Meaning of the word ‘Reimbursement’
The term “Reimbursement” has not been defined in the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) and hence its meaning has to be understood as in common parlance.
As per Black’s Law Dictionary the term “reimburse” means “to pay back, to make restoration, to repay that is expended, to indemnify or make whole”.
As per the Concise Oxford Dictionary the term “reimburse” means “repay (a person who has expended money) or repays (a person’s expenses)”.
In view of the above, it can be said that a pure reimbursement doesn’t constitute a reward or compensation paid for a service rendered. Hence, a mere reimbursement of expenses cannot be construed as ‘royalty’ or ‘payments for services rendered’ since what is achieved by a reimbursement is a mere repayment of what has been already spent.
The above is more so because in most cases the payer of the reimbursement generally has an option to incur the cost on its own by making all the requisite arrangements. However, the reimbursement route is taken only as a mode of logistical convenience since the payee would under the circumstances, would be in a better position to undertake the arrangements.
A foreign company has to send its executives to India to serve the Indian Company. Both the parties have agreed that the travelling cost of the executives i.e conveyance will be borne by the Indian company.
In this case, the Indian company would have to get the air tickets done from India for the foreign personnel and then courier the same to the foreign company. This could involve unnecessary inconvenience like conformation of traveler’s details from the foreign company at the time of booking the tickets, confirming receipt of couriered tickets etc. Alternatively the foreign company could on its own accord make arrangements for the tickets and then seek a reimbursement for the same from the Indian company. This would result in removal of unnecessary hassles and bottle necks and would be very convenient for both the parties.
The ultimate outcome in both the cases is the same (i.e., expenditure by the Indian company without any corresponding monetary benefit to the foreign company). Just because the reimbursement route is taken for logistical convenience, the foreign company should not be unnecessary be penalized by considering the reimbursement as taxable income in its hands. In the instance, where the foreign company were to incur the expenditure on the behalf of the Indian Company and gets it back later on without any profit element thereon, then it could not be treated as income in the hands of the foreign company. By no stretch of imagination, should the reimbursement be considered as income.
Reasons for Reimbursement
The foreign company had incurred costs on behalf of the Indian entity and the said cost was reimbursed by the Indian entity to foreign entity on cost-to-cost basis. Hence, there is no scope for rendering any services by foreign entity on the Indian entity. Further, since the Indian company is responsible for bearing the cost, the foreign entity is incurring such costs on behalf of the Indian entity and subsequently it is claiming the reimbursement of the same from the respondent. It may be appreciated that in the above arrangement of reimbursement of costs, there is no element of income/profit involved.
1. The Indian entity is solely responsible for bearing the cost. It was only for the sake of convenience that the amount was expended by the foreign party on behalf of the respondent and the same was refunded back. It may be appreciate that it is a mere repayment of what has already been spent on behalf of the Indian company.
2. The entire arrangement is entered into by the parties on cost-to-cost basis and there is no element of profit involved. The Foreign entity did not derive any economic benefit from payment received. The amount received was fully spent.
3. The Indian entity had neither received any rights nor any services in lieu of payment made to the foreign company towards reimbursement of costs. It was merely on account of the reimbursement of obligations which the Indian entity was bound to discharge.
In the event, the payer i.e. the Indian entity has not received any rights or services in lieu of payment made by him then the said payment cannot be said to be in the nature of fees. In the transactions of reimbursements, the basic element of quid-pro-quo is missing.
It is well settled that foreign reimbursement of actual expenditure is not subjected to deduction of TDS under the provisions of the Act.
Reference in this regard is invited towards section 4 of the Act which reads as follows,
“Charge of income-tax.
(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.”
On perusal of the above, it could be seen that the reimbursement of costs incurred by a party on behalf of payer is not an income chargeable to tax under the provisions of section 4(1) in payee’s hands and in such a situation, section 4(2) of the Act makes it ample clear that there lies no need for deduction of TDS on such reimbursement.
In this regard attention is further invited to the provisions of section 195 of the Act, which reads as under:
“195. (1) 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 income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force……..
(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.”
On the perusal of the above provision, it could be seen that TDS would be deductible under section 195(1) of the Act if the payee is a non-resident and the amount payable to him is chargeable to tax under the provisions of the Act. In the instant case, the Indian company was to remit the actual expenses incurred by the foreign entity on behalf of the respondent and hence, the same was not to be treated as income and thereby, the conditions prescribed in section 195 have not been fulfilled. Hence, the question of deduction of TDS under section 195(1) of the Act on such remittance did not arise. Similar provisions are
Reliance in this regard is placed on the decision in the case CIT – vs.- Tejaji Farasram Kharawalla Ltd. (1968) 67 ITR 95 (SC) wherein the Hon’ble Supreme Court held that the reimbursement of actual expenses would not be taxable in the hands of the person receiving the reimbursements.
Attention is further invited to the decision of the Hon’ble Apex Court in the case of Transmission Corporation of A.P. Ltd. – vs.- CIT (1999) 239 ITR 587 (SC) wherein it was held that the obligation of the deductor to deduct tax under section 195 of the Act is limited only to the appropriate proportion of income chargeable under the Act.
Reliance is further placed on the decision in the case of CIT -vs.- Dunlop Rubber Co Ltd. (1983) 142 ITR 493 (Cal.) wherein the Hon’ble Calcutta High Court held that if a foreign company is recovering the actual expenses from the Indian company then the same is not assessable as income in the hands of the foreign company.
In the case of CIT vs.- Industrial Engineering Projects Pvt. Ltd. (1993) 202 ITR 1014 (Del.) the Hon’ble Delhi High Court held that reimbursement of expenses cannot, under any circumstances, be regarded as a revenue receipt.
The Hon’ble Bombay High Court has also upheld the same view in the case of CIT -vs.- Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom.).
Further, the Hon’ble Karnataka High Court in the case of Bharti Airtel Ltd.-vs.- DCIT (2015) 372 ITR 33 (Kar.) in the context of section 194H of the Act has held that if the payee is not in possession of the net income which is chargeable to tax, the question of payer deducting any tax does not arise. It may be noted that both the provision of section 195 and section 194H of the Act provide that tax is deductible if the same is income in the hands of the payee. The Hon’ble High Court has further rejected the contention of the Department that if the same is not taxable in the hands of payee the payee can claim refund of tax by holding that the Hon’ble Apex Court in the case of Bhavani Cotton Mills Ltd. -vs.- State of Punjab AIR 1967 SC 1616(SC) held that if a person is not liable for payment of tax at all, at any time, the collection of tax from him, with a possible contingency of refund at a later stage will not make the original levy valid.
In the case of CIT -vs.- Expeditors International India Pvt. Ltd. (2012) 209 Taxman 18 (Del.) wherein the Hon’ble Delhi High Court held that assessee was not liable to deduct TDS in respect of reimbursement of global management expenses, communication uplink charges and other expenses made to its parent company located abroad. Similar view has been taken in the case of Van Oord ACZ India (P) Ltd. -vs.- CIT (2010) 323 ITR 130 (Del.).
In the case of CIT -vs.- Creative Infocity Ltd. (2017) 397 ITR 165 (Guj.) the Hon’ble Gujarat High Court held that the Tribunal had not committed any error in deciding that the payment was made to a non-resident towards reimbursement of expenses and not reimbursement of service and hence TDS was not to be deducted under section 195 of the Act.
The Hon’ble Kolkata Bench of the ITAT in the case of DCIT -vs.- Ernest & Young Pvt. Ltd. (2014) 32 ITR (T) 639 (Kol.) held that assessee was not liable to deduct TDS under section 195 of the Act on amount paid to foreign group concerns towards reimbursement of cost of administrative and management support services.
Further, the Hon’ble Hyderabad Bench in the case of ACIT – vs.- Louis Berger International Inc. (2010) 40 SOT 370 (Hyd.) held that reimbursable expenditure could not form part of fees payable for technical services and hence is not liable to tax. The Hon’ble Tribunal further held that if the first party agrees to incur expenditure at the first instance on the condition that the same would be reimbursed by the second party, such reimbursement would not be liable to tax.
Similar view has been taken in the following cases:
Hence, from the perusal of the above decisions, it is clear that if expenditure incurred by the Indian Company does not qualify as income in the hands of the foreign company, then it is only but fair that reimbursement on the basis of actual expenditure incurred should not be considered as income in the hands of the foreign company, especially when no surplus accrues to it.
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