The Asstt. Director of Income-tax Vs. Chiron Behring GmbH & Co. (ITAT Mumbai)

An assessee to whom the agreement applies has the option of being subjected to tax as per DTAA or the Income-tax Act 1961, which is more beneficial to it. When section 44D is read in juxtaposition to section 115A, it mandates for putting the amount of royalty and fees for technical services to tax at 20% as against 10% as provided by Article 12 of DTAA. The assessee being a person to whom the agreement applies, has rightly subjected itself to taxation at the reduced rate of 10% as per DTAA.

IN THE INCOME T AX APPELLATE TRIBUNAL

MUMBAI BENCHES “L”, MUMBAI

ITA No.4633/Mum/2006
Asst. Year 2002-2003

Appellant by: Shri Manvendra Goyal
Respondent by: Shri F.V. Irani

O   R   D   E   R

This appeal by the Revenue is directed against the order passed by the Commissioner of Income-tax (Appeals) on 15.5.2006 in relation to the assessment year 2001-2002.

2. First two grounds are against the direction given by the learned CIT(A) for applying the beneficial rate of tax as provided under DTAA as the assessee is liable to tax in Germany.

3. Briefly stated the facts of the case arc that the assessee filed its return declaring income of Rs.3,35,78,984. During the course of assessment proceeding the assessee was called upon to produce “Tax Residency Certificate” with regard the claim of lower rate of tax under the India-Germany Double- Taxation Avoidance Agreement ( hereinafter called DTAA). A copy of “Verification registration” issued by German Authorities was filed wherein the name or the assessee was mentioned as “Chiron Behring Gmbh & Co. Kg” indicating the assessee as a “firm”. The Assessing Officer noted that the suftix “KG” stands for “Kommandit Gesellschaft” in Germany, which was a term used for “Limited Partnership”. On being confronted on this aspect of the matter, the assessee stated that it was a Limited Partnership Firm incorporated under the law of Germany. Till 2003, it was known as Chiron Behring Gmbh & Co. However, with effect from the year 2003, all limited partnership firms were required to include “KG” in their name as per German Law. The assessee was asked to show cause as to why the benefit of the DTAA should not be denied to it as it was not a  “Resident” in terms of Article 4 of the DTAA. The assessee stated that it was chargeable to trade tax in Germany, which was a tax covered under DTAA vide para 3 of Article 2. The Assessing Officer observed that “Limited Partnerships” are not liable to tax in Germany. He further noted that in the OECD Publication: “The Application of OCED Mode Tax Convention to Partnership” published as Publication No.6 under “Issues in International Taxation”, the reply was submitted by Germany which has been reproduced on pages 2 and 3 of the assessment order. After perusing this reply, the Assessing Officer observed that the “Limited Partnerships” were not considered as “liable to tax in Germany. The assessee even if liable to pay “trade tax” in Germany, which was a type of tax on turnover, was found by the AO to be not equivalent to the income tax proceedings. It was, therefore, held that the provisions of DTAA would not ‘apply and the provisions of Income-tax Act, 1961 would consequentially be attracted. Since the assessee had received Royalty and Fees for technical services from an Indian company, the same were included in the total income at Rs.3,63,04,600 and held to be taxable u/s.9(1)(vi) and (vii) r.w.s. 44D. The tax rate of 20%, as per section 115A, wvas applied.

4. Aggrieved thereby, the assessee went in appeal before the learned CIT(A), who held that the assessee was entitled to the benefit of DTAA as it was Resident of Germany’. He further held that the ‘trade tax’ was not a turnover tax but was computed on the Profits of the business. For this purpose, he relied on the translated version of Articles 6 to 11 of the German Trade Tax Act. In the final analysis, it was held that the assessee was entitled to the beneficial rate of tax as per DTAA over the rate applicable as per Income-tax Act, 1961. The Department has assailed this finding of the learned first appellate authority in the first two grounds of its appeal.

5. Before us, the learned Departmental Representative contended that the assessee was not entitled to the beneficial rate of tax on income under Article 12 of DTAA as it was not Resident since the trade tax paid by it was in the nature of tax on turnover and not tax on income. He further contended. that the Assessing Officer has drawn a chart on the basis of reply given by Germany to OECD, which clearly depicted that in case of Limited Partnerships, only the partners were liable to pay tax and not the firm itself. Relying on the assessment order, the learned D.R. contended that the benefit flowing from DTAA was only available to the Resident and since the assessee was not the Resident of Germany, the beneficial lower rate of tax could not be applied to his income.

6. Per contra, the learned Counsel for the assessce reiterated the submissions advanced before the first appellate authority and on the basis of his reasoning urged that the impugned order be sustained. He invited our attention towards the copy of Trade tax return furnished by the assessee for the relevant period, whose translated copy has also been placed in the paper book at page No.70. He further referred to the copy of Certified Translation from German Tax Office at page 16 of the paper book to indicate that the assessee was registered inter alia, for the payment of trade tax. It was, therefore, pleaded that the learned CIT(A) was correct in holding that the assessee was resident of Germany and the lower rate of tax on the royalty and fees for technical services, would apply.

