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Income Tax Appellate Tribunal, BANGALORE BENCH ‘A’
Before: SHRI A.K GARODIA & SHRI PAVAN KUMAR GADALE
PER SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER :
The appeals filed by the assessee are respect of sole disputed issue on disallowance by the AO for non deduction of TDS on payments due under the provision of sec. 194J of the Income-tax Act, 1961 (the Act) and Fee for Technical Fee and applicability of sec. 40a(ia)(a) of the Act.
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Before we proceed, the assessee has raised an additional grounds by petition which reads as under:-
Subject: Petition for filing of Additional Ground of Appeal The above-mentioned appeal is fixed for hearing and disposal before the Hon'ble Bench 'A' on ii April 2018. In this connection, we are enclosing herewith additional grounds of appeal, in triplicate. We request the Hon'ble Bench to admit the additional grounds as the consideration of the ground would not require any investigation into fresh facts in accordance with the powers vested in you. We crave leave of your good self to rely upon the following decisions in support of our plea for admission and adjudication of the enclosed additional ground of appeal: CIT vs. S. Nelliappan [66 ITR 722 (SC)] In this case, the Hon'ble Apex Court held as under: "In hearing an appeal the Tribunal may give leave to the assessee to urge grounds not set forth in the memorandum of appeal, and in deciding the appeal the Tribunal is not restricted to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal." CIT Vs. Kanpur Coal Syndicate 53 ITR 225 (SC) In this decision, a three member bench of the Hon'ble Apex Court while discussing the scope of section 31(3)(a) of the Indian Income-tax Act, 1922, which is almost identical to section 251(1)(a) of the Act, observed as under:
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"The Appellate Assistant Commissioner has, therefore, plenary powers in disposing of an appeal. The scope of his powers is conterminous with that of the Income-tax Officer. He can do what the Income- tax Officer can do and can also direct him to do what he has failed to do." Jute Corporation of India Ltd. 187 ITR 688 (SC) In this case, relying on its decision in the case of Kanpur Coal Syndicate (Supra), the Hon'ble Apex Court observed as under at Page 693: "The above observations are squarely applicable in the interpretation of section 251(1)(a) of the Act. The declaration of law is clear that the power of the Appellate Assistant Commissioner is co-terminous with that of the Income-tax Officer, and if that is so, there appears to be no reason ( as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the Income-tax Officer. No exception could be taken to this view, as the Act does not place any restriction or limitation on the exercise of appellate power. Even otherwise, an appellate authority while hearing the appeal against the order of a subordinate authority, has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers, which the subordinate authority may have in the matter" Ahmedabad Electricity Co. Ltd. and Godavari Sugar Mills Ltd. vs. CIT [199 ITR 351 (Born)]
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In the aforesaid case, the Hon'ble Mumbai High Court at page 369, has observed as under: "We do not find anything in section 254(1) of the Income-tax Act which limits the jurisdiction of the Appellate Tribunal in any manner. For reasons which we have set out earlier, the phrase "pass such order thereon" does not in any way restrict the jurisdiction of the Tribunal but, on the contrary, confers the widest possible jurisdiction of the appellate Tribunal including jurisdiction to permit any additional ground of appeal if, in its discretion, and for good reason, it thinks it necessary or permissible to do so." It, therefore held as under: "it is quite clear that the Appellate Tribunal has jurisdiction to permit additional grounds to be raised before it even though these may not arise from the order of the Appellate Assistant Commissioner, so long as these grounds are in respect of the subject-matter of the entire tax proceedings." New India Industries Limited 207 ITR 1010 (Guj.)
The decision of the Hon'ble Apex Court in the case of Jute Corporation of India Ltd. (supra) was followed by the Hon'ble Gujarat High Court in the case of New India Industries (Supra). In doing so, the Court observed as under at Page 1010: "The power of the Appellate Assistant Commissioner is coterminous with that of the Income-tax Officer and there is no reason why the appellate authority
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cannot modify the assessment order on an additional ground even if it is not raised before the Income-tax Officer. No exception could be taken to this view as the Income-tax Act does not place any restriction or limitation on the exercise of the appellate power. Even otherwise, an appellate authority, while hearing the appeal against the order of a subordinate authority, has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitation, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter." Union Coal Co. Ltd. 70 ITR 45 (Cal) In this case, the Hon'ble Calcutta High Court observed as under: "There is nothing to debar an assessee from making a new claim for deduction in appeal before the Appellate Assistant Commissioner, and nothing to prevent the Appellate Assistant Commissioner, prima facie, to examine the force of such a claim, and if he is satisfied about the maintainability of such a claim the Appellate Assistant Commissioner may remand the matter to the Income Tax Officer for consideration of the new claim for deduction. For, the right of appeal conferred by section 30 of the Act includes right of appeal against 'the assessment' of income and the assessee is entitled to challenge the assessment in appeal and argue that the assessment should be reduced by allowing a claim or deduction even though he had not made the claim in his return of income or before the Income Tax Officer.
