Accrual and treaty payment basis limited Indian taxability of foreign group entity payments where RBI approval and actual payment were absent

Amounts payable to foreign group entities did not accrue as income in India where remittance was contingent on RBI approval, so additions based on accrual were deleted. The Tribunal also held that the relevant tax treaties taxed royalties and fees for technical services on a receipt or payment basis; because the amounts were not actually paid during the year, they were not taxable in India as fees for technical services for that year. The assessee succeeded on these substantive taxability issues, and the remaining grounds were disposed of as not pressed.

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Issues: (i) Whether the amounts payable to foreign group entities could be treated as income accruing in India in the absence of RBI approval for remittance under foreign exchange law; (ii) whether the same amounts were chargeable to tax in India as fees for technical services under the applicable tax treaties in the year of mere accrual and not actual payment.

Issue (i): Whether the amounts payable to foreign group entities could be treated as income accruing in India in the absence of RBI approval for remittance under foreign exchange law.

Analysis: The liability to pay the foreign group entities was subject to obtaining RBI approval for remittance. The amounts had been debited in the books, but the judicial principles applied by the Tribunal treated accrual as postponed until the required approval was obtained. The authorities relying on a different context did not dislodge the position that, for income-tax purposes, the income could not be said to have accrued while the statutory approval remained outstanding.

Conclusion: The amounts payable to the concerned foreign group entities did not accrue as income during the year in the absence of RBI approval, and the additions on this basis were deleted in respect of the entities covered by this finding.

Issue (ii): Whether the same amounts were chargeable to tax in India as fees for technical services under the applicable tax treaties in the year of mere accrual and not actual payment.

Analysis: The relevant treaty language taxed royalties and fees for technical services on a receipt or payment basis. Since the amounts in question had not been actually paid during the year, the treaty provisions were construed as not triggering taxation in India for that year. The Tribunal followed the binding and persuasive treaty-based decisions relied on before it and distinguished accrual-based taxation under the domestic law from the treaty mechanism.

Conclusion: The unpaid amounts were not taxable in India as fees for technical services under the treaties for the year under consideration.

Final Conclusion: The assessee succeeded on the substantive taxability issues to the extent the additions were found unsustainable, while the remaining grounds that were not pressed stood disposed of accordingly.

Ratio Decidendi: Where remittance of payment to a foreign entity is contingent on statutory approval, income does not accrue for tax purposes until such approval is obtained; and where the applicable treaty taxes royalties or fees for technical services on a receipt or payment basis, mere accrual without actual payment does not create treaty-taxability in the source State.

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