2020 (7) TMI 721 - HC - Income Tax

TDS u/s 195 - liability for deduction of tax - whether payments made by the assessee cannot be treated as royalty ? - HELD THAT - Substantial question of law framed by this Court is answered in favour of the revenue and against the assessee in 2015 (6) TMI 1205 - KARNATAKA HIGH COURT In the event the assessee succeeds before the Apex Court, it is clear that this order also cannot come into effect. The assessing authority shall therefore, pass an order under Section 260(1A)of the Act, based on the outcome of the assessee s appeal before the Apex Court. If the assessee loses his battle before the Apex Court, then before giving effect to this order, the assessing authority shall consider the application of Art. 24(4) of the DTAA between India and the Netherlands. Though the said question is not raised by the assessee before the authorities, the same being purely a question of law and the said DTAA being a beneficial piece of delegated legislation, if the assessee is entitled to the benefit of the same, that cannot be denied to it.

Summary

Issues:
Interpretation of tax law regarding royalty payments and liability for tax deduction under Section 195 of the Act.

Analysis:
The High Court addressed the appeal filed by the revenue regarding the treatment of payments made by the assessee as royalty and the consequent liability for tax deduction under Section 195 of the Act. The substantial question of law before the Court was whether the tribunal was justified in holding that the payments made by the assessee cannot be treated as royalty, thereby negating the liability for tax deduction under Section 195 and ruling out the applicability of Section 40(a) of the Act. The revenue contended that a previous judgment by the Court on a similar issue favored their position, which was not disputed by the assessee's counsel.

The Court acknowledged the revenue's submission and ruled in favor of the revenue and against the assessee based on the previous judgment. However, the Court also considered the possibility of the assessee succeeding in an appeal before the Apex Court. In such a scenario, the order of the High Court would not come into effect. The Court directed the assessing authority to pass an order under Section 260(1A) of the Act based on the outcome of the assessee's appeal before the Apex Court. If the assessee were to lose the appeal, the assessing authority was instructed to consider the application of Article 24(4) of the Double Taxation Avoidance Agreement (DTAA) between India and the Netherlands, even though this question was not raised by the assessee before the authorities. The Court emphasized that if the assessee is entitled to the benefit of the DTAA, it should not be denied to them.

In conclusion, the High Court allowed the appeal with the mentioned observations, providing guidance on the next steps depending on the outcome of the assessee's appeal before the Apex Court. The judgment highlighted the importance of considering the provisions of the DTAA in cases where the assessee may be entitled to its benefits, ensuring a fair and just application of the law.