Foreign Company Eligible for Concessional Tax Rate Without Separate Central Government Approval for FTS: ITAT [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled that where no prior approval is required under the Foreign Exchange Management Act, 1999 (FEMA) or Reserve Bank of India (RBI) regulations, the benefit of Section 115A(1)(b) of the Income Tax Act, 1961 cannot be denied merely for want of separate Central Government approval in respect of Fees for Technical Services (FTS) receipts.

During assessment proceedings, the Assessing Officer (AO) treated Rs. 10,61,365 received towards travel expenses of the assessee, Gemological Institute International, Inc. as Fees for Technical Services (FTS), holding that the reimbursement was connected with technical and training services. The assessee contended that the amount was a pure reimbursement not taxable under the Income Tax Act, or the India–USA Double Taxation Avoidance Agreement (DTAA), and relied on favourable orders in its own case for earlier years. Although the Dispute Resolution Panel (DRP) upheld the addition, the Tribunal deleted the same following its consistent view in preceding assessment years.

The assessee also claimed taxation of FTS income at 10% under Section 115A(1)(b) of the Income Tax Act, instead of 15% under the India–USA DTAA. The AO and DRP rejected the claim on the ground that the conditions prescribed under Section 115A(1)(b), including approval requirements, were not fulfilled. The assessee argued that the remittances were covered under the Reserve Bank of India (RBI) automatic approval route and, therefore, satisfied the statutory requirement. However, the AO and DRP continued to apply the 15% treaty rate. Aggrieved, the assessee preferred appeal before the Tribunal.

The only issue that arose for consideration was whether the receipts earned by the assessee are liable to be taxed at the rate of 15% in terms of the DTAA entered into between India and the USA, or at the rate of 10% in terms of section 115A(1) of the Income-tax Act, 1961, as claimed by the assessee.

The counsel for the assessee submitted that the Revenue has consistently accepted the applicability of section 115A(1)(b) of the Income Tax Act to the assessee’s receipts and there is no basis to take a contrary view in the impugned assessment year. Accordingly, it was submitted that the conditions prescribed under section 115A(1)(b) stand satisfied and the benefit of the concessional rate of tax provided therein cannot be denied to the assessee.

The Departmental Representative relied upon the orders passed by the authorities below and submitted that the assessee had failed to establish that the agreement entered into with the Indian concern had obtained the requisite approval contemplated under section 115A(1)(b) of the Act. It was submitted that, in the absence of such approval, the assessee was not eligible to claim the benefit of the concessional rate of tax provided under the said provision.

The Bench of Beena Pillai, Judicial Member and Arun Khodpia, Accountant Member noted that in the absence of any requirement under the Foreign Exchange Management Act, 1999 (FEMA) or Reserve Bank of India (RBI) regulations to obtain prior approval for such remittances, the assessee cannot be expected to secure an approval not contemplated by the governing framework.

The Tribunal further noted that the remittances were made pursuant to a genuine agreement for rendering Fees for Technical Services (FTS), the nature of services was undisputed, and similar receipts had been accepted as eligible for taxation under Section 115A(1)(b) in the assessee’s own cases for earlier years.

“In view of the above, we hold that the assessee has substantially complied with the conditions prescribed under section 115A(1)(b) of the Act. The mere absence of a separate approval letter from the Central Government cannot be a ground to deny the concessional rate of tax, particularly when the transaction is permitted under the automatic route prescribed by the RBI”, the Tribunal concluded.

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