Sundaram Fasteners Limited, CHENNAI V. ACIT, CHENNAI

ITA 874/CHNY/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4870 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 11 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 19-01-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 20-04-2015
• Court: TRIBUNAL
• Department Lawyers: M N MAURYA
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Business income; Depreciation; Double taxation relief; Earning of tax free income; Proportionate interest; Additional evidence; Permanent establishment; Cost of acquisition; Fair market value; Competent authority; Commercial expediency; Onus to prove; Revised return; Capital expenditure
• Section: 244A; 14A; 80G

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C, CHENNAI , . , ! ' BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ITA NO.874/MDS/2015 ! # $# / ASSESSMENT YEAR : 2009-10 SUNDARAM FASTENERS LTD., 98-A, 7 TH FLOOR, DR. RADHAKRISHNAN SALAI, MYLAPORE, CHENNAI 600 004. [PAN: AAACS 8779D ] VS. ASST. COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-6(2), NUNGAMBAKKAM, CHENNAI 600 034. ( /APPELLANT ) ( / RESPONDENT ) %& ( ) / APPELLANT BY : SHRI R.VIJAYARAGHAVAN, ADVOCATE *+%& ( ) / RESPONDENT BY : SHRI M.N.MAURYA, CIT ( , / DATE OF HEARING : 19.01.2017 -$ ( , / DATE OF PRONOUNCEMENT : 17.04.2017 /O R D E R PER SANJAY ARORA, AM : THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-15, CHENNAI ( CIT(A) FOR SHORT) DATED 10.02.2015, DISMISSING THE ASSESSEES APPEAL CONTES TING ITS ASSESSMENT U/S. 143(3)(C) R/W S.92CA(4) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) DATED 30.03.2013 FOR ASSESSMENT YEAR (AY) 2009-10. 2 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT 2. THE FIRST ISSUE IN THIS APPEAL IS THE DISALLOWAN CE U/S. 14A, SINCE CONFIRMED BY THE FIRST APPELLATE AUTHORITY. THE ASSESSEE WAS DURING THE ASSESSMENT PROCEEDINGS OBSERVED TO HAVE INVESTED IN SHARES (AT .14,245.30 LACS) AS WELL AS ASSUMED LOANS (SECURED AND UNSECURED) AT . 20618.44 LACS ON WHICH INTEREST EXPENDITURE HAD BEEN INCURRED (AT . 9919.88 LACS), AS AT THE YEAR-END. THE ASSESSEE FAILING TO PROVE THAT NO PART OF THE LOANS HAD BEEN UTILIZED TOWARD INVESTMENT, ITS CLAIM THAT THE INVESTMENTS HAD BEE N FINANCED FROM OWN CAPITAL COULD NOT BE ACCEPTED. THE ASSESSING OFFICER (AO), ACCORDINGLY, RELYING ON THE DECISION IN CIT V. WALFORT SHARE & STOCK BROKERS (P.) LTD. [2010] 326 ITR 1 (SC), EFFECTED DISALLOWANCE U/S. 14A AT .79,92,910/-, INCLUDING INDIRECT, ADMINISTRATIVE EXPENDITURE FOR . 68,92,485/-, APPLYING R. 8D. THE SAME STANDS CONFIRMED IN APPEAL FOLLOWING A NUMBER OF DECISIONS , INCLUDING WALFORT SHARE & STOCK BROKERS (P.) LTD. (SUPRA) AND BEACH MINERALS CO. LTD. (IN TCA NO.681/2013 DATED 31.12.2013) BY THE HONBLE JURISD ICTIONAL HIGH COURT, QUOTING PARA 11 THEREOF IN HIS ORDER, SO THAT, AGGR IEVED, THE ASSESSEE IS IN SECOND APPEAL. 3. BEFORE US, THE ASSESSEE PLACED RELIANCE, IN THE MAIN, ON THE DECISION IN REDINGTON (INDIA) LTD. V. ADDL. CIT (IN TCA NO.520/2016 DATED 23.12.2016), CLAIMING, ON THAT BASIS, THAT THE DISALLOWANCE U/S. 14A IS TO BE RESTRICTED W.R.T. TO THE INVESTMENT ONLY IN THOSE SHARES THAT HAD YIELDE D INCOME DURING THE RELEVANT YEAR, EARNED AT . 4.21 LACS, AND FOR WHICH THEREFORE THE MATTER MAY BE RESTORED TO THE FILE OF THE AO. THE LD. DR WOULD OBJECT, ST ATING THAT AS LONG AS THE EXPENDITURE RELATABLE TO, I.E., HAVING CLOSE PROXIM ITY WITH, INCOME THAT DOES NOT FORM PART OF THE TOTAL INCOME, IS INCURRED, ITS DI SALLOWANCE U/S. 14A IS WARRANTED, WHICH IS ONLY TOWARD DETERMINING THE TOT AL INCOME UNDER THE ACT. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS, AND ALSO PERUSED THE MATERIAL ON RECORD. 3 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT THE DECISION IN REDINGTON (INDIA) LTD. (SUPRA), BEING BY THE HONBLE JURISDICTIONAL HIGH COURT, IS BINDING ON US. FURTHE R, THOUGH SO IS THE DECISION IN BEACH MINERALS CO. LTD. (SUPRA), THE SAME STANDS CONSIDERED IN THE LATER DECISION, I.E., REDINGTON (INDIA) LTD. (SUPRA). IT, IN CONCLUSION, HOLDS AS UNDER: 16. IN CONCLUSION, WE ARE OF THE VIEW THAT THE PRO VISIONS OF S. 14A R/W RULE 8D OF THE RULES CANNOT BE MADE APPLICABLE IN A VACUUM, I. E., IN THE ABSENCE OF EXEMPT INCOME. THE QUESTIONS OF LAW ARE ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE DEPARTMENT AND THE APPEAL IS ALLOWED. NO COSTS. THE HONBLE COURT DISCERNS THE SHORT QUESTION ARISI NG BEFORE IT AS TO WHETHER S. 14A WOULD BE APPLICABLE IN THE ABSENCE OF ANY EXEMP T INCOME (PARA 4), I.E., COULD S.14A BE INVOKED UNDER SUCH A CIRCUMSTANCE? P ARAS 5 TO 8 RECORD THE RESPECTIVE ARGUMENTS OF THE PARTIES, INCLUDING RELI ANCE ON CASE LAW. PARA 9 NOTES THE NEED FOR S. 14A, I.E., TO ENSURE THAT NO DEDUCT ION IS ALLOWED IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCOME EXEMPT F ROM TAXATION, I.E., IN COMPUTING TOTAL INCOME, QUOTING FROM WALFORT SHARE & STOCK BROKERS (P.) LTD. (SUPRA). PARA 10 IS THE OPERATIVE PART OF THE DECI SION, AND READS AS UNDER: 10. THE PROVISION THUS IS CLEARLY RELATABLE TO THE EARNING OF ACTUAL INCOME AND NOT NOTIONAL OR ANTICIPATED INCOME. THE SUBMISSION OF THE DEPARTMENT TO THE EFFECT THAT S. 14A WOULD BE ATTRACTED EVEN TO EXEMP T INCOME INCLUDABLE IN TOTAL INCOME WOULD ENTAIL THE ASSESSMENT OF NOTIONA L INCOME, ASSUMED TO THE EXEMPT IN THE FUTURE, IN THE PRESENT ASSESSMENT YEA R. THE COMPUTATION OF TOTAL INCOME IN TERMS OF S.5 OF THE ACT IS ON REAL INCOME AND THERE IS NO SANCTION IN LAW FOR THE ASSESSMENT OF ADMITTEDLY NOTIONAL INCOM E, PARTICULARLY IN THE CONTEXT OF EFFECTING A DISALLOWANCE IN CONNECTION T HEREWITH. PARAS 11 TO 14 OF THE JUDGMENT MEET THE VARIOUS ARG UMENTS ADVANCED BY THE LD. COUNSEL FOR THE REVENUE, CLARIFYING (PER PARA 15) E ACH YEAR TO BE SEPARATE AND DISTINCT, SO THAT IT IS ONLY THE INCOME OF A PARTIC ULAR YEAR THAT COULD BE ASSESSED FOR THAT YEAR. IT IS ONLY WHERE THE INCOME (NOT FO RMING PART OF THE TOTAL INCOME) IS EARNED DURING A PARTICULAR YEAR THAT IT WOULD BE TAX-EXEMPT AND, THUS, ONLY THE EXPENDITURE INCURRED IN CONNECTION THEREWITH THAT H AS TO BE ADJUSTED THERE- AGAINST, SO THAT WHERE NO EXEMPT INCOME IS EARNED, THERE CANNOT BE A 4 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT DISALLOWANCE OF EXPENDITURE IN RELATION TO SUCH ASS UMED INCOME. THE JUDGMENT, IN SUM, THEREFORE, STATES THAT S. 14A R/W R. 8D CAN NOT APPLY WHETHER THERE IS NO EXEMPT INCOME, WHICH WOULD OTHERWISE IMPLY APPLYING THE PROVISION IN VACUUM, I.E., AGAINST PRESUMED OR NOTIONAL INCOME T HAT MAY ARISE IN FUTURE. RULE 8D IS ONLY TOWARD QUANTIFYING THE DISALLOWANCE U/S. 14A, I.E., WHERE THERE IS INCOME NOT FORMING PART OF THE TOTAL INCOM E AND, FURTHER, THE AO IS NOT SATISFIED WITH THE ASSESSEES CLAIM IN RESPECT OF E XPENDITURE RELATABLE TO SUCH INCOME, WHICH MAY INCLUDE A CLAIM AS TO NIL EXPENDI TURE, I.E., OF HAVING IN FACT NOT INCURRED ANY EXPENDITURE IN RELATION THERETO. T HERE BEING ADMITTEDLY EXEMPT INCOME IN THE PRESENT CASE, HOW THEN, WE WONDER, THE SAID JUDGMENT BECOMES APPLICABLE ? THE ARGUMENT ADVANCED SEEKS TO INVOKE THE SAID DE CISION IN FACTS NOT IN AGREEMENT WITH THAT OBTAINING IN THAT CASE, AND UNDER WHICH CIRCUMSTANCE (I.E., OF NO EXEMPT INCOME) ONLY, THE HON'BLE COURT HELD THE EXPENDITURE AS NOT LIABLE TO THE DISALLOWED U/S. 14A. THE DECISION HOL DS THE PROVISION AS BEING A LEGAL MANDATE TO DISALLOW ALL