TMI Blog2022 (4) TMI 1443X X X X Extracts X X X X X X X X Extracts X X X X ..... H COURT ], Hon'ble AAR in Cholamandalam MS General Insurance Co. Ltd. [ 2009 (1) TMI 19 - AUTHORITY FOR ADVANCE RULINGS ], Hon'ble Bombay High Court in case of Marks Spencer Reliance India Pvt. Ltd. [ 2017 (5) TMI 1638 - BOMBAY HIGH COURT ] Hon'ble Delhi High Court in the case of DIT Vs. HCL Infosystems Ltd. [ 2004 (1) TMI 16 - DELHI HIGH COURT ] Coordinate bench of this Tribunal in case of IDS Software Solutions [ 2009 (1) TMI 363 - ITAT BANGALORE-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 Toyota Corporation, Japan, towards the seconded employees cannot be regarded as Fee For technical Services and therefore not taxable u/s. 195 of the Act. We therefore direct the Ld. AO to delete the disallowance made u/s. 40(a)(i) of the Act. Nature of expenditure - treatment of payment towards plant layout charges - revenue or capital expenditure - HELD THAT:- We note that the alleged expenditure has been claimed as plant la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. In response to statutory notices, representative of the assessee appeared before the Ld. AO and file requisite details as called for. 4. The Ld. AO observed that, the international transaction entered by the assessee with its associated enterprises exceeded Rs. 15 crores. Accordingly, the case was referred to the transfer pricing officer. On receipt of the reference under 92 CA of the Act, the Ld. TPO called upon the assessee to furnish economic details of the international transaction. 5. The Ld. TPO from the details filed by assessee, observed as under: Toyota Boshoku India is jointly held by Toyota Boshoku Corporation, Japan (95% shareholding) and Toyota Tsusho Corporation, Japan (5% Shareholding). Toyota Boshoku India manufactures components such as seats, door trims and interiors for the automobile industry. The company's plant commenced commercial operations from November 1999. Toyota Boshoku India is a licensed manufacturer conducting the manufacturing activities with the license and technical know-how obtained from Toyota Boshoku Corporation, Japan. The company also supplies seats, door trims and interiors to Toyota Kirloskar Motor pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved that, the assessee entered into transaction with AE, whereby following payments were made to the AE: Reimbursement of expat salary - Rs. 4,85,23,268/- Purchase of software - Rs. 18,89,528/- The assessee was called upon to furnish details in respect of the expenses incurred and TDS if any, effectuated, in respect of such payments. The assessee vide reply dated 06/04/2017 submitted that, TDS was not effectuated as these were the reimbursement of expenses to the AE and towards purchase of software. 10. The DRP noted that, the assessee deducted TDS under the head salary on the amount payable to the seconded employees, whereas on the reimbursed amount, no TDS was made. 10.1. The DRP after considering various submissions by the assessee, was of the opinion that, reimbursement of salary of the expat employees was in the nature of, fee for technical services and that, these were the employees of the AE, as per the agreement between the AE and assessee. 10.2. The DRP for following reasons, concluded the nature of payment in the form of reimbursement made by the assessee to Toyota Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identical, with that of the assessee, and the Ld. TPO therein, also applied PSM to be the most appropriate method to benchmark the royalty transaction. 11.1. On the contrary, the Ld. CIT.DR placed reliance and orders passed by authorities below. 11.2. We have perused submissions advanced by both sides in light of records placed before us. We note that the functions performed by the assessee before us, and that of Toyota Kirloskar (supra) considered by Coordinate Bench of this Tribunal, being the sister concern, are identical in nature. Both these assessee are engaged in manufacture of automotive components, peculiar to automobile industry. The assessee before us aggregated all the international transaction by using TNNM as the most appropriate method to benchmark the international transactions. The Ld. TPO segregated management fees and royalty payment, which constituted major part of the transaction. The entire dispute before us, is in respect of the method used for benchmarking the royalty transaction by separately benchmarking it under PSM. 11.3. The overall margin computed by the assessee was at 5.26%. From the transfer pricing study, we note that the assessee p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO and DRP to come to a conclusion that the Assessee is a start up in manufacture of various parts for automobiles. The technology in question was that of TMC Japan. The technology is being used by the Assessee even today. There is no basis for the TPO/DRP's conclusion that the useful economic life of the technology would be only 5 years. In any event passage of time cannot be the basis to discard TNMM which is already held by the Tribunal and upheld by the Hon'ble High Court as no longer the MAM because the conditions necessary for PSM as MAM are not met in the case of the Assessee. Even going by Rule 10B(1)(d), there should be contribution by each of the parties to a transaction for earning profits from sale of goods or provision of services. Then the contribution of each of the parties is identified and the profit is split between those parties. In the case of the Assessee the technology is given by TMC, Japan for which royalty is paid. The use of the technology in manufacturing and the sale of the product so manufactured contribute to the profit of the Assessee and TMC, Japan has nothing to do with that. There is therefore absence the first condition for application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curate delineation of a transaction requires a two-sided analysis (or a multi-sided analysis of the contributions of more than two associated enterprises, where necessary) irrespective of which transfer pricing method is ultimately found to be the most appropriate. 