TRIBUNAL

1. Payment for import of computer software packages from USA –Whether Royalty or Business Income under India-USA DTAA r/w sections 9(1)(vi) and 90 of I.T. Act – Whether TDS deductible u/s 195 – OECD Commentary on Article 12

Hewlett-Packard (India) (P.) Ltd. vs. ITO (International Taxation) [2006] 5 SOT 660 (Bang.) Assessment Years 2000-01 to 2003-04

1. As per India-USA DTAA, royalty in respect of subject-matter of a copyright includes only payments for use; i.e., exploitation of copyright of such literary/artistic or scientific work.
    

2. As per paragraph 13.1 of OECD Model Commentary, payment can constitute royalty only if transferor grants to transferee right to use copyright of product
    

3. The said payment was commercial income which is subject-matter of Article 7 of India-USA DTAA but, since the payee did not have permanent establishment in India, the assessee company had no obligation to deduct tax at source from the payments.

Facts

1. The assessee-company was engaged in the business of providing networking solutions to its customers. The said activity of the assessee included sale of software packages to customers.
    

2. For the purpose of its business, the assessee had imported readymade software packages from one ‘H’ of USA. The assessee sold the software packages imported to its customers in the packed condition.
    

3. The assessee claimed that the payments made by it to ‘H’ for the imports of the software packages was not in the nature of royalty and, therefore, it had no obligation to deduct tax on payment made to ‘H’.
    

4. The Assessing Officer disallowed the assessee’s claim and held that the entire amount paid by the assessee to ‘H’ for the import of the software packages was in the nature of ‘royalty’ and as such was subject to deduction of tax at source as per the provisions of section 195 read with Article 12 of the India-USA DTAA. On appeal, the CIT(A) confirmed the A.O.’s order.

Decision

On Second Appeal, The Tribunal decided the issue in favour of the assessee, as follows:

1. Section 9(1)(vi) provides that royalty receivable by a non-resident from a person in India is deemed to accrue or arise in India. Section 90(2) provides that if the provisions of Tax Treaty between India and the country of the non-resident are more beneficial to such non-resident, then the provisions of Tax Treaty shall override the provisions of the Act.
    

2. Article 12(3) of the India-USA DTAA defines the term ‘royalty’. As per the India-USA DTAA, royalty in respect of the subject-matter of a copyright includes only the payments for the use; i.e., exploitation of the copyright of such literary/artistic or scientific work. Therefore, in order to be classified as royalty, the right of the person in possession of the subject-matter of a copyright should be to utilize such copyright in the manner which is otherwise protected by the respective copyright law in favour of the owner of the copyright. The use of the copyright of a copyrighted work is different from use of such work itself. The acquisition of a product, wherein the subject-matter of copyright is embedded, without right to exploit the copyright, does not amount to use or right to use the copyright of such literary/artistic/scientific; i.e., copyrighted work.
    

3. As per paragraph 13.1 of the OECD Model Commentary, payments made for acquisition of partial rights in copyright would represent a royalty where the consideration is for the right to use the programmes in a manner that would, without such licence, constitute an infringement of the copyright. In other words, the payment can constitute royalty only if the transferor grants to the transferee the right to use the copyright of the product. If, on the other hand, the use of the programmes by the transferee (by acquiring a copy of such programme) is in a manner which does not constitute infringement of the copyright, the payment therefore would not amount to royalty.
    

4. Under the OECD Model Commentary also, payments for acquiring a copy of a computer programme would not be treated as payments for right to use the copyright in the computer programmes. Accordingly such payments are to be considered as commercial income under Article 7 and not as royalty under Article 12 of the India-USA DTAA.
    

5. The computer programme may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the programmes is tangible, movable and available in the market place. The fact that some programmes may be tailored for specific purposes need not alter their status as ‘goods’ because the code definition included ‘specially manufactured goods’. In the case of Tata Consultancy Services vs. State of Andhra Pradesh [2004] 271 ITR 401/141 Taxman 132 the Apex Court after citing several decisions of the Courts of the USA has noted that acquisition of a copy of computer programmes, which is a copyrighted Article, amounts to sale of such Article.
    

6. Therefore, the payment made by the assessee to ‘H’ was not in the nature of royalty but was subject-matter of Article 7 of the India-USA DTAA. It was an admitted fact that H, did not have any permanent establishment in India. Therefore, the assessee had no obligation to deduct tax at source on such payments made to H, USA. Therefore, the claim of the assessee was liable to be allowed.

Cases referred to and relied upon

1. Samsung Electronics Co. Ltd., India Software Operation vs. ITO [2005] 94 ITD 91 (Bang.)
    

2. Sonata Information Technology Ltd. vs. ITO [IT Appeal Nos. 864, 865, 3132 and 3133 (Bang.) of 2004]
    

3. Associated Cement Cos. Ltd. vs. Commissioner of Customs [2001] 128 ELT 21 (SC)
    

4. Advent Systems Ltd. vs. Unisys Corp. (925F 2d 670) (3rd Cir 1991) and
    

5. Tata Consultancy Services vs. State of Andhra Pradesh [2004] 271 ITR 401/141 Taxman 132 (SC).

2. Scope of the expression “International Traffic” – Articles 3(h) and 8 of India – Singapore DTAA – Alternatively, whether Article 7 or Article 23 of the DTAA will apply – Whether the freight income taxable u/s 44B of the I.T. Act – Liability to deduct TDS u/s 195

Essar Oil Ltd. vs. DCIT [2006] 5 SOT 669 (Mum.) Assessment Year 2000-01

1. A foreign ship owned by a Singapore-based company made a deviation from its international voyage to touch two Indian ports to discharge charter obligations entered into with assessee-company and foreign ship was in Indian waters for 10 days.
    

2. As per Article 8 of India-Singapore DTAA, if any ship is operated by a non-resident, it shall be considered operated in international traffic even after it is operated between two places in India by chance or along with other voyages, but a voyage becomes coastal traffic only if foreign ship operates solely and exclusively between domestic ports in India.
    

3. Since foreign ship never operated between two Indian ports solely and exclusively and operated only once and that too by taking a short deviation from international waters on its way from Singapore to Arabian Gulf, it could be said that foreign ship operated in international traffic and, therefore, income, if any, arising out of instant case would be taxable only in Singapore and not in India.
    

4. The assessee’s case being covered by Article 8 as well as Article 7 of DTAA and not under Article 23, freight amount paid by assessee to the Singapore company was not in nature of a sum chargeable under provisions of Act, and, therefore, assessee was not liable to deduct tax as provided under section 195.
    

5. Since a DTAA was already in force, same should be considered first in preference to Act and, therefore, sections 9 and 44B could not take precedence over relevant Articles of India-Singapore DTAA.

Facts

1. A foreign ship on its way from Singapore to Arabian Gulf, sailing through international waters, on being chartered by the assessee-company, came to the port of Chennai, loaded the petroleum products and sailed to the port of Hazira for unloading the goods there. Thereafter, the ship continued its sailing to Arabian Gulf.
    

2. The assessee-company remitted freight to the foreign oil tanker without withholding tax u/s 195.
    

3. The A.O. treated the assessee to be in default and passed orders under sections 201(1) and 201(1A) making demand for tax deductible at source and interest due thereon. On appeal, the Commissioner (Appeals) held that the voyage of the ship was not in ‘international traffic’ and Article 8 of the Singapore DTAA would not apply in the assessee’s case. He further held that Article 23 applied in the assessee’s case and that the A.O. had rightly invoked the provisions of section 44B in the assessee’s case.

Decision

On Second Appeal, the Tribunal held in favour of the assessee as follows:

1. The foreign ship had made a deviation from its international voyage to touch the two Indian ports to discharge the charter obligation entered into with the assessee-company and for that matter, the foreign ship was in Indian waters for 10 days.
    

2. The non-residentship coming under the purview of section 9, whereby it earns income taxable in India, is endorsed by the provisions of section 44B, a special provision providing for a presumptive taxation of income. In the case of a non-resident ship, income under section 44B is worked out on the basis of a fixed percentage of the freight collected from Indian ports. When a country enters into a DTAA with India, the provisions of DTAA will have precedence over the provisions of law contained in the Act.
    

3. Article 8 of the DTAA provides that profit derived by an enterprise of a Contracting State from the operation of ship or aircraft in international traffic shall be taxable only in that State. The term ‘international traffic’ means any transport by a ship or aircraft operated by an enterprise of Contracting State except when the ship or aircraft is operated solely between places in the other Contracting State. The whole case of destination revolves round the expression ‘solely’. If any ship is operated by a non-resident, it shall be considered to have operated in international traffic even after it is operated between two places in India by chance or along with other voyages. A voyage becomes coastal traffic only if the foreign ship operated solely and exclusively between domestic ports in India. Therefore, in the instant case, the ship never operated between Chennai and Hazira solely and exclusively. It operated only once and that too by taking a short deviation from international waters on its way from Singapore to Arabian Gulf. Examined in terms of Article 8, the ship of the Singapore company had operated in international traffic even while carrying petroleum products from the port of Chennai to the port of Hazira.
    

