2011 (7) TMI 644 - HC - Income Tax

Tax deduction on payment to Non resident whether on Gross Amount or Net Amount - Payment to non resident on Technical collaborations -Agreement approved by government Held That - Agreement between the assessee and the foreign company is approved by Government of India under Section 10(6A), tax paid is exempt from further tax and therefore grossing up under Section 195A to cover tax component of the remittance does not arise.

Summary

Issues: Assessment of tax paid by the respondent on remittance made to a foreign collaborator as income assessable, dispute over rejection of exemption claim under Section 10(6A) of the Income Tax Act.

Analysis:
1. Assessment of Tax on Remittance:
The respondent, a Company engaged in manufacturing, entered into a technical collaboration agreement with a British Company. The Assessing Officer grossed up the income on the tax component of remittance made to the foreign company and assessed it as income earned by the foreign company in India. The respondent disputed the rejection of their claim for exemption under Section 10(6A) of the Act. The CIT (Appeals) and the Tribunal upheld the respondent's claim for exemption, stating that the income earned by the foreign company cannot be grossed up under Section 195A for assessment purposes.

2. Interpretation of Section 10(6A) and Section 195A:
The Revenue contended that Section 195A applies regardless of Section 10(6A and argued that the remittance of tax by the respondent was not separately approved by the Government of India under Section 10(6A. However, the Court held that the approval of the agreement between the parties by the Government of India under Section 10(6A) exempts the tax paid by the Indian concern on the remittance to the foreign collaborator from further tax. Therefore, grossing up under Section 195A to cover the tax component of the remittance is not permissible when the agreement is approved under Section 10(6A.

3. Decision and Conclusion:
The Court dismissed the Income Tax Appeals, affirming the respondent's entitlement to exemption from paying tax on the tax component of the remittance. The approval of the collaboration agreement by the Government of India under Section 10(6A resulted in the tax paid being exempt from further taxation. As a result, grossing up under Section 195A was deemed unnecessary in this case. The judgments of the lower appellate authorities were upheld, emphasizing the importance of the Government's approval of the agreement in determining tax liabilities on remittances made to foreign collaborators.