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2006 (10) TMI 260 - AT - Income TaxIncome - Deemed to accrue or arise in India - non-banking finance company - nature of payment - DTAA between India Australia - whether or not the CIT(A) was justified in holding that the assessee before us, i.e., Kotak Mahindra Primus Limited, was required to withhold tax @ 15% from payment of Australian Dollars (A ) 3,25,000 made to M/s. Ford Credit Australia Limited, Australia (Australian company) - HELD THAT - DR s reliance on the ruling given, by the Hon ble Authority for Advance Ruling in the case of ABC 1999 (4) TMI 612 - ADVANCE RULING AUTHORITY , we see no need to deal with the same separately. The Assessing Officer had adopted the reasoning approved by the Hon ble Authority for Advance Ruling and we have dealt with the same in the course of our consideration to the matter. The prescription of section 245S is unambiguous. We are not inclined to disturb our conclusions merely because the conclusions arrived at above, and in the light of detailed reasons set out earlier in the order, are at variance with the conclusions arrived at in the said ruling. We have carefully perused the esteemed views of the Hon ble Authority for Advance Ruling, and, with respect but without hesitation, we are not persuaded. Hence, in our considered view, the impugned payment cannot be held to be covered by the scope of expression royalty under article 12(3) of the India Australia DTAA. Since the Australian company admittedly does not have any permanent establishment (PE) in India, this payment cannot also be taxed as a business profit of the Australian company in India. It is so in view of the fact that article 7(1) of the applicable tax treaty specifically provides that, The profits of the enterprises of one of the Contracting States shall only be taxable in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein . This leads us to the conclusion that the right of Indian tax jurisdiction does not extend to taxing the impugned payment of A 3,25,000 to the Australian company, i.e., FCAL, for specialized data processing of information furnished by the Indian company. Having held that the Australian company, i.e., FCAL, did not have any tax liability in India, and as the tax withholding liability is only a vicarious and substitutionary liability, we also hold that the appellant before us, i.e. , Indian company by the name of Kotak Mahindra Primus Limited, did not have any tax withholding liability so far the payment of A 3,25,000 to the Australian company was concerned. The plea of the appellant is accepted. Thus, we vacate the orders of the authorities below. We also direct the Assessing Officer to refund the taxes deposited by the appellant company, after verifying that the appellant company has not issued tax deduction at source certificate u/s 203 and, accordingly, the credit for the tax deduction at source has not been given to the Australian company in its income-tax assessment in India. The appellant will get the relief, if so admissible in law, accordingly. In the result, the appeal is allowed.
Issues Involved:
1. Whether the CIT(A) was justified in holding that the assessee was required to withhold tax at 15% on the payment made to Ford Credit Australia Limited. 2. The nature of the payment made to the Australian company and its taxability under the India-Australia Double Taxation Avoidance Agreement (DTAA). 3. Whether the payment constitutes "royalty" under Article 12 of the DTAA. 4. The applicability of Article 7 of the DTAA concerning business profits and permanent establishment (PE). Issue-wise Detailed Analysis: 1. Whether the CIT(A) was justified in holding that the assessee was required to withhold tax at 15% on the payment made to Ford Credit Australia Limited: The CIT(A) upheld the Assessing Officer's decision that the Indian company, Kotak Mahindra Primus Limited, was required to withhold tax at 15% on the payment of A$ 3,25,000 made to Ford Credit Australia Limited. The Assessing Officer classified the payment as "royalty" under Section 9(1) of the Indian Income-tax Act, 1961, and Article 12(3)(a) of the India-Australia DTAA. The CIT(A) confirmed this classification, leading to the litigation before the Appellate Tribunal. 2. The nature of the payment made to the Australian company and its taxability under the India-Australia Double Taxation Avoidance Agreement (DTAA): The payment was made under an agreement dated 30th April 1997, which included an annual maintenance fee and data processing costs. The appellant contended that these payments were business profits and not taxable in India as the Australian company did not have a permanent establishment (PE) in India. The Tribunal noted that the entire payment was for "on-going payment charges for data processing" and not for the use of any equipment or intellectual property. 3. Whether the payment constitutes "royalty" under Article 12 of the DTAA: The Tribunal examined whether the payment could be classified as "royalty" under Article 12(3)(a), (b), and (c) of the DTAA: - Article 12(3)(a): The Tribunal concluded that the payment was not for the use of or right to use any copyright, patent, design, model, plan, secret formula, process, trademark, or other like property or right. The payment was for data processing, not for the use of software or mainframe computer per se. - Article 12(3)(b): The Tribunal found that the payment was not for the use of any industrial, commercial, or scientific equipment. The Indian company did not have control or physical access to the mainframe computer in Australia; hence, the payment was for data processing services, not for the use of the mainframe computer. - Article 12(3)(c): The Tribunal determined that the payment was not for the supply of scientific, technical, industrial, or commercial knowledge or information. The Indian company provided the information, which was processed by the Australian company and transmitted back. 4. The applicability of Article 7 of the DTAA concerning business profits and permanent establishment (PE): Since the Australian company did not have a PE in India, the payment could not be taxed as business profits under Article 7(1) of the DTAA. Article 7(1) stipulates that the profits of an enterprise of one Contracting State shall only be taxable in that State unless the enterprise carries on business in the other Contracting State through a PE situated therein. Conclusion: The Tribunal concluded that the payment of A$ 3,25,000 to the Australian company was not taxable in India under the provisions of the India-Australia DTAA. Consequently, the Indian company, Kotak Mahindra Primus Limited, did not have any tax withholding liability for this payment. The orders of the authorities below were vacated, and the Assessing Officer was directed to refund the taxes deposited by the appellant company, subject to verification that no tax deduction at source certificate was issued under Section 203 and no credit for the tax deduction at source was given to the Australian company in its income-tax assessment in India. The appeal was allowed.
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