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Johnson Matthey Public Ltd. Company, C/o-Johnson Matthey Chemicals India Pvt. Ltd. Versus DCIT (International Taxation) , Circle 2 (2) (1) , New Delhi

2017 (12) TMI 470 - ITAT DELHI

Corporate/bank guarantee recharge - nature of receipt - India U.K. DTAA - payment relate to the tendering of any technical or consultancy service - payment towards seconding an expatriate employee - fee for technical services (FTS) or not - concept of make available - Held that:- Having examined the issue of corporate/bank guarantee recharge with reference to Article 12(5) of the Indo U.K. Treaty and Section 2(28A) of the Act, we are of the considered opinion that the authorities below are perfe .....

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received from JMIPL on account of charges received for the services rendered by senior management employee seconded by the assessee to India - Held that:- Both the authorities below recorded a finding that the secondment contract, secondment agreement, the employment contract and salary reimbursement agreement are not made available by the assessee. Statement of Ld. DR that the assessee failed to furnish these documents before the authorities below, by forcing them to consider only such documen .....

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not reveal that either the Ld. AO or the Ld. DRP directed the production of these documents and in spite of such direction the assessee failed to produce the same, thereby permitting the authorities to draw an adverse inference against the case of the assessee. - However, we feel that in order to appreciate the contention of the Ld. AR as to the nature of this particular receipt in the hands of the assessee on account of the services rendered by the seconded employee - whether it is reimbu .....

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after looking into the documents to be produced by the assessee. We, therefore, restore Ground Nos. 5 to 7 to the file of the AO for considering the nature of receipt of ₹ 55,80,855/- with reference to the above documents and other material to be filed by the assessee. - ITA No.-1143/Del/2016 - Dated:- 6-12-2017 - SHRI G.D.AGRAWAL, HON BLE PRESIDENT AND SHRI K.N. CHARY, JUDICIAL MEMBER For The Assessee : Sh. Kanchan Kaushal, CA & Sh. K.M.Gupta, Adv. For The Revenue : Sh. T.M. Shiv Kum .....

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e return of income. 2. On the facts, in the circumstances of the case and in law, the Ld. AO as well as Dispute Resolution Panel (Ld. DRP') has erred in holding that guarantee fee of ₹ 1,49,15,090 is taxable as Other Income in terms of Article 23 of the India UK Double Taxation Avoidance Agreement ( Tax Treaty ). 3. On the facts, in the circumstances of the case and in law, the Ld. AO/ Ld. DRP failed to appreciate that the income arising to appellant providing guarantee for its Associa .....

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lity visa- vis the debt raised by the principal debtors is coextensive and hence, the guarantee fee is in the nature of Interest Income under Article 12 of the India UK Tax Treaty, as claimed by the Appellant. 4.2 mechanically relying upon Technical Explanation to US Model Tax Convention 2006 without appreciating that the Appellant has provided the guarantee in the normal course of business to its AEs. 4.3 not appreciating the fact that where a specific provision under the Act or the Tax Treaty .....

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On the facts, in the circumstances of the case and in law, Ld. AO/ Ld. DRP, merely by relying upon the Hon'ble Delhi High Court judgment in Centrica India Offshore Pvt. Ltd.', grossly erred in concluding that by seconding an expatriate employee (as the Managing Director of the Indian AE), the Appellant has satisfied the restrictive 'make available' criteria in terms of Article 13(4) of India UK tax treaty thereby treating the same as FTS, without appreciating the fact that: - 6. .....

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as a mere reimbursement without any income element towards salary of expatriate employee disbursed by it, as a facilitator, and therefore cannot be subject to tax as FTS. 8. On the facts, in the circumstances of the case and in law, the Ld. AO erred in levying consequential interest under section 234B of the Act on the disallowance made in the assessment order. 9. On the facts, in the circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271(1)(C .....

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ohnson Matthey India Private Limited (JMIPL) and Johnson Matthey Chemicals India Private Limited (JMCIPL). JM Plc provides various types of guarantees in relation to the business of its subsidiaries companies. In the relevant previous year JM Plc provided guarantees to support credit facilities extended to JMIPL and JMCIPL by banks in India. Guarantees provided to HSBC and Citibank on a global basis outside India include guarantee for the facilities extended to JMIPL and JMCIPL. While filing its .....

