TaxTMI 
TaxTMI 
2008 (11) TMI 74
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....y, 1975. 3. The issue which arises for consideration in the present reference is whether the amounts received under those Agreements by the Respondent from the three Companies were chargeable to tax in India either having regard to the provisions of the Income Tax Act, 1961 (hereinafter referred to as the Act) or having regard to the provisions of the Double Taxation Avoidance Agreement (DTAA) entered into between the Governments of India and the Federal Republic of Germany (hereinafter referred to as the German DTAA). 4. The Income Tax Officer by order of assessment dated 3rd September, 1983 had assessed these amounts as being liable for tax. In the Appeal preferred, for reasons cited by the Commissioner of Income Tax (Appeals), the Appeal was dismissed except to the extent of granting relief in the sum of Rs.49,974/-which was by way of commission received from M/s.Cable Corporation of India Limited. 5. The Respondent assessee preferred an appeal to ITAT. The Tribunal first dealt with the Agreement dated 23rd February, 1973 between Siemens India Limited and the Assessee. Under this agreement the assessee had agreed to provide to Siemens India Ltd., relevant patents, patent appl....
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....onnel of B.H.E.L. and also to delegate its personnel to B.H.E.L. and some other requisitions. In consideration B.H.E.L. was to pay the assessee 4% of the selling price of the industrial turbines for the next five years. These payments were described as royalty. Any tax payable was to be paid by B.H.E.L. The learned Tribunal was pleased to hold that the payment is royalty under Section 9(1) (vi) of the Act but not royalty within DTAA but were part of commercial profits but as there was no PE, it would not be taxable. It considered the payments described as technical assistance fee but which had been treated as royalties under the extended definition of Section 9(1)(vi). The argument advanced on behalf of the Respondents that they should be considered under Section 9(1)(vii) was rejected. For similar reasons as discussed earlier considering D.T.A.A. it held the same to be commercial profits not assessable to tax in the absence of permanent establishment (PE) though they were royalties under Section 9(1)(vi) of the I.T.Act. 8. The Tribunal then dealt with the Agreement with BEL dated 15th March, 1967 and the payment of Rs.64,380/- under clause 11.1.1 of the Agreement which was....
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.... already held that the additional assistance fees of Rs.42.41 lakhs is not taxable and consequently held that the reimbursement of expenditure also would not be taxable. The Tribunal accordingly partly allowed the Appeal. 11. The Revenue moved an application by way of Reference. The Tribunal by its order dated 26th May, 1987 has referred the following questions of law to this Court for its opinion:- "(1) Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the definition of the term "royalty" in Explanation 2 to Section 9(1)(vii) of the Income-tax Act will not apply to the said term as used in Article III(3) of the Agreement for Avoidance of Double Taxation of income between India and the Federal Republic of Germany? (2) Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that certain sums namely (1) the sum of Rs.2,089,457/- due to the assessee from M/s. Siemens (India) Ltd. under the agreement dated 22.2.1973 and dated 17.7.1975 respectively (2) the sum of assessee from M/s.Bharat Electronics Ltd., under the agreement dated 15.3.1967 and (c) the sum of Rs.53,844/- due to the....
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....dia. Reliance is placed on rulings on Ambulatory approach of the Supreme Court of Netharlands and the Supreme Court of Belgium. We do not propose to deal with the said judgments, in the absence of the full texts of the judgment being made available to the Court as such we are not giving the citations. On behalf of the assessee it is submitted that what will have to be considered are the Clauses of the D.T.A.A. and not the subsequent amendments. In other words the static interpretation. Reliance is placed on the ruling of the Supreme Court of Canada. In the alternative, it is submitted that even if it is accepted, that amounts are royalty as defined under Section 9(1)(vi) of the Income Tax Act and, therefore, deemed to accrue in India they would not be chargeable to tax in India having regard to the provisions of the DTAA. It is open to an assessee when the provisions of D.T.A.A. are more beneficial considering Section 90(2), to contend that the taxability of the income should be governed by the provisions of the DTAA and not by the provisions of the Act. Reliance is also placed on the Circular issued by the CBTD being Circular No.333 dated 2nd April, 1982 (see 137 ITR I st.)....
