Case Law Details
C.U.Inspections (I) Pvt. Ltd Vs DCIT (ITAT Mumbai)
Mere fact that the payment in question is not reimbursement of expenses to the holding company would not per se expose the expenditure to disallowance u/s 40(a)(ia) of the Act. It has been noticed supra that the disallowance u/s 40(a)(ia) is activated when there is failure on the part of the assessee to deduct/pay tax at source from the payment on which tax is otherwise deductible as per law. Deduction of tax at source u/s 195 from payment is envisaged when the amount is chargeable to tax in the hands of recipient. Reimbursement of expenses to the related party without any mark-up is one of the situations under which the amount paid cannot be considered as chargeable to tax. There can be several other situations under which albeit the payment includes income element but it still may not be not chargeable to tax under the provisions of the Act and/or the relevant Double Taxation Avoidance Agreement (DTAA). The crucial factor to consider is the chargeability to tax of the amount in the hands of the recipient. If the amount is not chargeable to tax due to one reason or the other, the payment cannot suffer disallowance in the assessment of the payer.
Adverting to the facts of the instant case, we find that the assessee paid a sum of Rs. 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. Unless the chargeability of such amounts is established in the hands of such trainers, the provisions of section 195 cannot apply and ex consequenti, the application of section 40(a)(ia) is ruled out. We find virtually no discussion in the assessment order and the impugned order about the taxability of this amount in the hands of those two trainers so as to bring it within the purview of chargeability. In our considered opinion the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of A.O. We order accordingly and direct him to first decide the question of chargeability or otherwise of the amounts paid by the assessee in the hands of the two trainers under the relevant provisions of the Act read with the relevant DTAA and thereafter the question of application of section 40(a)(ia). Needless to say the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the assessee arises out of the order passed by the Commissioner of Income- tax (Appeals) on 18.10.2010 in relation to the assessment year 2006-2007.
2. First issue is against the confirmation of disallowance amounting to `34,94,816 made by the Assessing Officer (AO) u/s 40(a)(ia) of the Income-tax Act, 1961 (Act). Briefly stated the facts of the case are that the assessee is a subsidiary of M/s P.S.O. Beheer B.V., a resident of Netherlands. It is engaged in the business of certification of activities in respect of quantity, quality, pre-shipment inspections, surveys etc. Apart from others, a sum of `34,94,816 was paid by the assessee to its holding company towards reimbursement of expenses without deducting tax at source. The Assessing Officer observed that the provisions of section 195 were attracted in respect of such payment. As the assessee was required to deduct tax at source before remitting the said payment, which it did not, the AO made the disallowance invoking the provisions of section 40(a)(ia) of the Act. The contention of the assessee that this payment was towards reimbursement of expenses incurred by the holding company without any profit element, did not find favour with the AO. The learned CIT(A) upheld the assessment order on this count. The assessee is aggrieved against the sustenance of this disallowance.
3. After considering the rival submissions and perusing the relevant material on record, it is observed that the assessee entered into an agreement with its holding company towards incurring of such expenses. Vide Agreement dated 5th June, 2005, a copy of which has been placed on record, the holding company agreed to incur various costs for and on behalf of the assessee and other group concerns. These expenses include Accounting services, Legal and professional services, Communication, R&D etc. Clause 3 of the Agreement talks of consideration. This clause provides that the total overhead costs shall be collected from various group members at certain percentage of the total cost determined as per arm’s length principle by considering the size of the group member, percentage of ownership, time spent by the management, number of visits etc. Second part of clause 3 provides that : “Taking into account all the abovementioned parameters, the percentage for the Group Member, Control Union India Private Limited, has, after careful consideration, been fixed at 4% of the Total Overhead Cost”. The Auditors, namely M/s.Gran Thornton confirmed the assessee’s share of such overhead expenses at 4% amounting to `34.94 lakh through their certificate, a copy of which has been placed at page 11 of the paper book. This certificate unequivocally mentions that the apportionment “does not include any profit elements”. From the Agreement and the Certificate of the Auditor, the contents of which have not been controverted by the authorities below, it is amply clear that the assessee’s share at 4% of total overhead charges, as worked out at `34.94 lakh, is without any profit element. When we consider the nature of expenses borne by the head office such as accounting, legal and professional, staff and management etc., it becomes vivid that these expenses are otherwise in the nature of revenue expenses. It is not the case of the AO that some part of such expenses is not deductible as breaching the mandate of section 44C of the Act.
4. Section 195 of the Act provides that any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act, not being certain exclusions, shall at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, deduct income-tax thereon at the rates in force. A pre-requisite for making disallowance under section 40(a)(ia) is that the payment for the expenditure should necessarily be liable to deduction of tax at source. In the instant context, an amount will be liable to tax withholding if it inter alia contains some income element. If the amount paid by the assessee is not taxable in the hands of the recipient, there can be no question of making any disallowance under this provision. A conjoint reading of sections 195 and 40(a)(ia) brings to the fore that the disallowance can be made only if the amount paid is chargeable to tax in the hands of the recipient. In other words, if the amount is not chargeable to tax in the hands of the recipient, there cannot be any scope for deduction of tax at source. There is no dearth of judgments and Tribunal orders to the effect that the reimbursement of expenses without any profit element cannot be charged to tax in the hands of the recipient. If such an amount is not chargeable to tax there cannot be any scope for deduction of tax at source from such payment. Once no deduction of tax at source is contemplated, the natural corollary which manifestly follows is that the provisions of section 40(a)(ia) can not be triggered. We, therefore, do not see any reason for sustaining the disallowance confirmed by the learned CIT(A).