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the Ld. AO vide final assessment order dated 17 December 2015 passed under section 144(3) read with section 143(3) of the Act, assessed the income of the assessee at ₹ 25,10,69,882 making the addition of ₹ 1,49,15,090/- treating alleged guarantee fee as taxable under Article 23 - Other Income of India UK Double Taxation Avoidance Agreement (India UK Tax Treaty) @ 40% (plus surcharge and education cess) as against the above sum offered to tax under Article 12 - Interest income of Indi .....

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respect of characterisation of Guarantee fee recharge (Bank guarantee recharge/Corporate guarantee recharge)amounting to ₹ 1,49,15,090 as Other Income under Article 23(3) of India UK Double Taxation Avoidance Agreement (India UK DTAA or Tax Treaty), taxed @ 40% (plus surcharge and education cess) in the final assessment order, whereas Ground No. 5, 6 & 7 Relate to tax on reimbursement of salary cost of a seconded employee disbursed on behalf of Indian Associated Enterprise (AE) amount .....

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10 is concerned, it is the argument of the Ld. AR that in terms of Art. 265 of the Constitution of India, no tax shall be levied or collected except by authority of law and the Hon ble Supreme Court of India also held that the purpose of assessment proceedings is to assess correctly the tax and consequently, the tribunal has the power to grant relief if it is found that a non-taxable item is taxed or a permissible deduction is denied and thus an assessed income can be lesser than the returned in .....

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case of Capgemini S.A. vs ADIT (International Taxation) for the Assessment Years 2009-10 & 2012-13 rendered by the Mumbai Tribunal in ITA Nos. 7198/Mum/2012 and 888(Mum) of 2016 respectively for the principle that when the Indian subsidiaries avail credit facilities pursuant to the corporate guarantee agreement entered into by the foreign parent outside India with a financial institution, the guarantee commission received by the foreign parent does not accrue nor does it deem to have been a .....

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sary for deciding a new ground are not available on record. Insofar as the categorization of the receipt of guarantee commission as the income from other source, Ld.DR placed reliance on the orders of the authorities below. 5. We have carefully gone through the record. In the case of the NTPC (supra), the Hon ble Supreme Court observed that, - The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the tax .....

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there is no dispute that in the return of income, the assessee had declared the receipts on account of the guarantee commission treating it as interest within the meaning of section 2(22A) of the Act and before the authorities below, the assessee placed reliance on a decision reported in Viswapriya Financial Services and Securities Limited [2002] 258 ITR 496 (Madras) and CIT vs Vijay Ship Breaking Corporation [2003] 261 ITR 113 (Gujarat). It is, therefore. Clear that there is no dispute as to th .....

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at the guarantee commission received by the foreign parent pursuant to the availment of the loan by the Indian subsidiary basing on the global guarantee agreement entered into by the foreign holding company with a banker outside India, is not taxable in India, Ld.AR placed reliance on the decision of the Mumbai Tribunal in Capgemini SA Vs. DCIT (International Taxation) for Assessment Year 2009-10 vide ITA No. 7198/Mum/2012 dated 28.3.2016, which needs to be extracted hereunder:- 3. Rival content .....

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an Branches of BNP Paribas, which credit facilities to the extent of USD 15 million4and 2 million respectively, were secured by the said corporate guarantee given by the assessee. The assessee has charged guarantee commission @ 0.5% per annum for the corporate guarantees given on behalf of its subsidiaries in India. The AO has taxed the same by holding it to be Other Income under Article 23 of the DTAA between India and France. 4. The assessee is before us against the said addition. 5. We have c .....

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rd we found that guarantee commission received by France company did not accrue in India nor it can be deemed to be accrued in India, therefore, not taxable in India under Income Tax Act. Furthermore, as per Article 23.3, income can be taxed in India, only if it arises in India. In the instant case, the income clearly arises in France because the guarantee has been given by the assessee, a French company to BNP Paribas, a French Bank, in France and, therefore, Article 23.3 has no applicability a .....

