1989 (5) TMI 103 - AT - Income Tax

Issues Involved:
1. Applicability of Section 195(2) of the Income Tax Act.
2. Grossing up of tax on fees for technical services.
3. Legislative intent and interpretation of Sections 115A and 195.
4. Reliance on judicial precedents.

Detailed Analysis:

1. Applicability of Section 195(2) of the Income Tax Act:

The appeal was instituted by the assessee, a limited company, against the order of the CIT(A) confirming the action of the ITO under Section 195(2) of the Income Tax Act for the realization of income tax on fees paid for technical services to M/s Hokushin Electric Works Ltd. The assessee had applied for a no-objection certificate for remittance of 7,70,000 Yen to the non-resident company. The ITO examined the agreement between the two companies and found that the Indian Company was to bear the taxes. The ITO directed the assessee to deposit Rs. 19,750 after grossing up the amount of tax with the net amount payable.

2. Grossing up of tax on fees for technical services:

The assessee contended that grossing up should be limited to the tax on technical services and not the tax on tax. However, the Tribunal held that where the non-resident company demands the fee for technical services net of all taxes, the net amount payable is 60% of a certain gross amount, after deduction of tax at 40%. The Tribunal elucidated this with two situations:
- Situation 1: Non-resident company is paid Rs. 100 (gross) as fees, and the non-resident bears all taxes. The tax payable is Rs. 40, leaving Rs. 60 net.
- Situation 2: Non-resident company is paid Rs. 60 (net) as fees, and the Indian Company bears all taxes. The gross amount needs to be Rs. 100, with Rs. 40 as tax.

3. Legislative intent and interpretation of Sections 115A and 195:

Section 115A was introduced to cover incomes earned by a foreign company in India from dividends, royalty, and technical services, prescribing a 40% tax rate. Section 195 obligates the Indian Company to deduct income tax at the rates in force on the income payable to the non-resident company. The Tribunal emphasized that the tax payable under Section 115A should be the tax deducted under Section 195, ensuring the non-resident company receives the net amount agreed upon. The Tribunal supported this by citing a circular from the Department of Revenue & Insurance, which clarified the statutory obligation under Section 195 to deduct tax at the rates in force.

4. Reliance on judicial precedents:

The Tribunal considered various judicial precedents. The CIT(A) had relied on the Mysore High Court ruling in Tokyo Shibaura Electric Co. Ltd. v. CIT, which held that the real income by way of royalty is the amount net of taxes. The Tribunal also referred to the Andhra Pradesh High Court ruling in CIT v. Superintending Engineer, which did not contemplate the tax on tax basis. However, the Tribunal found that the legislative changes and intent clarified that the tax payable by the non-resident should be the tax deducted under Section 195. The Tribunal also referenced the King's Bench decision in Jawarski v. Institution of Polish Engineers, which supported grossing up to leave the stipulated remuneration tax-free.

Conclusion:

The Tribunal upheld the action of the authorities in grossing up the tax to ensure the non-resident company received the net amount agreed upon. The tax calculated at Rs. 19,750 as deductible by the assessee company was upheld. The appeal was dismissed, and the issue was decided in favor of the revenue and against the assessee.

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