Whether when assessees reimburse costs to a third party for manufacturing steel in a pre-determined ratio, such payments are to be treated as FTS, liable to withholding tax - NO: ITAT

THE issues before the Bench are - Whether when the assessees reimburse the costs to a third party for manufacturing steel in a pre-determined ratio, such payments are to be treated as FTS, liable to withholding tax and Whether the costs reimbursements made by the assesses has an element of income. And the verdict goes against the Revenue.

Facts of the case

The assessees, companies being Kalyani Ltd and Mukund Ltd (ML), were engaged in the business of steel manufacturing. To manufacture steel in economical and cost effective manner the assessee had entered into a Strategic

Alliance Agreement [SSA] on 16.5.1998 for setting up steel making facilities. In this regards they had incorporated a company HSL and invested in the same as per the SSA. As per terms of the SSA, both the assessees had agreed to reimburse HSL all the expenses incurred in course of business. Accordingly, the expenses incurred towards hot metal making and steel rolling activities were allocated to the assessee and the expenses incurred on steel making activities were allocated to ML and the common expenses and corporate expenses were reimbursed in predetermined ratios. During the A.Y. under consideration the assessees had reimbursed the expenditure incurred by HSL as per the SSA. In the course of the assessment u/s 133A the AO was of the view that payments made by the assessee were in nature of fees for technical services and thus the assessee’s were liable to deduct taxes u/s 194J. Based on the above the AO treated both the assesses as assessee in default u/s 201(1A) for non-withholding of taxes on costs reimbursed to HSL. The AO also placed reliance on Circular no. 715 issued by CBDT clarifying that reimbursed costs being part of bill for professional services was subject to withholding of taxes in totality. The assessee’s argued that the payments made to HSL were reimbursements made in terms of SSA and no technical service was rendered by them. Therefore there was neither an element of income in such payments nor any services were rendered by HSL to the assessee. In appeal the CIT(A) agreed with the assessee and held that the payments made to HSL by assessee’s were not in the nature of any technical service and thus not liable for tax deduction at source.

In appeals, having heard the parties, the Tribunal held that:

++ … as per the terms of SAA, the assessee and ML have reimbursed the expenses incurred by HSL in performance of its obligations. As rightly argued by the learned AR, the said reimbursement was on cost to cost basis and the same is evident from the P&L account and debit notes raised by HSL on the assessee and ML for the concerned assessment years. Therefore, the said payments did not comprise of any income component. Thus, in our considered view, the reimbursement of such expenses incurred by HSL cannot be categorized as in the nature of fees towards professional and technical services;

++ (i) In the case of CIT v. Dunlop Rubber Co. the Hon’ble Calcutta High Court has held as under:

“…... It was for sharing of the expenses of the research which was utilized by the subsidiaries as well as the head office organization, that the payments were made by the Indian Company and received by the assessee. The fact that after the termination what was to happen to these information gathered was not mentioned indicated that it could not be anything but sharing of the expenses because if it had provided that the information would belong either to the parent company or to the subsidiary, then perhaps it might have been contended that payments were either royalty or hiring charges of the information sand as such could be treated as income. But the very fact that the technical data was jointly obtained and the expenses were shared together indicated that it could not be treated as income…Accordingly, the amounts received by the assessee did not constitute income assessable to tax.”

With due regards, we have perused the ruling of the Hon’ble Court and of the considered view that the ratio laid down by the Court is squarely applicable to the facts of the issue on hand.

The Hon’ble Authority for Advance Rulings, New Delhi in the case of DECTA v. CIT had held that ‘the amount of contribution received/receivable to recover part of the cost of technical assistance provided by the applicant under the provisions of its aid programme to the companies assisted by it in India is neither income of the appellant under the provisions of the Income-tax Act nor fees for technical services……”

++ taking into account the facts and circumstances of the issue and also in conformity with the rulings of the judiciary (supra), we are of the firm view that the reimbursements of payment by the assessee and ML to HSL cannot be regarded as income in the hands of HSL.

++ In an overall consideration of the facts and circumstances of the issues as deliberated upon in the fore-going paragraphs, the findings of the learned CIT(A) under consideration and also in conformity of the judicial views on the issues cited supra, we are of the considered view that - the CIT (A) was justified in holding that the payments made by the assessee and ML to HSL towards services availed for operating and maintaining an integrated steel plant were in the nature of reimbursements; & the CIT (A) was also justified in holding that the said payments being in the nature of reimbursements on cost to cost basis and thus, the said payments did not constitute income in the hands of HSL and, therefore, the assessee as well as ML were not liable to deduct tax at source u/s 194J of the Act.