Accrual of foreign remittance liability and treaty taxation of technical fees depend on approval and actual payment.

Where a payment to a foreign entity is contingent on Reserve Bank approval for remittance, the liability does not accrue for tax purposes until that approval is obtained, even if the amount is booked in the accounts. The article also notes that, under the relevant treaty wording for fees for technical services, taxation in India arises only on actual receipt or payment and not on mere accrual. On those bases, the substantive addition was deleted because there was no approved remittance and no payment during the year.

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Issues: (i) Whether the amount payable to the foreign entity could be said to accrue as income in the relevant year in the absence of Reserve Bank of India approval required for remittance under foreign exchange law; (ii) Whether the same amount was taxable in India as fees for technical services under the relevant treaty only on actual payment.

Issue (i): Whether the amount payable to the foreign entity could be said to accrue as income in the relevant year in the absence of Reserve Bank of India approval required for remittance under foreign exchange law.

Analysis: The liability to pay the foreign entity was subject to the statutory approval required for remittance, and the authorities considered whether the amount had accrued merely because it was booked as expenditure in the assessee's accounts. The decision followed earlier judicial authority holding that where remittance was contingent upon Reserve Bank approval, accrual of income or liability was postponed until such approval was obtained. The contrary reliance on a different foreign exchange case was held inapplicable because it arose in a distinct statutory and factual setting and did not concern accrual of income under tax law.

Conclusion: The amount did not accrue as income in the relevant year in the absence of the required Reserve Bank approval, and the addition was not sustainable on this ground.

Issue (ii): Whether the same amount was taxable in India as fees for technical services under the relevant treaty only on actual payment.

Analysis: The treaty language used the expression referring to payments for royalties and fees for technical services. On that wording, and following the binding interpretation placed on similar treaty language, taxation in India could arise only when the amount was actually received or paid, not merely because a liability had accrued in books. Since the amount had not been paid during the year, the treaty condition for taxation was not satisfied.

Conclusion: The amount was not taxable in India as fees for technical services for the year in question because no payment had been made.

Final Conclusion: The challenge to the reopening and assessment validity was not pursued, while the substantive addition was deleted on both accrual and treaty-basis grounds, resulting in partial success for the assessee.

Ratio Decidendi: Where remittance of a payment to a foreign entity is contingent upon Reserve Bank approval, income does not accrue for tax purposes until such approval is obtained; and where the applicable treaty taxes fees for technical services on a payment basis, the amount is not taxable in India absent actual payment.

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