This appeal by Revenue is against order of CIT(A)-XI, Mumbai dt. 30th June, 2004 for asst. yr. 2001-02. Revenue has raised following grounds: "(1) On facts and in circumstances of case and in law, learned CIT(A)-XI has erred in deleting addition of Rs. 43,11,694 made by AO under s. 40(a)(i) of Act in respect of transponder charges/uplinking charges paid by assessee to foreign company M/s Shim Satellite Public Co. Ltd., Thailand. (2) On facts and in circumstances of case and in law, learned CIT(A)-XI has erred in deleting expenditure of Rs. 11,53,806 out of total expenditure of Rs. 14,46,892 disallowed by AO on ground that Sanskar T.V. had not started commercial operation during year. (3) On facts and in circumstances of case and in law, learned CIT(A)-XI has erred in directing AO to allow depreciation under s. 32 of IT Act on software development expenses amounting to Rs. 15,10,885 at 25 per cent applicable to plant and machinery though no evidence filed by assessee during assessment proceedings that business of Sanskar T.V. started during year. (4) On facts and in circumstances of case and in law, learned CIT(A)-XI has erred in directing AO to allow 90 depreciation of Rs. 5,19,956 under s. 32 of IT Act, in respect of Cinemax Equipments & Computers though no evidence filed by assessee during assessment proceedings that business of Sanskar T.V. started during year. (5) On facts and in circumstances of case and in law, learned CIT(A)-XI has erred in admitting new evidence as certificate dt. 10th May, 2004 from M/s Star in contravention of r. 46A of IT Rules, 1961." learned Departmental Representative submitted that amount of transponder charges/rent paid to M/s Shim Satellite Public Co. Ltd. for purpose of uplinking of TV channel in its broadcasting through satellite should be covered by provisions of s. 195 of Act and consequently disallowance made under s. 40(a)(i) by AO should be upheld. It was submitted that CIT(A) has erred in allowing expenditure stating that provisions of s. 195 of IT Act, 1961 are applicable w.e.f. 1st April, 2002 and not before. It was submitted that provisions of s. 9(1)(vi) were always applicable and consequently, as no withholding of tax was made, disallowance made by AO should be upheld. With reference to ground Nos. 2 and 5 it was submitted that AO made disallowance of Rs. 14,46,892 and CIT(A) gave relief of Rs. 11,53,806 holding that channel was set up on 15th Nov., 2000. issue of starting on 15th Nov., 2000 was not before AO and CIT(A) has accepted certificate from STAR dt. 10th May, 2004 without referring matter to AO in contravention to r. 46A. Since this issue is inter-linked with starting up of business it was submitted that matter should have been restored to AO. With reference to ground Nos. 3 and 4 it was submitted that issue is claim of depreciation on software development and issue can be restored back to AO in view of Tribunal, Delhi Special Bench decision in case of Amway India Enterprises vs. Dy. CIT, dt. 15th Feb., 2008 [reported at (2008) 114 TTJ (Del)(SB) 476 Ed.]. learned Authorised Representative, however, submitted that enough evidences were placed before AO to prove that company has started its operation w.e.f. 15th Nov., 2000, but same were not discussed in order and these facts were analysed by CIT(A) and gave necessary relief and he supported order of CIT(A). It was further submitted with reference to provisions of s. 9(1)(vi) particularly cl. (iva) in Expln. 2 that use of transponder was covered by amendment/provision introduced w.e.f. 1st April, 2002 by Finance Act, 2001. Continuing further learned Authorised Representative submitted that explanatory note attached to Finance Bill has this explanation which was again reiterated in Circular No. 14 of 2001 [(2002) 172 CTR (St) 13: (2001) 252 ITR (St) 65]. said explanatory note is as under: "Under existing provisions contained in cl. (vi) of sub-s. (1) of s. 9, income by way of royalty payable is deemed to accrue or arise in India subject to certain conditions. term royalty has been defined in Expln. 2 to this clause. definition of term royalty as used in DTAA entered into by India includes inter alia payments for use of, or right to use, industrial, commercial or scientific equipment . Presently, these payments are not included in definition of royalty in aforesaid explanation. result is that income from leasing of industrial, commercial or scientific equipment becomes taxable in source company as business income only. Consequently there is no withholding tax on such payments as taxpayer takes shelter under definition of term royalty as provided in IT Act since same is more beneficial to him. It is therefore, proposed to amend s. 9 so as to widen scope of term royalty as provided in Expln. 