THE ITO, (INTERNATIONAL TAXATION),, SURAT vs. MICRO INKS LIMITED,, VAPI

आदेश /O R D E R

PER SANDEEP GOSAIN, JM:

Assessment Year 2012-13 (by Revenue): 2. Grounds raised by the Revenue in read as under: “1. The Ld. CIT(A) erred in law and on facts in holding that both sections 5(2) and 9(1 )(iv) of the Act are applicable to determine the situs of interest income in case of non-resident.

2. The Ld. CIT(A) erred in law and on facts in holding that the interest on ECB loan amounting to Rs.3,76,67,052/- is covered by exception to Section 9(1)(v)(b) of the Act and consequently it falls outside the ambit of deemed income arising and accruing in India and as a result out of Section 5 also.

3. The Ld. CIT(A) erred in law and on facts in holding that there is ambiguity in determining whether income has been received or arisen in India and thus there is a need to travel from Section 5(2) to Section 9(1) of the Act.

4. On the facts and circumstances of the case the Ld. CIT(A) ought to have upheld the order of the Assessing Officer.

5. Any other ground that may be urged at the time of hearing.”

3. First of all, we take up the appeal filed by the Revenue. Brief facts of the case are that the assessee company is in the business of manufacturing of printing inks. During the year under consideration, the assessee has credited/paid total amount of Rs.3,76,67,052/- towards interest to following foreign banks as under: Name of the Bank Country Nature of Amount remittance Australia And New Singapore Interest Rs.1,93,89,614 Zealand Banking Group DBS Bank Ltd. Singapore Interest Rs.66,53,684 ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 3 of 27

Standard Chartered Bank UK Interest Rs.84,50,573 The Hongkong And Hong Kong Interest Rs.31,73,184 Shanghai Banking Corporation Ltd. Total Rs.3,76,67,052

4. And accordingly, after serving statutory notices and seeking reply of the assessee order u/s.201 and 201(1A) r.w.195 of the Income Tax Act, 1961 was passed by the ld.Assessing Officer (AO) thereby making addition.

5. Being aggrieved with the order of the ld.AO, the assessee preferred an appeal before the ld.CIT(A) as ld.CIT(A) after considering the case of both the parties and partly allowed the appeal of the assessee.

ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 4 of 27

“4. Assessing Officer (AO) has passed order u/s.201 & 201(1A) r.w.s 195 of the Act on 12/03/2014 determining the default of interest payment in respect of interest payment as under:

