ADDL CIT 6(3), MUMBAI V. HEINZ INDIA P. LTD, MUMBAI

ITA 2531/MUM/2011

• Counselvise Citation: 253119914 RSA 2011
• Duration Of Justice: 1 year(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 19-04-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 31-03-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V V SHASTRI
• Keywords: Business expenditure; Double taxation relief; Advance ruling; Capital expenditure
• Section: 143(3); 14A; 37(1)

Judgement Text

ITA NOS 2531 AND 3102 OF 2011 HEINZ INDIA (P) LTD MU MBAI PAGE 1 OF 13 IN THE INCOME TAX APPELLATE TRIBUNAL 'H' BENCH, MUMBAI BEFORE SHRI SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI S.S. GODARA, JUDICIAL MEMBER ITA NO.2531/MUM/2011 (ASSESSMENT YEAR: 2006-07) ADDL. CIT 6(3) VS HEINZ INDIA (P) LTD ROOM NO.522, 5 TH FLOOR D-SHIVASAGAR ESTATE, 7 TH AAYAKAR BHAVAN, MK ROAD FLOOR, DR.A.B.ROAD MUMBAI 400020 WORLI MUMBAI PAN NO: AAACH 0667 B (APPELLANT) (RESPONDENT) ITA NO.3102/MUM/2011 (ASSESSMENT YEAR: 2006-07) HEINZ INDIA (P) LTD VS ADDL. CIT 6(3) D-SHIVASAGAR ESTATE, 7 TH ROOM NO.522, 5 TH FLOOR FLOOR, DR.A.B.ROAD AAYAKAR BHAVAN, MK ROAD WORLI MUMBAI MUMBAI 400020 PAN NO: AAACH 0667 B (APPELLANT) (RESPONDENT) REVENUE BY: SHRI V.V. SHASTRI, DR ASSESSEE BY: SHRI RAJAN VORA DATE OF HEARING: 19/04/2012 DATE OF PRONOUNCEMENT: 30/04/2012 O R D E R PER B. RAMAKOTAIAH, A.M. THESE ARE THE CROSS APPEALS BY ASSESSEE AND REVENU E AGAINST THE ORDERS OF THE CIT (A)-12 MUMBAI DATED 28/01/201 1. IN ASSESSEE APPEAL, ASSESSEE IS CONTESTING THE ISSUE OF DISALLO WANCES UNDER SECTION 14A, UNDER MODVAT, UNDER SECTION 40(A)(IA) WHEREAS IN CROSS APPEAL REVENUE IS CONTESTING THE DISALLOWANC E UNDER SECTION 14A IN GROUND NO.1 AND DELETION OF CLUB MEMBERSHIP EXPENSES IN GROUND NO.2. THESE ARE DECIDED AS UNDER AFTER HEARI NG THE LEARNED COUNSEL AND THE LEARNED DEPARTMENTAL REPRESENTATIVE . ASSESSEE ITA NOS 2531 AND 3102 OF 2011 HEINZ INDIA (P) LTD MU MBAI PAGE 2 OF 13 ALSO PLACED FACTS SHEETS, DETAILED SUBMISSIONS AND PAPER BOOK ON RECORD WHICH WERE ALSO PERUSED IN DECIDING THE APPE AL. GROUND NO.1 IN BOTH ASSESSEE AND THE REVENUE APPEAL IS WITH REF ERENCE TO THE DISALLOWANCE UNDER SECTION 14A OF ` .17.33 LAKHS. 2. BRIEFLY STATED, ASSESSEE COMPANY, HEINZ INDIA PRIVA TE LIMITED HAD INVESTMENTS IN MUTUAL FUND UNITS AND SHARES AS ON MARCH 31, 2005 AND MARCH 31, 2006 OF ` 3,707.61 LACS AND ` 10,452.49 LACS RESPECTIVELY. ASSESSEE HAD EARNED TAX FREE DIVIDEND OF ` 346.68 LACS AND SHORT TERM CAPITAL GAINS ON SALE OF MUTUAL FUND S OF ` 1.64 LACS WHICH WAS DULY OFFERED TO TAX DURING THE YEAR ENDED 31 ST MARCH 2006. ASSESSEE, IN ITS RETURN OF INCOME FILED FOR A Y 2006-07 HAD CLAIMED DEDUCTION OF ` 42.32 LACS, BEING EXPENSES IN THE NATURE OF FINANCE CHARGES. ASSESSEE HAD CASH SURPLUS OF ` 1,192.08 LACS AND ` 732.38 LACS AS OF 31 ST MARCH 2005 AND 31 ST MARCH 2006 RESPECTIVELY. FURTHER, IT DID NOT HAVE ANY BORROWIN G OR OVERDRAFT DURING THE RELEVANT FINANCIAL YEAR. 3. THE ASSESSING OFFICER BY PLACING RELIANCE ON THE M UMBAI TRIBUNAL RULING IN THE CASE OF M/S DAGA CAPITAL SER VICES AND SECTION 14A OF THE ACT R.W. RULE 8D OF THE INCOME T AX RULES 1962 DISALLOWED ` 52.73 LACS. 4. ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) AGAI NST THE ORDER PASSED BY THE AO, AND PLACING RELIANCE ON THE DECISION OF HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING C O LTD, CONTENDED THAT DISALLOWANCE UNDER SECTION 14A OF TH E ACT R.W. RULE 8D OF THE RULES IS NOT APPLICABLE TO THE RELEVANT A Y. 5. THE CIT(A) HELD THAT THE DECISION IN THE CASE OF GO DREJ & BOYCE MANUFACTURING CO LTD IS APPLICABLE TO THE ASS ESSEES CASE. HOWEVER, THE CIT(A), RELYING UPON VARIOUS DECISIONS , VIZ. LUPEN LABORATORIES PRIVATE LIMITED ITAT (MUMBAI) (ITA NO.3859/MUMBAI12002 DATED 20/10/2009); MAGNALAL CHH AGANLAL PRIVATE LIMITED (236 ITR 456); GHERZI EASTERN LIMIT ED (ITA NUMBER 6562/BOM/94 DATED 29/09/2002; GODREJ AGROVET LTD V ACIT ITA NOS 2531 AND 3102 OF 2011 HEINZ INDIA (P) LTD MU MBAI PAGE 3 OF 13 (MUMBAI ITAT G BENCH ORDER DATED 17/09/2010) AN D 2011 9 TAXMAN.COM 148 (KER), HELD THAT 5% OF DIVIDEND INCO ME I.E ` 17.33 LACS SHOULD BE TREATED AS EXPENDITURE INCURRED FOR EARNING TAX FREE INCOME. ACCORDINGLY, THE CIT(A) DIRECTED THE AO TO RESTRICT THE DISALLOWANCE UNDER SECTION 14A OF THE ACT TO 5% OF THE DIVIDEND INCOME EARNED BY ASSESSEE. 6. BOTH ASSESSEE AND THE REVENUE ARE CONTESTING THE DI RECTION OF THE CIT (A). IT WAS FAIRLY SUBMITTED THAT THE MATTE R WAS SET ASIDE TO THE ASSESSING OFFICER IN ASSESSMENT YEAR 2005-06 AN D CERTAINLY AS RULE 8D IS NOT APPLICABLE FOR THIS AY, ASSESSING OF FICER HAS TO DETERMINE A REASONABLE AMOUNT IN DETERMINING THE EX PENDITURE RELATED TO DIVIDEND INCOME. IT WAS THE SUBMISSION T HAT CHARGES PAID TO THE BANK OF ` 42.32LAKHS ARE TOWARDS FINANCE CHARGES PRIMARILY COMPRISING OF DOMESTIC CHEQUE COLLECTION SERVICES A ND SERVICE CHARGES FOR MANAGING IMPORT PAYMENT, EXPORT CLEARAN CE, REIMBURSEMENT OF DEMAND DRAFT ETC. AND THESE PAYMEN TS ARE NOT IN THE NATURE OF BANK INTEREST FOR ANY BORROWING OR LO ANS. IT WAS THE SUBMISSION THAT THESE AMOUNTS CANNOT BE CONSIDERED FOR DISALLOWANCE UNDER SECTION 14A AS THESE ARE NECESSA RY BUSINESS EXPENDITURE NOT PERTAINING TO THE INVESTMENTS. EVEN THOUGH THE ACTION OF THE ASSESSING OFFICER IN NOT EXAMINING TH E ABOVE CONTENTIONS CANNOT BE FAULTED AS HE INVOKED RULE 8D , WE ARE OF THE OPINION THAT THE ASSESSING OFFICER SHOULD RE-EXAMIN E THE ISSUE IN THE LIGHT OF THE FACTS AS SUBMITTED BY ASSESSEE AND ALSO ON THE LAW AS PROPOUNDED BY VARIOUS JUDGMENTS AND DECISIONS. I T IS ALSO NOTICED THAT THE ISSUE IN EARLIER YEAR WAS RESTORED TO THE FILE OF THE ASSESSING OFFICER. THEREFORE, IN THE INTEREST OF JU STICE, THE ISSUE IN THIS YEAR IS ALSO RESTORED TO THE FILE OF THE ASSES SING OFFICER WITH THE DIRECTIONS TO CONSIDER THE REASONABLE AMOUNT IF ANY , AFTER CONSIDERING THE FACTS AS SUBMITTED BY ASSESSEE AND LAW ON THE ISSUE. THEREFORE, GROUND NO.1 RAISED BY ASSESSEE AN D THE REVENUE ARE CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. TH E ASSESSING ITA NOS 2531 AND 3102 OF 2011 HEINZ INDIA (P) LTD MU MBAI PAGE 4 OF 13 OFFICER, IF HE COMES TO THE CONCLUSION THAT THE FIN ANCE CHARGES PAID ARE RELATED TO THE BUSINESS, HE CAN AS WELL DETERMI NE A REASONABLE PERCENTAGE OF THE DIVIDEND INCOME AS EXPENDITURE PE RTAINING TO EARNING THAT DIVIDEND INCOME. HOWEVER, THE ASSESSIN G OFFICER IS FREE TO EXAMINE THIS ISSUE ALSO. 7. GROUND NO.2 IN ASSESSEES APPEAL IS WITH REFERENCE TO THE ADDITION OF CLOSING BALANCE OF MODVAT IN VALUE OF C LOSING STOCK UNDER SECTION 145A. BRIEFLY STATED ASSESSEE FOLLOWS THE EXCLUSIVE METHOD OF ACCOUNTING AND RECORDS PURCHASES NET OF M OD VAT CREDIT. SALES ARE ALSO RECORDED NET OF SALES TAX AN D EXCISE DUTY. CONSEQUENTLY, INVENTORIES OF RAW MATERIALS AND PACK ING MATERIAL ARE RECORDED NET OF MOD VAT CREDIT. 8. THE AO DISREGARDED SUBMISSIONS FILED BY THE ASSESSE E AND MADE ADDITION OF ` 58.44 LACS UNDER SECTION 145A OF THE ACT TOWARDS CLOSING BALANCE UNUTILIZED PORTION OF MOD VAT CREDI T APPEARING IN THE BALANCE SHEET OF THE ASSESSEE. 9. ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) AGAI NST THE ORDER OF THE AO. THE CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE AND RELYING UPON VARIOUS DECISIONS (VIZ. M AHALAXMI GLASS WORKS [ORDER DATED 1 ST APRIL 2009] AND MAHAVIR ALUMINIUM LIMITED [(2008) 297 ITR 77], HAS HELD THAT WHEREVER AN EXCL USIVE METHOD OF VALUATION IS BEING FOLLOWED, SECTION 145A OF THE AC T, BEING MANDATORY IN NATURE, HAS TO BE INVOKED AND ACCORDIN GLY CONFIRMED THE ADDITIONS MADE BY THE AO. 10. IT WAS THE SUBMISSION THAT ASSESSEE HAS BEEN CONSIS TENTLY VALUING THE CLOSING STOCKS IN ACCORDANCE WITH THE A CCOUNTING STANDARDS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) FOR VALUATION OF INVENTORIES. THERE HA S BEEN NO CHANGE IN THE STOCK VALUATION METHODOLOGY IN THE CURRENT Y EAR. THE TAX AUDIT REPORT UNDER SECTION 44AB OF THE ACT ALSO CLA RIFIES THAT THERE IS NO IMPACT ON THE PROFITS OF THE COMPANY ON ACCOU NT OF ADJUSTMENTS PRESCRIBED UNDER SECTION 145A OF THE AC T. ITA NOS 2531 AND 3102 OF 2011 HEINZ INDIA (P) LTD MU MBAI PAGE 5 OF 13 11. FURTHER, THE HONBLE JURISDICTIONAL MUMBAI HIGH CO URT IN THE CASE OF CIT V INDO NIPPON CHEMICALS CO. LTD 245 ITR 384 HAS DISCUSSED BOTH INCLUSIVE AND EXCLUSIVE METHODS OF A CCOUNTING IN DETAIL. IN THIS CASE, ASSESSEE HAD USED EXCLUSIVE M ETHOD OF ACCOUNTING WHEREAS THE AO HAD APPLIED INCLUSIVE MET HOD OF ACCOUNTING. THE HONBLE MUMBAI HIGH COURT CONCLUDED THAT THERE WAS NO CHANGE IN PROFITABILITY UNDER BOTH THESE MET HODS. AS SUCH, NO ADJUSTMENT WAS REQUIRED TO BE MADE EVEN THOUGH E XCLUSIVE METHOD OF ACCOUNTING IS FOLLOWED BY ASSESSEE. THE S AID HIGH COURT DECISION HAS ALSO BEEN AFFIRMED BY THE HONBLE SUPR EME COURT 261 ITR 275 CONFIRMING THAT NO ADJUSTMENT IS WARRANTED IN CASE EXCLUSIVE METHOD OF ACCOUNTING IS FOLLOWED. 