Obeetee(P)Ltd., Mirzapur V. Addl. CIT, Mirzapur

ITA 249/ALLD/2011

• Counselvise Citation: 24920714 RSA 2011
• Duration Of Justice: 10 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2005-2006
• Appeal Filed On: 26-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANDEEP CHAUHAN
• Assessee Lawyers: S K GARG
• Keywords: Principle of natural justice; Wholly owned subsidiary; Bad and doubtful debts; Validity of assessment
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ALLAHABAD BENCH, ALLAHABAD BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI A.L. GEHLOT, ACCOUNTANT MEMBER ITA NO.249/ALLD/2011 ASSESSMENT YEAR: 2005-06 OBEETEE (P) LTD., VS. ADDL. COMMISSIONER OF INC OME TAX, BISUNDERPUR, RANGE-III, MIRZAPUR. CIVIL LINES, MIRZAPUR. (PAN : AAACO 2694 P). (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S.K. GARG, ADVOCATE RESPONDENT BY : SHRI SANDEEP CHAUHAN, CIT D.R. DATE OF HEARING : 07.11.2012 DATE OF PRONOUNCEMENT : 23.11.2012 ORDER PER A.L. GEHLOT, ACCOUNTANT MEMBER: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER DATED 15.09.2011 PASSED BY THE LD. CIT(A), ALLAHABAD FOR THE ASSESSM ENT YEAR 2005-06. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL :- 1. BECAUSE CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOLDING TO THE EFFECT THAT A) ADDL. CIT, RANGE-III, MIRZAPUR STOOD VALIDLY VES TED WITH THE JURISDICTION OF ASSESSING OFFICER IN THE CASE OF TH E APPELLANT, ITA NO.249/ALLD/2011 A.Y. 2005-06 2 IN TERMS OF NOTIFICATION NO.267/201/F.NO.187/5/2001 DATED 17.09.2001; AND B) THE APPELLANT HAVING NOT OBJECTED TO THE ASSUMPT ION OF JURISDICTION ASSESSING OFFICER BY ADDL. CIT, RANGE III, MIRZAPUR, SUCH OBJECTION COULD NOT HAVE BEEN RAISED AT THE APPELLATE STAGE. AND IN UPHOLDING THE VALIDITY OF ASSESSMENT ORDER D ATED 29.12.2008 PASSED BY THE ADDL. CIT RANGE-III, MIRZAPUR. 2. BECAUSE THE ACIT, MIRZAPUR HAVING INITIATED REG ULAR ASSESSMENT-RELATED PROCEEDINGS BY ISSUE OF NOTICE UNDER SECTION 143(2), HE CONTINUED TO REMAIN VESTED WITH THE JURI SDICTION OF ASSESSING OFFICER IN THE CASE OF THE APPELLANT AND SUCH JURISDICTION COULD NOT HAVE BEEN DIVESTED AND CONFERRED ON THE A DDL. CIT, RANGE- III, MIRZAPUR WITHOUT THERE BEING AN ORDER PASSED B Y THE CIT, ALLAHABAD UNDER SECTION 127, AFTER COMPLYING WITH T HE PROCEDURE LAID DOWN THEREIN. 3. BECAUSE VARIOUS CASE LAWS AS HAVE BEEN REFERRED TO AND RELIED UPON BY CIT(A), WHILE UPHOLDING THE JURISDIC TION OF ADDL. CIT, RANGE-III, MIRZAPUR TO ACT AS ASSESSING OFFICER AND THE VALIDITY OF ASSESSMENT ORDER DATED 29.12.2008, HAD BEEN RENDERE D IN ALL TOGETHER DIFFERENT CONTEXT AND DECISION BASED ON THE SAID CA SE LAWS IS WHOLLY VITIATED AS THE SAME IS VIOLATIVE OF WELL LAID RULE OF FOLLOWING A JUDICIAL PRECEDENCE. 4.1 BECAUSE PAYMENT OF GUARANTEE COMMISSION COULD N OT HAVE BEEN DISALLOWED ON THE GROUND THAT A) THE PAYMENT HAD BEEN MADE IN VIOLATION OF THE GU IDELINES ISSUED BY RBI AS GIVEN TO SCHEDULED BANKS ; AND B) SUCH A VIOLATION IS OPPOSED TO PUBLIC POLICY AND IS HIT BY THE EXPLANATION BELOW SECTION 37. 4.2 BECAUSE WHILE UPHOLDING THE DISALLOWANCE OF GUA RANTEE COMMISSION AS AFORESAID, CIT(A) HAS MISSED TO NOT E AND FAILED TO CONSIDER THAT ITA NO.249/ALLD/2011 A.Y. 2005-06 3 A) INSTRUCTIONS CONTAINED IN THE GUIDELINES ISSUED TO SCHEDULED BANKS, WERE OF ADVISORY IN NATURE, AND DID NOT PROV IDE FOR ANY PENAL CONSEQUENCE IN THE EVENT OF FAILURE TO COMPLY WITH THE SAME; B) SUCH INSTRUCTIONS WERE OF ADVISORY NATURE, MEANT TO BE FOLLOWED BY SCHEDULED BANKS AND SUCH SCHEDULED BANKS WERE GI VEN INSTRUCTION TO RELAX THE CONDITION IN APPROPRIATE C ASES; C) IN THE CASE OF THE APPELLANT, SUCH RELAXATION HA D ACTUALLY BEEN GRANTED ALSO BY OTHER BANKS; D) IN ANY CASE IN THE ABSENCE OF ANY OVER-RIDING PR OVISION CONTAINED IN THE RBI ACT, SUCH INSTRUCTIONS OF ADV ISORY NATURE COULD NOT BE EQUATED WITH LAW AS ENACTED BY THE PARLIAMENT ; AND E) IN ANY CASE, VIOLATION OF SUCH INSTRUCTIONS BEIN G NOT INVITING ANY PUNITIVE ACTION, VIOLATION OF THE SAME COULD NOT BE SAID TO BE OPPOSED TO PUBLIC POLICY AS ENVISAGED IN THE EXPLAN ATION BELOW SECTION 37 OF THE ACT. AND, ACCORDINGLY, THE VIEW TAKEN BY THE CIT(A) IS WHOLLY VITIATED. 