Authority For Advance Rulings
Timken India Ltd., In Re
Section 44D, 195
Syed Shah Mohammed Quadri, J., Chairman & K.D. Singh, Member
AAR No. 617 of 2003
6th December, 2004
Counsel Appeared
Rahul Krishna Mitra & Parikshit Datta, for the Applicant : Sanjay Puri, for the CIT concerned
Ruling
Syed Shah Mohammed Quadri, J., chairman :
This is an application under s. 245Q(1) of the IT Act, 1961 (for short the ‘Act’). The applicant– Timken India Ltd.—is a company incorporated in India and is a tax resident of India. It is a subsidiary of M/s Timken Company, a company incorporated in the United States of America and is a tax resident of USA (hereinafter referred to as “Timken-USA”). The applicant is engaged in the business, inter alia, of manufacture and sale of bearings and other ancillary products. On 2nd Aug., 2000, the applicant entered into an agreement with Timken-USA, pursuant to which the said company agreed to render various services in favour of the applicant in USA and no part of the same was to be rendered in India. It was also agreed between the parties that the compensation payable by the applicant to Timken-USA for the services would cover only the cost actually incurred by the Timken-USA and that no profit element or mark-up on the cost would be added to it. For the services rendered by Timken-USA several invoices were raised on the applicant for an aggregate amount of US $756,728.26; the break-up of that amount was given in the statement marked as Appendix-C and the description of the services rendered is mentioned in the statement marked as Appendix-D. The applicant remitted US $145,610.62 to Timken-USA and US $ 611,117.64 remain to be remitted. On 21st March, 2002, before remitting the said sum of US $ 145,610.62, the applicant approached the AO for an order under s. 195(2) of the Act, authorizing it to remit the said amount without deducting income-tax at source under s. 195(1) of the Act on the ground that the said sum was only reimbursement of expenditure and cost actually incurred and that it did not contain any mark-up or profit element so the tax deductible would be zero.
It was also pleaded before the AO that the said sum did not, per se, constitute taxable income of Timken-USA in the light of India-USA Tax Treaty. The AO declined to examine whether the said sum of US $ 145,610.62 had an element of profit embedded therein, taking the view that such an exercise was not permissible at the stage of issuing an order under s. 195(2) of the Act and that the same would be subject-matter of an enquiry in the course of a regular assessment of the recipient. It was, however, ordered that the applicant should withhold income-tax at the rate in force within the meaning of s. 2(37A)(iii) and s. 115A r/w ss. 44D and 9(1)(vii) of the Act. Aggrieved by the said order of the AO, the applicant filed an appeal under s. 248 of the Act before the CIT(A)-VIII, Kolkata. With a view to approach the Authority, the applicant withdrew the appeal on 5th June, 2003, and filed the present application seeking advance ruling of the Authority on the following questions : Whether the fees payable by M/s Timken India Ltd. (hereinafter referred to as the “applicant”) amounting to US $ 756,728.26 in favour of M/s The Timken Company (hereinafter referred to as “Timken”) which is a company incorporated in the United States of America (hereinafter referred to as ‘USA’) and accordingly a tax resident of USA, in consideration for Timken rendering certain services in USA in favour of the applicant, pursuant to an agreement entered into between the two parties on 2nd Aug., 2000, where such sum of US $ 756,728.26 represents only the recovery or imbursement of the costs or expenses actually incurred by Timken while rendering the said services, are subject to income-tax in the hands of Timken in India and accordingly, whether the applicant has any obligation to withhold income-tax thereon under s. 195(1) of the IT Act, 1961 (hereinafter referred to as the “Act”). Whether, in view of the provisions of the Double Taxation Avoidance Agreement entered into by the Government of India with the Government of USA in exercise of the powers conferred upon it by s. 90(1) of the Act, the sum of US $756,728.26 receivable by Timken from the applicant in consideration for the services rendered by Timken in USA in pursuance of the agreement dt. 2nd Aug., 2000, would not be subject to tax in India in the hands of Timken and accordingly whether the applicant would not have any obligation to withhold income-tax thereon under s. 195(1) of the Act.
