Grossing up for TDS was applicable on payment to foreign University for technical services as DTAA did not define the term gross amount-High Court
ABCAUS Case Law Citation:
ABCAUS 2494 (2018) 08 HC
The instant appeal was filed by the appellant assessee against the order of the Income Tax Appellate Tribunal (ITAT/Trubunal) upholding grossing up principle in the context of order passed under Section 201 read with Section 201(1A) of the Income Tax Act, 1961 (the Act).
The assessee company entered into an agreement with the Foreign University for providing technical services. As per the agreement with the University, tax has to be borne by the assessee and accordingly, when the fee was remitted to the said university the assessee paid tax at 15% on the amount remitted by adopting the provisions of the Double Taxation Avoidance Agreement (DTAA).
However, the Assessing Officer (AO) held that under Section 195A, where tax chargeable on any income is borne by the person by whom the income is payable, then the purpose of deduction of tax on such income should be increased to such amount as could, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable.
The assessee had made remittance without grossing up for the purpose of determining the tax to be deducted. Therefore, the AO held that there was a short deduction of tax. Accordingly under Section 201(1) of the Act the assessee was deemed to be the assessee in default and an order was issued under Section 201(1) and 201(1A) of the Act demanding tax and interest. This was accompanied by a demand notice under Section 156 of the Act.
The assessee being aggrieved by the order passed preferred appeal before the Commissioner of Income Tax (Appeals) and contended that as per CBDT circular, where a DTAA provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions of the Income Tax Act.
The CIT (A) rejected the contention of the assessee that if grossing up is applied, the tax rate would exceed 15%, being prescribed under DTAA. Accordingly, the appeal filed by the assessee was dismissed by the CIT(A).
The Tribunal by the impugned order, following its earlier decision, dismissed the appeals.
Aggrieved by the dismissal of the appeal by the Tribunal, the present appeal was filed by the assessee.
It was the contention of the assessee that what was paid as fees for technical services, was the amounts specified in the agreement as payable for the services and that amount alone will be the income of the recipient University. Further, taxes borne by the assessee will not constitute fees for technical services in the hands of the recipient University.
It was submitted that Section 195A cannot increase the income of the non-resident. It was further contended that the assessee was entitled to take the provisions of the Act or the DTAA, whichever was more beneficial in the light of the decision of the Hon’ble Supreme Court.
It is the further contention of the assessee that the words “gross amount” appearing in DTAA referred to no deduction of expenses incurred towards such royalties or fees for technical services and any other interpretation given to the words “gross amount”, would be erroneous.
The Hon’ble High Court opined that the India-UK DTAA did not define the term “gross amount”. Likewise the word “income” was not been defined in the treaty and therefore, one must be guided by the definition of “income” as defined under Section 2(24) of the Act, which includes, payments net of taxes.
The Hon’ble High Court opined that the tax which was borne by the assessee, was also the income of Foreign University and since such income is covered by the words “gross amount”, as mentioned in the treaty, the Revenue was justified in grossing up by applying Section 195A, as the provisions of the treaty did not provide a mechanism for computation of income, it prescribed only the rate of tax.
The Hon’ble High Court opined that thus, to apply the correct rate of tax, the first requirement would be to determine the income on which tax is payable. This mechanism having not been provided under the treaty essentially, the assessee had to compute his income on such transaction in terms of the provisions of the Act and on such computation, if the rate of tax as applicable to such transactions under the DTAA was beneficial to assessee, then the assessee would be entitled to avail such beneficial provision in terms of Section 90 of the Act.
The Hon’ble High Court observed that provisions of section 195A provides for the manner of grossing up of income for computing the tax deductible at source in a case, where he tax is to be borne by the payer. This Section provides for grossing up of the tax only if it forms part of the income. ), If the tax is exempted under Section 10(6A), it will not form part of the total income and there would be no grossing up of such tax for the purpose of tax deduction at source.
Thus the Hon’ble High Court held that in the light of the legal and factual position, for the purpose of deduction of tax at source on the payment made by the assessee to the Foreign University, the income should be computed in terms of the provisions of the Act and in so doing, it shall be increased by taking into consideration the amount of tax liability undertaken to be borne by the assessee. In other words, the obligation to pay the tax was on the University and since the assessee in terms of the agreement agreed to pay the taxes, the same had to be necessarily added to the income of the University and therefore, the principle of grossing up has to be applied
Accordingly, the substantial question of law as framed was answered against the assessee and the appeal was dismissed