International Taxation

Case Laws Update

1. SUPREME COURT

1. Income deemed to accrue or arise in India – Salary for off-period – Non-Resident employees working on oil rigs in India

1. Salary paid to non-residents working on oil rigs in India for field breaks outside India for undergoing training, updating of knowledge and for being in a state of readiness to serve anywhere under a distinct clause of the service contract with their employer was not for "services rendered in India" within the meaning of Explanation to s. 9(1)(ii) as it stood prior to substitution w.e.f. 1st April, 2000, and therefore, same was not taxable in India under s. 9(1)(ii); Explanation to s. 9(1)(ii) as substituted w.e.f. 1st April, 2000, is applicable prospectively.
    

2. If an Explanation is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force. But if it changes the law it is not presumed to be retrospective irrespective of the fact that the phrase used are ‘it is declared’ or ‘for the removal of doubts’.

Sedco Forex International Drill Inc. vs. CIT – [2005] 279 ITR 310 (SC) : 199 CTR (SC) 320 : 149 Taxman 352 (SC)

Facts

1. Appellant, a non resident company, entered into a contract with an Indian company to supply oil rigs and the employees to man the rigs to enable Indian company to carry on offshore drilling. Also, the appellant entered into an agreement with its non-resident employees (assessees). The schedule of work as specified in the agreements envisaged 35/ 28 days work in India followed by 35/ 28 field break in U.K. ‘Field break’ was defined in the agreements to include, but was not limited to, undergoing training by attending classes at such places as may be specified, on the spot demonstration to update the knowledge in the latest technique and attending to the offshore drilling work on any project of the appellant in any part of the world. The employees were to be paid monthly salaries for the alternating periods.
    

2. The assessing authority assessed the employees of the appellant including the salary for the field breaks as part of the total income under section 9(1)(ii) in the assessment years 1992-93 and 1993-94.
    

3. On appeal, the Commissioner (Appeals) upheld the order of the assessing authority. On Second Appeal, the Tribunal deleted the addition of such salary.
    

4. On revenue’s appeal, the High Court allowed the revenue’s appeal on the ground that the ‘Off period’ and ‘On periods’ formed an integral part of the agreement between the appellant and its employees and that it was not possible to give separate tax treatment to the two periods and that during the field breaks the employees had to remain fit and had to undergo demonstration and training and all that had a nexus with the services, the assessee had to render in India.
    

5. On appeal to the Supreme Court, the appellant submitted that the decision of the High Court gave retrospective effect to the scope of section 9(1)(ii) after its amendment by Finance Act, 1999 when it was clarified as being prospective by a circular No. 779, dtd. 14-9-1999 issued by the CBDT. Appellant further submitted that during the field breaks, its employees were kept on standby in the UK for serving anywhere in the world which was not necessarily in India.

Judgment

The Hon’ble Supreme Court held that

1. There was no ground for assuming that agreement between the appellant and the employees was to render them more fit for service in India. The contract provided the field break for readiness of the employees for service anywhere in the world. The employees had not in fact "served" in India during the field breaks but earned income in the U.K. as residents of the U.K. the consideration therefor being the undergoing of training or updating knowledge and being in a state of readiness to service anywhere in the world. Nor did the contract mention that the salary was for a well earned rest. The clause in the contract relating to salary payable during the field breaks was not "earned in India" within the fiction created by section 9(1). There was no question of introducing a further fiction by extending the Explanation to include whatever has a possible nexus with service in India.
    

2. The new Explanation substituted by the Finance Bill, 1999, was deliberately introduced w.e.f. 1st April, 2000, and was, therefore, intended to apply only prospectively. It was also understood as such by the Central Board of Direct Taxes which issued Circular No. 779 dtd. 14-9-1999, which, though not binding on the assessee, afforded a reasonable construction of the amendment.
    

3. A cardinal principle of tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication.
    

4. An Explanation to a statutory provisions may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time the main provision came into force. But if it changes the law it is not presumed to be retrospective irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts".

