2012 (6) TMI 106 - HC - Income Tax

Rate of tax u/s 115A - royalty - Amended collaboration agreement entered in 1981 to be treated as an extension of the old agreement of 1973 - the assessee claimed relief of deduction of 20% towards expenses, further deduction of 20% towards training and exemption in respect of lumpsum royalty and royalty on export sales if new agreement entered is considered to be the extension of earlier agreement - Held that - Once 1981 agreement is treated as part of 1973 agreement, then the consequences of treating the second agreement as part of the original agreement should have been considered for applying the relevant statutory provisions under the Income Tax Act and in consonance with the Double Taxation Avoidance Agreement - Assessing Officer is directed to consider the claim of the assessee on the relief under DTAA agreement in respect of expenses towards free training, exemption under Section 9(i)(vi) in respect of lumpsum royalty as well as the claim for deduction under Section 44D towards expenses partly in favour of assessee.

Summary

Issues:
1. Characterization of the second agreement as an extension of the original agreement.
2. Consideration of deductions and exemptions under the Income Tax Act and Double Taxation Avoidance Agreement.

Issue 1: Characterization of the second agreement as an extension of the original agreement:

The assessee, a non-resident represented by BHEL, had an agreement for technical knowhow transfer with an Indian company. The original agreement was from 26.11.1973, renewed on 21.8.1981. The dispute arose on whether the 1981 agreement was an extension of the 1973 agreement or a new agreement. The Commissioner of Income Tax held it as an extension, charging tax at 50%. The Tribunal upheld this view, considering the 1981 agreement as merely extending the period of the original agreement. The assessee contended that the 1981 agreement was separate, covering new products and royalties. However, the Revisional authority and Tribunal disagreed, leading to the appeal.

Issue 2: Consideration of deductions and exemptions under the Income Tax Act and Double Taxation Avoidance Agreement:

The assessee claimed exemptions based on the nature of royalty receipts but was denied by the Assessing Officer, who taxed royalties at varying rates. The Commissioner of Income Tax invoked Section 263, directing tax at 50%. The assessee argued for deductions under Section 44D and exemptions under Section 9(1)(vi) if the 1981 agreement was part of the 1973 agreement. The Commissioner rejected these claims, stating they contradicted Section 263. The Tribunal upheld this decision, leading to the current appeal. The Court agreed that deductions should have been considered post the characterization of the 1981 agreement, directing the Assessing Officer to evaluate the claims under the Double Taxation Avoidance Agreement and relevant provisions of the Income Tax Act.

In conclusion, the Court partly allowed the appeal, emphasizing the need for considering deductions and exemptions once the 1981 agreement was deemed an extension of the 1973 agreement. The Tribunal's failure to address these aspects was noted, leading to directions for the Assessing Officer to evaluate the claims under the Double Taxation Avoidance Agreement and statutory provisions of the Income Tax Act.