4. In the light of the facts, it could be said that the ship was operating in international traffic and, therefore, income, if any, arising out of the instant case would be taxable only in Singapore and not in India. Article 8 becomes operative only when there are circumstances where ship sailing through international waters may occasionally cross over to Indian waters for carrying out random business operations. Such cross over to Indian waters does not change the character of international voyage of the ship only for the reason that the ship has operated in random business for an Indian client.
    

5. Sections 9 and 44B would apply if there was no Singapore DTAA. As a DTAA was already in force, the same should be considered first in preference to the Act and, therefore, sections 9 and 44B could not take precedence over the relevant Articles of Singapore DTAA.
    

6. If the case of the assessee did not fall under the specific provision of Article 8, still the assessee could not be deprived of the benefit already available to it under the general provisions of Article 7. Only for the reason that the assessee did not come under Article 8 the assessee could not be placed under a lesser advantage than Article 7. Therefore, the profit attributable to the Singapore company was in the nature of business income and business income was covered by Article 7 even if the assessee was driven out of Article 8. Article 5 deals with PE. None of the items specified in Article 5 was applicable to the assessee. It was a sailing ship which just crossed over to Indian waters for a period of 10 days. Therefore, according to the stipulations provided in the DTAA, the Singapore company had no permanent establishment in India during the relevant previous year. In view of above, the case of the assessee was covered by Article 8 as well as Article 7 of Singapore DTAA and did not come under Article 23.
    

7. Therefore, the amount paid by the assessee to the Singapore company was not in the nature of a sum chargeable under the provisions of the Act, and, therefore, the assessee was not liable to deduct tax as provided under section 195. The orders of the A.O. under sections 201(1) and 201(1A) were, accordingly, cancelled.

Cases referred to

1. Dy. CIT vs. Subsea Offshore Ltd. [1998] 66 ITD 296 (Mum.),
    

2. CIT vs. ONGC [2005] 276 ITR 585/147 Taxman 230 (Uttaranchal),
    

3. Niraj Petrochemicals Ltd. vs. ITO [2000] 73 ITD 1 (Hyd.) (TM),
    

4. Dy. CIT vs. Arthur Anderson & Co. [IA No. 9125 (Mum.) of 1995, dated 29-7-2003],
    

5. CIT vs. Visakhapatnam Port Trust [1983] 144 ITR 146/15 Taxman 72 (AP),
    

6. Consolidated Iron Ores Ltd. 28 TC 127 and
    

7. Boudier Christian vs. ITO [1993] 46 ITD 114 (Delhi).

3. Disallowance of 20% of reimbursement of expenses to a foreign entity – Whether legally sustainable Disallowance of claim for deduction u/s 80 HHE – Whether A.O.’s action unsustainable in law

ACIT vs. Arthur Anderson & Co. [2006] 5 SOT 393 (MUM.) / [2005] 94 TTJ 736 [Assessment Years 1997-98 & 1998-99]

1. Assessee-firm, rendering professional and consultancy services to foreign clients, entered into an agreement with AWSC, a co-operative company organized under laws of Switzerland, which entitled assessee to use trade name of AWSC and also benefited it in significant ways. The assessee claimed deduction on account of reimbursement of expenses under said agreement to AWSC. The A.O. accepted that accounts of assessee were duly audited, that expenses were justified on grounds of business expediency in light of substantial benefit received from AWSC. However, he made an ad hoc disallowance of 20 % out of expenses on ground that there might be an element of excess expenditure embedded in reimbursement of cost of AWSC. The disallowance made by the A.O. was inherently based on surmises and conjectures and was devoid of any legally sustainable foundation.
    

2. Assessee claimed a deduction u/s 80HHE on account of providing technical services outside India for development of computer software. The A.O. disallowed the claim holding that most of persons sent to work on software development projects were plain graduates and they did not have requisite qualifications to carry out job of development of computer software, that assessee was simply supplying technical manpower to AWSC for carrying out various consultancy and management services in assisting them in execution of their contracts and by a single invoice, it billed AWSC in respect of computer services and software. It was held that though some of the persons employed by assessee for development of software were plain graduates but that fact by itself could not mean that they lacked requisite technical expertise to make a useful contribution in development of computer software and that doubts raised by Assessing Officer were ill-founded and unsustainable in law, and as such assessee was entitled to deduction under section 80HHE.

