Case Law Details
Any amount received by a non-resident in pursuance of an agreement made before 1-4-2003 is to be governed by the provisions of section 44D of the Income-tax Act; the words `according to the domestic law of the contracting State in which the PE is situated’ appearing in Article 7(3) of DTAA between India and Germany are the words of significance which, would only mean that the expenditures incurred by the non-resident assessee for the purpose of business of the PE in India would be allowable in accordance with the provisions of domestic law i.e., Income-tax Act, 1961; consequently, no deduction is to be allowed against the receipts by way of royalties or fees for technical services in case of non-resident company, even if the business profits in respect of such income are to be computed under Article 7 of the DTAA.
RELEVANT EXTRACTS:
14. Rival submissions of the parties have been considered carefully. For the sake of convenience, firstly we shall deal with the contention of the assessee that the provisions of section 44DA, being clarificatory in nature, should be construed retrospectively.
This contention, in our opinion, has to be rejected outright. It is pertinent to note that Section 44DA was inserted in the Statute book by the Finance Act, 2003 w.e.f. lsl April, 2004. Simultaneously, the provisions of Section 44D were also amended by the same Finance Act. According to the amended provisions, Section 44D is applicable for computing the income by way of royalty or fees for technical services received by the non-resident in pursuance of the agreement made before 1st April, 2003. On the other hand, the provisions of Section 44DA are applicable for computing the income by way of Royalty or Fees for technical services received by the non-resident in pursuance of an agreement made after 31st March, 2003. Thus it is clear beyond doubt that the legislature had never intended to give the provisions of section 44DA retrospective effect. Any amount received in pursuance of an agreement made before lsl April, 2003 is to be governed by the provisions of section 44D. In view of such express provisions, the contention of the assessee cannot be accepted.
15. The view taken by us also finds support from the decision of the co-ordinate Bench of the Tribunal in the case of Steel Authority of India Ltd. vs. ACIT 105 ITD 679 (Del.) wherein it has been held as under:
“7.2. The learned counsel also argued that s. 44D was replaced by Finance Act, 2003, w.e.f. 1st April, 2004 which provides for deduction of expenditure or allowance in accordance with the provisions of the Act. Since the subject-matter of both the sections is same, the amendment should be taken as clarificatory in nature. We have considered this argument also, however, we are unable to agree with him for two reasons, namely, – (i) the provisions are substantive in * nature and, therefore, s. 44DA applies prospectively to the proceedings of asst. yr, 2004-05 and on wards, and (ii) the new provision is made specifically applicable in respect of agreements made after 31st March, 2003. Thus the new provision is not applicable to the facts of the assessee’s case. It does appear to us that the amendment was made prospectively in order to mitigate the hardship caused by the old provisions.”
16. The judgment of the Hon’ble Supreme Court in the case of Gold Coin Health Foods P. Ltd. 304 ITR 308 relied upon by the learned Counsel for the assessee is an authority for the proposition that the clarificatory provisions are to be construed retrospectively. It further provides that the provisions can be said to be clarificatory when it makes the legal position explicit what was implicit earlier. In the present case, nothing has been brought on record to prove that prior to the insertion of section 44DA, the assessee was entitled to deduction in respect of the expenditure incurred by the PE in India. On the contrary, the provisions of section 44D are clear beyond doubt wherein it has been expressly provided by the legislature that none of the deductions permitted under sections 28 to 44C would be allowed in computing the income by way of Royalty or fees for technical services. The provisions of Section 44D are non-obstante provision and therefore specifically overrides the provisions contained in sections 28 to 44C. In view of such clear provisions, it cannot be said by any logic that prior to insertion of section 44DA, the assessee was entitled to deduction in respect of expenditure incurred by PE in India while computing the income by way of royalties or fees for technical services.
17. In fact, the legislature has introduced a new scheme of taxation by inserting section 44DA in the Statute book by Finance Act, 2003 effective from 01.04.2004. Prior to insertion of Section 44DA, the non-resident companies were required to pay the lower rate of tax of 20% on the gross receipt by way of royalties or fees for technical services as per the provisions of section 115A(l)(b) of the Act. However, after insertion of section 44DA, non-resident companies are now required to pay tax on the net income (aver allowing deduction in respect of expenditure incurred by PE in India) but at a higher rate of tax as prescribed by Finance Act, for the concerned year. This is apparent from the provisions of section 115A(l)(b) of the Act as amended by Finance Act, 2003. By virtue of this amendment, income by way of royalties or fees for technical services referred to in section 44DA has been excluded from the purview of section 115A(l)(b). Thus, the lower rate of tax of 20% is restricted to the royalties or fees for technical services received in pursuance of agreement made before 1st April, 2003. Thus, there is a complete change in the scheme of taxation of royalties or fees for technical services in the hands of non-resident by the Finance Act, 2003.
