TOYODA GOSEI COMPANY,JAPAN vs. DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE-2(2), BANGALORE

PER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER:

This appeal by the assessee is against the final assessment order passed by the AO u/s 143(3) r.w.s. 144C(13) of the Act dated 16.01.2023, DIN & Order No. ITBA/AST/S/143(3)/2022- 23/1048739084(1) on the following grounds of appeal:-

IT(IT)A No.172/Bang/2023 M/s. TOYODA Gosei Company, Bidadi

Page 2 of 30 “General Grounds On the facts and circumstances of the case, the assessment order passed by 1. the Learned Assessing Officer (`Ld. AO') under section 143(3) r.w.s. 144C(13) of the Income tax Act, 1961 (`the Act') .pursuant to the directions of the Ld. Dispute Resolution Panel (`Ld. DRP') is bad in law, unlawful and unjust. On the facts and circumstances of the case and in law, the Ld. AO has erred in 2. determining the total income of the Appellant at INR 24,72,78,287 as against the returned income of INR 22,19,87,044 offered to tax by the Appellant. Taxability of employee cost reimbursements as Fee for Technical Services CFI'S') amounting to INR 2,52,91,243 3. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP was not justified in holding that the employee cost reimbursements amounting to INR 2,52,91,243 by the Indian associated enterprises (AEs) i.e., Toyoda Gosei South India Private Limited and Toyoda GoseiMinda India Private Limited to the Appellant is taxable as FTS as per the provisions of section 9(1)(vii) of the Act as well as Article 12 of the India- Japan Double Taxation Avoidance Agreement (`DTAA'). 3.1. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating that there exists an employer- employee relationship between the expatriates and the Indian AEs and thus, no service was rendered by the Appellant to the Indian AEs. 3.2. On the facts and in the circumstances of the case, the Ld. AO/Ld. DRP erred in ignoring the fact the seconded/ transferred employees were reporting to and working under control, direction and supervision and in accordance with the policies and rules of the Indian AEs. The salary was paid by the Appellant to the expatriates only for administrative convenience, which has been later on reimbursed by the Indian AEs to the Appellant. Further, such amount paid by the Appellant has been recorded as 'advances' in its books of accounts while the Indian AEs have accounted the same as 'salaries'. 3.3. On the facts and circumstances of the case and in law, the Ld. AO/ DRP has erred in ignoring and not taking cognizance of documents/ information and explanations (including documents submitted as additional evidence which inter-cilia included the debit notes, Form 16 etc.) to substantiate the existence of employer- employee relationship between the Indian AEs and the expatriates and thereby, erroneouslyconcluding that no employer- employee relation existed between Indian AEs and the seconded/ transferred employees. 3.4. The principle of determining employment relationship through the "economic criteria" is also supported by OECD Commentary on the Model Convention. The Commentary supports the concept of "economic employer" (rather than formal/legal employer) in the context of taxation of dependent personal services. It states that the term "employer" should be interpreted as "the person having rights on the work produced and bearing the relative responsibility and risks". It is the substance that prevails over the form. The real employ‘is the user of the labour. The Ld.

IT(IT)A No.172/Bang/2023 M/s. TOYODA Gosei Company, Bidadi Page 3 of 30 AO/Hon'ble DRP has erred in not relying on the concept of economic and legal employer. 3.5. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating the fact that the Appellant has not performed any specific function apart from transfer of personnel in order to support the Indian AEs and thus, therecould be no FTS in the absence of any service being rendered. 3.6. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating the fact that the reimbursement amount constitutes salary which is not taxable as FTS as per the provisions of section 9(1)(vii) of the Act and Article 12 of India — Japan DTAA. 3.7. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating that the Indian AEs have withheld taxes under section 192 of the Act on the entire salary paid to the expatriates as evidenced by Form 16 issued to the expatriates and such expatriates have offered the entire income to taxes in their respective returns of income filed under the Act. 3.8. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred by not appreciating that the payments made by the Indian AEs to the Appellant are pure reimbursements of the actual employee costs, without any element of income. Levy of interest under section 234C of the Act 4. On the facts and circumstances of the case and in law, the Ld. AO has erred in charging interest under section 234C of the Act despite of the fact of the refund situation (i.e., no tax payable) even after accepting the addition. Initiation of penalty proceedings

All the above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.”

