When a claim was made by the assessee that there was no income of element embedded in the remittances, the AO has not examined the claim of the assessee in a proper perspective. They have merely said only few evidence have been filed. Another reason given was that no independent audit was carried out in respect of the remittances. We are of the view that the evidence filed by the assessee before the revenue authorities and which have been filed in the form of paper book filed before us amply demonstrates the plea of the assessee that the remittances were purely reimbursement of expenses with no element of income embedded in such payments. The question in such circumstances, will be as to whether the obligation to deduct tax at source can be said to exists on such payments. The law in this regard is very clear. The Special Bench of ITAT, Mumbai in the case of Mahindra & Mahindra Ltd., 30 SOT 374 examines this issue and have held that in respect of reimbursement of expenses there is no obligation to deduct tax at source and there was no element of income involved in such payments.
FULL TEXT OF THE ITAT JUDGEMENT
These are appeals by the assessee against the common order passed by the CIT(A)-IV, Bangalore u/s 201(1)( and 201(1A) of the IT Act, 1961 (‘The Act’) relating to assessment year 2007-08.
2. The assessee is encaged in the business of providing data processing and other IT enabled services to M/s Hewlett Packard entities. Another company by name M/s Hewlett Packard, AP (Hong Kong Ltd., ) (HK) herein after referred to as HP AP(HK), a company incorporated under the laws of Hong Kong and having office at Hong Kong. HP AP (HK) is also part of the HP Co., world wide group and it provides services to various members of the HP Co., world wide group. There was an agreement dated 01-06-2004 between HP, AP(HK) and the assessee whereby HP,AP(HK) agreed to provide the following services to the assessee.
1. Workforce development services
2. Logistics services
3. IT Support services
4. Financial services support
5. Facilities management services
6. Relocation services
7. Tax services
8. Stationery charges
9. Overseas travel services
10. Other services that may be rendered from time to time
The consideration payable by the assessee to HP,A P(HK) to provide the aforesaid services is mentioned in clause-II of the agreement and it reads as follows;
“ Costs, billing, payment;
The costs of services (costs) are the total direct and indirect costs incurred by service provider to perform the services. Such costs are incurred by the service provider in cost of sales or operating expense accounts.
Billing for services may be based partly or wholly on forecast costs, provided adjustments are made thereafter to reflect actual costs. Service provider will invoice user monthly (or, if agreed to in writing, quarterly) for the compensation due hereunder or on some other periodic basis agreed to by the parties. User shall make all remittances under this agreement within 30 days of receipt of an invoice, or in accordance with other payment terms agreed to in writing by the parties. Unless otherwise agreed, all invoices and remittances shall be in U.S.Dollars. In its reasonable discretion, service provider may utilize related parties in the HP world wide group as billing intermediaries for amount due hereunder.
In consideration for providing the services, user shall pay service provider for the costs plus mark up of 10% on such costs”.
During the previous year, the assesseee made the following payments to HP, AP(HK)
Break up for remittance made on 27.9.2006
|Particulars||Amt. in US $|
|Reimbursement of relocation expenses|
|(benefits and FSE taxes)||21,497.39|
|Reimbursement of relocation expenses||25,844.14|
|Reimbursement of communication expenses||41.91|
|Reimbursement of FSE Taxes||24,988.66|
|Reimbursement of employee awards||63,288.59|
|Reimbursement of VAT on services rendered||5,295.64|
Break up for remittances made on 28.12.2006
|Particulars||Amt. in US $|
|Reimbursement of relocation expenses|
|(benefits and FSE taxes)||37,470.19|
|Reimbursement of license fee for website access||4,122.36|
|Reimbursement of employee awards||36,557.41|
|Reimbursement relocation expenses and|
|and FSE Taxes||38,579.89|
|Reimbursement of relocation expenses|
|(benefits and taxes)||57,715.50|
3. On the aforesaid payments made to HP,AP(HK) who was a non-resident assessee has not deducted tax at source at the time of making payments. The assessee submitted that the aforesaid payments were reimbursement of relocation expenses (Benefits and taxes of Indian employees) and reimbursement of payments made towards employees awards. It was the claim of the assessee that there was no element of income embedded in such payments, which is chargeable to tax in the hands of HP,AP (HK) in India and therefore, there was no obligation to deduct tax at source, while making payments. The assessee explained the nature of reimbursement of relocation expenses and reimbursement of employees awards.
