BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI

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P R E S E N T

Hon’ble Mr. Justice Syed Shah Mohammed Quadri (Chairman) Mr. K.D. Singh (Member)

Monday, the sixth December two thousand four

A.A.R. NO. 617 OF 2003

Name & address of Timken India Limited the applicant Bara P.O. Agrico,

Jamshedpur 831009 Jharkhand

Commissioner concerned Commissioner of Income-tax-I Kolkata

Present for the Department Mr. Sanjay Puri Addl. DIT (International Taxation)

Present for the Applicant Mr. Rahul Krishna Mitra, CA Mr. Parikshit Datta, CA

R U L I N G (By Mr. Justice Syed Shah Mohammed Quadri)

.

This is an application under section 245Q(1) of the Income

Tax Act, 1961 (for short the ‘Act’). The applicant –Timken India

Limited- 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

1

engaged in the business, inter alia, of manufacture and sale of

bearings and other ancillary products. On August 2, 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 March 21,

2002, before remitting the said sum of US$ 145,610.62, the

applicant approached the assessing officer 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 deductable would be zero.

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It was also pleaded before the assessing officer that the said sum

did not per se constitute taxable income of Timken-USA in the light

of India-USA tax treaty. The assessing officer declined to examine

whether the said sum of US$ 145,610.62 had an element of profit

embedded therein, taking the view that such an exercise was not

permissible at the stage of issuing an order under section 195(2) of

the Act and that the same would be subject matter of an enquiry in

the course of a regular assessment of the recipient. It was,

however, ordered that the applicant should withhold income tax at

the rate in force within the meaning of section 2(37A)(iii) and

section 115A read with sections 44D and 9(1)(vii) of the Act.

Aggrieved by the said order of the assessing officer the applicant

filed an appeal under section 248 of the Act before the

Commissioner (Appeals) VIII, Kolkata. With a view to approach the

Authority, the applicant withdrew the appeal on June 5, 2003 and

filed the present application seeking advance ruling of the Authority

on the following questions:-

1. Whether the fees payable by M/s. Timken India Limited

(hereinafter referred to as the “applicant”) amounting to

US $ 756,728.26 in favour of M/s. The Timken

Company (hereinafter referred to as “Timken”) which is

a company incorporated in the United State of America

(hereinafter referred to as ‘USA”) and accordingly a tax

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resident of USA, in consideration for Timken rendering

certain services in USA in favour of the applicant,

pursuant to an agreement entered into between the two

parties on 2nd August, 2000 where such sum of US $

756,728.26 represents only the recovery or

imbursement of the costs or expenses actually incurred

by Timken while rendering the said services, are

subject to income tax in the hands of Timken in India

and accordingly whether the applicant has any

obligation to withhold income tax thereon under section

195(1) of the Income-tax Act, 1961 (hereinafter referred

to as the “Act”).

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 dated 2nd August,

2000 would not be subject to tax in India in the hands

of Timken and accordingly whether the applicant would

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not have any obligation to withhold income tax thereon

under section 195(1) of the Act.

3. Whether, in any event, in view of the fact that 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 dated

2nd August, 2000, does not actually contain any

element of profit or income in the hands of Timken, the

said sum would not be subject to tax in India in the

hands of Timken and accordingly whether the

applicant does not have any obligation to withhold

income tax thereon under section 195(1) of the Act?

4. 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 read with 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% of such fees, an option

would be deemed to be read in the provisions of the Act

5

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 vs. A. Sanayasi Rao & others

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?

5. Whether the income tax deducted and deposited by the

applicant amounting to Rs.1,059,100 on the Rupee

equivalent of an amount of US $ 145,610.62 being a

part of the aggregate sum of US $ 756,728.26 which

has been remitted by the applicant in favour of Timken

till date, where such deduction and deposit of income

tax by the applicant was as per the insistence of the

Assessing Officer through his order passed under

section 195(2) of the Act dated 10th May, 2002

incidentally with respect to which no appeal or other

petition is currently pending before any income tax

authority or the income tax appellate tribunal or any

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court, is liable to be refunded in favour of the applicant

on the ground that the sum of US $ 145,610.62 did not

attract withholding of tax under section 195(1) of the

Act?

At the stage of hearing of the application, the applicant did

not press question no. 5 and prayed for permission to include two

more questions. The plea is that the proposed questions are

germane to the questions initially framed and that they do not

require investigation into any fresh facts and they are only

questions of law. The additional questions are permitted and they

read as follows:-

(a) Whether notwithstanding the fact that the moneys

receivable by M/s. The Timken Company (hereinafter

referred to as “Timken”) which is a company

incorporated in the United State of America

(hereinafter referred to as “USA”) and accordingly a

tax resident of USA, from M/s. Timken India Limited

(hereinafter referred to as the “applicant”) which is a

company incorporated in India and accordingly a tax

resident of India, amounting to US $ 756,728.26 in

pursuance of an agreement entered into between the

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two parties dated 2nd August, 2000 constitute “fees

for technical services” within the meaning of section

9(1)(vii) of the Income-tax Act, 1961 (hereinafter

referred to as the “Act”) and further notwithstanding

the fact that section 44D read with section 115A of

the Act provide for a gross basis form of taxation of

such sum in the hands of Timken at the rate of 20%

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 vs. A. Sanyasi Rao & others in

the context of presumptive basis of taxation, with the

result that the said sum of US $ 756,728.26 would be

taxable in India in the hands of Timken on net basis,

namely, after deducting legitimate expenses incurred

by Timken with respect thereto?

(b) Whether, in the event the additional question (a) is

answered in the affirmative, the applicant would be

required to withhold income-tax under section 195(1)

of the Act with reference to the net income

embedded in the sum of US $ 756,728.26 and for

this purpose, the Assessing Officer should compute

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the quantum of withholding tax under section 195(1)

of the Act with reference to the net income

embedded in the sum of US $ 756,728.26 on an

application made by the applicant before the

assessing Officer under section 195(2) of the Act,

which Timken had incidentally done vide its letter

dated 21st March, 2002?

It will be relevant to note here that the convention between

the Government of the United States of America and the

Government of the Republic of India for the avoidance of double

taxation and the prevention of fiscal evasion with respect to taxes

on income, was concluded on 18th December, 1990 vide notification

No. GSR 990(E) dated 20th December 1990 [subsequently it was

corrected by the notification dated 12.7.1991 (hereinafter the same

shall be referred to as “India-USA treaty”)].

2. The commissioner offered the comments and additional

comments. The substance of the comments is as follows:-

The agreement between the parties dated 2nd August, 2000,

shows that Timken-USA has to render services including

management services, system development and computer

usage, communication services, engineering services, process

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in tool design services, manufacturing services etc. Any

payment for providing these services is “fees for technical

services” as envisaged in explanation (2) to section 9(1)(vii) of

the Act and “fee for included services” as envisaged in article

12(4) of the India-USA treaty, which would be the deemed

income of Timken-USA accruing or arising in India within the

meaning of sub-section(1) of Section-(9) of the Act. The

definition of “fees for technical services” in explanation 2 to

section 9(1)(vii) of the Act has wider connotation as it includes

every possible service whether managerial, technical or

consultancy in nature, irrespective of the place where the

services are rendered. The amount of fees should be deemed

to accrue or arise in India if the payments are made for services

which are utilized in business or profession carried on by the

payers in India or for the purpose of making any income from a

source in India. As per section 115A the rate of tax applicable

to a foreign company in respect of the income, in the nature of

fees for technical services, is 20% of gross receipts. The

applicant may take aid of the judgement of the Supreme Court

in Union of India v. A. Sanyasi Rao and others [219 ITR 330

(SC)] (1), at the stage of assessment but at the stage of

withholding tax under section 195, it would not apply. Section

195 speaks of any sum and not income; in view of the decision

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of the Supreme Court in the case of Transmission Corporation

