INCOME TAX OFFICER Vs. CHLORIDE INDIA LTD

JUDGEMENT

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

(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.