TMI Blog2014 (12) TMI 761X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be taxed under Article 12, albeit only under Article 7 of the DTAA - DTAA benefit has been availed by the assessee and therefore, treaty benefit has to be given to the assessee for granting relief - the seconded employees will constitute Service PE of the assessee in India and in that case any payment received on account of rendering of service of such employees will have to be governed under Article 7 as per unequivocal terms of para 6 of Article 12 - Thus, the ratio laid down in the decision of M/s. Centrica India Offshore Pvt. Ltd. Versus Commissioner of Income Tax-I & Others [2014 (5) TMI 154 - DELHI HIGH COURT] Hon’ble Delhi High Court, will not help the case of the revenue, in any manner because under the concept of PE, FIS cannot be taxed under Article 12, but only as a business profit under Article 7 – thus, the payment made by the Indian entity to the assessee on account of reimbursement of salary cost of the seconded employees will have to be seen and examined under Article 7 only, that is, while computing the profits under Article 7, payment received by the assessee is to be treated as revenue receipt and any cost incurred has to be allowed as deduction because sala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to various subsidiaries all over the world and in India. In the relevant previous year, the assessee had entered into an agreement with M/s J M Morgan Stanley Securities Private Limited, an Indian Company for providing support services. The Assessing Officer noted that during the year, the assessee has received certain payments on account of salary to the assessee s employees who were deputed to Indian subsidiaries, M/s Morgan Stanley Advantages Services Pvt. Ltd (MSASPL) and M/s MISM Global Support and Technology Services Pvt Ltd. (GSTSPL). He further noted that, following party wise receipts and tax withholdings was reported by the assessee :- Name of the party Amount Tax Withhold Taxability M/s J M Morgan Stanley Securities Private Limited Rs.6,30,22,098 ₹ 95,29,168 Offered for tax as FIS M/s Morgan Stanley Advantages Services Pvt. Ltd Rs.4,46,66,994/- ₹ 66,41,000/- Not taxable as it is reimbursement of expenses M/s MISM Global Support and Technology Services Pvt Ltd Rs.2,00,63,673/- ₹ 30,13,000 Not taxable as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttance certificate for the remittance of salary. The assessee also produced the copies of Form No.16 and certificate of TDS deducted u/s 192 on such salary paid. However, the AO did not accept the assessee s contention that the payment made on account of reimbursement of salary is not taxable in India. His main reasoning were :- a) Firstly, the employees have been deputed to India who are highly qualified and technical persons, offering special services to the Indian subsidiaries in the designated areas of work for which they are expected to utilize in India. The nature of services offered by the employees have to be understood in broad terms as there is no secondment agreement between the two parties to this effect. b) Secondly, though the employees have been deputed in India and required to work under the general supervision and control of Indian companies, however, the assessee is responsible for the review, discipline, promotion, appraisal and all other HR and administrative matters of the deputed persons. c) Thirdly, the assessee is providing consultancy services to the Indian companies, as its main business activity is to provide support service to its subsidiaries. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the assessee, Ld. CIT(A) observed that they are not applicable to the facts and circumstances of the case and held that the AO has rightly treated the said income taxable as FIS under India US DTAA and also u/s 9(1)(vii). The relevant portion of ld. CIT(A) s finding is as under : 3.11. Considering all the above and since, the assessee has failed to demonstrate with evidence that the cost incurred by the foreign company has been reimbursed by the Indian companies as such' and that there is no secondment agreement, and that the Indian company cannot remove the employees deputed to India, I am of the view that this is not a case of reimbursement of cost simplicitor. Considering the nature of the job performed by the deputed persons and also the discussion made by A.O. I am of the opinion that this is a case of providing technical services in terms of Article 12 of India-US DTAA and Section 9(1)(vii) of the Income-tax Act, 1961 and the sum remitted is fees for technical services'. Therefore, the order of the A.O. is upheld and appeal is dismissed . 