TaxTMI 
TaxTMI 
2000 (8) TMI 243
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....any person responsible for paying to a foreign company any sum chargeable under the provisions of the Act is to deduct tax at the time of credit of such income to the account of payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode whichever is earlier. Sub-section (2) thereof, however, provides that the person responsible for paying any such sum chargeable under this Act considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine the appropriate proportion of such sum so chargeable and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. The assessee's claim is that as per Article 13(2) the tax was to be deducted at the rate of 30 per cent only. The Assessing Officer, however, held that the payment made by the assessee being in pursuance of agreement which was an extension of an old agreement and which, according to him, was evident from the Government of India's approval dated 27-2-1981 and, therefore, the assessee was taxable at the rate of 50 per cent ....
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....orted only will be allowed and that the agreement should be subject to Indian Laws and not that of England. These modifications were noted vide Government's letter dated 17-12-1971. The change in the name of the company from Associated Battery Makers (Eastern) Ltd. to Chloride India Ltd. was noted vide Government of India's letter dated 13-10-1972. Subsequently, another agreement dated 1-6-1976 was entered into w.e.f. 1-1-1976 for a period of 5 years which was to expire on 31-12-1979. By clause 2 of this agreement, Chloride U.K. agreed to make available in England such day to day technical assistance as may reasonably be required by the assessee to maintain its present standard of quality of Accumulators manufactured by it in its factory in India; to entitle the assessee to ask Chloride for specific development and for assistance in factory layout plan modernisation and like improvements and the consideration was at the same rate as it was in the earlier agreement. The Government of India, Ministry of Industry & Civil Supplies vide letter dated 26-8-1976 informed the assessee that the Government is prepared to approve the terms of the agreement subject to the condition, viz. - (i) ....
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....ollowing : "2.1 (a) Advice on the outline design and layout of the manufacturing processes within the existing factory building; (b) advice as to the preparation and procurement of all requisite raw materials; (c) advice as to the selection procurement and use (but not the manufacture) of machinery and tools special to the production of Accumulators; (d) advice as to the design of Accumulators; (e) advice as to general operational methods; (f) copies of general and detailed drawings of machinery and tools special to the production of Accumulator; (g) copies of operating instructions." As in the past, the assessee was given a right to ask Ukarian Co. for specific development and assistance of factory layout plan modernisation and like improvement on charges to be agreed subject to Government of India's approval. 8. The consideration is provided in clause 9(a) of the agreement as under : "9(a) From 1st January, 1980 during the continuance of this Agreement Battery makers shall pay to Chloride: (i) an amount equal to three per cent (3%) in the case of Accumulators primarily intended for starting lighting and ignition of motor road vehicles and five per....
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....onary engine starting, railway locomotive engine starting and train lighting including parts and ingredients of the said batteries. "Turnover"-shallmean "Turnover" - shall mean "Turnover"-shall mean the amount invoiced for the amount invoiced for the amount invoiced all goods and materials all goods and materials for all goods and mate-relating to or in any way relating to or in any way rials relating to or in associated with the associated with the any way associated Accumulators which Accumulators which with the Accumulators Battery Makers manu- Battery Makers manu- which Battery Makers factures or assembles facture or assemble manufacture or reduced firstly by cred- reduced firstly by credits assemble reduced firstly its to customers for such to customers for such by credits to customers goods or materials re- goods or materials re for such goods or turned and secondly by turned and secondly by materials returned and these taxes and duties those taxes and duties secondly by those taxes for which Battery Makers for which Battery Makers and duties for which acts only as a collecting act only as a collecting Battery Makers act only lecting agency and as a agency a....
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....an income is deemed to accrue or arise. Royalty is the item of income in this case. The payer is Indian company and the recipient is Ukarian company. The payment is made in India and the right to receipt has also accrued in India because of the user of know-how for the production of Batteries in India. Section 9(1)(vi) deals with royalty income and its accrual in India and consequently its taxability in India. It reads as under :--- "9(1) The following income shall be deemed to accrue or arise :--- (vi) income by way of royalty payable by--- (a) the Government; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: ....
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....he head 'Capital gains') for (i) the transfer of all of any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (I) to (V). Explanation 3 - For the purposes of this clause, the expression ....
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....asting; but does not include royalties or other amounts paid in respect of the operation of mines or quarries or of the extraction or removal of natural resources. 4. The term "fees for technical services" as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15 (independent personal services), in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel. 5. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties, or fees for technical services arise through a permanent establishment situated therein, or perform in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such....
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....the DTAA OR (iv) the royalty is paid under a contract which is signed after the date of entry into force of DTAA. There is no dispute in this case that first two conditions are satisfied. The dispute is for the applicability of the alternate conditions stated in item Nos. (iii) and (iv) above. If either of the conditions is satisfied, the tax is to be levied not more than at the rate of 30 per cent even though the tax is to be levied as per the law in India. 15. The revenue's case is that the agreement dated 10-12-1981 is nothing but an extension of agreement which was originally signed on 28-6-1971 and then on 1-6-1976 both being signed before entry into force of the DTAA and, therefore, it cannot be said to be an agreement signed after the coming into force of DTAA. Reliance is placed on the order of the Tribunal dated 28-8-1992 in ITA Nos. 1219 and 1220 (Cal.)/89 in the case of the Ukarian Co. for assessment years 1983-84 and 1984-85 wherein by referring to the decision of the Calcutta High Court in the case of Continental Commercial Co. Ltd. v. CIT [1990] 192 ITR 66/[1992] 60 Taxman 429 it was held that the date of agreement and the date of approval by the Government o....
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....pe of the turnover, (iii) the basis of the royalty, (iv) the absence of the clause that if any of the items manufactured was covered by a patent held by the non-resident company in India the royalty payment shall also constitute full compensation for the use of such patent rights, and (v) the introduction of the provision for extension of the period of the agreement which was not true in the earlier agreement. Referring to the Calcutta High Court decision in the case of Borhat Tea Co. Ltd. he further submitted that though this case was for payment of interest, but its taxability was considered by Their Lordships under article 12 of DTAA wherein also the language of clause 2 is similar to clause (2) of Article 13. Clause (2) of Article 12 reads as under : "2. However, such interest may also be taxed in the Contracting State in which it arises and according to the law of that State; provided that where the resident of the other Contracting State is the beneficial owner of the interest and it is paid in respect of a loan or debt first created after the date of entry into force of this Convention, the tax so charged shall not exceed 15 per cent of the gross amount of the interest." ....
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....d only at the rate of 30 per cent of the gross amount of the royalties and the assessee was required to deduct tax only at that rate. 19. The decision of the Calcutta High Court in the case of Borhat Tea Co. Ltd. was rendered in the context of Article 12. Clause (2) of Article 12, as extracted above, uses only one and first part of the language used in clause (2) of Article 13, i.e. "the interest is paid in respect of a loan or debt first incurred after the date of coming into force of Convention." The second part of the agreement in clause (2) of Clause 13, viz., the agreement is signed after coming into force of the Convention is absent in clause (2) of Article 12. We, therefore, agree that the first order of the Tribunal in the case of the assessee that it has no application in so far as in deciding the applicability of the second part of the proviso in clause (2) of clause 13. The renewal of the fixed deposit in the case of Borhat Tea Co. Ltd. was after the expiry of the earlier agreement and, therefore, the Court held that it was a new agreement. The Court held at page 993 as under :--- "In our view, when a matured deposit is discharged or renewed, a fresh contract or de....
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....at context Their Lordships of Calcutta High Court held that once an application has been made within the time prescribed by the Act to the Commissioner for approval, it was immaterial when such approval was accorded inasmuch as the approval would relate back to the date of application for such approval and that the condition of creating an approved gratuity fund would be satisfied if the assessee makes an application for such approval on or before January 1, 1976, irrespective of the fact whether such approval was accorded to the assessee before the assessment was completed. This was a case of relating back the date of approval for the gratuity fund and not for treating the date of the approval on that day. At best this case can be authority that approval given by the Government relates back to the date of application or date of agreement. In the present case, what is required under Article 13(2) is that the agreement should be signed after the coming into force of the DTAA and this is a factual matter. It is a fact that the agreement has been signed between the parties in this case on 10- 12-1981, i.e. a date after coming into force of the Convention on 23-11-1981. The mere fact t....