4.3 BECAUSE THE APPELLANTS CASE OF ADMISSIBILITY O F GUARANTEE COMMISSION AMOUNTING TO RS.81,60,000 WAS BASED ON W ELL LAID PRINCIPLES OF LAW, DULY SUPPORTED BY DIRECT AUTHORI TIES, AND THE DECISION ARRIVED AT BY THE CIT(A) IN DISREGARD OF SUCH WELL LAID PRINCIPLES AND DECIDED CASE LAWS, IS WHOLLY UNSUS TAINABLE. 5.1 BECAUSE THE CIT(A) HAS ERRED IN LAW AND ON FA CTS IN UPHOLDING THE DISALLOWANCE OF EXPENSES REIMBURSED T O OBEETEE INC. (WOS) USA I) GRAPHICS & DESIGN CHARGES PAID BY THEM TO ANDREA ALARI 31,68,042 II) SALARY PAID TO MR. BILL WARD 20,66,042 52,34,084 III) PAYMENT OF RENT OF SHOW ROOM OF OBEETEE INC., USA 56,69,588 ITA NO.249/ALLD/2011 A.Y. 2005-06 4 IV) ADVERTISEMENT, WEBSITE, PHOTOGRAPHY, SOFTWARE, TRAVELING EXPENSES, COMMISSION CHARGES AND FREIGHT 38,44,189 BY OBSERVING THAT A) PAYMENT TO M/S ANDREA ALARI AND MR. BILL WARD IS FEE FOR TECHNICAL SERVICES AND NOT IN THE NATURE OF REIMBUR SEMENT OF EXPENSES; B) PAYMENT OF RENT COMES IN THE CATEGORY OF ANY OT HER SUM. THEREFORE PROVISIONS OF SECTION 195 ARE APPLICABLE; C) VARIOUS PAYMENTS UNDER THE HEAD ADVERTISEMENT, W EBSITE, PHOTOGRAPHY, SOFTWARE, COURIER, FREIGHT, TRAVELLING ETC. COME IN THE CATEGORY OF ANY OTHER SUM STIPULATED IN SECTI ON 195 AND TAXABLE IN INDIA; AND D) ACCORDINGLY, FAILURE AT THE PART OF THE APPELLAN T TO DEDUCT TAX AT SOURCE, ATTRACT DISALLOWANCE UNDER SECTION 40(A)(I) OF THE ACT. 5.2 BECAUSE NONE OF THE PAYMENTS AS AFORESAID IS FA LL WITHIN THE CHARGING SECTION 5 OF THE ACT AND ACCORDINGLY, THE SAME WERE OUTSIDE THE PURVIEW OF PROVISION RELATING TO WITHHOLDING TA X UNDER SECTION 195 OF THE ACT AND THE APPELLANT DID NOT CARRY ANY OBLI GATION TO DEDUCT TAX AT SOURCE AND DISALLOWANCE OF THE SAME (ON THE GROU ND OF NON- DEDUCTION OF TAX AT SOURCE) IS WHOLLY ILLEGAL. 6.1 BECAUSE THE CIT(A) HAS ERRED IN LAW AND ON FA CTS IN CONFIRMING THE DISALLOWANCE OF SUBSCRIPTION CHARGES AMOUNTING TO RS.3,12,087/- PAID TO WOOLMARK SERVICES INDIA (P) L IMITED ON THE GROUND THAT THOUGH THE BILL RELATED TO ASSESSMENT Y EAR 2005-06 BUT ITS PAYMENT HAD BEEN REMITTED ON 23.3.2004 AND THE SAME CONSTITUTED EXPENSES RELATING TO EARLIER YEAR. 6.2 BECAUSE THE CIT(A) HAS FAILED TO APPRECIATE T HAT THE APPELLANT HAD BEEN MAINTAINING ITS ACCOUNT ON MERCA NTILE SYSTEM OF ACCOUNTING WHICH IS MANDATORY ALSO AS PER SECTION 2 09 OF THE COMPANIES ACT 1956 AND THE EXPENSES IN QUESTION BEI NG RELATED TO THE YEAR UNDER APPEAL ITSELF, DISALLOWANCE OF THE SAME (AS UPHELD BY LD. FIRST APPELLATE AUTHORITY) IS WHOLLY ERRONEOUS. ITA NO.249/ALLD/2011 A.Y. 2005-06 5 7. BECAUSE THE AUTHORITIES BELOW HAVE ERRED IN LAW AND ON FACTS IN HOLDING THAT PAYMENT OF RS.2,88,135 AS MADE TO M /S CANESIS NETWORK LIMITED, BY WAY OF WOOLMARK LABEL CHARGES, WAS IN THE NATURE OF PAYMENT OF ROYALTY AND TAX AT SOURCE HAVI NG NOT BEEN DEDUCTED ON SUCH PAYMENT, THE SAME WAS DISALLOWABLE UNDER SECTION 40(A)(I) OF THE ACT. 8. BECAUSE THE PAYMENT IN QUESTION NEITHER FELL IN THE CATEGORY OF ROYALTY NOR FEE FOR TECHNICAL SERVICES AND D ISALLOWANCE OF THE SAME COULD NOT HAVE BEEN MADE/UPHELD BY THE AUTHORI TIES BELOW ON THE ROUND THAT THE SAME INVITED DEDUCTION OF TAX AT SOURCE, WHICH THE APPELLANT HAS FAILED TO DO. 9. BECAUSE THE ORDER APPEALED AGAINST IS CONTRARY T O THE FACTS LAW AND PRINCIPLES OF NATURAL JUSTICE. 3. GROUND NOS.1, 2 & 3 HAVE NOT BEEN PRESSED. THER EFORE, THE SAME ARE DISMISSED AS NOT PRESSED. 4. GROUND NO.4 IS IN RESPECT OF DISALLOWANCE OF GUA RANTEE COMMISSION OF RS.81,60,000/-. 5. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E CLAIMED RS.85,50,000/- AS GUARANTEE COMMISSION PAID TO SHRI DIPANKAR CHATTERJ EE, ONE OF THE DIRECTORS OF THE COMPANY. THE ASSESSING OFFICER WAS OF THE VIEW THA T AS PER RBI GUIDELINES VIDE CIRCULAR NO.RBI/2004-05/68 DBOD NO.DIR.BC.18/13.03. 