Facts

Issue I

1. The assessee, a Chartered Accountant firm, was rendering professional and consultancy services to the foreign clients and earned fees only in foreign currency.
    

2. In order to generate work from, and execute assignments for, such foreign entities, it had entered into an agreement with AWSC, a co-operative company organized under the laws of Switzerland. The said agreement entitled the assessee to use the trade name of AWSC. The assessee claimed deduction on account of reimbursement of expenses under the said agreement to AWSC.
    

3. The A.O. concluded that the payments to AWSC represented reimbursement of establishment costs, royalty for the use of its trade name and access to knowledge and database and fees for technical services for provision for various other services. On that basis, the A.O. held that the expenditure was incurred wholly and exclusively for the purpose of business.
    

4. However, the A. O. disallowed 20% of the said expenditure on the ground that ‘considering the magnitude and complexity of expenditure, it could not be ruled out that there might be an element of excess expenditure embedded in the reimbursement to cost of AWSC’. The Commissioner (Appeals) deleted the said disallowance.

Issue II

1. The assessee claimed deduction u/s 80HHE on account of providing technical services outside India for development of computer software.
    

2. The A.O. declined the said deduction on the ground that the assessee failed to substantiate its claim of providing technical services for the development of computer software. He was also of the view that most of the persons sent to these jobs were without any technical qualifications. He, thus, held that these personnel did not have the requisite qualifications to carry out the job of development of computer software. The A.O. concluded that the "assessee was simply supplying technical manpower to AWSC for carrying out various consultancy and management services in assisting them in execution of their contracts". For all these reasons, the Assessing Officer declined deduction under section 80HHE to the assessee. The Commissioner (Appeals) upheld the orders of the Assessing Officer.

Decision

On appeal, the Tribunal held in favour of the assessee, as follows:

Issue I

The A.O. had accepted that the accounts were duly audited, that expenses were justified on the grounds of business expediency in the light of the substantial benefit received from AWSC and yet he made an ad hoc disallowance of 20% of expenses. Such an approach was entirely unsustainable in law. The very concept of token disallowance was bad in law, because such a disallowance, was inherently based on ‘surmises and conjectures’ and devoid of a legally sustainable foundation. It was a case where one accepted all the contentions but not the consequences flowing from accepting the same. That could not be approved. The Commissioner (Appeals) was quite justified in deleting the disallowance.

Issue II

1. Section 80HHE provides the condition for eligibility for deduction that the assessee should be engaged in the business of (i) export out of India of computer software or its transmission from India to a place outside India by any means; or (ii) providing technical services outside India in connection with the development or production of computer software.
    

2. Therefore, once an assessee can establish that the technical services were provided in connection with or for the purpose of the development of computer software, the assessee will be eligible for being considered for deduction u/s 80HHE. The assessee had furnished full details of the clients to whom the services were rendered in connection with development of software. The precise nature of services was also on record. The qualifications of the persons actually working on those projects were also furnished. No doubt some of the persons were plain graduates but that fact by itself could not mean that they lacked the requisite technical expertise to make a useful contribution in the development of computer software. In any event, detailed technical appraisals of the employees deputed on various software development jobs overseas were also on record. These evidences could not be simply brushed aside as the lower authorities had chosen to do. The confirmations by the local affiliate of AWSC who was handling the project and client concerned, were also perused.
    

3. Those documents reasonably established the fact that the said technical services were indeed rendered by the assessee’s personnel. The mere fact that most of the evidences were in the nature of documentation of AWSC affiliate could not lead to the conclusion that the documentation was unreliable. The detailed billing particulars in respect of each project were also available. However, only because AWSC made one billing adjustment, it did not vitiate the fact that the complete details of the relevant earnings were on record. It was not necessary that in respect of each billing unit a separate entry was required to be made by the AWSC. The reasonable evidence in support of the services having been rendered by the assessee’s personnel was on record.
    

4. Even though the evidence was internal to the extent the evidence was primarily from AWSC, that fact by itself could not indicate that the evidence was fabricated or unreliable. It was contemporaneous evidence and constituted reasonable basis for a finding that the assessee’s personnel had rendered technical services for or in connection with development of computer software. The requisite chartered accountant’s certificate under section 80HHE(4) was also placed on record and no faults had been noticed in the same. The doubts raised by the Assessing Officer and the Commissioner (Appeals) were ill founded and unsustainable in law.
    

