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TMI Blog2020 (3) TMI 959X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds of appeal represent the grievances of the Appellant against order dated 18 October 2017 passed by the Learned Deputy Commissioner of Income Tax, Circle - 3(1 )(1), New Delhi ("Ld. AO") under Section 143(3) r.w.s. 144C (5) of the Income-tax Act, 1961 (''the Act") in pursuance of the directions issued by Learned Dispute resolution Panel - 1, Delhi ("DRP") dated 28 August 2017. 1. That the assessment order passed under section 143(3) r.w.s. 144C(5) of the Act by the Ld. AO and the additions made by the Ld. AO, are bad in law .unlawful and unjust. 2. That, in view of the facts and circumstances of the case and in law, the Ld. AO has erred in determining the total income of the Appellant at 3,07,34,310/- as against the returned income of Rs. 72,84,230/- which was offered to tax on gross basis as per Article 12 of Double Taxation Avoidance Agreement ("DTAA") by making an addition of Rs. 2,32,98,701/- (assessed income Rs. 3,07,34,310/- Less Rs. 1,51,473/- offered to tax by the Appellant on account of inadvertent mistake in return of income filed) on account of secondment arrangement between the Appellant and its Indian Associated Enterprise ("AE"). That, in view of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rounds of appeal and the facts and circumstances of the case. 2. Grounds raised in ITA No. 2580/Del/2018 are reproduced as under: "These grounds of appeal represent the grievances of the Appellant against order dated 9 February 2018 passed by the Learned Deputy Commissioner of Income Tax, Circle - 3(1 )(1), New Delhi ("Ld. AO') under section 154 of the Income-tax Act, 1961 ("the Act") ("impugned order") in pursuance of the rectification application dated 11 January 2018 filed by the Appellant against the final assessment order dated 18 October 2017 passed under section 143(3) read with section 144C(13) of the Act. 1. That, the order passed under section 154 read with section 143(3) of the Act by the Ld. AO is illegal, bad in law, without jurisdiction and contrary to the facts of case. 2. That, in view of the facts and circumstances of the case and in law, the Ld. AO has erred in ignoring the settled position of law that proceedings before the Dispute Resolution Panel ("DRP") are part of the assessment proceedings only and therefore, failed to appreciate that detail of relocation expenses filed before the Ld. DRP was part of the assessment records. 3. That, in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Software Development Bashyam Ramesh MS Computer Science and BE Electrical and Electronic Engineering Software Development and guiding Teradata India Raj Cherabuddi MS Computer Science Software Development and handling Teradata India teams working on wide variety of software development projects 3.2 In the draft assessment order dated 22/12/2016 issued by the learned Assessing Officer under section 144C(1) read with section 143(3) of the Act, he proposed that the arrangement of seconded employees constitute existence of Permanent Establishment (PE) in India and a sum of Rs. 2,32,98,701 (25% of Rs. 9,31,94,804) was attributed to the said PE. The amount of Rs. 9,31,94,804/-was computed as under: Particulars Amount (in Rs.) Towards payments made for insurance, retirement costs and social security contributions 5,21,34,696 Towards VISA charges and other travel costs paid by company for seconded persons 4,10,60,108 Total 9,31,94,804 3.3 Before the Assessing Officer, the assessee contended that: i. The employees are seconded to Teradata India under a secondment agreement under which those employees worked as employees of Indian company. ii. The seconded e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinue to be under assessee's employment and/or have lien on overseas employment with assessee company. Thes e are released only for a short period of time to provide services to Teradata India. This is evident from the relevant clause (objective clauses on first page) of Secondment Agreement which provides that "And Whereas the International Assiqnee shall be released IbrTP their work under the supervision of Teradata Operations and'shall be integrated as employees of Teradata India for a period of Secondment with Teradata India". iii. Where the expatriate employees continue to be the employees of the assessee company and there is no employer-employee relationship between , it is difficult to accept that these employees work under the control and supervision of the Indian Company. The said claim of the assessee remains completely unsubstantiated also on account of the fact that expatriate continues to enjoy lien with the foreign company and also his account on social benefit continues in the foreign country. If it is not so, no foreign expatriate would like to be seconded.Apparently, therefore, there is control exercised by the foreign company on the seconded employee e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivities of the home entity. It is settled law that the foreign entity need not be owner of the premises from which the business activity are carried out. The place of business need only be at the disposal of the enterprise and it is not necessary that it should be for the exclusive vie of the enterprise. The premises of Teradata India, where the seconded employees were stationed, remained at the disposal of the assessee throughout the duration of the stay of the transferred employees. Therefore, a Fixed Place PE of the assessee is constituted in India in the form of the premises from which these transferred employees operated." 