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income Tax Officer Vs. Chloride India Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIT Appeal Nos. 327 & 328 (Cal) of 1987, 2843 (Cal) of 1988 & 363 (Cal) of 1989 18 August 200
Reported in[2001]75ITD69(Cal),[2001]75ITD69(Cal)
Appellantincome Tax Officer
RespondentChloride India Ltd.
Advocates: J.C. Mishra, for the Revenue R.K. Mitra, for the Assessee.
Excerpt:
- orderper benchthe president, income tax appellate tribunal, referred following common question for consideration of the special bench :'whether, on the facts and circumstances of the case, the agreement entered into between the assessee and m/s. chloride group ltd. u.k. on 10-12-1981 can be treated as an extension of the previous agreement'.2. the aforesaid question assumes importance to determine the liability of the assessee to deduct tax at source under section 195 read with the double taxation avoidance agreement (hereinafter referred to as `the dtaa') between united kingdom and india which came into effect on 23-11-1981. there is no dispute in the case that in view of the decision of the tribunal in the case of graphite vicarb india ltd., (1993) 199 itr (at), the provision of the.....
Judgment:
ORDER

Per Bench

The President, Income Tax Appellate Tribunal, referred following common question for consideration of the Special Bench :

'Whether, on the facts and circumstances of the case, the agreement entered into between the assessee and M/s. Chloride Group Ltd. U.K. on 10-12-1981 can be treated as an extension of the previous agreement'.

2. The aforesaid question assumes importance to determine the liability of the assessee to deduct tax at source under section 195 read with the Double Taxation Avoidance Agreement (hereinafter referred to as `the DTAA') between United Kingdom and India which came into effect on 23-11-1981. There is no dispute in the case that in view of the decision of the Tribunal in the case of Graphite Vicarb India Ltd., (1993) 199 ITR (AT), the provision of the DTAA would also govern the liability for TDS under section 195 of the Act.

3. As per sub-section (1) of section 195 of the Act, any person responsible for paying to a foreign company any sum chargeable under the provisions of the Act is to deduct tax at the time of credit of such income to the account of payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode whichever is earlier. Sub-section (2) thereof, however, provides that the person responsible for paying an such sum chargeable under this Act considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the assessing officer to determine the appropriate proportion of such sum so chargeable and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. The assessee's claim is that as per article 13(2) the tax was to be deducted at the rate of 30 per cent only. The assessing officer, however, held that the payment made by the assessee being pursuance of agreement which was an extension of an old agreement an which, according to him, was evident from the Government of India approval dated 27-2-1981 and, therefore, the assessee was taxable at the rate of 50 per cent and surcharge at the rate of 2.5 per cent, less deduction of 20 per cent under section 44D of the Act. The Commissioner (Appeals) following his earlier order held that the impugned agreement dated 10-12-1981 was not an extension of the previous agreement and that the rate of tax should be at 50 per cent as provided in DTAA without any deduction under section 44AD of the Act.

4. When the matter came up before the Division Bench, it was noticed that there are two contradictory decisions of the Tribunal on this issue and with reference to this agreement-(i) In the case of the non-resident company in ITA Nos. 1219 & 1220 (Cal.)/89, order dated 28-8-1992 wherein the Tribunal held that the impugned agreement dated 10- 12-1981 was an extension of the earlier agreement and could not be termed as a new agreement; and (ii) in the case of the assessee under ITA No. 1601 (Cal.)/87, order dated 28-12-1993 wherein it was held that there was a basic difference between the earlier two agreements on the one hand and the agreement dated 10-12-1981 on the other and that the impugned agreement was to be treated as new agreement and not a mere extension of the earlier agreement. The Bench, therefore, referred the matter to the President, Income Tax Appellate Tribunal to resolve the aforesaid two conflicting views. The question for consideration, as set out in paragraph (i) above, was thus referred to this Special Bench.

5. The facts in nutshell are - Originally, the assessee entered into a collaboration agreement with M/s. Chloride Group Ltd., London on 28-6-1971. In this agreement, the assessee is named as Associated Battery Makers (Eastern) Pvt. Ltd. This agreement was for the manufacture of accumulators and the consideration was agreed to be 3 per cent in the case of Accumulators primarily intended for starting lighting and ignition of motor road vehicles and 5 per cent in the case of all other accumulators of its turnover of direct and indirect exports from India. This was in addition to any fees quoted by Chloride and accepted by the assessee for making available any specific developments and for assistance in factory layout plan modernisation. The Government of India, Ministry of Industrial Development vide its letter dated 13-12-1971 approved the agreement with certain modification, viz., that the royalty on indirect exports cannot be agreed to and so the royalty on quantity exported only will be allowed and that the agreement should be subject to Indian Laws and not that of England. These modifications were noted vide Government's letter dated 17-12-1971. The change in the name of the company from Associated Battery Makers (Eastern) Ltd. to Chloride India Ltd. was noted vide Government of India's letter dated 13-10-1972. Subsequently, another agreement dated 1-6-1976 was entered into with effect from 1-1-1976 for a period of 5 years which was to expire on 31-12-1979. By clause 2 of this agreement, Chloride U.K. agreed to make available in England such day to day technical assistance as may reasonably be required by the assessee to maintain its present standard of quality of accumulators manufactured by it in its factory in India; to entitle the assessee to ask Chloride for specific development and for assistance in factory layout plan modernisation and like improvements and the consideration was at the same rate as it was in the earlier agreement. The Government of India, Ministry of Industry and Civil Supplies vide letter dated 26-8-1976 informed the assessee that the government is prepared to approve the terms of the agreement subject to the condition, viz.-(i) that the foreign collaborator shall be paid a royalty at the rate of 3 per cent subject to Indian taxes on export of automotive batteries and 5 per cent subject to taxes on export of other types of batteries for a period of five years only and that the royalty will be calculated on the basis of the net ex-factory sale price of the product exclusive of excise duties minus the landed cost of the imported components, irrespective of the course of procurement including ocean freight, insurance, customs duties, etc.; that the payment of royalty will be restricted to the existing licensed capacity plus 25 per cent in excess thereof and in case of production in excess of this quantum, prior approval of government would have to be obtained. It was further stated that no royalty shall be payable on internal sales. Vide letter dated 19-7-1976, it is stated that the agreement proposed by the assessee was a renewal of the agreement which had expired on 31-12-1974 and that the agreement with modified terms and conditions stipulated in its letter dated 26-8-1975 was taken on record.

6. It appears that assessee made an application for extension of the earlier agreement as is evident vide Government of India's letter dated 27-2-1981, wherein the subject is stated to be 'Application for extension of foreign collaboration with M/s. Chloride Group Limited, 52, Crosvenor Gardens, London SWIW OAH, U.K.'. In this letter it is stated that Government of India are prepared to approve the extension of foreign collaboration subject to certain conditions. One was with regard to royalty and it is stated that it should be 3 per cent on accumulators for starting, lighting and ignition of motor and vehicles and 5 per cent on all other accumulators for direct export only subject to taxes for a period of five years during the period of the agreement. In clause (iv) of this letter it is stated that the extension of the agreement shall be for a period of 5 years from 1-1-1980 and within this period the Indian company should develop and set up their own design and research facilities so that continued dependence on foreign collaboration beyond this period will not be necessary.

7. The terms were modified as per the Government of India's approval letter dated 27-2-1981 and finally on 10-12-1981, the assessee signed the impugned agreement for making the assessee available in England the following :

'2.1 (a) Advice on the outline design and layout of the manufacturing processes within the existing factory building;

(b) advice as to the preparation and procurement of all requisite raw materials;

(c) advice as to the selection procurement and use (but not the manufacture) of machinery and tools special to the production of accumulators;

(d) advice as to the design of accumulators;

(e) advice as to general operational methods;

(f) copies of general and detailed drawings of machinery and tools special to the production of accumulator;

(g) copies of operating instructions.'

