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Income Tax Appellate Tribunal, DELHI BENCH “A” New Delhi
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
Since the issues involved in both the appeals are common arising out of identical set of facts, therefore, both were heard together and are being disposed of by way of this consolidated order.
2 I.T.As. No.2935 & 2937/DEL/2013
We will first take up the appeal for the Assessment Year 2008-09, wherein the Revenue has raised sole ground which reads as under:-
“The ld. CIT (A) has erred in deleting the addition of Rs.81,49,561/- made by the Assessing Officer on account of reimbursement of repair charges.”
The brief facts are that assessee-company is a subsidiary of a foreign enterprise, Silicon Graphics Inc. USA (SGI). It is a reseller of silicon products and it imports computer hardware and software from its AE and sells it to its customers in India. The assessee also undertakes warranty and post warranty maintenance services for SGI products in India and in addition to that, it also provides consultancy to its AE. The Assessing Officer from the perusal of the Form 3CEB noted that assessee has made payment of Rs.81,49,561/- to its AE on account of reimbursement of repair charges. The assessee was required to explain the nature of such reimbursement and also to produce documentary evidence in support of its claim. In response the assessee had stated as under:-
“This represents the actual cost of spare parts required by the assessee to render repair services of hardware machines of its customers. It is respectfully submitted that the assessee company requires spare parts for rendering repair services of hardware machines of its customers under the terms of independent contracts entered by the assessee with its customers. For procuring the said spare parts the assessee has entered into agreement with its parent entity viz. Silicon Graphics Inc of USA to purchase the said spare parts from Silicon Graphics Inc of USA whereby the assessee will pay/reimburse the actual cost incurred by Silicon Graphics Inc USA in arranging the said spare parts and no additional mark up/fee will be payable to Silicon Graphics Inc USA in providing the said spare parts to the assessee. Copy of the said agreement is 3 I.T.As. No.2935 & 2937/DEL/2013 enclosed herewith as Annexure A for your perusal. Further, the voucher wise and month wise details of said expenditure is enclosed herewith as Annexure R for your perusal.”
4.1 Along with the submissions assessee had also annexed copy of agreement for purchase/reimbursement of spare part cost which was marked as Annexure A and B to the said reply. However, the Assessing Officer observed that the details given in Annexure B is not supported with any bills, vouchers, invoices and therefore, same cannot be accepted and assessee has also not furnished the details of the parties to whom it retails hardware machines for which it needed spare part to be imported from the AE in USA. Further assessee has not been able to clarify, whether it has complied with provision of TDS. Accordingly, he held that assessee was required to deduct TDS upon reimbursement of Rs.81,49,561/- relying upon CBDT Circular No.7 of 2009. Thus, he disallowed the entire reimbursement of payment of Rs.81,49,561/-.
Before the ld. CIT (A), the assessee had made very elaborate submissions, countering each and every finding given in the assessment order, which for sake of understanding the entire background and factum of the case is reproduced hereunder:-
“The assessee has made an accrual of Rs.81,49,561 on account of 'reimbursement' of repair charges payable to its parent entity viz. Silicon Graphics Inc USA. Such payment is essence for the 'reimbursement' towards actual cost of spare parts required by the assessee for rendering repair service to its customers under the terms of a cost reimbursement arrangement with the parent entity (Annexure H) as furnished before the AO vide submission dated 20.12.10 (Annexure G). Further, the month wise details of payments on account of purchase / reimbursements of spare parts were also submitted {Annexure I). The said spare parts were obtained by the 4 I.T.As. No.2935 & 2937/DEL/2013 assessee from its parent entity on a cost to cost basis without any mark up charged by the parent entity as clearly provided in the agreement (supra). Since the said payment was purely on account of 'reimbursement' and in any case it was in respect of purchase/ sale transaction undertaken with theparent entity based in USA who does not has a Permanent Establishment ('PE') inIndia therefore no tax was deducted at source on the said accrual to the parent entity. Vide letter dated 15.12.10, the Assessing Officer had sought clarification with respect to the said payment by the assessee in respect of which the assessee had