TMI Blog2014 (4) TMI 1094X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicable. We are therefore of the view that the revenue authorities were justified in rejecting the claim of the assessee under the head ‘long term capital loss’. - Decided against assessee. Disallowance of refurbishing / warranty claims - non deduction of tds - Was there an obligation on the part of the Assessee to reimburse the cost of refurbishing the products sold by Mantrra Inc.? - Held that:- Perusal of the refurbishing statement shows it refers to several heads of expenses but none of the head of expense is “value of the cooker returned by customer”. Besides the above it includes expenses on retrieving returned cookers to make them fit for sale again, rent for storing returned cookers, costs of shifting the returned cookers, travelling expenses, Apartment rent paid for workmen who visited from India to refurbish the returned cookers. It is clear from these bills that none of the above expenditure can be attributed to the Assessee as per any article in the agreement between Assessee and MI. These expenses are clearly that of MI for which the Assessee has procured a Product Liability Insurance cover at its cost in favour of MI. As we have already seen and as rightly held b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t also be allowed as the main claim for liability on account of warranty liability itself has been held to be not that of the Assessee. Addition on account of disallowance of interest on the ground that the interest expenses claimed as deduction were on borrowed funds which was given as interest free advances to MI - CIT(A) deleted the addition - Held that:- the plea with regard to commercial expediency has been accepted by the CIT(A) without any basis. There has been no investigation of facts with regard to how the interest free loan was given to MI to enable it to warehouse and sell the Assessee’s products in US. As we have already seen the distributor agreement is silent on all these aspects and the basis on which CIT(A) has given relief to the Assessee in our view cannot be accepted. We however are of the view that the plea of the Assessee both with regard to its claim that interest free advance was given out of surplus funds of the Assessee as well as the plea with regard to commercial expediency in giving interest free loan to subsidiary requires fresh examination by the AO and accordingly the order of CIT(A) on this issue is set aside and the issue remanded to the AO for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n equity shares of the company by name TT Kitchenware Ltd. [ TTK for short]. This company was not in operation for several years and had no assets or liabilities. This company therefore approached Registrar of Companies, Tamil Nadu, to have its name struck off the Registrar of Companies [ ROC for short], as it was a defunct company. TTK had made the application for striking off its name from the ROC u/s. 560 of the Companies Act, 1956. By letter dated 7.4.2004, TTK informed the assessee of its proposed action u/s. 560 of the Companies Act, 1956 and also sought consent of the assessee for such an action as the assessee was a major shareholder in TTK. 5. It is not in dispute that as per the balance sheet of the TTK as on 29.02.2004, there was no underlying asset representing share capital and therefore the value of the shares held by the assessee in TTK was NIL. The assessee gave its consent to TTK for an application u/s. 560 of the Companies Act, 1956. The assessee also wrote off the value of investments in its books of accounts in the F.Y. 2004-05 relevant to A.Y. 2005-06. Based on the above, the assessee claimed that it has suffered a long term capital loss which had to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stribution of assets by a company in liquidation in the hands of a shareholder as follows:- 46 (2) Where a shareholder on the liquidation of a company receives any money or other assets from the company, he shall be chargeable to income-tax under the head Capital gains , in respect of the money so received or the market value of the other assets on the date of distribution, as reduced by the amount assessed as dividend within the meaning of sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 48. According to the ld. counsel for the assessee, the above provisions clearly contemplate a situation where capital loss can be allowed as a deduction on liquidation of a company. 9. The ld. DR, on the other hand, relied upon the order of the CIT(Appeals). 10. We have considered the rival submissions. U/s. 560(5) of the Companies Act, 1956, the final procedure for striking a company s name off the registrar is to publish a notice thereof in the official gazette and on publication in the official gazette of notice referred to in section 560(3) of the Companies Act, 1956, the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Importer at such prices as determined in accordance with the transfer price formula described in the agreement elsewhere. 3.2 All Products sold by Manufacturer to Importer shall be sold on CI + freight on actual basis unless otherwise agreed. The Port of delivery will be specified by the Importer. 