Case Note & Summary
The appeal by the Revenue under the Income Tax Act, 1961, challenged the order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 1998-1999. The assessee, Krupp Udhe GMBH, a German company, had entered into a contract with M/s. EID Parry (India) Limited for supply of a compressor for an Ammonia Storage Tank. The compressor was found damaged, and the assessee deputed two technicians from Germany to India for inspection. EID Parry remitted DM 202,433.37 comprising inspection fees of DM 170,701.37 and reimbursement of expenses for air tickets of DM 11,732. The Assessing Officer treated the reimbursement as part of taxable income, relying on decisions of the Andhra Pradesh High Court in Elkem Technology Vs. DCIT and the Kerala High Court in Cochin Refineries Limited V/s. CIT. The Commissioner of Income Tax (Appeals) upheld this. However, the ITAT held that reimbursement of expenses is not income and cannot be taxed, and also deleted the levy of interest under Section 234B. The Revenue appealed to the High Court raising three questions of law. The court admitted the appeal and, after hearing counsel, held that the first two questions regarding reimbursement of expenses are covered by the decisions in Elkem Technology and Cochin Refineries, which held that reimbursement of actual expenses is not income. The court dismissed the appeal on those questions. However, on the third question regarding interest under Section 234B, the court held that the Tribunal was not justified in deleting the levy of interest without considering the mandatory provisions of the Act. The court allowed the appeal on that question and restored the levy of interest under Section 234B.
Headnote
A) Income Tax - Reimbursement of Expenses - Taxability - Reimbursement of actual expenses incurred by the assessee is not income and cannot be included in taxable income - The court held that reimbursement of expenses is not income in the hands of the recipient and cannot be taxed as such (Paras 1-6). B) Income Tax - Fees for Technical Services - Gross Basis Taxation - When income is taxed on gross basis under the Act or DTAA, non-inclusion of reimbursement of expenses does not violate law as it would not tantamount to taxation partly on net basis - The court held that the issue is covered by the decision in Elkem Technology and Cochin Refineries (Paras 1-6). C) Income Tax - Interest under Section 234B - Levy of Interest - Interest under Section 234B is mandatory if the assessee has not paid advance tax - The court held that the Tribunal was not justified in deleting the levy of interest under Section 234B without considering the provisions of the Act (Paras 1-6).
Issue of Consideration
Whether reimbursement of expenses can be included in income; whether non-inclusion of reimbursement when income is taxed on gross basis violates law; whether ITAT was justified in deleting levy of interest under Section 234B of the Act.
Final Decision
Appeal dismissed on questions (i) and (ii) regarding reimbursement of expenses; appeal allowed on question (iii) regarding interest under Section 234B, restoring the levy of interest.
Law Points
- Reimbursement of actual expenses is not income
- Fees for technical services taxable under Section 9(1)(vii) read with Article 12 of DTAA
- Interest under Section 234B is mandatory if advance tax not paid
