The Hindu Business Line : A matter of precedence

An assessee who is covered by the DTAA provisions is entitled to seek the benefit thereunder, even if they are inconsistent with those of the I-T Act.

T. C. A. Ramanujam

Part II of the Finance Act prescribes the rate of tax deduction at source on various types of income. In the case of a company which is not a domestic company, royalty income is taxed at 30 per cent if the agreement under which it is payable is made before June 1, 1997. Where the royalty is payable outside India, the Double Taxation Avoidance Agreement (DTAA) provisions come into play.

Conflict between the provisions of the Indian law and that of DTAAs has now been resolved by an amendment made to the Income-Tax Act itself. Despite the clear statement of the law, departmental authorities continue to make mistakes in applying the proper tax rate.

Indo Nissin case

Indo Nissin Foods Ltd entered into a technical collaboration agreement with Nissin Technology (S.A) Pvt Ltd, Singapore, for the period January 1993 to January 2000.

Royalty was payable to the collaborator for use of knowhow and technical assistance. The payment was subject to TDS (tax deduction at source) under the Indian law.

The company credited the royalty to the collaborator and initially deducted income-tax at 30 per cent for the period 1994 to 2000. During 1998, the company discovered that as per the DTAA with Singapore, the tax rate should have been only 15 per cent; the DTAA took effect from April 1, 1994.

The company applied to the I-T department for rectification. The assessing officer (AO) however held that the Finance Act provision of 30 per cent should apply. Surprisingly, the Income-Tax Appellate Tribunal (ITAT) agreed with the department’s view.

The lower authorities had overlooked Section 90(2) of the I-T Act, 1961, which was inserted by the Finance [No. 2] Act, 1991 with retrospective effect from April 1, 1972. It was laid down that the provisions of the Act will apply to the extent they are more beneficial to the assessee when compared to the provisions of the DTAA. In case of conflict, the more beneficial provision should prevail.

This view was accepted by the Central Board of Direct Taxes (CBDT) in Circular No. 333 dated April 2, 1982, and Circular No. 769 dated August 6, 1998.

The Karnataka High Court had enunciated the Doctrine of Treaty Override in CIT vs R. M. Muthiah (202 ITR 508). The Supreme Court considered the matter in the well-known Azadi Bachao (263 ITR 706) case.

The court pointed out that if a tax liability is imposed by the Act, the DTAA may be resorted to for negativing or reducing it. In case of difference between the provisions of the Act and the Agreement, the latter would prevail and can be enforced by the Appellate Authorities and the court.

Assisting DTAA

Section 90 is specifically intended to enable and empower the Central Government to issue Notification for implementation of the terms of the DTAA. The provisions of such an agreement would operate even if inconsistent with the provisions of I-T law.

When the requisite Notification is issued under Section 90, Section 90(2) springs into operation. An assessee who is covered by the DTAA provisions is entitled to seek the benefit thereunder, even if the provisions are inconsistent with those of the Act. Tax treaties are intended to grant tax relief and not put residents of a contracting country at a disadvantage vis-À-vis other taxpayers.

The Karnataka High Court pointed out to its own earlier ruling in the Muthia case (Supra) and the circulars of the CBDT and wondered how the lower authorities and the I-T department chose to ignore the settled law on the subject to recover tax at 30 per cent on royalties as against the DTAA Rule of 15 per cent.

Indo Nissin Foods Ltd was pleading that it had paid tax in excess to the tune of over Rs 10 lakh and still the department was levying interest under Section 201 (1A) charging the company with short-deduction. The department was taking refuge under the amended provisions of Sections 201 and 201 (1A).

The High Court pointed out that the question of short deduction of tax did not arise in this case.

It directed the AO to consider the relevant provisions of the law, the circulars and the judgment of the court throwing light directly on the issue involved in the case (301 ITR 143 Karnataka).

It’s unfortunate that a matter which has been settled at the highest level by way of Board circulars, apex court judgments, and so on, , is allowed to be dragged on and re-agitated for no useful purpose.

(The author is a former Chief Commissioner of Income-Tax.)

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