Whether, in any event, in view of the fact that the sum of US $ 756,728.26 receivable by Timken from the applicant in consideration for the services rendered by Timken in USA in pursuance of the agreement dated 2nd Aug., 2000, does not actually contain any element of profit or income in the hands of Timken, the said sum would not be subject to tax in India in the hands of Timken and accordingly whether the applicant does not have any obligation to withhold income-tax thereon under s. 195(1) of the Act ? Whether, notwithstanding the fact that the fees receivable by Timken from the applicant amounting to US $ 756,728.26, as referred to in question Nos. 1 to 3 hereinabove, constitute “fees for technical services” within the meaning of s. 9(1)(vii) of the Act, and that s. 44D r/w s. 115A of the Act, provide for a gross basis for taxation of such fees in the hands of Timken, being a non- resident corporate assessee, at the rate of 20 per cent of such fees, an option would be deemed to be read in the provisions of the Act for computing such income on net basis, in view of the principles enunciated by the Hon’ble Supreme Court in the case of Union of India vs. A. Sanyasi Rao & Ors. (1996) 132 CTR (SC) 81 : (1996) 219 ITR 330 (SC) in the context of presumptive basis of taxation of certain receipts, with the result that, since the said sum of US $ 756,728.26 does not actually contain any element of profit or income in the hands of Timken, the same would not be subject to income-tax in India in the hands of Timken and accordingly whether the applicant would not have any obligation to withhold income-tax thereon under s. 195(1) of the Act ?
Whether the income-tax deducted and deposited by the applicant amounting to Rs. 10,59,100 on the rupee equivalent of an amount of US $ 145,610.62 being a part of the aggregate sum of US $ 756,728.26 which has been remitted by the applicant in favour of Timken till date, where such deduction and deposit of income-tax by the applicant was as per the insistence of the AO through his order passed under s. 195(2) of the Act dt. 10th May, 2002, incidentally with respect to which no appeal or other petition is currently pending before any IT authority or the Tribunal or any Court, is liable to be refunded in favour of the applicant on the ground that the sum of US $ 145,610.62 did not attract withholding of tax under s. 195(1) of the Act ? At the stage of hearing of the application, the applicant did not press question No. 5 and prayed for permission to include two more questions. The plea is that the proposed questions are germane to the questions initially framed and that they do not require investigation into any fresh facts and they are only questions of law. The additional questions are permitted and they read as follows : (a) Whether, notwithstanding the fact that the moneys receivable by M/s The Timken Company (hereinafter referred to as “Timken”) which is a company incorporated in the United States of America (hereinafter referred to as “USA”) and accordingly a tax resident of USA, from M/s Timken India Ltd. (hereinafter referred to as the “applicant”) which is a company incorporated in India and accordingly a tax resident of India, amounting to US $ 756,728.26 in pursuance of an agreement entered into between the two parties dt. 2nd Aug., 2000, constitute “fees for technical services” within the meaning of s. 9(1)(vii) of the IT Act, 1961 (hereinafter referred to as the “Act”), and further notwithstanding the fact that s. 44D r/w s. 115A of the Act provide for a gross basis form of taxation of such sum in the hands of Timken at the rate of 20 per cent of such fees, an option would be deemed to be read in the provisions of the Act for computing such income on net basis, in view of the principles enunciated by the Hon’ble Supreme Court in the case of Union of India vs. A. Sanyasi Rao & Ors. (supra) in the context of presumptive basis of taxation, with the result that the said sum of US $ 756,728.26 would be taxable in India in the hands of Timken on net basis, namely, after deducting legitimate expenses incurred by Timken with respect thereto ? (b) Whether, in the event the additional question (a) is answered in the affirmative, the applicant would be required to withhold income-tax under s. 195(1) of the Act with reference to the net income embedded in the sum of US $ 756,728.26 and for this purpose, the AO should compute the quantum of withholding tax under s. 195(1) of the Act with reference to the net income embedded in the sum of US $756,728.26 on an application made by the applicant before the AO under s. 195 (2) of the Act, which Timken had incidentally done vide its letter dt. 21st March, 2002 ?
