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High Court Of Calcutta
Tarun Chatterjee, S. N. Bhattacharjee
LEONHARDT ANDRA AND PARTNER - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 101 Of 1994
Decided On : 12/12/2000
INCOME TAX - Double Taxation Avoidance Agreement (DTAA) - Germany - Royalty - Fees for technical services - Whether sums received by assessee for design and technical services chargeable to income-tax - Whether transfer of drawings, designs and technical services constituted out and out transfer - Whether sums received constituted industrial and commercial profits - Whether agreement dated April 18, 1980, continuation of agreement dated July 19, 1974 - Whether sums received constituted fees for technical services.
Fact of the Case:
Assessee, a foreign company, entered into design contract with Hooghly River Bridge Commissioners (HRBC) for construction of second Hooghly Bridge. Agreement terminated on December 31, 1978. New agreement entered into on April 18, 1980. Assessee filed return of income showing nil income for assessment year 1981-82, claiming exemption under Section 9(1)(vii) of Income-tax Act, 1961 (Act). Income-tax Officer held amounts remitted to assessee were royalty and taxable. Commissioner of Income-tax (Appeals) and Tribunal upheld the finding. Assessee contended that contract of 1980 was continuation of contract dated July 19, 1974, which was approved by Central Government and as such not chargeable under proviso to Section 9(1)(vi) and (vii).
Finding of the Court:
Court held that agreement dated April 18, 1980, was a new agreement and remittances received by assessee were taxable in India. Court also held that transfer of drawings, designs and technical services did not constitute out and out transfer and sums received therefor constituted royalty. Further, court held that sums received did not constitute industrial and commercial profits and assessee was liable to pay income-tax even though it had no permanent establishment in India. Court further held that agreement dated April 18, 1980, could not be treated as continuation of agreement dated July 19, 1974, and sums received were liable to be assessed under the Act and not saved by proviso to Section 9(1)(vi). Finally, court held that sums received by assessee did not constitute fees for technical services and were chargeable to income-tax as royalty.
Issues: 1. Whether sums received by assessee for design and technical services chargeable to income-tax under the Act? 2. Whether transfer of drawings, designs and technical services constituted out and out transfer and sums received therefor could be treated as royalty for purpose of DTAA and liable to Indian Income-tax? 3. Whether sums received by assessee constituted industrial and commercial profits for purpose of DTAA and assessable under the Act, considering assessee had no permanent establishment in India? 4. Whether agreement dated April 18, 1980, could be treated as continuation of agreement dated July 19, 1974, which was duly approved by Central Government and as such sum liable to be assessed under the Act, in view of proviso to Section 9(1)(vi)? 5. Whether sums received by assessee for supply of designs, drawings and technical services constituted fees for technical services for purpose of DTAA and chargeable to income-tax under the Act?
Ratio Decidendi: 1. Agreement dated April 18, 1980, was a new agreement and remittances received by assessee were taxable in India. 2. Transfer of drawings, designs and technical services did not constitute out and out transfer and sums received therefor constituted royalty. 3. Sums received did not constitute industrial and commercial profits and assessee was liable to pay income-tax even though it had no permanent establishment in India. 4. Agreement dated April 18, 1980, could not be treated as continuation of agreement dated July 19, 1974, and sums received were liable to be assessed under the Act and not saved by proviso to Section 9(1)(vi). 5. Sums received by assessee did not constitute fees for technical services and were chargeable to income-tax as royalty.
Final Decision: Questions Nos. 1 and 2 under reference are rendered in the affirmative and to questions Nos. 3 and 4 are rendered in the negative. Question No. 5 is thus answered accordingly.
( 1 ) IN this reference under Section 256 (1) of the Income-tax Act, 1961, the following questions have been referred to this court :" (1) Whether, on the facts and in the circumstances of the case and on a true interpretation of the relevant provisions of the Indo-German agreement for double taxation, prior to its amendment in 1984, the sums received by the assessee for design and technical services for the construction work, i. e. , the second bridge over the river Hooghly is chargeable to income-tax under the Income-tax Act, 1961 ? (2) Whether, on the facts and in the circumstances of the case and on a true interpretation of the Indo-German agreement for double taxation, the transfer of the drawings, designs and technical services under the collaboration agreement constituted an out and out transfer of such rights and as such the sums received therefor could be treated as royalty for the purpose of the Indo-German Double Taxation Agreement and liable to Indian Income-tax ? (3) Whether, the sum received by the assessee for the supply of designs, drawings and technical services constituted 'industrial and commercial profits' for the purpose of the Indo-German agreement for double taxation and, as such, the same is assessable under the Indian Income-tax Act, having regard to the admitted position that the assessee has no permanent establishment in India within the meaning of the said agreement ? (4) Whether even assuming though not admitting that the sums received by the assessee constitutes royalty, the agreement dated April 18, 1980, can be treated as a continuation of the agreement dated July 19, 1974, which had been duly approved by the Central Government and as such the said sum is liable to be assessed under the Indian Income-tax Act, in view of the proviso to Section 9 (1) (vi) of the Income-tax Act ? (5) Whether, in any event, the sum received by the assessee for the supply of designs, drawings and technical services constituted 'fees for technical services' for the purpose of the double taxation agreement and is chargeable to income-tax under the Income-tax Act, 1961 ?"
( 2 ) ON July 19, 1974, the assessee-company, a foreign company registered in West Germany with its registered office at Stuttgart, entered into a design contract with the Hooghly River Bridge Commissioners (for short "hrbc"), in connection with the design of the second Hooghly Bridge to be built over the river Hooghly. The HRBC was a statutory authority created by the State of West Bengal for the purpose of construction of the said bridge. Bhagirathi Bridge Construction Co. Ltd. (for short "brbc"), was a contractor engaged for designing and constructing the bridge. The said design contract came to an end on December 31, 1978, after extension. Another agreement was entered into between the assessee-company and the HRBC on April 18, 1980. For the accounting year ending on March 31, 1981, relevant to the assessment year 1981-82, the assessee filed a return of income showing "nil" income. It was stated that the assessee had no permanent establishment in India and the services were entirely rendered outside India. It was further claimed that the only income earned by the assessee-company was by way of fees for technical services within the meaning of Section 9 (1) (vii) of the Income-tax Act, 1961 (hereinafter referred to as "the Act" ). It was further claimed that the fees were payable in pursuance of the agreement made before April 1, 1976, and approved by the Central Government and as such the said fees were not chargeable under the proviso to Explanation 1 to Section 9 (1) (vii) of the Act. The Income-tax Officer was, however, of the opinion that the design contract executed on April 18, 1980, was a new agreement made after April 1, 1976, and, therefore, "the amount payable to the assessee by the resident in respect of the services rendered under the contract are taxable under the provisions of Sections 9 (1) (vi) and 9 (1) (vii
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