TMI Blog1992 (4) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... o be a draft agreement in effect. Section II of the agreement deals with the price to be paid by the Indian company to the two foreign companies. Clause 2.1 stipulated that the Indian company would pay Japanese Yen 261,954,000. Sec. III stipulates that the said sum: "...shall be paid by an irrevocable, confirmed and without recourse letter of credit covering the said total amount which shall be established in favour of SUPPLIER through any scheduled bank in India to the specified Japanese bank to be designated by SUPPLIER within THIRTY (30) days from the effective date of this AGREEMENT. The PURCHASER may, however, explore the possibility of getting a guarantee of the Government of India for this amount. 3.1.1. one third of the fee shall be paid within THIRTY (30) days from effective date of AGREEMENT against presentation of simple receipt of the SUPPLIER in triplicate, provided that the performance bond has been furnished by the SUPPLIER within the prescribed time as mentioned in SECTION XVIII. 3.1.2. One third of the fee shall be paid against presentation of simple receipt of the SUPPLIER accompanied by SUPPLIER'S invoices in triplicate attached with post receipts or air ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total fee of Japanese Yen 261,954,000, that is to say, Japanese Yen 87,318,000 equivalent to Rs. 44,14,459 was payable by 7th Dec., 1984. 2. For the purpose of remitting the said sum, the assessee company it is common ground, approached the ITO, C-Ward, Trivandrum requesting him to issue a No Objection Certificate to enable it to remit the sum in question. It would appear that the ITO asked the assessee to deduct at source a tax of Rs. 29,42,972 from the said sum of Rs. 44,14,459. While issuing the said direction, it is common ground, the ITO had proceeded on the basis that tax was to be deducted at source at 40 per cent and that too on "tax on tax basis". The ITO issued the direction to the said effect obviously relying on the circumstances: (1) that under cl. 2.2 of the agreement the total technical fee of Japanese Yen 261,954,000 was payable to the foreign collaborators net of tax and (ii) that under the agreement dt. 3rd Sept., 1984 the delivery of technical know-how "shall be deemed to have taken place to purchaser in India". It is common ground that the assessee did deduct and did pay to the credit of the IT Department a sum of Rs. 29,42,922. 3. Subsequently, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . At the outset we may say that insistence on rigid adherence to the letter of law on preference to the spirit thereof lies at the bottom of this departmental appeal. Be that as it may, we now proceed to examine the two-fold objections raised by the Department against the impugned order of the CIT(A). 10. The key to the problem that arises for resolution in this case lies in the answer to the question: "Did the assessee deduct at source a larger amount of tax than it was statutorily obligated to under the relevant provisions of the Act." The answer to the said question depends on the answer to the further question whether the sums paid by the assessee-company under the foreign collaboration agreement was royalty or technical fees within the meaning of the Act. It is, therefore, necessary to notice first the relevant provisions of the Act. 11. Under the scheme of the Act, the ambit of taxation varies with the factor of residence in the previous year. As respects non-residents, the following categories of income are charged to tax: (a)(i) Income received by the non-resident in India. (ii) Income deemed to be received by the non-resident in India. In either case, the da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h or from any property in India, or through or from any asset or source of income in India, or through or from any money lent at interest and brought into India in cash or in kind, or through the transfer of a capital asset situate in India. Explanation: For the purpose of this clause,— (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export;" It will be evident that the said clause dealt with five categories of income which are deemed to accrue in India. Of these, the category of income first mentioned in the clause (viz. income accruing or arising through or from any business connection in India) is relevant for our purposes. For the exigibility issue relating to the royalty/technical fees received abroad by a non-resident from a resident for services re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to so much of the income by way of 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 of specifications relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved the Central Government. Expln. 1: For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Expln. 1: For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Expln. 2 : For the purpose of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... types of fees are deemed to accrue in India: (a) Fees payable by the Central Government or any State Government; (b) Fees payable by a resident except where the payment is relatable to a business or profession carried on by him outside India or to any other source of his income outside India; and (c) Fees payable by a non-resident, if the payment is relatable to a business or profession carried on by him in India or to any other source of his income in India. (iii) By virtue of the proviso introduced by the Finance (No. 2) Act, 1977 w.e.f. 1st April, 1977, the deeming provisions contained in s. 9(1)(vii), will not apply to income by way of fees for technical services if the fees are payable by or under an agreement made, actually or constructively, before 1st, April, 1976, and approved by the Central Government. 17. Some of the significant legal implications of the new provisions may be now be examined. First, the terms "royalty" and "fees for technical services" have been defined. Therefore, the nature of the payment received by a non-resident under a collaboration agreement with a resident will have to be determined strictly in accordance with the definitions. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cific instance having been provided by cl. (vi), we have only to look at that cl. (vi) and not to the more general provision of cl. (i) of s. 9(1). Similarly, income by way of fees for technical assistance, which is covered by cl. (vii), is more general category as compared to the royalty which is referred to in cl. (vi), particularly in the light of the definition of 'royalty' in Expln. 2 to cl. (vi) of s. 9.(1). Again, the same principle of particular excluding the general has to be applied in this case and if the case falls under cl. (vi) and is exempted from the operation of cl (vi) by virtue of the proviso, then we cannot refer to cl. (vii) which is a general clause." As couple of points are noteworthy. First, the Court has held that, dealing as it does with a larger class of income, cl.(i) is general in nature. Secondly, and more significantly, the Court has also held that cl. (vii) itself is more general than cl. (vi). One of the significant legal consequence of this ruling is that, in a given case, a payment may properly fall to be considered under cl. (vi) rather than under cl. (vii). This aspect of the matter may be illustrated in the following manner. Let us take a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies, the Finance Act, 1976 introduced two more sections, namely ss. 44D and 115A. The former contains special provision for computing income by way of royalty, etc., in the case of foreign companies, while the latter deals with income-tax payable on dividends, royalty and technical fees in the case of foreign companies. It is, therefore, necessary to notice these sections. 21. Prior to the 1976 amendment, in cases where it was held that the whole or part of royalty/fees for technical services was exigible to tax in India for whatever reason, the net income by way of royalty or fees for technical services had still to be computed. But the Act did not contain any specific provision governing such computation, with the result, the mode and mechanics of quantifying the net income varied from case to case, leading, not unknowingly, to litigation. With the introduction of s. 44D, however, a uniform method of computing the net income has been prescribed. Two points are notworthy here. First is that for purposes of this section, the terms "royalty" and "fees for technical services" have the same meaning as in s. 9(1)(vi) and 9(1)(vii) representatively. Secondly, as respects royalty/tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra, the key to the problem that arises for resolution in this case lines in the answer to the question: "Did the assessee deduct at source a large amount of tax than it was statutory obligated to under the relevant provisions of the Act?" The answer to the said question depends upon the answer to the further question whether the sum paid by the assessee-company under the foreign collaboration agreement was royalty or technical fees within the meaning of the Act. To answer the last question, it is necessary first to glean from the collaboration agreement the exact details of the contractual obligations of the foreign companies and, thereafter ascertain, with reference to the definition of the terms "Royalty" and "fees for technical services" contained in Expln. 2 to s. 9(1)(vii) and 9(1)(ii) respectively, whether the amount paid by the assessee-company to the foreign companies is royalty or fees for technical services. The details substrancted (sic) in the concordance table below will clearly indicate that it was royalty within the meaning of s. 9(1)(vi) that was paid by the assessee-company to the foreign companies: Paragraph No. of the Agreement Activity/tas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be reiterated here that, as pointed out by the Gujarat High Court in the case of Meteor Satellite Ltd., the provisions of s. 9(1)(vii) being more general in nature as compared to the provisions of s. 9(1)(vi), the latter would prevail over the former. 26. In view of the foregoing, therefore, we hold that the case before us is one of royalty. Indeed, the CIT(A) has also come to the same conclusion, though he has not given us the benefit of his reasoning process. 27. Since the amount in question is royalty payable under a post 31st March, 1976 agreement, under s. 44D of the Act no deduction in respect of any expenditure or allowance is admissible. This would mean that the gross amount paid is itself the taxable income. 28. Secondly, the royalty in question is a lump sum consideration of the type referred to in s. 115A(1)(b)(ii)(1) and, hence, income-tax is exigible at 20 per cent. 29. Thirdly, under Item No. I(2)(b)(iv)(B)(1) of the First Schedule to the Finance Act, 1984, tax deductible at source is also fixed at 20 per cent. 30. From the foregoing it is clear that one of the significant results of the systematisation or rationalisation of assessment of foreign compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny as agents of the foreign companies. Be that as it may, as we see it, there is nothing in s. 163, which prevents the assessee from filing a return in the capacity of a representative assessee. On the contrary, under s. 163(1)(c), the assessee is clearly an agent of the foreign companies and, as such, is entitled to file a return in that capacity, and on its own. We may here mention that the provisions of s. 163(2) are based on the principle of audi-alteram partem, which is an essential ingredient of natural justice. Those provisions are designed in the interest of justice and they will come to play only when the Assessing Officer chooses to treat a person as an agent of the non-resident. This, however, cannot lead to the conclusion that the assessee is prevented from filing a return in the status of a representative assessee for the purpose of claiming the refund. 35. But the matter does not rest there. As in the case of the foreign companies, so in the case of the assessee-company, it is unnecessary to go through such motions. The position would, of course, have been different, if the making of the assessment on the basis of such a return had entailed any inquiry for purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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