BANGALORE INTERNATIONAL AIRPORT LTD. v. INCOME TAX OFFICER
[Citation -2007-LL-1217-5]

Citation 2007-LL-1217-5
Appellant Name BANGALORE INTERNATIONAL AIRPORT LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 17/12/2007
Assessment Year 2006-07
Judgment View Judgment
Keyword Tags non-resident company • deduction of tax • double taxation • foreign company • airport project • audit report • real estate
Bot Summary: On the basis of such agreement, the board of directors of the assessee company in their meeting on 8th July, 2002 passed the resolution that read, The offshore expenses shall be advanced by private promoters. The two foreign companies, Siemens and Unique incurred expenses from March, 2000 to August, 2004 and these were to be reimbursed to the two parties. The particulars o f pre-development expenses that were claimed for reimbursement and capitalized by the assessee company along with details of external costs are reproduced below : Bangalore International Airport Ltd. Details of development costs to be reimbursed Siemens Unique Period March 2000-January 2002 Internal costs 6,28,560. The two foreign companies apparently carried out the necessary exercise on their own with regard to various legal services, engineering, business planning, technical, financial and so on and all such activities was with concerns who were non-residents insofar as India was concerned and the contract between the shareholders and the foreign company was in their capacity not as shareholder, but in their own rights as independent companies. Further, since the expenses were incurred by the foreign company out of India with regard to services rendered by another foreign company to the non-resident company, the provision of tax deduction at. The foreign shareholders of the applicant company had provided certain services to the applicant company. All these services which are proposed to be paid for by the applicant company now, have been utilized by the applicant company in India.


A. KALYANASUNDHARAM, VICE PRESIDENT: ORDER These are four appeals by assessee instituted against common orders of CIT(A)-VI, Bangalore ("CIT(A)" for short) dt. 31st March, 2006. issues that arise in present appeals are also common. common issues as raised by assessee are on conclusion of authorities below about applicability of s. 195(2) of IT Act, 1961 (hereinafter referred to as "the Act") with regard to amounts reimbursed by assessee to two of its shareholders/promoters on various expenses incurred by them in connection with project of international airport at Bangalore. 2. brief facts of case are that in 1994 Bangalore International Airport project was conceived as project of public and private participation. Since project was located at Bangalore, Karnataka State Industrial Investment and Development Corporation ("KSIIDC" for short) on behalf of State of Karnataka was included as one of parties and accordingly there was understanding between Airports Authority of India ("AAI" for short), who was supervising authority for setting up of all airports in India to effect that KSIIDC shall have shareholding of 26 per cent in project. In 1999, public and private participation programme was carried further by inviting private partners in remaining 74 per cent stake in project. By applying law of elimination, AAI zeroed in three parties, viz., Siemens Project Ventures GmbH, Germany (Siemens), Swiss airport operator Flughafen Zuerich AG, Switzerland (Unique) and Larsen & Toubro Ltd., India (L&T). At this point, limited company was floated called Bangalore International Airport Ltd. ("BIAL" for short) for sole purpose of developing international airport at Devanahalli, Bangalore. shareholders, who are four in number entered into agreement on 23rd Jan., 2002 and on that basis Siemens was to have 40 per cent shareholding, Unique and L&T were to have 17 per cent each and KSIIDC and AAI were to have 13 per cent each. 3 . shareholders agreement as above covered development costs which were pre-agreement development cost, State promoters pre-agreement development cost, reimbursement of development cost to private promoters in certain circumstances and reimbursement of development cost to State promoters in certain circumstances. On basis of such agreement, board of directors of assessee company in their meeting on 8th July, 2002 passed resolution that read, "The offshore expenses shall be advanced by private promoters. All expenses will be reimbursed and capitalized after financial close." 4 . arrangement between shareholders and promoters also required promoters pre-agreement development costs, etc. in accordance with t h e shareholders agreement shall be examined, verified and certified by independent auditors and same would be placed for capitalization by assessee company. two foreign companies, Siemens and Unique incurred expenses from March, 2000 to August, 2004 and these were to be reimbursed to two parties. Similarly, L&T also incurred expenses which also came for consideration for financial close and capitalization of project. particulars o f pre-development expenses that were claimed for reimbursement and capitalized by assessee company along with details of external costs are reproduced below : "Bangalore International Airport Ltd. Details of development costs to be reimbursed Siemens Unique Period (Euro) (Swiss Franc) March 2000-January 2002 Internal costs 6,28,560.00 9,32,783.55 Travel costs 70,912.57 92,590.90 External costs (see 1,62,587.51 2,18,582.27 Attachments 1 and 2) Total (A) 8,62,060.08 12,43,956.72 January 2002- December 2003 Internal costs 8,59,202.94 20,09,198.80 Travel costs 2,27,145.55 4,56,050.38 External costs (see 19,78,552.40 15,05,189.32 Attachment 1 and 2) Total (B) 30,64,900.89 39,70,438.50 January 2004-August 2004 Internal costs 1,44,326.52 2,12,656.00 Travel costs 27,842.88 45,128.49 External costs (see 61,237.00 6,62,092.37 Attachment 1 and 2) Total (C) 2,33,406.40 9,19,876.86 Internal costs 16,32,089.46 31,54,638.35 Travel costs 3,25,901.00 5,93,769.77 External costs (see 22,02,376.91 23,85,863.96 Attachment 1 and 2) Total (A+B+C) 41,60,367.37 61,34,272.08 Annexure 1 Bangalore International Airport Ltd. Siemens Project Ventures GmbH Amount paid in home Nature of services currency (Euro) Consultancy legal services 11,56,814.34 Consultancy engineering 8,32,839.94 Consultancy business planning 1,16,070.03 Consultancy technical 39,099.03 Consultancy financial planning 1,771.71 Consultancy real estate 4,955.42 development study Stationery 16,607.24 Animation 9,976.35 Advertisement 5,310.63 Travel 3,207.89 Translation 816.42 Courier 591.85 Others 14,315.69 Total 22,02,376.91 Note: These were services rendered by service providers to Siemens. Annexure 2 Bangalore International Airport Ltd. Unique Zurich Airport Ltd. Amount paid in home currency Nature of services (Swiss Franc) Consultancy legal services 15,98,030.17 Consultancy engineering 5,49,017.22 architecture Consultancy business Consultancy business 1,09,989.82 planning Consultancy technical 32,109.77 Consultancy real estate 6,393.00 Stationery 16,322.27 Animation 9,858.37 Advertisement 6,851.25 Travel 4,574.59 Translation charges 1,053.27 Courier charges 537.78 Others 1,126.45 Total 23,85,863.96 Note : These were services rendered by service providers to Unique. 5. issue is in regard to amounts that are payable to two non- resident companies. assessee had claimed that two of promoters, who had incurred various expenses on understanding between shareholders before start of project and before financial close, had carried out their own exploration with regard to viability of project and other technical details and accordingly they were to be reimbursed. various exploration done by two non-resident companies did not require any approval from Indian counterpart as agreement with them did not indicate such understanding. two foreign companies apparently carried out necessary exercise on their own with regard to various legal services, engineering, business planning, technical, financial and so on and all such activities was with concerns who were non-residents insofar as India was concerned and contract between shareholders and foreign company was in their capacity not as shareholder, but in their own rights as independent companies. issue being reimbursement of expenses incurred, question of deducting tax on such reimbursement did not arise. 6. AO in his order accepted fact that it was case of amount being paid much after expenses have been incurred by those promoters. However, since amounts so paid included certain element of technical services and so on, he was of opinion that tax should have been deducted or should be deducted. For this purpose, AO was of opinion that since expenses were incurred after agreement between shareholders in January, 2002, it would fall within ambit requiring deduction of tax at source. AO was confronted with decision of Authority for Advance Rulings in Hyder Consulting Ltd., In re (1999) 151 CTR (AAR) 641 : (1999) 236 ITR 640 (AAR) and when it was specifically drawn to his attention that reimbursement of actual expenses incurred in no way involves any element of profit. Further, since expenses were incurred by foreign company out of India with regard to services rendered by another foreign company to non-resident company, provision of tax deduction at. source is not attracted. AO was, however, not impressed and his conclusions are reproduced below : "06. Conclusion following are conclusions from analysis made in para Nos. 5 (a) to (t). (a) foreign shareholders of applicant company had provided certain services to applicant company. (b) contention that part of these services were obtained from other parties is of no consequence. (c) All these services which are proposed to be paid for by applicant company now, have been utilized by applicant company in India. (d) All these services called by applicant as consultancy services fall squarely within meaning of fees for technical services, as provided for in art. 12 of both relevant Double Taxation Avoidance Agreements (hereafter referred to as DTAAs) as also IT Act. (e) Thus, consideration payable for such services is chargeable to tax, even if its nomenclature is reimbursement , as income is deemed to accrue or arise in India. (f) Hence, withholding provisions of s. 195 are clearly invoked. (g) rate of withholding tax is 10 per cent as per respective DTAAs, in view of fact that it is rate beneficial to payees. (h) above conclusions, based on facts and information as provided b y applicant, are to be seen in context of s. 195 of IT Act. provisions of s. 195 are necessarily summary and are only for purpose of determining issue and quantum of withholding tax. It follows that said tentative conclusion is subject to test of final determination at stage of assessment. 