TTK Prestige Ltd.,, Bangalore v. ACIT, Bangalore

ITA 1257/BANG/2011 | 2005-2006
Pronouncement Date: 11-04-2014 | Result: Partly Allowed

Appeal Details

RSA Number 125721114 RSA 2011
Assessee PAN AAACT6503G
Bench Bangalore
Appeal Number ITA 1257/BANG/2011
Duration Of Justice 2 year(s) 3 month(s) 28 day(s)
Appellant TTK Prestige Ltd.,, Bangalore
Respondent ACIT, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 11-04-2014
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 11-04-2014
Date Of Final Hearing 04-04-2014
Next Hearing Date 04-04-2014
Assessment Year 2005-2006
Appeal Filed On 13-12-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN JUDICIAL MEMBER AND SHRI JASON P. BOAZ ACCOUNTANT MEMBER ITA NO.1257/BANG/2011 ASSESSMENT YEAR : 2005-06 TTK PRESTIGE LTD. 11 TH FLOOR BRIGADE TOWERS 135 BRIGADE ROAD BANGALORE 560 025. PAN : AAACT 6503G VS. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 12(4) BANGALORE. APPELLANT RESPONDENT ITA NOS.130 & 131/BANG/2011 AND 475/BANG/2012 ASSESSMENT YEARS : 2006-07 2007-08 & 2008-09 THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 12(4) BANGALORE. VS. TTK PRESTIGE LTD. 11 TH FLOOR BRIGADE TOWERS 135 BRIGADE ROAD BANGALORE 560 025. PAN : AAACT 6503G APPELLANT RESPONDENT ASSESSEE BY : SHRI R.B. KRISHNA ADVOCATE REVENUE BY : SHRI BIJOY KUMAR PANDA ADDL. CIT(DR) DATE OF HEARING : 04.04.2014 DATE OF PRONOUNCEMENT : 11.04.2014 ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 2 OF 54 O R D E R PER N.V. VASUDEVAN JUDICIAL MEMBER ITA 1257/B/11 THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 20.10.2011 OF THE CIT(APPEALS)-IV BANGALORE RELATI NG TO ASSESSMENT YEAR 2005-06. 2. GROUND NO.1 RAISED BY THE ASSESSEE READS AS FOLL OWS:- 1. THE CIT (A) ERRED IN UPHOLDING THE DISALLOWANC E OF L.T CAPITAL LOSS ON EXTINGUISHMENT IN THE VALUE OF ASSE T HELD BY THE ASSESSEE/APPELLANT BY WAY OF INVESTMENTS IN EQUITY SHARES OF M/S TT KITCHENWARE LIMITED FAILING TO APPRECIATE TH AT THE LOSS AROSE DURING THE YEAR ENDING 31/03/2005 (A.Y 2005-0 6) IN WHICH THE INVESTMENTS WERE WRITTEN OFF. 3. THE ASSESSEE IS AN INDIVIDUAL ENGAGED IN THE BUS INESS OF MANUFACTURING AND MARKETING OF PRESSURE COOKER COO KWARE AND DOMESTIC ELECTRICAL APPLIANCES. FOR THE A.Y. 2005-06 THE A SSESSEE FILED A RETURN OF INCOME DECLARING LOSS OF RS.47 60 516. IN THE COU RSE OF ASSESSMENT PROCEEDINGS THE AO NOTICED THAT THE ASSESSEE HAD C LAIMED LONG TERM CAPITAL LOSS OF RS.50 40 000. THE FACTS WITH REGAR D TO THE LONG TERM CAPITAL LOSS CLAIMED BY THE ASSESSEE ARE AS FOLLOWS. 4. THE ASSESSEE HAD MADE INVESTMENTS IN EQUITY SHAR ES OF THE COMPANY BY NAME TT KITCHENWARE LTD. [ TTK FOR SHORT]. THIS COMPANY WAS NOT IN OPERATION FOR SEVERAL YEARS AND HAD NO A SSETS OR LIABILITIES. THIS ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 3 OF 54 COMPANY THEREFORE APPROACHED REGISTRAR OF COMPANIES TAMIL NADU TO HAVE ITS NAME STRUCK OFF THE REGISTRAR OF COMPANIES [ ROC FOR SHORT] AS IT WAS A DEFUNCT COMPANY. TTK HAD MADE THE APPLICATIO N FOR STRIKING OFF ITS NAME FROM THE ROC U/S. 560 OF THE COMPANIES ACT 19 56. BY LETTER DATED 7.4.2004 TTK INFORMED THE ASSESSEE OF ITS PROPOSED ACTION U/S. 560 OF THE COMPANIES ACT 1956 AND ALSO SOUGHT CONSENT OF THE ASSESSEE FOR SUCH AN ACTION AS THE ASSESSEE WAS A MAJOR SHAREHOLDER IN T TK. 5. IT IS NOT IN DISPUTE THAT AS PER THE BALANCE SHE ET OF THE TTK AS ON 29.02.2004 THERE WAS NO UNDERLYING ASSET REPRESENT ING SHARE CAPITAL AND THEREFORE THE VALUE OF THE SHARES HELD BY THE ASSES SEE IN TTK WAS NIL. THE ASSESSEE GAVE ITS CONSENT TO TTK FOR AN APPLICA TION U/S. 560 OF THE COMPANIES ACT 1956. THE ASSESSEE ALSO WROTE OFF T HE VALUE OF INVESTMENTS IN ITS BOOKS OF ACCOUNTS IN THE F.Y. 20 04-05 RELEVANT TO A.Y. 2005-06. BASED ON THE ABOVE THE ASSESSEE CLAIMED THAT IT HAS SUFFERED A LONG TERM CAPITAL LOSS WHICH HAD TO BE ALLOWED IN C OMPUTING TOTAL INCOME OF THE ASSESSEE. 6. THE ASSESSING OFFICER HOWEVER DID NOT AGREE WI TH THE SUBMISSIONS OF THE ASSESSEE. HE WAS OF THE VIEW THAT TO CLAIM LOSS UNDER THE HEAD CAPITAL GAINS THERE HAS TO BE A TRANSFER OF SHAR ES AS CONTEMPLATED U/S. 2(47) OF THE INCOME-TAX ACT 1961 [HEREINAFTER REFE RRED TO AS 'THE ACT']. HE WAS OF THE VIEW THAT THERE WAS NO SUCH TRANSFER BY THE ASSESSEE EITHER BY WAY OF SALE EXCHANGE OR RELINQUISHMENT OR EXTINGUI SHMENT OF RIGHTS IN THE ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 4 OF 54 SHARES. HENCE LONG TERM CAPITAL LOSS CLAIMED BY T HE ASSESSEE WAS NOT ALLOWED BY THE AO. 7. ON APPEAL BY THE ASSESSEE THE CIT(APPEALS) CONF IRMED THE ACTION OF THE AO. THE CIT(A) IN THIS REGARD FOUND THAT TT K HAD MADE AN APPLICATION U/S. 560 OF THE COMPANIES ACT 1956 TO THE ROC CHENNAI ON 25.03.2004 WHICH FELL WITHIN THE PREVIOUS YEAR RELE VANT TO A.Y. 2004-05. THE CIT(A) ALSO FOUND THAT NOTIFICATION STRIKING OF F THE TTK FROM THE ROC WAS PUBLISHED ON 24.03.2007 WHICH FELL WITHIN THE F .Y. RELEVANT TO A.Y. 2007-08. HE HELD THAT THE COMPANY STANDS DISSOLVED BY THE ACT OF THE ROC STRIKING OFF THE COMPANY FROM THE ROC AS A DEFU NCT COMPANY AND ONLY ON DOING SO THE COMPANY IS DISSOLVED. IT IS ONLY THEREAFTER THAT THE ASSESSEE CAN CLAIM CAPITAL LOSS ON THE GROUND THERE WAS AN EXTINGUISHMENT OF THE ASSESSEES RIGHTS IN THE SHARES. HE THEREFO RE HELD THAT FILING OF AN APPLICATION U/S. 560 OF THE COMPANIES ACT 1956 OR THE NOTIFICATION STRIKING OFF THE COMPANYS NAME FROM THE ROC HAPPENED DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2005-06 AND THEREFORE THE ACTION O F THE AO IN REFUSING TO ALLOW THE CLAIM OF THE ASSESSEE WAS JUSTIFIED. AGG RIEVED BY THE ORDER OF THE CIT(A) THE ASSESSEE RAISED GROUND NO.1 BEFORE THE TRIBUNAL. 8. BEFORE US THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE PROVISIONS OF SECTION 560 OF THE COMPANIES ACT 195 6 AND ALSO REITERATED THE SUBMISSIONS AS WERE MADE BEFORE THE REVENUE AUT HORITIES. HE DREW OUR ATTENTION TO THE PROVISIONS OF SECTION 46(2) OF THE ACT. SECTION 46 ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 5 OF 54 PROVIDES FOR CAPITAL GAINS ON DISTRIBUTION OF ASSET S BY COMPANIES IN LIQUIDATION. SECTION 46(1) DEALS WITH CASES WHERE THERE IS A DISTRIBUTION OF ASSETS ON COMPANYS LIQUIDATION AND LAYS DOWN THAT SUCH DISTRIBUTION SHALL NOT BE REGARDED AS A TRANSFER BY THE COMPANY FOR TH E PURPOSE OF SECTION 45 OF THE ACT. SECTION 46(2) LAYS DOWN THE POSITION W ITH REGARD TO CAPITAL GAINS ON DISTRIBUTION OF ASSETS BY A COMPANY IN LIQUIDATI ON IN THE HANDS OF A SHAREHOLDER AS FOLLOWS:- 46 (2) WHERE A SHAREHOLDER ON THE LIQUIDATION OF A COMPANY RECEIVES ANY MONEY OR OTHER ASSETS FROM THE COMPANY HE SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD 'CAPITAL GA INS' IN RESPECT OF THE MONEY SO RECEIVED OR THE MARKET VALU E OF THE OTHER ASSETS ON THE DATE OF DISTRIBUTION AS REDUCED BY T HE AMOUNT ASSESSED AS DIVIDEND WITHIN THE MEANING OF SUB-CLAU SE ( C ) OF CLAUSE ( 22 ) OF SECTION 2 AND THE SUM SO ARRIVED AT SHALL BE D EEMED TO BE THE FULL VALUE OF THE CONSIDERATION FOR THE P URPOSES OF SECTION 48. ACCORDING TO THE LD. COUNSEL FOR THE ASSESSEE THE ABOVE PROVISIONS CLEARLY CONTEMPLATE A SITUATION WHERE CAPITAL LOSS CAN BE A LLOWED AS A DEDUCTION ON LIQUIDATION OF A COMPANY. 9. THE LD. DR ON THE OTHER HAND RELIED UPON THE O RDER OF THE CIT(APPEALS). 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. U/S. 560(5) OF THE COMPANIES ACT 1956 THE FINAL PROCEDURE FOR STRIKI NG A COMPANYS NAME OFF THE REGISTRAR IS TO PUBLISH A NOTICE THEREOF IN THE OFFICIAL GAZETTE AND ON PUBLICATION IN THE OFFICIAL GAZETTE OF NOTICE REFER RED TO IN SECTION 560(3) OF ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 6 OF 54 THE COMPANIES ACT 1956 THE COMPANY SHALL STAND DI SSOLVED. IT IS ONLY ON SUCH PUBLICATION THAT THE ASSESSEES RIGHT IN THE S HARES GET EXTINGUISHED AND PRIOR TO THAT POINT OF TIME IT CANNOT BE SAID THAT THERE WAS ANY TRANSFER TO INVOKE PROVISIONS OF SECTION 45 OF THE I.T. ACT 1961. IN OUR VIEW REFERENCE TO PROVISIONS OF SECTION 46(2) OF THE ACT ARE NOT APPROPRIATE AS THOSE PROVISIONS CONTEMPLATE A SITUATION OF RECEIPT OF MONEY OR OTHER ASSETS IN THE PROCESS OF LIQUIDATION OF A COMPANY. ADMITTEDLY THERE WAS NO RECEIPT OF MONEY OR OTHER ASSETS ON LIQUIDATION BY THE ASSESSEE AND THEREFORE PROVISIONS OF SECTION 46(2) OF THE ACT WE RE NOT APPLICABLE. WE ARE THEREFORE OF THE VIEW THAT THE REVENUE AUTHORITIES WERE JUSTIFIED IN REJECTING THE CLAIM OF THE ASSESSEE UNDER THE HEAD LONG TERM CAPITAL LOSS. 11. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FOL LOWS:- 2. THE CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE OF REFURBISHING / WARRANTY CLAIMS FAILING TO NOTE THAT THE TRANSACTION WAS GENUINE; MONIES HAD BEEN REMITTED DURING THE YE AR ENDING 31/03/2006; THE TRANSFER PRICING REGULATIONS WOULD NOT APPLY; NO TDS WAS REQUIRED TO BE MADE IN AS MUCH AS THE INCOM E ACCRUED/ AROSE OUTSIDE INDIA TO M/S MANTTRA INC; THAT THE LI ABILITY WAS FOR THE YEAR ENDING 31/03/2005; AND THAT CIT(A) FOR THE AY 2006-07 HAD ALLOWED THE LIABILITY IN IDENTICAL CIRCUMSTANCE S. 12. AS WE HAVE ALREADY SEEN THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING AND MARKETING OF PRESSURE COOKERS. T HE ASSESSEE CLAIMED AS A DEDUCTION A SUM OF RS.2 61 20 735 TOWARDS REFU RBISHING/WARRANTY. ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 7 OF 54 THE FACTS WITH REGARD TO THE AFORESAID CLAIM MADE B Y THE ASSESSEE ARE AS FOLLOWS. 13. THE ASSESSEE WAS EXPORTING PRESSURE COOKERS TO USA. THERE WAS A COMPANY BY NAME MANTTRA INC.[ MI ] A COMPANY INCORPORATED IN USA. MI WAS A SUBSIDIARY OF THE ASSESSEE IN USA AND WAS ACT ING AS A DISTRIBUTOR FOR THE ASSESSEES PRESSURE COOKERS EXPORTED TO USA. T HERE WAS AN AGREEMENT BETWEEN THE ASSESSEE AND MI DATED 30.06.1 998. THE AGREEMENT REFERS TO THE FACT THAT THE ASSESSEE IS I N THE BUSINESS OF MANUFACTURE OF PRESSURE COOKERS. MI IS DESCRIBED A S AN IMPORTER OF THE PRESSURE COOKERS MANUFACTURED BY THE ASSESSEE AND D ESIROUS OF RESELLING THE PRESSURE COOKERS IN US. ARTICLE 3 OF THE SAID A GREEMENT READS AS FOLLOWS:- ARTICLE THREE SALE & TITLE 3.1 THE PRODUCTS AS MAY BE AGREED UPON FROM TIME TO TIME WILL BE SOLD BY THE MANUFACTURER TO THE IMPORTER AT SUCH PRICES AS DETERMINED IN ACCORDANCE WITH THE TRANSFER PRICE FO RMULA DESCRIBED IN THE AGREEMENT ELSEWHERE. 3.2 ALL PRODUCTS SOLD BY MANUFACTURER TO IMPORTER SHALL BE SOLD ON CI + FREIGHT ON ACTUAL BASIS UNLESS OTHERWI SE AGREED. THE PORT OF DELIVERY WILL BE SPECIFIED BY THE IMPORTER. 3.3 TITLE TO PRODUCTS SHALL TRANSFER TO IMPORTER U PON THE CLEARANCE OF THE CONSIGNMENT BY THE IMPORTER AT THE PORT OF DESTINATION UNLESS OTHERWISE AGREED. IT IS AGREED T HAT MANUFACTURER SHALL BE OBLIGED TO REPLACE OR GIVE IM PORTER CREDIT FOR ANY PRODUCTS FOUND TO BE DEFECTIVE OR UNACCEPTA BLE TO THE IMPORTER/STATUTORY AUTHORITIES OR RETURNED BY THE I MPORTER TO THE ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 8 OF 54 MANUFACTURER OR AS MAY EXPRESSLY BE AGREED BETWEEN THE PARTIES ON CASE TO CASE BASIS IN THE INTEREST OF SERVICING THE TERRITORY AND THE CUSTOMERS THEREOF SATISFACTORILY. 14. ARTICLES 6.4 & 6.5 OF THE AGREEMENT WHICH IS AL SO RELEVANT FOR THE PRESENT CASE READS AS FOLLOWS:- 6.4 THE IMPORTER SHALL DEAL WITH THE PRODUCTS ON ITS OWN ACCOUNT FOR SALE IN THE TERRITORIES AND SHALL BE SO LELY RESPONSIBLE FOR REALISATION OF THE SALES MADE BY THE IMPORTER. THE IMPORTER ON ITS OWN ACCOUNT ENGAGE MANUFACTURERS REPRESENTATIV ES OR OTHER AGENCIES FOR EFFECTIVE PROMOTION AND SALE OF THE PR ODUCTS. 6.5 THE IMPORTER ON ITS OWN ACCOUNT MAY EMPLOY SUC H STAFF AS MAY BE REQUIRED AND SUCH ENGAGEMENTS AND OBLIGATION S & LIABILITIES THEREOF WILL BE THE SOLE RESPONSIBILITY OF THE IMPORTER. 15. ARTICLE 9.1 OF THE AGREEMENT READS THUS:- 9.1 MANUFACTURER WARRANTS AND REPRESENTS TO IMPORT ER THAT ALL PRODUCTS PURCHASED BY IMPORTER SHALL BE FREE AND CL EAR OF ALL LIENS CHARGES SECURITY INTERESTS OR SIMILAR RIGH TS OF THIRD PARTIES. MANUFACTURER HEREBY DISCLAIMS ANY AND ALL WARRANTIE S EXPRESS OR IMPLIED INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MARKETABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 16. ACCORDING TO THE ASSESSEE CLAUSE 3.3 OF THE AG REEMENT PROVIDES THAT THE ASSESSEE AS A MANUFACTURER WAS OBLIGED TO REPLACE OR GIVE IMPORTER CREDIT FOR ANY PRODUCTS FOUND TO BE DEFECT IVE OR UNACCEPTABLE TO THE IMPORTER. IT WAS SUBMITTED THAT THERE WAS A WA RRANTY OBLIGATION WHICH THE ASSESSEE HAD TO DISCHARGE IN THE MATTER OF SALE OF PRESSURE COOKERS TO ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 9 OF 54 MI. THE ASSESSEE BASED ITS CLAIM FOR DEDUCTION ON THE BASIS OF LETTER DATED 22.03.2005 OF MI WHICH IS A DEBIT NOTE ISSUED ON T HE ASSESSEE. THE DEBIT NOTE REFERS TO THE EXPENSES STATEMENT RECEIVED FROM MIS WAREHOUSING AGENTS M/S. VEERAVALLI INTERNATIONAL INC. [ VII FOR SHORT] TOWARDS REFURBISHING/RECONDITIONING EXPENSES INCURRED ON RE TURNED COOKERS. A COPY OF LETTER OF VII DATED 31.03.2005 AND 16.04.2004 ARE ENCLOSED WITH T HIS LETTER WHICH IS DATED 22.03.2005. THE ASSESSEE MAD E PAYMENTS TO MI OF 5 96 500 US $ ON 25.11.2005 WHICH IS EQUIVALENT TO RS.2 61 20 735. 17. THE CLAIM OF THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS THAT ON RECEIPT OF LETTER DATED 22.03.2005 A LIABILITY ON ACCOUNT OF WARRANTY CLAIMS HAD ARISEN TO THE ASSESSEE AND HAD TO BE ALLOWED AS A DEDUCTION. 18. THE AFORESAID CLAIM OF THE ASSESSEE WAS EXAMINE D BY THE AO AND HE REJECTED THE CLAIM OF THE ASSESSEE FOR THE FOLLO WING REASONS:- (A) THE ASSESSEE DID NOT FURNISH THE NAME AND ADDRE SS OF THE CLIENTS WHO MADE THE CLAIMS ON ACCOUNT OF WARRANTY LIABILIT Y. (B) THERE WAS NO EVIDENCE PRODUCED WITH REGARD TO THE ACTUAL CLAIM MADE AND ITS ACCEPTANCE BY MI. (C) EVEN ASSUMING THE CLAIM OF THE ASSESSEE HAS TO BE ALLOWED THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE WHILE MAKING THE PAYMENTS TO MI WHICH WAS A NON-RESIDENT U/S. 195(1) OF THE ACT AND ON THE GROUND OF NON-DEDUCTION OF TAX AT SOURCE THE CLAIM FOR DEDUCTION ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 10 OF 54 CANNOT BE ALLOWED; NO APPLICATION U/S. 195(2) WAS M ADE BY THE ASSESSEE FOR NON-DEDUCTION OF TAX AT SOURCE. (D) THERE WAS AN ABSOLUTE SALE OF THE COOKERS BY T HE ASSESSEE TO MI. MI WAS SELLING THE COOKERS ON ITS OWN ACCOUNT TO TH E CUSTOMERS IN USA AND THEREFORE IF AT ALL THERE WAS A WARRANTY CL AIM THAT SHOULD BE BORNE BY THE MI AND NOT BY THE ASSESSEE. FOR ALL THE ABOVE REASONS THE AO REJECTED THE CLA IM FOR DEDUCTION ON ACCOUNT OF REFURBISHING/WARRANTY. 19. THE ASSESSEE REITERATED ITS SUBMISSIONS BEFORE THE CIT(APPEALS) THAT THE CLAIM OF THE ASSESSEE SHOULD BE ALLOWED BY PLACING RELIANCE ON CLAUSE 3.3 OF THE AGREEMENT WITH MI. THE ASSESSEE ALSO REITERATED ITS STAND THAT THE LIABILITY OF THE ASSESSEE ACCRUES ON RECEIPT OF LETTER DATED 22.03.2005 FROM MI NOTWITHSTANDING THE FACT THAT T HE WARRANTY CLAIM RELATED TO A PERIOD NOT FALLING WITHIN THE PREVIOUS YEAR RE LEVANT TO A.Y. 2005-06. WITH REGARD TO THE APPLICATION U/S. 195(1) OF THE A CT IT WAS SUBMITTED THAT THE AMOUNT IN QUESTION WAS REIMBURSEMENT OF EXPENSE S INCURRED FOR WHICH THE PROVISIONS OF SECTION 195(1) OF THE ACT ARE NOT APPLICABLE. THE ASSESSEE RELIED ON JUDICIAL PRONOUNCEMENTS IN SUPPO RT OF ITS CLAIM THAT THE PROVISION MADE FOR WARRANTY EXPENDITURE IS ALLOWABL E AS BUSINESS EXPENDITURE. THE PRINCIPAL RELIANCE OF THE ASSESSE E WAS ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA LTD. ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 11 OF 54 314 ITR 62 (SC) . THE ASSESSEE ALSO SUBMITTED THAT THERE WAS NO INCOME RECEIVED EITHER BY MI OR VII WHICH IS CHARGEABLE TO TAX IN INDIA AND THEREFORE PROVISIONS OF SECTION 195 OF THE ACT ARE NOT ATTRACTED. 20. THE ABOVE ARGUMENTS OF THE ASSESSEE WERE DEALT WITH BY THE CIT(APPEALS) IN HIS ELABORATE ORDER AND ULTIMATELY REJECTED. THE FINDINGS AND CONCLUSIONS OF THE CIT(A) MAY BE SUMMED UP AS F OLLOWS:- (I) THE AGREEMENT BETWEEN THE ASSESSEE AND MI WAS DATED 30.6.1998. THE ASSESSEE CLAIMED THE EXPENSE OF RS.2 61 20 735/- BY DEBITING THE PROFIT AND LOSS AC COUNT IN SCHEDULE 15 OF PROFIT AND LOSS A/C FOR ASSESSMENT Y EAR UNDER THE HEAD REFURBISHING/WARRANTY CLAIMS OF SUBSIDIARY CO MPANY. EVEN THOUGH THE AGREEMENT WAS ENTERED ON 30.6.199 8 IN NONE OF THE ASSESSMENT YEARS THE EXPENSES ON ACCOUNT OF REFURBISHING OR WARRANTY WERE CLAIMED BY THE APPELLANT IN ITS P ROFIT AND LOSS ACCOUNT EVEN THOUGH THE PRODUCTS WERE SOLD IN EACH OF THE ASSESSMENT YEARS AFTER THE AGREEMENT WAS ENTERED TO MI WHICH IS EVIDENT FROM THE PARTICULARS TABULATED BELOW IN RESPECT OF ASSESSMENT YEAR 2001- 02 TO ASSESSMENT YEAR 2005-06 . --------------------------------------------------- ----------------------------- SNO. ASST EXPORT OF COOKWARE EXPENSES CLA IMED ON YEAR PRODUCTS (RS.IN LACS) ON REFURBISHING WAR RANTY --------------------------------------------------- ------------------------------ 1 2001-02 1112 0 2 2002-03 810 0 3 2003-04 1942 0 4 2004-05 1691 0 5 2005-07 2558 2 61 20 735 --------------------------------------------------- ---------------------------- NO CLAIM FOR DEDUCTION ON ACCOUNT OF SUCH LIABILITY WAS MADE IN ANY OF THE EARLIER A.Y.S. (II) 100% SHARE OF MI WERE HELD BY THE ASSESSEE. ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 12 OF 54 (III) THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTS. THE CLAIM MADE BY THE ASSESSEE WAS AS A PROVISION FOR WARRANTY CLAIMS WHICH IS NOT ON THE BASIS OF ACCRUA L OF LIABILITY. ACCORDINGLY TO THE ABOVE PARAGRAPH OF THE AGREEMEN T THE APPELLANT HAS THE FOLLOWING OBLIGATIONS :- I) REPLACEMENT OF THE PRODUCT FOUND TO BE DEFECTIV E OR UNACCEPTABLE BY MANTTRA INC OR STATUTORY AUTHORITIE S. II) REPLACEMENT OF THE PRODUCTS RETURNED BY THE US STATE III) ALTERNATIVELY GIVE CREDIT FOR THE PRODUCT RET URNED ON ABOVE ACCOUNTS. (IV) UNDER CLAUSE 3.3 OF THE AGREEMENT BETWEEN THE ASSESSEE AND MI REPLACEMENT OR CREDIT TO MI IS SUBJECT TO T HE RETURN OF SUCH STOCK TO THE MANUFACTURER (ASSESSEE). NO EVIDE NCE HAS BEEN PRODUCED BY THE ASSESSEE EITHER DURING THE ASSESSME NT PROCEEDINGS OR AT THE APPELLATE STAGE TO PROVE THAT ANY SUCH CLAIM ACCORDING TO THE AGREEMENT WAS EVER MADE BY MI. (V) AS PER CLAUSE 6.4 OF THE AGREEMENT THE IM PORTER (M/S. MANTRA INC.) SHALL DEAL WITH THE PRODUCTS ON ITS OW N ACCOUNT WHICH MAKES IT CLEAR THAT EXPENSES REQUIRED TO BE I NCURRED IN CONNECTION OF REFURBISHING OR THE WARRANTY TO BE IN CURRED BY M/S. MANTRA INC. (VI) UNDER CLAUSE 9.1 OF THE AGREEMENT EXPENSES IN RESPECT OF THE WARRANTY WAS TO BE INCURRED BY MI WHICH READS THUS: MANUFACTURER WARRANTS AND REPRESENTS TO IMPORTER THAT ALL PRODUCTS PURCHASED BY IMPORTER SHALL BE FREE AND CLEAR OF ALL LIENS CHARGES SECURITY INTERESTS OR SIMILAR RIGHTS OF THIRD PART IES. MANUFACTURER HEREBY DISCLAIMS ANY AND ALL WARRANTIES EXPRESS OR IMPLIED INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MARKETABILITY OR FITNESS FOR A PARTICULAR PURPOSE. (VII) THE FOLLOWING FURTHER FACTS ACCORDING TO CIT( A) ESTABLISHES THAT THE CLAIM BY THE ASSESSEE WAS NOT GENUINE: A) DEBIT NOTE OF MANTRA INC IS DATED 22.3.2005 WHEREAS THE STATEMENT ISSUED BY M/S. VEERAVALLI ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 13 OF 54 INTERNATIONAL INC DATED 31.3.2005 IS ENCLOSED WITH THE DEBIT NOTE DATED 22.3.2005 WHICH IS NOT POSSIBLE. B) THE STATEMENT OF VEERAVALLI INTERNATIONAL INC FO R US$ 2 68 033.95 IS DATED 16.4.2004 AND IT IS STATED IN THE STATEMENT THAT WE HAVE INCURRED THE EXPENSES ON AC COUNT OF REFURBISHING FOR THE PERIOD APRIL 2003 TO MARCH 2004. THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND IF THE GENUINE EXPENSES HAVE BEEN IN CURRED AS CLAIMED THROUGH THE STATEMENT THE ASSESSEE SHOUL D HAVE CLAIMED THE EXPENSES EQUIVALENT TO US$ 2 68 033.95 IN ASSESSMENT YEAR 2004-05. IT IS UNBELIEVABLE THAT I F THE ASSESSEE WAS HAVING AN OBLIGATION TO INCUR SUCH EXPENDITURE WHY NO PROVISION WAS MADE IN THE PROFIT & LOSS ACCOUNT FOR FINANCIAL YEAR 2003-04 RELEVANT TO ASSESSMENT YEAR 2004-05. C) THE EXPENSES IN THE TWO STATEMENTS ARE IN THE N ATURE OF FREIGHT CHARGES ON THE RETURNED COOKERS TRAVELLING EXPENSES INCURRED ON ATTENDING WARRANTY COOKERS INSPECTION CHARGES PAID TO VARIOUS BUYERS OF PRESSU RE COOKERS PACKING MATERIAL USED FOR RETRIEVING RETUR NED COOKERS TO MAKE THEM SALEABLE AGAIN THE LABOUR COS T ON INTERNAL SHIFTING OF THE RETURNED MERCHANDISE THE TELEPHONE CHARGES INCURRED ON CALLING BACK CUSTOMER S OF WARRANTY & USER TIPS ENQUIRIES WAREHOUSING RENT PA ID ON STORAGE OF RETURNED COOKER SENT BY VARIOUS BUYERS U NDER WARRANTY CLAIM POSTAGE CHARGES INCURRED ON SENDING BACK THE REPLACEMENT PARTS OF COOKERS UNDER WARRANTY AM OUNT SPENT ON REFILLING PROPANE FOR THE FORKLIFT USED F OR MOVEMENT OF RETURNED COOKERS AMOUNT TO CLEAN THE T RASH GENERATED OUT OF THE RETURNED COOKERS APARTMENT RE NT PAID FOR THE WORKMEN VISITED FROM INDIA TO REFURBISH THE RETURNED GOODS COST OF PALLETS PURCHASED FOR STACK ING THE RETURNED MERCHANDISE UPS CHARGES INCURRED ON SENDI NG BACK THE REPAIRED COOKERS TO CUSTOMERS AND LABOUR C OST INCURRED ON HIRING PEOPLE TO SEGREGATE STACK REFU RBISH AND CLEAN UP RETURNED MERCHANDISE. THE EXPENSES MENTION ED IN THE STATEMENTS ARE IN THE NATURE OF THE WARRANTY OR ATTENDING THE WARRANTY CLAIMS WHICH HAVE TO BE INCU RRED BY MANTRA INC AS PER PARA 9.1 OF THE AGREEMENT THE MANTRA INC IS ALSO REQUIRED TO HAVE ADEQUATE FACILI TIES FOR ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 14 OF 54 WAREHOUSING THE PRODUCTS AS PER PARAGRAPH 2.1 OF TH E AGREEMENT. THUS THE EXPENSES CONNECTED TO THE WAREHOUSING ARE ALSO TO BE INCURRED BY M/S. MANTRA INC AND NOT BY THE ASSESSEE. D) IF THE EXPENSES WERE GENUINE THERE WAS NO NEED TO HIDE THESE TRANSACTIONS IN 3 CEB REPORT FILED AS PE R RULE 10E OF THE INCOME TAX RULES IN WHICH IN COLUMN NO.1 2 THE ASSESSEE WAS REQUIRED TO FURNISH PARTICULARS IN RESPECT OF MUTUAL AGREEMENT OR ARRANGEMENT ENTERED THE PARTICULARS REQUIRED AS PER THE COLUMN ARE HAS THE ASSESSEE ENTERED INTO ANY INTERNATIONAL TRANSACTION S WITH AN ASSOCIATE ENTERPRISE BY WAY OF MUTUAL AGREEMENT OR ARRANGEMENT FOR ALLOCATION OR APPORTIONMENT OF OR ANY CONTRIBUTION TO ANY COST OR EXPENSES INCURRED OR T O BE INCURRED IN CONNECTION WITH A BENEFIT SERVICE OR F ACILITY PROVIDED OR TO BE PROVIDED TO ANYONE OR MORE OF SUC H ENTERPRISES. (VIII) THE ASSESSEE HAD RELIED ON THE ORDER OF CIT (A) III BANGALORE WHILE DISPOSING THE APPEAL FOR THE ASSESS MENT YEAR 2006-07 WHICH WAS EARLIER IN POINT OF TIME TO THE I MPUGNED ORDER OF CIT(A) WHEREIN HE HAD ALLOWED THE CLAIM OF THE A SSESSEE FOR EXCHANGE LOSS ON ACTUAL PAYMENT OF THE ABOVE EXPENS ES CLAIMED. ACCORDING TO CIT(A) THE CIT(A) WHILE DECIDING THE APPEAL OF THE ASSESSEE FOR AY 05-06 DID NOT HAVE ANY OCCASIO N TO EXAMINE THE GENUINENESS OF THE EXPENSES AS THE SAME WAS THE SUBJECT MATTER OF THE ASSESSMENT PROCEEDINGS FOR ASSESSMENT YEAR 2005- 06. EVEN OTHERWISE THE DECISION WAS NOT BINDING ON THE CIT(A) WHILE DECIDING APPEAL FOR ANOTHER A.Y. 21. BEFORE US THE LD. COUNSEL FOR THE ASSESSEE REI TERATED THE SUBMISSIONS AS WERE MADE BEFORE THE CIT(APPEALS). ON THE QUESTION AS TO WHY IN THE TP ANALYSIS THE ASSESSEE DID NOT DISCLOS E THE TRANSACTION OF REIMBURSEMENT OF REFURBISHING/WARRANTY THE LD. COU NSEL FOR THE ASSESSEE SUBMITTED THAT THE PAYMENT WAS MADE TO VII WHICH WAS NOT AN ASSOCIATED ENTERPRISE [AE] AND THEREFORE NOT DISCLOSED IN THE TP STUDY. ON THIS ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 15 OF 54 ASPECT WE MAY MENTION THAT IN THE BANK STATEMENT R EGARDING PAYMENT OF REFURBISHING CLAIM IT IS CLEARLY MENTIONED THAT PA YMENT IS MADE TO MI AND NOT TO VII THE SAME IS AT PAGE 22 OF THE ASSESSEES PAPERBOOK WHICH IS A BANK STATEMENT OF CANARA BANK BANGALORE IN THE NAM E OF THE ASSESSEE. 22. THE LD. DR APART FROM RELYING ON THE ORDER OF THE CIT(APPEALS) SUBMITTED THAT THOUGH THE AGREEMENT WITH MI WAS IN THE YEAR 1998 IT IS FOR THE FIRST TIME IN THE A.Y. 2005-06 THAT THE CLAIM O N ACCOUNT OF WARRANTY EXPENSES WAS MADE BY THE ASSESSEE. THE OTHER FINDI NGS OF THE CIT(APPEALS) WERE REITERATED BEFORE US. 23. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE FOLLOWING POINTS ARISE FOR CONSIDERATION ON GR.NO.2 RAISED BY THE AS SESSEE. (A) WAS THERE AN OBLIGATION ON THE PART OF THE ASSE SSEE TO REIMBURSE THE COST OF REFURBISHING THE PRODUCTS SOLD BY MANTR RA INC.? (B) IF THE ANSWER TO THE ABOVE POINT IS IN THE AFFI RMATIVE THEN WAS THE PAYMENT BY THE ASSESSEE TO MANTRRA INC. GENUINE AND FOR THE PURPOSE OF REFURBISHING WARRANTY CLAIMS? (C) IF THE ANSWER TO POINT (B) IS IN THE AFFIRMATIV E THEN DID THE LIABILITY TO THE ASSESSEE CRYSTALIZE DURING THE PREVIOUS YEAR RELEVANT TO AY 05-06? (D) IF THE ANSWER TO POINT ( C ) IS IN THE AFFIRMAT IVE THEN WHETHER THE PAYMENT BY THE ASSESSEE TO MANTRAA INC. A NON-RESID ENT CANNOT BE ALLOWED AS DEDUCTION IN VIEW OF THE PROVISIONS OF S EC.40(A)(I) OF THE ACT WHICH PROVIDES THAT ANY SUM WHICH IS CHARGEABLE TO TAX PAID OUTSIDE INDIA ON WHICH TAX WAS REQUIRED TO BE DEDUC TED AT SOURCE WHEN MAKING PAYMENT AS REQUIRED UNDER CHAPTER-XVIIB OF THE ACT AND TAX HAS NOT BEEN SO DEDUCTED SHALL NOT BE ALLOW ED AS A DEDUCTION WHILE COMPUTING INCOME? ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 16 OF 54 24. AS FAR AS POINT (A) ABOVE IS CONCERNED THE FAC TS ARE NOT CLEARLY NARRATED IN THE AOS ORDER. THE AO HAS MENTIONED I N PARA 8.6 OF HIS ORDER THAT THE LIABILITY ON ACCOUNT OF WARRANTY IN RESPEC T OF DEFECTIVE COOKERS SOLD IN USA IS THAT OF MI AND NOT THAT OF THE ASSESSEE. THE CIT(A) HAS HOWEVER ANALYSED THE TERMS OF THE AGREEMENT BETWEEN MI AND THE ASSESSEE WHEREBY THE MI AGREED TO ACT AS DISTRIBUTOR FOR CO OKERS MANUFACTURED IN INDIA AND EXPORTER TO US. THE TERMS OF THE SAID AG REEMENT WHICH IS DATED 30.6.1998 IS AT PAGES 12 TO 24 OF THE ASSESSEES PA PER BOOK. THE RECITALS IN THE AGREEMENT SAY THAT THE ASSESSEE IS MANUFACTU RER OF PRESSURE COOKERS AND HAS ESTABLISHED A REPUTATION FOR ITS PR ODUCT AND BRAND IN INDIA AND ABROAD. MI WISHES TO PURCHASE FROM THE ASSESSE E PRESSURE COOKER AND COOKWARE PRODUCTS FOR RE-SALE IN THE TERRITORY OF USA CANADA MEXICO AND COUNTRIES IN SOUTH AND CENTRAL AMERICA. THE AS SESSEE AGREES TO SELL THE PRODUCTS TO MI FOR RESALE IN THE SAID TERRITORI ES. THEREAFTER THE TERMS OF THE AGREEMENT WHICH ARE 15 ARTICLES IN NUMBER ARE S ET OUT. WE WILL REFER TO ONLY THE RELEVANT CLAUSES OF THE AGREEMENT THAT MAY BE NECESSARY AND RELEVANT FOR DECIDING THE PRESENT APPEAL. ARTICLE 3 OF THE AGREEMENT LAYS DOWN CONDITIONS WITH REGARD TO SALE & TITLE. ART ICLE 3.3 OF THE AGREEMENT WHICH WE HAVE SET OUT IN THE EARLIER PART OF THIS O RDER PROVIDES THAT TITLE TO THE PRODUCTS SOLD WILL PASS TO MI UPON CLEARANCE OF THE CONSIGNMENT BY MIU AT THE PORT OF DESTINATION. THE ASSESSEE WAS H OWEVER OBLIGED TO REPLACE OR GIVE MI CREDIT FOR ANY PRODUCTS FOUND TO BE DEFECTIVE OR UNACCEPTABLE TO MI/STATUTORY AUTHORITIES OR RETURNE D BY US TRADE PROVIDED ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 17 OF 54 THE STOCKS ARE RETURNED BY THE IMPORTER TO THE ASSE SSEE. ARTICLE 6 OF THE AGREEMENT LAYS DOWN THE TERMS OF THE AGREEMENT WITH REGARD TO DUTIES AND OBLIGATIONS OF IMPORTER I.E. MI. ARTICLE 6.4 PROVIDES THAT MI SHALL DEAL WITH THE PRODUCTS ON ITS OWN ACCOUNT FOR SALE IN TH E TERRITORIES AND SHALL BE SOLELY RESPONSIBLE FOR REALISATION OF THE SALES MAD E BY MI. CLAUSE 7 OF THE AGREEMENT LAYS DOWN THE TERMS OF THE AGREEMENT WITH REGARD TO INDEMNIFICATION & PRODUCT LIABILITY INSURANCE. A RTICLE 7.1 LAYS DOWN THAT THE ASSESSEE HAS TO PROCURE PRODUCT LIABILITY INSUR ANCE WITH RESPECT TO THE PRODUCTS FOR A MAXIMUM AMOUNT OF US $ 15 00 000 SO AS TO INDEMNIFY DEFEND AND HOLD HARMLESS MI FROM ANY AND ALL CLAIMS LIABILITIES DAMAGES EXPENSES (INCLUDING REASONABLE ATTORNEYS FEES AND LITIGATION COSTS) OR COSTS ARISING OUT OF ANY DEFECTS IN THE PRODUCTS. ARTICLE 9 OF THE AGREEMENT LAYS DOWN THE AGREEMENT WITH REGARD TO WARRANTIES AND THE ASSESSEE GUARANTEES ONLY TITLE OF THE ASSESSEE TO THE PRODUC TS SOLD BUT DISOWNS ASSESSEES LIABILITY ON ACCOUNT ANY OTHER WARRANTY EXPRESS OR IMPLIED AND IN PARTICULAR IMPLIED WARRANTY OF MARKETABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 25. IT IS CLEAR FROM THE TERMS OF THE AGREEMENT THA T THERE IS ABSOLUTE SALE BY THE ASSESSEE TO MI. THE ONLY OBLIGATION OF THE ASSESSEE IS IN RESPECT OF THE PRODUCTS SOLD TO MI IS TO REPLACE OR GIVE MI CR EDIT FOR ANY PRODUCTS FOUND TO BE DEFECTIVE OR UNACCEPTABLE TO MI / STATUTORY A UTHORITIES OR RETURNED BY US TRADE PROVIDED THE STOCKS ARE RETURNED BY MI TO THE ASSESSEE (ARTICLE 3.3 OF THE AGREEMENT). THE ASSESSEE HAS NO LIABILI TY VIS--VIS THE ULTIMATE ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 18 OF 54 PURCHASER OF THE PRODUCTS IN THE TERRITORIES IN WHI CH THE SAME ARE SOLD BY MI AND THAT HAS TO BE LOOKED AFTER ONLY BY MI. IN THI S REGARD MI HAS PROTECTION IN THE FORM OF A PRODUCT LIABILITY INSURANCE PROCU RED BY THE ASSESSEE WITH RESPECT TO THE PRODUCTS FOR A MAXIMUM AMOUNT OF US $ 15 00 000 SO AS TO INDEMNIFY DEFEND AND HOLD HARMLESS MI FROM ANY AND ALL CLAIMS LIABILITIES DAMAGES EXPENSES (INCLUDING REASONABLE ATTORNEYS FEES AND LITIGATION COSTS) OR COSTS ARISING OUT OF ANY DEFECTS IN THE PRODUCTS. 26. NOW LET US EXAMINE THE CLAIM OF THE ASSESSEE AS MADE BEFORE THE AO. IN RESPONSE TO THE QUERY OF THE AO ON WHETHER AND HOW THE CLAIM FOR DEDUCTION ON ACCOUNT OF REFURBISHING WARRANTY CLAIM CAN BE ALLOWED THE ASSESSEE BY HIS LETTER DATED 22.11.2005 HAS INFORME D THE AO AS FOLLOWS: AS EXPLAINED DURING THE DISCUSSIONS OUR SUBSIDI ARY HAD TO INCUR EXPENDITURE UNDER VARIOUS HEADS FOR REFURBISH ING AND RECONDITIONING STOCKS RETURNED BY CUSTOMERS (TO OUR SUBSIDIARY). THIS HAS HELPED OUR SUBSIDIARY TO BRING BACK THE ST OCKS INTO SALEABLE CONDITION. THESE EXPENSES ARE IN THE NATURE OF WAR RANTY CLAIMS IN TERMS OF THE AGREEMENT ENTERED INTO BETWEEN MANTTRA INC. AND TTK PRESTIGE LIMITED. TTK PRESTIGE LTD. BEING MANUFACT URE SHALL BEAR ALL THE COST RELATED TO THE REFURBISHING/RECTIFICATION .. 27. THE ASSESSEE HAS ALSO FILED DEBIT NOTES RAISED BY MI ON IT. THE DEBIT NOTE (COPY AT PAGE-20 OF THE ASSESSEES PAPER BOOK) REFERS TO TWO REFURBISHING STATEMENT DATED 16.4.2004 AND 31.3.200 5 RAISED BY VEERAVALLI INTERNATIONAL INC. USA TO WHOM MI HAD EN TRUSTED THE WORK OF ATTENDING TO DEFECTS IN THE COOKERS SOLD BY MI IN U SA. IT IS CURIOUS TO NOTE THAT THE DEBIT NOTE IS DATED 22.3.2005 BUT REFERS T O A REFURBISHING STATEMENT ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 19 OF 54 DATED 31.3.2005. PERUSAL OF THE REFURBISHING STATE MENT AT PAGE 21 DATED 31.3.2005 AND AT PAGE 24 DATED 16.4.2004 SHOWS IT R EFERS TO SEVERAL HEADS OF EXPENSES BUT NONE OF THE HEAD OF EXPENSE IS VAL UE OF THE COOKER RETURNED BY CUSTOMER. BESIDES THE ABOVE IT INCLUD ES EXPENSES ON RETRIEVING RETURNED COOKERS TO MAKE THEM FIT FOR SA LE AGAIN RENT FOR STORING RETURNED COOKERS COSTS OF SHIFTING THE RETURNED CO OKERS TRAVELLING EXPENSES APARTMENT RENT PAID FOR WORKMEN WHO VISIT ED FROM INDIA TO REFURBISH THE RETURNED COOKERS. IT IS CLEAR FROM T HESE BILLS THAT NONE OF THE ABOVE EXPENDITURE CAN BE ATTRIBUTED TO THE ASSESSEE AS PER ANY ARTICLE IN THE AGREEMENT BETWEEN ASSESSEE AND MI. THESE EXPEN SES ARE CLEARLY THAT OF MI FOR WHICH THE ASSESSEE HAS PROCURED A PR ODUCT LIABILITY INSURANCE COVER AT ITS COST IN FAVOUR OF MI. AS WE HAVE ALREADY SEEN AND AS RIGHTLY HELD BY THE REVENUE AUTHORITIES THE ONLY OBLIGATION OF THE ASSESSEE WAS WHEN COOKERS WHICH ARE FOUND TO BE DEF ECTIVE AND UNACCEPTABLE AND HENCE RETURNED TO THE ASSESSEE TO GIVE CREDIT OR REPLACE THE DEFECTIVE COOKERS. THIS IS THE ONLY LEGAL LIAB ILITY OF THE ASSESSEE AS PER THE TERMS OF THE AGREEMENT. THE CLAIM MADE BY THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF REFURBISHING WARRANTY IS TH EREFORE HELD TO BE NOT SUSTAINABLE AS IT IS NOT THE LIABILITY OF THE ASSES SEE. IN VIEW OF THE ABOVE CONCLUSION POINT (B) TO (D) DO NOT REQUIRE ANY CON SIDERATION. WE MAY ALSO ADD THAT THERE IS REFERENCE TO AN AGREEMENT DATED 1 .4.2000 BETWEEN ASSESSEE AND MI IN THE STATEMENT OF FACTS FILED BEF ORE CIT(A). NEITHER IN THE CIT(A)S ORDER OR AOS ORDER NOR BEFORE US ANY COPY WAS FILED NOR ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 20 OF 54 ARGUMENTS ADVANCED ON THE BASIS OF THE SAID AGREEME NT. GROUND NO.2 RAISED BY THE ASSESSEE IS ACCORDINGLY DISMISSED. 28. GROUND NO.2A RAISED BY THE ASSESSEE READS AS FO LLOWS:- 2A. THE CIT(A) FAILED TO APPRECIATE THAT THE ADDIT ION MADE BY WAY OF IMPUTED INTEREST IS OPPOSED TO LAW AND TO FA CTS AS THE APPELLANT HAD ADVANCED THE AMOUNT DUE TO BUSINESS E XIGENCIES OUT OF OWN FUNDS. 29. THE ASSESSEE HAD GIVEN AN INTEREST FREE LOAN OF RS.3 05 90 000 TO MI ITS WHOLLY OWNED SUBSIDIARY. THIS WAS AN INTER EST FREE LOAN. THE AO HAS OBSERVED THAT THE AMOUNT IN QUESTION WAS ADVANC ED NOT OUT OF INTEREST FREE FUNDS AND THAT THE ASSESSEE HAD CLAIMED INTERE ST EXPENSES OF RS.6 36 32 677 IN ITS PROFIT & LOSS (P&L) ACCOUNT O N BORROWED FUNDS. THE AO PROPOSED TO ADD INTEREST AT AVERAGE PRIME LENDIN G RATE OF STATE BANK OF INDIA AS ON 31.3.2005 AT 10.25% ON THE INTEREST FRE E LOAN AND MADE AN ADDITION OF RS.31 35 475 TO THE TOTAL INCOME OF THE ASSESSEE. HOWEVER ON A REFERENCE TO THE TPO U/S. 92CA OF THE ACT THE AD DITION OF 10% OF THE OUTSTANDING BALANCE WAS SUGGESTED BY THE TPO. THE AO ACCORDINGLY MADE AN ADDITION OF RS.39 59 000 TO THE TOTAL INCOM E OF THE ASSESSEE. 30. ON APPEAL BY THE ASSESSEE THE CIT(APPEALS) CON FIRMED THE ORDER OF THE AO. THE ASSESSEES CONTENTIONS BEFORE THE CIT( A) WERE THAT THE AO HAS ERRONEOUSLY CONCLUDED THAT THE ASSESSEE DID NOT HAVE INTEREST FREE FUNDS TO ADVANCE LOAN TO ITS WHOLLY OWNED SUBSIDIAR Y MANTTRA INC. BASED ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 21 OF 54 ON THE INTEREST PAYMENT MADE BY THE ASSESSEE DURING THE FINANCIAL YEAR 2004-05 WHILE THE ASSESSEE HAD ADVANCED THE LOAN O N 26 TH MARCH 2002 AMOUNTING TO RS.3 41 58 762 ONLY WHEN THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS TO THE TUNE OF RS.77 28 71 738/ - AS CAN BE SEEN FROM THE PRINTED BALANCE SHEET AS 31.03.2002. ALTERNATI VELY IT WAS SUBMITTED THAT ASSUMING THAT AN INTEREST IS TO BE ATTRIBUTED TO THIS LOAN THOUGH NOT AGREED TO IT COULD ONLY BE COMPUTED ON THE BASIS O F LIBOR RATE AND NOT ON THE BASIS OF SBI PRIME LENDING RATE. THE LOAN WAS GIVEN TO MI OWING TO COMMERCIAL EXPEDIENCY. AS DISTRIBUTOR OF ASSESSEE S PRODUCT MI HAD AN OBLIGATION TO TAKE SPECIAL CARE TO BUY ASSESSEES G OODS WAREHOUSE STOCK AND SELL THEM IN USA. WITHOUT THE DISTRIBUTORS AR RANGEMENT ASSESSEE WOULD HAVE HAD TO INCUR EXPENSES FOR ARRANGING A WA RE HOUSE AT US FOR STOCKING ITS PRODUCTS BESIDES INCURRING ADMINISTRA TIVE AND SELLING/DISTRIBUTION EXPENSES AND THEN SELL THE PRO DUCTS TO THE SUPERMARKETS THERE. MI HAD INCURRED EXPENDITURE FO R WAREHOUSING ADMINISTRATION AND SELLING EXPENSES IN USA TOWARDS DISTRIBUTION OF ASSESSEES PRODUCTS DURING AY2005-06 OF RS.5 82 28 173/-. 31. THE CIT(A) HOWEVER DID NOT AGREE WITH THE SUB MISSIONS OF THE ASSESSEE AND HELD AS UNDER:- 2.6.3 THE ABOVE CONTENTIONS OF THE APPELLANT A RE NOT FOUND ACCEPTABLE IN VIEW OF THE FINDINGS GIVEN BY T HE TRANSFER PRICING OFFICER IN PARAGRAPH 6 OF THE ORDER U/S.92C A(3) OF THE INCOME TAX ACT WHEREIN THE TPO ACCORDING TO THE COM PARABLE UNCONTROLLED PRICE METHOD APPLIED A REASONABLE INTE REST RATE AT THE ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 22 OF 54 RATE OF 10% PER ANNUM. THE VIEW TAKEN BY THE TPO FI NDS SUPPORT FROM THE DECISION OF THE HONOURABLE ITAT DELHI IN T HE CASE OF M/S. PEROT SYSTEM TSI (INDIA) LTD IN ITA NO.2320 2 321 & 2322/DEL/2008 IN WHICH IN PARAGRAPH 11 & 12 HELD AS UNDER: IF THE ASSESSEES CONTENTION THAT WHENEVER INTERES T FREE LOAN IS GRANTED TO ASSOCIATED ENTERPRISES THE RE SHOULD NOT BE ANY ADJUSTMENT IS ACCEPTED IT WILL TANTAMOUNT TO TAKING OUT SUCH TRANSACTIONS FROM THE REALM OF SECTION 92(1) AND SECTION 92B OF THE IT AC T. SECTION 92(1) MANDATES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVI NG REGARD TO THE ARMS LENGTH PRICE. SECTION 92B DEFIN ES INTERNATIONAL TRANSACTION AS UNDER: 92B(1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92 92C 92D AND 92E INTERNATIONAL TRANSACTION MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES EITHER OR BOTH OF WHOM ARE NON RESIDENT IN THE NATURE OF PURCHASE SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICES OR LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS INCOME LOSSES OR ASSETS OF SUCH ENTERPRISES AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF OR ANY CONTRIBUTION TO ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL FOR THE PURPOSES OF SUB-SECTION (1) BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE. ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 23 OF 54 FROM THE ABOVE IT IS CLEAR THAT LENDING OR BORROWI NG MONEY BETWEEN TWO ASSOCIATED ENTERPRISES COMES WITHIN THE AMBIT OF INTERNATIONAL TRANSACTION AND WHETHER THE SAME IS A T ARMS LENGTH PRICE HAS TO BE CONSIDERED. THE QUESTION OF RATE OF INTEREST ON THE BORROWING LOAN IS AN INTEGRAL PART OF ARMS LENGTH P RICE REDETERMINATION IN THIS CONTEXT. THUS CLEARLY THE ASSESSEE CONTENTION SEEKS TO ADD TEXT TO THE CLEAR LEGAL POS ITION AS EMBODIED IN STATUTE. SUCH AN INTERPOLATION IS NOT P ERMISSIBLE THAT WHEN AN INTEREST FREE LOAN IS GIVEN TO THE AES INC OME ON ACCOUNT OF INTEREST CANNOT BE ATTRIBUTED FROM THE POINT OF VIEW OF ARMS LENGTH CONSIDERATION. IN THIS REGARD WE ALSO DRAW S UPPORT FROM THE HONOURABLE APEX COURT IN THE CASE OF SMT TARULATA S HYAM AND OTHERS VS CIT WEST BENGAL IN 108 ITR 345 WHEREIN I T WAS HELD THAT WHEN THE LANGUAGE OF THE ACT IS CLEAR AND UNAM BIGUOUS THERE IS NO SCOPE OF INTERPOLATION. ACCORDINGLY ARMS LENGTH PRICE OF INTEREST DETERM INED BY THE TRANSFER PRICING OFFICER AT 30 59 000/- IS UPHE LD. 32. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS) THE ASSESSEE HAS RAISED GROUND NO.2A BEFORE THE TRIBUNAL WHICH IS REPRODUCE D ABOVE. 33. WE HAVE HEARD THE RIVAL SUBMISSIONS WITH REGARD TO GROUND NO.2A IN THE ASSESSEES APPEAL WHICH IS WITH REGARD TO THE A DDITION MADE ON ACCOUNT OF INTEREST FREE LOAN GIVEN BY THE ASSESSEE TO MI. IT IS NOT IN DISPUTE THAT MI IS AN ASSOCIATED ENTERPRISE (AE) WI THIN THE MEANING OF THE TERM AS DEFINED IN THE ACT. THE ASSESSEE HOWEVER D ISPUTES THAT THE TRANSACTION BY WHICH AN INTEREST FREE LOAN IS GIVEN OUT OF INTEREST FREE FUNDS CANNOT BE REGARDED AS AN INTERNATIONAL TRANSACTION AT ALL TO TRIGGER THE PROVISIONS OF SEC.92CB OF THE ACT. THE ASSESSEE HA S HOWEVER CONSIDERED THE TRANSACTION IN QUESTION AS AN INTERNATIONAL TRA NSACTION WITH AN AE AND ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 24 OF 54 FILED A TRANSFER PRICING ANALYSIS REPORTING THE TRA NSACTION IN THE PRESCRIBED FORM VIZ. FORM-3CEB. THE AO IN THE ORDER OF ASSES SMENT HAS HELD THAT THE INTEREST FREE LOAN WAS GIVEN OUT OF INTEREST BE ARING FUNDS. THE LEARNED COUNSEL FOR THE ASSESSEE HAS HOWEVER PLACED RELIANC E BEFORE US ON THE FINDINGS OF THE TPO IN HIS ORDER THAT THE LOAN TO T HE AE WAS GIVEN OUT OF INTEREST FREE FUNDS OF THE ASSESSEE. THIS MAY NOT HAVE ANY IMPACT FOR THIS ASSESSMENT YEAR. THE CLAIM OF THE ASSESSEE IS THAT SINCE LOAN WAS GIVEN OUT OF INTEREST FREE FUNDS NO ADDITION CAN BE MADE EITHER UNDER THE NORMAL PROVISIONS OF THE ACT OR U/S.92CA OF THE ACT. IN T HE ALTERNATIVE THE LEARNED COUNSEL FOR THE ASSESSEE HAS PLEADED THAT THE RATE OF INTEREST ADOPTED FOR MAKING THE IMPUGNED ADDITION BY ADOPTING THE PRIME LENDING RATE OF SBI AS ON 31.3.2005 SHOULD BE DELETED. THE ADDITION IF AT ALL CAN BE MADE BY DETERMINING THE ARMS LENGTH PRICE IN CASE OF INTER EST ON EXTENDED CREDIT PERIOD GRANTED TO AN ASSOCIATED ENTERPRISE ON THE B ASIS OF USD LIBOR AND NOT ON ANY OTHER CURRENCY DENOMINATED LOAN RATE. 34. ANOTHER SUBMISSION WAS ALSO MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE TRANSACTION OF GIVING LOAN WAS IN PREVIOUS YEAR RELEVANT TO AY 02-03 AND THEREFORE IT IS ONLY IN THAT YEAR T HE PROVISIONS OF SEC.92CA OF THE ACT COULD BE APPLIED AND NOT IN AY 05-06. O N THIS ARGUMENT WE ARE OF THE VIEW THAT THE SAME IS NOT ACCEPTABLE AS THE BENEFIT IN THE FORM OF INTEREST FREE LOAN CONTINUES SO LONG AS THE LOAN RE MAINS NOT REPAID. TO THIS EXTENT THE INTERNATIONAL TRANSACTION CONTINUES DURI NG THE PREVIOUS YEAR ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 25 OF 54 RELEVANT TO AY 05-06 ALSO AND THEREFORE THE PROVISI ONS OF SEC.92CA OF THE ACT WOULD BE APPLICABLE. 35. WE ARE OF THE VIEW THAT THE PLEA RAISED BY THE ASSESSEE BEFORE US CANNOT BE ACCEPTED. IN THIS REGARD THE LEARNED DR HAS RELIED ON A DECISION OF THE MUMBAI BENCH OF THE ITAT IN THE CASE OF TATA AUTOCOMP SYSTEMS LTD. VS. ACIT ITA 7354/MUM/11 DATED 30.4.20 12 WHEREIN ON IDENTICAL FACTS THE MUMBAI BENCH OF THE TRIBUNAL CONSIDERED THE QUESTION AS TO WHETHER SUCH INTEREST FREE LOAN TO A E CAN BE SUBJECTED TO A TRANSFER PRICING ADJUSTMENT AND ADDITION MADE. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ON THE SAID I SSUE. 15. ON THE ISSUE WHETHER THE TRANSACTION IN QUEST ION VIZ. INTEREST FREE LOAN BY THE ASSESSEE TO ITS SISTER CONCERN CAN BE SUBJECT MATTER OF TEST OF ARMS LENGTH PRICE (ALP) U/S.92 OF THE A CT WE ARE OF THE VIEW THAT THE ORDER OF THE REVENUE AUTHORITIES HAVE TO BE UPHELD. IT WAS ARGUED ON BEHALF OF THE ASSESSEE THAT UNDER THE NORMAL PROVISIONS OF THE ACT (CHAPTER IV) HAD THE ASSESS EE GIVEN INTEREST FREE LOAN OUT OF ITS INTEREST FREE FUNDS TO A RESID ENT OR TO A NON- RESIDENT WHO IS NOT AN ASSOCIATED ENTERPRISE THEN THE REVENUE COULD NOT HAVE BROUGHT TO TAX NOTIONAL INTEREST INCOME AT TRIBUTABLE TO SUCH INTEREST FREE LOAN GIVEN BY THE ASSESSEE. THE POSI TION CANNOT BE DIFFERENT WHEN INTEREST FREE FUNDS ARE GIVEN TO AE WHICH IS A NON- RESIDENT. WE ARE UNABLE TO AGREE WITH SUCH ARGUME NT. CHAPTER X OF THE ACT DEALING WITH SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX WAS INTRODUCED W.E.F. AY 02-03 BY THE FINANCE A CT 2001. PRIOR TO SUCH INTRODUCTION SEC.92 OF THE ACT WAS THE ONLY SECTION DEALING WITH TRANSFER PRICING. THOSE PROVISIONS AND RULES MADE THEREUNDER DID NOT GIVE SUFFICIENT POWERS TO THE REVENUE AUTHO RITIES TO FIND OUT WHETHER THE FOREIGN COMPANIES/NON-RESIDENTS OPERATI NG IN INDIA OR EARNING INCOME IN INDIA WERE BEING TAXED ON THEIR I NDIAN INCOME ON AN ARMS LENGTH BASIS. THE LEGISLATIVE INTENT BEHI ND THE INTRODUCTION OF DETAILED TRANSFER PRICING PROVISIONS IS BROUGHT OUT IN PARA 55.6 OF CBDT CIRCULAR NO. 14 / 2001 ON PROVISIONS RELATING TO FINANCE ACT 2001 WHICH INTER ALIA STATES: ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 26 OF 54 THE BASIC INTENTION UNDERLYING THE NEW TRANSFER PR ICING REGULATIONS IS TO PREVENT SHIFTING OUT OF PROFITS B Y MANIPULATING PRICES CHARGED OR PAID IN INTERNATIONAL TRANSACTION S THEREBY ERODING THE COUNTRYS TAX BASE. SEC.92 OF THE ACT LAYS DOWN THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THE CHARGE TO TAX UNDER THE ACT IS ON THE TOTAL INCOME COMPUTED IN ACCORDANCE WITH THE PROVISIONS O F THE ACT. SEC.28 OF THE ACT LAYS DOWN THE CATEGORIES OF INCOM E THAT ARE ASSESSED AS INCOME FROM BUSINESS OR PROFESSION. SE C.29 LAYS DOWN THE MANNER OF COMPUTATION OF INCOME FROM BUSINESS O R PROFESSION. THESE ARE GENERAL PROVISIONS FOR COMPUTATION OF INC OME FROM BUSINESS APPLICABLE TO ALL CLASS OF ASSESSEES. PRO VISIONS OF SEC.92 IN PARTICULAR AND CHAPTER X IN GENERAL ARE SPECIAL PROVISIONS DEALING WITH COMPUTATION OF INCOME IN AN INTERNATIONAL TRAN SACTION. THOSE PROVISIONS WILL PREVAIL OVER THE GENERAL PROVISIONS . GENERALIA SPECIALIBUS NON DEROGANT (GENERAL PROVISIONS MUST Y IELD TO THE SPECIFIC PROVISIONS). GENERALLY SPEAKING THE SECT IONS IN THE ACT DO NOT OVERLAP ONE ANOTHER AND EACH SECTION DEALS WITH THE MATTER SPECIFIED THEREIN AND GOES NO FURTHER. IF A CASE A PPEARS TO BE GOVERNED BY EITHER OF TWO PROVISIONS IT IS CLEARLY THE RIGHT OF THE ASSESSEE TO CLAIM THAT HE SHOULD BE ASSESSED UNDER THE ONE WHICH LEAVES HIM WITH A LIGHTER BURDEN. WHEN THERE IS A CONFLICT BETWEEN A GENERAL PROVISION AND SPECIAL PROVISION THE LATTER SHALL PREVAIL. 16. INTEREST FREE LOAN EXTENDED TO THE ASSOCIATED CONCERNS AS AT ARM'S LENGTH LENDING OR BORROWING MONEY BETWEEN TWO ASSOCIATED ENTERPRISES COMES WITHIN THE AMBIT OF INTERNATIONAL TRANSACTION AND WHETHER THE SAME IS AT ARMS LENGTH PRICE HAS TO BE CONSIDERED. THE QUESTION OF RATE OF INTEREST ON THE BORROWING LOAN IS AN INTEGRAL PART OF ARMS LENGTH PRICE REDETERMINATION IN THIS CONTEX T. THE FACT THAT THE LOAN HAS THE RBI'S APPROVAL DOES NOT PUT A SEAL OF APPROVAL ON THE TRUE CHARACTER OF THE TRANSACTION FROM THE PERS PECTIVE OF TRANSFER PRICING REGULATION AS THE SUBSTANCE OF THE TRANSACT ION HAS TO BE JUDGED AS TO WHETHER THE TRANSACTION IS AT ARMS LEN GTH OR NOT. THE DELHI BENCH OF ITAT IN THE CASE OF PEROT SYSTEMS TS I (INDIA) LTD. VS. DCIT (SUPRA) HAD CONSIDERED IDENTICAL ARGUMENT AND HELD AS FOLLOWS: 9. BEFORE US THE ID. COUNSEL OF THE ASSESSEE CONT ENDED THAT INCOME MEANS REAL INCOME AND NOT FICTITIOUS INCOME AND SINCE THE ASSESSEE HAS NOT EARNED ANY INCOME THE S AME CANNOT BE TAXED. RELIANCE IN THIS REGARD HAS BEEN P LACED UPON IN THE CASE OF CIT VS. KRMTT THIAGARAJA CHETTY & CO. REPORTED IN 24 ITR 525 (SC) & IN THE CASE OF MORVI INDUSTRIES ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 27 OF 54 LTD. VS. CIT REPORTED IN 82 ITR 835 (SC) FOR THE PR OPOSITION THAT LIABILITY TO TAX CAN ARISE ONLY WHEN THERE IS INCOME. NO TAX CAN BE CHARGED AS NOTIONAL INCOME ON ACCRUAL. FURTH ER RELIANCE HAS BEEN PLACED UPON THE RULING OF AUTHORI TY FOR ADVANCE RULINGS DELIVERED IN THE CASE OF VENEBURG G ROUP B.V. VS. CIT 727 OF 2006 FOR THE PROPOSITION THAT I N THE ABSENCE OF ANY INCOME TRANSFER PRICING PROVISIONS BEING MACHINERY PROVISION SHALL NOT APPLY. IT HAS FURTHER BEEN ARGUED THAT TRANSFER PRICING DOCUMENT MAINTAINED BY THE ASSESSEE CLEARLY MENTIONED THAT THESE LOANS/ADVANCE S ARE IN THE NATURE OF QUASI-EQUITY AND HENCE THE TRANSACTIO N OF GRANTING INTEREST FREE LOAN IS AT ARM'S LENGTH. THE LOAN AGREEMENTS MENTIONED THAT THESE ARE INTEREST FREE L OANS. RELIANCE IN THIS REGARD IS PLACED UPON THE DECISION OF DELHI TRIBUNAL IN THE CASE OF SONY INDIA LTD. 114 ITD 448 PARA 100 THAT 'UNDER FISCAL LOANS ACTUAL TRANSACTION AS ENTE RED BETWEEN THE PARTIES IS TO BE CONSIDERED. AUTHORITIES HAVE N O RIGHT TO RE- WRITE THE TRANSACTION UNLESS IT IS HELD THAT IT SHA M OR BOGUS OR ENTERED INTO BY THE PARTIES TO AVOID AND EVADE TAXE S.' FURTHER REFERENCE HAS BEEN MADE TO PARA 1.37 OF 1995 OF OEC D GUIDELINES FOR THE PROPOSITION THAT IT IS LEGITIMAT E TO CONSIDER THAT ECONOMIC SUBSTANCE OF THE TRANSACTIONS. THE TRANSACTIONS HAS BEEN SAID TO BE COMMERCIALLY EXPED IENT AND LOAN GRANTED TO SUPPORT THE SUBSIDIARY AND OBTAIN R ETURNS IN FUTURE. THE ASSESSEE HAD FULL CONTROL OVER ITS SUBS IDIARY WHICH REDUCE THE CREDIT RISK. THE LOAN HAD BEEN DULY GRAN TED BY THE APPROVAL OF THE RBI. THE INCOME TAX ACT 1961 AND O ECD GUIDELINES SUPPORT THE CONTENTION THAT THE EFFECT O F GOVERNMENT CONTROL/ INTERVENTION SHOULD BE CONSIDER ED WHILE DETERMINING THE ARM'S LENGTH PRICE. UNDER THE THIN CAPITALIZATION RULES NO DEDUCTION WAS ALLOWABLE TO THE HUNGARY ENTITY FOR PAYMENT OF INTEREST THEREFORE THERE EXISTED IMPOSSIBILITY OF PERFORMANCE WITH REGARD TO PAYMENT OF HUNGARY ENTITY. ECONOMIC CIRCUMSTANCES OF THE SUBSI DIARIES DID NOT WARRANT THE CHARGING OF INTEREST FROM SUBSI DIARIES. THE ID. COUNSEL FOR THE ASSESSEE FURTHER RELIED UPON TH E APEX COURT DECISION IN THE CASE OF M/S S.A. BUILDERS LTD . VS. CIT(APPEALS) AND OTHERS 288ITR 1 (SC). 9.1 THE ID. DR FOR THE REVENUE ON THE OTHER HAND RE LIED UPON THE ORDERS OF THE ID. CIT(A) HE CLAIMED THAT THE I D. CIT(A)'S ORDER WAS A SPEAKING ORDER AND IT HAS REBUTTED ALL THE ARGUMENTS OF THE ASSESSEE. 10. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AN D PERUSED THE RECORDS. THE PRIMARY CONTENTION BEFORE US AS ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 28 OF 54 SUBMITTED BY THE ID. COUNSEL OF THE ASSESSEE IS THA T IT WAS COMMERCIALLY EXPEDIENT FOR ASSESSEE TO ADVANCE INTE REST FREE LOANS TO THE AES AND THAT SINCE NO INTEREST HAS ACT UALLY BEEN CHARGED THERE IS NO REAL INCOME EXIGIBLE TO TAX. A S OBSERVED BY THE ID. CIT(A) THE AGREEMENTS SHOW THAT THESE AR E LOAN AMOUNT GIVEN BY THE ASSESSEE TO ASSOCIATED ENTERPRI SES (AES). THIS IN FACT IS AN ADMITTED POSITION. THERE IS NO CASE THAT ANY SPECIAL FEATURE IN THE CONTRACT MAKE THE T RANSACTION AS CAPITAL IN NATURE. IT IS ALSO AN ADMITTED PROPOS ITION THAT THE ASSESSEE HAS EXTENDED THE LOAN TO ITS AE'S WHO ARE 100% SUBSIDIARIES. THE ASSESSEE'S CASE IS THAT IT HAS AC TUALLY NOT EARNED ANY INTEREST AND IT WAS COMMERCIALLY EXPEDIE NT TO EXTEND THESE INTEREST FREE LOANS. NOW IT IS NOTED T HAT THIS IS NOT A CASE OF ORDINARY BUSINESS TRANSACTION. THE QU ESTION RELATES TO SCRUTINY OF INTERNATIONAL TRANSACTION TO DETERMINE WHETHER OR NOT THE SAME IT AS ARM'S LENGTH. THE PRI NCIPLE OF TRANSFER PRICING AIMS AT DETERMINING THE PRICING IN THE SITUATIONS OF CROSS BORDER INTERNATIONAL TRANSACTIO NS WHERE TWO ENTERPRISES WHICH ARE SUBJECT TO THE SAME CENTR E OR DIRECTION OR CONTROL (ASSOCIATED ENTERPRISE) MAINTA IN COMMERCIALLY OR FINANCIALLY RELATION WITH OTHER. IN SUCH A SITUATION THE POSSIBILITY EXIST THAT BY WAY OF INT ERVENTION FROM THE CENTRE OR OTHERWISE BUSINESS CONDITIONS MUST B E ACCEPTED BY THE ACTING UNITS WHICH DIFFERS FROM THO SE WHICH IN THE SAME CIRCUMSTANCES WOULD HAVE AGREED UPON BETWE EN UN-RELATED PARTIES. THE AIM IS TO EXAMINE WHETHER THERE IS ANOMALY IN THE TRANSACTION WHICH ARISE OUT OF SPECI AL RELATIONSHIP BETWEEN THE CREDITOR AND THE DEBTOR. H ENCE THE CONTENTION OF HAVING ACTUALLY NOT EARNED ANY INCOME CANNOT COME TO THE RESCUE OF THE ASSESSEE IN THIS SCENARIO . THE CASE LAWS FROM THE APEX COURT CITED BY THE ID. COUNSEL O F THE ASSESSEE ARE IN THE CONTEXT OF THE PROPOSITION THAT ONLY THE REAL INCOME HAS TO BE TAXED AND INTEREST FREE ADVAN CES CAN BE GIVEN BY COMPANIES (DOMESTIC) TO THEIR SUBSIDIAR IES ON THE GROUND OF COMMERCIAL EXPEDIENCY. BUT THESE DECISION S ARE NOT IN THE CONTEXT OF CHAPTER-X OF THE IT ACT WHICH RELATES TO SPECIAL PROVISION RELATING TO COMPUTATION OF INCOME FROM INTERNATIONAL HAVING REGARD TO ARM'S LENGTH PRICE. OTHER CASE LAWS CITED BY THE ASSESSEE ARE NOT GERMANE TO THE F ACTS OF THIS CASE. HENCE IN OUR CONSIDERED OPINION THEY DO NOT HELP THE CASE OF THE ASSESSEE. 