S. 44D, S. 44DA, S. 115A, Income-tax Act;
Articles 7, 12, India-Germany DTAA
A.Y. : 2000-01 & 2001-02. Dated : 19-12-2008
Issues :
(i) No expenditure/allowance can be deducted from
royalty/FTS income earned by non resident pursuant to agreement entered into
prior to 1st April 2003.
(ii) S. 44DA does not have retrospective effect.
(iii) Authority to read down a provision vests only in a
High Court or Supreme Court.
(iv) As Article 12(5) [dealing with royalty/FTS
effectively connected with PE] excludes applicability of Article 12(1) and
(2), cap on rate of tax in Article 12(2) cannot apply.
Facts :
The appellant was a German company, and also a tax resident
of Germany. It was engaged in the business of providing engineering
consultancy services for oil and gas pipelines transmission systems. The
appellant had set up a PE in India. It entered into an agreement with an
Indian company for providing consultancy services. The agreement was entered
into before April 1, 20031.
Pursuant to the agreement, the appellant had earned royalty/fees for technical
services (‘FTS’) through its PE in India. The appellant had offered entire
income for tax in terms of S. 44D of the Act without claiming deduction of any
expenses. In the subsequent year, the appellant claimed that in terms of
Article 12(2) of India-Germany DTAA, tax should be chargeable @10% instead of
20% and further that the income should be computed after deduction of expenses
incurred by the PE. It also claimed that although the fees were within the
scope of Article 12, by virtue of Article 12(5), they should be treated as
business profits and subjected to Article 7. Thus, the income should be
computed after allowing expenses of the PE.
The AO concluded that the allowance of expenditure of PE
was subject to S. 44D of the Act and hence no deduction could be allowed.
Further, in terms of S. 115A, the income should be taxable @20%. The CIT(A)
upheld the Order of the AO.
Before the Tribunal, the appellant contended that :
- As the
taxpayer had incurred loss in its Indian operations carried through PE, as
per Article 7(3) of India-Germany DTAA read with S. 44D and S. 115A of the
Act, its income cannot be taxed @20% of the gross receipts.
- If
Article 7(3) is applied, actual expenses incurred for earning income should
be allowed and hence question of invoking S. 44D cannot arise.
- Once the
income is to be computed as business profits, provisions of S. 44D relating
to royalty would not apply.
- The
intention of insertion of S. 44DA was to harmonise the provisions of the Act
and the DTAA, to bring non-resident on par with resident as regards taxation
of royalty or FTS. S. 44DA is a clarificatory provision to be applied
retrospectively.
- The
taxpayer had choice of being assessed as per Article 12, in which case, the
gross receipts would be taxed @10% without deduction of any expenditure.
Held :
(i) Allowance of expenses and deductions :
S. 44D as amended was applicable for computing royalty or
FTS received by the non-resident in pursuance of an agreement made before 1st
April 2003. The non-obstante clause in S. 44D(b) specifically provides that no
expenditure or allowance shall be allowed while computing income by way of
royalty or FTS. Hence, no deduction would be allowed even if the income is to
be computed under Article 7 of DTAA which requires computation of income to be
done in accordance with provisions of the Act.
(ii) Reading down the provisions of S. 44D :
The theory of reading down the provisions of the statute
can be applied only when such provision is violative of fundamental right.
Only the High Court or the Supreme Court can decide such issue and, if
necessary, apply the theory of reading down.
(iii) S. 44DA being clarificatory and having retrospective effect :
The Finance Act 2003 completely changed the scheme of
taxation of royalty or FTS. Hence, provisions of S. 44DA cannot be regarded as
clarificatory.
(iv) Non-discrimination article and its impact :
Article 24 of India-Germany DTAA is in two parts. The first
part provides that income of non-resident through a PE shall not be less
favourably taxed than that of a resident. The second part of Article 24 carves
out an exception to provide that limitation on deductibility of expenses in
computation of PE profit in accordance with provisions of the Act is not
protected by non discrimination article. As a result, Article 24(2) does not
affect operation of S. 44D of the Act.
(v) Applicable rate of tax :
As the recipient has PE in India and as income is
effectively connected with PE in India, such income is covered by provisions
of Article 12(5). In such situation, royalties or FTS received by non-resident
would be governed by Article 7 and paragraphs (1) and (2) of Article 12 are
expressly made non-applicable. The income is therefore to be treated as
business profits to be computed as per domestic law. Once paragraph (5) of
Article 12 excludes applicability of paragraphs (1) & (2), the cap in respect
of rate of tax in paragraph (2) cannot be applied. Hence, in terms of S. 115A,
the applicable rate of tax would be 20%.