duly vide its submission dated 20.12.10 (supra) submitted the copy of agreement entered with its parent entity regarding the payment of said 'reimbursement' charges (supra) and also the complete voucher wise and month wise payment details. Thereafter no further information / clarification was sought by the AO from the assessee which is clearly evident from the assessment records even though vide the said submission dated 20.12.10 (supra) the assessee had particularly expressed its willingness to provide any other clarification etc on the issue as may be required by the AO. 3.2 Assessee's submissions. It is respectfully submitted that the AO had in an utterly perverse manner and by framing an absolutely wrong understanding in law disallowed the said amount. It has been admitted by the AO himself that the assessee has duly furnished the agreement with the parent entity for the cost reimbursement arrangement (supra). The assessee had also furnished the month-wise payment summary (supra). Vide assessee's submission on record dated 20.12.10 (supra) it was specifically submitted that the assessee shall be pleased to provide any further information / clarification as may be required. However, without at all confronting the assessee on requirement of any further details the AO has very wrongfully proceeded to disallow the said expense claim. Regarding the AO's observation to the effect that assessee has not furnished details of parties to whom repair services are rendered for which spare parts have been imported, it may be noted that the assessee had duly submitted the cost reimbursement arrangement with the parent entity {Annexure H) along with month wise details of payments on account of purchase / reimbursements of spare parts were also submitted {Annexure I). Thereafter, without at all confronting the assessee on the requirement of submitting any other detail the AO has proceeded to make the disallowance in a very perverse manner even though the assessee had specifically vide its submission on record dated 20.12.10 stated that the assessee will be 5 I.T.As. No.2935 & 2937/DEL/2013 pleased to provide any other detail with respect to reimbursement charges. Regarding the parties to whom maintenance services are rendered for whom spare parts are imported, it may be noted since inception i.e. 22.06.1993 the assessee renders comprehensive maintenance services to its various customers which is in the nature of a works contract involving supply of spare parts and rendering services. During the subject year assessee has rendered comprehensive maintenance services to the following reputed customers, copies of contracts enclosed herewith as follows: i. Annexure M: Annual Maintenance contract (AMC) with Paradigm Geophysical (India) Pvt. Ltd.; ii. Annexure N: Annual Maintenance contract (AMC) with CSIR Centre for Mathematical Modelling & Computer Simulation; iii. Annexure O: Annual Maintenance contract (AMC) with Centre for Artificial Intelligence & Robotics; iv. Annexure P: Annual Maintenance contract (AMC) with Ushodaya Enterprises Limited. Your good self is free to undertaken any verification in this regard on the aforesaid documents enclosed and / or seek a remand report from the AO and the assessee will provide due support in this regard. There is a serious fallacy in the understanding framed by AO to the effect that in the said transaction being essentially a cost reimbursement arrangement the withholding tax provisions will apply. It is a well settled law as laid down in several decisions including decisions from Jurisdictional High Court; Jurisdictional Tribunal and in various other cases that the withholding tax requirement does not applies where the payment made to a non-resident is essentially in the nature of a cost reimbursement as in the present case. A very direct support is drawn in this regard from the following decisions: i. Decision of Delhi High Court in the case of Van Oord ACZ India (P) Ltd. Vs. CIT 323 ITR 130 (Del.) (copy enclosed): Held that the requirement of TDS does not arises when payment to a non-resident is only in the nature of a reimbursement; ii. Decision of Special Bench of ITAT in the case of Mahindra & Mahindra Ltd. Vs DCIT (2009) 122 TTJ (Mum.)(SB)(577) (copy enclosed): Held in this decision of Special Bench as approved by Delhi High Court in the case of Van Oord (supra) that payment towards reimbursement of expenses to a non-resident not being in the nature
6 I.T.As. No.2935 & 2937/DEL/2013 of income, the requirement of withholding tax on such payment does not arises u/s 195 on the same; iii. Decision of Delhi High Court in the case of CIT Vs Industrial Engineering Projects Pvt. Ltd. Dated 20.08.92 2003-TIOL-247-HC-DEL. (copy enclosed): Held that reimbursement of expenses to a foreign entity cannot be regarded as revenue receipts; iv. Decision of Delhi ITAT in thecase of CIT Vs Modicon Network (P) Ltd. (2007) 14 SOT 204(Del.) (copyenclosed): Held in this important decision from Delhi ITAT that obligation to deduct tax at source u/s 195(1) is with reference to the income element embedded in the remittance. Held that reimbursement of expenses cannot be considered as having an income element embedded therein so as to attract section 195(1). The AO has further seriously erred in not understanding and appreciating that the subject payment was made to the credit of a non-resident entity based in US and the payment was in the nature of a transaction of sale / purchase on a cost to cost basis. The AO has just failed to appreciate and understand that in view of the clear provisions of Article 7 of India US DTAA the said transaction cannot at all be subject to tax in India in the absence of a Permanent Establishment (PE) of the said non-resident in India a-e consequently the question of tax withholding does not arises at all. These very vital points have just been omitted to be considered by the AO. Thus, it is respectfully submitted in view of the foregoing facts and position that the AC has grossly erred in making the disallowance in respect of 'reimbursement' of repair charges of Rs. 8,149,56/-”
5.1 Ld. CIT (A) held that the amount in question was payment to the parent company at cost for the spare parts imported by the assessee for rendering the maintenance services to the customers which requires supply of spare parts. On perusal of copy of the relevant agreement with the parent company, he was of the opinion that there is no provision for deducting TDS on purchases and neither any services have been provided by the AE nor any payment have been made to any services provided to the AE. Thus,
7 I.T.As. No.2935 & 2937/DEL/2013 he held that no TDS would be deductible on the amount of purchase of spare parts and accordingly, deleted the said addition.
Before us the learned Senior DR, submitted that the allegation of the Assessing Officer was that assessee could not produce the supporting vouchers and bills for reimbursement of spare cost. Apart from that, assessee has not furnished the details of parties to whom it rendered the repair services and in absence of these details, he has made the addition. Ld. CIT (A) has not given any proper finding while deleting the said addition on the specific reasons given by the Assessing Officer.
Before us the learned counsel for the assessee, submitted that in this case it cannot be disputed that payment of Rs.81,49,561/- has been made to the parent entity on account of actual costs of purchase of spare parts which was required by the assessee company for rendering repair services under the terms of independent contracts entered by the assessee with its customers in India. As per the agreement with the parent entity for the purchase of the spare parts, the assessee was required to pay the actual cost to its AE and no additional markup /fee was payable. He submitted that all these agreements were produced before the Assessing Officer and it was amply demonstrated that only the cost incurred for procuring the spare parts were given. So far as the allegation that assessee could not produce the details of parties to whom he rendered repair services, the same is not correct, because, assessee to show that it has carried out AMCs had filed various contracts with the parties in India on sample basis. The assessee was not required to deduct TDS on payment of purchases from a non resident especially when there is no dispute
8 I.T.As. No.2935 & 2937/DEL/2013 that purchase had been made on cost to cost basis without any markup or margin. The judgments as referred by the assessee before the ld. CIT (A) were reiterated by him before us, viz; a) Delhi High Court decision in the case of Van Oord ACZ India (P) Ltd. Vs CIT 323 ITR 130 (Del.) - held that no liability for TDS arises on a payment on account of reimbursement to a non- resident; Decision of Special Bench of ITAT in the case of Mahindra & b) Mahindra Ltd. Vs DC IT 30 SOT 374 - held that no liability for TDS arises on a payment on account of reimbursement to a non-resident;
Decision of Delhi High Court in the case of CIT Vs Industrial d) Engineering Projects Pvt Limited 2003-TIOL-247-HC-DEL-IT - held that reimbursement of expenses cannot be regarded as revenue receipts in the hands of non resident; Decision of Delhi ITAT in the case of ACIT Vs Modicon e) Network (P) Ltd. 14 SOT 204 - held that reimbursement of expenses cannot be considered as having an income element embedded in it so as to attract sec 195(1); f) Decision of Supreme Court in the case of GE India Technology Centre P Ltd. Vs CIT 327 ITR 456 - held that liability to tax deduction arises only when the remittance is chargeable to tax in the hands of non-resident and not otherwise.
