In a recent ruling, the Mumbai Income Tax Appellate Tribunal (ITAT) held that the amount received by the assessee, Gemological Institute International Inc, on account of reimbursement which has been received over and above the amount of FTS cannot be treated as Fee for Technical services (FTS) for the purpose of Income Tax Act.
Assessee, a non-resident Company, provided technical services for the implementation of grading policies, procedures and processes to its group company, GIA India. As per a training and technical service agreement entered into between the assessee and the GIA India, the assessee raised separate debit notes for ‘fee for training and technical services’ rendered by it to GIA India and also on account of ‘reimbursement of travel expenses, group health insurance and other minor incidental expenses’ incurred by it pertaining to the aforesaid assignment.
During the relevant assessment year, the AO treated the above amount of travel, group health insurance and other incidental expenses as the income of the assessee. The assessee maintained that these amount would not from part of its income since these constituted actual cost borne by them. Assessee failed to secure relief from the first appellate authority and approached the ITAT on second appeal.
Overruling the findings of the lower authorities, the division bench observed that as per the agreement, assessee was entitled to receive by way of fee only the amount incurred by way of cost to ‘employ’ the individuals plus mark-up of 6.5%. It was pointed out that the expression cost to ‘employ’ individuals is different from the expression cost incurred to ‘depute’ a person. “The cost of employment would clearly mean and include only internal costs as are incurred by an organisation to employ an individual in the organisation. Any cost incurred over and above that to depute the individual for a particular assignment which is not internal assignment of the assessee would be additional cost. Thus, in the case before us, costs and expenses incurred by the assessee on travel and insurance etc on the persons deputed in India for providing training and technical services to GIA India was in the nature of cost incurred over and above the cost of employment.”
The bench further noted that, as per the agreement, GIA India shall reimburse to the assessee any expenses incurred on account of thirty party costs. It was found that the agreement demarcated FTS, different from the expenses incurred on third party costs. Since there is a clear bifurcation in the agreement between the internal cost incurred by the assessee and external cost borne or paid by the assessee on behalf of GIA India, the order of the lower authorities were held as not sustainable.
With regard to the question that whether the expenses incurred on cost to cost basis will also be included in the amount of FTS, the bench relied on the Apex Court decision in DIT vs A.P. Moller Maersk, and held that the amount received by the assessee on account of reimbursement which has been received over and above the amount of FTS cannot be included and taxed as part of FTS.
Read the full text of the order below.
