TaxTMI 
TaxTMI 
1999 (5) TMI 69
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....SL, for which TSL agreed to pay Austrian Shillings (A.S) 91,00,000 to AVL as detailed below: (a) 20% on approval by the Government of India A.S. 18,20,000 (b) 25% on 30 days after first meeting at Austria A.S. 22,75,000 (c) 40% within 10 days of completion of phase procurement of prototypes A.S. 36,40,000 (d) 15% on completion of project A.S. 13,65,000 A.S. 91,00,000 3. The actual payments were made as detailed below:-- Assessment year 1991-92:-- Date of payment A.S. Rs. 12-6-1990 18,20,000 26,87,542 16-1-1991 22,75,000 39,38,712 66,26,254 Assessment year 1992-93:-- 9-11-1991 36,40,000 87,18,563 Assessment year 1994-95:-- 10-2-1994 3,65,000 34,67,100 4. The abovesaid agreement was entered into between TSL and AVL and was approved under the auspices of Technical Development Fund constituted by the IDBI and was approved by the Government of India. The Reserve Bank of India had also accorded sanction to the agreement as 'Technical Aid Agreement'. At the time of remittance of the fees in four instalments as noted above, the Deputy Commissioner ....
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....of the Income-tax Officer, TDS-V in holding that the assessee was an assessee in default under section 201(1) and that the assessee-company was liable to pay interest under section 201(1A) of the Act. His contentions are summarised below. 9 TSL entered into an agreement with AVL on 13-4-1989 for technical assistance for- development of low fuel consumption and low emission level for motor bike produced by TSL, which would be comparable with four-stroke engines. Further, AVL had to provide supporting calculations for Thermo Dynamics. 10 The technical services agreed to be rendered AVL related to study and improvement fuel of efficiency of the carburetted engine of TSL's two wheelers. The services to be rendered by AVL were given in Article 2 of the agreement between TSL and AVL dated 13-9-1989 (page Nos. 6 to 26 of paperbook I). 11 As per Article 2 of the agreement AVL had to provide design, documents, calculations for modification of the existing carburetted engine of TSL to attain the efficiency of four-stroke engine. 12. AVL should procure parts and components to fit into the revised design. 13. AVL should prepare prototype engines and test the same till they a....
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.... (iii) Royalty (Article VI) derived from sources in India is taxable in India (Pages 1 to 5 of paper book II) 24. Therefore, the amount paid to AVL is not taxable in India under the DTAA: (i) If it was 'business profits' and if it was not attributable to a permanent establishment in India; (ii) If it was not in the nature of 'royalty' derived from sources in India; and (iii) If it was fees for 'technical services' and the services are rendered outside India. 25. Though, as per Article 6. 1.1 TSL would have a right to use drawings, calculations and reports as these relate only to modifications of existing design, the payment would not take the character of royalty. The Reserve Bank of India in their permit for remittance of foreign exchange also recognised the agreement as a technical aid fees agreement and referred to the payment as lump sum know-how fees. 26. It may be clear from the above that what had been done by AVL was nothing but providing technical consultancy for improving the efficiency of the existing engine. Clause 6. 1.1 of the agreement clearly stipulated that TSL shall have the 'worldwid....
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....IAC [1984] 148 ITR 774 (Kar.) (DTAA with Japan) (pages 29 to 40 of paperbook II). 4. Graphite Vicarb India Ltd. v. ITO [1993] 199 ITR 119 (Cal.) (SB),[DTAA with France) (pages 41 to 44 of paperbook II). 5. Union Bros. Industries Inc. A/R Protchem Industries (India) Ltd [IT Appeal Nos. 989 (Mad.) of 1995, 1251 and 1252 (Mad.) of 1992 dated 14-9-1995] Madras B-Bench of Tribunal) (DRAA with Japan) (pages 45 to 52 of paperbook II). 6. Wellman Incandescent India Ltd. v. Dy. CIT [1995] 55 ITD 339 (Cal.) (DTAA with Italy) (pages 53 to 57 of paperbook II). 31. The agreement between TSL and AVL was viewed only as technical services by the Government, the Reserve Bank of India, the Austrian company and the Austrian tax authorities and the Assessing Officer of TSL. 32. Though Indian Income-tax law is blind to equity on grounds of doctrine of estoppel the Income-tax Officer taking a contrary and different view compared to Deputy Commissioner (Asstt.) should be forbidden. It was not correct on the part of the department to put the assessee company to hardship on grounds of more change of opinion. The Income-tax Officer himself in para 10 had admitted that a port....
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....s case are totally different from the case of Majestic Auto Ltd. 37 Various High Courts and the CBDT have held clearly that the provisions of DTAA override the provisions of the Income-tax Act. In this connection the learned counsel for the assessee cited the following case laws: 1. CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146/15 Taxman 72 (AP). 2. CIT v. S.R.M. Fir [1994] 208 ITR 400 (Mad.) at page 418. 3. Davy Ashmore India Ltd.'s case at page 630. 4. Arabian Express Line Ltd. of United Kingdom v. Union of India [1995] 212 ITR 31 (Guj.) at page 35. 38. Relying on the above cited decisions it was contended that the definition of royalty as per the DTAA had to be applied. Where there is DTAA between two countries, in order to decide whether a payment is royalty, only the definitions contained in DTAA have to be seen. 39. The Karnataka High Court in the case of Citizen Watch Co. Ltd. at page 787 and the Calcutta High Court in the case of Davy Ashmore India Ltd, at pages 630 and 631 have clearly held that the definition of royalty under section 9(1)(vi) will apply only for that section and it cannot be applied for the purposes of....
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....eration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'. The above definition covers only the fees for managerial, technical or consultancy services. It does not provide for the fees paid for transfer of any calculations, design drawings, any other information or any right to use any patents, etc. 43. The present case in hand is covered by Article VI of the Double Taxation Avoidance Agreement between India and Austria, as per which, the term 'royalty' means any royalty or other like amount received as consideration for the right to use copyrights, artistic or scientific works, cinematographic films, patents, models, designs, plants, secret processes or formulae, trade marks and other like property or lights. 44. Section 9(1)(vi) of the Income-tax Act, 1961 defines royalty on the similar lines, as per which royalty income consisting of lump sum consideration for the transfer outside India of or the imparting of information outside India in respect of any data, documentation, drawings or specifications relating to any patent, invention,....
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.... the Assessing Officer had held that the payments did not attract Indian Income-tax Act and had issued no objection certificate for remittance of the fees without deduction of tax was also not correct. The no objection certificate in question stated that the Assessing Officer had no objection to M/s. TSL remitting the fees to AVL and that the remitter in his capacity as a representative had: No liabilities outstanding. 52. Made satisfactory arrangements for payment of tax due under the IT Act, 1961..... in respect of the remittances referred to above. 53. Thus the certificate did not state that the fees were not liable to Indian Income-tax, instead it stated that TVS had made necessary arrangements for payment of the tax due under the Income-tax Act. 54. In this connection he referred to Article 5.3 of the agreement between TSL and AVL, which states: "The amount in 5.1 is net of Indian taxes and any taxes due will be borne by TSL". Thus the payment of taxes was the responsibility of TSL. Hence no objection certificates were issued for remittance abroad of the amounts. 55. The argument that TSL was paying royalty to Suzuki, Japan was also not relevant because TS....
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....ted 26-2-1990 (issued by the Ministry of Industries, Department of Industrial Development) precluded the Income-tax Officer, TDS, from exercising his jurisdiction under the Income-tax Act in passing the impugned orders. 60. We have heard the rival submissions and considered the facts and the materials on record including the paperbook submitted by the learned counsel for the assessee, the orders of the lower authorities and the case laws cited by both the parties before us. To resolve the point at issue the following crucial questions are to be answered: (i) Whether the provisions of DTAA between India and any other country prevail over the provisions of the Income-tax Act, 1961 ? (ii) In case the DTAA prevails over the Act, whether the impugned payments made by TSL to AVL fall under the definition of 'royalty' or 'technical know-how fees' as per the DTAA vis-a-vis the collaboration agreement between India and Austria ? (iii) In case the impugned payments fall under the term 'technical fees' as per DTAA between India and Austria, whether the Indian company, viz., TSL is liable to deduct tax at source, particularly when AVL, The ....
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....s of the Act, which means that they are subject to the provisions of section 90. By necessary implication it is subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Government of India with foreign countries. Even assuming that all the profits of a foreign company are to be deemed to accrue or arise in India under section 9 of the Act, the provisions of the article of the agreement will prevail over section 9. In effect, such profits of a foreign company will not be liable to tax under section 9 except to the extent allowed by the Agreement with the foreign country." 65. In the case of VR. S.R.M. Firm the Madras High Court has observed as follows : "It is obvious and inevitable that there exists a provision to the contrary in the agreement, there is no scope for applying the law of any one of the respective contracting states to tax the income and the liability to tax has to be worked out in the manner and to the extent permitted or allowed under the terms of the agreement." 66. In the case of Arabian Express Line Ltd. of United Kingdom's case the Hon'ble Gujarat High Court has observed as follows: "Sub-section....
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....eement. 69. Having answered the first question, let us now move on to answer the second question as to whether the impugned payments made by TSL to AVL would fall under the definition of 'royalty' or 'technical fees' as per the DTAA between India and Austria. The admitted facts are that AVL had no permanent establishment in India and the services were rendered outside India. Also AVL was not a manufacturer of two wheelers and was only a consultant. In the instant case the Austrian company had provided technical consultancy on the specific terms raised by the Indian company, vis., TSL. According to the agreement between the two companies the entire 'technical know-how' was absolutely to be passed on to the Indian company, namely, TSL. There was no grant of any right to use any property of AVL. The payment was only for the work done by AVL and for the transfer of technology absolutely to TSL. AVL had not patented any of such drawings. Hence there was no question of AVL permitting TSL the 'right to use their patented technical know-how. Under these circumstances the contention of the assessee's counsel that 'the payment for the services rendered by AVL could only be termed as fees ....
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....ments being made to the said company as they were fees for technical services. On appeal the Commissioner (Appeals) held that deduction of tax at source was not called for in view of the provisions of Double Taxation Agreement between India and Austria. On the revenue's appeal the Tribunal held that 'in view of Article 7 of the Double Taxation Agreement between India and Austria the amounts paid to the Austrian company for technical services rendered in Austria are taxable in Austria and not in India. In view of this there was no question of deduction of tax at source from the payments in question. In the instant case the technical services for which the payments were made were rendered in Austria and not in India. Hence the Commissioner (Appeals) was right in holding that the deduction of tax at source was not called for in this case and the Assessing Officer should have issued no objection certificate for the remittances of technical know-how fees without deduction of tax at source. Thus the departmental appeal was dismissed. The facts of the case in hand are identical with those in the case considered by the Patna Bench of this Tribunal. In the instant case also the Aust....