Citicorp Overseas Software Ltd. (Formerly M/s.Orbitech Ltd.), V. JCIT Range 1,

ITA 4744/MUM/2004

• Counselvise Citation: 474419914 RSA 2004
• Duration Of Justice: 6 year(s) 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 23-05-2011
• Assessment Year: 1999-2000
• Appeal Filed On: 08-06-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JI TENDRA YADAV
• Assessee Lawyers: K K LALKAKA
• Keywords: Double taxation relief; Deemed to accrue or arise in india; Advance ruling
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH L, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI RAJENDRA SIN GH (A.M) ITA NO.4744/MUM/04(A.Y. 1999-2000) M/S. ORBITECH LTD., (FORMERLY CITICORP OVERSEAS SOFTWARE LTD.) 133/SDF 5, SEEPZ, ANDHERI(E), MUMBAI 400 096 PAN:AAACC5736G (APPELLANT ) VS. JT. C.I.T, RG.1, AAYKAR BHAVAN, MK ROAD, MUMBAI 20. (RESPONDENT) APPELLANT BY : SHRI K.K.LALKAKA RESPONDENT BY : SHRI JITENDRA YADAV ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 31/3/2004 OF CIT(A)VIII, MUMBAI RELATING TO ASSESSMENT YEAR 1 999-2000. THE GROUND NO.1 RAISED BY THE ASSESSEE READS AS FOLLOWS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS E RRED IN SUSTAINING THE ORDER OF THE ASSESSING OFFICER BY HOLDING THAT AS TAX HAD NOT BEEN DEDUTED UNDER SECTION 40(A)(I) OF THE INCOME TAX AC T ON LINK CHARGES OF RS. 79,27,017/- PAID TO NON-RESIDENT COMPANY, THE S AID EXPENDITURE IS NOT ALLOWABLE. 2. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. DURING THE PREVIOUS YEAR THE ASSESSEE INCURRED AN EXPENSE OF RS. 1,45,34,426/- ON ACCOUNT OF CONNECTION CHARGES. THE ASSESSEE AS WELL AS THE AO REFERRED TO THIS AS LINK CHARGES. THE DE TAILS OF THE LINK CHARGES PAID BY THE ASSESSEE ARE AS FOLLOWS: ITA NO.4744/MUM/04(A.Y. 1999-2000) 2 DATE OF PAYMENT PARTY NAME DESCRIPTION AMOUNT TDS DATE ON WHICH TAX WAS PAID 09.07.98 CITIBANK, SINGAPORE CITIMAIL CHGS (JAN. TO MAR 98) 1734991 305460 9.7.98 06.08.98 CITIBANK , SINGAPORE CITIMAIL CHGS (APR TO JUNE 98) 1559759 277170 6.8.98 30.12.98 CITIBANK SINGAPORE LINK CHGS. (JULY- AUG 98) COST- PROJECT LINK 553700 30.12.98 CITIBANK SINGAPORE SINGAPORE- MUMBAI , LINK CHGS (JULY-AU 98) 407417 30.12.98 CITIBANK SINGAPORE CITIMAIL LINK CHGS (JULY-SEPT. 98) 3312660 500760 30.12.98 31.03.99 ACCRUALS FOR MARCH, 1999 HP OPEN MAIL CHARGES- YEAR END ACCRUAL**** 1000000 31.03.99 ACCRUALS FOR MARCH, 1999 CC MAIL CHARGES 1946788 1,28,41,497 COMMUNICATION CHARGES (FCY) HYDERABAD 30.06.98 CITIBANK SINGAPORE LINK CHARGES (APRIL TO JUNE 1998)***** 417956 31.12.98 CITIBANK SINGAPORE LINK CHARGES (JULY TO DEC 1998)***** 850714 31.03.98 ACCRUALS FOR MARCH, 1998 LINK CHARGES 424258 16,92,928 TOTAL (RS.12841498 + 1692928) 14534426 3. THE ABOVE PAYMENT WAS MADE BY THE ASSESSEE FOR U SE OF AIR TIME FROM CITICORP GLOBAL TECHNOLOGY INFRASTRUCTURE, HEREINAF TER REFERRED TO AS CGTI FOR SATELLITE SERVICES PROVIDED OUTSIDE INDIA. IN A NO TE ANNEXED TO THE ABOVE STATEMENT, THE ASSESSEE SAID THAT THE PAYMENT BY TH E ASSESSEE TO CGTI WHO IS A NON-RESIDENT WAS NOT TAXABLE IN INDIA BECAUSE LINK CHARGES REPRESENT SERVICE ENTIRELY RENDERED OUTSIDE INDIA. THE ASSES SEE FURTHER EXPLAINED THAT VSNL LINK IS USED UPTO THE INDIA TERRITORY AND THER EAFTER THE LINK SERVICE IS PROVIDED BY CITIBANK GLOBAL TECHNOLOGY INFRASTRUCTU RE [CGTI]. HENCE NO INCOME ACCRUES TO CGTI IN INDIA. THE ASSESSEE CLAI MED THE AFORESAID EXPENSE AS A DEDUCTION WHILE COMPUTING ITS TOTAL IN COME. ACCORDING TO THE ITA NO.4744/MUM/04(A.Y. 1999-2000) 3 AO THE LINK CHARGES PAID BY THE ASSESSEE WAS IN THE NATURE OF FEES FOR TECHNICAL SERVICES AND, THEREFORE, THE ASSESSEE OUG HT TO HAVE DEDUCTED TAX AT SOURCE BEFORE MAKING PAYMENTS. IN VIEW OF THE PROV ISIONS OF SEC.40(A)(I) OF THE INCOME TAX ACT, 1961 (THE ACT), THE AO WAS OF T HE VIEW THAT THE AMOUNT CLAIMED AS DEDUCTION CANNOT BE ALLOWED BECAUSE OF N ON DEDUCTION OF TAX AT SOURCE BY THE ASSESSEE AS REQUIRED IN LAW. 4. THE ASSESSEE EXPLAINED THAT IT HAS ITS OWN INFR ASTRUCTURE IN TERMS OF PROCESSORS/RELATED COMPUTER EQUIPMENT, LEASED CIRCU ITS AND SO ON. IT ONLY AVAILS OF THE USE OF AIR TIME FROM CGTI FOR SATELLI TE SERVICES PROVIDED OUTSIDE INDIA. CGTI INTER ALIA, HAS A GLOBAL CENTRAL PURCH ASING UNIT (CPU) IN USA WHERE CGTI HAS INSTALLED SEVERAL MAINFRAMES OTHER E QUIPMENT FOR OPERATING VARIOUS GROUP