Appellant absolved from tax liability on License Fee payments under Income-tax Act

The Third Member held that the order treating the appellant as "assessee in default" under Section 201 of the Income-tax Act for non-remittance of tax on Licence Fee payments to a non-resident company was invalid. The Tribunal concluded that the Licence Fee payments did not constitute "Royalty" under the DTAA between India and Germany, absolving the appellant from the liability to deduct tax at source on these payments. The appeal was allowed in favor of the appellant, and the matter was referred back to the Division Bench for further proceedings.

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Issues Involved:
1. Validity of the order under Section 201 of the Income-tax Act treating the appellant as "assessee in default" for non-remittance of tax deducted/deductible and levying of interest under Section 201(1A).
2. Whether payments made towards Licence Fee constitute "Royalty" under the Double Taxation Avoidance Agreement (DTAA) between India and Germany, thereby creating a liability to deduct tax at source.
3. Admissibility of the appellant's plea regarding non-liability to deduct tax at source on payments made towards Licence Fee at a late stage.

Detailed Analysis:

1. Validity of the Order under Section 201:
The Tribunal examined the validity of the order passed by the Income Tax Officer (ITO) under Section 201, which treated the appellant as an "assessee in default" for non-remittance of tax deducted/deductible on payments made towards Licence Fee to a non-resident company. The Tribunal found that the appellant had made payments to a foreign company for Basic Engineering and Licence Fee. The learned Judicial Member and the learned Accountant Member agreed that TDS should be deducted for Basic Engineering payments. However, they differed on the necessity of TDS deduction for Licence Fee payments. The Judicial Member held that the ITO should have treated the appellant's letter dated 2-6-1993 as an application under Section 195(2) and made an order accordingly. The Accountant Member disagreed, stating that the appellant's plea was raised too late and should not be considered.

2. Whether Licence Fee Constitutes "Royalty":
The Tribunal analyzed whether the payments made by the appellant towards Licence Fee to the foreign company constituted "Royalty" under the DTAA between India and Germany. The Judicial Member concluded that the Licence Fee payments did not constitute "Royalty" as per the DTAA and thus, the appellant was not liable to deduct tax at source on these payments. The Judicial Member emphasized that the definition of "Royalty" in the DTAA did not cover the Licence Fee payments made by the appellant. The Accountant Member did not provide a detailed analysis on this issue but upheld the ITO's order, implying a disagreement with the Judicial Member's conclusion.

3. Admissibility of the Late Plea:
The Tribunal also considered whether the appellant's plea regarding non-liability to deduct tax at source on Licence Fee payments could be admitted at a late stage. The Judicial Member admitted the additional ground, treating the letter dated 2-6-1993 as an application under Section 195(2), and held that the ITO should have made an order under Section 195(2) before passing the order under Section 201. The Accountant Member opposed the admissibility of the additional ground, arguing that it was raised too late and should not be entertained.

Conclusion:
The Third Member agreed with the Judicial Member on all issues. The Third Member held that the appellant's letter dated 2-6-1993 should be treated as an application under Section 195(2) and that the ITO should have made an order under Section 195(2) before treating the appellant as an "assessee in default" under Section 201. The Third Member also agreed that the Licence Fee payments did not constitute "Royalty" under the DTAA and thus, the appellant was not liable to deduct tax at source on these payments. Consequently, the Third Member concluded that the order under Section 201 was invalid to the extent it related to Licence Fee payments, and the appeal was allowed in favor of the appellant on this ground. The matter was referred back to the Division Bench to decide the issue according to the majority opinion under Section 255(4) of the Income-tax Act.

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