1992 (4) TMI 72 - AT - Income Tax

Tribunal Upholds CIT(A) Decision on Tax Refund and Royalty, Emphasizes Facts & Circumstances

The Tribunal upheld the CIT(A)'s decision that the appeal was maintainable under Section 246(1)(c) of the Income Tax Act, emphasizing the importance of ... - Issues Involved:1. Maintainability of the appeal under Section 246(1)(c) of the Income Tax Act.2. Refund of excess tax deducted at source.Detailed Analysis:1. Maintainability of the Appeal under Section 246(1)(c) of the Income Tax Act:The Department argued that the CIT(A) erred in holding that the appeal filed by the assessee was maintainable under Section 246(1)(c) of the Act. The CIT(A), however, had examined the facts and circumstances of the case and concluded that the appeal was validly filed under this section. The Tribunal upheld this decision, emphasizing that the insistence on rigid adherence to the letter of the law over its spirit was at the root of the Department's appeal. The Tribunal noted that the CIT(A) had rightly entertained the appeal considering the facts and circumstances, thus the appeal was maintainable.2. Refund of Excess Tax Deducted at Source:The primary issue was whether the assessee deducted a larger amount of tax than statutorily obligated under the relevant provisions of the Act. This required determining whether the payment made by the assessee under the foreign collaboration agreement was royalty or technical fees within the meaning of the Act.Relevant Provisions and Legal Framework:The Tribunal examined the relevant provisions of the Act, particularly Section 9, which deals with income deemed to accrue or arise in India. The determination of whether a receipt is chargeable to tax in the hands of a non-resident involves examining whether the receipt is on capital or revenue account, whether the income was received or deemed to be received in India, and whether it actually accrued or could be deemed to accrue in India.Amendments by the Finance Act, 1976:The Tribunal noted that the Finance Act, 1976 introduced significant changes, including the addition of clauses (vi) and (vii) to Section 9(1), dealing with royalty and fees for technical services respectively. These amendments put the exigibility issue in a new and unambiguous perspective. The Tribunal referred to the Karnataka High Court's observations in VDO Tachometer Werke, West Germany vs. CIT, highlighting the legislative intent to alter the law regarding the liability of such payments to tax.Definition and Scope of Royalty and Fees for Technical Services:The Tribunal noted that the definitions of 'royalty' and 'fees for technical services' were introduced for the first time by the amendments. The definition of 'royalty' in Explanation 2 to Section 9(1)(vi) was particularly wide, encompassing various circumstances including the imparting of information concerning technical know-how. The Tribunal emphasized that the specific provisions of clauses (vi) and (vii) of Section 9(1) would prevail over the general provisions of clause (i).Application to the Case:The Tribunal examined the foreign collaboration agreement and concluded that the payment made by the assessee to the foreign companies was royalty within the meaning of Section 9(1)(vi). The activities outlined in the agreement, such as the transfer of technical know-how, participation in design discussions, and imparting technical information, fell within the scope of 'royalty' as defined in the Act. Consequently, the amount paid was taxable as royalty, and the applicable tax rate was 20%, not 40%.Refund of Excess Tax:The Tribunal addressed the Department's argument that the excess tax deducted should be refunded to the foreign companies, who should file returns and claim the refund. The Tribunal rejected this argument, noting that the agreement stipulated that the foreign companies were to receive royalty without bearing any tax burden, which was to be borne by the assessee. The Tribunal highlighted the impracticality and unnecessary burden of requiring the foreign companies to go through the motions of filing returns and claiming refunds, especially given the rationalized scheme of assessment introduced by the Finance Act, 1976.The Tribunal concluded that the assessee was entitled to the refund of Rs. 20,60,080 and upheld the CIT(A)'s decision directing the refund. The Tribunal emphasized that minor and technical errors should be disregarded when the judgment is right on the law and facts and does not affect the substantial rights of the parties.Conclusion:In the result, the Tribunal dismissed both the Department's appeal and the cross-objections, affirming the CIT(A)'s order directing the refund of the excess tax deducted at source to the assessee.