Global E Business Operations Private Limited, Bangalore V. Deputy Director of Income Tax, Bangalore

ITA 957/BANG/2010

• Counselvise Citation: 95721114 RSA 2010
• Duration Of Justice: 1 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 26-06-2012
• Assessment Year: misc
• Appeal Filed On: 04-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA CITI
• Section: 201(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE A BENCH, BANGALORE BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V.VASUDEVAN, JUDICIAL MEMBER I.T.A.NOS.643 & 957(B)/2010 (ASSESSMENT YEARS : 2007-08) M/S GLOBAL E-BUSINESS OPERATIONS THE DY. DCIT, INTL. TAXATION, PVT.LTD., THE 1,2 HP TOWERS, C IRCLE-1(1), GOLF VIEW CAMPUS, WIND TUNNEL ROAD, BANGALORE MURUGESHPALYA, BANGALORE VS PAN NO.AABCG2843D APPELLANT RESPONDENT ASSESSEE BY : SHRI SRIRAM SESHADRI, CA REVENUE BY : SHRI S.K.AMBASTHA, CIT-I DATE OF HEARING : 26-06-2012 DATE OF PRONOUNCEMENT : 04-07-2012 O R D E R PER SHRI N.V.VASUDEVAN, JM THESE ARE APPEALS BY THE ASSESSEE AGAINST THE COMMO N ORDER PASSED BY THE CIT(A)-IV, BANGALORE U/S 201(1)( AND 201(1A) OF THE IT ACT, 1961 (THE ACT) RELATING TO ASSESSMENT YEAR 2007-0 8. 2. THE ASSESSEE IS ENCAGED IN THE BUSINESS OF PROVI DING DATA PROCESSING AND OTHER IT ENABLED SERVICES TO M/S HEWLETT PACKAR D ENTITIES. ANOTHER COMPANY BY NAME M/S HEWLETT PACKARD, AP (HONG KONG LTD., ) (HK) HEREIN AFTER REFERRED TO AS HP AP(HK), A COMPANY IN CORPORATED UNDER THE LAWS OF HONG KONG AND HAVING OFFICE AT HONG KONG. HP AP (HK) IS ALSO PART OF THE HP CO., WORLD WIDE GROUP AND IT PROVIDE S SERVICES TO VARIOUS ITA NOS.643 & 957(B)/2010 2 MEMBERS OF THE HP CO., WORLD WIDE GROUP. THERE WAS AN AGREEMENT DATED 01-06-2004 BETWEEN HP, AP(HK) AND THE ASSESSE E WHEREBY HP,AP(HK) AGREED TO PROVIDE THE FOLLOWING SERVICES TO THE ASSESSEE. 1. WORKFORCE DEVELOPMENT SERVICES 2. LOGISTICS SERVICES 3. IT SUPPORT SERVICES 4. FINANCIAL SERVICES SUPPORT 5. FACILITIES MANAGEMENT SERVICES 6. RELOCATION SERVICES 7. TAX SERVICES 8. STATIONERY CHARGES 9. OVERSEAS TRAVEL SERVICES 10. OTHER SERVICES THAT MAY BE RENDERED FROM TIME T O TIME THE CONSIDERATION PAYABLE BY THE ASSESSEE TO HP,A P (HK) TO PROVIDE THE AFORESAID SERVICES IS MENTIONED IN CLAUSE-II OF THE AGREEMENT AND IT READS AS FOLLOWS; COSTS, BILLING, PAYMENT; THE COSTS OF SERVICES (COSTS) ARE THE TOTAL DIREC T AND INDIRECT COSTS INCURRED BY SERVICE PROVIDER TO PERF ORM THE SERVICES. SUCH COSTS ARE INCURRED BY THE SERVICE P ROVIDER