SUCH EXPENDITURE THAT CAN BE SAID TO BE INCURRED IN RELATION TO, I.E., ATTRIBUTABLE TO, EARNING EXEMPT INCOME, SO THAT NO DISALLOWANCE WOULD ARISE IN THE ABSENCE OF SUCH INCOME . ONCE, THEREFORE, THERE IS EXEMPT INCOME, ALL SUCH EXPENDITURE THAT STANDS INCURRED I N RELATION TO ITS EARNING WOULD STAND TO BE DISALLOWED. WHAT, IN EFFECT, THE ASSESSEE STATES IS THAT THOUGH S. 14A IS APPLICABLE, R. 8D IS NOT . IN OTHER WORDS, IT QUESTIONS THE APPLICABILITY OF R. 8D IN THE CIRCUMSTANCE OF S. 14A BEING ADMITTEDL Y APPLICABLE. THIS IS A MATTER VERY DIFFERENT FROM THAT ADDRESSED BY THE HONBLE C OURT IN REDINGTON (INDIA) LTD. (SUPRA), WHICH DOES NOT EVEN REMOTELY STATE SO. RAT HER, COULD NOT IN-AS- MUCH AS WHERE S. 14A IS NOT APPLICABLE, THE QUESTIO N OF ESTIMATION OF THE DISALLOWANCE, AND WHICH IS PURPORT OF R. 8D, DOES N OT ARISE. AGAIN, IT IS TRITE LAW THAT A DECISION IS AN AUTHORITY FOR WHAT IT ACTUALL Y DECIDES, AND NOT WHAT MAY REMOTELY OR EVEN LOGICALLY FOLLOW FROM IT ( GOODYEAR INDIA LTD. VS. STATE OF HARYANA & ANR. [1991] 188 ITR 402 (SC); CIT V. SUN ENGINEERING WORKS (P.) 5 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT LTD . (1992) 198 ITR 297 (SC); LACHMAN DASS BHATIA HINGWALA (P.) LTD. VS. ASSTT. CIT (2011) 330 ITR 243 (DEL) (FB); BLUE STAR LTD. V. CIT (1996) 217 ITR 514 (BOM). THE RELIANCE ON THE SAID DECISION, NOT A PPLICABLE IN THE PRESENT CASE, IS MISPLACED. CONTINUING FURTHER, ONCE, THEREFORE, THERE IS EXEMP T INCOME, SECTION 14A BECOMES APPLICABLE, AND ON ITS CONDITIONS BEING SA TISFIED, A DISALLOWANCE THERE- UNDER SHALL FOLLOW, AND WHICH MAY BE IN A SUM AS WO RKED OUT BY THE ASSESSEE ITSELF, I.E., WHERE THE AO IS SATISFIED THEREWITH. RULE 8D, AS AFORE-EXPLAINED, IS ONLY TOWARD ESTIMATING SUCH EXPENDITURE. THE INDIRE CT EXPENDITURE, I.E., BY WAY OF INTEREST ON BORROWED CAPITAL AND ADMINISTRATIVE EXPENDITURE, COVERED UNDER RULE 8D(2)(II) AND R. 8D(2)(III) RESPECTIVELY, IS, QUA DIVIDEND INCOME, INCURRED ONLY WITH REFERENCE TO THE INVESTMENT/S. EVEN FOR D IRECT EXPENDITURE, BE IT INTEREST (ON BORROWINGS) OR OTHER EXPENDITURE, THE SAME, AGAIN, IS ONLY QUA INVESTMENT/S, I.E., TOWARD THE BORROWINGS UTILIZED THERE-FOR OR TOWARD HOLDING/ MAINTAINING SUCH INVESTMENT/S. THE EXPENDITURE ON I TS ACQUISITION WOULD THOUGH GO TO INCREASE THE VALUE OF SUCH INVESTMENT/S. THE ASSESSEE, BY SEEKING EXCLUSION OF SOME INVESTMENTS, I.E., THAT HAVE NOT YIELDED DIVIDEND INCOME, IN COMPUTING THE AVERAGE VALUE OF THE INVESTMENT U/R. 8D, IS QUESTIONING THE PROPRIETY OF THE SAID RULE, I.E., TO THAT EXTENT. T HE CHALLENGE FAILS AT THE THRESHOLD AS RULE 8D HAS BEEN HELD BY THE HONBLE COURTS AS C ONSTITUTIONALLY VALID, IMPLYING IT BEING BASED ON RELEVANT, INTELLIGIBLE A ND RATIONAL CRITERIA, BESIDES BEING REASONABLE. IN FACT, IT IS NOBODYS CASE THAT IT IS NOT SO. WHY, THE ASSESSEE ITSELF RECOGNIZES THE PRIMACY OF THE INVESTMENTS AS A VALID MEASURE (FOR BASING THE DISALLOWANCE OF EXPENDITURE ON) WHEN IT SEEKS R ETENTION OF A PART OF THE INVESTMENTS. IN OTHER WORDS, THE CHALLENGE TO R. 8D , WITHOUT SHOWING ANY BASIS THEREFOR, IS NOT LEGALLY SUSTAINABLE, MORE SO CONSI DERING THAT THE SAID RULE HAS BEEN UPHELD AS A VALID BASIS FOR ESTIMATING DISALLO WANCE U/S. 14A. REFERENCE IN THIS CONTEXT BE MADE TO THE DECISION IN GODREJ & BOYCE MFG. CO. LTD. V. DY. CIT 6 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT [2010] 328 ITR 81 (BOM). A RULE, EVEN OTHERWISE, HA S THE STATUTORY FORCE OF LAW ( CIT V. AJANTA ELECTRICALS [1995] 215 ITR 114 (SC); KANODIA COLD STORAGE V. CIT [1995] 215 ITR 369 (ALL)). REFERENCE, WITH PROFIT MAY ALSO BE MADE TO THE DECISION IN THE CASE OF K.M. VIJAYAN & ORS. V. UNION OF INDIA [1995] 215 ITR 371 (MAD), UPHOLDING THE CONSTITUTIONALITY OF R. 46 A. IN FACT, NO ARGUMENTS ASSAILING THE VALIDITY OF THE RULE WERE MADE DURING HEARING. THE EARNING OF INCOME ENTAILS INCURRING OF EXPENDIT URE ON THE RELEVANT ACTIVITY, WHICH MAY BE LIMITED TO INVESTMENTS IN SH ARES AND/OR MUTUAL FUNDS, WHICH GIVE RISE TO TAX-EXEMPT DIVIDEND INCOME. THE ACTIVITY WOULD INCLUDE THEIR ACQUISITION (A CAPITAL COST) AND HOLDING COSTS, WHI CH (THE LATTER) MAY INCLUDE A PERIODIC REVIEW OF PERFORMANCE WITH REFERENCE TO TH E STATED INVESTMENT OBJECTIVES, AS ALSO SCANNING THE ENVIRONMENT FOR AL TERNATIVES/BETTER OPTIONS. IN FACT, INCOME, WHICH IS ACCRETION TO CAPITAL BY DEFI NITION, MAY ITSELF ASSUME DIFFERENT FORMS, AND IS NOT LIMITED TO DIVIDEND INC OME ALONE. WHY, A COMPANY MAY DO WELL AND YET NOT DECLARE DIVIDEND, EVEN AS I TS FAIR MARKET VALUE INCREASES IN APPRECIATION OF ITS WORTH. THIS INCREA SED VALUE MAY GET CAPTURED AS CAPITAL GAIN, WHICH IS AGAIN TAX-EXEMPT WHERE IT IS LONG-TERM, I.E., WHERE THE ASSET IS HELD FOR A PERIOD OF 12 MONTHS OR MORE PRI OR TO ITS TRANSFER. OR MAY NOT, WHERE THE ASSET IS NOT SOLD, BEING ONLY INTENDED TO BE RETAINED. THE INVESTMENTS MAY BE MADE UNDER GROWTH (AS AGAINST THE EARNING ) OPTION, WHERE THE INVESTOR PREFERS THE EARNINGS TO BE REDEPLOYED TO P ROPEL GROWTH IN THE VALUE OF THE INVESTMENT. THEN, AGAIN, STABILITY IN INVESTMEN T VALUE MAY BE A PREDOMINANT OBJECTIVE, AS WHERE THE INVESTOR PREFERS A MODERATE RETURN, RATHER THAN ASSUMING HIGHER RISK; RISK AND RETURN BEING POSITIVELY CORRE LATED. IN OTHER WORDS, THE EARNING OF INCOME MAY BE IN DIFFERENT FORMS AS WELL AS NOT UNIFORM ACROSS TIME. IRRESPECTIVE, HOWEVER, EXPENDITURE IS INCURRED ON T HE RELEVANT ACTIVITY/S, EVEN IF IT IS LARGELY PASSIVE, AS IN THE CASE OF INVESTMENT INCOME, AS THE DIVIDEND INCOME, INASMUCH AS IT IS THE INVESTEE, AS AGAINST THE INVESTOR, WHO MANAGES THE 7 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT FUNDS OR THE BUSINESS IN WHICH THE SAME ARE DEPLOYE D. THOUGH INCURRED IN RELATION TO AND FOR THE PURPOSE OF EARNING INCOME, EXPENDITURE DOES NOT BY ITSELF GUARANTEE INCOME, MUCH LESS AT A PARTICULAR AMOUNT. THE QUANTUM OF EXPENDITURE INCURRED HAS NO CORRELATION THEREWITH, I.E., THE QUANTUM OF INCOME THAT MAY ARISE. THE EXPENDITURE INCURRED MAY THUS B E LOWER, EQUAL TO, OR EVEN HIGHER THAN THE INCOME THAT MAY FINALLY ARISE, RESU LTING IN A SURPLUS (GAIN), NO NET GAIN OR, AS THE CASE MAY BE, LOSS FROM THE RELE VANT ACTIVITY. IF INCURRING EXPENDITURE ITSELF ENSURED INCOME IN A HIGHER SUM, ALL THAT WOULD NEED TO BE DONE, TO EARN INCOME, IS TO INCUR EXPENDITURE. FURT HER, THERE WOULD IN THAT CASE, NEVER BE A CASE OF A LOSS BEING SUFFERED. IT IS FOR THIS REASON THAT INCOME INCLUDES LOSS; THERE BEING NO DIFFERENCE IN THEIR NATURE OR CHARACTER, BUT ONLY IN QUANTUM. IN FACT, WHAT IS AT PLAY IS A NUMBER OF FA CTORS, BOTH QUANTITATIVE AND QUALITATIVE, VIZ. BUSINESS AND MARKET RISKS; THE MA NAGEMENT INPUT, INCLUDING ITS QUALITY, ETC., WHICH HAVE A BEARING ON THE INCOME T HAT MAY ARISE, WHICH IS LARGELY IN A DYNAMIC ENVIRONMENT, SO THAT THE RELEV ANT VARIABLES AND THEIR VALUES ARE BOTH SUBJECT TO CHANGE FROM TIME TO TIME. SPEAKING IN THE CONTEXT OF OUR CASE, THE ENTIRE EXP ENDITURE IS INCURRED ON, OR IN RELATION TO, INVESTMENTS, WHICH YIELD DIVIDEN D AS INCOME, THE QUANTUM OF WHICH IS GENERALLY OUTSIDE THE DOMAIN OF THE INVEST OR, THE PERSON INCURRING THE EXPENDITURE. THE EXPENDITURE IS INCURRED QUA INVESTMENTS AS A CL ASS OR PORTFOLIO . WHICH SHARE MAY ACTUALLY YIELD DIVIDEND AND, HOW MU CH, CANNOT BE PREDICATED. WHY, IN A GIVEN CASE, THE INVESTEE-COMPANY MAY NOT DO WELL, SO THAT DESPITE MAKING INVESTMENT THEREIN, INCURRING