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2016 (5) TMI 25 - ITAT CHENNAI

2016 (5) TMI 25 - ITAT CHENNAI - TMI - TDS u/s 195 - disallowance under section 40(a)(i) of the Act in respect of payment to non-resident for the purpose of testing charges - Held that:- In the instant case, it is a fact that the export contracts are concluded in India and the assessee's products are sent outside India under these contracts. Further the manufacturing activity of the assessee is also located in India. The source of income is created at the moment when the export contracts are con .....

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n 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.

The meaning of the term source of income in section 9(1)(vi)/(vii) of the Act has been a subject matter of dispute since over some time. It is not the payer of .....

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ded in Section 9(1)(vii)(b) of the Act. Accordingly, respectfully following the decision of the Hon’ble Delhi High Court in the case of CIT v. Havells India Ltd. (2011 (5) TMI 530 - ITAT DELHI ), we hold that the FTS paid to KEMA Netherlands and CESI, Italy, TDS is, therefore, deductible under section 195 of the Act and the Assessing Officer has rightly invoked provisions of section 40(a)(i) of the Act and made disallowance. - Decided against assessee - I.T.A. Nos. 661, 662 & 663/Mds/2013, C.O. .....

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assessment years 2003-04 and 2004-05. The Revenue has also preferred an appeal against the order of the Ld. CIT(A) LTU, Chennai dated 11.01.2013 for the assessment year 2001-02. With regard to Cross Objections filed by the assessee for the assessment years 2003-04 and 2004-05, since the assessee has raised the ground with regard to assumption of jurisdiction under section 147 of the Income Tax Act, 1961 [ Act in short] after the expiry of four years, we proceeded to decide the cross objections .....

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see could support the order passed by the learned CIT(A) without filing the Cross Objections because Rule 27 of the Appellate Tribunal Rules permit the Respondent in departmental appeal to support the order appealed against on any of the grounds decided against him. He has, therefore, submitted that the assessee however, due to abandoned precaution filed the Cross Objections. The ld. DR has submitted that the points raised in the Cross Objections are decided against the assessee by the ld. CIT(A .....

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CIT(A) has passed the first appellate order on 11.01.2013 for both the assessment years 2003-04 and 2004-05, wherein, challenging the jurisdiction of reopening of assessment under section 147 of the Act has been quashed by the ld. CIT(A) and held to be valid and dismissed the ground raised by the assessee. Against the order of the ld. CIT(A), the assessee has not preferred any appeals before the Tribunal. Aggrieved by the order of the ld. CIT(A) on other issue, the Revenue has filed appeals for .....

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dated 29.08.2013, the hearing of the appeals filed by the Revenue were adjourned subsequently. Despite service of notice on the assessee for putting its appearance against the appeals filed by the Revenue, the assessee has slept on the order of the ld. CIT(A) dated 11.01.2013 as well as notice served by the Tribunal over a period of 240 days and finally on 31.01.2014, the assessee has filed its Cross Objections for both the assessment years. Though the assessee has stated some reasons in the na .....

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on 11.01.2013 dismissing the ground raised by the assessee with regard to challenging jurisdiction of reopening of assessment under section 147 of the Act. The Income Tax Act has provided sufficient time of 60 days for consultation, preparing appeal papers, etc. for filing further appeals/cross objections before the Tribunal. But in this case, it was sheer negligence on the part of assessee to simply slept on the orders of the first appellate authority and did not wake-up even though the Tribun .....

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objections beyond the stipulated time, the affidavits filed for condonation of delay is liable to be dismissed. Our view find support from the decision of the Hon ble Jurisdictional High Court in the case of Madhu Dadha v. ACIT [2009] 317 ITR 458, wherein the Hon ble High Court dismissed the appeal filed by the assessee and confirmed the order of this Tribunal since the assessee had not taken proper plea to show sufficient cause for condoning the delay in filing the appeal . In the present case, .....

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04 and 2004-05 is with regard to deletion of disallowance under section 40(a)(i) of the Income Tax Act, 1961 [ Act in short] in respect of payment to non-residents for the purpose of testing charges. For the assessment year 2001-02, the Revenue has raised two grounds viz., (1) the ld. CIT(A) erred in holding that the reassessment proceedings are invalid and (2) deletion of disallowance made by the Assessing Officer of ₹.41,73,000/- claimed under VRS payment treating the same as retrenchmen .....

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.2002 determining a refund of ₹.96,43,455/-. 6. Subsequently, the assessee has filed revised return on 08.05.2002, enhancing inter alia, the claim on account of provisions made in earlier year but actually spent during the concerned previous year. The claim was enhanced from ₹.3,52,50,200/- to ₹.4,45,50,000/- by inclusion of claim on account of reversal of entries on the provisions made for C forms. It was submitted before the Assessing Officer that these provisions were create .....

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by the Assessing Officer. After considering various submissions, the assessment was completed under section 143(3) of the Act on 20.01.2004 by determining the total income of the assessee at ₹.1,55,99,729/- after making various additions. 7. The Assessing Officer suo motu reopened the assessment order passed under section 143(3) of the Act by issuing notice under section 148 of the Act on 28.03.2008. In response to the notice, the assessee has filed the return of income on 20.01.2004 and r .....

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;.41,73,000/- and revised the loss to the extent of ₹.2,79,48,783/-. 8. On appeal, after considering the submissions of the assessee and facts of the case, the ld. CIT(A) has observed that the reopening of assessment under section 147 of the Act beyond 4 years from the end of the relevant assessment year was bad in law and held that the assessment order passed under section 143(3) r.w.s. 147 of the Act dated 19.12.2008 is invalid and quashed by allowing the ground raised by the assessee. 9 .....

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;.88,07,800/- being 1/5th of 4,40,39,000 [ 4,79,09,000-31,33,000 - 7,37,000] by applying section 35DDA of the Act. 11. Against the original assessment order passed under section 143(3) of the Act on 29.01.2004, the assessee preferred appeals before the ld. CIT(A) as well as the Tribunal [in I.T.A. No. 2035/Mds/2005]. The Revenue also filed appeals in ITA Nos. 2317/Mds/2005 & 1218/Mds/2006 for AY 2001-02 and 2000-01 and against these Revenue s appeals, the assessee also filed Cos in C.O. Nos. .....

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e prescription of section 35DDA is not applicable. Both the parties agreed that the claim of the assessee is to be allowed subject to verification. The Assessing Officer is required to see whether such payments were allowed on mercantile basis in the preceding assessment years. If such payments are not claimed in the preceding year, this can be allowed in the year under consideration. We set aside the impugned order on this count and restore this issue to the file of the Assessing Officer with a .....

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ssment year 2001-02. Against the order of the reassessment under section 143(3) r.w.s. 147 of the Act dated 19.12.2008, the assessee preferred an appeal before the ld. CIT(A). After considering various judicial precedents, and facts of the case, the ld. CIT(A) has observed that reopening of the assessment under section 147 beyond 4 years from the end of the relevant assessment year was bad in law and is accordingly held it as invalid and quashed the reassessment after considering the provisions .....

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3. The only common ground raised in both the appeals of the Revenue is with regard to deletion of disallowance under section 40(a)(i) of the Act in respect of payment to non-resident for the purpose of testing charges. 14. The Assessing Officer has observed from the financial statement filed by the assessee that the assessee has made payment of ₹.1,01,37,434/- for the purpose of testing charges to the non-residents in foreign currency without deducting TDS under section 195 of the Act. Hen .....

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king TDS and added to the total income of the current year as per the provisions of section 40(a)(i) of the Act. 15. On appeal, by filing detailed submissions, the assessee has challenged the above disallowance on two counts viz., (1) disallowance under section 40(a)(i) of the Act can be made only when the amount is payable as on the balance sheet date and (2), payments made to certifying agencies for certifying exports are not fees for technical services as they fall under the provision of sect .....

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36 KV 200a Outdoor Type PCOB 36 Vacuum Circuit Breakers and the said prototype development will be completed only after the design tests as specified in the IEC standards are fulfilled. KEMA is an internationally recognised testing agency in Europe which carries out these design tests for the electrical engineering industry. Towards this purpose, the assessee company had entered into contract with KEMA to conduct various types of tests to these Circuit Breakers that is mandatory to achieve worl .....

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e acceptance of the Company's Circuit Breakers and components, thereby make these products saleable in export markets. For the above purpose, the assessee has paid ₹.1,01,37,434/- towards testing charges and claimed deduction of the expenditure. However, the Assessing Officer has observed that the assessee has not deducted TDS under section 195 of the Act towards the payment for the purpose of testing charges to the nonresidents in foreign currency and therefore, disallowed the same an .....

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of the Delhi Benches of the ITAT in the case of Havells India Ltd. v. Addl. CIT (supra), the Department has preferred an appeal before the Hon ble Delhi High Court and the Hon ble High Court in the case of CIT v. Havells India Ltd. in ITA No.55/2012 & ITA No. 57/2012 vide order dated 21.05.2012, has given an elaborate observation and findings and decided the issue against the assessee, which is reproduced hereunder: 4. As regards first substantial question of law, the brief facts are as foll .....

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Section 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 .....

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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 nature and, therefore, the amount paid by the assessee to the US Company represented consideration for the rendering of technical services to the assessee. He, therefore, held that the amount was assessable in the hands of the US Company as income deemed to have accrued or arisen in India and since no ta .....

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ication represented technical services which made available technical knowledge, experience and skill to the assessee because they were utilized in the manufacture and sale of the products in the business of the assessee. In this view of the matter the Assessing Officer disallowed the amount of ₹.14,71,095/- under Section 40(a)(ia) of the Act. 6. The assessee appealed to the CIT (Appeals) against the disallowance. The CIT (Appeals) referred to the judgment of the Kerala High Court in Cochi .....

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assessee carried the matter in further appeal to the Tribunal in ITA No.1300/Del/2010. Several contentions were raised before the Tribunal on behalf of the assessee. The principal contentions were: - (a) That Section 9(1)(vii)(b) of the Act exempted from tax the fees for technical services if they were paid for services which were utilised by the assessee in a business or profession carried on outside India or for the purpose of making or earning any income from any source outside India. Since .....

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les 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 technic .....

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the export of its products. (b) The income tax authorities have not been able to bring anything on record to support their stand that the service of testing and certification has been applied by the assessee for its manufacturing activity within India. (c) The CIT (Appeals) has not specifically met the contention of the assessee, raised before him, that the technical services were rendered by the US Company outside India and the assessee has also utilised them outside India and the payment was .....

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activities of production in India. The assessee has thus discharged its burden, whereas the Revenue has not been able to show to the contrary and they have not denied that the utilisation of the testing and certification was in respect of the exports. In view of the above findings, the Tribunal deleted the disallowance made under Section 40(a)(ia) of the Act. 9. It is against the aforesaid decision of the Tribunal that the Revenue has come in appeal before this Court. It appears to us on a read .....

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aforesaid provision. If that is so, the only question which we are required to examine is (a) whether the fees were payable in respect of services 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 t .....

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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 Section 9(1)(vii)(b) of the Act were satisfied. 10. In support his contention, the learned counsel for the assessee drew our attention to a judgment o .....

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e same as in the case of fees for technical services dealt with in Section 9(1)(vii)(b) of the Act. In that case the resident company paid royalty to a West German company. The royalty was payable on export sales effected by the resident-assessee. The question before the High Court was whether the Tribunal was right in law in holding that the royalty on export sales was not taxable within the meaning of Section 9(1)(vi) of the Act. The High Court held as under: - As far as royalty on export sale .....

