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Taxability for reimbusement of exp incurred outside india

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Court :
The Mumbai Bench of the Tribunal

Brief :
Taxability of payment for reimbursement of expenses incurred outside India Fact of case : in this case, the assessee running merchant banking business had debited in its accounts reimbursements of expenses made to the parent company against the following: a) Recovery of insurance charges of director; b) Cost allocation for use of web area network. The assessee claimed that such reimbursements were made against actual costs incurred by the parent company. The assessee furnished copies of invoices in this regard received from the parent company for such reimbursements. Decision of Assessing Officer : The assessing officer without disputing the fact that the amounts were reimbursements went on to hold that such payment would fall under the category “ Other sums chargeable under this Act” mentioned in section 40 (a)(i) of the income tax Act hence would warrant a disallowance. The commissioner ( Appeals) upheld the disallowance The ITAT Bench held that reimbursement of expenses cannot be the subject matter of disallowance under section 40 (a)(i)

Citation :
ITA Nos. 7277/Mum/2008, 632/Mum/2009 & 4505/Mum/2009

 

ITAT, MUMBAI BENCH “L”

DCIT
v.

Lazard India Pvt. Ltd.

ITA Nos. 7277/Mum/2008, 632/Mum/2009 & 4505/Mum/2009

June 11, 2010

FACTS

The assessee is a company. It is engaged in the business of corporate and project finance and merchant banking. The assessee had taken premises at Bardy House, Veer Nariman Road, Fort, Mumbai-400 001 on rent. During the previous year, it incurred an expenditure of Rs. 30,94,066/- in connection with renovation of the aforesaid leasehold premises. The assessee explained before the Assessing Officer that it is associated with Lazard Brothers & Co., UK, which is a renowned merchant banker operating at a global level; and therefore it has to maintain its office as per the global standards of the group. The assessee also explained that it has to cater to several high profile Indian as well as foreign corporate clients which necessitate frequent repairs and renovation of the premises to keep it to global standards. The renovation expenses were incurred by the assessee in the aforesaid office premises formodifying Reception cabin, Chairman’s office and four Head of Department’s office. The assessee explained that the expenses involved replacing old parts of furniture or replacements of old tiles with marble etc. and are purely revenue expenses in nature and have to be allowed as a deduction u/s. 30 of the Act. The break up of the expenses incurred by the assessee, the nature of expenses incurred and the persons to whom the payments were made together with addresses were furnished by the Assessee. The nature of expenses and the persons to whom the Assessee made payments are as follows :-

Details of renovation expenditure :-

 
S.No

Name and address of the supplier

Amount (Rs.)
Purpose
1

Shree Om Furniture

154,520
Labour charges (carpentry work)
2

Classic marble

142,855

Cost of marble slabs

3

Shree Jalaram Timber Depot P. Ltd.

389,365
Timber, Plywood, Fevicol etc.
4
Vimina
111,379

Labour    charges    for    cutting, fixing, polishing etc. of marble and granite

5

Meher Dubhash

116,504

Professional    fee   for    interior design work

6
Kismat
68,185

Supply of hardware items

7

Manoj Glass House

26,728

Cost of glass clear and design

8

J.M. Trading Co.

426,920

Black jet granite and tiles for flooring

9

Shakti Trading Co.

716,935

Plywood and materials supplied for making tables, partitions etc.

10

J.K. Enterprises

198,172

Labour charges for making door frames, partition, storage cabinet etc.

11

Associated Electrical Services

69,405

Supply of electrical material and labour charges

12

Styanarayan Sukhraj

75,512

Painting and polish work

13
Nishad
 
 
14

Doors & Doors Systems

40,220

Purchase of hardware

15

Jasmine Adenwalla

86,144
Design and supervision fees
16

Unique Plast

69,415

Plastering    work-false    ceiling A.C. grill, gypsum etc.

17
Columbus Traders Ltd.
62,260
 
18

Khozem Glass Processing Works

32,511

12mm Float Glass assorted

19

C Bhogilal West End

25,320
Cost of sanitary wares purchased
20

Lovely Lights

35,964

Electrical work-light point wiring plug and switch board circuit point wiring, AC point wiring etc.

21

Durafit Floors

53,634

Berry Loc Laminate  Flooring, wall to wall wooden flooring

22

Others (less than Rs. 25,000/-)

192,118
 
 

Total

3,094,066
 
 

The Assessing Officer was of the view that the aforesaid expenses were in the nature of capital expenses and therefore they cannot be allowed as a deduction. The Assessing Officer referred to the provisions of Explanation 1 to section 32 of the Act, which provides that, ‘where an assessee carries on business in rented premises and incurs any capital expenditure is incurred for construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the assessee can claim depreciation as if building was owned by the assessee. The Assessing Officer further referred to the details of the expenditure and came to the conclusion that it is capital in nature. The Assessing Officer also noticed that in its books of account, the assessee had capitalized renovation expenses to the fixed asset. According to the Assessing Officer, this was also an indicatorof the fact that the expenditure was capital in nature. The Assessing Officer therefore, did not allow the claim of the assessee for deduction of a sum of Rs. 30,94,066/-. The Assessing Officer however allowed depreciation at 5% namely Rs. 1,54,703/- and disallowed the remaining sum of Rs. 29,39,363/-.

