1989 (12) TMI 92 - AT - Income Tax

Central Government, Central Government, Foreign Enterprise, Foreign Enterprise, Tax At Source, Tax At Source

Summary

Issues Involved:
1. Applicability of Section 10(6)(vi) of the Income-tax Act, 1961.
2. Approval of the agreement under Section 115A(1)(b)(iii) of the Income-tax Act, 1961.
3. Deduction of tax at source under Section 195(2) of the Income-tax Act, 1961.
4. Revision of the order under Section 263 of the Income-tax Act, 1961.

Detailed Analysis:

1. Applicability of Section 10(6)(vi) of the Income-tax Act, 1961:
The assessee argued that payments made to Mr. Stephen Blash were not taxable under Section 10(6)(vi) as the conditions prescribed were satisfied. The IAC (Asst.) disagreed, stating that the payment was made to a foreign enterprise (M/s. Yourdon Inc. USA) and not to an individual employee. The services were rendered as per an agreement dated April 1, 1985, between the assessee and M/s. Yourdon Inc., and not by Mr. Stephen Blash in his individual capacity. The Tribunal upheld the IAC's view, noting that Mr. Blash was acting as a nominee of M/s. Yourdon Inc. USA, and the payment was covered under the definition of "Technical services" under Explanation 2 to Section 9(1)(vii).

2. Approval of the Agreement under Section 115A(1)(b)(iii) of the Income-tax Act, 1961:
The Commissioner argued that the agreement dated April 1, 1985, was not approved by the Central Government, making Section 115A(1)(b)(iii) inapplicable. The Tribunal found that the Administrative Ministry (Department of Electronics) had granted "No Objection" for the remittance, which amounted to approval. The Tribunal cited an office memorandum dated November 23, 1982, clarifying that Administrative Ministries handle engagements of foreign experts for visits of less than 12 months. The Tribunal concluded that the agreement was indeed approved by the Central Government, contrary to the Commissioner's view.

3. Deduction of Tax at Source under Section 195(2) of the Income-tax Act, 1961:
The IAC (Asst.) held that the assessee was liable to deduct tax at source at the rate of 40% on the payment of 13,000 US dollars to M/s. Yourdon Inc. USA. The Commissioner later directed the IAC to amend the order and apply a tax rate of 65% plus a surcharge of 3.25%. The Tribunal, however, found that the approval for the agreement was valid and thus, the IAC's initial application of a 40% tax rate was appropriate.

4. Revision of the Order under Section 263 of the Income-tax Act, 1961:
The Commissioner issued a notice under Section 263, stating that the IAC's order was erroneous and prejudicial to the interests of revenue. The assessee contended that the IAC's order was not prejudicial to revenue and had filed a revision petition under Section 264. The Tribunal observed that the Commissioner's revision was based on an incorrect interpretation of the facts and the law. The Tribunal concluded that the order passed by the Commissioner under Section 263 was not justified and thus quashed it.

Conclusion:
The Tribunal held that the provisions of Section 10(6)(vi) were not applicable as the payment was made to M/s. Yourdon Inc. USA and not to Mr. Stephen Blash in his individual capacity. The agreement dated April 1, 1985, was deemed approved by the Central Government, making the IAC's application of a 40% tax rate appropriate. The Tribunal quashed the Commissioner's order under Section 263, thereby partly allowing the assessee's appeal.