Income Tax Appellate Tribunal - Hyderabad
Niraj Petrochemicals Ltd. vs Income Tax Officer on 20 August, 1999
ORDER
A. Venku Reddy, J.M. November, 1996
1. These appeals by the assessee in default, are directed against the consolidated order dt. 25th January, 1996 of the learned CIT(A). Hyderabad, confirming the order dt. 23rd November, 1995 passed under s. 201 of the IT Act by the ITO (TDS), Hyderabad, for the asst. yrs. 1991-92, 1992-93 & 1994-95, directing the assessee, in default to pay the deducted/deductible tax of Rs. 59,41,600 together with the interest of Rs. 28,79,435 levied under s. 201(1A) of the IT Act. Since a common issue arises for consideration in all these appeals, they have been heard together for disposal by a consolidated order.
2. According to the ITO (TDS), Hyderabad, the appellant a resident Indian company, made certain payments to a non-resident foreign company M/s. Lurgi Gmbh, West Germany, towards technical know-how and deducted the tax due thereon, but did not remit the tax deducted during the financial years 1991-92 and 1993-94 to the Government. In respect of the tax deducted during the financial year 1990-91, the appellant remitted the same to the Government with a delay of 13 months. Following is the table showing details of payments made to the foreign company and deductions to tax at source :
------------------------------------------------------------------------
Financial Date of payment Amount paid Amount deducted
year to N.R. to N.R. (T.D.S.)
Rs. Rs.
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1990-91 19-6-1990 92,66,409 18,53,262 1991-92 31-7-1991 1,32,46,983 26,49,400 1993-94 31-3-1994 1,64,61,000 32,92,200
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3. The TDS amount of Rs. 18,53,282, relating to the financial year 1990-91, though deducted on 19th June, 1990 was actually credited to the Central Government on 12th August, 1991 with a delay of 13 months. The tax deducted during the financial years 1991-92 and 1993-94, total amounting to Rs. 59,91,600 was not at all remitted to the Government. It would appear that the annual report of the appellate-company for the period ending 30th June, 1994 has shown outstanding liability of Rs. 59,41,600 being the income-tax deducted at source. The said fact came to the notice of the ITO (TDS). Hence, the ITO issued a notice dt. 8th November, 1995, calling upon the appellant to state the reasons for the non-remittance of TDS into Government account. He also requested the appellant in the said letter to furnish proof in case the tax was already remitted and further directed the appellant to file Annual Returns under Chapter-XVI for the years relevant to the financial year 1991-92 to 1994-95. In response to the said notice dt. 8th November, 1995, the appellant filed a letter dt. 17th November, 1995, along with certain enclosures. However, the said letter was silent on the aspect of payment of TDS of Rs. 59,41,600. On 22nd November, 1995, the ITO visited the office of the appellant-company to ascertain whether the tax deducted/deductible was, in fact remitted into the Government account or not. He was informed by the general manager (finance) of the appellant company that the TDS was not remitted even till 22nd November, 1995. Hence, on 23rd November,1995, the ITO made the impugned order under s. 201 treating the appellant as assessee in default in respect of the said amount of Rs. 59,41,600 not remitted to the Government. Further, the ITO levied total interest of Rs. 28,79,435 on the delayed remittance of TDS relating to the financial year 1990-91 and on the unremitted TDS for the financial years 1991-92 and 1993-94. Accordingly, the ITO passed an order under s. 201 directing the appellant to pay the unremitted TDS of Rs. 59,41,600 together with interest of Rs. 28,79,435.
4. Aggrieved by the order under s. 201 of the IT Act passed by the ITO, the assessee in default preferred the appeal before the CIT(A) contending inter alia that the ITO had not given a proper opportunity to the appellant to explain its stand as to how it is not liable to deduct or remit TDS on the payments made to the non-resident foreign company, that the appellant had only acquired certain assets absolutely from the foreign company outside India and no portion of the payment made for acquiring the said assets by it to the foreign company gave rise to any income arising or accruing in India under s. 9 of the IT Act, that the appellant acquired only basic engineering and licence on the basis of an outright sale, that the consideration paid by it for acquiring them cannot be treated as income arising or accruing in India to the foreign company, that on the said payments no income chargeable to income-tax in the hands of the foreign company arose or accrued in India particularly in view of the Agreement for a Avoidance of Double Taxation (AADT) executed between India and the Federal German Republic of Germany and that when no income chargeable to tax in the hands of the foreign company accrued or arose in India, the question of the appellant deducting TDS on the payments made by it to the foreign company and remitting the same to the Government does not arise at all. Thus, in effect, the stand taken by the appellant before the first appellate authority was that the payments made by it to the foreign company, cannot be considered either as "royalty" under s. 9(1)(vi) or as "fees for technical services" falling under s. 9(i)(vi) of the IT Act, that the entire transactions of delivering the basic engineering and licence and payment of consideration for them all took place outside India and nothing happened in India, that what was acquired by way of basic engineering and licence was a capital asset or plant for which it paid price and that there was no liability on its part to make any deduction of tax out of the consideration paid by it to the foreign company for basic engineering and licence.
5. The learned CIT(A) after considering the terms of the Collaboration Agreement, dt. 29th June, 1988, entered into between the appellant and the foreign company and also considering the purposes for which the payments in question were made to the foreign company as well as the nature and character of the said payments held, that the payment made by the appellant to the foreign company towards basic engineering was in fact "fee for technical services" and, therefore, it is clearly chargeable to income-tax as per s. 5(2)(b) r/w s. 9(i)(vi)(b) of the IT Act. Further, he held that the payment made on account of "licence fee" to the foreign company, partakes the character of "royalty" under s. 9(1)(vi) of the IT Act and the same also is chargeable to tax under the IT Act in India. Hence, he held that the appellant is liable to deduct tax on the payments made by it to the foreign company towards Basic engineering and licence fees and remit the same to the Government. He also held that Art. VIIIA of the AADT is of no avail to the appellant. Finally, he held that the appellant is a defaulter for the tax deducted or deductible on the payments made to the foreign company towards basic engineering and licence. Holding so, he dismissed the appeals preferred by the appellant. Aggrieved by it, the appellant preferred these appeals before the Tribunal.
6. At the time of the hearing of these appeals, the learned Departmental Representative raised a preliminary objection regarding the very maintainability of these appeals. He contended that the appellant though deducted tax on the payments made by it to the non-resident foreign company, did not credit the said deducted tax to the account of Central Government and that, therefore, the appellant is not entitled to file these appeals under s. 248 of the IT Act. He submits that unless the tax deducted/deductible is first remitted to the Government, the deductor is not entitled to prefer an appeal under s. 248 and that, inasmuch as, the appellant failed to satisfy the said mandatory condition-precedent contained in s. 248, these appeals particularly relating to the deductions made during the financial years 1991-92 and 1993-94 are not maintainable and are, therefore, liable to be dismissed in limine. For this objection, the simple answer of the learned counsel for the appellant is that the order passed by the ITO was one under s. 201 which is expressly made appealable under s. 246(1)(i) of the IT Act, that in that view of the matter the appeals filed by the appellant before the first appellate authority were rightly entertained and disposed off and that, therefore, the present appeals filed against the orders made by CIT(A) are clearly maintainable.
7. The initial order that gave rise to these appeals was one passed under s. 201 by the ITO (TDS) deeming the appellant as "assessee in default" and raising a huge demand. Clause (i) of sub-s. (i) of s. 246 provides an unconditional right of appeal, as against an order made under s. 201 of the IT Act. An order under s. 201(1A) also is one covered by s. 201. An order passed under any of the sub-sections of s. 201 is appealable. Sec. 246(1)(i) does not impose any condition that unless the tax is deducted and remitted appeal is not maintainable. In that view of the matter, the appeals preferred against the order under s. 201 before the CIT(A) were maintainable under s. 246(1)(i) and consequently the Tribunal as against the orders of the CIT(A) passed under s. 250 are certainly maintainable. Hence, the preliminary objection raised by the learned Departmental Representative regarding the maintainability of the appeals is rejected.
8. At the time of hearing of these appeals, the learned counsel for the appellant filed a petition under r. 11 of the ITAT Rules, 1961, for leave to raise the following additional ground in these appeals :
"The order under s. 201 passed by the AO is invalid in the eye of law for want of jurisdiction, inasmuch as he could not have treated the assessee to be in default without adjudicating on the assessee's claim that it was not liable to deduct tax at source, vide its letter dt. 2nd June, 1993".
9. The learned counsel for the appellant submits that as long back as on 2nd June, 1993 itself the appellant filed a letter before the ITO denying its liability to deduct tax on the payments made to the foreign company towards consideration for basic engineering and licence and further requesting the ITO to determine the extent of its liability, if any to deduct tax at source and to determine on how much of the payment made to the foreign company tax is to be deducted, that the ITO should have treated the said letter as an application under s. 195(2) of the IT Act and disposed it of, that the ITO did not care to dispose of that application till today, that again on 23rd November, 1995, also the appellant filed a letter reiterating its earlier stand that no portion of the payments made by it to the foreign company is chargeable to tax in India and, therefore, there is no liability on the part of the appellant to deduct tax, that in the said letter dt. 23rd November, 1995, also the appellant made a reference to its earlier letter dt. 2nd June, 1993 and that the order dt. 23rd November, 1995, passed under s. 201 straight away treating the appellant as "assessee in default" without first disposing of the application dt. 2nd June, 1993 treating it as an application under s. 195(2), is ab initio void and is, therefore, liable to be cancelled.
10. The learned Departmental Representative contended that this additional ground does not arise out of the order of the first appellate authority and, therefore, it cannot be entertained at this stage, that the authenticity of the copy of the letter, dt. 2nd June, 1993, said to have been filed before the ITO by the appellant is doubtful, that even otherwise the said letter, dt. 2nd June, 1993, cannot be treated as an application under s. 195(2) as the appellant has not denied its liability to deduct tax on the payments made to the foreign company, in the said letter, that in any event the points that are required to be dealt with under s. 195(2) by the ITO have already been dealt with the details by the learned CIT(A) in his orders now under appeal and that, therefore, the additional ground may be rejected.
11. The learned counsel for the appellant submits that this ground taken by way of additional ground goes to the very root of the matter viz., the very jurisdiction of the ITO to make an order under s. 201 without first disposing of the application filed under s. 195(2), that the disposal of this vital ground does not involve any enquiry into new facts and that it being a purely legal plea going into the very root of the matter can be raised even in the second appellate stage before the Tribunal. Learned counsel for the appellant submits that the appellant's contention before the lower authorities was that it is not liable to deduct tax on any portion of the payments made by it to the non-resident as they fall outside s. 9, that the appellant is not claiming any new or additional relief through this additional ground which is only another facet to its original plea that it is not liable to deduct tax on the payments in question and that it arises out of the subject-matter of the appeals.
12. Sub-ss. (1) and (2) of s. 195 read as follows :
Sub-s. (1) "Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "salaries" or "dividends" shall, at the time of credit of such income to the account of the payee or at the time of the payment thereof in cash, or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force."
Sub-s. (2) "Where the person responsible for paying any such sum chargeable under this Act (other than interest on securities, dividend an salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the AO to determine (by general or special order) the appropriate proportion of such sum so chargeable and upon such determination, tax shall be deducted under sub-s. (i) only on that proportion of the sum which is so chargeable."
13. Thus, when once a person responsible for paying money to a non-resident files an application under sub-s. (2) of s. 195 the AO is bound to determine the appropriate proportion of the said sum so chargeable and it is only upon such determination by the AO tax shall be deducted by the person responsible for paying monies to non-resident under sub-s. (1) on that proportion of the sum which is so chargeable. When once the ITO adjudicates upon that application and makes an order under s. 195(2) then only the liability on the part of the deductor to deduct the tax under sub-s. (i) of s. 195 arises. Thereafter in case the said person does not deduct tax or after deducting fails to pay the tax to the Government, he can be deemed to be an assessee in default under s. 201(1) in respect of that tax. The learned counsel for the appellant submits that in as much as the ITO did not pass any order under s. 195(2) on the application, dt. 2nd June, 1993, filed by the appellant, there was no liability on the part of the appellant to deduct tax under s. 195(1) and that, therefore, the ITO cannot make an order under s. 201 deeming the appellant as an assessee in default under s. 201(1). As it being purely a legal plea going into the very power and jurisdiction of the ITO to make an order under s. 201(1) without disposing of the application under s. 195(2) we are inclined to entertain this additional ground. It arises out of the subject-matter of the appeals. Accordingly arguments have been heard on this ground.
14. A xerox copy of the letter, dt. 2nd June, 1993, stated to have been addressed by the appellant to the ITO has been filed before us (vide p.-1 of the appellant's paper-book No. 2). The said letter runs as follows :
"Income-tax Officer, TDS Ward-4(7), Office of the ITO, Shapurwadi, Hyderabad.
Dear Sir, Sub : Deduction of tax at source of payments made to foreign collaborator towards licence fees.
This is to bring to your kind notice that our company has entered into a foreign collaboration agreement with M/s. Lurgi Gmbh, Germany vide agreement dt. 29th June, 1988, duly approved by Government of India and Reserve Bank of India. This agreement inter alia among other aspects covers a payment of DM 27,00,000 consisting of the following :
1. Detailed basic engineering DM 16,00,000 (59.26 per cent)
2. Licence fee DM 11,00,000 (40.74 per cent) Out of the above total charges an amount of DM 9,00,000 (equivalent to Rs. 92,66,409) was remitted on 19th June, 1990 duly deducting income-tax at source of Rs. 18,53,282 at the rate of 20 per cent and remitted the same to the Government treasury. For the balance charges of DM 18,00,000 and irrevocable letter of credit was opened by Industrial Development Bank of India, Bombay. Out of this DM 9,00,000 representing 50 per cent towards submission of documents, (equivalent to Rs. 1,32,46,983) was remitted on 25th July, 1991.
The above remittances made to the foreign collaborator are for basic engineering and also for licence fee at the ratio of 59.26 per cent for basic engineering and 40.74 per cent for licence. We are of the opinion that no tax need to deducted at source for payments made towards licence fee to any non-resident foreign collaboration agreements approved by the Government of India and Reserve Bank of India, as they are outside the purview of s. 195 of the IT Act, 1961.
The following are the details of the workings towards the tax payable.
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Date of Particulars Total amount Income-tax @ 20% on Remittance remitted basic engineering Rs. Rs.
