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SB verdict in Merilyn Shipping on S. 40(a)(ia) tds disallowance is not good law

The key words used in Section 40(a)(ia), according to us, are "on which tax is deductible at source under Chapter XVII –B". If the question is "which expenses are sought to be disallowed?" The answer is bound to be "those expenses on which tax is deductible at source under Chapter XVII –B. Once this is realized nothing turns on the basis of the fact that the legislature used the word 'payable' and not 'paid or credited'. Unless any amount is payable, it can neither be paid nor credited. If an amount has neither been paid nor credited, there can be no occasion for claiming any deduction.

The language used in the draft was unclear and susceptible to giving more than one meaning. By looking at the draft it could be said that the legislature wanted to treat the payments made or credited in favour of a contractor or sub-contractor differently than the payments on account of interest, commission or brokerage, fees for professional services or fees for technical services because the words "amounts credited or paid" were used only in relation to a contractor or sub-contractor. This differential treatment was not intended. Therefore, the legislature provided that the amounts, on which tax is deductible at source under Chapter XVII-B payable on account of interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services or to a contractor or sub-contractor shall not be deducted in computing the income of an assessee in case he has not deduced, or after deduction has not paid within the specified time. The language used by the legislature in the finally enacted law is clear and unambiguous whereas the language used in the bill was ambiguous.

A few words are now necessary to deal with the submission of Mr. Bagchi and Ms. Roychowdhuri. There can be no denial that the provision in question is harsh. But that is no ground to read the same in a manner which was not intended by the legislature. This is our answer to the submission of Mr. Bagchi. The submission of Ms. Roychowdhuri that the second proviso sought to become effective from 1^stApril, 2013 should be held to have already become operative prior to the appointed date cannot also be acceded to for the same reason indicated above. The law was deliberately made harsh to secure compliance of the provisions requiring deductions of tax at source. It is not the case of an inadvertent error.

For the reasons discussed above, we are of the opinion that the majority views expressed in the case of Merilyn Shipping & Transports are not acceptable. The submissions advanced by learned advocates have already been dealt with and rejected.

HIGH COURT AT CALCUTTA
Special Jurisdiction(Income Tax)

ITAT 20 OF 2013
GA 190 OF 2013
COMMISSIONER OF INCOME TAX, KOLKATA-XI
Versus
CRESCENT EXPORT SYNDICATE

—-

ITAT 30 OF 2013
GA 319 OF 2013
COMMISSIONER OF INCOME TAX, KOLKATA-XI

-VS-

PARK INTERNATIONAL

BEFORE:

The Hon'ble JUSTICE GIRISH CHANDRA GUPTA

The Hon'ble JUSTICE TARUN KUMAR DAS

Date : 3^rdApril, 2013.

Dictated on 28^th March 2013

The Court : The subject matter of challenge in ITAT No.30 of 2013 is a judgment and order dated July 18, 2012, by which the learned Tribunal, relying on the decision of a Special bench in the case of Merilyn Shipping & Transports (ITA 477/viz/2008, dated March 29, 2012) held as follows:

"If all the amounts have been paid, then obviously following the principles laid down by the Hon'ble Special Bench of this Tribunal in the case of Merilyn Shipping & Transports, no addition shall be made. If any amount is found to be payable as on the year end, then the Assessing Officer shall give the assessee adequate opportunity to substantiate his case as to why the disallowance, if any, should not be made by invoking the provisions of section 40(1)(ia) of the Act".

ITAT No.20 of 2013 is directed against a judgment and order dated May 24, 2012, by which the learned Tribunal, following the aforesaid judgment in the case of Merilyn Shipping & Transports, passed the following order:

"As the issue claimed by the assessee is that there is nothing payable as on 31.03.2006 and this expenditure of Rs.1,08,80,559/- is paid during the year and nothing remains payable, it means that the issue is covered. Principally, we have agreement with the assessee's counsel and are of the view that the issue is squarely covered in favour of the assessee. Principally, we allow this issue of the assessee but subject to the verification by AO that these expenses are paid within the year i.e. up to 31.03.2006 and nothing remains payable. Hence, this appeal of assessee in principle is allowed in favour of the assessee but subject to verification."

The revenue has come up in appeal in both the matters.

Mr. Bagchi, learned Advocate appearing for the assessee in ITAT No.30 of 2013, drew our attention to the judgment in the case of Merilyn Shipping & Transports. The reasons why the Tribunal was of the opinion that clause (ia) of section 40 of the I.T. Act, 1961 did not apply to the amounts already paid, according to the aforesaid judgment of the Tribunal, are as follows:

"Now, I have to look at how this provision was proposed in the Finance Bill 2004 and compare it with what was finally enacted after the assent of the President. The comparative provision is as under:

Finance (N0.2) Bill, 2004	: ( 268 Finance Act 2004: Actual Enactment ITR(st.) 40-41)
Amendment of section 40. – In such "40(a)(ia) 40 of the Income-tax Act, in clause (a), after sub-clause (i), the following shall be inserted with effect from the 1 st day of April, 2005, namely:-
(ia) any interest, commission or brokerage, fees for professional services of fees for technical services payable to a resident, or amount credited or paid to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax has not been deducted or, after deduction, has not been paid before the expiry of the time prescribed under sub-section (1) of section 200 and in accordance with the other provision of Chapter XVII-B:	(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a contractor or or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139,-
Provided that where in respect of any Such sum, tax has been deducted under Chapter XVII-B or paid in any Subsequent year, such sum shall be allowed as a deduction in computing the such tax has been paid."	Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) income of the previous year in which of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid."

"From the above comparison between the proposed and enacted provision, I find that the Legislature has replaced the word "amounts credited or paid" with the word 'payable" in the final enactment. As argued by ld. Counsel for assessee as well as for the Interveners, a question arises as to why the Legislature dropped the words "credited" and "paid" under section 40(a)(ia) as proposed in the Finance Bill, 2004."

"The provision of section 40(a)(ia) of the Act was introduced in order to ensure compliance of TDS but assigned the term "payable" in the provision of section 40(a)(ia) of the Act. On a comparison between the term "payable" in the provision the only conclusion, which can be reached, is that Legislature consistently replaced the words "amount credited" or "paid" with the word "payable" in the final enactment and such change was not done without any purpose. It is a basic presumption that an enactment was brought in by the Legislature is well-thought of and properly worded in order to give meaning to its intent by changing the words from "credited" or "paid" or to "payable". The legislative intent has been made clear that only the outstanding amount or the provision for expense liable for TDS is sought to be disallowed in the event there is a default of TDS."

"This proposition is also explained by Hon'ble Supreme Court in the case of CIT vs. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 wherein it is held 'Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion". However, on receipt of representations from the companies against omission of the words "reason to believe", Parliament reintroduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the AO.' And further Hon'ble Supreme Court quoted the relevant portion of circular No.549 dated October 31, 1989 [1990] 182 ITR (St.) 1, 29), which reads as under:"

"7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression 'reason to believe' in section 147.-A number of representations were received against the omission of the words 'reason to believe' from section 147 and their substitution by the 'opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, 'reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression 'has reason to believe' in place of the words 'for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same."

"From the above, I am of the view that similar is the situation here that after receiving representations from professional bodies (copy of which is filed before us also), the Legislature in this provision replaced the word from "credited" or "paid" to "payable". I am of the view that where the language is clear, the intention of the Legislature is to be gathered from the language used. What is to be borne in mind is as to what has been said in the statute as also what has not been said. A construction which requires, for its support, addition or substitution of words or which results in rejection of words, has to be avoided, unless it is covered by the rule of exception, including that of necessity. In the present provision of Section 40(a)(ia) of the Act there is no such exception and the only word provided by Legislature is "payable".

" In the present case, the only word put in the provision of section 40(a)(ia) of the Act is "payable" and not "paid" or "credited", rather Legislature consciously replaced the words "amounts credited or paid" with the word "payable" in the final enactment and such change was done with a purpose. I am of the view that presumption that enactment brought in by the Legislature is well-thought off and properly worded in order to give meaning to its intent. The Legislature by consciously replacing the words from "credited" or "paid" or "payable", the intent has been made clear that only the outstanding amount or the provision for expenses are liable for TDS are to be disallowed in the event there is default in not following the TDS provisions under Chapter XVII-B of the Act. No doubt the object of section 40(a)(ia) of the Act is to ensure that the TDS provision as provided in Chapter XVII-B is implemented without any default. As per section 40(a)(ia) of the Act any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services "payable" on which tax is not deducted or the tax is deducted but the same is not paid within the time allowed such amount shall be disallowed while computing the income. The sub-section speaks of the amount "payable" on which the tax is not deducted and therefore it should apply only if any amount is "payable", but if the amount is already paid the provisions of this section should not apply. The crucial word is "payable". The question arises "whether payable means payable at the end of the year or payable at any time during the year though paid during the year itself? If one looks into the TDS Provisions from sections 194A to 194K, it will be apparent that as per the language of those sections, tax is to be deducted at the time the amount is paid or at the time when the amount is credited, i.e. when the liability is admitted and it becomes payable. Therefore wherever the payment is covered by aforesaid sections whether paid or credited, tax has to be deducted. Sections 194 L and 194 LA may also be looked into which says that tax has to be deducted only at the time of payment. The language in these sections therefore shows that the Legislature has used different language in different sections. It is trite law that each and every word of the section has its own meaning and while drafting section 40(a)(ia) was meant to be applicable only if the amounts covered therein was "payable" at the end of the year. Reference may be made, for the scope and effect of section 40(a)(ia) as clarified by CBDT in Circular No.5 of 2005, date 15^th July, 2005 to show that the intention to introduce this provision was brought to curb bogus payments by creating bogus liability."

"In the present case, Section 40(a)(ia) of the Act creates a legal fiction for the amounts outstanding or remains payable i.e. at the end of every year as on 31^st March and it cannot be extended for taxing the amounts already paid. In fact, Section 201 of the Act itself take care of tax to be collected in the hands of the payee and other TDS provisions under Chapter XVIIB of the Act. No further legal fiction from elsewhere in the statute can be borrowed to extend the field of Section 40(a)(ia) of the Act. This fiction cannot be extended any further and, therefore, cannot be invoked by Assessing Officer to disallow the genuine and reasonable expenditure on the amounts of expenditure already paid."

"On comparison between the proposed and enacted provision, the only conclusion which I can reach is that the Legislature consciously replaced the words "amounts credited or paid" with the word "payable" in the final enactment. By changing the words from "credited" or "paid" to "payable", the legislative intent has been made clear that only outstanding amounts or the provisions for expenses liable for TDS under Chapter XVII-B of the Act is sought to be disallowed in the event there is a default in following the obligations casted upon the assessee under Chapter XVII-B of the Act."

Mr. Bagchi drew our attention to the relevant clause (ia) which reads as follows:

"(ia) any interest, commission or brokerage, [rent, royalty,] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, [has not been paid on or before the due date specified in sub-section (1) of section 139 :]

[Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.]"

Mr. Bagchji contended that there may be two possible constructions. However the construction that the word 'payable' is interchangeable with word 'paid' shall make the position of the assessee who has already paid, without deducting tax, worse than the assessee who has not as yet paid. If on the other hand the word 'payable' is not so construed the scope of any such mischief shall be altogether eliminated. In the case of the assessees who already have paid the disallowance of the expenditure shall be permanent. They shall have no means of deducting tax relatable to the amount already paid in the subsequent year and thus the relief contemplated by the proviso can never be availed by them.

Ms. Roy Chowdhury, learned Advocate appearing for the assessee respondent in ITAT No.20 of 2013 reiterated the reasons advanced by the Special Bench in the case of Merilyn Shipping & Transports which we have already noticed. She added that if the proviso is taken into account, it would lead to the only conclusion that the main provision contained in Clause (ia) relates to a case where the payment is outstanding. She submitted that there is a possibility of double jeopardy in the event it is held that Clause (ia) is also applicable to those cases where the money has already been paid. She developed her submission by citing an example. Take for instance that a sum of Rs. 100 was paid on account of professional fees without deducting TDS. The aforesaid expenditure shall not in that case be allowed to be deducted. The recipient of the aforesaid sum of Rs. 100 may have offered the same for taxation. Therefore, the income in the hands of the recipient has been taxed but the payer did not get the benefit thereof. She concluded by submitting that a second proviso to

Clause (ia) is intended to become effective from ^1stApril, 2013 which was enacted to lessen the rigour of Clause (ia) which provides as follows:

"The following second proviso shall be inserted in sub-clause (ia) of clause (a) of section 40 by the Finance Act, 2012, w.e.f. 1.4.2013 :

Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso."

She submitted that considering that the legislature was not in favour of creating undue hardship for an assessee, Clause (ia) should only be construed to apply to those cases where the payment is outstanding.

We requested Mr. Khaitan, learned Senior Advocate to assist the Court in resolving the issue. The matter was directed to be listed for further hearing on 1^stApril, 2013.

Dictated on 3^rdApril 2013

Mr. Khaitan, learned Senior Counsel, submitted that the views expressed by the Accountant Member are preferable to the views expressed by the Judicial Members. The Accountant Member in the case of Merilyn Shipping & Transports had expressed the following views :

"12.2. The question for consideration is as to why the words 'credited' or 'paid' contemplated in the Bill were dropped while incorporating Section 40(a)(ia). All the amounts whether 'credited' or 'paid' come within the ambit of term 'payable' and, therefore, the two terms, viz. 'credited' or 'paid' were only superfluous and, therefore, were dropped in the Section 40(a)(ia) inserted in the Act. In the provisions relating to TDS, the relevance of these terms was with reference to timing of deduction but while making disallowance under Section 40(a)(ia), these terms had no relevance and, therefore, legislature dropped these two terms, viz. 'paid' or 'credited' before insertion of Section 40(a)(ia) in the statute.

12.3. It is noticeable that Section 40(a) is applicable irrespective of the method of accounting followed by an assessee. Therefore, by using the term 'payable' legislature included the entire accrued liability. If assessee was following mercantile system of accounting, then the moment amount was credited to the account of payee on accrual of liability, TDS was required to be made but if assessee was following cash system of accounting, then on making payment TDS was to be made as the liability was discharged by making payment. The TDS provisions are applicable both in the situation of actual payment as well of the credit of the amount. It becomes very clear from the fact that the phrase, 'on which tax is deductible at source under Chapter XVII-B', was not there in the Bill but incorporated in the Act. This was not without any purpose.

12.4 In our considered opinion, there is no ambiguity in the Section and term 'payable' cannot be ascribed narrow interpretation as contended by assessee. Had the intentions of the legislature were to disallow only items outstanding as on 31st March, then the term 'payable' would have been qualified by the phrase as outstanding on 31st March. However, no such qualification is there in the section and, therefore, the same cannot be read into the section as contended by the assessee.

13. Section 40(a)(ia) is to be interpreted harmoniously with the TDS provision as its operation solely depends on the provisions contained under Chapter XVII-B. It contemplates one of the consequences of non-deduction of tax and ,therefore, has to be interpreted in the light of mandatory provisions contained under Chapter XVII-B. It would be appropriate to reproduce Section 40(a)(ia), which reads as under:-

Section 40(a)(ia):- any interest, commission or brokerage, [rent, royalty,] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, [has not been paid,-

(A) in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub-section (1) of Section 139; or

(B) in any other case, on or before the last day of the previous year:]

[Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted -

(A) during the last month of the previous year but paid after the said due date; or

(B) during any other month of the previous year but paid after the end of the said previous year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.]

Explanation:-For the purposes of this sub-clause,-

(i) "commission or brokerage" shall have the same meaning as in clause (i) of the Explanation to section 194 H;

(ii) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (I) of section 9;

(iii) "professional services" shall have the same meaning as in clause (a) of the Explanation to section 194J;

(iv) "work" shall have the same meaning as in Explanation III to section 194C;

[(v) "rent" shall have the same meaning as in clause (I) to the Explanation to section 194-I;

(v) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub- section (I) of section 9;]

Section 40 contained in Chapter IV deals with computation of business income and lists out various amounts which are not deductible notwithstanding anything to the contrary in Sections 30 to 38. This implies that even if a particular amount is allowable under Sections 30 to 38 still, if it does not comply the provisions contained in Section 40, then the same cannot be allowed.

The basic ingredients of Section 40(a)(ia) are as under:-

(i) It applies to interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services;

(ii) The aforementioned amounts are payable to a resident,

(iii) The amounts are payable to a contractor or sub-contractor being resident.

(iv) Tax is deductible at source under Chapter XVII-B in respect of amounts payable in respect of a aforementioned items.

(v) Tax has not been deducted as per requirement of Chapter XVII-B.

(vi) After deduction of tax, amount has not been paid.

Therefore, if aforementioned conditions are not fulfilled then deduction would not be allowed.

However, proviso to this Section further gives leverage to assessee to deduct tax in subsequent year or pay tax deducted during the previous year after the due date specified in Section 139(1). In such a situation, deduction would be allowed in the year in which such tax has been deducted. The explanation to this Section defines various amounts contemplated in this Section. The relevant Sections in Chapter XVII-B are re-produced hereunder:-

Interest on securities.

193. The person responsible for paying [to a resident] any income [by way of interest on securities] shall, [at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier], deduct income-tax [***] at the rates in force on the amount of the interest payable:

Payments to contractors and sub-contractors.

194C. (1) Any person responsible for paying any sum to any resident (hereinafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and –

** ** **

shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to-

(i) one per cent in case of advertising,

(ii) in any other case two per cent, of such as income-tax on income comprised therein.

Commission or brokerage:

194-H: Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in Section 194D) or brokerage, shall, at the time of credit of such income to the

account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of (ten) per cent:

** ** **

Rent.

194-I. Any person not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of -

(a) ten per cent for the use of any machinery or plant or equipment;

(b) fifteen per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings where the payee is an individual or a Hindu undivided family; and

(c) twenty per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings where the payee is a person other than an individual or a Hindu undivided family:

Fees for professional or technical services Section 194-J:-

(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of -

(a) fees for professional services, or

(b) fees for technical services,

(d) any sum referred to in Clause (va) of Section 28,

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income tax on income comprised therein:

** ** **

Explanation. – For the purposes of this section,-

(a) "professional services" means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section;

(b) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (I) of section9;

(ba) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;

(c) where any sum referred to in sub-section (1) is credited to any account, whether called "suspense account" or by any other name, in the books of account of the person liable to pay such sum, such crediting shall be deemed to be credit of such sum to the account of the payee and the provisions of this section shall apply accordingly.

If we examine the aforementioned sections, we find that identical considerations permeate through all the aforementioned Sections which are as under:-

(i) any person responsible for paying any sum to any resident in respect of aforementioned items;

(ii) shall;

(iii) at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of cheque or draft or by any other mode, whichever is earlier;

(iv) Deduct income tax thereon at the prescribed rate;

The term 'shall' used in all these sections make it clear that these are mandatory provisions and applicable to the entire sum contemplated under the respective sections. These sections do not give any leverage to the assessee to make the payment without making TDS. On the contrary, the intention of the legislature is evident from the fact that timing of deduction of tax is earliest possible opportunity to recover tax, either at the time of credit in the account of payee or at the time of payment to payee, whichever is earlier.

When we examine Section 40(a)(ia) in the backdrop of these sections, we find that it refers to the amount 'payable' 'on which tax was deductible at source under Chapter XVII-B'. Applying the principles of eujesdem generis, it can easily be inferred that term 'payable' in section 40(a)(ia) has to be interpreted in the light of sum referred to in various sections contained in Chapter XVII-B noted above, on which tax was deductible and, therefore, the term 'payable' in Section 40(a)(ia) refers to entire amount on which tax was required to be deducted. Keeping in view the principles of harmonious construction, the term 'payable' in Section 40(a)(ia) cannot be read separately from the provisions relating to TDS as pleaded on behalf of assessee. In our opinion, ld. CIT (Appeals) has rightly observed that taking the spirit of TDS provision into account and Section 40(a)(ia) being directly related to such TDS provision, a harmonious construction of the word 'payable' leads to inevitable conclusion that the said word also includes the 'paid' amount.

14. Ld. Counsel has relied on the dictionary meaning of term 'payable' which, in our opinion, cannot be resorted to in view of discussion in foregoing paras. The context in which term 'payable' has been used in Section 40(a)(ia) is to be taken into consideration. The context is various sections of Chapter XVII-B.

15. The next argument of ld. Counsel is based on the definition of term 'paid' as contemplated under Section 43(2) which reads as under:-"43(2) : 'paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head 'profits and gains of business or profession' ".16. A bare reading of the above provision would make it clear that the term 'paid' does not only mean actual payment but if the liability has been incurred according to the method of accounting followed by the assessee, then the same also comes within the purview of term 'paid'. If the assessee is following mercantile system of accounting then as soon as the liability accrues in its favour, the same is accounted for by crediting the amount of payee. Thus, it is evident that the emphasis is on liability to pay and not on actual payment. If we accept the contention of assessee, then Section 40(a)(ia) would become otiose and the section will not be attracted where payment is made though without deducting tax at source. Ld. Counsel has referred to the various decisions and in the case of Jaipur Vidyut Vitaran Nigam Limited (supra), the Tribunal had relied on the definition of Section 43(2) but the import of phrase 'incurred in accordance with the method of accounting followed' was not considered. Therefore, the finding that by implication the word 'payable' does not include 'paid' cannot be accepted.

