI ON U/S.154 OF THE ACT INSTEAD OF ALLOWING THE SAME. 9) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE COMMISSIONER OF INCOME TAX(A) ERRED IN CONFIRMI NG ADDITION ON ACCOUNT OF INTEREST EXPENSES OF RS.3,18,6001-, WITHOUT CONSIDERING THAT: A) NO BORROWED FUNDS WERE UTILISED FOR INVESTMENTS/ ADVANCES. B) MOST OF THE AMOUNTS WERE GIVEN FOR STRATEGIC INVESTMENT AND NOT BY WAY OF LOAN. ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 4 OF 28 C) THE INVESTMENTS WERE MADE ON VARIOUS DATES AND NOT ON THE FIRST DAY OF THE YEAR FOR WORKING OUT INTERE ST. 2. IN THE COURSE OF THE APPELLATE PROCEEDINGS THE GROU ND NOS.1, 2, 7 & 8 WERE NOT PRESSED AS AO RECTIFIED THE ORDER UNDER SECTION 154. 3. THE ISSUE IN GROUND NOS. 3 & 5 IS ON THE DISALLOWAN CE OF AN AMOUNT OF ` .17,29,389 UNDER SECTION 40(A)(IA) OF THE ACT OF COMMISSION PAID TO NON RESIDENT AGENTS. THIS GROUND IS SIMILAR TO GROUND NOS. 1 & 2 RAISED BY THE REVENUE IN AY 2008- 09 IN ITA NO.169/MUM/2012 AS THE CIT (A) THEREIN HAS HELD AGA INST THE REVENUE ON SIMILAR FACTS. THEREFORE, ALL THE GROUND S ARE CONSIDERED TOGETHER FOR THE SAKE OF CONVENIENCE. 4. BRIEFLY STATED, ASSESSEE PAID AN AMOUNT OF ` .17,29,389 AS COMMISSION PAYMENT TO NON-RESIDENT AGENTS FOR THE S ERVICES PROVIDED IN FOREIGN COUNTRY. AS THEY DO NOT HAVE AN Y BUSINESS CONNECTION IN INDIA, ASSESSEE HAS NOT DEDUCTED ANY TAX WHEN THE AMOUNTS WERE REMITTED. ON THE REASON THAT ASSESSEE SHOULD HAVE REMITTED THE AMOUNT AFTER DEDUCTING THE TAX, AO INV OKED PROVISIONS OF SECTION 40(A)(IA) AND DISALLOWED THE AMOUNT. THE LEARNED CIT (A) IN AY 2007-08 REJECTED ASSESSEES CONTENTIONS AND C ONFIRMED THE DISALLOWANCE. THEREFORE, ASSESSEE IS IN APPEAL. 4.1 IN AY 2008-09 ASSESSEE PAID AN AMOUNT OF ` .32,73,538 TO NON RESIDENTS FOR SERVICES PROVIDED IN FOREIGN COUN TRIES. FOR THE SAME REASONS, AO DISALLOWED THE ABOVE AMOUNT INVOKI NG THE PROVISIONS OF SECTION 40(A)(I). THE LEARNED CIT (A) AFTER ELABORATE DISCUSSION DELETED THE SAID ADDITION. THEREFORE, TH E REVENUE IS AGGRIEVED IN THAT YEAR. 4.2 BEFORE US THE LEARNED COUNSEL SUBMITTED THAT DU RING THE AY 2007-08 ASSESSEE PAID COMMISSION TO FIVE NON RESIDE NT AGENTS FOR RENDERING SERVICES IN RESPECT OF PROCURING EXPORT O RDERS FROM ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 5 OF 28 VARIOUS COUNTRIES. COPIES OF COMMISSION AGREEMENTS, COPIES OF CREDIT NOTES AND PAYMENT ADVICES ARE AT PAGES 20 TO 63 OF THE PAPER BOOK. IT WAS STATED THAT THE NON RESIDENTS AGENTS W ERE OPERATING IN THEIR OWN RESPECTIVE COUNTRIES AND THEY PROCURED TH E ORDERS FOR ASSESSEE FROM THE PARTIES OUTSIDE INDIA AND THE COM MISSION WAS PAID TO THEM OUTSIDE INDIA DIRECTLY IN FOREIGN CURR ENCY. IN INDIA, NEITHER THESE AGENTS HAVE ANY BUSINESS CONNECTION N OR DO THEY HAVE ANY PLACE OF BUSINESS. THEREFORE, COMMISSION I NCOME EARNED BY THE NON RESIDENT AGENTS OUTSIDE INDIA HAS NOT DE EMED TO ACCRUE OR ARISE IN INDIA AND HENCE THE SAID COMMISSION INC OME OF THE NON RESIDENT AGENTS ARE NOT TAXABLE IN INDIA. 4.3 IT WAS FURTHER SUBMITTED THAT THE ASSESSEE COMP ANY APPOINTED AFORESAID AGENTS FOR MARKETING AND DISTRI BUTION OF VARIOUS GRADES OF RECLAIM RUBBER IN THE RESPECTIVE COUNTRIES FOR A COMMISSION OF 5% OF THE FOB VALUE OF THE SHIPMENT O F THE PRODUCTS TO THE CLIENTS. THE TERMS & CONDITIONS OF SALES OF THE PRODUCTS BY THE PRINCIPAL INCLUDING PRICE, DELIVERY SCHEDULE, P ACKING, PAYMENT TERMS, PRODUCT GRADES AND SPECIFICATIONS IS TO BE M UTUALLY DECIDED BETWEEN THE PRINCIPAL, AGENTS AND THE CUSTOMERS WHI CH IS CONFIRMED BY A PURCHASE ORDER FROM THE AGENT OR FRO M THE CUSTOMER. IN OTHER WORDS, ASSESSEE RESERVES THE RIG HT OF EXECUTION OF ORDER AND/OR CANCEL THE ORDER PROCURED BY THE AG ENT. THE AGENT IS NOT AUTHORIZED TO MARKET THE PRODUCTS OF THIRD P ARTY WHICH ARE COMPETING WITH THOSE OF THE ASSESSEE COMPANY. 4.4 ASSESSEE RELIED ON THE BOARD CIRCULAR NO.23 AND 786 WHICH WAS SUBSEQUENTLY WITHDRAWN BY THE CIRCULAR NO.7 ISS UED ON 22.10.2009. THE LEARNED COUNSEL RELIED ON THE DECIS ION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF BASF (INDI A) LTD. V. W. HASAN, CIT, 280 ITR 136 THAT THE CIRCULAR WHICH ARE IN FORCE DURING THE RELEVANT AYS ARE TO BE APPLIED. IT WAS FURTHER RELIED ON THE HON'BLE BOMBAY HIGH COURT DECISION IN THE CASE OF U NIT TRUST OF ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 6 OF 28 INDIA V. INCOME TAX OFFICER, 249 ITR 612 TO SUBMIT THAT THE SUBSEQUENT WITHDRAWAL OF THE CIRCULAR WILL HAVE NO EFFECT ON THE CIRCULAR ISSUED AND APPLICABLE IN THE RELEVANT AY. ON MERITS THE LEARNED COUNSEL RELIED ON THE DECISION OF THE COORD INATE BENCH IN THE CASE OF ARMAYESH GLOBAL V. ACIT, 50 SOT 564 (MU M.) TO SUBMIT THAT THE COMMISSION AMOUNTS PAID DOES NOT ARISE OR ACCRUE IN INDIA AS THE SERVICES ARE RENDERED OUTSIDE INDIA. THEREFO RE, PROVISIONS OF SECTION 195 DOES NOT APPLY AND CONSEQUENTLY CANNOT BE DISALLOWED UNDER SECTION 40(A)(IA). HE ALSO RELIED ON THE JUDG MENT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. EON TECHNOLOGIES, 203 TAXMAN 266 TO SUBMIT THAT THE PAYMENT OF COMMIS SION PAID BY THE INDIAN EXPORTERS TO NON RESIDENT AGENTS CANNOT BE DISALLOWED UNDER SECTION 40(A)(IA). 4.5 THE LEARNED DR HOWEVER, RELIED ON THE ORDERS OF THE CIT (A) IN AY 2007-08 TO SUBMIT THAT HAVING WITHDRAWN THE BOAR D CIRCULAR AND IS APPLICABLE FOR THE PROCEEDINGS PENDING, AO H AS RIGHTLY DISALLOWED THE AMOUNT AND SO THE AMOUNT HAS TO BE D ISALLOWED UNDER SECTION 40(A)(IA) AND THE ORDER OF THE CIT (A ) IN AY 2008-09 IS NOT CORRECT. THEREFORE, THAT HAS TO BE REVERSED AND THE ORDER OF THE CIT (A) IN AY 2007-08 SHOULD BE CONFIRMED. 4.6 WE HAVE CONSIDERED THE ISSUE. THERE IS NO DISPU TE WITH REFERENCE TO THE FACT THAT ASSESSEE PAID COMMISSION AT 5% ON FOB VALUE OF THE SHIPMENT OF THE PRODUCT TO THE FOREIGN AGENTS AND IS ALSO NOT IN DISPUTE THAT THE AGENT IS NOT AUTHORIZE D TO MARKET THE PRODUCTS TO ANY THIRD PARTY AND IT DOES NOT HAVE AN Y BUSINESS CONNECTION IN INDIA. THEIR SERVICES ARE ALSO NOT UT ILIZED IN INDIA. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF T HE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. EON TECHNOLOGY (SU PRA) AND ALSO THE COORDINATE BENCH DECISION IN THE CASE OF ARMAYE SH GLOBAL V. ACIT (SUPRA), THE INCOME OF THE NON RESIDENT CANNOT BE CONSIDERED AS ACCRUED OR ARISEN OR DEEMED TO ACCRUE OR ARISE I N INDIA AS THE ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 7 OF 28 SERVICES OF THE SAID AGENTS WERE RENDERED/UTILIZED OUTSIDE INDIA AND THE COMMISSION WAS ALSO PAYABLE/PAID OUTSIDE INDIA. FURTHER, IN THE ABSENCE OF PERMANENT ESTABLISHMENT IN INDIA, TH E INCOME OF THE SAID AGENTS CANNOT BE SUBJECTED TO TAX IN INDIA AND HENCE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX ON PAYMENTS MADE TO TH E SAID AGENTS. THEREFORE, PROVISIONS OF SECTION 40(A)(IA) HAVE NO APPLICATION ON THE GIVEN FACTS. THIS ISSUE WAS VERY ELABORATELY DISCUS SED BY THE CIT (A) IN AY 2008-09 WHICH WE CONSIDER AS WORTH EXTRACTING FOR COMPLETENESS OF THE ORDER. THE ORDER OF THE CIT (A) IN PARA 4.3 IN AY 2008-09 IS AS UNDER: 4.3 I HAVE CONSIDERED THE FACTS OF THE CA SE. THE APPELLANT MADE PAYMENT OF COMMISSION TO THREE NON- RESIDENT COMMISSIONS AGENTS AGGREGATING TO RS.32,73,538/- FOR PROCURING THE ORDERS FOR EXPORT OF RECLAIMED RUBBER MANUFACTURED BY THE APPELLANT. IT WAS ADMITTED FACT THAT FIRSTLY THE NON- RESIDENT COMMIS SION AGENTS PROCURED ORDERS OUTSIDE INDIA, SECONDLY REND ERED SERVICES OUTSIDE INDIA AND THIRDLY THE PAYMENT TO S UCH NON- RESIDENT COMMISSION AGENTS WERE MADE BY APPELLANT IN FOREIGN CURRENCY AND OUTSIDE INDIA. IT WAS ALSO AN ADMITTED FACT THAT THE SAID NON-RESIDENT COMMISSION AGENTS HAD NO PERMANENT ESTABLISHMENT IN INDIA. THE A.O. DISALLOWED SUCH PAYMENT OF COMMISSI ON HOLDING THAT FIRSTLY NO DOCUMENTARY EVIDENCE WAS FURNISHED TO SUBSTANTIATE AS TO HOW THE ABOVE PAYME NTS WERE NOT LIABLE FOR TDS EXCEPT THE MERE STATEMENT T HAT SERVICES WERE NOT RENDERED IN INDIA, SECONDLY THERE WERE VARIOUS PROVISIONS UNDER THE ACT IN WHICH EVEN SERVICES WERE PERFORMED OUTSIDE INDIA BUT IF SERVIC ES WERE UTILIZED IN INDIA THE PAYMENTS WERE LIABLE TO INDIAN TAXATION LAWS AND THIRDLY THE SEC.195 MANDATES THAT IF ANY SUM WHICH IS CHARGEABLE TO TAX IN INDIA, TAX AT SOURCE NEEDS TO BE DEDUCTED. THE A.O. ALSO HELD THA T IF THE APPELLANT WAS BELIEVING THAT SUCH PAYMENT WAS N OT LIABLE FOR TDS, THE APPELLANT SHOULD HAVE APPROACHE D THE IT AUTHORITIES FOR A CERTIFICATE FOR NIL DEDUCTION OF TAX. I HAVE CONSIDERED THE A.O'S OBSERVATION FOR MAKING TH E DISALLOWANCE OF COMMISSION PAYMENT UJS.40(A)(I) OF THE ACT. I AM NOT IN AGREEMENT WITH THE A.O'S OBSERVATI ON. IT IS NOT UNDERSTOOD AS TO WHAT MORE EVIDENCE SHOULD ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 8 OF 28 HAVE BEEN SUBMITTED BY APPELLANT TO SUBSTANTIATE TH AT THE PAYMENTS WERE NOT LIABLE FOR TDS EXCEPT CLAIMIN G THAT THE SERVICES WERE NOT RENDERED IN INDIA. THE A .O. ALSO INCORRECTLY OBSERVED THAT THE TDS PROVISIONS W ERE APPLICABLE IF SERVICES ARE RENDERED OUTSIDE INDIA B UT IF SERVICES ARE UTILIZED IN INDIA. IN THE CASE UNDER CONSIDERATION THOUGH THE SERVICES WERE RENDERED OUTSIDE INDIA BUT THE SERVICES WERE NOT UTILIZED IN INDIA AND, THEREFORE, THE A.O'S OBSERVATION WAS NOT RELEV ANT. THE A.O'S OBSERVATION WAS ALSO IRRELEVANT THAT THE APPELLANT SHOULD HAVE APPROACHED THE IT AUTHORITIES FOR OBTAINING THE CERTIFICATE OF NIL DEDUCTION OF TAX. WHEN THE APPELLANT WAS CLAIMING THAT SUCH PAYMENT OF COMMISSION TO NON-RESIDENT AGENTS WAS NOT LIABLE FO R TDS THEREFORE, THERE WAS NO NEED FOR APPROACHING TH E IT AUTHORITIES FOR OBTAINING SUCH CERTIFICATE. IN THE ASSESSMENT ORDER THE A.O. ALSO CONSIDERED CBDT'S CIRCULAR NO.23 OF 1969 AND 786 OF 2000 AND WITHDRAWAL OF SUCH CIRCULARS BY CBDT VIDE CIRCULAR NO.7 OF 2009. THE A.O. HELD THAT PAYMENT OF COMMISS ION BY APPELLANT TO THE NON-RESIDENT COMMISSION AGENTS WAS ATTRACTING THE PROVISIONS OF SEC.195 OF THE ACT AND HENCE THE APPELLANT SHOULD HAVE DEDUCTED TDS THEREO N. I HAVE CONSIDERED THE FACTS OF THE CASE. THE QUESTI ON UNDER CONSIDERATION IS AS TO WHETHER THE PAYMENT OF COMMISSION TO THE NON- RESIDENT COMMISSION AGENTS W AS COVERED BY THE PROVISIONS OF SEC.195 OF THE ACT. AS PER PROVISIONS OF SEC.195, ANY PERSON RESPONSIBLE FOR P AYING TO A NON-RESIDENT ANY INTEREST OR ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT DEDUCTE D INCOME-TAX THEREON AT THE RATES ENFORCED. THE PAYME NT MADE BY APPELLANT WAS ADMITTEDLY NOT ON ACCOUNT OF ANY INTEREST PAYMENT. CONSEQUENTLY IT HAS TO BE EXAMINE D WHETHER THE COMMISSION PAID BY APPELLANT IS COVERED BY THE TERM 'ANY OTHER SUM CHARGEABLE UNDER THE PROVISION OF THIS ACT' AS PROVIDED IN SEC.195 OF TH E ACT. IT IS WORTH TO MENTION HERE THAT FOR THE PURPOSE OF APPLICABILITY OF SEC.195 ANY OTHER SUM MUST BE CHARGEABLE UNDER THE PROVISIONS OF THE I. T. ACT. S EC. 5 OF THE I.T. ACT DEALS WITH THE 'SCOPE OF TOTAL INCOME' . AS PER SUB-SEC.(2) OF SEC.5, THE TOTAL INCOME OF A PERSON WHO IS NOT RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOUR CES DERIVED WHICH IS RECEIVED OR DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON O R ACCRUE OR ARISE OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 9 OF 28 INDIA DURING SUCH YEAR. SEC.7 EXPLAINS THE INCOME DEEMED TO BE RECEIVED. SEC.9 FURTHER EXPLAIN ED/ DEFINED THE INCOME DEEMED TO ACCRUE OR ARISE IN IND IA. AS PER SUB-SEC.(I) OF SEC.9, THE INCOME SHALL BE DE EMED TO ACCRUE OR ARISE IN INDIA IN CASE OF ALL INCOME ACCR UING OR ARISING WHETHER DIRECTLY OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA, OR THROUGH ANY PROPERTY IN INDIA, OR FROM ANY ASSET OR SOURCES OF INCOME IN INDIA, OR THROUGH THE TRANSFER OF CAPITAL ASSET SITUATED IN INDIA. IN THE CASE OF PAY MENT OF COMMISSION BY APPELLANT TO ITS NON-RESIDENT COMMISS ION AGENTS, SUCH COMMISSION INCOME TO SUCH NON-RESIDENT COMMISSION AGENTS WAS NOT RECEIVED IN INDIA OR WAS NOT ACCRUING OR ARISING IN INDIA WHETHER DIRECTLY OR IN DIRECTLY. SUCH INCOME WAS ALSO NOT ACCRUING OR ARISING TO NON - RESIDENT THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA SINCE THESE COMMISSION AGENTS WERE RENDERING SERVICES OUTSIDE INDIA AND THE PAYMENTS WERE ALSO MADE OUTSIDE INDIA. IN THE FACTS AND CIRCUMSTANCES IT COULD NOT BE SAID THAT THESE COMMISSION AGENTS W ERE HAVING ANY BUSINESS CONNECTION IN INDIA PARTICULARL Y WHEN THESE NON-RESIDENT COMMISSION AGENTS WERE HAVING NO PERMANENT ESTABLISHMENT IN INDIA. INCOME (IN THE FORM OF COMMISSION PAID BY APPELLANT) WAS ALSO NOT ARISE OR ACCRUED TO THOSE NON-RESIDENT THROUGH OR F ROM ANY ASSET OR SOURCES OF INCOME IN INDIA OR THROUGH TRANSFER OF CAPITAL ASSET SITUATED IN IN DIA. IN THE FACTS AND CIRCUMSTANCES, I AM OF CONSIDERED VIE W THAT PROVISIONS OF SUB-SEC.