1. AUTHORITY FOR ADVANCE RULINGS

1. Business Profit vs. Royalty – Articles 7 & 13 of Dtaa With U.k.

ABC Ltd., IN RE – (2006) 201 CTR (AAR) 227

Payment made by an Indian company engaged in providing business information reports (BIRs) of business entities for the electronic purchases of BIRs from the applicant, a UK company, is business profit covered by the provisions of Article 7 of Indo-UK DTAA and not taxable in India as the applicant has no PE in India; payment is also not “royalty” within the meaning of para 3 of Article 13 of the DTAA as the information that is provided in a BIR is publicly available and the BIR is accessible by any subscriber on payment of requisite price with regular internet access.

Facts:

1. B Ltd., an Indian company, engaged in providing business information reports (BIRs) of business entities obtained these reports from the applicant, a UK company, by accessing the server of the applicant and downloading the BIR which was required by an Indian customer.

2. The applicant provided no copyright in the BIRs to B Ltd. nor was the same assigned or licensed to any customer. Also, the applicant did not render services to the customers of B. Ltd.

3. Sale of BIRs to B. Ltd. was on a principal-to-principal basis and was independent of ‘conditions of services’ between B Ltd. and its customers.

Ruling:

1. It is clear from the representation of the applicant that each time a BIR is sold to third parties and affiliates on a principal-to-principal basis as a product, the applicant retains all the copyrights in the BIRs that are compiled and sold by it. The copyright in the BIRs is neither assigned nor licensed to any customer. It is also clear that the applicant provides no copyright in the BIRs to B Ltd. and only sells products to B Ltd. and does not render services to the customers of B Ltd.

2. There is no basis to hold that the B Ltd. is concluding agreements with the customers on behalf of the applicant when the B Ltd. purchases these products as a principal and sells the same to the customers at a price and on terms and conditions of its choice. At times it has sold its products even at a price lower than that at which it purchased the BIRs from its affiliates out of India, keeping in view commercial considerations for dealing with its local Indian customers. Applicant’s sale of BIRs to B Ltd. is on a principal-to-principal basis and is independent of ‘conditions of service’ entered into between B Ltd. and its customers.

3. It is not in dispute that the payments made by B Ltd. to the applicant for electronic purchases of BIRs are its business income covered by Art. 7 of the Treaty. The business income of the applicant would not be chargeable to tax in India, there being no PE in India as it does not have any subsidiary, branch, office or place of business in India and it does not have any advisor or agent or any employee deputed by it to India.

4. The information that is provided in a BIR is said to be publicly available; it is collected and compiled by Group associates. A BIR is accessible by any subscriber on payment of requisite price with regular internet access for which no particular software or hardware is required. Access to the database of the applicant is available to the public at large at a price as in the case of buying a book and it is not a pre-requisite, that the BIR must be downloaded by B Ltd. only. In fact some clients access the server themselves to download a BIR. The applicant does not have any server in India for the use of B. Ltd. Indeed the applicant has specifically averred that the copyright in the BIR would neither be licensed nor assigned to either B. Ltd. or the Indian customer. For the abovementioned reasons, payments made by B Ltd. to the applicant for purchases of BIRs, do not answer the description of “royalties” within the meaning of para 3 of Article 13 of the Treaty. So payments made by B Ltd. to the applicant cannot be regarded as royalty payment.

2. HIGH COURT

2. Relief u/s 91 in Respect of Doubly Taxed Income Commissioner Of Income Tax vs. Best & Crompton Engineering Ltd. - (2006) 201 Ctr (Mad) 18

Expression ‘income’ contemplated under s. 91 is not the exact quantum of income as computed in India or abroad for the purpose of taxation in the respective countries, but the income as ordinarily understood in commercial business sense-Hence, assessee is entitled to relief under s. 91 on the Iranian income prior to adjustment of weighted deduction under s. 35B

Facts

1. The resident assessee company earned income in Iran for which there was no DTAA. The assessee company earned income in Iran amounting to Rs. 25,61,426 on which tax of Rs. 10,29,564 was paid in Iran. In terms of s. 91 of the IT Act, the assessee claimed a double taxation relief which was allowed by the Assessing Officer in the original order. Later, the A.O. revised the assessment under s. 154 of the Act and passed an order deducting the weighted deduction under s. 35AB amounting to Rs. 20,00,056 from Iranian income and worked out the double taxation relief on the sum of Rs. 5,61,370.

