1994 (6) TMI 48 - AT - Income Tax

Tribunal Ruling: Business Income Classification and Profit Attribution in International Taxation

DEPUTY COMMISSIONER OF INCOME TAX. Versus TAIKISHA LTD.

DEPUTY COMMISSIONER OF INCOME TAX. Versus TAIKISHA LTD. - TTJ 052, 594, Issues Involved:1. Classification of supervision fee as business income or fee for technical services.2. Computation of income on a completed contract basis.3. Disallowance of expenses due to non-furnishing of details.4. Attribution of profits from the supply of machinery to the permanent establishment in India.Issue-wise Detailed Analysis:1. Classification of Supervision Fee:The assessee, a non-resident Japanese company, received Rs. 7,85,998 as supervision fee from M/s Maruti Udyog Ltd. (MUL) for the supply of machinery and fabricating the paint line. The Assessing Officer classified this amount as a fee for technical services under section 9(i)(vii) of the Act, which was upheld by the CIT(A). However, the assessee argued that the supervision fee should be considered as business income, not as a fee for technical services. The Tribunal, referring to its earlier decision in the assessee's case for the assessment year 1984-85, concluded that supervision charges are not assessable as a fee for technical services but should be assessed as commercial profits. The alternative claim of treating the amount as a reimbursement of expenses was not pressed by the assessee.2. Computation of Income on Completed Contract Basis:The assessee completed the contract within 15 months and argued that income should be computed on a completed contract basis. The Assessing Officer, relying on the Delhi High Court decision in Tirath Ram Ahuja (P) Ltd. vs. CIT, computed the income on a year-to-year basis, assessing Rs. 21,59,902 for the year under appeal. The CIT(A) accepted the assessee's contention and directed that the profit of Rs. 13,23,385 be assessed for the year under appeal, substituting the loss with income of Rs. 1,10,282 for the subsequent year. The Tribunal found no merit in the assessee's ground as the claim had been accepted by the CIT(A).3. Disallowance of Expenses:The assessee claimed Rs. 94,444 as expenses, but the Assessing Officer disallowed 50% due to non-furnishing of details. The CIT(A) upheld this disallowance. However, the Tribunal found that the details of these expenses were available in the assessment record, making the disallowance unwarranted. Consequently, the addition of Rs. 47,222 was deleted, and the business income of the assessee for the assessment years 1986-87 and 1987-88 was modified accordingly.4. Attribution of Profits from Supply of Machinery:The Revenue appealed against the CIT(A)'s direction to exclude the profit on the sale of machinery from the assessable profit. The assessee supplied machinery to MUL on an FOB basis in Japan, with 100% payment made in Japan in foreign currency. The CIT(A) held that the permanent establishment in India did not contribute to the placement, manufacture, or delivery of the machinery, and thus, profits from such transactions could not be attributed to the permanent establishment in India. The Tribunal upheld this view, noting that the agreement specified the supply of machinery FOB Japan, with 100% payment made before shipment. The Tribunal found that the sale was complete in Japan, and no part of the profit from this activity was assessable in India. The Revenue's appeal was dismissed as the CIT(A)'s decision was justified.The consolidated order thus partially allowed the assessee's appeal and dismissed the Revenue's appeal, providing a clear demarcation of income sources and their appropriate tax treatment.