ORDER This is appeal by assessee against order dt. 25th Feb., 2005 of CIT(A)-XV, New Delhi, relating to asst. yr. 2001-02. 2 . first two grounds of appeal of assessee are general in nature and do not call for any specific adjudication. grievance projected by assessee in ground Nos. 3 to 3.13 is with regard to action of Revenue authorities in disallowing expenditure of Rs. 5.83 crores being administrative fee paid by assessee to M/s Herbalife International of America Inc. facts in this regard are as follows. assessee carries on business of trading and marketing of herbal products for use in weight management, to improve nutrition and enhance personal care. assessee was incorporated as company in India with 100 per cent foreign equity participation, pursuant to approval granted by Ministry of Industry, Department of Industrial Policy & Promotion, Secretariat for Industrial Assistance. M/s Herbalife International, USA, was foreign collaborator who obtained approval for setting up assessee- company in India. As per approval of Ministry of Industry, assessee should manufacture herbal products on contract basis in India and should not import these items. 3 . products of parent USA company are sold in 58 countries worldwide. Scientists, doctors and nutritionists have developed these products with personal wellness goals in mind. Through constant research and product testing, products are claimed to meet highest standards set for industry. parent company claims to have developed significant expertise developed over years. parent company desires that these standards should be achieved by various subsidiaries throughout world. parent company, therefore, provides data processing services, record keeping, distributor/supervisor information and order and shipment processing, etc. parent company also provides financial, marketing services. Besides above direct services parent company also renders some indirect administrative services. As already stated, similar services are rendered to several subsidiaries worldwide and costs incurred in this regard are centralized costs, which is allocated to overseas subsidiaries. costs are allocated on scientific basis. 4 . assessee entered into Administrative Services Agreement dt. 10th Nov., 1999 with Herbalife International of America, Inc. (hereinafter called HIAI) company formed in accordance with laws of State of California, United States of America. Under this agreement HIAI agreed to provide data processing services, accounting, financial and planning services, marketing services besides long-term financial planning for assessee, analysis of prospects, etc. and to obtain approval for parent company products from Government and regulatory bodies. If necessary to assist in protecting trademark, tradename, logo of products. assessee was to pay administrative fee under this agreement. As already stated, these expenses are incurred by assessee in USA not only for providing services to assessee but also to its various other subsidiaries across world by maintaining its centralized staff and other resources. cost so incurred is apportioned and claimed from assessee on scientific basis. This agreement will hereinafter be referred to as "Administrative Service Agreement" (ASA for short). 5 . As already noticed as per approval of Ministry of Industry, assessee was not permitted to import products. It could get products manufactured on contract basis in India. For such manufacture assessee entered into agreement called License and Technical Assistance Agreement with company called M/s Herbalife International Inc. (hereinafter called HII), company incorporated in United States of America, which was owner of incorporeal right relating to process of manufacture of various products. As owner of technical know-how regarding manufacture, HII permitted assessee as licensee to manufacture products. This agreement was also dt. 10th Nov., 1999. 6 . This is background of assessee s nature of business. assessee had claimed expenditure of Rs. 5.83 crores as administrative fee paid during year. This sum was paid by assessee to M/s HIAI as consideration for various services it provided to assessee under agreement dt. 10th Nov., 1999, details of which have been mentioned at para 4 above. break-up of this sum of Rs. 5.83 crores on basis of period to which it relates to is as follows : 1st January, 2000 to 31st December, 2000 10,00,000 US $ 1st January, 2001 to 31st March, 2001 2,50,000 US $ Total 12,50,000 US $ 12,50,000 US $ is equivalent to Rs. 5.33 crores. 7 . It is pertinent to mention here that previous year of assessee relating to asst. yr. 2001-02 is period from 1st April, 2000 to 31st March, 2001. M/s HIAI follows calendar year and annual charges payable for calendar year 2000 was 10,00,000 US $. 8 . As can be seen from details of administration fee claimed as deduction by assessee, it includes fee for period 1st Jan., 2000 to 31st March, 2000, which relates to previous year relevant to asst. yr. 2000-01. According to Revenue, since this item of expenditure relates to period falling within asst. yr. 2000-01, same cannot be claimed as deduction in asst. yr. 2001-02. 9 . plea of assessee in this regard was that payment by assessee to M/s HIAI requires permission of RBI under Foreign Exchange Regulation Act. Though assessee had applied for grant of such permission on 24th March, 2000, RBI granted permission only on 30th June, 2000, and has allowed assessee to remit only 10,00,000 US $ as reimbursement of head-office expenses and has also directed that income-tax should be paid on remittances as per provisions of IT Act, 1961. Since payment was conditional on obtaining RBI approval, assessee pleaded that expenditure in question cannot be deemed to have accrued to assessee in law without such approval having been accorded and, therefore, assessee treated expenditure as having accrued only during previous year relevant to asst. yr. 2001-02 when RBI granted approval on 30th June, 2000. 