7.1 Thus, the order of the ld. CIT (A) deleting the said addition should be confirmed.
We have heard the rival submissions, perused the relevant findings given in the impugned order as well as the material referred to before us. The assessee had entered into a purchase agreement with its Associate Enterprise (parent entity) Silicon Graphics Inc. USA for purchase of spare parts which was required by the assessee to execute repairs and annual maintenance contracts services to its customers in India under separate agreement on principal to principal basis. It is not the case of the 9 I.T.As. No.2935 & 2937/DEL/2013 Revenue that there is some element of markup or margin on cost to cost reimbursement of purchases made by the assessee from its AE. In any case, whether such arrangement is at arm’s length or not is not a subject matter of dispute before us, as it a matter of separate transfer pricing proceedings under Chapter-X. Once it is pure reimbursement of actual cost of purchase, then ostensibly there is no requirement of tax deduction at source or withholding of tax while making the payment to non-resident which is not in the nature of income to the non-resident India. It is not the case of the Revenue that there is an element of income which is chargeable to tax in the hands of the non-resident on account of purchase transaction of spare parts and once that is so, then no withholding of tax is required, which proposition has been upheld in various judgments as cited by the learned counsel including that of the Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. vs. CIT (supra).
So far as the issue that assessee has not furnished any bill/vouchers invoices for the purchase or assessee could not furnish details of parties to whom it had rendered repair services, we find that assessee had given the detail of the spare parts purchased from its AE, a copy of which is appearing at page 16 of the assessee’s paper book which gives the description of the product; the purpose for which such product was purchased; month of purchase amount in US dollars; and conversion date as on debit date, etc. These details goes to show that the products have been imported from the AE for which assessee had made the payment on cost to cost basis. Thus, it cannot be held that the assessee has not imported or purchased the spare parts from its AE and once it is established that the spare parts have been 10 I.T.As. No.2935 & 2937/DEL/2013 imported, then, liability to pay for the cost of spare parts to its AE arises to the assessee. Further, to prove that assessee has utilized these costs, it has filed copies of AMCs with various parties in India on sample basis. Thus, the reasoning given by the Assessing Officer for making the addition on both the counts does not survive and accordingly, ground as raised by the Revenue is dismissed.
Now we will come to the appeal for the Assessment Year 2009-10 wherein the assessee has raised the following grounds.
“1. "The Ld.CIT(A) has erred in deleting the addition of Rs.10,54,76,381/- made by the Assessing Officer on account of expenses claimed in the P & L account. 2. The Ld.CIT(A) has erred in deleting the addition of Rs.47,93,704/- made by the Assessing Officer on account of reimbursement of repair charges.”
So far as the issue raised in ground no.2 is concern it has been admitted by the parties and the facts and issue involved is similar to the grounds raised in appeal for the Assessment Year 2008-09, wherein the Assessing Officer has made the disallowance precisely on same reasoning and Ld. CIT (A) too has deleted the said addition on similar grounds. Since, we have already dealt with this issue in the aforesaid appeal; therefore, our finding given therein will apply mutatis mutandis in this year also.
Now so far as the issue raised in ground no.1 is concern, the facts in brief are that, the assessee who is a subsidiary of Silicon Fabrics Inc. USA with whom assessee has different agreements for various activities and transactions. The Assessing
11 I.T.As. No.2935 & 2937/DEL/2013 Officer noted that assessee has shown huge loss in its account in terms of payment accruing to the foreign entity, so much so that, for the year under consideration the auditors have expressed doubts about the status of the company. The Assessing Officer observed that buying parts from its parent entity for which no markup is charged and payment is made at cost has resulted into negative net worth of Rs.282.56 millions and had also shown carried forward loss of Rs.40.12 crores. The Assessing Officer perused certain sample copies of contracts entered by the assessee with various parties and noted that the order is for maintenance of SGI work station and servers. Thus, assessee is only performing necessarily functions to promote sales of its AE in India and hence, assessee is functioning like an agent of SGI (USA), not only for its business but also to support sales for the parent entity and therefore, such an expenditure cannot be allowed u/s.37(1). However, he proceeded to make an adhoc disallowance of 50% of personnel expenses and other expenses and worked out the disallowance at Rs.10,54,76,381/- on the ground that same can be attributed to the expenditure incurred for AE.
