Assessee-company is engaged in the business of investment advisory. It filed its return of income on 31.10.2007, declaring income of Rs. 3.79 Crores. The Assessing Officer(AO)completed the assessment,u/s.143(3)of the Act,on 31.10.2011, determining the income of the assessee at Rs. 5,05,23,090/-.
2. Effective ground of Appeal filed by the AO is about disallowance of reimbursement of expenses of Rs. 97.95 Crores. During the assessment proceedings, the AO found that the assessee had made certain payments to its overseas group companies, that it had not deducted tax at source with regard to such payments. He observed that payments made by the assessee were in nature of the Technical/Managerial services, that the assessee was liable to deduct tax as per the provisions of section 195(1)r.w.s.9(1)(vii)of the Act. He issued a notice to the assessee asking it as to why not same should be disallowed as per the provisions of Section 40(a)(ia)of the Act and be added back to its total income. After considering the submissions of the assessee, the AO held that it had not filed any details to prove that the expenditure incurred was reimbursement, that it had paid the said sum for services provided by the group companies, that in the audit report it was not mentioned that the expenditure represented simple reimbursement, that the group companies were doing recruitment for the assessee, that group companies were located outside India, that the assessee had handed over the job of recruitment in foreign territories to them, that the payments were in the nature of technical services as it required technical expertise, that it was Fees for Technical Services(FTS), that as per the amended provisions of section 9(1)(vii)income would deemed to arise or accrue in India even if payment was made outside India/the services were rendered outside India. Finally, he made a disallowance of Rs. 97,95,014/-invoking the provisions of section 40(a)(ia)of the Act.
3. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA). Before him, the assessee argued that it had furnished details of reimbursement of expenses to overseas group companies along with supporting documents vide letters 18.11.2009 and 30.11.2010, that the AO without providing any opportunity passed the assessment order on 31.1.2011, that the payment made by the assessee to the overseas group company was mainly in respect of legal and professional charges, recruitment charges and repairs / maintenance cost, that the overseas group companies initially incurred the expenses by way of payment to third parties, that the payment were made on behalf of the assessee, that the expenses were booked at cost and there was no mark-up, that no income had accrued to the overseas group companies from the amounts reimbursed by the assessee. It was further stated the complete details of reimbursement of expenses to overseas group companies were submitted vide letter dated 28.11.2009 and 30.11.2010, that the reimbursement of expenses had also been reported in the Form 3CED, that the TPO had examined the nature of reimbursement of expenses while passing the transfer pricing order on 9.10.2010, that the TPO had found that the transactions were not hit by the ALP provisions. Without prejudice to the above, the assessee argued that the amount paid / payable to the overseas group companies would not qualify as FDS, that the amount paid / payable would not qualify as make available services under the DTAA, that while disallowing the amount in question, u/s 40(a)(ia) of the Act, the AO had not considered the provisions of section 90(2) of the Act, that as per the Article 12(4) of the Indo-USA Tax Treaty services will qualify as FDS only if it made available technical knowledge, experience, skill, know-how to the person receiving the services.
After considering the submission of the assessee and the assessment order, the FAA held that the majority amount (Rs.96.43 lakhs) pertained to recruitment charges paid to overseas entities, that vide its letter dated 28.11.2009 the assessee had submitted employee-wise recruitment charges incurred during the year along with the supporting documents, that the copies of invoice raised towards search fees for recruiting employees for the services were also submitted, that the AO, in his assessment order, had not referred to the letter date 18.11.2009 of the assessee, that the remaining expenses (1.15 lacs assessee 97.95 lakhs – 96.43 lakhs) were towards communication expense (Rs.3,252/-legal & professional charges (47,800), printing & stationery expenses (Rs. 12,226) and repairs / maintenance cost (Rs.88,065), that all these expenses were reimbursement only and were not in the nature of FTS, that there was no element of income/ profit embedded in such payments, that the provisions of section 195(1)were not attracted. Finally, he held that the disallowance made by the AO by invoking provisions of section 40 (a) (ia) of the Act was not sustainable.