It will be relevant to note here that the Convention between the Government of the United States of America and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, was concluded on 18th Dec., 1990, vide Notification No. GSR 990(E) dt. 20th Dec., 1990 [subsequently it was corrected by the Notification dt. 12th July, 1991 (hereinafter the same shall be referred to as “India-USA Treaty”)]. 2. The CIT offered the comments and additional comments. The substance of the comments is as follows : The agreement between the parties dt. 2nd Aug., 2000, shows that Timken-USA has to render services including management services, system development and computer usage, communication services, engineering services, process in tool design services, manufacturing services, etc. Any payment for providing these services is “fees for technical services” as envisaged in Expln. 2 to s. 9(1)(vii) of the Act and “fee for included services” as envisaged in art. 12(4) of the India-USA Treaty, which would be the deemed income of Timken-USA accruing or arising in India within the meaning of sub-s. (1) of s. 9 of the Act. The definition of “fees for technical services” in Expln. 2 to s. 9(1)(vii) of the Act has wider connotation as it includes every possible service whether managerial, technical or consultancy in nature, irrespective of the place where the services are rendered. The amount of fees should be deemed to accrue or arise in India if the payments are made for services which are utilized in business or profession carried on by the payers in India or for the purpose of making any income from a source in India. As per s. 115A, the rate of tax applicable to a foreign company in respect of the income, in the nature of fees for technical services, is 20 per cent of gross receipts. The applicant may take aid of the judgement of the Supreme Court in Union of India vs. A. Sanyasi Rao & Ors. (supra), at the stage of assessment but at the stage of withholding tax under s. 195, it would not apply. Sec. 195 speaks of any sum and not income; in view of the decision of the Supreme Court in the case of Transmission Corporation of A.P. Ltd. vs. CIT (1999) 155 CTR (SC) 489 : (1999) 239 ITR 587 (SC) (2), it is not open to the applicant to urge that s. 195(1) does not apply to the payment of fees by the applicant as it is in the nature of reimbursement and contains no element of income.
The Authority for Advance Rulings in the case of Danfoss Industries (P) Ltd., In re (2004) 189 CTR (AAR) 489 : (2004) 268 ITR 1 (AAR) (3) also held that the applicant was liable to pay for services to be provided by non- resident which was equivalent to the expenses incurred in providing the services even when there is no profit element. From the assessment record of the applicant, it is noted that the parties entered into collaboration agreement pursuant to which there was transfer of a technology from Timken-USA to the applicant on a continuing basis with regular monitoring. By the agreement in question Timken-USA agreed to provide certain services including transfer of technology, etc. for the “proper conduct of the applicant’s objectives” to improve applicant’s effectiveness in the use of such manufacturing and other processes. These services, though provided under a separate agreement, apparently constitute incidental services to the collaboration agreement for transfer of technology, therefore, the payment must be treated under cl. (a) of art. 12(4) of India-US Treaty as fee for technical services. Even otherwise, payment against providing services can also be considered as fee for included services under cl. (b) of art. 12(4) of India-US Treaty. Consequently, such payment is subject to tax in India @ 15 per cent on the gross amount in terms of the Treaty and accordingly under s. 195(1), the applicant has to withhold the tax. The decision of the Supreme Court in Sanyasi Rao [supra (1)] case has no application to the facts of the present case.