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Page 4 of 30 for scrutinyand statutory notices were issued to the assessee. In response to the notice, the assessee filed submissions& challenging the notice issued by the CPC which was dully disposed –off by the AO. From the submissions it was observed by the AO that the company has entered into an agreement for secondment of personnels with Indian entities M/s. Toyoda Gosei South India Pvt. Ltd., M/s. Toyoda Gosei Minda India Pvt. Ltd.& and Minda T.G. Rubber Pvt. Ltd. The agreements among the companies were extracted by the AO in his order. During the impugned financial year, 24 employees were employed with the assessee company and the AO has also observed that the seconded employees were functioning as administrative heads at various levels from the rank of President downwards. Accordingly, the AO noticed that their services are squarely fall under managerial services and the employees were also providing consultancy services in the nature of technical services. Therefore, the same employees falls within the ambit of the definition of fees for technical services both under the income tax Act and DTAA prima facie. The documents furnished by the assessee were examined by the AO and he noted as under:

“4.4 The documents furnished have been perused and the copy of the assignment letter examined. The salient aspects of such assignment letters are brought out hereunder: a) Compensation package for the assignment is determined as per the peer to peer policy as against Strategic & Skills Need Policy as in earlier years. The compensation is computed on the base salary of the b) home country

The assignment letter also mentions the date when the c) salary will be review. Indian employment requires payment of Provident Fund by d) the employer which shall be returned by the employee The assignment letter provides for net supplement to ensure e) that the assignee has the same net spendable income in comparison to the peers in the host country.”

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2.1 The AO also observed the concept of secondment which is as under:

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IT(IT)A No.172/Bang/2023 M/s. TOYODA Gosei Company, Bidadi

Page 12 of 30 2.2 During the course of assessment proceedings, the assessee relied on certain judgements, which have been extracted by the AO. The AO relied on judgement of Hon’ble Delhi High Court in the case of M/s. Centrica India Offshore Pvt. Ltd. in writ petition No.6807/2012. The AO also relied on other judgements, which have been quoted in his order. After considering the various judgements and analysis of the judgements, he held that the amount paid is a fees for technical services. Accordingly, it was brought to tax in accordance with Indian Income Tax law as well as DTAA & a sum of Rs. 4,46,87,235/- was added as fees for technical services & order u/s 144C of the Act was passed. The assessee filed objection before the Ld. DRP. The ld. DRP gave marginal relief to the assessee on reimbursement expenses received & Rs. 10,00,000/- for the calculation mistake & passed the order on 13.12.2022. Accordingly, the final assessment order was passed on 16.01.2023 by making addition on Rs. 3,14,80,485/- and completed the assessment.

2.3 The Ld. A.R. filed written synopsis which is as under:

4) “During the subject year, the salary costs amounting to INR 3,14,80,485 of only 13 expats assigned by TGMIN and TGSIN were reimbursed. The details of the employees whose salary was reimbursed are tabulated herein below: Work Profile Sr. Name of Employee Indian Entity to No. which seconded 1 Mr. Mitsuhiro Nawashiro President 2 Mr. Yasuyuki Yamashita Senior Vice President Senior General Manager 3 Mr. Kazunari Yokoyama 4 Mr. KazundoWatase Quality General Manager TGMIN 5 Mr. Hiroshi Gondo Production General Manager 6 Mr. Takanori Mizuno Factory Manager 7 Mr. Makoto Kanematsu Quality Senior General Manager 8 Mr. Kazuki Kano Quality Coordinator 9 Mr. Akio Harada Senior Vice President 10 Mr. Toshhiro Morita Sr. Coordinator 11 Mr. Kenichi Ishige Coordinator

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Page 13 of 30 -, 12 Mr. Kaziyuki Hayashi Manager 13 Mr. HarukikoIwayama TGSIN AGM

The Indian entities, accordingly, are responsible for payment of salaries to 5) these expatriates employed by it in India. However, only for the limited purpose of certain part of salary and payment of Japanese social security of the expats in their home-country i.e., Japan i.e., for administrative convenience, the Appellant agreed to disburse part of the remuneration of such expatriates on behalf of the Indian entities in their home country which is subsequently reimbursed by the Indian entities on cost-to-cost basis i.e., without any mark up to the Appellant (the debit notes raised by the Appellant on the respective Indian entities are enclosed at page 118 to 145 of the Paperbook).

The Indian entities bear the responsibility to withhold/deposit tax on 6) salaries disbursed to expatriates for the services rendered by them in India and has been diligently deducting and depositing tax in accordance with section 192 of the Act, on the entire salary paid to the expats (whether disbursed in India or in Japan). In support of the salary so disbursed and taxes withheld by the Indian entities, please refer to Form 16 issued to the expatriates (refer page 72-117 of the Paper Book)

The Appellant cross-charged an amount of INR 3,14,80,485/- from the 7) Indian entities which was towards the cost of salary paid to the expatriates in Japan on behalf of the Indian AEs on cost to cost basis. Accordingly, the same represents pure reimbursement by the Indian entities as the same has been cross charged without any mark-up.

Assessment Proceedings The Learned Assessing officer (`Ld. AO') by way of a draft assessment 8) order dated 24 March 2022, disallowed the sum paid by the Indian entities to Appellant by treating the same as Fee for Technical Services (`FTS') in terms of Article 12 of the India Japan Double TaxationAvoidance Agreement (`DTAA') and section 9(1)(vii) of the Act and accordingly, proposed to add INR 3,14,80,485/- to the total income of the Appellant similar to the order of its predecessor for the AY 2019-20. [Re: Page 24 of Draft Order]

Proceedings before Dispute Resolution Panel (`DRP') 9) The Hon'ble DRP upheld the action of the Ld. AO in treating the reimbursement of salary cost to the Appellant from the Indian AEs as FTS accordingly upheld the disallowance made on similar lines of the order passed in AY 2019-20. [Re: Page 17 of DRP Order]

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Page 14 of 30 The Ld. AO thereafter in consonance with the DRP directions passed 10) the final assessment order wherein the impugned disallowance was sustained. [Re: Page 27 of Assessment Order] Being aggrieved by the said final order, the Appellant is now in appeal before this Hon'ble Tribunal.

