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Facts
The assessee, a Danish company, received Rs. 3,89,32,214/- from its Indian AE as reimbursement for legal and professional expenses incurred on behalf of the AE. The Assessing Officer (AO) treated this reimbursement as Royalty and Management fee taxable in India, while the assessee contended it was a cost-to-cost reimbursement without any markup.
Held
The Tribunal held that the amount received by the assessee was a reimbursement of expenses without any markup. Citing the Supreme Court's decision in DIT vs. A.P. Moller Maersk A S, the Tribunal concluded that such reimbursements cannot be treated as income chargeable to tax.
Key Issues
Whether reimbursement of expenses without markup from an Indian AE to a foreign AE is taxable as Royalty and Management Fees under the India-Denmark DTAA.
Sections Cited
92CA, 13
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY&
O R D E R
Per Padmavathy S, AM:
This appeal by the Revenue and the C.O. of the assessee are against the order of Commissioner of Income Tax (Appeals)-56, Mumbai [in short "the CIT(A)]" dated 08.01.2024 for the AY 2014-15. The Revenue raised following grounds of appeal:
“1. Whether on the facts and circumstances of the case and in law, the Ld CIT(A) erred in deleting the addition made by the A.O on account of reimbursement of expenses of Rs.3,89,32,214/- relying on judgment of Hon'ble Karnataka High Court in the case of CIT Vs UE Development India Pt Ltd- and 55/2014.
2. Whether on the facts and circumstances of the case and in law, the Ld CIT(A) erred in deleting the addition made by the A.O on account of reimbursement of expenses of Rs.3,89,32,214/- without considering the fact that the assessee has received the said amount from its Indian A.E. on account of rendering of services from the third party which were of the nature of FTS and are taxable in India.”
The assessee is a company incorporated under the laws of Denmark and is a resident of Denmark of taxation purposes. The assessee filed the return of income for AY 2014-15 on 29.11.2014 declaring a total income of Rs. 32,80,91,490/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had international transactions with its Associated Enterprises (AE) a reference was made to the Transfer Pricing Officer (TPO) under section 92CA of the Income Tax Act (the Act) to determine the Arm's Length Price (ALP) of the international transactions reported by the assessee. The TPO passed the order under section 92CA(3) dated 30.10.2017 without finding any variation to the value of international transaction with AE with respect to ALP. The Assessing Officer (AO) during the assessment proceedings, noticed that the assessee has received Rs. 3,89,32,214/- as reimbursement of expenses without mark up. The AO called on the assessee to show-cause as to why the reimbursement of expenses should not be taken as part of income of the assessee. The assessee submitted that the legal and other advisory expenses incurred by the assessee on behalf of its AE ISS Facility (India) and the same are reimbursed on a cost to cost basis. The assessee further submitted that there is no element of any provision of services by the assessee nor any intention of providing any direct or proximate benefit to either of the parties. Accordingly the assessee submitted that the amount reimbursed cannot be treated as income of the assessee. The AO did not accept the submissions of the assessee and held that the amount received is to be treated as Royalty and Management fee which is subject to tax as per Article 13 of the DTAA between India and Denmark. The AO accordingly made the addition of Rs. 3,89,32,214/- to the income returned by the assessee. The relevant observations of the AO in this regard are extracted below:
“5.2 The reply of the assessee is perused. On inspection of Annexure 1 to letter dated 30/11/2017 and enclosed invoice as well as from the explanations of the assessee, it is clear that the expenses incurred by the assessee company are not for employees of the associated companies. The services that assessee has provided, through other professionals, to associated enterprise are in nature Legal and Professional advice. The extract of details of the reimbursement of expenses being the major part are as under: Expense Head 1 Expense Head 2 Nature Amount Other Expenses Legal and External Consulting 85998 Professional Charges Other Expenses Legal and FMS@ISS June 2013 196570 Professional Charges
Other Expenses Legal and KPMG debit Note 75711 Professional DKK 6655 Charges Other Expenses Legal and Other HR and 215351 Professional Personnel Charges Management Expenses Other Expenses Miscellaneous Professional Fee - 31690601 Expenses Kroll Other Expenses Legal and Exp regarding 2966144 Professional Project HIGH Inv Charges raised by Global Other Expenses Legal and Global Signage 444594 Professional Project Charges Total 35674969
5.3 It is apparent from above that out of total reimbursement of Rs. 3,89,32,214/- the major part of reimbursements are Legal and Professional Fees i.e. Rs. 3,56,74,969/-. Thus though assessee has termed the receipts as reimbursement of expenses and claimed without mark up, that itself will not change the nature of receipt or services rendered. The basic nature of receipt for which payment is received by the assessee is "Fee for Legal and Professional Services". It is also undisputed fact that the Indian Entity has paid for expenses in consideration of services received that are in nature of "Legal and Professional Services" Therefore as per Article 13 of DTAA with Denmark, same is taxable in India. ****** 5.4 It is observed from the supporting invoice of Kroll Advisory Solutions - Kroll Associates (India) Private Ltd. for Rs. 3,16,90,601/- is for rendering of Legal Services. Further in the annexure to invoice raised by assessee same is termed as Legal and Professional Expenses. Therefore, the nature of receipt by assessee is for providing Legal consultancy service to Indian entity. 5.5 Therefore, based on the above facts and discussion, the claim of the assessee for reimbursement of expenses of Rs. 3,89,32,214/- is hereby rejected. Thus, the same is added to the total income of the assessee as being Royalty & Management Fees and the said amount is subject to tax in India as per Article 13 of the DTAA @ 20% (plus surcharge and education cess) of value of service.”