2 of cl. (vi) of sub-s. (1) of s. 9 so as to include in its ambit consideration for use of or right to use, industrial, commercial or scientific equipment. proposed amendment will take effect from 1st April, 2002 and will accordingly, apply in relation to asst. yr. 2002-03 and subsequent assessment years." Relying upon above explanatory note learned Authorised Representative submitted that transponder hire charges/uplinking charges received by foreign satellite owner from Indian company is not taxable in India. There is no continuity of relationship as transponder hire and uplinking is isolated transaction and hence there is no PE or business connection of foreign satellite owner said to exist in India. Therefore no part of income is said to be attributable to Indian operations consequently there is no need to deduct tax for year under consideration. Consequent to said amendment, it was submitted assessee deducted tax and paid w.e.f. 1st April, 2001. He supported order of CIT(A) on this issue. Before adverting to arguments it is necessary to state brief facts. assessee company entered into Digital Broadcast Service Agreement dated, first day of June, 2000 with Shim Satellite Public Company Ltd., Thailand. As per agreement these are important terms: "Whereas (a) SSA agrees to provide to customer Digital Broadcast Service as specified in Appendix B (the service ). (b) Customer desires to obtain service from SSA for purpose of transmitting one digital television channel through Thaicom-3 Satellite on MCPC platform. (c) SSA and customer therefore agree to enter into Digital Broadcast Service Agreement (the "Agreement") under terms and conditions set forth herein. (d) Agreement is subject to all approvals from RBI and other statutory authorities of India. Provision of service SSA hereby agrees to provide to customer and customer agrees to acquire from SSA service at full time basis. beam frequencies and transponder forming part of service shall be set forth in Appendix C. SSA may change or replace such frequency(ies) or transponder(s) with other frequency(ies) or transponder(s) on satellite or other satellite(s), provided that 3 months prior written notice is given to customer. Service fee service fee and payment schedule shall be as specified in Appendix A. In event any payment is not received by SSA on due date, additional charge (the late payment charge ) @ 2 per cent per month shall be imposed on overdue amount from due date, until SSA receives overdue amount in full. Customer agrees that such suspension is not breach of this agreement. During suspension period, customer shall be obligated to pay service fee and late payment charge. Appendix to above agreement contains details of service fee payment. Appendix B is with reference to terms of Digital Broadcast Service which include service description and source signal provision by customer. Appendix C is with reference to technical specifications of orbital location, etc. There was modification to Appendix C vide amendment to agreement entered on 7th Dec., 2000 regarding changes in technical specifications. This agreement was further amended by another amendment dt. 24th Jan., 2002 mainly for Appendix for payment schedule." foreign satellite company is governed by DTAA between Government of India and Government of Kingdom of Thailand which was notified in GSR 915(E), dt. 27th June, 1986, in (1986) 161 ITR (St) 82. As per DTAA terms of PE, royalty were defined art. 12 of above DTAA defines royalties as under: "The term royalties as used in this article means payments of any kind received as consideration for alienation or use of, or fright to use, any copyright of literary, artistic or scientific work (including cinematograph films, phonographic records, and films or tapes for radio or television broadcasting), any patent, trademark, design or model, secret formula or process, or for use of, or right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." Sec. 40(a)(i) of IT Act, which is material for this is as under: "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 April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable, (A) outside India; or (B) in India to non-resident, not being company or to foreign company, on which tax is deductible at source or, after deduction, has not been paid during previous year, or in subsequent year before expiry of time prescribed under sub-s. (1) of s. 200: Provided that where in respect of any such sum tax has been deducted in any subsequent year or, has been deducted in previous year but paid in any subsequent year after expiry of time prescribed under sub-s. (1) of s. 200, such sum shall be allowed as deduction in computing income of previous year in which such tax has been paid. Explanation For purposes of this sub-clause, (A) royalty shall have same meaning as in Expln. 