SJS Enterprises Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 660/BANG/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95433 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 7 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-12-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 01-12-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 15-05-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUNIL KUMAR AGARWALA JT
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Capital asset; Depreciation; Transfer pricing; Double taxation relief; Retrospective amendment; Permanent establishment; Corroborative evidences; Revenue expenditure; Capital expenditure
• Section: 234B; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA NO.680/BANG/2014 ASSESSMENT YEAR : 2009-10 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(3), BANGALORE. VS. M/S. SJS ENTERPRISES PVT. LTD., NO.1, THALAGHATTAPURA, KANAKAPURA MAIN ROAD, BANGALORE 560 062. PAN: AAJCS 0794B APPELLANT RESPONDENT ITA NO.660/BANG/2014 ASSESSMENT YEAR : 2009-10 M/S. SJS ENTERPRISES PVT. LTD., BANGALORE 560 062. PAN: AAJCS 0794B VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(4), BANGALORE. APPELLANT RESPONDENT REVENUE BY : SHRI SUNIL KUMAR AGARWALA, JT. CIT(DR) ASSESSEE BY : SHRI PADAMCHAND KHINCHA, CA DATE OF HEARING : 01.12.2015 DATE OF PRONOUNCEMENT : 28.12.2015 ITA NO.680 & 660/BANG/2014 PAGE 2 OF 26 O R D E R PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER THESE ARE CROSS APPEALS BY THE REVENUE AND THE AS SESSEE DIRECTED AGAINST THE ORDER DATED 14.02.2014 OF THE CIT(APPEALS)-III, BANGALORE RELATING TO ASSESSMENT YEAR 2009-10. 2. THE ASSESSEE IS AN INDIAN COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE OF LABELS, STICKERS AND PANELS TITLED A S DECALS. RETURN OF INCOME FOR THE AY 2009-10 WAS FILED ON 29.9.09. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO MADE VARIOUS ADDITIO NS TO THE RETURNED INCOME AND ASSESSED INCOME AT RS.3,92,28,719. ITA 660/B/14 (ASSESSEES APPEAL) 3. THE FIRST ISSUE THAT IS AGITATED BEFORE US IS R EGARDING DISALLOWANCE OF REIMBURSEMENT OF EXPENSES AMOUNTING TO RS.2,42,921. 4. THE AO NOTED THAT THE ASSESSEE COMPANY HAS DEBIT ED AN AMOUNT OF RS52,42,921/- TOWARDS REIMBURSEMENT OF EXPENSES. I N REPLY TO AOS QUERY, THE ASSESSEE SUBMITTED THE ABOVE AMOUNT OF R S.24,25,921 IS PAID BY THE ASSESSEE TO M/S SERIGRAPH INC.(ASSOCIATED EN TERPRISE)[AE]. THE ASSESSEE WAS ASKED TO FURNISH PROOF OF THE ABOVE PA YMENT INCLUDING INVOICES, BILLS, RECEIPTS, BANK STATEMENTS INCLUDIN G, COST-TO-COST BREAK UP OF EXPENSES INCLUDING THE TERMS AND CONDITIONS OF A GREEMENT IF ANY. THE ASSESSEE REITERATED THAT PAYMENTS HAVE BEEN MADE ON THE EXPENSES ITA NO.680 & 660/BANG/2014 PAGE 3 OF 26 INCURRED BY M/S SERIGRAPH INC., BUT DID NOT FURNISH ANY SUPPORTING DOCUMENT AND EVIDENCE AS SOUGHT. THEREFORE, THE A O MADE AN ADDITION OF RS.2,42,921. 5. ON APPEAL, THE CIT(APPEALS) OBSERVED THAT BY LET TER DATED 21.09.2011 THE AO HAD ASKED FOR INFORMATION WITH RE SPECT TO FOREIGN EXPENDITURE CLASSIFIED UNDER PROFESSIONAL AND CONSU LTATION FEES. BEFORE THE CIT(A), IT WAS SUBMITTED THAT THIS EXPENDITURE WAS IN THE NATURE OF AIRFARE AND HOSPITALITY CHARGES PAID TO PERSON WHO TRAINED THE EMPLOYEES IN CONNECTION WITH THE MANUFACTURING PROCESS. THE CIT (A) OBSERVED THAT THE NATURE OF THIS TRAINING UNDERTAKEN AND DETAILS OF P ERSON TO WHOM IT IS PAID HAVE NOT BEEN FURNISHED AND THEREFORE NO NEXUS BET WEEN THE EXPENDITURE AND NEEDS OF THE BUSINESS HAVE BEEN ESTABLISHED. H ENCE HE CONFIRMED THE ADDITION MADE BY THE AO OF RS.2,42,921. 6. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. WE HAVE HEARD BOTH THE PARTIES. THE AO HAD CALLED FOR THE PROOF OF ABOVE PAYMENT OF RS,2,42,921 INCLUDING LNVOICES, BILLS, RECEIPTS, BA NK STATEMENTS INCLUDING, COST-TO-COST AND OTHER DETAILS IN RESPECT OF THE SA ME. THE ASSESSEE MERELY STATED THAT PAYMENTS HAVE BEEN MADE ON THE E XPENSES INCURRED BY M/S SERIGRAPH INC. BUT HAS NOT FURNISHED ANY SUPPOR TING DOCUMENT AND EVIDENCE EITHER BEFORE THE AO OR THE CIT(A). HENC E, WE REMAND THE ISSUE TO THE FILE OF THE ASSESSING OFFICER AND DIRECT THE ASSESSEE TO FURNISH THE ITA NO.680 & 660/BANG/2014 PAGE 4 OF 26 EVIDENCE AS SOUGHT FOR BY THE AO. THE AO SHALL DEC IDE THE ISSUE AFTER AFFORDING REASONABLE OPPORTUNITY TO THE ASSESSEE. 7. THE SECOND ISSUE IS REGARDING DISALLOWANCE OF CO MMISSION PAID TO SRI MURALI RAJAGOPALACHARI AND M/S. SERIGRAPH INC T OTALLY AMOUNTING TO RS.1,12,47,098. 8. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTED THAT THE ASSESSEE COMPANY HAS DEBITED AN AMOUNT OF RS. 4,04, 72,566 TOWARDS COMMISSION. FROM THE DETAILS SOUGHT AND FURNISHED B Y THE ASSESSEE, IT WAS OBSERVED THAT AN AMOUNT OF RS.1,13,10,580 IN FO REIGN EXCHANGE HAS BEEN DEBITED AS FOLLOWS:- A. M/S SERIGRAPH INC., USA [ASSOCIATED ENTERPRISE] RS. 8,52,589 B. MR. MURALI RAJAGOPALACHARI RS.33,94,590 C, M/S ZIRVE POLYMER RS. 63,401 ------------------- RS.1,13,10,580 ------------------ 9. THE ASSESSEE WAS ASKED TO FURNISH THE DETAILS OF THE SALES ON WHICH SALES COMMISSION OF RS.1,12,47,098 WHICH HAS BEEN P AID TO M/S SERIGRAPH INC., USA [AE] AND MR. MURALI RAJAGOPALAC HARI WITH SUPPORTING DOCUMENTS AND EVIDENCE INCLUDING TAX DEDUCTED AT SO URCE FOR THE SAME. 10. THE AO NOTED THAT THE ASSESSEE COMPANY HAS NOT BEEN ABLE TO FURNISH ANY DETAILS AND SUPPORTING DOCUMENTS TO EVI DENCE THE SERVICES RENDERED BY THE ABOVE ENTITIES INCLUDING ITS AE FOR INCREASING THE SALES FOR WHICH THE COMMISSION HAS BEEN PAID. THE ASSESSEE ST ATED THAT THE ABOVE ITA NO.680 & 660/BANG/2014 PAGE 5 OF 26 ENTITIES HAVE RENDERED SERVICES OUTSIDE INDIA AND T AX DEDUCTION AT SOURCE IS NOT APPLICABLE IN THE ABOVE CASES AS THEY DO NOT HAVE PERMANENT ESTABLISHMENT IN INDIA. 