The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the mere absence of a separate approval letter from the Central Government cannot be a ground to deny the concessional 10% tax rate under section 115A(1)(b) of the Income Tax Act, particularly where the remittance is permitted under the automatic route prescribed by the RBI. It further held that, under section 90(2) of the Act, the assessee is entitled to apply the provision which is more beneficial to it. Since Article 12 of the India–USA DTAA provides a 15% rate for Fees for Technical Services (FTS), while section 115A(1)(b) provides a lower 10% rate, and the statutory conditions stood satisfied, the assessee was entitled to the 10% rate under domestic law.
The Division Bench comprising Beena Pillai (Judicial Member) and Arun Khodpia (Accountant Member) noted that, in the earlier round itself, it had already held that the receipts were in the nature of FTS and that the 10% rate under section 115A(1)(b) applied from April 01, 2016, i.e., from Assessment Year 2016–17 onwards. The only issue left was whether the conditions of section 115A(1)(b), particularly the approval requirement, stood satisfied in the facts of the case.
The Tribunal then examined the RBI Master Direction dated January 01, 2016 and found that prior approval was required only where remittances for consultancy services procured from outside India exceeded USD 1 million per project. In the present case, the total FTS receipts were only USD 62,562, which was far below that threshold. The Tribunal observed that, where the applicable FEMA provisions and RBI guidelines do not require prior approval, the assessee cannot be expected to obtain an approval which is not contemplated under the governing regulations.
The Tribunal further observed that the expression “approved by the Central Government” in section 115A(1)(b) must be interpreted in a practical and reasonable manner. It held that when the regulatory framework itself permits the transaction under the automatic route, that itself evidences approval of the transaction mechanism by the competent authority. The Tribunal also noted that the Revenue had not disputed the genuineness of the agreement, the nature of services rendered, or the fact that similar receipts had been accepted under section 115A(1)(b) in the earlier years.
Briefly, Gemological Institute International, Inc., a US tax resident, filed its return declaring income of Rs. 41.44 lakhs from training and technical services rendered in India. The dispute was not on the nature of the receipts, but on the applicable tax rate for such Fees for Technical Services (FTS). The assessee claimed that the receipts should be taxed at 10% under section 115A(1)(b) of the Income-tax Act, whereas the Assessing Officer and the DRP taxed the receipts at 15% under Article 12 of the India–USA DTAA on the ground that the assessee had not shown approval of the agreement by the Central Government. The assessee’s case was that the remittance was permitted under the RBI automatic route and, therefore, no separate approval was required.
