High Court ruling: Revenue wins on Section 40(a)(ia) issue; Assessee prevails on pre-operative expenses & debenture classification.

Commissioner of Income-tax Versus Havells India Ltd.

Commissioner of Income-tax Versus Havells India Ltd. - [2013] 352 ITR 376 Issues Involved:

1. Applicability of Section 40(a)(ia) of the Income-tax Act, 1961 to testing fee paid to a US company.
2. Allowability of pre-operative expenses as revenue expenditure.
3. Classification of expenditure on fully convertible debenture issue as revenue or capital expenditure.

Issue-wise Detailed Analysis:

1. Applicability of Section 40(a)(ia) of the Income-tax Act, 1961 to testing fee paid to a US company:

The assessee paid Rs. 14,71,095/- to M/s. CSA International, Chicago for testing services without deducting tax at source under Section 195 of the Act. The Assessing Officer (AO) disallowed the payment under Section 40(a)(ia), asserting that the payment constituted fees for technical services under Section 9(1)(vii) of the Act and the Indo-US Double Taxation Avoidance Agreement (DTAA). The CIT (Appeals) upheld the AO's decision. The Tribunal, however, held that the services were utilized for export purposes and not for business activities in India, thus falling under the exception in Section 9(1)(vii)(b) of the Act, and deleted the disallowance.

Upon appeal, the High Court disagreed with the Tribunal, stating that the source of income from export sales was located in India, not outside. The Court emphasized that the source of income and the receipt of monies are distinct, and the source of income should be outside India to fall under the exception. The High Court restored the issue to the Tribunal to examine the applicability of the Indo-US DTAA and the consequent applicability of Section 40(a)(ia).

2. Allowability of pre-operative expenses as revenue expenditure:

The assessee incurred Rs. 2,31,253/- as pre-operative expenses for a project at Haridwar. The AO treated these expenses as capital expenditure, arguing that the new unit was independent of the existing business. The CIT (Appeals) upheld this view. The Tribunal, however, found interlacing and intermingling of funds and common management between the existing and new units, thus treating the expenses as revenue in nature.

The High Court agreed with the Tribunal, noting the factual findings of interconnection and interdependence among the units. The Court referenced the test of interlacing and interdependence from the House of Lords case of Scales v. George Thompson & Co. Ltd., concluding that the expenses were for the expansion of an existing business and thus revenue in nature.

3. Classification of expenditure on fully convertible debenture issue as revenue or capital expenditure:

The assessee issued fully convertible debentures and incurred Rs. 92,67,841/- as related expenses. The AO disallowed the expenditure as capital in nature, citing the conversion of debentures into equity shares. The CIT (Appeals) and the Tribunal allowed the expenditure as revenue, referencing the Rajasthan High Court's decision in CIT v. Secure Meters Ltd. and other judgments, which held that the nature of the expenditure should be determined at the time of debenture issuance, not future conversion.

The High Court upheld the Tribunal's decision, noting the predominant judicial view that expenditure on debenture issues is revenue in nature, even if the debentures are later converted into shares. The Court referenced several judgments supporting this view and concluded that the expenditure was revenue in nature.

Conclusion:

The appeals filed by the Revenue were disposed of with no order as to costs. The High Court ruled in favor of the Revenue on the first issue, restoring it to the Tribunal for further examination, and in favor of the assessee on the second and third issues, affirming the Tribunal's decisions.