DCIT (LTU), New Delhi V. M/s. Havells India Ltd., New Delhi

ITA 2093/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3890 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 18-05-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 05-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ROHIT JAIN
• Assessee Lawyers: ROHIT JAIN
• Keywords: Capital asset; Double taxation relief; Deemed to accrue or arise in india; Non-deduction of tax; Revenue expenditure; Capital expenditure
• Section: 143(3); 37

Judgement Text

I.T.A. NOS.1300 & 2093/DEL./2010 (A.Y. : 2005-06) IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH C : NEW DELHI) (DELHI BENCH C : NEW DELHI) (DELHI BENCH C : NEW DELHI) (DELHI BENCH C : NEW DELHI) BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND SHRI SHAMIM YAYHA, ACCOUNTANT MEMBER SHRI SHAMIM YAYHA, ACCOUNTANT MEMBER SHRI SHAMIM YAYHA, ACCOUNTANT MEMBER SHRI SHAMIM YAYHA, ACCOUNTANT MEMBER ITA NO.1300/DEL./2010 ITA NO.1300/DEL./2010 ITA NO.1300/DEL./2010 ITA NO.1300/DEL./2010 (ASSESSMENT YEAR : 2005 (ASSESSMENT YEAR : 2005 (ASSESSMENT YEAR : 2005 (ASSESSMENT YEAR : 2005- -- -06) 06) 06) 06) M/S HAVELLS INDIA LTD. M/S HAVELLS INDIA LTD. M/S HAVELLS INDIA LTD. M/S HAVELLS INDIA LTD. VS. VS. VS. VS. ADDL.CIT, RANGE 12, ADDL.CIT, RANGE 12, ADDL.CIT, RANGE 12, ADDL.CIT, RANGE 12, 1/7, RAM KISHORE ROAD, 1/7, RAM KISHORE ROAD, 1/7, RAM KISHORE ROAD, 1/7, RAM KISHORE ROAD, NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. CIVIL LINES, CIVIL LINES, CIVIL LINES, CIVIL LINES, NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. (PAN/GIR NO.AAACH0351E) (PAN/GIR NO.AAACH0351E) (PAN/GIR NO.AAACH0351E) (PAN/GIR NO.AAACH0351E) AND AND AND AND I.T. A. NO.2093/DEL./2010 I.T. A. NO.2093/DEL./2010 I.T. A. NO.2093/DEL./2010 I.T. A. NO.2093/DEL./2010 (ASSTT. YEAR : 2005 (ASSTT. YEAR : 2005 (ASSTT. YEAR : 2005 (ASSTT. YEAR : 2005- -- -06) 06) 06) 06) DCIT(LTU), DCIT(LTU), DCIT(LTU), DCIT(LTU), VS. VS. VS. VS. M/S HAVELLS INDIA LTD., M/S HAVELLS INDIA LTD., M/S HAVELLS INDIA LTD., M/S HAVELLS INDIA LTD., NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPON (RESPON (RESPON (RESPONDENT) DENT) DENT) DENT) ASSESSEE BY : SHRI AJAY VOHRA, ADV. & SH. ROHIT JAI N, FCA ASSESSEE BY : SHRI AJAY VOHRA, ADV. & SH. ROHIT JAI N, FCA ASSESSEE BY : SHRI AJAY VOHRA, ADV. & SH. ROHIT JAI N, FCA ASSESSEE BY : SHRI AJAY VOHRA, ADV. & SH. ROHIT JAI N, FCA REVENUE BY : SMT. PARTIMA KAUSHIK & SMT. MONA MOHAN TY, SR.DR REVENUE BY : SMT. PARTIMA KAUSHIK & SMT. MONA MOHAN TY, SR.DR REVENUE BY : SMT. PARTIMA KAUSHIK & SMT. MONA MOHAN TY, SR.DR REVENUE BY : SMT. PARTIMA KAUSHIK & SMT. MONA MOHAN TY, SR.DR ORDER ORDER ORDER ORDER PER A.D. JAIN: JM PER A.D. JAIN: JM PER A.D. JAIN: JM PER A.D. JAIN: JM I.T.A. NO.1300/DEL./2010 THIS IS ASSESSEES APPEAL FOR AY 2005-06 AGAINST THE ORDER DATED 15.2.2010, PASSED BY THE CIT(A)-LTU, NEW DELHI. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS OF APPEAL: 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND THE LEGAL POSITION, THE LD.CIT(A) HAS ERRED IN CONFIR MING THE DISALLOWANCE OF `1471095 U/S 40(A)(I) IN RESPECT OF EXPENDITURE INCURRED TOWARDS TESTING FEE PAID TO M/S C SA INTERNATIONAL CHICAGO ILLIONOS, USA ON ACCOUNT OF NO N- DEDUCTION OF TDS. 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND THE LEGAL POSITION, THE LD.CIT(A) HAS ERRED IN CONFIR MING THE DISALLOWANCE OF PRE-OPERATIVE EXPENSES OF `231253 ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 2 INCURRED AT HARIDWAR UNIT TREATING THE SAME AS CAPITA L EXPENDITURE. 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND THE LEGAL POSITION, THE LD.CIT(A) HAS ERRED IN CONFIR MING THE DISALLOWANCE OF `41012 BEING THE AMOUNT WRITTEN OFF @1/10 TH OF THE EXPENDITURE ON INCREASE IN AUTHORIZED CAPITAL AS THE SAME IS ALLOWABLE U/S 35D(2)(C)(IV) OF T HE INCOME TAX ACT, 1961. 1(A) IN THE ORIGINAL HEARING IN BOTH THESE APPEALS, T HE DEPARTMENT WAS REPRESENTED BY SMT. PRATIMA KAUSHIK, LD.SR.DR. SMT . MONA MOHANTY APPEARED FOR THE DEPARTMENT WHEN THE MATTER WAS REFIXED FOR CLARIFICATION. 2. GROUND NO.1 STATES THAT THE CIT(A) HAS ERRED IN CON FIRMING THE DISALLOWANCE OF ` 14,71,095 U/S 40(A)(I) OF THE I.T. ACT IN RESPECT OF EXPENDITURE INCURRED TOWARDS TESTING FEES PAID BY THE ASSESSEE TO M/S CSA INTERNATIONAL, CHICAGO, ILLIONOS, USA, ON ACCOUN T OF NON-DEDUCTION OF TDS. 3. DURING THE YEAR, THE ASSESSEE COMPANY HAD PAID `14,7 1,095 TO M/S CSA, INTERNATIONAL CHICAGO, ILLIONOS, USA (CSA, FOR SHORT), FOR GETTING WITNESS TESTING OF AC CONTACTOR AS PART OF CB R EPORT AND KEMA CERTIFICATION. CSA WAS ASSIGNED THIS JOB SINCE IT HAD A SPECIALIZED KNOWLEDGE AND FACILITY FOR THE REQUISITE TESTING AND CERTIFICATION. THE AO WAS OF THE VIEW THAT THE SAID TESTING AND CERTIFICA TION WAS REQUIRED TO BE UTILIZED IN THE MANUFACTURING ACTIVITY OF THE ASSESSEE COMPANY. THE ASSESSEE, WHILE MAKING THE PAYMENT TO CSA, HAD NOT DEDUCTED TDS. ON QUERY, THE ASSESSEE SUBMITTED BEFORE THE AO, VI DE LETTER DATED 4.10.2007, THAT THE PAYMENT HAD BEEN MADE TO CSA FOR TESTING OF MCBS LAB IN THE USA AND THAT SINCE THE TESTING WAS D ONE BY A FOREIGN COMPANY OUTSIDE INDIA, NO INCOME HAD ACCRUED OR ARISEN IN INDIA DUE TO WHICH, NO TDS WAS DEDUCTED. 4. THE AO, HOWEVER, WAS OF THE VIEW THAT IT WAS NOT C ORRECT TO STATE THAT NO INCOME HAD ACCRUED OR ARISEN IN INDIA; THAT AS PER SECTION ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 3 9(1)(VII) OF THE I.T. ACT, INCOME BY WAY OF FEES FOR TECHNICAL SERVICES, PAYABLE BY A PERSON, WHO IS A RESIDENT INDIAN, SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA, EXCEPT WHERE FEES ARE PAYAB LE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION CARRIED ON B Y SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA. THE AO OPINED THAT AS SUCH, IRRESPECTIVE OF WHETHER THE NON-RESIDENT HAS BUSINESS CONNECTION IN INDI A OR NOT, THE PAYMENT MADE BY A RESIDENT AS FEES FOR TECHNICAL SERVIC ES BEING UTILIZED IN BUSINESS IN INDIA WOULD LEAD TO INCOME BEI NG DEEMED TO ACCRUE OR ARISE IN INDIA. IT WAS OBSERVED THAT IN THE CASE OF THE ASSESSEE, THE TESTING REPORT AND CERTIFICATION, ETC. WER E OBTAINED IN RESPECT OF PRODUCTS TO BE UTILIZED FOR PURPOSES OF BUSIN ESS OF THE ASSESSEE, A NON RESIDENT COMPANY IN INDIA; AND THAT THE TESTING WAS A HIGHLY SPECIALIZED JOB OF TECHNICAL NATURE, AMOUNTIN G TO TECHNICAL SERVICES OFFERED AND RECEIVED BY THE ASSESSEE. IT WAS OBSE RVED THAT SINCE THE FOREIGN ENTITY WAS BASED IN THE USA, THE SERV ICES AND PAYMENTS MADE WERE COVERED UNDER FEES FOR INCLUDED SE RVICES, AS DEALT WITHIN ARTICLE 12(4)(B) OF THE DIRECT TAXATIO N AVOIDANCE AGREEMENT BETWEEN INDIA AND THE USA (THE DTAA, FO R SHORT). THE AO OBSERVED THAT THE TESTING REPORT AND CERTIFICATION WE RE IN THE NATURE OF MAKING AVAILABLE OF TECHNICAL KNOWLEDGE, EXPERTISE A ND SKILL OF CSA TO THE ASSESSEE, RENDERING SUCH SERVICES TO BE FEES FOR INCLU DED SERVICES UNDER ARTICLE 12(4)(B) OF THE DTAA, SINCE TH E TESTING REPORT AND CERTIFICATIONS WERE UTILIZED IN MANUFACTURE AND SALE OF PRODUCTS IN THE ASSESSEES BUSINESS. IT WAS HELD THAT ACCORDINGLY, SECTI ON 195 OF THE I.T. ACT WAS APPLICABLE TO THE PAYMENT MADE BY T HE ASSESSEE COMPANY TO CSA; AND THAT THE NON-DEDUCTION OF TAX B Y THE ASSESSEE LED TO NON-AVAILABILITY OF DEDUCTION OF `14,71,095 U/S 40(A)(I) OF THE ACT. IT WAS, THEREFORE, THAT THE AO ADDED `14,71,095 TO T HE TOTAL INCOME OF THE ASSESSEE. ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 4 5. THE AO, VIDE ORDER DATED 20.12.2007, PASSED THE ASSE SSMENT ORDER U/S 143(3) OF THE I.T. ACT. 6. ON APPEAL, THE CIT(A) OBSERVED, INTER ALIA, THAT AS PER EXPLANATION(2) TO SECTION 9(1)(VIII)(B) OF THE I.T. ACT, FEES FOR TECHNICAL SERVICES MEANS CONSIDERATION FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES; THAT IN COCHIN REF INERIES LTD. VS. CIT, 222 ITR 354 (KER.), IT HAS BEEN HELD THAT FEES PAID BY AN INDIAN COMPANY TO A FOREIGN COMPANY TO EVALUATE THE QUALIT Y OF CERTAIN PRODUCTS AND TO ASCERTAIN THE SUITABILITY OF SUCH PRODU CTS FOR A SPECIFIC INDUSTRY, CONSIDERED AS REIMBURSEMENT MADE BY THE INDIA N COMPANY, WERE PART AND PARCEL IN THE PROCESS OF ADVICE OF A TE CHNICAL CHARACTER AND WOULD FALL FOR COVERAGE IN THE DEFINITION OF F EES FOR TECHNICAL SERVICES, WITHIN THE PROVISIONS OF SECTION 9(1)(VII) OF THE ACT; THAT SINCE THE PAYMENT MADE BY THE ASSESSEE AS FEES FOR TECHNICAL SER VICES WAS UTILIZED IN BUSINESS IN INDIA, IT WOULD LEAD TO INCOME BEING DEEMED TO ACCRUE OR ARISE IN INDIA; THAT SINCE FEES HAD BEEN PAI D FOR OBTAINING TECHNICAL SERVICES FOR THE PURPOSES OF THE ASSESSEES BUSINESS AND IT HAD ALSO BEEN UTILIZED FOR THE PURPOSE OF MANUFACTURE AND SALE OF PRODUCTS IN THE BUSINESS OF THE ASSESSEE, THE PROVISIONS OF SE CTION 195 OF THE ACT WERE APPLICABLE TO SUCH PAYMENT; AND THAT