IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 13/07/2004
CORAM
THE HONOURABLE MR.JUSTICE P.D.DINAKARAN
AND
THE HONOURABLE MR.JUSTICE N.KANNADASAN
T.C. (Appeal) No.329 of 2004
Commissioner of Income Tax
Coimbatore .. Appellant
-VS-
M/s.Kwality Textile Associate Pvt Ltd.,
Pollachi-642 003. .. Respondent
Appeal under Section 260 A of the Income Tax Act, 1961 against the
order of the Income Tax Appellate Tribunal Madras Bench "C" dated 03.0 7.2003
in I.T.A.364/MDS/95.
!For Appellant : Mr.J.Narayanaswamy
^For Respondent : --------
:O R D E R
(Order of the Court was made by P.D.DINAKARAN, J,.)
Heard. The appeal is preferred against the order of the Income Tax
Appellate Tribunal Madras Bench “C” dated 03.07.2003 in I.T.A.364/95. The
following substantial questions of law are raised for consideration:-
1.Whether on the facts and in the circumstances of the case, the Income Tax
Appellate Tribunal was right in law in holding that the technical and
engineering fees received by the assessee is not exigible to tax in view of
the Double Taxation Avoidance Agreement?
2.Whether on the facts and in the circumstances of the case that the Income
Tax Appellate Tribunal was right in holding that the payment for technical and
engineering services rendered outside India would constitute royalty and is to
be assessed in accordance with the provisions of Article 7 of the Double
Taxation Avoidance Agreement since the assessee had no permanent establishment
in India?
3.Whether on the facts and in the circumstances of the case, the Income Tax
Appellate Tribunal was right in law in not considering Section 80-O of the
Income Tax Act as the entire receipt is taxable in India subject to the
deduction, as mentioned in the above Section?”
2.1. In brief, the assessee is engaged in the business of export of
textile spares and equipments. For the assessment year 1988-89, the
assessment was completed on 24.3.1994 under Section 143(3) read with 263 of
the Income Tax Act. The assesee dis d the assessability of an amount of
Rs.39,20,252/- being the fees received for technical and engineering services
rendered by the assessee outside India. According to the assessing officer,
this was assessable as income from India subject to the deduction of 50%
admissible under Section 80-O of the Income Tax Act. The assessee contended
that the income was totally exempt as the amount was received from Malaysia
and as per the Double Taxation Avoidance Agreement between India and Malaysia,
the technical service fees received were not taxable in India. It was also
pointed out that the Income Tax Appellate Tribunal had held decided the issue
in assessee’s favour for the immediately preceding assessment year. The
Commissioner of Income Tax (Appeals) accordingly allowed the appeal.
2.2. Aggrieved by the order of the Commissioner of Income Tax (
Appeals), the Revenue filed an appeal before the Income Tax Appellate
Tribunal, Chennai Bench. The Tribunal, following the decision of the Madras
High Court in the case of ‘COMMISSIONER OF INCOME TAX -vs- VR.S. R.M.FIRM AND
OTHERS (208 ITR 400)’, wherein the issue has been decided in favour of the
assessee, dismissed the Revenue’s appeal. Hence the present appeal by the
Revenue.
3. The issue that arises for consideration in this appeal is whether
the technical fee earned by the assessee from sources in Malaysia cannot be
taxed in India and the technical fee earned by the assessee can be subjected
to deduction under Section 80-O?
4. Under identical facts and circumstances, the Apex Court in
Commissioner of Income Tax (vs) P.V.A.L.Kulandagan Chettiar (267 ITR 654),
held as follows:-
” Where liability to tax arises under the local enactment, the
provisions of Sections 4 and 5 of the Income Tax Act, 1961, provide for
taxation of global income of an assessee chargeable to tax thereunder. But
this is subject to the provisions of an agreement entered into between the
Central Government and the Government of a foreign country for avoidance of
double taxation as envisaged under Section 90 to the contrary, if any, and
such an agreement will act as an exception to or modification of sections 4
and 5 of the Income Tax Act. The provisions of such agreement cannot fasten a
liability where the liability is not imposed by a local Act. Where tax
liability is imposed by the Act, the agreement may be resorted to either for
reducing the tax liability or altogether avoiding the tax liability. In case
of any conflict between the provisions of the agreement and the Act, the
provisions of the agreement would prevail over the Act in view of the
provisions of Section 90(2). Section 90(2) makes it clear that “where the
Central Government has entered into an agreement with the Government of any
country outside India for granting relief of tax, or for avoidance of double
taxation, then in relation to the assessee to whom such agreement applies, the
provisions of the Act shall apply to the extent they are more beneficial to
that assessee”, meaning thereby that the Act gets modified in regard to the
assessee in so far as the agreement is concerned if it falls within the
category stated therein.
When it is intended under the Double Taxation Avoidance Agreement
between India and Malaysia that, even though it is possible for a resident in
India to be taxed in terms of Sections 4 and 5 of the Income Tax Act, 1961, if
he is deemed to be a resident of contracting State where his personal and
economic relations are closer, then his residence in India will become
irrelevant, the Double Taxation Avoidance Agreement will have to be
interpreted as such and would prevail over Sections 4 and 5 of the Act.”
5. Applying the said ratio in Commissioner of Income Tax (vs)
P.V.A.L.Kulandagan Chettiar (267 ITR 654), this Court (N.V.BALASUBRAMANIAN AND
M.THANIKACHALAM, JJ.), by an order dated 15.6.2004 in T.C.A.No.18 2 of 2004
also held that the income earned from Malaysia is not taxable in India. The
substantial question of law raised by the appellant is therefore liable to be
answered against the revenue and accordingly the appeal stands dismissed.
Index : Yes
Internet : Yes
KST.
To:
1.The Assistant Registrar,Income Tax Appellate Tribunal
Madras Bench “C”, Rajaji Bhavan III Floor, Besant Nagar, Chennai-90.
2.The Secretary, Central Board of Direct Taxes, New Delhi.
3.The Commissioner of Income Tax (Appeals), Coimbatore.0-
4.The Deputy Commissioner, Special Range-II, Coimbatore.
