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Income Tax Appellate Tribunal, MUMBAI BENCH “I”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI G. MANJUNATHA, HONBLEShri J. D. Mishtry & Shri Niraj Sheth Shri V. Sreekar
O R D E R PER C.N. PRASAD (JM) 1. This appeal is filed by the assessee against the directions of the Dispute Resolution Panel – 1(WZ), Mumbai [hereinafter in short “DRP”] dated 29.06.2018 passed u/s. 144C(5) of the Act.
Assessee in its appeal has raised following grounds: - 1:0 Re.: Treating the reimbursement of the expenses as income for the year -Rs. 49,68,247/-:
(A.Y: 2015-16) Gemological Institute International, Inc 1:1 The Assessing Officer/ the Dispute Resolution Panel has erred in treating the travel expenses reimbursed to the Appellant by 'GIA India Laboratory P. Ltd.' as the income of the Appellant for the year. 1:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the travel amounts reimbursed to it cannot be treated as its income and the stand taken by the Assessing Officer / the Dispute Resolution Panel in this regard is illegal, incorrect, erroneous and misconceived. 1:3 The Appellant submits the Assessing Officer be directed to delete the addition so made by him and to re-compute its total income accordingly. 2:0 Re.: Lew of surcharge and education cess: 2:1 The Assessing Officer has erred in levying surcharge and education cess on the Appellant. 2:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject no surcharge and education cess is leviable and the stand taken by the Assessing Officer in this regard is misconceived, incorrect, erroneous and illegal. 2:3 The Appellant submits that the Assessing Officer be directed to delete the surcharge and education cess so levied on it and to re- compute its tax liability accordingly.”
Learned Senior Advocate Shri J.D. Mistry appearing for the assessee submits that the issue in Ground No.1 of grounds of appeal is relating to the action of the Assessing Officer in treating the travel expenses reimbursed to the assessee by GIA India Laboratory Pvt. Ltd., as income of the assessee, and this issue has been decided in favour of the assessee by the Coordinate Benches of the Tribunal in assessee’s own case for the A.Ys. 2009-10 to 2014-15 in ITA.No. 2310/Mum/2017 dated 20.11.2018 and ITA.No. 6556/Mum/2017 dated 20.06.2018. Copies of the orders were placed on record.
(A.Y: 2015-16) Gemological Institute International, Inc 4. Ld. DR strongly supported the orders of the DRP as well as the Assessing Officer. Supporting the orders of the DRP, the Ld. DR submits that agreement should be read as a whole and cannot be segregated. Ld. DR submits that the decision of the Tribunal for the A.Y. 2009-10 is distinguishable as the facts for the A.Y. 2009-10 suggests purely reimbursement and no technical services were involved. However, this year there is element of technical services involved and therefore the said decision cannot be applied for this year.
We have heard the rival submissions, perused the orders of the authorities below and the case laws relied on. On a careful perusal of the order of the TPO as well as the DRP and the order of the Coordinate Bench for the earlier assessment years, we find that the issue and facts are identical to this year and the Coordinate Bench for the immediately preceding assessment year i.e. A.Y. 2014-15 in ITA.No. 6556/Mum/2017 dated 20.06.2018 held that the fee for technical services is different from the expenses incurred on third party cost and there is a clear bifurcation in the agreement between the internal cost incurred and external cost paid by the assessee on behalf of GIA India Laboratory Pvt. Ltd. The Tribunal applying the ratio of the decision of the Hon'ble Supreme Court in the case of DIT v. A.P. Moller Maersk [392 ITR 186] held that amount (A.Y: 2015-16) Gemological Institute International, Inc received towards reimbursement of cost cannot be taxed in the hands of the assessee. While holding so the Tribunal observed as under: - “7. We have considered rival submissions and perused materials on record. Undisputedly, the assessee has entered into a training and technical service agreement with GIA India on 1st November 2008, for training the employees of GIA India and providing technical services for the implementation of grading policies, procedures and processes. It is also not disputed that in pursuance of such agreement, the assessee has raised separate debit notes for fee for training and technical services and towards reimbursement of certain costs like travel expenses, meals, etc. While it is the claim of the assessee that the reimbursement of cost of travel and meals by GIA India is on actual basis without any profit element, hence, not to be included in the income, it is the stand of the Department that there is no scope for bifurcation of the amount received by the assessee under the agreement, as it has to be taxed on gross basis as fee for technical services. There is no dispute that the agreement under which the assessee has received the disputed amount is continuing from assessment year 2009–10. While deciding identical dispute in assessee’s own case for assessment year 2009–10 and 2011–12, in ITA no.4659/Mum./2014 and ITA no.385/Mum./2016, dated 9th May 2017, the Tribunal has held as under:– “8. We have gone through the orders passed by the lower authorities and arguments made before us by both the sides.
9. The brief facts are that the assessee company incorporated in USA is engaged in grading and certification of diamonds. GIA India, (i.e. the company incorporated in India) entered into an agreement with the assessee company for availing training and technical services. The terms regarding payment of fee and reimbursement of expenses read as under:- “1.2 Fees and Payment Terms for Training and Technical Services. Customer will pay Service Provider the costs incurred by the Service Provider to employ the individuals(s) performing the training or technical service plus a markup of six and one-half percent (6.5%). Service Provider will invoice Customer the fees due for the services and Customer will pay such invoices within forty-five(45) days after receipt of the invoice. Such invoices may be monthly or quarterly as specified by Service Provider.
(A.Y: 2015-16) Gemological Institute International, Inc 1.3. Reimbursement of Third Party Costs Customer will reimburse Service Provider for (i) fees paid by Service Provider to third party service providers, advisors and consultants in connection with or related to the performance of the services rendered under the Agreement, including without limitations accountants, attorneys, marketing consultants and agencies and information technology service providers, etc) and (ii) software, materials and items paid for by service Provider in connection with or related to the performance of the Services (collective, (i) and (ii) are referred to as “Third Party Costs”). If Third Party Costs are incurred by Service Provider for the benefit of Customer and other customers, then Service Provider will allocate the Third Party Costs between and among Customer and such other customers in a manner determined by Service Provider in its sole discretion. Service Provider will invoice Customer the third Party Costs and Customer will pay such invoices within forty-five(45) days after receipt of the invoice. Such invoices may be monthly or quarterly as specified by Service Provider.”
10. Thus, from the perusal of the above, it may be noted that assessee offered to tax only the amount of fee received for providing training and technical services and amount of expenses received by way of reimbursement on cost to cost basis were not shown as taxable in the hands of the assessee. The AO was of the view that whole of the amount including the amount reimbursed aggregating to Rs.1,26,09,523 should also be included as fees in the hands of the assessee.
We have carefully considered the orders passed by the lower authorities and we do not agree with the stand adopted by the lower authorities. It may be noted from the perusal of the terms of the agreement which are reproduced above that assessee was entitled to receive by way of fee only the amount incurred by way of cost to „employ‟ the individuals plus mark-up of 6.5%. Clearly speaking, the expression cost to „employ‟ individuals is different from the expression cost incurred to „depute‟ a person. The cost of employment would clearly mean and include only internal costs as are incurred by an organisation to employ an individual in the organisation. Any cost incurred over and above that to depute the individual for a particular assignment which is not internal assignment of the assessee would be additional cost. Thus, in the case before us, costs and expenses incurred by the assessee on travel and insurance etc on the persons deputed in India for providing training and technical services to GIA India was in the nature of cost incurred over and above the cost of employment. This interpretation is further re-enforced when we read the next clause, i.e. clause 1.3 which says that GIA India shall reimburse to the assessee any expenses incurred (A.Y: 2015-16) Gemological Institute International, Inc on account of thirty party costs. The drafting of the agreement and manner of placements the clauses in the agreement clearly make out a case that FTS is different from the expenses incurred on third party costs. Thus, there is a clear bifurcation in the agreement between the internal cost incurred by the assessee and external cost borne or paid by the assessee on behalf of GIA India. In our mind, there is no confusion in this regard and the lower authorities have unnecessarily made an issue out of that.