Name of the Country Amount Tax rate of Amount of TDS Bank which TDS made Australia & New Singapore Rs.1,93,89,614 10% DTAA Rs.19,38,960 Zealand Banking Group DBS Bank Ltd. Singapore Rs.66,53,684 10% DTAA Rs.6,65,370 Standard UK Rs.84,50,573 10% DTAA Rs.8,45,060 Chartered Bank The HSBC Ltd. Hong Kong Rs.31,73,181 40% No DTAA Rs.47,18,660 Rs.3,76,67,052 Rs.47,18,660 Total Tax to be withdrawn : Rs.47,18,660 Grossing up u/s.195A : @10% Rs.34,49,390 Rs.38,32,655 : @40% Rs.12,69,270 Rs.21,15,450 Rs.59,48,105 Add: Interest u/s.201(1A) of the Act. Rs.17,69,500 Rs.77,17,605 ========== 5. Further, the assessee-company was also issued, a show-cause notice u/s.201 & 201(1A) of the Act on 07-02-2014, in respect of IT Data line charge Rs.1,35,98,703/- to MHM Holding under the head "reimbursement of expenses" and the ultimate beneficiary is BT (Germany) GmbH & Co., Germany during the financial year ending on 31-03-2012. The deductor company is required to withhold the tax, at the applicable rates, from the payments in view of provisions of section 9(l)(v) r.w.s 195 of the Act and also as per Article 12 of the DTAA entered into with Germany. As per record available, the assessee-company in its reply dated 13/02/2014 6. claimed that agreement to the provide the service between BT (Germany) GmbH & Co., Germany and MHM Holding GmbH, Germany and not with Micro Inks Ltd. The invoices has also raised by the BT (Germany) GmbH 85 Co., Germany to MHM Holding GmbH. So in substance, BT (Germany) GmbH & Co., Germany has rendered services to MHM Holding GmbH, Germany. However, as per policy of the group, India related charges are recovered from M/s. Micro Inks Ltd. Based on actual uses and in proportion to that without any markup. Hence, no income accrues or deemed to accrue or arise to MHM Holding GmbH, Germany. Hence, no withholding tax is required to be from such reimbursement. The assessee-company rely on honorable Supreme Court in the case of GE India Technology Pvt. Ltd. V/s. CIT [2010] 193TAXMAN234 [SC]. The assessee-company claim that payment reimbursement of expenses ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 5 of 27 is not deemed to accrue or arise in India and therefore not chargeable to tax in India. Therefore, there is no default in withholding tax from reimbursement of expenses payment and request to drop proceedings. Assessing Officer (AO) has passed order u/s.201 & 201A rws 195 of the Act on 7. 12/03/2014 determining the default of withholding the TDS on reimbursement of expenses payment in respect of IT Data line charge Rs.1,35,98,703/- to MHM Holding under the head "reimbursement of expenses" to the ultimate beneficiary is BT (Germany) GmbH & Co., Germany during the financial year ending on 31-03-2012. Total tax after grossing up u/s 195A on remittance of Rs. 1,35,98,703/- regarding usage charges of IT data lines remittance to BT (Germany) GmbH assessed at Rs. 15.10,970/- and Interest u/s 201(1A) of the Act at Rs.4,46,750/-. Total amount payable comes to Rs.19,57,720/- on account of default in payment reimbursement of expenses. As per order passed order u/s.201 & 201(1A) r.w.s 195 of the Act on 12/03/2014 total 8. amount determined payable come to Rs.96,75,325/-(77,17,605/- + 19,57,720). Assessee company preferred appeal against the above mentioned order before the 9. Ld. CIT(A)- Gandhinagar vide appeal No. CIT(A)-GNR/93/(Intl.Taxn.)/13-14 on 25-03-2014. Meanwhile, Assessee Company also filed application for rectification of mistake u/s 154 of the Act before the AO on 25-03-2014 vide application dated 20-03-2014. AO had passed order u/s 154 r.w.s 201&201(1A)&195 of the IT Act, 1961 on 25-03- 10. 2014 rectifying the mistake in respect of the rate of withholding tax calculated at the rate 40% instead of 20.06% of the payment made to the HSBC Ltd Hong Kong and resultant interest on such defaults. The rectified defaults determined of Rs.46,55,925/- and interest u/s 2Q1(1A) at Rs. 13,78,355/-. The total default amount payable was determined at Rs.60,34,280/- (46,55,925/- +13,78,355/-). Whereas, total amount payable Rs. 19,57,720/- on account of default in payment reimbursement of expenses remains unchanged. After rectification total default determined at Rs.79,92,000/(60,34,280/- + 19,57,720). In appellate proceeding, Ld. CIT(A)-Gandhinagar, has partially allowed the appeal vide 11. order dated 30-06-2014 in Appeal NO.CIT(A)-GNR/Intl.Taxn./97/2013-14. The Ld. CIT(A)- Gandhinagar, has accepted the claim of the assessee company in respect of interest payment to foreign banks on External Commercial Borrowing (ECB) specifically taken for the purpose of making investment in foreign subsidiary company. The Ld. CIT(A)-Gandhinagar, has relied upon the judgment of Hon hie ITAT Ahmedabad, in the case of Adani Enterprises Ltd.(ITA NO. 3072/Ahd/2009 with C.O. No.291 /Ahd/2009 A.Y.2009-10) and directed the AO to reverse the defaults, in respect of interest payment to foreign Banks, in para 4.2(b) of the order, and allowed the relief of Rs.60,34,280/- (46,55,925/- +13,78,355/-). It is pertinent to mention here that the Ld. CIT(A) has confirmed the findings of the AO in respect of default of withholding tax for reimbursement of expenses to the ultimate beneficiary BT (Germany) GmbH & Co., Germany. The Ld CIT(A) has relied on decision of Hon hie High Court of Madras in the case of Verizon Communications Singapore Pte Ltd., reported at (2013) 39 taxmann.com 70 (Madras) and agreed with the findings of the AO that the payment made to holding company of the appellant as reimbursement of charges towards International Private Leased Circuit amount to Royalty as defined in the Act as well as India-Germany DTAA. 11.1 At the outset, it is to be noticed, that the quoted judgment of Hon'ble ITAT Ahmedabad, in the case of ADIT(Intl. Tazm.}5 Ahmedabad v. Adam Enterprises Ltd, (ITA NO. 3072/Ahd/2009 A.Y.2009-10), during the course of proceedings u/s 201 &201(1A) of the Act and the Assessing Officer has rejected the contention of the assessee company as the aforesaid judgment has been challenged by the revenue in the HonrbIe Gujarat High Court. The appeal of the Revenue has been admitted by the Hon'ble Gujarat High Court and the question of law has been framed by Hon'ble Gujarat Eiigb, Court in Tax Appeal Ho. 698 of 2013, while admitting the Tax Appeal of revenue. The questions of law framed are as under; ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 6 of 27