COSTS, IT RESU LTS IN A FALL IN THE VALUE OF THE INVESTMENT, I.E., AT THE END OF THE ACCOUNT PERIOD VIS-A-VIS ITS COMMENCEMENT. THE EXPENDITURE IN ANY CASE STANDS INCURRED, AND IS THEREFORE TO BE ESTIMATED, AND DISALLOWANCE IN ITS RESPECT EFFECTED. THE PREMISE OF SEC. 14 A, IT MAY BE APPRECIATED, IS TO DETERMINE THE TOTAL INCOME IN TH E CORRECT SUM . IT IS THIS THAT THEREFORE WARRANTS EXCLUDING INCOME NOT FORMING PAR T OF THE TOTAL INCOME, WHERE 8 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT THE TWO - TAXABLE AND TAX-EXEMPT INCOME/S (OR INCOM E STREAMS) ARISE FROM THE SAME COMPOSITE BUSINESS OR SET OF ACTIVITIES. INCOME, BY DEFINITION, IS NET OF ALL EXPENDITURE INCIDENTAL THERETO . INCOME EXEMPT UNDER CHAPTER-III OF THE ACT IS AGAIN ONLY THE NET INCOME AND NOT AT GROSS VALUE (R EFER: WALFORT SHARE & STOCK BROKERS (P.) LTD. (SUPRA); GODREJ & BOYCE MFG. CO. LTD. (SUPRA)). IT IS FOR THIS REASON THAT THE EXPENDITURE INCURRED IN EARNING EXE MPT INCOME AND, THUS, ATTRIBUTABLE THERETO, NEEDS TO BE DETERMINED. THIS ONLY WOULD ENABLE ESTIMATION OF THE TAX-EXEMPT INCOME/S, I.E., NET OF EXPENDIT URE, SO AS TO REMOVE THE SAME IN THE ASSESSMENT OF THE TOTAL INCOME UNDER THE ACT . AGAIN, IT IS FOR THIS REASON THAT IN ESTIMATING SUCH EXPENDITURE, ALL THE INVEST MENTS QUA WHICH THE EXPENDITURE IS INCURRED, I.E., WHETHER IT HAS ACTUA LLY YIELDED INCOME NOT FORMING PART OF THE TOTAL INCOME DURING THE RELEVANT YEAR O R NOT, IS TO BE TAKEN INTO ACCOUNT. THE ONLY IDENTIFICATION OF THE INVESTMENTS THAT IS VALID AND RELEVANT IS IF THE SAME HAS OR COULD GIVE RISE TO INCOME NOT FORMI NG PART OF THE TOTAL INCOME, I.E., TAX-EXEMPT INCOME. WHERE THERE IS SUCH INVEST MENT, THE CORRESPONDING EXPENDITURE THEREON, PROVIDED THERE IS INCOME, IS T O BE DISALLOWED. THIS ALSO EXPLAINS THE USE OF THE WORDS OR SHALL NOT FORM PA RT OF THE TOTAL INCOME IN ARRIVING AT THE AVERAGE VALUE OF THE INVESTMENT, BO TH IN R. 8-D(2)(II) AND R. 8D(2)(III). THIS, AS AFORE-STATED, IN FACT IS ALSO IMPLICIT IN R. 8D(2)(I), I.E., QUA DIRECT EXPENDITURE. FOR EXAMPLE, WHERE THE BORROWED CAPITAL IS DIRECTLY INVESTED IN INSTRUMENTS YIELDING DIVIDEND INCOME, THE ENTIRE INTEREST ON THE SAID BORROWED CAPITAL WOULD STAND TO BE DISALLOWED U/S. 14A R/W R . 8D(2)(I). ONE COULD POSSIBLY ARGUE THAT, IN THAT CASE, DISALLOWANCE U/S . 14A OUGHT TO BE MADE EVEN WHEN NO INCOME NOT FORMING PART OF THE TOTAL INCOME IS EARNED, AND ALL THE EXPENDITURE ATTRIBUTABLE TO THE RELEVANT INVESTMENT S SUBJECT TO DISALLOWANCE, CONTRADICTING REDINGTON (INDIA) LTD. (SUPRA). THIS IS AS IT IS ONLY A CASE WHERE NONE, AS AGAINST SOME, OF THE INVESTMENTS YIELD (TA X-EXEMPT) INCOME FOR THE RELEVANT YEAR. WE DO NOT THINK THAT THERE IS SCOPE FOR ANY SUCH ARGUMENT WHEN 9 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT THE HON'BLE HIGH COURT HAS, ON A READING OF S. 14A, FOUND THAT IT DOES NOT ADMIT OF DISALLOWANCE WHERE INCOME NOT FORMING PART OF TO TAL INCOME IS NOT ACTUALLY EARNED. IT NOWHERE STATES THAT NO EXPENDITURE IS PRESUMED T O HAVE BEEN INCURRED WHERE NO TAX EXEMPT INCOME IS EARNED . RATHER, IT DISCOUNTENANCES ANY ADJUSTMENT BEING MADE ON THE BASIS OF A PRESUMPTION , STATING THAT APPLYING SEC. 14A IN THE ABSENCE OF ANY TAX-EXEMPT INCOME WOULD I MPLY A DISALLOWANCE IN RESPECT OF PRESUMED INCOME, AND WHICH SURELY CANNOT BE, AND WHICH CAN BE REGARDED AS THE RATIO OF THE DECISION. AGAIN, AS EX PLAINED BY IT WITH REFERENCE TO MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD . [1997] 225 ITR 802 (SC), IT IS ONLY THE TAX-EXEMPT INCOME FOR THE RELEVANT YEAR TH AT IS TO BE IDENTIFIED, EVALUATED AND ISOLATED. THIS IS AS ONLY IN THAT CAS E THE CORRECT TOTAL INCOME, I.E., THE INCOME ASSESSABLE UNDER THE ACT, COULD BE DETER MINED, WHICH IS THE ESSENCE OF S. 14A . IN FACT, NOT DOING SO WOULD AMOUNT TO ADJUSTING T HE EXPENDITURE INCURRED FOR THE PURPOSE OF EARNING TAX-EXEMPT INCO ME AGAINST TAXABLE INCOME, REMOVAL OF WHICH DISTORTION IS THE PURPOSE AND LIFE BLOOD OF SECTION 14A, TO WHICH RULE 8D IS ADJUNCT AND IN COMPLETE HARMONY. W E HAVE EXPLAINED THE DECISION IN REDINGTON (INDIA) LTD. (SUPRA), STATING ITS RATIO. EXTRAPOLATING THE SAID DECISION TO A CASE WHERE TAX EXEMPT INCOME STA NDS IN FACT EARNED WOULD BE TO DO VIOLENCE TO THE SAID DECISION, AS INDEED TO T HE CLEAR LANGUAGE OF THE PROVISION, TO WHICH DUE DEFERENCE HAS TO BE ACCORDE D, AS INDEED SOUGHT TO BE BY THE HONBLE COURT. IN VIEW OF THE FOREGOING, THERE IS NO CASE FOR PRO FILING THE INVESTMENTS, CLASSIFYING THEM ON THE BASIS OF WHETHER THEY HAVE OR HAVE NOT YIELDED TAX EXEMPT INCOME DURING THE RELEVANT YEAR, I.E., FOR T HE PURPOSE OF DETERMINING THE EXPENDITURE DISALLOWABLE U/S. 14A, OTHERWISE APPLIC ABLE. ONE HAS, TO SO CONCLUDE, ONLY TO CONSIDER THE MANNER AND THE PURPO SE FOR WHICH THE EXPENDITURE IS INCURRED; THE PREMISE OF S. 14A BEIN G TO IDENTIFY AND DISALLOW ALL SUCH EXPENDITURE. WHEN THE SAME IS ITSELF INCURRED IRRESPECTIVE OF AND DE HORS 10 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT THE IDENTITY OF THE INVESTMENT, THE QUESTION OF SEG REGATION OF THE INVESTMENTS ON THAT, OR FOR THAT MATTER, ANY BASIS, DOES NOT ARISE . THE DISTINCTION IS ARTIFICIAL AND NOT RELEVANT FOR THE PURPOSE AT HAND, I.E., DETERMI NING EXPENDITURE, DIRECT OR INDIRECT, WHICH IS INCURRED FOR ALL THE INVESTMENTS TOGETHER, I.E., AS A CLASS, ATTRIBUTABLE TO EARNING TAX-EXEMPT INCOME AND, BY I MPLICATION, TO TAXABLE INCOME, COMPUTING THEREBY THE LATTER UNDER THE ACT. RULE 8D SHALL, ACCORDINGLY, APPLY WITH FULL FORCE . THE ASSESSEE HAS, APART FROM THE DECISION IN REDINGTON (INDIA) LTD. (SUPRA), ALSO RELIED ON CERTAIN OTHER DECISIONS. THE SAID DE CISIONS, TO WHICH THOUGH NO REFERENCE WAS MADE DURING HEARING, WOULD HOWEVER BE TO NO MOMENT. WE HAVE ALREADY EXPLAINED THAT RULE 8D IS NOT UNDER CHALLEN GE, NOR COULD BE, INASMUCH AS IT STANDS UPHELD FOR ITS CONSTITUTIONAL VALIDITY A ND REASONABILITY, AND WHICH IS WHAT THE ASSESSEE IN EFFECT CHALLENGES, WITHOUT IN FACT EITHER ARGUING SO OR STATING ANY REASON FOR THE SAME. THE DECISION BY A NON-JURISDICTIONAL HIGH COURT IS, IN ANY CASE, NOT BINDING ON THE TRIBUNAL (REFER , INTER ALIA, SURESH DESAI & ASST. CIT [1998] 230 ITR 912 (DEL); CIT V . THANE ELECTRICITY SUPPLY LTD. [1994] 206 ITR 797 (BOM)). THE ASSESSEE FURTHER STATES THAT TH E TRIBUNAL HAS IN ASST . CIT V. SUN INVESTMENTS (P.) LTD . [2011] 8 ITR (TRIB) 33 (DEL) HELD THAT THE AO HAS TO ESTABLISH THAT SPECIFIC EXPENDITURE HAS BEEN INCURR ED BY THE ASSESSEE FOR EARNING EXEMPT INCOME, IN THE ABSENCE OF WHICH NO DISALLOWA NCE U/S. 14A COULD BE MADE BY HIM. THE PRIMARY ONUS TO ESTABLISH ITS RET URN AND THE CLAIMS PREFERRED THEREBY IS ON THE ASSESSEE (SEE: CIT V. CALCUTTA AGENCY LTD . [1951] 19 ITR 191 (SC); CIT V. R. VENAKATASWAMY NAIDU [1956] 29 ITR 529 (SC)). THE REASON IS SIMPLE; IT IS THE ASSESSEE WHO IS IN THE INTIMATE K NOW OF ITS AFFAIRS, AND PREFERS CLAIMS THEREBY. SECTION 14A IS A STATUTORY DISALLOW ANCE, SO THAT IT FOLLOWS WHERE THERE IS EXEMPT INCOME. THE PRIMARY ONUS TO SHOW, W ITH REFERENCE TO ITS ACCOUNTS AND OTHER RECORDS, IS ON THE ASSESSEE AS T O WHY THE DISALLOWANCE U/S. 14A SHOULD NOT BE RESTRICTED TO THAT WORKED OUT BY HIM (WHICH COULD BE NIL), AND 11 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT WHERE SO DONE THE ONUS SHIFTS TO THE AO TO SHOW AS TO WHY HE IS NOT SATISFIED THEREWITH. SECTION 14A(2), AND WHICH SHALL