Case Law Details
IN THE ITAT MUMBAI BENCH ‘L’
Booz. Allen & Hamilton (India) Ltd.
Versus
Assistant Director of Income-tax, (International Taxation)
IT APPEAL NO. 4505 (MUM.) OF 2003
[ASSESSMENT YEAR 1998-99]
DECEMBER 21, 2012
ORDER
P.M. Jagtap, Accountant Member
This appeal is filed by M/s Booz. Allen & Hamilton (India) Ltd. & Co. Kg. (BAH India in short) as agent of Booz Allen & Hamilton, USA against the order passed by the learned CIT(Appeals)-XXXI, Mumbai dated 28th February, 2003.
2. BAH India is a foreign partnership firm established in Germany. It has a branch office in India through which it renders management and technical consultancy services. During the year under consideration, such services were rendered by BAH India in connection with six projects – two related to TISCO and one each of Asian Paints, Siemens, Philips India and Deutsche Telecom. In this connection, BAH India had availed the services from various Booz Allen group entities including Booz. Allen & Hamilton USA. A sum of Rs. 89,35,777/- was payable by the assessee to the said entity in USA for such services. According to the AO, the said amount payable by BAH India to the USA entity was chargeable to tax in India in its hands as “fees for technical services” and BAH India was liable to treat as an agent of the said entity for this purpose. He, therefore, issued a notice to BAH India requiring it to show cause why it should not be treated as an agent. Although the assessee raised objection in this regard, the AO overruled the same and passed order u/s 163 treating BAH India as an agent of the USA entity which was upheld by the learned CIT (Appeals). The AO, therefore, issued notice u/s 148 to BAH India as an agent of the USA entity in response to which return of income was filed by the assessee declaring total income of the said entity chargeable to tax in India for the year under consideration at Nil. In the assessment completed u/s 143(3) read with section 148 of the Act on BAH India as agent of the USA entity, the amounts payable by BAH India to the said entity was brought to tax in India by the AO as “fees for technical services”.
3. Against the order passed by the AO u/s 143(3) read with section 148 of the Act, appeal was filed by BAH India before the learned CIT (Appeals) challenging the validity of the said assessment as well as disputing the addition made therein on merit. During the course of appellate proceedings before the learned CIT (Appeals), various contentions were raised on behalf of BAH India challenging the validity of assessment made by the AO u/s 143(3) read with section 148 on various grounds. The learned CIT (Appeals), however, did not find merit in the said contentions and rejecting the same, he upheld the validity of assessment made by the AO. As regards the addition made by the AO in the said assessment, it was contended on behalf of BAH India on merit that the amount payable by it to the USA entity did not partake character of income till necessary approval was received under the Exchange Control Regulation Act. It was contended that there being no such approval received from RBI during the year under consideration, the amount payable by BAH India to USA entity entities did not constitute income which could be brought to tax in India. In support of this contention, reliance was placed on behalf of BAH India on the decisions of Hon’ble Bombay High Court in the case of CIT v. Kirloskar Tractor Ltd. 231 ITR 849 and in the case of CIT v. John Fowler (India) Ltd. (Bom) 239 ITR 312. The learned CIT (Appeals), however, did not accept this contention raised on behalf of BAH India. He held that the USA entity having raised the invoices on BAH India after rendering the services and even BAH India having already accounted for the said invoices in its books of account claiming the said as expenditure, it could not be claimed that the amount payable by BAH India to the said entity did not accrue as income merely for want of permission from RBI. In this regard, he relied on the decision of Hon’ble Supreme Court in the case of LIC of India v. Escorts Ltd. [1986] 59 Comp.cas 548, AIR 1986 SC 1370 wherein it was held that permission obtained from Reserve Bank of India for establishing business in India should be construed as permission granted previously or obtained subsequently as long as the relevant statutory provisions did not stipulate that such permission should have been obtained previously. The learned CIT (Appeals) thus held that there was a liability arising as a result of the entries made in the books of account of BAH India and the effect of liability having been acknowledged by BAH India by claiming deduction in its profit & loss account, income had accrued during the year under consideration.
4. It was also contended on behalf of BAH India that as per the specific language used in the relevant tax treaties, “fees for technical services” could be taxed only when it was paid to the resident of the other contracting States. It was contended that since the amounts of fees for technical services had not been paid by BAH India to the USA entity in the year under consideration, the same could not be taxed in that year. The learned CIT (Appeals) did not find merit in this contention also raised before him. According to him, the word “paid” used in the relevant Article of the treaty dealing with “fees for technical services” was not used to denote actual payment of the same but the same was used in the sense of incurring a liability. He, therefore, held that the amount payable by BAH India to the USA entity was chargeable to tax in India as “fees for technical services” in the year under consideration although the same was not actually paid in that year. Accordingly, the addition made by the AO on account of fees for technical services in the assessment completed u/s 143(3) read with section 148 of the Act was confirmed by the learned CIT (Appeals). Aggrieved by the order of the learned CIT (Appeals), the present appeal is preferred before the Tribunal.
5. In ground No. 1 to 4, the preliminary issue challenging validity of assessments made by the AO u/s 143(3) read with section 148 is raised. However, the same have not been pressed by the learned counsel for the assessee at the time of hearing before us. Ground Nos. 1 to 4 of the appeal are accordingly dismissed as not pressed.
6. In ground No.5, the addition made on account of fees for technical services is challenged on the basis that there being no approval received from RBI under the Exchange Control Regulation Act to pay the impugned amount by BAH India to the USA entity, the said amount did not partake the character of income and there was thus no accrual of income in the year under consideration.
7. The learned counsel for the assessee submitted on merit that as per the provisions of FERA, BAH India was required to obtain the approval of the RBI before making payment to the USA entity. He contended that no such approval, however, was obtained and in the absence of the same, no income could be said to have accrued to the USA entity in respect of the amount in question. He contended that such income could accrue only in the year when RBI permission would be obtained for the remittance of the said amount. In support of this contention, he relied on the decision of Hon’ble Bombay High Court in the case of CIT v. Kirloskar Tractors Ltd. (supra) wherein it was held that the liability to pay the amount pertaining to the earlier assessment years could be said to have accrued or arisen only in the years when the required approval u/s 9 of the Foreign Exchange Regulation Act, 1963 was granted by the Reserve Bank of India. He also relied on the another decision of Hon’ble Bombay High Court in the case of CIT v. John Fowler (India) Ltd. (supra) wherein it was held that the liability to pay royalty did not accrue or arise during the previous year ending on 31st December, 1979 and the same accrued only on 30th December, 1980 when the Government of India granted its approval to the agreement. He contended that both these decisions of the Hon’ble Bombay High Court which are directly on the issue were brushed aside by the learned CIT (Appeals) relying on the decision of Hon’ble Supreme Court in the case of LIC of India v. Escorts Ltd. (supra) which was not rendered in connection with the Income-tax proceedings. He contended that the said decision was rendered by the Hon’ble Supreme Court taking into consideration the provisions of section 29 of FERA which are very specific in this regard. He contended that the issue before the Hon’ble Supreme Court in any case was not related to accrual of income and the decision rendered by the Hon’ble Supreme Court in altogether different context was wrongly relied upon by the learned CIT (Appeals).
8. The learned DR, on the other hand, submitted that in the case of assessee following mercantile system of accounting, once income is accrued, the same is taxable. He contended that the amount in question payable to USA entity was claimed by BAH India as deduction by passing necessary entries in the books of account which itself shows that there was accrual of income to the said entity. He submitted that in the case laws relied upon by the learned counsel for the assessee, the assessee had actually sought permission from the RBI whereas in the present case, no such permission has even been applied to the RBI. He contended that by not applying for the permission from RBI, the payment of tax in case of USA entity is being avoided.
9. In the rejoinder, the learned counsel for the assessee clarified that due to substantial losses suffered by BAH India, no payment has been made till date of the impugned amount to the USA entity and that is why no application has been made to RBI for getting the permission to make such payment. He contended that there is no attempt being made to avoid the tax by delaying such application as alleged by the learned DR.
10. We have considered the rival submissions and also perused the relevant material on record. It is observed 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 before the authorities below as well as before us, 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. In support of this contention, reliance has been placed, inter alia, on the decision of Hon’ble Bombay High Court in the case of Kirloskar Tractors Ltd. (supra) wherein it was 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 234 ITR 723 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. Following these two decisions of Hon’ble Bombay High Court, the coordinate bench of this Tribunal in the case of UBS Securities India P. Ltd. v. DCIT (ITA No. 4622/Mum/2007 dated 26th February, 2009) has held that the liability on account of fees payable to foreign lawyers, payment of which was subject to approval from the RBI, could be said to have accrued only on receipt of such approval and the assessee was entitled to claim deduction for the said amount only in the year when such approval was granted by the RBI.
11. In our opinion, 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. It is observed that the learned CIT (Appeals), however, has not accepted this stand relying on the decision of Hon’ble Supreme Court in the case of LIC of India v. Escorts Ltd. (supra) wherein it was held that permission granted by the RBI is to be construed to mean both permission granted previously or obtained subsequently. As rightly contended by the learned counsel for the assessee, the said decision, however, was not rendered by the Hon’ble Supreme Court in relation to income-tax proceedings and there was no issue of accrual of income involved in that case. Moreover, the said decision was rendered in the context of section 29 of Foreign Exchange Regulation Act under which permission of Reserve Bank of India in regard to the establishment of business in India was required to be obtained subsequently within a period of six months from the date of establishment of business in India and in these facts and circumstances, it was held by the Hon’ble Supreme Court that the permission obtained subsequently from the Reserve Bank of India should be treated as having retrospective effect. The decision of the Hon’ble Supreme Court in the case of LIC v. Escorts Ltd. (supra) thus was rendered in a different context and in a different set of facts and the same in our opinion, cannot support the stand of the Revenue in the present case.
12. Before us, the learned DR has made an attempt to distinguish the decision of Hon’ble Bombay High Court in the case of CIT v. Kirloskar Tractors Ltd. (supra) and in the case of CIT v. John Fowler (India) Ltd. (supra) stating that permission in the said cases was applied by the assessee from the RBI whereas no such permission has been sought by the assessee in the present case. However, as explained by the learned counsel for the assessee, permission has not been sought from RBI since BAH India having substantial losses is not in a position to remit the amount in question to the USA entity. In any case, this aspect, in our opinion, is not relevant for deciding the issue of accrual of income which as held by the Hon’ble Bombay High Court in the case of Kirloskar Tractors Ltd. (supra) and in the case of Dorr-Oliver (India) Ltd. takes place only on the obtaining of the necessary approval required from RBI. Keeping in view the said decision of Hon’ble Bombay High Court, we accept the contention raised on behalf of the assessee that the amount payable by BAH India to the USA entity did not constitute its income chargeable to tax in the year under consideration as there was no accrual of income in the absence of permission obtained from RBI as required by FERA. We, therefore, delete the additions made on this count by the AO and confirmed by the learned CIT (Appeals) and allow ground No. 5 of the assessee’s appeal.
13. Ground No. 6 relating to the issue of assessee’s claim regarding non-accrual of income on the basis of cash system of accounting followed by the assessees has not been pressed by the learned counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed.
14. In ground No.7 raised in this appeal, the assessee has disputed the addition made by the AO and confirmed by the learned CIT (Appeals) on account of the amount payable by BAH India on the ground that the same is not liable to tax in India under the relevant tax treaty which covers only the amount paid.
15. The learned counsel for the assessee submitted that the amount in question payable by BAH India to the USA entity was not actually paid during the year under consideration. In this regard, he referred to the relevant provision of Article 12 of the treaties to point out that the term “Royalties” as used in Article 12 is defined to mean “Payments of any kind received as a consideration for .. .. .. .. .. .. ..” and the term “fees for technical services” is defined to mean “Payments of any amount in consideration for”. He contended that royalties and fees for technical services thus are liable to tax as per Article 12 of the relevant treaties only on payment basis and there being no payments made by BAH India of the impugned amount to the USA entity, the said amount was not liable to tax as royalties or fees for technical services in India during the year under consideration as per Article 12 of the relevant treaties. In support of this contention, he relied on the decision of Hon’ble Bombay High Court in the case of DIT (International Taxation) v. Siemens Aktiengesellschaft (I.T. Appeal No. 124 of 2010 dated 22nd Oct., 2012) and various decisions of the Tribunal including the decision of Mumbai Bench in the case of DCIT v. UDHE GmbH 54 TTJ 355 and the decision of Delhi Bench of ITAT in the case of CSC Technology, Singapore Pte. Ltd. v. ADIT 50 SOT 399.
16. The learned DR, on the other hand, relied on the orders of the authorities below in support of the Revenue’s case on this issue.
17. We have considered the rival submissions and also perused the relevant material on record. It is observed that the amount in question payable by BAH India to the USA entity was not paid during the year under consideration and there is no dispute about the same. The said amount payable to the USA entity has been brought to tax in India in its hands by the Revenue authorities as fees for technical services. As per the relevant provisions of the Double Taxation Avoidance Treaty between India and the USA, the term “fees for technical services” as used in the relevant treaties is defined to mean “Payments of any amount in consideration for the services of managerial, technical or consultancy nature including the provision of services of technical or other personnel.” In the case of Seamens Aktiengesellschaft (supra), a similar language was employed in the relevant provisions of DTAA between India and Germany and keeping in view the language so employed, the Tribunal held that royalty and fees for technical services should be reckoned for taxation only when it is actually received by the assessee and not otherwise and this decision of the Tribunal was upheld by the Hon’ble Bombay High Court observing that the assessment of royalty or any fees for technical services should be made in the year in which the amounts are received as per the relevant provisions of the DTAA and not otherwise. The coordinate bench of this Tribunal at Delhi in the case of CSC Technology Singapore Pte. Ltd. (supra) has also taken a similar view holding that 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. In our opinion, the issue thus is squarely covered in favour of the assessee by the decision of Hon’ble Bombay High Court in the case DIT (International Taxation) v. Siemens Aktiengesellschaft (supra) as well as the decisions of the Tribunal in the case of DCIT v. UDHE GmbH (supra) and in the case of CSC Technology, Singapore Pte. Ltd. v. ADIT (supra) and respectfully following the said judicial pronouncements, we hold that 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. Ground No. 7 of the assessee’s appeal is accordingly allowed.
18. In the result, appeal filed by the assessee is partly allowed.
