GEMOLOGICAL INSTITUTE INTERNATIONAL INC., MUMBAI V. ASST CIT (IT) CIRCLE- 2 (3)(2), MUMBAI

ITA 7182/MUM/2019

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 3673 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-10-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2016-2017
• Appeal Filed On: 21-11-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K.L. KANAK
• Keywords: Transfer pricing; Opportunity of being heard; Rule of consistency; Set aside
• Section: 143(3); 115A; 13

Judgement Text

1 ITA 7182/MUM/2019 IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY (JUDICIAL MEMBER) AND SHRI RAJESH KUMAR (ACCOUNTANT MEMBER) I.T.A. NO.7182/MUM/2019 (ASSESSMENT YEAR 2016-17) GEMOLOGICAL INSTITUTE INTERNATIONAL, INC., C/O GIA INDIA LABORATORY PVT LTD 10 TH FLOOR, TRADE CENTRE, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI- 400 098 PAN : AADCG6758M VS THE ASSISTANT COMMISSIONER OF INCOME-TAX-(INTERNATIONAL TAXATION), CIRCL-2(3)(2), MUMBAI APPELLANT RESPONDENT APPELLANT BY SHRI NIRAJ SHETH, AR RESPONDENT BY SHRI K.L. KANAK, DR DATE OF HEARING 02-09-2021 DATE OF PRONOUNCEMENT 12-10-2021 O R D E R PER SAKTIJIT DEY (JM) CAPTIONED APPEAL BY THE ASSESSEE IS AGAINST THE FI NAL ASSESSMENT ORDER DATED 30-09-2019 PASSED UNDER SECTION 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 FOR THE ASSESSMENT YEAR 2016-17 IN PURSUA NCE TO DIRECTIONS OF LEARNED DISPUTE RESOLUTION PANEL (DRP). 2. IN GROUND 1 ASSESSEE HAS CHALLENGED ADDITION OF RS.10,61,365/-, BEING REIMBURSEMENT OF EXPENSES. 2 ITA 7182/MUM/2019 3. BRIEFLY THE FACTS ARE, THE ASSESSEE IS A COMPANY INCORPORATED IN THE UNITED STATES OF AMERICA (USA) AND IS A TAX RESIDENT OF TH AT COUNTRY. AS STATED BY THE ASSESSING OFFICER, ASSESSEE IS ENGAGED IN THE BUSIN ESS OF PROVIDING GEM TRADING SERVICES AND OTHER ALLIED AND TECHNICAL SERVICES. F OR THE ASSESSMENT YEAR UNDER DISPUTE, ASSESSEE FILED ITS RETURN OF INCOME ON 26- 07-2016 DECLARING TOTAL INCOME OF RS.41,44,650/-. IN COURSE OF ASSESSMENT PROCEEDI NGS, THE ASSESSING OFFICER, WHILE VERIFYING THE RETURN OF INCOME FILED BY THE A SSESSEE NOTICED THAT THE ASSESSEE HAS NOT OFFERED TO TAX AN AMOUNT OF RS.10, 61,365/- BEING TRAVEL COST. WHEN CALLED UPON TO EXPLAIN, IT WAS SUBMITTED BY TH E ASSESSEE THAT THE TRAVEL COST NOT BEING IN THE NATURE OF FEES FOR TECHNICAL SERVI CES (FTS) AND PURELY REIMBURSEMENT OF EXPENDITURE INCURRED, IS NOT TAXAB LE EITHER UNDER THE PROVISIONS OF THE ACT OR UNDER THE INDIA-USA DOUBLE TAXATION A VOIDANCE AGREEMENT (DTAA). FURTHER, THE ASSESSEE SUBMITTED THAT THE TRIBUNAL H AS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN THE PRECEDING ASSESSMENT YEARS. HOWEVER, THE ASSESSING OFFICER WAS NOT CONVINCED WITH THE SUBMISSIONS OF THE ASSES SEE. HE OPINED, PAYMENT FOR TRAVEL BEING INTRINSICALLY LINKED FOR PROVIDING TRA INING AND TECHNICAL SERVICES, HAS TO BE REGARDED AS FTS. FOR COMING TO SUCH CONCLUSION, THE ASSESSING OFFICER ALSO RELIED UPON THE OBSERVATIONS OF LEARNED DRP AND COM MISSIONER (APPEALS) IN ASSESSMENT YEARS 2009-10, 2010-11 AND 2011-12. THUS , ULTIMATELY HE HELD THAT THE TRAVEL COST OF RS.10,61,365/- IS TAXABLE AS FTS AND ACCORDINGLY BROUGHT IT TO TAX. THOUGH, THE ASSESSEE OBJECTED TO THE AFORESAID ADDITION BEFORE LEARNED DRP; HOWEVER, IT WAS UNSUCCESSFUL. 4. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED, THE ISSUE STANDS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISIONS OF THE TRIBUNAL IN THE PRECEDING ASSESSMENT YEARS. 3 ITA 7182/MUM/2019 5. THOUGH, LEARNED DEPARTMENTAL REPRESENTATIVE FAIR LY AGREED THAT THE AFORESAID SUBMISSIONS OF LEARNED COUNSEL FOR THE AS SESSEE; HOWEVER, HE RELIED UPON THE OBSERVATIONS OF THE ASSESSING OFFICER AND LEARNED DRP. 6. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIALS ON RECORD. THE ISSUE ARISING FOR CONSIDERATION IS, WHETHER THE TRAVEL COST RECEIVED BY THE ASSESSEE BY WAY OF REIMBURSEMENT CAN BE REGARDED AS FTS. AS COULD BE SEEN, IN COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE HAS SPECIFICALLY BROUGHT TO THE NOTICE OF THE ASSESSING OFFICER THE ORDERS PASSED B Y THE TRIBUNAL IN THE PRECEDING ASSESSMENT YEARS HOLDING THAT SUCH REIMBURSEMENT OF EXPENSES IS NOT IN THE NATURE OF FTS. HOWEVER, THE ASSESSING OFFICER, WHIL E IGNORING THE DECISIONS OF THE TRIBUNAL HAS RELIED UPON THE OBSERVATIONS OF THE HI GHER DEPARTMENTAL AUTHORITIES. THIS, IN OUR VIEW, IS MOST UNDESIRABLE. FURTHER, TH OUGH, LEARNED DRP HAS ACKNOWLEDGED THAT IN ASSESSMENT YEARS 2009-10 AND 2 010-11, THE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE; HOWEVE R, RELYING UPON A SOLITARY AMENDMENT MADE TO THE AGREEMENT BETWEEN THE PARTIES AND DISTINGUISHING THE DECISIONS OF THE TRIBUNAL IN ASSESSEES OWN CASE, L EARNED DRP HAS UPHELD THE ADDITION MADE BY THE ASSESSING OFFICER. ON A CAREFU L PERUSAL OF THE AMENDED CLAUSE 1.2 OF THE AGREEMENT AS REFERRED TO BY LEARN ED DRP, WE DO NOT FIND MUCH DIFFERENCE, EXCEPT, THE MODE AND MANNER OF QUANTIFI CATION OF THE FTS. THUS, IN OUR CONSIDERED OPINION, THE SPIRIT OF THE OLD CLAUSE 1. 2 HAS NOT UNDERGONE ANY SUBSTANTIAL CHANGE BY THE AMENDMENT. BE THAT AS IT MAY, EVEN AFTER THE AMENDMENT TO THE AGREEMENT WAS EFFECTED FROM 01-04- 2012, THE TRIBUNAL HAS CONSISTENTLY DECIDED THE ISSUE IN FAVOUR OF THE ASS ESSEE FROM ASSESSMENT YEARS 2009-10 ONWARDS. IN THE LATEST ORDER PASSED FOR ASS ESSMENT YEAR 2015-16 IN ITA NO.6381/MUM/2018 DATED 19-02-2020, THE TRIBUNAL FOL LOWING ITS ORDER IN 4 ITA 7182/MUM/2019 ASSESSEES OWN CASE IN ASSESSMENT YEAR 2014-15 HAS DELETED THE ADDITION WITH THE FOLLOWING OBSERVATIONS:- 5. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE OR DERS OF THE AUTHORITIES BELOW AND THE CASE LAWS RELIED ON. ON A CAREFUL PERUSAL OF THE ORDER OF THE TPO AS WELL AS THE DRP AND THE ORDER O F THE COORDINATE BENCH FOR THE EARLIER ASSESSMENT YEARS, WE FIND THAT THE ISSUE AND FACTS ARE IDENTICAL TO THIS YEAR AND THE COORDINATE BENCH FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR I.E. A.Y. 2014-15 IN ITA.N O. 6556/MUM/2017 DATED 20.06.2018 HELD THAT THE FEE FOR TECHNICAL SE RVICES IS DIFFERENT FROM THE EXPENSES INCURRED ON THIRD PARTY COST AND THERE IS A CLEAR BIFURCATION IN THE AGREEMENT BETWEEN THE INTERNAL COST INCURRED AN D EXTERNAL COST PAID BY THE ASSESSEE ON BEHALF OF GIA INDIA LABORATORY PV T. LTD. THE TRIBUNAL APPLYING THE RATIO OF THE DECISION OF THE HON'BLE S UPREME COURT IN THE CASE OF DIT V. A.P. MOLLER MAERSK [392 ITR 186] HELD THAT AMOUNT RE CEIVED TOWARDS REIMBURSEMENT OF COST CANNOT BE TAXED IN TH E HANDS OF THE ASSESSEE. WHILE HOLDING SO THE TRIBUNAL OBSERVED AS UNDER: 7. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MA TERIALSON RECORD. UNDISPUTEDLY, THE ASSESSEE HAS ENTERED INTO A TRAINING AND TECHNICAL SERVICE AGREEMENT WITH GIA INDIA ON 1ST NOVEMBER 2008, FOR TRAINING THE EMPLOYEES OF GIA INDIA AND PROVIDING TECHNICAL SERVICES FOR THE IMPLEMENTATION OF GRADING POLICIES, PROCEDURES AND PROCESSES. IT IS ALSO NO T DISPUTED THAT IN PURSUANCE OF SUCH AGREEMENT, THE ASSESSEE HAS RAISED SEPARATE DE BIT NOTES FOR FEE FOR TRAINING AND TECHNICAL SERVICES AND TOWARDS REIMBURSEMENT OF CERTAIN COSTS LIKE TRAVEL EXPENSES, MEALS, ETC. WHILE IT IS THE CLAIM OF THE ASSESSEE THAT THE REIMBURSEMENT OF COST OF TRAVEL AND MEALS BY GIA IN DIA IS ON ACTUAL BASIS WITHOUT ANY PROFIT ELEMENT, HENCE, NOT TO BE INCLUDED IN TH E INCOME, IT IS THE STAND OF THE DEPARTMENT THAT THERE ISNO SCOPE FOR BIFURCATION OF THE AMOUNT RECEIVED BY THE ASSESSEE UNDER THE AGREEMENT, AS IT HAS TO BE TAXED ON GROSS BASIS AS FEE FOR TECHNICAL SERVICES. THERE IS NO DISPUTE THAT THE AG REEMENT UNDER WHICH THE ASSESSEE HAS RECEIVED THE DISPUTED AMOUNT IS CONTIN UING FROM ASSESSMENT YEAR 2009-10. WHILE DECIDING IDENTICAL DISPUTE IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2009-10 AND 2011-12, IN ITA NO.4659/MUM./2014 AND ITA NO.385/MUM./2016, DATED 9TH MAY 2017, THE TRIBUNAL HAS HELD AS UNDER '8. WE HAVE GONE THROUGH THE ORDERS PASSED BY THE L OWER AUTHORITIES AND ARGUMENTS MADE BEFORE US BY BOTH THE SIDES. 