Assessee can choose between treaty rate & 115A

Section 115A; vs DTAA rate; Assessee can choose between treaty rate and 115A for different agreements before and after 1.6.2005

As per the Income Tax Act the tax on royalty income in respect of agreements entered into before 1.6.2005 is 20% and the rate of tax in respect of agreements entered into on or after 1.6.2005 is 10%.

As per Article 12 of the India-USA DTAA Treaty, royalty income is chargeable to tax @ 15%. We have held that the provisions of section 115A, concerning the taxability of royalty income are separate and independent and  therefore, consequently, the assessee is justified in comparing the rate of 10% and 20% (as per section 115A) separately and independently with the rate of 15% (as per Article 12 of the India-USA DTAA Treaty). Between the rate of 20% as per section 115A and 15% rate as per Article 12 of the Treaty, the assessee computed tax @ 15% being the rate beneficial to it. Similarly between 10% tax rate as per section 115A and 15% tax rate as per Article 12 of the Treaty, the assessee has computed tax @  10% which is beneficial to it. The assessee, in our view, is justified in computing the tax at a rate beneficial to it which is in accordance with the provisions of section 90(2) of the Act wherein the expression ‘to the extent’ reinforces the principle that the provisions of the Act or Treaty whichever is beneficial is applicable to the assessee.

Assessee has not invoked or applied the provisions of the Treaty selectively. The assessee has computed the tax on royalty income arising from two different contracts falling under two different limbs of section 115A(1)(b) at two rates : (i) At the rate prescribed under the Treaty and (ii) at the rate prescribed under the I.T. Act. The assessee has invoked the benefit of the Treaty only in respect of royalty income arising  from the agreements entered into on or before 1.6.2005. In respect of agreements entered into on or after 1.6.2005, the assessee has offered royalty income @ 10% as per the provision of section 115JA. The concerned contracts are different; the source of income is different and the provisions under which royalty income is taxable is different and the assessee was therefore justified in offering the royalty income arising under two different contracts at two  rates – one under the I.T. Act and one under the Treaty. In the instant case, it is not one of selective Treaty benefit as the case before the Mumbai Tribunal in the above referred case. The above decision is therefore, distinguishable from the instant case of the assessee.

There is merit in the contention of the learned A.R. on the aspect of principle of consistency also. In the instant case, it is seen that the Assessing Officer has accepted the computation of tax based on different rates in the assessment orders passed u/s. 143(3) for Asst. Year 2006-07 whereas the very same officer has concluded differently in respect of the same facts and same issue in the order of assessment passed u/s.143(3) for A.Y. 2007-08. This, in our opinion, it is contrary to the rule of consistency as laid down by the Hon’ble Apex Court in the case of Radhasoami Satsung Vs. CIT (193 ITR 321)

INCOME TAX APPELLATE TRIBUNAL, BANGALORE

I.T.A. No.759/Bang/2011 & S.P.No.50/Bang/2012

(Assessment Year : 2007-08)

M/s. IBM World Trade Corporation

Vs.

Dy. Director of Income Tax, International Taxation

Date of Pronouncement: 13.04.2012.

O R D E R

Per Shri Jason P. Boaz :

This appeal is directed against the order of the Commissioner of Income Tax (Appeals)- IV, Bangalore dated 26.7.2011 for the Assessment Year 2007-08.

2. The facts of the case, in brief, are as under :

2.1 The assessee is a foreign company incorporated in the United States of America and is a non-resident under the Income Tax Act, 1961. For the Assessment Year 2007-08, the return of income was filed electronically on 30.10.2007 declaring an income of Rs.50,72,30,070. Subsequently, the assessee filed a revised return of income on 31.3.2005 declaring a total income of Rs.208,01,76,260 and the taxes on the revised total income amounting to Rs.26,9042,413 was discharged by way of TDS amounting to Rs.23,82,53,287 and self assessment tax of Rs.3,07,89,125.

2.2 The break up of total income as per the revised return of income and taxes thereon are as under :

 In respect of royalty income of Rs.50,72,32,073 received from IBM India P. Ltd., it was in respect of ‘Marketing Royalty Agreement’ between the assessee and IBM India Pvt. Ltd. Dt.1.6.2005. The receipts from sale of software to third parties amounting to Rs.43,85,11,114 were received pursuant to agreements entered into between the assessee and various parties on or after 1.6.2005. The royalty received towards ESW was in respect of the ‘IBM Software Remarketer Agreement’ entered into between the assessee and IBM India Pvt. Ltd. on 1.10.2004 which is before 1.6.2005.