THEREFORE, THE AO HAD BEEN CORRECT IN HOLDING THAT DEDUCTION OF `14,7 1,095 WAS NOT ALLOWABLE. IN THIS MANNER, THE CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE AO. 7. AGGRIEVED, THE ASSESSEE HAS RAISED GROUND NO.1 BEFORE US. 8. CHALLENGING THE IMPUGNED ORDER IN THIS REGARD, TH E LD.COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT SECTION 40(A)(I) OF T HE ACT HAS WRONGLY BEEN APPLIED BY THE AUTHORITIES BELOW TO MAK E THE DISALLOWANCE IN QUESTION; THAT SECTION 40(1)(I) PROVID ES FOR DISALLOWANCE OF, INTER ALIA, FEES FOR TECHNICAL SERVIC ES PAYABLE BY AN ASSESSEE OUTSIDE INDIA, ON WHICH, TAX IS DEDUCTIBLE AT SOU RCE UNDER ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 5 CHAPTER XVII-B OF THE ACT AND SUCH TAX HAS NOT BEEN D EDUCTED; THAT IN THE PRESENT CASE, THE FEES FOR TECHNICAL SERVICES IS NOT CHARGEABLE UNDER THE ACT; THAT THE PROVISIONS OF SECTION 195 OF T HE ACT HAVE BEEN WRONGLY INVOKED; THAT THEREUNDER ALSO, THE PAYER SHAL L DEDUCT INCOME- TAX ON PAYMENT TO A FOREIGN COMPANY, A SUM CHARGEABL E UNDER THE PROVISIONS OF THE ACT, WHICH IS AGAIN NOT THE CASE HERE IN; THAT IN GE INDIA TECHNOLOGY CENTRE P. LTD. VS. CIT & ANOTHER, 327 ITR 456 (SC) IT HAS BEEN HELD THAT ON A MERE REMITTANCE TO A NON-RESI DENT, DUTY TO DEDUCT TAX AT SOURCE DOES NOT ARISE, UNLESS THE REMITTAN CE CONTAINS WHOLLY OR PARTLY TAXABLE INCOME; THAT EXPLANATION( 2) TO SECTION 9(1)(VIII) DEFINES FEES FOR TECHNICAL SERVICES FOR PU RPOSES OF THE SAID SECTION, AS TO MEAN A CONSIDERATION FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES; THAT SEC TION 9(1)(VII)(B) PROVIDES INCOME BY WAY OF FEES FOR TECHNICAL SERVICES P AYABLE BY A PERSON WHO IS A RESIDENT, TO BE INCOME DEEMED TO ACCRU E OR ARISE IN INDIA, EXCEPT WHERE THE FEES ARE PAYABLE IN RESPECT O F SERVICES UTILIZED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSONS OUTSI DE INDIA, OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA; THAT IN THE INSTANT CASE, THE ASSESSEE IS MA KING EXPORTS TO THE USA AND SO, THE FEES IN QUESTION HAS BEEN PAID F OR THE PURPOSES OF MAKING OR EARNING INCOME FORM THE USA, I.E., FRO M A SOURCE OUTSIDE INDIA; THAT THEREFORE, AS PER THE PROVISIONS OF SECTION 9(1)(VIII)(B) ALSO, THE FEES PAID BY THE ASSESSEE TO CSA CANNOT BE DEEMED TO HAVE ACCRUED OR ARISEN IN INDIA AND IS NOT CHARGEABLE TO T AX IN INDIA; THAT IT WAS THEREFORE, THAT NO TDS WAS REQUIRED TO BE MADE ON SUCH PAYMENT, DUE TO WHICH, SECTION 40(A)(I) OF THE ACT HAS NO APPL ICABILITY; THAT IN TITAN INDUSTRIES LTD. VS. ITO, INTERNATIONAL TAXATION , WARD XIX, BANGALORE, 11 SOT 206 (BANG.), WHERE THE ASSESSEE, TIT AN INDUSTRIES LTD., A RESIDENT COMPANY, MADE PAYMENT OF FEES FOR T ECHNICAL SERVICES FOR GETTING ITS PATENT NAME REGISTERED IN HONG KONG T HROUGH A FIRM OF PROFESSIONALS OF HONG KONG. IT WAS HELD THAT THE SERVICE S RENDERED BY ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 6 THE PROFESSIONALS OF HONG KONG HAD BEEN UTILIZED BY TH E ASSESSEE OUTSIDE INDIA AND SINCE THE PATENT WAS REGISTERED OUTSID E INDIA FOR MAKING AN INCOME FROM A SOURCE OUTSIDE INDIA, THE PAY MENT WAS COVERED IN THE EXCEPTION PROVIDED IN SECTION 9(1)(VI I)(B) OF THE ACT, DUE TO WHICH, THE ASSESSEE WAS NOT REQUIRED TO DEDUCT TAX AT SOURCE AND SINCE THE FEES WAS NOT TAXABLE IN INDIA IN THE HANDS OF THE RECIPIENT FIRM OF PROFESSIONALS OF HONG KONG, THE ASSESSEE PAYEE WAS NOT REQUIRED TO DEDUCT TAX AT SOURCE AS PER THE PROVISIONS OF SECTION 195 OF THE ACT; THAT THE CIT(A) HAS ERRED IN CONFIRMING THE OBSERVATIONS OF THE AO TO THE EFFECT THAT THE REPORT AND CERTIFICAT ION WAS UTILIZED IN MANUFACTURE AND SALE OF THE PRODUCTS OF THE ASSESSEE IN T HE ASSESSEES BUSINESS IN INDIA, DUE TO WHICH, THE PROVISIONS OF SECTIO N 195 OF THE ACT WERE APPLICABLE TO THE PAYMENT MADE, ATTRACTING THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT; THAT THE ASSESSEE HAD MADE THE PAYMENT TO CSA FOR GETTING WITNESS TESTING OF AC CONTACTOR AS PART OF CB REPORT AND KEMA CERTIFICATION THROUGH CSA; THAT CSA, IS AN AGENCY WHICH SPECIALIZES IN PRODUCT TESTING AND CERTIFICATION FOR E LECTRICAL AND ELECTRONICS PRODUCTS; THAT KEMA CERTIFICATION ENABLES THE ASSESSEE COMPANY TO SELL ITS PRODUCTS FREELY WITHIN THE EUROPEA N UNION; THAT THE ASSESSEE COMPANY IS EXPORTING ITS PRODUCTS OUTSIDE INDIA AN D THE CERTIFICATE FROM KEMA THROUGH CSA IS REQUIRED TO ENA BLE IT TO MAKE FOR SUCH EXPORT; THAT THIS CERTIFICATE IS NOT REQUIRED IN INDIA BY THE ASSESSEES BUYERS; THAT THE SAID SERVICES OF CSA ARE RENDERE D AND UTILIZED ABROAD; THAT THE PAYMENT HAS ALSO BEEN RECEI VED BY CSA OUTSIDE INDIA; THAT THE PAYMENT IN QUESTION IS SQUARELY COVERED IN THE EXEMPTION PROVIDED BY SECTION 9(1)(VII)(B) OF THE AC T; THAT THE AO HAD GONE WRONG IN OBSERVING THAT THE PAYMENT MADE, HAD B EEN UTILIZED FOR THE BUSINESS PURPOSES OF THE ASSESSEE IN INDIA, WHEREAS IT WA S NOT SO; THAT IN THE INDIAN MARKET, THE KEMA CERTIFICATION I S NOT REQUIRED, WHEREAS THE SAME IS NECESSARY FOR THE ASSESSEES PRODUCT TO B E SOLD OUTSIDE INDIA; THAT ALL THESE ARGUMENTS WERE SPECIFICAL LY RAISED BEFORE ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 7 THE CIT(A), BY WAY OF WRITTEN SUBMISSIONS; THAT HOWEVER , ERRONEOUSLY, THE CIT(A) HAS NOT DEALT WITH THEM IN THE IMPUGNED O RDER, CAUSING INJUSTICE TO THE ASSESSEE BY WAY OF CONFIRMATION OF THE DISALLOWANCE WRONGLY MADE BY THE AO; THAT THE CIT(A) HAS ALSO FAIL ED TO CONSIDER THE DECISION OF THE HONBLE SUPREME COURT IN ISHIKAWAJI MIHARIMA HEAVY INDUSTRIES LTD. VS. DIRECTOR OF INCOME TAX, 158 TAXMA N 259 (SC), WHEREIN IT HAS BEEN HELD THAT INCOME CAN BE DEEMED T O ACCRUE OR ARISE IN INDIA, ONLY IF THE SERVICES ARE UTILIZED IN INDIA AS WELL AS RENDERED IN INDIA; THAT IN THE ASSESSEES CASE, NEITHER WERE THE SERVI CES RENDERED BY CSA IN INDIA, NOR WERE THEY UTILIZED IN INDIA; T HAT THE CIT(A) HAS GONE WRONG IN PLACING RELIANCE ON COCHIN REFINERY LTD. VS. CIT (SUPRA); THAT THE SAID JUDGMENT IS NOT APPLICABLE TO T HE CASE OF THE ASSESSEE AT ALL; THAT IN THAT CASE, IT WAS THE REIMBURSEM ENT OF THE AMOUNTS PAID BY THE FOREIGN COMPANY TO ITS PERSONNEL, WHICH WAS HELD ASSESSABLE, COVERED BY THE EXPLANATION TO SECTION 9(1)(V III) OF THE ACT; THAT AS PER SECTION 90(2) OF THE ACT, WHERE THE CENTR AL GOVT. HAS ENTERED INTO AN AGREEMENT WITH THE GOVERNMENT OF AN Y COUNTRY OUTSIDE INDIA U/S 90(1) OF THE ACT FOR GRANTING RELIE F OF TAX OR AVOIDANCE OF DOUBLE TAXATION, THEN, IN RELATION TO THE ASSESSEE T O WHOM SUCH AGREEMENT APPLIES, THE PROVISIONS OF THE INCOME TAX AC T SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THAT ASSESSEE; T HAT ARTICLE 12 OF THE INDIA-US DTAA [187 ITR (STATUTES) 102] DEALS WITH ROYALTY AND FEES INCLUDED SERVICES; THAT INCLUDED SERVICES IN THE SAID ARTICLE 12 ARE THE SAME AS TECHNICAL SERVICES AS PROVIDED IN SECTION 9(1)( VII) OF THE ACT; THAT THE DTAA HAS ATTACHED TO IT A MEMORANDUM OF UN DERSTANDING CONCERNING FEES FOR INCLUDED SERVICES IN ARTICLE 12; T HAT PARAGRAPH 4(B) OF THE SAID MOU CORRESPOND TO PARAGRAPH 4(B) OF ARTIC LE 12 OF THE DTAA, WHICH REFERS TO TECHNICAL OR CONSULTANCY SERVICE S THAT MAKE AVAILABLE TO THE PERSON ACQUIRING THE SERVICES, INTER ALIA, TECHNICAL KNOW-HOW, EXPERTISE, SKILL, KNOW-HOW OR PROCESS; THAT P ARAGRAPH 4(B) OF THE MOU STATES THAT THIS CATEGORY IS NARROWER THAN THE CATEGORY ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 8 PRESCRIBED IN PARAGRAPH 4(B), BECAUSE IT EXCLUDES ANY SERVICE THAT DOES NOT MAKE TECHNOLOGY AVAILABLE TO THE PERSON ACQU IRING THE SERVICE; THAT IT STATES THAT GENERALLY SPEAKING TECHNOL OGY WILL BE CONSIDERED MADE AVAILABLE WHEN THE PERSON ACQUIRING THE SERVICE IS UNABLE TO APPLY THE TECHNOLOGY; THAT IT STATES THAT T HE FACT THAT PROVISION OF THE SERVICE MAY REQUIRE TECHNICAL INPUT BY THE PERSON PROVIDING THE SERVICES, DOES NOT PER SE MEAN THAT TECHN ICAL KNOWLEDGE, SKILLS, ETC., ARE MADE AVAILABLE TO THE PERSON PURCHASI NG THE SERVICES, WITHIN THE MEANING OF PARAGRAPH 4(B); THAT IT FURTH ER STATES THAT SIMILARLY, THE USE OF A PRODUCT WHICH EMBODIES TECHNOL OGY SHALL NOT BE PER SE CONSIDERED TO MAKE THE TECHNOLOGY AVAILABLE; T HAT IN THE ASSESSEES CASE, IT WAS ONLY THAT THE SERVICES OF CSA WERE MADE AVAILABLE TO THE ASSESSEE NO TECHNICAL KNOW-HOW WAS TR ANSFERRED TO THE ASSESSEE; THAT IN RAYMOND LTD. VS. DCIT, 86 ITD 79 1 (MUM.), CONSIDERING PAYMENT OF UNDERWRITING COMMISSION UNDER T HE INDO-UK DTAA, UNDER SIMILAR CIRCUMSTANCES, IT WAS HELD THAT SINC E NO TECHNICAL KNOWLEDGE, ETC., WAS MADE AVAILABLE TO THE ASSESSEE COMP ANY BY RENDERING OF UNDERWRITING SERVICES, IT DID NOT AMOUNT TO FEES FOR TECHNICAL SERVICES WITHIN THE MEANING OF THE INDO-UK DTAA AND THAT SQUARELY, THERE WAS NO OBLIGATION ON THE PART OF THE ASSESSEE COMPANY TO DEDUCT TAX U/S 195 OF THE ACT; THAT IN JOINT ACC REDITATION SYSTEM OF AUSTRALIA AND NEW