In The Decision In The Case Of M/S.tvs Motor Company Ltd v. Ito[Tca.nos.1509 To 1513 Of 2007 Dated 24.8.2018], To Which, One

In the High Court of Judicature at Madras Dated : 22.10.2018 Coram : The Honourable Mr.Justice T.S.SIVAGNANAM and The Honourable Mrs.Justice V.BHAVANI SUBBAROYANTax Case Appeal Nos.1200 & 1201 of 2008M/s.Sundaram Clayton Limited,Chennai-6...Appellant VsThe Income Tax Officer, InternationalTaxation-II, Chennai-34....RespondentAPPEALS under Section 260A of the Income Tax Act, 1961 against the common order dated 13.10.2006 passed respectively in I.T..A.Nos.1551 and 1552/Mds/2003 on the file of the Income Tax Appellate Tribunal 'B' Bench, Chennai for the assessment year 2003-04. For Appellant :Mr.R.Venkata Narayanan forM/s.Subbaraya Aiyer PadmanabhanFor Respondent :Mr.Karthik RanganathanCOMMON ORDER (Judgment was delivered by T.S.SIVAGNANAM,J) We have heard the learned counsel on either side. 2. These appeals, by the assessee, have been directed against the common order passed by the Income Tax Appellate Tribunal 'B' Bench, Chennai dated 13.10.2006 passed respectively in I.T.A.Nos.1551 and 1552/ Mds/2003 for the assessment year 2003-04. 3. The above appeals have been admitted on 13.8.2008 on the following substantial question of law : “Whether, on the facts and in the circumstances of the case and considering the provisions of the Double Taxation Avoidance Agreement between India and UK, the Tribunal was right in law in holding that the liability of the assessee to deduct tax at source from the payments made to a non resident is to be computed on the gross amount including the tax liability undertaken by the appellant ?” 4. In the decision in the case of M/s.TVS Motor Company Ltd. Vs. ITO[TCA.Nos.1509 to 1513 of 2007 dated 24.8.2018], to which, one of us (TSSJ) was a party, this Court decided the substantial question of law against the assessee. The relevant portions of the said judgment read thus : “26. The assessee entered into an agreement with the University of Warwick, UK for providing technical services, as per the agreement, the tax was to be paid by the assessee. The assessee deducted tax at the rate of 15% of the amount paid to the University of Warwick and the TDS made by the assessee was Rs.19,13,010/-. The Assessing Officer held that since the payment of tax was to be borne by the assessee, the tax should have been deducted on the tax payment by the assessee and therefore, the principle of grossing up should have been applied. The assessee contended that the tax to be deducted at source is governed by the provisions of the DTAA between India and UK and the maximum tax payable is the percentage of gross receipts of fees for technical services or royalty payable. Referring to Section 90 of the Act, it was contended that wherever DTAA exists, it will override the provisions of the Income Tax Act and the rates of tax would be the rate in force under the Annual Financial Act or DTAA whichever is more beneficial to the assessee. The assessee relied on circular No.333, dated 02.04.1982, issued by the CBDT, which provides that where DTAA provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions of the Income Tax Act. Thus, it is the contention of the assessee that the order passed by the Assessing Officer under Section 201(1) and 201(1A) is liable to be set aside. 27. Clause 10 of the agreement, dated 31.06.2000, between the assessee and University of Warwick reads as follows:- '10. After discussion, the parties have agreed that TSL will pay WARWICK a fee of 200,000 (nett of Indian taxes) for the year 2000-2001 to be paid as follows: (a) 50,000 (nett of Indian taxes) immediately after 3 months from the effective date of the agreement (b) 50,000 (nett of Indian taxes) immediately after 3 months from (a) (c) 50,000 (nett of Indian taxes) immediately after 6 months from (a) 27. Clause 10 of the agreement, dated 31.06.2000, between the assessee and University of Warwick reads as follows:- '10. After discussion, the parties have agreed that TSL will pay WARWICK a fee of 200,000 (nett of Indian taxes) for the year 2000-2001 to be paid as follows: (a) 50,000 (nett of Indian taxes) immediately after 3 months from the effective date of the agreement (b) 50,000 (nett of Indian taxes) immediately after 3 months from (a) (c) 50,000 (nett of Indian taxes) immediately after 6 months from (a) (d) 50,000 (nett of Indian taxes) immediately after 9 months from (a) Indian Income tax, if any, will be borne by TSL under Section 19(c) of Indian Income Tax Act.' 28. Article 13 of the DTAA between the India and UK reads as follows:- Article 13 : Royalties and Fees for TechnicalServices 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed: (a) in the case of royalties within paragraph 3(a) of this Article, and fees for technical services within paragraphs 4(a) and (c) of this Article. (i) during the first five years for which this Convention has effect; (aa) 15 per cent, of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first mentioned Contracting State or a political sub-division of that State, and (bb) 20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and (ii) during subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and (b) in the case of royalties within paragraph 3(b) of this Article and fees for technical services defined in paragraph 4(b) of this Article, 10 per cent of the gross amount of such royalties and fees for technical services. 