2020 (10) TMI 297 - HC - Income Tax

Levy of tax on the royalties or fees for technical services - rate of tax under the Double Taxation Avoidance Agreement (DTAA) - assessee submitted that from perusal of Article 4 of the Notification dated 18.07.2015, it is evident that paragraph 12 of Article 12 of DTAA has been deleted and has been substituted by the paragraph which provides for levy of tax on the royalties or fees for technical services at the rate not exceeding 10% - DTAA between India and Singapore - HELD THAT - Instant case is a case of substitution by repeal and therefore, the Tribunal has rightly held that new provision which is in existence shall apply for the entire fiscal year as defined in DTAA. The singular issue which arises for consideration in this appeal is with regard to the rate of tax under the DTAA for Assessment Year 2006-07. Before proceeding further, we may advert to well settled rules of Interpretation with regard to taxing statutes. The substitution of a provision results in repeal of earlier provision and its replacement by new provision. When a new rule in place of an old rule is substituted, the old one is never intended to keep alive and the substitution has the effect of deleting the old rule and making the new rule operative. Thus, it is evident that paragraph 2 of Article 12, which provided for levy of tax on royalties or fees for technical services at the rate not exceeding 12% has been deleted and in its place, the provision which provides for levy of tax on the royalties or fees for technical services at the rate not exceeding 10% has been substituted. Thus, the substitution has the effect of deleting the old rule and making the new rule operative. Therefore, the Tribunal has rightly determined the rate of tax as substituted in Clause 2 of Article 12 of DTAA between India and Singapore applicable for the entire fiscal year as defined in DTAA and is liable to be taxed at 10%. For the aforementioned reasons, the substantial questions of law framed by this court are answered in affirmative and against the revenue.

Summary

Issues:
Interpretation of tax rate under Double Taxation Avoidance Agreement (DTAA) for Assessment Year 2006-07.

Analysis:
The High Court of Karnataka heard an appeal under Section 260A of the Income Tax Act, 1961, filed by the revenue concerning the Assessment Year 2006-07. The appeal questioned whether the Tribunal was correct in taxing the assessee at 10% instead of 15% as per the DTAA, considering a modification in the tax rate by a notification dated 18.07.2005. The case involved the interpretation of the rate of tax under the DTAA for the mentioned assessment year.

The facts of the case revealed that the assessee, a Singapore-based company engaged in software sales, declared a taxable income of 'NIL' for the Assessment Year 2006-07. The Assessing Officer determined that the software supplied was chargeable to income tax from royalty and technical services. Subsequently, the Commissioner of Income Tax (Appeals) affirmed this decision, leading the assessee to appeal to the Income Tax Appellate Tribunal, which allowed the appeal. The revenue challenged this decision, leading to the current appeal.

The core issue revolved around the interpretation of the rate of tax under the DTAA for the relevant assessment year. The revenue argued that the Notification dated 18.07.2005 came into force from 01.08.2005, and the Assessing Officer rightly applied the tax rate under the DTAA. On the other hand, the assessee contended that the substitution of the provision in the DTAA by the notification resulted in the deletion of the old rule (tax at 15%) and the introduction of a new rule (tax at 10%), applicable for the entire fiscal year as defined in the DTAA. The assessee relied on the Supreme Court decision in 'GOVERNMENT OF INDIA AND OTHERS VS. INDIAN TOBACCO ASSOCIATION' (2005) 7 SCC 396 to support their argument.

The High Court analyzed the legal position on the substitution of provisions in taxing statutes, citing precedents such as 'U.P.SUGAR MILLS ASSN. VS. STATE OF U.P.' (2002) 2 SCC 645 and 'WEST UP SUGAR MILLS ASSOCIATION V. STATE OF UP' (2012) 2 SCC 773. The Court emphasized that when a new rule replaces an old rule, the old rule is repealed, and the new rule becomes operative. In this case, the substitution of the provision in the DTAA resulted in the deletion of the old rule (tax at 15%) and the implementation of the new rule (tax at 10%) for the entire fiscal year defined in the DTAA.

Consequently, the High Court upheld the Tribunal's decision, affirming that the assessee was liable to be taxed at 10% as per the substituted provision in the DTAA. The substantial questions of law framed by the Court were answered in the affirmative and against the revenue. The appeal was dismissed, finding no merit in the revenue's arguments.

In conclusion, the High Court's judgment clarified the application of the tax rate under the DTAA for the Assessment Year 2006-07, emphasizing the legal principle of substitution in taxing statutes and the impact of such substitutions on the interpretation of tax provisions.