of AP Limited v. CIT [239 ITR 587] (2), it is not open to the

applicant to urge that section 195(1) does not apply to the

payment of fees by the applicant as it is in the nature of

reimbursement and contains no element of income. The

Authority for Advance Ruling in the case of Danfoss Industries

Limited [268 ITR 01] (3) also held that the applicant was liable to

pay for services to be provided by non-resident which was

equivalent to the expenses incurred in providing the services

even when there is no profit element. From the assessment

record of the applicant, it is noted that the parties entered into

collaboration agreement pursuant to which there was transfer of

technology from Timken-USA to the applicant on a continuing

basis with regular monitoring. By the agreement in question

Timken – USA agreed to provide certain services including

transfer of technology etc. for the “proper conduct of the

applicant’s objectives” to improve applicant’s effectiveness in

the use of such manufacturing and other processes. These

services, though provided under a separate agreement,

apparently constitute incidental services to the collaboration

agreement for transfer of technology, therefore, the payment

must be treated under clause (a) of article 12(4) of India-US

Treaty as fee for technical services. Even otherwise payment

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against providing services can also be considered as fee for

included services under clause (b) of article 12(4) of India-US

Treaty. Consequently, such payment is subject to tax in India

@ 15% on the gross amount in terms of the Treaty and

accordingly under section 195(1), the applicant has to withhold

the tax. The decision of the Supreme Court in Sanyasi Rao

[supra (1)] case has no application to the facts of the present

case.

3. The main thrust of arguments of Mr. Rahul Krishna Mitra for

the applicant, is that services were provided to the applicant without

any mark up or profit and in fact what was being paid by the

applicant was the reimbursement of the actual cost incurred by

Timken- USA, therefore, section 195(1) of the Act would have no

application. It is further contended that in case of presumptive

basis of taxation an option for computation of profits under section

28 to 43C of the Act should be read in section 44D, in the light of

the decision of the Supreme Court in Union of India v. A. Sanyasi

Rao,[supra (1)] wherein such an option was read in section 44AC.

Mr. Sanjay Puri for the Commissioner argued that in the case of

foreign enterprises, it would be impossible for an assessing officer

to ascertain the truth of the expenditure claimed by them, therefore,

the Parliament provided an alternative basis for assessment of tax

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on presumptive basis. It was submitted that Sanyasi Rao was a

case of domestic enterprise and it had no application to a foreign

company which would constitute a different class.

It would be apt to commence our discussion on the basis

of the position summed up by the applicant in Annexure III to the

application which is reiterated in the written submission filed on

22nd April, 2004. The relevant portion of Annexure III is

reproduced below:

”In other words, the scheme of taxing income inter

alia in the form of “fees for technical services” in the

hands of foreign companies on gross basis but at a

reduced rate of tax is akin to a presumptive

taxation, which the Parliament adopts in various

places to get over the difficulties faced in quantifying

and establishing the actual expenses incurred for

earning the income for which deduction is available

under the provisions of the Act and accordingly in

computing the net income in such cases.

If one applies the said scheme of presumptive

taxation literally to the facts of the instant case, the

unavoidable conclusion, which shall emerge is that

the entire sum of US $ 756,728.26 to be remitted by

13

the applicant in favour of Timken shall attract

withholding of income tax in India at the rate of 20%

on gross basis, notwithstanding the fact that there

may not be any element of income actually embedded

in the said sum in the hands of Timken for the reason

that Timken has actually charged by the applicant for

the services rendered by it in terms of the service

agreement to cover the actual costs incurred by it in

rendering the services without adding any mark up or

profit element on such costs. In the light of the facts

of the present case, such presumptive taxation is

undoubtedly harsh and unfair on the part of Timken,

since when under the normal procedure for taxation,

where Timken would have been otherwise required to

pay tax on net basis at the rate of 40%, there would

not have been any incidence of tax on Timken for the

reason that there would not have been any positive

income in the hands of Timken, whereas, under the

scheme of presumptive taxation, Timken would be

required to pay income-tax at the rate of 20% on the

gross amount of the fees.”

