2016 (6) TMI 692 - AT - Income Tax

Reimbursement of travelling expenses of expatriates received from its clients and also living allowance paid by the clients to expatriates (employees deputed by the assessee) - whether such receipt do not constitute income in the hands of the assessee? - CIT(A) deleted the addition - Held that - It is an admitted fact that the DRP has held in AY 2006-07 and 2007-08 that these receipts, viz., reimbursement of travelling expenses and living allowance paid to expatriates, are not to be considered as forming part of fees received by the assessee. The co-ordinate bench of Tribunal has held in AY 2003-04 and 2004-05 that these items are not taxable in the hands of the assessee. However, we notice that the Tribunal has held so in AY 2003-04 and 2004-05 on the understanding that the assessee herein and Indian companies are not related parties. The Ld D.R has pointed out that they are related parties, which fact was not disputed by the assessee. We have noticed that the addition made by the assessing officer has been deleted by DRP in AY 2006-07 and 2007-08. Identical additions made in AY 2003-04 and 2004-05 have also been deleted by the Tribunal, even though there was misunderstanding about the facts. But the fact remains that the order of the Tribunal passed for AY 2003-04 and 2004-05 remains in operation as of now. We are dealing with AY 2005-06, which falls in between the above said years. Even though there is merit in the contentions of the Ld D.R yet, in order to maintain consistency in the matter, we are inclined to uphold the view taken by the Ld CIT(A), since the same is consistent with the view taken by the DRP in the succeeding years. Accordingly, we uphold the order of Ld CIT(A). - Decided against revenue

Summary

Issues:
1. Taxability of reimbursement of travelling expenses and living allowance received by a foreign company from Indian group companies.

Analysis:
The primary issue in this case pertains to the taxability of the reimbursement of travelling expenses and living allowance received by a foreign company from Indian group companies. The Assessing Officer initially held that these amounts should be considered as part of the fee for technical services received by the foreign company and hence, should be taxed. The Assessing Officer relied on various legal precedents to support this position. However, in the appellate proceedings, the learned CIT(A) took a different stance. The CIT(A) observed that the Dispute Resolution Panel had held in subsequent years that the reimbursement of travelling expenses should not be taxed in the hands of the foreign company. The CIT(A) also noted that the living allowance paid to expatriates should not be considered as income in the hands of the foreign company. The CIT(A) relied on legal judgments, including one from the Hon'ble Bombay High Court, to support this decision.

In the arguments presented before the Tribunal, the Department contended that the expenses related to deputed employees should be borne by the foreign company itself, and therefore, should be considered as part of the fee received by the foreign company. The Department highlighted that the transactions involved related parties, which distinguished this case from the legal precedents cited by the foreign company. On the other hand, the Assessee argued that the expenses were to be borne by the Indian companies as per the contract, and the foreign company merely received reimbursements for the same. The Assessee also emphasized that the living allowances were paid directly to the expatriates, and the foreign company had no benefit from it.

The Tribunal considered the decisions of the DRP in subsequent years, which held that the reimbursement of travelling expenses and living allowance should not be treated as part of the fees received by the foreign company. Despite the Department's argument regarding related party transactions, the Tribunal upheld the order of the CIT(A) for the sake of consistency with the decisions of the DRP in the following years. Consequently, the Tribunal dismissed the appeal filed by the revenue, affirming the decision of the CIT(A) regarding the taxability of the reimbursement of travelling expenses and living allowance received by the foreign company from Indian group companies.