5. Keeping in view these facts as also entirety of the case, the Tribunal directed the A.O. to grant deduction under section 80HHE in accordance with the law.

4. Payment of fees for servicing of aircraft, provision of crew for flying aircrafts etc. to a German company without TDS u/s 195 – Assessee paying TDS amount demanded by the A.O. out of its pocket and claiming refund of the same – Delay in filing appeals by 9 to 11 years – Condonation of the delay – Whether there was reasonable cause – Section 249 of I.T. Act – DTAA between India and Germany – CBDT Circular No. 790 dt. 20-4-2000

Royal Airways Ltd. vs. ADIT, International Taxation, [2006] 98 ITD 259 (Delhi) / 98 TTJ 665 [Assessment Years 1994-95 to 1996-97]

1. Provision limiting time for bringing an appeal must be liberally interpreted so that party pursuing remedy allowed to him, is not deprived of same on mere technicalities. Where major part of delay in filing appeal related to period when assessee’s business operation came to a grinding halt and assessee had acted bona fide which was not in doubt, reasons for delay, in absence of any material to contrary, should be construed to be reasonable and delay in filing appeal should be condoned.
    

2. In view of Tribunal’s order in assessee’s own case in earlier years, holding that payments made by assessee to the foreign company, LAG, were governed by Article VIII of India-Germany DTAA and could not be charged to tax in India because LAG did not have any permanent establishment in India, the A.O. was not justified in insisting upon payment of TDS by assessee.

Facts

1. The assessee entered into three separate agreements with a foreign company Lufthansa A.G. (LAG) for providing aircrafts on lease, for servicing of the aircrafts and for providing crew to fly the aircrafts and took on lease three aircrafts from LAG. The CBDT granted exemption u/s 10(15A) in relation to the assessee’s lease agreements with LAG.
    

2. According to the assessee, since the lease was a composite lease of the aircrafts, services and operation, the said exemption fully covered the aforesaid three agreements and applied to all the payment for crew, lease, flat-rate charges, training fee and ground handling charges.
    

3. The assessee contended that otherwise also no tax was payable in India in terms of Article III of the DTAA between Germany and India. The A.O., however, took the view that only the payments for the leased aircrafts were exempted from tax u/s 10(15A), and not the payment for other services rendered by LAG. He also rejected the assessee’s claim based on Article III of the DTAA. The A.O. held that the amounts received by LAG in relation to the payments not approved by the CBDT, were chargeable to tax in India @ 20%.
    

4. The assessee made remittances to LAG without deduction of tax at source, but tax was paid by the assessee itself and shown in the books of account as tax receivable.
    

5. On appeal, the Commissioner (Appeals) observed that initially on the basis of legal advice, the foreign company was required to file return and claim refund, and even when the assessee found LAG reluctant to file the return and the statutory period for filing the same had expired, it did not file the appeal under section 248 for denial of tax liability without any reason. Even after takeover of the company by the new management, no attention was paid for filing the appeals and, thus, the appeals were late by almost 9 to 11 years. The CIT(A) further observed that the assessee had failed to establish that there had been diligence on the part of the assessee and that it was not guilty of negligence. The CIT(A), thus, held that the assessee did not have any sufficient cause for not presenting the appeals within the statutory period and, therefore, dismissed the appeals being time-barred by limitation, in limine.

Decision

On second appeal, the Tribunal held in favour of the assessee as follows:

1. It is settled legal position that the provisions relating to condonation of delay are procedural provisions. The Courts have, therefore, held that the statutes conferring a right of appeal are in furtherance of justice and the provision limiting the time for filing an appeal must be liberally interpreted so that the party pursuing remedy allowed to him is not deprived of the same on mere technicalities. The words ‘sufficient cause’ should receive liberal construction so as to advance substantial justice.
    

2. In the instant case, the major part of the delay related to the period when the assessee’s business operation came to a grinding halt. Cessation of business activity is commercially the worst calamity that could happen and brings in its wake deterioration of all other collateral activities, such as upkeep and maintenance of fixed assets, regular maintenance of books of account, collection and recovery of outstanding dues and so on. The assessee made full payments to LAG and decided to make payments of TDS demanded by the Assessing Officer on its own. The assessee had, therefore, nothing to gain by delaying the matters. The delay in filing of appeals had caused prejudice to no one except the assessee itself. Keeping these facts in mind, the bona fides of the assessee were not in doubt. Sufficient cause and bona fides go hand in hand. If the assessee had acted bona fide, the reasons for delay, in the absence of any material to the contrary, should be construed to be reasonable. On a pragmatic appreciation of the matter, the assessee could be said to have been prevented by a sufficient cause from filing the appeals on a date earlier than the date on which the appeals were filed before the Commissioner (Appeals). At the same time, the assessee would not be entitled to payment of any interest, etc., for the period of this delay.
    

