M/s Booz Allen and Hamilton (India) Ltd. & C. Kg (BAHI) is a foreign partnership firm, established in Germany. It had a branch office in India, through which, it carried certain management and consultancy services in connection with certain project works for Indian clients, part of which was done by its overseas group entities, including BAH USA.
The AO treated BAHI as agent of BAH US entity and issued notice u/s 148 to BAHI. Pursuant thereof, a Nil return was file by BAHI India. The AO however concluded that the income of BAH US was taxable in India, which was also upheld by CIT(A). Aggrieved, an appeal was filed before the Tribunal.
Key Contentions of the AO and BAHI
|RBI Approval||In case of an assessee following mercantile system of accounting, once income is accrued in the books of accounts, the same is taxable. This amount was claimed by BAH India as deduction by passing necessary entries in the books of account. No permission has been applied by assessee from RBI.||Since no approval was received from RBI to pay the said amount during the relevant FY, the payable did not result in accrual of any income to the taxpayer – Bombay High Court in the case of CIT v. Kirloskar Tractors Ltd relied|
|Treaty position||FTS would be taxable when liability to pay the amount was incurred.||FTS would be taxable only when the amount has been paid to the non resident as the definition of royalty refers to Payment.|
- The judicial pronouncements quoted by the assessee, clearly support its stand that 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. Since no such approval was received during the year under consideration, such amount payable to BAH USA could not be taxed as income in that year. The ITAT also relied on its own decision in the case of UBS Securities India (P.) Ltd. v. DCIT (ITA No. 4622/Mum/2007 dated 26-2-2009) wherein it was held liability to pay fees to foreign lawyers, which was to be paid 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.
The Tribunal did not accept the argument of Tax office, that permission granted by the RBI is to be construed to mean both permission granted previously or obtained subsequently, which was rendered in the decision of the Supreme Court in LIC of India v. Escorts Ltd., since that decision was rendered in a different context of FERA, and not income tax.
The term “fees for technical services” as used in the India USA DTAA 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.”
Given the above definition, the Tribunal decided 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. In arriving at this decision,it relied on the following decision, which squarelt covered this issue : –
- Seamens Aktiengesellschaft
It was observed that the above decision was rendered in the context of DTAA between India and Germany, which had similar languae as India USA DTAA. In this decision 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. This decision was subsequently upheld by the Hon’ble Bombay High Court.
- CSC Technology Singapore Pte. Ltd.- Delhi Tribunal
The tribunal held that royalty/FTS which had accrued as income to a foreign company, could not be taxed in India unless this amount had been received by the foreign company.