EQUALLY APPLY TO A CASE FALLING U/S. 14A(3), SO CONTEMPLATES, EVEN AS EXPLAINED BY THE H IGHER COURTS, AS IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA), AS ALSO BY THE TRIBUNAL, AS IN AFL (P.) LTD V. ASST. CIT [2013] 28 ITR (TRIB) 263 (MUM). BE THAT AS IT MAY, WE OBSERVE THAT THE ASSESSEE HA S CONTRACTED BOTH, SECURED AND UNSECURED, BORROWINGS DURING THE RELEVANT YEAR. THE FINANCING, TO THE EXTENT IT IS DEDICATED, I.E., IS FOR SPECIFIED PURPOSE/S, AS FOR EXAMPLE A TERM LOAN FOR PLANT AND MACHINERY; A CASH CREDIT FOR WORKING CA PITAL, ETC., THE SAME COULD EASILY BE SHOWN TO HAVE BEEN APPLIED FOR THE STATED PURPOSE/S, I.E., WHERE SO. FOR EXAMPLE, A TERM LOAN FUNDS MACHINERY TO THE EXTENT OF (SAY) 80%. FUNDING TO THAT EXTENT IS ESTABLISHED, SO THAT IN PROPORTIONIN G THE COST OF BORROWINGS OVER THE ASSETS, THE INTEREST COST IN RESPECT OF THE SAI D TERM LOAN AS WELL AS THE ASSETS (TO THE EXTENT OF 80%) WOULD STAND TO BE REDUCED. I T IS A BALANCE (20%) OF THE RELEVANT ASSET THAT STANDS TO BE FINANCED FROM THE GENERAL POOL OF FUNDS, IF NOT, PRESUMABLY, THE ASSESSEES OWN CAPITAL. THE ASSESSE E HAS STATED (OSTENSIBLY ON THE BASIS OF ITS NET WORTH AS WELL AS THE CASH GEN ERATED FROM OPERATIONS) THAT IT HAS SUFFICIENT FUNDS OF ITS OWN. NOW, THAT MAY WEL L BE TRUE, BUT, COULD IT BE SAID, WHERE INVESTMENTS ARE MADE FROM THE GENERAL P OOL OF FUNDS AVAILABLE (FOR BUSINESS), THAT IT IS ONLY THE OWN FUNDS THAT GO TO FINANCE THE INVESTMENTS. RATHER, IF ANYTHING, THE PRESUMPTION WOULD BE THAT THE MARGIN REQUIRED IN CASE OF DEDICATED FINANCING, AS FOR EXAMPLE THE BALANCE 20% OF THE PLANT & MACHINERY, IS OUT OF OWN FUNDS, I.E., CONTAIN NO E LEMENT OF BORROWINGS. SIMILARLY, THE TERM LOAN WOULD STAND TO BE REPAID O VER TIME, AND THE SAID REPAYMENT WOULD PRESUMABLY ONLY BE FROM THE PROFITS /OWN CAPITAL. AS SUCH, UNLESS A STRONG CASE (BASED ON ACCOUNTS AND SUPPORT ED BY EVIDENCES) IS MADE QUA EXCLUSION OF THE GENERAL-PURPOSE, NON-DEDICATED BO RROWINGS, THE INTEREST COST THEREOF, FOLLOWING THE GENERAL POOL OF FUNDS H YPOTHESIS, WOULD STAND TO BE 12 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT EQUITABLY SPREAD, AS INDEED CONTEMPLATED BY RULE 8D . THE MATTER, ACCORDINGLY, TO ALLOW THE ASSESSEEE AN OPPORTUNITY TO STATE ITS CASE IN THE MATTER, RESTORED TO THE FILE OF THE AO, WHO SHALL, AFTER HEARING THE AS SESSEE, DECIDE ON MERITS ISSUING DEFINITE FINDINGS OF FACT. REFERENCE FOR THE PURPOS E MAY ALSO BE MADE TO OUR DECISION QUA AN ANALOGOUS ISSUE, I.E., DISALLOWANCE OF INTEREST TOWARD THE INTEREST-FREE LOANS TO SUBSIDIARY COMPANIES, WHICH IS THE SUBJECT MATTER OF GD. 3 OF THE INSTANT APPEAL. WE DECIDED ACCORDINGLY. 5. THE SECOND ISSUE, PER GD. 3, ARISING IN THE INST ANT APPEAL IS THE DISALLOWANCE OF INTEREST ON BORROWINGS U/S. 36(1)(I II), EFFECTED PROPORTIONATELY, IN RESPECT OF INTEREST-FREE LOANS AND ADVANCES TO W HOLLY OWNED SUBSIDIARY (WOS) COMPANIES, BEING SUNDARAM FASTENERS INVESTMEN TS LTD. (SFIL) AND UPASANA ENGINEERING LTD. (UEL). THE ASSESSEES CASE , WHICH DID NOT FIND FAVOUR WITH THE REVENUE, AND WHICH CONTINUES TO BE THE SAME BEFORE US, IS TWO- FOLD. FIRSTLY, IT IS CONTENDED THAT INVESTMENT IS O UT OF OWN FUNDS, SO THAT NO INTEREST IS ATTRIBUTABLE TO THE SAID ADVANCES. TWO, IT IS STATED THAT THE ADVANCES ARE FOR THE PROMOTION OF THE NEW COMPANIES AND, THU S, TO FURTHER THE BUSINESS INTERESTS OF THE ASSESSEE-COMPANY. THE SAME, IT IS ADDED, ARE ONLY APPLIED FOR THE BUSINESS PURPOSES OF THE LOANEE COMPANIES, ESTABLIS HING COMMERCIAL EXPEDIENCY. THE ASSESSEE HAS BEEN SUCCESSFUL FOR TH E PRECEDING YEARS, I.E., AY 2003-04 ONWARDS, BEFORE THE FIRST APPELLATE AUTHORI TY. THE REVENUES CASE IS BASED ON THE PREMISE THAT THE ASSESSEES CASE IS WH OLLY UNPROVED, AND NO MORE THAN BALD CLAIMS. THE ADVANCES TO THE TWO SUBSIDIAR IES ARE ONLY FROM THE GENERAL POOL OF FUNDS, I.E., INCLUDING BORROWINGS, WHICH ST AND IN FACT INCREASED DURING THE CURRENT YEAR. IN THE ABSENCE OF THE ASSESSEE SH OWING THE MANNER OF FINANCING OF THE IMPUGNED LOANS AND ADVANCES, PROPORTIONATE D ISALLOWANCE OF INTEREST INCURRED ON THE BORROWINGS WOULD FOLLOW. SIMILARLY, NO COMMERCIAL EXPEDIENCY HAS BEEN ESTABLISHED; THE SUBSIDIARY COMPANIES PURS UING THEIR OWN OBJECTS, I.E., FOR WHICH THEY HAD BEEN FORMED. IN FACT, THE AMOUNT S HAVE BEEN USED BY THE 13 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT INVESTEE COMPANIES IN ACQUIRING LAND AND BUILDING A ND BY WAY OF EQUITY AND INTEREST-FREE LOANS IN OTHER COMPANIES, INCLUDING T HEIR SUBSIDIARIES. THE DECISION IN S.A. BUILDERS LTD. V. CIT [2007] 288 ITR 1 (SC), RELIED UPON BY THE ASSESSEE, IS DISTINGUISHABLE ON FACTS. 6. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE TRIBUNAL, WHICH HAD SET ASIDE THE MATTER FOR AY 2003-04, I.E., IN THE FIRST ROUND, HAS DECIDED IN THE ASSESSEES FAVOUR, UPHOLDING THE ORDER BY THE FIRST APPELLATE AUTHORITY (IN ITA NO.1009/MDS/2011 DATED 15.07.2016/COPY ON RECORD) AND, FOLLOWING IT, FOR AY 2005-06 (IN ITA N O.1010/MDS/2011 DATED 15.07.2016), BEING IN FACT A COMBINED ORDER FOR BOT H THE YEARS. THE SAME, HOWEVER, WE MAY CLARIFY AT THE OUTSET, SHALL BE OF LITTLE CONSEQUENCE. THIS IS AS THE LOANS UNDER REFERENCE, QUA WHICH THE INTEREST STANDS DISALLOWED, ARE ADVANCED ONLY DURING THE RELEVANT YEAR, THE BALANCE OUTSTANDING AT THE BEGINNING OF THE YEAR FOR THE TWO FIRMS BEING NIL; THE SNAP S HOT PICTURE BEING AS UNDER (APB PG.2): (AMOUNT OF LACS) SL NO PARTICULARS OP. BAL AS ON 01.04.2008 LOANS GRANTED DURING FY 2008-09 REPAID DURING FY 2008-09 CL. BAL AS ON 31.03.2009 1. 2. INTEREST FREE LOANS GRANTED TO SUBSIDIARIES: SUNDRAM FASTENERS INVESTMENTS LIMITED UPASANA ENGINEERING LIMITED - - 376.40 1,721.10 366.00 10.79 10.40 1,720.32 TOTAL - 2,097.50 376.79 1,720.71 CONTINUING FURTHER, THE LOANS TO THE SUBSIDIAR Y COMPANIES AS A CLASS, AT THE BEGINNING OF THE YEAR, IS AT . 69.42 LACS ONLY, WHILE THAT AT ITS END IS AT . 4187.49 LACS (SHEDULE-XI TO THE BALANCE-SHEET AS ON 31.03.2009), SO THAT, AS APPARENT, THE AO HAS NOT EVEN INCLUDED, FOR THE PUR POSE OF DISALLOWANCE OF 14 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT INTEREST, THE AMOUNTS LENT/ADVANCED DURING THE PREC EDING YEARS WHICH, DEPENDING ON WHETHER THE OPENING BALANCE CONTINUES TO OUTSTAND IN FULL OR IN PART, WOULD THEREFORE VARY BETWEEN . 2397.36 LACS AND . 2466.78 LACS. SURELY, THE BUSINESS PURPOSE AND COMMERCIAL EXPEDIENCY, AS CLAIMED, WOULD NEED TO BE EXAMINED ONLY WITH REFERENCE TO THE LOANS/ADVANCES QUA WHICH THE INTEREST STANDS DISALLOWED. NO ASSISTANCE ON THE BASIS OF TH E APPLICATION OF THE EARLIER LOANS TO SUBSIDIARY COMPANIES, SINCE RETURNED, INAS MUCH AS THEY OUTSTAND AT A NOMINAL FIGURE OF . 