4. During the course of hearing before us, the departmental representation (DR) supported the order of the AO and relied on the case of Virolo International(42 Taxman.com 286). The authorised representative(AR)relied upon cases of Seimens Aktiongesellschaft (310 ITR 320, WNS Global Services Ltd (214Taxman317)and made the same submissions that were made before the FAA.
5. We have heard the rival submissions and perused the material before us.We find that the assessee had incurred an expenditure of Rs. 97.95 lakhs towards reimbursement, that out of the above amount Rs. 96.95 lakhs were paid for recruitment charges, that it had reimbursed the foreign entities who had undertaken search process for recruiting employees on its behalf, that expense was paid at cost price and there was no mark up, that the TPO in his order had not disturbed the claim made by the assessee, that vide its letter dated 28.11.2009 the assessee furnished all the necessary details about the expenditure incurred, that the AO did not consider the details while finalising the assessment, that the AO had made the disallowance u/s.40(a)(i)by treating the expenditure in question as FTS as per the provisions of section 9(1)(vii)of the Act, that the auditor had not qualified the disputed amount as disallowance u/s.40(a)(i)of the Act, that AO had not proved that profit element was embedded in the payments made to the overseas entities, that payment was pure and simple reimbursement, that provisions of section 195 were not attracted for reimbursements. Here, we would like to refer to the relevant portion of the judgment of Seimens Aktiongesellschaft (supra) delivered by the Hon’ble Bombay High Court and same reads as under:
“33. That leaves us with the last contention as to whether the amounts by way of reimbursement are liable to tax. To answer that issue, we may gainfully refer to the judgment of a Division Bench of the Delhi High Court in CIT vs. Industrial Engineering Products (P) Ltd. (supra). The learned Division Bench of the Delhi High Court was pleased to hold that reimbursement of expenses can, under no circumstances, be regarded as a revenue receipt and in the present case the Tribunal had found that the assessee received no sums in excess of expenses incurred. A similar issue had also come up for consideration before the Division Bench of the Calcutta High Court in CIT vs. Dunlop Rubber Co. Ltd. (supra). The learned Division Bench was answering the following question :
"Whether, on the facts and in the circumstances of the case, the amounts received by the assessee (English company) from M/s Dunlop Rubber Co. (India) Ltd. (Indian company) as per agreement dt. 29th Jan.,1957 constituted income assessable to tax ?"
On considering the issue the learned Bench noted that the Tribunal was of the view that what was recouped by the English company was part of the expenses incurred by it. The learned Court upheld the said finding. The learned Bench was pleased to hold that sharing of expenses of the research utilised by the subsidiaries as well as the head office organisation would not be income which would be assessable to tax. A similar view was taken in CIT vs. Stewarts & Lloyds of India Ltd. (supra).
We are in respectful agreement with the view expressed by the Delhi and Calcutta High Courts.” In our opinion, the FAA had rightly held that section 40(a)(i)had no role to play regarding the payments made by the assessee to overseas companies. Secondly, services in the nature of recruitment or placement agency do not come under the purview of fees for included services within the meaning of Art.12(4)(b)of the DTAA. Reliance is placed on the matters of Real Resourcing Ltd. (190 Taxman 151-AAR)and IIC System(P.)Ltd.(127TTJ435).We would also like to mention that the retrospective amendment to section 9 cannot change the tax withholding liability with retrospective effect. In the cases of Virola International(supra)and Channel Guide India Ltd.(25taxmann.25)it had been clearly held that liability to deduct tax cannot be implemented retrospectively. The assessee had acted as per the provisions of Act that were applicable at the time of making the payment and in the case under consideration there was no liability on part of the assessee to deduct tax for the payment made. Considering the above, we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity. So, confirming his order, we decide effective ground of appeal against the AO.
CO.41/Mum/2014,AY.-2007-08:
In the ground raised in the CO, the assessee had stated that FAA had not held that reimbursement was not FTS as per the provisions of section 9(1)(vii).While deciding the appeal filed by the AO we have decided the issue in favour of the assessee and against the AO. So, the CO is allowed for statistical purposes.
As a result, appeal filed by the AO is dismissed and the CO filed by the assessee is allowed for statistical purposes.