ACIT CIR-3(1), JAMSHEDPUR V. TIMKEN INDIA LTD , JSR

ITA 228/RAN/2019

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 2759 (ITAT-RANCHI)
• Duration Of Justice: 2 year(s) 11 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-05-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2003-2004
• Appeal Filed On: 05-06-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Double taxation relief; TDS
• Section: 143(3); 40(a)(ia); 201(1); 195; 250

Judgement Text

1 ITA No. 228/Ran/2019 A.Y 2003-04 Timken India Ltd. IN THE INCOME TAX APPELLATE TRIBUNAL, RANCHI BENCH, VIRTUAL HEARING AT KOLKATA [Before Shri Rajpal Yadav, VP (KZ) & Shri Girish Agrawal, AM] ITA No. 228/Ran/2019 A.Y 2003-04 ACIT, Cir-3(1), Jamshedpur Bagmati Road, Northern Town Bistupur, Jamshedpur-831001 Vs. M/s. Timken India Limited Bara P.O Agrico Jamshedpur - 831009 PAN: AABCT0596J Appellant Respondent Date of Hearing (virtual) 21.02.2022 Date of Pronouncement 09.05.2022 For the Appellant Shri K.M. Gupta, Advocate, Ld. AR For the Respondent Shri Sanjay Mukherjee, CIT/DR आदेश /O R D E R Per Girish Agrawal, Accountant Member: This appeal preferred by the revenue is against the order of Ld. Commissioner of Income Tax (Appeals), Jamshedpur in appeal no. 03/14-15/76/JSR/2006-07 dated 18.03.2019 for AY 2003-04 passed u/s. 250 of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’) against the assessment order u/s 143(3) of the Act passed by ACIT, Circle – 3, Jamshedpur dated 31.03.2006. 2. The only issue before us in this appeal by the revenue is against the action of Ld. CIT(A) deleting the addition made by the Ld. AO u/s. 40(a)(i) of the Act in respect of non- deduction of tax at source u/s 195 of the Act on payment made by the assessee towards reimbursement of expenses to a non-resident company in USA. 3. Brief facts relating to the issue are that Timken Inc, USA is the holding company of the assessee company Timken India Ltd (TIL). In the assessment proceedings, Ld. AO noted from Form 3CEB that the assessee company has made payment of Rs. 2,38,26,680/- 2 ITA No. 228/Ran/2019 A.Y 2003-04 Timken India Ltd. (Rs. 73,19,280 + Rs. 1,65,07,400) towards reimbursement of expenses and actual cost of services to M/s. Timken Inc, USA incurred by it on behalf of TIL. By taking a view that section 195 speaks of any sum and not income, Ld. AO held that assessee was obliged to deduct tax at source while making payment towards reimbursement of expenses. Since the claim of expenditure of Rs. 2,38,26,680/- by the assessee in computing the profits and gains of business and profession is without deduction of tax at source, Ld. AO disallowed the same by applying the provisions of section 40(i)(a) of the Act and added it back to the total income of the assessee. Aggrieved, assessee went in appeal before the Ld. CIT(A). 4. On appeal, the Ld. CIT(A) deleted the impugned addition made by the Ld. AO by following the finding given at Para 11 in the earlier order dated 07.09.2017 of the Coordinate Bench of ITAT Ranchi in assessee’s own case in ITA Nos. 176-177- 178/Ran/2014 & CO Nos. 10-11-12/Ran/2014 for AYs 2005-06, 2006-07 and 2007-08. Aggrieved by the said deletion, Revenue is in appeal before the Tribunal. 5. At the outset, Shri Sanjay Mukherjee, Ld. CIT(DR) appearing on behalf of the Revenue submitted that Ld. CIT(A) is not correct in deleting the impugned addition made u/s. 40(a)(i) of the Act since the payment of reimbursement of expenses by the assessee to non-resident company Timken Inc, USA is covered by the Indo-US Double Taxation Avoidance Agreement (DTAA) and sub-section (2) of section 195 of the Act. He also placed has reliance on the order of the Ld. AO. 6. On the other hand, Shri K.M. Gupta, Advocate appearing on behalf of assessee submitted that the issue in hand is squarely covered by the earlier order dated 07.09.2017 in assessee’s own case passed by the Co-ordinate Bench of ITAT, Ranchi (supra) and also by the order dated 29.11.2017 in the case of the non-resident payee company Timken Inc, USA, passed by the Co-ordinate Bench of ITAT, C Bench, Kolkata in ITA Nos. 387 & 398/Kol/2010, CO Nos. 32 & 31/Kol/2010 for the AYs 2002-03 and 2003-04. Copy of these orders is placed in the paper book. 3 ITA No. 228/Ran/2019 A.Y 2003-04 Timken India Ltd. 6.1 Ld. Counsel for the assessee further submitted that these reimbursements represent expenses and actual cost of services incurred by the holding company in USA on behalf of TIL which are subsequently paid back, commonly known as ‘chargeback payment’. According to him, these expenses are primarily in the nature of travelling expenses, boarding, lodging, apartment rentals, legal/professional services, etc. and the reimbursements made by the assessee are without any mark-up or profit element. He thus contended that since no element of income is involved in these ‘chargeback payments’ to Timken USA, the assessee has not deducted tax at source u/s 195 of the Act while making remittances. According to him, Ld. AO has wrongfully disallowed the deduction claimed by the assessee in respect of these payments u/s 40(a)(i) of the Act for non deduction of tax at source u/s 195 of the Act. He relied on the order of the Ld. CIT(A) in allowing the same on this issue. 