THE COMMISSIONER OF INCOME TAX vs. M/S BANGALORE INTERNATIONAL AIRPORT LTD

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ITA/573/2008HC KarnatakaKAHC01032122200801 July 2014Bench: B.MANOHAR,N.KUMAR12 pages
AI SummaryRemanded

What did the High Court hold?

The High Court held that the Tribunal had not applied its mind to the facts of the case. The Court noted that the application filed by the assessee under Section 195(2) did not contain the facts that the Tribunal relied upon for its decision. Furthermore, the finding that it was a case of reimbursement of expenses limited to 50% was not pleaded by anyone. The Tribunal appeared to have been influenced by the reimbursement in the case of HOCHTIEF Airport GmbH, where the Department had permitted 50% reimbursement without tax deduction. Consequently, the High Court found that the impugned order of the Tribunal could not be sustained and was liable to be set aside. The matter was remanded back to the Tribunal for fresh consideration in accordance with law, based on the assessee's case and the material on record. The substantial questions of law framed in the appeals were left undecided.

What were the facts?

The Revenue has filed these appeals against the order of the Income Tax Appellate Tribunal (Tribunal) which held that the assessee, Bangalore International Airport Ltd. (BIAL), was justified in claiming that reimbursement expenses, to the extent of 50%, did not attract Section 195(2) of the Income Tax Act, 1961. BIAL was incorporated to develop an international airport. An agreement among shareholders stipulated reimbursement of development costs to private and state promoters. Siemens and Unique incurred expenses from March 2000 to August 2004, which were to be reimbursed. BIAL applied for nil deduction of tax at source under Section 195(2). The Assessing Officer and the first Appellate Authority rejected this application. The Tribunal, however, allowed BIAL's appeal, holding that 50% reimbursement of expenses did not attract Section 195(2). The Revenue is aggrieved by this decision.

What were the issues?

1. Whether the Tribunal erred in holding that reimbursement of expenses to the extent of 50% by the assessee did not attract the provisions of Section 195(2) of the Income Tax Act, 1961, when the application filed by the assessee under Section 195(2) did not contain the facts relied upon by the Tribunal for its decision. Assessee's contention (as inferred from the Tribunal's reasoning): The expenses were incurred by promoters for feasibility studies and were to be reimbursed to the extent of 50%. These reimbursements did not involve any profit element and were not payments for technical services. The Tribunal also noted a previous instance where the Department permitted 50% reimbursement without tax deduction for another bidder, HOCHTIEF Airport GmbH. Revenue's contention: The Tribunal failed to apply its mind to the facts of the case and arrived at a conclusion based on extraneous considerations, such as the HOCHTIEF Airport GmbH case and the 50% reimbursement limit, which were not pleaded by the assessee. The Tribunal's findings were not supported by the application filed under Section 195(2).

Which sections of the Income-tax Act were involved?

Section 195(2),Section 5,Section 9

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KARNATAKA AT BANGALORE

Dated this the 1st day of July, 2014 PRESENT

THE HON’BLE MR. JUSTICE N KUMAR

AND

THE HON’BLE MR. JUSTICE B MANOHAR ITA No.571 of 2008 C/W ITA No 569 of 2008 ITA No.573 of 2008 ITA No.576 of 2008 ITA No.571 of 2008 BETWEEN:

1.

The Director of Income Tax

International Taxation

Rashtrothana Bhavan

Nrupathunga Road

Bangalore

2.

The Income-Tax Officer

Ward-19(1)

International Taxation

Rashtrothana Bhavan

Nrupathunga Road

Bangalore

…Appellants

(By Sri K.V. Aravind, Advocate)

AND:

M/s. Bangalore International Airport Ltd., No.118, Gayathri Lakefront Outer Ring Road Hebbal, Near Flyover Bangalore – 560 024

…Respondent

(By Sri P. Dinesh, Advocate)

This ITA filed under Section 260A of the Income Tax Act, 1961 arising out of the order dated 17-12-2007passed in ITA No.537/Bang/2006, for the assessment year 2006-2007 praying to: i) formulate the substantial questions of law stated therein, ii) allow the appeal and set aside the orders passed by the Income Tax Appellate Tribunal, Bangalore in ITA No.537/Bang/2006, dated 17-12-2007 and confirm the order of the Appellate Commissioner confirming the order passed by the Income Tax Officer, International Taxation, Ward-19(1), Bangalore.

