TMI Blog2017 (7) TMI 950X X X X Extracts X X X X X X X X Extracts X X X X ..... as beneficial to the business of call centre then run by the assessee-company. We, therefore, find no justification to discard the finding reached by the ld. CIT(A) that Sh. Karun Ansal did not attend any specialized course and the simple degree of BBA cannot be said to be directly linked to the business of running a call centre in which the appellant was engaged and therefore, the decision of the Board of Directors of the appellant company to sponsor Karun Ansal for foreign education was for other than business consideration. It is also evident from the record, that there was no agreement between the assessee company and Karun Ansal nor is there any such request from Karun Ansal for further MBA course. Suo moto extension of sponsorship of Karun Ansal by the assessee company without any agreement between the assessee company and Karun Ansal for such extension for MBA course speaks a lot against the assessee. No business expediency or necessity was established by assessee to bear such a huge expenditure on foreign education of son of assessee’s promoter, who was not even a regular employee of the assessee company at the time of joining the course abroad - Decided against assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) read with Article 12(2) and 12(4) of DTAA between USA and India. 3. That on the law, facts and in the circumstances of the case, the Learned Commissioner of Income-tax (A) has erred in confirming the disallowance made by Learned Assessing Officer in respect of Training and Development Expenses amounting to ₹ 17,71,2147- claimed as allowable expense U/s 37(1) being foreign higher education expenses incurred in respect of its employee Mr. Karun Ansal's studies abroad, particularly when he had committed to render services to the organization after competing his studies abroad. 4. That all the above grounds and sub-grounds have to be read conjunctively and also independent of each other. 5. That the above ground(s) of appeal are to be considered separately and without prejudice to one another. 6. That the appellant assessee craves, leaves to add, alter, amend, substitute, withdraw or forego any of the ground(s) of appeal before or at the time of hearing. 7. That the order of Learned CIT (A) is bad in law and wrong on facts of the case and is in violation of the principles of natural justice without providing reasonable opportunity to the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciples of natural justice without providing reasonable opportunity to the appellant assessee to meet the merits of its case. A.Y. 2006-07: 1. That on the law, facts and in the circumstances of the case, the Learned Commissioner of Income-tax (A) has erred in confirming the disallowance made by Learned Assessing Officer in respect of Training and Development Expenses amounting to ₹ 7,22.790/- claimed as allowable expense u/s 37(1) being foreign higher education expenses incurred in respect of its employee Mr. Karun Ansal's studies abroad, particularly when he had committed to render services to the organization after competing his studies abroad. 2. That the appellant assessee craves, leaves to add, alter, amend, substitute, withdraw or forego any of the ground(s) of appeal before or at the time of hearing. 3. That the order of Learned CIT (A) is bad in law and wrong on facts of the case and is in violation of the principles of natural justice without providing reasonable opportunity to the appellant assessee to meet the merits of its case. A.Y. 2007-08: 1. That on the law, facts and in the circumstances of the case, the Lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee u/s. 35D and relying the judgment of Hon ble Supreme Court in the cases of Punjab State Industrial Development Corporation. Ltd. vs. CIT, 225 ITR 792 (SC) and Brooke Bond India Ltd. vs. CIT, 225 ITR 798 (SC), observed that these expenditures are capital in nature and not allowable as claimed by the assessee by way of revised computation of income. 5. Aggrieved by this disallowance, the assessee appealed before the first appellate authority and the ld. CIT(A) after considering the submissions and relying on the judgments as cited by the AO, upheld the order of the AO. The assessee is, therefore, in appeal before the Tribunal. 6. The ld. AR of the assessee submitted that the Assessing Officer has allowed such amortization of expenses u/s. 35D in the assessment year 2003-04. Therefore, rule of consistency should be maintained. He placed reliance on the decision of Hon ble Supreme Court in the case of Shasoon Chemicals and Drugs Ltd. vs. CIT, 298 CTR 97. The assessee has expanded his business by utilizing the share capital raised. He submitted that once this position is accepted and the clock had started running in favour of the assessee, it had to complete entire peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 wherein it has been observed as under : 6 We have considered the rival submissions as well as relevant material on record. There is no dispute on the fact that the expenditure in question was incurred in relation to the increase in authorised capital and not in relation to incorporation of the assessee company by registration with ROC. The assessee has mainly relied upon the decision of honourable Rajasthan High Court in case of multi-metal Ltd (supra) and advanced the argument that the language of section 35D(2)(c ) is wide in nature and would include the deductibility of fee paid by the assessee to ROC for enhancement of authorised capital. We note that the Assessing