Income Tax Appellate Tribunal - Vizag
Skoda Export Co. Ltd. vs Deputy Commissioner Of Income Tax on 17 June, 2002
ORDER
N.L. Dash, J.M.
1. In these group of cases, the assessee is one and it relates to two asst. yrs. 1992-93 and 1993-94. For both the assessment years, both the assessee and the Revenue have filed appeals. Therefore, it is deemed proper to pass one common consolidated order for the sake of (1) ITA No. 1176/H/96 (Asst, yr. 1992-93) The assessee-company has raised six grounds in this second appeal preferred by them. The first three grounds raised by the assessee relate to upholding of the AO's order by the CIT(A) on SDR variation in respect of design and engineering charges which partakes the character of the fees for technical services. The assessee vide ground No. 2 and 3 has raised a serious objection to the view taken by the CIT(A) on the ground that as per the Article 22 of AADT between India and Czechoslovakia only income of the nature received by the foreign company as specified under the AADT are taxable in India and the income by way of SDR variation being in the nature of foreign exchange 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 Section 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. v. 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. v. CIT (1986) 157 ITR 86 (SC). Alternatively, vide ground No. 5(b), the assessee has taken the contention that even assuming without admitting design and engineering fee received by it in the nature of fee for technical services as defined in Section 9(1)(vii) of the IT Act, the same having been covered by exemptions provided in Expln. 2 of the said section is not taxable. In this connection, they have placed reliance on the order of the Hyderabad Bench of the Tribunal in the case of ITO v. National Mineral Development Corporation (1992) 44 TTJ (Hyd) 8 : (1992) 42 ITD 570 (Hyd) Ground No. 6 being general in nature, does not require any consideration.
2. The brief facts giving rise to the 2nd appeal are that the assessee is a nonresident company incorporated in Czechoslavakia being represented by M/s Rashtriya Ispat Nigam Ltd. (hereinafter will be known as RINL) in its capacity as a representative assessee. The assessee-company had executed three contractual agreements with RINL for manufacture and delivery outside India of their equipments for medium merchant and structural mill of Visakhapatnam Steel Project, for supply of design & engineering services abroad, for technical assistance through supervision of erection, commissioning and performance guarantee tests, and for the overall responsibility in connection with the medium merchant and structural mill of the above project, the first two agreements were entered into on 20th July, 1987, and the third agreement was entered into on 31st Aug., 1987. The total contract price for the supply of design and engineering charges outside India was non convertible Indian Rs. 16,28,20,000 and the consideration for supervision of erection, commissioning, performance guarantee tests of the mill was NCI Rs. 7,51,26,800. As per the terms and conditions of the contract agreement executed between the two parties that 10 per cent of the contract price would have to be paid in advance towards down payment and another 10 per cent would have to be paid within 12 months from the date of the letter of acceptance and the balance 80 per cent working out to Rs. 13,02,56,000 to be paid in 5 annual successive instalments. The instalment scheme involved an interest rate at 4.5 per cent p.a. with each instalment.
As per the contention taken by the learned authorised representative of the assessee and the written submission filed before this Bench the above contract was subject to the approval of the Government of India as evidenced by the letter of the Ministry of Finance, Department of Economic Affairs, issued on 8th March, 1988, as has been approved by the Government of India (finds place at p. 63 and 64 of Paper book No. 2).
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 (copy of the assessment order finds place at pp. 227 to 229 of paper book). 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 Section 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 (as per p. 229 of the paper book). 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 written submission filed by him.
3. In this assessment year under consideration i.e., asst. yr. 1992-93, RINL filed a return on behalf of the assessee-company on 26th Dec., 1992, declaring 'Nil' taxable income. During the relevant provions year, the appellant had received a sum of Rs. 5,67,94,174. This consisted of two receipts of Rs. 3,19,12,720 remitted on 25th June, 1991 and Rs. 2,48,81,454 remitted on 6th March, 1992. The first sum is part of Rs. 13,02,56,000 (80 per cent of D&E) which had already been subjected to tax by the assessing authority for the asst. yr. 1991-92 on accrual basis. The second item of Rs. 2,48,81,454 represented SDR variation on the principal and interest relating to the first instalment of D&E charges, In the above circumstances the appellant claimed the entire, sum is not liable to tax in the asst. yr. 1992-93.