Groundwise contentions of the appellant:

With respect to Ground No.3.9 of ITAT appeal: The present issue is covered in the favour of the appellant in its own case i.e. M/s. Toyoda Gosei Company vs. Deputy Commissioner of Income Tax, International Taxation Circle 2(2), Bengaluru (TS-993-ITAT-2022(Bang)] in AY 2019-20 (ITA (IT)800/Bang/2022)

At the outset the Appellant submits that the issue in the present appeal pertaining to Taxability of employee cost reimbursements as Fees for Technical Services (`FTS') amounting to INR 3,14,80,485 is covered in favour of the Appellant in its own case in AY 2019-20. M/s Toyoda Gosei Company vs Deputy Commissioner of Income Tax, International Taxation Circle 2(2), Bengaluru [TS-993-ITAT- 2022(Bang)J [ITA(IT) 800/Bang/2022J

The Hon'ble ITAT while adjudicating the issue as to whether the reimbursement of salary to seconded employees is taxable as FTS, answered the same in favour of the Appellant and observed as follows:

• The Assessee paid salary to seconded employees as a means of administrative convenience and also deducted necessary tax under section 192. (Para 4 of order on pg. 197 of paperbook) • Relying on HC ruling in Abbey Business Services and Flipkart Internet service as well as coordinate bench ruling in Toyota Boshuku and Pune ITAT ruling in Faurecia Automotive Holding it was held that reimbursement paid to the assessee were on cost-to-cost basis and no profit element was involved. (Para 4.1,4.2 of order on pg. 197, 205 of paperbook) • ITAT held that "The amount paid by the assessee company was only the reimbursement, which was part of the salary of expatriate employees, which is covered by the Article 12 of DTAA provisions between India and Japan following the judgment of Hon'ble jurisdictionalHigh Court of Karnataka ", the issue is covered in favour of the assessee. (Para 6 of order on pg. 206-207 of paperbook)

Thus, ITAT ruled in the favour of the appellant and the present case is also covered by the order of the ITAT for AY 2019-20.

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Page 15 of 30 A copy of the case law is enclosed on page 170-208 of paperbook.

With respect to Ground no. 3 of ITAT appeal — Taxability of employee cost reimbursements as Fees for Technical Services (`FTS') amounting to INR 3,14,80,485

1) In the given backdrop, it is humbly submitted that the reimbursement of salary cost towards the expatriate employees is not taxable as FTS under the provisions of both the Act and the India-Japan DTAA, on account of the following reasons: a. Distinguishing case laws relied upon by the ld. AO b. Existence of employer-employee relationship between expatriates and Indian entities basis the control and supervision of the Indian Entities c. Explanation 2 of section 9(1)(vii) of the Act excludes income chargeable to tax under the head “salaries” d. Payments made by the Indian entitles are towards reimbursement of actual employee cost and does not have any element of income.

a) Distinguishing case laws relied upon by the Ld. AO

11)It is submitted that in the Final Assessment order, the Ld. AO has alleged that the employee cost reimbursement received from the Indian Entities is taxable as FTS in the hands of the Appellant by relying on the decision of the Hon'ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd. vs. CIT ([2014] 364 ITR 336) [refer page no. 278-303 of the Case Law Compendium (`CLC')]. In this regard, it is submitted that the fact pattern of the said case is distinguishable from the present case on the following grounds: S.No. Centrica Facts Appellant’s Facts 1 In Centrica's case, the In the instant case, as already Indian company was a stated above, the Indian entities newly formed entity and have been in existence since a did not have the requisite very long time. Hence, it is not a technically trained human case where the expatriate resources. In this case, the employees can be said-to be Hon'ble High Court had deputed to India to assist the observed that the Indian entities in providing secondees were not only assistance in establishing the providing services to the operations in the initial years of Indian company in the its establishment or to transfer initial period but also any technical knowledge etc. to ensured that going the local employees in the initial forward, the skill set of the phase of its operations.

