R.L. Segel, Judicial Member -
(1.) I.T. Appeal No. 1584 (Delhi) of 1981 by the assessee-non-resident foreign company, Compagnie Francaise D'Etudes Et De Construction, TECHNIP, incorporated in France and I.T. Appeal No. 1722 (Delhi) of 1981 by the revenue arising out of the order of the Commissioner (Appeals), dated 7-2-1981, have been consolidated, heard together and are being disposed of by a common order for the sake of convenience. The year of assessment involved is 1977-78, for which the previous year ended 31-12-1976.
(2.) Admittedly, as in the past in the year under consideration, the assessee-non-resident company was engaged in supplying technical know-how to (i) Haldia Project of the Refinery Division of the Indian Oil Corporation, and (ii) to Low Density Polyethylene Project (LDPP) for the Indian Petro-chemical Corporation Ltd.
The IAC in the assessment of the assessee has, by relying on Section 44D(a) of the Income-tax Act, 1961 ('the Act'), restricted the expenses claimed to 20 per cent on the quantum of fee earned for services rendered in India by the assessee. While so holding, the IAC rejected the stand taken by the assessee based on Articles XVI and XIX of the Avoidance of Double Taxation Agreement between the Government of the French Republic and the Indian Government which, according to the assessee, entitled it to the deduction of the entire expenses incurred by the assessee-non-resident company in India in connection with the activities performed in India in the shape of providing technical know-how to the above Indian companies. The IAC further held that the amount received by the assessee-non-resident company from each of the aforesaid Indian companies by way of reimbursement of the payments made on behalf of each of those companies, in all Rs. 30,98,000, was to be treated as part of the total income of the assessee-non-resident company. There was, however, no discussion in the assessment order regarding the set off of the brought forward losses and unabsorbed depreciation in the assessment order by the IAC.
(3.) AGGRIEVED by the aforesaid assessment, the assessee-non-resident company brought the matter by way of appeal before the Commissioner (Appeals). The contention of the assessee that there being conflict between Section 44D and Articles XVI and XIX of the Avoidance of Double Taxation Agreement between the Governments of India and French Republic, the latter has to prevail. The Commissioner (Appeals) went into the language of Article XVI and rejected the aforesaid stand of the assessee by observing as under:
Admittedly, the appellant is an enterprise of France being paid amounts by the two Indian enterprises attributable to activities actually performed in India and in computation of its total income is entitled to deduction of expenses incurred in India in connection with the above activities. It is patent that the deduction for expenses is to be worked out in accordance with the scheme of the Income-tax Act. Ordinarily, the deductions are as provided in Sections 30 to 44C of the Income-tax Act. However, Section 44D inserted by the Finance Act, 1976, stipulates, inter alia, that notwithstanding anything to the contrary contained in Sections 28 to 44C, in the case of an assessee, being a foreign company, the deductions admissible under the said sections, in computing the income by way of royalty or fees for technical services in pursuance of an agreement made by the foreign company with the Indian concern before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount of such royalty or fees, as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer, outside India of, or the imparting of information outside India in respect of any data, documentation, etc., etc. The effect of this special provision is that in the case of a foreign company, the quantum of deductions admissible under Sections 28 to 44C is subject to the ceiling of 20 per cent of the gross amount of the fees received for technical services. And, if in computation of the assessee's total income, the above special provision, which is equally applicable to all foreign companies, is applied, it cannot be contended that it is not being allowed a deduction of expenses incurred as envisaged under Article XVI of the Agreement with France. It is to be pointed out that Article XIX of that Agreement provides, inter alia, that laws in force in either of the Contracting States will continue to govern taxation of income in the respective Contracting States except where express provision to the contrary is made in the Agreement. By restricting the permissible expenses within the ceiling laid down by Section 44D, the IAC is only giving effect to the provisions of the Tax Laws in force in this country and there is no provision either in the Agreement or in the contracts coming in her way.;