Royalty payment to Italian Co. pursuant to agreement effective from 01-04-2008 would be taxable at 10%

Facts of the case:

• The Assessee being a company located in Italy and having several other group concerns around the globe had received royalty & technical fees for services of SAP implementation and fees for TP consultancy from its Associated enterprises located in India.
• Assessee & its Associated enterprises (“AE”) formerly entered into an contract dated 26-03-1998 for the chargeability of royalty income, later they have entered into an fresh contract effective from 01-04-2008.
• Pursuant to the fresh agreement between the Assessee & its Associated enterprises in India, the assessee had offered the royalty income received from its AE @ 10.506% tax u/s 115A(1)(b)(AA) of the Income tax act, 1961(the act).
• Assessssing officer by considering the agreement as merely the renewal of earlier contract and by invoking the provisions of section 115A(1)(B)(A) of the act read with Double Taxation Avoidance Agreement (DTAA) between India & Italy levied the tax on royalty at the rate of 20%.

Hon’ble ITAT held that:

• Section 115(1)(B)(AA) of the act states that royalty income that emerges in respect of agreement entered into after 31-05-1997 but before 01-06-2005 shall be chargeable to tax at the rate of 20% plus surcharge etc. however this rate has been further reduced to 10% plus surcharge etc. in case agreement is entered after 01-06-2005
• After thorough analysis of the two agreements , it has been observed that the agreement dated 01-04-2008 covering periods of the financial years 2008-09 onward is independent and altogether a new agreement vis-à-vis earlier agreement of 1997.
• Therefore ITAT held that royalty income earned by assessee from its AE in India, pursuant to an agreement dated 01-04-2008, should be charged to tax at the rate of 10.5060%(in favour of assessee).

Source:[2019] 102 taxmann.com 135 (Pune-Trib.)