Foreign Company Entitled To Concessional Tax Rate Without Separate Central Govt. Approval: ITAT Mumbai

On 19 June, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) held that a foreign company cannot be denied the benefit of a lower tax rate merely because no separate approval was obtained from the Central Government, where the transaction itself was permitted under the automatic route prescribed by the RBI.

Judicial Member Beena Pillai and Accountant Member Arun Khodpia allowed the appeal filed by Gemological Institute International, Inc., noting that a taxpayer cannot be expected to obtain an approval which is not contemplated under the governing regulations. The Bench held:

“The expression 'approved by the Central Government' occurring in section 115A(1)(b) has to be interpreted in a practical and reasonable manner so as to give effect to the legislative intent and cannot be construed in a manner which makes the provision impossible to comply with.”

Gemological Institute International is a US-based company and taxpayer engaged in providing gem trading and technical services, and had offered fees for technical services (FTS) to tax at 10%. The Assessing Officer, however, applied the 15% rate under the India-US DTAA on the ground that the agreement with the Indian entity had not been approved by the Central Government.

Before the Tribunal, the company contended that the remittances were permissible under the RBI's automatic route and that no separate approval was required since the receipts of USD 62,562 were substantially below the threshold requiring prior approval. It also pointed out that similar receipts had consistently been taxed at 10% in earlier years.

The Revenue supported the orders passed by the Assessing Officer and the DRP, contending that in the absence of an approval from the Central Government, the concessional rate was unavailable.

The Tribunal noted that the RBI framework required prior approval only for remittances exceeding USD 1 million per project and that Gemological Institute International's receipts were far below the prescribed limit.

It also held that insisting on a separate approval when none was contemplated under the applicable regulations would amount to reading an additional condition into the law. The Bench further observed:

“The mere absence of a separate approval letter from the Central Government cannot be a ground to deny the concessional rate of tax, particularly when the transaction is permitted under the automatic route prescribed by the RBI.”

Holding that the Gemological Institute International had substantially complied with the statutory conditions and was entitled to avail the more beneficial domestic tax rate, the Tribunal directed that the fees for technical services be taxed at 10% instead of 15%.

Accordingly, the ITAT allowed the appeal. However, it rejected the challenge to the levy of education cess.

For Assessee: Shri J.D. Mistry, Senior Advocate and Shri Niraj Sheth, Authorised Representative

For Revenue: Shri Rajendra Jaypal, Senior Departmental Representative