1994 (8) TMI 65 - AT - Income Tax

Assessing Officer, Chargeable To Tax, Foreign Company, Income Deemed To Accrue Or Arise In India, Income Tax, Tax At Source

Summary

Issues Involved:
1. Whether the payment of Rs. 9,34,579 made by the assessee-company to Puch was chargeable to tax in India.
2. Whether the provisions of the Convention for Avoidance of Double Taxation with Austria override the provisions of the Income-tax Act.
3. Whether the payment in question constituted "royalty" under the relevant provisions.

Detailed Analysis:

1. Chargeability of Payment to Tax in India:
The primary issue in this case was whether the payment of Rs. 9,34,579 made by the assessee-company to Puch was chargeable to tax in India. The Income-tax Officer (ITO) required the assessee-company to deduct tax at source on this payment, which the assessee contested by filing an appeal under section 248 of the Income-tax Act. The CIT (Appeals) held that the payments were for drawings and designs and not for services rendered in India, and thus, not in the nature of royalty, thereby negating the liability to deduct tax at source under section 195 of the Act.

2. Provisions of the Convention vs. Income-tax Act:
The assessee argued that the specific provisions of section 90 of the Act, which deals with Double Taxation Avoidance Agreements (DTAA), override the general provisions of the Act. It was contended that the income of the non-resident (Puch) was liable to deduction of tax at source in India only if such income arose from activities carried out in India. The Convention between India and Austria was cited, particularly Article III(1) and III(3), which stipulate that commercial profits of an enterprise of Austria are taxable in India only if derived through a permanent establishment in India, and certain incomes like royalties can be taxed in India even without a permanent establishment.

3. Nature of Payment as "Royalty":
The Tribunal examined the agreement between the assessee-company and Puch, noting that the payment was for the supply of drawings, designs, and specifications. The Tribunal referred to Article VI of the Convention, which defines "royalty" to include payments for the right to use designs. Similarly, Explanation 2 to section 9(1)(vi) of the Act defines "royalty" to include consideration for the transfer or use of designs. The Tribunal found no contradiction between the Convention and the Act, concluding that the payment for the supply of designs implied their use, thus constituting "royalty."

Conclusion:
The Tribunal held that the payment of Rs. 9,34,579 made by the assessee-company to Puch was indeed in the nature of royalty and chargeable to tax in India. Consequently, the provisions of section 195 of the Act, which mandate the deduction of tax at source, were applicable. The Tribunal set aside the order of the CIT (Appeals) and restored the direction of the Assessing Officer, thereby allowing the Revenue's appeal.

Result:
The appeal by the Revenue was allowed, confirming that the payment in question was taxable in India and subject to deduction of tax at source under section 195 of the Income-tax Act.