ZEALAND IN RE, 326 ITR 487 (AAR), WHERE THE APPLICANT NON-RESIDENT, NON-PROFIT ORGANIZATION PROV IDED ACCREDITATION TO CONFORMITY ASSESSMENT BODIES AND THE FEES WERE RECEIVE D BY THE NON-PROFIT ORGANIZATION FOR CERTIFICATION FROM BODI ES IN INDIA, IT WAS HELD THAT THE NON-PROFIT ORGANIZATION WAS NOT LIABLE TO T AX IN INDIA; THAT IN DIAMOND SERVICES P. LTD. VS. UNION OF INDIA & OTHERS , 304 ITR 201 (MUM.), WHERE PAYMENT WAS MADE TO A NON-RESIDENT COMP ANY FOR GRADING CERTIFICATE ISSUED BY A FOREIGN COMPANY TO IT S INDIAN CLIENT AND NO TAX WAS DEDUCTED AT SOURCE, IT WAS HELD THAT THERE WAS NO TRANSFER OF TECHNICAL KNOWLEDGE OR SKILL; THAT IN NQA QUALIT Y SYSTEM REGISTRAR ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 9 LTD. VS. DCIT, 92 TTJ (DEL.) 946, IT WAS HELD THAT P AYMENTS RECEIVED BY A NON-RESIDENT, NOT PAYING EITHER ROYALTY OR FEES FOR TECHNICAL SERVICES, WERE NOT TAXABLE IN INDIA IN VIEW OF THE INDO-UK DT AA AND THE SAME COULD NOT BE ALLOWED BY INVOKING THE PROVISIONS OF SEC TION 40(A)(I) OF THE ACT FOR NON-DEDUCTION OF TAX AT SOURCE; THAT IN TAXATION DEPARTMENT, ICICI BANK LTD. VS. DCIT (INTERNATIONAL TAXATION) 3-1, MUM., 20 SOT 453(MUM.), WHERE THE ASSESSEE BANK HAD A PPOINTED A NON-RESIDENT GRADE RATING AGENCY BASED IN THE USA FOR THE PURPOSE OF RATING ITS FLOATING RATE EURO NOTES ISSUE, THE AGENCY P ROVIDED COMMERCIAL INFORMATION TO THE ASSESSEE FOR RATING EURO NOTES AND THE ASSESSEE MADE PAYMENTS IN US DOLLARS TO THE AGENCY FOR RE NDERING SUCH ANALYTICAL SERVICES WITHOUT DEDUCTING TAX U/S 195 OF THE ACT ON SUCH PAYMENT, IT WAS HELD THAT UNDER ARTICLE 12 OF TH E INDO-US DTAA, FOR BRINGING ANY PAYMENT WITHIN THE DEFINITION OF F EES FOR INCLUDED SERVICES, A NON-RESIDENT MUST MAKE AVAILABLE TECHNICAL SKILL, EXPERTISE OR TECHNICAL KNOW-HOW TO THE ASSESSEE, ON THE BASIS OF WH ICH, THE NON- RESIDENT HAS PREPARED OR DEVELOPED COMMERCIAL INFORMA TION; AND THAT IN THAT CASE, SINCE THE ASSESSEE HAD ONLY GOT COMMERCIAL INFORMATION AND NOT TECHNICAL KNOW-HOW, TECHNICAL EXPERTISE OR T ECHNOLOGIES ON THE BASIS OF WHICH IT WAS PREPARED, THE PAYMENT MADE BY TH E ASSESSEE FOR OBTAINING SUCH COMMERCIAL INFORMATION COULD NOT BE ST ATED TO BE FEES FOR INCLUDED SERVICES AND, THEREFORE, THE SAID PAYME NT COULD NOT BE TAXED IN INDIA. 9. THE LD.COUNSEL FOR THE ASSESSEE HAS SUMMED UP HIS ARGUME NTS BY CONTENDING THAT AS SUCH, THE AUTHORITIES BELOW HAVE ERRED IN MAKING THE DISALLOWANCE IN QUESTION WHILE WRONGLY INVOKING T HE PROVISIONS OF SECTION 40(A)(I) OF THE ACT WHICH, IN VIEW OF THE AF ORESAID SUBMISSIONS, IS NOT AT ALL APPLICABLE; THAT THE ASSESSEE, AS SUCH, WAS N OT REQUIRED TO DEDUCT TAX ON THE PAYMENTS MADE TO CSA; AND THAT THE REFORE, THE ORDER UNDER APPEAL BE SET ASIDE AND THE DISALLOWANCE M ADE AND CONFIRMED BE CANCELLED. ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 10 10. THE LD.DR, ON THE OTHER HAND, HAS STAUNCHLY SUPPOR TED THE ORDER UNDER APPEAL. SHE HAS STATED THAT THE AO, IN THE ASSESSM ENT ORDER HAS RECORDED A FIRM FINDING THAT THE CERTIFICATES AND TE STING AND CERTIFICATION PROVIDED TO THE ASSESSEE BY CSA WERE REQU IRED TO BE UTILIZED IN THE MANUFACTURING ACTIVITY OF THE ASSESSEE IN INDIA; THAT THE TESTING AND CERTIFICATION HAVE BEEN FOUND TO HAVE BE EN IN FACT UTILIZED BY THE ASSESSEE COMPANY IN ITS MANUFACTURING ACTIVITY I N INDIA; THAT WHILE MAKING PAYMENT TO CSA, THE ASSESSEE DID NOT DEDUC T TAX AT SOURCE, DUE TO WHICH, THE PROVISIONS OF SECTION 40(A)(I ) COME INTO PLAY AND WERE RIGHTLY APPLIED; THAT ON QUERY BY THE AO, THE ASSESSEE GAVE A BLAND REPLY, I.E., THAT THE PAYMENT HAD BEEN MADE F OR TESTING OF MCBS LAB IN THE CSA AND SINCE THE TESTING WAS DONE BY A FO REIGN COMPANY OUTSIDE INDIA, NO INCOME HAD ACCRUED OR ARISEN IN IND IA AND HENCE, NO TDS WAS DEDUCTED; THAT THE AO RIGHTLY TOOK RECOURSE T O THE PROVISIONS OF SECTION 9(1)(B) OF THE ACT, AS PER WHICH, FEES FOR TECHNICAL SERVICES PAYABLE BY A PERSON WHO IS A RESIDENT, EXCEPT WHERE FE ES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA, SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA; THAT SINCE IN THE PRESENT CASE, THE TEC HNICAL SERVICES WERE UTILIZED IN THE ASSESSEES BUSINESS IN INDIA, INCOME, AS PER SECTION 9(1)(VII)(B) OF THE ACT SHALL BE DEEMED TO HAVE ACCR UED OR ARISEN IN INDIA AS HAS RIGHTLY BEEN ORDERED BY THE AUTHORITIES B ELOW; THAT MOREOVER, THE PAYMENT IS ALSO COVERED IN FEES FOR INC LUDED SERVICES, AS REFERRED TO UNDER ARTICLE 12(4)(B) OF THE INDO-US DTAA, AS PER WHICH, FOR THE PURPOSES OF ARTICLE 12, FEES FOR INCLUDED SERV ICES, MEANS PAYMENTS OF ANY KIND TO ANY PERSON, IN CONSIDERATION F OR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES, IF SUCH SERVIC ES MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERTISE, SKILL, KNOW -HOW OR PROCESS; THAT THE TESTING REPORT AND CERTIFICATION MADE AVAIL ABLE TO THE ASSESSEE BY CSA WERE IN THE NATURE OF THE TECHNICAL KNOWLEDG E, EXPERTISE AND ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 11 SKILL MADE AVAILABLE BY CSA TO THE ASSESSEE, SINCE THE SAM E HAD BEEN UTILIZED IN THE MANUFACTURE AND SALE OF PRODUCTS IN T HE BUSINESS OF THE ASSESSEE IN INDIA; THAT AS SUCH, AS RIGHTLY HELD BY THE AO , SECTION 195 OF THE ACT IS DIRECTLY APPLICABLE TO THE CASE; THAT E XPLANATION 2 TO SECTION 9(1)(VII) OF THE ACT WAS RIGHTLY APPLIED BY T HE AUTHORITIES BELOW; THAT COCHIN REFINERY LTD. (SUPRA), WHICH HAS CORREC TLY BEEN RELIED ON BY THE CIT(A), IS A DIRECT AUTHORITY ON THE ISSUE; THA T THEREIN, FEES PAID BY AN INDIAN COMPANY TO A FOREIGN COMPANY TO EVALUA TE THE QUALITY OF CERTAIN PRODUCTS AND TO ASCERTAIN THE SUITABILITY OF SUCH PRODUCTS FOR SPECIFIC INDUSTRIES, WERE CONSIDERED AS REIMBURSEMENT MAD E BY THE INDIAN COMPANY AND WERE HELD TO BE PART AND PARCEL IN THE PROCESS OF ADVICE OF TECHNICAL NATURE, FALLING SQUARELY WITHIN THE DEFINITION OF FEES FOR TECHNICAL SERVICES, AS GIVEN BY EXPLANATION 2 TO SECTION 9(1)(VII) OF THE ACT; THAT THIS JUDGMENT IS DIRECTLY APPLICABLE TO THE FACTS OF THE PRESENT CASE AND IT HAS WRONGLY BEEN SOUGHT TO BE DISTIN GUISHED ON BEHALF OF THE ASSESSEE; AND THAT TITAN INDUSTRIES LTD. (SUPRA) IS NOT APPLICABLE, SINCE THEREIN, THE ACCRUAL WAS TO THE ASSOC IATED COMPANY ABROAD, WHICH IS NOT THE CASE HERE. 11. AS SUCH, THE LD.DR HAS PLEADED THAT THERE BEING NO MERIT IN THE GROUND TAKEN BY THE ASSESSEE, THE SAME BE REJECTED UPHOL DING THE WELL-VERSED ORDER PASSED ON THE ISSUE BY THE CIT(A). 12. WE HAVE HEARD BOTH THE PARTIES ON THE ISSUE AND HA VE EXAMINED THE RECORD IN RESPECT THEREOF. THE ISSUE IS AS TO WHETH ER THE CIT(A) HAS BEEN CORRECT IN CONFIRMING THE DISALLOWANCE OF RS.14, 71,095 MADE U/S 40(A)(I) OF THE ACT, CONCERNING EXPENDITURE BY WAY OF PAYMENT OF TESTING FEE PAID BY THE ASSESSEE TO CSA AND NOT DEDUCTIN G TAX ON SAID PAYMENT. 13. THE AO MADE DISALLOWANCE FOR THE SOLE REASON THAT THE WITNESS TESTING OF AC CONTACTOR AS PART OF CB REPORT AND KEMA CERTIFICATION, WHICH WERE PROVIDED BY CSA AS SERVICES TO THE ASSESSEE, WE RE UTILIZED IN THE MANUFACTURE AND SALE OF PRODUCTS BY THE ASSESSEE I N INDIA. THE ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 12 CIT(A) CONFIRMED THIS DISALLOWANCE. FOR MAKING THE DI SALLOWANCE, THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT WERE INVOKED . SECTION 40(A)(I) (RELEVANT PORTION) OF THE ACT READS AS FOLLOWS: 40. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTI ONS 30 TO 38, THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PRO FITS AND GAINS OF BUSINESS OR PROFESSION, - (A) IN THE CASE OF ANY ASSESSEE (I) ANY INTEREST, ROYALTY, FEES FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER THIS ACT, WHICH IS PAYABLE, - (A) OUTSIDE INDIA, OR (B) .. ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCTION, HAS NOT BEEN PAID DURING THE PREVIOUS YEAR. 14. THE STAND TAKEN BY THE ASSESSEE IS THAT IN ORDER TO I NVOKE THE PROVISIONS OF SECTION 40(A)(I), IT IS A SINE QUA NON THA T THE AMOUNT PAID SHOULD BE CHARGEABLE TO TAX UNDER THE I.T. ACT. IT HAS BEEN MAINTAINED THAT IN THE PRESENT CASE, THE FEE FOR TECHNICAL SERVIC ES PAID BY THE ASSESSEE TO CSA IS NOT CHARGEABLE TO TAX IN INDIA, DUE T O THE EXCEPTION CONTAINED IN SECTION 9(1)(VII)(B) OF THE ACT. 15. SECTION 9(1)(VII)(B) READS AS FOLLOWS: 9(1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA:- (VII) INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE BY (A).. (B) A PERSON WHO IS A RESIDENT EXCEPT WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILISED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSE OF MAKING OR EARNING ANY INCOME FORM ANY SOURCE OUTSIDE INDIA; (C).. ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 13 16. IN ORDER TO FALL WITHIN EXCEPTION OF SECTION 9(1 )(VIII)(B) OF THE ACT, THE TECHNICAL SERVICES, FOR WHICH, THE FEES HAVE BEEN PAID, OUGHT TO HAVE BEEN UTILIZED BY A RESIDENT IN A BUSINESS OUTSIDE I NDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOUR CE OUTSIDE INDIA. 