ASST CIT 16(3), MUMBAI V. D.A. JHAVERI, MUMBAI

ITA 3758/MUM/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 1673 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 13-07-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 10-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MORYA PRATAP
• Keywords: Depreciation; Double taxation relief; Additional depreciation; Retrospective amendment; Permanent establishment; Non-deduction of tax
• Section: 143(3); 80IB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L, MUMBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA NO. 3758/MUM/2013 : (A.Y : 2008-09) ACIT-16(3), MUMBAI (APPELLANT) VS. M/S. D.A. JHAVERI FLAT NO. 7, 9 TH FLOOR, JAIN TOWER, 17-MATHEW ROAD, OPERA HOUSE, MUMBAI 400 004 (RESPONDENT) PAN : AAAFD0295J ASSESSEE BY : SHRI HIRO RAI REVENUE BY : SHRI MORYA PRATAP DATE OF HEARING : 25/11/2016 DATE OF PRONOUNCEMENT : 30/11/2016 O R D E R PER G.S. PANNU, AM : THE CAPTIONED APPEAL BY THE REVENUE IS DIRECTED AGA INST THE ORDER OF CIT(A)-27, MUMBAI DATED 12.02.2013, PERTAI NING TO THE ASSESSMENT YEAR 2008-09, WHICH IN TURN HAS ARISEN F ROM THE ORDER DATED 20.12.2011 PASSED BY THE ASSESSING OFFICER, M UMBAI UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (IN SHOR T THE ACT). 2. IN THIS APPEAL, REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL :- 2 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 1. WHETHER ON THE FACTS AND CIRCUMSTANCES AND IN LAW , THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE U/S. 40A(IA) OF RS .22,95,152/- WHICH IS SUPPORTED BY THE DECISION OF APEX COURT IN 239 ITR 58 7 AND FOLLOWED IN CIT(INTERNATIONAL TAXATION) VS. SAMSUNG ELECTRONIC CO . LTD. 320 ITR 209 (KARNATAKA). 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) HAS ERRED IN ALLOWING THE ADDITIONAL DEPRECIATION CLAIMED OF RS.18,26,347/-. 3. WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE, TH E LD. CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT HON'BLE SUPREME COURT I N THE CASE OF CIT VS. GEM INDIA MANUFACTURING CO. (2001) 249 ITR 307(SC) A ND HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF LONDON STAR DIAMOND CO. (10 LTD. 213 ITR 517 (BOM) HAD HELD THAT THE DIAMOND CUTTING AND POLISHING AMO UNTS TO PROCESSING OF GOODS AND NOT MANUFACTURING OF GOODS AND DECISION RE LIED UPON IN THE CASE OR M/S. SHEETAL MANUFACTURING HAS NOT BEEN ACCEPTED ON MERITS. 3. ALTHOUGH THE REVENUE HAS RAISED THREE GROUNDS OF APPEAL, BUT TWO ISSUES HAVE BEEN RAISED, WHICH WE SHALL DEAL IN SERIATIM . 4. INSOFAR AS THE GROUND OF APPEAL NO. 1 IS CONCERN ED, THE SAME RELATES TO AN AMOUNT OF RS.22,95,152/- REPRESENTING PAYMENT TO ONE M/S. HRD, ANTWERP NV, BELGIUM (IN SHORT HRD), WHI CH HAS BEEN DISALLOWED BY THE ASSESSING OFFICER BY INVOKING SEC . 40(A)(I) OF THE ACT ON THE GROUND THAT ASSESSEE FAILED TO DEDUCT TAX AT SOURCE ON SUCH PAYMENT. THE CIT(A) HAS SINCE SET-ASIDE THE DISALL OWANCE BY HOLDING THAT SEC. 40(A)(I) OF THE ACT WAS INAPPLICABLE SINC E ASSESSEE WAS NOT REQUIRED TO DEDUCT TAX AT SOURCE ON SUCH PAYMENT. 