Calcutta High Court

Timken India Ltd. vs Commissioner Of Income-Tax And ... on 14 May, 2002

Equivalent citations: 2002 256 ITR 460 Cal

JUDGMENT Kalyan Jyoti Sengupta, J.

1. In this matter the point in the dispute is short, as to whether the petitioner-company is obliged to deduct income-tax at the rate of 30 per cent, or 20 per cent, from the amount of royalty paid by the writ petitioner to the American company under the provisions of the technical collaboration agreement.

2. Briefly stated the facts of this case are that the writ petitioner No. 1 on March 20, 1990, entered into an agreement with an American company, viz., the Timken company, for acquisition and transfer of proprietary technical information in consideration of payment of a lump sum amount of Rs. 3,70,00,000 in a phased manner. Under the terms of the agreement a sum of Rs. 1,23,33,333 was to be paid within sixty days after the agreement is filed with the Reserve Bank of India and the capital goods clearance is obtained, and within 60 days from the date of transfer of delivery of technical documentation a sum of Rs. 1,23,33,333 and lastly a sum of Rs. 1,23,33,334 on commencement of production pursuant to the technical know-how were to be paid. As far as the first payment is concerned there is no dispute that the petitioner deducted income-tax at the rate of 30 per cent, on the payment of the first instalment and remitted to the American company on receipt of a no objection certificate as per the provision of the Income-tax Act as at that point of time there was no agreement between the Republic of India and the United States as regards double taxation avoidance agreement (in short "the DTAA"). The double taxation avoidance agreement was executed between these two countries on September 18, 1990, and was notified on December 20, 1990, before the aforesaid second instalment became due and payable. Under article 12 of the double taxation avoidance agreement the said payment is taxable at the rate of 20 per cent, on its gross amount. So, the petitioner made an application to the Commissioner of Income-tax after deposit of 20 per cent, tax, for granting no objection certificate and clearance for remittance of the aforesaid second instalment after deducting 20 per cent, of the gross royalty, as the said payment is "royalty" within the definition of Article 12(3) of the said treaty. However, the Commissioner remanded the matter to the concerned Income-tax Officer who held that the plea taken by the writ petitioner is not sustain-able. Naturally he overruled the claim of the petitioner and viewed that the double taxation avoidance agreement would have no application as the said agreement between the writ petitioner and the American company was entered into much before that came into force. He further held that the moment the agreement has been concluded, the liability to pay income-tax had accrued irrespective of the date of actual payment or receipt so also deduction. Being aggrieved by the aforesaid order of the Income-tax Officer the petitioner made an application for revision under Section 264 of the Income-tax Act. The Income-tax Commissioner has rejected the aforesaid application upholding the views taken by the Income-tax Officer. Hence, this writ petition is filed to challenge both the orders of the aforesaid two authorities.

3. Dr. Pal, learned senior advocate appearing with Mr. P. K. Pal, learned senior advocate, and Smt. Manisha Seal, the learned advocate, submits that both the authorities have committed a grave mistake in law by not giving benefit of the provision of the aforesaid agreement which enables deduction of 20 per cent, of the royalty amount. He contends that the views taken by both the authorities are contrary to the established judicial principle of law. An old decision of the Supreme Court reported in E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27, has settled the law long ago as to when the liability to pay income-tax arises.

4. He submits that there are two systems for maintaining accounts for the purpose of discharging the income-tax liability. One is the mercantile system and another is the cash receipt system. His client maintains the mercantile system. The moment the right to claim any income arises the same is shown as being an income irrespective of the date of receipt. In this case his client is not liable as an assessee payee but under Section 195 of the Income-tax Act it is obliged to deduct the income-tax on behalf of the Revenue and to pay the same at the rate as prescribed under the law. In this case under the agreement between the writ petitioner company and the American company, the second instalment is payable by the writ petitioner and receivable by the American company within 60 days after the delivery of the technical documentation from the American company to the writ petitioner.

