TMI Blog2012 (5) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. Pre operative expenses - held that:- The fact that in the books of account the assessee had capitalised the expenses does not prevent the assessee from claiming them as revenue expenses since the question of allowance of expenses has to be considered in the light of the legal position and the accounting treatment cannot be conclusive. - Decided in favor of assessee and against the revenue. Expenditure relating to fully convertible debentures - whether related to issue or shares or merely related to issue of debenture - held that:- It is well settled that expenditure incurred in connection with the issue of debentures or obtaining loan is revenue expenditure. - The question before us however, is whether it is a debenture issue or an issue of share capital involving the strengthening of the capital base of the company. Though it prima facie appears that there are sufficient facts to indicate that what was contemplated was an issue of shares to the Mauritius Company under the Investor Agreement which would result in strengthening of the assessee's capital base, having regard to the judgments cited on behalf of the assessee [India Cements Ltd. v. CIT [1965 (12) TMI 22 (SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 195 of the Act from the amount paid to the US Company. He accordingly proposed to disallow the payment by invoking Section 40(a)(ia) of the Act. The assessee by letter dated 04.10.2007 stated that the amount was paid as testing charges to the US Company, that the testing was carried out by the US Company outside India, that no income arose or accrued to the US Company in India and, therefore, the assessee did not deduct any tax from the amount paid. The assessee, therefore, claimed that the provisions of Section 40(a)(ia) cannot be invoked to disallow the payment on the ground of non-deduction of tax at source. 5. The Assessing Officer did not agree with the assessee's contentions. According to him the assessee was not right in saying that no income had accrued or arisen to the US Company in India. According to him the deeming provisions of Section 9(1)(vii) of the Act was applicable and that the amount paid represented fees for technical services rendered by the US Company to the assessee within the meaning of Explanation 2 below Section 9(1)(vii)(b) of the Act. According to the Assessing Officer the testing of the equipment was a highly specialised job of technical n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for the purpose of making or earning income from a source outside India and hence the payment was not chargeable to tax in India. There was thus no liability to deduct tax. ( b ) The departmental authorities erred in concluding that the technical report and certification were utilised in the manufacture and sale of the assessee's products in the assessee's business in India. ( c ) The KEMA certification enables the assessee to sell its products freely in the European Union. The assessee exports the products which bear the KEMA certification and that such certification is not required in India or by the Indian buyers and the taxing authorities were wrong in saying that the technical services were utilised by the assessee for its business in India. ( d ) In any case under Article 12(4)(b) of the double tax avoidance agreement between India and USA makes it a condition that the mere rendering of technical services is not sufficient and that it is also necessary, in order that the fees for included services are taxable in India, that such services should have resulted in "making available" to the assessee technical knowledge, experience and skill. 8. The Tribunal, on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilised in a business or profession carried on by the assessee outside India or (b) they were paid for the purposes of making or earning any income from any source outside India. In either of these two cases, the amount paid will not be taxable in the hands of the non-resident company and correspondingly there will be no liability upon the assessee to deduct tax under Section 195 of the Act. It was stated before us by the learned counsel for the assessee that exception (b) will be applicable in the assessee's case and not (a). In other words his contention was that the fees were payable for the purposes of making or earning income from a source outside India. He elaborated this by submitting that the certification by the US Company that the products turned out by the assessee were KEMA certified and were fit for being used in European countries and in countries where such certification is accepted, was indispensable for the export of such products to those countries and accordingly the fees for such certification and testing were for the purposes of making or earning income from a source outside India. It was accordingly contended that the conditions of the second exception in Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business operations were confined to the territory of Pondicherry. After the merger of Pondicherry with India in August, 1962, the Income Tax Act was extended to Pondicherry w.e.f. 1.4.1963. Till then, the French law relating to income tax was in force in Pondicherry. During the period when the French tax law was in force, the assessee surrendered certain raw cotton import and machinery import entitlement and received payments from the Textile Commissioner (Bombay). The question arose as to the taxability of the income referable to the import entitlements. While the income tax department took the stand that the income accrued to the assessee outside Pondicherry and was therefore texalite under the Act, the assessee maintained that the receipts were only in Pondicherry and since the exports were made from Pondicherry, the income accrued or arose to the assessee in the territory of Pondicherry which was outside the purview of the Act. The Madras High Court observed that the import entitlements arose out of the export activity which was carried on by the assessee only in Pondicherry, that no part of the manufacturing or selling activity of the assessee was carried on outside Pondiche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource of income was located in India and not outside. Moreover, just as in the Madras case it was held that the mere fact that the import entitlements which had their source in Bombay, did not constitute a source of income within the meaning of Section 9 of the Act, we have also to hold in the present case that the mere fact that the export proceeds emanated from persons situated outside India did not constitute them as the source of income. 12. The question as to what is a source of income has been dealt with in some authoritative pronouncements. The Judicial Committee in Rhodesia Metals Ltd. v. Commissioner of Income Tax , [1941] 9 ITR (Suppl.) 45 observed that a "source" means not a legal concept but one which a practical man would regard as a real source of income. This observation was adopted by Malik, J. in his separate but concurring judgment in the case of Rani Amrit Kaur v. CIT [1946] 14 ITR 561, a decision of the Full Bench of the Allahabad High Court. A source of income was described by R.S. Pathak, J. (as he then was) in the following words in Seth Shiv Prasad v. CIT [1972] 84 ITR 15 (All.) at page 18: - "A source of income, therefore, may be described ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e source of the receipt of the monies. In order to fall within the second exception provided in Section 9(1)( vii )( b ) of the Act, the source of the income, and not the receipt, should be situated outside India. That condition is not satisfied in the present case. The Tribunal, with respect, does not appear to have examined the case from this aspect. Its conclusion that the technical services were not utilised for the assessee's business activity of production in India does not bring the assessee's case within the second exception in Section 9(1)( vii )( b ) of the Act. It does not bring the case under the first exception either, because in order to get the benefit of the first exception it is not sufficient for the assessee to prove that the technical services were not utilised for its business activities of production in India, but it is further necessary for the assessee to show that the technical services were utilised in a business carried on outside India. Therefore, we cannot also approve of the Tribunal's conclusion in para 29 of its order to the extent it seems to suggest that the assessee satisfies the condition necessary for bringing its case under the first exception. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company. This aspect of the matter has not been examined by the Tribunal, though raised before it by the assessee, since there was no occasion for the Tribunal to do so on account of the view it took regarding the taxability of the fees for technical services under the Act. It is axiomatic that if the receipt is not taxable under the Act, then there is no need to examine whether it would fall under any of the provisions of the agreement for avoidance of double taxation. We cannot therefore find fault with the Tribunal for not having discussed the applicability of Article 12 of the Indo-US Treaty, which defines "fees for included services" in a manner which is different from the definition of "fees for technical services" in Explanation 2 below Section 9(1)( vii ) of the Act. It would therefore not be proper or necessary for us to examine the applicability of the treaty which should be left to the Tribunal. While therefore answering the first substantial question of law in the negative, in favour of the Revenue and against the assessee, we restore the issue relating to the applicability of the Indo-US treaty to the receipt in question and consequently the applicability of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management. The Tribunal also referred to the judgment of this Court in CIT v. Monnet Industries Ltd. [2009] 221 CTR 266 and applying this decision to the facts found, it held that the expenditure was revenue in nature having been incurred for the expansion of the existing business and accordingly directed the Assessing Officer to allow the same as deduction. 20. Having heard both the sides on this question, we are satisfied that the Tribunal has taken the right view of the matter. There is no challenge to the factual findings recorded by the Tribunal on the basis of the financial statements and the director's report before them, to the effect that (a) that the Haridwar Unit was only a expansion of an existing business of the assessee and (b) that there was intermingling and interlacing of the funds of the units and (c) there was a common management. This is the usual test which has been deduced by the courts in India, following the locus classicus on the subject, which is that of the House of Lords in the case of Scales v. George Thompson Co. Ltd. 13 TC 83 where the test laid down by Rowlatt, J. was whether there was interconnection, interlacing, interdependence a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which it was stated that the FCDs would be converted into equity shares on or before 12.6.2006 and these shares would be issued to the Mauritius Company. It was also mentioned in the resolution that the Mauritius Company would be entitled to bonus shares in the ratio of 1:1 and they will be allotted at the time of conversion of the debentures. According to the Assessing Officer, this actually meant that the assessee was in fact making an issue of share capital and according to the judgments of the Supreme Court in Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798 and Punjab State Industrial Development Corporation v. CIT [1997] 225 ITR 792, any expenditure incurred in relation to the expansion of the capital base of a company should be treated as capital expenditure. He accordingly disallowed the expenditure of Rs. 92,67,841/-. 24. On appeal the CIT (Appeals) referred to the judgment of the Rajasthan High Court in CIT v. Secure Meters Ltd. [2010] 321 ITR 611 in which it was held that the position has to be examined only with reference to the time when the debentures were issued and that the fact that at a future point of time they were to be converted into shares was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as revenue expenditure on the basis of the factual position obtaining at the time of the debenture issue, we are not inclined to take a different view. The following cases have been cited on behalf of the assessee in support of the view that even in such a situation the expenditure is allowable as revenue expenditure: - ( i ) CIT v. East India Hotels Ltd. [2001] 252 ITR 860 (Cal.) ( ii ) CIT v. ITC Hotels Ltd. [2011] 334 ITR 109 (Kar.) ( iii ) CIT v. South India Corporation (Agencies) Ltd. [2007] 290 ITR 217 (Mad.) ( iv ) CIT v. First Leasing Co. of India Ltd. [2008] 304 ITR 67 (Mad.) 27. In addition to the above judgments, we also have the judgment of the Rajasthan High Court ( supra ) against which the Special Leave Petition filed by the Revenue was dismissed. Having regard to the predominant view taken in the above judgments, in which the judgment of the Supreme Court in India Cement ( supra ) has been noticed, we are inclined to uphold the view taken by the Tribunal that the expenditure is revenue in nature. Accordingly, we answer the substantial question of law in favour of the assessee and against the revenue. 28. In the result the appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X
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