TaxTMI 
TaxTMI 
2018 (5) TMI 253
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....ned CIT(A) erred in deleting the disallowance of Rs. 3,10,195 on the ground that these expenses pertained to a period prior to the relevant previous year. 5. The relevant material facts are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noted that the assessee has claimed the deduction for expenses pertaining to a period prior to the relevant previous year. The assessee's explanation, justifying deductibility of these expenses, that the liability to pay for these expenses "crystallized during the (relevant previous) year" was rejected by the Assessing Officer on the ground that "these expenses are to be disallowed since they donot pertain to the current year and the matching principle does not get fulfilled" and that "here the expenditure incurred is not matching with the year of earning revenue". He also observed that the "accounts are generally finalized after sufficiently long period of time so as to make adequate provision for expenses". As for the income of the prior year also being offered to tax, the Assessing Officer observed that "as the assessee has itself included the income of the earlier year in the taxable income, no dispute ....
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....y the CIT(A). The relief granted by the CIT(A) was, therefore, quite justified. We approve the same and decline to interfere in the matter. 8. Ground no. 1 is thus dismissed. 9. In ground no. 2, the Assessing Officer is aggrieved that the CIT(A) erred in deleting the disallowance of Rs. 30,85,947 despite the fact that the assessee did not deduct tax at source from the related payments to non-residents. In a connected ground no. 2 in the cross objection filed by the assessee, the grievance of the assessee is that learned CIT(A) erred in upholding, to the extent of Rs. 4,09,927, disallowance under section 40(a)(i) in respect of payments to non-residents. 10. The relevant material facts are as follows. During the course of scrutiny assessment proceedings, the Assessing Officer noted that the assessee has made payments, aggregating Rs. 34,95,874, to various non-residents but has not deducted any tax at source from the same. The explanation of the assessee, as noted by the Assessing Officer, was that out of these four payments, two payments- namely to M E Shreiff and Paul Jenser, were on account of salaries and, in terms of the related tax treaty provisions, these payments did ....
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....t the assessee has duly furnished requisite details, about the nature of these payments, before the CIT(A), and copies of these details were also filed before us at pages 90 to 95 of the paper-book as well. As regards the payment to O&O, a UK based company, there is no dispute that the payments are in the nature of payments for consultancy services. As the consultancy agreement stipulates, the O&O's obligation is "to provide technical advices on phone/fax/ email as and when required" and to provide for "consultancy services" in the specified areas. As to the question whether consideration for such services can be taxed under article 13 of Indo UK DTAA, we find guidance from the Third Member decision of this Tribunal, in the case of CESC Ltd Vs DCIT [(2003) 87 ITD TM 653 (Kol)] wherein one of us, i.e. the Accountant Member, articulating the majority views, had observed as follows: 9. Let us first take a look at the scope of expression 'fees for technical services' so far as applicable India UK Double Taxation Avoidance Agreement is concerned. 10. Article 13(4) of the India UK DTAA defines "fees for technical services" as payments of any kind to any person in consid....
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....xperience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design." 13. In the protocol note attached to and forming part of the aforesaid DTAA, Government of India has confirmed that memorandum of understanding between the India and USA with regard to interpretation of Article 12 (Royalties and Fees for Included Services) also represents the view of the Indian Government. This memorandum inter alia provides as follows : "Paragraph 4(b) of Article 12 refers, to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, . . . or transferee of such person.) This category is narrower. . . because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the ....
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....ideration for technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person' as is the expression used in India UK and India USA DTAAs. 16. We may also mention that this paradigm shift in definition of the 'fees for technical services', so far as Article 13(4)(c) of India UK DTAA is concerned, is a conscious departure from the traditional model which represented broadly by the definition of technical services as given in the Indian Income-tax Act. Even after India entered into DTAA with United States on 12-9-1989, wherein this departure from traditional definition was made for the first (sic) entered into several DTAAs wherein traditional definition, on the lines of definition in Indian Income-tax Act, 1961, continues to find the place, such as in India Australia DTAA dated 25-7-1991, India Belgium DTAA dated 26-4-1993, India France DTAA dated 29-9-1992, India Germany DTAA and India Israel DTAA dated 29-1-1996. On the other hand, there are several DTAAs wherein the narrower definition o....
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.... Karnataka High Court in the case of CIT v. De Beers India Minerals (P.) Ltd. [2012] 21 taxmann.com 214, and there is no contrary decision by Hon'ble jurisdictional High Court or by Hon'ble Supreme Court. We, therefore, hold that unless there is a transfer of technology in the sense that recipient of service is enabled to provide the same service on his own, without recourse to the original service provider, the 'make available' clause is not satisfied and, accordingly, the consideration for such services cannot be taxed under Article 13 (4) of Indo UK DTAA. 14. The question then arises whether rendition of consultancy services makes available any technical knowledge, skill, know how so as the recipient of services can render the same services without recourse to the service provider. The answer is clearly in negative. Merely because consultancy services has technical inputs, these services donot become technical services and simply because the recipient of a technical consultancy services learns something with each consultancy, there is no transfer of technology in the sense that recipient of service is enabled to provide the same service without recourse to the....