17. NOW, SO AS TO SEEK EXEMPTION U/S 9(1)(VII)(B) OF TH E ACT, THE ONUS LIES ON THE ASSESSEE TO PROVE THAT THE SERVICES WERE IN FA CT UTILIZED EITHER IN A BUSINESS CARRIED ON OUTSIDE INDIA, OR FOR T HE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA. IF THE ASSESSEE IS ABLE TO ESTABLISH SUCH FACTS, THE EXCEPTION U/S 9 (1)(VII)(B) WILL BE AVAILABLE TO HIM. ELSE, SECTION 9(1)(VII)(B) HAS NO APPLICATION AND THE PAYMENT WILL BE CHARGEABLE AS PER THE PROVISIONS O F SECTION 5(1)(A) OF THE ACT. SECTION 5(1)(A) READS AS FOLLOWS: 5 (1) SUBJECT TO THE PROVISION OF THIS ACT, THE TOTA L INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A RESIDENT INCL UDES ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH (A). (B) (C) ACCRUES OR ARISE TO HIM OUTSIDE INDIA DURING SUCH YEAR 18. THEREFORE, SUBJECT TO THE OTHER PROVISIONS OF THE ACT, INCOME OF A RESIDENT ASSESSEE, WHICH ACCRUES OR ARISES TO HIM OUTSIDE IN DIA, IS INCLUDED IN THAT ASSESSEES TOTAL INCOME. THE PROVISIONS OF SECTION 5(1) OF THE ACT ARE THUS SUBJECT TO, INTER ALIA, THE PROVI SIONS OF SECTION 9(1)(VII)(B) OF THE ACT. 19. FOR ESTABLISHING THAT THE ASSESSEE HAS UTILIZED THE TE CHNICAL SERVICES, IN RESPECT OF WHICH, THE PAYMENT OF FEES INVI TING THE DISALLOWANCE HAS BEEN MADE, WERE RENDERED OUTSIDE INDI A, THE ASSESSEE HAS PLACED ON RECORD COPIES OF DETAILS OF THE TEST ING CHARGES ALONG WITH COPIES OF INVOICES OF THE PAYEE I.E., CSA. THESE ARE TO BE FOUND AT 9-12 OF THE ASSESSEES PAPER BOOK (APB, FOR SH ORT). THE ASSESSEE HAS ALSO PLACED ON RECORD BEFORE US, A COPY OF CE RTIFICATE OF ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 14 COMPLIANCE FROM CSA ALONG WITH THE CERTIFICATE REQU IRED AND, THEREFORE, THESE ARE AT APB 13-16. THE DOCUMENTS ARE CERTIFIED TO HAVE BEEN FILED BEFORE THE AUTHORITIES BELOW. THE DOCUMENTS AT APB 14 STATES, INTER ALIA, AS FOLLOWS: CE, EUROPEAN PRODUCT PASSPORT. THE APPLICATION OF THE CE SYMBOL MEANS THAT YOU MAY T RADE FREELY WITHIN THE EUROPEAN UNION. BUT FREELY DOES NOT MEAN FREE OF COMMITMENT. WHEN YOU AFFIX CE TO YOUR PRODUCT, YOU ARE DECLARING THAT YOU ARE DECLARING THAT YOUR COMMITMENT TO PROC EDURE COMPLIANCE WITH THE RELEVANT EUROPEAN DIRECTIVES. . COMPLY WITH CE KEMA KNOWS THE DRILL IN EUROPE BETTER THAN ANY OTHER TESTING HOUSE. QUITE OFTEN KEMA HAS FIRST-HAND KNOWLEDGE ABOUT STANDA RDS AS A RESULT OF ITS PARTICIPATION IN STANDARDIZATION COMMITTEES. K EMA IS COMMITTED TO ITS CUSTOMERS AND HAS MORE THAT 75 YEARS OF EXPERIENC E IN TESTING ELECTRICAL PRODUCTS. OUR REPUTATION IS UNDISPUTED. APB 15 STATES AS FOLLOWS: CSA INTERNATIONAL YOUR ONE STOP SOLUTION TO CERTI FY YOUR PRODUCTS FOR BRAZIL CSA INTERNATIONALS PRODUCT TESTING & CERTIFICATION SP ECIALISTS WILL PROVIDE THE KNOWLEDGE AND GUIDANCE YOU NEED TO CERT IFY YOUR ELECTRICAL & ELECTRONIC PRODUCTS FOR BRAZIL. IN BRAZIL, CERTIFICATION BODIES MUST BE ACCREDITED BY INMETRO (NATIONAL INSTITUTE OF METROLOGY, STANDARDIZATION AND INDUSTRIA L QUALITY). ELECTRICAL & ELECTRONIC PRODUCTS THAT MEET BRAZILIAN REQUIREMENTS AND THAT ARE CERTIFIED BY AN INMETRO ACCREDITED ORGANIZ ATION MUST CARRY THE MANDATORY INMETRO MARK ALONG WITH THE MARK OF T HE CERTIFICATION ORGANIZATION, SUCH AS UCIEE. (..) CSA INTERNATIONAL LABORATORIES CAN CONDUCT TESTING AN D PROVIDE YOU WITH THE CB (CERTIFICATION BODY) TEST REPORTS SO THAT YOUR PRODUCT CAN OBTAIN THE INMETRO MARK PLUS THE MARK OF THE CERTIFY ING ORGANIZATION. ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 15 SINCE BRAZILIAN STANDARDS ARE MOSTLY IEC (INTERNATIONA L ELECTRO- TECHNICAL COMMISSION) BASED, CSA INTERNATIONAL CAN TIE YOUR BRAZILIAN CERTIFICATION PROGRAM WITH OTHER APPLICATIONS LIKE T HE CSA INTERNATIONAL MARK, GS MARK, CE MARKING, CCG MARK, ELIMINATING RE DUNDANT TESTING AND SAVING TIME AND COST. IF YOU ALREADY HAVE A CERTIFICATION BODY(CB) REPORT , CSA INTERNATIONAL CAN TEST ANY BRAZILIAN NATIONAL DIFFERENCES APPLICABL E TO YOUR ELECTRICAL & ELECTRONIC PRODUCT. THE INMETRO CAN BE APPLIED TO BOTH MANDATORY AND VO LUNTARY BRAZILIAN PROGRAMMES.. 20. APB 16-18 CONTAIN DETAILED INFORMATION REGARDIN G CERTIFICATION IN BRAZIL. 21. THAT THE ABOVE IS THE CERTIFICATION OBTAINED BY THE ASSESSEE FORM CSA FOR ENABLING EXPORTS OF ITS PRODUCTS, IS UNASSAILED. THE SOLE STAND OF THE DEPARTMENT IS THAT THIS SERVICE OF TESTING AND C ERTIFICATION HAS BEEN APPLIED BY THE ASSESSEE FOR ITS MANUFACTURING ACTIV ITY WITHIN INDIA. HOWEVER, NEITHER THE AO, NOR THE CIT(A), NO R EVEN THE LD.DR BEFORE US HAS BEEN ABLE TO BRING ANYTHING ON RECORD T O BUTTRESS SUCH A STAND. TRUE, THE INITIAL ONUS U/S 9(1)(VII)(B) OF THE ACT LAY SQUARELY ON THE ASSESSEE TO PROVE THAT THE EXEMPTION AVAILABLE THER EUNDER WAS IN FACT AVAILABLE TO THE ASSESSEE. THE ASSESSEE HAS BEEN AMPLY SUCCESSFULLY IN DISCHARGING THIS ONUS. IT HAS MAINTAINED THROUGHOUT THAT THE TESTING AND CERTIFICATION SERVICES PROVIDED T O IT BY CSA WERE UTILIZED ONLY FOR ITS EXPORT ACTIVITY. 22. A COPY OF THE WRITTEN SUBMISSIONS FILED BEFORE THE CIT(A) HAS BEEN PLACED AT APB 1-8. AT PARA.3.03, ON PAGE 3 TH EREOF, IT HAS BEEN STATED AS FOLLOWS: 3.03 THE ASSESSEE HAS PAID A SUM OF RS.1471095 TO M/S CSA INTERNATIONAL, CHICAGO ILLINOIS, USA FOR THE PURPOSE OF GETTING TESTING OF AC CONTACTOR AS PART OF CB REPORT & KEMA CERTIFICATION THROUGH CSA. CSA INTERNATIONAL IS AN AGENCY ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 16 SPECIALIZING IN PRODUCT TESTING AND CERTIFICATION FOR ELECTRICAL AND ELECTRONIC PRODUCTS. KEMA CERTIFICATI ON ENABLES THE COMPANY TO SELL ITS PRODUCTS FREELY WITHIN THE EUROPEAN UNION. THAT THE COMPANY IS EXPORTING ITS PRODUCTS OUTSIDE INDIA AND THE CERTIFICATE FROM KEMA THROUGH CSA IS REQUIRED TO ENABLE THE COMPANY TO EXP ORT ITS PRODUCT. THE SAID CERTIFICATE IS NOT REQUIRED BY THE BUYERS IN INDIA. THE SAID SERVICES ARE RENDERED AND UTILIZED OUTSIDE INDIA AND PAYMENT HAS ALSO BEEN RECEI VED BY THE CSA OUTSIDE INDIA. THE CASE OF THE ASSESSEE IS SQUARELY COVERED IN THE EXEMPTION PROVIDED IN SECTION 9(1)(VII)(B) OF THE ACT WHICH IS REPRODUCED AS UNDER: A PERSON WHO IS A RESIDENT, EXCEPT WHERE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION EARNED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSE OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA THEREFORE, IN CASE WHERE FEE FOR TECHNICAL SERVICES HA S BEEN RENDERED OUTSIDE INDIA AND HAS BEEN UTILIZED FOR THE PURPOSE OF MAKING OR EARNING ANY INCOME FROM ANY SOUR CE OUTSIDE INDIA, SUCH PAYMENTS WOULD FALL OUTSIDE THE PURVIEW OF SECTION 9(1)(VII) AND WILL NOT BE DEEMED TO ACCRUE OR ARISE IN INDIA. 23. PARA 3.04 OF THE ASSESSEES WRITTEN SUBMISSIONS BEFORE T HE CIT(A) READS AS FOLLOWS: 3.04 THE A.O. HAS ERRED WHILE STATING THAT THE PAYMEN T MADE IN THE INSTANT CASE HAS BEEN UTILIZED FOR THE BUSINESS PURPO SE IN INDIA WHILE THE SAME HAS NOT BEEN UTILIZED FOR THE ASSESSEES BUSINESS IN INDIA SINCE IN INDIAN MARKET, THE KEMA CERTIFICATION IS NOT REQUIRED AND THE SAME IS ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 17 NECESSARY FOR THE COMPANYS PRODUCTS TO BE SOLD OUTSIDE INDIA. PLEASE REFER TO THE DECISION OF HONBLE SUPREME COUR T IN THE CASE OF ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. V S. DIRECTOR OF INCOME TAX (2007) 158 TAXMAN 259 (SC), WHEREIN IT WAS HELD THAT: - FOR SECTION 9(10(VII) TO BE APPLICABLE, IT IS NECESSAR Y THAT SERVICES PROVIDED BY A NON-RESIDENT ASSESSEE UNDER A CONTRACT SHOULD NOT ONLY BE UTILIZED WITHIN INDIA, BUT SHOULD ALSO BE RENDERED IN INDIA OR SHOULD HAVE SUCH A LIVE LINK WITH INDIA THAT ENTIRE INCOME FROM FEES, ETC., BECOMES TAXABLE IN INDIA; THUS, FOR A NON-RESIDENT TO BE TAXED ON INCOME FRO SERVICES, SUCH A SERVICE NEEDS TO BE RENDERED WITHIN INDIA, AND HAS TO BE A PART OF A BUSINESS OR PROFESSION CARRIED ON BY PERSON IN INDIA. WHATEVER IS PAYABLE BY A RESIDENT TO A NON-RESIDENT BY WAY OF FEES FOR TECHNICAL SERVICES WOULD NOT ALWAYS COME WITHIN PURVIEW OF SECTION 9(1)(VII) BUT IT MUST HAVE SUFFICIE NT TERRITORIAL NEXUS WITH INDIA SO AS TO FURNISH A BASIS FOR IMPOSITION OF TAX. IT CAN BE OBSERVED THAT IN THE ABOVE MENTIONED CASE, THE HONBLE SUPREME COURT HAS HELD THAT INCOME CAN BE DEEMED TO ACCRUE OR ARISE IN INDIA ONLY IF THE SAID SE RVICES ARE UTILIZED IN INDIA AS WELL AS RENDERED IN INDIA. IN THE CASE OF THE ASSESSEE, WHICH GOES A STEP AHEAD, NEITHER THE SERVICES HAVE RENDERED IN INDIA NOR HAVE THEY BEEN UT ILIZED IN INDIA AND THEREFORE, IT FALLS OUTSIDE THE SCOPE OF SECTION 9(1)(VII) AND NO INCOME CAN BE DEEMED TO ACCRUE OR ARISE IN INDIA. IN VIEW OF THE ABOVE FACTS AND LEGAL POSITION, THE PA YMENT MADE IN RESPECT FOR TESTING FEE IS ALLOWABLE AS A REVEN UE EXPENDITURE AS CLAIMED. 