17. The next argument of ld. Counsel for the assessee is based on Rule 30, which contemplates time and mode of payment to Government account of tax deducted at source. In our opinion, this Rule merely contemplates the procedure of depositing the TDS amount and merely because different time limits are prescribed, it would not follow that different considerations would apply while considering the term 'payable' under Section 40(a)(ia) of the Act. Ld. Counsel has also referred to Section 234B dealing with levy of interest to demonstrate that actual payment and payable amount are to be separately dealt with. However, these procedural sections cannot override the substantive provision of the Act.Tribunal in the case of Jaipur Vidyut Vitaran Nigam Limited (supra) has also observed that Section 40(a)(ia) being a legal fiction needs to be construed strictly. There is no quarrel with this proposition but at the same time we have to take into consideration the context in which a particular word is used and the overall purpose sought to be achieved by inserting a Section in the Act.

18. One more argument of assessee is that if the amount has already paid, then the assessee will not be able to in a position to deduct any pay tax, because, under such circumstances, as per the provisions of Section 191, the liability for payment of tax is to be discharged by payee. In the first place, the argument seems to be quite convincing because the assessee would be deprived of genuine expenditure and the payee will pay the tax on its income. Further, the proviso to Section 40 (a) (ia) does not make any provision in regard to this contingency. This may be a case of casus omisus but the Court cannot fill this gap. Hon'ble Allahabad High Court in the case of Dey's Medicals (UP) (P) Ltd.' case (supra) observed as under:-"Once a deduction of a particular amount is not allowable under the Act, it is liable to be taxed and merely because some other person may also be liable to tax after receiving the said amount in one or the other manner, it cannot be said that former assessee is entitled for exemption and cannot be taxed. No authority is shown providing that such taxation is not permissible in law and is bad even otherwise."19. Ld. ClT, DR has strongly relied on the decision of the Hon'ble Madras High Court in the case of Tube Investments of India Ltd. 's case (supra). The contention of Ld. Counsel for the assessee is that this decision was rendered in the context of constitutional validity of the provisions of section 40(a)(ia) and, therefore, in view of the decision of Hon'ble Delhi High Court in the case of Lachman Dass Bhatia Hingwala (P) Ltd.'s case (supra), the said decision is not relevant. It is true that this decision has been rendered in the context of examining of constitutional validity of the provisions of section 40(a)(ia) of the Act but in course of examining the constitutional validity, Hon'ble Madras High Court has extensively considered the import of section 40(a)(ia) and, therefore, in our opinion, this decision has strong bearing on the present issue.20. Hon'ble Madras High Court has noticed various contentions of assessee. We re-produce some contentions, which have direct bearing on the present issue:- "At para 5 of judgment: Mr. C. Natarajan, learned senior counsel appearing for the petitioners in Writ Petn. Nos. 10750 and 10751 of 2009 contended that while contractors business has no nexus to the determination of profits and gains of the business of the petitioner, s. 40(a)(ia) mutates itself to tax the petitioners at a disproportionate rate and quantum while purporting to address s. 194C and the contractors. According to him the effect of s. 40(a) (ia) is so grossly unreasonable that it imposes tax liability on the business of the petitioners even if the contractor himself paid the tax in his returns in the absence of TDS effected by the petitioners.At para 14 of judgment: According to the learned senior counsel, the implication of s. 40(a)(ia) is irrespective of the circumstances in which the deduction failed to be made and therefore it is arbitrary. By relying upon the decisions of the Hon'ble Supreme Court in the case of Coca cola and Eli Lily, the learned senior counsel contended that when the Hon'ble Supreme court has held that the liability of an assessee under s. 201 on failure to deduct or pay tax disappears once the recipient has paid the fix and even penalty cannot be levied if there was a reasonable cause for non-deduction, it should be held that s. 40(a)(ia) cannot be invoked in the case were the recipient had paid the tax. Absence of such a relief under s. 40(a)(ia) makes the provision arbitrary.

At para 18 of judgment: According to the learned counsel when the object of introduction of s. 40(a)(ia) is to enforce TDS provision, in the light of the fact that very many provisions by way of imposition of penalty, interest and prsecution have been providved under the recovery chapter viz. Chapter XVII, the addition of s. 40(a)(ia) disallowing the whole of the actual expenditure is highly onerous and thereby it becomes arbitrary, unreasonable warranting declaration of the provision as ultra vires of the Constitution.

At para 20 of judgment: According to the learned Counsel, the proviso to s. 40(a)(ia) does not in any way mitigate the damage caused under the main provision. It was also contended that under s. 195(5) of the Act relating to non-residents, where on production of a certificate as per the IT Rules, the requirement of TDS is exempted, such a safety valve measure not being available in respect of a resident recipient, s. 40(a)(ia) is unreasonable and unjustifiable.

At para 24 of judgment: According to the learned counsel a comparative reading of s.40(a)(ia) and s. 198 would show that while under s. 198, the non-deduction of TDS would result in deemed income in the hands of the assessee, there is no such expression in s. 40(a)(ia) and consequently the non-income viz., the expenditure cannot be treated as deemed income in the hands of the assessee. The learned counsel also contended that since the recipient of the expenditure of the assessee is also taxed, the imposition of tax by invoking s. 40(a)(ia) would result in double taxation which cannot be permitted.

At para 25 of judgment: The learned counsel by pointing out ss. 205 and 64 of the Act contended that in similar situations the legislature has made specific exoneration of double taxation. The learned counsel relied upon:

(i) CIT v. Indo Nippon Chemicals co. Ltd. [2003] 182 CTR 291/[2003] 261 ITR 275 (SC);

(ii) K.P. Varghese v. CIT [1981] 24 CTR 358 [1981] 131 ITR 597 (SC);

(iii) Navnit Lai C. Javeri v. K.K.Sen, AAC [1065] 56 ITR 198 (SC);

(iv) Govind Saran Ganga Saran v. CST [1985] 155 ITR 144 (SC);

(v) Godhira Electricity Co. Ltd. v. CIT [1997] 139 (JR 564/ [1997] 225 ITR 746 (SC) in support of his submissions.

At para 33 of judgment: It was then contended that an expenditure is not an income and consequently the collection of tax as envisaged under Art. 265 is not permissible. It was also contended that s. 40(a)(ia) conflicts with S. 145 of the Act since the method of accounting is disturbed.

At para 41 of judgment: As against the submissions of the petitioners that the provision is illusory, the learned counsel contended that though the words used in the proviso are deduct and pay, there is no prohibition for the assessee to make the payment without any deduction. In that context, the learned counsel relied upon s. 195A and stated that such a situation is envisaged therein. The learned standing counsel also relied upon Addl CIT v. Farasol Ltd. [1987] 163 ITR 364 (Raj.) where in the context of s.40(a) it was held by the Rajasthan High Court that even where the amount is paid out of the assessee's pocket but not deducted, he would be eligible for the deduction.

At para 46 of judgment : Mr.K. Subramaniam, learned standing counsel for the IT Department brought to our notice the CBDT circulars published in [2009] 310 ITR (St)55, wherein it was stated that the introduction of s.40(a)(ia) allows additional time (till due date of filing return of income) for deposit of TDS pursuant to the deduction made for the month of March so that the disallowance under the sub-clause is not attracted. The learned standing counsel submitted a statement containing the TDS collections for the financial year 2008-09, which was Rs. 1,30,470.8 crores as compared to other forms of tax collections which shows that out of the net collection, at least 1/3 is by way of TDS. The learned standing counsel therefore contended that the object for introducing s.40(a)(ia) has really worked viz., augmentation of the TDS provision and therefore the provision should be upheld.

In the backdrop of these submissions, Hon'ble Madras High Court upheld the constitutional validity of the provisions of section 40(a)(ia) and made various observations:-

(i) Hon'ble Madras High Court, inter alia, noted the observations of Hon'ble Supreme Court in the case of A.S.Krishna v. State of Madras AIR 1957 SC 297 which are as under:-

'It would be quite an erroneous approach to the question to view such a statute not as an organic whole, but as a mere collection of sections then disintegrate it into parts, examine under what heads of legislation those parts would severally fall, and by that process determine what portions thereof are inter vires and what are not. Thus, section 40(a)(ia) could not be viewed independently and had to be considered along with other provisions.

(ii) The provisions of section 40(a)(ia) were compared with the provisions of section 201 of the Income Tax Act and, it was, inter alia, observed that as far as section 201 is concerned that would relate to the amount of tax that could be deducted by way of TDS. However, as far as section 40(a)(ia) is concerned, which would result in the disallowance of whole of the expenditure and thereby the entire sum expended would attract the levy of tax at a prescribed rate with all other conditions such as surcharge, etc. Thus, Hon'ble Madras High Court has also held in para 61 of its judgment that "whole of the expenditure claimed without making TDS is to be disallowed and not only part of the expenditure".

(iii) The Finance Bill No.2 of 2004 states that the insertion of clause (ia) in clause (a) to section 40 of the Act was with a view to augment compliance of TDS provisions.

(iv) When the provisions and procedures relating to TDS are scrupulously applied, first and foremost it ensures the identification of the payees and thereby network of assessees gets confirmed. When once such identity of assessees, who are in receipt of the income can be ascertained, it will enable tax collection machinery to bring within its fold all such persons who are liable to come within the network of taxpayers.

Thus, if it is held that the provisions of section 40(a)(ia) are not applicable in respect of those payments which have been paid without making TDS and at the end of the year no amount is outstanding then the very object of identification of payees will get frustrated.

(v) The legislative intent of the introduction of section 40(a)(ia) is in the larger perspective of augmenting the very TDS provisions themselves. It is not merely related to the collection of TDS only.

(vi) The intention of the legislature is not to tax the payer for its failure to deduct the tax at source. The object of introduction of section 40(a)(i) as well as section 40(a)(ia) is to ensure that one of the modes of recovery as provided in Chapter XVII-B is scrupulously implemented without any default, in order to augment the said mode of recovery.

Hon'ble Madras High Court, inter alia, observed at para 69 of its judgment as under:-

"With the proviso to section 40(a)(ia) the deduction in the subsequent year by rectifying the default committed in the matter of TDS in the previous year, a defaulting assessee cannot be heard to say that irrespective of the deliberate default committed by it in implementing the provision relating to TDS, it should be held that a higher tax liability is mulcted on it".

Hon'ble Madras High Court, inter alia, observed in para 83 of its judgment as under:-

"After all the proviso has been inserted in order to ensure that even a defaulter is not put to serious prejudice, in as much as, by operation of the substantive provision, the expenditure which is otherwise allowable as a deduction is denied on the ground that the obligation of TDS provisions is violated. The law makes while imposing such a stringent restriction wanted to simultaneously provide scope for the defaulter to gain the deduction by complying with the TDS provision at a later point of time".

Thus, impliedly Hon'ble Madras High Court, has, inter alia, held that the provisions of section 40(a)(ia) will be applicable with respect to entire expenditure. It is true that specific issue regarding 'paid', 'credited' and 'payable' has not been considered but from the judgment it is evident that if assessee's contention is accepted then the very object of incorporation of section 40(a)(ia) would be frustrated.

21. In view of above discussion, we answer the question as under:-

The provisions of section 40(a)(ia) of the Income Tax Act, 1961, are applicable not only to the amount which is shown as payable on the dateof balance-sheet, but it is applicable to such expenditure, which become payable at any time during the relevant previous year and was actually paid within the previous year. In the result the question is decided in favour of revenue and against the assessee."

Before dealing with the submissions of the learned Counsel appearing for the assessees in both the appeals we have to examine the correctness of the majority views in the case of Merilyn Shipping.

We already have quoted extensively both the majority and the minority views expressed in the aforesaid case. The main thrust of the majority view is based on the fact "that the Legislature has replaced the expression "amounts credited or paid" with the expression 'payable' in the final enactment.

Comparison between the pre-amendment and post amendment law is permissible for the purpose of ascertaining the mischief sought to be remedied or the object sought to be achieved by an amendment. This is precisely what was done by the Apex Court in the case of CIT Vs. Kelvinator reported in 20 10(2) SCC 723. But the same comparison between the draft and the enacted law is not permissible. Nor can the draft or the bill be used for the purpose of regulating the meaning and purport of the enacted law. It is the finally enacted law which is the will of the legislature.

The Learned Tribunal fell into an error in not realizing this aspect of the matter.

The Learned Tribunal held "that where language is clear the intention of the legislature is to be gathered from the language used". Having held so, it was not open to seek to interpret the section on the basis of any comparison between the draft and the section actually enacted nor was it open to speculate as to the effect of the so-called representations made by the professional bodies.

The Learned Tribunal held that "Section 40(a)(ia) of the Act creates a legal fiction by virtue of which even the genuine and admissible expenses claimed by an assessee under the head "income from business and profession" if the assessee does not deduct TDS on such expenses are disallowed".

Having held so was it open to the Tribunal to seek to justify that "this fiction cannot be extended any further and, therefore, cannot be invoked by Assessing Officer to disallow the genuine and reasonable expenditure on the amounts of expenditure already paid"? Does this not amount to deliberately reading something in the law which is not there?

We, as such, have no doubt in our mind that the Learned Tribunal realized the meaning and purport of Section 40(a)(ia) correctly when it held that in case of omission to deduct tax even the genuine and admissible expenses are to be disallowed. But they sought to remove the rigour of the law by holding that the disallowance shall be restricted to the money which is yet to be paid. What the Tribunal by majority did was to supply the casus omissus which was not permissible and could only have been done by the Supreme Court in an appropriate case. Reference in this regard may be made to the judgment in the case of Bhuwalka Steel Industries vs. Bombay Iron & Steel Labour Board reported in 2010 (2) SCC 273.

'Unprotected worker' was finally defined in Section 2 (II) of the Mathadi Act as follows:-

" 'unprotected worker' means a manual worker who is engaged or to be engaged in any scheduled employment."

The contention raised with reference to what was there in the bill was rejected by the Supreme Court by holding as follows:-

"It must, at this juncture, be noted that in spite of Section 2(11), which included the words "but for the provisions of this Act is not adequately protected by legislation for welfare and benefits of the labour force in the State", these precise words were removed by the legislature and the definition was made limited as it has been finally legislated upon. It is to be noted that when the Bill came to be passed and received the assent of the Vice- President on 05-06-1969 and was first published in the Maharashtra Government Gazette Extraordinary, Part IV on 13-06-1969, the aforementioned words were omitted. Therefore, this would be a clear pointer to the legislative intent that the legislature being conscious of the fact and being armed with all the Committee reports and also being armed with the factual data, deliberately avoided those words. What the appellants are asking was to read in that definition, these precise words, which were consciously and deliberately omitted from the definition. That would amount to supplying the casus omissus and we do not think that it is possible, particularly, in this case. The law of supplying the casus omissus

by the courts is extremely clear and settled that though this Court may supply the casus omissus, it would be in the rarest of the rare case and thus supplying of this casus omissus would be extremely necessary due to the inadvertent omission on the part of the legislature. But, that is certainly not the case here".

We shall now endeavour to show that no other interpretation is possible.

The appeal is, thus, allowed in favour of the revenue.

Urgent xerox certified copy of this order, if applied for, be supplied to the parties subject to compliance with all requisite formalities.

(GIRISH CHANDRA GUPTA, J.)

(TARUN KUMAR DAS, J.)

CBDT allows issue of Refund Intimation U/s. 143(1) beyond time

Instruction No. 18th/ 2013, dated the 17th of December, 2013

Subject: – Issue of Intimation under section 143(1) of Income-tax Act, 1961 beyond time-regarding.

Several instances have come to the notice of the Board Where due to certain technical or other reasons (which inter-alia included wrong migration of PAN and delayed release of returns by the Centralized Processing Cell to the jurisdictional authorities), intimation in refund cases could not be sent to the concerned assessees within the time-frame as prescribed in second proviso to sub-section (1) of section 143 of the Income-tax Act, 1961 ('Act'). This has caused grievances as assessees are unable to get their legitimate refunds in accordance with provisions of Act, although the delay is not attributable to them.

2. The matter has been examined. Central Board of Direct Taxes, by virtue of power vested in it under section 119(2)(a) of the Act, hereby relaxes the time-frame prescribed in second proviso to sub-section(1) of section 143 of the Act in those cases where the return¬of-income was filed by the assessee in accordance with provisions of section 139/142(1) of the Act, but due to technical or other reasons not attributable to such assessees, the date of sending intimation under section 143(1) of the Act has lapsed before 01-04-2013. In such cases, Central Board of Direct Taxes directs that such returns shall be processed and intimation of processing of such returns shall be sent to the assessee concerned by the Assessing Officer in accordance with provisions of section 143 of the Act notwithstanding the time-limit prescribed in second proviso to sub-section (1) of that section.

3. The progress of disposal of such cases shall be monitored by the Addl./Joint CIT.

4. It its reiterated that this Instruction shall only apply to those cases where a valid return-of-income was filed as per provisions of the Act with refund claim, but the same remained peOing beyond the prescribed date due to reasons not attributable to the assessee. Further, this relaxation shall not be applicable to those cases where either Demand is shown as payable in the return-of-income or as a result of processing beyond the date as prescribed in second proviso to sub-section (1) of section 143, Demand is determined As payable.

5. This should be immediately brought to the notice of all officers working in your region.

F.No. 225/196/2013-ITA.II

Yours faithfully,

(Rohit Garg)

Deputy Secretary to the Government of India

Ratio decidendi of a judgment prevails upo the contrary obiter dicta of another judgment

Posted In Income Tax Case Laws | Judiciary | No Comments »

In the case of ACIT, Circle 4(2), Mumbai v. Rishti Stock and Shares Pvt. Ltd. in ITA No. 112/Mum/2012, Hon'ble ITAT, Mumbai in its order dated 02-08-2013 has examined the decision of the Hon'ble Allahabad High Court (supra) as regards to section 40(a)(ia) of the Act and concluded that the same was an 'orbiter dicta' while the decisions of the Hon'ble Gujarat and Calcutta High Court (supra) were 'ratio decidendi'. The ITAT accordingly applied the view taken by the Hon'ble Gujarat and Calcutta High Court as ratio decidendi prevails over an orbiter dicta.

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

Before Shri R.S.Syal, AM and Shri Vivek Varma, JM

ITA No.112/Mum/2012 : Asst.Year 2008-2009

CO No.263/Mum/2012 : Asst.Year 2008-2009

The Asstt.Commissioner of Income-tax

Vs.

M/s. Rishti Stock and Shares Pvt.Ltd.

Date of Pronouncement : 02.08.2013

OR D E RPer R.S.Syal (AM) :

This appeal by the Revenue and cross objection by the assessee arise out of the order passed by the Commissioner of Income-tax (Appeals) on 28.10.2011 in relation to the assessment year 2008- 2009.

2. First ground of the Revenue's appeal is against the deletion of addition of Rs. 20,05,328 on account of bad debts. Briefly stated the facts of this ground are that the assessee, a stock broker, claimed certain deduction on account of bad debts. The Assessing Officer restricted the allowance to the extent of brokerage which passed through profit and loss account amounting to Rs. 19,00,789. The remaining amount of Rs. 20,05,328 was disallowed. The learned CIT(A) deleted the disallowance.

3. After considering the rival submissions and perused the relevant material on record we find that in principle the question of bad debt in the hands of stock broker stands settled in assessee' s favour by the judgment of the Hon'ble Delhi High Court in CIT Vs. D.B. (India) Securities [(2009) 318 ITR 26 (Delhi)] holding that the unrecovered amount by the share broker on behalf of its sub-broker has to be treated as debt and deduction is allowable. It has further been laid down in this case that the shares remaining in the possession of the assessee can be sold in the market for whatever consideration and adjusted against the balance outstanding payable by the debtors and the net figure which results thereafter, has to be allowed as bad debt. The Special Bench of the Tribunal in DCIT Vs. Shreyas S.Morakhia [(2010) 5 ITR (Tri.) 1 (Mum.) (SB)] has also decided this issue in asses see's favour by holding that the sum receivable by share broker from clients for transactions undertaken on their behalf is a trading debt. Unrecovered part has to be allowed as deduction. In view of the above judgment and Special Bench order, we hold that the assessee is entitled to deduction in respect of the amount becoming unrecoverable from its clients. However the deduction has to be restricted to the amount determined after reducing the sum recoverable from sale proceeds of shares with assessee, if any, in terms of the judgment in D.B. (India) Securities (supra). We, therefore, set aside the impugned order on this issue and restore the matter to the file of A.O. for taking a fresh decision accordingly, after allowing a reasonable opportunity of being heard to the assessee.

4. Second ground of the Revenue's appeal is against the deletion of disallowance of ~98,198 u/s 40(a)(ia) on account of `Transaction charges'. The learned AR was fair enough to concede that this issue needs to be decided against the assessee in view of the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Kotak Securities Limited [(2012) 340 ITR 333 (Bom.)]. In view of the candid admission by the learned AR, we set aside the impugned order on this issue and restore the addition made by the Assessing Officer.

5. The only issue in the assessee's cross objection is against sustenance of the above addition of Rs. 98,198 u/s 40(a)(ia) on the ground that no amount was outstanding at the end of the year and hence the disallowance could not have been made u/s 40(a)(ia). This ground is based on the majority view of this Special Bench decision in Merilyn Shipping and Transports. The ld. AR was fair enough to accept during the course of his arguments that the Hon'ble Calcutta High Court, by a recent judgment in CIT v. Crescent Export Syndicate, has reversed the majority view of this Special Bench decision in Merilyn Shipping and Transports. He accepted that the addition be confirmed on this score. However, after the conclusion of hearing but before the rising of the Court, the ld. AR came back to contend that the Hon'ble Allahabad High Court has very recently decided similar issue in favour of the assessee and in view of the conflicting decisions, the view in favour of the assessee should be followed. The ld. DR opposed the submissions made on behalf of the assessee.