SYSTEMS/APPLICATIONS AND STORING DATA . THESE FACILITIES HAVE BEEN ACCESSED BY VARIOUS SUBSIDIES/AFFILIATES LOCAT ED IN DIFFERENT PARTS OF THE WORLD. THE CPU IN USA OR CGTI IS ACCESSED AND USED BY VARIOUS CITIBANK UNITS LOCATED THROUGH A CONSOLIDATED DATA NET WORK (CDN) MAINTAINED OUTSIDE INDIA BY OUR CLIENT. THE CDN OF THE ASSESS EE COMPRISES EQUIPMENT EITHER OWNED BY IT OR TAKEN ON LEASE. CGTI ALLOWS ACCESS TO THE USE OF CPU/CDN TO THE ASSESSEE WHO IS ONE OF ITS CUSTOMERS FOR SUCH USE. THE CPU IS ACCESSED BY THE ASSESSEE BY LINKING UP WITH DEDICATED INTERNATIONAL LEASED CIRCUITS LINES OF VSNL. VSNL THEN MAKES U SE OF CGTIS NET WORK TO TRANSMIT THE INFORMATION TO USA. CGTI IS LOCATED OU TSIDE INDIA AND THE ASSESSEE PAYS CHARGES BY WAY OF REMITTING FOREIGN E XCHANGE WHICH ARE RECEIVED BY CGTI OUTSIDE INDIA. ACCORDING TO THE A SSESSEE IT IS NOT CONNECTED WITH CGTI SINCE IT IS OPERATING AS A SEPA RATE BUSINESS ENTITY IN SEEPZ ZONE IN INDIA. 5. THE ASSESSEE CONTENDED THAT THE TERM FEES FOR TECHNICAL SERVICES (FTS)IS REQUIRED TO BE UNDERSTOOD IN THE CONTEXT IN WHICH IT IS USED. IT COULD ONLY BE MEAN TO COVER SUCH THINGS TECHNICAL AS ARE CAPABLE OF BEING PROVIDED BY WAY OF SERVICE FOR A FEE. THE POPULAR MEANING A SSOCIATED WITH TECHNICAL ITA NO.4744/MUM/04(A.Y. 1999-2000) 4 IS INVOLVING OR CONCERNING APPLIED AND INDUSTRIAL S CIENCE. THE ASSESSEE SUBMITTED THAT ANY CONSTRUCTION OF THE PROVISIONS O F THE ACT MUST BE IN THE BACKGROUND OF THE REALITIES OF DAY-TO-DAY LIFE IN W HICH THE PRODUCTS OF TECHNOLOGY PLAY AN IMPORTANT ROLE IN MAKING LIFE SM OOTHER AND MORE CONVENIENT. SECTION 194J AS ALSO EXPLANATION 2 IN SECTION 9(1)(VII) WERE NOT INTENDED TO COVER THE CHARGES PAID BY THE AVERAGE H OUSE-HOLDER OR CONSUMER FOR UTILIZING THE PRODUCTS OF MODERN TECHNOLOGY SUC H AS, USE OF THE TELEPHONE, FIXED OR MOBILE, THE CABLE TV, THE INTER NET, THE AUTOMOBILE, THE RAILWAY, THE AEROPLANE, CONSUMPTION OF ELECTRICAL E NERGY, ETC. SUCH FACILITIES WHICH WHEN USED BY INDIVIDUALS ARE NOT CAPABLE OF B EING REGARDED AS TECHNICAL SERVICE, CANNOT BECOME SO WHEN USED BY FI RMS AND COMPANIES. THE FACILITY REMAINS THE SAME WHOEVER THE SUBSCRIBE R MAY BE INDIVIDUAL FIRM OR COMPANY. THE ASSESSEE ALSO ARGUED THAT TECHNICA L SERVICE REFERRED TO IN SECTION 9(1)(VII) CONTEMPLATES RENDERING OF A SERV ICE TO THE PAYER OF THE FEE. MERE COLLECTION OF A FEE FOR USE OF A STANDARD FA CILITY PROVIDED TO ALL THOSE WILLING TO PAY FOR IT DOES NOT AMOUNT TO THE FEE HA VING BEEN RECEIVED FOR TECHNICAL SERVICES. RELIANCE WAS PLACED BY THE ASS ESSEE ON THE DECISION OF MADRAS HIGH COURT IN THE CASE OF SKYCELL COMMUNICAT IONS LTD. REPORTED IN 192 TAXMAN 496 IN SUPPORT OF OUR CLIENTS CASE. TH E ASSESSEE THUS SUBMITTED THAT LINK CHARGES CANNOT BE EQUATED WITH FEES PAID FOR TECHNICAL SERVICES WITHIN THE MEANING OF SECTION 9(1)(VII) OF THE INCOME TAX ACT AND THEREFORE, THERE IS NO LEGAL OBLIGATION TO DEDUCT T AX AT SOURCE. 6. THE AO HOWEVER WAS OF THE VIEW THAT THE ASSES SEE WAS IN INDIA AND WAS USING THE SERVICES PROVIDED BY THE NON-RESIDENT . NO DOUBT THE ASSESEE WAS TRANSMITTING DATA USING NON-RESIDENTS SATELLITE LINK. ALTHOUGH THE VARIOUS TRANSMISSION RECEIVERS AND THE NON-RESIDENT AND SATELLITE ARE NOT LOCATED WITHIN INDIA, HOWEVER, THE SATELLITE IS BEA MING SIGNALS AND RECEIVING SIGNALS FROM WITHIN THE TERRITORY OF INDIA AND, TH EREFORE, THE SERVICES ARE PROVIDED IN INDIA. THE AO ALSO RELIED ON THE FAC T THAT IN RESPECT OF SIMILAR PAYMENT GIVEN IN THE CHART EARLIER, THE ASSESSEE HA D ITSELF DEDUCTED TAX AT ITA NO.4744/MUM/04(A.Y. 1999-2000) 5 SOURCE IN RESPECT OF SOME OF THE PAYMENTS. THE AO ALSO HELD THAT THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CA SE OF SKYCELL COMMUNICATION LTD. (SUPRA) WILL NOT BE APPLICABLE B ECAUSE THE ASSESSEE WAS USING VERY SOPHISTICATED TECHNOLOGY SERVICE. 