1996 (5) TMI 106 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Rule 26 of the IT Rules for computing the income of the assessee.
2. Determination of the rate of exchange for conversion into Indian rupees of income received in foreign currency.
3. Taxability of lump-sum payment received as royalty under the Double Taxation Avoidance Agreement (DTAA) between India and Italy.
4. Taxability of fees for technical services without deduction of any expenditure under Section 115A of the IT Act.

Detailed Analysis:

1. Applicability of Rule 26 of the IT Rules for computing the income of the assessee:
The Revenue contended that the learned CIT(A) erred in directing that Rule 26 of the IT Rules be applied for computing the income of the assessee. The assessee argued that the rate of exchange for conversion should be the telegraphic buying rate as on the date of tax deduction at source, in view of Rule 26 of the IT Rules. The CIT(A) found the assessee's contention correct and directed the AO to recompute the income in rupees by adopting the conversion rate as on the date of remittance. However, the Tribunal disagreed with the CIT(A) and held that Rule 26 is applicable only for TDS purposes, whereas Rule 115 is applicable for assessing the income of the assessee. The Tribunal concluded that Rule 115 should govern the assessee's case.

2. Determination of the rate of exchange for conversion into Indian rupees of income received in foreign currency:
The Tribunal examined whether the rate of exchange should be the date on which tax was deducted, the date of remittance, or the last day of the previous year. The Tribunal agreed with the assessee's submission that applying the rate of exchange as on the last day of the previous year would lead to anomalous situations. The Tribunal held that the proviso added to Rule 115 by the IT (Ninth Amendment) Rules, 1993, is clarificatory in nature and retrospective in effect. Therefore, the Tribunal directed the AO to recompute the income of the assessee in rupees by adopting the conversion rate as on the date of TDS.

3. Taxability of lump-sum payment received as royalty under the Double Taxation Avoidance Agreement (DTAA) between India and Italy:
The assessee contended that the lump-sum payment of US $3,50,000 was not taxable in India under the DTAA. The CIT(A) examined the claim in the context of the DTAA provisions and concluded that the payment represented royalty under the DTAA. The Tribunal upheld the CIT(A)'s conclusion, finding that the agreement terms indicated that the assessee did not part with its property in the form of designs/technical details forever. The Tribunal agreed that the amount received was royalty under the DTAA and taxable in India.

4. Taxability of fees for technical services without deduction of any expenditure under Section 115A of the IT Act:
The AO taxed the fees for technical services at 40% under Section 115A of the IT Act, which was upheld by the CIT(A). The assessee argued against this, but the Tribunal found that the receipts represented payments for rendering technical services under the agreement. The Tribunal noted that under the DTAA, fees for technical services are taxable in India under Section 115A, which envisages a flat tax rate of 40%. Consequently, no expenditure against these receipts is admissible to the assessee. The Tribunal dismissed this ground of appeal.

Conclusion:
- The Tribunal rejected the Revenue's appeals and modified the CIT(A)'s order to recompute the income by adopting the conversion rate as on the date of TDS.
- The Tribunal upheld the CIT(A)'s conclusion that the lump-sum payment of US $3,50,000 was royalty under the DTAA and taxable in India.
- The Tribunal dismissed the assessee's appeal regarding the taxability of fees for technical services without deduction of any expenditure.