9911796707
TMI Blog2012 (6) TMI 328X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. CIT(A) erred in holding that royalty income received by the assessee is taxable @ 15% of the income under the relevant Double Taxation Avoidance Agreement ("DTAA") instead of 20% under domestic law particularly when the assessee has claimed benefit of the Income Tax Act, 1961, available u/s 10 (6A), on the same income. Ground No. 2 is that the Ld. CIT(A) erred in holding that interest u/s 234B and 234C is not chargeable in the case. 2. The facts of the case for assessment year 2003-04 are that the assessee filed its return on 28.11.2003 showing total income of Rs. 2,45,83,770/-. The assessee is tax - resident of the USA and it is earning income of the nature of the royalty from Yum Restaurant India Ltd ("YUM" for short) under a technical license agreement. It claimed that its income is taxable @ 15% under the DTAA. In the course of assessment the AO found that it had claimed exemption u/s 10(6A) of the Act in respect of tax on royalty borne by Yum. This claim was considered by the AO after hearing the assessee. He came to the conclusion that the assessment has to be made either in accordance with the provisions contained in the Act or in the DTAA. The assessee cannot avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocal law. The licensee shall procure all equipments, paper goods and all other products and materials required to be utilised in the operation of business for making approved products from such suppliers etc, as approved by the assessee. In order to maintain and protect uniqueness and uniformity of taste, quality and image of the approved products, the assessee owns and has developed and will continue to develop certain secret blends of herbs, spices and special seasoning and other trade secrets which will be made available to the licensee , which will be purchased at the prevailing international prices in consideration of the license granted to the license, which shall pay licence fees equal to - (i) 5% of sales per outlet, (ii) all fees from sub licensees, not in excess of 5% of all of such - licensees' sales. The fees shall be clear of any tax due including withholding taxes imposed by applicable law. 4.1 It is submitted that the first payment under the agreement was made in the year 2000. It was accounted for on net of tax basis by following cash system of accounting. Two disputes have arisen in these years. The first one is - whether tax of Rs. 46,55,877/- paid by the license ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for included services. This article, in so far as we are concerned, reads as under:- "2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in sub-paragraph (b) of this paragraph] : (i) during the first five taxable years for which this Convention has effect, (a) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company ; and (b) 20 per cent of the gross amount of the royalties or fees for included services in all other cases ; and (ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services; and (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee will have to be included in the "gross amounts", chargeable to tax. Therefore, the assessee has an option to be taxed @ 15% of the gross amount or tax rate applicable under the Act on the net amount after claiming exemption u/s 10(6A), which is 20%. Thus, it is argued that the Ld. CIT(A) erred in taxing the net amount @ 15% under the DTAA. 4.6 In regard to the income accruing for three months during which the agreement was not in operation, it is submitted that the assessee is a company and, therefore, it has to perforce follow mercantile system of accounting as mandated under the companies Act. The licensee has made entries in the books of account for the payment and reduced its income accordingly. Therefore, the income arisen or accruing to the assessee in India for these three months will have to be included in the total income. 4.7. Coming to chargeability of interest u/s 234B and 234C, it is submitted that these provisions should be read along with section 209. At the time of receipt of income, the assessee knew that tax is not being deducted at source in respect of income accruing for three months. It was also aware that a wrong calculation was made in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us. The first question to be decided by us is - whether, income by way of royalty is taxable on gross basis under the DTAA @ 15% or on a net basis @15% ? We have seen that the assessee has opted for the provision contained under article 12 of DTAA as taxation under the Act is not more beneficial to it. Prargraph No. 2 of Article 12 of the DTAA contemplates taxation @ 15% of the "gross amounts" of royalties. The term "Gross amounts" has not been defined in the treaty. In common parlance, these words mean the amount received alongwith tax deducted etc. at source. If the intention was to tax only that amount which is actually paid to the assessee, then the word "amount" only would have been used. Therefore, it is clear that the intention is to tax the gross amount and not the net amount of the royalty. We also find that this term has not been defined in the DTAA. Therefore, the guidance will have to be sought, if available, from the Act. We find that the Act, in section 198, provides that all sums deducted in accordance with the provisions of chapter XVII shall be deemed to be income received for computing the income of an assessee. This section embodies in itself the principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduced below :- " We find that the ld. Senior DR has primarily relied upon the provision contained in section 5(2). The decision in the case of Standard Triumph Motors Co. Ltd. (supra) also deals with harmonious interpretation of the provisions contained in sections 145 and 5(2). The decision and the submissions do not take into account the provisions of the DTAA as probably none existed at that time. These have been considered by the Tribunal in the case of Uhde Gmbh and National Organic Chemical Industries Ltd. (supra). It has been mentioned that in case of conflict between the provisions of the DTAA and Act, the provisions contained in the treaty shall prevail. Consequently, it has been held that the taxation of royalty/FTS is on receipt basis. In other words, the amount which has accrued as income to a foreign company cannot be taxed in the source country, being India in this case, unless the amount has been received by the foreign company. It is also the case of the Ld. Senior DR that such an interpretation can lead to deferment of payment of tax for some time or for indefinite time. We have considered this matter also. This issue has to be decided on the basis of conduct of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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