TMI Blog2002 (6) TMI 184X X X X Extracts X X X X X X X X Extracts X X X X ..... does not fall under any of the heads of income specified in the AADT and hence the same is not taxable in India. As per Ground No. 4, it has been contended that as design and engineering charges having accrued and shown in earlier years was considered for taxation, cannot be brought to taxation again on receipt basis. As per the Ground No. 5, it has been submitted that the CIT(A) should not have held that SDR variation on design and engineering received by the assessee as it is meant for technical services under s. 9(1)(vii) of the IT Act. Since the drawings, designs and technical data are despatched from abroad which is in the nature of plant supplied from abroad which cannot be termed as fee from technical services. In this context, the assessee-company has relied on the case law Goyal Trading Co. vs. ITO (1989) 28 ITD 265 (Gau) held by the Hyderabad Bench of Tribunal in the case of Klayman Porcelains Ltd. and on the judgment of the Hon ble Supreme Court in the case of Scientific Engineering House (P) Ltd. vs. CIT (1985) 49 CTR (SC) 386 : (1986) 157 ITR 86 (SC). Alternatively, vide ground No. 5(b), the assessee has taken the contention that even assuming without admitting design ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Economic Affairs, issued on 8th March, 1988, as has been approved by the Government of India. According to the learned authorised representative as per the written submission, the AO brought to tax the receipt of Rs. 3,25,64,000 towards design and engineering fees for the asst. yr. 1988-89. Apart from this, the AO brought to tax the technical assistance of supervision and erection amounting to Rs. 1,50,25,360. The assessee-company took the contention before the AO that the cost of drawings and designs and designs supplied outside the country is not liable to tax which was not accepted by the AO on the ground that it falls within the ambit of s. 9(1)(vii). Hence, the assessee-company challenged the order before the High Court forum. The AO also did not accept the contention of the assessee-company regarding the claim of deduction of expenses at the rate of 20 per cent on receipt of technical assistance of supervision and erection amounting to Rs. 1,50,25,360 and taxed this entire amount in the asst. yr. 1993-94. In this case, the learned authorised representative of the assessee has given a detailed picture of the amounts subjected to tax by the AO in the earlier years in the writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity demanding deduction of tax at source before remittance, and declining to give a no objection certificate without deduction of tax, the appellant filed an appeal before the CIT(A), Visakhapatnam in ITA No. 77/DC (SR)/VSP/91-92 and the said appeal was allowed by order dt. 20th Nov., 1991 directing the assessing authority to issue the NOC without deduction of tax. Pursuant to the aforesaid order the Dy. CIT issued a NOC dt. 26th Nov., 1991 permitting remittance of aforesaid sum of Rs. 2,03,11,400 without payment of any tax. While this was so in the assessment for the asst. yr. 1992-93, the assessing authority had subjected to tax the aforesaid sum Rs. 2,03,11,400. Against the aforesaid assessment an appeal was filed before the CIT(A), who by his order dt. 29th Feb., 1996, confirmed the assessment. It was contended before the CIT(A) that the aforesaid sum is not liable to tax for the following reasons among others. That the aforesaid amount represents SDR variation on the amount claimed by the appellant on the debt due on account of the principal amount not being paid in a lumpsum but only in annual instalments. This claim was based on the variation of the rate of rupee as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admittedly beneficially owned by a resident of other contracting state and is derived in connection with a credit, which is approved by the Government of India vide their letter dt. 9th March, 1988. (iv) The term interest used in art. 11 of the Double Taxation Avodance Agreement is defined in cl. (iv) of the art. 11 which has been used in the said article meaning income from debt claims of every kind whether or not secured by mortgage and whether or not carrying a right to participate in the debtor s profits and in particular income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this article. (v) The expression debt has been defined to mean "a sum of money due under an express or implied agreement". Hence, unpaid purchase consideration is also a debt. The learned senior counsel has cited the following decisions on this point: (i) Kesoram Industries Cotton Mills Ltd. vs. CWT (1965) 59 ITR 767 (SC) (ii) Banchharam Majumdar vs. Adyanath Bhattacharjee (1909) ILR 36 (Cal) 5. In reply to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to compensate for the fluctuation in currency rate based on the SDR rates issued by the IMF which consequently constitutes a compensatory payment. In this context, the learned counsel have submitted that Courts have considered the scope of a compensatory payment to compensate for the non-payment of an amount on a specified date and to pay the amount over a period in instalments and distinguished the same from penalty which is a payment of a penal character. In CIT vs. M. Chandrasekhar (1985) 44 CTR (SC) 110 : (1985) 151 ITR 433 (SC), the Supreme Court considered a case where an ITO extended the time for furnishing the return and the question arise whether furnishing the return within the extended time attracted penalty. The Court held that filing of the return within the extended time was in exercise of the powers vested in the ITO and consequently the ITO could not invoke the penalty clauses. Applying the above ratio in the instant case, the contractor had agreed to extend the time for payment subject to the compensation based on the SDR clause and hence there is no question of any penalty in so far as the payment was pursuant to the agreement between the parties. 