Cases followed

1. CIT vs. Moon Mills Ltd. [1966] 59 ITR 574 (SC); [1966] AIR 1966 SC 870
    

2. Mancheri Puthusseri Ahmed vs. Kuthiravattam Estate Receiver [1997] AIR 1997 SC 208
    

3. CIT vs. Patel Brothers & Co. Ltd. [1995] 215 ITR 165 (SC); [1995] 4 SCC 485
    

4. CIT vs. Goslino Mario [2000] 241 ITR 312 (SC)
    

5. Sonia Bhatia (Ku) vs. State of U.P. [1981] AIR 1981 SC 1274; [1981] 2 SCC 585
    

6. Shyam Sunder vs. Ram Kumar [2001] 8 SCC 24
    

7. Brij Mohan Das Laxman Das vs. CIT [1997] 223 ITR 825 (SC); [1997] 1 SCC 352
    

8. CIT vs. Podar Cement P. Ltd. [1997] 226 ITR 625 (SC); [1997] 5 SCC 482

Cases referred

1. CIT vs. Goslino Mario [2000] 241 ITR 312 (Gau)
    

2. CIT vs. Patton (S.R.) [1992] 193 ITR 49 (Ker)
    

3. CIT vs. Patton (S.R.) [1998] 233 ITR 166 (SC); [1998] 8 SCC 608
    

4. CIT vs. Pgnatale (S.G.) [1980] 124 ITR 391 (Guj)
    

5. Reliance Jute & Industries Ltd. vs. CIT [1979] 120 ITR 921 (SC)

Case reversed

1. CIT vs. Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320 (Uttaranchal)

2. TRIBUNAL

2. Section 37(1) read with Article 7 of the dtaa between India and Netherlands

1. Payment of interest by a Permanent Establishment (PE) of a foreign enterprise to head office outside India and/or other offshore branches is not an allowable deduction
    

2. Interest paid by PE of a foreign enterprise to its head office or other branches located abroad is a payment to self and same does not require any deduction of tax at source under section 195. Consequently, section 40(a)(i) cannot be invoked for disallowing such interest .
    

3. Observations in Circular No. 740, dt. 17th Aug., 1996 to the effect that tax is deductible under s. 195 on interest payable by Indian branch to its head office or any branch located abroad are not in accordance with law

ABN Amro Bank NV vs. Asst Director of Income Tax, International Taxation-i-(2005) 97 ITD 89 (Kol)(sb): 98 ttj 295

Facts

The assessee-bank, incorporated in Netherlands having its original office at Singapore , carried on banking business in India through its branch (PE). PE had been paying/receiving interest to and from its head office and /or other branches outside India from year to year. In the relevant two years, it claimed interest paid to head office as deduction. The assessee had not deducted tax at sources as per provisions of section 4(a)(1) on such payment under the impression that it, being the same person, was not required to do so. According to the Assessing Officer, however, branch of assessee in India constituted a separate taxable entity different from head office and other branches located abroad as far taxation was concerned and, therefore, on any payment of interest to head office and other branches located abroad, the tax was deductible and assessee having failed to so deduct, the interest was not allowable . He added the same to its income accordingly . On appeal, the Commissioner (Appeals) upheld the impugned order.

Decision

The Hon’ble Tribunal held

1. The proposition of law is well settled that nobody can make profit out it self nor can trade with self nor earn from self. The contention of the assessee on the first limb of the question, i.e., by virtue of deeming fiction by article 7.3(b) of DTAA, the interest paid by the PE to the head office, in case of a banking enterprise, was an allowable deduction, had no force. Article 7.3(b) prohibits the allowance of certain expense. It, however, specifically excludes interest paid by PE from disallowable list. It, thus, only makes it evident that interest is not disallowable under article 7.3(b) of DTAA and nothing more. The deductibility of the interest payment by PE/ branch to head office or other branches outside India is dealt with by clause (b) of article 7.3 of DTAA. By the mere fact that a particular expenditure is excluded from the list of disallowable items, it does not ipso facto mean that it would be allowable. The deductibility of interest paid by branch in India to the head office is to be seen by looking to other provisions of the treaty or the local law. The payment of such interest may be included in the expense allowable including executive and general expenses by virtue of provisions contained in article 7.3(a) of DTAA. The article 7.3(a) provides that in determining the profit of a PE, there shall be allowable as deduction expenses which are incurred for the purpose of the PE, including executive and general administrative expenses so incurred whether in the State in which the PE is situated or elsewhere in accordance with the provisions of and subject to the limitations of the taxation laws of that state. Interest is not specifically included in the expenses to be allowed in determining the income of the PE. Even if it is included within its purview, then the deductibility has to be in accordance with the provisions of local law and subject to the limitations provided therein, like as provided in section 44C, etc. it has to be judged from the point of view of local laws. Looked at from that point of view, the local law does not allow any deduction of the payment of expenditure to self. Nor it assumes the interest receipt from self through a branch or PE as its income and charges it to tax.
   As there was only one assessment in the case of the assessee-bank both for the profit earned by the PE as well as the income earned by the head office in India, the result would be that on one hand, an expenditure by way of payment of interest by PE to head office would be allowable as a deduction and on other, the receipt by the head office from PE would have to be charged to tax because the interest had been earned by and arisen and accrued to the head office in India. Result would be same in both cases, i.e., the income or expense was nil in the first case because no profit is earned from self and, therefore, nothing accrued and in the second case again nil by allowing deduction of payment of interest by PE to head office and assessing the receipt of interest in the head office being receipt of income by head office from PE.
    

