2004 (5) TMI 58 - AAR - Income Tax

Applicant availing services of foreign Company - applicant believes that no tax is required to be deducted at source while making payments of the service fee to Danfoss Singapore u/s 195 - payments made by the applicant to Danfoss Singapore cannot be said to be reimbursement of the actual expenditure incurred by Danfoss Singapore and it cannot be said that no income is embedded into such payment, therefore, the payments have to be made after withholding tax us/ 195

Issues Involved:
1. Determination of tax withholding under section 195 of the Income-tax Act, 1961 for payments made by the applicant to Danfoss Singapore.
2. Nature of the payments - whether they are reimbursements or contain an income element.

Issue-wise Detailed Analysis:

1. Determination of tax withholding under section 195 of the Income-tax Act, 1961 for payments made by the applicant to Danfoss Singapore:

The applicant, an Indian company, sought an advance ruling on whether payments to Danfoss Singapore for various services would be subject to tax withholding under section 195 of the Income-tax Act, 1961. The applicant contended that these payments were mere reimbursements of actual expenditures incurred by Danfoss Singapore, with no income element embedded, thus not attracting tax withholding.

2. Nature of the payments - whether they are reimbursements or contain an income element:

The jurisdictional Commissioner argued that under section 195, tax must be deducted on any sum chargeable under the Act paid to a foreign company. The Commissioner contended that the payments in question were not mere reimbursements but service fees with an income element. The Commissioner highlighted that the service agreement did not explicitly state the payments as reimbursements of actual costs, thus implying the presence of an income element.

The applicant's representative, Mr. Rajesh Gupta, argued that the payments were strictly reimbursements, with no profit involved, and thus not subject to tax deduction. However, the Authority examined the provisions of section 195, which mandates tax deduction on any sum chargeable under the Act, excluding salaries. The Authority noted that for section 195 to apply, the amount must be an income of the payee and not a mere reimbursement.

The Authority scrutinized the term "income" as defined in section 2(24) of the Act, which includes various items, some of which may not be "income" in the strict sense. The Authority emphasized that an element of profit is not necessary for a receipt to be taxable as income. The Authority examined the service agreement's consideration clause, which indicated that the service fee was based on the portion of services received relative to the total costs incurred by Danfoss Singapore, with adjustments based on budget turnover, growth rate, and market maturity.

The Authority concluded that there was no direct nexus between the actual costs incurred by Danfoss Singapore and the fees payable by each individual Danfoss company. Therefore, the service fee could not be considered a mere reimbursement of costs. The Authority distinguished this case from others cited by the applicant, where payments were found to be reimbursements for joint ventures or contributions to common funds.

The Authority also referenced the Supreme Court's ruling in Transmission Corporation of A.P. Ltd. & Another v. Commissioner of Income-tax, which clarified that section 195 applies to sums chargeable to tax, including those with income embedded. The Authority concluded that even if the fees were equivalent to expenses, they constituted a quid pro quo for services, not reimbursements.

Conclusion:

The Authority ruled that the payments to be made by the applicant to Danfoss Singapore for services could not be considered reimbursements of actual expenditures and contained an income element. Therefore, the payments were subject to tax withholding under section 195 of the Income-tax Act, 1961.

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