Reimbursment of certain expenses to a non-resident company attracts Sec-195 and tax withholding needs to be done...
IN THE INCOME TAX APPELLATE TRIBUNAL
CHENNAI BENCH 'A' CHENNAI
Assessment Year : 2005-06
M/s ASHOK LEYLAND LTD
19, RAJAJI SALAI
THE DEPUTY COMMISSIONER OF INCOME-TAX
COMPANY CIRCLE-I(1), CHENNAI
Income Tax - Applicability of Sec 195(2) - Assessee enters into an agreement with an Austrian company for supply of designs, drawings and consultancy for development of automobile engines - as per the agreement, the assessee was to reimburse certain expenses in addition to the fee for technical knowhow - Certain personnel of the non-resident company come to India to impart technical expertise to the assessee's staff - reimbursement of expenses - Assesee applies for a certificate of non-deduction of tax on such payment - AO rejects it and prescribes 10% deduction - CIT(A) agrees with the AO - True that the non-resident company has no PE in India but this fact has no bearing on the chargeability of tax on fees for technical services u/s 9(1)(vii). The agreement was entered into for rendering technical services. The services of the experts of the foreign company were requisitioned in that connection. There is absolutely nothing on record to indicate that how such reimbursement could be termed as business income of the assessee. The payments of reimbursement were made in the process of executing the agreement. The expenditure in question was part and parcel in the process of advice of technical character. As such the payment on account of reimbursement also attracts the provisions of section 195 of the Act - CIT(A) order upheld - Assessee's appeal dismissed
This appeal by the assessee is directed against the order dated 17.4.2006 passed by the Commissioner(Appeals)-XI, Chennai and relates to the assessment year 2005-06.
2. The solitary issue raised in this appeal relates to the question as to whether the reimbursement of expenses to M/s AVL List GmbH, Austria comes within the ken of section 195 of the Income-tax Act, 1961.
3. We have heard the rival submissions in the light of the material placed before us and the precedents relied upon. The assessee is a company manufacturing motor vehicles, etc. It entered into a technical assistance agreement with M/s.AVL List GmbH, Austria for supply of designs, drawings and consultancy in the development of engines. As per the terms of the agreement in addition to fees for technical knowhow the assessee was required to reimburse expenditure towards air fare, accommodation and subsistence cost for the personnel deputed by the Austrian firm to India. The personnel were deputed to assist the assessee in India for imparting their technical expertise. The Austrian firm raised four invoices on the assessee towards reimbursement on items of expenses. The assessee applied for a certificate for non deduction of tax at source on such reimbursements under section 195(2) of the Act. The Assessing Officer declined to grant the exemption and directed the assessee to deduct tax at 10% on such reimbursements. The matter was assailed in appeal before the Commissioner(Appeals). The Commissioner(Appeals) confirmed the order of the Assessing Officer. Being aggrieved of the said order the assessee is in appeal. The Revenue authorities took the view that the amount sought to be reimbursed in terms of the agreement would constitute fees for technical services. As such the assessee is duty-bound to deduct tax at source in accordance with the prescription of section 195(2) of the Act.
4. Shri R. Vijayaraghavan, the learned counsel for the assessee invited our attention on the prescription of section 195 and submitted that it is applicable only in the context of such sums which are chargeable to tax under the Act. At the outset it was contended that reimbursement of expenses cannot be construed to be the income chargeable to tax. Reliance was placed on the decision of the Hon'ble Delhi High Court rendered in the case of CIT vs. Industrial Engineering Projects Pvt. Ltd., 202 ITR 1014 (Del). In this case the assessee had an agreement with a foreign company ETAG whereby some services were to be rendered by the assessee to ETAG for which the assessee would receive a minimum sum of Rs.1,20,000/- per year. The agreement also provided that certain costs and expenses incurred by the assessee would be reimbursed. The Assessing Officer disallowed some of the expenses incurred which were in the nature of entertainment and travelling expenses on the ground that they mere more than the permissible limit. On reference the Hon'ble High Court has held that reimbursement of expenses can under no circumstances be regarded as revenue receipt. Reference was also made to the decision rendered by the Delhi Bench-A of the Tribunal in the case of HNS India VSAT Inc. vs. Deputy Director of Income-tax, International Taxation, Circle I(1), 95 ITD 157. In this case the Tribunal held that in the facts of the case the amount paid on account of reimbursement of actual expenses incurred by sub contractors could not be treated as income of the sub contractors chargeable to tax in India. As such the provisions of section 195 are not attracted.