 
HELD

We have heard the submissions of learned counsel for the assessee. The learned counsel for the assessee submitted that provisions of section 40(a)(i) will not be applicable in the case of reimbursement of actual expenses. It was further submitted by him that the Assessing Officer did not dispute the fact that the payments in question were reimbursement of expenses. The Assessing Officer made the disallowance on the ground that this would be “other sum chargeable to tax under the Act”. It was submitted by him that reimbursement of expenses can never be chargeable to tax. In this regard, our attention was drawn to the decision of Hon'ble Bombay High Court in the case of CIT Vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom); wherein it was held that reimbursement of expenses are not taxable in India. The Hon'ble Bombay High Court followed the decision of Hon'ble Delhi High Court in the case of CIT Vs. Industrial Engineering Projects Pvt. Ltd., 202 ITR 1014 (Del) and Hon'ble Calcutta High court in the case of CIT Vs. Dunlop Rubber Co. Ltd., 142 ITR 493 (Cal). He further drew our attention to the decision of Hon'ble Special Bench of ITAT Mumbai in the case of Mahindra & Mahindra, 313 ITR 263 (AT)(SB)(Mum); wherein it was laid down that reimbursement of expenses is not income; and therefore cannot be treated as ‘other sum chargeable to tax’ within the meaning of section 40(a)(i) of the Act. Further, reliance was also placed for identical proposition on the decision of Hon'ble Chennai ITAT in the case of in the case of Cairn Energy India Pty. Ltd., 126 TTJ 226 (Chennai) and decision of Hon'ble Bombay High Court in the case of Porbandar State Bank Vs. CIT, 28 ITR 134 (Bom). In the decision of Hon'ble Bombay High Court in the case of Porbandar State Bank (supra), in the context of identical provisions as that of section 40(a)(i) of the Act, the Hon'ble Bombay High Court held that sum in question which is paid outside India should be chargeable to tax. It was also submitted that findings of learned CIT(A) are contrary to the findings of the Assessing Officer. It was also submitted that learned CIT(A) before giving his finding that there was no evidence produced by the Assessee regarding insurance policy and how it benefited the Assessee, did not call upon the assessee for any of the M/s. Lazard India Pvt. Ltd. 14 details. Further learned CIT(A) has ignored evidence on record in the form of invoice raised by the parent company. It was thus submitted that the disallowance sustained by learned CIT(A) should be deleted.

 

We have considered the rival submissions. Perusal of the order of the Assessing Officer shows that he has not disputed that payment outside India by the assessee to Lazard & Co. Services Ltd., UK was reimbursement of expenses. In fact, before the Assessing Officer, the assessee has filed statement of reimbursement of expenses and invoice raised by the Lazard & Co. Services Ltd., UK. Descriptions of services M/s. Lazard India Pvt. Ltd. 15 incurred by the parent company have been given in this invoice. Invoice clearly mentions the fact that it is recharge of cost incurred by the parent company. The Assessing Officer did not called upon the assessee to furnish any further evidence. It was also stated by learned counsel for the assessee before us that even learned CIT(A) did not call upon the assessee to furnish any further evidence; but learned CIT(A) has however drawn adverse inference against the assessee. We are of the view that the amount paid by the assessee outside India were reimbursement of expenses and finding of learned CIT(A) to the contrary are without any basis. In this regard, we also find that in A.Y. 2003-04, 2005-06 & 2006- 07, identical payments have been accepted as reimbursement of expenses by learned CIT(A) and disallowance have been deleted. We fail to see as to how payments can be said to be not reimbursement of expenses. Decision of Hon'ble Bombay High Court in the case of CIT Vs. Siemens Aktiongesellschaft (supra) supports stand of the assessee that reimbursement of expenses cannot be the subject matter of disallowance u/s. 40(a)(i) of the Act.

 
ORDER
PER N.V. VASUDEVAN, JM :-
 

ITA No. 5095/Mum/06 is an appeal by the assessee against the order dated 28.7.2006 of learned CIT(A)-II, Mumbai relating to A.Y. 2002- 03.  ITA No. 7277/Mum/08 is an appeal by the revenue against the order dated 12.9.2008 of learned CIT(A)-II, Mumbai relating to A.Y. 2003- 04. ITA No. 632/Mum/09 is an appeal by the revenue against the order dated 26.11.2008 of learned CIT(A)-II, Mumbai relating to A.Y. 2005-06. ITA no. 4505/Mum/09 is an appeal by the revenue against the order dated 20.5.2009 of learned CIT(A)-II, Mumbai relating to A.Y. 2006- 07. 2. Since, some common issues are involved in these appeal and they were heard together. We deem it convenient to pass a common consolidated order.   3. First, we shall take up for consideration Ground No. 1&2 raised by the assessee reads as follows :- 1) On the facts and circumstances of the case and in law,  earned CIT(A) erred in confirming as capital expenditure Rs. 30,94,066/-incurred towards renovation of leasehold premises.

