TMI Blog2017 (6) TMI 868X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be, UK; the assessee not making it’s case with reference to the relevant DTAAs before the Revenue. Accordingly, subject to finding of it being so, we direct the deletion of the impugned disallowance. Disallowance of deduction u/s.10B - Held that:- he assessee’s undertaking ostensibly satisfies all the conditions of s. 10B, stands granted the approval by the Development Commissioner, to whom the power of approval has been delegated by the Board constituted u/s. 14 of the I(D&R) Act.We are thus not inclined to accept the reasons advanced by the ld. CIT(A) for not admitting the assessee’s evidence. So, however, to the extent that the matter would require being examined by the AO, we are in agreement with the ld. CIT(A). Accordingly, admitting the said letter, along with the other related documents, we restore the matter back to the file of the AO for necessary verification and adjudication afresh on merits. Deduction u/ss. 80G and 80-IB - Held that:- A ssessee’s income as per the returns filed is at a loss in fact endorses it’s stand of having not claimed the deductions in the absence of adequate GTI u/s. 80B(5) of the Act. Further, the particulars with regard to deductions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Share Stock Brokers (P.) Ltd. [2010] 326 ITR 1 (SC), effected disallowance u/s. 14A at Rs. .79,92,910/-, including indirect, administrative expenditure for Rs. . 68,92,485/-, applying r. 8D. The same stands confirmed in appeal following a number of decisions, including Walfort Share Stock Brokers (P.) Ltd. (supra) and Beach Minerals Co. Ltd. (in TCA No.681/2013 dated 31.12.2013) by the Hon ble jurisdictional High Court, quoting para 11 thereof in his order, so that, aggrieved, the assessee is in second appeal. 3. Before us, the assessee placed reliance, in the main, on the decision in Redington (India) Ltd. v. Addl. CIT (in TCA No.520/2016 dated 23.12.2016), claiming, on that basis, that the disallowance u/s. 14A is to be restricted w.r.t. to the investment only in those shares that had yielded income during the relevant year, earned at Rs. . 4.21 lacs, and for which therefore the matter may be restored to the file of the AO. The ld. DR would object, stating that as long as the expenditure relatable to, i.e., having close proximity with, income that does not form part of the total income, is incurred, it s disallowance u/s. 14A is warranted, which is only toward deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred in connection therewith that has to be adjusted thereagainst, so that where no exempt income is earned, there cannot be a disallowance of expenditure in relation to such assumed income. The judgment, in sum, therefore, states that s. 14A r/w r. 8D cannot apply whether there is no exempt income, which would otherwise imply applying the provision in vacuum, i.e., against presumed or notional income that may arise in future. Rule 8D is only toward quantifying the disallowance u/s. 14A, i.e., where there is income not forming part of the total income and, further, the AO is not satisfied with the assessee s claim in respect of expenditure relatable to such income, which may include a claim as to nil expenditure, i.e., of having in fact not incurred any expenditure in relation thereto. There being admittedly exempt income in the present case, how then, we wonder, the said judgment becomes applicable ? The argument advanced seeks to invoke the said decision in facts not in agreement with that obtaining in that case, and under which circumstance (i.e., of no exempt income) only, the Hon'ble Court held the expenditure as not liable to the disallowed u/s. 14A. The decision hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividend income, in computing the average value of the investment u/r. 8D, is questioning the propriety of the said rule, i.e., to that extent. The challenge fails at the threshold as rule 8D has been held by the Hon ble Courts as constitutionally valid, implying it being based on relevant, intelligible and rational criteria, besides being reasonable. In fact, it is nobody s case that it is not so. Why, the assessee itself recognizes the primacy of the investments as a valid measure (for basing the disallowance of expenditure on) when it seeks retention of a part of the investments. In other words, the challenge to r. 8D, without showing any basis therefor, is not legally sustainable, more so considering that the said rule has been upheld as a valid basis for estimating disallowance u/s. 14A. Reference in this context be made to the decision in Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom). A rule, even otherwise, has the statutory force of law ( CIT v. Ajanta Electricals [1995] 215 ITR 114 (SC); Kanodia Cold Storage v. CIT [1995] 215 ITR 369 (All)). Reference, with profit may also be made to the decision in the case of K.M. Vijayan Ors. v. Union of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. If incurring expenditure itself ensured income in a higher sum, all that would need to be done, to earn income, is to incur expenditure. Further, there would in that case, never be a case of a loss being suffered. It is for this reason that income includes loss ; there being no difference in their nature or character, but only in quantum. In fact, what is at play is a number of factors, both quantitative and qualitative, viz. business and market risks; the management input, including it s quality, etc., which have a bearing on the income that may arise, which is largely in a dynamic environment, so that the relevant variables and their values are both subject to change from time to time. Speaking in the context of our case, the entire expenditure is incurred on, or in relation to, investments, which yield dividend as income, the quantum of which is generally outside the domain of the investor, the person incurring the expenditure. The expenditure is incurred qua investments as a class or portfolio . Which share may actually yield dividend and, how much, cannot be predicated. Why, in a given case, the investee-company may not do well, so that despite making investment t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant investments subject to disallowance, contradicting Redington (India) Ltd. (supra). This is as it is only a case where none, as against some, of the investments yield (tax-exempt) income for the relevant year. We do not think that there is scope for any such argument when the Hon'ble High Court has, on a reading of s. 14A, found that it does not admit of disallowance where income not forming part of total income is not actually earned. It nowhere states that no expenditure is presumed to have been incurred where no tax exempt income is earned . Rather, it discountenances any adjustment being made on the basis of a presumption, stating that applying sec. 14A in the absence of any tax-exempt income would imply a disallowance in respect of presumed income, and which surely cannot be, and which can be regarded as the ratio of the decision. Again, as explained by it with reference to Madras Industrial Investment Corporation Ltd . [1997] 225 ITR 802 (SC), it is only the tax-exempt income for the relevant year that is to be identified, evaluated and isolated. This is as only in that case the correct total income, i.e., the income assessable under the Act, could be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ane Electricity Supply Ltd. [1994] 206 ITR 797 (Bom)). The assessee further states that the tribunal has in Asst . CIT v. Sun Investments (P.) Ltd . [2011] 8 ITR (Trib) 33 (Del) held that the AO has to establish that specific expenditure has been incurred by the assessee for earning exempt income, in the absence of which no disallowance u/s. 14A could be made by him. The primary onus to establish it s return and the claims preferred thereby is on the assessee (see: CIT v. Calcutta Agency Ltd . [1951] 19 ITR 191 (SC); CIT v. R. Venakataswamy Naidu [1956] 29 ITR 529 (SC)). The reason is simple; it is the assessee who is in the intimate know of its affairs, and prefers claims thereby. Section 14A is a statutory disallowance, so that it follows where there is exempt income. The primary onus to show, with reference to it s accounts and other records, is on the assessee as to why the disallowance u/s. 14A should not be restricted to that worked out by him (which could be nil), and where so done the onus shifts to the AO to show as to why he is not satisfied therewith. Section 14A(2), and which shall equally apply to a case falling u/s. 14A(3), so contemplates, even as explained by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to subsidiary companies, which is the subject matter of Gd. 3 of the instant appeal. We decided accordingly. 5. The second issue, per Gd. 3, arising in the instant appeal is the disallowance of interest on borrowings u/s. 36(1)(iii), effected proportionately, in respect of interest-free loans and advances to wholly owned subsidiary (WOS) companies, being Sundaram Fasteners Investments Ltd. (SFIL) and Upasana Engineering Ltd. (UEL). The assessee s case, which did not find favour with the Revenue, and which continues to be the same before us, is twofold. Firstly, it is contended that investment is out of own funds, so that no interest is attributable to the said advances. Two, it is stated that the advances are for the promotion of the new companies and, thus, to further the business interests of the assessee-company. The same, it is added, are only applied for the business purposes of the loanee companies, establishing commercial expediency. The assessee has been successful for the preceding years, i.e., AY 2003-04 onwards, before the first appellate authority. The Revenue s case is based on the premise that the assessee s case is wholly unproved, and no more than bald claims. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 376.79 1,720.71 Continuing further, the loans to the subsidiary companies as a class, at the beginning of the year, is at Rs.. 69.42 lacs only, while that at its end is at Rs.. 4187.49 lacs (Shedule-XI to the balance-sheet as on 31.03.2009), so that, as apparent, the AO has not even included, for the purpose of disallowance of interest, the amounts lent/advanced during the preceding years which, depending on whether the opening balance continues to outstand in full or in part, would therefore vary between Rs.. 2397.36 lacs and Rs.. 2466.78 lacs. Surely, the business purpose and commercial expediency, as claimed, would need to be examined only with reference to the loans/advances qua which the interest stands disallowed. No assistance on the basis of the application of the earlier loans to subsidiary companies, since returned, inasmuch as they outstand at a nominal figure of Rs.. 69.42 lacs, to a different concern/s, would therefore ensue. Coming to the merits of the case, the same has two aspects to it, i.e., in principle and on quantum. The law in the matter is clear, and toward which we have, while discussing the disallowance u/s. 14A, ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the investment being out of own funds provided the assessee has sufficient funds for the purpose. This is as, in contradistinction to s. 14A, which is a statutory disallowance, s. 36(1)(iii) is a provision allowing the expenditure, albeit subject to certain conditions, so that on the circumstances being shown, the same can be regarded as satisfied. This aspect, clearly, has factual overtones. This would accordingly warrant examination of the assessee s cash flow statement for the year (which forms part of its balance-sheet as on 31/3/2009/ copy on record). The summarized cash flow statement for the year is as under: Table I (Amount in Rs.. lacs) Sl. No. Particulars Amount Remarks a) Net cash flow from operations 8787.08 b) Cash flow from investment activities (9817.19) c) Short-fall (1030.11) (a b) d) Cash flow from financing activities 89.25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) Sl. No. Particulars Amount Remarks A) Own capital - Gross generation from activities 8787.08 - Repayment of term loan/s (505.50) - Loans/advances to subsidiary companies 1720.71 - Repayment of borrowings (500.00) (say) - Payment of interest, tax and dividend (net) (7226.53) Net of that received Total own funds available 2274.96 (Amount in Rs.. lacs) Sl. No. Particulars Amount Remarks B) The positions may be now summarized as under: - Net cash flow from activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the balance only from the mix (of own capital and general purpose borrowings). This would give a fair estimation of the financing pattern of the loans/advances to the two subsidiaries during the year. To the extent financed from borrowings, the average interest rate thereon can then be applied to the same. The same shall, in our view, have to be on a month-wise basis inasmuch as there has been repayment during the year as well and, in any case, there is nothing to suggest that the entire amount stands advanced at the beginning of the year itself. As such, the average for each month (for which the opening and closing for that month be adopted) taken, and the financing cost computed accordingly. The figures worked out are, as afore-stated, illustrative, as the amounts of repayment of term loans and borrowings which is a fact, have been taken at assumed figures, and shall require being substituted by actual figures. Further, the assessee shall be allowed due opportunity to represent its case as the working, though based on its pleading and balance-sheet, stands not confronted thereto and, besides, it is just possible that the assessee may point out some corrections/ modifications ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a have a PE in India. 9. We have heard the parties, and perused the material on record. The relevant agreements are not on record. It is, however, clear that the Agents provide a range of services, viz. logistics, warehousing, inventory management, marketing support services, as well as those related services to ascertaining and providing information on the financial standing and creditability of the buyers, i.e., apart from canvassing orders for and on behalf of the assessee. The DTAAs between and USA UK, the two countries where the agents are claimed to be residents, are on record. Article 7 of both deals with business profits, and which requires, for the business profits to be assessable in the other contracting state (India), the enterprise to have a permanent establishment (PE) thereat. There is no claim by the Revenue as to the nonresident payees having a PE in India. The question therefore boils down to if the services provided by them can be regarded as royalty and fee for included services and royalties and fees for technical services , as defined under Indo- US (Article 12) and Indo-UK (Article 13) DTAAs. Article 12 of the Indo-US DTAA, in its relevant part, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices as defined in Article 15 (Independent Personal Services). The memorandum of understanding between India and US dated 15/5/1989 in respect of Article 12 of DTAA, again, in its relevant part, reads as under: Paragraph 4 (in general) This memorandum describes in some detail the category of services defined in paragraph 4 of Article 12 (Royalties and Fees for Included Services). It also provides examples of services intended to be covered within the definition of included services and those intended to be excluded, either because they do not satisfy the tests of paragraph 4, or because, notwithstanding the fact that they meet the tests of paragraph 4, they are dealt with under paragraph 5. The examples in either case are not intended as an exhaustive list but rather as illustrating a few typical cases. For case of understanding, the example in this memorandum described U.S. persons providing services to Indian persons, but the rules of Article 12 are reciprocal in application . Article 12 includes only certain technical und consultancy services. But technical services, we mean in this context services requiring expertise in a technology. By consultancy services, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic. 4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term fees for technical services means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appeal is in respect of disallowance of deduction u/s.10B. The same was withheld by the Revenue for want of approval by the Board, i.e., the Board appointed in this behalf by the Central Government in exercise of the powers conferred upon it by section 14 of the Industries (Development and Regulation) Act, 1951 and the rules made there-under. The assessee has in this regard produced before us a communication by the Government of India, Ministry of Commerce and Industry, Department of Commerce (F.No.A/2004/ 014/EOU-TN) dated 28.02.2014 addressed to the assessee company (Autolec Division), communicating ratification of the approval (granted earlier by the Development Commissioner (DC), to whom the Board, subject to subsequent ratification, has delegated the power of approval, vide his letter dated 15.04.2004), through its Unit Approval Committee in its 4th meeting (2013 series) held on 30.08.2013, enclosing also a copy thereof along with other related documents (APB pgs. 5-20). On that basis, it is claimed that the approval granted earlier by the DC having been since ratified by the Board, the objection by the Revenue does not survive. A perusal of the impugned order reveals tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he verification and the satisfaction of the requisite conditions, deduction u/ss. 80G and 80-IB of the Act, being claimed in the sum of Rs.. 13.77 lacs and Rs.. 38,44,924/- respectively. The same were not claimed in the original return on account of insufficient profits, which on account of additions/ disallowances sustained in assessment stand converted into a positive gross total income (GTI). The ld. CIT(A) did not accept the assessee s plea in this regard as even per the revised return filed on 16.03.2011, the assessee had reported a loss of Rs.. 750.57 lacs, besides not furnishing any evidence to substantiate its claims before him. 13. We have heard both the parties, and perused the material on record. That the assessee s income as per the returns filed is at a loss in fact endorses it s stand of having not claimed the deductions in the absence of adequate GTI u/s. 80B(5) of the Act. Further, the particulars with regard to deductions stand furnished per the revised claim vide return dated 16.03.2011. We therefore find no reason for the Revenue for not entertaining the same. We may though clarify that our finding is limited to the right of the assessee in pressing its said ..... X X X X Extracts X X X X X X X X Extracts X X X X
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