Officer has distinguished the decision of the honourable Rajasthan High Court and relied upon the decision of honourable Supreme Court as well as honourable Delhi High Court. The relevant part of the assessment order at page no.4 is reproduced as under: The submissions of the assessee is considered, but cannot be accepted due to the reasons that the expenditure allowed to be amortised of certain preliminary expenses are mentioned in the provisions of Section 35D of I.T. Act, 1961. Assessee s expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nourable Supreme Court and held in para 3 and 4 as under: We have heard learned counsel for the Revenue. There is no appearance on behalf of the assessee in spite of notice. So far as the question referred at the instance of the assessee is concerned, the matter is squarely concluded by two decisions of the Supreme Court in Punjab State Industrial Development Corporation Limited v. CIT [1997] 225 ITR 792 and Brooke Bond India Limited v. CIT [1997] 225 ITR 798. It was held in both the cases that expenditure incurred by a company in connection with issue of shares with a view to increase its share capital is directly related to the expansion of the capital base of the company and is capital expenditure even though it may incidentally help in the business of the company and in the profit making. That being the position, the question is answered in the affirmative, in favour of the Revenue and against the assessee. Coming to the question referred at the instance of the Revenue it would be necessary to quote the provision as it stood at the relevant point of time: 35D. (1) ( 2) The expenditure referred to in sub-section (1) shall be the expenditure specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with incorporation of a company and matters incidental thereto. Section 12 deals with mode of forming an incorporated Company. Sections 33 and 34 deals with registration of memorandum and articles and effect of registration respectively. Section 97 deals with the requirement of notice of increase of the share capital or of members. Section 611 deals with the fees payable under Schedule X. Subsection (1) of section 34 to which we have made reference earlier stipulates that on the registration of the memorandum of a company, the Registrar shall certify under his hand that the company is incorporated and, in the case of a limited company, that the company is limited. Therefore, on the registration of the memorandum of a company the company becomes incorporated. A reading of Schedule X would go to show that items 1 and 2 deal with registration of a company depending on the nominal share capital, in respect of a company having a share capital. Item 3, on the other hand, deals with fees payable for filing a notice for increase in the nominal share capital of the company. The first two items and the third item operate in conceptually and contextually different fields. This is also clear f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arges to non-resident parties without tax deduction at source. Following payments were made to non-resident parties without TDS : S. No. Name of the party Nature of payment Amount (Rs.) 1. M/s. GNG Solutions Inc. USA Tele communication Expenses 4541474/- 2. World Com Data International Services USA IPLC (International Private Lease Circuit) Charges 3647900/- The Assessing Officer noted that the above parties have rendered their services in India, but the assessee submitted that the Transponder/Modem was situated outside India and which the control brainwave of rendering services at Miyami USA and no part of services have been rendered in India. The Assessing Officer after analyzing the agreement and Article 12 of the DTAA between USA India and as per section 9(1)(vi), treated the payment as royalty. He concluded that the assessee is a resident and his business is situated in India and the source of income is its call centre which is also situated in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payments made to those parties was liable as income accrued or deemed to accrue in their hands within the provisions of the Act or income in their hands as per the articles of the DTAA between the USA and the India. If the answer to the question is positive, the assessee was liable to deduct tax at source on those payments and consequent disallowance under section 40(a)(i) of the Act. 9.12.2 The services rendered by both the parties have been described in detail by the lower authorities in their orders. Briefly, it can be summarized that the executive of the call Centre of the assessee located at Ghaziabad used to make call to the persons in USA for marketing of the products of the clients of the assessee. The voice call data was converted into electronic data and transmitted from the call Centre in India to the person in USA to whom the call was made. The call from the call Centre at Ghaziabad to the last point of Indian territory at Mumbai was transmitted by the VSNL. We may call it as domestic leg of the call transmission. Further, the call data was transmitted from last point in Indian Territory at Mumbai to entry point in the USA at Miami through undersea cable by M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the recipient non-resident parties in terms of section 9(1)(i) of the Act. In this respect, we are reproducing the relevant part of section 9(1)(i), as under: Income deemed to accrue or arise in India. 9. ( 1) The following incomes shall be deemed to accrue or arise in India : - ( i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. 