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TMI Blog2018 (9) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of M/s.Lakshmi Auto Components Ltd., dated 22.09.2006. The Tribunal by the impugned order, following its earlier decision, dismissed the appeals. 3. The assessee is engaged in the business of manufacture of auto-mobile parts. It entered into an agreement with the University of Warwick, UK for providing technical services. The assessee remitted fees for technical services to the said university and as per the agreement with the University, tax has to be borne by the assessee and accordingly, the assessee paid tax at 15% on the amount remitted to UK by adopting the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and UK. The Assessing Officer held that under Section 195A, where tax chargeable on any income is borne by the person by whom the income is payable, then the purpose of deduction of tax on such income should be increased to such amount as could, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable. It was pointed out that the assessee had made remittance of the amount of Rs. 1,27,53,400/- (2002-03) without grossing up for the purpose of determining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 201(1A) is leviable? 4.1. The CIT(A) referred to Article 13 of the DTAA with UK., and Section 195 of the Act and held that the provisions would lead to the conclusion that for the purpose of tax deduction on the amount payable to University of Warwick, UK, the income shall be increased by taking into consideration the amount of all tax liability undertaken by the Indian concern. Therefore, the tax liability undertaken by the Indian company is the income of a foreign company and the tax has to be deducted on which gross amount including the tax liability undertaken by the assessee. The CIT (A) rejected the contention of the assessee that if grossing up is applied, the tax rate goes beyond 15%, which according to the assessee was against the DTAA between India and UK. Further by applying the principle of grossing up, the rate of deduction of tax at source does not go up, the percentage of deduction of tax at source has to be seen from the gross amount payable by the assessee to the University of Warwick, UK, including the tax liability undertaken by the assessee. By referring to Section 195A of the Act, it was held that the said provision contemplates that the increase in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be taxable in India will not apply to deduction of tax at source already made prior to its introduction. The assessee, while deducting tax from the fees for technical services remitted during the previous year relevant to the assessment year in the appeal, could not have anticipated the subsequent amendment to law regarding determining the quantum of tax to be deducted and hence, could not be held assessee-in-default under Section 201 of the Act and that the assessee cannot be penalised on the basis of retrospective amendment as it was impossible for the assessee to anticipate such subsequent statutory amendment/requirement and comply with the same. With the above grounds, the assessee seeks permission to raise an additional substantial question of law, namely, whether on the facts and circumstances of the case, the assessee can be held to be an assessee in default under Section 201 for non-deduction or short deduction of tax at source in respect of payment of fees for technical services rendered outside India by a non-resident, incurred and made prior to the introduction of Explanation to Section 9(2) by Finance Act, 2010? . This memorandum filed by the assessee on 02.12.2016, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Equally right is the learned Senior Standing counsel that Explanation to Section 9(2) of the Act has been retrospectively amended from 1976, which covers every transaction entered by the assessee and that the Assessing Officer was fair and reasonable in not imposing any penalty for non-deduction of tax due to retrospective amendment, but passed an order to pay only the tax and interest. That apart, this issue having not been raised before the Assessing Officer, was never adjudicated at any point of time and the appeal before the CIT (A) as well as the Tribunal was only on the limited issue with regard to grossing up of payment made to University of Warwick, UK. Thus, we cannot be called upon to decide a question, which was never raised and adjudicated before the lower authorities and the Tribunal. That apart, if we are to take up for consideration this question, it would be virtually allowing the assessee to go back on their voluntary act of payment of taxes. 13. In the case of M/s.Sundaram Finance Ltd vs. Assistant Commissioner of Income Tax Company Circle VI(4) TCA.Nos.876 & 877 of 2008, when a similar plea was raised by the assessee, it was held that such a plea having not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It is reiterated that the meaning of fees for technical services have to be uniformly understood under sub-article (1)(2) & (2bb) of Article 13 of the India-UK DTAA and it would mean only the actual amount paid to the non-resident. Further, it is submitted that under Section 9(1)(vii) only income by way of fees for technical services payable by resident to non-resident is deemed to occur in India. Therefore, both under DTAA as well as under Section 9(1)(vii) fees for technical services would mean only the amount payable/paid to the non-resident and would not include any additional amount representing tax to be borne by the payer by virtue of special provision regarding TDS. 17. Referring to the decision of the High Court of Uttaranchal in CIT & Anr., vs. ONGC [(2003) 264 ITR 340 (Uttaranchal)], it is submitted that in the said decision, it was held that discharge of tax liability by resident company, will not amount to any benefit under Section 28(iv) of the Act. Therefore, it is the submission of the learned counsel that tax borne on behalf of the non-resident will not constitute income of the non-resident under DTAA and that Section 195A is restricted to the special provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payee i.e., University of Warwick UK and hence, there has to be tax deducted at source on such deemed income resulting in grossing up of the principal amount as per Section 195A. By way of illustration, it is submitted that if the amount to be paid to a recipient is Rs. 100/- and the rate of TDS is 10%, then as per Section 195A, the income of the recipient is not just Rs. 100/-, but it will be Rs. 111.11, since 10% of Rs. 111.11 will result in Rs. 100/- to the recipient and Rs. 11.11 to the Revenue. It is explained that this is called multiple grossing up, which is an accepted mode of computation, if there is an agreement to pay net of tax to the recipient by the payer. Further it is submitted that the definition of income under Section 2(24)(iva) of the Act is an inclusive definition and the value of any benefit or perquisite and any sum paid by the representative assessee in respect of any obligation, which, but for such payment, would have been payable by the beneficiary, is