7. ON APPEAL BY THE ASSESSEE THE CIT(A) REFERRED TO THE DECISION OF THE HONBLE AUTHORITY FOR ADVANCE RULING (AAR), 238 ITR 296 (AAR), WHEREIN UNDER SIMILAR CIRCUMSTANCES SERVICES RENDERED WERE HELD TO BE TAXABLE. THE ASSESSEE HOWEVER, TOOK A STAND BEFORE THE CIT(A) TH AT ITS FACTS ARE DISTINGUISHABLE FROM THE FACTS AS IT PREVAILED BEFO RE THE AAR. THE CIT(A) HOWEVER HELD AS FOLLOWS: 8. THE SUBMISSION MADE BY THE APPELLANTS REPRESE NTATIVE HAS BEEN CONSIDERED. HIS CLAIM THAT THE RATIO OF THE DECISI ON OF THE AAR IS NOT APPLICABLE IN THE INSTANT CASE IS NOT BORNE OUT FRO M THE FACTS OF THE CASE. IT IS EVIDENT FROM THE SERVICE AGREEMENT THA T THE APPELLANT COMPANY HAD ENTERED INTO IN TERMS OF WHICH SERVICE HAVE BEEN PROVIDED BY THE CITICORPS GLOBAL TECHNOLOGY INFRAST RUCTURE FOR WHICH THE PAYMENT HAS BEEN MADE, THE SERVICE ENUMERATED I N EXHIBIT A OF THE AGREEMENT CLEARLY PROVIDES THAT THE CMAP HELPLI NE IS TO ADMINISTER THE ADDITIONS AND DELETIONS OF MAIL BOXES AND MAINT ENANCE OF GLOBAL DISTRIBUTION LISTS. MESSAGES ARE TO BE STORED IN T HE CHRONO FILES AND ARE TO BE RETAINED FOR 10 DAYS. THIS STORED MESSAG ES ARE TO BE PURGED ON A REGULAR BASIS. 9. THIS SERVICE ENUMERATED IN THE EXHIBIT CLEARLY SHOW THAT IT IS NOT MERE CELLULAR SERVICE IN THE CONTEXT OF WHICH THE D ECISION IN THE CASE OF SKYCELL COMMUNICATION LTD. (SUPRA) WAS PRONOUNCED. THE APPELLANT COMPANY IN THE INSTANT CASE IS MAKING PAYMENT NOT O NLY FOR THE USE OF EQUIPMENT BUT FOR THE USE OF PROTECTED SOFTWARE WHI CH THE US BASED COMPANY IS ALLOWING IT TO USE FOR THE PURPOSE OF BU SINESS. THEREFORE, IN THE LIGHT OF THE DECISION OF THE AUTHORITY OF AD VANCE RULING AS DISCUSSED ABOVE, THE SUM PAID TO THE FOREIGN COMPAN Y IS REQUIRED TO BE HELD AS ROYALTY PAYABLE TAXABLE IN INDIA UNDER A RTICLE 12(3)(A) OF THE DTAA BETWEEN INDIA AND USA. EVEN THE APPELLANT FOR SIMILAR SERVICES PROVIDED BY THE SAID COMPANY IS DEDUCTING TAX AT SO URCE PRIOR TO MAKING THE REMITTANCE. HENCE HAVING NOT DEDUCTED T HE TAX AT SOURCE IN TERMS OF SECTION 195(1) OF THE ACT, THE AMOUNT O F LINK CHARGES IS REQUIRED TO BE HELD AS INADMISSIBLE FOR DEDUCTION I N TERMS OF THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT. THE ACT ION OF THE ASSESSING ITA NO.4744/MUM/04(A.Y. 1999-2000) 6 OFFICER IN THIS REGARD IS THEREFORE UPHELD AND DISA LLOWANCE MADE IS SUSTAINED. APPEAL IN RESPECT OF GROUND NO.1 IS THU S DISPOSED OFF AS DISMISSED. 8. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESSE E RAISED GROUND NO.1 BEFORE THE TRIBUNAL. 9. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE LD. D.R. IN CASES SUCH AS THE PRESENT ONE IT IS VERY IMPORTANT TO UNDERSTAND THE NATURE OF SERVICES RENDERED TO DECID E WHETHER THE SAME ARE TAXABLE OR NOT. THE AO PROCEEDED ON THE BASIS THAT THE PAYMENT BY THE ASSESSEE TO CGTI WAS FEES FOR TECHNICAL SERVICES RENDERED. THE CIT(A) HOWEVER PROCEEDED ON THE BASIS THAT THE PAYMENT BY THE ASSESSEE TO CGTI WAS ROYALTY. DIFFERENT PARAMETERS APPLY TO CONSI DER A PAYMENT AS FEES FOR TECHNICAL SERVICES OR ROYALTY. IN THIS REGA RD WE FIND THAT IN THE AGREEMENT BETWEEN ASSESSEE AND CGTI DATED 1/1/1997 IN EXHIBIT A TO THE AGREEMENT IT HAS BEEN PROVIDED AS FOLLOWS: CITIMAIL / CCMAIL 1. SERVICE PROVISIONS - THESE ARE PRIVATE ELECTRONIC MAIL SERVICES PROVIDED BY CITIBANK. 2. SERVICE HOURS - THE SERVICE IS AVAILABLE 24 HOURS A DAY, 7 DAYS A WEEK, WITH THE EXCEPTION OF SCHEDULED DOWN TIME FOR WEEKLY HOUSEKEEPING BETWEEN 2000 GMT SATURDAY TO 0359 GMT SUNDAY. 3. SERVICE SUPPORT - THE TELEPHONE NUMBER FOR THE CM AO HELPLINE IS [phone]. HELPLINE SERVICE IS AVAILABLE FRO M MONDAYS THROUGH FRIDAYS FROM 9.00 AM TO 6.00 PM.(SINGAPORE TIME). THE CMAP HELPLINE ALSO ADMINISTERS ADDITIONS AND DE LETIONS FOR MAILBOXES AND MAINTAINS GLOBAL DISTRIBUTION LISTS. ITA NO.4744/MUM/04(A.Y. 1999-2000) 7 MESSAGES STORED IN THE CHRONO FILE ARE RETAINED FOR 10 DAYS. THESE STORED MESSAGES ARE PURGED ON A REGULAR BASIS. THE SYSTEM WILL BE BROUGHT DOWN FOR HOUSEKEEPING BETWEEN 200 GMT SA TURDAY TO 0359 GMT SUNDAY. 4. CHARGES- THE FOLLOWRING CHARGES ARE CHARGED QUARTE RLY AT COST +10%. FEE COMPONENT CITIMAIL CCMAIL SUBSCRIPTION PER MAIL BOX US$ 400 PER ANNUM US$300 PER ANNUM STORAGE NO CHARGES FOR THE FIRST 500 MESSAGE STORED. US $0.50 PER MONTH PER MESSAGE FOR STORED MESSAGES IN EXCESS OF 500 US$ 60/MB OVER 8 MB DISTRIBUTION LIST 01-50 MEMBERS : US$100(ONE TIME CREATION FEE) US$100 (ANNUAL MAINTENANCE FEE) 51-300 MEMBERS: US$200(ONE TIME CREATION FEE) US$ 200 (ANNUAL MAINTENANCE FEE) US$ 204/LIST BULLETIN BOARD ALL POINTS BULLETIN US$300 PER ANNUM US$1000/BULLETIN INSTALLATION (ONE TIME CHARGE) LAN MAILBOX US$150 MOBILE MAILBOX US$200 10. IT CAN BE SEEN FROM THE ABOVE THAT THE NATURE OF SERVICES TO BE PROVIDED AND THE MANNER IN WHICH IT IS TO BE PROVIDED