3. The main thrust of arguments of Mr. Rahul Krishna Mitra for the applicant, is that services were provided to the applicant without any mark-up or profit and in fact what was being paid by the applicant was the reimbursement of the actual cost incurred by Timken-USA, therefore, s. 195(1) of the Act would have no application. It is further contended that in case of presumptive basis of taxation an option for computation of profits under ss. 28 to 43C of the Act should be read in s. 44D, in the light of the decision of the Supreme Court in Union of India vs. A. Sanyasi Rao (supra) wherein such an option was read in s. 44AC. Mr. Sanjay Puri for the CIT argued that in the case of foreign enterprises, it would be impossible for an AO to ascertain the truth of the expenditure claimed by them, therefore, the Parliament provided an alternative basis for assessment of tax on presumptive basis. It was submitted that Sanyasi Rao (supra) was a case of domestic enterprise and it had no application to a foreign company which would constitute a different class. It would be apt to commence our discussion on the basis of the position summed up by the applicant in Annex. III to the application which is reiterated in the written submission filed on 22nd April, 2004. The relevant portion of Annex. III is reproduced below : “In other words, the scheme of taxing income, inter alia, in the form of ‘fees for technical services’ in the hands of foreign companies on gross basis but at a reduced rate of tax is akin to a presumptive taxation, which the Parliament adopts in various places to get over the difficulties faced in quantifying and establishing the actual expenses incurred for earning the income for which deduction is available under the provisions of the Act and accordingly in computing the net income in such cases. If one applies the said scheme of presumptive taxation literally to the facts of the instant case, the unavoidable conclusion, which shall emerge is that the entire sum of US $ 756,728.26 to be remitted by the applicant in favour of Timken shall attract withholding of income-tax in India at the rate of 20 per cent on grass basis, notwithstanding the fact that there may not be any element of income actually embedded in the said sum in the hands of Timken for the reason that Timken has actually charged the applicant for the services rendered by it in terms of the service agreement to cover the actual costs incurred by it in rendering the services without adding any mark-up or profit element on such costs. In the light of the facts of the present case, such presumptive taxation is undoubtedly harsh and unfair on the part of Timken, since when under the normal procedure for taxation, where Timken would have been otherwise required to pay tax on net basis at the rate of 40 per cent, there would not have been any incidence of tax on Timken for the reason that there would not have been any positive income in the hands of Timken, whereas, under the scheme of presumptive taxation, Timken would be required to pay income-tax at the rate of 20 per cent on the gross amount of the fees.” This takes us to the question : whether having regard to the decision of the Hon’ble Supreme Court in the Sanyasi Rao case (supra) an option for the assessee can be read in s. 44D of the Act either to pay the tax at the reduced rate under the scheme of presumptive taxation or to have profits computed under ss. 28 to 43C of the Act.
4. We shall first notice provisions of ss. 44AC and 44D and then refer to the decision of the Hon’ble Supreme Court in Union of India vs. A. Sanyasi Rao & Ors. (supra). Sec. 44AC was inserted by Direct Tax Laws (Amendment) Act, 1988, w.e.f. 1st April, 1989, and was omitted by the Finance Act, 1992, w.e.f. 1st April, 1993. It had a short life of 4 years. The salient features of s. 44AC are : (1) It is special provision enacted for computing profits and gains from the business of trading in certain specified goods; (2) it commences with a non obstante clause and excludes application of ss. 28 to 43C of the Act; (3) it applies to an assessee, being a person other than a public sector company (the buyer), obtaining in any sale by way of auction, tender or any other mode, conducted by any other person or his agent (the seller); (4) it relates to specified goods in the nature of alcoholic liquor for human consumption (other than Indian-made foreign liquor) and forest produce; (5) it provides that a sum equal to 40 per cent of the amount paid or payable by the buyer as the purchase price in respect of alcoholic liquor and the percentages specified in the table in respect of different forest produce, shall be deemed to be the profits and gains of the buyer from the business of trading in such goods chargeable to tax under the head “Profits and gains of business or profession”.
