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TMI Blog2010 (6) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... s a part of the arrangement the US company leases to the Indian company a piece of equipment which allows the Indian company to ensure the level of bacterial deposit on its machinery in order for it to which when cleaning is required - Accordingly, the cleaning services are not included services within the meaning of paragraph 4(a) Regarding 115A - In fact, the expenditure incurred by the assessee in the course of carrying on its activities in India cannot be deducted in view of section 115A(3) - Therefore, section 115A(3) also has no application at all As observed by the CIT(A), fee received by the assessee towards technical services/ consultancy would fall under Article 12 and not under Article 7 - In the result, all the appeals of the Revenue stand dismissed X X X X Extracts X X X X X X X X Extracts X X X X ..... 000-01 only to the extent of Rs.211,63,426/- instead of Rs.279,80,493/-. Referring to Page 15 of the CIT(A) order, more particularly Para 19.2, the learned departmental representative pointed out that the CIT(A) followed the judgement of the Calcutta High Court in the case of CIT Vs. Sanderson & Morgan's 75 ITR 433, Bombay High Court in the case of CIT Vs. Tanubai D. Desai 84 ITR 713. According to the learned departmental representative, the case before the Calcutta High Court and Bombay High Court are entirely different, therefore these Calcutta High Court and Bombay High Court judgement may not be applicable to the facts of the case. According to the learned representative, no case was made out before the Lower Authorities that the expenditure was incurred on behalf of National Highway Authority of India. According to learned representative, Article 12 of Double Taxation Avoidance Agreement, between USA and India clearly says that any payment for rendering the services would amounts to payment for technical services. Therefore, the CIT(A) is not correct in saying that Sec.44D and Sec.115A(3) are applicable only to the income and not to reimbursable expenditure. According to learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Income Tax Act, 1961. Further, the learned representative pointed out that reference to Sec.80IA (4) by CIT(A) is not relevant in the facts of the case. Therefore, according to learned representative, the assessee is not eligible for deduction u/s 10(6A) of the Act. Referring features for technical services, the learned representative pointed out that payment of any kind has to be considered as fee for technical services, therefore there is not need for examining the nature of the payment. Referring to payment made to sub contractor, the learned representative pointed out that the liability of the assessee to execute the work cannot be diluted by raising bill through sub contractors. The learned representative placed reliance on the decision of this Tribunal in the case of Progressive Constructions Vs. JCIT in ITA.No.482/Hyd/2001 dated 23.11.2006 and submitted that by assigning the work to the sub contractor, there is no diversion of income by overriding title. According to learned representative, at the best the payment made to the sub contractor may constitute an expenditure in the hands of the assessee as found by this Tribunal in the case of Progressive Construction (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, such reimbursement of expenditure has to be excluded from the fee payable for technical services. According to learned counsel, reimbursement of expenditure is entirely different from the fee payable for technical services. The amount will be reimbursed by the Government or Government department when the expenditure was actually incurred on their behalf. In such an event, the assessee spends the amount on behalf of the govt. or its department. Therefore, the said expenditure is only paid by the govt. by way of reimbursement. The learned counsel further submitted that the assessee has also incurred expenditure on its own in the course of its business activity and as such expenditure was not claimed as reimbursable expenditure. The assessee claiming the expenditure incurred on behalf of its clients alone as reimbursable expenditure. According to the learned counsel, the expenditure incurred by the assessee on behalf of Govt. is a debt due from the Government. Therefore, it would amount to capital receipt in the hands of the assessee. Accordingly, the same is not taxable. 6. Referring to Sec.9(1)(vii) of the Income Tax Act, 1961 and Sec.115A, the learned counsel submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t reimbursement expenditure need not be subjected to deduction of tax at source within the meaning of Sec.195(1) of the Act. The learned counsel also placed reliance on the decision of this Tribunal in the case of Carvi Energy (India) Pvt. Ltd. Vs. ACIT 126 TTJ 226. The learned counsel again placed reliance on the decision of Delhi Bench of this Tribunal in the case of ACIT Vs. Modicon Network (P) Ltd. 2007 14 SOT 204 and submitted that reimbursement of expenditure does not amount to payment for technical services. The learned counsel also placed reliance on the judgement of the Apex Court in the case of CIT Vs. Tejaji Farasram Kharawalla Ltd. 67 ITR 95 and submitted that any amount received in respect of expenses incurred, would be exempt from taxation. Referring to the Calcutta High Court judgement in the case of