24. THE CIT(A), HOWEVER, HAS FAILED TO MEET THESE SPEC IFIC SUBMISSIONS MADE BEFORE HIM BY THE ASSESSEE, THOUGH AT PAGE 6 OF THE ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 18 IMPUGNED ORDER, IN THE LAST THREE LINES THEREON, IT H AS BEEN NOTED BY THE CIT(A) THAT THE ASSESSEE CONTENDED BEFORE HIM THAT: - THAT THE COMPANY IS EXPORTING ITS PRODUCT OUTSIDE IND IA AND THE CERTIFICATE FROM KEMA THROUGH CSA IS REQUIRED TO ENA BLE THE COMPANY TO EXPORT ITS PRODUCT. THE SAID CERTIFICATE IS NOT REQUIRED BY THE BUYERS IN INDIA. 25. ON PAGE 7 OF THE ORDER UNDER APPEAL, THE CIT(A) NOTES THE ASSESSEES FURTHER CONTENTION THAT:- THE SAID SERVICES ARE RENDERED AND UTILIZED OUTSIDES IN DIA AND PAYMENT HAS ALSO BEEN RECEIVED BY CSA OUTSIDE INDIA. THE CASE OF THE ASSESSEE IS SQUARELY COVERED IN THE EXEMPTION PROV IDED IN SECTION 9(1)(VII)(B) OF THE ACT WHICH IS REPRODUCED A S UNDER: THEREFORE, IN CASE WHERE, IF ANY TECHNICAL SERVI CES HAS BEEN RENDERED OUTSIDE INDIA AND HAS BEEN UTILIZED FOR THE PURPOSE OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA, SUCH PAYMENTS WOULD FALL OUTSIDE PURVIEW OF SECTION 9(1)(VII) WILL NOT BE DEEMED TO A CCRUE OR ARISE IN INDIA. 26. AFTER NOTING THE ABOVE CONTENTION OF THE ASSESSEE, THE CIT(A) OBSERVES: IN VIEW OF THE ABOVE, THE APPELLANT HAS STATED THAT THE AO HAS ERRED WHILE STATING THAT THE PAYMENT MADE IN THE INSTANT CASE HAS BEEN UTILIZED FOR THE BUSINESS PURPOS E IN FOR THE BUSINESS PURPOSE IN FOR THE BUSINESS PURPOSE IN FOR THE BUSINESS PURPOSE IN INDIA WHILE THE SAME HAS NOT BEEN UTILIZED FOR THE ASSESSEES INDIA WHILE THE SAME HAS NOT BEEN UTILIZED FOR THE ASSESSEES INDIA WHILE THE SAME HAS NOT BEEN UTILIZED FOR THE ASSESSEES INDIA WHILE THE SAME HAS NOT BEEN UTILIZED FOR THE ASSESSEES BUSINESS IN INDIA BUSINESS IN INDIA BUSINESS IN INDIA BUSINESS IN INDIA SINCE IN INDIAN MARKET, THE KEMA CERTIFICATION IS NOT REQUIRED AND THE SAME IS NECESSARY FOR THE COMPANYS PRODUCTS TO BE SOLD OUTSIDE INDIA. 27. THE CIT(A), HOWEVER, WITHOUT MEETING THE ABOVE SPECIFIC SUBMISSIONS OF THE ASSESSEE, CONFIRMED THE DISALLOWANCE MADE , OBSERVING, INTER ALIA, AS FOLLOWS: I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT, THE FINDINGS OF THE AO AND THE FACTS ON RECORD. THE APPE LLANT HAD MADE PAYMENT OF `1471095 TO M/S CSA INTERNATIONA L, CHICAGO, USA FOR GETTING BUSINESS TESTING OF AC CONTACT OR AS PART OF CV REPORT AND KEMA CERTIFICATION THROUGH CSA. ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 19 THE APPELLANT WHILE MAKING THE PAYMENT TO M/S CSA INTERNATIONAL HAD NOT DEDUCTED ANY TDS. THE AO HAS OBSERVED THAT HE TESTING REPORT AND CERTIFICATION ARE IN THE NATURE OF MAKING AVAILABLE TECHNICAL KNOWLEDGE AND EXPERIENCE AND THE SAME IS USED IN MANUFACTURING AND SALE OF PRODUCT IN THE BUSINESS OF THE APPELLANT. IN VI EW OF THE ABOVE THE AO WAS OF THE OPINION THAT SECTION 195 WAS APPLICABLE ON THE PAYMENT MADE BY THE APPELLANT TO THE FOREIGN COMPANY AND SINCE NO DEDUCTION WAS MADE, THEREFORE, UNDER PROVISIONS OF SECTION 40(A)(I), AN AM OUNT OF `1471095 WAS LIABLE TO BE ADDED TO THE INCOME OF HE APPELLANT. EXPLANATION TO SUB-SECTION (B) OF SECTION 9(1)(VII) IS AS UNDER: FOR THE PURPOSE OF THIS CLAUSE, FEES FOR TECHNICAL SERVICES MEANS ANY CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISIONS OF SERVICES OF TECHNICAL OR OTHER PERSONNEL) BUT DOES NOT INCLUDE CONSIDERATION FOR ANY CONSTRUCTION, ASSEMBLY, MINDING OR LIKE PROJECT UNDERTAKEN BY THE RECIPIENT OR CONSIDERATION WHICH WOULD BE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE SALARIES. THE HONBLE KERALA HIGH COURT IN THE CASE OF COCHIN REFINERIES LTD. VS. CIT, 222 ITR 354 HAS HELD THAT FE ES PAID BY INDIAN COMPANY TO FOREIGN COMPANY TO EVALUA TE QUALITY OF CERTAIN PRODUCTS AND ASCERTAIN SUITABILITY OF SUCH PRODUCTS FOR SPECIFIC INDUSTRY, WERE CONSIDERED AS REIMBURSEMENT MADE BY INDIAN COMPANY WERE PART AND PARCEL IN THE PROCESS OF ADVICE OF TECHNICAL NATURE, AND THEREFORE, SQUARELY FELL IN THE DEFINITION OF FEES F OR TECHNICAL SERVICES IN EXPLANATION 2 TO SECTION 9(1)(V II). 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 IN INDIA WILL LEAD T O INCOME BEING DEEMED TO ACCRUE OR ARISE IN INDIA. SI NCE THE FEES HAS BEEN PAID FOR OBTAINING TECHNICAL SERVICES FOR THE PURPOSE OF THE BUSINESS OF THE APPELLANT AND HAS ALSO BEE N UTILIZED FOR THE PURPOSE OF MANUFACTURING AND SALE OF THE PRODUCT IN THE BUSINESS OF THE APPELLANT, THEREFORE, T HE PROVISION OF SECTION 195 WILL BE APPLICABLE TO THE PA YMENT MADE BY THE APPELLANT. I AM IN AGREEMENT WITH THE VIEWS OF THE AO THAT DEDUCTION OF `1471095 IS NOT ALLOWABL E. THE ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 20 DISALLOWANCE MADE BY THE AO IS UPHELD. THIS GROUND IS DISMISSED. 28. BEFORE US, THE LD.DR HAS PLEADED THAT THE FACTS AS TO WHETHER OR NOT THE TESTING AND CERTIFICATION WAS UTILIZED BY THE ASSESSEE IN ITS BUSINESS ACTIVITY IN INDIA, IS ESSENTIAL FOR A PROPER DET ERMINATION OF THE CONTROVERSY. SHE HAS STATED THAT IN THE ASSESSMENT ORDER, THE AO HAS SPECIFICALLY OBSERVED THAT THE TESTING AND CERTIFICATI ON WAS INDEED UTILIZED IN INDIA IN THE ASSESSEES BUSINESS. SHE HAS STRESSED THAT IF THE ASSESSMENT ORDER IS FOUND TO BE DEFICIENT IN THIS REGARD, THE MATTER BE REMITTED TO THE FILE OF THE AO FOR DECISION AFRESH CO NCERNING THIS ASPECT OF THE MATTER. THE LD.COUNSEL FOR THE ASSESSEE, IS OPPOSE D TO SUCH ACTION BEING TAKEN. 29. WE FIND OURSELVES UNABLE TO AGREE WITH THE CONTEN TION RAISED BY THE LD.DR. AS DISCUSSED HEREINABOVE, THE AO HAS NOT BRO UGHT ANYTHING ON RECORD TO SUBSTANTIATE HIS OBSERVATION OF THE TESTING AND CERTIFICATION PROVIDED TO THE ASSESSEE BY CSA HAVING BE EN UTILIZED FOR THE ASSESSEES BUSINESS ACTIVITY IN INDIA. ON THE OTHER HA ND, TO REITERATE, THE ASSESSEE HAS SHOWN THAT THIS TESTING AND CER TIFICATION WAS NECESSARY FOR THE EXPORT OF ITS PRODUCT; THAT IT WA S UTILIZED FOR SUCH EXPORT; AND THAT IT WAS NOT UTILIZED FOR ITS BUSINESS AC TIVITIES OF PRODUCTION IN INDIA. NOW, WHEN THE ASSESSEE HAS, IN SO M ANY WORDS, STATED SO, IT HAS DISCHARGED ITS BURDEN. THE DEPARTMENT , ON THE OTHER HAND, WHILE NOT DENYING THE UTILIZATION OF THE TESTI NG AND CERTIFICATION FOR THE EXPORT, HAS NOT AT ALL SHOWN ANYTHING TO PROV E ITS ALLEGATION OF THE TESTING AND CERTIFICATION HAVING BEEN UTILIZED I N THE ASSESSEES PRODUCTION ACTIVITY IN INDIA. IT CANNOT BE ASKED TO PROVE A NEGATIVE. THE BURDEN IN THIS REGARD WAS ENTIRELY ON THE DEPARTM ENT, WHICH BURDEN, THE DEPARTMENT HAS MISERABLY FAILED TO DISCHAR GE. APROPOS THE LD.DRS CONTENTION ASKING FOR REMITTING THE MATTE R TO THE AO, IT MUST BE NOTED HERE THAT SUCH A COURSE IS NEITHER REQUIR ED, NOR ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 21 APPROPRIATE TO BE ADOPTED. AS AN APPELLATE AUTHORIT Y, THE TRIBUNAL HAS TO SEE WHETHER THE ASSESSMENT FRAMED HAS BEEN FRAMED IN A CCORDANCE WITH LAW AND IF THERE IS SUFFICIENT MATERIAL TO SUPPOR T IT. IF THAT IS NOT SO, IT IS NOT FOR THE TRIBUNAL TO START INVESTIGATION SU O MOTO AND TO THEREBY FILL UP THE LACUNAE. IF THERE IS MATERIAL TO SUPPORT THE ASSESSMENT, THE ASSESSMENT, AS CONFIRMED OR UPHELD BY THE CI T(A) NEEDS TO BE SUSTAINED BY THE TRIBUNAL. IF NOT, THE ASSE SSMENT FALLS. IT IS FOR THE DEPARTMENT TO GATHER MATERIAL AND MAKE P ROPER ASSESSMENT AND THE TRIBUNAL IS NOT IN THAT MANNER, AN INCOME-TA X AUTHORITY. THE INCOME TAX ACT DOES NOT ENVISAGE THE ITAT AS AN INCOME -TAX AUTHORITY, RATHER IN THE SCHEME OF THE ACT, IT IS A PURELY APPEL LATE AUTHORITY. THAT BEING SO, AS OBSERVED IN RAJ KUMAR JAIN VS. ADDL.CIT, 50 ITD 01 (ALLAHABAD)(TM), THE OBJECT OF THE APPEAL BEFORE TH E TRIBUNAL IS WHETHER THE ADDITION OR DISALLOWANCE SUSTAINED WAS IN A CCORDANCE WITH LAW. IF THERE IS SUFFICIENT MATERIAL, THE ADDITION M UST BE UPHELD. IF NOT, THE ADDITION MUST BE DELETED. NO FURTHER ENQUIRY C AN BE ORDERED BY THE TRIBUNAL WITH A VIEW TO FILL IN THE LACUNAE AND SUSTAIN THE ADDITION/DISALLOWANCE. DOING SO WOULD AMOUNT TO TAKI NG SIDES WITH THE PARTIES, WHICH IS NOT THE FUNCTION OF A JUDICIAL AUTH ORITY LIKE THE TRIBUNAL. IT IS ONLY THAT IF THERE IS ANY ERROR IN T HE PROCEEDINGS OR THE PROCEDURE, THE APPELLATE AUTHORITY COULD CORRECT IT . MAKING FURTHER INVESTIGATION, HOWEVER, IS NOT A PART OF THE PROCEDUR E, BUT IS SUBSTANTIVE AND IS BEYOND THE PURVIEW OF THE TRIBUNAL. 30. AS SUCH, WE HOLD THAT THE CIT(A) HAS ERRED IN CONF IRMING THE DISALLOWANCE OF `1471095 U/S 40(A) OF THE I.T. ACT. 31. FOR THE ABOVE DISCUSSION, GROUND NO.1 IS ACCEPTED. 32. GROUND NO.2 STATES THAT THE LD. CIT(A) HAS ERRED I N CONFIRMING THE DISALLOWANCE OF PRE-OPERATIVE EXPENSES OF ` 2,31,253/- INCURRED BY THE ASSESSEE AT ITS HARIDWAR UNIT, TREATING THE SAME AS CAPITA L EXPENDITURE. THE AO OBSERVED THAT THE ASSESSEE HAD UNDERTAKEN THE PRO JECT AT HARIDWAR FOR INSTALLING A UNIT ENGAGED IN THE MANUFA CTURE OF FANS, ETC. ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 22 IN ITS BOOKS OF ACCOUNT, THE ASSESSEE HAD BEEN CAPITALIZI NG THESE EXPENSES TOWARDS CAPITAL WORK IN PROGRESS RELATING TO TH E HARIDWAR UNIT. IN THE COMPUTATION OF INCOME, THE ASSESSEE HAD CLAIMED AN AMOUNT OF ` 2,31,253/-, CLAIMING THESE EXPENSES TO HA VE BEEN INCURRED IN THE COURSE OF REGULAR BUSINESS AND RELATED TO THE EXPANSION OF THE ASSESSEES EXISTING BUSINESS CAPACITY. 33. THE AO, HOWEVER, DID NOT AGREE WITH THE STAND TA KEN BY THE ASSESSEE. IT WAS OBSERVED THAT BY THE ASSESSEES OWN ADMISSION, THE EXPENDITURE INCURRED WAS BY WAY OF AND FOR THE PURPO SE OF SUBSTANTIAL EXPANSION OF ITS BUSINESS ACTIVITY; THAT THEREFORE, IT SH OULD BE TREATED AS CAPITAL EXPENDITURE ; THAT FURTHER, THE NEW UNIT AT HARIDWAR WAS NOT DEPENDENT ON THE OTHER RUNNING BUSINESS OF THE ASSESSEE AN D VICE VERSA; THAT THERE WAS NO POSSIBILITY OF THE CLOSURE OF O NE OF THE UNITS AFFECTING THE BUSINESS OF ANOTHER. IN THIS MANNER, THE AO DISALLOWED THE CLAIM OF ` 2,31,253/- AND ADDED IT TO THE INCO ME OF THE ASSESSEE. 34. BY WAY OF THE IMPUGNED ORDER, THE LD. CIT(A) CO NFIRMED THE ADDITION MADE BY THE AO. IT IS, THEREFORE, THAT GRO UND NO.2 HAS BEEN RAISED BY THE ASSESSEE. 35. CHALLENGING THE IMPUGNED ORDER IN THIS REGARD, T HE LEARNED COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT THE ASSESSEE HAD SET UP A NEW UNIT AT HARIDWAR FOR THE PURPOSE OF MANUFACTURIN G ELECTRIC FANS AND OTHER ELECTRICAL PRODUCTS; THAT THE DETAILS OF TH E EXPENDITURE SHOW THAT ALL THE EXPENSES WERE OF REVENUE IN NATURE AND P ERTAINED TO SALARIES, TRAVELLING EXPENSES AND OTHER EXPENSES OF COMME RCIAL NATURE, OF THE PEOPLE INVOLVED IN THE CAPACITY EXPANSION AND THE EXISTING BUSINESS OF THE ASSESSEE; THAT THE ASSESSEE COMPANY IS A LEADIN G COMPANY IN THE FIELD OF ELECTRICAL PRODUCTS, MANUFAC TURING SWITCH GEAR PRODUCTS, CABLES AND WIRES, ELECTRIC FANS AND OTHER ELE CTRICAL PRODUCTS; THAT THE ASSESSEE WAS HAVING A TURNOVER OF ` 665.38 CROR ES DURING FINANCIAL YEAR 2004-05; THAT THE EXPENSES OF ` 2,31,2 53/- HAD BEEN INCURRED BY THE ASSESSEE FOR THE PURPOSE OF EXPANSION OF ITS EXISTING ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 23 BUSINESS, IN THE SAME LINE OF PRODUCTS, BEING ELECTRICAL PRODUCTS; THAT THE SAID EXPENSES HAVE WRONGLY BEEN TREATED AS CAPITAL EXPENDITURE, MERELY FOR THE REASON THAT THE EXPENDITURE RELATES TO A SUBSTANTIAL EXPANSION OF THE BUSINESS ACTIVITY OF THE ASSESSEE. ATTEN TION HAS BEEN DRAWN TO PAGES 4 TO 5 OF THE ASSESSEES PAPER BOOK, WHICH IS A COPY OF THE WRITTEN SUBMISSIONS IN THIS REGARD, AS FILED BY THE A SSESSEE BEFORE THE LD. CIT(A). ATTENTION HAS ALSO BEEN DRAWN TO TH E ASSESSEES BALANCE SHEET AND PROFIT AND LOSS ACCOUNT, INTERNAL PA GES 12 & 13 OF APB 31. IT HAS BEEN CONTENDED THAT THE EXPENDITURE IN QUESTION IS A REVENUE EXPENDITURE AND IS ALLOWABLE AS SUCH. RELIAN CE HAS BEEN PLACED ON CIT V. RELAXO FOOTWEARS LTD., 293 ITR 23 1(DEL), JAY ENGINEERING WORKS LTD. V. CIT, 311 ITR 405(DEL). 36. THE LD. DR, ON THE OTHER HAND, HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER. IT HAS FURTHER BEEN CONTENDED THAT THE PROVISIONS OF SECTION 35 D OF THE ACT ARE APPLICABLE, WHEREAS THOSE OF SECTION 37 ARE NOT APPLICABLE. RELIANCE HAS BEEN PLACED ON SHREE SYNTHETICS LTD, 303 ITR 451(MP). 37. HAVING CONSIDERED THE RIVAL CONTENTIONS IN THE LI GHT OF THE MATERIAL ON RECORD IN THIS REGARD, WE FIND THAT THE OBSERVATIONS OF THE LD. CIT(A) ARE TO THE EFFECT THAT THOUGH THE ASSESSEE H AS MAINTAINED THAT THE EXPENDITURE IN QUESTION WAS INCURRED FOR THE EXPANSION OF ITS EXISTING BUSINESS ACTIVITY, THE ASSESSEE REMAINED UNABLE TO SUBSTANTIATE THIS CONTENTION; THAT NO EVIDENCE REGARDI NG THE INTER- LACING OR INTER-DEPENDENCE OF THE UNITS HAD BEEN FIL ED; THAT IT HAD ALSO NOT BEEN SUBSTANTIATED THAT THE NEW UNIT WAS DEPENDENT ON THE OTHER RUNNING UNITS OF THE ASSESSEE; AND THAT IN THE ACCOUNTS, THE EXPENDITURE HAD BEEN CAPITALIZED BY THE ASSESSEE. THE WRITTEN SUBMISSIONS FILED BY THE ASSESSEE BEFORE THE CIT(A) ARE AS F OLLOWS: THE ASSESSEE HAS SET UP A UNIT AT HARIDWAR FOR THE PURPO SE OF MANUFACTURE OF ELECTRIC FANS AND OTHER ELECTRICAL PR ODUCTS. IT CAN BE SEEN FROM THE DETAILS OF THE EXPENDITURE GIVEN AB OVE THAT ALL ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 24 THE EXPENSES ARE OF REVENUE NATURE AND PERTAIN TO SALA RIES, TRAVELLING EXPENSES AND OTHER EXPENSES OF COMMERCIAL NA TURE OF THE PEOPLE INVOLVED IN THE CAPACITY EXPANSION OF TH E EXISTING BUSINESS OF THE ASSESSEE. THE ASSESSEE IS A PIONEER COMPANY I N THE FIELD OF ELECTRICAL PRODUCTS CARRYING ON THE BU SINESS OF MANUFACTURE OF SWITCHGEAR PRODUCTS, CABLES AND WIRES, E LECTRIC FANS AND OTHER ELECTRICAL PRODUCTS HAVING A TURNOVER OF ` 665.38 CRORES DURING THE FINANCIAL YEAR 2004-05. THE AFOR ESAID EXPENSES OF ` 2,31,253/- HAVE BEEN INCURRED BY THE A SSESSEE FOR THE PURPOSE OF EXPANSION OF THE EXISTING BUSINESS OF THE ASSESSEE AND IN THE SAME LINE OF PRODUCTS BEING ELECTRICA L PRODUCTS. THE SAID EXPENSES CANNOT BE TREATED AS CAPIT AL EXPENDITURE MERELY ON THE GROUND THAT THE EXPENDITU RE RELATES TO THE SUBSTANTIAL EXPANSION OF THE BUSINESS ACTIVITY AS CONTENDED BY THE AO. THE PROVISIONS OF THE I.T. ACT DO NOT PROVIDE FOR ANY SUCH PROVISION EXCEPT IN THE CASE OF I NTEREST ON BORROWED CAPITAL WHICH HAS BEEN INSERTED VIDE PROVISO TO SECTION 36(1)(III), W.E.F. ASSESSMENT YEAR 2004-05. THE SAID P ROVISO IS REPRODUCED HEREIN BELOW:- PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN R ESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTEN SION OF EXISTING BUSINESS OR PROFESSION (WHETHER CAPITALIZED IN T HE BOOKS OF ACCOUNT OR NOT); FOR ANY PERIOD BEGINNING FROM T HE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE; SHALL N OT BE ALLOWED AS DEDUCTION. THEREFORE, THE PROVISIONS OF THE I.T. ACT GOVERN CAPI TALIZATION OF INTEREST DURING CONSTRUCTION PERIOD OR BEFORE THE ASSET S ARE FIRST PUT TO USE BUT AS FAR AS OTHER EXPENSES ARE CONCERNED, SU CH AS SALARIES, TRAVELLING EXPENSES AND OTHER EXPENSES OF COMM ERCIAL NATURE AS IN THE CASE OF THE ASSESSEE, THE SAME CANNOT BE TREATED AS CAPITAL EXPENDITURE. THE JUDICIAL CASE OF CIT V. S.L. M. MANEKLAL INDUSTRIES LTD. [1977] REPORTED AT 107 ITR 1 33(GUJ) CITED BY THE AO IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE SINCE THE FACTS AND CIRCUMSTANCES OF THE CASE ARE DIFFER ENT THAN THE CASE OF LTHE ASSESSEE. IN THE CASE CITED BY THE AO, THE COMPANY WAS A MANUFACTURER OF DIESEL ENGINES, COMPRESSOR S, PUMPS AND BLOWERS. THE RELEVANT EXPENDITURE WAS INCU RRED FOR THE PURPOSE OF SETTING UP OF A FOUNDRY WHICH WOULD MA NUFACTURE IRON CASTINGS, ETC. REQUIRED BY THE COMPANY IN THE MA NUFACTURE OF OTHER PRODUCTS. THUS, THE SAID EXPENDITURE COULD NOT BE SAID TO HAVE BEEN INCURRED FOR THE PURPOSE OF EXPANSION OF EXISTING LINE OF BUSINESS BUT FOR THE EXPLORATION OF NEW LINE O F BUSINESS ACTIVITY. THUS, CASE OF THE ASSESSEE IS DIFFERENT FROM T HE ABOVE ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 25 CITED CASE SINCE THE ASSESSEE HAS EXPANDED ITS EXISTING LINE OF BUSINESS BY EXPANDING THE MANUFACTURING BASE. THE CASE OF CIBA OF INDIA LTD. V. CIT[1993] REPORTED AT 70 TAXMAN 505 (BOM) RELIED BY THE AO IS ALSO NOT APPLICABLE TO THE ASSESSEE SINCE IN THE CITED CASE, THE ASSESSEE WAS A MANUFACTURER OF PHARMACEUTICAL PRODUCTS. THE ITO H AD DISALLOWED THE TRAVELLING EXPENSES OF FOREIGN EXPERT A ND IT WAS HELD THAT THE EXPENDITURE WAS INCURRED IN CONNECTION WITH SETTING UP OF A NEW PLANT. THUS, IT CANNOT BE SAID TO BE A C ASE OF EXPANSION OF EXISTING LINE OF BUSINESS AS IN THE CASE OF T HE ASSESSEE. IN THE CASE OF THE ASSESSEE, THE EXPENDITURE AT HARIDWAR UNIT WAS INCURRED FOR THE EXPANSION OF ITS EXISTING BUSINESS ACTIV ITIES WHICH WERE ALREADY BEING CARRIED ON AT OTHER UNITS. THE REAL TEST FOR ALLOWABILITY OF THE EXPENDITURE IS WHETHER TWO O R MORE BUSINESSES CARRIED ON BY THE ASSESSEE ARE INTERCONNECTED, INTERLACED, ETC. SO AS TO CONSTITUTE THE SAME BUSINESS. THUS, WHERE IT IS FOUND THAT THERE WAS A COMPLETE UNITY, IN TERLACING, INTER-DEPENDENCE AND INTER-CONNECTION OF MANAGEMENT , FINANCIAL, ADMINISTRATIVE AND PRODUCTION ASPECTS AMONG ST ALL DIVISIONS OF EACH UNIT AND AMONGST ALL UNITS OF THE BU SINESS AS A WHOLE, THE EXPENDITURE INCURRED IN CONNECTION WITH THE NEW UNIT IS DEDUCTIBLE. PLEASE REFER TO THE DECISION IN THE C ASE OF CIT V. HINDUSTAN MACHINE TOOLS LTD.