2005 (2) TMI 457 - AT - Income Tax

Summary

Issues:
1. Whether tax deduction from royalty payments should be at the rate of 15% or 20% under the Double Tax Avoidance Agreement between India and United Kingdom.

Analysis:

Issue 1: Tax Deduction Rate
The case involved appeals for the assessment years 1997-98 and 1998-99, where the main issue was the rate of tax deduction from royalty payments under the Double Tax Avoidance Agreement between India and the UK. The assessee, a company incorporated in England, had an agreement with the Government of India for the manufacture of aircraft. The agreement involved royalty payments, which were to be made by the Government of India through Hindustan Aeronautics Ltd. (HAL), appointed as its agent. The controversy revolved around whether the Government of India or HAL paid the royalties, determining the applicable tax rate.

Issue 1 Analysis:
The relevant article of the Double Tax Avoidance Agreement specified that if the payer of royalties is the Government of India, tax should be deducted at 15%, while in other cases, it should be at 20%. The IT authorities contended that HAL received the royalties and hence tax should be at 20%. However, the tribunal disagreed, stating that HAL acted as an agent for the Government of India, making the payments on behalf of the Government. Previous assessments and acceptances by the IT Department also supported the view that the royalties were paid by the Government of India, justifying the 15% tax deduction rate.

Conclusion:
The tribunal ruled in favor of the assessee for the assessment year 1997-98, allowing the appeal, and against the Department for the assessment year 1998-99, dismissing their appeal. It held that the Government of India was the entity paying the royalties, warranting a tax deduction rate of 15% as per the Double Tax Avoidance Agreement between India and the UK.