5. Sec. 44D which is the subject-matter of the present discussion, is in the following terms : “44D. Notwithstanding anything to the contrary contained in ss. 28 to 44C, in the case of an assessee, being a foreign company,— (a) the deductions admissible under the said sections in computing the income by way of royalty or fees for technical services received [from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern] before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property; (b) no deduction in respect of any expenditure or allowance shall be allowed under any of the said sections in computing the income by way of royalty or fees for technical services received [from Government nor an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern] after the 31st day of March, 1976 [but before the 1st day of April, 2003]; (c) xxxxx (d) xxxxx Explanation.—for the purpose of this section,— (a) “fees for technical services” shall have the same meaning as in [Expln. 2] to cl. (vii) of sub-s. (1) of s. 9; (b) “foreign company” shall have the same meaning as in s. 80B; (c) “royalty” shall have the same meaning as in [Expln. 2] to cl. (vi) of sub-s. (1) of s. 9; (d) royalty received [from Government or an Indian concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern] after the 31st day of March, 1976, shall be deemed to have been received in pursuance of an agreement made before the 1st day of April, 1976, if such agreement is deemed, for the purposes of the proviso to cl. (vi) of sub-s. (1) of s. 9, to have been made before the 1st day of April, 1976].” From a perusal of the provision quoted above, the following features are evident : (1) it is a special provision for computing income by way of royalties, fees for technical services; etc.; (2) it commences with a non obstante clause and excludes deductions admissible under ss. 28 to 44C of the Act in computing income; (3) it applies to an assessee being a foreign company; (4)(A) in respect of an agreement between a foreign company and the Government of India or an Indian concern entered into before 1st April, 1976, it places a ceiling of 20 per cent of the amount of royalty or fees for technical services as allowable deductions under ss. 28 to 44C of the Act for computing the income by way of royalty or fee for technical services received from Government or an Indian concern; (B) in respect of agreement entered into after 31st March, 1976 but before 1st day of April, 2003, no deduction is allowed under ss. 28 to 44C in computing the income by way of royalty or fees for technical services received from Government or an Indian concern. The agreement in question is covered under this clause since it was entered into on 2nd Aug., 2000.
6. A comparison of s. 44AC and s. 44D shows that both of them deal with computation of income; features (1) and (2) noted above of these provisions are similar. In regard to the third feature, whereas s. 44AC deals with a resident-assessee (other than a public sector company), s. 44D deals with an assessee being a foreign company; it needs to be noticed here that under s. 44AC within the same category of assessees (domestic assessees) different treatment was meted out to different traders in regard to allowability of expenses under ss. 28 to 43C for computation of income, such a position does not exist in s. 44D which treats all assessees—foreign companies— alike. The fourth aspect is s. 44AC concerns itself with trading in alcoholic liquor for human consumption and forest produce and s. 44D with royalties and fees for technical services. The last point relates to computation of income. Sec. 44AC provides that 40 per cent of purchase price shall be deemed ‘profits and gains’ of the buyer and s. 44D says that in computing income by way of royalty or fees for technical services received from Government or any Indian concern (in regard to agreements entered into before 1st April, 1976) only 20 per cent of the amount of royalty or fees for technical services shall be allowed as deduction under ss. 28 to 44C of the Act; (in regard to agreements entered into between 31st March, 1976 and 1st April, 2003) it enjoins that no deduction under ss. 28 to 44C shall be allowed, however, relief of reduced rate of tax is provided under s. 115A of the Act. Sec. 44DA deals with admissibility of deductions in respect of agreements after 1st April, 2003, with which we are not concerned here.
7. In Sanyasi Rao’s case (supra), constitutional validity of ss. 44AC and 206C of the Act was challenged in a batch of writ petitions under Art. 32 of the Constitution before the Hon’ble Supreme Court on the ground that they were ultra vires and beyond the legislative competence as well as violative of Art. 14 of the Constitution of India. The same point was raised in some civil appeals which were tagged with the writ petitions. The Hon’ble Supreme Court observed, “Considered in the light of the practical difficulties envisaged by the Revenue to locate persons and to collect the tax due in certain trades, if the legislature in its wisdom thought that it would facilitate the collection of the tax due from such specified traders on a “presumptive basis”, there is nothing in the said legislative measure to offend Art. 14 of the Constitution”. In order to prevent evasion of tax legitimately due to the State from persons carrying on particular trade, ss. 44AC and 206C were enacted so as to facilitate the collection of tax on income at the very inception itself or at anterior stage and that those provisions were akin to advance tax. It was pointed out that the basis of charge was laid down in ss. 4 to 9 and s. 44AC and s. 206C were only machinery provisions and not charging sections. What was brought to tax, though levied with reference to the purchase price and at an earlier point, was nonetheless income liable to be taxed under the IT Act. While reaffirming that Art. 14 of the Constitution applied to tax law as well and that classification for taxation and application of Art. 14, in that context, must be viewed liberally, it was held that s. 44AC r/w s. 206C was not hit by Art. 14 of the Constitution.
