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2012 (5) TMI 58 - AT - Income TaxRoyalty income - assessee-company computed tax on royalty in respect of Marketing Royalty Agreement and royalty on sale of software to third parties @ 10.455% as per section 115A as against the rate of 15% as per Article 12 of the DTAA between India and USA royalty towards ESW the tax was computed @ 15% as per Article 12 of the DTAA between India - USA as against the tax rate of 20% as per section 115A - Held that - It is a settled position that as per section 90(2), the provisions of the Act or the provisions of the Treaty, whichever is beneficial, apply to the assessee - royalty income in respect of the agreement entered into before 1.6.2005 are from one source and royalty income in respect of agreements entered into on or after 1.6.2005 are from a different source , the contracts or agreements being the source of income have been entered into on different dates and the statute recognizes such time differentiation and provides separate tax rates for each such stream - the assessee is justified in comparing the rate of 10% and 20% (as per section 115A) separately and independently with the rate of 15% (as per Article 12 of the India-USA DTAA Treaty - where a provision in the taxing statute is capable of two reasonable interpretations, the view favorable to the assessee is to be preferred in favour of assessee. Charging of interest u/s.234B Revenue submitted that since the rate for advance tax at 15% is more than the TDS rate under section 115A @10%, the assessee is liable to be charged interest under section 234B Held that - Foreign company is not liable for internet u/s. 234B - the computation of tax by the assessee at the rates specified in the Treaty and section 115A is correct - that the rate of tax for payment of advance tax and TDS being different, their ratio is not applicable - assessee is therefore not liable to be charged interest u/s. 234B in favour of assessee.
Issues Involved:
1. Application of blanket rate of tax. 2. Levy of interest under section 234B of the Income Tax Act. Issue-wise Detailed Analysis: 1. Application of Blanket Rate of Tax: The assessee, a foreign company, filed its return of income for the Assessment Year 2007-08, declaring an income of Rs. 50,72,30,070, later revised to Rs. 208,01,76,260. The tax was computed on royalty income from agreements entered before and after 1.6.2005 at different rates: 15% as per Article 12 of the India-USA DTAA for agreements before 1.6.2005 and 10.455% as per section 115A for agreements after 1.6.2005. The Assessing Officer, however, applied a blanket rate of 15% for all agreements, leading to an additional tax demand. The CIT(A) upheld the Assessing Officer's decision, stating that the income cannot be split to determine whether the Act or the Treaty provisions are beneficial, and the assessee must opt for either the Act or the Treaty as a whole. The CIT(A) relied on decisions in Dresdner Bank Ag. v. Addl. CIT and DCIT v. Patni Computers Systems Ltd., concluding that the assessee cannot split income to avail benefits partly under the Act and partly under the Treaty. Upon appeal, the Tribunal examined whether the provisions of the Act and the Treaty should be compared for each source of income or on an aggregate basis. The Tribunal found that section 115A(1)(b) prescribes different tax rates for royalties based on the date of the agreement, indicating that each sub-clause is separate and independent. The Tribunal held that the assessee was justified in computing tax at different rates for different sources of income, comparing the Act and Treaty provisions separately for each source. Consequently, the Tribunal concluded that the CIT(A) was incorrect in comparing the tax on an aggregate basis and accepted the assessee's computation of tax. 2. Levy of Interest under Section 234B: The assessee challenged the levy of interest under section 234B, arguing that it had computed tax correctly and there was no shortfall in advance tax payment. The CIT(A) upheld the interest charge, distinguishing the Tribunal's earlier decision in the assessee's own case on the ground that the rate of tax for advance tax and TDS were not uniform for the relevant period. The Tribunal, however, relied on its earlier decisions in the assessee's case for the Assessment Years 2003-04 to 2006-07, where it was held that a foreign company is not liable for interest under section 234B. The Tribunal found no justifiable reason to deviate from these decisions and concluded that the assessee was not liable to be charged interest under section 234B. Conclusion: The Tribunal allowed the assessee's appeal, accepting the computation of tax at different rates for different sources of income and holding that the assessee was not liable for interest under section 234B. The stay petition filed by the assessee was dismissed as infructuous.
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