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TMI Blog2004 (4) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... also members of the Flakt group. The first application relates to Sweden company and the second application relates to Swiss company, 2. The following are the facts common to these applications. The applicant entered into two separate agreements in respect of IP Licence and Fee Agreement and Trademark Licence and Fee Agreement with the Sweden company for consideration specified therein payable by the applicant to the said company (hereinafter referred to as the "royalties"). The applicant entered into management services agreement with the Swiss company for providing various services to the applicant in consideration of "fees" payable by it to the said company. Those agreements were operative for different periods. In response to the invoices for royalties and fees raised by the said companies, the applicant credited amounts to the account of aforementioned companies in its own accounts for the period February 2002 to December, 2002. No amount was, however, paid to the said companies by the applicant till 31 st March, 2003. On the assumption that no amount was paid to or received by the said companies, the income-tax payable under the Act by those companies was not deducted and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As per the provisions of Article 12 of India-Sweden Tax Treaty/India-Swiss Confederation Treaty, submits Mr. Mitra, the amount of Royalties could be taxed only on cash or receipt basis; in view of the section 90(2) of the Act the taxability of the said sum in the hand of the applicant is governed by the provisions of the said Treaties and the provisions of the Act will apply only if they are more beneficial to the contracting parties. The Commissioner has contended that foreign companies would be subjected to tax in India as soon as their accounts are credited with the amount of royalties/fee whether or not the amounts are paid or remitted to the foreign companies. 5. The controversy in this case falls in a narrow compass, viz, to what extent will the provisions of Article 12 of the Treaties between the Republic of India and the Government of Kingdom of Sweden/Swiss Confederation, affect the taxability of royalties/fees payable by the applicant to the foreign companies having regard to the provisions of sub-section (2) of Section 90 of the Act? 6. Section 90 occurs in Chapter IX of the Act which deals with double taxation relief. Sub-section (1) of section 90 empowers the Centra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of both the applications para (1) of Article 12 may be read thus: Royalties and fees for technical services arising in India and paid to the resident of Sweden/Swiss Confederation may be taxed in Sweden/Switzerland. This para as is evident, deals with taxability of royalties/fees in Sweden and Switzerland, as the case may be; it does not in any way affect the taxability and the manner of levy of tax on such Royalties/fees in India. Para (2) of Article 12 which is pertinent, says that notwithstanding the provisions of para (I), such Royalties/fees may also be taxed in India in accordance with the laws of India. It further provides that if the recipient of the Royalty/fees is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10% of the gross income of royalties or fees. In other words, para 2 ensures that the said companies are not burdened with the Indian tax at the rate more than 10% of the gross amount of the royalties/fees. The effect of section 90 of the Act will be that in the event of the tax payable under the Act being less than 10%, the foreign companies would be liable to pay tax at such lesser rate as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties/fees would be taxable according to the law in India. 10. Now it will be apposite to advert to section 195(1) of the Act which to the extent it is relevant reads thus: " 195 (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force". A plain reading of this provision shows that it enjoins every person responsible for paying to: (i) a non-resident individual, or (ii) a non-resident taxable entity other than a company, or (iii) a foreign company, (a) any interest or (b)any other sum chargeable under the provisions of the Act (other than income chargeable under the head "salaries"), to deduct income tax thereon at the rate in force at the time of * credit of such income to the account of the payee , or * payment thereof in cash or by issue of a cheque or draft or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, we rule in AAR Application No. 623 of 2003 on : Question No.1: The income receivable by M/s. Flakt Woods AG(hereinafter referred to as "Flakt AG") which is a company incorporated in Switzerland and accordingly a tax resident of Switzerland, in the form of "fees for technical services" from M/s. Flakt (India) Limited (the "applicant") under the Management Services Agreement, would be subject to tax in its hands in India in accordance with the provisions of the Act which include cash or receipt basis, and the provisions of Article 12 of the Double Taxation Avoidance Agreement entered into between the Government of the Republic of India and the Swiss Confederation do not provide to the contra. Question No.2: It is consequential. However, in the light of our ruling on the first question, the applicant is required to withhold tax u/s. 195(1) of the Income tax Act, 1961 from the sums payable to Flakt AG in pursuance of the agreement referred to hereinbefore. The deduction of tax need not necessarily be at the time of making actual remittance of the said sums; it has to be at the time of making a mere provision thereof in the books of account of the applicant, since the requi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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