Authority Tribunal
In Re: Danfoss Industries P. Ltd. vs Unknown on 14 May, 2004
Equivalent citations: [2004]268ITR1(AAR)
RULINGS A.A.R. No. 606 of 2002 Decided On: 14.05.2004 Appellants: In Re: Danfoss Industries P. Ltd. Vs. Respondent: Hon'ble Judges: Syed Shah Mohammed Quadri, J. (Chairman), K.D. Singh and K.D. Gupta, Members Counsels: For Appellant/Petitioner/Plaintiff: Rajesh Gupta and N. Madhav, Advs. For Department: S. Lahiri, Adv. Subject: Direct Taxation Acts/Rules/Orders: Income Tax Act, 1961 - Section 195 Cases Referred: CIT v. Dunlop Rubber Co. Ltd., [1983] 142 ITR 493 (Cal); DECTA v. CIT, [1999] 237 ITR 190 (AAR); Trasmission Corporation of A.P. Ltd. v. CIT, [1999] 239 ITR 587 (SC) Head Note: INCOME TAX Advance rulings--Tax deduction at source under section 195Technical services to be rendered to a Indian company--Fees to be paid on basis of budget turnover cost incurred by foreign company on services rendered to group companies, the Indian company is one of them Catch Note: An Indian company, is the applicant. It is a member of D Group of companies. The applicant entered into agreement with DS, a foreign company, who is to be rendered technical services to group of companies and Indian company (applicant) is one of them. The consideration for availing those services is on the basis of allocation key which is determined on a proportional percentage of budget turnover weighted by growth rate and market maturity of the group company availing the services and any increase or shortfall in the actual turnover would proportionately increase or decrease the portion of cost to be absorbed by the group company which avails of services from D S. The cost is reimbursable on a monthly basis. Though the applicant believes that no tax is required to be deducted at source while making payments of the service fee to D S under section 195 in order to confirm its position advance ruling is sought. In the absence of the break-up of the cost incurred by D S in providing such services and fees payable by each individual company it is, not possible to conclude that the service fee payable by the applicant is nothing but reimbursement of costs incurred by D in providing services to the applicant. Therefore, the payments to be made by the applicant pursuant to the agreement proposed to be entered into between the D S for the services to be provided by it to the applicant cannot be said to be reimbursement of the actual expenditure incurred by D S and it cannot be said that no income is embedded into such payment hence the payments have to be made after withholding tax under section 195. Ratio: In the absence of the break-up of the cost incurred by D S in providing such services and fees payable by each individual company it is, not possible to conclude that the service fee payable by the applicant is nothing but reimbursement of costs incurred by D in providing services to the applicant. Therefore, the payments to be made by the applicant pursuant to the agreement proposed to be entered into between the said D S for the services to be provided by it to the applicant cannot be said to be reimbursement of the actual expenditure incurred by D S and it cannot be said that no income is embedded into such payment, hence the payments have to be made after withholding tax under section 195. Held: There is no direct nexus between the actual costs incurred by the D S providing the said services to a D group company and the fees payable by each individual company which avails of the services. In the absence of the break-up of the cost incurred by D S in providing such services and fees payable by each individual company it is, not possible to conclude that the service fee payable by the applicant is nothing but reimbursement of costs incurred by Danfoss in providing services to the applicant. The applicant is liable to pay fees for services to be provided by D S. Even assuming that the fees charged by D S to the applicant and similarly situated group companies is equivalent to the expenses incurred by it in providing the services and there is no profit element, it would then be a case of quid pro quo for the service fees and not of reimbursement of expenses. The payments to be made by the applicant pursuant to the agreement proposed to be entered into between the said DS for the services to be provided by it to the applicant cannot be said to be reimbursement of the actual expenditure incurred by D S and it cannot be said that no income is embedded into such payment, therefore, the payments have to be made after withholding tax under section 195. Case Law Analysis: CIT v. Dunlop Rubber Co. Ltd. (1983) 142 ITR 493 (Cal) distinguished. Application: Also to current assessment year. Decision: In favour of revenue.. Cases Referred: DECTA v. CIT (1999) 237 ITR 190 (AAR) and Transmission Corporation of A. P. Ltd. v. CIT (1999) 239 ITR 587 (SC) Income Tax Act 1961 s.245Q(1) Income Tax Act 1961 s.195 Advance rulings--Tax deduction at source under section 195Technical services to