Brief of the Case
ITAT Mumbai has held in the case of Lionbridge Technologies Private Limited vs ITO (International Taxation) (TDS) that There is no liability to deduct tax at source on reimbursement of cost. Consequently for not deducting tax at source, the assessee cannot be treated as assessee in default under sections 201/ 201(1A).
Brief Facts of the Case
i. Lionbridge Technologies Inc, USA, had entered into an agreement with Microsoft Inc, USA and Skillsoft (which are referred as Vendors) for the purchase of Standard off the Shelves Software to be used by Lionbridge entities across the globe.
ii. Lionbridge Technologies Inc, USA, had made the payment to the vendors for the purchase of software, which in turn was reimbursed by the various group entities using the software.
iii. One of the group entities is Lionbridge Technologies Private Limited ( the Appellant)
iv. Lionbridge Technologies Inc, USA has allocated the cost of the software amongst various group entities based on headcounts i.e number of desktop in each office.
v. The said allocation was made on cost and no mark-up was charged by Lionbridge Technologies Inc, USA.
vi. The asseseee being one of the group entity, made the payments to Lionbridge Technologies Inc, USA as reimbursement of the cost of the software.
vii. The assessee’s contention was that the acquisition of the software for the use of software does not give rise to ‘royalty’ or ‘income’ in the hands of the recipient, because it was purchased off shelf and was merely a reimbursement of cost.
viii. The copies of the agreement between Lionbridge Technologies Inc, USA and Microsoft Inc, USA was furnished along with the details of allocation of cost amongst the various group entities.
Question of Law
Whether there is any element of income in reimbursement of cost. If not, whether the assessee claiming the deduction for expenditure can be treated as assessee in default under section 201/ section 201(1A) of Income-tax Act, 1961, for non-deduction of tax at source.
Contention of the Assessee
a. The assessee contended that it would have been liable to withhold the tax under section 195 on the amount remitted to non- resident, only if the income would have been chargeable to tax in India in the hands of the non-resident.
b. The assessee (citing the facts) contended that the allocation of cost has been done without any mark-up. Hence it is only reimbursement of cost incurred by Lionbridge Technologies Inc, USA.
c. Hence there is no income of Lionbridge Technologies Inc, USA which is taxable in India. Further the assessee submitted that its case has been squarely covered by the decision of the Hon’ble Supreme Court in the case of GE India Technology Centre Pvt Ltd vs CIT, reported in 339 ITR 587 ( 193 Taxman 234).
Contention of the Revenue
a. The Departmental Representative submitted that the allocation key used by Lionbridge Technologies Inc, USA for allocating the cost amongst various group entities was inappropriate and it is open to verification.
b. Accordingly the cost allocated to the assessee in India was inaccurate. The Departmental Representative also relied upon the order of Commissioner of Income –tax (Appeals).
Held by the ITAT
a. The ITAT citing the facts and paper book submitted opined that the said allocation was made at cost and no mark-up was charged.
b. The ITAT cited that it has not been disputed that the cost of reimbursement paid to Lionbridge Technologies Inc, USA is not chargeable to tax in India and if that is so, then the assessee was not required to withhold the tax under section 195 and this proposition is well supported by the decision of the Apex Court in the case of GE India Technology Centre Pvt Ltd.
c. The ITAT also mentioned that it is not a question of where Lionbridge Technologies Inc, USA has developed software which has been given for use to the assessee. The software has been purchased from Microsoft Inc, USA, the cost of which has been distributed amongst all the group entities.
d. The ITAT held that this is a pure case of reimbursement of cost and admittedly there is no mark-up. Accordingly, there was no liability to deduct tax at source on such reimbursement of cost.
e. The ITAT cited references to the decision of the Apex Court by drawing parallel to the case of GE India Technology Centre Pvt Ltd and one of the significant principles given the context was that the necessity to deduct tax at source under section 195 arises only when the said sum is chargeable under the provisions of the Income-tax Act, 1961. In the absence of the sum being chargeable as income under the Income-tax Act, 1961, the assessee is not required to deduct tax at source. In that case, the assessee cannot be held as assessee in default. The ITAT also relied on the decision in Vijay Ship Breaking Corporation and Others vs CIT 314 ITR 309.
f. Thus following the aforesaid ratio and the principles of Apex Court, the ITAT held that the assessee was not liable to deduct tax at source under Section 195 of Income-tax Act, 1961 as the sum paid to Lionbridge Technologies Inc, USA is not chargeable to tax in India.
Note by the writer
This decision is an addition to the few other judgements, commonly putting forth the principle that in case the income is not chargeable to tax in India, the necessity to deduct tax at source under section 195 of Income-tax Act, 1961 does not arise. The following are the few judgements in the context
a. CIT vs Neyveli Lignite Corporation Ltd (2000) 243 ITR 459 ( Madras)
b. Van Oord ACZ India (P) Ltd vs CIT (2010) 36 DTR 425 ( Delhi) affirmed by the Delhi High Court in Maharishi Housing Development Finance Corporation Ltd.