ACIT (E), NEW DELHI vs. M/S APCO WORLDWIDE INDIA PVT. LTD.,, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: Bench ‘F’, NEW DELHI

BEFORE SMT. BEENA A PILLAI, JUDICIAL MEMBER AND Dr. B.R.R. KUMAR, ACCOUNTANT MEMBER

ITA No. 205/Del/2016 A.Y. 2010-11

Dy.CIT, Circle 3(1) vs. APCO Worldwide (India) Pvt.Ltd. New Delhi 64, 2nd Floor, Okhla Industrial Area Phase III New Delhi 110 020

PAN: AAFCA8835M

A N D ITA No. 1256/Del/2016 A.Y. 2011-12 ACIT (E), Circle 1(1) vs. APCO Worldwide (India) Pvt.Ltd. New Delhi 252, 2nd Floor, Okhla Industrial Area Phase III New Delhi 110 020

PAN: AAFCA8835M (Appellant) (Respondent)

Dept. by Sh. Surender Pal, Sr.D.R.

Assessee by Sh. Ajay Vohra, Sr.Adv. & Sh. Karan Jain, C.A. Date of Hearing 03/01/2019 Date of Pronouncement 03/01/2019

ORDER PER BEENA A PILLAI, JUDICIAL MEMBER Present appeals have been filed by revenue against order dated 13/10/15 passed by Ld.CIT(A)-1, New Delhi, for AY 2010- 11 and order dated 27/01/2016 for A.Y. 2011-12, on following grounds of appeal:

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. ITA 205/Del/16 AY 2010-11 “1. On the fact and the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition made by the A.O. amounting to Rs.1,76,41,309/- on account of disallowance of expenses u/s 40(a)(ia) of Income Tax Act, 1961. 2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”

ITA 1256/Del/16 AY 2011-12 1. On the fact and the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition made by the A.O. amounting to Rs.1,45,99,745/- on account of disallowance of expenses u/s 40(a)(ia) of Income Tax Act, 1961. 2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. During the assessment proceedings Ld.AO observed that assessee claimed expenses of Rs.1,76,41,309/-on account of book charges under the head ‘ administrative and other expenses’. Accordingly, Ld.AO called upon assessee to show cause as to why group charges should not be disallowed for non- deduction of TDS. After considering submissions of assessee, Ld.AO was of the opinion that, assessee was required to deduct tax at source under section 195 of the Act, for payments made to non-resident, and accordingly, made disallowance of Rs.1,76,41,309/-under section 40 (a) (i) of the Act. 3. Aggrieved by addition made by Ld.AO, assessee preferred appeal before Ld.CIT(A), who allowed claim of assessee, by observing as under: “I have considered the submission of the appellant and observations made by the Assessing Officer. It is seen that during the year under consideration appellant made payment to various overseas group entities towards reimbursement of actual cost incurred on various corporate, administration, finance support, human resources, marketing and legal support functions. The details of the expenses reimbursed to the overseas group entities are as under: Entity Name Corporate Charges Professional / Legal Total (in Rs.) (in Rs.) Services (in Rs.) APCO Hong Kong 10,826,197 - 10,826,197 APCO US 3,890,695 1,972,031 5,862,726 APCO UK 460,933 491,451 952,384 Total 17,641,307

It is submitted by the appellant that overseas group entities had provided administrative support services, financial support services, information technology services, human resources

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. support system and marketing support services to the appellant company in India. The nature of services provided by the overseas group entities on each spare of activities are summarized hereunder: Administrative support services: These services involve - providing strategic direction, communication and vision to APCO India, assisting APCO India in development and coordination of strategic business planning activities and ensuring that the same is aligned to the global business strategy, supporting in APCO India’s business development efforts (through support in client development and research, evaluation of new business initiatives, participation in boards, councils of external organizations that assist in maintaining APCO’s profile in the business community, including India, etc). Finance support services: The services involve oversight of - financial and business management functions, treasury, local audit, global/ regional consolidation and reporting, etc. for APCO India. In addition, financial support services also include assistance in developing financial strategy for APCO group and providing guidance on various financial matters relating to APCO India (including establishing and documenting uniform finance policies and procedures, global transfer pricing policies, banking relationships etc.) to ensure alignment with global financial strategies. Information Technology: These services involve - management of data and IT network required by APCO India, undertaking data/ server back-up procedures, new joiner IT related induction, assistance in centralized procurement of

