This Tax Alert summarises a recent ruling of the High Court (HC) of Delhi in the case of Van Oord ACZ India (P) Ltd. (Taxpayer) [2010-TIOL-187-HC-DEL-IT] on withholding tax obligation arising under the provisions of the Indian Tax Law (ITL) in respect of reimbursement of expenses to non-resident companies. The Delhi HC held that a payer is obligated to withhold tax only if the payment is chargeable to tax under the provisions of the ITL.
Further, if the payer considers that the entire payment is not chargeable to tax under the ITL, he can seek a certificate for withholding at nil/ lower rate of tax from the Tax Authority. In reaching its conclusion, the Delhi HC has expressed its disagreement with some observations of the Karnataka HC ruling in the case of Samsung Electronics [320 ITR 209] (Karnataka HC ruling).
Background and facts of the case
- The Taxpayer, an Indian company, is a wholly-owned subsidiary of a company incorporated in the Netherlands (Parent company). The Taxpayer is engaged in the business of dredging, contracting, reclamation and marine activities in India.
- The Taxpayer reimbursed to the Parent company certain mobilisation and demobilisation expenses incurred by the Parent company on the basis of invoices raised from other non-resident service providers.
- The Taxpayer applied for a certificate for nil withholding tax in respect of the reimbursement made to the Parent company on the ground that such reimbursement was not chargeable to tax under the ITL. However, the Tax Authority determined a sum equivalent to 11% of such reimbursement as profit arising to the Parent company in India and directed the Taxpayer to withhold tax on such sum. The Taxpayer withheld the taxes in accordance with the Tax Authority’s order.
- In the tax return, the Taxpayer claimed deduction for the amount reimbursed to the Parent company. However, such expenses were disallowed by the Tax Authority on the ground of default, in compliance with the withholding tax obligation. The Tax Authority’s order was upheld by the first level appellate authority.
- The Income Tax Appellate Tribunal (ITAT) also upheld the Tax Authority’s order. Based on the findings of the Tax Authority, the ITAT observed that the Parent company was, in substance, executing the Taxpayer’s contract and, thus, held the Taxpayer to be a dependent agent permanent establishment (PE) of the Parent company. Hence, the Parent company was taxable in India with respect to reimbursements received from the Taxpayer. Further, the ITAT, placing reliance on the Supreme Court (SC) ruling in the case of Transmission Corporation of A.P. Ltd. [239 ITR 587] (SC ruling), held that the Taxpayer was obligated to withhold tax regardless of whether the payment/ reimbursement was chargeable to tax in the hands of the non-resident under the ITL. Additionally, the Taxpayer is not required to independently determine the tax liability of the non-resident recipient. The Taxpayer filed an appeal before the HC against the ITAT’s ruling.
Contentions of the Taxpayer
