TMI Blog2013 (9) TMI 187X X X X Extracts X X X X X X X X Extracts X X X X ..... the business which is chargeable to tax in India and, therefore, the provisions of section 40(a) are apparently attracted - Provisions of Section 40(a) only on the limited ground of royalty/fees for technical services. Though, the assessee, as is clear from the assessment order, had filed copies of separate agreements between Zee Telefilms and M/s. EFHL as well as between M/s. EFHL and Asiasat but these have not been examined – Restored the matter back to Commissioner(A) for passing a fresh order after necessary examination in the light of the observations made – Decided against the Assessee. Expenditure on issuance of Foreign currency convertible bond (FCCB) - Within section 35D as preliminary expnediture or is allowable as revenue expenditure – Held that:- from assessment year 2004-06 even the interest on capital borrowed which otherwise was allowable as revenue expenditure is required to be capitalized if the same had been borrowed in connection with extension of existing business. Therefore, expenses incurred on borrowing the capital cannot, in our opinion, be considered as revenue expenditure. Further, the expenditure has been incurred in connection with extension of bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r footprint of the satellite and there was no processing done by the satellite nor was any operation done by the assessee. The assessee had only used facility/space and there was no use of any equipment nor were any technical services provided. The payment was therefore, neither royalty nor fee for technical services provided. Thus, no tax was required to be deducted. 2.1 The assessee placed reliance on the judgment of AAR in the case of ISRO Satellite Center (AAR 765 of 2007), dated 22-10-2008 in which it was held that the assessee was only receiving the existing space segment capacity of transponder to enable uninterrupted transmission of uplinked data over the entire footprint of satellite. The assessee had no right to use transponder. The payment had been made only for deriving the benefit of satellite using capacity and not for equipment. It was also held that mere use of service or product after receipt of technical inputs did not amount to making available technical knowledge or skills and it was thus held that payment made by the assessee to the non-resident was neither royalty nor fees for technical services. The assessee also referred to AAR ruling in the case of Dell I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 9(i)(vi). The AO therefore held that the assessee was liable to deduct tax at source which was not done and, therefore he disallowed the claim under section 40(a) of the Act. 2.3 In appeal, the CIT(A)referred to the decision of the Special Bench in case of New Skies Satellites BV v. Asstt. DIT (IT) [2009] 121 ITD 1 (Delhi) (SB) in which it was held that receipts on account of use of transponder were taxable in the hands of the foreign company. CIT(A) also noted that the assessee itself in the assessment year 1997-98 had deducted tax from the payments made on account of transponder fees. CIT(A) therefore confirmed the disallowance made by AO aggrieved by which the assessee is in appeal before the Tribunal. 3. Before us, the ld. AR for the assessee submitted that the AO in disallowing the claim had followed the decision of the Tribunal in the case of Sanskar Info TV (P.) Ltd. (supra), and CIT(A) had followed the decision of the Special Bench of the Tribunal in the case of New Skies Satellites BV (supra). It was pointed out that the said decisions of the Tribunal have been reversed by the Hon'ble High Court of Delhi in the case of Asia Satellite Telecommunications Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim should be allowed. 3.1 The ld. DR on the other hand submitted that the judgments cited by the ld. AR related to pre-amendment period. Since the amendment to section 91(vi) had retrospective application, it has to be considered as legal position since inception and therefore would apply in case of the assessee. As regards the incorporation of the amendment in the treaty, it was submitted that the assessee had not claimed the benefits of the treaty and it was not known whether it had any non-discrimination clause or whether similar amendment had been made in the treaty. 3.2 In reply, the ld. AR submitted it was not correct that the assessee had not claimed treaty benefits. He referred to para 2.1 of the assessment order from which it was clear that the treaty benefit had been claimed. It was further submitted that the assessee had filed copy of the agreement between the two countries. It was pointed out that there was no amendment in the treaty on the pattern of Explanation (v) and Explanation (vi) to section 9(1)(vi) inserted by the Finance Act 2012. It was further pointed out that the treaty between India and Mauritius which was applicable in this case had non-discriminati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the nature of fees for technical services though it had raised additional ground before the Tribunal who had admitted the same. The ld. AR for the assessee, therefore, argued that the issue was covered in favour of the assessee by the judgment of Hon'ble High Court of Delhi in case of Asia Satellite Telecommunication Co. Ltd. (supra). It has also been pointed out that though there has been amendment in section 9(1)(vi) by the Finance Act, 2012 with retrospective effect i.e. 1.6.1976 by inserting Explanation-(V) as per which royalty included any consideration in respect of any right, property or information