3. For the purposes of this Article, the term 'royalties' means: (a) payments of any kin received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.' (a) payments of any kin received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.' 29. The assessee's case is that they are liable to bear the tax burden of University of Warwick and they have deducted tax at source on the net payment made to the University and the rate of tax in terms of Article 13 of the DTAA between India and UK is 15% of the gross amount of such fees for technical services. Thus, it is their contention that what is paid as fees for technical services, is the amounts specified in the agreement as payable for the services and that amount alone will be the income of the recipient. Further, taxes borne by the assessee will not constitute fees for technical services in the hands of the recipient (University of Warwick). Article 13 of the DTAA between India and UK provides that (1) royalties and fees for technical services arising in a contracting state and paid to a resident of the other contracting state may be taxed in that other state; (2) however, such royalties and fees for technical services may also be taxed in the contracting state in which they arise and according to the law of that state; but if the beneficial owner of the royalties or fees for technical services is a resident of the other contracting state, the tax so charged shall not exceed clause (aa); 15% of the gross amount of such royalties or fees for technical services, when the payer of the royalties or fees for technical services is the Government of the first mentioned contracting State or a political sub-division of that State (bb); 20% of the gross amount of such royalties or fees for technical services in all other cases; and clauses (ii) during subsequent years 15% of the gross amount of such royalties or fees for technical services. 30. Thus, by referring to Clause 2 (supra), it is submitted that the said clause refers only to such royalties or fees for technical services and such fees can only refer to the fees paid to a non-resident as per Article 13(1) and therefore, what is to be taxed in India is only such royalty and fees for technical services i.e., the amount paid to the resident of U.K. The assessee relied on Section 195A of the Act and submitted that grossing up will be only applicable to the provisions of the chapter relating to TDS and therefore, Section 195A cannot increase the income of the non-resident. It was further contended that the assessee is entitled to take the provisions of the Act or the DTAA, whichever is more beneficial in the light of the decision in Azadi Bachao Andolan (supra). Thus, the case of the assessee is that the maximum tax required to be borne by them as per the DTAA is only at the rate of 15% of the gross amount of such royalties or fees for technical services. It is the further contention of the assessee that the words “gross amount”, which is found in Article 13(2bb) of the India-UK DTAA cannot refer to a different sum other than what has been mentioned in Article 13(1) and (2). This is so because “gross amount”, refers to no deduction of expenses incurred towards such royalties or fees for technical services and any other interpretation given to the words “gross amount”, would be erroneous. In Azadi Bachao Andolan (supra), the Apex Court while dealing with double taxation treaty, among other issues, held that the agreement provides for allocation of taxing jurisdiction to different contracting parties in respect of different heads of income. 