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This takes us to the question: whether having regard to the

decision of the Hon’ble Supreme Court in the Sanyasi Rao case

[supra(1)] an option for the assessee can be read in section 44D of

the Act either to pay the tax at the reduced rate under the scheme

of presumptive taxation or to have profits computed under

sections 28 to 43C of the Act.

4. We shall first notice provisions of sections 44AC and 44D

and then refer to the decision of the Hon’ble Supreme Court in

Union of India vs.A.Sanayasi Rao & others [supra (1)]. Section

44AC was inserted by Direct Tax Laws (Amendment) Act. 1988,

with effect from 1.4.1989 and was omitted by the Finance Act,

1992, with effect from 1.4.1993. It had a short life of 4 years. The

salient features of section 44AC are : (1) It is special provision

enacted for computing profits and gains from the business of

trading in certain specified goods; (2) it commences with a

nonobstante clause and excludes application of sections 28 to 43C

of the Act; (3) it applies to an assessee, being a person other than

a public sector company (the buyer), obtaining in any sale by way

of auction, tender or any other mode, conducted by any other

person or his agent (the seller); (4) it relates to specified goods in

the nature of alcoholic liquor for human consumption (other than

Indian-made foreign liquor) and forest produce; (5) it provides that

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a sum equal to 40% of the amount paid or payable by the buyer as

the purchase price in respect of alcoholic liquor and the

percentages specified in the table in respect of different forest

produce, shall be deemed to be the profits and gains of the buyer

from the business of trading in such goods chargeable to tax under

the head “Profits and gains of business or profession”.

5. Section 44D which is the subject matter of the present

discussion, is in the following terms:

44D. Notwithstanding anything to the contrary contained in sections 28 to 44C, in the case of an assessee, being a foreign company,- (a) the deductions admissible under the said sections in

computing the income by way of royalty or fees for technical services received [from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern] before the Ist 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, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property;

(b) no deduction in respect of any expenditure or

allowance shall be allowed under any of the said sections in computing the income by way of royalty or fees for technical services received [from Government nor an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern] after the 31st day of March, 1976 [but before the Ist day of April, 2003];

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(c) xxxx

(d) xxxx

Explanation – for the purpose of this section.,- (a) “fees for technical services” shall have the same

meaning as in [Explanation 2] to clause (vii) of sub-section(1) of section 9;

(b) “foreign company’ shall have the same meaning as in

section 80B;

(c) “royalty’ shall have the same meaning as in [Explanation 2] to clause (vi) of sub-section(1) of section 9;

(d) royalty received [from Government or an Indian

concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern] after the 31st day of March, 1976, shall be deemed to have been received in pursuance of an agreement made before the Ist day of April, 1976, if such agreement is deemed, for the purposes of the proviso to clause (vi) of sub-section(1) of section 9, to have been made before the Ist day of April, 1976].

From a perusal of the provision quoted above, the following

features are evident:

(1) it is a special provision for computing income by way

of royalties, fees for technical services; etc.;

(2) it commences with a nonobstante clause and

excludes deductions admissible under sections 28 to

44C of the Act in computing income;

(3) it applies to an assessee being a foreign company;

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(4)(A) in respect of an agreement between a foreign

company and the Government of India or an Indian

concern entered into before 1.4.1976, it places a

ceiling of 20% of the amount of royalty or fees for

technical services as allowable deductions under

sections 28 to 44C of the Act for computing the

income by way of royalty or fee for technical services

received from Government or an Indian concern;

(B) in respect of agreement entered into after 31st

March,1976 but before 1st day April, 2003, no

deduction is allowed under sections 28 to 44C in

computing the income by way of royalty or fees for

technical services received from Government or an

Indian concern.

The agreement in question is covered under this clause

since it was entered into on 2.8.2000

6. A comparison of section 44AC and section 44D shows that

both of them deal with computation of income; features (1) and (2)

noted above, of these provisions are similar. In regard to the third

feature, whereas section 44AC deals with a resident assessee

(other than a public sector company), section 44D deals with an

assessee being a foreign company; it needs to be noticed here

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that under section 44AC within the same category of assessees

(domestic assessees) different treatment was meted out to different

traders in regard to allowability of expenses under section 28 to

43C for computation of income, such a position does not exist in

section 44D which treats all asessees – foreign companies – alike.

The fourth aspect is section 44AC concerns itself with trading in

alcoholic liquor for human consumption and forest produce and

sec. 44D with royalties and fees for technical services. The last

point relates to computation of income, Section 44AC provides that

40% of purchase price shall be deemed ‘profits and gains’ of the

buyer and section 44D says that in computing income by way of

royalty or fees for technical services received from Government or

any Indian concern ( in regard to agreements entered into before

1.4.1976) only 20% of the amount of royalty or fees for technical

services shall be allowed as deduction under sections 28 to 44C of

the Act; (in regard to agreements entered into between 31.3.1976

and 1.4.2003) it enjoins that no deduction under section 28 to 44C

shall be allowed, however, relief of reduced rate of tax is provided

under sec. 115A of the Act.

Section 44DA deals with admissibility of deductions in

respect of agreements after 1.4.2003, with which we are not

concerned here.

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7. In Sanyasi Rao’s case [supra(1)] constitutional validity of

sections 44AC and 206C of the Act was challenged in a batch of

writ petitions under the Article 32 of the Constitution before the

Hon’ble Supreme Court on the ground that they were ultra vires

and beyond the legislative competence as well as violative of

Article 14 of the Constitution of India. The same point was raised

in some civil appeals which were tagged with the writ petitions. The

Hon’ble Supreme Court observed, “Considered in the light of the

practical difficulties envisaged by the Revenue to locate persons

and to collect the tax due in certain trades, if the legislature in its

wisdom thought that it would facilitate the collection of the tax due

from such specified traders on a “presumptive basis”, there is

nothing in the said legislative measure to offend article 14 of the

Constitution”.

In order to prevent evasion of tax legitimately due to the

state from persons carrying on particular trade, sections 44AC and

206C were enacted so as to facilitate the collection of tax on

income at the very inception itself or at anterior stage and that

those provisions were akin to advance tax. It was pointed out that

the basis of charge was laid down in sections 4 to 9 and section

44AC and section 206C were only machinery provisions and not

charging sections. What was brought to tax, though levied with

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reference to the purchase price and at an earlier point, was

nonetheless income liable to be taxed under the Income tax Act.

While reaffirming that Article 14 of the Constitution applied to tax

law as well and that classification for taxation and application of

article 14, in that context, must be viewed liberally, it was held that

section 44AC read with section 206C was not hit by article 14 of

the Constitution.

In our view the principle laid down by the Hon’ble Supreme

Court in that case in interpreting section 44AC cannot be called in

aid in interpreting section 44D. The Hon’ble Supreme Court itself

observed in regard to section 44D, among other sections that they

relate to a non-resident carrying on business in India and are not

much relevant in construing sections 44AC and 206C of the Act,

therefore, it would be futile to contend that interpretation placed on

sections 44AC and 206C would equally apply to 44D of the Act. In

construing 44AC, the Hon’ble Supreme Court observed thus:-

“Counsel for the Revenue brought to our notice sections

44B, 44BB, 44BBA and 44D and contended that there are

other similar provisions in the Act. We should state that they

relate to non-residents carrying on business in India and

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are not much relevant in construing sections 44AC and 206C

of the Act”.

