Case Law Details
Bureau Veritas-Indian Division Vs ADIT (ITAT Mumbai)
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’.
FULL TEXT OF THE ITAT JUDGEMENT
ITA No.3238/Mum/2006,A.Y.2002-03, ITA NO.659/MUM/2007,A.Y.2003-04, ITA NO.273/MUM/2008, A.Y 2004-05, ITA NO.2184/MUM/2009, 2006-07 are filed by the assessee and ITA No.04/Mum/2008,A.Y.2004-05 is an appeal filed by the Revenue. Grounds of appeal in each appeal read as under:
Grounds of Appeal in ITA No. 3238/Mum/06, A.Y. 2002-03:
1.1 The CIT(A) erred in confirming the disallowance of Rs. 50,59,019 being share of Technical expenses of head office without appreciating the fact that the same was reimbursement of actual expenses incurred by the head office.
1.2 The CIT(A) further erred in considering the reimbursement of actual expenses as fees for technical services without considering the definition of “Fees for included services” as per Article 12(4) of India-USA T- France Tax Treaty
2.1The CIT(A) erred in not admitting the additional ground of appeal reproduced in the Order of CIT(A) under para 14, same having been taken on account of the view on the appellant’s ground of appeal being taken by CIT(A), gathered in the course of appeal proceedings. proceedings.
2.2 It is submitted that disallowance of Rs. 50,59,019 on the ground completely other than basis of the assessing officer was not called for and in any case on that basis, additional ground as raised should have been admitted.
3.1 Assessing Officer erred in disallowing expenditure on foreign travel of Rs. 6,87,066 being expenditure on foreign travel of business associates and CIT(A) erred in confirming the same. The appellant submits that the said expenditure is incurred for commercial expediency. Hence. same be allowed.
3.2 1he appellant notes that for similar disallowance of foreign travel expenditure for A.Y 93-94 appeal is pending before the Supreme Court and for A.Ys. 1995-96 to 1998-99 appeals are pending before Bombay High Court.”
Grounds of Appeal in ITA No. 659/Mum/2007(A.Y.2003-04):
1.1 The assessing officer erred and CIT(A) in confirming the disallowance of Rs 48,51,584/- being share of Technical expenses of head office without appreciating the fact that the same is reimbursement of actual expenses incurred by the head office.
1.2 The assessing officer further erred in considering the reimbursement of actual expenses as fees for technical services without considering the definition of “Fees for included services” as per Article 12(4) of India-USA Treaty which applies to India-France Tax Treaty as per clause 7 of the Protocol of India France Tax Treaty and CIT(A) in confirming such consideration.
Grounds of appeal in ITA No.273/Mum/2008(A.Y. 2004-05):
“1. The Assessing Officer has erred in disallowing u/s. 40(a)(i) the share of technical expenses of the head office of Rs.47,75,357/- ignoring the fact that the payment is towards reimbursement of share of expenses charged to the branch on the ground that the payment is in the nature of technical fees liable to deduction of tax at source.
2 The Assessing Officer erred in disallowing foreign traveling expenses of Rs. 2,57,052/- ignoring the fact that the expenses were incurred for the purpose of business”.
Grounds of appeal in ITA No.2184/Mum/2009(A.Y.2006-07):
“1. The Commissioner of Income Tax (Appeal) has erred in confirming the disallowances made by the assessing officer u/s. 40(a)(i) in respect of share of technical expenses of the head office of Rs.50,22,533/- on the ground that the payment is in the nature of technical fees liable to deduction of tax at source ignoring the fact that the payment is towards reimbursement of share of expenses charged to the branch”.
Grounds of appeal in ITA No.04/Mum/2008 (A.Y.2004-05):
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.47,75,357/- holding that this amount not being an allowable deduction in the hands of Indian P.E cannot be brought to tax in the hands of Head Office as income.”