5. THE RELEVANT FACTS ARE THAT THE RESPONDENT-ASSES SEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF IMPORT OF ROUGH DIAMOND, 3 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 CUTTING AND POLISHING AND SALE THEREOF. HRD IS A B ODY CORPORATE WHOSE REGISTERED OFFICE IS LOCATED IN ANTWERP, BELGIUM. DURING THE PERIOD UNDER CONSIDERATION, ASSESSEE PAID RS.22,95,152/- T O HRD TOWARDS GRADING AND CERTIFICATION OF DIAMONDS. ASSESSEE HA D EXPLAINED BEFORE THE LOWER AUTHORITIES THAT IT SENDS CUT AND POLISHE D DIAMONDS TO HRDS OFFICE AT BELGIUM FOR NECESSARY CERTIFICATION FOR W HICH A SEPARATE SERIES OF INVOICE NUMBERS ARE PREPARED IN THE NAME OF HRD GIVING QUANTITATIVE AND QUALITATIVE DETAILS AND THE SHIPPING BILL FOR S UCH TRANSACTION IS CERTIFIED BY THE CUSTOMS DEPARTMENT. UPON COMPLETI NG THE CERTIFICATION OF DIAMONDS RECEIVED, HRD RAISES AN I NVOICE IN FAVOUR OF THE ASSESSEE WITH NECESSARY PARTICULARS AND THE DIA MONDS ARE SHIPPED BACK TO THE ASSESSEE ALONGWITH CERTIFICATION AND OT HER DOCUMENTS LIKE INVOICE, AIRWAY BILL, ETC. THE CERTIFIED DIAMONDS ARE RELEASED TO ASSESSEE THROUGH CUSTOMS AND A BILL OF ENTRY. FOR SUCH SERVICES, ASSESSEE HAD MADE PAYMENT OF RS.22,95,152/- TO HRD, FOR WHICH NO DEDUCTION OF TAX AT SOURCE WAS REQUIRED TO BE MADE. FIRSTLY, AS PER THE ASSESSEE, THE GOODS ARE DIRECTLY SENT TO HRD AT BEL GIUM AND THE SAID CONCERN DOES NOT HAVE A PERMANENT ESTABLISHMENT (PE ) OR AGENCY IN INDIA TO RECEIVE THE GOODS ON ITS BEHALF; SECONDLY, IT WAS CONTENDED THAT THE SERVICE OF CERTIFICATION IS CARRIED OUT BY HRD ENTIRELY OUTSIDE INDIA, I.E., IN BELGIUM. FURTHER, IT WAS ALSO POINTED OUT THAT THE GRADATION CERTIFICATE/REPORT GIVEN BY HRD WAS ONLY AN ANALYSI S OF THE QUALITY OF EACH PIECE OF DIAMOND AND DID NOT CONSTITUTE TRANSF ER OF ANY TECHNOLOGY, COMMERCIAL INTEREST, SKILL OR TECHNICAL KNOWLEDGE IN FAVOUR OF THE ASSESSEE AND, THEREFORE, SUCH SERVICES COULD NOT BE REGARDED AS FEES PAID FOR TECHNICAL SERVICES. UNDER THESE CI RCUMSTANCES, THE CASE SET-UP BY ASSESSEE WAS THAT THERE WAS NO INCOME LIA BLE TO BE TAXED IN 4 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 THE HANDS OF HRD IN INDIA AND ACCORDINGLY, NO TAX W AS REQUIRED TO BE DEDUCTED AT SOURCE ON THE DIAMOND GRADATION OR CERT IFICATION CHARGES PAID TO HRD. 6. ON THE CONTRARY, THE ASSESSING OFFICER NOTED THA T HRD WAS HAVING A SPECIALIZED KNOWLEDGE IN DIAMOND GRADING AND CERT IFICATION, WHICH WAS TECHNICAL IN NATURE, AND THEREFORE, THE IMPUGNE D PAYMENT FELL IN THE CATEGORY OF FEES PAID FOR TECHNICAL SERVICES. THE ASSESSING OFFICER FURTHER REFERRED TO THE PROVISIONS OF SEC. 9(1)(VII ) OF THE ACT, SPECIALLY EXPLANATION 2 TO THE SAID CLAUSE, AND NOTING THAT T HE EXPLANATION PRESCRIBED THAT THE IMPUGNED PAYMENT AMOUNT TO INCO ME ACCRUED TO HRD IN INDIA, BEING FEES FOR TECHNICAL SERVICES R ENDERED, HE HELD THAT ASSESSEE WAS LIABLE TO DEDUCT TAX AT SOURCE THEREFR OM. IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS ALSO RE FERRED TO ARTICLE 12 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) B ETWEEN INDIA AND BELGIUM AND NOTED THAT THE DEFINITION OF FEES FOR TECHNICAL SERVICES PRESCRIBED THEREIN WAS ON A SIMILAR FOOTING TO THE DEFINITION OF FEES FOR TECHNICAL SERVICES PROVIDED IN EXPLANATION 2 TO SE C. 9(1)(VII) OF THE ACT. IN NUTSHELL, THE ASSESSING OFFICER HELD THAT THE IM PUGNED PAYMENT WAS MADE TOWARDS FEES FOR TECHNICAL SERVICES RENDERED BY HRD, WHICH WAS LIABLE TO BE TAXED IN INDIA IN VIEW OF SEC. 9(1)(VI I) OF THE ACT AND, THEREFORE, ASSESSEE WAS LIABLE TO DEDUCT TAX AT SOU RCE ON SUCH PAYMENT U/S 195(1) OF THE ACT. HAVING FAILED TO DO SO, ASS ESSING OFFICER INVOKED THE PROVISIONS OF SEC. 40(A)(I) OF THE ACT AND DISA LLOWED THE EXPENDITURE OF RS.22,92,152/-. 