By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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New Page 18 Bangalore
International Airport Ltd. v.
ITO (2008) 6 DTR (Bang.) (Trib.) 15
S. 195 of the Act
A.Y. : 2006-07. Dated :
17-12-2007
Issue :
Whether reimbursement of expenses incurred by
non-resident promoters prior to their participation in joint venture company is
subject to tax deduction u/s.195 of the Act ?
Facts :
The assessee-company was a joint venture company
established for development of international airport at Bangalore, having equity
participation from certain non-resident companies, which were also the promoters
of the assessee. The non-resident promoters had incurred various expenses
towards technical and other consultations. These consultations were undertaken
outside India prior to the award of the contract to the non-resident promoters
and payments were also made by the non-resident promoters outside India. The
shareholders’ agreement pertaining to the assessee-company provided for
reimbursement of development cost to the promoters. In pursuance thereof, the
Board of Directors of the assessee-company passed a resolution to the effect
that “The offshore expenses shall be advanced by private promoters. All
expenses will be reimbursed and capitalised after financial close“. The
reimbursement of the expenses was to be limited to 50%. Accordingly, the
assessee-company reimbursed 50% of the expenses to the non-resident promoters.
In his order u/s.195 of
the Act, the AO had accepted the fact that the amount was being paid much after
the incurring of the expenses by the promoters. However, since the expenses
included element of technical services and since they were incurred after the
execution of shareholders agreement, he was of the opinion that tax should have
been deducted or should be deducted. In this context, the assessee-company
brought to the attention of the AO the decision in Hyder Consulting Ltd., In
re (1999) 236 ITR 640 (AAR) and also contending that reimbursement of
expenses in no way involves any element of profit and further since the expenses
were incurred by the non-resident in respect of services rendered by another
non-resident outside India, TDS provisions were not attracted. The AO, however,
did not accept this contention and concluded as follows and proceeded to compute
the tax to be withheld by the assessee-company.
(a) The foreign
shareholders of the applicant company had provided certain services to the
applicant company.
(b) The contention
that part of these services were obtained from other parties is of no
consequence.
(c) All these services
which are proposed to be paid for by the applicant company now, have been
utilised by the applicant company in India.
(d) All these services
called by the applicant as ‘consultancy services’ fall squarely within the
meaning of fees for technical services, as provided for in Article 12 of both
the relevant DTAAs as also the IT Act.
(e) Thus, the
consideration payable for such services is chargeable to tax, even if its
nomenclature is ‘reimbursement’, as the income is deemed to accrue or arise in
India.
(f) Hence, withholding
provisions of S. 195 are clearly invoked.
(g) The rate of
withholding tax is 10% as per the respective DTAAs, in view of the fact that
it is the rate beneficial to the payees.
(h) The above
conclusions, based on the facts and information as provided by the applicant,
are to be seen in the context of S. 195 of the IT Act. The provisions of S.
195 are necessarily summary and are only for the purpose of determining the
issue and quantum of withholding tax. It follows that the said tentative
conclusion is subject to the test of final determination at the stage of
assessment.
In appeal by the assessee-company, the CIT(A) noted
the agreement and arrangement between the share-holders and also the arguments
of the assessee-company. CIT(A) did not dispute assessee-company’s claim of it
being a case of reimbursement of expenses and also that the reimbursement was
only to the extent of 50% of the actual expenses. However, observing as follows,
he held that the AO was justified in his conclusions :
(i) The nature of
services are such as would be prima facie covered by the definition of
FTS in IT Act as well as respective DTAAs.
(ii) Adequate support
in respect of quantification of costs reimbursed has not been furnished by the
appellant.
In appeal before the Tribunal, the Tribunal noted that the expenses were incurred by the non-residents out of India in their capacity as promoters and at the relevant time, S. 5 or S. 9 was not applicable, since it was not a payment by a resident to a non-resident. The payment by the assessee-company to the non-resident promoters was a case of reimbursement of expenses incurred and such reimbursement was limited to 50%, which could not be equated to amount paid for technical services. As such it would not involve any profit element. The expenses were incurred to ascertain the feasibility and viability of the project for the promoters to decide whether to participate in the project. One of the bidders whose bid was not accepted had also incurred certain expenses, 50% of which were reimbursed and the Department had permitted such reimbursement without any TDS. The Tribunal noted that there was no difference between the bidder whose bid was not accepted and the bidder whose bid was accepted.
Held:
The Tribunal held that on facts and circumstances, the reimbursement of 50% of the expenses incurred by the non-resident promoters outside India did not attract provisions of S. 195(2) of the Act.
