Citation Codes

Equivalent Citations

citation codes

Case Number

Tax Appeal No. 27 of 2001

Judges

Sushil Harkauli
D.N Patel, JJ.

Acts

Section 195(2) of the Income Tax Act, 1961
Indian Contract Act.
Section 143(1)(a)(ii)
Section 35-AB (1)
INCOME TAX ACT
Section 35-AB

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Smart Summary

Structured Summary of the Provided Opinion

Factual and Procedural Background

These consolidated appeals concern Assessment Years 1993–94, 1994–95 and 1995–96. The assessee (formerly "TATA Yodbgawa Ltd.", now "Tayo Rolls Ltd.") entered into a technical collaboration agreement with M/s. Eisenwerk Sulzau-Werfen, Austria ("ESW") under which the assessee would acquire know‑how from ESW for business use in return for a stated lump‑sum consideration of two million Deutsche Marks (DM), payable overseas in three equal instalments in terms of paragraph 13.1 of the agreement. Paragraph 13.5 of the agreement provided that taxes, if any, on the payment were to be borne by the assessee.

After approval of the collaboration agreement, the assessee applied under Section 195(2) of the Income Tax Act, 1961 to the Assessing Officer (AO) seeking permission to remit the consideration without deduction of tax at source. The AO directed the assessee to deduct tax at source under Section 195(2). The assessee nonetheless paid certain amounts as income tax on the remittances and also paid Research & Development Cess before making the remittances.

The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)] under Section 248; the CIT(A) allowed the appeals, holding that no income tax was payable on the remittances. The Department appealed to the Income Tax Appellate Tribunal (ITAT). While Department appeals to the ITAT were pending, the AO refunded the income tax amounts to the assessee (with interest) after obtaining indemnity bonds guaranteeing re‑deposit should the CIT(A)'s order be reversed. The ITAT dismissed the Department's appeals and rejected the Department's applications for reference under Section 256(1). The ITAT's order rejecting the reference applications was served on the assessee on 17‑5‑1999. The assessee credited the earlier refunds in its audited accounts for the financial year ending 31‑3‑2000 (assessment year 2000–01) in accordance with Section 41.

Legal Issues Presented

Whether deduction under Section 35‑AB was permissible only in respect of the remittances made to ESW (the two million DM) or whether it was permissible also in respect of the income tax paid by the assessee on those remittances under the collaboration agreement; in particular whether the phrase "lump sum consideration" in Section 35‑AB(1) includes taxes paid by the assessee under the agreement for acquisition of know‑how.
(a) Whether reversal of the AO's order under Section 195(2) by the CIT(A) would disentitle the assessee to claim deductions in respect of the income tax paid on the foreign remittances; and (b) whether such reversal would instead mean that deductions already allowed and refunded would have to be added to the assessee's income under Section 41 in the year when the reversal attained finality upon service of the ITAT's order rejecting the Department's reference application under Section 256(1).
Whether deductions under Section 35‑AB were liable to prima facie adjustment by the AO under Section 143(1)(a)(ii) of the Act.

Arguments of the Parties

Assessee's Arguments

The assessee contended that no income tax was payable on the remittances to ESW in view of the provisions of the Income Tax Act read with the International Agreement for avoidance of double taxation, and therefore it should not be required to have tax deducted under Section 195(2).
The assessee maintained that deduction under Section 35‑AB for lump‑sum consideration for acquisition of know‑how should include not only the two million DM payable to ESW but also the taxes and R&D cess that the assessee was contractually obliged to pay to effect the acquisition of know‑how.
The assessee argued that any refund made while appeals were pending (and secured by indemnity bonds) should not be treated as accruing to the assessee for tax purposes until the departmental appeals had attained finality (i.e., when the ITAT's rejection of the Department's reference application was served on 17‑5‑1999).
The assessee argued that the AO could not make prima facie adjustments under Section 143(1)(a)(ii) for debatable claims such as the present deduction under Section 35‑AB.