5 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 7. IN APPEAL, ASSESSEE REITERATED THE SUBMISSIONS M ADE BEFORE THE ASSESSING OFFICER AND POINTED OUT THAT THERE WAS NO REQUIREMENT TO DEDUCT TAX AT SOURCE IN INDIA AS SAID PAYMENT WAS N OT TO BE CONSTRUED AS INCOME LIABLE TO BE TAXED IN THE HANDS OF HRD IN INDIA. BEFORE THE CIT(A), ASSESSEE ALSO MADE AN ALTERNATIVE PLEA THAT EXPLANATION TO SEC. 9(1)(VII) OF THE ACT, INSERTED BY THE FINANCE ACT, 2010 RETROSPECTIVELY, PRESCRIBING THAT INCOME IS DEEMED TO HAVE BEEN ACCR UED IN INDIA TO A RECIPIENT EVEN IN THE CASE WHERE SERVICES WERE REND ERED OUTSIDE INDIA UNDER SUB-SECTION 2 TO SEC. 9 OF THE ACT WAS NOT AV AILABLE TO THE ASSESSEE DURING THE PREVIOUS YEAR RELEVANT TO THE A SSESSMENT YEAR UNDER CONSIDERATION AND, THEREFORE, ASSESSEE COULD NOT BE MADE LIABLE TO DEDUCT TAX AT SOURCE ON SUCH BASIS. ON THIS BAS IS ALSO, IT WAS SOUGHT TO BE CONTENDED THAT THE PAYMENT TO HRD COULD NOT B E DISALLOWED BY INVOKING SEC. 40(A)(I) OF THE ACT. 8. THE CIT(A) HAS CONSIDERED THE FACT AND LEGAL SIT UATION AND AFFIRMED THE STAND OF ASSESSEE. ACCORDING TO THE C IT(A), HRD DOES NOT HAVE ANY PE OR ANY OFFICE OR DEPENDENT AGENT OR REP RESENTATIVE IN INDIA AND, THEREFORE, IT IS A NON-RESIDENT FOR THE PURPOS ES OF THE ACT. SECONDLY, CIT(A) HAS CONCLUDED THAT THE IMPUGNED CE RTIFICATION SERVICES OF THE DIAMONDS SENT BY THE ASSESSEE WERE ENTIRELY CARRIED OUT OUTSIDE INDIA, I.E., IN BELGIUM. REGARDING THE NATURE OF S ERVICES RENDERED BY HRD, CIT(A) OBSERVED THAT NO DOUBT THE SAID CONCERN WAS POSSESSING EXPERTISE AND TECHNOLOGY TO GRADE OR CERTIFY THE DI AMONDS TO DETERMINE THEIR TRUE FEATURES, AND IT WAS USING SUCH COMMERCI AL OR TECHNICAL KNOWLEDGE FOR GRADING THE DIAMONDS AND GIVING A REP ORT THEREON TO ITS CLIENTS, WHICH INCLUDED THE ASSESSEE. IN THIS BACK GROUND, CIT(A) RELIED 6 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 UPON THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF DIAMOND SERVICES INTERNATIONAL PVT. LTD., (2008) 16 9 TAXMANN 201 TO HOLD THAT THE IMPUGNED CERTIFICATION SERVICES DO NO T INVOLVE PARTING OF ANY TECHNICAL KNOWLEDGE TO THE CLIENTS, THOUGH HRD WAS USING THE EXPERTISE AND TECHNICAL KNOW-HOW POSSESSED BY IT. 9. FURTHER, THE CIT(A) EXAMINED THE ISSUE AS TO WHE THER THE PAYMENT MADE BY THE ASSESSEE FOR AVAILING THE SERVI CES FROM HRD WOULD FALL WITHIN THE MEANING OF EXPRESSION FEES F OR TECHNICAL SERVICES FOR THE PURPOSES OF THE ACT AS WELL AS THE INDIA-BE LGIUM DTAA. ON THIS ASPECT, CIT(A) OBSERVED THAT THE DEFINITION OF THE EXPRESSION FEES FOR TECHNICAL SERVICES IS SIMILAR UNDER THE ACT AS WEL L AS IN THE INDIA- BELGIUM DTAA, SO HOWEVER, HE REFERRED TO THE PROTOC OL ARTICLE OF INDIA- BELGIUM DTAA WHICH PRESCRIBES THAT IF UNDER ANY CON VENTION AND AGREEMENT BETWEEN INDIA AND A THIRD STATE, ENTERED AFTER 1.1.1990, INDIA LIMITS IT TAXATION ON ROYALTIES OR FEES FO R TECHNICAL SERVICES TO A RATE LOWER OR A SCOPE MORE RESTRICTED THAN THE RATE OR SCOPE PROVIDED FOR IN THE DTAA WITH BELGIUM ON THE SAID ITEMS OF I NCOME, THEN THE SAME RATE OR SCOPE AS PROVIDED FOR IN THE LATER CON VENTION OR AGREEMENT WITH THE THIRD STATE ON THE SAID ITEMS OF INCOME SHALL ALSO APPLY TO THE INDIA-BELGIUM DTAA WITH EFFECT FROM TH E DATE ON WHICH THE PRESENT AGREEMENT WITH BELGIUM OR THE CONVENTION OR AGREEMENT WITH THIRD STATE IS EFFECTED, WHICHEVER DATE IS EARLIER. ON THE STRENGTH OF THE SAID PROTOCOL, CIT(A) NOTED THAT THE SUBSEQUENT DTA A BETWEEN INDIA AND UNITED KINGDOM PRESCRIBED THAT FEES FOR TECHNI CAL SERVICES WOULD BE TAXABLE IN INDIA ONLY IF TECHNICAL KNOWLEDGE, EX PERTISE, SKILL, KNOW- HOW