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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K. & Ms. PADMAVATHY S
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER
IT(TP)A No.338/Bang/2021 Assessment year : 2016-17
Biesse Manufacturing Company Pvt. Ltd., Vs. The Assistant Commissioner of Survey No.32, No.469, Income Tax, Sondekoppa Road, Jakkasandra Village, Circle 1(1)(2), Nelamangala Taluk, Bengaluru. Bengaluru – 562 123. PAN: AACCB 7928D APPELLANT RESPONDENT
Appellant by : Shri, Tata Krishna, Advocate Respondent by : Shri Sankar K. Ganeshan, CIT(DR)(ITAT), Bengaluru.
Date of hearing : 19.10.2022 Date of Pronouncement : 31.10.2022 O R D E R Per Padmavathy S., Accountant Member This appeal is against the order of National Faceless Assessment Centre, Delhi [NFAC] dated 21.4.2021 passed u/s. 143(3) r.w.s.144C (13) of the Income-tax Act,1961 [the Act] for the assessment year 2016-17.
The assessee is a private limited company engaged in manufacturing and trading of woodworking machine components and
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related services. The assessee is a wholly owned subsidiary of Bissie Spa, Italy. The assessee filed return of income for AY 2016-17 on 30.11.2016 declaring a total income of Rs.23,40,00,190 and a book profit of Rs.18,55,51,785. The case was selected for scrutiny through CASS and notice u/s. 143(2) was duly served on the assessee. A reference was made to the TPO for determination of ALP of the international transaction. The TPO made an adjustment in the manufacturing segment for an amount of Rs.16,14,17,954 and also interest on delayed receivables for Rs.45,80,016. The AO passed the draft assessment order incorporating the TP adjustment. The AO also made an addition towards secondment charges and reimbursement of expenses for an amount of Rs.1,94,40,869 and disallowed interest on delayed remittance of statutory payments of Rs.8,27,360. Aggrieved, the assessee filed its objections before the DRP.
The DRP gave partial relief to the assessee whereby the interest on receivables was reduced to Rs.22,82,138. The DRP also deleted disallowance of interest on delayed remittance of statutory payments. The DRP confirmed the TP adjustment in the manufacturing segment and also the disallowance of secondment charges. The AO passed the final assessment order pursuant to the order of the DRP.
The assessee raised concise grounds as per below details:-
Ground No.1, 3 & 9 – general grounds 2. Ground 2 – legal issue with regard to the order u/s. 92CA does not bear the Document identification number (DIN).
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Ground 4 – (4.1 to 4.14) – TP adjustment with respect to manufacturing segment. 4. Ground 5 (5.1 to 5.11) – Interest on delayed receivables. 5. Ground 6 (6.1 to 6.16) – Disallowance of secondment charges and reimbursement. 6. Ground 7 – Levy of interest u/s. 234A 7. Ground 8 – Levy of interest u/s. 234B & 234C. TP adjustment
As per the TP study, the assessee has entered into several international transactions with its AE. In the manufacturing segment, the assessee followed the TNMM as the most appropriate method and operating Profit/Operating Cost is considered as the Profit Level Indicator. The financials of the manufacturing segment as per the TP study is as follows:-
Particulars 2015-16 Income Sales & Other related income 190,87,89,429 Total Operating Income 190,87,89,429 Expenditure Material Cost 123,68,51,046 Employees Costs 27,06,66,050 Operating Expenses & Other Expenses 17,22,09,593 Depreciation 5,16,50,231 Total Operating Cost 173,13,76,920 Operating Profit 17,74,12,508 Operating Profit/Operating Costs 10.25%
The assessee chose 21 companies as comparables whose 35th 6. percentile margin is 3.19% and 65th percentile of margin is 7.59% and therefore the assessee concluded that the international transaction of
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the assessee is within arm’s length. The TPO rejected all the 21 comparables chosen by the assessee. The TPO did a fresh search to choose the following final set of comparables.