11. THE AO OBSERVED THAT IN THE CASE OF M/S SERIGRA PH INC., USA [AE], IT HELD 26% SHARES IN THE ASSESSES COMPANY WHICH IS RE GISTERED IN INDIA WITH PERMANENT ACCOUNT NUMBER WHICH ESTABLISHES THE RESI DENCY OF THE SAME AND THE AO HELD THAT M/S SERIGRAPH INC., USA IS DEE MED TO BE HAVING PERMANENT ESTABLISHMENT IN INDIA AND HENCE THE PROV ISIONS OF TAX DEDUCTION AT SOURCE IS APPLICABLE. THE AO NOTED THA T THE ASSESSEE HAD FINANCIAL TRANSACTION WITH M/S SERIGRAPH INC. USA FOR A.Y 2009-10 AS FOLLOWS:- A. PURCHASE OF FIXED ASSETS RS.15,23,120 B. PURCHASE OF RAW MATERIAL RS.22,79,859 C. PURCHASE OF SERVICES RS. 2,42,921 ----------------- RS.40,45,900 ----------------- 12. IN THE CASE OF MR. MURALI RAJAGOPALACHARI GIVIN G THE BENEFIT OF DOUBT THAT HE DOES NOT HAVE PERMANENT ESTABLISHMENT IN IN DIA, THE ASSESSEE WAS ASKED TO FURNISH PROOF OF NON-RESIDENT STATUS W ITH COPY OF RETURN OF INCOME FILED IN HIS COUNTRY OF RESIDENCE REFLECTING THE ABOVE RECEIPT OF COMMISSION OF RS.33,94,590. 13. NOT WITHSTANDING THE ABOVE, THE ASSESSEE COMPAN Y WAS ASKED TO FURNISH SUPPORTING DOCUMENTS AND EVIDENCE OF THE SE RVICES AS CLAIMED TO ITA NO.680 & 660/BANG/2014 PAGE 6 OF 26 HAVE BEEN RECEIVED FROM THE ABOVE ENTITIES WITH INV OICES, BILLS, RECEIPTS, BREAK-UP OF EXPENSES, BANK STATEMENTS INCLUDING, NA MES AND LIST OF CLIENTS FROM WHOM SALES HAVE BEEN MADE INCLUDING CO MPARATIVE STATEMENT OF THE NEW CLIENTS IN AY 2009-10 VIS--VI S THE OLD CLIENTS IN AY 2008-09 AND ALSO NEW BUSINESS AND INCOME GENERATED TO JUSTIFY THE PAYMENT OF THE ABOVE COMMISSION. 14. IN RESPONSE, THE ASSESSEE ONLY REITERATED THAT SERVICES HAVE BEEN AVAILED BY THE ASSESSEE COMPANY. THEREFORE AN AMOU NT OF RS.1,12,471791 WAS ADDED BACK TO THE TOTAL INCOME O F THE ASSESSEE BY THE AO. 15. ON APPEAL, THE CIT(APPEALS) DISCUSSED THE ISSUE AT PARA 2.13 OF HIS ORDER. THE ASSESSEE STATED BEFORE THE CIT(A) THAT NO OPPORTUNITY WAS GIVEN TO THE ASSESSEE BY THE AO BEFORE CONSIDERING THE ISSUE. THE CIT(A) REJECTED THIS CONTENTION OF THE ASSESSEE AND HELD T HAT THE AO HAD CLEARLY STATED THAT SPECIFIC INFORMATION REGARDING COMMISSI ON AND SUPPORTING EVIDENCE WAS SOUGHT FROM THE ASSESSEE. THE CIT(A) OBSERVED THAT ASSESSEE MERELY STATED THAT COMMISSION WAS PAID FOR PROCUREMENT OF ORDERS AND BASIS OF PAYMENT OF COMMISSION AND OTHER EVIDENCE WAS NOT FILED. 16. THE FURTHER SUBMISSIONS OF THE ASSESSEE BEFORE THE CIT(A) WAS THAT THAT COMMISSION WAS PAID TO MR. MURALI RAJAGOPALACH ARI, CANADA AND M/S SERIGRAPH INC, USA FOR THE SALES ORDERS PROCURED TH ROUGH THEM. THE ITA NO.680 & 660/BANG/2014 PAGE 7 OF 26 PAYEES WERE NON RESIDENTS UNDER THE INCOME TAX ACT, 1961 AND THE SERVICES WERE RENDERED OUTSIDE INDIA. 17. IT WAS SUBMITTED THAT CBDT CIRCULAR NO. 23 DAT ED 23.7.1969 AND CIRCULAR NO. 786 DATED 7.2.2000 HAD CLARIFIED THAT COMMISSION PAID TO NON RESIDENTS FOR THE SALES ORDERS PROCURED THROUGH THE M IS NOT CHARGEABLE TO TAX IN INDIA UNDER SECTIONS 5 & 9 AND CONSEQUENTLY THERE IS NO REQUIREMENT TO DEDUCT TAX AT SOURCE IN RESPECT OF THE SAID PAYM ENTS UNDER SECTION 195. 18. THE ABOVE CIRCULARS WERE WITHDRAWN BY CIRCULAR NO. 7 OF 2009 DATED 22.10.2009 WITH IMMEDIATE EFFECT. IN OTHER WORDS, C IRCULAR NOS. 23 & 786 WERE WITHDRAWN WITH EFFECT FROM 22.10.2009. IN THE PRESENT CASE, THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2009-10 RELE VANT TO PREVIOUS YEAR 2008-09. CIRCULAR NOS. 23 & 786 WERE IN FORCE WHEN COMMISSION WAS PAID DURING THE FINANCIAL YEAR 2008-09 AS WELL AS ON THE FIRST DAY OF THE ASSESSMENT YEAR I.E., 1.4.2009. THUS, COMMISSION PA ID TO MR. MURAL! RAJAGOPALACHARI, CANADA AND M/S SERIGRAPH MC, USA D URING THE PREVIOUS YEAR 2008-09 WERE NOT LIABLE FOR TDS UNDER SECTION 195. 19. IT WAS FURTHER SUBMITTED THAT THE WITHDRAWAL OF CIRCULAR NOS. 23 AND 786 IS WITH EFFECT FROM 22.10.2009 AND WITHDRAWAL O F CIRCULAR DOES NOT HAVE RETROSPECTIVE OPERATION. THUS, WITHDRAWAL OF CIRCU LAR NOS.23 AND 786 W.E.F. 22.10.2009 HAS NO RELEVANCE IN THE PRESENT CASE SIN CE THE ABOVE CIRCULARS WERE IN FORCE WHEN THE COMMISSION WAS PAID DURING T HE PREVIOUS YEAR 2008-09. RELIANCE WAS PLACED ON THE FOLLOWING DECI SIONS:- ITA NO.680 & 660/BANG/2014 PAGE 8 OF 26 JCIT V SIEMENS AKTIENGESELLSCHAFT 2010-TIOL-102-ITA T-MUM ACIT V MODERN INSULATOR LTD (2011] 11 ITR (TRIB) 14 7 (ITAT- JAIPUR) DCIT V SANJIV GUPTA (2011] 135 TTJ 641 (LUCKNOW) GUJARAT RECLAIM & RUBBER PRODUCTS LTD V AD. CIT (20 13) 7 TAXCORP (A.T.) 32950 (MUMBAI) M/S EXOTIC FRUITS P LTD V ITO (IT) - IT(IT)A NOS. 1008 TO 1013/BANG/2012 - DECISION DATED 4.10.2013 OF ITAT B ANGALORE BENCH. 