31. The Revenue's contention is that the DTAA is primarily entered into between two countries to reduce the scope of tax or the rate of tax. The assessee is under no compulsion to apply the provisions of the treaty and is at an option to apply the treaty or the Income Tax Act, whichever is more beneficial to it as per Section 90(2) of the Act. By way of illustration, it is stated that if the rate of TDS for fees for technical services is 15% under the DTAA, the same may be 25% under the Act and whichever is more beneficial can be opted by the assessee. It is further the case of the Revenue that the treaty does not provide for a tax computation mechanism to arrive at the income and therefore, necessarily the income has to be computed under the provisions of the Act and whatever is such computed income, the rate of tax as per the treaty or the Income Tax Act can be applied. In this regard, reference was made to Section 195A of the Act and it was submitted that when the tax chargeable on any income is to be borne by the person by whom the income is payable, then, for the purpose of deduction of tax, such income shall be increased to such amount as it would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. In terms of clause 10 of the agreement between the assessee and the University of Warwick is Rs.2,00,000/- and as per Article 13 of the DTAA between India and UK, the University of Warwick is liable to pay tax at 15% on the gross amount of fee for technical services. Thus, it is contended that the gross amount received by the University of Warwick would be 2,00,000 X 100/85 = 2,35,294/- and the tax to be deducted at source by the assessee is Rs.2,35,294 X 15/100= Rs.35,294/-, as against which the assessee had deducted only a sum of Rs.30,000/-. It is the further case of the Revenue that the DTAA does not define the term “gross amount”, nor contains any provision for computation of the gross amount and therefore, provisions of Section 195A of the Act will apply for computation of the “gross amount”. provisions of Section 195A of the Act will apply for computation of the “gross amount”. 32. In TATA Ceramics Ltd. (supra), the assessee was a company engaged in manafacture of ceramics products at a Special Economic Zone, entered into an agreement with a British company for technical collaboration for manufacture of products. In terms of the agreement with the assessee and the British company, all direct or indirect taxes and the import duties due in India, in connection with the performance of the agreement shall be borne by the assessee and all direct or indirect taxes and import duties in London in connection with the performance of the agreement shall be borne by the British company. In terms of the said clause contained in the agreement, the assessee paid tax in India for the remittances made to the foreign company. The Assessing Officer by applying Section 195A of the Act grossed up the income on the tax component on the remittance and assessed the grossed up amount, as the income earned by the foreign company in India and assessed the same at the hands of the assessee. The dispute raised by the assessee was on the rejection by the Assessing Officer of their claim for exemption on the tax paid on the remittance under Section 10(6A) of the Act, which otherwise would constitute a component of income earned by the foreign company justifying grossing up of net remittance to determine the total income for the assessment. Before the CIT (A), the assessee produced the approval obtained from the Government of India and based on which the CIT(A), upheld the assessee's claim for exemption under Section 10(6A) and held that the income earned by the foreign company cannot be grossed up under Section 195A for the purpose of assessment. The said order was confirmed by the Tribunal against which, the Revenue moved the Division Bench of the High Court of Kerala. The Revenue contended that Section 195A applies irrespective of Section 10(6A). It was further contended that remittance of tax by the assessee is not separately approved by the Government of India in terms of Section 10(6A). The Court after referring to Section 10(6A) and Section 195A held that only the dispute raised by the assessee is against the demand of tax on the income grossed up with tax component by applying Section 195A of the Act and that they are liable to be assessed on the remittance made to the foreign company, which is their income and not the tax paid thereon by the assessee in terms of the conditions in the agreement between the assessee and the British company. The Court while upholding the order of the Tribunal, which confirmed the order of the CIT (A), pointed out that Section 195A authorises the assessment of gross income only when collaboration agreement is not approved by the Government of India under Section 10(6A). The effect of the approval of the agreement under Section 10(6A) is that the tax paid by the Indian concerned on the remittance to the foreign collaborator gets exemption from tax and when such tax is exempted grossing up under Section 195A to cover up tax component of remittance is not permissible. Since the CIT(A) and the Tribunal declared the assessee's entitlement for exemption from payment of tax, the Court held that grossing up could not have been made. This decision could clearly support the case of the Revenue, since the Court held that grossing up under Section 195A was not permissible in the said case on account of as exemption under Section 10(6A). In other words, but for the exemption, the Revenue would have been fully justified in grossing up the income. 