6. Having heard the rival submissions and perused the relevant material on record, there is no dispute in principle that the amount is otherwise disallowable on merits as has been accepted by the ld. AR in response to the second ground of the Revenue's appeal. Now, the sustenance of such disallowance has been challenged on the ground that the amount was paid during the year and hence no disallowance be made as per the very recent judgment of the Hon'ble Allahabad High Court in CIT VS. Vector Shipping Services (P) Ltd. It is noticed that the special bench of the tribunal in Merilyn Shipping and Transports held that unless the amount is payable at the end of the year, no disallowance can be made u/s 40(a)(i) of the Act. This view came up for consideration before the Hon'ble Calcutta High Court in CIT v. Crescent Export Syndicate and the Hon'ble High Court was pleased to disapprove the view taken by the special bench after considering the very same order. It is further noted that the Hon'ble Calcutta High Court has reiterated the same view vide its judgment dated 4.4.20 13 in CIT VS. Md. Jakir Hossain Mandal. It is still further relevant to note that the Hon'ble Gujarat High Court, vide its judgment dated 9.5.2013, in a series of cases led by CIT VS. Sikandarkhan N. Tunvar has disproved the special bench order in the case of Merilyn Shipping (supra).

7. The ld. AR has relied on the judgment dated 9.7.2013 rendered by the Hon'ble Allahabad High Court in CIT VS. Vector Shipping Services (P) Ltd. to contend that in this case a view favourable to the assessee has been taken. We have gone through the said judgment. It is of paramount importance to note that the only question pressed by the Revenue in that case has been reproduced as under : -

"The department has pressed the only question of law as follows:-

"(a) Whether on the facts and in the circumstances of the case, the Hon 'ble ITAT has rightly confirmed the order of the CIT (A) and thereby deleting the disallowance of Rs.1,17,68,621/- made by the Assessing Officer under section 40 (a) (ia) of the I.T. Act, 1961 by ignoring the fact that the company M/s Mercator Lines Ltd. had performed ship management work on behalf of the assessee M/s Vector Shipping Services (P) Ltd. and there was a Memorandum of Understanding signed between both the companies and as per the definition of memorandum of understanding, it included contract also."

8. From the factual matrix of this case it can be noticed as an admitted position that M/s Mercator Lines Limited had deducted tax at source on salaries paid by it on behalf of assessee, in respect of which the disallowance was made by the AO u/s 40(a)(ia). By answering the question as reproduced above, the Hon'ble High Court held that : `In the present case tax was deducted as TDS from the salaries of the employees paid by M/s Mercator Lines Ltd., and the circumstances in which such salaries were paid by M/s Mercator Lines Ltd., for M/s Vector Shipping Services, the assessee were sufficiently explained.' Having answered the question raised before it in above terms, the Hon'ble High Court incidentally noticed that for disallowing expenses from business and profession on the ground that tax has not been deducted, the amount should be payable and not which has been paid by the end of the year. These passing remarks, which are only obiter dicta, seem to have been made because the tribunal in the impugned order before the Hon'ble High Court, apart from deleting the disallowance on the ground that `M/s Mercator Lines Limited had deducted TDS on salaries paid by it on behalf of assessee. Under such circumstances assessee was not required to deduct TDS on reimbursement being made by it to M/s Mercator Lines Limited.', also referred to the special bench decision in the case of Merilyn Shipping (supra). As it is manifest from the solitary question of law reproduced above that there is no reference to the deletion of disallowance u/s 40(a)(ia) when the expenditure has been paid, such remarks of the Hon'ble High Court can be considered as obiter dicta. On the contrary, the Hon'ble Calcutta High Court in the aforenoted two judgments and the Hon'ble Gujarat High Court in the above referred case have dealt with this issue on merits arising out of the special bench order in Merilyn Shipping (supra) and specifically disproved it. Such decision constitutes the ratio decidendi of these cases. There is hardly any prize for guessing that it is the ratio decidendi of a judgment which prevails upon the contrary obiter dicta of another judgment. In view of the foregoing discussion, we are of the considered opinion that there is no merit in the ground raised by the assessee in its cross objection.

9. In the result, appeal of the Revenue is partly allowed and the C.O. of the assessee is dismissed.

Order pronounced on this ^02ndday of August, 2013.

Leasehold Rights Are Eligible For Depreciation

Posted In Income Tax Case Laws | Judiciary | No Comments »

Issue in dispute is squarely covered by the decision of the Tribunal, Mumbai in the case of Kotak Forex Brokerage Ltd. Vs ACIT (33 SOT 237)(Mum.). In this case, the assessee paid an amount of Rs. 1.88 crore towards the use of the name 'Kotak' and claimed depreciation thereon terming it as depreciation on goodwill. The Tribunal held that business or commercial rights are rights obtained for effectively carrying on the business or commerce. Commerce is a wider term, which ncompasses business in its fold. Therefore, any right which is obtained for carrying on the business effectively and profitably has to fall within the meaning of intangible asset. The Tribunal held that goodwill was similar to the specified assets and accordingly the assessee was allowed depreciation. The Hon'ble Supreme Court in the case of CIT Vs. Smifts Securties Ltd. held that goodwill is an intangible asset eligible for depreciation u/s 32 of the Act. In these circumstances, we remit the issue to the file of the AO to decide the issue in the light of the said decisions to consider the allowability of depreciation on intangible assets after getting bifurcation of payment of Rs. 75 lakhs and to allow depreciation on the goodwill @ 25%.

INCOME TAX APPELLATE TRIBUNAL, HYDERABAD

BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER

AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER

ITA No. 37/HYD/2012 – Assessment Year: 2008-09

ITA No. 1482/HYD/2012 – Assessment Year: 2009-10

M/s Tirumala Music Centre (P) Ltd

Vs.

Asst. Commissioner of Income-tax

Date of Pronouncement : 28/06/2013

ORDER

PER ASHA VIJAYARAGHAVAN. J.M.: The appeal being ITA No. 37/H/12 by the assessee and appeal being ITA No. 1482/Hyd/12 by the revenue are directed against separate orders of CIT(A) for the assessment years 2008- 09 and 2009-10 respectively.

ITA No. 37/Hyd/12 – appeal by the assessee

2. Briefly the facts of the case are that the assessee is a company engaged in the business of retail trading in electronic goods and home appliances. For the AY 2008-09, it filed return of income on 30/12/2008, showing income of R. 3,75,45,760/-. During the course of assessment proceedings, the AO found that the assessee had debited a sum of Rs. 15.00 lakhs to the profit and loss account, showing as goodwill amortized. On the query raised by the AO for justifying such claim of deduction, the assessee had submitted that the said amount was paid to one M/s Krishna Electronics, Vijayawada, towards transfer of leasehold rights of premises to the assessee. It was stated that total amount of Rs. 60,00,000/- was paid by them for transfer of leasehold rights for Vijayawada Branch and since the benefit of such payment is over a period of time, the company decided to defer recognizing such expenditure over a period of four years and, hence, Rs. 15 lakhs was written off during the current year. The learned AR of the submitted that the expenditure was wholly and exclusively for the purpose of business of the company and, hence, the same is deductible u/s 37 of the Act, and the same also falls under intangible asset as per the provisions of section 32(1)(ii) and is eligible for depreciation @ 25%. The assessee had requested the AO to allow the depreciation as the company had not claimed depreciation due to inadvertence. The AO, however, rejected the claim of the assessee and observed that the Act does not recognize goodwill as intangible asset. The AO, however, pointed out that the assessee had not shown such expenditure under fixed assets, but had shown the goodwill in the balance sheet as miscellaneous expenditure and, hence, the assessee has not recognized the same as asset. The AO did not allow deduction u/s 37 of the Act towards the same and added the amount of Rs. 15 lakhs to the income of the assessee.

3. On appeal, the CIT(A) held that in the absence of any documentary evidence including copy of agreement from the assessee, it is difficult to believe that the said amount had been paid for transfer of leasehold rights of such premises. The CIT(A) concurred with the view taken by the AO. The CIT(A) observed that the assessee has however separately shown such payment under miscellaneous expenditure in the balance sheet and, therefore, cannot be allowed as deduction u/s 32(1)(ii) of the Act, the same cannot be treated as intangible asset. Accordingly, the CIT(A) confirmed the order of the AO in making the addition of Rs. 15 lakhs towards income of the assessee.

4. Aggrieved the assessee is in appeal before us.

5. Ground No. 1 is general in nature. Ground Nos. 4 & 5 regarding the addition of Rs. 8,46,440/- and disallowance of amount of Rs. 2,33,000/- have not pressed by the learned counsel for the assessee, therefore, the same are dismissed as not pressed.

6. The substantive grounds to adjudicate are ground Nos. 2 & 3 wherein it was stated that the amount of Rs. 15 lakhs qualifies for inclusion under the head intangible asset as provided u/s 32(1)(ii) of the Act and has entitled to depreciation @ 25% on Rs. 60.00 lakhs.

7. We have heard the arguments of both the parties, perused the record and have gone through the orders of the authorities below. We find that the issue in dispute is squarely covered by the decision of the Tribunal, Mumbai in the case of Kotak Forex Brokerage Ltd. Vs ACIT (33 SOT 237)(Mum.). In this case, the assessee paid an amount of Rs. 1.88 crore towards the use of the name 'Kotak' and claimed depreciation thereon terming it as depreciation on goodwill. The Tribunal held that business or commercial rights are rights obtained for effectively carrying on the business or commerce. Commerce is a wider term, which ncompasses business in its fold. Therefore, any right which is obtained for carrying on the business effectively and profitably has to fall within the meaning of intangible asset. The Tribunal held that goodwill was similar to the specified assets and accordingly the assessee was allowed depreciation. The Hon'ble Supreme Court in the case of CIT Vs. Smifts Securties Ltd. held that goodwill is an intangible asset eligible for depreciation u/s 32 of the Act. In these circumstances, we remit the issue to the file of the AO to decide the issue in the light of the said decisions to consider the allowability of depreciation on intangible assets after getting bifurcation of payment of Rs. 75 lakhs and to allow depreciation on the goodwill @ 25%.

8. In the result, appeal being ITA No. 37/Hyd/12 is partly allowed for statistical purposes.

ITA NO. 1482/Hyd/12 – appeal by the revenue

9. In this case, the CIT(A) has held that the assessee had taken the transfer of lease hold rights of M/s Krishna Electronics, Vijayawada, which is running its business along with equipments, interiors and good will, and in turn paid Rs. 75,00,000/- as consideration. Accordingly, the assessee amortized Rs. 15,00,000/- by showing only Rs. 60,00,000/- as consideration and the assessee had claimed depreciation at 25%. The CIT(A) held that the assessee has taken possession of premises along with plant and machinery, furniture & fittings, and also lease rent paid, which is not disputed by the AO. Therefore, running business of the assessee at Vijayawada premises in which M/s Krishna Electronics is running the same business of electronic goods and handed over as it is, 'as is where is' basis. In turn the assessee has paid an amount of Rs. 75 lakhs as per the agreement. The CIT(A) held that this amount includes certain plant & machinery like, air conditioners, computers and furniture & fittings and goodwill. Therefore, the CIT(A) categorized the entire amount of Rs. 75 lakhs in the least of block of assets as furnitures & fittings and allowed depreciation @ 10% on the amount of Rs. 75 lakhs.

10. Aggrieved, the revenue is in appeal before us raising a ground that the CIT(A) has wrongly given 10% depreciation on the amount of Rs. 75 lakhs.

11. In the grounds of appeal before the CIT(A) at ground No. 3 the assessee himself has submitted that the learned AO should have appreciated that during the previous year relevant to the AY 2008-09 the amount of Rs. 60 lakhs paid by the assessee company for deduction of Rs. 15 lakhs in question qualifies for inclusion under the head 'intangible asset' as provided u/s 32(1)(ii) and is entitled to a depreciation @ 25% on intangible assets. Hence, we direct the AO to allow depreciation on goodwill at 25% on the intangible assets and with respect to furniture and fittings depreciation to be allowed at 10% since they fall under block of assets as furniture and fittings. The assessee is directed to give bifurcation of good will and furniture and fittings.

12. In the result, appeal of the revenue being ITA No. 1482/Hyd/12 is partly allowed.

13. To sum up, the appeal being ITA No. 37/Hyd/12 is partly allowed for statistical purposes and the appeal being ITA No. 1482/Hyd/12 is partly allowed.

Pronounced in the open court on 28/06/2013.

IT : Mere fact that an income is not exempt under section 11 would not by itself render Tamil Nadu Cricket Association's registration under section 12AA liable to be cancelled

• If a particular activity of the institution appeared to be commercial in character, and it is not dominant, then it is for the Assessing Officer to consider the effect of section 11 of the Act in the matter of granting exemption on particular head of receipt.

• The mere fact that the said income does not fit in with section 11 of the Act would not, by itself, herein lead to the conclusion that the registration granted under section 12AA is bad and hence, to be cancelled. Only possible enquiry under section 12AA of the Act for cancellation is to find out whether the activities of the trust are genuine or in accordance with the objects of the trust. If any of the income arising on the activities are not in accordance with the objects of the trust, the assessee's income, at best, may not get the exemption under section 11 of the Act. But this, by itself, does not result in straight rejection of the registration as 'trust' under section 12AA of the Act. The question as to whether the particular income qualified under section 11 of the Act or not is not the same as activity being genuine or not which is relevant for cancellation of registration.

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[2013] 40 taxmann.com 250 (Madras)

HIGH COURT OF MADRAS

Tamil Nadu Cricket Association

Director of Income-tax (Exemptions)

MRS. CHITRA VENKATARAMAN AND T.S. SIVAGNANAM, JJ.

TAX CASE (APPEAL) NO. 450 OF 2013
M.P. NO. 1 OF 2013

OCTOBER 21, 2013

P.S. Raman and P.R. Raman for the Appellant. J. Narayanaswamy for the Respondent.

JUDGMENT

Mrs. Chitra Venkataraman, J. - The assessee is on appeal as against the order of the Income Tax Appellate Tribunal and seeks admission of Tax Case (Appeal) on the following substantial questions of law:-

"1.		Whether the Tribunal was right in upholding the cancellation of registration under Section 12AA(3) of the Income Tax Act, 1961 on the ground that the activities of the appellant could not be said to be genuine after the amendment of the definition of 'charitable purpose' ?
2.		Whether the Tribunal was right in law in holding that the activities of the appellant could be said to be "not genuine", when the appellant was carrying on activities in accordance with its objects and similar to its activities in earlier years, merely on account of the amendment to the definition of 'charitable purpose' in the Act ?
3.		Whether the Tribunal was right in not following the decisions of the jurisdictional High Court and coordinate benches of the Tribunal, on the ground that certain aspects had not been highlighted before the Hon'ble High Court and the coordinate Benches ?"

2. The assessee is a Society registered under the Tamil Nadu Societies Registration Act. The said Society was granted registration under Section 12AA of the Income Tax Act, 1961 on 28.03.2003. As is evident from the reading of the Memorandum of Association, the objects of the Association are as follows:-

(a)		to maintain a general control of the game of cricket in the State and the Union Territory of Pondicherry and give its decision on all matters concerning the game either when referred to or suo moto.
(b)		to spread the game throughout the State by organizing tournaments, including Inter-University, Inter-School and Inter- Association matches, to educate young sportsmen in the game generally and also in the field of physical culture and the spirit of sportsmanship. The benefits would be available to the General Public irrespective of caste, creed, religion or sex.
(c)		to maintain a library of books, publications and periodicals of interest of sportsmen and to diffuse knowledge of cricket and its ideals of sportsmanship.
(d)		to communicate with public authorities and various sports organizations in India and abroad and concert and promote measures for the development of the game and to provide social security safe guards for the players, officials such as Managers, Coaches, Umpires, Selectors and others who are directly connected with the game.

3. Apart from this, yet another object is to afford required facilities for the cricketers, officials such as Managers, Coaches, Umpires, Selectors and others who are directly connected with the game, members to acquire by purchase, lease, hire or otherwise suitable playgrounds, stadia and any other property, movable and immovable, rights or privileges etc.

4. The objects further seek to impart physical education through the medium of cricket and take all steps to assist the citizens to develop their physique and have a healthy mind and a healthy body; to establish, promote or assist in establishing and promoting and to subscribe to and become a member of any other Association or Club whose objects are similar or in part to the objects of the Association; to create, foster and maintain friendly relations with and among the population of the area under its control through sports, tournaments and competitions connected therewith, to create, develop and foster a healthy spirit of sportsmanship and a broad and generous outlook devoid of all prejudices and to mould the character of citizen through the medium of sports in general and cricket in particular; to spread the ideals of cricket and all that it stands for throughout the length and breadth of its area by arranging schools for coaching, lectures, tournaments and run international matches between India and other leading foreign countries so as to develop mutual goodwill and better understanding between India and other countries; to collect funds and whenever necessary borrow with or without security for purposes of the Association and in particular by the issue of debentures or debenture stock perpetual or otherwise charged upon all or any of the Association's property both or future and to purchase, redeem or payoff any such securities and to utilise such funds in such manner as the General Body may consider desirable for the fulfillment of the objects of the Association; to invest monies and funds of the Association as per the provisions of the Income Tax Act, 1961; to maintain a panel of approved cricket umpires and to do such acts as may be necessary for this purpose including holding of prescribed periodical tests with a view to enable them to qualify themselves as first class umpires; to organise a proper coaching scheme for the benefit of cricketers in the City and in the Districts under the supervision of coaches from India and abroad; to take such action as may be necessary to coordinate the activities of affiliated club, District Associations and institutions and their members in relation to the Association and amongst themselves.

5. To achieve the objects, the assessee takes steps to arrange, supervise, regulate and finance visits of State teams or Foreign teams under the auspices of bodies like the Board of Control for Cricket in India; to draw up and organise a proper coaching scheme for the benefit of young and promising cricketers within the State and the Union Territory of Pondicherry, to draw up a scheme of net practice whether free of charge or on payment for members of affiliated clubs, District Associations and for players selected to represent the Association in various competitions within or outside State, and to arrange for group coaching lectures, exhibition of cricket films for this purpose, etc; to engage a person or persons as a professional or amateur cricket or cricketers and to pay remuneration or honorarium to him or them; to start or sponsor charity or benefit matches and/or to subscribe to funds for the benefit of cricketers, coaches, umpires Staff of the Association or their families; to do all such other acts, deeds, and things as are incidental to or as the Association may deem conducive to the attainment of the objects of the Association.

6. After Considering the genuineness of these objects, as early as 2003 ,the assessee was granted registration as a Trust under Section 12AA of the Income Tax Act, 1961 (hereinafter called as the "Act"). However, on 19.07.2011. a notice was issued by the Director of Income Tax (Exemptions) under Section 12AA(3) of the Act that the statement of income and expenditure revealed that the assessee derived income from the following activities:-

1.		Subscription
2.		Rent for hiring cricket ground, rooms and premises
3.		Fees for providing services to IPL
4.		Income from advertisement
5.		Subsidy from BCCI
6.		Sale of ticket for conducting of matches
7.		Restaurant and catering income etc.

Thus, these receipts were held to be in the nature of trade or commerce or business and hit by the proviso to Section 2(15) of the Income Tax Act, 1961 (hereinafter called as the "Act"). In the circumstances, notice was issued proposing to withdraw the registration granted to the assessee under Section 12AA of the Income Tax Act, 1961.

7. Immediately, on the receipt of the notice, the assessee replied that the receipts were not in the nature of trade or commerce or business, since, the income of the assessee included interest income earned from Fixed Deposits with Banks; subsidy from BCCI was a voluntary grant from the parent body for promotion and development of the game of cricket in Tamil Nadu; there was no commercial activity involved in the conduct of the IPL matches for which only subsidy was received by the assessee from BCCI like other cricket associations; thus, the receipt of subsidy was not a payment for carrying on of any trade, commerce or business; the TV subsidy was given to all State Associations and was part of the scheme of BCCI, being a voluntary donation, there was no commercial character attached to these receipts; so too, the donations and contributions and the sale of tickets in conducting matches organised by BCCI. Pointing out that the Association was not running any canteen or restaurant, the assessee submitted that as far as fee for providing services to IPL is concerned, the entire income from the sale of tickets belonged to the franchisee, and therefore, there was no service rendered or charges made by the assessee.

8. Referring to the satisfaction recorded as to the genuineness of the objects of the association under the provision contained in Section 12AA of the Act, the assessee pointed out that the genuineness of the objects of the trust, thus not being in question and the objects of the trust thus remaining the same as before and the activities also being in accordance with the objects of the trust, there was no case made out for cancelling the Registration.

9. After hearing the assessee, the respondent passed the order under Section 12AA (3) rejecting the claim of the assessee and thereby cancelling the registration as trust.

