2013 (1) TMI 156 - AT - Income Tax

Payments towards services availed from HSL for operating and maintaining an integrated Steel plant - whether in the nature of reimbursement? - whether attracts the provisions of s.194J or not? - Held that - As per SAA the share capital of Hospet Steel Ltd HSL was held by the assessee and Mukund Ltd ML in equal proportion and the investment in the said steel making facilities has been made by SAA constituents in the ratio of 41.38 and 58.62 by the assessee and ML respectively. As per the terms of SAA, the assessee and ML have reimbursed the expenses incurred by HSL in performance of its obligations. As rightly argued by the AR, the said reimbursement was on cost to cost basis and the same is evident from the P&L account and debit notes raised by HSL on the assessee and ML for the concerned assessment years. Therefore, the said payments did not comprise of any income component. Thus, the reimbursement of such expenses incurred by HSL cannot be categorized as in the nature of fees towards professional and technical services. As decided in DECTA v. CIT 1996 (5) TMI 385 - AUTHORITY FOR ADVANCE RULINGS the amount of contribution received/receivable to recover part of the cost of technical assistance provided by the applicant under the provisions of its aid programme to the companies assisted by it in India is neither income of the appellant under the provisions of the Income-tax Act nor fees for technical services. Thus taking into account the facts and circumstances of the issue the reimbursements of payment by the assessee and ML to HSL cannot be regarded as income in the hands of HSL. Relying on CIT v. Expeditors International (India) (P) Ltd. 2011 (12) TMI 104 - DELHI HIGH COURT the said payments being in the nature of reimbursements on cost to cost basis and thus, the said payments did not constitute income in the hands of HSL and, therefore, the assessee as well as ML were not liable to deduct tax at source u/s 194J - in favour of assessee..

Summary

Issues Involved:
1. Whether the payments made by the assessee to M/s. Hospet Steels Limited for operating and maintaining an integrated steel plant are in the nature of reimbursement.
2. Whether such payments attract the provisions of section 194J of the Income Tax Act, given that the services were charged on a cost-to-cost basis with no income accruing to M/s. Hospet Steels Limited.

Detailed Analysis:

Issue 1: Nature of Payments as Reimbursement
The assessee companies, engaged in steel manufacturing, entered into a Strategic Alliance Agreement (SAA) with M/s. Mukund Limited to set up steel making facilities. They promoted M/s. Hospet Steels Limited (HSL) as a joint venture company for smooth functioning. According to the SAA, both companies agreed to reimburse HSL for expenses incurred in administering plant operations on a cost-to-cost basis. The Assessing Officer (AO) treated these payments as fees for technical services, invoking section 194J for non-deduction of tax at source.

The CIT (A) held that the payments were reimbursements, not fees for technical services, as HSL charged on a cost-to-cost basis without any profit element. This was evident from the profit and loss accounts and notes to accounts of the companies. The CIT (A) noted that the AO had previously accepted this in the assessment order for 2008-09.

Issue 2: Applicability of Section 194J
The CIT (A) observed that the payments were reimbursements for expenses incurred by HSL on behalf of the assessee companies, not fees for technical services. The CIT (A) referenced various case laws to support that reimbursements without profit elements do not attract TDS under section 194J. The CIT (A) also dismissed the AO's reliance on Circular No.715, stating it was not applicable as the payments were made per the agreement and were purely reimbursements.

Revenue's Appeal:
The Revenue argued that the payments were for managerial and technical services, thus attracting section 194J. They contended that HSL, KSL, and the assessee were independent entities, and HSL provided services using its assets and manpower. The Revenue cited several case laws to support their position that TDS should be deducted regardless of profit.

Assessee's Defense:
The assessee maintained that the payments were reimbursements on a cost-to-cost basis, with no service charges levied by HSL. They argued that the payments did not constitute income for HSL and thus did not attract section 194J. The assessee cited the annual report of HSL, which stated that HSL acted as a conduit pipe for the strategic alliance constituents, with all expenses reimbursed by the parties involved.

Tribunal's Findings:
The Tribunal analyzed whether the payments were fees for technical services or reimbursements. They noted that the share capital of HSL was held equally by the assessee and Mukund Limited, with expenses reimbursed on a cost-to-cost basis. The Tribunal referenced judicial rulings, including CIT v. Dunlop Rubber Co. Ltd and Transmission Corporation of A.P Ltd v. CIT, which supported the view that reimbursements without profit elements do not constitute income and thus do not attract TDS.

Conclusion:
The Tribunal upheld the CIT (A)'s findings, concluding that the payments were reimbursements and not fees for technical services. They ruled that the assessee companies were not liable to deduct tax at source under section 194J. The appeals by the Revenue for both assessment years in the cases of M/s. Kalyani Steels Limited and M/s. Mukund Limited were dismissed.

Judgment:
The appeals by the Revenue for the assessment years 2008-09 and 2009-10 in the cases of M/s. Kalyani Steels Limited and M/s. Mukund Limited are dismissed. The order was pronounced on 18.12.2012.