1990 (9) TMI 126 - AT - Income Tax

Issues Involved:
1. Taxability of the amount received by the assessee.
2. Classification of the amount as 'royalty' or 'fees for technical services'.
3. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and West Germany.
4. Method of accounting for the income.
5. Credit of tax deducted at source.
6. Levy of interest under section 217 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Taxability of the Amount Received by the Assessee:
The assessee, a non-resident company, received Rs. 4,81,102 from Precision Bearings India Ltd. (PBI) and claimed it was not taxable in India due to services rendered abroad and the Double Taxation Avoidance Agreement (DTAA) between India and West Germany. The Income Tax Officer (ITO) brought the amount to tax as royalty under section 9(1) of the Income-tax Act, 1961, and also taxed Rs. 11,68,823 on an accrual basis. The CIT(A) upheld this, stating the amounts constituted royalty and were taxable in India.

2. Classification of the Amount as 'Royalty' or 'Fees for Technical Services':
The CIT(A) held that the consideration received by the assessee for providing recurring know-how fell under clauses (i) to (iv) of Explanation 2 to Section 9(1)(vi) and constituted 'royalty'. The obligations regarding training and providing engineers/technicians were considered services related to technical know-how, thus also classified as 'royalty'. The Tribunal agreed, noting that the agreement primarily covered the provision of technical know-how, and only a negligible part (estimated at 20%) related to training, which could be considered fees for technical services.

3. Applicability of the Double Taxation Avoidance Agreement (DTAA):
The CIT(A) observed that the DTAA did not define 'royalty' and thus the definition in Explanation 2 to Section 9(1)(vi) of the IT Act applied. Article III(3) of the DTAA excluded royalties from 'Industrial or Commercial profits', making them taxable in India. The Tribunal concurred, stating that only the part of the consideration related to training (20%) would be exempt under the DTAA as industrial or commercial profits, while the rest (80%) would be treated as royalty and taxable in India.

4. Method of Accounting for the Income:
The assessee claimed to follow the cash method of accounting. However, the CIT(A) and Tribunal found no evidence of this method being followed. The Tribunal cited the Madras High Court decision in Standard Triumph Motor Co. Ltd., holding that non-resident income should be assessed on an accrual basis. The Tribunal directed the exclusion of Rs. 4,81,202 received during the year but relating to prior periods, as it should not be taxed on a cash basis if the accrual basis was adopted.

5. Credit of Tax Deducted at Source:
The assessee sought credit for tax deducted at source on Rs. 11,68,823 in the year it was taxed. The Tribunal upheld the CIT(A)'s decision, stating that Section 199 of the IT Act allows credit in the assessment year immediately following the deduction. Therefore, the assessee was not entitled to credit for the year under consideration.

6. Levy of Interest under Section 217:
The assessee argued that since its income was subject to tax deductible at source, there was no liability for advance tax, and thus no interest under Section 217 should be levied. The Tribunal agreed, noting that the liability for advance tax was 'nil' when considering tax deductible at source. The Tribunal deleted the interest, stating that the CIT(A)'s reasoning regarding non-remittance of royalty income was incorrect.

Conclusion:
The appeal was allowed in part. The Tribunal held that 80% of the consideration received was royalty and taxable in India, while 20% related to training was exempt under the DTAA. The Tribunal also directed the exclusion of Rs. 4,81,202 from the year under consideration and deleted the interest levied under Section 217.

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