Karnataka High Court
Aeg Telefunken vs Commissioner Of Income-Tax on 11 March, 1998
Equivalent citations: [1998]233ITR129(KAR), [1998]233ITR129(KARN)
Author: S.R. Bannurmath
Bench: S.R. Bannurmath
JUDGMENT Y. Bhaskar Rao, J.
1. This is an application by the assessee seeking reference of the following questions :
"(1) Whether, on the facts the Tribunal was right in holding that the fee of Rs. 2,95,362 received from Indian company was liable to be assessed to Indian Income-tax Act by virtue of the provision of Section 2(1)(viii) (sic) of the Act ?
(2) Whether the Tribunal was right in holding that applicant was not entitled to the exemption under Article (III)(1) of the DTA agreement ?"
The facts of the case are that the assessee is a non-resident company having its place of business at Frankfurt in West Germany. The assessment year is 1982-83. During the previous year, relevant to the assessment year 1982-83, the assessee had received Rs. 2,85,362 from the Indian companies towards the services rendered by its technical personnel. The case of the assessee is that a double taxation agreement was entered into between India and West Germany and this amount is exempted from taxation in India and, accordingly, he is not liable to pay the tax.
2. On the other hand, it is the contention of the Revenue that the clauses provided in the double taxation agreement will not enure for the benefit of the assessee and he is liable to pay the tax.
3. Therefore, the question is now sought to be referred to this court.
4. To appreciate the above contention, it is relevant to refer to article III of the Double Taxation Agreement which were in force for the relevant year which reads as follows :
"Article III (1) Subject to the provisions of paragraph (3) below, tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first mentioned territory through a permanent establishment of the said enterprise situated in the first-mentioned territory. If profits are so derived, tax may be levied in the first-mentioned territory on the profits attributable to the said permanent establishment.
(2) There shall be attributed to the permanent establishment of an enterprise of one of the territories situated in the other territory, the industrial or commercial profits which it might be expected to derive in that other territory if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is the permanent establishment. In any case, where the correct amount of profits attributable to a permanent establishment is incapable of determination, or the ascertainment thereof presents exceptional difficulties the profits attributable to the establishment may be estimated on a reasonable basis.
(3) For the purposes of this agreement the term 'industrial or commercial profits' shall not include income in the form of rents, royalties, interests, dividends, management charges, remuneration for labour or personal services or income from the operation of ships or aircraft but shall include rents or royalties in respect of cinematographic films."
By reading the above article, it is manifest that the tax shall not be levied on the industrial or commercial profits of an enterprise in that other territory. Then the question arises what is the meaning of industrial or commercial profits. Sub-clause (3) of article III has defined what the meaning of industrial or commercial profits. According to the said definition, it shall not include income in the form of rents, royalties, interests, dividends, management charges, remuneration for labour or personal services or income from the operation of ships or aircraft but shall include rents or royalties in respect of cinematographic films. Therefore, all the remaining amounts which accrue to the foreign company apart from the above excluded items will form part of the industrial or commercial profit and are liable to be excluded from taxation in this country as per article III of the above agreement.
5. Learned counsel for the petitioner contended that the service charges paid for technical services have not been excluded specifically from the term "industrial or commercial profits". It is deemed to be included in the definition. It is an exclusionary definition. If the Legislature wants to exclude the same, it should have specifically mentioned as it mentioned other items.
6. On the other hand, learned counsel for the Revenue Department, contended that the management charges and remuneration for labour or personal services includes the remuneration received by the petitioner-company towards the technical services rendered by it towards the Indian companies.
7. There is no dispute that the remuneration or the amount towards rendering technical services is not specifically excluded from the definition of the term "industrial or commercial profits". Once the same is not excluded, it cannot be inferred that there is exclusion.
8. The second question that arises for consideration is whether it amounts to management charges. Management charges are quite different from the amounts paid towards technical services. Management charges are paid for managerial supervision or managerial functions done by the concerned person or the company. Therefore, by the wordings management charges itself cannot be taken as rendering technical services unless a particular agreement is shown that management charges include the technical services as managerial duty. In this case, it is not brought to our notice that there is any such agreement which includes the technical service as managerial duty. Therefore, we are not able to accede to the said contention.
9. The next question that arises for consideration is whether the amount received for rendering technical services amounts to remuneration for labour or personal services. The remuneration of the labour cannot be said to be the amount received for technical service. Personal labour is a specific wording used in the agreement which denotes only payment of the labour by the labourers by the non-technical personnel. Whether technical service rendered through other persons amounts to personal service. Personal service denotes that personal service rendered by the assessee himself. But service rendered through other technical personnel will not amount to personal service. Therefore, we are not able to agree with the contention of learned counsel for the Revenue.
10. It is also to be noticed that in another agreement a similar agreement entered into by the Government of India and the Government of the Republic of Finland, Sub-clause (3) of article III at page 5 of volume 44 of the Income Tax Reports (Statutes Section) reads as follows :
"(3) The term industrial or commercial profits shall not include income in the form of rents, royalties, including rents or royalties for cinematographic films, fees for technical services, interest, dividends, capital gains, management charges, remuneration for labour or personal services or income from the operation of ships or aircraft."
the above sub-clause the fees received for technical services are specifically excluded from the term industrial or commercial profits which is not there in Sub-clause (3) of article III of the agreement entered into with West Germany.
11. Therefore, in our view, the fees received or remuneration received towards technical service are not excluded from the definition of the term "industrial or commercial profits". So it is an industrial or commercial profit. Therefore, it is not liable to be taxed in India under the Double Taxation Agreement referred to above under article III(1) of the above articles. Therefore, we answer question No. 1 in favour of the assessee and against the Revenue.
12. In view of the above answer, it is not necessary to answer the second question.
13. I. T. R. C. is allowed.