 

2) On the facts and circumstances of the case and in law, the assessee submits that the expenditure did not result in acquisition of any capital asset nor in any enduring benefit in the capital filed and hence the amount of Rs. 30,94,066 ought to be allowed as a revenue expenditure. 4. The assessee is a company. It is engaged in the business of corporate and project finance and merchant banking. The assessee had taken premises at Bardy House, Veer Nariman Road, Fort, Mumbai-400 001 on rent. During the previous year, it incurred an expenditure of Rs. 30,94,066/- in connection with renovation of the aforesaid leasehold premises. The assessee explained before the Assessing Officer that it is associated with Lazard Brothers & Co., UK, which is a renowned merchant banker operating at a global level; and therefore it has to maintain its office as per the global standards of the group. The assessee also explained that it has to cater to several high profile Indian as well as foreign corporate clients which necessitate frequent repairs and  renovation of the premises to keep it to global standards. The renovation expenses were incurred by the assessee in the aforesaid office premises for modifying Reception cabin, Chairman’s office and four Head of Department’s office. The assessee explained that the expenses involved replacing old parts of furniture orreplacements of old tiles with marble etc. and are purely revenue expenses in nature and have to be allowed as a deduction u/s. 30 of the Act. The break up of the expenses incurred by the assessee, the nature of expenses incurred and the persons to whom the payments were made together with addresses were furnished by the Assessee. The nature of expenses and the persons to whom the Assessee made payments are as follows :-

Details of renovation expenditure :

 
S.No

Name and address of the supplier

Amount (Rs.)
Purpose
1

Shree Om Furniture

154,520
Labour charges (carpentry work)
2

Classic marble

142,855

Cost of marble slabs

3

Shree Jalaram Timber Depot P. Ltd.

389,365
Timber, Plywood, Fevicol etc.
4
Vimina
111,379

Labour    charges    for    cutting, fixing, polishing etc. of marble and granite

5

Meher Dubhash

116,504

Professional    fee   for    interior design work

6
Kismat
68,185

Supply of hardware items

7

Manoj Glass House

26,728

Cost of glass clear and design

8

J.M. Trading Co.

426,920

Black jet granite and tiles for flooring

9

Shakti Trading Co.

716,935

Plywood and materials supplied for making tables, partitions etc.

10

J.K. Enterprises

198,172

Labour charges for making door frames, partition, storage cabinet etc.

11

Associated Electrical Services

69,405

Supply of electrical material and labour charges

12

Styanarayan Sukhraj

75,512

Painting and polish work

13
Nishad
 
 
14

Doors & Doors Systems

40,220

Purchase of hardware

15

Jasmine Adenwalla

86,144
Design and supervision fees
16

Unique Plast

69,415

Plastering    work-false    ceiling A.C. grill, gypsum etc.

17
Columbus Traders Ltd.
62,260
 
18

Khozem Glass Processing Works

32,511

12mm Float Glass assorted

19

C Bhogilal West End

25,320
Cost of sanitary wares purchased
20

Lovely Lights

35,964

Electrical work-light point wiring plug and switch board circuit point wiring, AC point wiring etc.

21

Durafit Floors

53,634

Berry Loc  Laminate  Flooring, wall to wall wooden flooring

22

Others (less than Rs. 25,000/-)

192,118
 
 

Total

3,094,066
 
 

5. The Assessing Officer was of the view that the aforesaid expenses were in the nature of capital expenses and therefore they cannot be allowed as a deduction. The Assessing Officer referred to the provisions of Explanation 1 to section 32 of the Act, which provides that, ‘where an assessee carries on business in rented premises and incurs any capital expenditure is incurred for construction of any structure or doing of any work in or in relation to, andby way of renovation or extension of, or improvement to, the building, then, the assessee can claim depreciation as if building was owned by the assessee. The Assessing Officer further referred to the details of the expenditure and came to the conclusion that it is capital in nature. The Assessing Officer also noticed that in its books of account, the assessee had capitalized renovation expenses to the fixed asset. According to the Assessing Officer, this was also an indicator of the fact that the expenditure was capital in nature. The Assessing Officer therefore, did not allow the claim of the assessee for deduction of a sum of Rs. 30,94,066/-. The Assessing Officer however allowed depreciation at 5% namely Rs. 1,54,703/- and disallowed the remaining sum of Rs. 29,39,363/-.

 