69.42 LACS, TO A DIFFERENT CONCERN/S, WOULD THERE FORE ENSUE. COMING TO THE MERITS OF THE CASE, THE SAME HAS TWO ASPECTS TO IT, I.E., IN PRINCIPLE AND ON QUANTUM. THE LAW IN THE MATTER IS CLEAR, AND TOWARD WHICH WE HAVE, WHILE DISCUSSING THE DISALLOWANCE U/S. 14A, R EFERRED TO THE BURDEN OF PROOF, WHICH IS ON THE ASSESSEE. THE ASSESSEES CLA IMS ARE TWO-FOLD; ONE, THAT ADVANCES ARE OUT OF COMMERCIAL EXPEDIENCY. TWO, THA T THE ADVANCES ARE FINANCED BY OWN CAPITAL, SO THAT NO INTEREST COST CAN BE ATTRIBUTED THERETO. WE FIND NO BASIS OR ANY MATERIAL/EVIDENCE LED AT ANY S TAGE TOWARD THE SAME. FOR WHAT PURPOSE THE LOAN/ADVANCE/S STAND GIVEN, OR ACT UALLY APPLIED TO, REMAINS UNEXPLAINED. THE ASSESSEE STATES THE ADVANCES TO BE FOR THE PROMOTION WHATEVER THAT MAY MEAN , OF THE NEW COMPANIES, WHICH ARE SEPARATE AND DIST INCT LEGAL ENTITIES, BESIDES DIFFERENT PERSONS UNDER THE ACT. EVEN SO, SURELY, PROMOTION OF OTHER COMPANIES IS NOT THE ASSESSEES BUSINESS; IT BEING NOBODYS CASE THAT IT IS SO, NOR IS ANY BUSINESS MODEL, ON T HAT BASIS, PRESENTED. THAT THE ASSESSEE IS A MAJOR SHAREHOLDER; RATHER, THE ONLY S HAREHOLDER AS THE LENDEES ARE WOS COMPANIES, ONLY STATES THE ASSESSEES CAPACITY VIS--VIS THERETO AS A SHAREHOLDER, I.E., DEFINES THE ASSESSEES LEGAL RIG HTS AND THE NATURE OF ITS STAKE THEREIN. IT HAS NO BEARING ON THE NATURE OF THE ADV ANCES, OR OF THEIR BEING FOR BUSINESS PURPOSES, WHICH IS TO CHARACTERIZE THE SAM E FOR THE ALLOWANCE OF INTEREST ON THE CORRESPONDING BORROWED CAPITAL (S. 36(1)(III)). COMMERCIAL EXPEDIENCY, IT MAY BE APPRECIATED, IS A MATTER OF F ACT AND NOT OF LAW, AND WOULD 15 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT ACCORDINGLY REQUIRE BEING SHOWN, AND IS NOT A MATTE R OF PRESUMPTION . RATHER, THE ASSESSEES CLAIM OF HELPING OR PROMOTING TH E LOANEE/ADVANCEE COMPANIES (WHICH ARE A DIFFERENT LEGAL PERSONS), SEPARATE AND DISTINCT FROM THE ASSESSEE- COMPANY, BESIDES BEING VAGUE, CONTRADICTS ITS CASE AND, IN ANY CASE, DOES NOT BY ITSELF INDICATE, MUCH LESS PROVE, ANY BUSINESS P URPOSE. AS IT APPEARS, THE ASSESSEE DOES SO IN ITS CAPACITY AS THEIR PARENT, WHICH WOULD HAVE LITTLE BEARING IN THE MATTER, UNLESS SHOWN TO BE, IN SOME MANNER, PROMOTING ITS OWN BUSINESS INTEREST, WHICH CANNOT BE EQUATED WITH THAT AS AN I NVESTOR OR PROMOTER. THE CASE AS TO COMMERCIAL EXPEDIENCY IS WHOLLY UNPROVED. THE LAW IN THE MATTER IS CLEAR, AND FOR WHICH WE MAKE REFERENCE TO K. SOMASUNDARAM & BROS . V. CIT [1999] 238 ITR 939 (MAD). THE ASSESSEES ALTERNATE CLAIM, WHICH IT MAKES WIT H REFERENCE TO THE DECISION IN CIT V. HOTEL SAVERA [1999] 239 ITR 795 (MAD), HAS SOME MERIT. THAT IS, WHERE THE INVESTMENT IS MADE OUT OF COMMON FUNDS, THE SAME WOULD LEAD TO THE INFERENCE OF THE INVESTMENT BEING OUT O F OWN FUNDS PROVIDED THE ASSESSEE HAS SUFFICIENT FUNDS FOR THE PURPOSE. THIS IS AS, IN CONTRADISTINCTION TO S. 14A, WHICH IS A STATUTORY DISALLOWANCE, S. 36(1)(II I) IS A PROVISION ALLOWING THE EXPENDITURE, ALBEIT SUBJECT TO CERTAIN CONDITIONS, SO THAT ON THE CIRCUMSTANCES BEING SHOWN, THE SAME CAN BE REGARDED AS SATISFIED. THIS ASPECT, CLEARLY, HAS FACTUAL OVERTONES. THIS WOULD ACCORDINGLY WARRANT E XAMINATION OF THE ASSESSEES CASH FLOW STATEMENT FOR THE YEAR (WHICH FORMS PART OF ITS BALANCE-SHEET AS ON 31/3/2009/ COPY ON RECORD). THE SUMMARIZED CASH FLO W STATEMENT FOR THE YEAR IS AS UNDER: TABLE I (AMOUNT IN . LACS) SL. NO. PARTICULARS AMOUNT REMARKS A) NET CASH FLOW FROM OPERATIONS 8787.08 B) CASH FLOW FROM INVESTMENT ACTIVITIES (9817.19) C) SHORT-FALL (1030.11) (A B) D) CASH FLOW FROM FINANCING ACTIVITIES 89.25 16 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT E) NET SHORTFALL (940.86) (C D)(*) (AMOUNTS IN BRACKETS REPRESENT NEGATIVE SUMS) (*) CASH AND CASH EQUIVALENTS AS AT 31/3/2009 ARE A T . 940.86 LACS LOWER THAN THAT AS ON 31/3/2008. CLEARLY, IT CANNOT BE SAID THAT THE ASSESSEE HAS S URPLUS FUNDS, OR THAT THE MONIES LENT/ADVANCED ARE FROM ITS OWN FUNDS. THE O NLY READY INFERENCE IS THAT THE SAME HAVE COME FROM A MIX OF OWN FUNDS AND BORR OWED CAPITAL, WHICH BRINGS US TO THE QUESTION OF THE RATIO OF EACH COMP ONENT IN THE MIX. TERM LOANS (NET OF REPAYMENTS DURING THE YEAR) AVAILED DURING THE YEAR, ARE AT RS.5494.50 LACS, I.E., IN THE FINANCING ACTIVITY. THE SAME A T GROSS OF REPAYMENTS, CAN ONLY BE CONSIDERED AS HAVING BEEN APPLIED FOR THE STATED PURPOSE, I.E., FINANCING THE ACQUISITION COST OF FIXED ASSETS, WITH THE BALANCE BEING BY OWN CAPITAL, WHICH WOULD ALSO STAND TO BE INCREASED BY THE APPLICATION UNDER REFERENCE, I.E., RS. 1,720.71 LACS. SIMILARLY, THE PAYMENT OF INTEREST A ND DIVIDEND FOR THE YEAR (RS. 7415.02 LACS) CAN ONLY BE CONSIDERED AS OUT OF THE ASSESSEES OWN FUNDS; IN FACT, PROFITS. THE SAME, NET OF THAT RECEIVED, AT RS. 722 6.53 LACS, WOULD ACCORDINGLY STAND ALSO TO BE ADJUSTED THERE-FROM, AS WOULD BE T HE REPAYMENT OF BORROWINGS, WHICH CANNOT BE PRESUMED TO BE FINANCED FROM THE BO RROWINGS THEMSELVES. THE FIGURES OF REPAYMENTS BEING NOT AVAILABLE, THE SAME , FOR THE PURPOSE OF OUR CALCULATION, WHICH IS THUS ILLUSTRATIVE, ARE TAKEN AT RS. 505.50 LACS AND RS. 500 LACS FOR THE TERM LOAN/S AND BORROWINGS RESPECTIVEL Y. THE MODIFIED SUMMARIZED CASH FLOW STATEMENT IS AS UNDER: TABLE II (AMOUNT IN . LACS) SL. NO. PARTICULARS AMOUNT REMARKS A) REPAYMENT OF TERM LOAN/S (SAY) 505.50 B) TERM LOAN/S AT GROSS FOR THE YEAR 6000.00 (549 4.50 +505.50) C) PURCHASE OF FIXED ASSETS (NET OF SALES) 9131.95 (9183.70 51.75) D) OWN CAPITAL UTILIZED TOWARD FIXED ASSETS 3131.95 (C B) 17 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT TABLE III (AMOUNT IN . LACS) SL. NO. PARTICULARS AMOUNT REMARKS A) OWN CAPITAL - GROSS GENERATION FROM ACTIVITIES 8787.08 - REPAYMENT OF TERM LOAN/S (505.50) - LOANS/ADVANCES TO SUBSIDIARY COMPANIES 1720.71 - REPAYMENT OF BORROWINGS (500.00) (SAY) - PAYMENT OF INTEREST, TAX AND DIVIDEND (NET) (7226.53) NET OF THAT RECEIVED TOTAL OWN FUNDS AVAILABLE 2274.96 (AMOUNT IN . LACS) SL. NO. PARTICULARS AMOUNT REMARKS B) THE POSITIONS MAY BE NOW SUMMARIZED AS UNDER: - NET CASH FLOW FROM ACTIVITIES 2274.96 - BORROWINGS 2510.57 (2010.57+500) TOTAL FUNDS AVAILABLE 4785.53 (AMOUNT IN . LACS) SL. NO. PARTICULARS AMOUNT REMARKS C) APPLICATION OF FUNDS - LOANS/ADVANCES TO SUBSIDIARIES 1720.71 - ACQUISITION OF FIXED ASSETS 3131.95 - INVESTMENTS (PURCHASED SOLD) 873.73 TOTAL APPLICATION OF FUNDS 5726.39 SHORTFALL 940.86 (AVAILABLE (B) - APPLIED (C)) NOW, FIRSTLY, THE SHORTFALL (I.E., THE CASH BALANCE UTILIZED) CAN ONLY BE TAKEN AS FINANCED IN THE SAME RATIO AS OF THE FUNDS AVAILABL E FOR FINANCING FOR THE CURRENT YEAR, TAKEN AS A WHOLE, I.E., . 4785.53 LACS, WHICH WOULD ENABLE APPLYING THE SAID RATIO TO THAT PART OF THE FINANCING (REPRESENT ED BY THE SHORTFALL, OR UTILIZATION OF THE FIRMS CASH BALANCE/S) AS WELL. OR, ELSE, TH E SAME COULD BE CONSIDERED TO 18 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT BE IN THE RATIO OBTAINING AS AT THE BEGINNING OF TH E YEAR, WHICH WOULD THOUGH REQUIRE PREPARATION, SIMILARLY, OF THE CASH FLOW ST ATEMENT FOR THE IMMEDIATELY PRECEDING YEAR (I.E., THE YEAR ENDING 31/3/2008), O R COULD EVEN BE TAKEN ON THE BASIS OF THE CAPITAL STRUCTURE OBTAINING AS AT THE BEGINNING OF THE YEAR, WHICH WOULD REFLECT AS TO HOW THE WORKING CAPITAL, OF WHI CH THE CASH (AND CASH EQUIVALENTS) IS A PART, STANDS FINANCED THEREAT. TH E INTEREST, IF ANY, APPLICABLE TO THAT PART OF THE FINANCING SHALL STAND TO BE WORKED OUT ACCORDINGLY. COMING TO THE BALANCE FINANCING OF RS. 4785.53 LACS, I.E., OU T OF FUNDS ARISING DURING THE YEAR, THE DATA IS, DEPENDING ON THE OBTAINING FACTS , SUBJECT TO TWO INTERPRETATIONS. IF THE BORROWINGS ARE GENERAL PURPOSE BORROWINGS, T HE SAME COULD BE USED FOR FINANCING FIXED ASSETS AS WELL. IF AND TO THE EXTEN T THEY ARE NOT, THE FIXED ASSETS WOULD STAND TO BE FINANCED ONLY FROM OWN FUNDS, AND ONLY THE BALANCE ONLY FROM THE MIX (OF OWN CAPITAL AND GENERAL PURPOSE BO RROWINGS). THIS WOULD GIVE A FAIR ESTIMATION OF THE FINANCING PATTERN OF THE L OANS/ADVANCES TO THE TWO SUBSIDIARIES DURING THE YEAR. TO THE EXTENT FINANCE D FROM BORROWINGS, THE AVERAGE INTEREST RATE THEREON CAN THEN BE APPLIED T O THE SAME. THE SAME SHALL, IN OUR VIEW, HAVE TO BE ON A MONTH-WISE BASIS INASMUCH AS THERE HAS BEEN REPAYMENT DURING THE YEAR AS WELL AND, IN ANY CASE, THERE IS NOTHING TO SUGGEST THAT THE ENTIRE AMOUNT STANDS ADVANCED AT THE BEGIN NING OF THE YEAR ITSELF. AS SUCH, THE AVERAGE FOR EACH MONTH (FOR WHICH THE OPE NING AND CLOSING FOR THAT MONTH BE ADOPTED) TAKEN, AND THE FINANCING COST COM PUTED ACCORDINGLY. THE FIGURES WORKED OUT ARE, AS AFORE-STATED, ILLUSTRATI VE, AS THE AMOUNTS OF REPAYMENT OF TERM LOANS AND BORROWINGS WHICH IS A FACT, HAV E BEEN TAKEN AT ASSUMED FIGURES, AND SHALL REQUIRE BEING SUBSTITUTED BY ACT UAL FIGURES. FURTHER, THE ASSESSEE SHALL BE ALLOWED DUE OPPORTUNITY TO REPRES ENT ITS CASE AS THE WORKING, THOUGH BASED ON ITS PLEADING AND BALANCE-SHEET, S TANDS NOT CONFRONTED THERETO AND, BESIDES, IT IS JUST POSSIBLE THAT THE ASSESSEE MAY POINT OUT SOME CORRECTIONS/ MODIFICATIONS REQUIRED THERETO, WHICH THE AO SHALL CONSIDER ON MERITS. 