7. After hearing the rival submissions and perusing the material available on record, we find that the issue in hand is squarely covered in favour of the assessee by the earlier order dated 07.09.2017 in assessee’s own case passed by the Co-ordinate Bench of ITAT, Ranchi (supra). Relevant portion of the said order is reproduced herein below for the sake of clarity and ease of reference:- “11. We have heard the rival submissions, perused the orders of lower authorities and materials available on record. In the instant case, the assessee has claimed to have made reimbursement of expenses of Rs. Rs.47,08,040/­ for assessment year 2005­06 and Rs. Rs.l,68,16,412/­ for assessment year 2007­08. The Assessing Officer disallowed deduction for the same for the respective assessment years on the ground that no TDS was deducted u/s.195(2) of the Act. The contention of the assessee is that since the assessee had made reimbursements of expenses and as there was no profit element embedded in those payments, therefore, no TDS was required to be deducted u/s.195(2) of the Act from the payments of Timken Company, USA. For this, reliance was placed on the decision of Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd., (supra). Ld A.R. of the assessee has pointed out from the assessment order in the case of Timken Company, USA for assessment years 2005­06 and 2007­08 that in the assessment made for assessment year 2005­06, the Assessing Officer has himself admitted Rs. 41,52,635/­ towards 4 ITA No. 228/Ran/2019 A.Y 2003-04 Timken India Ltd. reimbursement of expenses and only added Rs. 5,55,405/­ under the head "fees and royalty" and that in the assessment year 2007­08, the Assessing Officer has taxed the entire payment of Rs.1,66,04,740/­ towards fees and royalty. It was his submission that as Rs.41,52,635/­ has been accepted to be reimbursed the expenses, therefore, said amount is not liable to TDS u/s.195(2) of the Act and hence, the addition is required to be deleted. Regarding balance amount of Rs.5,55,405/­ for the assessment year 2005­ 06 and payment of Rs.1,66,04,740/­ for assessment year 2007­08, it is the submission that when the recipient of the amount i.e. Timken Company USA has paid tax on the said amount, in view of the second proviso to section 40(a)(ia), which provides that if the assessee is not treated as assessee in default u/s.201 of the Act for the payments made, then no addition u/s.40(a)(i) is not called for and the 1 st proviso to section 201(1) provides that where the recipient has paid tax on the amount received from the assessee, no disallowance u/s 40(a)(ia) can be made. We find force in such submission of ld AR of the assessee. The sole purpose to deduct income tax from the payments made to the recipient on the amount u/s.195(2) to realise a part of the tax due from the recipient of the amount. Further, where the assessee fails to deduct TDS and the recipient of the amount has been taxed of such amount then the same amount cannot be taxed in the hands of the assessee itself as it would amount to double taxation for the same amount, which cannot be the intention of the law. Hence, we set aside the orders of the lower authorities and vacate the disallowance of Rs. Rs.47,08,040/­ for the assessment year 2005­06 and Rs.l,66,04,740/­ for the assessment year 2007­08. Regarding balance amount of Rs.2,1l,672/­ for the assessment year 2007­08, ld AR very fairly conceded that the addition should be sustained in the hands of the assessee. Hence, this part of addition is sustained. Accordingly, Ground of Appeal Nos. 1.0 to 1.4 for the assessment year 2002­05 is allowed and ground of appeal No. 1 to 4 for assessment year 2007­08 is partly allowed.” 7.1 This issue was subsequently dealt by the Co-ordinate bench of ITAT Ranchi again in the assessee’s own case for AYs 2008-09 to 2014-15 (seven years) in ITA Nos. 319 to 325/Ran/2017 vide order dated 13.08.2018 wherein the views expressed and finding given in the order dated 07.09.2017 (supra) were reiterated and the appeals of the assessee were allowed. 