TaxTMI 
TaxTMI 
2010 (6) TMI 524
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....er the Article 12 of Double Taxation Avoidance Agreement between Govt. of India and USA. Referring to the agreement between the assessee and National Highway Authority of India, the learned departmental representative pointed out that the agreement has two parts. The first part contains General Clauses and the second part contains Special Clauses. In the agreement, there was no difference between reimbursable expenditure and the fee payable for technical services. Referring to Sec.9(1)(vii) of the IT Act, the learned departmental representative submitted that all types of payment constitute fees for technical services, therefore no deduction of any expenses would be allowed in case the assessee receives any amount in the guise of reimbursement of expenditure. Therefore, the entire amount payable including reimbursable expenditure has to be taken as a whole towards fee for technical service, under Article 12 of the Double Taxation Avoidance Agreement with USA. The learned departmental representative further pointed out that for the purpose of claim of deduction u/s 10(6A), the assessee has to get the approval of the Govt. of India. In this case, according to the learned departmental....
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....rding to learned departmental representative, service tax is liability of the service provider. Service provider may eventually pass over the same to the other person. However, the liability remains that of the service provider for payment of service tax. The learned departmental representative placed reliance on the judgement of the Calcutta High Court in the case of Chowringhee Sales Bureau (P) Ltd. Vs. CIT, 110 ITR 385, Apex Court in the case of Sinclair Murray & Co. P. Ltd. Vs. CIT, 97 ITR 615. Referring to the disallowance of tax deducted at source, the learned departmental representative submitted that the reimbursable expenditures are to be taxed. Therefore, the tax deducted at source are borne by the clients of the assessee are part of the technical services. The learned representative further submitted that since the tax payable by the assessee has to be borne by the respective clients, it has to be treated as part of the fee payable for technical services. The learned representative placed reliance on the judgement of the Andhra Pradesh High Court in the case of CIT Vs. Superintendent Engineer, Upper Sileru,....
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....pany is a Non Resident Company incorporated in the USA. The assessee company engaged in providing technical services to Govt. of India and the other govt. organizations for developing infrastructure facilities. Most of the agreements entered into by the assessee were with National Highway Authority of India, State Govt. departments. The assessee has to provide technical services to the govt. agencies. According to the learned counsel for the assessee, in the course of its business activity in India, the assessee has to incur expenditure on behalf of the National Highway Authority of India and other govt. departments which engage the services of the assessee. The expenditure incurred by the assessee would be reimbursed in terms of the agreement. The learned counsel for the assessee pointed out that there is a maximum limit for such expenditure to be reimbursed by the National Highway Authority of India and other departments of Govt. 5. According to learned counsel for the assessee, the assessee being a non resident foreign company, assessable either under the provisions of the In....
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.... it would amount to capital receipt in the hands of the assessee. Accordingly, the same is not taxable. 6. Referring to Sec.9(1)(vii) of the Income Tax Act, 1961 and Sec.115A, the learned counsel submitted that the amount received towards fee for rendering technical services are governed by Sec.9(1)(vii) and Sec.115A. Referring to Explanation to Sec.9(1)(vii), the learned counsel pointed out that the Legislature employed the word 'for rendering any managerial, technical or consultancy services' for relevant consideration. Explanation to sec. 9(1)(vii) does not say that any amount received which is not for rendering any service also would form part of fee for services. In view of explanation Sec.9(1)(vii), according to the learned counsel, the reimbursable expenditure are not included in the definition fee for technical services in Sec.9(1)(vii) of the Act. Referring to Article 12(4) of the Double Taxation Avoidance Agreement between Govt. of India and USA, the learned counsel submitted that any amount other than the amount received as consideration for services rendered cannot form part of ....
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....urred, would be exempt from taxation. Referring to the Calcutta High Court judgement in the case of CIT Vs Sandersons & Morgan's 75 ITR 433 and submitted that when the solicitors received money on behalf of his client the same cannot be considered to be a Revenue receipt. He also placed reliance on the judgement in the case of Bombay High Court in CIT Vs. Tanubhai D. Desai 84 ITR 713. The learned counsel also placed reliance on the decision of the Authority for Advance Ruling Danfoss Industries (P) Ltd. 268 ITR 1 and submitted that there is no direct nexus between the actual cost incurred by the foreign company in providing services and fee payable to each individual company availing services. Therefore the authority of advance ruling held that the amount does not represent reimbursement of expenditure. Therefore, according to the learned counsel, this decision is not applicable to the facts of the case. Referring to the decision in the case of Progressive construction Ltd. (supra) the learned counsel submitted that this decision has no application to the facts of this case. In the....