As in the past, the assessee was given aright to ask Ukarian Co. for specific development and assistance of factory layout plan modernisation and like improvement on charges to be agreed subject to Government of India's approval.

8. The consideration is provided in clause 9(a) of the agreement as under :

'9(a) From 1-1-1980 during the continuance of this agreement Battery makers shall pay to Chloride:

(i) an amount equal to three per cent (3 per cent) in the case of accumulators primarily intended for starting lighting and ignition of motor road vehicles and five per cent (5 per cent) in the case of all other accumulators of its turnover of direct exports from India, in respect of each quarter or proportion thereof;

(ii) any fee quoted by Chloride and accepted by Battery Makers in respect of clause 2.2;

(iii) a quarter means a period of three (3) months commencing on 1st January, 1st April, 1st July or 1st October.'

9. Vide letter dated 23-12-1981, this agreement as modified has been taken on record. In the three agreements, the following terms are defined as under:

As per Agreement dated 28-6-1971

As per Agreement dated

28-6-1976

As per Agreement dated

28-6-1981

'Accumulator;'-means those types of lead acid secondary electric storage batteries of whatever construction in which the reacting materials comprise lead or lead compounds and having sulphuric acid electrolyte with or without additives including parts accessories and ingredients of the said batteries but excluding lead recovery technology separators containers lids plugs and production machinery thereof.

'Accumulators'-means those types of lead acid secondary electric storage batteries of whatever construction in which the reacting materials comprise lead or lead compounds and having sulphuric acid electrolyte with or with out additives including parts accessories and ingredients of the said batteries but excluding lead recovery technology separators containers lids plugs and production machinery therefor.

'Accumulators' means and is limited to those types of lead acid secondary electric storage batteries of whatever construction in which the reacting materials comprise lead or lead compounds and having Sulphuric Acid electrolyte with or with out additives either:

(i) Primarily intended for storing electricity to provide current for the starting lighting and ignition of petrol & Diesel driven motor vehicles including parts and ingredients of the said batteries;

OR

(ii) primarily intended to provide

(1) Motive power for land vehicles;

(2) Standby power for commercial and industrial use;

(3) Stationary engine starting, railway locomotive engine starting and train lighting including parts and ingredients of the said batteries.

'Turnover' - shall mean the amount invoiced for all goods and materials relating to or in any way associated with the accumulators which Battery Makers manufactures or assembles reduced firstly by credits to customers for such goods or materials returned and secondly by these taxes and duties for which Battery Makers acts only as a collecting agency and as a collecting agency and are levied by the Government of India or other competent taxing authority in India on the amount of such goods and materials invoiced.

'Turnover' - shall mean the amount invoiced for all goods and materials relating to or in any way associated with the accumulators which Battery Makers manufacture or assemble reduced firstly by credits to customers for such goods or materials returned and secondly by those taxes and duties for which Battery Makers act only as a collecting agency and are levied by the Government of India or other competent taxing authority in India on the and are levied by the Government of India or other competent taxing authority in India on the amount of such goods and materials invoiced.

'Turnover' - shall mean the amount invoiced for all goods and materials relating to or in any way associated with the accumulators which Battery Makers manufacture or assemble reduced firstly by credits to customers for such goods or materials returned and secondly by those taxes and duties for which Battery Makers act only as a collecting agency and are levied by the Government of India or other competent taxing authority in India on the amount of such goods and materials invoiced and thirdly by the cost of standard bought out components and landed cost of imported components (irrespective of the source of procurement) including ocean freight insurance and customs duties.

10. Normally the law of the country where the income is earned governs the taxability of income. Where, however, the recipient of income is a resident of other country, the law of both the countries may provide for the tax ability of the income because of different taxable events and status, viz. place of receipt or accrual of income or the residential status of the parties. A situation may arise, and our experience shows that it did, that the recipient of income is called upon to pay tax in both the countries. TO obviate such a situation, the taxation treaties are entered into by and between the countries so that double taxation is avoided. A situation may again arise in such case where the provisions of treaty are in direct conflict with the laws of respective countries. In such a situation, the Courts have held that provision of treaty shall prevail. See in this connection the decision of Calcutta High Court in the case of CIT v. Davy Ashmore India Ltd. : [1991]190ITR626(Cal) and the CBDT Circular No. 333 dated 2-4-1982, in : [1982]137ITR1(Bom) .

