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

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 8TH DAY OF APRIL, 2021

PRESENT

THE HON'BLE MR. JUSTICE SATISH CHANDRA SHARMA

AND

THE HON'BLE MR. JUSTICE S.VISHWAJITH SHETTY

ITA NO.64/2019 BETWEEN:

THE COMMISSIONER OF INCOME-TAX CIT(A) INTERNATIONAL TAXATION 7TH FLOOR, BMTC BUILDING 80 FEET ROAD, KORAMANGALA BENGALURU-560095

THE DEPUTY COMMISSIONER OF INCOME TAX INTERNATIONAL TAXATION CIRCLE-1(2), 4TH FLOOR, BMTC BUILDING 80 FEET ROAD, KORMANGALA BENGALURU-560095 …APPELLANTS

(BY SRI.K.V.ARAVIND, ADV.,)

AND:

M/S IBM WORLD TRADE CORPORATION LEVEL-3, PRESTIGE NEBULA-1, 9-12 CUBBON ROAD BENGALURU-560001 PAN:AAACI 1209G … RESPONDENT

(BY SRI.SATYANARAYANA T., ADV.,)

THIS APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, PRAYING TO SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN IT(IT)A NO.2169/BANG/2017 DATED 07.09.2018 FOR ASSESSMENT YEAR

2012-2013 ANNEXURE-C CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE-1 (2), BENGALURU.

THIS APPEAL COMING ON FOR HEARING THIS DAY, SATISH CHANDRA SHARMA J., DELIVERED THE FOLLOWING:

JUDGMENT

The present appeal is arising out of the order dated 07.09.2018 passed by the Income Tax Appellate Tribunal, ‘A’ Bench, Bengaluru, in IT(IT)A No.2169/Bang/2017 for the Assessment Year 2012-13.

The facts of the case reveal that the assessee is a company incorporated in the USA. The assessee entered into agreements with IBM India Pvt. Ltd. (IBM Ltd) as well as with different third parties in connection with sale licensing and usage of certain IPs, know how, software etc., owned or developed by the assessee. It was in receipt of royalty income from IBM India on account of ‘Marketing Royalty Agreement’ dated 1-6-2005 and there were also receipts from sale of software to third parties in pursuance of agreementt entered into after 1-6-2005. Further, royalty was received from IBM India in certain instances on account of agreement entered into before 1-6-2005. The assessee offered the incomes on account of agreements entered prior to 1-6-2005 under DTAA at the rate of

15% and others at 10% as per provisions of Section 115A i.e., various rates were applied. The assessing officer however held that the assessee cannot split the income which is chargeable to tax under one provision of the Income-tax Act (Sec.115A) and one Article of DTAA (Art.12). The assessing officer accordingly worked out the tax liability as per the provisions of the Act. The assessing officer also levied the interest under section 234B. Aggrieved by the order, the assessee went in appeal before the Commissioner of Income Tax (Appeals). The said authority by following the decision of the ITAT in ITA No.759/B/2011 in the assessee’s own case for the assessment year 2007-08 has accepted the computation done by the assessee for the Royalty and allowed the assessee’s appeal. Similarly, the CIT(A), by following the decision of the Tribunal in the assessee’s own case for the assessment year 2003-04 has held that the assessee is not liable for interest under Section 234B. Against the said order the Revenue had filed further appeal before the Tribunal. The Tribunal has dismissed the appeal of Revenue for the assessment year 2011-12 and for the assessment years 2012-13 and 2013-14 appeals are partly allowed. Being aggrieved, the Revenue has preferred the present appeal.

This Court has framed the following substantial question of law:

“Whether, on the facts and in the circumstances of the case, the “Tribunal was right in law in holding that royalty income in respect of agreement entered into before 1/6/2005 which are from one source and royalty income in respect of an agreement entered into on or after that date are from the same source and as such assessee can apply section 115A or DTAA separately for one sources of income covered by different agreements by following its earlier decision which has not reached finality and without appreciating that it is not legally permissible for the assessee to have a mix of both DTAA and portion of the relevant section of the Act a time?”

Learned counsel for the parties, at the outset, have informed this Court that the question of law framed in the present appeal has already been answered by the Division Bench of this Court in ITA No.278/2012 decided on 01.10.2020 in respect of the same assessee though for a different financial year. The judgment passed by the Division Bench of this Court in paragraphs-2 to 8 is reproduced hereunder: “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: “1. Whether 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 01.06.2005 and 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? 2. 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 dated 26.07.2011, dismissed the appeal preferred by the assessee. The assessee thereupon approached the Tribunal. The Tribunal, by order dated 13.04.2012, inter alia, held that the income received by the assessee by virtue of different agreements cannot be bifurcated for the purpose of computation of total income and held that the rates prevailing during different periods under the DTAA and under Section 115A of the Act which are more beneficial to the assessee, have to be applied. The Tribunal deleted the levy of interest under Section 234B of the Act on the ground that the non-resident assessee was not liable for payment of advance tax. In the aforesaid factual background, this appeal has been filed.

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 company has to compute tax on its income under each of the above sub-clauses separately and the tax so computed has to be segregated as per the mandate of Section 115A(a)(b) which provides that the income tax payable shall be the aggregate of. The aforesaid expression which provides for aggregation of tax computed under each of sub-clauses (A), (AA), (B), (BB),

(C) indicate that the charge of tax provided under the aforesaid clauses are separate and distinct. In this connection, reference may be made to the decision of the Supreme Court in ‘UNION OF INDIA Vs. AZADI BACHAO ANDOLAN’ (2003) 263 ITR 706 (SC).

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 connected with permanent establishment, if any, of the non-resident in India. Prior to amendment of section 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 or FTS is received in pursuance of an agreement entered on or before 31.05.1997 (ii) 20% if income by way of royalty or FTS is received in pursuance of an agreement entered after 31.05.1997 but before 01.06.2005; and (iii) 10% if income by way of royalty or FTS is received in pursuance of an agreement entered on or before 01.06.2005.

26.2 India has tax treaties with 87 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 a lower rate of 10 per cent even if the treaty allows the 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 technical 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 FTS received by a non- resident, under an agreement entered after 31.03.1976, which is taxable under section 115A. 26.4 Applicability- This amendment takes effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years.”

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 the result, the appeal fails and is hereby dismissed.”

In the light of the aforesaid fact that the controversy has already been adjudicated by the Division Bench of this Court, the substantial question of law is answered in favour of assessee and against the revenue, resultantly, the appeal fails and is hereby dismissed.

Sd/- JUDGE

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