2. As regards the second part of the question as to whether the provisions of section 40(a)(I) were attracted in respect of such payment of interest, the branch/PE of the assessee in India was not a person in legal terminology. The person was the corporate body/bank and not its branch or the PE, which was also evident from the fact that assessment was made on the corporate body and not on its branch or PE. Therefore, there was force in the assessee’s contention that the provisions dealing with deduction of tax at source under section 195 presupposes the existence of two distinct and separate entities which was absent in the instant case. On both the grounds, therefore, section 40(a)(I) did not come into play. Therefore, disallowance of interest by invoking the provisions of said section would not be justified. There was also force in the submission of the assessee that the interest paid was not the income of the assessee on the ground that no income did arise from self and, consequently, interest paid by PE to head office was not chargeable under the provisions of Act’ which was a condition precedent for invoking the provision of section 195 and also on the ground that payment by PE was cancelled by the receipt by the head office of the assessee-enterprise, in case if the PE was considered as a separate entity than the head office of the assessee-enterprise.
    

3. The Circular No. 740, dated 17-4-1996 opines in the first part that the "branch of a foreign company/concern in India is a separate entity for the purpose of taxation. Interest paid/payable by such branch to its head office or any branch located abroad would be liable to tax in India and would be governed by the provisions of section 115A. If the double taxation avoidance agreement with the country where the parent company is assessed to tax provides for lower rate of taxation, the same would be applicable". To that extent, the circular lays down correct state of law. But its subsequent observation in the second part that "consequently, tax would have to be deducted accordingly on the interest remitted as per the provisions of section 195" are not in accordance with law particularly in view of the fact that the head office and PE are the two wings of the same person and they are not separate and independent taxable entities. It was a payment to self and the same did not require any deduction of tax under section 195. Consequently, section 40(a)(i) would not apply entailing no disallowance of interest allowable under section 7 of DTAA.

Cases referred

A number of cases were referred to .

3. Section 201 – TDS

No tax is required to be deducted under section 195 from payment of interest by a PE of foreign enterprise to its head office outside India or other offshore branches and therefore failure to deduct tax at source from such payment would not make assessee liable for payment u/s. 201.

Asst Director of Income-tax, International Taxation–I vs. Bank of Tokyo Mitsubishi Ltd.– (2005) 97 itd 89 (Kol)(sb): 98 ttj 295

Facts

The Indian office of the assessee, Japanese bank, made interest payment to its head office in Tokyo and other foreign branches without deduction of tax at source under section 195 for which default it was held liable under section 201 and was directed to make the payment by the Assessing Officer. On appeal, the Commissioner (Appeals) cancelled the impugned order.

Decision

On revenue’s appeal the Hon’ble Tribunal held

On a close reading of the provisions of various articles of the Japanese DTAA, it is found that clauses 1, 2, 5, 6. And 7 of article 7 of the same are similarly worded as clauses 1, 2, 4, 5, and 6 of Netherlands DTAA. Clause3 of the Japanese DTAA merely incorporates the first part of clause 3(a) of Netherlands DTAA and the proviso placing a restriction by the law of the state in which PE is situate are not incorporated. Again clause3(b) of Netherlands DTAA, which prohibits allowance of certain expenditure, is also missing in Japanese DTAA. There is no other material difference between the two treaties. There are no restrictive covenants in article 7 for allowance of expenses incurred for the purposes of PE either by the prefix of the words " in accordance with the provisions of the law of that State" or by the suffix words "and subject to limitations of taxation laws of that State".

