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Taxpayer is eligible for lower rate of tax under Section 115A of the Act on payment of royalty since the new agreements entered into by the taxpayer were not an extension of old agreements 23 September 2014

Background

Recently, the Pune Bench of the Income-tax Appellate

Tribunal (the Tribunal) in the case of GKN Holdings

Plc1 (the taxpayer) held that benefit of the lower rate

of tax under Section 115A2 of the Income-tax Act,

1961 (the Act) on royalty income cannot be denied to

the taxpayer since these provisions do not debar the

taxpayer to enter into new agreements. Further, the

new agreements entered into by the taxpayer were

not an extension of old agreements.

The Tribunal also observed that the taxpayer can

manage its affairs within the framework of the statute.

The tax department cannot sit into the business

decisions of the taxpayer. Even if the taxpayer has

managed its affairs as far as renewal of agreement is

concerned, the tax department should not interfere

with the same, unless it is proved beyond doubt that it

is nothing but a colourable device.

_____________

1 GKN Holdings Plc v. DDIT (ITA No.149/PN/2013) – Taxsutra.com

2 Section 115A(1)(b)(AA) - The amount of income-tax calculated on the

income by way of royalty, if any, included in the total income, at the rate of

ten per cent if such royalty is received in pursuance of an agreement made

on or after 1 June 2005

Facts of the case

The taxpayer is a U.K. based company. It has two associate companies in India, namely GKN Sinter Metals Ltd. and GKN Driveline (India) Ltd.

The taxpayer is a proprietor of certain trademarks and entered into agreements in the year 2004 with GKN Sinter Metals Limited and GKN Driveline (India) Limited permitting them to use its trademarks in respect of various products and services.

In the year 2007, new licence agreements were entered into by the taxpayer with its associates as per which royalty was charged based on sales at the rates dependent on the reported operating profit by each foreign entity.

During the Assessment Year 2008-09, the taxpayer received payment of royalty from GKN Driveline (India) Ltd. and from GKN Sinter Metals Ltd., and it was offered to tax at 10.56 per cent as per Section 115A of the Act.

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The Assessing Officer (AO) held that since the new agreement entered in the year 2007 was nothing but extension of the existing agreement, the taxpayer will not get the benefit of lower rate of tax under Section 115A(1)(b)(AA) of the Act. Accordingly, the AO rejected the contention of the taxpayer and assessed the royalty income at 15 per cent under Article 13 of the India-U.K. tax treaty (tax treaty).

The Dispute Resolution Panel (DRP) upheld the order of the AO.

Tribunal’s ruling

As per the provisions of Section 115A(1)(b)(AA) of the Act, the tax will be levied on royalty income at 10 per cent on the strength of the agreement. It was an undisputable fact that the taxpayer had an earlier agreement in 2004 with GKN Sinter Metals Ltd. and the same was renewed in 2007.

The provisions of Section 115A(1)(b)(AA) of the Act does not debar the taxpayer from entering into new agreements after change of situation in the provisions of the said Section as far as the reduced rate of royalty is concerned.

New agreements entered into in 2007 between the taxpayer and GKN Sinter Metals Ltd., and in the same year with GKN Driveline (India) Ltd. are independent agreements.

The taxpayer can manage its affairs within the framework of the statute. The tax department cannot sit into the business decisions of the taxpayer. By no stretch of imagination, the new agreement entered into in 2007 can be said to be the extension of old agreements entered into between the parties.

Even if the taxpayer has managed its affairs as far as the renewal of agreement is concerned, the tax department should not interfere with the same, unless it is proved beyond doubt that it is nothing but a colourable device.

Even if the taxpayer had entered into new licence agreements with GKN Sinter Metals Ltd. and GKN Driveline (India) Ltd. to take advantage of the lower rate of tax of 10 per cent, the same cannot be denied to the taxpayer on the grounds that the same is nothing but an extension of the old agreement.

The new licence fee agreement entered into by the taxpayer with GKN Sinter Metals Ltd. and in the same year with GKN Driveline (India) Ltd. is nothing but a new and separate agreement. Accordingly, the licence fee income should be taxed at 10 per cent.

Our comments

This is a welcome ruling by the Pune Tribunal where it has held that the taxpayer is eligible for the lower rate of tax under Section 115A of the Act. The Pune Tribunal while giving this benefit to the taxpayer observed that the taxpayer can manage its affairs within the framework of the statute. The tax department cannot interfere with the business decisions of the taxpayer. Even if the taxpayer has managed its affairs as far as the renewal of agreement is concerned, the tax department should not interfere with the same, unless it is proved beyond doubt that it is nothing but a colourable device.

The Calcutta High Court in the case of Great Lakes Carbon Corporation

3, while dealing with Section 115A

of the Act, observed that the old agreement was not a separate or new agreement but a continuation of original agreement and therefore, the royalty payment was taxable at the higher rate.

_______________ 3 Great Lakes Carbon Corporation v. CIT [1993] 202 ITR 133 (Cal)

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we

endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue

to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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