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

The Tribunal allowed the appeal partly by deleting the addition of Rs. 10,61,365 as reimbursement of expenses, emphasizing that reimbursement of travel costs without profit element should not be taxed as Fees for Technical Services (FTS). The issue of incorrect tax rate application was remanded to the assessing officer for reconsideration, highlighting the misinterpretation of tax rates and failure to consider relevant regulations. The Tribunal instructed a fresh adjudication, considering RBI regulations and ensuring the assessee's opportunity to present its case.

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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.

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