be rendered to a Indian company--Fees to be paid on basis of budget turnover cost incurred by foreign company on services rendered to group companies, the Indian company is one of them Catch Note: An Indian company, is the applicant. It is a member of D Group of companies. The applicant entered into agreement with DS, a foreign company, who is to be rendered technical services to group of companies and Indian company (applicant) is one of them. The consideration for availing those services is on the basis of allocation key which is determined on a proportional percentage of budget turnover weighted by growth rate and market maturity of the group company availing the services and any increase or shortfall in the actual turnover would proportionately increase or decrease the portion of cost to be absorbed by the group company which avails of services from D S. The cost is reimbursable on a monthly basis. Though the applicant believes that no tax is required to be deducted at source while making payments of the service fee to D S under section 195 in order to confirm its position advance ruling is sought. In the absence of the break-up of the cost incurred by D S in providing such services and fees payable by each individual company it is, not possible to conclude that the service fee payable by the applicant is nothing but reimbursement of costs incurred by D in providing services to the applicant. Therefore, the payments to be made by the applicant pursuant to the agreement proposed to be entered into between the D S for the services to be provided by it to the applicant cannot be said to be reimbursement of the actual expenditure incurred by D S and it cannot be said that no income is embedded into such payment hence the payments have to be made after withholding tax under section 195. Ratio: In the absence of the break-up of the cost incurred by D S in providing such services and fees payable by each individual company it is, not possible to conclude that the service fee payable by the applicant is nothing but reimbursement of costs incurred by D in providing services to the applicant. Therefore, the payments to be made by the applicant pursuant to the agreement proposed to be entered into between the said D S for the services to be provided by it to the applicant cannot be said to be reimbursement of the actual expenditure incurred by D S and it cannot be said that no income is embedded into such payment, hence the payments have to be made after withholding tax under section 195. Held: There is no direct nexus between the actual costs incurred by the D S providing the said services to a D group company and the fees payable by each individual company which avails of the services. In the absence of the break-up of the cost incurred by D S in providing such services and fees payable by each individual company it is, not possible to conclude that the service fee payable by the applicant is nothing but reimbursement of costs incurred by Danfoss in providing services to the applicant. The applicant is liable to pay fees for services to be provided by D S. Even assuming that the fees charged by D S to the applicant and similarly situated group companies is equivalent to the expenses incurred by it in providing the services and there is no profit element, it would then be a case of quid pro quo for the service fees and not of reimbursement of expenses. The payments to be made by the applicant pursuant to the agreement proposed to be entered into between the said DS for the services to be provided by it to the applicant cannot be said to be reimbursement of the actual expenditure incurred by D S and it cannot be said that no income is embedded into such payment, therefore, the payments have to be made after withholding tax under section 195. Case Law Analysis: CIT v. Dunlop Rubber Co. Ltd. (1983) 142 ITR 493 (Cal) distinguished. Application: Also to current assessment year. Decision: In favour of revenue.. Cases Referred: DECTA v. CIT (1999) 237 ITR 190 (AAR) and Transmission Corporation of A. P. Ltd. v. CIT (1999) 239 ITR 587 (SC) Income Tax Act 1961 s.245Q(1) Income Tax Act 1961 s.195 JUDGMENT
Syed Shah Mohammed Quadri, J. (Chairman)
1. M/s. Danfoss Industries Private Limited, Chennai, an Indian company, registered under the Indian Companies Act, 1956, is the applicant. It is a member of Danfoss Group of companies. Danfoss Industries Private Limited, Singapore, a company incorporated in Singapore (Danfoss Singapore), is another member of the group, which provides the following services :
(a) Advice and assistance on the preparation and conduct of market research, surveys and strategies, advertising campaigns and public promotion;
(b) Review, analyse and give recommendations on improvement of management and business activities ;
(c) Advice and assistance on financial matters including but not limited to budgeting and long-term financial planning ; and
(d) Assistance regarding seminars, customer training, employee relations and product application training.
2. Danfoss Singapore provides the aforementioned services to help the group companies in the region to effectively carry out their business and to ensure that all Danfoss Group companies follow the procedures relating to Human Resource, Accounting, Finance, etc., uniformly. The applicant says that to carry out business operation in a more economic and efficient manner and to maintain the global standards set by Danfoss Group it proposes to enter into an agreement with Danfoss Singapore to avail the said services. The consideration for availing those services is on the basis of allocation key which is determined on a proportional percentage of budget turnover weighted by growth rate and market maturity of the group company availing the services and any increase or shortfall in the actual turnover would proportionately increase or decrease the portion of cost to be absorbed by the group company which avails of services from Danfoss Singapore. The cost is reimbursable on a monthly basis. Though the applicant believes that no tax is required to be deducted at source while making payments of the service fee to Danfoss Singapore under Section 195 of the Income-tax Act, 1961 (for short "the Act"), in order to confirm its position advance ruling is sought on the following question :
"Whether pursuant to the agreement proposed to be entered into between the applicant with Danfoss Singapore, the payments to be made by the applicant to Danfoss Singapore for the services obtained would be subject to tax witholding under Section 195 of the Income-tax act, in view of the fact that the payments are only in the nature of reimbursement of a portion of the actual expenditure incurred by Danfoss Singapore and there is no income embedded in it ?"
3. In his comments to the application, the jurisdictional Commissioner states that as per the provisions of Section 195 of the Act, tax has to be deducted by every person responsible for paying to a foreign company any sum chargeable under the provisions of the Act. The Singapore company provides services either by itself or having recourse to a group company. In the event of Danfoss Singapore availing the services of a third party and charging the fee amount to the assessee, it would be able to avoid application of Section 195 but if the third party should provide services directly, the consideration payable to it would be liable to deduction of tax at source under Section 195 of the Act. It is added that from the service agreement, it is clear that the amount payable to Danfoss Singapore is the service fee based on actual cost but it is not exactly the reimbursement of the actual cost. If it were only the reimbursement of the actual cost it would have been simply mentioned in the service agreement that the actual cost of service will be payable by that company. The Commissioner disputes the assertion that there is no element of income in the service fee paid by the applicant to Danfoss Singapore.
4. Mr. Rajesh Gupta, learned chartered accountant, has invited our attention to the consideration clause of the proposed agreement to submit that the applicant would be reimbursing only the cost incurred by the Danfoss Singapore and that there is no profit in providing the services, therefore, no tax is deductible. The jurisdictional Commissioner would contend, what is payable under the agreement is not reimbursement of the cost ; had it been recoupment of cost the terminology in the agreement would have been different. Paras second and third of Clause (2) of the proposed service agreement, it is submitted, would show that the amount in question is not reimbursement of the actual cost as pleaded by the applicant.
5. The parties did not refer to the DTAA entered into between the Government of the Republic of India and the Government of the Republic of Singapore in their submissions.
6. Inasmuch as the answer to the question revolves around the provisions of Section 195, it will be useful to refer to it here, as it stands now, (in so far as it is relevant for our purpose) :
"195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest [not being interest on securities] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head 'Salaries') shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force."
7. A plain reading of this provision shows that it enjoins every person responsible for paying to :
(i) a non-resident individual, or (ii) a non-resident entity other than a company, or (iii) a foreign company ;
(a) any interest or (b) any other sum chargeable under the provisions of the Act (other than income chargeable under the head "Salaries"), to deduct income-tax thereon at the rate in force at the time of (1) credit of such income to the account of the payee, (2) payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.
8. From the above, it is clear that the following two conditions must be satisfied to attract the provisions of Section 195 :
(i) the amount in question should be payable to (a) a non-resident individual or (b) a non-resident taxable entity other than a company or (c) a foreign company ; and
(ii) the amount in question should be either (a) interest or (b) any other sum chargeable under the provisions of the Act (not being a sum chargeable under the head "Salaries").
9. It is a common ground that to apply Section 195 of the Act the amount in question should be income of the payee and not a mere reimbursement of the cost incurred by the payee.
10. One of the difficult terms in the Income-tax Act which admits of no precise definition is the term "income". It is an elusive term. Even the definition Clause (Section 2(24) of the Act) enumerates twenty items, some of which may and the others may not be "income" in stricto sensu. The definition is inclusive and not exhaustive. If the payment in question falls in any of the twenty items of Section 2(24) of the Act or has the attributes of income, Section 195 of the Act will be attracted.