Admittedly, in this case, this was delivered in May, 1991, after the double taxation avoidance agreement came into force. Under the convention between the two Governments the said agreement has been recognised and it has been given effect retrospectively. Therefore, the right to receive the said second instalment in other words, the liability to pay the same had arisen within 60 days after May, 1991, being the date of transfer. The provision of the said agreement will override the statutory provision and this has been clarified by the Board's Circular No. 728, dated October 30, 1995, reported in [1995] 216 ITR (St.) 141. Therefore, there is no doubt that the writ petitioner is under an obligation to deduct at the rate of 20 per cent, from the royalty amount for the payment of the second instalment even the following instalment also, as in terms of the said circular which is clarificatory in nature, this rate is more beneficial to the petitioner.

5. He submits that even before the amendment of the aforesaid Section which has been incorporated retrospectively with effect from April 1, 1972, the Division Bench of this court has held that the provision of this kind of agreement will override in this case, the normal statutory provision as regards rate of deduction of income-tax is concerned. The reasoning given by the Commissioner is contrary to the established principle of law, and in fact in derogation of the convention entered into by the two sovereign Governments and in effect it amounts to derecognising the diplomatic relation between the two countries and the same is contrary to the public interest and collides with public policy. Therefore, the same is liable to be set aside and the necessary no objection certificate should be directed to be granted enabling the petitioner to remit the royalty.

6. Mr. Shome, the learned senior advocate appearing on behalf of the Revenue, contends that in this case the date of the agreement is the criteria not the date of making payment stipulated in the agreement. He has drawn my attention to two judgments, viz., E. D. Sassoon and Co. Ltd. v. CIT and CIT v. Ashokbhai Chimanbhai and submits that it has been held by the aforesaid two decisions that liability for payment of income arises as and when an assessee gets his right and claim to realise the amount. So in this case the date of agreement is the date of making the claim a fortiori date of making payment to the American company though the date of payment is suspended for a future date. The right to claim royalty has vested on the date of agreement. In view of the aforesaid pronouncement of the Supreme Court the writ petitioner is obliged to deduct at the rate as it was prevailing on the date of signing of the agreement. Admittedly, the said convention and double taxation avoidance benefit came into operation after signing of the aforesaid agreement and it has no retrospective effect.

7. Mr. Shome further contends that power under Section 264 of the Income-tax Act is a discretionary one and when the authority has exercised discretion considering the law, may be rightly or wrongly, it is not open for the writ court to examine it and to substitute its own discretion.

8. He also contends that the petitioner is not an assessee and the petitioner is not affected either in any manner. It is the American company which is affected. So the writ petition is not maintainable either on the facts or in law.

9. Having given due consideration to the rival contentions of the parties I find that points involved in this case are as to whether the views expressed by the Revenue officials, namely, respondents Nos. 1 and 2, that the petitioner is obliged to deduct income-tax at the rate of 30 per cent, per annum and it cannot get any advantage of the provision of the double taxation avoidance agreement are correct or not. Before I go into this aspect I am to Rule on the question of maintainability of the writ petition as raised by Mr. Shome, learned senior counsel for the Revenue, his contention is that the petitioner is incompetent to maintain a writ petition, as it is not the affected person rather the American company being the beneficiary of the technical collaboration agreement is affected. It is the settled position of law that the writ petition can be maintained by the person affected when action is brought for his relief.

10. I have no hesitation to reject the point of maintainability in view of the fact the writ petitioner herein is affected, not in remote sense but in somewhat circuitous way. The writ petitioner is saddled with the statutory responsibility under Section 195 of the Income-tax Act, 1961 (hereinafter referred to as "the said Act"), to deduct accurate tax applying the correct provision of law. In case of failure in any manner, be it total or partial, to deduct tax, the petitioner is to be held as a deemed assessee on default and tax shall be recovered from the petitioner under Section 206 of the Act.

Therefore, I hold the petitioner has locus standi to maintain this application.

11. Normally, the writ court while exercising power of judicial review does not interfere with the decision taken by the statutory authority, particularly, on the question of interpretation of law.

However, when the law is patently misapplied or given manifestly wrong interpretation, the superior courts certainly relieve the aggrieved party from being suffered with injustice. In this case both the Revenue officials have held that the American company cannot get any benefit of paying income-tax at a reduced rate, as, the technical collaboration agreement was concluded before the said double taxation avoidance agreement came into force. They have held in substance for the purpose of deducting and/or charging income-tax, the date of the agreement not any other date, shall be taken into consideration.

