Annexure-G :Copy Of Agreement Dated 10/05/1991 Between Advancedproject Technology Ltd v. Tata Ceramics (Kerala) Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE P.S.GOPINATHAN FRIDAY, THE 29TH JULY 2011 / 7TH SRAVANA 1933 ITA.No. 307 of 2002() --------------------- AGAINST ORDER DATED 29/04/2002 IN ITA.117/COCH/1998 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT --------------------------------------- THE COMMISSIONER OF INCOMETAX, COCHIN BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENT(S): RESPONDENT ------------------------- TATA CERAMICS LTD., EXPORT PROCESSING ZONE, KAKKANAD, COCHIN (AGENT FOR ADVANCED PROJECT TECHNOLOGY LTD., U.K.) SRI.E.K.NANDAKUMAR FO R R1 SRI.A.K.JAYASANKAR NAMBIAR FOR R1 SRI.ANIL D. NAIR FOR R1 SMT.PRIYA MAHESH FOR R1 SMT.PRIYA MANJOORAN FOR R1 DR.K.P.PRADEEP, FOR RESPONDENT THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 29/07/2011, ALONG WITH ITA NO.17 OF 2003 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA NO.307/2002 APPENDIX APPELLANT'S EXHIBITS ANNEXURE-A :COPY OF ASSESSMENT ORDER DATED 12/07/96. ANNEXURE-B :COPY OF ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) DATED 31/12/1997. ANNEXURE-C :COPY OF ORDER OF THE TRIBUNAL DATED 29/04/2002. ANNEXURE-D :COPY OF CENTRAL GOVERNMENT COMMUNICATION DATED15/02/91. ANNEXURE-E :COPY OF LETTER DATED 15/02/1991. ANNEXURE-F :COPY OF NOTE PREPARED BY THE DEPUTY COMMISSIONER OFINCOME TAX DATED NIL. ANNEXURE-G :COPY OF AGREEMENT DATED 10/05/1991 BETWEEN ADVANCEDPROJECT TECHNOLOGY LTD. V. TATA CERAMICS (KERALA) LTD. ANNEXURE-H :COPY OF AGREEMENT DATED 25/01/91 BETWEEN TATACERAMICS LTD. v. ADVANCED PROJECT TECHNOLOGY LTD. //TRUE COPY// jg PA TO JUDGE. C.N.RAMACHANDRAN NAIR & P.S.GOPINATHAN, JJ. .................................................................... I.T.A. Nos.307 of 2002 & 17 of 2003 .................................................................... Dated this the 29[th] day of July, 2011. J U D G M E N T Ramachandran Nair, J. These appeals are filed by the Revenue for sustaining assessment of the tax paid by the respondent assessee onremittance made to a foreign collaborator as incomeassessable at the hands of the respondent. 2.We have heard learned Senior counselShri.P.K.R.Menon appearing for the appellant and learnedcounsel appearing for the respondent. We have heard learned Senior counsel 3.The respondent assessee, a Company engaged inmanufacture of ceramic products at Special Economic Zone,Kochi, entered into an agreement with a British Company fortechnical collaboration for manufacture of products. Clause11 of the technical collaboration agreement produced asAnnexure G is as follows:- The respondent assessee, a Company engaged in “11. Taxes All direct or indirect taxes and the importduties due in India in connection with the performance of the Agreement shall be borne byTCKL. All direct or indirect taxes and import dutiesin London in connection with the performance ofthe Agreement shall be borne by APT.” In terms of the above provision, for the remittances made to We have heard learned Senior counsel 3.The respondent assessee, a Company engaged inmanufacture of ceramic products at Special Economic Zone,Kochi, entered into an agreement with a British Company fortechnical collaboration for manufacture of products. Clause11 of the technical collaboration agreement produced asAnnexure G is as follows:- The respondent assessee, a Company engaged in “11. Taxes All direct or indirect taxes and the importduties due in India in connection with the performance of the Agreement shall be borne byTCKL. All direct or indirect taxes and import dutiesin London in connection with the performance ofthe Agreement shall be borne by APT.” In terms of the above provision, for the remittances made to the foreign company the assessee paid tax in India. In theassessment, the Assessing Officer by applying Section 195A ofthe Income Tax Act grossed up the income on the taxcomponent on the remittance and assessed the grossed upamount as income earned by the foreign company in India andassessed the same at the hands of the respondent assessee.There is no dispute about the respondent's liability to pay taxon the remittance made to the foreign company either as theiragent in India or in terms of the above provision in theagreement. However, dispute raised by the respondent was onthe rejection by the Assessing Officer of their claim forexemption on the tax paid on the remittance under Section 10(6A) of the Act which otherwise would constitute a componentof the income earned by the foreign company justifyinggrossing up of net remittance to determine total income forassessment. 4.In the first appeal filed before the CIT(Appeals) theassessee produced the approval obtained from Government ofIndia for Annexure G agreement based on which the CIT(Appeals) upheld assessee's claim for exemption under Section10(6A) and held that the income earned by the ForeignCompany cannot be grossed up under Section 195A for thepurpose of assessment. The Tribunal confirmed the same,against which the Department has filed these Appeals. 