A. "whether the appellate tribunal has substantially erred in holding that the assessee company was not liable to deduct tax at source under Section 196c read with Section 11 SAC on the interest payable on FCCBs to the non-resident bond holders by holding that in the interest payment by the assessee to non-resident investors cannot be said to have accrued or arisen in India and it also cannot be said that this interest income can be deemed to have accrued or arisen in India?" B. "whether the appellate tribunal has substantially erred in traveling to Section 9 which deals with the deeming clause in spite of the fact as per the provisions of Section 5(2) as interpreted by the Hon'ble Supreme Court in Performing Rights Society Case (Supra), the income clearly accrued/arose in India and. hence there was no ground for invoking the provisions of Section 9 in this case?" The Tax Appeal No. 698 of 2013, is still pending before the Hon'ble Gujarat High Court for the adjudication. Under the facts and circumstances narrated above., the reliance placed by the Ld. CIT(A), on the un-comparable, distinguishable and contested judgment, which has not reached at finality of the issues involved, is not applicable to the present case of the assessee. Hence, the decision 'of Ld. CIT(A)-Gandhinagar, needed to be set-aside and the order of the AO should be restored. Further, the judgment of Hon'ble ITAT Ahmedabad, in the case of ADTT(Intl. Taxn.), 11.2. Ahmedabad v. Adani Enterprises Ltd, is in respect of the payment transactions of FCCB, in which TDS is required to be deducted as per the provisions of Section 196C r.w.s 115AC of the Act. Whereas, transaction in present appeal of assessee, concerned with the payment of interest, and are covered, as per the provisions of Section 195 of the Act. Clearly, the transactions made by the assessee company are distinguishable from the transactions under reference of the judgment of Hon hie ITAT Ahmedabad, in the case of ADIT(lntl. Taxn.), Ahmedabad v. Adani Enterprises Ltd. The nature and purpose of transactions in the instant case are different, un-comparable and distinguishable from the transactions of the quoted judgment of Adani Enterprises Ltd. Hence, the ratio laid down in the case of ADIT(Intl. Taxn.), Ahmedabad v. Adani Enterprises Ltd is not applicable to the instant case of M/s. Micro Inks Ltd. The facts of the assessee company are different and payments are to be covered as per the provisions of section 195 of the Act. In the light of above stated facts and circumstances, the Ld. CIT(A), has erred in application of the above mentioned judgment to the instant case. It is established fact that once the any expenses are debited in the books of account 11.3. of the any company, it automatically constitutes accrual of income of the credit party/entity. Therefore, once interest expenses have been claimed by the assessee company, there is no dispute in respect of such, income arisen in the hands of the recipient party. The assessee company reduced its profit by claiming the expenses and still not deducted the TDS on such payments, claiming the income to the recipient is not arisen in India, is erroneous understanding of income recognition principle. 11.4 Going further to this, in different situation, assume that, payment was made by some offshore entity to any person outside India, on behalf of a resident company. And if such expenses are debited and claimed by the resident company in its Profit and Loss account, then also such payments arc deemed to be income arisen and accrued in India to such person. This is cardinal principle to determine the accrual concept. In the instant case, not only payments are made from India, but the same are claimed as expenses by the resident company also, which reduced the profit of the company and hence, resulted in reducing its Tax Liability. Nobody should be allowed to do so and more particularly, the assessee company of the instant case who had made payments of interest without deducting tax at source as per the provisions of section 195 of the Act, should not be unduly benefitted. Therefore in the light of the facts and circumstances narrated above, the the judgment pronounced by the Ld CIT(A) is erroneous in respect of the factual position stated above and hence, needed to be set-aside and the order of the AO should be restored.”

ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 7 of 27

“4.1 The appellant during the course of appellate proceedings submitted as under: "Withholding! of tax on interest ori ECB loan 2.1 The appellant company M/s. Micro Inks Limited is engaged in the business of manufacturing of printing inks. The company has availed ECB loan for tha purpose of investment in subsidiaries abroad for manufacturing printing inks and earning income therefrom. During the F. Y. 2011-2012 the appellant company has credited / paid total amount of Rs. 3,76,67,052/- towards interest to the following non- resident foreign banks. The details of interest paid during the year can be tabulated as under:-

Name of the Bank Country Nature of Amount (In Rs.) remittance Australia And New Zealand Banking Singapore Interest 193,89,614 Group, Singapore DBS Bank Ltd, Singapore Singapore Interest 66,53,684 Standard Chartered Bank, UK UK interest 84,50,573 The Hongkong And Shanghai Hong Interest 31,73,181 Banking Corporation Ltd, Hong Kong Kong

Total 3,76,67,052 2.2. The proceeds of the aforesaid loan has been utilized by the company for investment in the share capital of wholly owned subsidiaries outside India during the year as under Name of the Bank & country ECB received Name of the Amount (In US $) subsidiary & Invested (In US Amount $) Australia And New Zealand US $ Hostmann- US $ Banking Group, Singapore 14,473,000 Steinberg 14,473,000 (Total ECB of USD 20 million Australia Pty. out of which USD 1.396 Ltd., Australia million used for Capex and balance USD 18.604 million used for ODI.) US $ Hostmann- US$4,131,000 4,131,000 Steinberg New Zealand Ltd. Mew Zealand ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 8 of 27

DBS Bank Ltd., Singapore US $ Hostmann- US $ 4,000,000 4,000,000 Steinberg Inc., USA Standard Chartered Bank, UK US $ Hostmann- US $ 5,000,000 5,000,000 Steinberg Inc.,

2.3 The appellant company had not deducted TDS on the aforesaid payments on the basis of the benefit of exception clause provided in Section 9(l)(v)(b) of the Act. The Learned Assessing Officer held that the interest payments constitute an accrual of income in India U/s. 5(2) of the Act as far as the nonresident banks are concerned. Accordingly he held that withholding tax is deductible U/s. 195(1) of the Act while making remittance of the interest to the non-resident banks 2.4 The appellant company is in appeal before your honor against the aforesaid order of the Learned Assessing Officer. In response to the show cause notice issued by the Learned Assessing Officer the appellant: Company had furnished detailed written submissions dated 13/02/2014 and 06/03/2014 which has been duly reproduced by the Learned Assessing Officer in page no. 2 1:o 4 of the order U/s. 201 & 20.1. (1A) r.vv.s. 195 of the Act. The appellant Company has relied upon the plain reading of Section 9(:l)(v)(b) of the Act and submitted that its case is covered by the exception clause in the aforesaid section of the Act. Section 9(l)(v)(b) is reproduced as under:- "9. (1) (v) income by way of interest payable by— (a) ……………… (b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or 3.2 On the other hand the Learned Assessing Officer held that the receipt falls under the ambit of Section 5(2)(b) of the Act which defines the scope of the total income. According to the Learned Assessing Officer when a receipt is covered under the provisions of section 5(2) of the Act, there is no need to travel to the deeming provisions of Section 9 to examine its taxability. In order to support the above proposition the Learned Assessing Officer has relied upon the following decision of various courts and the commentary on the subject as given by the Learned Authors Kanga, Palkhiwalal & Vyas 9th edition - Performing Rights Society V/s. CIT -106 ITR 11 (SC) Hira Mills Ltd, Cawnpur V/s. ITO -14 ITR 417 (Allahabad HC) - - 3.3 Thereafter the Learned Assessing Officer concluded that the interest on the loans accrued as income for the non-resident banks in India. In view of the following reasons a) There is a security having paripassu charge The Appellant company has obligations to pay interest to foreign banks b) c) The Appellant company is an Indian resident 3.4 Thus it was concluded that the situs of accrual of income is in India. On that basis the recipient being non resident, tax should have been withheld U/s. 195 of the Act. The Learned Assessing Officer has also given his observations and arguments in support of his contention that Section 9(1 )(v) is not: applicable to the present case due to applicability of section 5(2) of the Act, Apart from that he has held that the benefit of exclusion clause in Section 9{l)(v)(b) as pleaded by the Appellant company is also not available in the given facts of the present case. 3.6 The observations of the Learned Assessing Officer in this regard is reproduced from Para. 4.6. of the order as under.

ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 9 of 27

"First exclusion covers the cases where interest is paid by the resident and money raised is used by such person for business and profession carried on by such person outside India. In present case, it is accepted position that assessee company itself does not carry any business or profession outside India for which the debt in the form of ECB loan has been obtained, It is also an admitted position that the amount of interest paid hy the assessee has been claimed as deductible expense against its income earned in India and offered for tax in the return of income filed. In view of this, the first exception is not applicable in the present case. Second exclusion covers the cases where the interest is paid by the resident for the purpose of making or earning any income from any source outside India. This clause covers the situation where the interest is related to Earning of income from source outside India arid such interest is deductible from the earning of the income from source outside India. Since in the present case, the assessee has raised the money to be used for making overseas direct investment in its subsidiary situated in U.S.A, and not for earning any income from any source outside India. In view of the above, it is hereby held that the interest paid by the assessee company on ECB loan is not covered by two exclusions provided by the section S(l)(v)(b) and the same is chargeable to tax in India. [Emphasis supplied-extract from order- page No. 10] Thus it is very clear from the above that the Learned Assessing Officer has not 3.7 considered manufacturing activities through wholly owned subsidiaries as a business carried on outside India. Similarly he has also stated that making investment in overseas subsidiaries is not for earning any income from any source outside India. 4 As against the aforementioned analysis and interpretation of the law adopted by the Learned Assessing Officer we would like to humbly submit before your honor our pleadings and proposition of law in regard thereto; 4.1 The primary contention of the Learned Assessing Officer is that the income has accrued in India, in order to objectively analyze the situs of accrual of income, the following facts are relevant – 4.1.1 The non-resident banks do not carry on business in India. 4.1.1 The interest is payable to the non-resident bank by virtue of the agreement under which the Financial assistance has been given to the appellant company the appellant company is obliged to remit the interest to the non-resident bank in its place of business which is Singapore, UK or Hong Kong as the case may be. 4.1.3 These agreements are subject to the governing law and jurisdiction of the countries where the non-resident banks are situated. The loans have been given in foreign currency in those territories and have to be repaid back in foreign currency in those countries. Accordingly the Situs of accrual of income as well as receipt of income is Singapore, UK and or Hong Kong as far as the present case of the Appellant company is concerned. 4.2 The Learned Assessing Officer has on the other hand merely held that since the payer is an Indian company income accrues in India. No other reason has been cited by the Learned Assessing Officer in support of his proposition other than as stated in para 4.4. of the order.

In regard to the above we would like to submit before your honor that the legislature 4.3 in its wisdom has considered the above aspects of the law in this regard and has ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 10 of 27 enacted a deeming provision by way of section 9 of the Act. The relevant portion of the said section has already been reproduced in para. 3.1 supra. In this manner the deeming provision have been enacted to cover situations not 4.4 coming within the ambit of another existing provision. The Learned Assessing Officer has not considered these aspects of the situs of accrual of income based on the location and legal jurisdiction of the transaction and the non -resident recipient. It has been merely stated that the accrual of income is in India only because of the fact that the payer is an Indian company. It is respectfully submitted that this is not in accordance with the law of income tax in India.