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Page 16 of 30 Indian company's other The present case is not a case of employees was built and initial support and the Indian these services could be entities already had plenty of local continued by them without employees. It is to be noted that assistance. In the said the local employees are well case, the Indian Company qualified and possess the requisite had admitted that the technical knowhow and skills to reason for secondment was carry out their duties in India. to provide support during the initial years till the necessary skill set was acquired by the resident employee group. Therefore, it was held that the secondees had transferred their technical ability and had made available their technical knowhow for future consumption. In this case, the Indian 2 In the present case, the Indian entity was set up as a company has its business captive unit engaged in independent from that of the providing services in the Appellant. Further, the employees nature of coordinating with seconded by the Appellant were third party Indian vendors not taking forward the business of and its overseas entities. the Appellant in India but were The employees seconded by effectively working under the the overseas entity were to control and supervision of the oversee the quality control Indian entities. of work of vendors. In this case, the seconded 3 The seconded employees were employees were not taken into employment by the specifically taken into Indian entities employment by the Indian Company In the instant case, the 4 In this case, the seconded Expatriation Agreements clearly employees were not demonstrate that the seconded specifically released by employees would work Foreign Company during "exclusively" for the Indian the period of secondment. entities during the term of their dispatch to the Indian entities. The Expatriation Agreements 5 The supervision and control entered into with the Indian over the employees were not entities clearly state that the clearly spelt out seconded employees shall work

IT(IT)A No.172/Bang/2023 M/s. TOYODA Gosei Company, Bidadi Page 17 of 30 under the direct control and supervision of the Indian entities during the term of their employment in India. Employees were In the instant case, the Indian 6. seconded entities have been in existence period since a very long time and the tooperationalizetheI employees were seconded to the ndian Indian entities merely to carry on Company. routine business activities as their employee. In Centrica's case, the In the case at hand, the payments 7. money paid to the which were made by the Indian 1 overseas entity accrued to entities to the Appellant, never the overseas entity, which accrued to the Appellant. During might or might not have the course of the assessment been applied by it for proceedings, it was already payment to thesecondees, clarified based thattheAppellantaccountsforthe onitscontractual Reimbursementsasreceivablesinits relationship with them. books of account.

12) It is evident from above that the facts on which the decision of the Hon'ble High Court has been rendered are entirely different from the facts of the case under consideration. Therefore, the said judgment would not be applicable to the Appellant's case as a binding precedent.

The Appellant humbly submits that there is a plethora of judgments 13) wherein the decision of Centrica has been distinguished. Following are the decisions having a similar fact pattern on which reliance is placed by the Appellant:

− DIT(IT) vs. Abbey Business Services India (P.) Ltd. [2020] 122 taxmann.com 174 (Karnataka) (refer para 11 & 12 at page no. 7 of CLC), wherein the Hon'ble High Court, basis the following factual observations, held that the secondees were employees of the taxpayer i.e., the Indian entity and not of the foreign company: • Secondees were to work at places as instructed by the taxpayer; • Secondees were to function under the control, direction and supervision of the taxpayer, in accordance with the policies, rules and guidelines applicable to other employees of the taxpayer; and • Secondees in their capacity as employees assisted the functioning of the taxpayer

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Page 18 of 30 M/s Toyota Boshoku Automotive India Private Limited vs DCIT IIT(TP)A No. 1646/Bang/20171 (refer page no. 8 to 37 of CLC) which squarely covers the case of the Appellant. In the said ruling, the Hon'ble Bangalore ITAT held that reimbursement made by the Indian Company to Toyota Corporation, Japan towards seconded employees cannot be regarded as 'fees for technical services'. The facts of the case are also identical wherein the Hon'ble Tribunal has dealt with the decision of Centrica and distinguished the same in Para 14.20.

M/s Faurecia Automotive Holding vs. DCIT (ITA No.784/PUN/2015) (refer page no. 112 to 151 of CLC), wherein it has been held that when the foreign company did not provide any 'service' to the Indian company and only received reimbursement on account of part employee cost paid outside India, such amounts would not qualify as FTS. (refer para 4.9-4.12 at page no. 47 to 86 of CLC)

From the above it is evident, that the case of payment of salary of the expats by the foreign entityis not chargeable to tax as FTS as it neither has an element of service nor it qualifies as FTS.

b) Existence of employer-employee relationship basis the control and supervision of the Indian entities

14) It is humbly submitted that the expatriates worked under the direct control and supervision of the Indian entities and that during the entire period of secondment, the Indian entities are the real and economic employer of these expats. The same is evident from Clause 1(c) of the respective Expatriation Agreement entered into with both the Indian entities, wherein the expatriates have been designated as employees of the respective Indian entities during the term of their employment in India. [refer page 22,30 of the Paper book]. The relevant clause is reproduced hereunder for Your Honors' kind reference:

'2. Dispatch of TG Employees All Expatriate shall retain their status as employees of TG, but c) render services exclusively to shall belong to TGMIN and TGMIN/TGSIN as employees of TGMIN/TGSIN during the term of their respective dispatches to TGMIN."

The Appellant would further like to rely on Clause 2 of the Expatriation 15) Agreements (refer page 23 of the Paper book) entered into with the respective Indian counterparts which further bolsters the aforesaid contention of the Appellant. The said article clearly states that the Indian entities shall be completely responsible for the conduct of the seconded employees and that the employees are required to follow

IT(IT)A No.172/Bang/2023 M/s. TOYODA Gosei Company, Bidadi

Page 19 of 30 internal policies of the Indian entities. Further, the functions, scope of work, roles and responsibilities too are to be carried out by the expatriates as per the instructions of the Indian entities. The relevant extracts of the said clause are reproduced herein for Your Honors' ready reference:"2. Services of Expatriate a) The Expatriate shall render their respective services to TGMIN/TGSIN in accordance with instructions from TGMIN/TGSIN at the places designated by TGMIN/TGSIN ...... TGMIN/TGSIN shall determine job title and work location of Expatriate, as well, as any changes thereto. • ) During the dispatch to TGMIN/TGSIN hereunder, each Expatriate shall be bound by, and treated in accordance with the applicable rules, policies, and corporate regulation regarding their services (including working hours, annual paid leaves, holidays, work discipline and reporting structure) established by TGMIN/TGSIN ... d) TGMIN/TGSIN shall make an appraisal of the Expatriate during the term of their respective dispatches to TGMIN/TGSIN!"