11. We have to examine the taxability of this income first with reference to Indian Tax Laws and then after seeing whether any exception is provided to such assessment in India. Section 4 of Income Tax Act charges the total income of a person of the previous year relevant to the assessment year. Section 5 provides for the scope of total income and includes all income received or deemed to be received, accrued or arisen or is. deemed to have accrued or arisen in India or outside. Section 9 provides for the circumstances when an income is deemed to accrue or arise. Royalty is the item of income in this case. The payer is Indian company and the recipient is Ukarian company. The payment is made in India and the right to receipt has also accrued in India because of the user of know-how for the production of Batteries in India. Section 9(1)(vi) deals with royalty income and its accrual in India and consequently its taxability in India. It reads as under :

'9(1) The following income shall be deemed to accrue or arise :

(vi) income by way of royalty payable by-

the government; or

a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:

Provided that nothing contained in this clause shall apply in relation to such much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government:

Provided further that nothing contained in this clause shall apply, in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.

Explanation 1 - For the purpose of the first proviso, an agreement made on or after the 1-4-1976 shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royally is a foreign company, the agreement shall not be deemed to have been made before that date unless, before, the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the assessing officer (such option being final for that assessment year and for every subsequent year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976.

Explanation 2 - For the purpose of this clause, 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'Capital gains') for-

(i) the transfer of all of any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting but not including consideration for the sale, distribution or exhibition of cinematographic films; or

(vi) the rendering of any services in connection with the activities referred to in sub-clauses (1) to (V).

Explanation 3 - For the purposes of this clause, the expression computer software' shall have the meaning assigned to it in clause (b) of the Explanation to section 80HHE.'

12. By virtue of clause (b) hereinabove, the royalty paid by Indian concern is deemed to accrue and taxable in India. 1st proviso, however, excludes the applicability of section 9(1)(vi) in case of lump sum payments, for transfer of know-how outside India if agreement was entered into before 1-4-1976. Explanation 1 deems certain agreements to have been entered before 1-4-1976 on exercising an option by the assessee. No option as provided in Explanation 1 was exercised by the assessee and, therefore, it is an agreement entered into after 1-4-1976 and, therefore, all the receipts including lump sum, if any, are taxable in India under section 9(1)(vi) of the Act.

13. Now we come to the provision of treaty between India and UK. Article 13 of DTAA deals with income from royalty. It provides for the taxation of royalty in a contracting State to whose resident the royalty is paid and also in other country where the royalty income arises. For the sake of brevity article 13 is reproduced hereunder:

'1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; provided that where the royalties or fees for technical services are paid to a resident of the other Contracting State who is the beneficial owner thereof and they are paid in respect of a right or property which is first granted, or under a contract which is signed, after the date of entry into force of this Convention, the tax so charged shall not exceed 30 per cent of the gross amount of the royalties or fees for technical services.

3. The term 'royalties' as used in this article means payments of any kind including rentals received as a consideration for the use of or the right to use :

(a) any patent, trademark, design or model, plan, secret formula or process;

(b) industrial, commercial or scientific equipment, or information concerning industrial, commercial or scientific experience;

(c) any copyright of literary, artistic or scientific work, cinematographic films, and films or tapes for radio or television broadcasting;

but does not include royalties or other amounts paid in respect of the operation of mines or quarries or of the extraction or removal of natural resources.

4. The term 'fees for technical services' as used in this article means payments of any kind to any person, other than payments to an employee of the person making the payments arid to any individual for independent personal services mentioned in article 15 (independent personal services), in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel.

5. The provisions of paragraphs 1 and 2 of this article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties, or fees for technical services arise through a permanent establishment situated therein, or perform in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of article 7 (business profits) or article 15 (Independent personal services), as the case may be, shall apply.

6. Royalties and fees for technical services shall be deemed to arise in a Contracting State where the payer is that State itself, a political sub-division, a local authority or a resident of the State. 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 obligation to make the payments was incurred and the payments are borne by that permanent establishment or fixed base, then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

7. Where, owing to a special relationship between the payer and some other person, the amount of the royalties or fees for technical services paid exceeds for whatever reason the amount which would have been paid in the absence of such relationship, the provisions of this article shall apply only to the last mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this convention.'

14. By the provisions of clause (1) of this article 13, the royalty received shall be taxable in U.K., because it is paid to the resident of U.K. Clause (2) of the article also provides its taxability in a country where the income arises and according to law of that country. By virtue of this clause, the taxability reverts back to Indian tax Laws as well. This, however, is made subject to a maximum rate of tax of 30 per cent where the royalty is paid in the circumstances mentioned therein. This provision is the bone of dispute in these appeals. On a close reading of this provision, we find that for liability of tax royalty is restricted by this proviso at the rate of 30 per cent when-

(i) the royalty is paid to a resident of other contracting State;

(ii) such resident of other contracting State is the beneficial owner of such royalty;

(iii) the royalty is paid in respect of a right or property which is first granted after the date of entry into force of the DTAA

OR

(iv) the royalty is paid under a contract which is signed after the date of entry into force of DTAA.

There is no dispute in this case that first two conditions are satisfied, The dispute is for the applicability of the alternate conditions stated in item Nos. (iii) and (iv) above. if either of the conditions is satisfied, the tax is to be levied not more than at the rate of 30 per cent even though the tax is to be levied as per the law in India.

15. The revenue's case is that the agreement dated 10-12-1981 is nothing but an extension of agreement which was originally signed on 28-6-1971 and then on 1-6-1976 both being signed before entry into force of the DTAA and, therefore, it cannot be said to be an agreement signed after the coming into force of DTAA. Reliance is placed on the order of the Tribunal dated 28-8-1992 in ITA Nos. 1219 and 1220 (Cal)/89 in the case of the Ukarian Co. for assessment years 1983-84 and 1984-85 wherein by referring to the decision of the Calcutta High Court in the case of Continental Commercial Co. Ltd. v. CIT (1990) 192 ITR 66 it was held that the date of agreement and the date of approval by the Government of India became immaterial as the said agreement is made effective from 1-1-1980 which is a date much before coming into existence of the DTAA and that the right or property accrued to the assessee before entry into force of the convention because the right accrued to the assessee with effect from 1-1-1980 as provided in clause 14 of the said agreement dated 10-12-1981.

16. The learned Departmental Representative Shri J.C. Mishra emphasised on the similarity of terms of the agreements and submitted that the impugned agreement was not a fresh agreement but a renewal of the earlier agreements and it was also so understood by the government in its correspondence with the assessee stating it to be a renewal of the agreement. Application was also made by the assessee for extension of the agreement and approval was also granted for such extension. Even though the term 'extension' was not used in the agreement, it is submitted that it has to be taken as an extension of the agreement if read in the light of the government letter dated 27-2-1981. It was further submitted that before the expiry of the right to property under the earlier agreement which was for five years, it was extended for another 5 years and, therefore, the decision of the Calcutta High Court in the case of CIT v. Borhat Tea Co. Ltd. : [1993]203ITR987(Cal) would not cover the case of the assessee because that was a case of interest on loan where the right to receive interest depends upon the basis of the amount of loan or date of renewal from time to time and since the payment of interest can only arise on the basis of the loan advanced or debt owed, the same principle cannot be applied to the case of royalties and fees for technical services. Unfortunately, the earlier decision of the Tribunal in the case of the non-resident was not brought to the notice of the Tribunal while dealing with the subsequent appeal in the case of the assessee.

17. The learned counsel of the assessee Shri Rahul Mitra, on the other hand, submitted that the contents of the impugned agreement and the earlier agreements are altogether different and, therefore, it cannot be said to be an extension of the earlier agreement. He brought to our notice such distinction as noticed by the Tribunal in the case of the assessee, wherein a change was noticed in the two agreements with regard to (i) the definition of the accumulator, (ii) the scope of the turnover, (iii) the basis of the royalty, (iv) the absence of the clause that if any of the items manufactured was covered by a patent held by the non-resident company in India the royalty payment shall also constitute full compensation for the use of such patent rights, and (v) the introduction of the provision for extension of the period of the agreement which was not true in the earlier agreement. Referring to the Calcutta High Court decision in the case of Borhat Tea Co. Ltd. (supra) he further submitted that though this case was for payment of interest, but its taxability was considered by Their Lordships under article 12 of DTAA wherein also the language of clause 2 is similar to clause (2) of article 13. Clause (2) of article 12 reads as under:

'2. However, such interest may also be taxed in the Contracting State in which it arises and according to the law of that State; provided that where the resident of the other Contracting State is the beneficial owner of the interest and it is paid in respect of a loan or debt first created after the date of entry into force of this convention, the tax so charged shall not exceed 15 per cent of the gross amount of the interest.'

He, therefore, supported the latter decision of the Tribunal in ITA No. 1601 (Cal)/1987 dated 28-2-1993. He further submitted that the impugned agreement was, in fact, signed on 10-12-1981 and, therefore, even if the know-how is deemed to have been first granted pursuant to earlier agreement, the assessee is entitled to succeed because of the 2nd part of proviso to article 13(2) of DTAA

18. We have heard the parties and considered their rival submissions. We have already extracted clause (2) of article 13 of the DTAA On a bare reading of the provisions it is evident as aforesaid that the proviso to this clause restricts maximum rate of 30 per cent on assessee's satisfying two situations-(i) when the royalty is paid in respect of right or property which is first granted after the date of enter into force of DTAA, or (ii) when the royalty is paid under a contract which is signed after the date of entry into force of the convention. The royalty payment in respect of the right or property which the Ukarian company had could be said to have been first granted to the assessee pursuant to the first agreement entered in 1976 or earlier and it was only the terms and conditions of the agreement that were changed and varied in the impugned agreement. But if one carefully reads the second term used i.e., that right or property is granted under a contract which is signed after the date of entry into force, the conclusion is obvious that is that the tax chargeable was 30 per cent. We have to see the difference that here in the second part of the proviso the convention does not use the words 'first signed' but uses the word 'signed'. It is not a dispute at all in this case that the agreement is actually signed on 10-12-1981 which is a date after the coming into force of the convention. The earlier agreement expired and only a new agreement is signed after coming into force of the convention. It would be a new agreement even if all the terms and conditions of the agreement are same. In any case, in the present case even the terms and conditions of the earlier agreements and the impugned agreements are different, as pointed out by the latter decision of the Tribunal in five respects, as aforesaid. We, therefore, find ourselves in agreement with the view taken in the subsequent order of the Tribunal in the case of the assessee and hold that the tax is to be charged only at the rate of 30 per cent of the gross amount of the royalties and the assessee was required to deduct tax only at that rate.

19. The decision of the Calcutta High Court in the case of Borhat Tea Co. Ltd. (supra) was rendered in the context of article 12. Clause (2) of article 12, as extracted above, uses only one and first part of the language used in clause (2) of article 13, i.e. 'the interest is paid in respect of a loan or debt first incurred after the date of coming into force of convention.' The second part of the agreement in clause (2) of clause 13, viz., the agreement is signed after coming into force of the convention is absent in clause (2) of article 12. We, therefore, agree that the first order of the Tribunal in the case of the assessee that it has no application in so far as in deciding the applicability of the second part of the proviso in clause (2) of clause 13. The renewal of the fixed deposit in the case of Borhat Tea Co. Ltd. (supra) was after the expiry of the earlier agreement and, therefore, the court held that it was a new agreement. The court held at page 993 as under :

'In our view, when a matured deposit is discharged or renewed, a fresh contract or deposit is created. In the certificate of deposit, as we have already observed, it has been specifically made clear that the discharged certificate of deposit will not be accepted for renewal unless an application in the prescribed form of the Housing Development Finance Corporation filed in properly and completed in all respects is submitted along with the old certificate of deposit. Thus it is only on the fresh application that a new contract of deposit is created. In our opinion, on a true and proper interpretation of article 12(2) of the said convention when the deposits have been renewed after the coming into force of the aforesaid convention, such renewal amounted to a fresh deposit and, therefore, the deposit was first created after the coming into effect of the Convention of Double Taxation Avoidance Agreement and accordingly the provisions of article 12(2) will apply.'

In that sense of the matter, the Calcutta High Court decision in the case of Borhat Tea Co. Ltd.'s case (supra) helps the assessee even on the first part of the language used in the proviso in clause (2) of article 13 of the convention. The contention of the learned Departmental Representative that application for extension was made prior to expiry of earlier agreement is not supported by any evidence. On the contrary from the correspondences of the assessee with the government for approval of agreement, we find that the application for approval was made by the assessee sometime in 1980 or 1981 after the expiry of the agreement on 31-12-1979. Various objections were raised by the government and after meeting with the objections and incorporating the suggestions thereof, the agreement was ultimately signed on 10-12-1981. It was, therefore, for all intent and purposes of a new agreement.

20. The decision in the case of Continental Commercial Co. Ltd. (supra), in our opinion, is not of much help in deciding the issue under consideration. That was a case under section 40A(7)(b)(ii) wherein three conditions for allowing a deduction for provision of gratuity are prescribed. One of such conditions was that the assessee must create an approved gratuity fund for the exclusive benefit of its employees under an irrevocable trust, the application for the approval thereof was to be made before the 1st day of January, 1976. The assessee in that case made an application for approval on 31-12-1975 and in that context Their Lordships of Calcutta High Court held that once an application has been made within the time prescribed by the Act to the Commissioner for approval, it was immaterial when such approval was accorded inasmuch as the approval would relate back to the date of application for such approval and that the condition of creating an approved gratuity fund would be satisfied if the assessee makes an application for such approval on or before 1-1-1976, irrespective of the fact whether such approval was accorded to the assessee before the assessment was completed. This was a case of relating back the date of approval for the gratuity fund and not for treating the date of the approval on that day. At best this case can be authority that approval given by the government relates back to the date of application or date of agreement. In the present case, what is required under article 13(2) is that the agreement should be signed after the coming into force of the DTAA and this is a factual matter. It is a fact that the agreement has been signed between the parties in this case on 10-12-1981, i.e. a date after coming into force of the convention on 23-11-1981. The mere fact that it has been made effective from 1-1-1980, i.e. a date prior to the coming into force of the treaty would not make an agreement itself having been signed on 1-1-1980. The rights and liabilities of the parties flowing from the impugned agreement maybe effective from 1-1-1980, but that would not convert the date of signing the agreement from that prior date from which the effect is given to the agreement. The signing date remains the date when it is actually signed and that is in this case 10-12-1981. The agreement was signed after incorporating various suggestions by the Government of India and it was thus finally signed agreement on 10-12-1981 that was taken on record. It cannot, therefore, be said to be an extension of the earlier agreement simpliciter. It is a new agreement and in this case, as aforesaid with new terms and conditions.

21. In view of the aforesaid discussion, we are of the opinion that neither the rights or property could be said to have been first granted to the assessee before the date of entry into force of the convention in view of the Calcutta High Court decision in the case of Borhat Tea Co. Ltd. (supra), nor the payment was made in respect of right or property under a contract which is signed before the date of entry into force of the convention. Both the events being after the date of entry into force of the DTAA between India and U.K., the tax chargeable cannot exceed 30 per cent of the gross amount of royalty in view of the language used in the proviso contained in clause (2) of article 13 of the DTAA.

22. We, accordingly, uphold the order of the Commissioner (Appeals) and dismiss the four appeals filed by the revenue.


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