CIT Vs Sandersons & Morgan's 75 ITR 433 and submitted that when the solicitors received money on behalf of his client the same cannot be considered to be a Revenue receipt. He also placed reliance on the judgement in the case of Bombay High Court in CIT Vs. Tanubhai D. Desai 84 ITR 713. The learned counsel also placed reliance on the decision of the Authority for Advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not connected or associated with Govt. of India. Since the agreement itself with the Govt. and Govt. departments, no specific approval is required. Therefore, according to the representative, both the conditions laid down to Sec.10(6A) are fulfilled. Referring to the argument of the learned departmental representative with regard to the industrial policy declared in 1991, the learned counsel submitted that the assessing officer himself referred to the very same industrial policy for the assessment year 2003-04. The assessing officer for the assessment year 2003-04 has not referred any other industrial policy. Therefore, according to the learned representative, the Revenue may not be correct in saying that the industrial policy declared in 1991 is out dated. According to the learned counsel, in the absence of any other industrial policy, the policy declared in 1991 has to be taken as such. Therefore, according to the counsel, the assessee is entitled for exemption u/s 10(6A) of the Act. 7. Referring to rate of tax on the fee for technical services, the learned counsel submitted that Article 12 of the Double Taxation Avoidance Agreement between Govt. of India and USA clearly says ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, according to the learned counsel, the assessee is not liable to pay any advance tax and there is no question of levy of interest u/s 234B (1) of the Act. The learned counsel also placed reliance on the decision of Delhi Bench in SNC Lavalin International Inc. Vs. DY. DDIT 118 TTJ 802 and the decision in the case of ADIT(International Taxation)1(2)/JCIT Vs. Kaiser Aluminium Technical Services Inc. 20 SOT 226. 9. We have considered the rival submissions on either side and also perused the material on record. Let us first take up the issue of reimbursable expenditure. The Assessing Officer found that the reimbursable expenditure forms part of the fees for technical services. The Assessing Officer mainly placed reliance in Article 12 of Double Taxation Avoidance Agreement (DTAA) between Government of India and USA and also the provisions of section 9(1)(vii) of the Income-tax Act, 1961. The learned Departmental Representative also placing reliance on the DTAA, more particularly on Article 12, submitted that the reimbursable expenditure would form part of the fee payable for technical services. The question arises for consideration is whether the reimbursable expenditure received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eof, the client shall pay the consultants (i) remuneration as set forth in Clause GC 6.2(b) and (ii) reimbursable expenditure as set forth in Clause GC 6.2(c). If specified in the SC, said remuneration shall be subject to price adjustment as specified in SC. (b) Remuneration for the personnel shall be determined on the basis of time actually spent by such personnel in the performance of the services after the date determined in accordance with clause GC 2.3 and clause SC 2.3, (or such other date as the Parties shall agree in writing) (including time for necessary travel via the most direct route) at the rates referred to and subject to such additional provisions as are set forth, in the SC. (c) Reimbursable expenditure actually and reasonably incurred by the consultants in the performance of the services as specified in clause SC 6.3(b). Clause 6.3(b) reads as follows: (a) The SC shall specify which items of the remuneration and reimbursable expenditure shall be paid, respectively, in foreign and local currency. 11. In view of the above, we have to see the special clause for reimbursement of the expenditure in foreign currency and in local currency. As far as tax for technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dependants shall stay after arrival in India for a minimum period of 3 (three) consecutive months and the remaining input is not less than 6 (six) months for such key personnel. (iv) For the air travel of each of the foreign personnel, and each eligible dependent, the cost of excess baggage up to twenty (20) kilograms per person, or the equivalent in cost of unaccompanied baggage or air freight, and (v) Miscellaneous travel expenses such as the cost of transportation to and from airports, airport taxes, passport, visas, travel permits, vaccinations, etc., at a fixed unit price per round trip as specified in Appendix G. (3) the cost of shipment of personnel effects up to fifty kilograms weight. (4) The cost of laboratory tests on materials, model tests and other technical services authorized or requested by the Client, as specified in Appendix G. (5) The cost of training of the client's personnel outside India, as specified in Appendix G. (6) The cost of items not covered in the foregoing but which may be required by the consultants M/s Louis Berger International Inc. for completion of the services, subject to the prior authorization in writing by the client, and (7) Any such additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the parties, the assessee has to incur the expenditure. However, the liability as agreed in the agreement rests with NHAI and they undertook to reimburse the expenditure that may be incurred by the assessee. In addition to reimbursable expenditure the NHAI has also agreed to pay fee for services which include the expenditure which has to be incurred by the assessee. Therefore, the reimbursable expenditures are in the nature of expenditure to be incurred by the NHAI in the course of its expansion programme of infrastructure. The assessee being a consultant has agreed to incur at the first instance on behalf of NHAI on condition that the same shall be reimbursed by the NHAI. Therefore, in our opinion this reimbursable expenditure cannot form part of the fee payable for technical services. 