TIMKEN INDIA LTD Vs. STATE

JUDGEMENT

(1.) 1. This is an application under Section 245Q(1) of the IT Act, 1961 (for short the 'Act'). The applicant-Timken India Ltd.-is a company incorporated in India and is a tax resident of India. It is a subsidiary of M/s Timken Company, a company incorporated in the United States of America and is a tax resident of USA (hereinafter referred to as "Timken-USA"). The applicant is engaged in the business, inter alia, of manufacture and sale of bearings and other ancillary products. On 2nd Aug., 2000, the applicant entered into an agreement with Timken-USA, pursuant to which the said company agreed to render various services in favour of the applicant in USA and no part of the same was to be rendered in India. It was also agreed between the parties that the compensation payable by the applicant to Timken-USA for the services would cover only the cost actually incurred by the Timken-USA and that no profit element or mark-up on the cost would be added to it. For the services rendered by Timken-USA several invoices were raised on the applicant for an aggregate amount of US $ 756,728.26; the break-up of that amount was given in the statement marked as Appendix-C and the description of the services rendered is mentioned in the statement marked as Appendix-D. The applicant remitted US % 145,610.62 to Timken-USA and US $ 611,117.64 remain to be remitted. On 21st March, 2002, before remitting the said sum of US $ 145,610.62, the applicant approached the AO for an order under Section 195(2) of the Act, authorizing it to remit the said amount without deducting income-tax at source under Section 195(1) of the Act on the ground that the said sum was only reimbursement of expenditure and cost actually incurred and that it did not contain any mark-up or profit element so the tax deductible would be zero.

(2.) Whether, in view of the provisions of the Double Taxation Avoidance Agreement entered into by the Government of India with the Government of USA in exercise of the powers conferred upon it by Section 90(1) of the Act, the sum of US $ 756,728.26 receivable by Timken from the applicant in consideration for the services rendered by Timken in USA in pursuance of the agreement dt. 2nd Aug., 2000, would not be subject to tax in India in the hands of Timken and accordingly whether the applicant would not have any obligation to withhold income-tax thereon under Section 195(1) of the Act.

(3.) WHETHER, notwithstanding the fact that the fees receivable by Timken from the applicant amounting to US $ 756,728.26, as referred to in question Nos. 1 to 3 hereinabove, constitute "fees for technical services" within the meaning of Section 9(1)(vii) of the Act, and that Section 44D r/w Section 115A of the Act, provide for a gross basis for taxation of such fees in the hands of Timken, being a non-resident corporate assessee, at the rate of 20 per cent of such fees, an option would be deemed to be read in the provisions of the Act for computing such income on net basis, in view of the principles enunciated by the Hon'ble Supreme Court in the case of Union of India v. A. Sanyasi Rao and Ors. (1996) 219 ITR 330 (SC) in the context of presumptive basis of taxation of certain receipts, with the result that, since the said sum of US $ 756,728.26 does not actually contain any element of profit or income in the hands of Timken, the same would not be subject to income-tax in India in the hands of Timken and accordingly whether the applicant would not have any obligation to withhold income-tax thereon under Section 195(1) of the Act ?