2016 (1) TMI 171 - AT - Income Tax

Addition u/s 40(a)(ia) - withholding of tax - liability to deduct TDS u/s 195 - expenses in the form of reimbursement cost incurred - CIT(A) deleted the addition - Held that - Reimbursement cost incurred by the assessee is out of the purview of the TDS provision as it does not generate any income in the hands of the recipient and consequently the provisions of section 40(a)(ia) could not be invoked. Hence this ground of appeal of the revenue is dismissed. - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of addition under Section 40(a)(ia) for non-deduction of TDS on payments made.
2. Disallowance of reimbursement of rework costs under Section 40(a)(ia).

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 40(a)(ia) for Non-deduction of TDS on Payments Made:

Facts:
The assessee, a private limited company engaged in the manufacture and sale of professional grade printed circuit boards, claimed an expense of Rs. 1,59,95,287 towards share technology services paid to a company based in Austria. The Assessing Officer (AO) found that the assessee failed to deduct TDS on these expenses and added the amount to the total income under Section 40(a)(ia) of the Income Tax Act, 1961.

Assessee's Argument:
The assessee argued that the payments were merely reimbursements of expenses incurred under an agreement with AT&S Austria and were not chargeable to tax in India. Therefore, the provisions for withholding tax did not apply. The assessee cited several case laws to support their claim, including:
- Lufthansa Cargo India Private Ltd 140 Taxman 1 (AT-Del)
- GE India Technology Centre Pvt. Ltd. v. (2010) CIT 327 ITR 456 (SC)
- CIT v. Dunlop Rubber Co. Ltd. 142 ITR 493 (Cal)
- Van Oord ACZ India (P) Ltd. v. CIT (2010) TIOL 187

CIT(A)'s Decision:
The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's argument, holding that the expenses were reimbursements and not chargeable to tax in India. Consequently, the addition made by the AO was deleted.

Tribunal's Analysis:
The Tribunal referred to its own previous decisions in the assessee's case for various assessment years, where it had held that reimbursement of actual expenses was not taxable in the hands of the recipient. The Tribunal also cited the Hon'ble Supreme Court's decision in the case of Tejaji Farasram Kharawalla Limited, which held that reimbursement of actual expenses is not taxable. Additionally, the Tribunal referred to the Karnataka High Court's judgment in DIT v. Sun Microsystems India P. Ltd., which supported the view that technical services not made available to the assessee do not attract TDS.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the reimbursement cost incurred by the assessee was out of the purview of TDS provisions and consequently, Section 40(a)(ia) could not be invoked. The appeal by the Revenue was dismissed.

2. Disallowance of Reimbursement of Rework Costs under Section 40(a)(ia):

Facts:
The assessee claimed expenses of Rs. 1,01,28,788 as reimbursement costs incurred by AT&S Austria for the repair/remanufacturing of defective products. The AO disallowed these expenses, treating them as fees for technical services under Section 9(1)(vii) and applied Section 40(a)(ia) for non-deduction of TDS.

Assessee's Argument:
The assessee contended that the reimbursement of rework costs did not result in income in the hands of the recipient and hence, was not subject to TDS. The assessee relied on the Tribunal's decision in its own case for earlier assessment years (2002-03 and 2003-04), where it was held that such reimbursements were not taxable.

CIT(A)'s Decision:
The CIT(A) upheld the AO's decision, confirming the disallowance of the reimbursement costs.

Tribunal's Analysis:
The Tribunal referred to its previous decisions in the assessee's case, as well as the Karnataka High Court's judgment in DIT v. Sun Microsystems India P. Ltd., and the jurisdictional High Court's decision in CIT v. Dunlop Rubber Co. Limited. These cases supported the view that reimbursement of expenses does not generate income and therefore, does not attract TDS.

Conclusion:
The Tribunal reversed the CIT(A)'s decision and deleted the disallowance made by the AO. The appeal by the assessee was allowed.

Final Order:
The appeal by the Revenue was dismissed, and the appeal by the assessee was allowed. The order was pronounced in the open court on 15/10/2015.