M/S HAVELLS INDIA LTD.,NEW DELHI vs. DCIT, NEW DELHI

Brief facts shows that assessee is a company engaged in the manufacturing of switchgears, energy meters, cables and wires, electrical fans, compact fluorescent lamp and related components and trading of luminaries lighting fixtures and exhaust fans. It filed its return of income on 30.10.2004 at Rs. 241077353/-. The case of the assessee was taken up for scrutiny. During the course of assessment proceedings, assessee invoked the provision of reference u/s 144A on certain issues. The ld Additional Commissioner gave certain directions to the ld AO. Consequently, the ld AO passed assessment order u/s 143(3) of the Act on 29.12.2006. The ld AO made following adjustment/ additions/ disallowances to the total income of the assessee:- i. Disallowance u/s 14A of Rs. 57000/-. ii. Term loan interest capitalized of Rs. 280276/- iii. Disallowances of non compete fees holding it to be a capital expenditure of Rs. 5 lakhs. iv. Additions on accounts of increase in authorised capital of Rs. 41012/. 04. The ld AO also noted that the assessee has claimed deduction u/s 80HHC of the Act of Rs. 41,45,160/-. The ld AO computed interest income as ‗income from other sources‘ against interest income offered by the assessee as ‗business income‘. The assessee was also not allowed netting of the interest paid against interest received. The ld AO also deducted 90% of the amount of Rs. 64,38,525/- received from another group concern for common office and infrastructure facilities. Thus, 80HHC claim of the assessee was substantially reduced. 05. Against this order, assessee preferred an appeal before the ld CIT (A). The ld CIT(A) upheld the following adjustment/ additions:- i. Additions of Rs. 2,80,276/- interest expenditure holding it to be capital in nature. ii. Disallowance of Rs. 5 lakh on non compete fees holding the same to be capital in nature iii. The deduction under section 80HHC was also decided by him with income from FDR and NSC amounting to Rs. 444195/- as income from other sources. Even netting of the interest was not allowed relying on the decision of the Hon'ble Delhi High Court in 16 DTR 339 and Hon‘ble Madras High Court 221 CTR 196.

The ld AR Shri Rohit Jain, advocate, raised contentions relying on plethora of judicial precedents to submit that non compete fees is a revenue expenditure. His submission is that the assessing officer and CIT(A) have failed to appreciate the facts of the case and have erroneously treated the expenditure as being ‗capital in nature‘ for the reasons that i. In the relevant assessment year, the appellant made payment of Rs.5 lacs on account of business necessity and commercial expediency in order to promote its existing business in the line of manufacturing and trading in lighting fixtures and fittings, by utilizing the manufacturing facility of GSL. ii. It is pertinent to mention here that on 11th August, 2003, three separate agreements were entered into with GSL: a) Assignment Deed between GSL and M/s. QRG Enterprises Limited, subsidiary of the appellant, for assigning of trademark/ brand ―Pole Star‖ owned by GSL; b) Exclusive Manufacturing Agreement between appellant and GSL where under GSL agreed to exclusively manufacture products of the appellant at its factory at Gurgaon; c) Non-competition Agreement between appellant and GSL where under the appellant paid Rs.5 lacs for GSL agreeing not to manufacture and market products using the brand ―Pole Star‖ during the continuance of the exclusive manufacturing agreement referred in clause (b) above. iii. He referred to salient features of the Exclusive Manufacturing Agreement between the appellant and GSL:

He further stated that the judicial precedent cited by the ld Addll. CIT in his 144A direction and the ld CIT (A) in his order are neither distinguished nor challenged by the ld AR and therefore, same are accepted and therefore claim of the assessee that it is revenue expenditure cannot be allowed. 16. He further stated that the alternative submission of the assessee that depreciation on it should be allowed clearly shows that non compete fee paid is capital expenditure. He further submitted that the ld AR has cited the decision, however, none of them applies to the facts of the case.

We have carefully considered the rival contention and perused the orders of the lower authorities. The facts show that appellant has entered into three agreements on 11.09.2003. i. The first agreement entered into as ‗Assignment deed‖ between Krishan Mehtra, Shyam Mehta as partners of GS Electricals (a partnership firm) and GS Lightings Pvt. Ltd in favour of QRG Enterprises Ltd, which is a wholly owned subsidiary of the appellant. According to that agreement trade mark of brand ‗Polstar‘ registered in the name of Shri Kishan Mehta and Mr. Shyam Mehta who are partners of GS Electronics for electrical lighting, fittings and fixtures, the above trade mark was assigned by that partnership firm to M/s. GS Lightings Pvt. Ltd by deed of assignment dated 17.08.2002 for a agreed consideration. According to that agreement above trademark was assigned to M/s. GS Lightings Pvt. Ltd. This fact is recorded in the preamble to the assignment deed. M/s. GS Lightings entered into an MOU dated 01.08.2003 with appellant group, has agreed to transfer this in favour of QRG Enterprises Ltd for Rs. 5 lakhs. The consideration was paid by QRG Enterprises Ltd on 11.08.2003. Thus, by the assignment deed the partnership firm along with their partners and GS Lightings Pvt. Ltd conveyed all its rights in the above trademark of ‗Polstar‘ to QRG Enterprises. Thus, the assignee i.e. QRG Enterprises Ltd became full owner of the brand ‗Polstar‘. The details of design and trademark are part of the annexure 2 and 3 of the assignment deed. ii. Second agreement was entered into as ‗Manufacturing agreement‘ on 11.09.2003 between appellant and GS Lightings Pvt. Ltd. According to that, GS Lights during the continuation of this agreement agreed to manufacture exclusively the ‗Polstar‘ Brand accessories for the appellant. In that agreement, reference of acquisition of trademark and design in favour of the QRG was mentioned. As per para No. 4 of the agreement, the GSL and its shareholders undertook not to use the above trademark during the continuation of this agreement and even after the termination thereof. The action was also taken by GSL to withdraw approval granted to it even on the expiry of the termination of the agreement for manufacturing of the above products. The manufacturing agreement further divested GSL with any right in the above ‗Polstar‘ products in consideration of this appellant agreed to remunerate the GSL on cost plus basis. The tenure of the agreement started from the effective date and shall remain in force until 12 months advance notice of termination by either party. There is also a lock in period for three years for issue of such notice. Thus only after three years period, 12 months notice is required by either party to terminate it. iii. Third agreement, Simultaneously a non-compete agreement was also entered on the same date between the appellant on one part and GS Lightings Pvt. Ltd, Mr. Krishan Mehta himself and other shareholders of GSL Lightings Pvt. Ltd on the other part. According to that all the other parties representing GSL Lightings Pvt. Ltd , G S Electricals, Shareholders of GS Lighting Pvt Ltd were collectively referred to as ―GSL‖. They also agreed to not to compete with respect to the product manufactured by GSL [naturally, as GSL was to manufacture for appellant] or appellant. It also prohibits them to carry out such business by forming any subsidiary or associated companies or a firm, which are to compete with the product manufactured by GSL or appellant. All existing shareholders and their family members also bound them to not to do any such activity. In consideration for doing so GSL and its shareholders authorized Mr. Krishan Mehta to receive consideration on their behalf for non competition. A sum was paid of Rs. 5 lakhs on 11.08.2003 which is held by the revenue authorities as capital expenditure.

First argument of the ld AR is that the appellant under non competitive agreement was in essence part and parcel of exclusive manufacturing agreement which was entered into merely to derive commercial advantage in the form of assured manufacturing and supply from GSL. This argument cannot be accepted for the reason that assessee is a group who has acquired trade mark and design and also obtained the manufacturing facilities of GSL Ltd which prevented the GSL, a partnership firm and all its shareholders from not competing in the business of manufacturing of electrical items. The non-competition charges paid by the assessee are part of the whole transaction of acquisition of a brand, obtaining manufacturing facilities of GSL Ltd on cost plus basis and prevented all the shareholders and their family members in warding competition with the appellant. Therefore, it cannot be said that the non compete fees is merely to obtain the manufacturing facilities. The assessee in sum in substance acquired the whole ‗Polstar‘ business of the GSL and warding off the competition of the appellant for a long time. [ Minimum being 4 years] The assessee relied upon the decision of the Hon‘ble Supreme Court in CIT Vs. Coal Shipment Pvt. Ltd 82 ITR 902 to support his contention. The facts in that case shows that assessee entered into an arrangement with another company engaged in the same line of shipping business to prohibit that company for export of coal to Burma during the agreement. However, that company also to assist assessee in procurement of coal for shipment to Burma. The assessee carried on coal shipping business and would pay specified amount per ton of coal shipped to Burma. Incidentally, the last coal shipment was made in June 1954 and the arrangement ended. The non compete fee paid was hooked to the volume of the coal shipped to Burma. The Hon‘ble Supreme Court has categorically held that the payment made to ward off competition in business to a rival dealer would constitute capital expenditure, if the object of making that payment is to derive an advantage eliminating the competition over some length of time, the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. It is further held that how long the period of contemplated advantage should be in order to constitute an enduring benefit would depend upon the circumstances and facts of each individual case. Comparing the facts of that case with the case before us, it is apparent that payment of non compete fees was connected to acquisition of ‗Polestar‘ brand and favour of QRG Enterprises. Therefore, it was a sale of the brand. The tenure of the manufacturing agreement was also till it gets cancelled i.e. Minimum 4 years. Even the notice period could not be given before the lock in time of three years. During the course of hearing bench asked a specific query to the counsel of the assessee that whether the agreement of manufacturing is ever terminated, if yes, when, ld AR did not produce any details / agreements etc. Assessee was also asked to produce the memorandum of Understanding referred to in various agreements, it was also not produced. Therefore, it is apparent that the object of making that payment is definitely for considerable length of time. In view of this, the decision in fact supports the case of the revenue.

The assessee also relied on the decision of the Hon‘ble Delhi High Court in CIT Vs. Eicher Ltd 302 ITR 249. In that particular case, two similar manufacturers paid the non compete fees to its full time employee who entered into an agreement with another company to promote it and set up manufacturing facilities for two wheelers on his retirement from assessee company. The management of the assessee company came to know of this, assessee paid a sum of Rs. 4 crores for not to carry on any business activity with regard to two wheelers. The issue was whether such expenditure is revenue in nature or not. The Hon‘ble Court held that while the length of the time for which competition is eliminated may not directly be decisive in all the cases but at the same time it should not be so prove to be virtual transitory. In that, particular case the Hon‘ble Court held that the assessee has merely eliminated competition in the two wheelers business, for a while. Therefore, it was held that the payment was not of enduring nature. In the present case, the appellant‘s advantage is ‗not for a while‘ but for long period. Thus, the facts of that case are distinguishable.

The assessee also relied on the decision of the Hon‘ble Madras High Court in Carborandum Universal Limited Vs. JCIT 226 Taxmann 268. The facts of that case was with respect to non compete fees paid to an ex manager who was chairman and managing director of one of the amalgamating company. The assessee paid the above sum to a person who had enjoyed knowledge of the entire operation. In that particular case there were no acquisition of any brand or other intellectual property right as well as the non compete fees was not paid to the company and all other stakeholder as in the present case.

