2014 (12) TMI 128 - AT - Income Tax

Rate of tax on Royalty / License fee - 10% u/s 115A or higher rate @ 15% as per DTAA with United Kingdom - Whether New licence fee agreements is to be treated as extension of old licence fee agreements Held that - The assessee has received ₹ 6,20,94,207/- from M/s. GKN Driveline (India) Ltd and ₹ 87,97,966/- from M/s. GKN Sinter Metals Ltd. offered this income as royalty @ 10.56% as per section 115A of the Act - the rate of tax on licence fee income to be taxed @ 10% at the strength of the agreement - the assessee was having earlier agreement dated 12.07.2004 with M/s. GKN Sinter Metals Ltd. and it was renewed from 01.01.2007. The provisions of section 115A(1)(b)(AA) does not debar the assessee to enter into new agreements after change of situation in the provisions of section 115A(1)(b)(AA) as far as the reduced rate of royalty is concerned the new agreements entered into on 29.05.2007 between the assessee and GKN Sinter Metals Ltd. and in the same year with GKN Driveline (India) Ltd. are independent agreements - The assessee can manage its affairs within the framework of statute - The Revenue authorities cannot sit into the business decisions of the assessee - By no stretch of imagination, the new agreement entered into in 2007 can be said to be the extension of old agreements entered into between the parties - Even if the assessee has managed its affairs as far as renewal of agreement is concerned, the Revenue authorities should not interfere with the same, unless it is proved beyond doubt that it is nothing but colourable devise. Even if the assessee had entered into new licence agreement with GKN Sinter Metals Ltd. and in the same year with GKN Driveline (India) Ltd. to take advantage of lower rate of tax of 10%, it cannot be denied to the assessee on the ground that it is nothing but extension of old agreement which is not correct otherwise - the new licence fee agreement entered into by the assessee with GKN Sinter Metals Ltd. and in the same year with GKN Driveline (India) Ltd. is nothing but a new and separate agreement - licence fee income should be taxed at 10% - Decided in favour of assessee.

Issues Involved:
1. Treating new license fee agreements as extensions of old license fee agreements and thereby taxing license fee at a higher rate of 15%.
2. Rejection of additional evidence filed before the learned Dispute Resolution Panel (DRP).

Detailed Analysis:

Issue 1: Treating New License Fee Agreements as Extensions of Old License Fee Agreements

Facts and Circumstances:
The assessee, a company incorporated in the United Kingdom, entered into new license fee agreements with its Indian associates, M/s. GKN Sinter Metals Ltd. and M/s. GKN Driveline (India) Ltd., effective from January 1, 2007. The assessee argued that these new agreements should be taxed at a lower rate of 10% under section 115A(1)(b)(AA) of the Income-tax Act, 1961. However, the Assessing Officer and the Dispute Resolution Panel (DRP) treated these agreements as extensions of old agreements dated 2003 and 2004, thereby taxing the license fee at a higher rate of 15% as per Article 13(2)(a)(ii) of the Double Taxation Avoidance Agreement (DTAA) between India and the United Kingdom.

Assessing Officer's Stand:
The Assessing Officer found no significant difference between the old agreements and the new agreements except for the change in the royalty rate. The officer concluded that the new agreements were executed to circumvent the provisions of the Income-tax Act and to take advantage of the lower tax rate.

DRP's Observations:
The DRP noted that the old agreements with other group affiliates were not produced before the Assessing Officer and were presented for the first time before the DRP. The DRP found no significant changes in the new agreements except for the royalty rate and rejected the additional evidence provided by the assessee.

Tribunal's Analysis:
The Tribunal found that the new agreements were independent and not mere extensions of the old agreements. The Tribunal held that the Revenue authorities cannot interfere with the business decisions of the assessee unless it is proven that the new agreements are a colorable device. The Tribunal concluded that the new license fee agreements should be taxed at the lower rate of 10%.

Conclusion:
The Tribunal directed that the new license fee agreements entered into by the assessee with GKN Sinter Metals Ltd. and GKN Driveline (India) Ltd. be treated as new and separate agreements, and the license fee income should be taxed at the rate of 10%.

Issue 2: Rejection of Additional Evidence Filed Before the DRP

Facts and Circumstances:
The assessee produced additional evidence in the form of old license fee agreements with other GKN group entities before the DRP. The DRP rejected this additional evidence, stating that it was presented for the first time during the DRP proceedings and was not produced before the Assessing Officer.

Tribunal's Analysis:
The Tribunal noted that the additional evidence was relevant to the conclusions arrived at by the Assessing Officer. The Tribunal observed that the Revenue authorities should not have rejected the additional evidence without giving the assessee an opportunity to present it.

Conclusion:
The Tribunal implicitly accepted the relevance of the additional evidence by treating the new agreements as independent and directed the lower authorities to tax the license fee income at the lower rate of 10%.

Final Judgment:
The appeal filed by the assessee was allowed, and the Tribunal directed that the new license fee agreements be treated as new and separate agreements, thereby taxing the license fee income at the rate of 10%. The Tribunal also implicitly recognized the relevance of the additional evidence provided by the assessee. The judgment was pronounced in the open court on August 28, 2014.

← Previous Next →