The assessing authority, however, took the view that a sum of Rs. 2,03,11,400 representing the SDR variation on the principal that was in the nature of further payment towards the supply of D&E, and in this view of the matter subjected the same to tax at 30 per cent. In addition to tax the assessing authority .also levied interest under Section 234(B) amounting to Rs. 43,87,248 (Page No. 33 of the paper book No. 2). At the time of payment of principal amount in respect of the supply of D&E, the appellant had sought by issue of a 'no objection certificate' without tax deduction, which was not granted by the AO. Thereupon the appellant filed an appeal before the CIT(A), who by his order in ITA No. 92/Vsp/87-88, dt. 30th March, 1989, (pp. Nos. 105 to 117 of the paper book No. 2) held that the above payment is not liable to tax and directed the assessing authority to issue the 'no objection certificate' authorising the appellant to make the remittance without deduction of tax. Accordingly the assessing authority granted an NOC dt. 20th June, 1989, authorising the remittance of Rs. 16,28,20,000 comprising the entire sum payable, (p. No. 129 of the paper book No. 2) Since the amount that was due was not paid in a lump sum and that was discharged in 5 instalments, the appellant had to pay an extra amount of Rs. 2,03,11,400 representing the SDR variation on first instalment. For remitting the said amount, without deduction of tax, the appellant sought for issue of 'no objection certificate'. This was against rejected by the AO, who directed that tax shall be deducted at 30 per cent on the proposed remittance. Again against the order of the assessing authority 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 (pp. Nos. 171 to 175 of the paper book No. 2) 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 (P. Nos. 27 to 33 of the paper book No. 2). Against the aforesaid assessment an appeal was filed before the CIT(A), who by his order dt. 29th Feb., 1996, confirmed the assessment (pp. Nos. 43 to 51 of the paper book). 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 International Monetary Fund, adopting the base date as 22nd Oct., 1986.
That, in so far as this is a payment based on the aforesaid debt claim relating to the principal amount, it cannot be assessed to tax.
That the principal amount for the supply of design and engineering itself is not liable to tax and consequently, the above payment cannot also be subjected to tax.
That the said amount is not liable to tax in India as the double taxation avoidance agreement between agreement between India and Czechoslavakia.
That the variation has been taken adopting the base date as 22nd Oct., 1986, and in so far as the variation has occurred from year to year, in any event, even assuming without conceding that the variation results in taxable income, it is only the amount representing the variation during the previous year relevant to the asst. yr. 1992-93, that can attract liability. This argument was advanced without prejudice to the claim that the entire amount was not liable to tax on the various grounds referred to above.
The CIT(A) rejected the contention that the aforesaid sum of Rs. 2,03,11,400 is not liable to tax and confirmed the assessment of the same.
As regards the levy of interest under Section 234B which was also challenged in appeal, the CIT(A) held that the interest is not leviable under Section 234B insofar as in the view of assessing authority, the tax was deductible at source on the aforesaid sum under the provisions relating to payment of advance tax, the income subject to deduction of tax source is not liable to payment of advance tax.
The present appeal by the assessee is against the order of the CIT(A), confirming the assessment of the aforesaid sum of Rs. 2,03,11,400.
4. As per the vociferous argument made by the learned senior counsel of the assessee-company represented through RINL and as per their written submission filed before us, the following factual aspect as well as legal aspect emerge from out of the same.
(i) The income assessed to, represents the variation on account of the difference in the rate of rupee as per International Monetary Fund adopting the base date as 22nd Oct., 1986. Therefore, according to the assessee-company, it does not constitute income liable to tax.
(ii) The same is covered by Article 11 of the Agreement for Avoidance of Double Taxation between India and Czechoslovakia.