10. Another submission of assessee in this regard was that by 31st March, 2000 when accounting year for asst. yr. 2000-01 ended, assessee did not receive details regarding share of common expenses payable by it to HIAI. assessee pointed out that since ASA commenced only from 11th Sept., 2000, (M/s HIAI had waived ASA fee from 11th Sept., 2000 to 31st Dec., 2000) there was no past precedent available which enabled assessee to make provision on estimate basis also. assessee further pointed out that interim invoice was received by assessee on 30th June, 2000 for US $ 333,333. second interim invoice for US $ 333,333 was raised on 30th Sept., 2000 and final invoice on 31st Dec., 2000 for same amount. last invoice duly supported with cost allocation sheets was actually received by 31st Jan., 2001 and total amount payable to HIAI towards administration fee amounted to US $ 1,015,240. In terms of approval granted by RBI only amount of US $ 1 million were remitted and balance US $ 15,240 were waived by HIAI. This, however, formed prudent basis for accruing of such expenses for first quarter of year 2001, (i.e., January to March, 2001) in assessee s books for period ended 31st March, 2001. 11. As far as expenditure pertaining to period 1st Jan., 2001 to 31st March, 2001 is concerned, plea of assessee was firstly that since bills upto 31st Dec., 2000 were received from M/s HIAI, there was precedent on basis of which it could reasonably estimate expenditure under this head and it had estimated same at 1/4th of sum payable for period of 12 months. second plea of assessee was that w.e.f. 1st June, 2000 Foreign Exchange Regulation Act, 1973 was replaced by Foreign Exchange Management Act, 1999 (FEMA for short) and under new legislation payment such as one made by assessee , resident of India to non-resident like M/s HIAI was payment on current account transactions and in terms of s. 5 of FEMA, foreign exchange could be drawn from authorised dealer without necessity for permission from RBI as was position earlier. assessee thus pleaded that in view of these two facts sum payable by assessee to M/s HIAI could be ascertained and could, therefore, be said to have accrued and arisen to assessee and, therefore, was allowable expenditure. 12. Apart from this, disputes with regard to whether or not expenditure relating to period 1st Jan., 2000 to 31st March, 2000 can be said to have relating to period 1st Jan., 2000 to 31st March, 2000 can be said to have accrued or arisen as liability in asst. yr. 2001-02 and dispute as to whether expenditure for period 1st Jan., 2001 to 31st March, 2001 can be said to have accrued or arisen as liability for asst. yr. 2001-02, another major dispute which is applicable to entire expenditure of Rs. 5.83 crores is to its allowability vis-a-vis provisions of s. 40(a)(i) of Act. provisions of s. 40(a)(i) of Act as it existed in asst. yr. 2001-02, reads as follows : "Sec. 40 : Notwithstanding anything to contrary in ss. 30 to 38, following amounts shall not be deducted in computing income chargeable under head Profits and gains of business or profession , (a) in case of any assessee (i) any interest (not being interest on loan issued for public subscription before 1st day of April, 1938), 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 : Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as deduction in computing income of previous year in which such tax has been paid or deducted. Explanation : For purposes of this sub-clause, (A) royalty shall have same meaning as in Expln. 2 to cl. (vi) of sub-s. (a) of s. 9; (B) fees for technical services shall have same meaning as in Expln. 2 to cl. (vii) of sub-s. (1) of s. 9;" 13. sum paid or payable by assessee as consideration under ASA to M/s HIAI is payable outside India and, therefore, aforesaid provisions areprima facieattracted. question is whether sum paid or payable by assessee to M/s HIAI under ASA can be said to be "fees for technical services" or "other sum", chargeable under Act within meaning of s. 40(a)(i) of Act. It is not in dispute that assessee did not deduct tax at time of making payment or credit nor did it pay tax in respect of consideration payable to M/s HIAI under ASA. 14. In assessment proceedings, AO held that under ASA, M/s HIAI provides data processing services, accounting services, marketing services, financial services as well as miscellaneous consultancy services and that as per provisions of s. 9(1)(vii), income by way of fees for technical services payable by person who is resident utilized within India are deemed to b e income accruing or arising in India. AO after making reference to Expln. 2 to s. 9(1)(vii) of Act, defining term "fees for technical services" observed that it includes any consideration paid for rendering any managerial, technical and consultancy services and that nature of services rendered by M/s HIAI to assessee for which sum was payable, fell within definition referred to above. Since, there was failure to deduct tax at source, AO disallowed claim for deduction of sum of Rs. 5.83 crores, in view of provisions of s. 40(a)(i). 1 5 . assessee raised plea before AO that amount paid/payable to M/s HIAI were reimbursement of actual cost incurred by M/s HIAI on behalf of assessee and, therefore, mere reimbursement of cost will not give rise to income in hands of M/s HIAI which can be brought to tax in India in hands of M/s HIAI. assessee also pleaded that nature of services were not such that expenditure can be said to be payment of "fees for technical services". 16. AO also held that portion of expenditure comprised in sum of Rs. 5.83 crores which relates to period from 1st Jan., 2000 to 31st March, 2000, is prior period expense and cannot be allowed as deduction. AO refused to accept plea of assessee that due to non-receipt of bill from M/s HIAI before end of previous year relevant to asst. yr. 2000-01 and absence of RBI permission for payment, liability cannot be said to have accrued to assessee. 