1990 (7) TMI 163 - AT - Income Tax

Summary

Issues Involved:
1. Whether the payment made to a foreign company for design and documentation services is subject to tax deduction under Section 195(2) of the Income Tax Act.
2. Whether the payment constitutes "royalty" under Explanation 2 to Section 9(1)(vi) of the Income Tax Act and the Double Taxation Agreement (DTA) between India and France.
3. Whether the order directing deduction of tax under Section 195(2) is appealable.

Issue-wise Detailed Analysis:

1. Appealability of the Order:
The Department raised a preliminary objection that the order directing deduction of tax under Section 195(2) is not appealable. However, the tribunal found no merit in this submission, citing Section 248 of the Income Tax Act, which clearly provides for filing an appeal in respect of a direction for deduction of tax.

2. Nature of Payment:
The assessee, a limited company, entered into a tripartite agreement with Mecon and Clecim, a French company, for establishing a continuous galvanizing line. The agreement involved design, engineering, manufacturing, and commissioning services. The payment in dispute was for design and documentation services provided by Clecim. The Income Tax Officer (ITO) viewed the payment as royalty under Explanation 2 to Section 9(1)(vi) and directed the assessee to deduct tax at the rate of 30%. The assessee disputed this liability and appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who ruled that no part of the payment was subject to Indian income tax.

3. Double Taxation Agreement (DTA):
The CIT(A) considered the provisions of the DTA between India and France and concluded that the payment was not taxable in India. The Department, however, argued that the payment constituted royalty, which could be taxed in both contracting states as per Article VII of the DTA. The tribunal examined the definition of "royalties" under Article VII(2), which includes payments for the use of or the right to use designs, plans, and industrial, commercial, or scientific experience.

4. Nature of Services and Payment:
The tribunal noted that the payment was for designs and documentation necessary for the erection of the plant. The documentation was delivered in France to Mecon, not the assessee. The tribunal concluded that the payment represented a trading receipt for the French company, arising from its industrial experience. Thus, the payment fell under the definition of "royalties" in Article VII of the DTA.

5. Taxability under Indian Law:
The tribunal analyzed whether the payment could be brought to tax under the Income Tax Act. Section 9(1)(vi) deems certain payments as income by way of royalty, including payments for imparting information concerning industrial, commercial, or scientific experience. The tribunal found that the payment for documentation constituted such information and was therefore taxable under Indian law.

6. Precedents and Case Law:
The tribunal distinguished the present case from decisions cited by the assessee, including the Andhra Pradesh High Court's decision in Vishakapatnam Port Trust and the Madhya Pradesh High Court's decision in Hindustan Electrographites Ltd. The tribunal also referred to a Special Bench decision in Siemens Aktiengesellschaft vs. ITO, which held that payments for documentation prepared and transmitted could be considered as royalty.

7. Integrated Contract Argument:
The tribunal considered whether the entire agreement should be treated as one integrated contract. It concluded that the agreement stipulated different types of services, payments, and time schedules, allowing for the payment for documentation to be considered separately.

Conclusion:
The tribunal allowed the Department's appeal, restored the ITO's order directing the deduction of tax, and held that the payment for design and documentation services constituted royalty under both the Income Tax Act and the DTA between India and France. The appeal was allowed.