Whether reimbursement of traveling expenses received by non-resident assessee is taxable as fees for technical services?
IN THE ITAT MUMBAI BENCH ‘L’
Deputy Director of Income-tax, (International Taxation)-2(1), Mumbai
IT APPEAL NOS. 3223 & 3224 (MUM.) OF 2008
[ASSESSMENT YEARS 2003-04 & 2004-05]
AUGUST 24, 2012
R.S. Syal, Accountant Member
These two appeals by the assessee relate to the assessment years 2003-2004 and 2004-2005. Since some of the issues raised in these two appeals are common, we are, therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.
Assessment Year 2003-2004
2. The only issue raised in this appeal is against the taxability of Rs. 1,24,06,210 being reimbursement of traveling expenses as fees for technical services. Briefly stated the facts of the case are that the assessee, a non-resident, received a sum of Rs. 54,55,44,925 from Hazira Marine Engineering & Construction Management Private Limited (HME) and Hazira Cryogenic Engineering Construction Management Private Limited (HCE) as fees for technical services for providing management services and personnel to them. Apart from that, the assessee received reimbursement of traveling expenses from HME and HCE amounting to Rs. 31,59,238 and Rs. 92,46,972 respectively totaling Rs. 1,24,06,210. The said reimbursement of travelling expenses was claimed as not taxable. On being called upon to explain as to why the said amount be not taxed, the assessee stated that the reimbursement of traveling expenses was on the basis of invoices issued by the third parties and did not have any element of income. It was stated that the amounts billed by the travel agent to the assessee were recovered by it from HME and HCE, being two Indian companies, to whom it had rendered technical services. Not convinced, the Assessing Officer held that such reimbursement of total expenses amounting to Rs. 1.24 crore as taxable as fees for technical services. Relying on certain decisions, the A.O. held that : “the amount of Rs. 1,24,06,210 which is the reimbursed travel expenses by HME and HCE to the assessee company is treated as fees for technical services and charged to tax @ 10%”. The learned CIT(A) approved the action of the Assessing Officer.
3. Having heard the rival submissions and perused the relevant material on record, we find from the Agreement between the assessee and HME, a copy of which is available on page 8 onwards of the paper book, that the assessee undertook to provide personnel for rendering technical services at the prescribed rates of Euro 1,200 per day for Senior Manager, Euro 1,000 per day for Senior Engineer and Euro 900 per day for Engineer. Clause 7 of the agreement provides for these rates with escalation clause of 6% increase each year. Clause 9 of the agreement, which is relevant for our purpose, reads as under:-
“HME agrees that it shall provide to the Personnel provided by BOS the following allowances / facilities in India –
• Residential accommodation in India;
• Transportation and travel, including travel outside India;
• Living allowance per month as may be mutually agreed upon by BOS and HME from time to time;
• Such other benefits/facilities as may be mutually agreed upon by BOS and HME from time to time.”
4. From a bare perusal of the above clause, it is apparent that the HME, apart from paying fees for technical services at the rate of prescribed Euros per day to Senior Manager, etc., also undertook to bear their transportation and travelling expenses along with living allowance. Detail of travelling expenses incurred by the assessee and reimbursed by HME is available on page 88A of the paper book. Agreement between assessee and HCE, the other party, is also available in the paper book on pages 27 onwards. Relevant clauses of the agreement provide for fees for technical services at a particular Euros per day in respect of Senior Manager, Discipline Leader and Specialist. Clause 4 of the agreement categorically provides as under:-
“The cost of travel, stay, etc….., of the management personnel of BOS, coming to India in connection with services to be rendered under the Agreement, shall be borne by HME. This cost of travel is not included in, and is over and above, the rates defined in paragraph 3 above.”