9. THE BRIEF FACTS ARE THAT THE ASSESSEE COMPANY INCORPORATED IN USA IS ENGAGED IN GRADING AND CERTIFICATION OF D IAMONDS. GIA INDIA, (I.E. THE COMPANY INCORPORATED IN INDIA) ENTERED INTO AN AGREEMENT WITH THE ASSESSEE COMPANY FOR AVAILING TRAINING AND TECHNICAL SERVICES. THE TERMS REGARDIN G PAYMENT OF FEE AND REIMBURSEMENT OF EXPENSES READ AS UNDER- '1.2 FEES AND PAYMENT TERMS FOR TRAINING AND TECHNI CAL SERVICES. CUSTOMER WILL PAY SERVICE PROVIDER THE COSTS INCURR ED BY THE SERVICE PROVIDER TO EMPLOY THE INDIVIDUALS(S) 5 ITA 7182/MUM/2019 PERFORMING THE TRAINING OR TECHNICAL SERVICE PLUS A MARKUP OF SIX AND ONE- HALF PERCENT (6.5%). SERVICE PROVIDER WILL INVOICE CUSTOMER THE FEES DUE FOR THE SERVICES AND CUSTOMER WILL PAY SUCH INVOICES WITHIN FORTY~FIVE(45) DAYS AFTER RECE IPT OF THE INVOICE. SUCH INVOICES MAY BE MONTHLY OR QUARTERLY AS SPECIFIED B Y SERVICE PROVIDER. 1.3. REIMBURSEMENT OF THIRD PARTY COSTS CUSTOMER WI LL REIMBURSE SERVICE PROVIDER FOR (I) FEES PAID BY SERVICE PROVI DER TO THIRD PARTY SERVICE PROVIDERS, ADVISORS AND CONSULTANTS IN CONNECTION W ITH OR RELATED TO THE PERFORMANCE OF THE SERVICES RENDERED UNDER THE AGRE EMENT, INCLUDING WITHOUT LIMITATIONS ACCOUNTANTS, ATTORNEYS, MARKETI NG CONSULTANTS AND AGENCIES AND INFORMATION TECHNOLOGY SERVICE PROVIDE RS, ETC) AND (II) SOFTWARE, MATERIALS AND ITEMS PAID FOR BY SERVICE P ROVIDER IN CONNECTION WITH OR RELATED TO THE PERFORMANCE OF THE SERVICES (COLLECTIVE, (I) AND (II) ARE REFERRED TO AS 'THIRD PARTY COSTS'). IF THIRD P ARTY COSTS ARE INCURRED BY SERVICE PROVIDER FOR THE BENEFIT OF CUSTOMER AND OTHER CUSTOMERS, THEN SERVICE PROVIDER WILL ALLOCATE THE THIRD PARTY COST S BETWEEN AND AMONG CUSTOMER AND SUCH OTHER CUSTOMERS IN A MANNER DETER MINED BY SERVICE PROVIDER IN ITS SOLE DISCRETION. SERVICE PROVIDER W ILL INVOICE CUSTOMER THE THIRD PARTY COSTS AND CUSTOMER WILL PAY SUCH INVOIC ES WITHIN FORTY-FIVE(45) DAYS AFTER RECEIPT OF THE INVOICE. SUCH INVOICES MA Y BE MONTHLY OR QUARTERLY AS SPECIFIED BY SERVICE PROVIDER.' 10. THUS, FROM THE PERUSAL OF THE ABOVE, IT MAY BE NOTED THAT ASSESSEE OFFERED TO TAX ONLY THE AMOUNT OF FEE RECEIVED FOR PROVIDING TRAINING AND TECHNICAL SERVICES AND AMOUNT OF EXPENSES RECEIVED BY WAY OF REIMBURSEMENT ON COST TO COST BASIS WERE NOT SHOWN AS TAXABLE IN THE HANDS OF THE ASSESSEE. THE AO WAS OF THE VIEW THAT WHOLE OF THE AMOUNT INCLUDING THE AMOUNT REIMBURSED AGGREGATING TO RS. 1,26,09,523 SHOULD ALSO BE INCLUDED AS FEES IN THE HANDS OF THE ASSESS EE. 11. WE HAVE CAREFULLY CONSIDERED THE ORDERS PASSED BY THE LOWER AUTHORITIES AND WE DO NOT AGREE WITH THE STAND ADOP TED BY THE LOWER AUTHORITIES. IT MAY BE NOTED FROM THE PERUSAL OF TH E TERMS OF THE AGREEMENT WHICH ARE REPRODUCED ABOVE THAT ASSESSEE WAS ENTITLED TO RECEIVE BY WAY OF FEE ONLY THE AMOUNT INCURRED BY W AY OF COST TO EMPLOY' THE INDIVIDUALS PLUS MARK-UP OF 6.5%. CLEARLY SPEAK ING, THE EXPRESSION COST TO ,,EMPLOY' INDIVIDUALS IS DIFFERENT FROM THE EXPRESSION COST INCURRED TO ,,DEPUTE' A PERSON. THE COST OF EMPLOYMENT WOULD CLEARLY MEAN AND INCLUDE ONLY INTERNAL COSTS AS ARE INCURRED BY AN O RGANISATION TO EMPLOY AN INDIVIDUAL IN THE ORGANISATION. ANY COST INCURRE D OVER AND ABOVE THAT TO DEPUTE THE INDIVIDUAL FOR A PARTICULAR ASSIGNMENT W HICH IS NOT INTERNAL ASSIGNMENT OF THE ASSESSEE WOULD BE ADDITIONAL COST . THUS, IN THE CASE BEFORE US, COSTS AND EXPENSES INCURRED BY THE ASSES SEE ON TRAVEL AND INSURANCE ETC ON THE PERSONS DEPUTED IN INDIA FOR P ROVIDING TRAINING AND TECHNICAL SERVICES TO GIA