TaxTMI 
TaxTMI 
1999 (8) TMI 123
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.... Judicial Member that the payments made by the appellant to the non-resident towards Licence Fee do not constitute "Royalty" within the meaning of the word "Royalty" contained in the Agreement for Avoidance of Double Taxation entered into between India and Germany and, therefore, the appellant had no liability under law to deduct tax at source on those payments, is correct? 3. Whether on the facts and in the circumstances of the case, the view taken by the learned Accountant Member that the appellant's plea that it is not liable under law to deduct tax at source on the payments made by it to the non-resident towards Licence Fee cannot be considered at this late stage is correct in the facts and circumstances of this case?" 2. Few facts necessary for appreciation of the points in controversy are the following. These appeals arose out of the consolidated order passed by the CIT(A), Hyderabad, dated 25-1-1996 confirming the orders passed by the ITO, Ward-5(9), TDS, Hyderabad dated 23-11-1995 under section 201 of the Income-tax Act for not remitting the amounts/for late remitting the amounts deducted towards TDS payable to a West German Company (M/s Lurgi Gmbh, West Germany). In ....
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....udicial Member adverted to Article 4.4 of the Agreement which stipulates that all taxes, duties and dues levied outside the Federal Republic of Germany shall be borne and directly paid by the Buyer. The following table would show the rupee equivalent of foreign currency instalments due by the Indian company to the Foreign company and in fact, the amounts were already paid: ----------------------------------------------------------------------------- Financial Date of Amount paid TDS Date of year payment (Rs.) (Rs.) remittance 1990-91 19-6-1990 92,66,409 18,53,282 12-8-1991 1991-92 31-7-1991 1,32,46,983&nbs....
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....bsp; earlier, against simple receipt of SELLER." -------------------------------------------------------------------------------------- The Agreement is provided at pages 6 to 38 of the assessee's paper book. The approval of the Government of India by their letter dated 31-12-1987 is provided at pages 40 & 41 of the assessee's paper book. Therefore, the table of remittances of different amounts relate to price for basic engineering and price for Licence fee. 3. As far as the price for Basic Engineering is concerned, both the learned Members felt that TDS is to be deducted by the Indian company and paid to the Government of India within the time prescribed before remitting the amounts to the foreign company. 4. The difference among the learned Members arose only when they considered whether such TDS deduction is to be made at all while, remitting the price for Licence Fee of DM 11,00,000. Admittedly, when the matter was pending in second appeal before the Tribunal, an additional ground, of appeal was raised as follows: "The order under section 201 passed by the Assessing Officer is inva....
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....tax need be deducted at source for payments made towards Licence fee to any non-resident under the foreign collaboration agreements approved by the Government of India and Reserve Bank of India, as they are outside the purview of section 195 of the Income-tax Act, 1961. The following are the details of the workings towards the tax payable: ------------------------------------------------------------------------------- Date of Particulars Total amt. Income-tax @ remittance remitted 20% on basic &nbs....
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....p; ----------- --------- 1,32,46,983 26,68,287 Less tax remitted on 12-8-1991 18,53,282 ------------------------------------------------------------------------------- Thus, on the basis of the above calculations, we have to remit an amount of Rs.8,15,005 towards TDS for which we request you to accord your approval and confirm the amount to enable us to make arrangements for payment. Awaiting for an early and favourable reply. Yours faithfully, for Niraj Petrochemicals Limited Sd/- T.M.G. Chary ....
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....the ingredients of section 195(2) in respect of the payments made towards Licence Fee as per the Agreement dated 29-6-1988. He also held that it is significant that in the said letter dated 2-6-1993 the Indian company did not dispute its liability to make deduction of tax on the payments made towards Basic Engineering. He held that inasmuch as the Indian company entertained a doubt regarding its liability to deduct tax on the consideration paid towards Licence Fee, it sought opinion of the ITO on this aspect. Thus, the letter dated 2-6-1993 contains all the requirements of section 195(2) of the Income-tax Act. Then, he called-in-aid the ratio of the Delhi High Court in CITv. Jay Engg. Works Ltd. [1984] 149 ITR 425 /19 Taxman 587, holding that there is no particular form or format for an application under section 195(2). The learned Judicial Member held that the Indian company in its letter dated 2-6-1993 clearly differentiated the payment into two different components, one for Engineering and the other for Licence. The learned Judicial Member held that the ITO should have treated the letter dated 2-6-1993 as an application under section 195(2) in respect of payments made, towards L....
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.... 2 filed by the assessee. Thus, the learned Judicial Member had believed the authenticity and genuineness of the letter dated 2-6-1993 filed before the ITO. However, the learned Accountant Member without doubting either the authenticity or genuineness of the letter dated 2-6-1993 wanted to disregard the same on the ground that the additional ground on the basis of that letter was filed very late, not having been filed before the first appellate authority. 10. After considering the difference thus expressed by the learned Members of the Division Bench, I am inclined to agree with the learned Judicial Member. Firstly, I agree with him that a comprehensive reading of the letter dated 2-6-1993 leaves no one in doubt that it is a fit one to be considered under section 195(2). The following para in the said letter clinches the issue: "We are of the opinion that no tax need be deducted at source for payments made towards Licence Fee to any non-resident under the foreign collaboration agreements approved by the Government of India and Reserve Bank of India, as they are outside the purview of section 195 of the Income-tax Act, 1961." In the said letter, it is clearly stated that to....
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....Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item. There is no reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commissioner of Income-tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. The Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier. The view that t....
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....cle in regard thereto. Even though limitation is not specifically set up as a defence, a barred proceeding has to be dismissed. Rule 27 of the Income-tax Appellate Tribunal Rules, 1963, enacts that the respondent may support the order, though he may not have appealed, on any of the grounds decided against him." 14. In the context of the facts of the case before me, the question whether any part of the Licence Fee is leviable within the Indian Income-tax Act and if so, whether TDS is to be deducted while making/remitting payment to the Foreign company constitutes additional ground. Therefore, to my mind, it appears that the learned Judicial Member is correct in admitting the additional ground and also deciding the said ground and treating the letter dated 2-6-1993 as an application under section 195(2) of the Income-tax Act. Thus, on point of difference No. (3), the learned Judicial Member's order is to be upheld or to be preferred as correct in law. 15. The arguments advanced by the learned Advocate for the assessee before me can be summarized as follows. No reply was received from the Assessing Officer to the letter dated 2-6-1993 or to the letter dated 23-11-1995 which i....
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....opriate proportion of such sums chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable." Therefore, when the Indian company by its letter dated 2-6-1993 feels that no amount of the remittance or any part of the amount of remittance to the Foreign company is deductible because the amount is not taxable under the Income-tax Act, he can file a petition before the Assessing Officer to determine the taxability of the said sum under section 195(2). The question is whether any particular form is prescribed in which the claim under section 195(2) should be made. It is made very clear that there are several decisions in which a view is taken by the High Courts as well as the Supreme Court that it is enough if the prayer contemplated under section 195(2) can be culled out from the correspondence made by the Indian company with the Assessing Officer. 17. In CIT v. Superintending Engineer, Upper Sileru [1985] 152 ITR 753/19 Taxman 356 (AP), the question before the Andhra Pradesh High Court was whether the amount sought to be remitted to the Foreign company should wholly bear the character of income or....
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....geable under the Act. There is no prohibition in section 201 of the Act against the ITO so determining the tax. Indeed, the power to determine the appropriate amount of tax deductible at source under section 95 is implicit in section 201 of the Act... As already mentioned, the power to determine the appropriate amount of tax is referable to section 201 of the Act and the fact that the assessee did not file an application under section 195(2) for determination of such appropriate proportion is not relevant for the purpose. In any event, this is the only way the provisions contained in section 195 and section 201 can be harmoniously interpreted. We, therefore, hold that the power of the ITO under section 201 of the Act to deem the person responsible for paying any sum to the non-resident under section 195 as being in default extends only to the proportion of income chargeable under the Act and forming part of the gross sum of money." While furnishing answers to the questions which arose for decision before them and while answering each of them, for question No. 2 they furnished the following answer as can be seen from page 772 of the Report: "The obligation of the respondent-as....
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....sp; DM 1.600.000 4.1.4 Price for licence DM 1.100.000 ---------------------------------------------------------------------------- Thus, 2.700.000 DM is the disputed amount. At para 4.4, it is stated: "The total fee stated in Article 4.1 includes all taxes, duties and dues levied by and within the Federal Republic of Germany. Any and all taxes, duties and dues levied outside the Federal Republic of Germany are excluded, but shall be borne and directly paid by BUYER." Para 5.3 sets out the time schedule when the payments agreed upon towards licence fee and basic engineering shall be paid and it is as follows: "5.3: The price for licence fee as per Article 4.1.4 and basic engineering as per Article 4.1.3 shall be paid by BUYER to SELLER according to the following schedule: ---------------------------------------------------------------------------- (a) 33....
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....ovisions of this Act shall apply to the extent they are more beneficial to that assessee." There is a double taxation avoidance agreement entered into between India and Federal Republic of Germany for the Avoidance of Double Taxation with respect to taxes on income and capital. The Avoidance of Double Taxation Agreement was first entered into between these two countries on 18-3-1959. Subsequently, on mutual agreement, the said Agreement was amended and the amended Agreement was published at pages 90 to 104 of the Report. One of the Articles which was amended was Article VIII. However, it is important to note that after deleting Article VIII, new Article VIIIA was inserted in the amended Double Taxation Avoidance Agreement, which is as follows: "(1) Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. (2) However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State. But in so far as the fees for technical services are concerned, the tax so charged shall not exceed 20 per....
