Case Law Details
Apollo Tyres Ltd. Vs CIT (Karnataka High Court)
The case of Apollo Tyres Ltd. vs CIT before the Karnataka High Court delves into the intricacies of Double Taxation Avoidance Agreements (DTAA) and the necessity of notifications for their provisions. In this matter concerning Assessment Years 2015-2016 and 2016-2017, the petitioner, Apollo Tyres Ltd., challenges the order of the Commissioner of Income Tax (International Taxation) [CIT (IT)], Bangalore.
Background: The central issue revolves around whether a separate notification by the Central Government is required to enforce a subsequent Treaty (DTAA) when a company is governed by a pre-existing DTAA. In this case, the petitioner was initially under the India–Netherlands DTAA but questioned the applicability of the India–Finland DTAA.
Key Points from the Order:
1. Automatic Application of Subsequent Treaties: The Commissioner held that if a subsequent Treaty between India and another OECD country provides more beneficial clauses, it automatically applies to the existing DTAA. This was based on Clause-12.4.2 of the Protocol in the India–Netherlands DTAA.
2. Relevance of AAR Decision: The Commissioner referred to the Authority for Advance Rulings (AAR) decision in the case of STERIA (INDIA) LTD. The AAR held that a separate notification was necessary for the application of the Most Favored Nation (MFN) clause in a subsequent Treaty. However, the Commissioner noted that the AAR decision had not been reversed or finalized.
3. Precedence and Notification: The Commissioner mentioned the precedent of a notification when the India-Netherlands DTAA was affected by the India-US DTAA. It was argued that a notification was necessary for the India–Finland DTAA as well.
Steria (India) Ltd. Judgment: The petitioner brought attention to the judgment by the Division Bench of the Delhi High Court in the case of Steria (India) Ltd. The High Court set aside the AAR decision, emphasizing that the wording of the Protocol made it self-operational. The court stated that once a DTAA is notified, including the Protocol, there is no need for a separate notification for beneficial provisions from another OECD country.
Court’s Decision: The Karnataka High Court, respecting the Delhi High Court’s judgment, found no justification for the Revenue’s contention that a separate notification was required for the India–Finland Treaty. The Court set aside the Commissioner’s order under Section 264 of the Income Tax Act, 1961.
Conclusion: While the Court did not delve into the factual aspects of services and payments, it provided clarity on the necessity of notifications for subsequent Treaties. The case serves as a significant reference for companies navigating the complexities of DTAA provisions. The matter is remitted to the Commissioner for a fresh decision, allowing for a detailed examination of the factual aspects.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The petitioner M/s.Apollo Tyres Ltd. is aggrieved by the order passed by the Respondent-Commissioner of Income Tax (International Taxation) [CIT (IT)], Bangalore, vide Annexure-A dated 30.3.2016 for the Assessment Year(s) 2015-2016 and 2016-2017 holding that without a separate notification issued by Central Government for enforcing the subsequent Treaty (DTAA) between India–Finland in the present case, where the petitioner Company is governed by a former India– Netherlands Double Taxation Avoidance Agreements (DTAA), the Protocol thereto itself provides that any subsequent Treaty of India with another OECD (Organisation for Economic Co-operation and Development) Country, if such subsequent Treaty provide for a more beneficial Clause, then, by virtue of Clause-12.4.2 of the Protocol, such subsequent Treaty will automatically apply to the present India-Netherlands DTAA also.
2. Further, the respondent – CIT (IT), relying upon the decision passed by the Authority for Advance Rulings (AAR) in the case of STERIA (INDIA) LTD reported in [(2014) 45 Taxman 281 (AAR- New Delhi)] held contrary to such Treaty Provisions otherwise while upholding the order passed by the Assessing Authority viz., Deputy Commissioner of Income Tax (International Taxation), Kochi.
3. The relevant extract of the order passed by the respondent-Commissioner of Income Tax, which is impugned in the present petition Annexure-A dated 30.3.2016 is quoted below for ready reference:-
“The rival arguments and submissions have been examined and the following conclusions are reached:
1. There is no final or binding ruling on the issue of the necessity of a notification to give effect to MFN clause whenever any subsequent treaty with more restricted scope is entered into by India. The Steria decision may have been stayed for the time being, but it is not reversed. The stay order of the Honourable High Court contains no discussion on the merits of the case. Also the decision of ITAT has not become final.
2. The Honourable Karnataka High Court in its decision on the ISRO Case [263 CTR 549 2013] has ruled that protocol is an integral part of a DTAA. But it has not considered or given any ruling on the necessity of a notification to give effect to the MFN clause included in a protocol in the event of any new DTAA with more beneficial provision is entered into by India. It may be noted that neither the AAR in the Steria case or ITAT in the Schell Global case makes any reference to the ISRO ruling.
3. There is a precedence of notification in the case of India-Netherlands DTAA itself. When the India-US DTAA was entered, a notification was issued to make its beneficial provisions applicable to the Netherlands DTAA. Therefore it cannot be said that the issue of notification is redundant.
In the light of the above, I see no reason to intervene in the case and revise the order of the AO. As the question of tax treatment under the India-Finland DTAA no longer arises, the same is not discussed. Since the relevant payment is apparently taxable in India as per the provisions of the Income Tax Act as well as India-Netherlands DTAA, the ruling of Apex Court in GE India case is not applicable in the instant case.”
4. Mr.Ajay Vohra, the learned Senior Counsel appearing on behalf of the petitioner submitted that the aforesaid decision of AAR in the case of Steria (India) Ltd., itself has since been set aside by the Division Bench of Delhi High Court in the case of Steria (India) Ltd. on 28.7.2016, reported in [2016] 386 ITR 390 (Delhi). The relevant extract of the said judgment is also quoted below for ready reference:-
“16. The Authority for Advance Rulings appears to have failed to notice that wording of clause 7 of the Protocol makes it self-operational. It is not in dispute that the India-France Double Taxation Avoidance Agreement was itself notified by the Central Government by issuing a notification under section 90 of the Act. It is also not in dispute the separate Protocol signed between India and France simultaneously forms an integral part of the Convention itself. The preamble in the Protocol, which states “the undersigned have agreed on the following provisions which shall form an integral part of the Convention”, makes this position clear. Once the Double Taxation Avoidance Agreement has itself been notified, and contains the Protocol including para 7 thereof, there is no need for the Protocol itself to be separately notified or for the beneficial provisions in some other Convention between India and another OECD country to be separately notified to form part of the Indo-France Double Taxation Avoidance Agreement.
17. Reliance is rightly placed by the petitioner on the following passage at page 32 in the commentary by Klaus Vogel on “Double Taxation Conventions.”:
“As previously mentioned, (final) Protocols and in some cases other completing documents are frequently attached to treaties. Such documents elaborate and complete the text of a treaty, sometimes even altering the text. Legally they are part of the treaty, and their binding force is equal to that of the principal treaty text. When applying a tax treaty, therefore, it is necessary carefully to examine these additional documents.”.
18. The court is, therefore, unable to agree with the conclusion of the Authority for Advance Rulings that the clause 7 of the Protocol, which forms part of the Double Taxation Avoidance Agreement between India and France, does not automatically become applicable and that there has to be a separate notification incorporating the beneficial provisions of the Double Taxation Avoidance Agreement between India and UK as forming part of the India-France Double Taxation Avoidance Agreement.”
5. Mr. Ajay Vora also drew the attention of the Court towards Ad Article 12 of the said India – Netherlands Treaty, which, by its Protocol, provide as under:-
“V. Ad Article 12
It is understood that in case India applies a levy, not being a levy covered by Article 2, such as the Research and Development Cess, on payments meant in Article 12, and if after the signature of this Convention under any Convention or Agreement between India and a third State which is a member of the OECD India should give relief from such levy, directly, by reducing the rate or the scope of the levy, either in full or in part, or, indirectly, by reducing the rate or the scope of the Indian tax allowed under the Convention or Agreement in question on payments as meant in Article 12 of this Convention with the levy, either in full or in part, then, as from the date on which the relevant Indian Convention or Agreement enters into force, such relief as provided for in that Convention or Agreement shall also apply under this Convention.”
6. He therefore submitted that on its own force and per se the provision made in India-Finland Treaty, which was entered into between India-Finland on 19.4.2010, which was made effective from 1.4.2011, vide its Article 12.5, provide that the fees for technical services, if such services are rendered and paid in a Contracting State, viz., in Netherlands as in the present case, the same cannot be taxed in India, and in view of its non-taxability, the provisions with regard to withdrawing of Tax or TDS under Section 195 of the Income Tax Act (‘Act’) would not apply the Article 12.5 of India-Finland, as aforesaid, read as under:-
“5. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority, or a resident of that State. Where, however, the right or property for which the royalties are paid is used within a Contracting State or the fees for technical services relate to services performed, within a Contracting State, then such royalties or fees for technical services shall be deemed to arise in the State in which the right or property is used or the services are performed. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.”
7. Therefore, the learned Senior Counsel for the petitioner urged that the orders passed by the Assessing Authority Deputy Commissioner of Income Tax (International Taxation), Kochi as well as the Commissioner of Income Tax (International Taxation), Bangalore under Section 264 of the Act, deserve to be quashed in the present case.
8. On the other hand, Mr.K.V.Aravind, the learned counsel appearing for the respondent – Income Tax Department submitted that a Notification was required to be issued by Central Government to give effect to the India – Finland Treaty in the present case, where the earlier India–Netherlands Treaty was applicable, and in the absence of any such Notification, CIT (IT) was justified in passing the impugned order.
9. Secondly, he has submitted that the questions of facts relating to rendering of the services in Netherlands and payment of such fees for technical services in Netherlands are the aspects which have not been considered by the CIT (IT) in detail. However, Mr.Aravind, despite the query from the Court as to whether the Revenue has preferred any Special Leave Petition or Regular Appeal against the Division Bench’s judgment of the Delhi High in the case of Steria (India) Ltd. (surpa), was unable to give any specific information about the same to the Court.
10. Having heard the learned counsels for the parties and in view of the Division Bench judgment of the Delhi High Court, respectfully following the same, this Court is of the view that the impugned order passed by the CIT (IT) under Section 264 of the Act on 3.2016 cannot hold the field and the same deserves to be set aside.
11. As far as the issue of there being a requirement of issuing a separate Notification for enforcing the later Treaty with another OECD country, viz., Finland, in the present case is concerned, this Court does not find any justification in the contentions raised on behalf of the Revenue, that such a Notification was required to be issued by the Government of India to enforce such later Treaty between India – Finland in the present case. The Protocol clause quoted above in the India- Netherlands DTAA itself provide for such automatic application of subsequent Treaty, to the India–Netherlands Treaty in hand and therefore, no such separate Notification was envisaged to be issued for enforcing such subsequent Treaty with another OECD country, viz., Finland, to be made applicable to the facts of the present case.
12. As far as the decision of AAR is concerned, in the case of Steria (India) Ltd. (surpa), that the decision having been set aside by the Division Bench of Delhi High Court, at a later point of time and after the said CIT (IT) passed the impugned order under Section 264 of the Act, dated 30.3.2016, even that reliance placed by CIT (IT) cannot now be sustained.
13. In view of the aforesaid, the two reasons assigned by CIT (IT) in the impugned order, are no longer sustainable and therefore, the impugned order cannot be sustained in the eye of law. However, since the factual aspects of the matter about the payment of fees for technical services for rendering such services and payments made therefor are the questions of facts, which in the impugned order, this Court does not find any detailed discussion on the said issues. Therefore, that aspect of the matter may be required to be looked into by the CIT (IT) again, who would re-decide the said Revision Petition filed by the petitioner-assessee under Section 264 of the Act de novo. Therefore, this Court need not give its own findings on these aspects of the matter.
14. In view of the aforesaid, the present Writ Petitions are allowed and the impugned order passed by the respondent–Commissioner of Income Tax (International Taxation), Bangalore, vide Annexure-A, dated 3.2016 is set aside and the matter is restored back to the said Authority for passing fresh orders in accordance with law, as discussed above.
15. The parties may appear before the Commissioner of Income Tax (International Taxation) in the first instance on 12.2017 and a period of three months is allowed to the said Authority to pass fresh orders in accordance with law.
No order as to costs.