6. On appeal by the assessee, learned CIT(A) upheld the order of the Assessing Officer. Following were the relevant observations :-  “There is no doubt that the expenditure incurred represented capital expenditure as the entire office had been done up and renovated incurring this huge expenditure of Rs. 30.94 lakhs. The examination of details clearly showed the nature of expenditure professional fee for interior design itself was Rs. 1.16 lakhs, granite andtiles for flooring was Rs. 4.26 lakhs, plywood itself was Rs. 7.16 lakhs, marble was Rs. 1.42 lakhs, timber was Rs. 3.89 lakhs, etc. There is no doubt that this is a one time expenditure bringing in enduring benefit to the assessee. As per the provisions, the assessee is entitled to claim depreciation on the same.And by implication the assessee is not entitled to claim the expenditure as on current repairs. I therefore, uphold the action of the Assessing Officer in treating the sum of Rs. 30,94,066/- as representing capital expenditure”. 7. Aggrieved by the order of learned CIT(A), the assessee has raised ground No. 1&2 before the Tribunal. 8. Learned counsel for the assessee submitted that Explanation 1 to section 32(1) can be invoked only when the expenditure is capital in nature. He drew our attention to the details of expenditure and submitted that these expenses were necessary for the purpose of carrying on business of the assessee more efficiently. It is incurred for the purpose of creating better working environment. He submitted that none of the expenses involved construction of structure or renovation, extension or improvement to the building; and therefore, Explanation 1 to section 32(1) will not be applicable. In this regard, learned counsel for the assessee placed reliance on the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT, 124 ITR 1 (Supreme Court), wherein Hon'ble Supreme Court explained as to how test of enduring benefit was not conclusive in the following words  “There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may none the less be on revenue account andthe test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. It the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched the expenditure would be on revenue account, even through the advantage may endure for an indefinite future. The test of enduring benefit is therefore not certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts andcircumstances of a given case.” It was submitted by him that none of the expenses incurred by the assessee gave the assessee any enduring benefit. Further reliance was placed on the decision of Hon'ble Delhi Bench of ITAT in the case of Herbalife Interanational India (P) Ltd. Vs. ACIT, 101 ITD 450 (Del)and Escorts Ltd. Vs. ACIT, 104 ITD 427 (Del). Our attention was also drawn to the decision of Hon'ble Madras High Court in the case of CIT Vs. Ayesha Hospitals P. Ltd., 292 ITR 266 (Mad); wherein it was held that expenditure on repairs and painting on premises taken on lease is revenue expenditure. Reliance was also placed on the decision of Hon'ble Delhi High Court in the case of CIT Vs. Hi Line Pens Pvt. Ltd., 306 ITR 182 (Del); wherein Hon'ble Delhi High Court has held that where repairs to rental premises are claimed as a deduction, the same need not be in the nature of current repairs andexpenditure on any repair has to be allowed as a deduction.  9. Learned DR relied on the order of learned CIT(A). It was submitted by him that without seeing individual items of expenditure, one has to see cumulative effect of the expenses incurred and ultimate result. According to him, by reason of incurring expenses, the assessee gets an advantage of enduring nature and therefore expenditure was capital expenditure.  10. We have considered the rival submissions. We have already listed items of expenses incurred by the assessee. Perusal of the same reveals that the assessee has not made any construction of structure or carried out any work in the form of renovation or extension, improvement of the building. The building that was taken on lease remained intact. What has been done was only to create a better working environment. In this regard, we also notice that the assessee is an associateof Lazard Brothers & Co., UK, which is a renowned merchant banker operating at a global level. It is also necessary for the assessee, who is also a merchant banker to maintain good office premises which is frequented by foreign global clients and high profile Indian clients. In our view, these expenses cannot be said to be capital expenditure. It also does not result in any advantage or acquisition of asset of an enduring nature. In this regard, we are also of the view that the principles laid down by Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra) supports the plea of the assessee. The other decisions relied upon by the learned counsel for the assessee also support the plea of the assessee that the expenditure were revenue in nature and have to be allowed as a deduction. In the decision of Hon'ble Delhi High Court in the case of Hi Line Pens Pvt. Ltd. (supra) has explained allowability of expenses claimed as deduction by way of repairs and as a revenue expenditure by a tenant, as follows :- “What the assessee has done has been construed to be repairs by the Tribunal as a finding of fact. It has not brought about any new asset and more importantly it was not the intention of the assessee to bring about any new capital asset. The expenses that were incurred by the assessee were towards repairing the premises taken on lease so as to make it more conducive to its business activity. Such expenses would clearly fall within the expression of repairs to the premises as appearing in s. 30(a)(i). The legislature has made a distinction between expenses incurred by a tenant for ‘repairs’ of the premises and expenses incurred by a person who is not a tenant towards ‘current repairs’ to the premises. This distinction has to be given meaning. Perhaps the logic behind the distinction was that a tenant would, by the very nature of his status as a tenant, not undertake expenditures as would endure beyond his likely period of tenancy or create a new M/s. Lazard India Pvt. Ltd. 8 asset. Whereas, an owner may undertake expenditures so as to even bring about new assets of capital nature. It was, therefore, necessary to qualify the expenditure on repairs. The deduction was, therefore, limited to expenditure on ‘ current repairs ’ only. It follows, therefore, that the cost of repairs that has been incurred by a tenant in respect of such premises would have to be allowed under s. 30(a) (i). The question of disallowing such an expenditure and relegating the assessee to claim depreciation under s. 32 does not arise.” 11. In the aforesaid decision, nature of expenses were renovation of rental premises by having false ceiling, fixing tiles, replacing glasses, wooden partitions, replacement of electric wiring, earthing, replacement of GI pipes etc. We are of the view that the expenditure incurred by the assessee in the present case is revenue expenditure and has to be allowed as a deduction. Ground No. 1&2 raised by the assessee is accordingly allowed. 12. Ground No. 3&4 raised by the assessee read as follows :- 3) On the facts andcircumstances of the case and in law, learned CIT(A) erred in confirming the disallowance of bad debt of Rs. 75,56,400. 4) On the facts and circumstances of the case and in law, the assessee submitted that the bad debt of Rs. 75,56,400 being written off as irrecoverable is an allowable deduction u/s. 36(1)(vii) of the Income Tax Act, 1961 and the learned CIT(A) erred in not allowing the same.

 

13. On perusal of the profit and loss account, the Assessing Officer noticed that the assessee has debited a sum of Rs.87,02,583/- on account of bad debt written off. It is not in dispute that the amount which was written off as bad debt has been offered as income in the earlier years; and therefore the condition mentioned in section 36(2) is fulfilled. The amount written off as bad debt is in respect of three parties :- (i) Malacron (Cincinnati) Rs. 53,61,300/- (ii) Vijay Industries Rs. 9,10,000/- (iii) Teleic Global Rs. 21,95,100/- M/s. Lazard India Pvt. Ltd. 9 The Assessing Officer was of the view that the assessee failed to substantiate that the debts which were written off as bad has in fact become bad; and he therefore refused to allow the claim of the assessee fordeduction.

 

14. On appeal by the assessee, learned CIT(A) was satisfied that the amount written off as bad in respect of Vijay Industries was justified but in respect of other two debts written off, learned CIT(A) was of the view that the assessee failed to establish that the debts have in fact become bad.

