Wednesday, November 5, 2014

Sec. 115A doesn't debar assessee from entering into a new agreement to have lower tax rate on royalty

Provisions of section 115A(1)(b)(AA) do not debar assessee to enter into a new agreement after change of situation resulting in reduced rate of royalty.


a)The assessee-company was incorporated in the United Kingdom. It had two associate companies in India, namely, ‘GKN S’ and ‘GKN D’.

b)The assessee had entered into agreements with GKN S and GKN D allowing them to use trademarks in respect of various products and services, in accordance with the terms and conditions mentioned in such agreements. Sum received by assessee from GKN D and GKN S was offered to tax as royalty at the rate of 10.56 per cent as per section 115A.

c)The revenue authorities opined that the subsequent agreements entered into in the year 2007 were nothing but extension of existing agreement between the contracting parties. Since it was extension of earlier agreement, the assessee would not get advantage of provisions of section 115A, wherein there was a provision for lower rate of taxability, i.e., 10 per cent. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)As per provisions of section 115A(1)(b)(AA), the rate of tax on license fee has to be taxed at the rate of 10 % on the strength of the agreement. It was undisputed that the assessee was having earlier agreement dated 12-7-2004 with GKN S and the same had been renewed from 1-1-2007.

2)The provisions of section 115A(1)(b)(AA) do not debar the assessee to enter into new agreements after change of situation in the provisions of said section as far as the reduced rate of royalty is concerned.

3)It was undisputed that the new agreements entered into in 2007 between the assessee and GKN S and with GKN D were independent agreements. The revenue authorities could not interfere into the business decisions of the assessee.

4)By no stretch of imagination, the new agreement entered into in 2007 could be said to be the extension of old agreements entered into between the parties. Even if the assessee had managed its affaires, as far as renewal of agreement was concerned, the revenue authorities could not interfere with the same, unless it was proved beyond doubt that it was nothing but a colourable devise.

5)Even if the assessee had entered into new licence agreement with GKN S and in the same year with GKN D to take advantage of lower rate of tax of 10 per cent, the same could not be denied to the assessee on the ground that the it was nothing but extension of old agreement which was otherwise not correct.

6)The new licence fee agreement entered into by the assessee with GKN S and with GKN D was nothing but a new and separate agreement. Accordingly, licence fee had to be taxed at 10%. - GKN HOLDINGS PLC V. DEPUTY DIT [2014] 50 TAXMANN.COM 307 (PUNE - TRIB.)