11. The thrust of the argument of the applicant is that there is no income element in the service fee payable by the applicant and that it is only reimbursement of the costs to Danfoss Singapore. It is important to remember that an element of profit is not an essential ingredient of a receipt to be taxable as an income. Notwithstanding the fact that neither Danfoss Singapore nor all the relevant record like its balance-sheet and profit and loss account, etc., is before us, we have to determine whether the amounts payable by the applicant to Danfoss Singapore have an income element or represent reimbursement of costs. This takes us to the consideration clause in the proposed agreement. Clause 2 of the proposed service agreement which deals with the consideration reads as follows :
"2. Service fee :
As a consideration for the services rendered by the service company, Danfoss shall pay to the service company a service fee based on the portion of the services it receives in relation to the total costs of the service company in providing such services.
The fee for each individual Danfoss company is calculated on the basis of an allocation key which is based on a proportional percentage of budget turnover weighted by growth rate and market maturity.
The weighting may be modified on the basis of the previous year's results, at the request by either party to the agreement. The weighting may also be modified at the request of any remaining Danfoss company at any time in case a Danfoss company departs from the co-operation.
Regulation of the fee paid for the currency year can be made if there is a discrepancy between the budgeted costs which serve as the basis for the service fee and the actual costs incurred. The short fall or overage is reimbursed once annually in the following year in the payment for the month following the month in which the accounts of the service company have been approved.
A portion of the service fee shall be due at the beginning of each calendar month. Payments shall be made not later than the 20th of the following month. Recalculation can also occur upon any new entry or withdrawal of a participant from the co-operation."
12. The first para. says that, for the services rendered by Danfoss Singapore, the applicant has to pay service fee based on the portion of the services it receives in relation to the total costs of that company in providing such services. The substance of the second and the third paras. is that fee for each individual Danfoss company is calculated on the basis of allocation key which is based on proportional percentage of budget turnover weighted by growth rate and market maturity. It is postulated in paras. fourth and fifth that in the event of discrepancy between the budgeted cost which forms the foundation for the service fee and the actual cost incurred, the shortfall or overage is reimbursed once in the following year in the payment for the month following the month in which the accounts of the service company are approved and accordingly the fee for the current year will be regulated and a portion of the fee shall be due at the beginning of each calendar month. A combined reading of the above noted paras. shows that the consideration is fixed having regard to the portion of the services the applicant would receive in relation to the total cost in providing such service. However, the fees payable by each individual Danfoss company depends upon proportional percentage of budget turnover weighted by growth rate and market maturity of each individual company. The weighting is liable to be modified on the basis of the previous year's results at the request of the remaining Danfoss company in the event of any one of them departing from co-operation. So also, re-calculation is done upon any new entry or withdrawal of a participant. It is thus clear that there is no direct nexus between the actual costs incurred by the Danfoss Singapore in providing the said services to a Danfoss group company and the fees payable by each individual company which avails of the services. In the absence of the break-up of the cost incurred by Danfoss Singapore in providing such services and fees payable by each individual company, the aforementioned conclusion, in our view, is unassailable. It is, therefore, not possible to conclude that the service fee payable by the applicant is nothing but reimbursement of costs incurred by Danfoss in providing services to the applicant.
13. Now we shall advert to the case law relied upon by Mr. Gupta. In the case of CIT v. Dunlop Rubber Co. Ltd. [1983] 142 ITR 493 (Cal), the assessee was a non-resident English company, which was having world wide subsidiaries and associated companies. The assessee-company maintained extensive technical research establishments in the U. K. The assessee-company entered into agreements with its subsidiary Indian company which, inter alia, provided that all costs and expenses incurred by the assessee-company in connection with the communication of the information, process and inventions and/or the grant of any licence and/or the giving of any advice or assistance provided for by the assessee-company to the Indian company shall be paid by it. It was also provided that the Indian company would also pay to the assessee-company proportionate costs and expenses incurred by the assessee-company in the acquisition, discovery and development of information, processes and inventions. In accordance with the terms of the agreement, the Indian company paid to the assessee-company proportionate costs and expenses. The question before the High Court was whether such payments would constitute income of the assessee-company. The assessing authority held the payments to be income of the assessee-company and not reimbursement of expenses and that was confirmed by the Appellate Assistant Commissioner. The Income-tax Appellate Tribunal took the view that the payments by the Indian company to the assessee-company were part of expenses incurred by it and was not royalty. On a reference to the High Court of Calcutta, a Division Bench upheld the view of the Tribunal that the payments were for recoupment of the expenses incurred for the technical data for which a research department was maintained by the assessee-company in London. It is worth noticing that there, the result of the research was for the benefit of all concerned including the assessee-company ; the technical data was jointly obtained, there was sharing of the expenses of the research between the assessee-company and the subsidiaries. That was not the case of the assessee-company providing services to an Indian company on payment of consideration in the form of service fees as in the present case. In that case both the assessee-company and the Indian company were beneficiaries of the research conducted as a joint venture. In the instant case the applicant availed the services provided by Danfoss Singapore on payment of service fees. We may, however, observe that we are not unmindful of the principle that it is the substance and not the nomenclature of the payments that is material. For all the reasons noted above, that case is clearly distinguishable.
