TMI Blog2018 (9) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... e the income in terms of Section 195A of the Act. Admittedly, in the instant case, there is no exemption granted under Section 10(6A) of the Act for the assessee to contend that the said payment does not form part of total income. In the light of the above legal and factual position, for the purpose of deduction of tax at source on the payment made by the assessee to the University of Warwick, the income should be computed in terms of the provisions of the Act and in so doing, it shall be increased by taking into consideration the amount of tax liability undertaken to be borne by the assessee. In other words, the obligation to pay the tax is on the University of Warwick and since the assessee in terms of the agreement agreed to pay the taxes, the same has to be necessarily added to the income of the University of Warwick and therefore, the principle of grossing up has to be applied. No hesitation to hold that the Assessing Officer, the CIT(A), and the Tribunal rightly held that the principles of grossing up would apply to the assessee's case. - Decided against the assessee - T.C. (Appeal).Nos.1509 to 1513 of 2007 - - - Dated:- 24-8-2018 - T. S. SIVAGNANAM AND N. SESHA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by or under the Act, he shall be deemed to be the assessee in default in respect of tax. Further, by referring to Section 201(1A) of the Act, it was stated that if any such person does not deduct or fails to pay the tax as required by or under the Act, he shall be liable to pay simple interest at 15%, on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Accordingly, an order under Section 201(1) and 201(1A) of the Act was issued and an amount of ₹ 3,37,590/- towards tax and ₹ 16,880/- towards interest was demanded. This was accompanied by a demand notice under Section 156 of the Act. The assessee being aggrieved by the order passed by the Assessing Officer under Section 201(1) and 201(1A) of the Act, preferred appeal before the Commissioner of Income Tax (Appeals)-XI, [CIT (A)]. Before the CIT (A), the assessee contended that it remitted fee for technical services to the University of Warwick, U.K., and as per the terms of agreement, the tax was borne by the assessee and tax to be deducted at source is governed by the provisions of the DTAA with these countries and the maximum tax payable is the percen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out on account of the assessee's failure to apply the principle of grossing up at the time of deduction of tax. With regard to the levy of interest under Section 201 (1A) of the Act, the CIT(A) held that such levy is mandatory. Accordingly, the appeal filed by the assessee was dismissed. 5. On appeal before the Tribunal, it was conceded that the issue is covered by the decision in the case of M/s.Lakshmi Auto Components Ltd., and following the said decision, the appeals were dismissed. 6. Before this Court, the assessee challenges the impugned order by contending that the Tribunal fell in error in confirming the order of the lower authorities, that the assessee had not applied the grossing up principle and that accounted for short deduction of tax. Further, it was contended that if the tax payment requires grossing up of tax, the tax liability has to be restricted to the amount calculated as per the provisions of DTAA, which overrides the provisions of the Income Tax Act. Further, it is contended that the application of grossing up principle for calculation of tax cannot enhance the tax rate beyond the restricted percentage fixed under DTAA between India and UK. 7. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l appearing for the respondent assisted by Mr.D.Prabu Mukunth Arunkumar and Mr.Vijayakumar Punna, learned Junior standing counsel for the department. 10. The first question to be considered is whether the assessee can be permitted to raise the additional substantial question of law as framed by them at this stage, when the appeals are taken up for disposal for hearing after 11 years, after they were admitted. (amendment to Finance Act was in 2010, additional grounds were issued in 2016) 11. It cannot be disputed by the assessee that when they preferred an appeal before the CIT(A), challenging the order under Section 201(1) 201(1A), they have accepted their liability for deduction of tax at source and no such plea as raised in the memorandum, dated 02.12.2016, was put forward before the CIT(A). Thus, we find that the assessee was not aggrieved by that portion of the order passed by the Assessing Officer. Similar is the position in the appeal filed before the appellate Tribunal. In terms of Section 253 of the Act an assessee who is aggrieved can file an appeal against such order of the Assessing Officer or that of the CIT(A), in terms of the above referred provision. Equally, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal substantial question of law. Accordingly, the memorandum dated 21.11.2016, filed by the assessee on 02.12.2016, is rejected. 14. Now we proceed to decide the substantial question of law, which has been framed for consideration. 15. Mr.Vikram Vijayaragavan, learned counsel appearing for the assessee contended that only the actual amount paid to non-resident is fees for technical services as per the agreement and that amount alone will be the income of the recipient and that taxes borne by the assessee will not constitute fees for technical services in the hands of the recipient. In this regard, the learned counsel referred to Article 13 of the India-UK DTAA. Further, it is submitted that Section 195A clearly mentions that grossing up, i.e., payment of taxes on tax will be only applicable to the provisions of that chapter namely, TDS and therefore, provision of Section 195A cannot increase the income of the non-resident. It is further submitted that Section 90 of the Act clearly provides that the assessee can take the provisions of the Act or the articles of relevant DTAA, whichever is more beneficial. In this regard, reliance was placed on the decision of the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired to gross up the payments to University of Warwick, UK, since there is a DTAA between India and UK, which does not require the same to be done. It is submitted that the scope of any treaty is to reduce the scope of tax or the rate of tax. The treaty is always applied for the better of situation of the assessee and not to put in a lesser privileged position than the Act. Further, no one can be compelled to invoke the treaty and the same is at the option of the assessee to apply the treaty or the Act, whichever is more beneficial to it as per Section 90(2) of the Act. By way of illustration, it is submitted that the rate of TDS for fee for technical services may be 15% under DTAA and the same may be 25% under the Act and whichever is beneficial to the assessee could be opted by the assessee. It is submitted that what is not found in any of the treaties is the tax administration or the computation mechanism to arrive at