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. software, desktop, server hardware built and related maintenance services as per APCO Group standards, management of IT relationships with 3rd party software and hardware providers, support in uninterrupted remote access to APCO systems, resolving e-mail issues and Microsoft Office issues, etc. Human Resources support: These services involve - development of various employee strategies/ policies to address large-scale organizational issues, such as succession planning, workforce planning, benefit plan design, training programs, recruitment processes. In addition, HR support services include support in addressing issues relating to employee performance, misconduct or restructuring, conducting centralized trainings on employee policies and HR tools to ensure uniformity in approach followed by APCO group entities worldwide (including APCO India). Marketing support services: These services involve - assistance in tracking and analyzing new business opportunities for APCO India, developing and placing articles with trade and other publications, assistance in responding to media enquiries, supporting APCO India in client proposals and presentations, assistance in developing marketing materials and advertisement for enhancing the business opportunities available to APCO group entities worldwide (including APCO India).” The cost incurred in providing above-mentioned services by the overseas group entities of the appellant company are allocated across all APCO group companies worldwide including the appellant on an agreed cost allocation basis on cost to cost basis and these services have been taken on the basis of corporate service agreement with the overseas group entities. The copy of the

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. said agreement is filed at Annexure 4 page 19- 32 of the paper book. The appellant submitted that these reimbursements have been made to group entities situated at APCO Hongkong, APCO U.S. and APCO U.K. The appellant has filed tax residency certificate of APCO U.K. and APCO U.S. as Annexure 5 to the paper book page 33-34 and as per these certificates, APCO U.S. is a corporation having tax residency at United States of America for taxation purposes. Similarly, APCO U.K. has tax residency of U.K. and subject to taxation in U.K. It is also submitted by the appellant that APCO U.S., APCO U.K. to whom reimbursement of expenses have been made as mentioned above do not constitute any permanent establishment in India as contemplated under Article 5 of Indo-U.S., India-U.K. Double Taxation Avoidance Certificate. APCO Hongkong has filed no business connection certificate before me which is filed at page 39 of the paper book. The no permanent establishment declaration provided by APCO U.S., APCO U.K. has been filed by the appellant as per Annexure 6 to page 35-38 of the paper book. The appellant submitted that the payment made to the overseas group reimbursement of expenses and no income element is involved in the same. These payments have been made to the group entities towards professional, legal and corporate charges on cost to cost basis and there is no mark up involved. The appellant submitted that there is no income element embedded in the aforesaid reimbursement of expenses. The appellant has filed copy of Form 15CA & CB in the paper book filed on 12.10.2015 wherein the payments remitted to the group entities are reflected. It is also seen that the reimbursement made to overseas group

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. entities has been made in the consolidated manner which is pertaining to the previous year as well as for the assessment year under consideration. The appellant has also filed reconciliation of the reimbursement made with the respective party ledger account filed in the paper book dated October 12, 2015. The same has been found to be in order. As discussed above, the appellant has filed tax residency certificate of APCO U.S., APCO U.K. The appellant has also filed certificate from APCO U.S., APCO U.K. stating that they do not constitute any permanent establishment in India as contemplated under Article 5 of Indo-U.S., Indo-U.K. DTAA u/s 9(1 )(i). The APCO Hongkong has filed a certificate of no business connection which is placed on record. Therefore, the provisions of Section 195(2) are not applicable in the case of appellant. As per the provisions of Income Tax Act, tax is levied only on such receipts which constitute income in the hands of the non-resident. The reimbursement of expenses on cost to cost basis to the overseas entities do not constitute any income, therefore, the provisions of Section 195(2) are not applicable in the case of appellant and there was no requirement of withholding tax on such reimbursement of expenses. Hence, the disallowance of the reimbursement made by the AO of the reimbursement expenses was not justified and the disallowance of Rs.1,76,41,309/- made by the AO is deleted. In support of my decision, reliance is placed on the decision of Hon'ble Delhi High Court in the case of DLF Commercial Project Corporation Vs. CIT-XI ITA No.627/2012 and ITA No.507/2013: “19. In the instant case, it is undisputed that M/s DLF Land Ltd. had deducted TDS on the payments made by it under various