10. The Director of Income Tax (Exemptions) viewed that though BCCI confirmed the payment to the assessee on IPL matches as grant of subsidy , the same was not in the nature of grant. It was also pointed out that most of the advertisements through TV telecasting are received by the BCCI, it being the apex body, thus the so called subsidy given by the BCCI is nothing but some sort of sharing of the advertisement income on account of holding of international test matches and ODI matches, due to which the BCCI has gathered huge advertisement income; thus, the nature of receipt, even though called subsidy by the assessee was necessarily in the nature of income received by the activity of the assessee.

11. As regards the entrance fee charged, the the Director of Income Tax (Exemptions) held that the receipts out of IPL matches by giving its ground for conducting those matches were commercial in nature.

12. Referring to Section 12AA(3) read with Section 2(15) of the Income Tax Act, 1961, the respondent/Director of Income Tax (Exemptions) viewed that even if the activities were carried on in accordance with the arrangement with the other party, the activities being not charitable, it was hit by Section 12AA(3) of the Income Tax Act, 1961; thus it was held that the activities were not carried on in accordance with the objects of the trust; the activities not being charitable, the same could not be held to be genuine and the institution was not a charitable institution. Reading genuineness into the activities of the trust and looking at the the objects of the trust, the Director of Income Tax (Exemptions) held that "genuineness" was a term used only to find out whether the institution was charitable or not; thus once the institution was held as not for charitable purpose, Section 12AA registration had to be necessarily cancelled. In the circumstances, the registration originally granted to the assessee stood cancelled with effect from 01.04.2009.

13. The assessee contended before the Income Tax Appellate Tribunal that since its inception and the date of granting of the registration under the Act, the objects of the Association ever remained same and it has not undergone any change to question its genuineness. The assessee contended that the view of the Director of Income Tax (Exemptions) that the assessee was not carrying on charitable activity as per Section 2(15) of the Act is erroneous in law; in any event, all that Section 12AA(3) of the Act prescribes for cancellation is the genuineness of the activities of the trust or that the activities are not carried on in accordance with the objects of the trust. The assessee contended that it conducts National and International matches including the District League. In addition to the income arrived by sale of tickets, income out of advertisement revenue arising out of the telecast rights auctioned to different visual media, obtained from BCCI in India was distributed among the different States in India and this is in the nature of grant/subsidy from BCCI which had been confined by BCCI.

14. The Income Tax Appellate Tribunal pointed out that the physical play of cricket game was not the sole point which would decide as to whether the assessee association was carrying on its activities as stated in the memorandum of association or the activities were genuine or not. The Tribunal pointed out that the activities were genuine; however the matches conducted did not go to the extent of "advancement of any other object of general public utility". The Tribunal also pointed out that the activities did not come within the conceptual framework of charity, vis-a-vis the activity of general public utility as given under Section 2(15) and the activities were all commercial in character. Thus the matches conducted were not conducted in accordance with the objects of the association and as explained in the proviso to the provision in Section 2(15). Thus, according to the Tribunal, when the assessee's case was fully covered by the proviso, the proceedings taken under Section 12AA(3) were justified. Thus the Tribunal viewed that the provisions under Section 12 AA (3) could not be read in disregard of Section 2(15) first proviso. It further held that after the insertion of first proviso to Section 2(15) of the Income Tax Act, 1961, effective from 1st April, 2009, every activity on the advancement of the general public utility to be called as for "charitable purpose" has to qualify itself as charitable activity within the meaning of the expression 'charitable purpose'. As such, the activities of the assessee could not be considered as for a charitable purpose. The Income Tax Appellate Tribunal pointed out that the proviso inserted with effect from 01.04.2009 clearly pointed out that advancement of any other object of general public utility shall not be a charitable purpose, if it involved the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity. Considering the said amendment and looking at the activities of the assessee, the Income Tax Appellate Tribunal held that the conduct of the matches by cricket associations could be nothing but in the nature of commercial ventures and the assessee was selling the game for the highest amount of revenue and the effect and the thrust of the assessee was towards maximising the revenue. Citing IPL matches held and the manner of selection of players, the Income Tax Appellate Tribunal held that the matches were big game with big money involved; in the words of the Income Tax Appellate Tribunal, "In fact it is an entertainment industry by itself". It pointed out that 78% of the total receipts came out of advertisement revenue and in the background of the nature of activity undertaken, the entire activity of commercial nature were oriented towards earning hyper profits and these activities contributed 86.5% of the receipts of the assessee in the Financial Year 2008-09. In this background, the Income Tax Appellate Tribunal referred to the decision reported in 77 ITR 435 in the case of Bangalore Race Club v. Commissioner of Income Tax, which related to the case of horse racing and held the same could not be held to be of public utility or interest. After referring to the decision of this Court reported in 343 ITR 300 in the case of CIT v. Sarvodaya Ilakkiya Pannai, wherein, this Court considered the effect of Section 12AA(3) of the Act, the Income Tax Appellate Tribunal held that this Court had not considered the effect of Section 2(15) proviso and the necessary facts of the case relating to charitable purpose was not highlighted. It also referred to the decision of the Ahmedabad Bench-A rendered in the case of Gujarat Cricket Association v. DIT (Exemption) in ITA.No.93(Ahd)/2011 dated 31.01.2012 as well as other decision of the Nagpur Bench rendered in the case of M/s.Vidarbha Cricket Association v. Commissioner of Income Tax-I, Nagpur in ITA.No.3/Nag/10 dated 30.05.2011, which were against the similar rejection order passed and reversed by the Income Tax Appellate Tribunal and held that these orders had considered only the physical aspect of the cricket game promoted by the assessee; however, all the assessee's activities centered around the celebrated game of cricket.

15. As far as on the crucial question of general public utility was concerned, the Income Tax Appellate Tribunal held that the activities of the assessee are all commercial activities. The Income Tax Appellate Tribunal held that the activities of the association are not in the nature of activities for advancement of any object of general public utility; consequently, the appeal has to be dismissed. The Income Tax Appellate Tribunal upheld the rejection order passed under Section 12AA of the Income Tax Act. The Income Tax Appellate Tribunal further viewed that there was no conflict between the first proviso to Section 2(15) of the Act and the conditions laid down under Section 12AA(3) of the Act for cancelling the registration; thus, when the assessee's case is hit by Section 2(15) of the Act, consequential action is automatic to pass an order under Section 12AA(3) of the Income Tax Act, 1961. It further pointed out that when the assessee was given registration originally, it was on the ground that it was a charitable institution inasmuch as it engaged itself in the advancement of an object of general public utility; however, when the Revenue had found the assessee's activities were oriented towards generating income by converting the sport of cricket into a celebrated industry, the activities not being genuine, rightly, the Revenue had cancelled the registration granted under Section 12AA of the Income Tax Act, 1961. Aggrieved by the same, the present appeal has been preferred by the assessee.

16. Learned Senior counsel appearing for the assessee took us through the various objects of the Association and pointed out to the clear distinct words used in Section 12AA(1) and 12AA(3) of the Act as well as the first proviso to Section 2(15) of the Act and pointed out that the grant of registration originally as early as 2003 clearly pointed out the satisfaction of the authorities that the assessee was public charitable trust under Section 12AA of the Act. Referring to Section 12AA (3) of the Act, he further pointed out that the cancellation of registration granted is possible only under the stated circumstances, viz., on the Commissioner recording his satisfaction that the activities of the trust are not genuine or are not being carried out in accordance with the objects of the trust or institution; thus unless and until the show cause notice issued contained the grounds and materials as prescribed under Section 12AA(3) of the Act, the question of cancellation of registration, per se, does not arise.

17. Learned Senior Counsel appearing for the appellant further pointed out that the appellant was granted registration under Section 12AA of the Act only on the Commissioner satisfying himself on the objects of the trust and the genuineness of the activities. The nature of activity carried on by the assessee continues to be the same without any change till this date and if any of the activities carried on by the assessee resulted in an income not incidental and not connected with the main activity or main object of the Trust, it would be a matter for assessment. Thus what has to be a subject matter for assessment cannot be considered as a ground for cancelling the registration under Section 12 AA (3).

18. Taking us through Circular No.11 of 2008 of Central Board of Direct Taxes dated 19.12.2008 issued immediately in the wake of the insertion of proviso to Section 2(15) of the Income Tax Act, 1961, learned Senior counsel appearing for the assessee submitted that as is evident from the reading of the circular, the question of rejection of registration under Section 12AA(3) would arise only in those cases where an entity uses this status of charitable institution with a charitable object of general public utility as a mask or a device to hide the true purpose and that object is nothing other than trade, commerce or business or the rendering of any service in relation to trade, commerce or business; as far as the present case is concerned, Revenue has not substantiated with any material to show the absence of genuineness; all that the Revenue alleges is by conduct of matches, it has exhibited a sense of business or commercial character. This according to the assessee is not a good ground for cancelling the registration under Section 12AA of the Income Tax Act, 1961.

19. Going by the tenor of the language in Section 12AA(3) of the Act and Section 12AA(1) of the Act, the cancellation of the registration under Section 12AA of the Income Tax Act, 1961 is without any substance. He further pointed out that when in a similar assessee's case viz., Gujarat Cricket Association v. DIT (Exemption) in ITA.No.93(Ahd)/2011 and in the case of M/s.Vidarbha Cricket Association v. Commissioner of Income Tax-I, Nagpur the Income Tax Appellate Tribunal Ahmedabad Bench-A dated 31.01.2012 and in I.T.A.No.3/Nag/10 dated 30.05.2011 of the Nagpur Bench, respectively on the very same allegations for cancellation of registration under Section 12AA(3) had held that the cancellation of the registration under Section 12AA of the Income Tax Act, 1961 was contrary to law, the Chennai Bench of the ITAT ought to have followed these decisions, which were rendered as early as 2011 and 2012. He further pointed out to the unreported decision of this Court in the case of Gowri Ashram v. Director of Income Tax (Exemptions) in T.C(A).No.91 of 2013 dated 29.04.2013 as well as 315 ITR 428 in the case of Commissioner of Income Tax v.National Institute of Aeronautical Engineering Educational Society and submitted that they stand on a different line, they being the decisions rendered on the rejection of the application for registration. He also referred to the decision of this Court reported in 343 ITR 300 in the case of CIT v.Sarvodaya Ilakkiya Pannai, wherein, under similar circumstances, this Court had held that when a trust is registered with definite objects to carry on its activities and under Section 12AA of the Income Tax Act, 1961, the Commissioner is empowered to cancel registration only on two conditions laid down under Section 12AA(3) of the Income Tax Act, 1961. He further pointed out that whether the income derived from such transaction would be assessed to tax or whether the trust would be entitled to exemption under Section 11 of the Income Tax Act, 1961 are entirely matters to be considered at the time of assessment. Thus, placing reliance on the decision of this Court reported in 343 ITR 300 (CIT v. Sarvodaya Ilakkiya Pannai), learned Senior Counsel appearing for the assessee submitted that the Income Tax Appellate Tribunal committed serious error in upholding the rejection order passed by the Director of Income Tax (Exemptions).

20. Countering the claim made by the learned Senior Counsel appearing for the assessee, learned Standing counsel appearing for the Revenue, however, submitted that the condition for continuance of the registration depends on the satisfaction of the conditions given under the definition of 'charitable purpose' laid down under Section 2(15) of the Act; when the assessee's activities do not go hand in hand with the objects of the assessee's assessment, rightly, the Revenue had cancelled the registration. He further pointed out that at the time of grant of registration, the Commissioner is empowered to look into the objects of the trust, for the purpose of grant of registration. However, after granting registration, if the Revenue finds that the activities of the trust are not genuine and that the advancement of the object of the general public utility is not in terms of the objects of the trust and that the objects are in the nature of carrying on trade, commerce or business, the grant of registration originally given may be cancelled; thus, rightly, the registration was cancelled, hence, no exception could be taken to the order of the Income Tax Appellate Tribunal.

21. Heard learned Senior counsel appearing for the assessee and learned Standing counsel appearing for the Revenue and perused the materials available on record.

22. We had already extracted in the preceding paragraph, the objects of the association. Going by the objects, we find that the trust falls under the head of "any other object of general public utility" and hence falls within the meaning of charitable purpose under Section 2(15) of the Act. Section 2(15) of the Act defines "charitable purpose" as it originally stood at the time of grant of registration as under:

" 'charitable purpose' includes relief of the poor, education, medical relief and the advancement of any other object of general public utility."

23. Section 2(15) was amended under Finance Act,2008, with effect form 1.4.2009 by substituting the following provision which reads s under:

"2. Definitions.

.... (15) "charitable purpose" includes relief of the poor, education, medical relief, preservation of environment (including waterheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility.

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity;)

24. Section 2(15) as it stood prior to 1983 defined 'charitable purpose' to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit. The phrase "not involving the carrying on of any activity for profit" was omitted from the Section by the Finance Act 1983, with effect from 01.04.1984, consequent on the amendment to Section 11, where under profits and gains of business in the case of charitable or religious trust and institutions would not be entitled to exemption under that Section, except in cases where the business fulfilled the conditions under Section 11 (4). The Section was once again amended by substitution in the year 2008 under the Finance Act, 2008, with effect from 01.04.2009, streamlining the definition of 'charitable purpose', considering the fact that taking advantage of the phrase 'advancement of any other object of general public utility', number of entities operating on commercial lines claimed exemption on their income either under Section 20(23c) or under Section 11 of the Act. Thus, to limit the scope of this expression, Section was amended in the year 2008 that the advancement of any other object of general public utility shall not be a charitable purpose, if the object involved the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity. Though the section as it stood prior to the substitution in 2008 contained no provision as in the proviso under the 2008 amendment, yet the Supreme Court held that that if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity: vide CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC) (referred to in the decision reported in (1980) 121 ITR 1 (Addl. Commissioner of Income-tax v. Surat Art Silk Cloth Manufacturers Association). Thus if the dominant object or the primary object was charitable, the subsidiary object for the purpose of securing the fulfillment of the dominant object would not militate against its charitable character and the purpose would not be any the less charitable. The amendment in the year 2008 made a drastic amendment to deny the status of a charitable purpose to an institution with the object of general public utility, having any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration.

25. Proviso to Section 2(15) of the Income Tax Act states that if the objects involve the carrying on any activity in the nature of trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, the status of the institution will not be one for 'charitable purpose'.

26. The Central Board of Direct Taxes, in paragraph 3.2 pointed out to the scope of the circular as under:

"In such a case, the object of 'general public utility' will be only a mask or a device to hide the true purpose, which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is 'charitable purpose' within the meaning of Section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business."

27. Thus, the anxiety of the Parliament in introducing the proviso to Section 2(15) of the Act is only to check those institution, which attempt to gain exemption under the cloak of a trust.

28. Section 11 of the Act states that income from property held for religious or charitable purposes shall not be included in the total income of the previous year. Section 12 deals with income of trusts or institutions from contributions. Section 12A deals with making application for registration of the trust/association so that the said institution will have the benefit of exemption under Section 11 and 12 of the Act.

29. Section 12AA of the Act prescribes procedure for registration. As per this, on receipt of the application for registration, the Commissioner is to call for such documents or information from the trust or institution in order to satisfy himself about the genuineness of activities of the trust or institution. The Section further empowers the Commissioner to make such enquiry as he deems necessary in this regard. Once the Commissioner is satisfied himself about the objects of the trust or institution and the genuineness of the activities of the trust, he has to pass an order in writing registering the trust or institution; if he is not so satisfied, he has to pass an order in writing refusing to register the trust or institution.

30. Section 12AA(3) of the Act inserted with effect from 01.10.2004 under the Finance (No.2) Act, 2004 and the amendment inserted by Finance Act, 2010, with effect from 01.06.2010 therein empowering the Commissioner to cancel the registration granted under the stated circumstances, reads as under:-

Provision inserted under Finance Act, 2004:

Section 12AA(3):- Where a trust or an institution has been granted registration under clause (b) of sub-section (1) and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution.

Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard.

31. After amendment in the year 2010, Section 12AA(3) of the Income Tax Act reads as follows:

"Section 12AA(3):- Where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A as it stood before its amendment by the Finance (No.2) Act, 1996 (33 of 1996) and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution:

Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard."

32. Thus in contrast to Section 12AA(1)(b) of the Income Tax Act, 1961, where the grant of registration requires satisfaction about the objects of the trust as well as genuineness of the activities, for the cancellation of the registration under Section 12AA(3), all that it is insisted upon is the satisfaction as to whether the activities of the trust or institution are genuine or not and whether the activities are being carried on in accordance with the objects of the trust. Thus, even if the trust is a genuine one i.e., the objects are genuine, if the activities are not genuine and the same not being carried on in accordance with the objects of the trust, this will offer a good ground for cancellation. Thus, in every case, grant of registration as well as cancellation of registration rests on the satisfaction of the Commissioner on findings given on the parameters given in Section 12AA(1) and 12AA(3) of the Act, as the case may be.

33. Registration of the trust under the Act, confers certain benefits from taxation under the provisions of the Act. The conditions under which the income of the trust would be exempted under the provisions of the Act are clearly laid down under Section 11 as well as in Section 12 of the Act. Section 11 of the Act specifically points out the circumstances under which income of the trust is not to be included in the total income of the previous year of the person. So too, Section 12 of the Act on the income derived from property held for charitable or religious purposes.

34. Thus, when the assessee is in receipt of income from activities, which fits in with Sections 11 and 12 of the Act as well as from sources which do not fall strictly with the objects of the trust, would not go for cancellation of registration under Section 12AA of the Act on the sole ground that the assessee is in receipt of income which does not qualify for exemption straight away by itself. All that ultimately would arise in such cases is the question of considering whether Section 11 of the Act would at all apply to exempt these income from liability. These are matters of assessment and has nothing to do with the genuineness of the activity or the activities not in conformity with the objects of the trust. As rightly pointed out by learned Senior counsel appearing for the assessee, as is evident from the reading of Circular No.11 of 2008 dated 19.12.2008, the object of the insertion of first proviso to Section 2(15) of the Act was only to curtail institution, which under the garb of 'general public utility', carry on business or commercial activity only to escape the liability under the Act thereby gain unmerited exemption under Section 11 of the Act.

35.-36. In the decision reported in [2012] 343 ITR 23 (Bom) (Sinhagad Technical Education Society v. Commissioner of Income Tax (Central), Pune & Anr), the Bombay High Court held as follows:

"As a result of the amendment, which has been brought about by the Finance Act of 2010, Sub-section (3) of Section 12AA has been amended specifically to empower the Commissioner to cancel a registration obtained under Section 12A as it stood prior to its amendment by the Finance (No.2) Act, 1996. Sub-section (3) was inserted into the provisions of Section 12AA by the Finance (No.2) Act, 2004 with effect from 1 October 2004. As it originally stood, under sub-section (3), a power to cancel registration was conferred upon the Commissioner where a trust or an institution had been granted registration under clause (b) of sub-section (1) of Section 12AA. The Commissioner, after satisfying himself that the objects of the trust or an institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, was vested with the power to pass an order in writing cancelling the registration of such trust or institution. By the Finance Act of 2010, sub-section (3) was amended so as to empower the Commissioner to cancel the registration of a trust or an institution which has obtained registration at any time under Section 12A (as it stood before its amendment by the Finance (No.2) Act, 1996). As a result of the amendment, a regulatory framework is now sought to be put in place so as to cover also a trust or an institution which has obtained registration under Section 12A as it stood prior to its amendment in 1996.

power under Section 12AA(3) can be exercised by the Commissioner in respect of a trust registered prior to 1 June 2010. The mere fact that a part of the requisites for the action under Section 12AA (3) is drawn from a time prior to its passing namely registration as a charitable trust under Section 12A prior to 2010 would not make the amendment retrospective in operation. The amendment does not take away any vested right nor does it create new obligations in respect of past actions."

37. As already pointed out earlier, the question as to whether the particular income of trust is eligible for exemption under Section 12 of the Act is a matter of assessment and this Court had pointed out in the decision reported in 343 ITR 300 in the case of CIT v. Sarvodaya Ilakkiya Pannai, as under:

"In order to avail the benefit of exemption under Section 11 of the Income Tax Act, 1961, a Trust can make an application to the Commissioner for registration under Section 12A of the Income Tax Act, 1961. On receipt of the said application for registration of a trust or institution, the Commissioner should satisfy himself about the genuineness of the activities of the trust or institution. In order to satisfy himself, the Commissioner may also make such enquiry as he may deem necessary in that behalf. In the event the Commissioner satisfies himself that the trust is entitled to registration keeping in mind the objects, shall grant registration in writing in terms of Section 12AA(1)(b)(i) of the Income Tax Act, 1961. In the event the Commissioner is not satisfied, he shall refuse such registration in terms of Section 12AA(1)(b)(ii) of the Income Tax Act, 1961. Once such a satisfaction is arrived at by the Commissioner to grant, such registration cannot be cancelled by following the very same provision of section 12AA(b)(i) of the Income Tax Act, 1961 to go into the genuineness of the activities of the trust. However, the Commissioner is empowered to revoke the certificate in terms of Section 12AA(3) of the Income Tax Act, 1961. As Commissioner is empowered to revoke the certificate in terms of section 12AA(3) of the Income Tax Act, 1961. As per the said provision, in the event the Commissioner is satisfied subsequently i.e., after registration that the activities of such trust or institution are not genuine or not being carried out in accordance with the objects of the trust or the institution as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution."

38. After the grant of registration, if the Commissioner is satisfied subsequently that the activities of the institution are not genuine or they are not carried on in accordance with the trust/ institution, he could pass an order in writing cancelling the registration of such trust or institution.