In that case domestic enterprises were involved in the

commercial activities of purchasing goods in auctions or by filing

tenders. Presumptive taxation was resorted to at the initial stage

with reference to the purchase price on the ground that it was

difficult for the Revenue to assess and recover the tax due from the

bidders or purchasers in the case of goods mentioned therein. If

they are before the assessing officer seeking regular assessment,

there is no reason as to why they should be deprived of the benefit

of sections 28 to 43C for computing their income. The assessees

dealing in a particular trade, subject matter of section 44AC, were

treated differently in regard to relief under sections 28-43C, so it

was held to be unreasonable. Section 44D deals with foreign

companies and no such different treatment is given within the

same class in that provision. The following observation of Hon’ble

Supreme Court is apt to be noted:-

“In the matter of granting various reliefs provided under

sections 28 to 43C, the assessees carrying on business are

similarly placed and should there be a law, negativing such

valuable reliefs to a particular trade or business, it should be

shown to have some basis fair and rational. It has not been

shown as to why the persons carrying on business in the

particular goods specified in section 44AC are denied the

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reliefs available to others. The Revenue puts no plea

forward that these trades are distinct and different even for

the grant of reliefs under sections 28 to 43C of the Act. The

denial of such reliefs to trades specified in section 44AC,

available to other assessees, has no nexus to the object

sought to be achieved by the Legislature.” (emphasis added)

It was not a case of the assessing officer experiencing

difficulty in ascertaining the truth or otherwise of claim of

expenditure/allowance in respect of foreign companies. The

difficulty experienced in the case of assesses under section 44D

was verification of claim of expenses by foreign companies and that

plight of the assessing officer is not common to section 44AC and

section 44D. It is evident that the ratio of the decision of the Hon’ble

Supreme Court is that denial of relief available under sections 28 to

43C to the class of assessees in section 44AC is unreasonable and

therefore that relief was made available in it. The decision does not

lay down that in every provision dealing with presumptive taxation,

where relief under the said provisions is denied, an option to the

assessee should be read in them to avail the relief under sec. 28-

43C of the Act. For all these reasons it is not possible to read any

option for the assessee in section 44D of that. That section treats all

foreign companies alike and has to be given effect to as it stands.

23

Relying upon the decisions of Sankar Lal Das v. State of

West Bengal (226 ITR (AT 35 (WBTT) (4) and Waterman steamship

Corporation vs. ITO – in the Income-tax Appellate Tribunal, Mumbai

Bench-D, Mumbai – I.T.A.4740/Bom./ 1978 & ITA

No.2888/Bom./1988 (5) (unreported), Mr. Mitra vehemently argued

that following the decision of Supreme Court in Saniyasi Rao’s case

[supra (1)] the said Tribunals read similar options in respect of

deductions under sections 28 to 44C and we should also read in

section 44D such an option to the assessee to avail benefit of those

sections.

We find it difficult to accede to this contention. It must be

borne in mind that when the constitutional validity of a provision in

an Act is questioned before a High Court or the Supreme Court, the

court may instead of striking down the impugned provision, read it

down to save the constitutionality of the provision in the Act. Such a

power can be exercised only by courts/tribunal vested with the

jurisdiction to strike down a statute or a provision thereof being ultra

vires or unconstitutional. A Tribunal which is itself the creature of a

statute, not having such specific constitutional power, cannot

arrogate to itself the power to pronounce upon the constitutional

validity of a provision of or the statute so it has to give effect to the

provisions of the Act, which represent the will of the legislature.

24

We shall now refer to the cases relied upon by the applicant.

In Shankar Lal Das vs. State of West Bengal [supra (4)], the

question before the West Bengal Tribunal was whether the proviso

to clause (1) of sub-section (1) of section 7 of the Bengal

Agricultural Income-tax Act, 1944 was violative of article 14 of the

Constitution. It was noted by the Tribunal that an application under

section 8 of the West Bengal Tribunal Act, 1987 was in the nature

of an application under article 226 of the Constitution of India. It

was in exercise of power in the nature of article 226 of the

Constitution that the Tribunal found the impugned proviso to be

discriminatory and relying upon the decision of the Supreme Court

in Sanyasi Rao’s case held that it would be read down giving an

option to the assessees being individuals, Hindu undivided families,

who cultivated land by themselves (in the case of individuals) or by

members of families (in the case of Hindu undivided families) with

or without the aid of servants or hired laborers or of both, to either

choose the procedure laid down in the proviso in question, or to

choose the general procedure to prove in the regular manner the

cost actually incurred under clause (1) of sub-section (1) of section

7 like other assessees. Admittedly the Authority is not vested with

similar powers.

