Sections 195, 90(2) of the Act, Article 13 of India-Italy DTAA – Withholding tax obligation arises only if income is taxable; as royalty is taxable under Article 13 of India-Italy DTAA only on payment/receipt, section 195 will be triggered only on payment; even if a taxpayer opts for beneficial provision under the Act, withholding tax obligation will be triggered only when income is taxable as per the DTAA.

8.  TS-134-ITAT-2017
(Ahd)

Saira Asia Interiors Pvt. Ltd vs. ITO

A.Y. 2011-12, Date of Order: 28^th March, 2017

Facts

The Taxpayer was an Indian company. It was required to make
payment towards technical know-how to FCo, which was a resident of Italy. The
Taxpayer accounted the liability on accrual basis in its books of account for
AY 2011-12. However, it did not withhold and deposit tax in respect thereof
during that year. The Taxpayer made payment in AY 2012-13 and duly withheld and
deposited tax thereon.

According to the AO, withholding obligation of the Taxpayer
arose at the time of credit in the books of account (i.e., AY 2011-12). Hence,
the AO held that the Taxpayer had belatedly withheld tax. Therefore, he raised
demand for interest on delayed deposit of taxes.

According to the Taxpayer, in terms of India-Italy DTAA, royalty
was taxable in the hands of FCo only when it was actually “paid”. Hence, there
was no withholding obligation on the Taxpayer when the payment was accounted in
its books of account.

The CIT(A) upheld the order of the AO.

Held

–  Withholding tax liability under the Act is a
vicarious liability. Hence, as held by the Supreme Court in G. E. Technology
Centre Pvt. Ltd. vs. CIT (2010) 327 ITR 456 (SC), if the income embedded in
a payment is not taxable under the Act, the withholding tax liability is not triggered
.

– The withholding tax provision cannot be
applied in vacuum. It should be read in conjunction with the charging
provisions under the Act as well as the provisions of the DTAA, depending upon
whichever is more beneficial.

– In terms of Article 13(1) of India-Italy DTAA,
royalty is taxable only when it is actually paid to the non-resident. Further,
in terms of Article 13(3), the term “royalties” means payments of any
kind “received”. Thus, mere credit does not trigger the tax liability. This view
is also supported by the decision of the Mumbai Tribunal in National Organic
Chemical Industries Ltd. (2005) 96 TTJ 765 (Mum).

–    Since the amount was not taxable at the time
of credit of the amount, the Taxpayer did not have any tax withholding obligation.

–    Article 13(2) restricts the tax liability in
India to 20% whereas section 115A prescribes tax @10%. Hence, in view of
section 90(2), the Taxpayer can exercise the option of adopting the lower rate
of tax under the Act.

–  However, since under the DTAA tax liability is
on payment, adoption of the lower rate under the Act tax liability will not be
triggered on accrual of income.