12. In my view if the date of the agreement is taken into consideration for payment of royalties under the agreement, then the Revenue officials are justified in their decision. So, I need to see under the law when income-tax is to be deducted at source under Section 195 of the said Act.

Accordingly, I reproduce Section 195 :

"195. Other sums.--(1) Any person responsible for paying to a non-resident, not being a company or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being chargeable under the head 'Salaries' (...)) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :

Provided that in the case interest payable by the Government or a public sector bank within the meaning of Clause (23D) of Section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode."

13. It will appear from the aforesaid Section that income-tax at source is deducted at the time of crediting of such income to the account of the payee or at the time of payment thereof, in cash or by the issue of a cheque or draft or any other mode, whichever is earlier. In this case, I find undisputedly the payment of the second instalment to the American company under the collaboration agreement was to be and indeed made within 60 days after the delivery of the technical documentation by the American company to the petitioner company not by crediting. This technical documentation was delivered to the petitioner company in May, 1991. Therefore, the right to receive payment by the American company, consequently obligation to pay by the petitioner company arose in between May, 1991, and July, 1991. It is nobody's case that the petitioner company has debited the said amount for payment of the second instalment in their books of account.

Therefore, under the provisions of Section 195 the tax is to be deducted on the date when the actual payment has been made by the petitioner to the American company. In this connection, the submission of Dr. Pal has much relevance as it has been decided in two Supreme Court decisions reported in E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27, at pages 50-51, and CIT v. Hindustan Housing and Land Development Trust Ltd., [1986] 161 ITR 524, at page 527, amongst others that the basic conception is that the payee must have acquired a right to receive the income.

There must be a "debt" owed to him by somebody. Unless and until there is a credit in favour of the assessee a debt due by somebody, it cannot be said that he has acquired a right to receive the income or the income has accrued to him. In this context, a decision of the Supreme Court rendered in the case of CIT v. Ashokbhai Chimanbhai, [1965] 56 ITR 42, cited by Mr. Shome is much useful. It is held amongst others (page 45) :

"Under the Income-tax Act, income is taxable when it accrues, arises or is received, or when it is by fiction deemed to accrue, arise or is deemed to be received. Receipt is not the only test of chargeability to tax; if income accrues or arises it may become liable to tax. For the purpose of this case it is unnecessary to dilate upon the distinction between income 'accruing' and 'arising'. But there is no doubt that the two words are used to contra-distinguish the word 'receive'. Income is said to be received when it reaches the assessee : when the right to receive the income becomes vested in the assessee, it is said to accrue or arise."

14. In this case factually under the agreement mere conclusion of the agreement does not entitle the American company to receive the second instalment and the fight of realising the second instalment arises only when the technical documentation is made over, until that happens, the right of the American company to receive the second instalment is inchoate as rightly argued by Dr. Pal.

Therefore, applying the principles laid down in the aforesaid decisions of the Supreme Court, I hold that the American company's right of receiving the second instalment matures after May, 1991. So, the necessary logical conclusion will be that the obligation of the petitioner company to deduct income-tax in relation to payment of the second instalment of the technical collaboration agreement arises after May, 1991.

Therefore, I hold that both the Revenue officials have not applied the correct position of law. The contention of Mr. Shome drawing support from E. D. Sassoon's case that the date of the agreement is to be reckoned in this case is not accurate. In my view the date of the agreement can be reckoned in a case where in the agreement itself a payee gets an absolute and vested right to receive any income and on the date of the agreement itself somebody is saddled with liability to make payment, only the date of payment is deferred for future date. In this case as I have already discussed the date of payment of the second instalment is not deferred and the right of receiving income of the American company becomes absolute and/or mature after delivery of the technical documentation.

If the technical documentation were not delivered then the question of payment of the second instalment would not have arisen.

15. Next the question remains as to whether the petitioner can have any benefit of the double taxation avoidance agreement.