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....ever, he observed that in the letter of the Indian company dated 2-6-1993 its claim was not denial of deduction of tax at source, but was limited to consideration the Indian company paid for acquisition of Licence and not to payments made for Basic Engineering services and therefore, ultimately he held that the order under section 201 is wrong only to the extent of Indian company being treated as in default for non-payment of TDS in regard to Licence Fee. In para 14, however, he held that the payment made for Engineering services was income liable to tax. However, regarding Licence fee it is held that the Indian company is not liable to deduct tax at source. Shri Satyanarayana contended that the difference between the Members, when carefully observed, seems to be about the learned Judicial Member's agreement to take up the additional ground and the decision he rendered thereon. According to the learned Accountant Member, the additional ground should not have been entertained and should not have been decided. However, the learned Accountant Member did not go into the merits of the additional ground and there was no discussion about the merits in his whole order. Shri Satyanarayana s....
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....sideration. According to him, question Nos. 1 and 2 do not reflect the difference at all and they need not be answered by the Third Member. He tried to convince me that question Nos. 1 and 2 did not in fact reflect any difference whatsoever. The learned counsel continued to contend that whereas the learned Judicial Member had decided the consideration paid for obtaining licence in favour of the Indian company and appreciated the arguments advanced under section 195(2), as well as, on merits, and on both the counts, the learned Judicial Member recorded his findings in favour of the Indian company. The learned Accountant Member merely stated his objection in regard to entertaining the Indian company's prayer under section 195(2) and did not consider the taxability of the sum paid for acquiring Licence. Therefore, so-far-as the merits of the payment of the sum for Licence is concerned, there is no difference of opinion expressed in the orders of the Judicial Member and Accountant Member. Therefore, question No. 1 does not project the real difference of opinion between the Members. With regard to question No. 2, he contended that this difference is consequential to question No. 1 for w....
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....es not express any difference at all in identifying the difference between the Members, the Third Member cannot alter the referred questions to him or cannot modify the questions and/or reframe the questions and then decide the reframed questions instead of the original questions. This method suggested to me by Shri Satyanarayana and the analogy he had attempted to draw from the powers exercised by the High Court, is to say the least, unconvincing, uncomparable and worthy to be rejected. 22. I do not agree with the learned counsel for the Indian company when he contended that the learned Accountant Member did not differ with the learned Judicial Member about the nature of the payment made towards Licence fee and on the aspect whether it is taxable in India or not. If that is so, the ultimate order of the learned Accountant Member would have been different. There is no dispute that the CIT(A) had confirmed the penalty under section 201 and interest under section 201A. Confirmation of the penalty is with reference to Rs.59,41,600 which includes the sum payable towards Licence fee. If in fact he agreed with the learned Judicial Member or he did not want to dispute the learned Judic....
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....aside. The learned Judicial Member accordingly held that the order of the first appellate authority is partly set aside and consequently the order of the Assessing Officer passed under section 201 is partly set aside. 24. The learned Accountant Member in para 7 of his separate orders stated that the facts narrated in detail by his learned brother are not in dispute. There is no dispute that the assessee had deducted tax in respect of all the three years mentioned above. In respect of the first year, it had not only deducted tax, but also remitted the same late by 13 months. Therefore, the Assessing Officer charged interest undersection 201(1A) of the Income-tax Act. According to the learned Accountant Member, Rs.59,41,600 comprised of the following items. Out of it, Rs.26,49,400 represents-TDS deductible on the amount of Rs.1,32,46,983 credited to the account of the Foreign company in the books of account of the Indian company for Financial year 1991-92. Similarly, a sum of Rs.32,92,200 is the TDS on the sum of Rs.1,64,61,000 credited to the account of the Foreign company as on 31-3-1994 in the account books of the Indian company for Financial year 1993-94. Further a sum of Rs.2....
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....r as well as the CIT(A). Thus, there is conflict between both the Members about the leviabihty of penalty under section 201 and also leviability of interest under section 201(1A). 25. Now, firstly let me examine whether after admitting the liability by the Indian company and crediting the amounts in the name of the Foreign company in its books of account it is open for the Indian company to challenge its liability to pay tax deducted at source. To put it in other words, the proposition emerges is that after having admitted the liability whether the Indian company can still dispute its liability to pay TDS in time or challenge its tax liability in any way. In this connection, the law is wellsettled and much time need not be wasted. It is enough to have a reference made to the following two decisions: (1) B.S.C. Footwear Ltd.v. Ridgway (Inspector of Taxes) [1970] 77 ITR 857, 860 (CA). (2) Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT [1997] 227 ITR 172, 184/93 Taxman 502 (SC). In B.S.C Footwear Ltd's case the question was how to value the unsold stock and how to interpret "cost or market value, whichever is lower". Uptill 1959 the words market value in the formula w....