Vimal Gandhi, Judicial Member -
(1.) THE appellant, M/s Unitika Limited, is a nonresident company incorporated in Japan. THE assessment for the assessment year 1985-86 now under appeal, has been made through Modipon Limited, Modi Nagar, an Indian company with whom the foreign company entered into a collaboration agreement on 21-6-1983 to supply know how and basic engineering facilities stipulated in the agreement. THE Indian company remitted a sum of Y 2,26,87,500 to Japan after deducting ï¿½56,81,875 as tax at source under the agreement between the two companies. THE taxability of above amount is the issue involved in the present appeal.
(2.) As per collaboration agreement dated 21 -6-1983, Unitika was to provide 'knowhow and basic engineering' to Modipon for manufacturing nylon tyres cord and industrial yarn and the process for commercial production. The aforesaid agreement is divided into ten articles which are made annexures of the collaboration agreement. The terms "knowhow", "know-how and basic engineering documents", "knowhow fees", "basic engineering fees", "effective date", etc. etc. are defined in Article I. As to what would constitute "knowhow" and "basic engineering documentation" and their delivery schedule is provided in Articles II and III of the agreement. Fees and payment schedule is provided in Article IV. As per Article III of the agreement, the entire knowhow and basic engineering was to be supplied by way of documents containing drawing, designs, data, etc. which were to be delivered in Tokyo, Japan and title in them was to pass to Modipon in Japan in such delivery. Modipon was granted non-exclusive licence to use knowhow, construct and operate its plan, make products and sell the same anywhere in the world. The entire consideration was fixed at ï¿½ 34,37,50,000 consisting of knowhow fees ï¿½ 21,87,50,000 and basic engineering fee ï¿½ 12,50,000. The consideration as per Article IV of the agreement was to be paid in three equal instalments. Article 13.1.3 of the agreement provided that the agreement would be effective after the first instalment was paid. Although original agreement was amended on 27-8-1983 and supplementary agreement was executed on 8-10-1985, the above term relating to effective operation of the agreement continued to be applicable. The agreement was admittedly approved by the Governments and Boards of both the companies. Modipon Limited remitted 25% of first instalment i.e. Y 2,26,87,500 (tax at source ï¿½ 56,71,875) on 7-5-1985. The above amount was l/12th of the total consideration. It did not make any further payment and it is stated that Unitika Ltd. neither supplied any design, drawing, data, etc. nor rendered any other service.
Modipon Limited filed return on behalf of foreign company declaring income of Rs. 13,76,320 on 3-6-1985. However, during the course of assessment proceedings, Modipon claimed that return was filed under a misconception and the same be treated as withdrawn as Modipon could not be treated as agent of the foreign company. The Assessing Officer after referring to terms and conditions of the agreement held that the agreement dated 21 -6-1983 between the parties became null and void as it was not put into effect within 90 days of the signing of the agreement as provided in Article 13.3. There was no further evidence to show that the agreement was approved by Government of India. According to the Assessing Officer, 25% of the following amounts paid under unapproved and void agreement were taxable :-
The above amount at the relevant exchange rate worked out to Rs. 13,76,322. Basic engineering fees worked out by the Assessing Officer at ï¿½ 33,00,000 was liable to be charged at 40% and the balance amount at 20%. However, the Assessing Officer simultaneously observed that above bifurcation was irrelevant as no services were rendered in pursuance to the remittance made and that remittance was not under a valid approved agreement. Thus a special rate of 20% or 40% applicable to "royalty" or "technical services fees" under Section 1 ISA of the Income-tax Act was not applicable. She accordingly subjected the entire sum, i.e., Rs. 13,95,638 to tax without specifying any head.
(3.) THE assessee carried the matter in appeal before the CIT(A) and drew his attention to the terms and conditions of agreement. THE assessee sought to raise additional grounds of appeal noted by the CIT(A) in para 10 of his order to the effect that ï¿½ 2,26,87,500 were not taxable income as there was no nexus between the above amount and any business activity carried by the company in India. THE assessee further relied upon Double Taxation Avoidance Agreement (DTAA) between India and Japan. THE learned CIT(A) observed that additional grounds raised were in conflict with original grounds as per Memo of appeal preferred by the appellant and the Assessing Officer, vide letter dated 29-8-1989 had objected to entertainment of additional grounds. However, as pure question of law was raised in the additional grounds, the learned CIT(A) allowed the assessee to raise those grounds. On merit of the grounds, the learned CIT(A) held that agreement dated 21-6-1983 did not become null and void for nonpayment within the stipulated period of 90 days as the appellant accepted belated payments and had in fact entered into a supplementary agreement on 18-10-1985. He further held that as per written submissions of the assessee, the collaboration agreement continued to be effective even beyond the accounting year under question. In fact, there was no evidence on record to indicate that the agreement had been rescinded by the parties till date. He concluded that payments in question were received on account of services rendered by the appellant. He held that Y 1,03,12,500 were received on account of basic engineering fees and the balance amount ï¿½ 1,80,46,875 on account of technical knowhow fees. THE aforesaid amount was taxable under the Double Taxation Avoidance Agreement (hereinafter referred to as DTAA). On the question whether the assessee had a permanent establishment in India, the learned CIT(A) held that the collaboration agreement was for carrying construction, erection or assembly project in other contracting States, and therefore the assessee would be treated as having a 'permanent establishment'. Accordingly, the learned CIT(A) held that the amount in dispute were taxable in India. In this connection, he referred to Article III (i), X(e), X(f), X(k), Section 1 l5A(b) of Income-tax Act and held that royalty would be taxed at the rate of 20% whereas fees for technical services would be taxed at the rate of 40%. He rejected the contention of the assessee relating to non-taxability of receipt. He further rejected that the agreement became null and void. According to learned CIT(A) the agreement continued to be effective even after the end of the accounting year. He, however, accepted assessee's contention that for purposes of conversion of Japanese Yen into Indian rupee, the rate as on date of remittance, as per rule 26 of the Income-tax Rules, was to be applied and not the rate as on the last date of the accounting year. Some other minor reliefs were also allowed to the assessee and appeal was treated as partly allowed.;