TMI Blog2022 (4) TMI 1444X X X X Extracts X X X X X X X X Extracts X X X X ..... LORE-A ], Hon'ble Pune Tribunal in case of M/s. Faurecia Automative Holding [ 2019 (7) TMI 402 - ITAT PUNE ], Hon'ble Ahmedabad Tribunal in the case of Burt Hill Designs (P) Ltd. [ 2017 (3) TMI 1515 - ITAT AHMEDABAD ] we are of the view that the reimbursement made by the assessee in India to overseas entity, towards the seconded employees cannot be regarded as Fee For technical Services Once there is no violation of provision of section 195, assessee cannot be held to be an assessee in default under section 201(1) of the Act for all the years under consideration. We therefore direct the Ld. AO to delete the interest levied under section 201(1A) of the Act for all the years under consideration. Assessee appeal allowed. - IT(IT)A Nos. 362 to 369 & 338 to 345/Bang/2020 - - - Dated:- 29-4-2022 - SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER Assessee by : Shri Sharath Rao, CA Revenue by : Dr. Manjunath Karkihalli, CIT DR ORDER PER BEENA PILLAI, JUDICIAL MEMBER 1. Present appeals are filed by the assessee against following orders, passed by the Ld. DCIT, International Taxation, Circle - 1(1), Bangalore independen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e levied? The Ld. AO was of the opinion that the payments should be treated as Fees for Technical Services/Fees for Included Services' (hereinafter referred to as FTS/FIS). 3.4 The assessee in response to the notice, submitted that, the expatriate employees were employed pursuant to a 'Contract of Employment' between the assessee and the respective employees and a performa of the said contract was duly submitted. Further, it was submitted before the Ld. AO that, the assessee duly deducted appropriate taxes on the entire salary (including the amounts paid by the overseas entity) of such expatriate employees under section 192(1) of the Act, and paid to the credit of the Central Government. The assessee has submitted that list of expatriate employees who were seconded to India during the assessment years under consideration at page 248-249 containing details like PAN designation, division and brief description of the duties performed by such employees. It was also submitted that such expatriate employees held valid permanent account number in India and were assessed to tax in India. The assessee also filed Form 16 issued by the assessee to the few expatriate employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... triate employees, Form 16 and relieving letters issued by the assessee were submitted. 5. The Ld. CIT(A) called for remand report from the Ld. AO. The Ld. AO objected to the admission of the additional evidences without commenting on the factual merits of the evidences. The assessee also filed technical submission, and filed summary of the distinguish the facts between the assessee and the facts before Hon'ble Delhi High Court in Centrica India Offshore (P) Ltd., reported in (2014) 44 taxmann.com 300. The distinguishing facts between the assessee and that in case of Centrica India Offshore (P) Ltd.(supra) before Hon'ble Delhi High Court are as under: Particulars Centrica India Assessee Local employment agreement No separate local employment Agreement Independent local contract of employment between Appellant and expatriate employees Employer - employee relationship No relationship between Centrica India and employee Relationship and legal obligations between Appellant and employee pursuant to local contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the overseas entity towards secondment of employees. The assessee has placed copy of the 'India Recharge and Cost Allocation Agreement', dated 03/03/2006, at page 141-154 of paper book. The relevant articles governing the agreement for employees on loan are as under: 2. THE DIRECT COSTS AND COMMON COSTS 2.1 Each of the Group Companies will recharge Direct Costs and Common Costs to GSSPL which are attributable to its business and are incurred by the Group Companies on behalf of GSSPL. 2.2 The Parties agree that Direct Costs and Common Costs attributable to GSSPL may include hut not be limited to (i) salaries, bonuses, benefits and relocation expenses incurred on employees seconded to GSSPL by the Group Companies and who work under the direct control and supervision of GSSPL, (ii) technology recharges pertaining to utilization of a common pool of assets, and specifically used by GSSPL for its operations (such as voicemail, email, messaging systems etc.), (iii) training charges incurred by Group Companies towards training GSSPL employees, secondees, etc.. (iv) travelling expenses (v) professional fees incurred by Group Companies for services procured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of. 4.3 This Agreement constitutes the entire agreement between the Parties with respect to its subject matter, and supersedes all earlier conduct and prior agreements and understandings between the Parties in connection with its subject matter. 4.4 No modification or amendment to this Agreement and no waiver of any of the terms or conditions hereto shall be valid or binding unless made in writing and duly executed by all Parties. 4.5 This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 4.6 If any provision of this Agreement is held to be illegal, invalid, or unenforceable under any present or future law, (i) such provision shall be fully severable; (ii) this Agreement shall be construed and enforced as if such illegal invalid, or unenforceable provision had never comprised a part hereof: (iii) the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance here from; and (iv) in lieu of such illegal, invalid, or u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book Vol I. Scanned copy of the Letter of confirmation by assessee to Christopher Roberts, as an Associate is annexed hereunder: Scanned copy of the agreement between assessee with Christopher Roberts is annexed hereunder: 9. It is submitted that, at the request of the seconded employee, the assessee, the overseas entity agrees to remit part of the salary to USA for the local use and family maintenance and the other part of the salary is paid in India. 