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....resident has a residence or place of business or business connection in India." The income from receipt of royalties as set out in section 9(1)(vi) are thus now taxable in India whether or not the non-resident has a place of residence, or place of business or business connection in India. In the present appeal though the agreements entered into are before 1st June, 1976, income have received is for several Assessment Years. 14. The relevant provisions of DTAA notified by Notification dated September 13, 1960, read as under:- Article (1) The taxes which are the subject of the present Agreement are:- (a) in India: the income-tax, the super tax, the surcharge, imposed under the Indian Income-tax Act, 1922 (11 of 1922) (hereinafter referred to as "Indian tax"); (b) ....... (2) The present Agreement shall also apply to any other taxes of a substantially similar character imposed in India or the Federal Republic of Germany subsequent to the date of signature of the present Agreement.(emphasis supplied). Article II: (1)....... (2) In the application of the provisions of this Agreement in one of the territories any term not otherwise defined in this Agreement shall, unless the cont....
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....t 1976 with effect from 1st June, 1976 introduced clauses 5, 6 and 7 to Section 9(1). Clause 5 deals with income by way of interest. Clause 6 defines income by way of royalty. Explanation 2 sets out the meaning of royalty for the purpose of the clause. Clause 7 deals with income by way of fees for technical services. The proviso which was inserted by Finance Act, 1977 with effect from 1st April, 1977 provides that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976 and approved by the Central Government. Explanation 2 defines fees for technical services. 17. While answering the Reference, we have to consider whether (1) Income received by way of royalty; (2) Income received by way of technical fees and (3) Reimbursement of expenses, are taxable in India considering the provisions of Section 9 of the I.T. Act as amended with effect from 1st June, 1976. 18. The Finance Act, 2007 has inserted the explanation to Section 9(1) with retrospective effect from 1st June, 1976. The Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. vs. Dire....
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....n in India. Thus, for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India. The petitioners in the present case have provided services to persons resident in India, and though the same have been used here, they have not been rendered in India." 19. Parliament, it appears, took note of this judicial pronouncement as is noted in the Explanatory notes on provisions relating to direct taxes for the Finance Act, 2007. It referred to Circular No.202 dated 5th July, 1976. With respect to rule for royalty income, it was stated as follows:- "In view of the aforesaid amendment, 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, model, design, secret formula or process or trade mark or similar property, will ordinarily become chargeable to tax in India." Memorandum Explaining the provisions, further notes that the source rule would mean that irrespective of the situs of the service....
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....ent are not, in my view, incorporated in the expression "laws in force" in Canada as employed by the Agreement. To read this section otherwise would be to feed the argument of the Appellant, which in my view is without foundation in law, that subs. (2) authorizes Canada or Germany to unilaterally amend the tax Treaty from time to time as their domestic needs may dictate." The ratio of that judgment, in our opinion, would mean that by an unilateral amendment it is not possible for one nation which is party to an Agreement to tax income which otherwise was not subject to tax. Such income would not be subject to tax under the expression "laws in force". Income covered by the provisions of the I.T. Act is subject to tax. The question which calls for consideration is Article III and Articles V to XII of the DTAA. We have already reproduced Article III(1) and Article III(3). Articles III (1) provides that tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first-mentioned territory through a permanent establishment of the said enterprise situated in the first-mentioned territo....
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....f forming the subject matter of patent rights. For some years the company, as a general rule, used its "know-how" only in its own trade, but subsequently entered into a number of agreements whereby in consideration of lump sum payments and royalties, it undertook to supply the foreign government or company with technical knowledge, plans, a licence and facilities for the interchange of staff to enable them to manufacture specified types of aircraft engines. The Agreements were for various periods. The question was whether in computing the company's profits or gains, the lump sums paid to it under the Agreements should or should not be included. The House of Lords held that the sum should be so included as being part of the receipts of the company's trade; the company was not parting with its assets but trading in them as part of the development of its general trade. In this context we may refer to the observation of Lord Radcliffe:- ""know-how" is an ambience that pervades a highly specialised production organisation and, although I think it correct to describe it as fixed capital so long as the manufacturer retains it for his own productive purposes and expresses its values in h....
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....cise of the powers conferred by Section 10(1) while considering Section 10(2) have to be reasonably construed. 23. The next question that we have to answer is, if the provisions of Double Taxation Avoidance Agreement are more beneficial to the assessee whether the taxability of the income should be governed by the provisions of that Agreement and not by the provisions of I.T. the Act as amended. In other words would the D.T.A.A. prevail over the provisions of the I.T. Act. 24. In Commissioner of Income-tax, A.P.I vs. Visakhapatnam Port Trust, 144 ITR 146 a learned Division Bench of the Andhra Pradesh High Court considering the German DTAA and Section 9 of the Income Tax Act was pleased to hold that the terms of Article III of the Agreement will prevail over Section 9 of the Act. It was so held considering that Sections 4 and 5 of the Act are expressly made subject to the provisions of the Act which means that they are subject to the provisions of Section 90 of the Act. 25. Next reference may be made to Circulars No.333 dated April 2, 1982 issued by the Central Board of Direct Taxes to the following paragraph as to how the Board has understood the law when there be a confli....
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....e very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC. Referring to the Circular the Court held that the Circular shall prevail even if inconsistent with the provisions of the Income-tax Act, 1961, in so far as assessees covered by the provisions of the DTAA are concerned. 27. It would, thus be clear that though provisions of Section 9 would be applicable, however, considering the provisions of the D.T.A.A. if beneficial, than provisions of the Income Tax Act, the provisions of D.T.A.A. would prevail. In our opinion, therefore, in the absence of a permanent establishment the amounts in respect of which the Tribunal has recorded a finding that the income sought to be assessed is industrial or commercial profit are not assessable to tax in India as admittedly the Assessee having no PE. 28. We may, however, note that Parli....
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.... interests, dividends, management charges, remuneration for labour or personal services or income from the operation of ships or aircraft but shall include rents or royalties in respect of cinematographic films. A reading of this Article may prima facie indicate that only royalties from cinematographic films form a part of industrial or commercial profits and all other incomes by way of royalty would not be taxable except to the extent which may be provided by the D.T.A.A. This must also be seen in the context of Articles V to XII where the income from the excluded heads under Article III are taxable. Article IX provides that any rent received from operation of a mine, quarry or any other extraction of natural resources shall be regarded as income from immovable property and will be taxed in the territory in which the property is situated. Similarly, royalty included under Article IX is royalty from the operation of a mine, quarry or any other extraction of natural resources. On the argument advanced by the learned Counsel, considering this Article, such royalty would not be included in the term "industrial" or "commercial" profits. Similarly, interests, dividends, management char....
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.... royalty other than royalty for mine, quarries, etc., if relateable to industrial or commercial profits would be taxable under Article III(1) provided there was a permanent establishment of the enterprise in India. 32. That leaves us with the second question in respect of the payments have been held by the Tribunal to be by way of technical services. Reference by the Tribunal is whether the payment under the Agreement dated 27th July, 1975 and 28th October, 1975 were in the nature of fees for technical services within the meaning of Section 9(1)(vii) or royalty within the meaning of Explanation 2 to Section 9(1)(vi) of the Act. There are two aspects of the matter. Findings have been recorded that in so far as agreement dated 15th March, 1967 is concerned, that work had been done in Germany and there was no question of any transfer or license of any existing technical know-how to BHEL. It was pure and simple consultancy for manufacture of contract products. Secondly, the issue whether they were taxable had come up before the Tribunal at Delhi in the matter of Deduction of Tax at source. The Tribunal recorded a finding that these are not taxable in India. The argument advanced on be....