Executive summary

Payments made to foreign company relating to manufacture of high speed draw frames, in instalments, amounts to Fees for Technical Services (FTS) and not royalty. In terms of Double Taxation Agreement and Exchange of notes between India and Federal Republic of Germany, the applicable rate of tax is 20 per cent of the gross amount be it royalty or fees for technical knowhow.

References :

– DTAA between India and Federal Republic of German, Articles – 12(3) and 12 (4).
– Provisions of I.T. Act 1961 – Section 9 (1) (VI)
– Cases referred to : P.V.A.L. Kulangadan Chettiar (2004) 267 ITR 654 (SC)
– CIT vs. BARMAG AG, (2005) 272 ITR 603 (Mad)

It so happens that the assessee company honestly offers the income for taxation correctly, yet however the revenue in its zeal to garner more revenue, taxes the same income at a higher rate. Under such circumstances the assessee company is forced to fend for itself and seek relief before the judicial forums. This was one such instance in the case of CIT vs. Reiter ingolsteadt spinnerimaschinenbau AG (2006) 285 ITR 199 (Mad).

1. Facts of the case

1.1 In the present case the Revenue is the appellant. The foreign company is represented by Lakshmi Machine Works Ltd. The assessee filed return of income offering Rs. 37,97,980/- as technical knowhow fees (Assessment Year 1993-94) and Rs. 1,14,43,800 for Assessment Year 1994-95, relating to manufacture of high speed draw frames. Down payments were made in three instalments. The assessee contended that these down payments were in the nature of fees for technical knowhow and the applicable rate of tax is 20 per cent under the DTAA. The Assessing Officer contended that the down payments were in the nature of lump sum payments attracting section 9(1)(vi) of the Act, wherein it is stated that the applicable rate is 30 per cent as applicable to “royalty”.

1.2 The assessee preferred an appeal before the CIT(A). The CIT(A) allowed the appeal. In respect of the appeal for Assessment Year 1994-95 the CIT(A) elaborately discussed the DTAA as well as exchange of notes and held that since the technical services were rendered outside India, and the payments involved whether termed as royalties or fees for technical services are to be taxed at 20 per cent of the gross amount of payment, based on the DTAA and the Exchange of Notes between India and Federal Republic of Germany.

1.3 The findings of the CIT(A) were confirmed by the Hon'ble Tribunal. The Revenue preferred an appeal raising substantial question of law, namely “Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the lump sum payment made to the assessee foreign company was taxable at the rate of 20 per cent relying on the exchange of notes of 1984 and not considering the terms of the Double Taxation Avoidance Agreement with Germany and especially, Articles 12(3) and 12 (4) of the said Agreement and the definition of ‘royalty’ under the Income-tax Act?”

2. Findings by the Hon'ble High Court

2.1 Both the CIT(A) and the Tribunal have found that the agreement executed by the German company clearly shows that the amount received by the assessee was Fees for Technical Knowhow.

2.2 The Hon'ble High Court held that both the authorities have concluded that wherever there is a DTAA, the definition contained in the DTAA should prevail over the definition under the Income-tax Act. in respect of Royalties and Fees for Technical Services. Exchange of notes between India and Federal Republic of Germany, referred to by them, gross receipts by the assessee whether termed as royalties or fees for technical services should be taxed at 20 per cent.

2.3 The Hon'ble Court referred to the case of CIT vs. P.V.A. L Kulandagan Chettiar (2004) 267 ITR 654 (S.C.) wherein it was held that the provisions of DTAA prevail.

2.3.1 The Honb'le Court also referred to the case of CIT vs. Barmag AG, West Germany, (2005) 272 ITR 603, it was held in that case that based on facts the entire payment received by the company constituted Fees for Technical knowhow and taxable at 20 per cent as per Article 12.1 of the DTAA.

2.3.2 The Hon'ble Court applying the above ratio and referring to the cases cited and the DTAA, held that the appellant (revenue) is aggrieved by the factual findings by the appellate authorities. There is to substantial question of law.

2.3.3 The Hon'ble Court dismissed the appeal.

Authors’ Note:

It is an instance of the Department not accepting the correct interpretation and not accepting the decision of the appellate authorities, and forcing the assessees to fend for themselves. This is despite the fact what the assessee had submitted was in terms of the DTAA and the exchange of notes between India and Federal Republic of Germany. Such avoidable litigation would save the time of the assessees and the judicial authorities especially when the facts and law are prima facie apparent.