TMI Blog1999 (8) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... taken by the learned Judicial Member that the payments made by the appellant to the non-resident towards Licence Fee do not constitute "Royalty" within the meaning of the word "Royalty" contained in the Agreement for Avoidance of Double Taxation entered into between India and Germany and, therefore, the appellant had no liability under law to deduct tax at source on those payments, is correct? 3. Whether on the facts and in the circumstances of the case, the view taken by the learned Accountant Member that the appellant's plea that it is not liable under law to deduct tax at source on the payments made by it to the non-resident towards Licence Fee cannot be considered at this late stage is correct in the facts and circumstances of this case?" 2. Few facts necessary for appreciation of the points in controversy are the following. These appeals arose out of the consolidated order passed by the CIT(A), Hyderabad, dated 25-1-1996 confirming the orders passed by the ITO, Ward-5(9), TDS, Hyderabad dated 23-11-1995 under section 201 of the Income-tax Act for not remitting the amounts/for late remitting the amounts deducted towards TDS payable to a West German Company (M/s Lurgi Gmbh, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Judicial Member adverted to Article 4.4 of the Agreement which stipulates that all taxes, duties and dues levied outside the Federal Republic of Germany shall be borne and directly paid by the Buyer. The following table would show the rupee equivalent of foreign currency instalments due by the Indian company to the Foreign company and in fact, the amounts were already paid: ----------------------------------------------------------------------------- Financial Date of Amount paid TDS Date of year payment (Rs.) (Rs.) remittance 1990-91 19-6-1990 92,66,409 18,53,282 12-8-1991 1991-92 31-7-1991 1,32,46,983 26,49,400 Not yet remitted 1993-94 31-3-1994 1,64,61,000 32,92,000 Not yet remitted ---------------------------------------------------------------------------- As already stated, I am concerned with the payment of price for Basic Engineering which is stated to be DM 16,00,000 and price for Licence Fee which is mentioned in the Agreement at DM 11,00,000. Para 4.4 of the Agreement, which is in two paras, is as follows: "The total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is invalid in the eye of law for want of jurisdiction, inasmuch as he could not have treated the assessee to be in default without adjudicating on the assessee's claim that it was not liable to deduct tax at source, vide its letter - dated 2nd June, 1993." Copy of the letter dated 2-6-1993 addressed to the Assessing Officer and a copy of similar letter addressed to the Assessing Officer on 8-11-1995 are provided at pages 1 2 of the paper book No. 2 filed on behalf of the assessee. The letter dated 2-6-1993 is important and hence, it is extracted as under: "Income-tax Officer, TDS Ward 4(7) Office of the ITO, Shapurwadi, Hyderabad. Dear Sir, Sub:- Deduction of Tax at source on payments made to foreign collaborator towards Licence Fee-- This is to bring to your kind notice that our Company has entered into a Foreign Collaboration Agreement with M/s Lurgi GmbH, Germany vide agreement dated 29-6-1988, duly approved by Government of India and Reserve Bank of India. This Agreement, inter alia among other aspects covers a payment of DM 27,00,000 consisting of the following: ---------------------------------------------------------------------------- 1. Detailed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18,53,282 ------------------------------------------------------------------------------- Thus, on the basis of the above calculations, we have to remit an amount of Rs.8,15,005 towards TDS for which we request you to accord your approval and confirm the amount to enable us to make arrangements for payment. Awaiting for an early and favourable reply. Yours faithfully, for Niraj Petrochemicals Limited Sd/- T.M.G. Chary Accounts Officer" Contending to admit the additional ground under rule 11 of the Income-tax (Appellate Tribunal) Rules, the learned counsel for the assessee submitted - before the Tribunal that way back on 2-6-1993 itself the Indian company denied its liability to deduct tax on the payments made to the Foreign Company towards price for Licence Fee, inasmuch as the Indian company requested the ITO to determine the extent of its liability to deduct tax at source and to determine how much of TDS is to be deducted while making payment to the foreign company. The said letter should be treated as an application under section 195(2). However, the ITO did not dispose of the said application dated 2-6-1993 till today and without disposing of the application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular form or format for an application under section 195(2). The learned Judicial Member held that the Indian company in its letter dated 2-6-1993 clearly differentiated the payment into two different components, one for Engineering and the other for Licence. The learned Judicial Member held that the ITO should have treated the letter dated 2-6-1993 as an application under section 195(2) in respect of payments made, towards Licence Fee and passed an order under section 195(2) in respect of that part of the payment. He further held that the ITO should have made an order under section 195(2) expressing his opinion on the aspect whether the payment made towards Licence Fee is taxable in the hands of the foreign company in India under the provisions of section 9 or not. Without passing any such order under section 195(2) on that application, the ITO should not have treated the Indian company as an assessee in default under section 201 in respect of the tax deducted/deductible on the payments made by the Indian company to the foreign company towards Licence Fee. In that way, the learned Judicial Member held that part of the order under section 201 made by the ITO relating to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 195(2). The following para in the said letter clinches the issue: "We are of the opinion that no tax need be deducted at source for payments made towards Licence Fee to any non-resident under the foreign collaboration agreements approved by the Government of India and Reserve Bank of India, as they are outside the purview of section 195 of the Income-tax Act, 1961." In the said letter, it is clearly stated that towards Basic Engineering a sum of Rs.26,68,287 is to be remitted to the Foreign company and out of which on 12-8-1991 a sum of Rs.18,53,282 was already paid and only a sum of Rs.8,15,005 remained to be paid and, therefore, the Indian company requested the ITO to accord his approval and confirm the amount to enable them to make arrangements for payment. Thus, it clearly brought out the point that on Licence Fee, no TDS need be deducted. This obvious inference which can be made out from the last portion of the letter, together with the penultimate para of the letter already, extracted above, clearly shows that this application is definitely to be considered as an application under section 195(2). Further, it is received by the ITO on 16-6-1993 by initialling and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commissioner of Income-tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. The Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner (Appeals) is too narrow a view to take off the powers of the Tribunal. Undoubtedly, the Tribunal has the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee." 12. In Kerala State Co-operative Marketing Federation Ltd.'s case, based on the Supreme Court decisions, following ratio is laid down by the Kerala High Court: "The Tribunal gets power under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application under section 195(2) of the Income-tax Act. Thus, on point of difference No. (3), the learned Judicial Member's order is to be upheld or to be preferred as correct in law. 15. The arguments advanced by the learned Advocate for the assessee before me can be summarized as follows. No reply was received from the Assessing Officer to the letter dated 2-6-1993 or to the letter dated 23-11-1995 which is to be found at page 4 of paper book No. 2 filed by the assessee. Before the CIT(A), he contended that the payment was made under mistake and the Indian company was not liable to deduct any TDS under law. This argument of course was not upheld by the CIT(A). The Indian company did not claim any refund of the amounts paid for the first year. It is contended that for all the three years, the Indian company made two payments to the Foreign company, but did not deduct TDS out of any amounts paid for those years. The Indian company made a provision in its books of account covering its liability, if any, under the terms of the Agreement which it had entered into with the Foreign company. In the Tax Audit Report, it was shown that a sum of Rs.59,41,600 was provided towards TDS. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s enough if the prayer contemplated under section 195(2) can be culled out from the correspondence made by the Indian company with the Assessing Officer. 17. In CIT v. Superintending Engineer, Upper Sileru [1985] 152 ITR 753/19 Taxman 356 (AP), the question before the Andhra Pradesh High Court was whether the amount sought to be remitted to the Foreign company should wholly bear the character of income or whether it applies to payments of gross sums also. Their Lordships also considered that in case if it is construed that section 195 deals with or covers not only the sums bearing character of income but also gross sums liable to be remitted to the Foreign party, how such a construction of section 195 brings in harmony with the provisions of section 195(2). Ultimately, their Lordships held that even if gross sums are to be remitted to the Foreign party and even though the said sum does not wholly bear the character of income, still it is covered by section 195 and the failure of deduction of tax at source is liable to be penalised under section 201. At page 768, their Lordships held the following: "For the reasons aforesaid, we are clearly of the opinion that the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent under section 195 as being in default extends only to the proportion of income chargeable under the Act and forming part of the gross sum of money." While furnishing answers to the questions which arose for decision before them and while answering each of them, for question No. 2 they furnished the following answer as can be seen from page 772 of the Report: "The obligation of the respondent-assessee to deduct tax under section 195 is limited only to the appropriate proportion of the income chargeable under the Act forming part of the gross sums of money paid to the three non-residents above referred." This Andhra Pradesh High Court decision and the ratio of the said decision are followed in the later decisions of the Andhra Pradesh High Court in CIT v. Barium Chemicals Ltd. [1989] 175 ITR 243 / 143 Taxman 194 and 178 ITR 31. Their Lordships gave a reference to the Hon'ble Supreme Court on this decision. However, the reference was not answered by the Supreme Court till now. Therefore, the decision of the Andhra Pradesh High Court in Superintending Engineer, Upper Silery's case is held to be still governing the issue. As can be seen from the Andhra Pradesh High Court's dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------------------------------------------------- (a) 33 1/3% after the CONTRACT is filed with the Reserve Bank of India and the capital goods clearance, if any, is obtained. (b) 33 1/3% on delivery of technical documentation (except operating manual) against SELLER's invoice and airway bill. (c) 33 1/3% upon commencement of commercial production or 4 years after CONTRACT is filed with Reserve Bank of India, whichever is earlier, against simple receipt of SELLER." ---------------------------------------------------------------------------- It is contended by Shri Satyanarayana that before the CIT(A) he contended that the payment was made under mistake, even though the Indian company was not liable to deduct TDS under law. 19. Section 5, sub-section (2) of the Income-tax Act which deals with the total income of a non-resident is as follows: "Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-- (a) is recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation concerning industrial, commercial or scientific experience. (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, in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel. (5) .................. (6) .................. (7) ..................." Shri Satyanarayana contended that in view of the above provisions the amounts remitted to the Foreign company were not liable to Income-tax, inter alia, under the Double Taxation Avoidance Agreement. The Indian company filed its written submissions before the CIT(A), but the CIT(A) did not agree and held that 'royalty' or 'technical fees' are both taxable and the Indian company was under an obligation to deduct TDS. It is no doubt true that the Indian company did not advert to the two letters dated 2-6-1993 and 23-11-1995 mentioned above. But he contended before the Tribunal that these two letters virtually amount to a petition under section 195(2) and the Assessing Officer was under an obligation to decide the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n company is not at all liable to remit TDS. The learned Accountant Member did not discuss in his orders whether the consideration paid towards obtaining Licence is liable to tax or not and did not agree with the learned Judicial Member on this aspect of the matter. Shri Satyanarayana submitted that there is no difference between the Members with regard to liability to deduct TDS on the payment made for acquisition of Licence. 