2. Aggrieved by the order, the assessee filed an appeal to the CIT(A), who held that the weighted deduction allowed under s. 35 should not be deducted from the Iranian income, while computing the relief for double taxation and further directed to recompute the double income-tax relief on the foreign income of Rs. 25,61,426.

3. Aggrieved by the order of the first appellate authority, the Revenue filed an appeal to the Tribunal. The Tribunal held that the order of the CIT(A) was correct, relying on the decision of the Supreme Court in the case of K.A.A.L.M. Ramanathan Chettiar vs. CIT 1973 CTR (S C)58: (1973) 88 ITR 169 (SC).

JUDGMENT

Aggrieved by the said order of the Tribunal, the revenue filed reference application before the Tribunal and the Tjribunal referred the following question for the opinion of the Hon’ble High Court.

“Whether on facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee is entitled for relief under s. 91 of the I.T. Act, 1961 without taking into account the weighted deduction allowed u/s. 35B of the I.T. Act, in respect of the Iranian income?”

The Hon’ble High Court held

1. The unilateral relief is granted only in respect of the “doubly taxed income”, which means that, that part of the income is actually included in the assessee’s total income. The word “income” as it is understood for the purpose of s. 91 would be the income computed in the normal sense before adjustment of deduction under s. 35B. What is contemplated by the term or expression “income” in the said section is not an exact quantum or measure of the income as computed either in India or abroad for the purpose of taxation in the respective countries, but the income as ordinarily understood in a commercial business sense. This is so, because the Indian tax laws may not be identical to the laws obtaining in another country and the computation of income in either country would not result in the same quantum of income since each country has its own fiscal policies and tax structure and allowances.

2. Sec. 91 speaks of the income which accrued or arose outside India. Hence, the income which accrued or arose outside India; viz., Iran was prior to the adjustments contemplated unders 35B. It is on that income, the assessee is entitled to the benefit of double income-tax relief. The curtailment of the benefit in this regard by imputing the deduction under s. 35B to the income from Iran is clearly erroneous. It is clear that the double taxation relief has to be worked out on the Iranian income earned abroad, as above. That part of the income; viz. Iranian income actually included in the assessee’s total income. Hence there was a “doubly taxed” income. When the income is doubly taxed, the assessee is entitled to the unilateral relief under s. 91. In view of the same, the orders of the authorities below are in conformity with law and require no interference.

CASE RELIED ON

K.V.A.L.M. Ramanathan Chettiar vs. CIT 1973 CTR (SC) 58 : (1973) 88 ITR 169 (SC)

CASE DISTINGUISHED

CIT vs. M.A Mois (1994) 210 ITR 284 (AP)

3. Tribunal Decision

3. USA based FII – Interest income – Rate of Tax –Whether 15% or 20% – Section 115AD of IT Act – Article 11 of India – USA DTAA.

Morgan Stanley Asset Management Inc. vs. JCIT [2006] 6 SOT 384 (MUM.)

[ASSESSMENT YEAR 1998-99]

Assessee-company, incorporated in U.S.A., derived income from capital gains, dividend and interest. Relevant Articles of the India - USA DTAA provide that said incomes are taxable as per the domestic law. Assessee applied tax rate for capital gains and dividends as per Income-tax Act whereas it applied tax rate for interest as per India - USA DTAA. However, the A.O. calculated tax on interest @ 20% as per provisions of section 115AD against 15% as per the DTAA. The CIT (Appeals) upheld the assessment order holding that assessee had to apply either the rates prescribed in the Act or in the DTAA for all sources of income and assessee could not opt for ‘pick and choose policy’ to pay taxes. Since as per DTAA local tax rate for interest could not exceed 15% and further tax rate applied by assessee was as per combined reading of the Act and the DTAA, assessee was liable to pay tax @ 15% on interest and it could not be said that assessee had adopted pick and choose policy for applying tax rate for various sources of income.

