9911796707
TMI Blog1996 (5) TMI 385X X X X Extracts X X X X X X X X Extracts X X X X ..... porated in the United Kingdom on April 17, 1986. Its name was changed to the shorter form, DECTA , on October 13, 1993. It is a non- resident company for the purposes of the Act. It had entered into memoranda of understanding with as many as forty-five Indian companies from time to time. Under these agreements, it received various amounts from these companies and the question on which the ruling of the Authority has been sought is in regard to the taxability of these amounts under the Act. The questions posed by the applicant are as follows : (1) Whether the amount of contribution received/receivable to recover part of the cost of the technical assistance provided by the appli- cant under the provisions of its aid programme to the companies assisted by it in India is income of the applicant under the provisions of the Income-tax Act and chargeable to tax ? (2) Whether the amount of contribution received/receivable to recover part of the cost of the technical assistance provided by the appli- cant under the provisions of its aid programme to the companies assisted by it in India is fees for technical services as defined in Explanation 2 to clause (vii) of sub-section (1) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernmental and official bodies which will be involved in the projects. They also envisage that DECTA should administer project bank accounts in India to handle the rupee contributions that will be paid by the companies receiving direct assistance, such contributions being a commitment by the companies to the achievement of the aims of the projects and intended to be used for various local expenses incurred in running the projects. EDPI Phase III consists of three separate sections involving : (1) a scheme of direct product specific technical assistance in areas of market identification, product development to match market requirements and development of export capability and marketing to achieve the sales potential ; (2) a market entry scheme for general consumer and industrial products involving a small amount of design and systems assistance but mainly involving assistance in marketing to identify buyers and facilitate market entry ; and (3) an export break through service using the skills of a panel of market development consultants in target markets and offering a customised package of assistance to Indian companies in areas of general market research, specific market research, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferred to any body or bodies having objects similar to the objects of the agency which shall prohibit the distribution of its or their income and property among its members to an extent at least as great as that applying to the agency under or by virtue of clause 4 hereof, such body or bodies being determined by the members of the agency at or before the date of dissolution. 6. The broad scheme of operation of the DECTA in Phase III of the EDPI projects was as follows : The Government of the United Kingdom intended to make available to the Government of India a sum not exceeding 4,300,000 by way of tech- nical co-operation funds to be administered by the DECTA through its project office in Delhi. The project office was initially set up for the period of three years for purpose of undertaking purely liaison activities and co- ordinate between the head office and the Indian authorities in relation to the EDPI. The Reserve Bank of India granted permission for the establishment of the project office subject to the following conditions : (1) Except the proposed liaison work the projects office will not undertake any other activity of a trading, commercial or industrial nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he project memo- randum attached thereto was, however, placed before us at our direction at the time of hearing. Para. 3 of this memorandum is of relevance and may be extracted here : 3. Project description : 3.1. The objective of the project is to provide Indian export earnings to hard currency markets over a five year period and, in this phase, to develop Indian consultancy capacity, especially in the private sector, to provide advice of this kind. 3.2. Promotion of export capability will concentrate on assisting the companies to become more efficient and competitive by upgrading design capability, production techniques, operational and marketing skills. 3.3. The project will help companies in key sectors, with exporting potential, to achieve increased exports. It will aim both at companies at present unable to afford commercial consultancy rates and at larger firms which, once persuaded of the benefits, can afford to employ consultancy services on a commercial basis. 3.4. An additional objective is to increase the chance of sustaining project benefits by : (a) Encouraging Indian consultancy companies to develop the expertise to provide this service. DECTA will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work period. The contribution for the first work plan annexed in Appendix I shall be Indian rupees 168,750. For subsequent work plans the contribution will be recorded in the work plan itself. Para 3.2 deals with the mode of payment. Broadly speaking, 25 per cent. of the contribution for each work period has to be made on the first day of the work period and the balance has to be paid in monthly instalments. Under para. 7, DECTA retains the copyright of the documents prepared by it and the company shall only be entitled to use them or copy them only for the implementation of the work plan and the purpose for which it is intended. 10. It may be useful to mention one more circumstance to allay one s curiosity as to why DECTA should be required to receive contributions from the companies with which it contracts and that only to the extent of 25 percent. of the cost as referred to earlier. It may be mentioned that originally the cost of the projects was being met in its entirety by DECTA itself. However, subsequently, the ODA requested DECTA to ensure that the participating companies made a rupee contribution towards the cost of the assistance they received from the organisation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which . . . 13. The Act also defines the expression in an almost identical manner. Explanation 2 to section 9(1)(vii) reads thus : 9(1)(vii).-. . . fees for technical services means any consideration (including any lump sum consideration) for the rendering of any mana- gerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries . 14. The case of the Department may appear, at first sight, to be covered by the definitions given above. There is no doubt that DECTA provides various kinds of services to the companies with which it enters into memoranda of understanding and, if the contributions or amounts paid by the companies into the account of the DECTA with the Standard Chartered Bank really represent the consideration for the service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The debits to the account fall into three categories : 2. (i) For making payment of hotel bills in India for DECTA s staff members and experts ; (ii) For purchase of tickets of Indian Airlines, Indian Railways or any other form of transport for internal travel by DECTA s staff members and experts as also for purchase of international air-tickets of staff members of DECTA ; and (iii) For payment of local expenses related to the project. 16. The applicant has placed on record a letter dated December 16, 1993, from the Reserve Bank of India which specifically advised the DECTA s bankers to ensure that the debits in respect of items 2(i) and (ii) are met from inward remittances only but there is another letter dated February 23, 1994, in identical terms but without this endorsement. It is not clear why there are two such letters on record and it appears that the restriction contained in the first letter has been withdrawn by the second. Even so, it is clear that, so far as DECTA s account with the Standard Chartered Bank is concerned, it does not cater to the technical fees or consultation charges or other remuneration which DECTA may pay to the various managerial or te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion, he tells them that 25 per cent. of the cost of their medicines and treatment will have to be borne by themselves. This would be a case where the doctor does not receive any consideration for his services and all that is happening is that, in the project called medical treatment of his clien tele, the patient saves 75 per cent. and has to bear only 25 per cent. of the expenses involved. Such an arrangement, in the opinion of the authority, does not contain any element bearing the character of income. Here also the contribution by the company is really not a payment to DECTA but only a contribution to a common fund in the hands of DECTA to enable the latter to defray a part of the expenses of the project carried out by DECTA on behalf of the company in question. 18. One of the arguments addressed before the authority on behalf of the applicant was that even if the amounts of contribution by the various com- panies can be treated as income by way of technical fees, they cannot be charged to tax in India keeping in view the memorandum and articles of association of the applicant. The relevant clauses have already been set out. The argument is that the income is utilised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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