1996 (6) TMI 346 - AAR - Income Tax

Summary

Issues Involved:
1. Applicability of tax withholding rate u/s 195 of the Income-tax Act, 1961.
2. Interpretation of the relevant provisions of the Finance Act, 1995.
3. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and Sweden.
4. Discrimination under Article 26 of the DTAA.

Summary:

1. Applicability of Tax Withholding Rate u/s 195 of the Income-tax Act, 1961:
The applicant, a foreign company, argued that the tax withholding by the Indian companies should not be at the rate of 55% as prescribed under paragraph 2(b)(ix) of Part II of the First Schedule to the Finance Act, 1995. Instead, it should be at the estimated net profits from the local operations, which the applicant estimated to be not more than 10% of the total gross receipts.

2. Interpretation of the Relevant Provisions of the Finance Act, 1995:
The Authority examined whether the payments made to the applicant fall under clause (vii) or the residuary clause (ix) of paragraph 2(b) of Part II of the First Schedule to the Finance Act, 1995. It concluded that the nature of the payments falls squarely within the ambit of clause (vii), which pertains to "fees for technical services." Consequently, the applicable rate of tax deduction should be 30% and not 55%.

3. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and Sweden:
The Authority considered the provisions of Article 13 of the DTAA, which defines "fees for technical services" and the relevant taxation rules. It also examined Article 7, which deals with business profits. The Authority concluded that the receipts in question are "fees for technical services" and should be taxed as business profits under Article 7. However, due to the provisions of section 44D of the Income-tax Act, no deductions are allowed, making the entire gross amount received liable to tax.

4. Discrimination under Article 26 of the DTAA:
The applicant argued that taxing the gross payments at a higher rate is discriminatory and violates Article 26 of the DTAA. The Authority did not express a final opinion on this contention, stating that it can be raised in appropriate proceedings during the final assessment.

Ruling:
The Authority ruled that the Indian companies shall not withhold tax on amounts payable to the applicant-company at the rate of 55%. Instead, they should deduct tax at the rate of 30%, as per paragraph 2(b)(vii) of Part II of the First Schedule to the Finance Act, 1995. The Authority left the question of the applicant's net profits from local operations open to be agitated in appropriate proceedings.