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19-6-1990 Basic engineering 54,91,274 10,98,255
Licence fee 37,75,135 -
-----------
92,66,409
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25-7-1991 Basic engineering 78,50,162 15,70,032
Licence fee 53,96,821 -
----------- ----------
1,32,46,983 26,68,287
Less tax remitted on 12-8-1991 18,53,282
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Thus, on the basis of the above calculation we have to remit an amount of Rs. 8,15,005 toward TDS for which we request you to accord your approval and confirm the amount to enable us to make arrangements for payments.
Awaiting for an early and favourable reply.
Yours faithfully, for Niraj Petrochemicals Ltd.
Sd/-
T. N. C. Chary Accounts Officer"
15. The said letter bears the initials, dt. 16th June, 1993, of some staff members of the ITO's office or the ITO himself. On 23rd November, 1995, the appellant filed another letter before the ITO wherein it is clearly mentioned about the filing of the letter, dt. 2nd June, 1993, before the ITO. A copy of the letter, dt. 23rd November, 1995, bearing receipt stamp of ITO's office is found at p.-5 of the page-book No. 2. Hence, the factum of the appellant filing the letter, dt. 2nd June, 1993, on 16th June, 1993, in the office of the concerned ITO, cannot seriously be disputed. Therefore, there cannot be much dispute regarding the genuineness of the letter dt. 2nd June, 1993 or the factum of its having been filed before the ITO concerned on 16th June, 1993.
16. A perusal of the letter, dt. 2nd June, 1993, extracted (supra) indicates that it contains all the requirements of s. 195(2) in respect of the payments made towards licence fee as per the terms of the collaboration agreement, dt. 29th June, 1988, executed between the appellant and the foreign company. The appellant has to pay the following amounts to the foreign company.
1. Detailed basic engineering DM 16,00,000 (59.26 per cent)
2. Licence fee DM 11,00,000 (40.74 per cent)
17. In the said letter, dt. 2nd June, 1993, the appellant did not dispute its liability to make deduction of tax on the payments made towards basic engineering. It only disputed its liability to deduct tax on the payment made towards licence fee to a non-resident under the collaboration agreement stating that it fell outside the purview of s. 195. On that basis the appellant calculated the tax to be deducted by it on the payments made by it to the foreign company and requested the ITO to accord his approval for the same and for crediting the amount to the Government. Thus, inasmuch as the appellant entertained a doubt regarding its liability to deduct tax on the consideration paid towards the licence fee, it sought the opinion of the ITO on that aspect. Thus, the letter dt. 2nd June, 1993 contains all the requirements of s. 195(2) of the IT Act. As has been observed by the Delhi High Court in the case of CIT vs. Jay Engineering Works Ltd. (1984) 149 ITR 425 (Del), there is no particular form or format for an application under s. 195(2). In that view of the matter, the ITO ought to have treated the letter, dt. 2nd June, 1993, as an application under s. 195(2) in respect of the payments made by the appellant to the non-resident towards the licence-fee and passed an order on it. However, it cannot be treated as an application under s. 195(2) in respect of the consideration or the price paid for basic engineering also since the appellant in that letter, dt. 2nd June, 1993, practically admitted its liability to deduct tax on that payment and credit it to the Government. The payment clearly comprises of two different components, one for engineering and the other for licence. In our view, the ITO should have treated the letter dt., 2nd June, 1993, as an application under s. 195(2) in respect of the payments made towards the licence-fee and passed an order under s. 195(2) in respect of that part of the payment. He should have made an order under s. 195(2) expressing his opinion on that aspect whether the payment made towards licence-fee is taxable in the hands of the foreign company in India under the provisions of s. 9 or not. Without passing any such order under s. 195(2) on that application, the ITO should not have treated the appellant as an assessee in default under s. 201 in respect of the tax deducted/deductible on the payments made by the appellant to the non-resident towards licence-fee. In that way, that part of the order under s. 201 made by the ITO relating to the tax deducted/deductible on the payments made towards licence-fee is vitiated. That failure on the part of the ITO to make an order under s. 195(2) does not affect that part of the order under s. 201 relating to the payments made for basic engineering.
18. Now let us consider the merits of these appeals. The sole issue that arises for consideration in these appeals is whether the payment made by the appellant to the non-resident towards basic engineering constitutes "fees for technical services" falling under s. 9(i)(vii) of the IT Act and whether the payment made by the appellant to the non-resident towards licence-fee is 'royalty' falling under s. 9(1)(vi). Before dealing with that issue it is necessary to state a few facts. The appellant-company is engaged in the business of manufacture of calcium carbonate and maleic anhydride (MA). For the purpose of manufacturing maleic anhydride, the appellant-company required plant and equipment as well as technical know-how. For that purpose it entered into a collaboration agreement with a German company M/s. Lugri Gmbh (for short foreign company) on 27/29th June, 1988. The said collaboration agreement is styled as follows :
"The equipment deliveries, licence and basic engineering for a plant to produce 5,000 tons/year of maleic anhydride based on benzene as feed stock".
19. In that agreement, the foreign company is described as "seller" and the appellant-company (resident) as 'buyer'. The preamble of the collaboration agreement runs as follows :
"Buyer intends to instal a plant for the production of high purity maleic anhydride (MA) from benzene using the process of chemical works Buls AC, Marl (hereinafter called "licensor's process").
This agreement stipulates the understanding reached between buyer and seller on the scope of equipment, licence and basic engineering to the supplied by seller and buyer for this plant and on the commercial terms and conditions in respect thereto as follows and this agreement forms the basis for conclusion of a detailed contract containing seller's supply of equipment and licence as well as basic engineering services (hereinafter called "contract").
20. Thus, the appellant intending to instal a plant for the production of high purity maleic anhydride (MA) from benzene using a particular process referred to in the agreement as "licensor's process" at Visakhapatnam, entered into this agreement with the foreign company. The said agreement was earlier approved by the Government of India (vide Appendix-IV of the collaboration agreement). Art. 2 of the agreement refers to the subject of agreement. It comprises of the following items :
Art. 2.1 "Seller is entitled by licensor to grant and hereby grants to buyer the licence for practising licensor's process in the plant".
Art. 2.2 "Seller will deliver the basic engineering and the operating manual for the plant as Appendix-I. Art. 2.3 "Seller will deliver equipment and catalyst for the plant as per Appendix-II."
Art. 2.4 "Seller will delegate appropriate technical personnel for supervision of detailed engineering, commissioning erection and start-up".
Art. 2 of the agreement deals with the time schedule of delivery. Basic engineering should be delivered within 3 to 8 months from the "effective date" of the contract. The operating manual was to be delivered within 15 months from the effective date of the contract.
Art. 3.2 refers to the place of delivery for basic engineering. It runs as follows :
"Place of delivery for basic engineering shall be the post office in Frankfurt/Main (in case of despatching by airmail) or Frankfurt airport (in case of sending by air freight).
Thus, the place of delivery for basic engineering was fixed to be at Frankfurt in Germany.
Art. 4 prescribes the total fees for the contract. Art. 41.1 to 41.4 give in break-up of the figures for each item. We are mainly concerned in these appeals with the price for basic engineering and the price for "licence". They are stipulated as follows :
Art. 4.1.3 - Price for basic engineering DM 16,00,000 Art. 4.1.4 - Price for licence DM 17,00,000
Art. 4.4 stipulates that all taxes, duties and dues levied outside the Federal Republic of Germany, shall be borne and directly paid by the buyer.
Thus, the price mentioned ((supra) is not of Indian taxes. The Indian company undertook to pay the taxes, if any, payable in India on the payments made to the foreign company towards basic engineering and licence fee.
Art. 5 prescribes the schedule of payment. Art. 5.3 states that the price for licence-fee as per art. 4.1.4 and basic engineering as per art. 4.1.3 shall be paid by the buyer to the seller as per the schedule given therein. It should be paid in three equal instalments. Thus, though the consideration stipulated was a lump sum amount, the facility of its payment in 3 equal instalments was given to the buyer. Art. 5.5 states that the payment of the "down payments" shall be made by simple remittance to seller's bank account and that all other payments shall be made out of an irrevocable letter of credit to the opened by buyer and confirmed by a reputable West German bank.
Art. 6 deals with the delegation of technical personnel by the seller to India for supervision of erection of proprietary equipment and catalyst filling and for supervision of commissioning of the plant including guarantee tests. For the services covered by Art. 6 charges are fixed. We are not now concerned with it in these appeals. Art. 7 deals with guarantees and liabilities. Art. 7.1 states that the seller shall assume the following guarantees.
(i) "Process guarantees related to capacity, product quality and yield as well as utility consumption as stipulated in Appendix-III."
(ii) "Mechanical guarantees on seller's delivered equipment for a period of 12 months after start-up of the plant or 36 months from the effective date of the contract."
(iii) "Time of delivery as per art. 3 of this agreement".
Art. 8.1 states that the agreement shall become effective on that date on which buyer and seller sign this agreement. The seller signed it on 27th June, 1988 at Frankfurt and the managing director of the buyer company signed it on 29th June, 1988 in India.
21. Appendix-I of the agreement contains the "seller's scope of engineering services". As per Appendix-I, the seller undertook to handle the extended basic engineering for maleic anhydride plant and supply the technical know-how for the operation of the plant. Appendix-I states that 'engineering' comprises of technical services, the details of which were given in Appendix-I under the following heads :
1.1. - General documentation 1.2. - Process design 1.3. - Mechanical engineering 1.4. - Piping engineering 1.5. - Instrument engineering 1.6. - Insulation 1.7. - Electrical engineering 1.8. - Structural steel 1.9. - Civil engineering
22. Appendix-IV of the agreement contains the foreign collaboration approval by the Government of India. The Government of India after duly considering the proposals of the appellant to enter into a collaboration agreement with the Foreign Company gave its approval to the proposed terms of collaboration by its letter, dt. 31st December, 1987, subject to the following conditions :
"(i) "Lump sum know-how and basic engineering - DM 27,00,00 subject to taxes.
(ii) Items 1 & 2 of the Annexure-I are not applicable."
23. Item-I of the Annexure-I to the collaboration approval relates to the non-resident shareholding" in the Indian company. It has no application to the case on hand. Item 2 of the Annexure-I to the collaboration approval relates to payment of "royalty clauses" to lump sum knowhow and Basic Engineering. The Government's approval letter permits the Indian company to sub-licence the technical know-how (vide Item 9 of the Annexure-I to the approval letter). It runs as follows :
"The Indian company should be free to sub-licence the technical know how/product design/engineering design under the agreement to another Indian party should become necessary. The terms of such sub-licencing will, however, be as actually agree to by all the parties concerned including the foreign collaborator and will be subject to the approval of Government."
24. On those facts the issue that arises now for consideration is whether the fees paid for basic engineering constitutes "fees for technical services" falling under s. 9(1)(vii)(b) r/w Expln. 2 and whether the price paid for the 'licence' partakes the character of "royalty" falling under s. 9(1)(vi) of the IT Act as has been held by the first appellate authority and whether the appellant was obliged to deduct tax at source on the aforementioned payments made to the non-resident foreign company and remit the same to the Government.
25. Let us first consider whether the consideration paid by the appellant towards "price for basic engineering" in terms of art. 4.1.3 of the collaboration agreement constitutes "Fees for technical services" falling under s. 9(1)(vii)(b) r/w Expln.-2 of the IT Act. The learned counsel for the appellant vehemently contended that the collaboration agreement is a composite one whereunder the foreign company undertook to grant licence for practising licensor's process in the plant, to supply equipment and catalyst for the plant, to deliver the basic engineering and the operating manual for the plant and to depute technical personnel for supervision of the detailed engineering, commissioning, erection and start-up of the plant, that the designs and drawings (documentation) covered by basic engineering were all prepared and sold by the foreign company at Frankfurt, West Germany, outside India, that the technical know-how in the shape of drawings and designs were purchased by the appellant on the basis of outright sale from the foreign company outside India, that what was acquired by the appellant in the shape of drawings and designs outside India was a capital asset and that, therefore, price paid for basic engineering i.e. documentation cannot be treated as "fees for technical services" rendered by the foreign company in India and hence there is no liability on the part of the appellant to deduct any tax on the payment made towards the price for basic engineering. Further, he contended that the Supreme Court in the case of Scientific Engineering House (P) Ltd. vs. CIT (1986) 157 ITR 86 (SC), held that documentation service comprising of drawings, designs, plans, processing data, etc. constitutes 'plant' whereon depreciation also is allowable, that when plant and machinery are sold by a foreign company outside India, that the sale of basic engineering outside India also takes the character of sale of plant and machinery abroad, that if there is any profit element of the said transaction, it can be assessed in the hands of the foreign company as its commercial profit and that the price paid for basic engineering can never be treated as "fees for technical services". He submits that all the transactions took place outside India in respect of the basic engineering which is a capital asset, that the price paid by the appellant to the foreign company can only be treated as a "trading receipt" in the hands of the foreign company and the profit, if any, arising out of it can only be assessed as "commercial profit" in the hands of the foreign company and that it cannot be treated as "fees for technical services." He, further submits that there was no business connection or permanent establishment for the foreign company in India and that even under the provisions of the Double Taxation Avoidance Agreement (DTAA) also the price paid for the basic engineering cannot be treated as "fees for technical services."
26. On the other hand, the learned Departmental Representative contended that from the nature of the engineering services, the foreign company undertook to render as seen from the Appendix-I to the collaboration agreement, it can be said that it is nothing, but technical services, that it is not a case where the foreign company took out from its shelf some readymade drawings and designs and sold them at the counter, that the said drawings, designs, plans, etc. were prepared for the special and particular needs of the appellant to enable the appellant to establish a plant for manufacture of maleic Anhydride out of benzene using "licensor's process", that in order to supervise the correct implementation of those drawings, designs and plans by the appellant, the foreign company undertook to depute its technical experts also for supervision of detailed engineering, commissioning, erection and start-up of the plant, that it is not a simple case of a foreign company selling away the designs and drawings abroad and shedding off its responsibility, that even assuming for a moment that designs and drawings constitute 'plant', the payment made for them can still fall within the definition of "fee for technical services" and that when once the payment made satisfies the requirements of the Expln. (2) to s. 9(i)(vii), it is deemed to be income arising or accruing in India and that in that view of the matter, the appellant is obliged to deduct tax on the said payment made for basic engineering and remit the same to the Government.
