Saira Asia Interiors Pvt. Ltd., Baroda V. The Income Tax Officer, TDS-I, Baroda

ITA 673/AHD/2014

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8992 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 07-02-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 06-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Double taxation relief; Permanent establishment; Non-deduction of tax; TDS
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 194C; 195; 115A; 13(2); 13

Judgement Text

ITA NO. 673/AHD/2014 ASSESSMENT YEAR: 2011-12 PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD I BENCH, AHMEDABAD [CORAM: PRAMOD KUMAR AM AND S S GODARA JM] ITA NO.673/AHD/2014 ASSESSMENT YEAR: 2011-12 SAIRA ASIA INTERIORS PVT LTD .............AP PELLANT 121, MANJUSAR, GIDC INDUSTRIAL ESTATE, SAVLI, VADODARA 391175 [PAN : AAMCS 9585 M] VS. INCOME-TAX OFFICER TDS-I, VADODARA .......................RESPONDENT APPEARANCES BY: MILIN MEHTA FOR THE APPELLANT MAHESH SHAH AND VINOD TANWANI FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : MARCH 15, 2017 DATE OF PRONOUNCING THE ORDER : MARCH 28, 2017 O R D E R PER PRAMOD KUMAR AM: 1. BY WAY OF THIS APPEAL, THE ASSESSEE HAS CHALLENG ED CORRECTNESS OF THE ORDER DATED 24.12.2013 PASSED BY THE CIT(A), IN THE MATTE R OF TAX WITHHOLDING DEMAND RAISED UNDER SECTION 201(1A) R.W.S. 195 OF THE INCO ME-TAX ACT, 1961, ON THE FOLLOWING GROUNDS:- THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-V, BARODA (THE CIT(A)) ERRED IN FACT AND IN LAW IN CONFORMING THE ACTION OF THE INCOME TAX OFFICER, TDS-I, BARODA (THE AO) IN TRE ATING ASSESSEE AS AN ASSESSEE IN DEFAULT AND CONSEQUENTLY DIRECTING T HE APPELLANT TO PAY A SUM OF RS.5,56,880/- U/S 201(1A) OF THE INCOM E-TAX ACT, 1961. 2. THE ISSUE IN APPEAL LIES IN A VERY NARROW COMPAS S OF MATERIAL FACTS. THE ASSESSEE BEFORE US WAS LIABLE TO MAKE A PAYMENT OF RS.5,02,35,336 ON ACCOUNT OF TECHNICAL-KNOW-HOW, TO SAIRA EUROPE SPA, ITALY. TH IS LIABILITY WAS DULY ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS ON 22.11.2010, THOUGH THE PAYMENT WAS MADE, A BIT LATER, ON 12.05.2011. THE TAX OF RS.53,03,595 WAS DULY WITHHELD FROM THE PAYMENT SO MADE, AND IT WAS DEPOSITED ON 20.06.2011. THERE IS A SMALL VARIATION IN THE AMOUNT CREDITED, AMOUNT PAID AND THE AMOUNT OF TAX BUT THAT WAS BECAUSE OF THE FACT ITA NO. 673/AHD/2014 ASSESSMENT YEAR: 2011-12 PAGE 2 OF 8 THAT THE AMOUNT WAS PAYABLE IN EUROS AND THE CONVER SION RATES AT DIFFERENT POINTS OF TIME VARIED. SUFFICE TO NOTE THAT ON THESE FACTS, A DEMAND FOR INTEREST UNDER SECTION 201(1A) WAS RAISED ON THE ASSESSEE BY TREATING THE DUE DATE FOR DEPOSITING TAX DEDUCTIBLE AT