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आदेश /O R D E R
PER C.N. PRASAD, J.M.
These three appeals are filed by the Revenue against different orders of the Ld.CIT(Appeals), Delhi-43, dated 20.03.2024 and 28.03.2024 for the assessment years 2012-13 to 2014-15, in holding that the assessee is not in default for non-deduction of tax at source u/s 195 of the Act in respect of payments made to non- resident AE of the assessee namely M/s Bain & Company Inc., USA.
The facts and grounds of appeal of the Revenue for AY 2013-14 and 2014-15 are identical to AY 2012-13 except for the figures and therefore all these appeals were heard together and disposed of by way of common order for the sake of convenience.
2. Briefly stated the facts are that the assessee is a wholly owned subsidiary of Bain & Company Inc. (‘Bain US’), a Massachusetts Corporation incorporated under the laws of USA and is engaged in rendition of consultancy services. Bain US is also engaged in rendering of consultancy services and in addition to this it provides support services to Bain group of companies primarily with the objective of cost optimization for the group as a whole.
The assessee during these assessment years remitted certain sums to Bain US, on account of cost-to-cost reimbursement of various client related expenses and computer maintenance expenses incurred by Bain US for and on behalf of the assessee. The nature of expenses are (i) reimbursement of client relates expenses, these are reimbursements for out of pocket expenses (OPEs) incurred by Bain US during the course of rendering consultancy services to the assessee. These OPEs are primarily on account of travelling expenses like airfare, hotel, boarding and lodging, food expenses, etc. and other miscellaneous expenses paid to third parties.
Whenever a customer of the assessee requires setting up of a certain project in USA, the assessee reaches out to Bain US for its assistance for rendering of services. Certain OPEs are incurred by Bain US during the course of rendition of services. These expenses are called client related expenses and the assessee recovers client related expenses from the clients and passes them onto Bain US.
2.1 The second type of expenses are reimbursement of computer maintenance expenses. These expenses represented cost reimbursement paid by the assessee to Bain US for actual maintenance of the IT System and other computer related expenses incurred by Bain US for and on behalf of the assessee. Bain group to achieve global standardization works on a global server which is centrally maintained by Bain US. As part of exercise of centralized maintenance of server, Bain US undertakes various activities/expenses like payment of technical support charges to third party vendors, payment of antivirus and winzip maintenance charges, annual support charges for blackberry phones, etc. The third party cost is allocated to Bain’s worldwide offices including the assessee on a cost-to-cost basis without any markup.
The Assessing Officer passed an order u/s 201 of the Act holding that the assessee to be assessee in default for not withholding tax u/s 195 of the Act on the remittance made by the assessee to Bain US on the ground that the reimbursement of client related expenses qualify as Fees for Technical Services (FTS) and reimbursement of computer maintenance charges qualify as royalty/fees for technical services under the India US DTAA read with Income Tax Act. On appeal the Ld.CIT(A) deleted the additions made by the AO and held that the remittances neither qualify as FTS nor Royalty following the order of the Tribunal in assessee’s own case for the AY 2009-10 and also the order of the Tribunal in the case of Bain US for AY 2018-19, wherein the Tribunal held that the reimbursement of expenses are not subjected to withholding tax in the case of the assessee and in the case of the Bain US the receipts are held to be not in the nature of FTS under Article 12(4)(b) of the tax treaty. Against this order of the Ld. CIT(Appeals) the Revenue is in appeal before us.
The Ld. Counsel for the assessee, at the outset, submitted that the issue in appeal is squarely covered by the decision of the Tribunal in assessee’s own case in dated 10.11.2021 for the AY 2009-10, wherein the Tribunal held that on reimbursement of client related expenses the assessee was not liable to withhold taxes. The Ld. Counsel for the assessee further submitted that the issue of characterizing the reimbursement of third party cost as FTS has been decided in favour of the payee (Bain US) by the Tribunal in the case of Bain US for assessment years 2018-19 & 2019-20. The Ld. Counsel for the assessee further referring to the directions of the DRP in Bain US case for AY 2022- 23, submitted that on identical facts and circumstances the DRP has categorically held that the reimbursement received by Bain US do not constitute income and therefore not taxable in India.
