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NEC HCL System Technologies Ltd. Versus ACIT Circle-13 (1) New Delhi And Vica-Versa

2016 (1) TMI 1084 - ITAT DELHI

Eligibilty to claim deduction u/s 10A - Set off loss of eligible unit against the business income of the assessee rejected - Held that:- In the circular no. 7/DV/2013 [FILE NO.279/MISC./M-116/2012-ITJ], DATED 16-7-2013 at para No. one that it has been brought to the notice of the Board that the provisions of 10A/10AA/10B/10BA of the Income-tax Act, with regard to applicability of Chapter IV of the Act and set off and carry forward of losses, are being interpreted differently by the Officers of t .....

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ew of the above circular where in it is provided that If after aggregation of income in accordance with the provisions of sections 70 and 71 of the Act, the resultant amount is a loss (pertaining to assessment year 2001-02 and any subsequent year) from eligible unit it shall be eligible for carry forward and set off in accordance with the provisions of section 72 of the Act. Therefore, according to us assesse’s claim deserves to be considered favourably in view of the beneficial circular issued .....

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c tax laws and consequently there is no withholding tax liability in case of such payments, we do not wish to address the alternative arguments of the AR of the assessee regarding non-taxability of such sum in accordance with the provision of Article 12 (6) of the indo Japan DTAA. - Decided in favour of assessee - ITA No. 5497/Del/2012, ITA No. 5804/Del/2012 - Dated:- 22-1-2016 - Shri Sudhanshu Srivastava, Judicial Member And Shri Prashant Maharishi, Accountant Member For the Petitioner : Shri A .....

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x (Appeals) (CIT(A)) has erred in upholding the action of the Learned AO in not allowing set-off of losses incurred by the STPI unit of ₹ 5, 490, 557 which is entitled for deduction under section 10A of the Act against the business profits from Non - STPI unit of ₹ 7, 460, 124. 2. the Hon'ble CIT(A) has erred in holding that since section 10A of the Act provides for an 'exemption', the losses, if any incurred by units eligible for benefit under section 10A should be treat .....

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Bear India V JCIT [2951TR 148 (Delhi ATJ)]. 4. the Hon'ble CIT (A) has erred in not applying the various precedents cited by the Appellant (including that of Jurisdictional Tribunal) wherein, in identical circumstances, the Tribunals have allowed setting off losses of STPI units against the profits of Non-STPI units. 5. the Hon'ble CIT(A) has erred in not directing the Learned AO to allow set off of brought forward losses and unabsorbed depreciation against the assessed business income .....

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ppellant declared business income of ₹ 19, 69, 567/-. No deduction was claimed under section 10A of the Act since the STPI unit had reported losses. However, the taxable income was reduced to Nil after claiming set off of brought forward losses and unabsorbed depreciation. Notice under section 143(2) of the Act was issued. In response to the said notice, the Appellant furnished documentation/ information/ clarifications as requested by the AO during the course of assessment proceedings. Th .....

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om STPI unit against other business profits of ₹ 5, 490, 557/- 4. Aggrieved by the order passed by the AO under section 143(3) of the Act dated December 9, 2011, the appellant has preferred an appeal. Ld. CIT (A) passed order on 18/08/2012 wherein he confirmed the action of AO of rejection of set off of loss from STPI unit against other business profits of ₹ 5, 490, 557/- and deleted the disallowance u/s 40a(i) of the Act. . Solitary ground raised by the appellant in this appeal befo .....

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e provisions of sections 70 and 71 of the Act, the resultant amount is a loss (pertaining to assessment year 2001-02 and any subsequent year) from eligible unit it shall be eligible for carry forward and set off in accordance with the provisions of section 72 of the Act. Similarly, if there is a loss from an ineligible unit, it shall be carried forward and may be set off against the profits of eligible unit or ineligible unit as the case may be, in accordance with the provisions of section 72 of .....