14. In the case of DECTA v. CIT [1999] 237 ITR 190 (AAR), the applicant sought Ruling of the Authority on the question, "Whether the contribution received from the Government of United Kingdom by way of technical cooperation funds to be administered by Decta through its project office in Delhi, was taxable in India". The applicant was established by Overseas and Development Administration (ODA) of the British Government ; later it became an autonomous body, with the object of establishing and providing information and advisory services and undertaking research and promotional activities for the benefit of Third World countries. It opened a liaison office in Delhi to aid administration of the programme and to facilitate communication between DECTA and various governmental and official bodies which will be involved in the projects. At the instance of ODA the participating companies made a rupee contribution towards the costs of the assistance they received from the organisation. The Government of U. K. made available substantial amount by way of technical co-operation fund to meet the expenses of the projects carried on by DECTA. The Authority ruled that DECTA was merely implementing an agreement between the British Government and the Indian Government under which all kind of assistance was extended to Indian companies for developing their products, their export potential and their export markets in Europe and other Western countries. In substance and reality the contributions made by Indian companies could not be described as consideration for the technical services provided by DECTA. The contribution was not really payment to DECTA but to a common fund to enable it to defray a part of the expenses of the project carried out by DECTA on behalf of the company in question. Therefore, the amount of contribution received/receivable to recover the part of the technical assistance provided by the applicant under the provisions of the Aid programme to the companies assisted by it in India was not income of the applicant and was not chargeable to tax. It was also found that it was not fee for technical service as defined in Explanation 2 to Clause (vii) of Sub-section (1) of Section 9 of the Act. In view of the aforementioned clear findings the ruling in that case is of no assistance to the applicant as in the present case the service fees payable by the applicant is a consideration for various services provided by the Danfoss Singapore.
15. The case of Trasmission Corporation of A. P. Ltd. v. CIT [1999] 239 ITR 587 (SC), remains to be considered. In that case, the hon'ble Supreme Court laid down that Section 195 of the Act dealt with deduction of tax in cases where payment was to be made to a non-resident and that the scheme of Sub-sections (1), (2) and (3) of Section 195 and Section 197 left no doubt that the expression "any other sum chargeable under the provisions of this Act" would mean sum on which income-tax was leviable. In other words, the said sum would be chargeable to tax and could be assessed to tax under the Act and that such sum might be income or income hidden or otherwise embedded therein and that the scheme of tax deduction at source applied not only to amount paid which would wholly bear income character such as salaries, dividend, interest on securities, etc., but also to gross sums, the whole of which might not be income or profits of the recipient, such as payments to contractors and subcontractors and the payment of insurance commission. In the case on hand the applicant is liable to pay fees for services to be provided by Danfoss Singapore. Even assuming that the fees charged by Danfoss Singapore to the applicant and similarly situated group companies is equivalent to the expenses incurred by it in providing the services and there is no profit element, it would then be a case of quid pro quo for the service fees and not of reimbursement of expenses.
16. For the aforementioned reasons, our ruling on the question is as follows :
The payments to be made by the applicant pursuant to the agreement proposed to be entered into between the said Danfoss Singapore for the services to be provided by it to the applicant cannot be said to be reimbursement of the actual expenditure incurred by Danfoss Singapore and it cannot be said that no income is embedded into such payment, therefore, the payments have to be made after withholding tax under Section 195 of the Act.