Fact that third party invoices are paid does not necessarily show “reimbursement”
The assessee, a Netherlands company, was awarded a dredging contract to be carried out at Port Mundra. It assigned the contract to its fully owned Indian subsidiary. It also entered into a “cost allocation agreement” under which it agreed to provide to the subsidiary all services necessary to execute the dredging contract in return for a reimbursement of the costs. It received Rs. 11.53 crores from the subsidiary towards invoices raised by third parties and claimed that as it was a “reimbursement of expenditure” incurred by the assessee it was not chargeable to tax. The AO & DRP assessed the receipts as “fees for technical services”. It was also held that the subsidiary was a “Dependent Agent Permanent Establishment”. On appeal by the assessee, HELD dismissing the appeal:
(i) While it is true that reimbursement of expenditure is not income, the payment made by the subsidiary to the assessee cannot be regarded as a “reimbursement” because (a) the subsidiary had no technical expertise to carry out the contract & the assessee had rendered technical services to it such as arranging the dredgers from abroad & choosing appropriate parties to execute the work. The facilities arranged by the assessee to support the operations of the subsidiary are not layman’s activities and require technical know-how. The argument that the dredgers were simply brought from outside India and taken back is over-simplified, (b) though it is claimed that the expenses were reimbursed at par with the invoices issued by third parties, there is nothing on record to show that the price negotiated between the assessee and the third parties are prices comparable to similar services provided by international parties. It is not established that the assessee offered services to the subsidiary on cost to cost basis at best reasonable and competent prices available at that point of time. Therefore, an element of profit in the invoices raised by third parties cannot be ruled out even though what was paid by the subsidiary to the assessee is the amount reflected in the invoice. Therefore, the fact that what has was paid by the subsidiary to the assessee was only the amount reflected in the invoices issued by the third parties, does not go to support the argument that the payments were only reimbursement of expenditure and there was no element of profit in those amounts. As the subsidiary had no technical expertise, the inevitable conclusion is that the assessee rendered technical services to its subsidiary and the payments are in the nature of fees for technical services;
(ii) The subsidiary constituted a dependent agent PE (DAPE) of the assessee because de facto the assessee was carrying on the contract work on behalf of the subsidiary and if we pierce the veil of the assignment contract and go to the root, there is interlacing of activities and interlocking of funds between the assessee and the subsidiary in executing the dredging contract. There is a relationship of agency and a PE is created.