3.9 The Assessing Officer also concluded that the seconded employees rendered services on behalf of the assessee in India, they also constituted the service PE in India in view of the decision of the Hon'ble Supreme Court in the case of Morgan Stanley & Co (supra). 3.10 The Assessing Officer held that the reimbursement in the hands of the assessee is a business income as those payments have been on account of services rendered by the assessee through its employees in India and, therefore, the profit generated on the amount of activities carried out by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded services, placing reliance on the decision of the Hon'ble Delhi High Court in the case of Centrica India offshore private limited (supra). 3.13 The assessee raised objection before the Learned DRP. The Learned DRP agreed with the finding of the Assessing Officer on the issue of Fixed Place PE and service PE, however, on the issue of the attribution of the profit to the PE, issued direction as under: "xv. Since it has been held that the A' has PE in India, profits needs to be attributed to such PE. The AO has mentioned that global profit figures of the A' were not available and therefore an attribution of 25% was made by applying Rule 10 of IT Rules. It is observed that even during the proceedings before us, the A' has not submitted the global profit figures or the audited account which could be used for the purpose of reasonable attribution as desired by the A' itself. In view of the same, the AO is directed to once again verify whether the global profitability of the A' is readily available and use the same for attribution of profit. If not, the attribution as per rule 10 is upheld. xvi Further, the A' has mentioned that the relocation expenses of Rs. 4,10,60,108/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, it filed rectification application before the Assessing Officer, which was rejected by the Learned Assessing Officer. Aggrieved with the rejection of the rectification, the assessee is before us by way of appeal in ITA No. 2580/Del./2018. ITA No. 7805/Del/2017 Assessment Year: 2014-15 5. First, we take up the appeal bearing ITA No. 7805/Del/2017 for assessment year 2014-15. 6. We have heard rival submission of the parties on the issue in dispute. The learned Counsel of the assessee reiterated the submission made before the lower authorities and submitted that absence only of employment agreement between the Teradata India and expatriate is not determinative of employer- employee relationship and other factors like control and direction to employees are important. He submitted that relevant clauses of the seconded agreement established beyond doubt the fact that seconded persons were working under the employment of Teredata India and had no responsibility towards the assessee. Though the Ld. Counsel objected to the existence of PE of the assessee in India, but could controvert that issue in dispute in the instant case is covered by the decision in the case of Centr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally, these seconded employees retained their entitlement to participate in the overseas entities‟ retirement and social security plans and other benefits in terms of its applicable policies, and the salary was properly payable by the overseas entitle, which claimed the money from CIOP. There was no purported employment relationship between CIOP and the secondees. None of the documents, including the attachment to the secondment agreements placed on record (between the secondees and CIOP) reveal that the latter can terminate the secondment arrangement; there is no entitlement or obligation, clearly spelt out, whereby CIOP has to bear the salary cost of these employees. The WP(C) No.6807/2012 Page 40 secondees cannot in fact sue the CIOP for default in payment of their salary- no obligation is spelt out vis-à-vis the Petitioner. All direct costs of such seconded employee's basic salary and other compensation, cost of participation in overseas entities' retirement and social security plans and other benefits in accordance with its applicable policies and other costs were ultimately paid by the overseas entity. Whilst CIOP was given the right to terminate the seco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kages. Whilst CIOP may have operational control over these persons in terms of the daily work, and may be responsible (in terms of the agreement) for their failures, these limited and sparse factors cannot displace the larger and established context of employment abroad. 36. In this context, the decision of the Supreme Court in Morgan Stanley (supra) offers support for the Authority‟s viewpoint, rather than the contrary stance. In that case, the Court considered various forms of PEs, agency, service etc, each of which contemplate a different characteristic and link between the deputed WP(C) No.6807/2012 Page 42 employee/organization and the parent. In the context with which we are presently concerned, the following observations are critical: "15. As regards the question of deputation, we are of the view that an employee of MSCO when 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. ... It is important to note that where the activities of the multinational enterprise entails it being respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g tax under Section 195 of the IT Act, in view of the facts that (1) the payments are only in the nature of reimbursement of actual expenditure incurred by AT&S Austria. (2) AT&S Austria is not engaged in the business of providing technical services in the ordinary course of its business, (3) AT&S Austria is not charging the applicant any separate fee for the secondment and (4) the seconded personnel work under the direct control and supervision of the applicant?" In holding