2 to cl. (vi) of sub- section 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;" As can be seen from above any amount of royalty or fees for technical services or other sum chargeable under this Act, which is payable outside India on which tax is deductible at source cannot be allowed as deduction under head Profits or gains of business or profession unless tax is deducted and paid. Now issue to be considered is whether transponder charges paid/payable to foreign satellite company 16 covered by either definition of royalty or by fees for technical services or other sum chargeable under this Act. It is contention of learned Authorised Representative that provisions s. 9(1)(vi) are amended w.e.f. 1st April, 2002 by amending Expln. 2 by including cl. (iv)(a). Consequently, till such time hire of transponder does not come within purview of royalty and hence provisions of s. 40(a)(i) were not applicable. We are not in agreement with this claim of assessee for reason that Digital Broadcast Service Agreement is for providing service for digital broadcast only. service description in Appendix B is as under: "1. Service description SSA shall provide digital channel including video and audio signal for broadcasting customer s television programs. SSA shall provide Digital Broadcast Service at Thaicom Teleport & DTH Centre (The Teleport Facilities ) located in Pranthum Thani Province, Thailand. SSA shall provide Digital Broadcast Service as MCPC platform. SSA shall provide Digital Broadcast Service by means of equipment including digital compression system and uplink system, and personal located at Teleport facilities. Digital Broadcast Service shall begin from receiving source signal in PAL format including video and audio signals from tape play system feed source signal into encoder to encode source signal in stream of 4 Mbps for one digital channel without any encryption and multiplex this stream into one MPEG-2/DVB transport stream of MCPC platform then fed into uplink system from equalizer through upconverter and other subsequent RF equipment then transmitted to space segment capacity of transponder on Thaicom-3 Satellite located at 78.5 degree east directly provided by SSA as specified in Appendix C. All equipment used for Digital Broadcast Service shall be equipment already installed at Teleport Facilities and used at discretion of SSA only. Customer shall be responsible for its own requirement of any specific and/or additional equipment. source signal shall be provided by customer." As can seen from terms of agreement assessee is getting comprehensive service as part of digital broadcast of their programmes on M C P C platform at Thaicom Teleport & DTH Centre. These service provisions cannot equated with simple hire of transponder as "equipment" to be governed by amended provision as canvassed by learned Authorised Representative. Whether any process is used or any services in connection with process are provided and whether same fell within meaning of term Royalty was already been considered by Hon ble Tribunal Delhi "C" Bench in case of Asia Satellite Telecommunications Co. Ltd. vs. Dy. CIT (2003) 78 TTJ (Del) 489: (2003) 85 ITD 478 (Del). In that case issue was whether rental charges for hiring transponder capacity was covered by definition of royalty. issue was considered and held as under: "Income deemed to accrue or arise in India Royalty Rental charges for transponder capacity Assessee making available transponder capacity to TV channels It was receiving signals from its customers, i.e., TV channels, by way of uplinked beam, changing its frequently, amplifying same and relaying it from transponder or satellite to cable operators in India Signals sent by customers come into contact with process in transponder Thus, TV channels were clearly using transponder capacity for carrying on their business in India Word secret occurring before word formula in cl. (iii) of Expln. 2 to s. 9(1)(vi) cannot be prefixed to process as well What TV channels were using was process made available by assessee through its transponder Transponder, which is part of satellite, cannot be termed as equipment and hence leasing out of transponders cannot be equated with leasing out of any equipment Therefore, contention that rental income could be charged to tax only after cl. (iva) of Explanation came into effect is not acceptable Merely because lease rentals were fixed on annual basis it cannot be said that payment is for any consideration other than, rendering of said services Activity which is resulting into income in hands of TV channels who are non-residents is ultimate viewership of programmes transmitted by them in footprint areas including India Thus, these TV channels were not only carrying on their business in India but were also earning income from source in India Accordingly lease rent paid by TV channels to assessee was royalty within meaning of s. 9(1)(vi) r/w Expln. 2. transponder is not equipment itself. In other words, it is not capable of performing any activity when divorced from satellite. It was fairly conceded by Authorised Representative that transponder in itself without other parts of satellite is not capable of performing any functions. Rightly so because satellite is not plotted at fixed place. It rotates in same direction and speed as earth. If it had been fixed at particular place or speed or direction had been different from that of earth, it could not have produced desired results. Transponder is part of satellite, which is fixed in satellite and is neither moving in itself nor assisting satellite to move. Therefore, satellite is equipment and transponder, namely, part of it, playing howsoever important role, cannot be termed as equipment. Hence, leasing out of transponders to various customers in satellite cannot be equated with leasing out of any equipment. Therefore, contention of Authorised Representative with reference to applicability of cl. (iva) of Explanation to present case is not acceptable for reason that assessee has not leased out any equipment (satellite) but has only made available process (in transponder) to its customers. Therefore, consideration paid by TV channels to assessee has no connection with cl. (iva) and falls within cl. (iii) r/w cl. (vi) of term royalty as explained in Expln. 2." above said decision was given in context of Foreign Satellite Company. But service provisions are applicable equally in assessee s case as assessee is getting services as part of agreement and not simple hire of "equipment". In fact payment made to Foreign Satellite Company are clearly termed as service fee vide cl. 4 of Agreement. original invoices given by said Shim Satellite Public Company is for transponder service fee only (copies placed on record as part of paper book). Thus charges paid by assessee cannot be termed as hire charges. permission from RBI is placed at p. 10 of paper book. This is extract of letter to assessee dt. 21st Dec., 2000. Hiring of transponder and uplinking services abroad We advise that you have our permission for hiring of transponder on Thaicom-3 Satellite and uplinking services from M/s Shim Satellite Co. Ltd., Thailand at annual service fee of US $ 2,50,000 for period between August, 2000 to July, 2001. service fee is inclusive of security deposit of US $ 1,04,167 and is adjustable within period of sanction. approval is also subject to following conditions: (a) You will start uplinking facility from India as soon as you are permitted uplinking through VSNL s own earth station are not later than two years of issue of this NOC. (b) You will adhere to programme and advertising code. We further advise that remittance towards service fee shall be allowed on production of following documents: Original invoices from M/s Shim Satellite Co. Ltd., Thailand. Income-tax paid challan As can be seen from above RBI permission also fee is considered as annual service fee which include hiring of transponder and uplinking services. only conclusion that can be drawn from above facts is that fee paid by assessee company is not hire charges for equipment but fee for services in domain of Digital Broadcast. Thus transponder service fee paid by assessee company to foreign company are covered by definition of royalty and as this sum is chargeable to tax under Act assessee should have deducted tax and consequently provisions of s. 40(a)(i) are applicable in this case. Not only that, in case of Satellite Television Asian Region Ltd. vs. Dy. CIT (2006) 99 TTJ (Mumbai) 1025: (2006) 99 ITD 91 (Mumbai) (wherein one of us is party) issue of deduction of similar amount is considered and expression any person responsible for paying to non-resident occurring in s. 195 of IT Act was considered and held as under: "Sec. 195 of IT Act, 1961 Deduction of tax at source Payment to non-resident Assessment year 2000-01 Whether situs of payment or source o f payment is not relevant consideration while applying provisions of s. 195; emphasis in s. 195 is on chargeability Held, yes Whether therefore, if payment is made to non-resident whether it is in India or outside India or in any manner, person making payment is liable for deducting tax at source Held, yes Sec. 40(a)(i), r/w s. 195, of IT Act, 1961 Business disallowance Interest, etc., payable outside India Assessment year 2000-01 Whether application of provisions of s. 40(a)(i) is one of inherent consequences coming out of violation of s. 195 and, therefore, before invoking provisions of s. 40(a)(i), AO is not required to establish chargeability to tax of payments in question Held, yes Sec. 9, r/w ss. 195 and 40(a)(i), of IT Act, 1961 Income Deemed to accrue or arise in India Asst. yr. 2000-01 Assessee, non-resident company incorporated in Hongkong, was carrying on business of selling airtime to various Indian advertisers through its advertising sales agent, namely, Star