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aragraphs of the circular. He further submitted that the circulars are binding on lower authorities and that circular shall prevails over the decision of honourable Delhi high court. 6. Regarding his submission that the circulars issued by CBDT are binding on Revenue authorities he relied up on decision of Honourable supreme court in case of Navnitlal C Jhaveri V ACIT 56 ITR 198 (SC) , Ellerman Lines Ltd V CIT 82 ITR 913 (SC ), K P verghese V ITO 131 ITR 597 and UCO bank V CIT 237 ITR 889. 7. Ld .....

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apply to a specific year but to the mechanism of computation of total income and set off losses. Therefore, it should apply with equal force to the period prior to issue of the circular. He further submitted that as this circular is beneficial to the assessee it should be applied in favour of the assessee and benefit should be granted to the assesse. 9. We have carefully considered the rival contentions. The facts of the case are not in dispute that assessee has one unit, which is eligible to c .....

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ion 80A (4) cannot defeat that interpretation. The object of Section 80-A (4) was explained as ensuring that "double benefit does not result to an assessee in respect of the same income, once under Section 10A or Section 10B or under any of the provisions of Chapter VIA and again under any other provision of the Act." It was held that even if Section 10A or Section 10B is construed as exemption provisions, "it is still possible to invoke the sub-section and ensure that the assesse .....

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to that decision CBDT has come out with the circular dated 16/07/2013 which provides as under :- SECTION 10A, READ WITH SECTIONS 10AA & 10B OF THE INCOME-TAX ACT, 1961 - FREE TRADE ZONE - CLARIFICATION ON ISSUES RELATING TO APPLICABILITY OF CHAPTER IV OF THE ACT AND SET OFF AND CARRY FORWARD OF BUSINESS LOSSES CIRCULAR NO. 7/DV/2013 [FILE NO.279/MISC./M-116/2012-ITJ], DATED 16-7-2013 It has been brought to the notice of the Board that the provisions of 10A/10AA/10B/10BA of the Income-tax Act .....

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industrial undertakings in the free trade zones.-(1) Subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee." 2.1 Similarly section 10B as inserted by Finance Act, 1988 read as under: "10B. Special provision in respect of newly established hundred per cent export oriented undertakings.-Subject to the provisions of this section, any prof .....

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undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed form the total income of the assessee...." 3.1 Similarly, section 10B as substituted by Finance Act, 2000 reads as under: "10B. (1) Subject to the provisions of thi .....

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tion of sections 10A and 10B of the Act has been elaborated in Circular No. 794 dated 9.8.2000 which clearly provides that the new provisions provide for deduction in respect of profits and gains derived by an undertaking from export of articles or things or computer software. 4. Sub-section (6) of sections 10A and 10B were amended by Finance Act, 2003 with retrospective effect from 1-4-2001. Circular No. 7/2003, dated 5-9-2003 explains the amendments brought by Finance Act, 2003. The relevant p .....

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existing tax incentives in respect of such units, sub-section (6) in sections 10A and 10B has been amended to do away with the restrictions on the carry forward of business losses and unabsorbed depreciation. 20.3 The amendments have been brought into effect retrospectively from 1-4-2001 and have been made applicable to business losses or unabsorbed depreciation arising in the assessment year 2001- 02 and subsequent years." 5. From the above it is evident that irrespective of their continu .....

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otal income' has been defined in section 2 (45) of the IT Act and it means the total amount of income referred to in section 5, computed in the manner laid down in the Income-tax Act. 5.1 All income for the purposes of computation of total income is to be classified under the following heads of income and computed in accordance with the provisions of Chapter IV of the Act- • Salaries • Income from house property • Profits and gains of business and profession • Capital gai .....

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r loss of the other head in accordance with the provisions of section 71 of the Act. If after giving effect to the provisions of sections 70 and 71 of the Act there is any income (where there is no brought forward loss to be set off in accordance with the provisions of section 72 of the Act) and the same is eligible for deduction in accordance with the provisions of Chapter VI-A or sections 10A, 10B etc. of the Act, the same shall be allowed in computing the total income of the assessee. 5.3 If .....