FACTS

3. The assessee-company, incorporated in U.S.A., had income from capital gains, dividend and interest. For capital gains and dividend income, the assessee applied tax rate as per the I.T. Act. For interest income, it applied tax rate as per DTAA.

4. In the return filed, the assessee claimed benefit of DTAA but while completing the assessment, the Assessing Officer calculated the tax on interest @ 20% as per provisions of section 115AD against 15% as provided in Article 11 of the DTAA.

5. On appeal, the Commissioner (Appeals) upheld the assessment order, holding that the assessee had to apply either the rates prescribed in the Act or in the DTAA for all sources of income and assessee could not opt for ‘pick and choose policy’ to pay taxes.

Decision

On assessee’s appeal, the Tribunal held in favour the assessee as follows:

1. For all the three sources of income, i.e., dividend, capital gains and interest, Articles 10, 11 and 13 provide that these incomes are taxable as per domestic law. A cap has been provided in Article 10 for dividend; i.e., 25% and Article 11 for interest; i.e., 15%. For capital gains, even no cap has been provided in article 13 of the DTAA.

2. From a plain reading of the three articles, it is clear that for dividend income the local rate of tax is applicable subject to maximum 25%. Similarly, for interest, the local rate of tax was to be applied subject to maximum 15%. Since the local rate as per section 115AD is 20%, the same could not exceed 15% as per DTAA. For capital gains, no rate or ceiling is provided in article 13 and, hence, only local rate is applicable.

3. In this view of the matter, the assessee had not adopted pick and choose policy for applying tax rate for various sources of income and the rates applied by the assessee for all three sources were as per combined reading of Act and DTAA and, hence, the assessee was liable to pay tax at the rate of 15% on interest income being the maximum rate provided in DTAA for interest income.

4. Non Discrimination Clause in a DTAA – Effect of the Explanation to section 90 inserted by the Finance Act, 2001 with retrospective effect from 1-4-1962 – Ambit of the powers of the Appellate Tribunal. – DTAA between India and Japan.

JCIT, vs. Sakura Bank Ltd. [2006] 6 SOT 684 (Mum..) / [2006] 99 TTJ 689

[ASSESSMENT YEAR 1992-93]

The A. O. held that in terms of non-discrimination clause in the Indo-Japan DTAA, assessee-bank was required to be taxed at same rate at which Indian companies were taxed in India. On appeal, assessee contended that it ought to be taxed at rate applicable to domestic companies in which public were substantially interested. Commissioner (Appeals) held that assessee should be taxed in India at same rate as applicable to domestic companies; i.e., 45%, and surcharge should not be payable by it as it was a non-resident bank. On second appeal, revenue contended that Commissioner (Appeals) ought to have held that despite non-discrimination clause in India-Japan DTAA, rate payable by assessee would be as per provisions of Finance Act as applicable to foreign companies. Since the Commissioner (Appeals) did not have benefit of having perused Explanation to section 90 which was inserted by Finance Act, 2001 with retrospective effect from 1-4-1962, Commissioner (Appeals) by any stretch of logic could not be said to have erred in not applying the said Explanation. Since the issue as to whether or not assessee was entitled to benefit of lower rate by virtue of non-discrimination clause in DTAA had already been decided in favour of assessee by A.O., question that was being raised by revenue could not be said to arise out of order of Commissioner (Appeals) or even that of Assessing Officer. However, since matter was to be decided in accordance with law as it existed at point of time when matter was being decided, the same was to be sent back to the A. O. for fresh adjudication in accordance with correct legal position in force.

