2015 (3) TMI 684 - AT - Income Tax

Non deduction of TDS - assessee in default u/s. 201(1) - BIOCON an Indian company and CIMAB, a Cuban company entered into a joint venture agreement hereby they agreed to form a joint venture company (JVC) in India - shares ought to be issued to CIMAB against of transfer of technology is payment which could be said to be royalty as per AO - Whether the provisions of Sec.195(1) of the Act are not applicable when shares are issued to a Non-resident (which is a foreign company in the present case) because it cannot be said to be a payment of any other sum chargeable under the provisions of this Act within the meaning of the said expression used in Sec.195(1) of the Act? - Held that - As rightly contended by the learned DR the expression any other sum chargeable under the provisions of the Act used in the earlier part of Sec.195(1) of the Act has to be read in conjunction with the words at the time of credit of such income to the account of the payee or at the time of thereof in cash or by issue of a cheque or draft or by any other mode . Thus payment in terms of the money is not the only mode contemplated under the provisions of Sec.195(1) of the Act. The use of the expression or by any other mode in Sec.195(1) of the Act makes the intention of the legislature clear that those provisions are attracted even to cases where payment is made otherwise than by money. We are therefore of the view that the argument canvassed by the Assessee cannot be accepted. - Decided against assessee. Whether the issue of shares by the Assessee on 30.3.2004 and 30.9.2004 can be said to be covered by the order of non-deduction of tax at source issued by the AO in his order dated 22.2.2005 and therefore in respect of issue of shares on the above two dates the Assessee cannot be proceeded against u/s. 201(1) s application dated 13.1.2005 in which the Assessee did not disclose the facts regarding issue of shares to CIMAB on 30.3.2004 and 30.9.2004. Therefore the Assessee cannot take any benefit under the order dated 22.2.2005 for any issue of shares to CIMAB which is not in accordance with law because that order which was passed u/s.195(2) of the Act was in response to an application by the person responsible for making payment in which the dispute can be only with regard to the rate of tax and not the question whether tax at all is deductible at source or not which remedy is available only to the recipient of the payment u/s.195(3) or 197 of the Act. - Decided against assessee. Can it be said that proceedings u/s.201(1) an assessee in default to the extent of tax on capital gain? - Held that - From a perusal of the aforesaid clauses-3 4 6 7 & 9 in the TT Agreement it is clear that there was no transfer of the know-how by CIMAB to the assessee. It is thus clear from the terms of this Agreement that the assessee did not acquire the know-how through a transfer within the meaning of section 2(47) of the Act from CIMAB and therefore the arguments of the assessee on the arguments resulting in a transfer of know-how deserve to be rejected. The JVA read together with the JVA contains two parts. The first part transfers right to use know-how. This part is a separate contract and the right to use know-how so transferred was Royalty within the Explanation 2(iv) to section 9(1)(vi) of the Act. The second part is the mode of payment of the consideration payable under the JVA & TTA for providing technology by CIMAB to the assessee (right to use the know-how) which is in the form of issue of shares in the JVC. Accrual of income from the second part of the contract has to be brought to tax subject to fulfillment of conditions specified in section 9(1)(vi) of the Act. The fact that the consideration payable under the Agreement is discharged by issue of shares in a JVC will have no effect on accrual of income in India and its taxability in India. In the present case as we have already seen operations are effected and services are rendered in India. There is nothing on record to show that there was delivery of technical know-how abroad. On the other hand the circumstances suggest that there has been delivery of technical know-how in India. We have already seen in the present case that under clause 2.1 of the JVA provides that the JVC will manufacture cancer drugs using the technology developed by CIMAB. The technology brought in by CIMAB would be its capital contribution. The terms on which technology was to be brought in by CIMAB is contained in a TTA. We have already seen the terms of the TTA and have come to the conclusion that there was no transfer of any intellectual property in the technology by CIMAB to the Assessee. Therefore it cannot be said that the Assessee had acquired any right to intellectual property in the know-how. - Decided against assessee.

Summary

Issues Involved:
1. Applicability of Section 195(1) of the Income-tax Act, 1961 for issuing shares to a non-resident.
2. Validity of the order under Section 195(2) concerning shares issued before the order.
3. Estoppel and delay in disposing of applications under Section 195(2).
4. Application of the principle "Actus Curle Neminem Gravabit".
5. Classification of the issue of shares as "Royalty" or "Capital Gains".

Issue-wise Detailed Analysis:

Issue No.1: Applicability of Section 195(1) of the Act

The primary argument was whether issuing shares to a non-resident constitutes a payment of "any other sum chargeable under the provisions of this Act" under Section 195(1). The tribunal held that Section 195(1) applies even when payment is made by issuing shares, as the term "by any other mode" includes non-monetary payments. Thus, the assessee was required to deduct tax at source on the value of shares issued to CIMAB.

Issue No.2: Validity of the Order under Section 195(2)

The assessee argued that the shares issued on 30.03.2004 and 30.09.2004 were covered by the order dated 22.02.2005 under Section 195(2). However, the tribunal noted that the application for the order was made after these shares were issued, and the order did not reference these prior issuances. Therefore, the order did not cover the shares issued before its date, and the assessee was liable for not deducting tax at source for those shares.

Issue No.3: Estoppel and Delay in Disposing Applications

The assessee contended that the principle of estoppel should apply since it relied on the AO's previous order and the delay in disposing of subsequent applications. The tribunal rejected this, stating that the assessee cannot claim estoppel against statutory obligations. Moreover, the order dated 22.02.2005 was not in force when the shares were issued, and the applications made after issuing shares did not justify non-deduction of tax.

Issue No.4: Application of the Principle "Actus Curle Neminem Gravabit"

The assessee argued that the principle "Actus Curle Neminem Gravabit" (an act of the court shall prejudice no man) should apply due to reliance on the AO's order. The tribunal dismissed this argument, emphasizing that tax laws do not accommodate equitable considerations, and the statutory provisions of Section 195 are clear and unambiguous. The tribunal reiterated that the order dated 22.02.2005 was valid only for a limited period and did not cover the issue of shares in question.

Issue No.5: Classification as "Royalty" or "Capital Gains"

The tribunal examined whether the issue of shares constituted "Royalty" or "Capital Gains". The definition of "Royalty" under Explanation 2 to Section 9(1)(vi) excludes consideration chargeable under the head "Capital Gains". The tribunal analyzed the Joint Venture Agreement (JVA) and Technology Transfer Agreement (TTA), concluding that the agreements provided only a right to use the technology, not an outright transfer. Therefore, the consideration paid was classified as "Royalty" under Section 9(1)(vi), and the assessee was liable to deduct tax at source.

Conclusion:

The tribunal upheld the orders of the CIT(A), confirming that the assessee was in default for not deducting tax at source on the value of shares issued to CIMAB. The appeals of the assessee were dismissed.