1982 (9) TMI 116 - AT - Income Tax

Summary

Issues Involved:

1. Applicability of Section 44D of the Income-tax Act, 1961 vs. Articles XVI and XIX of the Avoidance of Double Taxation Agreement.
2. Treatment of reimbursement of expenses as part of the total income.
3. Set off of brought forward losses and unabsorbed depreciation.

Issue-wise Detailed Analysis:

1. Applicability of Section 44D of the Income-tax Act, 1961 vs. Articles XVI and XIX of the Avoidance of Double Taxation Agreement:

The primary issue was whether the provisions of Section 44D(a) of the Income-tax Act, 1961, which restricts the deduction of expenses to 20% of the gross amount of fees for technical services, would prevail over Articles XVI and XIX of the Avoidance of Double Taxation Agreement (DTAA) between India and France. The assessee argued that the DTAA provisions should prevail, allowing the deduction of the entire expenses incurred in India. The Commissioner (Appeals) initially upheld the application of Section 44D, stating that the deductions are subject to the ceiling of 20% as per the Income-tax Act. However, the Tribunal held that the specific provisions of the DTAA would prevail over the general provisions of the Act, as per the CBDT Circular No. 333 and the Supreme Court's decision in Ellerman Lines Ltd. v. CIT. Thus, the assessee was entitled to deduct all expenses incurred in India in connection with the technical services provided.

2. Treatment of Reimbursement of Expenses as Part of the Total Income:

The second issue concerned whether the reimbursement of expenses by Indian companies to the assessee-non-resident company should be included in the total income. The Commissioner (Appeals) agreed with the assessee that such reimbursements, which did not result in any profit or loss for the assessee, should be excluded from the gross receipts. The Tribunal upheld this view, noting that the payments made by the assessee-non-resident company on behalf of the Indian companies were reimbursed and did not constitute revenue receipts. This was supported by the agreements and correspondence between the parties, indicating that these were purely reimbursements.

3. Set off of Brought Forward Losses and Unabsorbed Depreciation:

The final issue was whether the Commissioner (Appeals) was correct in directing the IAC to allow the set off of brought forward losses and unabsorbed depreciation. The revenue contended that Section 44D did not permit such allowances. However, the Tribunal did not provide a detailed analysis on this point but implicitly upheld the Commissioner (Appeals)'s direction by dismissing the revenue's appeal.

Conclusion:

The Tribunal concluded that the provisions of the DTAA between India and France would prevail over Section 44D(a) of the Income-tax Act, allowing the assessee to deduct all expenses incurred in India. It also held that reimbursements of expenses should not be included in the total income of the assessee. The appeal by the assessee was allowed for statistical purposes, and the appeal by the revenue was dismissed.