2001 (10) TMI 281 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 4,22,37,000 claimed under Section 35AB of the IT Act.
2. Applicability of Section 40(a) for non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 4,22,37,000 claimed under Section 35AB of the IT Act:
The appeal concerns the disallowance of Rs. 4,22,37,000 claimed by the assessee under Section 35AB of the IT Act. This amount represents 1/6th of the expenditure incurred for acquiring technical know-how. The expenditure was disallowed by the Assessing Officer (AO) under Section 40(a) due to non-deduction of tax at source on the payments made to M/s Davy Mackee (Stockton) Ltd. (DML) by Crown Agents in the UK. The CIT(A) upheld the AO's decision, leading to the present appeal.

2. Applicability of Section 40(a) for non-deduction of tax at source:
The crux of the issue is whether the provisions of Section 40(a) apply, which disallow deductions for amounts payable outside India on which tax has not been deducted under Chapter XVII-B. The assessee argued that the fees for technical services were not chargeable under the IT Act, 1961, as per Sections 4 and 5, and that the amount was not payable by the assessee to DML outside India.

Detailed Analysis:

Chargeability of Fees under IT Act:
The assessee contended that the fees paid to DML were not chargeable under the IT Act, 1961, as per Sections 4 and 5, arguing that the income deemed to accrue or arise in India under Section 9(1)(vii) would only apply if the fees were payable by a resident. The assessee maintained that the fees were paid by Crown Agents, a non-resident, and thus, Section 9(1)(vii) did not apply. Furthermore, the assessee highlighted that the fees were paid directly by Crown Agents to DML, and the equivalent amount was paid by the assessee to the Government of India, not to DML.

Payment Terms and Agreement Analysis:
The agreement between the assessee and DML specified that the total fees for technical services were payable by the assessee to DML. However, the actual payment was made by Crown Agents out of the UK Government's grant, and the assessee reimbursed the Government of India in rupees. The Tribunal found that despite the payment method, the fees were indeed payable by the assessee to DML, making the income chargeable under the IT Act.

Extra-territorial Operation and Constitutional Validity:
The assessee argued that the provisions of Section 9(1)(vii) would have extra-territorial operation and questioned the Parliament's competence to enact such laws under Article 245 of the Indian Constitution. The Tribunal noted that it is not the appropriate forum to adjudicate on the constitutional validity of laws. Moreover, the Supreme Court had already referred a similar issue to its Constitutional Bench in the case of Electronic Corpn. of India Ltd. vs. CIT.

Conclusion on Applicability of Section 40(a):
The Tribunal concluded that the amount of fees for technical services was not payable by the assessee to DML outside India. The liability towards the fees arose under the agreement, but due to the payment method agreed upon, it was never payable outside India. The Tribunal found no material arguments from the Departmental Representative to counter the assessee's contentions. Consequently, the Tribunal held that the provisions of Section 40(a) were not applicable, and the CIT(A) was not justified in confirming the disallowance made by the AO.

Final Judgment:
The Tribunal reversed the CIT(A)'s order and directed the AO to allow the assessee's claim for the deduction under Section 35AB. The appeal was allowed in favor of the assessee.