The Income Tax Appellate Tribunal (ITAT) delivered a ruling dated 31 January 2008 in the case of Ashok Leyland Ltd. v. Deputy CIT (2008-TIOL-205-ITAT-MAD), in which it held that the reimbursement of travel expense made to a foreign company pursuant to a technical assistance agreement, was chargeable to tax as part of fees for technical services (FTS) and therefore liable to withholding tax in India.
(a) Facts. The Taxpayer (i.e. Ashok Leyland Ltd.) was a company manufacturing motor vehicles, etc. It entered into a technical assistance agreement (the Agreement) with an Austrian company for the supply of designs, consultancy, etc. in the development of engines. The Agreement prescribed for reimbursement by the Taxpayer of expenditure incurred by the Austrian company towards air fare, accommodation, etc. for the personnel deputed by the Austrian company to India under the Agreement for imparting their technical expertise. Such reimbursement was in addition to the fees for technical know how payable to the Austrian company.
Under Sec. 195 of the Indian Income Tax Act 1961 (ITA), tax is withheld in India before any payment is made by a resident of India to a non-resident if such payment is chargeable to tax in India. To obtain exemption from withholding tax for any part of such payment, the payer must apply to the tax authorities for a certificate authorizing deduction of tax at a lower rate or determining the portion of payment which would be subject to withholding tax in India. The Taxpayer applied for a nil rate withholding tax certificate for reimbursements of expenses to the Austrian company under the Agreement. The tax authorities refused to grant the certificate on the ground that the amount sought to be reimbursed would constitute FTS under the ITA and therefore be liable to withholding tax. On appeal, the Commissioner of Income Tax (Appeals) (CIT(A))confirmed the order of the tax authorities, and the Taxpayer appealed to the ITAT.
(b) Issue. The issue before the ITAT was whether the CIT(A) was correct in its view that the reimbursement of expenses to the Austrian company was taxable as FTS and therefore be chargeable to income tax and subject to withholding tax under Sec. 195 of ITA.
(c) Decision. The ITAT observed that in order to invoke the provisions of Sec. 195 of the ITA in the context of a non-resident, it is necessary that the amount payable must be taxable under the ITA. Sec. 195(2) of the ITA, under which the tax authorities grant certificates to authorize the non-withholding of tax on certain part of payment, presupposes that the person responsible for making the payment is certain that tax is payable in respect of some part of the amount to be remitted but is not certain what the taxable portion is or the amount of the tax to be withheld.
The Agreement was entered into for rendering technical services and the services of the experts of the Austrian company were requisitioned in that connection. The payments of reimbursement were made in the process of executing the Agreement. The expenditure in question was part and parcel of the process of providing advice of a technical character. The fact that the Austrian company did not have a permanent establishment in India was not relevant in determining the question of taxability of FTS under the ITA. The existence of a permanent establishment would have been only relevant if the income was business income. Therefore, the payment of reimbursement was in the nature of FTS and would be taxable as part of FTS and subject to withholding tax in India under Sec. 195 of the ITA.