OR PROCESS, ETC., WHICH ARE THE BASIS FOR THE S ERVICES RENDERED, ARE 7 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 MADE AVAILABLE OR PARTED WITH IN FAVOUR OF THE CLIENT LOCATED IN INDIA ALONG WITH THE RENDERING OF SERVICES. CONSIDERING THE AFORESAID MEANING OF THE EXPRESSION FEES FOR TECHNICAL SERVI CES IN THE CONTEXT OF THE INSTANT FACT-SITUATION, CIT(A) NOTED THAT IN PR OVIDING GRADING OR CERTIFICATION SERVICES OF DIAMONDS TO THE ASSESSEE, HRD HAS NOT PARTED WITH ANY TECHNICAL KNOWLEDGE OR MADE AVAILABLE ANY TECHNICAL EXPERTISE TO THE ASSESSEE SO AS TO CLASSIFY THE IMPUGNED PAYM ENT TO HRD AS FEES FOR TECHNICAL SERVICES. THE CIT(A) HAS REPRODUCED THE RELEVANT PARAS OF INDIA-UNITED KINGDOM DTAA AND GIVEN HIS FINDINGS IN THE CONTEXT OF THE PROTOCOL CLAUSE IN THE INDIA-BELGIUM DTAA. THEREFO RE, THE CIT(A) CONCLUDED THAT THE IMPUGNED PAYMENT MADE TO HRD COU LD NOT BE TERMED AS AN INCOME ACCRUING TO HRD BY WAY OF FEES FOR TECHNICAL SERVICES U/S 9(1)(VII) OF THE ACT, AND UNDER THESE CIRCUMSTANCES, CONSIDERING THAT HRD DOES NOT HAVE A PE IN INDIA, T HE IMPUGNED PAYMENTS WERE NOT IN THE NATURE OF BUSINESS PROFIT S LIABLE TO BE TAXED IN INDIA IN THE HANDS OF HRD. THEREFORE, IT HAS BE EN CONCLUDED THAT THE IMPUGNED PAYMENT IS NOT SUSCEPTIBLE TO DEDUCTION OF TAX AT SOURCE U/S 195(1) OF THE ACT AND ACCORDINGLY, HE DELETED THE D ISALLOWANCE MADE BY THE ASSESSING OFFICER BY INVOKING SEC.40(A)(I) OF T HE ACT. AGAINST SUCH A DECISION OF CIT(A), REVENUE IS IN APPEAL BEFORE US. 10. BEFORE US, THE LD. DR APPEARING FOR THE REVENUE HAS ASSAILED THE ORDER OF CIT(A) BY REFERRING TO THE POINTS RAISED B Y THE ASSESSING OFFICER, WHICH WE HAVE ALREADY ADVERTED TO IN THE EARLIER PA RT OF THIS ORDER AND ARE NOT BEING REPEATED FOR THE SAKE OF BREVITY. 8 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 11. ON THE OTHER HAND, THE LEARNED REPRESENTATIVE F OR THE ASSESSEE HAS DEFENDED THE ORDER OF CIT(A) AND POINTED OUT TH AT THE DECISION OF CIT(A) IS IN LINE WITH THE FOLLOWING DECISIONS OF T HE TRIBUNAL WHEREIN BY VIRTUE OF THE MOST FAVOURED NATION (MFN) CLAUSE IN THE RELEVANT TREATY, THE EXPRESSION FEES FOR TECHNICAL SERVICES HAS BE EN UNDERSTOOD WITH THE REQUIREMENT OF MAKING AVAILABLE OF TECHNOLOGY : - (I) DDIT V. BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD., 154 ITD 300 (PUNE TRIB) (II) SANDVIK AB V. DDIT, 167 TTJ 217 (PUNE TRIB) (III) SANDVIK AB V. DDIT, 70 SOT 551 (PUNE TRIB) (IV) BIRLA CORPORATION LTD. V. ACIT, 168 TTJ 189 (JAB -TRIB) (V) SHELL GLOBAL SOLUTIONS INTERNATIONAL BV V. ITO, 175 TTJ 286 (AHD-TRIB) (VI) ADIT(IT) V. TTI-TEAM TELECOM INTERNATIONAL LTD. , 45 CCH 42 (MUM-TRIB) 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. THE FACTUAL ASPECTS OF THE CONTROVERSY HAVE ALREADY BEEN NOTED BY US IN THE EARLIER PART OF THIS ORDER IN DETAIL AND ARE NOT BEING REPE ATED FOR THE SAKE OF BREVITY. IT WOULD SUFFICE TO NOTE AT THIS STAGE TH AT THE IMPUGNED PAYMENT TO HRD HAS BEEN MADE TOWARDS GRADING AND CE RTIFICATION OF DIAMONDS. THE QUESTION IS AS TO WHETHER THE PAYMEN T MADE TO HRD CONSTITUTES FEES FOR TECHNICAL SERVICES OR NOT ? FOR THIS PURPOSE, THE ELABORATE DISCUSSION BY CIT(A) IN HIS ORDER REFLECT S THAT SO FAR AS THE DEFINITION OF FEES FOR TECHNICAL SERVICES IN THE INDIA-BELGIUM DTAA IS CONCERNED, IT IS AN EXPANDED DEFINITION IF CONSIDER ED IN THE LIGHT OF THE DEFINITION PRESCRIBED IN THE INDIA-UNITED KINGDOM D TAA. THE SCOPE OF THE EXPRESSION FEES FOR TECHNICAL SERVICES HAS