39. Referring to Section 11 and 12A of the Act, this Court pointed out that the act of granting registration under Section 12AA(1) itself is a result of a satisfaction recorded by the Commissioner as regards the genuineness of the objects of the trust as well as the activities of the trust and once a satisfaction is arrived at by the Commissioner, the cancellation could only be in terms of Section 12AA(3) of the Income Tax Act, 1961.

40. This Court pointed out that the cancellation made in the case of assessee therein was not on the ground that the activities were not genuine, but the activities of the trust in publication and sale and spread of Sarvodaya Literature and Gandhian Ideologies was not the objects of the trust. This Court pointed out that the cancellation was made not on the ground that the activities of the trust were not genuine but the activities of the trust were not in accordance with the objects of the trust; when the trust was registered with definite objects, carrying on such activities would be in terms of the objects for which registration was granted.

41. Referring to Section 12AA of the Income Tax Act, 1961, this Court has held as under:-

"9. Under section 12AA, the Commissioner is empowered to grant or refuse the registration and after granting registration, would be empowered to cancel and that too, only on two conditions laid down under Section 12AA(3) of the Income Tax Act, 1961. Whether the income derived from such transaction would be assessed for tax and also whether the trust would be entitled to exemption under section 11 are entirely the matters left to the assessing officer to decide as to whether it should be assessed or exempted."

42. In the light of the law declared by this Court in the above said decision, we do not find that the scope of Section 12AA(3) of the Act is of any doubt for a fresh look. It is relevant herein to point out that in two other assessee's case, the Income Tax Appellate Tribunal, Ahmedabad Bench-A rendered in the case of Gujarat Cricket Association v. DIT (Exemption) in ITA.No.93(Ahd)/2011 dated 31.01.2012 and that of the Nagpur Bench rendered in the case of M/s.Vidarbha Cricket Association v. Commissioner of Income-tax-I, Nagpur in ITA.No.3/Nag/10 dated 30.05.2011, considered the said decision reported in 343 ITR 300 in the case of CIT v. Sarvodaya Ilakkiya Pannai rendered under Section 12AA(3) of the Act. On appeal before the respective High Courts, the decision of the Income Tax Appellate Tribunal was confirmed.

43. Leaving that aside, there being no dispute raised by the Revenue as to the genuineness of the trust, or as to the activities of the trust not being in accordance with the objects of the trust, the question of cancellation under Section 12AA of the Act does not arise. We further hold that at the time of grant of registration on 28.3.2003, the same was made taking into consideration the objects of the institution fitting in with the definition of 'charitable purpose' defined under Section 2(150 of the Act and the substitution of the Section itself came only 2008, with effect from 01.04.2009. As rightly pointed out by the learned senior counsel appearing for the assessee, the circular clearly brings out the object of the amendment and the amended provision has no relevance to the case . The power regarding cancellation, hence has to be seen with reference to the registration and the object satisfying the definition on 'charitable purpose', as it stood at the time of registration and not by the subsequent amendment to Section 2(15) of the Income Tax Act.

44. Learned Standing counsel appearing for the Revenue placed heavy reliance on the proviso to Section 12AA(3) of the Act and submitted that when the assessee has income received from conduct of the matches, which are commercial in nature, as had been found by the Income Tax Appellate Tribunal, the objects of the trust ceased to be charitable. He submitted that going by the definition of Section 2(15) of the Act, rightly, the Commissioner assumed jurisdiction under Section 12AA(3) of the Act to cancel the registration. He further pointed out that for the finding to be recorded that the activities of the trust are not genuine, one must necessarily look into the objects of the association; if the objects of the association reveal commercial nature in the conduct of matches, the association cannot be one for charitable purpose as defined under Section 2(15) of the Act. Thus, there could be no inhibition for the Commissioner to assume jurisdiction to issue show cause notice calling upon the assessee to state whether the association is genuine or not. He further submitted that on looking at the activities of the association, the Commissioner had rightly come to the conclusion that the assessee's registration was liable to be withdrawn.

45. We do not accept the submission of learned Standing counsel appearing for the Revenue. As rightly observed by learned Senior counsel appearing for the assessee, the Revenue granted registration under Section 12AA of the Act satisfying itself as to the objects of the association befitting the status as charitable purpose as defined under Section 2(15), as it stood in 2003 and after granting the registration, if the registration is to be cancelled, it must be only on the grounds stated under Section 12AA(3) of the Act with reference to the objects accepted and registered under Section 12AA, as per the law then stood under the definition of Section 2(15) of the Income Tax Act. Even therein, Courts have defined as to when an institution could be held as one for advancement of any other object of general public utility. Thus, if a particular activity of the institution appeared to be commercial in character, and it is not dominant, then it is for the Assessing Officer to consider the effect of Section 11 of the Act in the matter of granting exemption on particular head of receipt. The mere fact that the said income does not fit in with Section 11 of the Act would not, by itself, herein lead to the conclusion that the registration granted under Section 12AA is bad and hence, to be cancelled.

46. It may be of relevance to note the language used in the definition "charitable purpose" in Section 2(15) of the Act, which states that charitable purpose includes relief of the poor, education, medical relief and advancement of any other object of general public utility. The assessee's case falls within the phrase of the definition 'general public utility'. In the decision reported in (2000) 246 ITR 188 in the case of Hiralal Bhagwati v. Commissioner of Income Tax, the Gujarat High court considered the said phrase in the context of Section 12AA registration and held that registration of the charitable trust under Section 12AA of the Act is not an idle or empty formality; the Commissioner of Income-tax has to examine the objects of the trust as well as an empirical study of the past activities of the applicant; the Commissioner of Income-tax has to examine that it is really a charitable trust or institution eligible for registration; the object beneficial to a section of the public is an object of "general public utility". The Gujarat High Court held that to serve as a charitable purpose, it is not necessary that the object must be to serve the whole of mankind or all persons living in a country or province; it is required to be noted that if a section of the public alone are given the benefit, it cannot be said that it is not a trust for charitable purpose in the interest of the public; it is not necessary that the public at large must get the benefit; the criteria here is the objects of general public utility. Thus, the Gujarat High Court held that in order to be charitable, the purpose must be directed to the benefit of the community or a section of the community; the expression "object of general public utility", however, is not restricted to the objects beneficial to the whole of mankind; an object beneficial to a section of the public is an object of general public utility; the section of the community sought to be benefited must undoubtedly be sufficiently defined and identifiable by some common quality of a public or impersonal nature.

47. The above said decision (2000) 246 ITR 188 - Hiralal Bhagwati v. Commissioner of Income Tax) came up on April 18, 2000. Evidently, the Revenue has not gone on appeal as against this judgment. In the decision reported in (2008) 300 ITR 214(SC) in the case of Assistant Commissioner of Income Tax v. Surat City Gymkhana, reference was made about this decision and the Apex Court pointed out that the Revenue did not challenge this case and it attained finality.

48. It is no doubt true that the decision reported in (2008) 300 ITR 214(SC) in the case of Assistant Commissioner of Income Tax v. Surat City Gymkhana, was in the context of Section 10(23) of the Income Tax Act, 1961, nevertheless, the fact remains that the understanding of the scope of the expression "general public utility" would nevertheless is of relevance herein. Admittedly when the assessee was granted registration, the Revenue recorded its satisfaction that the objects are of charitable purpose. Thus only possible enquiry under Section 12AA of the Act for cancellation is to find out whether the activities of the trust are genuine or in accordance with the objects of the trust. If any of the income arising on the activities are not in accordance with the objects of the trust, the assessee's income, at best, may not get the exemption under Section 11 of the Act. But this, by itself, does not result in straight rejection of the registration as 'trust' under Section 12AA of the Act. Consequently, we reject the prayer of the Revenue that Section 12AA(1) of the Income Tax Act, 1961 must be read along with Section 12AA(3) of the Income Tax Act, 1961 before considering the cancellation.

49. As far as the unreported decision of this Court in T.C(A).No.91 of 2013 dated 29.04.2013 (Gowri Ashram v. Director of Income Tax (Exemptions) is concerned, on which heavy reliance was placed by the Revenue, the said decision relates to the rejection of the registration at the threshold of the application filed for registration. So too the decision of the Apex court reported in 315 ITR 428 in the case of Commissioner of Income Tax v. National Institute of Aeronautical Engineering Educational Society, wherein, rejection was made on the threshold of application for registration made by the assessee. The decisions relied on is thus distinguishable and has no relevance to the facts of the present case.

50. As far as unreported decision of this Court in T.C(A).No.91 of 2013 dated 29.04.2013 (Gowri Ashram v. Director of Income Tax (Exemptions)is concerned, while rejecting the appeal filed by the assessee on the rejection of the application for registration, this Court observed that it was open for the assessee Society to renew its application as and when it expanded the objects of the Society and were approved by the competent Court. The rejection order passed by the Revenue was on the ground that the objects of the trust were not charitable in character. This decision also has no relevance to the case on hand.

51. As already noted in the preceding paragraphs, considering the provision under Section 12AA(3) of the Act, the cancellation or registration in a given case could be done only under the stated circumstances under Section 12AA(3) of the Act and in the background of the definition relevant to the particular year of registration. As rightly pointed out by the assessee, Revenue does not allege anything against the genuineness of the objects of the assessee or its activities. It rests its order only on the ground of the assessee receiving income from holding of matches which according to the assessee were not held by it. Thus, as regards the question as to whether the particular income qualified under Section 11 of the Act or not is not the same as activity being genuine or not. In the circumstances, we do not agree with the view of the Income Tax Appellate Tribunal that the order passed by the Director of Income Tax (Exemptions) was in accordance with the provisions of the Income Tax Act, 1961. He viewed that the conduct of test matches and ODI are in the nature of commerce or business. Though the assessee claimed their activities for promotion of sports, he held that the dominant feature is evident from the huge profits received and hence the amount received from BCCI as subsidy are commercial. As regards conducting of IPL Matches, he pointed out that though no services are rendered by the assessee for conducting the matches, the ground where the matches are played are given for rent which is a commercial venture. The subsidy received from BCCI included mainly TV Advertisements sold by BCCI for the conduct of IPL and their commercial receipts arising for IPL transactions. Therefore, the nature of receipt was important than the name of account under which it was accounted. Thus he viewed that the objects and activities would no longer come within the definition of Section 2(15) of the Act after the amendment come in effect from 01.04.2009.

52. As rightly pointed out by the assessee, the Revenue does not question the objects of the Association as not genuine or are in accordance with the objects. All that the Revenue stated was that the nature of receipt could not be called a subsidy. Thus Revenue came to the conclusion that the objects and activities could not come within the meaning of 'charitable purpose' under Section 2(15) of the Act.

53. On going through the materials, the Income Tax Appellate Tribunal pointed out that instead of promoting and developing the game of cricket, the assessee was promoting and developing cricket as an entertainment and the tickets are highly priced; here, the assessee has shifted the activities of general public utility to commercial activity for generating revenue; the public merely participate to view costly matches; hence the conditions of Section 12AA(3) were satisfied. The Income Tax Appellate Tribunal agreed with the Director of Income Tax (Exemptions) that the expression 'subsidy from BCCI' was a misleading nomenclature and it was a share from the revenue collected by BCCI from the sale of telecast rights. The surplus from IPL Season-I worked out to 8.5% of the total receipts. It further held that 78% of the total receipt came out of advertisement revenue.

54. The Income Tax Appellate Tribunal pointed out that the physical aspect of the game was one in accordance with the objects of the assessee and the activities are genuine. However, the matches held were not in advancement of any specific object of general public utility. The pattern of receipt is commercial in character and the matches conducted are not in accordance with the objects of the Association. Thus, it rejected the assessee's case and held that both the conditions under Section 12AA(3) of the Act stood attracted.

55. As seen from the observation of the Income Tax Appellate Tribunal, although generally it accepted the case of the assessee that the physical aspect of the game was one in accordance with the objects, the quantum of receipt apparently led the Income Tax Appellate Tribunal and the Revenue to come to the conclusion that the activities are commercial and hence by Section 2(15) proviso to the Act, the receipt from BCCI could not be called as subsidy. As for the observation of the Income Tax Appellate Tribunal that the twin conditions stood satisfied is concerned, it is not denied by the Revenue that at the time of granting registration, the Commissioner had satisfied himself about the objects of the trust and the genuineness of the activities as falling within the meaning of 'charitable purpose', as it stood in 2003. The Revenue does not deny as a matter of fact that the objects remain as it was in 2003 and there is no change in its content to call the assessee's object as not genuine. There are no materials to indicate that the grant of registration was not based on materials indicating objects of general public utility.

56. The assessee is a member of Board of Control for Cricket in India (BCCI), which in turn is a member of ICC(International Cricket Council). BCCI allots test matches with visiting foreign team and one day international matches to various member cricket association which organise the matches in their stadia. The franchisees conduct matches in the Stadia belonging to the State Cricket Association. The State Association is entitled to all in-stadia sponsorship advertisement and beverage revenue and it incurs expenses for the conduct of the matches. BCCI earns revenue by way of sponsorship and media rights as well as franchisee revenue for IPL and it distributes 70% of the revenue to the member cricket association. Thus the assessee is also the recipient of the revenue. Thus, for invoking Section 12AA read with Section 2(15) of the Act, Revenue has to show that the activities are not fitting with the objects of the Association and that the dominant activities are in the nature of trade, commerce and business. We do not think that by the volume of receipt one can draw the inference that the activity is commercial. The Income Tax Appellate Tribunal's view that it is an entertainment and hence offended Section 2(15) of the Act does not appear to be correct and the same is based on its own impression on free ticket, payment of entertainment tax and presence of cheer group and given the irrelevant consideration. These considerations are not germane in considering the question as to whether the activities are genuine or carried on in accordance with the objects of the Association. We can only say that the Income Tax Appellate Tribunal rested its decision on consideration which are not relevant for considering the test specified under Section 12AA(3) to impose commercial character to the activity of the Association. In the circumstances, we agree with the assessee that the Revenue has not made out any ground to cancel the registration under Section 12AA(3) of the Act.

57. As regards the observation of the Income Tax Appellate Tribunal that IPL Matches and Celebrity Cricket Matches are also being held by the Association and hence it is an entertainment industry, we need not go into these aspects, for, the order of the Director of Income Tax (Exemptions) casts no doubt on the genuineness of the objects of the trust. Hence, it is for the Assessing Officer to take note of all facts, while considering the same under Section 11 of the Income Tax Act, 1961. We disapprove the approach of the Tribunal in this regard. In the above said circumstances, we set aside the order of the Income Tax Appellate Tribunal.

58. In the result, the Tax Case (Appeal) stands allowed. No costs. Consequently, connected MP is closed.

Excise : Where, despite process not amounting to manufacture, by retrospective amendment of rule 16 of Central Excise Rules, 2002, wire drawing units were deemed to be assessee for certain period in respect of duty paid by them, said units were eligible for Cenvat credit as per CENVAT Credit Rules

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[2013] 39 taxmann.com 75 (Gujarat)

HIGH COURT OF GUJARAT

Raajratna Metal Industries Ltd.

Union of India*

MS. HARSHA DEVANI AND R.M. CHHAYA, JJ.

SPECIAL CIVIL APPLICATION NO. 18992 OF 2005

APRIL 4, 2011

Rule 16 of the Central Excise Rules, 2002 read with rule 2(k) and rule 5 of the Cenvat Credit Rules, 2004 and section 39 of the Taxation Laws (Amendment) Act, 2006 - Return of duty-paid goods to factory - Period from 29-5-2003 to 8-7-2004 - Assessee was engaged in business of drawing of Stainless Steel Wires from wire rods and was paying duty thereon - Assessee filed claim for refund of Cenvat Credit in respect of goods exported under bond - Later, vide a Supreme Court judgment, said process in relation to MS Wire and MS Rod was held as not amounting to manufacture - Department sought to deny credit of duty paid on inputs used in said process and rejected refund claims filed by assessee - HELD : Vide section 39 of Taxation Laws (Amendment) Act, 2006, rule 16 was retrospectively amended for relevant period to provide that wire drawing unit, which had cleared goods on payment of an amount equal to duty, would be regarded as assessee and amount so paid would be allowed as CENVAT credit as if it was duty paid by assessee who removes goods - By virtue of amendment, assessee is an 'assessee' within meaning of rule 16 and as such, would be entitled to avail of Cenvat credit in accordance with rules - Therefore, rejection of refund claim being contrary to specific provisions of law was set aside and matter was remitted back for fresh consideration [Paras 16 to 20] [In favour of assessee]

Circulars and Notifications : Circular No. 570/7/2001-CX, dated 16-2-2001 and Circular No. 720/35/2003-CX., dated 29-5-2003

CASES REFERRED TO

Krishna Wire Industries v. Collector of Central Excise 1983 (13) ELT 984 (Tri. - Delhi) (para 2), Jyoti Engineering Corporation v. Collector of Central Excise 1989 (42) ELT 100 (Tri.) (para 2) and Collector of Central Excise v. Technoweled Industries 2003 (155) ELT 29 (SC) (para 3).

Paresh M. Dave for the Petitioner. R.J. Oza for the Respondent.

JUDGMENT

Ms. Harsha Devani, J. - By this petition under Article 226 of the Constitution of India, the petitioners have challenged the order-in-appeal No. 376-377/2005, dated 8-6-2005, (Annexure "G" to the petition) and the Orders-in-Original No. 947/Ref/2004 and No. 948/Ref/2004 both dated 20-12-2005 passed by the Commissioner of Central Excise, Ahmedabad (Annexure "G") to the petition collectively).

2. The facts of the case as appearing in the petition are that the petitioner, a private limited company, is engaged in the business of manufacture of Stainless Steel Wires (SS Wires) of different thicknesses. Till 28-2-1986, under the erstwhile Tariff Item 26AA of the First Schedule to the Central Excises & Salt Act, 1944, the goods manufactured by the petitioner were considered as excisable and the Appellate Tribunal had also decided in the case of Krishna Wire Industries v. Collector of Central Excise 1983 (13) E.L.T. 984 (Tri. - Delhi) that wire was a different product from the wire rod from which it was produced and process of obtaining wire from wire rod was manufacture. On 18-11-1987, the Appellate Tribunal in the case of Jyoti Engineering Corporation v. Collector of Central Excise 1989 (42) E.L.T. 100 (Tri.), examined a case of MS wire and held that the activity of reducing thickness to 3 mm to 5 mm from wires of thickness of 6 mm to 8 mm was not manufacture. Despite the aforesaid decision, there was no dispute about the excisability of the SS wires produced by the manufacturers like the petitioners and they continued paying duties of excise on SS wires manufactured from SS rods and the Excise Department also never suggested that the decision in the case of Jyoti Engineering Corporation (supra) had any relevance or bearing to the excisability of SS wires from SS rods.

3. On 28-2-1986, the new Central Excise Tariff Act, 1985 came into operation and the SS wires came to be classified under Heading No. 72.33 whereas the petitioners' raw material, namely, SS hot rolled black wire rods came to be classified under Heading No. 72.21 of the Tariff. The petitioners continued paying excise duties on SS wires and the Excise Department also continued levying and recovering excise duties from the manufacturers like the petitioners on SS wires under Heading No. 72.23. Thereafter, on 16-2-2001, the Central Board of Excise & Customs issued a circular informing the trade that drawing of wire from wire rod was manufacture. This was in keeping with the understanding between the trade and the Revenue officers and also in keeping with the practice being followed throughout the country as regards SS wires. On 27-3-2003, the Supreme Court decided appeals involving issue of obtaining MS wires from MS rods in the case of Collector of Central Excise v. Technoweld Industries 2003 (155) E.L.T. 209 (SC), and held that the initial product and the ultimate product were the same and all that was done was only gauge of the rod was made thinner and the product was finished a little better and, therefore, the decision of the Tribunal holding that MS wire obtained from MS rod was not liable to excise duty was correct. Despite the aforesaid decision of the Supreme Court, the manufacturers like the petitioner were paying excise duties on SS wires and the Revenue authorities were also collecting such duties without any objection.

4. Vide circular dated 29-5-2003, the Central Board of Excise & Customs withdrew the previous Circular dated 16-2-2001 and informed the trade that the review petitions filed by the Excise Department in cases decided by the Supreme Court in Technoweld Industries (supra), were dismissed.

5. In view of the above position, a show cause notice dated 28-8-2003 came to be issued to the petitioner company and ultimately, after hearing the petitioners, an order-in-original dated 19-9-2003 came to be passed by the third respondent holding that drawing of SS wire from SS rods by the petitioner company does not amount to manufacture with effect from 29-5-2003 in view of the judgment of the Supreme Court in the case ofTechnoweld Industries (supra) and withdrawal of Board's Circular on 29-5-2003.

6. Being aggrieved, the petitioner company approached this Court by way of a writ petition being Special Civil Application No. 591 of 2004, seeking a declaration that the judgment of the Supreme Court in the case of Technoweld Industries (supra) was not applicable to the petitioners' case as well as a declaration that the processes undertaken by the petitioner company for producing stainless steel wires from stainless steel hot rolled back wire rods is "manufacture" and that the petitioner company was legally obliged to pay duties on stainless steel wires manufactured by it from stainless steel rolled back wire rods. This Court, on 20-1-2004, passed a detailed interim order in the above referred special civil application and directed the respondents to permit the petitioners to pay excise duty on stainless steel wires manufactured out of stainless steel hot rolled black wire rods with all other consequential benefits and liabilities including Cenvat credit in accordance with the Rules. It was also clarified that pendency of the petition would not preclude the Central Board of Excise and Customs from considering the question whether a distinction was required to be made between the process of drawing wires from mild steel rod on the one hand and processing of making stainless steel wires from stainless steel rods on the other hand.

