2002 (5) TMI 40 - HC - Income Tax

Summary

Issues Involved:
1. Obligation of the petitioner-company to deduct income-tax at the rate of 30% or 20% from the royalty payment.
2. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and the USA.
3. Maintainability of the writ petition by the petitioner-company.
4. Interpretation and application of Section 195 of the Income-tax Act, 1961.
5. Correct rate of tax deduction under Section 90(2) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Obligation of the petitioner-company to deduct income-tax at the rate of 30% or 20% from the royalty payment:
The central issue revolves around whether the petitioner-company should deduct income-tax at 30% or 20% on the royalty payments made to the American company. The petitioner argued for a 20% deduction based on the DTAA, while the Revenue authorities insisted on a 30% deduction as per the initial agreement date.

2. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and the USA:
The DTAA between India and the USA was executed on September 18, 1990, and notified on December 20, 1990. The petitioner contended that under Article 12 of the DTAA, the royalty payment is taxable at 20%. The Revenue officials, however, argued that the DTAA does not apply retroactively to agreements made before its enforcement.

3. Maintainability of the writ petition by the petitioner-company:
The Revenue argued that the petitioner-company is not the affected party; rather, the American company is. However, the court held that the petitioner-company is indeed affected as it is responsible for deducting and remitting the correct amount of tax under Section 195 of the Income-tax Act. The court stated, "the writ petitioner is saddled with the statutory responsibility under section 195 of the Income-tax Act, 1961... Therefore, I hold the petitioner has locus standi to maintain this application."

4. Interpretation and application of Section 195 of the Income-tax Act, 1961:
Section 195 mandates that tax should be deducted at the time of crediting the income to the payee's account or at the time of payment, whichever is earlier. The court noted that the right to receive the second installment matured after the delivery of technical documentation in May 1991, which was after the DTAA came into force. Hence, the tax should be deducted at the rate specified in the DTAA.

5. Correct rate of tax deduction under Section 90(2) of the Income-tax Act:
Section 90(2) allows the provisions of the DTAA to apply if they are more beneficial to the assessee. The court highlighted that "the rate mentioned in the agreement is more beneficial to the assessee as by the Act itself the aforesaid agreement has been recognised and accepted." The court referenced the Division Bench judgment in CIT v. Davy Ashmore India Ltd., which affirmed that DTAA provisions prevail over the Income-tax Act.

Conclusion:
The court concluded that the petitioner-company was obliged to deduct income-tax at the rate of 20% as per the DTAA. The orders of the Revenue officials were set aside, and the Revenue was directed to issue a no-objection certificate as the tax at 20% had already been deducted. The writ petition was allowed without any order as to costs.