 

15. Aggrieved by the order of learned CIT(A) sustaining in part disallowance made by the Assessing Officer, the assessee has raised Ground No. 3&4 before the Tribunal.

 

16. We have heard the rival submissions. The issue as to whether it is necessary for an assessee to establish that the debt has become bad, to claim it as a deduction on account of bad debt written off, has been laid down by Hon'ble Supreme Court in the case of T.R.F.Ltd. Vs. CIT, 323 ITR 397 (Supreme Court). The Hon'ble Supreme Court noticed that provisions of section 36(1)(vii) of the Act were amended w.e.f. 1.4.1989. Earlier provisions read “the amount of any debts or part thereof which is established to have become bad debts can be allowed as a deduction”. After the amendment of provisions reads as follows :- “Amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. The Hon'ble Supreme Court after noticing the aforesaid amendment held that after the amendment, it is not necessary for the assessee to establish that the debt in fact has become bad and irrecoverable and that it is enough if the debt is written off as bad and irrecoverable in the account of the assessee. In the present case, the Assessing Officer has not disputed that the debts have in fact been written off as bad and irrecoverable in the accounts of the assessee for the previous year. We M/s. Lazard India Pvt. Ltd. 10 therefore hold that the revenue authorities were not justified in disallowing the claim of the assessee for deduction on the ground that the assessee failed to establish that the debt has in fact become bad. The addition made by the Assessing Officer in this regard is directed to be deleted. Ground No. 3&4 raised by the assessee are accordingly allowed.

 

17. Ground No. 5 was not pressed, the same is dismissed as not pressed.

 

18. Ground No. 6&7 read as follows :- 6) On the facts and circumstances of the case and in law, learned CIT(A) erred in confirming the disallowance of Rs. 1,17,26,209 being reimbursement of expenses to the parent company by erroneously invoking the provisions of section 40(a)(i) of the I.T. Act, 1961. 7) On the facts and circumstances of the case and in law, the assessee was not liable to deduct tax at source on the reimbursement to its parent company andconsequently the learned CIT(A) erred in confirming the disallowance made by the Assessing Officer under section 40(a)(i) of the I.T. Act, 1961.

 

19. The Assessing Officer noticed that the assessee had debited a sum of Rs. 1,17,26,209/- as reimbursement of the expenses to parent company in London. The assessee submitted that its parent company Lazard & Company Services Ltd. is a UK company which recovers cost incurred by them for the benefit of its several associated companies worldwide. The assessee explained that reimbursement of the expenses in question pertain to the recovery of insurance charges of Directorand officers in respect of covering their liability, if any, arising from rendering services in foreign country. The Assessee also explained that the reimbursements are on actual basis to cover the liability of the Indian Directorand officers. Besides the above, part of the payment also related to the payment made by the assessee for use of web area network created by Lazard & Company Services Ltd. UK for the benefit of use of all the associate companies. The assessee therefore submitted that it was reimbursement of actual expenses.

 

20. Under the provisions of section 40(a)(i) of the Act, while computing income chargeable under the head profits and gains of business or profession, any amount paid as interest, royalty, fees for technical services or other sum chargeable under this Act outside India, will be allowed as a deduction only if, the assessee deducts tax at source on such payment. Of course payment made outside India should be chargeable to tax in the hands of the recipient in India under the Income Tax Act, 1961. The plea of the assessee was that the payment that it made to Lazard & Company Services Ltd. UK was merely reimbursement of expenses and was therefore not of the nature of interest, royalty, fees for technical services or other sums chargeable under this Act; andtherefore, no disallowance of the aforesaid payment can be made while computing income under the head ‘profit and gain of business or profession’ on the ground that no tax at source has been deducted. The details of expenses incurred by the assessee are as follows :-

 
Month
Invoice No.
Voucher No.
Insurance
 
I
T
 
Total
 
 
 
GBP
INR
GBP
 
INR
 
GBP
INR

April 2001

305

PR 978C

10,683.00
702,231.44
 
-
 
-
10,683.00
702,231.44

May 2001 to July 2001

479

PR 978B

32,049.00
2,225,350.52
 
-
 
-
32,049.00
2,225,350.52

August   2001 to      October 2001

552

PR 978A

32,049.00
2,225,350.52
 
-
 
-
32,049.00
2,225,350.52

November 2001           to December 2001

591

PR 1270

51,606.79
3,551,063.22
 
-
 
-
51,606.79
3,551,063.22

January 2002

617

PR 1271

9,883.00
680,049.23
14,251.23
980,627.14
24,134.23
1,660,676.37

February 2002

633

PR 1369

9,883.00
687,066.16
 
-
 
-
9,883.00
687,066.16

March 2002

667

PR 1496

9,883.00
686,670.84
(175.00)
(12,159.00)
9,708.00
674,511.84
 
 
 
 
 
 
 
 
 