This would be one of the other alternate reasons for not invoking the provisions of section 40(a)(i) for disallowing the payment of interest in computing the income of the assessee through the PE. However, in the instant case also, the deeming fiction of treating the PE as a different and separate entity dealing wholly independently with the enterprise in clause 2 of the article 7 of Japanese DTAA for the specific purpose of computing the income attributable to the PE and not for any other purpose would apply. Therefore, no tax was required to be deducted under section 195 from the payment of interest by the PE to its head office or other offshore branches of the assessee-enterprise and, therefore the order of the Commissioner (Appeals) in vacating the order under section 201 by holding that the assessee was not in default in deducting the tax at sources, was to be upheld.

Cases referred

A number of cases were referred to.

1. There being no definition of "less favourable charge" in the DTAA, Explanation to s. 90(2) inserted retrospectively w. e .f . 1st April, 1962, cannot be said to be in conflict with the provisions of the DTAA in regard to non-discrimination and therefore, assessee, a bank incorporated in Netherlands, is taxable at the rate of tax applicable to foreign companies in India.
    

2. Where the tax deduction in respect of any payment has been paid in a subsequent year, the payment has to be allowed as a deduction in that year by virtue of proviso to s. 40(a)(i) whether or not the same was claimed as deduction in the earlier year.
    

3. Interest under s. 201(1A) paid by assessee for default in discharge of its obligation to deduct tax under s. 192/195 and pay to the Government did not partake the character of remuneration package of the employees and had nothing to do with carrying on of the business of the assessee and, therefore, such payment could not be allowed as deduction.
    

4. Assessee-bank having lost the money received by it from a constituent for purchase of bonds on behalf of the latter due to fraudulent conduct of a broker, and later refunded the money to said constituent, loss incurred by the assessee was on account of the decision to make investment in the bonds and not by reason of refund of money; claim for loss could not be allowed in the relevant year as such loss cannot be said to have arisen in this year on the facts of the case.

ABN Amro Bank vs. Joint Commissioner of Income Tax (2005) 97 ITD 1 (Kol) (TM): 96 TTJ 1041

Decision

1. Sub-s. (2) of s. 90 provides for application of beneficial provisions of the agreement in contrast to the contrary provisions of the IT Act, 1961. It has, however, to be borne in mind that in the event of there being no conflict between the provisions of the DTAA and the IT Act, 1961, the effect shall have to be given to the provisions of the IT Act, 1961. Explanation to s. 90 inserted retrospectively w .e .f . 1st April, 1962, specifically provides that the charge of tax in respect of the foreign company at the rate higher than the rate at which a domestic company is chargeable shall not be regarded as less favourable charge. In the DTAA, there is no definition of "less favourable charge". Therefore, the Explanation to s. 90 cannot be said to be in conflict with the provisions of the DTAA. Accordingly, the decision of the CIT(A) in regard to the applicability of the rate of tax as applicable in the case of foreign companies in the case of the appellant is upheld. Article 25 of the DTAA is not attracted in this.
    

2. A sum chargeable under this Act (remuneration in this case) which is payable either outside India or in India to a non-resident, is not allowable as a deduction because of the provision of s. 40(a)(i) if the tax has not been deducted or after deduction has not been paid before the expiry of the time prescribed under s. (1) of s. 200 and in accordance with the other provisions of Chapter XVII-B When a deduction is not allowable because of the statutory provisions, it would make no difference whether the same was claimed or not by the assessee. Because as per the proviso to s. 40(a)(I) such sum has to be allowed as a deduction in computing the income of the previous year in which such tax deduction at sources has been paid in subsequent year. On a bare reading of the provision, it is evident such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid if tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-s. (1) of s. 200. No restriction is placed for allowability of deduction of the remuneration paid in the subsequent year that it should have been claimed in the earlier year.
    

3. The term ‘tax’ has been defined vide art. 3(d) of the DTAA to mean Indian tax or Netherlands tax as the context requires, but does not include any amount which is payable in respect of any default or mission in relation to the taxes to which this convention applies or which represents a penalty imposed relating to this tax. By this definition the interest paid cannot be treated or equated to a tax payment. The assessee committed a default and an omission in relation to the tax by not deducting the same within the prescribed time under the IT Act. The interest was thus payable for default or omission in relation to the tax deducted at source. Therefore, on a combined reading of the definition of tax in article 3(d) of the DTAA in conjunction with the provisions of ss. 192 and 195, the interest would not be an allowable deduction.
    

