TMI Blog2011 (5) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... the advances for non-business purposes have been made out of the own funds and that the borrowed funds have not been used for this purpose - It has been the submission of the assessee that at the point of time when the investment in shares was made there was no overdrawn account in the bank - the appeal is partly allowed by way of remand - IT APPEAL NO. 4744 (MUM.) OF 2004 - - - Dated:- 31-5-2011 - N.V. VASUDEVAN, RAJENDRA SINGH, JJ. K.K. Lalkaka for the Appellant. Jitendra Yadav for the Respondent. ORDER N.V.Vasudevan, Judicial Member. This is an appeal by the assessee against the order dated 31-3-2004 of CIT(A)VIII, Mumbai relating to assessment year 1999-2000. The ground No. 1 raised by the assessee reads as follows : "1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) has erred in sustaining the order of the Assessing Officer by holding that as tax had not been deduted under section 40(a)(i) of the Income-tax Act on link charges of Rs. 79,27,017 paid to non-resident company, the said expenditure is not allowable." 2. The assessee is a company. It is engaged in the business of Softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is provided by Citibank Global Technology Infrastructure [CGTI]. Hence no income accrues to CGTI in India. The assessee claimed the aforesaid expense as a deduction while computing its total income. According to the AO the link charges paid by the assessee was in the nature of fees for technical services and, therefore, the assessee ought to have deducted tax at source before making payments. In view of the provisions of section 40(a)(i) of the Income-tax Act, 1961 (the Act), the AO was of the view that the amount claimed as deduction cannot be allowed because of non-deduction of tax at source by the Assessee as required in law. 4. The Assessee explained that it has its own infrastructure in terms of processors/related computer equipment, leased circuits and so on. It only avails of the use of air time from CGTI for satellite services provided outside India. CGTI inter alia, has a global central purchasing unit (CPU) in USA where CGTI has installed several mainframes other equipment for operating various group systems/applications and storing data. These facilities have been accessed by various subsidies/affiliates located in different parts of the world. The CPU in USA or CGTI i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Dy. CIT [2001] 119 Taxman 496 in support of our client's case. The Assessee thus submitted that Link charges cannot be equated with fees paid for technical services within the meaning of section 9(1)(vii) of the Income-tax Act and therefore, there is no legal obligation to deduct tax at source. 6. The AO however was of the view that the assessee was in India and was using the services provided by the non-resident. No doubt the Assesee was transmitting data using non-residents Satellite link. Although the various transmission receivers and the non-resident and Satellite are not located within India, however, the Satellite is beaming signals and receiving signals from within the territory of India and, therefore, the services are provided in India. The AO also relied on the fact that in respect of similar payment given in the chart earlier, the assessee had itself deducted tax at source in respect of some of the payments. The AO also held that the decision of the Hon'ble Madras High Court in the case of Skycell Communications Ltd. (supra) will not be applicable because the assessee was using very sophisticated technology service. 7. On appeal by the assessee the CIT(A) referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised ground No.1 before the Tribunal. 9. We have heard the submissions of the ld. counsel for the assessee as well as the ld. D.R. In cases such as the present one it is very important to understand the nature of services rendered to decide whether the same are taxable or not. The AO proceeded on the basis that the payment by the Assessee to CGTI was "Fees for Technical Services" rendered. The CIT(A) however proceeded on the basis that the payment by the Assessee to CGTI was "Royalty". Different parameters apply to consider a payment as "Fees for Technical Services" or "Royalty". In this regard we find that in the agreement between assessee and CGTI dated 1-1-1997 in Exhibit -A to the agreement it has been provided as follows: "CITIMAIL/CCMAIL 1. Service Provisions - These are private electronic mail services provided by Citibank. 2. Service hours - The service is available 24 hours a day, 7 days a week, with the exception of scheduled down time for weekly housekeeping between 2000 GMT Saturday to 0359 GMT Sunday. 3. Service Support - The telephone number for the CMAO helpline is +65-328-7802. Helpline service is available from Mondays through Fridays from 9.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e non-resident is still liable to tax under those provisions. Explnation 2 to section 9(1)(vi) of the Act defines "Royalty" as follows : Section 9 Income deemed to accrue or arise in India. (1) The following incomes shall be deemed to accrue or arise in India (vi) income by way of royalty . Explanation 2. For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for (i) the transfer of all or any rights (Including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (v) the transfer of all or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed and used by various group entities located worldwide through a consolidated data network maintained in Hong Kong. The transactions done by a traveller in a particular country were reported to a centralised computer in that country. In India, this is done by XT, located at Delhi. The said Indian company XT received information on computer through telephonic and microwave links about the