THE COMMISSIONER OF INCOME-TAX vs. M/S IBM WORLD TRADE CORPORATION

The judgment delivered in ITA.No.278/2012 reads as under; “2. This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment Year 2007-08. The appeal was admitted by a Bench of this Court vide order dated 19.02.2013 to consider the following substantial questions of law:

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 assessee which is a foreign company and no advance tax is liable to be paid by it as its income is liable to tax deduction at source?”

Facts leading to filing of the appeal briefly stated are that the assessee is a foreign company which filed the return of income on 30.10.2007 claiming the income of `50,72,30,070/-. Thereafter, the assessee filed revised return of income on 31.03.2005 by which an income of `2,08,01,76,260/- was declared. The case of the assessee was taken up for scrutiny and a notice under Section 143(2) of the Act was issued on 14.08.2008. The Assessing Officer, by an order dated 30.12.2010, accepted the return filed by the assessee declaring the income from royalty and fee for technical services and concluded the assessment by levying tax at the rate of 15%. Interest under Section 234B of the Act was also levied. Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals), by an order

Learned counsel for the revenue, at the outset, fairly submitted that the 2nd substantial question of law has already been answered against the revenue by this Court vide order dated 14.09.2020 passed in ITA No.171/2011. However, while inviting the attention of this Court to Section 115A of the Act, it is submitted that the Tribunal grossly erred in holding that the assessee is entitled to adopt the provisions of Section 115A(1)(b)(AA) of the Act for computing the tax payable on the royalty income received in pursuance of the agreement entered into on or after 01.06.2005 and the provisions 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 01.06.2005. It is further submitted that the Tribunal erred in holding that the assessee is entitled to split the source of income to apply different rates of tax under DTAA and under Section 115A of the Act, when the rate of tax has to be applied on the total income of the assessee at the rate beneficial to the assessee as per Section 90(2) of the Act. On the other hand, learned counsel for the assessee has submitted that the view taken by the Tribunal is just and proper and does not call for any interference.

We have considered the submissions made by the learned counsel for the parties and have perused the record. As per Section 90(2) of the Act, the provisions of the Act or the provisions of the Treaty whichever is beneficial shall apply to the assessee. The Tribunal has found that sub clause (A), (AA), (B), (BB), (C) of Section 115A(1)(b) are mutually exclusive and are independent of each other and create or provide for a charge of income tax under Section 4 of the Act. Therefore, a foreign

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 are mutually exclusive and independent of each other and create or provide for a charge of income tax under Section 4 of the Act. The contracts or agreements being source of income had been entered into on different dates and the statute recognizes such differentiation and provides for separate tax rates for each stream. Therefore, the tax on royalty income cannot be levied on an aggregate basis and taxability of royalty under sub- clauses (A), (AB), (BB) and (C) of Section 115(a)(b) are separate and distinct. The assessee therefore can compute tax at the rate beneficial to it which is in accordance of provisions of Section 90(2) of the Act, wherein the expression ‘to the extent’ makes it evident that provisions of the Act or Treaty, whichever is beneficial, is applicable to the assessee. Therefore, the Tribunal has rightly held that the date of agreement while determining the rate of tax under the aforesaid clauses of Section 115(A)(1)(b) are separate and independent. It is also pertinent to note that the explanatory 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 as under: “26. Taxation of Income by way of Royalty or Fees for Technical Services 26.1 Section 115A of the Income-tax Act provides 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 (FTS) received under an agreement entered after 31.03.1976 and which are not effectively

From perusal of relevant extract of the aforesaid explanatory note, it is evident that in order to correct the anomaly prevalent in Section 115A with regard to rates of taxes in case of non-resident tax payer, in respect of income by way of royalty and piece for technical services as provided under Section 115A, was increased by way of amendment from 10% to 25%. Thus, from perusal of the aforesaid explanatory notes, it is evident that different rates of taxes in respect of royalty and piece for technical services were provided under different agreements. Therefore, the Tribunal has rightly taken the view that for the purposes of computing tax payable on the royalty income received, it has to be taxed with reference to the provisions of the agreement.

In view of the preceding analysis, the 1st substantial question of law is also answered against the revenue and in favour of the assessee.

In light of the aforesaid judgment, as the question of law has already been answered in respect of a different assessment year in favour of the assessee and against the revenue, the appeal is accordingly dismissed. The question of law is answered in favour of the assessee and against the revenue.