By Puloma Dalal, Jayesh Gogri, Mandar Telang Chartered Accountants
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Article 12, India-USA DTAA; Sections. 9(1)(vii), 40(a)(i), 195, the Act – amounts reimbursed to one US company in respect of services provided by another US company being not ‘fees for technical services’ under the Act nor ‘fees for included services’ under India-USA DTAA, were not subject to tax deduction u/s. 195; hence, payments could not be disallowed u/s. 40(a)(i).
Facts:
The taxpayer was an Indian Company. It was a joint venture between UPS International Forwarding Inc., USA and Jetair Private Limited. The taxpayer was engaged in the business of international express delivery services and international integrated transportation services and was having branches in several locations in India. UPS Worldwide Forwarding Inc. (“UPSWWF”) was a member-company of UPS group. UPS Group had a global arrangement with Receivables Management Services Inc. (“RMS”), USA for providing debt collection services. RMS provided these services to taxpayer outside India. As per the practice, UPSWWF would make payment to RMS and the taxpayer would then reimburse UPSWWF on cost-to-cost basis without any mark-up. During the year under consideration, the taxpayer made certain reimbursements to UPSWWF for services rendered by RMS.
In the course of assessment, the AO concluded that UPSWWF was merely a conduit or a facilitator and the taxpayer had obligation to deduct tax as per section 195 read with section 9(1)(vii) and Explanation to section 9(2) of the Act. Since the taxpayer had not deducted tax, invoking section 40(a)(i), the AO disallowed the payments.
The taxpayer relied on several decisions3 and contended that payment by way of reimbursement of expenses incurred on behalf of the payer is not income chargeable to tax in the hands of the payee and hence, it cannot be disallowed u/s. 40(a)(i).
The taxpayer further contended that since the services provided did not make available technical knowledge, skill, experience, know-how or process, the amounts paid were not taxable in India even in terms of Article 12 of India-USA DTAA .
Held:
Invoices raised by UPSWWF on taxpayer matched back-to-back with the invoices raised by the RMS. Thus, it was a clear case of reimbursement without any profit element.
In terms of Article 12 of India-USA DTAA , the services should make available technical knowledge skill, experience, know-how or process. If the taxpayer had directly paid RMS for debt collection services, it would not have been treated as Royalties or Fees for Technical/Included Services, either under the Act or under Article 12 of India-USA DTAA . Hence, provisions of section 195 were not attracted. Accordingly, payments could not be subjected to disallowance u/s. 40(a)(i) of the Act.