Therefore, it is the contention of the Ld. Counsel that following the principles of consistency the appeal of the Department on this issue is liable to be dismissed. Reliance was placed on the decisions of the Hon’ble Supreme Court in the case of Radhasoami Satsang Saomi vs. CIT (1992) 60 taxman 248 (SC) and CIT Vs. Excel Industries Ltd. (2013) 38 taxmann.com 100 (SC).
The Ld. Counsel for the assessee further made submissions as under: -
“On the issue of withholding obligation on reimbursement of client related expenses 10. This issue is squarely covered in Respondent’s favour in Respondent’s own case for AY 2009-10 [1TA No. 2845/Del/20J6], The remittances in the subject year are similar to the remittances made in AY 2009-10. The 5 details of client related expenses are given at para 6-7 on internal page 5-6 of AY 2009-10 ITAT order. The Hon’ble ITAT after careful consideration of the nature of the expenses unequivocally held that in respect of reimbursement of client related expenses, the Respondent was not liable to withhold taxes (refer para 23-26 of the order on internal page 16-32 of AY 2009-10 ITAT order).
It is further submitted that the issue of characterizing the reimbursement of third-party costs as FIS has been decided in favour of the payee (Bain US) by this Hon’ble ITAT in Bain US’s case for AY 2018-19 and AY 2019-20. The facts in AY 2018-19 and AY 2019-20 including the nature of services for which reimbursements were made and the vendors from whom the services were availed by the Respondent were identical in both the years, (refer para 20-25 on internal pages 13-15 of the order for relevant findings of AY 2018- 19 order; refer para 7-10 on internal pages 4-8 of AY 2021-22 order for relevant findings in AY 2019-20 order) 12. Further reliance is placed on the directions issued by the Hon’ble DRP in Bain US’s case for AY 2022-23, wherein, on identical facts and circumstances, the DRP has categorically held that the reimbursements received by Bain US do not constitute income and are therefore not taxable in India. “8.3 The matter has been considered. Being routine business expenses of the AE that were incurred by the assessee on behalf of the AE, subsequent payments received by it are in nature of reimbursement of expenses. As such, no services were provided by the Assessee to Bain India. Hence, reimbursement of expenses are not taxable under the provisions of the Act as the same does not constitute income. In addition, reimbursement receipts are not ancillary and subsidiary to the enjoyment of the right, property, or information received under the Royalty agreement and these payments also do not qualify as FIS under the provision of India-USA DTAA. This issue has been examined by the Hon'ble ITAT in the Assessee's own case and decided in favour of the Company. The 6 subject issue has partly been decided favourably by the Ld. CIT(A) and jurisdictional Hon'ble Delhi ITAT (ITA No. 2845/Del/2016) in the case of subsidiary company of Bain US, i.e., Bain India for AY 2009-10. Therefore, considering the facto-legal position on this issue, the Panel hereby directs the AO to delete the proposed addition of Rs.43,27,68,138/-. This ground is accordingly decided in favour of the assessee. ”
Therefore, considering that the issue is now settled in favour of the Respondent, it is humbly submitted that following the principle of consistency, the appeal of the Department on this issue may be dismissed by the Hon’ble ITAT. Reliance is placed on the following decisions which have recognized the principle of consistency in tax cases: - Radhasoami Satsang Saomi Bagh v. CIT [1992] 60 taxman 248 (SC)
- Commissioner of Income Tax v. Excel Industries Ltd. [2013] 38 taxmann.com 100 (SC) On the issue of withholding obligation on reimbursement of client related expenses 14. It is submitted that this issue stands covered in the Respondent’s own case for AY 2009-10. The CIT(A), in his order for AY 2009-10, while examining the characterization of computer maintenance expenses, categorically held that none of the payments made by the Respondent were towards licensing of software or of any right or property. Accordingly, such payments could not be regarded as royalty. (Refer para 6.4.2 at internal pages 33-34 of the CIT(A) order for AY 2009-10.) 15. Furthermore, the Ld. CIT(A) also observed that the computer maintenance charges were allocated between the Respondent and other affiliates on a proportionate basis. Based on the facts on record, the C1T(A) concluded that the Respondent had neither acquired any technology nor availed any technical service, but had merely contributed its proportionate share towards the use of a common IT system. Consequently, such payments could not be characterized as FTS. (Refer para 6.3.4 at internal pages 30-31 of the CIT(A) order for AY2009-10.) 16. It is respectfully submitted that the Department did not prefer any appeal against the findings of the Ld. CIT(A) on this issue in the Respondent’s case for Assessment Year 2009-10. Accordingly, the said findings have attained finality. In the absence of any challenge to the CIT(A)’s order in the earlier year, the Department is now estopped from re-agitating the same issue in the subject assessment years.
