Ita/278/2012 Of The Director Of Income Tax v. M/S Ibm World Trade Corporation

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 1 DAY OF OCTOBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD 1LT.A. NO.278 OF 2012 BEI|WEEN 1.THE DIRECTOR OF INCOME-TAX INTERNATIONAL TAXATION RASHTROTHANA BHAVAN. NRUPATHUNGA ROAD BANGALORE. 2.THE DY. DIRECTOR OF INCOME-TAX INTERNATIONAL TAXATION, CIRCLE-I(1). RASHTROTHANA BHAVAN. NRUPATHUNGA ROAD BANGALORE. ... APPELLANTS (BY Mr. K.V. ARAVIND, ADV.,). AND= M/S. IBM WORLD TRADE CORPORATIONC/O. BMR ASSOCIATES, EMBASSY ICON ANNEXE2/1, INFANTRY ROAD, BANGALORE. | ... RESPONDENT| (BY Mr. T. SURYANARAYANA, A/W_ Ms. MAHIMA GOUD, ADVS.,) | THIS IJ§.T.A. IS FILED UNDER SECTION 260-A OI.T.ACT, 1961, ARISING OUT OF ORDER DATED 13-04-2012|PASSED IN ITA NO.759/BANG/2011, FOR THE ASSESSMENTYEAR 2007-08, PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW|STATED THEREIN.» Il. ALLOW THE APPEAL AND SET ASIDE THE ORDERS|PASSED|BYTHE|IIAT, BANGALOREIN|LIANO.759/BANG/2011 DATED 13.04.2012 AND CONFIRM THE|ORDER OF THE APPELLATE COMMISSIONER CONFIRMING|THE ORDER PASSED BY THE DEPUTY DIRECTOR OF INCOME|TAX, INTERNATIONAL TAXATION, CIRCLE-I(1), BANGALORE. THIS I.T.A. COMING ON FOR FINAL HEARING, THISDAY,ALOK ARADHE J.,DELIVERED THE FOLLOWING: JUDGMENT Mr.K.V.Aravind, learned counsel for the revenue. Mr.T.Suryanarayana, learned counsel along with|Smt.Mahima Goud, learned counsel for the respondent. 2. This appeal under Section 260-A of the Income| Tax Act, 1961 (hereinafter referred to as ‘the Act’, forShort) has been preferred by the revenue. The subjectmatter of the appeal pertains to the Assessment Year2007-08. The appeal was admitted by a Bench of this Court vide order dated 19.02.2013 to consider thefollowing substantial questions of law: aWhether the Tribunal was correct In|holding that the assessee is entitled to adopt|provisions of Section 115A(1)(b)(AA) of the Act|for computing the tax payable on royalty|income received in pursuance of agreement|entered into on or after O1.06.72005 andprovisions of Article 12 of the Indo-US DTAA for|computing the tax payable on royalty income|received in pursuance of agreements entered|into on or before 01.06.7005?| 2D.Whether the Tribunal was correct In|holding that no interest u/s.234B of the Act|accrue or is leviable in the case of the assesseewhich Is a foreign company and no advance tax|is liable to be paid by it as its income fs liable|to tax deduction at source?’| 3. Facts leading to filing of the appeal briefly statedare that the assessee is a foreign company which filedthe return of income on 30.10.2007 claiming the income OT V50,72,30,070/-. Tnereafter, the assessee filed revised return of income on 31.03.2005 by which anincome of =2,08,01,/6,260/- was declared. The case ofthe assessee was taken up for scrutiny and a noticeunder Section 143(2) of the Act was issued on14.08.2008. The Assessing Officer, by an order dated30.12.2010, accepted the return filed by the assesseedeclaring the income from royalty and fee for technicalservices and concluded the assessment by levying tax atthe rate of 15%. Interest under Section 234B of the Act|was also levied. Being aggrieved, the assessee filed anappealbeforetheCommissioner|ofIncome.Tax(Appeals). The Commissioner of Income Tax (Appeals),by an order dated 26.07.2011, dismissed the appealpreferred by the assessee. The assessee thereuponapproached the Tribunal. The Tribunal, Dy order dated13.04.2012,inter alia, neld that the income received by.the assessee by virtue of different agreements cannot.be bifurcated for the purpose of computation of totalincome and held that the rates prevailing during different periods under the DTAA and under Section115A of the Act which are more beneficial to theassessee, Nave to be applied. The Tribunal deleted thelevy of interest under Section 234B of the Act on theground that the non-resident assessee was not liable forpayment of advance tax. In the aforesaid factualbackground, this appeal has been filed. 4. Learned counsel for the revenue, at the outset,|fairly submitted that the 2[23]substantial question of law.nas already been answered against the revenue by thisCourt vide order dated 14.09.2020 passed in ITANo.171/2011. However, while inviting the attention ofthis Court to Section 115A of the Act, it is submittedthat the Tribunal grossly erred in holding that theassessee is entitled to adopt the provisions of Section115A(1)(bD)(AA) of the Act for computing the tax payabieon the royalty income received in pursuance of theagreement entered into on or after 01.06.2005 and the provisions of Article 12 of the Indo-US DTAA forcomputing the tax payable on royalty income received inpursuance of agreements entered into on or before01.06.2005. It ts further submitted that the Tribunal|erred in holding that the assessee is entitled to split thesource of income to apply different rates of tax underDTAA and under Section 115A of the Act, when the rateof tax has to be applied on the total income of theassessee at the rate beneficial to the assessee as perSection 90(2) of the Act. On the other hand, learnedcounsel for the assessee has submitted that the view|taken by the Tribunal is just and proper and does notcall for any interference. 