[1993] 175 ITR 212(KARN) AND CIT V. HINDUSTAN MACHINE TOOLS LTD. [1993] 175 ITR 216(KARN) . ALSO, IN THE CASE OF CIT V. INDIAN TELEPHONE INDUSTRIE S LTD. [1989] 175 ITR 215 (KARN), IT WAS HELD THAT WHERE A NEW UNI T IS NOT A NEW INDEPENDENT UNIT BUT, JUST THE EXPANSION OF THE E XISTING BUSINESS, THE EXPENDITURE IS ALLOWABLE. IN THE CASE OF THE APPELLANT COMPANY, THE COMPANY IS ENGAGED IN THE MANUFACTURE OF VARIOUS ELECTRICAL PRODUCTS AND HA VING ITS HEAD OFFICE AT DELHI, CORPORATE OFFICE AT NOIDA AND MANUFACTURING UNITS AT VARIOUS PLACES, VIZ., BADLI (DELHI), NOIDA (U P), BADDI (HIMACHAL PRADESH), FARIDABAD (HARYANA), ALWAR (RAJA STHAN) AND VARIOUS BRANCH OFFICES THROUGHOUT THE COUNTRY. ALL THE UNITS ARE INTERDEPENDENT AND HAVING, INTERCONNECTION OF MANAG EMENT, FINANCIAL, ADMINISTRATION AND OTHER ASPECTS OF THE BUSI NESS. THE UNIT AT HARIDWAR WAS SET UP ONLY TO INCREASE THE CAPAC ITY EXPANSION OF ITS MANUFACTURING ACTIVITIES AND DOES NOT CARRY ANY DISTINCT OR SEPARATE BUSINESS. IN VIEW OF THE SAID FACT S AND LEGAL POSITION, THE EXPENDITURE INCURRED AT HARIDWAR UNIT SHOULD BE ALLOWED. ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 26 38. INTERNAL PAGES 12,13,36,38,46 & 56, OF THE DIREC TORS REPORT HAVE BEEN SPECIFICALLY ADVERTED TO. STILL FURTHER, ATTEN TION HAS ALSO BEEN DRAWN TO APB 36, SCHEDULE III TO APB 37-NOTES. IT H AS BEEN CONTENDED THAT FROM THIS, IT IS AMPLY CLEAR THAT THE FUNDS ARE M IXED IN ALL THE UNITS OF THE ASSESSEE; THAT INTERNAL ACCRUALS WERE USED, APART FROM BORROWED FUNDS TO SET UP THE PLANT AT HARIDWAR; AND THAT THE P LANT AT HARIDWAR IS NOTHING, BUT ONLY AN EXPANSION OF THE ASSESSEES BUSINESS. RELIANCE HAS BEEN PLACED ON CIT VS. MONNET INDUSTRIES LTD., 22 1 CTR 266(DEL.). 39. WE FIND THE CONTENTION OF THE ASSESSEE TO BE CORREC T. A PERUSAL OF THE DIRECTORS REPORT AND THE OTHER DOCUMENTS, AS ABOVE, CLEARLY SHOW THAT THERE IS COMPLETE INTERLACING AND INTERMIXI NG OF THE FUNDS OF THE ASSESSEE IN ALL ITS UNITS, BESIDES THERE BEING A COMMON MANAGEMENT. 40. IN MONNET INDUSTRIES LTD.(SUPRA), IT WAS FOUND AS A FACT BY THE TRIBUNAL THAT THERE WAS A COMMON BOARD OF DIRECTORS C ONTROLLING THE FERRO ALLOYS PLANT, AS WELL AS THE SUGAR PLANT, WHICH OPERATED FROM THE HEAD OFFICE LOCATED AT DELHI. FUNDS FOR THE TWO PLA NTS TOO WERE COMMON. IT WAS FOUND THAT THERE WAS INTERMINGLING A ND INTERLACING OF FUNDS, AND THAT EVEN THOUGH THE TWO DIVISIONS WERE GEO GRAPHICALLY LOCATED AT DIFFERENT SITES, MARKETING OF THE FINAL PR ODUCTS, WAS CARRIED OUT UNDER THE SUPERVISION AND CONTROL OF THE SAME SET O F EXECUTIVES AT THE HEAD OFFICE. THESE FACTUAL FINDINGS OF THE TRIBU NAL WERE UPHELD BY THE HONBLE HIGH COURT. 41. THE POSITION IN THE PRESENT CASE IS FOUND TO BE SUBST ANTIALLY THE SAME AS IN MONNET INDUSTRIES LTD. (SUPRA). IN VIEW OF THE ABOVE, GROUND NO.2 IS ACCEPTED. 42. AS PER GROUND NO.3, THE CIT(A) HAS ERRED IN CONFI RMING THE DISALLOWANCE OF ` 41,012/- BEING THE AMOUNT WRITTEN OFF @ 1/10 TH OF THE ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 27 EXPENDITURE ON INCREASE IN AUTHORIZED CAPITAL, AS THE SAME IS ALLOWABLE U/S 35D(2)(C)(IV)OF THE I.T. ACT. 43. THE AO OBSERVED THE ASSESSEE TO HAVE CLAIMED A DEDUC TION OF ` 41,012/- AS MISC. EXPENDITURE WRITTEN OFF ON ACCOUNT OF INCREASE IN AUTHORIZED CAPITAL. THE AO OBSERVED THAT THIS EXPEN DITURE WAS CAPITAL IN NATURE, NOT COVERED U/S 35D . THE CLAIM WAS DISA LLOWED FOLLOWING THE CIT(A)S ORDER IN THE ASSESSEES CASE FOR ASSESSMENT YEAR 2001-02 AND THE SUPREME COURT DECISIONS IN PUNJAB STATE INDU STRIAL DEVELOPMENT CORPN. V. CIT, 225 ITR 792(SC) AND BR OOKE BOND INDIA LTD. V. CIT, 225 ITR 798(SC). 44. THE LEARNED CIT(A) HAVING CONFIRMED THE AOS AC TION, THE ASSESSEE HAS RAISED GROUND NO.3 BEFORE US. 45. THE LEARNED COUNSEL FOR THE ASSESSEE HAS FAIRLY CONCE DED THAT THIS ISSUE STANDS DECIDED AGAINST THE ASSESSEE AND IN FAVOUR OF THE DEPARTMENT BY THE TRIBUNAL ORDER (COPY AT APB 77 TO 86) DATED 7.3.08, IN ITA NO. 1033(DEL)05. 46. IN THIS REGARD, IT IS SEEN THAT INDEED, THE TRIBUN AL HAD DECIDED THE ISSUE AGAINST THE ASSESSEE AND IN FAVOUR OF THE DEPART MENT, HOLDING AS FOLLOWS:- 13. GROUND NO.5 STATES THAT ON THE FACTS AND CIRCUMSTA NCES OF THE CASE AND THE LEGAL POSITION THE ASSESSING OFFICER HAS ERRED IN DISALLOWING A SUM OF ` 29,606/- ON ACCOUNT OF 1/10 TH OF EXPENDITURE ON INCREASE IN CAPITAL WRITTEN OFF DURIN G THE YEAR. BRIEFLY STATED FACTS ARE THAT ASSESSEE CLAIMED A DEDUCTIO N OF ` 6,40,078/- AS MISC. EXPENSES. THE ASSESSEE SUBMITTED THAT THIS EXPENDITURE INCLUDED ` 29,606/- ON ACCOUNT OF WRI TE OFF OF 1/10 TH OF EXPENDITURE INCURRED ON INCREASING CAPITAL AND ` 6,10,472/- ON ACCOUNT OF 1/10 TH OF PUBLIC ISSUE EXPENSES. THE INCREASE IN CAPITAL TOOK PLACE IN FINANCIAL YEAR 1990-91 AND 1 996-97 AND PUBLIC ISSUE WAS IN 1993-94. THE AO ASKED THE ASSESSEE TO EXPLAIN AND JUSTIFY THAT PROVISION OF SECTION 35 D COV ERED THE EXPENDITURE. THE ASSESSEE SUBMITTED THAT THE PUBLICATI ON EXPENDITURE HAD BEEN CLAIMED FROM 93-94 AND HAS BEEN ALLOWED FROM YEAR TO YEAR. HOWEVER, ACCORDING TO THE AO, T HE EXPENDITURE ON INCREASE IN SHARE CAPITAL IS CAPITAL EX PENDITURE ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 28 AND IS NOT COVERED BY THE PROVISION OF SECTION 35 D. HENCE HE DISALLOWED THE SAME. ON APPEAL THE LD. CIT(A) HAS HEL D THAT ANY EXPENDITURE INCURRED IN CONNECTION WITH RAISING CAP ITAL OF A COMPANY IS TO BE TREATED AS CAPITAL IN NATURE. A RE LIANCE IN THIS REGARD HAS BEEN PLACED TO THE DECISION IN THE CASE OF BROOK BOND INDIA, 225 ITR 798(SC). WITH REGARD TO THE ISSUE WH ETHER THE EXPENSES CAN BE AMORTIZED U/S 35D HE HAS OBSERVED THAT T HE EXPENSES WHICH CAN BE AMORTIZED U/S 35D ARE LISTED OUT IN THE SECTION ITSELF AND WHETHER EXPENSES OTHER THAN THOSE CAN BE AMORTIZED OR NOT HAS BEEN ADDRESSED BY THE MADRAS HIGH COURT IN ENNAR STEEL & ALLOY PVT. LTD., 261 ITR 347. TH E COURT HELD THAT EXPENDITURE CANNOT BE SPREAD OVER ON THE SAME LINES AS IN SECTION 35D UNLESS THE NATURE OF THAT EXPENDITURE IS CO VERED BY THE SPECIFIC PROVISIONS OF THAT SECTION. THE ACT MUST BE APPLIED AS ONE FINDS IT AND IT IS NOT OPEN TO THE TRIBUNAL TO ALLOW AMORTIZATION OF EXPENDITURE FOR WHICH THE ACT DOES N OT MAKE PROVISION FOR AMORTIZATION. ACCORDINGLY, THE LD. CI T(A) HAS HELD THAT THE EXPENSES IN QUESTION CANNOT BE AMORTIZED U/S 3 5D. 14. WE, AFTER HAVING HEARD THE PARTIES HAVE FOUND NO REASON TO INTERFERE WITH THE IMPUGNED ORDER. UNDER SECTION 35 D ONLY THOSE EXPENSES ARE ALLOWED TO BE AMORTIZED WHICH HAVE BEEN INCURRED BY THE ASSESSEE WHO IS RESIDENT IN INDIA, BEFORE THE COMMENCEMENT OF HIS BUSINESS OR AFTER THE COMMENCEMENT OF ITS BUSINESS IN CONNECTION WITH THE EXTENSION OF HIS INDU STRIAL UNDERTAKING OR IN CONNECTION WITH HIS SETTING UP A NE W INDUSTRIAL UNIT AND THE EXPENDITURE OF SUCH NATURE AS SPECIFIED I N SUB- SECTION (2) OF SECTION 35D. THE ASSESSEE COULD NOT PLAC E ANY MATERIAL ON RECORD TO CLAIM AMORTIZATION U/S 35D OF THE ACT. HENCE, WE UPHOLD THE ORDER PASSED BY THE CIT(A) IN TH IS REGARD. 47. IN VIEW OF THE ABOVE, RESPECTFULLY FOLLOWING TH E TRIBUNAL ORDER (SUPRA), IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2001-0 2, GROUND NO.3 IS REJECTED. 48. AS SUCH, ITA NO.1300(DEL)2010 IS PARTLY ALLOWED, A S INDICATED. ITA NO.2093(DEL)2010 : 49. THIS IS DEPARTMENTS APPEAL FOR THE ASSESSMENT YEAR 20 05-06, FILED AS A CROSS APPEAL TO THE ASSESSEES ITA 1300(DEL)2010 (SUPRA). THE FOLLOWING GROUND HAS BEEN RAISED:- THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF ` 92 ,67,841/- ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 29 BEING EXPENDITURE INCURRED FOR ISSUE OF 4% FULLY CON VERTIBLE DEBENTURE WHICH WAS LATER CONVERTED INTO EQUITY SHARE S OF THE ASSESSEE COMPANY. 50. THE AO OBSERVED THAT DURING THE YEAR, THE ASSESSEE H AD ISSUED 4% FULLY CONVERTIBLE DEBENTURES OF ` 23,50,00,000/-, COMPRISING 235 DEBENTURES OF THE FACE VALUE OF ` 10,00,000/-, TO M /S. SHINE LIMITED, A COMPANY INCORPORATED IN MAURITIUS. THE ASSESSEE CLAIME D AN AMOUNT OF ` 92,67,841/-, INCURRED FOR ISSUE OF THE FULLY CON VERTIBLE DEBENTURES, AS A REVENUE EXPENDITURE. THE AO, RELYING ON BRO OKE BOND INDIA LTD. V. CIT, 225 ITR 798(SC) AND PUNJAB STATE INDUSTRIA L DEVELOPMENT CORPN. V. CIT, 225 ITR 792(SC), HELD THAT THE EXPE NDITURE INCURRED IN RELATION TO EXPANSION OF THE CAPITAL BASE OF THE COMP ANY IS CAPITAL IN NATURE; AND THAT SINCE THE EXPENDITURE HAD BEEN INCU RRED BY THE ASSESSEE ON FULLY CONVERTIBLE DEBENTURES, WHICH WOULD ULTIMATELY GET CONVERTED INTO EQUITY CAPITAL, SUCH EXPENDITURE WAS I N THE NATURE OF CAPITAL EXPENDITURE. 51. BY VIRTUE OF THE IMPUGNED ORDER, THE LD. CIT(A ) DELETED THE DISALLOWANCE, ALLOWING THE CLAIM OF THE ASSESSEE. 52. AGGRIEVED, THE DEPARTMENT IS IN APPEAL. 53. CHALLENGING THE IMPUGNED ORDER, THE LD. DR HAS C ONTENDED THAT THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE , EVEN THOUGH THE DEBENTURES WERE LATER CONVERTED INTO EQUITY SHARES OF THE ASSESSEE COMPANY, IGNORING THAT THERE WAS A CHANGE IN THE ART ICLES OF ASSOCIATION OF THE ASSESSEE COMPANY, TO ISSUE EQUITY TO M/ S. SHINE LIMITED; THAT THE BONUS SHARES WERE ANNOUNCED IN ADVAN CE; THAT THE SHINE PEOPLE WERE GIVEN DIRECTOR POSITIONS; ANDTHAT W HEREAS THE ASSESSEE CONTENDED LOANS, THE AO HELD SHARE CAPITAL BROU GHT IN. 54. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER H AND, HAS STRONGLY SUPPORTED THE IMPUGNED ORDER. IT HAS BEEN CO NTENDED THAT IT IS SETTLED LAW THAT A DEBENTURE, WHETHER CONVERTIBLE OR NON-CONVERTIBLE, IS A LOAN, I.E., A BORROWING. ATTENTION HAS BEEN DR AWN TO PAGES 4 TO 10 ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 30 OF THE ASSESSEES PAPER BOOK, WHICH IS A COPY OF ALLOTMEN T LETTER FOR ISSUANCE OF 4% FULLY CONVERTIBLE DEBENTURES, ALONG WIT H THE TERMS AND CONDITIONS OF THE DEBENTURES. PARA 1.3 AT PAGE 5 THER EOF CONTAINS THE CONVERSION PRICE. PARA 1.4 AT PAGE 7 AND 8 TALKS OF CONVERSION PRICE ADJUSTMENT BASED ON OTHER EVENTS. 55. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE MA TERIAL ON RECORD. THE ISSUE, IT IS SEEN, IS SQUARELY COVERED IN F AVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE RAJASTHAN HIGH CO URT IN THE CASE OF CIT V. SECURE METERS LTD., 321 ITR 611(RAJ) , WHEREIN, IT HAS BEEN HELD THAT WHEN DEBENTURES ARE ISSUED, THEY ARE A LOAN AND AS SUCH, WHETHER A DEBENTURE IS CONVERTIBLE OR NON-CONVE RTIBLE, IT DOES NOT MILITATE AGAINST THE NATURE OF DEBENTURE BEING L OAN; AND THAT AS SUCH, THE EXPENDITURE INCURRED FOR ISSUANCE OF DEBENTU RES WOULD BE ADMISSIBLE AS REVENUE EXPENDITURE. 56. PERTINENTLY, THE HONBLE SUPREME COURT, VIDE TH EIR ORDER DATED 11.8.09(COPY AT APB 35), IN CIT V. M/S. SECURE METE RS LTD. SLP (C) NO. 10548/2009, DISMISSED THE SLP FILED BY THE REVENUE AG AINST THE AFORESAID ORDER OF THE HONBLE RAJASTHAN HIGH COURT. 57. THE AO HAD FOLLOWED PUNJAB STATE INDUSTRIAL DEV ELOPMENT CORPN. V. CIT(SUPRA), AND BROOKE BOND INDIA LTD. V . CIT(SUPRA), WHILE MAKING THE DISALLOWANCE. PUNJAB STATE INDUSTRIAL D EVELOPMENT CORPN. V. CIT(SUPRA), IT IS SEEN, WAS FOLLOWED IN BRO OKE BOND INDIA LTD. V. CIT(SUPRA). BROOKE BOND INDIA LTD. V. CIT (SUPRA), HOWEVER, HAS BEEN CONSIDERED IN M/S. SECURE METERS LTD.(SUPRA). WHILE DOING SO, IT WAS OBSERVED BY THEIR LORDSHIPS THAT BROOKE BOND INDIA LTD. V. CIT(SUPRA), WAS A CASE WHERE THE REGISTRATION FEE WAS P AID TO THE REGISTRAR OF COMPANIES FOR INCREASING THE SHARE CAPITA L OF THE COMPANY, WHEREAS IN THE CASE OF INDIA CEMENTS LTD. V. CIT, 60 ITR 52(SC), IT WAS HELD THAT A LOAN IS NOT AN ASSET OR ADVA NCE OF ENDURING NATURE AND THE PURPOSE OF TAKING LOAN IS TOTALLY AN I RRELEVANT CONSIDERATION, DUE TO WHICH, DEDUCTION ON ACCOUNT OF INTEREST ON LOANS ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 31 CANNOT BE DENIED. THE MATTER IN INDIA CEMENTS LTD. (SUPRA) RELATED TO BORROWAL FROM A FINANCE INSTITUTION, WHICH LOAN WAS SECURED BY A CHARGE ON THE FIXED ASSETS OF THE COMPANY. IN INDIA CEMENTS LTD. V. CIT (SUPRA), THE HONBLE SUPREME COURT HAD CONSIDERE D VARIOUS ASPECTS OF THE MATTER AND HAD HELD, INTER ALIA, THAT SINCE THE LOAN OBTAINED THEREIN WAS NOT AN ASSET OR ADVANTAGE OF AN E NDURING NATURE AND THE EXPENDITURE WAS MADE FOR SECURING THE USE OF M ONEY FOR A CERTAIN PERIOD, IT WAS IRRELEVANT TO CONSIDER THE OBJ ECT WITH WHICH THE LOAN WAS OBTAINED AND AS SUCH, THE EXPENDITURE INCURR ED IN PROCURING THE LOAN, WAS A REVENUE EXPENDITURE. 58. IT WOULD BE APPROPRIATE TO REPRODUCE HEREUNDER, THE OBSERVATIONS MADE BY THE HONBLE RAJASTHAN HIGH COURT IN SECURE METERS LTD.(SUPRA), WITH REGARD TO BROOKE BOND INDI A LTD. V. CIT(SUPRA):- 6. COMING TO THE SECOND QUESTION, THE LEARNED TRIBUN AL IN THIS REGARD HAS HELD THAT THE DECISION OF THE HONBLE SUPR EME COURT IN BROOKE BOND INDIA LTD. V. CIT REPORTED IN [199 7] 225 ITR 798 IS NOT APPLICABLE TO THE FACTS OF THE INSTANT CASE BECAUSE THAT WAS A SITUATION IN WHICH EXPENDITURE ON ISSUE OF SHARES W AS HELD TO BE INELIGIBLE FOR DEDUCTION, WHILE THE ASSESSEE HAS ISSUED DEBENTURES FOR WHICH ` 44 LAKHS WAS CLAIMED AS DEDUCTIO N AND IT WAS CONSIDERED THAT THIS ASPECT IS SETTLED BY SEVERAL DECI SIONS OF VARIOUS HIGH COURTS AND IT HAS BEEN HELD BY THE HONBL E SUPREME COURT IN INDIA CEMENTS LTD. V. CIT REPORTED IN [19 66] 60 ITR 52, THAT A LOAN IS NOT AN ASSET OR ADVANCE OF ENDURING NATURE AND THE PURPOSE OF TAKING LOAN IS TOTALLY AN IRRELEVANT C ONSIDERATION AND HENCE THE DEDUCTION ON ACCOUNT OF INTEREST ON LO ANS CANNOT BE DENIED. THEN, THE LEARNED TRIBUNAL ALSO PROCEEDE D TO RELY UPON ANOTHER JUDGMENT OF THE JAIPUR BENCH OF THE TR IBUNAL IN THE CASE OF RAJASTHAN FINANCIAL CORPN. V. DCIT[1997] TW-5 01, HOLDING THAT THE EXPENDITURE INCURRED FOR RAISING CA PITAL THROUGH BONDS IN BUSINESS WAS REVENUE IN NATURE AND IT WAS HELD THAT SINCE IN THE PRESENT CASE THE ASSESSEE HAD INCURRED EXPENSE S OF ` 44 LAKHS ON ISSUANCE OF DEBENTURES BEING A LOAN, IN OUR CONSIDERED OPINION, THERE IS NO BASIS FOR NOT ALLOWING DEDUCTION FOR THE ENTIRE SUM AND THUS THIS ADDITION WAS DELETED. ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 32 7. WE HAVE GONE THROUGH THE JUDGMENT IN BROOKE BO ND INDIA LTD.S CASE[1997] 225 ITR 798(SC) AND FIND THAT THAT WAS A CASE WHERE THE REGISTRATION FEE TO THE TUNE OF ` 1,50,00 0/- WAS PAID TO THE REGISTRAR OF COMPANIES FOR INCREASING THE SHARE CAPITAL OF THE COMPANY, WHILE IN THE CASE OF INDIA CEMENTS LTD.[ 1966] 60 ITR 52, THE MATTER RELATED TO THE BORROWING OF ` 4 0 LAKHS FROM A FINANCIAL INSTITUTION, WHICH LOAN WAS SECURED BY A CHA RGE ON THE FIXED ASSETS OF THE COMPANY. THE HONBLE SUPREME COU RT IN THIS JUDGMENT CONSIDERED VARIOUS ASPECTS OF THE MATTER INCLU DING THE PREVIOUS ENGLISH JUDGMENTS AND COUPLE OF JUDGMENTS OF T HE ENGLISH COURTS BASED ON THE ENGLISH INCOME TAX ACT AND PROCEEDED TO DRAW DISTINCTION BETWEEN THE INCOME TAX LAW IN ENGLAND AND INDIA. NOT ONLY THIS, THE HONBLE SUPRE ME COURT FURTHER PROCEEDED TO EXAMINE A NUMBER OF CASES DECIDE D BY VARIOUS HIGH COURTS LIKE, KERALA, ANDHRA PRADESH, CALC UTTA, BOMBAY, ETC., AND HAD GONE TO THE EXTENT OF HOLDING THAT SOME OF THE JUDGMENTS WERE WRONGLY DECIDED. THEN, THE HON BLE SUPREME COURT PROCEEDED TO HOLD AS UNDER(PAGE 63): 10. TO SUMMARISE THIS PART OF THE CASE, WE ARE OF THE OPINION THAT: (A) THE LOAN OBTAINED IS NOT AN ASSET OR ADVANTAGE OF AN ENDURING NATURE; (B) THAT THE EXPEN DITURE WAS MADE FOR SECURING THE USE OF MONEY FOR A CERTAIN PERIOD; AND (C) THAT IT IS IRRELEVANT TO CONSIDER THE OBJECT WITH WHICH THE LOAN WAS OBTAINED. THUS, IT WAS HELD THAT THE EXPENDITURE INCURRED IN PR OCURING THE LOAN WAS REVENUE EXPENDITURE WITHIN SECTION 10(2)(XV) OF THE OLD INCOME TAX ACT, WHICH CORRESPONDS TO SECTION 3 7 OF THE PRESENT ACT. BY GOING THROUGH THE SAID JUDGMENT , IT FURTHER TRANSPIRES THAT THE HONBLE SUPREME COURT ALSO PROCEEDED TO EXAMINE THE ASPECT OF PURPOSE OF RAISING LOAN AND ITS IMMEDIATE OR SUBSEQUENT UTILIZATION FOR DIFFERENT PURPOSE AND EXAMINED THAT EVEN IF A LOAN I S RAISED FOR PURCHASING RAW MATERIAL AND AFTER RAISING T HE LOAN THE COMPANY FINDS IT UNNECESSARY TO BY RAW MATERI AL AND SPENDS THE AMOUNT ON CAPITAL ASSET, STILL IT CANNOT BE SAID TO BE CAPITAL EXPENDITURE, AS IT WAS HELD THAT TH E PURPOSE FOR WHICH THE NEW LOAN WAS REQUIRED WAS IRRELEVANT TO THE QUESTION AS TO WHETHER THE EXPENDI TURE FOR OBTAINING LOAN WAS REVENUE OR CAPITAL EXPENDITUR E . WE ARE TOLD THAT RELYING ON THIS JUDGMENT MANY OF TH E HIGH COURTS OF THE COUNTRY HAVE CONSISTENTLY TAKEN THE VIEW THAT THE EXPENDITURE INCURRED IN ISSUING ANY DEBENTURES AND RAISING LOAN ON DEBENTURES IS ADMISSIBLE OBVIOUSLY BECAUSE THE DEBENTURE IS ALSO A LOAN. ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 33 59. FURTHER, IN CIT V. EAST INDIA HOTELS LIMITED 25 2 ITR 860(CAL), IT WAS HELD THAT THE EXPENSES INCURRED IN RAISING LOAN BY CONVERTIBLE DEBENTURES WOULD BE ADMISSIBLE AS A REVENUE EXPENDITUR E, FOR THE REASON THAT CONVERSION OF DEBENTURES RESULTS INTO REPAYM ENT OF LOAN AND ISSUANCE OF SHARES AND THAT IT IS IRRELEVANT TO CONSI DER THE OBJECT WITH WHICH THE LOAN WAS OBTAINED. 60. EAST INDIA HOTELS LIMITED (SUPRA), WAS ALSO REFERR ED TO IN SECURE METERS LTD.(SUPRA). 61. TO REITERATE, IN SECURE METERS LTD.(SUPRA), TH E SLP FILED BY THE DEPARTMENT STANDS DISMISSED BY THE HONBLE SUPREME COURT VIDE THEIR AFORESAID ORDER. 62. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY ERROR IN THE ORDER OF THE LD. CIT(A) AND THE GRIEVANCE OF THE DEPARTMENT IN T HIS REGARD IS DE VOID OF MERIT. AS SUCH, THE GRIEVANCE SOUGHT TO BE RAISED B Y THE DEPARTMENT BY WAY OF THE GROUND TAKEN, IS REJECTED. 63. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO. 1300(DEL)2010 IS PARTLY ALLOWED, WHEREAS THE APPEAL OF THE DEPARTME NT IN ITA NO. 2093(DEL)2010 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27.05.2011. SD/- SD/- (SHAMIM YAHYA) (A.D. JAIN) ACCOUNTANT MEMBER JUDCIAL MEMBER DATED: 27.5.2011 SKB COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A)-LTU, NEW DELHI. 5. DR DEPUTY REGISTRAR ITA NO.1300 & 2093/DEL.2010 (AY : 2005-06) 34