5. Next it was argued that the assessee did not have any permanent establishment in India. As per the convention between the Government of the republic of India and the Government of the Republic of Austria for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income dated 20th September, 2001 (251 ITR St. 97) even if it is treated as income it could be taxed only in Austria. Reference was made to Article 7 of the DTAA which deals with business profits. Lastly, it was argued that this was only reimbursement of expenses of individuals. Each one of them was in India for less than sixty days. As such it is not exigible to tax. Reliance was placed on the decision of the Hon'ble Delhi High Court rendered in the case of CIT vs. Bharat Heavy Electricals, 252 ITR 218. In this case two employees of a foreign concern came to India. The foreign concern was not doing any business in India. No amount was paid to the foreign concern for technical services. The services of the employees were requisitioned for seeking guidance' as well as consultation services. As such the amount was exempt under section 10(6)(vi) of the Act.
6. Shri Shaji P Jacob, the learned departmental representative, vehemently contended that the expenses incurred in question were incidental to the implementation of the agreement and as such form part and parcel of technical fees. Therefore it is not correct to say that these are not chargeable to tax. He explained the context in which the decision of the Delhi High Court in the case of Industrial Engineering Projects Pvt. Ltd., cited supra, was rendered and stated that the facts in the present case before us are entirely different. It was submitted that the payments in question bear a clear nexus with the technical fees. Further reliance was placed on the decision of the Hon'ble Kerala High Court rendered in the case of Cochin Refineries Ltd. vs. CIT, 222 ITR 354. In this case Cochin Refineries requested a foreign company to evaluate whether the coke produced from a blend of vacuum bottoms and clarified oil from Bombay High crude was suitable for making anodes for the aluminium industry. The tests were carried out in the USA in regard to which the assessee made payment. The assessee also reimbursed the expenses incurred by the foreign company. The Hon'ble High Court has held that the services rendered by the foreign company would be in the nature of technical services and would therefore consequently be covered fully by the Explanation to section 9(1)(vii) of the Act. Even with regard to the payments of reimbursement no different situation would be available because these payments would be part and parcel in the process of advice of a technical character and would fall for coverage only within the meaning of the above Explanation to section 9(1)(vii). Reliance was also placed on the decision of the Hon'ble Madras High Court rendered in the case of CIT vs. Cross Fraser (Division by agent BHEL), 244 ITR 654. In this case BHEL placed an order on a foreign company for supply of a deephole drilling machine. The machinery supplied was damaged on account of the unforeseen collapse of the roof of the building, wherein it had been kept awaiting erection. The foreign supplier was therefore requested to depute an engineer to assess the actual damage. BHEL placed an order for supervision of repair and commission of that machine by the engineer of the foreign company. The contract provided for payment to the foreign company. The Hon'ble High Court has held that the amount received by the foreign company for such services was exigible to tax in India.
7. In order to invoke the provisions of section 195 in the context of non resident it is sine qua non that the amount payable in question must bear the taxable character. Where the person responsible for making the payment is not sure as to which part of the amount of income referred to in section 195(2) is chargeable to tax, he can apply to the Assessing Officer to determine the proportion of the sum so chargeable and on such application the Assessing Officer is required to make an order determining the proportion of such income on which tax is to be deducted at source. It pre supposes that the person responsible for making the payment is in no doubt that tax is payable in respect of some part of the amount to be remitted but is not sure what should be the portion so taxable or the amount of the tax to be deducted. It is evident from the perusal of section 195 that it is applicable in the context of such sums which are chargeable to tax under the Act. It, is therefore, necessary to enquire as to whether the amount in question could be charged to tax.
8. The assessee did not have any permanent establishment in India. There is absolutely no dispute on this point. But this fact is relevant if the income in question bears the character of business income. It is not relevant in the context of chargeability of tax on fees for technical services. The agreement was entered into for rendering technical services. The services of the experts of the foreign company were requisitioned in that connection. There is absolutely nothing on record to indicate that how such reimbursement could be termed as business income of the assessee. The payments of reimbursement were made in the process of executing the agreement. The expenditure in question was part and parcel in the process of advice of technical character. As such the payment on account of reimbursement also attracts the provisions of section 195 of the Act. We have gone through the reasonings adduced in the impugned order. In our opinion the Commissioner(Appeals) took a correct view in the matter and his order calls for no interference on this count. Accordingly we uphold the same.
9. In the result the appeal of the assessee stands dismissed.