use of credit cards and travellers' cheques by travellers all over the country. XT also serviced thirteen group companies in Asia and the Pacific, in a similar manner. The information was then passed on to the Hong Kong computer centre of the applicant. For carrying out this operation, XT obtained leased lines from VSNL. The applicant-company, Y charged XT, the Indian company, for the use of its computer set up in Hong Kong and that in the USA. XT, the Indian company, is a sub-subsidiary of the applicant. On these facts, the applicant sought an advance ruling on the questions whether payment due to the applicant under the transactions with XT was liable to tax in India and, if so, whether the payment due to the applicant under the transactions was covered under article 12(3)(a) or article 12(3)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncryption product) developed by the applicant for the purpose of processing raw data transmitted by XT which would clearly fall within the ambit of article 12(3)(a) of the Double Taxation Avoidance Agreement between India and the U.S.A. It can be seen from the decided case laws referred to above that the manner in which the services are rendered will very crucial. In the aforesaid case the Assessee had a right to access sensitive and commercial information from the mainframe. In the present case, the Assessee was using the communication facilities only to communicate. As to whether that would amount to use of equipment and the payment can be said to be "Royalty" has to be examined. 12. In the case of Asia Satellite Telecommunication Co. Ltd. (supra), the facts were, Asia Sat, registered in Hong Kong, derived income from leasing transponder capacity on the satellites, owned and operated by it, to various customers to enable them to relay (i.e., uplink and downlink) their signals in Indian and non-Indian territories. To provide these transmission services, Asia Sat used its own assets and infrastructure comprising the satellite and control centre, which are located outside India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant, the appellant had no right to use the mainframe. He highlighted the fact that the ultimate control of the mainframe computer lies with SPL at Singapore and the fact that the substance of the agreement was the use of capacity of mainframe computer of SPL. Thus there was no right to use a process. 14. We have already observed the manner in which the services are provided to the assessee will have to be examined in the light of definition of FTS as given in section 9(1)(vii) read with Explanation 2 of the Act. It has to be first ascertained whether any income at all was accrued to the non-resident in India under section 9 of the Act. Thereafter the applicability of the DTAA has to be examined and then a conclusion has to be arrived at as to whether the payment by the Assessee to CGIT can be said to be "Royalty". We, therefore, deem it fit and proper to set aside the order of the CIT(A) and remand the issue for fresh consideration by the CIT(A). The assessee is directed explain the exact manner in which the services are rendered by the non-resident for which payment was made by the assessee. The CIT(A) will decide the issue keeping in mind the principle that emerges from sev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above, even if these investment is not made out of the interest bearing funds during the year, the factor of the assessee's funds lying in such investments has to be seen from the angle that if the assessee had not invested in such shares, then the equivalent amounts of funds would have been available with it and to the extent assessee would have avoided taking interest bearing loan overdraft and in consequence its interest burden would have reduced. The average interest on the interest bearing funds of the assessee is 9.8%. So at this rate, assessee has incurred an expenditure of Rs. 4,37,272 on the above said interest bearing funds. This amount has been debited by the assessee in its books. So the same is being disallowed as per provisions of section 14A." 18. On appeal by the assessee the CIT(A) was of the view that in the absence of any separate cash flow statement for the borrowing, it cannot be accepted that the investments were made out of interest free capital of the assessee or out of the internally generated cash resources. He held that on a preponderance of probability that both the interest-free capital as well as interest bearing borrowings have been utilized fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the order of the CIT(A) the assessee has raised Ground No.3 before the Tribunal. 24. We have heard the rival submissions. The Hon'ble Bombay High Court in the case CIT v. Reliance Utilities Power Ltd. [2009] 178 Taxman 135 has held that advances to sister concerns must be presumed to have come out of own funds and not borrowed funds. Where the assessee had its own funds as well as borrowed funds and it advanced funds to its sister concerns for allegedly non-business purposes and the question arose whether the AO was justified in disallowing the interest on the borrowed funds on the ground that they had been used for non-business purposes, it was held that where an assessee has his own funds as well as borrowed funds, a presumption can be made that the advances for non-business purposes have been made out of the own funds and that the borrowed funds have not been used for this purpose. Thus one has to see the overall availability of funds. The CIT(A) appears to have proceeded on the basis of actual funds flow which test is no longer valid in the light of the Hon'ble Bombay High Court decision referred to above. It has been the submission of the assessee that at the point of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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