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AAR ruling needs to be reviewed
September, 25th 2006
In the recent ruling of Rajiv Malhotra (284 ITR 564), the Authority for Advance Rulings examined the taxability of commission income earned by a French Company. A sole proprietary concern called LEMS was planning a food and wine show in India in which various foreign concerns were to participate. LEMS engaged a French company to furnish information to foreign participants, booking space in the exhibition and to render some services in connection therewith. LEMS had to pay a commission to French company for the services rendered by it in France. The question, before the AAR was whether the French company was liable to tax in India on the commission earned for services rendered in France and consequently whether LEMS would need to deduct any tax at source on the payments to be made to the French company. The AAR ruled that though French company rendered services abroad and pursued and solicited exhibitors there, the right to receive such commission arose in India only. Therefore, the commission was an income arising from a source within India, taxable under the Income-tax Act. The AAR further held that the commission income fell under the residual category of other income not dealt with specifically in any other article of the treaty. The AAR, accordingly, held that tax was deductible at source at the time of payment of the commission. With due respect to the Honble AAR, it is humbly submitted that this ruling is not correct. It appears that some vital facts have either not been brought to the notice of the AAR or have escaped its attention. In fact, the nature of services rendered by the French company is very much in its direct line of business. Therefore, such commission is clearly its business income. Under Article 7 of Indo-France Tax Treaty, the profits earned by a French company would be taxable in France unless it carries on business in India through a permanent establishment situated in India. In this case, French company did not have any PE in India. Hence, such business profits could not be taxed in India. Further, reference to Article 23 of the Treaty which deals with other income also appears to be misplaced. Therefore, the ruling pronounced by AAR needs to be reviewed. Although there is no specific provision for review before the AAR, it is submitted that the powers of the AAR are comprehensive and it is surely within its powers to review its earlier order given without considering some relevant facts, either suo moto or on receiving a petition in this regard. This is particularly important because there is no provision of any appeal against the ruling pronounced by AAR. A review of the ruling should not create any unavoidable hurdle because it would only involve correction of a judicial error. In this context, observations of the Supreme Court in Distributors (Baroda) P. Ltd. case (155 ITR 120 at page 124) should provide guidance: To perpetuate an error is no heroism. To rectify it, is the compulsion of the judicial conscience. In this, we derive comfort and strength from the wise and inspiring words of justice Bronson in Pierce v Delameter (A.M.Y. at page 18): A judge ought to be wise enough to know that he is fallible and therefore, ever ready to learn: great and honest enough to discard all mere pride of opinion and follow truth wherever it may lead: and courageous enough to acknowledge his errors H P Agrawal
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