10. The Ld. AR submitted that, the payment made by the assessee to the AE is towards reimbursement of the portion of salary paid by the AE to family of the seconded employee in USA, at the request of the employee. It is also submitted that 100% of the salary payable by assessee to the seconded employees are subjected to TDS under section 192 of the Act, and return of income is filed by such seconded employees in India, in respect of the total salary earned by the seconded employees in India. 11. He thus submitted that, the entire payment is subjected to tax under the head salary in India, and therefore the payment made to the AE was in the nature of reimbursement of expenses. The L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was responsible and accountable for the work performed by the employees, the assessee was the real employer of the secondees for all practical purposes. 15. The Ld. AR thus submitted that, the right of superintendence, direction and control by an assessee over a person would result in an employer-employee relationship, and the remuneration paid to such person would be considered as 'salaries'. In support he referred to the decision of Hon'ble Madras High Court in case of K.R. Kothandaramam v. CIT reported in (1966) 62 ITR 345. 16. TheLd. AR submitted that, dual employment of a person is well known in law and section 192(2), which provides for TDS from salary, recognizes this. It was submitted that, under dual employment as in the instant case, where the legal employment remains with one employer and the other person exercises supervision over the employee, the latter person should be recognized as the real or economic employer. In support of this argument, the Ld. AR relied on the following extract from the OECD commentary, which is as under: It should be noted that the term employer is not defined in the Convention but it is understood that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was submitted that, consequently in respect of the reimbursements made, the provisions of section 9(1)(vii) would not be attracted. 19. It was submitted that, as per section 9(1)(vii), the term 'fees for technical services' means any 'consideration' for rendering of managerial, consultancy or technical services. The Ld. AR submitted that, the remuneration and other administrative costs relating to seconded personnel was initially paid by overseas entity and these sums were reimbursed by the assessee. It was also submitted that, this arrangement was made out of social security and other reasons such as business exigencies and commercial expediency and did not contain any mark up resulting in any profit or income from it and therefore cannot be treated as 'consideration' as per the definition of the term 'fees for technical services u/s. 9(1)(vii) of the Act. The Ld. AR thus submitted that, overseas entity, did not render any services to the assessee. It only deputed secondees to the assessee as per the 'India Recharge and Cost Allocation Agreement', dated 03/03/2006, and therefore, contended that, the expression provision of services o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not only a matter of computation of total income when the concept of profit element in payment is relevant. If the payment being FTS or royalty is made to non-resident, then the concept of total income becomes irrelevant and the provisions of sec. 44D recognize the gross payment chargeable to tax. Thus all the payment made by the assessee to non-resident on account of FTS or royalty an chargeable to tax irrespective of any profit element in the said payment or not. However, there is an exception to this Rule of charging the gross amount when the non-resident is having fixed place of business or PE in India and the amount is earned through the PE, then the expenditure incurred in the relation to the PE for earning said amount is allowable as per the provisions of sec. 44DA of the Act. Therefore, in view of the judgment of Hon'ble Delhi High Court in the case of Centrica (supra), the payment made to foreign company DFCL partakes the character of FTS as per the definition under explanation 2 to sec. 9(1)(vii) of the Act. The decisions relied upon by the assessee in the case of IDS Software Solutions India (P.) Ltd. (supra) and Abbey Business Services (India) (P.) Ltd.'s case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... residence state. Article 15 of the Model Commentary reads thus: Article 15: INCOME FROM EMPLOYMENT 1. Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived there from may be taxed in that other State. 2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and (c) the remuneration is not borne by a permanent establishment which the employer has in the other State. 3. Notwithstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lines attaches importance to the nature of the services rendered, in order to determine, whether the services rendered by the individual constitute an integral part of the business of the enterprise to which these services are provided. In cases where the nature of the services rendered point to an employment relationship different than the one of the formal employer, the guidelines suggests objective criteria to determine the employer, namely:- who has the authority to instruct the individual regarding the manner in which the work has to be performed; - who controls and has responsibility for the place at which the work is performed; - the remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided; - who puts the tools and materials necessary for the work at the individual's disposal; - who determines the number and qualifications of the individuals performing the work. As a consequence, instead of being regarded as nonresident employee of a non-resident employer rendering services on a temporary basis, individuals may, if certain objective criteria are met, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The salary paid by the de jure employer is reimbursed by the assessee in India, to the overseas entity. 