00/2004-05 DATED 23 RD JULY, 2004 (MASTER CIRCULAR GUARANTEES AND CO-ACC EPTANCES) ISSUED TO ALL THE CHIEF EXECUTIVES OF ALL SCHEDULED COMMERCIAL BANKS, PARA 2.10 PART C WHICH HAS ITA NO.249/ALLD/2011 A.Y. 2005-06 6 BEEN QUOTED BY THE A.O. IN HIS ORDER AT PAGE NO.3. THE GUARANTEE COMMISSION PAID BY THE ASSESSEE TO THE DIRECTOR IS NOT ALLOWABLE IN VIEW OF EXPLANATION TO SECTION 37(1) OF THE INCOME TAX ACT, 1961 (THE ACT HEREIN AFTER). THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE GUARANTEE COM MISSION WAS PAID FOR THE PURPOSE OF CARRYING ON THE BUSINESS AS THE ASSESSEE HAS AVAILED CREDIT FACILITY FROM BANKS OF WHICH DETAILS FOUND AT PAGE NO.2 OF HIS OR DER. THE ASSESSING OFFICER, AFTER CONSIDERING ASSESSEES SUBMISSION, THE PAYMEN T MADE TO SHRI DIPANKAR CHATTERJEE BY WAY OF GUARANTEE COMMISSION RELATED T O CREDIT TAKEN FROM STATE BANK OF INDIA WAS ALLOWED AS EXPENDITURE BUT DID NOT ALL OW BALANCE AMOUNT OF GUARANTEE COMMISSION PERTAINING TO OTHER THAN THE STATE BANK OF INDIA. THE ASSESSING OFFICER ACCORDINGLY DISALLOWED RS.81,60,000/- OUT O F TOTAL CLAIM OF RS.85,50,000/- .THE CIT (A) CONFIRMED THE ORDER OF THE AO. 6. THE LEARNED AUTHORISED REPRESENTATIVE REITERATED THE CONTENTION WHICH WERE MADE BEFORE THE CIT(A). THE LEARNED AUTHORISED REP RESENTATIVE SUBMITTED THAT THE RESTRICTION GIVEN IN THE CIRCULAR WAS NOT STATU TORY RESTRICTION BUT WAS OTHER RESTRICTION. LEARNED AUTHORISED REPRESENTATIVE SUB MITTED THAT SUCH EXPENSES ARE ALLOWABLE IN VIEW OF VARIOUS JUDGMENTS INCLUDING PR AKASH COTTON MILLS VS. CIT, 201 ITR 684 (S.C) ART LEASING LIMITED VS. CIT, 33 DTR (KERALA) 277. ITA NO.249/ALLD/2011 A.Y. 2005-06 7 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, RELIED UPON THE ORDER OF CIT(A). 8. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AD RECORDS PERUSED. THE CASE OF THE ASSESSING OFFICER IS THAT THE GUARA NTEE COMMISSION PAID TO THE DIRECTOR IS NOT ALLOWABLE EXPENSE IN VIEW OF EXPLAN ATION TO SECTION 37(1) OF THE ACT. THE EXPLANATION TO SECTION 37(1) REQUIRES THA T ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENSE OR WHI CH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE. IF WE CONSIDER THE NATURE OF THE IMPUGNED EXPENDITURE, WE FIND THAT THE CIRCULAR OF RBI REFERRED BY THE A.O. WHICH WAS ADDRESSED TO ALL THE CHIEF EXECUTIVES OF ALL SCHEDULED COMMERCIAL BANKS. THE SAID CIRCULAR HAS BEEN ISSUED FOR GUIDELINES RELATING TO CONDUCT OF GUARANTEE BUSINESS IN BANKIN G SECTOR. A GUIDELINE RELATING TO OBTAINING OF PERSONAL GUARANTEE OF DIRECTORS AND OT HER MANAGERIAL PERSONNEL OF BORROWING CONCERNS WAS PROVIDED IN THE SAID CIRCULA R. IN RESPECT OF PERSONAL GUARANTEE OF DIRECTOR, IT WAS PROVIDED THAT THE BAN KS COULD TAKE PERSONAL GUARANTEES OF DIRECTORS FOR THE CREDIT FACILITIES, ETC. GRANTED TO THE CORPORATE, PUBLIC OR PRIVATE, ONLY, WHEN ABSOLUTELY WARRANTED AFTER A CAREFUL EXAMINATION OF THE CIRCUMSTANCES OF THE CASE AND NOT AS A MATTER OF CO URSE. IN ORDER TO IDENTIFY THE CIRCUMSTANCES UNDER WHICH THE GUARANTEE MAY OR MAY NO BE CONSIDERED NECESSARY, ITA NO.249/ALLD/2011 A.Y. 2005-06 8 THE BANKS COULD FOLLOW THE BROAD CONSIDERATIONS PRO VIDED IN THE CIRCULAR. IT HAS ALSO BEEN PROVIDED THAT THE SYSTEM OF OBTAINING GUA RANTEES SHOULD NOT BE USED BY THE DIRECTORS AND OTHER MANAGERIAL PERSONNEL AS A S OURCE OF INCOME FROM THE COMPANY. THE BANKS SHOULD OBTAIN AN UNDERTAKING FR OM THE BORROWING COMPANY AS WELL AS THE GUARANTORS THAT NO CONSIDERATION WHE THER BY WAY OF COMMISSION, BROKERAGE FEES OR ANY OTHER FORM WOULD BE PAID BY T HE FORMER OR RECEIVED BY THE LATTER DIRECTLY OR INDIRECTLY. THIS REQUIREMENT SH OULD BE INCORPORATED IN THE BANKS TERMS AND CONDITIONS FOR SANCTIONING OF CREDIT LIMI TS. DURING THE PERIODIC INSPECTIONS, THE BANKS INSPECTORS SHOULD VERIFY TH AT THIS STIPULATION HAS BEEN COMPLIED WITH. THERE MAY BE EXCEPTIONAL CASES WHER E PAYMENT OF REMUNERATION MAY BE PERMITTED. ON PERUSAL OF THE SAID CIRCULAR OF RBI, WE FIND THAT BASICALLY THIS WAS THE GUIDELINES FOR THE SCHEDULED COMMERCIA L BANKS WORKING UNDER THE RBI AND NOT THE CIRCULAR UNDER THE INCOME TAX ACT. THE ASSESSEE HAS PRODUCED THE DETAILS REGARDING THE LOAN TAKEN FROM SBI, HDFC , AND SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA. COPIES OF TERMS AND CON DITIONS OF SBI HAVE ALSO BEEN FURNISHED BY THE ASSESSEE. THE CONCERNED BANK DID NOT MAKE ANY OBJECTION REGARDING THE PAYMENT OF GUARANTEE FEE. IN RESPECT OF RBI GUIDELINES WE MAY STATE THAT FOR THE PURPOSE OF INCOME TAX PROCEEDINGS WHAT ARE TO BE SEEN ARE RELEVANT PROVISIONS OF THE INCOME TAX ACT. THE KERALA HIGH COURT IN THE CASE OF LEASING LIMITED VS. CIT, 187 TAXMAN 29 (KERALA) HELD THAT T HE APPELLANT OF THAT CASE NBFCS ARE NOT ENTITLED TO DEDUCTION OF ANY PROVISIO N CREATED FOR BAD DEBTS AND ITA NO.249/ALLD/2011 A.Y. 2005-06 9 DOUBTFUL DEBTS, NO MATTER SUCH PROVISION IS CRATED BASED ON THE GUIDELINES