India (P) Ltd., company incorporated in India Assessee acquired airtime meant for advertisement from television channel companies which were also non-resident companies Assessee did not deduct tax at source while making payments to channel companies by way of costs of ad air time on ground that agreements between assessee and channel companies were on basis of principal-to- principal; and that amounts paid by it to channel companies against cost of airtime were not amounts chargeable to tax in India in hands of channel companies and, therefore, it was under no statutory obligation to deduct tax at source in course of making those payments to channel companies AO, however, held that assessee was bound to make deduction of tax at source while making payment to channel companies and as assessee had failed to do so, AO, invoking provisions of s. 40(a)(i), disallowed said payment Whether since on examination of nature of operations carried out by channel companies in their business of telecasting it was clear that ultimate delivery of programmes w s made by channel companies in India and outcome of all agreements entered into between assessee and channel companies and those of cable operators were all finally culminating in India, it could be said that channel companies were having business connection with India and assessee was companies were having business connection with India and assessee was acting as agent of channel companies Held yes Whether therefore, assessee was liable to deduct tax at source on payments made to channel companies Held yes Whether since assessee did not deduct tax at source on payments made to channel companies, AO was justified in disallowing payments made to channel companies under s. 40(a)(i) Held, yes" facts in present case are similar to facts of case considered above. As already discussed above assessee paid service fee to non-resident for use of transponder and uplinking facility in satellite and said sum was paid without deducting tax. Since amount paid is considered as royalty covered by provisions of s. 9(1)(vi) assessee should have deducted withholding tax as per provisions and failure to do so result in being denied with deduction under s. 40(a)(i) of Act. Further Hon ble Supreme Court in case of Transmission Corporation of A.P. Ltd. vs. CIT (1999) 155 CTR (SC) 489: (1999) 239 ITR 587 (SC) held that if assessee has made no application under s. 195(2) tax must be deducted under s. 195(1) and further held that provisions of s. 195 are wide enough to consider any sum payable under Act. In view of this amount paid by assessee company to foreign company for hiring transponder are indeed chargeable under Act and as no tax is deducted AO is correct in invoking provisions of s. 40(a)(i) and CIT(A) is not correct in deleting same. Support can also be drawn from decision of Hon ble Gujarat High Court in case of CIT vs. Vijay Ship Breaking Corpn. (2003) 181 CTR (Guj) 134: (2003) 261 ITR 113 (Guj) for proposition that having not made any TDS disallowance of amount under s. 40(a)(i) was justified. In above referred case issue was payment of interest by resident to non-resident and Hon ble High. Court of Gujarat considered provisions of s. 9(1)(v)(b) r/w s. 5(2) and s. 40(a)(i) and held that payment of accrued interest to foreign concerns is amount taxable and assessee was responsible for paying amount and there is liability to deduct tax on part of assessee and having failed to make deduction of tax from interest, disallowance of interest under s. 40(a)(i) was justified on facts of case. In this case as well, assessee is responsible for paying transponder charges to foreign company and there is liability to deduct tax on above sum as it is covered by definition of royalty as well as provisions of s. 195. For these reasons we are not in agreement with order of CIT(A) and so same was set aside. Grounds of Revenue are upheld. With reference to ground Nos. 2 and 4 of disallowance of expenditure prior t o incorporation and consequent allowance of depreciation on software expenses, matter is restored back to AO as apparently CIT(A) has accepted certificate dt. 10th May, 2004 which is subsequent to order dt. 16th March, 2004 and was not furnished before AO. In view of this while allowing ground No. 5 matter is restored back to AO to examine issue afresh. AO is directed to consider date of set up of business and allow expenses accordingly. AO also to consider allowance of depreciation in light of decision of Special Bench in Amway India Enterprises vs. Dy. CIT (2008) 114 TTJ (Del)(SB) 476: (2008) 111 ITD 112 (Del)(SB) and reconsider issue afresh keeping in view principles established therein. Consequently, matter is restored back to AO for reconsideration and passing necessary orders afresh. In result, appeal allowed. *** ASSISTANT COMMISSIONER OF INCOME TAX v. SANSKAR INFO. T.V.P. LTD.