1993 (9) TMI 160 - AT - Income Tax

Business Connection, Business Income, Double Taxation Avoidance Agreement, Estimated Income, Expenditure Incurred, Fees For Technical Services, Foreign Company, Income Deemed To Accrue Or Arise In India, Income From Business, Indian Company, Permanent Establishment, Set Off Of Loss

Issues Involved:
1. Whether the assessee-company had a permanent establishment in India.
2. Whether the income from FOB sales in France is taxable in India.
3. Whether the expenses claimed against fees for technical services are allowable.
4. Whether the loss from technical services fees can be set off against income from royalty.
5. Whether the agreements constitute a single turnkey project or separate transactions.

Detailed Analysis:

1. Permanent Establishment in India:
The IAC (Asst.) treated the agreement with Mekaster Consultancy (P.) Ltd. as evidence of a permanent establishment in India, arguing that the support services provided to French engineers constituted maintaining an office in India. The Commissioner (A) disagreed, stating that the agreement with Mekaster was on a principal-to-principal basis and did not amount to maintaining a permanent establishment. The Tribunal upheld this view, noting that Mekaster's role was limited to providing support services and did not involve any business transactions on behalf of the assessee-company.

2. Taxability of Income from FOB Sales in France:
The IAC (Asst.) argued that the profits from FOB sales in France were taxable in India, as the source of income was in India. The Commissioner (A) found that the title and risk of the goods passed to the Indian Telephone Industries in France, and the sales were completed outside India. The Tribunal agreed, emphasizing that the property in the goods passed in France, and no operations related to the sale were carried out in India. Therefore, the income from these sales was not taxable in India.

3. Allowability of Expenses Claimed Against Fees for Technical Services:
The IAC (Asst.) allowed only 50% of the expenses claimed against fees for technical services, arguing that the expenses were incurred for other business activities as well. The Commissioner (A) allowed the full expenses, citing Article 16 of the Double Taxation Avoidance Agreement, which permits the deduction of expenses incurred in connection with activities performed in India. The Tribunal upheld this view, stating that the expenses were directly related to the technical services provided and were allowable under the Double Taxation Avoidance Agreement.

4. Set-Off of Loss from Technical Services Fees Against Income from Royalty:
The IAC (Asst.) contended that the loss from technical services fees could not be set off against income from royalty due to the provisions of section 44D of the Income-tax Act. The Commissioner (A) allowed the set-off, citing section 70(1) of the Income-tax Act, which permits the set-off of loss from one source against income from another source under the same head. The Tribunal agreed, noting that section 44D does not override section 70, and the set-off was correctly allowed.

5. Nature of the Agreements:
The Department argued that the four agreements constituted a single turnkey project, and the entire transaction should be seen as one integrated whole. The Commissioner (A) treated the agreements as separate transactions, each with its own specific purpose. The Tribunal upheld this view, stating that each agreement was distinct and related to different aspects of the project, such as technical collaboration, supply of machinery, and research and development assistance. The Tribunal found no basis to treat them as a single turnkey project.

Conclusion:
The Tribunal upheld the Commissioner (A)'s order, concluding that the assessee-company did not have a permanent establishment in India, the income from FOB sales in France was not taxable in India, the expenses claimed against fees for technical services were allowable, the loss from technical services fees could be set off against income from royalty, and the agreements were separate transactions rather than a single turnkey project. The appeals filed by the revenue were dismissed.

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