No Separate Agreement between Eshakthi and its Non-Resident US Subsidiary for Reimbursement of Expenses: ITAT Upholds Deletion of Disallowance u/s 40(a)(i) of Income Tax Act [Read Order]

The Chennai Bench of Income Tax Appellate Tribunal (ITAT) has upheld the disallowance under Section 40(a)(i) of the Income Tax Act 1961, as there was no separate agreement between the Eshakthi and its non-resident US subsidiary for reimbursement of expenses.

The assessee, Eshakti.Com Pvt. Limited had reimbursed professional charges of Rs.164.04 Lacs and advertisement expenses of Rs.349.19 Lacs to its wholly owned subsidiary (WOS) situated in the USA. No tax deducted at source (TDS) was deducted on the ground that the said entity had no permanent establishment (PE) in India and the provisions of Section 195 of the Income Tax Act would not apply. However, rejecting the same, AO disallowed the same under Section 40(a)(i) of the Income Tax Act.

During appellate proceedings, it transpired that the assessee run an e-commerce website (eshakti.com) and sells apparels mainly to customers based in the USA. In order to promote sales, the assessee had set up a wholly owned subsidiary (WOS) in the USA. The subsidiary would collect money from customers, take delivery of goods returned, refund the money and also advertise the products of the assessee besides operating as customer service centre.

The WOS had not carried out any other activity for any other party. The expenses so incurred were stated to be reimbursed by the assessee.was also submitted that WOS did not had HR set up in the USA and it employed people on a contract for service basis. Therefore, the reimbursements were categorised as professional services.

The assessee submitted that all the expenses were incurred by WOS outside India and all expenses were related to selling the assessee’s products outside India. There was no mark-up charged by the WOS. Hence, there was no requirement of TDS in such a case.

S.Senthil Kumaran, on behalf of the assessee submitted that WOS was resident in the USA and it did not have any PE in India. The income so earned was business income not subject to tax in India as per Indo-US Treaty.

In any case, WOS was resident in the USA and such reimbursement would constitute business income for AE which would not be subject to tax in India in terms of Article 7 read with Article 5 of Double Taxation Avoidance Treaty between India and USA. Reliance was placed inter-alia, on the decision of Apex Court in GE India Technology Centre P. Ltd. vs. CIT.

The two-member Bench of Mahavir Singh, (Vice-President) and Manoj Kumar Aggarwal, (Accountant Member) noted that the CIT(A) had merely gone by the fact that the ‘make available’ clause was not satisfied. However, considering the nature of services as enumerated in the remand report, ‘make available’ clause might not be even applicable for most of the services. The claim of the assessee hinged on the fact that the services were not technical in nature and the same were reimbursed on cost-to-cost basis.

The Bench set aside the impugned order to the extent of disallowance.

To Read the full text of the Order CLICK HERE

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