9911796707
TMI Blog2004 (12) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the applicant in USA and no part of the same was to be rendered in India . It was also agreed between the parties that the compensation payable by the applicant to Timken-USA for the services would cover only the cost actually incurred by the Timken-USA and that no profit element or mark-up on the cost would be added to it. For the services rendered by Timken-USA several invoices were raised on the applicant for an aggregate amount of US$ 756,728.26; the break-up of that amount was given in the statement marked as Appendix-C and the description of the services rendered is mentioned in the statement marked as Appendix-D. The applicant remitted US$ 145,610.62 to Timken-USA and US$ 611,117.64 remain to be remitted. On March 21, 2002, before remitting the said sum of US$ 145,610.62, the applicant approached the assessing officer for an order under section 195(2) of the Act, authorizing it to remit the said amount without deducting income tax at source under section 195(1) of the Act on the ground that the said sum was only reimbursement of expenditure and cost actually incurred and that it did not contain any mark-up or profit element so the tax deductable would be zero. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subject to tax in India in the hands of Timken and accordingly whether the applicant would not have any obligation to withhold income tax thereon under section 195(1) of the Act. • Whether, in any event, in view of the fact that the sum of US $ 756,728.26 receivable by Timken from the applicant in consideration for the services rendered by Timken in USA in pursuance of the agreement dated 2 nd August, 2000, does not actually contain any element of profit or income in the hands of Timken, the said sum would not be subject to tax in India in the hands of Timken and accordingly whether the applicant does not have any obligation to withhold income tax thereon under section 195(1) of the Act? • Whether, notwithstanding the fact that the fees receivable by Timken from the applicant amounting to US $ 756,728.26, as referred to in question Nos. 1 to 3 hereinabove, constitute "fees for technical services" within the meaning of section 9(1)(vii) of the Act, and that section 44D read with section 115A of the Act, provide for a gross basis for taxation of such fees in the hands of Timken, being a non-resident corporate assessee, at the rate of 20% of such fees, an option would be deemed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the meaning of section 9(1)(vii) of the Income-tax Act, 1961 (hereinafter referred to as the "Act") and further notwithstanding the fact that section 44D read with section 115A of the Act provide for a gross basis form of taxation of such sum in the hands of Timken at the rate of 20% of such fees, an option would be deemed to be read in the provisions of the Act for computing such income on net basis, in view of the principles enunciated by the Hon'ble Supreme Court in the case of Union of India vs. A. Sanyasi Rao & others in the context of presumptive basis of taxation, with the result that the said sum of US $ 756,728.26 would be taxable in India in the hands of Timken on net basis, namely, after deducting legitimate expenses incurred by Timken with respect thereto? • Whether, in the event the additional question (a) is answered in the affirmative, the applicant would be required to withhold income-tax under section 195(1) of the Act with reference to the net income embedded in the sum of US $ 756,728.26 and for this purpose, the Assessing Officer should compute the quantum of withholding tax under section 195(1) of the Act with reference to the net income embedded in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any sum and not income; in view of the decision of the Supreme Court in the case of Transmission Corporation of AP Limited v. CIT [239 ITR 587] (2), it is not open to the applicant to urge that section 195(1) does not apply to the payment of fees by the applicant as it is in the nature of reimbursement and contains no element of income. The Authority for Advance Ruling in the case of Danfoss Industries Limited [268 ITR 01] (3) also held that the applicant was liable to pay for services to be provided by non-resident which was equivalent to the expenses incurred in providing the services even when there is no profit element. From the assessment record of the applicant, it is noted that the parties entered into collaboration agreement pursuant to which there was transfer of technology from Timken-USA to the applicant on a continuing basis with regular monitoring. By the agreement in question Timken - USA agreed to provide certain services including transfer of technology etc. for the "proper conduct of the applicant's objectives" to improve applicant's effectiveness in the use of such manufacturing and other processes. These services, though provided under a separate agreement, appar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred for earning the income for which deduction is available under the provisions of the Act and accordingly in computing the net income in such cases. If one applies the said scheme of presumptive taxation literally to the facts of the instant case, the unavoidable conclusion, which shall emerge is that the entire sum of US $ 756,728.26 to be remitted by the applicant in favour of Timken shall attract withholding of income tax in India at the rate of 20% on gross basis, notwithstanding the fact that there may not be any element of income actually embedded in the said sum in the hands of Timken for the reason that Timken has actually charged by the applicant for the services rendered by it in terms of the service agreement to cover the actual costs incurred by it in rendering the services without adding any mark up or profit element on such costs. In the light of the facts of the present case, such presumptive taxation is undoubtedly harsh and unfair on the part of Timken, since when under the normal procedure for taxation, where Timken would have been otherwise required to pay tax on net basis at the rate of 40%, there would not have been any incidence of tax on Timken for the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uance of an agreement made by the foreign company with Government or with the Indian concern] before the Ist day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property; • no deduction in respect of any expenditure or allowance shall be allowed under any of the said sections in computing the income by way of royalty or fees for technical services received [from Government nor an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern] after the 31 st day of March, 1976 [but before the Ist day of April, 2003]; • xxxx • xxxx Explanation - for the purpose of this section.,- • "fees for technical services" shall have the same meaning as in [Explanation 2] to clause (vii) of sub-section(1) of section 9; • "foreign company' s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 44D which treats all asessees - foreign companies - alike. The fourth aspect is section 44AC concerns itself with trading in alcoholic liquor for human consumption and forest produce and sec. 44D with royalties and fees for technical services. The last point relates to computation of income, Section 44AC provides that 40% of purchase price shall be deemed 'profits and gains' of the buyer and section 44D says that in computing income by way of royalty or fees for technical services received from Government or any Indian concern ( in regard to agreements entered into before 1.4.1976) only 20% of the amount of royalty or fees for technical services shall be allowed as deduction under sections 28 to 44C of the Act; (in regard to agreements entered into between 31.3.1976 and 1.4.2003) it enjoins that no deduction under section 28 to 44C shall be allowed, however, relief of reduced rate of tax is provided under sec. 115A of the Act. Section 44DA deals with admissibility of deductions in respect of agreements after 1.4.2003, with which we are not concerned here. 7. In Sanyasi Rao's case [supra(1)] constitutional validity of sections 44AC and 206C of the Act was challenged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions in the Act. We should state that they relate to non-residents carrying on business in India and are not much relevant in construing sections 44AC and 206C of the Act". In that case domestic enterprises were involved in the commercial activities of purchasing goods in auctions or by filing tenders. Presumptive taxation was resorted to at the initial stage with reference to the purchase price on the ground that it was difficult for the Revenue to assess and recover the tax due from the bidders or purchasers in the case of goods mentioned therein. If they are before the assessing officer seeking regular assessment, there is no reason as to why they should be deprived of the benefit of sections 28 to 43C for computing their income. The assessees dealing in a particular trade, subject matter of section 44AC, were treated differently in regard to relief under sections 28-43C, so it was held to be unreasonable. Section 44D deals with foreign companies and no such different treatment is given within the same class in that provision. The following observation of Hon'ble Supreme Court is apt to be noted:- "In the matter of granting various reliefs provided under sections 28 to 43C, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in mind that when the constitutional validity of a provision in an Act is questioned before a High Court or the Supreme Court, the court may instead of striking down the impugned provision, read it down to save the constitutionality of the provision in the Act. Such a power can be exercised only by courts/tribunal vested with the jurisdiction to strike down a statute or a provision thereof being ultra vires or unconstitutional. A Tribunal which is itself the creature of a statute, not having such specific constitutional power, cannot arrogate to itself the power to pronounce upon the constitutional validity of a provision of or the statute so it has to give effect to the provisions of the Act, which represent the will of the legislature. We shall now refer to the cases relied upon by the applicant. In Shankar Lal Das vs. State of West Bengal [supra (4)], the question before the West Bengal Tribunal was whether the proviso to clause (1) of sub-section (1) of section 7 of the Bengal Agricultural Income-tax Act, 1944 was violative of article 14 of the Constitution. It was noted by the Tribunal that an application under section 8 of the West Bengal Tribunal Act, 1987 was in the natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the notice of the Hon'ble Supreme Court in Saniyasi Rao's case [supra(1)] it was observed that as those provisions related to non-residents carrying on business in India, they were not much relevant in construing sections 44AC and 206C. Further , in that case exclusion of sections 28 to 43C, was found to be unreasonable because among traders of the same goods, similarly placed, only those who purchased the specified goods in auction or by tender were denied the benefit of the aforementioned provisions. It was pointed out by the Hon'ble Supreme Court that no material was placed to justify discrimination between traders in the same goods who purchased the goods in auction or by tender and those who purchased the goods otherwise. It cannot be lost sight of that section 44AC was held to be an adjunct and explanatory to section 206C of the Act. It is apt to note that sub-section (4) of section 206C provided for assessment of the income under the Act for the assessment year for which such income was assessable. There the Hon'ble Supreme Court held that it did not dispense with regular assessment. The observations of the Supreme Court reads as follows: "Hence, to the extent the non-o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able as income and even assuming that fees charged by the Denfoss Singapore to the applicant and similarly situated group companies is equivalent to the expenses incurred by it in providing the services and there is no profit element, it would then be a case of quid pro quo for the service fees and not a case of reimbursement of expenses and held that the fees was taxable under the Act. In the light of the above discussion, the question of determination the quantum of the net income embedded in the said sum (US $ 756,728.26) under section 195(2) for withholding tax, does not arise. 8. For the above mentioned reason, we rule on: (1) question No.1 that sum of US$ 756,728.26 cannot be said to represent recovery or reimbursement of the costs or expenses actually incurred by Timken-USA while rendering the services by it and that the entire amount is liable to be taxed in India and accordingly, the applicant is obliged to withhold Income-Tax at appropriate rate (under the Act or the Treaty) whichever is lesser under section 195(1) of the Act; (2) question No.2 that having regard to the provisions of Article 12 of the Treaty the sum of US$ 756,728.26 received by Timken-USA from the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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