20. THE FURTHER CONTENTION OF THE ASSESSEE WAS THAT COMMISSION PAID TO NON-RESIDENTS IS NOT CHARGEABLE TO TAX IN INDIA AND CONSEQUENTLY THERE IS NO REQUIREMENT TO DEDUCT TAX AT SOURCE IN RESPECT OF T HE SAID PAYMENTS U/S. 195 AS HELD IN THE FOLLOWING DECISIONS:- M/S EXOTIC FRUITS P LTD V ITO (INTERNATIONAL TAX ATION) IT (IT) A NOS. 1008 TO 1013/BANG/2012 - DECISION DATED 4.10 .2013 - ITAT BANGALORE BENCH; ACIT V MODERN INSULATOR LTD (2011] 56 DTR 362 (J AIPUR) DCIT V SANJIV GUPTA (2011] 135 TTJ 641 (LUCKNOW) JCIT V SIEMENS AKTIENGESELLSCHAFT 2010-TIOL-L02- ITAT-MUM CIT V EON TECHNOLOGY (P) LTD (2011) 343 ITR 366 (DELHI) ADIDAS SOURCING LTD V ADIT - ITAT DELHI DECISI ON DATED 18.9.2012 BRAKES INDIA LTD V DCIT [2013] TAXCORP (INTL) 52 75 (ITAT CHENNAI) ITA NO.680 & 660/BANG/2014 PAGE 9 OF 26 21. THE ASSESSEE CONTENDED BEFORE THE CIT(A) THAT E VEN OTHERWISE, THE COMMISSION PAID TO MR. MURALI RAJAGOPALACHARI, CANA DA AND M/S SERIGRAPH INC, USA ARE NOT CHARGEABLE TO TAX UNDER THE DTAA B ETWEEN INDIA CANADA AND INDIA USA SINCE THERE WAS NO MAKE AVA ILABLE OF TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW, OR PROCESSE S OR DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN AS PER THE DEFINITION OF FEES FOR TECHNICAL SERVICES UNDER BOTH THESE TREATIES. RELIANCE WAS PLACED ON THE JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT IN CIT V DE BEERS INDIA MINERALS (P.) LTD (2012) 346 ITR 467 WHEREIN IT WAS HELD THAT PAYMENT FOR SERVICES WHICH DO NOT MAKE AVAILABLE OF TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW, OR PROCESSES OR DEVELOPMENT AND TR ANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN ARE NOT CHARGEABLE TO TAX IN INDIA UNDER THE TREATY AND CONSEQUENTLY SUCH PAYMENTS ARE NOT LIABLE FOR T DS UNDER SECTION 195. 22. IN VIEW OF THE ABOVE SUBMISSIONS, THE ASSESSEE SUBMITTED THAT COMMISSION PAID TO MR. MURALI RAJAGOPALACHARI, CANA DA AND M/S SERIGRAPH INC. USA DURING THE PREVIOUS YEAR 2008-09 WERE NOT LIABLE FOR TDS UNDER SECTION 195. 23. THE CIT(APPEALS) OBSERVED THAT THOUGH SPECIFIC DETAILS WERE CALLED FOR IN THE COURSE OF APPELLATE PROCEEDINGS BEFORE H IM, THE ASSESSEE HAS FAILED TO FURNISH SUPPORTING EVIDENCE REGARDING THE NATURE OF PAYMENT OF COMMISSION. THEREFORE, THE CIT(A) HELD THAT THERE IS NO CLARITY ON THE NATURE OF PAYMENT OF COMMISSION AND DETAILS OF INVO ICE VALUE BASED ON ITA NO.680 & 660/BANG/2014 PAGE 10 OF 26 WHICH COMMISSION PAID WAS FURNISHED BY THE ASSESSEE DOES NOT SHED ANY LIGHT ON THE NATURE OF SERVICES RENDERED. IN THE ABSENCE OF ANY DOCUMENTARY EVIDENCE THAT MR. MURALI RAJAGOPALACHAR I, CANADA AND M/S SERIGRAPH INC. HAVE ACTUALLY CONTRIBUTED TO THE SAL ES TURNOVER OF THE ASSESSEE COMPANY, THE CIT(A) HELD THAT THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THAT PAYMENTS TO FOREIGN PARTIES ARE IN THE N ATURE OF PAYMENT OF COMMISSION TOWARDS SALES AND THEREFORE HE UPHELD TH E ADDITION MADE BY THE AO. 24. AS REGARDS THE ASSESSEES CONTENTION THAT NO TD S WAS REQUIRED TO BE MADE AND THEREFORE NO DISALLOWANCE U/S. 40(A)(IA ) OF THE ACT WAS REQUIRED TO BE MADE, THE CIT(A) HELD THAT THESE CON TENTIONS WERE NOT RELEVANT TO THE PARTICULAR ISSUE, SINCE MORE THAN D EDUCTIBILITY OF TDS, THE ROOT QUESTION THAT AROSE WAS THE NATURE OF PAYMENT AND WHETHER IT WAS FOR ACTUAL SERVICES RENDERED. THE CIT(A) THEREFORE DIS MISSED THIS ISSUE RAISED BY THE ASSESSEE. 25. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. WE HAVE HEARD BOTH THE PARTIES. WE FIND THAT THE ITAT BANGALORE BENCH IN M/S EXOTIC FRUITS P. LTD. V ITO (IT) IN IT(IT)A NOS. 1008 TO 1013/BANG/2012, DECIS ION DATED 4.10.2013 [62 SOT 247], HAS HELD THAT WITHDR AWAL OF CIRCULAR NOS. 23 AND 786 DOES NOT HAVE RETROSPECTIVE OPERATION. THE RELEVANT PARAGRAPHS OF TRIBUNALS DECISION ARE EXTRACTED HER EUNDER:- ITA NO.680 & 660/BANG/2014 PAGE 11 OF 26 7.4 AT THIS JUNCTURE, WE WOULD LIKE TO REFER TO T HE AO'S OBSERVATION IN RESPECT OF THE ASSESSEE'S RELIANCE O N CBDT'S CIRCULAR NO.23 DATE 23.7.1969 THAT '5 . THE CIRCULAR NO.23 DATED 23.7.1969 HAS BEEN WITHDRAWN RESULTING IN CIRCULAR NO.786 DATED 7.2.2000 ALSO BE COMING INFRUCTUOUS.' IN FACT, AN IDENTICAL ISSUE TO THAT O F THE PRESENT ONE CAME UP FOR CONSIDERATION BEFORE THE HON'BLE MUMBAI TRIBUNAL IN THE CASE OF GUJARAT RECLAIM & RUBBER PRODUCTS LT D. V. ADDL CIT [2013] 35 TAXMANN.COM 587 WHEREIN THE HON'BLE B ENCH HAD OBSERVED THAT '4.7. IN VIEW OF THE ELABORATE DISCUS SION MADE BY THE CIT (A) IN AY 2008-09 WITH WHICH WE FULLY CONCU R AS IT IS CORRECT BOTH ON FACTS AND ON LAW, WE UPHOLD THE SAM E AND DISMISS THE REVENUE GROUND ON THIS ISSUE IN AY 2008-09 AND ALLOW ASSESSEE'S GROUNDS IN AY 2007-08 .' 