18. In view of the above discussion, the provisions of section 44DA cannot be said to be clarificatory. Hence, the judgment of the apex court in the case of Gold Coin Health Foods (supra) does not help the assessee. it is held that the provisions of section 44DA of the Act are to be construed prospectively and cannot be given retrospective effect. The contention raised by the assessee in this regard is therefore rejected.
19. Coming to the main contention raised by the learned counsel for the assessee, the question for our consideration is whether the assessee is entitled to deduction in respect of expenses incurred by non-resident assessee through its PE in India while computing the income by way of royalty or fees for technical services in view of the provisions of Article 7(3) of DTAA between India and Germany. There is no dispute between the parties that the amount received by the assessee amounts to fees for technical services as per the provisions of Section 9(l)(vii) of the Act and consequently the assessee is liable to pay the tax under the Act. It is also not in dispute that if the income is to be computed under the Act, then the provisions of Section 44D would apply and the assessee would be liable to pay tax on the gross amount of fees for technical services received by the assessee in view of the specific provisions of section 44D which prohibits deduction in respect of expenditure falling u/s. 28 to 44C.
20. However, the assessee has opted to avail the benefits available under DTAA between India and Germany. We have gone through the relevant provisions of the said DTAA. Article 12 specifically deals with the income by way of royalties or fees for technical services. Paragraph 1 of Article 12 provides that royalties and fees for technical services arising in a contracting state and paid to a resident of the other contracting state may be taxed in other state. Paragraph 2 provides that such income may also be taxed in the contracting state in which they arise and according to the laws of that state, but if trie recipient is the beneficial owner of such income, the tax so charged shall not exceed 10% of the gross amount of the royalties or fees for technical services. Paragraphs 3 and 4 define the scope of the terms ‘royalty’ and ‘fees for technical services1. Paragraph 5 provides that the provisions of paragraph 1 & 2 shall not apply if the beneficial owner of such income, being a resident of contracting state, carries on the business in the other contracting state through the PE situated therein and consequently, the provisions of Article 7 or Article 14 as the case may be shall apply. Both the parties are agreed that assessee is the beneficial owner of the income by way of fees for technical services which had been earned through the PE in India and therefore Article 7 of the DTAA would apply in this case. According to the learned Counsel for the assessee, such benefits are to be treated as business profits which is to be computed as per the provisions of Article 7(3) of the
said DTAA which reads as under:
“ARTICLE 7 – Business Profits : 1
1. ……….
2 . ………..
3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions, expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred whether in the State in which the permanent establishment is situated or elsewhere, and according to the domestic law of the Contracting State in which the permanent establishment is situated.”
21. A bare look to the above provisions reveals that the profits of a PE in India are to be computed after allowing deductions in respect of the expenses which are incurred for the purpose of business of PE but such deductions are also subject to the provisions of the domestic law of the contracting state. The words ‘according to the domestic law of the contracting state in which the PE is situated’ are the words of significance which, in our opinion, would only mean that the expenditures incurred by the non-resident assessee for the purpose of business of the PE in India would be allowable in accordance with the provisions of domestic law i.e. Income Tax Act 1961. The provision of section 28 to 44C of the Act permits or allows deductions in respect of the expenditure incurred by the assessee for the purpose of business. However, such provisions cannot be read in isolation. Section 44D of the Act is a non-obstante provisions and specifically overrides the provisions contained in sections 28 to 44C. Therefore, such provisions must be read along with the provisions of section 44D, of the Act. According to section 44D, the deductions permitted u/s. 28 to 44C are not to be allowed while computing income by way of royalty and fees for technical services. Thus, the combined reading of these provisions leads to only one conclusion that no deduction is to be allowed against the receipts by way of royalties or fees for technical services in case of non-resident company, even if the business profits in respect of such income are to be computed under Article 7 of the DTAA.