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.... assessing officer himself referred to the very same industrial policy for the assessment year 2003-04. The assessing officer for the assessment year 2003-04 has not referred any other industrial policy. Therefore, according to the learned representative, the Revenue may not be correct in saying that the industrial policy declared in 1991 is out dated. According to the learned counsel, in the absence of any other industrial policy, the policy declared in 1991 has to be taken as such. Therefore, according to the counsel, the assessee is entitled for exemption u/s 10(6A) of the Act. 7. Referring to rate of tax on the fee for technical services, the learned counsel submitted that Article 12 of the Double Taxation Avoidance Agreement between Govt. of India and USA clearly says that tax be levied at 15% and not 20%. According to learned counsel, in 1998-99, 1999-2000, the assessee company itself claimed that Article 7 would apply. However, the assessing officer did not accept the claim of the assessee and levied tax under article 12 of the Double Taxation Avoidance Agreement. Referring&nbs....
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....sp; 234B (1) of the Act. The learned counsel also placed reliance on the decision of Delhi Bench in SNC Lavalin International Inc. Vs. DY. DDIT 118 TTJ 802 and the decision in the case of ADIT(International Taxation)1(2)/JCIT Vs. Kaiser Aluminium Technical Services Inc. 20 SOT 226. 9. We have considered the rival submissions on either side and also perused the material on record. Let us first take up the issue of reimbursable expenditure. The Assessing Officer found that the reimbursable expenditure forms part of the fees for technical services. The Assessing Officer mainly placed reliance in Article 12 of Double Taxation Avoidance Agreement (DTAA) between Government of India and USA and also the provisions of section 9(1)(vii) of the Income-tax Act, 1961. The learned Departmental Representative also placing reliance on the DTAA, more particularly on Article 12, submitted that the reimbursable expenditure would form part of the fee payable for technical services. The question arises for consideration is whether the reimbursable expenditure received by the assessee in the course of its business ac....
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....p; increased by the amount or amounts, as the case may be, of any such additional payments. "6.2 Remuneration and Reimbursable Expenditures: (a) Subject to ceilings specified in clause GC 6.1(b) hereof, the client shall pay the consultants (i) remuneration as set forth in Clause GC 6.2(b) and (ii) reimbursable expenditure as set forth in Clause GC 6.2(c). If specified in the SC, said remuneration shall be subject to price adjustment as specified in SC. (b) Remuneration for the personnel shall be determined on the basis of time actually spent by such personnel in the performance of the services after the date determined in accordance with clause GC 2.3 and clause SC 2.3, (or such other date as the Parties shall agree in writing) (including time for necessary travel via the most direct route) at the rates referred to and subject to such additional provisions as are set forth, in the SC. (c) Reimbursable expenditure actually and reasonably incurred by the consultants in the performance of the services as sp....
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....nbsp; unmarried dependant children under eighteen (18) years of age of those of the foreign personnel assigned to resident duty in India for the purpose of the services for periods of six (6) consecutive months or longer. Only one round trip shall be admissible during the entire duration of the contract to any eligible dependant of the foreign key personnel whose input is continuously foreseen on the project. For other foreign personnel whose input is not continuous (as in the case of Pavement cum Material Engineer), the number of round trips of the dependants shall also be same as for the key personnel provided that the dependants shall stay after arrival in India for a minimum period of 3 (three) consecutive months and the remaining input is not less than 6 (six) months for such key personnel. (iv) For the air travel of each of the foreign personnel, and each eligible dependent, the cost of excess baggage up to twenty (20) kilograms per person, or the equivalent in cost of unaccompanied baggage or air freight, and (v) Miscellaneous travel....
