India: Although Third Party Payments For Training And Legal Fees, Routed Through Related Company, Not Reimbursement, These Payments Are Not Taxable In India As Fees For Technical Services: Kolkata Tribunal

Last Updated: 2 June 2017
Article by SKP  

In a recent case1, the Kolkata Tribunal rejected the taxpayer's stand of non-taxability in India based on the reimbursement theory in respect of training and legal fees paid to the third parties via related company. However, the Kolkata Tribunal granted relief to the taxpayer by taking a view that these payments are not taxable in India as Fees for Technical Services (FTS).

Facts of the case 

  • The taxpayer is carrying on the business of construction of integrated steel plant. 
  • The taxpayer is a wholly owned subsidiary of Ershishanye Construction Group Co Ltd (ECGCL), a company incorporated in, and a tax resident of China. 
  • As per the Tripartite Agreement dated 31 October 2008 between the taxpayer, ECGCL and Electrosteel Integrated Ltd (EIL), it was agreed that the taxpayer would carry out onshore services and construction contract of an integrated steel plant at Bokaro, Jharkhand. 
  • The taxpayer wanted to avail the services of Chinese engineers for the execution of the contract. The taxpayer entered into an Agreement dated 12 October 2008 with Hunan Province Overseas Working Training Centre (Hunan) for the training of the Chinese engineers in the areas of communicating in English, safety standards to be followed under the Indian Law, appearing for visa interview, etc.   
  • The taxpayer also entered into an Agreement dated 24 June 2009 with Hunan Junwei Law Firm (Hunan Law) for legal services in connection with the onshore construction contract between the taxpayer and EIL. 
  • As per the Agreement dated 10 May 2009 entered between the taxpayer and ECGCL, ECGCL paid all the amounts to the Chinese entities (namely Hunan and Hunan Law) and the taxpayer, in turn, reimbursed these amounts to ECGCL. 
  • The taxpayer did not apply Withholding Tax (WHT) on amounts paid to ECGCL. The Assessing Officer (AO), as well as the Dispute Resolution Panel (DRP), took a view in the tax year 2009-102that the payments were in the nature of FTS and hence, the taxpayer was under the obligation to apply WHT. As the taxpayer had failed to apply WHT, these payments were not allowable as a tax deduction. 
  • The taxpayer filed an appeal before the Kolkata Tribunal against the final assessment order of the AO.

Ruling of the Kolkata Tribunal 

On the reimbursement of expenses 

  • It is undisputed that Hunan conducted training of engineers in China for, and on behalf of the taxpayer, for the specific purpose of execution of the onshore services and construction of steel plant in India. 
  • The taxpayer was bound to make payment for the services to Hunan. The fact that ECGCL made the payment on behalf of the taxpayer, which was subsequently repaid by the taxpayer to ECGCL, will not make the payment in question a pure reimbursement. 
  • The decision of the Mumbai Tribunal in C. U. Inspections (I) Pvt Ltd vs DCIT3 would apply in the instant case and therefore, the payments in question cannot be regarded as mere reimbursement of expenses by the taxpayer to ECGCL. 

On taxability of training fees as FTS 

  • The definition of FTS under the Income Tax Act, 1961 (Act) and the Double Taxation Avoidance Agreement between India and China (India-China DTAA) is the same. Any payment to qualify as FTS should be for rendering managerial, technical or consultancy services. 
  • The main purpose for which Hunan was employed was to train Chinese engineers in the English language, acquaint them with the safety standards to be followed under the Indian law and enable them to answer questions that may be asked by the Indian authorities for issue of visa. 
  • The facts of the taxpayer's case are identical to the Chennai Tribunal decision in Cosmic Global Ltd vs ACIT4 in as much as the imparting of language training was the main nature of the service in both the cases. 
  • Therefore, the payment of training fees cannot be held as FTS and consequently, the taxpayer was not required to apply WHT. Accordingly, the disallowance of these fees by the AO needs to be deleted. 

On the taxability of legal fees as FTS 

  • As regards the consultancy services rendered by Hunan Law are concerned, the question for consideration is whether the payment for the same will fall within the FTS Article of the India-China DTAA or the Independent Personal Services (IPS) Article of India-China DTAA. 
  • In light of Mumbai Tribunal decisions in Maharashtra State Electricity Board vs DCIT5 and DCIT vs Chandbourne & Parke LLP6, the special IPS Article of the India-China DTAA shall override the general FTS Article of the India-China DTAA. 
  • As IPS Article of the India-China DTAA would apply, the payment of legal fees was not taxable in India since the conditions precedent (namely, a fixed base in India and physical presence of more than 183 days in India) for taxing such fees were not satisfied. Consequently, the taxpayer was not required to apply WHT. Accordingly, the disallowance of these fees by the AO needs to be deleted.


1 Ershisanye Construction Group India Pvt Ltd vs DCIT in ITA No. 756/Kol/2015 dated 12 April 2017 (Kolkata Tribunal)

2   Assessment Year 2010-11

3  Reported in [2013] 142 ITD 761

4  Reported in [2014] 48 365

5  Reported in [2004] 90 ITD 793

6  Reported in [2005] 2 SOT 434 

SKP's comments

In the facts and circumstances of the case, the Kolkata Tribunal appears to be right in rejecting the taxpayer's stand of non-taxability in India based on the reimbursement theory. In light of this decision, one needs to be careful in taking any tax position based on the argument of reimbursement of expenses.

This decision also brings out the importance of examining the nature of services properly and its alignment with the definition of FTS in the Act and/or relevant DTAA before deciding whether the payment of such services is in the nature of FTS or not.

This decision also accepts the principle that the specific provisions (IPS Article in the instant case) should override the general provisions (FTS Article in the instant case). However, the benefit of IPS Article of the India-China DTAA has been impliedly granted (without any discussion) to non-individual (Hunan Law). It may be noted that IPS Article of the India-China DTAA does not explicitly mention the class/category of taxpayers to whom the same shall apply.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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