RBI Automatic Route Deemed Sufficient for Section 115A Approval: ITAT Mumbai Rules FTS Taxable at 10%, Not 15% Under India-USA DTAA
Overview of the Dispute
The Income Tax Appellate Tribunal, Mumbai, recently adjudicated an appeal filed by Gemological Institute International, a company incorporated in and tax resident of the United States of America, against the final assessment order dated 24 December 2024 passed under Section 143(3) read with Section 144C(13) read with Section 254 of the Income Tax Act, 1961.
The central controversy revolved around three issues: the applicable tax rate on Fees for Technical Services (FTS), the levy of education cess, and the levy of interest under Section 234B of the Income Tax Act, 1961. The most substantive question — whether FTS receipts should be taxed at 10% under Section 115A(1)(b) of the Income Tax Act, 1961, or at 15% under Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA) — formed the crux of the proceedings.
Background and Assessee Profile
The assessee, a US-based entity, was engaged in providing gem trading, training, and technical services. For the relevant assessment year, it filed its return of income on 26 July 2016, declaring total income of ₹41,44,650. In computing its tax liability, the assessee applied a rate of 10% under Section 115A(1)(b) of the Income Tax Act, 1961, treating this as more beneficial than the 15% rate available under Article 12 of the India-USA DTAA.
Issues That Arose During Original Assessment
Travel Cost Reimbursement Treated as FTS
During assessment proceedings, the Assessing Officer (AO) observed that the assessee had not offered ₹10,61,365 representing travel costs to tax. The AO took the view that these travel costs were intrinsically linked to the rendering of technical services and, accordingly, characterised them as Fees for Technical Services liable to tax.
The assessee contended that these were purely reimbursements of actual expenses incurred and did not constitute FTS under either the Income Tax Act, 1961, or the India-USA DTAA. The Tribunal, following its consistent position in the assessee's own earlier assessment years, had already deleted this addition — a position that was reiterated in the present round of proceedings as well.
Misreading of Section 115A by the AO
On the question of the applicable tax rate, the original AO incorrectly concluded from a note appended to the return of income that the rate under Section 115A of the Income Tax Act, 1961, was 26.265%, and therefore applied the more beneficial DTAA rate of 15%. However, the note in question actually read as follows:
"Training and Technical Fees are in nature of 'fees for technical services' as defined under section 9(1)(vii) of the Income-tax Act, 1961 and taxable at the rate of 10% (plus surcharge and education cess) in terms of section 115A. As per Article 12 of the Double Tax Avoidance Agreement ('DTAA') entered into and subsisting between India and the United States of America, royalty received is taxable at the rate of 15%. Accordingly, the tax rate considered for computation is @10% taking benefit of sec 115A of Income-tax Act, 1961."
The Tribunal, in the first round of proceedings, categorically observed that the AO had proceeded under a complete factual misconception in applying the 15% DTAA rate.