2004 (12) TMI 636 - AT - Income Tax

Deduction of tax at source - Taxability of payment for preparation of Material Safety Data Sheets (MSDS) u/s Article 12(4) of the Indo-Swiss Tax Treaty - remittance for payment of invoice - Rate of tax applicable on technical services u/s Article 12 of the Indo-French Tax Treaty - HELD THAT - It is also an undisputed position that under the Indo-Swiss Tax Treaty the payment in question can only be taxed in India in case the provisions of article 12(4) are held to be applicable. We may also mention that as held by the Tribunal in the case of Maharashtra State Electricity Board v. Dy. CIT 2003 (8) TMI 165 - ITAT BOMBAY-H in a case the foreign recipient of an income is held to not liable to tax in respect of a certain income the payee can also not be saddled with the tax deduction at source liability in respect of the related remittance. Thus we hold that the assessee was not liable to deduct tax at source in respect of payment of CHF 8, 000 for making the material safety data sheets to M/s. RCC Registration Consulting Company Limited Switzerland. We therefore set aside the orders of the authorities below on this issue. Rate of tax - The Indo-US Tax Treaty defines the taxable year as previous year so far Indian laws are concerned. Therefore the applicability of the rate of 15 per cent which is effective after five taxable years after the treaty coming into force is relevant from previous year 1996-97. In other words the rate of tax so far as royalties and fees for technical services earned by the persons covered by the Indo-French DTAA after 1st April 1996 are concerned is to be applied at the rate of 15 per cent. We need not go beyond this point so far as the impact of protocol clause is concerned. As we have already noted as far as previous year 1996-97 and subsequent years are concerned the correct rate of tax is 15 per cent. By the virtue of protocol clause 7 which is recognized by and given effect to by the CBDT itself the same rate should also apply on the Indo-French DTAA. The grievance of the assessee is quite justified. We may clarify that even though we have referred to the CBDT notification earlier in this order it is also necessary to add that as the Tribunal held in the case of ITC Ltd. ( supra ) the benefit of lower rate or restricted scope of fees for technical services under the Indo-French DTAA is not dependent on any further action ( e.g. notification referred to by us) by the respective Governments unlike the situation envisaged in for example para 4 of protocol to India-Philippines DTAA or para 3 of protocol to Indo-Swiss DTAA . Since we have concluded that on merits the lower rate of 15 per cent in the Indo-US Tax Treaty was applicable with effect from previous year 1996-97 the same benefits are also available to the persons covered by the Indo-French Tax Treaty. Thus we uphold the grievance of the assessee. We accordingly direct the Assessing Officer to apply the tax rate of 15 per cent as claimed by the assessee. The excess amount collected will be refunded by the Assessing Officer. In the result both the appeals are allowed.

Summary

Issues Involved:
1. Taxability of payment for preparation of Material Safety Data Sheets (MSDS) u/s Article 12(4) of the Indo-Swiss Tax Treaty.
2. Rate of tax applicable on fees for technical services u/s Article 12 of the Indo-French Tax Treaty.

Summary:

Issue 1: Taxability of Payment for Preparation of MSDS u/s Article 12(4) of the Indo-Swiss Tax Treaty
- Grievance: The assessee contended that the CIT(A) erred in holding that the payment of CHF 8,000 to M/s. RCC Registration & Consulting Company Limited, Switzerland, is covered by the expression 'fees for included services' u/s Article 12(4) of the Indo-Swiss Tax Treaty and is liable to be taxed in India at the rate of 20% of the gross amount.
- Tribunal's Analysis: The Tribunal examined the invoice and found that the payment was for the preparation of MSDS in EU format. The Tribunal referred to its earlier decision in the case of *Raymond Ltd. v. Dy. CIT* [2003] 86 ITD 791 (Mum.), which clarified that mere rendering of services does not constitute 'making available' technical knowledge, experience, skill, or know-how.
- Conclusion: The Tribunal concluded that the payment for preparation of MSDS does not fall within the scope of Article 12(4) of the Indo-Swiss Tax Treaty as it does not 'make available' technical knowledge to the assessee. Therefore, the payment of CHF 8,000 is not taxable in India, and the assessee was not liable to deduct tax at source.

Issue 2: Rate of Tax on Fees for Technical Services u/s Article 12 of the Indo-French Tax Treaty
- Grievance: The assessee argued that the CIT(A) erred in holding that the assessee is liable to deduct tax at source at the rate of 20% on the remittance of US$ 3,30,000 to M/s. Techniship SA France.
- Tribunal's Analysis: The Tribunal noted that the remittance is taxable in India as fees for technical services u/s Article 13 of the Indo-French DTAA. However, the dispute was regarding the applicable tax rate. The Tribunal referred to the protocol clause 7 in the Indo-French Tax Treaty, which aligns the tax rate with the more favorable provisions of the Indo-US Tax Treaty, limiting the tax rate to 15%.
- Conclusion: The Tribunal held that the correct rate of tax is 15% as per the Indo-US Tax Treaty, applicable from the previous year 1996-97. The Tribunal directed the Assessing Officer to apply the tax rate of 15% and refund the excess amount collected.

Result:
Both appeals, ITA No. 2723/Mum./98 and ITA No. 2724/Mum./98, were allowed.