2002 (6) TMI 184 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of SDR variation on design and engineering charges.
2. Taxability of design and engineering charges on a receipt basis.
3. Classification of SDR variation on design and engineering charges as fees for technical services under Section 9(1)(vii) of the IT Act.
4. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Czechoslovakia.
5. Levy of interest under Section 234B of the IT Act.
6. Deduction of expenditure incurred for earning income from technical assistance.

Issue-wise Detailed Analysis:

1. Taxability of SDR Variation on Design and Engineering Charges:
The assessee contended that the SDR variation on design and engineering charges does not constitute income liable to tax, as it represents a variation due to the difference in the rate of rupee as per the International Monetary Fund (IMF) adopting the base date as 22nd October 1986. The assessee argued that this variation is covered by Article 11 of the DTAA between India and Czechoslovakia, which defines 'interest' to include income from debt claims. The Tribunal concluded that the receipt for import of drawings and designs and technical documents, being in the nature of plant and machinery, cannot be considered as fees for technical services. Consequently, the SDR variation is not taxable.

2. Taxability of Design and Engineering Charges on a Receipt Basis:
The assessee argued that design and engineering charges, having accrued and shown in earlier years, cannot be brought to taxation again on a receipt basis. The Tribunal agreed with the assessee's contention, noting that the principal amount representing the cost of drawings delivered outside India cannot be liable to tax in India. Therefore, the assessment of the same on a receipt basis was not justified.

3. Classification of SDR Variation on Design and Engineering Charges as Fees for Technical Services:
The assessee contended that the SDR variation on design and engineering charges should not be classified as fees for technical services under Section 9(1)(vii) of the IT Act. The Tribunal supported this view, stating that the receipts for import of drawings and designs and technical documents cannot be treated as fees received in India and are not taxable in India. The Tribunal also noted that the provisions of the DTAA would override the provisions of the domestic law in case of any conflict.

4. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Czechoslovakia:
The Tribunal emphasized that the provisions of the DTAA between India and Czechoslovakia would override the provisions of the domestic law. The Tribunal referred to various case laws, including the decision of the Andhra Pradesh High Court in CIT vs. Visakhapatnam Port Trust, which held that the DTAA would prevail over the domestic law in case of any conflict. Consequently, the SDR variation, being covered under the DTAA, was not taxable.

5. Levy of Interest under Section 234B of the IT Act:
The Revenue argued that interest under Section 234B is mandatory and not appealable. However, the Tribunal noted that the assessee had filed returns declaring 'Nil' taxable income and had obtained a 'no objection certificate' from the assessing authority for the remittance without deduction of tax. The Tribunal referred to various case laws, including the decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. vs. CIT, which held that the levy of interest is part of the process of assessment and can be disputed in appeal. Therefore, the Tribunal concluded that interest under Section 234B was not leviable.

6. Deduction of Expenditure Incurred for Earning Income from Technical Assistance:
The assessee contended that the expenditure incurred for earning income from technical assistance should be allowed as a deduction. The Tribunal agreed with the assessee's contention, noting that the expenditure relating to the receipt of technical assistance is eligible to be deducted in computing the income. The Tribunal also noted that the income from technical assistance had been assessed in earlier years, and the expenditure incurred for earning the same should be allowed as a deduction.

Conclusion:
The Tribunal allowed the appeals filed by the assessee, concluding that the SDR variation on design and engineering charges is not taxable, the design and engineering charges cannot be taxed on a receipt basis, and the expenditure incurred for earning income from technical assistance should be allowed as a deduction. The Tribunal also held that interest under Section 234B was not leviable. The appeals filed by the Revenue were dismissed.