S/s. 4, 163 – Where necessary RBI approval was not obtained for remitting amounts in foreign exchange and such amount was still payable during the relevant year, such amount cannot be taxed in the hands of recipients, despite the claim for deduction by the payer.

Taxpayer is a foreign partnership firm established in Germany, having a branch office in India through which it renders management and technical consultancy services. During the relevant year, taxpayer obtained services from overseas group entities and the consideration for services was shown as ‘payable’ in the books of accounts. However, the actual payments were not made, as Reserve Bank of India (RBI) approval for the same was not obtained.

The taxpayer was incurring losses and did not have sufficient funds and therefore did not even make an application to RBI seeking its approval to remit the amount. These amounts were debited to Profit & Loss Account of PE of taxpayer in India and deduction on the same was claimed.

The tax authority treated the taxpayer to be the representative assessee of the recipient group entities and considered the amounts payable by the taxpayer as income in the hands of recipients. CIT(A) upheld tax authority’s order. Aggrieved, the taxpayer appealed to the Tribunal.

Held 1:

 Income on account of amounts payable by the taxpayer to the overseas group entities could be said to have accrued to the said entities only on receipt of the required approval from RBI and there being no such approval received during the year under consideration, the same could not be taxed as income in that year. Reliance was placed on the Bombay High Court decision in the case of Kirloskar Tractors Ltd. [(1998) 231 ITR 849) (Bom)] and in the case of Dorr-Oliver (India) Ltd. [(1998) 234 ITR 723 (Bom)], wherein it was held that accrual of income takes place only on obtaining of necessary approval required from RBI.

S/s. 9, 90 – In respect of recipient from treaty country, income in the nature of FTS should be ‘paid’ during the relevant previous year to be taxed in the hands of recipients.

Facts 2:

In addition to the above, taxpayer had received certain technical services from other overseas entities, amounts for which were also ‘payable’ during the year. However, the same was not offered to tax on the premise that as per the relevant tax treaties the same was taxable only on actual receipt. The tax authority brought these amounts to tax as FTS in the hands of these overseas entities.

Held 2:

Following the decision of Bombay High Court in the case DIT (IT) v. Siemens Aktiengesellschaft [TS-795-HC- 2012(BOM)] as well as the decisions of the Tribunal in the case of DCIT vs. UDHE GmbH [(1996) 54 TTJ 355 (Bom)] and in the case of CSC Technology Singapore Pte. Ltd. vs. ADIT [(2012) 50 SOT 399 (Del)], Tribunal held that the amounts payable by taxpayer to the overseas group entities could not be brought to tax in India during the year under consideration as FTS as per the relevant provisions of the tax treaties, since the same had not been ‘paid’ to the said entities.