2.126. The existence of unique and valuable contributions by each party to the controlled transaction is perhaps the clearest indicator that a transactional profit split may be appropriate. The context of the transaction, including the industry in which it occurs and the factors affecting business performance in that sector can be particularly relevant to evaluating the contributions of the parties and whether such contributions ale unique and valuable. Depending on the facts of the case, other indicators that the transactional profit split may be the most appropriate method could include a high level of integration in the business operations to which the transactions relate and/or the shared assumption of economically significant risks (or the separate assumption of closely related economically significant risks) by the parties to the transactions. It is important to note that the indicators are not mutually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2008-09. The Tribunal has upheld TNMM as MAM from AY 2007-08 to 2011-12. In those AYs the dispute was whether TNMM or CUP was the MAM. It is for the first time in AY 2013-14 that the revenue has sought to apply PSM as MAM. In the given facts and circumstances, we are of the view that TNM Method is the Most Appropriate Method and the AO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. The grounds of appeal of the assessee are treated as allowed. 11.5. We note that, the Ld. TPO in present facts of the assessee before us, used identical comparables in order to ascertain the transaction to be at arms length as it was used in case of the sister concerns case referred to herein above. There is no dispute that, factual metrics and background our identical and the nature of payment having considered identically by the revenue authorities in both these cases. We are therefore respectfully following the view taken by coordinate bench of this tribunal in case of Toyota Kirloskar (supra), we are of the view that TNM Method is the Most Appropriate Method and the Ld. AO/TPO is directed to apply the said method in determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o meet out reward or punishment to employees on loan in accordance with rules or regulations of TBC, both parties shall consult with each other about it in advance. 3. The employees on loan shall report and perform services as directed by TBI during the transfer period and TBC shall not interfere with such services performed by the employees on loan. 4. It is expressly understood and agreed upon by the parties that TBC will not be considered at any time to have rendered any services of whatsoever nature to TBI under this agreement by transfer of employees on loan and that TBC shall not be held responsible for any acts or omissions of the employees on loan during the period of transfer. 5. TBI expressly acknowledges and agrees that the employees on loan will not have at any time any authority of whatsoever nature to act on behalf of or bind TBC in connection with their duties as employee of TBI and further that the employees on loan will have no express or implied authority whatsoever to act or represent or bind TBC for their acts. 6. The employees on loan shall during the period of transfer remain in the employment of TBC only for the lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arred by Indian Laws. 13.2. The Ld. AR submitted that, based on the above agreement, the assessee entered into independent contract with each of the seconded employees. It is submitted by the Ld. AR that the seconded employees worked under the control of the assessee. It is also mentioned that 100% of the salary payable by assessee to such employee is subject to TDS under the head salary and a form 16 is issued to the employees that are seconded. In support he referred to a sample contract entered into by assessee with one Mr. Minoru Ashahi placed that page 651-652 of paper book is as under. 13.3. It is further submitted that, at the request of the seconded employee, the assessee agree to remit part of the salary to Japan, for the local use and family maintenance there, and part of the salary is received in India. The Ld. AR submitted that, as per the request letter of the seconded employee, the salary is partly payable to the seconded employee in India and balance in Japan to his family. The Ld. AR referred to page 654 which is one such letter issued by Mr. Minoru Ashahi. For sake of convenience we reproduce here with the letter by Mr. Minoru Ashahi as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. AR submitted that, as per Article 2 of the Agreement for Employee loan', the secondees work under the direct management, supervision, control and as per instructions of the assessee in India, during the period of secondment. It was submitted that, the place of performance of their duty, and the manner in which the secondee had to work, were decided by the assessee in India, and, it was the assessee and not Toyota Corporation Japan, who was responsible and accountable to ensure proper performance of duty by the secondees. It is thus submitted that the entire risk of work performed by the secondees was borne by the assessee. 13.9. It was submitted by the Ld. AR that: (i) the nature of work to be performed by the secondee was specified by the assessee, (ii) the employees were required to act in accordance with the instructions and directions of the assessee; (iii) the salary costs of these employees were effectively borne by the assessee; (iv) the 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. 13.10. The Ld. AR submitted that, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... user, the number and qualifications of the employees are not solely determined by the hirer. 13.12. The Ld. AR thus submitted that, when the assessee is considered as the real and economic employer of the secondees, the reimbursement of salary and other administrative costs to Toyota Corporation Japan, constitutes expenditure in the nature of 'salary' and consequently the reimbursements made to Toyota Corporation Japan, under the Agreement of Employees on Loan dated 01/08/2008, cannot be considered as 'fees for technical services' either under the Act, or under the India Japan DTAA, and consequently the said reimbursements are not liable for TDS u/s. 195 of the Act. 13.13. The Ld. AR submitted that, the secondment of employees under the agreement do not tantamount to rendering of technical, professional or consultancy services u/s. 9(1)(vii) of the Act. It is submitted that apart from deputing secondees, Toyota Corporation Japan did not render any other service to the assessee under the Agreement for Employees on Loan dated 01.08.2008. It was submitted that, consequently in respect of the reimbursements made, the provisions of section 9(1)(vii) would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the decisions of, Verizon Data Services India P Ltd. In re reported in 337 ITR 192 the authority for advance ruling held that, the oversees entity is the real employer of the expatriate employees and it retains employer employee relationship with them. Thus, reimbursement of salaries was payment for rendering technical services hence taxable as FTS and liable to withholding of tax u/s. 195. The Hon'ble Madras High Court in Verizon Data Services India (P) Ltd. v. AAR Ors., reported in 346 ITR 489 upheld the ruling of AAR. 36. The Ld. DR also relied on the decision of coordinate bench of this Tribunal in case of Food World Supermarkets Ltd. vs. DDIT (International Taxation) reported in (2015) 63 taxman.com 43, wherein this Tribunal hailed as under: 13. The SLP filed against the judgment of Hon'ble Delhi High Court has been dismissed by the Hon'ble Supreme Court in Centrica India Offshore (P.) Ltd.'s case (supra). Therefore the view taken by the Hon'ble High Court has attained finality. The concept of income includes positive as well as negative income or nil income. In the case of payment being FTS or royalty as per sec. 9(1) of the Act it is irrelevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly three parties, the employer deputing or seconding his employee, the employee and the employer to whom the employee is seconded or deputed. Such arrangements are also referred to as International hiring out of labor . Sec. 9(1)(ii) of the Act, lays down that, Income in the form of salaries is deemed to accrue or arise in India, and is deemed to have been earned in India, if is received for services rendered in India. Under the Act, irrespective of the residential status of the employee, salary would be taxable in India, if it is for services rendered in India, which is deemed to have been earned in India. In the case of seconded employee, if they are tax residents of a country with whom India has Double Taxation Avoidance Agreement (DTAA), Indian tax authorities right to tax salary income would depend on the terms of such treaty. 14.2. In OECD Model Commentary, Article 15 provides for right of taxation, in so far as salaries are concerned, between the source state and the 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State. 14.4.1. The first condition - is not relevant as the seconded employees have been employed in India for more than 183 days. 14.4.2. The Second Condition -the remuneration is paid by, or on behalf of, an employer, who is not a resident of the other State. The meaning of the term 'employer' is critical, as there are occasions when seconded employees are on the rolls of a nonresident employer, but in essence, work as per the directions and under the supervision of an enterprise to whom he has been seconded and yet claims short stay exemption. 14.5. Since the right of the state of the temporary employment to tax employment income was limited by the provisions and conditions of Article 15, the tax administrations were not happy to notice that non-resident labor was easily entering their boundaries and easily avoiding source country taxation. 