Treaty overrides domestic tax law: foreign technical consultancy payments were fees for technical services, not royalty, with no withholding default.

Where a treaty is applicable, its specific provisions prevail over the Income-tax Act, 1961 to the extent they are more beneficial to the assessee. Payments for technical consultancy, design work, calculations, drawings, modification work and related assistance rendered outside India, without any right to use the foreign collaborator's proprietary rights, are treated as fees for technical services and not royalty under the India-Austria treaty. On that basis, no tax was required to be deducted at source by the Indian payer, and interest under section 201(1A) did not arise because there was no default under the withholding provisions.

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Issues: (i) Whether the Double Taxation Avoidance Agreement between India and Austria prevails over the Income-tax Act, 1961. (ii) Whether the payments made to the Austrian collaborator were royalty or fees for technical services under the treaty. (iii) Whether tax was deductible at source and interest under section 201(1A) was chargeable.

Issue (i): Whether the Double Taxation Avoidance Agreement between India and Austria prevails over the Income-tax Act, 1961.

Analysis: Section 90 of the Income-tax Act, 1961 gives effect to agreements entered into for relief from double taxation, and the treaty applies to the extent it is more beneficial to the assessee. Where a specific treaty provision governs the subject, it prevails over the general charging and deeming provisions of the Act.

Conclusion: The treaty prevails over the Income-tax Act, 1961 in relation to the income governed by it.

Issue (ii): Whether the payments made to the Austrian collaborator were royalty or fees for technical services under the treaty.

Analysis: The payment was made for technical consultancy, design work, calculations, drawings, modification work and related assistance rendered outside India. The agreement did not grant a right to use any proprietary property of the foreign collaborator in the sense required for royalty. The consideration was a lump sum for transfer of technical know-how and services, not for user of an exclusive right retained by the grantor.

Conclusion: The payments were fees for technical services and not royalty under the treaty.

Issue (iii): Whether tax was deductible at source and interest under section 201(1A) was chargeable.

Analysis: Since the payment was treated as fees for technical services rendered outside India and was taxable in Austria under the treaty, the Indian payer had no obligation to deduct tax at source. Once no default under section 195 existed, the consequence of interest under section 201(1A) also could not survive.

Conclusion: No tax deduction at source was required and interest under section 201(1A) was not leviable.

Final Conclusion: The assessee succeeded on all substantial issues, the remittance was held to be treaty-protected fees for technical services, and the demand treating the assessee as in default was not sustainable.

Ratio Decidendi: Where a tax treaty applies, its specific provisions prevail over the Income-tax Act, and payments for technical consultancy and transfer of know-how rendered outside India, without a right to use the foreign party's proprietary rights, are fees for technical services rather than royalty, leaving no obligation to deduct tax at source.

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