2024 (8) TMI 1568 - AT - Income Tax

Income deemed to accrue or arise in India - Fees for Technical Services (FTS) - Reimbursement of Secondment Charges - HELD THAT - We are of the considered view that cost to cost reimbursement on account of secondment of employees cannot be treated as FTS as defined under Article 12 of India USA-DTAA and seconded personnel are employees of EY India firms whose income has been taxed as salary in their respective hands. Therefore the very same amount could not in law be subjected twice firstly in the hands of the seconded employees working in India and secondly again the hands of the assessee. AO is accordingly directed to delete the impugned addition. Professional Services Article 15 FIS Article 12 - AO treated the amount received by the assessee on account of professional services as Fees for Inclusive Services as per the Article 12 on the premise that such services do not qualify the definition of professional services as per Article 15 of DTAA - HELD THAT - The assessee has given the party wise breakup of services rendered to India based clients from USA which was to the tune of Rs. 65.20 Cr. which includes E Y LLP SR Batliboi Company LLP Honeywell International Inc. The details of the services extended have already been discussed at length above. On going through the services we find that they cannot be said to be meeting the requirement of make available technical knowledge experience skill know-how or processes or consist of the development and transfer of a technical plan or technical design clause under Article 12(4)(b) of DTAA. Further we have gone through the Article 12(5)(e) which states that the FIS does not include the amounts paid to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services). To conclude the case of the assessee has been covered by the benefits of provisions of Article 12(4) (b) of DTAA as the make available criteria is not satisfied. The appeal of the assessee on this ground is allowed.

Summary

The core legal questions considered in this judgment revolve around the taxability of certain payments received by the assessee under the Income Tax Act, 1961, and the India-USA Double Tax Avoidance Agreement (DTAA). The principal issues examined are:

1. Whether the reimbursement of secondment charges paid by the assessee to Indian entities constitutes Fees for Technical Services (FTS) under Article 12 of the India-USA DTAA or is merely a cost-to-cost reimbursement not taxable as income.

2. Whether the seconded personnel are employees of the assessee or the Indian member firms, and consequently, whether the arrangement between the assessee and Indian entities constitutes the provision of services by the assessee through seconded personnel.

3. Whether the payments received by the assessee for professional services rendered from the USA to Indian clients qualify as "professional services" under Article 15 of the DTAA or as Fees for Included Services (FIS) under Article 12, including the applicability of the "make available" clause under Article 12(4)(b).

4. Whether the addition of income on account of professional services as FIS under Article 12 is justified, particularly in view of the definitions and scope of professional services under Article 15.

5. The applicability and interpretation of withholding tax provisions under Section 194J of the Income Tax Act in relation to the services rendered and payments received.

6. The correctness of initiating penalty proceedings under Section 270A of the Income Tax Act for alleged underreporting of income.

Issue-wise Detailed Analysis

1. Reimbursement of Secondment Charges and Taxability as Fees for Technical Services (FTS)

Legal Framework and Precedents: The primary legal framework includes Article 12 of the India-USA DTAA, which defines Fees for Technical Services, and relevant provisions of the Income Tax Act, 1961, particularly Section 9 and Section 192 (tax deduction at source on salary). The Tribunal relied heavily on a recent coordinate bench decision in the assessee's own case dated 20 June 2023, which dealt with similar facts. The Supreme Court judgment in M/s Northern Operating Systems Pvt. Ltd. was also considered for guidance on the nature of secondment arrangements.

Court's Interpretation and Reasoning: The Tribunal examined the deputation agreements between the assessee and the Indian member firms and found that the seconded personnel were released from all obligations and rights of employment in the USA and were employed by the Indian entities during the period of secondment. The Indian entities had full control, direction, and supervision over the secondees, including performance appraisals and salary payments. The invoices raised by the assessee represented mere reimbursement of salary costs and related expenses paid on behalf of Indian entities, without any profit element.

The Tribunal distinguished the facts from the Supreme Court judgment cited by the Revenue, noting that the Supreme Court's ruling pertained to service tax liability in a manpower recruitment and supply context, focusing on the service recipient's liability. In contrast, the present case concerns income tax implications and whether the payments qualify as FTS under the DTAA.

Key Evidence and Findings: The deputation agreements, sample Form 16 certificates showing tax deducted at source under Section 192, and the absence of any profit margin in the reimbursements were critical. The Tribunal also relied on the coordinate bench decision in Boeing India Pvt. Ltd., upheld by the Delhi High Court, which held that where seconded employees are employed by Indian entities and salary payments are reimbursed by the overseas entity, such payments are not taxable as FTS.

Application of Law to Facts: Applying the legal principles and precedents, the Tribunal concluded that the reimbursements do not constitute FTS under Article 12 of the DTAA. Since the seconded personnel are employees of Indian entities and their income has been taxed as salary in India, taxing the same amount again in the hands of the assessee would amount to double taxation, which is impermissible.

Treatment of Competing Arguments: The Revenue's reliance on the Supreme Court decision was addressed by clarifying the context and scope of that ruling. The Tribunal rejected the Revenue's contention that the payments represent a service provided by the assessee, emphasizing the legal and factual distinction that the personnel were not under the assessee's employment during secondment.

Conclusion: The Tribunal allowed the appeal on this ground, directing deletion of the addition treating reimbursements as FTS.

2. Taxability of Income from Professional Services Rendered from USA to Indian Clients - Article 15 vs. Article 12

Legal Framework and Precedents: The relevant provisions are Article 15 (Independent Personal Services) and Article 12 (Royalties and Fees for Included Services) of the India-USA DTAA, along with Section 194J of the Income Tax Act. Article 15 provides an inclusive definition of professional services, while Article 12 defines fees for included services, including technical or consultancy services, with a "make available" clause. The CBDT notifications expanding the scope of professional services under Section 194J were also referenced.

Court's Interpretation and Reasoning: The Assessing Officer and Dispute Resolution Panel (DRP) held that certain services rendered by the assessee did not qualify as professional services under Article 15 because the personnel involved were economists, MBA graduates, diploma holders, and other trained technical professionals who do not fall within the enumerated categories. They concluded that these services are technical or consultancy in nature and hence taxable under Article 12 as Fees for Included Services (FIS), especially since the "make available" condition was deemed satisfied.

The Tribunal, however, undertook a detailed examination of the nature of services rendered, including expatriate tax services, transfer pricing documentation, tax advisory, talent management, merger advisory, HR performance improvement, technology implementation, valuation, payroll services, SAP implementation, and customer billing. It found that these services do not meet the "make available" requirement under Article 12(4)(b) of the DTAA, which requires that the services make available technical knowledge, experience, skill, know-how, or processes to the recipient.

Furthermore, the Tribunal emphasized that Article 15 and Article 12 operate in fundamentally different spheres and are not conflicting provisions. Article 15 is a specific provision dealing with independent personal services, while Article 12 is a general provision covering technical and consultancy services. The specific provision (Article 15) prevails where applicable.

Key Evidence and Findings: The Tribunal scrutinized the qualifications of the engagement partners and professionals, the scope of work, and the agreements. It noted that the services rendered are independent activities of similar character to professional services and that the "make available" clause was not satisfied. The Tribunal also relied on the inclusive definition of professional services under Article 15(2) and the expanded scope under Section 194J and related CBDT notifications.

Application of Law to Facts: The Tribunal applied the principle that the "make available" condition is a necessary criterion for taxation under Article 12 and found it lacking. It also applied the principle of ejusdem generis to interpret the inclusive definition of professional services under Article 15. Since the assessee has no Permanent Establishment (PE) in India, business profits under Article 7 are not taxable in India.

Treatment of Competing Arguments: The Tribunal rejected the Revenue's narrow interpretation of Article 15, which confined it to services rendered within India. It also rejected the Revenue's contention that the services rendered by economists and MBA graduates do not qualify as professional services. The Tribunal distinguished the case law relied upon by the Revenue and held that the services rendered fall within the ambit of Article 15 and are not taxable as FIS under Article 12.

Conclusion: The Tribunal allowed the appeal on this ground, holding that the receipts from professional services rendered from the USA to Indian clients are not taxable as Fees for Included Services under Article 12 and are covered by Article 15.

3. Applicability of Withholding Tax Provisions and Penalty Proceedings

Legal Framework: Section 194J of the Income Tax Act deals with deduction of tax at source on fees for professional or technical services. The Tribunal examined the definition of professional services under Section 194J and Section 44AA, along with relevant CBDT notifications expanding the scope of the term.

Court's Interpretation and Reasoning: The Tribunal found that the services rendered by the assessee qualify as professional services under Section 194J, given the qualifications of the personnel and the nature of services. The Tribunal also noted that tax has already been deducted under Section 192 on salary income of seconded personnel, and Section 195 does not apply to reimbursements.

Regarding penalty proceedings under Section 270A for alleged underreporting, the Tribunal did not find merit in the initiation of such proceedings, given the findings on the nature of payments and taxability.

Conclusion: The Tribunal directed deletion of additions related to disallowance under Section 40(a)(ia) and disallowed penalty proceedings under Section 270A.

Significant Holdings

"Considering the facts of the case in totality, in light of the deputation agreement, we are of the considered view that cost to cost reimbursement on account of secondment of employees cannot be treated as FTS as defined under Article 12 of India USA-DTAA and seconded personnel are employees of EY India firms whose income has been taxed as salary in their respective hands. Therefore, the very same amount could not, in law, be subjected twice - firstly in the hands of the seconded employees working in India and secondly again the hands of the assessee."

"The services rendered by the assessee do not meet the 'make available' requirement under Article 12(4)(b) of the DTAA. Article 15 and Article 12 operate in fundamentally different arenas and the specific provision (Article 15) prevails over the general (Article 12). The receipts from professional services rendered from the USA to Indian clients are covered by Article 15 and are not taxable as Fees for Included Services under Article 12."

"Section 195 of the Act has no application once the nature of payment is determined as salary and deduction has been made under Section 192 of the Act. The initiation of penalty proceedings under Section 270A for alleged underreporting is without merit."

Core principles established include the non-taxability of mere cost-to-cost reimbursements of seconded employees' salaries as FTS under DTAA, the primacy of specific treaty provisions over general ones, the necessity of satisfying the 'make available' condition for taxation under Article 12, and the avoidance of double taxation where income is already taxed in the hands of employees.

Final determinations on each issue are that the additions made by the Assessing Officer and upheld by the DRP are set aside, the reimbursements for secondment charges are not taxable as FTS, the professional services income is covered under Article 15 and not taxable as FIS under Article 12, and penalty proceedings are quashed.