3.3 Title to Products shall transfer to Importer upon the clearance of the consignment by the Importer at the port of destination unless otherwise agreed. It is agreed that Manufacturer shall be obliged to replace or give Importer credit for any Products found to be defective or unacceptable to the Importer/Statutory Authorities or returned by the Importer to the Manufacturer or as may expressly be agreed between the parties on case to case basis in the interest of servicing the territory and the customers thereof satisfactorily. 14. Articles 6.4 6.5 of the agreement which is also relevant for the present case reads as follows:- 6.4 The Importer shall deal with the products on its own account for sale in the territories and shall be solely responsible for realisation of the sales made by the Importer. The Importer on its own account engage Manufacturers Representatives or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground of non-deduction of tax at source, the claim for deduction cannot be allowed; no application u/s. 195(2) was made by the assessee for non-deduction of tax at source. (d) There was an absolute sale of the cookers by the assessee to MI. MI was selling the cookers on its own account to the customers in USA and therefore if at all there was a warranty claim, that should be borne by the MI and not by the assessee. For all the above, reasons, the AO rejected the claim for deduction on account of refurbishing/warranty. 19. The assessee reiterated its submissions before the CIT(Appeals) that the claim of the assessee should be allowed by placing reliance on clause 3.3 of the agreement with MI. The assessee also reiterated its stand that the liability of the assessee accrues on receipt of letter dated 22.03.2005 from MI, notwithstanding the fact that the warranty claim related to a period not falling within the previous year relevant to A.Y. 2005-06. With regard to the application u/s. 195(1) of the Act, it was submitted that the amount in question was reimbursement of expenses incurred for which the provisions of section 195(1) of the Act are not applicable. The assessee r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Agreement , the appellant has the following obligations :- i) Replacement of the product found to be defective or unacceptable by Manttra Inc or statutory authorities. ii) Replacement of the products returned by the US State iii) Alternatively give credit for the product returned on above accounts. (iv) Under clause 3.3 of the Agreement between the Assessee and MI, replacement or credit to MI is subject to the return of such stock to the manufacturer (Assessee). No evidence has been produced by the Assessee either during the assessment proceedings or at the appellate stage to prove that any such claim according to the Agreement was ever made by MI. (v) As per clause 6.4 of the Agreement the importer (M/s. Mantra Inc.) shall deal with the products on its own account , which makes it clear that expenses required to be incurred in connection of refurbishing or the warranty to be incurred by M/s. Mantra Inc. (vi) Under clause 9.1 of the Agreement expenses in respect of the warranty was to be incurred by MI, which reads thus: Manufacturer warrants and represents to Importer that all Products purchased by Importer shall be free and clear of all liens, char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses mentioned in the statements are in the nature of the warranty or attending the warranty claims which have to be incurred by Mantra Inc as per Para 9.1 of the Agreement, the Mantra Inc is also required to have adequate facilities for warehousing the products as per Paragraph 2.1 of the Agreement. Thus the expenses connected to the warehousing are also to be incurred by M/s. Mantra Inc and not by the Assessee. d) If the expenses were genuine there was no need to hide these transactions in 3 CEB Report filed as per Rule 10E of the Income Tax Rules in which in Column No.12, the assessee was required to furnish particulars in respect of mutual agreement or arrangement entered, the particulars required as per the column are has the assessee entered into any international transactions with an associate enterprise by way of mutual agreement or arrangement for allocation or apportionment of, or any contribution to, any cost or expenses incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises . (viii) The Assessee had relied on the order of CIT(A) III, Bangalore while disposing the appeal for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t which provides that any sum which is chargeable to tax paid outside India on which tax was required to be deducted at source when making payment as required under Chapter-XVIIB of the Act and tax has not been so deducted shall not be allowed as a deduction while computing income? 24. As far as Point (a) above is concerned, the facts are not clearly narrated in the AO s order. The AO has mentioned in para 8.6 of his order that the liability on account of warranty in respect of defective cookers sold in USA is that of MI and not that of the Assessee. The CIT(A) has however analysed the terms of the Agreement between MI and the Assessee whereby, the MI agreed to act as distributor for cookers manufactured in India and exporter to US. The terms of the said agreement which is dated 30.6.1998 is at pages 12 to 24 of the Assessee s paper book. The recitals in the agreement say that the Assessee is manufacturer of pressure cookers and has established a reputation for its product and brand in India and abroad. MI wishes to Purchase from the Assessee Pressure cooker and cookware products for re-sale in the territory of USA, Canada, Mexico and countries in South and Central America. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mate purchaser of the products in the territories in which the same are sold by MI and that has to be looked after only by MI. In this regard MI has protection in the form of a Product liability Insurance procured by the Assessee with respect to the products for a maximum amount of US $ 15,00,000 so as to indemnify, defend and hold harmless MI from any and all claims, liabilities, damages, expenses, (including reasonable attorney s fees and litigation costs) or costs, arising out of any defects in the Products. 26. Now let us examine the claim of the Assessee as made before the AO. In response to the query of the AO on whether and how the claim for deduction on account of refurbishing warranty claim can be allowed, the Assessee by his letter dated 22.11.2005 has informed the AO as follows: As explained during the discussions, our subsidiary had to incur expenditure under various heads for refurbishing and reconditioning stocks returned by customers (to our subsidiary)., This has helped our subsidiary to bring back the stocks into saleable condition. These expenses are in the nature of warranty claims in terms of the agreement entered into between Manttra Inc. and TTK Prest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciate that the addition made by way of imputed interest is opposed to law and to facts as the appellant had advanced the amount due to business exigencies out of own funds. 29. The assessee had given an interest free loan of ₹ 3,05,90,000 to MI, its wholly owned subsidiary. This was an interest free loan. The AO has observed that the amount in question was advanced not out of interest free funds and that the assessee had claimed interest expenses of ₹ 6,36,32,677 in its profit loss (P L) account on borrowed funds. The AO proposed to add interest at average prime lending rate of State Bank of India as on 31.3.2005 at 10.25% on the interest free loan and made an addition of ₹ 31,35,475 to the total income of the assessee. However, on a reference to the TPO u/s. 92CA of the Act, the addition of 10% of the outstanding balance was suggested by the TPO. The AO accordingly made an addition of ₹ 39,59,000 to the total income of the assessee. 30. On appeal by the assessee, the CIT(Appeals) confirmed the order of the AO. The assessee s contentions before the CIT(A) were that the AO has erroneously concluded that the Assessee did not have interest free funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are non resident, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of or any contribution to any cost or expense incurred or to be incurred in connection with a benefit service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall for the purposes of sub-section (1) be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the asso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made either under the normal provisions of the Act or u/s.92CA of the Act. In the alternative the learned counsel for the Assessee has pleaded that the rate of interest adopted for making the impugned addition by adopting the Prime Lending Rate of SBI as on 31.3.2005 should be deleted. The addition if at all can be made by determining the arm s length price in case of interest on extended credit period granted to an Associated Enterprise on the basis of USD LIBOR and not on any other currency denominated loan rate. 34. Another submission was also made by the learned counsel for the Assessee that the transaction of giving loan was in previous year relevant to AY 02-03 and therefore it is only in that year the provisions of Sec.92CA of the Act could be applied and not in AY 05-06. On this argument we are of the view that the same is not acceptable as the benefit in the form of interest free loan continues so long as the loan remains not repaid. To this extent the international transaction continues during the previous year relevant to AY 05-06 also and therefore the provisions of Sec.92CA of the Act would be applicable. 35. We are of the view that the plea raised by the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the total income computed in accordance with the provisions of the Act. Sec.28 of the Act lays down the categories of income that are assessed as income from business or profession. Sec.29 lays down the manner of computation of income from business or profession. These are general provisions for computation of income from business applicable to all class of assessees. Provisions of Sec.92 in particular and Chapter X in general are special provisions dealing with computation of income in an international transaction. Those provisions will prevail over the general provisions. Generalia Specialibus Non Derogant (general provisions must yield to the specific provisions). Generally speaking, the sections in the Act do not overlap one another and each section deals with the matter specified therein and goes no further. If a case appears to be governed by either of two provisions, it is clearly the right of the Assessee to claim that he should be assessed under the one, which leaves him with a lighter burden. When there is a conflict between a general provision and special provision, the latter shall prevail. 