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. heads on behalf of the assessee. Further, it is also not disputed that the assessee deducted TDS on the service charge paid by it to M/s DLF Land Ltd. on the reimbursement expenses. In such circumstances, this Court holds that the entire amount paid by the assessee to M/s DLF Land Ltd. is entitled to deduction as expenditure. 20. In arriving at the aforesaid conclusion, this Court derives support from the Gujarat High Courts decision in Commissioner of Income Tax-Ill v. Gujarat Narmada Valley Fertilizers Co. Ltd. (in Tax Appeal No. 315 of 2013, decided on 25.06.2013), where the facts were similar to those in the present case. The Court therein rejected the revenues contention that non- deduction of TDS on reimbursement expenses would lead to disallowance of such reimbursement expenditure. The Court noted that the payee therein had already deducted tax on the various payments made by it to third parties (such as towards transport charges and other charges). Since the payments made by the assessee therein were only for the reimbursement of expenses incurred by the payee on behalf of the assessee, the Court held that no TDS was required to be deducted by the assessee. A special leave petition preferred by the revenue against the High Courts decision was dismissed by the Supreme Court on 17.01.2014 (in SLC CC No. 175 of 2014). This court is also supported in its reasoning by the text of Section 194C (TDS for "work”) and Section 194J (TDS of income from "professional services"- the latter expression defined expansively by Section 194J (3) Explanation (a)). Neither provision obliges the person making the payment to deduct anything from contractual

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. payments such as those made for reimbursement of ITA 627/2012 & 507/2013 Page 11 expenses, other than what is defined as "income". The law thus obliges only amounts which fulfil the character of "income" to be subject to TDS in such cases; for other payments towards expenses, the deduction to those entitled (to be made by the payeee) the obligation to carry out TDS is upon the recipient or payee of the amounts. 21. The facts of this case are identical to those in Gujarat Narmada Valley (supra) and for the reasons stated above, this Court does not find any compelling ground to arrive at a different conclusion. Thus, the ITATs ruling in this regard is upheld.” 22. Lionbridge Technologies (P.) Ltd. v. Income-tax Officer (International Taxation) (TDS), 4 Mumbai [ 2015 ] 61 taxmann.com 335 (Mumbai - Trib.) in the ITAT MUMBAI BENCH 'L'

“Section 9, read with section 195, of the Income-tax Act, 1961, and article 7 of DTAA between India and USA - Income - Deemed to accrue or arise in India (Business profit) - Assessment year 2007-08 - Lionbridge US had entered into an agreement with another company (Microsoft) for purchase of standard off shelves software to be used by its group entities including assessee, an Indian company - Lionbridge US allocated cost of software amongst various group entities and no mark-up was charged and, accordingly, assessee had reimbursed its share of cost to Lionbridge US - Whether said reimbursement being not chargeable to tax in India, assessee was not required to withhold tax under section 195 - Held, yes [Para 7] [In favour of assessee]”. The facts of the above cited judicial pronouncements are identical with the facts of the appellant’s case, therefore, the ratio of the said judgments is squarely applicable in the case of appellant. Hence, the appellant was not required to deduct TDS

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. on the reimbursement of expenses made to the overseas associate concerns on cost to cost basis. The disallowance made by the Assessing Officer u/s 40(a)(ia) is accordingly deleted.

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. India and that, therefore, there was no need to deduct any tax at source. 7. We have perused the submissions advanced by both sides in the light of the records placed before us. 8. The entire basis of Ld.Sr.DR ‘s contention is that, if assessee makes payments to non-residents without deducting tax at source, section 195(2), would plug the loophole, as, the said section requires payer to make declaration before Assessing Officer (TDS) of payments made to non-residents. In other words, according to Ld.Sr. DR, section 195(2) is a provision, by which payer is required to inform Department of remittance made to a non-resident. 8.1. In our opinion section 195(1) uses expression "sum chargeable under the provisions of the Act", and section 195 uses the word 'payer' and not the word "assessee", ‘ Payer’ becomes assessee-in-default, only when he fails to fulfil statutory obligation under section 195(1). If payment does not contain any element of income, payer cannot be made liable. He cannot be declared to be an assessee-in-default. 8.2. When a payer remits amount to a non-resident out of India, he claims deduction or allowances under the Act for as an "expenditure". 8.3. From order passed by Ld.AO it is an admitted position that payment made by assessee represents its share of expenses incurred by the group companies on cost-to-cost basis. Ld. AO made addition only on the ground that assessee made certain payments to a non-resident without deducting TDS. Nowhere there is any material that has been brought on record by Ld.AO

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. to establish that payments made to non-resident involved an element of income which is chargeable to tax in India. 8.4. Hon’ble Supreme Court in Transmission Corpn. of A.P. Ltd.(supra) held that tax at source was liable to be deducted by the payer on gross amount, if such payment included in it, an amount, which was chargeable to tax in India. It was further held that, if the payer wanted to deduct tax at source not on gross amount but on lesser amount, on the footing that only a portion of the payment made represented "income chargeable to tax in India", then it was necessary for him to make an application under section 195(2) of the Act to Assessing Officer (TDS) and obtain his permission for deducting tax at source at lesser amount. In our considered opinion decision of Hon’ble Supreme Court in case of Transmission Corpn. of A.P. Ltd. (supra) is not applicable, as the facts are distinguishable. 8.5. It is observed that Coordinate bench of this Tribunal in assessee’s own case (supra), on this issue has held as under: “ 4. We have heard the ld. DR and perused the relevant material on record. There is no appearance from the side of the assessee despite notice. We are, therefore, proceeding to dispose of this appeal ex parte qua the assessee but on merits. It is an admitted position as emanating from the impugned order that the aforesaid payment made by the assessee represents its share in the expenses incurred by the group companies on cost to cost basis. No material has been brought on record by the ld. DR to demonstrate that it was not a reimbursement but a payment made with some mark-up having profit element. It is a settled legal position that when reimbursement of expenses is made which does

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. not include any mark up or profit element, there can be no question of taxing such amount in the hands of the recipient. Once a particular amount is not chargeable to tax in the hands of the non- resident recipient, the question of applicability of section 195 does not arise. Recently, the Hon’ble Supreme Court in DIT(I.T.) VS. A.P. Moller Maersk A/S (2017) 392 ITR 186 (SC) has held that once payment is in the nature of reimbursement of expenses, that is, it is a cost sharing arrangement, it cannot be income chargeable to tax in the hands of recipient. Similar view was earlier taken by the Hon’ble Bombay High Court in DIT VS. Wizcraft International Entertainment P. Ltd. (Bom) (2014) 364 ITR 227 (Bom) holding that payment by way of reimbursement of expenses is not taxable in India. In view of the fact that the amount paid by the assessee to non-residents is not chargeable to tax in their hands and, as such, the provisions of section 195 of the Act are not attracted, there can be no question of applying section 40(a)(i) for making disallowance in the hands of the assessee. We, therefore, uphold the impugned order and sustain the deletion of disallowance made in the assessment order. 9. Respectfully following the above, we do not find any infirmity in the order of Ld. CIT (A) and the same is upheld. Accordingly grounds raised by revenue stand dismissed. 10. In the result appeal filed by revenue for A.Y. 2010-11 stands dismissed. 11. ITA 1256/Del/16 for AY 2011-12 11.1. Ld.Counsel submitted that facts and circumstances in this appeal for A.Y. 2011-12 is similar to that in preceding A.Y. which is decided hereinabove. It has also been submitted that

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. the issue raised by Revenue is also regarding allowability of expenditure claimed by assessee, being the “Group Charges” paid. 11.2. Both parties reiterated the similar arguments advanced that have been reproduced hereinabove. 12. Considering the totality of facts and keeping in view that Revenue has not been able to bring out any distinct facts for year under consideration vis-a-vis immediately preceding A.Y. which has been decided here in above, we do not find it necessary to interfere with finding of Ld.CIT(A). 12.1. Accordingly ground raised by Revenue stand dismissed. 13. In the result Revenue appeal for AY 2011-12 stand dismissed. 14. In the result both the appeals by Revenue for AY 2010-11 and 2011-12 both stand dismissed. Order pronounced in the open court on 03rd January, 2019.

Sd/- Sd/-

(B.R.R. KUMAR) (BEENA A PILLAI) Accountant Member Judicial Member Dated: 03rd January, 2019.

 GMV

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd.

Copy of the Order forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard File

By Order

Asst. Registrar ITAT, Delhi Benches, New Delhi

ITA Nos. 205/Del/16 & 1256/Del/16 A.Y. 2010-11 and 2011-12 APCO Worldwide (India) Pvt.Ltd. Details S.No. Date 03.01.19 1 Draft dictated on Dragon 2 Draft placed before author 03.01.19 Draft proposed & placed before 03.01.19 3 the Second Member Draft discussed/approved by 4 Second Member Approved Draft comes to the Sr. 5 PS/PS 6 Kept for pronouncement 7. Order uploaded on 8 File sent to Bench Clerk Date on which the file goes to 9 Head Clerk 10 Date on which file goes to A.R. 11 Date of Dispatch of order