Aggrieved assessee filed further appeal before the CIT(A). The CIT(A) deleted the addition made by the AO on the ground that the TPO of ISS India had not made any TP adjustment in respect of the international-transaction pertaining to reimbursement of expenses and once the transaction was accepted to be at ALP in the hands of Indian AE i.e. ISS India, there ought not be any adjustment in the hands of non-resident assessee. The revenue is in appeal against the order of the CIT(A).
We notice that there is a defect memo stating that the appeal is time barred by 26 days and that the Revenue has not filed any petition for condonation of delay. When queried by the Bench, the ld. DR submitted that the date of service of order of CIT(A) has been erroneously mentioned in Form-36 as 08.01.2024 whereas the actual receipt of the CIT(A)'s order is on 06.02.2024. The ld. DR submitted the copy of the order of CIT(A) bearing the stamp with the date of service of the order as 06.02.2024 to substantiate the above claim. On perusal of the material submitted by the ld. DR, we see merit in the submission that there is no delay in filing the appeal by the Revenue and accordingly there is no requirement of condoning the delay. The appeal is admitted thus for adjudication.
The ld. DR submitted that the nature of service as per assessee's own submission is legal and professional charges and therefore as per Article 13 of the DTAA between India and Denmark the same should be treated as Royalty and Management Fees. The ld. DR argued that the CIT(A) has not examined the claim of the assessee that the receipt is in the nature of reimbursement and has allowed the appeal for the reason that the ALP of the transaction is accepted in the hands of the payer. The ld. DR therefore, argued that the impugned transactions have not beeen properly scrutinized by the CIT(A) before allowing the appeal in favour of the assessee. The ld. DR also submitted that the assessee has not declared the reimbursement as international transaction in Form 3CEB and therefore the TPO has also not examined the impugned transactions. Accordingly, the ld. DR submitted that the claim of the assessee that the addition made by the AO towards reimbursement cannot be accepted without examining the facts.
The ld. AR on the other hand argued that the AO has not disputed the fact that the amount received by the assessee is a reimbursement. The ld. AR further argued that even the fact that the reimbursement is on cost to cost basis is also not disputed by the AO. The ld. AR in this regard drew our attention to para 5.2 and 5.3 of the AO's order (as extracted in the earlier part of this order). Therefore, the ld. AR argued that once the impugned transaction is accepted as a reimbursement without any profit element then the same cannot be treated as income in the hands of the assessee. The ld. AR in this regard placed reliance on the decision of the Hon'ble Supreme Court in the case of DIT vs. A. P.Moller Maersk A S [2017] 78 taxmann.com 287 (SC).
We heard the parties and perused the material on records. During the year under consideration, the assessee has received a sum of Rs. 3,89,32,214/- as reimbursement from its Indian AE towards legal and professional charges. The AO treated the said reimbursement as Royalty and Management under Article 13 of the DTAA between India and Denmark and made addition towards the same. The CIT(A) deleted the addition on the ground that the ALP is accepted in the hands of the payer and therefore no addition can be made in the hands of the assessee.
From the perusal of the findings of the AO as extracted in the earlier part of this order, we notice that the AO has not disputed the claim of the assessee that the impugned payments are in the nature of reimbursements and that it is without mark up. It is also noticed that the AO has observed that the invoice raised by the assessee is supported by the invoice of 3rd party namely Kroll Advisory Solutions – Kroll Associate India Pvt. Ltd. towards rendering of legal services. From these facts, it is clear that the AO himself has given a clear finding that legal and professional services are rendered by the 3rd party and not by the assessee and the nature of payment is a reimbursement. The Hon'ble Supreme Court in the case of A.P. Moller Maersk A S (supra) while considering the applicability Article 13 of DTAA between India and Denmark in the case of a transaction accepted as reimbursement held that – “11. Aforesaid are the findings of facts. It is clearly held that no technical services are provided by the assessee to the agents. Once these are accepted, by no stretch of imagination, payments made by the agents can be treated as fee for technical service. It is in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. It is re-emphasized that neither the AO nor the CIT (A) Ins stated that there was any profit element embedded in the payments received by the assessee from its agents in India. Record shows that the assessee had given the calculations of the total costs and pro rata division thereof among the agents for reimbursement. Not only that, the assessee have even submitted before the Transfer Pricing Officer that these payments were reimbursement in the hands of the assessee and the reimbursement was accepted as such at arm's length. Once the character of the payment is found to be in the nature of reimbursement of the expenses, it cannot be income chargeable to tax.” (emphasis supplied) 9. In assessee's case also the revenue has not disputed the nature of payment as reimbursement of expenses without any markup and therefore applying the ratio laid down by the Hon'ble Supreme Court in the above case, we are of the considered view that the impugned amount cannot be treated as income chargeable to tax in the hands of the assessee. Accordingly, we hold that the AO is not correct in making the addition treating the reimbursement as income under Article 13 of DTAA between India and Denmark.
In the C.O. the assessee has raised the legal issue that the final assessment order of the AO is barred by limitation by placing reliance on the decision of the Hon'ble Madras High Court in the case of CIT vs. Roca Bathroom Products (P) Ltd. (2022) 445 ITR 537 (Mad.). In view of our decision with regard to the appeal filed by the Revenue, the C.O. of the assessee has become infructuous and dismissed accordingly.
In result the appeal of the Revenue and the C.O. of the assessee are dismissed.
Order pronounced in the open court on 07 -01-2025.