17. AO also held that liability for period from 1st Jan., 2001 to 31st March, 2001 cannot be allowed as deduction. According to AO though liability for this period can be said to have accrued to assessee by assessee s conduct in not making payment of this sum to M/s HIAI subsequently and not providing for such liability in future years, showed that this liability was dead liability and that payment has been given up by M/s HIAI. 1 8 . Aggrieved by order of AO, assessee preferred appeal before CIT(A). CIT(A) confirmed order of AO holding that payment by assessee under ASA to M/s HIAI were in nature of fee paid for technical services rendered and was taxable in India. On plea of assessee that payment were mere reimbursement of expenses, CIT(A) held as follows : "No doubt, on p. 4, para IIIA, agreement uses word reimburse and goes on to say in para B-I that Herbalife USA shall determine actual costs incurred for providing services, but later developments showed that element of reimbursement was retracted by actions (billing system) of appellant- company and Herbalife USA. It is noticed that for period 10th Nov., 1999 to 31st Dec., 1999, no bill was raised by Herbalife USA on appellant-company for so-called reimbursement of costs. For 5 quarters from 1st Jan., 2000 to 31st March, 2001, Herbalife USA raised fixed billing of US $ 2,50,000 per quarter. This makes it abundantly clear that there is no element of reimbursement of real costs involved but fixed lump sum payment. It is also seen in Exhibit para 6 at p. 4 that Herbalife USA is to provide consultation services. Exhibit is Annexure to administrative services agreement. Further, this matter was considered by RBI while granting permission for remittance of Administrative Services Fees , and their communication dt. 30th June, 2000 addressed to appellant-company has clearly stated that approval is for payment of services fee and that income- tax should be paid thereon as per provisions of IT Act. In light of above discussion, it is clear that there is no point-to-point reimbursement of actual expenditure undertaken by Herbalife USA on behalf of appellant. It is moot point that in any technical service agreement, what is being paid by user is partly cost of manpower deployed by service provider, but that does not constitute arrangement for reimbursement of costs or bills. If argument of appellant were to be accepted, then payments to law firms, chartered accountant firms, marketing consultants, etc. would all escape provisions of s. 40(a)(i) by arguing that payer is only reimbursing them for various labour and skill components and no element of profit is embedded in bills. In light of above, I hold that money paid to Herbalife USA was in nature of technical fees and not reimbursement of costs. Accordingly, arguments of appellant are rejected and disallowance made by AO by invoking provisions of s. 40(a)(i) is upheld. In view of finding that payment made to Herbalife USA is disallowed under s. 40(a)(i), arguments of appellant relating to inequitable/contrary treatment of quarters January- March, 2000 and January-March, 2001, are not discussed." 19. Aggrieved by order of CIT(A), assessee is in appeal before Tribunal. We have heard submissions of learned counsel for assessee and learned Departmental Representative at length. following main issue would arise for consideration on ground of appeal raised by assessee on this issue : (A) whether consideration paid or payable by assessee to M/s HIAI under ASA is chargeable to tax in hands of M/s HIAI, in India ? answer to aforesaid question would again depend on answer to following questions : 1. Whether sum in question is mere reimbursement of expense which would not give rise to income chargeable to tax ? 2. If answer to above question is in negative, what is nature of service rendered by M/s HIAI to assessee ? Can it be said to be "fees for technical services" rendered by M/s HIAI to assessee within meaning of s. 9(1)(vii) Expln. 2 of Act ? 3. If services rendered by M/s HIAI are technical services as above, whether applying source rule they can be said to have accrued or arisen in whether applying source rule they can be said to have accrued or arisen in India rendering them taxable in India in hands of M/s HIAI ? 4. If answer to question No. 3 is in affirmative, yet sum in question cannot be brought to tax in view of provisions of art. 12(4)(b) of DTAA between India and USA. sum in question will not be fees for included service and, therefore, not taxable in India in view of provisions of s. 90(2) of Act which lays down that in relation to assessee to whom DTAA applies, provisions of DTAA will override provisions of Act to extent to which they are more beneficial to assessee ? 5. Can alternative plea of Revenue raised for first time before Tribunal that provisions of art. 12(4)(a) will apply and consequently sum in question can be said to be fees for included services be entertained ? If yes, is such plea sustainable ? 6. Can alternative plea of assessee that in any event in view of provisions of art. 26(3) of DTAA between India and USA provisions of s. 40(a)(i) of Act cannot be applied in instant case and consequently no disallowance can be made as has been done by Revenue authorities. (B) If sum in question is held to be not chargeable to tax and not disallowable under s. 40(a)(i) of Act, whether disallowance of said sum for period from 1st Jan., 2000 to 31st March, 2000 can be disallowed as prior period expense or can it be said that liability accrued or arose to assessee only in previous year relevant to asst. yr. 2001-02 ? (C) Whether sum in question claimed as expenditure relating to period 1st Jan., 2001 to 31st March, 2001 can be allowed as deduction ? 