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‘ ’,
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES “L”, MUMBAI

, ! " # ! $

Before Shri R.S.Syal, AM and Shri Vivek Varma, JM

ITA No.577/Mum/2011 : Asst.Year 2006-2007

M/s.C.U.Inspections (I) Pvt. Ltd. The Dy.Commissioner of Income-tax

C/o.H.N.Motiwalla & Co. ( '
Circle 9(1)
508, Sharda Chambers Mumbai.
33 New Marine Lines Vs.
Mumbai – 400 020.
PAN : AAACH6794F.
( %& 'Appellant) ()* %&'Respondent)

%& + , /Appellantby : Shri H.N.Motiwalla

)* %& + , /Respondent by : Smt.Mahesh Kumar

( + - ' ./0 + - /
Date of Hearing : 04.03.2013 Date of Pronouncement : 06.03.2013

!1 ' O R D E R

Per R.S.Syal (AM) :

This appeal by the assessee arises out of the order passed by the
Commissioner of Income- tax (Appeals) on 18.10.2010 in relation to
the assessment year 2006-2007.

2. First issue is against the confirmation of disallowance

amounting to 34,94,816 made by the Assessing Officer (AO) u/s
40(a)(ia) of the Income-tax Act, 1961 (Act). Briefly stated the facts of
the case are that the assessee is a subsidiary of M/s P.S.O. Beheer

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B.V., a resident of Netherlands. It is engaged in the business of

certification of activities in respect of quantity, quality, pre-shipment
inspections, surveys etc. Apart from others, a sum of 34,94,816
was paid by the assessee to its holding company towards
reimbursement of expenses without deducting tax at source. The
Assessing Officer observed that the provisions of section 195 were
attracted in respect of such payment. As the assessee was required to
deduct tax at source before remitting the said payment, which it did
not, the AO made the disallowance invoking the provisions of
section 40(a)(ia) of the Act. The contention of the assessee that this
payment was towards reimbursement of expenses incurred by the
holding company without any profit element, did not find favour
with the AO. The learned CIT(A) upheld the assessment order on this
count. The assessee is aggrieved against the sustenance of this
disallowance.

3. After considering the rival submissions and perusing the

relevant material on record, it is observed that the assessee entered
into an agreement with its holding company towards incurring of
such expenses. Vide Agreement dated 5th June, 2005, a copy of which
has been placed on record, the holding company agreed to incur
various costs for and on behalf of the assessee and other group
concerns. These expenses include Accounting services, Legal and
professional services, Communication, R&D etc. Clause 3 of the
Agreement talks of consideration. This clause provides that the total

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overhead costs shall be collected from various group members at

certain percentage of the total cost determined as per arm’s length
principle by considering the size of the group member, percentage of
ownership, time spent by the management, number of visits etc.
Second part of clause 3 provides that : “Taking into account all the
abovementioned parameters, the percentage for the Group Member,
Control Union India Private Limited, has, after careful consideration,
been fixed at 4% of the Total Overhead Cost”. The Auditors, namely
M/s.Gran Thornton confirmed the assessee’s share of such overhead
expenses at 4% amounting to 34.94 lakh through their certificate, a
copy of which has been placed at page 11 of the paper book. This
certificate unequivocally mentions that the apportionment “does not
include any profit elements”. From the Agreement and the
Certificate of the Auditor, the contents of which have not been
controverted by the authorities below, it is amply clear that the
assessee’s share at 4% of total overhead charges, as worked out at
34.94 lakh, is without any profit element. When we consider the
nature of expenses borne by the head office such as accounting, legal
and professional, staff and management etc., it becomes vivid that
these expenses are otherwise in the nature of revenue expenses. It is
not the case of the AO that some part of such expenses is not
deductible as breaching the mandate of section 44C of the Act.

