TMI Blog2018 (11) TMI 330X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. - Tax Case Appeal Nos.1200 & 1201 of 2008 - - - Dated:- 22-10-2018 - Mr.Justice T.S. Sivagnanam And Mrs.Justice V. Bhavani Subbaroyan For the Appellant : Mr.R.Venkata Narayanan for M/s.Subbaraya Aiyer Padmanabhan For the Respondent : Mr.Karthik Ranganathan COMMON ORDER T.S.SIVAGNANAM, J. We have heard the learned counsel on either side. 2. These appeals, by the assessee, have been directed against the common order passed by the Income Tax Appellate Tribunal 'B' Bench, Chennai dated 13.10.2006 passed respectively in I.T.A.Nos.1551 and 1552/ Mds/2003 for the assessment year 2003-04. 3. The above appeals have been admitted on 13.8.2008 on the following substantial question of law : Whether, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2000- 2001 to be paid as follows: (a) 50,000 (nett of Indian taxes) immediately after 3 months from the effective date of the agreement (b) 50,000 (nett of Indian taxes) immediately after 3 months from (a) (c) 50,000 (nett of Indian taxes) immediately after 6 months from (a) (d) 50,000 (nett of Indian taxes) immediately after 9 months from (a) Indian Income tax, if any, will be borne by TSL under Section 19(c) of Indian Income Tax Act.' 28. Article 13 of the DTAA between the India and UK reads as follows:- Article 13 : Royalties and Fees for Technical Services 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 law 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 within paragraph 3(a) of this Article, and fees for technical servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalties 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 law 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 clause (aa); 15% of the gross amount of such royalties or fees for technical services, when the payer of the royalties or fees for technical services is the Government of the first mentioned contracting State or a political subdivision of that State (bb); 20% of the gross amount of such royalties or fees for technical services in all other cases; and clauses (ii) during subsequent years 15% of the gross amount of such royalties or fees for technical services. 30. Thus, by referring to Clause 2 (supra), it is submitted that the said clause refers only to such royalties or fees for technical services and such fees can only refer to the fees paid to a nonresident as per Article 13(1) and therefore, what is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that when the tax chargeable on any income is to be borne by the person by whom the income is payable, then, for the purpose of deduction of tax, such income shall be increased to such amount as it would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. In terms of clause 10 of the agreement between the assessee and the University of Warwick is ₹ 2,00,000/- and as per Article 13 of the DTAA between India and UK, the University of Warwick is liable to pay tax at 15% on the gross amount of fee for technical services. Thus, it is contended that the gross amount received by the University of Warwick would be 2,00,000 X 100/85 = 2,35,294/- and the tax to be deducted at source by the assessee is ₹ 2,35,294 X 15/100= ₹ 35,294/-, as against which the assessee had deducted only a sum of ₹ 30,000/-. It is the further case of the Revenue that the DTAA does not define the term gross amount , nor contains any provision for computation of the gross amount and therefore, provisions of Section 195A of the Act will apply for computati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax paid thereon by the assessee in terms of the conditions in the agreement between the assessee and the British company. The Court while upholding the order of the Tribunal, which confirmed the order of the CIT (A), pointed out that Section 195A authorises the assessment of gross income only when collaboration agreement is not approved by the Government of India under Section 10(6A). The effect of the approval of the agreement under Section 10(6A) is that the tax paid by the Indian concerned on the remittance to the foreign collaborator gets exemption from tax and when such tax is exempted grossing up under Section 195A to cover up tax component of remittance is not permissible. Since the CIT(A) and the Tribunal declared the assessee's entitlement for exemption from payment of tax, the Court held that grossing up could not have been made. This decision could clearly support the case of the Revenue, since the Court held that grossing up under Section 195A was not permissible in the said case on account of as exemption under Section 10(6A). In other words, but for the exemption, the Revenue would have been fully justified in grossing up the income. 33. As rightly pointed ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payer. This Section provides for grossing up of the tax only if it forms part of the income. As pointed out in Tata Ceramics, (supra), if the tax is exempted under Section 10(6A), it will not form part of the total income and there would be no grossing up of such tax for the purpose of tax deduction at source. 36. Section 2(24) of the Act, defines income and it is an inclusive definition and includes such net of tax payments also [Section 2(24)(iva)]. Thus, in the absence of the definition of income and definition of gross amount under the treaty, the assessee has to necessarily compute 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. 37. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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