2.3 The assessee-company computed tax on royalty of Rs.50,72,32,070 from IBM India Pvt. Ltd. and royalty on sale of software to third parties @ 10.455 % as per section 115A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for agreement entered into on or after 1.6.2005 as against the rate of tax on royalty as per Article 12 of the DTAA between India and USA which is 15%, on the ground that the rate of tax as per section 115A was beneficial to it. In respect of royalty towards ESW amounting to Rs.113,44,33,077 the tax was computed @ 15% as per Article 12 of the DTAA between India – USA as against the tax rate of 20% as per section 115A for agreements entered into prior to 1.6.2005, as the rate of tax as per Article 12 of the DTAA between India – USA was beneficial to the assessee-company. The return of income for the relevant year was selected for scrutiny and notice under section 143(2) was issued on 14.8.2008. Since the value of international transactions in the relevant period were in excess of Rs.15 crores, reference was made to the Transfer Pricing Officer (TPO) to compute the Arms Length Price. The TPO after examining the issue passed an order under section 92CA on 20.10.2010 accepting the computation of ALP of international transactions and did not recommend any adjustment. The Assessing Officer completed the assessment by an order under section 143(3) of the Act on 30.12.2010. In the order of assessment, the Assessing Officer observed that the assessee is offering the royalty income to tax both under section 115A of the Act as also as per Article 12 of the India – USA DTAA and that the assessee could not furnish a copy of the agreement between it and other parties. The Assessing Officer did not accept the tax determined by the assessee @ 10.455% based on agreements entered into on or after 1.6.2005, but determined the tax payable @ 15% for all agreements entered into by the assessee during the relevant period. This led to the raising of tax demand payable at Rs.6,97,16,210 which was inclusive of interest charged under section 234B of the Act.

2.4 Aggrieved the assessee filed an appeal before the CIT(A) in which it challenged both the Assessing Officer’s computation of tax @ 15% on the entire income of the relevant period and    also charging of interest under section 234B of the Act. The learned CIT(A) after considering the submissions made by the assessee passed the appellate order on 26.7.2011 holding that the income which is assessable cannot be split to find out whether the provisions of the Act are beneficial or whether the provisions of the Treaty are beneficial and that the assessee has to either opt for the provisions of the Act or the provisions of the Treaty considering the fact that the Act and Treaty are independent and separate codes. The table of taxes at page 7 of the order of the learned CIT(A) is as under :

 2.4.1 The assessee computed tax on royalty as per the Act and as per the Treaty in respect of each stream of income and paid tax of Rs.26,90,42,412. The learned CIT(A) was of the opinion that the tax on income @ 15% as per the Treaty, at the aggregate level, amounting to Rs.31,20,26,440 was less than the tax on entire income as per rates under section 115A amounting to Rs.33,09,25,735 and concluded that the provisions of the Treaty are beneficial to the assessee. The judicial decisions and circulars relied on by the assessee were distinguished and the learned CIT(A) relied on the decision in the case of Dresdner Bank Ag. Vs. Addl. CIT (105 TTJ 149) (Mum) and DCIT Vs. Patni Computers Systems Ltd. (109 TTJ 742) (Pune) in concluding that the assessee cannot split the income into different segments to avail the benefit partly under the Act and partly under the Treaty.

2.4.2 In respect of the charge of interest under section 234B of the Act, the learned CIT(A) was of the view that the assessee ought to have computed tax @ 15% and not @ 10.455%, should have estimated the shortfall and voluntarily paid the advance tax. The decision of the Tribunal in assessee’s own case for an earlier year was distinguished by the learned CIT(A) on the ground that the rate of tax as per Treaty and rate of TDS as per the Finance Act are not uniform for the relevant period. Learned CIT(A), accordingly upheld the charging of interest under section 234B of the Act. In the result the assessee’s appeal was dismissed.

3.0 Aggrieved the assessee is in appeal before us. The grounds of appeal raised by the assessee are as under :

“ 1. The learned CIT(A) has erred in passing an order which is bad in law and on facts.

Application of blanket rate of tax

2. The learned CIT(A) has erred in law and on facts in upholding the contention of the learned Assessing Officer and applying a blanket rate of 15 percent on the total income returned by the appellant disregarding the fact that of the total income reported by the appellant, an amount of Rs.945,743,187 was liable to tax at the rate of 10.455 percent as per the provisions of section 115A of the Income Tax Act, 1961 (“the Act”)

3. The learned CIT(A) has erred in law and on facts in interpreting the provisions of section 90, section 115A of the Act and the corresponding provisions of the relevant agreement for avoidance of double taxation (DTAA).

4. The learned CIT(A) has erred in law and on facts in disregarding the Circular issued by the CBDT (Circular 728 dated October 30, 1995) which allows an assessee to take into account the lower rates prescribed by the applicable DTAA.

5. The learned CIT(A) has erred in law and on facts in applying a blanket rate of tax of 15 percent, disregarding the fact that for the previous Assessment Year 2006-0 7, the learned Assessing Officer had accepted the beneficial rates of tax applied by the appellant (at the rate of 10.455 percent and 15 percent), although there was no change in-law during the subject Assessment Year 2007-08.

Levy of interest under section 234B of the Act

6. The learned CIT(A) has erred in law and on facts in holding that the appellant is required to pay advance tax under section 209 of the Act and therefore erred in confirming section 234B interest levy.

7. The learned CIT(A) has erred in law and on facts in disregarding the order passed by the Hon’ble Income Tax Appellate Tribunal in the appellant’s own case for the Assessment Year 2003-04, Assessment Year 2004-05 and Assessment Year 2005-06.”

3.1 The grounds of appeal at S.No.1 is general in nature and no separate adjudication is called for thereon. The grounds of appeal at S.Nos.2 to 5 deal with the correctness or otherwise of the application of blanket rate of tax as per Treaty on the entire income for the relevant period. Grounds at S.Nos.6 and 7 challenge the charging of interest under section 234B of the Act.