3. On merits, the department argued that the matter should be sent back to the CIT(A) for decision afresh, for the reasons that the assessee had not conclusively established that LAG did not have any permanent establishment in India; that the CBDT Circular No. 790 had not been taken into consideration in the earlier orders of the Tribunal in the assessee’s case; and that where tax was paid in pursuance of an order under section 195, it was only the non-resident payee that could pursue the matter thereafter. The A.O. had held that the payments made by the assessee to LAG were chargeable to tax in India being ‘fees for technical services’. His orders were silent on the question of permanent establishment. The department only wanted the assessee to prove the negative that the payee did not have permanent establishment in India. Such negative burden could not be cast upon the assessee. Secondly, it was not a case where income did not accrue to the non-resident payee. It was very much the case of the assessee that the income did accrue to LAG and, therefore, was duly paid for. The issue was not whether or not income accrued. It was whether or not the income accrued to the non-resident was chargeable to tax in India. Therefore, the CBDT Circular No. 790 did not have any bearing on the instant issue.
    

4. The department’s argument that where tax was paid in pursuance of an order under section 195, it was only the non-resident payee that could pursue the matter thereafter, was completely contrary to the provisions of section 248, which expressly gives right to appeal to the resident payee.
    

5. Coming to the merits of the case, the Tribunal had, in ITA No. 2648 (Delhi) of 1998, held that the payments made by the assessee to LAG were governed by Article VIII of DTAA and could not be charged to tax in India because LAG did not have any permanent establishment in India. In a number of appeals decided by the Tribunal, facts of the case and issues for consideration were identical. The only new issue in the instant appeals was condonation of delay. Since, on merits, the issue had been decided after consideration of the matter at length on more than one occasion and since no distinguishing features had been brought to notice, no useful purpose would be served by restoring the matter for adjudication afresh by the CIT(A). Therefore, following the orders to the Tribunal in the assessee’s own cases, the payments made by the assessee to LAG were not chargeable to tax in India and, accordingly, the Assessing Officer was not justified in insisting upon the payment of TDS by the assessee before issue of no-objection certificate.

[Editorial Note:

1. Various decisions of the Tribunal in the assessee’s own case in earlier years, regarding non taxability of the amount in question in the hands of LAG, are unreported, as yet.
    

2. The Tribunal dealt at length with various judicial decisions under various laws dealing with condonation of delay in filing of Appeal]

5. Taxation of Non Resident filer Distribution/Exhibition Company – Principles laid down by CBDT in Settlement of 3rd March, 1987 to the followed even for subsequent assessment years

JCIT vs. Warner Bros. (F.E.) Inc. [2006] 99 ITD 1 (Mum.) (SB) Assessment Years 1995-96 to 1998-99

1. Assessee, a non-resident company, along with other non-resident companies, was member of Motion Pictures Association of America (MPA) – Business of member companies was distribution/exhibition of motion pictures produced outside India and all those companies had been carrying on said business in India.
    

2. As there were number of problems in tax matters of said member companies and assessing authorities were opting different standards for their assessment, CBDT issued a proceeding dated 3-3-1987, (settlement) which provided that assessments in case of member companies of MPA would be made only on designated member company; and that taxable income of member companies would be determined on a presumptive rate of 25% of gross film receipts earned by member company out of its operation in India. CBDT had made it clear through its subsequent clarifications that said settlement would not be applicable for assessment falling for period beyond 31-3-1987,
    

3. Since circumstances which prompted CBDT to pronounce settlement dated 3-3-1987, continued till date and no other alternative for completing assessments of member companies of MPA had been worked out by competent authorities, revenue was estopped from disowning principles of settlement, particularly when in many cases assessments of member companies of MPA had been completed by department on basis of settlement. Therefore, principles laid down in settlement were to be followed for assessments even after period
   31-3-1987.

Facts

1. The assessee, a non-resident company, incorporated in USA, was engaged in the business of distribution of foreign films on behalf of another non-resident company. The assessee was a member of Motion Picture Association of America (MPA) along with other companies. The business of the member companies was distribution/exhibition of motion pictures produced outside India.
    