SOURCE AS 07.12.2010, BEING 7 DAYS FR OM THE END OF THE MONTH IN WHICH AMOUNT WAS CREDITED IN THE BOOKS OF ACCOUNTS. THIS DEMAND WAS QUANTIFIED AT RS.6,90,530 AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). IT WAS CONTENDED BY THE ASSESSEE THAT THE TAXABILITY O N THE AMOUNT OF RS.5,02,35,336, WHICH IS TAXABLE UNDER ARTICLE 12(3) OF INDIA ITALY DOUBLE TAXATION AVOIDANCE AGREEMENT [(1996) 220 ITR (ST) 3] ONLY AT THE POINT OF TIME WHEN IT IS ACTUALLY PAID, DID NOT ARISE AT THE POINT OF TIME WHEN CREDIT WAS AFFORDED TO THE RECIPIENT IN THE BOOKS OF ACCOUNTS. LEARNED CIT(A) REJECTED THIS PL EA, AND, WHILE DOING SO, HE OBSERVED AS FOLLOWS:- 4.2 I HAVE GIVEN MY CAREFUL CONSIDERATION TO THE FACTS OF THE CASE AND THE SUBMISSION OF THE AR. THE FIRST ISSUE TO BE DECIDE D IS WHETHER THE APPELLANT WAS LIABLE TO DEDUCT TAX AT SOURCE AT THE TIME OF CREDI TING SUM IN THE ACCOUNT OF SAIRA EUROPE S.P.A. ITALY OR AT THE TIME OF PAYMENT THERE OF. IN THIS REGARD, IT WILL BE USEFUL TO REFER TO THE PROVISIONS OF SECTION 195 OF THE IN COME TAX ACT UNDER WHICH THE TAX WAS DEDUCTIBLE BY THE APPELLANT: - '195. (1) ANY PERSON RESPONSIBLE FOR PAYING TO A NO N-RESIDENT, NOT BEING A COMPANY, OR TO A FOREIGN COMPANY, ANY INTEREST OR A NY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT (NOT BEING INCOME CHARGEABLE UNDER THE HEAD 'SALARIES') SHALL AT THE TIME OF CREDIT OF SUCH INC OME TO THE ACCOUNT OF THE 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, D EDUCT INCOME TAX THEREON AT THE RATES IN FORCE: PROVIDED THAT IN THE CASE OF INTEREST PAYABLE BY TH E GOVERNMENT OR A PUBLIC SECTOR BANK WITHIN THE MEANING OF CLAUSE (23D) OF S ECTION 10 OR A PUBLIC FINANCIAL INSTITUTION WITHIN THE MEANING OF THAT CL AUSE, DEDUCTION OF TAX SHALL BE MADE ONLY AT THE TIME OF PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE: PROVIDED FURTHER THAT NO SUCH DEDUCTION SHALL BE MA DE IN RESPECT OF ANY DIVIDEND REFERRED TO IN SECTION 115 - O' FROM THE PLAIN READING OF ABOVE PROVISIONS, IT IS V ERY CLEAR THAT THE APPELLANT WAS LIABLE TO DEDUCT TAX AT SOURCE AT THE TIME OF C REDIT OF SUM TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT THEREOF WHICHEVER W AS EARLIER. THE CASE LAWS QUOTED BY THE APPELLANT ARE NOT RELEVANT TO THE FACTS OF T HE CASE OF THE APPELLANT. THE PROVISIONS OF DTAA QUOTED BY THE APPELLANT ARE RELE VANT FOR THE PAYEE IN REGARD TO TAXATION OF INCOME FROM ROYALTY IN HIS HANDS. SO FA R AS THE CLAIM OF THE APPELLANT THAT - 'AS PER THE PROVISIONS OF ARTICLE - 13 OF THE IND IA -ITALY DTAA SUCH PAYMENT WOULD BE TAXABLE ONLY AT THE TIME OF PAYMENT/'REMITTANCE, THE LIABILITY OF TAX DEDUCTION AT SOURCE WOULD ARISE