we were to test the deployment of foreign borrowing through the bonds in question, it is clear that almost all of them have been deployed outside India for assessee's business activities. Investing in Joint Ventures or wholly owned subsidiaries is one of two categories of end-use conditions imposed by R.B.I, for raising foreign funds through these types of bonds. As is well accepted, "business" is wide enough a term to include investment in subsidiaries or joint ventures which are further involved in business or commerce. Therefore, the Assessing Officer's observation that the appellant is not earning out of a business outside India is not correct. The appellant has invested the borrowed funds in 11 company which is not only incorporated outside but is also doing business outside. Similarly parking funds outside to earn interest would also be covered by the second limb of the except to section 9(l)(v)(b). The Assessing Officer's objection of investment being capital in nature is contradictory and of not much consequence, as only by incurring expenditure of capital nature, it could have run business or earned income. 2.3.14. Hence, therefore, on the basis of legal and factual position, I think, it is fair to say that the interest paid by the appellant on its FCCBs is covered by exceptions to section 9(l)(v)(b) and consequently it shall fall outside the ambit of deemed income arising or accruing in India and as a result out of section 5 also." 5.3 Admittedly the Learned Assessing Officer had not accepted the pleading of the Appellant company that the exception clause in section 9(l)(v)(b) is not applicable to the facts of the case of the Appellant company. In this regard it is humbly submitted before your honor that in the present case under appeal of the Appellant company also the ECB loans raised abroad have been invested in wholly owned subsidiaries for carrying on manufacturing; of printing inks outside India for earning income there from and hence the interest paid on such loans are squarely covered by the provisions of Section 9(l)(v)(b). Thus it is respectfully submitted that the view adopted by the Learned Assessing Officer regarding the place of accrual of income has not been accepted by the higher judicial authorities ie. Honorable CIT(Appeals) Gandhinagar and the honorable jurisdictional ITAT Ahmedabad 5.4 As Submitted by us the honorable Jurisdictional ITAT has dealt with the applicability and scope of provisions of Section 9{l)(v)(b) and Section 5(2) in paragraph number 8 to 17 of the order. While exhaustively analyzing the plain interpretation of section 9(l)(v)(b) of the Act, the honorable ITAT has considered the decisions of Hon'ble Apex Court in the case of Performing Rights Society v. CIT and another of Hon'ble Allahabad High Court rendered in the case of Hira Mills Ltd. Cawnpur which has been relied upon by the Learned Assessing Officer in support of his contention in the present case of the Appellant company before your honor. 5.4 The concluding paragraph of the Honorable ITAT is reproduced from para. 17 of the order as under:- "17. In the light of above discussion, we have no hesitation in holding that in the present case, interest payment by the assessee to non-resident investors cannot be said to have accrued or arisen in India and it also cannot be said that this interest income can be deemed to have accrued or arisen in India. Therefore, no TDS is to be deducted by the assessee from this payment in question. It has neither accrued nor arisen in India nor is deemed to accrue or arises in India in the hands of non-resident investors and therefore, no TDS is deductible. We, therefore, decide this issue in favour of the assessee and decline to interfere with the order of the CIT(A)." 5.6. We would like to humbly submit before your honor that the facts of the case in the case of appellant company are similar to facts of the case of M/s,. Adani Enterprises Limited. The issue in the case of M/s. Adani Enterprises has arisen consequent to remittance to Bank of New York, Mellon towards the interest payable on Foreign Currency Convertible Bonds (FCCBs), issued by Adani Enterprises Ltd. After rejecting the explanation given by the appellant in that case the Assessing Officer held that the ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 12 of 27 Bonds have been issued by an Indian company and the interest has been paid by an Indian company from India only and further the obligation to pay the interest rested with the assessee in that case, only. Therefore, according to him the Interest has accrued or arisen in the hands of non-resident bondholders in India as scon as the interest became due to the Bondholders. According to him, the interest: on FCCBs is chargeable to tax u/s.5(2) itself and the appellant's assertion that the same is covered by section 9 is incorrect. According to him, when the income is actually received or accrued in India, the provisions, contained in section 5(2) are sufficient to create a charge in respect of a non-resident's income and there is no need to resort to the deeming provisions of section 9(l)(v). The Assessing Officer in that case has further quoted extensively from a number of decisions, namely the decision of Hon'ble Supreme Court in the case of Performing Rights Society v. CIT 106 ITR 11 and that of Hon'ble Allahabad High Court in the case of Hira Mills Ltd. Cawnpur v. ITO 14 ITR 417 a:; also from the commentary of Kanga, Paikhiwala & Vyas. On the strength of above, the Assessing Officer in that case came to the conclusion that the income derived from the non-resident bondholders is chargeable u/s.5(2) as the income accrued in India and once it is covered u/s.5(2), section 9(l)(v)(b) is not applicable. 5.6.1 In the present case before your honor our company had also raised foreign currency loans under the scheme permitted by RBI and has invested the monies in wholly owned subsidiaries aboard for carrying on manufacturing activities. The Learned Assessing Officer has passed the order U/s. 201 r.w.s. 201(1A) on the basis of the same interpretation of law and reason as adopted while framing the order the afore- cited decision in the .case of M/s. Adani Enterprises. The Learned Assessing Officer in para.5 of the order has mentioned that the decision 5.7 of the honorable ITAT as reported in 29 Taxman.com 99 has not: been accepted by the department who has filed an appeal before Gujarat HC. Accordingly the order in the case of the Appellant company has been passed without considering the legal propositions as adopted by the honorable higher authorities i.e. the honorable CIT(Appeals) Gandhinagar and the honorable jurisdictional ITAT Ahmedabad. Admittedly the Learned Assessing Officer has not distinguished the decision of the higher authorities in any manner and has merely "stated the said decision was not accepted by the department. In view of the above factual and legal aspects of the case we request your honor to 5.8 consider our pleading that as per the provisions of section 9(l)(v)(b) of the Act the interest paid to non-resident banks do not constitute income in their hands either U/s. 9{l)(v)(b) or U/s. 5(2) of the Act In the case of GE India Technology Centre Pvt Ltd reported in 327 ITR 456 the 6. Honorable Apex Court has held that if the payment to the non-resident do not represent sum chargeable to tax as per the provisions of Income Tax Act 1961, the requirement to withhold tax U/s. 195 is not attracted. Keeping in view of the facts of the case and law we request your honor to consider 7. our pleading that the interest paid to non-resident banks does not constitute income chargeable to tax in their hands and oblige.”

10. We have heard the Counsels of both the parties and we have also perused material placed on record, judgments cited by the parties as well as orders passed by the Revenue Authorities. From ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 13 of 27 the records, we notice that the ld.CIT(A) has relied upon the decision of the Co-ordinate Bench of ITAT Ahmedabad in the case of Adani Enterprises Ltd., [2013] 29 taxmann.com 99 wherein it was held that “interest paid to non-resident bankers shall not be considered to have accrued or arisen in India u/s.5 or deemed have been accrue or deemed to have arisen u/s.9(1)(vb) of the Income Tax Act. Whereas, it is also an undisputed fact that the assessee has utilised the funds borrowed under ECB Loan for the purpose of making investment in foreign subsidiary companies. Since under the similar facts and circumstances, Hon'ble Ahmedabad Bench of ITAT in the case of Adani Enterprises Ltd., 29 taxmann.com 99 (Ahmedabad Tribunal) already held that “interest paid to non-resident banker shall not be considered to have accrue or arisen in India. Thus, according to our view, the said findings recorded by the ld.CIT(A) needs no interference.