that the obligation under Section 195 would be triggered, the AAR held as follows: "From the above analysis of both the agreements it is clear that pursuant to the obligation under the FCA, the AT&S Austria has offered the services of technical experts to the applicant on the latter's request and the terms and conditions for providing services of technical experts are contained in the secondment agreement which we have referred to above in great details. Though the term "reimbursement" is used in the agreements, the nature of payments under the secondment agreement has to satisfy the characteristic of reimbursement and that the term "reimbursement" in the agreement will not be determinative of nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to time and that such salary may be paid either in India or outside India but the total salary shall not exceed the salary fixed as above, but no fixed salary is mentioned in the employment agreement. Other perquisites and entitlements are : travel expenses, transport, boarding, lodging; and annual leave of 30 days per year; and home leave which the employee will be entitled to once. The applicant shall have to organize an economic class return flight tickets to go on home leave. The employment agreement also provides that the employee will be responsible for meeting all requirements under Indian tax laws including tax compliance and filing of returns and the applicant is authorized to deduct taxes from the compensation and benefits payable." 38. The mere fact that CIOP, and the secondment agreement, phrases the payment made from CIOP to the overseas entity as "reimbursement‟ cannot be determinative. Neither is the fact that the overseas does not charge a mark-up over and above the costs of maintaining the secondee relevant in itself, since the absence to mark- up (subject to an independent transfer pricing exercise) cannot negate the nature of the transaction. It would le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de technical knowledge. The employees though worked at the premises of the Terdata India but for all practical purposes the remained employees of the assessee company. The employees continued to make their social security contributions in USA and their salaries were also distributed to their bank accounts in USA. In the case of Centrica (supra) there was agreement between the Indian entity and expatriate, but in this case, even there was no such agreement also. In view of the above facts, respectfully following the finding of the Hon'ble High Court, we uphold the finding of the lower authorities on the issue of existence of PE of the assessee in India in terms of the DTAA. The ground No. 2.1 to 2.4 of the appeal accordingly dismissed. 7. Regarding profit attribution, the Learned Counsel has made several arguments/ submissions in support of the Ground Nos. raised from 2.5 to 2.8 of the appeal. 7.1 The first submission which has been made is that relocation expenses of Rs. 4,10,60,108/- does not only relate to the secondment arrangement and were also paid for the other employees of the TIPL. The Assessing Officer is of the view that the entire amount was incurred towards VISA cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be considered for attributing to the alleged PE. 9.1 This contention of the assessee is not acceptable because in the instant case, revenue earned by the PE for providing services to the Indian entity is under consideration for profit attribution and the cost or expenditure incurred by the Indian entity is not an issue in dispute. 9.2 Further, the assessee proposed that salary costs paid to seconded person is to be allowed as per Article 7 of the DTAA while making attribution to the alleged PE in India. The submission of the assessee are reproduced as under: "3.1.1 Article 7 of the DTAA governs the taxability of business income of an US resident in India, which provides for deduction of any expenses which are incurred for the business of PE. 3.1.2 In the instant case this cost is the amount expended towards the salary and other benefit paid to the seconded persons. It is also submitted that as the reimbursements were on a case to cost basis, no profit element would be left and therefore there would be no taxable income in India. 3.1.3 In the instant case, attribution of profits to the alleged PE in India under the provisions of the DTAA would stand as under: Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t arm's length price to 'Teradata India', will not make any impact, as in the instant case the income taxable in the hands of the PE is under consideration and nothing has been brought on record that Arm's Length Price of the service transaction between PE of assessee and Indian Entity has been determined. What is relevant here is that income has to be taxed in the hands of the correct person and in the instant case income from rendering services by the PE has to be taxed in the hands of the PE and remunerating the Teradata India by other AEs at arm's-length price is not relevant. Accordingly, we reject this alternative argument of the assessee. 10. The ground No. 3 of the appeal is premature at this stage and the dismissed as infructuous. 11. The ground No. 4 is consequential and, therefore, accordingly dismissed as infructuous. 12. In ground no. 5, the assessee has sought credit of tax deducted at source for amount of Rs. 22,721/-. This is issue of verification by the Assessing Officer from the records of the assessee as well as from the record of the Department and therefore, accordingly, we restore this issue to the file of the learned Assessing Officer with the direction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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