TMI Blog2010 (6) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 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 - IT APPEAL NOS. 1073 AND 1074 (HYD.) OF 2004, 720, 721, 820 AND 821 (HYD.) OF 2005, 1217 AND 1218 (HYD.) OF 2006 - - - Dated:- 30-6-2010 - SHRI N.R.S. GANESAN, JUDICIAL MEMBER J. AND SHRI AKBER BASHA, ACCOUNTANT MEMBER J. Appellant by : Smt. Vasundhara Sinha, DR Respondent by : Shri S. Rama Rao ORDER Per N.R.S. Ganesan, JM: All these appeals of the Revenue are directed against the independent orders of the CIT(A)-III, Hyderabad and pertains to the assessment years 1998-99, 1999-2000, 2000-01, 2001-02, 2002-03. Since common issues arise for consideration in all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly 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 learned r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as required u/s 10(6A) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority of India and other departments cannot partake the character of income. 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. Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Special Bench of this Tribunal in ITO Vs. Prasad Productions in I.T.A. No.663/Mad/2003 dated 9.4.2010 and submitted that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding to the learned counsel, specific approval of Govt. of India may be required, in case the assessee entered into agreement for providing technical service with any company which is 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the relevant assessment year. According to the learned counsel for the assessee the entire amount was received by the assessee from the government and its agencies for the service rendered by it and tax was deducted at source. Therefore, 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 pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove, the ceiling or ceilings, as the case may be, set forth in Clause GC 6.1(b) above shall be increased by the amount or amounts, as the case may be, of any such additional payments. 6.2 Remuneration and Reimbursable Expenditures: (a) Subject to ceilings specified in clause GC 6.1(b) hereof, 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible during the entire duration of the contract to any eligible dependant of the foreign key personnel whose input is continuously foreseen on the project. For other foreign personnel whose input is not continuous (as in the case of Pavement cum Material Engineer), the number of round trips of the dependants shall also be same as for the key personnel provided that the 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 authorize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contention of the Learned Departmental Representative. The agreement entered into between the parties clearly shows that certain expenses are reimbursable in foreign currency and certain expenses are reimbursable in Indian currency besides payment of fee for technical services. Therefore, the expenditure reimbursable by the NHAI is the liability of the NHAI and not that of the assessee. At the initial stage in order to carry out the contract between 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the consultancy services, the NHAI has agreed to reimburse certain expenditures which are to be incurred by the NHAI. In the ordinary circumstances such expenditures are to be incurred only by the NHAI and not by the assessee. 15. Let us now examine item-wise expenditure said to be reimbursed by the NHAI. A per diem allowance for each of the export personnel for every day in which such personnel shall be absent from his home office and shall be outside India for the purpose of service 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause such personnel happen to be the employees of the assessee it does not mean that the expenditure has some connection with the services to be provided by the assessee in India. In our opinion, the reimbursable expenditure received by the assessee other than the consideration received for the services rendered cannot form part of the fee for technical services. In view of example 2 given in the Memorandum of Understanding the payment reimbursed by the NHAI is not for the included services also. Therefore, in our opinion, it cannot be treated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 44D(b) would be applicable only in respect of deduction at source. In the case before us, we have to compute the net taxable income for the purpose of taxation. Therefore, the expenditure incurred by the assessee which are to be reimbursed by the NHAI are to be excluded from the net taxable income. In view of this factual situation, in our opinion, this decision of the AAR in the case of Timken (I) Ltd. (Supra) may not be of any assistance to the Revenue. 19. We have also carefully gone through the decision of the AAR in the case of AT S 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 resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore us it is not in dispute with regard to payment of salary to the employees of the non resident company. The assessee is not claiming any deduction in respect of salary paid to its employees. As per the agreement, certain expenditure has to be incurred initially by the non resident company which otherwise has to be incurred by the NHAI. However, it would be reimbursed by the NHAI. Therefore, such a reimbursed expenditure would not form part of the fee for technical services. The AAR in the case of DHV Consultants BV (supra) had no occasion to consider the reimbursable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oney was received by the assessee on behalf of their clients for incurring the expenditure. Therefore, the money received did not have the profit making quality as held by the Calcutta High Court. In our opinion, this judgement of the Calcutta High Court also supports the case of the assessee. 23. We have also carefully gone through the judgement of the Apex Court in the case of CIT vs. Tejaji Farasram Kharawalla Ltd. (1968) 67 ITR 95. The assessee before the Apex Court acted as a selling agent of Ciba (India) Ltd. The assessee was entitled to commission of 12.5% on sales. Out of 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 Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was received after incurring the expenditure by way of reimbursement. Therefore, the reimbursable expenditure received by the assessee cannot form part of the total income. In view of the above discussion, in our opinion, the reimbursable expenditure received by the assessee cannot form part of the total income. Therefore, we do not find any infirmity in the order of the lower authority. Accordingly the same is confirmed. 25. The next contention of the learned Departmental Representative is that the Government of has not approved the agreement as required u/s. 10(6A) of the Income-tax Act, 1961. 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... structure falls within the industrial policy of Government of India specific approval may not be required for claiming exemption u/s. 10(6A) of the Act. 27. The next contention of the learned Departmental Representative is that in view of section 44D(b) and section 150A(3) the payment received by the assessee has to be construed as fee for technical services. We have carefully gone through the provisions of section 44D and section 150A of the Act. Section 44D provides special provisions for computation of income by way of royalty in the case of foreign company. Sub clause (b) says that no deduction in respect of any expenditure 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of default, service provider/trader may be held responsible to pay the same. In the case before us the agreement entered into between the parties clearly says that service tax payable shall be reimbursed separately on production of original receipt by the assessee. For the purpose of convenience, we are reproducing clause 1.10.3 in the agreement which is available at page 36 of the Paper Book. "However, the consultancy service tax payable in India for providing this consultancy service shall be paid/reimbursed by the client separately. The consultant shall produce the original receipt to the client in this regard as evidence for claim." 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A), fee received by the assessee towards technical services/ consultancy would fall under Article 12 and not under Article 7. Therefore, in our opinion, tax has to be levied only at 15% and not at 20%. Therefore, we do not find any infirmity in the order of the lower authority. Accordingly the same is upheld. 35. The next ground arises for consideration in assessment years 1998-99, 1999-2000 and 2000-01 is levy of tax u/s. 234B of the Act. We have considered the rival submissions on either side and perused the material on record. As rightly submitted by the learned counsel for the assessee all payments were received from the Government or its agencies. All payments were subjected to deduction of tax at source as required u/s. 195 of the Act. The Mumbai Bench of this Tribunal in the case of Lavelin International Inc. (supra) and Kaiser Aluminium Technical Services Inc. (supra) examined this issue and held that there is no liability to pay the advance tax wherever the tax was deducted at source. A similar view was taken by Special Bench of this Tribunal in Sumit Bhattacharya (2008) 112 ITD 1. Therefore, interest was not chargeable u/s. 234B of the Act. In view of the above, w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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