INTRODUCTION

Globalisation of Indian economy has been gaining unprecedented momentum in recent years – almost two decades now. In its course, overwhelmingly large number of changes, that too of a significant nature / overreaching in effect , have been taking place; not only in the country’s economic front but also in almost every sphere of human activity or walk of life.

As part of the on-going process of globalization, several fiscal measures have been taken by the Central Government, successively, in tandem with policy changes. Of which quite a few double taxation avoidance agreements/ conventions (tax treaties / DTAAs) newly entered into, so also as modified,   call for a special mention. Today, India has the privilege of having trade pact and   tax treaty in force almost with every country around the world. There is a long list of tax treaties, which includes comprehensive tax treaties, mostly based on ‘OECD Model’, not only with developed but also with developing countries.

It is in this drastically changed / constantly changing economic scenario (no guess or certainty if that is for the good or bad of the national economy or to what extent) besides the extant adjudicating authorities – Tribunals and Courts, a new authority christened as AAR has been brought into being.

2. The discussion herein is in continuation of the earlier Post @Analysis of ITAT Chennai order on Applicability of Section 167B of  Income Tax Act, 1961(for short,earlier article).

The intent is to attempt and provide further insight / supplementary feed- input; so also to serve as a Backdrop, for anyone inspired to embark on a deep study and deliberation. It is hoped that will be of use / help anyone interested and concerned- particularly professionals in international tax practice- to try and reach a convincingly better conclusion on the ongoing controversy centred on one of the modern- day concepts- ‘CONSORTIUM’ (a type of joint business venture).

In the Direct Tax regime, presently, there are three empowered institutions for adjudicating and settling disputes between the Revenue and taxpayers, as a class. That is by recourse to legal action in domestic courts. The other alternative courses of action open to entities,- especially if foreign companies (being non-residents in India but residents of the other tax treaty country) are ‘Mutual Agreement Procedure’ (‘MAP’-as embodied in the tax treaty)or ‘Arbitration’.

2.1. TRIBUNAL (ITAT):

ITAT is the last ‘fact’-finding authority. Its appellate powers as expressed in the Income-tax Act (the Act) are quite wide. According to case law, it has power to allow a new question, or a new ground, to be raised, provided that CAN BE DECIDED ON THE FACTS ALREADY ON RECORD. Besides, a new question or ground cannot be allowed by the authority on any assumption of facts. AFTER AN APPEAL HAS BEEN FINALLY DECIDED, THERE IS NO SCOPE FOR THE TRIBUNAL TO REVIEW ITS OWN ORDER, OR CALL FOR ANY FURTHER INFORMATION OR MAKE A FRESH INVESTIGATION, BE IT SUO MOTU OR OTHERWISE.

Strictly speaking, when the law is amended with retrospective effect, the fiction that follows is that all must proceed on the basis that the law AT THE RELEVANT TIME WAS AS it stood then AMENDED. Accordingly, in a pending appeal or reference, the concerned authority is obliged to necessarily give effect thereto by rendering his/its decision in accordance therewith. Nonetheless, a practical difficulty is bound to arise in a case where for so giving effect to the amended law it becomes necessary for the authority to call for any additional information or further investigate and arrive at any additional or fresh finding of fact. Especially, if the retrospectively amended law comes into being after the Tribunal has finally disposed of the appeal but a reference or appeal is pending before Court. FOR, IN REFERENCE OR APPEAL, IT IS NOT OPEN TO THE COURT TO GIVE ANY SUCH DIRECTION TO THE TRIBUNAL AS WOULD INVOLVE A FURTHER OR FRESH INQUIRY, OR INVESTIGATION, OF FACTS.

On the foregoing aspects, moot points have often arisen in the past whenever there has been a retroactive amendment of the Act. The legal effect and consequences of such an amendment, with particular reference to the scope of the powers of the Tribunal or Court to take cognisance thereof in pending proceedings, have been considered in several decisions of Courts.

Aside: The above mentioned aspects may be found discussed in the Article “Law of Income-tax – Fetters on Powers” – [2005] 147 TAXMAN 175.

