TaxTMI 
TaxTMI 
1996 (5) TMI 385
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....pli- cant under the provisions of its aid programme to the companies assisted by it in India is income of the applicant under the provisions of the Income-tax Act and chargeable to tax ? (2) Whether the amount of contribution received/receivable to recover part of the cost of the technical assistance provided by the appli- cant under the provisions of its aid programme to the companies assisted by it in India is fees for technical services as defined in Explanation 2 to clause (vii) of sub-section (1) of section 9 of the Income-tax Act or in article 13 para. 4 of the Avoidance of Double Taxation Agreement with India and the U. K. (3) Even if the amount of contribution referred to in question No. 2 be assumed to be in the nature of technical fees, will such fee be chargeable to tax in India keeping the memorandum of articles of association of the applicant in view ?" 3. DECTA was originally established by the British Government's Overseas Development Administration (ODA) in 1973 to assist exporters and export promotion organisations in Third World countries. In 1986, it became an autonomous company limited by guarantee and sponsored by the ODA. In 1991, the control of....
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....nd marketing to achieve the sales potential ; (2) a market entry scheme for general consumer and industrial products involving a small amount of design and systems assistance but mainly involving assistance in marketing to identify buyers and facilitate market entry ; and (3) an export break through service using the skills of a panel of market development consultants in target markets and offering a customised package of assistance to Indian companies in areas of general market research, specific market research, search for a partner and marketing and follow-up services. 5. As mentioned earlier, DECTA is a U. K. company, with its principal objects set out in the memorandum of association, extracts of which are set out below : Clause 3 : The objects for which the agency is established are : (1) to promote commerce and help developing countries, particularly the poorest and least developed, to promote their economic development by increased exports, especially to the United Kingdom ; (2) to deal with enquiries from developing countries' producers, exporters, trade organisations and export promotion organisations on (i) market opportunities in the UK and i....
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....of tech- nical co-operation funds to be administered by the DECTA through its project office in Delhi. The project office was initially set up for the period of three years for purpose of undertaking purely liaison activities and co- ordinate between the head office and the Indian authorities in relation to the EDPI. The Reserve Bank of India granted permission for the establishment of the project office subject to the following conditions : (1) Except the proposed liaison work the projects office will not undertake any other activity of a trading, commercial or industrial nature or enter into any business contracts without prior permission of the RBI. (2) No commission/fee will be charged or any other remuneration received/income be earned by the projects office for its liaison activities/ services rendered by the projects office otherwise in India. (3) The entire expenses of the projects office will be met exclusively out of the funds received from abroad through normal banking channels. (4) The representative will not borrow or lend any money from/to any person in India without the prior permission of the RBI. (5) The representative will not acquire,....
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....s to become more efficient and competitive by upgrading design capability, production techniques, operational and marketing skills. 3.3. The project will help companies in key sectors, with exporting potential, to achieve increased exports. It will aim both at companies at present unable to afford commercial consultancy rates and at larger firms which, once persuaded of the benefits, can afford to employ consultancy services on a commercial basis. 3.4. An additional objective is to increase the chance of sustaining project benefits by : (a) Encouraging Indian consultancy companies to develop the expertise to provide this service. DECTA will research the availability of sound Indian consultancy companies. British consultants employed under the programme will be encouraged to work with these Indian consultants to share their knowledge and experience and possibly to form longer term associations. DECTA will produce a proposal within the first six months of the project on how the development of local consultancy capability will be encouraged. (b) Requiring Indian companies to pay a more realistic share of the costs of services. The target will be an average ....
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....e entitled to use them or copy them only for the implementation of the work plan and the purpose for which it is intended. 10. It may be useful to mention one more circumstance to allay one's curiosity as to why DECTA should be required to receive contributions from the companies with which it contracts and that only to the extent of 25 percent. of the cost as referred to earlier. It may be mentioned that originally the cost of the projects was being met in its entirety by DECTA itself. However, subsequently, the ODA requested DECTA to ensure that the participating companies made a rupee contribution towards the cost of the assistance they received from the organisation. There were three main reasons for this : (i) Assistance that is offered free of charge does not elicit the level of commitment required from companies to ensure the success of the project; (ii) It was considered that companies were benefited financially from the assistance provided and it was, therefore, reasonable to expect some financial input from them ; (iii) The rupee contribution may be added to the overall budget so that the scope of the programme could be extended and more companies co....
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....(including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'." 14. The case of the Department may appear, at first sight, to be covered by the definitions given above. There is no doubt that DECTA provides various kinds of services to the companies with which it enters into memoranda of understanding and, if the contributions or amounts paid by the companies into the account of the DECTA with the Standard Chartered Bank really represent the consideration for the services so rendered, then the amount thereof will be clearly taxable as income in India both by virtue of section 9(1)(vii) of the Act as well as by virtue of article 13(4) of the DTAA. But the real and crucial question is whether the payments made are capable of being described as the consideration for the services rendered by DECTA. One way of looking at the transaction is that, on the one hand, DECTA provides some services to the companies and towards those services the companies make a cash payment. Th....
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....letter dated December 16, 1993, from the Reserve Bank of India which specifically advised the DECTA's bankers "to ensure that the debits in respect of items 2(i) and (ii) are met from inward remittances only" but there is another letter dated February 23, 1994, in identical terms but without this endorsement. It is not clear why there are two such letters on record and it appears that the restriction contained in the first letter has been withdrawn by the second. Even so, it is clear that, so far as DECTA's account with the Standard Chartered Bank is concerned, it does not cater to the technical fees or consultation charges or other remuneration which DECTA may pay to the various managerial or technical personnel which they employ for the purposes of the projects. The Indian rupee contribution goes to meet only the expenses of the staff members and experts of DECTA by way of hotel bills or transport and other local expenses related to the project incurred in India. On this ana- lysis it will be clear that this is not a case where DECTA provides technical services to the Indian companies and charges them therefor at a conces- sional rate. This is a case where the DECTA executes vari....
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....cter of income. Here also the contribution by the company is really not a payment to DECTA but only a contribution to a common fund in the hands of DECTA to enable the latter to defray a part of the expenses of the project carried out by DECTA on behalf of the company in question. 18. One of the arguments addressed before the authority on behalf of the applicant was that even if the amounts of contribution by the various com- panies can be treated as income by way of technical fees, they cannot be charged to tax in India keeping in view the memorandum and articles of association of the applicant. The relevant clauses have already been set out. The argument is that the income is utilised by the DECTA not for private profit but only for purposes of utility to Indian industries which is a charitable purpose. The profits, if any, cannot be distributed amongst the shareholders of DECTA and even if the company were to be dissolved, the assets and liabilities are bound to be transferred to some other non-profit making organisation. This argument is not really of much help to the applicant. The income of a charitable organisation is nonetheless its income and it will not be chargeable to ....