7. In the Union Budget of year 2004-05 presented on 8-7-2004, the Central Government has amended the Tariff Act by inserting Note 10 in Section XV thereby providing that in relation to products of that section, process of drawing or re-drawing a rod, wire or any other similar article into wire shall amount to "manufacture". Section XV of the Tariff covers Chapters 72 to 83, and thus, Chapter 72 under which petitioners' case fell is also covered thereunder, and accordingly, a process undertaken by the petitioners and other similarly situated manufacturers is considered to be "manufacture" by virtue of the above referred note inserted with effect from 1-3-2004 in the Tariff. Thus, the dispute was therefore confined only for the period from 29-5-2003 to 8-7-2004.

8. Vide show cause notice dated 25-5-2004 issued to the petitioner company, the Commissioner of Central Excise, Ahmedabad-Il proposed to deny Cenvat credit of Rs. 2,62,24,156/- taken by the petitioner company during the period 29-5-2003 to 8-11-2003 with proposals for penalty and interest on the ground that the petitioner company could not have taken credit of duties paid on raw materials when its activities did not constitute "manufacture". The petitioners filed a reply to the above show cause notice vide letter dated 4-6-2004, but this show cause notice was kept in abeyance by the Commissioner of Central Excise-III, Ahmedabad in view of the pendency of the above referred petition before this Hon'ble Court involving the same issue.

9. During the above referred period, the petitioner company was clearing SS wires on payment of excise duties at appropriate leviable rates. The petitioner company was also availing credit of duties paid on SS wire rods by virtue of the interim orders passed by this Court in the above referred matter. The Cenvat Credit Rules provide for cash refund of credit of duties paid on inputs used in or in relation to the manufacture of final products exported under bond if such credit cannot be utilized for paying duties on any other goods cleared for home consumption on payment of duty or cleared for export on payment of duty. Since the petitioner company was not in a position to utilize Cenvat credit availed on inputs used in relation to the manufacture of the exported goods, the petitioner company filed two refund claims for such accumulated credit for the goods exported during the period from July, 2003 to September, 2003 and April, 2003 to June, 2003 as regards its final products. Pursuant to the aforesaid refund claims, two show cause notices dated 25-6-2004 and 1-6-2004 respectively came to be issued to the petitioners proposing to reject the refund claims on various grounds. The aforesaid show cause notices culminated into orders-in-original No. 947/Ref/2004 and No. 948/Ref/2004 both dated 20-12-2004, whereby the refund claims came to be rejected as premature as well as devoid of any merits so far as rebate under Notification No. 41/2001, dated 26-6-2001 was concerned. Being aggrieved, the petitioner company filed two appeals before the Commissioner (Appeals), the second respondent herein. During the pendency of the aforesaid appeals, the Central Government introduced the Tax Laws Amendment Bill, 2005 dated 9-5-2005 in the Parliament, thereby amending Rule 16 of the Cenvat Credit Rules with retrospective effect from 29-5-2003 (i.e. the day on which the C.B.E. & C. issued Circular No. 720/35/2003-CX, thereby clarifying that wire drawing was not "manufacture") and covering the entire period from 29-5-2003 to 8-7-2004. By virtue of these amendments, wire drawing units like the petitioners have been considered as the "assessee" under the cenvat excise law and they are also allowed to avail Cenvat credit thereby regularizing their availment of credit during the above referred period. It is the case of the petitioners that by virtue of the above referred proposal before the Parliament, the whole issue of availability of credit would stand settled in favour of the trade. However, without considering the significance of the above proposal put before the Parliament as far back as 9-5-2005, the Commissioner (Appeals), Ahmedabad rejected the above referred two appeals of the petitioner company on the ground that claiming refund of unutilized credit was premature in view of the pendency of the petition before this Court. Being aggrieved, the petitioners have filed the present petition, seeking the relief noted hereinabove.

10. Mr. Paresh M. Dave, learned advocate appearing on behalf of the petitioners invited attention to the provisions of the Taxation Laws (Amendment) Act, 2006 (Amendment of 2006) and more particularly, to Section 39 thereof whereby Rule 16 of the Central Excise Rules, 2002 (the Rules) has been amended, to the effect that for the purpose of the Rules, wire drawing units which cleared the goods on payment of an amount equal to duty at the rate applicable to drawn wire on the date of removal were included in the definition of "assessee" and the amount paid on the goods brought to the factory of such assessee was allowed as Cenvat credit as if it was duty paid by the assessee who removed the goods. It was submitted that in the light of the amendment in Rule 16 of the Rules the petitioner is entitled to take Cenvat credit of the duty paid on the goods brought to the factory of the petitioner.

11. Attention was also invited to the fact that the said Amendment of 2006 has been made effective for the period from 29-5-2003 to 8-7-2004. It was submitted that in the light of the Amendment of 2006, the decision of the Supreme Court would no longer be applicable to the facts of the present case inasmuch as, the legislature by the amendment has included the persons like the petitioner herein as assessee for the purposes of Rule 16 of the Rules. It was submitted that in the present case, the dispute relates to the period 29-5-2003 to 8-11-2003 and as such, the same is directly covered by the Amendment of 2006. In the circumstances, the impugned order dated 8-6-2005 passed by the respondent No. 2 - Commissioner of Central Excise (Appeals) being contrary to the amended provisions of the Rules, is required to be quashed and set aside.

12. Mr. R.J. Oza, learned Senior Standing Counsel appearing on behalf of the respondents was not able to dispute the aforesaid position of law. It was submitted that in the light of the amended statutory provisions, the petitioner company would be entitled to refund of the unutilized Cenvat credit provided it has paid the duty on the wire rods.

13. In the background of the aforesaid facts as well as the submissions advanced by the learned advocates for the respective parties, it is apparent that the impugned order passed by the Commissioner (Appeals) is based upon the decision of the Supreme Court in the case of Technoiweld Industries(supra), holding that the process of drawing wires does not amount to manufacture.

14. Sub-section (1) of section 39 of the Taxation Laws (Amendment) Act, 2006, as is relevant for the present, reads thus :

"39. (1)		In the Central Excise Rules, 2002, made by the Central Government in exercise of the powers conferred by section 37 of the Central Excise Act, rule 16 thereof as published in the Official Gazette vide notification of the Government of India in the Ministry of Finance (Department of Revenue), No. G.S.R. 143(E), dated the 1st March 2002 shall stand amended and shall be deemed to have been amended retrospectively in the manner as specified in column (2) of the Schedule for the period specified in column (3) of that Schedule against the rule specified in column (1) of that Schedule.
(2)		Notwithstanding anything contained in any judgment, decree or order of any court, tribunal or other authority, any action taken or anything done or purported to have been taken or done, at any time during the period commencing on and from the 29th day of May, 2003 and ending with the 8th day of July, 2004 under the rule as amended by sub-section (1), shall be deemed to be and always to have been, for all the purposes, as validly and effectively taken or done as if the amendment made by sub-section (1) had been in force at all material times.
(3)		For the purposes of sub-section (1), the Central Government shall have and shall be deemed to have the power to make rules with retrospective effect as if the Central Government had the power to make rules under section 37 of the Central Excise Act, retrospectively, at all material times.
		Explanation. — For the removal of doubts, it is hereby declared that no act or omission on the part of any person shall be punishable as an offence, which would not have been so punishable if this section had not come into force."

15. By virtue of the aforesaid provisions, rule 16 of the Rules has been amended retrospectively in the manner as specified in column (2) of the Schedule for the period specified in column (3) of that Schedule against the rule specified in column (1) of that Schedule. Sub-section (2) of section 39 says that notwithstanding anything contained in any judgment, decree or order of any court, tribunal or other authority, any action taken or anything done or purported to have been taken or done, at any time during the period commencing on and from the 29th day of May, 2003 and ending with the 8th day of July, 2004 under the rule as amended by sub-section (1), shall be deemed to be and always to have been, for all the purposes, as validly and effectively taken or done as if the amendment made by sub-section (1) had been in force at all material times.

16. The Schedule thereto indicates that rule 16 of the Central Excise Rules has been amended by inserting the second proviso thereto, which read thus :

"Provided that for the purposes of this rule, "assessee" shall include wire drawing unit, which has cleared the goods on payment of an amount equal to the duty at the rate applicable to drawn wire on the date of removal and on the value determined under relevant provisions of the Act and the rules made thereunder.

'Provided further that the amount paid under the first proviso shall be allowed as CENVAT credit as if it was duty paid by the assessee who removes the goods.'

17. Thus, the persons like the petitioners are termed to be "assessee" within the meaning of rule 16 of the Rules. Rule 16 of the Rules lays down that where any goods on which duty had been paid at the time of removal thereof are brought to any factory for being re-made, refined, re-conditioned or for any other reason, the assessee shall state the particulars of such receipt in his records and shall be entitled to take Cenvat credit of the duty paid as if such goods are received as inputs under the Cenvat Credit Rules, 2002 and utilize this credit according to the Rules. By virtue of the amendment, the petitioner is an "assessee" within the meaning of rule 16 of the Rules and as such, would be entitled to avail of Cenvat credit in accordance with the Rules.

18. Examining the facts of the present case in the light of the aforesaid amendment in the statutory provisions, the impugned order dated 8-6-2005 passed by the Commissioner (Appeals) as well as the orders in-original dated 20-12-2004 passed by the adjudicating authority are clearly contrary to the statutory provisions and as such, cannot be sustained.

19. For the foregoing reasons, the petition succeeds and is, accordingly, allowed. The impugned order-in-appeal No. 376 to 377/2005, dated 8-6-2005, (Annexure "I" to the petition) and the orders-in-original No. 947/Ref/2004 and No. 948/Ref/2004 both dated 20-12-2005 passed by the Commissioner of Central Excise, Ahmedabad (Annexure "G" to the petition collectively), are hereby quashed and set aside. Consequently, the refund claims of the petitioners shall stand restored to the file of the adjudicating authority, who shall decide the same afresh in the light of the aforesaid amended statutory provisions.

20. Rule is made absolute accordingly with no order as to costs.

VINEET

*In favour of assessee.

IT: Where Commissioner (Appeals) observed that interest under section 244A was allowed on refund and same was affirmed by Tribunal, it could not be apprehended that they had not verified fact as to whether assessee was in default

■■■

[2013] 40 taxmann.com 15 (Gujarat)

HIGH COURT OF GUJARAT

Commissioner of Income-tax, Ahmedabad-IV

Shah Alloys Ltd.*

M.R. SHAH AND MS. SONIA GOKANI, JJ.

TAX APPEAL NO. 788 OF 2013†

SEPTEMBER 16, 2013

Section 244A of the Income-tax Act, 1961 - Refunds - Interest on [General] - Assessment year 2005-06 - Tribunal held assessee entitled to credit of Rs. 1.30 crore - On application under section 154 claiming interest on Rs. 1.30 crore, Assistant Commissioner did not grant interest - It was revenue's case that it was because only mentioning of wrong assessment year by assessee, refund was not given so far and, thus, assessee would not be liable to interest - On appeal, Commissioner (Appeals) directed Assessing Officer to grant interest - On appeal, Tribunal affirmed order of Commissioner (Appeals) - Revenue submitted that by passing impugned orders and directing Assessing Officer neither Commissioner (Appeals) nor Tribunal had considered whether assessee and/or department was at fault - Whether where Commissioner (Appeals) had himself observed that interest under section 244A was to be allowed in accordance with law and same was affirmed by Tribunal, apprehension on part of revenue was not well founded and, hence, there was no reason to interfere with impugned judgment of Tribunal - Held, yes [Para 6] [In favour of assessee]

Varun K. Patel for the Appellant.

JUDGMENT

M.R. Shah, J. - The present Tax Appeal has been preferred by the revenue against the impugned judgment and order passed by the Income Tax Appellate Tribunal ('ITAT' for short) dated 14/12/2012 in ITA No. 2024/Ahd/2012 with respect to Assessment Year 2005-06 by which the Tribunal has dismissed the said appeal preferred by the revenue confirming the order passed by the CIT(A) dated 28/06/2012.

2. It appears that on finalization of the assessment proceedings by the Tribunal, the assessee was entitled to the credit of Rs.1,30,00,000/-. It appears that the Assessing Officer did not (give the credit of Rs.1,30,00,000/- and, therefore, the assessee submitted an application dated 07/11/2011 under Section 154 of the Income Tax Act (hereinafter referred to as 'the Act') claiming credit/refund of the aforesaid amount of Rs.1,30,00,000/- as well as interest thereon under Section 244A of the Act. Vide order dated 03/02/2012, the Assistant Commissioner of Income Tax (OSD) Circle - 8 has allowed the said application and directed to give credit of Rs.1,30,00,000/-. However, as such, no order was passed granting interest on the aforesaid amount under Section 244A of the Act. Shri Patel, learned Counsel appearing on behalf of the appellant has submitted that as such at the relevant time the Department did not give the refund of Rs.1,30,00,000/- because of wrong assessment year mentioned by the assessee. It is submitted that therefore as it was the mistake on the part of the assessee, the assessee would not be entitled to the interest under Section 244A of the Act.

3. Being aggrieved and dissatisfied with the order passed by the Assistant Commissioner of Income Tax (OSD) Circle - 8 in not granting and/or not passing any order with respect to interest on the aforesaid amount under Section 244A of the Act, the assessee preferred appeal before the CIT(A) and by order dated 28/06/2012 CIT(A) has allowed the appeal and has directed the Assessing Officer to grant interest under Section 244A of the Act on the refund till date of issue of the review order to the assessee in accordance with law and provision of the Act after taking into account the date of advance tax and other details. When the order passed by the CIT(A) was further carried in appeal before the ITAT, the Tribunal by impugned judgment and order dismissed the appeal against which revenue is before this Court with the aforesaid proposed question of law.

4. Shri Varun Patel, learned advocate appearing on behalf of the revenue has vehemently submitted that by passing the impugned orders and directing the Assessing Officer neither the CIT(A) nor the Tribunal had considered, whether the assessee and/or the Department was at fault. It is submitted that as such there was no delay attributed to the Department and, therefore, the assessee would not be entitled to the interest under Section 244A of the Act. It is submitted that according to the Department, it was the mistake on the part of the assessee and, therefore, the assessee would not be entitled to the interest under Section 244A of the Act.

5. Having heard Shri Varun Patel, learned advocate appearing on behalf of the revenue and considering the order passed by the CIT(A), which has been confirmed by the Tribunal, it appears that CIT(A) has directed the Assessing Officer to grant the interest under Section 244A of the Act on the refund issue till the date of issue of the refund order to the assessee in accordance with law and the provisions of the Act. Meaning thereby, the CIT(A) has kept open all the issues/questions, which are required to be considered whether to grant interest under Section 244A of the Act or not.

6. In that view of the matter and when the CIT(A) itself has observed that the interest under Section 244A of the Act should be considered in accordance with law and the said order has been confirmed by the Tribunal, apprehension on the part of the appellant is not well founded. While considering the question of interest under Section 244A of the Act, all the contentions, which are stipulated under Section 244A of the Act are required to be satisfied. Under the circumstances, we see no reason to interfere with the impugned judgment and order passed by the CIT(A) confirmed by the ITAT. Hence, the present appeal deserves to be dismissed and is accordingly dismissed.

*In favour of assessee.

†Arising out of IT Appeal No. 2024/Ahd./2012, dated 14-12-2012.

Regards,

Pawan Singla

BA (Hon's), LLB

Procedure for TDS Payment (FORM 26QB) and Generation of Form 16B

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Urvi Parekh Ambbala

From June 2013, purchaser of property with value of Rs. 50 lakh and above should deduct 1% TDS at the time of making payment. Here is the guide about making payments of TDS and obtaining form 16B for the buyer and form 26QB for the seller.

I would like to run the readers through the TDS payment process and the steps to be taken to obtain Form 16B (for the deductor or buyer) and Form 26QB for the (seller or deductee):

Firstly one has to go to the site of Tin.nsdl in following link: https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp

Online Payment through Challan 26QB:

Once this link is opened click on Form 26QB (Payment of TDS on sale of property). Select (0021) in case of non corporate payer and 0020 in case of corporate payer. On filling in the various details called for in that form, click on 'Proceed' at the bottom of the page, this will then take you to the next page, which will give you the option to select your bank. Once you select the bank, then login using the normal online process for your bank. Once the payment is made the bank will let you print challan 280 with a tick on (800), which is payment of TDS on sale of property. Take a printout of the challan and keep the same for your records and for the builder/seller if required. This is the first phase of the process.

There is also alternative mode payment if one does not have online banking registration.

One can fill in the form as above & while proceed there is option of "Subsequent payment through bank"

Choose that & it allows you to generate online receipt for Form 26QB with Ack no.

The same can be valid for 10 days from the date of generation online.

The same is to be carried at the authorized bank (list is given on the TIN.nsdl site) with cheque.

Bank will do online payment for you & generate Challan.

Generation of Form 16B:

Once this is completed one has to wait for seven days for the details to be reflected on TRACES web site – https://www.tdscpc.gov.in/.

As a first time user, you will have to register on this website as Tax Payer with your PAN card no. & Challan no as generated while payment (no need to have TAN)

Once you register whether as seller or buyer, you will be able to obtain the Form 16B or 26QB which has been approved and is reflected against your PAN in your Form 26AS. Check Form 26 AS after seven days and you will notice that the payment you had effected against TDS on sale of property is reflected in Part F of the Form 26 AS under 'Details of Tax Deducted at Source on Sale of Immoveable Property u/s 194(IA) [For Buyer of Property]. This will give you details such as the TDS certificate number (generated by TRACES), name of deductee, PAN of deductee, acknowledgement number (same as above on Form 26QB), total transaction amount, transaction date, TDS deposited, date of deposit, status of booking and date of booking.

Once the payment is reflected in 26AS as above, you will have to go to the TRACES again. Login to the website & Go to 'Download' Tab & make application for request of Form 16B

To make a request for download, here fill in the acknowledgment number (nine digit number) & required details as asked which is reflected on Form 26AS Part F as mentioned above.

It will give application & generates an application request number.

Now, click on 'Downloads' tab. In the dropdown menu click on 'requested downloads'. You can filter by way of Request no or by Date filter.

You can see you request for Form 16B as Submitted.

Within a couple of hours, the application gets processed and you will be able to view your Form 16B as Available.

Download it & it will give Zip file, save at your destination & to open it, use the password of Date of birth of Deductor. (DDMMYYYY)

Form 16B will be available in PDF format.

You can take a printout of the same for your records as well as for handing over to the seller of the property. A similar process has to be followed by the seller to obtain form 26QB.

Disallowance u/s 14A for the period before AY 2008-09, should be restricted to 2% of dividend income

Posted In Income Tax Case Laws | Judiciary | No Comments »

It was held had held that Disallowance u/s 14A for the period before AY 2008-09 i.e pre-Rule 8D period, should be restricted to 2% of the dividend income. Shakuntaladevi Trade & Investments Pvt. Ltd. Vs. ITO (ITAT Mumbai).

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER

AND SHRI SANJAY GARG, JUDICIAL MEMBER

I.T.A. No.8006/M/2010 (AY: 2007-2008)

Shakuntaladevi Trade & Investments Pvt. Ltd.

Vs.

The ITO

Appellant by : Shri Bikas Kumar Bogi

Respondent by : Shri M.L. Perumai, DR

Date of Pronouncement : 06.12.2013

O R D E R

PER D. KARUNAKARA RAO, AM:

This appeal filed by the assessee on 19.11.2010 is against the order of CIT (A)-20, Mumbai dated 20.9.2010 for the assessment year 2007-08.

2. In this appeal, assessee raised the following grounds which read as under:

"1. The CIT (A) erred in confirming the disallowance u/s 14A of Rs. 2,28,944/- made by the AO and not granting relief as claimed by the appellant.

2. The CIT (A) erred in confirming disaiowance u/s 14A of Rs. 2,28,944/-, which is based on the formula given in Rule 8D in spite of the fact that the Hon 'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd held that Rule 8D is not applicable for AY 2007-2008.

3. The CIT (A) erred in concluding that there was nothing wrong to make disallowance based on the method prescribed under Rule 8D even though Rule 8D was not applicable to the relevant year.

4. The CIT (A) erred in ignoring the fact that firstly AO has to give his finding having regard to the account of the assessee that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not for part of the total income under this Act.

5. The CIT (A) erred in concluding that the appellant failed to meet its onus to establish expenses disaiowed by the AO, since there was no disallowance of expenses rather it was 1/2% of average value of investment that was disallowed by the learned officer.

6. The CIT (A) erred in relying to the judgment of Hon'ble Supreme Court in the case of Munjal Sales Corporation vs. CIT 298 ITR (SC), since the facts of the given case and your appellant's case are not the same."

3. The only issue emanating from the above grounds is the disallowance of Rs. 2,28,944/- u/s 14A made by the AO and confirmed by the CIT (A). At the outset, Shri Shri Bikas Kumar Bogi, Ld Counsel for the assessee brought our attention to the judgment of the Hon'ble Bombay High Court in the case of CIT vs. M/s. Godrej Agrovet Ltd vide Income Tax Appeal No. 934 of 2011, dated 8.1.2013 and mentioned that the in view of the above mentioned judgment of the, the ITAT has taken the view that the disallowance u/s 14A should be restricted to 2% of the dividend income. Ld Counsel also relied on various decisions of the ITAT, Kolkata Benches in support of his contention.