5. The details of total travelling expenses incurred by the assessee and then reimbursed by HCE is available on page 88B of the paper book. From the above clauses of the agreement, it is amply clear that the travelling expenses borne by HME and HCE are distinct from the fees for technical services as stated in the other relevant clauses of this agreement. Such fees totalled to Rs. 54.55 crore which the assessee offered as fees for technical services. Insofar as the reimbursement of travel expenses is concerned, it is found that the same represents the actual amount spent by the assessee on sending the personnel to India for rendering technical services, which was undertaken by HME and HCE. Copy of invoices raised by the assessee on HME is available on page 90 of the paper book which contains the total amount of 29952400 Euros. Bifurcation of this amount is given on page 91 of the paper book which is annexure to the invoice. This annexure refers to personnel costs of 28700000 Euros and travels totalling 1252400 Euros. Various other pages in the paper book amply demonstrate that the amount claimed by the assessee reimbursed by HME does not contain any element of profit. It is evident from the copies of invoices raised by travel agency that the amount given in such invoices of travel agency exactly tallies with the amount claimed by the assessee from HME. Thus, it can be seen that the total sum of Rs. 1.24 crore is in the nature of reimbursement of travelling expenses incurred by the assessee without having any element of profit. On a specific query, the learned AR submitted that both HME and HCE were not related to the assessee in any manner. The learned Departmental Representative could not point out any fact to the contrary for establishing any relation between assessee and HME or assessee and HCE, which could have been an indicator of bifurcation of total fees for technical services into different segments with the object of reducing the incidence of tax in India. The position which, therefore, follows is that the assessee has no relation with HME and HCE. It rendered technical services to these two concerns for a specified fees which amount was offered for taxation. The amount in question received by the assessee from HME and HCE without any element of profit is reimbursement of traveling expenses incurred by the assessee’s personnel for rendering technical services in India.
6. The Hon’ble jurisdictional High Court in the case of CIT v. Siemens Aktiongesellschaft  310 ITR 320/177 Taxman 81 (Bom.) has held that reimbursement of expenses is not liable to tax. Similar view has been reiterated in DIT (International Taxation) v. Krupp Udhe Gmbh [IT Appeal No. 2626 of 2009, dated 9-3-2010]. It is further interesting to note that the Assessing Officer in the draft assessment order for the assessment year 2006-2007 included reimbursement of traveling expenses in the fees for technical services and also charged it to tax. The Dispute Resolution Panel, vide its order dated 20.09.2010, has held that the reimbursement does not have any element of income comprised therein and hence not liable to tax. Copy of the order passed by the DRP in assessee’s own case for assessment year 2006-2007 is available on record.
7. In view of the foregoing discussion it is manifest that the reimbursement of travelling expenses amounting to Rs. 1.24 crore cannot be included in the fees for technical services and the same is not taxable. The impugned order is overturned to that extent.
Assessment Year 2004-2005
8. First issue raised in this appeal is against the reimbursement of travelling expenses amounting to Rs. 82,17,160. Both the sides are in agreement that the facts and circumstances of this issue are similar to those for assessment year 2003-2004. Following the view taken hereinabove, we hold that the reimbursement of traveling expenses cannot be considered as fees for technical services.
9. The only other issue is against the decision of the learned CIT(A) for treating sum of Rs. 1,37,49,302 being payment of living allowance by the Indian company to expatriates as fees for technical services in the hands of the appellant. The facts apropos this issue are that the experts of the assessee deputed for rendering services to HME and HCM received living allowances as per the agreement entered into between the assessee and HME and HCM. The Assessing Officer included this amount in fees for technical services and assessed it accordingly. No relief was allowed in the first appeal.
10. Having heard the rival submissions and perused the relevant material on record, here again it is found that the living allowance has been directly paid by HME and HCM, to the technicians etc. deputed by the assessee for rendering services to these two companies. Technical fees as set out in the agreements with HME and HCE is independent of this amount. It is further relevant to note that the Dispute Resolution Panel in the above referred order has also held that the amount of living allowance cannot be charged to tax in the hands of the assessee for assessment year 2006-2007. That being the position, we are of the considered opinion that the learned CIT(A) was not justified in including this sum in the fees for technical services. We, therefore, vacate the impugned order on this issue. This issue is decided in assessee’s favour.
11. In the result, both the appeals are allowed.