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2017 (12) TMI 470

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..... 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 documents as are produced by the assessee and referred to in the order of the AO stood uncontroverted. No administrative convenience or inconvenience is proved before us with reference to any evidence whatsoever. The need of assessee remitting the amounts to the account of the employee is not brought out. It is not known whether it is the regular practice with the assessee to remit the salaries of the seconded employees to their overseas accounts and to claim reimbursements. However, record does 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 ad .....

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..... siness and thus could not be held taxable as Other Income in terms of Article 23 of the India UK Double Taxation Avoidance Agreement ('India UK Tax Treaty'). 4. On the facts, in the circumstances of the case and in law, while coming to the aforementioned conclusion, the Ld. AO/ Ld. DRP erred in: 4.1 not appreciating that the guarantee fee is arising from debt raised by the principal debtors and that the Appellant's liability 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 deals with a specific kind of income, the same could not be taxed under any other general provisions of the Act or the Tax Treaty. 5. On the facts, in the circumstances of the case and in law, the Ld. AO as well as Ld. DRP grossly .....

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..... rivate 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 return of income for Assessment Year ('AY) 2011-12, the assessee treated the Guarantee fees received from Indian subsidiaries to be in the nature of Interest Income under Article 12 of India UK tax treaty and offered it to tax @ 15%. So stated that a sum of ₹ 50,79,860/- was reimbursement is on account of disbursement of salary of a seconded employee on behalf of AE. and accordingly not offered to tax. However, during the scrutiny assessment by the Learned Assessing Officer (Ld. AO), 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 Ar .....

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..... horities is to assess correctly the tax liability of an assessee in accordance with law, the assessee should not be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. He also placed reliance on the decisions reported in the 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 accrued in India and, therefore, not taxable in India under Income Tax Act, 1961. Per contra, Ld. DR submitted that the additional ground cannot be admitted because at no point of time the authorities below had an opportunity to examine this issue, inasmuch as the only issue that was only under consideration was whether the receipt was in the nature of interest or other income. Accord .....

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..... ed 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 contentions have been heard and record perused. Facts in brief are that the assessee is a resident of France and does not have a permanent establishment in India. During the year assessee has given a corporate guarantee BNP Paribas, a French Bank in France, on behalf of its various subsidiaries worldwide. During the year under consideration, in India, two subsidiaries of the assessee M/s.Capgemini India Pvt. Ltd. and Capgemini Business Services (India) Ltd. were sanctioned credit facilities by the Indian 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 befor .....

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..... es or is deemed to accrue or arise to him in India during such year. It is, therefore, clear that in cases covered under section 5(2) of the Act, there are 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 occasions the assessee to charge the guarantee commission, but it is the act of the subsidiary in availing the loan that accrues the guarantee commission to the assessee. So long as there is no denial that the loan transaction took place in India, it is not open for the assessee to contend that no income accrued to them in India. We are fortified in our this opinion, by the decision of the Hon ble Apex Court in Kanchanganga Sea Foods Pvt. Ltd. vs. CIT [2010] 325 ITR 540 (SC) where the Hon ble Court held that in cases of the receipts created by .....

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..... Securities Limited [2002] 258 ITR496 (Madras), in support of his argument that the statutory definition under section 2(28A) of the Act regards such amounts which may not otherwise be regarded as interest to be treated as interest for the purpose of the statute and that too even in cases where there is no relationship of debtor and creditor or borrower and lender, if payment is made in any manner in respect of any moneys received as deposits or on money claims or rights or obligations incurred in relation to money, such payment is, by this statutory definition, regarded 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 fulfilled to enable the transaction to get covered under the definition of business, as the Appellant is providing guarantees .....

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..... claim or other similar 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 in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized, therefore, the guarantee/bank commission is also covered in such definition; whereas According to the authorities below, this definition of interest is not wide enough to cover corporate guarantee recharge and bank guarantee recharge because there is no relationship of lendorborrower in this transaction. 17. A bare reading of these provisions indicate that either the debt claims of any 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 .....

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..... the service fee or other charge in respect of moneys borrowed or debt incurred does not stand extended to the payment of guarantee commission received by the assessee in India. The payments relating to debt claims, service fee or other charge, could be categorized as interest provided they is privity of such contract. Lest we are afraid that the thin line that separates the payment of interest from other payments will be missing and the payments 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 categorize the corporate/bank guarantee recharge amount as interest for the purpose of taxation. 18 Alternative request of the assessee is that, if for any reason the Tribunal reaches a conclusion that this Corporate/Bank guarantee recharge cannot be trea .....

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..... eceived 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 contention of the assessee and observed that considering the overall sphere of activities and overall availability of technical and skilled personnel with them in U.K., there remains no doubt that this seconded person was rendering specialist consultancy services for the benefit of India AE, as such these services are fee for technical services u/s 9(1)(vii) of the Act and Article 13 of the DTAA. LD. DRP found that there is similarity of facts between the case of the present assessee and the case in Centrica 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 t .....

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..... as catalysts used in automobile 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, one Mr. Dhananajay Tapasvi was an employee of the assessee for over 20 years, 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 documents before the authorities below. Ld. DR further submitted that the issue as to whether the amount paid towards secondment of employees amounts to 'Fees for Technical Services' under India -UK DTAA, is no more res-integra, inasmuch as it was held to be FTS by the jurisdictional High Court in the case of Centrica India Offshore (P.) Ltd. v. CIT (2014) 364ITR 336 (Del)) and the SLP filed against the said decisio .....

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..... 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, and to provide support for the initial years of operation, till the necessary skill set is acquired by the resident employees, the assessee entered into secondment agreement with overseas group entities. He, therefore, submitted that in this set of facts, it was inferred that the expatriate employees were seconded to Centrica India to essentially oversee the business functions of the overseas entities , thus advancing the business functions of the overseas entities and thereby resulting into profit 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 Assessee which is evi .....

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..... e expatriate employee in his home country that his salary was disbursed to his designated 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 services, since the authorities below failed to demonstrate that how a MD of an Indian AE make available or transfer the technical knowledge to another, such services do not satisfy the available criteria and accordingly cannot be taxed as FTS under the provisions of the India UK DTAA. He submitted that an identical arguments were dealt by the decision of Burt Hill (Supra) in its order Relevant extract of the decision is reproduced hereunder: 9. As for the payments made by the assessee being in nature of the fees for technical services, this stand of the Assessing Officer is equally frivolous. The .....

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..... produced by the employee s work? ii. Who has the authority to instruct the worker regarding the manner in which the work has to be performed? iii. Who has control and responsibility over the place where the work is performed? iv. Who puts the tools and materials necessary for the work at the employee s disposal? v. Who determines the number and qualifications of the employees? vi. Who has a right to terminate the contractual arrangements entered into with that individual? vii. Whether there 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 into a separate local employment agreement with Indian A.E. He observed that the documents filed by the assessee do not shared any light on these questions. He r .....

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