27. The foreign company undertook to deliver basic engineering to the appellant outside India as seen from art. 3.2. Art. 2.2 states that the seller will deliver the basic engineering and the operating manual for the plant as per Appendix-I. Seller's scope of engineering services are mentioned in details in Appendix-I of the collaboration agreement. It is mentioned in Appendix-I that the "engineering" comprises of "technical services". Paras 1.1 to 1.9 of Appendix-I describe the details of those technical services under as many as nine heads, which have already been referred to (supra) in para 19 of this order. We find those details (Appendix-I) at pp. 19 to 24 of the paper book No. 1. The technical services constituting "basic engineering" comprised of general documentation, process design, mechanical engineering, piping engineering, instrument engineering, insulation, electrical engineering, structural steel and civil engineering. No doubt, a substantial part of the said technical services are in the shape of designs, drawings, plans, etc. Separate price of DM 16,00,000 was fixed for basic engineering as per art. 4.1.3 of the agreement. Art. 7.1 states that the seller shall assume the following guarantees :
(a) "Process guarantees related to capacity, product quality and yield as well as utility consumption as stipulated in Appendix-III."
28. Seller's guarantees are enumerated in Appendix-II. Thus, the guarantees undertaken by the foreign company related to capacity of the plant, yield and quality of the product, etc. In order to implement and put into shape the designs, drawings, data sheets, etc. and supervise the erection of the equipment and commissioning of the plant including the guarantee tests, the foreign company undertook to repute its experts. Separate charges were fixed in Art. 6.3 for taking the services of the experts of the seller and licensor. Seen in this background, supply of the basic engineering also formed part and parcel of the package of technical services, that were undertaken by the foreign company.
29. Sec. 5(2)(b) of the IT Act states that subject to the provisions of the Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived, which accrues or arises or is deemed to accrue or arise to a non-resident, is includible as his income assessable to tax. Sec. 9 specifies the incomes which are deemed to accrue or arise in India. For the purposes of the present issue we are now concerned with cl. (vii) of sub-s. (i) of s. 9 which runs as follows :
Sec. 9(i) The following incomes shall be deemed to accrue or arise in India :-
(vii) Income by way of fees for technical services payable by -
(a) the Government, or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source in India.
(c) xxxxx xxxxx xxxxx
30. Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976 and approved by the Central Government.
31. Explanation 1 : For the purpose of 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 :
Explanation 2 : For the purposes of this clause "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provisions of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "salaries". Thus, it is seen for the Expln. (2) that for the purposes of cl. (vii), "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services. In our considered opinion, the basic engineering, the scope of which was clearly mentioned in detail in Appendix-I is in the nature of technical services. Appendix-I. clearly mentions that the engineering comprises of technical services which were described in detail under as many as nine heads in Appendix-I. Appellant a resident paid fee for these technical services utilised in business in India. Thus the consideration paid by the appellant towards basic engineering, clearly constitutes "fees for technical services" as it was paid for rendering technical services as contemplated under Expln. (2) to s. 9(i)(vii). The foreign company had not undertaken any construction, assembly, mining or like project in India. It only undertook to grant licence, supply of equipment, delivery of engineering services and depute on salaries experts for supervising the erection, commissioning and start-up of the plant. Its role is only supervisory through its experts. The foreign company itself had not undertaken any construction or assembly or like project. In that view of the matter, the exclusionary clause contained in Expln. (2) does not apply to the technical services rendered by the foreign company. When once the payment satisfies the ingredients of Expln. (2) to cl. (vii) of sub-s. (i) of s. 9 it falls within the definition of "fee for technical services" and the income by way of "fees for technical services" paid by the Indian company to the non-resident is deemed to be income accruing or arising to the non-resident in India. Thus, when once the receipt satisfies the requirements of Expln. (2) it results in deemed accrual of income in India.
No doubt, it is true, the Supreme Court in the case of Scientific Engineering House (P) Ltd. vs. CIT (1986) 157 ITR 86 (SC) and the Andhra Pradesh High Court in the case of the very same assessee Scientific Engineering House (P) Ltd. vs. CIT (1984) 148 ITR 171 (AP) and the Tribunal Hyderabad Bench 'A' in the case of Klayman Porcelains Ltd. vs. ITO (1985) 21 TTJ (Hyd) 283 : (1984) 8 ITD 265 (Hyd) have held that technical know-how acquired by an assessee is also an asset and falls within the expression 'plant' eligible for depreciation. The Supreme Court held that documentation service comprised of drawings, designs, plans, processed data, etc. in a book form constitutes 'plant' and, therefore, it is eligible for depreciation. There can be no dispute regarding the proposition. A part of basic engineering delivered in the form of designs, drawings, data sheets, plans, etc. may answer the description of a 'plant'. The disbursement in the hands of the Indian company may be capital in nature and the corresponding receipts in the hands of the foreign company may be revenue in nature. It may be a capital disbursement insofar as the purchaser is concerned, but it does not necessarily mean that it would be capital receipt in the hands of the recipient. The foreign company rendered services by preparing the design and basic engineering including documentation and delivered the same to the appellant to enable the latter to erect a plant for the manufacture of maleic anhydride by using the "licensor's process". The said services insofar as the foreign company is concerned are certainly in the nature of "technical services" rendered by it and the receipt of consideration by the foreign company would be chargeable to tax under s. 9(1)(vii) r/w Expln. 2 and art. VIIIA of DTAA. There is no conflict between the DTAA and the IT Act regarding the definition of the expression "fees for technical services".
32. Engineering services rendered by the foreign company in the shape of design and drawings may amount to a 'plant' or an "asset" in the hands of the appellant. Then consideration received for it need not necessarily be a capital receipt in the hands of the foreign company. When a receipt satisfies the ingredients of s. 9(i)(vii) and Expln. (2), it has to be treated as "fees for technical services", irrespective of the fact that the said services constituted a 'plant' in the hands of the appellant. It is true, that the price paid for supply of the equipment outside India, cannot be taxed in India in the hands of the non-resident seller. The treatment cannot be given to a fee paid for technical services though rendered abroad, when once it satisfied the ingredients of s. 9(1)(vii) and Expln. 2.
33. The Tribunal, Hyderabad-A Bench in the case of ITO vs. SMS Schloemann Siemag Aktiengesellschaft Dussoldori (1996) 55 TTJ (Hyd) 580 : (1996) 57 ITD 254 (Hyd), on almost similar facts held that fee paid for drawings, designs and engineering services constitutes fee for technical services within the meaning of the Expln. 2 to s. 9(i)(vii). In that case, Visakhapatnam Steel Plant (VSP) intended to establish a light and medium merchant mill (LMM) and wire road mill as an integrated part of its steel plant. In that connection Visakhapatnam Steel Plant (for short VSP) entered into a collaboration agreement with a foreign company - SMS Schloemann Siemag Aktiengesellschaft Dusseldorf (for short SMS) which undertook to supply designing and engineering. SMS was the prime contractor in respect of the wire road mill and it was a sub-contractor in respect of light and medium merchant mill (LMM). The question that arose for consideration before the Tribunal in that case was whether the lump sum consideration paid by VSP to the foreign company SMS towards engineering services constitute "fees for technical services" falling under s. 9(i)(vii). In that case, the foreign company SMS undertook to supply mechanical equipment, commissioning spares, designs and engineering, etc. to VSP. After going through the terms and conditions of the collaboration agreement, the Tribunal held as follows :
"From the above, in our opinion, it is an irresistible conclusion that the consideration for drawings and design and also engineering services received by the assessee would be fees for technical services within the meaning of Expln. 2 to s. 9(1)(vii) of the IT Act."
34. Further, the Tribunal while rejecting the contention of the assessee therein that the technical service as incidental to the supply of equipment and has to be treated as supplemental cost of the equipment held as follows :
"It is true that drawings and designs were supplied in connection with the equipment but that does not exclude it from being treated as technical service. When a receipt satisfies the ingredients of s. 9(1)(vii) and Expln. 2 thereunder, it has to be treated as fees for technical services irrespective of the fact that it has a relation to the supply of plant and equipment."
35. Thus, even if this technical services in the shape of drawings and designs is treated as 'plant' in the hands of the purchaser, still the consideration paid for it does not cease to be "fee for technical services" in the hands of the seller. The circumstances of the foreign company delivering the basic engineering abroad to the Indian company does not make any difference in view of the specific provisions of s. 9(1)(vii)(b). We are not inclined to agree with the learned counsel for the appellant that the decision of the Tribunal rendered in the case of SMS West Germany (supra) cannot cover the case on hand. There may be some difference in the range of services undertaken by SMS vis-a-vis VSP and the range of services undertaken by the foreign company in the present case vis-a-vis the appellant. We are only concerned with the ratio of that decision.
36. A similar view was taken by Tribunal Bangalore Bench in the case of AEG Aktiengesellschaft vs. IAC (1994) 47 TTJ (Bang) 648 : (1994) 48 ITD 359 (Bang). In that case also a foreign company incorporated in Germany, undertook to supply electrical equipment and engineering to an Indian company VSP. Engineering fee included cost of importation of drawings. It was contended in that case that the engineering and drawings constitute 'plant' and, therefore the price paid for it cannot be treated as fee for technical services, as it being only a consideration paid abroad for acquiring a plant or asset. Reliance was placed on the decision of the Supreme Court in (1986) 157 ITR 86 (SC) before the Tribunal. The Tribunal after considering the nature of the engineering services described in the collaboration agreement and after considering the provisions of the DTAA particularly art. VIIA entered into between India and West Germany held as follows :
"Since, so far as the definition of "fees for technical services" is concerned we have to be guided by the above mentioned article (art. VIIIA) of the DTAA only and we must come to the conclusion that in the instant case, the payment having been made in consideration for services of a technical nature, the said payments have got to be considered as fees for technical services rendered by the assessee-company to the Indian concern. This definition is more or less in conformity with the Expln. 2 to s. 9(1)(vii) of the IT Act."
37. The learned counsel for the appellant placed reliance on (1985) 21 TTJ (Hyd) 283 : (1984) 8 ITD 265 (Hyd) (supra) in support of his contention that the drawings and designs constituting know-how being plant acquired by the appellant outside India on the basis of an outright sale, cannot be treated as "technical services." In that case the Tribunal held that the consideration paid for drawings and designs and technical data, cannot be treated as 'royalty' under s. 9(1)(vi). The issue whether the consideration paid for drawings and designs constitute "fees for technical services" falling under s. 9(1)(vii) r/w Expln. 2 did not arise for consideration before the Tribunal in that case. Therefore, reliance on that decision (1985) 21 TTJ (Hyd) 283 : (1984) 8 ITD 265 (Hyd) (supra) has no relevance for the issue involved in these appeals.
38. The contention of the appellant that the provisions of DTAA also do not permit the assessment in India of "fees paid for technical services" rendered abroad, has no substance. The amended provisions of the DTAA accepted between Republic of India and the Federal Republic of Germany are reproduced in (1985) 156 ITR 90 (St). Clause (iv) of art. VIIIA of the DTAA runs as follows :
"The term 'fees for technical services' as used in the article means payment of any kind to any person other than payment to an employee of the person making the payments in consideration for services of a managerial, technical or consultancy nature including the provisions of services of technical or other personnel."
39. It is similar to the definition contained in Expln. 2 to s. 9(1)(vii) of the IT Act. Thus, the fees paid in consideration for services of technical nature constitutes "fees for technical services" even under the DTAA also. In that view of the matter, there is not conflict between the DTAA and the provisions contained in s. 9(1)(vii) and Expln. 2 in respect of the expression "fees for technical services". On a due consideration of the terms and conditions of the collaboration agreement, the provisions of s. 9(1)(vii) of the IT Act and art. VIIA of the DTAA, we are inclined to agree with the view taken by the learned CIT(A) that the consideration paid by the appellant to the foreign company towards basic engineering services constitutes "fee for technical services" as contemplated under s. 9(1)(vii) r/w Expln. 2 and as such it is taxable in the hands of the non-resident as income arising or accruing in India. Hence, the appellant Indian company is bound to deduct tax on the payment made by it to the foreign company towards consideration for basic engineering services and remit the same to the credit of the Central Government. Having not done so, it was rightly treated as "assessee in default' in respect of the tax deducted/deductible on the payments made towards basic engineering.
40. The next issue that arises for consideration is whether the price paid by the appellant towards licence-fee constitutes 'royalty' under s. 9(1)(vi) of the IT Act. Learned counsel for the appellant submits that the appellant acquired licence outside India for a lump sum price paid outside India, that the foreign company which transferred the licence has no permanent establishment in India, that what was acquired by the appellant was 'know-how' absolutely for a lump sum price paid abroad, that the said price paid for the know-how acquired abroad does not fall within the purview of 'royalty' as per the provisions of the DTAA executed between India and Federal Republic of Germany, that the provisions of the DTAA prevail over the provisions contained in the IT Act and that, therefore, the consideration contained paid by the appellant for acquiring the know-how in the shape of licence cannot be said to be the income by way of 'royalty' arising or accruing in India which can be assessed to tax in the hands of the foreign company in India. On the other hand, the learned Departmental Representative while supporting the view taken by the first appellate authority contended that the consideration though in lump sum paid by the appellant to the foreign company for acquiring the "licensor's process" in the plant, as seen from the art. 2.1 of the collaboration agreement. Art. 4.1.4 stipulated the "price for licence" at DM 11 lakhs. The said price is not of Indian taxes. It was a lump sum consideration which the appellant was permitted to pay in three equal instalments as per art. 5.3. The licence was granted outside India and consideration was paid outside India. Admittedly, the foreign company has no permanent establishment in India. This licence in respect of the "licensor's process" is termed as lump sum know-how in the approval granted by the Government of India for the collaboration agreement. We find it in the Appendix-IV to the agreement. Annexure-I to the collaboration approval granted by the Government contains various terms and conditions. Para 2 of Annexure-I refers to 'royalty'. The Government's approval letter, dt. 31st December, 1987, clearly states that para 2 of Annexure-I referring to 'royalty' is not applicable to the lump sum know-how in question. Thus, the approval letter itself in a way excludes the application of the provisions of 'Royalty' to the consideration paid for lump sum know-how. Clause IX of Annexure I to the approval letter clearly states that the Indian company should be free to sub-licence the technical know-how, etc. under the agreement to another Indian party, should it becomes necessary. No doubt, the terms of sub-licencing have to be actually agreed to by all the parties concerned including the foreign collaborator and also subject to the approval of the Government. However, that restriction does not militate against the transfer of know-how being an absolute transfer.