19 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT THE MATTER, ACCORDINGLY, IS RESTORED TO THE FILE OF THE AO FOR ADJUDICATION IN TERMS OF THE FOREGOING PER A SPEAKING ORDER. FIN ALLY, THE FINANCING OF INVESTMENTS, IT SHALL BE SEEN, IS INTERWOVEN AND, A GAIN, DEPENDING ON WHETHER THE BORROWINGS ARE GENERAL PURPOSE OR OTHERWISE, WO ULD ESTABLISH THEIR FINANCING PATTERN AS WELL. AGAIN, WHERE AND TO THE EXTENT NOT GENERAL PURPOSE, BUT DEDICATED BORROWINGS, SUITABLE MODIFICATION TO THE FINANCING PATTERN, AS WE HAVE DONE IN THE CASE OF TERM LOANS, WOULD BE REQUIRED, REQUIRING ELIMINATION OF BOTH, SUCH BORROWINGS AND THE BALANCE, OWN FUNDS, FROM TH E AGGREGATE/GENERAL CASH FLOW FOR THE YEAR, I.E., TO ARRIVE AT THE FUNDING A VAILABLE FOR FINANCING THE BALANCE ASSETS/APPLICATIONS. WE DECIDE ACCORDINGLY. 7. THE NEXT AND THE FOURTH GROUND OF APPEAL IS IN R ESPECT OF DISALLOWANCE OF SOFTWARE EXPENSES AS CAPITAL EXPENDITURE, ON WHICH, THEREFORE, DEPRECIATION STANDS ALLOWED IN ASSESSMENT AT THE RATE PRESCRIBED IN ITS RESPECT. THE SAID GROUND WAS NOT PRESSED DURING HEARING, AND IS ACCOR DINGLY DISMISSED AS NOT PRESSED. 8. THE FIFTH GROUND OF APPEAL IS IN RESPECT OF DISA LLOWANCE OF COMMISSION EXPENDITURE, ALLOWED TO NON-RESIDENT AGENTS, EFFECT ED UNDER SECTION 40(A)(I) IN THE SUM OF RS. 130.47 LACS. THE ASSESSEE CLAIMS THA T THE SERVICES BY THE AGENTS ARE RENDERED OUTSIDE INDIA AND, THEREFORE, NO PART OF THE EXPORT COMMISSION ALLOWED TO THEM ACCRUES OR ARISES IN INDIA, FOR SEC TIONS 5(2)(B) OR 9(1) TO APPLY THERETO. FURTHER, NO DOUBT THE SERVICES INCLUDE UPD ATING THE ASSESSEE OF THE CHANGES, MARKET TRENDS, ETC. IN THE RESPECTIVE MARK ETS, AND EXAMINATION OF THE ACCREDITATION AND THE FINANCIAL STANDING OF THE BUY ERS, THE SAME IS ONLY IN THE NATURE OF MARKETING INFORMATION AND NOT TECHNICAL K NOWLEDGE AND, ACCORDINGLY, ONLY BUSINESS INCOME. THE SAME WOULD ACCORDINGLY BE TAXABLE IN INDIA ONLY WHERE, IN TERMS OF INDO-US AND INDO-UK DOUBLE TAX A VOIDANCE AGREEMENTS (DTAAS), THE NON-RESIDENT PAYEES HAVE A PERMANENT E STABLISHMENT (PE) IN 20 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT INDIA, WHICH THEY UNDISPUTEDLY DO NOT. IN THE VIEW OF THE REVENUE, ON THE OTHER HAND, THE SAME IS IN THE NATURE OF FEE FOR TECHNIC AL SERVICES, AS DEFINED U/S. 9(1)(VII) OF THE ACT, AND WHICH CORRESPONDS TO THE DEFINITION OF THE SAID TERM AS PROVIDED IN SEVERAL DTAAS, AND WHICH DOES NOT REQUI RE, FOR IT BEING TAXED IN INDIA, THE PAYEE TO BE A HAVE A PE IN INDIA. 9. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE RELEVANT AGREEMENTS ARE NOT ON RECORD. IT IS, H OWEVER, CLEAR THAT THE AGENTS PROVIDE A RANGE OF SERVICES, VIZ. LOGISTICS, WAREHOUSING, INVENTORY MANAGEMENT, MARKETING SUPPORT SERVICES, AS WELL AS THOSE RELATED SERVICES TO ASCERTAINING AND PROVIDING INFORMATION ON THE FINAN CIAL STANDING AND CREDITABILITY OF THE BUYERS, I.E., APART FROM CANVA SSING ORDERS FOR AND ON BEHALF OF THE ASSESSEE. THE DTAAS BETWEEN AND USA & UK, TH E TWO COUNTRIES WHERE THE AGENTS ARE CLAIMED TO BE RESIDENTS, ARE ON RECO RD. ARTICLE 7 OF BOTH DEALS WITH BUSINESS PROFITS, AND WHICH REQUIRES, FOR THE BUSIN ESS PROFITS TO BE ASSESSABLE IN THE OTHER CONTRACTING STATE (INDIA), THE ENTERPRISE TO HAVE A PERMANENT ESTABLISHMENT (PE) THEREAT. THERE IS NO CLAIM BY TH E REVENUE AS TO THE NON- RESIDENT PAYEES HAVING A PE IN INDIA. THE QUESTION THEREFORE BOILS DOWN TO IF THE SERVICES PROVIDED BY THEM CAN BE REGARDED AS ROYAL TY AND FEE FOR INCLUDED SERVICES AND ROYALTIES AND FEES FOR TECHNICAL SER VICES, AS DEFINED UNDER INDO- US (ARTICLE 12) AND INDO-UK (ARTICLE 13) DTAAS. ART ICLE 12 OF THE INDO-US DTAA, IN ITS RELEVANT PART, READS AS UNDER: ARTICLE 12 3. THE TERM 'ROYALTIES' AS USED IN THIS ARTICLE ME ANS: (A) PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FO R THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF A LITERARY, ARTISTIC, OR SCIE NTIFIC WORK, INCLUDING CINEMATOGRAPH FILMS OR WORK ON FILM, TAPE OR OTHER MEANS OF REPRODUCTION FOR USE IN CONNECTION WITH RADIO OR TELEVISION BROADCAS TING, ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, O R FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXP ERIENCE, INCLUDING GAINS DERIVED FROM THE ALIENATION OF ANY SUCH RIGHT OR PR OPERTY WHICH ARE CONTINGENT ON THE PRODUCTIVITY, USE, OR DISPOSITION THEREOF; A ND 21 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT (B) PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY INDUSTRIAL, COMMERCIAL, OR SCIENTIFIC EQUI PMENT, OTHER THAN PAYMENTS DERIVED BY AN ENTERPRISE DESCRIBED IN PARAGRAPH I O F ARTICLE 8 (SHIPPING AND AIR TRANSPORT) FROM ACTIVITIES DESCRIBED IN PARAGRA PH 2(C) OR 3 OF ARTICLE 8. 4. FOR PURPOSES OF THIS ARTICLE, 'FEES FOR INCLUDED SERVICES' MEANS PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR THE RENDERI NG OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THROUGH THE PROVISION OF SERVIC ES OF TECHNICAL OR OTHER PERSONNEL) IF SUCH SERVICES: (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIB ED IN PARAGRAPH 3 IS RECEIVED; OR (B) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKI LL, KNOW-HOW, OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRANSF ER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. 