2004 (4) TMI 70 - AAR - Income Tax

Applicant entered into two separate agreements in respect of IP Licence and Fee Agreement and Trademark Licence and Fee Agreement with the foreign company for consideration (royalty) specified therein payable by the applicant to the said company - fees for technical services which foreign company received from applicant under the management services agreement would be subject to tax in its hands in India as per provisions of Income-tax Act 1961which include cash or receipt basis

Issues Involved:
1. Taxability of royalties under the India-Sweden tax treaty.
2. Requirement to withhold tax under section 195(1) of the Income-tax Act, 1961.
3. Taxability of fees for technical services under the India-Switzerland tax treaty.
4. Requirement to withhold tax under section 195(1) of the Income-tax Act, 1961 for fees for technical services.

Detailed Analysis:

1. Taxability of Royalties under the India-Sweden Tax Treaty:
The central question was whether the income receivable by M/s. Flakt Woods AB (a Swedish company) in the form of "royalties" from M/s. Flakt (India) Limited would be subject to tax in India on a cash or receipt basis, as per Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Sweden.

The ruling clarified that the royalties would be subject to tax in India in accordance with the provisions of the Income-tax Act, 1961, which includes cash or receipt basis. Article 12 of the DTAA does not provide otherwise. This means that the taxability of such royalties in India is governed by Indian law, and the treaty does not stipulate that royalties should only be taxed on a cash or receipt basis.

2. Requirement to Withhold Tax under Section 195(1) of the Income-tax Act, 1961:
The applicant argued that tax should be withheld only at the time of actual remittance of royalties, not when the amounts are merely credited in the books of account. However, the ruling stated that under section 195(1) of the Act, tax must be deducted at the time of crediting the income to the account of the payee or at the time of payment, whichever is earlier.

This means that the applicant is required to withhold tax from the sums payable to Flakt AB at the time of making a mere provision in the books of account, not necessarily at the time of actual payment. The requirement of actual payment of "royalties" is not a pre-condition for triggering the incidence of income tax under the India-Sweden tax treaty.

3. Taxability of Fees for Technical Services under the India-Switzerland Tax Treaty:
The second application dealt with whether the income receivable by M/s. Flakt Woods AG (a Swiss company) in the form of "fees for technical services" from M/s. Flakt (India) Limited would be subject to tax in India on a cash or receipt basis, as per Article 12 of the DTAA between India and Switzerland.

The ruling confirmed that the fees for technical services would be subject to tax in India in accordance with the provisions of the Income-tax Act, 1961, which includes cash or receipt basis. Article 12 of the DTAA does not stipulate otherwise. Therefore, the taxability of such fees in India is governed by Indian law, and the treaty does not mandate taxation only on a cash or receipt basis.

4. Requirement to Withhold Tax under Section 195(1) of the Income-tax Act, 1961 for Fees for Technical Services:
Similar to the first issue, the applicant contended that tax should be withheld only at the time of actual remittance of fees for technical services. The ruling, however, reiterated that under section 195(1) of the Act, tax must be deducted at the time of crediting the income to the account of the payee or at the time of payment, whichever is earlier.

Thus, the applicant is required to withhold tax from the sums payable to Flakt AG at the time of making a mere provision in the books of account, not necessarily at the time of actual payment. The requirement of actual payment of "fees for technical services" is not a pre-condition for triggering the incidence of income tax under the India-Switzerland tax treaty.

Conclusion:
The ruling concluded that both royalties and fees for technical services are taxable in India as per the provisions of the Income-tax Act, 1961, and the applicant must withhold tax at the time of crediting the amounts in the books of account as per section 195(1) of the Act. The DTAA provisions do not override the requirement to withhold tax at the time of crediting the income.

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