Department's / Revenue's Position (as reflected in the opinion)

The Assessing Officer directed deduction of tax at source under Section 195(2) when remittances were being made to ESW.
The Department appealed against the CIT(A)'s decision upholding the assessee's contention that no tax was payable; the Department sought further recourse before the ITAT and pursued applications for reference under Section 256(1) when ITAT dismissed the Department's appeals.
The AO made prima facie adjustments under Section 143(1)(a)(ii) in respect of the deduction claimed; this reflects the Department's position that the deduction claimed was incorrect or not allowable in the assessment years in question.
The Department (as recorded) treated R&D Cess and related amounts as part of the consideration in assessing tax consequences (the opinion notes the Department itself treated R&D Cess as part of ‘consideration’).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
McDowell and Co. Ltd. v. CTO ((1985) 154 ITR 148 : (1985) 3 SCC 230 : AIR 1986 SC 649)	Held that excise duty was part of the 'consideration' for the purposes of a transaction.	The court referred to McDowell to support the conclusion that taxes/cess payable as part of contractual obligations can form part of the 'consideration' for acquisition of know‑how under Section 35‑AB.
CIT v. Standard Polygraph Machines (Madras High Court) ((2000) 243 ITR 788)	Direct decision covering the question whether payments like taxes/cess formed part of consideration for acquisition (as relevant to Section 35‑AB).	The court cited this Madras High Court decision as another direct authority supporting the view that such payments can be regarded as part of lump‑sum consideration.
CIT v. Hindustan Housing and Land Development Trust Ltd. ((1986) 161 ITR 524 : (1986) 3 SCC 641 : AIR 1986 SC 1805)	Holding that compensation paid upon furnishing of a security bond for refund (in case of successful appeal) does not accrue absolutely until final determination of the appeal; right to income arises only after final determination.	The court relied on this Supreme Court decision as analogous authority to hold that the refunded tax (given subject to indemnity bonds while appeals were pending) did not accrue to the assessee for tax purposes until the CIT(A)'s reversal attained finality (i.e., 17‑5‑1999).
J.K. Synthetics Ltd. v. Bajpai (O.S), ITO ((1976) 105 ITR 864) (Allahabad HC), upheld by Union of India v. J.K. Synthetics Ltd. ((1993) 199 ITR 14 : 1993 Supp (3) SCC 566 : AIR 1994 SC 1541)	Held that liability under Section 41 would not arise finally until the tribunal had decided the matter; right to income does not crystallize before final adjudication.	The court cited these authorities to support the proposition that Section 41 does not require adding back refunds until departmental appeals attain finality and that doing so does not prejudice the Department.
Kvaverner John Brown Engg. (India) P. Ltd. v. ACIT ((2008) 305 ITR 103)	Supports the proposition that prima facie adjustments under Section 143(1)(a)(ii) are permissible only where incorrectness is apparent from information in the return; debatable claims are not subject to such adjustments.	The court cited this Supreme Court decision to hold that the AO was not justified in making prima facie adjustments in respect of the assessee's deduction claimed under Section 35‑AB, since the claim was debatable.

Court's Reasoning and Analysis

The court proceeded by addressing each posed question with reasoning constrained to the statutory text, contractual terms and controlling authorities cited in the opinion:

Interpretation of "consideration" under Section 35‑AB: The court read "consideration" in Section 35‑AB in the sense used in the Indian Contract Act — i.e., it encompasses the entire contractual obligation the assessee must perform to obtain the know‑how. On the facts, the assessee's contractual obligations included not only payment of two million DM but also payment of taxes (income tax and R&D Cess) specified in paragraph 13.5. Because ESW would not have relinquished know‑how absent payment of taxes (and the principal amount), those taxes were integral to the consideration. The court therefore held that the income tax paid under the agreement forms part of the "lump sum consideration" eligible for deduction under Section 35‑AB. The court reinforced this statutory and contractual construction with authority (McDowell; Standard Polygraph Machines).
Scope of "lump sum": The court clarified that the qualifier "lump sum" in Section 35‑AB is intended to exclude periodical or turnover‑based payments (e.g., royalties). A one‑time, fixed and specified payment for know‑how is encompassed by "lump sum" even if payable in instalments.
Effect of reversal and timing for addition under Section 41: The court held that Section 41 deals with situations where an allowance/deduction was made in an earlier year and the assessee subsequently obtains sum by way of remission or cessation of that liability. Applying Section 41 and the authorities cited (Hindustan Housing; J.K. Synthetics and its affirmation), the court reasoned that the CIT(A)'s reversal of the AO's direction to deduct TDS did not attain finality until 17‑5‑1999 when the ITAT served its order rejecting the Department's request for reference under Section 256(1). Because the refunds earlier made by the AO were conditional on indemnity bonds, the refunded amounts did not accrue absolutely to the assessee prior to finality. Consequently, the deduction under Section 35‑AB was properly allowable in the relevant assessment years (1993–94, 1994–95, 1995–96), and any obligation to add back the refunded amounts under Section 41 arose only on and after 17‑5‑1999 when the reversal became final.
Prima facie adjustments under Section 143(1)(a)(ii): The court applied the legal test that prima facie adjustments at the assessment stage are permissible only where the incorrectness of the claim is apparent from information in the return; debatable claims are not subject to such an adjustment. Relying on Kvaverner John Brown, the court held that the AO was not justified in making prima facie adjustments in respect of the deduction for income tax paid as part of the lump‑sum consideration, because the claim was debatable.
Ancillary point: The assessee also argued that a co‑equal Bench of the ITAT could not take a different view for a subsequent assessment year; the court observed that it was unnecessary to decide this contention in view of the other conclusions reached.