8. On a specific query by the Bench to the Ld. Counsel to demonstrate his claim that there is no element of income involved in the impugned chargeback payments, it was 5 ITA No. 228/Ran/2019 A.Y 2003-04 Timken India Ltd. submitted that this matter from the side of payee i.e. Timken Inc, USA for the same year under consideration travelled before the Hon’ble Co-ordinate bench of ITAT Kolkata in ITA Nos. 387 & 388/Kol/2010 and CO Nos. 32 & 31/Kol/2010 for AYs 2002-03 and 2003- 04. He submitted that receipts of Rs. 2,38,26,680/- (Rs. 73,19,280 + Rs. 1,65,07,400) by Timken Inc, USA towards reimbursement of expenses and actual cost of services from the assessee were treated as ‘fees for technical services’ (FTS) by the concerned Ld. AO which the Hon’ble Co-ordiante Bench of ITAT Kolkata was pleased to hold in Para 31 vide its order dated 29.11.2017 that. ‘We are of the view that there is no basis for the AO to conclude that the payment of reimbursements were in the nature of FTS.’ 8.1 On perusal of the order of the coordinate bench of ITAT Kolkata in the case of Timken Inc, USA i.e. the payee placed on record, we find that it is a detailed order analyzing the full facts and circumstances of the case dealing with the same transaction from the payee side for the same year under consideration which answers our query and covers the instant matter squarely in favor of the assessee. Relevant extracts from the said order including facts, observations and findings are reproduced herein below for ease of reference:- “2. We shall first take up for consideration appeals and COs for AY 2002­ 03 & 2003­04. I.T.A.387& 398/Ko1/201O are appeals by the Revenue against a common order dated.27.11.2009 of. C.I.T.(A)­XXXVI, Kolkata relating to A.Y. 2002­03 & 2003­04. The Assessee has filed C.O.No.32 (in ITA No.397/Kol/2010) & C.O.No.31(in ITA No.398/Kol/2010) against the very same order of CIT(A). The only issue that arises for consideration in Revenue's appeals for AY 2002­03 & 2003-04 is as to whether the CIT(A) was justified in deleting an addition of Rs.87,65,928 in AY 2002­03 & a sum of Rs.l ,65,07,400/- in AY 2003-04 on the ground that the aforesaid sums paid by Timken India Limited (TIL), a subsidiary of the Asssessee by way of reimbursement of certain expenses incurred out of India which were paid by the Assessee and which were reimbursed by TIL to the Assessee in India without any mark up. The only issue that arises for consideration in the Cross­Objections filed by the Assessee is as to whether the CIT(A) was justified in taxing a sum of Rs.1,11,74,863 in AY 2002­03 and Rs.73, 19,280 (wrongly mentioned as Rs.l,1l,74,863. In CIT(A)’s order in AY 2003­04 treating the same to be payment of "Fees for Technical 6 ITA No. 228/Ran/2019 A.Y 2003-04 Timken India Ltd. Services" rendered or "Fees for Included Services"(FTS). In AY 2002­03, the Assessee has also raised issues challenging the validity of initiation of reassessment proceedings. The issues on merits will be taken up for consideration as it is common in AY 2002­03 & 2003­04. 3. We shall first take up for consideration the issue raised in the COs by the Assessee with regard to taxing a sum of Rs.1,11,74,863 in AY 2002­03 and Rs.73,19,280 in AY 2003­04 treating the same to be payment of "Fees for Technical Services' rendered or "Fees for Included Services"(FTS). The Asessee, is a company incorporated in the United States of America (USA) and is a tax resident of USA. It is engaged in the business of manufacturing and sale of bearings. Multi National Enterprise (MNE) that have formidable global presence across different countries, in order to control their businesses across the globe perform many functions for their counterparts in the other country in order to manage, supervise, guide, co­ ordinate the activities of the group entities. These activities are referred to as intra group services, which are performed by the parent company for their group companies or vice versa. These services may also be performed by anyone of the group companies for its fellow group company. These services are referred to as "Home Office Allocation receipts" in the order of assessment and the submissions made by the Assessee before the revenue authorities as well as the Tribunal. Such services rendered to group companies are generally referred to as "Intra Group Services" (IGS). 22. Now we shall deal with the grounds raised by the revenue in its appeals viz.,challenging the correctness of the order of CIT(A) deleting the addition of Rs.87,65,928 in AY 2002­03 & a sum of Rs.l,65,07,4001- in A Y 2003- 04 on the ground that the aforesaid sums paid by Tirnken India Limited (TIL) a subsidiary of the Asssessee by way of reimbursement of certain expenses incurred out of India which were paid by the Assessee and which were reimbursed by TIL to the Assessee in India without any mark up. The Assessee had received payments from TIL on account of certain services rendered to TIL by some third parties for which the Assessee made payments and which TIL reimbursed to the Assessee. It is the plea of the Assessee that it acted only as a conduit and derived no income from such reimbursements which were at actual amounts spent by the Assessee on behalf of TIL, with no profit element. The plea' of the Assessee was that the amount received/receivable from TIL was only reimbursements, without having any element of income is not taxable in India. The sum so received/receivable by the Assessee from TIL for A Y 2002­03 & 2003-04 was Rs.87,65,928 and Rs.73,19,280 respectively. These are referred to as "Charge Back Receipts" in the orders of the revenue authorities as well as the submissions made before the Tribunal. 