2007 (12) TMI 315 - AT - Income Tax

Deduction of tax at source u/s 195 - Reimbursement of development cost to the private promoters and state promoters - Project of international airport - technical consultation undertaken by the non-residents - applicability of provisions of section 5 or section 9 of the Act - HELD THAT - In the instant case, the technical consultation and various other consultations undertaken by the non-residents in their capacity as promoters were incurred by them out of India and at that time when they had consultation; section 9 was inapplicable to them because it was not a payment by Indian resident to a non-resident. It is a case of reimbursement of various expenses incurred and in this case it is also limited to only 50 per cent. The expenses as incurred by the promoters compensated to them would not involve any profit element also, especially as is seen in the instant case, the compensation is also only to the extent of 50 per cent. Initially when the expenses were incurred by the non-resident company, it was not answerable to any of the provisions of section 5 or section 9 of the Act. The benefit that the promoters received in the shape of legal advice, technical advice and other things was only to provide them the necessary input to decide to go ahead or not to go ahead with the project. Such services even in the remotest possibility would have no connection whatsoever with the project and all the de tails were so provided so as to satisfy that the expenses as incurred were justified and reimbursable. As a passing reference we may observe that one of the bidders of the project viz., Hochtief Airport GmbH, which bid was not accepted, also had incurred certain expenses and was reimbursed to the extent of 50 per cent. The Department vide its NOC dated 12-9-2003 had permitted the reimbursement to the tune of 50 per cent without any deduction of tax. There is absolutely no difference between the bidder who had gone off and the bidder who has continued because he was accepted. Thus, we are of the opinion that the assessee is justified in claiming that reimbursement of expenses in the circumstances of the case to the extent of 50 per cent did not attract the provisions of section 195(2) of the Act. The appeals are allowed.

Summary

Issues Involved:
1. Applicability of section 195(2) of the Income-tax Act, 1961 regarding reimbursement of expenses.
2. Whether the reimbursement of expenses to non-resident companies constitutes fees for technical services (FTS) under the Act and relevant Double Taxation Avoidance Agreements (DTAAs).
3. Determination of withholding tax obligations on the reimbursement of expenses.

Issue-wise Detailed Analysis:

1. Applicability of Section 195(2) of the Income-tax Act, 1961:
The primary issue in these appeals is the applicability of section 195(2) of the Income-tax Act, 1961 concerning the amounts reimbursed by the assessee to its shareholders/promoters for expenses incurred in connection with the Bangalore International Airport project. The shareholders' agreement included provisions for the reimbursement of pre-agreement and pre-financial close development costs. The board of directors resolved that "the offshore expenses shall be advanced by private promoters. All expenses will be reimbursed and capitalized after financial close."

The assessee argued that the expenses incurred by non-resident companies Siemens and Unique were for their exploration regarding the project's viability and other technical details, which did not require approval from Indian counterparts. The reimbursement was claimed to be devoid of any profit element, thus not attracting the provisions of section 195(2).

2. Whether Reimbursement Constitutes Fees for Technical Services (FTS):
The Assessing Officer (AO) concluded that the services provided by the foreign shareholders to the assessee fell within the definition of FTS under both the Income-tax Act and the relevant DTAAs. Despite the expenses being incurred outside India, the AO opined that since the services were utilized in India, the reimbursement should be subject to tax deduction at source (TDS). The AO's conclusions were based on the premise that the services, including legal, engineering, business planning, and other technical consultations, were utilized by the assessee in India and thus attracted withholding tax provisions.

The CIT(A) upheld the AO's view, emphasizing that the nature of services prima facie fell under FTS as per the Act and DTAAs. The CIT(A) also noted the lack of adequate support for the quantification of costs and the absence of specific tax exemption under the legislation.

3. Determination of Withholding Tax Obligations:
The AO computed the withholding tax on the amounts to be reimbursed to Siemens and Unique at the rate of 10% as per the respective DTAAs. The amounts were determined based on the rupee equivalent of the expenses incurred by the non-resident companies.

The Tribunal, however, disagreed with the AO and CIT(A)'s conclusions. It noted that the expenses incurred by the non-residents were for their own exploration and feasibility studies, which were reimbursed by the assessee to the extent of 50%. The Tribunal emphasized that such reimbursement did not involve any profit element and could not be equated to payments for technical services. It was observed that the initial expenses incurred by the non-resident companies were not subject to sections 5 and 9 of the Act, as they were not payments by an Indian resident to a non-resident.

The Tribunal also referenced a similar case where a bidder, Hochtief Airport GmbH, was reimbursed 50% of its expenses without any deduction of tax, as permitted by the Department. This precedent supported the assessee's claim that the reimbursement in the present case did not attract the provisions of section 195(2).

Conclusion:
The Tribunal concluded that the reimbursement of expenses to the non-resident companies, limited to 50%, did not attract the provisions of section 195(2) of the Income-tax Act, 1961. Consequently, the appeals were allowed, and it was held that no tax deduction at source was required on the reimbursement of these expenses.