2.2. Authority For Advance Ruling (AAR):

Out of the three adjudicating authorities AAR is the one lastly created/ instituted.

The objective and scheme of the relevant provisions of the Act have been set out and made available on the official website of the Income-tax Department-http://incometaxindia.gov.in.

GIST:

  • Advance ruling means the opinion or decision pronounced by AAR with regard to the tax consequences of a transaction on hand or proposed, or an ‘assessment’ in regard thereto.
  • Under section 245N a ruling can be obtained by an applicant (who may be either a non-resident or a resident having a transaction with a non-resident). That could be in respect of any question of law or fact in relation to the tax liability of a non-resident arising out of a transaction undertaken or proposed.
  • The word ‘question’ as used in the provisions is unqualified, and may have to be taken to REFER TO QUESTION(S) OF LAW OR FACT PERTAINING TO THE INCOME-TAX LIABILITY OF THE NON-RESIDENT QUA THE TRANSACTION UNDERTAKEN OR PROPOSED.
  • The question(s) SHOULD ARISE OUT OF THE STATEMENT OF FACTS FILED WITH THE APPLICATION.
  • No ruling will be given on a purely hypothetical question.
  • THE QUESTION MAY RELATE TO ANY ASPECT OF A NON-RESIDENT’S LIABILITY, INCLUDING INTERNATIONAL ASPECTS AND ASPECTS GOVERNED BY THE DOUBLE TAXATION AVOIDANCE AGREEMENTS. The questions may even cover aspects of allied laws that may have a bearing on tax liability such as the law of contracts, the law of trusts and the like, but the question must have a direct bearing on, and nexus with, the interpretation of the Act.

Aside: FONT supplied above is for a special focus on/ to help making a conscious note of; for, as set out herein later, the subject matter chosen for discussion is in specific reference to the Rulings handed out by AAR but mutually in conflict.  

2.3. Is AAR a Court?  

Until the SC happened to hand out its verdict to the contrary (in July 2012), it was largely believed that an order passed by AAR was final; the only further recourse was to file a SLP and have the dispute adjudicated upon by the SC.

According to a till then prevailing school of different thought, however, it would be within the powers of HC to admit and dispose of an appeal against AAR’s order.

For the discussion herein it is considered necessary to be recall and bear in mind what tax practitioners (mostly CAs- permitted to appear / represent up to the level of ITAT)-selectively two of them – have had to say: 

“With this order AAR has been reduced to the status of Income-tax Appellate Tribunal (ITAT). This order paves way for long drawn out litigation”.

“Unless ….the AAR Ruling is treated as final, no one will be interested in approaching AAR for getting an advance Ruling, by giving up their alternate remedies of going through the normal route. Thereby, the purpose of creation of AAR for expediting finality and certainty of tax disputes will be lost.”

May have to add and highlight that, as would not have been unexpected, – or wished for or not, – the fresh spate of controversy that the referred SC verdict gave rise to, has thus far remained unsettled; and with no prospects of a settlement or ideal resolution in the near or even far off future.

3. It is by and large known by (or expected to be known in) concerned quarters that certain developments, – in the form of views taken by the adjudicating authorities in cases of foreign companies in very recent years – have brought to the fore the matter of controversy alluded to herein before. That is whether or not a ‘consortium’ with ‘companies’ as its constituents, for carrying out a project work at the behest of an operating company in India could be treated and jointly assessed as an ‘AOP’?

4. Answer will have to be searched for and found in decided cases; some of the cases are dealt with herein bleow:

CASE STUDY I

4.1. The Delhi HC Judgment in re.Linde AG and Anr. is one such classic case; which deserves to be mindfully read through.