17. THE AFORESAID DECISION OF THE TRIBUNAL IS AN A NSWER TO THE ARGUMENT OF THE ASSESSEE BEFORE US THAT THE IMPUGNE D ADDITION COULD NOT HAVE BEEN MADE BY THE AO AT ALL. RESPECT FULLY FOLLOWING THE SAID DECISION WE HOLD THAT THE AO WAS WELL WIT HIN HIS POWERS IN ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 29 OF 54 MAKING THE IMPUGNED ADDITION. THE JUSTIFICATION FO R THE QUANTUM OF NOTIONAL INCOME CONSIDERED AS TAXABLE IN THE HANDS OF THE ASSESSEE IS A MATTER WHICH WE WILL EXAMINE IN THE SUBSEQUENT PARAGRAPHS. 36. IN VIEW OF THE AFORESAID DECISION OF THE TRIBUN AL WE ARE OF THE VIEW THAT THERE IS NO MERIT IN THE MAIN PART OF THE ARGU MENT RAISED IN GR.NO.2A BY THE ASSESSEE. 37. ON THE QUANTUM OF INTEREST PERCENTAGE THAT HAS TO BE ADDED WE FIND THE MUMBAI BENCH OF THE ITAT IN THE CASE OF TATA AUTOCOMP SYSTEMS LTD. (SUPRA) HELD AS FOLLOWS: 18. ON THE ISSUE AS TO WHAT IS QUANTUM OF ADDITIO N THAT HAS TO BE MADE WE WILL PROCEED TO EXAMINE THE ISSUE ON THE B ASIS THAT CUP IS THE MOST APPROPRIATE METHOD FOR DETERMINING ALP IN THE PRESENT CASE. IT HAS BEEN THE ARGUMENT ON BEHALF OF THE AS SESSEE THAT THE TPO HAS ADOPTED THE INTEREST RATE CHARGED BY A DOME STIC BANK AS COMPARABLE RATE IGNORING THE FACT THAT THE ASSESSEE IS NOT IN THE BUSINESS OF GRANTING LOANS. IT HAS FURTHER BEEN SU BMITTED THAT IN A SITUATION WHERE AN INTERNATIONAL LOAN WAS GRANTED T O AN AE A EURIBOR BASED INTEREST RATE WOULD HAVE BEEN THE MOS T APPROPRIATE COMPARABLE UNCONTROLLED RATE. THE WORKING OF THE EU RIBOR RATE AT 4.15% HAS ALREADY BEEN SET OUT IN THE EARLIER PART OF THIS ORDER AND IS NOT BEING REPEATED. THE CONTENTION OF THE ASSESSEE IN THIS REGARD FINDS SUPPORT FROM THE FOLLOWING RULINGS OF THE TRI BUNAL VVF LTD. VS. DCIT (SUPRA) M/S. SIVA INDUSTRIES & HOLDINGS LTD. VS. ACIT (SUPRA) DCIT VS. TECH MAHINDRA LTD. (SUPRA) AND M/ S. FOUR SOFT LTD. VS. DCIT (SUPRA). THE MUMBAI TRIBUNAL IN THE CASE OF TECH MAHINDRA (SUPRA) HELD THAT THE ARMS LENGTH PRICE I N CASE OF INTEREST ON EXTENDED CREDIT PERIOD GRANTED TO AN ASSOCIATED ENTERPRISE SHALL BE DETERMINED ON THE BASIS OF USD LIBOR AND NOT ON ANY OTHER CURRENCY DENOMINATED LOAN RATE. THE MUMBAI BENCH OF THE INCOME-TAX APPELLATE TRIBUNAL (THE TRIBUNAL) IN CAS E OF TECH MAHINDRA LIMITED (THE TAXPAYER) FOR ASSESSMENT YEAR (AY) 2004-05 HELD THAT THE ARMS LENGTH PRICE IN CASE OF INTERES T ON EXTENDED CREDIT PERIOD ALLOWED TO AN ASSOCIATED ENTERPRISE (AE) BAS ED IN USA SHALL BE DETERMINED ON THE BASIS OF USD LONDON INTER BANK OFFER RATE ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 30 OF 54 (LIBOR) INSTEAD OF APPLYING THE RATE OF INTEREST PE RTAINING TO EURO DENOMINATED LOAN CHARGED TO AE BASED IN GERMANY SIN CE THE AE WAS BASED IN USA. THE FACTS OF THE CASE WERE THAT THE ASSESSEE IN THAT CASE WAS A JOINT VENTURE BETWEEN MAHINDRA & M AHINDRA LIMITED (INDIAN COMPANY) AND BRITISH TELECOMMUNICATIONS (UK COMPANY) WAS ENGAGED IN RENDERING OF SOFTWARE SERVICES RELAT ING TO TELECOMMUNICATION INTERNET TECHNOLOGY AND ENGINEER ING ETC. DURING THE PREVIOUS YEAR THE TAXPAYER HAD EXTENDED CREDI T BEYOND THE STIPULATED CREDIT PERIOD TO ITS AE BASED IN USA WIT HOUT CHARGING ANY INTEREST ON SUCH EXTENDED CREDIT PERIOD. DURING TH E ASSESSMENT PROCEEDINGS THE TRANSFER PRICING OFFICER (TPO) RE JECTED TAXPAYERS ARGUMENTS AND DETERMINED THE ARMS LENGTH INTEREST FOR SUCH EXTENDED CREDIT PERIOD TO US AE AT THE RATE OF 10 P ERCENT PER ANNUM. THE TPO DETERMINED THIS RATE BASED ON THE RATE OF INTEREST CHARGED BY THE TAXPAYER ON EURO DENOMINATED LOAN G RANTED TO ITS GERMAN AE. THE RESULTANT TRANSFER PRICING ADJUSTME NT AMOUNTED TO INR 1.87 CRORES. THE ASSESSING OFFICER (AO) ADO PTED THE ADJUSTMENTS MADE BY THE TPO. AGGRIEVED BY THE DECIS ION OF THE AO THE TAXPAYER FILED OBJECTIONS BEFORE THE COMMISSION ER OF INCOME TAX (APPEALS) [CIT(A)]. THE CIT(A) CONFIRMED THE TR ANSFER PRICING ADJUSTMENT HOWEVER RESTRICTED THE SAME TO 2 PERCE NT BASED ON THE USD LIBOR RATE PLUS 80 BASIS POINT MARK-UP. AGGRIEV ED BY THE ORDER OF THE CIT(A) THAT AO FILED AN APPEAL BEFORE THE TRIBUNAL. THE TRIBUNAL HAD THAT THE TPO MADE AN ERROR IN SELECTIN G THE TRANSACTION OF CHARGING OF INTEREST TO GERMAN AE ON LOAN GRANTE D AT THE RATE OF 10 PERCENT PER ANNUM AS INTERNAL COMPARABLE. FOLLO WING THE POSITION SETTLED IN CASE SKODA AUTO INDIA AND RULE 10B(1)(A) OF THE INCOME-TAX RULES 1962 TO BE AN INTERNAL COMPARABL E UNDER THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD THE TRA NSACTION NEEDS TO OCCUR BETWEEN THE TAXPAYER AND AN INDEPEND ENT PARTY. EVEN ASSUMING THAT THE ADJUSTMENT FOR EXTENDED CRED IT WAS NECESSARY USD LIBOR IS MORE APPROPRIATE BASIS THAN THE RATE OF INTEREST ON EURO DENOMINATED LOAN CONSIDERING THE F ACT THAT THE AE IS BASED IN USA AND COMMERCIAL PRINCIPLES AND PRACT ICES RELATED TO USD DENOMINATED EXTENDED CREDIT. THE TRIBUNAL HAS ALSO MADE A CRUCIAL POINT THAT THE ARMS LENGTH INTEREST RATE S HOULD BE TAKEN FROM THE COUNTRY OF THE BORROWER/DEBTOR I.E. THE RATE O F INTEREST TO BE USED FOR BENCHMARKING SHALL BE THE RATE OF INTEREST IN RESPECT OF THE CURRENCY IN WHICH THE UNDERLYING TRANSACTION HAS TA KEN PLACE IN CONSIDERATION OF ECONOMIC AND COMMERCIAL FACTORS AR OUND THE SPECIFIC CURRENCY DENOMINATED INTEREST RATE. THE A FORESAID RULING WAS FOLLOWED BY THE CHENNAI BENCH OF ITAT IN THE CA SE OF M/S. SIVA INDUSTRIES & HOLDINGS LTD. (SUPRA) WHEREIN THE TRI BUNAL HELD AS FOLLOWS: ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 31 OF 54 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PERUSA L OF THE ORDER OF THE TPO CLEARLY SHOWS THAT THE ASSESSEE HA D RAISED THE FUNDS BY WAY OF ISSUANCE OF 0% OPTIONAL CONVERT IBLE PREFERENTIAL SHARES. THUS IT IS NOTICED THAT THE FU NDS RAISED BY THE ASSESSEE COMPANY FOR GIVING THE LOAN TO INDIA T ELECOM HOLDINGS LTD. MAURITIUS WHICH IS ITS ASSOCIATED E NTERPRISES AND WHICH IS THE SUBSIDIARY COMPANY IS OUT OF THE FUNDS OF THE ASSESSEE COMPANY. IT IS NOT BORROWED FUNDS. THE ASSESSEE HAS GIVEN THE LOAN TO THE ASSOCIATED ENTER PRISES IN US DOLLARS. THE ASSESSEE IS ALSO RECEIVING INTERES T FROM THE ASSOCIATED ENTERPRISES IN INDIAN RUPEES. ONCE THE T RANSACTION BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES IS IN FOREIGN CURRENCY AND THE TRANSACTION IS AN INTERNAT IONAL TRANSACTION THEN THE TRANSACTION WOULD HAVE TO BE LOOKED UPON BY APPLYING THE COMMERCIAL PRINCIPLES IN REGAR D TO INTERNATIONAL TRANSACTION. IF THIS IS SO THEN THE DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLICABILITY AND THE IN TERNATIONAL RATE FIXED BEING LIBOR WOULD COME INTO PLAY. IN THE CIRCUMSTANCES WE ARE OF THE VIEW THAT IT LIBOR RAT E WHICH HAS TO BE CONSIDERED WHILE DETERMINING THE ARMS LE NGTH INTEREST RATE IN RESPECT OF THE TRANSACTION BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES. AS IT IS N OTICED THAT THE AVERAGE OF THE LIBOR RATE FOR 1.4.2005 TO 3 1.3 .2006 IS 4.42% AND THE ASSESSEE HAS CHARGED INTEREST AT 6% W HICH IS HIGHER THAN THE LIBOR RATE WE ARE OF THE VIEW THAT NO ADDITION ON THIS COUNT IS LIABLE TO BE MADE IN THE HANDS OF THE ASSESSEE. IN THE CIRCUMSTANCES THE ADDITION AS MAD E BY THE ASSESSING OFFICER ON THIS COUNT IS DELETED. 19. IN THE PRESENT CASE THE AE IS A GERMAN COMPANY . EUROBIOR RATES ARE BASED ON THE AVERAGE INTEREST RATES AT WH ICH A PANEL OF MORE THAN 50 EUROPEAN BANKS BORROW FUNDS FROM ONE A NOTHER. THERE ARE DIFFERENT MATURITIES RANGING FROM ONE WE EK TO ONE YEAR. THESE RATES ARE CONSIDERED TO BE THE MOST IMPORTANT RATE IN THE EUROPEAN MONEY MARKET. THE INTEREST RATES DO PROVI DE THE BASIS FOR THE PRICE AND INTEREST RATES OF ALL KINDS OF FINANC IAL PRODUCTS LIKE INTEREST RATE SWAPS INTEREST RATE FUTURES SAVING ACCOUNT AND MORTGAGES. WE FIND THAT THE RBI IN RESPECT OF EXPO RT CREDIT TO EXPORTERS AT INTERNATIONALLY COMPETITIVE RATES UNDE R THE SCHEME OF PRE-SHIPMENT CREDIT IN FOREIGN CURRENCY (PCFC) AND REDISCOUNTING OF EXPORT BILLS ABROAD (EBR) HAS PERMITTED BANKS TO F IX THE RATES OF INTEREST WITH REFERENCE TO RULING LIBOR EURO LIBOR OR EURIBOR WHEREVER APPLICABLE AND THERETO APPROPRIATE PERCENT AGE RANGING FROM 1% TO 2%. THE REFERENCE TO THE SAID CIRCULAR IS AT PAGE -80 OF THE ASSESSEES PAPER BOOK. IN OUR VIEW THE CLAIM O F THE ASSESSEE TO ADOPT EURIBOR RATE AS STATED BEFORE THE TPO IS R EASONABLE AND ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 32 OF 54 DESERVES TO BE ACCEPTED. FOLLOWING THE RULING OF T HE TRIBUNAL IN THE AFORESAID CASES WE ARE OF THE VIEW THAT THE CLAIM MADE BY THE ASSESSEE IN THIS REGARD HAS TO BE ACCEPTED. THE AO IS DIRECTED TO WORK OUT THE TP ADJUSTMENT ACCORDINGLY. GR.NO.1 TO 4 ARE THUS PARTLY ALLOWED. 38. FOLLOWING THE AFORESAID DECISION OF THE MUMBAI ITAT WE DIRECT THE AO TO WORK OUT THE TP ADJUSTMENT AS DIRECTED IN THE TRIBUNALS ORDER REFERRED TO ABOVE. GR.NO.2A IS THUS PARTLY ALLOWED TO THE EXTENT INDICATED ABOVE. 39. IN THE RESULT APPEAL BY THE ASSESSEE IS TREATE D AS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ITA NO.130 & 131/BANG/2011 & ITA NO.475/BANG/2012: 40. THESE ARE APPEALS BY THE REVENUE AGAINST ORDER DATED 21.10.2010 & 22.10.2010 & 31.1.2012 OF CIT(A)-III BANGALORE RELATING TO AY 06-07 07-08 & 08-09 RESPECTIVELY. THE GROUNDS RAISED BY THE REVENUE IN ALL THESE APPEALS ARE IDENTICAL AND CONNECTED WITH THE GROUNDS RAISED IN AY 05-06 AND ARISE UNDER SAME FACTS AND CIRCUMSTANCES. THESE APPEALS WERE HEARD TOGETHER ALONG WITH APPEAL FOR AY 05-06. WE DEEM IT CONVENIENT TO PASS A CONSOLIDATED ORDER. 41. GROUND NO.2 IN REVENUES APPEAL IN ITA NO.130/B ANG/2011 CHALLENGES THE ACTION OF THE CIT(A) IN DIRECTING TH E AO TO ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF PROVISION FOR LOSS ARISING ON ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 33 OF 54 ACCOUNT OF FOREIGN EXCHANGE RATE FLUCTUATION ON RES TATEMENT OF LIABILITY. THE MATERIAL FACTS IN THIS REGARD ARE THAT THE ASSESSEE HAD DEBITED IN ITS PROFIT AND LOSS ACCOUNT A SUM OF RS.63 66 651/- ON ACCOUNT OF FOREIGN EXCHANGE LOSS. ON VERIFICATION OF THE DETAILS THE AO FOUND THAT OUT OF THE AFORESAID LOSS WHICH WAS CLAIMED AS EXPENDITURE AND DEDUCTION IN COMPUTING TOTAL INCOME OF THE ASSESSEE A SUM OF RS.38.81 424/- WAS LOSS ON ACCOUNT OF FLUCTUATION IN FOREIGN EXCHANGE CURRENCY WHICH WERE SETTLED BY ACTUAL PAYMENT AND THE REMAINING LOSS OF RS.24 85 227 RELA TED TO FOREIGN EXCHANGE FLUCTUATION ON ACCOUNT OF AMOUNTS PAYABLE BY THE ASSESSEE WHICH HAD NOT BEEN SETTLED BY ACTUAL PAYMENT. THE ASSESSEE HAS QUANTIFIED ON A NOTIONAL BASIS THE LOSS BY RESTATIN G ITS LIABILITY REPAYABLE IN FOREIGN EXCHANGE AS ON THE LAST DATE OF THE PREVIOU S YEAR AND CLAIMED THE DEDUCTION. THE AO DISALLOWED THE CLAIM OF THE ASSE SSEE FOR DEDUCTION IN RESPECT OF THE LOSS TO THE EXTENT OF RS.24 85 227 O N THE GROUND THAT THE LOSS WAS PURELY NOTIONAL AND DID NOT RELATE TO ACTUAL DI SCHARGE OF THE LIABILITY BY PAYMENT BUT REINSTATEMENT OF LIABILITY ON THE LAST DATE OF THE PREVIOUS YEAR CONSEQUENT TO EXCHANGE RATE FLUCTUATION AS ON THE L AST DATE OF THE PREVIOUS YEAR. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F WOODWARD GOVERNORS CASE 312 ITR 254 (SC) . AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENUE HAS RAISED GR.NO.2 BEFORE THE T RIBUNAL. ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 34 OF 54 42. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LAW W ITH REGARD TO THE YEAR OF ALLOWABILITY OF ADDITIONAL LIABILITY DUE TO EXCHANGE RATE FLUCTUATION AS ON THE LAST DATE OF THE PREVIOUS YEAR HAS BEEN LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNORS ( SUPRA ). THE HONBLE SUPREME COURT HELD THAT LOSS SUFFERED BY AN ASSESSE E IN RESPECT OF A REVENUE LIABILITY ON ACCOUNT OF EXCHANGE DIFFERENCE AS ON THE DATE OF THE BALANCE SHEET IS AN ITEM OF EXPENDITURE ALLOWABLE U NDER S. 37(1). THE HONBLE COURT FURTHER REFERRED TO PARA 9 OF AS-11 WHICH PROVIDES THAT EXCHANGE DIFFERENCES ARISING ON FOREIGN CURRENCY TR ANSACTIONS HAVE TO BE RECOGNIZED AS INCOME OR EXPENSE IN THE PERIOD IN WH ICH THEY ARISE EXCEPT AS STATED IN PARA 10 AND PARA 11. AN ENTERPRISE HA S TO REPORT THE OUTSTANDING LIABILITY RELATING TO IMPORT OF RAW MAT ERIALS USING CLOSING RATE OR EXCHANGE. ANY LOSS ARISING ON CONVERSION OF SAID L IABILITY AT THE CLOSING RATE HAS TO BE RECOGNIZED IN THE P&L A/C FOR THE REPORTI NG PERIOD. THE GRIEVANCE OF THE REVENUE AND THE SUBMISSION OF THE LEARNED DR BEFORE US WAS THAT THERE IS NO FINDING THAT THE LIABILITY IN QUESTION IS IN RESPECT OF A TRANSACTION ON CURRENT ACCOUNT OR CAPITAL ACCOUNT. WE DO NOT F IND THIS OBJECTION TO BE SUSTAINABLE. IN THE STATEMENT OF FACTS BEFORE CIT( A) THE ASSESSEE HAS CATEGORICALLY CLAIMED THAT THE TRANSACTION IN QUEST ION WAS ON CURRENT ACCOUNT/REVENUE ACCOUNT AND NOT CAPITAL ACCOUNT. T HE AO HAS ALLOWED PART OF THE CLAIM OF THE ASSESSEE CLEARLY IMPLYING THAT THE TRANSACTION IN QUESTION WAS ON ACCOUNT OF REVENUE/CURRENT ACCOUNT AND NOT CAPITAL ACCOUNT. THE ORDER OF AO IS SILENT ON THIS ASPECT. IT IS NO DOUBT TRUE THAT IN ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 35 OF 54 THE ORDER OF CIT(A) THERE IS NO SPECIFIC FINDING ON THIS ASPECT. IN OUR VIEW THAT BY ITSELF WILL NOT BE A GROUND FOR THE REVENUE TO DEMAND A FRESH LOOK INTO THIS ASPECT. WE ARE THEREFORE OF THE VIEW THA T THE ORDER OF THE CIT(A) ON THIS ISSUE HAS TO BE UPHELD. ACCORDINGLY GR.NO. 2 RAISED BY THE REVENUE IS DISMISSED. 43. THE REVENUE HAS RAISED ADDITIONAL GROUND OF APP EAL RAISED IN ITA NO.130 & 131/BANG/11 AND ITA NO.475/BANG/12 RELATIN G TO THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF LIABILITY ON A CCOUNT OF REFURBISHING WARRANTY. THE ADDITIONAL GROUND RAISED BY THE REVE NUE IS ADMITTED FOR ADJUDICATION AS IT ARISES OUT OF THE ORDER OF THE C IT(A). WE HAVE ALREADY SEEN WHILE DECIDING THE ASSESSEES APPEAL FOR AY 05 -06 THAT THE REVENUE REFUSED TO ALLOW THE CLAIM OF THE ASSESSEE ON ACCOU NT OF LIABILITY ARISING OUT OF REFURBISHING WARRANTY CLAIMS. IN A.Y.06-07 THE CLAIM OF THE ASSESSEE IS NOT ACCOUNT OF LIABILITY ON ACCOUNT OF REFURBISHING WARRANTY CLAIMS BUT ON ACCOUNT OF THE FOREIGN EXCHANGE FLUCTUATION IN RESP ECT OF ITS LIABILITY FOR AY 05-06. IN RESPECT OF AY 07-08 & 08-09 THE CLAIM O F THE ASSESSEE WAS ON ACCOUNT OF LIABILITY TOWARDS REFURBISHING WARRANTY. THE CLAIM WAS ALLOWED BY CIT(A) IN AY 06-07 TO 08-09. THE ORDER OF CIT(A ) FOR AY 06-07 WAS EARLIER IN POINT OF TIME TO THE ORDER OF CIT(A) FOR AY 05-06. WHILE DECIDING THE APPEAL OF THE ASSESSEE FOR AY 05-06 WE HAVE AL READY UPHELD THE ORDER OF THE CIT(A). THE CIT(A) IN THE IMPUGNED ORDERS I N APPEAL BY THE REVENUE FOR AY 06-07 TO 08-09 HAS NOT EXAMINED THE TERMS OF THE AGREEMENT BETWEEN THE ASSESSEE AND MI AND HAS PROCE EDED ON THE BASIS ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 36 OF 54 THAT THE ASSESSEE WAS BOUND TO REIMBURSE THE WARRAN TY CLAIMS OF CUSTOMERS TO WHOM MI SOLD PRESSURE COOKERS. FOR TH E REASONS STATED WHILE DECIDING THE APPEAL OF THE REVENUE FOR AY 05- 06 WE ALLOW THE ADDITIONAL GROUNDS RAISED BY THE REVENUE IN ITS APP EAL FOR AY 06-07 TO 08- 09. WE MAY ALSO ADD THAT THE LIABILITY ON ACCOUNT OF EXCHANGE RATE FLUCTUATION AT THE TIME OF ACTUAL PAYMENT TO MI OF THE ALLEGED LIABILITY ON ACCOUNT OF WARRANTY CLAIMS CANNOT ALSO BE ALLOWED A S THE MAIN CLAIM FOR LIABILITY ON ACCOUNT OF WARRANTY LIABILITY ITSELF H AS BEEN HELD TO BE NOT THAT OF THE ASSESSEE. 44. THE REVENUE HAS ALSO RAISED ANOTHER ADDITIONAL GROUND IN AY 06-07 & 07-08 WHEREIN THEY HAVE CHALLENGED THE ORDER OF T HE CIT(A) WHEREBY THE CIT(A) DELETED THE ADDITION MADE BY THE AO BY MAKIN G ADDITION ON ACCOUNT OF DISALLOWANCE OF INTEREST ON THE GROUND THAT THE INTEREST EXPENSES CLAIMED AS DEDUCTION WERE ON BORROWED FUNDS WHICH WAS GIVEN AS INTEREST FREE ADVANCES TO MI. WE HAVE ALREADY SEEN WHILE DECIDIN G THE APPEAL OF THE ASSESSEE FOR AY 05-06 THAT THE AO CONSIDERED THE IN TEREST FREE LOAN TRANSACTION TO MI AN AE OF THE ASSESSEE AS AN INTER NATIONAL TRANSACTION WITH AE WHICH ATTRACTS THE PROVISIONS OF SEC.92CB O F THE ACT. THE REFERENCE WAS MADE TO THE TPO IN THAT YEAR BUT IN A Y 06-07 & 07-08 NO REFERENCE WAS MADE TO THE TPO BUT THE ADDITION WAS MADE BY A SIMPLE DISALLOWANCE OF INTEREST EXPENSES ON THE GROUND THA T BORROWED FUNDS ON WHICH INTEREST WAS PAID AND CLAIMED AS DEDUCTION IN COMPUTING INCOME HAD ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 37 OF 54 NOT BEEN USED FOR THE PURPOSE OF BUSINESS BUT HAD B EEN GIVEN AS INTEREST FREE LOANS TO SUBSIDIARY COMPANY VIZ. MI. 45. ON THIS ASPECT THE ASSESSEE RAISED TWO PLEAS BE FORE CIT(A) IN AY 06-07 & 07-08 VIZ. (A) THAT THE TPO IN HIS ORDER F OR AY 05-06 HAD ACCEPTED THE FACT THAT THE INTEREST FREE LOAN WAS GIVEN TO T HE AE OUT OF INTEREST FREE FUNDS OF THE ASSESSEE; (B) IN ANY EVENT THE INTERES T FREE LOAN WAS GIVEN TO MI WHICH WAS ITS SUBSIDIARY AND DISTRIBUTING ASSESS EES PRODUCTS IN USA OWING TO COMMERCIAL EXPEDIENCY TO FURTHER THE BUSIN ESS OF THE ASSESSEE AND IN THIS REGARD RELIED ON THE DECISION OF THE HO NBLE SUPREME COURT IN THE CASE OF SA BUILDERS 288 ITR 1 (SC ) WHEREIN IT WAS HELD IN CASES IN WHICH BORROWED FUNDS ON WHICH INTEREST WAS PAID IS GIVEN AS INTEREST FREE LOANS TO SISTER CONCERNS IT WAS REQUIRED TO BE ENQ UIRED AS TO WHETHER THE INTEREST-FREE LOAN WAS GIVEN TO THE SISTER CONCERN AS A MEASURE OF COMMERCIAL EXPEDIENCY. IF IT IS SO INTEREST ON BO RROWED FUNDS IS TO BE ALLOWED. THE ASSESSEE SUBMITTED BEFORE CIT(A) THAT THE INTEREST FREE LOAN WAS GIVEN TO MI WHICH WAS A DISTRIBUTOR OF ASSESSEE S PRODUCT IN USA. THE PRODUCTS OF THE ASSESSEE HAD IT BEEN SOLD DIRECTLY BY THE ASSESSEE WAREHOUSING EXPENSES AND SALES EXPENSES HAD TO BE I NCURRED BY THE ASSESSEE. BY GIVING INTEREST FREE LOAN THE ASSESSE E WAS PASSING ON SUCH RESPONSIBILITY TO MI AND THUS THE GIVING OF INTERES T FREE LOAN WAS COMMERCIALLY EXPEDIENT AND THEREFORE SHOULD BE ALLO WED AS A DEDUCTION. ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 38 OF 54 THE CIT(A) ACCEPTED THE ARGUMENT OF THE ASSESSEE AN D DELETED THE ADDITION MADE BY THE AO. 46. BEFORE US THE LEARNED DR SUBMITTED THAT THE ADD ITION OUGHT TO HAVE BEEN SUSTAINED U/S.92CA OF THE ACT BASED ON THE TPO S ORDER FOR AY 05- 06. ACCORDING TO HIM THE ABSENCE OF A REFERENCE U/ S.92CA OF THE ACT AND AN ORDER OF TPO FOR AY 06-07 AND 07-08 SHOULD NOT B E AN OBSTACLE IN SUSTAINING THE ADDITION MADE BY THE AO. WE ARE OF THE VIEW THAT IN THE ABSENCE OF A REFERENCE TO THE TPO U/S.92CA OF THE A CT FOR AY 06-07 & 07- 08 THE PLEA OF THE DR CANNOT BE ACCEPTED. 47. HOWEVER WE FIND THAT THE PLEA WITH REGARD TO C OMMERCIAL EXPEDIENCY HAS BEEN ACCEPTED BY THE CIT(A) WITHOUT ANY BASIS. THERE HAS BEEN NO INVESTIGATION OF FACTS WITH REGARD TO HOW T HE INTEREST FREE LOAN WAS GIVEN TO MI TO ENABLE IT TO WAREHOUSE AND SELL THE ASSESSEES PRODUCTS IN US. AS WE HAVE ALREADY SEEN THE DISTRIBUTOR AGREEM ENT IS SILENT ON ALL THESE ASPECTS AND THE BASIS ON WHICH CIT(A) HAS GIV EN RELIEF TO THE ASSESSEE IN OUR VIEW CANNOT BE ACCEPTED. WE HOWEVE R ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE BOTH WITH REGARD TO I TS CLAIM THAT INTEREST FREE ADVANCE WAS GIVEN OUT OF SURPLUS FUNDS OF THE ASSES SEE AS WELL AS THE PLEA WITH REGARD TO COMMERCIAL EXPEDIENCY IN GIVING INTE REST FREE LOAN TO SUBSIDIARY REQUIRES FRESH EXAMINATION BY THE AO AND ACCORDINGLY THE ORDER OF CIT(A) ON THIS ISSUE IS SET ASIDE AND THE ISSUE REMANDED TO THE AO FOR FRESH EXAMINATION AFTER GIVING ASSESSEE OPPORTUNITY OF BEING HEARD. THE ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 39 OF 54 RELEVANT GROUNDS OF THE REVENUE ARE TREATED AS ALLO WED FOR STATISTICAL PURPOSE. 48. ANOTHER COMMON ISSUE WHICH REQUIRES TO BE CONSI DERED IN REVENUES APPEAL FOR AY 07-08 & 08-09 IS THE DISALL OWANCE OF EXPENSES CLAIMED BY THE ASSESSEE UNDER THE HEAD ROYALTIES PAID TO A NON-RESIDENT IN VIEW OF THE PROVISIONS OF SEC.40(A)(I) OF THE AC T WHICH PROVIDES THAT ANY SUM WHICH IS CHARGEABLE TO TAX PAID OUTSIDE INDIA O N WHICH TAX WAS REQUIRED TO BE DEDUCTED AT SOURCE WHEN MAKING PAYME NT AS REQUIRED UNDER CHAPTER-XVIIB OF THE ACT AND TAX HAS NOT BEEN SO DE DUCTED SHALL NOT BE ALLOWED AS A DEDUCTION WHILE COMPUTING INCOME. ACC ORDING TO THE REVENUE PAYMENT OF ROYALTY IN QUESTION WAS MADE TO A NON-RESIDENT AND AS PER PROVISIONS OF SEC.195 OF THE ACT THE ASSESS EE OUGHT TO HAVE DEDUCTED TAX AT SOURCE AT THE TIME OF MAKING PAYMEN TS WHICH THE ASSESSEE FAILED TO SO DEDUCT. 49. THE MATERIAL FACTS FOR ADJUDICATING THE AFORESA ID GROUNDS ARE THAT THE ASSESSEE AS WE HAVE ALREADY SEEN IS A MANUFACTURE R OF PRESSURE COOKERS UNDER THE BRAND NAME PRESTIGE. THE ASSESSEE ACQU IRED THE RIGHT TO USE THE BRAND NAME PRESTIGE ON ITS PRODUCTS IN INDIA. THE ASSESSEE ALSO EXPORTS ITS PRODUCTS MANUFACTURED IN INDIA TO MIDDL E EAST COUNTRIES AUSTRALIA SRI LANKA AND BANGLADESH AND IN THESE PL ACES A NON-RESIDENT BY NAME M/S. MEYER MARKETING HAS A RIGHT TO USE THE BR AND NAME PRESTIGE. SIMILARLY THE ASSESSEE EXPORTS ITS PRODUCTS TO SOUT H AFRICAN COUNTRIES AND ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 40 OF 54 IN THESE PLACES A NON-RESIDENT BY NAME M/S. MIC DIS TRIBUTORS OWNS THE RIGHT TO USE THE BRAND NAME PRESTIGE. ON SALE OF THE PRODUCT OF THE ASSESSEE IN THOSE TERRITORIES WITH THE BRAND NAME PRESTIGE THE ASSESSEE HAD TO PAY ROYALTY. IT IS NOT DISPUTED BY THE AS SESSEE THAT THE NATURE OF THE PAYMENT IS ROYALTY. THE ASSESSEE CLAIMS THAT THE INCOME TO THE NON- RESIDENT IN THE FORM OF ROYALTY DOES NOT ACCRUE OR ARISE IN INDIA AND THEREFORE THE RECEIPT FROM THE ASSESSEE BY THE NON- RESIDENTS IS NOT CHARGEABLE TO TAX IN INDIA. THE CIT(A) AGREED WITH THE SUBMISSION OF THE ASSESSEE ON THIS ASPECT. HE HELD AS FOLLOWS: 7.4. COMING TO THE NATURE OF PAYMENT MADE BY THE APPELLANT THE PAYMENT IS TOWARDS EXPLOITATION OF AN INTANGIBL E ASSET (TRADE MARK) IN A FOREIGN COUNTRY OWNED BY A FOREIGN ENTI TY OUTSIDE INDIA. THE HONBLE HIGH COURT OF KARNATAKA IN JINDAL THERMAL POWER COMPANY LTD. VS DCIT [2010] 321 ITR (31) KARN) HAS LAID A TWIN TEST TO DETERMINE WHETHER THE INCOME IS CHARGEABLE TO INCOME TAX IN INDIA NAMELY : (I) RENDERING OF SERVICE IN INDIA (II) UTILISATION OF S ERVICE IN INDIA. ADMITTEDLY THE INSTANT CASE FAILS THIS TEST ALSO S INCE NO SERVICE WAS RENDERED OR UTILISED IN INDIA. HENCE THE INCOME OF THE FOREIGN ENTITY IS NOT CHARGEABLE TO INCOME TAX IN INDIA. 7.5. SIMILAR PROPOSITION IN LAW WAS LAID IN THE CA SE OF VAN OORD ACZ INDIA (P) LTD. VS CIT [2010-TIOL-187-HC- DELL-IT] AND ALSO BY HONBLE SUPREME COURT IN THE CASE OF ELI LILLLY & CO.[2009-TIOL-45-SC-IT ] ONCE IT IS ESTABLISHED THAT THE INCOME EARNED BY A FOREIGN ENT ITY IS NOT CHARGEABLE TO INCOME TAX IN INDIA THE TDS PROVISIO NS WOULD NOT BE ATTRACTED ON SUCH PAYMENTS. HENCE I AM OF THE C ONSIDERED OPINION THAT THE ROYALTY PAYMENT MADE BY THE APPELL ANT IS ALLOWABLE AS BUSINESS EXPENDITURE AND IS ALLOWED AC CORDINGLY. THE AO IS DIRECTED TO DELETE THE ADDITION OF RS.51 62 761/- AS ROYALTY EXPENSES . ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 41 OF 54 50. THE DEFINITION OF ROYALTY UNDER THE ACT AND W HEN IT IS DEEMED TO ACCRUE OR ARISE IN INDIA IS LAID DOWN IN SEC.9(1)(V I) OF THE ACT WHICH READS THUS: SEC.9: INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. (1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA (VI) INCOME BY WAY OF ROYALTY PAYABLE BY (A) THE GOVERNMENT; OR (B) A PERSON WHO IS A RESIDENT EXCEPT WHERE THE ROYALTY IS PAYABLE IN RESPECT OF ANY RIGHT PROPERT Y OR INFORMATION USED OR SERVICES UTILISED FOR THE PURPO SES OF A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERS ON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARN ING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA; OR (C) A PERSON WHO IS A NON-RESIDENT WHERE THE ROYAL TY IS PAYABLE IN RESPECT OF ANY RIGHT PROPERTY OR INFORM ATION USED OR SERVICES UTILISED FOR THE PURPOSES OF A BUS INESS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA O R FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE IN INDIA: PROVIDED THAT NOTHING CONTAINED IN THIS CLAUSE SHAL L APPLY IN RELATION TO SO MUCH OF THE INCOME BY WAY OF ROYALTY AS CONSISTS OF LUMP SUM CONSIDERATION FOR THE TRANSFER OUTSIDE IND IA OF OR THE IMPARTING OF INFORMATION OUTSIDE INDIA IN RESPECT O F ANY DATA DOCUMENTATION DRAWING OR SPECIFICATION RELATING TO ANY PATENT INVENTION MODEL DESIGN SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY IF SUCH INCOME IS PAYABLE IN PURS UANCE OF AN AGREEMENT MADE BEFORE THE 1ST DAY OF APRIL 1976 A ND THE AGREEMENT IS APPROVED BY THE CENTRAL GOVERNMENT : PROVIDED FURTHER THAT NOTHING CONTAINED IN THIS CLA USE SHALL APPLY IN RELATION TO SO MUCH OF THE INCOME BY WAY O F ROYALTY AS CONSISTS OF LUMPSUM PAYMENT MADE BY A PERSON WHO I S A RESIDENT FOR THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING TH E GRANTING OF A LICENCE) IN RESPECT OF COMPUTER SOFTWARE SUPPLIED B Y A NON-RESIDENT MANUFACTURER ALONG WITH A COMPUTER OR COMPUTER-BASE D EQUIPMENT UNDER ANY SCHEME APPROVED UNDER THE POLICY ON COMPU TER SOFTWARE ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 42 OF 54 EXPORT SOFTWARE DEVELOPMENT AND TRAINING 1986 OF THE GOVERNMENT OF INDIA. EXPLANATION 1 : FOR THE PURPOSES OF THE FIRST PROVI SO AN AGREEMENT MADE ON OR AFTER THE 1ST DAY OF APRIL 1976 SHALL BE DEEMED TO HAVE BEEN MADE BEFORE THAT DATE IF THE AGREEMENT IS MADE IN ACCORDANCE WITH PROPOSALS APPROVED BY THE CENTRAL GOVERNMENT B EFORE THAT DATE; SO HOWEVER THAT WHERE THE RECIPIENT OF THE INCOME BY WAY OF ROYALTY IS A FOREIGN COMPANY THE AGREEMENT SHALL N OT BE DEEMED TO HAVE BEEN MADE BEFORE THAT DATE UNLESS BEFORE THE EXPIRY OF THE TIME ALLOWED UNDER SUB-SECTION (1) OR SUB-SECTION ( 2) OF SECTION 139 (WHETHER FIXED ORIGINALLY OR ON EXTENSION) FOR FURN ISHING THE RETURN OF INCOME FOR THE ASSESSMENT YEAR COMMENCING ON THE 1S T DAY OF APRIL 1977 OR THE ASSESSMENT YEAR IN RESPECT OF WHICH SU CH INCOME FIRST BECOMES CHARGEABLE TO TAX UNDER THIS ACT WHICHEVER ASSESSMENT YEAR IS LATER THE COMPANY EXERCISES AN OPTION BY F URNISHING A DECLARATION IN WRITING TO THE INCOME-TAX OFFICER (S UCH OPTION BEING FINAL FOR THAT ASSESSMENT YEAR AND FOR EVERY SUBSEQ UENT ASSESSMENT YEAR) THAT THE AGREEMENT MAY BE REGARDED AS AN AGRE EMENT MADE BEFORE THE 1ST DAY OF APRIL 1976. EXPLANATION 2 : FOR THE PURPOSES OF THIS CLAUSE 'R OYALTY' MEANS CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDERATION BUT EXCLUDING ANY CONSIDERATION WHICH WOULD BE THE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS') FOR (I) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING TH E GRANTING OF A LICENCE) IN RESPECT OF A PATENT INVENTION MODEL DESIGN SECRET FORMULA OR PROCESS OR TRADE-MARK OR SIMILAR PROPERTY; (II) THE IMPARTING OF ANY INFORMATION CONCERNING TH E WORKING OF OR THE USE OF A PATENT INVENTION MODEL DESIGN SECRET FORMULA OR PROCESS OR TRADE-MARK OR SIMILAR PROPERT Y; (III) THE USE OF ANY PATENT INVENTION MODEL DESI GN SECRET FORMULA OR PROCESS OR TRADE-MARK OR SIMILAR PROPERT Y; (IV) THE IMPARTING OF ANY INFORMATION CONCERNING TE CHNICAL INDUSTRIAL COMMERCIAL OR SCIENTIFIC KNOWLEDGE EXP ERIENCE OR SKILL; (IVA) THE USE OR RIGHT TO USE ANY INDUSTRIAL COMME RCIAL OR SCIENTIFIC EQUIPMENT BUT NOT INCLUDING THE AMOUNTS REFERRED TO IN SECTION 44BB;; (V) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING TH E GRANTING OF A LICENCE) IN RESPECT OF ANY COPYRIGHT LITERARY ART ISTIC OR ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 43 OF 54 SCIENTIFIC WORK INCLUDING FILMS OR VIDEO TAPES FOR USE IN CONNECTION WITH TELEVISION OR TAPES FOR USE IN CONN ECTION WITH RADIO BROADCASTING BUT NOT INCLUDING CONSIDERATION FOR THE SALE DISTRIBUTION OR EXHIBITION OF CINEMATOGRAPHIC FILMS; OR (VI) THE RENDERING OF ANY SERVICES IN CONNECTION WI TH THE ACTIVITIES REFERRED TO IN SUB-CLAUSES (I) TO (IV) (IVA) AND (V). EXPLANATION 3 : FOR THE PURPOSES OF THIS CLAUSE 'C OMPUTER SOFTWARE' MEANS ANY COMPUTER PROGRAMME RECORDED ON ANY DISC TAPE PERFORATED MEDIA OR OTHER INFORMATION STORAGE DEVIC E AND INCLUDES ANY SUCH PROGRAMME OR ANY CUSTOMIZED ELECTRONIC DAT A; EXPLANATION 4.FOR THE REMOVAL OF DOUBTS IT IS HER EBY CLARIFIED THAT THE TRANSFER OF ALL OR ANY RIGHTS IN RESPECT OF ANY RIGHT PROPERTY OR INFORMATION INCLUDES AND HAS ALWAYS INCLUDED TRANSF ER OF ALL OR ANY RIGHT FOR USE OR RIGHT TO USE A COMPUTER SOFTWARE ( INCLUDING GRANTING OF A LICENCE) IRRESPECTIVE OF THE MEDIUM THROUGH WH ICH SUCH RIGHT IS TRANSFERRED. EXPLANATION 5.FOR THE REMOVAL OF DOUBTS IT IS HER EBY CLARIFIED THAT THE ROYALTY INCLUDES AND HAS ALWAYS INCLUDED CONSID ERATION IN RESPECT OF ANY RIGHT PROPERTY OR INFORMATION WHET HER OR NOT (A) THE POSSESSION OR CONTROL OF SUCH RIGHT PROPER TY OR INFORMATION IS WITH THE PAYER; (B) SUCH RIGHT PROPERTY OR INFORMATION IS USED DIR ECTLY BY THE PAYER; (C) THE LOCATION OF SUCH RIGHT PROPERTY OR INFORMA TION IS IN INDIA. EXPLANATION 6.FOR THE REMOVAL OF DOUBTS IT IS HER EBY CLARIFIED THAT THE EXPRESSION 'PROCESS' INCLUDES AND SHALL BE DEEM ED TO HAVE ALWAYS INCLUDED TRANSMISSION BY SATELLITE (INCLUDIN G UP-LINKING AMPLIFICATION CONVERSION FOR DOWN-LINKING OF ANY S IGNAL) CABLE OPTIC FIBRE OR BY ANY OTHER SIMILAR TECHNOLOGY WHETHER O R NOT SUCH PROCESS IS SECRET; 51. THE FIRST PART OF SEC.9(1)(VI) LAYS DOWN WHEN I NCOME IN THE FORM OF ROYALTY IS DEEMED TO ACCRUE OR ARISE IN INDIA. FOR THE PRESENT CASE THE RELEVANT CLAUSE IS SEC.9(1)(VI) CLAUSE (B) WHICH RE FERS TO A PAYMENT BY A ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 44 OF 54 RESIDENT ON ACCOUNT OF ROYALTY. THE ASSESSEE WHO I S A RESIDENT IN THE PRESENT CASE HAS MADE PAYMENTS TO TWO NON-RESIDENTS . THEREFORE CLAUSE (B) OF SEC.9(1)(VI) WILL APPLY. CLAUSE (B) OF SE C.9(1)(VI) HOWEVER PROVIDES FOR TWO EXCEPTIONS VIZ. (I) WHERE THE ROYALTY IS PAYABLE IN RESPECT OF ANY RIGHT PROPERTY OR INFORMATION USED OR SERVICES UTI LISED FOR THE PURPOSES OF A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON (I .E. THE RESIDENT) OUTSIDE INDIA OR (II) FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA. 52. THE LEARNED COUNSEL FOR THE ASSESSEE PLACED STR ONG RELIANCE ON THE ABOVE EXCEPTION CLAUSE TO CONTEND THAT ROYALTY IS P AYABLE BY THE ASSESSEE FOR RIGHT TO USE BRAND NAME PRESTIGE FOR THE PURP OSE OF SALE OF PRESSURE COOKERS OUTSIDE INDIA AND THEREFORE THE PAYMENT IN QUESTION DOES NOT ACCRUE OR ARISE TO THE NON-RESIDENT IN INDIA. WE A RE UNABLE TO ACCEPT THE ABOVE SUBMISSION FOR THE REASON THAT THE ASSESSEE C ARRIES ON BUSINESS IN INDIA AND THE ABOVE EXCEPTION WILL APPLY ONLY WHEN THE BUSINESS OF THE ASSESSEE (THAT IS THE PERSON MAKING PAYMENT OF ROYA LTY) ITSELF IS CARRIED ON OUTSIDE INDIA. IN THIS REGARD THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. AKTIENGESELLSCHAFT KUHNLE KOPP AND KAUSCH W. GERMANY BY BHEL 262 ITR 513 (MAD) WHEREIN IT WAS HELD ROYALTY PAID BY A RESIDENT IN INDIA IT CANNOT BE SAID THAT IT WAS DEEMED TO HAVE ACCRUED OR ARISEN I N INDIA IF THE ROYALTY WAS PAID OUT OF THE EXPORT SALES AND HENCE THE SOURCE FOR ROYALTY IS THE SALES ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 45 OF 54 OUTSIDE INDIA. SINCE THE SOURCE FOR ROYALTY IS FROM THE SOURCE SITUATE OUTSIDE INDIA THE ROYALTY PAID ON EXPORT SALES IS NOT TAXA BLE. THE HONBLE COURT HELD THAT THE TRIBUNAL WAS THEREFORE CORRECT IN HOL DING THAT THE ROYALTY ON EXPORT SALES IS NOT TAXABLE WITHIN THE MEANING OF S . 9(1)(VI). 53. IN OUR VIEW THE AFORESAID DECISION AS WELL AS T HE DECISIONS ON WHICH CIT(A) PLACED RELIANCE WHILE ALLOWING RELIEF TO THE ASSESSEE CANNOT BE SUSTAINED FOR THE FOLLOWING REASONS. IN THE CASE O F ISHIKAWAJMA-HARIMA HEAVY INDUSTRIES LTD. VS. DIRECTOR OF IT 288 ITR 40 8 (SC) WHILE INTERPRETING THE PROVISIONS OF SECTION 9(1)(VII)(C) OF THE ACT THE SUPREME COURT HELD THAT SECTION 9(1)(VII)(C) OF THE ACT STA TES THAT 'A PERSON WHO IS A NON-RESIDENT WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY S OURCE IN INDIA.' READING THE PROVISION IN ITS PLAIN SENSE AS PER AP EX COURT IT REQUIRES TWO CONDITIONS TO BE MET THE SERVICES WHICH ARE THE S OURCE OF THE INCOME THAT IS SOUGHT TO BE TAXED HAVE TO BE RENDERED IN INDIA AS WELL AS UTILIZED IN INDIA TO BE TAXABLE IN INDIA. BOTH THE ABOVE CO NDITIONS HAVE TO BE SATISFIED SIMULTANEOUSLY. THUS FOR A NON-RESIDENT TO BE TAXED ON INCOME FOR SERVICES SUCH A SERVICE NEEDS TO BE RENDERED WITHI N INDIA AND HAS TO BE PART OF A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA. IN THE ABOVE JUDGMENT APEX COURT OBSERVED THAT 'SECTION 9 (1)(VII) OF THE ACT MUST BE READ WITH SECTION 5 THEREOF WHICH TAKES WI THIN ITS PURVIEW THE ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 46 OF 54 TERRITORIAL NEXUS ON THE BASIS WHEREOF TAX IS REQUI RED TO BE LEVIED NAMELY (A) RESIDENT AND (B) RECEIPT OF ACCRUAL OF INCOME'. AS PER THE ABOVE JUDGMENT OF THE APEX COURT THE INTERPRETATION WITH REFERENCE TO THE NEXUS TO TAX TERRITORIES ALSO ASSUMES SIGNIFICANCE. TERRI TORIAL NEXUS FOR THE PURPOSE OF DETERMINING THE TAX LIABILITY IS AN INTE RNATIONALLY ACCEPTED PRINCIPLE. AN ENDEAVOR SHOULD THUS BE MADE TO CON STRUE THE TAXABILITY OF A NON-RESIDENT IN RESPECT OF INCOME DERIVED BY IT. HA VING REGARD TO THE INTERNATIONALLY ACCEPTED PRINCIPLE AND DOUBLE TAXAT ION AVOIDANCE AGREEMENT NO EXTENDED MEANING CAN BE GIVEN TO THE WORDS 'INCOME DEEMED TO ACCRUE OR ARISE IN INDIA' AS EXPRESSED IN SECTION 9 OF THE ACT. THE SECTION 9 INCORPORATES VARIOUS HEADS OF INCOME ON WHICH TAX IS SOUGHT TO BE LEVIED BY THE REPUBLIC OF INDIA. WHATEVER IS PAYABLE BY A RESIDENT TO A NON-RESIDENT BY WAY OF FEES FOR SERVICES THUS WOU LD NOT ALWAYS COME WITHIN THE PURVIEW OF SECTION 9(1)(VII) OF THE ACT. IT MUST HAVE SUFFICIENT TERRITORIAL NEXUS WITH INDIA SO AS TO FURNISH A BAS IS FOR IMPOSITION OF TAX. WHEREAS A RESIDENT WOULD COME WITHIN THE PURVIEW OF SECTION 9(1)(VII) OF THE ACT A NON-RESIDENT WOULD NOT AS SERVICES OF A NON-RESIDENT TO A RESIDENT UTILIZED IN INDIA MAY NOT HAVE MUCH RELEVA NCE IN DETERMINING WHETHER THE INCOME OF THE NON-RESIDENT ACCRUES OR A RISES IN INDIA. IT MUST HAVE A DIRECT LINK BETWEEN THE SERVICES RENDERED IN INDIA. WHEN SUCH A LINK IS ESTABLISHED THE SAME MAY AGAIN BE SUBJECTED TO ANY RELIEF UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT. A DISTINCTION MAY ALSO BE MADE BETWEEN RENDITION OF SERVICES AND UTILIZATION THERE OF. ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 47 OF 54 54. TO SUPERSEDE THE JUDGMENT IN ISHIKAWAJMA (SUPRA) AN EXPLANATION TO SECTION 9(1) WAS INSERTED BY THE FINANCE ACT 20 07 WITH RETROSPECTIVE EFFECT FROM 1ST JUNE 1976. MEMORANDUM EXPLAINING TH E PROVISIONS IN THE FINANCE BILL 2007 RELATING TO THE EXPLANATION INCO RPORATED TO SECTION 9(2) OF THE ACT IS EXTRACTED HEREUNDER : 'RATIONALISATION AND SIMPLIFICATION MEASURES INCOME DEEMED TO ACCRUE OR ARISE IN INDIA.SECTION 9 PROVIDES FOR SITUATIONS WHERE INCOME IS DEEMED TO ACCRUE OR ARIS E IN INDIA. VIDE FINANCE ACT 1976 A SOURCE RULE WAS PROVIDED IN THE SAID SECTION THROUGH INSERTION OF CLAUSES (V) (VI) AND (VII) FOR INCOME FROM INTEREST ROYALTY OR FEES FOR TECHNICAL SERVICES. I T WAS PROVIDED INTER ALIA THAT IN CASE OF PAYMENTS OF INTEREST ROYALTY OR FEES FOR TECHNICAL SERVICES RECEIVED FROM A RESIDENT PAYER INCOME WOUL D BE DEEMED TO ACCRUE OR ARISE IN INDIA EXCEPT WHERE THE INTEREST OR ROYALTY OR FEES FOR TECHNICAL SERVICES ARE RELATABLE TO A BUSINESS OR PROFESSION CARRIED ON BY THE RESIDENT PAYER OUTSIDE INDIA OR F OR MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA. . IRRESPECTIVE OF THE SITUS OF THE SERVICES THE SITUS OF THE PAYE R AND THE SITUS OF THE UTILISATION OF SERVICES WILL DETERMINE THE TAX JURI SDICTION. FURTHER SECTION 5 WHICH DEFINES SCOPE OF TOTAL INCOME IS SUBJECT TO OTHER PROVISIONS OF THE ACT WHICH WOULD INCLUDE SECTION 9 AND THE INCOME DEEMED TO ACCRUE OR ARISE IN TERMS OF SECTION 9 GET S COVERED UNDER SECTION 5 INCOME DOES NOT HAVE TO ACTUALLY ACCRUE OR ARISE IN INDIA TO BE DEEMED TO ACCRUE OR ARISE IN INDIA.' 