IN COST OF SALES OR OPERATING EXPENSE ACCOUNTS. BILLING FOR SERVICES MAY BE BASED PARTLY OR WHOLL Y ON FORECAST COSTS, PROVIDED ADJUSTMENTS ARE MADE THERE AFTER TO REFLECT ACTUAL COSTS. SERVICE PROVIDER WILL INVO ICE USER MONTHLY (OR, IF AGREED TO IN WRITING, QUARTERLY) FOR THE CO MPENSATION DUE HEREUNDER OR ON SOME OTHER PERIODIC BASIS AGREED TO BY THE PARTIES. USER SHALL MAKE ALL REMITTANCES UNDER THI S AGREEMENT WITHIN 30 DAYS OF RECEIPT OF AN INVOICE, OR IN ACCO RDANCE WITH OTHER PAYMENT TERMS AGREED TO IN WRITING BY THE PAR TIES. UNLESS OTHERWISE AGREED, ALL INVOICES AND REMITTANCES SHAL L BE IN U.S.DOLLARS. IN ITS REASONABLE DISCRETION, SERVICE PROVIDER MAY UTILIZE RELATED PARTIES IN THE HP WORLD WIDE GROUP AS BILLING INTERMEDIARIES FOR AMOUNT DUE HEREUNDER. IN CONSIDERATION FOR PROVIDING THE SERVICES, USE R SHALL PAY SERVICE PROVIDER FOR THE COSTS PLUS MARK UP OF 10% ON SUCH COSTS. DURING THE PREVIOUS YEAR, THE ASSESSEEE MADE THE FO LLOWING PAYMENTS TO HP, AP(HK) ITA NOS.643 & 957(B)/2010 3 BREAK UP FOR REMITTANCE MADE ON 27.9.2006 PARTICULARS AMT. IN US $ REIMBURSEMENT OF RELOCATION EXPENSES (BENEFITS AND FSE TAXES) 21,497.39 REIMBURSEMENT OF RELOCATION EXPENSES 25,844.14 REIMBURSEMENT OF COMMUNICATION EXPENSES 41 .91 REIMBURSEMENT OF FSE TAXES 24,988.66 REIMBURSEMENT OF EMPLOYEE AWARDS 63,288.59 REIMBURSEMENT OF VAT ON SERVICES RENDERED 5,295 .64 ------------- 1,40,956.33 BREAK UP FOR REMITTANCES MADE ON 28.12.2006 PARTICULARS AMT. IN US $ REIMBURSEMENT OF RELOCATION EXPENSES (BENEFITS AND FSE TAXES) 37,470.19 REIMBURSEMENT OF LICENSE FEE FOR WEBSITE ACCESS 4,122.36 REIMBURSEMENT OF EMPLOYEE AWARDS 36,557.41 REIMBURSEMENT RELOCATION EXPENSES AND AND FSE TAXES 38,579.89 REIMBURSEMENT OF RELOCATION EXPENSES (BENEFITS AND TAXES) 57,715.50 ------------- 174,445.35 3. ON THE AFORESAID PAYMENTS MADE TO HP,AP(HK) WHO WAS A NON- RESIDENT ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE AT THE TIME OF MAKING PAYMENTS. THE ASSESSEE SUBMITTED THAT THE AFORESA ID PAYMENTS WERE REIMBURSEMENT OF RELOCATION EXPENSES (BENEFITS AND TAXES OF INDIAN EMPLOYEES) AND REIMBURSEMENT OF PAYMENTS MADE TOWAR DS EMPLOYEES AWARDS. IT WAS THE CLAIM OF THE ASSESSEE THAT THER E WAS NO ELEMENT OF INCOME EMBEDDED IN SUCH PAYMENTS, WHICH IS CHARGEAB LE TO TAX IN THE HANDS OF HP,AP (HK) IN INDIA AND THEREFORE, THERE W AS NO OBLIGATION TO DEDUCT TAX AT SOURCE, WHILE MAKING PAYMENTS. THE ASSESSEE EXPLAINED THE NATURE OF REIMBURSEMENT OF RELOCATION EXPENSES AND REIMBURSEMENT OF EMPLOYEES AWARDS. 