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TMI Blog2012 (5) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... nd provides separate tax rates for each such stream - the assessee is justified in comparing the rate of 10% and 20% (as per section 115A) separately and independently with the rate of 15% (as per Article 12 of the India-USA DTAA Treaty - where a provision in the taxing statute is capable of two reasonable interpretations, the view favorable to the assessee is to be preferred – in favour of assessee. Charging of interest u/s.234B – Revenue submitted that since the rate for advance tax at 15% is more than the TDS rate under section 115A @10%, the assessee is liable to be charged interest under section 234B Held that:- Foreign company is not liable for internet u/s. 234B - the computation of tax by the assessee at the rates specified in the Treaty and section 115A is correct - that the rate of tax for payment of advance tax and TDS being different, their ratio is not applicable - assessee is therefore not liable to be charged interest u/s. 234B – in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... dia - USA as against the tax rate of 20% as per section 115A for agreements entered into prior to 1.6.2005, as the rate of tax as per Article 12 of the DTAA between India - USA was beneficial to the assessee-company. The return of income for the relevant year was selected for scrutiny and notice under section 143(2) was issued on 14.8.2008. Since the value of international transactions in the relevant period were in excess of Rs. 15 crores, reference was made to the Transfer Pricing Officer (TPO) to compute the Arms Length Price. The TPO after examining the issue passed an order under section 92CA on 20.10.2010 accepting the computation of ALP of international transactions and did not recommend any adjustment. The Assessing Officer completed the assessment by an order under section 143(3) of the Act on 30.12.2010. In the order of assessment, the Assessing Officer observed that the assessee is offering the royalty income to tax both under section 115A of the Act as also as per Article 12 of the India - USA DTAA and that the assessee could not furnish a copy of the agreement between it and other parties. The Assessing Officer did not accept the tax determined by the assessee @ 10.455 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that the assessee ought to have computed tax @ 15% and not @ 10.455%, should have estimated the shortfall and voluntarily paid the advance tax. The decision of the Tribunal in assessee's own case for an earlier year was distinguished by the learned CIT(A) on the ground that the rate of tax as per Treaty and rate of TDS as per the Finance Act are not uniform for the relevant period. Learned CIT(A), accordingly upheld the charging of interest under section 234B of the Act. In the result the assessee's appeal was dismissed. 3.0 Aggrieved the assessee is in appeal before us. The grounds of appeal raised by the assessee are as under : "1. The learned CIT(A) has erred in passing an order which is bad in law and on facts. Application of blanket rate of tax 2. The learned CIT(A) has erred in law and on facts in upholding the contention of the learned Assessing Officer and applying a blanket rate of 15 percent on the total income returned by the appellant disregarding the fact that of the total income reported by the appellant, an amount of Rs.945,743,187 was liable to tax at the rate of 10.455 percent as per the provisions of section 115A of the Income Tax Act, 1961 ("the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15A(1)(b) which states " …. The income tax payable shall be the aggregate of ….." CBDT Circular No.202 dt.5.7.1976 confirms the proposition that the rate of tax in respect of royalties depends on the date of agreement. Therefore, it is contended that the assessee was correct in computing the tax on royalties at different rates based on the date of agreement. (ii) The computation of income into four specific heads under section 14 depends on the source from which it arises. The fifth is a residuary head of income and is titled as 'income from other sources.' The source of royalties is the lessee's covenant to pay them as held by in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 (PC) and Hart (Inspector of Taxes) v. Sangster [1957] 34 ITR 303 (CA). Each agreement pursuant to which royalty is received by the assessee constitutes an independent source and the tax rates mentioned in section 115A depend upon the period during which the agreement was made and the date of such agreement. It thus envisages the computation of tax at two different rates in respect of two different sources of income. The learned Authorised Representative referred to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income. It was argued that the provisions of the Treaty are to be applied to relieve or reduce the tax liability, to grant relief and not impose the tax liability over and above the domestic tax laws. It was submitted that the expression 'to the extent' in section 90(2) confirms the proposition that the provisions of the Act or the Treaty, whichever is beneficial, are to be considered. (ix) Relying on the decision in the case of Foramer SA v. DCIT [1995] 52 ITD 115 (Del) and Circular No.728 dt.30.10.1995, it was argued that - (a) the provisions of the Act are applicable if they are more beneficial than the Treaty; (b) the choice of availing the benefit under the Treaty is with the assessee and not with the Revenue authorities. (c) under section 115A, every source of income has a separate rate of tax; (d) the tax rate for each source has to be compared with the rate of tax under the Treaty and (e) tax has to be computed in respect