4.1 Ground Nos.2 to 5 : The learned Authorised Representative has submitted written submissions and also made arguments in order to demonstrate that the assessee’s claim is correct and in accordance with law. The gist of the submissions of the learned Authorised Representative are as under :

i) Section 115A(1)(6) deals with different sources of income based on the nature of income and date of agreement and each sub-clause thereto is separate, independent, are mutually exclusive and do not overlap, incorporating a separate tax rate. The tax so computed separately under each sub-clause is to be aggregated as mandated by the last portion of section 115A(1)(b) which states “ …. The income tax payable shall be the aggregate of ” CBDT Circular No.202 dt.5.7.1976 confirms the proposition that the rate of tax in respect of royalties depends on the date of agreement. Therefore, it is contended that the assessee was correct in computing the tax on royalties at different rates based on the date of agreement.

ii) The computation of income into four specific heads under section 14 depends on the source from which it arises. The fifth is a residuary head of income and is titled as ‘income from other sources.’ The source of royalties is the lessee’s covenant to pay them as held by in Raja Bahadur Kamakshya Narain Singh of Ramgarh Vs. CIT (1943) 11 ITR 513 (PC) and Hart (Inspector of Taxes) Vs. Sangster (1957) 34 ITR 303 (CA). Each agreement pursuant to which royalty is received by the assessee constitutes an independent source and the tax rates mentioned in section 115A depend upon the period during which the agreement was made and the date of such agreement. It thus envisages the computation of tax at two different rates in respect of two different sources of income. The learned Authorised Representative referred to the decision of the Hon’ble Apex Court in the case of Raja Rameshwar Rao Vs. CIT (1963) 49 ITR 144 wherein it was held that the statute could be the only source of income.

iii) It was submitted by the learned Authorised Representative that computation of income source-wise is well recognized under the Act. He referred to section 70 wherein loss from one source is eligible for set off against the other source within the same head of income.

iv) The learned Authorised Representative referred to section 111A, 112 and 115BB which levy of tax on different sources of income in support of the contention that tax needs to be computed separately in respect of income from different streams of income.

v) The learned Authorised Representative referred to relevant portion of the income tax return which provides for disclosure of income chargeable to tax at special rates and submitted that stream wise computation of tax is prescribed by the income tax return as well. He placed reliance on the decision of the Hon’ble Apex Court in the case of CIT Vs. P.K. Kochammu Amma    Peroke (1980) 125 ITR 624 in support of his argument that the form prescribed by the Income Tax Department cannot be ignored as the interpretation of law contained therein is a reflection of the executive opinion in the matter.

vi) The learned Authorised Representative further submitted that by providing separate tax for individual streams of income, the Act has created a conscious departure from the traditional concept of income tax representing one tax on total income and not a conglomeration of taxes on different streams of income.

vii) CBDT Circular No.636 dt.31.8.1992 explaining the intention of the legislature in defining the term ‘rates in force’ was referred to. This circular provides that deduction of tax from payments to non-residents is to be made at the rate specified in the Treaty or in the annual Finance Act, whichever is beneficial. Placing reliance on this, the learned Authorised Representative submitted that one has to compare the rate as per the Act and as per the Treaty every time a tax is computed in respect of incomes falling in different sub-clauses of section 115A(1)(b).

viii) Relying on the provisions of section 90(2) and CBDT Circular No.333 dt.2.4.1982, the learned Authorised Representative submitted that the provisions of a Treaty are to be examined for each and every source of income. It was argued that the provisions of the Treaty are to be applied to relieve or reduce the tax liability, to grant relief and not impose the tax liability over and above the domestic tax laws. It was submitted that the expression ‘to the extent’ in section 90(2) confirms the proposition that the provisions of the Act or the Treaty, whichever is beneficial, are to be considered.

ix) Relying on the decision in the case of Foramer SA Vs. DCIT (1995) 52 ITD 115 (Del) and Circular No.728 dt.30.10.1995, it was argued that –

a) the provisions of the Act are applicable if they are more beneficial than the Treaty;

b) the choice of availing the benefit under the Treaty is with the assessee and not with the Revenue authorities.

c) under section 115A, every source of income has a separate rate of tax;

d) the tax rate for each source has to be compared with the rate of tax under the Treaty and

e) tax has to be computed in respect of income from each source at the rate which is beneficial to the assessee.

x) The learned Authorised Representative referred to the use of the expression ‘ and’ in sub-clause (A) of section 115A(1)(b) and submitted that the computation of tax under various sub-clauses of section 115A()(b) is different and separate.

xi) The learned Authorised Representative referred to the use of the expression “and” in sub-clause (A) of section 115A(1)(b) and submitted that the computation of tax under various sub-clauses of section 115A(1)(b) is different and separate.

xii) The learned Authorised Representative referred to various instances where different rates could be adopted for each stream of income from royalty and fees for technical session. These instances are as under :

“ A. Receipt of royalty income from two different countries :

Tax Treaties are bilateral agreements between two countries seeking to eliminate double taxation or granting relief there from. If royalty income is received from two different countries, the Treaty applicability will have to be examined individually and separately for each country. The choice (for an assessee) to be governed either by the Act or Treaty will depend upon the rate prescribed under the each of the Treaties for the relevant stream of income.