In our view, the principle laid down by the Hon’ble Supreme Court in that case in interpreting s. 44AC cannot be called in aid in interpreting s. 44D. The Hon’ble Supreme Court itself observed in regard to s. 44D, among other sections that they relate to a non-resident carrying on business in India and are not much relevant in construing ss. 44AC and 206C of the Act, therefore, it would be futile to contend that interpretation placed on ss. 44AC and 206C would equally apply to s. 44D of the Act. In construing s. 44AC, the Hon’ble Supreme Court observed thus
: “Counsel for the Revenue brought to our notice ss. 44B, 44BB, 44BBA and 44D and contended that there are other similar provisions in the Act. We should state that they relate to non-residents carrying on business in India and are not much relevant in construing ss. 44AC and 206C of the Act.” In that case, domestic enterprises were involved in the commercial activities of purchasing goods in auctions or by filing tenders. Presumptive taxation was resorted to at the initial stage with reference to the purchase price on the ground that it was difficult for the Revenue to assess and recover the tax due from the bidders or purchasers in the case of goods mentioned therein. If they are before the AO seeking regular assessment, there is no reason as to why they should be deprived of the benefit of ss. 28 to 43C for computing their income. The assessees dealing in a particular trade, subject-matter of s. 44AC, were treated differently in regard to relief under ss. 28 to 43C, so it was held to be unreasonable. Sec. 44D deals with foreign companies and no such different treatment is given within the same class in that provision. The following observation of Hon’ble Supreme Court is apt to be noted.— “In the matter of granting various reliefs provided under ss. 28 to 43C, the assessees carrying on business are similarly placed and should there be a law, negativing such valuable reliefs to a particular trade or business, it should be shown to have some basis fair and rational. It has not been shown as to why the persons carrying on business in the particular goods specified in s. 44AC are denied the reliefs available to others. The Revenue puts no plea forward that these trades are distinct and different even for the grant of reliefs under ss. 28 to 43C of the Act. The denial of such reliefs to trades specified in s. 44AC, available to other assessees, has no nexus to the object sought to be achieved by the legislature.” (emphasis, italicized in print, added)
It was not a case of the AO experiencing difficulty in ascertaining the truth or otherwise of claim of expenditure/allowance in respect of foreign companies. The difficulty experienced in the case of assessees under s. 44D was verification of claim of expenses by foreign companies and that plight of the AO is not common to s. 44AC and s. 44D. It is evident that the ratio of the decision of the Hon’ble Supreme Court is that denial of relief available under ss. 28 to 43C to the class of assessees in s. 44AC is unreasonable and, therefore, that relief was made available in it. The decision does not lay down that in every provision dealing with presumptive taxation, where relief under the said provisions is denied, an option to the assessee should be read in them to avail the relief under ss. 28 to 43C of the Act. For all these reasons it is not possible to read any option for the assessee in s. 44D of the Act. That section treats all foreign companies alike and has to be given effect to as it stands. Relying upon the decisions of Sankar Lal Das vs. State of West Bengal (1997) 226 ITR 35 (WBTT) (AT) and Waterman Steamship Corporation vs. ITO—in the Tribunal, Mumbai Bench-D, Mumbai-ITA No. 4740/Bom/1978 and ITA No. 2888/Bom/1988 (unreported), Mr. Mitra vehemently argued that following the decision of Supreme Court in Sanyasi Rao’s case (supra) the said Tribunals read similar options in respect of deductions under ss. 28 to 44C and we should also read in s. 44D such an option to the assessee to avail benefit of those sections. We find it difficult to accede to this contention. It must be borne in mind that when the constitutional validity of a provision in an Act is questioned before a High Court or the Supreme Court, the Court may instead of striking down the impugned provision, read it down to save the constitutionality of the provision in the Act. Such a power can be exercised only by Courts/Tribunals vested with the jurisdiction to strike down a statute or a provision thereof being ultra vires or unconstitutional. A Tribunal which is itself the creature of a statute, not having such specific constitutional power, cannot arrogate to itself the power to pronounce upon the constitutional validity of a provision of or the statute so it has to give effect to the provisions of the Act, which represent the will of the legislature.
We shall now refer to the cases relied upon by the applicant. In Sankar Lal Das vs. State of West Bengal (supra), the question before the West Bengal Tribunal was whether the proviso to cl. (1) of sub-s. (1) of s. 7 of the Bengal Agrl. IT Act, 1944, was violative of Art. 14 of the Constitution. It was noted by the Tribunal that an application under s. 8 of the West Bengal Tribunal Act, 1987, was in the nature of an application under Art. 226 of the Constitution of India. It was in exercise of power in the nature of Art. 226 of the Constitution that the Tribunal found the impugned proviso to be discriminatory and relying upon the decision of the Supreme Court in Sanyasi Rao’s case (supra) held that it would be read down giving an option to the assessees being individuals, HUFs, who cultivated land by themselves (in the case of individuals) or by members of families (in the case of HUFs) with or without the aid of servants or hired labourers or of both, to either choose the procedure laid down in the proviso in question, or to choose the general procedure to prove in the regular manner the cost actually incurred under cl. (1) of sub-s. (1) of s. 7 like other assessees. Admittedly the Authority is not vested with similar powers. In Waterman Steamship’s case (supra), the Tribunal, Mumbai Bench-D, was dealing with the case of an assessee which was a non-resident shipping company. It was contended by the applicant before the Tribunal that the opening words of ss. 44AC and 44B were similar in nature for computing the profits in regard to the certain transactions and as the Hon’ble Supreme Court in Sanyasi Rao’s case (supra) held that the non obstante clause did not dispense with regular assessment as provided in accordance with the ss. 28 to 43C of the Act, similar direction for regular assessment should be issued in favour of the applicant. That submission was accepted by the Tribunal holding as follows : “As observed by the Supreme Court, the right of claim for making the assessments in accordance with the provisions of the Act like ss. 28 to 43A, not being taken away, we have to uphold the claim of the assessee to this extent. Because the assessing authority had not gone into this proposition of loss being operation losses, etc. the same needs to be examined at the level of the AO for which purpose we set aside all the assessments. The assessee would be entitled to place and prove that the real income was a loss and the AO would be acting within his right to evaluate such a loss and conclude the assessments.”
We are not persuaded to accept the reasoning of the Tribunal. We have already pointed out above that when s. 44B and s. 44D, among other provisions, were brought to the notice of the Hon’ble Supreme Court in Sanyasi Rao’s case [supra (1)] it was observed that as those provisions related to non-residents carrying on business in India, they were not much relevant in construing ss. 44AC and 206C. Further, in that case exclusion of ss. 28 to 43C, was found to be unreasonable because among traders of the same goods, similarly placed, only those who purchased the specified goods in auction or by tender were denied the benefit of the aforementioned provisions. It was pointed out by the Hon’ble Supreme Court that no material was placed to justify discrimination between traders in the same goods who purchased the goods in auction or by tender and those who purchased the goods otherwise. It cannot be lost sight of that s. 44AC was held to be an adjunct and explanatory to s. 206C of the Act. It is apt to note that sub-s. (4) of s. 206C provided for assessment of the income under the Act for the assessment year for which such income was assessable. There, the Hon’ble Supreme Court held that it did not dispense with regular assessment. The observations of the Supreme Court reads as follows : “Hence, to the extent the non obstante clause in s. 44AC excludes the provisions of ss. 28 to 43C (applicable to all assessees), the provisions are unreasonable. Sec. 44AC is a valid piece of legislation and is an adjunct to and explanatory to s. 206C. It does not dispense with the regular assessment, as provided in accordance with ss. 28 to 43C of the Act.” In our view, merely because a provision commences with a non obstante clause and excludes ss. 28 to 43C as in s. 44AC, is no reason to read an option for the assessee to avail those provisions and that is not the ratio of the decision of the Hon’ble Supreme Court in Sanyasi Rao’s case [supra (1)]. In the decision of the Tribunal, no provision was referred to justify the conclusion that the assessment was not dispensed with. For the abovementioned reason, the said decisions of the Tribunals, are of no assistance to the applicant.