CANNOT BE EASILY ASCERTAINED. THE RELIANCE PLACED BY THE LEARNED CIT(A) ON THE DE CISION OF THE HONBLE AAR IN THE CASE OF P.NO.30(SUPRA) HAS TO BE EXAMINED IN THE LIGHT OF THE SERVICES AND THE MANNER IN WHICH THOSE SERVICES ARE RENDERED BY CGIT TO THE ASSESSEE. WITHOUT SUCH ANALYSIS IT IS NOT POSSIBLE TO CONCLUDE THAT THE PAYMENT BY THE ASSESSEE TO CGIT IS ROYALTY. IN T HIS REGARD WE ALSO NOTICE THAT THE LD. COUNSEL FOR THE ASSESSEE HAD PLACED VE RY STRONG RELIANCE ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF ASIA SATELLITE TELECOMMUNICATIONS CO. LTD. VS. DIT 332 ITR 340 (DE L) WHEREIN IT WAS HELD THAT WHERE TRANSPONDER IS ALLOWED TO BE USED FOR TR ANSMITTING SIGNALS, IT ITA NO.4744/MUM/04(A.Y. 1999-2000) 8 WOULD NOT AMOUNT TO ALLOWING RIGHT TO USE PROCESS. THE LD. D.R ON THE OTHER HAND PLACED VERY STRONG RELIANCE ON THE DECISION OF THE AAR IN THE CASE OF P.NO.30 (SUPRA). THE CIT(A) IN COMING TO THE ABOVE CONCLUSION HAS NOT EVEN EXAMINED AS TO WHETHER THEIR EXISTS ANY AGREEMENT F OR AVOIDANCE OF DOUBLE TAXATION AND AS TO HOW THE NON-RESIDENT IS STILL LI ABLE TO TAX UNDER THOSE PROVISIONS. EXPLNATION-2 TO SEC. 9(1)(VI) OF THE ACT DEFINES ROYALTY AS FOLLOWS: SEC.9 INCOME DEEMED TO ACCRUE OR ARISE IN INDIA.--( 1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA (VI) INCOME BY WAY OF ROYALTY. EXPLANATION 2.--FOR THE PURPOSES OF THIS CLAUSE, 'R OYALTY' MEANS CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDE RATION BUT EXCLUDING ANY CONSIDERATION WHICH WOULD BE THE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD 'CAPITAL GA INS') FOR-- (I) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING TH E GRANTING OF A LICENCE) IN RESPECT OF A PATENT, INVENTION, MO DEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; (II) THE IMPARTING OF ANY INFORMATION CONCERNING TH E WORKING OF, OR THE USE OF, A PATENT, INVENTION, MOD EL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; (III) THE USE OF ANY PATENT, INVENTION, MODEL, DESI GN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERT Y ; (IV) THE IMPARTING OF ANY INFORMATION CONCERNING TE CHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXP ERIENCE OR SKILL; (V) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING TH E GRANTING OF A LICENCE) IN RESPECT OF ANY COPYRIGHT, LITERARY , ARTISTIC OR SCIENTIFIC WORK INCLUDING FILMS OR VIDEO TAPES FOR USE IN CONNECTION WITH TELEVISION OR TAPES FOR USE IN CONN ECTION WITH RADIO BROADCASTING, BUT NOT INCLUDING CONSIDER ATION FOR THE SALE, DISTRIBUTION OR EXHIBITION OF CINEMAT OGRAPHIC FILMS ; OR ITA NO.4744/MUM/04(A.Y. 1999-2000) 9 (VI) THE RENDERING OF ANY SERVICES IN CONNECTION WI TH THE ACTIVITIES REFERRED TO IN SUB-CLAUSES (I) TO (V) ; (IVA) THE USE OR RIGHT TO USE, ANY INDUSTRIAL, COMM ERCIAL OR SCIENTIFIC EQUIPMENT BUT NOT INCLUDING THE AMOUNTS REFERRED TO IN SECTION 44BB ; EXPLANATION.FOR THE REMOVAL OF DOUBTS, IT IS HEREB Y DECLARED THAT INCOME OF THE NATURE REFERRED TO IN T HIS CLAUSE PAYABLE FOR SERVICE RENDERED IN INDIA SHALL BE REGARDED AS INCOME EARNED IN INDIA ; EXPLANATION. FOR THE REMOVAL OF DOUBTS, IT IS HERE BY DECLARED THAT FOR THE PURPOSES OF THIS SECTION, INC OME OF A NON-RESIDENT SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLAUSE (V) OR CLAUSE (VI) OR CLAUSE (VII) OF SUB-SECTION (1) AND SHALL BE INCLUDED IN THE TOTAL INCOME OF TH E NON- RESIDENT, WHETHER OR NOT,(I) THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTI ON IN INDIA ; OR(II) THE NON-RESIDENT HAS RENDERED SERVIC ES IN INDIA. 11. UNDER WHICH CLAUSE OF THE DEFINITION OF ROYALT Y DOES NOT THE PAYMENT BY THE ASSESSEE FALL HAS ALSO NOT BEEN SPELT OUT. THE FACTS OF THE CASE IN THE RULING IN P.NO.30 (SUPRA) BY THE AAR WAS THAT THE APPLICANT BEFORE THE AAR, Y, A COMPANY FORMED AND INCORPORATED IN THE U.S.A. AND BELONGING TO A GROUP OF COMPANIES WHICH OPERATE IN THE WORLDWIDE C REDIT CARD AND TRAVEL BUSINESS. IT WAS ENGAGED IN PROVIDING INTERNATIONAL CREDIT CARDS, TRAVELLERS' CHEQUES AND OTHER TRAVEL RELATED SERVICES. THESE IN STRUMENTS ARE USED, DISCOUNTED AND ENCASHED ALL OVER THE WORLD BY TRAVE LLERS ON TOUR OR BUSINESS. TO KEEP TRACK OF THE EXPENSES INCURRED ON A TRAVELL ERS' CREDIT CARD OR PURCHASE AND ENCASHMENT OF TRAVELLERS' CHEQUES, ETC ., Y MAINTAINS A CENTRALISED COMPUTER IN THE USA. THE