UNDER SECTION 195 ONLY AT THE TI ME OF REMITTANCE ONLY', IS CONCERNED, I AM NOT IN AGREEMENT WITH THE CLAIM OF THE APPELLANT. THERE IS NO PROVISION IN THE INCOME TAX ACT WHICH EMPOWERS THE APPELLANT TO DEDUCT THE TAX AT SOURCE IN RESPECT OF THE AMOUNT PAYABLE IN THE YEAR OF TAXABILITY OF THE SAME IN THE CASE OF THE PAYEE. THE DTAA QUOTED BY THE APPELLANT ALSO DOES NOT CONTAIN ANY SUCH PROVISION. THEREFORE, ANY PERSON RESPONSIBLE F OR MAKING PAYMENT TO ANOTHER ITA NO. 673/AHD/2014 ASSESSMENT YEAR: 2011-12 PAGE 3 OF 8 PERSON SHALL HAVE TO DEDUCT TAX AT SOURCE AT THE TI ME OF CREDIT THEREOF TO THE ACCOUNT PAYEE OR PAYMENT THEREOF TO THE PAYEE WHICHEVER IS EARLIER. TAXABILITY OF THE AMOUNT IN THE HANDS OF THE PAYEE SHALL BE DETERMINED IN AC CORDANCE WITH THE RELEVANT PROVISIONS OF THE ACT. THE CIRCUMSTANCES UNDER WHIC H THE TAX IS DEDUCTIBLE AT THE TIME OF PAYMENT, HAVE BEEN PROVIDED IN THE FIRST PROVISO TO SUBSECTION (1) QUOTED ABOVE. IN CASE THE AMOUNT PAYABLE IS NOT CHARGEABLE IN THE HANDS OF THE PAYEE, SUBSECTIONS (2) AND (3) OF SECTION 195 PROVIDE FOR PROCEDURE TO BE FOLLOWED FOR NON-DEDUCTION OF TAX AT SOURCE. IN VIEW OF THIS, THE ACTION OF THE A O IN TREATING DUE DATE OF PAYMENT OF TAX AS 07/12/2010 AND CHARGING INTEREST FROM THE DA TE OF DEDUCTION OF TAX TO THE DATE OF PAYMENT, IN ACCORDANCE WITH THE PROVISIONS OF SE CTION 201(1A) OF THE IT ACT, IS HEREBY UPHELD. 3. THE ASSESSEE IS AGGRIEVED AND IS IN APPEAL BEFOR E US. 4. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 5. IT IS ONLY ELEMENTARY THAT THE TAX DEDUCTION SOU RCE LIABILITY UNDER SECTION 195 IS A VICARIOUS LIABILITY IN THE SENSE THAT ITS SUR VIVAL IN THE HANDS OF TAX-DEDUCTOR IS WHOLLY DEPENDENT ON EXISTENCE OF TAX LIABILITY IN T HE HANDS OF RECIPIENT OF INCOME. WHEN A CREDIT AFFORDED BY, OR A PAYMENT MADE BY, AN INDIAN RESIDENT, TO A NON- RESIDENT, DOES NOT TRIGGER THE TAXABILITY OF THAT I NCOME IN THE HANDS OF RECIPIENT, THE TAX DEDUCTION LIABILITY DOES NOT COME INTO PLAY AT ALL. THIS SCHEME OF THE ACT IS IMPLICIT FROM THE WORDINGS OF SECTION 195 (1) WHICH STATE TH AT ANY PERSON RESPONSIBLE FOR PAYING TO A NON-RESIDENT, NOT BEING A COMPANY, OR T O A FOREIGN COMPANY, ANY INTEREST (NOT BEING INTEREST ON SECURITIES) OR ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT (NOT BEING INCOME CHARGE ABLE UNDER THE HEAD SALARIES) SHALL, AT THE TIME OF CREDIT OF SUCH IN COME TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT THEREOF IN CASH OR BY TH E ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE , WHICHEVER IS EARLIER, DEDUCT INCOME-TAX THEREON A T THE RATES IN FORCE (EMPHASIS, BY UNDERLING, SUPPLIED BY US). WHEN IN