The cited Judgment delivered in April 2014 is reported, -@ https://taxguru.in/income-tax/hc-explains-entire-law-formation-aop-taxability-off-shore-supply-services.html

4.2. Excerpts from / portions of the Judgment, as selected, are either reproduced or paraphrased below:

1) The petition filed by Linde AG and Anr. is under Articles 226/227 of the Constitution. In the Ruling under challenge the AAR held that the Consortium of the Linde AG and Samsung Engineering Company Ltd. constitutes an ‘Association of  Persons’ (AOP)  and the income received/ receivable or profits derived by Linde for both the offshore supply of goods and for rendering of offshore services were taxable in India. (Para 1)

2) The principal point of dispute is: whether on the given facts, Linde and Samsung constitute an ‘AOP’; notwithstanding that while ‘PERSON’’ has been defined under section 2(31) , ‘AOP’ has not been so defined?

And, whether the income received/receivable by Linde for the supply of equipment, material and spares outside India and for rendering services outside India is taxable in India?

(Para 3)

Aside: These are points of dispute required to be first settled; before deciding the Petitioner’s other grievance namely, – whether or not the AO was right in rejecting the request for allowing payment (s) without TDS.

3) In Linde’s application to the AO under section 197  it was claimed that no portion of the amount payable to Linde for supply of equipment, material and spares and for providing basic and detailed engineering services was liable to be subjected to withholding of tax under section 195. That was on the ground that all the related transactions were performed and completed outside India and payments for the said transactions was also received outside India. Therefore, those were not chargeable to tax in India.

The Assessing Officer did not accept the said plea and directed OPAL to withhold tax on amounts paid to Linde in terms of the Contract. Thereafter, Linde filed an application before the Authority under section 245Q of the Act seeking advance ruling with regard to the status of Linde and Samsung ( claimed to be not an AOP) ; also as to the tax liability of Linde in India in respect of income received/receivables under Contract dated 10.02.2009. The Authority admitted the application for consideration and proceeded to give his Ruling on the questions, as framed. (Para 5)

4) The said application (AAR No.962 of 2010) was disposed of by the impugned Ruling whereby the Authority held that the joint venture of Linde and Samsung has to be treated and assessed as an ‘ÁOP’.

5) ‘DISCUSSION AND CONCLUSION’

“25. We have heard the counsel for the parties. The principal questions that are required to be considered are:-

(i) Whether the consortium formed by Linde and Samsung constitutes an Association of Persons under section 2(31) of the Act and are they liable to be taxed under the provisions of the Act as an Association of Persons; and

(ii) Whether the income/profit received/receivable by Linde towards the offshore supply of equipment, materials and spares and for drawings and designs in relation thereto, is taxable in India under the provisions of the Act or under the Double Taxation Avoidance Agreement read with the Protocol between India and Germany?”

In the succeeding paragraphs of the Judgment, the points of discussion and the grounds of the conclusion reached by the HC have been elaborated succinctly and set out in details. All the relevant provisions of the Act and of the applicable DTAA,- unlike in the AAR’s Ruling,- have been, as warranted, enormously discussed, from all angles of every relevance, and at great length.

The HC, in essence, had flawed the AAR’s ruling, on all counts. And held that the Consortium (with Linde and Samsung as its constituents) is not liable to be assessed as a separate legal entity i.e. AOP. Consequently, the court has held that Linde is not taxable in India on the sums received /receivable from the operating company in India as consideration for offshore supply of goods.    And, in doing so, has relied on and followed the binding SC Judgments (Precedents).

The rest of the operative portions of the Judgment read:

“100. Following the aforesaid decision, it would be necessary to determine the income attributable to Linde’s permanent establishment in India. Admittedly, Linde has a permanent establishment in India, however, it is contended by Linde that its Permanent Establishment came into existence after Linde had completed the offshore supplies of equipment and duly provided the offshore services. This is disputed by the Revenue and it is contended that Linde had a pre-existing permanent establishment in India. The stage at which the permanent establishment came into existence is a mixed question of fact and law. The Authority has not considered this question in view of its conclusion that Linde and Samsung had constituted an Association of Persons which was a tax resident entity in India for the purposes of the Act. The question at what stage Linde’s permanent establishment came into existence would have to be examined by the Authority.

