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TMI Blog2024 (9) TMI 1129X X X X Extracts X X X X X X X X Extracts X X X X ..... e direction of Ld. CIT(A) deleting the disallowance of Rs. 21,05,07,858/- made under Section 40(a)(i) of the Act by the Ld. AO on account of payment made to non-resident association enterprises for freight and forwarding services? 2. We note that the first issue which stands posited is with respect to reimbursement of expenses which the respondent/assessee made to Non-Resident Associated Enterprises ["NRAE"]. The relationship between the Indian assessee and its NRAE stood comprised in an agreement dated 12 December 2005, relevant parts whereof are extracted hereinbelow: "2.0 GENERAL CONDITIONS 2. 1 This Agency Agreement covers the Agency work for and on behalf of the Principal and includes the duties of marketing the services of the Principal and other activities as desired by the Principal. 2.2 Whereas both parties are fully organized and equipped to perform all the services customarily associated with international sea and air transportation of goods and property as legally obligated in accordance to the Bill of Lading/Airway Bill so issued. 2.3 Where as both parties are mutually desirous of entering into an agreement here in after set forth. 3.0 DUTIES OF THE AGENT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the instructions of the Principal but so that the Principal will indemnify the Agent against any cost expenses or liabilities incurred by reason of the Agent's own negligence or default. 3.10 The Agent shall inform the Principal, prior to quoting various charges such as CAF/BAF/FSC etc, applicable from time to time. They shall also notify of any changes in the trade practices to the Principal periodically. 4.0 Duties of the Principal 4.1 The Principal shall support the Agent in his efforts to promote services at all times with timely and appropriate information with reasonable limits of his infrastructure. 4.2 The Principal shall pay the remuneration to the agents at the rates so agreed, in accordance to this Agreement (Clause 5.2). 5.0 PAYMENT & ACCOUNTING PROCEDURE 5.1. Payments of collect freight less Profit share will be settled as agreed mutually by both the parties. 5.2. Profit share between the Principal and the Agent shall be on a 50/50 basis and it shall be calculated only on the sea freight or airfreight, irrespective of whether freight is prepaid or collect. 6.0 INDEMNITY In the event of any claim/liability to be referred to the loca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.2010 has stated):- "The assessee is a Multinational Enterprise (MNE) and in MNE it is common to have one member of the group to give services to other members of the group in the interest of the whole group. These arrangements are commonly referred as "intra- group services". Therefore, the services are provided by one member to other member and later on a bill for reimbursement of expenses is cross changed". The submission of the assessee company were duly examined, considered and however, not found acceptable. 4.2. At the outset, it is to be noted that the sums were paid by way of expenses to non-resident third parties who had rendered services to the assessee. These payments there fore fall within the purview of section 9(1)(vii) and are there fore taxable in India as fee for technical services. 4.3 The contention of the assessee that the payment made is reimbursement against actual expenses, and therefore not chargeable to tax is not acceptable. 4.4 At the outset it may be noted that the Income Tax Act as well as tax treaties entered into by India, provide for taxation of fees for technical services on a gross basis. As far as taxation by the source state is conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax in India. 4.9 In the case of Steffen, Robertson and Kirsten Consulting Engineers and Scientists vs. Commissioner of Income Tax. [1998] 230 ITR 0206 [Authority for Advance Ruling], the Hon'ble Authority for Advance Ruling in its order dated 29.10.1997 held that "the living allowance paid to the foreign. technicians will form an integral part of the fees payable to SRK under the agreement and will also be taxable in India." 4.10. In Danfoss Industries P. Ltd. vs. Commissioner of Income Tax [2004] 268 ITR 0001 [Authority for Advance Ruling], the Hon'ble Authority in its order dated 14.05,2004 held that "the payments to be made by the applicant pursuant to the agreement proposed to be entered into between the said Danfoss Singapore for the services to be provided by it to the applicant cannot be said to be reimbursement of the actual expenditure incurred by Danfoss Singapore and it cannot be said that no income is embedded into such payment, therefore, the payments have to be made after withholding tax under Section 195 of the Act." 4.11. The Authority for Advance Ruling again in the in the case of Timken India Ltd. [2005] 273 ITR 0067 held: a) That the sum of US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ITAT in Para 25 of the order impugned. The said findings are reproduced hereinbelow: "25. The CIT (A) thereafter admitted the additional evidence and Noted that the AO has also not made any adverse comment with regard to admission of additional evidence. Before the CIT (A), the, Assessee preferred written submissions explaining the nature of reimbursements. Relevant extracts of the submission which also find mention in the order of the CIT (A) are reproduced herein below- "The Assessee carried out certain transactions during the year under appeal with overseas JAS Group of Companies and other domestic entities. In this regard JAS Group of Companies incurred certain expenses totaling Rs.21,58, 139/- on behalf of the Assessee which were later on recharged by its associates on cost to cost basis. The nature of such expenses are discussed below: (i) Reimbursement of Server Maintenance Cost amounting to Rs. 13,780/-. Here, the expenses only represented proportionate expenses incurred by the AE for the maintenance of server from time to time. An overseas server had been set up to run the business efficiently, which is shared and maintained by Jas Forwarding Worldwide Pty Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LLC, situated in Atlanta, USA perform administrative, business development activity for common interest of the JAS Group which in-turn help the entities to grow their businesses. In this procedure, they incur some cost which they allocate within the group members which are benefited by the said activity, directly or indirectly. The Assessee was also charged its share of expenses, for which the assessee made the payment. Further, the expenses only represented proportionate expenses incurred by the non-resident to avail administrative, business development activity. (iv) Reimbursement of Traveling Cost amounting to Rs.1,18,328:The said expenses were incurred by the Assessee on behalf of the non-resident on account of local air tickets of foreign delegates coming to India. The same was cross charged by the Assessee to the respective non-resident during the year. However, during the assessment proceedings, when the Assessee provided the details of the payments made to the non-residents, the above travelling cost, which was in fact receivable from the nonresident was inadvertently included as payable in the list. Since the same was received/ receivable by the Assessee, therefore, in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the nature of day-to-day expenses of the business activities of the Assessee. The copy of the invoices, ledger accounts etc. have been filed before us. We find that the nature of expenses includes server maintenance Cost, netting charges, management expenses, travelling cost, insurance expense etc., which are an integral part of running of a business and for undertaking day-to-day activities. The Ld. AO/CIT(A) have not doubted the genuineness of the expenses. In fact, even the nature of the expenses stands accepted. Thus, the domain of commercial expediency cannot be entered into. We find that this issue in principle is covered in the case of S.A. Builders (SC) (288 ITR 1) and is directly applicable on the facts of the present case as the evidences have already been filed by the Assessee and a stated above, the expenses being reimbursed are regular business expenses. Thus, the appeal filed by the Assessee succeeds." 7. Before us it was principally sought to be contended that the nature of functions which have been performed by the foreign principals in favour of the respondent/ assessee would clearly amount to and fall with in the ambit of Section 9(1)(vii) of the Act and thus c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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