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National Thermal Power Co. Ltd. vs. CIT 229 ITR 383 (SC) In the above case, the Hon'ble Apex Court, following its decision in the case of Jute Corporation of India Ltd. (supra) observed at page 387 as under: "The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner of Income Tax (Appeals) takes too narrow view of the powers of the Appellate Tribunal. Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee." Ashok Vardhan Birla vs. CWT [208 ITR 958 (Born)] In this case, following its decision in case of Ahmedabad Electricity Co. Ltd. (supra) and the decision of the Apex Court in case of Jute Corporation of India Ltd. (supra), the Hon'ble Mumbai High Court, in the context of the Wealth-tax Act, 1957, observed that the powers of the appellate authorities are the same as the powers of the assessing authority and hence additional grounds can be entertained so long as they relate to the subject-matter of the proceedings which were before the assessing officer or the appellate authority. It further held that, the Tribunal had jurisdiction to permit additional grounds to be raised even though these did not arise out of the order of the Appellate Assistant Commissioner.
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Controller of Estate Duty Vs. R.Brahadeeswaran 163 ITR 68o (Mad) In this case, the Hon'ble Madras High Court held as under at Page 68o: "The real function of an appeal against an assessment must be considered to be the same as the function of the assessment itself and not in any way different from it. That function is to adjust the taxpayer's liability, as far as it is humanly possible, to the correct pie and make it accord with the relevant taxing provisions. If an assessing authority for any reason, either owing to ignorance or overzealousness or sheer devilment, makes an over- assessment and an appeal is carried from its order, the function of the appellate authority in that appeal is to set right the assessment and adjust the taxpayer's liability in accordance with the statutory provisions. In the appeal, as in the assessment, the task is one of adjustment of the taxpayer's liability. The function of a tax appeal is thus precisely the same as that of a tax assessment. A taxpayer who carries the assessment in appeal is not to be regarded as being engaged in a us with the taxing department. He is only interested in ensuring that he is not burdened with payment of an amount, which is more than what is due from him as tax. In this sense, an appeal is merely a reconsideration of the assessment by a higher authority. Such an appeal is not to be regarded as a forensic controversy between two parties ranged on opposite sides as adversaries. It must always be common ground between an assessee and the assessing officer that the assessment must be in accordance with the statute". Inaroo Ltd. vs. CIT [204 ITR 312 (Born)]
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Following its decision in case of Ahmedabad Electricity Co. Ltd. (supra), the Hon'ble Mumbai High Court in the aforesaid case has held that the Tribunal has jurisdiction to entertain the assessee's additional ground, even though the claim has not been made before either the Income Tax Officer or the Appellate Assistant Commissioner. CIT vs. Govindram Bros. P. Ltd. 1141 ITR 626 (Born)] In the aforesaid case also the Hon'ble Mumbai High Court has held that the rules of the Income- tax Tribunal are wide enough to permit additional grounds to be raised and that it was justified in allowing the assessee to raise the additional grounds and giving necessary directions. In light of the foregoing and in the interest of substantial justice, we request your Honours to admit the additional ground and duly adjudicate the same for which we shall be most grateful. 3. The ld AR submitted that the assessee has raised additional grounds in respect of the observations made by the TPO which is as under:-
“Additional Grounds of Appeal On the facts and in the circumstances of the case and in law: 2.6 That, the learned Commissioner of Income- tax (Appeals) ["CIT(A)"] erred in not appreciating that the Transfer Pricing Officer has accepted the nature of transaction as 'reimbursement of expense' and therefore the Assessing Officer cannot re-characterise the said transaction as 'Fee for technical services'.
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The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.” 4. The contention of the ld AR that the TPO in the course of Transfer Pricing Proceedings has accepted the financial statements and has made a reference to the profit and loss account on reimbursement of expenses. The ld AR emphasized that the AO has treated the re-imbursement of expenditure as Fee for Technical Services (FTS) and due to non deduction of tax at source, and can applying the provisions of sec. 40a(ia), made an addition. The ld AR referred to the paper books on the issue of admission of additional ground, whereas the ld DR has objected to the submissions of the assessee. The DR submitted that there is no reimbursement of expenses and by the assessee to its parent company PGS Ireland, therefore, and the provisions of sec. 9(1)(vii)(b) Explanation II shall apply.
Having heard the submissions on the additional grounds, we are of the opinion that the additional grounds raised by the assessee is part of the grounds of appeal raised before us and referred at para 2.3 which reads as under:-
2.3 That, on the facts and the circumstances of the case, the learned CIT(A) erred in not adjudicating on Appellant's contention that payments to PGS Ireland be
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regarded as 'reimbursement of expenses' and hence, not subject to withholding tax in India. 6. We are of the opinion that the additional grounds raised by the assessee are merged with the ground raised by the assessee in para 2.3 and accordingly we shall proved to hear the submissions.
For the sake of convenience, we take up the appeal for assessment year 2013-14 and the facts narrated therein.
The assessee has raised the following grounds of appeal.
“1. That, the order of the learned Commissioner of Income-tax (Appeals) - 5, Bangalore ['CIT(A)'], to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. 2.1 That, on the facts and the circumstances of the case, the learned CIT(A) erred in disregarding the business transaction between the Appellant, its parent company - Premiere Conferencing Ireland Limited ('PGS Ireland') and Tata Communications Limited ('Tata India') of INR 9,25,38,873 (nomenclated as commission in the books) and concluded that the transaction be considered as between the Appellant and Tata India. 2.2 That, on the facts and the circumstances of the case, the learned CIT(A) erred in disregarding Appellant's contention that the agreement with Tata India was for sharing of revenue and Tata India provided services to customers and not to the Appellant. The learned CIT(A) erred in not following the decision of the jurisdictional High Court in this regard. 2.3 That, on the facts and the circumstances of the case, the learned CIT(A) erred in not adjudicating on
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Appellant's contention that payments to PGS Ireland be regarded as 'reimbursement of expenses' and hence, not subject to withholding tax in India. 2.4 That, on the facts and the circumstances of the case and law applicable, the learned CIT(A) erred in not appreciating that the nomenclature of payment to PGS Ireland as commission is not decisive in determining the nature of the transaction. 2.5 That, on the facts and the circumstances of the case, the learned CIT(A) erred in concluding that payments by the Appellant to PGS Ireland be considered as 'Fee for Technical Services' without adjudicating on merits and by distinguishing the jurisprudence relied upon by the Appellant on functional dissimilarity. The learned CIT(A) erred in not following the decision of the jurisdictional Tribunal in this regard. 3. That, on the facts and the circumstances of the case, the learned CIT(A) erred in characterising the same transaction as fee for technical services to a resident (Tata India) as well as payment to a non-resident (PGS Ireland). 4. That, on the facts and the circumstances of the case, the learned CIT(A) erred in concluding that payments by Appellant to PGS Ireland will be liable to withholding tax in India and in the absence of such withholding, the payments should be disallowed under section 40(a)(ia) of the Act. 5. That, on the facts and the circumstances of the case, the learned CIT(A) erred in not accepting Appellant's contention that once Tata India has offered to tax the amounts received in its income tax return, no disallowance is warranted under the second proviso to section 40(a)(ia) of the Act in the hands of the Appellant.
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Without prejudice, the learned CIT(A) erred in not restricting the disallowance under section 40(a)(ia) to 30% of the impugned payment. 7. That on the facts and circumstances of the case and in law, the learned CIT(A) erred in levying consequential interest under section 234B of the Act. The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.” 9. The brief facts are that the assessee is in the business of Audio web Conferencing services and filed the Return of income electronically on 28/11/2013 disclosing total income of Rs.4,51,350/-. Subsequently this case was selected for scrutiny under CASS and AO has issued notices u/s 143(2) and 142 (1) of the Act and correspondence was made through email. The AO found that the assessee has international transactions as per the Audit report 3CEB and with the prior approval of the Principal Commissioner of Income-tax. The matter was referred to the TPO and whereas the TPO after considering the submission based on this records of the assessee and also perused the financial statements and passed the order on 28/10/2016 under the provisions of sec. 92CA without any adjustment to the arms length price (ALP) determined by the assessee in respect of international transactions.
The AO perusal of profit and loss account found that the amount of Rs.9,25,38,873/- was claimed by the assessee as commission paid and in the scrutiny proceedings it was submitted
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that the TDS provision shall not apply and therefore no disallowance shall be made under provision of sec. 40A(ia) of the Act. The assessee filed the written submission explaining the nature of claim made in the profit and loss account and modus operandi of revenue expense. The AO has dealt on the written submission made by the assessee at para 5.22 and 5.33 and observed that the assessee has providing the services to its PGS, Ireland and the expenses claimed are in the nature of commission and not re-imbursement of the commission paid to PGS, Ireland. The AO further applied provisions of sec. 9(1) and dealt with the provisions of sec. 9(1)(vii)(b) to consider the type of expenditure is in the nature of fee for technical services (FTS). But as per the Article 12 of India-Ireland DTAA, the submissions of the assessee are that no tax is deductible.
Whereas the AO being not satisfied with the submissions and material, found that the assessee as entered into agreement in respect of the services provided by Tata India, dealt in the asst. order and finally analyzed the provisions of DTAA and the nature of expenses and come to the conclusion that the expenses claimed by the assessee Rs.9,25,38,873/- are liable for deduction of tax at source on application of provisions of sec. 40a(ia). Hence made addition to the Returned income and assessed total income of Rs.9,29,90,223/- and passed order u/s 143(3) of the Act on 27/12/2016.
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Aggrieved by the order of the AO, assessee has filed appeal with the CIT(A). The ld. CIT(A) after considering the submissions of the assessee, grounds raised and finding of the AO and judicial decision, confirmed the action of the AO and dismissed the assessee’s appeal. Aggrieved by order of CIT(A), assesee has filed appeal before the Tribunal.
Before us, the ld AR mentioned that the additional grounds raised by the assessee be taken up first and all the other grounds raised are in respect of applicability of provisions of sec. 40a(ia) and submitted that there is no fee for technical services. The ld AR’s contentions that the expenses claimed by the asseseee is reimbursement of expenditure and further referred to the TPO’s order at page 200 to 301 of paper book where the TPO has accepted the financial statements and no adjustment was considered for ALP. The ld AR referred to the paper books at pages 425 and 421 explaining that claim of expenditure is only a reimbursement made to the PGS, Ireland, therefore, no tax deduction at source provision shall apply. The ld AR referred that the CIT(A) in the appellate proceedings at page 10 has dealt on this disputed issue and provision of DTAA read with fee for technical services were also considered and the assessee has filed written submissions. The ld AR emphasized that the nature of expenditure does not attract the provisions of sec. 9(1)(vii)(b) with Explanation II where there is no profit element in the process of the services. Therefore, the provisions of applicability of TDS for fee for
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technical services shall not be considered. The ld AO dealt on re- imbursement of expenditure but accepts the payments are made to the parent company PGS Ireland and such expenses are covered in the agreements. The ld AR in the written submission referred to the Documents and the Audit report and ld AO dealt at para 5.26 where as consider the PGS Ireland expenses in the nature of re- imbursement of expenses and finally, the ld AR submitted that the issue of applicability of provisions of sec. 40a(ia) of the Act and Fee for technical services in this case’s is considered that the agreement and the nature of work shall not be covered under provisions of sec. 40(a)(ia) and prayed for allowing the appeal.
Contra, the ld DR vehemently opposed and the submissions and referred to the from 3CB and explained that the Auditor has not certified as the re-imbursement of expenditure. The parent company has assigned the total revenue and expenditure to the assessee company and concluded his submission relying on the judicial decisions and the provision of law explanations that the TDS on fee for technical services is applicable to said transactions and the AO was correct in making an addition and exempted the order of CIT(A).
We heard rival submissions and perused the material on record and paper book filed in respect of claim of the assessee. Though the assessee has raised various grounds. As per the grounds of appeal the sole ground argued by the ld counsel for the
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assessee in respect of the disallowance made by the AO for not deducted tax at source. On applying the provision of sec. 40a(ia) on the commission payment made by the assessee company. The assessee has raised additional grounds. The ld AR has demonstrated that the copy of the financial statements at the pages 386 of the paper book where the assessee has segregated the expenses at Schedule 16 and the assessee has claimed in the financial year 2012-13 commission expenses of Rs.9,25,38,873/-. The auditor’s report on the notes to financial statements at para 33 explained that till Oct, 31, 2012, the assessee company was rendering market and sales support services to PGS Ireland and the revenue is recognized on the basis of agreed mark up on cost incurred. Whereas the said policy was changed form 1/11/2012 where PGS Ireland is rendering audio web conference and Collaboration Services and data communication services to PSG Ireland on direct revenue model wherein the revenue is recognized as and when services are rendered.
When a query was raised to the ld AR that if the nature of payment debited to profit and loss account under Schedule 16 is a reimbursement of expenditure and what is the exact amount of income which has been included in the gross revenue from operation, as we understand that reimbursement of expenditure shall not have any profit element or income element and the same has to be paid, the ld AR could not make any submissions or support with evidence, except explaining that the claim of expenses
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is in nature of reimbursement therefore there in no applicability of provision of sec. 40(a)(ia) of the Act. We found in respect of the second aspect of department violation considering such expenses is the fees for technical services we referred to the provisions of sec. 9(1)(vii) and Explanation 2 where as the ld DR expressed that the nature of expense fall into category explained in Explanation II but the Department has only relied on the documents which are filed by the assesse and no enquiry was conducted on this issue. The ld AR made a rebuttable to the objections of the Revenue and demonstrated the invoices raised by the assessee on the payments of PGS Ireland and the Tata in respect of parent company on the different dates.
Further, ld AR could not establish the fact with reasons that why there is a difference in the invoice value raised by the assessee in the parent company and the invoice raised by the Tata in favour of PGS Ireland. The ld AR’s submission that due to data fluctuation and the 2 invoices are raised on different dates 1st invoice placed at page 238 it was raised on 31/12/2012 and 2nd invoice placed at page 239 was raised by Tata in favour of PGS, Ireland at page 234 dated 23/1/2013. We find the submissions on this issue are not supportive and we found on perusal of the order of the AO and the CIT(A), this aspect was never noticed by the AO or CIT(A) which requires further examination. The ld AR submitted that the AO cannot apply both the provision of sec. 40(a)(ia) or 40(a) and relied on the judicial decisions. The ld AR
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referred to page 247 of the paper book where in form No.15CA was obtained by the assesee in respect of remittances to parent company and at page 247 the nature of remittance was mentioned as reimbursement of expenses and also the ld AR supported with the certificate obtained every time the remittance are made to the foreign countries to comply the RBI guidelines. We have considered the legal aspect of provision of law and there is no clarity on the disputed issue form both the parties whether the nature is a re-imbuement of expenditure or a fees for technical services and the AO has only dealt on the aspects of sec.40(a)(ia) and overloaded whether this amount is taxable in the hands of the recipient. Therefore considering over all aspects, we are of the substantive opinion that the matter has to be relooked based on the observations made in the above paragraphs and the paper book filed by the assessee. Accordingly, in the interest of substantial justice, we restore the entire disputed issue to the file of CIT(A) who shall call for remand report and the evidence from the assessee to substantiate its claim. Further it is needless to mention that the assessee shall be provided adequate opportunity of being heard and assessee also cooperate in submitting the clarifications, evidences documents for early disposal of the appeal.
Accordingly, the Appeal of the assessee is allowed for statistical purposes.
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Similarly the assesee has filed appeal for the asst. year 2014- 15 which is also on the similar lines and applying on the ratio decidendi refereed in the above paragraphs, we consider it fit to restore this disputed issue also to the file of the CIT(A) for fresh adjudication. Accordingly, this ground of the appeal is treated as allowed for statistical purposes.
In the result, Assessee’s appeal for asst. years 2013-14 and 2014-15 are allowed for statistical purposes.
Order pronounced in the open court on 5th February, 2019. Sd/- Sd/- (A.K GARODIA) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore Dated : 5 /2/2019 Vms Copy to :1. The Assessee 2. The Revenue 3.The CIT concerned. 4.The CIT(A) concerned 5.DR 6.GF By order
Asst. Registrar, ITAT, Bangalore.
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Date of Dictation ……………………………………… 2. Date on which the typed draft is placed before the dictating Member ……………………. 3. Date on which the approved draft comes to Sr.P.S .……………………………. 4. Date on which the fair order is placed before the dictating Member ……………….. 5. Date on which the fair order comes back to the Sr. P.S. ………………….. 6. Date of uploading the order on website…………………………….. 7. If not uploaded, furnish the reason for doing so ………………………….. 8. Date on which the file goes to the Bench Clerk ………………….. 9. Date on which order goes for Xerox & endorsement…………………………………… 10. Date on which the file goes to the Head Clerk ……………………. 11. The date on which the file goes to the Assistant Registrar for signature on the order ………………………………. 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order …………………………. 13. Date of Despatch of Order. ……………………………………………..