Income Tax Appellate Tribunal - Bangalore
Bangalore International Airport Ltd. vs Income Tax Officer on 17 December, 2007
Equivalent citations: (2008)115TTJ(BANG)477
ORDER
A. Kalyanasundharam, Vice President
1. These are four appeals by the assessee instituted against the common orders of the CIT(A)-VI, Bangalore ("C1T(A)" for short) dt. 31st March, 2006. The issues that arise in the present appeals are also common. The common issues as raised by the assessee are on the conclusion of the authorities below about the applicability of Section 195(2) of the IT Act, 1961 (hereinafter referred to as "the Act") with regard to the amounts reimbursed by the assessee to two of its shareholders/promoters on the various expenses incurred by them in connection with the project of international airport at Bangalore.
2. The brief facts of the case are that in 1994 the Bangalore International Airport project was conceived as the project of public and private participation. Since the project was located at Bangalore, the Karnataka State Industrial Investment and Development Corporation ("KSIIDC" for short) on behalf of the State of Karnataka was included as one of the parties and accordingly there was an understanding between the Airports Authority of India ("AAI" for short), who was the supervising authority for setting up of all airports in India to the effect that KSIIDC shall have a shareholding of 26 per cent in the project. In 1999, a public and private participation programme was carried further by inviting private partners in the remaining 74 per cent stake in the project. By applying the law of elimination, the AAI zeroed in three parties, viz., Siemens Project Ventures GmbH, Germany (Siemens), Swiss airport operator-Flughafen Zuerich AG, Switzerland (Unique) and Larsen & Toubro Ltd., India (L&T). At this point, a limited company was floated called Bangalore International Airport Ltd. ("BIAL" for short) for the sole purpose of developing the international airport at Devanahalli, Bangalore. The shareholders, who are four in number entered into an agreement on 23rd Jan., 2002 and on that basis Siemens was to have 40 per cent shareholding, Unique and L&T were to have 17 per cent, each and KSIIDC and AAI were to have 13 per cent each.
3. The shareholders agreement as above covered development costs which were pre-agreement development cost, State promoters pre-agreement development cost, reimbursement of development cost to the private promoters in certain circumstances and reimbursement of development cost to the State promoters in certain circumstances. On the basis of such agreement, the board of directors of the assessee company in their meeting on 8th July. 2002 passed the resolution that read, "The offshore expenses shall be advanced by private promoters. All expenses will be reimbursed and capitalized after financial close."
4. The arrangement between the shareholders and promoters also required promoters pre-agreement development costs, etc. in accordance with the shareholders agreement shall be examined, verified and certified by independent auditors and the same would be placed for capitalization by the assessee company. The two foreign companies, Siemens and Unique incurred expenses from March, 2000 to August, 2004 and these were to be reimbursed to the two parties. Similarly, L&T also incurred expenses which also came for consideration for financial close and capitalization of the project. The particulars of pre-development expenses that were claimed for reimbursement and capitalized by the assessee company along with details of external costs are reproduced below:
Bangalore International Airport Ltd.
Details of development costs to be reimbursed
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Period Siemens Unique (Swiss
(Euro) Franc)
March 2000-January 2002
Internal costs 6,28,560.00 9,32,783.55
Travel costs 70,912.57 92,590.90
External costs (see Attachments 1 and 2) 1,62,587.51 2,18,582.27
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Total (A) 8,62,060.08 12,43,956,72
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January 2002-December 2003
Internal costs 8,59,202.94 20,09,198.80
Travel costs 2,27,145.55 4,56,050.38
External costs (see Attachment 1 and 2) 19,78,552.40 15,05,189.32
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Total (B) 30,64,900.89 39,70,438.50
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January 2004-August 2004
Internal costs 1,44,326.52 2,12,656.00
Travel costs 27,842.88 45,128.49
External costs (see Attachment 1 and 2) 61,237.00 6,62,092.37
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Total (C) 2,33,406.40 9,19,876.86
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Internal costs 16,32,089.46 31,54,638.35
Travel costs 3,25,901.00 5,93,769.77
External costs (see Attachment 1 and 2) 22,02,376.91 23,85,863.96
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Total (A+B+C) 41,60,367.37 61,34,272,08
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Annexure 1 Bangalore International Airport Ltd.