9.12.4 Thus, for Revenue to succeed on this issue, it has to prove that income has accrued or arisen, whether directly or indirectly in India: ( a) through or from any business connection in India ( b) through or from any property India ( c) through or from any assets or source of income in India ( d) through a from transfer of capital asset situated in India. 9.12.5 Further the business connection has been defined in Explanation-2 below the subsection 9(1)(i) as under: Explanation 2.-For the removal of doubts, it is hereby declared that business co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the non-resident's goods or for other business purposes. ( c) Erecting a factory in India where the raw produce purchased locally is worked into a firm suitable for export abroad. ( d) Forming a local subsidiary company to sell the products of the non-resident parent company. ( e) Having financial association between a resident and non- resident company. 3. The following clarifications would be found useful in deciding questions regarding the applicability of the provisions of s. 9 in certain specific situations : 1. Non-resident exporter selling goods from abroad to Indian importer.-(i) No liability will arise on accrual basis to the non-resident on the profits made by him where the transactions of sale between the two parties are on a principal to principal basis. In all cases, the real relationship between the parties has to be looked into on the basis of an agreement existing between them but where : ( a) the purchases made by the resident are outright on his own account, ( b) the transactions between the resident and the non-resident are made at arm's length and at prices which would be normally chargeable to othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. It, thus, clearly follows that carrying out the operations in India, wholly or at least partly, is sine qua non of the application of Clause (i) of sub-section (1) of Section 9 of the Act. Can it be said that the appellant, under the given circumstances, is doing some business in India, i.e., is there any business act of the appellant which could be attributed to the Indian territory? Under the agreement with TV channels, role attributed to the appellant can be paraphrased in the following steps: ( i) Programmes are uplinked by the TV channels (admittedly not from India). ( ii) After receipt of the programmes at the satellite (at the locations not situated in India airspace), these are amplified through complicated process. ( iii) The programmes so amplified are relayed in the footprint area including India where the cable operators catch the waves and pass them over to the Indian population. 33. Accepted position is that the first two steps are not carried out in India and the entire thrust of the Revenue is limited to the third step ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IGTL Solutions by the assessee. 10.10.1 In view of above, we are of the opinion that consideration paid to the non-resident parties does not fall under the term royalty in terms of section 9(1)(vi) of the Act. 10.10.2 Further, we now examine whether the consideration paid by the assessee falls in the definition of the royalty in the hands of the recipient as per the DTAA between USA and India. The term royalty has been defined under the DTAA between India and USA in article 12 (3) of the treaty as under: 3. The term royalties as used in this Article means : ( a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, 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, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n detail the use or right to use the process, information or equipments. The relevant paragraphs of the decision of the Hon ble High Court are reproduced as under: 55. Keeping in view the aforesaid principles, we now embark upon the interpretative process in defining the ambit and scope of term royalty appearing in Expln. 2 to subcl. (vi) of s. 9(1) of the Act. Sub-cl. (i) deals with the transfer of all or any rights (including the granting of a licence) in respect of a patent, etc. Thus, what this sub-cl. envisages is the transfer of rights in respect of property and not transfer of right in the property . The two transfers are distinct and have different legal effects. In first category, the rights are purchased which enable use of those rights, while in the second category, no purchase is involved, only right to use has been granted. Ownership denotes the relationship between a person and an object forming the subject-matter of his ownership. It consists of a bundle of rights, all of which are rights in rem, being good against the entire world and not merely against a specific person and such rights are indeterminate in duration and residuary in character as held b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken by receiving the uplinked signals, amplifying them and relaying them after changing the frequency in the footprint area including India. This is held that the TV channels in entire cycle of relaying the programmes in India were using the process provided by the assessee and, therefore, it is liable to be taxed as royalty income. 57. We have to test the rationality of the aforesaid reasoning and consider the attack thereupon by the appellants in their arguments recorded above. Before that, we may take note of few judgments relevant to the context. In the case of CIT vs. Datacons (P) Ltd. (1985) 47 CTR (Kar) 162 : (1985) 155 ITR 66 (Kar), the company was engaged in processing the data supplied by its customers by using IBM unit record machine computer. The assessee received vouchers and statements of accounts from its customers and converted them into balance sheets, stock accounts, sales analyses etc. They were printed as per the requirement of the customers. The Karnataka High Court held that in all these activities, the assessee had to play an active role by co-ordinating the activities and collecting the information. Such activities amounted to processing of goods. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n detail the process of the operation of a satellite and the role played by the transponder therein. 59. Following features of the agreement entered into by the appellant with its clients need to be highlighted at this stage : ( a) The appellant is a foreign company incorporated in Hong Kong and carries business of providing satellite business and broadcasting facilities. ( b) The clients with whom the appellant has entered into agreement are not the residents of India. ( c) The appellant has launched its satellites in the orbit footprint on which it is extended over four continents including Asia and, thus, covers India. ( d) The agreement signed with the customers which are TV channels, the appellant provides facility of transponder capacity available on its satellite to enable these TV channels to relay their signals. These customers have their own relaying facilities, which are situated outside India. From this facility, the signals are beamed in space where they are received by a transponder located in the appellant s satellite. The transponder receives the signal and on account of the distance these signals have to travel, they are required t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city at a particular frequency is made available to the applicant through INLUS (Navigation Land Uplink Station) which is set up and operated by the applicant. The capacity is meant to be used for the purpose of providing an augmentation to global satellite navigation system. The capacity will be utilized through data commands issued from the ground station INLUS. Undeniably, the applicant will not be able to operate the transponder in the space but it will be transmitting/uplinking the augmented data to the navigation transponder. Access to the transponder s space capacity is established through the applicant s operations at the ground station INLUS pursuant to which the transponder transmits signals/data received from INLUS from the geo-stationary orbits. The Inmarsat satellite carries many transponders out of which the transponder for navigation purposes will provide the satellite based augmentation system signals in space at two frequencies i.e. 1575.42 MHz (L1) and 1176.45 MHz (L5) which are accessed for the GAGAN project undertaken by the applicant. It is also seen that the navigation transponder which uplinks and downlinks the data is a passive transponder unlike the communi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of transponder as such is not at all contemplated under the contract. What really happens is that the augmented data sent by INLUS reaches the transponder and it is transmitted back to the earth and the same is accessed by SBAS user receivers in the coverage area. In response to a query, the applicant specifically clarified that the transponder does not perform any operation with reference to the data uplinked and downlinked and there is no onboard data storage. 61. It is worthwhile to note that the contention of the Department that there was use of transponder by the applicant was specifically rejected in the following terms: 17. It is contended by the Revenue that in substance, there is use of equipment i.e. transponder by the applicant. The exclusive capacity of specific transponder is kept entirely at the disposal of the applicant. The use of transponder is ensured when it responds to the directions sent through the ground station. Such directions, it is stated, are akin to the operation of TV by remote control apparatus. We find it difficult to accept this contention. The fact that the transponder automatically responds to the data commands sent from the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract document, the technical report and other facts furnished by the applicant. 64. On the aforesaid poser, the AAR discussed the issue and held that the transponder and the process therein are actually utilized for the satellite user for rendering the services to the customer and further that it cannot be said that the transponder or process employed therein are used by the customer. 65. It needs to be emphasized that a satellite is not a mere carrier, nor is the transponder something which is distinct and separable from the satellite as such. It was explained that the transponder is in fact an inseverable part of the satellite and cannot function without the continuous support of various systems and components of the satellite, including in particular: (a) Electrical power generation by solar arrays and storage battery of the satellite, which is common to and supports multiple transponders on board the satellite. ( b) Common input antenna for receiving signals from the customers ground stations, which are shared by multiple transponders. ( c) Common output antenna for retransmitting signals back to the footprint area on earth, which are shared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed at a particular place or the speed or direction had been different from that of earth, it could not have produced the desired results. Transponder is part of satellite, which is fixed in the satellite and is neither moving in itself nor assisting the satellite to and the transponder, namely, a part of it, playing howsoever important role, cannot be termed as equipment. 