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n accordance with the provisions of section 72 of the Act. 6. The provisions of Chapter IV and Chapter VI shall also apply in computing the income for the purpose of deduction under sections 10AA and 10BA of the Act subject to the conditions specified in the said sections. 11. On conjoint reading of the circular, it is apparent that regarding claim of set off losses of eligible unit against the profits of non-eligible units and loss of non-eligible unit against the profits of eligible units diff .....

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ution of the act. It is also a settled law that even if such circulars are found not to be in accordance with the law and they depart and deviate from the construction of law. Hon. Supreme court in case of Uco bank V CIT In 237 ITR 889 has held as under :- In the case of Navnit Lal (C.) Javeri v. K. K. Sen, AAC [1965] 56 ITR 198, the legal effect of such circular is, inter alia, considered by a Bench of five judges of this court. Section 2(6A)(e) and section 12(1B) were introduced in the Income- .....

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e taxed as dividends in the assessment years 1955-56 will not be subjected to tax if it is shown that they had been genuinely refunded to the respective companies before June 30, 1955. Accordingly, a circular was issued by the Central Board of Revenue on May 10, 1955, pointing out to all Income-tax Officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions an .....

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from the ambit of section 12(1B). It was so held because the circular was considered as issued for the purpose of proper administration of the provisions of section 12(1B) and the court did not look upon this circular as being in conflict with section 12(1B). A similar view of the Central Board of Direct Taxes circulars has been taken in the case of K. P. Varghese v. ITO [1981] 131 ITR 597, by a Bench of two judges consisting of P. N. Bhagwati and E. S. Venkataramiah, JJ. The Bench has held tha .....

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nd persons employed in the execution of the Act even if they deviate from the provisions of the Act. In Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1, a Bench of three judges of this court has also taken the view that circulars beneficial to the assessee which tone down the rigiour of the law and are issued in exercise of the statutory powers under section 119 are binding on the authorities in the administration of the Act. The benefit of such circulars is admissible to the assessee even though .....

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wer under section 119 to tone down the rigour of the law for the benefit of the assessee by issuing circulars to ensure a proper administration of the fiscal statute and such circulars would be binding on the authorities administering the Act. In the case of C. B. Gautam v. Union of India [1993] 199 ITR 530 at page 546, a Bench of five judges of this court considered as enforceable, Instruction No. 1A-88 issued by the Central Board of Direct Taxes relating to the enforcement of the provisions of .....

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on. The instruction that when the property is put up for sale by the appropriate authority, the reserve price should be fixed at a minimum of 15 per cent. above the purchase price shown as the apparent consideration under the agreement between the parties, was held to be binding on the authority. The Constitution Bench in the above case also approved of the decision of this court in K. P. Varghese v. ITO [1981] 131 ITR 597. There are, however, two decisions of this court which have been strongly .....

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circular of June 20, 1978. The majority appears to have proceeded on the basis that by the second circular of June 20, 1978, the Central Board had directed that interest in the suspense account on sticky advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The subsequent circular of October 9, 1984, by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular .....

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to what extent the concept of real income should intermingle with the accrual of income, will have to be judged in the light of the provisions of the Act, the principles of accountancy recognised and followed, and feasibility . The court said that the earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions which could always be prospectively withdrawn. The court also observed that the circulars cannot detract from the Act. Th .....

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resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law. The said circulars under section 119 of the Income-tax Act were not placed before the court in the correct perspective because the later circular continuing certain benefits to the assessees was overlooked and the withdrawn circular was looked upon as in conflict .....

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pt of income and in particular, notional income as also the treatment of such notional income under accounting practice. In the premises the majority decision in the State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), cannot be looked upon as laying down that a circular which is properly issued under section 119 of the Income-tax Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situation .....

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ng in the nature of a concession, could always be prospectively withdrawn. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a sticky loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee, although generally using a me .....

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essees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense .....

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section 145 of the Income-tax Act. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the income-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be bindi .....

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, refund of the tax paid on the interest would become due and the same can be claimed by the assessee in accordance with law. For reasons set out above, we are not in agreement with the said judgment. The relevant circulars of the Central Board of Direct Taxes cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act ; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in .....