CENTRALISED CO MPUTER OR THE CENTRAL PROCESSING UNIT (CPU) IS A HUGE HIGH TECHNOLOGY COM PUTER COMPLEX HAVING 15 TO 20 MAINFRAME IBM COMPUTERS AND OTHER RELATED HARDWARE AND SOFTWARE FACILITIES INVOLVING SUBSTANTIAL INVESTMENT AND CAP ABLE OF VERY HIGH VOLUME STORAGE AND HIGH SPEED PROCESSING OF DATA. THIS CEN TRAL PROCESSING UNIT WAS ITA NO.4744/MUM/04(A.Y. 1999-2000) 10 ACCESSED AND USED BY VARIOUS GROUP ENTITIES LOCATED WORLDWIDE THROUGH A CONSOLIDATED DATA NETWORK MAINTAINED IN HONG KONG. THE TRANSACTIONS DONE BY A TRAVELLER IN A PARTICULAR COUNTRY WERE REPORTE D TO A CENTRALISED COMPUTER IN THAT COUNTRY. IN INDIA, THIS IS DONE BY XT, LOCA TED AT DELHI. THE SAID INDIAN COMPANY XT RECEIVED INFORMATION ON COMPUTER THROUGH TELEPHONIC AND MICROWAVE LINKS ABOUT THE USE OF CREDIT CARDS A ND TRAVELLERS' CHEQUES BY TRAVELLERS ALL OVER THE COUNTRY. XT ALSO SERVICED T HIRTEEN GROUP COMPANIES IN ASIA AND THE PACIFIC, IN A SIMILAR MANNER. THE INFO RMATION WAS THEN PASSED ON TO THE HONG KONG COMPUTER CENTRE OF THE APPLICAN T. FOR CARRYING OUT THIS OPERATION, XT OBTAINED LEASED LINES FROM VSNL. THE APPLICANT-COMPANY, Y CHARGED XT, THE INDIAN COMPANY, FOR THE USE OF ITS COMPUTER SET UP IN HONG KONG AND THAT IN THE USA. XT, THE INDIAN COMPANY, I S A SUB-SUBSIDIARY OF THE APPLICANT. ON THESE FACTS, THE APPLICANT SOUGHT AN ADVANCE RULING ON THE QUESTIONS WHETHER PAYMENT DUE TO THE APPLICANT UNDE R THE TRANSACTIONS WITH XT WAS LIABLE TO TAX IN INDIA AND, IF SO, WHETHER T HE PAYMENT DUE TO THE APPLICANT UNDER THE TRANSACTIONS WAS COVERED UNDER ARTICLE 12(3)(A) OR ARTICLE 12(3)(B) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND THE USA. THE AUTHORITY RULED: (I) THAT THE DEFINITION OF THE EXPRESSION 'ROYALTY' UNDER SECTION 9(1)(VI) OF THE INCOME-TAX ACT, 1961, READ WITH ITS EXPLANAT ION 2(VI), INCLUDED RENDERING OF ANY SERVICES IN CONNECTION WITH ANY AC TIVITIES FOR THE USE OF ANY PATENT, INVENTION, SECRET FORMULA OR PROCESS , ETC. HENCE THE TRANSMISSION OF INFORMATION IS THROUGH ENCRYPTION A S THE DATA RELATED TO CLIENTS AND STRICT CONFIDENTIALITY IS OBSERVED. IT IS FOR THE DOWNLOADING OF THE SOFTWARE THAT THE ROYALTY IS PAI D. IN THIS CONTEXT, THE SOURCE RULE BECOMES RELEVANT WHICH REQUIRES THA T THE ROYALTY IS SOURCED IN THE STATE OF PAYER. THE ROYALTY IS, THER EFORE, TAXABLE IN INDIA. (II) THAT ACCORDING TO THE AGREEMENT BETWEEN THE AP PLICANT AND THE INDIAN COMPANY, THE FACILITIES ARE TO BE ACCESSED O NLY BY XT. THE CONSIDERATION PAYABLE IS FOR THE SPECIFIC PROGRAMME THROUGH WHICH XT IS ABLE TO CATER TO THE NEEDS OF THE GROUP COMPANIE S LOCATED IN JAPAN, ASIA PACIFIC, AUSTRALIA AND NEW ZEALAND. THE TRANSA CTION WOULD RELATE TO A 'SCIENTIFIC WORK' AND WOULD PARTAKE OF THE CHA RACTER OF INTELLECTUAL PROPERTY. THE PAYMENTS RECEIVED IN SUCH TRANSACTION S ARE FOR THE USE ITA NO.4744/MUM/04(A.Y. 1999-2000) 11 OF INTELLECTUAL PROPERTY AND PARTAKE OF THE CHARACT ER OF ROYALTY. THE SOFTWARE IS CUSTOMISED AND SECRET. FROM THE FACILIT IES PROVIDED BY THE APPLICANT TO THE INDIAN COMPANY, WHICH ARE IN THE N ATURE OF ONLINE, ANALYTICAL DATA PROCESSING, IT WOULD BE CLEAR THAT THE PAYMENT IS RECEIVED AS 'CONSIDERATION FOR USE OF, OR THE RIGHT TO USE... DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS...' WITHIN T HE MEANING OF THE TERM 'ROYALTIES' IN ARTICLE 12(3)(A). THE USE BY XT OF THE CENTRAL PROCESSING UNIT AND THE CONSOLIDATED DATA NETWORK O F THE APPLICANT IS NOT MERELY 'USE OF OR THE RIGHT TO USE ANY INDUSTRI AL, COMMERCIAL OR SCIENTIFIC EQUIPMENT', AS ENVISAGED IN ARTICLE 12(3 )(B) OF THE DTAA BUT MORE THAN THAT. FROM THE TRANSACTIONS OF THE APPLIC ANT WITH THE INDIAN COMPANY IT IS QUITE CLEAR THAT THE CENTRAL PROCESSI NG UNIT/CONSOLIDATED DATA NETWORK OF THE APPLICANT ARE MODERN TECHNOLOGI CAL DESIGNS OR MODELS INVOLVING CUSTOMISED COMMUNICATION AND COMPU TATION WITH APPLICATION OF SOPHISTICATED INFORMATION-TECHNOLOGY REQUIRING CONSTANT UPKEEP AND UPDATING SO AS TO MEET THE CHALLENGE OF THE ADVANCE OF TECHNOLOGY IN THIS AREA. IT IS THE USE OF EMBEDDED SECRET SOFTWARE (AN ENCRYPTION PRODUCT) DEVELOPED BY THE APPLICANT FOR THE PURPOSE OF PROCESSING RAW DATA TRANSMITTED BY XT WHICH WOULD C LEARLY FALL WITHIN THE AMBIT OF ARTICLE 12(3)(A) OF THE DOUBLE TAXATIO N AVOIDANCE AGREEMENT BETWEEN INDIA AND THE U.S.A. IT CAN BE SEEN FROM THE DECIDED CASE LAWS REFERRED TO ABOVE THAT THE MANNER IN WHICH THE SERVICES ARE RENDERED WILL VERY CRUCIA L. IN THE AFORESAID CASE THE ASSESSEE HAD A RIGHT TO ACCESS SENSITIVE AND COMMER CIAL INFORMATION FROM THE MAINFRAME. IN THE PRESENT CASE, THE ASSESSEE W AS USING THE COMMUNICATION FACILITIES ONLY TO COMMUNICATE. AS T O WHETHER THAT WOULD AMOUNT TO USE OF EQUIPMENT AND THE PAYMENT CAN BE S AID TO BE ROYALTY HAS TO BE EXAMINED. 