DANFOSS INDUSTRIES P LTD Vs. STATE

JUDGEMENT

(1.) 1. M/s. Danfoss Industries Private Limited, Chennai, an Indian company, registered under the Indian Companies Act, 1956, is the applicant. It is a member of Danfoss Group of companies. Danfoss Industries Private Limited, Singapore, a company incorporated in Singapore (Danfoss Singapore), is another member of the group, which provides the following services :

(2.) Danfoss Singapore provides the aforementioned services to help the group companies in the region to effectively carry out their business and to ensure that all Danfoss Group companies follow the procedures relating to Human Resource, Accounting, Finance, etc., uniformly. The applicant says that to carry out business operation in a more economic and efficient manner and to maintain the global standards set by Danfoss Group it proposes to enter into an agreement with Danfoss Singapore to avail the said services. The consideration for availing those services is on the basis of allocation key which is determined on a proportional percentage of budget turnover weighted by growth rate and market maturity of the group company availing the services and any increase or shortfall in the actual turnover would proportionately increase or decrease the portion of cost to be absorbed by the group company which avails of services from Danfoss Singapore. The cost is reimbursable on a monthly basis. Though the applicant believes that no tax is required to be deducted at source while making payments of the service fee to Danfoss Singapore under Section 195 of the Income-tax Act, 1961 (for short "the Act"), in order to confirm its position advance ruling is sought on the following question :

(3.) MR. Rajesh Gupta, learned chartered accountant, has invited our attention to the consideration clause of the proposed agreement to submit that the applicant would be reimbursing only the cost incurred by the Danfoss Singapore and that there is no profit in providing the services, therefore, no tax is deductible. The jurisdictional Commissioner would contend, what is payable under the agreement is not reimbursement of the cost ; had it been recoupment of cost the terminology in the agreement would have been different. Paras second and third of Clause (2) of the proposed service agreement, it is submitted, would show that the amount in question is not reimbursement of the actual cost as pleaded by the applicant.