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ircular at para No. one that It has been brought to the notice of the Board that the provisions of 10A/10AA/10B/10BA of the Income-tax Act, with regard to applicability of Chapter IV of the Act and set off and carry forward of losses, are being interpreted differently by the Officers of the Department as well as by different High Courts. Therefore, it cannot be said that circular is against the provision of the law merely because different high courts have interpreted the law differently. It is .....

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ear 2001-02 and any subsequent year) from eligible unit it shall be eligible for carry forward and set off in accordance with the provisions of section 72 of the Act. Therefore, according to us assesse s claim deserves to be considered favourably in view of the beneficial circular issued by CBDT. However at the time of making assessment AO was not having the privilege of this circular , we set aside this matter to the file of with direction to grant benefit of deduction of set off of losses of S .....

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ty nor it has any business activity of its own and the outsourcing cost of payment made by the assessee to HCL Japan is deemed income within the meaning of Sec. 9 (1) (vii) of the Act. 2. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in not appreciating the fact that the invoices filed by the assessee shows that NEC HCL Systems Technology India is the exporter and NEC System Technologies Ltd. Japan is the buyer and the source of payment or income of the no .....

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porated on October 31, 2005 as a joint venture between HCL Technologies Ltd., India, NEC System Technologies Ltd., Japan and NEC Corporation, Japan. In terms of the Joint Venture Agreement entered between HCL Technologies Limited, NEC Systems Technologies Ltd and NEC Corporation representing NEC Group, it was agreed that the assessee is being established for the purpose of providing offshore centric software engineering services and solutions to NEC Group and its subsidiaries. On December 12, 20 .....

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d and competent to undertake any and all activities and objects for which the assessee company was established. In furtherance of the JV Agreement entered, as mentioned above, a Framework Agreement dated June 1, 2006 was signed between the assessee, HCL Technologies (JV Partner) and HCL Japan Ltd., a company incorporated in Japan for the purpose of subcontracting software development work to HCL Japan Ltd obtained by Japan BO from NEC Corporation, Japan, which could not have been serviced by the .....

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the profit and loss account of the Japan BO which is then consolidated with the audited financial statements of NEC HCL India. During the year under reference, Japan BO paid outsourcing cost of ₹ 166, 637, 966 to HCL Japan which is also evident from Note 7.2 ofthe audited financial statements of the Appellant. Admittedly no tax was withheld on the payment made to HCL Japan being a non resident company as assessee believed that the payment was covered by the exception carved out under secti .....

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ent company is covered within the provisions of section 9(1)(vii) fees for technical services, however, the same is covered by the exception carved out by section 9(1)(vii)(b) of the Act because expenses are incurred in foreign currency for availing facilities/ services for its branch in Japan which are utilized by the Japan BO for carrying out its business outside India. The Learned AO rejected the contentions of assessee that such expenses are covered by the exception carved out by section 9(1 .....

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e agreement entered into with NEC Corporation, there is no reference to the Japan BO; f. merely because invoices have been raised on Japan branch by HCL Japan is incorrect and contrary to the facts mentioned in the agreement; g. Japan BO has been created only for proper execution of the JV agreement and also its employees are appointed for carrying out sales, marketing activity and general administration work. h. Rejected the argument that Japan BO has an independent existence in Japan and carri .....

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y complying with the Japanese laws locally, payments are also made outside India i.e. by Japan BO to HCL Japan Limited and are also debited in the books of Japan branch office, appropriates taxes have been paid in Japan as the income of Japan BO is Japan sourced income, only for purposes of the balance sheet of the assessee company profit and loss etc. are incorporated in the balance sheet of the assessee, credits for taxes paid in Japan by Branch office are also claimed as credit of foreign tax .....

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apan branch of the assesse. Therefore he held that there is no liability fastened on the assessee company of withholding tax u/s 195 of the Income tax act and therefore he deleted the disallowance u/s 40a(i) of The income Tax act of ₹ 16, 66, 37, 966/-. 18. Before us the Ld. Dr submitted that the carve out the clause (b) to section 9(1) (vii) is not available to the assessee as branch office has very little role to play in earning this income and hence this income has deemed to accrue or a .....

