Bombay High Court
Deputy Commissioner Of Income Tax vs Uhde Gmbh. on 13 May, 1994
Equivalent citations: (1996)54TTJ(MUMBAI)355
ORDER
N. R. PRABHU, A. M. :
The only ground of appeal in this case is that the learned CIT(A) was in error in directing the Assessing Officer (AO) to tax the income on various projects on receipt basis as against accrual basis and further erred in directing that provisions of s. 145 were not applicable for determining the total income of the assessee.
2. We have heard the parties to the dispute. Assessee is a foreign company and had entered into an agreement for rendering among other things, technical services to the following companies, viz. :
(i) Punjab Alkalies
(ii) Modi Alkalies
(iii) Kothari Madras
(iv) Gujarat Alkalies The dispute in this case is only regarding the fees for rendering technical services and whether the same is to be taxed on accrual basis or on receipt basis.
3. The AO, inter alia, relying on the Madras High Court decision in the case of CIT vs. Standard Triumph Co. Ltd. (1979) 119 ITR 573 (Mad), had held that the income by way of fees for technical services was liable to be taxed on accrual basis and not on receipt basis. When the matter was carried in Appeal, the CIT(A) relying on art. VIIIA of the Agreement for the Avoidance of Double Income-tax between India and the Federal Republic of Germany, held that the same was liable to be taxed on receipt basis. It is, this controversy, we are required to resolve in this appeal.
4. After hearing the parties to the dispute, we are of the view, that the order passed by the CIT(A) does not suffer from any legal infirmity. There cannot be any dispute that where there is a conflict between the agreement for avoidance of double taxation and the domestic laws relating to taxation of income arising in the Contracting State, the former has to prevail. We have also been informed by the assessee, that in the past, fees for technical services were not at all taxed in India as the assessee did not have a permanent establishment in India and the fees received were in the nature of an industrial and commercial profit. Income of this nature require to be taxed in India only because of the new treaty entered into between India and the Federal Republic of Germany. The relevant provisions governing the ambit of taxation of such income are contained in art. VIIIA of the agreement for the avoidance of double taxation. In cl. 2 of the said agreement, fees for technical services, could be taxed in the Contracting State in which they arose and according to the law of that State. The term "fees for technical services" has been defined in cl. 4 of the said article in a wide manner so as to include payments of any kind to any person. If we read cl. 3, which defines the term "royalties" and cl. 4, as observed earlier, which defines the term "fees for technical services" together, there cannot be any doubt that what is taxable is payment received by a person of the other Contracting State. Though under s. 5(2)(b) of the IT Act, in the case of a non-resident, income which accrues or arises or deem to accrue or arises to him in India is taxable, in view of the specific provisions of Art. VIIIA, what could be taxed, is only a payment to him. This presupposes, that the liability to tax arises only on the non-resident receiving such payment. The same is not liable to be taxed on an accrual basis as has been laid down under s. 5 of the IT Act. The order of the CIT(A) which is to this effect, is not, therefore, open to any challenge. The reliance by the Revenue on the decision of the Madras High Court reported in (1979) 119 ITR 573 (Mad) (supra), is of little help. The decision, no doubt, is an authority for the proposition that income accruing to a non-resident assessee is liable to tax even if the assessee is keeping its account on the cash basis in regard to its income. This decision has not taken into consideration the double taxation avoidance agreement between India and the Federal Republic of Germany, as there was no occasion to do that. It has merely explained the scope of s. 5(2)(b) of the IT Act and we have already observed earlier that there is apparent conflict between the provisions of s. 5(2)(b) of the IT Act and art. VIIIA of the treaty for avoidance of double taxation and we have also adverted to the accepted principle of interpretation that when there is such a conflict, the provisions of the treaty would have to prevail. In the light of this discussion, what emerges is that in the case of a non-resident, who is a resident of Germany, income arising to him in India by way of royalties or technical charges could be taxed in India but that could be only on the receipt basis.
5. In the result, appeal is dismissed.