5. NOTWITHSTANDING PARAGRAPH 4, 'FEES FOR INCLUDED SERVICES' DOES NOT INCLUDE AMOUNTS PAID: (A) FOR SERVICES THAT ARE ANCILLARY AND SUBSIDIARY, AS WELL AS INEXTRICABLY AND ESSENTIALLY LINKED TO THE SALE OF PROPERTY OTHER TH AN A SALE DESCRIBED IN PARAGRAPH 3(A) ; (B) FOR SERVICES THAT ARE ANCILLARY AND SUBSIDIARY TO THE RENTAL OF SHIPS, AIRCRAFT, CONTAINERS OR OTHER EQUIPMENT USED IN CONNECTION WI TH THE OPERATION OF SHIPS OR AIRCRAFT IN INTERNATIONAL TRAFFIC; (C) FOR TEACHING IN OR BY EDUCATIONAL INSTITUTIONS; (D) FOR SERVICES FOR THE PERSONAL USE OF THE INDIVIDUAL OR INDIVIDUALS MAKING THE PAYMENTS; OR (E) TO AN EMPLOYEE OF THE PERSON MAKING THE PAYMENTS OR TO ANY INDIVIDUAL OR FIRM OF INDIVIDUALS (OTHER THAN A COMPANY) TOR PROFESSIO NAL SERVICES AS DEFINED IN ARTICLE 15 (INDEPENDENT PERSONAL SERVICES). THE MEMORANDUM OF UNDERSTANDING BETWEEN INDIA AND U S DATED 15/5/1989 IN RESPECT OF ARTICLE 12 OF DTAA, AGAIN, IN ITS RELEVA NT PART, READS AS UNDER: PARAGRAPH 4 (IN GENERAL) THIS MEMORANDUM DESCRIBES IN SOME DETAIL THE CATEG ORY OF SERVICES DEFINED IN PARAGRAPH 4 OF ARTICLE 12 (ROYALTIES AND FEES FOR INCLUDED SERV ICES). IT ALSO PROVIDES EXAMPLES OF SERVICES INTENDED TO BE COVERED WITHIN THE DEFINITION OF INC LUDED SERVICES AND THOSE INTENDED TO BE EXCLUDED, EITHER BECAUSE THEY DO NOT SATISFY THE TE STS OF PARAGRAPH 4, OR BECAUSE, NOTWITHSTANDING THE FACT THAT THEY MEET THE TESTS O F PARAGRAPH 4, THEY ARE DEALT WITH UNDER PARAGRAPH 5. THE EXAMPLES IN EITHER CASE ARE NOT IN TENDED AS AN EXHAUSTIVE LIST BUT RATHER AS ILLUSTRATING A FEW TYPICAL CASES. FOR CASE OF UNDERSTANDING, THE EXAMPLE IN THIS MEMO RANDUM DESCRIBED U.S. PERSONS PROVIDING SERVICES TO INDIAN PERSONS, BUT THE RULES OF ARTICLE 12 ARE RECIPROCAL IN APPLICATION . ARTICLE 12 INCLUDES ONLY CERTAIN TECHNICAL UND CONS ULTANCY SERVICES. BUT TECHNICAL SERVICES, WE MEAN IN THIS CONTEXT SERVICES REQUIRING EXPERTISE I N A TECHNOLOGY. BY CONSULTANCY SERVICES, WE MEAN IN THIS CONTEXT ADVISORY SERVICES. THE CATEGO RIES OF TECHNICAL AND CONSULTANCY SERVICES 22 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT ARE TO SOME EXTENT OVERLAPPING BECAUSE A CONSULTANC Y SERVICE COULD ALSO BE A TECHNICAL SERVICE. HOWEVER, THE CATEGORY OF CONSULTANCY SERVI CES ALSO INCLUDES AN ADVISORY SERVICE, WHETHER OR NOT EXPERTISE IN A TECHNOLOGY IS REQUIRE D TO PERFORM IT. EXAMPLE 6 AND 7 OF THE EXAMPLES THERETO, EXPLAINING THE APPLICATION OF ART. 12 IN DIFFERENT FACT SITUATIONS, ARE RELEVANT: EXAMPLE 6 FACTS : AN INDIAN VEGETABLE OIL MANUFACTURING COMPANY WANTS TO PRODUCE A CHOLESTEROL-FREE OIL FROM A PLANT WHICH PRODUCES OIL NORMALLY CONTAINING CHOL ESTEROL. AN AMERICAN COMPANY HAS DEVELOPED A PROCESS FOR REFINING THE CHOLESTEROL OU T OF THE OIL. THE INDIAN COMPANY CONTRACTS WITH THE U.S. COMPANY TO MODIFY THE FORMULAS WHICH IT USES SO AS TO ELIMINATE THE CHOLESTEROL, AND TO TRAIN THE EMPLOYEES OF THE INDI AN COMPANY IN APPLYING THE NEW FORMULAS. ARE THE FEES PAID BY THE INDIAN COMPANY FOR INCLUDE D SERVICES? ANALYSIS : THE FEES ARE FOR INCLUDED SERVICES. THE SERVICES AR E TECHNICAL, AND THE TECHNICAL KNOWLEDGE IS MADE AVAILABLE TO THE INDIAN COMPANY. EXAMPLE 7 FACTS: THE INDIAN VEGETABLE OIL MANUFACTURING FIRM HAS MAS TERED THE SCIENCE OF PRODUCING CHOLESTEROL-FREE OIL AND WISHES TO MARKET THE PRODU CT WORLDWIDE. IT HIRES AN AMERICAN MARKETING CONSULTING FIRM TO DO A COMPUTER SIMULATI ON OF THE WORLD MARKET FOR SUCH OIL AND TO ADVERSE IT ON MARKETING STRATEGIES. ARE THE FEES PA ID TO THE U.S. COMPANY FOR INCLUDED SERVICES? ANALYSIS: THE FEES WOULD NOT BE FOR INCLUDED SERVICES. THE AM ERICAN COMPANY IS PROVIDING A CONSULTANCY SERVICE WHICH INVOLVES THE USE OF SUBST ANTIAL TECHNICAL SKILL AND EXPERTISE. IT IS NOT, HOWEVER, MAKING AVAILABLE TO THE INDIAN COMPAN Y ANY TECHNICAL EXPERIENCE, KNOWLEDGE OR SKILL, ETC., NOR IS IT TRANSFERRING A TECHNICAL PLAN OR DESIGN. WHAT IS TRANSFERRED TO THE INDIAN COMPANY THROUGH THE SERVICE CONTRACT IS COMMERCIAL INFORMATION. THE FACT THAT TECHNICAL SKILLS WERE REQUIRED BY THE PERFORMER OF THE SERVIC E IN ORDER TO PERFORM THE COMMERCIAL INFORMATION SERVICE DOES NOT MAKE THE SERVICE A TEC HNICAL SERVICE WITHIN THE MEANING OF PARAGRAPH 4(B). ARTICLE 13 OF THE INDO-UK DTAA, IN ITS RELEVANT PAR T, READS AS UNDER: ARTICLE 13 3. FOR THE PURPOSES OF THIS ARTICLE, THE TERM ROY ALTIES MEANS: (A) PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATI ON FOR THE USE OF , OR THE RIGHT TO USE , ANY COPYRIGHT OF A LITERARY, ARTISTIC OR SCIENTIFIC WORK, INCLUDING CINEMATOGRAPHY FILMS OR WORK ON FILMS, TAPE OR OTHER MEANS OF REPRODUCTION FOR U SE IN CONNECTION WITH RADIO OR TELEVISION BROADCASTING, ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA O R PROCESS, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SC IENTIFIC EXPERIENCE; AND (B) PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT, OTH ER THAN INCOME DERIVED BY AN ENTERPRISE OF A CONTRACTING STATE FROM THE OPERATION OF SHIPS OR AIRCRAFT IN INTERNATIONAL TRAFFIC. 23 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT 4 . FOR THE PURPOSES OF PARAGRAPH 2 OF THIS AR T ICLE, AND SUBJECT TO PARAGRAPH 5, OF THIS ARTICLE, THE TERM 'FEES FOR TECHNICAL SERVICES' MEANS PAYMEN TS OF ANY KIND OF ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF A TECHNICAL OR OTHER PERSO NNEL) WHICH: (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIB ED IN PARAGRAPH 3( A) OF THIS ARTICLE IS RECEIVED; OR (B) ARE ANCILLARY AND SUBSIDIARY TO THE ENJOYMENT OF TH E PROPERTY FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH (B) OF THIS ARTICLE IS RECEIVED ; OR (C) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKI LL KNOW-HOW OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TEC HNICAL PLAN OR TECHNICAL DESIGN. 5 . THE DEFINITION OF FEES FOR TECHNICAL SERVICES IN PA RAGRAPH 4 OF THIS ARTICLE SHALL NOT INCLUDE AMOUNTS PAID : (A) FOR SERVICES THAT ARE ANCILLARY AND SUBSIDIARY, AS WELL AS INEXTRICABLY AND ESSENTIALLY LINKED, TO THE SALE OF PROPERTY, OTHER THAN PROPERTY DESCRIBED IN PARAGRAPH 3(A) OF THIS ARTICLE; (B) FOR SERVICES THAT ARE ANCILLARY AND SUBSIDIARY TO T HE RENTAL OF SHIPS, AIRCRAFT, CONTAINERS OR OTHER EQUIPMENT USED IN CONNECTION W ITH THE OPERATION OF SHIPS, OR AIRCRAFT IN INTERNATIONAL TRAFFIC; (C) FOR TEACHING IN OR BY EDUCATIONAL INSTITUTIONS; (D) FOR SERVICES FOR THE PRIVATE USE OF THE INDIVIDUAL OR INDIVIDUALS MAKING THE PAYMENT; OR (E) TO AN EMPLOYEE OF THE PERSON MAKING THE PAYMENTS O R TO ANY INDIVIDUAL OR PARTNERSHIP FOR PROFESSIONAL SERVICES AS DEFINED IN ARTICLE 15 ( INDEPENDENT PERSONAL SERVICES) OF THIS CONVENTION. IT IS PATENTLY CLEAR FROM THE FOREGOING THAT THE WA REHOUSING, LOGISTIC, INVENTORY MANAGEMENT, MARKETING AND OTHER SUPPORT S ERVICES BEING PROVIDED BY THE FOREIGN AGENTS CANNOT BE DESCRIBED AS FEE FOR INCLUDED SERVICES OR, AS THE CASE MAY BE, FEE FOR TECHNICAL SERVICES, AS DEFIN ED UNDER THE RELEVANT DTAAS, BUT ONLY AS BUSINESS PROFITS. WE HAVE ALSO EXAMINED THE IMPUGNED PAYMENTS FROM THE STAND-POINT OF THE SAME QUALIFYING AS ROY ALTY, TO FIND THE SAME AS NOT FALLING WITHIN THE MEANING OF THE TERM AS DEFINED U NDER THE RELEVANT ARTICLES. THE FOREIGN AGENTS HAVING NO PE IN INDIA, THE COMMI SSION (REMUNERATION) ALLOWED TO THEM FOR THE SAID SERVICES, IS NOT TAXAB LE IN INDIA. THERE IS 24 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT ACCORDINGLY NO LIABILITY TO DEDUCT TAX AT SOURCE U/ S. 195 OF THE ACT THEREON. SECTION 40(A)(I) SHALL, THEREFORE, NOT APPLY IN RES PECT OF THE IMPUGNED PAYMENTS. THERE IS NO FINDING WITH REGARD TO THE FOREIGN AGEN TS BEING TAX RESIDENTS OF USA OR, AS THE CASE MAY BE, UK; THE ASSESSEE NOT MAKING ITS CASE WITH REFERENCE TO THE RELEVANT DTAAS BEFORE THE REVENUE. ACCORDINGLY, SUBJECT TO FINDING OF IT BEING SO, WE DIRECT THE DELETION OF THE IMPUGNED DI SALLOWANCE. WE DECIDE ACCORDINGLY. 