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t by drawing our attention to page no 49 of the paper book where details of the staff employed by the Japan branch is given stating that this staff were not capable of doing the work. Therefore, he submitted that the assessee failed to deduct tax at sources on this payment and hence disallowance u/s 40a (i) may be confirmed. 19. Ld. AR submitted that the facts of the case stated by CIT (A) at page no 10 to 13 of his order clearly shows the facts of the case which clearly proves that assessee s c .....

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o referred to the agreement between the Japan BO and HCl Japan limited relating to this payments. Therefore he submitted that according to section 9(1) (vii) (b) of the income tax act the payment does not results in to income of the recipient as it does not deemed to accrue or arise in India. He submitted that the reliance on page no 18 and 19 of the assessment order by DR is unfounded; as these allegations are not based on the facts, which is proved by the documents submitted before CIT (A) at .....

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and has directed AO to delete the similar additions. Therefore, he supported the order of CIT (A) and submitted that the disallowance is deleted correctly. 21. In rejoinder LD DR submitted that services provided by the Japan BO are highly technical and cannot be provided by the employees employed by the Japan BO and therefore the case does not fall in the exception section 9(1) (vii) as claimed by the assessee. 22. We have carefully considered the rival contentions. The facts in present case ha .....

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n the Job profile, we have seen that who are engaged in the business development activities of the BO of the assessee in Japan. Further, after obtaining the work by Japan BO it was outsourced to HCL Japan Limited to whom these payments are made by Japan BO. Ld. AO has lost sight of the fact that Japan BO has not fully executed the work but it was outsourced to HCL Japan Limited. Ld AO has also lost sight of the nature of work being carried out by Japan BO. The customers of NEC HCL India are NEC .....

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rk carried out by Japan BO staff is business development activities of obtaining the client and for this assessee has demonstrated that it has adequate staff for carrying on such work. As per details furnished Japan BO had 5 employees as sales managers for carrying out sales and marketing activities and 2 managers for general administrative affairs of the company. These employees also possess the technical skills required to understand the requirements of the projects. They are also supported by .....

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ubstantiated the argument of rendering of services in Japan where the sample projects details were also submitted along with the sample copies of the bills of the work carried out outside India. Assessee has also submitted the financial statements of the Japan BO where in the project cost is debited in Profit and loss statement of Japan BO. Further, the copy of computation of total Income for offering the tax in Japan by the Branch office was also submitted along with copy of the return of incom .....

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deemed to accrue or arise in India or not. According to the provision of section 9 (1) ( vii) of the act incomes shall be deemed to accrue or arise in India way of fees for technical services payable by a person who is a resident of India. Exception is carved out if such fees are payable in respect of services utilised in 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. Admittedly, in this case as .....

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of the assessee. Therefore we fully agree with the reasoning of CIT (A) that the payments of fees for technical services borne by the Japan BO of the assessee is not subject to withholding tax u/s 195 of the Income tax act because there is no income deemed to accrue or arise in India in the hands of recipient of such fees. Ld. AR of the assessee has further relied up on the decision of the Honourable Delhi high court where in the provisions of section 9 (1) (vii) (b) were considered as under :- .....

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urred, i.e., for earning the income from a source in India, is applicable. This was clearly stated by the Supreme Court, when it later held that (page 467 of 371 ITR) : "The exception carved out in the latter part of clause (b) applies to a situation when fee is payable in respect of services utilised for business or profession carried out by an Indian payer outside India or for the purpose of making or earning of income by the Indian assessee i.e. the payer, for the purpose of making or ea .....

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held that the overwhelming or predominant nature of the assessee's activity was to wet- lease the aircraft to LCAG, a foreign company. The operations were abroad and the expenses towards maintenance and repairs payments were for earning abroad. In these circumstances, the Income-tax Appellate Tribunal's factual findings cannot be faulted. The question of law is answered in favour of the assessee and against the Revenue. Ratio laid down by Honourable Delhi high court squarely applies to t .....

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