Income Tax Appellate Tribunal - Delhi
Assistant Commissioner Of Income Tax vs Snia Fibre Spa (Snia Fibre Spa V. Asstt. ... on 13 May, 1996
ORDER
N.S. Chopra, A. M.
1. Both the Revenue as also the assessee are in cross appeals against common order dt. 30th Aug., 1989, of the learned CIT(A) for the two assessment years. These appeals are consolidated and disposed of by this common order for the sake of convenience.
2. The only ground of appeal taken by the Revenue is that the learned CIT(A) erred in directing that r. 26 of the IT Rules be applied for the purpose of computing the income of the assessee. The assessee has taken the following additional ground in its Appeal No. 7061 before us, which is linked with the ground taken by the Department :
"That the CIT(A) having held that the rate of exchange for conversion should be as on the date of deduction of tax, erred in directing that the same be adopted as on the date of remittance."
Since the above additional ground of appeal taken by the assessee does not require investigation into the facts and is purely legal in nature the same is allowed to be raised.
2.1 The relevant facts are that the assessee is a foreign company based in Italy. It had entered into an agreement with M/s Modipon Ltd. on 21st Jan., 1983, which was subsequently approved by the Government of India. The account period of the assessee-company is financial year. In accordance with terms of the said agreement M/s Modipon Ltd. remitted the following payments on account of royalties and fee for technical services :
(1)(a) 2 lakh US dollars on 7th May, 1983;
(b) 1,50,000 US dollars on 29th March, 1984;
(2) 2,17,500 US dollars @ 250 US dollars per day per technician on 11th Nov., 1983.
2.2 For asst. yr. 1985-86 only a sum of 1,12,500 US dollars stood remitted on 19th Feb., 1985, by way of fee for technicians @ 250 US dollars per day per technician. The AO held both these items taxable in the hands of the assessee-company and for the purposes of working out the equivalent of the sum remitted, into Indian rupees, the AO took into account the rate of conversion of the dollars into rupees as on the last day of the previous year, i.e., 31st March, 1984. For asst. yr. 1985-86 such rate was taken as was prevalent on the date of remittance.
3. The assessee went in appeal before the learned CIT(A) when it was submitted that the rate of exchange for calculation of value in rupees should be telegraphic buying rate as on the date on which the tax is required to be deducted at source in view of r. 26 of the IT Rules. The learned CIT(A) found the contention of the assessee as correct. The learned CIT(A), thus, directed the AO to recompute the income in rupees by adopting the conversion rate as on the date of remittance in accordance with r. 26 of the IT Rules. He, thus, allowed assessee's appeal on this count. The Revenue is aggrieved.
4. In turn the assessee has taken the additional ground in its appeals, as reproduced in para 2 above to the effect that the learned CIT(A) fell in error when he directed that the conversion rate as on the date of remittance was to be applied. The learned Departmental Representative supported the order of the AO. According to the learned Departmental Representative, r. 26 is applicable only for the purpose of computation of assessee's income for the purposes of deduction of tax at source and it has no applicability in computing assessee's income for assessment purposes.
4.1 On the other hand, the learned authorised representative for the assessee invited our attention to proviso to Expln. under r. 115 and submitted that the same provides for specified date in respect of income referred to in sub-cls. (a) to (f) payable in foreign currency and from which tax had been deducted at source under r. 26, shall be the date on which the tax at source had been deducted. The learned authorised representative further submitted that it is not in dispute that the Department has applied the provisions of r. 115 of IT Rules for the purpose of conversion of amount received by the assessee in foreign currency into Indian rupees for the purpose of computing assessee's income, subject to tax under the IT Act. He submitted that the assessee had, in fact, received the entire amount in foreign currency well before the end of the relevant previous years and nothing is receivable by the assessee under the contract as at the end of the relevant previous years. It was submitted that assessee received the money in foreign currency on which it suffered TDS during the relevant previous year itself and, therefore, for purposes of conversion r. 115 is rightly applicable. The only dispute is as to what rate should be applied to convert the foreign exchange received by the assessee into Indian rupees. In this connection, Shri Agarwal submitted that the rate could be :
(i) date on which tax was deducted;
(ii) date of remittance; and
(iii) last day of previous year.