7. Computation of withholding tax Following conclusions drawn in para No. 6, computation of withholding tax required to be made by M/s Bangalore International Taxation Ltd. is as follows : (a) Payment of/passing of credit entry of rupee equivalent amount of $ 41,60,367.37 to M/s Siemens Project Ventures GmbH, Germany to be taxed @ 10 per cent amounting to $ 4,16,036.74. (b) Payment of/passing of credit entry of rupee equivalent amount of Swiss Francs 61,34,272.08. to M/s Flughafen Zurich A.G., Switzerland to be taxed @ 10 per cent amounting to Swiss Francs 6,13,427.21." 7. CIT(A) was confronted with facts of case and he noted various arguments as well as agreement and arrangement between shareholders, pre-development expenses etc. He had no dispute to claim of assessee that it was case of reimbursement of expenses. He also noted that reimbursement was only to extent of 50 per cent of cost incurred and as certified by auditors. He was, however, of view that AO was justified in his conclusions. His observations are as under : "To sum up, main points of this case in support of AO s action in light of dispute raised are (i) nature of services are such as would be prima facie covered by definition of FTS in IT Act as well as respective DTAAs; (ii) Adequate support in respect of quantification of costs in particular audit report mentioned in shareholders agreement has not been furnished by appellant. (iii) As specific tax exemption has been granted under original or subordinate legislation despite concession agreement mentioning that no withholding tax would apply in respect of these payments." 8. notes on accounts of assessee company on balance sheet for year ending 31st March, 2005 in regard to above are reproduced below for sake of convenience : "10. Notes on Accounts contd. Rs. in 3. Development costs (i) Pre-agreement development costs .............. pre-agreement development costs are to be reimbursed by company within 30 days of Financial Close (FC) (i.e., date on which financing projected to be necessary to achieve commercial operations is available to company). FC was achieved on 23rd June, 2005. (ii) Pre-financial close development costs As per SHA, costs incurred by promoters and their affiliates on behalf of company after 23rd Jan., 2002 and upto date of FC are referred to as Pre-financial close development costs . Such costs are to be reimbursed by company after FC. FC was achieved on 23rd June, 2005." 9 . rival contentions in regard to above have been very carefully considered. In order that ss. 5 and 9 of Act are made applicable to facts of case, various provisions of Act as contained in sad sections must be found applicable. In instant case, the, technical consultation and various other consultations undertaken by non-residents in their capacity as promoters were incurred by them out of India and at that time when they had consultation; s. 9 was inapplicable to them because it was not payment by Indian resident to non-resident. It is case of reimbursement of various expenses incurred and in this case it is also limited to only 50 per cent. expenses as incurred by promoters compensated to them would not involve any profit element also, especially as is seen in instant case, compensation is also only to extent of 50 per cent. Initially when expenses were incurred by non-resident company, it was not answerable to any of provisions of s. 5 or s. 9 of Act. By virtue of arrangement, expenses to extent of 50 per cent were agreed to be reimbursed and reimbursement under no circumstances could be equated to amount paid for technical services. In fact, what really happened or what really was incurred by promoters was study with regard to feasibility, viability, etc. of entire project and finally whether it would ultimately result in them ending up with some profit or not. This study as promoter for which they used services of other agencies for their own purpose was to decide about whether their decision to jointly participate in international airport project was decision taken in right direction or otherwise along with input in shape of finance and other technical information. benefit that promoters received in shape of legal advice, technical advice and other things was only to provide them necessary input to decide to go ahead or not to go ahead with project. Such services even in remotest possibility would have no connection whatsoever with project and all details were so provided so as to satisfy that expenses as incurred were justified and reimbursable. As passing reference we may observe that one of bidders of project viz., Hochtief Airport GmbH, which bid was not accepted, also had incurred certain expenses and was reimbursed to extent of 50 per cent. Department vide its NOC dt. 12th Sept., 2003 had permitted reimbursement to tune of 50 per cent without any deduction of tax. There is absolutely no difference between bidder who had gone off and bidder who has continued because he was accepted. For aforesaid reasons, we are of opinion that assessee is justified in claiming that reimbursement of expenses in circumstances of case to extent of 50 per cent did not attract provisions of s. 195(2) of Act. *** BANGALORE INTERNATIONAL AIRPORT LTD. v. INCOME TAX OFFICER
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