Case: Commissioner of Income Tax, West Bengal Vs. Wesman Engineering Company Private Limited

2. Brief facts of the case are that the respondent-assessee is a private limited company incorporated in India. The assessee company carried on some business in collaboration with M/s. Wilhelm Ruppmann, Industrieofenbau, Stuttagart W, Gutenbergstr. By an agreement entered on January 1, 1963 it was agreed that the foreign collaborators would grant to the Indian company during the terms(a) the exclusive right to manufacture the licensed equipment in India(b) the exclusive right to sell the licensed equipment in India under the "Wesman Ruppnan" such sale to be effected by the agency agreed upon(c) permit licensees to export the licensed equipment freely outside India, except to countries where the licensors have similar licence arrangementsClause 5 of the agreement provided for payment to the licensees of the following sums(a) "A payment of 5 per cent towards the cost of detailed working drawings in terms of clause 3(b). The payment for these drawings shall be admissible in those cases where new drawing are supplied by the licensors abroad i.e. from their or their associates works design officers at Stuttgart or elsewhere in EuropeThis payment shall not be admissible for minor modification of drawing and designs which have already been purchased from the licensors and paid for by the licensees nor on repeat orders executed by the licenseesThis fee shall be calculated on the ex-factory selling prince of the licensed products after deducting the value of imported components used in the manufacture thereof, if any, payment for cost of drawings shall be arranged by the licensees against supply of individual furnace designs, such payment being effected forthwith against delivery ofroyalty at 5 per cent (five) which will be subject to Indian taxes on the annual net ex-factory sale value of each licensed equipment manufactured by the licensees shall be payable to the licensors. The value of imported components, if any, that may be used in the manufacture of the licensed equipment shall be deducted in computing the ex-factory price of the licensed equipment for purpose of payment of royalty. The payment has to be effected together with the report referred to under clause 6." *3. The assessment year involved in the case is 1964-65. In the matter of remittance to the non-resident company, the assessee vide applications dated June 4, 1964 and August 18, 1964 requested the Income Tax Officer to grant necessary certificate in order to enable them to approach the Reserve Bank of India for remittance to their collaborators. The said applications related to the invoice in regard to supply of drawings for manufacture of furnaces in India in accordance with their collaboration agreement. The Income Tax Officer placing reliance on the terms of the agreement came to the conclusion that the payments made by the applicant company to the non-resident collaborators in Germany could be grouped under the heads Royalties and Remuneration for labour or personal services. According to the Income Tax Officer neither the remittance fell within the exempted category nor did the agreement for avoidance of double taxation between Indian and the Federal German Republic apply to the facts of the instant case. According to him, the payment of the remittances in respect of which the applications had been made represented payment for supply of technical knowhow and for use for trade name and manufacturing right of the licensor company. He did not agree with the submissions of the assessee company and disposed of the said applications vide order dated September 5, 1964 under Section 195(2) of the Income Tax Act, 1961 directing the assessee company to deduct tax @ 65 per cent on the entire sum proposed to be remitted4. The assessee company preferred an appeal to the Appellate Assistant Commissioner. It did not dispute the assessability of the royalty @ 5 per cent mentioned in clause 5(b) of the agreement aforesaid. It, however, challenged that the whole of the sum of 5 per cent specified in clause 5(a) was not chargeable to income tax in India. In regard to the same the assessee submitted that there was no liability to deduct tax in terms of the order of the Income Tax Officer as, in its opinion, (a) the services, if any, enumerated under clause 5(a) of the agreement were performed outside India and the payment were also being made outside India so that the amount paid was not chargeable to tax under the Indian statue, (b) there was a bar to assessment under the Income Tax Act, 1961 in terms of an agreement for avoidance of doublet taxation between India and the Federal German Republic referred to above and (c) in the alternative, since the cost of the work drawings to the foreign collaborators exceeds the remuneration, the same was not taxable5. The Appellate Assistant Commissioner did not accept the first two of the aforesaid contentions of the assessee. With regard to the third contention, however, the Appellate Assistant Commissioner came to the conclusion that it would be reasonable to determine the said cost by estimate which he did at 75 per cent of the amount paid to the non-resident. In his opinion the net profit chargeable to tax was accordingly 25 per cent of the amount paid6. The department filed an appeal against the aforesaid order of the Appellate Assistant Commissioner and the assessee filed a cross-objection, before the Income Tax Appellate Tribunal. Both the departmental appeal and the assessees cross-objections were head together and decided by a consolidated order of the Tribunal. The departmental representative made two submissions. The first was that the AAC was wrong in holding that the quantum of income could be determined in an appeal under Section 248. The second was that the AAC was wrong in allowing expenses at 75 per cent of the remittance. The first point of the assessees cross-objection was covered by the first ground of the departmental appeal mentioned above. The second point raised in the assessees cross-objection was to the effect whether the payment for other cost of drawings were exempt from the tax under the provisions of Double Taxation Avoidance Agreement or not. The Tribunal, taking the points raised in the departmental appeal first, came to the conclusion that it was difficult to accept the argument that a total denial enable an appeal to be filed but not a part denial with reference to part of the payment subjected to deduction of tax. In the opinion of the Tribunal the interpretation of Section 248 of the Income Tax Act as given by the AAC was correct. According to the Tribunal the AAC could pass an order regarding the quantum. The Tribunal held that the same could not be said to the unreasonable. In the result the departmental appeal was dismissed. In regard to the assessees cross-objection, the Tribunal held that first part of the cross-objection had already been dealt with in the appeal preferred by the department and to that extent the assessees cross-objection on the said issue automatically succeeded. In regard to the second issue, the Tribunal came to the conclusion that the amount brought to charge by Income Tax Officer was not exempt under the Double Taxation Avoidance Agreement between Indian and the Federal Republic of Germany vide Articles 3(1) and 16 of the Agreement. The assessees cross-objection was thus, partly allowed

Reasoning:
9. It was contended by Mr. Manchanda that the order passed by the Income Tax Officer under Section 195(2) of the Income Tax Act, 1961 (hereinafter referred to as the Act) was not appealable to AAC under Section 248 of the Act. His further contention was that the order passed by AAC was totally without jurisdiction and the only remedy available to the assessee was to file a writ petition to High Court under Article 226 of the Constitution of India.In our opinion this question does not arise before us nor such question was raised in the reference before the High Court. The Commissioner of Income Tax only sought to refer the following question for the opinion of the Highn our opinion the AAC was also competent to pass an order with regard to quantum when once he is seized of the matter. Under Section 248 a person having deducted and paid tax under Section 195 may appeal to the AAC denying his liability to make such deduction and for a declaration that he is not liable to make such deduction. It is thus difficult for us to accept the argument that total denial may enable an appeal to be filed but not a part denial with reference to part of the payment subjected to deduction of tax. The right of appeal given under Section 248 is clear and we cannot accept the view sought to be propounded by Mr. Manchanda that such a right is restricted and the AAC was not competent to fix the quantum or to revise the proportion of the amount chargeable under the provisions of the Act as determined by the Income Tax Officer. Section 251 of the Act provides with the powers of the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals)