2012 (8) TMI 512 - AT - Income Tax

Disallowance of non-deduction of TDS on reimbursement of the salary cost - DTAA between India and UK - Held that - CIT (A) has allowed the assessee s claim for reimbursement of the expenses of salary cost considering undisputed fact that these expenses were in the nature of reimbursement. So there is no income element at all. As decided in CIT vs. Siemens Aktiongesellschaft 2008 (11) TMI 74 - BOMBAY HIGH COURT the amount received by German company under the agreement with three Indian companies was not taxable in India before insertion of an Explanation to section 9 (2) with retrospective effect from 01.06.1976 - As the agreement was entered into before June 1, 1976 the income would not be a Royalty from patent, copy rights or trade mark and like, within the meaning of DTAA but would fall under expression commercial or industrial profit . In absence of permanent establishment, such income would not be taxable in India for agreement dated March 15, 1969, work was done in Germany and there was no transfer of licence of any existing technical knowhow , thus in view of this the sum claimed to be reimbursement of expenses was held to be not taxable in India - in favour of the assessee

Summary

Issues:
Disallowance of Rs.29,33,472/- made by A.O. on account of non-deduction of TDS on reimbursement of salary cost in respect of various employees of Dirk European Holding Ltd.

Analysis:

1. The Appellate Tribunal ITAT, Pune heard an appeal filed by the revenue against the order of CIT(A) regarding the disallowance of Rs.29,33,472/- made by the Assessing Officer (A.O.) due to non-deduction of TDS on reimbursement of salary cost for employees of Dirk European Holding Ltd. The assessee is involved in producing and selling "Pozzocrete," a cement replacement product made from fly-ash. The A.O. had initially computed a loss which included various additions, and later issued a notice to amend the order, specifically mentioning the disallowance of professional/consultancy expenses under section 40(a)(i)(B).

2. The A.O. allowed certain amounts after verification but disallowed Rs.29,33,472/- stating it was reimbursement of salary cost for employees of Dirk European Holding Ltd., and hence, subject to TDS under section 40(a)(i)(B). The A.O. believed that the expenses were professional fees paid to non-residents outside India without TDS. Consequently, the assessed loss was reduced by Rs.41,96,057/- due to this disallowance.

3. The matter was taken to the First Appellate Authority, where the CIT(A) granted relief to the assessee, citing various court decisions that reimbursement is not considered income. The CIT(A) deleted the addition made by the A.O. regarding the reimbursement of salary cost. The revenue opposed this decision, arguing that the disallowance was justified under section 40(a)(i)(B) as TDS was not deducted.

4. The Appellate Tribunal, after considering the submissions and material on record, upheld the CIT(A)'s decision to allow the reimbursement of expenses of Rs.29,33,472/-. Referring to the Bombay High Court's decision in CIT vs. Siemens Aktiongesellschaft, it was established that the reimbursement was not taxable in India. The Tribunal found no reason to interfere with the CIT(A)'s decision, ultimately dismissing the appeal filed by the revenue.

5. In conclusion, the Appellate Tribunal affirmed the allowance of reimbursement of salary cost and rejected the revenue's appeal, emphasizing the non-taxable nature of the reimbursement based on relevant legal precedents and interpretations.