Income Tax Appellate Tribunal - Hyderabad
Solid State Devices India Ltd. vs Income-Tax Officer on 15 July, 1986
Equivalent citations: [1986]19ITD169(HYD)
ORDER
T. Venkatappa, Judicial Member
1. The assessee-company is engaged in the manufacture of electronic components. It entered into an agreement dated 3-7-1976 with a foreign company, viz., Cassie Engineering Co., Florida, U.S.A. for the supply of technical know-how in the form of designs, drawings, documentation, etc. As per clause 4(1) of the agreement the assessee was to pay a sum of $ 35,000 at the time of the transfer of technical know-how, drawings and documentation. In pursuance of the proposals approved by the Central Government as per the Government letter dated 28-2-1976, the assessee had made initial payment of $ 35,000 to the foreign company though the agreement was itself executed subsequently on 3-7-1976. On 23-11-1976, the assessee remitted the first instalment of $ 35,000 equivalent to Rs. 3,18,181 to the foreign company. The ITO passed an order under Section 163 of the Income-tax Act, 1961 ('the Act') on 22-2-1979 treating the assessee as the agent of the non-resident company. Against this there was no appeal. A notice dated 22-2-1979 under Section 148 of the Act was issued by the ITO which was received by the assessee on 6-3-1979. In response to this notice the assessee filed a nil return on 29-4-1980. The ITO made the assessment on 26-3-1983. In this assessment order the ITO held that as per Section 9(1 )(vi) of the Act, the impugned payment to the foreign company should be treated as royalty paid by the assessee and accordingly it should be considered as representing the income accruing or arising in India to the non-resident company. Since the foreign company had not exercised the option as mentioned in Explanation 1 to Section 9(1)(vi) he held that the agreement executed cannot be treated as an agreement executed before 1-4-1976. Accordingly, the ITO treated the entire payment of royalty of Rs. 3,18,181 as the income of the foreign company arising or accruing in India which should be taxed by treating the assessee as the agent of the foreign company. Accordingly, he taxed the same. The assessee appealed to the Commissioner (Appeals). He held that the assessee's objection as to the legality of the assessment order cannot be sustained. As per the letter dated 30-10-1976 addressed to the ITO the assessee has accepted the position that it could be treated as agent of the non-resident company under Section 163. As per Section 153(2)(a) of the Act the assessment could be made within four years from the end of the assessment year in which notice under Section 148 was served. The assessment order has been passed within that period and it is valid. He also did not agree with the assessee's submission that the sum of $ 35,000 remitted to the foreign company could not be considered as income of that company accruing or arising in India. He held that the option under Explanation 1 to Section 9(1)(vi) was not exercised by the non-resident company and so the proviso to Section 9(1)(vi) will not be applicable. The concerned payment is in the nature of royalty payment falling within the term 'royalty' as per Explanation 1 to Section 9(1)(vi). The relevant agreement dated 3-7-1976 was executed long after 1-4-1976 and so Section 9(1)(vi) is squarely applicable. The ITO was justified in treating the remittance of $ 35,000 as the income of the foreign company accruing or arising in India. Against the above order, the present appeal is preferred.
2. The learned counsel for the assessee strongly urged that the remittance of royalty of $ 35.000 is not income liable to be taxed under Explanation 1. to Section 9(1)(vi) Hence, the assessment is bad in law. Exercising the option is only a formality as this is not a case where two options are available so that the assessee can opt for one of them. He further submitted that in the assessee's letter dated 28-10-1976 addressed to the ITO it was stated that the option letter will be filed shortly and this should be deemed as sufficient compliance in terms of Explanation. He further urged that the ITO has allowed the assessee to remit the amount which means the ITO accepted the submission of the assessee. Once the payment is not liable to tax the question of treating the assessee as agent does not arise. He strongly urged that there is no valid order under Section 163 and so there cannot be an assessment. Hence, the assessment made is invalid. He also submitted that the assessment made is to be treated as one made under Section 147(b) of the Act and so barred by time.
3. The learned departmental representative submitted that in the absence of the option being filed by the assessee cannot get the benefit of exemption. He submitted that it is only on account of letter dated 30-10-1976 of the assessee agreeing that it could be treated as agent of the non-resident company the ITO allowed the remittance to be made to the non-resident. He submitted that the order under Section 163 passed on 22-2-1979 was not appealed against. In view of that order, which has become final, the assessee cannot say that it cannot be treated as an agent of the nonresident. In the letter dated 22-10-1979 of the ITO column (h) was not struck of by mistake as it was only a stereotyped notice and on that account the assessee cannot plead that there was no subsisting order under Section 163. He further urged that the assessment has been reopened under Section 147(a) and it is within time. Thus, the reassessment order is valid.
4. We have considered the rival submissions. The ITO passed an order on 22-2-1979 under Section 163 treating the assessee-company as agent of the non-resident company. Against this order no appeal was preferred by the assessee. Having accepted the above order the assessee cannot now turn round and say that it is not the agent of the non-resident company. Further, assessee by its letter dated 30-10-1976 addressed to the ITO has stated that it has no objection for being treated as an agent of the nonresident company under Section 163. In view of this letter the ITO passed the order dated 22-2-1979 treating the assessee as agent of the non-resident company and permitted it to remit the sum of $ 35,000. Having accepted by the above letter dated 30-10-1976 to be treated as agent of the nonresident company, the assessee cannot turn round and say that it cannot be treated as agent of the non-resident company. Thus, the ITO was perfectly justified in treating the assessee as the agent of the non-resident company.
5. Under Section 9(1)(vi) income by way of royalty payable by a person who is a resident shall be deemed to accrue or arise in India. There is an exception to this rule under the proviso to the abovesaid section according to which nothing contained in Section 9(1)(vi) 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 or specification 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 1-4-1976 and the agreement is approved by the Central Government. Explanation 1 which is relevant for our purpose reads as under :
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 ; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under Sub-section (1) or Sub-section (2) of Section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Income-tax Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976.
According to the above Explanation unless the non-resident exercises an option by furnishing the declaration in writing to the ITO, the agreement executed on 3-7-1976 cannot be regarded as agreement made before 1-4-1976. In the instant case, the non-resident has not exercised any such option. Though the Central Government has approved the proposal on 28-2-1976 the agreement was executed on 3-7-1976. In the absence of the option by the non-resident as required under Explanation 1 the agreement dated 3-7-1976 cannot be regarded as an agreement made before 1-4-1976. Hence, the proviso to Section 9(1)(vi) does not come to the rescue of the assessee. Once the proviso does not apply, the income by way of royalty payable by a person who is a resident shall be deemed to accrue or arise in India as per Section 9(1)(vi) and, thus, the remittance of $ 35,000 is liable to be taxed. Since the assessee is treated as agent of the non-resident, the assessment made on the assessee is perfectly valid.
6. We do not find any force in the contention that the assessment is time barred. Since the non-resident did not file a return, notice under Section 148 of the Act was issued. The assessment is reopened under Section 147(a) and not under Section 147(b). As per Section 153(2)(a) the assessment could be made within four years from the end of the assessment year in which 148 notice was served. In the instant case notice under Section 148 was served on 6-3-1979 during the year ending 31-3-1979 and assessment could be made on or before 31-3-1983. The assessment order was passed on 26-3-1983. Hence, it is within the time limit. Thus, the reassessment order is valid. Thus, we uphold the order of the Commissioner (Appeals).
7. In the result, the appeal fails and is dismissed.