170,113.02
11,726,250.07
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

In support of the fact that these were reimbursement of expenses incurred by the parent company in UK, the assessee submitted invoices raised by the Lazard & Company Services Limited. Copies of these invoices are at page No. 15 to 24 of the assessee’s paper book. These Invoices give description of services. The Assessing Officer was satisfied that this was reimbursement of expenses incurred by the parent company; but he held that the aforesaid payment would fall under the M/s. Lazard India Pvt. Ltd. 12 category of “other sums chargeable under this Act” mentioned in section 40(a)(i) of the Act. Since, the assessee had not deducted tax at source on the aforesaid payment, the Assessing Officer was of the view that the assessee cannot claim aforesaid sum as a deduction. The Assessing Officer further referred to the decision of Hon'ble ITAT in the case of M/s. Arthur Andersen & Co. Ltd.; wherein the Tribunal had held that, ‘any other sum chargeable under the provisions of this Act’, would mean ‘sum’ on which income tax is leviable. As to whether that sum has any income embedded in it is irrelevant and that by way of abundant caution tax at source should be deducted. The Tribunal thereafter held that where payment is claimed to be reimbursed, it has to be proved that the amount is actually reimbursement. After making reference to the aforesaid decision, the Assessing Officer made a disallowance of a sum of Rs. 1,17,26,209/-. 21. On appeal by the assessee, learned CIT(A) upheld the order of the Assessing Officer and further gave his conclusion on the issue as follows:- “Further the appellant is not in possession of any acceptable evidence in support of its claim that the remittance made of a sum of Rs. 1,17,26,209/- really represented reimbursement of insurance premium paid in UK on behalf of the officers of appellant. What is produced before the Assessing Officer and also before me is a sheet of paper without any authentication which gives details of the month of payment, voucher number and the amount involved. There is absolutely no other evidence to establish that the sum involved represented either insurance premium paid in UK on behalf of the officers of the appellant or represented even reimbursement. There is no evidence of buying any insurance in UK or in whose name and with what premiums. In the absence of basically any evidence to the effect that the remittance represented reimbursement of expenses I am of further view that the appellant is not entitled to the deduction on facts.” 22. Aggrieved by the order of learned CIT(A), the assessee has preferred ground No. 6&7 before the Tribunal. M/s. Lazard India Pvt. Ltd. 13

 

23. We have heard the submissions of learned counsel for the assessee. The learned counsel for the assessee submitted that provisions of section 40(a)(i) will not be applicable in the case of reimbursement of actual expenses. It was further submitted by him that the Assessing Officer did not dispute the fact that the payments in question were reimbursement of expenses. The Assessing Officer made the disallowance on the ground that this would be “other sum chargeable to tax under the Act”. It was submitted by him that reimbursement of expenses can never be chargeable to tax. In this regard, our attention was drawn to the decision of Hon'ble Bombay High Court in the case of CIT Vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom); wherein it was held that reimbursement of expenses are not taxable in India. The Hon'ble Bombay High Court followed the decision of Hon'ble Delhi High Court in the case of CIT Vs. Industrial Engineering Projects Pvt. Ltd., 202 ITR 1014 (Del) and Hon'ble Calcutta High court in the case of CIT Vs. Dunlop Rubber Co. Ltd., 142 ITR 493 (Cal). He further drew our attention to the decision of Hon'ble Special Bench of ITAT Mumbai in the case of Mahindra & Mahindra, 313 ITR 263 (AT)(SB)(Mum); wherein it was laid down that reimbursement of expenses is not income; and therefore cannot be treated as ‘other sum chargeable to tax’ within the meaning of section 40(a)(i) of the Act. Further, reliance was also placed for identical proposition on the decision of Hon'ble Chennai ITAT in the case of in the case of Cairn Energy India Pty. Ltd., 126 TTJ 226 (Chennai) and decision of Hon'ble Bombay High Court in the case of Porbandar State Bank Vs. CIT, 28 ITR 134 (Bom). In the decision of Hon'ble Bombay High Court in the case of Porbandar State Bank (supra), in the context of identical provisions as that of section 40(a)(i) of the Act, the Hon'ble Bombay High Court held that sum in question which is paid outside India should be chargeable to tax. It was also submitted that findings of learned CIT(A) are contrary to the findings of the Assessing Officer. It was also submitted that learned CIT(A) before giving his finding that there was no evidence produced by the Assessee regarding insurance policy and how it benefited the Assessee, did not call upon the assessee for any of the M/s. Lazard India Pvt. Ltd. 14 details. Further learned CIT(A) has ignored evidence on record in the form of invoice raised by the parent company. It was thus submitted that the disallowance sustained by learned CIT(A) should be deleted.

 

24. The learned DR on the other hand relied on the findings of learned CIT(A) and submitted that there was no reimbursement of expenditure. It was further submitted that as to whether payment made by the assessee outside India is chargeable to tax or not, cannot be decided by the Assessing Officer in the present proceedings and in this regard relied on the decision of Hon'ble Karnataka High Court in the case of Samsung Electronics, 185 Taxman 313. It was also submitted by him that evidence of expenditure cannot be the invoice raised by the parent company. According to him the best evidence would be the insurance policy taken out by the parent company and benefit which the assessee will derive by virtue of such policy. It was also submitted by him that as to how the amounts raised in the invoice was arrived at, have not been revealed by the assessee. It was also submitted that it is also not known as to whether head office also claim this expenses. It was submitted by him that the assessee’s self certification would not be sufficient and in the circumstances the disallowance made by the Assessing Officer should be sustained. 25. The learned counsel for the assessee, in rejoinder submitted that that in the A.Ys. 2003-04, 2005-06 & 2006-07, the learned CIT(A) has allowed claim of the assessee for deduction on identical facts treating the payment outside India as reimbursement of expenses. It was therefore submitted by him that contentions of learned DR are without any merits.