4. While making the purchase of 17 per cent NPC Bonds, assessee was making investment as a businessman though for and on behalf of the customer, i.e., PHB. Therefore the loss was incurred by the assessee as such on its own account, and not on account of its client PHB, on whose behalf and specifically in whose name, the assessee was trying to acquire securities. The assessee stated to have agreed to bear this loss because of commercial expediency Therefore, the refund of money to PHB was not a loss to the assessee. Loss if any, which could be said to have suffered by the assessee was on account of the decision to invest in NPC Bonds through N.K. the broker who had played a mischief and consequently taken that upon himself by offering another security in IRFC Bonds A Bank has transferred the money on the instructions of N.K., stated to be on behalf of the assessee That fact is disputed by the assessee. The assessee had not pursued the matter vis-à-vis A Bank. It had carried the matter further accepting the alternative security in the form of IRFC Bonds, the registration for which was refused on the ground that they have already been registered in the name of another bank. The matter of registration of alternative security ended in 1998 whereas the matter vis-à-vis N.K. is pending even on date. In these circumstances, there was no loss which can be said to have arisen to the assessee in the year under consideration. Position would have been different if the claim was made in the appeal for assessment year 1993-94 when the assessee got the information that the cheques issued for investment in NPC Bonds were diverted by N.K. to the account of HD or when the alternative security in IRFC Bonds was found to be registered in some other bank’s name. Both these dates were falling in assessment year 1993-94 and consequently, the assessee cannot claim the loss in the year under consideration. The CIT(A) was right in disallowing the claim of the assessee

Cases referred

A number of cases were referred to.

British Bank of Middle East vs. JCIT [2005] 4 SOT 122 (Mum.)

Facts

The assessee is a branch of a foreign bank. The A.O. disallowed the expenses incurred abroad on mobilization of NRI deposits, treating the same as " Head Office Expenditure" u/s 44C. The CIT (A) upheld the disallowance. Further, the A.O. disallowed the salaries of expatriate employees posted in India by treating the same as H. O. expenses u/s 44C. The CIT(A) allowed the assessee’s claim.

Decision

On appeal, the Tribunal held as follows:

1. The provisions of section 44C would hit only such expenditure which is not capable of being allocable to any particular profit centre and which is required to be allocated on some general basis. The expenses on mobilization of NRI deposits cannot be said to fall in this category because these expenses are for purpose of India specific operations where non-resident Indian deposits are of relevance. Therefore, expenditure incurred by assessee abroad on mobilisation of NRI deposits would not fall under scope of ‘head office expenditure’ u/s 44C.
    

2. Since expatriate employees in question were working exclusively for India operations, these expenses could not be treated as head office expenses and had to be allowed in computation of income of Indian operations which was taxable in India.

Cases referred

The Tribunal referred to and relied upon the following decisions:

1. CIT vs. Emirates Commercial Bank Ltd. [2003] 262 ITR 55 (Bom.)
    

2. Kedarnath Jute Mfg. Co. Ltd. [1971] 82 ITR 363 (SC)

On the second point, the Tribunal followed the unreported decision of ITAT in the case of ABN Amro Bank u/s JCIT

[Note: This decision relates to A.Y.s 1992-93 to 1997-98. There were several other issues relating to business deductions under various other sections. The same have not been discussed here]

6. Taxability of credit rating fees paid to Standard & Poor’s (s & p) – Whether ‘fees for technical services’ or ‘royalty' – Whether assessee liable to deduct tds
   u/s 195 – Article 12 of dtaa between India and Australia

Assessee-company paid annual surveillance fee to a company incorporated in Australia, namely, ‘S&P’ in connection with opinion of ‘S&P’ in form of issuance of credit rating certificate to assessee. Credit rating certificate in question was a commercial information because it was mandatorily required in raising resources from international markets. Therefore, annual surveillance fee would fall under Article 12. Since payment had been made in respect of business carried on in India, annual surveillance fee paid to ‘S&P’ would fall within ambit of section 9(1)(vii)(b)

Essar Oil Ltd. vs. JCIT [2005] 4 SOT 161 (Mum.)

Facts

1. The assessee-company applied for the permission of the Assessing Officer to remit the annual surveillance fee to a company incorporated in Australia, namely, ‘S&P’ without deduction of tax at source u/s 195.
    

2. It stated that the fee had to be paid to S&P in connection with the annual surveillance of credit rating certificate issued by it to the assessee.
    