(iii) The amount in question is 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 Article 11 of the Double Taxation Avodance Agreement is defined in Clause (iv) of the Article 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. v. CWT (1965) 59 ITR 767 (SC)
(ii) Banchharam Majumdar v. Adyanath Bhattacharjee (1909) ILR 36 (Cal)
5. In reply to the querry raised by the Bench as to whether the Double Tax Avoidance Agreement can contain a definition of interest which is at variance with the normal accepted manner of the term, the learned counsel submitted that the Courts have consistently held that the Double Taxation Avoidance Agreement would override the provisions of domestic law and where there is variance between the provisions contained in the domestic law and the terms of Double Taxation Avoidance Agreement, the latter would prevail over the former. In this connection vide para xii, p. 15 of the written submission, it has been submitted by the learned senior counsel that in the case of CIT v. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP), the Hon'ble High Court of AP has held that the charging provision as well as definition of "total income" under the Act are expressly made subject to the provision of the Act including agreements made under Section 90. The Hon'ble High Court referred to the decision of the House of Lords in Ostime (Inspector of Taxes v. Australian Mutual Provident Society) (1960) AC 459 : (1960) 39 ITR 210 (HL) where it was held that if there was conflict between the terms of the DTA agreement and the taxation statute, the DTA agreement alone would prevail. The Hon'ble Court also referred to the decision of the Supreme Court in Turner Morrison & Co. Ltd. v. CIT (1953) 23 ITR 152 (SC) wherein it was held that the provisions of the Double Taxation Avoidance Agreement would override the provisions of Sections 4 and 5 r/w Section 9 of the IT Act.
6. Further, a decision of the Authority for Advance Rulings in Advance Ruling No. P-11 of 1996 has been quoted which has been reported as XYZ, In re (1997) 228 ITR 55 (AAR) wherein it has been held that that it is settled law that the specific provisions of an agreement for avoidance of double taxation should override the general provisions of the IT Act, 1961. Further in the written submission filed on behalf of the assessee-company, the distinction between penalty and interest has been made clearly in order to show that interest or additional payments pursuant to agreement between the parties are totally different from penalty. It has been further attempted to show that in order to compensate the payment over a period of 5 years, the interest element has been taken into consideration in order 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 v. M. Chandrasekhar (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 learned counsel for the assessee in their written submission vide para (xvi) p. 18, while meeting the contention of the AO in the assessment order with regard to the income received on account of SDR clause partaking the character of the principal amount subjected to tax, has accounted the same on the ground that this contention/argument of the AO is not factually as well as legally correct. As per their submission even assuming without conceding when the principal amount is not taxable how can the income received on account of SDR clause will be taxable ? Assailing the order of the CIT(A), they urged the Bench that the principal amount representing the cost of drawings delivered outside India cannot be liable to tax in India. The view taken by the CIT(A) in this regard requires reconsideration at the end of the Tribunal.
The learned counsel has further tried to distinguish the facts of the case reported in AEG Aktiengeselsthaft v. IAC (1993) 44 TTJ (Bang) 648 : (1994) 48 ITD 359 (Bang) decided by the Bangalore Bench of the Tribunal where the Tribunal had taken the view that the design and engineering fee is liable to be assessed as fees for technical services. The CIT(A) has relied on this decision while deciding the issue. According to the learned authorised representative of the assessee neither the authorities in the appellant's appeal for the year 1991-92 nor the case of AEG (supra) before the Tribunal at Bangalore had considered the true nature of the transaction relating to the design and drawings. Further quoting certain terms and conditions of the existing contract between the parties, it has been submitted that as per the terms and conditions of the contract, the designs and drawings are to be delivered at Praha in Czechoslovakia from outside India.
In support of their contention, they cited the following case laws which are analysed as under.
