Foreign Remittance: TDS u/s 195: Reimbursement of Expenses

CA Rohit Gupta

Taxability of Reimbursement of expenses has always been a contentious issue. In most of the cases, assessee gets away with non-taxability of reimbursement of expenses on the plea of no profit element. However, in some cases, even without profit element, tax authorities and courts have held reimbursement of expenses as income of recipient liable for TDS and taxability in India. Also, reimbursements under cost allocation agreement have been held to be taxable in some of the cases. In few cases, courts have termed the payment as service fees instead of reimbursement of expenses.

Some of the court/tribunal judgement pertaining to reimbursement of expenses are discussed hereunder:

a) Payment for link charges: Non-Taxable:

The assessee made payment for link charges to telecom service providers in the USA and cross-charged the portion of the cost incurred by it in connection with the India half link to CIS, which was accordingly reimbursed by CIS to assessee. The assessee has merely procured a service and provided the same to CIS; no part of equipment was leased out to CIS. Even otherwise, the payment is in the nature of reimbursement of expenses and, accordingly, not taxable in the hands of the assessee. Therefore, the said payments do not constitute royalty under the provisions of article 12 of the Tax Treaty. (Convergys Customer Management Group Inc. vs. ADIT [2014] 159 TTJ 42 (Delhi – Trib.))

b) Reimbursements for cargo communication facility-Cost Allocation: Non-Taxable:

Assessee was a non-resident company incorporated under laws of Denmark – It carried on business of shipping, chartering and related business – MIPL, MLIL and SIPL were acting as agents of assessee for booking cargo and as clearing agents of assessee in India – Assessee procured and maintained a global telecommunications facility and installed it at each of its premises – Out of total cost incurred by assessee, a share of cost was recovered by them from MIPL, MLIL and SIPL – According to assessee, amount received by assessee from MIPL, MLIL and SIPL represented merely allocation of cost incurred by them and, hence, were in nature of reimbursement of expenses. HELD, the payments received by the assessee are for providing a facility to its agents. The payment received is nothing but a payment by way of reimbursement of the cost for providing a particular facility. The Assessee is in the business of shipping and not in the business of providing any technical service. The Assessee as well as its agents are the beneficiaries of such improved technology. The Assessee is not the owner of any technology to provide them for a fee to prospective user. They are themselves consumers of the technology. (Dampskibsselskabet vs. ADIT [2011] 130 ITD 59 (Mum.))

c) Reimbursement of management expenses to parent company: Non-Taxable if on cost to cost:

Assessee-company was engaged in business of supplying chain management, logistics and freight forwarding related to movement of goods and cargo within India or outside by road, rail, air or ship – It involved activities of packing, loading/unloading, trucking, tenderization, customs clearance and other cargo handling functions at both ends, besides moving goods by air or sea, where goods crossed international borders – To undertake these activities, assessee-company had arrangement with its parent company, located in USA, which was rendering global management services and VSAT uplinking which enabled it to have global communication network. HELD, Assessee was not liable to deduct tax at source in respect of reimbursement of global management expenses, communication uplink charges and other expenses made to its parent company located abroad. (Commissioner of Income-tax vs. Expeditors International (India) (P.) Ltd. [2012] 209 Taxman 18 (Delhi))

d) Per-Day Allowance during employee stay abroad: Non-Taxable:

The amounts paid by the assessee to its employees towards overseas maintenance allowance. These amounts were paid towards expenses at the rate of IEP 50 per day per employee. Held that these amounts constitute only reimbursement for the expenses incurred by the employees at a particular amount per day and would not form part of the salary in the hands of the recipients. Hence the question of applying sub-clause (iii) of clause (a) of section 40 would not arise. (CIT v. Information Architects [2010] 322 ITR 1(Bom.))

e) Reimbursement of technical expenses-Cost Allocation: Non-Taxable:

Technical expenses allocated by head office to assessee-Indian division was in nature of reimbursement of technical expenses to head office and not on account of any specific technical services having been ‘made available’ and, therefore, such amount could not be brought to tax in hands of assessee under article 13 of Indo-French Tax Treaty. Also, said amount could not also be taxed in hands of assessee under article 7 as it was not an income ‘attributable to PE’. (Bureau Veritas-Indian Division vs. ADIT (International Taxation) 3(2), Mumbai [2015] 54 com 139 (Mumbai – Trib.)

f) Reimbursement of relocation expenses of outbound employees–Non-Taxable:

 Assessee was engaged in business of providing IT enabled services to one HP group. HPAP was one of HP group companies, with which assessee entered into an agreement, whereunder HPAP provided certain services with regard to employees of assessee sent abroad like relocation of employees who had been deputed to foreign company, providing accommodation, logistical support and other basic amenities, along with monetary incentives to such relocated employees of the assessee. HELD, since evidence filed by assessee as to furnishing of break-up of payments, amply demonstrated that payments made were purely reimbursement of expenses with no element of income embedded in such payments, assessee was not obligated to deduct tax at source on reimbursement of expenses. (Global E-Business Operations (P.) Ltd. vs. DCIT [2012] 52 SOT 457 (Bangalore))

g) Reimbursement of Audit fees: Taxable:

Tax was required to be deducted at source on share of ISO audit expenses paid to foreign parent company, as element of income was embedded in receipt of auditor. (SPX India (P.) Ltd. V. CIT(A) [2014] 147 ITD 120 (Delhi – Trib.))

h) Reimbursement of Purchase service charges: Non-Taxable:

Sister concern made purchases of rough diamonds on behalf of assessee. Sister concern made payment of core service charges to vendor after deducting tax at rate of 15 per cent as per article 13 of the India-UK DTAA.  Assessee reimbursed expenses to sister concern. HELD, There was no element of margin or profit or value addition by sister concern, therefore no TDS was required to be made at time of payment by assessee to sister concern. The original payment was made by the sister concern of the assessee on behalf of the assessee and subsequently the assessee has reimbursed the amount to the sister concern. Thus, once the TDS was deducted by the sister concern and deposited to the Government account, then no subsequent TDS is required to be deducted on the same amount. (ITO vs. Vishinda Diamonds [2014] 146 ITD 745 (Mumbai – Trib.))

i) Reimbursement for marketing services–Taxable:

Assessee-company was tax resident of Netherland – Assessee entered into agreement with Indian hotel company ITC and provided marketing service outside India – ITC paid marketing fee. HELD, Assessee failed to demonstrate that actual expenses incurred were equal to amount received and thus, impugned receipts were not reimbursement of expenses as claimed. Taxability of impugned amount was required to be determined in terms of article 7. (Marriott International Licensing Co. BV vs. Deputy Director of Income-tax [2014] 151 ITD 653 (Mumbai – Trib.))

j) Reimbursement of travelling expenses as FTS: Taxable:

Where Indian company, reimbursed foreign holding company, expenses in respect of SAP licence and RAS charges paid to third party for getting connectivity and no part of it was incurred for earning royalty/FTS by holding company, such reimbursement was not taxable in India. where reimbursement of travelling expenses to foreign holding company was in connection with technical service agreement, such expenditure could be said to have been incurred for earning royalty/FTS. Article 12 of DTAA between India and Singapore taxes royalty/FTS on gross basis and does not permit deduction of expenses; therefore, amount paid for reimbursement of expenses for travelling or other expenses of foreign company would be liable to be included in its gross receipts. (CSC Technology Singapore Pte. Ltd. vs. ADIT [2012] 50 SOT 399 (Delhi))

k) Reimbursement of Travelling Expenses: Non-Taxable:

Where assessee, a non-resident, receives reimbursement of travelling expenses incurred by its personnel while performing technical services in India, from service receiver, such reimbursement being without any profit element cannot be treated as fees for technical services. Also held that Where experts of non-resident receives living allowance from Indian companies in course of their deputation for rendering technical services, such allowance cannot be treated as fees for technical services. (Saipem S.A. vs. DDIT [2012] 54 SOT 111 (Mumbai))

l) Reimbursement of travelling expenses as FTS: Taxable:

Assessee-company, engaged in manufacturing of motor vehicles, entered into an agreement with a foreign company for supply of designs, drawings and consultancy in development of engines – Assessee agreed to reimburse expenditures towards air fare, accommodation and subsistence cost of personnel deputed by foreign company – Foreign company raised invoices and assessee applied for exemption certificate under section 195 which was denied by Assessing Officer – On appeal, Commissioner (Appeals) confirmed order of Assessing Officer – HELD, since payment on account of reimbursement was part and parcel in process of advice of a technical character, it would attract provisions of section 195. (Ashok Leyland Ltd. vs. DCIT [2008] 119 TTJ 716 (Chennai))

m) Reimbursement of travelling expenses-Non-Taxable:

