CIT V. HAVELLS INDIA LTD, Delhi High Court Judgement on making or earning any income from other souce

CIT vs. Havells India Ltd (Delhi High Court)

S. 9(1)(vii)(b): Export sales is not a “source of income outside India”. Expenditure on fully convertible debentures is deductible

The assessee, an Indian company, paid Rs. 14.71 lakhs to a US company for ‘KEMA’ certification which was necessary to enable it to sell its products in the European markets. The assessee claimed that though the said amount was ‘fees for technical services’ u/s 9(1)(vii), it was paid “for the purpose of earning income from a source outside India” (i.e. the exports) and so it was not taxable in India u/s 9(1)(vii)(b). The AO & CIT (A) rejected the claim though the Tribunal upheld it. On appeal by the department, HELD reversing the Tribunal:

(i) S. 9(1)(vii)(b) provides that fees for technical services payable by a resident 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 shall not be taxable in India. The term “source” means not a legal concept but one which a practical man would regard as a real source of income. It is a spring or fount from which a clearly defined channel of income flows. The assessee manufactured goods in India and concluded the export contracts in India. The source of income is created the moment the export contracts are concluded in India. The customer located outside India is not the source of the income though he is the source of the monies received. There is a distinction between the source of income and the source of receipt of monies. In order to fall u/s 9(1)(vii)(b), the source of the income, and not the receipt, should be situated outside India. Further, though the profits arise both from the manufacturing activity and from the sale, bifurcation of the fees is not permissible (Aktiengesellschaft 262 ITR 513 (Mad) not followed);

(ii) Also held that expenditure on fully convertible debentures could not be treated as expenditure on equity and was deductible even though the time and conversion price was fixed (Secure Meters Ltd 321 ITR 611 (Raj) (SLP dismissed) followed)

Case Study of KPMG India Pvt Ltd V. DCIT

Rendering of services is not “supply of knowledge or information” to be “royalty”

The assessee was engaged as a consultant by Essar Oil Ltd to provide consultancy services in connection with sale of its energy business. As the consultancy required high level technical and industry knowledge, the assessee engaged KPMG LLP, USA & KPMG Consulting LP, Canada for rendering professional services and paid Rs. 20 lakhs & Rs. 13 lakhs respectively. The AO held that the said fees constituted “royalty” u/s 9(1)(vi) & Article 12 and as there was no TDS, the amount was to be disallowed u/s 40(a)(i). This was reversed by the CIT(A). On appeal by the department, HELD dismissing the appeal:

The professional services rendered does not fall in the definition of “royalty” in Article 12 of the DTAA. It was purely a professional service for consultancy which were rendered outside India and not for supply of scientific, technical, industrial or commercial knowledge or information. Thus, there was no liability to deduct TDS and consequently no disallowance u/s 40(ia) can be made.