TaxTMI 
TaxTMI 
2026 (10) TMI 184
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....ue. (iii) Reframe suitable questions of law, if it is considered necessary, to do justice to the appellant. (iv) Any other appropriate relief, as may be considered just and proper, including awarding of the costs may be granted in favour of the appellant." 1.1. The record reflects that notice was initially issued in the appeal and, by order dated 10.05.2010, the appeal came to be admitted on the following substantial questions of law: "1. Whether the provisions of Section 40(a) are attracted in the facts and circumstances of this case when the sum is not payable by the appellant (assessee) outside India to DML (foreign contractor) in terms of the agreement entered into between the parties? 2. Whether upon a true and correct interpretation of the relevant provisions of law, circulars issued, provisions of Double Taxation Avoidance Agreement and various clauses of the treaties and upon a true construction of the agreement, the sum payable to DML by the Crown Agents in U.K. out of grant given by U.K. Government can be said to be income accruing or arising to DML in India or deemed to be income accruing or arising to DML in India and whether the f....
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....nd DML. 2.4. The Assessing Officer disallowed the disputed part of the deduction on the premise that tax deductible in respect of the amount payable to the foreign company had not been deducted. The learned Commissioner of Income Tax (Appeals) sustained the disallowance. 2.5. In the earlier round, the learned Tribunal, vide order dated 30.10.2001, recorded findings which this Court, in D.B. Income Tax Appeal No.76/2002 decided on 21.11.2007, found to be irreconcilable. The matter was, therefore, remitted to the learned Tribunal for reconsideration and for arriving at a categorical conclusion in accordance On remand, the learned Tribunal passed the impugned order dated 20.02.2009 and again sustained the disallowance. 2.6. The learned Tribunal found, inter alia, that the payment made by the Crown Agents was a payment made on behalf of the appellant; that the appellant had incurred an enforceable contractual liability towards DML; that the technical know-how and services were acquired for and utilised in the appellant's business in India; and that the circumstance that the foreign currency component was released out of grant assistance through the Crown Agents did not alt....
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....n Agents merely constituted the mechanism through which the contractual consideration payable for the appellant's technical services agreement was discharged. 4.1. The Revenue's case was that the invoices were raised by DML upon the appellant; the appellant certified the contractual entitlement before release of payment; and the corresponding rupee amount was thereafter accounted for by the appellant with the Government of India. The fact that the foreign currency component was physically released by the Crown Agents, therefore, did not sever the nexus between the appellant's contractual liability and the payment received by DML. 4.2. It was further the Revenue's case that the technical know-how was acquired for the appellant's business and utilised for its project in India and, consequently, the consideration was chargeable under the statutory provisions governing fees for technical services. Section 195 was therefore attracted and failure to deduct tax attracted the consequence under Section 40(a)(i). 5. Heard learned counsel for the parties and perused the material available on record. 5.1. The two substantial questions of law are interconnected. ....
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.... a meaning which includes an amount incurred according to the method of accounting employed by the assessee. Thus, for claiming the deduction, the appellant treated the contractual consideration as expenditure incurred for acquiring know-how; while resisting the statutory consequence of such payment, it seeks to characterise the same consideration as not being payable by it at all. 5.6. The two positions cannot be reconciled on the record. The source from which the appellant's contractual liability was financially discharged cannot be confused with the existence or character of that liability. A payment by a third person pursuant to an agreed funding mechanism may discharge the liability of the contracting party without converting the third person into the person who incurred the underlying expenditure. 5.7. The agreement assumes particular significance in this regard. Hindustan Zinc Limited is the "Owner"; DML is the "Contractor"; the Crown Agents are identified as the agency through whom the grant account was administered; the fees were contractually referable to the services rendered to the appellant; and the mechanism envisaged release by Crown Agents after the contra....
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....ndia Technology Centre (supra), Transmission Corporation dealt with a composite payment which admittedly included an element chargeable to tax in India; Section 195(2) provided the mechanism for determination of the appropriate taxable proportion. The principle remains that chargeability precedes the withholding obligation. On the facts of the present case, that condition is satisfied. 5.12. The reliance placed upon Grasim Industries Ltd. v. S.M. Mishra, CIT also does not govern the present controversy. That decision dealt with a distinct technical-services arrangement where the Bombay High Court examined the taxability of offshore services in the light of Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income Tax, (2007) 288 ITR 408 (SC). The judgment in Grasim Industries was delivered on 05.05.2010. The Finance Act, 2010 thereafter substituted the Explanation to Section 9 with retrospective effect from 01.06.1976, specifically providing that income falling under clauses (v), (vi) or (vii) of Section 9(1) may be deemed to accrue or arise in India whether or not the non-resident has rendered services in India. More importantly for the present appeal, the question before....