4. THE ASSESSEE EXPLAINED THAT HP AP (HK) WAS LIKE A CLEARING HOUSE (I.E SIMILAR TO THE RESERVE BANK OF INDIA) AND GIVEN THE HUGE VOLUME OF INTER COMPANY TRANSACTIONS BETWEEN VARIOUS WORLDWIDE GROU P COMPANIES OF THE HP GROUP AND THE RELATED PAYMENTS AND RECEIPTS, ALL OF THESE ACCOUNTING IS MONITORED BY HP AP(HK) WHICH IS MERE CLERICAL EXERCISE ITA NOS.643 & 957(B)/2010 4 UNDERTAKEN BY HPAP (HK). IN OTHER WORDS, THE SUBJ ECT PAYMENT WERE MERE REIMBURSEMENT OF EXPENSES INCURRED BY SOME OVE RSEAS HP GROUP ENTITY ON BEHALF OF THE ASSESSEE WHICH HP AP(HK) ID ENTIFIED AS PAYABLE BY ASSESSEE AND CROSS CHARGED UNDER THE GENERAL SERVIC ES AGREEMENT REFERRED TO IN THE EARLIER PART OF THIS ORDER. REI MBURSEMENT OF EMPLOYEES AWARDS WAS EXPLAINED BY THE ASSESSEE AS A PART OF T HE REWARDS AND RECOGNITION POLICY OF HP THAT IT ADOPTS FOR RECOGNI ZING CERTAIN BEHAVIOURAL ATTRIBUTES AND TRAITS LIKE, ACHIEVEMENT AND CONTRIB UTION, EMPLOYEE REFERRAL, MEANINGFUL INNOVATION, PASSION FOR CUSTOM ERS, TEAMWORK, COMMITMENT TO QUALITY, LEADERSHIP, SPEED AND AGILIT Y, UNCOMPROMISING INTEGRITY, ADAPTIVE/CHANGE MANAGEMENT ETC. ALTHOU GH, THE RECOMMENDATIONS, REFERRALS, PEOPLE EVALUATION ETC. IS DONE BY EACH COUNTRY AND UNDER A PARTICULAR LEGAL ENTITY, THE E- AWARD SCHEME IS ADMINISTERED CENTRALLY. FOR EXAMPLE THE SUBJECT E-A WARDS, WHICH WERE RECEIVED BY THE EMPLOYEES WAS ADMINISTERED FROM HP AP(HK). THE E- AWARDS WORK ON A POINT SYSTEM AND AT THE TIME WHEN THE PEOPLE MANGER NOMINATES EN EMPLOYEE FOR SUCH AWARD, HE ALSO ALLOT S POINTS AND DEPENDING ON THE POINTS COLLECTED BY THE EMPLOYEE, THE EMPLOYEE CAN CHOOSE AN AWARD THAT IS MEANINGFUL TO THEM AND THE SAID POINTS CAN BE REDEEMED AT ANY TIME. E-AWARDS ARE SIMILAR TO CREDI T CARD POINTS THAT ACCRUE TO EMPLOYEES OF THE ASSESSEE. AS AND WHEN E LIGIBLE AND DESIRED, THE EMPLOYEES ENCASH THESE E-WARDS. BASED ON NUMB ER OF EMPLOYEES EXERCISING THE OPTION, AT THE FIRST STAGE FUNDS ARE PUMPED INTO THE ASSESSEE BY HP AP(HK). BASED ON THIS, THE ACTUAL PAY OUT BY ASSESSEE TO THE CONCERNED EMPLOYEE AFTER DEDUCTING TAXES AT SOURCES, AS APPLICABLE, IS MADE. ONCE THE PAYMENT TO EMPLOYEE I S MADE, GIVEN THAT THE EXPENSE HAS TO BE BOOKED IN THE BOOKS OF ASSESS EE, HP AP(HK) RAISES AN INVOICE FOR SUCH AMOUNTS ON THE ASSESSEE, WHICH IS DULY PAID BY THE ASSESSEE. 