Admittedly, the ld.AO had not distinguished the decision of Higher Authorities in any manner and had merely stated that the said decision was not accepted by the Department. Hon'ble ITAT in the case of Adani Enterprises Ltd(supra) has held as under: "12. From the above finding of the A.O., it does not come out as to on what basis, it is stated by him that the income has accrued or arisen in India. It cannot be said that interest income has accrued or arisen in India in all cases where the payer is an Indian resident because if that be so, then the provisions of clause (b) of Section 9(l)(v) becomes redundant. In that clause (b) of Section 9{l)(v), an exception has been carved out in respect of interest payable by a person who is resident and the exception is this that where the interest is - payable in respect of his debt incurred and the money borrowed outside India and was used for the purposes of business carried on by such person outside- India or for the purposes of making investment outside India. This goes to show that in a case where the interest is payable in respect of any debt incurred or money borrowed and used for the purposes of a business or investment outside India, then such interest income cannot be said as even deemed to accrue or arise in India. Hence, this is not the deciding factor regarding place of accrual or arising that who is payer of the interest. There are several judgments on this aspect as to where the income has accrued or arisen. These judgments are taken note of by the Tribunal in para No.15 of its order rendered in the case of Credit Agricole Indosuzz [supra). One judgement so noted is of Hon'ble Madras High Court rendered in the case of C.G. Krishnaswami Naidu v. CIT 62 ITR I T R 686 and it was held in that case that in money lending transaction, the decisive factor would be the place where the money is actually lent: irrespective of where it came from. In the present case, this is not in dispute that the money was actually lent by the non-resident investors in the foreign country and it was not lent in India. Hence, as per this judgment of Hon'ble Madras High Court, it cannot be said that the interest income has accrued or arisen to the non-resident investors in India. We find that the only basis adopted by the A.O. for holding that the interest income has accrued or arisen in India is this that the payer is an Indian company and he has totally ignored this aspect of the matter as to where the money lending transaction has taken place. This is admitted factual position that money lending transaction has taken place outside India and hence, it cannot be said that the interest has accrued or arisen in India as per this judgment of Hon'ble Madras High Court. We have also seen that none of the judgments, cited by Id. D.R. of the Revenue, is rendering any help to the Revenue whereas as per the judgment of Hon'ble Madras High Court, it cannot be said that, the interest income has accrued or arisen in India and there is no other basis of the A.O's order in holding that the interest income has accrued or arisen in India except this that interest payer is an Indian company i.e. assessee but there is no authority cited by him in support of this contention whereas as per the judgment of Hon'ble Madras High Court, we have seen that the place of lending is important.

13. When we apply the provisions of Section 9(l)(v), we find that the case of the assessee is falling under clause-b of Section 9(l)(v) because in the present case:, the money borrowed was utilized for the oversees business of the assessee company and the assessee has riot deducted tax in respect of that portion of interest payment which is relating to borrowing for investment outside India and hence, as per this clause also, no income can be said to have deemed to accrue or arisen in India in the hands of non-resident investors and therefore no TDS is deductible.

14. We now examine the whole things from a different angle which will conclude the matter. As per the provision of section 5(2), total income will include those incomes which are received in India or which has accrued or arisen in India. In addition to this, this is also to be included in ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 15 of 27 the total income of non-resident if income is deemed to be received in India or income is deemed to accrue or arise to non-resident in India. In our considered opinion, deemed to be received in India and deemed to accrue or arise in India increases the scope of taxability in India in addition to income received in India and; income accrued or arisen in India. If an income is not received in India, it can be deemed to be received in India in some specific situation:; and similarly, even if any income has not accrued or arisen in India, it can be deemed to arise or accrue in India under some given situations but if an income has actually been received in India or has actually accrued or arisen in India, it cannot be part of deemed to be received in India or deemed to accrue or arise in India because what has actually been received in India or what has actually accrued or arisen in India cannot be said to be within the purview of deemed to be received in India or deemed to accrue or arise in India.

by the Revenue stands dismissed. for Assessment Year 2012-13(by Assessee):

13. Grounds of appeal raised by the Assessee read as under: “01. On appreciation of the facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer that tax has to be withheld u/s 195 of the Act to the tune of Rs.15,10,970/- on the remittance towards reimbursement of expenses to the tune of Rs.1,35,98,703/- by holding that the same is chargeable to tax u/s 9(1)(vi) of the Act read with article 12 of the DTAA with Germany. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts of the case and law and deserves to be deleted.

02. On appreciation of the facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in levying interest u/s 201(1A) on the aforementioned remittance. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts of the case and law and deserves to be deleted.

03. The appellant craves leave to add, amend, modify or alter the above grounds of appeal at any stage of appellate proceedings.

04. The appellant humbly prays that the appeal be allowed in toto.”

14. The solitary ground raised by the assessee relates challenging the order of ld.CIT(A) in confirming the action of the ld.Assessing Officer(AO) that tax has to withheld u/s.195 of the Act on the remittances towards reimbursement of expenses by holding that the ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 18 of 27 same is chargeable to tax u/s.9(1)(vi) of the Act read with Article 12 of the DTA with Germany.