7.5 FOR APPRECIATION OF FACTS, WE EXTRACT THE CIT (A)'S OBSERVATIONS VERBATIM AS REPRODUCED BY THE TRIBUNAL IN ITS ORDER (SUPRA) AS UNDER: '4.3. ON PAGE 7..... THE NEXT QUESTION FOR CONSIDERATION IS THE EFFECT O F WITHDRAWAL OF CIRCULAR NO.23 OF 1969 AND 786 OF 2000 BY THE CBDT VIDE CIRCULAR NO.7 OF 2009. I HAVE CONSIDERED THE FACTS OF THE CASE. IN THE CIR CULAR NO.23 OF 1969 DTD 23.9.1969 SOME ILLUSTRATION INSTANCES OF N ON-RESIDENT HAVING BUSINESS CONNECTION IN INDIA HAD BEEN GIVEN AS UNDER: - MAINTAINING A BRANCH OFFICE IN INDIA FOR THE PU RCHASE OR SALE OF GOODS OR TRANSACTING OTHER BUSINESS, - APPOINTING AN AGENT IN INDIA FOR THE SYSTEMATIC A ND REGULAR PURCHASE OF RAW MATERIALS OR OTHER COMMODITIES, OR FOR SALE OF THE NON-RESIDENT'S GOODS, OR FOR OTHER BUSINESS PUR POSES - ERECTING FACTORY IN INDIA WHERE THE RAW PRODUCE PURCHASED LOCALLY IS WORKED OUT INTO A FORM SUITABLE FOR EXPO RT ABROAD. - FORMING A LOCAL SUBSIDIARY COMPANY TO SELL THE PR ODUCTS OF THE NON-RESIDENT PARENT COMPANY - HAVING FINANCIAL ASSOCIATION BETWEEN A RESIDENT A ND A NON- RESIDENT COMPANY ITA NO.680 & 660/BANG/2014 PAGE 12 OF 26 - HAVING FINANCIAL ASSOCIATION BETWEEN A RESIDENT A ND A NON- RESIDENT COMPANY IN THE SAID CIRCULAR, CBDT HAVE GIVEN CLARIFICATION REGARDING THE APPLICABILITY OF PROVISIONS OF SEC. 9 IN THE CERTAI N SPECIFIC SITUATIONS AS UNDER: (1) NON-RESIDENT EXPORTER SELLING GOODS FROM ABROAD TO INDIAN IMPORTER (2) NON-RESIDENT COMPANY SELLING GOODS FROM ABROAD TO INDIAN SUBSIDIARY (3) SALE OF PLANT AND MACHINERY TO AN INDIAN IMPORT ER ON INSTALMENT BASIS (4) FOREIGN AGENTS OF INDIAN EXPORTERS A FOREIGN AG ENT OF INDIAN EXPORTER OPERATES IN HIS OWN COUNTRY AND NO PART OF HIS INCOME ARISES IN INDIA. HIS COMMISSION IS USUALLY R EMITTED DIRECTLY TO HIM AND IS, THEREFORE, NOT RECEIVED BY HIM OR ON HIS BEHALF IN INDIA. SUCH AN AGENT IS NOT LIABLE TO INC OME-TAX IN INDIA ON THE COMMISSION. (5) NON-RESIDENT PERSONS PURCHASING GOODS IN INDIA (6) SALE BY A NON-RESIDENT TO INDIAN CUSTOMER EITHE R DIRECTLY OR THROUGH AGENTS. (7) EXTENT OF THE PROFIT ASSESSABLE U/S 9. IN THE ABOVE CIRCULAR RELEVANT PARA IS NO.4 DEALING WITH THE SUBJECT OF FOREIGN AGENTS OF INDIAN EXPORTERS. THE CBDT VIDE CIRCULAR NO.7 OF 2009 DTD. 22.10.2009 HAS WITHDRAWN THE CIRCULAR NO.23/1969 WITH RETROSPECTIV E EFFECT. IN THE CIRCULAR NO.23 OF 1969, CBDT CLARIFIED THAT THE PAYMENT MADE TO NON-RESIDENT COMMISSION AGENTS WAS NOT LIAB LE TO INCOME-TAX IN INDIA. SUCH CLARIFICATION OF CBDT WAS BASED ON THE PROVISIONS OF SECTIONS 5, 7, 9, 195 AND OTHER R ELEVANT PROVISIONS OF THE ACT. THE QUESTION FOR CONSIDERATI ON IS WHEN THERE IS NO RELEVANT CHANGE IN SECTIONS 5, 7, 9, 19 5 THEN AS TO HOW THE WITHDRAWAL OF CIRCULAR NO.23 OF 1969 OF CBDT WI LL MAKE THE COMMISSION PAID TO SUCH NON-RESIDENT COMMISSION AGE NTS TAXABLE IN INDIA. I AM OF THE CONSIDERED VIEW THAT EVEN AFT ER THE ITA NO.680 & 660/BANG/2014 PAGE 13 OF 26 WITHDRAWAL OF CIRCULAR NO.23 OF 1969, THE POSITION WILL REMAIN THE SAME I.E., THE COMMISSION PAID TO NON-RESIDENT AGENTS IS NOT LIABLE TO TAX UNDER THE PROVISIONS OF I.T. ACT WHEN THE SERVICES WERE RENDERED OUTSIDE INDIA, SERVICES WERE USED OUT SIDE INDIA, PAYMENTS WERE MADE OUTSIDE INDIA AND THERE WAS NO P ERMANENT ESTABLISHMENT OR BUSINESS' CONNECTION IN INDIA. IT CANNOT BE ACCEPTED THAT BY VIRTUE OF CBDT CIRCULAR NO.23/1969 , THE COMMISSION PAID TO NON-RESIDENT AGENTS BECOME NOT L IABLE TO INCOME-TAX IN INDIA AND ON SUCH WITHDRAWAL OF CIRCU LAR BY THE CBDT, SUCH COMMISSION PAID TO NON-RESIDENT AGENTS B ECOME LIABLE TO INCOME-TAX IN INDIA. IRRESPECTIVE OF CIRC ULAR ISSUED BY CBDT, THE QUESTION OF TAXABILITY OF SUCH COMMISSION TO INCOME- TAX HAS TO BE DECIDED AS PER THE PROVISIONS OF SECT ION 9(1) OF THE ACT. I AM OF CONSIDERED VIEW THAT THE PROVISIONS OF SEC. 9(1) ARE NOT APPLICABLE TO THE COMMISSION PAID TO SUCH NON-R ESIDENT AGENTS. SUCH INCOME (COMMISSION) IN THE HANDS OF NO N-RESIDENT COMMISSION AGENTS DID NOT ACCRUE OR ARISE DIRECTLY OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA. S UCH INCOME TO THE NON-RESIDENT COMMISSION AGENTS DID NOT ACCRUE O R ARISE IN INDIA THROUGH OR FROM ANY PROPERTY IN INDIA OR THRO UGH THE TRANSFER OF CAPITAL ASSET SITUATED IN INDIA. IN THE FACTS AND CIRCUMSTANCES THE PROVISIONS OF SEC. 9(1) WERE NOT APPLICABLE TO SUCH PAYMENT OF COMMISSION BY APPELLANT TO NON-RESI DENT AGENTS. THE YEAR UNDER CONSIDERATION IS AY 2008-09 COVERING THE PREVIOUS YEAR PERIOD 1.4.2007 TO 31.3.2008. THE CBD T ISSUED CIRCULAR NO.7 OF 2009 IN THE YEAR 2009. IN THE ABOV E MENTIONED CASE, THE BENCH OF ITAT HAVE HELD THAT WITHDRAWAL O F SUCH CIRCULAR IS NOT HAVING RETROSPECTIVE EFFECT AND WIL L BE APPLICABLE PROSPECTIVELY. IN THE FACTS AND CIRCUMSTANCES, EVEN IF IT IS ASSUMED THAT THE WITHDRAWAL OF CIRCULAR NO.23 OF 19 69 BY THE CBDT'S CIRCULAR NO.7 OF 2009 IS HAVING ANY EFFECT O N TAXABILITY OF COMMISSION PAID TO NON-RESIDENT AGENTS, SUCH WIT HDRAWAL OF CIRCULAR WILL NOT BE APPLICABLE IN THE YEAR UNDER C ONSIDERATION. IN THE FACTS AND CIRCUMSTANCES, THE CIRCULAR NO.23 OF 1969 WILL BE CLEARLY APPLICABLE IN THE YEAR UNDER CONSIDERATION MAKING SUCH COMMISSION PAYMENT NOT LIABLE TO TAX IN INDIA. .. .. ITA NO.680 & 660/BANG/2014 PAGE 14 OF 26 7.9 THE FACTS AND CIRCUMSTANCES OF THE ISSUE AS DE LIBERATED UPON AND ALSO IN CONFORMITY WITH THE JUDICIAL VIEWS (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT AUTHORITIES BELOW W ERE NOT JUSTIFIED IN BRINGING THE ASSESSEE'S CASE UNDER THE PURVIEW OF S. 201 (1) OF THE ACT. IN SUBSTANCE, THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE WHILE MAKING PAYMENTS OF COMMI SSIONS TO NON-RESIDENT AGENTS. IT IS ORDERED ACCORDINGLY. 