1991 (2) TMI 176 - AT - Income Tax

Tribunal upholds taxability of income as fees for technical services, cancels order under section 263, allowing appeal.

The Tribunal upheld the taxability of income as fees for technical services, directing the recomputation of total income after allowing deductible ... Assessing Officer, Fees For Technical Services Issues Involved:1. Taxability of income as fees for technical services.2. Determination of total income versus gross receipts.3. Application of the doctrine of merger under section 263 of the Income-tax Act, 1961.Issue-Wise Detailed Analysis:1. Taxability of Income as Fees for Technical Services:The primary issue was whether the income earned by the non-resident firm (assessee) from the Government of Maharashtra was taxable in India as fees for technical services. The assessee contended that the income was not taxable in India, arguing that the nature of the assignment was the collection and study of information for a project report, carried out in London, and that the firm had no permanent establishment in India. The assessee relied on various legal provisions and agreements, including the Double Taxation Avoidance Agreement between India and the United Kingdom, to support its claim that no technical services were rendered.The Assessing Officer and the first appellate authority held that the income was indeed fees for technical services and taxable in India. The Tribunal examined the agreement dated 8th April 1982 and concluded that the services provided by the assessee were consultancy services of a technical nature. The Tribunal referred to section 9(1)(vii) and Explanation 2 of the Income-tax Act, 1961, which define 'fees for technical services' and include consultancy services within its ambit. The Tribunal noted that the agreement's terms, including the provision of drawings and reports, indicated that the services were technical. Thus, the Tribunal upheld the assessment of the income as fees for technical services, taxable under section 9(1)(vii).2. Determination of Total Income versus Gross Receipts:The second issue was whether the Assessing Officer correctly assessed the total income by considering the gross receipts as total income. The Tribunal observed that the Assessing Officer had taken advance payments/monthly payments as total income, which was incorrect. The Tribunal emphasized that the charge of tax should be on the total income, not on gross receipts. According to sections 2(24) and 2(45) of the Income-tax Act, 'income' and 'total income' must be distinguished, and the charge of tax under section 4 should be on the total income, computed after allowing for deductible expenses.The Tribunal directed the Assessing Officer to recompute the total income by allowing the expenditure incurred by the assessee, which was not capital or personal expenditure, and wholly and exclusively laid out for earning the income. The Tribunal set aside the orders of the lower authorities to this limited extent and directed the Assessing Officer to work out the total income accordingly. The appeal was thus partly allowed on this issue.3. Application of the Doctrine of Merger under Section 263 of the Income-tax Act, 1961:The third issue pertained to the order under section 263 of the Income-tax Act, 1961, made by the Commissioner of Income-tax, which the assessee contested based on the doctrine of merger. The Tribunal noted that the doctrine of merger was applicable in this case, as the order of the Commissioner of Income-tax (Appeals) had already been passed on 27th May 1986. The Tribunal referred to jurisdictional High Court decisions in CIT v. P. Muncherji & Co. and Ritz Ltd v. Union of India, which supported the assessee's position.Consequently, the Tribunal canceled the impugned order under section 263 for obvious reasons, allowing the appeal in favor of the assessee on this issue.Conclusion:The appeals were allowed in the above terms, with the Tribunal upholding the taxability of the income as fees for technical services, directing the recomputation of total income after allowing deductible expenses, and canceling the order under section 263 based on the doctrine of merger.