1987 (5) TMI 96 - AT - Income Tax

Assessment Year, Deemed Accrual, Fees For Technical Services, Foreign Technician, Plant And Machinery

Issues Involved:
1. Application of amended provisions of Section 9(1) of the Income-tax Act.
2. Taxability under Section 115A of the Income-tax Act.
3. Non-resident assessee's liability under the agreement for avoidance of double taxation.
4. Classification and taxability of payments made to the non-resident assessee.
5. Validity of the assessment without specific order under Section 163 of the Income-tax Act.

Detailed Analysis:

1. Application of Amended Provisions of Section 9(1) of the Income-tax Act:
The Income-tax Officer (ITO) based his assessment on the amended provisions of Section 9(1), particularly clauses (vi) and (vii), which relate to the deemed accrual of income in India from royalties and technical fees. The ITO held that these incomes had accrued to the assessee and were liable to be taxed under Section 9 as per the rates mentioned in Section 115A. The Commissioner of Income-tax (Appeals) [CIT (Appeals)] opined that the contract was signed after 1-4-1976, and therefore, the amended provisions applied. However, the CIT (Appeals) also noted that the assessee had not exercised its option under Explanation 1 to Section 9(1)(b) within the prescribed time, thus bringing clauses (vi) and (vii) into operation.

2. Taxability under Section 115A of the Income-tax Act:
The ITO grossed up the income by including the tax liability paid by the Indian party as part of the non-resident's income. This was contested by the assessee, who argued that the contract was approved by the Central Government before 1-4-1976, thus falling within the provisions that exclude such income from taxation. The CIT (Appeals) upheld the ITO's decision, stating that the non-resident had not exercised the necessary option within the prescribed time, making the income taxable under Section 115A.

3. Non-Resident Assessee's Liability under the Agreement for Avoidance of Double Taxation:
The CIT (Appeals) referred to the agreement for avoidance of double taxation between India and the Federal Republic of Germany, particularly Article III(1) and (3), which exempted 'industrial or commercial profits' unless derived through a permanent establishment in India. The CIT (Appeals) concluded that the non-resident assessee had no fixed place of business in India, and the activities carried out did not constitute a 'construction, installation, or assembly project.' Therefore, the income was exempt from tax under the double taxation agreement. However, the Tribunal found that the CIT (Appeals) misunderstood the scope of sub-article (3), which excluded rents, royalties, and fees for technical services from the exemption, making them taxable in India.

4. Classification and Taxability of Payments Made to the Non-Resident Assessee:
The Tribunal noted that the payments made to the assessee included fees for documentation, know-how, and technical services. The CIT (Appeals) had bifurcated these payments, but the Tribunal emphasized the need for a more detailed examination to determine what portion of the payments constituted royalties and what portion was for technical services. The Tribunal held that while fees for technical services were exempt under the proviso to clause (vii) of Section 9(1), royalties were taxable due to the non-exercise of the option by the assessee.

5. Validity of the Assessment Without Specific Order Under Section 163 of the Income-tax Act:
For the assessment year 1980-81, the CIT (Appeals) held that the assessment could not be sustained due to the lack of a specific order under Section 163 treating the Indian company as the agent of the non-resident. The Tribunal reversed this finding, stating that the Indian company had filed the return on behalf of the non-resident and did not dispute its liability as a representative. Therefore, a specific order under Section 163 was not necessary.

Conclusion:
The Tribunal partly allowed the appeals, emphasizing the need for a thorough examination to bifurcate the payments into royalties and fees for technical services. The Tribunal upheld the taxability of royalties due to the non-exercise of the option by the assessee and reversed the CIT (Appeals) on the necessity of a specific order under Section 163.

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