TMI Blog2004 (4) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... , Village Numbai, Chennai-600 077, is a member of Flakt Woods Group of Companies - a worldwide group of companies - (for short "the Flakt group") . M/s. Flakt Woods AB incorporated in Sweden and a tax resident of Sweden, (hereinafter referred to as the "Sweden company") and M/s. Flakt Woods Group AG incorporated in Switzerland and a tax resident of Switzerland,(hereinafter referred to as the " Swiss company"), are also members of the Flakt group. The first application relates to Sweden company and the second application relates to Swiss company, 2. The following are the facts common to these applications. The applicant entered into two separate agreements in respect of IP Licence and Fee Agreement and Trademark Licence and Fee Agreement with the Sweden company for consideration specified therein payable by the applicant to the said company (hereinafter referred to as the "royalties"). The applicant entered into management services agreement with the Swiss company for providing various services to the applicant in consideration of "fees" payable by it to the said company. Those agreements were operative for different periods. In response to the invoices for royalties and fees ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Act has to be deducted u/s. 195(1) thereof. According to the Commissioner, income-tax is deductible at the time of crediting royalties and fee to the accounts of the said companies in the accounts of the applicant even though the same is neither paid to nor received by those companies. 4. Mr. Rahul Krishna Mitra, learned Chartered Accountant, appearing for the applicant, has argued the case forcefully and thoroughly. As per the provisions of Article 12 of India-Sweden Tax Treaty/India-Swiss Confederation Treaty, submits Mr. Mitra, the amount of Royalties could be taxed only on cash or receipt basis; in view of the section 90(2) of the Act the taxability of the said sum in the hand of the applicant is governed by the provisions of the said Treaties and the provisions of the Act will apply only if they are more beneficial to the contracting parties. The Commissioner has contended that foreign companies would be subjected to tax in India as soon as their accounts are credited with the amount of royalties/fee whether or not the amounts are paid or remitted to the foreign companies. 5. The controversy in this case falls in a narrow compass, viz, to what extent will the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 7. In the context of this Article, it is useful to notice Article 3 ( c) which defines expressions " Contracting State " and "the other Contracting State " to which in this case admittedly mean India and Sweden/Swiss Confederation respectively. After substituting the meaning of the said expressions, for the purpose of both the applications para (1) of Article 12 may be read thus: Royalties and fees for technical services arising in India and paid to the resident of Sweden/Swiss Confederation may be taxed in Sweden/Switzerland. This para as is evident, deals with taxability of royalties/fees in Sweden and Switzerland, as the case may be; it does not in any way affect the taxability and the manner of levy of tax on such Royalties/fees in India. Para (2) of Article 12 which is pertinent, says that notwithstanding the provisions of para (I), such Royalties/fees may also be taxed in India in accordance with the laws of India. It further provides that if the recipient of the Royalty/fees is the beneficial owner of the royalties or fees for techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , para (1) is wholly irrelevant. It is also pointed out above that para (2) thereof clearly lays down that the amount of such royalties/fees may also be taxed in India, in which they arise, and according to the laws of India. It is thus clear that the provisions of Article 12 of the treaty, discussed above, do not provide that taxability of such royalties/fees in India shall be on cash or receipt basis. Indeed even according to Article 12 such royalties/fees would be taxable according to the law in India. 10. Now it will be apposite to advert to section 195(1) of the Act which to the extent it is relevant reads thus: " 195 (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force". A plain reading of this provision shows that it enjoins every person responsible fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arily be at the time of making actual remittance of the said sums; it has to be at the time of making a mere provision thereof in the books of account of the applicant, since the requirement of actual payment of "royalties", is not a pre-requisite or pre-condition for triggering the incidence of income tax, in the India-Sweden tax treaty. It follows that on compliance with section 195(1) of the Act, it can not be said that the Treaty would be defeated and rendered otiose. * Accordingly, we rule in AAR Application No. 623 of 2003 on : Question No.1: The income receivable by M/s. Flakt Woods AG(hereinafter referred to as "Flakt AG") which is a company incorporated in Switzerland and accordingly a tax resident of Switzerland, in the form of "fees for technical services" from M/s. Flakt (India) Limited (the "applicant") under the Management Services Agreement, would be subject to tax in its hands in India in accordance with the provisions of the Act which include cash or receipt basis, and the provisions of Article 12 of the Double Taxation Avoidance Agreement entered into between the Government of the Republic of India and the Swiss Confederation do not provide to the contra. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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