Royalty income receipts under different agreements are different sources of income, taxpayer can take benefit of lower tax rate by comparing the rate of tax under Income-tax Act and the DTAA separately for each agreement.

Royalty income receipts under different agreements are different sources of income, taxpayer can take benefit of lower tax rate by comparing the rate of tax under income-tax act and the DTAA separately for each agreement.

1. Taxpayer, a Company incorporated in the USA (FCO), received royalty income in respect of the following agreements:

• Royalty income in respect of IBM software ‘remarketer agreement’ entered into between FCO and IBM India Pvt. Ltd. (ICO) before 1 June 2005.
• Royalty income in respect of ‘Marketing Royalty Agreement’ between FCO and ICO dated 1 June 2005.
• Receipts from sale of software to third parties in India pursuant to agreements entered into on or after 1 June 2005.

 2.  FCO computed tax @15% under the DTAA as against 20% u/s.115A of the Income-tax Act for income from software ‘remarketer agreement’ entered into prior to 1 June 2005, on the basis that the beneficial rate of tax under DTAA was available. As against that for the other two agreements, tax was sought to be paid u/s.115A @10% (plus surcharge).

ITAT Ruling:

ITAT accepted FCO’s contentions and held:

• Depending on the nature of receipt i.e., royalty or FTS, and the date of the agreement i.e., before 1 June 2005 or after 1 June 2005, a foreign company has to compute the tax separately under each sub-clause of section 115A(1)(b) of the Incometax Act. Further, each sub-clause is mutually exclusive and independent of each other.
• Royalty income in respect of agreement entered into before 1 June 2005 was from one ‘source’ and royalty income in respect of agreement entered into on or after 1 June 2005 was from a different ‘source’.
• The contracts or agreements being the source of income have been entered into on different dates and the statute recognises such time differentiation and provides separate tax rates for each such stream.
• Reliance placed on SC ruling in the case of Vegetable Products Ltd.3 to support that where a provision in the taxing statute is capable of two reasonable interpretations, the view favourable to the taxpayer is to be preferred.
• FCO was correct in computing the tax at a beneficial rate in accordance with section 90(2) of the Income-tax Act wherein the expression ‘to the extent’ reinforces the principle that the provisions of Income-tax Act or the DTAA whichever is beneficial is applicable to the taxpayer.