Siemens Project Ventures GmbH
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Nature of services Amount paid in
home currency
(Euro)
Consultancy-legal services 11,56,814.34
Consultancy-engineering 8,32,839.94
Consultancy-business planning 1,16,070.03
Consultancy-technical 39,099.03
Consultancy-financial planning 1,771.71
Consultancy-real estate development study 4,955.42
Stationery 16,607.24
Animation 9,976.35
Advertisement 5,310.63
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Travel 3,207.89
Translation 816.42
Courier 591.85
Others 14,315.69
Total 22,02,376.91
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Note: These were services rendered by the service providers to Siemens.
Annexure 2 Bangalore International Airport Ltd.
Unique Zurich Airport Ltd.
-------------------------------------------------------------------
Nature of services Amount paid in
home currency
(Swiss Franc)
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Consultancy-legal services 15,98,030.17
Consultancy-engineering architecture 5,49,017.22
Consultancy-business planning 1,09,989.82
Consultancy-technical 32,109.77
Consultancy-real estate 6,393.00
Stationery 16,322.27
Animation 9,858.37
Advertisement 6,851.25
Travel 4,574.59
Translation charges 1,053.27
Courier charges 537.78
Others 1,126.45
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Total 23,85,863.96
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Note : These were services rendered by the service providers to Unique.
5. The issue is in regard to the amounts that are payable to the two nonresident companies. The assessee had claimed that the two of the promoters, who had incurred various expenses on the understanding between the shareholders before the start of the project and before the financial close, had carried out their own exploration with regard to viability of the project and other technical details and accordingly they were to be reimbursed. The various exploration done by the two non-resident companies did not require any approval from the Indian counterpart as the agreement with them did not indicate such an understanding. The two foreign companies apparently carried out the necessary exercise on their own with regard to various legal services, engineering, business planning, technical, financial and so on and all such activities was with concerns who were non-residents insofar as India was concerned and the contract between the shareholders and the foreign company was in their capacity not as shareholder, but in their own rights as independent companies. The issue being reimbursement of expenses incurred, the question of deducting tax on such reimbursement did not arise.
6. The AO in his order accepted the fact that it was a case of amount being paid much after the expenses have been incurred by those promoters. However, since the amounts so paid included certain element of technical services and so on, he was of the opinion that tax should have been deducted or should be deducted. For this purpose, the AO was of the opinion that since the expenses were incurred after the agreement between the shareholders in January, 2002, it would fall within the ambit requiring deduction of tax at source. The AO was confronted with the decision of the Authority for Advance Rulings in Hyder Consulting Ltd., In re (1999) 151 CTR (AAR) 641 : (1999) 236 ITR 640 (AAR) and when it was specifically drawn to his attention that reimbursement of actual expenses incurred in no way involves any element of profit. Further, since the expenses were incurred by the foreign company out of India with regard to services rendered by another foreign company to the non-resident company, the provision of tax deduction at. source is not attracted. The AO was, however, not impressed and his conclusions are reproduced below:
06. Conclusion-The following are the conclusions from the analysis made in para Nos. 05 (a) to (t).
(a) The foreign shareholders of the applicant company had provided certain services to the applicant company.
(b) The contention that part of these services were obtained from other parties is of no consequence.
(c) All these services which are proposed to be paid for by the applicant company now, have been utilized by the applicant company in India.
(d) All these services called by the applicant as 'consultancy services' fall squarely within the meaning of fees for technical services, as provided for in Article 12 of both the relevant Double Taxation Avoidance Agreements (hereafter referred to as DTAAs) as also the IT Act.
(e) Thus, the consideration payable for such services is chargeable to tax, even if its nomenclature is 'reimbursement', as the income is deemed to accrue or arise in India.
(f) Hence, withholding provisions of Section 195 are clearly invoked.
(g) The rate of withholding tax is 10 per cent as per the respective DTAAs, in view of the fact that it is the rate beneficial to the payees
(h) The above conclusions, based on the facts and information as provided by the applicant, are to be seen in the context of Section 195 of the IT Act. The provisions of Section 195 are necessarily summary and are only for the purpose of determining the issue and quantum of withholding tax. It follows that the said tentative conclusion is subject to the test of final determination at the stage of assessment.
07. Computation of withholding tax- Following the conclusions drawn in para No. 06, the computation of withholding tax required to be made by M/s Bangalore International Taxation Ltd. is as follows:
(a) Payment of/passing of credit entry of rupee equivalent amount of $ 41,60,367.37 to M/s Siemens Project Ventures GmbH, Germany to be taxed @ 10 per cent amounting to $ 4,16,036.74.
