The Authority for Advance Rulings (Income Tax) has ruled that the income receivable by M/s Flakt Woods AB, which is a company incorporated in Sweden and accordingly a tax resident of Sweden, in the form of 'royalties' from M/s Flakt (India) Limited under the IP licence, fee agreement, trademark licence and fee agreement would be subject to tax in its hands in India.

This is in accordance with the provisions of the Act which include cash or receipt basis, and the provisions of Article 12 of the Double Taxation Avoidance Agreement entered into between the government of the Republic of India and the government of the Kingdom of Sweden does not provide for the contra.

It has been further ruled by the authority that the applicant is required to withhold tax u/s. 195 (1) of the Income Tax Act, 1961 from the sums payable to Flakt AG in pursuance of the agreement referred to hereinbefore. The deduction of tax need not necessarily be at the time of making actual remittance of the said sums; it has to be at the time of making a mere provision thereof in the books of account of the applicant, since the requirement of actual payment of 'fees for technical services', is not a pre-requisite or pre-condition for triggering the incidence of income tax, in the India-Switzerland tax treaty. It follows that on compliance with section 195(1) of the Act, it cannot be said that the Treaty would be defeated and rendered otiose.

The applicant which was a resident company having its registered office in Poonamallee High Road, Village Numbai, Chennai, is a member of Flakt Woods Group of Companies- a worldwide group of companies -- M/s Flakt woods AB incorporated in Sweden and a tax resident of Sweden, and M/s Flakt Woods Group AG incorporated in Switzerland and a tax resident of Switzerland, are also members of the Flakt group.

The first application related to Sweden company and the second application related to Swiss company,

The applicant entered into two separate agreements in respect of IP Licence and Fee Agreement and Trademark Licence and Fee Agreement with the Sweden company for consideration specified therein payable by the applicant to the said company (hereinafter referred to as the 'royalties').

The applicant entered into management services agreement with the Swiss company for providing various services to the applicant in consideration of 'fees' payable by it to the said company.

Those agreements were operative for different periods. In response to the invoices for royalties and fees raised by the said companies, the applicant credited amounts to the account of aforementioned companies in its own accounts for the period February 2002 to December 2002.

No amount was, however, paid to the said companies by the applicant till March 31, 2003.

On the assumption that no amount was paid to or received by the said companies, the income-tax payable under the Act by those companies was not deducted and made over to the concerned income-tax authorities u/s. 195(1) of the Income-tax Act by the applicant.

On this factual background, the applicant sought advance ruling of the Authority, in the first mentioned application, on the following questions:

'(1) Whether the income receivable by M/s. Flakt Woods AB (hereinafter referred to as 'Flakt AB') which is a company incorporated in Sweden and accordingly a tax resident of Sweden, in the form of 'royalties' from M/s. Flakt (India) Limited (hereinafter referred to as the 'applicant') under the IP licence and fee agreement and trademark licence and fee agreement, would be subject to tax in its hand in India only on cash or receipt basis, as per the provisions of Article 12 of the Double Taxation Avoidance Agreement entered into between the Government of India and the Government of the Sweden (hereinafter referred to as 'India-Sweden tax treaty')?

'(2) In the event, the answer to question no. (1) is in the affirmative, whether the applicant is required to withhold income tax u/s. 195(1) of the Income tax Act, 1961 from the sums payable in favour of Flakt AB in pursuance of the two agreements referred to hereinbefore, only at the time of making actual remittance of the said sums and not at the time of making a mere provision thereof in the books of account of the applicant, since otherwise, the requirement of actual payment of 'royalties', as a pre-requisite or pre-condition for triggering the incidence of income tax, as contained in the India-Sweden tax treaty, would be defeated and rendered otiose?'

The CIT-I, Chennai, the jurisdictional Commissioner, does not dispute the facts stated by the applicant. It is, however, submitted that on the 'royalties and the 'fee' payable by the applicant income tax under the Act has to be deducted u/s. 195(1) thereof.

According to the commissioner, income tax is deductible at the time of crediting royalties and fee to the accounts of the said companies in the accounts of the applicant even though the same is neither paid to nor received by those companies.

Section 90 occurs in chapter IX of the Act which deals with double taxation relief. Sub-section (1) of section 90 empowers the central government to enter into agreement with the government of any country outside India, in respect of matters specified in clauses (a) to (d) thereof and to make such provisions as may be necessary for implementing the agreement by issuing notification n the Official Gazette.

Sub-section 2 thereof provides that where the central government has entered into an agreement with the government of any country outside India under sub-section (1) for granting relief of tax, or as the case may, avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

The Republic of India entered into Agreements with the Government of the Kingdom of Sweden and the Swiss Confederation for respect to taxes on Income and on Capital. Article 12 of the DTAA is in the following terms.

Article 12: Royalties and fees for technical services:

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. Notwithstanding the provisions of paragraph (1), 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 ten per cent of the gross amount of the royalties or fees for technical services.

3(a). The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic, or scientific work including cinematograph films, any patent, trademark, design or model, plan secret formula or process, or for information concerning industrial, commercial or scientific experience.

The Authority held that the provisions of Article 12 of the treaty do not provide that taxability of such royalties/fees in India shall be on cash or receipt basis. Indeed even according to Article 12 such royalties/fees would be taxable according to the law in India.