12. IN THE CASE OF ASIA SATELLITE TELECOMMUNICAT ION CO. LTD. (SUPRA), THE FACTS WERE, ASIA SAT, REGISTERED IN HONG KONG, DERI VED INCOME FROM LEASING TRANSPONDER CAPACITY ON THE SATELLITES, OWNED AND O PERATED BY IT, TO VARIOUS CUSTOMERS TO ENABLE THEM TO RELAY (IE UPLINK AND DO WNLINK) THEIR SIGNALS IN INDIAN AND NON-INDIAN TERRITORIES. TO PROVIDE THES E TRANSMISSION SERVICES, ASIA SAT USED ITS OWN ASSETS AND INFRASTRUCTURE COM PRISING THE SATELLITE AND CONTROL CENTRE, WHICH ARE LOCATED OUTSIDE INDIA. T HE ASSETS AND THE PROCESSES EMBEDDED IN THEM ARE CONTROLLED, OPERATED AND MAINTAINED BY ITA NO.4744/MUM/04(A.Y. 1999-2000) 12 ASIA SAT. ASIA SAT DID NOT EXERCISE ANY CONTROL OVE R THE SIGNALS UPLINKED/DOWNLINKED BY ITS CUSTOMERS. ASIA SAT CLAI MED IT WAS NOT SUBJECT TO TAX IN INDIA. THE REVENUE HELD THAT THE FEE REC EIVED BY ASIA SAT FROM PERSONS USING TRANSPONDER WAS ROYALTY UNDER SECTION 9(1)(VI) OF THE ACT AND WAS TAXABLE AS ROYALTIES UNDER THE ACT. ON APPEAL, THE ITAT UPHELD THE CLAIM OF THE REVENUE IN THIS REGARD. ON FURTHER AP PEAL BY THE ASSESSEE, THE HONBLE DELHI HIGH COURT HELD THAT THE MEANING OF T HE TERM PROCESS BEING A SERIES OF ACTIONS OR STEPS TAKEN IN ORDER TO ACHIEV E A PARTICULAR END, IN THE PRESENT CASE IT IS EVIDENT THAT THE PARTICULAR END IE VIEWERSHIP WAS ACHIEVED ONLY THROUGH A SERIES OF STEPS TAKEN BY RECEIVING T HE UPLINKED SIGNALS, AMPLIFYING THEM AND RELAYING THEM AFTER CHANGING TH E FREQUENCY IN THE FOOTPRINT AREA INCLUDING INDIA. THE APPLICABILITY O F THE PROVISIONS OF SECTION 9(1)(VI) OF THE ACT, WOULD DEPEND ON NATURE OF SERV ICES PROVIDED BY ASIA SAT TO ITS CUSTOMERS AS PER THE AGREEMENT EXECUTED BETWEEN THEM. THE SUBSTANCE OF THE AGREEMENT BETWEEN ASIA SAT AND ITS CUSTOMERS IS THE PROVISION OF BROADBAND CAPACITY AVAILABLE ON THE TRANSPONDER BY ASIA SAT AND NOT THE RIGHT TO USE ANY PROCESS EMBEDDED THEREIN. THE DATA SENT BY THE CUSTOMERS DOES NOT UNDERGO ANY CHANGE FOR IMPROVEMENT THROUGH THE MEDIA OF THE TRANSPONDER. THUS THE REVENUES EARNED BY ASIA SAT C ANNOT BE ON ACCOUNT OF PROVIDING ITS CUSTOMERS A RIGHT TO USE A PROCESS OR EQUIPMENT AS THE ULTIMATE CONTROL ON THE PROCESS AND EQUIPMENT RESIDES WITH A SIA SAT. THE HIGH COURT HAS CATEGORICALLY STATED THAT IN ITS VIEW, ASIA SAT S CUSTOMERS DO NOT MAKE A PAYMENT FOR THE USE OF A PROCESS. THE TRANSPONDER I S AN INSEVERABLE PART OF THE SATELLITE AND CANNOT FUNCTION WITHOUT THE CONTI NUOUS SUPPORT OF VARIOUS SYSTEMS AND COMPONENTS OF THE SATELLITE. CONSEQUENT LY IT IS INCORRECT TO ASSUME THAT A TRANSPONDER IS A SELF-CONTAINED UNIT, THE CONTROL AND CONSTRUCTIVE POSSESSION OF WHICH CAN BE HANDED OVER BY THE SATELLITE OPERATOR TO THE CUSTOMER. ASIA SAT WAS THE OPERATOR OF THE SATELLITES AND CONTINUED TO BE IN CONTROL OF THE SATELLITES AND HA D NOT LEASED THE SATELLITE TO ITS CUSTOMERS. ITA NO.4744/MUM/04(A.Y. 1999-2000) 13 13. THE LEARNED COUNSEL FOR THE APPELLANT POINTING OUT TO THE ABOVE DECISION OF THE HONBLE DELHI HIGH COURT SUBMITTED THAT IN T HE CASE OF APPELLANT, THE APPELLANT HAD NO RIGHT TO USE THE MAINFRAME. HE H IGHLIGHTED THE FACT THAT THE ULTIMATE CONTROL OF THE MAINFRAME COMPUTER LIES WITH SPL AT SINGAPORE AND THE FACT THAT THE SUBSTANCE OF THE AGREEMENT WA S THE USE OF CAPACITY OF MAINFRAME COMPUTER OF SPL. THUS THERE WAS NO RIGHT TO USE A PROCESS. 14. WE HAVE ALREADY OBSERVED THE MANNER IN WHICH T HE SERVICES ARE PROVIDED TO THE ASSESSEE WILL HAVE TO BE EXAMINED IN THE LIG HT OF DEFINITION OF FTS AS GIVEN IN SECTION 9(1)(VII) R.W. EXPLANATION2 OF TH E ACT. IT HAS TO BE FIRST ASCERTAINED WHETHER ANY INCOME AT ALL WAS ACCRUED T O THE NON-RESIDENT IN INDIA UNDER SECTION 9 OF THE ACT. THEREAFTER THE APPLICABILITY OF THE DTAA HAS TO BE EXAMINED AND THEN A CONCLUSION HAS TO BE ARRIVED AT AS TO WHETHER THE PAYMENT BY THE ASSESSEE TO CGIT CAN BE SAID TO BE ROYALTY. WE, THEREFORE, DEEM IT FIT AND PROPER TO SET ASIDE THE ORDER OF THE CIT(A) AND REMAND THE ISSUE FOR FRESH CONSIDERATION BY THE CIT (A). THE ASSESSEE IS DIRECTED EXPLAIN THE EXACT MANNER IN WHICH THE SERV ICES ARE RENDERED BY THE NON-RESIDENT FOR WHICH PAYMENT WAS MADE BY THE ASSE SSEE. THE CIT(A) WILL DECIDE THE ISSUE KEEPING IN MIND THE PRINCIPLE THAT EMERGES FROM SEVERAL CASES REFERRED TO IN THE EARLIER PART OF THIS ORDER . GROUND NO.1 IS THUS ALLOWED FOR STATISTICAL PURPOSES. 