3. The Assessing Officer treated the annual surveillance fee payable to S&P as ‘fees for technical services’ u/s 9(1)(vii) and also held that these services were covered under the term ‘royalty’ as per Article 12(3)(c) and (d) of the DTAA between the India and Australia. He, therefore, directed the assessee to deduct tax at source u/s 195.
    

4. On appeal, the Commissioner (Appeals) held that the services provided by ‘S&P’ to the assessee were in the nature of services prescribed under Article 12 of the DTAA and, accordingly, upheld the decision of the AO.

Decision

On appeal, the Tribunal observed and held as follows:

1. Undisputedly, S&P issued initial rating certificate to the assessee for a sum of US $ 55,000 and remittance in question pertained to annual surveillance fee in connection therewith as per the terms of agreement between the assessee and S&P.
    

2. Taxability of any sum payable by the assessee in India has to be first looked into with respect to the provisions of the Act and thereafter [with reference to] the provisions of DTAA, if any, between the countries. Therefore, the necessary question for consideration in the instant case was whether the services provided by ‘S&P’ to the assessee would fall within the definition of ‘royalty’ as per Article 12 of the DTAA between India and Australia or not.
    

3. From a perusal of Article 12(3)(c), it is noticed that if payment is made for the supply of commercial knowledge or information, then such payment would fall within the meaning of term ‘royalty’. Article 12(3)(d) provides that [if payment is made for] rendering of any technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of information as mentioned in sub-paragraph (c), such payment would also fall within the term ‘royalty’.
    

4. Therefore, the moot question for consideration in the instant case was whether credit rating certificate was ‘commercial information or not’ and if it was held to be so, then the impugned payment would be covered under sub-paragraph (d). The word ‘commercial information’ has not been defined in the treaty and, therefore, it has to be interpreted as it is understood in general sense. In general, the term ‘information’ means the act or process of informing, communication or reception of knowledge and any information which has got a commercial value for the user can be termed as ‘commercial information’. In a given situation, a particular commercial transaction or assignment may have elements both of professional services and supply of commercial information and to characterize it as a transaction of rendering of professional services only or as a transaction of supply of commercial information, a threshold limit or border line would have to be drawn. In the instant case, such threshold limit or border line was the opinion of ‘S&P’ in the form of issuance of credit rating certificate to the assessee.
    

5. In any way, for the purpose of determining the taxability of such transaction, the nature of transaction should be analysed and considered in totality having regard to facts and circumstances of each case. In the instant case, no material had been placed on record that obtaining of credit rating was required under some statute and payment was made to statutorily authorized organization, and, therefore, such services, being taken for commercial objectives, were in the nature of services for the supply of commercial information.
    

6. The assessee had also contended that it had taken ‘opinion’ from S&P for the purposes of raising of resources for its business from international markets. That aspect also supported the view that credit rating certificate was a commercial information because the assessee wanted to inform the prospective investors through such certificate, about its financial status, capability and other credentials so that they might make investment in the assessee-company. Thus, on that count also, ‘opinion’ of S&P could be termed as supply of commercial information both from the angle of the assessee and the potential investors.
    

7. ‘S&P’ could not change its rating without prior discussion and explaining reasons. Therefore, the assessee acquired certain dominant rights under the agreement so that it could enjoy the fruits of commercial information supplied by S&P in the form of credit rating certificate.
    

8. The credit rating certificate was a commercial information because it was mandatorily required in raising resources from the international markets. It indicates the level of safety for the potential investors and thus facilitates the marketing/resource mobilisation exercise of the rated company. It also enables an assessee to reduce its cost of borrowing. For the period for which it is issued the assessee has got absolute rights to utilize it for the intended purposes unless such rating is changed by the rating institution depending upon developments subsequent to the issue of credit rating certificate. Thus, credit rating certificate could also be viewed as rights acquired by the assessee which could be used for mobilisation of higher resources at an appropriate cost. The assessee had also pleaded that if payment made by it to S&P was considered as fees for technical services as per Explanation 2 to section 9(1)(vii), even then it would not be taxable in India as it would fall outside the purview of section 9. There was no merit in that contention as the payment had been made in respect of business carried on in India and would squarely fall within the ambit of section 9(1)(vii)(b).

Accordingly, in the instant case, the annual surveillance fee would fall within the category of ancillary services under sub-paragraph (d) provided in connection with the supply of commercial information under sub-paragraph (c) of paragraph (3) of the Article 12 of DTAA. Therefore, the assessee-company was liable to deduct the tax u/s 195.