COME EMBEDDED IN A PAYMENT IS NOT TAXABLE UNDER THE INCO ME TAX ACT, 1961, THE TAX WITHHOLDING LIABILITY DOES NOT GET TRIGGERED AT ALL . THIS IS WHAT HONBLE SUPREME COURT HAS ALSO HELD IN THE CASE OF G E TECHNOLOGY CENTRE PVT LTD VS CIT [(2010) 327 ITR 456(SC)] . WHILE HOLDING SO, THEIR LORDSHIPS HAVE, INTER ALI A, OBSERVED AS FOLLOWS: .THE SAID EXPRESSION IN SECTION 195(1) SHOWS THA T THE REMITTANCE HAS GOT TO BE OF A TRADING RECEIPT, THE WHOLE OR PART OF WH ICH IS LIABLE TO TAX IN INDIA. THE PAYER IS BOUND TO DEDUCT TAX AT SOURCE ONLY IF THE TAX IS ASSESSABLE IN INDIA. IF TAX IS NOT SO ASSESSABLE, THERE IS NO QUESTION OF T AX AT SOURCE BEING DEDUCTED. [SEE: VIJAY SHIP BREAKING CORPORATION AND OTHERS VS . CIT 314 ITR 309]. 9. ONE MORE ASPECT NEEDS TO BE HIGHLIGHTED. SECTIO N 195 FALLS IN CHAPTER XVII WHICH DEALS WITH COLLECTION AND RECOVERY. CHA PTER XVII-B DEALS WITH DEDUCTION AT SOURCE BY THE PAYER. ON ANALYSIS OF VA RIOUS PROVISIONS OF CHAPTER XVII ONE FINDS USE OF DIFFERENT EXPRESSIONS, HOWEVE R, THE EXPRESSION SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT IS USED ONLY IN SECTION 195. FOR ITA NO. 673/AHD/2014 ASSESSMENT YEAR: 2011-12 PAGE 4 OF 8 EXAMPLE, SECTION 194C CASTS AN OBLIGATION TO DEDUCT TAX AT SOURCE IN RESPECT OF ANY SUM PAID TO ANY RESIDENT. SIMILARLY, SECTIONS 194EE AND 194F INTER ALIA PROVIDE FOR DEDUCTION OF TAX IN RESPECT OF ANY AMO UNT REFERRED TO IN THE SPECIFIED PROVISIONS. IN NONE OF THE PROVISIONS WE FIND THE EXPRESSION SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT, WHICH AS STATED ABOVE, IS AN EXPRESSION USED ONLY IN SECTION 195(1). THEREFORE, THIS COURT IS REQUIRED TO GIVE MEANING AND EFFECT TO THE SAID EXPRESSION. IT FOLLOWS, THEREFORE, THAT THE OBLIGATION TO DEDUCT TAX AT SOURCE ARISES ONLY WHEN THERE IS A SUM CHARGEABLE UNDER THE ACT. 6. THE DECISION TO WITHHOLD TAX FROM A CREDIT OR P AYMENT TO A NON-RESIDENT IS NOT TAKEN IN VACUUM. IT IS TAKEN IN THE LIGHT OF THE TA X LIABILITY OF THE NON-RESIDENT IN RESPECT OF THE AMOUNT IN QUESTION, AND, IF THERE WE RE ANY DOUBTS ON THIS PROPOSITION, THESE DOUBTS HAVE NOW BEEN SET AT REST BY THEIR LOR DSHIPS. ESSENTIALLY, THEREFORE, THE PROVISIONS OF SECTION 195 ARE TO BE READ IN CON JUNCTION WITH THE CHARGING PROVISIONS UNDER THE STATUE, AS ALSO IN CONJUNCTION WITH THE RELEVANT DOUBLE TAXATION AVOIDANCE AGREEMENTS WHICH OVERRIDE THESE CHARGING PROVISIONS. OF COURSE, THIS IS SUBJECT TO THE RIDER, AS SET OUT IN SECTION 90(2) I TSELF, THAT THE PROVISIONS OF THE RELEVANT DTAA ARE TO BE IGNORED IN A SITUATION IN W HICH PROVISIONS OF THE ACT ARE MORE BENEFICIAL TO THE ASSESSEE VIS--VIS THE PROVI SIONS OF THE ACT. AS