As evident from above, the Indian entities exercise their complete control over the 16) expatriates as well as undertake the appraisal of the expatriates. Thus, the Ld. AO/DRP has incorrectly alleged that the Appellant exercises control over the expatriates. If these expatriates were working as employees of the Appellant, then the Indian entities would not have evaluated the performance of the employees. Thus, it appears that the Ld. AO/DRP has failed to appreciate the substance of the arrangement and has relied on specific clauses of the agreement in order to draw inaccurate conclusions and in complete disregard to facts of the case.

Further, the Ld. AO in its impugned order has wrongly stated that the secondees 17) are not appointed by the Indian entities but, in turn, are assigned by the Appellant. In this regard, the Appellant would like to invite this Hon'ble Panel's attention to Clause 1 of the respective Expatriation Agreement, the relevant extract of which is reproduced herein below: [Re: Page 22 of Paperbook]

"1. Dispatch of TG employees (a) When TGMIN / TGSIN wishes to use skilled and qualified personnel of TG in accordance with _the business needs of TGMIN / TGSIN, TGMIN / TGSIN determines and notifies TG of expatriation requirements of employees to be dispatched by TG to TGMIN/TGSIN under this agreement (hereinafter referred to as "Expatriate') including necessary number, job experiences, places of service and term of dispatch of Expatriate."

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Page 20 of 30 18) As evident from above, the expatriates are deployed by the Appellant on the specific request of the Indian entities and as per its business requirements. Thus, the Appellant is not involved in the selection criteria of the expatriates and the same is solely at the discretion of the Indian entities.

It is worthwhile to note that such a process is not followed where actual 19) "services" are rendered by one entity to another. In such cases, the service provider decides the employees who should perform such services and the service recipient has no role to play in it.

Thus, the parties to the agreements have clarified their intent behind 20) deployment of expatriates at the very beginning of the agreement, which has been disregarded by the Ld. AO.

It is pertinent to reiterate that the Indian entities are the real and 21) economic employers of the expatriates as opposed to what has been alleged by the Ld. AO in the impugned order. The same is evident from Clause 1 & 2 discussed in the foregoing submission. Your Honors' would appreciate that the employees retain their status as employees of the Appellant only to ensure continuity of employment so as to be eligible for the retirement allowances that they would receive in their home country (i.e., Japan). However, during the secondment period, these expatriates shall remain the employees of Indian entities as evident from Clause 1(c) of the respective Expatriation Agreement.

22) It is submitted that the said employment agreements carve out the preliminary details of the employment of the expats with the respective Indian entities viz, place of service, term of dispatch, job title work location etc., all of which are decided by the Indian entities thereby making them the real employers of the expats.

Your Honors would further appreciate that in terms of Article 3 of the 23) Expatriation Agreement, the Indian entities are under an obligation to pay the expats' salary and wages (refer page no. 31-32 of the Paperbook) and the appropriate taxes have been deducted and deposited under section 192 of the Act. In support of the salary disbursed and taxes withheld by the Appellant, it has issued Form 16 to the expatriates. As per the Oxford English dictionary, an 'employee' is a person who 24) works under the direct control, supervision and direction of another person called an employer who exercises such authority over the employee. The employee not only receives instructions from his employer but is also subject to the right of the employer to control the manner in which he should carry out such instructions. A significant feature of employer-employee relationship being 'control and command.'

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The Hon'ble ITAT would appreciate that the documentation provided by 25) the Appellant such as the secondment agreements i.e., the Expatriation Agreements clearly establishes the fact that the expatriates are employees of the Indian entities and not the Appellant i.e., the foreign entity.

26) In this regard, reliance is placed on the judgment of Karnataka High Court in the case of DIT(IT) vs. Abbey Business Services India (P.) Ltd. [2020] 122 taxmann.com 174 (Karnataka) (refer para 11 at page no. 7 of CLC), wherein the Hon'ble High Court, basis the facts, held that the secondees were employees of the taxpayer and not of the foreign company.

Similar observations have been made by various courts/ tribunals in the 27) following cases: • DIT vs. HCL Infosystems Ltd [2004] 274 ITR 261 (Delhi HC) (refer page no. 101 of CLC) • Reckitt Benckiser (India) Ltd. vs. JCIT [2016] 70 taxmann.com 143 (Kolkata - Trib.) (refer page no. 102 to 119 of CLC) • Boeing India Pvt. Ltd vs. ACIT (ITA No. 9765/Del/2019) (refer page no. 120 to 143 of CLC)

28) The aforesaid case laws squarely apply to the facts of the instant case. Therefore, these expats qualify as employees of the Indian entities as they work completely under the control and supervision of the Indian entities.

Considering the foregoing submissions and from the various terms/provisions of the Expatriation Agreements, it is evident that the seconded employees shall be considered effective employees of the Indian entities and the Indian entities shall provide all facilities and other amenities as are provided to its employees and as may be required by such Employee.

Thus, it can be easily concluded that the Appellant never took the 29) responsibility for the work executed by an Employee while seconded to the Indian subsidiaries and that the Indian entities were solely responsible for the conduct of the employees.

c) No service element in secondment to Indian Entities [Explanation 2 of Section 9(1)(vii) of the Act excludes income chargeable to tax under the head "salaries"]

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Page 22 of 30 The Appellant would now like to draw the Hon'ble Bench's kind attention 30) to Explanation 2 of section 9(1)(vii) of the Act which is reproduced herein below:

(vii) income by way of fees for technical services payable by— (a) .....

(b)- • • • •• (c) ....... Explanation I. — 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, or like undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries"

As evident from above, once the payment is in the nature of salary, the 31) same cannot be classified as FTS. Therefore, the payment made by the Indian subsidiaries, being a pure reimbursement of salary cost, cannot be regarded as FTS in the hands of the Appellant, as the same is taxable as salary in the hands of the expatriate employees.

Further, the Indian entities have withheld taxes in accordance with 32) section 192 of the Act on the entire salary paid to the expats (whether disbursed in India or in Japan) as the same is applicable to the salary earned by the seconded employee. This is duly supported in Form 16, the copy of which is furnished before the Hon'ble ITAT (refer page no. 71 to 117 of the Paperbook).

Reliance in this regard is placed on the ruling of Mumbai Tribunal in the 33) case of Morgan Stanley Asia (Singapore) Pte. Ltd. vs. DDIT(IT) [95 taxmann.com 165 (Mumbai - Trib.)] (refer para 13 at page 160 of CLC)wherein it was held that the payment being reimbursement of salary cost covered under the exception to section 9(1)(vii) of the Act cannot be regarded as FTS.

IT(IT)A No.172/Bang/2023 M/s. TOYODA Gosei Company, Bidadi

Page 23 of 30 It has been further held by various Courts that in typical secondment/ 34) expatriation arrangements, the expatriates' salary reimbursements are not taxable as FTS or otherwise in the hands of foreign company. Some of the decisions on which the Appellant wishes to place reliance in this regard are as follows:

• United Hotels Ltd. vs. ITO [2005] 2 SOT 267 (DELHI) (refer page no. 161 to 164 of CLC) • DIT(IT) vs. Marks & Spencer Reliance India Pvt. Ltd. (ITA No. 893 of 2014) (Born HC) (refer page no. 95 to 97 of CL C) The attention of Hon'ble ITAT is invited to the judgement of Burt Hill 35) Design Private Limited ITS-127-ITAT-2017 (Ahd)prefer page no. 87 to 94 of CLC) passed by the Hon'ble Ahmadabad ITAT in which it was held that there is no income portion in salary reimbursement under secondment agreement.

d) No FTS in the absence of 'service' element " • It is submitted that the expats work under the control and supervision of 36) the Indian entities. Further, no technical service is being rendered by the Appellant to the Indian entities under such an arrangement.

37) As per the definition contained in Explanation 2 to section 9(1)(vii) of the Act, FTS is defined as "any consideration (including any lump sum consideration) for the rendering of any managerial. technical or consultancy services .

(Emphasis Supplied)

In this regard, the Appellant would like to submit that mere secondment of expatriates does not tantamount to rendering of any technical, managerial or consultancy services as specified u/s 9(1)(vii) of the Act, as apart from deputing the expatriates, the Appellant has not provided any services to the Indian subsidiaries, much less any technical, managerial or consultancy services.

The Ld. AO has made no reference to the services rendered by the 38) Appellant and the basis for holding that the impugned services are in the nature of FTS.

IT(IT)A No.172/Bang/2023 M/s. TOYODA Gosei Company, Bidadi

Page 24 of 30 The words of the statute too leave no room for any doubt that the 39) consideration must be for rendering of services of the nature described therein. Unless such services are rendered, the amount paid cannot be characterised as consideration for services. Since the Appellant had only deputed the expats and not rendered any services, therefore, the expression "provision of services of technical or other personnel" as appearing in the definition of FTS is also not satisfied.

It is pertinent to note that the definition of FTS mandates the existence 40) of 'consideration' for rendering of managerial, consultancy or technical services which would mean a positive act of something given in return for obtaining or getting a thing. In the present facts of the case, the entire salary of the expatriates is borne by the Indian entities, being the real and economic employer. In case the Appellant is requested to pay any amount to the expatriates in Japan on behalf of the Indian companies for administrative convenience, then the same was subsequently reimbursed by the Indian entities without any element of profit. This

arrangement, as stated above, was made solely for administrative convenience in payment of part salary of the expatriates and the same does not contain any mark-up resulting in any profit or income from it. Therefore, it cannot be treated as 'consideration' as per the definition of the term FTS under section 9(1)(vii) of the Act.

Reliance, in this regard, is again placed on the order of Pune Tribunal in 41) the case of M/s Faurecia 4utomotive Holding vs, DCIT(IT A No.784/PUN/2015) (refer page no. 47 to 86 of CL C). (as discussed above)

Further reliance is placed on the ruling of AAR in the case of 42) Cholamandalam MS General Insurance Co. Ltd., In re* [20091 178 Taxman 100 (AAR) wherein while adjudicating on a similar issue, the Hon'ble Advance Authority held, that reimbursement of part salary of secondee by the Indian entity cannot be construed as consideration for rendering of service of the kind specified in the FTS clause. (refer para 8.5 at page no. 171 of CLC)

In light of the above, it can be said that the Appellant is only acting as a 43) conduit for facilitating the salary payment of the expatriates and is not providing any services. Hence, the reimbursement from Indian counterparts cannot be subject to tax by any stretch of imagination and the addition made by the Ld. AO in consonance with the directions of Hon'ble Panel warrants deletion.

IT(IT)A No.172/Bang/2023 M/s. TOYODA Gosei Company, Bidadi Page 25 of 30 e) Payments made by the Indian entities are towards reimbursement of actual employee cost and does not have any element of income

It is submitted that the Appellant had disbursed part of the salary 44) payments of the expats in their home country on behalf of the Indian entities. It is pertinent to reiterate that the expats are non-residents and would typically like to have their salary paid in their home country. Therefore, only when requested by the Indian entities for the sake of administrative convenience, salary disbursements have been made in the bank accounts of the expatriates in their home country by the Appellant on behalf of the Indian entities, thus acting purely as a disbursing agent. Accordingly, the Indian entities made cost-to-cost reimbursements, without there being any element of mark-up or profit, towards the Appellant towards the expatriate salary payments disbursed. As already stated above, the same has been confirmed by the Ld. TPO as no adverse inference has been drawn w.r.t to the impugned transaction and the same has been held to be at arm length. To evidence that the payments to Appellant are back-to-back 45) reimbursements, without any element of profit or mark-up, reliance has been placed on various documents like details of the salary cost borne by the Indian entities.

A perusal of the aforesaid documents reveal that the amounts cross 46) charged by Appellant to the Indian entities is actually the amount which is paid to the expatriates in Japan. Hence, the impugned amount received by the Appellant from the Indian entities is a mere reimbursement with no element of profit or income and thus, are not taxable in India.

It is trite law that in the absence of any "income", reimbursements cannot 47) be charged to tax. Reliance in this regard is placed on 'the following case laws wherein similar finding has been returned: • TISCO vs. Union of India [2001] 2 SCC 41 (refer page no. 176 to 185 of the CLC) • Mahindra & Mahindra Ltd. vs. Dy. CIT [2010] 122 ITD 216 (refer page no. 186 to 248 of the CLC) • Temasek Holdings Advisors (I) (P.) Ltd. vs. DCIT [2014] 160 TTJ 556 (ITAT Mum) (refer page no. 249 to 277 of the CLC) • ITO vs. Ariba Technologies (India) Pvt. Ltd. [ITA No. 616(Bang.)/2011] (refer page no. 38 to 46 of the CLC)

Further, the Appellant wishes to bring to the kind attention of this 48) Hon'ble Bench a recent ruling of M/s Toyota Boshoku Automotive India Private Limited vs DCIT (supra) (refer page no. 8 to 37 of the CLC) which squarely covers the case of the Appellant. In the said ruling, the

IT(IT)A No.172/Bang/2023 M/s. TOYODA Gosei Company, Bidadi

Page 26 of 30 Hon'ble Bangalore ITAT held that reimbursement made by the Indian Company to Toyota Corporation, Japan towards seconded employees cannot be regarded as `fees for technical services'. Accordingly, the same was held to be not taxable in India and correspondingly, no withholding was required to be made on the same.

In view of the above, it is submitted that mere disbursement of salary by 49) the Appellant on behalf of the Indian entities cannot be categorized as 'provision of services' by the Appellant to the Indian entities. Therefore, the attempt of the Ld. AO as per the directions of Hon'ble DRP in holding employee cost reimbursement to be taxable as FTS is bad in law and warrants deletion.

In view of the above facts and arguments advanced by the Appellant it is prayed that the addition of INR 3,14,80,485 on account of cross charge by the Appellant from the Indian entities may kindly be deleted.”

