2015 (4) TMI 578 - AT - Income Tax

Disallowance u/s. 40(a)(i) of share of Technical expenses of head office - whether the same was reimbursement of actual expenses incurred by the head office - CIT(A) considering the reimbursement of actual expenses as fees for technical services without considering the definition of Fees for included services as per Article 12(4) of India-USA France Tax Treaty - Held that - Assessee was not required to deduct tax at source from the impugned payment, consequently no disallowance could be made of the said amount of fee for technical services paid by the assessee to its Head Office, therefore, disallowance under section 40(a)(ia) of the Act was not called for. The connotations of fees for technical services under the Indo-French tax treaty were confined to payment for such services as make available technical knowledge, skill, experience, etc. or consisted of development and transfer of technical plan or design. Generally speaking, technical services are treated as having been made available when recipient of such technical services is enabled to perform such services without recourse to the service provider. In the instant case, the payment for technical services, which was sought to be brought to tax in the hands of the assessee was in the nature of reimbursement of technical expenses to the head office. The Assessing Officer had observed that the head office expenditure allocated to the Indian division was in the nature of technical and administrative expenses . Thus, this amount was not on account of any specific technical services having been made available , in the sense in which this expression was employed in the tax treaties, the amount could not be brought to tax in the hands of the assessee under article 13 of the Indo- French tax treaty. This amount could not also be taxed in the hands of the assessee under article 7 as it was not an income attributable to PE . Hence, the taxability of the impugned sum in the assessee s hand was indeed incorrect. The Tribunal in assessee s own case in respect of very same year, i.e. for A.Y 2002-03, it has to be held that the aforementioned amount could not even be assessed in the hands of the assessee on account of applicability of Article -13 and 7 of DTAA. - Decided in favour of assessee

Issues Involved:
1. Disallowance of reimbursement of technical expenses.
2. Non-admission of additional grounds of appeal.
3. Disallowance of foreign travel expenses.
4. Taxability of fees for technical services under the India-France Tax Treaty.
5. Double taxation concerns.

Issue-wise Detailed Analysis:

1. Disallowance of Reimbursement of Technical Expenses:
The primary issue across multiple assessment years (2002-03, 2003-04, 2004-05, and 2006-07) was the disallowance of technical expenses reimbursed by the Indian branch to its Head Office. The Assessing Officer (AO) treated these reimbursements as "fees for technical services" taxable in India and disallowed them under section 40(a)(ia) of the Income Tax Act, 1961, due to non-deduction of tax at source. The CIT(A) confirmed this disallowance, considering the payments as fees for technical services under Article 13 of the Indo-France Tax Treaty. However, the Tribunal, following the decision of the Bombay High Court, held that these payments were in the nature of reimbursements and not taxable in India, thus no tax deduction was required. Consequently, the disallowance under section 40(a)(ia) was not justified.

2. Non-admission of Additional Grounds of Appeal:
The assessee argued that the CIT(A) erred in not admitting additional grounds of appeal related to the disallowance of Rs. 50,59,019 on a completely different basis than that of the AO. The Tribunal did not specifically address this procedural issue in detail, as the primary disallowance itself was found to be unjustified.

3. Disallowance of Foreign Travel Expenses:
The AO disallowed foreign travel expenses incurred by the assessee on the grounds of lack of commercial expediency. The CIT(A) confirmed this disallowance. However, the assessee noted that similar disallowances for earlier years were pending before higher judicial authorities. The Tribunal dismissed these grounds as not pressed by the assessee for the assessment years 2002-03 and 2006-07.

4. Taxability of Fees for Technical Services Under the India-France Tax Treaty:
The Tribunal examined whether the fees for technical services paid by the Indian branch to its Head Office were taxable under the India-France Tax Treaty. The Tribunal concluded that the payments were reimbursements and did not qualify as fees for technical services under Article 13 of the treaty, as they did not "make available" technical knowledge, skill, or experience to the Indian branch. Therefore, these payments were not taxable in India.

5. Double Taxation Concerns:
The CIT(A) initially held that the disallowance of technical expenses should not result in double taxation. The Tribunal affirmed this view, emphasizing that the same amount could not be taxed twice-once as a disallowance in the hands of the Indian branch and again as income in the hands of the Head Office. The Tribunal's decision was supported by the precedent set in the ABN Amro Bank NV case, where payments to self were not considered allowable deductions.

Conclusion:
The Tribunal, following the decision of the Bombay High Court, ruled in favor of the assessee on the primary issue of disallowance of technical expenses, holding that these were reimbursements not subject to tax in India. Consequently, no disallowance under section 40(a)(ia) was warranted. The Tribunal also dismissed the appeals related to foreign travel expenses as not pressed. The Revenue's appeal for the assessment year 2004-05 was dismissed, affirming the Tribunal's earlier decision. The assessee's appeals for the assessment years 2003-04 and 2006-07 were allowed, while the appeal for 2002-03 was partly allowed. The Tribunal's order was pronounced on 16/12/2014.

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