INDIA WAS IN THE NATURE O F COST INCURRED OVER AND ABOVE THE COST OF EMPLOYMENT. THIS INTERPRETATION I S FURTHER RE-ENFORCED WHEN WE READ THE NEXT CLAUSE, I.E. CLAUSE 1.3 WHICH SAYS THAT GIA INDIA SHALL REIMBURSE TO THE ASSESSEE ANY EXPENSES INCURR ED ON ACCOUNT OF THIRTY PARTY COSTS. THE DRAFTING OF THE AGREEMENT A ND MANNER OF PLACEMENTS THE CLAUSES IN THE AGREEMENT CLEARLY MAK E OUT A CASE THAT FTS IS DIFFERENT FROM THE EXPENSES INCURRED ON THIR D PARTY COSTS. THUS, THERE IS A CLEAR BIFURCATION IN THE AGREEMENT BETWE EN THE INTERNAL COST 6 ITA 7182/MUM/2019 INCURRED BY THE ASSESSES AND EXTERNAL COST BORNE OR PAID BY THE ASSESSES ON BEHALF OF GIA INDIA. IN OUR MIND, THERE IS NO CO NFUSION IN THIS REGARD AND THE LOWER AUTHORITIES HAVE UNNECESSARILY MADE A N ISSUE OUT OF THAT. 12. WITH REGARD TO THE TAXABILITY OF FTS ON GROSS B ASIS, IT HAS BEEN FAIRLY ADMITTED BY THE LD. COUNSEL OF THE ASSESSES THAT THERE IS NO DISPUTE ON THE PROPOSITION THAT FTS HAS TO BE TAXED ON GROSS B ASIS. HOWEVER, THE ISSUE THAT ARISE HERE FOR OUR CONSIDERATION IS WHET HER THE EXPENSES INCURRED ON COST TO COST BASIS WILL ALSO BE INCLUDE D IN THE AMOUNT OF FTS. WE FIND THAT THIS CONTROVERSY HAS NOW BEEN PUT TO R EST BY HON'BLE SUPREME COURT BY WAY OF ITS LATEST JUDGMENT IN THE CASE OF DITVSA.P, MOLLER MAERSK 392 ITR 186(SC). RELEVANT PART OF THE JUDGEMENT IS REPRODUCED HEREUNDER- '10. THE FACTS WHICH EMERGE ON RECORD ARE THAT THE ASSESSEE IS HAVING ITS IT SYSTEM, WHICH IS CALLED THE MAERSK NET. AS THE A SSESSEE IS IN THE BUSINESS OF SHIPPING, CHARTERING AND RELATED BUSINE SS, IT HAS APPOINTED AGENTS IN VARIOUS COUNTRIES FOR BOOKING OF CARGO AN D SERVICING CUSTOMERS IN THOSE COUNTRIES, PREPARING DOCUMENTATION ETC. TH ROUGH THESE AGENTS. AFOREMENTIONED THREE AGENTS ARE APPOINTED IN INDIA FOR THE SAID PURPOSE. ALL THESE AGENTS OF THE ASSESSEE, INCLUDING THE THR EE AGENTS IN INDIA, USED THE MAERSK NET SYSTEM. THIS SYSTEM IS A FACILITY WH ICH ENABLES THE AGENTS TO ACCESS SEVERAL INFORMATION LIKE TRACKING OF CARGO OF A CUSTOMER, TRANSPORTATION SCHEDULE, CUSTOMER INFORMATION, DOCU MENTATION SYSTEM AND SEVERAL OTHER INFORMATIONS. FOR THE SAKE OF CON VENIENCE OF ALL THESE AGENTS, A CENTRALISED SYSTEM IS MAINTAINED SO THAT AGENTS ARE NOT REQUIRED TO HAVE THE SAME SYSTEM AT THEIR PLACES TO AVOID UNNECESSARY COST THE SYSTEM COMPRISES OF BOOKING AND COMMUNICAT ION SOFTWARE, HARDWARE AND A DATA COMMUNICATIONS NETWORK. THE SYS TEM IS, THUS, INTEGRAL PART OF THE INTERNATIONAL SHIPPING BUSINES S OF THE ASSESSEE AND RUNS ON A COMBINATION OF MAINFRAME AND NON-MAINFRAM E SERVERS LOCATED IN DENMARK. EXPENDITURE WHICH IS INCURRED FOR RUNNI NG THIS BUSINESS IS SHARED BY ALL THE AGENTS. IN THIS MANNER, THE SYSTE MS ENABLE THE AGENTS TO COORDINATE CARGOS AND PORTS OF CALL FOR ITS FLEE T. 11. AFORESAID ARE THE FINDINGS OF FACTS. IT IS CLEA RLY HELD THAT NO TECHNICAL SERVICES ARE PROVIDED BY THE ASSESSEE TO THE AGENTS . ONCE THESE ARE ACCEPTED, BY NO STRETCH OF IMAGINATION, PAYMENTS MA DE BY THE AGENTS CAN BE TREATED AS FEE FOR TECHNICAL SERVICE. IT IS IN T HE NATURE OF REIMBURSEMENT OF COST WHEREBY THE THREE AGENTS PAID THEIR PROPORT IONATE SHARE OF THE EXPENSES INCURRED ON THESE SAID SYSTEMS AND FOR MAI NTAINING THOSE SYSTEMS. IT IS REEMPHASISED THAT NEITHER THE A O NO R THE CIT(A) HAS STATED THAT THERE WAS ANY PROFIT ELEMENT EMBEDDED I N THE PAYMENTS RECEIVED BY THE ASSESSEE FROM ITS AGENTS IN INDIA. RECORD SHOWS THAT THE ASSESSEE HAD GIVEN THE CALCULATIONS OF THE TOTAL CO STS AND PRO RATA DIVISION THEREOF AMONG THE AGENTS FOR REIMBURSEMENT . NOT ONLY THAT, THE ASSESSEE HAVE EVEN SUBMITTED BEFORE THE TRANSFER PR ICING OFFICER THAT THESE PAYMENTS WERE REIMBURSEMENT IN THE HANDS OF T HE ASSESSEE AND THE REIMBURSEMENT WAS ACCEPTED AS SUCH AT ARM'S LEN GTH. ONCE THE CHARACTER OF THE PAYMENT IS FOUND TO BE IN THE