EXXONMOBIL SERVICES AND TECHNOLOGY PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(1)(2), BANGALORE

The briefly stated facts of the case are that that the assessee company is engaged in the business of administrative support, document processing, account maintenance, billing and transaction support services to examine group of companies. It filed its return of income on 29.11.2016 at a total income of ₹ 69,071,470 which was resigned revised on 19 March 2018 at a total income of ₹ 54,743,010. Subsequently the return of income was picked up for scrutiny by issuing a notice under section 143 (2) of the Act. During the course of the assessment proceedings the ld. AO noted that assessee has got the reimbursement of salaries and allowances amounting to ₹ 147,133,002 made to ExxonMobil Asia-Pacific Pvt. Ltd. without deduction of tax at source. Therefore the assessee was asked why the taxes were not required to be deducted under section 195 of the Act and therefore it should be disallowed under section 40 (a) (i) of the Act in case of the assessee.

The assessee submitted that the above sum is paid as secondment/assignment of the employees and therefore no taxes are required to be deducted at source on the above sum being cost to cost reimbursement to the group company. Assessee submitted that since it is in the initial year of operation certain employees of affiliates have been deputed to the company for supporting the company in setting up of its operation as per the standards of Exxon group. In this regard 27 employees were deputed by the group companies having different functional profile. The deputed employees assisted the company in setting up of its business operation and such activities are in the nature of oversight/supervisory/control activities. The assessee further explained the nature of the activities and also the terms of the deputation of the employees. According to the assessee the deputed employees are working under the supervision and control of the company,

The ld. AO referred to the provisions of the Act as well as the provisions of the Double Taxation Avoidance Agreement [DTAA] and thereafter held that the assessee should have deducted tax at source on the sum of ₹ 147,133,002 and as assessee has failed to deduct the same, it is required to be disallowed under the provisions of section 40 (a) (i) of the Act as the amount received by the assessee company is a reimbursement from ExxonMobil treated as fees for technical services both under the Income Tax Act as well as the DTAA. As it is a fees for technical services, the assessee should have deducted tax at source on the sum paid to the group company. The ld. AO further relied upon the decision of the Coordinate Bench in case of IBM Corporation in ITA No. 1/Bang/2024 dated 6 January 2017 wherein it has decided the issue in favour of the Revenue and held that such sum is a fees for technical services. The learned AO further referred to the decision of Food World Supermarkets Ltd and Intel Corporation wherein the Coordinate Bench has ruled that the reimbursement made by the Indian company to its parent company for receiving the services of the technical personnel seconded to the Indian company are fees for technical services and therefore the tax should have been deducted. Accordingly the total income of the assessee was assessed at ₹ 201,876,012/– against the returned income of ₹ 54,743,010 by assessment order dated 12 December 2019.

The assessee carried the matter in appeal before the learned CIT – A wherein the appeal filed by the assessee was dismissed. The learned CIT – A held that undisputed fact shows that the employees were on the rolls of assessee

The ld Authorized Representative Shri KetanVed, CA, submitted a case law compilation and submitted the following judicial precedents and submitted that issue is covered in favour of the assessee by the Decision of honourable Karnataka high court in case DCIT V Abbey BusinessServices Private Limited. He relied upon following judicial decisions i. PCIT V Boeing India(P) Limited 158 taxmann.com 214 (SC) ii. PCIT V Boeing India(P) Limited 158 taxmann.com 131(del) iii. Flipkart internet P Ltd V DCIT 139 taxmann.com 595 (kar) iv. DCIT V Abbey Business services India P Ltd 122 taxmann.com 174 (kar) v. DCIT V Total energies marketing India P Ltd ITA no 97/M/2023 vi. Goldman sachs services P Ltd V DCIT 138 taxmann.com 162(bang) vii. TE Connectivity services P Ltd V DCIT 177 taxmann.com 792(bang) viii. Ernst & Young LLP VACIT 175taxmann.com 150 (Del) ix. Serco india P Ltd V DCIT ITA no 1432 / del/2016

The Ld DR vehemently supported the orders of the ld Lower authorities. He submitted that issue is squarely covered against the assessee by the decision of the honourable Delhi High Court in case of Centrica India offshore private limited versus CIT (364 ITR 336).

We have carefully considered the rival contentions and perused the orders of the learned lower authorities. Multinational companies often establish offices in India and require experienced personnel to manage and conduct their operations. For this purpose, they may hire locally available skilled employees

The Hon’ble Delhi High Court, in Centrica India Offshore Pvt. Ltd. v. CIT, 364 ITR 336 (Delhi), applied what is commonly known as the “real or economic employer” test. Under this test, the Court examines, among other factors, who has the authority to terminate the employment and whether the employees can recover their salaries only from the overseas entity. The economic employer is the entity that derives the benefit of the employee’s work, exercises supervision and control over the employee, and bears the risks and consequences of the work performed.

Article 15 of the OECD Model Tax Convention, 2014, sets out relevant factors for determining an employer-employee relationship, including the authority to direct the individual’s work, control over and responsibility for the workplace, provision of tools and materials, the right to select and terminate the person

The Hon’ble Supreme Court considered this issue in C.C., C.E. & S.T., Bangalore v. Northern Operating Systems (P.) Ltd., [2022] 138 taxmann.com 359 (SC)/ [2022] 61 GSTL 129 (SC)/[2022] 92 GST 792 (SC), dated 19.05.2022. In that case, Northern Operating Systems (P.) Ltd. (“NOS”), an Indian entity forming part of a multinational group, entered into secondment agreements with group companies located in the USA, UK, Ireland and Singapore. The expatriate employees remained on the payroll of the foreign entities for continuity of social security and retirement benefits, though NOS claimed to be their employer for all practical purposes. During the secondment period, NOS issued employment letters setting out the terms of employment. The employees received salary, bonus, social benefits, out-of-pocket expenses and other payments from the foreign entities, which NOS reimbursed without any mark-up. After completion of the secondment, the employees were required to return to their original employer. NOS deducted tax at source from the employees’ salaries and also discharged statutory obligations such as provident fund contributions. The Hon’ble Supreme Court analyzed the factual aspects in detail and noted the following:

The learned Authorized Representative relied on the decision of the Hon’ble Karnataka High Court in Director of Income Tax v. Abbey Business Services India Pvt. Ltd., 122 taxmann.com 174 (Karnataka). In that case, while answering questions Nos. (iii) and (iv), the Hon’ble High Court examined the agreement dated 07.11.2003, the relevant clauses referred to in paragraph 11, and the nature of services rendered under the agreement. It held that the expenses incurred for the seconded employees and reimbursed by the assessee were not liable to tax deduction at source and could not be treated as fees for technical services. The Court further noted that the secondment agreement constituted an independent contract of service in relation to

In case of Flipkart Internet private limited versus DCIT the honourable Karnataka High Court in 139 taxmann.com 595 was concerned with the interpretation of the master service agreement dated 28th may 2019 between Walmart incorporation and flipkart Singapore for secondment of employees and provision of services. Based on the interpretation of agreement the honourable High Court in fact relied on the decision of the Abbey business services India private limited.

Further in case of Boeing India private limited honourable Delhi High Court in 146 taxmann.com 131 was also concerned with the disallowance under section 40a (i) as per substantial question of law No. (3) which is discussed from paragraph No. 11 however no facts are discussed therein.

On examining the orders of the learned lower authorities and the submissions made before us, we find that the assessee did not support its contentions by producing the relevant agreements, nor did the learned Assessing Officer call for them. Both parties contested the matter essentially on legal submissions. The learned CIT(A) also decided the issue without examining the agreements or their substance. Consequently, the matter has reached the Tribunal without the assessee having produced the agreements or the Revenue authorities having requisitioned them. In the absence of such examination, the issue cannot be decided solely on the basis of judicial precedents, since each

In view of the above, we restore the matter to the file of the learned Assessing Officer. The assessee is directed to furnish all relevant agreements entered into with its associated enterprises or group concerns, and seconded employees including agreements involving the seconded employees, the foreign entity and the Indian entity, along with details of the services rendered by the seconded employees, the terms and conditions of their employment in India, and any disclosures made by them before the relevant authorities regarding their secondment in India. The learned Assessing Officer shall thereafter examine whether any income chargeable to tax in the hands of the foreign entity accrues or arises in India and whether the transaction gives rise to any obligation to deduct tax at source. Needless to say, the learned Assessing Officer shall consider the issue from all relevant aspects, provide the assessee an opportunity of being heard, and decide the matter afresh. While doing so, he shall consider the judicial precedents relied upon by the assessee as well as the decision of the Hon’ble Supreme Court referred to above. Accordingly, ground No. 3 of the appeal is restored to the file of the learned Assessing Officer with the above directions.

The assessee did not press ground No. 1, 2, 4 and 5 of the appeal and therefore same are dismissed.

In the result appeal of the assessee is partly allowed.