2017 (5) TMI 580 - AT - Income Tax

Amount of travel group health insurance and other incidental expenses received by way of reimbursement - treated as income of the assessee for the year under consideration - assessee company incorporated in USA is engaged in grading and certification of diamonds entered into agreement GIA India provoding training and technical services - Held that - Costs and expenses incurred by the assessee on travel and insurance etc on the persons deputed in India for providing training and technical services to GIA India was in the nature of cost incurred over and above the cost of employment. This interpretation is further re-enforced when we read the next clause i.e. clause 1.3 which says that GIA India shall reimburse to the assessee any expenses incurred on account of thirty party costs. The drafting of the agreement and manner of placements the clauses in the agreement clearly make out a case that FTS is different from the expenses incurred on third party costs. Thus there is a clear bifurcation in the agreement between the internal cost incurred by the assessee and external cost borne or paid by the assessee on behalf of GIA India. There is no confusion in this regard and the lower authorities have unnecessarily made an issue out of that. whether the expenses incurred on cost to cost basis will also be included in the amount of FTS ? - Taxability of FTS on gross basis it has been fairly admitted that there is no dispute on the proposition that FTS has to be taxed on gross basis. However the issue that arise here for our consideration is . We find that this controversy has now been put to rest by Hon ble Supreme Court by way of its latest judgment in the case of DIT vs A.P. Moller Maersk (2017 (2) TMI 993 - SUPREME COURT ). It is clear that the amount received by the assessee on account of reimbursement which has been received over and above the amount of FTS cannot be included and taxed as part of FTS. Our attention has been drawn on the Transfer Pricing Study report and Transfer Pricing orders passed in the case of GIA India from where it can be made out that no profit element has been included in the expenses reimbursed. Thus taking into account the totality of facts and circumstances of the case we find that addition made by the AO is contrary to facts and therefore is directed to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Treatment of reimbursement of expenses as income.
2. Taxability of fees for technical services (FTS) on a gross basis.
3. Distinction between internal costs and third-party costs in the context of FTS.

Detailed Analysis:

1. Treatment of Reimbursement of Expenses as Income:
The primary issue was whether the reimbursement of travel, group health insurance, and other incidental expenses received by the assessee from GIA India Laboratory P. Ltd. (GIA) should be treated as income. The assessee, a non-resident company, provided technical services to GIA India and raised separate debit notes for fees and reimbursement of expenses. The assessee excluded the reimbursement from its income, arguing that it constituted actual costs borne by the assessee and not income. The Assessing Officer (AO) included the reimbursement as part of the income, treating it as fees for technical services (FTS). The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the agreement did not specify that GIA India was liable to reimburse these expenses. The Tribunal, however, disagreed with the lower authorities, stating that the agreement clearly bifurcated FTS from third-party costs, and the reimbursement was not part of the FTS. The Tribunal directed the deletion of the addition made by the AO.

2. Taxability of Fees for Technical Services (FTS) on a Gross Basis:
The Tribunal acknowledged that FTS is taxable on a gross basis, as admitted by the assessee's counsel. However, the issue was whether expenses incurred on a cost-to-cost basis should be included in the FTS. The Tribunal referred to the Supreme Court judgment in DIT vs A.P. Moller Maersk 392 ITR 186 (SC), which clarified that reimbursement of expenses without any profit element cannot be taxed as part of FTS. The Tribunal noted that the Transfer Pricing Study report and orders confirmed no profit element in the reimbursed expenses. Thus, the reimbursement could not be included in the FTS and taxed.

3. Distinction Between Internal Costs and Third-Party Costs in the Context of FTS:
The Tribunal emphasized the distinction between internal costs (cost to employ individuals) and third-party costs (expenses incurred for third-party services) as per the agreement. The agreement allowed the assessee to receive a fee for internal costs plus a markup of 6.5% and reimbursement for third-party costs. The Tribunal highlighted that the agreement's terms clearly separated FTS from third-party costs, and the lower authorities' interpretation was incorrect. The Tribunal concluded that the reimbursement of third-party costs should not be treated as part of the FTS.

Conclusion:
The Tribunal allowed the appeals, directing the deletion of the additions made by the AO for both assessment years, as the reimbursement of expenses was not part of the FTS and should not be taxed as income. The order was pronounced in the open court in the presence of representatives from both parties.