DCIT, CHENNAI vs. INZI CONTROL INDIA LIMITED, SRIPERAMBUDUR

आदेश / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:- In this appeal filed by the Revenue, which is directed against an order dated 23.02.2015 of ld. Commissioner of Income Tax (Appeals)-6, Chennai, it is aggrieved on deletion of disallowance made by the ld. Assessing Officer on development fees and royalty paid by the assessee to a non –resident entity for want of deduction of tax at source.

Ground No.2 of the Revenue summarizes its grievance and 2. this is reproduced hereunder:-

Facts apropos are that assessee an Indian company 3. engaged in manufacture of automobile parts and accessories had filed its return of income for the impugned assessment year disclosing income of �3,17,67,041/-. During the course of assessment proceedings, it was noted by the ld. Assessing Officer that assessee had claimed expenses in the nature of incurred development fees and royalty, aggregating to �3,12,69,759/-. As per the ld. Assessing Officer, though assessee had deducted TDS on such amount, it did not remit such tax to the exchequer before the date of filing of return of income. Ld. Assessing Officer applied Section 40(a)(i) of the Income Tax Act, 1961 (in short ’the Act’’) and made a disallowance of �3,12,69,759/-.

Aggrieved, assessee moved in appeal before ld. CIT(A). 4.

Argument of the assessee was that there were no payment of any development fees or royalty during the relevant previous year.

According to the assessee, such amounts were credited to the accounts of the non-resident companies to whom payments were due.

Contention of the assessee was that the amounts remained outstanding as on 31.03.2010 and by virtue of Article 13 of the Double Taxation Avoidance Agreement (DTAA) between India and Korea, tax liability on a non –resident on royalty and technical fees, arose only when the amounts were paid to such non-residents. Reliance was placed by the assessee on the following decisions of different benches of this Tribunal.

1 DCIT vs. PHA India Pvt. Ltd, - Order dated 11.03.2014.

2 Pizza Hut International LLC c/o. Dinesh Mahta & Co vs. DDIT (International Taxation ) (2012) 54 SOT 425, Delhi.

3 CSC Technology Singapore Pte Ltd. vs. ADIT (2012) 50 SOT 399 (Delhi). 4 DCIT vs. UHDE GMBH (1996) 54 TTJ 355 (Bom) 5 National Organic Chemical Industries Ltd vs. DCIT, (2006) 5 SOT 317 (Mum)

Ld. Commissioner of Income Tax (Appeals) was appreciative 5. of the above contentions. According to him, tax liability on the non- resident, in relation to royalties and fees for technical services, would arise only at the time when such amounts were paid to non-residents.

As per the ld. Commissioner of Income Tax (Appeals), assessee had not paid the amounts before the end of the relevant previous year.

Ld. Commissioner of Income Tax (Appeals) also noted that assessee, when it effected the payments in the subsequent year, had remitted the deducted taxes to the exchequer as under:-

Party Name Nature of Amount in TDS amount Date of TDS Expenditure INR remittance Inzi Controls Royalty 82,36,890 10,85,598 20.11.2011 & Co. Ltd 18.03.2011 Inzi Controls Development 2,30,32,869 24,31,698 18.01.2011 Co. Ltd fee Relying on the decisions of the different Benches of the Tribunal cited by us at para 4 above, ld. Commissioner of Income Tax (Appeals) held that Section 40(a)(i) of the Act had no application, since assessee was yet to pay the development fees and royalty, though such expenses were booked in its accounts. He deleted the disallowance made by the ld. Assessing Officer.

6. Now before us, ld. Departmental Representative strongly assailing the order of the ld. Commissioner of Income Tax (Appeals) submitted that royalty and fees for technical services could be taxed in a contracting state, by virtue of clause (2) to Article 13 of the DTAA. Further, according to him, Hon’ble Apex Court in the case of Palam Gas Service vs. CIT, (2017) 394 ITR 300, had held that the word ‘’payable’’ as appearing Section 40(a)(ia) of the Act had to be construed as inclusive of paid amounts. Thus, according to him, assessee was obliged to deduct tax at source on the sum of �3,12,69,759/-. Since, assessee had not done so, as per the ld. Departmental Representative, the ld. Assessing Officer was justified in making a disallowance under section 40(a)(i) and ld. Commissioner of Income Tax (Appeals) fell in error in deleting such disallowance. Ld. Departmental Representative submitted that decisions of this Tribunal relied on the ld. Commissioner of Income Tax (Appeals), were all rendered prior to judgment of Hon’ble Apex Court in the case of Palam Gas Service (supra) and therefore could not be considered as binding precedents.

7. Per contra, ld. Authorised Representative strongly supporting the order of the ld. Commissioner of Income Tax (Appeals) submitted that Mumbai Bench of the Tribunal in the case of National Organic Chemical Industries Ltd. (supra) had, with reference to Article 12(1) and Article 12(2) of Indo-USA Tax Treaty, which was pari materia with Article 13(1) and Article 13(2) of Indo-Korea DTAA, held that for taxing royalties and fees for technical services, twin conditions of ‘’accrual’’ as also the ‘’payment’’ were to be satisfied. Reliance was also placed on the decision of Ahmedabad Bench of the Tribunal in the case of Saira Asia Interiors Pvt. Ltd vs. ITO, (2017) 164 ITD 687.

According to him, ld. Commissioner of Income Tax (Appeals) was justified in deleting the disallowance made u/s. 40(a)(i) of the Act.

Article 13 of the said DTAA which is apposite is reproduced hereunder:-

‘’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 laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 15 per cent of the gross amount of the royalties or fees for technical services.

3. The term " royalties " as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph film, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

4. The term " fees for technical services " as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15, in consideration for services of managerial, technical or consultative nature, including the provision of services of technical or other personnel.

5. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated there or perform in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services and paid is effectively connected with such permanent establishment or fixed base. In such cases the provisions of Article 7 or Article 15, as the case may be, shall apply.

6. Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not has in a contracting State a permanent establishment or a fixed base in connection with which the obligation to make the payments was incurred and the payments are borne by the permanent establishment or fixed base, then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

7. Where, owing to a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services paid, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the recipient in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such cases, the excess part of the payments shall remain taxable according to the law of each Contracting State due regard being had to the other provisions of this Convention’’.

First contention of the ld. Departmental Representative is that term ‘’paid’’ used in clause (1) will include ‘’payable’’ amount also. To buttress this argument, reliance has been placed on the judgment of Hon’ble Apex Court in the case of Palam Gas Service (supra). Said case concerned interpretation of Section 40(a)(ia) of the Act where the word ‘’payable’’ occurred and the word ‘’paid’’ was not mentioned.

Their lordships held that word ‘’payable’’ appearing in Section 40(a)(ia) of the Act would include paid amount also. In our opinion, this judgment would not aid the Revenue in interpreting, the word ‘’paid’ as appearing clause (1) of Article 13 of the DTAA. Terms used in treaties are not to interpreted in the manner which terms are used in a legislative edict in the form of a statute or law. Hon’ble Apex Court had noted as under in its judgment in the case of UOI vs. Azadi Bachao Andolan (2006) 263 ITR 706, which throws light on the manner which a treaty is to be interpreted.

‘’Interpretation of treaties, The principles adopted in interpretation of treaties are not the same as those in interpretation of statutory legislation. While commenting on the interpretation of a treaty imported into a municipal law, Francis Bennion observes : “With indirect enactment, instead of the substantive legislation taking the well-known form of an Act of Parliament, it has the form of a treaty. In other words the form and language found suitable for embodying an international agreement become, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganised composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for very good reason. To get agreement, politic uncertainty is called for. . . . The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being ‘unconstrained by technical rules of English law, or by English legal precedent, but conducted on broad principles of general acceptation’. This echoes the optimistic dictum of Lord Widgery C. J. that the words ‘are to be given their general meaning, general to lawyer and layman alike. . . the meaning of the diplomat rather than the lawyer’.”

In the light of observation of Hon’ble Apex Court reproduced above, we feel that the word ‘’paid’’ cannot be construed in a manner to include in it payable amounts also. ‘’Paid’’ indicates a past event and not one which is to happen in future. Hence, we cannot say that the Korean entity was liable to tax on these amounts under clause (1) of Article 13 of the DTAA.

Now the question, is whether clause (2) of Article 13 would 10. apply. Said clause says that royalties and fees for technical services might also be taxed in that contracting state in which they arose. We find that the decision of Ahmedabad Bench of the Tribunal in the case of Saira Asia Interiors Pvt. Ltd (supra) elucidates the manner in which this clause has to be interpreted. Ahmedabad Bench was considering application of Article 13 of DTTA between India and Italy, in a more or less similar fact circumstances. Said article was pari materia to Article 13 of the India and Korea, DTAA. Observations of the Tribunal at para 7 & 8 of its order dated 20.03.2017 is reproduced hereunder:-

‘’7. Clearly, therefore, so far as tax deduction at source liability under section 195 is concerned, all that is required to be seen is the taxability of income embedded in a payment, in the hands of the non-resident, as existing in law If there is no tax liability in the hands of the recipient at the point of time when event triggering tax deduction liability takes place- i.e. at the point of time when credit is afforded and when the payment is made. If the recipient does not tax any tax liability, in respect of the said amount at that point of time, there is no question of tax deduction at source, and, as a corollary to this proposition, if there is a tax liability in respect of that amount at that point of time, the said tax liability is to be withheld by the person crediting or paying the money. Of course, if there is same tax liability in either of the situation, the tax is to be withheld at the point of time when either of these events, whichever is earlier, takes place. We may also, while on the subject, reproduce Article 13 of India Italy DT AA, which deals with taxation of royalty, as below:

Article 13 ROYALTIES AND FEES FOR TECHNICAL SERVICES 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.

(Emphasis by underlining, supplied by us)

8. A or the point of time of crediting the amount payable to non resident, i.e. "at the time of credit of such income to the account of payee", the royalty so paid by the assessee was not taxable in the hands of the resident, for the simple reason that, in terms of article 13 of Indo Italian DTAA- which is reproduced above for the ready reference, taxability of royalty is dependent on the payment by the resident of a contracting state and receipt of the same by the resident of the other contracting state. Unless, therefore, the actual payment takes place, the taxability under article 13 of Indo Italian DTAA does not arise. In other words, the mere fact that an Indian resident credits the amount of royalty payable to an Italian resident does not trigger taxability under article 13 of the Indo Italian DTAA. Such is also the view taken by a series of decisions by the coordinate benches, including the decision in the case National Organic Chemical Industries Ltd [(2005) 96 TT J 765 (Mum)], with which we are in respectful agreement. When the royalty so credited by the assessee is not taxable at the time of credit of such amount to the account of payee, in the light of law laid down by Hon'ble Supreme Court in the case of GE Information Technology (supra), it does not give rise to any tax withholding obligations under section 195 (1) either’’.

It was held by the Co-ordinate Bench that for triggering the taxability under article 13 of the Indo-Italian DTAA, mere credit of amount of the royalty payable to the non-resident concerns account would not be sufficient. According to them, it was imperative that actual payments were effected. Or in other words, both conditions had to be satisfied. Judicial discipline requires us to follow the decisions of a Co- ordinate Bench, unless it is ‘’per-incuriam’’, so as to avoid multiplicity of litigation and the disconcerting effect of differing opinions by different Benches on similar issue. Hence we are choosing to follow the Co-ordinate Bench view. Ld. Commissioner of Income Tax (Appeals) has at para 4.1.3 clearly observed that amounts stood outstanding on 31.03.2010. Ld. Commissioner of Income Tax (Appeals) also observed that when payments were effected, assessee had remitted the tax to the exchequer. In such circumstances, we are of the opinion that ld. Commissioner of Income Tax (Appeals) was justified in deleting the disallowance made u/s.40(a)(i) of the Act. We do not find any reason to interfere with the order of the ld. Commissioner of Income Tax (Appeals).

Order pronounced on Thursday, the 16th day of August, 2018, at Chennai.