NATU RE OF REIMBURSEMENT OF THE EXPENSES, IT CANNOT BE INCOME CHARGEABLE TO TAX ........' (EMPHASIS SUPPLIED IN BOLD) 7 ITA 7182/MUM/2019 THUS, FROM THE ABOVE JUDGEMENT IT IS CLEAR THAT THE AMOUNT RECEIVED BY THE ASSESSEE ON ACCOUNT OF REIMBURSEMENT WHICH HAS BEEN RECEIVED OVER AND ABOVE THE AMOUNT OF FTS CANNOT BE INCLUDED AND TAXED AS PART OFFTS. OUR ATTENTION HAS BEEN DRAWN ON THE TRANSFER PRICING STUDY REPORT AND TRANSFER PRICING ORDERS PASSED IN THE CASE OF G IA INDIA FROM WHERE IT CAN BE MADE OUT THAT NO PROFIT ELEMENT HAS BEEN INC LUDED IN THE EXPENSES REIMBURSED. THUS, TAKING INTO ACCOUNT T HE TOTALITY OF FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT ADDITION MA DE BY THE AO IS CONTRARY TO FACTS AND THEREFORE, IS DIRECTED TO BE DELETED.' 8. ON A CAREFUL READING OF THE ORDER OF THE CO-ORDI NATE BENCH REPRODUCED HEREIN ABOVE, IT IS EVIDENT THAT THE TRIBUNAL AFTER ANALYZ ING THE DIFFERENT TERMS OF THE AGREEMENT AND EXAMINING THE FACTS ON RECORD HAVE RE CORDED A FACTUAL FINDING THAT THE AGREEMENT CLEARLY ENVISAGES THAT FEE FOR T ECHNICAL SERVICES IS DIFFERENT FROM THE EXPENSES INCURRED ON THIRD PARTY COST. FUR THER, IT HAS RECORDED A FINDING OF FACT THAT THERE IS A CLEAR BIFURCATION IN THE AG REEMENT BETWEEN THE INTERNAL COST INCURRED BY THE ASSESSEE AND EXTERNAL COST BORNE OR PAID BY THE ASSESSEE ON BEHALF OF GIA INDIA. THUS, ON THE BASIS OF AFORESAI D FACTS, THE TRIBUNAL HAS APPLIED THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN CASE OF DIT V/S A.P. MOLLER MAERSK, 392 ITR 186 (SC) AND HELD THAT THE A MOUNT RECEIVED TOWARDS REIMBURSEMENT OF COST CANNOT BE TAXED AT THE HANDS OF THE ASSESSEE. THEREFORE, THE OBSERVATION OF THE LEARNED DRP THAT TRIBUNAL HAS NOT ADDRESSED THE ISSUE IS BASELESS. 9. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS NOT BEE N ABLE TO CONVINCE US THAT THERE IS ANY DIFFERENCE IN FACTS AS INVOLVED I N THE IMPUGNED ASSESSMENT YEAR AND ASSESSMENT YEARS 2009-10 AND 2011- 12 ON THE BA SIS OF WHICH THE TRIBUNAL HAS DECIDED THE ISSUE. THE CORRECTNESS OF THE DECIS ION RENDERED BY THE TRIBUNAL IS SUBJECT TO JUDICIAL SCRUTINY BEFORE THE HIGHER A PPELLATE COURT AND THE AGGRIEVED PARTY, WHICH IS THE DEPARTMENT IN THE PRESENT CASE, HASEVERY RIGHT TO CHALLENGE THE DECISION OF THE TRIBUNAL BEFORE THE HIGHER APPE LLATE COURT. HOWEVER, UNLESS AND UNTIL THE DECISION OF THE TRIBUNAL IS REVERSED OR SET ASIDE BY THE HIGHER APPELLATE COURT, IT IS NOT ONLY BINDING ON THE SUBO RDINATE AUTHORITIES BUT JUDICIAL DISCIPLINE DEMANDS THAT IT SHOULD BE FOLLOWED BY TH E OTHER BENCHES OF THE TRIBUNAL. MORE SO, IF SUCH DECISION IS RENDERED IN ASSESSEE'S OWN CASE AND UNDER IDENTICAL FACTS AND CIRCUMSTANCES. IN VIEW OF THE A FORESAID, CONSIDERING THE FACT THAT THE CO-ORDINATE BENCH HAS DECIDED THE DISPUTED ISSUE IN FAVOUR OF THE ASSESSEE IN A. Y. 2009-10 AND 2011-12 AS REFERRED T O ABOVE, RESPECTFULLY FOLLOWING THE SAME WE DELETE THE ADDITION OFF. 15,4 3,815 MADE BY THE ASSESSING OFFICER. GROUND RAISED IS ALLOWED.' 6. THUS, RESPECTFULLY FOLLOWING THE SAID DECISION, WE DELETE THE ADDITION OF F .49,68, 2471- MADE BY THE ASSESSING OFFICER. THIS GROUND IS ALLOWED. 7. THUS, FACTS BEING IDENTICAL, RESPECTFULLY FOLLOW ING THE CONSISTENT VIEW OF THE TRIBUNAL ON THE DISPUTED ISSUE AS DISCUSSED EARLIER , WE DELETE THE ADDITION MADE BY THE ASSESSING OFFICER. THIS GROUND IS ALLOWED. 8 ITA 7182/MUM/2019 8. IN GROUND 2, ASSESSEE HAS RAISED THE ISSUE OF IN CORRECT TAX RATE APPLIED BY THE ASSESSING OFFICER ON THE INCOME OFFERED BY THE ASSESSEE. 