5. Before parting with this issue, we would like to record that the learned Departmental Representative referred to certain observations made by the learned CIT(A) to bring home the point that the assessee did not furnish any details of the actual expenditure incurred and in that view of the matter he urged for sustaining the disallowance. We are unable to countenance such a contention because the authorities below have made and sustained disallowance of `94 lakh u/s 40(a)(ia) of the Act. An amount can be disallowed under this provision only when it is otherwise eligible for deduction. If the amount of expenditure does not otherwise qualify for deduction, the question of considering the provisions of section 40(a)(ia) cannot apply. As both the authorities have made and sustained disallowance u/s 40(a)(ia) of the Act, we cannot permit the learned Departmental Representative to improve the case of the Revenue and doubt the very deductibility of the expenditure itself, which has not been done by the AO. No doubt, the ld. DR’s has unbridled power to argue the case of the Revenue from any angle, but there is an inherent limit on such arguments. He can’t travel beyond the assessment order to set up an altogether new case. If we accept the contention of the ld. DR that the assessee was not entitled to deduction in the very first instance, it would set aside the bedrock of the action of the AO, being the disallowance u/s 40(a)(ia). In our considered opinion, such a course of action is not open to the ld. DR. In view of the foregoing reasons, we decide this issue in assessee’s favour by overturning the impugned order on this score.
6. The only other issue which survives in this appeal is against the confirmation of disallowance of Rs. 15,44,700 u/s 40(a)(ia) of the Act. The facts apropos this issue are that the assessee claimed deduction for a sum of `44 lakh towards training expenses to its employees claiming the amount paid as reimbursement of expenses to its holding company. No tax was deducted at source from such payment. The training was, in fact, imparted to the employees of the assessee by Mr. Henk Jan Sijtsma and Mr. Mike van de Laak, which was arranged by the assessee’s holding company. Two invoices were raised by the holding company on the assessee at EUR 13,500 and EUR 15,000 towards such training given by these two persons. The Assessing Officer, invoking the provisions of section 40(a)(ia), made the disallowance for the failure of the assessee to deduct tax at source from such payments. The learned CIT(A) upheld the disallowance. The assessee has assailed the sustenance of such disallowance.
7. We have heard the rival submissions and perused the relevant material on record. It is noticed as an undisputed fact that the amount of `44 lakh was paid by the assessee to its holding company, which amount was in turn paid by the holding company to some outside trainers. The learned AR was fair enough to concede that the training was imparted solely to assessee’s employees by some trainers independent of the assessee’s holding company. Now the question arises as to whether this amount paid by the assessee to its holding company can be termed as reimbursement of expenses so as to immune it from the rigor of section 40(a)(ia)? In our considered opinion, the answer to this question can be in negative alone. In the extant context, the reimbursement of expenses for avoiding deduction of tax at source contemplates the actual incurring of expenses by the later in the first instance, which is subsequently made good by the former. Where the expenses are incurred not by the later itself but someone else, its payment by the former to the later to pass it to such third person cannot be considered as reimbursement of expenses to the later so as to push such transaction outside the ambit of the provisions of deduction of tax at source. To put it in simple terms, if the Indian subsidiary company incurs expenses or makes purchases or avails any service from some third party abroad and the payment to such third party is routed through its holding or related company abroad, the provision for deduction of tax at source apply as if the assessee has made the payment to such independent party de hors the routing of payment through the 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. Such a route is impermissible to thwart the flow of law. It, therefore, follows that the payment made to the related party for paying eventually to some third party cannot be construed as reimbursement of expenses to the related party. It is only where the payment is ultimately stopping with the related party that it can be considered as payment to the associated concern and not otherwise. Reverting to the facts of the instant case, it is noticed that the assessee availed services from some third parties. Payment for such services was made to such third parties through the medium of its holding company. Such payment cannot be considered as reimbursement of expenses at cost to its holding company. We, therefore, uphold the view taken by the learned CIT(A) in this regard that the amount in question cannot be considered as reimbursement of expenses.
8. However, the mere fact that the payment in question is not reimbursement of expenses to the holding company would not per se expose the expenditure to disallowance u/s 40(a)(ia) of the Act. It has been noticed supra that the disallowance u/s 40(a)(ia) is activated when there is failure on the part of the assessee to deduct/pay tax at source from the payment on which tax is otherwise deductible as per law. Deduction of tax at source u/s 195 from payment is envisaged when the amount is chargeable to tax in the hands of recipient. Reimbursement of expenses to the related party without any mark-up is one of the situations under which the amount paid cannot be considered as chargeable to tax. There can be several other situations under which albeit the payment includes income element but it still may not be not chargeable to tax under the provisions of the Act and/or the relevant Double Taxation Avoidance Agreement (DTAA). The crucial factor to consider is the chargeability to tax of the amount in the hands of the recipient. If the amount is not chargeable to tax due to one reason or the other, the payment cannot suffer disallowance in the assessment of the payer.
9. Adverting to the facts of the instant case, we find that the assessee paid a sum of Rs. 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. Unless the chargeability of such amounts is established in the hands of such trainers, the provisions of section 195 cannot apply and ex consequenti, the application of section 40(a)(ia) is ruled out. We find virtually no discussion in the assessment order and the impugned order about the taxability of this amount in the hands of those two trainers so as to bring it within the purview of chargeability. In our considered opinion the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of A.O. We order accordingly and direct him to first decide the question of chargeability or otherwise of the amounts paid by the assessee in the hands of the two trainers under the relevant provisions of the Act read with the relevant DTAA and thereafter the question of application of section 40(a)(ia). Needless to say the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.
10. In the result, the appeal is partly allowed.
Order pronounced on this 06th day of March, 2013