14.6. As a possible contribution to solving problems of abuse, recent OECD guidelines lay down guidelines to resolve interpretation issues concerning the concept of employer for purposes of paragraph 2 of Article 15. In determining the employer, the guidelines attaches importance to the nature of the services rendered, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conded employee is with the assessee in India. As per Article 7 of the 'Agreement of employees on loan', dated 01/08/2008 between the assessee and Toyota Corporation Japan, the salary of expatriate employee will be paid by the Toyota Corporation, Japan, that sends the employee on deputation, and that, Toyota Corporation Japan, continues to be the de jure employer. The assessee in India, to which the employee is sent on deputation is the de facto employer. The salary paid by the de jure employer is reimbursed by the assessee in India, to the Toyota Corporation, Japan. 14.11. Article 7 of the 'Agreement of employees on loan', dated 01/08/2008 between the assessee and Toyota Corporation Japan imposes obligation of compliance with tax deduction at source as per the Act, on salaries paid to the seconded employees on the assessee in India. 14.12. As per Article 8 of the 'Agreement of employees on loan', dated 01/08/2008, between the assessee and Toyota Corporation Japan, the assessee in India as well as the seconded employee shall not disclose confidential information of the other party. 14.13. From the recitals to the 'Agreement of employees on loan& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 14.16. From a conjoint reading of Article 15 of the OECD Model Convention and the articled referred to herein above, there is no doubt in our minds that the assessee in India is the economic and de facto employer of the seconded employees. It is an admitted fact that all the seconded employees are in India for more that 183 days in a 12 month period. Further all the seconded employees have PAN card as well as file their returns in India in respect of the 100 % salary, though the assessee pays only part of the salary in India. We are therefore of the view that there exists an employer-employee relation between the assessee and the seconded employees. 14.17. Article 12(4) of India Japan DTA,A that deals with Fees for technical services', as under: 4. The term fees for technical services as used in this Article means payments of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in Article 14, in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion which would be income of the recipient chargeable under the head Salaries . 14.19. 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 Toyota Corporation, Japan, 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 Toyota Corporation, Japan, and therefore there would be no obligation to deduct tax at source at the time of making payment u/s. 195 of the Act. 14.20. 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. 14.20.1. 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 expatri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here 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. 14.21. 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. 14.22. There is another decision of Hon'ble Supreme Court in case of DIT v. Morgan Stanley reported in (2007) 162 Taxman 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation, 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). 14.22.2. 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. 14.23. 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 no materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely 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 bracketed words - including provision of services of technical or other personnel is independent of preceding terminology - managerial, technical or consultancy services or whether the bracketed 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 bracketed 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 of it, does not fal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions relied by revenue are distinguishable with the present facts of the case. 15. 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 Toyota Corporation, Japan, towards the seconded employees cannot be regarded as Fee For technical Services and therefore not taxable u/s. 195 of the Act. We therefore direct the Ld. AO to delete the disallowance made u/s. 40(a)(i) of the Act. Accordingly, Ground nos. 11-14 raised by assessee for the assessment year 2013-14 stands allowed. 15.1. The facts for the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure towards repairs to machinery or building etc. is capital or revenue. As per this decision one need to see, based on facts whether such expenditure is incurred to preserve or maintain already existing assets or it is incurred for renewal, restoration, bringing new asset into existence or bringing new (or) different advantage to the assessee. As observed based on existing facts that the factory production line was fully refurbished and made fit to manufacture new Toyota Corolla Model. Such expenditure brings new (or) different advantage and falls within the definition of capital expenditure as per above test. Accordingly, we confirm the AO's treatment that the expenditure is capital in nature. Ground rejected. On an appeal before this Tribunal, the Ld. AR reiterated the submissions before the authorities below. The Ld. CIT.DR relied on orders passed by authorities below and submitted that there is nothing placed on record in support of the claim by assessee. We have perused the submissions advanced by both sides in the light of records placed before us. We note that the alleged expenditure has been claimed as plant layout charges to improve utilisation of r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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