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1996 (5) TMI 385 - AAR - Income TaxThe amount of contribution received/ receivable to recover part of the cost of the technical assistance provided by the applicant under the provisions of its aid programme to the companies assisted by it in India is not an income of the applicant under the provisions of the Income-tax Act and not chargeable to tax. No amount of contribution received/ receivable to recover part of the cost of the technical assistance provided by the applicant under the provisions of its aid programme to the companies assisted by it in India is fees for technical services as defined in Explanation 2 to clause (vii) of sub-section (1) of section 9 of the Income-tax Act or in article 13. para. 4 of the Avoidance of Double Taxation Agreement with India and U. K.
Issues Involved:
1. Whether the contributions received by the applicant are income under the Income-tax Act and chargeable to tax. 2. Whether the contributions are fees for technical services as defined in the Income-tax Act or the Avoidance of Double Taxation Agreement (DTAA) between India and the UK. 3. Whether such fees, if considered technical fees, are chargeable to tax in India considering the applicant's memorandum and articles of association. Detailed Analysis: Issue 1: Taxability of Contributions as Income The applicant, a UK-based non-resident company, entered into agreements with Indian companies to provide technical assistance under an aid program. The contributions received from these Indian companies were questioned for their taxability under the Income-tax Act. The Authority examined the nature of these contributions, noting that DECTA, acting as an agent of the British Government's Overseas Development Administration (ODA), provided significant assistance to Indian companies. The contributions were described as a "token contribution" towards project costs, and the Authority concluded that these payments were not income but part of a joint arrangement to manage project expenses. Thus, the contributions were not considered taxable income under the Act. Issue 2: Contributions as Fees for Technical Services The Authority analyzed whether the contributions could be classified as "fees for technical services" under Explanation 2 to section 9(1)(vii) of the Income-tax Act or Article 13(4) of the DTAA. The Department argued that the contributions were consultancy charges for technical and managerial services, fitting the definition of fees for technical services. However, the Authority disagreed, emphasizing the spirit and terms of the project agreements. It was highlighted that DECTA executed the projects at its own expense, with only a portion of local expenses covered by the contributions. The contributions were not considered consideration for services but a pooling arrangement for project expenses. Therefore, the contributions did not meet the definition of fees for technical services under the Act or the DTAA. Issue 3: Chargeability of Technical Fees Considering Memorandum and Articles of Association The applicant argued that even if the contributions were deemed technical fees, they should not be taxable in India due to the non-profit nature of DECTA's operations, as outlined in its memorandum and articles of association. The Authority noted that the income of a charitable organization is still income but is exempt from tax only if it meets specific conditions under sections 11 to 13B of the Act. However, since the contributions were not considered income, this issue did not arise. Ruling: 1. The contributions received to recover part of the cost of technical assistance are not income under the Income-tax Act and are not chargeable to tax. 2. The contributions are not fees for technical services as defined in the Income-tax Act or the DTAA. 3. The question of taxability of such fees does not arise, given the conclusions on the first two issues. Conclusion: The Authority ruled that the contributions received by DECTA from Indian companies are neither taxable income nor fees for technical services under the Income-tax Act or the DTAA. Consequently, the question of their taxability considering DECTA's memorandum and articles of association does not arise.
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