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2001 DIGILAW 552 (CAL)

CHLORIDE GROUP PLC. v. COMMISSIONER OF INCOME-TAX

2001-08-30

ARUN KUMAR MITRA, Y.R.MEENA

body2001
Y. R. MEENA, J. ( 1 ) ON an application under Section 256 (2) of the Income-tax Act, 1961, this court has directed the Tribunal to refer the following questions set out at pages 15 and 16 of the paper book :"1. Whether, on a proper interpretation of Article 13 (2) of the Double Taxation Avoidance Agreement between India and U. K. , the Tribunal was right in law in rejecting the assesee's claim for concessional rate of tax of 30 per cent, on the royalty income received by it in pursuance of the agreement signed on December 10, 1981 ?" ( 2 ) WHETHER, on a proper interpretation of the Contract Act and the agreements entered into by Chloride Group Plc. with Chloride India Ltd. from time to time, the Tribunal was correct in law in holding that the agreement dated December 10,1981, was not a separate and new agreement and even assuming that it was a separate agreement, the effective date of signing of the contract was to be treated as January 1,1980, in the light of the decision in the case of C/t v. Continental Commercial Co. Ltd,? ( 3 ) WHETHER the Tribunal was correct in law in interpreting the provisions of Article 13 (2) of the Double Taxation Avoidance Agreement between India and U. K. and, therefore, legally justified in holding that even though the contract dated December 10,1981, was signed after the date of entry into force of the convention for avoidance of double taxation between India and U. K. , the assessee would be deprived of the concessional rate of 30 per cent, provided in the said article only because the right under the agreement dated December 10, 1981, accrued to the assessee with effect from January 1, 1980 ?" In compliance with the direction of this court, the Tribunal has referred the aforesaid questions for opinion of this court. 2. The assessee is a non-resident company. It has a collaboration agreement dated June 28, 1971, with Chloride India Ltd. known at that time as Associated Battery Makers (Eastern) Ltd. The said agreement was to commence on January 4, 1970, and to expire on December 31, 1974. Before the expiry of the said agreement, the assessee entered into another agreement dated June 1, 1976, which was for a period of five years commencing on January 1,1975, up to December 31, 1979. Before the expiry of the said agreement, the assessee entered into another agreement dated June 1, 1976, which was for a period of five years commencing on January 1,1975, up to December 31, 1979. Thereafter, again the assessee entered into another agreement with the Chloride group on December 10,1981. The agreement was made effective from January 1, 1980, which is to be terminated on December 31, 1985. 3. For this purpose an application for extension of the foreign collaboration was made to the Government of India and the Government of India by its letter dated February 27, 1981, gave interim approval for the extension of the agreement which shall be for a period of five years from January 1, 1980 to December 31, 1984. ( 4 ) DURING the relevant previous year, the assessee had only royalty income, which arose by virtue of clauses 9 and 14 of the agreement dated December 10,1981. It offered this amount for taxation at 40 per cent under Section 115a of the Income-tax Act. Thereafter, by a letter dated December 26, 1985, the royalty income was offered for the period from April 16, 1981, to December 31, 1984 at 30 per cent. , as provided in Article 13 of the Double Taxation Avoidance Agreement dated April 16, 1981 (hereinafter referred to as "the convention" between India and U. K. ). ( 5 ) THE Assessing Officer has not accepted the claim and levied the tax on the entire royalty amount at 40 per cent, under Section 115a of the Act. According to him, the royalty income received by the assessee arose in pursuance of the original agreement dated June 28,1971, and the agreement dated June 1,1976, and December 10,1981, are merely an extension of the agreement entered into on June 28, 1971, and he accordingly taxed the royalty income at 40 per cent, plus surcharge. The Assessing Officer also did not allow the expenditure claimed under Section 44d of the Act. In appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) has taken the view though even the case of extension of the old agreement unless the assessee opted old law the new provisions of the law is applicable, which are existence of the date of the extension of the agreement. In appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) has taken the view though even the case of extension of the old agreement unless the assessee opted old law the new provisions of the law is applicable, which are existence of the date of the extension of the agreement. He further took the view that as the agreement has been made effective from January 1,1980, the assessee is not entitled for the benefit under Article 13 of the convention. In appeal before the Tribunal, the Tribunal also has taken the view that when the agreement has been made effective from January 1, 1980, the assessee is not entitled for the benefit of the provisions of the convention that is the Double Taxation Avoidance Agreement with the U. K. which comes into effect from November 23, 1981. ( 6 ) HEARD learned counsel for the parties. Dr. Pal submits that there are three agreements. The first agreement was entered into in 1971, the second agreement was entered into in 1974 and the third agreement was entered into on December 10,1981. The last agreement was made effective for the period from January 1, 1980, to December 31,1984. He submits that as per Article 13 of the convention the tax rate in the case of fees for technical services will be taken at 30 per cent, if the fees 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 and this convention has come into effect from November 23, 1981, the agreement has been signed in December, 1981. Therefore, the assessee is liable to pay tax at 30 per cent, of the gross amount of the royalties and fees for technical services. ( 7 ) WHEN the third agreement is signed after the commencement of this convention into force, the assessee is liable to pay the tax at 30 per cent, on the total receipt of royalties and fees. He also pointed out that the changes of the terms and conditions in the second agreement and the third agreement, which are pointed out by the Tribunal in paras. 9 and 17 of its order. According to Dr. He also pointed out that the changes of the terms and conditions in the second agreement and the third agreement, which are pointed out by the Tribunal in paras. 9 and 17 of its order. According to Dr. Pal, when the agreement dated December 10, 1981, is an independent agreement and which is signed after the commencement of the convention, the rate of tax, on royalty and fees should be taken at 30 per cent. On the other hand, learned counsel for the Revenue, Mr. Mallick, submits that the agreement dated December 10, 1981, is nothing but an extension of the agreement entered into by the assessee on June 28, 1971. Therefore, as per clause 13 (2) of the convention the assessee is liable to pay tax at 30 per cent. ( 8 ) THE facts are not in dispute that the agreement dated December 3,1981, has been entered into between the Chloride group of India and Chloride India Ltd. on December 10, 1981. Clause 14 of this agreement provides that this agreement made effective from January 1,1980, shall continue until December 31,1984. That makes it clear that this agreement has been signed on December 10, 1981, but is made effective from January 1, 1980. Clause 15 of this agreement further provides that this agreement is valid and comes into force when the countries of both the parties give consent. ( 9 ) ARTICLE 27 of this convention provides that the convention shall come into force on the date of the notification. For enforcing this convention, the notification has been issued on November 23, 1981. Article 13 (2) of the Convention provides that if the 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 rates shall be at 30 per cent. The relevant part of Article 13 reads as under (see [1982] 133 ITR (St.) 34, 44) under :"royalties and fees for technical services.-- (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. The relevant part of Article 13 reads as under (see [1982] 133 ITR (St.) 34, 44) under :"royalties and fees for technical services.-- (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". A perusal of Sub-article (2) of Article 13 of the convention shows that if [the royalities or fees are paid in respect of] any 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. ( 10 ) THE income in question of the assessee here is on account of royalties or fees for technical services and that income accrued as per agreement on December 10,1981. Before signing this agreement on December 10,1981, there was no question of accrual of any income before signing the agreement, though after signing of this agreement on December 10, 1981, some income also accrued from January 1,1980, under this agreement as the agreement was made effective from January 1,1980. The assessee has not claimed the rate of 30 per cent, which accrued before the commencement of the convention that is November 23, 1981. ( 11 ) HE claimed the rate of 30 per cent, tax only for the income which accrued after November 23, 1981, the words in sub-article (2) of Article 13 as 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 enforcement of this convention. ( 11 ) HE claimed the rate of 30 per cent, tax only for the income which accrued after November 23, 1981, the words in sub-article (2) of Article 13 as 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 enforcement of this convention. Thus, the tax so charged shall not exceed 30 per cent, for the period from November 23, 1981. ( 12 ) ADMITTEDLY, in the case in hand, the Double Taxation Avoidance Agreement with the U. K. which is called the convention has come into force on November 23, 1981, and the agreement between Chloride Group Ltd. and Chloride India Ltd. has been signed on December 10, 1981. That is after the commencement of the convention. ( 13 ) WHETHER the agreement dated December 10, 1981, is just extension of the agreement of 1971 or an independent one, Dr. Pal has pointed out that the agreement dated December 10, 1981, is not an extension of the agreement dated June 28, 1971, but an independent agreement and even the terms and conditions of this agreement dated June 28, 1971, and the agreement dated December 10, 1981, are different. Those are pointed out by the Tribunal in paras. 9 and 7 of its order. The order of the Tribunal has also been reported in [1975] ITD 69 (Cal ). In view of the different terms and conditions of the agreement dated June 28,1971, and the agreement dated December 10,1981, it cannot be said that the agreement dated December 10,1981 is just an extension of the agreement dated on June 28, 1971. ( 14 ) A perusal of the agreement dated December 10, 1981, though made effective from January 1, 1980, does not mean that it is merely an extension of the agreement dated June 28, 1971. The terms and conditions are different. The rate of royalty is different. ( 14 ) A perusal of the agreement dated December 10, 1981, though made effective from January 1, 1980, does not mean that it is merely an extension of the agreement dated June 28, 1971. The terms and conditions are different. The rate of royalty is different. Therefore, the agreement dated December 10,1981, cannot be said as mere extension of agreement dated June 28,1971, and when the agreement dated December 10, 1981, has been signed on December 10, 1981, that is, after the commencement of the convention as per Sub-article (2), the assessee is liable to pay tax at the rate of 30 per cent, on the income accrued for the period after the commencement of the convention, that is, after November 23, 1981. ( 15 ) IN view of the facts and law discussed in our opinion, the Tribunal has committed error in holding that the assessee was not entitled for the benefit of tax rate given in Article 13 of the convention. ( 16 ) IN the result, we answer all the questions in the negative, that is, in favour of the assessee and against the Revenue.