9. BRIEFLY THE FACTS ARE, ON THE INCOME OFFERED IN THE RETURN OF INCOME, ASSESSEEE COMPUTED TAX @10% IN TERMS OF SECTION 115 A(B) OF THE ACT AS THE AFORESAID PROVISION IS MORE BENEFICIAL TO THE ASSES SEE COMPARED TO THE TAX RATE OF 15% UNDER THE TAX TREATY. IN COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER REFERRING TO NOTE 2 OF THE NOTE APPENDED TO THE RETURN OF INCOME OBSERVED THAT THE APPLICABLE TAX RATE FOR FTS UNDER SECTION 115A OF THE ACT IS 26.265%. WHEREAS, THE TAX RATE UNDER THE TAX TREATY IS 15%. ACCORDINGLY, HE PROCEEDED TO COMPUTE TAX @15% IN TERMS OF TAX TREATY. IN ITS OBJE CTION BEFORE LEARNED DRP, THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER HAS C OMMITTED A MISTAKE BY INCORRECTLY REFERRING TO NOTE 2 OF THE NOTE APPENDE D TO THE RETURN OF INCOME. IT WAS SUBMITTED BY THE ASSESSEE THAT AS PER SECTION 1 15A(B), THE APPLICABLE TAX RATE IS 10% AS AGAINST 26.265% MENTIONED BY THE ASSESSIN G OFFICER. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, LEARNED DRP OBSERV ED THAT THE PROVISIONS OF SECTION 115A(B) WOULD APPLY ONLY IF THE FOREIGN COM PANY HAS ENTERED INTO AN AGREEMENT WITH AN INDIAN CONCERN AND SUCH AGREEMENT HAS BEEN APPROVED BY THE CENTRAL GOVERNMENT OR WHERE IT RELATES TO A MATTER INCLUDED IN THE INDUSTRIAL POLICY AND THE AGREEMENT IS IN ACCORDANCE WITH THAT POLICY. FURTHER, LEARNED DRP OBSERVED, SINCE THE ASSESSEE FAILED TO ESTABLISH TH AT THE CONDITIONS OF SECTION 115A(1) HAVE BEEN SATISFIED, IT CANNOT AVAIL THE BE NEFIT OF SECTION 115A(1)(B). ACCORDINGLY, LEARNED DRP UPHELD THE DECISION OF ASS ESSING OFFICER IN APPLYING THE TAX RATE OF 15%. 10. BEFORE US, LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED, AS PER THE MASTER DIRECTION DATED 01-01-2016 ISSUED BY RESERVE BANK O F INDIA (RBI), PRIOR APPROVAL 9 ITA 7182/MUM/2019 OF RBI IS REQUIRED ONLY IF THE REMITTANCE FOR CONSU LTANCY SERVICE EXCEEDS USD 10,00,000 PER PROJECT FOR CONSULTANCY SERVICES PROCU RED FROM OUTSIDE INDIA. IN THIS CONTEXT, HE DREW OUR ATTENTION TO PARAGRAPH 4.3 OF THE MASTER DIRECTION. FURTHER, DRAWING OUR ATTENTION TO FOREIGN EXCHANGE MANAGEMEN T (CURRENT ACCOUNT TRANSACTION) RULES, 2000 TO THE MASTER DIRECTION, H E SUBMITTED, PAYMENT RECEIVED BY THE ASSESSEE DID NOT FALL WITHIN THE PROHIBITORY LIST REQUIRING SPECIFIC APPROVAL OF THE CENTRAL GOVERNMENT. THUS, HE SUBMITTED, WHEN THE RULES, REGULATIONS/GUIDELINES DID NOT REQUIRE ANY SPECIFIC APPROVAL FOR THE PAYMENT RECEIVED, IT HAS TO BE CONSTRUED THAT THE REMITTANC ES TO THE ASSESSEE ARE DEEMED TO HAVE BEEN APPROVED AS REQUIRED UNDER SECTION 115 A OF THE ACT AND NO FURTHER APPROVAL OF CENTRAL GOVERNMENT IS REQUIRED. FURTHER , HE SUBMITTED, THE REMITTANCES HAVE BEEN RECEIVED THROUGH NORMAL BANKI NG CHANNEL UNDER THE AUTOMATIC ROUTE OF RBI WHICH PRE-SUPPOSES APPROVAL OF THE REGULATORY AUTHORITY. THUS, HE SUBMITTED, THE RATE OF TAX AT 10% AS PER S ECTION 115A(1)(B)(B), WHICH IS APPLICABLE FROM ASSESSMENT YEAR 2016-17 WOULD APPLY TO THE ASSESSEE AS IT IS MORE BENEFICIAL. IN SUPPORT OF HIS CONTENTION, LEAR NED COUNSEL RELIED UPON A DECISION OF ITAT, AHMEDABAD BENCH IN THE CASE OF AL EMBIC LTD VS ITO ITA NO.1202/AHD/2014 DATED 23-11-2016. 11. PER CONTRA, LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED, THE TAX RATE OF 10% AS PROVIDED IN SECTION 115A(1)(B) WOULD BE APPL ICABLE FROM ASSESSMENT YEAR 2017-18 AND NOT TO THE IMPUGNED ASSESSMENT YEAR. FU RTHER, HE SUBMITTED, THE MASTER DIRECTION REFERRED TO BY THE ASSESSEE SPEAKS OF CONSULTANCY SERVICES, WHEREAS, THE INCOME OFFERED BY THE ASSESSEE RELATES TO TECHNICAL SERVICES. THEREFORE, THE MASTER DIRECTION WOULD NOT BE APPLIC ABLE. FURTHER, HE SUBMITTED, THE PROVISION CONTAINED IN SECTION 115A(1) HAS TO B E STRICTLY INTERPRETED AND IN 10 ITA 7182/MUM/2019 CASE THE CONDITIONS CONTAINED THEREIN ARE NOT SATIS FIED, THE ASSESSEE CANNOT GET THE BENEFIT OF 10% TAX RATE. FINALLY, HE SUBMITTED, VARIOUS ARGUMENTS ADVANCED BY THE ASSESSEE, BY REFERRING TO MAST DIRECTION AND SO ME OTHER RULES/REGULATIONS ARE BEING CANVASSED FOR THE FIRST TIME BEFORE THE TRIBU NAL AND HAVE NEVER BEEN TAKEN BEFORE THE DEPARTMENTAL AUTHORITIES. THUS, NEITHER THE ASSESSING OFFICER NOR LEARNED DRP HAD ANY OCCASION TO VERIFY ASSESSEES C LAIM HAVING REGARD TO THE RBI RULES, REGULATIONS/GUIDELINES RELIED UPON BY THE AS SESSEE. 