(b) Payment of/passing of credit entry of rupee equivalent amount of Swiss Francs 61,34,272.08. to M/s Flughafen Zurich A.G., Switzerland to be taxed @ 10 per cent amounting to Swiss Francs 6,13,427.21.
7. The CIT(A) was confronted with the facts of the case and he noted the various arguments as well as the agreement and arrangement between the shareholders, the pre-development expenses etc. He had no dispute to the claim of the assessee that it was a case of reimbursement of expenses. He also noted that the reimbursement was only to the extent of 50 per cent of the cost incurred and as certified by the auditors. He was, however, of the view that the AO was justified in his conclusions. His observations are as under:
To sum up, the main points of this case in support of AO's action in the light of the dispute raised are:
(i) The nature of services are such as would be prima facie covered by the definition of FTS in IT Act as well as respective DTAAs;
(ii) Adequate support in respect of quantification of costs in particular the audit report mentioned in shareholders' agreement has not been furnished by the appellant.
(iii) As specific tax exemption has been granted under original or subordinate legislation despite the concession agreement mentioning that no withholding tax would apply in respect of these payments.
8. The notes on accounts of the assessee company on the balance sheet for the year ending 31st March. 2005 in regard to the above are reproduced below for the sake of convenience:
10. Notes on Accounts--contd.
Rs. in 000
3. Development costs
(i) Pre-agreement development costs The pre-agreement development costs are to be reimbursed by the company within 30 days of Financial Close (FC) (i.e., the date on which the financing projected to be necessary to achieve commercial operations is available to the company). The FC was achieved on 23rd June, 2005.
(ii) Pre-financial close development costs As per SHA, the costs incurred by promoters and their affiliates on behalf of the company after 23rd Jan., 2002 and upto the date of FC are referred to as 'Pre-financial close development costs'. Such costs are to be reimbursed by the company after FC. The FC was achieved on 23rd June, 2005.
9. The rival contentions in regard to the above have been very carefully considered. In order that Sections 5 and 9 of the Act are made applicable to the facts of the case, the various provisions of the Act as contained in the sad sections must be found applicable. In the instant case, the, technical consultation and various other consultations undertaken by the nonresidents in their capacity as promoters were incurred by them out of India and at that time when they had consultation; Section 9 was inapplicable to them because it was not a payment by Indian resident to a nonresident. It is a case of reimbursement of various expenses incurred and in this case it is also limited to only 50 per cent. The expenses as incurred by the promoters compensated to them would not involve any profit element also, especially as is seen in the instant case, the compensation is also only to the extent of 50 per cent. Initially when the expenses were incurred by the non-resident company, it was not answerable to any of the provisions of Section 5 or Section 9 of the Act. By virtue of the arrangement, the expenses to the extent of 50 per cent were agreed to be reimbursed and reimbursement under no circumstances could be equated to amount paid for technical services. In fact, what really happened or what really was incurred by the promoters was a study with regard to feasibility, viability, etc. of the entire project and finally whether it would ultimately result in them ending up with some profit or not. This study as a promoter for which they used the services of other agencies for their own purpose was to decide about whether their decision to jointly participate in the international airport project was a decision taken in the right direction or otherwise along with the input in the shape of finance and other technical information. The benefit that the promoters received in the shape of legal advice, technical advice and other things was only to provide them the necessary input to decide to go ahead or not to go ahead with the project. Such services even in the remotest possibility would have no connection whatsoever with the project and all the details were so provided so as to satisfy that the expenses as incurred were justified and reimbursable.
10. As a passing reference we may observe that one of the bidders of the project viz., Hochtief Airport GmbH, which bid was not accepted, also had incurred certain expenses and was reimbursed to the extent of 50 per cent. The Department vide its NOC dt. 12th Sept., 2003 had permitted the reimbursement to the tune of 50 per cent without any deduction of tax. There is absolutely no difference between the bidder who had gone off and the bidder who has continued because he was accepted. For the aforesaid reasons, we are of the opinion that the assessee is justified in claiming that reimbursement of expenses in the circumstances of the case to the extent of 50 per cent did not attract the provisions of Section 195(2) of the Act.
11. The appeals are allowed.