Case Law Details
ADIT(IT) Vs Aditya Vikram Global House Ltd. (ITAT Mumbai)- Royalty payment pursuant to a technical collaboration agreement in accordance with the Industrial policy of the Government of India, is exempt in the hands of the foreign company under clause (a) of Section 10(6A) of the Income tax Act, 1961. The Tribunal also held that approval of the Reserve Bank of India is sufficient confirmation that the technical collaboration agreement is in accordance with the Industrial Policy.
Full Text of the judgment is as follows:-
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
ITA No. 5402/Mum/ 2007 – (Assessment Year: 2001- 02)
ITA No. 5403/Mum/ 2007 -(Assessment year: 2004- 05)
ITA No. 4651/Mum/2007 -(Assessment year: 2003- 04)
ADIT(IT) -1(1),
Vs
Aditya Vikram Global House Ltd.,
Date of Pronouncement: 19.08.2011
ORDER
PER R.S. PADVEKAR, JM:
These three appeals are filed by the revenue, in which the respective impugned orders of the Ld. CIT (A)-3 1 Mumbai for the A.Ys. 2001- 02, 2003- 04 & 2004- 05 are challenged. The solitary common issue in controversy arises in all these appeals is whether the ld. CIT (A) is justified in holding that the A.O. erred in grossing-up the amount of the withholding tax paid by M/s. Indian Rayon and Industries Limited (in short referred to as Indian Rayon) as per agreement with the assesse to the total income.
2. The facts pertaining to the issue in controversy are as under. The assessee is a foreign company who has entered into an agreement with Indian Rayon and as per the said agreement, the assessee received royalty on which tax was paid by IRIL as under:-
|
Assessment year |
Amount of Tax paid |
| 2001- 01 |
1,21,40,221/- |
| 2003- 04 |
1,06,51,672/- |
| 2004- 05 |
83,82,359/- |
3. It is claimed by the assessee that the tax paid by Indian Rayon is exempt u/s. 10(6A) of the I.T. Act on the ground that the technology collaboration agreement entered into between the assessee and Indian Rayon is in accordance with the Industrial Policy and was also approved by the Reserve Bank Of India (RBI) which is a competent authority duly authorized by the Central Government. In opinion of the A.O,. the activities carried on by the assessee- company with Indian Rayon does not have any locus standi as activities carried out in terms of agreement are not as per the industrial policy and, therefore, the assessee does not fall within the clause (a) to section 10(6A) of the Act. The A.O. also is of the opinion that the assessee’s agreement with Indian Rayon is not as per the industrial policy framed by the Govt. of India and if it is as per the industrial policy of the Govt. of India then no approval of the RBI is required. The A.O., therefore, grossed up the amount payable by the Indian company on the royalty payment to the assessee.
4. The assessee carried the issue before the Ld. CIT (A) and Ld. CIT (A) held that the assessee is entitled to the benefit of tax paid by Indian Rayon of considering the provisions of section 10(6A) of the Act. The Ld. CIT (A) deleted the addition made by the A.O. by grossing-up the amount of the tax paid by the Indian Rayon. We may prefer to re-produce the reasons given by the Ld. CIT (A) for the A.Y. 2003- 04 for deleting the addition, which are as under:–
“2.4 I have considered the arguments of the AR and I have also examined the facts. The A.O. has simply mentioned that the activity in the Technical Assistance Agreement is not as per Industrial Policy. He has failed to provide any basis for such an assertion. The AO has further mentioned that the appellant has neither made any application nor sought any approval for claiming exemption u/s. 1 O(6A) from the Government. The AO has held that the activity of appellant is not under the Industrial Policy and the approval by RBI is also not equivalent to approval by Government of India and therefore claim was rejected. Section 1O(6A) of Income-tax Act reads as under:-
“10(6A) where in the case of a foreign company deriving income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976 but before the 1st day of June, 2002 [and,—”
(a) where the agreement relates to a matter included in the industrial policy, for the time being in force, of the Government of India, such agreement is in accordance with that policy; and
(b) in any other case, the agreement is approved by the Central Government,
the tax on such income is payable, under the terms of the agreement, by Government or the Indian concern to the Central Government, the tax so paid.
Explanation.—For the purposes of this clause and clause (6B),—
(a) ‘fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;
(b) ‘foreign company” shall have the same meaning as in section 80B;
(c) ‘royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;
2.5. It is apparent from section that no procedure has been descried for the approval of the Central Government purposes of this section. On the contrary, wherever specific approval is needed for the purposes of I.T. Act, it has been specifically spelt out in the Act. Few examples are section 1 0(23G) and section 35(1)(iii) Act. Thus, for purposes of sec 1 0(6A), approval by the Central Government or the matter being under Industrial Policy has to be examined. The Technical Assistance agreement has been granted by the appellant for the manufacture and sale of men’s wear clothing and other accessories. Technical assistance means technical and commercial assistance and advise relating to the goods and their design, manufacture, export marketing and export promotion. The RBI has approved the proposal of technical collaboration vide letter dated 09.03.2000 after putting the ceiling on royalty payment which are in accordance with the Industrial Collaboration Agreement approved by RBI is in accordance with the Industrial Policy. Clause-C of Para‑39 (as extracted above) clearly provides for automatic approval for foreign technology agreements for the industries other than those mentioned in Annexure- III. The RBI approval for the remittance of foreign exchange is given as per Foreign Exchange Regulation Act 1973 (FERA). Section-8 of FERA provides for ban on remittance of any foreign exchange outside India without any previous general or special permission of the RBI. It is therefore apparent that the RBI approval dated 09.03.2000 issued under FERA is issued in accordance the Industrial Policy and also as per FERA. Subsequently, FEMA was introduced and CAT Rules 2000 were brought into effect. Para-4 of CAT Rules provides for prior approval of government in respect of cases mentioned in Schedule-II. Serial no.8 of Schedule-II refers to remittance under Technical Collaboration Agreement where payment of royalty exceeds 5% on total sales and 8% on exports and lump sum payment exceeds US$ 2 million, no approval of Ministry of Industrial and Commerce is needed as provided in Schedule II of CAT Rules. The approval of such agreement is automatic. From the perusal of Industrial Policy, CAT Rules and FERA and the RBI approval, it is apparent that the appellant satisfied all the conditions acquired of section 1 0(6A) of the Technical Assistance Agreement being in accordance with the Industrial Policy and wherever required, approved by the Government. In the case of appellant, approval is automatic and no specific approval of Ministry of Industry and Commerce is needed. There is no provision in the I. T. Act for approval u/s. 1 0(6A). I am therefore of the opinion that the appellant is entitled to the benefit of tax paid by Indian Rayon of ~ 1,06,51,674/- being exempt u/s. 1 0(6A). It is therefore held that the AO has wrongly held it to be taxable.”
5. Now, the revenue being aggrieved is in appeal before us.
6. We have heard the rival submissions of the parties and perused the records. The Ld. Counsel took us through the facts as well as the reasoning given by the Ld. CIT (A). He submits that the case is squarely covered by clause (a) to sec 1 O(6A) of the Act. Otherwise also, it is covered under clause (b) to sec 1O(6A) of the Act, as the agreement has been given approval by the RBI. He, further, submits that the identical issue has been considered by the ITAT ‘B’ Bench, Mumbai in the case of ADIT (International Taxation) vs. Kaisar Aluminum Technical Services Inc.20 SOT 226 (Mum) He, therefore, pleaded that the tax paid by the Indian company on the royalty paid to the assessee cannot be grossed-up. We have also heard the Ld. D.R.
7. Section 1O(6A) is already reproduced herein above. The said provision deals with a situation where in pursuant of the agreement between Indian company or concern and the foreign company which derives the income by way of royalty or fees for technical services and any tax is borne by the Govt. of India or Indian concern as per terms of agreement or understanding, subject to the following two conditions, the same will be exempt:-
i) If the agreement relate to the matters in consonance with the industrial policy of the government of India; and
ii) Otherwise, the said agreement is approved by the Central Government.
8. In the case of Kaisar Aluminum Technical Services Inc. (supra) the provision of section 1O(6A) has been explained and operative part of finding of the Tribunal is as under:-
“17. Now coming to the objection of the Revenue that both the conditions mentioned in sub-ss. (a) and (b) of s. 1 O(6A) should be satisfied, we are not able to appreciate the view convassed by the learned Departmental Representative. This section reads as under:
“10(6A) where in the case of a foreign company deriving income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976 but before the 1st day of June, 2002 [and,—”
(a) where the agreement relates to a matter included in the industrial policy, for the time being in force, of the Government of India, such agreement is in accordance with that policy; and
(b) in any other case, the agreement is approved by the Central Government, the tax on such income is payable, under the terms of the agreement, by Government or the Indian concern to the Central Government, the tax so paid].
Reading of sub-s. (a) to s. 1 0(6A) makes it clear that where the agreement relates to a matter, which is included in the industrial policy, for time being in force, of the Government of India, such agreement, is in accordance with that policy then while computing the total income of a previous year of any assessee, income specified above cannot form part of total income. In the light of the subsequent explanation by the Government quoted herein above vide para 15, in such cases no specific approval is required. Approval is automatic. But in any other case, the agreement is to be approved by the Central Government. This means the agreement entered into between an Indian entrepreneur and foreign technology supplier, Government will provide automatic approval for technology agreement related to such high priority industries within the specified parameters. If it is not falling within that high priority industry, then the agreement is specifically to be approved by the Central Government in accordance with s. 1 O(6A)(b).
18. In the instant case of the assessee, we have seen that the assessee falls within the enumerated list of high priority industries. As such, we are of the view that the order of the learned CIT (AO is in agreement with the industrial policy approved by the Government of India and, therefore, s. 1 O(6A)(a) squarely applies in the instant case of the assessee. It is not necessary that both the conditions stipulated in s.1 O(6A) should apply at the same time. Because if that be so, there was no need of using the following words in s. 1 O(6A)(b), which reads as under:
“in any other case, the agreement is approved by the Central Government”
This means that it is not necessary to get approval in all cases. The case of the assessee falls within the ambit of s. 1 O(6A)(a), i.e., automatic approval. Only in cases that fall within s.1 O(6A)(b), approval is required. Hence, the appeal by the Revenue on this ground is without merit and dismissed for both the years under consideration.”-
9. In the present case, the Ld. CIT (A) has recorded that the RBI has approved the proposal of the technical services agreement vide letter dated 9.3.2000, after putting the ceiling on the royalty payment, which are in accordance with the industrial policy 1991, Clause- C of Para 39 of that policy and the technical collaboration agreement (TCA) is in accordance with the Industrial Policy. The Ld. CIT (A) further observed that clause-C of Para 39 clearly provides for automatic approval for foreign technology agreements for the industries other than those mentioned in Annexure-3. The RBI approval is given under the Foreign Exchange Regulation Act, 1973 (FERA) and it is, therefore, apparent that the RBI approval dated 9.03.2000 issued in FERA is issued in accordance with the Industrial Policy of the Govt. of India and also as per the FERA. In our opinion, the categorical finding of the Ld. CIT (A) that technical agreement between the assessee and Indian Rayon is in conformity with the Industrial Policy has not been controverted by the revenue. Otherwise also, the said agreement has been approved by the RBI. In our opinion, even if the assessee’s case is not covered under clause (a) of sec. 10(6A) then the same can also fall in clause (b) and hence tax paid by the Indian company cannot be added to the total income of the assessee company. We find no reason to interfere with the order of the Ld. CIT (A) on this issue and accordingly all the orders challenged of the Ld. CIT (A) for the A.Ys. before us are confirmed.
10. The Ld. Counsel submits that he is invoking the Rule 27 of the Income Tax Tribunal Rules, 1962 to support the order of the Ld. CIT (A) on the issue of the reopening, more particularly in the A.Y. 2001- 02. We find that so far as A.Y. 200 1-02 is concerned, the assessee raised the ground before the Ld. CIT (A) challenging the validity issue u/s. 148. The Ld. CIT (A) did not adjudicate the ground by giving reason that, as relief is given on merit of the issue hence the issue of the validity of the notice u/s. 148 has become academic. In our humble opinion, Rule 27 cannot be invoked in the present case as no adverse finding has been given by the Ld. CIT (A) on this issue and accordingly we reject his plea for invoking Rule 27 of the Income-tax Appellate Tribunal Rules.
Order pronounced in the open court on this day of 19th August 2011.
