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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI O.P. KANT & SHRI K.N. CHARY
ORDER PER O.P. KANT, AM:
These appeals by the assessee are directed against the Final Assessment Order dated 28th December, 2015 passed by the Assessing Officer and Rectification Order dated 28.03.2018 passed by the Assessing Officer for Assessment Year 2011-12.
These appeals are connected with the same assessment year and, therefore, same were heard together and disposed of by way of this consolidated order for the sake of convenience. ./2016 (AY: 2011-12) 3. Firstly, we take up the appeal in ITA No. 983/Del./2016. The grounds raised
in the appeal are reproduced as under:
1. On the facts, in law and in the peculiar circumstances of the present case, the Learned Dispute Resolution Panel (‘Ld. DRP’)/ Ld. AO has grossly erred in making an addition of Rs. 25,10,56,019/- under section 40(a)(i) of the Act, by exceeding its powers as detailed under section 1440(8) of the Act by directing an addition on an issue which neither arose out of the assessment proceedings, nor was in relation to proposed variation by the Ld. AO and hence for this reason alone, it is prayed that the addition so made, may be ordered to be deleted.
2. Without prejudice to the above, on the facts, in the circumstances of the case & in law, the Ld. AO as well as Ld. DRP grossly erred in making an adjustment of Rs. 25,10,56,019/- to the returned income of the Appellant, treating the same as fees for technical services (‘FTS’) as per the provisions of section 9(i)(vii) of the Act and Fee for Included services/ FTS/ Royalty under Article 12(4) of India- US Tax Treaty/ Article 12(4) of India-UK Tax Treat/ Article 12(3) of India Australia Tax Treaty respectively and holding that the same is to be disallowed under section 40(a)(1) of the Act for failure on the part of the Appellant in deducting the taxes thereof.
3. On the facts, in the circumstances of the case & in law, the Ld. AO as well Ld. DRP failed to appreciate that the payment of Rs. 25,10,56,019/- was on account of reimbursement of salary and other allowances paid to various Associated Enterprises (‘AEs’) for employees who were seconded and were working for the Appellant under its control during the course of the concerned Assessment Year.
On the facts, in the circumstances of the case & in law, while coming to the aforementioned conclusion, the Ld. AO/ Ld. DRP erred in:
4.1 ignoring the facts submitted by the Appellant vide letters dated September 24, 2015 and October 26, 2015 that the expatriate employees worked under the control and supervision of the Appellant, and were engaged in carrying out business activities for and on behalf of the Appellant in India. 4.2 not appreciating that the expatriate employees have not been carrying out services on behalf of the AEs in India and did not have authority to bind or otherwise oblige the AEs in any manner whatsoever.
4.3 drawing adverse inference from the Linked In profile/ personal website of the expatriate employees (Dinesh Keskar and Vivek Lall) and concluding that all the expatriate employees continued to be in the service of the AEs.
4.4 not appreciating the fact that the tax was duly withheld on the salary cost as per the provisions of section 192 of the Act.
4.5 giving incorrect findings on facts, alleging that the Appellant failed to file the requisite details.
5. On the facts, in the circumstances of the case & in law, the Ld. DRP and the Ld. Transfer Pricing Officer (‘Ld. TPO’) / AO (following the directions of the Ld. DRP), have grossly erred on facts and in law in enhancing the income of the Appellant by Rs. 7,64,82,506 on account of:
5.1 incorrectly characterising the Appellant as a technical consultancy service provider and not appreciating the fact that the Appellant is a business development, advisory and other support service provider; 5.2 Pursuant to such incorrect re-characterization:
5.2.1 incorrectly rejecting the economic analysis and the comparable results contained in the Transfer Pricing (‘TP’) documentation; 5.2.2 incorrectly rejecting comparables selected by the Appellant as functionally not comparable; 5.2.3 incorrectly including the segment of a comparable company WAPCOS Ltd. even when the company as a whole was comparable to the Appellant; 5.2.4 disregarding the fresh search conducted by the Appellant with respect to alleged technical consultancy services performed by the Appellant.
On the facts, in the circumstances of the case and in law, the Ld. DRP and business and commercial reality that the Appellant undertakes minimal comparable companies that are full-fledged risk taking entrepreneurs, adjustment to the Appellant on account of this fact.
7. On the facts, in the circumstances of the case and in law, the Ld. DRP and Ld. TPO/AO have grossly erred in computing the transfer pricing adjustment by considering even unrelated party transactions of the Appellant 8. On the facts, in the circumstances of the case and in law, the assessment order passed by the Ld. AO pursuant to the directions of Ld. DRP is bad in law and void ab-initio. 9. On the facts, in law and in peculiar circumstances of the case, the Ld. DRP/ Ld. AO erred in not giving the appellant proper or sufficient opportunity to have it say or make necessary compliance of the reasons relied upon by Ld. DRP/ Ld. AO in making the addition/ adjustments under the Act in the present case. 10. On the facts, in the circumstances of the case and in law, the Ld. AO erred in levying consequential interest under section 234B of the Act on the disallowance made in the assessment order. 11. On the facts, in the circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271(1X0) of the Act.
We have heard both the parties through Video Conferencing facility. The learned counsel for the assessee filed a paper-book and other documents electronically.
4. At the outset, the learned counsel for the assessee submitted that grounds no. 1 to 4 of the appeal are covered by the order of the Tribunal for assessment year 2015-16. The grounds no. 5 to 9 were not pressed by the learned counsel for the assessee and accordingly the same are dismissed as infructuous. 4.1 The assessee company was engaged in the business of providing market information and knowledge support services to “The Boeing Company” (TBC), USA. In the Draft Assessment order, the learned Assessing Officer proposed disallowance in terms of Section 40(a)(ia) for expenditure towards salary and other allowances of expatriate employees holding that same are in nature of Fee for Technical Services and no tax was deducted at source by the assessee. The learned Dispute Resolution Panel (DRP) rejected the objection raised by the assessee on this issue. In the final Assessment order, the Assessing Officer has made disallowance of Rs.25,10,56,019/-, observing as under:
“7. Addition u/s 40a(a)(i) of Income Tax Act, 1961 Further, the DRP vide his order directed the AO, the direction(s) of the DRP are reproduced as under:
"Considering the facts and judicial decisions on this subject, this expenditure toward salaries and allowances and travel expenses etc, amounting to Rs. 31,73,75,430/- constitutes Fees for Included Services chargeable to tax in India, in terms of Article 12(4) of the India US DTAA. The payments covered by the India UD DTAA and the India Australia DTAA are also taxable in terms of these DTAAs. These payments are fees for Technical Services in terms of section 9(l)(vii) read with Explanation 2, of the Income Tax Act and are chargeable to tax in the hands of the recipients. The assessee failed to deduct tax at source on this expenditure therefore, disallowance under section 40(a)(i) is required. Fees for Technical Services are taxed @10% under section 115A. CBDT circular no. 03/2015 dated 12.02.2015 has clarified that "for the purpose of making disallowance of other sum chargeable' under section 40(a)(i) of the I.T, Act, 1961, the appropriate portion of the sum which is chargeable to tax under the Act shall form the basis of such disallowance". This circular also refers to similar CBDT Instruction no. 2/2014 dated 26.02.2014. The AO is directed to compute the disallowance under section 40(a)(i) in accordance with the CBDT circular. The above will result in an enhancement of income as compared to the draft assessment order. This is within the statutory powers of the DRP u/s 144C(8). The assessee has been given the opportunity to explain why the above expenditure be not disallowed and income accordingly enhanced and its reply has been duly considered." As per the direction given by the DRP, the Assessing Officer verified the amount of Rs. 31,73,75,430/-. The same constitutes expenditure towards Salaries and other allowances of employees of Rs. 25,10,56,019/- expenditure towards Travelling Expenses of employees of Rs. 6,42,34,233/- and other expenses of Rs. 20,85,178/-. During the verification of various submission and ledger submitted by the AR of the assessee, it is found that the assessee failed to deduct tax at source on the expenditure towards Salaries and other allowances, therefore, disallowance under section 40(a)(i) of the l.T. Act, 1961 is required. The assessee was asked why the expenditure towards expenditure towards Salaries and other allowances should be disallowed as the assessee has failed to deduct the TDS over this expenditure. The AR attended and submitted reply. After considering the submission of the assessee, it came to notice that no TDS has been deducted by the assessee on amount of Rs. 25,10,56,019/-. Hence, the same is disallowed u/s 40(a)(i) of the l.T. Act, 1961. (Addition: - Rs. 25,10,56,019/-)”
4.2 We find that identical issue of disallowance under Section 40(a)(i) of the Act for expenditure on salary, allowances and travelling expenses to expatriate employees was raised by the Assessing Officer in assessment year 2015-16, which has been deleted by the Income Tax Appellate Tribunal (Tribunal) in ITA No.9765/Del./2019. The relevant finding of the Tribunal (supra) is reproduced as under: “22. During the course of assessment proceedings, the Assessing Officer sought clarification of services performed by Boeing Company USA, Boeing Defence Australia Ltd, Boeing Korea LLC and whether the salary paid to expatriates has been included in the total salary. Further, the assessee was asked to explain the work performed by the expatriates. The assessee was asked to explain the reimbursement of expenses to Boeing company USA, Boeing International Corporation Korea and Boeing Defence Australia. The assessee furnished necessary details. It was explained that reimbursement of salary cost to expatriate employees is not taxable as FIS, both under the provisions of the Act and relevant DTAA, and no withholding tax was required on the same.