In the case of Scientific Engineering House Pvt. Ltd. v. CIT (supra). In this case the Hon'ble Supreme Court has held that the drawings, designs, charts, plants, processing, data and other literature comprise in the "document service" constituted a book and fell within the definition of "plant" as per Section 43(3) of the IT Act, 1961. The purpose of rendering such documentation service by supplying these documents to the appellant was to enable it to undertake its trading activity of manufacturing the odolities and microscopes 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 v. 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 expert deputed by the foreign company. The amount was not paid for imparting any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade-mark or similar property falling under Clause (ii) of Expln. 2 to Section 9(1)(vi) or for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill within the meaning of Clause (iv) of Expln. 2 A close reading of the second type of work as well as the other items of the memorandum showed that the consideration was paid for construction/installation of the kiln. Therefore, the payment made by the assessee to the non-resident company did not constitute "income" by way of royalty of the non-resident company within the meaning of the provisions of Section 9(1)(vi) of the Act.
In its original case decided by the Hyderabad Bench of the Tribunal Klayman Porcelains Ltd. v. ITO (1985) 21 TTJ 283 (Hyd), the Hyderabad Bench of the Tribunal has held that it is now well-settled that technical drawings, etc. constituting know-how would be 'plant'. If these could be treated as plant, supply of the same from abroad in the same manner as the supply of materials would have the same consequences. No part of the activities relating to supply of materials or engineering data were undertaken in India. If there was no taxable profit element in the supply of materials, because they were sent from abroad, there could not similarly be any taxable element in the supply of such engineering data. From the angle alone, the assessee was entitled to succeed.
8. The learned authorised representatives on behalf of the assessee have cited some more case laws in the written submission on the self same point decided by other High Courts and other Benches of the Tribunal. Since the issue is one and the point resolved is the same, in order to avoid repetition, it has been deemed proper not to quote the same and make the order a more langthy one.
9. In furtherance to their written submission and citation of case laws on the point of the drawing and designs supplied by Skoda Export Co. Ltd. to RINL, the price received for the same, even assuming for technical services as defined in Section 9(1)(vii) of the IT Act, according to the learned counsel the same has been covered by the exclusion clause provided in Expln. 2 of the said section and, therefore, it is not taxable. In this connection, they relied on the order of the Hyderabad Bench of the Tribunal in the case of ITO v. National Mineral Development Corporation Ltd. (supra).
10. On the other hand, the learned Departmental Representative oh 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 import of drawings and designs and technical documents can be treated as fees received in India and has to be taxable in India. We are of the opinion that the receipt for import of drawings and designs and technical documents being in the nature of plant and machinery cannot be considered as fee for technical services. Once this decision is arrived at, SDR variation has to be treated as not taxable, for not being in the nature of fees for technical services. Even on the alternate grounds raised by the assessee-appellant the same is not taxable. On a perusal of the provisions relating to Double Taxation Avoidance Agreement and the relevant provision of the IT Act along with the judgments cited, it is evident that in case of any dispute or doubt emerging out in between the same, the provisions of Double Taxation Avoidance Agreement have to override the other. Having considered from all possible factual as well as legal angles, the appeal will have to be allowed in favour of the assessee-company.
In the result, the appeal is allowed and the assessment is annulled.
ITA No. 1060/H/96 (Asst. yr. 1992-93)The Revenue has come up in this appeal assailing the order of the CIT(A) with the following grounds of appeal.
"1. The learned CIT(A) erred both in law and on facts in the circumstances of the case.
2. The CIT(A) ought not have entertained the ground against charging of interest under Section 234B as Section 234B is not an item of appealable orders under Section 246 of IT Act.
