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TMI Blog2007 (2) TMI 354X X X X Extracts X X X X X X X X Extracts X X X X ..... e genuineness or bona fide of the terms of arrangement between the partners of the consortium. The relevant clause under which a consortium partner is entitled to defray his share of the pre-bid expenses and get the same reimbursed by the joint venture vehicle has also been placed before the departmental authorities and no question has been raised about the existence of the clause. Since the HK company lacked the expertise to draw up the pre-bid documents, it had to engage the services of another consultancy firm. It paid the consultancy firm and raised an invoice for the amount on the assessee-company, under the terms of the consortium arrangement, to get reimbursed. The argument of the department is that the nature of the remittance as FTS does not change merely because the HK company had to engage another agency to prepare the pre-bid documents. In our view, the argument cannot be accepted having regard to the objective of the consortium and the agreement between the partners of the consortium to the effect that the pre-bid expenses incurred by them will be reimbursed by the joint venture vehicle. Furthermore, in our view, in the light of the authorities cited above, reimburseme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n holding-- (a )The learned CIT(A) has erred in estimating net income of M/s. Distacom Communication Ltd., Hong Kong at 20 per cent of the total receipts from M/s. Modicom Network Pvt. Ltd. in the nature of fee for technical services, whereas in view of section 44D of the I.T. Act, 1961, 100 per cent of such total receipts were income of M/s. Distacom Communication Ltd., Hong Kong. 2. The appellant craves to be allowed to amend, delete or add any other ground(s) of appeal during the course of hearing of this appeal." 2. Before we proceed to discuss and decide the issues arising in the appeal and cross-objection, it is necessary to bring on record the essential facts very briefly. Three companies viz., Modi Wellvest Private Limited, Distacom Communications (HK) Ltd. (a company incorporated in Hongkong) and Matorala Inc. (company incorporated in the USA) formed a consortium, with 51 per cent, 39 per cent and 10 per cent shares respectively, for the purpose of bidding for operation GSM-based cellular services in 18 circles in India in1995. The original partners of the consortium were different but that it not relevant for our purpose. As is normal in such cases the respective conso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee placed the relevant facts and figures before the Assessing Officer and would appear to have explained that since the amount is being remitted only towards reimbursement of pre-bid expenses, there was no income element imbedded therein and that the remittance cannot also be considered as "fees for technical services" ("FTS") because no technical services of any kind were rendered by the HK company. A letter dated 16-9-1997 from the HK company was also addressed to the Assessing Officer to the same effect. 6. The Assessing Officer noted that according to the letter dated 16-9-1997 of the HK company, the HK company had engaged another agency for consultancy services for preparation of the bid documents and had paid them for their services and had raised an invoice on the assessee-company for reimbursement of the expenses and no income element was imbedded therein and that they have not rendered any technical services to the assessee-company so as to enable the payment to be called FTS, but refused to accept the claim on the following grounds : (a)The provisions of section 9(1)(vii) read with Explanation 2 thereto, defining the expression "fees for technical services" are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted and contending that the order of the Assessing Officer should be resorted, the assessee is in cross-objection to contend that nothing was deductible as tax from the remittance. 9. In support of the appeal, Mr. K.C. Jain, the learned CIT DR and Mr. Tripuri, the learned Senior DR submitted that once the CIT (Appeals) had found that the payment was in the nature of FTS, he should have directed that the tax at the rate of 30 per cent on the entire amount ought to have been deducted and there was no basis for holding that only 20 per cent of the amount represents the income imbedded in the payment. They have relied on section 44D of the Income-tax Act and have submitted that the section was overlooked by the CIT (Appeals). It was pointed out by them that section 44D gives a statutory clue - though it may not strictly apply to the assessee's case - to the question as to how much of the remittance can be assessed as income. It has further been pointed out by them that the assessee has not disputed that the services rendered by the consultancy firm engaged by the HK company were in the nature of technical services. The further argument was that just because the HK company lacked tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that when there is no liability at all to deduct tax, the CIT (Appeals) was not justified in estimating 20 per cent of the remittance as income element and in directing the assessee to deduct tax at the rate of 30 per cent thereon. He submitted that as a proposition of law, reimbursement of expenses has no element of profit imbedded therein. 11. In support of the above submissions, Mr. Sapra relied on the following authorities : (i) Transmission Corpn. of AP Ltd. v. CIT [1999] 239 ITR 587 (SC); (ii) CIT v. Industrial Engg. Projects (P.) Ltd. [1993] 202 ITR 1014 (Delhi); (iii) Hyderabad Industries Ltd. v. ITO [1991] 188 ITR 749 (Kar.); (iv) CIT v. Neyveli Lignite Corpn. Ltd. [2000] 243 ITR 459 (Mad.); (v) DECTA, In re [1999] 237 ITR 190 (AAR); and (vi) Rolls Royce India Ltd. v. ITO [1988] 25 ITD 136 (Delhi)(TM). The learned counsel for the assessee also filed a synopsis of his arguments. 12. We have carefully considered the facts and the rival contentions. Under section 195(1) of the Act, any person responsible for paying to a non-resident any interest or any other sum chargeable under the provisions of the Act (except salaries) shall, at the time of credit of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered by the recipient of the amount. In the present case, the HK company has not rendered any services, let alone technical services, to the assessee-company for which the amount was remitted. The services were rendered by a consultancy firm engaged by the HK company. The HK company paid the consultancy agency and sought reimbursement of the same from the assessee-company in terms of the consortium arrangement. Thus, the amount remitted by the assessee-company was only by way of reimbursement of the expenses incurred by the HK company and not by way of consideration for rendering any services which are technical services. As pointed out by the learned counsel for the assessee, there is no evidence on record to show that the HK company and the agency firm engaged by it were connected in any manner or that the entire transaction was a pre-planned or pre-meditated arrangement devised in order to avoid the provisions of tax deduction at source. Therefore, it is not possible to hold that the remittance was in truth and reality consideration for technical services disguised as reimbursement of the expenses. 14. In the very nature of things, reimbursement of expenses cannot be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecific terms of the contract. It was held by the AAR that DECTA was merely implementing an agreement between the U.K. and Indian Government under which U.K. Government through DECTA, extended assistance to Indian exporters. After referring to the terms of the agreement, it was held by the AAR that it is really a pooling arrangement or joint arrangement for the management of the projects and the contribution by the Indian companies is the modus operandi by which they are made to meet a part of the expenses incurred on the projects. It was ultimately held at page 200 in DECTA's case ( supra) that it would be totally absurd and incorrect to describe these contributions as being in the nature of FTS paid to DECTA within the meaning of section 9. In the opinion of the AAR, such an arrangement did not contain any element bearing the character of income (page 201). A careful reading of the ruling shows that if under a bona fide arrangement there is a provision for reimbursement of expenses to the parties, which they incur in furtherance of a common objective, such reimbursement cannot be considered as bearing the character of income. In CIT v. S.G. Pgnatale [1980] 124 ITR 391 (Guj.) the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bona fide of the terms of arrangement between the partners of the consortium. The relevant clause under which a consortium partner is entitled to defray his share of the pre-bid expenses and get the same reimbursed by the joint venture vehicle has also been placed before the departmental authorities and no question has been raised about the existence of the clause. Since the HK company lacked the expertise to draw up the pre-bid documents, it had to engage the services of another consultancy firm. It paid the consultancy firm and raised an invoice for the amount on the assessee-company, under the terms of the consortium arrangement, to get reimbursed. The argument of the department is that the nature of the remittance as FTS does not change merely because the HK company had to engage another agency to prepare the pre-bid documents. In our view, the argument cannot be accepted having regard to the objective of the consortium and the agreement between the partners of the consortium to the effect that the pre-bid expenses incurred by them will be reimbursed by the joint venture vehicle. Furthermore, in our view, in the light of the authorities cited above, reimbursement per se cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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