It is submitted that reimbursement of client related expenses is just one of the reimbursements, similar to reimbursement of client related expenses and once this Hon’ble ITAT, in its order for AY 2009-10, after due consideration of the facts, has held that such reimbursements do not constitute either royalty or FTS, the principle laid down therein would equally apply to the present case.
Accordingly, this issue also stands squarely covered in favour of the Respondent. The DRP in Bain US’s case (extract given in para 12 above) has held that reimbursement of expenses does not involve any income element and is not taxable under the provisions of the Act. The Hon’ble ITAT in Bain US’s for AY 201 8-19 and AY 2019-20 has also held that the reimbursement of expenses cannot be characterized as FTS.
Therefore, this issue is also covered in favour of the Respondent. Also, the position of law is now settled that cost- to-cost reimbursement of expenses do not have any income element and thereby the same cannot be considered as income.
Reliance is further placed on the following decisions for the proposition that reimbursement of expenses for the maintenance of a centralized IT system cannot be treated as either FTS or royalty: - Director of Income Tax v. A. P. Moller Maersk [2017] 78 taxmann.com 287 (SC) (refer paras 10-15 of the judgement)
- Decision of Hon 'ble High Court of Delhi in EY Global Services Ltd. v. ACIT [2021] 133 taxmann.com 157 (Delhi) (Para 13-19 of the judgement) Department has accepted non-taxability of these reimbursements in the Respondent’s reassessment proceedings for AY 2013-14 and AY 2014-15 21. Reassessment proceedings were initiated in the Respondent’s case for Assessment Years 2013—14 and 2014-15, wherein the Respondent was issued show cause notices requiring it to show cause as to why the sums remitted to Bain US during both years—comprising reimbursement of client-related expenses and reimbursement of computer maintenance expenses— should not be disallowed under Section 40(a)(i) of the Act, and added to the total income of the Respondent (refer para 2 of the respective show cause notices).
In response, the Respondent filed detailed submissions relying upon, inter alia, the order of this Hon’ble ITAT for AY 2009-10 as well as the CIT(A)’s order for the same year (refer para 2.3 at internal pages 7-8 of the submissions).
Upon consideration of these submissions, the Department accepted the Respondent’s position that the said reimbursements did not qualify as either royalty or FTS, and accordingly, no disallowance was made in the reassessment orders (refer para 9 of the reassessment orders for both years).
In view of the above, it is evident that the Department has accepted the non-taxability of the sums remitted to Bain US in the reassessment proceedings for AYs 2013-14 and 2014-15. Having done so, the Department cannot now be permitted to take a contrary stand in the present appeals before this Hon’ble Tribunal. It is therefore respectfully prayed that the appeals filed by the Department be dismissed.”