Cases referred

1. Raymond Ltd. vs. Dy. CIT [2003] 86 ITD 791 (Mum.),
    

2. NQA Quality Systems Registrar vs. Dy. CIT [2005] 2 SOT 249 (Delhi)
    

3. Dy. CIT vs. Arthur Andersen & Co. [IT Appeal No. 9125 (Mum.) of 1995 dated
   29-7-2003]

The Tribunal distinguished the decisions in Raymond Ltd. vs. Dy. CIT [2003] 86 ITD 791 (Mum.), and NQA Quality Systems Registrar vs. Dy. CIT [2005] 2 SOT 249 (Delhi) and did not follow the same.

External Commercial Borrowings (ECB) were made by assessee-company in terms of policy of Government of India granting permission for ECB to be utilised by industrial undertakings in India. It was further conveyed by Government that payment of interest, commission and fees in respect of said loan was exempt from withholding tax u/s 10(15)(iv)(f). Assessee remitted interest on borrowing without deducting any withholding tax in India, till exemption was withdrawn. According to assessee, such withdrawal was unjustified and legally incorrect, because section 10(15)(iv)(f) did not permit same. Assessee denied its liability to deduct withholding tax at rate of 20 per cent directed vide an order u/s 195(2). Both assessing authority and first appellate authority held that since exemption had already been withdrawn and power of granting exemption vested with Government assessee was bound to withhold tax. Meanwhile, when order of withdrawal was impugned in a writ petition, Delhi High Court rejected the same. It is main statute which will govern rules provided under an Act and not vice versa, and since no criteria has been laid down in section 10(15)(iv)(f) for end-use of money borrowed, it could be stated that imposition of a condition by Dy. Director (ECB) during progress of scheme was like changing rules of game midway, and a retrospective or ex-post facto change in such a manner was an arbitrary approach having no legal sanctity. Where Legislature has granted exemption to lender and not to borrower, if there is a mistake committed by borrower, even then lender cannot be punished by withdrawal of exemption.

Considering totality of facts, circumstances, conditions of scheme, evidence of utility of funds and legal matrix of case, withdrawal of exemption was unwarranted and, consequently, assessee-company was not liable to deduct withholding tax @ 20 % in respect of interest payment.

A person who denies liability to deduct tax
u/s 195 on amount payable to a non-resident is entitled to appeal u/s 248, and Commissioner (Appeals) has jurisdiction to quantify amount on which alone tax is deductible.

Reliance Industries Ltd. vs. DDI [2005] 3 SOT 501 (Mum.)

Facts

1. The assessee-company had raised a foreign currency loan for the purpose of part financing of foreign exchange cost of its project. The Government of India, while granting approval for raising the loan, had conveyed that payment of interest commission and fees in respect of the said loan was exempt from withholding tax u/s 10(15)(iv)(f).
    

2. The assessee was, thus, remitting the interest on the borrowing without deducting any withholding tax in India, till it was withdrawn by the Government of India in February, 2002.
    

3. On a writ filed against withdrawal of exemption, the High Court had observed that the assessing authority and the appellate authority are quasi-judicial authorities and by reason of the impugned order in the writ petition the Central Government had no way curtailed the power of a judicial or quasi-judicial authority.
    

4. The Assessing Officer, accordingly, directed the assessee to withhold tax, and deduct tax before remitting the interest on the borrowing.
    

5. On appeal, the first appellate authority concluded that since the exemption had already been withdrawn and the power of granting exemption vested with the Government, the Assessing Officer had rightly directed to withhold tax.
    

6. On Second Appeal by the assessee, the revenue challenged the jurisdiction of the Tribunal in entertaining the instant appeal because according to the revenue issue had already been resolved in assessee’s own writ filed before the Delhi High Court. It was contended that once Writ Petition of the appellant had already been dismissed by a higher judicial body, the lower judicial forum had no authority to entertain any appeal on the same issue:

Decision

On Second Appeal, the Tribunal observed and held as follows:

1. A person who denies liability to deduct tax u/s 195 on the amount payable to a non-resident is entitled to appeal u/s 248 and the Commissioner (Appeals) has a jurisdiction to quantify the amount on which alone the tax is deductible.
    