BE EN RESTRICTIVELY DEFINED IN THE INDIA-UNITED KINGDOM DTAA TO MEAN TH AT THE TECHNICAL 9 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 KNOWLEDGE, EXPERTISE, SKILL OR KNOW-HOW, ETC., WHIC H ARE THE BASIS FOR PROVIDING THE SERVICES, OUGHT TO BE TRANSFERRED TO OR PARTED WITH IN FAVOUR OF THE CLIENT SO AS TO FALL WITHIN THE MEANI NG OF FEES FOR TECHNICAL SERVICES. NOW, IN THE PRESENT CASE, CIT (A) HAS RIGHTLY RELIED UPON THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF DIAMOND SERVICES INTERNATIONAL PVT. LTD. (SUPRA) TO HOLD THAT THE IMPUGNED PAYMENT IS MADE TO OBTAIN GRADATION OR CER TIFICATION OF DIAMONDS AND IS NOT MEANT FOR OBTAINING USE OF THE TECHNICAL KNOW- HOW, EXPERTISE OR KNOWLEDGE POSSESSED BY HRD TO ISS UE SUCH GRADATION CERTIFICATE. THEREFORE, IN THE ABSENCE OF ANY MAK ING AVAILABLE OF TECHNICAL KNOWLEDGE, EXPERTISE, SKILL OR KNOW-HOW B Y HRD TO THE ASSESSEE IN THE COURSE OF GIVING GRADATION CERTIFIC ATE, SUCH SERVICES CANNOT BE CHARACTERISED AS FEES FOR TECHNICAL SERV ICES IN TERMS OF THE INDIA-UNITED KINGDOM DTAA. THE AFORESAID RESTRICTIV E SCOPE OF FEES FOR TECHNICAL SERVICES PROVIDED IN THE INDIA-UNITED KI NGDOM DTAA HAS BEEN APPLIED BY THE CIT(A) IN THE PRESENT CASE OWIN G TO THE MFN CLAUSE IN THE INDIA-BELGIUM DTAA. ON THIS ASPECT OF THE M ATTER, WE FIND NO FAULT ON THE PART OF CIT(A) BECAUSE ON THE STRENGTH OF THE MFN CLAUSE AVAILABLE IN THE PROTOCOL BETWEEN INDIA AND BELGIUM , ASSESSEE CAN RIGHTLY BE ALLOWED THE BENEFIT OF RESTRICTIVE DEFIN ITION OF FEES FOR TECHNICAL SERVICES CONTAINED IN THE SUBSEQUENTLY E NTERED INDIA-UNITED KINGDOM DTAA. THE PHRASEOLOGY OF MFN CLAUSE IN THE INDIA-BELGIUM DTAA, WHICH HAS BEEN REPRODUCED BY THE CIT(A) IN PA RA 7.1 OF HIS ORDER, IS ITSELF QUITE CLEAR AND JUSTIFIES THE APPROACH OF CIT(A). EVEN OTHERWISE, THE DECISIONS RELIED UPON BY THE LEARNED REPRESENTA TIVE BEFORE US SUPPORTS THE SAID APPROACH OF CIT(A). AS A CONSEQU ENCE, WE AFFIRM THE CONCLUSION OF CIT(A) THAT THE IMPUGNED PAYMENT CANN OT BE 10 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 CHARACTERISED AS FEES FOR TECHNICAL SERVICES HAVI NG REGARD TO THE MEANING AND SCOPE OF THE EXPRESSION FEES FOR TECHN ICAL SERVICES PROVIDED IN THE INDIA-UNITED KINGDOM DTAA, WHICH IS AMENABLE FOR APPLICATION IN THE INSTANT CASE HAVING REGARD TO MF N CLAUSE IN THE INDIA- BELGIUM DTAA. AS A CONSEQUENCE, ONCE IT IS HELD TH AT SUCH PAYMENT IS NOT TO BE REGARDED AS FEES FOR TECHNICAL SERVICES , AS INFERRED BY THE ASSESSING OFFICER, AND CONSIDERING THAT HRD DOES NO T HAVE ANY PE IN INDIA, THE CIT(A) HAS RIGHTLY CONCLUDED THAT SUCH P AYMENTS ARE NOT LIABLE TO BE TAXED IN INDIA IN THE HANDS OF HRD. THUS, TH ERE WAS NO JUSTIFICATION FOR THE ASSESSING OFFICER TO HAVE INV OKED SEC. 40(A)(I) OF THE ACT CITING FAILURE OF THE ASSESSEE TO DEDUCT TAX AT SOURCE U/S 195(1) OF THE ACT. IN THE RESULT, WE HEREBY AFFIRM THE DECIS ION OF CIT(A) ON THIS ASPECT AND REVENUE FAILS. 13. BEFORE PARTING, WE MAY ALSO REFER TO THE ALTERN ATIVE PLEA RAISED BY ASSESSEE, WHICH ALSO SUPPORTS THE ULTIMATE CONCLUSI ON OF CIT(A) THAT SEC. 40(A)(I) OF THE ACT IS NOT APPLICABLE. THE AL TERNATIVE PLEA PROCEEDS ON THE BASIS THAT EVEN IF THE SERVICES RENDERED BY HRD ARE IN THE NATURE OF TECHNICAL SERVICES, AND ARE RENDERED AND UTILISE D IN INDIA SO AS TO BE TAXABLE IN TERMS OF SEC. 9(1)(VII) OF THE ACT, EVEN THEN THE DISALLOWANCE IS NOT WARRANTED. IN THIS REGARD, THE REQUIREMENT OF RENDERING OF SERVICES IN INDIA IN ORDER TO ATTRACT SEC. 9(1)(VII ) OF THE ACT WAS REMOVED BY INSERTION OF THE EXPLANATION BY THE FINANCE ACT, 2010 WITH RETROSPECTIVE EFFECT FROM 1.4.1976. ACCORDING TO T HE REVENUE, INSPITE OF THE SERVICES HAVING BEEN RENDERED BY HRD OUTSIDE INDIA, THE SAME IS DEEMED TO BE TAXABLE IN INDIA IN VIEW OF THE AFORES AID AMENDMENT AND, 11 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 THEREFORE, ACCORDING TO THE REVENUE ASSESSEE WAS LI ABLE TO DEDUCT TAX AT SOURCE U/S 195(1) OF THE ACT. 14. IN OUR CONSIDERED OPINION, SUCH RETROSPECTIVE A MENDMENT IS DETERMINATIVE OF THE TAX LIABILITY IN THE HANDS OF A RECIPIENT OF INCOME, BUT SO FAR AS THE PRESENT CASE IS CONCERNED, WHAT I S HELD AGAINST THE ASSESSEE IS THE FAILURE TO DEDUCT TAX AT SOURCE AT THE TIME OF PAYMENT OF SUCH INCOME. OSTENSIBLY, DE HORS THE AFORESAID AMENDMENT, THE IMPUGNED INCOME WAS NOT SUBJECT TO TAX DEDUCTION IN INDIA AS PER THE PREVAILING LEGAL POSITION WHEN THE PAYMENTS WERE MA DE. THUS, THE TAXABILITY OF A SUM IN THE HANDS OF THE RECIPIENT O N ACCOUNT OF A SUBSEQUENT RETROSPECTIVE AMENDMENT WOULD NOT EXPOSE THE PAYER OF INCOME TO AN IMPOSSIBLE SITUATION OF REQUIRING DEDU CTION OF TAX AT SOURCE ON THE ANTERIOR DATE OF PAYMENT OF SUCH INCO ME. THUS, ON THIS COUNT ALSO, ASSESSEE CANNOT BE HELD TO BE IN DEFAUL T FOR NOT DEDUCTING TAX AT SOURCE SO AS TO TRIGGER THE DISALLOWANCE U/S 40(A)(I) OF THE ACT. AT THE TIME OF HEARING, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE HAS RELIED ON THE FOLLOWING DECISIONS IN SUPPORT OF THE AFORESAID PROPOSITION:- 1. ACIT V. BSR & CO., ITA NO. 1917/MUM/2013 2. CHANNEL GUIDE INDIA LTD. V. ACIT, 139 ITD 49 (MU M-TRIB) 3. NEW BOMBAY PARK HOTEL PVT. LTD. V. ITO(IT), 61 SO T 105 (MUM-TRIB) 4. (URO) UNITED HELICHARTERS (P) LTD. V. ACIT, 60 SOT 58 (MUM-TRIB) 5. HOLCIM SERVICES SOUTH ASIA LTD. V. DCIT, 157 ITD 892 (MUM-TRIB) 12 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 IN THE ABSENCE OF ANY CONTRARY DECISION, THE AFORES AID PLEA OF ASSESSEE IS ALSO LIABLE TO BE UPHELD AND THUS, THE DISALLOWA NCE MADE BY ASSESSING OFFICER BY INVOKING SEC. 40(A)(I) OF THE ACT STANDS CORRECTLY DELETED BY THE CIT(A), WHICH WE HEREBY AFFIRM. 15. INSOFAR AS THE GROUND OF APPEAL NOS. 2 & 3 ARE CONCERNED, THE SAME RELATE TO A COMMON ISSUE RELATING TO ASSESSEE S CLAIM FOR ADDITIONAL DEPRECIATION @ 20% IN TERMS OF SEC. 32(1 )(IIA) OF THE ACT AMOUNTING TO RS.18,26,347/- ON THE NEW PLANT AND MA CHINERY ACQUIRED AND INSTALLED DURING THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER DENIED THE CLAIM OF ASSESSEE FOR ADDITIONAL DEPRECIATION SOLELY ON THE GROUND THAT ASSESSEES ACTIVITY OF CUTTING A ND POLISHING OF DIAMONDS DOES NOT AMOUNT TO MANUFACTURE OR PRODUCT ION OF GOODS IN VIEW OF THE JUDGMENT OF HON'BLE SUPREME COURT IN TH E CASE OF GEM INDIA MANUFACTURING CO., 249 ITR 307 (SC) . ON APPEAL BY THE ASSESSEE, CIT(A) HELD THAT THE BUSINESS OF CUTTING AND POLISH ING OF ROUGH DIAMONDS CONSTITUTES A MANUFACTURING ACTIVITY AND IN COMING TO SUCH CONCLUSION, HE RELIED ON THE DECISION OF MUMBAI BENCH OF THE TR IBUNAL IN THE CASE OF SHEETAL DIAMONDS LTD. , ITA NOS. 6687 TO 6689/MUM/2003 DATED 23.3.2011 . THE CIT(A) NOTED THAT THE DECISION OF TRIBUNAL I N THE CASE OF SHEETAL DIAMONDS LTD. (SUPRA) DEALT WITH AN ACTIVITY WHICH WAS IDENTICAL TO THAT CARRIED OUT BY THE ASSESSEE, AND FURTHER TH AT THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF GEM INDIA MANUFACTURING CO. (SUPRA) WAS ALSO CONSIDERED. THEREFORE, THE