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....oans. In a connected grievance raised by the assessee in ground no. 3 in the cross objection, the assessee is aggrieved that the CIT(A) has erred in sustaining the interest disallowance to the extent of Rs. 4,18,139 (out of Rs. 48,93,930) made by the Assessing Officer, even though, as against the interest free advance of Rs. 4.08 crores, the assessee had interest free funds aggregating to over Rs. 34 crores. 19. It is sufficient to take note of the fact that law on this issue is very well settled inasmuch as in a case in which the interest free advances granted by the assessee are less than interest free funds available to the assessee, the presumption to be normally drawn is that no portion of interest on borrowings could be disallowed on the ground that the assessee has granted interest free loans and borrowings, to that extent, have been diverted. In the case of CIT Vs Raghvir Synthetics Ltd [(2013) 354 ITR 222 (Guj)], Hon'ble jurisdictional High Court has observed as follows: 5. As can be noted from the order of the Tribunal, the Assessing Officer disallowed the interest solely on the ground that the assessee had given interest-free loans to the associate concerns, ....
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.....66 lakhs was not sustainable. 8. The Tribunal has correctly approached the issue which has been proposed in the present tax appeal. When there was no evidence brought on record by the Department for the Tribunal to hold otherwise than what has been concluded by way of any material, we hold that the issue is appropriately concluded in favour of the assessee and against the Revenue. 9. We may refer to the judgment of the apex court at this stage given in case of S. A. Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 (SC) where the question was whether interest on funds borrowed by the assessee to give an interest-free loan to sister concern should be allowed as deduction and the apex court ruled thus (pages 7 and 8) : "We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest on borrowed funds and, hence, we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct. . . . In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the in....
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....ld the plea of the assessee in principle and remit the matter back to the file of the Assessing Officer for the limited verification to the effect that interest free loans granted by the assessee are less than interest free funds available to him or not. If the factual elements embedded in the plea of the assessee are indeed correct, entire disallowance will have to be deleted. We, therefore, remit the matter back to the file of the Assessing Officer for fresh adjudication, as directed above, in accordance with the law and after giving a fair opportunity of hearing to the assessee on this point. 21. Ground nos. 3 of the appeal by the Assessing Officer and ground no. 3 of the cross objection filed by the assessee are thus allowed for statistical purposes. 22. Ground no. 1 of the cross objection by the assessee was not pressed, and is dismissed as such. 23. In the result, the appeal filed by the Assessing Officer, as also cross objection filed by the assessee, for the assessment year 2009-10 are thus partly allowed in the terms indicated above. 24. We now take up appeal of the Assessing Officer for the assessment year 2010-11. 25. In the first ground of appeal, the Ass....
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....grieved of the CIT(A) deleting the disallowance of Rs. 47.74 lakhs on account of interest relatable to interest free advances granted by the assessee. 33. Vide our order for the assessment year 2009-10 on this issue, we have remitted the matter to the file of the Assessing Officer for limited verification as to whether the interest free funds available to the assessee are more than interest free loans granted by the assessee, and, if so, the deletion of disallowance will stand confirmed for this short reason alone. These observations will apply mutatis mutandis for this assessment year as well. 34. Ground no. 3 thus stands allowed for statistical purposes. 35 In ground no. 4, the Assessing Officer is aggrieved that the CIT(A) erred in deleting the disallowance of R 12,81,593 on account of additional depreciation even though the product has not undergone any transformation and no new distinctive article has come into existence. 36. The grievance of the Assessing Officer is ill conceived inasmuch as undisputedly what the assessee does is that it manufacture intra ocular lenses out of the acrylic sheets. The output and input are of different use, character and trade descri....
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....gar Mills v. Haryana State Board [1992] 1 SCC 418). 6. The prevalent and generally accepted test to ascertain that there is 'manufacture' is whether the change or the series of changes brought about by the application of processes take the commodity to the point where, commercially, it can no longer be regarded as the original commodity but is, instead, recognized as a distinct and new article that has emerged as a result of the process. There might be borderline cases where either conclusion with equal justification can be reached. Insistence on any sharp or intrinsic distinction between "processing and manufacture', results in an oversimplification of both and tends to blur their interdependence. (See Ujagar Prints v. Union of India [1989] 3 SCC 488). 7. To put it differently, the test to determine whether a particular activity amounts to "manufacture' or not is: Does a new and different good emerge having distinctive name, use and character. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several proc....
