2011 (3) TMI 446 - HC - Income Tax

TDS u/s 195 - Assessee in default - Tribunal held that payment of Daily Allowance by the assessee-company to the Japanese company and the expenses incurred by the assessee company on the Japanese engineers during their stay in India were not in the nature of fee and were not taxable u/s 115A read with Explanation 2 to Section 9(1)(vii) - Held that - If the assessee was not required to deduct tax at source and could not be declared assessee in default, question whether the payment was in the nature of fee for technical services or in the nature of reimbursement for the expenses incurred or whether Double Taxation Avoidance Agreement overrides the provisions of the Act, need not be gone into - Hence, the revenue has not been able to dispute the fact that there is no challenge to the finding that certificate issued to the assessee u/s 195(2) was never cancelled and in absence thereof, the assessee could not be treated as assessee in default.

Summary

Issues:
1. Interpretation of payment of Daily Allowance by the assessee-company to a Japanese company and expenses incurred on Japanese engineers.
2. Whether Double Taxation Avoidance Agreement between India and Japan overrides Income Tax Act provisions.

Issue 1:
The case involved a dispute regarding the nature of payments made by the assessee-company to a Japanese company for the assistance of Japanese engineers in training the assessee's engineers. The Assessing Officer treated the payments as charges for technical services, while the assessee claimed they were Dearness Allowance as per the agreement and not taxable income. The Tribunal analyzed the definitions of royalty and fees for technical services under Section 9(1) of the Income Tax Act. It concluded that the payments were not royalty or fees for technical services, as training did not fall under the definitions provided. The Tribunal also considered the Double Taxation Avoidance Agreement, stating that if any commercial profits were left with the Japanese company, they could not be treated as taxable income due to the agreement's provisions.

Issue 2:
The Tribunal examined the validity of the Assessing Officer deeming the assessee as a defaulter for not deducting tax at source on the payments. The Tribunal noted that the certificate granted under Section 195(2) was never cancelled under Section 195(4), meaning the assessee was not required to deduct tax at source and could not be declared a defaulter. As this finding was unchallenged, the Tribunal upheld that the questions regarding the nature of payments and the Double Taxation Avoidance Agreement need not be addressed. The Tribunal disposed of the reference accordingly, sustaining the order based on the unchallenged finding.

In conclusion, the judgment clarified that the payments made by the assessee to the Japanese company were not taxable as royalty or fees for technical services. Additionally, the Tribunal upheld that the assessee was not required to deduct tax at source due to the unchallenged finding regarding the certificate under Section 195(2). The Double Taxation Avoidance Agreement provisions were considered in determining the taxability of any commercial profits left with the Japanese company.