20. At outset, we take up for consideration question whether in view of provisions of art. 26(3) of DTAA between India and USA, even assuming that payment in question is not reimbursement of expenses and even assuming that they were fees for included services within meaning of art. 12(4) of said DTAA between India and USA, whether provisions of s. 40(a)(i) of Act, cannot be applied in this case and consequently no disallowance can be made. decision on this question, in our view, will obviate necessity of deciding other questions raised in point (A) above. We may at this stage itself mention that apart from consequence of disallowance of expenditure for non-deduction of tax at source at time of making payment to non-resident, assessee as person responsible for making payment of any sum chargeable to tax to non-resident is obliged to deduct tax at source under provisions of s. 195 of Act. On such failure person responsible for deduction of tax at source is liable to pay tax deductible together with interest from date on which such tax is due to date on which such tax is paid under provisions of s. 201(1) and (1A) of Act. In present case payment to M/s HIAI had been made by assessee s office at Bangalore and, therefore, officer having jurisdiction over branch office at Bangalore had already initiated proceedings against assessee under provisions of Chapter XVII of Act dealing with "collection and recovery of tax" and part B thereof dealing with deduction at source. assessee has, in such proceedings, taken plea that payment in question is not chargeable to tax. In such proceedings, which is now pending disposal before Tribunal Bangalore Benches, questions arising in this appeal, other than applicability of art. 26(3) of DTAA between India-USA, is subject-matter for consideration. If applicability of art. 26(3) of DTAA between India and USA in context of s. 40(a)(i) is decided in favour of assessee, other questions can be decided in appeal pending before Tribunal Bangalore Benches, which we feel is appropriate forum to decide as to whether payment by assessee to M/s HIAI is chargeable to tax in India in hands of M/s HIAI and assessee as person responsible for making payment ought to have deducted tax at source. 21. We may also incidentally point out that art. 27 of DTAA between India and USA contemplates situation where person considers that actions of one or both Contracting States result or will result for in taxation not in accordance with provisions of DTAA, then he may, without prejudice to other remedies available to him under local law, present his case to competent authority of Contracting State of which he is resident or national. assessee has made reference under mutual agreement procedure provided under art. 27 of India-USA DTAA. 2 2 . Keeping in mind aforesaid background of case, we now proceed to decide question of applicability of art. 26(3) of India-US DTAA. Article 26 of India-US DTAA deals with "Non-discrimination". Article 26(1) says that nationals of one Contracting State shall not be subjected in other Contracting State to any taxation or any requirement connected therewith which is much more onerous, then it is on nationals of that other Contracting State. Article 26(2) provides against discrimination in context of PE in other Contracting State. Article 26(3) is general clause providing for indirect discrimination against non-resident, it reads thus : "Article 26(3) : Except where provisions of para 1 of art. 19 (associated enterprises), para 7 of art. 11 (interest), or para 8 of art. 12 (royalties and fees for included services) apply, interest, royalties, and other disbursements paid by resident of Contracting State to resident of other Contracting State, shall, for purposes of determining taxable profits of first mentioned resident, be deductible under same conditions as if they had been paid to resident of first mentioned State." provisions of s. 40(a)(i) as it stood prior to its amendment by Finance Act, 2003 w.e.f. 1st April, 2004 applied to payments by assessee outside India to non-resident only. After 1st April, 2004 provisions apply equally to both resident and non-resident. In this appeal we are concerned with asst. yr. 2001-02 in which provisions of s. 40(a)(i) as it existed prior to 1st April, 2004 alone are applicable. Admittedly, in present case exceptions set out in art. 26(3) are not attracted. Therefore, payment by assessee to M/s HIAI is of nature contemplated by art. 26(3). 23. question may arise for consideration is as to whether assessee who is resident could take benefit under this clause, i.e., art. 26(3). plain reading of art. 26(3) clearly suggests that assessee can claim benefit. In this regard it would be relevant to refer to provisions of s. 90(2) of Act, which reads as follows : "Sec. 90(2). Where Central Government has entered into agreement with Government of any other country outside India under sub-s. (1) for granting relief of tax, or as case may be, avoidance of double taxation then in relation to assessee to whom such agreement applies, provisions of this Act, shall apply to extent they are more beneficial to that assessee." 2 4 . payment in question by assessee to M/s HIAI attracts provisions of Indo-US DTAA. payment in question if at all will be taxable in hands of M/s HIAI in India only if it is payment for included services within meaning of art. 12(4) of said DTAA and not taxable in India otherwise. sum in question cannot be taxed as business income, since M/s HIAI admittedly does not have PE in India. If income is considered as having accrued or arisen to M/s HIAI in India, yet they can be taxed in India only if they are fees for included services. Even if payment is considered as "fees for technical services" within meaning of IT Act, 1961, yet they cannot be taxed because fees for technical services and fees for included services under India-US DTAA have different meaning and they are not one and same. If Revenue wants to tax payment by assessee to M/s HIAI in hands of M/s HIAI in India it has to bring its case within ambit of art. 12(4) of DTAA, i.e., fees for included services. payment in question would, therefore, have to be judged in context of DTAA as to whether it is taxable in India or not. 25. We shall now revert to art. 26(3) of DTAA which deals with non- discrimination. To illustrate as to what extent non-discrimination clause would apply, we may make reference to such clauses in OECD Model of "Double Taxation Convention". Organisation for Economic Co-operation and Development ("OECD") is organization, comprising of member countries, for economic co-operation. Its fiscal committee had taken up for consideration study of questions relating to double taxation and of other fiscal questions of similar technical nature. committee after examining methods by which taxation can be used to promote improved allocation and use of economic resources, both domestically