1993 (8) TMI 97 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of engineering fees received from VSP/MECON.
2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Germany.
3. Classification of payments as fees for technical services or supplemental payments for plant and machinery.
4. Basis of taxation: accrual vs. receipt.

Summary:

Issue 1: Taxability of Engineering Fees
The common issue for the three years relates to the taxability of the engineering fees received from VSP/MECON. The respective amounts for the three years are Rs. 90,65,711, Rs. 2,55,18,033, and Rs. 1,86,58,174. The assessee, a non-resident company incorporated in Germany, argued that the fees should be taxable in Germany alone as per the Amended Agreement on Avoidance of Double Taxation between India and Germany. However, the Assessing Officer concluded that the payments, although made in Germany, were considered to have been made by the Indian party and thus taxable in India at the rate of 20%.

Issue 2: Applicability of DTAA
The CIT (Appeals) and the Tribunal both emphasized that the Double Taxation Avoidance Agreement (DTAA) between India and Germany would prevail over the national tax laws. According to article VIIIA of the DTAA, fees for technical services arising in a contracting state and paid to a resident of the other contracting state may be taxed in that other state. However, such fees may also be taxed in the contracting state in which they arise, not exceeding 20% of the gross amount.

Issue 3: Classification of Payments
The assessee contended that the payments were supplemental to the cost of plant and machinery supplied and thus not taxable in India. However, the CIT (Appeals) and the Tribunal found that the payments were clearly termed as "engineering fees" in the agreement and should be considered as fees for technical services. The Tribunal noted that the onus was on the assessee to prove otherwise, which it failed to do.

Issue 4: Basis of Taxation
The assessee argued that the payment should be assessed on an accrual basis rather than a receipt basis. The CIT (Appeals) and the Tribunal, relying on the decision of the Madras High Court in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 572, concluded that for a non-resident assessee, accrual and receipt become synonymous. Therefore, the assessee was taxed on an actual receipt basis, and the question of accrual of income in India was deemed irrelevant.

Conclusion:
The appeals filed by the assessee for all the years were dismissed, affirming the taxability of the engineering fees as fees for technical services in India.