It is possible that the assessee could chose to be governed by the tax rate under the Treaty with one country and the rate in the domestic law in respect of the income from another country. This could be so even though the income pertains to the same time period. If a different choice as above could be exercised for the income of the same period, such choice cannot be denied when incomes are earned in different time periods.

B. Royalty income from two different companies from the same country :

What is true of the choice when income is received from two countries, would equally be valid when royalty is received from two different companies from the same country.

It is possible for an assessee to choose to be governed by the tax rate under the Treaty in respect of income from one company and the rate in the domestic law in respect of similar income from another company. This could be so even though the two sources pertain to the same nature of income. To reiterate, if a choice could be exercised for income earned from different countries, such choice cannot be denied when incomes are earned from the same country, but, pursuant to separate agreements.

C. Income from royalty & FTS from same company :

Extending the above logic further, there could be instances where income is received from the same company but under two agreements (revenues), whether for the same or different periods.

It is possible that the assessee could choose to be governed by the tax rate under the Treaty for one stream of income and the rate in the domestic law in respect of the another stream of income. This could be so even though the two sources pertain to the same head of income.

D. Income from royalty & FTS for two different periods.

For the reasons already detailed, income derived from royalty and fees for technical services would be governed by the tax rates prevailing during the staid period. The assessee has a choice to opt for being governed by the rates in either the Act or the Treaty. This being the case, the Assessing Officer’s action of adopting   only the Treaty rates for income from pursuant to agreements entered into before as also after June 1, 2005 is not a correct proposition of law. These incomes constitute distinct cases which mandate an independent and separate evaluation from both Tr5eaty as well as the Act perspective. Mere fact that for one income stream, the Treaty rate is adopted, the assessee cannot be compelled to adopt the same rate for the other stream as well.”

xii) The learned Authorised Representative referred to the Memorandum explaining the provisions of section 90(2) on its introduction by the Finance (No.2) Act of 1991, submitting that the beneficial provision of domestic law cannot be denied merely because the corresponding provision in the tax Treaty is less beneficial. It was submitted that the assessee cannot be burdened with a detrimental rate relying upon the erstwhile higher rate in the domestic law or a provision that such rate shall not be capable of being disturbed for the entire year. The relevant interest extract from the Memorandum relied on by the learned Authorised Representative is as under :

“ Tax Treaties generally contain a provision to the effect that the laws of the two Contracting States will govern the taxation of income in the respective State except when express provision to the contrary is made in the Treaty. It may so happen that the tax Treaty with a foreign country may contain a provision giving concessional treatment to any income as compared to the position under the India law existing at that point of time. However, the Indian law may subsequently be amended, reducing the incidence of tax to a level lower than what has been provided in the tax Treaty.

Since the tax Treaties are intended to grant tax relief and not to put residents of a contracting country at a disadvantage, vis-à-vis, other tax payers, it is proposed to amend section 90 of the Income Tax Act to clarify that any beneficial provision in the law will not be denied to a resident of contracting country merely because the corresponding provision in the tax Treaty is less beneficial.”

xiii) The learned Authorised Representative referred to different rates of tax in respect of royalties and fees for technical services based on the date of agreement which are as follows : – Period between 1.4.1976 to 31.5.1997 – rate of tax 30%   – Period between 1.6.1997 to 31.5.2005 – rate of tax 20%.

– Period on or after 1.6.2005 – rate of tax 10%

It was submitted that the cut off dates of the above period are in between a financial year and do not run in tandem or coincide with any financial year. It was submitted that in a given year, there could be income arising from agreements relating to two separate time periods and this results in two separate tax rates in force for that year. In such a case, it was argued that the comparison with the tax Treaty provisions has to be made for each of the period separately and the tax rate adopted for one period should not be automatically applied for the other period.

xiv) Referring to the OECD and U.N. Treaty models and the commentary on double taxation convocation by Prof. Klaus Vogel, it was submitted that classification of income besides the Treaty is based on the type and source of income. The relevant interact from Prof. Vogel’s commentary relied on by the assessee is as follows :

“ First, rules referring to income from certain activities – there are four such activities : business (Article 7), independent personal services (Article 14), dependent personal services (Article 15), agriculture and forestry (Article 6);

Second, rules referring to income from certain assets — four again; dividends (Article 10), interest (Article 11), royalties (Article 12) and immovable property (Article 6);

Third rules referring to capital gains – four according to the four paragraphs of Article 13;

Fourth, a rule referring to students (Article 20) and residuary rule (catch-all clause) referring to income not dealt with in the foregoing three categories (Article 21)”

xv) The learned Authorised Representative finally submitted that the assessment order passed under section 143(3) for the preceding year i.e. Assessment Year 2006-07 was passed by the very same officer accepting the computation of tax determined in the similar manner as determined for the relevant year under consideration. It was contended that since there is no    change in the facts of the case for both the years, Revenue cannot take a different stand for the year under consideration. The following decisions were relied on in support of his argument/contention.

– CIT Vs. Sridev Enterprises (1991) 192 ITR 165 (Kar)

– Hoystead Vs. Commissioner of Taxation (1926) AC 155, 165 (PC).

– Radhasoami Satsang Vs. CIT (1992) 193 ITR 321 (SC)

4.2 In respect of the charging of interest under section 234B, the learned Authorised Representative relied on the orders for the earlier years in the assessee’s own case in which it was held that the assessee is not liable for interest under section 234B.

4.3 In view of the above arguments, the learned Authorised Representative submitted that the computation of tax as determined by the assessee be accepted and charge of interest under section 234B be deleted thereby allowing the assessee’s appeal.

5. The learned Departmental Representative supported the orders passed by the Assessing Officer and the CIT(A). He also filed written submissions explaining in detail as to why the orders passed by the Assessing Officer and CIT(A) in the instant case ought to be confirmed. The learned Departmental Representative referred to the decisions of CIT Vs. ITC (2002) 82 ITD 239 (Kol), Addl. DIT Vs. Telecom International P. Ltd 60 DTR 177 and Union of India Vs. Azadi Bachao Andolan 363 ITR 706 (SC) and submitted that the provisions of the Treaty override the provisions of the Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income except to the extent the latter are more beneficial to the    assessee. The learned Departmental Representative referred to the table quoted at page 7 of the CIT(A)’s order which is as under :

Referring to the above, the learned Departmental Representative submitted that the total tax computed as per the Treaty amounting to Rs.31,20,26,440 is less than the total tax computed under the Act amounting to Rs.33,09,25,735. It was submitted that as the provisions of the Treaty are beneficial to the assessee, therefore the amount of tax as per the rate prescribed under the Treaty is to be adopted. The learned Departmental Representative reiterated the findings of the CIT(A) that (a) income for the same year cannot be charged both under section 115A and Article 12 of the DTAA and (b) once the provisions of either the Act or the DTAA are found beneficial to the assessee, the same would govern the tax computation without splitting the income into different segments or sources. The learned Departmental Representative also relied on the decision in the case of Dresdner Bank Ag. Vs. Addl. CIT 105 TTJ 149 (Mumbai) and DCIT Vs. Patni Computer Systems Ltd. 109 TTJ 742 (Pune) in support of the findings of the lower authorities that the assessee cannot split the income into different segments to avail the benefit partly under the Act and penalty under the Treaty.

5.2 In support of the charging of interest u/s. 234B, the learned Departmental Representative relied on the findings of the CIT(A) and on the observation of the Bangalore Bench of the Tribunal in the order dt.19.5.2010 in the assessee’s case, that since the rate of tax for advance tax and TDS is the same, there would be no liability under section 234B if tax is deductible from the income. The learned Departmental Representative submitted that since the rate for advance tax at 15% is more than the TDS rate under section 115A which is 10%, the assessee is liable to be charged interest under section 234B. In view of the above arguments, the learned Departmental Representative prayed that the order of the learned CIT(A) be confirmed and the assessee’s appeal be dismissed.

6. The learned Authorised Representative, in rejoinder, submitted a note and argued that the decision relied on by the learned Departmental Representative are distinguishable both on facts and in law. It was submitted that the decision in the case of Dresdner Bank AG Vs. ACIT (2007) (108 ITD 375) (Mum) is distinguishable as in the said case, the assessee accepted the charge of tax and computation of income under the provisions of the Act and argued for the adoption of the rate of tax as per the Treaty. It was contended that there is no selective Treaty benefit in the instant case as was the position in the case before the Mumbai Tribunal. The relevant submissions of the assessee were as under :

“ The Tribunal in para 78 of the judgment made the aforesaid observation in the context of the same income being offered to tax under ‘normal provisions for regular income computation’ and ‘Treaty provisions for MAT computation’. The Tribunal laid down that different Treatment cannot be given for each income segment.

Under the broad scheme of the Income Tax Act, section 4 creates the charge. It provides that tax shall be charged for any assessment year at any rate or rates prescribed by the Finance Act. This charge of tax is in respect of the total income of the previous year of every person. Section 2(45) defines total income. Chapter II of the Act deal with the basis of charge (sections 4 to 9) Chapter III of the Act, deals with income which do not form part of total income. Chapter IV deals with the computation of total income. Thus, Income Tax Act is an integrated scheme which deals with the charge, computation and rate at which the subject income is to be   taxed. The Mumbai High Court in the case of B.M. Kamdar, IN RE (1946) 14 ITR 10 (Mum) observed as under –

“ The correct method of approach in my judgment is to Treaty nothing as being charged to tax until by the process of computation laid down by the Act, the status of income, profits and gains emerges.”

Once the charge is satisfied and income becomes liable to tax, rates as prescribed by the relevant Finance Act are to be applied to determine the ultimate tax outflow.

Double Taxation Avoidance Agreements (“DTAA”) are designed among others to provide relief in case of double taxation of the same income. Tax Treaties in force are organized into different chapters according to the ‘types of income”. Tax Treaties thus contain classification and assignment rules known as the distributive rule for avoiding or granting relief from double taxation. The tax rate under the Treaty is determined based on the type and source of income.

The three stages of charge, computation and rate of tax are to be determined either under the Act or the Treaty. In the case before the Mumbai Tribunal, the banking company sought to crystallize on the charge and computation as per the scheme under the Act. However, it derived that the rate of tax was to be as per the Treaty. The Tribunal held that when the charge and computation is determined under the domestic scheme of tax, the rate of tax also is to be determined under the domestic tax provisions.

