Technical Services by DAVY Outside India Not Taxable; Refund of Withholding Tax Ordered with Interest

The HC ruled in favor of the petitioner, determining that the technical services rendered by DAVY outside India were not taxable in India. Consequently, the petitioner was entitled to a refund of the withholding tax deposited under protest. The HC directed the Income Tax Department to comply with its previous order by refunding the amounts deducted at source and emphasized adherence to legal provisions to prevent unauthorized tax collection. The Prothonotary and Senior Master was instructed to release the refundable amount, including interest, to the petitioner, who agreed to manage any tax obligations on the interest received.

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Issues Involved:
1. Taxability of technical services rendered outside India.
2. Entitlement to refund of withholding tax deposited.
3. Compliance with High Court's previous order.
4. Legal provisions and amendments relevant to refund claims.

Summary:

Issue 1: Taxability of Technical Services Rendered Outside India
The petitioner entered into a Foreign Technical Collaboration Agreement with DAVY to set up a Gas-based Sponge Iron Plant in India. DAVY agreed to render engineering and other related services outside India, providing necessary design, drawing, data, and training to the petitioner's employees outside India. The petitioner paid DAVY a sum of US $16,231,000 net of Indian Income-tax, if any, leviable. The Assistant Commissioner of Income Tax (ACIT) initially held that the amount payable to DAVY was taxable as income in India, requiring the petitioner to deduct tax at source. However, DAVY declared nil income for the consideration received, arguing that the income neither accrues nor is received in India and hence is not chargeable to tax in India. The High Court eventually held that the income received by DAVY from the petitioner under the agreement was not correct and directed fresh assessment orders excluding the income received by DAVY by way of fees for technical services from the petitioner.

Issue 2: Entitlement to Refund of Withholding Tax Deposited
The petitioner sought a refund of the withholding tax deposited under protest, arguing that since the payment made to DAVY was held non-chargeable to tax, the petitioner was entitled to the refund. Despite DAVY's successor-in-interest, Kvaerner U.S. Inc., giving a 'no objection' to the petitioner receiving the refund, the ACIT refused to give effect to the High Court's order, holding that the petitioner was not entitled to the refund as the tax was deposited on behalf of DAVY.

Issue 3: Compliance with High Court's Previous Order
The High Court directed the Income Tax Department to pass fresh assessment orders excluding the income received by DAVY for providing technical services to the petitioner and to refund the amounts deducted at source if required. The Department complied by depositing the refundable amounts with the Prothonotary and Senior Master, High Court, Bombay.

Issue 4: Legal Provisions and Amendments Relevant to Refund Claims
Section 248 of the Income Tax Act was amended by the Finance Bill 2007 to provide that where the tax deductible on any income is to be borne by the person by whom the income is payable, and such person claims that no tax was required to be deducted, he may appeal for a declaration that no tax was deductible. The High Court recognized that the petitioner had always maintained that the technical services were rendered outside India and the fees paid outside India, thus not taxable in India. The refusal of the Department to return the amount was deemed unauthorized by law, amounting to unjust enrichment. The Court directed the Prothonotary and Senior Master to foreclose the fixed deposit and pay over the amount including interest to the petitioner, with the petitioner undertaking to pay the entire income tax on the interest earned in the financial year in which the amount is received and to indemnify the Department against any claims by DAVY or Kvaerner.

Conclusion:
The High Court ruled in favor of the petitioner, directing the refund of the withholding tax deposited under protest, recognizing the petitioner's entitlement based on the non-taxability of the technical services rendered outside India. The Court emphasized compliance with legal provisions and amendments, ensuring that only legitimate taxes are collected.

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