4. The Assessee explained that HP AP (HK) was like a clearing house (i.e similar to the Reserve Bank of India) and given the huge volume of inter company transactions between various worldwide group companies of the HP group and the related payments and receipts, all of these accounting is monitored by HP AP(HK) which is mere clerical exercise undertaken by HPAP (HK). In other words, the subject payment were mere reimbursement of expenses incurred by some overseas HP group entity on behalf of the Assessee which HP AP(HK) identified as payable by Assessee and cross charged under the General services agreement referred to in the earlier part of this order. Reimbursement of employees awards was explained by the Assessee as a part of the rewards and recognition policy of HP that it adopts for recognizing certain behavioural attributes and traits like, achievement and contribution, employee referral, meaningful innovation, passion for customers, teamwork, commitment to quality, leadership, speed and agility, uncompromising integrity, adaptive/change management etc. Although, the recommendations, referrals, people evaluation etc. is done by each country and under a particular legal entity, the E-award scheme is administered centrally. For example the subject E-awards, which were received by the employees was administered from HP AP(HK). The E-awards work on a point system and at the time when the people manger nominates en employee for such award, he also allots points and depending on the points collected by the employee, the employee can choose an award that is meaningful to them and the said points can be redeemed at any time. E-awards are similar to credit card points that accrue to employees of the Assessee. As and when eligible and desired, the employees encash these e-wards. Based on number of employees exercising the option, at the first stage funds are pumped into the Assessee by HP AP(HK). Based on this, the actual pay out by Assessee to the concerned employee after deducting taxes at sources, as applicable, is made. Once the payment to employee is made, given that the expense has to be booked in the books of Assessee, HP AP(HK) raises an invoice for such amounts on the Assessee, which is duly paid by the Assessee.
5. The other major component of impugned payment is reimbursement of relocation related expenses of employees of the Assessee. The Assessee explained that were various employees of the Assessee who are required to travel to other HP Group entities overseas either on short term or long terms assignments for the purpose of carrying on the business of the Assessee. In this regard, relocation related expenses, FSE taxes, etc. are borne by overseas HP entities and then through HP AP (HK) are charged to the Assesssee. The expenses cross charge to HP AP (HK) by the Assessee with respect to above are primarily on account of outbound assignees, who travel abroad to customer sites for process transitioning etc. but it could also include a few in bound assignees, who would travel into India to Assessee’s operations.
6. Copies of the sample invoices evidencing above reimbursements were also filed. It was submitted that the said sample of invoices without any doubt clearly demonstrates that the subject payment made by the Assessee was a mere reimbursement of expenses as evidenced by the back to back invoices etc. It was also highlighted that a reconciliation of all the expenses under scrutiny with vouchers and bills would not be feasible owing to the voluminous size and volume of documentation involved, it was physically very difficult to undertake the said exercise in the given time limit. However, despite the paucity of time, Assessee made a bonafide effort and submitted as many sample invoices/details, as was possible for it to collate.
7. It was further reiterated that subject payment is a mere reimbursement of expenses without mark up, which cannot be held to be in the nature of ‘fees’ for technical services and hence, not subject to tax withholding u/s 195 of the Act.
8. On the above facts, the question before the AO was to whether amounts in question are reimbursement of expenses having no element of income embedded in such payments and whether the aforesaid payments consisted payment in the nature fees for technical services rendered (FTS) which is chargeable to tax in India in the case of HP, AP(HK).
