The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that a non-resident company cannot be denied the benefit of the concessional 10% tax rate under Section 115A of the Income Tax Act merely because it did not obtain a separate approval from the Central Government, where the underlying transaction was already permitted under the Reserve Bank of India’s automatic approval route.
The bench of Beena Pillai (Judicial Member) and Arun Khodpia (Accountant Member) has observed that where government regulations do not prescribe any approval mechanism for a transaction, taxpayers cannot be expected to obtain an approval that does not exist. The Tribunal emphasized that tax provisions must be interpreted practically and harmoniously rather than in a manner that renders compliance impossible.
The appeal was filed by a United States-based company engaged in providing gem trading, training, and technical services. The dispute related to Assessment Year 2016-17 and concerned the applicable tax rate on Fees for Technical Services (FTS) received from its Indian affiliate.
The controversy centered on whether the assessee’s technical service income should be taxed at the concessional rate of 10% under Section 115A(1)(b) of the Income Tax Act or at 15% under Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA).
The Assessing Officer and the Dispute Resolution Panel (DRP) had taken the view that the assessee was not entitled to the benefit of Section 115A because the agreement with the Indian concern allegedly lacked the approval contemplated under the provision. Consequently, they taxed the receipts at 15% under the treaty.
The assessee, however, argued that Section 115A offered a more beneficial tax rate of 10% and that the statutory conditions stood satisfied because the remittances were permitted under RBI regulations without requiring any separate governmental approval.
A crucial aspect of the case involved the RBI’s Master Direction on Other Remittance Facilities.
The assessee demonstrated that prior RBI approval for consultancy services procured from outside India is generally required only where remittances exceed USD 1 million per project. In the present case, the technical service receipts amounted to approximately USD 62,562, far below the prescribed threshold. Therefore, the remittance qualified under the automatic route and did not require any specific approval from the RBI or the Central Government.
The Tribunal accepted this reasoning and observed that where the governing regulatory framework itself permits a transaction under the automatic route, insisting upon a separate approval that is neither prescribed nor contemplated would impose an impossible condition on taxpayers.
The Bench made an important observation regarding statutory interpretation.
According to the Tribunal, the expression “approved by the Central Government” appearing in Section 115A must be read in light of the prevailing FEMA and RBI framework. If a transaction is validly permitted under the automatic route, that itself reflects regulatory approval of the transaction mechanism.
The Tribunal further took note of the fact that similar receipts earned by the assessee in earlier years had consistently been subjected to tax at the concessional rate of 10% under Section 115A. In several assessment years, the Revenue had accepted such treatment without dispute.
The Bench observed that the Revenue had not questioned the genuineness of the agreement, the nature of services rendered, or the fact that similar income had historically been assessed under Section 115A.
Referring to Section 90(2) of the Income Tax Act, the Tribunal reiterated that where a taxpayer is entitled to benefits under both domestic law and a tax treaty, the more beneficial provision must prevail.
Since Article 12 of the India-US DTAA prescribed a tax rate of 15%, whereas Section 115A provided a lower rate of 10%, the assessee was entitled to choose the more favourable domestic law provision after satisfying the relevant conditions.
Accordingly, the Tribunal held that the Assessing Officer’s decision to apply the 15% treaty rate was unsustainable and directed that the FTS income be taxed at 10% under Section 115A.
On the separate issue concerning levy of education cess, the Tribunal ruled against the assessee, observing that the matter was no longer res integra. Consequently, the ground challenging education cess was dismissed.
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