WE MAKE THESE OBSERVATIONS, WE MAY REFER TO, FOR THE SAKE O F COMPLETENESS, WORDINGS OF SECTION 90(2) WHICH ARE AS FOLLOWS: WHERE THE CENTRAL GOVERNMENT HAS ENTERED INTO AN AGREEMENT WITH THE GOVERNMENT OF ANY COUNTR Y OUTSIDE INDIA OR SPECIFIED TERRITORY OUTSIDE INDIA, AS THE CASE MAY BE, UNDER SUB-SECTION (1) FOR GRANTING RELIEF OF TAX, OR AS THE CASE MAY BE, AVOI DANCE OF DOUBLE TAXATION, THEN, IN RELATION TO THE ASSESSEE TO WHOM SUCH AGRE EMENT APPLIES, THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT TH EY ARE MORE BENEFICIAL TO THAT ASSESSEE . 7. CLEARLY, THEREFORE, SO FAR AS TAX DEDUCTION AT S OURCE LIABILITY UNDER SECTION 195 IS CONCERNED, ALL THAT IS REQUIRED TO BE SEEN IS TH E TAXABILITY OF INCOME EMBEDDED IN A PAYMENT, IN THE HANDS OF THE NON-RESIDENT, AS EXIST ING IN LAW IF THERE IS NO TAX LIABILITY IN THE HANDS OF THE RECIPIENT AT THE POINT OF TIME WHEN EVENT TRIGGERING TAX DEDUCTION LIABILITY TAKES PLACE- I.E. AT THE POINT OF TIME WH EN CREDIT IS AFFORDED AND WHEN THE PAYMENT IS MADE. IF THE RECIPIENT DOES NOT TAX ANY TAX LIABILITY, IN RESPECT OF THE SAID AMOUNT AT THAT POINT OF TIME, THERE IS NO QUESTION OF TAX DEDUCTION AT SOURCE, AND, AS A COROLLARY TO THIS PROPOSITION, IF THERE IS A TAX LIABILITY IN RESPECT OF THAT AMOUNT AT THAT POINT OF TIME, THE SAID TAX LIABILITY IS TO BE WITH HELD BY THE PERSON CREDITING OR PAYING THE MONEY. OF COURSE, IF THERE IS SAME TAX LIABILIT Y IN EITHER OF THE SITUATION, THE TAX IS TO BE WITHHELD AT THE POINT OF TIME WHEN EITHER OF THESE EVENTS, WHICHEVER IS EARLIER, TAKES PLACE. WE MAY ALSO, WHILE ON THE SUBJECT, RE PRODUCE ARTICLE 13 OF INDIA ITALY DTAA, WHICH DEALS WITH TAXATION OF ROYALTY, AS BELO W: ARTICLE 13- ROYALTIES AND FEES FOR TECHNICAL SERVICES ITA NO. 673/AHD/2014 ASSESSMENT YEAR: 2011-12 PAGE 5 OF 8 1. ROYALTIES AND FEES FOR TECHNICAL SERVICES ARISIN G 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 LAWS OF THAT STATE, BUT IF THE RECIPIENT IS THE BENEFICIAL OWNER OF THE ROYALTIES, OR FEES FOR TECHNICAL SERVICES, THE TAX SO CHARGED SHALL NOT EXCEED 20 PE R CENT OF THE GROSS AMOUNT OF THE ROYALTIES OR FEES FOR TECHNICAL SERVICES. 3. THE TERM ' ROYALTIES' AS USED IN THIS ARTICLE MEANS PAYMENTS O F ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK, INCLUDING CI NEMATOGRAPHY FILMS OR FILMS OR TAPES USED FOR RADIO OR TELEVISION BROADCASTING, ANY PATE NT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, OR FOR THE USE OF, OR THE RIGHT TO USE, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT, OR FOR INFORMAT ION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. 