33. As rightly pointed out by the learned Senior Standing counsel appearing for the Revenue, the India-UK DTAA does not define the term “gross amount”. Likewise the word “income” has not been defined in the treaty and therefore, we are to be necessarily guided by the definition of “income” as defined under Section 2(24) of the Act, which includes, payments net of taxes. The tax which has been borne by the assessee, is also the income of University of Warwick and since such income is covered by the words “gross amount”, as mentioned in the treaty, the Revenue was justified in grossing up by applying Section 195A, as the provisions of the treaty do not provide a mechanism for computation of income, it prescribes only the rate of tax. Thus, to apply the correct rate of tax, the first requirement would be to determine the income on which tax is payable. This mechanism having not been provided under the treaty essentially, the assessee has to compute his income on such transaction in terms of the provisions of the Act and on such computation, if the rate of tax as applicable to such transactions under the DTAA is beneficial to the assessee, then the assessee would be entitled to avail such beneficial provision in terms of Section 90 of the Act. Thus, the contentions advanced by the assessee to state that no grossing up is provided for under Article 13 of the DTAA and therefore, they are liable to pay tax at the rate of 15% on the amounts specified in the agreement is a submission, which is liable to be rejected. 34. Section 195A deals with income payable “net of tax”, which reads as follows:- '195A. Income payable 'net of tax' [In a case other than that referred to in sub-section (1A) of Section 192,] Where, under an agreement or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement'. 35. The above provision provides for the manner of grossing up of income for computing the tax deductible at source in a case, where the tax is to be borne by the payer. This Section provides for grossing up of the tax only if it forms part of the income. As pointed out in Tata Ceramics, (supra), if the tax is exempted under Section 10(6A), it will not form part of the total income and there would be no grossing up of such tax for the purpose of tax deduction at source. in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement'. 35. The above provision provides for the manner of grossing up of income for computing the tax deductible at source in a case, where the tax is to be borne by the payer. This Section provides for grossing up of the tax only if it forms part of the income. As pointed out in Tata Ceramics, (supra), if the tax is exempted under Section 10(6A), it will not form part of the total income and there would be no grossing up of such tax for the purpose of tax deduction at source. 36. Section 2(24) of the Act, defines “income” and it is an inclusive definition and includes such net of tax payments also [Section 2(24)(iva)]. Thus, in the absence of the definition of “income” and definition of “gross amount” under the treaty, the assessee has to necessarily compute the income in terms of Section 195A of the Act. Admittedly, in the instant case, there is no exemption granted under Section 10(6A) of the Act for the assessee to contend that the said payment does not form part of total income. 37. In the light of the above legal and factual position, for the purpose of deduction of tax at source on the payment made by the assessee to the University of Warwick, the income should be computed in terms of the provisions of the Act and in so doing, it shall be increased by taking into consideration the amount of tax liability undertaken to be borne by the assessee. In other words, the obligation to pay the tax is on the University of Warwick and since the assessee in terms of the agreement agreed to pay the taxes, the same has to be necessarily added to the income of the University of Warwick and therefore, the principle of grossing up has to be applied. 38. In the light of the above discussion we have no hesitation to hold that the Assessing Officer, the CIT(A), and the Tribunal rightly held that the principles of grossing up would apply to the assessee's case. In the result, substantial question of law as framed is answered against the assessee and the appeals stand dismissed.” 5. In the light of the said decision, the above tax case appeals are dismissed as the substantial question of law is answered against the assessee. No costs. Internet : Yes 22.10.2018 To The Income-tax Appellate Tribunal 'B' Bench, Chennai. RS T.S.SIVAGNANAM,JANDV.BHAVANI SUBBAROYAN,J RS TCA.Nos.1200 & 1201 of 2008 22.10.2018