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....P.) Ltd. [1993] 202 ITR 825. The Revenue has not questioned any of these decisions, at least not successfully, and the position of law, therefore, was taken as settled. The reasoning given by the High Court, in the decisions noted by us earlier, is, in our opinion, unimpeachable. This Court had, as early as in 1961, in Chrestian Mica Industries Ltd. v. State of Bihar [1961] 12 STC 150, defined the word 'production', albeit, in connection with the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word in the Oxford English Dictionary as meaning 'amongst other things that which is produced; a thing that results from any action, process or effort, a product; a product of human activity or effort'. From the wide definition of the word 'production', it has to follow that mining activity for the purpose of production of mineral ores would come within the ambit of the word 'production' since ore is 'a thing', which is the result of human activity or effort. It has also been held by this Court in CIT v. N.C. Budharaja & Co. [1993] 204 ITR 412 that the word 'production' is much wider than the word ....
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.... of income in the hands of a non-resident, provides that "the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year". There is no dispute that since no part of the operations of the recipient non-residents is carried out in India, no income accrues to these non-residents in India. The case of the revenue hinges on income which is "deemed to accrue or arise in India". Coming to the deeming provisions, which are set out in Section 9, we find that the following statutory provisions are relevant in this context: 'Section 9- Incomes deemed to accrue or arise in India (1) The following incomes will 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, Explanation: For the purpose of this clause ....
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....Malhotra, In re [2006] 284 ITR 564/155 Taxman 101 (AAR - New Delhi) which, in our considered view, does not take into account the impact of Explanation 1 to Section 9(1)(i) properly. That was a case in which the non-resident commission agent worked for procuring participation by other non-resident entities in a food and wine show in India, and the claim of the assessee was that since the agent has not carried out any business operations in India, the commission agent was not chargeable to tax in India, and, accordingly, the assessee had no obligation to deduct tax at source from such commission payments to the non-resident agent. On these facts, the Authority for Advance Ruling, inter alia, opined that "no doubt the agent renders services abroad and pursues and solicits exhibitors there in the territory allotted to him, but the right to receive the commission arises in India only when exhibitor participates in the India International Food & Wine Show (to be held in India), and makes full and final payment to the applicant in India" and that "the commission income would, therefore, be taxable under section 5(2)(b) read with section 9(1)(i) of the Act". The Authority for Advance Ruli....
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.... situationswhich are not attracted in the present case anyway, are deemed to be income accruing or arising in India. Explanation 2 to Section 9(1)(vii) defines 'fees for technical services' as any consideration (including any lumpsum consideration) for the rendering of any managerial, technical or consultancy services (including the provisions of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries' [Relevant portion highlighted by underlining]". 35. In the light of the above legal position, what we need to decide at the outset is whether the amounts paid by the assessee to the non-resident agents could be termed as "consideration for the rendering of any managerial, technical and consultancy services". As we do so, it is useful to bear in mind the fact that even going by the stand of the Assessing Officer, at best services rendered by the non-resident to the agent included technical services but it is for this reason that the amounts paid to these agents, on ac....
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....s carried out by non-residents for Indian principals is concerned. It does not need much of a cerebral exercise to find out whether the income from the business carried on by a non-resident assessee, as a commission agent and to the extent it can be said to directly or indirectly accruing through or from any business connection in India, is required to be taxed under section 9(1)(i) or under section 9(1)(vii), of the Income Tax Act, 1961. The answer is obvious. Deeming fiction under section 9(1)(i) read with proviso thereto, as we have seen in the earlier discussions, holds the key, and lays down that only to the extent that which the operations of such a business is carried out in India, the income from such a business is taxable in India. When no operations of the business are carried on India, there is no taxability of the profits of such a business in India either. The question then arises whether in a situation in which, in the course of carrying on such business, the assessee has to necessarily render certain services, which are of such a nature as covered by Explanation 2 to Section 9(1)(vii), and even though the assessee is not paid any fees for such services per se, any pa....
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.... 50. Ground no. 3 of the appeal as also ground no. 3 of the cross objection thus stands allowed for statistical purposes. 51. In ground no. 4, the Assessing Officer is aggrieved of the learned CIT(A) deleting the disallowance of Rs. 30,64,273 on account of additional depreciation, even though, according to the Assessing Officer, end product has not undergone any transformation and no new or distinctive article has come into existence. 52. In the impugned order, learned CIT(A) has merely followed his order for the assessment year 2010-11, but, in our detailed discussions earlier in this consolidated order, we have confirmed and approved the same. Respectfully following the views so formed by us for the assessment year 2010-11, we confirm this order of the CIT(A) as well and decline to interfere in the matter. 53. Ground no. 4 is thus dismissed. 54. Let us now turn to remaining grievances in the cross objection as well. 55, Ground no. 1 in the cross objection filed by the assessee is not pressed, and is, accordingly, dismissed for want of prosecution. 56. In ground no. 2 in the cross objection filed by the assessee, the assessee is aggrieved of the learned CIT(A) ....