67. Even after stating so, the Tribunal did not take the aforesaid view to its logical conclusion, viz., the process carried on in the transponder in receiving signals and retransmitting the same, is an inseparable part of the process of the satellite and that process is utilized only by the appellant who is in control thereof. Whether it is done with or without amplification of the signal would not make any difference, in such a scenario. 68. We are inclined to agree with the argument of the learned senior counsel for the appellant that in the present case, control of the satellite or the transponder always remains with the appellant. We may also observe at this stage that the terms lease of transponder capacity , lessor , lessee and rental used in the agreement would not be the determinative f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unloading at destination. Can it be said that right to use of the lorry has been transferred by the carrier to the customer ? The answer is obviously in the negative, as there is no transfer of the use of the lorry for the following reasons : (i) The lorry is never in the control, let alone effective control of the customer; (ii) the carrier decides how, when and where the lorry moves to the destination, and continues to be in effective control of the lorry; (iii) the carrier can at any point (of time or place) transfer the consignment in the lorry to another lorry; or the carrier may unload the consignment en route in any of his godowns, to be picked up later by some other lorry assigned by the carrier for further transportation and delivery at destination. ( ii) On the other hand, let us consider the case of a customer (say a factory) entering into a contract with the transport operator, under which the transport operator has to provide a lorry to the customer, between the hours 8 a.m. to 8 p.m. at the customer s factory for its use, at a fixed hire per day or hire per km. subject to an assured minimum, for a period of one month or one week or even one day; and under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eer, procure equipment, materials and supplies to erect and construct storage tanks including marine facility (jetty and island breakwater) for transmission and supply of LNG to purchasers, to test and commission the facilities, etc. The contract involved : (i) offshore supply, (ii) offshore services, (iii) onshore supply, (iv) onshore services, and (v) construction and erection. The price for offshore supply and offshore services was payable in US dollars, that for onshore supply and onshore services and construction and erection partly in US dollars and partly in Indian rupees. The payment for offshore supply of equipment and materials supplied from outside India was received by the appellant by credit to a bank account in Tokyo and the property in the goods passed to Petronet on the high seas outside India. Though the appellant unloaded the goods, cleared them from customs and transported them to the site, it was for and on behalf of Petronet and the expenditure including the customs duty was reimbursed to it. The price of offshore services for design and engineering including detailed engineering in relation to the supplies, services and construction and erection and the cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly or indirectly attributable to that PE and, therefore, so much of the amount received or receivable by the appellant as was directly or indirectly attributable to the PE as postulated in para 6 of the protocol would be taxable in India. The price of the offshore services would be deemed to accrue or arise under s. 9(1)(vii) of the IT Act, 1961. And in as much as fees for technical services were specifically provided in art. 12 of the Convention, they would not fall under art. 7. Therefore, the price of the offshore services was taxable in India under the Act as well as the Convention. ( iii) That, however, in view of s. 115A(1)(b)(B) of the Act and art. 12(2) of the Convention, tax was payable at the fixed rate of 20 per cent of the gross amount of fees for technical services and the applicant would not be able to claim any deduction from the amount. 71. In that case, the appellant approached the Supreme Court challenging the aforesaid judgment of the AAR. The Supreme Court reversed the decision of the AAR and in the process, inter alia, held as under : ( i) That s. 9 of the IT Act, 1961, raises a legal fiction; but, having regard to the contextual interpre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al jurisdiction could tax that particular part of the transaction. This principle helped to determine where the territorial jurisdiction of a particular State lay and to determine its capacity to tax on event. Applying it to composite transactions which had some operations in one territory and some in the other, was essential to determine the taxability of various operations. The concepts of profits of business connection was relevant for the purpose of application of s. 9, the concept of PE was relevant for assessing the income of a non-resident under the Convention. ( v) That in this case the entire transaction was completed on the high seas and, therefore, the profits on sale did not arise in India. Once excluded from the scope of taxation under the IT Act application of the double taxation avoidance treaty would not arise. ( vi) That, in relation to offshore services, s. 9(1)(vii)(c) required two conditions to be met: to be