Powers of Tribunal are not confined to deal with issues arising out of orders of authorities below. The Tribunal has no powers of enhancement even though, in fit cases, it can remit matter to file of Commissioner (Appeals) or Assessing Officer for deciding matter in accordance with law irrespective of whether or not order being so passed in accordance with law may result in enhancement.

FACTS

1. The A.O. charged income-tax on the assessee-bank @ 65%, the rate applicable to foreign companies.

2. On appeal, the Commissioner (Appeals) remitted the matter back to the A.O. on the ground that the A.O. had not considered the DTAA between India and Japan while charging taxes applicable to foreign companies.

3. When the matter was restored, the A.O. held that in terms of non-discrimination clause in the India-Japan DTAA, the assessee was required to be taxed at the same rate at which Indian companies were taxed in India, i.e., 50%.

4. On appeal, the assessee contended that it ought to be taxed at the rate applicable to domestic companies in which the public were substantially interested.

5. The Commissioner (Appeals) held that the assessee should be taxed in India at the same rate as applicable to domestic companies, i.e., 45% and that surcharge should not be payable by it as it was a non-resident bank.

6. On appeal, the revenue contended that the Commissioner (Appeals) ought to have held that despite the non-discrimination clause in the India-Japan DTAA, the rate payable by the assessee would be as per the provisions of the Finance Act for foreign companies.

7. The assessee, on the other hand, contended that it was not open to the revenue to appeal against the assessment order passed by the Assessing Officer but if the revenue’s contention was adjudicated, the revenue would end up challenging in appeal the order passed by the Assessing Officer, that the jurisdiction of the Tribunal was confined to the subject-matter of appeal which could be determined by finding out what the Commissioner (Appeals) had expressly or impliedly decided and that the Tribunal had no powers of enhancement.

Decision

The Tribunal held in favour of the Revenue as follows

1. The scope of section 90 has been curtailed by inserting an Explanation, by the Finance Act, 2001 but with retrospective effect from 1-4-1962. The net effect of insertion of that Explanation is that the non-discrimination clauses in the Double Taxation Avoidance Agreements, so far as they relate to non-discrimination in tax rates between domestic companies vis-a-vis foreign companies in India, have been rendered ineffective. The very section which enabled the relief being given in respect of the cases covered by the DTAAs has been amended so as to disable the relief being given on the ground of such non-discrimination. The enforceability of the non-discrimination clauses, to that extent, is not supported by any enabling provisions. These provisions, thus, remain academic and unenforceable in law.

2. The aforesaid Explanation was inserted by the Finance Act, 2001 whereas the impugned order was passed on 4-3-1999. The Commissioner (Appeals) obviously did not have benefit of having perused the said Explanation to section 90. The Commissioner (Appeals), therefore, by any stretch of logic could not be said to have erred in not applying the said Explanation.

3. The issue as to whether or not the assessee was entitled to the benefit of lower rate by the virtue of non-discrimination clause in the DTAA had already been decided in favour of the assessee by the Assessing Officer; that round of litigation was on the question as to whether the assessee was liable to be taxed on the rate applicable to a company in which public were substantially interested or applicable to a company which was a closely-held company. On the face of it, therefore, the question that was being raised by the revenue did not arise out of the order of the Commissioner (Appeals) or even that of the Assessing Officer.

4. The powers of the Tribunal are not confined to deal with the issues arising out of the orders of the authorities below. As long an issue has relevance to the correct determination of taxes in respect of the year, and particularly when relevant facts can be found from the material already on record, it is open to the appellant and the cross objector, whether assessee or the revenue, to raise that issue, provided the issue so raised is bona fide and the same could not have been raised earlier for good reasons. There was no difference between the assessee and the revenue on that issue as both of these parties were equal parties and their rights were the same.

5. Undoubtedly, the normal principle is that the Tribunal does not have any powers of enhancement, but that principle is not without any exceptions. In the instant case there was no enhancement of income but there was an enhancement in tax liability wholly because of insertion of Explanation to section 90 with retrospective effect from 1-4-1962, which restricted the application of non-discrimination clauses in the tax treaties.