Before the ld. CIT (A), assessee had submitted that it has never been the case of the Revenue that assessee is economically dependent on SGI, USA or it constitutes Agency PE (Permanent Establishment) for US entity. Out of the total revenue only small portion of 16.80% comprises of transaction with AE and in support, various figures of revenue stream was given which has been incorporated at pages 2 and 3 of the Appellate order. It was further pointed out that the contracts entered with the customers in India are on principal to principal basis. The assessee is undertaking purchase/sales and rendering services for more than
12 I.T.As. No.2935 & 2937/DEL/2013 two decades and only 3.8% of the total expenditure is incurred on account of payment for AE this was demonstrated in the following manner:
Expenditure on account of SGI Inc. as detailed in the Transfer Pricing Documentation:
Table 3 Import of spares for trading Rs. 1,785,685 Import of finished goods Rs. 2,068,052 Reimbursement of repair Rs.4,793,703 Import of spares for services Rs. 815,279 Total on account of SGI Inc Rs.9,462,719 12.1 The assessee had also filed the copy of the transfer pricing documentation to show that the various transactions undertaken by the assessee with its AE, meets the arms length requirement. In the past also the losses have been examined in the scrutiny proceedings by the department and in all the years transfer pricing analysis has been undertaken by the assessee which has been accepted. The assessee’s detailed submission in this regard has been incorporated and dealt with the ld. CIT(A) from pages 2 to 5 of the appellate order also from pages 10 to 22. In the exhaustive written submission the assessee has also given point wise rebuttable of Assessing Officer’s observation.
13. Ld. CIT(A) has deleted the said addition after observing by holding as under:-
“The AO has made a very sweeping addition on the basis of statements which are not supported by any facts of figures. The AO has no where stated that the expenses were not legitimately incurred. The AO has also not stated that they were not genuine. The AO did not ask for a break up of expenses to determine which expenses were relating to the overseas entity. Moreover, the amount of 16,00,73,871/- includes 12,41,11,179/- on account of the foreign exchange fluctuation loss which was added back again.
13 I.T.As. No.2935 & 2937/DEL/2013
As has been stated by the AO the appellant is a reseller of Silicon Graphics Products and undertakes warranty and post warranty services and provides consultancy services. The AO should have at least divided the business of the appellant into what the appellant was doing as an agent for its parent company and with it was doing independently. The appellant has stated that as far as the foreign entity was concerned there were two aspects. One, the parent company was making sales of computers directly to clients in India and the appellant was providing logistic support, Two, the Indian Company was providing maintenance services to the customers and for that purpose buying spare parts from the foreign entity. The total revenue earned from the foreign entity as per the appellant was in the range of 18%. The AO has not been able to specify which part of expenditure incurred by the appellant would be incurred wholly and exclusively for the business of the foreign entity. Before me, the appellant has shown that the expenditure has been incurred in +s business. What would be relevant is whether the foreign entity has earned revenue because of the presence of the appellant in India. The expenses corresponding to that part could have been disallowed. The addition of Rs. 10,54,76,381/- is therefore, deleted. This ground of appeal is ruled in favour of the appellant.”
14. Before us the ld. D.R. strongly relied upon the order of the Assessing Officer and submitted that persistent loss coupled with the fact that assessee has been making reimbursement of cost without charging any markup, definitely goes to show that AE is loading some of its charges for its own activity in India on the assessee and therefore, Assessing Officer has rightly made the disallowance on the expenses debited in the P&L Account.
The learned counsel, on the other hand, reiterated the same submission as earlier made before the ld. CIT (A) and submitted that assessee’s receipt from its transaction from AE, only constitutes 18.60% of the total revenue and the major revenue is from independent contract with third parties in India. Out of total income of Rs.13.86 crores, only 2.59 crore pertains to 14 I.T.As. No.2935 & 2937/DEL/2013 the transaction with AE in the form of marketing support fees and technical service fees. Similarly, only a miniscule expenses of 3.8% of total expenditure is incurred on account of transaction undertaken by the assessee with its AE and in the net result the revenue derived from the assessee forms the transaction undertaken with its AE, i.e., Rs.2.59 crore is much higher than the expenditure incurred on account of transaction with the Assessing Officer which is only Rs.94,62,719/-. Apart from that. all these details of income and expenditure have been fully disclosed in the transfer pricing documentation which has not been disturbed at all and has been accepted by the Assessing Officer thus order of the ld. CIT(A) should be confirmed.
16. We have heard the rival submission and also perused the relevant finding given in the impugned order as well as material referred to before us. From the facts as culled out from the impugned order as well as the material on record, we find that it has never been the case of the Revenue that the parent enterprise has any kind of permanent establishment in India in the form of the assessee company. The assessee is no doubt a subsidiary of SGI (USA), but it has never been reckoned as PE in terms of Article 5 of India-USA. All its transaction have been reported in the transfer pricing documentation from year to year and TP Study Report has been filed in form 3CEB before the Assessing Officer to justify the arms length price of all the international transactions undertaken by the assessee with its AE. In none of the years including the impugned Assessment Years it has been brought on record before us that, such transfer pricing analysis undertaken by the assessee has ever been disturbed or there is any adjustment on account of ALP. The Assessing Officer’s case is that 15 I.T.As. No.2935 & 2937/DEL/2013 the assessee has been making persistent loss and therefore, it can be presumed that the cost/expenditure of the foreign entity for carrying out its activity in India is directly or indirectly is loaded or borne by the assessee and therefore, he has proceeded to make some adhoc disallowance of 50% of administrative and personnel expenses. Such a premise for adopting adhocism or making the addition in such a manner is definitely divorced from the facts and settled judicial norm or any authority of law. The assessee had duly demonstrated not only before the Assessing Officer and also before the ld. CIT(A), that out of the total revenue earned by the assessee of Rs.13,86,13,293/- only amount of Rs.2,59,09,985/- pertains to the transaction with the AE as per the following details:-
Rs. 24,261,335 Marketing support fees received from SGI Inc Technical service fees Rs. 1,648,650 received from SGI Inc Total earnings from SGI Inc Rs. 25,909,985 15.1 Apart from that, it is seen that the total expenditure on account of AE as dealt in transfer pricing report was as under:-
Import of spares for Rs. 1,785,685 trading Import of finished Rs. 2,068,052 goods Reimbursement of Rs. 4,793,703 repair charges Import of spares for Rs. 815,279 services Total on account of Rs. 9,462,719 SGI Inc 15.2 If such expenditure is to be seen then it needs to be analysed via-vis the business undertaken and revenue generated from the transaction with the parent entity. It is seen that, the total expenditure debited in the account is merely sum of Rs.24,81,24,087/- which is miniscule, i.e., 3.8% of the total
16 I.T.As. No.2935 & 2937/DEL/2013 expenditure. Thus, it cannot be held that the cost of expenditure on account of AE has been loaded by the assessee so as to suggest that the loss incurred by the assessee is attributable due to loading of the cost of the AE. In any case, once the transaction with the AE has not be disturbed and the ALP has been accepted, then such an inference drawn by the Assessing Officer cannot be held to be justified. Learned counsel has also pointed out before us that in all the past year the assessee’s case has been made in scrutiny proceedings and in none of the years, there is any whisper that losses incurred by the assessee is an account loading of cost by foreign entity on the assessee. In the past also transfer pricing analysis has been undertaken by the assessee has been accepted in wake of these fact also, the observation and the conclusion of the Assessing Officer is definitely ill founded and cannot be sustained and the order of the ld. CIT(A) in deleting the said addition is confirmed.
In the result, both the appeals of the Revenue are dismissed. Order pronounced in the open Court on 20th December, 2017.