15. The ld.Authorised Representative(AR) reiterated the same arguments as was raised before the ld.CIT(A) and has also relied upon the written submissions filed before the ld.CIT(A) which are contained in para 4.1 of its order and the same is reproduced below:

“Ground No. 2 Withholding of tax on reimbursement of expenses to the tune of Rs. 1,35,98,703/- 8. During the year under consideration the appellant company had given a sum of Rs. 1,35,98,703/- to its holding company abroad towards reimbursement of actual cost towards end to end IT data connectivity service across the geography called as Multiprotocol Label Switching (MPLS). The facts of the case can be summarized as under:- 8.1 The appellant company is incorporated under the Companies Act, 1956 and having its registered office at Bitakhia House, MukatanandMarg, Chala, Vapi, Gujarat -396191 and is a subsidiary company of Germany based MHM Holding GmbH. The appellant company is engaged in the business of manufacturing and selling of Printing Inks and their intermediate/key raw materials. In order to have effective communications among the group companies, MHM Holding GmbH, Germany has entered into contract with BT (Germany) GmbH, Germany for providing end to end IT data connectivity service across the geography called as Multiprotocol Label Switching (MPLS). MPLS is a mechanism in high- performance telecommunications networks that directs data from one network node to the next based on short path labels rather than long network. In pursuance of aforesaid contract, MIL utilizes the said services for carrying out data communications with group entities. 8.2 Thus M/s. MHM Holding GmbH Germany had taken MPLS facility from British Telecom (Germany) GmbH, a local service provider having operations in Germany. This facility rendered and availed entirely in Germany enables the Appellant company to have continuous voice and data flow with its holding company at Germany. In order to comply with the Arms Length Pricing requirement, the Appellant company reimbursed the actual cost of such data usage without any additional mark up. In this manner it was submitted that the non-resident company has not earned any income by virtue of this reimbursement of expenses. 8.3 The Learned Assessing Officer has relied upon the decision of Honorable Madras High Court in the case of Verizon Communications Singapore Pte Ltd reported in 39 Taxmann.com 70 and held that the payment constitute a Royalty on which withholding tax is deductible under the provisions of Section 195 of the Act. The Appellant Company in fact brought to the notice of the Learned Assessing Officer that the service provider located at Germany has rendered the service to MHM Holding GmbH a non-resident company located in Germany. No part of the ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 19 of 27 services has been rendered in India and no income has resulted to' the non- resident company out of the reimbursement of actual expenses for which an invoice has been raised by the non resident company on the basis of actual time usage. 8.4 The Learned Assessing Officer after perusing these aspects of undisputed facts of the case concluded that the remittance constitutes payment to the service provider of the holding company directly. In his view the holding company is only an intermediary and he held that the payment is in effect of data services rendered by British Telecom (Germany). 8.5 The observation of the Learned Assessing Officer is reproduced hereunder:- "8.3 in the view of the above, the remittance made by the assessee company is nothing but band-with payments made by the Indian company to non-resident for International Private Leased Circuit (IPLC) for providing end-to-end interest connectivity for transmission of data by the assessee BT (Germany) GmbH, Germany, transmits the traffic/data of the Indian company in India from the customer's office in India and transmits data to a virtual Point outside India. The invoice raised by BT(Germany) GmbH on the MHM Holding and in- turri MHM Holding to Indian company are part of one transaction Further the data lines are the property of BT (Germany) GmbH and MHM Holding is a facilitator entity on behalf of the India company. 8.4 Further, article-12 of DTAA with Germany is as under:- "Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such royalties and fees for technical services may also be taxed in the- Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 10 percent of the gross amount of royalties or the fees for technical services. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting any patent, trademark, design or model, plan, secret formula or process, or for the use of or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience." 8.5 Considering the above, it is clear that the remittance were liable to be treated as "royalty" for the use of IPLC u/s.9(l)(vi) read with Explanation 2(iva) and correspondingly Article 12 of DTAA between India and Germany. Even if the payment is not treated as one for the use of equipment, the use of the process was provided by the BT (Germany) GmbH, whereby through the assured bandwith the Indian company is guaranteed the transmission of the data. The fact that the invoice is raised by MHM Holding, a parent company, has to be seen in the light facilitator and provisioning entity and' this by itself does not take the remittance cut of the scope of royalty. [Emphasis supplied extract from the order page no. 14 &15] We would like to humbly submit before your honor that the Learned Assessing 9. Officer has accordingly made an assumption by ignoring the actual facts of the matter. The payment has been made to the holding company of the Appellant company purely as reimbursement of expenses. We humbly plead before your honor that the Tax laws have to be harmoniousiy interpreted to give effect to the machinery provisions. Section 195 is a machinery provision to collect tax at ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 20 of 27 source. The provision clearly lays down that the withholding tax is deductible only in case income accrues to the nonresident recipient of the remittance. 9.1 The Learned Assessing Officer has adjudicated the issue on the basis of an assumption that the payment has been indirectly made to British Telecom (Germany) for services rendered which can be considered as Royalty within the meaning of Section 9(l)(vi) of the Act. The Learned Assessing Officer has acknowledged that the services have been rendered by British Telecom (Germany) to MHM Holding GmbH only. He has classified MHM Holding GmbH as a facilitator intermediary. This is contrary to the facts of the case. There is no privity of contract: between Appellant company and British Telecom(Germany). Hence it is humbly submitted that the Learned Assessing Officer has interpreted the facts of the case to adjudicate the issue in the manner it has been done and has classified the payment as a payment towards Royalty.

ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 21 of 27

ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 23 of 27

In view of the above factual and legal aspects of our case it is humbly submitted 13. that there is no default U/s. 195 for not withholding tax from the reimbursement of expenses as alleged by the Learned Assessing Officer Alternatively and without prejudice to our above aforesaid submission, we would 14. also plead before your honor that the remittance to the appellant company's parent company at Germany MHM Holding GmbH do not constitute a consideration which can be classified as "Royalty" within the meaning of explanation (2) to (6) of Section 9(l)(vi) of the Act. The said explanations (2) to (6) to Section 9(l)(vi) are reproduced hereunder: - “Explanation 2. —For the purposes of this clause, "royalty" 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 the 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 the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; [(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;] (iv) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection 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 with the activities referred to in subclauses (71 to 93[(iv), (iva) and](v). [Explanation 3.—For the purposes of this clause, "computer software" means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data.] [Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use-a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not— (a) the possession or control of such right, property or information is with the payer; such right, property or information is used directly by the (b) payer; ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 24 of 27 the location of such right, property or information is in (c) India. Explanation 6. —For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;] '' 14.1 As regards the applicability of the aforesaid explanations of Section 9(l)(vi) to the facts of our case we would like to humbly submit before your honor as under:- Clause(i) to Explanation (3) No rights or licenses as mentioned in the aforesaid clause has been transferred Clause(ii) to Explanation (3) No information as mentioned in Clause (ii) has been imparted Ciause(iii) to Explanation (3) The consideration is not for the usage of any patent, invention, model, design, secret formula or process or trade mark or similar property Clause(iv) to Explanation (3) No information concerning technical, industrial, commercial or scientific knowledge, experience or skill has been imparted. Clause(iva) to Explanation (3) The Appellant company has neither used nor has a right to use any equipment of either the parent company MHM Holding GmbH or British Telecom (Germany) GmbH. The equipments are in their possession and location and the Appellant company has never used or have any right to use any of their equipments CIause(v) to Explanation (3) No rights as mentioned in the clause (v) has been transferred Since any of the activities mentioned in clauses (i) to (v) has not been carried out there is no possibility of rendering any of the services in connection with the1 same. Explanation 3 & 4 Further Explanation 3 & 4 are applicable to units engaged in software business and hence are not connected with the facts of the appellant company's eases Explanation 5 Explanation 5 is applicable only in the event of transfer of any right property or information. In the case before your honor the remittance is for sharing of expenses of end to end IT data connectivity service and not a consideration in respect of any right, property or information. Explanation 6 Explanation 6 brings within its ambit an expansion of the expression "process" by deeming that transmission by satellite (including up-linking, amplification, conversion for downlinking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret constitute process. 14.2 In this connection we would like to submit before your honor that the word "process" on a standalone basis has no implication and has to be read in tandem with Clause (i), (ii), (iii) of Explanation (2). Only if those clauses are applicable then only this explanation will come into play where the imparting of Information or transfer of right as mentioned in those clauses are transmitted by satellite 14.3 In the case before your honor the Appellant company has merely availed the bandwidth services for day to day communications and not for any purpose as mentioned in explanation (2) to Section 9(l)(vi) of the Act. It is not the case of the Appellant company to avail any information or right as mentioned in explanation ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 25 of 27 (2) and it is also not the case of parent company MHM Holding GmbH and also not the case of the service provider British Telecom (Germany) GmbH to grant any such right or information. Our parent company has availed end to end IT data connectivity service in Germany which does not fall within any of the aforesaid clauses. The; Appellant company has merely shared the actual cost. 14.4 In this manner it is humbly submitted that the payment do not constitute Royalty either within the meaning of DTAA with Germany or within the meaning of 9(l)(vi) as held by the Learned Assessing Officer. Apart the recipient of remittance has not earned any income out of the remittance. On the basis of these facts as well the appellant company was riot liable for withholding of tax U/s. 195 from the reimbursement of expenses as alleged by the Learned Assessing Officer.”

16. Apart from the above, the ld.AR also submitted that subsequently in assessee’s own case for A.Y. 2011-12 and 2015-16 the ld.CIT(A) has himself allowed the grounds.

17. On the other hand, the ld.Departmental Representative(DR) relied upon the order passed by the ld.CIT(A).

ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 26 of 27 had categorically held that the amount paid by assessee does not amount to royalty and has distinguished the decision in the case of Venzone Communication, Singapore Vs. ITO 39 taxmann.com 70 [2013] and relying upon the decision of Bombay High Court in the case of Director Of Income Tax (IT)-I Vs. A.P.Moller Maersk A.S. had reached the conclusion that assessee company has not made any payment to BT Germany and has only reimbursed a part of the cost to its parent company MHM Germany. Therefore, it was held that the remittances shall be treated as reimbursement of actual expenses without any mark up or profit element. Similarly, in assessee’s own case for A.Y. 2015-16, the ld.CIT(A) has also by relying upon the judgment of Hon'ble Mumbai High Court in the case of DIT Vs. A.P.Moller Maersk A.P. (supra) had treated the remittances as reimbursement of actual expenses without any mark up or profit element. Moreover, Revenue has not been able to controvert the said findings recorded by ld.CIT(a) in A.Y. 2011-12 & 2015-16, which was decided subsequently, wherein Revenue themselves admitted the remittances to be reimbursement of actual expenses. Therefore, keeping in view of the totality of the facts and circumstances and also keeping I view of the principle rule of consistency, we allow this ITO,(Int. Taxation), Surat Vs. Micro Inks Ltd.: Vice-Versa /ITA No’s.2375 & 2707/AHD/2014 for A.Y. 2012-13 Page 27 of 27 ground raised by the assessee, accordingly, solitary ground raised by the assessee is allowed.