2. The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the AO restored.”
2. At the outset it was submitted by Ld. AR that cross appeal filed by the Revenue in respect of A.Y 2002-03 has already been disposed off by the Tribunal vide its order dated 29/10/2009 reported as (2011) 45 SOT 67 (Mum) (URO). Copy of the order was placed on our record. It also came to our notice that against aforementioned order passed by the Tribunal Revenue had preferred an appeal which has also been decided by their Lordship of Hon’ble Bombay High Court vide their order dated 28/09/2011 in ITA No.3377 of 2010, copy of the said order is also placed on record. One common issue raised in all the appeals is regarding disallowance made by the AO in respect of amount paid by the assessee to its Head Office, which according to assessee is in the nature of reimbursement of technical expenses and is not taxable in India. As against the said claim of the assessee it is the claim of the Revenue that the said amount is taxable in the hands of the Head Office and since no tax has been deducted by the assessee which was required to be deducted, the disallowance was called for under section 40(a)(ia) of the Income Tax Act, 1961(the Act). It is also the case of the Revenue that the said amount is also assessable in the hands of the assessee as the said amount is received by the Head Office of the assessee is in the nature of “fee for technical services” which is taxable in India @ 20% apart from other income of the permanent establish as per Double Taxation Avoidance Agreement (DTAA) between India and France.
3. Before proceedings further it will be relevant to mention brief facts of the case. The assessee is a company incorporated in France and operated in India through its Indian Division. The Head Office of the assessee is classification society recognized by 120 National Maritime Administrator and carries out classification and a statutory survey as well as audits for implementation of International Safety Management code and issuing Documents of compliance to companies and Safety Management Certificates to Ships. The Indian branch is engaged in the business of providing services relating to shipping industries, which inter-alia includes, classification, statutory instructions and surveys of all types of ships, crafts and vessels and issuing statutory surveys in respect of surveys and inspection carried out. During the course of assessment proceedings for assessment year 2002-03 the AO noticed that Head Office of the assessee has allocated an expenditure to its Indian Division which according to AO was in the nature of technical expenditure of a sum of Rs.50,59,019/-. According to AO the said amount represents “fee for technical services” and while crediting such amount to Head Office account no tax was deducted. Therefore, AO added the said amount under section 40(a)(ia) of the Act. The AO also added the said amount in the hands of the assessee as according to AO the said amount is taxable separately @ 20% in the hands of permanent establishment as per DTAA between India and France.
4. An appeal was filed before Ld. CIT(A) who has decided appeal by the impugned order dated 6/3/2006. Ld. CIT(A) has held that the amount paid by the assessee to its Head Office is “ fee for technical services” taxable under Article -13 of the IndoFrance Tax Treaty. He rejected the contention of the assessee that amount could not be disallowed as its payment is to self and reliance was placed as the decision of the Tribunal in the case of ABN Amro Bank NV. Ld. CIT(A) has also confirmed the disallowance being in accordance with Article 7(3)(b) of Indo-France tax treaty which describe that the deduction will not be allowed for amount, if any, paid (otherwise than towards reimbursement of actual expenditure) by P.E to the Head Office by way of royalty, fee or other payments in return for the use of patent or other rights. However, Ld. CIT(A) has accepted the case of the assessee that since the said amount has already been added to the income of the P.E the same amount cannot be added again in the hands of PE separately from its income assessable as PE. Ld. CIT(A) held that such amount would amount to double taxation. For the sake of completeness such conclusion of Ld. CIT(A) are reproduced below.
“9. The appellant is accepting that technical services are being provided to the branch by Bureau Veritas, Paris (refer para 2 of Annexure to Note 1 with the statement of facts in which the details of technical services actually provided by our Head office’ is given. Therefore, the amount of Rs.50,59,019/- is ‘fees for technical services” taxable under Article 13 of the India France Tax Treaty. The appellant’s contention based on para 26 of ABN Amro Bank NV supra that the amount cannot be considered disallowable in the hands of the branch while computing its business income is not accepted. Therefore, the disallowance of the claim of share of technical expenses of Rs.50,59,619/- made by the AO is confirmed on the ground that the payment of expenditure is to self and reliance in this regard is placed upon ABN Amro Bank NV supra. Alternatively, the disallowance is also confirmed under paragraph 3(b) of the Article-7 of India France Tax Treaty which inter- alia states that deduction will not be allowed for amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the PE to the Head Office by way of royalties, fees or other payment in return for the use of patent or other rights.
10. The AO has also held that the head office has received Rs.50,59,019/- as fees for technical services which is taxable in India at 20% separate from other income of PE as per DTAA between India and France. The disallowance of the amount of Rs.50,59,019/- has been confirmed above since the payment made by the branch (PE) to the head office is payment to self and is therefore not an allowable deduction. In view of this finding, the taxation of the same amount of Rs.50,59,019/- as fees for technical services in the hands of the head office would not survive. This conclusion is also supported by the discussion in para no.26 of ABN Amro Bank NV case where it is stated that on the assumption that the PE is a different entity than its head office and the interest payment by the PE to the head office is an allowable deduction on the parity of reasoning, the receipt by the head office of the interest paid by the PE would be chargeable to tax in India u/s. 5(2) of the Act read with Article 11 of the DTAA i.e. the chargeability in the hands of the head office would only arise where the PE is treated as a different entity than its head office. In the present case, as discussed above, the PE is not regarded as a separate entity from the head office and the payment of the amount of Rs.50,59,019/- by the branch (PE) to the head office has been held to be a payment to self. This conclusion would also be applicable to the alternative finding given above that the amount of Rs.50,59,019/- is to be disallowed under Article 7(3) of the India France Tax Treaty since the disallowance arises because of the relationship of PE and head office and taxation of the amount disallowed by assessing the amount in the hands of the head office on the basis of the same relationship would amount to double taxation. Therefore, the AO’s finding that the amount of Rs.50,59,019/- will be taxed in the hands of the head office at the rate of 15% separate from other income of the PE is deleted and the AO is directed accordingly.”
4.1 On the aforementioned findings of the Ld. CIT(A) the Revenue in its appeal for A.Y 2002-03 had raised following ground which is decided by aforementioned order dated 29/10/09 rendered in Revenue’s cross appeal.
“On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the Assessing Officer (not) to tax the ‘fees for technical services’ received by the head office amounting to Rs.50,59,019/- separately from the other income of the PE (permanent establishment) as payment to self.”
5. The appeal filed by the Revenue has been dismissed by the Tribunal. The Tribunal has recorded a finding of fact that the payment made by the assessee to its Head Office was in the nature of reimbursement of technical expenses and accordingly amount being not taxable in India, the assessee is justified in not deducting tax at source. Consequently no disallowance could be made on the said amount of fee for technical services paid by the assessee to its Head Office. These findings of Tribunal are mentioned in the order passed by Hon’ble High Court dated 28/09/2011(supra) and the said order is reproduced below.
“1. Whether the Income Tax Appellate Tribunal was justified in holding that the fees for technical services paid by the assessee to its head office was not taxable in India and, therefore, the assessee was not liable to deduct tax at source is the question raised in this appeal.
2. The finding of fact recorded by the Income Tax Appellate Tribunal is that the payment made by the assessee to its head office was in the nature of reimbursement of technical expenses and accordingly the amount being not taxable in India, the assessee is justified in not deducting tax at source. Consequently, no disallowance could be made on the said amount of fees for technical services paid by the assesee to its head office.
3. We see no infirmity in the order passed by the Income Tax Appellate Tribunal. The appeal is accordingly dismissed with no order as to costs.”
5.1 In view of aforementioned decision of Hon’ble High Court in the case of assessee itself, after hearing both the parties it has to be held that assessee was not required to deduct tax at source from the impugned payment, consequently no disallowance could be made of the said amount of fee for technical services paid by the assessee to its Head Office, therefore, disallowance under section 40(a)(ia) of the Act was not called for.