On the other hand, the Ld. DR strongly supported the orders of the authorities below. 9
Heard rival submissions, perused the orders of the authorities below and the orders of the Tribunal placed before us. On a careful consideration of the facts and the findings of the Ld. CIT(Appeals) it is observed that in the case of the assessee for the AY 2009-10 the Tribunal held that reimbursement of client related expenses and computer maintenance charges do not attract withholding tax u/s 195 of the Act. We also observed that in the case of Bain US this Tribunal considered the taxability of client related expenses in the hands of Bain US and held that the said receipts are not in the nature of FIS under an Article 12(4)(b) of the Tax Treaty. Following these orders of the Tribunal the Ld. CIT(Appeals) held that the assessee was not liable to deduct tax at source from such reimbursements observing as under: -
“6.1 I have carefully considered the facts of the case in the light of the submissions made by the appellant and applicable law in this regard. Accordingly, my decision in the matter is as under: 6.2 Ground no. 1 to 6 are interconnected and related to the primary issue of holding the appellant to be an assessee-in-default for non-deduction of tax at source u/s 195 of the Act, in respect of payments aggregating to Rs.3,53,73,494/- made to non-resident Associated Enterprises (“AEs”) of the appellant, namely, M/s Bain & Co. Inc, USA. 6.3 The appellant has challenged the addition to FTS on multiple grounds. The Ground No. 4.1 is on the plea that payments relate to expense reimbursement and no element of technology is involved. The Ground No. 4.2 is 10 based on the argument that services are not technical in nature. The Ground No. 4.3 is based on failure of AO to provided sufficient arguments and Ground No. 4.4 and 4.5 are based on the argument that no technology is being ‘made available’ to Appellant. Ground No. 4.6 is on plea that services are not ancillary to royalty payments and Ground No. 4.7 is against binding judgements of Hon’ble Apex Court. In Ground No. 4.8, Appellant has pleaded that the payments cannot be bifurcated for withholding tax purposes. 6.4 The Appellant has further challenged the addition as Royalty on the Ground that payments are not in the nature of Royalty and payments cannot be called Royalty and FTS at same time. 6.5 The appellant has challenged the addition to computer maintenance expense also on multiple grounds. The Ground No.-6.1 is based on the argument that the payment relates to reimbursement of expenses and Ground No. 6.2 is against the judgements relied upon by AO. Ground No. 6.3 and 6.4 are against ignorance of binding precedents. The Ground No. 6.5 and 6.6 are based on argument that no technology is being ‘made available’ and payments cannot be called Royalty and FTS at same time, being mutually exclusive. Ground No. 6.7 and 6.8 are based on plea that payments are pure reimbursements and there was no profit motive. 6.6 The appellant has given the break-up of payments into two categories:
(i) Client Related Expenses (Rs. 3,03,87,974) (ii) Computer Maintenance Expenses (Rs. 49,85,520) These are being examined as under: 6.7 With regard the first type of payments, namely, client related expenses, the appellant has pleaded that these are out of pocket expenses incurred by Bain US during the course of rendition of professional services to Bain India. Bain India recovers these costs/OPEs from its clients on cost to cost basis and passes them on to BAIN US. Bain India recognizes the aforesaid expenses (incurred 11 by Bain US for and on behalf of Bain India) it in its financial statements as being amount payable to Bain US and receivable from client. There is no element of technology involved since the services provided are not technical in nature. The appellant also referred to the MOU to the India U.S. tax treaty in this regard. The nature of services provided under the present case (travelling, meal, hotel, market information etc.), certainly, do not fall under category of technical services. 6.7.1 Further, in order to qualify any services as FTS, make available condition should be satisfied, however, in the present set of facts there is no material on record to demonstrate that Bain US had made available technical knowledge, experience, skill, know how etc. to Bain India to apply such technology, know how etc. independently without the assistance of Bain US. Further considering that the said payments were made on cost-to-cost basis, it cannot be held as FTS/FIS under India US tax treaty. 6.8 With regard the second type of payments, namely, computer maintenance expenses, the appellant has pleaded that the said payment were in the nature of reimbursement of annual software and hardware maintenance charges and other computer related expenses incurred by Bain US for an on behalf of Appellant. It was submitted by Appellant that no mark-up was charged for the said expenses by Bain US. In this regard, reliance was placed by Appellant on the multiple rulings holding that no technology was being 'made available' to the recipient. Basis our analysis of the Appellant’s submission, the said payment cannot be held as FTS/FIS under India US tax treaty. 6.8.1 Vide the Ground No. 6, the appellant has further pleaded that the payments do not qualify as Royalty under India-USA Tax Treaty. On careful consideration of the Appellant’s submission, the alternative reasoning given by the AO to tax such payment as royalty, is found to be unjustified since none of thepayments were towards licensing of software or any other right or property which is in the nature of Royalty. Following the Hon’ble Apex Court judgement in case of Engineering Analysis Centre of Excellence Private Limited, the said payments cannot be held as royalty. 