1989 (9) TMI 137 - AT - Income Tax

Royalty income taxed at 40% not 53.75% under new agreement

The ITAT Bombay-A held that royalty income should be taxed at 40% instead of 53.75% as per the new agreement entered into in 1979. The addition made on a ... Characterisation of agreement for rate of tax on royalty - applicability of concessional tax rate to agreements entered into after cutoff date - distinction between renewal/extension and a fresh agreement - protectionary additions and prior taxation on accrual basisCharacterisation of agreement for rate of tax on royalty - distinction between renewal/extension and a fresh agreement - applicability of concessional tax rate to agreements entered into after cutoff date - Royalty income was taxable at the concessional effective rate of 40% because the 1979 instrument constituted a materially different fresh agreement entered into after the relevant cutoff date. - HELD THAT: - The Tribunal accepted the CIT(A)'s conclusion that the instrument effective in 1979 could not be treated as the same agreement made in 1973 merely because it arose under an option to extend. The 1979 agreement altered material terms - including the royalty rate, the manner of computing net compensation, the scope of markets, and other substantive provisions - and had Government of India approval. Those material differences make the 1979 instrument a different agreement for tax purposes; accordingly the concessional rate applicable to agreements entered into after the relevant cutoff applies and the effective tax rate on the royalty is 40%. The ITO's view treating the payment as under the 1973 agreement and taxing at the higher effective rate was therefore reversed and the CIT(A)'s order was confirmed. [Paras 3]Confirmed that the 1979 instrument is a different agreement and royalty is taxable at effective rate of 40%.Protectionary additions and prior taxation on accrual basis - The protective addition previously made on cash basis was to be deleted because the same amount had already been taxed on accrual basis in an earlier year. - HELD THAT: - The Tribunal noted it had earlier upheld the addition of the impugned amount on accrual basis. Since that amount was included in income in an earlier year, there was no justification for taxing it again in the year under consideration merely on a protective basis. Accordingly, the CIT(A)'s deletion of the protective addition was proper and was upheld. [Paras 4]Upheld deletion of the protective addition as the amount had already been taxed on accrual basis in an earlier year.Final Conclusion: The departmental appeal is dismissed: the CIT(A)'s treatment of the 1979 instrument as a fresh agreement attracting the concessional 40% effective tax rate on royalty is upheld, and the deletion of the protective addition is sustained. The ITAT Bombay-A held that royalty income should be taxed at 40% instead of 53.75% as per the new agreement entered into in 1979. The addition made on a protective basis was deleted as it had already been taxed on an accrual basis in an earlier year. The appeal was dismissed.