15. GROUND NO.2 WAS NOT PRESSED AND THE SAME IS DIS MISSED AS NOT PRESSED. 16. GROUND NO.3 RAISED BY THE ASSESSEE READS AS FO LLOWS: 3.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ER RED IN DISALLOWING INTEREST OF RS.4,37,272/- ON INCONSEQUE NTIAL AND IRRELEVANT GROUNDS. ITA NO.4744/MUM/04(A.Y. 1999-2000) 14 17. THE A.O DISALLOWED INTEREST EXPENDITURE OF RS. 4,37,272/- ON THE BASIS THAT THE ASSESSEE HAD UTILIZED THE BORROWED FUNDS IN MAKING INVESTMENTS IN SHARES, THE DIVIDEND INCOME FROM WHICH IS NOT CHARG EABLE TO TAX. THE AO IN DOING SO INVOKED THE PROVISIONS OF SECTION 14A OF T HE ACT. THE BASIS ON WHICH THE AO ARRIVED AT THE ABOVE FIGURE IS AS FOLL OWS A. INTEREST FEE FUNDS SHARE CAPITAL 20,00,00,000 RESERVES & SURPLUS 669,567,706 ----------------- TOTAL AVAILABLE FUNDS 86,95,67,706 (1) B, INTEREST BEARING FUNDS UNSECURED LOANS 1,17,24,184 ---------------- TOTAL INTEREST BEARING FUNDS 1,17,24,184 (2) C INVESTMENT, WHERE INCOME OF INVESTMENT DOES NOT FORM PART OF THE TOTAL TAXABLE INCOME QUOTED AND UNQUOTED EQUITY SHARES 38,92,06,054 (3) D. OTHER INVESTMENT OUT OF FUNDS AS AT (1) & (2) ABOVE. 88,12,91,900 - 38,92,06,054 = 49,20,85,846 (4) C: D:: 38.92:: 49.2 = 1:1.26 CONSIDERING THAT INTEREST-FREE FUNDS HAVE GONE IN B OTH INVESTMENTS AS AT (3) & (4) ABOVE IN THE SAME PROPORTION AS THE IN VESTMENT, THE EXTENT OF INTEREST-FREE FUNDS UTILIZED FOR INVESTMENT AS I N (3) ABOVE WILL BE 86.96 = 38.48 CRORES 2.26 SO INVESTMENT MADE BY THE ASSESSEE FROM INTEREST BE ARING FUNDS WILL BE: 389206054 384764472 = 44,41,583 THUS, IT IS EVIDENT THAT ASSESSEE HAS UTILIZED RS. 44,41,583 OF ITS INTEREST BEARING FUNDS FOR MAKING INVESTMENT, THE INCOME OF WHICH DOES NOT FORM PART OF THE TAXABLE INCOME OF THE ASS ESSEE. WITHOUT ITA NO.4744/MUM/04(A.Y. 1999-2000) 15 PREJUDICE TO THE ABOVE, EVEN IF THESE INVESTMENT I S NOT MADE OUT OF THE INTEREST BEARING FUNDS DURING THE YEAR, THE FACTOR OF THE ASSESSEES FUNDS LYING IN SUCH INVESTMENTS HAS TO BE SEEN FROM THE ANGLE THAT IF THE ASSESSEE HAD NOT INVESTED IN SUCH SHARES, THEN THE EQUIVALENT AMOUNTS OF FUNDS WOULD HAVE BEEN AVAILABLE WITH IT AND TO THE EXTENT ASSESSEE WOULD HAVE AVOIDED TAKING INTEREST BEARIN G LOAN OVERDRAFT AND IN CONSEQUENCE ITS INTEREST BURDEN WOULD HAVE R EDUCED. THE AVERAGE INTEREST ON THE INTEREST BEARING FUNDS OF T HE ASSESSEE IS 9.8%. SO AT THIS RATE, ASSESSEE HAS INCURRED AN EXPENDITU RE OF RS. 4,37,272/- ON THE ABOVE SAID INTEREST BEARING FUNDS . THIS AMOUNT HAS BEEN DEBITED BY THE ASSESSEE IN ITS BOOKS. SO THE SAME IS BEING DISALLOWED AS PER PROVISIONS OF SECTION 14A. 18. ON APPEAL BY THE ASSESSEE THE CIT(A) WAS OF THE VIEW THAT IN THE ABSENCE OF ANY SEPARATE CASH FLOW STATEMENT FOR THE BORROWING, IT CANNOT BE ACCEPTED THAT THE INVESTMENTS WERE MADE OUT OF INT EREST FREE CAPITAL OF THE ASSESSEE OR OUT OF THE INTERNALLY GENERATED CASH RE SOURCES. HE HELD THAT ON A PREPONDERANCE OF PROBABILITY THAT BOTH THE INTEREST -FREE CAPITAL AS WELL AS INTEREST BEARING BORROWINGS HAVE BEEN UTILIZED FOR MAKING THE INVESTMENT. HE HOWEVER HELD THAT ONLY THAT PORTION OF BORROWING S CAN BE TAKEN FOR WORKING OUT THE DISALLOWABLE AMOUNT OF INTEREST IS THE ONE THAT HAS BEEN ADVANCED AFTER THE APPELLANT HAD RAISED THE BORROWI NGS. 19. ON SUCH PREMISES, THE CIT(A) HELD THAT INTEREST AMOUNT CAN BE HELD AS DISALLOWABLE ONLY IN RESPECT OF INVESTMENT MADE IN EQUITY SHARES OF I-FLEX SOLUTIONS LTD. IN THE PAST AND ON ACCOUNT OF THE IN VESTMENT OF RS.2,08,67,666/- MADE BETWEEN 1.1.1999 TO 22.3.1999 IN THE SHARES OF CITICORP SERVICES AND INVESTMENT LTD. NO DISALLOWA NCE OF INTEREST CAN BE MADE IN REGARD TO THE INVESTMENT OF SHARES OF CITIC ORP BROKERAGE INDIA LTD. IF IT IS FOUND THAT THE INVESTMENT WAS MADE IN THE PER IOD WHEN THERE WAS NO OVERDRAWN ACCOUNT FROM THE BANK. SINCE THIS WAS A MATTER OF VERIFICATION THE