The assessee also relied upon the decision of the CIT Vs. Max India Ltd. In 2013 dated 06.08.2018 of Hon‘ble Punjab and Haryana High Court, in that particular case the non compete expenses paid to an ex- employee restraining him in doing particular business for a particular time. The Hon‘ble Court held that since on the issue whether the expenditure was revenue or capital in nature, two opinions were possible and therefore, the view taken by the ld CIT (A) was upheld. The court also noted that the non compete fee was paid to safeguard the business interest as strategic investor in the joint venture agreement, assessee has obligation to them [JV Partners] that neither the assessee nor any of its employees get into competing business. In those circumstances, it was held to be expenses out of ―commercial expediency‖. In the present case manner of acquisition of business of 3rd parties with its manufacturing facilities and warding off the competition of all the concerned persons including the family members of the stake holders clearly shows that expense of the Non compete fees is capital in nature. Therefore, the facts are distinguishable. More so, in the present case the assessee has acquired an enduring benefit of a business.

Similarly all other decision relied upon by the assessee have distinguishing facts and hence same were considered while deciding the issue. The ld AR also did not distinguish the various decision relied up on by the lower authorities.

Though assessee has made a treatise of the judicial precedents on allowability of non compete fees as revenue expenditure, however he missed out Judicially binding precedent of the Hon Delhi High court in case of Sharp Business System Versus Commissioner Of Income Tax 27 Taxman.Com 50 (Delhi) which clearly covers the issue is squarely covered in favour of revenue. In that case the issue before the honourable High Court was whether the non compete fee paid by the assessee to its erstwhile partner as a consideration for not setting up any business of selling marketing and trade of electronic office products for a period of seven years amounted to capital expenditure and the same was not allowable u/s 37 (1) of the act. The honourable High Court after considering the plethora of judicial precedents including the judicial precedents cited by the assessee before us, held in para number 9 – 10 of its decision that the non compete fees paid by the assessee is a capital expenditure as Under:- “9. It can be gathered from the previous discussion that the assessee claimed deduction, as revenue expenditure, the sum of Rs.3 crores, paid by it to L&T, towards non- competing fee. The agreement between the assessee and L&T by which the latter was not to compete with the assessee, was to subsist for seven years. This Court is conscious of the fact that the ruling in Empire Jute Co. Ltd. ( supra) and Alembic Chemical Works Co. Ltd. (supra) have emphasized that a single test, i.e. whether the payment results in an enduring benefit cannot be conclusive in a decision as to whether an expenditure qualifies as one falling or in the capital field. Those decisions have emphasized the need to shift from an narrower field to a broader one, to ascertain the real nature of the advantage which a tax-payer would derive. The test now well-settled is one of ascertaining whether from the commercial angle, the advantage results in a capital field or does the expenditure fall legitimately within the revenue field. The decisions such as Madras Auto Service (P) Ltd. ( supra) have no doubt emphasized that the length or duration of the benefit accruing to the assessee may at times be irrelevant. In that case, the Court was concerned with the duration of the lease. At the same time, even while accepting the contentions of the assessee, the Supreme Court had cautioned that if an advantage accrues in a short span of time or is "epheramal", it cannot be considered a capital benefit qualifying as a capital expenditure. Necessarily, therefore, the Court has to adopt a fact-based approach and apply settled proposition. In the present case, the advantage which the assessee/appellant derived on account of its agreement with L&T was that the latter, a previous joint-venture partner to the extent of 26% was kept put out of the market for a period of 7 years. In this context, the decision in Blaze & Central (P) Ltd. v. CIT [1979] 120 ITR 33/1 Taxman 546 (Mad.), the decision of the Madras High Court is instructive. The assessee had entered into an agreement with one Saraswati Publicities by which the latter agreed to part with its business of film exhibition shots and not to compete with the assessee in business within a specified territory for nine years. The Supreme Court's decision in Coal Shipments (P.) Ltd. (supra) was relied upon and the High Court ruled that the assessee warded off business rivalry for nine years and also acquired business in a specified area and, therefore, the acquisition of business that generated income or the expenditure led out for Page | 26 fighting competition had to be treated as capital. The observations in Eicher Ltd. (supra) no doubt favour the assessee; however, this Court notices that the judgment recorded also noticed that "it is not clear how long the restrictive covenants was to last but it was neither permanent or epheramal. In that sense, the advantage was not of an enuring nature." This Court in another decision, Pitney Bowes India (P) Ltd. v. CIT [2012] 204 Taxman 333 / 17 taxmann.com 116 (Delhi) held that the expenditure of Rs. 5,94 crores made an non-competing fees for a limited period of 5 years to a distributor not to enter into agreements with other concerns, paid at the time of acquisition of business from its erstwhile manager as acting concern, requiring the previous management not to enter into identical business. The Court had held that the deduction towards non-competing fee could not be allowed as it conferred a capital advantage.

The learned departmental representative vehemently opposed the above submission and stated that for claiming of the depreciation the assessee must prove the ownership of the asset, user of the said for the purpose of the business and the actual cost. Over and above, the assessee must satisfy that the said on which depreciation is claimed is the eligible asset u/s 32 of the income tax act. He submitted that claim of depreciation on the same satisfying the conditions of section 32 of the Act, if eligible, can be allowed. He submitted that before us, neither the ld AR has shown that how the non Page | 28 compete fees is an eligible asset for depreciation nor these contentions have been raised before the lower authorities. Therefore, it cannot be accepted now and allowed.

We have carefully considered the rival contention and perused the orders of the lower authorities. This claim has been raised by the assessee before the ITAT for the first time. However the issue is also covered against the assessee by the decision of the honourable Delhi High Court in Sharp Business System Versus Commissioner Of Income Tax (Supra) wherein in para number 11 – 13 the honourable High Court considered the alternative argument on identical facts and circumstances and has a held as Under:- ―Q. Nos. 2 and 3 In Tangible Asset - 11. This question arose as a direct sequel to the appellant's alternative submission that if the expenditure is treated as a conferring capital advantage, necessarily they are depreciable. The appellant claims for depreciation of "know-how", "patents", "copyrights", "trademarks", "licenses", "franchises" or other business or commercial rights of similar nature being intangible assets acquired on or after 1st day of April 1998. Arguing by analogy, learned counsel for the appellant relied upon the judgment of the Supreme Court in Techno Shares & Stocks Ltd. (supra) where the issue was whether the contention of the assessee that it could claim depreciation on the Bombay Stock Exchange Membership Card held by it on the plea that it was a license or "business or commercial right of similar nature" was upheld. The appellant also relied upon the decision of this Court in Hindustan Coca Cola Beverages (P.) Ltd. (supra) and the judgement of the Kerala High Court in B. Raveendran Pillai v. CIT [2011] 332 ITR 531 /[2010] 194 Taxman 477 . As would be evident from Section 32(1)(ii), depreciation can be allowed in respect of intangible assets. Parliament has spelt-out the nature of such assets by express reference to 'know-how', 'patents', 'copyrights', 'trademarks', 'licenses' and 'franchises'. So far as patents, copyrights, trademarks, licenses and franchises are concerned, though they are intangible assets, the law recognizes through various enactments that specific intellectual property rights flow from them. Licenses are derivative and often are the means of conferring such intellectual property rights. The enjoyment of such intellectual property right implies exclusion of others, who do not own or have license to such rights from using them in any manner whatsoever. Similarly, in the matter of franchises and know-how, the primary brand or intellectual process owner owns the exclusive right to produce, retail and distribute the products and the advantages flowing from such brand or intellectual process owner, but for the grant of such know-how rights or franchises. In other words, out of these species of intellectual property like rights or advantages lead to the definitive assertion of a right in rem. The decisions of this Court in Hindustan Coca Cola Beverages (P.) Ltd. (supra) and that of the Page | 29 Kerala High Court in B. Raveendran Pillai ( supra) underlined that goodwill is also a species of depreciable right which can claim the benefit of Section 32. Those decisions were based on the ruling of the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1 and subsequent cases which have ruled that goodwill is a depreciable capital asset. So far as the decisions in Techno Shares & Stocks Ltd. (supra) is concerned, the Supreme Court clearly limited its holding that the right to membership of Stock Exchange is in the nature of "any other business or commercial right" which was an intangible asset as is evident from the following observations: "Before concluding we wish to clarify that our present judgment is strictly confined to the right to membership conferred upon the membership under the BSE Membership Card during the relevant assessment years. We hold that the said right to membership is "business or commercial activity" which gives a non-defaulting continuing membership and right to access Exchange and to participate therein and in that sense it is a license or akin to a license, in terms of Section 32(1)(ii)."

Therefore, in view of the decision of the honourable jurisdictional High Court, on the identical facts and circumstances, holding that non- compete fees is not eligible for depreciation u/s 32 of the income tax act, further, the above decision has considered the decision of the honourable Delhi High Court in case of Pitney Bowse ( I) Pvt Ltd 204 taxman 333 (Delhi),[ which is relied upon by the ld AR], we respectfully following that decision dismiss the alternative contentions of the assessee for the claim of depreciation. In view of this ground number [2] of the appeal of the assessee is dismissed.

Ground number [3] of the appeal of the assessee is against the order of the learned CIT – A in not allowing the interest income earned amounting to ₹ 44,41,951 as part of the business income claimed by the appellant company. The learned assessing officer found that assessee has claimed that interest income of ₹ 4,441,951 which represented interest received on margin money deposited with the banks as ‗business income‘ of the assessee. The learned assessing officer held that interest income received from the bank FDRs and National savings certificates is chargeable under the head ‗income from other sources‘ and cannot be held to be ‗business income‘. Furthermore, the learned assessing officer also reduced 90% of the amount of the above interest from deduction claimed u/s 80 HHC of the act applying explanation (baa) of that section. 31. The ld AR vehemently assailed the orders of the lower authorities. He submitted that appellant is engaged in the business of manufacture of energy meters and other electrical items. The energy meters are supplied to various electricity boards throughout the country, the supplies are made against open tenders, and bank guarantees furnished to buyers against earnest money / performance guarantees. The letter of credits is opened to Page | 31 import the materials required for manufacturing. During the relevant assessment year, the appellant received an amount of Rs. 46,78,544, out of which interest income of Rs. 41,93,072 on FDRs pledged with banks towards margin money against bank guarantees / letter of credits and against public deposits. In this regard, it is submitted that interest income in the case of the appellant is inextricably connected with the business of the appellant; hence, it should be included in the profit of the business for claiming deduction under section 80HHC of the Act. Assessee supported its contentions by relying on decision of Honourable Supreme Court in the case of CIT vs Alfa Laval India Ltd.: 295 ITR 451, wherein it has been held that interest from customers is to be included as business profits for computation of deduction under section 80HHC of the Act. He also relied up on decisions wherein it has been held that interest income earned on margin money, when inextricably linked with the business of the assessee, will be assessable as business income: i. Pr. CIT v. Universal Precision Screws: ITA 392/2015 (Del.) CIT v. K & Co.: 364 ITR 93 (Del.) ii. iii. CIT v. Koshika Telecom Ltd.: 287 ITR 479 (Del.) iv. CIT v. Infosys Technologies Ltd: 352 ITR 74(Karn) v. CIT vs. Sociedade de Fomento Industrial Ltd.: 237 CTR 141(Bom) vi. Mrs. Saroj Dassani v. ACIT: [2008] 25 SOT 1 (DELHI)(URO) (Del. Trib.)/99 TTJ 345 vii. Voltas International Ltd. v. ACIT: 2 ITR (Trib.) 410 (Mum. Trib.) viii. Oasis Securities Ltd. v. DCIT: [2013] 36 taxmann.com 88 (Mum. Trib.)/59 SOT 302 ix. ITO v. Midas Touch Exports: [2005] 1 SOT 553 (Mum. Trib.) x. DDIT v. Samsung Engg Co. Ltd.: [2011] 43 SOT 38 (Mum.) (URO) xi. SMS Pharmaceuticals Ltd. vs. DCIT: [2014] : 32 ITR(T) 220 Mitsu Ltd. v. Asstt. CIT: 142 ITD 157(Ahd.) xii.

He further submitted in following decisions it has been held that interest income earned on delayed or overdue payment from customers is assessable as profits and gains from business for computing deduction under Chapter VI-A of the Act: i. CIT v. Govinda Choudhury and Sons.: 203 ITR 881 (SC) ii. CIT vs. Jindal Polyester And Steel Ltd.: 221 Taxman 30 (All) iii. Nirma Industries Ltd. v. DCIT: 283 ITR 402 (Guj) (SLP dismissed/rejected): CIT v. Madras Motors Ltd: 257 ITR 60 (Mad): 80HH and 80I iv. CIT v. Rane (Madras) Ltd.: 238 ITR 377 (Mad): 80I v. vi. CIT v. Indo Matsushita Carbon Co. Ltd.: 286 ITR 201 (Mad): 80HH Tata Sponge Iron Ltd. v. CIT: 292 ITR 175 (Orissa): 80HH vii. viii. JCIT v. Sidheshwari Paper Udyog Ltd.: 94 ITD 187 (Del. Trib.) (TM): 80IA 145 taxman 22 ix. Joyco India P. Ltd. v. ITO: [2009] 122 TTJ 940 (Del. Trib.): 80IA x. G. S. C. Toughened Glass P. Ltd.: 13 SOT 668 (Del. Trib.) Kirloskar Electrodyne Ltd. v. DCIT: 87 ITD 264 (Pune Trib.) xi. xii. Asst. CIT v. Biotech Medicals P. Ltd.: 119 ITD 143 (Hyd Trib.) 17 CIT vs Universal Pipes (P) Ltd.: 211 Taxman 420 (Gauhati) xiii.

We have carefully considered the rival contention and perused the orders of the lower authorities. A bare reading of cl. (baa) (1) of Section 80 HHC indicates that receipts by way of brokerage, commission, interest, rent, charges etc., formed part of gross total income being business profits. But, for the purposes of working out the formula and in order to avoid distortion of arriving export profits cl. (baa) stood inserted to say that although incentive profits and ‗independent incomes‘ constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. The explanation given by the assessee clearly shows that energy meters are supplied to various electricity boards throughout the country and the supplies are made against open tenders and bank guarantees furnished to buyers against earnest money/ performance guarantees. The letter of credits is opened to import the materials required for manufacturing. Therefore, such interest income is related to letter of credit for import of the material for which various bank guarantees are obtained against the placement of fixed deposits and the National savings certificates. This itself shows that such interest income does not have any relation with the export turnover or export of goods. In view of this, we do not find any infirmity in the orders of the lower authorities in excluding 90% of the interest income for calculating eligible deduction u/s 80 HHC of the income tax act.

The learned departmental representative submitted that unless the interest income is held to be the income chargeable under the head business income then only net of interest paid on interest received can be considered for the purpose of netting of. He submitted that in this case the lower authorities have held that the above interest received by the assessee is not a business income but income from other sources therefore; the decision relied upon by the learned authorised representative who not apply.

We have carefully considered the rival contention on this issue and find that the assessee has received interest on margin money deposit for the purpose of letter of credit from various banks. Therefore, it cannot be said that there is no relationship with the business of the assessee with the interest earned by the assessee. In fact, the interest has been received on Fixed deposits placed for enjoying letter of credit against which the assessee has imported the goods and therefore it is inextricably linked with the business of the assessee. Therefore, according to us, the above interest is chargeable to tax as business income of the assessee. The moment the above interest is held to be chargeable Under the head business income, the issue of netting of interest paid with interest received is squarely covered in favour of the Page | 35 assessee by the decision of the honourable Supreme Court in case of of ACG Associated Capsules (P.) Ltd. v. CIT: 343 ITR 89 (SC), therefore we direct the learned assessing officer to consider 90 % of the interest after net of the interest received and paid for the purpose of working out of the deduction u/s 80 HHC of the act. Accordingly, this issue is allowed in favour of the assessee.

The next issue in the 3rd ground is with respect to deduction of Rs. 90% of the amount of Rs. 6438525/- received from M/s Crabtree India Ltd towards common office and infrastructure facilities provided. The assessee claimed the same to be in the nature of reimbursement of expenses incurred by the appellant. Therefore, the contention was that 90% of the same cannot be reduced while working out deduction u/s 80HHC of the Act. During the course of assessment proceedings in Schedule 11 AO noted that assessee has received Rs. 6438525/- from M/s. Crabtree India Ltd on account of reimbursement of common office and infrastructure facilities availed by the such company from the assessee company. The ld AO asked the assessee to show that how the above sum can be ‗profits of the business‘. The assessee submitted that miscellaneous receipt shown under the head ―other income‖ are connected with the business of the assessee company and therefore, they have taken as a profit of the business for calculation of deduction u/s 80HHC of the Act. The ld AO noted that reimbursement of expenses from the above company cannot be considered to be receipt derived from export undertaken by the assessee and therefore, same is hit by provision of explanation (baa) of section 80HHC and therefore, for the working of eligible deduction the same is required to be reduced to the extent of 90% from profits of the business.

We have carefully considered the rival contentions and perused the orders of the lower authorities. The assessee has submitted at page 37 of the paper book being an agreement between Crabtree India Ltd and assessee dated 13.03.2002. The agreement says that the assessee is having marketing infrastructure in the form of Central and Accounts Office in Delhi and branches in all over India and same were allowed to be used by Crabtree for its business. For the consideration, the Crabtree shall pay 2% of the sale amount as reimbursement towards usage of common facilities. The agreement is effective from 01.04.2001 though executed on 13th March 2002. Based on the agreement and findings of the lower authorities that it is a lease rent paid by Crabtree to the assessee, which can never be the business income of the assessee derived from export of goods, therefore, is not eligible for deduction u/s 80HHC of the Act. Bench raised a query to the ld AR that how the assessee shows this is a reimbursement of rent paid or any other expenditure. We also asked the ld AR who denied that it is rent. As the ld CIT (A) has giving categorical finding that the above amount of receipt is rent from Crabtree by the assessee and the same finding has not been controverted by the appellant, we are not inclined to interfere with the finding of the lower authorities. Even otherwise, the assessee has neither produced the debit note issued to the Crabtree detailing what kinds of expenditures were reimbursed. The copy of the agreement is also entered into at the fag end of the accounting year. In absence of any detail of expenditure incurred, which was reimbursed by Crabtree to the assessee, the argument of reimbursement of expenses is also not tenable. Thus, we do not find any infirmity in the order of the lower authorities. Accordingly, ground No. 3 of the appeal is partly allowed.

In the result the appeal of the assessee in A Y 2004-05 is partly allowed.

For assessment year 2007 – 08, assessee filed its return of income declaring an income of ₹ 427,259,528 and 27/9/2007. The assessment u/s 143 (3) of the income tax act, 1961 was passed by the learned Deputy Commissioner of income tax, large taxpayers unit, Delhi (the learned AO) on 30 December 2009 determining the total taxable income of Rs. 444966560/–. The learned assessing officer made following disallowances:- i. disallowance u/s 40 (a) (i) of Rs. 26,02,844/- of payment made to foreign parties without deducting tax u/s 195 of the income tax act ii. disallowance of Rs. 175,64,366/– being provision for scheme Shaenshah to provide incentive to the distributors of the assessee‘s product iii. claim of deduction u/s 80 IC of the income tax act made by the assessee of ₹ 645,962,957/– in the original return of income however assessee requested for adjustment of the above deduction to ₹ 654,050,969/– by excluding the loss of ₹ 4,488,012 of Baddi Unit - II by filing a letter dated 11 November 2009 along with the revised report in form number 10CCB ignored by the AO but allowed the deduction of Rs. 648,221,370/– iv. disallowance of amalgamation expenditure claimed by the assessee violator dated 11 November 2009 46. Assessee carried the matter before the learned CIT – A – LTU, New Delhi, who passed an order dated 15 November 2010 wherein:- i. Disallowance u/s 40 (a) (i) of Rs 2602844/- was upheld ii. provision made for sales incentive in respect of Sahanshah scheme of Rs. 175,64,366/– was deleted while following his own order for assessment year 2006 – 07 iii. upheld the action of the AO in ignoring the letter dated 11 November 2009 of the assessee for revision in the computation of the eligible deduction u/s 80 IC of the income tax act holding that same was not carried out through a revised return.

Therefore, both the parties are aggrieved with that order has preferred an appeal before us.

In ITA number 466/Del/2011 the revenue has challenged the order of the learned CIT – A raising the solitary ground that he has erred in directing the AO to allow provision made by the appellant of Rs. 175,64,366/– for sales incentive in respect of Shaenshah Scheme.

The learned departmental representative relied upon the order of the learned assessing officer whereas the learned authorised representative submitted that this issue is squarely covered in favour of the assessee by the order of the coordinate bench for assessment year 2006 – 07 wherein the order of the learned CIT (A), which was relied upon by the learned CIT - A in this year has been upheld.

We have carefully considered the rival contention and perused the orders of the lower authorities. The issue of disallowance of sales incentive with respect to the above scheme is decided by the coordinate bench in assessee‘s favour for assessment year 2006 – 07 in dated 30/9/2019 as Under:- ―30. Second ground of the appeal of the Revenue relates to the deletion of the addition made on account of the provision for sale incentive 'Sahenshah Scheme". Brief facts of this aspect are that the assessee had launched a sales incentive scheme for the authorized dealer under the name Shahen shah Scheme. As per the scheme on every payment of Rs. 300/- made by the customers within 90 days the customers would earn one point and one point was equal to Rs. 1/-. The customers could request for redemption of these point for their holiday package in India and abroad. The points accumulated are communicated to the customers from time to time. The same has also been posted on the web portal. The purpose of the scheme was to promote the sales for the company and therefore, to increase the profit. The scheme was effective from one month, 2001 and is continuing during the year under consideration. As per the offer document it could also be seen that unutilized points can be null and void only six months after the closer of the scheme. It could further be seen that all authorized dealers of the assessee are automatically enrolled at member of the scheme.