12. With regard to the taxability of FTS on gross basis, it has been fairly admitted by the Ld. Counsel of the assessee that there is no dispute on the proposition that FTS has to be taxed on gross basis. However, the issue that arise here for our consideration is whether the expenses incurred on cost to cost basis will also be included in the amount of FTS. We find that this controversy has now been put to rest by Hon‟ble Supreme Court by way of its latest judgment in the case of DIT vs A.P. Moller Maersk 392 ITR 186 (SC). Relevant part of the judgement is reproduced hereunder:- “10. The facts which emerge on record are that the assessee is having its IT System, which is called the Maersk Net. As the assessee is in the business of shipping, chartering and related business, it has appointed agents in various countries for booking of cargo and servicing customers in those countries, preparing documentation etc. through these agents. Aforementioned three agents are appointed in India for the said purpose. All these agents of the assessee, including the three agents in India, used the Maersk Net System. This system is a facility which enables the agents to access several information like tracking of cargo of a customer, transportation schedule, customer information, documentation system and several other informations. For the sake of convenience of all these agents, a centralised system is maintained so that agents are not required to have the same system at their places to avoid unnecessary cost. The system comprises of booking and communication software, hardware and a data communications network. The system is, thus, integral part of the international shipping business of the assessee and runs on a combination of mainframe and non-mainframe servers located in Denmark. Expenditure which is incurred for running this business is shared by all the agents. In this manner, the systems enable the agents to coordinate cargos and ports of call for its fleet.
(A.Y: 2015-16) Gemological Institute International, Inc 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 reemphasised that neither the AO nor the CIT(A) has 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 in bold) Thus, from the above judgement it is clear that the amount received by the assessee on account of reimbursement which has been received over and above the amount of FTS cannot be included and taxed as part of FTS. Our attention has been drawn on the Transfer Pricing Study report and Transfer Pricing orders passed in the case of GIA India from where it can be made out that no profit element has been included in the expenses reimbursed. Thus, taking into account the totality of facts and circumstances of the case, we find that addition made by the AO is contrary to facts and therefore, is directed to be deleted.”
On a careful reading of the order of the Co–ordinate Bench reproduced herein above, it is evident that the Tribunal after analyzing the different terms of the agreement and examining the facts on record have recorded a factual finding that the agreement clearly envisages that fee for technical services is different from the expenses incurred on third party cost. Further, it has recorded a finding of fact that there is a clear bifurcation in the agreement between the internal cost incurred by the assessee and external cost borne or paid by the assessee on behalf of GIA India. Thus, on the basis of aforesaid facts, the Tribunal has applied the ratio laid down by the Hon'ble Supreme Court in case of DIT v/s A.P. Moller Maersk, 392 ITR 186 (SC) and held that the amount received towards reimbursement of cost cannot be taxed at the hands of the assessee.
(A.Y: 2015-16) Gemological Institute International, Inc Therefore, the observation of the learned DRP that Tribunal has not addressed the issue is baseless.
9. The learned Departmental Representative has not been able to convince us that there is any difference in facts as involved in the impugned assessment year and assessment years 2009–10 and 2011– 12 on the basis of which the Tribunal has decided the issue. The correctness of the decision rendered by the Tribunal is subject to judicial scrutiny before the higher Appellate Court and the aggrieved party, which is the Department in the present case, has every right to challenge the decision of the Tribunal before the Higher Appellate Court. However, unless and until the decision of the Tribunal is reversed or set aside by the higher Appellate Court, it is not only binding on the subordinate authorities but judicial discipline demands that it should be followed by the other Benches of the Tribunal. More so, if such decision is rendered in assessee’s own case and under identical facts and circumstances. In view of the aforesaid, considering the fact that the Co–ordinate Bench has decided the disputed issue in favour of the assessee in A.Y. 2009– 10 and 2011–12 as referred to above, respectfully following the same we delete the addition of ₹.15,43,815 made by the Assessing Officer. Ground raised is allowed.”
Thus, respectfully following the said decision, we delete the addition of ₹.49,68,247/- made by the Assessing Officer. This ground is allowed.
Coming to Ground No.2 of grounds of appeal
, the Ld. Senior counsel submits that once the DTAA rates are applied education cess and surcharge cannot be levied separately. Ld. Counsel for the assessee submits that the rate applied as per DTAA is inclusive of education cess and surcharge. Reliance was placed on the following decisions: - (i) M/s. Epcos Electronic Components S.A v. Union of India & Others in W.P. (C) 10417/2018 dated 10.07.2019. (ii) Soregam SA v. DDIT [101 taxmann.com
94. (Delhi-Trib)] (iii) R.A.K. Ceremics, UAE v. DDIT [104 taxmann.com 380 (Hyd-Trib)] (iv) Parke Davis and Company LLC v. ACIT [41 taxmann.com 193 (Mum-Trib)] (v) Sunil V. Motiani v. ITO [33 taxmann.com 252 (Mum-Trib)]
(A.Y: 2015-16) Gemological Institute International, Inc 8. Ld. DR vehemently supported the orders of the DRP.
We have heard the rival submissions, perused the orders of the authorities below and the case laws relied on. The short point to be decided is whether the levy of surcharge and education cess is permissible when once the tax rate is applied as per the DTAA, and, we find that the issue is squarely covered by the decisions relied by the Ld. Senior counsel. In the case of Sunil V. Motiani v. ITO (supra), the Mumbai Bench of the Tribunal held as under: - “5. We have perused the records and considered the matter carefully. There is no dispute that the assessee is a non resident based in UAE. There is also no dispute that the assessee had received gross interest of Rs.7,55,187/- from the Indian firms in which he was a partner. The interest income is no doubt taxable as the same had arisen from the sources in India. However there is Double Taxation Avoidance Agreement (DTAA) between India and UAE and, therefore, tax has to be computed under the provisions of DTAA which is beneficial to the assessee. There are specific Articles in DTAA dealing with taxation of income under different heads. The business profit is governed by Article-7 whereas interest income by Article-11. Under para-7 of Article-7 where business profit includes items of income which are dealt with separately in any other Article of the agreement, provisions of those Articles should not be affected by the provisions of this Article. In other words, in case there is provision for dealing with a particular type of income, such type of income has to be dealt with by those provisions. Therefore, though interest income may have been assessed as business income, there being specific Article to deal with interest income i.e. Article-11, taxation of interest will be governed by the said Article-11. Secondly interest income may be taxed in contracting State in which it arises, according to law of that State but if the recipient is beneficial owner of interest, tax so charged shall not exceed 5% of gross interest if the interest is received from bank and in other cases 12.5% of gross amount of interest. In this case, the assessee is the beneficial owner of interest and tax charged cannot exceed 12.5% of gross interest.
(A.Y: 2015-16) Gemological Institute International, Inc Tax has been defined in Article-2(2)(b) as per which income tax included surcharge. Therefore, tax referred to in Article 11(2) @ 12.5% also includes surcharge. Further, nature of education cess and surcharge being same as held by the Tribunal in the case of DIC Asia Pacific Pte Ltd.(supra), in our view education cess and surcharge cannot be levied separately and will be included in tax rate of 12.5%. The judgment of Hon’ble High Court of Uttarakhand in the case of Arthusa Offshore Co. (supra), is not applicable to the facts of the present case as the Hon'ble High Court was concerned with taxability of income under Article 14(2) of the DTA between India and USA. The Hon'ble High Court was not concerned with interpretation of tax payable on interest income under DTAA. The judgment of AAR in the case of Airports Authoritiy of India, IN RE (supra), is also distinguishable as in that the court was concerned with taxability of business income and it was held that under Article 5(3) of DTAA with USA, preparatory and auxiliary type of work was excluded from the purview of PE and therefore, there being no PE it was held that income from software maintenance was liable to be taxed in India. The high Court was not concerned with taxability of interest income as per the treaty. 5.1 In view of the fore-going discussion, we hold that tax payable @ 12.5% under Article 11(2) of FTAA is inclusive of surcharge and education cess. We, therefore, set aside the order of CIT(A) and allow the claim of the assessee.”
We also find that the Hon'ble Delhi High Court in the case of M/s. Epcos Electronic Components S.A. v. Union of India & Ors. (supra) held as under: - “20. The Petitioner has sought a clarification regarding the erroneous payment of the surcharge. Indeed the Court finds that the payment of tax on FTS under the DTAA included surcharge and cess etc. There was no requirement that once the tax rate at the appropriate slab was paid, to separately pay the surcharge and cess. 21. For the aforementioned reasons, the Court quashes the impugned order passed by the Respondent No.2 and directs the Respondents to permit the Assesee to rectify its return by paying tax on FTS at 10%. The excess amount of tax, including the surcharge
(A.Y: 2015-16) Gemological Institute International, Inc and cess paid shall be refunded to the Petitioner along with the interest due thereon, not later than eight weeks from today.”
11. Thus, respectfully following the above said decisions, we direct the Assessing Officer to delete the education cess and surcharge levied on the assessee. This ground is allowed.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on the 19th February, 2020