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mmission is only the Indian entity availing loan, but not merely on the foreign parent company entering into the global corporate guarantee agreement, as such consideration of the matter in the light of the provisions under section 5(2) of the Act is necessary. 9. At the outset, it is needless to say that while according to Section 4 of the Act income-tax shall be charged in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of the Act in .....

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no escapes for the receipts from being included in the total income of the Non-resident Indian. In the case on hand, though it is contended by the assessee that they have entered into the global corporate guarantee agreement with the banker outside India, fact remains that on that account alone, no receipts would accrue to the assessee in the jurisdictions where the loan facility is not availed by the subsidiaries. It is not the entering of the global corporate agreement outside India that occa .....

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held that in cases of the receipts created by legal fiction under section 5(2) of the Act, there is no escape from the conclusion that the income earned by the non-resident company had received the same in India. 10. In these circumstances, in view of the legal fiction followed by the Hon ble Supreme Court in the above decision while considering section 5(2) of the Act, we are of the considered opinion that the parental/bank guarantee commission was accrued to and received by the assessee in Ind .....

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viding Bank Guarantee/ Corporate Guarantee, in the normal course of business, would not be chargeable to tax in India. However, out of utmost caution, the Appellant has offered the guarantee fee to tax as Interest in terms of the provisions of the Act and Article 12(5) of the India UK Tax Treaty. He objected authorities below placing reliance on the US - MTC Technical Explanation 2006 on the ground that even the US Tax Court has not supported the view given in US MTC 2006 for a ruling given in t .....

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a deposit, claim or other similar right or obligation and also any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised. 12. He also placed reliance on a decision of Gujarat High Court in the case of CIT vs Vijay Ship Breaking Corporation [2003] 261ITR 113 (Gujarat), and Madras High Court in the case of Viswapriya Financial Services and Securities Limited [2002] 258 ITR496 (Madras), in support of his argu .....

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egarded as interest. Basing on these provisions and decisions, he contends that the payments by Indian AEs to Appellant in respect of guarantee provided to support credit facilities obtained by them from banks in India could be classified as Interest for tax purposes in India UK Tax Treaty as well as under provisions of the Act, and the tax offered on the guarantee fee treating it as interest is proper. 13. He further argued that in this case the essential characteristics of business are being f .....

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arantee fee income partakes the nature of business income which could be chargeable to tax as per Article 7 of India UK tax treaty. However, he further argued that as per the provisions of Article 7 of India UK tax treaty, the income is taxable in India only if the recipient carries on business through a Permanent Establishment ( PE ) in India. In the absence of any PE in India, the business profits of an enterprise are taxable in the country in which the recipient is resident. 14. In the altern .....

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he authorities below may not be sustained. 15. For better appreciation of facts on this issue, Article 12(5) of the India U.K. DTAA and section 2(28A) of the Act needs to be referred:- Article 12(5) of India UK reads as follows: 5. The term interest as used in this Article means income from debtclaims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income fro .....

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ilar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;] 16. According to the Ld. AR as is evident from the above, Article 12(5) of the India U.K. DTAA speaks of income from debt claims of every kind whereas Section 2(28A) says that the term interest includes a deposit claim or other similar right or obligation which shall further include service fee or other charge .....

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ny kind or the service fee or other charge in respect of moneys borrowed or debt incurred, refer to the payments relating to the debt proper, whether or not there is any relationship of debtor-creditor or borrower-lender. At this juncture, we would like to observe that words and phrases employed in any provision of Statute or Treaty have to be understood in the context of their usage and with reference to the company of other words or phrases they keep in. Too much of expansion of the literal me .....

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odical payment or remuneration for service in the context of a loan can not be treated as interest . The term interest, with its widest connotations, indicate the payments, whatever may be the name that is called with, relate to the payments made by the receiver of some amount, pursuant to a loan transaction. Loan transaction is also a species of contract. Art 12(5) of the DTAA and Section 2(28A) of the Act extend the scope of such payments. However, payment or re-payment pursuant to any loan to .....

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be qualified to be treated as interest, even if there is no semblance of relationship between the parties like that of creditor-debtor exists. However, it does not take into its fold any payments made to stranger to the privity of loan transactions, though such payments have to be made incidentally in relation to such loan. Undoubtedly, assessee is a stranger to the privity of loan transactions inasmuch as the contract of loan is a different from the contract of guarantee, as such in our conside .....

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ayments towards consultancy charges, expenditure incurred for the purpose of pre-loan documentation and the host of expenditure incurred with third parties and not relatable to the loan transaction proper, will have to be treated as interest . Certainly it cannot be the intention of the legislature or treaty-makers. We are, therefore, of the considered opinion that, so long as the assessee is a stranger to the privity of contract of loan between the Indian entity and the banker, they cannot cate .....

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omobile and other industries, it manufactures a variety of precious metal containing catalysts and chemical products which are used in a wide range of industrial applications. Further, it is nobody s case that the assessee also does the business of providing corporate/bank guarantee recharge to earn income on regular basis. The global corporate guarantee that was entered into by the assessee is only for the limited purpose of securing loans to its subsidiaries and the recharge income is only an .....

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ing available any knowledge, experience, skill know-how or process or consist of any development or transfer of a technical plan or a technical design. At the same time, it does not also meet the requirement of explanation to section 9(1)(vii) of the Act. We, therefore, are not inclined to place this guarantee recharge amount in the category of FTS. 20. Having examined the issue of corporate/bank guarantee recharge with reference to Article 12(5) of the Indo U.K. Treaty and Section 2(28A) of the .....

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orities below. We, therefore, dismiss Ground Nos. 2 to 4 & 10. 21. Now, turning to Ground Nos. 5 to 7, is an admitted fact that the assessee received a sum of ₹ 55,80,855/- from JMIPL on account of charges received for the services rendered by senior management employee seconded by the assessee to India. However, the assessee s case is that such an amount represents the expenditure incurred by them on the employee and was reimbursed by the Indian entity. Ld.AO did not accept the conten .....

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entrica India Offshore Pvt. Ltd. and the broad principles laid down by the Hon ble Delhi High Court is that where the employees are seconded and continue to retain their lean with their parent organization, on terms where they transfer and make available their technical knowledge then the reimbursement of salaries of seconded employees are in the nature of FTS in the hands of the parent organization taxable on source basis. 22. According to the Ld. AR, for the year under consideration, the Asses .....

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e country. The Assessee agreed to disburse the salary of such employee to his designated overseas account. In order to recover the above salary, the Assessee had raised invoice towards claim of reimbursement of salary expense of seconded employee. The Indian AE has also been duly undertaking withholding tax compliances on the salary of the MD. Ld. AR further submitted that it is an undisputed fact that the Indian AE had deducted tax at source on salary paid to Mr. Dhananjay Tapasvi, thus the inc .....

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e in employment of the foreign enterprise or not is wholly irrelevant for this purpose. What is relevant is that the income embedded in these payments in question is taxable in India under the head Salaries and if that be so, there are no tax withholding obligations under section 195. In view of the above decision, it is submitted that the sum received by the Appellant could not be brought to tax separately in the hands of Appellant under the deeming provisions of 9(1)(vii) i.e. FTS. Thus, the a .....

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that he was appointed as new General Manager of Emission Control Technology Plant (ECT Plant) in India and made the Director on the Board of Jhonson Matthey India Pvt. Ltd. (the subsidiary). This person has been seconded to the India to oversee the Emission Control Technology Plant of the subsidiary. He is an employee of the assessee and the services rendered by him to the Indian entity are Fees for Technical Services. Ld. DR further submits that the assessee did not furnish the necessary docum .....

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(P.) Ltd. v. CIT (2014)151 taxmann.com 386 (SC). 24. Further argument of the Ld. DR is that there was no real employeeemployer relationship between Indian subsidiary and the Mr.Tapasvi as he was appointed by the Assessee and continued to be the employee of the Assessee who was also paid salary in UK, that he would continue to be Assessee's employee till his services are terminated by Assessee, but not by Subsidiary where he is seconded. Ld. DR, therefore, submits that so long as one of the i .....

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on the board of Johnson Matthey India Pvt Ltd (the subsidiary), as such it amounts that the revenue clearly admitted the position that Mr. Dhananjay Tapasvi was appointed as an employee of Indian AE in its capacity of MD. Referring to the stand of the Revenue that Mr. Tapasvi (Seconded employee) has been seconded to India to oversee the Emission Control Technology Plant of the subsidiary, that he is an employee of the Assessee and accordingly the services rendered by him are FTS and the Ld. DR .....

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inting MD of Indian AE. According to the Ld. DR, the decision of the Hon ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd vs CIT [2014] 44 taxmann.com 300 (Delhi) is very fact specific, for the reasons that, Centrica India having been newly constituted, was presumably not in a position to render help to the various vendors in the matter of fulfilling their obligations or in the matter of ensuring compliance with the processes and practices employed by the overseas entities, a .....

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it generation of the overseas entities in Indian territory. However, according to him, in the case of the Assessee, the Indian AE of the Assessee was incorporated in India on 16 January 1998, that the Indian AE was not in the initial set-up phase, that the MD who was on secondment to India was the brain of the Indian AE taking forward the business of the Indian AE, that the MD was not imparting any skill set to the resident employees. The MD was not advancing the business functions of the Assess .....

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The MD was working for the direct benefit of Indian subsidiary. According to the Ld. AR if the seconded employee is working for the Indian subsidiary and taking forward it s business then the question of FTS does not arise. If not so, and the seconded employee is working for the Assessee s business in India in that case also there is no income chargeable to tax in India, as the payment made by the Indian AE to the Assessee on account of reimbursement of salary cost of the seconded employees wil .....

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International Incorporated v. Deputy Director of Income-tax, (IT) (4)(1) [2015] 53 Taxmann.com 457 (Mum. Trib), which has duly considered the case of DIT(A) v. Morgan Stanley & Co. [2007] 292 ITR 416 (SC) and Centrica India Offshore (P.) Ltd. v. CIT [2014] 364 ITR 336 (Delhi HC). 26. While enumerating the services performed by the said seconded employee as mentioned in Page No.118 of the Paper Book, Ld.AR submitted that the nature of such activities make it evident that the MD was working as .....

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nated overseas account. The Indian AE was not in the initial set up phase as it was incorporated in India on 16 January 1998 and had substantial number of local employees who are well qualified and capable of rendering services in their own capacity. 27. Last limb of the arguments on behalf of the assessee is that even if is said that the MD was rendering services on behalf of the Assessee, since the skill involved in rendering the subject services does not get transferred to the recipient of se .....

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the assessee being in nature of the fees for technical services, this stand of the Assessing Officer is equally frivolous. There is not even an effort to show as to how any technical knowledge, skills, knowhow or processes etc are made available by these services inasmuch as these services can be performed by the assessee without any recourse to the service provider. Unless this condition, under make available clause under article 12(4)(b), is satisfied the fees for technical services cannot be .....

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owledge, experience or skill which can be used by the Indian AE of its own in future, it does not satisfy the available criteria and accordingly cannot be taxed as FTS under the provisions of the India UK DTAA. 29. It is, therefore, clear that while admitting the receipt of ₹ 55,80,855/- from JMIPL on account of the charges received for the services rendered by senior management employee seconded by the assessee to India, the assessee pleads that it is only the reimbursement of the salary .....

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ormed and the conduct of the duty of the seconded employee with reference to the business of the assessee and the Indian entity. As a matter of fact, Ld.DRP in his order stated that in order to test the case of the assessee on the touchstone of the principles laid down by the Hon ble Jurisdictional High Court in the case of Centrica (supra), the secondment agreement was required to be examined by the DRP. DRP felt the following questions, namely, - i. Who bears the responsibility or risk for the .....

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here is a right to impose disciplinary sanctions related to the work of that individual? viii. Who determines the work schedule of that individual? are to be answered with reference to the secondment contract, secondment agreement, employment contract and salary reimbursement agreement, which, when read together point out either points of similarity or distinction between these two cases and more particularly, whether the employees have been released from their work and subsequently they entered .....

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unsubstantiated bald statements of the assessee do not enure to their benefit. Precisely for this reason, Ld. DRP concluded that the attachment of the secondees was not fleeting as concluded by the Hon ble High Court in Centrica and that employees seconded continued to retain their lein with their parent organization on terms where they transferred and made available their technical knowledge and the reimbursement of salaries of seconded employees was thus in the nature of FTS in the hands of t .....

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