TIMKEN INDIA LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) In this matter the point in the dispute is short, as to whether the petitioner-company is obliged to deduct income-tax at the rate of 30 per cent, or 20 per cent, from the amount of royalty paid by the writ petitioner to the American company under the provisions of the technical collaboration agreement.

(2.) Briefly stated the facts of this case are that the writ petitioner No. 1 on March 20, 1990, entered into an agreement with an American company, viz., the Timken company, for acquisition and transfer of proprietary technical information in consideration of payment of a lump sum amount of Rs. 3,70,00,000 in a phased manner. Under the terms of the agreement a sum of Rs. 1,23,33,333 was to be paid within sixty days after the agreement is filed with the Reserve Bank of India and the capital goods clearance is obtained, and within 60 days from the date of transfer of delivery of technical documentation a sum of Rs. 1,23,33,333 and lastly a sum of Rs. 1,23,33,334 on commencement of production pursuant to the technical know-how were to be paid. As far as the first payment is concerned there is no dispute that the petitioner deducted income-tax at the rate of 30 per cent, on the payment of the first instalment and remitted to the American company on receipt of a no objection certificate as per the provision of the Income-tax Act as at that point of time there was no agreement between the Republic of India and the United States as regards double taxation avoidance agreement (in short "the DTAA"). The double taxation avoidance agreement was executed between these two countries on September 18, 1990, and was notified on December 20, 1990, before the aforesaid second instalment became due and payable. Under article 12 of the double taxation avoidance agreement the said payment is taxable at the rate of 20 per cent, on its gross amount. So, the petitioner made an application to the Commissioner of Income-tax after deposit of 20 per cent, tax, for granting no objection certificate and clearance for remittance of the aforesaid second instalment after deducting 20 per cent, of the gross royalty, as the said payment is "royalty" within the definition of Article 12(3) of the said treaty. However, the Commissioner remanded the matter to the concerned Income-tax Officer who held that the plea taken by the writ petitioner is not sustain-able. Naturally he overruled the claim of the petitioner and viewed that the double taxation avoidance agreement would have no application as the said agreement between the writ petitioner and the American company was entered into much before that came into force. He further held that the moment the agreement has been concluded, the liability to pay income-tax had accrued irrespective of the date of actual payment or receipt so also deduction. Being aggrieved by the aforesaid order of the Income-tax Officer the petitioner made an application for revision under Section 264 of the Income-tax Act. The Income-tax Commissioner has rejected the aforesaid application upholding the views taken by the Income-tax Officer. Hence, this writ petition is filed to challenge both the orders of the aforesaid two authorities.

(3.) Dr. Pal, learned senior advocate appearing with Mr. P. K. Pal, learned senior advocate, and Smt. Manisha Seal, the learned advocate, submits that both the authorities have committed a grave mistake in law by not giving benefit of the provision of the aforesaid agreement which enables deduction of 20 per cent, of the royalty amount. He contends that the views taken by both the authorities are contrary to the established judicial principle of law. An old decision of the Supreme Court reported in E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27, has settled the law long ago as to when the liability to pay income-tax arises.