2021 (9) TMI 653 - HC - Income Tax

Application of section 115A or DTAA separately for one sources of income covered by different agreements - royalty income in respect of agreement entered into before 1/6/2005 which are from one source and royalty income in respect of an agreement entered into on or after that date are from the same source - Indo-US DTAA for computing the tax payable on royalty income received in pursuance of agreements entered into on or before 01.06.2005 - HELD THAT - In order to correct the anomaly prevalent in Section 115A with regard to rates of taxes in case of non-resident tax payer, in respect of income by way of royalty and piece for technical services as provided under Section 115A, was increased by way of amendment from 10% to 25%. Thus, from perusal of the aforesaid explanatory notes, it is evident that different rates of taxes in respect of royalty and piece for technical services were provided under different agreements. Therefore, the Tribunal has rightly taken the view that for the purposes of computing tax payable on the royalty income received, it has to be taxed with reference to the provisions of the agreement. Decided in favour of the assessee

Summary

Issues:
1. Interpretation of tax provisions for royalty income from agreements entered into before and after a specific date.

Analysis:
The High Court heard an appeal regarding the tax treatment of royalty income from agreements entered into before and after a specific date. The respondent cited a previous judgment where a similar question of law was decided against the revenue and in favor of the assessee. The substantial question of law in this case was whether the Tribunal was correct in allowing the assessee to apply different tax provisions for royalty income from agreements made before and after a specific date. The Tribunal had held that the assessee could segregate income sources and apply different tax rates under the Income Tax Act and Double Taxation Avoidance Agreement (DTAA). The revenue contended that the Tribunal erred in allowing this segregation and that the tax rate should be applied on the total income at the rate most beneficial to the assessee as per Section 90(2) of the Act.

The Court analyzed Section 90(2) of the Act, which states that the Act or the Treaty, whichever is beneficial, shall apply to the assessee. It observed that different sub-clauses of Section 115A(1)(b) were independent and created a charge of income tax separately. The Court referred to a Supreme Court decision to support its interpretation. It held that each sub-clause under Section 115A(1)(b) was distinct and the tax on royalty income had to be computed separately for each sub-clause. The Court also cited an explanatory note to the Finance Act, 2013, which highlighted the need for different tax rates in cases of royalty income under various agreements. Therefore, the Court upheld the Tribunal's decision to allow the assessee to apply different tax rates based on the date of the agreement.

In conclusion, the Court dismissed the appeal, stating that the question of law had already been answered in favor of the assessee in a previous judgment. The Court affirmed the Tribunal's decision to allow the assessee to compute tax on royalty income separately for agreements made before and after a specific date, based on the provisions of the Act and relevant agreements.