6. In any event, even as a result of the correct rate of tax being applied in case the contention of the revenue was to be upheld, the assessee’s tax liability would not be beyond the tax liability determined by the Assessing Officer in the assessment order under section 143(3) as framed by him originally.

7. The Tribunal does not have powers of enhancement, even though, in fit cases, it can remit the matter to the file of the Commissioner (Appeals) or the Assessing Officer for deciding the matter in accordance with the law irrespective of whether or not the order so being passed in accordance with the law may result in enhancement. The Tribunal is not always prevented from passing orders which may result in enhancement of the assessee’s tax liability beyond the tax liability determined by the Assessing Officer. The rule preventing enhancement of the assessee’s tax liability, beyond the liability fixed by the Assessing Officer, is not universal and without exceptions to the said rule.

8. The reasons for the revenue not taking up plea earlier was the retrospective amendment in law. There could not be any lack of bona fides in that reason; nobody can be expected to have the clairvoyance of knowing as to what the amendments in the statute will be in future. When the law so permitted, the Assessing Officer happily gave the relief prayed for. The legal position has changed since. The appellate proceedings are still on and there cannot be any excuse for any appellate authority to decide the issue in any manner except in accordance with the law as is in existence at the point of time, for the relevant assessment year, when the appeal is being heard. If the correct rate of tax was the rate which neither the Assessing Officer nor the Commissioner (Appeals) had applied, no option was left except to remit the matter to the file of the Assessing Officer to decide in accordance with the law.

9. It was fit and proper to vacate the order of the Commissioner (Appeals), which was not in accordance with the correct legal position in force. Accordingly, the matter was to be sent back to the Assessing Officer for fresh adjudication in accordance with the law.

Cases referred

The Tribunal referred to a number of Supreme Court & High Courts decisions on the issue of ambit of the powers of the Tribunal

[Editorial Note: On similar lines, the Mumbai Tribunal has held in Chohung Bank vs. DDIT [2006] 6 SOT 144 (MUM.) that the Explanation introduced in 2001 by the Finance Act, 2001 with retrospective effect from 1-4-1962 is no way in conflict with the DTAA with Korea]

5. Taxability of ‘Non technical’ Consultancy Services - Scope of ‘Fees for included Services” – Connotations of the Expression “Make Available” – Articles 12 and 7 of India-US DTAA – MOU between India and USA forming part of the DTAA

Mc Kinsey & Co., Inc. vs. ADIT [2006] 6 SOT 186 (Mum.)

[ASSESSMENT YEAR 2001-02]

Double Taxation Avoidance Agreement (‘DTAA’) is only an alternate tax regime and not an exemption regime and, therefore, burden is first on revenue to show that assessee has a taxable income under DTAA and then burden is on assessee to show that its income is exempt even under DTAA. In order to attract taxability of an income under article 12(4)(b) of DTAA with USA, not only payment should be in consideration for rendering of technical or consultancy services, but in addition to payment being consideration for rendering of technical services, services so rendered should also be such that ‘make available’ technical knowledge, experience, skill, know-how, or processes, or consist of development and transfer of a technical plan or technical design. Generally speaking, technology would be considered ‘made available’ when person acquiring service is enabled to apply ‘technology’. Assessee-company was a resident of USA and was covered by India-USA DTAA. The assessee did not have any permanent establishment (PE) in India. Assessee rendered certain services to an Indian company inasmuch as it furnished to Indian company, geographical specific data and information inputs, which were commercial and industrial information in nature. Assessee claimed that payment received by it from Indian company for supply of said information was not liable to be taxed in its hands in India. The A.O. held that services rendered by assessee to Indian company were covered by scope of Article 12(4)(b) and, therefore, payment in question was liable to be taxed in India. It was held that since assessee had received payment for supply of commercial and industrial information, the payment received by assessee could not be treated as ‘fees for included services’ within meanings of Article 12(4) and was, accordingly, not liable to be taxed in India. Further, since the assessee did not have any permanent establishment in India, income so arising to it in India could not be taxed under Article 7 as ‘business profits’ either.