5. THE OTHER MAJOR COMPONENT OF IMPUGNED PAYMENT I S REIMBURSEMENT OF RELOCATION RELATED EXPENSES OF EMPLOYEES OF THE ASSESSEE. THE ASSESSEE EXPLAINED THAT WERE VARIOUS EMPLOYEES OF T HE ASSESSEE WHO ARE REQUIRED TO TRAVEL TO OTHER HP GROUP ENTITIES OVERS EAS EITHER ON SHORT ITA NOS.643 & 957(B)/2010 5 TERM OR LONG TERMS ASSIGNMENTS FOR THE PURPOSE OF C ARRYING ON THE BUSINESS OF THE ASSESSEE. IN THIS REGARD, RELOCATI ON RELATED EXPENSES, FSE TAXES, ETC. ARE BORNE BY OVERSEAS HP ENTITIES A ND THEN THROUGH HP AP (HK) ARE CHARGED TO THE ASSESSSEE. THE EXPENSE S CROSS CHARGE TO HP AP (HK) BY THE ASSESSEE WITH RESPECT TO ABOVE ARE P RIMARILY ON ACCOUNT OF OUTBOUND ASSIGNEES, WHO TRAVEL ABROAD TO CUSTOMER S ITES FOR PROCESS TRANSITIONING ETC. BUT IT COULD ALSO INCLUDE A FEW IN BOUND ASSIGNEES, WHO WOULD TRAVEL INTO INDIA TO ASSESSEES OPERATIONS. 6. COPIES OF THE SAMPLE INVOICES EVIDENCING ABOVE REIMBURSEMENTS WERE ALSO FILED. IT WAS SUBMITTED THAT THE SAID SAMPLE OF INVOICES WITHOUT ANY DOUBT CLEARLY DEMONSTRATES THAT THE SUBJECT PAYMENT MADE BY THE ASSESSEE WAS A MERE REIMBURSEMENT OF EXPENSES AS EV IDENCED BY THE BACK TO BACK INVOICES ETC. IT WAS ALSO HIGHLIGHTED THAT A RECONCILIATION OF ALL THE EXPENSES UNDER SCRUTINY WITH VOUCHERS AND B ILLS WOULD NOT BE FEASIBLE OWING TO THE VOLUMINOUS SIZE AND VOLUME OF DOCUMENTATION INVOLVED, IT WAS PHYSICALLY VERY DIFFICULT TO UNDER TAKE THE SAID EXERCISE IN THE GIVEN TIME LIMIT. HOWEVER, DESPITE THE PAUCITY OF TIME, ASSESSEE MADE A BONAFIDE EFFORT AND SUBMITTED AS MANY SAMPLE INVOICES/DETAILS, AS WAS POSSIBLE FOR IT TO COLLATE. 7. IT WAS FURTHER REITERATED THAT SUBJECT PAYMENT IS A MERE REIMBURSEMENT OF EXPENSES WITHOUT MARK UP, WHICH CA NNOT BE HELD TO BE IN THE NATURE OF FEES FOR TECHNICAL SERVICES AND HENCE, NOT SUBJECT TO TAX WITHHOLDING U/S 195 OF THE ACT. 8. ON THE ABOVE FACTS, THE QUESTION BEFORE THE AO WAS TO WHETHER AMOUNTS IN QUESTION ARE REIMBURSEMENT OF EXPENSES H AVING NO ELEMENT OF INCOME EMBEDDED IN SUCH PAYMENTS AND WHETHER TH E AFORESAID PAYMENTS CONSISTED PAYMENT IN THE NATURE FEES FOR T ECHNICAL SERVICES RENDERED (FTS) WHICH IS CHARGEABLE TO TAX IN INDIA IN THE CASE OF HP, AP(HK). 9. THE AO WAS OF THE VIEW THAT THE RELOCATION EXPE NSES WERE IN THE NATURE OF FTS AND HE OBSERVED IN THIS REGARD AS FOL LOWS; ITA NOS.643 & 957(B)/2010 6 6.1 RELOCATION EXPENSES: DURING THE COURSE OF HE ARING, THE AR SUBMITS THAT INDIA EMPLOYEES HAVE BEEN DEPUTED TO T HE FOREIGN COMPANY AND M/S HP, ( HAS INCURRED CERTAIN EXPENDIT URE TOWARDS RELOCATION OF THE INDIAN EMPLOYEES. THESE EMPLOYEES ARE 1)MR.GANESH