(I)(I) OF SEC.9 WERE NOT APPLICABLE IN THE CASE OF PAYMENT OF COMMISSION TO THOSE NON-RESIDENT COMMISSION AGENTS. THE ITAT, MUMBAI IN THE CASE OF DEIT VS. ARDESHI B. CURSETJEE & SONS LT D. 115 ITJ 916 HAS HELD THAT COMMISSION PAID TO NON- RESIDENT AGENTS OUTSIDE INDIA FOR SERVICES RENDERED OUTSIDE INDIA WERE NOT CHARGEABLE TO TAX IN INDIA. IN THE FACTS AND CIRCUMSTANCES, IN MY CONSIDERED OPINION, COMMISSION PAID BY APPELLANT TO THE NON RESIDENT COMMISSION AGENT WAS NOT CHARGEABLE UNDER THE PROVISIONS OF 1. T. ACT. SUCH PAYMENT OF COMMISSION WAS NOT CHARGEABLE TO TAX AS THE CONDITIONS SPECIFIED I N SUB- CLAUSE (I) OF SEC.9(1) WERE NOT ATTRACTED. SUB CLAU SE (III) , (IV) , (V), (VI) & (VII) OF SEC.9(1) WERE ALSO NOT APPLICABLE IN THE CASE UNDER CONSIDERATION. THE EXPLANATION TO SEC.9(2) INSERTED BY FINANCE ACT, 2010 WITH RETROSP ECTIVE EFFECT (01.06.1996) WAS ALSO NOT APPLICABLE SINCE T HE SAID EXPLANATION WAS NOT APPLICABLE TO SUB CLAUSE ( I) OF SEC.9(1) OF THE ACT. ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 10 OF 28 THE NEXT QUESTION FOR CONSIDERATION IS THE EFFECT O F WITHDRAWAL OF CIRCULAR NO.23 OF 1969 AND 786 OF 200 0 BY THE CBDT VIDE CIRCULAR NO.7 OF 2009. I HAVE CONSIDERED THE FACTS OF THE CASE. IN THE CIR CULAR NO.23 OF 1969 DTD.23.09.1969 SOME ILLUSTRATION INSTANCES OF NON-RESIDENT HAVING BUSINESS CONNECTIO N IN INDIA HAD BEEN GIVEN AS UNDER: - MAINTAINING A BRANCH OFFICE IN INDIA FOR THE PURCHA SE OR SALE OF GOODS OR TRANSACTING OTHER BUSINESS. - APPOINTING AN AGENT IN INDIA FOR THE SYSTEMATIC AND REGULAR PURCHASE OF RAW MATERIALS OR OTHER COMMODITIES, OR FOR SALE OF THE NON-RESIDENT'S GOODS, OR FOR OTHER BUSINESS PURPOSES - ERECTING FACTORY IN INDIA WHERE THE RAW PRODUCE PURCHASED LOCALLY IS WORKED OUT INTO A FORM SUITABL E FOR EXPORT ABROAD. - FORMING A LOCAL SUBSIDIARY COMPANY TO SELL THE PRODUCTS OF THE NON- RESIDENT PARENT COMPANY. - HAVING FINANCIAL ASSOCIATION BETWEEN A RESIDENT AND A NON-RESIDENT COMPANY. IN THE SAID CIRCULAR CBDT HAVE GIVEN CLARIFICATION REGARDING THE APPLICABILITY OF PROVISIONS OF SEC.9 IN THE CERTAIN SPECIFIC SITUATIONS AS UNDER: (1) NON-RESIDENT EXPORTER SELLING GOODS FROM ABROAD TO INDIAN IMPORTER (2) NON-RESIDENT COMPANY SELLING GOODS FROM ABROAD TO ITS INDIAN SUBSIDIARY (3) SALE OF PLANT & MACHINERY TO AN INDIAN IMPORTER ON INSTALLMENT BASIS. (4) FOREIGN AGENTS OF INDIAN EXPORTERS - A FOREIGN AGENT OF INDIAN EXPORTER OPERATES IN HIS OWN COUNTRY AND NO PART OF HIS INCOME ARISES IN INDIA. HIS COMMISSION IS USUALLY REMITTED DIRECTLY TO HIM AND IS, THEREFORE, NOT RECEIVED BY HIM OR ON HIS BEHALF IN INDIA. SUCH AN AGENT IS NOT LIABLE TO INCOME-TAX IN INDIA ON THE COMMISSION. (5) NON-RESIDENT PERSONS PURCHASING GOODS IN INDIA. (6) SALE BY A NON-RESIDENT TO INDIAN CUSTOMER EITHE R DIRECTLY OR THROUGH AGENTS. ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 11 OF 28 (7) EXTENT OF THE PROFIT ASSESSABLE U/ S.9. IN THE ABOVE CIRCULAR RELEVANT PARA IS NO.4 DEALING WITH THE SUBJECT OF FOREIGN AGENTS OF INDIAN EXPORTERS. THE CBDT VIDE CIRCULAR NO.7 OF 2009 DTD.22.10.2009 HAS WITHDRAWN THE CIRCULAR NO.23/ 1969 WITH RETROSPECTIVE EFFECT. IN THE CIRCULAR NO.23 OF 1969, CBDT CLARIFIED THAT THE PAYMENT MADE TO NON- RESIDENT COMMISSION AGENTS WAS NOT LIABLE TO INCOME -TAX IN INDIA. SUCH CLARIFICATION OF CBDT WAS BASED ON T HE PROVISIONS OF SECTION 5, 7, 9, 195 AND OTHER RELEVA NT PROVISIONS OF THE ACT. THE QUESTION FOR CONSIDERATI ON IS WHEN THERE IS NO RELEVANT CHANGE IN SECTIONS 5, 7, 9, 195 THEN AS TO HOW THE WITHDRAWAL OF CIRCULAR NO.23 OF 1969 OF CBDT WILL MAKE THE COMMISSION PAID TO SUCH NON-RESIDENT COMMISSION AGENTS TAXABLE IN INDIA. I AM OF CONSIDERED VIEW THAT EVEN AFTER THE WITHDRAWAL OF CIRCULAR NO.23 OF 1969, THE POSITION WILL REMAIN TH E SAME I.E. THE COMMISSION PAID TO NON-RESIDENT AGENTS IS NOT LIABLE TO TAX UNDER THE PROVISIONS OF LT. ACT WHEN THE SERVICES WERE RENDERED OUTSIDE INDIA, SERVICES WERE USED OUTSIDE INDIA, PAYMENTS WERE MADE OUTSIDE INDIA AND THERE WAS NO PERMANENT ESTABLISHMENT OR BUSINESS' CONNECTION IN INDIA. IT CANNOT BE ACCEPTED THAT BY VIRTUE OF CBDT CIRCULAR NO.23/1969, THE COMMISSION PAID TO NON-RESIDENT AGE NTS BECOME NOT LIABLE TO INCOME-TAX IN INDIA AND ON SUC H WITHDRAWAL OF CIRCULAR BY THE CBDT, SUCH COMMISSION PAID TO NON-RESIDENT AGENTS BECOME LIABLE TO INCOME -TAX IN INDIA. IRRESPECTIVE OF CIRCULAR ISSUED BY CBDT, THE QUESTION OF TAXABILITY OF SUCH COMMISSION TO INCOME -TAX HAS TO BE DECIDED AS PER THE PROVISIONS OF SECTION 9(1) OF THE ACT. I AM OF CONSIDERED VIEW THAT THE PROVISION S OF SEC.9(1) ARE NOT APPLICABLE TO THE COMMISSION PAID TO SUCH NON-RESIDENT AGENTS. SUCH INCOME (COMMISSION) IN THE HANDS OF NON-RESIDENT COMMISSION AGENTS DID NOT ACCRUE OR ARISE DIRECTLY OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA. SUCH INCOME TO THE NO N- RESIDENT COMMISSION AGENTS DID NOT ACCRUE OR ARISE IN INDIA THROUGH OR FROM ANY PROPERTY IN INDIA OR THROUGH THE TRANSFER OF CAPITAL ASSET SITUATED IN I NDIA. IN THE FACTS AND CIRCUMSTANCES THE PROVISIONS OF SEC.9 (1) WERE NOT APPLICABLE TO SUCH PAYMENT OF COMMISSION B Y APPELLANT TO NON-RESIDENT AGENTS. THE YEAR UNDER CONSIDERATION IS A.Y.2008-09 COVERIN G ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 12 OF 28 THE PREVIOUS YEAR PERIOD 01.4.2007 TO 31.03.2008. T HE CBDT ISSUED CIRCULAR NO.7 OF 2009 IN THE YEAR 2009. IN THE ABOVE MENTIONED CASE, THE BENCH OF ITAT HAVE HELD THAT WITHDRAWAL OF SUCH CIRCULAR IS NOT H AVING RETROSPECTIVE EFFECT AND WILL BE APPLICABLE PROSPEC TIVELY. IN THE FACTS AND CIRCUMSTANCES, EVEN IF IT IS ASSUMED THAT THE WITHDRAWAL OF CIRCULAR NO.23 OF 1969 BY THE CBDT'S CIRCULAR NO.7 OF 2009 IS HAVING ANY EFFECT ON TAXABILITY OF COMMISSION PAID TO NON-RESI DENT AGENTS, SUCH WITHDRAWAL OF CIRCULAR WILL NOT BE APPLICABLE IN THE YEAR UNDER CONSIDERATION. IN THE FACTS AND CIRCUMSTANCES THE CIRCULAR NO.23 OF 1969 WILL B E CLEARLY APPLICABLE IN THE YEAR UNDER CONSIDERATION MAKING SUCH COMMISSION PAYMENT NOT LIABLE TO TAX IN INDIA. IN VIEW OF THE ABOVE DISCUSSION, IT IS HELD THAT TH E PAYMENT OF COMMISSION AGGREGATING TO RS.32,73,538/- BY APPELLANT TO THE NON-RESIDENT COMMISSION AGENTS WAS NOT ATTRACTING THE PROVISIONS OF SEC.195 AND SEC.40(A)(I) OF THE ACT. WHILE HOLDING SO, THE UNDE RSIGNED HAS CONSIDERED THE APPEAL ORDER OF CIT(A)-22, MUMBA I DTD.20.01.2010 FOR A.Y.2007-08 IN THE CASE OF APPEL LANT COMPANY ON THE IDENTICAL ISSUE. THE DISALLOWANCE MADE BY A.O. IS THEREFORE, DELETED. THIS GROUND OF APPEAL IS ALLOWED. 4.7 IN VIEW OF THE ELABORATE DISCUSSION MADE BY THE CIT (A) IN AY 2008-09 WITH WHICH WE FULLY CONCUR AS IT IS CORRECT BOTH ON FACTS AND ON LAW, WE UPHOLD THE SAME AND DISMISS THE REVE NUE GROUND ON THIS ISSUE IN AY 2008-09 AND ALLOW ASSESSEES GR OUNDS IN AY 2007-08. AO IS DIRECTED TO DELETE THE ADDITION SO M ADE. 5. IN THE RESULT THE GROUNDS RAISED BY ASSESSEE IN AY 2007-08 ARE ALLOWED. 6. GROUND NOS. 4. THE ISSUE IN THIS GROUND IS WITH REF ERENCE TO DISALLOWANCE OF OCEAN FREIGHT EXPENSES PAID BY THE ASSESSEE COMPANY TO A NON RESIDENT SHIPPING COMPANY M/S TRAN SMODE OVERSEAS PARTNERS, GERMANY DURING THE YEAR AY 2007- 08 AGGREGATING TO ` .58,82,475, INVOKING SECTION 40(A)(IA) OF THE ACT. SIMILAR DISALLOWANCE WAS ALSO MADE BY AO IN LATER Y EAR ON PAYMENT ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 13 OF 28 OF OCEAN FREIGHT EXPENSES OF ` .84,12,764 PAID TO M/S. MSE AGENCY INDIA (P) LTD WHICH WAS A GENERAL AGENT OF M/S. MED ITERRANEAN SHIPPING CO. SA GENEVA ON THE REASON THAT TDS WAS N OT MADE. ASSESSEE SUBMITTED THAT SHIPPING INCOMES ARE TAXABL E UNDER SECTION 172 WHICH ITSELF IS A SELF CONTAINED CODE A ND THEREFORE, AS PER THE BOARD CIRCULAR NO.723, PROVISIONS OF SECTIO N 194(C) AND 195 SHALL NOT APPLY AS PROVISIONS OF SECTION 172 APPLIE S. ASSESSEE ALSO RELIED ON THE DECISION OF THE COORDINATE BENCH IN T HE CASE OF INCOME TAX OFFICER VS. FREIGHT SYSTEMS INDIA PVT. LTD, 6 S OT 473 FOR THE SAME PROPOSITION AND OTHER DECISIONS. THE LEARNED C IT (A) IN AY 2007-08 CONFIRMED THE ACTION OF AO REJECTING ASSESS EES CONTENTIONS, WHEREAS THE LEARNED CIT (A) IN AY 2008 -09 FOLLOWING THE CBDT CIRCULAR ALLOWED ASSESSEES CONTENTIONS. IT IS TO BE NOTED THAT REVENUE HAS ACCEPTED THE DECISION OF THE CIT ( A) IN AY 2008-09 AND HAS NOT PREFERRED ANY APPEAL ON THE ISSUE. THE LEARNED DR HOWEVER, RELIED ON THE ORDERS OF AO AND THE CIT (A) IN AY 2007-08. 7. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT AO WITHOUT ASSIGNING ANY SPECIFIC REASONS DISA LLOWED OCEAN FREIGHT EXPENSES UNDER SECTION 40(A)(IA) AS HE HAS CLUBBED THE SAME ALONG WITH COMMISSION PAYMENTS DISCUSSED IN TH E ABOVE GROUNDS. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT THE OCEAN FREIGHT WAS PAID TO FOREIGN SHIPPING COMPANIE S. THE BOARD CIRCULAR NO.723 DATED 19.09.1995 READS AS UNDER: '2. SECTION 172 DEALS WITH SHIPPING BUSINESS OF NO N-RESIDENT. SECTION 172(1) PROVIDES THE MODE OF THE LEVY AND RE COVERY OF TAX IN THE CASE OF ANY SHIP, BELONGING TO OR CHARTE RED BY A NON- RESIDENTS, WHICH CARRIES PASSENGERS, LIVE- STOCK, M AIL OR GOODS SHIPPED AT A PORT IN INDIA. AN ANALYSIS OF THE PROV ISION OF SECTION 172 WOULD SHOW THAT THESE PROVISIONS HAVE T O BE APPLIED TO EVERY JOURNEY A SHIP, BELONGING TO OR CH ARTERED BY A NON-RESIDENT, UNDERTAKES FROM ANY PORT IN INDIA. SE CTION 172 IS A SELF-CONTAINED CODE FOR THE LEVY AND RECOVERY OF THE TAX, SHIP- WISE AND JOURNEY-WISE, AND REQUIRES THE FILING OF T HE RETURN WITHIN A MAXIMUM TIME OF THIRTY DAYS FROM THE DATE OF ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 14 OF 28 DEPARTURE OF THE SHIP. '3. THE PROVISIONS OF SECTION 172 ARE TO APPLY, NOT WITHSTANDING ANYTHING CONTAINED IN OTHER PROVISION OF THE ACT. T HEREFORE, IN SUCH CASES, THE PROVISIONS OF SECTION 194C AND 195 RELATING- TO TAX DEDUCTION AT SOURCE ARE NOT APPLICABLE. THE REC OVERY OF TAX IS TO BE REGULATED, FOR A VOYAGE UNDERTAKEN FROM AN Y PORT IN INDIA BY A SHIP UNDER THE PROVISIONS OF SECTION 172 . '4. SECTION 194C DEALS WITH WORK CONTRACTS INCLUDIN G CARRIAGE OF GOODS AND PASSENGERS BY ANY MODE OF TRANSPORT OT HER THAN RAILWAYS. THIS SECTION APPLIES TO PAYMENTS MADE BY A PERSON REFERRED TO IN CLAUSES (A) TO U) OF SUB-SECTION (1) TO ANY 'RESIDENT'. (TERMED AS CONTRACTOR). IT IS CLEAR FRO M THE SECTION THAT THE AREA OF OPERATION OF TDS IS CONFINED TO PA YMENTS MADE TO ANY 'RESIDENT'. ON THE OTHER HAND, SECTION 172 O PERATES IN THE AREA OF COMPUTATION OF PROFITS FROM SHIPPING BU SINESS OF NON-RESIDENT SHIP-OWNER OR CHARACTERER, HE STEPS IN TO THE SHOES OF THE PRINCIPAL. ACCORDINGLY, PROVISIONS OF SECTIO N 172 SHALL APPLY AND THOSE OF SECTIONS 194 C AND 195 WIL L NOT APPLY.' 7.1 IN VIEW OF THE AFORESAID CIRCULAR OF THE BOARD, THE ASSESSEE COMPANY IS NOT REQUIRED TO DEDUCT TAX AT SOURCE FRO M THE OCEAN FREIGHT PAID BY IT OF ` 58,82,475/- TO M/S . TRANSMODE OVERSEAS PARTNERS, GERMANY, BECAUSE THE SAID COMPANY IS LIAB LE TO TAX U/S. 172 OF THE ACT. 7.2 IN THE COORDINATE BENCH DECISION OF THE APPELLA TE TRIBUNAL, DELHI BENCH IN THE CASE OF INCOME TAX OFFICER VS. F REIGHT SYSTEMS INDIA PVT. LTD, 6 SOT 473, THE TRIBUNAL HELD AS UND ER: 'THE PROVISIONS OF SECTION 172 CONSTITUTE A CODE IN ITSELF WITH REGARD TO THE MODE OF LEVY AND RECOVERY OF TAX IN THE CASE OF ANY SHIP, BELONGING TO OR CHARTERED BY A NO N- RESIDENT. BY VIRTUE OF SUB-SECTION (8) OF SECTION 172 'THE DEMURRAGE CHARGE OR HANDLING CHARGE OR ANY OTHER AM OUNT OF SIMILAR NATURE' ARE TREATED AT PAR WITH CARRIAGE PAID OR PAYABLE TO SUCH OWNER OR CHARTER. THUS, EVEN AS THE AMOUNTS IN THE NATURE OF DEMURRAGE ETC. MAY NOT END UP BEING PAID TO NON-RESIDENTS, THESE ARE TREATED AS A MOUNTS FALLING WITHIN SPECIAL PROVISIONS OF SECTION 172. THIS STANDS ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 15 OF 28 CLARIFIED IN CBDT CIRCULAR NO. 723, DATED 19-9-1995 WHEREIN THESE AMOUNTS HAVE BEEN TAKEN OUTSIDE THE PURVIEW OF SECTION 194C. THIS CIRCULAR HAS MADE IT FURTHER CLEAR THAT WHERE PAYMENTS ARE MADE TO SHIPPING AGEN TS OF NON RESIDENT SHIP OWNERS OR CHARTER SHIP AT A PORT IN INDIA PROVISIONS OF SECTION 172 WILL APPLY BECAUSE THE AG ENT STEPS INTO THE SHOES OF THE PRINCIPAL. HOWEVER, THE PROBLEM ARISES ONLY WHEN RESTRICTIVE INTERPRETATION IS PLAC ED ON THE BOARDS CIRCULAR REFERRED TO HEREINABOVE WHEN AO HA S SOUGHT TO DRAW DISTINCTION ON THE BASIS OF THE STAT US OF THE AGENTS. WE WOULD LIKE TO MENTION THAT EVEN IF THE A GENT IS TO BE TREATED AS RESIDENT, BY VIRTUE OF HIS ACTING ON BEHALF OF NON-RESIDENT SHIPPERS OR CHARTERS, HE RECEIVES PAYM ENTS PRIMARILY ON BEHALF OF HIS PRINCIPAL I.E., NON-RESI DENT SHIP OWNERS OR SHIPS CHARTERS SHIPPED AT A PORT IN INDIA . IN OUR OPINION, EVEN IF THESE AMOUNTS ARE INCLUSIVE OF SMA LL ELEMENT OF THE AMOUNTS THAT ULTIMATELY MAY BE GOING INTO HIS OWN POCKET OR ANY OF RESIDENT ON ACC OUNT OF DEMURRAGE OR HANDLING CHARGE OR ANY AMOUNT OF SIMIL AR NATURE, IT WILL BE COVERED BY SUB-SECTION (8) OF SECTION 172 INASMUCH AS THE CIRCULAR DOES NOT DRAW ANY DISTINCT ION BETWEEN A DRY PORT AND A SEA PORT. THUS, AS PER PRO VISIONS OF SECTION 172(8) THE INLAND HAULAGE CHARGES ARE AL SO COVERED UNDER THIS PROVISION OF LAW AND, HENCE, NO DEDUCTION OF TAX IS CALLED UNDER SECTION 194C OF TH E ACT. WE ARE FURTHER OF THE OPINION THAT SUCH AN INTERPRETAT ION IS ALSO FAIR BECAUSE THE DRY PORTS OR ICD'S ARE TREATED AT PAR WITH THE REGULAR PORTS. HENCE, THE CONTRADICTORY STAND T AKEN BY THE ASSESSING OFFICER I.E., WHEN HE INCLUDED CERTAI N CHARGES IN FREIGHT IN RESPECT OF MOVEMENT OF GOODS BY ROAD AT THE DESTINATION CONTRARY BY THE SLIPPING LINE SUCH CHAR GES ARE DEEMED TO BE COVERED UNDER SECTION 172, BUT WHEN THE SAME SHIPPING LINE OR THEIR AGENTS TAKE CHARGES FOR TRANSPORTATION FROM ICD, WHERE GOODS HAVE BEEN HAND ED OVER TO THEM BY AN EXPORTER, THEN THESE AMOUNTS ARE NOT DEEMED TO BE COVERED UNDER SECTION 172. 'FOR THE REASONS STATED ABOVE, IN OUR OPINION, IN T HE EXISTING FACTS AND CIRCUMSTANCES OF THE CASE OF THE ASSESSEE, THE ASSESSEE CANNOT BE TREATED AS AN ASSESSEE IN DEFAULT, SO, THE CIT (APPEALS) AFTER PR OPERLY CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND PRO PERLY ANALYZING THE PROVISIONS OF LAW, HAS RIGHTLY CANCEL LED THE IMPUGNED ORDERS OF THE ASSESSING OFFICER BY PASSING A WELL-REASONED AND WELL-DISCUSSED CONSOLID ATED ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 16 OF 28 ORDER. ACCORDINGLY, THE IMPUGNED ORDER OF THE CIT ( APPEALS) IS UPHELD AND THE GROUNDS OF APPEAL TAKEN BY THE RE VENUE IN THE RESPECTIVE APPEALS UNDER CONSIDERATION BEFOR E US ARE REJECTED. ' 7.3 FURTHER, THE FOLLOWING DECISIONS ALSO SUPPORT T HE SAME VIEW: (I) SUBHASH CHAND GUPTA VS. INCOME TAX OFFICER (ITA NO.898, 899 & 731/JP/2010, JAIPUR DATED 23.09.2011). (II) HINDUSTAN M-1 SWACO LTD, BHARUCH VS. INCOME TA X OFFICER (ITA NO.1004/AHD/2010, DATED 7 TH SEPTEMBER, 2012). 7.4 IT IS TO BE NOTED THAT THE LEARNED CIT (A) FOLL OWED THE SAME BOARD CIRCULAR IN AY 2008-09 TO DELETE THE DISALLOW ANCES SO MADE BY AO BY STATING AS UNDER: 5.3 I HAVE CONSIDERED THE FACTS OF THE CASE. TH E CBDT IN CIRCULAR NO.723 DTD. 19.09.1996 HAS STATED THAT SECTION 172 IS A SELF CONTAINED CODE FOR THE LEVY A ND RECOVERY OF TAX, SHIP-WISE AND JOURNEY WISE AND REQ UIRED THE FILING OF RETURN WITHIN THE MAXIMUM TIME OF 30 DAYS FROM THE DATE OF DEPARTURE OF THE SHIP. THE CBDT FU RTHER CLARIFIED THAT THE PROVISIONS OF SECTION 194-C AND 195 RELATING TO TAX DEDUCTION AT SOURCE WILL NOT BE APP LICABLE. IN VIEW OF THE CBDT CIRCULAR, THE DISALLOWANCE MADE BY AO AT ` 84,12,764 IS DELETED. THIS GROUND OF APPEAL IS ALLOWED. 7.5 THE REVENUE HAS ACCEPTED THE ABOVE DECISION AND HAS NOT EVEN CONTESTED IN AY 2008-09. IN VIEW OF THIS, WE C ANNOT UPHOLD THE ORDER OF THE CIT (A) CONFIRMING THE ACTION OF AO. S INCE THE BOARD CIRCULAR IS BINDING ON THE AUTHORITIES AND SINCE TH E INCOMES ARE BEING TAXED UNDER SECTION 172 OF THE INCOME TAX ACT SEPARATELY, WE ARE OF THE OPINION THAT THERE IS NO NEED FOR DEDUCT ING ANY TAX UNDER THE PROVISIONS OF THE TDS AND THEREFORE, DISALLOWAN CE UNDER SECTION 40(A)(IA) DOES NOT ARISE. THEREFORE, ASSESSEES GRO UND NO.4 IS ALLOWED. ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 17 OF 28 8. GROUND NO.6. THIS GROUND PERTAINS TO THE DISALLOWAN CE OF AN AMOUNT OF ` .6.00 LAKHS CLAIMED AS LEGAL EXPENSES. ASSESSEE CLA IMED THE FOLLOWING AMOUNTS UNDER THE HEAD LEGAL AND PROF ESSIONAL FEE: NAME OF THE PARTY DESCRIPTION AMOUNT RUCHIRA PILLAI FEES FOR NET SECURITY SOLUTION 2,50,000 SANGEETA TELANG FEES FOR ERP FEASIBILITY STUDY REPORT 50,000 SHALIN PANDEY FOR ACQUIRING LAND 35,000 SYSSOFT SOFTWARE DEVELOPMENT 3,00,000 TOTAL 6,35,000 8.1 AO DISALLOWED THE ABOVE AMOUNT BY STATING AS UN DER: 6.2 BILLS OF ABOVE PARTIES WERE PERUSED AND EXAMIN ED. IT IS NOTICED THAT ASSESSEE HAS GOT ENDURING BENEFIT F ROM ABOVE EXPENSES. THE SUM OF ` .6,00,000 WAS SPENT FOR DEVELOPMENT OF ERO SOFTWARE SYSTEMS IN THE COMPANY. IT RESULTS INTO CREATION OF ASSETS. REMAINDER AMOUNT O F ` .35,000 WAS SPENT FOR ACQUIRING LAND. IT IS NOT REL ATED TO REVENUE EXPENDITURE. THEREFORE, SUM OF ` .6,35,000 IS DISALLOWED AND ADDED BACK TO THE TOTAL INCOME OF ASSESSEE. HOWEVER, DEPRECIATION OF ` .3,60,000 IS ALLOWED @ 60% ON ` .6,00,000 BEING INTANGIBLE ASSETS CAME INTO EXISTENCE BY WAY OF ERP SYSTEM DEVELOPED BY ASSESSE E . 8.2 THE LEARNED CIT (A) AFTER CONSIDERING THE FACTS OF THE CASE DELETED THE DISALLOWANCE OF ` .35,000 STATING THAT THE SAME PERTAINS TO REVENUE EXPENDITURE FOR RENDERING PROFESSIONAL S ERVICES AND TO THAT EXTENT HE HAS ALLOWED, WHEREAS THE BALANCE AMO UNT WAS SUSTAINED HENCE, ASSESSEE IS AGGRIEVED. IT WAS SUBM ITTED THAT THE AMOUNT OF ` .2,50,000 WAS PAID TO MS. RUCHIRA PATIL FOR PROVIDI NG CONSULTANCY SERVICES IN RESPECT OF NETWORK SOLUTION SERVICES AT MUMBAI OFFICE FOR SMOOTH WORKING OF NETWORKING SYST EM AND CONNECTIVITY SOLUTION AND SERVICES FOR THE MUMBAI O FFICE AND THE BRANCH AT ANKLESHWAR. THE EXPENSES WERE OF RECURRIN G IN NATURE ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 18 OF 28 AND THERE WAS NO ACQUISITION OF AN ASSET OR ADVANTA GE FOR ENDURING BENEFITS. 8.3 A FEE OF ` .3,00,000 WAS PAID TO M/S SYS SOFT TOWARDS ATTENDING THE ISSUES RELATED TO PAYROLL SYSTEM BASE D ON FOXPRO SOFTWARE AND MODIFICATION FOR STATUTORY AND/OR INTE RNAL BUSINESS. BEFORE THE SAP ERP SYSTEM, THE COMPANY WAS HAVING F OXPRO PROGRAM. M/S SYS SOFT PROVIDED THE CONSULTANCY IN R ELATION TO FOXPRO AND SAP RELATED ISSUES. 8.4 SIMILARLY, AN AMOUNT OF ` .50,000 WAS PAID TO M/S SANGEETA TELANG, AN ERP CONSULTANT, FOR HER CONSULTANCY SERV ICES IN RESPECT OF ERP FACILITIES, WHICH WAS ALREADY IN EXISTENCE A ND THUS, THERE WAS NO CREATION OF ANY ASSET. 8.5 THE LEARNED COUNSEL REFERRING TO THE PAPER BOOK AND PARTICULARLY THE ORDERS PLACED ON RECORD AT PAGE NO S.87, 295 REFERRED TO THE NATURE OF THE SERVICES TO SUBMIT TH AT THE EXPENDITURE IS REVENUE IN NATURE. HE ALSO RELIED ON THE DECISIO N IN THE CASE OF DCIT VS. MAHINDRA REALTY & INF. DEVELOPERS LTD IN I TA NO.1160/MUM/2010 DATED 28 TH JANUARY, 2011 AND CIT V. RAYCHEM RPG LTD IN ITXA NO.4176 OF 2009 DATED 4 TH JULY, 2011 OF THE HON'BLE BOMBAY HIGH COURT. 8.6 WE HAVE CONSIDERED THE NATURE OF THE EXPENDITUR E AND THE SUBMISSIONS OF ASSESSEE. EVEN THOUGH THE EXPENDITUR E MAY BE OF ENDURING NATURE, THE SAME CANNOT BE CONSIDERED AS C APITAL IN NATURE ALWAYS UNLESS AN ASSET WAS CREATED. THIS ISS UE WAS DISCUSSED ELABORATELY BY THE COORDINATE BENCH IN TH E CASE OF DCIT VS. MAHINDRA REALTY & INF. DEVELOPERS LTD (WHEREIN THE AM IS ALSO A MEMBER) IN ITA NO.1160/MUM/2010 DATED 28.01.2011. I N THAT CASE THE EXPENDITURE WAS FOR DEVELOPMENT OF WEBSITE AND THE DISCUSSION ON THE ISSUE IS AS UNDER: ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 19 OF 28 6. GROUND NO. 2 IS WITH REFERENCE TO DELETING THE ADDITION OF ` .8,02,139/-MADE ON ACCOUNT OF WEBSITE DEVELOPMENT CHARGES. THE A.O. NOTICED THAT THE ASSESSEE HAS DEB ITED AN AMOUNT OF `8,02,139/- UNDER THE HEAD WEBSITE DEVELOPMENT CHARGES. THE A.O. ASKED WHY THE SAME SHOULD NOT BE TREATED AS CAPITAL EXPENDITURE. IT WA S SUBMITTED THAT THE WEBSITE OFFERS THE VARIOUS DETAI LS OF THE COMPANYS BUSINESS AND PRODUCTS IT OFFERS. HENC E IT IS ESSENTIALLY AN ADVERTISEMENT EXPENSES AND ALLOWABLE AS REVENUE IN NATURE. THE A.O. DID NOT ACCEPT THE CONT ENTIONS OF THE LEARNED A.R. AND TREATED THE EXPENDITURE AS CAPITAL IN NATURE STATING THAT THE LIFE SPAN OF THE WEBSITE IS QUITE LONG AND IT IS AN ASSET IN THE CYBER SPACE. HOWEVER , HE ALLOWED DEPRECIATION @ 25% ON WEBSITE DEVELOPMENT CHARGES. BEFORE THE CIT(A) IT WAS SUBMITTED THAT TH E WEBSITE IS A VERY COST EFFECTIVE TOOL OF ADVERTISEMENT/MARKETING OF THE COMPANYS BUSINESS. IT IS A MEDIUM OF CORPORATE COMMUNICATION AND OFFERS ADVANTAGES OVER TRADITIONAL MODE OF ADVERTISEMENT. THEREFORE IT IS ESSENTIALLY AN ADVERTISEMENT EXPEND ITURE ALLOWABLE AS REVENUE EXPENDITURE. AFTER HEARING THE LEARNED A.R. AND CONSIDERING THE FACTS THE CIT(A) D ELETED THE ADDITION BY HOLDING AS UNDER: - 9. I HAVE CAREFULLY CONSIDERED THE ABOVE FACT AND DO NOT FIND ANY MERIT IN THE OBSERVATIONS AND FINDINGS OF THE AO. EXPENDITURE INCURRED ON WEBSITE DEVELOPMENT IS ALTHOUGH ENDURING IN NATURE, THE INTENT AND PURPOSES BEHIND THE DEVELOPMENT IS NOT TO CREATE AN ASSET BUT ONLY TO PROVIDE A MEANS FOR DISSEMINATING THE INFORMATION ABOUT THE ASSESSEE AMONG ITS CLIENTS. IN THE CASE OF CIT VS. INDIAN VISIT.COM P. LTD. (2008) 219 CTR 603 (DEL), ON IDENTICAL FACTS, SUCH EXPENDITURE WAS HELD TO BE REVENUE EXPENDITURE AKIN TO PRINTING OF PAMPHLETS ETC. IT WAS STATED THAT MERE ENDURING BENEFIT, DE HORS ANY ACCRETION TO FIXED CAPITAL WOULD NOT MAKE AN EXPENDITURE A CAPITAL ONE. IN THE LIGHT OF SUCH FACTS AND THE LEGAL POSITION EMERGING FROM THE CITED DECISION, SUCH EXPENDITURE IS HELD TO BE REVENUE IN NATURE AND THE ADDITION MADE IS DELETED. THE AO IS, HOWEVER, DIRECTED TO WITHDRAW DEPRECIATION ALLOWED TO THE APPELLANT. ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 20 OF 28 7. WE HAVE CONSIDERED THE ISSUE. IN OUR VIEW THE CIT(A) HAS RIGHTLY CONSIDERED THE NATURE OF EXPENDITURE AS REVENUE IN NATURE. SIMILAR ISSUE WAS CONSIDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. INDIAN VISIT.COM P. LTD. (2008) 219 CTR 603 (DEL), WHEREIN IT WAS HELD AS UNDER: - JUST BECAUSE A PARTICULAR EXPENDITURE MAY RESULT IN AN ENDURING BENEFIT WOULD NOT MAKE SUCH AN EXPENDITURE OF A CAPITAL NATURE. WHAT IS TO BE SEEN IS WHAT IS THE REAL INTENT AND PURPOSE OF THE EXPENDITURE AND AS TO WHETHER THERE IS ANY ACCRETION TO THE FIXED CAPITAL OF THE ASSESSEE. IN THE CASE OF EXPENDITURE ON A WEBSITE, THERE IS NO CHANGE IN THE FIXED CAPITAL OF THE ASSESSEE. ALTHOUGH THE WEBSITE MAY PROVIDE AN ENDURING BENEFIT TO AN ASSESSEE, THE INTENT AND PURPOSE BEHIND DEVELOPMENT OF A WEBSITE IS NOT TO CREATE AN ASSET BUT ONLY TO PROVIDE A MEANS FOR DISSEMINATING THE INFORMATION ABOUT THE ASSESSEE. THE SAME COULD VERY WELL HAVE BEEN ACHIEVED AND, INDEED, IN THE PAST, IT WAS ACHIEVED BY PRINTING TRAVEL BROCHURES AND OTHER PUBLISHED MATERIALS AND PAMPHLETS. THE ADVANCE OF TECHNOLOGY AND THE WIDE SPREAD USE OF THE INTERNET HAS PROVIDED A VERY POWERFUL MEDIUM TO COMPANIES TO PUBLICIZE THEIR ACTIVITIES TO A LARGER SPECTRUM OF PEOPLE AT A MUCH LOWER COST. WEBSITES ENABLE COMPANIES TO DO WHAT THE PRINTED BROCHURES DID BUT, IN A MUCH MORE EFFICIENT MANNER AS WELL AS IN A MUCH SHORTER PERIOD OF TIME AND COVERING A MUCH LARGE SET OF PEOPLE WORLDWIDE. THE TRIBUNAL HAS CORRECTLY APPRECIATED THE FACTS AS WELL AS THE LAW ON THE SUBJECT AND HAS COME TO THE CONCLUSION THAT THE EXPENDITURE ON THE WEBSITE WAS OF A REVENUE NATURE AND NOT OF A CAPITAL NATURE. NO SUBSTANTIAL QUESTION OF LAW ARISES FOR CONSIDERATION. RESPECTFULLY FOLLOWING THE ABOVE DECISION WE UPHOLD THE DECISION OF THE CIT(A). THE EXPENDITURE IS CORR ECTLY ALLOWED AS REVENUE EXPENDITURE. GROUND IS REJECTED . 8.7 IN VIEW OF THE ABOVE, SINCE THE SAME PRINCIPLES WERE ALSO UPHELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 21 OF 28 RAYCHEM RPG LTD (SUPRA), WE MODIFY THE ORDERS OF AO AND DIRECT HIM TO ALLOW THE EXPENDITURE AS REVENUE IN NATURE. CONSEQUENTLY DEPRECIATION, IF ANY, ALLOWED BY AO CAN BE WITHDRAW N. WITH THESE DIRECTIONS, THIS GROUND IS CONSIDERED ALLOWED. 9. GROUND NO.9 PERTAIN TO DISALLOWANCE OF INTERES T EXPENSES OF.3,18,600. ON PERUSAL OF DETAILS FILED IT IS SEEN THAT ASSESSEE HAS PAID INTEREST AND FINANCIAL CHARGES OF RS. 10,104,1 98/. IT IS ALSO NOTICED THAT ASSESSEE HAS MADE INVESTMENT AMOUNTING TO RS. 20,05,600/ AND GAVE LOAN OF RS. 6,50,000/ TO M/S AL PANSO NETSECURE PVT. LTD BEING ASSOCIATE COMPANY. ASSESSE E WAS ASKED AS TO WHY THE PROPORTIONATE INTEREST SHOULD NOT BE DIS ALLOWED. IN RESPONSE TO SUCH QUERY, ASSESSEE HAS SUBMITTED NOTE THEREON AS UNDER:- THE COMPANY HAS GIVEN A LOAN OF RS. 6,50,000/ TO M/S ALPHANSO NETSECURE PVT. LTD AN ASSOCIATE CONCERN IN WHICH COMPANY HAS AN EQUITY PARTICIPATION OF RS. 20,05,600/. THE COMPANY HAS MADE INVESTMENT IN THIS COMPANY TO INCREASE ITS PRESENCE IN THE FILED OF SOFTWARE DEVELOPMENT. THE DIFFERENT TYPES OF SOFTWARE ARE BEING DEVELOPED BY THE SAID COMPANY. THE SOME OF THE SOFTWARE MAY BE USEFU L FOR THE COMPANY IN MANUFACTURING AND SECURITY ARRANGEMENT IN DIFFERENT PLANTS INCLUDING NETWORKIN G. THE INVESTMENTS BEING IN THE NATURE OF STRATEGIC INVESTMENTS IT IS IN THE INTEREST OF THE COMPANY TO INFUSE THE FUNDS TO GET BETTER RESULTS IN THE SAID COMPANY . IT MAY BE STATED THAT THE APPELLANT COMPANY HAS SUFFICIENT INTEREST FREE FUNDS AVAILABLE TO INVEST AND/ OR ADVANCES THE MONEY TO THE ASSOCIATE CONCERN. THE COMPANY HAS RESERVES AND SURPLUS OF RS. 14,76, 24,043/ IN THE BEGINNING OF THE YEAR EVEN THE PROFIT OF THE COMPANY WAS RS. 15,91,72,009/. CONSIDERING THE ABOVE FACTS, THE LOAN AND INVESTMEN TS OF RS.26.55 LACS IS OUT OF THE SAID RESERVES AND SURPLUS AND NOT OUT OF BORROWED FUNDS. WE WOULD LIKE TO INVITE YOUR ATTENTION TO THE JUDGM ENT OF S.A. BUILDERS LTD V. CIT (2007) 288 ITR 1 (SC) WHERE IT HAS BEEN HELD THAT IF THE INVESTMENT IS FOR THE COMMERCIAL EXPEDIENCY , THE SAME CAN NOT BE DISALLOWED EVEN THE SAME IS MADE IN THE COMPANY UNDER THE SAME MANAGEMENT. ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 22 OF 28 SIMILARLY CIT V. RELIANCE UTILITIES & POWER LTD- 313 ITR 340 (BOM) (2009) . IT HAS BEEN HELD THAT IF THE INVESTMENTS ARE MORE THAN INTEREST FREE FUNDS AVAILABLE WITH TH E ASSESSEE, NO INTEREST CAN BE DISALLOWED. 9.1 AO HOWEVER, DID NOT AGREE. HE DISALLOWED THE PR OPORTIONATE INTEREST OF ` .3,18,600 AT 12% OF THE INTEREST. THE LEARNED CIT ( A) CONFIRMED THE SAME BY STATING AS UNDER: 7.3 I HAVE GONE THROUGH THE ASSESSMENT ORDER PERUS ED THE SUBMISSIONS MADE BY THE APPELLANT AND ALSO DISCUSSED THE CASE WITH THE A/R OF THE APPELLANT. A O DISALLOWED ` .3,18,600 OUT OF INTEREST AND FINANCIAL EXPENSES STATING THAT ASSESSEE HAD MADE INVESTMENT IN ITS SISTER CONCERN M/S ALPHANSO NETSECURE PVT LTD O F ` .20,05,600 AND ALSO GAVE LOAN OF ` .6,50,000 TO IT. AO NOTED THAT LOANS WERE USED TO INVEST IN SISTER CONC ERN WITHOUT ANY BUSINESS CONSIDERATION. THE APPELLANT B EFORE ME STATED THAT IT HAS INVESTED IN THE SAID COMPANY TO INCREASE ITS PRESENCE IN THE SOFTWARE DEVELOPMENT W HICH WAS THE BUSINESS CONSIDERATION AND COMMERCIAL EXPEDIENCY AND HENCE INTEREST IS ALLOWABLE AS PER T HE DECISION OF THE HON'BLE SUPREME COURT IN CASE OF SA BUILDERS (SUPRA). HOWEVER, I DO NOT AGREE WITH THE CONTENTION OF THE APPELLANT SINCE DURING THE YEAR, ASSESSEE HAD PAID HUGE SOFTWARE CHARGES TO OTHER CONCERNS. HENCE NO BUSINESS EXPEDIENCY IS SERVED BY ADVANCING LOAN TO THE SISTER CONCERN. THE APPELLANT ALSO CLAIMED THAT IT WAS HAVING SUFFICIENT INTEREST FREE FUND TO INVEST OR ADVANCE TO THE ASSOCIATE CONCERN. HOWEVER , ON PERUSAL OF BALANCE SHEET IT IS NOTICED THAT SHARE C APITAL AND RESERVE AND SURPLUS IN TOTAL AMOUNTED ` .31.21 CRORES AS AGAINST WHICH THE INVEST IN FIXED ASSETS IS ` .37.21 CRORES. THUS, THERE WERE NO INTEREST FREE FUNDS AV AILABLE WITH THE APPELLANT TO MAKE INTEREST FREE ADVANCE/INVESTMENT. APPARENTLY THESE ADVANCES ARE O UT OF THE INTEREST BEARING FUNDS ONLY. FURTHER, THE PR OVISION OF SECTION 14A ARE ALSO APPLICABLE SINCE THE APPELL ANT HAS MADE INVESTMENT IN SHARES. IN VIEW OF THESE FACTS, I AM OF THE CONSIDERED OPINION THAT AO HAS RIGHTLY MADE THE DISALLOWANCE OF INTEREST WHICH IS UPHELD. 9.2 IT WAS SUBMITTED THAT DURING THE YEAR ENDING 31 .3.2007, THE ASSESSEE COMPANY HAD GIVEN INTEREST FREE ADVANCE OF ` .6,50,000 TO M/S ALPHANSO NETSECURE PVT LTD, A CONCERN WHEREIN A SSESSEE HAS ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 23 OF 28 AN EQUITY PARTICIPATION OF ` .20,05,600. A COPY OF THE LEDGER ACCOUNT OF M/S ALPHANSO NETSECURE PVT LTD IN THE BOOKS OF A SSESSEE (PAGE 97) SHOWS THAT THE LOAN OF ` .4,50,000 WAS GIVEN ON 20 TH & 28 TH FEBRUARY, 2007 AND FURTHER LOAN OF ` .2,00,000 WAS GIVEN ON 27 TH MARCH, 2007 I.E. AT THE FAG END OF THE YEAR. AO COM PUTED DISALLOWANCE OF INTEREST @ 12% P.A. I.E. ` .78,000 WITHOUT TAKING INTO ACCOUNT THAT THE LOAN WAS GIVEN AT THE FAG END OF T HE YEAR. AO ALSO COMPUTED DISALLOWANCE OF INTEREST OF ` .2,40,600 IN RESPECT OF INVESTMENT IN EQUITY SHARES OF M/S ALPHANSO NETSECU RE PVT LTD OF ` .20,05,600. 9.3 IT IS THE CASE OF THE ASSESSEE COMPANY THAT IT HAS INTEREST FREE FUNDS IN THE FORM OF CAPITAL AND RESERVES AND SURPL US AGGREGATING TO ` .16,09,57,373 AT THE BEGINNING OF THE YEAR. IN THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY HAD EARNED PROFI T AFTER TAX BUT BEFORE DEPRECIATION ALLOWANCE OF ` .12,56,30,119. THUS, THE ASSESSEE COMPANY HAD INTEREST FREE FUND MANY FOLD IN COMPARI SON TO INTEREST FREE ADVANCE OF ` .6,50,000 GIVEN AT THE FAG END OF THE YEAR AND INVESTMENT IN SHARES OF THE GROUP COMPANY OF ` .20,05,600. IT IS THEREFORE, SUBMITTED THAT THE AFORESAID INTEREST FR EE LOAN AND INVESTMENT IN SHARES ARE OUT OF ITS OWN FUNDS AND N OT OUT OF THE BORROWED FUNDS. HENCE NO PORTION OF THE INTEREST PA ID ON BORROWING CAN BE DISALLOWED. 9.4 THE LEARNED COUNSEL REFERRED TO THE DECISION OF THE ITAT IN THE CASE OF DCIT VS. MOHIT DIAMONDS PVT LTD IN ITA NO.2 097/M/11 FOR AY 2007-08 DATED 31,.7.2012 AND ALSO THE DECISION I N THE CASE OF SHEETAL MANUFACTURING CO. VS. JCIT IN ITA NO.7107/M /11 FOR AY 2008-09 DATED 28.09.2012. THE LEARNED DR HOWEVER, R ELIED ON THE ORDERS OF THE CIT (A) AS FAR AS THE FACTS ARE CONCE RNED. 9.5 WE HAVE CONSIDERED THE ISSUE. THERE IS NO DISPU TE WITH REFERENCE TO THE AVAILABILITY OF THE INTEREST FREE FUND IN THE FORM OF CAPITAL AND RESERVES AGGREGATING TO ` .16.09 CRORES. IN FACT THE ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 24 OF 28 INCOME DECLARED DURING THE YEAR ITSELF WAS TO THE T UNE OF ` .7.29 CRORES. FURTHER, AS SEEN FROM THE SCHEDULE III OF T HE SECURED LOANS, ASSESSEE HAS A CASH CREDITS, BILL DISCOUNTING, LOAN FOR ITS WORKING CAPITAL REQUIREMENTS TO AN EXTENT OF ` .5.65 CRORES AND TERM LOAN FOR MUMBAI OFFICE PREMISES AT PANOLI PLANT AND CAPTIVE POWER PLANT AT ANKLESHWAR TO THE TUNE OF ` .1.16 CRORES, THE DETAILS OF WHICH CAN BE REFERRED TO NOTE 2 OF THE NOTES FORMING PART OF THE ACCOUNT FOR THE YEAR ENDED ON 31.03.2007. THE INTEREST CHARGES AND THE FINANCE CHARGES AS SEEN FROM THE RECORD ARE MOSTLY PAID FOR THESE LOANS AND WORKING CAPITAL REQUIREMENTS INCLUDING DISCOUNTING OF BILLS. THEREFORE, WE ARE OF THE OPINION THAT NO PART OF TH E INTEREST COULD BE DISALLOWED ON THE REASON THAT ASSESSEE HAD ADVANCED INTEREST FREE ADVANCES TO ITS SISTER CONCERN. IT IS ALSO A FACT T HAT ASSESSEE HAS INVESTED MONEY IN A SISTER CONCERN AND IF ANY DISAL LOWANCE IS REQUIRED THE SAME HAS TO BE CONSIDERED UNDER SECTIO N 14A WHICH IS THE CASE NOT HERE AS ASSESSEE HAS NOT EARNED ANY EX EMPT INCOME. SINCE ASSESSEES AVAILABLE CAPITAL IS MORE THAN THE BORROWED FUNDS, PRESUMPTION AS DECIDED BY THE HON'BLE JURISDICTIONA L HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD 313 IT R 340 (BOM.) EQUALLY APPLY. THIS ASPECT WAS ELABORATELY DISCUSSE D BY THE COORDINATE BENCH IN THE CASE OF DCIT VS. MOHIT DIAM ONDS PVT LTD IN ITA NO.2097/M/11 FOR AY 2007-08 DATED 31,.7.2012 AS UNDER: THE LEARNED AR POINTED OUT THAT THE ASSESSEE HAD SHAREHOLDERS' FUNDS INCLUDING SHARE CAPITAL ALONG W ITH RESERVE AND SURPLUS TO THE TUNE OF RS. 72.19 CRORES AT THE END OF THE YEAR AND THE CORRESPONDING FIGURE FO R THE PRECEDING YEAR STOOD AT RS. 67.85 LACS. THE ABOVE REFERRED FIGURES ARE APPARENT FROM THE COPY OF BALA NCE SHEET AVAILABLE ON RECORD. WHEN WE CONSIDER THE AMO UNT OF AVERAGE LOAN ADVANCED BY THE ASSESSEE TO ITS SIS TER CONCERN, AS TAKEN BY THE AO, AT RS. 7.41 CRORES, WE OBSERVE THAT SUCH INTEREST FREE LOAN IS FAR SHORT O F INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE IN THE FORM OF SHAREHOLDERS' FUNDS. THE HON'BLE JURISDICTI ONAL HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIE S AND ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 25 OF 28 POWER LIMITED (2009) 313 ITR 340 (BOM.) HAS HELD TH AT IF THERE ARE INTEREST FREE FUNDS AVAILABLE TO AN ASSES SEE SUFFICIENTLY IN EXCESS OF ITS INVESTMENT AND AT THE SAME TIME THE ASSESSEE HAS ALSO RAISED A LOAN, IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM INTEREST FR EE FUNDS AVAILABLE. IN VIEW OF THE FACT THAT THE INTER EST FREE FUNDS ADVANCED BY THE ASSESSEE TO ITS SUBSIDIARY COMPANY ARE MUCH LESS THAN THE INTEREST FREE FUNDS AVAILABLE WITH IT IN THE SHAPE OF SHARE CAPITAL ALO NG WITH RESERVE AND SURPLUS, IN OUR CONSIDERED OPINION THER E CAN BE NO QUESTION OF SUSTAINING ANY ADDITION IN THIS R EGARD. WE, THEREFORE, UPHOLD THE IMPUGNED ORDER BUT FROM A DIFFERENT ANGLE. THIS GROUND IS NOT ALLOWED. 9.5 RESPECTFULLY FOLLOWING THE COORDINATE BENCH, BO TH ON FACTS AND PRINCIPLES WE ARE OF THE OPINION THAT THE AMOUN T OF ` .3,18,600 CANNOT BE DISALLOWED AS IT HAS NO NEXUS TO THE OTHE R FINANCE CHARGES CLAIMED BY ASSESSEE AS BUSINESS EXPENDITURE . ACCORDINGLY THE GROUND IS ALLOWED. 9.6 IN THE RESULT, THE APPEAL IS ALLOWED. ITA NO.169/MUM/2012 AY 2008-09: 10. THIS APPEAL IS FILED BY THE REVENUE AND THE GRO UNDS RAISED ARE AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT (A) ERRED IN HOLDING TH AT PAYMENT OF COMMISSION TO A NON RESIDENT COMMISSION AGENTS WAS NOT ATTRACTING THE PROVISIONS OF SECTION 195 AND SECTION 40(A)(IA) OF THE ACT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT (A) ERRED IN HOLDING THAT C IRCULAR NO.7 OF 2009 DATED 22.10.2009 IS NOT APPLICABLE FOR AY 2008-09 EVEN THOUGH THE ASSESSMENT WAS COMPLETED ON 08.12.2010. 3. THE APPELLANT PRAYS THAT THE ORDER OF CIT (A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF AO BE RESTORE D. 10.1 THIS ISSUE OF DISALLOWANCE UNDER SECTION 40(A) (IA) RAISED IN THE ABOVE TWO GROUNDS WAS DISCUSSED ELABORATELY ALO NG WITH ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 26 OF 28 ASSESSEES GROUND NOS. 3 & 5 IN THE APPEAL FOR AY 2 007-08 (SUPRA). FOR THE REASONS STATED THEREIN, THE REVENUE GROUNDS ARE REJECTED. 10.2 IN THE RESULT THE APPEAL FILED BY THE REVENUE IS DISMISSED. ITA NO.8789/MUM/2011 AY 2008-09: 11. ASSESSEE IN THIS APPEAL HAS RAISED THE FOLLOWIN G GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT (A) ERRED IN CONFIRMING ADD ITION ON ACCOUNT OF INTEREST EXPENSES OF ` .4,56,672 WITHOUT CONSIDERING THAT: (A) NO BORROWED FUNDS WERE UTILIZED FOR INVESTMENTS/ADVANCES (B) MOST OF THE AMOUNTS WERE GIVEN FOR STRATEGIC INVESTMENT AND NOT BY WAY OF LOAN. (C) THE INVESTMENTS WERE MADE ON VARIOUS DATES AND NOT ON THE FIRST DAY OF THE YEAR FOR WORKING OUT INTERE ST. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT (A) ERRED IN INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT IN RESPECT OF THE INVESTMENT IN SHARES OF ASSOCIATE CONCERN, THOUGH T HE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE TO THE FACTS OF THE CASE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT (A) ERRED IN INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT AS AO HAS CONS IDERED TOTAL INTEREST DISALLOWANCE OF ` .4,56,672 AFTER CONSIDERING AND INCLUDING INVESTMENTS IN SHARES OF ASSOCIATE CO NCERN AND THEREFORE, WOULD AMOUNT TO DOUBLE DISALLOWANCE . 11.1 GROUND NO.1 IS SIMILAR TO THE GROUND NO.9 DISC USSED IN ITA NO.8868/MUM/2010 IN AY 2007-08. THE LEARNED CIT (A) CONFIRMED THE SAME FOR THE REASONS STATED IN AY 2007-08. SINC E IN THAT YEAR WE HAVE NOT UPHELD THE ORDER OF THE CIT (A), IN THI S YEAR ALSO ASTHE FACTS AND THE LEGAL PRINCIPLES BEING THE SAME, WE M ODIFY THE ORDER OF THE CIT (A) AND ALLOW ASSESSEES GROUNDS. AN AMOUNT OF ` .4,56,672 DISALLOWED IN THIS YEAR WAS DELETED. GROUND NO1 IS ALLOWED. 11.2 GROUND NOS. 2 & 3 PERTAINS TO INVOKING SECTION 14A AFTER DISALLOWANCE OF INTEREST. THE LEARNED CIT (A) DURIN G THE APPELLATE ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 27 OF 28 PROCEEDINGS ASKED ASSESSEE WHY DISALLOWANCE COULD N OT BE MADE ON THE INVESTMENT MADE IN SHARES OF SISTER CONCERN. SI NCE NO REPLY WAS FURNISHED, HE DIRECTED AO TO INVOKE RULE 8D AND MAK E SUITABLE DISALLOWANCE UNDER SECTION 14A. THE LEARNED COUNSEL SUBMITTED THAT THERE IS NO PROPER OPPORTUNITY GIVEN BY THE CI T (A) AND WITHOUT EXAMINING FACTS DIRECTED AO TO INVOKE RULE 8D. IT W AS HIS SUBMISSION THAT EVEN THOUGH RULE 8D IS APPLICABLE F ROM AY 2008- 09 THE SAME CANNOT BE INVOKED UNLESS AO IS SATISFIE D THAT THE ASSESSEE CLAIM OF NO EXPENDITURE CANNOT BE VERIFIED FROM THE BOOKS OF ACCOUNT. IT WAS FURTHER SUBMITTED THAT THE LEARN ED AO DID NOT GIVE ANY EFFECT TO THE ORDER SO FAR. THE LEARNED DR HOWEVER, RELIED ON THE ORDERS OF THE CIT (A). 11.3 WE HAVE CONSIDERED THE ISSUE. THE DIRECTIONS OF THE CIT (A) WITHOUT EXAMINING THE FACTS DIRECTING TO INVOKE RUL E 8D CANNOT BE CONSIDERED AS APPROPRIATE IN THE GIVEN FACTS OF THE CASE. SINCE AO HAS NOT INVOKED RULE 14A, NOR THERE IS ANY EVIDENCE ON RECORD THAT ASSESSEE CLAIMED ANY AMOUNT AS EXEMPT, WE ARE NOT I N A POSITION TO GIVE ANY FINDING ON THE ISSUE. THEREFORE, WITHOUT P REJUDICE TO THE RESPECTIVE CLAIMS OF ASSESSEE AND REVENUE, IN THE I NTEREST OF JUSTICE, WE RESTORE THE ISSUE TO THE FILE OF AO FOR FRESH AD JUDICATION WHETHER THE PROVISIONS OF SECTION 14A ARE APPLICABLE AND WH ETHER PROVISIONS OF SECTION 14A(2) CAN BE INVOKED ON THE FACTS OF TH E CASE AND IF SO WHETHER ANY DISALLOWANCE IS REQUIRED. SINCE THE FAC TS ARE NOT AVAILABLE ON RECORD, AO IS DIRECTED TO EXAMINE THE FACTS FIRST, GIVE OPPORTUNITY TO ASSESSEE AND DETERMINE DISALLOWANCE UNDER SECTION 14A IF WARRANTED. HE SHOULD KEEP IN MIND THE PRINCI PLES LAID DOWN BY THE JUDICIAL AUTHORITIES ON THE ISSUE, INCLUDING THE JURISDICTIONAL HIGH COURT/ SUPREME COURT ORDERS. THE GROUNDS ARE A LLOWED FOR STATISTICAL PURPOSES AND THE ISSUE IS RESTORED TO T HE FILE OF AO FOR FRESH ADJUDICATION. ITA NOS.8868 OF 2010, 8789 OF 2011 & 169 OF 2012 GU JARAT RECLAIM & RUBBER PRODUCTS LTD MUMBAI PAGE 28 OF 28 11.4 IN THE RESULT THE APPEAL FILED BY ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 12. IN THE RESULT APPEAL IN ITA NO. 8868/MUM/2010 FILED BY ASSESSEE IS ALLOWED, WHILE APPEAL IN ITA NO.169/MUM /2012 FILED BY THE REVENUE IS DISMISSED AND APPEAL IN ITA NO.8789/ MUM./2011 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH APRIL, 2013 SD/- SD/- (VIJAY PAL RAO) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 19 TH APRIL, 2013. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, K BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI