M/S. YOKOGAWA INDIA LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, LTU, CIRCLE-2, BANGALORE

1. This appeal is against the final assessment order passed by ACIT, LTU, Circle 2, Bangalore dated 25.10.2019 passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] for the assessment year 2015-16.

The assessee company is engaged in the manufacture, trading, distribution, installation and servicing of process control systems and IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 2 of 30 industrial automation instrument/equipment and electrical measuring instruments.

The assessee filed the return of income for AY 2015-16 on 30.11.2015 declaring a total income of Rs.86,08,17,214. The case was selected for scrutiny and statutory notices were duly served on the assessee. During the year, the assessee had entered into several specified domestic transactions and international transactions with its AEs. Therefore a reference was made to the TPO to determine the arm’s length price (ALP) of the transactions enteed into by the assessee. The TPO made the following adjustments:- 1. Manufacturing segment Rs.32,07,44,000 2. Global sales & marketing fees Rs.1,43,33,706 3. Management fees Rs.74,51,000 4. Interest on receivables Rs.4,64,76,798 4. The assessee filed its objections before the DRP. The DRP gave partial relief to the assessee in terms of deleting adjustments made towards Global Sales & Marketing fees and Management fees. The TPO passed the OGE dated 11.10.2019 wherein the TP adjustment in the manufacturing segment was revised to Rs.30,26,25,000 and in the said order the TPO had mentioned that interest on delayed receivables will be revised as per DRP directions after receiving the 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:-

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 grounds contending this issue will not be pressed on the basis of materiality of the adjustment.

Accordingly, we direct the AO to pass the revised final assessment order incorporating the changes made to the TP adjustment in the manufacturing segment and the interest on delayed receivables as per the second OGE issued by the TPO dated 05.3.2020. In view of this direction, the ground no.9 and 10 raised with regard to interest on receivable is left open.

The assessee has entered into the following international transaction :- Relevant SI. No Nature of Transaction Amount in INR Method Segment Purchase of raw materials Manufacturing 79,30,64,893 TNMM 1 and components 2 Sale of systems 7,23,13,482 Manufacturing TNMM 3 Purchase of fixed assets Manufacturing 46,08,129 TNMM Manufacturing 82,35,000 TNMM Payment of engineering 4 service fees Payment towards After Manufacturing 1,56,94,000 TNMM 5 Sales Services Rendering of systems Manufacturing 7,64,89,970 TNMM 6 related services 7 Purchase, of traded Trading 1,38,52,15,544 TNMM goods 8 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 Income from rendering of Engineering 1,43,66,82,295 TNMM 11 engineering services Payment of CEC support Engineering 2,90,80,000 TNMM 12 fees IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 5 of 30 Manufacturing & 13 Management fees 74,51,000 TNMM Trading Global Sales and Manufacturing 14 1,56,70,000 TNMM & Trading Marketing activity Fee Reimbursement of Other 15 - 5,18,91,000 expenses method

The assessee adopted TNMM as the most appropriate method. In the manufacturing segment assessee has selected 6 comparables out of which the TPO has accepted only one comparable. The TPO did a fresh search and accordingly, the final set of comparables is as given below:- MANUFACTURING ACTIVITY SEGMENT Company Name OP/OC (%) OP/OR (%) 1 Subodhan Engineers (Pune) Pvt, Ltd, 3.46 3.35 Precision Automation & Robotics 2 India Ltd. 4.03 3.87 8.07 3 Comae Electronics,Pvt. Ltd. 7.46 4 Concord United Products Pvt. Ltd. 9,90 9.01 5 Sharpline Automation Pvt. Ltd. 12.26 10.92 Average 7.54 6.92

Accordingly, the TP adjustment in the manufacturing segment was arrived at by the TPO as below:- MANUFACTURING ACTIVITY SEGMENT Manufacturing Amount in Lakhs Arm's Length Mean Margin on revenue (OP/OR) 6.92% Operating revenue 32945.25 IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 6 of 30 Arm's Length Price(ALP) of Operating cost (@93.08% of 30665,44 OR) Operating cost 33872.88 Variation in cost 3207 Shortfall being adjustment 3207.44

During the course of hearing, with regard to the grounds raised for TP adjustment in the manufacturing segment, the ld. AR submitted that if ground No.5 (iv) wherein the following comparables are contended to be excluded is adjudicated, then the rest of the grounds become academic.

Ground No.5(iv) reads as follows:- “5. The lower authorities have erred in: (iv) Selecting inappropriate comparables and selecting companies as comparables even though they are not comparable in terms of functions performed, assets utilized, risks assumed, size, turnover have unusual 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;”

We have heard the rival submissions and perused the material on record. We notice that the DRP has upheld the inclusion of the company by stating that assessee is functionally comparable since assessee’s manufacturing installation, servicing of systems related to industrial automation instruments and process controlled systems are similar to that of the company. It is also noticed that the DRP has held that under TNMM, the comparable companies are required to be only broadly comparable to assessee’s system segment business.

The ld. AR during the course of hearing drew our attention to the annual report of the company wherein it is stated that “we at Concord United Products will endeavour to be the supplier of choice for Unique Technologies to cater to the needs of Indian manufacturing and tooling industry”, from which it is clear that the company is catering to the industries and not the end customer like the assessee.

The ld. DR relied on the orders of lower authorities.

We have heard the rival submissions and perused the material on record. The portfolio of the company from the annual report is as given below:-

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.”

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 made debited to the P&L account is not given the same treatment. this from the operating cost and the revenue. The ld. AR drew our attention in this regard to the directions of the DRP in para 3.9.3 in page 19 of DRP IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 11 of 30 order 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. Our attention was also drawn to the decision of the coordinate bench in assessee’s own case (IT(TP)A No.3369/Bang/2018 for AY 2014-15 dated 25.11.2021) where the similar issue is considered and remitted back to the AO. Respectfully following the above decision 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 supra. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.

The AO/TPO is directed to compute the arm’s length price in accordance with the directions given in this order. In view of our decision as rendered above the rest of the grounds with regard to TP adjustment in manufacturing segment are left open. Corporate grounds 26. The AO during the course of assessment called for to submit copies of Form 15CA and to provide ledger extract commenting on the nature of Form 15CA payments. The assessee vide submission dated 10.12.2018 provided the details of expat salary reimbursement amounting to Rs.4,53,92,631 and submitted that no TDS was deducted on the salary reimbursement. The 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, the AO held that tax should have been deducted on the payments and since no tax has been IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 12 of 30 deducted at source, disallowed the amount u/s. 40(a)(i). The DRP held that the assessee could not prove its claim with reliable evidence and confirmed the order of the AO. Aggrieved, the assessee is in appeal.

Accordingly, in light of the above discussion, 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.”

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.

Notwithstanding paragraph 4, "fees for included services" does not include amounts paid: (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a); (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services).”

Rendering of managerial, technical and consultancy services is governed by Article 12 on ‘Fees for included services’ of the Double Tax Avoidance Agreement, between India and US. Payments made to ‘individual or firm of individuals for service rendered by them in independent professional capacity are specifically excluded since they are covered by Article 15 on Independent Personal Services. Likewise, Article 12 specifically excludes payments made towards services rendered by an ‘employee’ of the enterprise since services rendered under employment are covered by Article 16 on Dependent Personal Services.

The relevant portion of para 5(e) of Article 12 of the DTAA between India and US reads as follows: - “Fees for included services does not include payments made - to an ‘employee’ of 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 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 employees. The Hon’ble Court held that, overseas entities had, through seconded employees, undoubtedly provided ‘technical’ services to Centrica India and that, the expression rendering technical services expressly includes provision of services of personnel. The Hon’ble Court held that the Seconded employees, were provided by overseas entities and work conducted by them thus, i.e. assistance in conducting business of assessee of quality control and management was through overseas entities. The Hon’ble Court also held that, mere fact that secondment agreement, phrases payment made by Centrica India to overseas entity as 'reimbursement' could not be determinative. It was also held that, the fact that overseas entity did not charge mark-up over and above costs of maintaining secondee could not negate nature of transaction. 29.2 Hon’ble Pune Tribunal in case of M/s.Faurecia Automative Holding (supra) has observed as under: “4.10. We have gone through the facts of the case obtaining in Centrica India (supra). The assessee therein contended that payment to foreign party towards seconded employees was only IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 19 of 30 reimbursement and hence, no income was chargeable to tax in its hands. The Authority for Advance Ruling (AAR) held that payment made by the petitioner to the overseas entity was in the nature of income in view of the existence of Service Permanent establishment (PE) in India and hence liable for tax withholding. Overturning the view of the AAR that Service PE was constituted, the Hon'ble High Court held that the payment to AE was in the nature of `fees for technical services' and not reimbursement of expenses and further laid down that the nomenclature of reimbursement was not decisive. It noted that: 'Money paid by assessee to overseas entity accrues to overseas entity, which may or may not apply it for payment to secondees, based on its contractual relationship with them.' It is perceptible that in that case money paid by the Indian entity accrued to overseas entities only, which could or could not have been paid to the secondees depending upon the terms of contract. Per contra, we are confronted with a situation wherein the money never accrued 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 no assistance to revenue.

Payment for supplying skilled manpower cannot be regarded as payment towards managerial, technical and consultancy services as per dictionary meanings of these terms. Hon’ble AAR in Cholamandalam 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 IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 23 of 30 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 fall within the ambit of S.9(1)(vii).”

Hon’ble Bombay High Court in case of Marks & Spencer Reliance India Pvt.Ltd. VS. DIT reported in (2013) 38 taxmann.cm 190, upheld the view of Hon’ble Mumbai Tribunal which held that, payment towards reimbursement of salary expenditure without any element of profit, would not be taxable under the provisions of the Act. Hon’ble Court also held that, when the entire salary has been subjected to tax in India at the highest average tax rate, the assessee could not held to be in default for not without tax under the provisions of the Act.

Hon’ble Delhi High Court in the case of DIT Vs. HCL Infosystems Ltd. reported in (2005) 144 Taxmann 492 (Delhi) upheld the order of Hon’ble Delhi Tribunal which held that, when an Indian company had already deducted and remitted taxes under Sec.192 of the Act on salaries paid abroad to the technical personnel and when such salary is reimbursed on a cost to cost basis without any profit element, the provisions of Sec.195 of the Act cannot be applied to reimbursement of salaries made to foreign company, once again. 34. Coordinate bench of this Tribunal in case of IDS Software Solutions v. ITO reported in (2009) 32 SOT 25, Abbey Business Services (P.) Ltd v. DCIT reported in (2012) 23 taxmann.com 346, took the view that expats are deputed to work under the control and supervision of the Indian company and that the oversees entity is not responsible for the actions of the expatriate employees. Thus, oversees entity does not render any technical service to the Indian company, since such payment are towards reimbursement of salary cost borne by oversees entity, and that, no income can be said to accrue to oversees entity in India. The decision of this IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 24 of 30 Tribunal in case of Abbey(supra) has been upheld by Hon’ble Karnataka High Court in DIT vs. Abbey Business Services India (P.)Ltd., reported in (2020) 122 taxmann.com 174.

Hon’ble Ahmedabad Tribunal in the case of Burt Hill Designs (P) Ltd. vs. DDIT(IT) (2017) 79 taxmann.com 459, on identical facts, as in the case of the present assessee before us, took the view that, there was no liability to deduct tax at source u/s.195 when payments were made by way of reimbursement. Based on the above detailed analysis of various contrary decisions on the issue, we 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, know- how, or processes, or consist of the development and transfer of a technical plan or technical design.”

Coming to the third issue of payment of salary, allowances and expenses of the personnel drawn from different global entities to work with the appellant, we find that learned Counsel submits 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 IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 27 of 30 Personnel, as required under the Income Tax Act, 1961. We find that the issue is no longer res integra and is covered by decision of Volkswagen India Pvt. Ltd. Vs CCE, Pune-I, 2014 (34) STR 135 (Tri. Mumbai) [maintained by Apex Court in 2016 (42) S.T.R. J145 (S.C.)] wherein it was held that: 5.1 In view of the clauses of agreements noticed herein above and other facts, we hold that the global employees working under the appellant are working as their employees and having employee employer relationship. It is further held that there is no supply of manpower service rendered to the appellant by the foreign/holding company. The method of disbursement of salary cannot determine the nature of transaction.

The learned Counsel for the appellants submits that the Department was fully aware of the facts when the SCN dated 27.10.2009 was issued and therefore no suppression of facts with an intent to evade payment of duty can be alleged in the subsequent SCN dated 15.04.2013. He relies upon Nizam Sugar Factory case (supra). We find that the argument is acceptable and for this reason, the second SCN is liable to be set aside ab initio…..

In 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.

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 IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 28 of 30 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 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.”

Ground No.14 is consequential not warranting a separate adjudication.

In the result, the appeal of the assessee is partly allowed and the Stay Petition is dismissed.