PANCHANATHAN 2) RITU NAGPAL 3) SEIG FRIED SCHOEN 4) SUMEET BATRA 5) VIVEK NAGAR KATTI 6) SANJ AY SINGH ETC. AS PER THE ARS SUBMISSION THE FOREIGN COMPAN Y HAS ARRANGED THE ACCOMMODATION AND OTHER LOGISTICS SERV ICES TO THE ABOVE SAID EMPLOYEES. FOR THIS PURPOSE, THE NON-RES IDENT HAS TO SEARCH FOR APPROPRIATE LOCATIONS TO ACCOMMODATE THE SE EMPLOYEES. SOMETIMES IT HAS TO RELY ON THIRD PARTIE S TO MAKE THESE ARRANGEMENTS. FROM THE DETAILS IT IS FURTHE R SEEN THAT THE FOREIGN COMPANY HAS ALSO PROVIDED FOR OTHER AMENITI ES LIKE GAS,WATER,POWER,FURNITURE ETC. TO THE INDIAN EMPLOY EES. FURTHER, THE FOREIGN COMPANY HAS TO GUIDE AND ADVIS E THE EMPLOYEES IN SOLVING ANY PROBLEMS IN THIS REGARD. T HEREFORE, THESE SERVICES BROADLY FALLS IN THE CATEGORY OF CON SULTANCY SERVICES. THE FOREIGN COMPANY HAS ALSO INCURRED E XPENDITURE TOWARDS TAX SERVICES. TO PROVIDE TAX SERVICES SPEC IFIED CONSULTANTS NEEDS TO BE HIRED WHO ARE EXPERIENCED I N THE LINE OF TAXATION AND ACCOUNTANCY. THIS IS SPECIALIZED AND PROFESSIONAL SERVICE. THESE SERVICES CAN BE RENDERED ONLY WITH T HE HELP OF EXPERIENCED CONSULTANTS. THUS, THE SERVICES RENDE RED BY THE FOREIGN COMPANY COLLECTIVELY FALLS IN THE CATEGORY OF CONSULTANCY SERVICES THEREFORE CHARGES PAID TOWARDS THESE SERVI CES ARE NOTHING BUT FTS. THE GROSS RECEIPTS IN THE HANDS OF THE FOREIGN COMPANY IS ONLY RELEVANT AT THIS JUNCTURE FOR THE P URPOSE OF CHARGING FTS. AS PER SERVICE AGREEMENT THE FOREIG N COMPANY HAS CHARGED @ COST+10% TO THE INDIAN COMPANY TO REN DER THESE SERVICES. THUS, THE CHARGES PAID TOWARDS THESE SE RVICES ARE NOTHING BUT FTS IN THE HANDS OF FOREIGN COMPANY. 6.2 EMPLOYEES AWARDS: DURING THE COURSE OF HEARING , THE AR SUBMITTED THAT THESE AWARDS HAVE BEEN GIVEN TO T HE INDIAN EMPLOYEES IN THE FORM OF MONETARY INCENTIVE. FURTHE R, HE AR STATED THAT THESE AWARDS HAVE BEEN GIVEN AT THE INS TRUCTION OF THE M/S HP(AP), HONG KONG AND THE SAME WERE REIMBUR SED TO M/S HP (AP) SUBSEQUENTLY. THE SUBMISSIONS OF AR A RE CONTRADICTORY. AT THE FIRST INSTANCE, SHE SAID TH AT THE PAYMENTS WERE MADE TO THE INDIAN EMPLOYEES BY THE INDIAN COM PANY AND THEN SHE SAYS THAT IT IS MERE REIMBURSEMENT. IF AN Y PAYMENT MADE BY THE FOREIGN COMPANY ON BEHALF OF THE INDIAN COMPANY AND SUBSEQUENTLY IF THE INDIAN COMPANY PAYS BACK TO THE FOREIGN COMPANY THEN ONLY IT IS CALLED REIMBURSEMEN T. WHEREAS HERE THE INDIAN COMPANY HAS MADE PAYMENTS TO ITS ON EMPLOYEES, THEREFORE THE ISSUE OF REIMBURSEMENT DOE S NOT ARISE. HERE, THE PAYMENTS MADE TO THE INDIAN EMPLOYEES ARE ON THE BASIS OF THEIR PERFORMANCE. TO IMPROVE THE EFFICIEN CY AND TO MOTIVATE THE EMPLOYEES THESE PERFORMANCE INCENTIVES WERE GIVEN IN THE FORM OF AWARDS. EVEN THOUGH THESE INCENTIV ES WERE GIVEN AT THE DISCRETION OF THE HONG KONG COMPANY BUT PAYM ENTS WERE ACTUALLY MADE BY THE INDIAN COMPANY THEREFORE, THE QUESTION OF ITA NOS.643 & 957(B)/2010 7 REIMBURSEMENT DOES NOT ARISE. SINCE THE PAYMENTS WE RE MADE TOWARDS WORKFORCE DEVELOPMENT, THE REMITTANCE CAN B E CATEGORIZED AS TOWARDS WORKFORCE DEVELOPMENT SERVIC ES AND ACCORDINGLY, FALLS IN THE CATEGORY OF FTS. THE ASSE SSEE COMPANY HAS CAMOUFLAGED THE WHOLE REMITTANCE IN THE NAME OF REIMBURSEMENT INSTEAD OF FTS. THUS, THE REMITTANC E MADE BY THE INDIAN COMPANY CHARGEABLE TO TAX AS FTS. 10. ON THE QUESTION WHETHER THE PAYMENTS WERE IN T HE NATURE OF REIMBURSEMENT OF EXPENSES, THE AO HELD AS FOLLOWS; 6.3 ISSUE OF REIMBURSEMENT: THE AR OF THE ASSESS EE CONTENDS THAT THIS IS ONLY COST TO COST REIMBURSEMENT AND NO ELEMENT OF INCOME EMBEDDED IN IT. AS PER SERVICES AGREEMENT IT IS CLEAR THAT THE FOREIGN COMPANY HAS CHARGED COST + 10% AS CHAGES TOWARDS THE ABOVE SERVICES RENDERED BY IT. HOWEVE R, DURING THE COURSE OF HEARING THE AR WAS ASKED TO SUBMIT NECESS ARY SUPPORTING IN SUPPORT OF ITS CLAIM OF REIMBURSEMENT . THE ASSESSEE COULD ONLY FURNISH FEW SUPPORTING WHICH AR E NOT MATCHING WITH THE REMITTANCES MADE BY THE INDIAN CO MPANY. SECONDLY, THE AR WAS ALSO ASKED TO CONFIRM WHETHER ANY INDEPENDENT AUDIT WAS CARRIED IN SUPPORT OF ITS CLA IM AND THE AR COULD NOT CONFIRM THE SAME. IN VIEW OF THE ABOVE, THE ASSESSEES CONTENTION OF REIMBURSEMENT IS WITHOUT ANY BASIS. 11. ON APPEAL BY THE ASSESSEE, THE CIT(A) CONFIRME D THE ORDER OF THE AO GIVING RAISE TO THE PRESENT APPEALS BY THE ASSESSEE BEFORE THE TRIBUNAL. IN ITA NO.643(B)/2010 12. THE ASSESSEE HAS CHALLENGED THE ORDER OF THE C IT(A) WHEREBY THE CIT(A) HAS TREATED THE ASSESSEE AS AN ASSESEEE IN DEFAULT U/S 201(1 OF THE IT ACT. IN ITA NO.957(B)/2010 13. THE ASSESEEE HAS CHALLENGED THE ORDER OF CIT(A) WHE REBY THE CIT(A) HAS LEVIED INTEREST U/S 201(1A) OF THE ACT ON THE T AX DUE, CONSEQUENT TO THE ASSESSEE BEING TREATED AS AN ASSESSEE IN DEFAU LT U/S 201(1) OF THE IT ACT. 14. THE REVENUES CONTENTION WAS THAT IT WAS NOT OPEN T O THE ASSESSEE TO RAISE ISSUES REGARDING CHARGEABILITY OF TAX ON P AYMENTS IN QUESTION IN PROCEEDINGS U/S 201(1) OF THE ACT. IN OUR VIEW THIS STAND OF THE REVENUE ITA NOS.643 & 957(B)/2010 8 WILL NO LONGER SURVIVES. THE HONBLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PVT.LTD., VS CIT & ANOTHER (327 ITR 456) HAS HELD THAT THE LIABILITY TO DEDUCT TAX AT SOURCE DOE S NOT ARISE UNLESS, REMITTANCES CONTAIN WHOLLY OR PARTLY TAXABLE INCOME . THE HONBLE SUPREME COURT HELD THAT THE LIABILITY TO DEDUCT TAX AT SOURCE WHILE MAKING PAYMENT TO NON-RESIDENT U/S 195 OF THE ACT, WILL ARISE ONLY IF THE REMITTANCES COMPRISES OF INCOME CHARGEABLE TO TAX U NDER THE ACT. IN OTHER WORDS, THE LIABILITY TO DEDUCT TAX AT SOURCE IS ONLY ON THE INCOME COMPONENT OF THE REMITTANCES TO THE NON-RESIDENT AN D NOT ON THE GROSS REMITTANCES. IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IT IS PERMISSIBLE FOR THE PERSON MAKING PAYMENT TO ALLEGE THAT THE REMITTANCES MADE TO THE NON-RESIDENT OR ANY PORTION OF SUCH REM ITTANCES DOES NOT COMPRISE OF INCOME WHICH IS CHARGEABLE TO TAX IN IN DIA IN THE HANDS OF THE NON-RESIDENT. WITH THIS BACKGROUND, WE PROCEED TO EXAMINE THE REMITTANCES MADE BY THE ASSESSEE TO HP, AP (HK). 15. WE HAVE ALREADY GIVEN THE BREAKUP OF THE REMITTANCE S MADE BY THE ASSESSEE TO HP, AP(HK). THE EVIDENCE IN SUPPORT OF SOME OF THE REIMBURSEMENTS HAVE BEEN PLACED IN THE PAPER BOOK FILED BEFORE US. THE ASSESSEE HAS GIVEN A BREAK UP OF REMITTANCES MADE T O HP, AP (HK) AND THESE ARE CONTAINED IN PAGES 3 TO 15 OF THE PAPER B OOK. TO DEMONSTRATE THE FACT THAT THE PAYMENTS WERE PURELY REIMBURSEMEN T OF EXPENSES INCURRED BY ENTITIES OF THE HP GROUP WORLDWIDE ON B EHALF OF THE ASSESSEE WHICH HAVE BEEN COLLATED BY HP,AP(HK). THE DETAILS OF SAMPLE EMPLOYEES LIKE INVOICES FOR REIMBURSEMENT MADE TO SAMPLE EMPL OYEES HAVE BEEN GIVEN. THESE ARE CONTAINED IN PAGES 16-18 OF THE A SSESSEEE PAPER BOOK. PERUSAL OF THE SAME REVEALS THE NATURE OF REIMBURSE MENT. FOR EXAMPLE: SHRI VIVEK NAGAR KATTI, HAD GONE TO HOUSTON, USA. HE WAS PROVIDED WITH A HOUSE AND FURNITURE FOR HIS LIVING IN USA. EXPEN SES HAD BEEN INCURRED IN THE FORM OF HOUSE RENTS, FURNITURE HIRE CHARGES ETC. M/SHP,AP(HK) RAISED INVOICES ON THE ASSESSEE FOR THE ACTUAL EXPE NSES INCURRED ON BEHALF OF THE ASSESSEE WITH REFERENCE TO THE EMPLOY EE SHRI VIVEK NAGAR KATTI. IT IS THUS CLER FROM THE SAMPLE INVOICES F ILED BEFORE US THAT THE PAYMENTS MADE BY THE ASSESEEE TO HP, AP(HK) WERE RE IMBURSEMENT OF ITA NOS.643 & 957(B)/2010 9 ACTUAL EXPENSES INCURRED BY THE ENTITIES OF THE HP GROUP ON BEHALF OF THE ASSESSEE. NO DOUBT, THE AGREEMENT BETWEEN THE ASSES SEE AND THE HP,AP(HK) CONTEMPLATES 10% MARK UP ON THE ACTUAL CO ST, BUT AS FAR AS THE PAYMENTS MADE DURING THE PREVIOUS YEAR ARE CONC ERNED, NO SUCH MARK UP HAS BEEN MADE AND THE DISPUTED PAYMENTS ARE PURELY REIMBURSEMENT OF ACTUAL EXPENSES INCURRED WITH NO I NCOME EMBEDDED IN SUCH PAYMENTS. 16. AS WE HAVE ALREADY SEEN WHEN A CLAIM WAS MADE BY THE ASSESSEE THAT THERE WAS NO INCOME OF ELEMENT EMBEDDED IN THE REMITTANCES, THE AO HAS NOT EXAMINED THE CLAIM OF THE ASSESSEE IN A PROPER PERSPECTIVE. THEY HAVE MERELY SAID ONLY FEW EVIDENCE HAVE BEEN F ILED. ANOTHER REASON GIVEN WAS THAT NO INDEPENDENT AUDIT WAS CARRIED OUT IN RESPECT OF THE REMITTANCES. WE ARE OF THE VIEW THAT THE EVIDENCE FILED BY THE ASSESSEE BEFORE THE REVENUE AUTHORITIES AND WHICH HAVE BEEN FILED IN THE FORM OF PAPER BOOK FILED BEFORE US AMPLY DEMONSTRATES THE P LEA OF THE ASSESSEE THAT THE REMITTANCES WERE PURELY REIMBURSEMENT OF E XPENSES WITH NO ELEMENT OF INCOME EMBEDDED IN SUCH PAYMENTS. THE Q UESTION IN SUCH CIRCUMSTANCES, WILL BE AS TO WHETHER THE OBLIGATION TO DEDUCT TAX AT SOURCE CAN BE SAID TO EXISTS ON SUCH PAYMENTS. THE LAW IN THIS REGARD IS VERY CLEAR. THE SPECIAL BENCH OF ITAT, MUMBAI IN T HE CASE OF MAHINDRA & MAHINDRA LTD., 30 SOT 374 EXAMINES THIS ISSUE AND HAVE HELD THAT IN RESPECT OF REIMBURSEMENT OF EXPENSES THERE IS NO OB LIGATION TO DEDUCT TAX AT SOURCE AND THERE WAS NO ELEMENT OF INCOME INVOLV ED IN SUCH PAYMENTS. 17. THUS, ON THE FACTS OF THE PRESENT CASE, WE ARE OF THE VIEW THAT THERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE AND CONSE QUENTLY, THE ASSESSEE COULD NOT BE TREATED AS AN ASSESSEE IN DEFAULT U /S 201(1) OF THE ACT AND CONSEQUENTLY, THE LEVY OF INTEREST U/S 201(1A) OF T HE ACT, CANNOT ALSO BE SUSTAINED. 18. THE LEARNED COUNSEL FOR THE ASSESSEE AS WELL A S THE REVENUE ALSO ADVANCED ARGUMENTS AS TO WHETHER THE PAYMENTS IN QU ESTION WOULD BE IN THE NATURE OF FTS. SINCE WE HAVE ALREADY HELD THAT THE PAYMENT IN ITA NOS.643 & 957(B)/2010 10 QUESTION IS PURELY REIMBURSEMENT OF EXPENSES THESE ARGUMENTS ARE NOT CONSIDERED AT THIS STAGE. 19. IN THE RESULT, THE APPEALS FILED BY THE ASSESS EE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 4 TH JULY, 2012. SD/- SD/- (N. BARATHVAJA SANKAR) (N. V.VASUDEVAN) VICE PRESIDENT JUDICIAL MEMBER PLACE: BANGALORE DATED: 04-07-2012 AM* COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. CIT(A) 4. CIT 5. DR 6. GF(BLORE) 7. GF(DELHI) BY ORDER SR. PRIVATE SECRETARY, ITAT, BANGALORE