1987 (2) TMI 104 - AT - Income Tax

Issues Involved:
1. Appeal against charging of interest under sections 215 and 217 of the Income-tax Act.
2. Determination of whether the agreement dated 18-4-1980 was a continuation of the earlier agreement dated 19-7-1974.
3. Taxability of royalties under the agreement dated 18-4-1980.
4. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and the Federal German Republic.
5. Determination of the rate of tax applicable to the royalties.
6. Grossing up by tax on tax basis.

Detailed Analysis:

1. Appeal Against Charging of Interest Under Sections 215 and 217:
The assessee contended that the CIT(A) erred in holding that charging of interest under sections 215 and 217 is not appealable. The Tribunal referred to the Supreme Court decision in Central Provinces Manganese Ore Co. Ltd. v. CIT, which established that the levy of interest is part of the assessment process and can be appealed if the assessee disputes the liability to pay interest. The Tribunal held that the CIT(A) was not justified in his decision and remitted the matter back to him for determination in accordance with the Supreme Court's ruling.

2. Continuation of the Agreement:
The assessee argued that the agreement dated 18-4-1980 was a continuation of the earlier agreement dated 19-7-1974, and thus, the proviso to section 9(1)(vi) should apply. The Tribunal examined the agreements and found that the 1980 agreement was a new agreement, as it significantly changed the role of the assessee from a check consultant to a prime consultant, responsible for developing and preparing the design of the bridge. Consequently, the Tribunal agreed with the lower authorities that the 1980 agreement was not a continuation of the 1974 agreement.

3. Taxability of Royalties:
The Tribunal noted that both the ITO and the CIT(A) had some confusion regarding the nature of the income under the 1980 agreement. However, it was established that the income was royalty within the meaning of sections 9(1)(vi) and 115A(1)(ii) of the Act. The Tribunal confirmed that the income under the 1980 agreement was indeed royalty and thus taxable.

4. Applicability of the DTAA:
The assessee contended that the definition of 'royalty' in the Explanation 2 to section 9(1)(vi) could not be applied to the term 'royalties' in Article III, Paragraph (3) of the DTAA. The Tribunal referred to Article XVI, Paragraph (1) of the Agreement, which states that the laws in force will govern the assessment and taxation of income unless expressly provided otherwise in the Agreement. The Tribunal concluded that the definition of 'royalty' in the Act applies to the term 'royalty' in the DTAA, and thus, royalties earned under the 1980 agreement are liable for taxation under the Act.

5. Rate of Tax Applicable to Royalties:
The Tribunal examined whether the income should be taxed at 20% or 40% under section 115A(1)(ii). It was determined that the income did not consist of a lump sum consideration, as the consideration was variable and calculated according to the agreement's provisions. Therefore, the Tribunal held that the rate of tax should be 40%, as per sub-clause (2) of section 115A(1)(ii), and set aside the CIT(A)'s order, restoring the ITO's decision on this point.

6. Grossing Up by Tax on Tax Basis:
The assessee argued that the ITO was not justified in grossing up by tax on tax basis, citing the case of CIT v. American Consulting Corpn. The Tribunal found that the materials on record were insufficient to show that the ITO had resorted to grossing up by tax on tax basis. The Tribunal did not record an opinion on this point but expected the ITO to consider the cited case while giving effect to the Tribunal's order.

Conclusion:
Both appeals were allowed in part, with specific directions provided on each issue, ensuring that the legal principles and relevant provisions were thoroughly analyzed and applied.

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