12. WITHOUT PREJUDICE TO THE ABOVE SUBMISSION IF ANY AD JUSTMENT WAS TO BE MADE BY THE AO ON THE CLOSING STOCK OF IN VENTORY, CORRESPONDING PROPORTIONATE ADJUSTMENT SHOULD ALSO BE MADE TO THE OPENING STOCK OF THE INVENTORY AS ON 1 APRIL 2005. 13. RELIANCE IS PLACED ON THE DECISION OF MUMBAI TRIBUN AL IN THE CASE OF DCIT V BECK INDIA LIMITED 127 TTJ 410, WHER EIN IT WAS HELD THAT: THE SECTION MENTIONS INVENTORY AND LIMITING IT O NLY TO CLOSING INVENTORY DISREGARDING THE OPENING INVEN TORY WILL BE NOT IN ACCORDANCE WITH THE PLAIN MEANING OF THE TERM INVENTORY USED IN THE SECTION. INVENTORY WIL L NECESSARILY INCLUDE WITHIN ITS FOLD BOTH OPENING AS WELL AS CLOSING. ASSESSEE WAS FOLLOWING EXCLU.IVE METHOD FO R ACCOUNTING DULY AND WAS FORCED TO ADOPT AN INCREASE D VALUATION IN ITS CLOSING STOCK ON ACCOUNT OF APPLIC ATION OF SEC 145A. WHEN SUCH A CHANGE IS THRUSTED UPON THE ASSESSEE DUE TO APPLICATION OF A STATUTORY PROVISIO N, THEN THE EFFECT THE RE OF HAS TO BE GIVEN INFILL. SEC. 1 45A MANDATES THAT THE CHANGE ON ACCOUNT OF ADJUSTMENTS MENTIONED THEREIN HAS TO BE GIVEN EFFECT ON PURCHAS E, SALE OF GOODS AND INVENTORY (EMPHASIS SUPPLIED). 14. IT WAS FURTHER CLARIFIED THAT IN RELATION TO ADDITI ON OF UNUTILIZED MODVAT CREDIT UNDER SECTION 145A OF THE ACT, SERVICE ITA NOS 2531 AND 3102 OF 2011 HEINZ INDIA (P) LTD MU MBAI PAGE 6 OF 13 TAX CREDIT ON INPUT SERVICES OF ` 4.12 LACS AND MOD VAT OF ` 7.63 LACS ON CAPITAL ITEMS DO NOT FORM PART OF THE INVEN TORY FOR THE PURPOSE OF SECTION 145A OF THE ACT SINCE THESE WERE NEITHER PAID NOR INCURRED TO BRING THE GOODS (BEING INVENTORY) TO TH E PLACE OF ITS LOCATION AND CONDITION AS ON THE DATE OF VALUATION AND THEREFORE SHOULD NOT HAVE BEEN CONSIDERED WHILE COMPUTING ADJ USTMENT UNDER SECTION 145A OF THE ACT. ASSESSEE SUBMITTED T HE FOLLOWING TABLE: FY PARTICULARS F.Y 2005-06 TOTAL CENVAT (INVENTORY) CENVAT (CAPITAL GOODS) SERVICE TAX CREDIT ON INPUT SERVICES AS PER TAX AUDIT REPORT OPENING STOCK OF CENVAT BALANCES 3,265,126 3,265,081 45 CLOSING STOCK OF CENVAT BALANCES 5,844,438 4,667,561 763,992 412,885 DIFF. BETWEEN OPENING & CLOSING STOCK 2,579,312 1,402,480 763,947 412,885 INTERPRETATION OF SECTION 145A ON CENVAT CONTAINED IN COGS TREATMENT (IN RETURN OF INCOME) NO EFFECT TREATMENT AS PER ASSESSMENT ORDER CLOSING BALANCE (INCL. OF SERV. TAX AND CAPITAL GODOS) 5,844,438 INTERPRETATION OF SECTION 145A CENVAT CONTAINED IN COGS 1,402,480 (4,441,958) *BIFURCATION BETWEEN THE CENVAT ON CAPITAL ITEMS AN D CENVAT ON OTHERS (INCLUDING SERVICE TAX CREDIT ON INPUT SERVICES). * THE EXTRACT OF THE RETURN OF EXCISABLE GOODS AND AVAILMENT OF CENVAT CREDIT FOR MARCH 2006. ITA NOS 2531 AND 3102 OF 2011 HEINZ INDIA (P) LTD MU MBAI PAGE 7 OF 13 15. WE HAVE CONSIDERED THE ISSUE. THE ISSUE IN SECTION 145A REQUIRES EXAMINATION BY THE