55. IN JINDAL THERMAL POWER COMPANY LTD. VS. DY. CIT (2009 ) 225 CTR (KAR) 220 THE ASSESSEE ENTERED INTO A CONTRACT WITH RE A FOREIGN COMPANY AND TWO OF ITS FOREIGN SUBSIDIARIE S FOR COMMISSIONING OF A POWER PLANT. THE ASSESSEE MADE PAYMENTS TO RE FOR R ENDERING TECHNICAL SERVICES PROVIDING START-UP SERVICES AND TAKING OVERALL RESPONSIBILITY FOR ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 48 OF 54 THE PROJECT. THE TWO FOREIGN SUBSIDIARIES OF RE CAR RIED ON ONSHORE SERVICES. THE TECHNICAL SERVICES WERE RENDERED BY RE WHOLLY O UTSIDE INDIA AND IT SUPERVISED THE CARRYING ON OF THE START UP SERVIC ES BY ITS SUBSIDIARIES. THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE ON PAYMENTS T O RE AND THE ASSESSING OFFICER HELD IT TO BE LIABLE UNDER SECTIO N 195 READ WITH SECTION 201. THE KARNATAKA HIGH COURT OPINED AS UNDER : (I) IN ISHIKAWAJMA-HARIMA (SUPRA) IT WAS HELD THAT FEES FOR TECHNICAL SERVICES WAS NOT ASSESSABLE TO TAX UNDER SECTION 9( 1)(VII) IF THE TWIN CONDITIONS OF IT BEING RENDERED IN INDIA AND UTILIZ ED IN INDIA WERE NOT SATISFIED. THE AMENDMENT TO SECTION 9 SUGGESTS THAT THE CRITERION OF RESIDENCE PLACE OF BUSINESS OR BUSINESS CONNECTION OF A NON- RESIDENT IN INDIA HAS BEEN DONE AWAY WITH FOR FASTE NING THE TAX LIABILITY. HOWEVER THE CRITERIA OF RENDERING SERVI CE IN INDIA AND THE UTILIZATION OF THE SERVICE IN INDIA AS LAID DOWN IN ISHIKAWAJMA-HARIMA (SUPRA) TO ATTRACT TAX LIABILITY UNDER SECTION 9(1) (VII) REMAIN UNTOUCHED AND UNAFFECTED BY THE EXPLANATION TO SECT ION 9; (II) AS THE PURPORT OF THE EXPLANATION TO SECTION 9 IS PLAIN IN ITS MEANING IT IS UNNECESSARY AND IMPERMISSIBLE TO REF ER TO THE MEMORANDUM EXPLAINING THE FINANCE BILL 2007. IT IS EXPLICIT FROM SECTION 9(1)(VII)(C) AND THE EXPLANATION TO SECTION 9 THAT THE RATIO OF ISHIKAWAJMAHARIMA (SUPRA) STILL HOLDS THE FIELD; (III) ON FACTS AS THE 'TECHNICAL SERVICES' WERE RE NDERED OUTSIDE INDIA THE FEES THEREOF WERE NOT CHARGEABLE TO TAX IN INDIA. AS REGARDS THE 'START UP SERVICES AND OVERALL RESPONS IBILITY' THE WORK WAS DONE PARTLY IN INDIA BY RAYTHEONS TWO SUBSIDIA RIES UNDER ITS DIRECT SUPERVISION. THOUGH THE SUBSIDIARIES HELD AN INDEPENDENT CONTRACT WITH JINDAL THEY VIRTUALLY CONSTITUTED TH E AGENTS OF RAYTHEON AND ACCORDINGLY THE FEES FOR THE SAID SERVICES WERE TAXABLE IN INDIA. 56. RELATING TO THE 2007 AMENDMENT THE KARNATAKA HIGH COURT SPOKE THUS : ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 49 OF 54 'THE EXPLANATION INCORPORATED IN SECTION 9(2) DECLA RES THAT 'WHERE THE INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA UN DER CLAUSES (V) (VI) (VII) OF SUB-SECTION (1) SUCH INCOME SHALL B E INCLUDED IN THE TOTAL INCOME OF THE NON RESIDENT; WHETHER OR NOT THE RESI DENT HAS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTI ON IN INDIA.' THE PLAIN READING OF THE SAID PROVISION SUGGESTS THAT C RITERION OF RESIDENCE PLACE OF BUSINESS OR BUSINESS CONNECTION OF A NON- RESIDENT IN INDIA HAS BEEN DONE AWAY WITH FOR FASTE NING THE TAX LIABILITY. HOWEVER THE CRITERIA OF RENDERING SERVI CE IN INDIA AND THE UTILISATION OF THE SERVICE IN INDIA LAID DOWN BY TH E SUPREME COURT IN ISHIKAWAJMA'S CASE (SUPRA) TO ATTRACT TAX LIABILITY UNDER SECTION 9(1)(VII) REMAINS UNTOUCHED AND UNAFFECTED BY THE E XPLANATION TO SECTION 9(2). WHEN THE PURPORT OF THE EXPLANATION T O SECTION 9(2) IS PLAIN IN ITS MEANING IT IS UNNECESSARY AND IMPERMI SSIBLE TO REFER TO THE MEMORANDUM EXPLAINING THE FINANCE BILL 2007. T HEREFORE IT IS EXPLICIT FROM THE READING OF SECTION 9(1)(VII)(C) A ND EXPLANATION TO SECTION 9(2) THAT THE RATIO LAID DOWN BY THE SUPREM E COURT IN ISHIKAWAJMA'S CASE (SUPRA) STILL HOLDS THE FIELD.' 57. THEREAFTER SEC.9(1) WAS AGAIN AMENDED BY THE F INANCE ACT 2010. IN SECTION 9 OF THE INCOME-TAX ACT FOR THE EXPLANA TION OCCURRING AFTER SUB- SECTION (2) THE FOLLOWING EXPLANATION WAS SUBSTITU TED RETROSPECTIVELY WITH EFFECT FROM THE 1ST DAY OF JUNE 1976 NAMELY:- 'EXPLANATION.-FOR THE REMOVAL OF DOUBTS IT IS HERE BY DECLARED THAT FOR THE PURPOSES OF THIS SECTION INCOME OF A NON-R ESIDENT SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLAUSE (V) OR CLAUSE (VI) OR CLAUSE (VII) OF SUB-SECTION (1) AND SHALL BE INCLUD ED IN THE TOTAL INCOME OF THE NONRESIDENT WHETHER OR NOT - (I) THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF BU SINESS OR BUSINESS CONNECTION IN INDIA; OR (II) THE NON-RESIDENT HAS RENDERED SERVICES IN INDI A.'. 58. THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL STATES THAT : ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 50 OF 54 'SECTION 9 PROVIDES FOR SITUATIONS WHERE INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA. VIDE FINANCE ACT 1976 A SOURCE RULE WAS PROVIDED IN SECTION 9 THROUGH INSERTION OF CLAUSES (V) (VI) AND (VII) IN SUB- SECTION (1) FOR INCOME BY WAY OF INTEREST ROYALTY OR FEES FOR TECHNICAL SERVICES RESPECTIVELY. IT WAS PROVIDED INTER ALIA T HAT IN CASE OF PAYMENTS AS MENTIONED UNDER THESE CLAUSES INCOME WO ULD BE DEEMED TO ACCRUE OR ARISE IN INDIA TO THE NON-RESID ENT UNDER THE CIRCUMSTANCES SPECIFIED THEREIN. THE INTENTION OF INTRODUCING THE SOURCE RULE WAS TO BRING TO TAX INTEREST ROYALTY AND FEES FOR TECHNICAL SERVICES B Y CREATING A LEGAL FICTION IN SECTION 9 EVEN IN CASES WHERE SERVICES A RE PROVIDED OUTSIDE INDIA AS LONG AS THEY ARE UTILISED IN INDIA . THE SOURCE RULE THEREFORE MEANS THAT THE SITUS OF THE RENDERING OF SERVICES IS NOT RELEVANT. IT IS THE SITUS OF THE PAYER AND THE SITU S OF THE UTILISATION OF THE SERVICES WHICH WILL DETERMINE THE TAXABILITY OF SUCH SERVICES IN INDIA. THIS WAS THE SETTLED POSITION OF LAW TILL 2007. HOW EVER THE HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJMA-HARIMA HEA VY INDUSTRIES LTD. VS. DIRECTOR OF IT (2007) 207 CTR (SC) 361 : ( 2007) 288 ITR 408 (SC) HELD THAT DESPITE THE DEEMING FICTION IN SECTION 9 FOR ANY SUCH INCOME TO BE TAXABLE IN INDIA THERE MUST BE SU FFICIENT TERRITORIAL NEXUS BETWEEN SUCH INCOME AND THE TERRITORY OF INDI A. IT FURTHER HELD THAT FOR ESTABLISHING SUCH TERRITORIAL NEXUS THE SE RVICES HAVE TO BE RENDERED IN INDIA AS WELL AS UTILISED IN INDIA. THIS INTERPRETATION WAS NOT IN ACCORDANCE WITH THE LEGISLATIVE INTENT THAT THE SITUS OF RENDERING SERVICE IN INDIA IS NOT RELEVANT AS LONG AS THE SERVICES ARE UTILISED IN INDIA. THEREFORE TO RE MOVE DOUBTS REGARDING THE SOURCE RULE AN EXPLANATION WAS INSERT ED BELOW SUB- SECTION (2) OF SECTION 9 WITH RETROSPECTIVE EFFECT FROM 1ST JUNE 1976 VIDE FINANCE ACT 2007. THE EXPLANATION SOUGHT TO C LARIFY THAT WHERE INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLAUSES (V) (VI) AND (VII) OF SUB-SECTION (1) OF SECTION 9 SUCH INC OME SHALL BE INCLUDED IN THE TOTAL INCOME OF THE NON-RESIDENT RE GARDLESS OF WHETHER THE NON-RESIDENT HAS A RESIDENCE OR PLACE O F BUSINESS OR BUSINESS CONNECTION IN INDIA. HOWEVER THE KARNATAKA HIGH COURT IN A RECENT JUDGME NT IN THE CASE OF JINDAL THERMAL POWER COMPANY LTD. VS. DY. CIT [R EPORTED AT (2009) 225 CTR (KAR) 220ED.] HELD THAT THE EXPLANA TION IN ITS PRESENT FORM DOES NOT DO AWAY WITH THE REQUIREMENT OF RENDERING OF SERVICE IN INDIA FOR ANY INCOME TO BE DEEMED TO ACC RUE OR ARISE TO A ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 51 OF 54 NON-RESIDENT UNDER SECTION 9. IT HAS BEEN HELD ON A PLAIN READING OF THE EXPLANATION THE CRITERIA OF RENDERING SERVICES IN INDIA AND THE UTILISATION OF SERVICE IN INDIA LAID DOWN BY THE SU PREME COURT IN ITS JUDGMENT IN THE CASE OF ISHIKAWAJMA-HARIMA HEAVY IN DUSTRIES LTD. (SUPRA) REMAINS UNTOUCHED AND UNAFFECTED BY THE EXP LANATION. IN ORDER TO REMOVE ANY DOUBT ABOUT THE LEGISLATIVE INTENT OF THE AFORESAID SOURCE RULE IT IS PROPOSED TO SUBSTITUTE THE EXISTING EXPLANATION WITH A NEW EXPLANATION TO SPECIFICALLY STATE THAT THE INCOME OF A NON-RESIDENT SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLAUSE (V) OR CLAUSE (VI) OR CLAUSE (VII) OF SUB-SECTION (1) OF SECTION 9 AND SHALL BE INCLUDED IN HIS TOTAL INCOME WHETHER OR NOT THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS O R BUSINESS CONNECTION IN INDIA OR THE NON-RESIDENT HAS RENDERE D SERVICES IN INDIA. THIS AMENDMENT IS PROPOSED TO TAKE EFFECT RETROSPEC TIVELY FROM 1ST JUNE 1976 AND WILL ACCORDINGLY APPLY IN RELATION T O THE ASSESSMENT YEAR 1977-78 AND SUBSEQUENT YEARS.' 59. THUS THE LAW AS IT STAND AT PRESENT CLEARLY ENV ISAGES THAT TERRITORIAL NEXUS IS NO LONGER NECESSARY TO TAX THE RECEIPT IN THE HANDS OF THE NON- RESIDENT. THE CASE LAWS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE THEREFORE HELD TO BE NOT APPLICABLE. 60. IN VIEW OF THE DISCUSSION ABOVE WE ARE OF THE VIEW THAT THE RECEIPT BY THE NON-RESIDENT IN THE PRESENT CASE IS IN THE N ATURE OF ROYALTY DEEMED TO HAVE ACCRUED OR ARISEN TO THE NON-RESIDENT IN IN DIA AND THEREFORE CHARGEABLE TO TAX. 61. THE ISSUE DOES NOT HOWEVER END HERE BECAUSE WE ARE NOW CONCERNED WITH A PAYMENT MADE BY THE ASSESSEE DURIN G THE PREVIOUS YEAR RELEVANT TO AY 07-08 & 08-09 WHEN THE LAW IN THIS R EGARD WAS IN FAVOUR OF ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 52 OF 54 THE ASSESSEE. WITH THE RETROSPECTIVE AMENDMENT TO THE LAW THE LIABILITY OF THE NON-RESIDENT WITH REGARD TO CHARGEABILITY CAN N OW BE SAID TO EXIST. THIS RAISES THE QUESTION AS TO WHETHER OBLIGATION TO DED UCT TAX AT SOURCE PURSUANT TO A RETROSPECTIVE AMENDMENT TO THE LAW CA N RESULT EITHER IN THE PERSON RESPONSIBLE FOR MAKING PAYMENT TO THE NON-RE SIDENT LIABLE TO BE TREATED AS AN ASSESSEE IN DEFAULT OR CAN ANY OTHE R DISALLOWANCE U/S.40(A)(I) OF THE ACT BE MADE. IN THIS REGARD T HE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF THE HONBLE MUMBAI ITAT IN THE CASE OF SHIN SATELLITE PUBLIC CO. LTD. VS. DDIT VOL. 20 IT R (TRIB.) 438 (MUM)/ 153 TTJ 432 (MUM ) WHEREIN IDENTICAL QUESTION WAS CONSIDERED BY THE TRIBUNAL. THE TRIBUNAL ISSU E RELATING TO THE DISALLOWANCE MADE UNDER S 40(A)(I) FOR NON-DEDUCTIO N OF TAX AT SOURCE FROM THE PAYMENT MADE BY THE ASSESSEE TO NON-RESIDENT BA SED ON RETROSPECTIVE AMENDMENT TO THE LAW CANNOT BE SUSTAINED AND IN THI S REGARD FOLLOWED THE DECISION OF THE AHMEDABAD BENCH OF THIS TRIBUNAL IN THE CASE OF STERLING ABRASIVES LTD ORDER DATED 23 DECEMBER 2010 WHEREI N IT WAS HELD THAT AN ASSESSEE CANNOT BE HELD TO BE LIABLE TO DEDUCT TAX AT SOURCE RELYING ON THE SUBSEQUENT AMENDMENTS MADE IN THE ACT WITH RETROSPE CTIVE EFFECT. IN THE SAID CASE EXPLANATION TO S. 9(2) WHICH WAS INSERTE D BY THE FINANCE ACT 2007 WITH RETROSPECTIVE EFFECT FROM 1 JUNE 1976 WAS CONSIDERED AND IT WAS HELD BY THE TRIBUNAL THAT IT WAS IMPOSSIBLE FOR THE ASSESSEE TO DEDUCT TAX IN FY 20032004 WHEN AS PER THE RELEVANT LEGAL POSITI ON PREVALENT IN FY 20032004 THE OBLIGATION TO DEDUCT TAX WAS NOT ON THE ASSESSEE. THE ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 53 OF 54 TRIBUNAL BASED ITS DECISION ON A LEGAL MAXIM LEX N ON COGIT AD IMPOSSIBILIA MEANING THEREBY THAT THE LAW CANNOT POSSIBLY COMPEL A PERSON TO DO SOMETHING WHICH IS IMPOSSIBLE TO PERFORM AND RELIE D ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF KRISHNA SWAMY S PD AND ANOTHER V UNION OF INDIA AND OTHERS 281 ITR 305 WHEREIN THE SAID LEGAL MAXIM WAS ACCEPTED BY THE HONBLE APEX COURT. 62. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE TRIBUNAL WE HOLD THAT THE ASSESSEE IN THE PRESENT CASE CANNOT BE S AID TO BE OBLIGED TO DEDUCT TAX AT SOURCE ON PAYMENTS MADE TO THE NON-RE SIDENTS AS ON THE DATE WHEN THE PAYMENTS WERE MADE ON THE BASIS OF TH E DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. AKTIENGESELLSCHAFT KUHNLE KOPP AND KAUSCH W . GERMANY BY BHEL 262 ITR 513 (MAD) . IT IS ONLY CONSEQUENT TO THE RETROSPECTIVE AMENDMENT TO THE LAW WHICH HAPPENED A FTER THE DATES ON WHICH THE ASSESSEE MADE PAYMENTS TO THE NON-RESIDEN T THAT THE LIABILITY OF THE ASSESSEE TO DEDUCT TAX AT SOURCE ARISES. THERE FORE NO DISALLOWANCE CAN BE MADE U/S.40(A)(I) OF THE ACT. FOR THE REASO NS GIVEN ABOVE WE UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE. THE RELEVANT GROUNDS OF APPEAL OF THE REVENUE ARE DISMISSED. ITA NOS.130 & 131 & 1257/B/11 & 475/B/12 PAGE 54 OF 54 63. IN THE RESULT ITA NO.1257/BANG/2011 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.130 & 131/BANG/2011 & ITA NO.475/ BANG/2012 ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 11 TH DAY OF APRIL 2014 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE DATED THE 11 TH APRIL 2014 . /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT BANGALORE.