taxable in India the services which were the source for the income sought to be taxed had to be rendered in India as well as utilized in India. ( vii) That whatever was payable by a resident to a non-resident by way of technical fees wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... call interconnectivity charges for call transmission on foreign network was amounted to royalty or not. The findings of the Tribunal are reproduced as under: 11.4 Thus, the essence of the agreement is that each party to the contract shall connect to network of other party at port locations. It is not a case of lease or licence of network of foreign operator in favour of the appellant. Once two networks are interconnected, the flow of call is completed. A foreign operator connects his network with network of the appellant and call coming from appellant's network is taken up by network of foreign operator for further transmission. In this model, only foreign operator is using his network and appellant is not using or is not allowed to use network of foreign operator. Thus, there is no 'use' on part of the appellant. Whether taking-up of call by network of foreign operator from network of the appellant is a 'process', is another issue to be looked into. The AO has not given a finding to the effect that it constitutes a 'process'. According to Explanation 6, which is proposed to be incorporated in section 9(1)(vi) of the Act by Finance Act, 2012, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been widened, the 'process' need not be secret and situs of control possession of right, property or information has been rendered irrelevant. However, all these changes do not affect the definition of royalty as per DTAA. In Article 13 (3)(a) of Indo-UK tax treaty, the word employed is 'use or right to use' in contradistinction to the word 'use' in domestic law. The meaning attached to phrase 'use or right to use' has been explained in various judicial decisions in case of Mis Yahoo India Pvt Ltd vs. DCIT (ITAT Mumbai), Standard Chartered Bank v.' DDIT, Mumbai, ISRO Satellite Centre [2008 307 ITR 59 AAR] and Dell International Services (India) P. Ltd. [2008305 ITR 37 AAR]. All these judicial pronouncements say that in order to satisfy 'use or right to use'; the control and possession of right, property or ITA Nos. 3593 TO 3596/Del/2012 [Bharti Airtel Ltd. vs. ITO(TDS)] ITA Nos. 4076 TO 4079/Del/2012 [ITO(TDS) vs. Bharti Airtel Ltd.] information should be with payer. Therefore, under DT AA, the restricted meaning of royalty shall continue to operate despite amendments in domestic law. 11.6 The appellant has further argued t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (FTS). In ground No. 1.1, the assessee has challenged this alternative finding of the learned Commissioner of Income-tax (Appeals). 18. We find that in the instant case also identical service of transmission of call data from end of the Indian Territory to the person in USA to whom call is made, is involved, and accordingly in view of above discussion and following the judgements cited above, the payment in question cannot be considered as Fee for Technical services (FTS)in terms of section 9(1)(vii) read with Explanation - 2 of the Act. 19. Further in para- 40 of the decision in the case of Bharti Airtel Limited Vs. ITO, the Tribunal has held that where make available clause is found in the treaty and there is no imparting as contemplated in the treaties, the payment cannot be treated as Fee for Technical Services (FTS) under the DTAA. The relevant paragraph of the decision is reproduced as under: 40. The second aspect of the issue are before us, is without prejudice to the finding under the Domestic Law, whether the payment to FTOs for IUC is fee for technical services under the DTAA, wherever 'make available clause' is found in these agreements. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A course and the assessee did not file any service agreement for further extension for MBA course. The assessee has just taken burden of sponsorship of the son of its main promoter after completion of his 10+2 examination. The assessee has not filed any details to show how Karun Ansal was considered as an exceptional case for sponsoring his education while he has served only for a period of few days in the company after passing his 10+2 examination before completing for his sponsorship and that too as a management trainee on stipend of ₹ 5000/- Further the sponsorship was not for any specialization course and the company sponsored for BBA course which is a normal educational course. He, therefore, disallowed the expenses of ₹ 17,71,214/- treating the same as personal expenses u/s. 40A(2)(b) of the Act and not the business expenditure, relying on the decision of Hon ble Karnataka High Court in the case of MAC Explotech P. Ltd. vs. CIT, 286 ITR 378. Aggrieved, the assessee approached the ld. CIT(A) in appeal where the order of the AO was upheld observing as under : I have considered the submissions of the appellant, the findings of the AO and the facts on record. P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BBA course in USA and he requested for sponsorship of his education abroad by letter dated 18.08.2000 which was approved by the assessee company. Accordingly an agreement and service agreement were made between the assessee company and Karun Ansal, which are available on paper book pages 205 to 207 and 209 to 212 respectively. After completion of BBA course, the sponsorship was suo moto extended to include the studies of MBA from the same Institute by the assessee company by way of