3. The CIT(A) erred in deleting interest charged under Section 234B which is contrary to law.
4. Any other ground(s) that may be urged at the time of hearing,"
2. While arguing on behalf of the Revenue, the learned Departmental Representative vehemently argued that late payment of advance tax leads to charging interest under Section 234B. A foreign company is bound to pay advance tax and file the return while earning in India. They cannot escape from their statutory liability of paying advance tax and filing return on the plea of foreign company. In this connection, the learned Departmental Representative heavily relied on the decision of the Authority for Advance Rulings in the case of Steffen, Robertson & Steffen Consulting Engineers & Scientists v. CIT (1998) 230 ITR 206 (AAR). In this case, the Authority for Advance Rulings has held that in a case where there was a colloboration 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 Sections 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 NOG 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., 1991. The said order of the assessee relating to asst. yr. 1992-93 in respect of an order under Section 195(2) of the IT Act. Filing detailed written submission with regard to the payment clause and payments made by the RINL to the assessee-company towards the remittances made to them in earlier years, the learned counsel submitted that for all those remittances made by RINL, NOC has been obtained from the IT Department. Therefore, nothing was hidden and all the transactions were known to the Revenue. After completion of the assessment for the asst. yr. 1992-93 on 31st March, 1995, the assessing authorities subject to tax the amount of Rs. 2,03,11,400 being the SDR payment on delayed payment of the principal amount payable as consideration under the contract and levied tax thereon at the rate of 30 per cent. In addition, the assessing authority levied interest under Section 234B amounting to Rs. 43,87,248. The assessee preferred appeals against the said order and the C!T(A) although confirmed the assessment, at the sametime allowed the appeal in respect of the levy of interest. The learned authorised representative further submitted that the appeal preferred by the Revenue on the ground of allowing the interest under Section 234B in favour of the assessee by the CIT(A) does not stand on a sound footing in view of the catena of decisions in favour of the assessee. In this connection, he invited our attention to the following decisions which are analysed below.
(i) Vittal Reddy and Ors. v. CIT (1987) 165 ITR 673 (AP) In this case it has been held that an assessee on objecting to assessment can also raise question regarding levy of interest.
(ii) CIT v. Dr. S. Roopkaran (1985) 154 ITR 717 (AP). In this case, the Hon'ble Andhra Pradesh High Court has held that since the question of charging of the interest was part of the appeal, the same is maintainable and the Hon'ble A.P. High Court decided the questions referred to by the Revenue in favour of the assessee.
(iii) Central Provinces Manganese Ore Co. Ltd. v. CIT (1986) 160 ITR 916 (SC). In this case, the Hon'ble Supreme Court has held that the levy of interest is a part of the process of assessment. Although Sections 143 and 144 do not specifically provide for the levy of interest and the levy is, in fact, attributable to Section 139(8) or Section 215, it is nevertheless a part of 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 v. Padma Timber Depot (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 v. A.P. Small Scale Industrial Development Corporation (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 v. Sri Durga Tobacco Co. (1998) 234 ITR 487 (AP). In this case, the Hon'ble A.P. High Court has held that while determining the liability under Section 139, amount of advance tax paid by the assessee beyond stipulated days were to be treated as advance tax and has to be given credit for the purpose of charging interest under Section 139(8) of the Act.
(vii) Associated Stone Industries (Kotah) Ltd. v. CIT (1997) 224 ITR 560 (SC). In this case, the Hon'ble Supreme Court has held that penal interest calculated and charged under Sub-section (6) or Section (8) of Section 18A of the Indian IT Act, 1922, can be challenged in an appeal filed by the assessee against the order of assessment to tax and the assessee would be entitled to deny his liability to payment of penal interest also, while denying his liability to be assessed to tax under Section 18A of the Act. No appeal would lie against the order levying interest under Section 18A(6) or Section 18A(8) of the Act, as such.
(viii) Ramakrishna Cine Studio v. CIT (1998) 233 ITR 277 (AP). In this case, the Hon'ble A.P. High Court has held that the question of maintainability of appeal arises only when the appeal relates to levy of interest alone. In the instant case, the assessee denied his liability to pay tax on subsidy and when that was allowed, levy of interest became a consequential issue. Grounds can be taken with reference to interest when the appeal raises other grounds and is otherwise maintainable. Therefore, the Tribunal was not correct in holding that the ground raised against the levy of interest under Section 217 could not be entertained.
3. In furtherance to the argument advanced by the learned counsel on behalf of the assessee, he further invited our attention to the provisions of Section 234B along with that of Section 210, 208, 209 and 195 of the IT Act and made a serious attempt to convince the Bench that in the instant case interest under Section 234B is not leviable since no tax is payable by the assessee-company.
4. On a perusal of the available materials on record and on hearing the rival submissions, going through the case laws in detail and in view of our decision taken in the earlier order in ITA No. 1176/H/96 we do not find that the Revenue has any case. The cited case law on behalf of the Revenue is not at all applicable in the present context which is entirely rejected. On the other hand, the cited case laws on behalf of the assessee have relevancy to the facts and circumstances of the case. We, therefore, do not 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 Section 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 para 20 of the order, the assessee-company further contended that it was not proper on the paper of the CIT(A) to hold that the certificates from the auditors of the non-resident company in respect of the expenditure incurred for earning the income could not be filed during assessment proceedings as the same was annexed to the revised statement of computation of total income filed with the AO and also a copy of the same was filed with the first appellate authority. Further, the learned authorised representative of the assessee in ground No. 1(d) has refuted that the assessee-company does not own any permanent establishment in India. They have further disagreed with the CIT(A) by holding that under the agreement, the assessee was entitled to two types of payment towards technical assistance i.e., fee for design and engineering services and fee for supervision of manufacture of indigeneous equipment, supervision of erection, commissioning etc. which is not justified as fee supervision is not of the same nature as fee for design and engineering.
The said view finds place in para 9 of the order of the CIT(A). Other grounds are identical like that of the previous appeal. So as to avoid repetition, the same are not being reproduced.
In the course of hearing of this second appeal preferred by the assessee, the learned authorised representative of the assessee committed to file one written submission which was filed later on before passing of this order and the same is being considered.
On the date of hearing both the sides on the Bench allowed to file written submission within a fortnight and from the assessee's side, the Senior counsel sent the same written submission from Chennai and the written submissions are dt. 2nd May, 2002. On the other hand, despite request made from the side of the Revenue, no written substitution has been filed till the date of order. Therefore, we treated that the Revenue has nothing to submit further besides their argument made at the time of hearing. It has been deemed proper to place this matter on record in order to show that the Bench has been fair enough to afford reasonable time to both the sides equally as both the assessee and the Revenue are equal litigants before the Bench.
2. As per the written submission filed on behalf of the assessee-company, there are three issues in dispute in the assessment for the asst. yr. 1993-94. 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 Section 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 assessment order, the AO has wrongly stated to have followed the view taken by his predecessor with regard to the erroneous conclusion that the amount received for technical assistance is liable to be assessed without any deduction of expenditure. As per the factual position placed before the Bench, technical assistance fee had come up for assessment earlier only in respect of asst. yr. 1988-89. The assessee-company has enclosed a copy of the assessment order for the asst. yr. 1988-89 at pp. 227 to 229 of the paper book filed by them in order to substantiate their contention wherein the AO had accepted then that the expenditure is eligible to be deducted for computing the income relating to technical assistance. As per the assumption made by the then AO, the income relating to technical assistance is at 30 per cent of the gross receipt after providing the expenditure. In order to prove that the income relating to technical assistance has not at all figured in the assessments for the asst. yr. 1991-92 and 1992-93, the assessee-company has annexed the copies of the said assessment orders at pp. 241 to 245 and 298 to 304 of the paper book. As per the contention as well as the assessment order for the year 1991-92 and 1992-93, the only income considered in these two years relate to drawings and designs which do not come up for consideration in the asst. yr. 1993-94 (except the SDR variation relating to the instalment payment which was subjected to tax on accrual basis in 1991-92). Therefore, according to the learned counsel of the assessee, the entire assessment for the, year 1993-94 where the expenditure has been disallowed on the assumption that there was a similar disallowance in respect of expenditure in the earlier years, is clearly wrong and is vitiated by non-application of mind to the correct facts. Further, in order to strengthen their contention, the assessee-company have enclosed a separate note in order to. show that the CIT(A) has also repeated the same error without application of mind to the facts by repeating the order of the AO.
Clarifying the position, it has been submitted in the last para of p. 4 of the written submission that in the above circumstances, the expenditure relating to the receipt of technical assistance is eligible to be deducted in computing the income.
In fact, for the asst. yr. 1988-89, the income was estimated at 30 per cent 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 assessee reduces its claim for deduction in the course of the assessment proceedings. The view taken by the AO on the interpretation of Section 139(4) would render the provision unworkable.