4. Section 195 of the Act provides that any person responsible for
paying to a non-resident, not being a company, or to a foreign

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company, any interest or any other sum chargeable under the

provisions of this Act, not being certain exclusions, shall at the time
of credit of such income to the account of the payee or at the time of
payment thereof, whichever is earlier, deduct income-tax thereon at
the rates in force. A pre-requisite for making disallowance under
section 40(a)(ia) is that the payment for the expenditure should
necessarily be liable to deduction of tax at source. In the instant
context, an amount will be liable to tax withholding if it inter alia
contains some income element. If the amount paid by the assessee is
not taxable in the hands of the recipient, there can be no question of
making any disallowance under this provision. A conjoint reading of
sections 195 and 40(a)(ia) brings to the fore that the disallowance can
be made only if the amount paid is chargeable to tax in the hands of
the recipient. In other words, if the amount is not chargeable to tax in
the hands of the recipient, there cannot be any scope for deduction of
tax at source. There is no dearth of judgments and Tribunal orders to
the effect that the reimbursement of expenses without any profit
element cannot be charged to tax in the hands of the recipient. If such
an amount is not chargeable to tax there cannot be any scope for
deduction of tax at source from such payment. Once no deduction of
tax at source is contemplated, the natural corollary which manifestly
follows is that the provisions of section 40(a)(ia) can not be triggered.
We, therefore, do not see any reason for sustaining the disallowance
confirmed by the learned CIT(A).

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5. Before parting with this issue, we would like to record that the
learned Departmental Representative referred to certain observations
made by the learned CIT(A) to bring home the point that the assessee
did not furnish any details of the actual expenditure incurred and in
that view of the matter he urged for sustaining the disallowance. We
are unable to countenance such a contention because the authorities
below have made and sustained disallowance of 34.94 lakh u/s
40(a)(ia) of the Act. An amount can be disallowed under this
provision only when it is otherwise eligible for deduction. If the
amount of expenditure does not otherwise qualify for deduction, the
question of considering the provisions of section 40(a)(ia) cannot
apply. As both the authorities have made and sustained disallowance
u/s 40(a)(ia) of the Act, we cannot permit the learned Departmental
Representative to improve the case of the Revenue and doubt the very
deductibility of the expenditure itself, which has not been done by the
AO. No doubt, the ld. DR’s has unbridled power to argue the case of
the Revenue from any angle, but there is an inherent limit on such
arguments. He can’t travel beyond the assessment order to set up an
altogether new case. If we accept the contention of the ld. DR that the
assessee was not entitled to deduction in the very first instance, it
would set aside the bedrock of the action of the AO, being the
disallowance u/s 40(a)(ia). In our considered opinion, such a course
of action is not open to the ld. DR. In view of the foregoing reasons,
we decide this issue in assessee’s favour by overturning the
impugned order on this score.

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6. The only other issue which survives in this appeal is against the
confirmation of disallowance of 15,44,700 u/s 40(a)(ia) of the Act.
The facts apropos this issue are that the assessee claimed deduction
for a sum of 15.44 lakh towards training expenses to its employees
claiming the amount paid as reimbursement of expenses to its
holding company. No tax was deducted at source from such payment.
The training was, in fact, imparted to the employees of the assessee
by Mr. Henk Jan Sijtsma and Mr. Mike van de Laak, which was
arranged by the assessee’s holding company. Two invoices were
raised by the holding company on the assessee at EUR 13,500 and
EUR 15,000 towards such training given by these two persons. The
Assessing Officer, invoking the provisions of section 40(a)(ia), made
the disallowance for the failure of the assessee to deduct tax at source
from such payments. The learned CIT(A) upheld the disallowance.
The assessee has assailed the sustenance of such disallowance.

7. We have heard the rival submissions and perused the relevant

material on record. It is noticed as an undisputed fact that the amount
of 15.44 lakh was paid by the assessee to its holding company,
which amount was in turn paid by the holding company to some
outside trainers. The learned AR was fair enough to concede that the
training was imparted solely to assessee’s employees by some
trainers independent of the assessee’s holding company. Now the
question arises as to whether this amount paid by the assessee to its
holding company can be termed as reimbursement of expenses so as

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to immune it from the rigor of section 40(a)(ia)? In our considered

opinion, the answer to this question can be in negative alone. In the
extant context, the reimbursement of expenses for avoiding deduction
of tax at source contemplates the actual incurring of expenses by the
later in the first instance, which is subsequently made good by the
former. Where the expenses are incurred not by the later itself but
someone else, its payment by the former to the later to pass it to such
third person cannot be considered as reimbursement of expenses to
the later so as to push such transaction outside the ambit of the
provisions of deduction of tax at source. To put it in simple terms, if
the Indian subsidiary company incurs expenses or makes purchases or
avails any service from some third party abroad and the payment to
such third party is routed through its holding or related company
abroad, the provision for deduction of tax at source apply as if the
assessee has made the payment to such independent party de hors the
routing of payment through the holding company. The remission of
amount to the holding or related company for finally making payment
to the third person will be considered as payment to third party. It
cannot be termed as reimbursement of expenses to the holding
company. If the contention of the assessee is accepted and the
payment to third party, routed through its related concern, is
considered as reimbursement of expenses to the related party, then
probably all the relevant provisions in this regard will become
redundant. Such a route is impermissible to thwart the flow of law.
It, therefore, follows that the payment made to the related party for

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paying eventually to some third party cannot be construed as

reimbursement of expenses to the related party. It is only where the
payment is ultimately stopping with the related party that it can be
considered as payment to the associated concern and not otherwise.
Reverting to the facts of the instant case, it is noticed that the assessee
availed services from some third parties. Payment for such services
was made to such third parties through the medium of its holding
company. Such payment cannot be considered as reimbursement of
expenses at cost to its holding company. We, therefore, uphold the
view taken by the learned CIT(A) in this regard that the amount in
question cannot be considered as reimbursement of expenses.

8. However, the mere fact that the payment in question is not

reimbursement of expenses to the holding company would not per se
expose the expenditure to disallowance u/s 40(a)(ia) of the Act. It
has been noticed supra that the disallowance u/s 40(a)(ia) is
activated when there is failure on the part of the assessee to
deduct/pay tax at source from the payment on which tax is otherwise
deductible as per law. Deduction of tax at source u/s 195 from
payment is envisaged when the amount is chargeable to tax in the
hands of recipient. Reimbursement of expenses to the related party
without any mark-up is one of the situations under which the amount
paid cannot be considered as chargeable to tax. There can be several
other situations under which albeit the payment includes income
element but it still may not be not chargeable to tax under the
provisions of the Act and/or the relevant Double Taxation Avoidance

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Agreement (DTAA). The crucial factor to consider is the

chargeability to tax of the amount in the hands of the recipient. If the
amount is not chargeable to tax due to one reason or the other, the
payment cannot suffer disallowance in the assessment of the payer.
9. Adverting to the facts of the instant case, we find that the
assessee paid a sum of 15.44 lakh to two trainers through the
medium of its holding company. Patently the payment cannot be
considered as having been made to the holding company at cost. But,
in order to invoke the provisions of section 40(a)(ia) it is of
paramount importance to ascertain the chargeability of the amount
to tax in the hands of such two trainers who were eventual receivers.
Unless the chargeability of such amounts is established in the hands
of such trainers, the provisions of section 195 cannot apply and ex
consequenti, the application of section 40(a)(ia) is ruled out. We find
virtually no discussion in the assessment order and the impugned
order about the taxability of this amount in the hands of those two
trainers so as to bring it within the purview of chargeability. In our
considered opinion the ends of justice would meet adequately if the
impugned order on this issue is set aside and the matter is restored to
the file of A.O. We order accordingly and direct him to first decide
the question of chargeability or otherwise of the amounts paid by the
assessee in the hands of the two trainers under the relevant provisions
of the Act read with the relevant DTAA and thereafter the question of
application of section 40(a)(ia). Needless to say the assessee will be

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allowed a reasonable opportunity of being heard in such fresh

proceedings.

10. In the result, the appeal is partly allowed.

Order pronounced on this 06th day of March, 2013.

!1 + ./0 2!( 3 / + 4

Sd/- Sd/-
(Vivek Varma) (R.S.Syal)
# ! / JUDICIAL MEMBER ! / ACCOUNTANT MEMBER

Mumbai; 2!( Dated : 06th March, 2013.

Devdas*

!1 + )#-5 " 6"0-'Copy

6"0- of the Order forwarded to :
1. %& / The Appellant
2. )* %& / The Respondent.
3. 78 9 / The CIT (A)-19, Mumbai.
4. 7 / CIT
5. " :4 )#-#( / DR, ITAT, Mumbai

6. 4; < ' Guard file.

!1 ( / BY ORDER,
* " - )#- //True Copy//

= ' > ? (Dy./Asstt. Registrar)

/ ITAT, Mumbai

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