ISSUED BY THE RBI. SO WHAT TO SEE IN SUCH CASES IS THE RELEV ANT PROVISIONS OF THE INCOME TAX ACT AND NOT GUIDELINES OF RBI. THE EXPLANATION TO SECTION 37(1) RESTRICTED ALLOWANCE OF EXPENDITURES IN RESPECT OF EXPENDITURE INCURRED FOR ANY PURPOSE OF AN OFFENCE OR WHICH IS PROHIBITED BY LAW. THE CLAIM O F THE ASSESSEE IN THE CASE UNDER CONSIDERATION IS NEITHER FOR THE PURPOSE OF ANY OFF ENSE NOR PROHIBITED BY LAW. THE GUIDELINE OF RBI WAS FOR BANKS AND BANKS DID OBJECT SUCH CLAIM OF THE ASSESSEE. FURTHER, IN THIS CLAUSE WHAT STATED BY REVENUE IS N OT PART AND PARCEL OF AGREEMENT BETWEEN THE ASSESSEE AND BANKS. THE ASSESSEE HAS D EMONSTRATED WITH FACTS AND FIGURES THAT THE EXPENDITURE INCURRED WAS FOR THE P URPOSE OF BUSINESS AND IN ACCORDANCE WITH COMMERCIAL EXPEDIENCIES. 8.1 FURTHER, THE PAYMENT UNDER THE GUARANTEE COMMIS SION ARE BEING PAID FROM A.Y. 2002-03 AS NOTED FROM THE ASSESSEES SUBMISSIO N WHICH IS REPRODUCED BY THE CIT(A) AT PAGE NO.39 OF HIS ORDER. IN A.Y. 2002-03 THE CLAIM OF THE ASSESSEE WAS ALLOWED AFTER PERUSAL OF THE SAID DETAILS OF THE GU ARANTEE COMMISSION. SIMILARLY, SUCH CLAIM WAS ALLOWED IN A.Y. 2003-04 & 2004-05. 8.2 IN THE LIGHT OF ABOVE DISCUSSIONS AND ON A PERU SAL OF SECTION 37(1) AND EXPLANATION TO SECTION 37(1) WE NOTICED THAT ANY EX PENDITURE INCURRED FOR ANY PURPOSE WHICH IS AN OFFENSE OR WHICH IS PROHIBITED BY LAW IS ONLY DISALLOWABLE. ITA NO.249/ALLD/2011 A.Y. 2005-06 10 BUT IN THE CASE UNDER CONSIDERATION AS STATED ABOVE THAT THE SAID RBI GUIDELINES WAS ADMINISTRATIVE GUIDELINES IN RESPECT OF SCHEDUL ED COMMERCIAL BANKS. BANKS DID NOT OBJECT SUCH DISALLOWANCE OF THE COMMISSION. THERE IS NO SUCH PROHIBITION IN THE AGREEMENT OF LOAN WITH THE ASSESSEE AND BANK S. UNDER THE CIRCUMSTANCES THE EXPENDITURES INCURRED FOR THE PURPOSE OF BUSINESS A ND IN ACCORDANCE WITH COMMERCIAL EXPEDIENCIES IS ALLOWABLE EXPENDITURE. THEREFORE, WE ARE OF THE VIEW THAT SUCH EXPENDITURE IS ALLOWABLE. WE ACCORDINGLY ALLOW THE EXPENDITURE CLAIMED BY THE ASSESSEE AND DELETE THE ADDITION OF RS.81,60 ,000/- 9. GROUND NO.5 IS IN RESPECT OF DISALLOWANCE OF EXP ENSES ON ACCOUNT THAT THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE AT THE TIME O F MAKING PAYMENT ON ACCOUNT OF GRAPHIC DESIGN CHARGES ETC. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE PAID RS.31,68,042 /- ON ACCOUNT OF GRAPHIC DESIGN CHARGES, RS.20,66,042/- ON ACCOUNT OF SALARY OF MR. BILL WARD( TOTAL RS 52,34084/-), RS.56,69,588/- SHOW ROOM RENT AND RS.3 8,44,189/- ADVERTISEMENT EXPENSES ETC. THE ASSESSING OFFICER WAS OF THE VIE W THAT THESE PAYMENTS WERE OF THE NATURE OF TECHNICAL RECEIPT. THE A.O. WAS OF T HE VIEW THE PAYMENT OF GRAPHIC DESIGN AND SALARY TO MR. BILL WARD IS NOTHING BUT F EE FOR TECHNICAL SERVICES. THE ASSESSING OFFICER NOTED THAT AS PER SECTION 9(VII)( C) AND EXPLANATION THEREOF, THE ASSESSEE WAS REQUIRED TO DEDUCT TAX AT SOURCE UNDER SECTION 195 OF THE ACT BUT THE ITA NO.249/ALLD/2011 A.Y. 2005-06 11 ASSESSEE HAS FAILED TO DEDUCT TAX AT SOURCE, THEREF ORE, THE CLAIM OF THE ASSESSEE IS NOT ALLOWABLE. 10. IN RESPECT OF SHOW ROOM RENT OF RS.56,69,588/-. , THE ASSESSING OFFICER WAS OF THE VIEW THAT THIS PAYMENT IS ALSO SUBJECT TO TA X DEDUCTED AT SOURCE. SINCE THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE, THEREFORE, T HE ASSESSING OFFICER DISALLOWED THE EXPENDITURE UNDER SECTION 40(A)(I) OF THE ACT. A SIMILAR DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER IN RESPECT OF PAYMENT ON ACCOUNT OF ADVERTISEMENT ETC. UNDER SECTION 40(A)(I) OF THE ACT. THE CIT (A ) CONFIRMED THE ADDITION MADE BY THE ASSESSING OFFICER. 11. THE LEARNED AUTHORISED REPRESENTATIVE REITERATE D THE SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES. 12. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, RELIED UPON THE ORDER OF CIT(A). 13. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND RECORDS PERUSED. THE SUBMISSIONS OF THE ASSESSEE ARE THAT MR. ANDREA ALERI IS DESIGNER AND PART OF ESTABLISHMENT OF OBEETEE INC. THE DEBIT ME MO RAISED BY THE OBEETEE INC. REVEALS THAT THE SUMS WERE PAID TO MR. ANDREA ALERI ON BEHALF OF THE ASSESSEE. ITA NO.249/ALLD/2011 A.Y. 2005-06 12 SIMILAR POSITION IS IN RESPECT OF AMOUNT OF RS.38,4 4,189/- WHICH WAS IN RESPECT OF ADVERTISEMENT EXPENSES, WEBSITE EXPENSES, PHOTOGRAP HY EXPENSES, SOFTWARE EXPENSES, COURIER CHARGES, FREIGHT AND TRAVELLING E TC. THE SUBMISSION OF THE ASSESSEE IS THAT THESE ARE REIMBURSEMENT OF THE EXP ENSES WHICH IS NOT SUBJECT TO DEDUCTION OF TAX AT SOURCE. THE SUBMISSION OF THE ASSESSEE THAT THESE ARE THE REIMBURSEMENT OF THE EXPENSES AS PER THE M.O.U., TH E RELEVANT SUBMISSION OF THE ASSESSEE NOTED FROM THE ORDER OF CIT(A) AT PARAGRAP H NO. 4.1, PAGE 49 IS REPRODUCED AS UNDER :- 4.1. SUBMISSION OF THE APPELLANT: THE WRITTEN SUBMISSION FURNISHED BY THE APPELLANT C OMPRISES OF COPY OF EXPLANATION DATED 25.11.2008 FILED BEFORE T HE A.O. IN RESPECT OF PAYMENT TO M. BILL WARD AND MR. ANDREA ALERI, CO PY OF MOA DATED 31.07.2002 ENTERED INTO WITH OBEETEE INC., COPY OF BILL DATED 01.03.2004 RAISED BY WOOLMARK SERVICES INDIA (P) LT D., THE COPY OF JUDGEMENT PASSED BY HONBLE APEX COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PVT. LTD VS. CIT 327 ITR 465. TH E RELEVANT PART OF THE SUBMISSION BEFORE THE A.O. AND ENCLOSED IN THE SUBMISSION BEFORE ME IS EXTRACTED BELOW :- 7.1 AS PER THE INFORMATION ALREADY ON RECORD, OUR RELATIONSHIP WITH OUR WHOLLY OWNED SUBSIDIARY (WOS) M/S OBEETEE INC. IS GOVERNED BY A MEMORANDUM OF UNDERSTANDING A S HAS BEEN ARRIVED AT BETWEEN US EARLIER (COPY ENCLOSED FOR TH E SAKE OF READY REFERENCE). AS PER CLAUSE 4(A) OF THE SAID MEMORAN DUM OF UNDERSTANDING, IT HAD BEEN AGREED TO BY US THAT THE EXPENSES THAT MIGHT BE INCURRED BY WOS ON OUR BEHALF WOULD BE DUL Y REIMBURSED BY OBEETEE (P) LTD., THE ASSESSEE BEFORE YOUR GOOD SEL F. THEREFORE, THE REIMBURSEMENT MADE BY US IS NOT BY WAY OF PAYMENT O F ANY INCOME TO OBEETEE INC., BUT MERELY A REIMBURSEMENT (TO WOS) O F THE EXPENSES INCURRED BY THEM ON OUR BEHALF. HE SAID PAYMENT BY WAY OF REIMBURSEMENT ARE OUTSIDE THE PURVIEW OF PROVISIONS CONTAINED IN CHAPTER XVII-B OF THE INCOME AX ACT, 1961. ITA NO.249/ALLD/2011 A.Y. 2005-06 13 7.2 BY WAY OF CLARIFICATION, IT IS SUBMITTED THAT M R. ANDREA ALARI AND MR. BILLWARD FORM PART OF THE ESTABLISHME NT WOS AND WE HAVE NO DEALINGS WITH THEM DIRECTLY. THEY HAVE MERELY COLLECTED PAYMENTS FROM US, ON BEHALF OF WOS, TO WH OM WE ARE OBLIGED O REIMBURSE THE EXPENSES INCURRED BY THEM F ROM TIME TO TIME ON OUR BEHALF. THEREFORE, NO ADVERSE VIEW DES ERVES TO BE DRAWN, IN RELATION TO THE SAID PAYMENTS. 14. THE LD. AUTHORISED REPRESENTATIVE RELIED UPON T HE JUDGEMENT OF HONBLE APEX COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTR E PVT. LTD. VS. CIT, 327 ITR 456 (SC) WHEREIN IT HAS BEEN HELD THAT - MERE REMIT TANCE TO NON-RESIDENT - DUTY TO DEDUCT TAX AT SOURCE - DOES NOT ARISE UNLESS REMITT ANCE CONTAINS WHOLLY OR PARTLY TAXABLE INCOME IN INDIA. LD. AUTHORISED REPRESENTA TIVE HAS ALSO RELIED UPON A JUDGEMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. INFORMATION ARCHITECTS, 322 ITR 1 (BOMBAY) WHEREIN IT HAS BEEN HELD THAT REIMBURSEMENT OF SALARY EXPENSES - NOT SALARY - DEDUCTION NEED NOT T O BE MADE AT SOURCE ON SUCH REIMBURSEMENT. TO APPLY SECTION 195, THE AMOUNT IN QUESTION SHOULD BE INCOME OF PAYEE AND NOT A MERE REIMBURSEMENT OF THE COST INCU RRED BY THE PAYEE. SUCH REIMBURSEMENT IS NOT SUBJECT TO DEDUCTION OF TAX AT SOURCE DANFOSS INDUSTRIES (P) LTD., 138 TAXMAN 280 AAR NEW DELHI. IN THE CASE UN DER CONSIDERATION, THE ASSESSEE HAS DEMONSTRATED THAT THESE WERE REIMBURSE MENT OF EXPENSES. THE ASSESSEE FURNISHED A COPY OF MOU DATED 31.07.2002 T O THE ASSESSING OFFICER AND RELEVANT BILL DATED 01.03.2004 RAISED BY WOOLMARK S ERVICES INDIA PVT. LTD. M/S OBEETEE INC. IS GOVERNED BY MEMORANDUM OF UNDERSTAN DING WHICH HAS BEEN ITA NO.249/ALLD/2011 A.Y. 2005-06 14 ARRIVED AT BETWEEN THE ASSESSEE AND THAT THE SAID P ARTY. AS PER CLAUSE 4(A) OF THE SAID MEMORANDUM OF UNDERSTANDING IT HAS BEEN AGREED THAT THE EXPENSES THAT MIGHT BE INCURRED ON BEHALF OF THE ASSESSEE WOULD BE DULY REIMBURSED BY OBEETEE PVT. LTD. THE REIMBURSEMENT MADE BY THE ASSESSEE WAS NO T BY WAY OF PAYMENT OF ANY INCOME TO OBEETEE INC. BUT MERELY A REIMBURSEMENT O F EXPENSES INCURRED BY THEM ON BEHALF OF THE ASSESSEE. IN THE LIGHT OF THE LAW LAID DOWN BY THE HONBLE APEX COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PVT . LTD. VS. CIT, 327 ITR 456 (SC) THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT S OURCE. THEREFORE, THE ASSESSING OFFICER WAS NOT CORRECT IN DISALLOWING THE EXPENSE UNDER SECTION 40(A) (IA) OF THE ACT 15. THE SECOND ASPECT OF THE MATTER IS THAT CERTAIN AMOUNT OF GRAPHIC DESIGN AND SALARY PAID TO MR. BILLWARD IS IN THE NATURE OF FEE FOR TECHNICAL SERVICES UNDER SECTION 195 OF THE ACT. THE ASSESSING OFFICER HAS PRESUMED THIS PAYMENT IN THE CATEGORY OF ANY OTHER SUM UNDER SECTION 9 OF THE ACT. AS HELD ABOVE THAT THESE ARE REIMBURSEMENT OF EXPENSES, THEREFORE, THE ACTIO N OF THE ASSESSING OFFICER CONFIRMED BY THE CIT (A) CANNOT BE UPHELD AS A CORR ECT NATURE AND THIS PAYMENT IS REIMBURSEMENT OF THE EXPENSE. 