26. HENCE, WITHDRAWAL OF CIRCULARS NO.23 AND 786 W. E.F. 22.9.2010 IS OF NO RELEVANCE IN THE PRESENT CASE. THE ABOVE CIRCUL ARS WERE IN FORCE WHEN THE COMMISSION WAS PAID DURING THE PREVIOUS YEAR 20 08-09. 27. IN THE CASE OF IN THE CASE OF M/S. FAIZAN SHOES PVT. LTD. IN ITA NO.2095/MDS/2012 DATED 23.04.2013 , THE CHENNAI BENCH OF THE TRIBUNAL HELD AS FOLLOWS:- 5. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES. THE ASSESSING OFFICER DISALLOWED THE COMMISSION PAY MENTS MADE TO NON-RESIDENTS HOLDING THAT IN VIEW OF EXPLANATION T O SUB-SECTION (2) OF SECTION 9, THESE PAYMENTS ARE DEEMED TO ACCRUE O R ARISE IN INDIA AND WHETHER OR NOT THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA. THE ASSES SING OFFICER WAS OF THE VIEW THAT IN VIEW OF WITHDRAWAL OF CIRCULAR BY CBDT, THE PAYMENT MADE TO NON-RESIDENTS TOWARDS COMMISSION IS LIABLE TO BE SUBJECTED TO TDS. HOWEVER, THE COMMISSIONER OF INCO ME TAX (APPEALS) AFTER EXAMINING THE AGENCY AGREEMENTS ENT ERED INTO BY THE ASSESSEE WITH THE NON-RESIDENTS HELD THAT THE AGENC Y AGREEMENT WAS ONLY FOR SECURING ORDERS FROM VARIOUS CUSTOMERS INC LUDING RETAILERS AND TRADERS FOR THE EXPORT OF LEATHER SHOE UPPERS A ND LEATHER SHOES BY THE ASSESSEE. THE BUSINESS WILL BE TRANSACTED BY OP ENING LETTERS OF CREDIT OR BY CASH AGAINST DOCUMENT BASIS AND THE AG ENT WILL BE RESPONSIBLE FOR PROMPT PAYMENT IN RESPECT OF ALL SH IPMENTS EFFECTED ON CASH AGAINST DOCUMENT BASIS. THE COMMISSIONER OF INCOME TAX (APPEALS) OBSERVED THAT EXPORTER WILL PAY COMMISSIO N OF 2.5% ON FOB VALUE OF ALL ORDERS PROCURED BY THE AGENT. THE COMMISSIONER OF INCOME TAX (APPEALS) ALSO OBSERVED THAT THE WITHDRA WAL OF CIRCULAR NO.23/1969 BY THE BOARD VIDE CIRCULAR NO.7/2009 IS NOT APPLICABLE FOR THE ASSESSMENT YEAR 2009-10, SINCE THE CIRCULAR WAS WITHDRAWN ON ITA NO.680 & 660/BANG/2014 PAGE 15 OF 26 22.10.2009, THEREFORE, CIRCULAR NO.23 OF 1969 IS VE RY MUCH APPLICABLE TO THE FACTS OF THE ASSESSEE. IT WAS THE OBSERVATIO N OF THE COMMISSIONER OF INCOME TAX (APPEALS) THAT THE SERVI CES RENDERED BY NON-RESIDENT AGENTS TO THE ASSESSEE DO NOT FALL UND ER THE PROVISIONS OF SECTION 9(1)(VII) OF THE ACT, AS NO TECHNICAL SERVI CES HAVE BEEN PROVIDED BY THE AGENTS. IT WAS ALSO THE OBSERVATION OF THE COMMISSIONER OF INCOME TAX (APPEALS) THAT THERE WAS NO QUESTION OF PAYMENT OF ROYALTY OR TECHNICAL FEES TO THE AGENTS ON CONTRACT WITH THE ASSESSEE. HE HAS FINALLY CONCLUDED THAT ALL THE CON DITIONS BRING TO A REASONABLE CONCLUSION THAT THE COMMISSION PAID IN T HE FACTS OF THE PRESENT CASE TO THE NON-RESIDENT AGENTS IS NOT TAXA BLE IN INDIA. IN COMING TO SUCH CONCLUSION, THE COMMISSIONER OF INCO ME TAX (APPEALS) OBSERVED AS UNDER:- 4.3 AS SEEN FROM THE FACTS OF THIS CASE, I. AGENT IS A NON-RESIDENT. II. AGENT IS OPERATING HIS BUSINESS ACTIVITIES O UTSIDE INDIA III. THE COMMISSION PAID RELATED TO SERVICES PROVIDED OUTSIDE INDIA. IV. THE AGENT DOES NOT HAVE ANY PERMANENT ESTABLISHMENT OR PERMANENT BUSINESS PLACE IN INDIA. V. THE COMMISSION WAS REMITTED TO THE AGENT DIRECTLY OUTSIDE INDIA. 4.3 ALL THE ABOVE CONDITIONS BRING TO A REASONABLE CONCLUSION THAT THE COMMISSION PAID IN THE FACTS OF THE PRESEN T CASE TO THE NON-RESIDENT AGENT IS NOT TAXABLE IN INDIA. THE IT AT MADRAS A BENCH IN THE CASE OF INDOPEL GARMENTS PVT. LTD., 72 TTJ 702 STATED THAT THE COMMISSION PAYABLE TO FOREIGN CONCE RN FOR ACTING AS A SELLING AGENT FOR CANVASSING ORDER OUTSIDE IND IA WAS NOT LIABLE TO TAX AS INCOME ARISING OR ACCRUING TO THE FOREIGN CONCERN IN INDIA AND THEREFORE, NO DISALLOWANCE COULD BE MA DE U/S 40A(I) ON THE GROUND THAT TAX WAS NOT DEDUCTED AT SOURCE U /S 195. 4.5 THE HONBLE SUPREME COURT OVERRULED THE DECISIO N OF THE KARNATAKA HIGH COURT IN SAMSUNG ELECTRONICS LTD., C ASE IN THE CASE OF GE INDIA TECHNOLOGY CEN. (P) LTD. VS. CIT ( 2010) 327 ITR 456 (SE). THE ITAT, MUMBAI D BENCH IN THE CA SE OF DCIT RANGE-7(2), MUMBAI VS. REDIFF.COM INDIA LTD., IN APPEAL NO.3061 (MUM.) OF 2009 HELD THAT AS HELD BY THE SUPREME COURT ITA NO.680 & 660/BANG/2014 PAGE 16 OF 26 IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PVT. LTD. , VS. CIT (2010) 327 ITR 456/193 TAXMAN 234, TAX DEDUCTION AT SOURCE OBLIGATIONS U/S 195(1) ARISE ONLY IF THE PAYMENT IS CHARGEABLE TO TAX IN THE HANDS OF NON-RESIDENT RECIPIENT. THEREF ORE, MERELY BECAUSE A PERSON HAS NOT DEDUCTED TAX AT SOURCE FRO M A REMITTANCE ABROAD, IT CANNOT BE INFERRED THAT THE P ERSON MAKING THE REMITTANCE HAS COMMITTED A DEFAULT IN DISCHARGI NG HIS TAX WITHHOLDING OBLIGATIONS BECAUSE SUCH OBLIGATIONS CA ME INTO EXISTENCE ONLY WHEN RECIPIENT HAS A TAX LIABILITY I N INDIA. THE UNDERLYING PRINCIPLE IS THIS TAX WITHHOLDING OF THE PAYER IS INHERENTLY A VICARIOUS LIABILITY, ON BEHALF OF THE RECIPIENT, AND, THEREFORE, WHEN RECIPIENT DOES NOT HAVE THE PRIMARY LIABILITY TO BE TAXABLE IN RESPECT OF INCOME EMBEDDED IN THE RECEIP T, THE VICARIOUS LIABILITY OF THE PAYER CANNOT BUT BE INEF FECTUAL. THIS VICARIOUS TAX WITHHOLDING LIABILITY CANNOT BE INVOK ED UNLESS PRIMARY TAX LIABILITY OF THE RECIPIENT IS ESTABLISH ED. JUST BECAUSE THE PAYER HAS NOT OBTAINED A