9. The AO was of the view that the relocation expenses were in the nature of FTS and he observed in this regard as follows;
“ 6.1 Relocation Expenses: During the course of hearing, the AR submits that India employees have been deputed to the foreign company and M/s HP, ( has incurred certain expenditure towards relocation of the Indian employees. These employees are 1)Mr.Ganesh Panchanathan 2) Ritu Nagpal 3) Seigfried Schoen 4) Sumeet Batra 5) Vivek Nagar Katti 6) Sanjay Singh etc. As per the AR’s submission the foreign company has arranged the accommodation and other logistics services to the above said employees. For this purpose, the non-resident has to search for appropriate locations to accommodate these employees. Sometimes it has to rely on third parties to make these arrangements. From the details it is further seen that the foreign company has also provided for other amenities like gas,water,power,furniture etc. to the Indian employees. Further, the foreign company has to guide and advise the employees in solving any problems in this regard. Therefore, these services broadly falls in the category of consultancy services. The foreign company has also incurred expenditure towards tax services. To provide tax services specified consultants needs to be hired who are experienced in the line of taxation and accountancy. This is specialized and professional service. These services can be rendered only with the help of experienced consultants. Thus, the services rendered by the foreign company collectively falls in the category of consultancy services therefore charges paid towards these services are nothing but FTS. The gross receipts in the hands of the foreign company is only relevant at this juncture for the purpose of charging FTS. As per service agreement the foreign company has charged @ cost+10% to the Indian company to render these services. Thus, the charges paid towards these services are nothing but FTS in the hands of foreign company.
6.2 Employees Awards: During the course of hearing, the AR submitted that these awards have been given to the Indian employees in the form of monetary incentive. Further, he AR stated that these awards have been given at the instruction of the M/s HP(AP), Hong Kong and the same were reimbursed to M/s HP (AP) subsequently. The submissions of AR are contradictory. At the first instance, she said that the payments were made to the Indian employees by the Indian company and then she says that it is mere reimbursement. If any payment made by the foreign company on behalf of the Indian company and subsequently if the Indian company pays back to the foreign company then only it is called reimbursement. Whereas here the Indian company has made payments to its on employees, therefore the issue of reimbursement does not arise. Here, the payments made to the Indian employees are on the basis of their performance. To improve the efficiency and to motivate the employees these performance incentives were given in the form of awards. Even though these incentives were given at the discretion of the Hong Kong company but payments were actually made by the Indian company therefore, the question of reimbursement does not arise. Since the payments were made towards workforce development, the remittance can be categorized as towards workforce development services and accordingly, falls in the category of FTS. The assessee company has camouflaged the whole remittance in the name of reimbursement instead of FTS. Thus, the remittance made by the Indian company chargeable to tax as FTS”.
10. On the question whether the payments were in the nature of reimbursement of expenses, the AO held as follows;
“6.3 Issue of reimbursement: The AR of the assessee contends that this is only cost to cost reimbursement and no element of income embedded in it. As per services agreement it is clear that the foreign company has charged cost + 10% as chages towards the above services rendered by it. However, during the course of hearing the AR was asked to submit necessary supporting in support of its claim of reimbursement. The assessee could only furnish few supporting which are not matching with the remittances made by the Indian company. Secondly, the AR was also asked to confirm whether any independent audit was carried in support of its claim and the AR could not confirm the same. In view of the above, the assessee’s contention of reimbursement is without any basis”.
11. On appeal by the assessee, the CIT(A) confirmed the order of the AO giving raise to the present appeals by the assessee before the Tribunal.
In ITA No.643(B)/2010
12. The assessee has challenged the order of the CIT(A) whereby the CIT(A) has treated the assessee as ‘an asseseee in default’ u/s 201(1 of the IT Act.
In ITA No.957(B)/2010
13. The asseseee has challenged the order of CIT(A) whereby the CIT(A) has levied interest u/s 201(1A) of the Act on the tax due, consequent to the assessee being treated as ‘an assessee in default’ u/s 201(1) of the IT Act.
14. The revenue’s contention was that it was not open to the assessee to raise issues regarding chargeability of tax on payments in question in proceedings u/s 201(1) of the Act. In our view this stand of the revenue will no longer survives. The Hon’ble Supreme Court in the case of GE India Technology Centre Pvt.Ltd., Vs CIT & Another (327 ITR 456) has held that the liability to deduct tax at source does not arise unless, remittances contain wholly or partly taxable income. The Hon’ble Supreme Court held that the liability to deduct tax at source while making payment to non-resident u/s 195 of the Act, will arise only if the remittances comprises of income chargeable to tax under the Act. In other words, the liability to deduct tax at source is only on the income component of the remittances to the non-resident and not on the gross remittances. In view of the decision of the Hon’ble Supreme Court it is permissible for the person making payment to allege that the remittances made to the non-resident or any portion of such remittances does not comprise of income which is chargeable to tax in India in the hands of the non-resident. With this background, we proceed to examine the remittances made by the assessee to HP, AP (HK).
15. We have already given the breakup of the remittances made by the assessee to HP, AP(HK). The evidence in support of some of the reimbursements have been placed in the paper book filed before us. The assessee has given a break up of remittances made to HP, AP (HK) and these are contained in pages 3 to 15 of the paper book. To demonstrate the fact that the payments were purely reimbursement of expenses incurred by entities of the HP group worldwide on behalf of the Assessee which have been collated by HP,AP(HK). The details of sample employees like invoices for reimbursement made to sample employees have been given. These are contained in pages 16-18 of the assesseee paper book. Perusal of the same reveals the nature of reimbursement. For example: Shri Vivek Nagar Katti, had gone to Houston, USA. He was provided with a house and furniture for his living in USA. Expenses had been incurred in the form of house rents, furniture hire charges etc. M/sHP,AP(HK) raised invoices on the assessee for the actual expenses incurred on behalf of the assessee with reference to the employee Shri Vivek Nagar Katti. It is thus cler from the sample invoices filed before us that the payments made by the asseseee to HP, AP(HK) were reimbursement of actual expenses incurred by the entities of the HP Group on behalf of the assessee. No doubt, the agreement between the assessee and the HP,AP(HK) contemplates 10% mark up on the actual cost, but as far as the payments made during the previous year are concerned, no such mark up has been made and the disputed payments are purely reimbursement of actual expenses incurred with no income embedded in such payments.
16. As we have already seen when a claim was made by the assessee that there was no income of element embedded in the remittances, the AO has not examined the claim of the assessee in a proper perspective. They have merely said only few evidence have been filed. Another reason given was that no independent audit was carried out in respect of the remittances. We are of the view that the evidence filed by the assessee before the revenue authorities and which have been filed in the form of paper book filed before us amply demonstrates the plea of the assessee that the remittances were purely reimbursement of expenses with no element of income embedded in such payments. The question in such circumstances, will be as to whether the obligation to deduct tax at source can be said to exists on such payments. The law in this regard is very clear. The Special Bench of ITAT, Mumbai in the case of Mahindra & Mahindra Ltd., 30 SOT 374 examines this issue and have held that in respect of reimbursement of expenses there is no obligation to deduct tax at source and there was no element of income involved in such payments.
17. Thus, on the facts of the present case, we are of the view that there was no obligation to deduct tax at source and consequently, the assessee could not be treated as ‘an assessee in default’ u/s 201(1) of the Act and consequently, the levy of interest u/s 201(1A) of the Act, cannot also be sustained.
18. The learned counsel for the assessee as well as the revenue also advanced arguments as to whether the payments in question would be in the nature of FTS. Since we have already held that the payment in question is purely reimbursement of expenses these arguments are not considered at this stage.
19. In the result, the appeals filed by the assessee are allowed.
Order pronounced in the open court on the 4th July, 2012