15.1 IN THE LIGHT OF THE ABOVE DISCUSSION, WE DELET E THE IMPUGNED ADDITION MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE CIT(A ) OF RS.31,68,042/- ON ITA NO.249/ALLD/2011 A.Y. 2005-06 15 ACCOUNT OF GRAPHICS & DESIGN CHARGES, RS.20,66,042/ - ON ACCOUNT OF SALARY PAID TO MR. BILL WARD, RS.56,69,580/- ON ACCOUNT OF PAYMENT OF RENT OF SHOW ROOM AND RS.38,44,100/- ON ACCOUNT OF ADVERTISEMENT EXPENSES . 16. GROUND NO.6 IS IN RESPECT OF DISALLOWANCE OF RS .3,12,087/-. THE BRIEF FACTS OF THIS ISSUE ARE THAT DURING THE ASSESSMENT PROCEE DINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED RS.3,12,087/- AS FEE FOR WOOLMARK LICENSE. THE BILL ISSUED BY WOOLMARK SERVICES (INDIA) PVT. L TD. WAS DATED 01.03.2004. THE AMOUNT WAS PAID ON 23.03.2004. THE ASSESSING OFFIC ER WAS OF THE VIEW THAT THE EXPENSES RELATED TO F.Y. 2003-04 & A.Y. 2004-05. S IMILARLY, THE ASSESSING OFFICER MADE ADDITION AS EXPENSES WAS NOT PERTAININ G TO THE YEAR UNDER CONSIDERATION. THE ACTION OF THE ASSESSING OFFICER HAS BEEN CONFIRMED BY THE CIT(A). 17. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND RECORDS PERUSED. THE CONTENTION OF THE ASSESSEE THAT THE P AYMENT MADE WAS ADVANCE PAYMENT FOR THE SERVICE DURING THE F.Y. 2004-05, RE LEVANT TO A.Y. 2005-06. 18. LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTE NTION TO PAGE NO.280 OF PAPER BOOK WHERE A COPY OF LETTER DATED 15.03.2004 HAS BEEN PLACED. IN THE SAID LETTER IT IS CLEARLY STATED THAT THE LICENSE FEE WA S FOR THE YEAR 2004-05 RELEVANT TO ITA NO.249/ALLD/2011 A.Y. 2005-06 16 A.Y. 2005-06. IT IS RELEVANT TO STATE THAT AS PER THE MERCANTILE SYSTEM OF ACCOUNTING THE EXPENDITURE INCURRED IN THE YEAR WHE N ITS SERVICES HAVE BEEN RENDERED. IN THE CASE UNDER CONSIDERATION, THE LIC ENSE FEE IS FOR THE YEAR F.Y. 2004- 05 RELEVANT TO A.Y. 2005-06. THEREFORE, THE EXPEND ITURE HAS BEEN ACCRUED IN THE FINANCIAL YEAR 2004-05 RELEVANT TO ASSESSMENT YEAR 2005-06 THOUGH IT MAY HAVE BEEN PAID IN ADVANCE. AS PER MERCANTILE SYSTEM OF ACCOUNTING THE EXPENDITURE IS ALLOWABLE IN THE YEAR UNDER WHICH IT IS INCURRED. SINCE THE EXPENDITURE INCURRED IN THE YEAR UNDER CONSIDERATION, THEREFORE, THE SAME I S ALLOWABLE. WE ACCORDINGLY DELETE THE ADDITION OF RS.3,12,087/-. 19. GROUNDS NO 7 AND 8 RELATES TO DISALLOWANCE OF R S 2, 88,135/-. THE CASE OF THE A.O. IS THAT THE PAYMENT MADE WAS IN RESPECT OF BRAND LEVEL WHICH REQUIRES DEDUCTION OF TAX AT SOURCE UNDER SECTION 195 OF THE ACT AS PAYMENT WAS FOR TECHNICAL SERVICES. THE ASSESSEE FAILS TO DEDUCT TA X AT SOURCE THEREFORE CLAM OF THE ASSESSEE IS NOT ALLOWABLE. THE CIT (A) CONFIRMED TH E ORDER OF THE AO. 20. WE HEARD THE LEARNED REPRESENTATIVES OF THE PAR TIES. WE NOTICED THAT THE PAYMENT WAS MADE FOR THE PERMISSION GRANTED TO THE ASSESSEE FOR USING TRADE MARK WOOL, NEW ZEALAND, WHETHER THIS PAYMENT IS FEE FO R TECHNICAL SERVICES OR NOT. WHAT IS FEES FOR TECHNICAL SERVICE HAS BEEN EXAMI NED BY THE HONBLE MADRAS ITA NO.249/ALLD/2011 A.Y. 2005-06 17 HIGH COURT IN THE CASE OF SKYCELL COMMUNICATIONS LT D. V. DEPUTY COMMISSIONER OF INCOME-TAX, 251 ITR 53 (MAD), THE COURT HELD AS UNDER ;- PAGE NO: 0057-- THAT EXPLANATION 2 IN SECTION 9(1)(VII) READS THUS: FOR THE PURPOSES OF THIS CLAUSE, FEES FOR TECHNI CAL SERVICE MEANS ANY CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDERA TION) FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTAN CY SERVICES (INCLUDING THE PROVISION OF SERVICES OF TECHNICAL O R OTHER PERSONNEL) BUT DOES NOT INCLUDE CONSIDERATION FOR ANY CONSTRUC TION, ASSEMBLY, MINING OR LIKE PROJECT UNDERTAKEN BY THE RECIPIENT OR CONSIDERATION WHICH WOULD BE INCOME OF THE RECIPIENT CHARGEABLE U NDER