41. Art. 2.1 of the collaboration agreement is as follows :
"Seller is entitled to licensor to grant and hereby grants to buyer the licence for practising licensor process in the plant."
42. Thus, the seller (foreign company) who was authorised by the licensor granted the licence to the buyer. It is nothing but technical know-how. It was transferred outside India. Consideration was paid in lump sum outside India. There is no restriction regarding the duration of the licence. The appellant who acquired the licence possesses it and owns it even after the duration of the agreement period. It is not bound to return it back to the seller or licensor after the duration of the agreement period. Appellant is entitled to sub-licence to any Indian company, of course subject to the approval of the Government. Irrespective of the fact whether the appellant practices or uses the licensor process, it had to pay the consideration for it to the seller. The fee for licence does not depend upon the production or turnover of the appellant. Appellant cannot get refund of the fee even in case it does not use the licensor's process. Taking into consideration of the aforementioned facts, we are inclined to hold that the seller-foreign company transferred the 'licence' absolutely for a lump sum consideration outside India to the Indian company.
43. Sec. 9(1)(vi) provides that income by way of 'royalty' shall be deemed to accrue or arise in India, when it is payable to a non-resident. The Expln. 2 to cl. (vi) of sub-s. (1) of s. 9 runs as follows :
Explanation 2 : For the purposes of this clause, 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'Capital gains' for -
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
(ii) the imparting of 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 :
(iii) the use of any patent, invention, model design, secret formula or process or trade mark or similar property;
(iv) the imparting of any information concerning technical industrial, commercial or scientific knowledge, experience or skills;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or
(vi) the rendering of any services in connection with the activities referred to in sub-s. (i) to (v)".
44. As per the Expln. 2 to s. 9(1)(vi). 'royalty' means the consideration for the transfer of all or any rights in respect of technical know-how. Lump sum consideration paid by the appellant to the foreign company for the acquisition of technical know-how in the shape of licence for practising licensor's process in its plant may fall under cl. (i) of Expln. 2 to s. 9(1)(vi). However, it has to be seen whether the lump sum payment for technical know-how in question would fall under the ambit of the DTAA executed between India and Federal Republic of Germany.
45. There is an agreement between the Government of India and the Government of the Federal Republic of Germany for the Avoidance of Double Taxation. It was originally executed in the year 1959 and subsequently it was amended in 1985. The said amended DTAA is found in (1985) 156 ITR 90 (St). Art. V of the DTAA states that the profits of an enterprise of a contracting state shall be taxable only in that state, unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. The foreign company Lurgi has no permanent establishment in India. It was incorporated in Germany where it is having permanent establishment. Art. VIIIA of the DTAA relevant for the purposes of the present appeals. Clause I of the Art. VIIIA runs as follows :
"The term 'royalty as used in this article means payments of any kind received as a consideration for the use of, or the right to use ........... any patent, trade mark, design or model, design, plans, 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."
46. Thus, the consideration for "the use of" or "the right to use" the technical know-how, secret formula or process falls within the definition of 'royalty' contained in cl. (iii) of art. VIIIA of the DTAA. It does not comprehend within its ambit the consideration paid in lump sum for the absolute acquisition of know-how by virtue of an outright transfer of sale abroad. In the case on hand, what was acquired by appellant was not a mere right to use the technical know-how given by the foreign company. Appellant purchased the licence on the basis of an outright sale outside India from the non-resident for the lump sum consideration. Consideration paid for that transfer of licence does not fall within the meaning of 'Royalty' contained in cl. (iii) of art. VIIIA of the DTAA.
47. It is well settled that when there is conflict between the provisions of the DTAA and the provisions of the IT Act, the former would prevail over the latter. At this stage it would be relevant to refer to the decision of the Calcutta High Court in the case of CIT vs. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal). The Calcutta High Court relying on the decision of the Andhra Pradesh High Court in the case of CIT vs. Visakhapatnam Port Trust, (1983) 144 ITR 146 (AP) and also relying on the CBDT Circular No. 333, dt. 2nd April, 1982 (1982) 137 ITR (St) 1 held that in the case of inconsistency between the DTAA and the IT Act the provisions of the DTAA will prevail. The Calcutta High Court held that the charging provisions in sections and of the IT Act are subject to the provisions of s. 90. It categorically held that in case of inconsistency between the terms of the DTAA and the taxation statute the former alone would prevail. There cannot be two opinions on that aspect.
48. Now it has to be seen whether the consideration paid for the acquisition of licence would be 'royalty' within the ambit of the DTAA. The consideration paid by the appellant towards licence was not merely for the use of or the right to use of the "licensor's process" it was paid for the absolute transfer of the licence and not for mere user of the "licensor's process".
49. In the case of CIT vs. Davy Ashmore India Ltd. (supra) the Calcutta High Court held that where there is an outright sale or purchase, the consideration is for the transfer of technical know-how and it cannot be treated as 'royalty' for the purposes of DTAA. In that case, the technical know-how was transferred in the shape of drawings and designs by a foreign company to an Indian company against lump sum payment. The Calcutta High Court after duly considering the DTAA executed between India and the United Kingdom, particularly cl. (ii) of art. XIII of the DTAA between India and the U.K. held that when there is a sale of designs and drawings by the foreign company to the Indian company against lump sum payment it cannot be taxed as 'royalty' by reference to Expln. 2 to s. 9(1)(vi) of the IT Act. The Calcutta High Court held that the Expln. 2 to s. 9(1)(vi) makes it quite clear that 'royalty' as defined in Expln. 2 is only for the purposes of cl. (vi) and that where a specific provisions is made in a DTAA, that provision will prevail over the general provisions contained in the IT Act. Finally, the Calcutta High Court held as follows :
"The importation of the designs and drawings postulates amount an out and out transfer or sale of such designs and drawings and the non-resident company does not retain any property in them leaving the grantee to use or exploit them. The consideration paid for transfer, therefore, cannot be treated as 'royalty' falling under Art. XIII of the agreement for avoidance of Double Taxation between India and the U.K. The consideration paid is for an outright transfer of the drawings and designs by the non-resident company and such consideration cannot be termed as 'royalty'."
50. In the case of Graphite Vicarb India Ltd. vs. ITO (1993) 199 ITR 119 (AT), the Special Bench of the Tribunal Calcutta Bench had to consider the issue whether the lump sum payment made for the transfer of technical know-how. by an Indian company to a French company constitutes 'royalty' or not. In that case, there is a collaboration agreement between the French company (non-resident) and the Indian company for transfer of know-how for lump sum payment. In addition to the lump sum payment of Rs. 10,00,000 towards lump sum know how the Indian company further agreed to pay a royalty of 3 per cent for five years or the right to use the know-how granted under cl. (viii) of the collaboration agreement. The Indian company claimed that the lump sum know-how of Rs. 10,00,000 is not taxable as 'royalty' ITO rejected it and the CIT(A) confirmed it. There is an DTAA between India and France. Clause (ii) of art. (viii) of the said DTAA defines 'royalties' which mean payment of any kind received as consideration for the use of or for the right to use any copyright, designs, plan, etc. Thus, the consideration for the right to use technical know-how would be 'royalty' which is subjected to tax in both the countries, whereas the consideration for transfer of the know-how would not be 'royalty' and consequently it would be a commercial profit exempt under Art. III of the DTAA as the foreign company has no permanent establishment in India. In that case the French company transferred outside India the technical know-how for the manufacture of 'impervious graphite equipment" to Indian company. The question that arose for consideration before the Special Bench of the Tribunal was whether the payment of Rs. 10,00,000 for lump sum know-how constituted 'royalty' as per the provisions of the DTAA between India and France. The Tribunal Special Bench following the decision of the Calcutta High Court in the case of CIT vs. Devy Ashmore India Ltd. (supra), held that the lump sum know-how fee of Rs. 10,00,000 does not constitute 'royalty' and it was only commercial profit within the meaning of art. III of the DTAA between India and France and that inasmuch as the French company has no permanent establishment in India, it was not liable to be taxed in India. The ratio of that decision of the Special Bench applies to the facts on hand in relation to the lump sum consideration paid towards 'licence' which is nothing but transfer of technical know-how on the basis of an outright sale outside India.
51. In the case of DCM Ltd. vs. ITO (1989) 29 ITD 123 (Del) an Indian company-DCM Ltd. entered into a technical collaboration agreement with a U.K. concern TL London. The Indian company wanted to acquire process technology called "Talo process" for using it in the manufacture of sugar. Hence, DCM entered into a technical collaboration with TL for the transfer of comprehensive technical information and know-how and the supply of equipment by TL to DCM. As per the said agreement, the technical know-how relating to 'Talo process' was to be transferred to DEM to TL outside India and DCM had to pay a certain lump sum consideration in four instalments. The issue that arose for consideration before the Tribunal Delhi Bench was whether the assessee-Indian company was liable to deduct tax on the payments made towards consideration to TL for the grant of licence and the disclosure of the know-how. The DCM was permitted to sub-licence its rights to any other Indian company, but with the consent of the foreign company and with the approval of the Government of India. The question that arose for consideration was whether the payments made by way of consideration by DCM to TL for the transfer or the grant of licence and the disclosure of the know-how constitute 'royalty'. There is DTAA between India and the U.K. The definition of 'royalty' contained in Expln. 2 of s. 9(1)(vi) is somewhat different from the definition of 'royalty' contained in art. XIII(3) of the DTAA between India and the U.K. 'Royalty' in art. XIII(2) of the said DTAA has been defined to mean payments of any kind including the rentals received as a consideration for the use of or the right to use any patent, trade mark, design or model, plan, secret formula or process, etc. The Tribunal found that the definition of 'royalty' contained in that DTAA and the IT Act are not identical. It found that the definition of 'royalty' contained in the DTAA is somewhat a truncated and narrower one. After duly considering the terms of the collaboration agreement and the provisions of the DTAA between Indian and the U.K. the Tribunal held as follows :
"We are, therefore, of the view that the consideration for the transfer of drawings, designs, etc. outside India by TL to DCM did not constitute 'royalty' as defined in art. XIII of the convention and that the said consideration actually constituted business profits for the said foreign concern which too could not be taxed through the assessee as per art. VII of the convention as that foreign party has no permanent establishment in India."
52. Thus, inasmuch as the payment in question did not fall within the meaning of 'royalty' contained in art. XIII(3) of the DTAA between India and the U.K. the Tribunal came to the conclusion that it cannot be treated as 'income by way of royalty' arising or accruing in India to be taxed in the hands of the non-resident.
53. It would also be relevant to refer to the decision of the Tribunal Delhi Bench in the case of Swadeshi Polytex Ltd. vs. ITO (1991) 38 ITD 328 (Del). In that case an Indian company established a plant for manufacture of polyester staple fibre in collaboration with a German company called M/s. Zimmer. The Indian company intended to expand its plant by using "Zimmer technology". In that connection an agreement was executed between the Indian company and the West German company for the supply of technical knowhow, improved and modified and for rendering of services outside India in that connection. As per the said agreement, the company had to remit a sum of DM 41,50,000 to the German company. The Indian company applied to the ITO under s. 195(2) for grant of permission to remit the amount without deduction of tax at source. It claimed that no tax is required to be deducted at source under s. 195 as payment was not assessable in India in the hands of M/s. Zimmer in view of the DTAA with West Germany. The ITO rejected that plea. The CIT(A) confirmed it. On appeal, the Tribunal held that though the payment may fall within the definition of 'royalty' under s. 9(1)(vi), it does not fall within the definition of 'royalty' contained in the relevant DTAA and that being so, the receipts in the hands of the German company cannot be deemed to be income arising or accruing in India to be taxed in the hands of the German company. In that connection the Tribunal held as follows :
"Considering the totality of the circumstances of this case, we are of the view that the company namely M/s. Zimmer have transferred the technical know-how etc. to the assessee-company for the consideration of DM 41,50,000 and that such a transfer was not merely a right to its use. It, therefore, follows that the payment made by the assessee-company to the German company does not fall within the definition of the term 'royalty' under the DTAA between India and Federal Republic of Germany. That being so, the receipts in the hands of German company would be taxable only under art. V of the said agreement. Since it is the admitted case of the parties that the German company was not having a permanent establishment in India, the receipt by the German company would be taxable in Germany and not in India."
54. Since DTAA deals with 'royalties' the definition under the said agreement shall have preference over the definition of the word 'royalty' contained in s. 9 of the IT Act. The distinguishing features in the two definitions are that whereas under the IT Act any consideration for the transfer of all or any rights in respect of a patent, invention, model designs, secret formula or process or trade mark or similar property falls within the definition of 'royalty' the payment for the 'use' of such assets would only fall with the definition of 'royalty' under the DTAA. In the case of hand, the lump sum consideration was paid for the absolute transfer of know-how abroad in the shape of licence in respect of the "licensor's process" by the foreign company to the Indian company. The consideration was not paid for the mere use of that "licensor's process". The appellant is entitled to sub-licence its rights in the licence in favour of any Indian company, no doubt, subject to certain restrictions. It is bound to make the payment towards licence whether it uses the "licensor's process" or not. The licence was acquired outside India and the payments were made outside India. The consideration paid for the transfer or grant of licence does not fall within the definition of 'royalty' contained in Art. VIIIA(3) of the DTAA. The foreign company is not having any permanent establishment in India. Hence, the consideration paid for the licence cannot be assessed in the hands of the German company in India as "income by way of royalty". The ratio of the aforementioned decisions of the Tribunal covers the issue on hand in respect of the consideration paid for licence. In that view of the matter, there was no liability on the part of the appellant to deduct tax at source on the payments made towards "licence fee" as they do not constitute 'royalty'. The view taken by the learned CIT(A) that the licence fees take the character of 'royalty' and, therefore, the appellant is liable to deduct tax at source, is not correct.