16. Interest free loan extended to the associated concerns as at arm's l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions has been said to be commercially expedient and loan granted to support the subsidiary and obtain returns in future. The assessee had full control over its subsidiary which reduce the credit risk. The loan had been duly granted by the approval of the RBI. The Income Tax Act, 1961 and OECD guidelines support the contention that the effect of government control/ intervention should be considered while determining the arm's length price. Under the thin capitalization rules, no deduction was allowable to the Hungary entity for payment of interest therefore, there existed impossibility of performance with regard to payment of Hungary entity. Economic circumstances of the subsidiaries did not warrant the charging of interest from subsidiaries. The Id. Counsel for the assessee further relied upon the Apex Court decision in the case of M/s S.A. Builders Ltd. Vs. CIT(Appeals) and others 288ITR 1 (SC). 9.1 The Id. DR for the revenue on the other hand relied upon the orders of the Id. CIT(A), he claimed that the Id. CIT(A)'s order was a speaking order and it has rebutted all the arguments of the assessee. 10. We have carefully considered the submissions and perused the rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur considered opinion they do not help the case of the assessee. 17. The aforesaid decision of the Tribunal is an answer to the argument of the Assessee before us that the impugned addition could not have been made by the AO at all. Respectfully following the said decision, we hold that the AO was well within his powers in making the impugned addition. The justification for the quantum of notional income considered as taxable in the hands of the Assessee is a matter which we will examine in the subsequent paragraphs. 36. In view of the aforesaid decision of the Tribunal, we are of the view that there is no merit in the main part of the argument raised in Gr.No.2A by the Assessee. 37. On the quantum of interest percentage that has to be added, we find the Mumbai Bench of the ITAT in the case of Tata Autocomp Systems Ltd. (supra) held as follows: 18. On the issue as to what is quantum of addition that has to be made, we will proceed to examine the issue on the basis that CUP is the most appropriate method for determining ALP in the present case. It has been the argument on behalf of the Assessee that the TPO has adopted the interest rate charged by a domestic bank as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made by the TPO. Aggrieved by the decision of the AO, the taxpayer filed objections before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) confirmed the transfer pricing adjustment, however, restricted the same to 2 percent based on the USD LIBOR rate plus 80 basis point mark-up. Aggrieved by the order of the CIT(A), that AO filed an appeal before the Tribunal. The Tribunal had that the TPO made an error in selecting the transaction of charging of interest to German AE on loan granted at the rate of 10 percent per annum as internal comparable. Following the position settled in case Skoda Auto India and Rule 10B(1)(a) of the Income-tax Rules, 1962, to be an internal comparable under the Comparable Uncontrolled Price (CUP) method, the transaction needs to occur between the taxpayer and an independent party. Even assuming that the adjustment for extended credit was necessary, USD LIBOR is more appropriate basis than the rate of interest on Euro denominated loan considering the fact that the AE is based in USA and commercial principles and practices related to USD denominated extended credit. The Tribunal has also made a crucial point that the arm s length interest rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rates are considered to be the most important rate in the European money market. The interest rates do provide the basis for the price and interest rates of all kinds of financial products like interest rate swaps, interest rate futures, saving account and mortgages. We find that the RBI in respect of export credit to exporters at internationally competitive rates under the scheme of pre-shipment credit in foreign currency (PCFC) and Rediscounting of Export Bills abroad (EBR), has permitted banks to fix the rates of interest with reference to ruling LIBOR, EURO LIBOR or EURIBOR, wherever applicable and thereto appropriate percentage ranging from 1% to 2%. The reference to the said circular is at page -80 of the Assessee s paper book. In our view the claim of the Assessee to adopt EURIBOR rate as stated before the TPO is reasonable and deserves to be accepted. Following the ruling of the tribunal in the aforesaid cases, we are of the view that the claim made by the Assessee in this regard has to be accepted. The AO is directed to work out the TP adjustment accordingly. Gr.No.1 to 4 are thus partly allowed. 38. Following the aforesaid decision of the Mumbai ITAT we direct the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C). Aggrieved by the order of the CIT(A), the revenue has raised Gr.No.2 before the Tribunal. 