2006 (1) TMI 96 - HC - Income Tax

Collaboration agreement entered into between the two companies - down payments were made in three instalments. - dispute is regarding the rate of tax applicable. - Contention of the assessee is that these down payments are in the nature of technical know-how fees and therefore, to be taxed at 20 per cent - AO stated that the down payments are in the nature of lump sum payment attracting section 9(1)(vi), wherein it is stated that the lump sum payments are to be treated as royalty and therefore, to be taxed at 30 per cent, and not at 20 per cent, - Whether Tribunal was right in holding that the lump sum payment made to the assessee foreign company was taxable at the rate of 20 per cent, relying on the exchange of notes of 1984 and not considering the terms of the Double Taxation Avoidance Agreement with Germany and especially, articles 12(3) and 12(4) of the said Agreement and the definition of royalty under the Income-tax Act? - held that the gross receipts by the assessee, whether termed as royalties or fees for technical services, should be taxed at 20 per cent.

Summary

Issues:
Interpretation of tax treatment for down payments made by a foreign company represented by an Indian entity. Application of Double Taxation Avoidance Agreement and exchange of notes in determining tax rate. Dispute over whether down payments should be taxed as technical know-how fees at 20% or as lump sum payments at 30%.

Analysis:
The High Court of Madras addressed tax case appeals concerning the tax treatment of down payments made by a foreign company represented by an Indian entity for the assessment years 1993-94 and 1994-95. The appellant, the Revenue, argued that the down payments should be taxed as lump sum payments attracting a 30% tax rate under section 9(1)(vi) of the Income-tax Act. On the other hand, the assessee contended that the down payments were technical know-how fees and should be taxed at a 20% rate. The Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal found in favor of the assessee, applying the Double Taxation Avoidance Agreement and the exchange of notes between India and Germany. They held that the payments should be taxed at 20% as fees for technical services or royalties.

The Revenue challenged this decision, raising the substantial question of law regarding the tax rate applicability based on the Double Taxation Avoidance Agreement and the definition of 'royalty' under the Income-tax Act. The High Court analyzed the agreement and notes, noting that the agreement executed by the German company clearly indicated the payments as fees for technical know-how. Referring to previous judgments and the exchange of notes, the court upheld the decision of the lower authorities, concluding that the payments should be taxed at 20%.

In citing previous cases such as CIT v. P.V.A.L. Kulandagan Chettiar and CIT v. Barmag AG, West Germany, the court emphasized the importance of factual findings and the application of Double Taxation Avoidance Agreements in determining tax liability. The court dismissed the appeals, stating that no substantial question of law arose as the appellant was primarily aggrieved by the factual findings of the lower authorities. Consequently, the appeals were dismissed, affirming the tax treatment of the down payments as technical know-how fees taxable at 20%.