irrespective of the fact whether the possession or control of such right or property or information is with the payer or not, or whether such right, property or information is used directly by payer, or whether location of such right, property or information is situated in India or not, such amendment was not available at the time of payment being made by the assessee and therefore the assessee could not be expected to deduct tax at source as held by the Tribunal in case of Channel Guide (I) Ltd. (supra). Moreover, it was also submitted that no such amendments were made in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limited ground of royalty/fees for technical services. Though, the assessee, as is clear from the assessment order, had filed copies of separate agreements between Zee Telefilms and M/s. EFHL as well as between M/s. EFHL and Asiasat but these have not been examined. The authorities below have disallowed the claim on the ground of non deduction of tax at source under section 40(a) treating the payment as royalty. Since the dispute before the Tribunal is regarding disallowability of claim under section 40(a) it is well within the subject matter of appeal to consider if provisions of section 40(a) are attracted on some other ground. We, therefore, for the purpose of deciding the issue consider it appropriate that the matter may be examined from the point of view of taxability of payment as business income in case of M/s. EFHL which has a PE in India for which there is a prima facie case which has not been examined. We, therefore, set aside the order of CIT(A) and restore the matter back to him for passing a fresh order after necessary examination in the light of the observations made above and after allowing opportunity of hearing to the assessee. 5. The second dispute is regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO, therefore, allowed only 1/5th of the said expenditure during the year. 5.1 The assessee disputed the decision of AO and submitted before CIT(A) that AO had placed reliance on the decision of the Tribunal in the case of Ashima Syntex Ltd. (supra), which related to issue of fully convertible debentures whereas in case of the assessee the debentures were optionally convertible. It was also submitted that, by the issue of FCCB the assessee had only raised unsecured loans and therefore, expenses incurred in connection with raising of loan was allowable as deduction under section 37 of the Act. CIT(A) however did not accept the contentions raised. It was observed by him that the bonds in case of the assessee were convertible into shares soon after issue of bonds i.e. after 8.6.2004 i.e. 1 months from the date of issue whereas the redemption option started two years after date of issue. CIT(A) also observed that primary object for the issue of FCCB was for converting them into shares. Therefore, the same could not be considered as unsecured loans. CIT(A) also held that the issue was covered against the assessee by the decision of the Special Bench of the Tribunal in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l provision prevailed over the general provisions and therefore expenditure incurred for issue of debentures convertible or inconvertible had to be amortized under section 35D. It was accordingly urged that the order of CIT(A) should be upheld. 5.4 In reply, the ld. AR submitted that Circular No.56 dated 19.3.71 of CBDT had specifically clarified that the provisions of amortization were not intended to supersede any other provisions of the Act as per which expenses were allowable under the Act. Therefore, it was clear that section 35D would apply in respect of capital expenses and not to expenses of revenue in nature. It was also submitted that in case of conflicting judgments of different High Courts, the view favourable to the assessee should be adopted in view of the judgment of Hon'ble Supreme Court in case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. He also referred to the judgment of Hon'ble High Court of Bombay in the case of CIT v. Mahindra Ugine and Steel Co. Ltd. 201 CTR 84 in which it has been held that Section 35D was applicable only in respect of expenses which were otherwise not allowable as deduction i.e. only to capital expenses. 5.5 We have perused the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrary judgment of Hon'ble High Court of Madhya Pradesh in the case of Shree Synthetics Ltd. (supra), in which it has been held that Section 35D being a special provision will prevail over general provisions of the Act and that, in view of specific provision of section 35D(2)(c)(iv), expenditure incurred even on non convertible debentures is required to be amortised. The ld. AR has argued that there being conflicting judgments, the interpretation which is favourable to the assessee should be adopted in view of the judgment of Hon'ble Supreme Court in the case of Vegetable Products Ltd. (supra). 5.7 We are however unable to accept the arguments advanced. Various judgments of Hon'ble High Courts which are in favour of the assessee as mentioned earlier relate to the period prior to assessment year 2004-05 from which year there is amendment to section 36(1)(iii) as per which interest on capital borrowed in connection with extension of existing business or profession starting from the date on which the capital was borrowed till the date on which the assets in the extended business have been first put to use, is required to be capitalized. Thus from assessment year 2004-06 even the int ..... X X X X Extracts X X X X X X X X Extracts X X X X
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