55. The appellant cannot be treated as an assessee in default for its failure to deduct tax on the payments made towards 'licence fee' and remit the same to the Government. However, the ITO was justified in treating the appellant as an assessee in default for its failure to deduct and remit the tax on the payments made towards "engineering fees." We have already held that a part of the order under s. 201 got vitiated on account of the ITO's failure to treat the letter dt. 2nd June, 1993 of the appellant as an application under s. 195(2) and make an order under s. 195(2) in respect of the extent of liability of the appellant to deduct tax on the payments made towards 'licence fee'. Even on merits also the consideration paid towards licence fee cannot be treated as 'royalty' assessable in the hands of the foreign company in India, in view of the restricted definition of 'royalty' contained in the DTAA executed between India and the Federal Republic of Germany. Accordingly, that part of the order under s. 201 passed by the ITO treating the appellant as an assessee in default in respect of the tax deducted/deductible on the payment made to the foreign company towards "engineering fees" and levying of interest under s. 201(1A) for not remitting or delayed remitting of the tax on the said payments (engineering fee) to the Government is upheld. That part of the order under s. 201 passed by the ITO treating the appellant as an assessee in default in respect of the tax deducted/deductible on the payments made to the non-resident towards 'licence fee' and levying interest under s. 201(1A) for non-remittance of such tax on the payments made towards 'licence fee' is hereby set aside. Accordingly, the order of the first appellate authority is partly set aside and consequently the order of the ITO passed under s. 201 is partly set aside.
56. In the result, the appeals are allowed in part to the extent as indicated supra.
P. Pradhan, A.M. 19th December, 1996
57. These appeals by the assessee are against the consolidated order of the CIT(A), dt. 25th January, 1996, for the asst. yrs. 1991-92, 1992-93 and 1994-95.
58. I have gone through the proposed consolidated order of my learned brother and am not fully in agreement with the said order and, hence, I am proposing this order. He has given facts involved in the case in detail with which I agree, but for the sake of convenience I am also mentioning the facts in brief.
59. The AO has passed the consolidated order under s. 201 of the IT Act, for the financial years 1990-91, 1991-92 and 1993-94 on 23rd November, 1995, directing the assessee to pay Rs. 59,41,600 on account of tax deducted at source, but not remitted, and interest of Rs. 28,79,435 under s. 201(1A) of the IT Act for the three years for the delayed payment/non-payment of tax deducted at source. The assessee was aggrieved by the said order and took the matter in appeal to the CIT(A), and the CIT(A) by an order, dt. 25th January, 1996, has upheld the AO's action and, hence, the present appeals are by the assessee.
60. The ITO (TDS), Hyderabad, has found while scrutinising the annual return that the assessee a resident Indian company, made certain payments to a non-resident foreign company - M/s. Lurgi Gmbh West Germany, towards technical know-how and deducted tax due thereon, but did not remit the tax deducted till the close of respective Financial years 1991-92 and 1993-94 to the Government. But in respect of the tax deducted during the Financial year 1990-91, the assessee remitted the same to the Government with a delay of 13 months. The above position will be clear from the following table.
------------------------------------------------------------------------
Financial Date of payment Amount paid Amount deducted Date of
year to N.R. to N.R. (TDS) remittance
Rs. Rs.
------------------------------------------------------------------------
1990-91 19-6-1990 92,66,409 18,53,262 12-8-1991
1991-92 31-7-1991 1,32,46,983 26,49,400 Not yet
remitted
1993-94 31-3-1994 1,64,61,000 32,92,200 -do-
------------------------------------------------------------------------
61. The above chart clearly go to show that Rs. 18,53,262 relating to the Financial Year 1990-91, though deducted on 19th June, 1990 was actually credited to the Central Government on 12th August, 1991, with a delay of 13 months. The tax deducted during the financial years 1991-92 and 1993-94, total amounting to Rs. 59,41,600 was not at all remitted to the Government which will be clear from the annual report of the assessee-company for the year ending 30th September, 1994, wherein liability of Rs. 59,41,600 is shown as outstanding on account of tax deducted at source.
62. The contention of the assessee, that he is not liable for any income-tax in respect of the remittances made to non-resident and, therefore, there is no question of deduction of tax in respect of the said income cannot be accepted. My learned brother has gone in detail in respect of the "fees" paid for "technical services" and "licence fees" and held that the assessee is liable for the deduction of tax in respect of the "fees" paid for "technical services", but not in respect of "licence fees". After considering the submissions of the parties and going through the proposed order of my learned brother, I may mention that I agree with my learned brother only to the extent that the assessee is liable for deduction of tax at source in respect of "fees for technical services", but not in agreement in respect of the finding on "licence fees". I am not in agreement with my learned brother to consider the assessee's submissions at this late stage that he is not liable to income-tax in respect of "fees" for technical services" and "licence fees" in view of facts stated above and herein below.
63. To appreciate the issues better in these appeals, I feel it necessary to extract the provisions of ss. 201(1) and 201(1A) of the IT Act.
201(1) :
"If any such person and in the cases referred to in s. 194, the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act. he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax."
201(1A) :
"Without prejudice to the provisions of sub-s. (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid."
64. Sec. 201(1) clearly specifies that the assessee will be treated as the assessee in default, if the person paying to a non-resident either fails to deduct the tax at source or after deduction fails to make the payment to the Government account in time. Similarly, s. 201(1A) clearly specifies that if a person is responsible for paying to a non-resident either fails to deduct the tax or after deduction fails to pay the tax as required, he is liable to pay simple interest at 15 per cent per annum on the amount of such tax from the date on which such tax is deductible to the date on which such tax is actually paid.
65. The facts narrated by my learned brother in detail and as stated above are not in dispute. There is no dispute that the assessee has deducted taxes in respect of all the three years mentioned above. In respect of the first year he has deducted the tax, but has remitted not in time, but late by 13 months. Therefore, the AO charged interest under s. 201(1A) of the IT Act.
66. As regards the remaining two years, the chart mentioned above, clearly shows that he has deducted that tax at source, but has not remitted to the Government account till today. Therefore, the AO has rightly directed the assessee to pay Rs. 59,41,600 (Rs. 26,49,400 plus Rs. 32,92,200) on account of TDS and interest of Rs. 28,79,435 for late payment/non-payment of taxes deducted at source in respect of all the three years, the calculation of which has been clearly indicated in the 201 order of the AO, dt. 23rd November, 1995. The contention of the assessee that he is not liable to deduct the tax for foreign remittances as the income itself is not liable to tax, cannot be accepted as correct, when the assessee himself has deducted the taxes in respect of all the three years and in fact in the first year he has remitted the same to the Government account, the conduct of the assessee itself shows that the contentions of the assessee are clearly an afterthought. The remittances to a non-resident and tax deductions have been made for the three years on 19th June, 1990, 31st July, 1991 and 31st March, 1994. Therefore, the contention that he is not liable to income-tax on remittances and/as such not liable to deduct tax at source cannot be accepted having already deducted the tax and in fact for the first year the payment has been made to the Government account. Moreover, the Supreme Court in the case Aggarwal Chamber of Commerce Ltd. vs. Ganpat Rai Hiralal (1958) 33 ITR 245 (SC) at 253, has held that the person responsible for remittances to a non-resident and deduct tax therein cannot challenge that the income is not liable to tax. In the said cases the Hon'ble Supreme Court has categorically held the said issue has to be agitated by the non-resident at the time of assessment and the persons who are bound under the Act to make deductions at the time of payment are not concerned with the ultimate result of the assessment and adjustments are made at the time of final assessment. I may also mention that the assessee should not have deducted the taxes at source, if his contention was that he is not liable to income-tax in respect of remittances to the non-resident. But having deducted and not remitted to the Government as required under the provisions of the IT Act, he cannot escape the consequences of the default.
67. The provisions of section mentioned above penalises in respect of failure to deduct and also in respect of non-payment after having deducted. The different High Courts have held that charging of interest under s. 201(1A) is mandatory. They have also held that the interest is charged as a compensation and not penalty on account of late payment/non-payment of taxes in time on account of non-deduction of taxes or having deducted and not paid. The Courts also have held that the charging of interest is in order because the Government has deprived of the benefit of the tax for the period during which it has remained unpaid. It is undisputed fact that the assessee has deducted the taxes and has not paid in the Government account in time and withheld the money and utilised the same for its own business purposes and, therefore, he has to pay interest as a compensation as held by various Courts.
68. The ratio to the decision of the Supreme Court in the case of Aggarwal Chamber of Commerce Ltd. vs. Ganapat Rai Hira Lal (supra), wherein their Lordships have held that the persons who are bound under the Indian IT Act, 1922 to make deduction of income-tax at the time of making payment of any income, profits or gains are not concerned with the ultimate result of the assessment of the person to whom the payment is made. In this connection, the findings of their Lordships at p. 253 of the discussion is worth mentioning in the present context and the extract of which is as follows :
"If the Hapur firm rightly paid the tax on the profits, the respondent cannot be allowed to challenge the amount on the ground that his total world income was not taxable and he was entitled to his profits without deduction. That is a question which has to be agitated by the non-resident assessee at the time of his assessment. Those persons who are bound under the Act to make deduction at the time of payment of any income, profits or gains are not concerned with the ultimate result of the assessment. The scheme of the Act is that deductions are required to be made out of "salaries" "interest on securities and other heads of "income, profits and gains" and adjustments are made finally at the time of assessment. Whether in the ultimate result the amount of tax deducted or any lesser, bigger amount would be payable as income-tax in accordance with the law in force would not effect the rights, liabilities and powers of a person under s. 18 or of the agent under s. 40(2) and 40(1)".
69. Similarly, the Rajasthan High Court in the case of CIT vs. Rathi Industries (1995) 213 ITR 98 (Raj), their Lordships have held that s. 201 of the IT Act, 1961, provides not only for collection of tax which has not been deducted but for levy and charge of interest also. Sub-s. (1A) of the said section provides for liability to pay simple interest at the rate of 15 per cent per annum on the amount of tax from the date on which the tax was deductible till the date of tax was actually paid. The provisions for payment of interest are mandatory and automatic and interest has to be paid from the date on which the tax was deductible till the date on which the tax is actually paid. If the tax has already been paid by the recipient on such income the IT Department may not be justified to recover the said amount of tax, but so far as the liability of interest is concerned, that cannot be considered to be non-existent on account of deposit of tax by the recipient at a subsequent or later stage.
70. Similarly, the Bombay High Court in the case of Pentagon Engineering (P) Ltd. vs. CIT (1995) 212 ITR 92 (Bom), their Lordships have held that the use of the word "shall in s. 201(1A) made the liability to pay interest, in the circumstances mentioned, mandatory and there was no preconditions of consideration of "reasonable cause" for non-payment in time of tax deducted under s. 192. Therefore, the ITO was not required to take into consideration the "reasonable cause" for non-payment of taxes deducted under s. 192. Therefore, the ITO was not required to take into consideration the "reasonable clause" for non-payment of taxes deducted under s. 192 of the IT Act.
71. The Bombay High Court in the case of Bennet Coleman & Co. Ltd. vs. V. P. Damla, ITO (1986) 157 ITR 812 (Bom), again it was held that s. 201(1) of the IT Act, 1961, deems a person to be an assessee in default in respect of tax if, after deducting tax deductible at source, he fails to remit it as required under the Act. Under sub-s. (1A), if that person, after deducting the tax, fails to remit it as required under the Act, he is made liable to pay interest at the rate of 15 per cent per annum. The liability arises immediately upon each default and is to be computed only with reference to the law as it then stood. The Court has further held that s. 201(1A) makes the payment of simple interest mandatory. The payment of interest thereunder is not a penal provision.
72. Similarly, the Gujarat High Court in the case of CIT vs. Assam Small Industries Development Corporation Ltd. (1996) 219 ITR 324 (Gau), their Lordships have held that interest is levied by way of compensation and not by way of penalty can only be imposed when the delay in payment of tax deducted at source was without good and sufficient reason. Sec. 201(1A) does not impose any restriction unlike penalty.
73. Similarly, the Supreme Court in the case of Central Provinces Manganese Ores Co. Ltd. vs. CIT (1986) 160 ITR 961 (SC), their Lordships have held that interest is levied by way of compensation and not by way of penalty. The Supreme Court also taken similar view in the case of CIT vs. M. Chandra Sekhar (1985) 151 ITR 433 (SC), reported their Lordships have also held that interest is levied as per the provisions of the Act, because by reason of omission of default mentioned in the provisions of the Act, the Revenue is deprived of the benefit of the tax for the period which it is remained unpaid.
74. Similarly, in the case of Ganesh Dass Sreeram vs. ITO (1988) 169 ITR 221 (SC), their Lordships have held that in view of the late filing of the return, there was postponement of payment of tax, the interest of Revenue suffer loss on account of delayed payment of tax. In that case, the apex Court has observed that the interest is levied by way of compensation and not by way of penalty. The ratios and the findings of the various Courts mentioned above are directly applicable to the facts of the present case. As already mentioned in the foregoing paras that the deduction of tax at source on account of non-resident is in respect of three financial years. The assessee has deducted tax in respect of all the three years. He has remitted the tax deducted at source to the Government account belatedly in respect of first year, but as regards the remaining two years he has not remitted at all. These are the findings of fact which are not in dispute.
75. Therefore, the action of the authorities directing to remit Rs. 59,41,600 on account of TDS is in order, because he has deducted to pay to the Government, but has not paid to Government account. Similarly, the charging of interest under s. 201(1A) is also in order, because as per decisions of the various High Courts the payment of interest is mandatory and compensatory in nature.
T. V. Rajagopalarao, President (As Third Member)
76. This is a reference made to Third Member under s. 255(4) of the IT Act against the differences identified between the two Members constituting the Division Bench while disposing of the appeals by a consolidated order. The identified differences between the learned Members are the following :
"1. Whether, on the facts and in the circumstances of the case, the order under s. 201 of the IT Act passed by the ITO treating the appellant as "assessee in default" for non-remittance of the tax deducted/deductible in respect of the payments made towards licence-fee by the appellant to a non-resident and levying of interest under s. 201(1A) of the IT Act on such non-remittance of tax to the Central Government are sustainable under law ?
2. Whether, on the facts and in the circumstances of the case, the view taken by the learned Judicial Member that the payments made by the appellant to the non-resident towards licence-fee do not constitute "royalty" within the meaning of the word "royalty" contained in the Agreement for Avoidance of Double Taxation entered into between India and Germany and, therefore, the appellant had no liability under law to deduct tax at source on those payments, is correct ?
3. Whether, on the facts and in the circumstances of the case, the view taken by the learned Accountant Member that the appellant's plea that it is not liable under law to deduct tax at source on the payments made by it to the non-resident towards licence-fee cannot be considered at this late stage is correct in the facts and circumstances of this case ?"