The above case however does not have a bearing on the appellant’s case. The issue for the appellant is whether each source of income can be computed and tax determined either under the Treaty or the domestic tax laws. The appellant is not seeking the aspects of charge, computation or rate of tax for the same source being spread over both the Act as well as the Treaties. On the other hand, the appellant’s arguments relating to charge, computation and rate for each stream of income are solely confined to either the provisions of the Act or the Treaty.

The issue before the Mumbai Tribunal was on the selective Treaty protection. Paragraph 77 of the Tribunal’s order reads as follows :

“77. Learned Departmental Representative’s objection is that since the assessee has specifically given up his option to be assessed to tax as per the provisions of the tax Treaty. It cannot be open to the assessee to seek protection of the tax Treaty for the purposes of levy of Minimum Alternate Tax (MAT, in short) under section 115JA. This kind of selective Treaty protection, according to the learned Departmental Representative, is not permissible in law. It is also contended that the levy of MAT under section 115JA is an integral part of the income computation process, and once the assessee has himself opted that his income be computed in accordance with the provisions of the Act, he cannot turn back and seek Treaty protection for the limited   purposes of applicability of MAT. For the reasons, we shall now state, it is not necessary to go any deeper so far as this line of argument is concerned.”

The observations of the Tribunal on segment wise computation are to be understood in the background of the facts before it. The Tribunal did not agree to the charge and computation being governed by the Act, and the rate of tax being dependent upon the Treaty.

It is a trite law that a judgment has to be read in the context of a particular case. A judgment cannot be applied in a mechanical manner. A decision is a precedent on its own facts. The judgment must be read as a whole. The observation in the judgment have to be considered in the light of the questions raised before the Court. A decision of the Court takes it s colour from the questions involved in the case in which it is rendered. While applying the decision to a latter case, one must ascertain the true principle laid down by the decision and not pick out words or sentences from the judgment, divorced from the context of the questions raised.”

In view of the above it is submitted that the decision in the Dresdner Bank AG Case (supra) is distinguishable both on facts and in law.

6.1 The learned counsel for the assessee submitted that the decision in the case of Patni Computer Systems Ltd. (supra) was distinguishable as the facts of that case and the facts of the assessee’s case were different. It was submitted that –

“ The facts before the Pune Tribunal are substantially different from the appellant’s case. Some of the distinguishing facts are – (i) in the case before the Pune Tribunal, there was no income earned by the assessee (only losses had been suffered); (ii) the issue was on taxability of a PE and not royalty income, (iii) there were no different streams of income; (iv) there was no issue of such streams of income being regarded as independent sources of income; (v) there was no issue of the streams of income being susceptible to tax at varying rates depending upon the date of the agreement giving rise to such incomes.

In view of the substantial difference in facts and ratio of the Pune Tribunal’s decision and some of the observations there under (sought to be relied upon by the Revenue) would not be relevant for the case of the appellant.”

7.1 We have carefully perused and given due consideration to the detailed arguments made and written submissions filed by both the learned Authorised Representative and the    learned Departmental Representative. It is a settled position that as per section 90(2), the provisions of the Act or the provisions of the Treaty, whichever is beneficial, apply to the assessee. Even the learned Departmental Representative has agreed that in view of section 90(2), the provision of the tax Treaty override the provisions of the Act except to the extent the latter are more beneficial to the assessee. The question for consideration is at what stage the provisions of the Act and the Treaty should be examined to ascertain the beneficial nature of the provisions. In the instant case, the assessee has compared the provisions of the Act and the Treaty in respect of income arriving from royalty on the basis of agreements entered into before 1.6.2005 and thereafter 1.6.2005. Revenue, on the other hand, has compared the provisions of the Act and Treaty on an aggregate basis disregarding the future of agreements having been entered into before 1.6.2005 and after 1.6.2005. The assessee’s argument is that the provisions of the Act and Treaty are to be compared in respect of each source of income whereas Revenue is of the view that the said comparison is to be made at the aggregate level.

7.2 In the instant case, there is, no dispute that the assessee has entered into ‘Marketing Royalty Agreement’ with IBM India Pvt. Ltd. on 1.6.2005 (Page 51 of the paper book). Agreements have also been entered into with other parties, for example Infosys Technologies Ltd. on 27.12.2006 (page 61 of paper book) and Centre for Development of Advanced Computing on 28.9.2006 (page 70 of paper book). There is another agreement i.e. IBM Software Remarket Agreement’ between the assessee and IBM India Pvt Ltd dt.1.10.2004 i.e. before 1.6.2005 (page 114 of paper book).

7.3 As per the provisions of section 115A(1)(b), the rate of tax on royalty payments in connection with the agreements entered into before 1.6.2005 is20% and the tax rates for agreements entered into on or after 1.6.2005 is 10%. These tax rates have been prescribed separately under sub-clause (A) and sub-clause (B). Therefore, depending on the nature of receipt viz. royalty or fees for technical services and the date of the agreement i.e. before 1.6.2005 or on or after 1.6.2005, the foreign company has to compute the tax separately under each of the sub-clauses (A), (AA), (B), (BB) and (C) of sections 115A(1)(b). Each of these sub-clauses are mutually exclusive and independent of each other and create or provide for a charge of income tax under section 4 of the Act. A foreign company has to, therefore, compute tax on its income under each of the above sub-clause separately and the tax so computed has to be aggregated as per the mandate of section 115A(1)(b) which provides that’ the income tax payable shall be the aggregate of.’

7.4 The above expression which provides for the aggregation of tax computed under each of the sub-clauses (A), (AA), (B), (BB) and (C) indicate that the charge of tax provided under the above sub-clauses are separate and independent. The arguments of the learned Authorised Representative support a proposition that the computation of tax under section 115A in respect of royalty income based on the date of agreements is separate and independent. We are inclined to accept the argument of the learned Authorised Representative that royalty income in respect of the agreement entered into before 1.6.2005 are from one ‘source’ and royalty income in respect of agreements entered into on or after 1.6.2005 are from a different ‘source’. The contracts or agreements being the source of income have been entered into on different dates and the statute recognizes such time differentiation and provides separate tax rates for each such stream. The learned CIT(A) was, therefore, not correct in comparing the tax on royalty income as per the Act and as per the Treaty on an aggregate basis. In view of the    above, we are of the considered opinion that the taxability of royalty under sub-clauses (A), (A), (B), (BB) and (C) of section 115A(1)(b) are separate and independent.

7.5 As per the provisions of section 90(2) of the Act OR the provisions of the Treaty, whichever is beneficial, applies to the assessee. It is settled law that the provisions of a Treaty would override the provisions of the Income Tax Act, 1961 and this view has been held in the following cases and circulars.

– Union of India Vs. Azadi Bachao Andolan (2003) 263 ITR 706 (SC)

– CIT Vs. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP)

– CIT Vs. R.M. Muthaiah (1993) 202 ITR 508 (Kar)

– CBDT Circular No.333 dt.2.4.1982 137 ITR (St.) 1.

– Advance Ruling P.No.13, (1997) 228 ITR 487 (AAR).

In the instant case, as per the Act the tax on royalty income in respect of agreements entered into before 1.6.2005 is 20% and the rate of tax in respect of agreements entered into on or after 1.6.2005 is 10%. As per Article 12 of the India-USA DTAA Treaty, royalty income is chargeable to tax @ 15%. We have held that the provisions of section 115A, concerning the taxability of royalty income are separate and independent and therefore, consequently, the assessee is justified in comparing the rate of 10% and 20% (as per section 115A) separately and independently with the rate of 15% (as per Article 12 of the India-USA DTAA Treaty). Between the rate of 20% as per section 115A and 15% rate as per Article 12 of the Treaty, the assessee computed tax @ 15% being the rate beneficial to it. Similarly between 10% tax rate as per section 115A and 15% tax rate as per Article 12 of the Treaty, the assessee has computed tax @ 10% which is beneficial to it. The assessee, in our view, is justified in computing the tax at a    rate beneficial to it which is in accordance with the provisions of section 90(2) of the Act wherein the expression ‘to the extent’ reinforces the principle that the provisions of the Act or Treaty whichever is beneficial is applicable to the assessee.

7.6 The learned CIT(A) and the learned D.R. have both placed reliance on the decisions in the case of Dresdner Bank AG Case (supra) and Patni Computer Systems Ltd (supra) in support of the conclusion that the determination of tax by the assessee is not correct. In the case of Dresdner Bank AG Case (supra), the assessee was a non-resident banking company incorporated in Germany and operating in India through its branch office in Mumbai. The issues before the Tribunal were with regard to (i) computation of income chargeable to tax in India under regular provisions and (ii) the applicability of section 115A to a foreign company. In respect of the first issue, it was submitted that the assessee does not want to invoke the Treaty provisions and the matter is to be adjudicated based on the provisions of the Act. The Tribunal accordingly decided the issue of taxability of income under the provisions of the Act. In respect of the second issue, the assessee submitted that the provisions of section 115JA do not apply to a foreign company. The Tribunal did not accept this contention. The assessee then submitted that assuming the provisions of section 115JA were applicable, it is not liable for MAT under the Treaty. The Tribunal found that the assessee sought to avail the benefit of the Treaty selectively in respect of taxability of book profit u/s. 115JA and held that once the assessee exercises an option to be taxed under the provisions of the Act, Treaty provisions cannot be invoked. The relevant observations of the Tribunal were as follows :

“ Either an assessee is to be assessed to tax on the basis of the provisions of the tax Treaty or not. In our considered view, the assessment of income cannot be split into several segments and then the applicability of Treaty provisions, vis-à-vis tax law provisions, cannot be separately considered for each segment. Liability for MAT  under section 115JA is an integral part of assessee’s assessment of income, and, once the assessee chooses to be assessed as per provisions of the Act, in preference over the provisions of the tax Treaty, it cannot be open to the assessee to seek Treaty protection in respect of one of the aspects of the assessment if the income i.e. applicability of MAT under section 1 15JA.”

In the above decision, while the assessee accepted the applicability of the provision of the Act in respect of charge of income tax and computation of total income, when it came to the rate of tax, the assessee submitted that the Treaty provisions should be made applicable thereby seeking a selective Treaty benefit. In the instant case on hand, the assessee has not invoked or applied the provisions of the Treaty selectively. The assessee has computed the tax on royalty income arising from two different contracts falling under two different limbs of section 115A(1)(b) at two rates :

(i) At the rate prescribed under the Treaty and (ii) at the rate prescribed under the I.T. Act.

The assessee has invoked the benefit of the Treaty only in respect of royalty income arising from the agreements entered into on or before 1.6.2005. In respect of agreements entered into on or after 1.6.2005, the assessee has offered royalty income @ 10% as per the provision of section 115JA. The concerned contracts are different; the source of income is different and the provisions under which royalty income is taxable is different and the assessee was therefore justified in offering the royalty income arising under two different contracts at two rates – one under the I.T. Act and one under the Treaty. In the instant case, it is not one of selective Treaty benefit as the case before the Mumbai Tribunal in the above referred case. The above decision is therefore, distinguishable from the instant case of the assessee.

7.7 In the case of Patni Computer Systems Ltd (supra), revenue argued that the losses of a foreign branch cannot be set off in computing the income of the assessee by virtue of Article 7    of the DTAA between India and Japan. The Tribunal held that the provisions of the Treaty cannot be thrust upon the assessee and the assessee be denied the Income Tax Act being applicable in its case. The facts of the case and the ratio of the decision, in our considered opinion, has no similarity to the instant case of the assessee. In the referred case, the issue pertained to set off of losses of foreign branch. In the year of loss, the assessee submitted that the provisions of the Act would prevail and as a result the loss of the foreign branch has to be set off in computing the taxable income in India. In the year of profit, relying on Article 7 of the India – Japan DTAA Treaty, the assessee submitted that the profits of the foreign branch would suffer tax only in that country and not in India. The Department objected to this selective Treaty application for different years. The Tribunal held that each year is different and hence the assessee is entitled to such applicability of the Act for one year and Treaty benefits for a different year. In the instant case, the issue in question is not with regard to taxability of royalty income at different rates under the Treaty and the Act. The above decision is not similar or applicable to the facts of the case on hand and is distinguishable both on facts and in law.

7.8 There is merit in the contention of the learned A.R. on the aspect of principle of consistency also. In the instant case, it is seen that the Assessing Officer has accepted the computation of tax based on different rates in the assessment orders passed u/s. 143(3) for Asst. Year 2006-07 whereas the very same officer has concluded differently in respect of the same facts and same issue in the order of assessment passed u/s.143(3) for A.Y. 2007-08. This, in our opinion, it is contrary to the rule of consistency as laid down by the Hon’ble Apex Court in the case of Radhasoami Satsung Vs. CIT (193 ITR 321) wherein it has held as under :

“ We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.”

7.9 The Hon’ble Karnataka High Court in CIT Vs. Sridev Enterprises (192 ITR 165) observed that –

“ Regarding the past years, the assessee’s claims for deduction were allowed in respect of the sums advanced during those years; this could be only on the assumption that those advances were not out of borrowed funds of the assessee. This finding during the previous years is the very basis of the deductions permitted during the past years, whether a specific finding was recorded or not. A departure from that finding in respect of the said amounts advanced during the previous year would result in a contradictory finding; it will not be equitable to permit the Revenue to take a different stand now in respect of the amounts which were the subject matter of previous years’ assessments; consistency and definiteness of approach by the Revenue is necessary in the matter of recognizing the nature of an account maintained by the assessee so that the basis of a concluded assessment would not be ignored without actually reopening the assessment.”

7.10 Even if the issue in the instant case is capable of two interpretations, the Hon’ble Apex Court in the case of CIT Vs. Vegetable Products Ltd. (1973) 88 ITR 192 has held that where a provision in the taxing statute is capable of two reasonable interpretations, the view favourable to the assessee is to be preferred. In view of the facts and circumstances of the case, as discussed above, we are of the considered opinion that the computation of tax by the assessee in respect of royalty income is to be accepted. In this view of the matter, the grounds of appeal raised at S.Nos.2,3,4 and 5 are accordingly allowed.

8. The grounds of appeal raised at S.Nos.6 & 7 deal with the charging of interest u/s.234B of the Act. This issue stands covered in favour of the assessee by the decision of this Tribunal in    the assessee’s own case for the A.Y. 2003-04 to 2006-07 vide orders in ITA Nos.998, 999 &

1000/Bang/2009 and ITA No.39/Bang/ dt. 13.10.2011. The assessee has also furnished a copy of the decision in the case of Texas Instruments Incorporated Vs. Dy. Director of Income Tax (International Taxation) (2011) 47 SOT 482 (Bangalore) Tribunal 482 (Bangalore) in support of its proposition that a foreign company is not liable for internet u/s. 234B. The learned CIT(A) has sought to distinguish the above decisions on the ground that the rate of tax for payment of advance tax and TDS being different, their ratio is not applicable. We have held that the computation of tax by the assessee at the rates specified in the Treaty and section 115A is correct. Hence, the reasons given by the CIT(A) in confirming the charging of interest u/s.234B are not correct and would not survive. In any case, we do not find any justifiable reason to deviate from the co-ordinate Bench decisions in the assessee’s own case on similar facts and issues for earlier years. The assessee is, therefore, not liable to be charged interest u/s. 234B of the Act. Grounds of appeal raised at S.Nos.6 and 7 are accordingly allowed.

9. In view of the assessee’s appeal being allowed, the stay petition filed by the assessee, in becomes infructuous and is accordingly dismissed.

10. In the result, the assessee’s appeal is allowed & the stay petition become infructuous and is accordingly dismissed.

Order pronounced in the open court on 13th April, 2012.