Wt. PLI2 Wt. PLI1 SI. (SOP/SOC) (SOP/SOR) (%) No. Company Name (%) 3.91 1 United Drilling Tools Ltd 4.07 2 Groz Engineering Tools Pvt Ltd 54.64 35.33 3. CMI F P E Ltd . 0.00 -4.37 Average 19.57 11.62
Accordingly, the TPO worked out the TP adjustment as under:-
Particulars Amount (Rs.) Arm's Length Mean Margin on Cost (Adjusted) 119.57% Operating Cost 1,73,13,76,920 2,07,02,07,383 Arm's Length Price (ALP) 119.57% of Operating Cost (A) Price Received (B) 1,90,87,89,429 16,14,17,954 Variation in price (C)= A-B
Aggrieved, the assessee filed objections before the DRP who confirmed the TP adjustment in the manufacturing segment. Before us, the ld. AR submitted that out of the final set of comparables selected by the TPO, 2 comparables viz., United Drilling Tools Ltd. and Gross Engineering Tools Ltd. have been excluded by the TPO in the assessee’s own case for AY 2015-16. Therefore the ld. AR submitted that the TPO is not correct in taking a different stand for the year under consideration given that there is no change in the facts. The ld. DR did not raise any objections to the contention of the ld. AR.
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We have heard the rival submissions and perused the material on record. We notice that for the AY 2015-16 in assessee’s own case, the TPO issued a show cause notice to the assessee wherein the TPO proposed to include United Drilling Tools Ltd. and Groz Engg. Tools Pvt. Ltd. (pg. 541 of PB) as comparable companies. The assessee filed its response raising objections for inclusion of the said two companies (pg. 545 of PB). We also notice that the TPO after considering the submissions of the assessee, in the final assessment order dated 31.10.2018 (pg.451 of PB), did not make any adjustments in the manufacturing segment and has accepted the comparables chosen by the assessee. Therefore, we see merit in the argument of the ld. AR that the TPO cannot a different stand in the year under consideration by rejecting the comparables of the assessee and choosing a fresh set of comparables. We therefore hold that the two comparables United Drilling Tools Ltd. and Groz Engineering Tools Ltd. have to be excluded from the comparables. The TPO is directed to recompute the ALP accordingly.
Interest on receivables
The TPO treated the delayed receivables as a separate international transaction and levied a notional interest using 6 months LIBOR + 400 basis points that worked out to 4.485%. In the absence of invoice wise details the TPO worked out the interest based on opening & closing balance of the receivables and arrived at an interest of Rs.45,80,016 after giving a credit of 60 days. The DRP held that
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adopting LIBOR rate is incorrect and that SBI short term deposit rate should be applied and directed the TPO to recompute the interest. The DRP also directed the assessee to submit the invoice wise details before the TPO. Accordingly, the interest was recomputed and got reduced to Rs.22,82,138. Aggrieved, the assessee is in appeal before us.
The ld. AR submitted that the assessee is a debt-free company and drew our attention to the financials of the assessee at pages 256 to 269 of PB. The ld. AR further submitted that the receivables are in foreign currency and therefore the DRP erred in applying the short term deposit rate of SBI for the purpose of charging notional interest.
The ld. DR relied on the orders of lower authorities.
We have heard the rival submissions and perused the material on record. We notice that as per the financials, the assessee is a debt free company. The impugned issue is squarely covered by the decision of the coordinate Bench of the Tribunal in the case of M/s. Barracuda Networks India Private Limited vs DCIT - IT(TP)A No.229/Bang/2021 wherein it was held that :-
“41. We have carefully considered the rival submissions. On the question whether delayed realization of trade receivables from the AE constitutes an international transaction or not, there are conflicting decisions of various benches of the Tribunal, which we shall point out. Sec.92B of the Act defining what is an international transaction was amended by Finance Act, 2012, way of insertion of an Explanation to sec.92B with retrospective effect from 1-4-2002 and the same reads thus:-
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“Explanation- For the removed of doubts, it is hereby clarified then-(i) the expression "international transaction" shall include— (a) …………. (b) ………….. (c) capital financing, including any type of long-term or short- term borrowing. lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment of receivable or any other debt arising during the course of business: …………” 14. The amendment is to the effect that “international transaction” would specifically include within its ambit. 'deferred payment or receivable or any other debt arising during the course of business’ and hence non-charging or under-charging of interest on the excess period of credit allowed to the AE for the realization of invoices would amount to an international transaction. It was so held by the ITAT Delhi Bench in the case of Bechtel India Pvt Ltd (in ITA No.6530/De1/2016 dated 16 May 2017). It is important to note that the Bench while arriving at the said conclusion distinguished its earlier order in the case of Kusum Healthcare Pvt. Ltd. (supra) and rejected the contention that interest gets subsumed in the working capital adjustment. The Hon`ble Bombay High court in the case of CIT vs. Patni Computer Systems Ltd, (2013) 215 Taxman 108 (Bom) dealt, inter alia, with the following question of law:- "(c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any Other transaction having a bearing on the profits, income, losses or assets of such enterprises?"
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While answering the above question, the Hon'ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon'ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. In the case of BT e Serv (TS-849-ITAT- 2017(DEL)-TP) the ITAT Delhi Bench held that undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f. 01.04.2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an "international transaction". The natural corollary would be of imputing interest on such "capital financing" if same is not charged at arm's length. The ITAT concluded that if outstanding receivables are within the terms of agreement, then it may be argued that interest on such outstanding is already covered in the sale price of the goods. However, if the agreement does not specify the term of the payment, even then assessee must be given benefit of credit period which is accepted business practice in the trade. The ITAT confirmed 30 days as the normal credit period adopted by the TPO. 42. The foregoing discussion discloses that non-charging or under- charging of interest on the excess period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. In view of the above observations. the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted. Similarly, Considering the above discussion, it is held that deferred trade receivable constitutes international transaction. 43. Having concluded that deferred trade receivables constitute international transaction, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be
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charged and the arm's length rate at which the interest should be charged. On this aspect we can take useful guidance from the decision of the ITAT Delhi Bench in the case of Techbooks International (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle-3, Noida [2015] 63 taxmann.com 114 (Delhi - Trib.), wherein the Tribunal laid down guidelines on the manner of determination of ALP, as follows:
“13.11 Now, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged.
13.12 In so far as the first aspect is concerned, we find that the TPO has taken normal credit period of 60 days and accordingly made addition on account of transfer pricing adjustment for the period in excess of 60 days. In our considered opinion, transfer pricing adjustment on account of interest for the entire period of delay beyond 60 days cannot be treated as a separate international transaction of trading debt arising during the course of business. It is noticed that the assessee entered into an agreement with its AE for realization of invoices within a period of 150 days. This implies that the interest amount on non-realization of invoices up to 150 days was factored in the price charged for the services rendered. Annexure-1 to the TPO's order gives details of the instances of late realization or non-realization of advances up to the year ending. First three and a half pages of this Annexure indicate number of days for which there was delayed realization. Such delay ranges from 175 days to 217 days. The remaining pages disclose no realization of invoices up to 31st March, 2010. When we consider the dates of invoices in the remaining pages, it is manifested that in certain cases these invoices have been raised on 31st August, 30th or September or 31st October, 2009. In all such cases, the period of 150 days already stood expired as on 31st March, 2010 and the assessee ought to have charged interest on the delay in realizing such invoices along with the first three and a half pages in which there is an absolute and identified delay in realization of
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invoices beyond the stipulated period. When the interest for realization of trade advances up to 150 days is part and parcel of the price charged from the AE, then the delay up to this extent cannot give rise to a separate international transaction of interest uncharged. Rather interest for the period in excess of normally realizable period in an uncontrolled situation upto 150 days needs to be considered in the determining the ALP of the international transaction of the 'Provision of IT Enabled data conversion services'. This can be done by increasing the revenue charged by the comparable companies with the amount of interest for the period between that allowed by them in realization of invoices and 150 days as allowed by the assessee, so as to bring such comparables at par with the assessee's international transaction of provision of the ITES. To illustrate, if the comparables have allowed credit period of, say, 60 days and the assessee has realized its invoices in 180 days, then interest for 90 days (150 days minus 60 days) should be added to the price charged by the comparables and the amount of their resultant adjusted operating profit be computed. Rule 10B permits making such an adjustment. Sub-rule (2) to rule 10B stipulates that for the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged, inter alia, with reference to:
'(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions …' .
Then sub-rule (3) mandates that an uncontrolled transaction shall be comparable to an international transaction if 'reasonably accurate adjustments can be made to eliminate the material effects of such differences'. Applying the prescription of rule 10, it becomes vivid that difference on account of the 'contractual terms of the transactions', which also include the credit period allowed, needs to be adjusted in the profit of comparables. As the TPO has taken the entire delay beyond that normally allowed as a separate international transaction, which position is not correct, we hold that the effect of delay on interest up to 150 days over and above the normal period of realization in an uncontrolled situation, should be considered in the determination
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of the ALP of the international transaction of 'Provision of IT Enabled data conversion services' and the period of delay above 150 days, namely, 30 days in our above illustration (180 days minus 150 days) should be considered as a separate international transaction in terms of clause (c) of Explanation to section 92B.
13.13 In so far as the question of rate of interest is concerned, we find that this issue is no more res integra in view of the judgment of the Hon'ble jurisdictional High Court in the case of Cotton Naturals (I) (P.) Ltd. (supra), in which it has been held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate. Under such circumstances, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of addition on account of transfer pricing adjustment towards interest not realized from its AE on the debts arising during the course of business in line with our above observations.”
We are of the view that the issue with regard to determination of ALP in respect of the international transaction of giving extended credit period for receivables should be directed to be examined afresh by the AO/TPO on the guidelines laid down in the decision referred to in the earlier paragraph, after affording Assessee opportunity of being heard. As held in the aforesaid decision the prime lending rate should not be considered and this reasoning will apply to adopting short term deposit interest rate offered by State Bank of India (SBI) also. The rate of interest would be on the basis of the currency in which the loan is to be repaid. We hold and direct accordingly. All issues on determination of ALP of the transaction are kept open.”
Respectfully following the above decision of the coordinate Bench, we remit the issue back to the TPO/AO for bench marking of the transaction of interest on delayed receivables and recomputation of ALP accordingly.
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Secondment charges and reimbursement
During the course of assessment proceedings, the AO noticed that the assessee has made payment to M/s. Biesse Spa, Italy towards secondment of employees deputed to India during the year under consideration for an amount of Rs.1,39,07,427. The AO also noticed that no tax was deducted at source on these amounts paid to the AE and issued a show cause notice to the assessee as to why the amount should not be disallowed u/s. 40(a)(i). The assessee submitted that these were salaries paid to Italian employees working in India. The payment was made to the employees in Italy and the same was reimbursed by the assessee. The assessee also submitted that the seconded employees was under the payroll of the assessee and part of salary was paid in Italy for which the AE periodically raised invoice for reimbursement. The assessee also submitted that tax has been duly deducted u/s. 192B on the salary paid in India and in Italy and therefore no tax was liable to be deducted on the reimbursements made to the AE. The AO rejected the submissions of the assessee and proceeded to treat the payment as fees for technical services and held that the same was liable to be deducted at source u/s. 195 since the assessee has not deducted the tax, the AO disallowed the same.
With regard to reimbursement of expenses, the assessee submitted that expenditure on insurance expenses, travelling expenses which are reimbursed to AE in relation to the personnel who visited
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India for providing technical services. The AO disallowed an amount of Rs.55,33,442 paid as reimbursement to the AE for the reason that tax was not deducted at source. The DRP confirmed the addition.
Before us, the ld. AR submitted that the payments to AE are purely reimbursements and taxes u/s. 192B is duly deducted. In this regard, the ld. AR drew our attention to Form 16 of the seconded employee (pages 669 to 671 of PB) and the return of income of the seconded employee (pg. 676 to 691 of PB) to substantiate that the amount paid as salary to seconded employee has already suffered tax. The ld. AR further submitted that the amount paid is only reimbursement and therefore not liable to deduct tax at source. The ld. AR submitted that the Hon’ble Karnataka High Court in the case of Flipkart Internet Pvt. Ltd. v. DCIT (WP No.3619/2021) has considered the issue of TDS on reimbursement of salary cost of seconded employees in the context of issue of NIL TDS and directed that the certificate for NIL TDS be issued. It is therefore submitted that the issue under consideration being the applicability of TDS provisions on the reimbursement of salary cost of seconded employees is covered by the above decision of the jurisdictional High Court. The ld AR further relied on the decision of the coordinate bench of the Tribunal in the case of Goldman Sachs Services Pvt. Ltd. vs. DCIT in IT(IT)A Nos. 362 to 369 & 338 to 345/Bang/2020 by order dated 29.04.2022.
The ld DR relied on the order of the lower authorities.
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We have heard the rival submissions and perused the material on record. We notice that 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 Department had sought for further information which was not furnished On the contrary, the petitioner has made out detailed representation on the legal position and record does not reflect any requisition for further information remaining unanswered In fact, the Apex Court in GE India Technology Centre (P.) Ltd. (supra) has rightly observed at para-16 as follows:- "16. The fact that the Revenue has not obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all..." 35. Further, it must be noticed that the finding as regards deduction of tax at source under section 195 of the IT Act is tentative insofar as the Revenue is concerned Even if the Revenue orders that there was no obligation to make deduction under section 195, the question of liability of the recipient still remains to be decided subsequently Accordingly, the question of prejudice to the Revenue at the stage of section 195 order is unavailable to it 36. Curiously, the file contains a note by the same DCIT who has eventually passed the impugned order, which note dated
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10.03.2020 addressed to the CIT seeks for granting approval for granting deduction of TDS at the rate of zero per cent on cost-to- cost reimbursement However, the opinion was directed to be reconsidered as per the endorsement found in the file and eventually an order was passed by DCIT contrary to the earlier view and has rejected the application 37. Accordingly, the findings in the impugned order and the conclusion regarding the employer-employee relationship is based on a wrong premise and is liable to be set aside As observed by this Court in DIT (International Taxation) v. Abbey Business Services India (P.) Ltd. [2020] 122 taxmann.com 174 (Kar.), "it is also pertinent to note that the Secondment Agreement constitutes an independent contract of services in respect of employment with assessee" Hence, the DCIT in the impugned order has missed this aspect of the matter and has proceeded to consider the aspect of rendering of service as to whether it was 'FIS' 38. In light of setting aside of the impugned order in the context of legal position as noticed, the only order that can now be passed is of one granting 'nil tax deduction at source'. 39. 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.” 22. 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
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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 Government. Form 16 at page 228- 230 issued to Christopher Roberts of PB Vol I, by the assessee in Indian, Certificate under section 203 of TDS having deducted at source and further indicates the following –
• Employee has a PAN number in India • Total taxable salary is Rs 9,761,581 (this corresponds to the US$ 130,000 as total compensation indicated in the local employment contract at para 4 • The Indian company does full TDS on 100% of the salaries, although 25% is paid in India and balance 75% outside India • TDS done is Rs 2,834,300/-, which translates to 30.8% of Rs 9,761,58 • Employee also contributes to Indian provident fund Rs.2,57,885/-
26.11. From conjoint reading of Article 15 of the OECD Model Convention and the articled referred to herein above, there is no doubt in our minds that the assessee in India is the economic and de facto employer of the seconded employees. It is an admitted fact that all the seconded employees are in India for more that 183 days in a 12 month period. Further all the seconded employees have PAN card as well as file their returns in India in respect of the 100 % salary, though the assessee pays only part of the salary in India.
26.12. The definition of FTS under the Act is given in Explanation 2 to Sec.9(1)(vii) of the Act that reads as follows:-
“Income deemed to accrue or arise in India. 9.(1) The following incomes shall be deemed to accrue or arise in India:-
(i) to (vi)
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(vii) income by way of fees for technical services payable by— (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.
Explanation 1.—For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 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
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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 the time of making payment u/s.195 of the Act.
26.14. Article 12(4)-(5) of India USA, DTAA deals with “Fees for technical services’, as under:
“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) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (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.
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).”
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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 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.
29.1. 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
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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 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
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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’be 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.
29.4 There is another decision of Hon’ble Supreme Court in case of DIT v. Morgan Stanley reported in (2007) 162 Taxman 165, wherein, it is held that, in case of deputation, the entity to whom the employees have been deputed cannot be regarded as employer of such employees as the employees continue to have lien on his employment with the entity which deputes him. Entity seconding the employee is the employer as it retained the right over seconded employee is also held by Hon’ble AAR in case of AT & S India Pvt Ltd., reported in 287 ITR 421.
29.5 The observations of the Hon’ble Supreme Court in the case of Morgan Stanley (supra) were in the context of existence of service PE. This is clear from a reading of the relevant portion of the judgment of the Hon’ble Supreme Court, which is as follows:-
“As regards the question of deputation, an employee of MSCo when deputed to MSAS does not become an employee of MSAS.
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A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist’s terms and employment. The concept of a service PE finds place in the UN Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entail it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. Applying the above tests to the facts of this case, it is found that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there 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
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resident company, pursuant to a foreign collaboration agreement on the terms and conditions contained in secondment agreement. Under the secondment agreement the applicant is required to compensate AT&S for all costs directly or indirectly arising from the secondment of the personnel, and the compensation is not limited to salary, bonus, benefits, personal travel, etc. but also includes other items. On the above facts, Hon’ble AAR ruled that the Contention that the payments are only in the nature of reimbursement of actual expenditure is not supported by any evidence and there is no material to show what actual expenditure was incurred by AT&S and what was claimed as reimbursement. A part of the salary of seconded personnel is paid by the applicant in Indian rupees and the remaining part is paid by the applicant to AT&S in Euro. While working with the applicant, the seconded personnel are required to comply with the regulations of the applicant, but they would go back to the AT&S on the expiry of assignment. Aforesaid terms and conditions show that the seconded personnel in effect continue to be employees of AT&S. Recipient of the compensation is AT&S and not the seconded employees. Further contention was that AT&S is not engaged in the business of providing technical services in the ordinary course of its business is also not tenable. Therefore, payments made to AT&S by the applicant are for rendering "services of technical or other personnel" and are in the nature of fees for technical services within the meaning of Explanation 2 to sub clause (vii) of section 9(1) and Article 12(4) of the relevant DTAA and are subject to deduction of tax at source under section195.
30.1 The ruling of Hon’ble AAR is on the factual finding that payments were not only reimbursement of actual salary, bonus etc., but was also included other sums.
30.2 Per contra in the present facts of the case, it is not at all the contention of the revenue that, something over and above what was paid as salary, bonus etc.
30.3 Liability under section 195 to deduct tax at source when making payment to a non-resident arises, only if, sum paid is chargeable to tax in India. Payment of salaries is not covered under section 195. Thus, it is
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necessary to take into consideration following aspect to determine Payments to enterprise seconding employees, the Indian entity has an obligation to deduct tax source u/s 195:
(i) Payment of fees by an enterprise (Indian entity) to foreign entity for seconding employees; (ii) Reimbursement of salaries to the entity seconding the employees (foreign entity) from the entity to whom employees have been seconded (Indian entity).
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 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).”
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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.
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 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.
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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.”
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 concept of ‘make available’, observed and held as under:
“What is the meaning of 'make available'. The technical or consultancy service rendered should be of such a nature that it 'makes available' to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on
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his own in future without the aid of the service provider. In other words, to fit into the terminology 'making available', the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b ). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as 'fee for technical/included services' only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.
The Ld.AR has placed before this Tribunal a decision rendered by Hon’ble CESTAT, Bangalore, wherein the Hon’ble CESTAT was deciding, whether the assessee in India, was required to pay service tax demand (on reverse charge basis) on the secondment reimbursements, on the basis that the same amounts to “manpower recruitment & supply agency services”, placed at page 66-86. The Hon’ble CESTAT, Bangalore, held that employer-employee relationship exist between the seconded employee and the assessee in India in para 14 of the order passed by Hon’ble CESTAT, Bangalore. 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 –
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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 respective returns under Section 139 of Income Tax Act, 1961 and shows the entire salary paid by the Appellant (including part of the salary paid in Foreign Exchange) as his/her income as salaries and pays the income tax thereon…..
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 Personnel, as required under the Income Tax Act, 1961. We find
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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
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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 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.” 23. In assessee’s case on perusal of records it is noticed that the seconded employee is in the payroll of the assessee and tax has duly been deducted on the salary paid to the employee including what is paid in Italy. It is also noticed that the reimbursement has also been taken into account for the purpose of TDS u/s.192B. We further notice that the reimbursement of expenses towards insurance, travelling expenses of the visiting employees is a cost to cost reimbursement with no element of income. Therefore, respectfully following the ratio laid down by the Hon’ble Karnataka High Court and also the decision of the coordinate bench of the Tribunal we hold that the reimbursement towards secondment charges and reimbursement of expenses are not liable for tax deduction u/s. 195 and therefore the disallowance made u/s. 40(a)(i) is not warranted on this count.
Through ground No.2, the assessee contended the validity of the order passed u/s. 92CA on the basis that the said order does not bear
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the mandatory DIN. During the course of hearing, the ld. AR presented several arguments in this regard. Since we have considered the TP adjustment on merits and allowed the issue in favour of the assessee, the legal issue contended has become academic. Accordingly, we leave this ground open.
The rest of the grounds raised in connection with TP adjustments with regard to the comparables are also left open in the light of our decision as given in the earlier part of this order.
Ground no.7 is with regard to levy of interest u/s.234A. Ld AR during the course of hearing submitted that there is no delay in filing the return of income and therefore there should not be any levy of interest u/s.234A. We direct the AO to examine this fact and not to levy interest u/s.234A if the assessee has filed the return of income before the due date u/s.139(1). It is ordered accordingly.
Ground no.8 is consequential not warranting a separate adjudication.
In the result, the appeal of the assessee is partly allowed.
Pronounced in the open court on this 31st day of October, 2022.
Sd/- Sd/-
( GEORGE GEORGE K. ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 31st October, 2022. /Desai S Murthy /
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Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore.
By order
Assistant Registrar ITAT, Bangalore.