ITA No 569 of 2008 BETWEEN:

1.

The Director of Income Tax

International Taxation

Rashtrothana Bhavan

Nrupathunga Road

Bangalore

2.

The Income-Tax Officer

Ward-19(1)

International Taxation

Rashtrothana Bhavan

Nrupathunga Road

Bangalore

…Appellants

(By Sri K.V. Aravind, Advocate)

AND:

M/s. Bangalore International Airport Ltd., No.118, Gayathri Lakefront Outer Ring Road Hebbal, Near Flyover Bangalore – 560 024

…Respondent

(By Sri S. Parthasarathi, Adv., along with Sri P. Dinesh & Jinita Chatterjee, Advocates)

This ITA filed under Section 260A of the Income Tax Act, 1961 arising out of the order dated 17-12-2007 passed in ITA No.536/Bang/2006, for the assessment year 2006-2007 praying to: i) formulate the substantial questions of law stated therein, ii) allow the appeal and set aside the order passed by the Income Tax Appellate Tribunal, Bangalore in ITA No.536/Bang/2006, dated 17-12-2007, confirming the order of the Appellate Commissioner and confirm the order passed by the Income Tax Officer, International Taxation, Ward-19(1), Bangalore.

ITA No.573 of 2008 BETWEEN:

1.

The Commissioner of Income Tax

International Taxation

Rashtrothana Bhavan

Nrupathunga Road

Bangalore

2.

The Income-Tax Officer

Ward-19(1)

International Taxation

Rashtrothana Bhavan

Nrupathunga Road

Bangalore

…Appellants

(By Sri K.V. Aravind, Advocate)

AND:

M/s. Bangalore International Airport Ltd., No.118, Gayathri Lakefront Outer Ring Road Hebbal, Near Flyover Bangalore – 560 024

…Respondent

(By Sri P. Dinesh, Advocate)

This ITA filed under Section 260A of the Income Tax Act, 1961 arising out of the order dated 17-12-2007passed in ITA No.538/Bang/2006, for the assessment year 2006-2007 praying to: i) formulate the substantial questions of law stated therein, ii) allow the appeal and set aside the order passed by the Income Tax Appellate Tribunal, Bangalore in ITA No.538/Bang/2006, dated 17-12-2007 confirming the order of the Appellate Commissioner and confirm the order passed by the Income Tax Officer, International Taxation, Ward-19(1), Bangalore.

ITA No.576 of 2008 BETWEEN:

1.

The Director of Income Tax

International Taxation

Rashtrothana Bhavan

Nrupathunga Road

Bangalore

2.

The Income-Tax Officer

Ward-19(1)

International Taxation

Rashtrothana Bhavan

Nrupathunga Road

Bangalore

…Appellants

(By Sri K.V. Aravind, Advocate)

AND:

M/s. Bangalore International Airport Ltd., No.118, Gayathri Lakefront Outer Ring Road Hebbal, Near Flyover Bangalore – 560 024

…Respondent

(By Sri P. Dinesh, Advocate)

This ITA filed under Section 260A of the Income Tax Act, 1961 arising out of the order dated 17-12-2007 passed in ITA No.539/Bang/2006, for the assessment year 2006-2007 praying to: i) formulate the substantial questions of law stated therein, ii) allow the appeal and set aside the order passed by the Income Tax Appellate Tribunal, Bangalore in ITA No.539/Bang/2006, dated 17-12-2007 confirming the order of the Appellate Commissioner and confirm the order passed by the Income Tax Officer, International Taxation, Ward-19(1), Bangalore.

These ITAs coming on for hearing this day, N. KUMAR J delivered the following:

J U D G M E N T

The revenue has preferred these appeals against the order of the Tribunal holding that the assessee is justified in claiming that reimbursement expenses in the circumstances of the case to the extent of 50% did not attract the provisions of Section 195(2) of the Income Tax Act, 1961 (hereinafter for short referred to as “the Act”).

2.