and internationally and after considering ways of increasing effectiveness of taxation as policy instrument for achieving Government objectives, have made model Double Taxation Convention. member countries generally use this model as basis for negotiating Double Taxation Conventions. India is not member of OECD. We may at this stage Taxation Conventions. India is not member of OECD. We may at this stage set out provisions of non-discrimination as contained in OECD model. Article 24(4) of OECD model is inpari materiathe same as that of art. 26(3) of Indo-US DTAA and same reads thus : "Article 24(4) : Except where provisions of para 1 of art. 9, para 6 of art. 11 or para 4 of art. 12, apply, interest, royalties and other disbursements paid by enterprise of Contracting State to resident, of other Contracting State shall, for purpose of determining taxable profits of such enterprise, be deductible under same conditions as if they had been paid to resident of first mentioned State." [Other portion of art. 24(4) are not repeated as they are not relevant to present issue]. Mr. Philip Baker, Author of book on"Double Taxation Conventions and International Tax Law",A manual on OECD model tax convention on Income and on capital, 1992, Second Edn. at pp. 396 to 397 has following to say on art. 24(4). "Article 24(4) : Deduction of interest, royalties and other disbursements 24-18 Article 24(4) is not concerned with discriminatory treatment of nationals, etc. of one State in other Contracting State, but treatment of enterprises of Contracting State under tax law of that State. Subject to position where special relationship exists between enterprise and recipient, interest, royalties and other disbursements paid to resident of other Contracting State should be deductible to same extent that they would be deductible if paid to resident of same State. Thus this prevents indirect discrimination which would arise if sums were not deductible. similar provision is included in article relating to deduction of debts owed to residents of other Contracting State in determining taxable capital of enterprise." At p. 411, following commentaries are found on art. 24(4) : "This paragraph is designed to end particular form of discrimination resulting from fact that in certain countries deduction of interest, royalties and other disbursements allowed without restriction when recipient is resident, is restricted or even prohibited when he is non-resident. same situation may also be found in sphere of capital taxation, as regards debts contracted to non-resident. It is however open to Contracting States to modify this provision in bilateral conventions to avoid its use for tax avoidance purposes". 26. As already observed by us provisions of s. 40(a)(i) as it existed prior to its amendment by Finance Act, 2003, w.e.f. 1st April, 2004 provided for disallowance of payment made to non-resident only where tax is not deducted at source on such payment at source. similar payment to resident does not result in disallowance in event of non-deduction of tax at source. Thus non- resident left with choice of dealing with resident or non-resident in business would opt to deal with resident rather than non-resident owing to provisions of s. 40(a)(i). To this extent non-resident is discriminated. Article 26(3) of Indo-US DTAA seeks to provide against such discrimination and says that deduction should be allowed on same condition as if payment is made to resident. Thus this clause in DTAA neutralizes rigour of provisions of s. 40(a)(i). By virtue of provisions of s. 90(2) law which is beneficial to assessee to whom DTAA applies, should be followed. We, therefore, hold that in view of art. 26(3) of Indo-US DTAA, AO cannot seek to invoke provisions of s. 40(a)(i) of Act to disallow claim of assessee for deduction even on assumption that sum in question is chargeable to tax in India. We however make it clear that question whether sum is chargeable to tax is left open for adjudication by appropriate forum in appropriate proceedings already referred to in this order. 27. This takes us to question (B) framed by us, viz., if sum in question is held to be not chargeable to tax and consequently not disallowable under s. 40(a)(i) of Act whether disallowance of sum attributable for period from 1st Jan., 2000 to 31st March, 2000 can be said to be prior period expenses or can it be said that liability accrued or arose to assessee only in previous year relevant to asst. yr. 2001-02. As far as this question is concerned, plea of assessee has been that since agreement with M/s HIAI is dt. 11th Sept., 2000 and since period from 1st Jan., 2000 to 31st March, 2000 was first period for which M/s HIAI raised bill for services rendered to was first period for which M/s HIAI raised bill for services rendered to assessee, it was not possible for them to even make estimate of expenditure and make claim for deduction on notional basis in asst. yr. 2000- 01. assessee also pointed out that M/s HIAI prepares its books of account on calendar year basis and that only in June, 2000 it raised bill on assessee for services it rendered to assessee. assessee further submitted that since payments to M/s HIAI without permission of RBI was contrary to provisions of FERA, 1973 or rules prescribed under said Act, no expenditure can be said to have accrued or arisen to assessee till such time RBI grants permission for remittances to M/s HIAI. assessee pointed out that only on 30th June, 2000 permission of RBI was received. assessee, therefore, pointed out that expenditure had accrued only in previous year relevant to asst. yr. 2001-02. 