42. We have heard the rival submissions. The law with regard to the year of allowability of additional liability due to exchange rate fluctuation as on the last date of the previous year has been laid down by the Hon ble Supreme Court in the case of Woodward Governors (supra). The Hon ble Supreme Court held that loss suffered by an assessee in respect of a revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable under s. 37(1). The Hon ble Court further referred to para 9 of AS-11, which provides that exchange differences arising on foreign currency transactions have to be recognized as income or expense in the period in which they arise, except as stated in para 10 and para 11. An enterprise has to report the outstanding liability relating to import of raw materials using closing rate or exchange. Any loss arising on conversion of said liability at the closing rate has to be recognized in the P L a/c for the reporting period. The grievance of the revenue and the submission of the learned DR before us was that there is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditional grounds raised by the Revenue in its appeal for AY 06-07 to 08- 09. We may also add that the liability on account of exchange rate fluctuation at the time of actual payment to MI of the alleged liability on account of warranty claims cannot also be allowed as the main claim for liability on account of warranty liability itself has been held to be not that of the Assessee. 44. The revenue has also raised another additional ground in AY 06-07 07-08 wherein they have challenged the order of the CIT(A) whereby the CIT(A) deleted the addition made by the AO by making addition on account of disallowance of interest on the ground that the interest expenses claimed as deduction were on borrowed funds which was given as interest free advances to MI. We have already seen while deciding the appeal of the Assessee for AY 05-06 that the AO considered the interest free loan transaction to MI an AE of the Assessee as an international transaction with AE which attracts the provisions of Sec.92CB of the Act. The reference was made to the TPO in that year but in AY 06-07 07-08 no reference was made to the TPO but the addition was made by a simple disallowance of interest expenses on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rehouse and sell the Assessee s products in US. As we have already seen the distributor agreement is silent on all these aspects and the basis on which CIT(A) has given relief to the Assessee in our view cannot be accepted. We however are of the view that the plea of the Assessee both with regard to its claim that interest free advance was given out of surplus funds of the Assessee as well as the plea with regard to commercial expediency in giving interest free loan to subsidiary requires fresh examination by the AO and accordingly the order of CIT(A) on this issue is set aside and the issue remanded to the AO for fresh examination after giving Assessee opportunity of being heard. The relevant grounds of the Revenue are treated as allowed for statistical purpose. 48. Another common issue which requires to be considered in Revenue s appeal for AY 07-08 08-09 is the disallowance of expenses claimed by the Assessee under the head Royalties paid to a non-resident in view of the provisions of Sec.40(a)(i) of the Act which provides that any sum which is chargeable to tax paid outside India on which tax was required to be deducted at source when making payment as required under Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LILLLY CO.[2009-TIOL-45-SC-IT] Once it is established that the income earned by a foreign entity is not chargeable to income tax in India, the TDS provisions would not be attracted on such payments. Hence, I am of the considered opinion that the royalty payment made by the Appellant is allowable as business expenditure and is allowed accordingly. The AO is directed to delete the addition of ₹ 51,62,761/- as Royalty expenses. 50. The definition of Royalty under the Act and when it is deemed to accrue or arise in India is laid down in Sec.9(1)(vi) of the Act, which reads thus: Sec.9: Income deemed to accrue or arise in India. (1) The following incomes shall be deemed to accrue or arise in India- (vi) income by way of royalty payable by- (a) the Government; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the royalty is payable in respect of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April, 1976. Explanation 2 : For the purposes of this clause, royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade-mark or similar property; (ii) the imparting of any information concerning the working of or the use of, a patent, invention, model, design, secret formula or process or trade-mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade-mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) for the purposes of making or earning any income from any source outside India. 