the income. Therefore, whatever is the income as computed under the Act, on that, the rate of tax as per the treaty or the Act, can be applied. Similarly, to determine whether or not, a particular payment is liable to tax, the definition of the said term under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a need to withhold tax under Section 195 of the Act, albeit, at the rate mentioned under the DTAA between India and UK. 20. With regard to the applicability of the tax treaty between India and UK, it is submitted that the term gross amount occurring in Article 13(2)(aa) has not been defined in the treaty nor under the Act and the term gross amount denotes only to the gross total income received by the payee, namely, University of Warwick. It is further submitted that gross total income is the total income/total income before any deductions under Chapter VIA, as defined in Section 80B(5) of the Act. Likewise, the word 'income' has not been defined in the treaty, but has been defined in the Act in Section 2(24), which includes such net of tax payments also. Therefore, the argument of the assessee that the Treaty does not require grossing up of the payments and therefore, there is no need to gross up at all is an argument, liable to be rejected. Further, elaborating on these submissions, it is contended that since the tax borne by the assessee is also the payee's income and since income is covered within the words gross amount as mentioned in the Treaty, grossing up i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be acceded to and therefore, the grounds canvassed by the learned counsel for the assessee that fee for technical services for the relevant years the assessee was not exigible to tax and therefore, they should be permitted to raise such a plea, stands rejected. 25. Thus, we proceed to decide the question of law as framed for consideration vide order dated 09.01.2008. 26. The assessee entered into an agreement with the University of Warwick, UK for providing technical services, as per the agreement, the tax was to be paid by the assessee. The assessee deducted tax at the rate of 15% of the amount paid to the University of Warwick and the TDS made by the assessee was ₹ 19,13,010/-. The Assessing Officer held that since the payment of tax was to be borne by the assessee, the tax should have been deducted on the tax payment by the assessee and therefore, the principle of grossing up should have been applied. The assessee contended that the tax to be deducted at source is governed by the provisions of the DTAA between India and UK and the maximum tax payable is the percentage of gross receipts of fees for technical services or royalty payable. Referring to Section 90 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting State or a political sub-division of that State, and (bb) 20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and (ii) during subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and (b) in the case of royalties within paragraph 3(b) of this Article and fees for technical services defined in paragraph 4(b) of this Article, 10 per cent of the gross amount of such royalties and fees for technical services. 3. For the purposes of this Article, the term 'royalties' means: (a) payments of any kin received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-resident. It was further contended that the assessee is entitled to take the provisions of the Act or the DTAA, whichever is more beneficial in the light of the decision in Azadi Bachao Andolan (supra). Thus, the case of the assessee is that the maximum tax required to be borne by them as per the DTAA is only at the rate of 15% of the gross amount of such royalties or fees for technical services. It is the further contention of the assessee that the words gross amount , which is found in Article 13(2bb) of the India-UK DTAA cannot refer to a different sum other than what has been mentioned in Article 13(1) and (2). This is so because gross amount , refers to no deduction of expenses incurred towards such royalties or fees for technical services and any other interpretation given to the words gross amount , would be erroneous. In Azadi Bachao Andolan,(supra), the Apex Court while dealing with double taxation treaty, among other issues, held that the agreement provides for allocation of taxing jurisdiction to different contracting parties in respect of different heads of income. 31. The Revenue's contention is that the DTAA is primarily entered into between two countries to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct or indirect taxes and the import duties due in India, in connection with the performance of the agreement shall be borne by the assessee and all direct or indirect taxes and import duties in London in connection with the performance of the agreement shall be borne by the British company. In terms of the said clause contained in the agreement, the assessee paid tax in India for the remittances made to the foreign company. The Assessing Officer by applying Section 195A of the Act grossed up the income on the tax component on the remittance and assessed the grossed up amount, as the income earned by the foreign company in India and assessed the same at the hands of the assessee. The dispute raised by the assessee was on the rejection by the Assessing Officer of their claim for exemption on the tax paid on the remittance under Section 10(6A) of the Act, which otherwise would constitute a component of income earned by the foreign company justifying grossing up of net remittance to determine the total income for the assessment. Before the CIT (A), the assessee produced the approval obtained from the Government of India and based on which the CIT(A), upheld the assessee's clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax which has been borne by the assessee, is also the income of University of Warwick and since such income is covered by the words gross amount , as mentioned in the treaty, the Revenue was justified in grossing up by applying Section 195A, as the provisions of the treaty do not provide a mechanism for computation of income, it prescribes only the rate of tax. Thus, to apply the correct rate of tax, the first requirement would be to determine the income on which tax is payable. This mechanism having not been provided under the treaty essentially, the assessee has to compute his income on such transaction in terms of the provisions of the Act and on such computation, if the rate of tax as applicable to such transactions under the DTAA is beneficial to the assessee, then the assessee would be entitled to avail such beneficial provision in terms of Section 90 of the Act. Thus, the contentions advanced by the assessee to state that no grossing up is provided for under Article 13 of the DTAA and therefore, they are liable to pay tax at the rate of 15% on the amounts specified in the agreement is a submission, which is liable to be rejected. 34. Section 195A deals with income payab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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