12. IN REJOINDER, LEARNED COUNSEL FOR THE ASSESSEE S UBMITTED, THE TAX RATE OF 10% UNDER SECTION 115(1)(B)(B) HAS BEEN MADE APPLIC ABLE FROM 01-04-2016. HENCE, IT WOULD APPLY TO ASSESSMENT YEAR 2016-17. FURTHER, HE SUBMITTED, WHILE THE ASSESSING OFFICER HAS APPLIED THE TAX RATE OF 1 5% BY INCORRECTLY MENTIONING NOTE 2 TO THE RETURN OF INCOME, LEARNED DRP, WHILE CONSIDERING THE ISSUE OF APPLICABILITY OF SECTION 115A(1) HAS NEVER ALLOWED ANY OPPORTUNITY TO THE ASSESSEE TO HAVE ITS SAY ON THE FULFILLMENT OF CONDITIONS OF THE SAID PROVISION. 13. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSE D MATERIALS ON RECORD. THE SHORT ISSUE ARISING FOR CONSIDERATION IS WHETHE R, THE TAX RATE OF 10% PROVIDED U/S 115A(1)(B)(B) WOULD BE APPLICABLE TO THE PAYMEN TS RECEIVED BY THE ASSESSEE TOWARDS FTS. APPARENTLY, THE ASSESSING OFFICER HAS REFERRED TO NOTE 2 TO THE NOTE APPENDED BY THE ASSESSEE TO THE RETURN OF INCOME TO CONCLUDE THAT THE TAX RATE UNDER THE ACT BEING 26.265% IS MORE THAN THE TAX RA TE OF 15% UNDER THE TAX TREATY; HENCE, THE TREATY PROVISION BEING MORE BENE FICIAL WOULD BE APPLICABLE TO THE ASSESSEE. HOWEVER, ON A PERUSAL OF NOTE 2 OF T HE NOTE APPENDED TO THE RETURN OF INCOME, A COPY OF WHICH IS AT PAGE 44 OF THE PAP ER BOOK, WE FIND, THE NOTE READS AS FOLLOWS:- 2. TRAINING AND TECHNICAL FEES ARE IN NATURE OF 'F EES FOR TECHNICAL SERVICES' AS DEFINED UNDER SECTION 9(L)(VII) OF THE INCOME-TAX ACT,1961 AND TAXABLE AT THE RATE OF 10%(PLUS 11 ITA 7182/MUM/2019 SURCHARGE AND EDUCATION CESS) IN TERMS OF SECTION 1 15A. AS PER ARTICLE 12 OF THE DOUBLE TAX AVOIDANCE AGREEMENT ('DTAA') ENTERED INTO AND SUBSI STING BETWEEN INDIA AND THE UNITED STATES OF AMERICA, ROYALTY RECEIVED IS TAXABLE AT T HE RATE OF 15%. ACCORDINGLY, THE TAX RATE CONSIDERED FOR COMPUTATION IS @10% TAKING BENEFIT O F SEC 115A OF INCOME-TAX ACT,1961 . 14. ON A READING OF THE AFORESAID, WE DO NOT FIND A NY REFERENCE TO THE TAX RATE OF 26.265% AS SUGGESTED BY THE ASSESSING OFFICER. T HUS, IT IS MANIFEST, THE ASSESSING OFFICER PROCEEDED TO APPLY THE TAX RATE O F 15% UNDER A COMPLETE FACTUAL MISCONCEPTION. WHEN THE AFORESAID ERROR COMMITTED BY THE ASSESSING OFFICER WAS BROUGHT TO THE NOTICE OF LEARNED DRP, IT IS OBSERVE D, LEARNED DRP HAS NOT MADE ANY OBSERVATION ON THE SAME. ON THE CONTRARY, LEARN ED DRP PROCEEDED TO EXAMINE WHETHER THE CONDITIONS OF SECTION 115A(1) H AVE BEEN FULFILLED OR NOT. THEREFORE, ASSESSEES CONTENTION THAT LEARNED DRP N EVER PROVIDED AN OPPORTUNITY TO THE ASSESSEE TO OFFER ITS SUBMISSIONS REGARDING FULFILLMENT OF CONDITIONS OF SECTION 115A(1) APPEARS TO BE CORRECT. THUS, IN OUR VIEW, TO THAT EXTENT, THERE IS LACK OF OPPORTUNITY BEING PROVIDED TO THE ASSESSEE TO ESTABLISH ITS POSITION. PROCEEDING FURTHER, WE FIND SECTION 115A(1)(B) PROV IDES THAT SUBJECT TO FULFILLMENT OF CERTAIN CONDITIONS, THE RATE OF TAX IN RESPECT O F INCOME RECEIVED BY A NON RESIDENT COMPANY BY WAY OF ROYALTY OR FTS WOULD BE TAXABLE @10%. THE CONDITIONS ARE AS UNDER:- I. THE ROYALTY OR FTS RECEIVED FROM THE INDIAN CONCERN MUST BE IN PURSUANCE TO AN AGREEMENT ENTERED BETWEEN THE PARTI ES AND SUCH AGREEMENT MUST HAVE BEEN APPROVED BY THE CENTR AL GOVERNMENT; OR II. WHERE IT RELATES TO A MATTER INCLUDED IN THE INDUST RIAL POLICY, FOR THE TIME BEING IN FORCE, OF THE GOVERNMENT OF I NDIA, THE AGREEMENT SHOULD BE IN ACCORDANCE WITH SUCH POLICY. 12 ITA 7182/MUM/2019 15. IN THIS REGARD, ASSESSEES CONTENTION IS THE AMOUNT BY WAY OF FTS RECEIVED BY THE ASSESSEE IS LITTLE MORE THAN RS.41 LAKHS. TH EREFORE, THERE IS NO NEED FOR ANY SPECIFIC APPROVAL FROM THE CENTRAL GOVERNMENT. ON A PERUSAL OF PARAGRAPH 4.3 OF THE MASTER DIRECTION DATED 01-01-2016 (UPDATED FROM TIME TO TIME) ISSUED BY THE RBI, A COPY OF WHICH IS AT PAGE 54 OF THE PAPER BOO K, WE FIND THAT PRIOR APPROVAL OF RBI WOULD BE NECESSARY, IF REMITTANCES EXCEED US D 10,00,000 PER PROJECT FOR OTHER CONSULTANCY SERVICES PROCURED FROM OUTSIDE INDIA. AS PER FOREIGN EXCHANGE MANAGEMENT (CURRENT ACCOUNT TRANSACTION) RULES, 200 0, REMITTANCES IN CERTAIN INSTANCES ARE PROHIBITED AS PER SCHEDULE 2 AND SCHE DULE 3. PRIMA FACIE, IT APPEARS, THE AMOUNT RECEIVED BY WAY OF FTS BY THE ASSESSEE D OES NOT COME WITHIN THE PROHIBITED ITEMS. THOUGH, THERE ARE CERTAIN CONDITI ONS SET OUT IN SECTION 115A(1); HOWEVER, IT HAS TO BE CONSIDERED WHETHER SUCH CONDI TIONS ARE MANDATORILY REQUIRED TO BE FULFILLED, EVEN, IN A CASE WHERE SPE CIFIC APPROVAL IS NEITHER REQUIRED NOR CONTEMPLATED AS PER THE EXTANT RULES/REGULATION S/GUIDELINES OF RBI OR CENTRAL GOVERNMENT. IN CASE, THE GOVERNMENT HAS NOT LAID DO WN ANY GUIDELINES OR PROCEDURE FOR APPROVAL FOR THE SUBJECT TRANSACTION, THE ASSESSEE CANNOT BE EXPECTED PERFORM AN IMPOSSIBLE TASK. IN OUR VIEW, I F STRICT AND LITERAL INTERPRETATION OF A STATUTORY PROVISION LEADS TO UN DESIRABLE CONSEQUENCES AND NOT ONLY RENDERS IT UNWORKABLE BUT ALSO CAUSES HARASSME NT TO THE TAXPAYER, THEN, IT HAS TO BE AVOIDED AND THE PROVISION HAS TO BE CONST RUED HARMONIOUSLY TO MAKE IT WORKABLE. HOWEVER, IT IS A FACT ON RECORD THAT ALL THESE ASPECTS HAVE NOT BEEN EXAMINED EITHER BY THE ASSESSING OFFICER OR BY LEAR NED DRP WHILE DECIDING THE DISPUTED ISSUE. 16. AS REGARDS THE CONTENTION OF LEARNED DEPARTMENT AL REPRESENTATIVE THAT THE 10% RATE WOULD BE APPLICABLE FROM ASSESSMENT YEAR 2 017-18, WE DO NOT FIND ANY 13 ITA 7182/MUM/2019 MERIT IN SUCH SUBMISSION. UNDISPUTEDLY, BY WAY OF F INANCE ACT, 2015, THE APPLICABLE TAX RATE OF 10% IN PLACE OF 15% HAS BEEN BROUGHT TO THE STATUTE W.E.F. 01-04-2016. THEREFORE, IN OUR VIEW, THE TAX RATE O F 10% WOULD BE APPLICABLE FROM ASSESSMENT YEAR 2016-17 ONWARDS. AS REGARDS THE CON TENTION OF LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE MASTER DIRECTI ON OF RBI SPEAKS OF CONSULTANCY SERVICES, HENCE, WOULD NOT BE APPLICABL E, WE FIND SUCH ARGUMENT THOROUGHLY MISCONCEIVED. A READING OF EXPLANATION ( A) TO SECTION 115A(1)(B)(B) MAKES IT CLEAR THAT FTS WOULD HAVE THE SAME MEANING AS IN EXPLANATION 2 SECTION 9(1)(VII) OF THE ACT. AS PER EXPLANATION 2 TO SECT ION 9(1)(VII) OF THE ACT, FTS WOULD INCLUDE CONSIDERATION FOR MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES. THUS, CONSULTANCY SERVICES WOULD ALSO COME WITHIN THE DEF INITION OF FTS. IT IS RELEVANT TO OBSERVE, IN COURSE OF HEARING, LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN ALL OTHER ASSESSMENT YEARS, SIMILAR PAYMENT RECEIVE D BY THE ASSESSEE HAS BEEN TAXED @10% AS PER SECTION 115A(1)(B) OF THE ACT. I F THAT IS SO, APPLICABILITY OF RULE OF CONSISTENCY ALSO NEEDS TO BE EXAMINED. 17. IN VIEW OF THE AFORESAID, WE RESTORE THE ISSUE TO THE ASSESSING OFFICER FOR FRESH ADJUDICATION KEEPING IN VIEW THE DISCUSSION MA DE HEREIN BEFORE. THE ASSESSING OFFICER SHOULD NOT ONLY TAKE NOTE OF THE MASTER DIRECTION OF RBI AND ANY OTHER RULES AND REGULATIONS ISSUED/FRAMED BY THE RB I/CENTRAL GOVERNMENT BUT MUST ALSO EXAMINE THE APPLICABILITY OF DECISIONS TO BE RELIED UPON BY THE ASSESSEE. NEEDLESS TO MENTION, BEFORE DECIDING THE ISSUE, THE ASSESSING OFFICER MUST PROVIDE A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSE SSEE. WITH THE AFORESAID OBSERVATIONS, THIS IS GROUND IS ALLOWED FOR STATIST ICAL PURPOSES. 14 ITA 7182/MUM/2019 18. IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED ON 12/10/2021. SD/- SD/- (RAJESH KUMAR) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DT : 12/10/2021 PAVANAN COPY TO : 1. APPELLANT 2. RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) 5. THE DR, ITAT, MUMBAI 6. GUARD FILE /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI