TMI Blog2012 (12) TMI 1153X X X X Extracts X X X X X X X X Extracts X X X X ..... nd maintaining an integrated Steel plant, are in the nature of reimbursement? (2) Whether, on the facts of the case and in law, the CIT (A) was right in holding that the said payments made towards services availed for operating and maintaining an integrated steel plant do not attract the provisions of s.194J of the Act since the company - M/s. Hospet Steels Limited charged their services on cost to cost basis and no income was accrued to M/s. Hospet Steels Limited? 3. As the issues raised in these appeals, being identical and interlinked, they were heard, considered together and disposed off, for the sake of convenience and clarity, in this common order. 4. Further, as the issues raised in the cases of (i) M/s. Mukund Limited; and (ii) M/s. Kalyani Steels Limited for both the AYs [2008-09 and 2009-10] are identical, for the sake of clarity and appreciation of facts, the issues raised in the case of M/s. Kalyani Steels Limited are taken up for adjudication and the findings recorded hereunder will hold good in the case of M/s. Mukund Limited for both the AYs as well. Reverting back, the issues, in brief, are as under: 5. The assessee company [ the assessee in shor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for various years; It is also evident from the SAA that no service charges is paid or payable to HSL from KSL and ML. The assessment order for the year 2000-01 by the then ACIT, Circle 1, Bellary in the case of HSL states that the expenditure incurred by HSL is reimbursed by KSL and ML in the agreed ratio. In my opinion, the AO is not justified in rejecting the contention that the payments are on cost to cost basis and, hence, reimbursements. While, he himself has stated so in the assessment order for the year 2008-09 u/s 143(3) that HSL charges KSL and ML on cost to cost basis as per the SAA, he cannot take a different view while assessing the TDS return of the appellant. Base(d) on the above, in my opinion, the payments made by KSL and ML is in the nature of reimbursements. 6.1. After having considered the payments as reimbursements and also after due examination as to whether such reimbursements were liable for TDS u/s 194J of the Act, as recorded in his appellate order, the CIT (A) made the following observations at para 11.11 of his order thus: 11.11. In view of the above factual position, various case laws on the matter, in my considered opinion, the payments made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - that HSL, KSL and the assessee were independent entities and HSL was carrying on its business independently and not an agent of either of the assessee or ML; - that HSL is a service company and manage an integrated steel plant for KSL and the assessee; and that the entire staff and manpower including labourers required for operating and maintaining the said integrated steel plant for rendering services to the assessee and KSL were employed by HSL; - that the assets owned by HSL were used for the purpose of rendering services to the assessee and KSL; - that HSL charged amounts aggregating to ₹ 20.76 crores and ₹ 20.11 crores [FY 2007-08] and ₹ 25.91 crores and ₹ 19.44 crores [for FY 2008-09] respectively from KSL and the assessee towards services rendered for operating and managing an integrated steel plant; - that the CIT (A) had erred in holding that no TDS was required as there was no element of profit in the payments which were made on cost to cost basis. As provided u/s 194J, TDS has to be deducted irrespective of the fact whether the deductee was making profit or not; Relies on the case laws: CIT v. American Express Bank Ltd 18 Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id payment does not comprise of any income component; as required under s.194J for liability to deduct tax at source. Further, the said payment was not in the nature of fees for professional services or technical services or royalty or compensation in restraint of trade; - That there was no profit element embedded in the payments made by the assessee and ML to HSL; Relies on in the case of Brij Bhushan Lal Parduman Kumar v. CIT (1978) 115 ITR 524 (SC) - That the reimbursement was not regarded as income in the hands of the recipient in the following cases: ITO v. M/s. CGI Information Systems Management 2009- TIOL-668-ITAT-BANG; BIAL v. ITO (2008) 115 TTJ (Bang)477; CIT v. Fortis Health Care Ltd (2009) 181 Taxman 257 (Delhi); CIT v. Tata Engg. Locomotive Co. Ltd (2000) 245 ITR 823 (Bom) - Thus, the judicial views (supra) reiterate that the reimbursement of expenditure does not partake the character of income; - That in the present case: (i) the payment made by the assessee to HSL was only reimbursement made in respect of the cost incurred by HSL on behalf of the assessee; (ii) the said payment does not have any element of income in the h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e laws etc., 8. We have carefully considered the rival submissions, perused the relevant case records and the documentary evidences produced by the learned AR in the shape of paper books coupled with various case laws. 8.1. The moot question now for consideration is as to whether the assessee s case falls within the mischief of s. 194J of the Act or not? 8.2. Kalyani Steels Limited [KSL], Kalyani Ferrous Industries Limited [KFIL] KSL and KFIL, the constituents of Kalyani Group [KG] engaged in manufacturing of steel billets, ingots and rolled products and Mukund Limited [ML] also engaged in the business of manufacture of steel billets, rolled products of various grades of steel and other steel products were desired of manufacturing steel through a more economical and cost effectively have entered into a Strategic Alliance Agreement [SAA] on 16.5.1998 for setting up steel making facilities. Under the SAA, both the companies have installed their plants in close by and in pursuance of the said SAA, the assessee along with ML promoted M/s. Hospet Steels Limited [HSL] for effective functioning of all the plants as one composite manufacturing unit and, accordingly, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd technical services within the meaning of the provisions of s. 194J of the Act and, accordingly, the assessee was treated as an assessee in default in accordance with the provisions of s.201 of the Act and interest u/s 201(1A) of the Act was also chargeable against the amount for which no TDS was effected u/s 194J of the Act. Since the deductee [HSL] had filed its return of income reflecting the payments received from the assessee and ML as receipts in its P L account, no demand u/s 201 of the Act was raised on the assessee for nondeduction of tax. However, interest u/s 201(1A) of the Act was raised for having failed to deduct tax at source u/s 194J of the Act. 8.2.3. This stand of the AO has been strongly objected by the learned A R. It was the case of the learned A R that the payments made by the assessee to HSL was in the nature of reimbursement on cost to cost basis and that no service charges have been levied by HSL in respect of transactions undertaken by it. Thus, according to the learned AR, the said payment did not constitute an income in the hands of HSL and, therefore, the assessee was not liable to deduct tax at source u/s 194J of the Act. The learned AR also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2/Bang/2011 research carried on by the assessee was for the benefit of all concerned, including the Indian Company. It was for sharing of the expenses of the research which was utilized by the subsidiaries as well as the head office organization, that the payments were made by the Indian Company and received by the assessee. The fact that after the termination what was to happen to these information gathered was not mentioned indicated that it could not be anything but sharing of the expenses because if it had provided that the information would belong either to the parent company or to the subsidiary, then perhaps it might have been contended that payments were either royalty or hiring charges of the information sand as such could be treated as income. But the very fact that the technical data was jointly obtained and the expenses were shared together indicated that it could not be treated as income. The fact was that only 0.67 per cent of the turnover was allowed because of the restrictions imposed by the Government. Accordingly, the amounts received by the assessee did not constitute income assessable to tax. With due regards, we have perused the ruling of the Hon ble Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en it is reimbursement of expenses. The Bangalore Bench vide order dated 17th December, 2007 observed that the expenses as incurred by the promoters compensated to them would not involve any profit element also and, therefore, no deduction of tax is required to be made. Following that decision, we hold that no TDS was required to be deducted in respect of expenses reimbursed. (iii) In the case of CIT v. Expeditors International (India) (P) Ltd reported in (2012) 24 Tax mann.com 76 (Delhi), the Hon ble Delhi High Court had agreed with the assessee s counsel s argument that the payment raised was towards reimbursement of the expenses incurred by the parent company, namely, global management expenses and other expenses. When such payment was not chargeable to tax at all, the collecting machinery provision, whether section 194J or section 195, would not get triggered. According to her (the assessee s counsel), there must be component of income chargeable to tax and only then the question of deduction of tax at source would arise in as much as tax at source is to be deducted on income and not on expenses . In its ruling, the Hon ble Court had concluded that, 6.Prima facie, we fin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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