7. The learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and these documents had a vital function to perform in the manufacture of these instruments; in fact, it was with the aid of these complete and up-to-date set of documents that the appellant was able to commence its manufacturing activity and these documents really formed the basis of the business of manufacturing the instruments in question. That by themselves these documents did not perform any mechanical operations or processes did not militate against their being a plant since they were in a sence the basic tools of the assessee s trade having a fairly enduring utility, though owing to technological advances they might or would in course of time become obsolete. The capital asset acquired by the appellant, viz., the technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature, fell within the definition of "plant" and was, therefore, a depreciable asset. CIT vs. Klayman Porcelains Ltd. (1988) 229 ITR 735 (AP) In this case the Hon ble AP High Court has held that this was a case of a foreign company undertaking to supply, erect and commission a kiln in India, the only service rendered in India being that of supervision by an exper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not taxable. In this connection, they relied on the order of the Hyderabad Bench of the Tribunal in the case of ITO vs. National Mineral Development Corpn. Ltd. 10. On the other hand, the learned Departmental Representative on behalf of the Revenue vociferously urged the Bench that in the instant case the payments have been made in the Indian currency on the basis of the SDR variation and as per the contract the payments said to have been made towards interest in instalments are definitely penal in nature. Therefore, the AO as well as the CIT(A) have rightly held it to be taxable in India. In addition to this argument, the learned Departmental Representative on behalf of the Revenue invited our attention to the relevant portion of the paper book and made an appreciable attempt to convince the Bench that the arguments advanced on behalf of the assessee does not have a sound footing. 11. On hearing the rival submissions, on a perusal of the available materials on record and after going through the cited case laws from any view of the matter, we do not find any substance in the orders of the authorities below to justify the inference that the receipt by the foreign company for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oboration agreement between the foreign company and Indian company, the agreement stipulating that foreign company would not be liable to pay any taxes in India and that Indian company is liable to pay tax which may have to be paid by foreign company. The foreign company is bound to file returns and pay advance tax. It has been further held that determination of question whether income accrued or arose to it in India would affect it and foreign company is entitled to file application for advance ruling as per the provisions of ss. 245N and 245Q. In reply to the argument advanced by the learned Departmental Representative, the learned counsel on behalf of the assessee submitted that for the relevant assessment year under consideration i.e., asst. yr. 1992-93, the assessee-company filed a return on 25th Dec., 1992, through RINL in their representative capacity. The assessee declared Nil taxable income on the ground that although they had received some amount from RINL, the entire amount was exempted under IT Act. The assessee s claim was based on the NOC dt. 26th Nov., 1991, issued consequent to the order of the CIT(A) in the assessee s case in ITA No. 77/DC/SR/BSP/91-92 dt. 20th Nov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the process of assessing the tax liability of the assessee. Inasmuch as the levy of interest is a part of the process of assessment, it is open to an assessee to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy at all. (iv) CIT vs. Padma Timber Depot (1988) 67 CTR (AP) 109 : (1988) 168 ITR 646 (AP). In this case, the Hon ble A.P. High Court has held that in as much as the levy of interest is part of the process of the assessment, it is open to an assessee to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy at all. (v) CIT vs. A.P. Small Scale Industrial Development Corpn. (1989) 175 ITR 352 (AP). In this case the Hon ble A.P. High Court agreeing with the view of the Tribunal held that the assessee not only disputed the charging of interest but also some of the additions and deductions made in the assessment. Therefore, the appeal to the appellate authority against such charging of interest is maintainable. (vi) CIT vs. Sri Durga Tobacco Co. (1999) 154 CTR (AP) 63 : (1998) 234 ITR 487 (AP). In this case, the Hon ble A.P. High Court has held that while determining the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agree with the grounds taken by the Revenue and according to our considered opinion, the appeal preferred by the Revenue deserves to be rejected. In the result, the appeal preferred by the Revenue is hereby dismissed. ITA No. 2190/H/96 (Asst. yr. 1993-94) In this case the assessee has taken four grounds of appeal against the order of the CIT(A). The first ground relates to confirmation of the order of the AO with regard to fee for supervision of erection of equipment received from RINL under the head "Fee for technical services" and consequently disallowing the deduction of expenditure incurred for earning the said income claimed by the assessee, under s. 44D, rejecting the plea of the assessee that the said income is assessable under the head "profits and gains of business or profession", as the same was derived from a permanent establishment in India. In the same ground No. 1, the assessee-company has taken further stand that it was not correct on the part of the first appellate authority to hold that design and engineering fee under the head "Income from other sources" had been offered to tax by the assessee-company in earlier years. Assailing the order of the CIT(A) at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-94. Those are: (i) The claim for the deduction of expenditure; (ii) The assessment of SDR variation of supervision fee and 2nd instalment of design and engineering; (iii) The nature of receipt of design and engineering. With regard to issues No. 2 and 3, the assessee-company s contention and arguments are identical with that of the asst. yr. 1992-93. Clarifying their stand, the assessee-company has invited the attention of the Bench to para 7.1 of the assessment order wherein the AO has erroneously observed that the assessee himself was offering the income as "fees for technical services" and it has been taxed accordingly as per s. 44D on a fixed rate of tax unlike the business income which is taxed at a higher rate. The returns and the computation in respect of instant assessment year filed originally also testifies the same. As per their contention, the AO has confused in this regard on the nature of the receipts relating to the income from technical assistance with the payment relating to design and engineering. Assailing the order of the CIT(A) on confirmation of the assessment order, it has been submitted in the written submission that vide para 7.2 and 7.3 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the gross receipt. However, for the year 1993-94, the actual expenses have been disclosed and the same will have to be allowed. Vide para 1 of p. 5 of the written submission, it has been brought to the notice of this Bench that while computing the income received under the head "technical assistance" there is a double assessment to the extent of 20 per cent of the total contract amount. During the asst. yr. 1988-89, 20 per cent of the amount was received and this was offered for assessment which was also assessed as is evident from the assessment order annexed to the paper book. Again in the asst. yr. 1993-94, the entire amount was assessed which means 20 per cent has suffered tax again. 3. The learned authorised representative has further submitted that the view of the AO is fantastic with regard to the revised expenditure on the ground that no revised return is filed. In the assessee s case, the assessee had claimed a higher amount of Rs. 14,60,00,000 as expenditure while in the course of assessment proceedings, it has reduced the claim of expenditure to Rs. 11,76,37,225, along with auditor s certificate to that effect. A revised return is not required to file when an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y registered in Tokyo, entered into an agreement with Maruti Udhyog Ltd. For manufacture and supply of equipments pertaining to setting up paint line and allied equipment, at the factory site at Gurgaon. The assessee-company had not only to supply raw material and the basic drawings and designs but it had also to undertake work of installation at the factory and the commissioning of the project in question. The break-up of the contract price contained the price for manufacture and supply of hardware (FOB KOBE PORT) and erection and supervision thereof 1,020,470 Yens, which included Rs. 44,86,932 as supervision fee . The AO found that supervision fee had been paid as consideration for the rendering of all managerial, technical and consultancy services. For the asst. yr. 1984-85, the AO held that the supervision fee was covered under the definition of fee for technical services , as provided in the earlier portion of Expln. 2 to s. 9(1)(vii) and taxed the same at the flat rate of 40 per cent. On appeal, the CIT(A) confirmed the view taken by the AO." On second appeal, the Tribunal held as follows: No doubt, the activity of supervision was involved, but it was a part and parce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers tilt the factual position in favour of the assessee-company more than that of Revenue. In view of the fact that the AO while completing the assessment for this assessment year has not considered the assessment of the earlier years in right perspective. The legal position, particularly the provisions of the DTAA between India and Choslovakia and the relevant provisions of the Act along with the case laws cited by the learned counsel both at the time of argument and while filing the written submission also tilt heavily in favour of the assessee. The fee for supervision having been paid for services rendered in India and the non-resident company having permanent establishment in India, the same should be subjected to tax as business income, allowing deduction for the expenditure incurred, as claimed by the assessee-appellant. When both factual as well as legal aspect favour strongly to the cause of the assessee-company, the appeal has to be allowed in favour of the assessee. In the result, the appeal is allowed. ITA No. 2161/H/96 (Asst. yr. 1993-94) In this appeal, the Revenue has taken the following grounds: 1. The order of the CIT(A) is erroneous in law and on facts; 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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