Ld. AO, however, disallowed the same by holding that the right does not get vested in dealer / distributor at any time before accumulation of minimum 60000 points and any extra points till next slab remain useless; that the accumulation of 6000 points itself is contingent on several events like continuing sales, continuing payments being made; and that the scheme itself is not perpetual, it can end any day and all points have'to be enchased within six months or get lapsed. 32 Ld: CIT (A), however, on a reappraisal of entire material before him reached a conclusion that the liability of the assessee on this score is not a contingent liability, but on the other hand, it is a contractual liability which may befall on the assessee during the assessment year to the extent of the rights accrued to the customers by earning the points. Ld. CIT(A) maintained that the distinction between the contingent liability which may or may not arise in future and the present liability which may have to be performed in the future. According to the Ld CIT(A) the liability incurred by the assessee has to be accounted for during the year in which it was crystallised so as to claim benefit in the year of payment and there is a reasonable certainty of discharge and there is logical basis for its quantification.

Ld. DR justified the findings of the id. AO and submitted that till the customer earns 6000 points and above no question of crystallization of liability arises. According to her the scheme itself is not perpetual and there is no certainty of the customers availing the benefits of scheme as is evidenced by the outflow of funds as against the huge amount of provision that was made.

Further about the uncertainty of the scheme, the unutilized points can be null and void only 6 months after the closer of the scheme and till such time there is no question of lapse of points. Till the scheme wound up, the liability of the assessee exists and the assessee shall discharge their liability as and when the performance was demanded by the customers. The ratio of outflow of funds with the quantum of provision is an irrelevant consideration so long as the expected or anticipated liability of the assessee is made on scientific basis.

On perusing the details of the sales and the points earned by the customers, we are satisfied that the provision is created on scientific basis. We, therefore, do not find anything illegal or irregular in the findings of the id. CIT(A) and no interference is warranted. We, therefore, dismiss the second ground of appeal

On appeal before the ld CIT(A) he confirmed the above disallowance held as under:- “Ground no. 2 is regarding the disallowance made by the assessing officer u/s 40(a)(i) of Rs. 2602844/-. While making the above disallowance the has made the following observation “In the present case, it is undisputed fact that testing report, certification etc. was obtained in respect of product to be utilized the purpose of business of assessee, (a resident) in India. That testing is highly specialized job of technical nature and therefore is covered in technical services offered and received by the assessee. Since foreign entity is based in USA, article 12(4)(b) of DTAA with USA is relevant to show that the service and payment made are covered in “Fees for included services” as defined. It is produced below : “For purpose of this article, “Fees for included services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services including through the provision of services of technical or other personnel) if such services. (a) are ancillary and subsidiary to the application or enjoyment of the right property or information for which as payment described in paragraph 3 is received , or (b) made available technical knowledge, expenses, skill, know how , or processes or consist of the development and transfer of a technical plan or technical design Therefore, making available technical knowledge, experience is also covered in fees for included services. The testing report and certification are in nature of making available technical knowledge, experience and skill because the same is utilized in manufacturing and sale of product in business of the assessee. In this regard, decision of Delhi Bench of ITAT in case of ITO Vs Sinar Maspup & Paper (India) Ltd. 85 TTJ 794 (Del.) is very much applicable. The Hon’ble Page | 43 ITAT in this case has held that payment made for getting a project report was payment for professional services and TDS was liable to be deducted. In the light of the ratio laid down in the case of ITAT mentioned supra, section 195 has applicability to the payment made by assessee company. The non deduction of tax by the assessee leads to disallowance of Rs. 2602844/- u/s 40(a)(i) of the I.T. Act. Accordingly amount of Rs. 2602844/- is added to total income u/s 40(a)(i) of the I.T. Act.” During the course of appellate proceedings, the appellant has submitted that the A.O. has made an addition of Rs. 2602844/- u/s 40(a)(i) on account of non deduction of TDS. The assessee company has paid testing charges to various foreign entities for the purpose of certification of electrical products manufactured by the company. The details of such expenses are as under :- M/s KEMA Quality B.V., Netherland 248218/- M/s CSA International, Chicago Illinois, USA. 1568212/- M/s Hangzhou Zhejiang University, China 46956/- M/s Hongkong Sensing Trade Co. Ltd., China 95981/- M/s VDE Prufund Zertifizierungs Institute, Germany 611490/- M/s Zhejiang Dongshun Electronic app. Group .China 30987/- Total 2602844/- The aforesaid entities are authorized for certification of products for export which are mandatory for selling of the products in USA, Europe, Middle East Countries, China, South African Countries, Singapore , Spain and U.K. No TDS have been deducted on aforesaid payments since the testing was done by foreign entities outside India for the purpose of exports outside India. That no income has accrued or arisen in India. The payment to foreign entities for the purpose of certification is not required to be utilized in manufacturing activities of the assessee company. The products are being tested and certified by the various agencies outside India to enable the assessee company to export its products, as it is the requirements of the importing countries to get the products tested from the agencies designated by them in their own country. The assessee vide letter dated 27/11/2009 has explained that the purpose of certification from outside agencies was to enable the appellant company to export its products. The copy of the said letter is also enclosed. The A.O. has invoked provisions of section 9(1 )(vii) read together with explanation 2 to the sub-section. The A.O. has contended that payment made in respect for fees for technical services has been utilized for the purpose of the business of the assessee in India and hence, It has further been submitted that the A.O. has also relied in the decision of Delhi Bench of ITAT in the case of ITO vs. Sinar Mas Pulp & Paper (India) Ltd. 85 TTJ 794 (Del.). The facts Page | 44 of the said case are not applicable to the appellant company. In the said case, it was held that the payment made for getting the project report was the payment made for professional services and TDS was liable to be deducted. In the said case, project report was prepared to raise a loan in the international market for the project to be set-up in India and thus was to be utilized in India. In case of the appellant company, the services were neither rendered in India nor utilized in India. Since, the said services are rendered and utilized outside India and payment has also been received by the foreign entities outside India, the case of the assessee is squarely covered in the exemption provided in section 9(1 )(vii)(b) of the Act which is reproduced as under “a person who is a resident, except where fees are payable in respect of services utilized in a business or profession earned on by such person outside India or for the purpose of making or earning any income from any source outside India” Therefore, in case where fee for technical services has been rendered outside India and has been utilized for the purpose of making or earning any income from any source outside India, such payments would fall outside the purview of section 9(1 )(vii) and will not be deemed to accrue or arise in India. The A.O. has erred while stating that the payment made in the instant case has been utilized for the business purpose in India while the same has not been utilized for the assessee’s business in India since in Indian market, the KEMA, CSA and other agencies, as stated in para 2.01 above, certification are not required and the same are necessary for the company’s products to be sold outside India. Reliance has been placed on the decision of Hon’ble Supreme Court the case of Ishikawajima-Harima Heavy Industries Ltd. vs. Director of Income Tax [2007] 158 Taxman 259 (SC), wherein it was held that “For section 9(1 )(vii) to be applicable, it is necessary that services provided by a non - resident assessee under a contract should not only be utilized within India, but should also be rendered in India or should have such a live link with India that entire income from fees, etc., becomes taxable in India; thus, for a non - resident to be taxed on income for services, such a service needs to be rendered within India, and has to be a part of a business or profession carried on by person in India. Whatever is payable by a resident to a non - resident by way of fees for technical services would not always come within purview of section 9(1 )(vii) but it must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax.” In view of the above it has been stated that Hon’ble Supreme Court has held that income can be deemed to accrue or arise in India only if the said services are utilized in India as well as rendered in India. In the case of the assessee, which goes a step ahead, neither the services have rendered in India nor have they been utilized in India and therefore, it falls outside the scope of section 9(1 )(vii) and no income can be deemed to accrue or arise in India. In section 9 of the Income-tax Act, for the Explanation occurring after sub-section (2), the following Explanation has been substituted by the Finance Act, 2010 with effect from the 1st day of June, 1976:- “Explanation. - For the removal of doubts, it is hereby declared that for the purposes of this section, 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) and shall be included in the total income of the non-resident, whether or not, - (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.” In the case of the appellant company, insertion of the above explanation to section 9(2), does not affect the taxability of the said services, since in the case of appellant company the services have been rendered and utilized outside India. Reliance has been placed on the following decisions: (i) Maharishi Housing development Finance Corporation Ltd. v. ACIT (ITA No. 222 of 2009) (ii) Van Oord ACZ India (P) Limited. V. CIT (ITA No. 439 of 2008) In view of the above facts and legal position, it has been submitted that no tax is deductable on the payments made to foreign entities on account of testing fee and thus the additions made by the AO u/s 40(a)(i) of the Income Tax 1961 is allowable as an revenue expenditure as claimed. I have considered the submissions of the appellant, the findings of the AO and the facts on record. This ground of appeal on similar facts was decided by my appellate order for A.Y. 2006-07 against the appellant by making the following observations: “I have considered the submissions of the appellant, the findings of the AO and the facts on records. The appellant had made payment of Rs.3199076/- to M/s CSA International Chicago, USA and other foreign entities for the purpose of certification of electrical products manufactured by the appellant. The appellant while making the payment to M/s CSA International had not deducted any TDS . The AO has observed that the testing report and certification are in the nature of making available technical knowledge and experience and the same is used in manufacturing and sale of product in the business of the appellant. In view of the above the AO was of the opinion that section 195 was applicable on the payment made by the appellant to the foreign company and since no deduction was made, therefore, under provisions of section 40(a)(i) , ;an amount of Rs.3199076/- was liable to be added to the income of the appellant. Explanation 2 to sub section (b) of section 9(i)(viii) is as under:

The fact that technology is used in providing a service is not indicative of whether the service is of a technical nature. Similarly, the delivery of a service via technological means does not make the service technical. This is especially important in the e-commerce environment as the technology underlying the internet is often used to provide services that are not, themselves, technical (e.g. offering online gambling services through the internet).

In that respect, it is crucial to determine at what point the special skill or knowledge is used. Special skill or knowledge may be used in developing or creating inputs to a service business. The fee for the provision of a service will not be a technical fee, however, unless that special skill or knowledge is required when the service is provided to the customer. For example, special skill or knowledge will be required to develop software and data used in a computer game that would subsequently be used in carrying on the business of allowing consumers to play this game on the internet for a fee. Similarly, special skill or knowledge is used to create a troubleshooting database that customers will pay to access over the Internet. In these examples, however, the relevant special skill or knowledge is not used when providing the service for which the fee is paid, i.e. allowing the consumer to play the computer game or consult the troubleshooting database.

Many categories of e-commerce transactions similarly involve the provision of the use of, or access to, data and software (see, for example, categories 7, 8, 9, 11, 13, 15, 16, 20 and 21 in annex 2). The service of making such data and software, or functionality of that data or software, available for a fee is not, however, a service of a technical nature. The fact that the development of the necessary data and software might itself require substantial technical skills is irrelevant as the service provided to the client is not the development of that data and software (which may well be done by someone other than the supplier) but rather the service of making the data and software available to that client. For example, the mere provision of access to a troubleshooting database would not require more than having available such a database and the necessary software to access it. A payment relating to the provision of such access would not, therefore, relate to a service of a technical nature. ………………….. Consultancy services 45. For the Group, "consultancy services" refer to services constituting in the provision of advice by someone, such as a professional, who has special qualifications allowing him to do so. It was recognised that this type of services overlapped the categories of technical and managerial services to the extent that the latter types of services could well be provided by a consultant.' We broadly agree with the aforesaid observations………….

Thus, the technical services consists of services of technical nature, when special skills or knowledge relating to technical field are required for their provision, managerial services are rendered for performing management functions and consultancy services relate to provision of advice by someone having special qualification that allow him to do so.‖ (emphasis supplied) c) In an earlier decision, the Madras High Court in the case of Skycell Communications Ltd. V. DCIT: 251 ITR 53 (Mad), while elaborately explaining the aforesaid concept of rendering of technical service, observed as under: ―5 . ……... ‗Fees for technical service‘ is not defined in section 194J. Explanation (b) in that section provides that that expression shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9. ……………… Thus, while stating that ‗technical service‘ would include managerial and consultancy service, the Legislature has not set out with precision as to what would constitute ‗technical‘ service to render it ‗technical service‘. The meaning of the word ‗technical‘ as given in the New Oxford Dictionary is adjective. 1 of or relating to, a particular subject, art or craft or its techniques: technical terms (especially of a book or article) requiring special knowledge to be understood: a technical report. 2 of involving, or concerned with applied and industrial sciences: an important technical achievement. 3 resulting from mechanical failure: a technical fault and 4 according to a strict application or interpretation of the law or the rules: the arrest was a technical violation of the treaty.

He further raised several alternative contentions without prejudice to the primary contention of the appellant that tax was not required to be deducted on the payments made towards testing and certification charges and hence, disallowance under section 40(a)(i) of the Act was not warranted.

He submitted that no disallowance u/s 40(a)(i) It is submitted that where tax is not deducted by an assessee under bonafide belief that tax was not deductible at source on payments made, the assessee cannot be treated as an assessee in default for not deducting the tax at source and consequently, disallowance under Section 40(a)(i) of the Act is not warranted. The Page | 59 aforesaid principle has been upheld by the Bombay High Court in the case of CIT vs. Kotak Securities Ltd: 340 ITR 333 wherein the Court held as under: ―……… 32. Accordingly, we hold that the transaction charges paid by the assessee to the stock exchange constitute "fees for technical services" covered under section 194J of the Act and, therefore, the assessee was liable to deduct tax at source while crediting the transaction charges to the account of the stock exchange. However, since both the Revenue and the assessee were under the bona fide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault can be found with the assessee in not deducting the tax at source in the assessment year in question and consequently disallowance made by the Assessing Officer under section 40(a)(ia) of the Act in respect of the transaction charges cannot be sustained. We make it clear that we have arrived at the above conclusion in the peculiar facts of the present case, where both the Revenue and the assessee right from the insertion of section 194J in the year 1995 till 2005 proceeded on the footing that the assessee is not liable to deduct tax at source and in fact immediately after the assessment year in question, i.e., from the assessment year 2006-07 the assessee has been deducting tax at source while crediting the transaction charges to the account of the stock exchange.

He also submitted that disallowance under section 40(a)(i) should, if at all, be directed to be made having regard to the clarificatory/ curative amendment made under section 40(a)(ia) of the Act which provides that disallowance should be restricted to 30% of the expenditure. Amendment under section 40(a)(ia) of the Act is clarificatory and retrospective. HE submitted that Vide the Finance Act 2014, the provisions of section 40(a)(ia) of the Act were further amended to restrict disallowance on account of non-deduction of tax at source on payments made to residents to the extent of 30% of the expenditure as against disallowance of entire expenditure. The Memorandum explaining provisions of the Finance Bill, Page | 61 2014 provides the rationale of the aforesaid amendment to section 40(a)(ia) of the Act in the following words: ―…………………… As mentioned above, in case of non-deduction or non-payment of tax deducted at source (TDS) from certain payments made to residents, the entire amount of expenditure on which tax was deductible is disallowed under section 40(a)(ia) for the purposes of computing income under the head "Profits and gains of business or profession". The disallowance of whole of the amount of expenditure results into undue hardship. In order to reduce the hardship, it is proposed that in case of non-deduction or non-payment of TDS on payments made to residents as specified in section 40(a)(ia) of the Act, the disallowance shall be restricted to 30% of the amount of expenditure claimed. Further, existing provisions of section 40(a)(ia) of the Act provides that certain payments such as interest, commission, brokerage, rent, royalty fee for technical services and contract payment made to a resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time specified under the said section. Chapter XVII-B of the Act mandates deduction of tax from certain other payments such as salary, directors fee, which are currently not specified under section 40(a)(ia) of the Act. The payments on which tax is deductible under Chapter XVII-B but not specified under section 40(a)(ia) of the Act may also be claimed as expenditure for the purposes of computation of income under the head "Profits and gains from business or profession – Clause 14 " …………………………………… These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.‖(emphasis supplied) The aforesaid amendment, it may be noted, is curative in nature, being introduced to reduce the undue hardship caused to assessee on disallowance of entire amount of expenditure. Accordingly, the same would, have retrospective operation.

He further referred to the decision of the Larger Bench of the Supreme Court in the case of CIT vs. Gold Coin Health Food (P) Limited: 304 ITR 308, Page | 62 wherein Their Lordships, while analyzing the principles regarding retrospective operation of statutes categorically observed, ―The presumption against retrospective operation is not applicable to declaratory statutes… In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form.‖ Reliance in this regard is placed on the following decisions, where the Courts/Tribunals have, in context with second proviso to section 40(a)(ia) of the Act inserted by Finance Act, 2012, held that the amendment being declaratory and curative in nature, should be given retrospective effect from 1st April, 2005, being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004 – CIT vs. Ansal Land Mark Township (P) Ltd: 377 ITR 635 (Del) SSP P. Ltd. vs. ACIT: (Del Tri) Convergys India Services Pvt. Ltd vs. ACIT: ITA No. 5451 of 2011 (Del) Rajeev Kumar Agarwal vs ACIT:149 ITD 363 (Agra) Shri G.Shankar vs. ACIT: ITA No.1832/Bang/2013 (Bang) It is respectfully submitted, that the aforesaid analogy provided by the Courts in relation to the retrospective operation of the second proviso to section 40(a)(ia), clearly applies even in case of the amendment made vide Finance Act 2014, to restrict disallowance on account of non-deduction of tax at source on payments made to residents to the extent of 30% of the expenditure as against disallowance of entire expenditure and the same would, it is respectfully submitted, have retrospective application. Specific reliance in this regard is placed on the following decisions, where it has been held that amendment to section 40(a)(ia) of the Act restricting the disallowance to 30% of expenditure, being clarificatory/ curative in nature, is applicable retrospectively: - i. Prabhatam Advertising Pvt. Ltd. vs. DCIT: ITA No.5798 of 2014 (Del) - Smt. Kanta Yadav vs. ITO: ITA No. 6312/Del/2016 (Del) ii. RH International Ltd. vs. ITO: ITA No. 6724 of 2018 (Del) Page | 63 iii. Sh. Rajendra Yadav vs. ITO: (Jaipur) iv. Smt.Sonu Khandelwal vs. ITO: ITA No. 597/JP/2013 (Jaipur) v. Siddi Vinayak Sarees vs. ITO: 2056 of 2018 (Kol) In view of the aforesaid, it is emphatically reiterated that amendment in section 40(a)(ia) of the Act, being clarificatory/ curative in nature, is applicable retrospectively. Being so, it is submitted that disallowance, if at all, should be directed to be restricted only to 30% of the expenditure claimed in the year under consideration.

He submitted that terms of DTAA provides that residents of foreign country shall not be subjected in India to any taxation or any requirement connected therewith which is more burdensome than the taxation and connected requirements to which nationals of India in the same circumstances are or may be subjected.

Reference is made to the following cases wherein it has been held that deduction neutrality clause in non-discrimination Article in a Tax Treaty is designed to primarily seek parity in eligibility for deduction between payments made to the residents and non-residents and any pre conditions for deductibility which are harsher than payments made to the residents, are ineffective in law by the virtue of such non-discrimination clause: i. CIT vs. Herbalife International India (P.) Ltd: 384 ITR 276 (Delhi HC) ii. Mitsubishi Corporation India Private Limited vs. ACIT: 5147/Del/2010 (Del. ITAT) iii. Rajeev Sureshbhai Gajwani Vs ACIT: 137 TTJ 1 (Ahmedabad ITAT) DCIT vs. Gupta Overseas [ITA No. 257/Agr/2013 (Agra ITAT) iv. In view of the aforesaid, it is emphatically reiterated that amendment in section 40(a) (ia) of the Act, being clarificatory and retrospective in nature should equally apply to section 40(a) (i) of the Act. Being so, it is submitted that disallowance, if at all, should be directed to be restricted only to 30% of the expenditure claimed in the year under consideration.

However, the Ld Authorised Representative was fair enough to state that the issue of payment to agents in China, as far as it relates to the issue of provision of such services in India is clearly covered against the assessee by the decision of the coordinate bench in Ashapura Minichem Ltd Vs. ADIT 131 TTJ 291.

He further referred to the various bills placed at page No. 58 to 77 of the paper book and stated that the above facilities provided by the testing agents are standard facilities and therefore those are not fees for technical services. 69. Identically, he says that the issue also applies to the payment made to agents in Germany. He also referred to the decision of coordinate bench dated 24.05.2018 and 30.09.2019 in assessee‘s own case for Assessment Year 2005-06 and 2006-07. 70. We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also considered the order of the coordinate bench in Assessment Year 2005-06 in assessee‘s own case wherein, payment with respect to CSA International USA of Rs. 1568212/- is not held to be a fees for technical services according to article 12(4)(b) of the Act. Accordingly, the payment to CSA International USA of Rs. 1568212/- on identically facts and circumstances cannot be disallowed u/s 40(a)(i) of the Act. With respect to payment made Kema Quality BB Netherland of Rs. 248218/- is also covered in favour of the assessee at para No. 9 of the order of the coordinate bench in assessee‘s own case for Assessment Year 2006- 07. 71. With respect to the payment to 3 different parties of China amounting to Rs. 173924/- and Rs. 611490/- paid to VDEPZI, Germany are required to be tested for this year. 72. The brief nature of the services could also be gathered from the various documents such as bills of the parties placed at page No. 57 onwards. These are the country specific certifications. The Kema Certification Quality Control Certification is mandatory with CE Sample for sale in European Union and similarly CSA Quality certifications are mandatory for sale in USA. As assessee in his written arguments have referred about the nature of services refereeing to a website which shows that Photometric Testing provides a comprehensive laboratory service for testing the amount, colour, quality and spatial distribution of light emitted from lamps, LEDs and luminaires. The luminous intensity (unit: candela) of LEDs can be measured with a conventional photometric bench and the standard photometers [2] under a far field condition, at a distance far enough so that the test LED can be regarded as a point source (typically 2 m or longer). Photometric Light. Photometric lights use data provided by lighting manufacturers in the form of IES or EULUMDAT format photometry files. These files contain "photometric" measurements of a light's intensity in different directions, as well as information about the size of the actual luminous surface. Undoubtedly, these are the certification for assistance to exporters in international market. This is an international process of testing and certification wherein the specialized will provide the knowledge and guidance the exporters need for electric and electronic products for the areas international market. These testing are done by accredited companies who are specialized and certified to do that and are carrying the mandatory mark and Mark of the certification for the respective products. When the products are exported and sold in the market to which the certification belongs to, they must carry along with the product the certificate. These accredited laboratories are conducting testing and provide the assessee with the certification body test reports so that the product can obtain necessary mark of the certifying organization. It also eliminates many redundant testing in different markets. These testing laboratories provide a user manual, which describe the process of testing, rating and labelling of the certification. It is carried out on the necessary number of samples where mandatory certification is required. It can also carry out factory inspection with auditors from different organization other than the laboratory as well as from the laboratory to give the authenticity of the certification. Such certification gives acceptability to the product of a company in the market in which it is not manufactured but sold. The delivery time of the certification is also depending on the product as well as certification that are required. The tests are mainly performed in accordance with the standards for electrical and electronic goods, which are finalized by the standardization committee. Therefore, such accredited organizations who are issuing certificates are up-to-date in their knowledge and technical skills with respect to the fast developments in the technological standards in its latest development. Thus, it is obvious that only properly accredited third parties have the objectivity required to issue test results that can be used for official purposes. They possess specialized knowledge of the local situation for which the certification is sought. The various certificates produced before us shows that the certificate has been issued and the product has been certified after the typed test according to the standards issued by the standardization committee, inspection of the product location, examination of the documents and comparison of the specification with the agreement with the number i.e code. So far as the electrical products are concerned, it certifies the related current, range of instantaneous tripping over current, related voltage, related short-circuit capacity, related service short-circuit capacity, the class of limiting the energy, the safety distance, method of mounting, degree of protection against moisture and verification of insulating material. It also keep the test results documentation in the respective test files and if desired can be accessed by the client or third party (buyer) in CD form. Testing certificates also shows that who conducted the test for this particular product and who checked the results of test carried out by that person. Further, the assessee has entered into an agreement with these accredited agencies for certification, which lays down the process of the certification as well as the respective liabilities. One such agreement is placed at page number 108 of the paper book. (Page number 93 -108 of the paper book of assessee).