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....isions of Clause GC 6.1(c); and (7) the cost of such further items as may be required by the consultants for the purpose of the services, as agreed in writing by the client. 12. From the above clauses of the agreement it is obvious that the expenditures narrated above are to be reimbursed to the assessee by NHAI in foreign currency and in local currency. The NHAI in addition to reimbursable expenditure, has to pay for the services rendered by the assessee. The contention of the Learned Departmental Representative is that these expenditures are primary liability of the assessee and not the NHAI. We are unable to accept the contention of the Learned Departmental Representative. The agreement entered into between the parties clearly shows that certain expenses are reimbursable in foreign currency and certain expenses are reimbursable in Indian currency besides payment of fee for technical services. Therefore, the expenditure reimbursable by the NHAI is the liability of the NHAI and not that of the assessee. At the initial stage in order to carry out the contract between the parties, the assessee has to incur the expenditure. However, ....
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....the expenditures of NHAI and the same were incurred by the assessee because of the agreement. But for the agreement, the assessee would not have incurred this expenditure. therefore, the same do not in any way be included in the services to be provided by the assessee. Therefore, in our opinion, clause 4 to the DTAA may not be applicable to the facts of this case. 14. We have also carefully gone through the provisions of section 9(1)(vii) of the Act. The Revenue placing reliance in Explanation 2 to section 9(1)(vii) contended that fee for technical services means any consideration for rendering of any managerial, technical or consultancy services. As observed earlier in the case before us, the assessee has received a separate fee for consultancy services provided in pursuance to the agreement. Apart from the consultancy services, the NHAI has agreed to reimburse certain expenditures which are to be incurred by the NHAI. In the ordinary circumstances such expenditures are to be incurred only by the NHAI and not by the assessee. 15. Let us now examine item-wise expenditure said to be....
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....ngement is the provision for cleaning services. Thus although the cleaning services might be considered as technical services, they are not ancillary and subsidiary to the rental of monitoring equipment. Accordingly, cleaning services are not included services within the meaning of paragraph 4(a). In the case before us also the predominant purpose of the agreement between the parties is to provide consultancy services in the formation of four lane road in the states of Orissa and West Bengal. In the course of formation of four lane road, the NHAI has to incur certain expenditure. The reimbursable expenditures are the expenditure incurred by the assessee which are otherwise the liability of the NHAI in the course of its formation of 4 lane road. The services of the assessee is to provide only consultancy services to the assessee in the formation of 4 lane road. Therefore, the payment relatable to the technical advice provided by the assessee in the formation of the road alone to be treated as fee for technical services. The payment for the personnel who are absent from India are not for the cons....
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....l cost incurred by the non resident company in providing services and there is no profit element would be added to the cost. The Indian company before making payment to non-resident company approached the Assessing Officer u/s. 195(2) of the Act to remit the amount without deducting tax at source contending that the amount was only reimbursement of expenditure and the cost was incurred by non resident company. The Assessing Officer rejected the claim of the assessee. The assessee approached the AAR. The AAR held that the assessee company has to deduct tax while making payment u/s. 195(2) of the Act. The AAR further observed that the question of computing net income for the purpose of withholding the tax u/s. 195(2) did not arise. In the case before us it is not the case of deduction of tax while making the payment. The question is whether the reimbursable expenditure would form part of the fee for technical services. As already observed, NHAI agreed to incur the expenditure. Therefore, the liability is that of NHAI and not that of the assessee. The assessee has to separately incur expenditure....
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....required to be made by the Indian company. In other words, no other expenses are required to be met by the Indian company. In the case before us, apart from fees for technical services, NHAI has to incur certain expenditure in connection with the execution of the four lane road as per the agreement. Merely because such expenditures are relatable to the employees of the assessee it does not mean that will form part of the fee for technical services. Apart from the reimbursable expenditure, the NHAI is also liable to pay fee for technical services as provided in clause 6.1 of the agreement. But for the agreement, the assessee need not incur the expenditure. As already observed, in the ordinary course, the expenditure has to be incurred by the NHAI. the assessee was separately paid in respect of fee for technical services. Therefore, this decision of the AAR also may not of any assistance to the Revenue. 20. We have also carefully gone through the decision of the AAR in DVH Consultants BV, In re (2005) 277 ITR 97. In the case before the AAR the applicant company was a foreign company incorporated in ....