FACTS

1. The assessee-company was a resident of USA and was covered by the India-USA DTAA. The assessee did not have any permanent establishment in India.

2. Another worldwide company, namely, M, also having a branch office in India, called M India, was engaged in the business of providing strategic consultancy services. M carried on said business and rendered these services to its clients in India.

3. In the course of rendering these services, M needed some information inputs from other group companies, such as the assessee. The assessee was specialised in respect of particular geographical locations. The assessee had rendered certain services to M India inasmuch as it furnished to ‘M’ India, geographical specific data and information inputs, which were commercial and industrial information in nature.

4. The assessee claimed that the payment received by it from M India for supply of the said information was not liable to be taxed in its hands in India.

5. The A.O. disallowed the assessee’s claim and held that the services rendered by the assessee to M India were covered by the scope of article 12(4) of the India-US DTAA. The Assessing Officer, therefore, held that the payment received by the assessee from M India was taxable in India.

6. On appeal, the Commissioner (Appeals) confirmed the impugned order.

Decision

On second appeal, the Tribunal held in favour of the assessee as follows:

1. A plain reading of Article 12(4) makes it clear that only such technical and consultancy services are covered by Article 12(4) as either (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information referred to in Article 12(3), or (b) ‘make available’ technical knowledge, experience, skill, know-how, etc. It was not the revenue’s case that the assessee’s case had anything to do with Article 12(3). The case of the revenue, therefore, hinged on the applicability of Article 12(4)(b), which applies to rendering of only such technical or consultancy services as ‘make available’ technical knowledge, experience, skill or know how, etc.

2. In order to attract the taxability of an income under Article 12(4)(b) not only the payment should be in consideration for rendering of technical or consultancy services, but in addition to the payment being consideration for rendering of technical services, the services so rendered should also be such that ‘make available’ technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. The question arises as to what are connotations of the expression ‘make available’ appearing in Article 12(4)(b).

3. The connotations of expression ‘make available’ are considered by the different Benches of the Tribunal in a number of cases. The majority view is that in order to be covered by the provisions of the said Article 12(4) of the tax treaty, ‘not only the services should be technical in nature but should be such as to result in making the technology available to person receiving the technical services in question’. It has also been held that generally speaking, technology would be considered ‘made available’ when the person acquiring the service is enabled to apply the technology.

4. The Assessing Officer had drawn a distinction between the scope of Article 12(3)(a) vis-a-vis Article 12(4)(b) and based on that distinction, interpreted scope of Article 12(4)(b). However, the scope of provisions of Article 12(3) and Article 12(4) are mutually exclusive and clearly distinct. Article 12(3) deals with the consideration for granting use or right to use certain physical or intellectual properties, whereas Article 12(4) deals with rendering of managerial, technical or consultancy services under certain specific conditions. The Assessing Officer was not correct in being of the view that if non-technical services were excluded from the scope of Article 12(4)(b), its scope would be the same as that of Article 12(3)(a). His observation that ‘it is settled law that any construction which renders other provisions of the statute meaningless, has to be avoided’ was also, therefore, irrelevant.

5. The Special Bench of the Tribunal in the case of Motorola Inc. vs. Dy. CIT [2005] 95 ITD 269 Delhi (SB) has also held that ‘DTAA is only an alternate tax regime and not an exemption regime’ and, therefore, ‘the burden is first on the revenue to show that the assessee has a taxable income under the DTAA and then the burden is on the assessee to show that its income is exempt even under the DTAA’. The onus was thus on the revenue to demonstrate that the assessee had a taxable income even under the DTAA. This onus had not been discharged by the revenue in the instant case. Merely because the assessee had rendered certain consultancy services to ‘M’ India, that by itself could not be reason enough to conclude that the consideration for such consultancy services was taxable in India under Article 12(4)(a) as ‘fees for included services’.

6. For the non-technical consultancy services, it is specifically agreed to between the Governments of India and the USA that such services shall not be covered by Article 12(4)(b). In the protocol note attached to and forming part of the India-US DTAA, the Government of India has confirmed that the Memorandum of Understanding between India and USA with regard to interpretation of Article 12 (royalties and fees for included services) also represents the views of the Indian Government. It is clear from the said MoU that so far as the India-US tax treaty is concerned, consultancy services, which are not technical in nature, cannot be treated as ‘fees for included services’.

7. The stand taken by the revenue right from the assessment stage was that the services rendered by it were ‘consultancy services’, though non-technical, and for that reason, the consideration for said services was taxable as ‘fees for included services’. In fact, the Assessing Officer specifically observed that ‘the fees received by the assessee in respect of the services (which were consultancy/advisory services with no technology in it) rendered would fall in the category of ‘fees for included services’ in terms of clause (4) of Article 12. There was an inherent contradiction in this stand. Even if the services were consultancy services but were non-technical in nature, the same could not be held to taxable under Article 12(4)(b), since the MoU specifically provides that ‘under paragraph 4(b), consultancy services which are not of a technical nature cannot be included services’.

8. What was supplied by the assessee to M India was nothing but geographical specific data and information inputs which were commercial and industrial information in nature. As to whether or not furnishing of such data and information could be considered to be ‘making available’ included services, example No. 7 given in the MoU throws some more light on the understanding of the Governments of India and the USA on the subject. This example set out in the MoU between Indian and US Governments also makes it clear that consideration for supply of commercial and industrial information inputs cannot be treated as ‘fees for included services’ under Article 12(4)(b). Since the assessee had received consideration for supply of commercial and industrial information, the money so received by the assessee was not taxable under Article 12(4)(b).

9. Therefore, the payments in question received by the assessee could not be treated as ‘fees for included services’ within the meaning of Article 12(4) and were, accordingly, not liable to be taxed in India. Further, since the assessee did not have any permanent establishment in India, the income so arising to it in India could not be taxed under Article 7 as ‘business profits’ either.

CASES REFERRED TO

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

2. CESC Ltd. vs. Dy. CIT [2003] 87 ITD 653 (Kol.) (TM),

3. Motorola Inc. vs. Dy. CIT [2005] 95 ITD 269 (Delhi) (SB) and

4. Dy. CIT vs. Boston Consulting Group Pte. Ltd. [2005] 94 ITD 31 (Mum.)

6. Meaning of ‘Indian Concern’ used in section 115A. - Taxability of interest earned by a Non Resident on Foreign Currency Deposits placed with Indian branch of a foreign bank – Section 115A r/w CBDT Circular No. 740 dt. 14-4-1996

Joint Official Liquidator of Bank of Credit & Commerce (Overseas) Ltd. v. JCIT [2006] 6 SOT 391 (Mum.)

[ASSESSMENT YEAR 1998-99]

Provisions of section 9(1)(v) and section 115A are closely connected and unless an interest income received by non-resident abroad is deemed to accrue or arise in India under section 9(1)(v), there could not be any occasion to tax same in India under section 115A. A resident carrying on business in India and a non-resident carrying on business in India are at par so far as interest paid by them to a non-resident is required to be treated as ‘accruing or arising in India’. Meaning of an ‘Indian concern’ in section 115A should be taken as a business carried on in India which may include a business carried on in India even by a non-resident. Where a non-resident company had placed in fixed deposits certain amount with an Indian branch of a foreign bank, interest income from such deposits was to be assessed u/s 115A.

An issue, being purely legal, not raised by assessee before any of authorities below, is admissible on second appeal before Tribunal.

Facts

1. The assessee, a non-resident company in liquidation, had placed in fixed deposits certain amount with an Indian branch of a foreign Bank.

2. The A.O. noticed that the only source of the assessee’s income was interest on the fixed deposits placed with the Bank and the assessee had paid tax @ 20% u/s 115A on such income.

3. The A.O. took the view that section 115A could be applied only when the interest was earned from an Indian concern and that the branch of foreign Bank could not be treated as an Indian concern. He, accordingly, held that section 115A could not be applied and assessed the entire income at the rate applicable to a foreign company.

4. On appeal, the Commissioner (Appeals) upheld the action of the Assessing Officer.

5. On second appeal, the Tribunal was also required to decide whether or not the interest paid by the Indian branch of a foreign bank to the non-resident assessee-company would qualify for exemption under section 10(15)(iv)(fa).

Decision

On second appeal, the Tribunal held in favour of the assessee, as follows:

1. The expression ‘Indian concern’ in section 115A remains undefined in the Income-tax Act.

2. What is important is the place where a business is being carried on, rather than the residential status of the person who is carrying on such business. Section 9(1)(v) and section 115A are closely connected in the sense that while section 9(1)(v) sets out the circumstances in which income is deemed to accrue or arise in the hands of a non-resident, section 115A prescribes the rate at which interest income in the hands of non-resident is to be taxed. Unless an interest income received by the non-resident abroad is deemed to accrue or arise in India under section 9(1)(v), there cannot be any occasion to tax the same in India under section 115A. It is also clearly discernible from the scheme of section 9(1)(v) that a resident carrying on business in India and a non-resident carrying on business in India are at par so far as the interest paid by them to a non-resident is required to be treated as ‘accruing or arising in India’.

3. The expression used in the statute is ‘Indian concern’ and there is nothing to suggest that the scope of this expression is to be inferred as confined to an ‘assessee resident in India’. The meaning to be assigned to an expression must flow from the context in which it is used. It is in respect of business carried on by the assessee, and not the residential status of the assessee, that interest income is deemed to accrue or arise. There can be a distinction between a company and a concern, and a company can be larger than a concern inasmuch as a company can own a concern.

4. A harmonious interpretation would suggest that the meaning of an Indian concern should be taken as a business carried on in India which may essentially include a business carried on in India even by a non-resident.

5. The Central Board of Direct Taxes itself has taken a view that the branch of a foreign company/concern in India is a separate entity for the purpose of taxation and that ‘interest paid/payable by such branch to its head office or any branch located abroad should be liable to tax in India and would be governed by the provisions of section 115 [CBDT Circular No. 740, dated 17-4-1996; 132 CTR (Statute) 5]. Beneficial circular is binding on the revenue authorities. In the context of the instant case, and to the extent this circular recognizes that the provisions of section 115A will also govern the cases in which interest is payable by Indian branches of foreign banks, this circular is clearly a beneficial circular to the assessee.

6. The expression ‘Indian concern’, for the purposes of section 115A, will also include Indian branch offices of foreign companies. Accordingly, the correct rate of tax applicable to the income earned by the assessee, by way of interest earned on foreign currency deposits with the Indian branch, would be 20%.

7. Section 10(15)(iv)(fa) prescribes that interest payable by a scheduled bank to a non-resident ‘on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the Reserve Bank of India’, shall not be included in total income of the assessee. This plea had not been taken at any stage before any of the authorities below. There was no finding by any of the authorities below that the ‘acceptance of such deposits’ was approved by the Reserve Bank of India for the purposes of section 10(15)(iv)(fa). Accordingly, the matter was referred back to the file of the Assessing Officer for adjudication.

[The Tribunal also held that appeal lies against charging of an interest under section 234B.]

Cases referred to

1. Dr. J.M. Mokashi vs. CIT [1994] 207 ITR 252 (Bom),

2. State of Tamil Nadu vs. Kodikanal Motor Union (P.) Ltd. [1986] 3 SCC 91,

3. Satyam Enterprises vs. Jt. CIT [2005] 93 ITD 606 (Mum.) and

4. National Thermal Power Co. Ltd. vs. CIT [1998] 229 ITR 383 (SC)

CBDT Circular No. 740, dated 17-4-1996; 132 CTR (Statute) 5 relied upon