SPECIFIC DECLARATION F ROM THE REVENUE AUTHORITIES TO THE EFFECT THAT THE RECIPIEN T IS NOT LIABLE TO BE TAXED IN INDIA IN RESPECT OF INCOME EMBEDDED IN PARTICULAR PAYMENT, HOWSOEVER DESIRABLE BE THAT PRACTICE, HE A O CANNOT PROCEED ON THE BASIS THAT THE PAYER HAD AN OBLIGATI ON TO DEDUCT TAX AT SOURCE. HE STILL HAS TO DEMONSTRATE AND EST ABLISH THAT THE PAYEE HAS A TAX LIABILITY IN RESPECT OF THE INCOME EMBEDDED IN THE IMPUGNED PAYMENT. THAT EXERCISE WAS NOT CARRIED OU T BY THE AO ON THE FACT OF THIS CASE. THE AO WAS THUS CLEARLY IN ERROR IN PROCEEDING TO INVOKE DISALLOWANCE U/S 40(A)(I) ON T HE SHORT GROUND THAT THE ASSESSEE DID NOT DEDUCT TAX AT SOUR CE FROM THE FOREIGN REMITTANCE .: THE ITAT D BENCH, IN THE CASE OF ACIT, COMPANY CIRCLE-II(I) VS. M/S EAGLE PRESS PVT. LTD, ON SIMILAR FACTS, RELYING ON THE JUDGMENT OF HONBLE SUPREME C OURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PVT. LTD. VS CIT AND ANOTHER 327 ITR 456 HELD THAT THE LIABILITY OF TDS IS NOT CAST ON THE ASSESSEE, WHERE THE SERVICES WERE RENDERED OUTS IDE INDIA AND SUCH SERVICES WERE RENDERED BY NON-RESIDENTS. REFE RRING TO THE ABOVE DISCUSSION AND THE JUDGMENTS RELIED BY THE A SSESSEE IN HIS SUBMISSIONS, WE DIRECT THE AO TO DELETE THE ADDITIO N. THIS GROUND OF APPEAL IS ALLOWED. 6. ON GOING THROUGH THE ORDER OF THE CIT(A), WE FIN D THAT THE NON- RESIDENTS ARE ONLY PROCURING ORDERS FOR THE ASSESSE E AND FOLLOWING UP PAYMENTS, NO OTHER SERVICES ARE RENDERED OTHER THAN PROCURING THE ORDERS AND COLLECTING THE AMOUNTS. THE NON-RESIDEN TS ARE NOT PROVIDING ANY TECHNICAL SERVICES TO THE ASSESSEE. THE COMMISSION ITA NO.680 & 660/BANG/2014 PAGE 17 OF 26 PAYMENT MADE TO NON-RESIDENTS ALSO DOES NOT FALL UN DER THE CATEGORY OF ROYALTY OR FEE OF TECHNICAL SERVICE, THEREFORE T HE EXPLANATION TO SUB- SEC. (2) OF SEC. 9 HAS NO APPLICATION TO THE FACTS OF THE ASSESSEES CASE. WE SEE THAT THIS CASE IS SQUARELY COVERED BY THE DE CISION OF THE SUPREME COURT IN THE CASE OF GE INDIA TECH., CEN. P VT. LTD., VS. CIT (327 ITR 456) WHEREIN THE HONBLE SUPREME COURT HEL D THAT THE ASSESSEE IS NOT LIABLE TO DEDUCT TDS WHEN NON-RESID ENTS PROVIDED SERVICES OUTSIDE INDIA. IT WAS HELD THAT WHEN THE SERVICES ARE PROVIDED OUTSIDE INDIA, THE COMMISSION PAYMENTS MAD E TO NON- RESIDENTS CANNOT BE TREATED AS INCOME DEEMED TO ACC RUE OR ARISE IN INDIA, THEREFORE, THE PROVISIONS OF SEC. 195 HAS NO APPLICATION. IN ORDER TO INVOKE THE PROVISIONS OF SEC. 195 OF THE A CT, THE INCOME SHOULD BE CHARGEABLE TO TAX IN INDIA. HERE THE COM MISSION PAYMENTS TO NON-RESIDENTS ARE NOT CHARGEABLE TO TAX IN INDIA AND, THEREFORE, THE PROVISIONS OF SEC. 195 ARE NOT APPLICABLE. IN THE CIRCUMSTANCES, WE SUSTAIN THE ORDER OF THE CIT(A) IN DELETING THE DIS ALLOWANCE MADE UNDER 40(A)(I) OF THE ACT. 28. HOWEVER, IN THE PRESENT CASE, THE LD. CIT(APPEA LS) HAS RIGHTLY POINTED OUT THAT THE CONTENTION OF THE ASSESSEE THA T, NO TDS WAS REQUIRED TO BE MADE IN THE ASSESSEES CASE AND HENCE NO DISA LLOWANCE U/S. 40(A)(IA) OF THE ACT WAS REQUIRED TO MADE, IS NOT R ELEVANT TO THE PRESENT CASE SINCE MORE THAN DEDUCTIBILITY OF TDS, THE REAL QUESTION THAT ARISES IS THE NATURE OF PAYMENT AND THE FACT WHETHER THE PAYM ENT OF COMMISSION WAS MADE FOR ACTUAL SERVICES RENDERED. WE THEREFO RE SET ASIDE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER TO PROVIDE ONE MORE OPPORTUNITY TO THE ASSESSEE TO BRING OUT THE BASIS OF PAYMENT OF COMMI SSION, NATURE OF SERVICES RENDERED AND OTHER SUPPORTING EVIDENCE TO SHOW THAT COMMISSION WAS PAID FOR PROCUREMENT OF ORDERS. THE ASSESSING OFFICER SHALL, AFTER SATISFYING HIMSELF ABOUT THE GENUINENESS OF COMMISS ION PAYMENTS AND NATURE OF SERVICES RENDERED, SHALL DECIDE THE ISSUE AFRESH IN THE LIGHT OF ITA NO.680 & 660/BANG/2014 PAGE 18 OF 26 DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL I N M/S EXOTIC FRUITS P. LTD. IN IT(IT)A NOS. 1008 TO 1013/BANG/2012, ORDER DATED 4.10.2013 [62 SOT 247]. THUS, THE ISSUE IS ALLOWED FOR STATISTICAL PURPOSES. 29. THE GROUND REGARDING LEVY OF INTEREST U/S. 234B AND 234D IS CONSEQUENTIAL IN NATURE. 30. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSES. ITA 680/B/14 (REVENUES APPEAL) 31. THE EFFECTIVE GROUNDS OF APPEAL RAISED BY THE R EVENUE ARE AS FOLLOWS:- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE THE LEARNED CIT(A) ERRED IN LAW IN DISALLOWING THE FEES PAID TOWARDS TRADE MARKS AND COPY RIGHT REGISTRATION AS CAPITAL EXPENDITURE AS THEY HAVE ENDURING BENEFIT TO THE ASSESSEE COMPA NY OVER A PERIOD OF TIME AND IS NOT LIMITED TO SINGLE FINANCI AL YEAR. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) ERRED IN LAW IN HOLDING THAT PURCHAS E OF SOFTWARE IS REVENUE EXPENDITURE AS THEY HAVE ENDURING BENEFI T TO THE ASSESSEE COMPANY OVER A PERIOD OF TIME AND IS NOT L IMITED TO SINGLE FINANCIAL YEAR. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) ERRED IN LAW IN HOLDING THAT SOFTWA RE EXPENSES ARE FEES PAID TO OPERATE SOFTWARE, CORAL DRAW, WIND OWS VISTA, MS OFFICE, WITHOUT APPRECIATING THE FACT THAT THE S AID SOFTWARE HAS ONLY TO BE PURCHASED BUT NOT OPERATED BY FEE PE RIODICALLY. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) ERRED IN LAW IN HOLDING THAT THE ASS ESSEE HAS ITA NO.680 & 660/BANG/2014 PAGE 19 OF 26 SURPLUS FUNDS FOR ADVANCING INTEREST FREE LOANS JUS T BECAUSE THE AO FAILED TO FURNISH REMAND REPORT. 32. AS FAR AS GROUND NO.2 IS CONCERNED, THE ASSESSE E INCURRED AN AMOUNT OF RS.18,600 TOWARDS FEES PAID TOWARDS TRADE MARKS AND COPYRIGHT REGISTRATION AND CLAIMED IT AS REVENUE EXPENDITURE. THE AO HELD IT TO BE CAPITAL EXPENDITURE HAVING ENDURING BENEFIT TO THE ASSESSEE OVER A PERIOD OF TIME NOT LIMITED TO A SINGLE FINANCIAL YEAR. 33. BEFORE THE CIT(APPEALS), THE ASSESSEE CONTENDED THAT EXPENDITURE HAS BEEN INCURRED IN THE ORDINARY COURSE OF BUSINES S AND IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THERE I S NO ENDURING BENEFIT OF A CAPITAL NATURE AS THERE WAS NO ACQUISITION OF AN ASSET. RELIANCE WAS PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT V. FINLAY MILLS LTD. 20 ITR 475 AND CIT V. PANACEA BIOTECH LTD., 6 TAXCORP (DT) 50157 (DELHI). 34. THE LD. CIT(APPEALS) HELD THAT THE AO HAS NOT P OINTED OUT AS TO HOW THE EXPENDITURE HAS RESULTED IN AN ENDURING BENEFIT AND THE DECISIONS RELIED UPON BY THE ASSESSEE IS SQUARELY APPLICABLE TO ASSE SSEES CASE. HE THEREFORE ALLOWED THE APPEAL OF THE ASSESSEE ON THI S ISSUE. 35. AGGRIEVED, THE DEPARTMENT IS IN APPEAL BEFORE U S. ITA NO.680 & 660/BANG/2014 PAGE 20 OF 26 36. THE LD. DR SUPPORTED THE ORDER OF THE AO AND RE LIED ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF L&T DEMAG PLASTICS MACHINERY (P) LTD. V. ITO, 123 ITD 391 (MUM) . 37. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, SUPPORTED THE ORDER OF CIT(APPEALS) AND RELIED ON THE FOLLOWING D ECISIONS:- CIT V. FINLAY MILLS LTD. 20 ITR 475 (SC) CIT V. PANACEA BIOTECH LTD., DELHI HC JUDGMENT DATE D 17.1.2012 IN ITA NO.22 & 24/2012. CIT V. TOYOTA KIRLOSKAR MOTOR P LTD. 349 ITR 65 (KA R) CIT V. IBM INDIA LTD. 357 ITR 88 (KAR) 38. WE HAVE HEARD BOTH THE PARTIES. THE HONBLE SU PREME COURT IN EMPIRE JUTE CO. LTD. V. CIT, 124 ITR 1 (SC) AT PAGE 10 HELD AS FOLLOWS:- THERE MAY BE CASES WHERE EXPENDITURE, EVEN I F INCURRED FOR OBTAINING ADVANTAGE OF ENDURING BENEFIT, MAY, N ONE THE LESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENE FIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSEE THAT BRINGS THE CASE WITHIN THE PRINCIPLE LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANTA GE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLO WABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESSEE'S TRADING OPERATIONS OR E NABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE'S BUSINESS T O BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVIN G THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVE NUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFIN ITE FUTURE. THE TEST OF ENDURING BENEFIT IS, THEREFORE, NOT A C ERTAIN OR CONCLUSIVE TEST AND IT CANNOT BE APPLIED BLINDLY AN D MECHANICALLY ITA NO.680 & 660/BANG/2014 PAGE 21 OF 26 WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMST ANCES OF A GIVEN CASE. . 39. FOLLOWING THE RATIO LAID DOWN BY THE HONBLE SU PREME COURT, THE HONBLE DELHI HIGH COURT IN ITS JUDGMENT IN THE CAS E OF CIT V. PANACEA BIOTECH LTD., ITA NO.22 & 24/2012 DATED 17.01.2012 , DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. IN THE CASE OF FINLAY MILLS LTD., 20 ITR 475 (SC) , IT WAS HELD THAT EXPENDITURE INCURRED BY THE COMPANY C ARRYING ON BUSINESS OF MANUFACTURING AND SELLING TEXTILE GOODS IN REGISTER ING FOR THE FIRST TIME ITS TRADE MARKS WHICH WERE NOT IN USE PRIOR TO 25 TH FEBRUARY, 1937, IS REVENUE EXPENDITURE AND AN ALLOWABLE DEDUCTION U/S. 10(2)(X V) OF THE INDIAN INCOME-TAX ACT, 1922. 40. THE CASE RELIED UPON BY THE LD. DR IN L&T DEMAG PLASTICS MACHINERY (P) LTD., 123 ITD 391 (MUM) IS A CASE OF DEDUCTION CLAIMED IN RESPECT OF EXPENSES INCURRED FOR ACQUIRING TRADE MA RK. THE AO HELD THAT SUCH EXPENDITURE TO BE CAPITAL IN NATURE ON THE GRO UND THAT THE AGREEMENT WITH L&T WAS FOR CREATING A NEW TRADEMARK USING A C OMBINED TRADEMARK OF BOTH COMPANIES WHICH AMOUNTED TO CREATING A NEW ASS ET WITH INDEPENDENT IDENTITY, OWNER OF NEW TRADEMARK BEING ASSESSEE COM PANY ITSELF. TO THE QUESTION WHETHER SINCE ASSESSEE HAD OBTAINED REGIST RATION OF NEW TRADEMARK USING A COMBINATION OF TWO COMPANIES AND SUCH NEW TRADEMARK WAS FOR EXCLUSIVE USE OF ASSESSEE AS ITS OWN, ALL E XPENSES INCURRED IN ITA NO.680 & 660/BANG/2014 PAGE 22 OF 26 RELATION TO ACQUIRING SUCH ASSET WERE TO BE CONSIDE RED AS CAPITAL IN NATURE, THE MUMBAI BENCH OF THE TRIBUNAL ANSWERED IN THE AF FIRMATIVE. 41. IN THE PRESENT CASE, THERE WAS NO ACQUISITION O F AN ASSET. WE ALSO FIND THAT THE TRADEMARK HAS NOT BEEN TAKEN AS AN AS SET IN THE BALANCE SHEET. THE ASSESSEE FOR THE FIRST TIME REGISTERED THE TRADEMARK AND COPYRIGHT AND EXPENSES WERE INCURRED ONLY TOWARDS R EGISTRATION AND HENCE IT WAS INCURRED IN THE COURSE OF AND FOR THE PURPOS E OF BUSINESS AND ARE REVENUE EXPENDITURE. HENCE, GROUND NO.2 RAISED BY THE REVENUE IS DISMISSED. 