Assessee has contended that ―Further, such testing is, the assessee understands, done through machines not involving any human intervention in testing (viz., photometric testing and CB Testing); the same, therefore, do not, constitute technical service warranting deduction of tax at source.‖ 74. For assessment year 2005 – 06 in assessee‘s own case the issue was before the honourable Delhi High Court in 21 taxmann.com 476 (352 ITR 376). In para number nine of such order the honourable High Court in the first line itself has held that ―It appears to us on reading of the orders of the departmental authorities and the order of the tribunal that there is no dispute that the amount paid by the assessee to the US company represented ―fees for technical services ―within the meaning of Section 9 (1) (viib) of the act. In fact, to the specific query put hon Court in the course of the hearing to the learned counsel for the assessee, he frankly stated that he could not dispute this position, having regard to the wide definition of ―fees for technical services ‖in the aforesaid provision. If that is so, the only question which we are required to examine is (A) whether the fees were payable in respect of services utilized in a business or profession carried on by the assessee outside India or (B) they were paid for the purposes of making or earning any income from any source outside India.‖ 75. Further, in para number 16 the honourable High Court held that the result of the discussion is that the fees for technical services are taxable in the hands of the US company Under the provisions of the act. Therefore, whether such income is chargeable to tax in India according to the Indian income tax act is already concluded by the honourable High Court in assessee‘s own case for assessment year 2005 – 06 by this decision.

One more argument has been taken by the assessee that according to the understanding of the assessee, the services are provided by the machines and it does not involve human intervention. Therefore it fails the test of being a technical services and hence relying on the decision of the honourable Supreme Court in case of CIT versus Bharti cellular Ltd (2011) 330 ITR 239 (assessee) wherein in para number six of that decision the honourable Supreme Court dealt with this issue. Now this aspect of the matter has further been dealt by the honourable Supreme Court in CIT versus Kotak securities Ltd and other connected appeals (2016) 383 ITR 1 (SC) wherein the honourable Supreme Court noted in para number six of that decision noting that as ‗managerial and consultancy services‘ and therefore necessarily ‗technical services‘ would obviously involves services rendered by human efforts. This has been the consistent view taken by the courts including Hon Supreme court in Bharti cellular Ltd (supra). However, it cannot be lost sight of those modern-day scientific and technological developments maintained to blur the specific human element in an otherwise fully automated process by which such services may be provided. The search for a more effective basis, therefore, must be made. According to this observation of the honourable Supreme court , it is clear that if a process is fully automated process there is no human intervention and still the particular activity or technical analysis may fall into the definition of ‗technical services‘. Further in para number [4] of that decision of the honourable Delhi High Court recording the facts of the case clearly noted that that the US company had specialized knowledge and facilities for carrying out the type of testing and necessary certification, which was required by the assessee. Even otherwise, the assessee has merely expressed an understanding without pointing out anything else that testing services does not require human intervention. The honourable High Court in assessee‘s own case for assessment year 2005 – 06 has categorically held with respect to the US company that US company had specialized knowledge and facilities for carrying out the type of testing and the necessary certification, which was required by the assessee for the purpose of its goods to be exported in a specified country. The natures of services have also been referred to by us in earlier paragraph. In view of the above facts, the argument of the assessee that it does not require human intervention, remains merely an assertion and even otherwise the honourable Supreme Court in case of CIT versus Kotak securities (supra) has clearly expressed a caveat on the view that whether for the purpose of taxation of ‗fees for technical services‘ according to the Indian income tax act human intervention is necessary or not, this argument advanced by the learned authorised representative does not hold water and therefore is rejected. Reliance on all other decision also becomes irrelevant in light of the decision of the Honourable Delhi High court in assessee‘s own case and Decision of Honourable supreme court in CIT V Kotak Securities Limited.

The second argument of the learned authorised representative is that such a technical services are standard facilities. For this proposition, he further relied upon the decision of the honourable Supreme Court in case of CIT versus Kotak securities (supra). The honourable Supreme Court in that particular case was concerned with the facilities provided by Bombay stock exchange/National stock exchange to its broker for a provision of facilities of a faceless screen-based transaction, a constant upgradation of the services made available and surveillance of the essential parameters connected with the trade including those of a particular/single transaction that would lead credence to its authenticity as provided for by the stock exchange. All these services were fully automated and were available to all the members of the stock exchange in respect of every transaction that is entered into. There was nothing special, exclusive or customized service that is rendered by the stock exchange. It was held that technical services like managerial and consultancy services would denote seeking of services to cattle to the special needs of the consumer user as may be felt necessary and the making of the same available by the service provider. It was held that it is the above feature i.e. a specialized feature that would distinguish or identify a service provided from a facility offered. While the former especially an exclusive to the seekers of the service, the letter, even if termed as a service, is available to all and would therefore stand out in the distinction to the former. The honourable court then held that the services provided by the stock exchange for which transaction charges are paid fails to satisfy these test of specialized, exclusive and individual requirement of the user or consumer who may approach the service provider for such assistance or services. The honourable court also noted that the assessee online trading (BOM) system for which the charges have been paid by the appellant are common services that every member of the stock exchanges necessarily required to avail of to carry out trading in securities in the exchange. The honourable Supreme Court also noted that the view taken by the honourable High Court that a member of the stock exchange has an option of trading through an alternative mode is not correct. A member who wants to conduct his daily business in the stock exchange has no option but to avail such services. Each and every transaction by a member in will have to use services provided by the stock exchange for which a member is compulsorily required to pay an additional charge. That feature of the services provided by the stock exchange would make some kind of a facility provided by the stock exchange for transacting business rather than a technical services provided to one of Section of the member of stock exchange to deal with special situation. Thus, the honourable Supreme Court held that there is no exclusivity of the services rendered by the stock exchange and each and every member has to necessary avail of such services in the normal course of trading in the securities in the stock exchange. In that circumstances the honourable Supreme Court held that these are the standard facilities available to everybody trading on a stock exchange to be compulsorily availing for such services. Thus they were not the technical services specialized for the assessee. In these terms if the services available the assessee from various testing agencies are examined, they would specifically provides that would be with respect to the specific country, specific product, specific manufactured lot of the assessee, which is exported in that particular country whether it conforms with the standard specified in that country, therefore, cannot be said to be a standard facility provided by that particular agency to the assessee. The honourable High Court in assessee‘s own case have also stated that it is a specialized facility provided to the assessee for testing of its goods exported in that particular country. In view of this, the argument of the assessee that these are standard facilities does not hold water and is rejected.