16. There is no dispute that the double taxation avoidance agreement came into force between the Republic of India and the United States of America dated December 18, 1990, with effect from April 1, 1991, by virtue of a notification. There is no dispute further that the said double taxation avoidance agreement under article 12 provides for payment of income-tax at the rate of 20 per cent, on the gross amount of royalties. In order to decide the applicability of the correct rate it is necessary to reproduce the definition of rate under Section 2(37A)(iii) during the relevant year that is to say prior to June 1, 1992.

"2. (37A) 'rate or rates in force' or 'rates in force', in relation to an assessment year or financial year,

mean--. . .

(iii) for the purposes of deduction of tax under Section 195, the rate or rates of income-tax specified in Section 115A or the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year, whichever is applicable."

Though the aforesaid provision was there at the relevant time of the assessment year in this case, subsequently there was an amendment by the Finance Act, 1992, with effect from June 1, 1992. Now the amended provision reads as follows :

"(iii) for the purposes of deduction of tax under Section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under Section 90, whichever is applicable by virtue of the provisions of Section 90."

17. In this case Sub-section (2) of Section 90 of the said Act would be relevant, so the same is reproduced hereunder.

"(2) Where the Central Government has entered into an agreement with the Government of any country outside India under Sub-section (1) for granting relief of tax, or, as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee."

18. Now the question remains which rate would be applicable whether the rate of 30 per cent, under Section 115A of the said Act or by virtue of Section 90(2) of the said Act the reduced rate mentioned in the agreement shall be applicable. It appears Sub-section (2) of Section 90 though incorporated into the Act by the Finance (No. 2) Act of 1991, the effect thereof has been given on and from April 1,

1972. It is time that Sub-section (2) of Section 90 of the said Act does not specifically provide that the rate mentioned in the agreement should be applicable. It merely speaks that it should apply to the extent they are more beneficial to the assessee. On the date of accrual of the income consequently deduction of tax under the Act rate was 30 per cent, under the provision of 19. Section 115A. So, the rate mentioned in the agreement is more beneficial to the assessee as by the Act itself the aforesaid agreement has been recognised and accepted. Before the aforesaid amendment came into force in Section 90, a Division Bench judgment of this court reported in CIT v. Davy Ashmore India Ltd., [1991] 190 ITR 626, has explained the object of entering into the double taxation avoidance agreement and it has been held amongst others as follows (headnote) :

"In determining the liability of a non-resident company, if there is any Agreement for Avoidance of Double Taxation entered into under Section 90 of the Income-tax Act, 1961, the said agreement must prevail over the provisions of the Income-tax Act."

20. Otherwise, there was no point in entering into an agreement for avoidance of double taxation.

Whenever any specific arrangement or agreement has been made regarding the taxability of any income under the agreement for avoidance of double taxation, such agreement will necessarily prevail over the provisions of this Act.

21. Their Lordships also took note in the said judgment of the notification dated November 23, 1981 (see [1982] 133 ITR (St.) 34), which said whereas the annexed convention between the Government of India and the Government of U. K. of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains has come into force on the notification by both the contracting states to each other of the completion of the procedures required by their respective laws, as required by article 27 of the said convention. Now, therefore, in exercise of the powers conferred by Section 90 of the Income-tax Act, 1961 (43 of 1961), and Section 24A of the Companies (Profits) Surtax Act, 1964 (7 of 1964), the Central Government directs that all the provisions of the said convention shall be given effect to the Union of India.

22. Similar notification is also found in Circular No. 638, dated October 28, 1992, regarding an identical agreement with Canada, the said circular has been published in [1992] 198 ITR (St.) 129 and 130. Therefore, the irresistible conclusion would be in this case that the rate mentioned in the agreement shall be the governing factor for deduction of income-tax under Section 195. The Revenue officer has been patently wrong in not applying the correct law and has unjustly refused to give no objection to the petitioner. I hold that on the relevant date the petitioner Indian company was obliged to deduct income-tax at the rate of 20 per cent.

23. Therefore, I set aside the orders of the Revenue officials, which are questioned here, and I direct the Revenue officials to issue no objection as income-tax at the rate of 20 per cent, has already been deducted. Thus, the writ petition is allowed without any order as to costs.