2017 (12) TMI 1832 - AT - Income Tax

Addition on account of reimbursement of repair charges - spare parts purchased from its AE - HELD THAT - Reimbursement of actual cost of purchase, then ostensibly there is no requirement of tax deduction at source or withholding of tax while making the payment to non-resident which is not in the nature of income to the non-resident India. It is not the case of the Revenue that there is an element of income which is chargeable to tax in the hands of the non-resident on account of purchase transaction of spare parts and once that is so, then no withholding of tax is required, which proposition has been upheld in various judgments as cited by the learned counsel including that in the case of GE India Technology Centre Pvt. Ltd. 2010 (9) TMI 7 - SUPREME COURT Assessee has not furnished any bill/vouchers invoices for the purchase or assessee could not furnish details of parties to whom it had rendered repair services, we find that assessee had given the detail of the spare parts purchased from its AE, a copy of which is appearing at page 16 of the assessee's paper book which gives the description of the product; the purpose for which such product was purchased; month of purchase amount in US dollars; and conversion date as on debit date, etc. These details goes to show that the products have been imported from the AE for which assessee had made the payment on cost to cost basis. Thus, it cannot be held that the assessee has not imported or purchased the spare parts from its AE and once it is established that the spare parts have been imported, then, liability to pay for the cost of spare parts to its AE arises to the assessee. Further, to prove that assessee has utilized these costs, it has filed copies of AMCs with various parties in India on sample basis. Reasoning given by the Assessing Officer for making the addition on both the counts does not survive and accordingly, ground as raised by the Revenue is dismissed. Addition on account of expenses claimed in the P L account - HELD THAT - As cost of expenditure on account of AE has been loaded by the assessee so as to suggest that the loss incurred by the assessee is attributable due to loading of the cost of the AE. In any case, once the transaction with the AE has not be disturbed and the ALP has been accepted, then such an inference drawn by the Assessing Officer cannot be held to be justified. Learned counsel has also pointed out before us that in all the past year the assessee's case has been made in scrutiny proceedings and in none of the years, there is any whisper that losses incurred by the assessee is an account loading of cost by foreign entity on the assessee. In the past also transfer pricing analysis has been undertaken by the assessee has been accepted in wake of these fact also, the observation and the conclusion of the Assessing Officer is definitely ill founded and cannot be sustained and the order of the ld. CIT(A) in deleting the said addition is confirmed. Revenue appeal dismissed.

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer on account of reimbursement of repair charges for Assessment Year 2008-09 and 2009-10.
2. Deletion of addition made by the Assessing Officer on account of expenses claimed in the Profit & Loss account for Assessment Year 2009-10.

Issue 1: Deletion of Addition on Account of Reimbursement of Repair Charges (Assessment Year 2008-09 and 2009-10)

The Revenue appealed against the deletion of an addition of ?81,49,561/- made by the Assessing Officer (AO) on account of reimbursement of repair charges. The assessee-company, a subsidiary of Silicon Graphics Inc. USA (SGI), imports computer hardware and software from its parent entity and sells it in India. The AO noted that the assessee paid ?81,49,561/- to its AE for spare parts required for repair services but failed to provide supporting documents such as bills, vouchers, and invoices. The AO also questioned the compliance with TDS provisions and disallowed the reimbursement relying on CBDT Circular No.7 of 2009.

The assessee argued that the payment was a reimbursement of actual costs for spare parts without any markup, as per an agreement with its AE. The CIT (A) accepted the assessee's explanation, noting that no TDS was required on such reimbursements as they were not income in the hands of the non-resident entity.

The Tribunal upheld the CIT (A)'s decision, stating that the reimbursement was purely for the cost of spare parts and did not include any income element. It referred to several judgments, including the Supreme Court's decision in GE India Technology Centre P Ltd. vs CIT, which held that TDS is required only when the remittance is chargeable to tax in the hands of the non-resident. The Tribunal also noted that the assessee had provided sufficient evidence of the transactions and the necessity of the spare parts for fulfilling its contracts in India.

For Assessment Year 2009-10, the issue was identical, and the Tribunal applied the same reasoning to dismiss the Revenue's appeal.

Issue 2: Deletion of Addition on Account of Expenses Claimed in the Profit & Loss Account (Assessment Year 2009-10)

The AO made an addition of ?10,54,76,381/- by disallowing 50% of personnel and other expenses, suspecting that the assessee was acting as an agent for its parent entity, SGI, and incurring expenses on its behalf. The AO's suspicion was based on the assessee's persistent losses and the nature of its transactions with its AE.

The assessee countered that only a small portion (16.80%) of its revenue came from transactions with its AE, and the majority of its business was independent. The assessee provided detailed financials and transfer pricing documentation to demonstrate that its transactions with the AE were at arm's length and that the expenses were legitimate and necessary for its business operations.

The CIT (A) found the AO's addition to be unsupported by facts and figures, noting that the AO did not specify which expenses were related to the foreign entity. The CIT (A) also observed that the assessee's revenue from transactions with its AE was significantly higher than the expenses incurred, and the transfer pricing documentation had been accepted by the Revenue in past assessments.

The Tribunal agreed with the CIT (A), emphasizing that the AO's approach was arbitrary and not based on any concrete evidence. The Tribunal noted that the assessee's transactions with its AE had been consistently accepted as being at arm's length, and there was no basis to disallow the expenses. The Tribunal confirmed the CIT (A)'s order, deleting the addition.

Conclusion:

The Tribunal dismissed the Revenue's appeals for both Assessment Years 2008-09 and 2009-10, upholding the CIT (A)'s decisions to delete the additions made by the AO on account of reimbursement of repair charges and expenses claimed in the Profit & Loss account. The Tribunal emphasized the importance of supporting evidence and adherence to established legal principles regarding TDS on reimbursements and the legitimacy of business expenses.