Income Tax Appellate Tribunal - Chandigarh
Deputy Commissioner Of Income-Tax vs Majestic Auto Ltd. on 31 August, 1994
Equivalent citations: [1994]51ITD313(CHD)
ORDER
J. Kathuria, Accountant Member
1. This appeal by the Revenue raises a ticklish issue. It appears that the assessee-company sought an income-tax clearance certificate from the Income-tax Officer. The Income-tax Officer, however, noticed that the assessee had paid a sum of Rs. 9,34,579 to Steyr Daimler-PUCIIAG (PUCH), Austria ("Puch" for short), which was chargeable to tax in India. He accordingly required the assessee-company to deduct the tax at source at. Rs. 2,80,400 on the aforesaid amount of Rs. 9,34,579. The assessee deposited the tax on 19-12-1986 but filed an appeal under Section 248 of the Income-tax Act ("the Act' for short). Since the direction on the basis of which the assessee-company paid tax at source was stated to be oral, a copy of such direction has not been filed before us.
2. The learned CIT (Appeals) admitted the appeal of the assessee. In fact, the entertainment of appeal was not the subject-matter of dispute by the Revenue. On merits, the learned CIT (Appeals) held that the payments made to Puch were only in respect of drawings and designs and not for services rendered in India. The learned CIT (Appeals) further held that payment in question was not in the nature of royalty and hence the assessee-company had no liability to deduct the tax at source under Section 195 of the Act.
3. The Revenue has come up in appeal before us.
4. The learned D.R. submitted that the payment made to Puch was chargeable to tax in India and hence there was an obligation on the assessee-company to deduct tax at source.
5. Shri Subhash Aggarwal, the learned Counsel for the assessee, however, took us through the copy of the Technical Know-how Transfer and Technical Services Agreement ("the agreement" for short) between the assessee-company and Puch which is available on the assessee's compilation at pages 1 to 32. The learned Counsel for the assessee also referred to the relevant provisions of the Act as also the provisions of the Convention for Avoidance of Double Taxation with Austria (hereinafter referred to as "the Convention"). It was vehemently argued that the payment in question was made to Puch in respect of supply of designs, drawings, etc. and not for rendition of any services in India. Explaining the scheme of the agreement, it was submitted that royalty was payable only after the commencement of commercial production by the assessee-company and that a sum of Rs. 35,52,666 was paid in the financial year 1990-91 on which tax at source to the tune of Rs. 10,65,800 had been duly deducted by the assessee-company. It was also submitted that the specific provisions of Section 90 of the Act over-ride the general provisions of the Act including Sections 9, 195, 195A and other provisions. It was also submitted that the income of the non-resident i.e. Puch was liable to deduction of tax at source in India only if such income arose out of the activities carried out in India. Reliance was also placed on the Supreme Court decision in the case of CIT v. Toshoku Ltd. [1980] 125 ITR 525 for the proposition that the commission amounts which were earned by the non-residents for services rendered outside India could not be deemed to be income which had either accrued or arisen in India. The learned Counsel for the assessee further relied on the Tribunal's decision in the case of Bharat Forge Co. Ltd. [IT Appeal No. 128 (Pune) of 1984, dated 15-10-1985 for assessment year 1984-85 in which Avoidance of Double Taxation agreement between India and West Germany was considered and it was held that no tax was payable in respect of remittance to the foreign company. It was further pointed out that even the reference application of the Revenue was rejected by the Tribunal vide order dated 6-5-1986. The learned Counsel for the assessee strongly relied on the impugned order.
6. We have carefully considered the rival submissions as also the facts on record. Before tackling the problem, it would be worthwhile to refer to the relevant provisions of the agreement, the Convention and the Act.
7. The agreement between the assessee-company and Puch noted that the assessee-company was a manufacturer of Mopeds and their relevant component parts and that Puch produced and marketed Mopeds and the components. The agreement was for the production of Mopeds and Motor cycles etc. manufactured, assembled and sold under Puch licence and for the manufacture of components etc. According to Clause 1.1 of the agreement, Puch granted the exclusive and indivisible right and licence to use manufacturing information supplied by Puch to manufacture, assemble and sell in India the specified products. Clause 1.4 of the agreement stated that in consideration of Puch supplying drawings, ' designs, specifications, process, schedule and all other relevant technical details and documents, the assessee-company would pay to Puch an amount of Austrian Shillings 3 Millions net of taxes, levies and fees of whatever nature and the tax liability will be borne by the assessee-company. The lump sum amount on this account was to be paid in three instalments as detailed below :-
(a) First l/3rd after agreement is filed with the Reserve Bank of India and the Capital Goods Clearance, if any, is obtained, however not later than 10 days from the date of approval by the Reserve Bank of India.
(b) Second l/3rd on delivery of technical documentation (as defined in Annexure 2) however, not later than 30 days after receipt of PUCH's confirmation that the complete technical documentation has been delivered.
(c) Third and final l/3rd on the commencement of commercial production or four years after agreement is filed with RBI whichever is earlier.
In consideration of Puch's furnishing the assessee the manufacturing information to facilitate the manufacture of product in India, the assessee-company was to pay Puch royalty during the period of agreement as per Clause 2.1 of the agreement as under :-
(a) Up to 50,000 vehicles : 1% (b) 50,000 to 1,00,000 vehicles : 0.75% (c) above 1,00,000 vehicles : 0.50%
This royalty was payable for a period of five years from the date of commencement of commercial production.
Clause 13 of the agreement noted that all taxes, duties, fees, levies and other charges in connection with the agreement which are payable in Austria, shall be borne by Puch. Similarly, all taxes, duties, fees, levies and other charges, especially for the lump sum fee, for the technical assistance fee and for the royalties and any other payment which may become due under the agreement, which were payable in India were to be borne by the assessee-company. Clause 22 stipulated that the effective date of agreement will be the date on which the agreement duly signed by both the Parties, approved by the Board of Directors and the Supervisory Board of Puch, was filed with Reserve Bank of India being the condition prescribed by Government of India for coming into force of collaboration agreement approved by it.
The other provisions of the agreement are not of immediate relevance to us in these proceedings and may be skipped.
8. Now we may note the relevant provisions of the Convention. Article III(1) laid down that the commercial profits of an enterprise of the other country (Austria) were to be assessed to tax in India only if the profits were derived in India through a permanent establishment of the said enterprise. Article II(g) defines the term "permanent establishment". Article 111(3), however, further stipulated as under :-
111(3) : The provisions of paragraph(1) of this article shall not be construed as preventing the taxation in one of the territories in pursuance of the present Convention and in conformity with the laws of that territory of income (e.g., dividends, interest, capital gains, fees for technical services, income from the operation of aircraft, rents or royalties or income from immovable property) derived from sources therein by a resident of the other territory even if such income is not attributable to a permanent establishment situated in that former territory.
Article VI of the Convention provided that the royalties derived by the foreign company (Puch, in the present case) from the sources in India may be taxed only in India. Article VI(2), however, defined the term "royalty" to mean "any royalty or other like amount received as consideration for the right to use copyright, artistic or scientific works, cinematographic films, patents, models, designs, plant, secret processes or formulae, trade marks and other like property or rights". Article XVII stipulated that "the laws in force in either of the territories will continue to govern the assessment and taxation of income in the respective territories except where express provision to the contrary is made in this Convention". The other clauses of the Convention are not of much relevance for the present controversy and need not be referred to.
9. As regards the Act, Section 5 provides that the total income of an assessee in any previous year of a person who is a non-resident shall include all income from whatever source derived which-
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Section 9 of the Act stipulates that certain income shall be deemed to accrue or arise in India. Section 9(vi) provides that income by way of royalty payable to a non-resident shall be deemed to accrue or arise in India. Explanation 2 to Section 9(1)(vi) defining 'royalty' reads as under:-
Explanation 2 : For the purposes of this clause, 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'Capital gains') for-
(i) the transfer of all or 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 connnection with television or tapes for use in connection with ratio 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).
Section 90 refers to the Double Taxation Relief allowable in respect of agreement with foreign countries. Section 195 lays down that a person responsible for paying to a non-resident or to a foreign company any interest (not being interest on securities) or any other sum chargeable under the provisions of the Act (not being income chargeable under the head "salaries") shall deduct the tax at source and pay the same in the Government Treasury.
10. From a perusal of the relevant clauses of the agreement, the Convention and the Act, we have to decide as to whether the payment of Rs. 9,34,579 made by the assessee-company to Puch was chargeable to tax in India or not. If it was chargeable to tax in India, then there is no difficulty in applying the provisions of Section 195 of the Act. As noted above, the payment of 3 Million Austrian Shillings apart from the other payments designated as "royalty" was to be made in three instalments in consideration of Puch supplying drawings, designs, specifications etc. There is no dispute that royalty payable by the assessee-company to Puch after the commencement of production did attract tax at source and that matter is not before us in the present proceedings. In the instant proceedings, we have to decide as to whether the lump sum payment made in consideration for the supply of drawings, designs etc. by Puch to the assessee-company attracted the provisions of Section 9 of the Act or not or whether the provisions of the Convention took it outside the purview of the Act.
11. The learned Counsel for the assessee submitted that the specific provisions of Section 90 of the Act shall over-ride the general provisions of the Act. In our opinion, the doctrine "generalia specially bus non derogant" embodies a rule of construction, but it has no universal application. We are supported in our view by the Supreme Court judgment in the case of CIT v. Shahazada Nand & Sons [1966] 60 ITR 392. The Karnataka High Court in the case of CIT v. R.M. Muthaiah [1993] 202 ITR 508 at 512, 513 has considered the provisions of Section 90 of the Act and has succinctly summed up the position as under :-
The effect of an 'agreement' entered into by virtue of Section 90 of the Act would be: (i) If no tax liability is imposed under this Act, the question of resorting to the agreement would not arise. No provision of the agreement can possibly fasten a tax liability where the liability is not imposed by this Act; (ii) if a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it; [Hi) in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the appellate authorities and the court. To the same effect is the circular issued by the Central Board of Direct Taxes as per Circular No. 333 dated April 2, 1982 (see [1982] 137 ITR (St.) 1), which reads thus:
'It has come to the notice of the Board that sometimes effect to the provisions of Double Taxation Avoidance Agreement is not given by the Assessing Officers when they find that the provisions of the agreement are not in conformity with the provisions of the Income-tax Act, 1961.
2. The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, that provision will prevail over the general provisions contained in the Income-tax Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under Section 90 of the Income-tax Act, 1961 also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement.
3. Thus, where the Double Taxation Avoidance Agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the agreement, it is the basic law i.e., the Income-tax Act, that will govern the taxation of income'.
12. From the above, it is clear that where no provision is made under the Act for imposing a tax, the Convention cannot fasten tax liability. If a tax liability has, however, been imposed by the Act, the Convention may be resorted to for negativing or reducing it. In case there is difference between the provisions of the Act and the Convention, the provisions of the Convention shall prevail over the provisions of the Act, which position has been accepted even by the Central Board of Direct Taxes as per Circular No. 333, dated 2-4-1982 reproduced above.
13. We have, therefore, to see whether there is any contradictory difference between the provisions contained in the Convention and those appearing in the Act so far as the present payment is concerned.
14. We have already noted above that royalty under the Convention has been defined to mean any royalty or other like payment for the right to use copyrights, designs etc. Explanation 2 to Section 9(1)(vi) of the Act also defines royalty to mean "consideration for the transfer or use of any designs etc." The agreement between the parties shows that the payment of 3 Million Austrian Shillings would be made by the assessee-company to Puch for the supply of drawings, designs etc. The supply of drawings, designs etc. imply their use also. There is thus no contradiction between the relevant provisions of the Act and of the Convention. It is true that Article 111(1) of the Convention stipulates that industrial or commercial ' profits of non-resident company would not be subject to tax in India unless such profits are derived in India through a permanent establishment. The learned CIT (Appeals) has not touched upon this aspect as to whether Puch was maintaining a permanent establishment in India or not. Neither the learned Counsel for the assessee nor the learned D.R. has addressed us on this aspect of the matter. We, therefore, do not propose to go into this aspect because all the requisite facts are not on record. Be that as it may, the provisions of Article 111(3), however, make certain incomes like royalty taxable in India even if Puch does not have a permanent establishment in India.
15. The learned Counsel for the assessee tried to distinguish between the supply of designs and their use. It was submitted that as per the agreement, the payment in question was to be made to Puch for the supply of designs, drawings whereas the Convention talked of royalty in the context of use of designs etc. We, however, do not find any distinction between the expressions "supply" and "use" for supply of designs would imply their use. We thus find no distinction between the provisions of the Convention and the Act and once the taxability of a particular payment is allowed both in the Act and the Convention, then there is no dispute that the payment is chargeable to tax in India and hence to be subjected to deduction at source. Article XVII of the Convention also supports our view because it lays down that laws in force in either of the countries will continue to govern the assessment and taxation of income in the respective countries except where express provision to the contrary is made in the Convention. In our opinion, there is no express provision to the contrary in the Convention which should lead us to the conclusion that the payment made by the assessee-company to Puch was not taxable in India under the Act.
16. The learned Counsel for the assessee relied on the Supreme Court judgment in the case of Toshoku. Ltd. (supra). That case, however, is distinguishable on facts because it considered only the provisions of the Act contained in Sections 5(2), 9(1)(i) and not the provisions of Section 9(1)(vi). Similarly the judgment of the Tribunal in the case of Bharat Forge Co. Ltd. (supra) relied on by the learned Counsel for the assessee is also distinguishable because the provisions of Avoidance of Double Taxation Agreement between India and West Germany are different from the provisions contained in the Convention. We have decided this issue on the basis of relevant provisions of the Convention.
17. In view of the foregoing discussion, we hold that the payment of Rs. 9,34,579 made by the assessee-company to Puch net of tax was royalty and non-designation of this term as such would not alter the true character of this payment. We further hold that this payment being royalty'was the income of Puch chargeable to tax in India and accordingly the provisions of Section 195 of the Act were applicable. The Income-tax Officer was, therefore, correct in directing the assessee-company to deduct the tax at source. We accordingly set aside the impugned order and restore the direction of the Assessing Officer.
18. In the result, the appeal is allowed.