Further assessee has raised an argument with respect to article 12 (4) of the Double Taxation Avoidance Agreement between India and China, where a specific argument is raised that the services have not been rendered or performed in India and therefore they are not ‗fees for technical services‘ as per the agreement, and hence same is not taxable as per DTAA. This argument of the assessee has been covered against the assessee by decision of coordinate bench in Ashapura Minichem Ltd. v. Assistant Director of Income-tax *, International Taxation 1(1), Mumbai [2010] 40 SOT 220 (Mumbai)/[2010] 131 TTJ 291 (Mumbai) where in t has been held as under :- “ 3. The basic thrust of assessee‘s contentions is that, since no part of the testing services was rendered in India, the Chinese company did not have any tax liability in India in respect of the bauxite testing charges. By way of a detailed note, it is submitted that in order to attract taxability under section 9(1)(vii) of the Income-tax Act, 1961, not only that Page | 71 the services should be utilized in India, but should also be rendered in India, in support of this proposition, learned counsel for the assessee has made a reference is made to the Hon‘ble Supreme Court judgment in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 1 and of Hon‘ble jurisdictional High Court‘s judgment in the case of Clifford Chance v. Dy. CIT [2009] 318 ITR 2372 (Bom.). As far as taxability under the domestic law is concerned, learned counsel primarily relies upon his exhaustive written submissions filed before us. Coming to the taxability under the applicable treaty provisions, it is submitted that even in terms of the provisions of article 12 of India China tax treaty, taxability of royalty can only arise when not only the services are used in India but also rendered in India. According to the learned counsel, the only other situation in which impugned receipt can be taxed in India, under article 7 of the applicable tax treaty provisions, is when the said income is earned in the course of business carried on by the assessee in India though a permanent establishment in India. Learned counsel submits that it is not even the case of the revenue that the Chinese company had any permanent establishment in India, and, therefore, the business profits of the Chinese company cannot be taxed under article 7 of the tax treaty. He fairly accepts that, in case impugned receipt is to be taxed under article 12 as ‗fees for technical services‘, the existence, or non-existence, of the permanent establishment will be wholly irrelevant. He, however, contends that article 12 cannot be applied on the facts of the present case, because unless the services rendered by resident of one of the Contracting States (i.e., China in the present case) are rendered in the other Contracting State (i.e., India in the present case), the payment for these services cannot be subjected to tax in that Source State (i.e., India in the present case). It is submitted that since the testing services are entirely rendered in China, and since no part of services is rendered in India, the testing services could not be brought to tax in India in terms of provision of article 12 of the tax treaty. It is contended that, unlike the provisions in most other tax treaties, the taxability of fees for technical services in the India China tax treaty has an additional requirement of ‗place of performance‘ in the source country, to be satisfied before it can be taxed as fees for technical services in the source country. He takes us through the provisions of Indo China tax treaty, China Pakistan Tax Convention, India Israel Tax Convention, India South Africa Tax Convention and India Germany Tax Convention. He does all this to highlight that India China tax treaty is unique in its wordings and its scope - so far as the taxability of fees for technical services is concerned. When his attention was invited to the deeming fiction under article 12(6) of the treaty, which requires the ‗fees for technical services‘ as deemed to have arisen in the State of which payer is resident, learned counsel submitted that ‗fees for technical services‘, for the purpose of article 12(6), cannot have any other meaning than the meaning assigned under article 12(4) and, under article 12(4), place of performance test is to be satisfied before FTS can be taxed in the source State. It is repeatedly emphasized that article 12(6) can come into play only when the ‗fees for technical services‘ meets the definition assigned to the said term under article 12(4) and since ‗place of performance test‘ must be met in order to meet the definition under article 12(4), unless the services are rendered in the other Contracting State, the same cannot be covered by article 12(6). When it is pointed out by us that this approach will render article 12(6) meaningless, since, in such a case, deeming clause to the effect that ‗services are deemed to have arisen in the other Contracting State‘ can only be invoked when services are performed in that other Contracting State - something which is patently absurd, learned counsel submits that if words of the treaty result in an absurdity, at best, to that extent, it is to be treated as unworkable. We cannot change the entire complexion of treaty provision in the name of making a segment thereof workable. Learned counsel thus urges us to hold that, in terms of the provisions of the applicable tax treaty, the payment in question were not liable to be taxed in India. Learned Departmental Representative, on the other hand, relies upon the orders of the authorities below, takes us through the same, and urges us to confirm the same. As far as taxability under the domestic law is concerned, it is submitted that in case we are to proceed on the basis that the royalties or fees for technical services can only be taxed in India only when not only the services are utilized in India, but also rendered in India, the source rule will cease to have any meaning. It is contended that the judgments of Hon‘ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. (supra) and of Hon‘ble Bombay High Court in the case of Clifford Chance (supra) are clearly contrary to the legislative intent and the doubts, if any, have been set at rest by the retrospective amendment in Explanation to section 9(1)(vii), as introduced by the Union Budget. It is submitted that once the proposed amendments are carried out, these judicial precedents will no longer constitute good law. (We may add that the proposed amendments relied upon by the learned Departmental Representative, on which have also heard the learned counsel for the assessee, are since carried out and legislative process for the same is duly completed). As far as learned counsel‘s arguments on treaty provisions are concerned, learned Departmental Representative mainly contends that the deeming provision of article 12(6) is quite clear and categorical, and we are urged to give it a sensible and reasonable meaning which makes the provision workable rather than making the provision redundant. It is submitted that when payment is made to a Chinese enterprise is made by an Indian enterprise, the ‗fees for technical services‘ is deemed to have arisen in India. In case we are to proceed on the basis that such deeming provision can only be invoked when the services by Chinese enterprise are rendered in India, this deeming clause will be rendered meaningless, as one cannot deem something which exists in reality anyway. Whichever way we examine the issue - whether under the Income-tax Act, 1961 of under the India China tax treaty, according to the learned Departmental Representative, the payment for tasting fees is liable to be taxed in India. We are thus urged to confirm the findings of the authorities below and decline to interfere in the matter.

We have given our careful consideration to the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

As regards the taxability under the domestic law, we have noted that section 9(1)(vii) provides that "income by way of fees for technical services" payable by, inter alia, "a person who is a resident, except where the fees are payable in respect of services utilised in 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" will be deemed to accrue or arise in India. There is also no dispute that the fees received by the assessee is covered by the scope of ‗fees for technical services‘ under Explanation 2 to section 9(1)(vii) which provides that for purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) Page | 75 for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel). There is also no dispute that the exclusion clause set out in the said definition is not attracted.

The case of the assessee, however, is that since the services are not rendered in India, the provisions of section 9(1)(vii) cannot be invoked. The main support for this proposition is assessee‘s reliance on the Hon‘ble Bombay High Court‘s judgment in the case of Clifford Chance (supra). It is, therefore, necessary to deal with this case in some detail.

In the case of Clifford Chance (supra) the appellant, an English law firm, was rendering legal services in connection with three projects in India, namely, Bhadravati Power Project, Vizag Power Project and Raviva Oil and Gas Field Project. While the claim of the assessee was that only such portion of the fees received, in connection with these projects is taxable in India as is attributable to services performed in India, the Assessing Officer opined that the total fees received for the India Project, whether the work was done in India or outside India, was taxable in India. When this dispute finally travelled before the Hon‘ble Bombay High Court, it was, inter alia, contended by the assessee that "the place of utilization of service is not relevant but place of performance of the service is what would be determinative (of taxability)....." and reliance was placed on Hon‘ble Supreme Court‘s judgment in the case of Ishikawajima Harima Heavy Industries Ltd. (supra). Their Lordships noted that the taxability is to be determined under section 9(1)(vii) of the Act, and observed as follows : "The Apex Court had occasion to consider the above question in the case of Ishikawajima Harima [2007] 288 ITR 408 (SC), wherein, while interpreting Page | 76 the provisions of section 9(1)(vii)( c) of the Act, the Supreme Court held as under (page 444) : ‗Section 9(1)(vii)( c) of the Act states 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 source of India‘. Reading the provision in its plain sense, as per the Apex Court it requires two conditions to be met—the services which are the source of the income that is sought to be taxed, has to be rendered in India, as well as utilized in India, to be taxable in India. Both the above conditions have to be satisfied simultaneously. Thus for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India. In the above judgment, the Apex Court observed that (page 444) : ‗Section 9(1)(vii) of the Act must be read with section 5 thereof, which takes within its purview the territorial nexus on the basis whereof tax is required to be levied, namely, (a) resident; and (b) receipt of accrual of income‘. According to the Apex Court, the global income of a resident although is subjected to tax, the global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DTA. What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act subject to the compliance with 90 days rule. As per the above judgment of the apex court, the interpretation with reference to the nexus to tax territories Page | 77 also assumes significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavour should, thus, be made to construe the taxability of a non-resident in respect of income derived by it. Having regard to the internationally accepted principle and the DTAA, 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. 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, would 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 basis 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 relevant in determining whether the income of the non-resident accrues or arises 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 DTAA. A distinction may also be made between rendition of services and utilization thereof. With the above understanding of law laid down by the Apex Court, if one turns to the facts of the case in hand and examines them on the touchstone, section 9(1)(vii)(c ) which clearly states . . . 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 source in India. It is thus, evident that section 9(1)(vii)( c), read in its plain, envisages the fulfilment of two conditions : services, which are source of income sought to be taxed in India must be (i) utilized in India, and (ii) rendered in India. In the present case, both these conditions have not been satisfied simultaneously."

It is thus clear that the judgment of Hon‘ble Bombay High Court in Clifford Chance’s case (supra) rests on the legal premises that, under section 9(1)(vii), "services, which are source of income sought to be taxed in India, must be (i) utilized in India; and (ii) rendered in India" and the conceptual premises that "territorial nexus for the purpose of determining the tax liability is an internationally accepted principle". Learned counsel has laid lot of emphasis on these two principles.

The legal proposition canvassed by the learned counsel, however, does no longer hold good in view of retrospective amendment with effect from 1-6-1976 in section 9 brought out by the Finance Act, 2010. Under the amended Explanation to section 9(1), as it exists on the statute now, it is specifically stated that the income of the non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of section 9(1), and shall be included in his total income, whether or not (a) the non- resident has a residence or place of business or business connection in India; or (b) the non-resident has rendered services in India. It is thus no longer necessary that, in order to attract taxability in India, the services must also be rendered in India. As the law stands now, utilization of these services in India is enough to attract its taxability in India. To that effect, recent amendment in the statute has virtually negated the judicial precedents supporting the proposition that rendition of services in India is a sine qua non for its taxability in India.

The concept of territorial nexus, for the purpose of determining the tax liability, is relevant only for a territorial tax system in which taxability in a tax jurisdiction is confined to the income earned within its borders. Under this Page | 79 system, any foreign income that is earned outside of its borders is not taxed by the tax jurisdiction, but then apart from tax heavens, the only prominent countries that are considered territorial tax systems are France, Belgium, Hong Kong and the Netherlands, and in those countries also this system comes with certain anti abuse riders. In other major tax systems, the source and residence rules are concurrently followed. On a conceptual note, source rule of taxation requires an income sourced from a tax jurisdiction to be taxed in this jurisdiction, and residence rule of taxation requires income, earned from wherever, to be taxed in the tax jurisdiction in which earner is resident. In the US tax system, this residence rule is further stretched to cover US taxation of all its citizens - irrespective of their domicile, and the source rule is also concurrently followed. It is this conflict of source and residence rules which has been the fundamental justification of mechanism to relieve a taxpayer, whether under a bilateral treaty or under domestic legislations, of the double taxation - either by way of exclusion of income from the scope of taxability in one of the competing jurisdictions or by way of tax credits. Except in a situation in which a territorial method of taxation is followed, which is usually also a lowest common factor in taxation policies of tax heavens, source rule is an integral part of the taxation system and any double jeopardy, due to inherent clash of source and residence rule, to a taxpayer is relieved only through the specified relief mechanism under the treaties and the domestic law. It is thus fallacious to proceed on the basis that territorial nexus to a tax jurisdiction being sine qua non to taxability in that jurisdiction is a normal international practice in all tax systems. This school of thought is now specifically supported by the retrospective amendment to section 9.

It is thus clear that Hon‘ble Bombay High Court‘s judgment in the case of Clifford Chance ( supra) is no longer good law, as there have been amendments in law in consonance with the school of thought discussed above and these amendment unambiguously negate the principle of territorial nexus which is the under structure of line of reasoning adopted by the Hon‘ble Courts above. It is no longer necessary that, in order to invite taxability under section 9(1)(vii) of the Act, the services must be rendered in the Indian tax jurisdiction. In our considered view, Therefore, the income of the Chinese company, by way of impugned receipt of fees for technical services from an Indian company, is to be deemed to accrue or arise in India under section 9(1)(vii) of the Act. It is accordingly liable to be taxed in India under the domestic tax law.

The next issue to be examined by us is whether or not the income earned by the Chinese company is liable to be taxed in India under article 12 of the India China tax treaty. 13. Article 12 of the India China tax treaty provides as follows : Royalties and fees for technical services 1.Royalties or 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 Contracting State. 2.However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting 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 per cent of the gross amount of the royalties of fees for technical services. Page | 81 3.The term "royalties" as used in this Article means payment 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 and films or tapes for radio or television broadcasting, any parent, trade mark 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. 4.The term "fees for technical services" as used in this article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State, but does not include payment for activities mentioned in paragraph 2(k) of article 5 and article 15 of the Agreement. 5.The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties of fees for technical services arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein; and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of article 7 or article 14, as the case may be, shall apply. 6.Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the Government of that Contracting State, a Page | 82 political sub-division a local authority thereof or a resident of that Contracting State. Where, however the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contacting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base then such royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 7.Where by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.