CIT(A) HAS HEL D THE ASSESSEE ENTITLED TO THE CLAIM OF ADDITIONAL DEPREC IATION U/S 32(1)(IIA) OF THE ACT ON THE GROUND THAT THE ACTIVITY OF CUTTING AND POLISHING OF ROUGH 13 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 DIAMONDS CONSTITUTED MANUFACTURING. AGAINST SUCH A DECISION OF CIT(A), REVENUE IS IN APPEAL BEFORE US. 16. BEFORE US, THE ONLY PLEA OF REVENUE IS THAT THE ASSESSING OFFICER MADE NO MISTAKE BY FOLLOWING THE JUDGMENT OF HON'BL E SUPREME COURT IN THE CASE OF GEM INDIA MANUFACTURING CO. (SUPRA) TO HOLD THAT THE ACTIVITY OF CUTTING AND POLISHING OF ROUGH DIAMONDS DID NOT AMOUNT TO MANUFACTURE OR PRODUCTION. 17. ON THE OTHER HAND, THE LEARNED REPRESENTATIVE F OR THE ASSESSEE POINTED OUT THAT THE OBJECTION RAISED BY ASSESSING OFFICER IS BASED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE O F GEM INDIA MANUFACTURING CO. (SUPRA), WHICH HAS BEEN APPROPRIATELY CONSIDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SHEETAL DIAMONDS LTD. ( SUPRA ), AND IT HAS BEEN HELD THAT THE ACTIVITY OF CUTTIN G AND POLISHING OF ROUGH DIAMONDS AMOUNTS TO MANUFACTURE OR PRODUCTION . IN THE COURSE OF HEARING, RELIANCE HAS ALSO BEEN PLACED ON FOLLOW ING DECISIONS:- 1. PARMES DIAMOND EXPORTS PVT. LTD. V. DCIT, ITA NO. 1073- 1075/MUM/2009 2. FLAWLESS DIAMOND (INDIA) LTD. V. ADDL. CIT, 64 S OT 135 (MUM-TRIB) 3. BARMECHAS IMPEX (P) LTD. V. DCIT, 105 TTJ 533 (M UM-TRIB) 4. ITO V. ARIHANT TILES AND MARBLES PVT. LTD., 320 IT R 79 (SC) 18. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. THE SHORT CONTROVERSY BEFORE US IS AS TO WHETHER THE ACTIVITY OF CUTTING AND POLISHING OF ROUGH DIAMONDS AMOUNTS TO MANUFACTURE OR NOT? AT THE TIME OF HEARING, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE HAS ALSO FURNISHED AN EXPLANATORY NOTE DEALING WITH THE VARI OUS STEPS AND STAGES 14 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 INVOLVED IN CUTTING AND POLISHING OF ROUGH DIAMONDS INTO POLISHED DIAMONDS. THE ASSESSING OFFICER HAS HEAVILY RELIED ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF GEM INDIA MANUFACTURING CO. (SUPRA) TO EMPHASISE THAT CUTTING AND POLISHING OF UNCUT R AW DIAMONDS DOES NOT AMOUNT TO MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING. IN THIS CONTEXT, THE FOLLOWING PARAGRAPH IN THE JUD GMENT OF THE HON'BLE SUPREME COURT IS RELEVANT:- THERE CAN BE LITTLE DIFFICULTY IN HOLDING THAT THE RAW AND UNCUT DIAMOND IS SUBJECTED TO A PROCESS OF CUTTING AND POL ISHING WHICH YIELDS THE POLISHED DIAMOND, BUT THAT IS NOT TO SAY THAT THE POLISHED DIAMOND IS A NEW ARTICLE OR THING WHICH IS THE RESULT OF MANUFACTURE OR PRODUCTION. THERE IS NO MATERIAL ON RECORD UPON WHIC H SUCH A CONCLUSION CAN BE REACHED. QUITE CLEARLY, THE HON'BLE SUPREME COURT NOTED THAT THE RAW AND UNCUT DIAMOND IS SUBJECTED TO PROCESS OF CUTTING AND POLI SHING WHICH YIELDS THE POLISHED DIAMOND, BUT IT COULD NOT GO TO SAY TH AT SUCH POLISHED DIAMOND WAS A NEW ARTICLE OR THING AS A RESULT OF M ANUFACTURE OR PRODUCTION BECAUSE THERE WAS NO MATERIAL ON RECORD UPON WHICH SUCH A CONCLUSION CAN BE REACHED . EVIDENTLY, THE PROPOSITION CANVASSED BY THE ASSESSEE COULD NOT SUCCEED BEFORE THE HON'BLE S UPREME COURT BECAUSE IT WAS NOT ABLE TO DEMONSTRATE THAT THE PRO CESS UNDERTAKEN OF CUTTING AND POLISHING UNCUT RAW DIAMONDS WAS PRODUC ING A NEW ARTICLE OR THING. THE AFORESAID UNDERSTANDING OF THE JUDGM ENT OF THE HON'BLE SUPREME COURT IS FORTIFIED BY THE SUBSEQUENT DECISI ON OF HON'BLE SUPREME COURT IN THE CASE OF HEAVEN DIAMONDS PVT. LTD. IN C.A NO. 9936 OF 2010 , WHEREIN THE FOLLOWING OBSERVATIONS HAVE BEEN MADE :- HEARD LEARNED COUNSEL ON BOTH SIDES. 