Assessee received certain amount from WHL, Max and other hospitals – It claimed that since said amount was reimbursement of expenses towards air fare, lodging, food, etc., incurred by its personnel during their visits to India, same could not be treated as income – Assessing Officer however was of view that reimbursement of expenses was also part of consideration paid for rendering services and same was brought to tax treating 90% of same as royalty and 10% as FIS. It was noticed that neither the Assessing Officer nor the CIT(A) have looked into the terms of the agreement to point out whether the receipts in question are reimbursement of expenses and as to whether they are not part of the agreement to provide services. Even assuming that these receipts were to be considered as part of payment for services rendered, they will not be taxable in India as they would be in the nature of business income. If they are considered as other income, they cannot be brought to tax in view of the Article 23(1) of the DTAA between India and USA. Prima facie the payments are in the nature of reimbursement of expenses and non-taxable. (JDIT vs. Harvard Medical International, USA [2011] 48 SOT 623 (Mumbai))

n) Reimbursement for GDR issue: Non-Taxable:

Assessee, a resident company, brought out Euro issue of convertible Bonds, convertible into Global Depository Receipts (GDRs) – For bringing out that Euro issue assessee employed services of non-resident lead managers. Apart from Commissions viz. selling commission, management commission, underwriting commission and legal charges, assessee-company reimbursed certain expenses incurred by lead managers. HELD, reimbursement of expenses did not have an element of income and, hence, could not assume character of income deemed to accrue or arise in India. (DDIT vs. Tata Iron & Steel Co. Ltd. [2010] 132 TTJ 566 (Mumbai))

o) Reimbursement for GDR Issue: Non-Taxable:

HELD, The Assessing Officer had not disputed that the sum of Rs. 1.68 crores was in the nature of expenses reimbursed by the assessee to the lead managers. When a particular amount of expenditure is incurred and that sum is reimbursed as such, that cannot be considered as having any part of it in the nature of income. Any payment, in order to be brought within the scope of income by way of fees for technical services under section 9(1)(vii), should be or have at least some element of income in it. Such payment should involve some compensation for the rendering of any services, which can be described as income in the hands of the recipient. In other words, the component of income must be present in the total amount of fees paid for technical services to constitute as an item falling under section 9(1)(vii). Where the expenditure incurred is reimbursed as such without having any element of income in the hands of the recipient, it cannot assume the character of income deemed to accrue or arise in India. (Mahindra & Mahindra Ltd. vs. DCIT . [2009] 30 SOT 374 (Mumbai) (SB))

p) Reimbursement for visit of foreign artists- Non-Taxable:

Assessee-company was engaged in business of entertainment event management and marketing – It made payments towards reimbursement of expenses incurred in connection with visit of foreign artistes for performance in India without deduction of tax at source. HELD, As far as reimbursement of expenses was concerned, it was clear from the details furnished by the assessee that the payments referred to therein were reimbursement of expenses. The law is well-settled that any payment made towards reimbursement of expenses is not chargeable to tax. Therefore, there was no obligation on the part of the assessee to deduct tax from the payments made towards reimbursement of expenses. (ADIT vs. Wizcraft International Entertainment (P.) Ltd. [2011] 43 SOT 470 (Mumbai)) (Affirmed by HC in [2014] 364 ITR 227 (Bombay))

q) Reimbursement of Pre-Bid Expenses-Non-Taxable:

In year 1999, a public and private participation programme was carried by Airport Authority of India(AAI) by inviting private partners for remaining 74 per cent stake in project. AAI zeroed in on three parties, viz., (Siemens, germany); (Unique, Switzerland), and (L&T, India) During relevant previous year, assessee-company made payment of 50 per cent of expenses incurred by Siemens and Unique by way of reimbursement of expenses without deduction of tax at source. HELD, In the instant case, the technical consultation and various other consultations undertaken by the non-residents in their capacity as promoters were incurred by them out of India and at that time when they had consultation, section 9 was inapplicable to them because it was not a payment by an Indian resident to a non-resident. It was a case of reimbursement of various expenses incurred and in instant case it was also limited to only 50 per cent. Since expenditure incurred by promoters was on a study with regard to feasibility, viability, etc., of entire project and finally whether it would ultimately result in their ending up with some profit or not, even in remotest possibility it would have no connection whatsoever with project, and, therefore, reimbursement of expenses in such circumstances to extent of 50 per cent would not attract provisions of section 195(2). Reimbursement under no circumstance could be equated with amount paid for technical services. (Bangalore International Airport Ltd. vs. ITO. [2008] 115 TTJ 477 (Bangalore))

r) Reimbursement for Pre-bid expenses:  Non-Taxable:

Assessee-company was created as a joint venture vehicle of three companies, which formed a consortium for purpose of bidding for operation GSM-based cellular services in India. Respective consortium members undertook to bear their own pre-bid expenses till such time bid was successful, which were to be reimbursed out of capital of assessee-company. HK company incorporated in Hongkong, which was one of three companies, had engaged services of another consultancy agency to draw up pre-bid documents. Assessee reimbursed to HK company, amount paid by it to consultancy agency – HELD, since there was no income element in remittance made by assessee to HK company, assessee was not required to deduct tax at source under section 195 from amount remitted to HK company. (ACIT vs. Modicon Network (P.) Ltd. [2007] 14 SOT 204 (DELHI))

s) Reimbursement to meet warranty obligation: Non-Taxable:

Asseseee issued free service coupons to customers along with vehicles sold for service of vehicles – Reimbursement was made by assessee to dealers for carrying out service on presentation of coupons – HELD, since contract between dealer and customer was an independent and separate contract, reimbursement by assessee was not for services rendered. Therefore, it could not be held that dealer rendered technical services as contemplated under section 194J and no tax was required to be deducted by assessee on reimbursement to dealers. (Hero MotoCorp Ltd. vs. ACIT [2013] 156 TTJ 139 (Delhi – Trib.))

t) Reimbursement for use of Trademark: Non-Taxable:

The assessee made payment to a concern for using its trademark wool, ‘New Zealand’. AO held that that payment as made to M/s Canesis Network Limited, by way of Woolmark label charges, was in the nature of payment of FTS and tax at source having not been deducted on such payment, the same was disallowable under section 40(a)(i) of the Act. HELD, payment was made for reimbursement of the permission granted to the assessee for using trade mark “Wool, New Zealand”. Such payment cannot be said to be fee for technical services. Reimbursements of expenses are not subject to TDS. (Obeetee (P.) Ltd. vs. ACIT [2013] 142 ITD 104 (Allahabad – Trib.))

u) Reimbursement to Foreign WOS: Non-Taxable:

The assessee paid to its wholly owned subsidiary (WOS) Obetee Inc. -Rs. 31,68,042/- on account of graphic design charges(paid to Mr. Andrea Aleri), Rs. 20,66,042/- on account of salary of Mr. Bill Ward (Total Rs. 52,34084/-), Rs. 56,69,588/- Show Room rent and Rs. 38,44,189/- advertisement expenses, website expenses, photography expenses, software expenses, courier charges, freight and travelling etc. Andrea Alari and Mr. Billward form part of the establishment of Obetee Inc. and assessee had no dealings with them directly. The submission of the assessee is that these are the reimbursement of the expenses as per the M.O.U. between assessee and WOS. HELD, As per clause 4(a) of the said memorandum of understanding it has been agreed that the expenses that might be incurred on behalf of the assessee would be duly reimbursed by Obeetee Pvt. Ltd. The reimbursement made by the assessee was not by way of payment of any income to Obeetee Inc. but merely a reimbursement of expenses incurred by them on behalf of the assessee. The assessee was not liable to deduct tax at source. (Obeetee (P.) Ltd. vs. ACIT [2013] 142 ITD 104 (Allahabad – Trib.))

v) Reimbursement for consultant fees: Non-Taxable:

Applicant, an Indian company, proposes to construct an international quality commercial office/hotel complex and for that purpose it has entered into an agreement with an American company, ‘HOK’ for provision of architectural design services. Under agreement, HOK will receive fixed price in US Dollars for all basic services and a further amount at various stages by way of reimbursement of compensation payable to consultants in USA. HELD, The remittances to HOK for the purpose of making payments to consultants under the agreement can also fall under article 12(4)(b) as they also render architectural services. However, since HOK is not the beneficiary of the said payments and they are to be passed on to the consultant in the USA for the services rendered outside India, such payments will not attract tax liability under the Act in India. (HMS Real Estate (P.) Ltd., In re [2010] 190 TAXMAN 22 (AAR – NEW DELHI))

w) Reimbursement of consultants fees: Non-Taxable:

The applicant, an Indian company, with a view to expand its pharmaceuticals business, entered into an agreement with an American company P for availing its consultancy services. The applicant paid consultancy fee to P. Secondly, it also paid commission to it for procuring orders, and, thirdly, it made reimbursement of payments to P as ‘P’ had utilized the services of an advocate and made payment to him for rendering services to applicant from time to time.The applicant is required to deduct tax at source in respect of the reimbursement made to the ‘P’ who had engaged the services of professionals for rendering services to applicant from time to time as it is part of consultancy services under terms of the agreement. (Wallace Pharmaceuticals (P.) Ltd., In re [2005] 148 TAXMAN 347 (AAR – NEW DELHI))

x) Reimbursement of sub-contractor fees: Taxable:

Whether where assessee in course of rendering software development services to its parent company located in Canada, made payment of certain engineering services availed by parent company from another Indian company and made it available to assessee-company, payment so made was to be treated as ‘fee for included services’ liable to tax in India. The said payment cannot be held as reimbursement of expenses incurred by parent company as ATI Technologies, Canada(parent company) was also substantially benefitted from the services rendered by Soctronics India Private Limited (Indian contractor) by retaining the proprietary rights of any of the inventions, and contract work products resulting from the provision of service by Soctronics. Thus it was not the case of reimbursement of actual expense on cost basis simplicitor without any element of profit as claimed by the assessee. (AMD Research & Development Center India (P.) Ltd. vs. DCIT [2015] 53 com 300 (Hyderabad – Trib.))

y) Reimbursement of market research on cost sharing: Non-Taxable:

Assessee was a manufacturer of automobile products in India – ‘LDV’ was a resident of UK and was also in business of manufacture of automobiles in U.K. – Assessee and ‘LDV’ had proposals for joint venture in area of automobile manufacture – ‘LDV’ wanted to do market research to find out potential market for different types of vehicles and consumer preferences in India – ‘LDV’ proposed to assessee for conduct of market research and sharing of costs between assessee and ‘LDV’ in respect of proposed market research – As per said agreement ‘LDV’ carried on market research and raised invoice on assessee. Assessee remitted certain amount to ‘LDV’ without deducting tax at source. HELD, since ‘LDV’ merely conducted market research on acceptability of possible market for its products in India, and no technical service was being made available to assessee, payment-in-question was a reimbursement of expenses and was not in nature of fees for technical services as contended by revenue. (Mahindra & Mahindra Ltd. vs. ADIT [2012] 145 TTJ 400 (Mumbai)).

z) Reimbursement of management service costs as FTS: Taxable:

Assessee-company was engaged in business of project and construction management. It entered into a management service agreement with one of its group concerns, namely, ‘L’ located in Singapore – Under said agreement, ‘L’ agreed to provide services to assessee-company in relation to day-to-day business operations consisting of administrative, legal, finance and accounting matters. In consideration of rendering of services, ‘L’ agreed to recover only costs incurred by it for providing above services to assessee-company. HELD, if payments are for the technical services then computation of such fees with reference to cost becomes non-relevant as one has to ascertain the income in the hands of the recipient because income by way of fee for technical services is the amount payable. However, if the payments were to be assessed in the hands of the recipient as business income then one was required to ascertain the income in the hands of recipient and in case the non-resident was getting reimbursement of expenses, then there was no income element and TDS was not required to be deducted. Since reimbursement of expenses to ‘L’ related to fee for technical services, section 195 would be applicable to instant case. (Bovis Lend Lease (India) (P.) Ltd. vs. ITO [2010] 127 TTJ 25 (Bangalore)(UO)).

aa) Reimbursement routed through holding company: Taxable:

When Indian subsidiary company incurs expenses or makes purchases or avails any service from some third party abroad and payment to such third party is routed through its holding or related company abroad, provision for deduction of tax at source apply as if assessee has made payment to such independent party de hors routing of payment through holding company. The remission of amount to the holding or related company for finally making payment to the third person will be considered as payment to third party. It cannot be termed as reimbursement of expenses to the holding company. If the contention of the assessee is accepted and the payment to third party, routed through its related concern, is considered as reimbursement of expenses to the related party, then probably all the relevant provisions in this regard will become redundant. The assessee paid a sum of Rs. 15.44 lakh to two trainers through the medium of its holding company. Patently the payment cannot be considered as having been made to the holding company at cost. But, in order to invoke the provisions of section 40(a)(ia) it is of paramount importance to ascertain the chargeability of the amount to tax in the hands of such two trainers who were eventual receivers. (C.U.Inspections (I) (P.) Ltd. vs. DCIT [2013] 156 TTJ 690 (Mumbai – Trib.)).

bb) Reimbursement of USA office Expenses: Non-Taxable:

Assessee was engaged in business of manufacturing, food processing and infotech – Assessee had a consignment agent located in USA – Assessee field its return claiming expenses on export sales under head ‘US office expenses’ – Assessing Officer opined that export sales was completed when goods left Indian customs boarders and, therefore, expenses claimed by assessee being in nature of post sales expenses could not be allowed as deduction – It was noted that in terms of consignment agreement, all US expenses incurred by foreign agent on behalf of assessee were responsibility of assessee – It was also noticed that expenses incurred by agent were duly certified by (PA audit report – Even otherwise when actual export sale was effected at USA through consignment agent on behalf of assessee, then expenses claimed by assessee for purpose of business could not be treated as post sales expenses. Assessee was not liable to deduct TDS for reimbursement of expenses. (Himalya International Ltd. vs. DCIT [2014] 151 ITD 726 (Delhi – Trib.)).