According to Shri Aggarwal, while the Department's case is that alternative at (iii) is applicable, the case of the assessee is that alternative at No. (i) is applicable, i.e., when the amount was subject to TDS rendering the assessee entitled to receive the amount. In support of his submission Shri Agarwal invited our attention to r. 115 of IT Rules regarding rate of exchange for conversion into Indian rupees of income expressed in foreign currency and submitted that in accordance with r. 115 the rate of exchange in the case of the assessee would be the telegraphic transfer buying rate as on the specified date. Shri Agarwal submitted that specified date has been defined in the rule itself. However, Shri Agarwal also invited our attention to proviso added to the said rule by IT (Ninth Amendment) Rules, 1993, w.e.f. 25th May, 1993, to the effect that the specified date in respect of income referred to in sub-cls. (a) to (f) payable in foreign currency and from which tax had been deducted at source under r. 26, shall be the date on which the tax had been deducted. According to Shri Agarwal, the assessee's income received in foreign currency was subject to TDS under the provisions of the IT Act r/w r. 26 of the IT Rules and, therefore, the proviso as added w.e.f. 25th May, 1993, is applicable in the case of the assessee. Shri Aggarwal submitted that the proviso so added is clarificatory in nature and retrospective in effect, similar to r. 1BB of the WT Rules. In support of his submission, Shri Aggarwal placed reliance on CWT vs. Sharvan Kumar Swarup & Sons (1994) 210 ITR 886 (SC). He submitted that rule is a part of procedure laid down for assessing assessee's income, i.e., a part of machinery provision and the proviso added w.e.f. 25th May, 1993, is in line with r. 26.
5. We have heard the learned representatives of the parties and have also perused the relevant record. The issue involved is with regard to the rate of exchange for conversion into Indian rupees of US $5,67,500 and 1,12,500 received by the assessee during the relevant previous years. There is no denying the fact that the entire amounts stood received during the relevant previous years themselves and nothing was receivable at the end of the relevant previous years. According to the Revenue, the rate, as was applicable on the last day of the previous year, is applicable; while according to the assessee, the rate as on date on which tax was deducted is applicable. We find ourselves in agreement with the submission made by the learned authorised representative for the assessee. In case the rate of exchange as at the last day of the relevant previous year is applied, it would lead to anomalous situation, inasmuch as if the rate of exchange had gone down, the assessee, who otherwise received high income, would be subject to tax on lesser income and conversely if the exchange rate has gone up on the last day of the previous year. M/s Modipon Ltd. deducted tax at source from the payments involved on 28th April, 1983, 28th March, 1984, 31st Oct., 1983, and 31st Jan., 1985, and the amounts on which tax was deducted at source, in fact, stood remitted by the RBI on 7th May, 1983, 29th March, 1984, 11th Nov., 1983, and 19th Feb., 1985, respectively. We are unable to agree with the finding recorded by the learned CIT(A) that the provisions of r. 26 of IT Rules are to be applied for the purposes of computing income of the assessee, when on the other hand, the provisions of r. 115 of IT Rules are applicable. Rule 26 provides for rate of exchange for the purpose of TDS on income payable in foreign currency; whereas r. 115 provides for rate of exchange for conversion into rupees of income expressed in foreign currency accruing or arising or deemed to accrue or arise to the assessee in foreign currency received by him in foreign currency, which is exactly the case of the assessee as the amount paid by M/s Modipon Ltd. was remitted in foreign currency and received by the assessee in foreign currency. Therefore, it is r. 115 which will govern the assessee's case. The specified date also stands defined in sub-r. (2) of r. 115. Sub-cl. (c) of cl. (2) of r. 115 which says that in respect of income chargeable under the head "Profits and gains of business or profession", the last day of the previous year of the assessee. As is seen the applicability of sub-cl. (c) in the case of the assessee, which had already received the amount during the relevant previous years itself, would lead to anomalous situation if the specified date for determining rate of exchange is taken as last day of the previous year of the assessee, as has already been discussed above. Therefore, we find ourselves in agreement with the submission made by Shri Agarwal that by providing the proviso the controversy which arose between the taxpayers and the Department as to the rate applicable for conversion stands settled by the clarificatory nature of the proviso added w.e.f. 25th May, 1993. We also find ourselves in agreement that the proviso being clarificatory in nature is retrospective in effect similar to r. 1BB of the WT Rules, as upheld by the Hon'ble Supreme Court in (1994) 210 ITR 886 (SC) (supra). We accordingly while rejecting the Revenue's appeals, modify the order of the learned CIT(A) to the extent to recompute income of the assessee in rupees by adopting the conversion rate as on the date of TDS, i.e., 28th April, 1983, 28th March, 1984, 31st Oct., 1983, and 31st Jan., 1985, respectively.
