2012 (12) TMI 763 - AT - Income Tax

Re opening of assessment - BAH India as an agent of the USA entity - fees for technical services - Held that - Although the amount payable by BAH India to the USA entity was debited by BAH India to the profit & loss account and was also claimed as expenses, no RBI approval was obtained for remitting the said amount in foreign exchange as required by relevant provisions of Foreign Exchange Regulation Act during the year under consideration. As claimed the said amount did not constitute income of the year under consideration for want of the RBI approval as no income chargeable to tax in India could be said to have accrued in the absence of the required approval from RBI reliance placed on the decision of in the case of Kirloskar Tractors Ltd. (1998 (2) TMI 117 - BOMBAY HIGH COURT) wherein held that the approval of RBI having been received in the subsequent years and the relevant amounts also having remitted during those years, liability could be said to accrue or arise in such subsequent years though the same pertained to the earlier years. Reliance has also been placed on another decision of Hon ble Bombay High Court in the case of Dorr-Oliver (India) Ltd. v. CIT 1998 (1) TMI 42 - BOMBAY HIGH COURT wherein it was held that collaboration agreement being subject to Government approval, deduction of sum paid as compensation and fees under collaboration agreement was allowable only upto the date till the agreement enjoyed approval by Government of India and not for any subsequent year. Thus the judicial pronouncements discussed above clearly support the stand of the assessee that income on account of the amount payable by BAH India to the USA entity could be said to have accrued to the said entity only on receipt of the required approval from RBI and there being no such approval received during the year under consideration, the same could not be taxed as income in that year. The decision of the Hon ble Supreme Court in the case of LIC v. Escorts Ltd. (1985 (12) TMI 289 - SUPREME COURT OF INDIA) thus was rendered in a different context and in a different set of facts and the same cannot support the stand of the Revenue in the present case - delete the additions made on this count by the AO - in favour of assessee. Method of accounting - royalty and fees for technical services - Held that - Keeping in view the language so employed in the case of Seamens Aktiengesellschaft (2012 (12) TMI 737 - BOMBAY HIGH COURT) & CSC Technology Singapore Pte. Ltd. (2012 (4) TMI 189 - ITAT DELHI) considering the relevant provisions of DTAA between India and Germany royalty and fees for technical services should be reckoned for taxation only when it is actually received by the assessee and not otherwise - royalty/FTS which had accrued as income to a foreign company, could not be taxed in the source country (being India) unless this amount had been received by the foreign company - thus the amount payable by BAH India to the USA entity could not be brought to tax in India during the year under consideration as fees for technical services as per the relevant provisions of the DTAAs since the same had not been paid to the said entity - in favour of assessee.

Summary

Issues Involved:
1. Validity of assessments made under section 143(3) read with section 148.
2. Accrual of income in the absence of RBI approval.
3. Taxability of fees for technical services under the relevant tax treaties.

Issue-Wise Detailed Analysis:

1. Validity of Assessments Made Under Section 143(3) Read with Section 148:
The preliminary issue of the validity of assessments made by the Assessing Officer (AO) under section 143(3) read with section 148 was raised in grounds No. 1 to 4. However, these grounds were not pressed by the appellant's counsel during the hearing, leading to their dismissal as not pressed.

2. Accrual of Income in the Absence of RBI Approval:
The main contention revolved around whether the amount payable by BAH India to the USA entity constituted income in the absence of RBI approval. The appellant argued that as per the Foreign Exchange Regulation Act (FERA), income could only accrue when RBI approval for remittance was obtained. The appellant relied on the decisions of the Bombay High Court in CIT v. Kirloskar Tractor Ltd. and CIT v. John Fowler (India) Ltd., which held that liability accrues only when RBI approval is granted.

The Revenue, however, argued that in a mercantile system of accounting, income accrues once it is recorded in the books, irrespective of RBI approval. The CIT (Appeals) upheld this view, relying on the Supreme Court's decision in LIC of India v. Escorts Ltd., which suggested that RBI permission could be construed as having retrospective effect.

The Tribunal, after considering the submissions, held that the judicial pronouncements in Kirloskar Tractors Ltd. and Dorr-Oliver (India) Ltd. supported the appellant's contention. The Tribunal noted that the Supreme Court's decision in LIC of India v. Escorts Ltd. was not rendered in the context of income-tax proceedings and did not involve the issue of income accrual. Consequently, the Tribunal concluded that the amount payable by BAH India to the USA entity did not constitute income chargeable to tax in the year under consideration due to the absence of RBI approval. The addition made by the AO and upheld by the CIT (Appeals) was deleted.

3. Taxability of Fees for Technical Services Under the Relevant Tax Treaties:
The appellant contended that as per the specific language of the relevant tax treaties, "fees for technical services" could only be taxed when paid, not when merely payable. The appellant referred to Article 12 of the treaties, which defined "fees for technical services" as "Payments of any amount in consideration for" services. The appellant argued that since the fees were not actually paid during the year, they were not taxable.

The Tribunal found merit in the appellant's argument, noting that similar language was employed in the DTAA between India and Germany. The Tribunal cited the decision of the Bombay High Court in DIT (International Taxation) v. Siemens Aktiengesellschaft, which upheld the view that fees for technical services should be taxed only when actually received. The Tribunal also referred to decisions in DCIT v. UDHE GmbH and CSC Technology, Singapore Pte. Ltd. v. ADIT, which supported the appellant's position.

Respectfully following these judicial pronouncements, the Tribunal held that the amount payable by BAH India to the USA entity could not be taxed as fees for technical services during the year under consideration since it was not paid. The addition made by the AO and confirmed by the CIT (Appeals) was deleted.

Conclusion:
The appeal filed by the appellant was partly allowed, with the Tribunal ruling in favor of the appellant on the key issues of income accrual in the absence of RBI approval and the taxability of fees for technical services under the relevant tax treaties.