The Rajasthan High Court on 5 September dismissed Hindustan Zinc Limited's appeal against an Income Tax Appellate Tribunal order sustaining the disallowance of a tax deduction claimed by the company for payment made towards technical know-how to a UK-based company.

A Division Bench comprising Justices Pushpendra Singh Bhati and Praveer Bhatnagar upheld the disallowance for Assessment Year 1994-95, holding that the payment made to Davy McKee (Stockton) Limited (DML) was subject to tax deduction at source under Section 195 of the Income Tax Act. The judges held:

“...Thus, for claiming the deduction, the appellant treated the contractual consideration as expenditure incurred for acquiring know-how; while resisting the statutory consequence of such payment, it seeks to characterise the same consideration as not being payable by it at all”

Hindustan Zinc had claimed a deduction under Section 35AB of the Income Tax Act for expenditure incurred to acquire technical know-how from DML for its lead-zinc smelter project at Chanderiya.

The Assessing Officer allowed part of the claim but disallowed the remaining amount under Section 40(a)(i), which restricts certain deductions where tax was required to be deducted at source but was not deducted.

The company contended that the payment was made in the UK by Crown Agents from a UK Government grant and, therefore, no payment was made by the company to DML outside India.

The Court rejected the contention. It observed that Section 195 requires a person responsible for paying a non-resident to deduct tax where the payment is chargeable to tax in India. The question of chargeability, it said, has to be examined with reference to Sections 4, 5 and 9 of the Act.

It particularly relied on Section 9(1)(vii), under which fees for technical services payable by a resident are deemed to accrue or arise in India, subject to the exceptions specified in the provision.

Since the payment related to technical know-how and services obtained for Hindustan Zinc's business in India, the Bench held that it could not be treated as having a source outside India merely because the foreign currency was released through Crown Agents in the UK.

It also noted that Hindustan Zinc had itself claimed the expenditure under Section 35AB, thereby recognising that the expenditure was incurred for acquiring technical know-how.

Referring to Section 43(2), which defines the expression “paid” to include expenditure incurred according to the method of accounting regularly employed by the taxpayer, the Court observed that the contractual consideration remained an expenditure incurred by Hindustan Zinc.

It noted that the fact that Crown Agents released the funds under the UK Government grant did not alter the nature of the contractual liability. The agreement was between Hindustan Zinc and DML, while Crown Agents merely acted as the mechanism through which the grant amount was released.

The Bench held that the source from which the payment was financially discharged was distinct from the question of who was liable to make the payment under the contract. It also considered the India-UK Double Taxation Avoidance Agreement and held that the place where the payment was physically remitted was not decisive. What was relevant was the person on whom the contractual payment obligation rested.

The Court distinguished the Supreme Court decisions relied upon by Hindustan Zinc, including those concerning the applicability of Section 195, noting that the present case concerned payment for technical know-how and services used in the company's business in India.

Holding that the payment was chargeable to tax in India and that the tax deduction obligation under Section 195 was attracted, it upheld the disallowance under Section 40(a)(i). The Bench held:

“...The payment made to DML through the Crown Agents under the grant arrangement represented discharge of the consideration incurred under the appellant's technical know-how agreement for its Indian business and could not be treated as having its source outside India merely by reference to the location from which the Crown Agents released the funds...”

Accordingly, the High Court dismissed the appeal and affirmed the Income Tax Appellate Tribunal's order dated 20 February 2009.

For Appellant: Senior Advocate Deepak Chopra

For Respondent: Advocates Anjay Kothari, Amit Sharma and K.K. Bissa

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Case Title :  Hindustan Zinc Ltd. v. The D.C.I.T. (Assessment)Case Number :  D.B. Income Tax Appeal No. 65/2009CITATION :  2026 LLBiz HC(RAJ) 43
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