Income Tax Appellate Tribunal - Mumbai
G.U.J. Jaeger Gmbh vs Income-Tax Officer on 20 September, 1990
Equivalent citations: [1991]37ITD64(MUM)
ORDER
R.P. Garg, Accountant Member
1. This is an appeal by the assessee against the order of the CIT(A), for the assessment year 1980-81.
2. The assessee is a non-resident company. On 29-1-1972, it had entered into a collaboration agreement with Precision Bearings India Ltd. (hereinafter referred to as 'FBI in short), for providing technical know-how possessed by it, including engineering data, drawings, documentation and advice, for the manufacture of: (i) precision self-aligning Spherical Roller Bearings Single and Double Row (all types); and (it) precision Cylindrical Roller Bearings (all types) including Roller Cage Assemblies. The initial as well as the recurring know-how was agreed to be provided in Europe, as per Clause 1 of the agreement Such know-how is clarified, as per Clause 3, to extend to any improvements that may be effected by the assessee in the methods of manufacture being followed by PBI, as a result of research and development carried on by it which shall be provided by the assessee, free of cost. Clause 5 provides for the secrecy of the know-how provided with a right to PBI to sub-licence the same to third parties on approval condition. Clause 8 and Clause 9 of the agreement are to the following effect:
8. Jaeger shall, relative to manufacture by PBI of the products, arrange for imparting to such trainees nominated by PBI and for such period as may be agreed upon between the parties training at their works or the Works of any of its associates in the Federal Republic of Germany or elsewhere. All travelling and living expenses and salaries of such trainees shall be borne by PBI. Except as otherwise provided, FBI shall reimburse Jaeger in West German Marks in Germany all monies as may from time to time have reasonably to be paid by Jaeger to or for or on behalf of any such trainee and shall indemnify and keep indemnified Jaeger from and against all claims, payments, proceedings and expenses whatsoever arising from any cause whatsoever by or in respect of any such trainee. The terms of training of such trainees shall in due course be settled between the parties and shall be subject to the approval of the Indian and German authorities concerned.
9. Jaeger shall make available in Europe to PBI for employment by it relative to manufacture by it of the products such Engineers/Technicians and for such period/periods as may be agreed upon between the parties. All expenses in connection with the visit of such Engineers/Technicians and their families to India shall be borne by PBI. The terms of employment of such Engineers/Technicians shall in due course be settled between the parties and shall be subject to the approval of the Indian and German authorities concerned.
Clause 13 says that PBI shall be entitled even after the expiry of the agreement, to continue the manufacture of the said products by utilising free of cost the know-how provided to it by the assessee.
3. Clauses 18 and 19 are relating to the consideration payable and mode of payment etc. They read -
18. In consideration of Jaeger providing to PBI the recurring know-how as envisaged herein before (including improvements in the methods of manufacture that may be effected as result of research and development carried on by Jaeger) and performing other obligations undertaken by it in terms hereof, PBI shall pay to Jaeger in respect of the products manufactured and sold by it in India sum equal to 5% (five per cent) subject to Indian taxes of the net selling price thereof and in respect of the products manufactured and sold by it outside of India a sum equal to 6% (six per cent) subject to Indian taxes of the net selling price thereof. The expression 'Net Selling Price' shall mean price received by PBI for any of the products manufactured by it as hereby envisaged after deducting therefrom the following:
1. Landed cost (including ocean freight, insurance, custom duty) of imported components therein used;
2. Cost of any component made by PBI in collaboration with a foreign company other than Jaeger on royalty basis and used therein;
3. Cost of any component made by any Indian company other than PBI in collaboration with Jaeger and used therein;
4. Sales-tax;
5. Freight;
6. Insurance;
7. Packing and forwarding expenses.
For avoidance of doubt, it is stated that the amounts payable to Jaeger in terms of this clause shall be payable also in respect of the products that shall have been in stock with PBI at the time of expiration or sooner termination of this agreement.