THE HEAD SALARIES. THIS DEFINITION SHOWS THAT CONSIDERATION PAID FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICE, AS AL SO THE CONSIDERATION PAID FOR THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL, WOULD BE REGARDED AS FEES PAID FOR TECH NICAL SERVICE. THE DEFINITION EXCLUDES FROM ITS AMBIT CONSIDERATIO N PAID FOR CONSTRUCTION, ASSEMBLY, OR MINING OR LIKE PROJECT U NDERTAKEN BY THE RECIPIENT, AS ALSO CONSIDERATION WHICH WOULD CONSTI TUTE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD SALARIES. THUS WHILE STATING THAT TECHNICAL SERVICE WOULD INCLUDE MANAGERIAL AND CONSULTANCY SERVICE, THE LEGISLATURE HAS NOT SE T OUT WITH PRECISION AS TO WHAT WOULD CONSTITUTE TECHNICAL SERVICE TO RENDER IT TECHNICAL SERVICE. THE MEANING OF THE WORD TECHNICAL AS GI VEN IN THE NEW OXFORD DICTIONARY IS ADJECTIVE 1. OF OR RELATING TO A PARTICULAR SUBJECT, ART OR CRAFT OR ITS TECHNIQUES: TECHNICAL TERMS (ESPECIALLY OF A BOOK OR ARTICLE) R EQUIRING SPECIAL KNOWLEDGE TO BE UNDERSTOOD: A TECHNICAL REPORT. 2. OF INVOLVING, OR CONCERNED WITH APPLIED AND IN DUSTRIAL SCIENCES: AN IMPORTANT TECHNICAL ACHIEVEMENT. 3. RESULTING FROM MECHANICAL FAILURE: A TECHNICAL F AULT. ITA NO.249/ALLD/2011 A.Y. 2005-06 18 4. ACCORDING TO A STRICT APPLICATION OR INTERPRETA TION OF THE LAW OR THE RULES: THE ARREST WAS A TECHNICAL VIOLATION OF THE TREATY. HAVING REGARD TO THE FACT THAT THE TERM IS REQUIRE D TO BE UNDERSTOOD IN THE CONTEXT IN WHICH IT IS USED, FEE FOR TECHN ICAL SERVICES COULD ONLY BE MEANT TO COVER SUCH THINGS TECHNICAL AS AR E CAPABLE OF BEING PROVIDED BY WAY OF SERVICE FOR A FEE. THE POPULAR MEANING ASSOCIATED WITH TECHNICAL IS INVOLVING OR CONCERNING APPLI ED AND INDUSTRIAL SCIENCE. IN THE MODERN DAY WORLD, ALMOST EVERY FACET OF ONE S LIFE IS LINKED TO SCIENCE AND TECHNOLOGY INASMUCH AS NUMEROUS THINGS USED OR RELIED UPON IN EVERY DAY LIFE IS THE RESULT OF SCIENTIFIC AND TECHNOLOGICAL DEVELOPMENT. EVERY INSTRUMENT OR GADGET THAT IS US ED TO MAKE LIFE EASIER IS THE RESULT OF SCIENTIFIC INVENTION OR DE VELOPMENT AND INVOLVES THE USE OF TECHNOLOGY. ON THAT SCORE, EVERY PROVID ER OF EVERY INSTRUMENT OR FACILITY USED BY A PERSON CANNOT BE R EGARDED AS PROVIDING TECHNICAL SERVICE. WHEN A PERSON HIRES A TAXI TO MOVE FROM ONE PLACE TO ANOTHER, HE USES A PRODUCT OF SCIENCE AND TECHNOLOGY, VIZ., AN AUTOMOBILE. IT CANNOT ON THAT GROUND BE SAID THAT THE TAXI DRIVER WHO CONTROLS THE VEHICLE, AND MONITORS ITS MOVEMENT IS RENDERING A T ECHNICAL SERVICE TO THE PERSON WHO USES THE AUTOMOBILE. SIMILARLY, WHEN A PERSON TRAVELS BY TRAIN OR IN AN AEROPLANE, IT CANNOT BE SAID THA T THE RAILWAYS OR AIRLINES IS RENDERING A TECHNICAL SERVICE TO THE P ASSENGER AND, THEREFORE, THE PASSENGER IS UNDER AN OBLIGATION TO DEDUCT TAX AT SOURCE ON THE PAYMENTS MADE TO THE RAILWAY OR THE A IRLINE FOR HAVING USED IT FOR TRAVELLING FROM ONE DESTINATION TO ANOT HER. WHEN A PERSON TRAVELS BY BUS, IT CANNOT BE SAID THAT THE UNDERTAK ING WHICH OWNS THE BUS SERVICE IS RENDERING TECHNICAL SERVICE TO THE P ASSENGER AND, THEREFORE, THE PASSENGER MUST DEDUCT TAX AT SOURCE ON THE PAYMENT MADE TO THE BUS SERVICE PROVIDER, FOR HAVING USED T HE BUS. THE ELECTRICITY SUPPLIED TO A CONSUMER CANNOT, ON THE GROUND THAT GENERATORS ARE USED TO GENERATE ELECTRICITY, TRANS MISSION LINES TO CARRY THE POWER, TRANSFORMERS TO REGULATE THE FLOW OF CURRENT, METERS TO MEASURE THE CONSUMPTION, BE REGARDED AS AMOUNTI NG TO PROVISION OF TECHNICAL SERVICES TO THE CONSUMER RESULTING IN THE CONSUMER HAVING TO DEDUCT TAX AT SOURCE ON THE PAYMENT MADE FOR THE POWER CONSUMED AND REMIT THE SAME TO THE REVENUE. ITA NO.249/ALLD/2011 A.Y. 2005-06 19 SATELLITE TELEVISION HAS BECOME UBIQUITOUS, AND IS SPREADING ITS AREA AND COVERAGE, AND COVERS MILLIONS OF HOMES. WHEN A PERSON RECEIVES SUCH TRANSMISSION OF TELEVISION SIGNALS THROUGH TH E CABLE PROVIDED BY THE CABLE OPERATOR, IT CANNOT BE SAID THAT THE HOM E OWNER WHO HAS SUCH A CABLE CONNECTION IS RECEIVING A TECHNICAL SE RVICE FOR WHICH HE IS REQUIRED TO DEDUCT TAX AT SOURCE ON THE PAYMENT S MADE TO THE CABLE OPERATOR. INSTALLATION AND OPERATION OF SOPHISTICATED EQUIPM ENTS WITH A VIEW TO EARN INCOME BY ALLOWING CUSTOMERS TO AVAIL OF THE B ENEFIT OF THE USER OF SUCH EQUIPMENT DOES NOT RESULT IN THE PROVISION OF