2021 (10) TMI 675 - AT - Income Tax

Tribunal decision emphasizes travel cost reimbursement not taxable as Fees for Technical Services

Gemological Institute International, Inc., C/o GIA India Laboratory Pvt Ltd Versus The Assistant Commissioner of Income-tax- (International Taxation), Circl-2 (3) (2), Mumbai

The Tribunal allowed the appeal partly by deleting the addition of Rs. 10,61,365 as reimbursement of expenses, emphasizing that reimbursement of travel ... Income accrued in India - Addition being reimbursement of expenses - FTS - Non offering to tax of travel cost - assessee is a company incorporated in the United States of America (USA) and is a tax resident of that country - as per assessee travel cost not being in the nature of fees for technical services (FTS) and purely reimbursement of expenditure incurred, is not taxable either under the provisions of the Act or under the India-USA Double Taxation Avoidance Agreement (DTAA) - Whether travel cost received by the assessee by way of reimbursement can be regarded as FTS? - HELD THAT:- While ignoring the decisions of the Tribunal has relied upon the observations of the higher departmental authorities. This, in our view, is most undesirable - though,DRP has acknowledged that in assessment years 2009-10 and 2010-11, the Tribunal has decided the issue in favour of the assessee; however, relying upon a solitary amendment made to the agreement between the parties and distinguishing the decisions of the Tribunal in assessee’s own case, learned DRP has upheld the addition made by the assessing officer. On a careful perusal of the amended clause 1.2 of the agreement as referred to by learned DRP, we do not find much difference, except, the mode and manner of quantification of the FTS. Thus, in our considered opinion, the spirit of the old clause 1.2 has not undergone any substantial change by the amendment. Be that as it may, even after the amendment to the agreement was effected from 01-04-2012, the Tribunal has consistently decided the issue in favour of the assessee from assessment years 2009-10 onwards. In the latest order passed for assessment year 2015-16 [2020 (4) TMI 752 - ITAT MUMBAI], the Tribunal following its order in assessee’s own case in assessment year 2014-15 has deleted the addition - Thus we delete the addition made by the assessing officer. This ground is allowed. Rate of tax u/s 115A - Incorrect tax rate applied by the assessing officer on the income offered by the assessee - As there are certain conditions set out in section 115A(1); however, it has to be considered whether such conditions are mandatorily required to be fulfilled, even, in a case where specific approval is neither required nor contemplated as per the extant rules/regulations/guidelines of RBI or Central Government. In case, the Government has not laid down any guidelines or procedure for approval for the subject transaction, the assessee cannot be expected perform an impossible task - if strict and literal interpretation of a statutory provision leads to undesirable consequences and not only renders it unworkable but also causes harassment to the taxpayer, then, it has to be avoided and the provision has to be construed harmoniously to make it workable - it is a fact on record that all these aspects have not been examined either by the assessing officer or by learned DRP while deciding the disputed issue. No merit in contention of learned departmental representative that the 10% rate would be applicable from assessment year 2017-18, we do not find any merit in such submission - Undisputedly, by way of Finance Act, 2015, the applicable tax rate of 10% in place of 15% has been brought to the statute w.e.f. 01-04-2016 - the tax rate of 10% would be applicable from assessment year 2016-17 onwards. As regards the contention of learned Departmental Representative that the master direction of RBI speaks of consultancy services, hence, would not be applicable, we find such argument thoroughly misconceived. A reading of Explanation (a) to section 115A(1)(b)(B) makes it clear that FTS would have the same meaning as in Explanation 2 section 9(1)(vii) of the Act. As per Explanation 2 to section 9(1)(vii) of the Act, FTS would include consideration for managerial, technical or consultancy services. Thus, consultancy services would also come within the definition of FTS. It is relevant to observe, in course of hearing, learned counsel for the assessee submitted that in all other assessment years, similar payment received by the assessee has been taxed @10% as per section 115A(1)(b) of the Act. If that is so, applicability of rule of consistency also needs to be examined - We restore the issue to the assessing officer for fresh adjudication keeping in view the discussion made herein before. The assessing officer should not only take note of the master direction of RBI and any other rules and regulations issued/framed by the RBI/Central Government but must also examine the applicability of decisions to be relied upon by the assessee - This ground is allowed for statistical purposes. Issues Involved:1. Addition of Rs. 10,61,365 as reimbursement of expenses.2. Incorrect tax rate applied on the income offered by the assessee.Issue-wise Detailed Analysis:1. Addition of Rs. 10,61,365 as Reimbursement of Expenses:The primary issue is whether the travel cost received by the assessee as reimbursement can be regarded as Fees for Technical Services (FTS). The assessee, a company incorporated in the USA, contended that the travel cost was purely a reimbursement of expenditure incurred and not taxable under the Income Tax Act or the India-USA Double Taxation Avoidance Agreement (DTAA). The assessee cited decisions from the Tribunal in preceding assessment years that supported this view. However, the assessing officer, supported by the Dispute Resolution Panel (DRP), held that the travel cost was intrinsically linked to providing training and technical services and thus taxable as FTS.Upon review, the Tribunal noted that the assessing officer ignored previous Tribunal decisions favoring the assessee. The DRP's reliance on a solitary amendment to the agreement between the parties was deemed insufficient to alter the Tribunal's consistent view from earlier years. The Tribunal reaffirmed that the reimbursement of travel expenses, without any profit element, should not be taxed as FTS. Citing the Supreme Court's decision in DIT v. A.P. Moller Maersk, the Tribunal reiterated that reimbursement of costs cannot be taxed as income. Consequently, the addition of Rs. 10,61,365 was deleted.2. Incorrect Tax Rate Applied on the Income Offered by the Assessee:The second issue concerns the appropriate tax rate for the income offered by the assessee. The assessee computed tax at 10% under section 115A(b) of the Income Tax Act, which was more beneficial than the 15% rate under the tax treaty. The assessing officer, however, applied a 15% tax rate based on a misinterpretation of note 2 appended to the return of income, which led to the conclusion that the applicable tax rate under the Act was 26.265%.The DRP upheld the assessing officer's decision, stating that the conditions of section 115A(1) were not met, as the assessee failed to establish that the agreement was approved by the Central Government or in accordance with the industrial policy. The Tribunal found that the assessing officer's reference to a 26.265% tax rate was factually incorrect and that the DRP did not provide the assessee an opportunity to address the fulfillment of section 115A(1) conditions.The Tribunal noted that the tax rate of 10% under section 115A(1)(b)(B) applies from the assessment year 2016-17, contrary to the Departmental Representative's claim that it applies from 2017-18. The Tribunal also considered the RBI's master direction, which indicated no need for specific approval for remittances under USD 10,00,000, implying that the Central Government's approval might not be necessary for the assessee's remittances.Given the lack of examination of these aspects by the assessing officer and the DRP, the Tribunal restored the issue to the assessing officer for fresh adjudication. The assessing officer was instructed to consider the RBI's master direction, other relevant rules/regulations, and the rule of consistency, providing the assessee a reasonable opportunity to present its case.Conclusion:The appeal was partly allowed, with the Tribunal deleting the addition of Rs. 10,61,365 and remanding the issue of the tax rate to the assessing officer for fresh consideration. The order was pronounced on 12/10/2021.