4. THE TERM 'FEES FOR TECHNICAL SERVICES' AS USED I N THIS ARTICLE MEANS PAYMENTS OF ANY AMOUNT TO ANY PERSON OTHER THAN PAYMENTS TO AN EMPLOYEE OF THE PERSON MAKING PAYMENTS, IN CONSIDERATION FOR THE SERVICES OF A MA NAGERIAL, TECHNICAL OR CONSULTANCY NATURE, INCLUDING THE PROVISIONS OF SERVICES OF TEC HNICAL OR OTHER PERSONNEL. 5. THE PROVISIONS OF PARAGRAPHS 1 AND 2 SHALL NOT A PPLY IF THE BENEFICIAL OWNER OF THE ROYALTIES OR FEES FOR TECHNICAL SERVICES, BEING A R ESIDENT 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 ESTAB LISHMENT SITUATED THEREIN, OR PERFORMS IN THAT OTHER STATE INDEPENDENT PERSONAL S ERVICES FROM A FIXED BASE SITUATED THEREIN, AND THE RIGHT, PROPERTY OR CONTRACT IN RES PECT OF WHICH THE ROYALTIES OR FEES FOR TECHNICAL SERVICES ARE PAID IS EFFECTIVELY CONNECTE D WITH SUCH PERMANENT ESTABLISHMENT OR FIXED BASE. IN SUCH A CASE THE ROY ALTIES OR FEES FOR TECHNICAL SERVICES SHALL BE TAXABLE IN THAT OTHER CONTRACTING STATE ACCORDING TO ITS OWN LAW. 6. ROYALTIES AND FEES FOR TECHNICAL SERVICES SHALL BE DEEMED TO ARISE IN A CONTRACTING STATE WHEN THE PAYER IS THAT STATE ITSELF, A POLITI CAL OR ADMINISTRATIVE SUB-DIVISION, A LOCAL AUTHORITY OR A RESIDENT OF THAT STATE. WHERE, HOWEVER, THE PERSON PAYING THE ROYALTIES OR FEES FOR TECHNICAL SERVICES, WHETHER H E IS A RESIDENT OR A CONTRACTING STATE OR NOT, HAS IN A CONTRACTING STATE A PERMANEN T ESTABLISHMENT OR A FIXED BASE IN CONNECTION WITH WHICH THE LIABILITY TO PAY THE ROYA LTIES OR FEES FOR TECHNICAL SERVICES WAS INCURRED, AND SUCH ROYALTIES OR FEES FOR TECHNI CAL SERVICES ARE BORNE BY SUCH PERMANENT ESTABLISHMENT OR FIXED BASE, THEN SUCH RO YALTIES OR FEES FOR TECHNICAL SERVICES SHALL BE DEEMED TO ARISE IN THE STATE IN W HICH THE PERMANENT ESTABLISHMENT OR FIXED BASE IS SITUATED. 7. WHERE, BY REASON OF A SPECIAL RELATIONSHIP BETWE EN THE PAYER AND THE BENEFICIAL OWNER OR BETWEEN BOTH OF THEM AND SOME OTHER PERSON , THE AMOUNT OF ROYALTIES OR FEES FOR TECHNICAL SERVICES PAID EXCEEDS 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 SUCH CASE, THE EXCESS PAR T OF THE PAYMENTS SHALL REMAIN TAXABLE ACCORDING TO THE LAWS OF EACH CONTRACTING S TATE, DUE REGARD BEING HAD TO THE OTHER PROVISIONS OF THIS CONVENTION [EMPHASIS, BY UNDERLINING, SUPPLIED BY US] ITA NO. 673/AHD/2014 ASSESSMENT YEAR: 2011-12 PAGE 6 OF 8 8. AS FOR THE POINT OF TIME OF CREDITING THE AMOUNT PAYABLE TO NON RESIDENT, I.E. AT THE TIME OF CREDIT OF SUCH INCOME TO THE ACCOUNT OF PAYEE , THE ROYALTY SO PAID BY THE ASSESSEE WAS NOT TAXABLE IN THE HANDS OF THE RE SIDENT, FOR THE SIMPLE REASON THAT, IN TERMS OF ARTICLE 13 OF INDO ITALIAN DTAA- WHICH IS REPRODUCED ABOVE FOR THE READY REFERENCE, TAXABILITY OF ROYALTY