52. The learned counsel for the Assessee placed strong reliance on the above exception clause to contend that royalty is payable by the Assessee for right to use brand name Prestige for the purpose of sale of pressure cookers outside India and therefore the payment in question does not accrue or arise to the non-resident in India. We are unable to accept the above submission for the reason that the Assessee carries on business in India and the above exception will apply only when the business of the Assessee (that is the person making payment of royalty) itself is carried on outside India. In this regard the learned counsel for the Assessee placed reliance on the decision of the Hon ble Madras High Court in the case of COMMISSIONER OF INCOME TAX vs. AKTIENGESELLSCHAFT KUHNLE KOPP AND KAUSCH W. GERMANY BY BHEL, 262 ITR 513 (Mad) wherein it was held royalty paid by a resident in India, it cannot be said that it was deemed to have accrued or arisen in India if the royalty was paid out of the export sales and hence, the source for royalty is the sales outside India. Since the source for royalty is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hatever is payable by a resident to a non-resident by way of fees for services, thus, would not always come within the purview of section 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. Whereas a resident would come within the purview of section 9(1)(vii) of the Act, a non-resident would not, as services of a non-resident to a resident utilized in India may not have much relevance in determining whether the income of the non-resident accrues or arises in India. It must have a direct link between the services rendered in India. When such a link is established, the same may again be subjected to any relief under the Double Taxation Avoidance Agreement. A distinction may also be made between rendition of services and utilization thereof. 54. To supersede the judgment in Ishikawajma (supra) an Explanation to section 9(1) was inserted by the Finance Act, 2007 with retrospective effect from 1st June,1976. Memorandum Explaining the Provisions in the Finance Bill, 2007 relating to the Explanation incorporated to section 9(2) of the Act is extracted hereunder : Rationalisation and simplification measures Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e criteria of rendering service in India and the utilization of the service in India as laid down in Ishikawajma-Harima (supra) to attract tax liability under section 9(1)(vii) remain untouched and unaffected by the Explanation to section 9; (ii) As the purport of the Explanation to section 9 is plain in its meaning, it is unnecessary and impermissible to refer to the Memorandum Explaining the Finance Bill, 2007. It is explicit from section 9(1)(vii)(c) and the Explanation to section 9 that the ratio of Ishikawajma Harima (supra) still holds the field; (iii) On facts, as the technical services were rendered outside India, the fees thereof were not chargeable to tax in India. As regards, the start up services and overall responsibility , the work was done partly in India by Raytheon s two subsidiaries under its direct supervision. Though the subsidiaries held an independent contract with Jindal, they virtually constituted the agents of Raytheon and accordingly the fees for the said services were taxable in India. 56. Relating to the 2007 amendment, the Karnataka High Court spoke thus : The Explanation incorporated in section 9(2) declares that 'where the income is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sident under the circumstances specified therein. The intention of introducing the source rule was to bring to tax, interest, royalty and fees for technical services by creating a legal fiction in section 9 even in cases where services are provided outside India as long as they are utilised in India. The source rule therefore means that the situs of the rendering of services is not relevant. It is the situs of the payer and the situs of the utilisation of the services which will determine the taxability of such services in India. This was the settled position of law till 2007. However the Hon ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. vs. Director of IT (2007) 207 CTR (SC) 361 : (2007) 288 ITR 408 (SC), held that despite the deeming fiction in section 9 for any such income to be taxable in India there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territorial nexus the services have to be rendered in India as well as utilised in India. This interpretation was not in accordance with the legislative intent that the situs of rendering service in India is not relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-resident in India and therefore chargeable to tax. 61. The issue does not however end here because, we are now concerned with a payment made by the Assessee during the previous year relevant to AY 07-08 08-09 when the law in this regard was in favour of the Assessee. With the retrospective amendment to the law the liability of the non-resident with regard to chargeability can now be said to exist. This raises the question as to whether obligation to deduct tax at source pursuant to a retrospective amendment to the law can result either in the person responsible for making payment to the non-resident liable to be treated as an Assessee in default or can any other disallowance u/s.40(a)(i) of the Act be made. In this regard, the learned counsel for the Assessee has placed reliance on the decision of the Hon ble Mumbai ITAT in the case of Shin Satellite Public Co. Ltd. Vs. DDIT Vol. 20 ITR (Trib.) 438 (Mum)/ 153 TTJ 432 (Mum) wherein identical question was considered by the Tribunal. The Tribunal issue relating to the disallowance made under s 40(a)(i) for non-deduction of tax at source from the payment made by the assessee to non-resident based on retrospective amendment to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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