7. We have heard the rival submissions and perused the relevant material on record. From the facts set out above, it is clear that there is no dispute on the liability of the assessee to pay the tax as it had itself offered the amount of income for taxation. Further the quantum of income is also not the subject matter of dispute. What is agitated before us is the rate at which the tax should be charged on the amount of royalty and fees for technical services earned in India. Whereas the assessee is claiming itself to be the Resident of Germany and hence entitled to the benefit under Article 12 of DTAA by which 10% tax on the gross amount of the royalties or the fees for technical services is payable, the Revenue has put the total income to tax at the rate of 20% as per section 44D read with section 115A. The short controversy before us is to decide as to whether the assessee is covered under DTAA. If the answer is in affirmative then the beneficial lower rate of tax would be applicable and vice versa.

8. Coming to the applicability of DTAA, we observe that Article 1 provides that it shall apply to persons who are Residents of one or both of the contracting States. “Person” has been defined in Article 3(d) to include an individual a company and any other entity which is treated as a taxable unit under the taxation laws in force in the respective contracting State. Article 4 defines “Resident of a Contracting State” to mean any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any criterion of a similar nature. Article 2 provides that this agreement shall apply to taxes on income and on capital imposed on behalf of a contracting State of a land or a political sub-division or local authority thereof, irrespective of the procedure in which they are levied. Clause 3 of Article 2, which is significant for our purpose is as under:-

“3. The existing taxes to which this agreement shall apply are in particular:

(a)        in the Federal Republic of Germany:

the Einkommensteuer (income-tax)..

the Korperschaftsteuer (corporation tax)

the Vermogensteuer (capital tax), and the

Gewerbesteuer (trade tax)

(hereinafter referred to as “German tax”)

(b)        in the Republic of India:

The income-tax including any surcharge tax thereon (Einkommeensteuer.. einschldarauf entfallender Zusatzsteuern).. and the wealth-tax (Vermogensteuer) (hereinafter referred to as “Indian Tax.

9. On a conjoint reading of the above Articles, the following requisite conditions emerge for availing the benefit under DTAA.

(i)         the assessee should be a person in terms of Article 3( d):

(ii)        such person should be the Resident of a contracting State:

(iii)       It should be liable to pay tax in the contracting State by reason of his domicile or residence etc.

If these three conditions are cumulatively satisfied then person becomes entitled to the benefit available under the Treaty.

10. Adverting to the facts of the instant case, we note that the assessee is a “person” as falling within article 3( d) under “any other entity”. Further it is resident of Germany as the Assessing Officer has accepted that the assessee is a “Limited Partnership” under the German law. Accordingly, the first two hurdles are crossed on the acceptance of the assessee as a person, who is Resident of Germany. The third stipulation is that it should be liable to pay tax as per German law. It is here that the controversy has arisen inasmuch as the Assessing Officer has held that the payment of “trade tax” by the assessee docs not tantamount to the assessee becoming “liable to tax” in Germany, because such trade tax, in his opinion, is a type of tax on the turnover. Article 2(3)(a) clearly describes the taxes to ‘which DTAA shall apply. The fourth item under this clause, as extracted above includes the Gewerbesteuer (i.e. Trade tax). Thus, the German tax includes trade tax also to which this Treaty applies. The Assessing Officer came to hold that the trade tax is a type of tax on turnover and hence the assessee is not’ liable to tax’ in Germany. There is no reference to any material whatsoever for reaching this conclusion. On the contrary, the learned CIT(A) has relied on translated version of Articles 6 to 11 of German Trade Tax Act at pages 6 and 7 of the impugned order. Article 6 of the German Trade Tax Act states “The basis of taxation for Trade Tax is the income from the business”. From this finding, it is clear that the trade tax is not a turnover tax but only is tax on the income from business. The learned D.R., except for disputing the authenticity of the translated version of the German Trade Tax Act, as relied upon by the learned CIT(A), has not brought any material on record to controvert the authenticity of this translation. The onus is on the Revenue to prove that the translated version of the German Trade Tax Act, relied upon by the ld. CIT(A), is not substantiated. The onus probandi can be discharged by bringing on record the correct translated version in supersession of the one relied upon by the ld CIT(A) or showing with some substance that at least it is not correct A mere submission made in the air, without any basis, cannot be accepted. It is a settled legal position that the appellant is bound to show that how it is aggrieved by the impugned order. It is the bounden duty of the appellant to bring on record some evidence or legal proposition to demonstrate that the finding recorded against it is not correct. In the absence of anything to show that the translated version relied upon by the ld. CIT(A) is incorrect we are not convinced La bring it in the realm of doubt. Moreover the AO has held that the trade tax is a type of tax on turnover without any corroboration. He has not indicated any source for his conclusion. It, therefore, becomes palpable that the very foundation of the Assessing Officer’s action, being the assessee liable to pay trade tax, which was a type of tax on turnover and hence the provisions of DTAA would not apply, has no legs to stand on.

11. The second leg of the argument of the lei. DR is that the Commentary of the OECD Publication indicated that the tax on the Limited Partnerships was the liability of the partners and not of the firm and in such a case only the partners and not the firm could become the person on whom DTAA shall apply. This argument arises from the portion extracted by the AO from the OECD Publication according to which the tax imposed on the income of the entity is the liability of the partners.

12. At this juncture it would be relevant to refer to the judgment of the Hon”blc Supreme Court in CIT VS. P.V.A.L Kulandagaon Chettiar (Deed. through legal representatives) reported in (2004) 267 ITR 654 (SC) in which it has been held in the penultimate para that “taxation policy is within the power of the Government and section 90 of the Income-tax Act enables the government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one state or the other and thus prevails over the other provisions of the Income-tax Act. It would be unnecessary to refer to other terms addressed in the GECD or in any other decision of foreign jurisdiction or in any other agreements”, The review petition filed against this judgment also stands dismissed in (2008) 300 ITR 5 (SC). It, therefore, clearly transpires that when the language of the treaty is unambiguous and does not admit of any doubt whatsoever, there is no need to make a reference to the Commentaries and other foreign decisions. Such commentaries deal with the model clauses generally without any reference to the specific provisions of the treaty. The ambit of various Articles of treaties with different countries is distinct. When we have a treaty in our hand, the provisions of which leave nothing to doubt, then all the authorities arc bound by the same and cannot take the assistance of commentaries for accepting or rejecting any claim of the person in disregard to it. These can be referred to in a situation, where the scope of an article is not clearly emanating from the language used. So these have only a persuasive value and cannot override the specific provisions of the treaty.

13. Coming back to the factual matrix of our case, we find that the Assessing Officer was swayed by the Commentary of the OECD Publication in coming the conclusion that the assesse is not liable to tax in Germany and is hence not entitled to the benefits of the DTAA. He overlooked the prescription of Articles 1 to 4 of the DT AA, ‘which has been discussed in the foregoing paras. The aassessec has filed Trade tax return under German law, a copy of which is placed at page 8 of the paper book. Its translated copy in English has been provided at page 70 of the paper book. It indicates that the assessee had filed its return of Trade tax for the relevant period under its own name and hence is covered under Article 2 of the DTAA. The submission of the ld. DR that only the partners can avail the benefit of treaty and not the firm, is therefore, devoid of any merits.

14. To sum up, we hold that the assessee is a Resident of Germany, liable to pay trade tax as per German law and hence is a person on whom treaty applies. Article 12 of DTAA slates that Royalties and Fees for technical services may also be taxed in the Contracting State in which they arise (India in the instant case) and the tax so charged shall not exceed ten percent of the gross amount of the royalty or the fees for technical services. The assessee has offered the income to tax at the rate of 10%. Section 90(2) provides that where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. To put it in simple words, an assessee to whom the agreement applies has the option of being subjected to tax as per DTAA or the Income-tax Act 1961, which is more beneficial to it. When section 44D is read in juxtaposition to section 115A, it mandates for putting the amount of royalty and fees for technical services to tax at 20% as against 10% as provided by Article 12 of DTAA. The assessee being a person to whom the agreement applies, has rightly subjected itself to taxation at the reduced rate of 10% as per DTAA. We, therefore, uphold the impugned order on this score.

15. The last ground taken by the Revenue is against the chargeability of interest u/s.234B. The Assessing Officer charged interest under this section the learned CIT(A) held that the assessee could not be subjected to interest as it was not liable to pay advance tax. After considering the rival submissions and perusing the relevant material on record we observe that section 195 provides that any person responsible for paying to a non-resident, any sum chargeable under the provisions of this Act, shall at the time of credit of such income to the account of the payee or at the time of payment thereof, deduct income-tax thereon at the rates in force. The assessee in the instant case is a non-resident and hence any person responsible for paying to it is under obligation for deducting tax at source. Section 208 provides that the advance tax shall be payable during a financial year in every case where the amount of such tax payable by the assessee during that year is five thousand rupees or more. Section 209(1)( d) states that the income-tax calculated under clauses (a) to (e) shall be reduced by the amount of income tax which would be deductible at source during the said financial year under any provision of this Act from any income. By virtue of section 195 all the payments made to the assessee are subjected to deduction of tax at source. Under these circumstances, the assessee cannot be said to have committed any default in not paying the advance tax for which the liability to pay interest u/s 234B could be fastened on it. Our view is fortified by the Special Bench order of the Tribunal in Motorola Inc. Vs. DCIT [(2005) 95 ITD 269 (Del.) (813)]. Respectfully following the precedent. we accept the opinion of the learned CIT(A) on this count in directing to delete the levy of interest u/s.234B. This ground, also fails.

16. In result, the appeal is dismissed.

Order pronounced on this 4th day of July, 2008.

NF