A plain reading of the above treaty provisions show that under article 12(4) shows that what is covered by the basic definition of the expression ‗fees for technical services‘ is the "provision of services of managerial, technical or consultancy nature" by a resident of a Contracting State in the other Contracting State. In other words, technical services being provided by resident of one of the Contracting State in the other Contracting State is what will be covered Page | 83 by the basic rule under article 12(4). The expression ‗provision of services‘ is not defined or elaborated anywhere in the tax treaty. The argument of the learned counsel is that ‗provision of services‘ should be construed as ‗rendition of services‘, but we will come to that aspect a little later.

When we put it to the learned counsel that in view of the deeming fiction of article 12(6), it is not really necessary to go into the broader question about the merits of his arguments on the scope of article 12(4) and proceed on the basis that the payments made by an Indian company will be deemed to have arisen in India even under the Indo China tax treaty, he has submitted that once a fees for technical service is not covered by the basic provisions of article 12(4), which is confined to services having been rendered in the Source State, there is no occasion of invoking article 12(6). It is submitted that the deeming provision for article 12(6) is confined to what is already covered by ‗royalties and fees for technical services‘ which are neatly defined in article 12(4) and it does not seek to extend the scope of the said basic definition. It is only after 12(4) is satisfied that the deeming fiction can be invoked. He invites our attention to corresponding article of China Pakistan tax treaty, i.e., article 13, which does not have any such deeming fiction but which provides that "the term ‗fees for technical services‘, as used in this article, means any consideration (including any lump sum consideration) for the provision of rendering of any managerial, technical or consultancy services by a resident of one of the Contracting State in the other Contracting State". It is pointed out that in China Pakistan tax treaty, there is no additional source rule, i.e., deeming fiction, for the fees for technical services, even Page | 85 though there is a deeming fiction of source rule for ‗royalties‘. It is thus pointed out that Chinese tax treaties, which do not generally have ‗fees for technical services‘ clause, have a ‗place of performance test‘, or negation of source rule, in several tax treaties. We are urged to recognize this underlying principle in Chinese tax treaties. It is also pointed out that this phenomenon is not unique to Chinese tax treaties. Our attention is invited to India Israel tax treaty which provides, under article 13(5), that ‗fees for technical services‘ will be deemed to arise in a Contracting State only when services are rendered in that State and the payer is resident of that State. A reference is then made to India Saudia Arabia tax treaty in which a specific provision for taxability of ‗fees for technical services‘ is said to be altogether absent, which, according to the learned counsel, shows that it is not at all necessary that the source rule must extend to all payments for fees for technical services.

We are unable to see any merits in this line of arguments either. Whether a particular income is to be covered by the benefits of a tax treaty or not is essentially a decision at the level of the Governments and it depends on several considerations - all of which do not necessarily reflect sound taxation or sound economic policies. Just because India does not seek a source taxation right in tax treaty with Saudia Arabia, or because Pakistan gives up a source taxation right in tax treaty with China, it cannot influence as to what is the scope of India China tax treaty. It is not at desirable to be influenced with what has been decided in other tax-treaties entered into by the Contracting States. As regards the references to India Israel and India Saudia Arabaia tax treaties, therefore, these are tax treaties with different countries and whatever is decided in these tax treaties does not influence the scope of tax treaty before us. As far as China Pakistan tax treaty is concerned, we have Page | 86 noted that while China Pakistan tax treaty refers to "provision of rendering of any managerial, technical or consultancy services (emphasis supplied by us)", India China tax treaty refers to "provision of services of managerial, technical or consultancy services". The scope the expression ‗provision of services‘ has to be something wider than ‗provision of rendering of services‘. If at all this contrast with China Pakistan tax treaty shows something, this contrast shows that the India China tax treaty intends to follow the source rule, while China Pakistan tax treaty gives up the source rule for fees for technical services. The difference between these two clauses can hardly be missed, and it becomes all the more clear when one takes into account the fact that while there is a deeming fiction clause in article 12(6) of India China tax treaty, taking care of the situations in which payments are made by persons not resident in the other Contracting State, though they have a permanent establishment or fixed base in the other Contracting State, there is no such corresponding clause in China Pakistan tax treaty. It is thus clear, from the material placed before us, that while India China tax treaty follows the source rule in the matter of fees for technical services, Pakistan China tax treaty does not do so. That‘s a conscious choice by the respective Governments, and just because China Pakistan have negotiated a bilateral tax treaty in a particular manner, it does not mean that India China tax treaty should also be construed on the same basis.

The next argument of the assessee was that assessee was under a bona fide belief for non-deduction of tax at source on these testing charges paid to the foreign parties. On careful consideration of the argument of the assessee which is emanating from para number 32 of the decision of the honourable Bombay High Court in case of Kotak securities Ltd (340 ITR 333), wherein the honourable High Court held that since both the Revenue and the assessee were under the bona fide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault can be found with the assessee in not deducting the tax at source in the assessment year in question and consequently disallowance made by the Assessing Officer under section 40(a)(ia) of the Act in respect of the transaction charges cannot be sustained. Before us, no evidences were produced before us that there was any bona fide belief for non-deduction of tax at source as revenue was constantly saying that the tax at sources are deductible on such payments. No evidences were produced before us that the assessee was under a bona fide belief that tax is not deductible on such Page | 90 testing charges. It is also not shown, even if there is a belief, whether the same was bona fide or not. The other decisions relied upon by the learned authorised representative all were related to the provisions of Section 201 of the income tax that where there is a specific exclusion for ‗good and sufficient reasons‘ for non-deduction of tax at source. Such provisions are absent under the provisions of Section 40 (a)(i) of the act. In view of this, this argument of the assessee is rejected.

The learned authorised representative submitted that a provision of Section 40 (a) (ia) has undergone changes over a period of time. This Section relate to payment to a resident. It is submitted that the disallowance according to the amendment made with effect from 1 April 2015 restricted the disallowance at the rate of 30% of the sum payable. Therefore, according to the learned authorised representative, disallowance should be restricted in case of a payment made to a non-resident also at the rate of 30% while applying the provisions of Section 40 (a) (i) of the act. We find that the legislature thought fit in its own wisdom to restrict the disallowance when the payment is made to a resident without deduction of tax at source to the extent of 30% of the sum payable. There is no such amendment found in that the provisions of Section 40 (a) (i) of the act. We cannot add or insert a condition that was not envisaged in a provision of the law by the lawmakers. It amounts to rewriting the provisions of the law itself that we are not authorised to.On perusal of various decision cited, they do not canvass the view advanced by ld AR on this issue. In view of this, this argument of the learned authorised representative is rejected.

As we have refused to read the conditions prescribed u/s 40(a) (ia) of the act of disallowance at the rate of 30% in case the payment is made to a resident in Section 40(a) (i) of the act, the another argument of the assessee that it amounts to discrimination with respect to the payment made to non- resident compared to the payment made to a resident, also does not deserve any consideration. Even otherwise, both are different provisions to be applied in different situations. Undoubtedly, both the provisions are applicable with respect to the resident assessee only, who is the payer. Therefore, there are two different conditions one for ‗payment made by a resident to a non-resident‘ [u/s 40(a) (i) and another by ‗a resident to a resident‘ [ u/s 40 (a) (ia)]. In view of this, we do not find there is any discriminatory treatment given to a non-resident entity. In fact a non resident assessee is not at all concerned with above payments and its disallowance in the hands of a resident payer. Therefore, there is no discrimation with respect to nationality. Decisions cited by ld AR does not support the contentions raised on this issue. Thus, this argument of the learned AR is also rejected.

The ld AR fairly agreed that in DTAA between India and China and India and Germany, in Article 12 of those treaties, there is no condition of ‗make available‘ for taxation of ‗Fees For technical services‘. No other articles of DTAA were referred or pressed up on.

In view of this with respect to the payment to China based agents and Germany based agents the disallowance is confirmed and the payment made to Kema and CSA International is deleted. Thus, AO is directed to delete the disallowance of Rs payment of Rs. 18,17,430/- are related to payment made to USA and Netherland and we confirm the disallowance of Rs 7,85,444/- for payments made to Testing agencies in China and Germany. Accordingly, ground No. 1 of the appeal is partly allowed.

Ground No. 2 is with respect to the claim of the assessee of deduction u/s 80IC of the Act. The facts show that in the return of income assessee has claimed deduction of Rs. 645962957/- u/s 80IC of the Act. The assessee also supported it by filing audit report in the form 10CCB along with tax audit report. During the course of hearing on 11.11.2009 the assessee filed a revised report in the form No. 10CCB wherein, deduction was increased by Rs. 4488012/- at Rs. 650450969/-. The AO noted that assessee has not filed any revised return but has claimed the enhanced deduction by filing the letter. The reason for such revision in the claim was found that the assessee had suffered loss of Rs. 4488012/- in its unit No. 2 of Badi, Hamichal Pradesh. At the time of filing of original report in the audit report the assessee reduced the profit eligible for deduction u/s 80IC of Badi Unit No. 1 by the loss of Unit NO. 2 of Badi. Both the units are undisputedly eligible for deduction u/s 80IC of the Act. Therefore, apparently the loss of Badi Unit No. 2 went to reduce the eligible profit of Badi Unit No. 1 of Rs. 4488012/-. The ld AO disallowed the claim in view of decision of the Hon‘ble Supreme Court in 284 ITR 323 wherein, it has been held that no claim can be entertained by the ld AO without having revised return filed by the assessee. Thus, the claim of the assessee for higher deduction u/s 80IC was not accepted. The assessee aggrieved with the order of the ld AO preferred an appeal before the ld CIT (A) who also confirmed the action of the ld AO. Therefore, the assessee is in appeal before us.

The ld AR submitted that it was merely an adjustment of the claim already made by the assessee in the original return of income. He submitted that some modification of the claim already made in the original return of income is not hit by the above decision of the Hon‘ble Supreme Court. He referred to the several judicial precedents. He further submitted that the ld CIT (A) should have allowed the claim of the assessee as the decision of the Hon‘ble Supreme Court applies only to the ld AO and not the appellate authorities. He vehemently relied upon the several judicial precedents.

On merits, he submitted that the exclusion of the loss of the eligible unit against the income of another eligible unit cannot be net off against each other as deduction u/s 80IC of the Act is allowable with respect to each eligible industrial undertaking. He relied upon the several judicial precedents. Thus, according to him deduction claimed by the revised letter before the ld AO should have been allowed to the assessee.

The ld DR vehemently supported the orders of the lower authorities. He submitted that the assessee should have filed the revised return if it wanted to claim the share deduction.

We have carefully considered the rival contention and perused the orders of the lower authorities. Undoubtedly, the assessee had two eligible units, profit of which is eligible for deduction u/s 80IC of the Act. These two units are Unit No. 1 and Unit No. 2 at Badi, Himachal Pradesh. At the time of filing of the original return of income, the assessee found that it has earned profit in Unit No. 1 and has incurred loss in Unit NO. 2, but it filed the audit report claiming the net profit/loss of both these units taken together u/s 80IC. During the course of hearing, assessee might have come to know that the loss incurred in one eligible units is not require to reduce the profit of another eligible unit. It was found that if the eligible unit incurs a loss, it is to be ignored for computing deduction u/s 80IC of the Act. Therefore, the