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2018 (8) TMI 1905 - AT - Income TaxTDS u/s 195 - development fees and royalty paid by the assessee to a non resident entity for want of deduction of tax at source - DTAA with Korea - Whether term paid used in clause (1) will include payable amount also ? - HELD THAT - Terms used in treaties are not to interpreted in the manner which terms are used in a legislative edict in the form of a statute or law. Hon ble Apex Court had noted as under in its judgment in the case of UOI vs. Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME COURT , which throws light on the manner which a treaty is to be interpreted. We feel that the word paid cannot be construed in a manner to include in it payable amounts also. Paid indicates a past event and not one which is to happen in future. Hence, we cannot say that the Korean entity was liable to tax on these amounts under clause (1) of Article 13 of the DTAA. Whether clause (2) of Article 13 would apply? - Said clause says that royalties and fees for technical services might also be taxed in that contracting state in which they arose. We find that the decision of Ahmedabad Bench of the Tribunal in the case of Saira Asia Interiors Pvt. Ltd 2017 (4) TMI 242 - ITAT AHMEDABAD elucidates the manner in which this clause has to be interpreted. Ahmedabad Bench was considering application of Article 13 of DTTA between India and Italy, in a more or less similar fact circumstances. Said article was pari materia to Article 13 of the India and Korea, DTAA For triggering the taxability under article 13 of the Indo-Italian DTAA, mere credit of amount of the royalty payable to the non-resident concerns account would not be sufficient. According to them, it was imperative that actual payments were effected. . Hence we are choosing to follow the Co-ordinate Bench view. Ld. Commissioner of Income Tax (Appeals) has at para 4.1.3 clearly observed that amounts stood outstanding on 31.03.2010. Ld. Commissioner of Income Tax (Appeals) also observed that when payments were effected, assessee had remitted the tax to the exchequer. In such circumstances, we are of the opinion that ld. Commissioner of Income Tax (Appeals) was justified in deleting the disallowance made u/s.40(a)(i)
Issues Involved:
1. Deletion of disallowance made by the Assessing Officer on development fees and royalty paid to a non-resident entity for want of deduction of tax at source. 2. Applicability of Section 40(a)(i) of the Income Tax Act, 1961. 3. Interpretation of Article 13 of the Double Taxation Avoidance Agreement (DTAA) between India and Korea. 4. Relevance of the Supreme Court judgment in the case of Palam Gas Service vs. CIT. Issue-wise Detailed Analysis: 1. Deletion of Disallowance: The Revenue was aggrieved by the deletion of the disallowance made by the Assessing Officer on development fees and royalty paid by the assessee to a non-resident entity without deducting tax at source. The Assessing Officer had disallowed ?3,12,69,759/- under Section 40(a)(i) of the Income Tax Act, 1961, as the tax deducted at source (TDS) was not remitted to the exchequer before the date of filing the return of income. 2. Applicability of Section 40(a)(i): The assessee contended that no payments were made during the relevant previous year, and the amounts were only credited to the accounts of the non-resident companies. The Commissioner of Income Tax (Appeals) (CIT(A)) accepted this argument, noting that the tax liability on royalties and fees for technical services would arise only when the amounts were paid to non-residents. The CIT(A) observed that the assessee had remitted the deducted taxes to the exchequer when payments were made in the subsequent year. Therefore, Section 40(a)(i) was deemed inapplicable. 3. Interpretation of Article 13 of DTAA between India and Korea: The Revenue argued that under Article 13 of the DTAA, royalties and fees for technical services could be taxed in the contracting state when the payer is a resident of that state. The CIT(A) and the Tribunal relied on various decisions, including those of different benches of the Tribunal, which held that tax liability on non-residents arises only upon actual payment, not merely on accrual or credit in accounts. The Tribunal found that the word "paid" in Article 13(1) of the DTAA could not be interpreted to include "payable" amounts, as treaties are to be interpreted differently from statutory legislation. 4. Relevance of Supreme Court Judgment in Palam Gas Service vs. CIT: The Revenue cited the Supreme Court judgment in Palam Gas Service vs. CIT, where it was held that the word "payable" in Section 40(a)(ia) includes paid amounts. However, the Tribunal distinguished this case, stating that the interpretation of terms in treaties differs from statutory interpretation. The Tribunal emphasized that the word "paid" in Article 13 of the DTAA indicates a past event and does not include future payables. Conclusion: The Tribunal upheld the CIT(A)'s decision, affirming that the assessee's liability to deduct and remit tax arose only when actual payments were made. The Tribunal followed the precedent set by coordinate benches, which required both accrual and payment for taxability under Article 13 of the DTAA. The appeal of the Revenue was dismissed, and the order of the CIT(A) was found to be justified. Order Pronouncement: The order was pronounced on Thursday, the 16th day of August, 2018, at Chennai.
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