2012 (5) TMI 58 - AT - Income Tax

Foreign Company's Tax Rates Upheld, Interest Waiver Granted, CIT(A) Decision Rejected

The Tribunal allowed the appeal of the foreign company, permitting the computation of tax at different rates for various income sources. It held that the ... Application of tax treaty vis-a -vis domestic law under section 90(2) - separate and independent taxability under sub-clauses of section 115A(1)(b) - source-wise computation of tax rates for royalties - prohibition on selective invocation of treaty benefits - liability for interest under section 234BSeparate and independent taxability under sub-clauses of section 115A(1)(b) - source-wise computation of tax rates for royalties - application of tax treaty vis-a -vis domestic law under section 90(2) - Whether royalty income arising under different agreements (entered into before and on/after 1.6.2005) can be taxed at different rates by comparing each sub-clause of section 115A(1)(b) separately with Article 12 of the India-USA DTAA under section 90(2). - HELD THAT: - The Tribunal held that the sub-clauses of section 115A(1)(b) create separate and independent charges of tax depending on the nature of receipt and the date of the underlying agreement, and that the statutory mandate to aggregate the tax computed under each sub-clause reinforces the independence of those charges. In consequence, the rate of tax applicable to royalty receipts under each sub-clause (e.g., 20% for agreements before 1.6.2005 and 10% for agreements on or after 1.6.2005) must be compared independently with the DTAA rate (15%) pursuant to section 90(2), and the assessee is entitled to apply the beneficial rate for each stream. The Tribunal distinguished authorities relied upon by Revenue (including Dresdner Bank AG and Patni Computers) as involving selective invocation of treaty benefits in materially different factual contexts, and applied principles of consistency and appellate precedents favouring the view beneficial to the assessee where statutes admit two reasonable interpretations. [Paras 7]Accepted the assessee's computation: royalty income arising under agreements before and on/after 1.6.2005 may be assessed at different rates by comparing each sub-clause of section 115A(1)(b) separately with Article 12 of the DTAA, and the beneficial rate applies to each stream.Prohibition on selective invocation of treaty benefits - application of tax treaty vis-a -vis domestic law under section 90(2) - Whether the assessee's approach amounted to an impermissible selective invocation of treaty provisions (i.e., applying Act for some aspects and Treaty for others) such that Treaty benefits must be disallowed in part. - HELD THAT: - The Tribunal found that the factual matrix shows distinct contracts giving rise to distinct sources of royalty income, taxed under different limbs of section 115A(1)(b). The assessee did not accept the Act's computation for charge/assessment and then selectively seek treaty protection for rate alone; rather, it computed tax stream-wise invoking either the Act or the Treaty for each discrete source. Thus the case did not involve the selective Treaty invocation condemned in the precedents relied upon by Revenue, and those decisions were held distinguishable on facts and law. [Paras 7]The assessee's stream-wise application of Act or Treaty is permissible and not an impermissible selective invocation of treaty benefits.Liability for interest under section 234B - Whether interest under section 234B is exigible on the facts, having regard to the tax computation accepted by the Tribunal. - HELD THAT: - The Tribunal accepted the assessee's method of computing tax at the beneficial rates (per Treaty and per sub-clauses of section 115A) and observed that co-ordinate Bench decisions in the assessee's own earlier years had held against liability for interest under section 234B on similar facts. The CIT(A)'s distinction based on differing advance tax/TDS rates was not sustained in view of the Tribunal's acceptance of the assessee's tax computation. Relying on precedent and the earlier Tribunal orders in the assessee's own case, the Tribunal concluded there was no justifiable reason to charge interest under section 234B for the assessment year in question. [Paras 8]Assessee is not liable to pay interest under section 234B for Assessment Year 2007-08; grounds challenging such interest are allowed.Final Conclusion: The Tribunal allowed the appeal: it held that royalty receipts arising under separate agreements before and on/after 1.6.2005 are taxable as separate sources under distinct sub-clauses of section 115A(1)(b) and may be compared stream-wise with Article 12 of the India-USA DTAA under section 90(2), permitting the assessee to adopt the beneficial rate for each stream; consequentially the tax computation by the assessee is accepted and the charge of interest under section 234B is deleted. The stay petition accordingly became infructuous and was dismissed. Issues Involved:1. Application of blanket rate of tax.2. Levy of interest under section 234B of the Income Tax Act.Issue-wise Detailed Analysis:1. Application of Blanket Rate of Tax:The assessee, a foreign company, filed its return of income for the Assessment Year 2007-08, declaring an income of Rs. 50,72,30,070, later revised to Rs. 208,01,76,260. The tax was computed on royalty income from agreements entered before and after 1.6.2005 at different rates: 15% as per Article 12 of the India-USA DTAA for agreements before 1.6.2005 and 10.455% as per section 115A for agreements after 1.6.2005. The Assessing Officer, however, applied a blanket rate of 15% for all agreements, leading to an additional tax demand.The CIT(A) upheld the Assessing Officer's decision, stating that the income cannot be split to determine whether the Act or the Treaty provisions are beneficial, and the assessee must opt for either the Act or the Treaty as a whole. The CIT(A) relied on decisions in Dresdner Bank Ag. v. Addl. CIT and DCIT v. Patni Computers Systems Ltd., concluding that the assessee cannot split income to avail benefits partly under the Act and partly under the Treaty.Upon appeal, the Tribunal examined whether the provisions of the Act and the Treaty should be compared for each source of income or on an aggregate basis. The Tribunal found that section 115A(1)(b) prescribes different tax rates for royalties based on the date of the agreement, indicating that each sub-clause is separate and independent. The Tribunal held that the assessee was justified in computing tax at different rates for different sources of income, comparing the Act and Treaty provisions separately for each source. Consequently, the Tribunal concluded that the CIT(A) was incorrect in comparing the tax on an aggregate basis and accepted the assessee's computation of tax.2. Levy of Interest under Section 234B:The assessee challenged the levy of interest under section 234B, arguing that it had computed tax correctly and there was no shortfall in advance tax payment. The CIT(A) upheld the interest charge, distinguishing the Tribunal's earlier decision in the assessee's own case on the ground that the rate of tax for advance tax and TDS were not uniform for the relevant period.The Tribunal, however, relied on its earlier decisions in the assessee's case for the Assessment Years 2003-04 to 2006-07, where it was held that a foreign company is not liable for interest under section 234B. The Tribunal found no justifiable reason to deviate from these decisions and concluded that the assessee was not liable to be charged interest under section 234B.Conclusion:The Tribunal allowed the assessee's appeal, accepting the computation of tax at different rates for different sources of income and holding that the assessee was not liable for interest under section 234B. The stay petition filed by the assessee was dismissed as infructuous.