7 ITA No. 228/Ran/2019 A.Y 2003-04 Timken India Ltd. 23. As mentioned earlier these expenses are for the services that are provided by various third parties who rise invoice on the Assessee directly. The same are charged back to back by the Assessee to the service recipients including TIL. The break of the reimbursement and heads under which expenses were incurred for A Y 2002­03 are given in Annexure­3 (Page­l to 3) to this order. The kind of services that are availed by TIL inter alia, includes Legal, Inspection and survey, Global Cargo Insurance, Internet usage, courier, vehicle leasing and rental, usage of various application software, travelling etc. The Legal expense forms the major head under which most of the expenses are booked. The in­house attorneys provide services on Indian law, antitrust advice, affiliation and assistance risks, advice on intellectual property etc. The second main head is the inspection and survey charges of cargo and vehicles, which are done by an Employment agency ­ "Adecco", based in USA. The third main head of expenses is the "Travelling ". Executives from TIL have to visit Assessee's office in USA on a regular basis for various business visits,, meetings, training etc. This is just a reimbursement of the actual travelling costs incurred by the Assessee on behalf of TIL. The nature of expenses incurred in A Y 2003­04 is also identical. 24. In the return of income filed for A Y 2002­03, the Assessee in Note­3 highlighted that the sum of Rs.87,65,928 was reimbursements and therefore not chargeable to tax, as follows: "3. The Company has received reimbursements from Timken India Limited (TIL) on account of certain services rendered to TIL by some third parties for which the company has acted only as a conduit. The amount received/receivable from TIL was only reimbursements and without any mark upon the amounts charged by such third parties. Such reimbursements, without having any element of income is not taxable in India." 25. The AO was not satisfied with the aforesaid claim of the Assessee. He observed that expenses claimed as reimbursement included Legal expenses, Inspection & Survey Exp., and airfare, local conveyance, fooding & lodging charges etc. incurred on behalf of employees of TIL who went abroad to attend various Workshop or Seminars, Business Meetings, Training Courses imparted / conducted by the Assessee or its associated enterprises. He was of the view that the fees received for imparting Training, certainly made available technical know­how, experience, skill etc., and therefore was nothing but fees for included services within the 8 ITA No. 228/Ran/2019 A.Y 2003-04 Timken India Ltd. meaning of Article 12 of the respective Treaty. He also held that Legal expenses and Inspection & Survey Expenses were incurred for providing Technical Services to Timken­India, These are part and parcel of the Technical Assistance fees paid to the assessee. Since consolidated amount of fees inclusive of all expenses were recovered from TIL by the assessee, the entire sum received is fee for included services. Assessee cannot segregate the various components of expenses included therein because income falling under Article 12 of the treaty is taxable on gross basis without allowing any deduction for expenses incurred. He also held that the Assessee attempted to declare portion of sum received for included services as reimbursement of expenses incurred and doing so was not permissible. Accordingly the AO brought to tax the sum of Rs.87,65,928 as fees for included services. The break of the reimbursement and heads under which expenses were incurred for A Y 2003­04 are given in Annexure­4 (Page­1 to 3 ) to this order. 26. Before CIT(A) the Assessee submitted that no services were rendered by the Assessee in consideration of the sum paid as reimbursement by TIL. The Assessee reiterated that the sum in question was merely recovery of actual expenditure incurred assessee on behalf of TIL's employees. The Assessee was not the ultimate beneficiary of the sum in question. There is no basis on which the AO came to the conclusion that the sum in question was FTS in the hands of the Assessee. Without prejudice to the above submission, the Assessee pointed out that under Article 12(4)(b) of the DTAA it is only when technical or consultancy services rendered by the assessee makes available technical knowledge, experience or skill that the sum in question can be taxed in the hands of the Assessee. Without prejudice to the above submissions, the Assessee submitted that at best the sum in question is taxable only in the hands of the persons who provided the services to TIL and not in the hands of the assessee. The Assessee also pointed out that the Transfer Pricing Officer scrutinized the details of reimbursements while examining the international transaction of reimbursement by TIL to the Assessee u/s.92 of the Act and found that the Assessee made no profit on such reimbursements and that the reimbursements were at Arm's Length. 27. The CIT(A) agreed with the submissions of the Assessee. He found from scrutiny of the evidence filed by the Assessee that the reimbursement of expenses were in the nature of commission charges, mobile expenses, Airlines Tickets, VISA CHARGES, Hotel expenses, Apartment rental etc. He held that the above sums were clearly re­imbursements and therefore do not contain the profit element. He also observed that the AO in AY 2004­05 has treated them as reimbursement and not subjected them to tax. The CIT(A) held that the expenses claimed as reimbursement of actual expenses 9 ITA No. 228/Ran/2019 A.Y 2003-04 Timken India Ltd. of Rs.8765928/­ and Rs.1,65,07,400l for AY 2002­03 & 2003­04 cannot be categorized as technical services or any other services rendered for the purpose of making profit. Accordingly, he held that taxing them was not justified. The A.O. was directed to delete the addition of Rs.87,65,928/­ and Rs. l,65,07,400/­ for the assessment Years 2002­ 03 and 2003­04 respectively. 31. We have considered the submissions of the ld.DR and are f the view that there is no merit in this appeal by the Revenue. A perusal of the details in Annexure­3 & 4 to this order would go to show that it was third parties who had rendered services to TIL. The actual billed by the third parties were paid by the Assessee in USA and later on reimbursed by TIL to the Assessee in India. We are of the view that there is no basis for the AO to conclude that the payment of reimbursements were in the nature of FTS. As rightly contended on behalf of the Assessee, the Assessee was not the ultimate beneficiary of the sum in question nor did it render any service to TIL. There is no basis on which the AO came to the conclusion that the sum in question was FTS in the hands of the Assessee. Even assuming that the sum in question is in the nature. of FTS, under Article 12(4)(b) of the DT AA it is only when technical or consultancy services rendered by the Assessee makes available technical knowledge, experience or skill that the sum in question can be taxed in the hands of the Assessee. There is no evidence brought on record to show that the technical skill, knowledge etc., were made available to TIL by the Assessee. At best the sum in question is taxable only in the hands of the persons who provided the services to TIL and not in the hands of the Assessee. The Transfer Pricing Officer scrutinized the details of reimbursements while examining the international transaction of reimbursement by TIL to the Assessee u/s.92 of the Act and found that the Assessee made no profit on such reimbursements and that the reimbursements were at Arm's Length. All these circumstances are sufficient to conclude that the order of the CIT(A) on this issue has to be upheld. We need not go into the question whether assessment order of the AO in AY 2004­05 had any influence on the decision of the CIT(A) as factually we have come to the conclusion that the sums received by the Assessee in question are pure reimbursements on actual with no mark up. We therefore dismiss the appeals of the Revenue for AY 2002­03 & 2003­ 04”. [emphasis supplied by us] 8.2 In view of above detailed discussion by the Co-oordinate benches (supra) in the decisions of assessee’s own cases and in the case of the payee, there being no change in the factual matrix and nothing contrary brought on record by the Ld. CIT(DR) both on fact and law, we find no reason to disagree with the submissions made by the Ld. Counsel for 10 ITA No. 228/Ran/2019 A.Y 2003-04 Timken India Ltd. the assessee to delete the addition made by the Ld. AO. We find that the ld. CIT(A) has rightfully deleted the addition made by the Ld. AO and allowed the claim of the assessee. Accordingly, we dismiss the ground raised by the revenue. 9. In the result, the appeal of the revenue is dismissed. Order is pronounced in the open court on 9 th May, 2022. Sd/- Sd/- (Rajpal Yadav) (Girish Agrawal) Vice President (KZ) Accountant Member Dated: 09.05.2022 **PP. Sr. PS Copy of the order forwarded to: 1. Assessee – Asstt. Commissioner of Income-tax, Circle-3(1), Bagmati Road, Norther Tower,Bistupur,,Jamshedpur-831001, Jharkhand. 2. Revenue – M/s. Timken India Limited Bara, P.O Agrico,Jamshedpur-831009. 3. CIT 4. CIT(A) 4. DR, ITAT, Kolkata/Ranchi. True Copy By Order Assistant Registrar/ Senior P.S ITAT, Kolkata Bench, Kolkata