5.Before us learned Senior Standing Counsel for theRevenue contended that Section 195A applies irrespective ofSection 10(6A). His further contention is that remittance oftax by the respondent assessee is not separately approved byGovernment of India in terms of Section 10(6A) of the Act.Since the controversy is with regard to the scope andapplication of Sections 10(6A) and 195A of the Act, we extracthereunder the said provisions. “10Incomes not included in total income In computing the total income of a previousIn computing the total income of a previousyear of any person, any income falling within any ofthe following clauses shall not be included-xxxxxxxxxxxxxxxxxxxxthe following clauses shall not be included-xxxxxxxxxxxxxxxxxxxx (6A) where in the case of a foreign companyderiving income by way of royalty or fees fortechnical services received from Government or anIndia concern in pursuance of an agreement madeby the foreign company with Government or theIndian concern after the 31[st] day of March, 1976 butbefore the 1[st] day of June, 2002 and,-(a)where the agreement relates to a matterincluded in the industrial policy, for the time beingin force, of the Government of India, suchagreement is in accordance with that policy; and(b)in any other case, the agreement is approvedby the Central Government, the tax on such incomeis payable, under the terms of the agreement, byGovernment or the Indian concern to the CentralGovernment, the tax so paid.” “195A. Income payable “net of tax” (6A) where in the case of a foreign companyderiving income by way of royalty or fees fortechnical services received from Government or anIndia concern in pursuance of an agreement madeby the foreign company with Government or theIndian concern after the 31[st] day of March, 1976 butbefore the 1[st] day of June, 2002 and,-(a)where the agreement relates to a matterincluded in the industrial policy, for the time beingin force, of the Government of India, suchagreement is in accordance with that policy; and(b)in any other case, the agreement is approvedby the Central Government, the tax on such incomeis payable, under the terms of the agreement, byGovernment or the Indian concern to the CentralGovernment, the tax so paid.” “195A. Income payable “net of tax” In a case other than that referred to in sub-section (1A) of section 192, where, under anagreement or other arrangement, the taxchargeable on any income referred to in theforegoing provisions of this Chapter is to be broneby the person by whom the income is payable, then,for the purposes of deduction of tax under thoseprovisions such income shall be increased to suchamount as would, after deduction of tax thereon atthe rates in force for the financial year in which suchincome is payable, be equal to the net amountpayable under such agreement or arrangement.” 6.As already stated, the assessee is liable to beassessed for payment of tax on the income earned by theforeign company in India in connection with the technicalcollaboration agreement such Company has with the assessee, and the same is not in dispute. The only dispute raised by theassessee is against the demand of tax on the income grossedup with the tax component by applying Section 195A of theAct. In other words, the assessee's contention is that theassessee is liable to be assessed on the remittance made tothe foreign company, which is their income and not the taxpaid thereon by the assessee by virtue of clause 11 of theagreement. We are of the view that the first appellate authority and the Tribunal rightly upheld assessee's claim because theagreement stands approved by Government of India and thereis no dispute on this. The contention of the Senior StandingCounsel for the Revenue that tax remittance itself should beseparately approved by Government of India is not tenablebecause Section 10(6A) speaks about only approval ofagreement and when the agreement is approved, clause 11thereof providing for remittance of tax by the assessee alsogets approved by the Government. Section 195A authorisesassessment of gross income only when collaboration agreement is not approved by Government of India underSection 10(6A). The effect of approval of agreement underSection 10(6A) is that the tax paid by the Indian concern onthe remittance to the foreign collaborator gets exemptionfrom tax and when such tax is exempted grossing up underSection 195A to cover up tax component of remittance is notpermissible. So much so, since the agreement between theassessee and the foreign company is approved by Governmentof India under Section 10(6A), tax paid is exempt from furthertax and therefore grossing up under Section 195A to cover taxcomponent of the remittance does not arise. Both theappellate authorities rightly declared respondent's entitlementfor exemption from payment of tax on tax. We therefore, dismiss both the Income Tax Appeals. (C.N.RAMACHANDRAN NAIR, JUDGE) (P.S.GOPINATHAN, JUDGE)