6.9 It is further noted that the similar issue relating to the nature and character of very same payments (client related expenses and computer maintenance charges) and whether it requires withholding of tax, was examined in Appellant’s own case for AY 2009-10 by the Hon’ble Delhi Tribunal and Ld. CIT(Appeals). 6.9.1 While holding that payment for computer maintenance expenses is not FIS/Royalty in nature, the Ld. CIT(A) in Appeal No. 166/13-14/CIT(A)-42 dated 16th March 2016 in Appellant’s own case for AY 2009-10 has held that- “On careful consideration of the break-up of the computer and communication expenses, it is seen that the appellant along with other global affiliates were using one common global portal maintained by the Central Department as Bain US towards maintenance of such system. The computer and maintenance charges were charged on the appellant and its other alliance on proportionate basis. It is evident through such payment, the appellant has not acquired any technology or any service but has only paid its proportionate share for use of common IT system. In view of this, such payment cannot be held as FIS in nature. 6.4.2 On careful consideration of the above submission, the alternative reasoning given by the AO to tax such receipt as royalty, is found to be unjustified, keeping in view the nature of payments discussed in the above paragraphs. The AO has relied upon the decision of Karnataka High Court in the case of CIT vs. Samsung Electronics Ltd. (2009-TII-25- HC-KAR-INR). However, the said decision was in the context of licensing of software. However, in the appellant's case, none of the payments were towards licensing of software or any other right or property. Therefore, such payments cannot be held as royalty.” 6.9.2 Further, in relation to client related expenses, while reversing the decision of the Ld. CIT(A) in 13
Appellant’s own case for AY 2009-10, the Delhi Tribunal in 2016 dated 10th November 2021 has held that Bain India is not liable to withhold tax on such payment. It is further noted that Delhi Tribunal in case of Appellant’s parent company ‘Bain US’ has considered taxability of client related expenses in hands of Bain US in dated 29th August 2023 for A.Y. 2018-19 and passed order in favor of Bain US holding that the said receipts are not in the nature of FIS under Article 12(4)(b) of the Tax Treaty. The Tribunal held that - “24. It is observed, while considering the issue relating to the nature and character of identical receipts and whether it requires withholding of tax, the Tribunal in case of the payer i.e. Bain lndia in assessment year 2009-10, in the order referred to above, has held that the payment cannot be treated either as FIS under Article 12(4)(b) of the Tax Treaty or royalty. Therefore, it was held by the Tribunal that there was no requirement on the part of the payer i.e. Bain India to withhold tax.
In our considered opinion, the controversy stands resolved by the aforesaid decision of the Tribunal. Therefore, we hold that the receipts are not in the nature of FIS under Article 12(4)(b) of the Tax Treaty. We order accordingly.” 6.10 Considering that the said decisions squarely cover the issue under consideration, in favour of the Appellant, accordingly, the above-mentioned two payments i.e. client related expenses and computer maintenance expenses cannot be held as FIS/Royalty. Therefore, the appellant was not found to be liable to deduct tax at source from such payments and the impugned order passed under section 201 of the I.T. Act is unsustainable. The levy of tax under section 201 of the I.T. Act and interest under section 201(1 A) on the appellant, in the impugned order is hereby deleted and the respective grounds of appeal raised by the Assessee are hereby allowed.
7. Grounds no. 7 & 8 of appeal raised by the appellant are general or consequential in nature and are not adjudicated upon.”
8. We also observed that for the assessment years 2013-14 & 2014-15 the assessments of the assessee were reopened u/s 147 of the Act to disallow the reimbursement of expenses to Bain US u/s 40(a)(ia) of the Act for the reason that no TDS was made by the Assessee. However, considering the detailed submissions filed by the assessee by relying on the order of the Tribunal for the AY 2009- 10, the AO completed the reassessment for AY 2013-14 and 2014-15 u/s 147 r.w.s. 144B of the Act dated 28.03.2022 accepting the income returned by the assessee, whereby the AO has accepted the non taxability of the reimbursement of client related and computer maintenance expenses remitted to Bain US by the assessee for the assessment years 2013-14 & 2014-15.
In view of the above discussion, following the order of the Tribunal for the Ay 2009-10 in assessee’s own case and also the order of the Tribunal in the case of Bain US and taking note of the fact that the Revenue accepted that the reimbursement of client related expenses and computer maintenance charges are not subjected to withholding tax u/s 195 of the Act for the assessment years 2013-14 and 2014-15, we hold that the reimbursement of 15 client related expenses and also the computer maintenance charges paid to Bain US by the assessee for the assessment years 2012-13 to 2014-15 are not subjected to withholding tax u/s 195 of the Act.
The grounds raised by the Revenue are dismissed.
In the result, appeals of the Revenue are dismissed.
Order pronounced in the open court on 28/05/2025