2024 (2) TMI 693 - AT - Income Tax

TDS u/s 195 - disallowance u/s. 40(a)(i) - chargeability of amount to tax in India - rendering of technical services under India-Singapore tax treaty - whether being reimbursement of cost without any mark-up? - Payment of fixed sum on monthly basis - HELD THAT - We find nowhere in the agreement in the definitions, no specific clause that the payments made by the assessee to BYK Singapore are in the nature of reimbursement. The said agreement, as discussed above entered between BYK Germany and BYK Singapore. Therefore, the said agreement does not come to the rescue of the assessee in supporting the claim of payment made to Singapore as reimbursement. The customer is responsible for paying the expenses actually incurred by BYK in connection with the delivery of the IT services relating to acquisition of third party software and hardware in connection with the IT services delivered to customer. Admittedly, the assessee is not the customer of BYK Germany and we find that the assessee s head office i.e. BYK Singapore is the customer to BYK Germany. Therefore, we find no force in the argument of ld. AR that the assessee is responsible for paying expenses actually incurred by the BYK in connection with the delivery of IT services. Having failed to bring on record the necessary evidences in support of assessee s contention inspite of reasonable opportunity, we hold that the assessee failed to place cogent evidences for our adjudication. Therefore, we treat the same as there were no evidences - significant accounting policies under revenue recognition is clearly mentioned revenue from services rendered is recognized on the basis of an agreed mark-up on net costs incurred, and in accordance with arrangements entered into with the parent company. Indian BO was allowed mark-up on such expenses of Rs. 1.22 crore, which was duly offered for taxation . Thus, in view of the above, the contention of assessee and the arguments of ld. AR are rejected. A cursory look at the provision transpires that deduction of tax at source is warranted, inter alia, on any other sum chargeable under the provisions of this Act. Thus, the chargeability of amount to tax in India in the hands of recipient is sine-quanon so as to trigger deduction of tax at source u/s. 195 of the Act. Chargeability under the provisions of the Act pre-supposes some profit element involved in the receipt. If the recipient simply recovers the amount spent by it without any profit element, such a receipt, being reimbursement, cannot be characterized as any sum chargeable under the provisions of this Act and hence would be immune from tax deduction at source. Two fundamental conditions must co-exist in order to fall within the domain of reimbursement. The first is that one-to-one direct correlation between the outgo of the payment and inflow of the receipt must be established; and the second is that the receipt and payment must be of identical amount. The first condition gets satisfied when there is a directly identifiable amount which is spent on behalf of another and later on it is recovered as such from the latter. It means that incurring of the expenditure, at the stage of incurring itself, is known to be for the benefit of the other and not the payer. The second condition gets satisfied when the receipt back of the amount originally spent is not laced with any mark-up inasmuch as exact amount incurred is recovered. Per contra, receipt of a fixed amount, which may be more or less than the actual outgo, cannot be designated as reimbursement - Appeal of assessee is dismissed.

Summary

Issues Involved:
1. General grounds of appeal.
2. Non-prosecution of certain grounds.
3. Rendering of technical services under India-Singapore tax treaty and reimbursement of cost without markup.
4. Non-deduction of tax at source under Section 195 of the Income Tax Act.

Summary:

1. General Grounds of Appeal:
The first ground was general in nature and required no adjudication.

2. Non-Prosecution of Certain Grounds:
The assessee did not wish to prosecute grounds 2, 2.1, and 2.2, leading to their dismissal as not pressed.

3. Rendering of Technical Services and Reimbursement of Cost:
The primary issue involved was whether the payment for IT expenses constituted reimbursement without markup, thus not warranting disallowance for non-deduction of tax at source under Section 195 of the Income Tax Act. The Tribunal noted that the issue was in its second round of litigation, having been remanded previously for examination of the true nature of the transactions. The Tribunal had earlier found that the assessee failed to demonstrate that the allocation of IT expenses to the Indian Branch Office (BO) was without any markup. The AO, upon re-examination, concluded that the services rendered by BYK Germany were highly technical and not mere BPO services, thus constituting "fees for technical services" under Section 9(1)(vii) of the Act and Article 12 of the DTAA with Germany. The AO rejected the assessee's contention that the payments were reimbursements, noting the lack of supporting evidence and the nature of the services provided.

4. Non-Deduction of Tax at Source:
The Tribunal reiterated that the burden of proving an expenditure as reimbursement lies on the assessee. The assessee failed to provide necessary evidence, such as the relevant agreement and accounting statements, to support its claim. The Tribunal upheld the AO's decision that the payments were not reimbursements and were subject to tax deduction at source under Section 195. Consequently, the disallowance under Section 40(a)(i) was upheld.

Conclusion:
The appeal of the assessee was dismissed, with the Tribunal affirming the AO's findings that the payments for IT services were not reimbursements and were subject to tax deduction at source. The Tribunal emphasized the necessity of providing cogent evidence to substantiate claims of reimbursement.