TMI Blog2023 (2) TMI 1259X X X X Extracts X X X X X X X X Extracts X X X X ..... timated loss on construction contract and the reversal of excess provision is credited to the profit loss account - AR drew our attention in this regard to the directions of the DRP where the direction is given for parity of treatment for the provision and the reversal and submitted that the TPO has not properly given effect to the same - HELD THAT:- We remit the issue back to the AO/TPO to consider the issue afresh in the light of the directions of the DRP and the Hon ble Tribunal in assessee s own case [ 2021 (11) TMI 1178 - ITAT BANGALORE] TDS u/s 192 - no TDS was deducted on the salary reimbursement - AO held that the salary cost of seconded employees form an integral part of fees for included services and they are not just reimbursements ,therefore tax should have been deducted on the payments - AR submitted that the DRP has upheld the disallowance on the ground that the secondment agreement and assignment letters were produced and whatever was produced was rejected stating the same to be unreliable - AR prayed for the admission of additional evidence as these evidences when considered would substantiate the claim of the assessee - HELD THAT:- With regard to disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant details from the assessee. The AO passed the final assessment order dated 25.10.2019 after incorporating the revised TP adjustment as per OGE dated 11.10.2019. Subsequently, the TPO passed the second OGE 5.3.2020 revising the TP adjustment as under:- 1. Manufacturing segment Rs.13,68,76,000 2. Interest on receivables Rs.11,88,817 5. Aggrieved, the assessee is in appeal against the final assessment order of the AO dated 25.10.2019. The assessee raised grounds pertaining to the following issues:- Ground 1 : General Ground 2 3 : Legal issue relating to TP adjustment Grounds 4 to 8 : TP adjustment in manufacturing segment Grounds 9 10 : Notional interest on trade receivables Grounds 11 12 : Expat salary reimbursement Ground 13 : Restricting the TDS credit Ground 14 : Interest u/s. 234B 6. During the course of hearing, the ld. AR did not press for ground Nos. 2 3 relating to the legal issue. The ld. AR also submitted that the adjustment towards notional interest on trade receivables is not material as per the final OGE dated 5.3.2020 and submitted that if the AO is directed to incorporate the 2nd OGE in the assessment order, the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,38,52,15,544 TNMM 8 Goods Purchase of fixed assets Trading 21,70,533 TNMM 9 Sale of traded goods Trading 5,16,33,056 TNMM 0 Commission received Trading 2,54,24,392 TNMM 11 Income from rendering of engineering services Engineering 1,43,66,82,295 TNMM 12 Payment of CEC support fees Engineering 2,90,80,000 TNMM 13 Management fees Manufacturing Trading 74,51,000 TNMM 14 Global Sales and Marketing activity Fee Manufacturing Trading 1,56,70,000 TNMM 15 Reimbursement of expenses - 5,18,91,000 Other me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual business circumstances, high margin, etc. The lower income tax authorities have erred in adopting the following company as a comparable: a. Subodhan Engineering (Pune) Private Limited; b. Concord United Private Limited; c. Sharpline Automation Private Limited; 14. Out of the above, the ld. AR presented arguments relating to exclusion of only Concord United Pvt. Ltd. and Sharpline Automation Pvt. Ltd during the course of hearing. Concord United Pvt. Ltd . 15. The ld. AR submitted that the company is functionally different. The ld. AR drew our attention to the profile of Concord (page 965 of PB) wherein it is stated that the company is engaged in designing and manufacturing high processed computer controlled wire cut machines and also deals with electronic toys. The ld. AR submitted that the company is majorly dealing with CMC wire cut EDM and EDM drilling. The ld AR also submitted that the company being a private limited company, the information available in the web is not sufficient for proper analysis and that the financial data with regard to the segmental information is not available. The ld AR therefore prayed for exclusion of the said companies. 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther on perusal of the financials (page 969 of paper book) it is noticed that the company is deriving income from Sale of products as well as services whereas there is segmental information available in this regard. Considering these facts we are of the view that the company being functionally different cannot be comparable with assessee and accordingly we direct the AO to exclude the company from the list of comparables. 23. Through ground No.6 which reads as follows, the assessee is contending the treatment of provision for expected loss and the reversal as being non-operative in nature. 6. The learned AO/TPO has erred in not following the direction of DRP by not considering provision for expected losses as non-operating in nature in the case of the Appellant. 24. In this regard, the ld. AR submitted that the assessee has debited the profit loss account towards provision for estimated loss on construction contract and the reversal of excess provision is credited to the profit loss account. The ld AR further submitted that the TPO while considering the margins of the assessee, has excluded reversal from the operating income of the assessee whereas the provision mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A No. 362 to 369/Bang/2020 dated 29.4.2022 has considered the similar issue and held that there is no violation of provisions of section 40(a)(ia). 28. The ld. DR relied on the order of the Supreme Court in the case of C.C.,C.E ST, Bangalore v. Northern Operating Systems (P) Ltd. [Civil Appeal No.2289 to 2293 of 2021) dated 19.5.2022. 29. We have heard the rival submissions and perused the material on record. We notice that the The Hon ble Karnataka High Court in the case of Flipkart Internet Pvt. Ltd(Supra) while considering the issue of NIL TDS certificate towards reimbursement of salary cost held as follows:- 33. In the present case, the stand taken on the material available is on the construction of legal position As pointed out in the discussion earlier that the understanding of the legal position being erroneous, the only conclusion that could be arrived at is to allow the application. 34. Though the Revenue has raised numerous contentions that further information is required to record a detailed finding, such stand is taken up for the first time in the present proceedings A perusal of the file of the Department does not make out any instance where the Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussion, the impugned order at Annexure-A dated 1-5-2020 is set aside and the respondent No.1 is directed to issue a Certificate under section 195(2) of IT. Act to the effect of 'Nil Tax education at Source' as regards the petitioner's application dated 15-1-2020. 30. We also notice that the coordinate bench of the Tribunal in the case Goldman Sachs Services Pvt. Ltd.(supra) has considered a similar issued and held that - 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 Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pril, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2. For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the person making the payment or - to any individual or firm of individuals (other than a company) for professional services as defined in article 15 (Independent Personal Services). The payments made by the Indian 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the assessee. It initially paid money to Mr. Franck in advance and then M/s.Faurecia Automotive Holding recovered the same from the Indian entity without 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is a service PE (MSAS) under art 5(2)(l). There is no infirmity in the ruling of the AAR on this aspect. In the 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 onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... am MS General Insurance Co. Ltd., reported in 309 ITR 356, took 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are of the view that 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, knowhow, 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 the conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angalore. 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 the Income Tax Act, 1961, files their re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Services Once there is no violation of provision of section 195, assessee cannot be held to be an ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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