TECHNICAL SERVICE TO THE CUSTOMER FOR A FEE. WHEN A PERSON DECIDES TO SUBSCRIBE TO A CELLULAR T ELEPHONE SERVICE IN ORDER TO HAVE THE FACILITY OF BEING ABLE TO COMMUNI CATE WITH OTHERS, HE DOES NOT CONTRACT TO RECEIVE A TECHNICAL SERVICE. W HAT HE DOES AGREE TO IS TO PAY FOR THE USE OF THE AIRTIME FOR WHICH HE PAYS A CHARGE. THE FACT THAT THE TELEPHONE SERVICE PROVIDER HAS INSTA LLED SOPHISTICATED TECHNICAL EQUIPMENT IN THE EXCHANGE TO ENSURE CONN ECTIVITY TO ITS SUBSCRIBER, DOES NOT ON THAT SCORE, MAKE IT PROVIS ION OF A TECHNICAL SERVICE TO THE SUBSCRIBER. THE SUBSCRIBER IS NOT CO NCERNED WITH THE COMPLEXITY OF THE EQUIPMENT INSTALLED IN THE EXCHA NGE, OR THE LOCATION OF THE BASE STATION. ALL THAT HE WANTS IS THE FACIL ITY OF USING THE TELEPHONE WHEN HE WISHES TO, AND BEING ABLE TO GET CONNECTED TO THE PERSON AT THE NUMBER TO WHICH HE DESIRES TO BE CONN ECTED. WHAT APPLIES TO CELLULAR MOBILE TELEPHONE IS ALSO APPLIC ABLE IN FIXED TELEPHONE SERVICE. NEITHER SERVICE CAN BE REGARDED AS TECHNICAL SERVICE FOR THE PURPOSE OF SECTION 194J OF THE ACT . THE USE OF THE INTERNET AND THE WORLD WIDE WEB IS INCREASING BY LEAPS AND BOUNDS, AND THERE ARE HUNDREDS OF THOUSANDS, IF NOT MILLIONS, OF SUBS - PAGE NO: 0059 CRIBERS TO THAT FACILITY. THE INTERNET IS VERY MUCH A PRODUCT OF TECHNOLOGY, AND WITHOUT THE SOPHISTICATED EQUIPMEN T INSTALLED BY THE INTERNET SERVICE PROVIDERS AND THE USE OF THE TELE PHONE FIXED OR MOBILE THROUGH WHICH THE CONNECTION IS ESTABLISHED, THE S ERVICE CANNOT BE PROVIDED. HOWEVER, ON THAT SCORE, EVERY SUBSCRIBER OF THE INTERNET ITA NO.249/ALLD/2011 A.Y. 2005-06 20 SERVICE PROVIDER CANNOT BE REGARDED AS HAVING ENTE RED INTO A CONTRACT FOR AVAILING OF TECHNICAL SERVICES FROM TH E PROVIDER OF THE INTERNET SERVICE, AND SUCH SUBSCRIBER REGARDED AS BEING OBLIGED TO DEDUCT TAX AT SOURCE ON THE PAYMENT MADE TO THE IN TERNET SERVICE PROVIDER. AT THE TIME THE INCOME-TAX ACT WAS ENACTED IN THE YEAR 1961, AS ALSO AT THE TIME WHEN EXPLANATION 2 TO SECTION 9(1)(VII ) WAS INTRODUCED BY THE FINANCE (NO. 2) ACT, WITH EFFECT FROM APRIL 1, 1977, THE PRODUCTS OF TECHNOLOGY HAD NOT BEEN IN SUCH WIDE USE AS THEY ARE TODAY. ANY CONSTRUCTION OF THE PROVISIONS OF THE ACT MUST BE IN THE BACKGROUND OF THE REALITIES OF DAY- TO-DAY LIFE IN WHICH THE PROD UCTS OF TECHNOLOGY PLAY AN IMPORTANT ROLE IN MAKING LIFE SMOOTHER AND MORE CONVENIENT. SECTION 194J, AS ALSO EXPLANATION 2 IN SECTION 9(1) (VII) OF THE ACT WERE NOT INTENDED TO COVER THE CHARGES PAID BY THE AVERAGE HOUSE- HOLDER OR CONSUMER FOR UTILISING THE PRODUCTS OF M ODERN TECHNOLOGY, SUCH AS, USE OF THE TELEPHONE FIXED OR MOBILE, THE CABLE T. V., THE INTERNET, THE AUTOMOBILE, THE RAILWAY, THE AEROPLAN E, CONSUMPTION OF ELECTRICAL ENERGY, ETC. SUCH FACILITIES WHICH WHEN USED BY INDIVIDUALS ARE NOT CAPABLE OF BEING REGARDED AS TECHNICAL SER VICE CANNOT BECOME SO WHEN USED BY FIRMS AND COMPANIES. THE FA CILITY REMAINS THE SAME WHOEVER THE SUBSCRIBER MAY BE-INDIVIDUAL, FIRM OR COMPANY. TECHNICAL SERVICE REFERRED IN SECTION 9(1)(VII) CONTEMPLATES RENDERING OF A SERVICE TO THE PAYER OF THE FEE. M ERE COLLECTION OF A FEE FOR USE OF A STANDARD FACILITY PROVIDED TO AL L THOSE WILLING TO PAY FOR IT DOES NOT AMOUNT TO THE FEE HAVING BEEN RECEI VED FOR TECHNICAL SERVICES. 21. IN THE LIGHT OF ABOVE DISCUSSIONS WE NOTICED THAT THE PAYMENT WAS MADE FOR REIMBURSEMENT OF THE PERMISSION GRANTED TO THE ASSE SSEE FOR USING TRADE MARKWOOL, NEW ZEALAND. SUCH PAYMENT CANNOT BE SAI D TO BE FEE FOR TECHNICAL SERVICES. EVEN OTHERWISE ALSO, IN THE LIGHT OF THE DETAILED DISCUSSIONS MADE IN PARAGRAPH NOS. 13, 14 AND 15 OF THIS ORDER, SUCH RE IMBURSEMENT OF EXPENSES ARE NOT ITA NO.249/ALLD/2011 A.Y. 2005-06 21 SUBJECT TO TDS. ACCORDINGLY, NO DISALLOWANCE IS WA RRANTED. THE ADDITION OF RS.2,88,135/-.IS DELETED. 22. GROUND NO.9 IS GENERAL IN NATURE REQUIRES NO SE PARATE FINDING. 23. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. (ORDER PRONOUNCED IN THE OPEN COURT) SD/- SD/- (BHAVNESH SAINI) (A.L. GEHLOT) JUDICIAL MEMBER ACCOUNTANT MEMBER PBN/* COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT (APPEALS) CONCERNED 4. CIT CONCERNED 5. D.R., ITAT, ALLAHABAD BENCH, ALLAHABAD 6. GUARD FILE. BY ORDER ASSISTANT REGISTRAR INCOME-TAX APPELLATE T RIBUNAL, ALLAHABAD TRUE COPY