4. On the other hand, Ld DR relied on the orders of the Revenue Authorities.

5. We heard both the parties and perused the orders of the Revenue. It is a fact that the relevant assessment year is 2007-08 under consideration is outside the scope of provisions of Rule 8D. The said provisions cannot be treated as applicable to the A.Y.2007-08 under consideration indirectly when the same is precluded by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT, reported in (2010) 328 ITR 81(Bom). The Hon'ble Bombay High Court also in the case of CIT vs. M/s. Godrej Agrovet Ltd vide Income Tax Appeal No. 934 of 2011, dated 8.1.2013, has held that percentage of the exempt income can constitute a reasonable estimate for making disallowance in the years earlier to the assessment year 2008-09. The relevant portion of the said judgment of the Bombay High Court (supra) reads as under:

"4. So far as question (b) is concerned, the Tribunal in its impugned order dated 17.9.2010 while applying the decision of this court in the matter of Godrej(supra) has disallowed the expenditure only to the extent of 2% of the total exempt income earned by the respondent-assessee on the basis its order dated 27.2.2009 for the assessment year 2002-2003 and order dated 10.9.2009 for the Assessment Years 2003-2004 and 2004-2005 wherein disaiowance was restricted to 2% of the exempt income. Further; the Tribunal has remanded the matter to the AO to verify the disallowance claimed and restrict the disallowance only to the extent to 2% of the total exempt income. We find no fault with the order of the Tribunal. "

Considering the binding nature of the judgment, we direct the AO to quantify the disallowance in the light of the aforesaid judgments of the Hon'ble High Court. Accordingly, grounds raised by the assessee are allowed for statistical purposes.

6. In the result, appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open court on 6th December, 2013.

S. 260A(4) HC can hear appeal on questions other than the questions on which appeal has been admitted CIT Vs. Mastek Ltd. (Supreme Court)

Posted In Income Tax Case Laws | Judiciary | No Comments »

The High Court's power to frame substantial question(s) of law at the time of hearing of the appeal other than the questions on appeal has been admitted remains under Section 260A(4). This power is subject, however, to two conditions, (one) the Court must be satisfied that appeal involves such questions, and (two) the Court has to record reasons therefor.

SUPREME COURT OF INDIA

RECORD OF PROCEEDINGS

Petition(s) for Special Leave to Appeal (Civil) /2013

CC 3075/2013

(From the judgement and order dated 01/08/2012 in ITA No.472/2012 of

The HIGH COURT OF GUJARAT AT AHMEDABAD)

THE C.I.T. -II AHMEDABAD, GUJARAT

VERSUS

M/S MASTEK LTD.

With I.A. 1 (c/delay in filing SLP)

Date: 04/03/2013 This Petition was called on for hearing today.

CORAM :

HON'BLE MR. JUSTICE R.M. LODHA

HON'BLE MR. JUSTICE J. CHELAMESWAR

HON'BLE MR. JUSTICE MADAN B. LOKUR

UPON hearing counsel the Court made the following O R D E R

Heard Mr. R.P. Bhatt, learned senior counsel for the petitioner.

We find that appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961 (for short, 'Act') has been admitted by the High Court and two substantial questions of law have been framed for consideration of the appeal.

The grievance of the Revenue is that by necessary implication, the other questions raised in the memo of appeal before the High Court have been rejected.

We are afraid that the Revenue is under some mis-conception. The proviso following the main provision of Section 260A(4) of the Act states that nothing stated in sub-section (4), i.e., 'The appeal shall be heard only on the question so formulated' shall be deemed to take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.

In view of the above legal position, we do not find any justifiable reason to entertain this special leave petition, although we are inclined to condone delay of 72 days.

Delay condoned.

Special leave petition is dismissed.

Services in which human intervention is not required are not covered by scope of section 9(1)(vii)

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As regards assessee's submission that the provisions of section 9(1)(vii) will not come into play in this case because the entire testing process is automated, it is well settled that when no human intervention is involved in any services, such services cannot be treated to be of the nature which can be covered by the scope of section 9(1)(vii). It is also undisputed that question is not of more or less of human involvement. It is, the question of presence of or absence of human involvement. Furthermore testing charges paid by assessee, a manufacturer and exporter of leather goods, to a German company, could not be regarded as fee for technical services prior to amendment in section 9(1) by Finance Act 2010, it was not liable to deduct tax at source while making payment of said charges in assessment year 2008-09

INCOME TAX APPELLATE TRIBUNAL, AGRA

[Coram : Bhavnesh Saini JM and Pramod Kumar AM]

I.T.A. No.: 393/Agra/2012 Assessment year: 2008-09

Metro & Metro

Vs.

Additional Commissioner of Income Tax

Date of concluding the hearing : October 31, 2013

Date of pronouncing the order : November 01, 2013

ORDER

Per Pramod Kumar:

1. By way of this appeal, the assessee appellant has challenged the correctness of learned Commissioner (Appeals)'s order dated 29th February 2012, in the matter of assessment under section 143(3) of the Income Tax Act, 1961 ( hereinafter referred to as 'the Act') for the assessment year 2008-09.

2. The main issue that we are required to adjudicate in this appeal is whether or not the learned CIT(A) was justified in confirming the disallowance of Rs 52,0 7,883, in respect of leather testing charges paid to TUV Product Und Umwelt GmbH – a tax resident of Germany, under section 40(a)(i) of the Act, on the ground that the assessee failed to discharge his tax withholding obligations in respect of the same.

3. The issue in appeal lies in a narrow compass of undisputed material facts. The assessee before us is a manufacturer and exporter of leather goods. On 14th August 2008, the assessee filed his return of income, declaring taxable income of Rs 5,81,56,220 which was later taken up for the scrutiny assessment proceedings. During the course of this scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has made remittances aggregating to Rs 52,07,883 to a Germany based company, by the name of TUV Product Und Umwelt GmbH (TUV GmbH, in short), in respect of leather testing charges, but did not withhold the applicable taxes from these remittances. The Assessing Officer was of the view that since the assessee has made the remittances without withholding requisite tax deductions, the payments so made are not allowable as deductions in the hands of the assessee. It was in this backdrop that a show cause notice was issued requiring the assessee to show cause as to why these payments not be disallowed under section 40(a)(i) of the Act.

4. It was contended by the assessee that unless TUV GmbH is liable to be taxed in India, in respect of the income embedded in the remittances made to them, the assessee did not have any obligations to deduct the taxes at source. It was also contended that the services rendered by way of leather testing charges were not rendered in India. While stating that, "the intention of introducing the source rule was to bring to tax interest, royalty or fees for technical services by way of creating a fiction in Section 9, the source rule would mean that irrespective of the situs of services, the situs of taxpayer and the situs of utilization of services will determine the tax jurisdiction", assessee referred to the judgment of Hon'ble Supreme Court, in the case of Ishikwajima Harima Heavy Industries Ltd Vs DIT ( 288 ITR 708) wherein it is said to have been held that there must be sufficient territorial nexus between income sought to be taxed in India and the territory of India. It was thus contended that unless the services are rendered in India, the same cannot be brought to tax in India. As regards amendment in Section 9 post the Hon'ble Supreme Court decision in the case of Ishikwajima (supra), reliance was placed on Hon'ble Karantaka High Court's decision in the case of Jindal Thermal Power Co Ltd Vs DCIT ( 321 ITR 31 ) in support of the proposition that the said amendment has not really nullified the impact of Hon'ble Supreme Court's judgment in the case of Ishikwajima (supra). It was submitted that no testing operations were carried out by the TUV GmbH in India, and that, accordingly, income cannot be said to accrue or arise in India. It was also contended that unless TUV GmbH can be said to have a PE in India, which cannot be said in the present case, and unless the services are rendered in India, which is not the case here, the income of the TUV GmbH cannot be brought to tax in India. It was also submitted that the assessee that the testing services for which impugned payments are made donot benefit the assessee in any other way except for compliance with statutory requirements in Germany with regard to the safety of products. With this factual contention, reliance was placed on the decisions of the Authority for Advance Ruling in the cases of Cushman & Wakefields Pvt Ltd In Re (305 ITR 208) and Joint Accreditation Committee of Australia and New Zealand ( 20 10- TII-28-ARA-INTL). None of these submissions, however, impressed the Assessing Officer. He was of the considered view that Explanation to Section 9 clearly states that for accrual of FTS, there is no requirement of residence, place of business or business connection in India. It was observed that if any payment is made by any person resident in India to a non resident person by way of fees for technical services, income is deemed to accrue or arise in India. It was because of this deeming fiction, according to the Assessing Officer, that the income is taxable in India. It was also observed that the double taxation avoidance agreement between India and Germany (Indo German tax treaty, in short) does not come to the rescue of the assessee since this treaty itself provides that the income on account of fees for technical services may be taxed in the source state as well. The Assessing Officer thus concluded that, "on the facts and in the circumstances of the case as discussed above, it is crystal clear that testing charge is payment on account of technical cum consultancy services only and is deemed to accrue or arise in India..and, therefore, leather testing charges paid ….of Rs 52,07,833, without deduction of tax at source as required under section 195, is disallowed under section 40(a)(i) of the Act and added to the income of the assessee". Aggrieved, assessee carried the matter in appeal before the learned CIT(A) but without any success. In broad terms, he rejected the theory of territorial nexus on the basis of analysis in, which he extensively reproduced from, a coordinate bench decision in the case of Ashapura Minichem Ltd Vs ADIT (131 TTJ 291), and held that post 2010 amendment in Section 9(1), this theory of territorial nexus between the situs of activity and the tax jurisdiction is no longer relevant. It was also held that the decisions of Hon'ble Supreme Court in the case of Ishikwajima and of Hon'ble Karnataka High Court in the case of Jindal Power are no longer good law, as Section 9(1) itself stands materially altered now. Learned CIT(A) also rejected assessee's contention that since the assessee is a one hundred percent exporter, the source of his income is outside India, and accordingly, by the virtue of exception visualized in Section 9(1)(vii)(b) the said income cannot be brought to tax in India. Learned CIT(A) held that while the sale may have been made to the persons outside India, the business is clearly carried on in India and as such it cannot be said that the source of income was outside India. It was in this backdrop that he distinguished decision of a coordinate bench of this Tribunal, in the case of Havel India Pvt Ltd Vs ACIT ( 140 TTJ 283) and noted that it was case in which assessee had the customers as also the manufacturing facilities outside India and, therefore, the Tribunal's decision that the business was carried out outside India was on different set of facts. Learned CIT(A) also rejected assessee's reliance on Hon'ble Supreme Court's judgment in the case of GVK Industries Ltd Vs ITO (332 ITR 130), on the ground of that this decision does not hold Section 9(1)(vii) to be unconstitutional and that the observations made by Their Lordships are being read out of context. He also referred to and relied upon the decision of another coordinate bench of this Tribunal, in the case of Indian Summer Vs ACIT [4 ITR (Tribu) 181] in support of the proposition that the only requirement of Section 9(1)(vii) is that the fees paid the fees for technical services paid by a person, who is a resident of India, to a non resident and that such services should not be used in a business carried on the resident person outside India. Learned CIT(A) observed that, " ..in leather testing, for determination of quality, contents in leather, and doing the necessary testing and doing the necessary checking whether the material has any toxic chemicals or not, before issuing the requisite certificate if its suitability to be used in manufacturing of shoes, an expertise in leather technology is required in which knowledge and skill of a technical expert is used, and, therefore, the leather testing is apparently in the nature of 'technical services'". He then referred to the provisions of Article 12 of Indo German tax treaty, analyzed the same and came to the conclusion that the testing charges , being consideration for technical services of testing leather, were clearly in the nature of technical services within the scope of Article 12(4) of the said tax treaty. Learned CIT(A) also rejected the assessee's plea to the effect that he cannot be expected to discharge the onus of tax deduction when law is amended with retrospective effect , by stating that the amendment was only clarificatory in nature and that, in any event, it was open to the assessee to move application under section 19 5(2) in case he had any doubts on the issue of taxability. It was also observed that the judicial precedents cited by the assessee, with regard to non applicability of penal provisions in respect of retrospective amendments, were on different facts and not applicable in the present context. In a very erudite and detailed order, thus, learned CIT(A) confirmed, and in fact fortified, the stand of the Assessing Officer. The assessee is not satisfied and is in further appeal before us.

5. We have heard the rival contentions at considerable length, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. We will set out and deal with the arguments of the learned representatives as we take up each of the issues raised before us one by one. These issues can be divided in two broad categories – first, arguments on merits against the taxability of testing charges in the hands of TUV GmbH, and, second, arguments against applicability of legal provisions under section 40 (a)(i) disabling the deduction for testing charges so paid to TUV GmbH.

6. So far as taxability of leather testing fees in the hands of the TUV GmbH, in terms of the provisions of Indo German tax treaty is concerned, while learned counsel fairly accepts that the issue of testing fees in terms of the treaty provisions is covered against him by a decision of the coordinate bench in the case of Ashapura Mibnichem Ltd (supra), he submits one aspect of the matter has been overlooked in this decision. The point is this. While Article 12(1) of the India German Double Taxation Avoidance Agreement does provide for taxation of the 'fees for technical services', it merely states that such fees "may be" taxed in the other contracting states, and that the expression "may" has a connotation much narrower than "shall" which alone can justify levy of taxes in the other contracting state. Learned counsel makes elaborate submissions on the connotations "may", "shall" in the context of the levy of taxes. Learned Departmental Representative, on the other hand, submits that even though the expression used is "may", it does entitle the other contracting state, i.e. the source state, to levy taxes in accordance with its domestic law. It is pointed out that the terminology used in the tax treaties is different from the tax laws but the scheme of taxation of fees for technical services, which are to be taxed in the source state as well, is free from doubt.

7. In our considered view, it is necessary to appreciate the fundamental position with regard to the treaties in the sense that treaties donot, and cannot, provide for taxation of any income; they limit the taxing authority of the con¬tracting states. The tax treaties are primarily instrument allocating between such contracting states, with or without conditions, rights to tax income which have allegiance in more than one tax jurisdiction. A tax treaty does, therefore, only enable a contracting state to levy tax. Once it does so, the domestic law of the tax jurisdiction which has been granted the right to tax comes into play and it comes into play subject to such restrictions as may have been placed thereon, A tax treaty cannot force a contracting state to levy a tax. The expression 'shall only be taxed' in the context of the treaties is used only in the sense of restricting the other state from levying taxes on such income, as in Article 8 for example. The use of expression 'shall' in such situations is not to levy any taxes, since, as we have noted earlier, treaties cannot impose any taxes, but it does only imply that taxability, if at all, can be in the specified jurisdiction alone. Let us, in this light, take a look at the provision of Article 12 of Indo German tax treaty.

8. Article 12 provides as follows:

Article 12

ROYALTIES AND FEES FOR TECHNICAL SERVICES

(1) Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

(2) However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or the fees for technical services.

(3) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting, any patent, 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 payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 of this 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 or fees for technical services arise, through a permanent establishment situated therein, or performs in that other 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 and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a Land or a political subdivision, a local authority or a resident of that 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 Contracting 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 State in which the permanent establishment or fixed base is situated.

(7) Where, by reason of special relationship between the payer and the beneficial owner or between both of them and some other Person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid 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.

9. A plain reading of the above provisions show that under the Indo German tax treaty, a source state has the rights to tax an income in the nature of 'royalties' and ' fees for technical services', as defined above, but the tax so levied, by the virtue of taxing rights allocated above, shall not exceed ten percent. In effect, therefore, when a source state taxes the said income at ten percent rate or less, the said levy is in accordance with the scheme of allocation of taxing rights. However, when taxes levied exceed the specified rate, the extent to which such taxes exceed the specified rate, it will be contrary to the scheme of the allocation of taxing rights under the treaty and the taxability will be restricted in terms of the limited rights so allocated to the source state.

10. In all fairness to the learned counsel, however, we are alive to the fact that a coordinate bench of this Tribunal, in the case of Pooja Bhatt Vs DCIT (2008 TIOL 558 ITAT MUM), had indeed drawn a line of demarcation between 'shall ', 'may' and 'may also' and, based on that analysis, held that an income cannot be taxed in the residence country unless it falls in the category where both the contracting states have the right to tax, which, in their esteemed view, will be represented by expression "may also". However, the question that we are called upon to adjudicate in this case did not fall for consideration in the said case, and as is the settled position of law, a judicial precedent is an authority for what it actually decides and not what may even reasonable follow from the same. We leave it at that.

11. In view of the above discussions, in our considered view, the TUV GmbH does not get any benefit from the provisions of the Indo German tax treaty, so far as taxability of its income from leather testing fees is concerned.

12. Coming to the merits of taxability of testing fees in the hands of TUV GmbH under section 9(1)(vii), we find that, in principle, the issue is covered against the assessee by decision of a coordinate bench, in the case of Ashapura Minichem (supra) wherein a coordinate bench, speaking through one of us (i.e. the Accountant Member), had observed as follows:

9. The legal proposition canvassed by the learned counsel, however, does no longer hold good in view of retrospective amendment w.e.f. 1st June 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.

10. 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 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 taxationsystem 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.

13. Learned counsel, however, submits that the conclusion so arrived at in Ashapura Minichem's case (supra) is vitiated in law for the fundamental reason that it overlooks the decision of Hon'ble Supreme Court, in the case of GVK Industries Ltd Vs ITO (supra) which rules against the extra territoriality of the tax laws. As regards the subsequent special bench decision in the case of ADIT Vs Clifford Chance ( 154 TTJ 537), learned counsel fairly accepts that the special bench decision covers only with the scope of Section 9(1)(i) and the other segments of Section 9(1) have not been dealt with the said decision. The Special Bench has specifically observed that they are concerned with the scope of Section 9(1)(i) which has remained unaffected by the retrospective amendment made by Finance Act 2010. The question that we are, therefore, required to deal with is whether or not the Ashapura Minichem decision holds good law in the light of Hon'ble Supreme Court's decision in the case of GVK Industries (supra).

14. As far as Hon'ble Supreme Court's judgment in the case of GVK Industries is concerned, it does not, by any stretch of logic, hold against the constitutional validity of Section 9(1)(vii). The relevant observations made against the constitutional validity of laws having extra territorial implications are as follows:

(2) Does the Parliament have the powers to legislate 'for' any territory other than the territory of India or any part of it ?

The answer to the above would be 'no'. It is obvious that Parliament is empowered to make laws with respect to aspects or causes that occur, arise or exist, or maybe expected to do so, within the territory of India and also with respect to extra-territorial aspects or causes that have an impact or nexus with India……Such laws would fall within the meaning, purport and ambit of grant of powers of Parliament to make laws "for the whole or any part of the territory of India" and they may not be invalidated on the ground that they require extra territorial operation. Any laws enacted by the Parliament with respect to extra territorial aspects or causes that have no nexus with India would be ultra vires and would be laws made for a foreign territory.

15. A plain reading of the above observations by Their Lordships clearly indicates that as long as the law enacted by the Parliament has a nexus with India, even if such laws require extra territorial operation, the laws so enacted cannot be said to constitutionally invalid. It is only when the "laws enacted by the Parliament with respect to extra territorial aspects or causes that have no nexus with India" that such laws "would be ultra vires". As to what is acceptable nexus, we find guidance from Prof Michael Lang's rather recent book 'Introduction to the Law of Double Taxation Conventions' ( published by Linde, Austria; ISBN 9 78-90-8722-082-2):

In international law practice, there are no significant limits on the tax sovereignty of states. In designing the domestic personal tax law, the national legislator can even tax situations when, for example, only a "genuine link" exists. It is only when neither the person nor the transaction has any connection with the taxing state that tax cannot be levied.

16. There is a clear nexus between the taxability of services rendered to residents of a tax jurisdiction with that jurisdiction itself. As the assessee himself has observed in the written submissions reproduced in the assessment order at page 6 thereof, "the intention of introducing the source rule was to bring to tax interest, royalty or fees for technical services by way of creating a fiction in Section 9, the source rule would mean that irrespective of the situs of services, the situs of taxpayer and the situs of utilization of services will determine the tax jurisdiction". This source rule taxability has not been struck down by the GVK decision. All it says that there has to be reasonable nexus and impact. It is not, and cannot be, anybody's case that there is no nexus between income in the hands of a person providing technical services to India and India the tax jurisdiction. We, therefore, reject learned counsel's reliance on GVK decision.

17. Learned counsel then contends that, in any event, the provisions of Section 9 (1)(vii) will not come into play in this case because the entire testing process is automated. It is submitted that the provisions of Section 9(1) (vii) can come into play only in respect of such a technical service which involves human skills and interplay. Our attention is invited to a decision of the coordinate bench in the case of Siemens Ltd Vs CIT ( ITA No 4356/Mum/2010; order dated 12th February 2013) in which it is held that " if a standard facility is provided through a usage of machine or technology, it cannot be termed as rendering of technical services", and it is contended that the leather testing services are rendered with the help of machines and, therefore, the same are not covered as being in the nature of technical services as envisaged under Section 9 (1)(vii). Learned counsel submits that human element, even at all involved, is no more than that of a rather routine process of making the reports while the core analysis work is done by the machines. When it was put to him that even if we assume that the core work is done by the machines, there is still quite a bit of human involvement, learned counsel submits that it is no more than that of a person reading the machine analysis. Learned Departmental Representative, on the other hand, invites our attention to the decision of Hon'ble Delhi High Court, which coordinate bench was presumably following in the Siemens decision (supra), which does indicate that it is only when the process is completely automated and is without any human involvement that the technical services involved could be beyond the scope of technical services envisaged under section 9(1) (vii).