2. There were a number of problems in the tax matters of the said member companies in India. Some companies were filing only one return of income whereas other companies including the assessee were filing two returns of income, one for themselves as member company and other for the non-resident producer company claiming deduction on account of share in production cost of the films, global publicity cost, print and materials cost, etc.
    

3. In the course of assessment proceedings of those member companies, assessing authorities opted for different standards and assessments varied violently from case to case even though all the companies did carry on the same line of business with exact parameters of operations in India. In the circumstances, the CBDT intervened in the situation by issuing proceeding dated 3-3-1987 (settlement), which provided that the assessment in case of member companies of MPA would be made only on the designated member company and no assessments could be made on the producer companies/distributor companies of that group. The settlement also provided that the taxable income of the member companies would be determined on a presumptive rate of 25% of the gross film receipts covered by the member companies out of their operations in India.
    

4. On the basis of said settlement, assessment of the assessee was completed up to assessment year 1993-94. However, from assessment year 1994-95, the income-tax authorities declined to make the assessment on the basis of the settlement on the ground that it applied only up to 31-3-1987 and not thereafter. As there was a conflict of opinion amongst the Benches of the Tribunal on the question whether the settlement continued to govern the assessments even after 31-3-1987, the matter was referred to the President who constituted the Special Bench to consider the issue.

Decision

The Special Bench of the Tribunal held in favour of the assessee as follows:–

1. The settlement was arrived at between the CBDT and MPA for sorting out the difficulties faced in completing the assessments. The agreement had been endorsed by the CBDT in the proceedings issued by it in F.No. 485/2/85/FTD on 3-3-1987. Even though the agreement was released in the form of a communication to the CIT as directions to complete the pending assessments, the agreement acted as a settlement for all purposes of the assessments of the member companies of MPA. The directions as per the settlement governed the assessments for and up to the assessment year 1987-88 and pending at the relevant point of time. When the member companies of MPA, later on, approached the CBDT to extend the scope of the settlement for the period falling beyond 31-3-1987, it was made very clear by the CBDT that the settlement dated 3-3-1987 was only in respect of those assessments pending at that point of time and the settlement would not be available for the assessments concerning the period after 31-3-1987. That position had been clarified by the CBDT through its letter dated 6-1-1992 and again in a subsequent clarification issued on 19-2-1998. In the course of hearing of the appeals, it was made clear that the assessee-company was also aware of the subsequent clarifications issued by the CBDT.
    

2. In such circumstances, when the author of the settlement had made it clear that the settlement did apply for the period only up to 31-3-1987 and not beyond that period, it was technically not feasible to hold that the said settlement applied for the period even after 31-3-1987. Even though it might be possible to hold that the settlement might not be applicable for the period falling after 31-3-1987, in the light of the subsequent clarifications issued by the CBDT, the termination of the settlement with effect from 1-4-1987 could be considered only as a technical outcome. Two conditions were highlighted in the settlement dated 3-3-1987. The first condition was that only one designated company would be assessed for and on behalf of a particular group of companies. The second condition was that the income of the designated company should be determined at 25% of the total gross receipts from exploitation of cinematographic films in India. It was to be seen that the revenue had its grievance only on the question of determination of income after 31-3-1987. It did not have any grievance with reference to the first limb of the settlement that the assessment would be completed only in the hands of the designated company representing a particular group. Even after the finding arrived at by the authorities that the settlement had been terminated after 31-3-1987, they sought to follow the first limb of the settlement and assessed only one designated company representing a particular group. Therefore, even after the technical termination of the settlement after 31-3-1987, the department was carrying on the settlement in a partial manner as far as the first limb of the settlement was concerned. Therefore, in the facts and circumstances of the case, it had necessarily to be held that the termination of the settlement for the period after 31-3-1987 was only a technical deliberation.
    

3. The circumstances which prompted the CBDT to pronounce a settlement dated 3-3-1987 continued even till date and no better alternative for completing the assessments of the member companies of MPA had been worked out by the competent authorities. It was in those circumstances that even after 31-3-1987, the revenue had been determining the income of the members of the MPA for the subsequent assessment years, on the basis of the principles of settlement reached into between the CBDT and MPA on 3-3-1987. The contention of the revenue that such assessments even after 31-3-1987 were only instances of mistakes, seemed to be difficult to accept.
    

