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TMI Blog2011 (5) TMI 530X X X X Extracts X X X X X X X X Extracts X X X X ..... p; 3. That on the facts and in the circumstances of the case and the legal position, the ld. CIT(A) has erred in confirming the disallowance of Rs. 41012 being the amount written off at the rate of 1/10th of the expenditure on increase in authorized capital as the same is allowable under section 35D(2)(c)(iv) of the Income-tax Act, 1961." 1.(a) In the original hearing in both these appeals, the Department was represented by Smt. Pratima Kaushik, ld. Sr. DR. Smt. Mona Mohanty appeared for the Department when the matter was refixed for clarification. 2. Ground No. 1 states that the CIT(A) has erred in confirming the disallowance of Rs. 14,71,095 under section 40(a)(i) of the Income-tax Act in respect of expenditure incurred towards testing fees paid by the assessee to M/s CSA International, Chicago, Illionos, USA, on account of non-deduction of TDS. 3. During the year, the assessee company had paid Rs. 14,71,095 to M/s CSA, International Chicago, Illionos, USA ("CSA", for short), for getting witness testing of AC Contractor as part of CB report and KEMA Certification. CSA was assigned this job since it had a specialized knowledge and facility for the requisite testing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's business. It was held that accordingly, section 195 of the Income-tax Act was applicable to the payment made by the assessee company to CSA; and that the non-deduction of tax by the assessee led to non-availability of deduction of Rs. 14,71,095 under section 40(a)(i) of the Act. It was, therefore, that the Assessing Officer added Rs. 14,71,095 to the total income of the assessee. 5. The Assessing Officer, vide order dated 20-12-2007, passed the assessment order under section 143(3) of the Income-tax Act. 6. On appeal, the CIT(A) observed, inter alia, that as per Explanation (2) to section 9(1)(viii)(b) of the Income-tax Act, "fees for technical services" means consideration for the rendering of any managerial, technical or consultancy services; that in Cochin Refineries Ltd. v. CIT [1996] 222 ITR 354 (Ker.), it has been held that fees paid by an Indian company to a foreign company to evaluate the quality of certain products and to ascertain the suitability of such products for a specific industry, considered as reimbursement made by the Indian company, were part and parcel in the process of advice of a technical character and would fall for coverage in the definition of " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or for the purposes of making or earning any income from any source outside India; that in the instant case, the assessee is making exports to the USA and so, the fees in question has been paid for the purposes of making or earning income from the USA, i.e., from a source outside India; that therefore, as per the provisions of section 9(1)(viii)(b) also, the fees paid by the assessee to CSA cannot be deemed to have accrued or arisen in India and is not chargeable to tax in India; that it was therefore, that no TDS was required to be made on such payment, due to which, section 40(a)(i) of the Act has no applicability; that in Titan Industries Ltd. v. ITO [2007] 11 SOT 206 (Bang.), where the assessee, Titan Industries Ltd., a resident company, made payment of fees for technical services for getting its patent name registered in Hong Kong through a firm of professionals of Hong Kong. It was held that the services rendered by the professionals of Hong Kong had been utilized by the assessee outside India and since the patent was registered outside India for making an income from a source outside India, the payment was covered in the exception provided in section 9(1)(vii)(b) of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are utilized in India as well as rendered in India; that in the assessee's case, neither were the services rendered by CSA in India, nor were they utilized in India; that the CIT(A) has gone wrong in placing reliance on Cochin Refinery Ltd. (supra); that the said judgment is not applicable to the case of the assessee at all; that in that case, it was the reimbursement of the amounts paid by the foreign company to its personnel, which was held assessable, covered by the Explanation to section 9(1)(viii) of the Act; that as per section 90(2) of the Act, where the Central Government has entered into an agreement with the Government of any country outside India under section 90(1) of the Act for granting relief of tax or avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of the Income-tax Act shall apply to the extent they are more beneficial to that assessee; that Article 12 of the India-US DTAA [187 ITR (Statutes) 102] deals with royalty and fees included services; that "included services" in the said Article 12 are the same as "technical services" as provided in section 9(1)(vii) of the Act; that the DTAA has attached to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing certificate issued by a foreign company to its Indian client and no tax was deducted at source, it was held that there was no transfer of technical knowledge or skill; that in NQA Quality System Registrar Ltd. v. Dy. CIT [2005] 92 TTJ (Delhi) 946/2 SOT 249, it was held that payments received by a non-resident, not paying either royalty or fees for technical services, were not taxable in India in view of the Indo-UK DTAA and the same could not be allowed by invoking the provisions of section 40(a)(i) of the Act for non-deduction of tax at source; that in Taxation Department, ICICI Bank Ltd. v. Dy. CIT [2008] 20 SOT 453 (Mum.), where the assessee bank had appointed a non-resident grade rating agency based in the USA for the purpose of rating its floating rate Euro Notes Issue, the agency provided commercial information to the assessee for rating Euro Notes and the assessee made payments in US dollars to the agency for rendering such analytical services without deducting tax under section 195 of the Act on such payment, it was held that under Article 12 of the Indo-US DTAA, for bringing any payment within the definition of fees for "included services", a non-resident must make ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or arise in India; that since in the present case, the technical services were utilized in the assessee's business in India, income, as per section 9(1)(vii)(b) of the Act shall be deemed to have accrued or arisen in India as has rightly been ordered by the authorities below; that moreover, the payment is also covered in "fees for included services", as referred to under Article 12(4)(b) of the Indo-US DTAA, as per which, for the purposes of Article 12, "fees for included services", means payments of any kind to any person, in consideration for the rendering of any technical or consultancy services, if such services make available technical knowledge, expertise, skill, know-how or process; that the testing report and certification made available to the assessee by CSA were in the nature of the technical knowledge, expertise and skill made available by CSA to the assessee, since the same had been utilized in the manufacture and sale of products in the business of the assessee in India; that as such, as rightly held by the Assessing Officer, section 195 of the Act is directly applicable to the case; that Explanation 2 to section 9(1)(vii) of the Act was rightly applied by the autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year......... ." 14. The stand taken by the assessee is that in order to invoke the provisions of section 40(a)(i), it is a sine qua non that the amount paid should be chargeable to tax under the Income-tax Act. It has been maintained that in the present case, the fee for technical services paid by the assessee to CSA is not chargeable to tax in India, due to the exception contained in section 9(1)(vii)(b) of the Act. 15. Section 9(1)(vii)(b) reads as follows : "9(1) The following incomes shall be deemed to accrue or arise in India:- (vii) income by way of fees for technical services payable by- (a) ........... (b) a person who is a resident except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India; (c) ..........." 16. In order to fall within exception of section 9(1)(viii)(b) of the Act, the technical services, for which, the fees have been p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pe better than any other testing house. Quite often KEMA has first-hand knowledge about standards as a result of its participation in standardization committees. KEMA is committed to its customers and has more that 75 years of experience in testing electrical products. Our reputation is undisputed. ......... APB 15 states as follows : CSA International - Your one stop solution to certify your products for Brazil CSA International's product testing & certification specialists will provide the knowledge and guidance you need to certify your electrical & electronic products for Brazil. In Brazil, certification bodies must be accredited by INMETRO (National Institute of Metrology, Standardization and Industrial Quality). Electrical & electronic products that meet Brazilian requirements and that are certified by an INMETRO accredited organization must carry the mandatory INMETRO Mark along with the mark of the certification organization, such as UCIEE. (...........) CSA International laboratories can conduct testing and provide you with the CB (Certification Body) test reports so that your product can obtain the INMETRO mark plus the mark of the certifying organization. Since Braz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is squarely covered in the exemption provided in section 9(1)(vii)(b) of the Act which is reproduced as under : "a person who is a resident, except where fees are payable in respect of services utilized in a business or profession earned on by such person outside India or for the purpose of making or earning any income from any source outside India." Therefore, in case where fee for technical services has been rendered outside India and has been utilized for the purpose of making or earning any income from any source outside India, such payments would fall outside the purview of section 9(1)(vii) and will not be deemed to accrue or arise in India." 23. Para 3.04 of the assessee's written submissions before the CIT(A) reads as follows : "3.4 The Assessing Officer has erred while stating that the payment made in the instant case has been utilized for the business purpose in India while the same has not been utilized for the assessee's business in India since in Indian market, the KEMA certification is not required and the same is necessary for the company's products to be sold outside India. Please refer to the decision of Hon'ble Supreme Court in the case of Ishikawaji ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilized for the purpose of making or earning any income from any source outside India, such payments would fall outside purview of section 9(1)(vii) will not be deemed to accrue or arise in India." 26. After noting the above contention of the assessee, the CIT(A) observes : "In view of the above, the appellant has stated that the Assessing Officer has erred while stating that the payment made in the instant case has been utilized for the business purpose in India while the same has not been utilized for the assessee's business in India since in Indian market, the KEMA certification is not required and the same is necessary for the company's products to be sold outside India." 27. The CIT(A), however, without meeting the above specific submissions of the assessee, confirmed the disallowance made, observing, inter alia, as follows : "I have considered the submission of the appellant, the findings of the Assessing Officer and the facts on record. The appellant had made payment of Rs. 1471095 to M/s CSA International, Chicago, USA for getting business testing of AC Contractor as part of CV report and KEMA Certification through CSA. The appellant while making the payment to M/s CSA I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has pleaded that the facts as to whether or not the testing and certification was utilized by the assessee in its business activity in India, is essential for a proper determination of the controversy. She has stated that in the assessment order, the Assessing Officer has specifically observed that the testing and certification was indeed utilized in India in the assessee's business. She has stressed that if the assessment order is found to be deficient in this regard, the matter be remitted to the file of the Assessing Officer for decision afresh concerning this aspect of the matter. The ld. Counsel for the assessee, is opposed to such action being taken. 29. We find ourselves unable to agree with the contention raised by the ld. DR. As discussed hereinabove, the Assessing Officer has not brought anything on record to substantiate his observation of the testing and certification provided to the assessee by CSA having been utilized for the assessee's business activity in India. On the other hand, to reiterate, the assessee has shown that this testing and certification was necessary for the export of its product; that it was utilized for such export; and that it was not utilized f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 40(a) of the Income-tax Act. 31. For the above discussion, ground No. 1 is accepted. 32. Ground No. 2 states that the ld. CIT(A) has erred in confirming the disallowance of pre-operative expenses of Rs. 2,31,253 incurred by the assessee at its Haridwar unit, treating the same as capital expenditure. The Assessing Officer observed that the assessee had undertaken the project at Haridwar for installing a unit engaged in the manufacture of fans, etc. In its books of account, the assessee had been capitalizing these expenses towards capital work in progress relating to the Haridwar unit. In the computation of income, the assessee had claimed an amount of Rs. 2,31,253, claiming these expenses to have been incurred in the course of regular business and related to the expansion of the assessee's existing business capacity. 33. The Assessing Officer, however, did not agree with the stand taken by the assessee. It was observed that by the assessee's own admission, the expenditure incurred was by way of and for the purpose of substantial expansion of its business activity; that therefore, it should be treated as capital expenditure; that further, the new unit at Haridwar was not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 37 are not applicable. Reliance has been placed on Shree Synthetics Ltd. v. CIT [2008] 303 ITR 451(MP). 37. Having considered the rival contentions in the light of the material on record in this regard, we find that the observations of the ld. CIT(A) are to the effect that though the assessee has maintained that the expenditure in question was incurred for the expansion of its existing business activity, the assessee remained unable to substantiate this contention; that no evidence regarding the interlacing or inter-dependence of the units had been filed; that it had also not been substantiated that the new unit was dependent on the other running units of the assessee; and that in the accounts, the expenditure had been capitalized by the assessee. The written submissions filed by the assessee before the CIT(A) are as follows : "The assessee has set up a unit at Haridwar for the purpose of manufacture of electric fans and other electrical products. It can be seen from the details of the expenditure given above that all the expenses are of revenue nature and pertain to salaries, travelling expenses and other expenses of commercial nature of the people involved in the cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred for the purpose of expansion of existing line of business but for the exploration of new line of business activity. Thus, case of the assessee is different from the above cited case since the assessee has expanded its existing line of business by expanding the manufacturing base. The case of Ciba of India Ltd. v. CIT [1993] 70 Taxman 505 (Bom.) relied by the Assessing Officer is also not applicable to the assessee since in the cited case, the assessee was a manufacturer of pharmaceutical products. The ITO had disallowed the travelling expenses of foreign expert and it was held that the expenditure was incurred in connection with setting up of a new plant. Thus, it cannot be said to be a case of expansion of existing line of business as in the case of the assessee. In the case of the assessee, the expenditure at Haridwar unit was incurred for the expansion of its existing business activities which were already being carried on at other units. The real test for allowability of the expenditure is whether two or more businesses carried on by the assessee are interconnected, interlaced, etc., so as to constitute the same business. Thus, where it is found that there was a complete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there was a common board of directors controlling the ferro alloys plant, as well as the sugar plant, which operated from the head office located at Delhi. Funds for the two plants too were common. It was found that there was intermingling and interlacing of funds, and that even though the two divisions were geographically located at different sites, marketing of the final products, was carried out under the supervision and control of the same set of executives at the head office. These factual findings of the Tribunal were upheld by the Hon'ble High Court. 41. The position in the present case is found to be substantially the same as in Monnet Industries Ltd. (supra). In view of the above, ground No. 2 is accepted. 42. As per ground No. 3, the CIT(A) has erred in confirming the disallowance of Rs. 41,012 being the amount written off at the rate of 1/10th of the expenditure on increase in authorized capital, as the same is allowable under section 35D(2)(c)(iv) of the Income-tax Act. 43. The Assessing Officer observed the assessee to have claimed a deduction of Rs. 41,012 as misc. expenditure written off on account of increase in authorized capital. The Assessing Officer obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 35D are listed out in the section itself and whether expenses other than those can be amortized or not has been addressed by the Madras High Court in Ennar Steel & Alloy (P.) Ltd. 261 ITR 347. The court held that expenditure cannot be spread over on the same lines as in section 35D unless the nature of that expenditure is covered by the specific provisions of that section. The Act must be applied as one finds it and it is not open to the Tribunal to allow amortization of expenditure for which the Act does not make provision for amortization. Accordingly, the ld. CIT(A) has held that the expenses in question cannot be amortized under section 35D. 14. We, after having heard the parties have found no reason to interfere with the impugned order. Under section 35D only those expenses are allowed to be amortized which have been incurred by the assessee who is resident in India, before the commencement of his business or after the commencement of its business in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit and the expenditure of such nature as specified in sub-section (2) of section 35D. The assessee could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital brought in. 54. The learned counsel for the assessee, on the other hand, has strongly supported the impugned order. It has been contended that it is settled law that a debenture, whether convertible or non-convertible, is a loan, i.e., a borrowing. Attention has been drawn to pages 4 to 10 of the assessee's paper book, which is a copy of allotment letter for issuance of 4 per cent fully convertible debentures, along with the terms and conditions of the debentures. Para 1.3 at page 5 thereof contains the conversion price. Para 1.4 at page 7 and 8 talks of conversion price adjustment based on other events. 55. We have heard the parties and have perused the material on record. The issue, it is seen, is squarely covered in favour of the assessee by the decision of the Hon'ble Rajasthan High Court in the case of CIT v. Secure Meters Ltd. [2010] 321 ITR 611/[2008] 175 Taxman 567, wherein, it has been held that when debentures are issued, they are a loan and as such, whether a debenture is convertible or non-convertible, it does not militate against the nature of debenture being loan; and that as such, the expenditure incurred for issuance of debentures would be admissible as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that this aspect is settled by several decisions of various High Courts and it has been held by the Hon'ble Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52, that a loan is not an asset or advance of enduring nature and the purpose of taking loan is totally an irrelevant consideration and hence the deduction on account of interest on loans cannot be denied. Then, the learned Tribunal also proceeded to rely upon another judgment of the Jaipur Bench of the Tribunal in the case of Rajasthan Financial Corpn. v. Dy. CIT [1997] TW-501, holding that the expenditure incurred for raising capital through bonds in business was revenue in nature and it was held that since in the present case the assessee had incurred expenses of Rs. 44 lakhs on issuance of debentures being a loan, in our considered opinion, there is no basis for not allowing deduction for the entire sum and thus this addition was deleted. 7. We have gone through the judgment in Brooke Bond India Ltd.'s [1997] 225 ITR 798 (SC) and find that that was a case where the registration fee to the tune of Rs. 1,50,000 was paid to the Registrar of Companies for increasing the share capital of the company, while in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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