15 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 LEAVE GRANTED. WE FIND FROM THE IMPUGNED ORDER OF THE INCOME TAX APPE LLATE TRIBUNAL [TRIBUNAL, FOR SHORT] THAT THERE IS NO DISCU SSION ON THE PROCESS UNDERTAKEN BY THE ASSESSEE, WHO CLAIMS BENEFI T OF SECTION 80IB OF THE INCOME TAX ACT, 1961 [ACT, FOR SHORT]. THE ASSESSEE IMPORTS RAW DIAMONDS AND APPLIES THEREON THE PROCESS OF SAWING, TURNING, PROFILING, CUTTING, DRILLING, POLISHING, ETC. , BY THE USE OF SOPHISTICATED MACHINERIES RESULTING IN PRODUCTION OF A SUPERIOR MARKETABLE COMMODITY. DETAILED PROCEDURE HAS BEEN SET OUT IN THE PAPER BOOK. THE TRIBUNAL OUGHT TO HAVE EXAMINED THE PROCESS AS TO WHETHER SUCH PROCESS WOULD CONSTITUTE MANUFACTURE UN DER SECTION 80IB OF THE ACT. THAT EXERCISE HAS NOT BEEN UNDERTAK EN. THE RELIANCE ON THE JUDGMENT OF THIS COURT IN THE CASE OF COMMISS IONER OF INCOME TAX VS. GEM INDIA MANUFACTURING COMPANY, REPORTED IN [ 2001] 249 I.T.R. 307, MAY NOT BE CORRECT FOR THE SIMPLE REASON T HAT, IN THAT CASE, THE REVENUE SUCCEEDED AS GEM INDIA MANUFACTURING COM PANY WAS NOT ABLE TO DEMONSTRATE THE PROCESS UNDERTAKEN BY IT T O CONVERT RAW DIAMONDS INTO A SUPERIOR COMMODITY. MOREOVER, THE HIG H COURT HAS ALSO NOT GONE INTO THAT ASPECT. THE HIGH COURT SHOU LD HAVE REMITTED THE CASE TO THE TRIBUNAL TO CONSIDER WHETHER THE PROCES S UNDERTAKEN BY CONSTITUTED MANUFACTURE. UNDER THE ABOVE CIRCUMST ANCES, THE IMPUGNED ORDERS OF THE HIGH COURT AND THE TRIBUNAL ARE S ET ASIDE AND THE MATTER IS REMITTED TO THE TRIBUNAL FOR DE NOVO CONS IDERATION IN THE LIGHT OF WHAT WE HAVE STATED HEREINABOVE. THE CIVIL APPEAL FILED BY THE ASSESSEE IS, ACCORDING LY, ALLOWED WITH NO ORDER AS TO COSTS. 19. IN FACT, THE AFORESAID OBSERVATIONS OF THE HON' BLE SUPREME COURT WERE BEFORE THE TRIBUNAL IN THE CASE OF HEAVEN DIAMONDS PVT. LTD. IN ITA NOS. 2504 & 2817/MUM/2004 DATED 22.12.2014, WHEREIN THE MATTER WAS REMANDED BACK TO THE FILE OF ASSESSING O FFICER TO EXAMINE THE PROCESS UNDERTAKEN BY THE ASSESSEE FOR CUTTING AND POLISHING OF DIAMONDS, AS TO WHETHER IT CONSTITUTED MANUFACTURE FOR THE PURPOSES OF SEC. 80IB OF THE ACT. CONSIDERED IN THIS LIGHT, TH E DECISION OF THE 16 M/S. D.A. JHAVERI ITA NO. 3758/MUM/2013 TRIBUNAL IN THE CASE OF SHEETAL DIAMONDS LTD. ( SUPRA ) IS QUITE ELOQUENT WHEREIN THE ENTIRE PROCESS INVOLVED IN THE ACTIVITY OF CUTTING AND POLISHING OF ROUGH DIAMONDS INTO POLISHED DIAMONDS HAS BEEN EXAMINED AND IT HAS BEEN HELD THAT IT CONSTITUTED M ANUFACTURE. THE SAID DECISION OF THE TRIBUNAL HAS BEEN FURTHER FOLL OWED BY OUR COORDINATE BENCHES IN THE CASE OF PARMES DIAMOND EXPORTS PVT. LTD. AND FLAWLESS DIAMONDS PVT. LTD. (SUPRA) . CONSIDERED IN THIS LIGHT, IN OUR VIEW, THE CIT(A) MADE NO MISTAKE IN HOLDING THAT TH E ACTIVITY OF CUTTING AND POLISHING OF DIAMONDS AMOUNTS TO MANUFACTURE SO AS TO ENABLE THE ASSESSEE TO CLAIM ADDITIONAL DEPRECIATION U/S 32(1) (IIA) OF THE ACT. THUS, ON THIS ASPECT ALSO, REVENUE FAILS. 20. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH NOVEMBER, 2016. SD/- SD/- SD/-/- SD/-D/- (AMARJIT SINGH) JUDICIAL MEMBER (G.S. PANNU) ACCOUNTANT MEMBER MUMBAI, DATE : 30TH NOVEMBER, 2016 * SSL * COPY TO : 1) THE APPELLANT 2) THE RESPONDENT 3) THE CIT(A) CONCERNED 4) THE CIT CONCERNED 5) THE D.R, L BENCH, MUMBAI 6) GUARD FILE BY ORDER DY./ASSTT. REGISTRAR