42. WITH RESPECT TO GROUND NO.3 & 4, THE AO NOTED T HAT AN AMOUNT OF RS.3,77,911 WAS INCURRED TOWARDS CORAL DRAW. WINDOW S VISTA MS OFFICE AND THE SOFTWARE EXPENSES HAS NOT BEEN ADDED BACK T O THE COMPUTATION OF INCOME. HE WAS OF THE VIEW THAT THE ABOVE IS IN T HE NATURE OF CAPITAL EXPENDITURE HAVING ENDURING BENEFIT TO THE ASSESSEE OVER A PERIOD OF TIME AND NOT LIMITED TO A SINGLE FINANCIAL YEAR. 43. BEFORE THE CIT(APPEALS), THE ASSESSEE STATED TH AT THE AMOUNTS ARE PAID FOR THE PURPOSE OF OPERATING SOFTWARE AND RELI ED ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. TOYOTA KIRLOSKAR MOTORS PVT. LTD., 349 ITR 65 (KAR) . THE CIT(A) HELD THAT THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IS SQUARELY APPLICABLE TO ASSESSEES CASE AND HENCE HE DIRECTED THE AO TO DELETE THE ADDITION. ITA NO.680 & 660/BANG/2014 PAGE 23 OF 26 44. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 45. WE HAVE HEARD BOTH THE PARTIES. THE EXPENSES T OWARDS OPERATING SOFTWARE IS ALLOWABLE AS REVENUE EXPENDITURE AS HEL D IN THE DECISION OF TOYOTA KIRLOSKAR MOTORS PVT. LTD. (SUPRA) . THE RELEVANT OBSERVATIONS OF THE HONBLE JURISDICTIONAL HIGH COURT IS EXTRACTED BELO W:- 3. AS RIGHTLY POINTED OUT BY THE AUTHORITIES, WHE N THE LIFE OF A COMPUTER OR SOFTWARE IS LESS THAN TWO YEARS AND AS SUCH, THE RIGHT TO USE IT IS FOR A LIMITED PERIOD, THE FEE PAID FOR ACQUISITION OF THE SAID RIGHT IS ALLOWABLE AS REVENUE EXPENDITURE AND THESE SOFTWARES IF THEY ARE LICENCED FOR A PARTICULAR PERIOD, FOR U TILISING THE SAME FOR THE SUBSEQUENT YEARS FRESH LICENCE FEE IS TO BE PAID. THEREFORE, WITHOUT RENEWING THE LICENCE OR WITHOUT PAYING THE FEE ON SUCH RENEWAL, IT IS NOT POSSIBLE TO USE THOSE SOFTWARES. IN THOSE CIRCUMSTANCES, THE FINDINGS RECORDED BY THE AUTHORI TIES THAT THE FEE PAID FOR OBTAINING THE SOFTWARE AND THE LICENCE AND FOR RENEWING THE SAME IS TO BE CONSTRUED AS ONLY REVENU E EXPENDITURE DO NOT CALL FOR INTERFERENCE BY THIS COURT. 46. RESPECTFULLY FOLLOWING THE AFORESAID JUDGMENT, WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. GROUND NOS.3 & 4 ARE DI SMISSED. 47. THE GRIEVANCE OF THE REVENUE IN GROUND NO.5 IS THAT THE CIT(APPEALS) ERRED IN HOLDING THAT THE ASSESSEE HAS SURPLUS FUNDS FOR ADVANCING INTEREST FREE LOANS. 48. THE AO NOTED THAT AN AMOUNT OF RS.1,35,09,949 W AS REFLECTED AS TOWARDS ADDITION TO ASSETS. THE ASSESSEE DEBITED I NTEREST EXPENSES OF RS.1,88,48,129 ON LOANS AND CLAIMED THE SAME AS EXP ENSES. ACCORDING TO THE AO, THE INTEREST FREE FUNDS FAR EXCEEDED THE AM OUNT USED FOR THE ITA NO.680 & 660/BANG/2014 PAGE 24 OF 26 PURPOSE OF ADDITION TO ASSETS. THEREFORE, HE MADE AN ADDITION OF RS.17,22,518. 49. BEFORE THE CIT(A), THE ASSESSEE CONTENDED THAT RS.1,35,09,949 REPRESENTS ADDITION TO ASSETS ON WHICH DEPRECIATION HAS BEEN CLAIMED U/S. 32 AND INTEREST PAID ON CAPITAL BORROWED FOR THE PU RPOSE OF ADDITION TO CAPITAL ASSETS IS ALLOWABLE U/S. 36(1)(III) OF THE ACT. 50. THE CIT(A) HELD THAT THE AO HAS NOT GIVEN ANY F ACTUAL FINDING AS TO WHETHER THERE IS ANY LOAN ADVANCED BY THE ASSESSEE TO ITS AE OR THE IT REPRESENTS ADDITION TO FIXED ASSETS. THE ISSUE WAS REMANDED TO THE AO FOR EXAMINATION. IN THE ABSENCE OF ANY REPORT FROM THE AO, THE CIT(A) HELD THAT THERE WAS NO GROUND FOR ANY ADVERSE FINDING BY THE AO. HE ACCEPTED THE CONTENTION OF THE ASSESSEE THAT AMOUNT OF INTER EST ATTRIBUTABLE TO INVESTMENT IN CAPITAL ASSETS IS TO BE ALLOWED U/S. 36(1)(III). THE CIT(A) OBSERVED THAT THERE WAS NO EVIDENCE OF ANY LOAN GIV EN TO THE AE OUT OF INTEREST BEARING FUNDS. HE THEREFORE DELETED THE A DDITION MADE BY THE AO. 51. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 52. WE HAVE HEARD BOTH THE PARTIES. WE FIND THAT D URING THE YEAR THE ASSESSEE COMPANYS BANKERS RELEASED ADDITIONAL TERM S LOAN TOTALING TO RS.54,85,000 FOR ACQUIRING NEW MACHINERY TO ENHANCE PRODUCTIVITY AND MANUFACTURING CAPACITIES. THE HONBLE SUPREME COUR T IN THE CORE HEALTH CARE LTD., 298 ITR 194 (SC) HAS HELD THAT SECTION 36(1)(III) OF THE ACT ITA NO.680 & 660/BANG/2014 PAGE 25 OF 26 MAKES NO DISTINCTION BETWEEN MONEY BORROWED TO OBTA IN A CAPITAL ASSET OR A REVENUE ASSET; ALL THAT IS REQUIRED IS THAT THE A SSESSEE MUST BORROW CAPITAL AND THE PURPOSE OF BORROWING MUST BE FOR BU SINESS WHICH IS CARRIED ON BY THE ASSESSEE IN THE YEAR OF ACCOUNT . FURTHER, THE ASSESSEE HAS STATED THAT THE AMOUNT OF RS.1,35,09,949 REPRESENTS ADDITION TO FIXED ASSETS ON WHICH DEPRECIATION HAS BEEN CLAIMED U/S. 32. NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE AO TO SHOW THAT ANY L OAN HAS BEEN GIVEN TO AE OUT OF INTEREST BEARING FUNDS. EVEN WHEN A PART ICULAR OPPORTUNITY WAS GIVEN BY THE CIT(A) IN THE REMAND PROCEEDINGS, THE AO DID NOT FILE HIS REMAND REPORT. WE THEREFORE FIND NO INFIRMITY IN T HE IMPUGNED ORDER OF THE CIT(APPEALS) ON THIS ISSUE. GROUND NO.5 IS DISMISS ED. 53. IN THE RESULT, THE REVENUES APPEAL IS DISMISSE D. 54. THUS, THE ASSESSEES APPEAL IS ALLOWED FOR STAT ISTICAL PURPOSES AND THE REVENUES APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF DECEMBER, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) (ASHA VIJAYARAGHAVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 28 TH DECEMBER, 2015. /D S/ ITA NO.680 & 660/BANG/2014 PAGE 26 OF 26 COPY TO: 1. REVENUE 2. ASSESSEE 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.