77. Few facts necessary for appreciation of the points in controversy are the following. These appeals arose out of the consolidated order passed by the CIT(A), Hyderabad, dt. 25th January, 1996 confirming the orders passed by the ITO, Ward-5(9), TDS, Hyderabad dt. 23rd November, 1995 under s. 201 of the IT Act for not remitting the amounts/for late remitting the amounts deducted towards TDS payable to a West German company (M/s Lurgi Gmbh, West Germany). In this order, Niraj Petrochemicals Ltd. is referred to as 'Indian company' and M/s. Lurgi Gmbh, West Germany, is referred to as a 'foreign company'. The Indian company entered into an agreement with the foreign company on 27th/29th June, 1988. The said agreement is approved by the Government of India as well as the Reserve Bank of India, vide its letter dt. 31st December, 1987. In this agreement, the foreign company is described as 'seller' and the Indian company as 'buyer'. The preamble of the agreement is as follows :
"Buyer intends to instal a plant for the production of high purity maleic anhydride (MA) from benzene using the process of Chemische Works Huls AG, Marl (hereinafter called "licensor's process").
The Indian company intended to set up a plant for the production of high purity maleic anhydride (MA) from benzene using a particular process referred to as "licensor's process" in the agreement. The plant is situated at Visakhapatnam. The agreement stipulated, inter alia, the understanding reached between the buyer and seller on the scope of equipment, licence and basic engineering to be supplied by seller to the buyer for this plant and on the commercial terms and conditions in respect thereto and it is further agreed that this agreement forms the basis for conclusion of a detailed contract containing seller's supply of equipment and licence as well as basic engineering services. In para 19 of the learned Judicial Member's order, he had explained the contents of Appendix-I to the agreement which deals with technical services to be provided by the Foreign company to the Indian company. The details of the services are said to fall under the following heads :
1.1. General documentation, 1.2. Process design, 1.3. Mechanical engineering, 1.4. Piping engineering, 1.5. Instrument engineering, 1.6. Insulation, 1.7. Electrical engineering 1.8. Structural steel, and 1.9. Civil engineering.
78. I am concerned with the following few payments by the Indian company to the foreign company and the question is whether TDS is to be deducted while sending the amount. This aspect is dealt with by the learned Judicial Member in para 16 of his orders. In the agreement under Art. 4.1.3 which deals with the price for basic engineering records an obligation to pay DM 16,00,000. Article 4.1.4 which deals with price of licence fixed at DM 11,00,000. The learned Judicial Member adverted to Art. 4.4 of the agreement which stipulates that all taxes, duties and dues levied outside the Federal Republic of Germany shall be borne and directly paid by the buyer. The following table would show the rupee equivalent of foreign currency instalments due by the Indian company to the foreign company and in fact, the amounts were already paid :
------------------------------------------------------------------------
Financial Date of Amount paid TDS (Rs.) Date of remittance year payment (Rs.)
------------------------------------------------------------------------
1990-91 19-6-1990 92,66,409 18,53,262 12-8-1991 1991-92 31-7-1991 1,32,46,983 26,49,400 Not yet remitted 1993-94 31-3-1994 1,64,61,000 32,92,200 Not yet remitted
------------------------------------------------------------------------
79. As already stated, I am concerned with the payment of price for basic engineering which is stated to be DM 16,00,000 and price for licence fee which is mentioned in the agreement at DM 11,00,000. Para 4.4 of the agreement, which is in two paras, is as follows :
"The total fee stated in Art. 4.1 includes all taxes, duties and dues levied by and within the Federal Republic of Germany.
Any and all taxes, duties and dues levied outside the Federal Republic of Germany are excluded but shall be borne and directly paid by buyer."
80. Para 5.3 of the agreement describes the time schedule for the payment of the price towards licence-fee as well as basic engineering adverted to at paras 4.1.4 and 4.1.3 in the agreement. Since it is germane for my purposes, para 5.3 of the agreement is extracted below :
"5.3 The price for licence-fee as per Art. 4.1.4 and basic engineering as per article 4.1.3 in the agreement. Since it is germane for my purposes, para 5.3 of the Agreement is extracted below :
"5.3 The price for licence fee as per Art. 4.1.4 and basic engineering as per Art. 4.1.3 shall be paid by buyer to seller according to the following schedule :
(a) 33-1/3 per cent after the contract is filed with the Reserve
Bank of India and the capital goods clearance,
if any, is obtained.
(b) 33-1/3 per cent on delivery of technical documentation
(except operating manual) against seller's
invoice and airway bill.
(c) 33-1/3 per cent upon commencement of commercial production
or 4 years after contract is filed with
Reserve Bank of India, whichever is earlier,
against simple receipt of seller."
81. The agreement is provided at pp. 6 to 38 of the assessee's paper-book. The approval of the Government of India by their letter dt. 31st December, 1987 is provided at pp. 40 & 41 of the assessee's paper-book. Therefore, the table of remittances of different amounts relate to price for basic engineering and price for licence fee.
82. As far as the price basic for engineering is concerned, both the learned Members felt that TDS is to be deducted by the Indian company and paid to the Government of India within the time prescribed before remitting the amounts to the foreign company.
83. The difference among the learned Members arose only when they considered whether such TDS deduction is to be made at all while, remitting the price for licence fee of DM 11,00,000. Admittedly, when the matter was pending in second appeal before the Tribunal, an additional ground of appeal was raised as follows :
"The order under s. 201 passed by the AO is invalid in the eye of law for want of jurisdiction, inasmuch as he could not have treated the assessee to be in default without adjudicating on the assessee's claim that it was not liable to deduct tax at source, vide its letter dt. 2nd June, 1993."
84. Copy of the letter dt. 2nd June, 1993 addressed to the AO and a copy of similar letter addressed to the AO on 8th November, 1995 are provided at pp. 1 & 2 of the paper-book No. 2 filed on behalf of the assessee. The letter dt. 2nd June, 1993 is important and hence, it is extracted as under :
"Income-tax Officer, TDS Ward 4(7), Shapurwadi, Hyderabad.
Dear Sir, Sub : Deduction of tax at source on payments made to foreign collaborator towards licence-fee.
This is to bring to your kind notice that our company has entered into a foreign collaboration agreement with M/s. Lurgi GmbH, Germany vide agreement dt. 29th June, 1988, duly approved by Government of India and Reserve Bank of India. This agreement, inter alia, among other aspects covers a payment of DM 27,00,000 consisting of the following :
1. Detailed basic engineering DM 16,00,000 (59.26%)
2. Licence-fee DM 11,00,000 (40.74%) Out of the above total charges an amount of DM 9,00,000 (equivalent to Rs. 92,66,409) was remitted on 19th June, 1990 duly deducting income-tax at source of Rs. 18,53,282 at the rate of 20 per cent and remitted the same to the Government treasury. For the balance charges of DM 18,00,000 an irrevocable letter of credit was opened by Industrial Development Bank of India, Bombay. Out of this DM 18,00,000 an amount of DM 9,00,000 representing 50 per cent towards submission of documents (equivalent to Rs. 1,32,46,983) was remitted on 25th July, 1991.
The above remittances made to the foreign collaborator are for basic engineering and also for licence-fee at the ratio of 59.26 per cent for basic engineering and 40.74 per cent for licence. We are of the opinion that no tax need be deducted at source for payments made towards licence-fee to any non-resident under the foreign collaboration agreements approved by the Government of India and Reserve Bank of India, as they are outside the purview of s. 195 of the IT Act, 1961. The following are the details of the workings towards the tax payable :
------------------------------------------------------------------------
Date of Particulars Total amount Income-tax @ 20% on remittance remitted basic engineering
------------------------------------------------------------------------
19-6-1990 Basic engineering 54,92,274 10,98,255
Licence-fee 37,75,135 -
-----------
92,66,409
-----------
25-7-1991 Basic engineering 78,50,162 15,70,032
Licence-fee 53,96,821 -
----------- ----------
1,32,46,983 26,68,287
Less tax remitted on 12-8-1991 18,53,282
------------------------------------------------------------------------
Thus, on the basis of the above calculations, we have to remit an amount of Rs. 8,15,005 towards TDS for which we request you to accord your approval and confirm the amount to enable us to make arrangements for payment.
Awaiting for an early and favourable reply.
Yours faithfully, for Niraj Petrochemicals Ltd.
Sd/-
T. M. G. Chary Accounts Officer"
85. Contending to admit the additional ground under r. 11 of the IT (Appellate Tribunal) Rules, the learned counsel for the assessee submitted before the Tribunal that way back on 2nd June, 1993 itself the Indian company denied its liability to deduct tax on the payments made to the foreign company towards price for licence-fee, inasmuch as the Indian company requested the ITO to determine the extent of its liability to deduct tax at source and to determine how much of TDS is to be deducted while making payment to the foreign company. The said letter should be treated as an application under s. 195(2). However, the ITO did not dispose of the said application dt. 2nd June, 1993 till today and without disposing of the application dt. 2nd June, 1993, the order passed under s. 201 of the IT Act is passed.
86. On behalf of the Revenue, admissibility of the additional ground/evidence was strongly opposed by contending that this ground does not arise out of the order appealed against or the impugned order and therefore, it cannot be entertained at this stage; that the authenticity of the letter dt. 2nd June, 1993 is doubtful; that in any case the said application cannot be treated as an application under s. 195(2) as the Indian company did not deny its liability to deduct tax on the payments made to the foreign company in the said letter and that, in any event, the points that are required to be dealt with under s. 195(2) by the ITO have already been dealt with in detail by the CIT(A) in his impugned orders and, therefore, the additional ground is liable to be rejected.
87. The learned counsel for the Indian company submitted that the additional ground goes to the very root of the matter and questions the jurisdiction of the ITO to make an order under s. 201, and without disposal of the said application and deciding whether it should be deemed to have been filed under s. 195(2), no valid order can be passed under s. 201. Further he contended that the plea raised in the application under s. 195(2) does not require any enquiry into new points and since it is purely a legal plea and, therefore, it can be raised at any stage including the second appellate stage.
88. The learned Judicial Member recorded a finding, after going through the contents of the letter dt. 2nd June, 1993 cited (supra), that it fulfilled all the ingredients of s. 195(2) in respect of the payments made towards licence-fee as per the agreement dt. 29th June, 1988. He also held that it is significant that in the said letter dt. 2nd June, 1993 the Indian company did not dispute its liability to make deduction of tax on the payments made towards basic engineering. He held that inasmuch as the Indian company entertained a doubt regarding its liability to deduct tax on the consideration paid towards licence- fee, it sought opinion of the ITO on this aspect. Thus, the letter dt. 2nd June, 1993 contains all the requirements of s. 195(2) of the IT Act. Then, he called-in-aid the ratio of the Delhi High Court in CIT vs. Jay Engg. Works Ltd. (1984) 149 ITR 425 (Del), holding that there is no particular form or format for an application under s. 195(2). The learned Judicial Member held that the Indian company in its letter dt. 2nd June, 1993 clearly differentiated the payment into two different components, one for engineering and the other for licence. The learned Judicial Member held that the ITO should have treated the letter dt. 2nd June, 1993 as an application under s. 195(2) in respect of payments made towards licence-fee and passed an order under s. 195(2) in respect of that part of the payment. He further held that the ITO should have made an order under s. 195(2) expressing his opinion on the aspect whether the payment made towards licence-fee is taxable in the hands of the foreign company in India under the provisions of s. 9 or not. Without passing any such order under s. 195(2) on that application, the ITO should not have treated the Indian company as an assessee in default under s. 201 in respect of the tax deducted/deductible on the payments made by the Indian company to the foreign company towards licence-fee. In that way, the learned Judicial Member held that part of the order under s. 201 made by the ITO relating to the tax deducted/deductible on the payments made towards licence-fee is vitiated. He clearly held that failure on the part of the ITO to make an order under s. 195(2) does not affect that part of the order under s. 201 relating to the payments made for basic engineering.
89. This view of the learned Judicial Member is not accepted by the learned Accountant Member. The learned Accountant Member without much discussion on the matter had struck a different note on the subject under discussion at para. 5, important portion of which is as follows :
"I may mention that I agree with my learned brother only to the extent that the assessee is liable for deduction of tax at once in respect of "fees for technical services", but not in agreement in respect of the finding on "licence fees". I am not in agreement with my learned brother to consider the assessee's submissions at this late stage that he is not liable to income-tax in respect of "fees for technical services" and "licence-fees" in view of facts stated above and herein below."
90. Now, let me examine the authenticity of the letter dt. 2nd June, 1993. The learned Judicial Member had looked into this aspect of the matter and recorded that "the said letter bears the initials dt. 16th June, 1993 of some staff member of the ITO's office or the ITO himself." He further held that on 23rd November, 1995, the Indian company filed another letter before the ITO wherein it is clearly mentioned about the filing of the letter dt. 2nd June, 1993 before the ITO. A copy of the letter dt. 23rd November, 1995 bears the receipt stamp of the ITO's office. It is found at p. 5 of the paper-book No. 2 filed by the assessee. Thus, the learned Judicial Member had believed the authenticity and genuineness of the letter dt. 2nd June, 1993 filed before the ITO. However, the learned Accountant Member without doubting either the authenticity or genuineness of the letter dt. 2nd June, 1993 wanted to disregard the same on the ground that the additional ground on the basis of that letter was filed very late, not having been filed before the first appellate authority.
91. After considering the difference thus expressed by the learned Members of the Division Bench, I am inclined to agree with the learned Judicial Member. Firstly, I agree with him that a comprehensive reading of the letter dt. 2nd June, 1993 leaves no one in doubt that it is a fit one to be considered under s. 195(2). The following para in the said letter clinches the issue;
"We are of the opinion that no tax need be deducted at source for payments made towards licence-fee to any non-resident under the foreign collaboration agreements approved by the Government of India and Reserve Bank of India, as they are outside the purview of s. 195 of the IT Act, 1961."
92. In the said letter, it is clearly stated that towards basic engineering a sum of Rs. 26,68,287 is to be remitted to the foreign company and out of which on 12th August, 1991 a sum of Rs. 18,53,282 was already paid and only a sum of Rs. 8,15,005 remained to be paid and, therefore, the Indian company requested the ITO to accord his approval and confirm the amount to enable them to make arrangements for payment. Thus, it clearly brought out the point that on licence-fee, no TDS need be deducted. This obvious inference which can be made out from the last portion of the letter, together with the penultimate para of the letter already, extracted above, clearly shows that this application is definitely to be considered as an application under s. 195(2). Further, it is received by the ITO on 16th June, 1993 by initialling and dating and also putting his designation. Thus, I fully agree with the learned Judicial Member that the letter is genuine and it was filed before the ITO and it should be treated under section 195(2). The learned Judicial Member has already quoted the Delhi High Court decision in Jay Engg. Works Ltd. case (supra) to hold that there is no particular form or format for an application under s. 195(2). Now the question is whether the inordinate delay in filing the said application is, in any way, fatal and on that ground it should not be admitted. In this connection, following case law is important to be noted :
(1) Moti Ram vs. CIT (1958) 34 ITR 646 (SC);
(2) National Thermal Power Co. Ltd. vs. CIT (1998) 229 ITR 383 (SC);
(3) CIT vs. Kerala State Co-op. Marketing Federation Ltd. (1992) 193 ITR 624 (Ker); and (4) CIT vs. Commonwealth Trust (India) Ltd. (1996) 221 ITR 474 (Ker)
93. The first of the cases is decided by the Hon'ble Supreme Court as per the head note as follows :
"The Tribunal has full jurisdiction, and it is in its discretion, to refuse permission to an appellant to raise for the first time before it new questions of fact which cannot be decided without taking further evidence."
94. However, in this case, the letter dt. 2nd June, 1993 is not a new evidence, but it was already filed before the ITO and was pending before him undisposed of.
95. In National Thermal Power Co. Ltd.'s case (supra) the ratio of the Hon'ble Supreme Court is clearly brought out in the head note of the decision as follows :
"Under s. 254 of the IT Act, 1961, the Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals in thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item. There is no reason to restrict the power of the Tribunal under s. 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. The Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier. The view that the Tribunal is confined only to issues arising out of the appeal before the CIT(A) is too narrow a view to take off the powers of the Tribunal.
Undoubtedly, the Tribunal has the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee."
96. In Kerala State Co-operative Marketing Federation Ltd.'s case (supra) based on the Supreme Court decisions, following ratio is laid down by the Kerala High Court.
"The Tribunal gets power under s. 254(1) of the IT Act which provides that the Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. Rule 11 of the IT (Appellate Tribunal) Rules, 1963, enables the Tribunal to permit the appellant to urge any ground not set forth in the memorandum of appeal. That rule provides that the appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal. It is further provided that it is open to the Tribunal to rest its decision on a ground not set forth in the memorandum of appeal and not taken by the leave of the Tribunal provided the party affected thereby has been afforded sufficient opportunity of being heard on that ground. An appellant before the Tribunal can, therefore, urge a new ground in appeal only with the leave of the Tribunal. The Tribunal has thus jurisdiction to permit the appellant to raise any ground which has not been raised before the assessing authority or the CIT(A). Once any such new or additional ground is raised before the Tribunal, they are duty-bound to entertain that ground and render a decision thereon either themselves or by remanding the matter if further investigation into the facts is necessitated."
97. Again in Commonwealth Trust (India) Ltd.'s case (supra) it is held as follows :
"The law of procedure has to be approached, understood and appreciated as a helpmate in the course of the process of administration of justice and never as a situation of obstruction or obstacle in regard thereto.
Even though limitation is not specifically set up as a defence, a barred proceeding has to be dismissed. Rule 27 of the Tribunal Rules, 1963, enacts that the respondent may support the order, though he may not have appealed, on any of the grounds decided against him."
98. In the context of the facts of the case before me, the question whether any part of the licence-fee is leviable within the Indian Income-tax Act and if so, whether TDS is to be deducted while making/remitting payment to the foreign company constitutes additional ground. Therefore, to my mind, it appears that the learned Judicial Member is correct in admitting the additional ground and also deciding the said ground and treating the letter dt. 2nd June, 1993 as an application under s. 195(2) of the IT Act. Thus, on point of difference No. (3), the learned Judicial Member's order is to be upheld or to be preferred as correct in law.
99. The arguments advanced by the learned advocate for the assessee before me can be summarized as follows. No reply was received from the AO to the letter dt. 2nd June, 1993 or to the letter dt. 23rd November, 1995 which is to be found at p. 4 of the paper-book No. 2 filed by the assessee. Before the CIT(A), he contended that the payment was made under mistake and the Indian company was not liable to deduct any TDS under law. This argument of course was not upheld by the CIT(A). The Indian company did not claim any refund of the amounts paid for the first year. It is contended that for all the three years, the Indian company made two payments to the foreign company, but did not deduct TDS out of any amounts paid for those years. The Indian company made a provision in its books of account covering its liability, if any, under the terms of the agreement which it had entered into with the foreign company. In the tax audit report, it was shown that a sum of Rs. 59,41,600 was provided towards TDS. In balance-sheet also, the Indian company had shown this amount as liability due from it. The Indian company had taken a ground before the CIT(A) that the payments remitted to the foreign company are not liable to income-tax, inter alia, under the provisions of Double Taxation Avoidance Agreement between Indian and West Germany. The Indian company filed its written submissions at p. 155 of the paper-book No. 1 filed on its behalf before the CIT(A), but the CIT(A) held that both the payments are taxable and the Indian company was under an obligation to deduct TDS. Before the CIT(A), the Indian company did not advert to the two letters, namely, dt. 2nd June, 1993 and 23rd November, 1995 mentioned above. However, before the Tribunal it was pleaded by the Indian company that these two letters virtually amounted to a petition under s. 195(2) and the AO was under an obligation to decide the claim. It is also contended that without rendering decision on the said petition the AO cannot pass an order under s. 201 and on that ground itself, the impugned order under s. 201 is liable to be set aside.
100. In order to appreciate this contention, it is necessary to extract the provisions of s. 195(2) which are as follows :
"Where the person responsible for paying any such sum chargeable under this Act (other than interest on securities and salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the AO to determine (by general or special order), the appropriate proportion of such sums chargeable, and upon such determination, tax shall be deducted under sub-s. (1) only on that proportion of the sum which is so chargeable."
101. Therefore, when the Indian company by its letter dt. 2nd June, 1993 feels that no amount of the remittance or any part of the amount of remittance to the foreign company is deductible because the amount is not taxable under the IT Act, he can file a petition before the AO to determine the taxability of the said sum under s. 195(2). The question is whether any particular form is prescribed in which the claim under s. 195(2) should be made. It is made very clear that there are several decisions in which a view is taken by the High Courts as well as the Supreme Court that it is enough if the prayer contemplated under s. 195(2) can be culled out from the correspondence made by the Indian company with the AO.
102. In CIT vs. Superintending Engineer, Upper Sileru (1985) 152 ITR 753 (AP), the question before the Andhra Pradesh High Court was whether the amount sought to be remitted to the foreign company should wholly bear the character of income or whether it applies to payments of gross sums also. Their Lordships also considered that in case if it is construed that s. 195 deals with or covers not only the sums bearing character of income but also gross sums liable to be remitted to the foreign party, how such a construction of s. 195 brings in harmony with the provisions of s. 195(2). Ultimately, their Lordships held that even if gross sums are to be remitted to the foreign party and even though the said sum does not wholly bear the character of income, still it is covered by s. 195 and the failure of deduction of tax at source is liable to be penalised under s. 201. At p. 768, their Lordships held the following :
"For the reasons aforesaid, we are clearly of the opinion that the provisions of s. 195 relating to the deduction of tax at source come into operation in respect of sums paid to the non-resident, whether or not such sums represent wholly income or profits and even if such sums are paid to the non-resident during the course of regular trading operations."
103. Then they considered the next question whether s. 195 requires a person responsible for paying any sum to the non-resident chargeable under the IT Act to deduct tax on the gross sums of money. While answering this question, they firstly held that the answer is clearly found in the language of s. 195 itself. Then they went on to hold that the obligation to deduct tax relates only to the appropriate portion of the gross sum, which would be chargeable as income in the hands of the recipient Foreign company. They further held that they had already referred to the provisions of s. 195(2) of the Act which affirms the above legal position. At p. 769, their Lordships held :
"We cannot accede to the contention of the learned counsel for the Revenue that the ITO is entitled to call upon the Electricity Board to pay tax deductible under s. 195 in respect of the entirety of the payments made to M/s. Charimilles Engineering Works Ltd. in R.C. 203 and to M/s. Oerlikon Engineering Co. in RC 205. It must be remembered that the order was passed under s. 201 of the Act. For the purpose of determining the tax in respect of which the person responsible for making the payment could be deemed to be in default, the ITO must determine the tax only on the appropriate proportion of income chargeable under the Act. There is no prohibition in s. 201 of the Act against the ITO so determining the tax. Indeed, the power to determine the appropriate amount of tax deductible at source under s. 95 is implicit in s. 201 of the Act..... As already mentioned, the power to determine the appropriate amount of tax is referable to s. 201 of the Act and the fact that the assessee did not file an application under s. 195(2) for determination of such appropriate proportion is not relevant for the purpose. In any event, this is the only way the provisions contained in s. 195 and s. 201 can be harmoniously interpreted. We, therefore, hold that the power of the ITO under s. 201 of the Act to deem the person responsible for paying any sum to the non-resident under s. 195 as being in default extends only to the proportion of income chargeable under the Act and forming part of the gross sum of money."
104. While furnishing answers to the questions which arose for decision before them and while answering each of them, for question No. 2 they furnished the following answer as can be seen from p. 772 of the report :
"The obligation of the respondent-assessee to deduct tax under s. 195 is limited only to the appropriate proportion of the income chargeable under the Act forming part of the gross sums of money paid to the three non-residents above referred."
105. This Andhra Pradesh High Court decision and the ratio of the said decision are followed in the later decisions of the Andhra Pradesh High Court in CIT vs. Barium Chemicals Ltd. (1989) 175 ITR 243 (AP) and 178 ITR 32 (sic). Their Lordships gave a reference to the Hon'ble Supreme Court on this decision. However, the reference was not answered by the Supreme Court till now. Therefore, the decision of the Andhra Pradesh High Court in Superintending Engineer, Upper Sileru's case (supra) is held to be still governing the issue. As can be seen from the Andhra Pradesh High Court's decision, this is an extreme case where no petition under s. 195(2) was ever made before the AO in order to determine the sum of money liable to be remitted for which TDS is to be deducted. However, in the facts before me a specific prayer was made, as can be seen from the portion of the letter dt. 2nd June, 1993 extracted above and, therefore, in my opinion, without validly disposing of the quantity of TDS deductible on the portion of remittances under s. 195(2), it is not possible to hold exactly in what amount the Indian company became a defaulter or assessee-in-default for which it is liable under s. 201 of the Act.
106. Next let me take the difference at point No. 2 in the referal order. Shri A. Satyanarayana, the learned counsel for the Indian company argued that the differences between the Members have not been correctly brought out and he requested that the real differences should be found out and should be taken out by the Third Member. He submitted the following. The Indian company is a public limited company. The agreement between the Indian company and the foreign company was entered into on 27th June, 1988. Para 4 of the agreement disclosed payments agreed upon for various items. The disputed items which formed the subject-matter of the appeal as well as Third Member difference confined to the amounts mentioned at para 4.1.3 and 4.1.4 which are as follows :
"4.1.3 Price for basic engineering DM 1,600.000 4.1.4 Price for licence DM 1,100.000
107. Thus, 2,700.000 DM is the disputed amount. At para 4.4, it is stated :
"The total fee stated in Art. 4.1 includes all taxes, duties and dues levied by and within the Federal Republic of Germany.
Any and all taxes, duties and dues levied outside the Federal Republic of Germany are excluded, but shall be borne and directly paid by buyer."
108. Para 5.3 sets out the time schedule when the payments agreed upon towards licence-fee and basic engineering shall be paid and it is as follows :
"5.3 : The price for licence-fee as per Art. 4.1.4 and basic engineering as per Art. 4.1.3 shall be paid by buyer to seller according to the following schedule :
(a) 33-1/3% after the contract is filed with the Reserve
Bank of India and the capital goods clearance,
if any, is obtained.
(b) 33-1/3% on delivery of technical documentation
(except operating manual) against seller's
invoice and airway bill.
(c) 33-1/3% upon commencement of commercial production
or 4 years after contract is filed with
Reserve Bank of India, whichever is earlier,
against simple receipt of seller."
109. It is contended by Shri Satyanarayana that before the CIT(A) he contended that the payment was made under mistake, even though the Indian company was not liable to deduct TDS under law.
110. Sec. 5, sub-s. (2) of the IT Act which deals with the total income of a non-resident is as follows :
"Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which :
(a) is received or is deemed to be received in India to such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year."
(b) accrues or arises or is deemed or arise to him in India during such year."
111. Explanations 1 & 2 under this sub-section are not felt relevant and not extracted. Sec. 90 of the IT Act is provided under Chapter IX and deals with double taxation relief. Sub-s. (2) of s. 90 is as follows :
"Where the Central Government has entered into an agreement with the Government of any country outside India under sub-s. (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee."
112. There is a double taxation avoidance Agreement entered into between India and Federal Republic of Germany for the avoidance of double taxation with respect to taxes on income and capital. It is now found provided at 156 ITR 90 (St). The avoidance of double taxation agreement was first entered into between these two countries on 18th March, 1959. Subsequently, on mutual agreement, the said agreement was amended and the amended agreement was published at pp. 90 to 104 of the report. One of the Articles which was amended was Art. VIII. However, it is important to note that after deleting Art. VIII, new Art. VIIIA was inserted in the amended Double Taxation Avoidance Agreement, which is as follows :
"(1) Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
(2) However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State. But insofar as the fees for technical services are concerned, the tax so charged shall not exceed 20 per cent of the gross amount of such fees.
(3) 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 cinematography films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design 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.
(4) The term 'fees for technical services' as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments, in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel.
(5) ...........
(6) ...........
(7) ..........."