The parties agree that no royalty shall become payable in terms of this agreement in respect of any ball bearings manufactured by PBI.
It is further agreed that this agreement envisages payment of royalty in respect only of Roller Bearings of newer types, i.e., other than those specified in the Annexure hereto.
19. The amounts payable to Jaeger in terms of clauses aforegoing shall be paid by PBI at Wuppertal-Elberfeld in the Federal Republic of Germany in West German Marks at semi-annual intervals as follows :
(a) By November 30 each year in respect of the products sale during the period ending on August 31, previous thereto ;
(b) By May 31, each year in respect of the products sold during the period ending on February 28/29 previous thereto.
Remittances of the said amounts shall be accompanied by statements setting out details of the products sold during the relative period. Further more, at the end of each financial year, PBI shall forward to Jaeger a statement, duly certified by its auditors, showing the amounts payable by PBI to Jaeger in terms hereof in respect of the products sold during such financial year.
4. During the year under consideration, the assessee received a sum of Rs. 4,81,102 from PBI but claimed the same to be not taxable as the services were rendered abroad and also because of the Double Taxation Avoidance Agreement between the Government of India and Federal Republic of Germany, as the assessee had no permanent establishment in India. The ITO did not agree with the claim of the assessee and therefore, he brought the said sum of Rs. 4,81,202 to tax as, in his opinion, it represented royalty liable to tax in India, under Section 9( 1) of the Income-tax Act, 1961. Referring to Section 5(2) of the Act, he also brought the sum of Rs. 11,68,823 to tax on accrual basis. Aggrieved with the order of the ITO, the assessee appealed to the CIT(A) on the following grounds :
(a) The amounts of Rs. 4,81,202 and Rs. 11,68,823 received/receivable by the appellant do not constitute royalty within the meaning of Explanation 2 to Section 9(1)(vi) of the IT Act. In support of this contention, he has relied on the decision of the Hyderabad Bench 'A' of the Tribunal in the case of Klayman Porcelains Ltd. v. ITO [1984] 8 ITD 265 (Hyd.);
(b) Both the above amounts represent fees for technical services and since they are received/receivable outside India, they are not taxable under the proviso to Section 9(1)(vi);
(c) The technical drawings, designs, documents etc. which were supplied by the appellant to the Indian Company in terms of the agreement, constitute 'Plant' and since the transfer of the plant took place outside India and the consideration thereof was also received outside India, it is not taxable in India. In support of this contention, he has relied on the decisions reported at 96 ITR 674 and 118 ITR 864;
(d) Since the amounts of Rs. 4,81,202 and Rs. 1,68,823 are fees for technical services, they constitute 'Industrial or Commercial profits' and as the appellant did not have a permanent establishment in India, they are not taxable in accordance with the provisions of the Double Taxation Avoidance Agreement between India and West Germany.
The CIT(A) did not find any merit in the aforesaid contentions raised on behalf of the assessee. He, therefore, rejected appeal observing as under:
6. In my opinion, the consideration received by the appellant for providing recurring know-how falls under Clauses (i) to (iv) of Explanation 2 to Section 9(1)(b) and, therefore, it constitutes 'royalty'. Further, the obligations undertaken by the appellant regarding imparting of training to the employees of the Indian company, making available engineers/technicians for employment by the Indian Company etc. are in the nature of rendering of services in connection with the provision of technical know-how and, therefore, the consideration received by the appellant in respect thereof, constitutes 'royalty' under Clause (vi) of Explanation 2 to Section 9(1)(vi). Therefore, the amounts of Rs. 4,81,202 and Rs. 11,68,823 received/receivable by the appellant under the agreement constitute royalty. Since the royalty was paid by a person resident in India, the income is deemed to accrue in India under Section 9(1)(vi) and the appellant is liable to pay tax thereon.
7. As I have held that the amounts of Rs. 4,81,202 and Rs. 11,68,823 constitute royalty assessable under Section 9(1l)(vi), these amounts cannot be treated as fees for technical services falling under Section 9(1)(vii). In this connection, a reference may be made to the decision of the Gujarat High Court in the case of Meteor Satellite Ltd. v. ITO [1980] 121 ITR 311, where it was held that income by way of fees for technical services, which is covered by Clause (vii), is a more general category as compared to the royalty which is covered by Clause (vi) and on the principle that the particular excludes the general Clause (vii) cannot be applied to royalty income which is covered only under Clause (vi).
10. I have also examined the matter in the light of the provisions of the Double Taxation Avoidance Agreement India and West Germany. It is no doubt true that since the appellant does not have any permanent establishment in India, it is not liable to pay tax in India in respect of 'Industrial or Commercial profits', as provided in Article III(1) of the Agreement. However, under Article III(3), it is provided that the term 'Industrial or Commercial profits' shall not include income in the form of royalties. The appellant's counsel has contended that since the term 'royalties' has not been defined in the Agreement, its dictionary meaning should be adopted for the purpose of deciding as to whether the consideration received by the appellant constitutes 'Industrial or Commercial profits'. He has further contended that the definition of the term 'royalty' as given in Explanation 2 to Section 9(1)(vi)(c)of the IT Act is not a general definition and has no application for matters under the Double Taxation Avoidance Agreement between India and West Germany. In this connection, he has relied on the decision of the Karnataka High Court in the case of Citizen Watch Co. Ltd. v. IAC [1983] 15 Taxman 438.
11. I have considered the matter carefully and, in my opinion, there is no force in the contention of the appellant's counsel. This is because Article XVI of the Double Taxation Avoidance Agreement between India and West Germany has specifically provided that the laws in force in either of the territories will continue to cover the assessment and taxation of income in the respective territories except where express provision to the contrary is made in the Agreement. From the provisions of this Article it is quite clear that the appellant's liability for taxation in India will have to be determined in the light of the provisions of the Income-tax Act, except with regard to matters for which a provision to the contrary has been made in the Double Taxation Avoidance Agreement. Since the Double Taxation Avoidance Agreement between India and West Germany does not contain any definition of the term 'royalty', its definition as given in Explanation 2 to Section 9(1)(vi) will have to be adopted for the purpose of deciding as to whether the consideration received by the appellant for providing recurring know-how and performing other obligations constitute 'royalty'. As already discussed, under Explanation 2 to Section 9(1)(vi), the amounts of Rs. 4,81,202 and Rs. 11,68,823 received/receivable by the appellant constitute 'royalty'. As such, both these amounts will not constitute 'Industrial or commercial profits' within the meaning of Article III(3) of the Double Taxation Avoidance Agreement between India and West Germany. I have gone through the decision of the Karnataka High Court in the case of Citizen Watch Co. Ltd. (supra). In this case, the assessments related to the assessment years 1964-65, 1965-66, 1966-67, 1967-68, 1968-69, 1969-70 and 1970-71. As Section (9)(1)(vi) was introduced in the Income-tax Act w.e.f. 1-6-1976 the Court held that the ITO's reliance on the definition of the term 'royalty' occurring in Explanation 2 to Section 9(1)(vi)(c) was illegal and unwarranted. It is in this context the Court observed that the definition of royalty occurring in Explanations '2 to 9(1)(vi)(c)was not a general definition and had no application interpreting that term whenever it occurs. Further in this case, it appears that the attention of the Court was not invited to Article XI of the Double Taxation Avoidance Agreement between India and Japan, which contains provisions corresponding to those contained in Article XVI of the Double Taxation Avoidance Agreement between India & West Germany. I am, therefore, of the opinion that the ratio of the decision of the Karnataka High Court in Citizen Watch Co. Ltd.'s case is not applicable in the present case. Accordingly, I reject the contention of the appellant's counsel that the above amounts are exempt under the provisions of the Double Taxation Avoidance Agreement between India and West Germany.
5. The assessee has also raised an alternative contention before the CIT(A) that the regular method of accounting followed by it was cash and, therefore, the ITO erred in ignoring the said method and in including Rs. 11,68,823 on accrual basis. In this connection, he stated that along with the return of income, the assessee did not file copies of the profit and loss account and balance-sheet or any other statement of account. It, therefore, appeared to him that the assessee had not maintained any books of accounts in respect of its income. The assessee's counsel was also requested to produce evidence to establish that the method of accounting followed by the assessee was cash and not mercantile. However, no evidence was produced before him. Following the decision of the Madras High Court in the case of CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573(Mad.), he held that royalty income was to be assessed in the hands of the assessee under Section 5(2)(b) of the Act, on accrual basis and not on receipt basis, as claimed by the assessee.
6. The assessee had also raised a contention that its income of Rs. 11,68,823 was assessed on accrual basis and, therefore, there was no justification in assessing the royalty income of Rs. 4,81,202 on receipt basis, as according to it, the same had accrued to it in earlier years in terms of the agreement. This contention was also found by the CIT(A) as not correct. He observed that admittedly, the royalty of Rs. 4,81,202 had not been assessed to income-tax in earlier years; and the scope of total income of a non-resident, as laid down in Section 5(2) of the Act, includes not only the income which accrues or arise to him in India, but also the income which was received in India. As the amount of Rs. 4,81,202 was received by the assessee during the relevant previous year, according to him, it formed a part of its total income. He, therefore, held that the ITO was justified in including the sum of Rs. 4,81,202 and Rs. 11,68,823 as royalty income of the assessee under Section 9(1)(vi) of the Act.
7. The learned counsel for the assessee, Shri S.E. Dastur, submitted before us that the consideration was for services mentioned in Clauses 3, 8 and 9 and, therefore, it was fees for technical services and not royalty. He, further, submitted that there being no permanent establishment in India, Article III of the Double Taxation Avoidance Agreement did not apply to tax its industrial or commercial profits. He further submitted that Clause 3 to Article III of DTA did not exclude services forming part of industrial or commercial profits and, therefore, they would not be taxable under any other provision of the DTA. In this connection, he referred to the French Agreement for avoidance of double taxation providing specifically for the taxation of the fees for technical services, and the decision of the Special Bench of the Tribunal in the case of Siemens Aktiengesellschaft v. ITO [1987] 22 ITD 87 (Bom.) (SB) paragraph 52. He further contended that the proviso to Section 9(1)(vii) excludes agreements prior to 1-4-1976 and, therefore, royalty definition contained in the Explanation to that section would not apply. He also contended that the receipt was not royalty even under the general sense, and referred to the decision of the Tribunal in Siemens Aktiengesellschaft's case (supra) and the judgment of the Karnataka High Court in Citizen Watch Co. Ltd. v. IAC [1984]148 ITR 774. He further submitted that the Indian counterpart being entitled to use the technical know-how even if the agreement had expired, it was a payment for acquisiting the technical know-how and improvements therefor and the same, thereby, would form part of the purchase price and accordingly a capital receipt in the hands of the assessee. As regards the system of accounting and the accessibility of the receipt, he submitted that the assessee was following cash system which should be accepted. In this connection, he referred to the decision of the Special Bench of the Tribunal in the case of IAC v. Reinz Dichtungs Gmbh [1989] 31 ITD 67(Delhi) (SB). In any case, he submitted that if the income is assessed on accrual basis, the receipt of Rs. 4,81,202 was not assessable in the year under consideration as it related to the period prior to the previous year under consideration. In this connection, he referred to the decision of the Calcutta High Court in the case of Seth Chemical Works v. CIT [1983] 140 ITR 507.
8. The learned Departmental Representative, on the other hand, supporting the orders of the departmental authorities, submitted that the entire receipt was in the nature of royalty as the agreement was mainly for the provision of technical know-how and the other services were merely ancillary and subserving to the provisions of know-how. Double Taxation Avoidance Agreement does not exclude assessment under the Income-tax Act, if there is no specific provision for taxation of a particular receipt in the DTA. He referred to Article XVI(1) in this regard. As regards the system of accounting, he supported the orders of the departmental authorities by relying upon the decision of the Madras High Court referred to by the CIT(A), and submitted that it was only the system of accounting which was applicable to nonresident assessees. The receipts having not been assessed in the earlier years, it was submitted, were validly brought to tax by the departmental authorities by invoking the provisions of Section 5(2)(b). The present year is the first year of production/receipt and, therefore, the maintenance of the accounts has to be justified on the sound principles of law. The Special Bench decision in the case reported in Reinz Dichtungs' case (supra), he submitted, was a case where the system was accepted by the revenue in the past. No accounts in the instant case are maintained in India either on cash system or mercantile system.
9. We have heard the parties and considered their rival submissions. On a careful consideration of the agreement entered into by the assessee with Precision Bearings India Ltd. ('PBI' in short), and the other materials on record, we are of the opinion that the receipt by the assessee in pursuance of the agreement was mainly and basically for the provision of technical know-how. It also covers the receipt for performing other obligations undertaken by the assessee under the agreement, vide Clauses 3, 8 and 9 referred to by the assessee. Clause 17 provides the consideration for the provision of initial know-how as envisaged in Clause 1 of the agreement. An amount equivalent to Rs. 8,58,123 was to be remitted at the rate of exchange current at the date of payment. It was to be made immediately after all the necessary approvals and consent of the Government of India or any other authority or authorities was obtained. We are concerned in this case for the receipt by the assessee not in pursuance of Clause 17, but Clause 18, extracted above, providing for the consideration @5 per cent of the net selling price of the products manufactured and sold by the assessee in India and @ 6 per cent of the net selling price, if sold outside India. This clause provides for the consideration of, (i) providing recurring know-how as envisaged including improvements in the method of manufacture that may be affected as a result of research and development carried on by the assessee and (ii) performing other obligations undertaken by it in terms of the agreement. The contention of the assessee is that this consideration under Clause 18 of the agreement was for providing technical fees for services. We do not find any merit in this contention of the assessee. This clause, as we have stated earlier provides the consideration for the provision of the recurring know-how and for that purpose, it included improvements in the method of manufacture, pursuant to the research and development carried on by the assessee. The training contemplated by Clause 8 and Clause 9 of the agreement is subject to the terms as settled between the parties in due course and approved by the Indian and German authorities concerned. Therefore, at the most, the consideration in Clause 18 could be said to have included a receipt for agreeing to provide training to the assessee's employees in India and West Germany. During the previous year under consideration, the assessee provided training to two of PBI's employees, namely, Mr. H.G. Verma and Mr. N.K. Ghosh. Besides, the assessee sent one of its technicians Dr. H. Morell to FBI's factory at Baroda for a brief period from 18-2-1979 to 3-9-1979. The purpose of Mr. Verma's visit, as stated in assessee's letter dated 7th June, 1983 to its Chartered Accountants Messrs. A.F. Ferguson and Company was "to study various roller bearings designs for high speed vehicles; to discuss and obtain improved designs, manufacturing methods and other useful data for manufacture and supply of products to the customers". Similarly, the purpose of the visit of Dr. H. Morell was "discussion with directors of the company on successful implementation of the agreement and constructive suggestions for the difficulties faced by the company". The purpose of the visit was stated as training only in the case of Mr. N.K. Ghosh. In these circumstances, in our opinion, a very negligible part of the consideration received by the assessee in pursuance of Clause 18 was for training. On the facts and circumstances of the case, we estimate the same to be at 20 per cent. The balance consideration was for providing recurring know-how including improvement in the methods of manufacture as the result of research and development carried on by the assessee and would be in the nature of royalty.
