1994 (11) TMI 171 - AT - Income Tax

Any Service, Business Receipt, Collaboration Agreement, Double Taxation Avoidance Agreement, Double Taxation Relief, Fees For Technical Services, Indian Company, Permanent Establishment

Summary

Issues Involved:
1. Taxability of the remitted amount under the collaboration agreement.
2. Validity and effectiveness of the collaboration agreement.
3. Nature of the remitted amount (whether it constitutes "royalty" or "fees for technical services").
4. Existence of a "permanent establishment" in India.
5. Applicability of Double Taxation Avoidance Agreement (DTAA).

Detailed Analysis:

1. Taxability of the Remitted Amount:
The central issue was whether the remitted amount of yen 2,26,87,500 from Modipon Limited to Unitika Limited was taxable in India. The Assessing Officer initially held that the agreement between the parties was null and void due to non-payment within 90 days and thus subjected the entire sum to tax without specifying any head. The CIT(A), however, held that the agreement did not become null and void and that the payments were received for services rendered by the appellant, thus taxable under DTAA.

2. Validity and Effectiveness of the Collaboration Agreement:
The collaboration agreement dated 21-6-1983 between Unitika and Modipon stipulated that it would become effective after the first installment was paid. Modipon remitted only 25% of the first installment, and no further payments were made. The CIT(A) held that the agreement continued to be effective beyond the accounting year and that the payments were received for services rendered. However, the Tribunal disagreed, stating that the agreement did not come into operation as the full first installment was not paid, and thus no services were rendered.

3. Nature of the Remitted Amount:
The Tribunal examined whether the remitted amount could be considered "royalty" or "fees for technical services." It was concluded that the amount could not be treated as such because no services were rendered, and the agreement stipulated an outright transfer of designs, not merely a license to use them. The Tribunal held that for an amount to be considered "royalty" or "fees for technical services," actual services must be rendered, which was not the case here.

4. Existence of a "Permanent Establishment" in India:
The CIT(A) held that the collaboration agreement constituted a "permanent establishment" in India, as it involved construction, erection, or assembly projects. The Tribunal, however, found that no such activities were carried out by Unitika in India, and thus, the company did not have a "permanent establishment" in India as defined under DTAA. The Tribunal emphasized that the term "carries" in the context of construction or assembly projects denotes actual activity, which did not occur.

5. Applicability of Double Taxation Avoidance Agreement (DTAA):
The Tribunal agreed that the income of the assessee should be computed with reference to DTAA between India and Japan. It was concluded that the remitted amount could only be treated as "industrial or commercial profits" under DTAA, and since Unitika did not have a "permanent establishment" in India, the amount could not be taxed in India.

Conclusion:
The Tribunal held that the amount remitted by Modipon to Unitika could not be charged to tax under the provisions of DTAA. The assessee's appeal was allowed, and the appeal filed by the revenue was dismissed.