2000 (8) TMI 243 - AT - Income Tax

Summary

Issues Involved:
1. Whether the agreement dated 10-12-1981 between the assessee and M/s. Chloride Group Ltd. U.K. can be treated as an extension of the previous agreement.
2. Determination of the liability of the assessee to deduct tax at source under section 195 read with the Double Taxation Avoidance Agreement (DTAA) between the United Kingdom and India.
3. Interpretation of the term "extension" in the context of the agreement.
4. Applicability of the tax rate under Article 13(2) of the DTAA.

Issue-wise Detailed Analysis:

1. Whether the agreement dated 10-12-1981 can be treated as an extension of the previous agreement:
The Tribunal examined the nature of the agreement dated 10-12-1981 to determine if it was a mere extension of the previous agreements dated 28-6-1971 and 1-6-1976. The Tribunal noted significant differences between the agreements, including changes in the definition of "Accumulators," the scope of "Turnover," and the basis of royalty payments. The Tribunal concluded that the impugned agreement was not an extension but a new agreement with different terms and conditions.

2. Determination of the liability of the assessee to deduct tax at source under section 195 read with the DTAA:
The Tribunal considered the provisions of section 195 of the Income-tax Act, which mandates the deduction of tax at source on payments to non-residents. The DTAA between the United Kingdom and India, effective from 23-11-1981, also governs the liability for TDS under section 195. The Tribunal noted that the taxability of royalty income under Indian tax laws is governed by section 9(1)(vi), which deems royalty income to accrue or arise in India and thus taxable in India.

3. Interpretation of the term "extension" in the context of the agreement:
The Tribunal analyzed the correspondence between the assessee and the Government of India, which referred to the agreement as an "extension." However, the Tribunal emphasized that the actual terms and conditions of the agreement dated 10-12-1981 were different from the earlier agreements. The Tribunal also referred to the decision of the Calcutta High Court in the case of Borhat Tea Co. Ltd., which held that a renewal of a fixed deposit after its expiry constituted a new agreement. Applying this principle, the Tribunal concluded that the agreement dated 10-12-1981 was a new agreement and not a mere extension.

4. Applicability of the tax rate under Article 13(2) of the DTAA:
The Tribunal examined Article 13 of the DTAA, which deals with the taxation of royalty income. Article 13(2) provides that royalty income may be taxed in the contracting state where it arises, but the tax rate should not exceed 30% if the royalty is paid under a contract signed after the entry into force of the DTAA. The Tribunal noted that the agreement dated 10-12-1981 was signed after the DTAA came into force and thus qualified for the 30% tax rate. The Tribunal rejected the revenue's argument that the agreement was an extension of the earlier agreements and thus not eligible for the 30% tax rate.

Conclusion:
The Tribunal upheld the order of the Commissioner of Income-tax (Appeals) and dismissed the appeals filed by the revenue. The Tribunal concluded that the agreement dated 10-12-1981 was a new agreement and not an extension of the previous agreements. Consequently, the tax rate on royalty income under Article 13(2) of the DTAA was limited to 30%. The assessee was required to deduct tax at source at this rate.