resolution dated 30.04.2003. Later on, the name of the company was changed to name of Geo Connect Ltd. Karun Ansal was required to serve the company for a limited period of seven years. Since this expenditure was made on foreign expenditure on employee s education so that the education and expertise acquired by him could be utilized for the purpose of the company. The assessee company gave appointment to Karun Ansal as a Vice-president (operation) of the company w.e.f. 17.04.2007 and he obtained permission from Company Law Board u/s. 314(2B) of the Companies Act. He had obtained specialization in basic financial markets, equity valuation, mergers and acquisition, strategic management, sales management, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, particularly when there was no agreement with the assessee for MBA course. No business expediency or necessity was established by assessee to bear such a huge expenditure on foreign education of promoter s son. The assessee also could not establish that there was any such scheme for sending the persons for education abroad. He, therefore, contended that the personal expenses incurred could not be claimed as business expenditure deductible u/s. 37 of the Act. Reliance is placed on the following decisions : (i). Ocean City Trading (India) P. Ltd. vs. CIT, 328 ITR 290 (Bom) (ii). CIT vs. R.K.K.R. Steels P. Ltd., 258 ITR 306 (Mad) (iii). MAC Explotec P. Ltd. vs. CIT, 286 ITR 378 (Kar) The learned DR further submitted that allowance of such expenditure, which was for the BBA course of Karun Ansal in preceding three years, would not create a bar to adjudicate upon a question of law on its own merit, particularly when there is no agreement for MBA course in the instant case. Reliance is placed on the decision of Hon ble Punjab Haryana High Court in the case of CIT vs. Punjab Braveries Ltd., 20 taxmann.com 630 )P H). 18. We have considered the rival submissions, pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sal by the assessee company without any agreement between the assessee company and Karun Ansal for such extension for MBA course speaks a lot against the assessee. No business expediency or necessity was established by assessee to bear such a huge expenditure on foreign education of son of assessee s promoter, who was not even a regular employee of the assessee company at the time of joining the course abroad. Moreover when the service agreement was made the business of assessee was of call centre only and such business was sold by the assessee company on 16th day of September, 2004 as per sale deed available on paper book pages 306 to 308. The List of call centre assets sold is available at paper book pages 309 to 327. Therefore, when the very business of call centre, for promotion of which Shri Karun Ansal was allegedly sponsored for higher studies abroad, stood sold in Sept. 2004, no benefit of such studies of Karun Ansal could be assumed for such a business of assessee company and there remains no justification to bear expenditure for his further studies abroad for MBA course. The assessee company has produced its financial results at page 404 of the paper book, on perusal of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheme of sending people abroad for training with the stipulation that after receiving the benefit of training they should work for the company and that moneys expended on such training were in fact, moneys which were expended for the purpose of obtaining the benefit of their expert service after they acquire proficiency in the field in which they had been sent for training,. It is evident that a director father had, instead of incurring expenses from his personal account, which he should have, had merely chosen to debit the expenditure of his son's education to the business of which he was the director. Such expenditure does not become business expenditure, merely because the father was in a position to debit the expenditure to the accounts of the business. The Tribunal was clearly in error in accepting and allowing the claim which had been rightly disallowed by the Assessing Officer and by the Commissioner in appeal. This court considered a similar claim of a father debiting the expenditure of the education of his sons to the business, in the case of M. Subramaniam Bros. v. CIT [2001] 250 ITR 769. In that case, the father had sent his son abroad for higher education. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. 25. Adverting to the penalty appeal for A.Y. 2004-05, the record speaks that the AO imposed penalty of ₹ 40,00,000/- u/s. 271(1)(c) of the Act for furnishing inaccurate particulars of its income on the basis of following additions sustained by the ld. CIT(A) : (i). Non deduction of TDS on telecommunication expenses paid to non-resident parties. (Correct figure is 81,89,374) Rs.91,89,375/- (ii). Training and Development Expenses Rs.17,71,214/- Out of above two additions, the addition of ₹ 91,89,375/-(correct figure 81,89,374) stands deleted by us as per our above discussion and therefore, the penalty based on this addition deserves to be deleted. 26. Regarding the penalty imposed on the basis of second addition of ₹ 17,71,214/- , it is notable that the assessee made a claim of training and development expenses in the return of income and disclosed all particulars thereof before the Assessing Officer. The AO has not made out any case that any material fact had been withheld or concealed by the assessee company. It is a different matte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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