TMI Blog2001 (10) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... 88, for the setting up of an integrated project consisting of zinc-lead mines at Rampura Agucha and Lead Zinc Smelter at Chanderiya. The financing pattern of the project, inter alia, included U.K. Government grant-in-aid 73.30 million which was subsequently revised to 83.60 million. An amount of Rs, 300 crores was also garnered through issue of bonds for the purpose of meeting the project cost. In respect of the U.K. aid extended by the Government of India to the assessee, it was to account to the Government of India towards its utilisation in the form of equivalent counterpart rupee deposit payment to office of the Controller of Aid. Accounts and Audit (CAAA in short), Department of Economic Affairs, Ministry of Finance, on receipt of the budgetary support from Ministry of Mines. The relevant terms and conditions are more specifically and elaborately spelt out in the sanction letter. The assessee-company thus received benefit of technical know-how for use of the same in its business through the good offices of the Government of India for which payment was made as per the manner and method specified in the said sanction letter. 4. The project was executed in phases and a tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educted under Chapter XVII-B from the corresponding amount payable outside India. The matter was carried before the learned CIT(A) who upheld the action of the AO. Aggrieved by the same, the assessee is in appeal before us. 5. The learned counsel for the assessee submitted before us that the expenditure claimed by the assessee under s. 35AB has been disallowed by the Revenue authorities by invoking the provisions of s. 40(a). He further submitted that as per said provisions, amount of interest, royalty, fees for technical services or other sum chargeable under the IT Act, 1961, which is payable outside India is not deductible in computing the income under the head "Profit and gains of business or profession" if tax has not been deducted by the assessee on the same under Chapter XVII-B. In this regard, he contended that the assessee s case does not fall in the ambit of s. 40(a) for two reasons, Firstly the fees payable to M/s DML for technical services was not chargeable under the IT Act, 1961, and secondly, the amount of fees was not payable by the assessee to M/s DML outside India. 6. As regards the chargeability of the said fees in the hands of M/s DML under the IT Act, he co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... know-how provided by M/s OML under Chapter XVII-B and there was no reason for the authorities below to disallow the said expenditure claimed by the assessee, by invoking provisions of s. 40(a) which had no application in the case. 8. The learned Departmental Representative, on the other hand, submitted that there is no dispute regarding the allowance of expenditure under s. 35AB, but the assessee having failed to deduct the tax at source from the amount of such expenditure, the same have been specifically disallowed in accordance with the provisions of s. 40(a). Relying on the decision of the Hon ble Supreme Court in the case of CIT vs. Moon Mills Ltd. (1966) 59 ITR 574 (SC), he contended that even if the expenditure is genuine, the same can be disallowed under the overriding provisions of s. 40(a) and the principles of commercial expediency do not apply in respect of such specific disallowances. He further submitted that the project executed by the assessee was not entirely financed by the U.K. Government and the assessee-company raised the funds by issuing bonds also, He, further, contended that the entire amount paid to M/s DML as a part of the said cost cannot be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered the rival submissions in the light of material available on record and precedent relied upon at the Bar, It is observed that the assessee-company claimed 1/6th of the amount paid as lump sum fees for acquiring technical know-how for the purpose of its business from M/s DML as business expenditure under s. 35AB. It is also observed that the allowability of the said expenditure under s. 35AB has not been disputed by the authorities below and the claim of the assessee on this count has been disallowed specifically under s. 40(a) for assessee s failure to deduct and pay tax on the said amount under Chapter XVII-B. In this regard, the learned counsel for the assessee has contended before us that the provisions of s. 40(a) have no application in the assessee s case for the reason that the fees for technical know-how was not chargeable under the IT Act, 1961, as per the provisions of s. 9(1)(vii) r/w s. 5 and also for the reason that the amount of said fees was never payable by the assessee to M/s DML outside India. In this regard, the learned Departmental Representative has contended, inter alia, that these contentions now raised by the learned counsel for the assessee before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the instant case, is defined in sub-s. (2) of s. 5 as follows: "Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. 12. As far as cl. (a) of sub-s. (2) of s. 5 is concerned, it appears from the facts of the case that although an amount equivalent to fees paid by the Crown Agents to M/s DML was paid over by the assessee-company to the Government of India, there is nothing on record to suggest/indicate that the said amount was received by the Government of India on behalf of M/s DML inasmuch as the payments had already been made by the Crown Agents to M/s DML out of grants received from the U.K. Government, As a matter of fact, the said amount received from the assessee-company was adjusted/reimbursed by the Government of India in the form of budgetary and equity support provided to the assessee-company, It is thus clear that the fees for technical services was neither recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55,950 (Pounds Sterling four million two hundred forty-three thousand eight hundred and eighty four only and Dutch Mark four million nine hundred fifty-five thousand nine hundred and fifty only.) 3.1.2 For Phase-II as per art. 2.2 above : 3.1.2.1 Licence know-how and basic engineering fee for total implementation as defined in Annexures-I and II (this includes fee as per art. 3.1.1.1) Plus 6,817,410 DM 10,405,936 3.1.2.2 Training-fee (125 man months as per art. 4.4) Plus 213,700 DM 283,500 3.1.2.3 Technical Assistance fees for supervision of Firm Cost Estimates, Detailed Engineering Construction and commissioning including supervision of operation upto six months from start up prior to guarantee tests as per art. 4.3 r/w cl. 1.6 of Annexure-I and 1,0 of Annexure-II hereof (estimated on the basis of 435 man months) (this includes the fee at art. 3.1.1.2. above). Plus 2,235,750 DM 4,553,397 3.1.2.4 Total fees (3.1.2.1 + 3.1.2.2 + 3.1.2.3) Plus 9,266,860 DM 15,242,833 (Pounds Sterling nine million two hundred sixty-six thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e recipient of the fees i.e., M/s DML as well as the person responsible for making the said payment i.e., Crown Agents, being the persons who are non-resident in India, the provisions of s. 9(1)(vii), even though held to be applicable in the present context, would have extra-territorial operation and the Parliament as per Art. 245 of the Constitution is not empowered to enact law which operates extra-territorial. In this regard, we may observe that the Tribunal is not right forum to raise the issue relating to the competence of Parliament to enact the relevant provisions of law nor it is authorised to adjudicate upon the constitutional validity of the existing provisions of law already enacted by the Parliament. In any case, a question involving identical issue has already been referred to its Constitutional Bench by the Hon ble Supreme Court considering its great public importance in the case of Electronic Corpn. of India Ltd. their Lordships of Hon ble Supreme Court have observed that for extending the operation of law to persons outside the territory of India, a nexus with something in India is necessary and we find that the existence of such nexus in the case on hand is very mu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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