IS DEPENDENT ON TH E PAYMENT BY THE RESIDENT OF A CONTRACTING STATE AND RECEIPT OF THE SAME BY THE RE SIDENT OF THE OTHER CONTRACTING STATE. UNLESS, THEREFORE, THE ACTUAL PAYMENT TAKES PLACE, THE TAXABILITY UNDER ARTICLE 13 OF INDO ITALIAN DTAA DOES NOT ARISE. IN OTHER WO RDS, THE MERE FACT THAT AN INDIAN RESIDENT CREDITS THE AMOUNT OF ROYALTY PAYABLE TO AN ITALIAN RESIDENT DOES NOT TRIGGER TAXABILITY UNDER ARTICLE 13 OF THE INDO ITALIAN DTA A. SUCH IS ALSO THE VIEW TAKEN BY A SERIES OF DECISIONS BY THE COORDINATE BENCHES, INCL UDING THE DECISION IN THE CASE NATIONAL ORGANIC CHEMICAL INDUSTRIES LTD [(2005) 96 TTJ 765 (MUM)] , WITH WHICH WE ARE IN RESPECTFUL AGREEMENT. WHEN THE ROYALTY SO CREDITED BY THE ASSESSEE IS NOT TAXABLE AT THE TIME OF CREDIT OF SUCH AMOUNT TO THE ACCOUNT OF PAYEE, IN THE LIGHT OF LAW LAID DOWN BY HONBLE SUPREME COURT IN THE CASE OF GE INFORMATION TECHNOLOGY (SUPRA), IT DOES NOT GIVE RISE TO ANY TAX WITHHOLDI NG OBLIGATIONS UNDER SECTION 195 (1) EITHER. 9. AS REGARDS THE POINT OF TIME WHEN THE PAYMENT IS ACTUALLY MADE, I.E. THE TIME OF PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHE QUE OR DRAFT OR BY ANY OTHER MODE, THE TAXABILITY IN THE HANDS OF THE RECIPIENT ARISES BY @ 20% IN TERMS OF THE PROVISIONS OF ARTICLE 13(2) ABOVE. HOWEVER, EVEN TH OUGH THE ASSESSEE IS COVERED BY THE INDO ITALIAN DTAA, THE PROVISIONS OF THE INCOME TAX ACT CONTINUE TO APPLY TO THE EXTENT SUCH DOMESTIC LAW PROVISIONS ARE MORE BENEFI CIAL TO THE ASSESSEE, AS, EVEN IN THE CASES COVERED BY THE DTAAS AND IN TERMS OF THE PROVISIONS OF SECTION 90(2), THE PROVISIONS OF THIS (INCOME TAX) ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THAT ASSESSEE. HOWEVER, THE PROVISIONS OF SECTION 115A PRESCRIBED TAXABILITY OF ROYALTY IN THE HANDS OF THE NON-RESID ENT @ 10%, AND, THEREFORE, ADOPTING THE MORE BENEFICIAL RATE OF 10%, THE PAYER WAS REQU IRED TO DEDUCT TAX AT SOURCE FROM THE ROYALTY PAYMENT SO MADE BY THE ASSESSEE. THAT I S PRECISELY WHAT THE ASSESSEE HAS DONE. THE PAYMENT WAS MADE BY THE ASSESSEE ON 12.5.2011 AND THE TAX SO DEDUCTED WAS PAYABLE WITHIN 7 DAYS FROM THE END OF MAY 2011, I.E. BY 7 TH JUNE 2011. THE ASSESSEE HAS, HOWEVER, DEPOSITED THE SAID TAX DEDUCTED AT SOURCE ON 20 TH JUNE 2011. THE DELAY IN DEPOSITING THE TAX DEDUCTE D AT SOURCE WAS THUS ONLY FOR 12 DAYS. TO THIS LIMITED EXTENT, THE ASSESSING OFF ICER COULD HAVE LEVIED INTEREST UNDER SECTION 201(1A) OF THE ACT. HOWEVER, THE AUTH ORITIES BELOW HAVE UPHELD THE TAX LIABILITY UNDER SECTION 20(1A) BY COMPUTING THE PER IOD OF DELAY WITH REFERENCE TO THE DATE ON WHICH THE AMOUNT WAS CREDITED TO PAYEES AC COUNT. THAT IS WHERE THE AUTHORITIES BELOW WERE IN ERROR AND WE VACATE THE ACTION OF THE AUTHORITIES BELOW TO THAT EXTENT. 