20. At this stage, I put a specific question as to how I can revise and add to the differences referred to me under the provisions of section 255(4) of the Act. In a bid to convince me about the tenability of his claim, he tried to draw an analogy between a Reference made to the High Court under section 256(2) And a Reference made under section 255(4). He argued that the High Court has been exercising the power to suggest a modified question or reframed question and were directing the Tribunal to refer the reframed question and to draft necessary statement of facts relating to that question and directing it to refer it again to the High Court. Sometimes the High Court, if it is satisfied that the statement of facts already on record are sufficient, reframes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the orders delivered by the Division Bench Members, then only the difference can be referred to a Third Member. But in a case where the learned Accountant Member did not express any opinion whatsoever on a point decided by the learn official Member, there cannot be any difference of opinion. Ultimately, Shri A. Satyanarayana contended that there are two broad issues involved; first being whether the Indian company is liable under section 201 in view, of the fact that the Indian company had already put forward a plea which should have been decided under section 195(2) and the second being whether the sum agreed to be paid for obtaining Licence from the Foreign company by the Indian company is taxable or not in India. As far as this question is concerned, it was thoroughly discussed by the learned Judicial Member and found it in favour of the Indian company. However, the learned Accountant Member did not express any opinion whatsoever. In substance, Shri Satyanarayana argued that simply because the Indian company made some entries in its books of account, it does not change the position in law and does not determine the taxability or otherwise of the amounts credited to the account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 of the referable order are not worthy of reference. Now, as regards difference No. 2, I entirely agree with the learned Judicial Member. 23. Now remains difference No. 1 which is already extracted above. The learned Judicial Member held in para 43 of his orders, firstly, that the Indian company cannot be treated as an assessee in default for its failure to deduct tax on the payments made towards Licence fee and remit the same to the Government. He had already held in prior paras of his orders that a part of the order under section 201 got vitiated on account of the Assessing Officer's failure to treat the letter dated 2-6-1993 of the Indian company as an application under section 195(2) and to make an order under section 195(2) with respect to the liability of the Indian company to deduct tax on the payments made towards Licence fee. Even on merits, the learned Judicial Member held that the sum paid towards Licence fee cannot be treated as "Royalty" assessable in the hands of the Foreign company in India, in view of the restricted definition of Royalty contained in Double Taxation Agreement between India and Federal Republic of Germany. Accordingly, that portion of the order p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t liable to deduct tax at source cannot be accepted having already deducted taxes and in fact for the first year payment has been made to the Government account. He cited Aggarwal Chamber of Commerce v. Ganpat Rai HiraLal [1958] 33 ITR 245 at 253 (SC) for the proposition that a person responsible for remittance to a non-resident and deduct tax therein cannot challenge that the income is not liable to tax. The learned Accountant Member held that in the said case the Hon'ble Supreme Court held that it is for the non-resident to agitate at the time of assessment and the person who is bound under the Act to make deductions at the time of payment are not concerned with the ultimate result of the assessment and adjustments are to be made at the time of final assessment. The learned Accountant Member found that the Supreme Court decision was followed by the following High Courts: (1) CIT v. Rathi Gum Industries [1995] 213 ITR 98 (Raj.), (2) Pentagon Engg. P. Ltd v. CIT [1995] 212 ITR 92 (Bom.), (3) Bennet Coleman Co. Ltd v. V.P. Damle, Third ITO [1986] 157 ITR 812 (Bom.), and (4) CITv. Assam Small Industries Development Corpn. Ltd [1996] 219 ITR 324/88 Taxman 1 (Guj.). The lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value, whichever is the lower", "market value", means the price at which the stock could be expected to be sold in the market in which the trader sells; in the case of a retail trade, that market must be the retail market. The Court of Appeal further held that if a method had been consistently applied in the past it should not be changed unless there were good reasons sufficient to outweigh any difficulties; here there was such a reason, namely, that the method consistently applied prior to 1959, however commercially sensible, did not reproduce the profit and gains for a particular year taken in isolation. In Tuticorin Alkali Chemicals Fertilizers Ltd's case, the Hon'ble Supreme Court held, following B.S.C Footwear Ltd's case, that the Income-tax law does not march step by step in the footprints of the accountancy profession. Therefore, it is clear that the way in which the accounts were prepared does not determine the taxability of the income. The taxability of income should be determined as per provisions of law and not depending upon the way in which the accounts are maintained. 26. I had agreed with the view expressed by the learned Judicial Member as far as TDS deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