10. GROUND 6 OF THE APPEAL IS IN RESPECT OF DISALLO WANCE OF DEDUCTION U/S.10B. THE SAME WAS WITHHELD BY THE REVENUE FOR WANT OF AP PROVAL BY THE BOARD, I.E., THE BOARD APPOINTED IN THIS BEHALF BY THE CENTRAL G OVERNMENT IN EXERCISE OF THE POWERS CONFERRED UPON IT BY SECTION 14 OF THE INDUS TRIES (DEVELOPMENT AND REGULATION) ACT, 1951 AND THE RULES MADE THERE-UNDE R. THE ASSESSEE HAS IN THIS REGARD PRODUCED BEFORE US A COMMUNICATION BY THE GO VERNMENT OF INDIA, MINISTRY OF COMMERCE AND INDUSTRY, DEPARTMENT OF CO MMERCE (F.NO.A/2004/ 014/EOU-TN) DATED 28.02.2014 ADDRESSED TO THE ASSES SEE COMPANY (AUTOLEC DIVISION), COMMUNICATING RATIFICATION OF THE APPROV AL (GRANTED EARLIER BY THE DEVELOPMENT COMMISSIONER (DC), TO WHOM THE BOARD, S UBJECT TO SUBSEQUENT RATIFICATION, HAS DELEGATED THE POWER OF APPROVAL, VIDE HIS LETTER DATED 15.04.2004), THROUGH ITS UNIT APPROVAL COMMITTEE IN ITS 4TH MEETING (2013 SERIES) HELD ON 30.08.2013, ENCLOSING ALSO A COPY T HEREOF ALONG WITH OTHER RELATED DOCUMENTS (APB PGS. 5-20). ON THAT BASIS, I T IS CLAIMED THAT THE APPROVAL GRANTED EARLIER BY THE DC HAVING BEEN SINCE RATIFIE D BY THE BOARD, THE OBJECTION BY THE REVENUE DOES NOT SURVIVE. A PERUSAL OF THE I MPUGNED ORDER REVEALS THAT THE SAID LETTER WAS ALSO PLACED BY THE ASSESSEE BEF ORE THE LD. CIT(A) WHO, HOWEVER, DID NOT ADMIT THE SAME ON THE GROUND THAT THE ASSESSEE DID NOT MAKE ANY APPLICATION FOR ADMITTING THE SAID CONFIRMATION LETTER DATED 28.02.2014 BEFORE HIM UNDER R. 46A OF THE INCOME TAX RULES, 19 62 (THE RULES HEREINAFTER), I.E., AS ADDITIONAL EVIDENCE, NOR FUR NISHED ANY REASON/S AS TO WHY 25 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT SUCH INFORMATION HAD NOT BEEN OBTAINED EARLIER FROM THE COMPETENT AUTHORITY AND PLACED BEFORE THE AO PRIOR TO THE COMPLETION OF THE ASSESSMENT. 11. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATE RIAL ON RECORD. THE ASSESSEES UNDERTAKING OSTENSIBLY SATISFIES ALL THE CONDITIONS OF S. 10B, STANDS GRANTED THE APPROVAL BY THE DEVELOPMENT COMMISSIONE R, TO WHOM THE POWER OF APPROVAL HAS BEEN DELEGATED BY THE BOARD CONSTITUTE D U/S. 14 OF THE I(D&R) ACT. ITS RATIFICATION BY IT IS THOUGH ESSENTIAL, EVEN A S SOUGHT TO BE EMPHASIZED BY THE REVENUE BY PLACING RELIANCE ON THE DECISIONS IN THE CASE OF CIT V. REGENCY CREATIONS LTD. [2012] 27 TAXMAN.COM 322 (DEL) AND CIT V. TECHNOVATE E SOLUTIONS PVT. LTD. [2013] 354 ITR 110 (DEL). THIS ASPECT THEREFORE GO ES TO THE ROOT OF THE MATTER. THE RESTRAINT ON THE ASSESSEE F OR ADMISSION OF ADDITIONAL EVIDENCE U/R. 46A OF THE RULES DOES NOT IN ANY MANN ER AFFECT THE POWER OF THE FIRST APPELLATE AUTHORITY TO DIRECT PRODUCTION OF A NY EVIDENCE WHICH HE CONSIDERS NECESSARY TO DISPOSE AN APPEAL BEFORE HIM (R. 46A(4 )). THOUGH THIS IS TRITE LAW, RELIANCE IN THIS REGARD MAY BE PLACED ON THE DECISI ON IN THE CASE OF PRABHAVATI S. SHAH V. CIT [1998] 231 ITR 1 (BOM). WE ARE THUS NOT INCLINED TO ACCEPT THE REASONS ADVANCED BY THE LD. CIT(A) FOR NOT ADMITTIN G THE ASSESSEES EVIDENCE. SO, HOWEVER, TO THE EXTENT THAT THE MATTER WOULD RE QUIRE BEING EXAMINED BY THE AO, WE ARE IN AGREEMENT WITH THE LD. CIT(A). ACCORD INGLY, ADMITTING THE SAID LETTER, ALONG WITH THE OTHER RELATED DOCUMENTS, WE RESTORE THE MATTER BACK TO THE FILE OF THE AO FOR NECESSARY VERIFICATION AND ADJUD ICATION AFRESH ON MERITS. NEEDLESS TO ADD, THE ASSESSEE SHALL BE ALLOWED A RE ASONABLE OPPORTUNITY TO STATE ITS CASE IN THE MATTER, ADDRESSING THE AO'S CONCER NS IN-AS-MUCH AS IT IS HE WHO IS TO BE SATISFIED WITH THE CORRECTNESS OF THE ASSE SSEES CLAIM. THE AO SHALL DECIDE PER A SPEAKING ORDER. WE DECIDE ACCORDINGLY . 12. VIDE GROUND 7 OF ITS APPEAL, THE ASSESSEE PRAY S FOR BEING ALLOWED, SUBJECT TO THE VERIFICATION AND THE SATISFACTION OF THE REQUISITE CONDITIONS, 26 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT DEDUCTION U/SS. 80G AND 80-IB OF THE ACT, BEING CLA IMED IN THE SUM OF . 13.77 LACS AND . 38,44,924/- RESPECTIVELY. THE SAME WERE NOT CLAI MED IN THE ORIGINAL RETURN ON ACCOUNT OF INSUFFICIENT PROFITS, WHICH ON ACCOUNT OF ADDITIONS/ DISALLOWANCES SUSTAINED IN ASSESSMENT STAND CONVERT ED INTO A POSITIVE GROSS TOTAL INCOME (GTI). THE LD. CIT(A) DID NOT ACCEPT THE ASS ESSEES PLEA IN THIS REGARD AS EVEN PER THE REVISED RETURN FILED ON 16.03.2011, TH E ASSESSEE HAD REPORTED A LOSS OF . 750.57 LACS, BESIDES NOT FURNISHING ANY EVIDENCE TO SUBSTANTIATE ITS CLAIMS BEFORE HIM. 13. WE HAVE HEARD BOTH THE PARTIES, AND PERUSED THE MATERIAL ON RECORD. THAT THE ASSESSEES INCOME AS PER THE RETURNS FILE D IS AT A LOSS IN FACT ENDORSES ITS STAND OF HAVING NOT CLAIMED THE DEDUC TIONS IN THE ABSENCE OF ADEQUATE GTI U/S. 80B(5) OF THE ACT. FURTHER, THE P ARTICULARS WITH REGARD TO DEDUCTIONS STAND FURNISHED PER THE REVISED CLAIM VI DE RETURN DATED 16.03.2011. WE THEREFORE FIND NO REASON FOR THE REVENUE FOR NOT ENTERTAINING THE SAME. WE MAY THOUGH CLARIFY THAT OUR FINDING IS LIMITED TO T HE RIGHT OF THE ASSESSEE IN PRESSING ITS SAID CLAIMS. THE AO SHALL CONSIDER THE SAME ON MERITS, DECIDING IN ACCORDANCE WITH THE LAW. WE DECIDE ACCORDINGLY. 14. THE EIGHTH AND THE LAST GROUND OF APPEAL RELATE S TO THE COMPUTATION OF INTEREST CHARGEABLE U/S. 234D OF THE ACT. THE ASSES SEE, ON THE PROCESSING OF ITS RETURN U/S. 143(1), WAS GRANTED A REFUND OF . 1069 LACS, INCLUDING INTEREST U/S. 244A AT . 126.35 LACS. THE COMPLETION OF THE ASSESSMENT RE SULTED IN A DEMAND, SO THAT THE REFUND TO THAT EXTENT STANDS WITHDRAWN, INCLUDING PROPORTIONATE INTEREST ALLOWED U/S. 244A. THE ASSESSEES CONTENTI ON IS THAT THE INTEREST U/S. 234D SHOULD NOT BE WITH REFERENCE TO THE SAID INTER EST WITHDRAWN, AND SHOULD BE CONFINED ONLY TO THE TAX COMPONENT OF THE DEMAND RA ISED (OR THE EXCESS REFUND). 15. WE HAVE HEARD BOTH THE PARTIES, AND PERUSED THE MATERIAL ON RECORD. 27 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT SECTION 234D, IN ITS RELEVANT PART, READS AS UNDER : INTEREST ON EXCESS REFUND . 234D. (1) SUBJECT TO THE OTHER PROVISIONS OF THIS ACT, WHERE ANY REFUND IS GRANTED TO THE ASSESSEE UNDER SUB-SECTION (1) OF SE CTION 143, AND ( A ) NO REFUND IS DUE ON REGULAR ASSESSMENT; OR ( B ) THE AMOUNT REFUNDED UNDER SUB-SECTION (1) OF SECT ION 143 EXCEEDS THE AMOUNT REFUNDABLE ON REGULAR ASSESSMENT, THE ASSESSEE SHALL BE LIABLE TO PAY SIMPLE INTEREST AT THE RATE OF ONE-HALF PER CENT ON THE WHOLE OR THE EXCESS AMOUNT SO REFUNDED, FOR EVE RY MONTH OR PART OF A MONTH COMPRISED IN THE PERIOD FROM THE DATE OF GRANT OF R EFUND TO THE DATE OF SUCH REGULAR ASSESSMENT . THE LANGUAGE OF THE SECTION IS UNAMBIGUOUSLY CLEAR. THE SAME REFERS TO THE AMOUNT OF REFUND WITHOUT BREAKING IT INTO OR DE FINING IT IN TERMS OF ITS ELEMENTS. THE INTEREST CHARGEABLE THERE-UNDER IS CO MPENSATORY IN CHARACTER, AS IN FACT IS THE INTEREST GRANTED U/S. 244A. THE APEX COURT IN CIT V. H.E.G. LTD. [2010] 324 ITR 331 (SC) DIRECTED FOR GRANT OF INTER EST U/S. 244A FOR THE PERIOD OF DELAY IN GRANT OF INTEREST U/S. 244A ITSELF; HAV ING BEEN NOT GRANTED ALONG WITH THE GRANT OF REFUND OF TAX, SO THAT IT HAD ASSUMED THE CHARACTER OF THE PRINCIPAL. FURTHER, THE TRIBUNAL IN DY. CIT V. TUBE INVESTMENTS OF INDIA LTD. (ITA NOS. 2221 & 2222/MDS/2016 DATED 31.01.2017) UPHELD THE G RANT OF INTEREST U/S. 244A ON THE INTEREST COMPONENT OF THE DEMAND, I.E., U/SS . 234A, 234B, ETC., ON ITS WITHDRAWAL; AGAIN, ON THE PREMISE OF THE INTEREST B EING COMPENSATORY. WE, ACCORDINGLY, FIND NO MERIT IN THE ASSESSEES CL AIM OF THE INTEREST U/S. 234D BEING RESTRICTED ONLY TO THE TAX COMPONENT OF THE DEMAND RAISED OR THE EXCESS REFUND. WE DECIDE ACCORDINGLY. 16. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED ON APRIL 17, 2017 AT CHENNAI SD/- SD/- ( . ) ( ) (G. PAVAN KUMAR) (SANJAY ARORA) ! /JUDICIAL MEMBER /ACCOUNTANT MEMBER 28 ITA NO.874 /MDS/2015 (AY 2009-10) SUNDARAM FASTENERS LTD. V. ASST.CIT /CHENNAI, . /DATED, APRIL 17 TH , 2017. EDN / ( *!,01 21$, /COPY TO: 1. %& /APPELLANT 2. *+%& /RESPONDENT 3. 3, ( )/CIT(A) 4. 3, /CIT 5. 145 *!,! /DR 6. 56# 7 /GF