Tribunal upholds deletion of addition under Income-tax Act - No tax deduction for non-resident reimbursements

The Tribunal upheld the Commissioner of Income Tax (Appeals) decision to delete the addition made by the Assessing Officer under section 40(a)(i) of the Income-tax Act, 1961. The Tribunal found that the reimbursements made by the assessee to a non-resident company did not involve any income element and were not subject to tax deduction under section 195. The Tribunal relied on earlier ITAT orders and concluded that the addition was rightly deleted. Consequently, the revenue's appeal was dismissed, and the CIT(A)'s decision was upheld.

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Issues Involved:
1. Deletion of addition made under section 40(a)(i) of the Income-tax Act, 1961 for non-deduction of tax at source under section 195 on reimbursement of expenses to a non-resident company.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 40(a)(i) of the Income-tax Act, 1961:

Background:
The revenue appealed against the order of the Commissioner of Income Tax (Appeals), Jamshedpur, which deleted the addition made by the Assessing Officer (AO) under section 40(a)(i) for non-deduction of tax at source under section 195 on the payment made by the assessee towards reimbursement of expenses to Timken Inc, USA, the holding company of Timken India Ltd (TIL).

Assessing Officer's Findings:
The AO noted that the assessee made a payment of Rs. 2,38,26,680 towards reimbursement of expenses and actual cost of services to Timken Inc, USA. The AO held that the assessee was obliged to deduct tax at source on these payments as per section 195, and since it failed to do so, the AO disallowed the expenditure under section 40(a)(i) and added it back to the total income of the assessee.

Commissioner of Income Tax (Appeals) Decision:
The CIT(A) deleted the addition made by the AO by following the findings of the Coordinate Bench of ITAT Ranchi in the assessee's own case for earlier assessment years (2005-06, 2006-07, and 2007-08).

Revenue's Argument:
The revenue argued that the CIT(A) was incorrect in deleting the addition since the payment of reimbursement of expenses was covered by the Indo-US Double Taxation Avoidance Agreement (DTAA) and section 195(2) of the Act. The revenue relied on the AO's order to support its contention.

Assessee's Argument:
The assessee argued that the issue was covered by earlier orders of the ITAT Ranchi and ITAT Kolkata in the assessee's own case and the case of Timken Inc, USA. The reimbursements represented expenses incurred by the holding company on behalf of TIL, without any markup or profit element, commonly known as 'chargeback payments.' Since no income element was involved in these payments, the assessee did not deduct tax at source under section 195. The assessee relied on the CIT(A)'s order in allowing the claim.

Tribunal's Findings:
The Tribunal found that the issue was squarely covered in favor of the assessee by the earlier ITAT Ranchi order dated 07.09.2017 and the ITAT Kolkata order dated 29.11.2017, which dealt with the same transaction from the payee's (Timken Inc, USA) side for the same assessment year. The Tribunal cited detailed excerpts from these orders, which established that the reimbursements were purely for actual expenses incurred without any profit element and were not in the nature of 'fees for technical services' (FTS).

Key Excerpts from ITAT Kolkata Order:
- The ITAT Kolkata order analyzed that the payments made by TIL to Timken Inc, USA were reimbursements for expenses such as legal fees, inspection charges, and travel expenses, which were incurred by Timken Inc on behalf of TIL.
- The order emphasized that these expenses were purely reimbursements without any profit element, and hence, not subject to tax deduction under section 195.
- The ITAT Kolkata concluded that there was no basis for the AO to treat these reimbursements as FTS and that the sums received by Timken Inc were pure reimbursements on actual costs without any markup.

Conclusion:
The Tribunal, agreeing with the findings of the earlier ITAT orders and the CIT(A), held that the reimbursements made by the assessee to Timken Inc, USA did not involve any income element and were not liable for tax deduction under section 195. Consequently, the addition made by the AO under section 40(a)(i) was rightly deleted by the CIT(A).

Judgment:
The appeal of the revenue was dismissed, and the order of the CIT(A) was upheld.

Pronouncement:
The order was pronounced in the open court on 9th May 2022.

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