27.1 learned counsel for assessee reiterated plea as was raised before Revenue authorities. Reliance was placed by him on following decisions for proposition that where particular act is prohibited under provisions of any law without obtaining approval of authority then it cannot be said that until and unless such approval is obtained, payment which is dependent on such approval, can be said to have accrued as liability. [Nonsuch Tea Estate Ltd. vs. CIT 1975 CTR (SC) 20 : (1975) 98 ITR 189 (SC),CIT vs. John Fowler (India) Ltd. (1999) 239 ITR 312 (Bom),CIT vs. Kirloskar Tractors Ltd. (1998) 148 CTR (Bom) 121 : (1998) 231 ITR 849 (Bom)]. learned Departmental Representative on other hand relied on order of Revenue authorities and also placed reliance on decision of Hon ble Supreme Court in case ofAssociated Cement Companies Ltd. vs. Commr. of Customs 128 ELT 21 (SC)wherein Hon ble Supreme Court has held that grant of permission by RBI for remittance in connection with import o f drawings and designs cannot be construed and be held as decisive in proceedings before customs authorities under Customs Act, 1962 where question is whether they were goods chargeable to customs duty. 28. We have considered rival submissions. It is not in dispute that as per provisions of FERA, 1973, payment by assessee to M/s HIAI could not be made by assessee without obtaining approval of RBI. It is also not in dispute that RBI granted approval for remittances by assessee to M/s HIAI only by its letter dt. 30th June, 2000. Hon ble Supreme Court in case ofNonsuch Tea Estates Ltd.(supra) was concerned with case where assessee paid remuneration to managing agent which required permission of Central Government under provisions of Companies Act, 1956 for their appointment. assessee was following mercantile system of accounting. Though remuneration paid by assessee related to period prior to asst. yr. 1959-60 assessee claimed same as deductible expenditure in asst. yr. 1959-60 on ground that Central Government s approval was obtained only in previous year relevant to asst. yr. 1959-60. Hon ble High Court did not agree with plea of assessee. Hon ble Supreme Court however reversed decision of Hon ble High Court and held that liability arose only when approval was given by Central Government for appointment of managing agent. In case ofJohn Fowler India Ltd.(supra) Hon ble Bombay High Court has held that liability towards royalty accrued only when Government of India granted approval to agreement. decision of Hon ble Supreme Court in case ofAssociated Cement Companies Ltd.(supra) relied upon by learned Departmental Representative is in different context. In said case Court held that purpose of grant of approval by RBI for remittance is from viewpoint of implications of Foreign Exchange outflow and that it had no impact on adjudication under Customs Act as to whether payment for which permission was granted by RBI was for rendering services or for import of goods. Considering law laid down in aforesaid judicial pronouncements, relied upon by learned counsel for assessee, we are of view that claim of assessee that expenses for period 1st Jan., 2000 to 31st March, 2000 accrued as liability to assessee only during previous year and action of Revenue authorities holding that it is prior period expenses cannot be sustained. expenditure claimed for this period is, therefore, directed to be allowed as deduction. 2 9 . next point that arises for consideration is as to whether Revenue authorities were justified in disallowing claim of assessee for deduction in respect of fees paid to M/s HIAI for period relating to 1st Jan., 2001 to 31st March, 2001. As far as fee payable for this period is concerned, reason given by AO for making disallowance was since payment to M/s HIAI required consent of RBI and since there was no evidence to show that assessee did apply for such permission to RBI for period subsequent to 31st Dec., 2000 it was evident that assessee treated this liability as non-existent. AO also noticed that even in subsequent years assessee has not made any provisions for its liability on this account. AO, therefore, disallowed claim for expenditure for period relating to 1st Jan., 2001 to 31st March, 2001. As far as expenditure for this period is concerned, there is no dispute that RBI permission was not required on or after 1st June, 2000 consequent to repeal of FERA, 1973 and introduction of FEMA, 1999. Under FEMA, 1999, payment in question by assessee to M/s HIAI would fall in category of current account transaction and, therefore, it did not call for any permission from RBI and authorised dealers were permitted for making remittances in connection with current account transactions. In view of above payment for this period did not require permission under any other law. Though assessee did not receive any bill for this period from M/s HIAI it had made estimate of amount payable to M/s HIAI for this period on basis of bill that it had received from M/s HIAI for period 1st Jan., 2000 to 31st Dec., 2000. This was reasonable basis on which assessee could claim liability as having accrued. Hon ble Supreme Court in case ofBharat Earth Movers vs. CIT (2000) 162 CTR (SC) 325 : (2000) 245 ITR 428 (SC)has stated law in this regard as follows : "The law is settled : if business liability has definitely arisen in accounting year, deduction should be allowed although liability may have to be quantified and discharged at future date. What should be certain is incurring of liability. It should also be capable of being estimated with reasonable certainty though actual quantification may not be possible. If these requirements are satisfied liability is not contingent one. liability isin praesentithough it will be discharged at future date. It does not make any difference if future date on which liability shall have to be discharged is not certain." 30. liability of assessee in present case has, therefore, to be held as accrued and arisen during previous year relevant to asst. yr. 2001-02 and, therefore, claim made by assessee for deduction deserves to be accepted. AO is directed to allow same. 31. We, therefore, hold that claim of assessee for deduction of entire sum of Rs. 5,83,68,396 being administrative fee paid to M/s HIAI should be allowed as deduction. AO is directed to allow deduction accordingly. third ground of appeal of assessee is allowed, to extent and on basis indicated above. 