10. The contention of the learned counsel for the assessee that the entire amount would form part of industrial and commercial profits and as the assessee had no permanent establishment in India, no part thereof would be taxable in India because of the provisions of Article III of the Double Taxation Agreement is not wholly correct. In our opinion, only that part of the consideration would form part of industrial and commercial profits which was in the nature of fees for technical services, in this case the consideration relating to training which we have estimated at 20 per cent. Since the fees for technical services is not excluded from the definition of industrial and commercial profits in the Double Taxation Avoidance Agreement in the same way as it was excluded in the French Treaty, and would accordingly be exempt from Indian taxation. This view is in conformity with the decision of the Special Bench of the Tribunal in the case of Siemens Aktiengesellschaft (supra). The contention of the assessee that the consideration pertaining to the provision of recurring know-how would also be a part of industrial and commercial profits has no force. It would, in our opinion, be in the nature of royalty and there being a specific exclusion of royalty from the definition of "industrial and commercial profits", by Article III(3) of DTA, it would not enjoy the exemption on the ground that the assessee had no permanent establishment in India.
11. It is true that the definition of "royalty" given in Proviso to Section 9(1)(vii) inserted w.e.f. 1-4-1976 should not be adopted for considering cases of agreements entered into prior to 1-4-1976, but as held by the Special Bench of the Tribunal in Siemens Aktiengesellschaft's case (supra) the ordinary meaning of the term "royalty" is to be taken into consideration for the purposes of Article III(3) of the DTA, which includes in its ambit the receipt of consideration for provision of technical know-how as also the recurring know-how.
12. We also do not find any force in the contention of the assessee based upon the judgment of the Karnataka High Court in the case of Citizen Watch Co. Ltd. (supra) that only that amount of royalty that was derived from the operation of a mine, quarry, or any other extraction of natural resources as stated in Article IX of the Double Taxation Avoidance Agreement alone was to be excluded from industrial and commercial profits and there being no provision for exclusion of other kinds of royalties, the receipt was not subject to taxation. As provided in Article XVI(1),the law of respective State shall apply unless contrary is provided in the DTA. It means that if there was no provision for the treatment to be given to the royalty, other than the royalty under Article IX of the DTA, the same would be subject to Indian taxation and taxable in India under Section 9(1)(vii of the Act. DTA does not provide that if any receipt which does not fall in any of the clauses, the same would be taxable under the Income-tax Act or would be excluded from the purview of Indian taxation.
13. The further contention of the assessee that it was a case of acquisition of know-how as PBI was entitled to use it even after the expiry of the agreement and, therefore, a capital receipt and not royalty also has no force. The receipt of consideration was for the user of the know-how and, therefore, the fact that PBI had a right to use it even after the expiry of the agreement would not make any difference. The proprietory rights in the know-how remained with the assessee. They had not been sold of to PBI to the exclusion of the assessee or for any other person. At least, nothing of that sort was brought to our notice. By the very nature of the term "know-how", it cannot be parted with; it could only be imparted or its fruits shared. By imparting it to or sharing the fruits thereof with some one, the author is not divested of the know-how. It continues to vest in him. We, therefore, hold that the fee for providing the recurring know-how was royalty and taxable under Section 9(1)(vii) of the Act.
14. The next contention of the assessee that its income was to be assessed on cash basis, the method being regularly followed by it, has also no force. As held by the Special Bench of the Tribunal in their decision in the case of Siemens (supra) by following the Madras High Court judgment in the case of Standard Triumph Motor Co. Ltd. (supra), the income of a non-resident has to be assessed on accrual basis. The Special Bench decision in the case of Reinz Dichtungs Gmbh (supra), relied upon by the learned counsel for the assessee, also has no application in the present case because as stated by the CIT(A), the assessee had not maintained any books of accounts in respect of its income nor the learned counsel produced any evidence to show that the method followed by the assessee was cash and not mercantile. We, however, agree with the learned counsel that if it was held to be assessable on accrual basis, the royalty actually received during the year under consideration, which did not relate to the previous year, should not be taxed. We, therefore, direct the exclusion thereof. The CIT(A) was not right in bringing it to tax on the ground that the assessee itself had offered it to tax in this year and that it was not taxed in the earlier years on accrual basis and, therefore, can be taxed in the year of receipt under Section 5(2) of the Act. Merely because it was not taxed in the year of accrual, it would not be open to the department to tax it on cash basis in the year of receipt in view of the judgment of the Supreme Court in the case of Laxmipat Singhania v. CIT [1969] 72 ITR 291 and that of the Calcutta High Court in the case of Seth & Chemical Works (supra), wherein the expenditure was the subject matter of consideration. In any case, it is not the assessee who is opting for the method. It is the department who is insisting for taxation on accrual basis though rightly so in view of our aforesaid finding and, therefore, the income which has not accrued in the previous year under consideration could not be assessed on receipt basis alone even though it was not offered by the assessee for taxation or had escaped taxation in the year of accrual. The request of the learned Departmental Representative that a direction be given for its taxation in the year of accrual has no force as our jurisdiction is limited to the year under appeal and any directions given for an year which is not in appeal would be of no legal sanctity. We, therefore, leave the matter like that. Ground No. 4 in this appeal is, thus, allowed.
15. Ground No. 5 is for the credit of tax deducted at source on the income of Rs. 11,68,823. According to the assessee, it should be allowed in the year in which the amount is subjected to taxation, i.e., the year under consideration. This has no force. Section 199 of the Act allows credit of tax deducted at source on the production of the certificate furnished in the assessment made for the immediately following assessment year under the Act. The assessee is, therefore, not entitled to the credit of tax with respect to the royalty income of Rs. 11,68,823 for the year under consideration. We hold that the CIT(A).was, therefore, justified in rejecting this claim of the assessee. The assessee fails on this ground.
16. The last ground is against the levy of interest under Section 217 of the Act. The assessee's stand is that its entire income was subject to tax deductible at source and, therefore, there was no liability to advance-tax. Its sources of income, it is submitted, were dividend and royalty and both were subject to deduction of tax at source under Section 195 of the Act. The tax was deductible at the same rate as was chargeable in the assessment. In these circumstances, we are of the opinion that the assessee could not be charged with interest under Section 217 of the Act, not because it was not liable to pay advance-tax, but because there would remain no tax payable by the assessee as advance-tax if the tax deductible at source was taken into consideration. In other words, the assessee's liability to advance-tax was 'nil'. We do not find any merit in what the CIT(A) had stated in his order that since royalty income of Rs. 11,68,823 was not remitted to the assessee, it would not be subject to tax deductible at source. Tax deductible at source, in our opinion, has to be seen with reference to the income brought to tax and not with reference to the remittance. Interest under Section 217 of the Act is levied on the assessee's failure to file estimate and the charge is on the amount of "assessed tax". "Assessed tax" is defined in Section 215(5) of the Act as follows:
In this section and Sections 217 and 273, 'assessed tax' means the tax determined on the basis of the regular assessment (reduced by the amount of tax deductible in accordance with the provisions of Sections 192 to 194, Section 194A, Section 194C, Section 194D and Section 195) so far as such tax relates to income subject to advance tax and so far as it is not due to variations in the rates of tax made by the Finance Act enacted for the year for which the regular assessment is made.
Section 195 of the Act, which is relevant for our purpose, reads as under:
195(1). Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head 'Salaries' or dividends) shall, at the time of credit of such income to the account of the 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, deduct income-tax thereon at the rates in force.
It provides tax deduction at the time when it was paid and also at the time of credit, whichever is earlier. The liability for deduction of tax is on the income chargeable to tax though it is deducted when it is paid or credited. The income was, therefore, subject to tax deductible at source. It was not deducted because it was not paid or credited to the assessee's account. We, therefore, hold that the assessee was not liable to interest under Section 217 and, therefore, delete the levy. The assessee succeeds on this ground.
17. In the result, the appeal is allowed in part.