ASSESSING OFFICER WAS DIRECTED TO LOOK INTO IT. ITA NO.4744/MUM/04(A.Y. 1999-2000) 16 20. WITH REGARD TO INVESTMENT MADE DURING THE ACCOU NTING YEAR IN SHARES OF CITICORP SECURITIES & INVT. LTD. AND CITICORP BR OKERAGE INDIA LTD., THE CIT(A) HELD THAT IF IT IS FOUND THAT AT THE POINT O F INVESTMENT THERE WAS OVERDRAWN ACCOUNT IN THE BANK, DISALLOWANCE OF INTE REST ON THE PRO-RATA BASIS CAN BE MADE ONLY FOR THE PERIOD WHEN THERE WA S OVERDRAFT AND NOT FOR THE ENTIRE ACCOUNTING YEAR. 21. IN RESPECT OF INVESTMENT MADE IN I-FLEX SOLUTIO NS LTD. IN THE PAST, THE DISALLOWANCE IS TO BE WORKED OUT ON PRO-RATA BASIS FOR THE WHOLE ACCOUNTING YEAR. THE CLAIM OF THE ASSESSEE THAT NO DISALLOWAN CE ON THIS ACCOUNT BE MADE CONSIDERING THAT IN THE ASSESSMENT YEAR WHEN T HE INVESTMENT WAS MADE IN THE PAST, AS THERE WAS NO SUCH DISALLOWANCE IN THE PAST WAS NOT ACCEPTED BY THE CIT(A) FOR THE REASON THAT EACH OF THE ASSESSMENT YEARS ARE INDEPENDENT AS FAR AS THE INCOME TAX PROCEEDINGS AR E CONCERNED AND THE DOCTRINE OF RES-JUDICATA IS NOT APPLICABLE IN THE S AID PROCEEDINGS. 22. THE CIT(A) ALSO HELD THAT THE EARNING OF THE DI VIDEND FROM SHARES AND ITS NON-EARNING FROM THE INVESTMENT CANNOT BE THE B ASIS FOR ALLOWABILITY OF THE DEDUCTION. HE HELD THAT WHAT IS NECESSARY FOR MAKING IS DISALLOWANCE IS THE EXPENDITURE ATTRIBUTABLE TO THE INVESTMENT PER -SE AND NOT EARNING OF THE INCOME THEREFROM. SO LONG AS THERE IS LIKELIHOOD O F THE INCOME ARISING THAT IS TO BE EXEMPT FROM TAX, RELATED EXPENSES IS REQUIRED TO BE HELD AS INADMISSIBLE FOR DEDUCTION ON ACCOUNT OF THE APPLIC ATION OF PROVISIONS OF SECTION 14A OF THE ACT. 23. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESS EE HAS RAISED GROUND NO.3 BEFORE THE TRIBUNAL. 24. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE HON BLE BOMBAY HIGH COURT IN THE CASE RELIANCE UTILITIES (SUPRA) HAS HE LD THAT ADVANCES TO SISTER CONCERNS MUST BE PRESUMED TO HAVE COME OUT OF OWN F UNDS AND NOT ITA NO.4744/MUM/04(A.Y. 1999-2000) 17 BORROWED FUNDS. WHERE THE ASSESSEE HAD ITS OWN FUN DS AS WELL AS BORROWED FUNDS AND IT ADVANCED FUNDS TO ITS SISTER CONCERNS FOR ALLEGEDLY NON-BUSINESS PURPOSES AND THE QUESTION AROSE WHETHER THE AO WAS JUSTIFIED IN DISALLOWING THE INTEREST ON THE BORROWED FUNDS ON THE GROUND TH AT THEY HAD BEEN USED FOR NON-BUSINESS PURPOSES, IT WAS HELD THAT WHERE A N ASSESSEE HAS HIS OWN FUNDS AS WELL AS BORROWED FUNDS, A PRESUMPTION CAN BE MADE THAT THE ADVANCES FOR NON-BUSINESS PURPOSES HAVE BEEN MADE O UT OF THE OWN FUNDS AND THAT THE BORROWED FUNDS HAVE NOT BEEN USED FOR THIS PURPOSE. THUS ONE HAS TO SEE THE OVERALL AVAILABILITY OF FUNDS. THE CIT(A) APPEARS TO HAVE PROCEEDED ON THE BASIS OF ACTUAL FUNDS FLOW WHICH T EST IS NO LONGER VALID IN THE LIGHT OF THE HONBLE BOMBAY HIGH COURT DECISION REFERRED TO ABOVE. IT HAS BEEN THE SUBMISSION OF THE ASSESSEE THAT AT THE POI NT OF TIME WHEN THE INVESTMENT IN SHARES WAS MADE THERE WAS NO OVERDRAW N ACCOUNT IN THE BANK. WHILE THE INVESTMENT OF RS. 29,05,77,325/- W AS MADE IN SHARES OF CITICORPS BROKERAGE INDIA LTD. DURING THE PERIOD FR OM JUNE 1998 TO DECEMBER, 1998 OPENING OVERDRAWN BALANCE IN THE OVE RDRAFT ACCOUNT OF RS.1,82,42,991/- WAS LIQUIDATED ON 29/6/1998. THE BANK ACCOUNT BECAME OVERDRAWN ONLY ON 1/2/1999. THEREFORE, THE INVESTM ENT MADE IN THE EQUITY SHARES OF CITICORP BROKERAGE INDIA LTD. CANNOT BE H ELD AS MADE EVEN PARTLY OUT OF BORROWINGS. SINCE THE ISSUE HAS NOT BEEN EX AMINED IN THE LIGHT OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT REFERRED TO ABOVE WE SET ASIDE THE ORDER OF CIT(A) AND REMAND THE ISSUE TO THE CIT(A) FOR FRESH CONSIDERATION IN THE LIGHT OF THE DECISION OF THE HONBLE BOMBAY H IGH COURT. THIS GROUND OF APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOS ES. 25. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE 31 ST DAY OF MAY, 2011. SD/- SD/- ( RAJENDRA SINGH ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 31 ST MAY ,2011 ITA NO.4744/MUM/04(A.Y. 1999-2000) 18 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RL BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.4744/MUM/04(A.Y. 1999-2000) 19 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 24/5/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 25/5/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER