TMI Blog2015 (1) TMI 553X X X X Extracts X X X X X X X X Extracts X X X X ..... llow the appeal of the Revenue. - Decided in favour of revenue. - ITA Nos. 194, 195 & 287/ PNJ/2014 - - - Dated:- 7-1-2015 - Shri P. K. Bansal And Shri D. T. Garasia,JJ. For the Appellant : Shri Vinay Singh Rawat, Ld. D.R. For the Respondent : Shri Elson Sequeira, C.A. ORDER Per P. K. Bansal All these three appeals are filed by the Revenue against the orders of CIT(A) dt. 03.03.2014, 04.03.2014 and 15.05.2014 for assessment years 2008-09, 2009-10 and 2010-11 by taking the following effective grounds of appeal:- 1. The order of the learned Commissioner of Income-Tax (Appeals) is opposed to law and facts of the case. 2. The Ld. CIT(A) has erred in allowing relief to the assesse in respect of disallowances made by the Assessing Officer u/s 40(a)(ia) of the IT Act on account of non deduction of tax at source u/s 195(1) of the IT Act on usance charges paid of ₹ 18,99,772/- to a non resident through an intermediatory bank. 3. The Ld. CIT(A) failed to appreciate that as per section 10(15)(iv)(c) interest payable outside India on the purchase of raw material / capital goods on delayed period from 01.06.2001 is taxable in the hands of purchaser and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellants have not paid any amount to the non-resident suppliers either directly or through the bankers. The learned A.R. of the appellant also contended that since no payments have not been made to non-resident suppliers in the form of usance charges or interest / commission, the ration of judgement, relied upon by the A.O in the case of CIT vs Vijay Ship Breaking Corporation and others (2003) 181 CTR B4, does not apply in the case of appellant as the facts are entirely different. Also, in this case, the payment has been made to suppliers, no parts of whose income are assessable in India. In view of the above facts, in my opinion, the A.O was not justified in making the disallowance u/s 40a (i) amounting to ₹ 18,99,772/- on account of usance charges / commission. The A.O is directed to delete the addition accordingly. 3. We heard the rival submissions and carefully considered the same. We noted that the Hon'ble Supreme Court has reversed the decision of Hon'ble Gujarat High Court in CIT vs. Vijay Ship Breaking Corporation as reported in 314 ITR 309 (SC) by observing as under : As regards the second question, we may state that in this case, the controversy w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jay Ship Breaking Corporation, 261 ITR 113 on merit but this decision has been reversed as the Assessee was engaged in ship breaking business and the Assessee had imported the ship for breaking in respect of which the Assessee had to incur the usance charges. The Hon'ble Gujarat High Court has taken the view that the usance charges are interest within the provisions of Sec. 2(28A) of the Income Tax Act and has accrued in India, therefore Sec. 195 was clearly applicable and Assessee has committed default by not deducting TDS. When the matter went before the Hon'ble Supreme Court, explanation (2) was inserted u/s 10(15)(iv)(c) by the Taxation Laws (Amendment) Act, 2003 with retrospective effect from 1.4.1962. This explanation reads as under :- For the removal of doubts, it is hereby declared that the usance interest payable outside India by an undertaking engaged in the business of ship-breaking in respect of purchase of a ship from outside India shall be deemed to be the interest payable on a debt incurred in a foreign country in respect of the purchase outside India. 5. From the reading of this explanation it is apparent that this explanation is applicable only in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised. The meaning of the word interest is thus very wide and would include interest on unpaid purchase price payable in any manner which would include by means of irrevocable letter of credit. The word debt is defined in section 2(c) of the Interest Act, 1978, inter alia, to mean any liability for an ascertained sum of money. According to the accounting standards, revenue from sale of goods is recognised when the seller transfers the goods to the buyer for consideration. Interest revenue is recognized on a time proportionate basis using the effective interest rate. The provisions of section 9(1)(v)(b) read with section 5(2) and section 4(1) and (2) of the Income-tax Act leave no room for doubt that the income payable by way of interest by a resident to a non-resident (which is not payable for the purpose of carrying on the business of such resident outside India or for earning income from any source outside India) would be deemed to have accrued or arisen to such non-resident in India, and will be part of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s favour. The Double Taxation Avoidance Agreements follow the pattern of the Organisation of Economic Co-operation and Development (OECD) Model Convention. The Model Convention has been used by the covenanting States as a basic document of reference while entering into such bilateral treaties. Such double taxation avoidance treaties are international agreements. Section 90 of the Act enables the Central Government to enter into such an agreement with the Government of another country, inter alia, for relief where income-tax is paid in both countries or for avoidance of double taxation. A formula reserving the exclusive taxation of interest to one State, whether the State of the beneficiary s residence or the State of source was not sure of general approval. Therefore, article 11 of the Model Convention concerning the taxation of interest adopted a compromise solution providing that interest may be taxed in the State of residence but leaves to the State of source of income the right to impose a tax, if its laws so provide, it being implicit in this right that the State of source is free to give up all taxation on interest paid to non-residents. Its exercise of this right will how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m separately. Merely because ship breaking is considered as an industry, it would not be an industry engaged in manufacture or production of any article or thing. The benefit of the provisions of sections 80HH and 80-I is clearly not intended for such ship breaking activities which do not result in bringing into existence any new article or thing. The word manufacture in the context of sections 80HH and 80-I of the Act would mean making articles or things. While dismantling the ship, steel plates are not made but only removed which is not the same thing as making steel plates. The word production in the context of these provisions would mean the action of making or manufacturing from components or raw materials an article or thing and not just removing an existing article or cutting it. The assessee-firm was engaged in the business of ship breaking at Alang during the previous year relevant to the assessment year 1995-96. Two old and condemned ships were acquired by the assessee for demolishing purpose. One was purchased by the assessee from a London party under the memorandum of agreement dated March 15, 1993, for a total purchase price of the ship which was agreed at US $ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ship. The Tribunal concluded that the interest amount though separately mentioned in the memorandum of agreement and described as interest therein, partook of the character of the purchase price for the buyer and should be treated as purchase price. It held that the assessee was not liable to deduct tax at source from the payment of interest to the non-resident and hence, the disallowance of interest made under section 40(a)(i) was not warranted. It also held that ship breaking resulted in production of articles and amounted to manufacture, and that deduction should be allowed to the assessee under sections 80HH and 80-I. On further appeal to the High Court : Held, (i) that the intention of the parties to the contract was clear and the price of the ship was considered to be separate as certified in the invoice, which reflected its price agreed in the memorandum of agreement, and the buyer in lieu of the credit facility of 180 days from the date of the notice of readiness was required to pay interest at the rate stipulated in the memorandum of agreement and worked out thereunder for which a separate invoice was prepared. There was no nexus between the interest amount and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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