It is relevant to note that sub-s. (3) of s. 115A also mandates that no deduction in respect of any expenditure/allowance under ss. 28 to 44C and s. 57 shall be allowed to the assessee in computing his or its income referred to sub-s. (1) of that section. We may add that cl. (b) of sub-s. (1) of s. 115A refers to the total income of a non-resident (not being a company) or a foreign company by way of “royalty” or “fees for technical services”, other than the income referred to in sub-s. (1) of s. 44DA, therefore, viewed from any angle, the applicant will not be able to claim deduction under ss. 28 to 44C in computing its income, being fee for technical services. In regard to the s. 195(1), the applicant says, “applicant does not deny the fact that remittances per se are covered by the ambit of withholding tax under s. 195(1) of the Act.” However, it is the contention of the applicant that in view of the procedure laid down by the Hon’ble Supreme Court in Sanyasi Rao’s case [supra (1)] and that of the Mumbai Tribunal in the case of Waterman Steamship Corporation [supra (5)] and in view of the deletion of proviso to s. 195(2) of the Act from 1st April, 1991, the quantum of the net income embedded in the sum in question for withholding tax ought to be computed. In Danfoss Industries (P) Ltd. [AAR/606/2002 dt. 14th May, 2004] (supra), we took the view that an element of profit is not essential ingredient of receipt to be taxable as income and even assuming that fees charged by the Danfoss, Singapore to the applicant and similarly situated group companies is equivalent to the expenses incurred by it in providing the services and there is no profit element, it would then be a case of quid pro quo for the service fees and not a case of reimbursement of expenses and held that the fees was taxable under the Act. In the light of the above discussion, the question of determination of the quantum of the net income embedded in the said sum (US $ 756,728.26) under s. 195(2) for withholding tax, does not arise.
8. For the abovementioned reason, we rule on : (1) question No. 1 that sum of US $ 756,728.26 cannot be said to represent recovery or reimbursement of the costs or expenses actually incurred by Timken-USA while rendering the services by it and that the entire amount is liable to be taxed in India and accordingly, the applicant is obliged to withhold income-tax at appropriate rate (under the Act or the Treaty) whichever is lesser under s. 195(1) of the Act; (2) question No. 2 that, having regard to the provisions of art. 12 of the Treaty, the sum of US $ 756,728.26 received by Timken-USA from the applicant as consideration for services rendered in USA in pursuance of the agreement dt. 2nd Aug., 2000, would be subjected to tax in India and accordingly, the applicant has to withhold income-tax at appropriate rate (under the Act or the Treaty) whichever is lesser under s. 195(1) of the Act. (3) question No. 3 that the sum of US $ 756,728.26 received by Timken-USA from the applicant as consideration for services rendered in USA in pursuance of the agreement dt. 2nd Aug., 2000, would be subjected to tax irrespective of there being a profit or income in the hands of Timken-USA and that the said sum would be subjected to tax in India and accordingly the applicant would have to withhold income-tax at appropriate rate (under the Act or the Treaty) whichever is lesser under s. 195(1) of the Act. (4) question No. 4 that the said sum, referred to in question Nos. 1 to 3, which is said to constitute fee for technical services within the meaning of s. 9(1)(vii) and s. 44D r/w s. 115A of the Act and provide gross basis for taxation of such fees in the hands of non- resident corporate-assessee at the rate of 20 per cent of such fees for the reasons mentioned above, no option can be read in s. 44D for computing income on net basis allowing the benefit of ss. 28 to 44C as the principle laid down by the Hon’ble Supreme Court in the case of Union of India vs. A. Sanyasi Rao & Ors. [supra (1)] in the context of presumptive basis of taxation of certain receipts, would not apply. Accordingly, the applicant has to withhold income-tax at appropriate rate (under the Act or the Treaty) whichever is lesser under s. 195(1) of the Act. We rule on : (1) additional question (a), contents of this question are the same as question, No. 4 referred to above. The ruling given on question No. 4 will equally apply to this question; (2) additional question (b) that this is a consequential question and that, in view of our ruling on additional question (a) and question No. 4, this question does not survive.
[Citation :273 ITR 67]