4. Before us, the ld. Sr.Counsel, Shri Arvind Sonde after explaining the entire facts of the issue involved, first o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, skill, know how or process or consist of the development and transfer of a technical plan or technical design It is represented to us that the deputed employees do not render services which should quality as FIS under Article 12 of the DTAA. The Supreme Court Of India has in the case of Director Of Income-Tax (International Taxation) V/s Morgan Stanley Co. has held that a permanent establishment (PE) of the overseas entity is constituted in India on account of deputing its employees to an Indian entity. Further, the Supreme Court held that where the PE, being the Indian entity, is remunerated on an arm s length basis taking into account all the functions and risks undertaken by the PE, there is no further need to attributing profits to the PE. In this regard, based on the Supreme Court ruling a PE of MSII should be constituted in India on account of deputing employees to MSAS. Based on discussions with the management, we understand that MSAS is remunerated on an arm s length basis, taking into account the risks assumed and factions performed by MSAS. Accordingly, based on the Supreme Court ruling, no further attribution to the PE of MSII, being MSAS is required. G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reimbursement of salary of the seconded employees is not taxable as FIS, he relied upon the decision of ITAT, Mumbai Bench in the case of Temasek Holdings V/s DCIT, (2013) 27 ITR (Trib) 125 (Mum) and catena of other decision which are as under : a) ITO V/s AON Specialist Services Private Limited (ITA No.1640/Bang/2012) b) DIT V/s HCL Infosystems Ltd (2005) 274 ITR 261 (Delhi) Upheld ITAT decision in the case of HCL Infosystems Ltd V DCIT -2002 76 TTJ 505) c) CIT V/s Karlstorz Endoscopy India Pvt. Ltd (ITA No.2929/Delhi HC/2009) d) Abbey Business services India Pvt Limited V/s DCIT (2012) 53 SOT 401 (Bang) e) ACIT V/s CMS (India) Operations and Maintenance Co.Pvt. Ltd (2012) 135 ITD 386 (Chennai) f) ITO V/s Ariba Technoloies (India) Pvt Ltd ITA No.616/Bang/2011 g) IDS Softwre Solut9ions (India) Pvt Ltd (2009) 122 TTJ 410 h) Cholamandalam MS General Insurance Co.Ltd (2009) 309 ITR 356 (AAR) i) DDIT V/s Tekmark Global Soluions LLC (2010) 38 SOT 7 (Mum) 5. Shri Arvind Sonde, further argued that by deputing employees to the Indian Companies, the assessee has not rendered any service nor has made available any kind of technical knowledge , experience, skill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Article 12(4) of DTAA in India. 7. After hearing of the case, it came to our notice that, the Hon ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd. V/s CIT, (2014) 364 ITR 336, while interpreting Article 13 of India-UKDTAA and Article 12 of India-Canada-DTAA, on similar kind of transaction has held that secondment of employees of overseas entities who have been paid salary by the overseas entity and reimbursed to the assessee company by the Indian company was held to be payment for technical services within the meaning of FIS clause and also under make available clause of Article 12. For the purpose of clarification, the case was re-fixed for seeking comments of both the parties. The ld. Sr.Counsel, Shri Arvind Sonde submitted that there was an earlier decision of the Hon ble Delhi High Court in the case of DIT V/s HCL Infosystem Ltd (2005) 274 ITR 261(Del), wherein this issue of reimbursement of salary was decided in favour of the assessee. This decision of the Delhi High Court has not been considered by the Hon ble Delhi High Court in its latest decision. However, without prejudice he submitted that the Hon ble Supreme Court in the case of, DIT (IT) V/s M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... control of the Board of Directors of the Indian companies and their day to day responsibility and activities were managed by the Indian company. However, their salary were paid by the assessee company after deducting TDS u/s 192 of the Act and duly deposited in the Indian Government Treasury. The entire salary paid by the assessee has been reimbursed by the Indian company to the assessee, which is evident from the debit notes appearing in the page 6 of the paper book. The TDS certificates have also been filed giving the details of tax deducted at source. One of the objection of AO as well as ld. CIT(A) was that, in the case of two employees, there has been some discrepancy in the amount shown in the TDS certificate and the amount shown in their income tax return filed in India. From the TDS certificate and the details of amount payable as clarified by the ld. Counsel, we find that, there is no discrepancy so far as the amount of cost which have been reimbursed by the Indian company to the assessee. However, ultimately the amount which has been received by the assessee towards reimbursement of Salary cost has been taxed as FIS which is a subject of dispute. The main issue before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been matter of huge controversy, as to what is the nature of such payment, whether it is fee for included services or not. Other related controversy is that, on the basis of duration of the stay of seconded /deputed employees in the host countries, whether the non-resident parent entity constitute the service PE in the host country or not. 11. In the present context the salary paid to the seconded employees by the parent company, the TDS has been already been deducted u/s 192 of the Act, which has been credited to the Government of India account. In case, if it is to be held that reimbursement of salary is nothing but payment for rendering technical services, then TDS has to be deduced u/s 195 of the Act. The Hon ble Bombay High Court, earlier in the case of Siemens Aktiongesellschaft (supra) has held that reimbursement of expenses cannot be regarded as revenue receipt following the decision of the Hon ble Delhi High Court in the case of CIT V/s Industrial Engineering Projects (1993) 202 ITR 1014 (Delhi) and therefore no TDS is required to be deduced u/s 195. However, this decision is not relied upon as this issue was decided on a different context. We have to examine our c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court, the major issues for adjudication before their Lordships was, firstly, whether by way of Secondment of employees the overseas entity had rendered any technical services in terms of Article 12 of India - Canada DTAA and Article 13 of India UK DTAA and secondly, whether the overseas entities establish any Service PE in India. Under these treaties the concept of Service PE has been embodied. The Hon ble Court after analyzing the definition of technical services and FIS as appearing in the India-UK treaty and India-Canada treaty, concluded that overseas entities are providing technical services to Centrica India through the seconded employees under India-UK treaty and FIS under India-Canada treaty. Regarding the issue, whether overseas entity through their seconded employees have constituted Service PE in India, the Hon ble High Court has referred and relied upon the decision of the Hon ble Supreme Court in the case of Morgan Stanley Co. (2007) 292 ITR 416 (SC) and also examined the terms and condition of the employment of seconded employees, whether they are employees of overseas entity or of Centrica India. The Hon ble High Court came to the conclusion that the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist s terms and employment. The concept of a service PE finds place in the U.N. Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding through the provision of services of technical or other personnel) if such services: a. are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or b. make available technical knowledge, experience, skill, know-how. or processes, or consist of the development and transfer of a technical plan or technical design. 5. xxxxx a. XXXXX b. XXXXXX c. XXXXX d. XXXXXX e. XXXX 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of article 7 (business profits) or article 15 (Independent Personal Services), as the case may be, shall apply. 7. a. Royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, then the seconded employees will constitute Service PE of the assessee in India and in that case any payment received on account of rendering of service of such employees will have to be governed under Article 7 as per unequivocal terms of para 6 of Article 12. Thus, the ratio laid down in the decision of Hon ble Delhi High Court, will not help the case of the revenue, in any manner because under the concept of PE, FIS cannot be taxed under Article 12, but only as a business profit under Article 7. It is very interesting to note that, similar provision is also embodied in the India-Canada DTAA in para 6 of Article 12, but this issue was neither raised or brought to the notice before the Hon ble Delhi High Court nor it was contested by either parties. There is inherent contradiction in this concept, as in most of the treaties, exclusionary clause like Article 12(6) has been embodied, which makes the issue of taxability of FTS of FIS in such cases as non applicable and have to be viewed from the angle of Article 7. Thus, the decision of the Hon ble Delhi High Court and all other decisions relied upon by the revenue will not apply in the case of the assessee, as nowhere the concept ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
