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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 ..... he 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 consortium members undertook to bear their own pre-bid expenses till such time the bid was successful. For this purpose, the assessee-company was created as a joint venture vehicle. The understanding was that as soon as the joint venture vehicle was created, the respective members of the consortium would become entitled to get their share of the pre-bid expenses reimbursed out of the capital of the company (viz., the joint venture vehicle). Clause 4.1(c) of the agreement between the memb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing 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 applicable; (b)The assessee-company is getting the technical services through the HK company which is acting as its agent in Hongkong and has made the payment on behalf of the assessee-company; The Assessing Officer however exempted the expenses incurred on trips to India and held that no tax need be deducted on that part of the remittance. As regards the balance, he accepted the assessee's claim only with regard to pro rata reduction having regard to the fact that the actual remi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght 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 technical expertise and, therefore, had to approach an outside agency for preparing the bid documents, which was a technical exercise, the nature of the remittance does not change. It was argued that the remittance would have been treated as FTS had the assessee-company directly engaged the consultancy firm (which was engaged by the HK company) and the position should not be differently viewed merely because the remittance was routed through the HK company. 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 such income to the account of the payee or at the time of payment thereof, whichever is earlier, deduct income-tax thereon at the rates in force. Under sub-section (2), the person paying the amount, if he considers that the whole of the amount would not be income chargeable to tax in the hands of the recipient, may make an application to the Assessing Officer to determine the appropriate proportion of such sum so chargeable and upon such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 considered as having an income element imbedded therein so as to attract section 195(1) of the Act. The question has been considered by the Hon'ble Delhi High Court in Industrial Engg. Projects (P.) Ltd.'s case (supra). In this case, the assessee had an agreement with a foreign company whereby some services were to be rendered by the assessee for remuneration. The agreement also provided that costs and expenses incurred by the assessee would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 question of reimbursement was considered in the context of whether it would give rise to any perquisite within the meaning of section 17(2) of the Income-tax Act. In that case, the assessee was an employee of a French company and he worked in India for an Indian company. The retention salary was paid by the French company and the Indian company agreed to pay living allowance to the assessee. The allowance was likely to be reduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 bear the character of income. Thus, the preliminary question, namely, whether the amount remitted would in its entirety or partly be considered as income of the HK company has to be resolved in favour of the view that it being a mere reimbursement it cannot be so considered. As held by the Karnataka High Court in the case of Hyderabad Industries Ltd. (supra), the purpose of deduction of tax at source is not to collect a sum whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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