2019 (8) TMI 1723 - AT - Income Tax

Reimbursements not taxable as royalty; Assessing Officer directed accordingly. Appeals allowed, interest and tax credit resolved.

The Tribunal concluded that reimbursements received by the assessee were not considered royalty but mere reimbursements of administrative charges without ... Income accrued in India - Reimbursement of rebate and discount in nature of Royalty - as per AO reimbursement of rebate and discount received by the Appellant from Braitrim India Private Limited ('BIPL') is for the use of the brand 'Braitrim' and is assessable to tax as 'Royalty' under section 9(1)(vi) of the Act/Article 13 of the India-United Kingdom tax treaty - HELD THAT:- We find that the assessee is required to give a rebate/discount to the retailers based on the volume/units of sales to garment suppliers achieved by the Braitrim group. Subsequently, the proportionate share of rebate/discount is recovered by the assessee from its group companies, including BIPL, based on the relative sales of those group companies to the respective retailers. The assessee has, accordingly entered into a reimbursement agreement with BIPL, whereby BIPL has acknowledged its obligation to reimburse its proportionate share of the discount/rebate to the assessee based on sale volumes/units achieved by it. As per the Cost Reimbursement Agreement (CRA), such reimbursements are depicted as 'Administration charges' by BIPL in its books of account. Quite clearly, payments by way of reimbursement of expenses incurred on behalf of the payer cannot be construed as income chargeable to tax in the hands of the payee, a proposition which is approved by the Hon'ble Bombay High Court in the case of Siemens Aktiongesellschaft [2008 (11) TMI 74 - BOMBAY HIGH COURT]. In view of the above discussion, we direct the Assessing Officer not to treat any part of reimbursement of expenses received by the assessee as income of the assessee. The assessee gets the relief accordingly on Ground no. 2 of the aforesaid appeal. Issues Involved:1. Legality of reassessment proceedings under section 147 of the Income Tax Act.2. Characterization of reimbursement of rebate and discount as royalty.3. Levy of interest under section 234B of the Act.4. Credit for taxes paid by the payer against demand.5. Recovery of tax already raised on the deductor.Detailed Analysis:1. Legality of Reassessment Proceedings:The assessee challenged the initiation of reassessment proceedings under section 147 of the Income Tax Act, claiming it was based on surmise and conjectures without tangible and conclusive material. The Tribunal did not provide a separate detailed analysis on this issue, implying the focus was primarily on the substantive issues of characterization of payments.2. Characterization of Reimbursement of Rebate and Discount as Royalty:The core dispute was whether the reimbursement of rebate and discount received from Braitrim India Pvt. Ltd. (BIPL) was in the nature of royalty. The assessee argued that these payments were mere reimbursements for rebates/discounts given to retailers, without any profit markup, and thus not taxable in India. The Revenue contended that these payments were for the use of the brand 'Braitrim' and should be treated as royalty under section 9(1)(vi) of the Act and the India-UK tax treaty.The Tribunal examined the Cost Reimbursement Agreement (CRA) and found that the payments were indeed reimbursements of administrative charges without any profit element. The Tribunal noted that similar transactions in the case of BIPL for Assessment Year 2007-08 were accepted as reimbursements by the Transfer Pricing Officer (TPO), Dispute Resolution Panel (DRP), and the Tribunal. Therefore, it was concluded that the payments were not royalty but mere reimbursements, not chargeable to tax in India.3. Levy of Interest under Section 234B of the Act:The issue of interest under section 234B was deemed consequential and did not require specific adjudication. The Tribunal noted that the charging of interest would follow the outcome of the primary issue regarding the characterization of payments.4. Credit for Taxes Paid by the Payer Against Demand:The assessee argued that credit for taxes paid by BIPL should be granted against the demand raised. The Tribunal did not provide a separate detailed analysis on this issue, implying it was resolved in line with the main issue regarding the nature of the payments.5. Recovery of Tax Already Raised on the Deductor:The assessee contended that recovering tax on the same income from both the payer (BIPL) and the payee (the assessee) was erroneous. The Tribunal's decision to treat the payments as reimbursements, not taxable as royalty, effectively resolved this issue, negating the need for double recovery.Conclusion:The Tribunal concluded that the reimbursements received by the assessee from BIPL were not in the nature of royalty but were mere reimbursements of administrative charges without any profit markup. Consequently, these payments were not taxable in India. The Tribunal directed the Assessing Officer to not treat any part of the reimbursement as income of the assessee. The appeals for all the assessment years under consideration were allowed, and the issues related to interest and tax credit were resolved as consequential to the main decision.Order Pronouncement:The order was pronounced in the open court on 21st August 2019, allowing the appeals of the assessee.