Holding and Implications

Holding: The court held that the taxes (income tax and R&D Cess) paid by the assessee pursuant to the collaboration agreement formed part of the "lump sum consideration" for acquisition of know‑how under Section 35‑AB and were therefore deductible in the relevant assessment years. The court further held that any refund of such tax amounts (made while departmental appeals were pending and secured by indemnity bond) became taxable under Section 41 only after the CIT(A)'s order attained finality upon service of the ITAT's order rejecting the Department's reference application on 17‑5‑1999. The court also held that the AO was not justified in making prima facie adjustments under Section 143(1)(a)(ii) in respect of this deduction.

Concretely, the court disposed of the appeals as follows: it dismissed the Department's appeals (Tax Appeals No. 29 & 30 of 2001; Tax Case No. 13 of 2001; Tax Appeal No. 26 of 2002) and allowed the assessee's appeal (Tax Appeal No. 27 of 2001).

Implications: The direct effect is that the assessee's deductions under Section 35‑AB for the relevant assessment years were held allowable to include taxes paid as part of the contractual consideration; additions under Section 41 were limited to the point of finality (17‑5‑1999) given the conditional nature of the refund. The opinion does not purport to lay down a broader new precedent beyond the conclusions applied to these facts; it relies on existing authorities to interpret the statutory provisions and apply them to the contractual arrangement and procedural posture in this case.

Order: "Order accordingly." (Court disposed of the appeals as set out above.)

Show full summary ...

Tata Yodogawa Ltd. v. Commissioner Of Income Tax, Ranchi & Ors.

1. These appeals relate to the Assessment Years 1993–94, 1994–95 and 1995–96. Some appeals are by the assessee, formerly known as ‘TATA Yodbgawa Ltd., now known as Tayo Rolls Ltd.’ (hereinafter referred to as the ‘assessee’). Other appeals are by the Income Tax Department. These appeals have been filed against the orders of the Income Tax Tribunal (hereinafter referred to as ‘ITAT’ for short).

2. Since common questions of law arise in these appeals, therefore, they are being disposed of by this common order.

3. The basic facts necessary for decision of these appeals are that the assessee entered into a technical collaboration agreement with M/s. Eisenwerk Sulzau-Werfen. Austria (hereinafter referred to as ‘ESW’). By that agreement the assessee was to acquire know-how from ESW against certain consideration, for the purposes of using the know-how in the business of the assessee.

4. Under the collaboration agreement the know-how was to be provided to the assessee by ESW, in consideration whereof the assessee was to pay a sum of two million Deutsche Marks (hereinafter referred as DM) overseas i.e Austria in three equal installments in the manner laid down in paragraph 13.1 of the agreement. In addition to the above, the agreement provided that taxes, if any, on the aforesaid payment were to be born by the assessee vide paragraph No. 13.5 of the said agreement.

5. After approval of the said technical collaboration agreement by the appropriate authorities, the assessee applied under Section 195(2) of the Income Tax Act, 1961 (hereinafter, referred to as the ‘Act’ for short) to the Assessing Officer (hereinafter referred to as AO), for grant of permission to remit the said consideration without deduction of tax at source.

6. The AO passed orders directing the assessee to deduct TDS under Section 195(2) of the Act directing the assessee to deduct TDS while remitting the payments to ESW.

7. As a result the assessee paid certain amounts by way of income tax on the remittances and also paid some further amounts by way of ‘Research and Development Cess before making the remittances.

8. The assessee filed appeals under Section 248 of the Act against the orders passed by the AO under Section 195(2) of the Act. In the appeals the assessee asserted that no income tax was payable on the remittances to ESW because of the provisions of the Act read with the International Agreement for avoidance of double taxation.

9. The appeals of the assessee were allowed by the CIT(A) upholding the aforesaid contention of the assessee and holding that no income tax was payable on the remittances. However, the Income Tax Department went in appeal before the ITAT against the orders of the CIT(A). Because those appeals filed by the Department were pending before the ITAT therefore the AO refunded the income tax deposited by the assessee along with the interest accrued on the said tax in terms of Section 244-A, after obtaining indemnity bonds guaranteeing redeposit of the refunded tax and interest, in case the orders of the CIT(A) were reversed by the ITAT.

10. The ITAT dismissed the appeals and thereafter also rejected the applications of the department seeking reference under Section 256(1) of the Act (as the said section stood in the relevant years). The orders rejecting the reference applications of the Department under Section 256(1) by the ITAT was served upon the assessee on 17-5-1999 i.e to say in the financial year relevant to the assessment year 2000–01. Thereupon, the assessee credited the refunded amounts in its audited accounts drawn up for the said financial year ending 31-3-2000 corresponding to the assessment year 2000–01 in accordance with Section 41 of the Act.

11. The following questions of law have been raised in these appeals:

(1) Whether deduction under Section 35-AB was permissible only in respect of the remittances made by the assessee to ESW or it was permissible in respect of the income tax paid by the assessee on the said remittances in terms of the collaboration agreement? To be more specific the question is whether the phrase “lump sum consideration” as used in Section 35-AB (1) would include the taxes paid by the assessee under the agreement for acquisition of know-how.

(2)(a) Whether the reversal of the order of the AO, passed under Section 195(2), by the CIT(A) in appeal under Section 248, would disentitle the assessee to claim the deductions in respect of the income tax paid by the assessee on the foreign remittances? (2)(b) Whether the said reversal by the CIT(A) would not have the effect of disallowing the deductions, but the deductions claimed allowed and refunded would have to be added to the income of the assessee under Section 41 in the year when the reversal by the CIT(A) attained finality upon communication/service of the order rejecting the Department's application under Section 256(1)?

(3) Whether the deductions under Section 35AB were liable for prima facie adjustment contemplated under Section 143(1)(a)(ii) of the Act by the AO?

12. So far as the first question is concerned, we find from Section 35-AB that deduction is permissible in respect of any lump sum consideration for acquiring any know-how for use for the purposes of the assessee's business.

13. ‘Consideration’ in Section 35-AB is to be understood in the sense in which it has been used in the, Indian Contract Act. Therefore, the word “consideration” would include the entire obligation of the assessee, without which the assessee would not be able to acquire the know-how.

14. On the facts of this case, the obligation of the assessee under the agreement with ESW extended not merely to remitting the amount of two million DM to ESW, but also extended to payment of taxes which would include the income tax as well as the R&D Cess. It seems quite obvious that if the assessee had not paid the tax or the R&D Cess, and had merely made payment of the two million DM to ESW, the latter would not be obliged to part with the know-how in view of the terms of the collaboration agreement. Therefore, payment of these taxes are as integral a part of the ‘consideration’ as the payment of two million DM. In fact the income tax department is itself treating not merely the amount of two million DM paid to ESW but also the R&D Cess, as part of ‘consideration’. In these circumstances, we find no logical reason for not treating the income tax paid by the assessee in terms of the collaboration agreement as part of the ‘consideration’ for acquisition of the know-how. We hold accordingly and answer the first question as above. A reference in this connection may be made to the decision of the Supreme Court in the case of McDowell and Co. Ltd. v. CTO reported in (1985) 154 ITR 148 : (1985) 3 SCC 230 : (AIR 1986 SC 649) wherein it was held that excise duty was part of the ‘consideration’: Another direct decision covering the question is by the Madras High Court in the case of CIT v. Standard Polygraph Machines reported in (2000) 243 ITR 788.

15. Before leaving this issue we may say that the words “lump sum” as used before the word “consideration” in Section 35AB, only exclude periodical or turnover based payments like royalty etc., and any one time payment for the know how would fall within the expression “lump sum” if it is fixed and specified in the agreement, although it may be payable in installments.

16. So far as the second question is concerned, we find that Section 41 of the Act takes complete care of situation obtaining in this case. For ready reference, Section 4I(1)(a) which is relevant to the present case is quoted below:

“41(1) Where an allowance, or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,—

(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or

17. Further, we find that the reversal order by the CIT(A) in appeal under Section 248 against the orders under Section 195(2) had not attained finality till much after the relevant assessment years i.e 1993–94, 1994- 95 and 1995–96. The said reversal by the CIT(A) attained finality only on 17-5-1999 when the order of the ITAT rejecting the reference application of the Department under Section 256(1) was served upon the assessee. We therefore, answer the second question by holding that the deduction under Section 35AB was liable to be allowed in the relevant assessment years and the refund, consequent upon the reversal of the AO's TDS orders under Section 195 by the CIT(A), became liable to be added under Section 41 only on and after 17-5-1999 when such reversal order attained finality to the knowledge of the assessee. This is more so because of the refund being conditional upon furnishing of the indemnity bond. In this connection reference may be made to the decision of the Supreme Court in the case of CIT v. Hindustan Housing and Land Development Trust Ltd. Reported in (1986) 161 ITR 524 : (1986) 3 SCC 641 : (AIR 1986 SC 1805). In that case it was held by the Supreme Court that in case of compulsory acquisition of land, the amount paid by way of compensation upon furnishing of security bond for refund of the compensation in the event of appeal being allowed did not accrue and the land owner did not have the absolute right to the compensation till the appeal had been decided. The Supreme Court held that the right to such income in the nature of compensation would arise or accrue only after final determination of the appeal and therefore it was not liable to tax till such final determination. Subsequently, the Income-tax Act has been amended to take care of such situations in accordance with the law laid down by the Supreme Court.

18. Another case cited at the bar in the same context is the decision of the Allahabad High Court in the case of J.K Synthetics Ltd. v. Bajpai (O.S), ITO reported in (1976) 105 ITR 864 which has been upheld by the Supreme Court in the case of Union of India v. J.K Synthetics Ltd. reported in ((1993) 199 ITR 14 : 1993 Supp (3) SCC 566 : (AIR 1994 SC 1541). It has been held in that case that the liability under Section 41 would not arise finally till the tribunal has decided the matter. It was also held by the Supreme Court that there would be no prejudice to the department by taking this view.

19. So far as the third question is concerned, it is trite that under Section 143(1)(a)(ii) prima facie adjustment is per-missible only in respect of claims, the incorrectness of which is apparent from any information in the return. Debatable claims are not liable to such prima facie adjustments. We, therefore, hold that the AO was not justified in making prima facie adjustments in respect of the deduction claimed in respect of the income tax paid by the assessee as part of the lump sum consideration for acquiring the know-how.

20. For support to the above proposition reference may be made to the decision of the Supreme Court in the case of Kvaverner John Brown Engg. (India) P. Ltd. v. Assistant Commissioner of Income-Tax reported in (2008) 305 ITR 103.

21. Apart from the above, another argument were advanced from the side of the as-. sessee that it was not open to a co-equal Bench of the ITAT to defer and take a different view for a subsequent assessment year in respect of the same assessee. However, it is not necessary to go into that argument in view of what has been stated above.

22. In view of our answers to the questions which arise, we dismiss the appeals of the Department being Tax Appeals No. 29 and 30 of 2001, Tax Case No. 13 of 2001 and Tax Appeal No. 26-of 2002 and we allow the appeal of the assessee being Tax Appeal No. 27 of 2001.

23. Order accordingly.

Tata Yodogawa Ltd. v. Commissioner Of Income Tax, Ranchi & Ors.

Structured Summary of the Provided Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Department's / Revenue's Position (as reflected in the opinion)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Tata Yodogawa Ltd. v. Commissioner Of Income Tax, Ranchi & Ors.

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