2019 (8) TMI 1264 - AT - Income Tax

Cost reimbursement for cross-border support services characterised as fees for technical services, taxable; TDS credit remanded for verification

Characterisation of cross-border cost reimbursements for group support services was examined on whether such payments constituted fees for technical ... Income accrued in India - FTS - Cost reimbursement received by the assessee towards providing support services to its group affiliates - taxability of the payment made by Heinz India towards the cost allocated by Heinz USA in respect of the activities carried out will depend upon the characterization of such payment - Taxability both u/s 9(1)(vii) of the Act as well as Article 12(4) of the DTAA - HELD THAT:- From the perusal of the records it can be seen that the assessee has entered into a global agreement effective from 3rd May, 2007 with its group entities (affiliates), including Heinze India Pvt. Ltd. (Heinze India) for the provision of support activities. The underlying objective of the agreement is to achieve consistency of approach and economies of scale for the group entities. The activities carried out by the Heinz, USA under the agreement are broadly in the area of supply chain Human Resources, Strategic Planning and marketing, Finance and information systems from the DTAA as well as the agreements entered into by the assessee company as well as Heinz, India Novel Define but services are coming while claiming the reimbursement. The approach of the assessee is that the services should not be considered as taxable contending that they are merely reimbursements and reimbursement cannot be taxed. But to come under the category of reimbursement of certain receipts of service, the same has to fulfill certain criteria for which the services have to be provided by the assessee to its affiliated companies. The assessing officer has observed that the services provided by the assessee are in the area of supply chain, human resources, strategic planning and marketing, finance and information systems under the agreement which is an admitted fact. Thus, services have been utilized by the Indian Company as well. The concept of make available requires that the fruits of the services should remain available to the service recipients in some concrete shape such as technical knowledge, experience, skills etc. which is met in the instant case as can be reflected from the nature and duration of the contract. The service recipient has to make use of such technical knowledge, skills etc. by himself in his business and for his own benefit. Thus, the short durability or permanent usage of the service envisages by the concept of make available services remains at the disposal of their service recipients. Thus, the consideration qualifies as fees for technical services (FTS) both under the Income Tax Act and under the tax treaty as well. - Decided against assessee. Non granting credit of taxes deducted at source - HELD THAT:- The issue is remanded back to the file of the assessing officer for granting due credit of TDS after proper verification. Needless to say the assessee be given opportunity of hearing by following principle of natural justice, therefore, ground no. 3 is allowed. Issues Involved:1. Assessment of total income2. Taxing of reimbursements as Fees for Technical Services (FTS) and Royalty3. Credit for Taxes Deducted at Source (TDS)4. Levy of interest under section 234B of the Income-tax Act5. Initiation of penalty proceedings under section 271(1)(c) of the Income-tax ActIssue-wise Detailed Analysis:1. Assessment of Total Income:The appeals were filed against the orders assessing the total income at Rs. 2,21,02,821 for A.Y. 2009-10 and Rs. 10,17,16,750 for A.Y. 2011-12, as opposed to the income returned by the appellant. The appellant argued that the learned AO/DRP erred in such assessment.2. Taxing of Reimbursements as FTS and Royalty:The appellant contended that the reimbursements for support services should not be taxed as FTS or Royalty under the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and the USA. The appellant argued that the activities carried out were broadly in areas such as Human Resources, Strategic Planning, Marketing, Finance, and Information Systems, and were merely cost reimbursements without any markup, thus not constituting taxable income.The Tribunal noted that the services provided by the appellant were utilized by the Indian company, and the concept of 'make available' was met, as the services provided enabled the recipient to apply the technical knowledge, skills, etc., independently. Therefore, the receipts were taxable as FTS both under the Income Tax Act and the DTAA.3. Credit for Taxes Deducted at Source (TDS):The appellant argued that the AO erred in not granting credit for TDS claimed in the return of income. The Tribunal remanded the issue back to the AO for proper verification and granting of due credit for TDS, ensuring the appellant is given an opportunity of hearing.4. Levy of Interest under Section 234B of the Income-tax Act:The appellant contended that being a non-resident, no interest under section 234B should be levied as its income is subject to tax withholding. The Tribunal deemed this issue consequential and did not adjudicate on it separately.5. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income-tax Act:The appellant argued that the AO erred in initiating penalty proceedings for concealment of income and furnishing inaccurate particulars of income. The Tribunal deemed this issue consequential and did not require separate adjudication.Conclusion:The Tribunal dismissed the appellant's contention regarding the taxability of reimbursements as FTS and Royalty, upheld the AO's assessment on this ground, and remanded the issue of TDS credit back to the AO for verification. The issues of interest under section 234B and penalty proceedings were deemed consequential. The appeals were partly allowed for statistical purposes.