113. Shri Satyanarayana contended that in view of the above provisions the amounts remitted to the foreign company were not liable to income-tax, inter alia, under the double taxation avoidance agreement. The Indian company filed its written submissions before the CIT(A), but the CIT(A) did not agree and held that 'royalty' or 'technical fees' are both taxable and the Indian company was under an obligation to deduct TDS. It is no doubt true that the Indian company did not advert to the two letters dt. 2nd June, 1993 and 23rd November, 1995 mentioned above. But he contended before the Tribunal that these two letters virtually amount to a petition under s. 195(2) and the AO was under an obligation to decide the claim before deciding the issue whether the Indian company was liable to penalty under s. 201 and since the AO did not decide the issue under s. 195(2) before passing his impugned orders under s. 201, they are liable to be set aside. He argued that he filed an additional ground under r. 11 of the IT (Appellate Tribunal) Rules and the learned Judicial Member dealt with this contention in para 7 of his orders. He admitted these letters dt. 2nd June, 1993 and 23rd November, 1995. While appreciating the admissibility of the additional ground, he discussed the matter is paras 8 to 13 of his orders and he ultimately decided in favour of the Indian company. However, he observed that in the letter of the Indian company dt. 2nd June, 1993 its claim was not denial of deduction of tax at source, but was limited to consideration the Indian company paid for acquisition of licence and not to payments made for basic engineering services and, therefore, ultimately he held that the order under s. 201 is wrong only to the extent of Indian company being treated as in default for non-payment of TDS in regard to licence-fee. In para 14, however, he held that the payment made for engineering services was income liable to tax. However, regarding licence-fee it is held that the Indian company is not liable to deduct tax at source. Shri Satyanarayana contended that the difference between the Members, when carefully observed, seems to be about the learned Judicial Member's agreement to take up the additional ground and the decision he rendered thereon. According to the learned Accountant Member, the additional ground should not have been entertained and should not have been decided. However, the learned Accountant Member did not go into the merits of the additional ground and there was no discussion about the merits in his whole order. Shri Satyanarayana suggested that the only point of difference should be condensed to the following :
"Whether the additional ground preferred by the Indian company before the Tribunal is entertainable and worthy to be taken up for consideration and decision ?"
114. The learned Accountant Member stressed the point that the Indian company itself made a provision in its books of account towards TDS and also paid one instalment of TDS at a later stage and having once paid, it is not open for the Indian company to contend that the Indian company is not at all liable to remit TDS. The learned Accountant Member did not discuss in his orders whether the consideration paid towards obtaining licence is liable to tax or not and did not agree with the learned Judicial Member on this aspect of the matter. Shri Satyanarayana submitted that there is no difference between the Members with regard to liability to deduct TDS on the payment made for acquisition of licence.
115. At this stage, I put a specific question as to how I can revise and add to the differences referred to me under the provisions of s. 255(4) of the Act. In a bid to convince me about the tenability of his claim, he tried to draw an analogy between a reference made to the High Court under s. 256(2) and a reference made under s. 255(4). He argued that the High Court has been exercising the power to suggest a modified question or reframed question and were directing the Tribunal to refer the reframed question and to draft necessary statement of facts relating to that question and directing it to refer it again to the High Court. Sometimes the High Court, if it is satisfied that the statement of facts already on record are sufficient, reframes the question itself and also provide answer to such reframed question while disposing of the reference before it. He argued that under s. 256(1) or (2) the jurisdiction of the High Court was to render an opinion. Similarly, even in the case of a Third Member, reference is only made to give an opinion on the point of difference. Therefore, the power that was available to the High Court with reference to s. 256 is equally available to Third Member under s. 255(4) and hence, the Third Member can identify the real point of difference and if such point was not being referred by the differing Members, such identified additional difference can also be taken up for consideration. According to him, question Nos. 1 and 2 do not reflect the difference at all and they need not be answered by the Third Member. He tried to convince me that question Nos. 1 and 2 did not in fact reflect any difference whatsoever. The learned counsel continued to contend that whereas the learned Judicial Member had decided the consideration paid for obtaining licence in favour of the Indian company and appreciated the arguments advanced under s. 195(2), as well as, on merits, and on both the counts, the learned Judicial Member recorded his findings in favour of the Indian company. The learned Accountant Member merely stated his objection in regard to entertaining the Indian company's prayer under s. 195(2) and did not consider the taxability of the sum paid for acquiring licence. Therefore, sofaras the merits of the payment of the sum for licence is concerned, there is no difference of opinion expressed in the orders of the Judicial Member and Accountant Member. Therefore, question No. 1 does not project the real difference of opinion between the Members. With regard to question No. 2, he contended that this difference is consequential to question No. 1 for which the arguments stated above are advanced. The learned Accountant Member did not discuss at all with regard to the question whether the consideration for licence amounted to 'royalty'. On the other hand, the learned Judicial Member discussed the matter thoroughly in his orders and recorded his findings with regard to payment of the sum agreed upon for obtaining licence and therefore, there was no difference at all between the Members. The learned counsel argued that where differing opinions were expressed in the orders delivered by the Division Bench Members, then only the difference can be referred to a Third Member. But in a case where the learned Accountant Member did not express any opinion whatsoever on a point decided by the learned Judicial Member, there cannot be any difference of opinion. Ultimately, Shri A. Satyanarayana contended that there are two broad issues involved; first being whether the Indian company is liable under s. 201 in view of the fact that the Indian company had already put forward a plea which should have been decided under s. 195(2) and the second being whether the sum agreed to be paid for obtaining licence from the foreign company by the Indian company is taxable or not in India. As far as this question is concerned, it was thoroughly discussed by the learned Judicial Member and found it in favour of the Indian company. However, the learned Accountant Member did not express any opinion whatsoever. In substance, Shri Satyanarayana argued that simply because the Indian company made some entries in its books of account, it does not change the position in law and does not determine the taxability or otherwise of the amounts credited to the account of the foreign company in the accounts of the Indian company. The learned counsel further contended that in all cases which were dealt with by the learned Accountant Member in his orders, the liability to pay amounts to the foreign collaborator was not questioned or not disputed and such liability was in the facts of the respective cases taken up by him as admitted. However, in this case the very premise is being disputed and therefore, the case law followed by the learned Accountant Member is besides the point.
116. After hearing the arguments from both sides, I am of the view that once specific differences were already referred to the Third Member and the referal order does not express any difference at all in identifying the difference between the Members, the Third Member cannot alter the referred questions to him or cannot modify the questions and/or reframe the questions and then decide the reframed questions instead of the original questions. This method suggested to me by Shri Satyanarayana and the analogy he had attempted to draw from the powers exercised by the High Court, is to say the least, unconvincing, uncomparable and worthy to be rejected.
117. I do not agree with the learned counsel for the Indian company when he contended that the learned Accountant Member did not differ with the learned Judicial Member about the nature of the payment made towards licence-fee and on the aspect whether it is taxable in India or not. If that is so, the ultimate order of the learned Accountant Member would have been different. There is no dispute that the CIT(A) had confirmed the penalty under s. 201 and interest under s. 201A. Confirmation of the penalty is with reference to Rs. 59,41,600 which includes the sum payable towards licence-fee. If in fact he agreed with the learned Judicial Member or he did not want to dispute the learned Judicial Member's finding that the sum payable towards licence-fee is not taxable in India, then the amount of TDS would have been much less than Rs. 59,41,600. The very fact that the learned Accountant Member confirmed the order of the AO and levy of penalty under s. 201 with reference to Rs. 59,41,600 would clearly negate the inference sought to be convassed by the learned Members constituting the Division Bench by Shri Satyanarayana and, therefore, I do not agree with him that difference Nos. 1 & 2 of the referable order are not worthy of reference. Now, as regards difference No. 2, I entirely agree with the learned Judicial Member.
118. Now remains difference No. 1 which is already extracted above. The learned Judicial Member held in para 43 of his orders, firstly, that the Indian company cannot be treated as an assessee-in-default for its failure to deduct tax on the payments made towards licence fee and remit the same to the Government. He had already held in prior paras of his orders that a part of the order under s. 201 got vitiated on account of the AO's failure to treat the letter dt. 2nd June, 1993 of the Indian company as an application under s. 195(2) and to make an order under s. 195(2) with respect to the liability of the Indian company to deduct tax on the payments made towards licence-fee. Even on merits, the learned Judicial Member held that the sum paid towards licence-fee cannot be treated as "royalty" assessable in the hands of the foreign company in India, in view of the restricted definition of royalty contained in Double Taxation Agreement between India and Federal Republic of Germany. Accordingly, that portion of the order passed under s. 201 treating the Indian company as assessee-in-default in respect of tax deducted/deductible on the sums remitted to foreign company towards engineering fees and levying of interest under s. 201(1A) for not remitting or delayed remitting of the tax on the said payments is upheld. He further held that the portion of the order under s. 201 passed by the AO treating the Indian company as an assessee in default in respect of tax deducted/deductible on the payment made to the foreign company towards licence-fee and levying of interest under s. 201(1A) for not remitting such tax on payments made towards licence-fee is hereby set aside. The learned Judicial Member accordingly held that the order of the first appellant authority is partly set aside and consequently the order of the AO passed under s. 201 is partly set aside.
119. The learned Accountant Member in para 7 of his separate orders stated that the facts narrated in detail by his learned brother are not in dispute. There is no dispute that the assessee had deducted tax in respect of all the three years mentioned above. In respect of the first year, is had not only deducted tax, but also remitted the same late by 13 months. Therefore, the AO charged interest under s. 201(1A) of the IT Act. According to the learned Accountant Member, Rs. 59,41,600 comprised of the following items. Out of it, Rs. 26,49,400 represents TDS deductible on the amount of Rs. 1,32,46,983 credited to the account of the foreign company in the books of account of the Indian company for financial year 1991-92. Similarly, a sum of Rs. 32,92,200 is the TDS on the sum of Rs. 1,64,61,000 credited to the account of the foreign company as on 31st March, 1994 in the account books of the Indian company for financial year 1993-94. Further a sum of Rs. 28,79,435 represents interest on the late payment/non-payment of tax deducted at source in respect of all the three years. The above break-up is already given by the AO in his order under s. 201 dt. 23rd November, 1995. The learned Accountant Member found that remittances to the non-resident and tax deductions have been made for the three years on 19th June, 1990, 31st July, 1991 and 31st March, 1994. He held that, therefore, the contention that the Indian company is not liable to income-tax on remittances and as such not liable to deduct tax at source cannot be accepted having already deducted taxes and in fact for the first year payment has been made to the Government account. He cited Aggarwal Chamber of Commerce vs. Ganpat Rai Hira Lal (1958) 33 ITR 245 at 253 (SC) for the proposition that a person responsible for remittance to a non-resident and deduct tax therein cannot challenge that the income is not liable to tax. The learned Accountant Member held that in the said case the Hon'ble Supreme Court held that it is for the non-resident to agitate at the time of assessment and the person who is bound under the Act to make deductions at the time of payment are not concerned with the ultimate result to the assessment and adjustments are to be made at the time of final assessment. The learned Accountant Member found that the Supreme Court decision was followed by the following High Courts :
(1) CIT vs. Rathi Gum Industries (1995) 213 ITR 98 (Raj);
(2) Pentagon Engg. (P) Ltd. vs. CIT (1995) 212 ITR 92 (Bom);
(3) Bennet Coleman & Co. Ltd. vs. V. P. Damle, ITO (1986) 157 ITR 812 (Bom), and (4) CIT vs. Assam Small Industries Development Corpn. Ltd. (1996) 219 ITR 324 (Gau).
120. The learned Accountant Member followed another Supreme Court decision in Central Provinces Maganese Ore Co. Ltd. vs. CIT (1986) 160 ITR 961 (SC) in support of levy of interest by way of compensation and not by way of penalty. He also relied upon another decision of the Supreme Court in CIT vs. M. Chandra Sekhar (1985) 151 ITR 433 (SC) for the proposition that levy of interest is by way of compensation and not by way of penalty. Similarly is the view taken in Ganesh Dass Shreeram vs. ITO (1987) 169 ITR 321 (SC). Therefore, he upheld the levy of penalty under s. 201 and also levy of interest under s. 201(1A) and upheld the orders of the AO as well as the CIT(A). Thus, there is conflict between both the Members about the leviability of penalty under s. 201 and also leviability of interest under s. 201(1A).
121. Now, firstly let me examine whether after admitting the liability by the Indian company and crediting the amounts in the name of the foreign company in its books of account it is open for the Indian company to challenge its liability to pay tax deducted at source. To put it in other words, the proposition emerges is that after having admitted the liability whether the Indian company can still dispute its liability to pay TDS in time or challenge its tax liability in anyway. In this connection, the law is well settled and much time need not be wasted. It is enough to have a reference made to the following two decisions :
(1) B.S.C. Footwear Ltd. vs. Ridgway (Inspector of Taxes) (1970) 77 ITR 857 (CA); and (2) Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 141 (SC) 387 : (1997) 227 ITR 172 (SC).
122. In B.S.C. Footwear Ltd.'s case (supra) the question was how to value the unsold stock and how to interpret "cost or market value, whichever is lower". Uptill 1959 the words market value in the formula which is accepted by the law from the practice of accountants for valuation of stock-in-trade cost or market value, whichever is less, prima facie connoted the price obtainable in the market which offered the best price and the evidence did not support the existence of an invariable accountancy practice of interpreting "market value" in such a way as to give the trader an option of valuing his stock at the wholesale market price even though that was less than cost. The Court of Appeal held that in the phrase "cost or market value, whichever is the lower", "market value", means the price at which the stock could be expected to be sold in the market in which the trader sells; in the case of a retail trade, that market must be the retail market. The Court of Appeal further held that if a method had been consistently applied in the past it should not be changed unless there were good reasons sufficient to outweigh any difficulties; here there was such a reason, namely, that the method consistently applied prior to 1959, however commercially sensible, did not reproduce the profit and gains for a particular year taken in isolation. In Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra), that the income-tax law does not march step by step in the footprints of the accountancy profession. Therefore, it is clear that the way in which the accounts were prepared does not determine the taxability of the income. The taxability of income should be determined as per provisions of law and not depending upon the way in which the accounts are maintained.
123. I had agreed with the view expressed by the learned Judicial Member as far as TDS deduction and corresponding interest liability under s. 201(1A). So far as they relate to payment of sum representing licence-fee payable by the Indian company to the foreign company. I hold that the Indian company cannot be held to be an assessee in default as far as those amounts are concerned. But so far as other amounts other than the above are concerned, penalty under s. 201 for non-payment or delayed payment as well as interest liability were upheld. Therefore, it follows that following the same views, it should be held that the order of the AO as well as the CIT(A) under s. 201 r/w 201(1A) is liable to be modified and the appeal is allowed with regard to the sums representing licence-fee payable by the Indian company to the foreign company. Therefore, I agree with the order of the learned Judicial Member and disagree with the order of the learned Accountant Member for the reasons set out above.
124. The matter should go back to the Division Bench to decide the issue according to majority under s. 255(4) of the IT Act.