2002 (12) TMI 43 - HC - Income Tax

Whether, Tribunal was right in law in holding that no tax was to be deducted at source on payment made by the assessee to AVL-Gesselschaft Fur Verbrennungskraftmachlan M.B.H. Austria for the feasibility study of improving the performance of the existing diesel engine 265 DI as the payment represented fees for technical services and not royalty? - In the circumstances, without going into the merits of the impugned order which is under section 195, since payment has already been made to the Austrian company, both the above appeals are dismissed as infructuous.

Summary

Issues:
- Determination of whether the payment made by the assessee to the Austrian company was for transfer of technology or for technical services, affecting the tax liability under the Income-tax Act, 1961.

Analysis:
The High Court of BOMBAY heard two appeals under section 260A of the Income-tax Act, 1961, which raised a common question regarding the tax liability of a payment made by the assessee to an Austrian company for a feasibility study to improve the performance of a diesel engine. The main issue was whether the payment represented fees for technical services or royalty. The facts revealed that the assessee entered into an agreement with the Austrian company for a feasibility study to enhance the diesel engine's performance, approved by the Government. The Assessing Officer initially required tax deduction at source on the payment, leading to appeals by the assessee up to the Tribunal. The Tribunal held that the payment was for technical services rendered outside India, thus not attracting tax liability in India. The Department appealed to the High Court challenging this decision.

In the arguments presented before the High Court, the Department contended that the payment was for transfer of technology, constituting royalty taxable under section 9(1)(vi) of the Act, rather than fees for technical services. It was argued that the agreement granted the assessee a worldwide right to use the designs and calculations, indicating a payment for royalty under the Act. However, the court observed a procedural issue with the Department's approach in such cases. The court noted that the Department often files appeals without seeking interim relief, leading to the assessee making payments without tax deduction at source by the time the appeal is heard, rendering the matter moot. The court emphasized that the Department should seek stay orders during regular assessment proceedings under section 195 to avoid such situations.

In the specific case at hand, the High Court found that the Department did not take necessary actions to prevent the payment to the Austrian company without tax deduction at source, despite the Tribunal's decision in favor of the assessee. Due to the payment already being made and the lack of instructions from the Department's counsel, the court dismissed both appeals as infructuous without delving into the merits of the impugned order. The court directed the office to inform the Chief Commissioner of Income-tax about the decision. The judgment highlighted the importance of procedural diligence by the Department to prevent situations where appeals become irrelevant due to payments made by the assessee without tax deduction at source.