10. WE MAY ALSO A DEAL YET ANOTHER ARGUMENT IN FAVO UR OF THE STAND OF THE REVENUE TO THE EFFECT THAT IF TAX LIABILITY OF THE NON-RESIDENT IS TO COMPUTED ON THE ITA NO. 673/AHD/2014 ASSESSMENT YEAR: 2011-12 PAGE 7 OF 8 BASIS OF DOMESTIC LAW ANYWAY, WHICH PERMITS TAXATIO N OF ROYALTIES AT THE POINT OF ACCRUAL, THE TAX WITHHOLDING SHOULD HAVE TAKEN PLAC E AT THE POINT OF TIME WHEN ROYALTIES ACCRUED I.E. WHEN THE ACCOUNT OF THE NON- RESIDENT WAS CREDITED. HOWEVER, WE ARE UNABLE TO SEE ANY LEGAL MERITS IN THIS PLEA BECAUSE WHAT IS MATERIAL IS THE TAX LIABILITY OF INCOME EMBEDDED IN THE RELATED PAYMENT AS AT THE POINT OF TIME WHEN EVENT TRIGGERING TAX WITHHOLDING LIABILITY TAKES PL ACE, I.E. CREDITING THE AMOUNT OR PAYING THE AMOUNT. WHEN THE INCOME EMBEDDED IN THE PAYMENT IS NOT LIABLE TO BE TAXED AT THE POINT OF TIME WHEN ACCOUNT OF THE NON- RESIDENT WAS CREDITED, IN VIEW OF THE FACT THAT, UNDER THE RELATED DTAA, TAX LIABILIT Y CAN ONLY ARISE AT THE POINT OF A SUBSEQUENT EVENT I.E. PAYMENT. WHEN INCOME EMBEDDED IN THE PAYMENT IS NOT TAXABLE AT THAT POINT OF TIME OF CREDITING THE AMOU NT, THERE CANNOT BE ANY OCCASION FOR DEDUCTION OF WITHHOLDING THE TAX ON SUCH INCOME. IT IS ONLY AT THE POINT OF TIME WHEN PAYMENT TAKES PLACE, THAT THE INCOME EMBEDDED IN PA YMENT BECOMES TAXABLE UNDER THE DTAA AS ALSO UNDER THE DOMESTIC LAW, BUT THEN R ATE OF TAX PRESCRIBED IN DOMESTIC LAW BEING LOWER, VIS--VIS THE RATE PRESCRIBED IN T HE DOMESTIC LAW, THE ASSESSEE HAS THE OPTION OF ADOPTING THE LOWER RATE UNDER THE DOM ESTIC LAW. THE ADOPTION OF LOWER RATE UNDER THE DOMESTIC LAW, IN OUR HUMBLE UNDERSTA NDING, DOES NOT IMPLY THAT NON- RESIDENT RECIPIENT COULD HAVE BEEN SADDLED WITH TAX LIABILITY AT THE POINT OF ACCRUAL WHEN, UNDER THE DTAAA PROVISIONS, THE NON-RESIDENT COULD NOT HAVE BEEN TAXED, IN RESPECT OF ACCRUAL OF THE SAID INCOME, IN INDIA. I N VIEW OF THESE DISCUSSIONS, AS ALSO FOR THE DETAILED REASONS SET OUT ABOVE, AND TO THE EXTENT INDICATED ABOVE, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESS ING OFFICER TO GRANT RESULTANT RELIEF. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 11. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON TODAY ON THE 28 TH DAY OF MARCH, 2017. - SD/- SD/- S S GODARA PRA MOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) AHMEDABAD, THE 28 TH DAY OF MARCH, 2017 COPIES TO: (1) THE APPELLANT (2) THE RESPONDE NT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER FIT FOR PUBLICATION SD/- SD/- TRUE COPY (JM) (AM) ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD