Full Judgment
1998-99, it is the Department which is in appeal. However, in both the appeals, the issue is the same namely whether tax was to be deducted from the royalty payments at the rate of 15 per cent or 20 per cent, under Art. 12(3) of the Double Tax Avoidance Agreement between India and United Kingdom.
2. The assessee is a company incorporated in England. At the time of incorporation its name was British Aerospace Public Ltd. Company. The name was changed on 5th May, 2000 to BAE Systems Plc. It entered into agreement with the Government of India through the President of India who was represented by the Jt. Secretary, Department of Defence Production, Ministry of Defence, New Delhi, on 12th April, 1979. This agreement has been classified as a secret document and, therefore, its only relevant portions thereof have been filed in the paper book filed by the assessee before us. Under the agreement, inter alia, the Government of India was to obtain a license of proprietary rights to manufacture and assemble and make Jaguar International Aircraft in India and in other specified countries (para A(b) of the preamble).
According to Clause 26.2 of the agreement, the following was provided : "26.2 The licensee shall appoint HAL as its agent (for the.performance and implementation of this agreement) (for and on behalf of the licensee) and such agency shall not be regarded as an assignment, sub-license or sub-contract prohibited under this clause. The licensee shall give prompt notice to the licensor upon such appointment and shall ensure that HAL shall observe and be bound by the terms and conditions of this agreement as if it is a party to this agreement. The licensee shall remain fully responsible for the due performance of this agreement." 2.1 On 4th Aug., 1995, the agreement was modified. Clause 9.2.2. was inserted into the agreement to provide for certain royalty payments to be made by the Government of India to the assessee-company. Clause 21.2 provided that the agreement shall be enforced for a period of 20 years and can be renewed at the option of the Government of India for a further period of 5 years on the existing terms and conditions and "without any financial liability to the licensee, additional to its obligations to pay royalties thereunder." 3. For the purpose of implementing the agreement, the Government of India appointed Hindustan Aeronautics Ltd. (HAL) of Bangalore as its agent. This is confirmed by the letter dt. 2nd Aug., 2000 written by the Jt. Secretary, Ministry of Defence, Government of India to the vice president and general manager of the assessee-company. A copy of this letter is at p. 31 of the paper book. A certificate issued by the chief manager (finance) of HAL to the effect that as per the terms of the license agreement, the royalty is payable by HAL and the taxes on the royalties are paid on behalf of the Government of India by HAL is placed at p. 30 of the paper book. At p. 32, there is a letter dt. 14th Aug., 2000 written by the chief manager, finance of HAL to the vice president and general manager of the assessee-company. In both the letters dt. 2nd Aug., 2000 and 14th Aug., 2000, there is reference to the fact that HAL while remitting the royalties, has deducted tax at source at 15 per cent as advised by the Government Audit and this has been accepted by the IT Department. It appears from the letter dt. 14th Aug., 2000 that earlier HAL was deducting tax at the rate of 20 per cent. After the opinion of the Government Audit, HAL appears to have made claims for refund of the excise tax with the IT Department.
4. The controversy in the present case centers around Art. 13.2 of the DTA between India and UK. This article, so far as it is relevant for our purpose is as follows : 1. Royalties and fees for technical services arising 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 law of that State, but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties within para 3(a) of this article, and fees for technical services within paras 4(a) and (c) of this article : (i) during the first five years for which this convention has effect; (aa) 15 per cent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first-mentioned Contracting State or a political sub-division of that State; and (bb) 20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and (ii) during subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and" 5. It is to be seen that if the payer of the royalties is the Government of India tax has to be deducted at the rate of 15 per cent whereas in all other cases, the tax payable is 20 per cent of the gross amount of the royalties. The question before us is whether it is the Government of India which has paid the royalties. The IT authorities have taken the view that it is HAL which is paid the royalties and, therefore, tax should have been paid at the rate of 20 per cent of the gross amount of royalties. In taking this view they have relied on the fact that under Clause 26.2 of the agreement between the assessee and the Government of India the performance and implementation of the agreement shall be by HAL. We are, however, unable to accept the view.
Undoubtedly HAL has been appointed as the agent of the Government of India for implementation and performance of the agreement. It has not been suggested that HAL was not the agent of the Government of India.
The royalties were paid by HAL not on its own account but only on account of the principal, namely the Government of India. When HAL made the payment of royalties it was doing so on behalf of and for the Government of India. The IT authorities were not justified in making a dichotomy between the Government of India and HAL to say that the royalties were paid not by the Government of India. In fact, in the asst. yr. 2000-01, it is stated that the CIT(A) held that tax was to be paid only at the rate of 15 per cent and this view was accepted by the Department and no appeal was filed. In respect of the asst. yr.
1999-2000, the AO himself accepted the payment of tax at the rate of 15 per cent vide intimation passed under Section 143(1)(a). Thus, for subsequent years, the IT Department itself appears to have accepted that the payment was made by the Government of India and, therefore, the tax payable was only 15 per cent.
6. For the above reasons, we hold that it was in fact the Government of India which paid the royalty and, therefore, the tax payable is only 15 per cent as per art 13.2(i)(aa) of the DTA between India and UK.7. In the result, the appeal of the assessee for the asst. yr. 1997-98 is allowed and that of the Department for the asst. yr. 1998-99 is dismissed.