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....ive a minimum sum of Rs.1, 20,000 per month for the services rendered besides reimbursement of certain costs and expenditure incurred by the assessee while rendering the services as per the agreement. The Income-tax Officer disallowed the expenses incurred. On appeal by the assessee before the Delhi Bench of this Tribunal, it was held that the reimbursement of the expenditure did not constitute income as the expenses were incurred on behalf of the Swiss company. On a reference to the Delhi High Court at the instance of the Revenue, the Delhi High Court after considering the judgement of the Apex Court in the case of CIT vs. Tejaji Farasram Kharawalla Ltd. (1968) 67 ITR 95 held that the reimbursable expenditure cannot form part of the taxable income. Accordingly it was held that the reimbursable expenditures are to be excluded from the total income. In view of this judgement of the Delhi High Court, in our opinion, the reimbursable expenditure received by the assessee for the purpose of rendering services cannot form part of the total income. Therefore, it has to be excluded. 22. We have....
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....ay High Court in CIT vs. Tanubai D. Desai (1972) 84 ITR 713. In the case before the Bombay High Court, the assessee was a practising solicitor. In the course of carrying on his profession the assessee used to receive money from or on behalf of his clients. The money received was deposited by him in separate current account with Imperial Bank of India. Subsequently the assessee withdrew a sum of Rs.3.25 lakhs and placed the same in fixed deposit with Chartered Bank. The assessee renewed the account from time to time together with interest earned thereon. The assessee earned interest on the fixed deposit. The interest earned on the fixed deposit was not adjusted by apportioning it to different clients whose moneys were deposited in the bank account. The assessee did not show the interest in the return of income. The question arose before the Bombay High Court was whether the interest accrued in the fixed deposit with Chartered Bank was the income of the assessee or not. The Bombay High Court after elaborately examining the issue found that the moneys received by the solicitor from his clients ar....
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....ere in the case of a foreign company deriving income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976 but before the 1st day of June, 2002 and,- (a) where the agreement relates to a matter included in the industrial policy, for the time being in force, of the Government of India, such agreement is in accordance with that policy; and (b) in any other case, the agreement is approved by the Central Government, the tax on such income is payable, under the terms of the agreement, by Government or the Indian concern to the Central Government, the tax so paid." 26. For the purpose of claiming exemption u/s. 10(6A) an agreement needs to be entered into after 31st day of March, 1976 but before the 1st day of June, 2002 in relation to matters included in the industrial policy of the Government of India. In any other case the approval of the Government is required. The industrial policy of Gover....
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....ncurred by the assessee in relation to fees for technical services cannot be deducted. As rightly observed by the CIT(A) the assessee received fee for technical services and has not claimed any expenditure from the fee for technical services. As we have already discussed, the reimbursable expenditure may not form part of the free for technical services. Therefore, Assessing Officer may not be correct in placing reliance u/s. 44D(b) of the Act. The reimbursable expenditures are to be incurred by the NHAI and other clients. therefore, it was the expenditure of NHAI and other clients and definitely it is not the expenditure of the assessee. 28. We have also carefully gone through the decision of the Tribunal in Progressive Construction (supra). The facts in Progressive Construction (supra) are definitely non different set of facts. The Tribunal in that case has no occasion to consider whether the reimbursable expenditure would form part of fee for technical services. Therefore, this decision may not be any assistance to the Revenue. 29. Now coming to section 115A of the Act, this provision is for the purpose of computing expenses from the fe....
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....bsp;circumstances, the assessee would have collected the service tax from the respective clients and would have paid the same. Therefore, in our opinion, reimbursement of the service tax cannot form part of the taxable income of the assessee. Fee for technical service is for the service rendered by the assessee. Service tax would not form part of fee for technical services. In other words, service tax is not an expenditure incurred by the assessee. It is a statutory levy on the person who availed the service from the assessee. The matter would stand entirely on a different footing in case the assessee collected the service tax and it was not paid to the Government account. That is not the case before us. 32. We have also carefully gone through the judgement of the Calcutta High Court in the case of Chowranghie Sales Bureau Pvt. Ltd. (supra). In the case before the Calcutta High Court, the assessee collected the sales tax along with the price of the goods and credited the same in separate sales tax account. Since the amount was not paid into the Government account and it was credited in a separate account, it was held that the sales tax formed part ....