In 1994 the Bangalore International Airport Project was conceived as the project of public and private participation. A limited Company was floated called ‘Bangalore International Airport Limited’ for the sole purpose of developing the international airport at Devanahalli, Bangalore. The share holders who are four in number entered into an agreement on 23.1.2002 under which Siemens was to have 40% shareholding, Unique and L & T were to have 17% each, KSIIDC and AAI were to have 13% each. The said agreement covered development costs which were pre-agreement

development cost, state promoters pre-agreement development cost, reimbursement of development cost to the private promoters in certain circumstances and reimbursement of development cost to the state promoters in certain circumstances. On the basis of this agreement, on 8.7.2002 a resolution was passed to the effect that, “the offshore expenses shall be advanced by Private Promoters. All expenses will be reimbursed and capitalized after Financial Close”. The two foreign companies, Siemens and Unique incurred expenses from March 2000 to August 2004 and these were to be reimbursed to the two parties. Similarly, L & T also incurred expenses which also came for consideration for financial close and capitalization of the project. The details of development costs to be reimbursed are set out by the Tribunal in its order at pages 4, 5 and 6.

3.

The Bangalore International Airport Limited on 5.10.2004 filed an application under Section 195(2) of the Act for nil deduction of tax at source. On consideration of the said

request, the assessing authority by a considered order held that, such an exemption is not permissible in law.

4.

Aggrieved by the said order, the assessee preferred an appeal. The first Appellate Authority affirmed the order of the assessing authority. The same was challenged by the assessee before the Tribunal.

5.

The Tribunal proceeded on the basis that, it is a case of reimbursement of various expenses incurred and in this case it is also limited to only 50%. The expenses as incurred by the promoters compensated to them would not involve any profit element also, especially as is seen in the instant case, the compensation is also only to the extent of 50%. Initially when the expenses were incurred by the non-resident company, it was not answerable to any of the provisions of Section 5 or Section 9 of the Act. By virtue of the arrangement, the expenses to the extent of 50% was agreed to be reimbursed and reimbursement under no circumstances could be equated to amount paid for technical services. In fact, what really

happened or what really was incurred by the promoters was a study with regard to feasibility, viability, etc., of the entire project and finally whether it would ultimately result in them ending up with some profit or not. This study as a promoter for which they used the services of other agencies for their own purpose was to decide about whether their decision to jointly participate in the international airport project was a decision taken in the right direction or otherwise along with the input in the shape of finance and other technical information. The benefit that the promoters received in the shape of legal advice, technical advice and other things was only to provide them the necessary input to decide to go ahead or not to go ahead with the project. Such services even in the remotest possibility would have no connection whatsoever with the project and all the details was so provided so as to satisfy that the expenses as incurred were justified and reimbursable. As a passing reference they observed that one of the bidders of the project viz., HOCHTIEF Airport GmbH, which bid was not accepted, also had incurred certain expenses and was reimbursed to the

extent of 50%. The Department vide its NOC dated 12-09-2003 had permitted the reimbursement to the tune of 50% without any deduction of tax. There is absolutely no difference between the bidder who had gone off and the bidder who has continued because he was accepted. Therefore, the Tribunal was of the opinion that the assessee is justified in claiming that reimbursement of expenses in the circumstances of the case to the extent of 50% did not attract the provisions of Section 195(2) of the Act. Accordingly, it allowed the appeal.

6.

Aggrieved by the said order, the revenue has preferred these appeals.

7.

We have heard the learned counsel for the parties. We have gone through the application filed under Section 195(2) of the Act seeking for nil deduction of tax at source. We do not find from the said application the facts which are set out by the Tribunal in its order. Even otherwise, the findings recorded by the Tribunal to the effect it is a case of reimbursement of various expenses incurred which is limited

only to the extent of 50% is a case which is not pleaded by anyone. Probably the Tribunal appears to have carried away by the reimbursement in the case of HOCHTIEF Airport GmbH where the department permitted reimbursement to the tune of 50% without any deduction at source. Therefore, we are of the view there is no application of mind to the facts of this case before arriving at the conclusion by the Tribunal. Therefore, the impugned order cannot be sustained. It is liable to be set aside. The matter has to be remanded back to the Tribunal for fresh consideration in accordance with law on the basis of the case of the assessee and the material on record independently. In view of the fact that we are setting aside the impugned order and remitting the matter to the Tribunal, the question of answering any of the substantial questions which are framed in these cases do not arise. All of them are left open to be decided in the future, if need arises. Hence, we pass the following order:-

(i) Appeals are allowed.

(ii) The impugned order is set aside. (iii) The matter is remitted to the Tribunal for fresh consideration in accordance with law.

Sd/- JUDGE

Sd/- JUDGE

ckl/-

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