In Waterman Steamship case [supra(5)], the ITAT Mumbai

Bench-D, was dealing with the case of an assessee which was a

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non-resident shipping company. It was contended by the applicant

before the tribunal that the opening words of section 44AC and 44B

were similar in nature for computing the profits in regard to the

certain transactions and as the Hon’ble Supreme Court in Saniyasi

Rao’s case [supra (1)] held that the nonobstante did not dispense

with regular assessment as provided in accordance with the section

28 to 43C of the Act, similar direction for regular assessment

should be issued in favour of the applicant. That submission was

accepted by the Tribunal holding as follows:

“As observed by the Supreme Court, the right of claim for

making the assessments in accordance with the provisions

of the Act like sections 28 to 43A, not being taken away, we

have to uphold the claim of the assessee to this extent.

Because the assessing authority had not gone into this

proposition of loss being operation losses, etc. the same

needs to be examined at the level of the assessing officer for

which purpose we set aside all the assessments. The

assessee would be entitled to place and prove that the real

income was a loss and the assessing officer would be acting

within his right to evaluate such a loss and conclude the

assessments.”

We are not persuaded to accept the reasoning of the

Tribunal. We have already pointed out above that when section

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44B and section 44D, among other provisions, were brought to the

notice of the Hon’ble Supreme Court in Saniyasi Rao’s case

[supra(1)] it was observed that as those provisions related to non-

residents carrying on business in India, they were not much

relevant in construing sections 44AC and 206C. Further, in that

case exclusion of sections 28 to 43C, was found to be

unreasonable because among traders of the same goods, similarly

placed, only those who purchased the specified goods in auction or

by tender were denied the benefit of the aforementioned

provisions. It was pointed out by the Hon’ble Supreme Court that

no material was placed to justify discrimination between traders in

the same goods who purchased the goods in auction or by tender

and those who purchased the goods otherwise. It cannot be lost

sight of that section 44AC was held to be an adjunct and

explanatory to section 206C of the Act. It is apt to note that sub-

section (4) of section 206C provided for assessment of the income

under the Act for the assessment year for which such income was

assessable. There the Hon’ble Supreme Court held that it did not

dispense with regular assessment. The observations of the

Supreme Court reads as follows:

“Hence, to the extent the non-obstante clause in

section 44AC excludes the provisions of sections 28

to 43C (applicable to all assessees), the provisions

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are unreasonable. Section 44AC is a valid piece of

legislation and is an adjunct to and expalantory to

section 206C. It does not dispense with the regular

assessment, as provided in accordance with sections

28 to 43C of the Act.”

In our view merely because a provision commences with a

nonobstante clause and excludes sections 28 to 43C as in section

44AC is no reason to read an option for the assessee to avail those

provisions and that is not the ratio of the decision of the Hon’ble

Supreme Court in Sanyasi Rao’s case [supra (1)]. In the decision of

the Tribunal, no provision was referred to to justify the conclusion

that the assessment was not dispensed with.

For the above mentioned reason, the said decisions of the

Tribunals, are of no assistance to the applicant.

It is relevant to note that sub-section (3) of section 115A also

mandates that no deduction in respect of any expenditure/allowance

under sections 28 to 44C and section 57 shall be allowed to the

assessee in computing his or its income referred to sub-section (1)

of that section. We may add that clause (b) of sub-section (1) of

Section 115A refers to the total income of a non-resident (not being

a company) or a foreign company by way of “royalty” or “fees for

technical services”, other than the income referred to in sub-section

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(1) of section 44DA, therefore, viewed from any angle, the applicant

will not be able to claim deduction under section 28 to 44C in

computing its income being fee for technical services.