ASSESSING OFFICER AS SO ME OF THE CONTENTIONS THAT THE AMOUNTS INVOLVED IN CENVAT ARE ON CAPITAL GOODS AND SERVICE TAX CREDITS WERE NEITHER EXAMINED BY THE ASSESSING OFFICER NOR CONSIDERED. NOT ONLY THAT THE ASSESSING OFFICER SHOULD FOLLOW THE DECISION OF THE HON'BLE BOMBAY HI GH COURT IN THE CASE OF MAHALAXMI GLASS WORKS PVT. LTD. (2009) 318 ITR 116(BOM.) SO THAT HE SHOULD GIVE EFFECT TO THE OPENING STOCK AS WELL AS CLOSING STOCK WHILE ARRIVING AT ANY ADDITION UNDER SECTION 145A. THEREFORE, THE ISSUE IN THIS GROUND IS RESTORED TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE FACTS AFRESH AND DECIDE THE CASE ACCORDING TO THE LAW ON THE SUBJECT. GROUND NO.2 IS ALSO CONSIDE RED ALLOWED FOR STATISTICAL PURPOSES. 16. GROUND NO.3 IS ON ADDITION OF ` 19,29,258/- OF NON- WITHHOLDING OF TAXES AT THE TIME OF MAKING REIMBURS EMENTS TO AFFILIATES. DURING A.Y 2006-07, ASSESSEE HAD MADE P AYMENTS TOWARDS COMMISSION AND REIMBURSEMENT AMOUNTING TO R S 19.29 LACS TO ITS OVERSEAS AFFILIATES IN RESPECT OF SERVI CES RENDERED AND CERTAIN EXPENSES INCURRED, FOR AND ON BEHALF OF ASS ESSEE. THE REIMBURSEMENTS WERE MADE AT ACTUAL COST INCURRED BY ASSESSEES AFFILIATES, WITHOUT ANY ELEMENT OF MARK UP. 17. IT WAS SUBMITTED THAT ASSESSEES AFFILIATES DIRECTL Y PAY FOR CERTAIN EXPENSES INCURRED FOR AND ON BEHALF OF THE GROUP COMPANIES AROUND THE WORLD, INCLUDING ASSESSEE, BASED ON INVO ICES RECEIVED FROM VARIOUS VENDORS. THE SAID AFFILIATES WOULD THE N RAISE INVOICES ON THE RESPECTIVE GROUP COMPANY, INCLUDING ASSESSEE , FOR REIMBURSEMENT OF THE EXPENSES (WITHOUT ANY MARK-UP) INCURRED ON THEIR BEHALF. THE DETAILS OF THE PAYMENTS MADE BY A SSESSEE TO ITS AFFILIATES ARE PROVIDED BELOW: ITA NOS 2531 AND 3102 OF 2011 HEINZ INDIA (P) LTD MU MBAI PAGE 8 OF 13 A) PAYM ENTS TO HEINZ AFRICA AND MIDDLE EAST (HAME): S.NO NATURE OF PAYMENTS AMOUNT ( ` .) 1 COMMISSION FOR SELLING ASSESSEES PRODUCTS IN SOUTH AFRICA 880,654 TOTAL 880,654 B) PAYMENTS TO HEINZ USA S.NO NATURE OF PAYMENTS AMOUNT ( ` .) 1 MEDICLAIM INSURANCE POLICY FOR DIRECTORS 364,282 2 CONSULTANCY CHARGES 138,606* 3 ORGANIZATIONAL RESOURCES 75,303 4 TRAVEL COST 178,668 TOTAL 756,859 *TAXES DEDUCTED AND PAID. C) PAYMENTS TO HEINZ UK S.NO NATURE OF PAYMENTS AMOUNT ( ` .) 1 CONSULTANCY CHARGES 135,928* 2 MEMBERSHIP FEE FOR INFANT FOOD MANUFACTURER 155,817 TOTAL 291,745 18. THE AO HELD THAT ASSESSEE WAS LIABLE TO DEDUCT TAX UNDER SECTION 195(1) OF THE ACT ON THE AFORESAID PAYMENTS . BY HOLDING THAT THE ASSESSEE HAD FAILED TO DEDUCT APPROPRIATE TAXES , THE AO DISALLOWED REIMBURSEMENT OF RS 19.29 LACS UNDER SEC TION 40(A)(I) OF THE ACT (WITHOUT CONSIDERING THAT TAXES HAVE BEEN D EDUCTED IN RESPECT OF PAYMENTS OF RS 1.38 LACS AND RS 1.35 LAC S TOWARDS CONSULTANCY CHARGES TO HEINZ USA AND HEINZ UK). 19. ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) AGAI NST THE ASSESSMENT ORDER ISSUED BY THE ASSESSING OFFICER. T HE CIT(A), PLACING RELIANCE ON THE RULING IN THE CASE OF HOTEL LICENSING COMPANY S.A.R.L IN RE(2007) 207 CTR (AAR) 261 BY TH E AUTHORITY FOR ADVANCE RULING (AAR) HELD THAT THE PAYMENT BE ING RELATED TO THE BUSINESS OF THE ASSESSEE, PROVISIONS OF SECTION 195(1) OF THE ACT ITA NOS 2531 AND 3102 OF 2011 HEINZ INDIA (P) LTD MU MBAI PAGE 9 OF 13 ARE ATTRACTED AND ACCORDINGLY, THE ADDITION MADE BY THE A0 WAS UPHELD. 20. IT WAS SUBMITTED THAT DURING THE YEAR, HAME ACTED A S AN AGENT FOR SELLING ASSESSEES PRODUCTS IN SOUTH AFRI CA. ASSESSEE PAID A COMMISSION OF RS 8.80 LACS TO HAME FOR SELLING IT S PRODUCTS IN SOUTH AFRICA. 21. TO SUPPORT ITS CONTENTION THAT NO TAX IS DEDUCTIBLE ON PAYMENT OF COMMISSION TO HAME, ASSESSEE PLACED RELI ANCE ON THE CBDT CIRCULAR 786 DATED 7 FEBRUARY 2000 WHEREIN THE CBDT HAS CONSIDERED AND CLARIFIED THAT WHERE THE NON-RESIDEN T AGENT OPERATES OUTSIDE THE COUNTRY, NO PART OF HIS INCOME ARISES I N INDIA. ALSO, SINCE THE PAYMENT IS USUALLY REMITTED DIRECTLY ABRO AD IT CANNOT BE HELD TO HAVE BEEN RECEIVED BY OR ON BEHALF OF THE A GENT IN INDIA. SUCH PAYMENTS ARE THEREFORE HELD TO BE NOT TAXABLE IN INDIA. ACCORDINGLY, AS PER THE SAID CIRCULAR, NO TAX IS TH EREFORE DEDUCTIBLE UNDER SECTION 195 OF THE ACT ON EXPORT COMMISSION A ND OTHER RELATED CHARGES PAYABLE TO NON-RESIDENT FOR SERVICE S RENDERED OUTSIDE INDIA. 22. IT WAS FURTHER SUBMITTED THAT THE CIRCULAR 786 HAS BEEN WITHDRAWN BY CIRCULAR 7 OF 2009 DATED 22 OCTOBER 20 09 WITH EFFECT FROM 22 OCTOBER 2009. ACCORDINGLY, THE CIRCULAR 786 WOULD CONTINUE TO BE APPLICABLE DURING AY 2006-07, I.E, T HE PERIOD UNDER APPEAL. IN THIS REGARD, ASSESSEE RELIED UPON THE DE CISION OF THE JURISDICTIONAL BOMBAY HIGH COURT IN THE CASE OF UTI V ITO (249 ITR 612), WHICH HAS HELD THAT THE WITHDRAWAL OF A CIRCU LAR CAN ONLY OPERATE PROSPECTIVELY. 23. BASED ON THE ABOVE, IT WAS SUBMITTED THAT SINCE HAM E WAS OPERATING OUTSIDE INDIA, NO PART OF AGENCY COMMISSI ON WOULD ARISE IN INDIA. 24. WITHOUT PREJUDICE TO THE RELIANCE ON THE SAID CBDT CIRCULAR, IT WAS SUBMITTED THAT, THE COMMISSION PAID TO HAME RELATES TO ITA NOS 2531 AND 3102 OF 2011 HEINZ INDIA (P) LTD MU MBAI PAGE 10 OF 13 SERVICES RENDERED BY HAME IN RESPECT OF BUSINESS OF THE ASSESSEE OUTSIDE INDIA. ACCORDINGLY, THE COMMISSION INCOME F OR HAME IS NEITHER RECEIVED IN INDIA NOR DEEMED TO ACCRUE OR A RISE IN INDIA. FURTHER, AS NO PART OF THE AGENCY OPERATIONS OF HAM E FOR SALE OF ASSESSEES PRODUCTS IN SOUTH AFRICA IS CARRIED OUT IN INDIA, THE COMMISSION CANNOT BE DEEMED TO HAVE ACCRUED OR ARIS EN IN INDIA ON ACCOUNT OF ANY BUSINESS CONNECTION IN INDIA. 25. FURTHER, WHERE THE AGENCY SERVICES RENDERED BY HAME ARE CONSIDERED TO BE IN THE NATURE OF CONSULTANCY OR MA NAGERIAL SERVICES, THE SAME WOULD FALL UNDER EXCLUSIONS AS P ROVIDED UNDER CLAUSE (B) TO SECTION 9(1 )(VII) OF THE ACT WHEREBY FEES FOR TECHNICAL SERVICES PAYABLE BY A RESIDENT TO A NON-RESIDENT FO R SERVICES UTILIZED IN A BUSINESS CARRIED ON BY SUCH RESIDENT OUTSIDE I NDIA OR FOR THE PURPOSE OF MAKING OR EARNING ANY INCOME FROM ANY SO URCE OUTSIDE INDIA IS NOT DEEMED TO ACCRUE OR ARISE IN INDIA. 26. AT THE OUTSET, IT WAS SUBMITTED THAT ON AN IDENTICA L ISSUE IN THE CASE OF ASSESSEE FOR AY 2002-03, THE DELHI TRIB UNAL HAD RESTORED THE CASE BACK TO THE AO FOR FRESH ADJUDICA TION. SUBSEQUENTLY, THE ASSESSING OFFICER IN HIS ORDER UN DER SECTION 143(3) OF THE ACT R.W. SECTION 254 OF THE ACT, HAS GRANTED RELIEF TO ASSESSEE IN RESPECT OF REIMBURSEMENTS MADE TO HEINZ USA WITHOUT DEDUCTING TAX AT SOURCE AS PER PROVISIONS OF ARTICL E 12(4) OF THE INDIA-USA TAX TREATY. 27. FURTHER, THE MUMBAI TRIBUNAL, ON AN APPEAL FILED BY THE REVENUE, IN RESPECT OF AY 2003-04 AND AY 2004-05 IN ASSESSEES OWN CASE ON AN IDENTICAL ISSUE HAS FOLLOWED THE ORD ER OF DELHI TRIBUNAL PASSED FOR AY 2002-03. 28. ADDITIONALLY, ON AN IDENTICAL ISSUE IN THE CASE OF THE ASSESSEE FOR AY 2001-02, RECENTLY, THE DELHI TRIBUNAL HAD RE STORED THE CASE BACK TO THE AU FOR FRESH ADJUDICATION. ITA NOS 2531 AND 3102 OF 2011 HEINZ INDIA (P) LTD MU MBAI PAGE 11 OF 13 29. IN ADDITION IT WAS ALSO SUBMITTED THAT REIMBURSED A MOUNT ARE MADE ON COST TO COST BASIS WITHOUT ANY MARK UP AND THERE ARE SEVERAL JUDICIAL PRECEDENT WHEREIN IT WAS HELD THAT REIMBURSEMENT OF EXPENSES CANNOT BE TREATED AS INCOME OF THE RECI PIENT. IT WAS ALSO FURTHER SUBMITTED THAT ASSESSEE OPTED TO BE GOVERNE D BY DTAA AND THE AMOUNTS REIMBURSED CANNOT BE CONSIDERED AS FEE FOR TECHNICAL SERVICES. THEREFORE, THE PROVISIONS OF SECTION 9(1) (VII) DOES NOT APPLY. IT RELIED ON VARIOUS CASE LAWS IN THIS REGARD PARTI CULARLY THE DECISION OF THE SPECIAL BENCH IN THE CASE OF MAHINDRA & MAHI NDRA 313 ITR 263 TO SUBMIT THAT THERE IS NO OBLIGATION TO DEDUCT TAX AT SOURCE. THE LEARNED COUNSEL ALSO PLACED COMPLETE DETAILS OF REIMBURSEMENT ON WHICH THE TAX WAS DEDUCTED WHICH WAS ALSO NOT CO NSIDERED BY THE ASSESSING OFFICER AND THE AMOUNTS ON WHICH TAX HAS NOT BEEN DEDUCTED FOR THE AMOUNTS CANNOT BE CONSIDERED AS IN COME. IT WAS FAIRLY SUBMITTED THAT THIS ISSUE IS CONSIDERED IN F AVOUR OF ASSESSEE IN EARLIER YEARS AS THE ORDER WAS SET ASIDE TO THE FILE OF THE ASSESSING OFFICER AND THE ASSESSING OFFICER IN CONSEQUENTIAL ORDER GAVE RELIEF. 30. WE HAVE CONSIDERED THE ISSUE AND THE DETAILED SUBMI SSIONS MADE BY ASSESSEE. AS SUBMITTED THE ITAT HAS CONSIDE RED THIS ISSUE IN EARLIER YEARS AND RESTORED THE MATTER FOR FRESH ADJUDICATION IN THE LIGHT OF RELEVANT TAX TREATY, NATURE OF REIMBURSEME NT SCHEDULE IN ASSESSMENT YEAR 2002-03. THE ASSESSING OFFICER IN C ONSEQUENTIAL ORDER GRANTED RELIEF, THE ORDER WHICH WAS PLACED ON PAGES 116 TO 118 OF THE PAPER BOOK. HOWEVER, IN THE IMMEDIATE PR ECEDING YEAR THE MATTER WAS PENDING WITH THE ASSESSING OFFICER C ONSEQUENT TO THE ORDER OF RESTORATION. THEREFORE, IN THE LARGER INTEREST OF JUSTICE, WE RESTORE THIS MATTER TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE FACTS AND NATURE OF EXPENSES REIMBURSED INCLUDI NG THE FACT THAT SOME OF THE AMOUNTS WERE COVERED BY TDS AND ALSO TO DECIDE IN THE LIGHT OF DTAA. ACCORDINGLY THE ISSUE IN GROUND NO.3 IS RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDIC ATION. THUS ASSESSEE APPEAL IS ALLOWED FOR STATISTICAL PURPOSES . ITA NOS 2531 AND 3102 OF 2011 HEINZ INDIA (P) LTD MU MBAI PAGE 12 OF 13 31. THE ONLY GROUND LEFT IN DEPARTMENTAL APPEAL IS WITH REFERENCE TO THE ADDITION OF CLUB-MEMBERSHIP EXPENSES MADE BY THE ASSESSING OFFICER BUT DELETED BY THE CIT (A) RELYING ON THE D ECISION IN THE CASE OF OTIS ELEVATOR CO. (INDIA) LTD VS. CIT; (1992)195 ITR 682. THE FACTS ARE THAT ASSESSEE HAS INCURRED EXPENDITURE TOWARDS THE MEMBERSHIP AND SUBSCRIPTION OF BOMBAY GYMKHANA ( ` 0.63 LACS), KHANNA HOTELS PVT. LTD ( ` 0.98 LACS) AND THE WILLINGDON SPORTS CLUB ( ` 1.32 LACS) FOR SELECT SENIOR MANAGEMENT EXECUTIVES ASSESSEE HAS CLAIMED THESE EXPENSES AS DEDUCTION UNDER SECTION 3 7(1) OF THE ACT. THE AO DISALLOWED THE EXPENSES INCURRED IN RESPECT OF CLUB MEMBERSHIP OF THE EMPLOYEES ON GROUND THAT THESE EX PENSES ARE PERSONAL IN NATURE AND THEREFORE NOT ALLOWED UNDER SECTION 37(1) OF THE ACT OR THAT THESE EXPENSES ARE IN THE NATURE OF CAPITAL EXPENDITURE OR THAT THE EXPENSES HAVE BEEN INCURRED FOR THE BENEFIT OF FEW SELECTED EXECUTIVES. THE AO HAS DISALLOWED T HE EXPENSES BY PLACING RELIANCE ON THE DECISION OF BOMBAY HIGH COU RT IN THE CASE OF CIT V W.I.A.A. CLUB LTD (136 ITR 569) AND CIT V DIN ERS BUSINESS SERVICES PVT LTD (263 ITR 1). 32. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF AS SESSEE AND RELYING UPON THE DECISION IN THE CASE OF OTIS ELEVA TOR CO. (INDIA) LTD. V CIT [(1991)(195 ITR 682)(HC)(BOM)] HELD THAT THE EXPENDITURE IS WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS AND IS ALLOWABLE IN THE HANDS OF ASSESSEE. ACCORDINGLY, TH E ADDITION MADE BY THE AO WAS DELETED. 33. AT THE OUTSET IT WAS FAIRLY SUBMITTED THAT SIMILAR ISSUE HAS BEEN EXAMINED AND RELIEF HAS BEEN GRANTED TO THE A SSESSEE IN ITS OWN CASE IN ASSESSMENT YEAR 2005-06 BY THE ITAT ORD ER DATED 19.10.2011 IN ITA NO.4473/MUM/2010. SINCE THE CIT ( A) FOLLOWED THE JURISDICTIONAL HIGH COURT AND ALSO THE FACT THA T THE EXPENDITURE INCURRED IS ONLY ANNUAL EXPENSES OF MEMBERSHIP FEE, BUT NOT THE EXPENSES INCURRED IN THE CLUB, WE DO NOT SEE ANY RE ASON TO INTERFERE ITA NOS 2531 AND 3102 OF 2011 HEINZ INDIA (P) LTD MU MBAI PAGE 13 OF 13 WITH THE ORDER OF THE CIT (A), THEREFORE, THE REVEN UE GROUND IS DISMISSED. 34. IN THE RESULT, APPEALS FILED BY ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES AND REVENUE APPEAL PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH APRIL, 2012. SD/- SD/- (S.S.GODARA) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 30 TH APRIL, 2012. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, H BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI