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TMI Blog2014 (11) TMI 605X X X X Extracts X X X X X X X X Extracts X X X X ..... Double Taxation Avoidance Agreement signed by the Government of India with the Government of Netherlands and stating that the income earned by letting out of industrial equipment would not be taxable in India. However, the Assessing Officer held that since the definition of royalty, as enumerated in Section 9 of the Act, means consideration for use or right to use any industrial, commercial or scientific equipment, the consideration received by the assessee company falls within the definition of royalty in Section 9 of the Act and accordingly, the same is liable to tax in India. 3. Assailing the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) after taking note of: (i) the documents produced by the assessee from the Income Tax Department of the Netherlands to the effect that equipment rent is included in the total income of the appellant as per the laws of the Netherlands and tax has also been paid on the same, and (ii) the amended provisions of the Double Taxation Avoidance Agreement, held that the contracting country (in the present case India) should not levy income tax on the said incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Sec.9(1)(i) of the Income Tax act. 9. On the other hand, the contention of the learned Senior counsel for the respondent company is as follows: the respondent company is incorporated in Netherlands and the entire management and control is situated outside India. Therefore, there is no permanent establishment in India. The Foreign company was engaged in the business of hiring out of dredging equipment and had let out such dredging equipment to its sister concern, which is incorporated in India and for such use of equipment, the company has raised invoices and the Indian Company deducted income tax at source (TDS) for which the foreign company is not liable to, and made a claim for refund. The amount received by the foreign company is a payment for use of equipment and the foreign company is governed by the provisions of Double Taxation Avoidance Agreement (DTAA) and according to the amended DTAA, the income earned from hiring of dredging equipment was not taxable in India. The payment towards the hire of dredging equipment is not a royalty as defined under Explanation II to clause (iva) to sec.9(1) of the Act. The dredging equipment was leased out on bareboat understanding ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied provisions of Article 12 of the DTAA agreement where the definition to Royalty was modified and the words payments of any kind received as consideration for the use of or the right to use industrial, commercial or scientific equipment were deleted from the definition. Therefore, the appellate authority deleted the levy of tax at 10% on equipment rent earned by the respondent company. 13. On further appeal by the Department, the Tribunal has also accepted that the respondent Company is not liable for Tax as per the provisions of the DTAA Agreement and also held that there is no permanent establishment in India to bring the income under the provisions of the Income Tax Act. 14. Before adverting to the merits of the case it is necessary to deal with the Double Taxation Avoidance Agreement which is known as DTAA. Under a Notification No.GSR 382(E) DATED 27.3.1989, the convention, between the Government of Republic of India and the Kingdom of Netherlands for the Avoidance of Double Taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, came into force w.e.f. 21.1.1989. Both Governments have agreed and the DTAA agreement with seven chapters a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, there was an amendment w.e.f.1.4.1991 and sub clauses (1), (2) and (4) of Article 12 were modified as follows: 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical 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 technical 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 (1) of paragraph 4 and fees for technical services as defined in this Article (other than services described in sub-paragraph(b) of this paragraph); (A) 15 percent of the gross amount of the royalties or fees for technical 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 gross amount of the royalties or fees for technical services in all other cases; and (ii) during the subsequent ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es viz., Netherlands and India and paid to a resident of the other State i.e., Netherlands or India, the same may be taxed in that other state i.e., Netherlands or India. 21. Clause (2) however stated that such royalties, fees, payments may also be taxed in the State in which they arise and according to the laws of the State. But the tax so charged shall not exceed 20% of the gross amount. 22. Sub clause (4) defines royalties which will include any consideration received for the use of any copy right of literary, artistic or scientific work including motion picture films and works on film or video tape for use in connection with television, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 23. Clause 5 defines 'fees for technical services' and clause (6) defines the term payments for the use of equipment and means payment of any kind received as a consideration for the use of or the right to use industrial, commercial or scientific equipment. 24. However, clause (1) of Article 12 as modified w.e.f.1.4.1991 would show that the 'Royalties' and 'fees for techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act and held as follows: No provision of the Double Taxation Avoidance Agreement can possibly fasten a tax liability where the liability is not imposed by the Act. If a tax liability is imposed by the Act, the Agreement may be resorted to for negativing or reducing it; and, in case of difference between the provisions of the Act and the Agreement, the provisions of the Agreement would prevail over the provisions of the Act and can be enforced by the appellate authorities and the court. Section 90 is specifically intended to enable and empower the Central Government, to issue notification for implementation of the terms of a Double Taxation Avoidance Agreement. The provisions of such an Agreement, with respect to cases to which they apply, would operate even if inconsistent with the provisions of the Income-Tax Act. If it was not the intention of the Legislature to make a departure from the general principles of chargeability to tax under section 4 and the general principle of ascertainment of taxable income under section 5, then there was no purpose in making those sections subject to the provisions of the Act . Section 90 was brought into the statute book precisely to enab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are reproduced hereunder: 88. This takes us to the consideration on Article 12 under DTAA. Article 12 of the Australian DTAA deals with the jurisdiction of and the State on the taxability of royalty. It states that Article 8 Ships and aircraft 1. Profits from the operation of ships or aircraft, including interest on funds connected with that operation, derived by a resident of one of the Contracting States shall be taxable only in that State. The definition of royalty as given under article 12(3) of the DTAA with Australia is the same as in the definition in the DTAA with France in Article 13, with Germany in Article 12; with Norway in Article 13; with Singapore in Article 12; with Switzerland in Article 12 and with U.S.A in Article 12. 89. The U.S.A DTAA specifically reads that royalty would mean payments of any kind, as follows: 12. Royalties and fees for included services:_ (1) Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.... (3) The term royalties as used in this article means (a) payments of any kind received as a consideration for the use of, or the right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties makes the present case distinguishable on facts. In Poompuhar Shipping case, referred supra, it was a case of hiring of ship on time-charter basis, whereas in the present case, dredging equipment is leased out on bareboat basis, namely, without Master and Crew. Therefore, on facts, the decision in Poompuhar Shipping case, referred supra, is distinguishable. 35. The learned Standing Counsel for the department referring to paragraph (2) of Article 5 which states that an installation or structure used for the exploration of natural resources is a permanent establishment, provided that the activities continue for more than 183 days, pleaded that the stand of the department is justified. 36. We are not inclined to accept such a plea, as in the case on hand the dredging equipment was leased out on bareboat basis viz., without Master and Crew. Therefore, it will not come under the permanent establishment and the entire control over the equipment was not with the Foreign company, but with the Indian Company. Therefore, the above said plea is not accepted. 37. For the foregoing reasons, the appellate authority below has rightly considered Article 12(4) of the DTAA agreement between ..... X X X X Extracts X X X X X X X X Extracts X X X X
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