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that the royalty on export sales is not taxable within the meaning of section 9(1)(vi) of the Income-tax Act. 11. The judgment of the Madras High Court certainly supports the contention of the learned counsel for the assessee. In an earlier judgment in CIT v. Anglo French Textiles Ltd., (1993) 199 ITR 785, a Division Bench of the Madras High Court had occasion to consider a somewhat similar question arising under Section 9 of the Act. In that case the assessee was a company incorporated under th .....

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dicherry. 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 .....

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export performance which took place in Pondicherry and that on the fulfillment of the export activity, a right to receive the export incentive accrued in favour of the assessee in the territory of the Pondicherry. The argument of the department was that the incentive was quantified and sent from Bombay from the office of the Textile Commissioner and, therefore, the income arose within the taxalite territories. This argument was rejected by the Madras High Court by holding that the right to rece .....

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This argument was also rejected by the Madras High Court which held: - Equally, it is difficult to regard the import entitlements as a source of income which should be looked at from a practical view-point and not merely as an abstract legal concept. We are, therefore, unable to agree with the contention of the learned counsel for the Revenue that the import entitlements constituted a source of income within the meaning of Section 9 of the Act as to deem the import entitlements as having accrued .....

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t entitlement/ incentive accrued in favour of the assessee. Since the export activity was fulfilled in Pondicherry, the source of income was located in Pondicherry. Applying this judgment to the facts before us in the present case, we have to conclude that the export activity having taken place or having been fulfilled in India, the source 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 the .....

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d 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, .....

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1970) 77 ITR 123. The location or situs of a source of income is another aspect. The third aspect is the accrual of the income. Though it is true, as held by Kania, C.J., speaking for a Constitution Bench of the Supreme Court in CIT v. Ahmedbhai Umarbhai, (1950) 18 ITR 472 (SC) at page 479, that the place where the source of income is located may not necessarily be the place where the income also accrues, that question is not material in the present case because herein we are concerned only with .....

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sales as the source located outside India from which assessee earned profits. The export contracts obviously are concluded in India and the assessee s products are sent outside India under such contracts. The manufacturing activity is located in India. The source of income is created at the moment when the export contracts are concluded in India. Thereafter the goods are exported in pursuance of the contract and the export proceeds are sent by the importer and are received in India. The importer .....

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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 cas .....

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the assessee satisfies the condition necessary for bringing its case under the first exception. Be that as it may, as we have already pointed out, since the source of income from the export sales cannot be said to be located or situated outside India, the case of the assessee cannot be brought under the second exception provided in the Section. 14. Mr. Vohra, learned counsel for the assessee, however, contended that income arose not only from the manufacturing activity but also arose because of .....

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tivity and from the sale. There are several authorities dealing with this question in the context of cases where an assessee had its manufacturing facility in British India but sold the goods outside British India. In such cases, it has been held that the profits arose both from manufacture and the sales and that part of the profit which arises from sales outside British India would be exempt from tax: See Anglo French Textiles Co. Ltd. v. CIT, (1953) 23 ITR 101 (SC); CIT v. Ahmedbhai Umarbhai & .....

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se of making or earning any income from any source outside India. 16. The result of our discussion is that the fees for technical services are taxable in the hands of the US Company under the provisions of the Act. The question to be considered then would be whether there is anything in the agreement for avoidance of double taxation between India and USA which would exempt or reduce the burden of taxation in respect of the fees for technical services received by the US Company. This aspect of th .....

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r 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 ag .....

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export contracts are concluded in India. Even though the importer of the assessee s products is situated outside India, he is only the source of the monies received and he cannot be regarded as a source of income. 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 and this condition is not satisfied in the present case. 20. The assessee s case does not even fall under the first .....

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