2. As regards the jurisdiction of the Tribunal, keeping in view the order of the Delhi High Court, it could not be culled out that the final direction of the High Court, as stated above, was that the issue (of withdrawal of exemption) be decided by the assessing authority and the appellate authority who are the quasi-judicial authorities. Due to that reason, the Court had not shown its concern with the merits of the decision. It was amply clear that the matter was left open to be decided by quasi-judicial authorities after taking into account the merits of the decision of withdrawal of exemption challenged before the Court. So, the Tribunal had to act accordingly and following the direction of the Court the Tribunal was authorised as well as empowered to decide the instant appeal.
    

3. Once because of the letter of notification the provisions of the statute have been negated or diminished by an executive order, then a tax-payer has no option but to knock the door of the judiciary. In a plethora of decisions, it is unequivocally held that the full effect of the provisions has to be given in preference to supporting legislation such as rules, notifications, approval, etc.
    

4. The Tribunal does have the power to deal with the validity of such rules or notifications and by applying the doctrine of ‘reading down’ can strike down such rules if held to be in contradiction with the provisions of the statute itself. Rules are made only for the purpose of carrying out the provisions of the Act which cannot be taken away or whittle down the effect conferred by the statute.
    

5. The provision of the statute provides, in unambiguous terms, to grant exemption in respect of interest payable to an international investor who has lent money to industrial undertaking in India under a loan agreement as approved by the Central Government. The Government of India has properly regarded the need for industrial development and only thereafter issued the notification and floated the Scheme of ECB.
    

6. The revenue authorities have to act upon in the light of the statute and the provisions of the Act and are not empowered to exercise discretion by making the rules or notification/order which derogate or deviate from the provisions of the statute. It is a cardinal principle that it is the main statute which will govern the rules provided under an Act and not vice versa. As far as the section 10(15) is concerned, it is amply clear that no criteria has been laid down for the end use of the money borrowed. The term used in that section is ‘having regard to the need for industrial development in India’, in contrast to the phrase used in other section wherein the utilization as well as the purpose is mentioned and is also directed the end use of the monies borrowed. So, it could safely be stated that imposition of a condition by Dy. Director (ECB) during the progress of the scheme was like changing the rules of the game midway and the change of the rule was in respect of a game already played to alter its outcome. A retrospective or ex-post facto change in such a manner was an arbitrary approach having no legal sanctity.
    

7. The issue of utilization of ECB funds was for the first time raised when the entire scheme was at its fag end. According to the company, the time had come for repayment or buy back of the outstanding loans. It was a commercial decision taken by the company in the capacity of a prudent businessman. At that juncture, the clock could not be set into reverse motion. Certain steps already taken by the appellant-company which were well within the knowledge of the concerned authority could not be retracted. As the facts indicated, retrospectively the mode of utilization of the funds could not be altered. Rather the sanctioning authority had not checked at that very point of time whether, according to them, if at all there was mis-utilization of ECB borrowings. On the contrary, the claim of the assessee was that the utilization was in accordance with the scheme though by the process of fungible funds the obligations were satisfied and the conditions were fulfilled. So, at that stage, it was catastrophic to withdraw the exemption already granted u/s 10(15)(iv)(f). Due to the withdrawal of the exemption, the impugned order u/s 195(2) was passed directing to deduct withholding tax at the rate of 20 per cent. Therefore, the withdrawal of exemption was unwarranted; consequently, the assessee-company was not liable to deduct withholding tax at the rate of 20 per cent in respect of interest payment. Hence, the order passed u/s 195(2) was to be quashed and that of the Commissioner (Appeals) reversed.

The assessee’s appeal was, thus, allowed.

Cases referred

The Tribunal relied upon the following decisions:

1. CIT vs. Abdul Hussein Essaji Arsiwalla [1968] 69 ITR 38 (Bom.),
    

2. CIT vs. Taj Mahal Hotel [1971] 82 ITR 44 (SC),
    

3. M. CT. Muthiah Chettiar Family Trust vs. Fourth ITO [1972] 86 ITR 282 (Mad.).
    

4. CIT vs. Bombay State Transport Corporation [1979] 118 ITR 399
    

5. CIT vs. Hyderabad Asbestos Cement Products Ltd. [1988] 172 ITR 762 (AP),
    

6. CIT vs. Sirpur Paper Mills [1999] 237 ITR 41
    

7. J.B. Boda & Co. (P.) Ltd. vs. CBDT [1997] 223 ITR 271