13. We have carefully gone through the DTAA between the Government of India and USA. Article 12 of the DTAA defines royalty and fees for the services. we have carefully gone through clause 4 to Article 12 of the DTAA. The contention of the learned Departmental Representative is that clause 4 of Article 12 refers to payment of 'any kind to any person' in consideration for rendering of technic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice at the daily rates. This expenditure shall be reimbursable by the NHAI. The question arises for consideration is whether this expenditure incurred by the assessee on behalf of the NHAI would form part of services as provided in clause 4(a) of Article 12. In the DTAA itself example 2 in the Memorandum of Undertaking clarified that this kind of expenditure would not form part of the services. In fact, as per example 2, it has to be clarified as follows: Example 2: Facts: "An Indian manufacturing company produces a product that must be manufactured under sterile conditions using machinery that must be kept completely free of bacterial or other harmful deposits. An US company has developed special cleaning process for removing such deposits from that type of machinery. The US company entered into a contract with the Indian company under which the former will clean the latest machinery on a regular basis. As a part of the arrangement the US company leases to the Indian company a piece of equipment which allows the Indian company to ensure the level of bacterial deposit on its machinery in order for it to which when cleaning is required. All the payments for the services, fees for in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reated as fee for technical services. 17. Similarly Explanation 2 to section 9(1)(vii) speaks of the consideration for rendering managerial, technical or consultancy services. Therefore, any amount received by the assessee for rendering consultancy services in the formation of four lane road alone can be considered as fee for technical services. This Explanation 2 does not applicable for the amounts received by the assessee as reimbursable expenditure from the NHAI. As already observed reimbursable expenditures are the expenditures in the ordinary course to be incurred by the NHAI and not by the assessee. Merely because certain expenditures are relatable to the employees of the assessee it does not mean that the payment was in connection with providing of consultancy services. At best it may be said that the payment received in pursuance to the agreement between the parties and not in connection with providing consultancy services. Therefore, even under Explanation 2 to section 9(1)(vii) it cannot be treated as fee for technical services. 18. We have carefully gone through the decision of the Authority for Advance Ruling (AAR) in Timken India Ltd., In re (2005) 273 ITR 67. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India P. Ltd., In re (2006) 187 ITR 421. In the case before the AAR, the Indian company was a subsidiary of AT & S, Australia, a non resident company. The Indian company entered into an agreement with the Australian company under which the non resident company undertook to assign or cause its subsidiary to assign its qualified employees to the Indian company. The non resident company retained the right over the employees and had the power to remove from the Indian company. The only condition is that the Indian company has to replace such employees with the similarly qualified individual. The assessee has to compensate the non resident company towards all costs that were arising directly or indirectly in connection with such employees. On this factual situation, the AAR ruled that the non resident company offered the services of technical experts to the assessee and the AAR ruled that payments made by the assessee company were for rendering services of technical or other personnel. Therefore, the assessee has to deduct tax u/s. 195(2) of the Act. In the case before the AAR the very agreement is to depute the qualified employees to serve the Indian company. Therefore, the assessee r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsable expenditure received by the assessee besides fee for technical services. In the case before us it is not in dispute that the assessee itself offered for taxation in respect of fee for technical services in connection with the execution of the services. Therefore, this decision of the AAR also may not be of any assistance to the Revenue. We have also carefully gone through the judgement of the Andhra Pradesh High Court in Superintending Engineer, Upper Siler (supra) and that of the Apex Court in Transmission Corporation of A.P. Ltd. (supra). In both the judgements, the Court has considered the deduction of tax at source u/s. 195 of the Act. In both the cases, the Court has no occasion to consider the reimbursable expenditure. Therefore, in our opinion, the same may not be applicable to the facts of the case. 21. We have also carefully gone through the judgement of the Delhi High Court in CIT vs. Industrial Engineering Projects Pvt. Ltd. (1993) 202 ITR 1014. In the case before the Delhi High Court the assessee had agreement with M/s. ETAG, a Swiss company, for rendering services. The assessee would receive a minimum sum of Rs.1, 20,000 per month for the services rendered bes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 12.5%, 7.5% was treated as selling commission and 5% as compensation in lieu of contingency expenses which it had to meet. The question arose before the Apex Court was whether the 5% selling commission in lieu of the contingency expenditure would form part of the total income or not. The Apex Court held that 5% of the expenses in lieu of the contingency expenses was for the expenditure incurred in the performance of the duties of the respondent as selling agent. Therefore, it will not form part of the taxable income. Accordingly, the same was exempt. In view of this judgement of the Apex Court, the reimbursable expenditure received by the assessee in pursuance to the agreement cannot form part of the taxable income. Accordingly, the same has to be excluded. 24. We have also carefully gone through the judgement of the Bombay High Court in CIT vs. Tanubai D. Desai (1972) 84 ITR 713. In the case before the Bombay High Court, the assessee was a practising solicitor. In the course of carrying on his profession the assessee used to receive money from or on behalf of his clients. The money received was deposited by him in separate current account with Imperial Bank of India. Subseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Admittedly, the assessee entered into agreement with State Governments or the agency of Central Government for the purpose of providing consultancy in formation of infrastructure facilities. The contention of the learned counsel for the assessee is that the industrial policy of Government of India is to develop infrastructure. Therefore, specific approval of the Central Government is not required for claiming exemption u/s. 10(6A) of the Act. We have carefully gone through the provisions of section 10(6A) of the Act which reads as follows: "(6A) where in the case of a foreign company deriving income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976 but before the 1st day of June, 2002 and,- (a) where the agreement relates to a matter included in the industrial policy, for the time being in force, of the Government of India, such agreement is in accordance with that policy; and (b) in any other case, the agreement is approved by the Central Government, the tax on such income is payable, under the terms of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture or allowance shall be allowed in computing the income by way of royalty or fees for technical services received from the Government or an Indian concern. This section clearly says that while computing the income by way of royalty and technical services no deduction in respect of expenditure would be allowed u/s. 28 to 44C of the Act. Therefore, any expenditure incurred by the assessee in relation to fees for technical services cannot be deducted. As rightly observed by the CIT(A) the assessee received fee for technical services and has not claimed any expenditure from the fee for technical services. As we have already discussed, the reimbursable expenditure may not form part of the free for technical services. Therefore, Assessing Officer may not be correct in placing reliance u/s. 44D(b) of the Act. The reimbursable expenditures are to be incurred by the NHAI and other clients. therefore, it was the expenditure of NHAI and other clients and definitely it is not the expenditure of the assessee. 28. We have also carefully gone through the decision of the Tribunal in Progressive Construction (supra). The facts in Progressive Construction (supra) are definitely non different se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " 31. In view of this clause what was received by the assessee is after paying the service tax and on production of the original receipt the respective client reimburses the same. In the normal circumstances, the assessee would have collected the service tax from the respective clients and would have paid the same. Therefore, in our opinion, reimbursement of the service tax cannot form part of the taxable income of the assessee. Fee for technical service is for the service rendered by the assessee. Service tax would not form part of fee for technical services. In other words, service tax is not an expenditure incurred by the assessee. It is a statutory levy on the person who availed the service from the assessee. The matter would stand entirely on a different footing in case the assessee collected the service tax and it was not paid to the Government account. That is not the case before us. 32. We have also carefully gone through the judgement of the Calcutta High Court in the case of Chowranghie Sales Bureau Pvt. Ltd. (supra). In the case before the Calcutta High Court, the assessee collected the sales tax along with the price of the goods and credited the same in separate sale ..... X X X X Extracts X X X X X X X X Extracts X X X X
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