4. In many cases, where the assessing authority had refused to follow the settlement, the Commissioner (Appeals) had held that the assessments should be completed on the basis of the settlement. In the ensuing cross appeals placed before the various Benches of the Tribunal, the Tribunal had taken a consistent view that the assessments need to be completed on the basis of the settlement. The assessee had cited a number of instances where the revenue had completed the assessments on the basis of the same ‘settlement’ even after 31-3-1987. It was only for the assessment year 1994-95 that in the case of the assessee, the revenue had gone in appeal before the High Court against the order passed by the Tribunal in favour of the assessee. That appeal had also been rejected by the High Court. In those circumstances, it was very difficult to hold that the assessments completed after 31-3-1987 on the basis of the settlement were instances of mistakes. On the other hand, the pattern of assessment followed by the department had laid down a clear case of consistent method followed by it. When an assessment is completed on the basis of a consistent method followed for a number of assessment years in the past, it assumes the role of a rule and the method cannot be bye-passed unless the circumstances warranted so. In the instant case, in spite of rejection of the settlement by the assessing authorities, no better method of assessment had been brought on record. Therefore, in the light of the Supreme Court decisions in the cases of Union of India vs. Kaumudini Narayan Dalal [2001] 249 ITR 219/117 Taxman 375 and Union of India vs. Satish Panalal Shah [2001] 249 ITR 221/117 Taxman 373, the revenue was estopped from disowning the principles of settlement dated 3-3-1987. The revenue had an onerous responsibility to establish that it had sufficient reasons to overlook the principles of settlement dated 3-3-1987 for the purpose of assessment. So long as the revenue had not discharged such liability assumed by its own past conduct, it was not proper on the part of the revenue to deviate from the accepted method and complete the assessment on an estimate basis.
    

5. There was real substance in the argument of the assessee that even after 31-3-1987, the revenue had followed the principles of settlement for determining the income of member companies of MPA, in a conscious and consistent manner. Therefore, the rule of prudence and the rule of consistency suggested that same procedure be followed in all assessments relating to the members of MPA even after 31-3-1987.
    

6. The settlement dated 3-3-1987 was in fact arrived at by the CBDT to overcome the difficulties which were felt before the settlement in determining the income of various member companies of MPA operating in India. That was the main object of the settlement. Therefore, the relevance of the principles of settlement could not be overlooked unless and until a better method of assessment was contemplated by the Board or that the prevailing circumstances had warranted a deviation from the terms of the principles of settlement. Thus, in the appeals filed by the revenue for the assessment years 1995-96 to 1997-98, the assessing authority had not pursued any better/concrete method of assessment to justify the rejection of the settlement. The Assessing Officer had completed the respective assessments on an estimate basis. There was no sanctity of replacing a well-settled method of assessment by an estimate method or to replace an existing and accepted method of assessment with an estimate method of assessment.
    

7. The revenue had not provided any meaningful alternative to the principles laid down in settlement accepted by the CBDT on 3-3-1987. Thus, the principles laid down in the settlement dated 3-3-1987 were to be followed for the assessments even after the period 31-3-1987. It was after facing practical difficulties in completing the assessments of the member companies of MPA operating in India, that the CBDT had come down to formulate a presumptive taxation. It was to avoid the complexities involved in the determination of income of the assessees. It was only after a series of thoughtful deliberations that the settlement was agreed to between the CBDT and the MPA. The Board had conducted extensive research on the subject. It was on the basis of such serious study that the CBDT had agreed to the settlement which was finally approved by the Government as a policy matter. Therefore, the settlement dated 3-3-1987 should not be taken as light-hearted. It should be accepted as a practical way of collecting taxes from non-resident companies engaged in film distribution in India. In the case of domestic taxation, usually larger principles of welfare economics are preached as the underlying priorities of taxation policy. This is what, the canons of taxation propounded in the study of public finance always stated. But, in the case of taxation of income of transactional companies operating in India, the principles of welfare economics are to be replaced by priorities of hard money economics. The collection of revenue in the form of money is the crucial motto in any scheme of taxation of transactional companies. Therefore, what is to be considered is a practical method to collect reasonable amount of tax on the income earned by such non-resident companies operating in India with least collection cost and less litigation. That was the spirit of the agreement entered into by the CBDT on 3-3-1987. The revenue had not invented any better method to replace the agreement/settlement entered into by the CBDT on 3-3-1987. Therefore, the principles embodied in settlement dated 3-3-1987 would apply to the assessment years subsequent to the assessment year 1987-88.