1988 (3) TMI 123 - AT - Income Tax

Summary

Issues:
1. Whether the payments made to a Danish company for carrying out a study and tests in Denmark constitute taxable income under the IT Act.
2. Whether the payments should be considered as technical fees or commercial profits in the hands of the foreign company.
3. Whether the provisions of the agreement for avoidance of double taxation take precedence over the IT Act.

Analysis:
1. The appeals were against the CIT(A) order related to the IAC (Asst.)'s decision under section 195(2) of the IT Act regarding payments made by the assessee to a Danish company for conducting a study. The IAC (Asst.) held that the fees constituted remuneration for personal services or royalties, not exempt from tax. He directed a 40% tax deduction. The CIT(A) upheld this decision, considering the payments as technical fees and not exempt under the double taxation agreement.

2. The CIT(A) rejected the argument that the payments were not taxable under the double taxation agreement. The assessee contended that the payments were commercial profits of the foreign company and not taxable in India due to the absence of a permanent establishment. Comparisons were made with agreements with other countries. The Tribunal agreed that the payments were technical fees, likely constituting commercial profit, and directed the CIT(A) to reconsider with Board clarifications.

3. The Tribunal acknowledged the nature of the payments as technical fees and potential commercial profits. It noted the absence of technical know-how transfer, ruling out royalty. The CIT(A) was directed to review Board clarifications and hear both parties. If the payments were deemed commercial profits, they would not be taxable in India due to the absence of a permanent establishment. The Tribunal allowed the appeal for statistical purposes pending the CIT(A)'s reconsideration.