cc) Reimbursement of data processing cost: Non-Taxable:

Where assessee, a Belgium based bank, having obtained a licence to use software, allowed its Indian branch to use same software by making it accessable through server located at Belgium, amount reimbursed of data processing cost by branch on pro rata basis for use of said resources was not liable to tax in India as royalty under section 9(1)(vi) or article 12(3) of India-Belgium DTAA. In order to fall within ambit of article 12(3) of India-Belgium DTAA, branch should have exclusive and independent use or right to use software and for such usage, payment had to be made in consideration thereof. Since there was no such right which had been acquired by Branch in relation to usage of software, because Head Office alone had exclusive right to use software, reimbursement of data processing cost did not fall within definition of ‘royalty’ under article 12(3)(a) of DTAA. (ADIT vs. Antwerp Diamond Bank NV Engineering Centre [2014] 163 TTJ 175 (Mumbai – Trib.)).

dd) Reimbursement of expenses to foreign parent for selecting vendors: Taxable:

 Assessee-company had received certain amount from its Indian subsidiary as reimbursement on account of mobilization and demobilization charges, freight and hire charges, travelling accommodation and meal charges. Assessee company had undertaken to provide all sorts of services to its Indian subsidiary. Such services included arranging dredgers from abroad. HELD, Even to choose the best dredger, it is necessary to have adequate technical know-how about the nature and place of work to be carried out by its Indian subsidiary. It is not possible to simply say that the assessee had only brought dredgers from outside India to the Indian port for dredging and kept back once the work is over. The facilities arranged and coordinated or obtained by the assessee to support the operations of its Indian subsidiary are not layman’s activities. Assessing Officer rightly concluded that assessee had rendered technical services to its subsidiary in India and payments were in nature of fee for technical services liable to tax in hands of assessee-company and cannot be considered as reimbursements of expenses. (Van Oord ACZ Marine Contractors BV vs. ADIT [2012] 149 TTJ 124 (Chennai)).

ee) Reimbursement of infra expenditure: Non-Taxable:

Assessee being a foreign consultant had agreed to incur expenditure at first instance on behalf of NHAI on condition that same would be reimbursed by NHAI. It was seen that reimbursable expenditure was in nature of expenditure to be incurred by NHAI in course of its expansion programme of infrastructure. HELD, on facts, Commissioner (Appeals) was justified in holding that reimbursable expenditure could not form part of fee payable for technical services and, hence, it was not liable to tax. (ACIT vs. Louis Berger International Inc. [2010] 40 SOT 370 (HYD.)).

ff) Reimbursement of Central Establishment costs-Cost Allocation- Taxable

HELD, it is manifest that the head office is charging at the rate of 40 per cent of the gross revenue of each branch towards central establishment costs which include both the technical and administrative head office expenses. If the HO is to charge at the rate of 40 per cent of the gross income of each branch irrespective of the actual expenditure incurred by it, there can be no co-relation between the incurring of actual expenses and getting reimbursement from branches across the world. The position would have been different if the total actual costs incurred by the HO would have been apportioned amongst various branches by some yardstick. However, the position as prevailing is totally different inasmuch as the HO is charging branches at 40 per cent of gross revenue of each branch notwithstanding the actual expenditure incurred by it. It can be seen from HO certificate that overheads attributable to non-exclusive branches are at 32.03 per cent of income of such non-exclusive branches. As against this, the HO has charged Indian branch at the rate of 40 per cent of its gross income. The HO is charging Indian PE with a profit element and further there is no correlation between the amount charged and that spent by the HO. Therefore, it is incorrect to contend that the sum in question is reimbursement of actual expenses of the HO. (Lloyds Register vs. DDIT [2013] 142 ITD 726 (Mumbai – Trib.)).

gg) Reimbursement of service fee : cost allocation: Taxable:

Applicant, an Indian company, was a member of ‘D’ group of companies – A company incorporated in Singapore (‘D Singapore’) was also a member of ‘D’ group of companies – ‘D Singapore’ provided services in respect of market research, etc., to help other group companies to effectively carry out their business – Applicant proposes to enter into an agreement with ‘D Singapore’ to avail its services – Consideration clause in proposed agreement shows that there is no direct nexus between actual costs incurred by ‘D Singapore’ in providing said services to ‘D’ group of companies and fees payable by each individual company which avails services. HELD, the fees payable by each individual ‘D’ company would depend upon proportional percentage of budget turnover weighted by growth rate and market maturity of each individual company. The weighting is liable to be modified on the basis of previous year’s results at the request of the remaining ‘D’ company, in the event of any one of them departing from co-operation. It is therefore, cannot conclude that the service fee payable by the applicant would be nothing but reimbursement of costs incurred by ‘D Singapore’ in providing services to the applicant. Even assuming that the fee charged by ‘D’ Singapore from the applicant and similarly situated group companies is equivalent to the expenses incurred by it in providing the services and there is no profit element, it would then be a case of quid pro quo for the service fees and not of reimbursement of expenses. An element of profit is not an essential ingredient of a receipt to be taxable as income. Therefore, payments have to be made after withholding tax under section 195. (Danfoss Industries (P.) Ltd., In re [2004] 268 ITR 1 (AAR)).

hh) Reimbursement of license fees-Cost Allocation: Non-Taxable:

Assessee, an American company, purchased PeopleSoft Software which helped in improving visibility, tracking, and control with a single source of information that provided complete, real-time reporting and reconciliation of operational and financial data – Out of total amount incurred by assessee, a proportion of license cost and maintenance cost for PeopleSoft was allocated by assessee to its Indian subsidiary, CIS, which was reimbursed by CIS to assessee. HELD, the payment is in the nature of reimbursement of expenses and accordingly not taxable in the hands of the assessee. (Convergys Customer Management Group Inc. vs. ADIT [2014] 159 TTJ 42 (Delhi – Trib.)).

ii) Reimbursement of Research Expenses- Cost allocation: Taxable:

A group of company enters into an agreement to carry out the research and development programme. In terms of agreement, it appears that it is only an agreement to share product of research and development allegedly without payment of royalty, but paying a consideration for use described as contribution towards costs of research incurred by researching party – This payment occurs only on use of product of research and not otherwise – Though all parties are joint owners of intellectual property rights, rights are registered in name of applicant and payment for use of product is made to applicant . As per the agreement, each member shall individually spend on research and development, and allow other to use the product on payment of consideration. The consideration, though described as allocation of cost, is actually royalty as it is paid on use of product of research and not otherwise. On facts, payment made by any party to applicant can only be understood as a consideration for use of process or formula developed by researching member and, thus, would satisfy definition of royalty under Explanation 2 to section 9(1)(vi) Hence, taxable as royalty under Article 12 of India-Germany DTAA and section 9(1)(vi). (‘A’ Systems, The Netherlands, In re [2012] 345 ITR 479 (AAR – New Delhi)).

jj) Reimbursement of Research expenses- Cost allocation: Non-Taxable:

The fact that R&D information can only be accessed by the parties to the Cost Contribution Agreement(CCA) and the further fact that the licensed income derived by the limited commercial exploitation of IPR would go to reduce the amount which the participants would have to contribute are clear pointers that an internal arrangement has been evolved by the participating group entities through a joint endeavour to reap the benefits of research conducted by an organized set up of R&D Board consisting, inter alia, of the representatives of those entities. Though legal ownership of Intellectual Property Rights (IPR) rests with ABB, Zurich as a matter of convenience, by mutual agreement, beneficial ownership of products of research belongs to all those ABB Group companies which have singed CCA. It is clear that ABB, Zurich merely acts as a co-ordinating agency for the purpose of recouping the costs that are contributed by the various participants and acts as a medium for organizing and providing the CRCs with the funds for the research that is carried out. For the services rendered by ABB, Zurich as a co-ordinating agency, it gets ‘co-ordination fee’ the taxability of which is not under dispute. The manner in which the corporate funding will be arranged by the R&D Board and ABB, Zurich based on budgeted cost and revised cost would indicate that the parties to CCA have devised a methodology to reimburse the actual cost. Therefore, the payments made by the applicant to ABB, Zurich cannot be treated as payments in the nature of royalties liable to be taxed in India. (ABB Ltd., In re . [2010] 322 ITR 564 (AAR)).

kk) Reimbursement of brand promotion expenses- Cost Allocation: Non-Taxable:

 The applicant, a non-resident company, is a subsidiary of a Luxembourg entity, engaged in the business of promoting enterprises by conducting international advertising/marketing and sales programs for Marriott chains of Hotel to promote them in the foreign markets. While Marriott entered into various agreements with an Indian company (owner) for setting up its hotel project in India, the applicant also entered into an agreement with the owner called International Marketing Program Participation Agreement (IMPPA). The IMPPA provides that the owner would participate in the marketing business promotion programs and that the applicant would provide, inter alia, space in magazines, newspapers and other printed/electronic media outside India. The consideration that the owner would pay to the applicant is described as an annual contribution equal to 1.5 per cent of the gross revenues of the hotel by way of reimbursement of expenses that the applicant would incur for conducting and co-ordinating the international marketing activities for Marriot Chains of Hotel. HELD, amounts received by applicant-non-resident company from a resident hotel owner in connection with marketing and business promotion activities said to be conducted by applicant outside India under an agreement would be taxable in India. It has been emphasized that the applicant has no profit motive and as a fact also it is not earning any profit. For a receipt to be income in the hands of the recipient, element of profits therein is immaterial. (International Hotel Licensing Co., In re [2007] 288 ITR 534 (AAR)).

ll) Reimbursement of Leased line expense to parent company–Non-Taxable: –

where assessee-company reimbursed community expenses to foreign company for utilising leased lines services situated outside India, said payment not being in nature of ‘royalty’ within meaning of section 9(1)(vi), assessee was not liable to deduct tax at source while making payment in question (DCIT vs. International Flavours & Fragrances (I) (P.) Ltd. [2014] 66 SOT 261 (Chennai – Trib.)).

mm) Reimbursement of leaseline -Taxable: –

Assessee was engaged in business of airline ticket booking through CRS for and on behalf of participating airlines – With a view to market facility on CRS and to advertise same to customers, assessee gave right to market CRS to ADSIL which was assessee’s wholly owned Indian subsidiary – It received certain amounts, viz., line charges, installation charges, service charges, etc., from ADSIL and claimed them as reimbursement of expenses incurred by it on behalf of ADSIL – HELD, alleged reimbursement of expenses represented payments initially made by assessee for services in nature of lease line, installation, service charges and other expenses which were required to be provided by assessee to end customers who subscribed to CRS system and, therefore, that amount could not be considered as reimbursement of expenses from ADSIL and was taxable as business income of assessee. (Abacus International (P.) Ltd. vs. DDIT [2013] 144 ITD 36 (Mumbai – Trib.)).

nn) Reimbursement of Leased line expense to parent company: Non-Taxable

 Assessee had obtained from an international telecom operator lease line on payment of charges – For this purpose, assessee recovered international telecommunication operator charges on cost to cost basis from WNS India. Held that amount in question was received by assessee as reimbursement of lease line charges and would not classify either as royalty or as income attributed to a permanent establishment in India. (DIT v. WNS Global Services (UK) Ltd. [2013] 32 com 54/214 Taxman 317 (Bom.)).

oo) No TDS on export freight to shipping agent of non-resident

According to the CBDT circular No.723 dated 19th September 1995, the Tribunal held that where payment is made to the shipping agents of the non-­resident, ship owner or charter, the agent steps into the shoe of the Principal i.e. shipping company and according to the provisions under Section 172 of the Act, 1961 which provides for shipping business in respect of the non-residents would be applicable and the provisions of Section 194C or 195 which provides for deduction of tax at source shall not be applicable. PCIT Vs Summit India Water Treatment (Gujarat High Court); Tax Appeal No. 830 of 2019; 03/02/2020

pp) No TDS on Commission to non-resident agents for procuring export orders

The CIT(A) has rightly deleted this addition as the commission paid to non-resident cannot be treated as assessee’s income from other sources as the assessee had earned income, the said income outside India and also the payment was made to non-resident which cannot be taxable in India when the parameters of DTAAs are applied to such transactions. Therefore, impugned payment could not be held as taxable in the hands of non-resident agents in India and, therefore, liability to withhold tax under section 195 did not arise. Punjab Stainless Steel Inds. Vs ACIT (ITAT Delhi); I.T.A. No. 5532/DEL/2016; 04/06/2019.

qq) No TDS u/s 195 on payment of buying agency commission to non-resident

Consideration paid by assessee for services rendered by non-resident were purely in the nature of procurement services and could not be characterized as ‘managerial’, ‘technical’ or ‘consultancy’ services and thus, could not be classified as fee for technical services and accordingly, not liable for deduction of tax at source under section 195. M/s. Adidas India Marketing Pvt. Ltd. Vs ITO (ITAT Delhi); ITA No 953/Del/2016; 31/07/2019.

(Author can be reached at ca.guptarohit@gmail.com / 9873832979 for any queries pertaining to taxability of foreign remittances)

(Republished with Amendments by Team Taxguru)