5.2 Now assessee in its appeal has agitated the findings of Ld. CIT(A) that the said amount could not be taxed in the hands of the assessee as neither the same could be taxed as per provisions of Article -13 nor it was taxable as per Article – 7 of India – France treaty. This issue is covered in favour of the assessee by the aforementioned decision of Tribunal passed in Departmental appeal. The Tribunal has held that it was only elementary that taxable unit in the instance case was the non-resident company and not its head office or the branch office. In terms of the provisions of section 90, the provisions of applicable DTAA over-ride the provisions of the Act, except to the extent that the latter were beneficial to the assessee. Therefore, when the assessee did not have any taxability in India, in respect of an income, in terms of the provisions of the applicable DTAA, any taxability in respect thereof could not arise on account of the provisions the Act either. The connotations of fees for technical services under the Indo-French tax treaty were confined to payment for such services ‘as make available’ technical knowledge, skill, experience, etc. or consisted of development and transfer of technical plan or design. Generally speaking, technical services are treated as having been ‘made available’ when recipient of such technical services is enabled to perform such services without recourse to the service provider. In the instant case, the payment for technical services, which was sought to be brought to tax in the hands of the assessee was in the nature of reimbursement of technical expenses to the head office. The Assessing Officer had observed that ‘the head office expenditure allocated to the Indian division was in the nature of technical and administrative expenses’. Thus, this amount was not on account of any specific technical services having been ‘made available’, in the sense in which this expression was employed in the tax treaties, the amount could not be brought to tax in the hands of the assessee under article 13 of the IndoFrench tax treaty. This amount could not also be taxed in the hands of the assessee under article 7 as it was not an income ‘attributable to PE’. Hence, the taxability of the impugned sum in the assessee’s hand was indeed incorrect.
5.3 The above observation of Tribunal can be found in para-9 of the order. In view of aforementioned order of the Tribunal in assessee’s own case in respect of very same year, i.e. for A.Y 2002-03, it has to be held that the aforementioned amount could not even be assessed in the hands of the assessee on account of applicability of Article -13 and 7 of DTAA. Therefore, findings of Ld. CIT(A) to this extend has to be vacated and the addition is deleted.
6. The other ground raised by the assessee in A.Y 2002-03 and 2006-07 relates to foreign travel expenses which was not pressed and, therefore, dismissed as not pressed. In the result, Ground No.3.1 and 3.2 for A.Y 2002-03 and Ground No.2 for assessment year 2004-05 of assessee’s appeal are dismissed being not pressed.
7. In view of above discussion, so far as it relates to A.Y 2002-03 since impugned addition of Rs.50,59,019/- is deleted, Ground No.1 & 1.2 are allowed and Ground No.2.1 and 2.2 become infructuous which need not to be adjudicated. The appeal of the assessee for A.Y 2002-03 is partly allowed.
8. So far as it relates to appeals of the assessee for A.Y 2003-04, 2004-05 and 2006-07, the common issue raised by the assessee is regarding similar addition of Rs.48,51,584/- for A.Y 2003-04, Rs.47,75,357/- for A.Y 2004-05 and Rs.50,22,533/- for A.Y 2006-07 respectively and the same is discussed in Ground No.1 & Ground No.1.2 for A.Y 2002-03. Following the aforementioned decision rendered in respect of A.Y.2002-03 the impugned disallowance in respect of all the years is deleted and the grounds relating to impugned addition are allowed.
9. So far as it relates to Revenue’s appeal for A.Y 2004-05, the ground taken by the Revenue is similar to the ground taken by Revenue in respect of 2002-03. In respect of A.Y 2002-03 the appeal filed by the Revenue was dismissed by the Tribunal vide aforementioned order of Tribunal dated 29/10/2009. The order of the Tribunal has also been confirmed by Hon’ble Jurisdictional High Court, therefore, respectfully following the same the present appeal filed by the Revenue is also dismissed.
10. Before parting it may be mentioned here that Revenue’s appeal for A.Y 2006-07 has already been dismissed by the Tribunal following the aforementioned order of the Tribunal dated 29/10/2009 in respect of Departmental appeal for A.Y 2002-03. Though as per judicial prudence cross appeal for A.Y 2006-07 were required to be decided in a consolidated order but taking cognizance of the confirmation of decision of Tribunal by Hon’ble High Court vide their order dated 28/9/2011 in respect of A.Y 2002-03 we have decided the assessee’s appeal by this order as the appeal filed by the Revenue has already been decided and is in accordance with the view upheld by Hon’ble High Court.
11. In the result the appeals filed by the assessee in respect of A.Y 2002-03 and 2004-05 are partly allowed and appeals for A.Y 2003-04 and 2006-07 are allowed.
Appeal filed by the Revenue for A.Y. 2004-05 is dismissed.