 

26. We have considered the rival submissions. Perusal of the order of the Assessing Officer shows that he has not disputed that payment outside India by the assessee to Lazard & Co. Services Ltd., UK was reimbursement of expenses. In fact, before the Assessing Officer, the assessee has filed statement of reimbursement of expenses and invoice raised by the Lazard & Co. Services Ltd., UK. Descriptions of services M/s. Lazard India Pvt. Ltd. 15 incurred by the parent company have been given in this invoice. Invoice clearly mentions the fact that it is recharge of cost incurred by the parent company. The Assessing Officer did not called upon the assessee to furnish any further evidence. It was also stated by learned counsel for the assessee before us that even learned CIT(A) did not call upon the assessee to furnish any further evidence; but learned CIT(A) has however drawn adverse inference against the assessee. We are of the view that the amount paid by the assessee outside India were reimbursement of expenses and finding of learned CIT(A) to the contrary are without any basis. In this regard, we also find that in A.Y. 2003-04, 2005-06 & 2006- 07, identical payments have been accepted as reimbursement of expenses by learned CIT(A) and disallowance have been deleted. We fail to see as to how payments can be said to be not reimbursement of expenses. Decision of Hon'ble Bombay High Court in the case of CIT Vs. Siemens Aktiongesellschaft (supra) supports stand of the assessee that reimbursement of expenses cannot be the subject matter of disallowance u/s. 40(a)(i) of the Act.

 

27. Besides the above, the other decisions relied upon by learned counsel for the assessee also supported the plea of the assessee. As far as decision of Hon'ble Karnataka High Court in the case of Samsung Electronics (supra) is concerned, it was a case where payments were made for purchase of readymade software without deduction of tax at source. In those circumstances, Hon'ble High Court held that the assessee cannot on his own decide regarding taxability of payments made outside India. It was not the case of reimbursement of expenses. Apart from the above, Hon'ble Delhi High Court in the case of Vanoord ACZ India Vs. CIT, ITA No. 439 of 2008 vide Judgement dated 15.3.2010 has taken the view that obligation to deduct tax at source is attracted only when payment is chargeable to tax in India. We are of the view that in the present case, issue is limited as to whether payment in question outside India was reimbursement of expenses or not. On the evidence filed by the assessee, we are satisfied that payment in question was M/s. Lazard India Pvt. Ltd. 16 reimbursement of expenses. We therefore direct that the addition sustained by learned CIT(A) should be deleted. We order accordingly. Ground No. 6&7 raised by the assessee is allowed.

 

28. In the result, appeal by the assessee is partly allowed.

 

29. ITA No. 7277/Mum/2008 : A.Y. 2003-04 : Revenue’s appeal

 

30. Ground No. 1,2&3 raised by the revenue read as follows :-

 

1) Learned CIT(A) erred in allowing the loss of Rs. 16,94,711/- on account of foreign exchange fluctuation.

2) Learned CIT(A) failed to appreciate that the above loss had not arisen in the current year.

3) Learned CIT(A) erred in not taxing Rs. 13,00,000/- earned by the assessee on account of gain on foreign exchange fluctuation in respect of External commercial Borrowings (ECB) loans, during the current year.

 

31. The Assessee had reflected an aggregate net exchange loss of Rs. 3,94,711/- in the profit and loss account. This net exchange loss was based on three transactions, which are as follows:-

1)       Exchange loss on professional fees/out Rs. 4,75,309 of pocket expenses

2)       Exchange loss on revenue charges by way Rs.12,19,402 of insurance premium/WAN facility Rs.16,94,711

3)        Less : Exchange gain on ECB loan (Rs. 13,00,000) Rs. 3,94,711/-

 

1)     Exchange loss on profession fees/out of pocket expenses:

The assessee company renders services to its overseas clients on whom it raises an invoice towards professional services and out of pocket expenses. These invoices are accounted for in Rupees based on the exchange rate prevailing on the date of the invoice. On account of exchange fluctuation, the amount actually received in Rupees differs from the amount accounted for in Rupees. Such exchange difference in M/s. Lazard India Pvt. Ltd. 17 the year ended 31st March, 2003 relevant to A.Y. under appeal resulted in an exchange loss of Rs. 4,75,309/-.

 

2) Exchange loss on revenue charges by way of insurance premium/WAN facility: The assessee’s associate company, Lazard & Co. Services Ltd., UK takes a global insurance policy to cover the risk of employees of the group being held liable for negligence in the discharge of their duties. The associate company also provides a Web Area Network (WAN) facility to its group (including the appellant company) enabling the employees in group use the internet and avail global information. The insurance premium and costs of WAN facility that are billed on a monthly basis are accounted for by the assessee company based on the exchange rate prevailing at the time of receipt of invoice. When the amounts are remitted to Lazard & Co. Services Ltd. UK, the rate of exchange differs from that prevailing on the date the bill is accounted. Such exchange difference in the year ended 31st March, 2003 relevant to A.Y. under appeal resulted in an exchange loss of Rs. 12,19,402/-.

 

3) Exchange gain on ECB loan: The assessee company had taken a loan in foreign current of US$ 2 million for working capital, from its group company Lazard Bros. & Co. Ltd. UK in the year ended 31st March, 1998. The necessary approval from Reserve Bank of India had been obtained and the amount was utilized for the purpose of clearing the outstanding liabilities that the assessee had and to meet its overhead expenses. On 31st March, 2003, the loan outstanding was US$ 1 million. As required by the Accounting Standard 11 on Exchange Differences, the assessee had recorded the foreign currency loan at the rate of exchange prevailing on the date of taking the loan. At the balance sheet date as required by the Accounting Standard, the foreign currency loan was revalued at the closing rate of exchange resulting in foreign gain of Rs. 13,00,000 which was recognized in the profit and loss account. M/s. Lazard India Pvt. Ltd. 18 Therefore, the aggregate net exchange loss of Rs. 3,94,711/- reflected in profit and loss account was based on the above 3 transactions as follows:-

 

1)     Exchange loss on professional fees/out Rs. 4,75,309 of pocket expenses

2)     Exchange loss on revenue charges by way Rs.12,19,402 of insurance premium/WAN facility Rs.16,94,711 3) Less : Exchange gain on ECB loan (Rs. 13,00,000) Rs. 3,94,711/-

32. The Assessing Officer accepted the fact that since the ECB loan was utilized for working capital, the exchange loss is to be allowed as revenue expenditure. However, he was of the opinion that since the liability to remit the ECB loan had not arisen in the assessment year under appeal, a notional entry in the books of account as per Accounting Standard to reflect the true picture of outstanding payable would not enable the assessee to be allowed such loss. He relied on the decision of Hon'ble Madras High Court in Indian Overseas Bank Vs. CIT, 246 ITR 206 and disallowed the gross exchange loss of Rs. 16,94,711/-. By so doing, he in effect disallowed the net exchange loss of Rs. 3,94,711/- that was claimed by the assessee in its profit and loss account as well as taxed the exchange gain of Rs. 13,00,000/-.

33. The learned CIT(A), however, following the decision of the Tribunal in assessee’s own case in A.Y. 1999-2000 & 2001-02 deleted the addition of Rs. 16,94,711/- made by the Assessing Officer and allowed net foreign exchange loss claimed by the assessee as a deduction.

 

34. Aggrieved by the order of the learned CIT(A), the revenue has raised ground No. 1to3 before the Tribunal.

 

35. We have perused the order of the Tribunal in assessee’s own case in ITA No. 6966/Mum/08 in A.Y. 1999-2000; wherein the Tribunal on identical issue after considering several decisions held that foreign M/s. Lazard India Pvt. Ltd. 19 exchange loss has to be allowed as deduction. In the present case, there is no dispute that loss is on revenue account. The Hon'ble Supreme Court in the case of Commissioner of Income-tax Vs. Woodward Governor India P. Ltd. 312 ITR 254 (Supreme Court); has held that loss on account of foreign exchange fluctuation has to be allowed as a deduction, if it is on current account. The Hon’ble Court held that "Loss" suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the Income-tax Act, 1961. In view of the above, we uphold the order of learned CIT(A) and dismiss ground No. 1to3 raised by the revenue.

 

36. Ground No. 4 to 6 read as follows :-

4)learned CIT(A) erred in allowing the disallowance of Rs. 1,20,52,000/- u/s. 40(a)(i) even though no TDS had been deducted at the time of reimbursement to Non resident.

4)       Learned CIT(A) failed to appreciate that the reimbursement as referred to in the Income Tax Act order falls under the ‘other sum’ payable outside India and therefore the provisions of section 40(a)(i) of the Income Tax Act is attracted. 6) For these and other grounds that may be urged at the time of hearing, the decision of learned CIT(A) may be set aside and that of the Assessing Officer restored. 37. These grounds are identical to Ground No. 6&7, which was decided in A.Y. 2002-03 in ITA No. 5095/Mum/06 above. In the present assessment year, the learned CIT(A) held that it was the case of reimbursement of expenses and therefore provisions of section 40(a)(i) will not be applicable. For the reasons stated while deciding similar grounds of appeal in A.Y. 2002-03, we uphold the order of learned CIT(A) and dismiss ground No. 4 to 6 of the revenue. 38. ITA No. 632/Mum/2009 for A.Y. 2005-06 & ITA No. 4505/Mum/2009 : Revenue’s appeals

39. Grounds raised in both these appeals reads as follows :-

M/s. Lazard India Pvt. Ltd. 20 Grounds in ITA No. 623/Mum/2009

1) Learned CIT(A) erred in allowing the disallowance of Rs. 9,68,785/- u/s. 40(a)(i) even though no TDS had been deducted at the time of reimbursement of non-resident.

2)     Learned CIT(A) failed to appreciate that reimbursement as referred to in the Income Tax order falls under the ‘other sum’ payable outside India andtherefore provisions of section 40(a)(i) of the I.T. Act is attracted.

3)     For these and other grounds that may be urged at the time of hearing, the decision of learned CIT(A) may be set aside and that of the Assessing Officer restored.

Grounds in ITA No. 4505/Mum/2009

1) Learned CIT(A) erred in allowing payment of Rs. 27,17,176/- disallowed u/s. 40(a)(i) since no tax had been deducted at the time of reimbursement of non-resident.

2) Learned CIT(A) failed to appreciate that reimbursement as referred to in assessment order falls under the ‘other sum’ payable outside India andtherefore provisions of section 40(a)(i) of the I.T. Act is attracted.

3) For these and other grounds that may be urged at the time of hearing, the decision of learned CIT(A) may be set aside and that of the Assessing Officer restored.

 

40. These grounds are identical to ground No. 6&7 raised by the assessee in A.Y. 2002-03. For the reasons stated therein, we uphold the order of learned CIT(A) and dismiss both these appeals by the revenue.

 

41. In the result, appeals by the Revenue are dismissed while appeal by the assessee is partly allowed. Order pronounced on 11th Day of June, 2010.

 
 
 

PANKAJ KHURANA
on 13 October 2010
Published in Income Tax
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