4. Cited Article 5 of the Convention between India and Czechoslovakia defining permanent establishment under Clause (2)(g) of Article 5. The learned counsel has submitted that since the supervisory activity of the project has continued for more than 6 months and charges payable for the project exceeds 10 per cent of the sale price of the machinery, in the instant case, it would be deemed to be a permanent establishment in India. Citing further the relevant article as para 2 of the written submission, the learned counsel has submitted that Article 7 or Article 14 shall apply to the instant case. Article 7 deals with "Business profits". In the light of the specific provisions under the convention, the consideration for technical assistance received by the assessee would be assessable as business profits unless excluded from the definition of "fees for technical services" under the exclusionary clauses in Expln. 2 to Section 9(1)(vii). In this connection, he has cited a decision of the Delhi Bench of the Tribunal in Agland Invesmtent Services Inc. v. ITO (1985) 22 Taxman 91 (Del) (Trib). In the above case, the assessee entered into an agreement with an Indian corporation to give to the said corporation, the expertise of consultants and technical assistance in connection with construction and assembly of hulling, drying and processing factories and plants and also for management services thereof. The bid evaluation and engineering services were said to be connected with inviting tenders and for other process but the ultimate aim for these tenders and for other process was the construction of the corporation's processing factory and plant and thus, the step-in-aid included in these services, viz., engineering and bid evaluations had to be held as a step-in-aid for construction of factories and plants of the Indian Corporation. Hence, the impugned income was held to be not taxable under Section 9(1)(vii) r/w Expln. 2 thereto.
In citing further, a case decided by the Delhi Bench of the Tribunal in the case of Taikisha Ltd. v. Dy. CIT (ITA No. 7078 (Delhi) (1988), the learned authorized representative has submitted the facts and case decided by the Tribunal as follows :
"The assessee, a non-resident company 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 Section 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 parcel of the contract and not dehors the same. In other words, if the only service question would be altogether different but that was not so in the present case, where the assessee was not only to provide raw material, to be shipped from Japan, but its installation in India and successful commissioning of a complete project. There was nothing on record to show that any supervision was to be carried on even after the 'paint line' had come in for full operation and in any case that was not the Revenue's case. There was also no challenge on the part of the Revenue to the fact asserted by the assessee that 'supervision charges' included in the 'Indian content' had been taxed under the head 'Profit and gains of business or profession' and not at a 'flat rate'.
Lastly, the learned counsel has taken the stand that in the light of the factual and legal position set out above, the consideration for technical assistance received by the assessee will have to be dealt with in the following manner :
(i) If the amount is treated as business profits, the expenditure claimed will have to be allowed as a deduction and the balance alone can be subjected to tax.
(ii) Alternatively, if the amount is treated as fee for technical services as is sought to be done by the assessing authority, the amount would be covered by the exclusionary clause in Expln. 2 to Section 9(1)(vii) in the light of the aforesaid decided cases and will not be liable to tax. On the other hand the learned Departmental Representative on behalf of the Revenue strongly supported the order of the AO and CIT(A) and while doing so referred to the relevant portion of the order as well as the documents submitted by the assessee in their paper book.
5. On hearing the rival submission and on a perusal of the written submission along with the materials available on record, it has been observed that the factual position as has been carved out by the learned counsel on behalf of the assessee for the assessment years under consideration in the instant case gives a clear picture of the sequence of assessments relating to the assessees involved and the factual as well as the legal position support their contention. On the other hand, the attempt of the Revenue to counter the argument and written submission of the assessee-company is although appreciable, but the sequence of events that have been found in the assessment orders 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. The CIT(A) erred in deleting the interest under Section 234B amounting to Rs. 2,50,72,632 since charging of interest under Section 234B is mandatory of Law and it is not appealable.
3. Any other ground that may be urged at the time of hearing.
6. The main contention relates to the deletion of interest under Section 234B amounting to Rs. 2,50,72,632. As the matter has already been decided in favour of the assessee and against the Revenue in ITA No. 2190/H/96, it is needless to discuss the issue again. In order to avoid repetition, we do not think to elaborately discuss the issue again.
7. In the result, the appeal filed by the Revenue fails and is dismissed.