18. While we are inclined to agree with the broad principles canvassed by the learned counsel, we donot think these principles lead to the conclusions he is seeking to justify. It is, if we may say so, classical case of right propositions being used to justify the wrong conclusions.

19. We agree that when no human intervention is involved in any services, such services cannot be treated to be of the nature which can be covered by the scope of Section 9 (1)(vii). The detailed reasoning for this approach, as was noted by another coordinate bench in the case of ITO Vs Right Florists Pvt Ltd (154 TTJ 142), is as follows:

24. While there is no specific definition assigned to the technical services, and Explanation 2 to Section 9(1)(vii), as also Article 12(2)(b) merely states that 'fees for technical services' will include considering of "rendering of any managerial, technical or consultancy services".It is significant that the expression 'technical' appears alongwith expression 'managerial' and 'consultancy' and all the three words refer to various types of services, consideration for which is included in the scope of 'fees for technical services'. The significance of this company of words lies in the fact that, as observed by a coordinate bench of this Tribunal in the case of Kotak Securities Ltd Vs DCIT (50 SOT 158), "when two or more words which are susceptible to analogous meaning are used together they are deemed to be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that of less general". Just as a man is known by the company he keeps ,a word is also to be interpreted with reference to be accompanying words. Words derive colour from the surrounding words. Broom's Legal Maxims (10th Edn.) observes that "It is a rule laid down by Lord Bacon, that copulation verborum indicate cceptationem in eodem sensu i.e. the coupling of words together shows that they are to be understood in the same sense. It is, therefore, clear on principle that as long as words are used together in a statutory provision, they take colour from each other and restrict its meaning to the genus of these words. In this way, the meaning of words is restricted because of other words in the same group of words, and the meaning is so restricted to the species or genus of those other words. Genus of these words should be clearly discernible from the lowest common factor in those words. The lowest common factor in 'managerial, technical and consultancy services' seems to be the human intervention, because while these three words are of wide scope and are in varied field, the only common thread in these words seems to be that the services, which are essentially professional services in nature, can be rendered with human interface. A managerial or consultancy service can only be rendered with human interface, while a technical service can be rendered with human interface as also without human interface. A technical service, for example, could be automated analysis of a chemical compound without any scope of any human contribution at any stage, and a technical service could also be physical examination by an expert chemical analyst, with or without the help of machines, of the same chemical compound. However, when we try to restrict the meaning of technical services to the services which are covered by managerial and technical services as well, services without human interface will have to be taken out of its ambit. It is, therefore, clear on principle that as long as words are used together in a statutory provision, they take colour from each other and restrict its meaning to the genus of these words which is evident by the lowest common factor in those words. The lowest common factor in 'managerial, technical and consultancy services' being the human intervention, as long as there is no human intervention in a technical service, it cannot be treated as a technical service under Section 9(1)(vii).There is one more approach to this issue, even though the results will be the same. The other way of looking at these three words on the basis of the principle of noscitur a sociis is, as was done by Hon'ble Delhi High Court in the case of CIT Vs Bharti Cellular Limited (319 ITR 139), is that the common characteristic of the majority of the words be read as limitation on the scope of the other words. While doing so, Their Lordships had observed as follows:

13. ………………….In the said Explanation [ i.e. Explanation 2 to Section 9(1)(vii)] the expression fees for technical services means any consideration for rendering of any managerial, technical or consultancy services. The word technical is preceded by the word managerial and succeeded by the word consultancy. Since the expression technical services is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable.

The said rule is explained in Maxwell on The Interpretation of Statutes (Twelfth Edition) in the following words:-

Where two or more words which are susceptible of analogous meaning are coupled together,noscitur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general.

This would mean that the word technical would take colour from the words managerial and consultancy, between which it is sandwiched.

The word managerial has been defined in the Shorter Oxford English Dictionary, Fifth Edition as:- of pertaining to, or characteristic of a manager, esp. a professional manager of or within an organization, business, establishment, etc.

The word manager has been defined, inter alia, as:- a person whose office it is to manage an organization, business establishment, or public institution, or part of one; a person with the primarily executive or supervisory function within an organization etc; a person controlling the activities of a person or team in sports, entertainment, etc.

It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression manager and consequently managerial service has a definite human element attached to it. To put it bluntly, a machine cannot be a manager.

14. Similarly, the word consultancy has been defined in the said Dictionary as the work or position of a consultant; a department of consultants. Consultant itself has been defined, inter alia, as a person who gives professional advice or services in a specialized field. It is obvious that the word consultant is a derivative of the word consult which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action. It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.

15. From the above discussion, it is apparent that both the words managerial and consultancy involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word technical as appearing in Explanation 2 to Section 9 (1) (vii) would also have to be construed as involving a human element.

25. We may also point out that while this judgment did not meet approval of Hon'ble Supreme Court, in the judgment reported as CIT Vs Bharti Cellular Limited (330 ITR 239), on the short factual aspect regarding fact of human intervention. It was for recording the factual findings on this aspect that the matter was remitted to the file of the Assessing Officer. However, so far as the principle laid down by Hon'ble Delhi High Court on the application of principle of noscitur a sociis in restricting the scope of 'technical services' to 'technical services with a human interface' was concerned, Their Lordships of Hon'ble Supreme Court took note of the said principle and left it intact. The stand taken by Hon'ble Delhi Court, in our humble understanding, stands approved. Of course, what constitutes a technical service without human interface is essentially a question of fact and each case will have to be examined on its own facts. However, as long as there is no human intervention in a technical service, in the light of law so laid down, it cannot be treated as a technical service under Section 9(1)(vii).

20. The principle of law, as clearly discernable from the observations made by Hon'ble Delhi High Court in Bharati Cellular's case (supra), is that "the word technical as appearing in Explanation 2 to Section 9 (1) (vii) would also have to be construed as involving a human element." In other words, when services have no human element involved, such services cannot be treated as 'technical services' for the purposes of Section 9(1)(vii). Let us also not forget that these observations were made in the context of inter connect and port access facility which is facility to use the gateway and the network of other cellular operator. This is a completely automated process with no human involvement at all, and yet , when the matter reached Hon'ble Supreme Court, Their Lordships, in the judgment reported as CIT Vs Bharati Cellular Ltd ( 330 ITR 239), did remit the matter back to the Assessing Officer by observing as follows:

The problem which arises in these cases is that there is no expert evidence from the side of the Department to show how human intervention takes place, particularly, during the process when calls take place, let us say, from Delhi to Nainital and vice versa. If, let us say, BSNL has no network in Nainital whereas it has a network in Delhi, the Interconnect Agreement enables M/s. Bharti Cellular Limited to access the network of BSNL in Nainital and the same situation can arise vice versa in a given case. During the traffic of such calls whether there is any manual intervention, is one of the points which requires expert evidence. Similarly, on what basis is the "capacity" of each service provider fixed when Interconnect Agreements are arrived at?

For example, we are informed that each service provider is allotted a certain "capacity". On what basis such "capacity" is allotted and what happens if a situation arises where a service provider's "allotted capacity" gets exhausted and it wants, on an urgent basis, "additional capacity"?

Whether at that stage, any human intervention is involved is required to be examined, which again needs a technical data. We are only highlighting these facts to emphasise that these types of matters cannot be decided without any technical assistance available on record.

There is one more aspect that requires to be gone into. It is the contention of Respondent No.1 herein that Interconnect Agreement between, let us say, M/s. Bharti Cellular Limited and BSNL in these cases is based on obligations and counter obligations, which is called a "revenue sharing contract". According to Respondent No.1, Section 194J of the Act is not attracted in the case of "revenue sharing contract". According to Respondent No.1, in such contracts there is only sharing of revenue and, therefore, payments by revenue sharing cannot constitute "fees" under Section 1 94J of the Act. This submission is not accepted by the Department. We leave it there because this submission has not been examined by the Tribunal.

In short, the above aspects need reconsideration by the Assessing Officer. We make it clear that the assessee(s) is not at fault in these cases for the simple reason that the question of human intervention was never raised by the Department before the CIT. It was not raised even before the Tribunal; it is not raised even in these civil appeals. However, keeping in mind the larger interest and the ramification of the issues, which is likely to recur, particularly, in matters of contracts between Indian Companies and Multinational Corporations, we are of the view that the cases herein are required to be remitted to the Assessing Officer (TDS).

Accordingly, we are directing the Assessing Officer (TDS) in each of these cases to examine a technical expert from the side of the Department and to decide the matter within a period of four months. Such expert(s) will be examined (including cross-examined) within a period of four weeks from the date of receipt of the order of this Court. Liberty is also given to Respondent No.1 to examine its expert and to adduce any other evidence.

21. In Siemens case (supra), however, the coordinate bench went much beyond what was held by the Hon'ble Courts above. The coordinate bench has concluded that, "Thus if a standard facility is provided through a usage of machine or technology, it cannot be termed as rendering of technical services. Once in this case it has not been disputed that there is not much of the human involvement for carrying out the tests of circuit breakers in the Laboratory and it is mostly done by machines and is a standard facility, it cannot be held that (the assessee) is rendering any kind of technical services to assessee" . These observations are not only based on erroneous analysis of the legal position but directly contrary to the law laid down by Hon'ble Supreme Court wherein it is held that even in a case of completely automated process like interconnect and port access facility, which is facility to use the gateway and the network of other cellular operator, the Assessing Officer is still required to examine "whether at any stage, any human intervention is involved". It is not a question of more of, or less of, human involvement. It is, in our humble understanding, the question of presence of or absence of human involvement. Our distinguished colleagues clearly erred in reading the unambiguous mandate of law laid down by Hon'ble Courts above. However, even as we disagree with the coordinate bench decision, for the reasons we will set out in a short while, we see no need to remit the matter to the larger bench. That would be, as we will see a little later, an academic exercise on the facts of the present case. Suffice to say, we are not inclined to accept this plea of the assessee. In any event, there is nothing on records to even demonstrate the precise process of leather testing, the actual steps involved in the process and parameters involved, nor these aspects of the matter have been examined by any of the authorities below.

22. The next plea of the assessee is whether the fees paid by the assessee, on account of leather testing charges, is in the nature of technical services within meanings of Section 9(1)(vii) or not is absolutely academic on the facts of this case because the assessee being a one hundred percent exporter, and the source of income thus being outside India, the exception visualized in Section 9(1) (vii) (b) will come into play.

23. Learned counsel's next argument is that since assessee is one hundred percent exporter, we have to proceed on the basis that the source of assessee's income, for which testing services are used, is outside India, and, accordingly, by the virtue of exception visualized in Section 9(1)(vii)(b), the fees for technical services paid to TUV GmbH will not be taxable in India.

24. In order to deal with this plea, let us take a fresh look at Section 9 (1)(vii)

first:

Section 9 (1) (vii)

The following income shall be deemed to accrue or arise in India

(vii) income by way of fees for technical services payable by—

(a) the Government; or

(b) 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; or

(c) a person who is a non-resident, where the fees are payable in respect of services utilised 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:]

Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.]

[Explanation 1 : For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.]

Explanation[2] : For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

25. Section 9(1)(vii)(b) makes it clear that the exception in respect of taxability of fees for technical services paid by an Indian resident is that when such fees is paid in respect of " services utilized in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India". This exception thus has two distinct segments- first, in respect of services utilized in a business or profession carried on by Indian resident outside India, and – second, in respect of services utilized in respect of earning any income from a source outside India. No doubt whether an India based business is one hundred percent export oriented unit or not, it is still a business carried on in India, and it cannot, therefore, be covered by the first limb of exception envisaged in Section 9(1)(vii)(b). Even if entire products are sold outside India, the fact of such export sales by itself does not make business having been carried outside India. What matters really, in this perspective, is whether or not business is carried on in India or not, and once it is an undisputed position that business is set up and carried on India, irrespective of where the end consumers are, the business is carried on outside India. However, the scope of second limb of this exception is rather narrow. As against use of expression 'profession or business carried on …….outside India', this exception refers to use of service in 'making or earning any income from any source outside India'. In order to be covered by this exception, what is material is that, irrespective of where the business is situated, the services need to be used for earning or making income from any source outside India. A business outside India and a source outside India are used together in contrast, and can be viewed as reflecting relatively active and passive activities. For example, if technical service is used in a business activity outside India, it could be covered by the first category, while technical service used in an asset which gave on lease could be in the second category. The question, however, is whether the customers being outside India could be viewed as source of income. In our considered view, the source of income, whether customers are inside India or outside India, continues to be business in India. A customer is an important part of the business but no matter how important a segment of business is, such a part of the business cannot be the business itself. The assessee has all along claimed that the leather testing services were required under instructions from importers and so as to enable its products to enter the German markets. All it indicates is that the services were required because of the foreign importers, but, as the mandate of the law, is that aspect itself is not decisive and sufficient for the purpose of exclusion from the scope of Section 9(1)(vii). The services should be for the purpose of earning an income from a source outside India. A customer is not the source of income, he is an important part of the business, which, in turn, is the source of income. As regards the decision of coordinate bench in Havel's case, that was a case in which not only the customers but also certain manufacturing facilities were outside India. We agree that once the manufacturing facilities are outside India and the customers are also outside India, such a situation will indeed be covered by the exception visualized in Section 9(1) (vii) (b).

26. Learned counsel's argument that the factual plea of the assessee that the business source was outside India has not been rejected by the authorities below, and should, as such, be taken as correct, does not impress us at all. That will be too superficial an approach for a judicial forum which is a final fact finding forum as well.

27. In view of the above discussions, as also bearing in mind entirety of the case, we reject this plea of the assessee as well. Just because the user of services is a one hundred percent export unit, in our considered view, it cannot be said that the technical services are used "for the purpose of making or earning any income from any source outside India", and, accordingly, outside the ambit of income taxable as fees for technical services under section 9(1) (vii).

28. In the light of the foregoing discussions, in our considered view, the payments made to TUV GmbH were taxable in India, and, accordingly, it cannot be said, based on the material on record and arguments before us, that the assessee did not have obligation to withhold taxes from the remittances made to TUV GmbH for leather testing charges. However, as hold so, we are alive to the fact that right now we are not dealing with the penal, recovery or other consequences of non deduction of tax at source, which are of different dimensions and import, and therefore, our findings above donot foreclose any plea or arguments that the assessee may like to take in the course of such proceedings, if any.

29. Learned counsel, however, submits that even if it is assumed, though he does not admit so, that the income embedded in leather testing charges paid to the TUV GmbH was taxable in India, since entire amount was paid during the relevant previous year itself and since no part of the same remaining outstanding at the year end, the disallowance under section 40(a)(i) cannot be made in the light of Special Bench decision in the case of Merlyin Shipping & Transport Vs ACIT (136 ITD SB 23) which is said to have been approved by Hon'ble jurisdictional High Court in the case of CIT Vs Vector Shipping Services (ITA No 122 of 2013; judgment dated 9th July 2013).

30. We are unable to accept this plea. There is no dispute that the Special Bench decision is in the context of Section 40(a)(ia) which is of recent origin and the majority view therein heavily relied upon the wordings originally proposed in the enactment of Section 40(a)(ia) which were in sharp contrast with the wordings actually used in the enactment of Section 40(a)(ia), as also certain other issues which donot touch upon the scope Section 40(a)(i). Section 40(a)(i) debars the deduction of "any interest , royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII- B" In contrast with these words, Section 40 (a) (ia) used the expression "payable to a resident". Obviously, the scope of setting of the words 'payable' in these two situations is materially different and there can indeed be a school of thought, howsoever detached from the reality as it may be, that amount payable to a resident, in the context of Section 40(a)(ia), reflects amount remaining payable. We are not concerned with that aspect of the matter nor do we need to deal with the same. Suffice to say that what is decided in the context of Section 40(a)(ia) does not apply to Section 40(a)(i) and the assessee thus does not derive any advantage from the decisions in the context of Section 40(a)(i). In our considered view, the provisions of Section 40(a)(i) cannot be interpretated in such a manner so as to restrict the scope of section to only amounts remaining payable at the end of the year, because, apart from the difference in wording of Section 40(a)(i) vis-a-vis Section 40(a)(ia) and other factors, such an interpretation will make the section redundant and it is one of the fundamental principles of interpretation is to interpret is ut res magis valeat quam pereat, i.e., in such a manner as to make it workable rather than redundant, and to understand the words with reference to the subject-matter, i.e., verba accopoenda sunt secundum subjectum materiam. It is also an elementary legal principle, as was also held by Hon'ble Bombay High Court in the case of CIT Vs Sudhir Jayantilal Mulji (214 ITR 154) that a judicial precedent is an authority for what it actually decides and not what may what come to follow from some observations made therein.

31. Learned counsel also submits in any event, it is because of a retrospective amendment in law . It is submitted that the retrospective amendment was brought about by the Finance Act 2010 which was nowhere in sight at the material point of time, i.e. previous year relevant to the assessment year 2008- 09. Learned counsel submits that the assessee cannot be penalized for performing the impossible task of deducting tax at source in accordance with the law which was brought on the statute book much after the point of time when tax deduction obligations were to be discharged. Our attention is invited to the decisions of a coordinate bench in the case of Channel Guide India Ltd Vs ACIT (139 ITD 49), wherein, following the views expressed by Ahmedabad bench in the case of Sterling Abrasives Ltd Vs ITO (ITA No. 2234 and 2244/Ahd/2008; order dated 2008), it is held that law cannot cast the burden of performing the impossible task of performing tax withholding obligations with retrospective effect, and, accordingly, the disallowance under section 40(a)(i) cannot be made in a situation in which taxability is confirmed only as a result of retrospective amendment of law. Learned counsel has also cited several other decisions in support of the proposition that in the case of retrospective amendment, the assessee cannot be punished for not complying with the law as it did not exist at the material point of time.

32. Even as we donot think that the provisions of Section 40(a)(i) are penal provisions in nature, particularly as the related deduction is allowed even in a subsequent period when tax withholding obligation is discharged, and even as we are alive to the fact that we are not dealing with consequences of non tax deduction of tax at source under section 201, as was the position in the case of Sterling Abrasives Ltd (supra), once there is a coordinate bench decision on this issue in favour of the assessee as in the case of Channel Guide (supra), and such a decision is not a manifestly erroneous decision, we see no reasons to take any other view of the matter than the view so taken by the coordinate bench. It is hardly necessary to emphasize that considerations of judicial propriety and decorum require us to normally follow the coordinate bench decision unless there are very strong and compelling reasons to refer the matter to larger bench. It is not one of those cases. We are inclined to agree with this view which also seems to be reasonable and justified. In the case of Channel Guide (supra), the coordinate bench has observed that the amount paid to the foreign enterprise was not taxable in India in the light of the legal position as it prevailed at that point of time, and it became taxable in India only as a result of the retrospective amendment in Section 9(1), the said payment cannot be disallowed by invoking section 40(a)(i). The situation is the same here. It is only as a result of the amendment in Section 9(1), by the virtue of Finance Act 2010, that the training fees paid to the TUV GmbH can be said to be taxable in India. As for the earlier period, even though the amendment is said to be merely clarifiactory in nature, in view of Hon'ble Supreme Court's judgment in the case of Ishikwajima (supra) and in view of the fact that services were rendered outside India – even if utilized in India, the impugned leather testing fees was not taxable in India. Such being the position, and respectfully following the decision of coordinate bench in the case of Channel Guide (supra), we hold that the disallowance under Section 40(a)(i) cannot be invoked on the facts of this case.

33. In the light of the above discussions, and for the reasons set out above, we delete the disallowance of Rs 52,07,883. The assessee gets the relief accordingly.

34. In the result, ground no. 1 is allowed in the limited terms indicated above. The other grounds of appeal, i.e. ground nos. 2 and 3, because of the smallness of the amounts were not really pressed before us. That fact however cannot be put against the assessee in the subsequent years or in penalty proceedings. With these observations, the ground no. 2 and 3 are dismissed.

35. In the result, the appeal is partly allowed in the terms indicated above.

Pronounced in the open court today on 1st day of November, 2013.

On Thursday, 19 December 2013 8:27 AM, CAclubindia Newsletter <newsletter@caclubindiamailer.com> wrote:

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Chartered Accountant Finance

Wednesday, December 18, 2013

[aaykarbhavan] Fw: CAclubindia Newsletter : 19/12/2013 & Judgments,

SB verdict in Merilyn Shipping on S. 40(a)(ia) tds disallowance is not good law

CBDT allows issue of Refund Intimation U/s. 143(1) beyond time

Ratio decidendi of a judgment prevails upo the contrary obiter dicta of another judgment

Leasehold Rights Are Eligible For Depreciation

Procedure for TDS Payment (FORM 26QB) and Generation of Form 16B

Disallowance u/s 14A for the period before AY 2008-09, should be restricted to 2% of dividend income

S. 260A(4) HC can hear appeal on questions other than the questions on which appeal has been admitted CIT Vs. Mastek Ltd. (Supreme Court)

Services in which human intervention is not required are not covered by scope of section 9(1)(vii)

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