2.4 The ld AR for the assessee reiterated the submissions made before the lower authorities and vehemently argued his case and submitted that all the details in regard to substantiating that they were employed by the Indian entities. He also referred to the relevant part of the agreements and further submitted that only the revenue has disputed in regard to the 13 employees to whom the amount was paid. The assessee has also deducted TDS as per section 192 of the I T Act on salary payments and he also submitted that Form No.16 were issued to the employees which were produced before the revenue authorities. The Ld. A.R. also submitted that the Hon’ble jurisdictional High Court of Karnataka has decided the similar issue in the case of Abbey Business Services India Pvt. Ltd. Reported in (2020) 122 Taxmann.com 174 (Karn). The relevant part of the order is as under:

IT(IT)A No.172/Bang/2023 M/s. TOYODA Gosei Company, Bidadi

Page 27 of 30 not be considered as 'fees for technical services'. It is also pertinent to note that secondment agreement constitutes an independent contract of services in respect of employment with assessee. From the perusal of the key features of the agreement, which have been reproduced by the Commissioner of Income Tax (Appeals), it is evident that the seconded employees have to work at such place as the assessee may instruct and the employees have to function under the control, direction and supervision of the assessee and in accordance with the policies, rules and guidelines applicable to the employees of the assessee. The employees in their capacity as employees of the assessee had to control and supervise the activities of Msource India Pvt. Ltd. Therefore, the assessee for all practical purposes has to be treated as employer of the seconded employees. There is no obligation in law for deduction of tax at source on payments made for reimbursement of costs incurred by a non resident enterprise and therefore, the amount paid by the assessee was not to suffer tax deducted at source under section 195 of the Act. Similar view has been taken by High Court of Delhi in HCL Info System Ltd. (supra) in respect of salaries paid to foreign technicians on behalf of the assessee. 12. So far as reliance placed by learned counsel for the revenue on the decision of Centrica India Offshore (P.) Ltd. (supra) is concerned, from perusal of paragraph 29 of the aforesaid decision, it is evident that the High Court of Delhi considered the issue whether the secondment of employees by BSTL and DEML, the overseas entities fall within Article 12 of India, Canada and Article 13 of India, UK DTAAs, which embody the concept of service permanent establishment. In the instant case, the issue of permanent establishment is not involved. Therefore, the aforesaid decision is not applicable to the fact situation of the case.

2.5 He further relied on the decision of coordinate bench of the Tribunal in assessee’s own case in IT(IT)A No.800/Bang/2022 for the AY 2019-20 dated 16.12.2022 and submitted that the issues are similar as decided in the assessee’s own case and he also referred to submissions as well as case laws relied by the assessee for the AY 2019-20. He further submitted that the issue is squarely covered in favour of the assessee. Accordingly, the appeal of the assessee may be allowed.

IT(IT)A No.172/Bang/2023 M/s. TOYODA Gosei Company, Bidadi

Page 28 of 30 1) Judgement of Hon’ble Supreme Court in the case of CC, CE & ST Bangalore vs. Northern Operating Systems (P) Ltd. reported in (2022) 138 taxmann.com 359(SC). 2) Judgement of Hon’ble High Court of Delhi in the case of Centrica India Offshore (P) Ltd. Vs. CIT-I reported in (2014) 44 taxmann.com 300 (Delhi)

3.1 In the rejoinder, the ld. A.R. submitted that the case law relied by the ld. D.R. is not applicable in the present facts of the case. During the course of assessment proceedings, the various case laws were filed before the AO but he has not dealt the issue properly. He further submitted that the case laws quoted in the written synopsis are squarely applicable in the present facts of the assessee.

IT(IT)A No.172/Bang/2023 M/s. TOYODA Gosei Company, Bidadi Page 29 of 30 “6. After hearing both the sides and perusing the entire material on record and the orders of lower authorities, from the facts narrated above, we observe that during the impugned assessment year, the 18 employees were engaged by the assessee company, out of which, the payment made for social security in the nature of reimbursement has not been accepted by the AO in respect of 11 employees to the extent of Rs.2,52,91,243/-. From the paper books, we notice that the seconded employees have been paid salaries and duly TDS has been deducted. The AO has accepted the salary payments directly to the employees and while computing total income of the employees, the social security amount has been considered as income in the hands of the employee. The reimbursement made by the assessee is on cost to cost basis and no any profit elements are involved. The terms and conditions of the services of the employees have been examined by the AO and agreements have also been examined. The AR submitted that as per the country of residence of the employees, there are some obligation cost upon the employer for social security of his employees to be maintained. The amount paid by the assessee company is only the reimbursement, which is part of the salary of expatriate employees, which is covered by the Article 12 of DTAA provisions between India and Japan. Considering the entire submissions cited supra from both the sides, we respectfully following the judgment of Hon’ble jurisdictional High Court of Karnataka, the issue is covered in favour of the assessee. Accordingly, we allow the appeal of the assessee. Respectfully following the above judgement of the coordinate bench of the Tribunal in assessee’s own case, the ground nos.3 to 3.9 raised by the assessee on this issue are allowed.”

Order pronounced in the open court on 31st May, 2023

Sd/- Sd/- (George George K.) (Laxmi Prasad Sahu) Judicial Member Accountant Member

Bangalore, Dated 31st May, 2023. VG/SPS

IT(IT)A No.172/Bang/2023 M/s. TOYODA Gosei Company, Bidadi Page 30 of 30

Copy to:

Asst. Registrar, ITAT, Bangalore.