Income Tax Officer (International Taxation) Vs. M/s. National Engineering Industries Ltd., (ITAT Kolkata), ITA No. 1270 and 1271/Kol/2010 dated 28th January, 2011
• National Engineering Industries Ltd. (the taxpayer) had entered into a License & Technical Assistance agreement with Brenco Inc., USA on 19th August, 2002 which expired on 25th June, 2007. Under the agreement the taxpayer was required to pay a certain amount as royalty to Brenco Inc.
• The taxpayer entered into a new agreement with Brenco Inc., USA on 17th August, 2007 wherein at clause (e) it was stated that the new agreement was effective from 26th June, 2007.
• In the new agreement, changes were effected in respect of royalty payable, grant of license, technical assistance and plant visitation. There were also changes to percentage of royalties to be paid.
• The Ministry of Industry, Government of India vide letter dated 5th March, 2008 granted approval to the new agreement.
• The taxpayer made an application under section 195 of the Indian Income tax Act (the Act) contending that as the new agreement was entered into after 1st June 2005, the rate of withholding tax applicable on the royalty payments was 10.5575 % per section 11 5A(1 )(b)(AA) of the Act.
• The AO was of the view that the new agreement was in continuation to the earlier agreement entered into by the taxpayer. i.e. before 1st June, 2005. Hence, as per section 1 15A(1 )(b)(A) of the Act the applicable rate of withholding tax would be 20% (plus surcharge and cess). However as the taxpayer was entitled to relief under section 90 of the Act, tax on royalty payments should be withheld at the rate of 15% per Article 12 of the Indo US Double Taxation Avoidance Agreement.
• The Commissioner of Income tax (Appeals) CIT(A) observed that the agreements provided for changes in the clauses with regard to royalty, grant of license, technical assistance and plant visitation as well as the percentage of royalty. The CIT(A) held that although a clause was added in the new agreement to provide for a continuity in the agreements, in essence, it was a new agreement with many amended terms and conditions.
• Accordingly the CIT(A) held that the new agreement was not an extension of the earlier agreement, but a fresh agreement entered after 1st June, 2005. The tax payer was eligible for the benefit of lower rate of withholding tax @ 10.5575% on the payment of royalty as provided by Finance Act, 2009.
Issues before the Tribunal- Whether the royalty agreement dated 17.8.2007 could be considered as a new agreement entered into after 01.06.2005 and not an extension of the old agreement and hence withholding tax was to be deducted @ 10.5575% and not 15%.
Ruling of the Tribunal- The Calcutta Tribunal considered the material on record as well as the reasoning given by the CIT (A) in holding that tax was required to be withheld at the rate of 10.5575 % and not 15% and concurred with the view of the CIT(A) , that the new agreement was not in continuation of the existing agreement but a fresh agreement entered into after 1st June, 2005. Hence the benefit of lower withholding tax rate as per section 115A(1 )(b)(AA) of the Act would be available to the tax payer.
Conclusion- Based on the facts of the case the Calcutta Tribunal has held that where a new agreement, has modified the principle terms of the earlier agreement, (though in continuation of the said agreement), could be considered as a new agreement.