2024 (8) TMI 1431 - HC - Income Tax

Tax payable u/s 115A or 20% under India-Italy DTAA - Royalty agreement as a new agreement or extension of the License and Technical Assistance agreement - whether the second agreement was a continuation of the first agreement or it was a separate agreement and that would decide whether the tax payable was at 10.56% or 20% u/s 115A of the Act. HELD THAT - Tribunal has analysed both the agreements and came to a factual finding that agreement dated 1st April 2008 was an independent agreement. ITAT has spelt out the difference between two agreements and also the law as prevailing. One of the factors which has influenced the ITAT to arrive at the conclusion that the old agreement provided the trademarks to be used by assessee were only restricted to Ape 501 and Ape 601, whereas, as per the new agreement assessee has provided the license to manufacture and sell the vehicles under the name of Ape, which encompasses all kinds of vehicles. ITAT also has considered the fact that assessee in view of the extended license provided also launched Ape city diesel of three wheelers under Ape brand which was different from Ape 501 and Ape 601 brands, which it could not have done under the old agreement. The ITAT also observed that the territory which was covered under the old agreement was different from the territory that was covered under the new agreement and so on. In view of these differences, the ITAT came to the conclusion that the agreement dated 1st April 2008 was an independent agreement and distinct from the earlier agreement dated 26th March 1998 and not an extension of the first agreement. Since these are factual findings and in our view possible findings and by no stretch of imagination can be termed perverse, no substantial questions of law arise.

Summary

Issues:
Interpretation of agreements for tax implications under Section 115A of the Income Tax Act 1961.

Detailed Analysis:

1. Background and International Transactions:
The case involves a foreign company based in Italy engaged in manufacturing motorized vehicles, receiving royalty income and technical fees in India. The transactions with its associated enterprises were referred to the Transfer Pricing Officer due to their value exceeding Rs.15 crores. The primary issue under consideration pertains to the tax application under Section 115A of the Income Tax Act based on agreements entered into by the company.

2. Agreements and Tax Rate Application:
The company and its associated enterprises initially had an agreement dated 26th March 1998, followed by another agreement dated 1st April 2008. The critical question was whether the latter agreement was a continuation of the former or a separate entity, determining the applicable tax rate either at 10.56% or 20% under Section 115A of the Act.

3. Assessment and Dispute Resolution:
The Assessing Officer, in the draft assessment for AY-2011-12, considered both agreements and concluded that the 2008 agreement was an extension of the 1998 agreement, warranting a 20% tax rate. The Dispute Resolution Panel upheld this view without independent findings. Subsequently, the matter was brought before the Income Tax Appellate Tribunal (ITAT).

4. ITAT Judgment and Analysis:
The ITAT, in its order dated 21st March 2017, determined that the 2008 agreement was a distinct and independent entity from the 1998 agreement. The Tribunal extensively analyzed the agreements, highlighting differences such as expanded trademark usage and territory coverage under the 2008 agreement. The ITAT's decision was based on factual findings, emphasizing the unique aspects of the 2008 agreement that set it apart from the earlier one.

5. Conclusion and Dismissal of Appeal:
Given the factual nature of the ITAT's findings and the absence of perversity, the High Court dismissed the appeal, stating that no substantial questions of law arose from the case. The judgment affirms the ITAT's determination that the 2008 agreement was not an extension but an independent agreement, impacting the tax rate application under Section 115A of the Income Tax Act.

This detailed analysis encapsulates the key legal issues, factual background, assessments, tribunal judgment, and the ultimate dismissal of the appeal by the High Court, providing a comprehensive understanding of the case's intricacies and legal implications.