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Income Tax Appellate Tribunal, L Bench, Mumbai
Before: Shri Ashwani Taneja
Date of Hearing: 02.05.2017 Date of order: 09 .05.2017 O R D E R Per Ashwani Taneja, AM:
These appeals pertain to same assessee for two different assessment years involving identical issues; therefore these were heard together and are being disposed of by this common order. 2. First, we shall take up appeal for AY 2009-10 in Commissioner of Income-tax (Appeals)-10, Mumbai [hereinafter called CIT(A)] dated27-02-2014 against 2 Gemological Institute the order passed by the AO dated 17-02-2012 for AY 2009-10, on the following grounds:-
1 : Re.: Treating the reimbursement of the expenses as income for the yearRs.1,26,90,522/-: 1: 1 The Commissioner of Income-tax (Appeals) has erred in confirming the treatment of travel and group health insurance amounts 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 and group health insurance amounts reimbursed to it cannot be treated as its income and the stand taken by the Assessing Officer in this regard is illegal, incorrect, erroneous and misconceived and the Commissioner of Income-tax (Appeals) ought to have held as such. 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."
3. The assessee is mainly aggrieved by the actions of the lower authorities in treating the amount of travel, group health insurance and other incidental expenses received by it by way of reimbursement from M/s GIA India Laboratory P Ltd (hereinafter called GIA) as income of the assessee for the year under consideration.
4. We have heard at length submissions of both the parties and decide this issue as under.
5. The brief background is that assessee is a non-resident company incorporated in USA and during the year, it provided technical services to GIA India, which happens to be a group company of the assessee company. In this regard, the assessee had entered into a training and technical service agreement dated 1-11-2008 (hereinafter referred to as agreement) with GIA India for training the employees of GIA India and providing technical services for the implementation of grading policies, procedures and processes. In 3 Gemological Institute pursuance to the said agreement, the assessee raised separate debit notes for ‘fee for training and technical services’ rendered by it to GIA India and also on account of ‘reimbursement of travel expenses, group health insurance and other minor incidental expenses’ incurred by it pertaining to the aforesaid assignment. The assessee filed its return of income declaring total income of Rs.10,61,84,934. The assessee excluded from its income, the amount received by way of reimbursement of aforesaid expenses for the reason that these constituted actual cost borne by the assessee, and therefore, these were not in the nature of income. The AO was of the view that the total amount so received by the assessee from GIA India was liable to be included in the income of the assessee including the aforesaid expenses reimbursed by GIA India for the reason that these constituted part of ‘fees or technical services’. Therefore, addition of the same was made in the assessment order passed by him. Being aggrieved, assessee filed appeal before CIT(A) and made detailed submissions to agitate the action of the AO. But Ld. CIT(A) was not convinced with the submissions of the assessee and, therefore, the order passed by the AO was upheld with the following observations:- “Having considered the AO's order as well as the appellant AR's submissions and after taking note of the aid agreement clause to which the appellant has specifically invited my attention for making its claim justified, I consider it proper and appropriate to hold that the appellant's claim is completely erroneous and incorrect as nowhere this clause of the agreement suggests that the Indian company i.e., M/s.GIA India Laboratory Private Limited was liable to reimburse the travel as well as insurance expenses of the appellant to the service provider. Further to that, even by no stretch of imagination, it can be said that the travelling or health expenses are in connection with the service provided by the appellant to an Indian company. Further to that, even I have no hesitation to hold here that the claim of the appellant is completely incorrect and justified as there is no such 4 Gemological Institute provision of any clause in the said agreement entered into by the appellant and its Indian company that any such payment has to be made in connection with the services availed by Indian company. In view of the same, I am in complete agreement with the A.O's finding that the changing of the name of such payment, which is not having any support of any agreement clause or by any business parlance, the liability of such payment on account of Indian company for incurring such expenditure. Therefore, I consider it proper and appropriate to hold that the A.O has rightly taxed the said payment under the head ‘Fee for technical services’. Accordingly, the addition so made by the A.O is confirmed.”
6. Aggrieved, assessee filed appeal before the Tribunal. During the course of hearing before us, Ld. Counsel of the assessee vehemently contested the orders passed by the lower authorities. It was inter-alia submitted that agreement entered into by the assessee with GIA India clearly lays down that assessee will be separately entitled for reimbursement of expenses in addition to fee received on account of technical services. It was submitted that there is no quarrel on the legal proposition that if the FTS is taxable on gross basis, no deduction is allowable against that. However, if an amount is not part of FTS and if the amount is merely on account of reimbursement of expenses wherein no profit element is embedded, then it cannot be taxed as part of FTS. In support of this proposition, he relied upon a very recent judgement of Hon’ble Supreme Court in the case of DIT vs A.P. Moller Maersk 392 ITR 186 (SC). It was further submitted that as per terms of the agreement, the assessee was entitled to receive from GIA India fee on account of cost incurred by the assessee to employ the individuals for performing the training and technical services plus a mark up of 6.5%. In addition to that, assessee was entitled to recover from GIA India by way of reimbursement the expenses incurred by it, on account of third party cost and expenses. The parties to the agreement have also understood the terms in the manner that FTS is separate 5 Gemological Institute from reimbursement of third party cost and expenses etc. The AO was of the different view and he applied his understanding of terms of the said agreement for the sake of making addition of notional income in the hands of the assessee. Ld. Counsel submitted that if parties to the agreement have understood the terms of agreement in a particular manner, then AO can forcibly infuse his distinct understanding of the same which may run contrary to what parties have understood. In support of this proposition, he relied upon the judgement of Hon’ble Calcutta High Court in the case of CIT vs Arun Dua 186 ITR 494 (Cal). Thus, he simply argued that there were no basis to treat the expenses as part of income. He also drew our attention upon the copy of transfer pricing study report and order passed by the TPO in the case of GIA India to show that no profit element was involved in the amount paid by it to the assessee on account of reimbursement of expenses.
7. Per contra, the Ld. DR relied upon the orders of the lower authorities and submitted that any payment made by GIA India to the assessee shall be considered as part of FTS and, therefore, whole amount should be brought to tax. Under these circumstances, addition made by the AO should be upheld.
We have gone through the orders passed by the lower authorities and arguments made before us by both the sides.
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 6 Gemological Institute 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. 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.”
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 7 Gemological Institute 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 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 8 Gemological Institute 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 co- ordinate cargos and ports of call for its fleet.
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-emphasised 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 9 Gemological Institute