1981 (6) TMI 42 - AT - Income Tax

Summary

Issues Involved:
1. Tax Deductibility on Payments to Non-Resident
2. Applicability of Double Tax Avoidance Agreement (DTAA)
3. Nature of Income (Industrial/Commercial Profits vs. Fees for Services)
4. Rate of Tax Deduction
5. Competency and Jurisdiction of Appeals

Detailed Analysis:

1. Tax Deductibility on Payments to Non-Resident:
The assessee, a limited company, requested the Income Tax Officer (ITO) to issue a no-objection certificate for remittances to Linde, a non-resident company, without tax deduction at source, arguing that Linde had no permanent establishment in India and was thus not liable to tax under the Double Tax Avoidance Agreement (DTAA) between India and Germany. The ITO directed the assessee to deduct tax at 40% on the gross amounts payable to Linde. The Commissioner upheld the ITO's view, leading the assessee to file appeals.

2. Applicability of Double Tax Avoidance Agreement (DTAA):
The assessee contended that under Article III of the DTAA, the payments to Linde were not taxable as Linde did not have a permanent establishment in India. The Tribunal held that the DTAA provisions must be considered in determining the obligation to deduct tax. The Tribunal emphasized that the chargeability to tax under section 195 includes the DTAA provisions, thus obliging the assessee to consider the DTAA when determining tax deductibility.

3. Nature of Income (Industrial/Commercial Profits vs. Fees for Services):
The Tribunal examined whether the payments to Linde constituted industrial or commercial profits, which would be exempt under the DTAA, or fees for services, which would be taxable. The Tribunal concluded that Linde's activities, involving consultancy and coordination services, did not qualify as industrial or commercial profits but were more akin to management charges or remuneration for personal services. Thus, the payments were chargeable to tax under the Act and the DTAA.

4. Rate of Tax Deduction:
The assessee argued that the tax should be deducted at 20% as per the Finance Act, 1979, instead of 40%. The Tribunal noted that the Commissioner (Appeals) had not considered this aspect and remitted the matter for fresh consideration. The Tribunal also clarified that tax should be deducted on the actual payment to the non-resident and not on grossed-up amounts, directing a refund of excess tax deducted.

5. Competency and Jurisdiction of Appeals:
The Tribunal addressed the maintainability of the appeals under section 248, which allows an appeal for a declaration of non-liability to deduct tax. The Tribunal held that the Commissioner (Appeals) erred in treating the appeals as arising from the ITO's letters and in considering them delayed. The Tribunal determined that appeals under section 248 are competent if tax has been deducted and paid, and there is no time limit for filing such appeals.

Conclusion:
The Tribunal partly allowed the assessee's appeals, holding that the payments to Linde were chargeable to tax, but the tax should be deducted at the correct rate and on the actual amounts paid. The matter was remitted to the Commissioner (Appeals) for fresh consideration of the applicable tax rate.