2019 (2) TMI 626 - AT - Income Tax

Rate of tax at which the amount received as Royalty to be charged to tax - Held that - As against the assessee s claim of taxability of royalty income at the rate of 10.5060% u/s.115A(1)(b), the Revenue has charged such income at 20% under the DTAA. Both the sides are in agreement that the facts and circumstances of this appeal are mutatis mutandis similar to those of the preceding year. Following the view taken hereinabove, we hold that the royalty income earned by the assessee from its Indian Associated Enterprises, pursuant to an agreement dated 01-04-2008, should be charged to tax at 10.5060%. Determining the correct amount of income chargeable to tax - guarantee fee not approved by the Reserve Bank of India (RBI) not be charged to tax in the hands of the assessee - claim of the assessee is that the RBI accorded approval for a sum of ₹ 17.99 lakhs after the filing of return and conclusion of assessment and hence, necessary relief should be given - Held that - It goes without saying that, if a particular sum is not and cannot be lawfully received by the assessee, the same cannot be charged to tax. However, before allowing any such reduction in income, it is essential to verify that the full amount of ₹ 25.39 lakh was offered for taxation at the first instance. Since the facts have not been examined by the authorities below, we are of the considered opinion that, it would be in the fitness of things if the AO is directed to verify the inclusion of ₹ 25.39 lakh in the income of the assessee as guarantee fee; granting of approval by the RBI in respect of this amount only for ₹ 17.99 lakh; and eventual receipt of lower sum of ₹ 17.99 lakh. In case, it is found that the assessee included guarantee fee of ₹ 25.39 lakhs in his total income and further the RBI did not accord approval for a sum of ₹ 7.40 lakh, which was not received also, then the said sum of ₹ 7.40 lakhs should be reduced from the total income of the assessee. Needless to say, the assessee will be accorded an opportunity of hearing in determining such issue.

Summary

Issues:
1. Rate of tax on royalty income for assessment year 2012-13.
2. Taxability of guarantee fee not approved by RBI for assessment year 2012-13.
3. Rate of tax on royalty income for assessment year 2013-14.

Analysis:

Issue 1: Rate of tax on royalty income for assessment year 2012-13
The dispute revolved around the rate of tax applicable to royalty income received by the assessee from its Indian Associated Enterprise. The assessee contended that the income should be taxed at 10.5060% under section 115A(1)(b)(AA) of the Income-tax Act, 1961. However, the Revenue categorized the assessee under sub-clause (A) of the same section, which prescribed a tax rate of 20% plus surcharge. The key contention was whether the agreement dated 01-04-2008 was a new agreement or an extension of the earlier agreement dated 26-03-1998. The Tribunal, based on precedent, concluded that the 2008 agreement was independent and new, thus falling under sub-clause (AA) and subject to a tax rate of 10.5060%.

Issue 2: Taxability of guarantee fee not approved by RBI for assessment year 2012-13
The assessee raised an additional ground concerning a guarantee fee not approved by the RBI, seeking exclusion of the unapproved amount from taxable income. The RBI approved a lower sum than what was included in the return of income. The Tribunal directed the Assessing Officer to verify if the full amount was initially offered for taxation, and if the unapproved portion was not received, it should be excluded from the total income after due verification.

Issue 3: Rate of tax on royalty income for assessment year 2013-14
Similar to the previous year, the dispute in this assessment year centered on the tax rate applicable to royalty income earned by the assessee from its Indian Associated Enterprises. The assessee argued for a tax rate of 10.5060% under section 115A(1)(b), while the Revenue imposed a rate of 20% under the Double Taxation Avoidance Agreement (DTAA). Following the decision made for the preceding year, the Tribunal held that the royalty income should be taxed at 10.5060%.

In conclusion, the appeal for the assessment year 2013-14 was allowed, while the appeal for the assessment year 2012-13 was partly allowed for statistical purposes.

This detailed analysis of the legal judgment highlights the key issues, arguments presented by the parties, relevant legal provisions, and the Tribunal's decisions for each issue involved in the case.