1986 (1) TMI 159 - AT - Income Tax

Summary

Issues:
1. Whether payments made under a technical collaboration agreement are liable to tax under the Income-tax Act, 1961.
2. Whether air fare and other incidental charges paid to individuals are taxable under the Act.

Detailed Analysis:
Issue 1:
The appeals before the Appellate Tribunal ITAT CUTTACK involved a dispute regarding the taxability of payments made under a technical collaboration agreement between an Indian company and a foreign corporation. The assessing officer had directed the Indian company to deduct tax at 40% on payments made to two individuals nominated by the foreign company. The Commissioner (Appeals) partially upheld the assessing officer's decision, excluding air fare and incidental charges from the taxable amount. The Appellate Tribunal analyzed the agreement and concluded that the entire payment, including air fare and incidental charges, constituted technical fees under the contract. The Tribunal rejected the argument that the payments represented salary under section 9(1)(ii) of the Act, emphasizing that the individuals were acting as agents of the foreign company, not as independent service providers. The Tribunal also noted that the definition of 'technical fees' in Explanation 2 to section 9(1)(vii) supported the conclusion that the payments were taxable. Ultimately, the Tribunal held that the entire sum was liable to tax at a rate of 40% under section 115A, overturning the Commissioner (Appeals) decision.

Issue 2:
Regarding the second issue of whether air fare and other incidental charges were taxable, the Tribunal referred to section 44D of the Act, which disallows deductions for such expenses in computing income from technical fees. The Tribunal reasoned that this disallowance was likely due to the lower tax rate of 40% under section 115A compared to the previous maximum rate for non-residents. Consequently, the Tribunal upheld the assessing officer's decision to tax the entire payment, including air fare and incidental charges. The Tribunal clarified that its decision only pertained to the order under section 195(2) for tax collection and did not preclude further assessments of the foreign company or the individuals. In conclusion, the Tribunal dismissed the assessee's appeal and allowed the departmental appeal, affirming the tax liability on the payments made under the technical collaboration agreement.