also treated as income. It is submitted that in the assessee's case, but for the assessee's bearing the tax on the payments made to University of Warwick, UK, the said University would be required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t applied only because the said agreement was covered under Section 10(6A) of the Act, which has a specific exemption and but for the such exemption, there has to be grossing up, if the agreement between parties states net of tax payment has been made. Thus, it is submitted that the correct understanding is that there has to be always grossing up of income in case of net of tax arrangement, unless the same is exempted under the Act. 22. The decision in the case of ONGC, (supra), was sought to be distinguished by contending that the said decision pertain to Section 44BB, wherein grossing up is not applicable, as the said Section falls under Chapter IV, whereas Section 195A falls under Chapter XVII of the Act, which includes Section 198. Thus, it is submitted that Section 44BB is a code by itself, which is not the case of the assessee's payment to the University of Warwick, UK. 23. Heard the learned counsels appearing for the parties and carefully perused the materials placed on record. 24. In the earlier part of this judgment, we had taken a decision on the memorandum for admission of additional grounds and substantial questions of law and have rejected such a prayer assignin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement (b)50,000 (nett of Indian taxes) immediately after 3 months from (a) (c) 50,000 (nett of Indian taxes) immediately after 6 months from (a) (d) 50,000 (nett of Indian taxes) immediately after 9 months from (a) Indian Income tax, if any, will be borne by TSL under Section 19(c) of Indian Income Tax Act. 28. Article 13 of the DTAA between the India and UK reads as follows:- Article 13 Royalties and Fees for Technical Services 1.Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2.However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed: (a) in the case of royalties within paragraph 3(a) of this Article, and fees for technical services within paragraphs 4(a) and (c) of this Article. (i)during the first five years for which this Convention has effect; (aa) 15 per cent, of the gross amount of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r technical services may also be taxed in the contracting state in which they arise and according to the law of that state; but if the beneficial owner of the royalties or fees for technical services is a resident of the other contracting state, the tax so charged shall not exceed clause (aa); 15% of the gross amount of such royalties or fees for technical services, when the payer of the royalties or fees for technical services is the Government of the first mentioned contracting State or a political sub-division of that State (bb); 20% of the gross amount of such royalties or fees for technical services in all other cases; and clauses (ii) during subsequent years 15% of the gross amount of such royalties or fees for technical services. 30. Thus, by referring to clause 2 (supra), it is submitted that the said clause refers only to such royalties or fees for technical services and such fees can only refer to the fees paid to a non-resident as per Article 13(1) and therefore, what is to be taxed in India is only such royalty and fees for technical services i.e., the amount paid to the resident of U.K. The assessee relied on Section 195A of the Act and submitted that grossing up will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. In terms of clause 10 of the agreement between the assessee and the University of Warwick is Rs. 2,00,000/- and as per Article 13 of the DTAA between India and UK, the University of Warwick is liable to pay tax at 15% on the gross amount of fee for technical services. Thus, it is contended that the gross amount received by the University of Warwick would be 2,00,000 X 100 w 85 = 2,35,294/- and the tax to be deducted at source by the assessee is Rs. 2,35,294X15w100= Rs. 35,294/-, as against which the assessee had deducted only a sum of Rs. 30,000/-. It is the further case of the Revenue that the DTAA does not define the term gross amount , nor contains any provision for computation of the gross amount and therefore, provisions of Section 195A of the Act will apply for computation of the gross amount . 32. In TATA Ceramics Ltd.,(supra), the assessee was a company engaged in manafacture of ceramics products at a Special Economic Zone, entered into an agreement with a British company for technical co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat Section 195A authorises the assessment of gross income only when collaboration agreement is not approved by the Government of India under Section 10(6A). The effect of the approval of the agreement under Section 10(6A) is that the tax paid by the Indian concerned on the remittance to the foreign collaborator gets exemption from tax and when such tax is exempted grossing up under Section 195A to cover up tax component of remittance is not permissible. Since the CIT(A) and the Tribunal declared the assessee's entitlement for exemption from payment of tax, the Court held that grossing up could not have been made. This decision could clearly support the case of the Revenue, since the Court held that grossing up under Section 195A was not permissible in the said case on account of as exemption under Section 10(6A). In other words, but for the exemption, the Revenue would have been fully justified in grossing up the income. 33. As rightly pointed out by the learned Senior Standing counsel appearing for the Revenue, the India-UK DTAA does not define the term gross amount . Likewise the word income has not been defined in the treaty and therefore, we are to be necessarily guided b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of tax deduction at source. 36. Section 2(24) of the Act, defines income and it is an inclusive definition and includes such net of tax payments also [Section 2(24)(iva)]. Thus, in the absence of the definition of income and definition of gross amount under the treaty, the assessee has to necessarily compute the income in terms of Section 195A of the Act. Admittedly, in the instant case, there is no exemption granted under Section 10(6A) of the Act for the assessee to contend that the said payment does not form part of total income. 37. In the light of the above legal and factual position, for the purpose of deduction of tax at source on the payment made by the assessee to the University of Warwick, the income should be computed in terms of the provisions of the Act and in so doing, it shall be increased by taking into consideration the amount of tax liability undertaken to be borne by the assessee. In other words, the obligation to pay the tax is on the University of Warwick and since the assessee in terms of the agreement agreed to pay the taxes, the same has to be necessarily added to the income of the University of Warwick and therefore, the principle of grossing u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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