5. We have considered the submissions made by the learned counsel for the parties and have perused therecord. As per Section 90(2) of the Act, the provisionsof the Act or the provisions of the Treaty whichever isbeneficial shall apply to the assessee. The Tribunal has found that sub clause (A), (AA), (B), (BB), (C) of Section115A(1)(b) are mutually exclusive and are independent.of each other and create or provide for a charge ofincome tax under Section 4 of the Act. Therefore, aforeign company has to compute tax on its incomeunder each of the above sub-clauses separately and thetax so computed has to be segregated as per themandate of Section 115A(a)(b) which provides that theincome tax payable shall be the aggregate of. Theaforesaid expression which provides for aggregation oftax computed under each of sub-clauses (A), (AA), (B),(BB), (C) indicate that the charge of tax provided underthe aforesaid clauses are separate and distinct. In thisconnection, reference may be made to the decision ofthe Supreme Court in)‘UNION OF INDIA Vs. AZADIBACHAO ANDOLAN’ (2003) 263 ITR 706 (SC). 6. From conjoint reading of the provisions of)Section 115A(1)(b) and sub-clauses (A), (AA), (B), (BB) and (C) thereof, it is evident that each sub-clauses aremutually exclusive and independent of each other andcreate or provide for a charge of income tax underSection 4 of the Act. The contracts or agreements beingsource of Income had been entered into on differentdates and the statute recognizes such differentiation andprovides for separate tax rates for each stream.|Therefore, the tax on royalty income cannot be levied onan aggregate basis and taxability of royalty under sub-clauses (A), (AB), (BB) and (C) of Section 115(a)(b) areseparate and distinct. The assessee therefore cancompute tax at the rate beneficial to it which is inaccordance of provisions of Section 90(2) of the Act,wherein the expression ‘to the extent’ makes it evidentthat provisions of the Act or Treaty, whichever isbeneficial, is applicable to the assessee. Therefore, theTribunal has rightly held that the date of agreementwhile determining the rate of tax under the aforesaidclauses of Section 115(A)(1)(b) are separate and independent. It is also pertinent to note that theexplanatory note to the provisions of Finance Act, 2013,were issued by Circular No.3/2014 dated 24.01.2014. ©The relevant extract of the explanatory note reads asunder:| independent. It is also pertinent to note that theexplanatory note to the provisions of Finance Act, 2013,were issued by Circular No.3/2014 dated 24.01.2014. ©The relevant extract of the explanatory note reads asunder:| “26. Taxation of Income by way of Royaltyor Fees for Technical Services 26.1 Section 115A of the JIncome-tax Actprovides for determination of tax in case of a|non-resident taxpayer where the total income|includes any income by way of Royalty and|Fees for technical services (FITS) received underan agreement entered after 31.03.19/6 and|which are not effectively connectedwith permanent establishment, if any, of the non-resident in India. Prior to amendment ofsection 115A by the Act, the tax was payable| on the gross amount of income at the rate of - — (i) 30% if income by way of royalty orFITS ts received in pursuance of anagreemententered|Of)Orbefore31.05.1199) (ii) 20% if income by way of royalty orFITS ts received in pursuance of anagreement entered after 31.05.1997 but.before 01.06.2005; and © (iii) 10% if income by way of royalty orFITS ts received in pursuance of anagreemententered|Of)Orbefore01.06.7005. 26.2 India has tax treaties with 8/7 countries,majority of tax treaties allow India to levy tax|on gross amount of royalty at rates ranging|from 10 per cent to 25 per cent, whereas the|tax rate as per section 115A is 10 per cent. In|some cases, this has resulted in taxation at alower rate of 10 per cent even if the treaty|allows tne income to be taxed at a higher rate.|26.3 In order to correct this anomaly, the tax|rate in case of non-resident taxpayer, in|respect of income by way of royalty and fees|for tecnnical services as provided under Section|115A, has been increased from 10 per cent to 25 per cent. This rate of 25 per cent shall be|applicable to any income by way of royalty and|FITS received by a non-resident, under anagreement entered after 31.03.1976, which Is taxable under section 115A. 26.4 Applicability- This amendment takes effect|from ] April, 2014 and will, accordingly, applyin relation to the assessment year 2014-15 and|subsequent assessment years. “ 7. From perusal of relevant extract of the aforesaid explanatory note, it is evident that in order to correctthe anomaly prevalent in Section 115A with regard torates of taxes in case of non-resident tax payer, inrespect of income by way of royalty and piece fortechnical services as provided under Section 115A, wasincreased Dy way of amendment from 10% to 25%.Thus, from perusal of the aforesaid explanatory notes, itis evident that different rates of taxes in respect ofroyalty and piece for technical services were providedunder different agreements. Therefore, the Tribunal hasrightly taken the view that for the purposes ofcomputing tax payable on the royalty income received, ithas to be taxed with reference to the provisions of theagreement. 8. In view of the preceding analysis, the 1[&:]substantial question of law is also answered against therevenue and in favour of tne assessee. �2�:;5�$5&84:!�:;5�/@@5/4�9/14&�/23�1&�;5$5C<� 31&?1&&53�� � � ������������ �����������