6. The Revenue's appeals are, thus, rejected as indicated above.
7. Now we deal with the appeals of the assessee. In Appeal No. 7061, first three grounds are against levy of tax on lump sum payment of US $3,50,000 as paid by M/s Modipon to the assessee under agreement. The relevant facts are that the assessee had entered into an agreement with M/s Modipon Ltd. on 21st Jan., 1983. In accordance with the terms of the said agreement M/s Modipon Ltd. remitted an amount of US $3,50,000, constituted of US $ 2,00,000 on 7th May, 1983, and US $ 1,50,000 on 29th March, 1984, relevant to asst. yr. 1984-85. This amount of US $ 3,50,000 was subjected to tax @ 20% when the AO treated the same as royalty for technical know how. Before the learned CIT(A) the assessee took an additional ground of appeal claiming that this lump sum payment of US $ 3,50,000 was not taxable at all in India. The learned CIT(A) admitted the additional ground as raised by the assessee and noted that there was Double Taxation Avoidance Agreement (DTAA for short) between India and Italy and as such the provisions of DTAA would override the provisions of the IT Act. The learned CIT(A) accordingly examined the claim of the assessee in the context of provisions of DTAA in paras 14 to 17 of his order vis-a-vis the terms of agreement in a detailed manner and concluded in para 17, page 13 of his order that the lump sum payment of US $ 3,50,000 was in the nature of royalty under the provisions of DTAA itself. The learned CIT(A) accordingly upheld the levy of tax @ 20% thereon. The assessee is in appeal.
7.1 The Department is not in appeal against the view taken by the learned CIT(A) that the provisions of DTAA would override the provisions of the IT Act and, therefore, it is an admitted fact that assessee's claim has to be examined in terms of DTAA, as was rightly done by the learned CIT(A). The only grievance of the assessee is against the conclusion of the learned CIT(A) that the amount, in fact, represented royalty under the definition as contained in the DTAA between India and Italy. According to the learned authorised representative, Shri S. K. Agarwal, once having held that the provisions of DTAA are applicable, the issue whether the amount is royalty has to be judged in the context of definition of the word "royalty" in the DTAA. According to Shri Agarwal, the DTAA defines "royalty" under Art. 13(3). Shri Agarwal submitted that the definition of the term "royalty" as per Art. 13(3) of the Double Taxation Agreement is as under :
"The term 'royalties' as used in this article means payments of any kind received as a consideration for the use of, or the right to use any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, designs or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience."
7.2 According to Shri Agarwal, the definition of 'royalty' under the DTAA is a truncated one, that is, it is narrower than the definition under the IT Act [Expln. 2 to s. 9(1)(vi) of the IT Act]. He submitted that the royalty under the DTAA means the consideration for the use of, or for the right to use in copyright of literary, artistic or scientific work or any patent, trade mark, design, secret formula or industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience. Advancing his arguments Shri Agarwal submitted that if a person, who is the owner of any such thing, retains the property in it, and permits the use or allows the right to use it for a consideration, the consideration for such user will be royalty under the DTAA. Shri Agarwal submitted that the definition does not include the consideration for the transfer of all or any rights in the aforesaid properties. He submitted that where there is an outright sale or purchase, the consideration for the transfer is not royalty, under DTAA, even though it would be royalty under the IT Act. According to Shri Agarwal, the assessee, under the said agreement, agreed for out and out transfer and sale of documents containing designs, drawings, process, technical data, etc., and the title to them was to pass to M/s Modipon on delivery. According to Shri Agarwal, the assessee did not retain any property in them, as M/s Modipon was entitled to use or exploit the same as it liked. The main thrust of the argument of Shri Agarwal is that lump sum consideration of US $ 3,50,000 was paid for purchasing the aforesaid documents, etc. He submitted that condition in the agreement that designs, drawings, process, technical data, etc., would be used by Modipon and would not be divulged or disclosed by them without prior consent of the assessee is a usual term inserted in such agreements to ensure that there is no rampant exploitation of the technology. According to Shri Agarwal, this condition does not affect the right of ownership acquired by M/s Modipon. It was, thus, submitted that the Revenue was not justified in holding that the sum of US $ 3,50,000 represented income of the assessee by way of royalty.