26.6. As per Article 13 of the Agreement between the assessee and Laura May shows that, the assessee in India as well as the seconded employee shall not disclose confidential information of the other party. 26.7. Thus the Agreement between assessee in India with the seconded employee, contains following features:- 1. She is employee of overseas entity and during his assignment to assessee India, his employment responsibilities with overseas entity will remain suspended. 2. That, she will be under the control and supervision of the assessee in India. 3. That, she was appointed as an Associate, by the assessee in India and that during her employment in India she would be exclusively working for the assessee in India. 4. That, during the assignment period, part of the salary after deducting grossed up income tax, under the Act, on the total salary, will be paid in India and the balance salary payable in New York, by overseas entity on behalf of assessee which shall be reimbursed by assessee to overseas entity against a debit note. 5. That, du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and GSSPL 26.9. Admittedly, the assessee deducted tax at source u/s. 192 of the Act, on the 100% salary paid to the seconded employees, and paid the same to the credit of the Central Government. The assessee only reimbursed part of the salary cost of the seconded employee to overseas entity that has already subjected to TDS under section 192 of the Act. And therefore, at the time of making such reimbursement, to overseas entity, no taxes were deducted at source by the assessee in respect of reimbursements made as, according to the assessee, it was in the nature of cost-to-cost reimbursement, and, no element of income was involved. 26.10. The assessee in India does the TDS on 100% salaries u/s. 192 and pay the same to the credit of the Central Government. Form 16 at page 228-230 issued to Christopher Roberts of PB Vol. I, by the assessee in Indian, Certificate under section 203 of TDS having deducted at source and further indicates the following- Employee has a PAN number in India Total taxable salary is Rs. 9,761,581 (this corresponds to the US$ 130,000 as total compensation indicated in the local employment contract at para 4 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries . 26.13. The definition of FTS under the Act excludes consideration which would be income of the recipient chargeable under the head salaries. If the seconded employee is regarded as employee of the assessee in India, then the reimbursement to overseas entity, by the assessee in India would not be in the nature of FTS, but would be in the nature of 'salary', and therefore, the reimbursements cannot be chargeable to tax in the hands of overseas entity, and therefore there would be no obligation to deduct tax at source at the time of making payment u/s. 195 of the Act. 26.14. Article 12(4)-(5) of India USA, DTAA deals with Fees for technical services , as under: 4. For purposes of this Article, fees for included services means payments of any kind to any person in consideration for the rendering of any technical or c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian entity to the overseas entity is towards reimbursement of salary paid by the overseas entity to the seconded personnel. As discussed in para 14.2 to 14.7 above, for the purpose of Article 15 of the OECD Model Commentary (corresponding to Article 16 of the DTAA between India and US), the seconded personnel are employees of the Indian entity, being the economic employer. It is to be noted that the understanding as to who is the 'employee' in order to be excluded from, fees for technical services , cannot be inconsistent with the understanding of employee for the purpose of Article 15 on income from employment, especially when Article 15 is an anti-abuse provision. 29. The Ld. DCIT placed reliance on the decision of the Hon'ble Delhi High Court in the case of Centrica India Offshore Pvt. Ltd. reported (2014) 44 taxmann.com 300 concluded that the reimbursement was FTS and that services provided make available technical skill or knowledge for use by the assessee. 29.1. In case of the decision of Hon'ble Delhi High Court in the case of Centrica India Offshore Pvt. Ltd. vs. CIT (supra) dealt with identical case of reimbursement of salaries paid to expatriate emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any mark-up. There can be no question of the assessee receiving money in its own independent right. Rather, it is a case of discharge by the Indian entity of its own liability towards salary payable to Mr. Franck. It is thus manifest that this decision has no application to the facts of the instant case. 29.3. We also note that, reliance is placed on the decision of Hon'ble Madras High Court in case of Verizon Data Services India (P) Ltd. v. AAR and Ors. (supra), wherein it is held that, the reimbursement of salary of expatriates to foreign co by Indian company results in taxable income in the hands of the foreign company. Hon'ble High Court also upheld the observations of AAR, wherein it characterized the secondment of personnel as provision of managerial services. However, the Hon'ble Court set aside the ruling of Hon'ble AAR, wherein it held that, the reimbursement of salary of expatriates constitutes fees for included services in terms of Article 12(4) of India USA DTAA. Therefore, reliance placed on this decision is of no assistance to revenue. 29.4. There is another decision of Hon'ble Supreme Court in case of DIT v. Morgan Stanley reported in (2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above situation, MSCo is rendering services through its employees to MSAS. Therefore, the Department is right in its contention that under the above situation there exists a service PE in India (MSAS). 29.6. Per contra, in the present facts of the case there is no finding, of their existing PE, in any form by the revenue and therefore is of no assistance to the revenue. 29.7. As far as the decision of Hon'ble AAR in the case of AT S (supra) is concerned, the facts of the said case were that AT S, a company incorporated in Austria, offered services of technical experts to applicant, a resident company, pursuant to a foreign collaboration agreement on the terms and conditions contained in secondment agreement. Under the secondment agreement the applicant is required to compensate AT S for all costs directly or indirectly arising from the secondment of the personnel, and the compensation is not limited to salary, bonus, benefits, personal travel, etc. but also includes other items. On the above facts, Hon'ble AAR ruled that the Contention that the payments are only in the nature of reimbursement of actual expenditure is not supported by any evidence and there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that, merely supplying technical, managerial or personnel with managerial skills cannot be regarded as rendering technical services by the person supply such personnel. The following were the relevant observations of Hon'ble AAR:- It is debatable whether the bracketted words - including provision of services of technical or other personnel is independent of preceding terminology - managerial, technical or consultancy services or whether the bracketted words are to be regarded as integral part of managerial, technical or consultancy services undertaken by the payee of fee. In other words, is the bracketted clause a stand alone provision or is it inextricably connected with the said services? HMFICL itself does not render any service of the nature of managerial, technical or consultancy to the applicant and it has not deputed its employee to carry out such services on its behalf. There is no agreement for rendering such services. In this factual situation, it is possible to contend that merely providing the service of a technical person for a specified period in mutual business interest not as a part of technical or consultancy service package but independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the decisions relied by revenue are distinguishable with the present facts of the case. Further, in the present facts we note that, the concept of make-available is not satisfied in the instant case. As per para 4(b) of Article 12 of the India-US DTAA on 'Royalties and fees for included services': 4. For purposes of this Article, fees for included services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services a. .... 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. Thus, even if, the rendering of service by the seconded personnel constitutes a contract for service, in the absence of making available any technical knowledge or skill to the Indian entity, the same shall not constitute fees for technical services. In support we refer to the decision of Hon'ble Karnataka High Court in the case of CIT vs. De Beers India Minerals Pvt. Ltd. reported in (2012) 21 taxmann.com 214, on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er passed by Hon'ble CESTAT, Bangalore. The Hon'ble CESTAT, Bangalore, further held that, there is no manpower supply services since assessee in India is the real employer by reason of the employment contract. Service tax demand was deleted. The relevant extracts are below- 6. Submitting on the demand of Service Tax under the category Manpower Recruitment Supply Agency Service , the learned counsel states that the employer-employee relationship exists between the Appellant and Seconded Personnel who have been sent on secondment to the Appellant; the Appellant has entered into separate employment contract with the Seconded Personnel. The seconded Personnel, during the period of secondment, work under the control and supervision of the Appellant; In terms of the employment contract, the appellant is under obligation to pay salary (including other entitlements) to the Seconded Personnel during the period of secondment in foreign exchange in his home country; for administrative convenience, the Appellant remits the salary payable to the Seconded Personnel in his home country in Foreign Exchange through the Seconder Company; the Seconded Personnel, as required under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the above, Appeal No. ST/25566/2013 Appeal No. ST/21705/2016 are allowed. Thus, the above decision of Hon'ble CESTST Tribunal further strengthens assessee's case. We therefore, hold that, the amount reimbursed by the assessee to the overseas entity cannot be subjected to tax in India as there does not involve any element of income embedded in it. 37. Respectfully following the above views expressed by Hon'ble Karnataka High Court in DIT vs. Abbey Business Services India (P.) Ltd.(supra), Hon'ble AAR in Cholamandalam MS General Insurance Co. Ltd. (supra), Hon'ble Bombay High Court in case of Marks Spencer Reliance India Pvt. Ltd. vs. DIT (supra), Hon'ble Delhi High Court in the case of DIT Vs. HCL Infosystems Ltd. (supra), Coordinate bench of this Tribunal in case of IDS Software Solutions vs. ITO (supra), Hon'ble Pune Tribunal in case of M/s. Faurecia Automative Holding (supra), Hon'ble Ahmedabad Tribunal in the case of Burt Hill Designs (P) Ltd. vs. DDIT(IT) (supra), we are of the view that the reimbursement made by the assessee in India to overseas entity, towards the seconded employees cannot be regarded as Fee For technical Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X
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