101. In the event, it is found that Linde had a permanent establishment in India at the material time when taxable services were being rendered by Linde which were attributable to the permanent establishment, the same would have to be considered as Business Profits and taxed accordingly.

102. We do not propose to examine these questions for the first time in these proceedings.”

Concluding paragraphs read:

“103. In view of the foregoing, the impugned ruling is set aside and we remand the matter to the Authority for deciding the same afresh and in accordance with the views expressed herein.”

104. Accordingly, the petition and application stand disposed of.”

CASE STUDY II

Delhi High Court

CTCI Overseas Corporation Ltd vs Director Of Income Tax-I, … on 20 May, 2014

Report of the HC Judgment @- https://indiankanoon.org/doc/168198886/

Extracts

3. On the question of AOP, the Authority for Advance Rulings has concluded as under:-

“11. The Revenue has argued that the case of the applicant is covered under the provisions of the Act as the Government of India has not entered into a Tax Treaty under section 90(2) of the Act with the Government of Hong Kong. It has a business connection in India for the reasons that it is a part of the consortium constituting an AOP as also in terms of Explanation 2(b) to section 9(1)(i) of the Act since it is providing offshore supplies. We notice that under section 2(31) of the Act, the consortium of CINDA and CTCI forms an Association Of Persons (AOP) to carry out the project awarded by Petronet. Whether the consortium’s object is to derive profit or share the profit in a particular manner is not relevant in view of the fiction created under the Explanation to section 2(31) of the Act. The responsibilities of the consortium members mentioned under the terms of the contract would also not affect conferring AOP status to the consortium in view of the formation of a consortium by CINDA and CTCI. That being so, the applicant can be said to have a business connection in India for the purpose of application of section 9(1) of the Act. As the applicant is excluded from the relief under section 90(2) of the Act, the fiscal jurisdiction to tax the offshore supplies would be governed under the Act.”

4. The above conclusion of the Authority for Advance Rulings cannot now stand in view of our decision in the case of Linde AG, Linde Engineering Division v. Deputy Director of Income Tax: [WP(C) 3914/2012] decided on 23.04.2014.

5. In Linde (supra), this Court held as under:-

“33. Therefore, it emerges from the above discussion that the Association of Persons is one in which two or more persons join together for a common purpose or common action and there is a joint management or joint action by the said two or more persons. In order to treat persons as an association, it is necessary that the members must have a common intention and must act jointly for fulfilling the object of their joint enterprise.

34. However, it is also necessary to bear in mind that the purpose of treating two or more persons as an association of persons is to impose tax on the income that may be attributed to their joint enterprise. It is, thus, obvious that it would be necessary to consider the extent and the nature of the common purpose and the common action, in order to determine whether the said persons form an association for the purposes of imposing tax or not. As explained by the Calcutta High Court in B. N. Elias (supra), the intention of the Legislature was to treat combinations of persons, who were engaged together in some joint enterprise but did not in law constitute partnerships, as a separate taxable entity. It is, thus, essential that an Association of Persons has the trappings of a partnership for conducting the joint enterprise which makes it amenable to be treated as a separate taxable entity. A person carrying on business may in the usual course cooperate with others for a common purpose. In many instances, the test of common purpose and common action, if literally applied, may also hold true. However, treating every instance of such cooperation between two or more persons as resulting in an Association of Persons would militate against the purpose of considering an association as a separate tax entity. WHETHER AN ARRANGEMENT OR COLLABORATIVE EXERCISE BETWEEN TWO OR MORE PERSONS RESULTS IN CONSTITUTING AN ASSOCIATION OF PERSONS AS A SEPARATE TAXABLE ENTITY WOULD DEPEND ON THE FACTS OF EACH CASE INCLUDING THE NATURE AND THE EXTENT OF COLLABORATION BETWEEN THEM. The Supreme Court in Indira Balkrishna (supra) had also clarified that:-

“There is no formula of universal application as to what facts, how many of them and of what nature are necessary to come to a conclusion that there is an association of persons within the meaning of Section 3”.

35. It is obvious that unless the facts lead to a conclusion that there is sufficient joint participation for a common enterprise, it would not be appropriate to treat two or more persons as an Association of Persons for the purposes of assessing them as a separate taxable entity. A mere cooperation of one person with another in serving one’s business objective would not be sufficient to constitute an Association of Persons merely because the business interests are common. A common enterprise, which is managed through some degree of joint participation, is an essential condition for constituting an Association of Persons.

36. It follows from the above discussions that before an association can be considered as a separate taxable entity (i.e. an Association of Persons); the same must exhibit the following essential features:

(i) Must be constituted by two or more persons.

(ii) The constituent members must have come together for a common purpose.

(iii) The association must move by common action and there must be some scheme of common management.

(iv) The cooperation and association amongst the constituent members must not be perfunctory and/or merely in form. The association amongst members must be real and substantial which is sufficient to treat the association as a separate homogenous taxable entity.”

6. The question as to whether the petitioner herein and CINDA constituted an AOP would have to be examined on the basis of the above principles. SINCE THE MATTER WAS NOT EXAMINED IN THIS LIGHT BY THE AUTHORITY FOR ADVANCE RULINGS, IT WOULD BE APPROPRIATE THAT THE MATTER WITH REGARD TO THE QUESTION OF AOP IS REMITTED TO THE SAID AUTHORITY TO RETURN A FINDING, ON FACTS, BASED UPON THE ABOVE LEGAL PRINCIPLES. IT IS ORDERED ACCORDINGLY.

7. We make it clear that the only issue urged before us was the question with regard to the existence of an AOP as a taxable entity. No other issue was agitated before us either by the petitioner or by the respondent. Consequently, this writ petition is disposed of with the direction that the finding of the Authority for Advance Rulings in the impugned ruling dated 01.02.2012 concerning the AOP issue is set aside and THE MATTER IS REMITTED TO THE SAID AUTHORITY FOR THE LIMITED PURPOSE OF DETERMINING, ON FACTS, AS TO WHETHER THE PETITIONER AND CINDA CONSTITUTED AN AOP IN TERMS OF THE LEGAL PRINCIPLES SET DOWN IN LINDE (SUPRA).

Aside: Same way as in Linde’s case, the matter was remanded to the AAR. In both the cases, there seems to be no update available in public domain on the subsequent developments.

CASE STUDY III

http://aarrulings.in/it-rulings/uploads/pdf/1269930912_rotem.pdf

M/s Hyundai Rotem Co., Korea In Application No. (AAR/798/2008)

M/s Mitsubishi Co., Japan In Application No. (AAR/799/2008)

Extracts

“3. According to the applicant, the Consortium of MC, Rotem, MELCO and BEML formed for the purpose of bidding and executing the Contract RS3 awarded by DMRC does not constitute an AOP for the purposes of the Act especially for the reason that there is no agreement to share profits and losses or to jointly incur any expenditure. The Revenue has contested the stand taken by the applicant and contended that the Consortium has all the attributes of AOP as clarified in the ruling of this Authority in Geo Consult GHBH.”

“12. On an overall consideration and adopting a holistic approach, we are unable to reach the conclusion that in this case, the Consortium can be treated as AOP and be assessed accordingly. The factors which rule out the inference are more glaring and conspicuous than the factors which support the inference.”

“15. Then, the arguments were addressed by the learned Counsel for the applicant on the point WHETHER IT IS A CASE OF DIVERSION OF INCOME BY OVERRIDING TITLE. THERE IS NO NEED TO EXPRESS ANY VIEW ON THIS ASPECT. SO ALSO, SECTION 167(B) WHICH IS A PROVISION FOR ASCERTAINING THE INCOME OF AOP MEMBERS, WHICH HAS BEEN REFERRED TO BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, NEED NOT BE DISCUSSED AS IT HAS NO BEARING ON THE BASIC ISSUE WHETHER ON THE FACTS OF THE CASE, AN AOP EXISTS.

16. In the light of above discussion, it is ruled that the MRMB Consortium cannot be treated as Association of Persons for the purposes of assessment under the Income-tax Act, 1961 and the applicants can only be subjected to taxation on the basis that they are separate taxable entities. Accordingly, the question is answered.

Accordingly, the ruling is given and pronounced on this the 23rd Day of March, 2010.”

NOTE:

a) In Linde’s case (also in CTCI’s case) the HC has approved of and followed the AAR’s Ruling in Rotem’s case.

b) Though searched for, no Update on further developments seems to be readily available.

5. DTAA – Non-discrimination

In the earlier Article one of the points briefly covered has reference to the provisions of the applicable DTAA dealing with ‘non-discrimination’. Also, a reference was made to the view taken by the ITAT in the case of Chohung Bank vs DDIT.

The Order of the ITAT has been reported   @ https://indiankanoon.org/doc/1675721/)

To elaborate:

The plea against the levy of tax on a foreign company at a higher ‘rate of tax’ than that applicable to a domestic company, on the ground of ‘discrimination’ came to be turned down.

Extracts

“9. We have heard both the sides and carefully gone through the orders of the authorities below. The facts of the assessee’s case are identical with that in the assessment year 2002-03, wherein, the Tribunal vide order dated 25-11-2005 in ITA No. 4948/M/05 (supra) held that Explanation to Section 90(2) introduced by the Finance Act, 2001 with retrospective effect from 1-4-1962 is an integral part of the Section, which clearly laid down that the charging of a foreign company at a higher rate will not be regarded as less favourable as compared to domestic company. In view of this, IN OUR OPINION, NO COMPARISON OF TAX RATE/TREATMENT GIVEN TO CO-OPERATIVE SOCIETY IN INDIA CAN BE GIVEN TO A FOREIGN COMPANY. The incentive given to the Co-operative Bank/ Society cannot be extended to the foreign bank. We therefore, follow the decision of the Co-ordinate Bench in assessee’s own case for the assessment year 2002-03 (supra).

We dismiss the appeals of the assessee.”

(FONT supplied)

The opinion handed out by the ITAT has, as thus seen, been founded on the distinguishing facts of that case; in that, the Indian entity is a co-operative society, not a company. In view thereof, the said opinion can have no application or be of avail to the Revenue in an instance in which the Indian entity is a company.

6. Own Independent Observations / Viewpoints

1) In the context, Experts’commentary and cited case law in Palkhivala’s Text Book may be usefully referred.

A) Commentary and case law cited under the heading-

‘Joint Ventures or Consortium’

Q

The position in law in the context of joint ventures has been examined in the undernoted ruling. In the facts of that case, it was found that the unincorporated joint venture (whose members were all incorporated companies) was not an “association of persons” (AOP). Three factors were found to be particularly helpful in coming to this conclusion…….

The ruling illustrates the importance of due weight being accorded to the agreement between the parties in determining whether or not a venture carried out by several persons ought to be treated as an association of persons or not.

UQ

(Read on)

To know about the three factors found a mention of, look up the full text of the commentary. These are more or less the very same or some of the factors which are required to be taken care and succinctly covered in proper drafting of a consortium agreement.

B) Commentary u/s 167 B –‘Synopsis’-

As may be seen there from, in the experts’ opinion on sub-section (2) of sec 167 B, to say the least, both the Clauses (i) and (ii) thereof bears out, – rather goes to illustrate- the thoughtless manner in which the provisions have been drafted and enacted.

Incidentally, the implications of sub-section (1) and/ or of the Explanation there under (sec 167 B) have been left to be critically examined and analysed. However, no need to add that, also these provisions are no less whimsical.

To know why to say so, suggest to independently study, for forming own opinion, with the help of the thoughts and viewpoints as set out in the earlier Article, as supplemented hereby.

2) TDS u/s 195

TDS u/s 195 is called for at the time of/ before making payment of income chargeable.

‘Income’, as defined in the Act, includes “profits and gains of business”. For computing and inclusion of such business profits in the total income, the IT Act lays down, in extenso, the manner in which/ methodology by which, that has to be determined. However, for computing the business profits of an AOU, – assuming but denying that a consortium constituted by a domestic company and a foreign company could be jointly assessed as a separate legal entity, as an AOP- so far as is known, -same way as in the case of a partnership firm,-there appears to be no safe- / fool- proof mechanism or methodology embodied in the Act. If so, one is left wildly wondering, how the domestic operating company would have been able to deduct tax at source in consequence of the AAR’s Ruling handed out?

CASE LAW

Delhi High Court

CIT vs Mitsubishi Corporation- https://indiankanoon.org/doc/110649684/

Extracts

“5. Finally, as regards Explanation 2 to Section 195 (1) of the Act, inserted by the FA 2012 with retrospective effect from 1st April 1962, I have concluded that the said Explanation, obligates the ‘payer’, whether a resident or a non-resident, to deduct TDS. It does not dispense with the fulfilment of the pre-condition that the sum in respect of which TDS is to be deducted has to be shown to be chargeable to tax. In this regard I rely on the decision in GE India (supra) as well as the Explanatory Memorandum to the said amendment inserted by FA 2012.”

“56. I also have taken note of the CBDT Circular dated 30th October 1995 which clarifies that the payer who is expected to deduct TDS can take into consideration the effect, if any, of the DTAA on such payment. I, therefore do not agree with the opinion of my colleague as expressed in para 33 that “the obligation to deduct tax under Section 195 is inescapable insofar as the payer is concerned.” These are the broad points of divergence. The details are in our respective opinions.

Conclusion

57. The two questions framed should, in my considered opinion, be answered in the negative, that is in favour of the Assessee and against the Revenue.

58. Consequently the present appeal of the Revenue is dismissed.”

TDS u/s 195 GE Case SC- https://indiankanoon.org/doc/1366752/

387. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded in them. The controversy was different and the Court held that if some part of the payment was taxable, an application u/s 195(2) had to be made. The High Court’s interpretation completely loses sight of the plain words of s. 195(1) which in clear terms lays down that tax at source is deductible only from “sums chargeable” under the Act i.e. chargeable u/s 4, 5 and 9;

…..

(v) As the High Court had not decided the question whether the payments for supply of software was “royalty” or not, the matters are remitted to the High Court for a decision on that point.”

Now,  reverting to the HC Judgment in Linde’s case, payments made by the Indian entity for off shore supply has been held to be not taxable; accordingly, no question of TDS thereon. However, taxation of the payments for offshore services was remanded to the AAR for a fresh consideration and adjudication.

The point is, even so, could not the HC given a decision to the effect that, whatever be / regardless of the final outcome of further proceedings as directed , on the facts and circumstances, the AO was in error in refusing to allow remittance of all the payments , with no TDS. The court does not seem to have been suitably addressed and argued on the indicated lines, by placing reliance on case law; such as the above cited Judgment of the HC in Mitsubishi’s case.

3) As earlier brought out (see Para.2.2. herein above), the powers of AAR are, in terms of the governing scheme of the provisions of the Act, quite wide. It extends to ‘interpret’; that is, to interpret the law of the land; i.e. mainly the Act. Even so, according to a strict view, it may be regarded not beyond doubt whether the AAR could, for giving its ruling, go into and interpret any matter covered in a tax treaty, especially if any such interpretation entails a possible or certain controversy. May be, unless it is a case where the relevant treaty provision is amply clear and has to be simply applied. In this context, one has to necessarily bear in mind that as is invariably found in the treaties India has with other countries, there is a special provision governing what is known as the ‘Mutual Agreement Procedure’. That stipulates among others that the Governments of India and the other country, as the parties to the treaty, are obligated to have any difficulties or doubts on the interpretation or application of the treaty cleared through joint consultations.

This is an aspect which came to the fore for deliberation quite long ago. That was in the context of the two AAR Rulings on a point of issue which necessarily had to be adjudicated upon having due regard to, and on an interpretation of, not only the provisions of the Act but also the implications of the tax treaty provisions.

It might be interesting to know how the matter prima facie entailing a piquant situation came to be prudently tackled and judiciously resolved by the SC.

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