In regard to the section 195(1), the applicant says,

“applicant does not deny the fact that remittances per se are

covered by the ambit of withholding tax under section 195(1) of the

Act.” However, it is the contention of the applicant that in view of

the procedure laid down by the Hon’ble Supreme Court in Saniyasi

Rao’s case [supra(1)] and that of the Mumbai Tribunal in the case

of Waterman Steamship Corporation [supra(5)] and in view of the

deletion of proviso to section 195(2) of the Act from 1.4.1991, the

quantum of the net income embedded in the sum in question for

withholding tax ought to be computed.

In Danfoss Industries Pvt.Ltd. [AAR/606/2002 dated

14.5.2004] (3), we took the view that an element of profit is not

essential ingredients of receipt to be taxable as income and even

assuming that fees charged by the Denfoss Singapore to the

applicant and similarly situated group companies is equivalent to the

expenses incurred by it in providing the services and there is no

profit element, it would then be a case of quid pro quo for the service

fees and not a case of reimbursement of expenses and held that the

fees was taxable under the Act.

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In the light of the above discussion, the question of

determination the quantum of the net income embedded in the

said sum (US $ 756,728.26) under section 195(2) for withholding

tax, does not arise.

8. For the above mentioned reason, we rule on :

(1) question No.1 that sum of US$ 756,728.26 cannot be said

to represent recovery or reimbursement of the costs or expenses

actually incurred by Timken-USA while rendering the services by it

and that the entire amount is liable to be taxed in India and

accordingly, the applicant is obliged to withhold Income-Tax at

appropriate rate (under the Act or the Treaty) whichever is lesser

under section 195(1) of the Act;

(2) question No.2 that having regard to the provisions of Article

12 of the Treaty the sum of US$ 756,728.26 received by Timken-

USA from the applicant as consideration for services rendered in

USA in pursuance of the agreement dated 2.8.2000 would be

subjected to tax in India and accordingly the applicant has to

withhold Income-Tax at appropriate rate (under the Act or the

Treaty) whichever is lesser under section 195 (1) of the Act.

(3) question No.3 that the sum of US$ 756,728.26 received by

Timken-USA from the applicant as consideration for services

rendered in USA in pursuance of the agreement dated 2.8.2000

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would be subjected to tax irrespective of there being a profit or

income in the hands of Timken-USA and that the said sum would be

subjected to tax in India and accordingly the applicant would have to

withhold Income-Tax at appropriate rate (under the Act or the

Treaty) whichever is lesser under section 195 (1) of the Act.

(4) question No.4 that the said sum, referred to in questions No.1

to 3, which is said to constitute fee for technical services within the

meaning of section 9(1)(vii) and section 44D read with section 115A

of the Act and provide gross basis for taxation of such fees in the

hands of non-resident corporate-assessee at the rate of 20% of

such fees for the reasons mentioned above, no option can be read

in section 44D for computing income on net basis allowing the

benefit of sections 28 to 44C as the principle laid down by the

Hon’ble Supreme Court in the case of Union of India vs.

A.Sanayasi Rao and others [supra(1)] in the context of presumptive

basis of taxation of certain receipts, would not apply. Accordingly,

the applicant has to withhold Income-Tax at appropriate rate (under

the Act or the Treaty) whichever is lesser under section 195 (1) of

the Act.

We rule on:-

(1) additional question (a), contents of this question are the

same as question No.4 referred to above. The ruling given on

question No.4 will equally apply to this question;

31

(2) additional question (b) that this is a consequential question

and that in view of our ruling on additional question (a) and

question No.4, this question does not survive.

Pronounced by the Authority in the presence of the parties on this 6th day of December, 2004.

Sd/- (JUSTICE S.S.M. QUADRI)

CHAIRMAN

Sd/- (K.D. SINGH)

MEMBER

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