7.3 On the other hand, the case of the Revenue is that the amount received by the assessee is royalty under the definition as contained in the DTAA and as discussed by the learned CIT(A) in para 17 of his order. In other words, the learned Departmental Representative fully supports the reasoning which prevailed with the learned CIT(A).
7.4 We have heard the learned representatives of the parties very carefully and have also gone through the relevant record. There is no dispute that the claim of the assessee that the amount of US $ 3,50,000 is not royalty, as defined in DTAA has to be judged in the context of the terms of agreement between the assessee and M/s Modipon. For this purpose, we have looked into the terms of agreement between the assessee and M/s Modipon and we find that the same do not support the case of the assessee in any manner, whatsoever. Under the agreement the assessee is to supply "copies of specifications and/or drawings for the modification of the equipment installed at Modis for achieving the results". As per cl. (3) of the agreement the assessee is to make available outside India for use by the Modis any improvements which are successfully developed and put into commercial use by the assessee in the field. For that purpose the assessee is required to permit annual technical visits to its plant/relevant parts of its research centre/any factory in Italy as specified by a specified number of technicians of Modis for a specified period per year, the cost of which is to be borne by Modis. In cl. (4) of the Agreement the assessee is required to depute its technicians twice a year to the Modis plant to inspect the plant progress and assess the problems, if any, at the cost of M/s Modis. Clause 9 of the agreement binds Modis not to engage any technician of the assessee without its previous written consent during the term of this agreement and for a further period of 5 years. As per Art. III the term of agreement is five years and provides that even after the expiry of 5 years and for a further period of 5 years, the secrecy clause shall continue to be in force. Article IV of the agreement deals with secrecy and binds Modis that all designs, etc., supplied by the assessee and any knowledge received as a result of implementation of the agreement to keep secret and confidential to be used by Modis only and enjoins upon Modis not to divulge or disclose directly or indirectly to any third party without prior written consent of the assessee. Under this article, it is stipulated that "Modi shall further ensure the incorporation of similar clause in any contract to be awarded to firm which shall receive information and data (sic) the seller through Modi". The agreement provides for renewal at the expiry of the term of the agreement on the terms to be mutually agreed upon. Viewed in the context of terms of agreement, it cannot be said that the assessee parted with its property in the form of designs/technical detail, formula, etc., forever in favour of Modi in consideration of the amount received. The assessee continues to hold property right in the information/designs, formula, etc., under the agreement with Modi and also binds Modis fully not to pass on the information, formula, etc., supplied, to anybody else without written consent of the assessee, which cannot be in the case of an outright sale. Therefore, we are unable to agree with the submission made by Shri Agarwal that the amount received is not royalty. We fully concur with the conclusions drawn by the learned CIT(A) that the amount of US $ 3,50,000 represents royalty under the terms of DTAA between India and Italy and, therefore, taxable as such in India.
8. Ground No. 4, which is common to the only ground of appeal taken by the assessee in Appeal No. 7062, is with regard to the taxability of the entire amount representing fees for technical services (US $2,17,500 for asst. yr. 1984-85 and US $1,12,500 for asst. yr. 1985-86) without deduction of any expenditure. The AO taxed these amounts @ 40% under s. 115A of the IT Act. It was upheld in appeal by the learned CIT(A), who held that the payment represented as relating to fee for technical services, since the amounts were paid for services rendered by technicians of the assessee in terms of the agreement with M/s Modipon Ltd. and no expenses against the receipts are admissible to the assessee either. The assessee is aggrieved.
8.1 We have heard the learned representatives of the parties and have also perused the relevant record. It is nobody's case that the receipts do not represent payments received for rendering technical services under the agreement between the assessee and M/s Modipon Ltd. In terms of Art. 23, r/w sub-cl. (d) of Protocol of the DTAA between India and Italy, the term 'Other income' includes fees for technical services. As such, the same is taxable in India in the hands of the assessee under s. 115A of the IT Act, which is not disputed by the assessee either. The said s. 115A envisages an application of flat rate of tax @ 40%. This being the position, no expenditure against this receipt is admissible to the assessee. In the result, this ground of appeal is dismissed.
9. In the result, Appeal Nos. 7044 and 7045 of the Revenue are dismissed in terms of para 5 above. Assessee's Appeal No. 7061 is partly allowed since the additional ground raised by the assessee stands allowed. Appeal No. 7062 of the assessee is dismissed.