of income from each source at the rate which is beneficial to the assessee. (x) The learned Authorised Representative referred to the use of the expression ' and' in sub-clause (A) of section 115A(1)(b) and submitted that the computation of tax u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreements (revenues), whether for the same or different periods. It is possible that the assessee could choose to be governed by the tax rate under the Treaty for one stream of income and the rate in the domestic law in respect of the another stream of income. This could be so even though the two sources pertain to the same head of income. D. Income from royalty & FTS for two different periods. For the reasons already detailed, income derived from royalty and fees for technical services would be governed by the tax rates prevailing during the staid period. The assessee has a choice to opt for being governed by the rates in either the Act or the Treaty. This being the case, the Assessing Officer's action of adopting only the Treaty rates for income from pursuant to agreements entered into before as also after June 1, 2005 is not a correct proposition of law. These incomes constitute distinct cases which mandate an independent and separate evaluation from both Tr5eaty as well as the Act perspective. Mere fact that for one income stream, the Treaty rate is adopted, the assessee cannot be compelled to adopt the same rate for the other stream as well." (xii) The learned Authorised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Treaty provisions has to be made for each of the period separately and the tax rate adopted for one period should not be automatically applied for the other period. (xiv) Referring to the OECD and U.N. Treaty models and the commentary on double taxation convocation by Prof. Klaus Vogel, it was submitted that classification of income besides the Treaty is based on the type and source of income. The relevant interact from Prof. Vogel's commentary relied on by the assessee is as follows : "First, rules referring to income from certain activities - there are four such activities : business (Article 7), independent personal services (Article 14), dependent personal services (Article 15), agriculture and forestry (Article 6); Second, rules referring to income from certain assets -- four again; dividends (Article 10), interest (Article 11), royalties (Article 12) and immovable property (Article 6); Third rules referring to capital gains - four according to the four paragraphs of Article 13; Fourth, a rule referring to students (Article 20) and residuary rule (catch-all clause) referring to income not dealt with in the foregoing three categories (Article 21)" (xv) The learned Author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 90,42,412 Referring to the above, the learned Departmental Representative submitted that the total tax computed as per the Treaty amounting to Rs.31,20,26,440 is less than the total tax computed under the Act amounting to Rs.33,09,25,735. It was submitted that as the provisions of the Treaty are beneficial to the assessee, therefore the amount of tax as per the rate prescribed under the Treaty is to be adopted. The learned Departmental Representative reiterated the findings of the CIT(A) that (a) income for the same year cannot be charged both under section 115A and Article 12 of the DTAA and (b) once the provisions of either the Act or the DTAA are found beneficial to the assessee, the same would govern the tax computation without splitting the income into different segments or sources. The learned Departmental Representative also relied on the decision in the case of Dresdner Bank Ag. v. Addl. CIT 105 TTJ 149 (Mumbai) and DCIT v. Patni Computer Systems Ltd. 109 TTJ 742 (Pune) in support of the findings of the lower authorities that the assessee cannot split the income into different segments to avail the benefit partly under the Act and penalty under the Treaty. 5.2 In support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d rate at which the subject income is to be taxed. The Mumbai High Court in the case of B.M. Kamdar, In re [1946] 14 ITR 10 (Mum) observed as under - "The correct method of approach in my judgment is to Treaty nothing as being charged to tax until by the process of computation laid down by the Act, the status of income, profits and gains emerges." Once the charge is satisfied and income becomes liable to tax, rates as prescribed by the relevant Finance Act are to be applied to determine the ultimate tax outflow. Double Taxation Avoidance Agreements ("DTAA") are designed among others to provide relief in case of double taxation of the same income. Tax Treaties in force are organized into different chapters according to the 'types of income". Tax Treaties thus contain classification and assignment rules known as the distributive rule for avoiding or granting relief from double taxation. The tax rate under the Treaty is determined based on the type and source of income. The three stages of charge, computation and rate of tax are to be determined either under the Act or the Treaty. In the case before the Mumbai Tribunal, the banking company sought to crystallize on the charge and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e judgment have to be considered in the light of the questions raised before the Court. A decision of the Court takes it s colour from the questions involved in the case in which it is rendered. While applying the decision to a latter case, one must ascertain the true principle laid down by the decision and not pick out words or sentences from the judgment, divorced from the context of the questions raised." In view of the above it is submitted that the decision in the Dresdner Bank AG Case (supra) is distinguishable both on facts and in law. 6.1 The learned counsel for the assessee submitted that the decision in the case of Patni Computer Systems Ltd. (supra) was distinguishable as the facts of that case and the facts of the assessee's case were different. It was submitted that - "The facts before the Pune Tribunal are substantially different from the appellant's case. Some of the distinguishing facts are - (i) in the case before the Pune Tribunal, there was no income earned by the assessee (only losses had been suffered); (ii) the issue was on taxability of a PE and not royalty income, (iii) there were no different streams of income; (iv) there was no issue of such streams of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As per the provisions of section 115A(1)(b), the rate of tax on royalty payments in connection with the agreements entered into before 1.6.2005 is20% and the tax rates for agreements entered into on or after 1.6.2005 is 10%. These tax rates have been prescribed separately under sub-clause (A) and sub-clause (B). Therefore, depending on the nature of receipt viz. royalty or fees for technical services and the date of the agreement i.e. before 1.6.2005 or on or after 1.6.2005, the foreign company has to compute the tax separately under each of the sub-clauses (A), (AA), (B), (BB) and (C) of sections 115A(1)(b). Each of these sub-clauses are mutually exclusive and independent of each other and create or provide for a charge of income tax under section 4 of the Act. A foreign company has to, therefore, compute tax on its income under each of the above sub-clause separately and the tax so computed has to be aggregated as per the mandate of section 115A(1)(b) which provides that' the income tax payable shall be the aggregate of.' 7.4 The above expression which provides for the aggregation of tax computed under each of the sub-clauses (A), (AA), (B), (BB) and (C) indicate that the charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate as per Article 12 of the Treaty, the assessee computed tax @ 15% being the rate beneficial to it. Similarly between 10% tax rate as per section 115A and 15% tax rate as per Article 12 of the Treaty, the assessee has computed tax @ 10% which is beneficial to it. The assessee, in our view, is justified in computing the tax at a rate beneficial to it which is in accordance with the provisions of section 90(2) of the Act wherein the expression 'to the extent' reinforces the principle that the provisions of the Act or Treaty whichever is beneficial is applicable to the assessee. 7.6 The learned CIT(A) and the learned D.R. have both placed reliance on the decisions in the case of Dresdner Bank AG Case (supra) and Patni Computer Systems Ltd. (supra) in support of the conclusion that the determination of tax by the assessee is not correct. In the case of Dresdner Bank AG Case (supra), the assessee was a non-resident banking company incorporated in Germany and operating in India through its branch office in Mumbai. The issues before the Tribunal were with regard to (i) computation of income chargeable to tax in India under regular provisions and (ii) the applicability of section 115A t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Treaty only in respect of royalty income arising from the agreements entered into on or before 1.6.2005. In respect of agreements entered into on or after 1.6.2005, the assessee has offered royalty income @ 10% as per the provision of section 115JA. The concerned contracts are different; the source of income is different and the provisions under which royalty income is taxable is different and the assessee was therefore justified in offering the royalty income arising under two different contracts at two rates - one under the I.T. Act and one under the Treaty. In the instant case, it is not one of selective Treaty benefit as the case before the Mumbai Tribunal in the above referred case. The above decision is therefore, distinguishable from the instant case of the assessee. 7.7 In the case of Patni Computer Systems Ltd (supra), revenue argued that the losses of a foreign branch cannot be set off in computing the income of the assessee by virtue of Article 7 of the DTAA between India and Japan. The Tribunal held that the provisions of the Treaty cannot be thrust upon the assessee and the assessee be denied the Income Tax Act being applicable in its case. The facts of the case and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee's claims for deduction were allowed in respect of the sums advanced during those years; this could be only on the assumption that those advances were not out of borrowed funds of the assessee. This finding during the previous years is the very basis of the deductions permitted during the past years, whether a specific finding was recorded or not. A departure from that finding in respect of the said amounts advanced during the previous year would result in a contradictory finding; it will not be equitable to permit the Revenue to take a different stand now in respect of the amounts which were the subject matter of previous years' assessments; consistency and definiteness of approach by the Revenue is necessary in the matter of recognizing the nature of an account maintained by the assessee so that the basis of a concluded assessment would not be ignored without actually reopening the assessment." 7.10 Even if the issue in the instant case is capable of two interpretations, the Hon'ble Apex Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 has held that where a provision in the taxing statute is capable of two reasonable interpretations, the view favourab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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