TMI Blog2019 (2) TMI 795X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011-12 excluded similar expenses - Held that:- Admittedly this Tribunal in orders for preceding Assessment Years directed Ld.TPO to exclude sales related expenditure/subsidies received by assessee. Insofar as business promotion expenses are concerned, Ld.TPO shall consider the same after perusal of relevant agreements entered into by assessee with its AE and to decide this issue as per law. TDS u/s 195 - payments in respect of reimbursement of salaries of seconded employees without deducting TDS - Held that:- In our considered opinion, inference that could be drawn from documents filed by assessee does not distinguish present case from Centrica offshore India (P.) Ltd. case (2014 (5) TMI 154 - DELHI HIGH COURT) and documents produced by assessee are no substitute for Secondment Agreement and fails assessee in discharge of its burden of proof. It would be relevant to go through secondment agreement before coming to a conclusion. Neither before DRP nor before us assessee filed Secondment Agreement. Assessee is therefore directed to file Secondment Agreement before Ld.AO and Ld.AO is then directed to verify the same. In the event assessee is not able to demonstrate through the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arketing and Promotion ( AMP ) expenditure. 3. That on the facts and circumstances of the case and in law, the orders passed by the AO/TPO were bad in law as the prerequisite for applying Chapter-X, i.e., existence of an international transaction between two Associated Enterprises ( AE ) under section 92B of the Act, was not satisfied or existed as there was no agreement, understanding or arrangement between the Appellant and the AE for incurrence of such expenditure by the Appellant. Further, the DRP erred in upholding the action of the lower authorities. 3.1. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in holding that the unilateral arrangement between the Appellant and Indian third parties for advertisement and promotion would be a transaction much less an international transaction within the meaning of Chapter X of the Act. 4. Notwithstanding and without prejudice, the orders passed by the AO / TPO were bad in law as the unilateral AMP expenditure incurred by the Appellant was categorized as 'international transaction under chapter X of the Act, contrary to law in as much the AO neither granted the Appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. 10. That on facts and circumstances of the case and in law, the AO / TPO erred in law and on facts, in applying Profit Split Method ( PSM ) to benchmark the alleged international transaction of incurring excessive AMP expenditure without establishing as to how PSM was the most appropriate method in terms of section 92C read with Rule 10B of the Rules and had applicability to the facts of the instant case. Further, DRP erred in summarily rejecting such action of AO / TPO without giving any cogent reasons. 10.1. That on the facts and circumstances of the case, AO / DRP / TPO erred in recharacterizing the functional analysis of the Appellant and further erred in alleging that in the instant case the overseas entities is an entrepreneur and AE has assigned vital function that otherwise should have been carried out by itself. 10.2. That on the facts and circumstances of the case and in law, the AO / DRP / TPO erred in holding that the Appellant is contributing to the intangible of the AE and thus, contributing to the global profit and therefore, the PSM is the most appropriate method for benchmarking the alleged international transaction pertaining to exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, DRP erred in not adjudicating the objection of the Appellant in this regard. 14. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not providing the Appellant the benefit of 5 percent range as provided by the proviso of section 92C(2) of the Act. Further, DRP erred in not adjudicating the objection of the Appellant in this regard. B . Corporate Tax Grounds 1. The Hon ble DRP has grossly erred in law and on facts in directing the Ld. AO to enhance the income by disallowing ₹ 3,90,27,709/- being the reimbursement to Canon Inc., Japan of salaries of the seconded employees under section 40(a)(i) of the Act for non-deduction of tax at source under section 195 of the Act. 1.1. The Ld. AO / Hon ble DRP have erred in holding reimbursement of salary cost of seconded employees as fees for technical services ( FTS ) under section 9(l)(vii) of the Act read with Article 12(4) of the India - Japan Double Taxation Avoidance Agreement ( DTAA ) and liable to TDS under section 195 of the Act. 1.2. The Ld. AO / Hon ble DRP have failed to appreciate that the above amount represent reimbursements of actual costs and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to Canon Inc., Japan towards reimbursement of expenses. 1.9. On the facts and in circumstances of the case and in law, the Ld. AO / Hon ble DRP have erred in not appreciating that the taxes on salaries reimbursed had been duly deducted and deposited under section 192 of the Act and thus any reimbursement of such payments, cannot be taxed again under section 195 of the Act. 2. On the facts and in the circumstances of the case and in law, after having computed a taxable income in case of Appellant, the Ld. AO has erred in not allowing the credit of Tax Deducted at Source amounting to ₹ 5,36,848/-. 3. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in charging interest under section 234A and 234B of the Act. 4. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1 )(c) of the Act. The above grounds are independent and without prejudice to each other. The Appellant craves leave to add, withdraw, amend or vary the above grounds of appeal before or at the time of hearing. 3. Brief facts of the case are as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY 2010- 11. Therefore, the observations made in that respect are applicable in the present appeal as well. This issue is not verified properly by the TPO and therefore, it requires verification as there is no mention of the specific agreements to the effect of the AMP whether is a international transaction or not. Therefore, we direct the TPO/AO to verify this issue in light of the agreements signed by the assessee with its AEs as well as the main company. Needless to say the assessee be given the opportunity of hearing by following principles of natural justice. Ground no.2, 2.2 and 4 of the assessee s appeal are partly allowed for statistical purpose. 6. Ld.CIT,DR though supported order passed by authorities below could not controvert aforestated observations by this Tribunal in assessee s own case for the preceding Assessment Years. 7. We have perused submissions advanced by both sides in light of records placed before us and orders relied upon by Ld.Counsel, for preceding Assessment Years, which are placed in paper book from pages 191-254. 7.1. It is further observed that, from Assessment Year 2006-07, 2007-08, 2008-09 and 2009-10 this Tribunal consistently r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included selling/business promotion expenses in scope of AMP expenditure when DRP for Assessment Year 2011-12 excluded similar expenses. 13.1 . Ld.Counsel submitted that issue stands squarely covered by order of this Tribunal in assessee s own case for Assessment Year 2006-07 to 2008-09 and 2010-11 as under: 53. As regards to ground no.8 and 8.1 relating to exclusion of certain selling and distribution expenditure and subsidy, the same are identical with ground no.8 of the appeal filed by the assessee for A.Y. 2010-11. Therefore, the observations made in that respect are applicable in the present appeal as well. Thus, following the order of the Tribunal for A.Y. 2006-07 to 2008-09 read with the subsequent directions of the Hon ble Delhi High Court in assessee s own case, it will be appropriate to direct the TPO to exclude Trade discount, commission, selling and administrative expenses and special purpose subsidy from the ambit of the AMP expenditure, as given in the tabulated form by the Ld.AR alongwith the synopsis at the time of hearing after verifying the same in accordance with the records available with the TPO/AO. Thus, this issue is remanded back to the file of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that DRP vide its order dated 30/12/16, for first time held reimbursement of part of salary paid by Cannon Inc., in Japan to seconded employees on behalf of assessee, is in nature of fee for technical services (FTS), and sum is chargeable to tax, both under section 9 (1) (vii) of the Act, as well as Article 12 (4) of India Japan DTAA. Ld.AR submitted that DRP while opining so, relied upon observations of Hon ble Delhi High Court in case of Centrica India offshore Pvt.Ltd., reported in (2014) 364 ITR 336 . He submitted that DRP further held assessee to be in default for non-deduction of TDS under section 195 of the Act on such reimbursements, and consequently made disallowance under section 40 (a) (i) of the Act. 19 . Ld.AR thereafter, took us through paper book and submitted that employees from Cannon Inc., (being Overseas entity) were seconded at request of assessee for a specified tenure of 3 years or more during which they worked wholly and exclusively for assessee only. He submitted that during assessment year under consideration following expatriates were seconded to assessee: S. No. Name of seconded employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. Referring to certain specific clause in above referred agreements, Ld.AR submitted that, assessee took into account both portions of salary paid in Indian Rupees as well as Japanese Yen for purposes of deducting tax at source, on payments of salary to such seconded employees under section 192 of the Act, and has issued Form 16 to them, which has been enclosed at page 11-40 of paper book. 22 . Ld.AR further submitted that relationship between assessee and seconded employees was of employer employee as per terms of agreement it clearly provides that these employees will work wholly and exclusively for assessee only. Further he submitted that, as per agreement seconded employees were under an obligation to perform from time to time such duties as has been directed by assessee. Referring to cost reimbursement agreement entered into between Canon Inc., and assessee, Ld.AR submitted that it clearly states that assessee is hiring these employees during the tenure of 3 years who will be under payrolls of assessee. 23 . Referring to Clause 4 of Cost Reimbursement Agreement, Ld.AR submitted that it is only for sake of administrative convenience that during period of employment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... office support functions like debt collections, consumer billing, monthly jobs to third-party vendor is in India for which the Indian subsidiary had entered into a service agreement (seconded agreement) with overseas entities, thereby acting as an interface between overseas entities and Indian vendors. * That according to terms of agreement Centrica India charged cost plus markup of 15% from overseas entities. * That it was at request of Centrica India that overseas entity provided staff with appropriate expertise and knowledge about process and practices implemented at Centrica UK with an intent to seek support during initial years of setup. And Centrica India subsequently entered into individual agreement with seconded employees. 28. He submitted that, it was on above aforestated factual background that Hon ble Delhi High Court , held that there was no purported employment relationship between Centrica India and seconded employees, and Centrica UK was providing services to Indian company through seconded employees to ensure quality control and management of their vendors of outsourced activities. He submitted that Hon ble High Court, thus held that, reimbursement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king addition in hands of assessee is not justified under peculiar facts in assessee s case. 32. On the contrary, Ld.CIT,DR placed reliance upon distinguishing factors brought on by DRP which is as under: S.No. Centrica Reference Taxpayer Secondment Agreement Ref 1. Seconded employees duties and functions were dictated by the instructions and directions of the CIOP. Two sample cost reimbursement agreements have been furnished i.r.o Mr. Takehiko Imoto and Mr. Katsuyuki Matsuda. While it is stated that the said persons would work under the directions of the tax payer, the subsisting relationship with Canon Inc. whose regular employees they are is defined by S.No.1 and 2 of the cost reimbursement agreement (refer Annexure-3) which states, 1. Mr.Takehiko Imoto is an employee of Canon Inc. 1. Canon Inc transfers Mr Takehiko Imoto to Canon India Private Limited as the Manager Market Engineering Division for a period of3 years, for the purpose of its business operations in India. Simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he attachment of the secondees to the overseas organization is not fraudulent or even fleeting, but rather permanent, especially in comparison to CIOP, which is admittedly only their temporary home. (Page 42 para 35) Canon Inc transfers the employee for a period of 3 years for the purpose of its business operations in India, the subsisting relationship with Canon Inc. whose regular employees they are is clearly specified and the temporary nature of the assignment is highlighted as also the fact that it is for the purpose of the business operations of Canon Inc in India. 5. While CIOP may have operational control over these persons in terms of the daily work, and may be Apropos remuneration it is stated that Canon India P Ltd. Shall reimburse and repay to Canon Inc the actual cost responsible (in terms of the agreement) for their failures, these limited and sparse factors cannot displace the larges and established context of employment abroad. (Page 42 para 36). of remuneration paid to the seconded employee-thus the terms of agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions advanced by both sides in light of records placed before us. In facts of present case, Ld.AO in impugned order disallowed reimbursement u/s 40(a)(ia) by holding the payments to be in the nature of FTS on which no TDS u/s 195 was deducted. 34. We have perused at length and in detail all submissions advanced by both sides in light of decision of Hon ble Delhi High Court in case of Centrica India Offshore Pvt.Ltd vs. DCIT (supra). We are in agreement with submission of Ld.AR that, applicability or otherwise of ratio of Hon'ble Delhi High Court in case of Centrica India offshore Pvt. Ltd., ( supra ), is a fact specific question to be determined with reference to functions performed and conduct of seconded employee with reference to business of assessee, vis-a-vis activities performed by Canon Inc. Thus to analyse, moot question that arises before us is to decide, whether amount paid by assessee to its overseas entity, equivalent to salary and other benefits paid to seconded employees by overseas entity, reimbursement of such salaries and whether withholding of tax thereon was contemplated by Section 195 of the Act. 34.1. At the outset, we observe that ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ult to find nature of services rendered by seconded employees to assessee for which overseas entity is reimbursed, as sought to be emphasized by LdAR. It is also observed that obligation to pay part of salary rested with overseas entity and right of seconded employee to claim such part is only against overseas entity. Further from agreement it is not clear if seconded employees conferred any right to claim salary from assessee or whether assessee is burdened with obligation to pay that part of salary to these employees directly. 34.5 . It is difficult to accept argument advanced by Ld.AR that what is paid by assessee to its overseas entity in view of its sending its employees to assessee for rendering service, is reimbursement of salary paid by overseas to seconded employees. Merely because overseas entity is not charging assessee anything more than what it has paid by way of salary to seconded employees, does not alter the situation. The fact that in accounts of assessee, this is entered as reimbursement of cost, or, it is not shown as income in account of overseas entity, cannot be conclusive of question. What Model commentary on Article 15 concerning Taxation of Income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 34.8. In our considered opinion, it is for this reason, DRP concluded that attachment of the secondees was not fleeting as concluded by the Hon'ble High Court in Centrica and that on facts it is established that employees seconded, continued to retain their lien with their parent organization who continued to pay them for the period of their secondmeant 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. 35. It is observed that documents filed by assessee do not throw any light on these questions. In our considered opinion, inference that could be drawn from documents filed by assessee does not distinguish present case from Centrica offshore India (P.) Ltd. case ( supra ) and documents produced by assessee are no substitute for Secondment Agreement and fails assessee in discharge of its burden of proof. It would be relevant to go through secondment agreement befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P expenses. AO/TPO shall call for all agreements entered into by assessee with its AE for purchase and resale of Cannon products in India. Needless to say that assessee will be allowed reasonable opportunity of hearing during proceedings and Ld.AO/TPO shall call for all necessary evidences/documents which shall be produced by assessee to substantiate its claim. Ld.AO/TPO shall determine the issue by applying law in force. 46. Accordingly, these grounds raised by assessee are allowed for statistical purposes. 47. Ground No.7 to 8.2 have been raised against bench marking the alleged international transactions of AMP, by using PSM instead of allowing set-off or following aggregated approach. 47.1 . Both parties submits that these issues are covered by ground no.9 to 12 for A.Y. 2012-13 which needs to be set aside for re-consideration. 47.2. Both parties refers to and relies upon submissions advanced while arguing ground no.9 to 12 in appeal for A.Y. 2012-13. 48. We have perused submissions advanced by both sides in light of records placed before us and orders relied upon by Ld.Counsel, for preceding Assessment Years, which are placed in paper book from pages 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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