2025 (8) TMI 948 - AT - Income Tax

Payments as third-party legal expense reimbursements supported by invoices and arm's-length TPO finding not taxable under Article 13 DTAA

Dy. Commissioner of Income Tax (IT) -2 (2) (2), Mumbai Versus Iss As, Denmark And (Vice-Versa)

Dy. Commissioner of Income Tax (IT) -2 (2) (2), Mumbai Versus Iss As, Denmark And (Vice-Versa) - TMI 1. ISSUES PRESENTED and CONSIDERED Whether the reimbursement of expenses amounting to Rs. 3,89,32,214/- received by the assessee from its Indian Associated Enterprise (AE) can be treated as income taxable under Article 13 (Royalty and Management Fees) of the Double Taxation Avoidance Agreement (DTAA) between India and Denmark. Whether the nature of the receipt as reimbursement without mark-up precludes it from being treated as income in the hands of the assessee. Whether the acceptance of the Arm's Length Price (ALP) of the transaction by the Transfer Pricing Officer (TPO) in the hands of the Indian AE precludes any addition in the hands of the non-resident assessee. Whether the appeal filed by the Revenue is barred by limitation due to delay in filing. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of reimbursement of expenses under Article 13 of the DTAA Relevant legal framework and precedents: Article 13 of the DTAA between India and Denmark deals with income from royalties and fees for technical services (FTS), which are taxable in India if the services are rendered therein. The Assessing Officer (AO) treated the reimbursement as Royalty and Management Fees taxable under this Article. The Hon'ble Supreme Court decision in DIT vs. A.P. Moller Maersk A S clarified the treatment of reimbursements under Article 13. Court's interpretation and reasoning: The AO observed that the reimbursement primarily related to legal and professional charges incurred by the assessee on behalf of its Indian AE, supported by third-party invoices (notably from Kroll Advisory Solutions India Pvt. Ltd.). The AO held that since the Indian AE paid for legal and professional services, the amount received by the assessee constituted income taxable under Article 13. However, the CIT(A) deleted the addition relying on the acceptance of ALP by the TPO in the hands of the Indian AE. Key evidence and findings: The invoices submitted by the assessee showed that legal and professional services were rendered by third parties, not by the assessee itself. The AO did not dispute that the amount was reimbursed without mark-up. The TPO did not make any transfer pricing adjustment, accepting the transaction at ALP in the hands of the Indian AE. Application of law to facts: The Court noted that the AO's own findings indicated that the services were provided by third parties and the amount received by the assessee was a reimbursement without profit. The Supreme Court's ruling in A.P. Moller Maersk A S was applied, which held that payments accepted as pure reimbursement without profit do not constitute income chargeable to tax under Article 13. Treatment of competing arguments: The Revenue argued that the nature of the services (legal and professional) should attract tax under Article 13 and that the CIT(A) erred in deleting the addition without examining the nature of the transaction. The assessee contended that the amount was a reimbursement without mark-up and hence not income. The Court found the assessee's argument consistent with the facts and precedent. Conclusions: The impugned amount being a reimbursement of expenses without mark-up and supported by third-party invoices cannot be treated as income taxable under Article 13 of the DTAA. The AO's addition was thus not sustainable. Issue 2: Effect of acceptance of ALP by TPO on taxability in the hands of the non-resident assessee Relevant legal framework and precedents: Section 92CA of the Income Tax Act mandates determination of ALP for international transactions by the TPO. The TPO accepted the reimbursement transaction as at ALP in the hands of the Indian AE. Court's interpretation and reasoning: The Court observed that since the TPO did not make any adjustment to the transaction in the hands of the Indian AE, and accepted it as at ALP, the same transaction cannot be subjected to addition in the hands of the non-resident assessee. Key evidence and findings: The TPO's order dated 30.10.2017 recorded no variation in the ALP of the international transaction relating to reimbursement. The CIT(A) relied on this to delete the addition made by the AO. Application of law to facts: The Court concurred with the CIT(A) that acceptance of ALP by the TPO in respect of the Indian AE's transaction precludes a contrary finding in the hands of the non-resident assessee for the same transaction. Treatment of competing arguments: The Revenue contended that acceptance of ALP by the TPO in the hands of the Indian AE does not preclude scrutiny of the transaction in the hands of the assessee. The Court rejected this argument in light of factual findings and the principle of consistency in transfer pricing adjustments. Conclusions: Acceptance of the transaction at ALP by the TPO in the hands of the Indian AE precludes addition in the hands of the non-resident assessee for the same reimbursement transaction. Issue 3: Nature of payment as reimbursement without mark-up and its tax implications Relevant legal framework and precedents: The Supreme Court ruling in DIT vs. A.P. Moller Maersk A S established that payments accepted as reimbursement without profit element do not constitute income chargeable to tax under Article 13 of the DTAA. Court's interpretation and reasoning: The AO himself recorded that the payments were reimbursements without mark-up and supported by third-party invoices. The Court emphasized that the absence of any profit element and the nature of the payment as reimbursement means it cannot be treated as income. Key evidence and findings: The invoices from Kroll Advisory Solutions India Pvt. Ltd. and other supporting documents showed that the assessee incurred expenses on behalf of the Indian AE and was reimbursed on a cost-to-cost basis without any mark-up or profit. Application of law to facts: Applying the Supreme Court's ratio, the Court held that the reimbursement amount cannot be treated as income in the hands of the assessee and is not taxable under Article 13. Treatment of competing arguments: The Revenue argued that the nature of services rendered justifies treating the receipt as income. The Court found this argument untenable given the factual matrix and precedent. Conclusions: The reimbursement without mark-up is not income chargeable to tax under the DTAA and cannot be added to the assessee's income. Issue 4: Limitation and delay in filing the Revenue's appeal Relevant legal framework and precedents: The Revenue's appeal was initially found time-barred by 26 days. The Revenue submitted that the date of service of the CIT(A) order was erroneously recorded, supported by stamped copy of the order. Court's interpretation and reasoning: Upon examination of the material submitted by the Revenue, the Court accepted that the actual date of service was later than recorded, thereby negating any delay in filing the appeal. Key evidence and findings: Stamped copy of the CIT(A) order showing service date of 06.02.2024. Application of law to facts: The Court held there was no delay in filing the appeal and no need for condonation of delay. Treatment of competing arguments: None significant as the Court accepted the Revenue's submission. Conclusions: The appeal filed by the Revenue was admitted for adjudication as not barred by limitation.