32. In ground Nos. 4 and 4.1 assessee has challenged action of Revenue authorities in disallowing claim for deduction of expenditure of sum of Rs. 53,63,731 being expenditure incurred for improvements carried out in respect of premises taken on lease by assessee. reasons given by Revenue authorities for making disallowance was that expenditure was of capital nature. It is seen from order of AO as well as order of CIT(A) that none of them have considered nature of expenses before concluding that they were of capital nature. details of expenditure are as follows : "Details of leasehold improvements during financial year 2000-01 : Date Particulars Amount Rs. Wood work, aluminium 19.6.2000 3,500.00 lock, wiring board 30.12.2000 Interior work 18,55,278.52 Renovation work at 26.06.2000 71,600.00 Koramangala Vinyl flooring, anodysed 20.10.2000 60,000.00 aluminium partitions Renovation work at 31.05.2000 25,98,264.69 Mumbai Electrical work at 31.05.2000 4,92,469.91 Mumbai 31.08.2000 Water proofing work 18,000.00 Rectangle awning in two 30.12.2000 58,000.00 parts 12.06.2000 Wooden steps 17,700.00 14.08.2000 Interior work 1,08,331.12 5.09.2000 Meha designers 27,066.50 Sign palates, fixing of 31.10.2000 53,521.00 flyer /drawers Total : 53,63,731.74 33. It is noticed that in respect of individual items of expenditure listed above, assessee had furnished details as well as copies of bills and same are placed at pp. 140 to 186 of assessee s paper book. On perusal of various bills as well as nature of expenses narrated above, it is clear that expenditure did not create benefit of enduring nature to assessee. These expenses have been incurred with view to enable assessee to carry on its business more effectively. nature of expenses involved carrying out some alterations to flooring, carrying out of some interior work, carrying out wooden panelling, wooden partition, installing false ceiling, installation of electrical fittings and wiring, etc. Perusal of above, in our view, clearly shows that expenditure in question cannot be considered as capital expenditure. After insertion of Expln. I to s. 32 of Act, even in respect of leased premises if assessee or lessee incurs capital expenditure, he can only claim depreciation. But as already stated, expenditure in present case is not of capital nature, and, therefore, disallowance made by Revenue authorities cannot be sustained. similar issue had come up for consideration in assessee s own case in asst. yrs. 1999-2000 and 2000-01 in ITA Nos. 3098 and 2664/Del/2004. This Tribunal on identical facts had held that claim for deduction made by assessee had to be allowed. Tribunal held that these expenditure were necessary for day-to-day working of assessee smoothly and it was necessary and was to facilitate carrying on business of assessee. In view of above disallowance made by Revenue authorities cannot be sustained, same is directed to be deleted. 34. In fifth ground of appeal assessee has challenged action of Revenue authorities in disallowing sum of Rs. 5,97,184 on account of foreign exchange fluctuation loss. In grounds of appeal assessee has however mentioned figure at Rs. 73,17,184 which is mistake as admitted by learned Authorised Representative before us. As far as this issue is concerned, total of loss on foreign exchange fluctuation is given at p. 187 of assessee s paper book 1 which is as follows : Summary of foreign exchange loss transactions during year 2000-01 Rs. On account of technical know-how fees $ 2 67,20,000.00 Million Imports 8,06,243.03 Expenses on travel, communication costs etc. (55,584.90) Loan 3,01,674.29 Administration Fee (4,55,148.00) 35. It is not in dispute that assessee has been consistently following system of accounting for recording exchange variation both when it is loss as well as when there is gain as on last day of every financial year. It is also not in dispute that foreign exchange fluctuation is not on capital account. According to Revenue authorities loss or gain for foreign exchange should be taken only at time of remittance and only then there can be accrual. This issue has been considered by Special Bench of Tribunal in case ofOil & Natural Gas Corpn. Ltd. vs. Dy. CIT (2002) 77 TTJ (Del)(SB) 387 : (2002) 83 ITD 151 (Del)(SB). said Bench has held that in case where assessee consistently follows system of accounting by which fluctuation in foreign exchange currency is duly accounted for at end of accounting year, same cannot be said to be notional and it cannot be said that assessee could claim fluctuation loss or gain only in year when loan was actually repaid. Tribunal held that loss was not notional loss and was to be allowed as deduction. Tribunal also referred to AS-2 of Institute of Chartered Accountants of India (the assessee in present case follows such accounting standard). In view of above loss on account of foreign exchange claimed by assessee deserves to be allowed. 5th ground of appeal is accordingly allowed. 36. In ground No. 6, grievance of assessee is against action of CIT(A) in confirming view of AO that books of account are unreliable and sustaining lump sum (addition) of Rs. 5 crores on this count. brief facts are as follows. AO found that assessee had claimed deduction of Rs 2,56,17,272 by way of debit to P&L a/c on account of obsolete/damaged inventory. During course of assessment proceedings AO show caused assessee to submit details and justify write off. assessee was further required to submit reconciliation of each of items written off vis-a-vis opening stock, production, sale and closing stock. In response, assessee submitted that finished goods were written off as there was huge pile-up of inventory and products had become unfit to be sold. However, reconciliation of stocks did not tally inasmuch as opening stock plus receipts less issues and write off did not tally with closing stock. quantitative reconciliation statement prepared by assessee also differed from quantitative figures of opening and closing stocks shown in audited balance sheet and P&L a/c for year under consideration. In this background AO concluded as under : "I, therefore, based on findings above, hold that manufacturing and trading accounts of assessee are not correct and complete. Its opening and closing stocks are not tallying as per its own stock records. production of each of products is also not reflected correctly in stock records, since only balancing figure is taken. sales in different statements submitted are varying and are not reliable. I, therefore, proceed to determine trading income of assessee to best of my judgment. In current year income of assessee to best of my judgment. In current year assessee has debited manufacturing costs which is 28.8 per cent of its sales whereas in preceding year manufacturing costs was 19.6 per cent of sales. sharp increase in cost of manufacture, coupled with inability of assessee to reconcile its production, sales, stock write off and opening and closing stock, further lead me to believe that he assessee has not recorded its transactions fully and truly in its books of account. Even taking into account inflation, slump in sales in later part of year, etc. increase in cost of production is found to be disproportionate. I, therefore, make lump sum addition of Rs. 5 crores to income of assessee on account of its manufacturing and trading operations in view of disproportionate increase in manufacturing costs and unreliable nature of assessee s books." 37. Aggrieved with aforesaid, assessee carried matter in appeal before CIT(A). In appeal, assessee contended that since AO had taken up this issue at fag end of proceedings, assessee did not have adequate time to properly explain reconciliation statements filed before AO, but nevertheless admitted that discrepancies existed. At that stage, assessee, in order to completely reconcile its stock statements, approached firm of chartered accountants to carry out independent exercise to ascertain discrepancies, if any, in stock position for year under consideration. report revealed discrepancies in stock statements of assessee with profit for year being understated by sum of Rs. 72,36,139. assessee submitted such report to CIT(A) as additional evidence under r. 46 of IT Rules. 1962. assessee also submitted that discrepancies were not such so as to merit rejection of manufacturing and trading results of assessee. However, CIT(A) has declined to admit additional evidence on ground that report was only attempt to patch up discrepancies noted by AO in records maintained by assessee. CIT(A) also sustained addition made by AO. assessee is presently in appeal before us. 3 8 . Before us, learned counsel for assessee has assailed decision of CIT(A) in rejecting prayer of assessee for submission of additional evidence and not examining same on merits. According to learned counsel approach of CIT(A) was not guided by principles of natural justice and fairplay. On merits, learned counsel explained that discrepancies in stock statements were primarily on account of use of different softwares in maintaining inventory transaction and financial books of account. inventory taken on basis of oracle software accounting system was compared with stock statements and discrepancies noticed were attempted to be reconciled by firm of chartered accountants appointed for carrying out this exercise. learned counsel has vehemently submitted that estimation made by lower authorities was highly unjustified and basis adopted was not justified, on facts. It was further submitted that profit for year, if at all, may be increased by amount of Rs. 72,36,139 in terms of report of independent firm of chartered accountants. 39. learned Departmental Representative has defended orders of lower authorities by placing reliance on reasonings taken by them resulting in addition based on estimate basis. 40. We have considered rival submissions. At outset, we may state that insofar as discrepancies in stock statements is concerned, assessee itself does not seriously dispute that same exist. central explanation of assessee for difference is on account of inventory software package which was introduced by assessee in this year. Without going into merits of same, it is safe to deduce that discrepancies are such so as to impact profits declared by assessee in its books of account. Thus, unreliability of manufacturing and trading results reflected in assessee s P&L a/c attached with return of income stands established and has been rightly ignored by AO. Now, it brings us to next stage, i.e., efficacy of estimated addition of Rs. 5 crores made on this count. AO has observed that in year under consideration manufacturing costs are 28.8 per cent of sales as against 19.6 per cent in preceding year. Coupled with unreliability of manufacturing and trading results AO made estimate of Rs. 5 crores. assessee has explained that major increase is on account of excise duty component which has increased from .65 per cent to 10.18 per cent and, therefore, proportion of increase in manufacturing costs 10.18 per cent and, therefore, proportion of increase in manufacturing costs cannot be yardstick to estimate impact on income. Similarly, increase in proportion of conversion costs, freight, etc. also cannot be sole basis to estimate impact of discrepancies on profits. We find that assessee has ample force in its stand inasmuch as turnover of assessee in preceding year was primarily of traded goods whereas in current year proportion of manufacturing goods has increased substantially. Nevertheless, it is inevitable that any process of estimation would involve element of guesswork, but it is to be based, as far as possible, on basis of material on record. In instant case, we find that entire dispute had arisen when AO started verification exercise of write off of obsolete damaged stocks claimed by assessee. stocks record maintained was found to be unreliable for same being unreconciled. In entire exercise, there is no material or evidence that assessee has carried out any sales outside books of account. In our view, having regard to facts and circumstances, in interest of justice and to plug leakage of revenue, it would be appropriate if addition of Rs. 3 crores be made to income of assessee to cover impact on profits on account of unverifiable discrepancies in stock records. order of CIT(A) is accordingly modified. assessee partly succeeds on this count. 41. In result, appeal of assessee is partly allowed. *** HERBALIFE INTERNATIONAL INDIA (P) LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX