1990 (8) TMI 191 - AT - Income Tax

Summary

Issues Involved:
1. Whether remuneration payable in respect of services rendered outside India is required to be treated as tax-free in India.
2. Whether it can be said that any services were rendered in Japan for which the payment is made, and if so, whether this aspect was required to be ignored since they were in relation to the work carried out in India.

Detailed Analysis:

Issue 1: Tax Treatment of Remuneration for Services Rendered Outside India

The primary issue was whether the payment of Japanese Yen 2,500,000 as engineering and management fees to M/s. Kobe Steel Ltd., Japan, for services rendered outside India, is exempt from tax under Clause 'K' of Article X of the Double Taxation Avoidance Agreement (DTAA) between India and Japan. The relevant clauses of Article X were discussed:

- Clause (e): Royalties and similar payments for the use of intellectual properties and fees for technical services rendered in that connection are treated as income from sources within the Contracting State where the services are rendered.
- Clause (j): Salaries and remuneration for personal services are treated as income from sources within the Contracting State where the services are rendered.
- Clause (k): Fees for technical services payable to an enterprise are treated as income from sources within the Contracting State where the services for which the fees are paid are rendered.

The Tribunal concluded that fees paid are required to be treated as income in the respective States where services are rendered. Therefore, if it can be established that the payment is in respect of services rendered in Japan, the same is required to be taken as non-taxable in India.

Issue 2: Factum of Services Rendered in Japan

The Tribunal examined whether services were indeed rendered in Japan. The agreement between the assessee and M/s. Kobe Steel Ltd. included distinct payments for supervision charges and engineering and management fees. A certificate from Alpha Kogyo stated that the engineering and management fee was for design calculations done in Japan. The Tribunal found no reasonable basis for the CIT (Appeals) to reject this certificate. The proposal from Alpha Kogyo to M/s. Kobe Steel Ltd. detailed consultations, negotiations, and the preparation of designs in Japan, which were then used for supervision in India. The Tribunal concluded that services were rendered in Japan, thus the payment of Yen 25,00,000 is not liable to taxation in India.

Separate Judgments:

Accountant Member's View:
The Accountant Member concluded that the engineering and management services were rendered in Japan, supported by the evidence of design work and preparatory activities undertaken in Japan. Thus, the payment for these services should not be taxed in India.

Judicial Member's View:
The Judicial Member disagreed, emphasizing that the payment was linked to the completion of work in India, and there was no explicit mention of work done in Japan in the agreement. Therefore, he concluded that the payment was taxable in India.

Third Member's Decision:
The Third Member agreed with the Accountant Member, stating that the engineering and management work was indeed done in Japan, supported by the sequence of events and documentary evidence. Thus, the payment of Yen 25,00,000 should not be treated as income liable to tax in India.

Final Order:
The matter was decided in favor of the assessee, and the appeal was allowed. The Assessing Officer was directed to pass an appropriate order to give effect to this decision.