It was further explained that the assessee was a real and economic employer of expatriate employees, as these employees were under the control of the company without any relation/connection with the AEs and salary expenses have been borne by the assessee on which the appropriate taxes were duly deducted and deposited u/s 192 of the Act. It was strongly contended that reimbursement of cost charges of salary of expatriate employees is not taxable as FTS/FIS.
The Assessing Officer was not convinced with the submissions of the assessee and referring to the terms of secondment agreement and drawing support from the decision of the Hon'ble High Court in the case of CentricaIndia Offshore India Ltd 364ITR 336 and further referring to various judicial decisions, the Assessing Officer finally came to the conclusion that the assessee has failed to deduct tax at source on the expenditure towards salaries and other allowances and invoking the provisions of section 40(a)(i) of the Act, the Assessing Officer made disallowance of Rs. 56,58,19,799/-.
Objections were raised before the DRP but were of no avail.
Before us, the ld. counsel for the assessee vehemently stated that the assessee has deducted tax at source/s 192 of the Act, and, therefore, there should not be any disallowance u/s 40(a)(i) of the Act. Reliance was placed on the decision of the co-ordinate bench in the case of Neemrana Hotels Pvt Ltd order dated 10.07.2019. It is the say of the ld. counsel for the assessee that since tax has been deducted u/s 192 of the Act, provisions of section 195 will not apply.
Distinguishing the decision of Centrica India Offshore India Ltd [supra], the ld. counsel for the assessee vehemently stated that the decision in the case of Centrica India Offshore India Ltd was based upon entirely different set of facts wherein in that case,the Indian company was a newly formed entity and did not have necessary trained human resources and scope of work emerging from service agreement and secondment agreement clearly shows that secondees were sent to India with the knowledge of various processes and practices and also with experience in managing and applying such processes and practices.
On these facts, the Hon'ble High Court was satisfied that the secondary employees are making available their experience and skill in managing and applying the processes. It is the say of the ld. counsel for the assessee that in so far as the assessee is concerned, it is in existence since 2003 and the employees recruited outside India do not possess any specific skill set that is not available with Indian employees. The ld. counsel for the assessee explained that in in-house administration support division, the appellant has 58 employees out of which only 6 are expatriate employees. This division renders travel logistics, finance and accounting support etc and the qualifications and role show that such expatriate employees cannot make available any knowledge. Further reliance was placed on the decision of the coordinate bench in the case of AT & T Communication Services India Pvt Ltd 101 TAxmannn.com 105 [Delhi Trib] 29. Per contra, the ld. DR strongly supported the findings of the lower authorities and placed strong reliance on the decision of the Hon'ble High Court in the case of Centrica India Offshore Pvt Ltd [supra].
We have given thoughtful consideration to the orders of the authorities below. We have also carefully perused the salary reimbursement agreement, which is placed at pages 296 onwards of the paper book, and as per clause1.1, it is provided that the secondees have expressed their willingness to be deputed to BIPICL [the 20 appellant] and TBC [AE] have agreed to release these employees to BIPICL. It is provided that TBC will facilitate payment of salaries in secondees home country on behalf of BICIPL. Under the head employment status, it is provided that the secondees shall be working for BICIPL and will be under supervision, control and management of BICIPL as an employee of BICIPL.
It is clear from the afore-stated relevant clauses that the secondees were, in fact, in employment of the appellant and as per the terms, the ‘A’ was paying salaries at the home country of the secondees and, therefore, there was reimbursement by the appellant. These facts clearly show that the assessee has been paying to its own employees and this fact alone clearly distinguishes the facts of the decision in the case of Centrica India Offshore Ltd [supra].
32. The co-ordinate bench in the case of AT & T Communication Services India Pvt Ltd. [supra], distinguishing the decision of the Hon'ble Delhi High Court in the case of Centrica India Offshore Pvt Ltd [supra], has held as under:
“30. The DRP has affirmed the decision of the Ld. AO by holding that the assessee has deducted withholding tax on 21 substantial payments and yet argued that the tax is not deductible u/s 195 of the act and provision of section 40(a)(i) cannot be invoked in the case of said payment.
31. The DRP has affirmed the decision of the AO by holding that the assessee has deducted withholding tax on substantial payments and yet argued that the tax is not deductible u/s 195 of the act and provision of section 40(a)(i) cannot be invoked in the case of said payment.
The Special Auditors in their Audit Report have worked out particulars of payments in respect of which no TDS was deducted u/s 40(a)(ia) of the Act. Consequently, an amount of Rs. 54,06,328/- was not to be allowed as expenditure.”
We have also perused the TDS certificates, Forms 15CA and 15CB, tax deducted by the assessee and all these documents are part of the paper book. There is no dispute that the assessee has deducted tax at source u/s 192 of the Act. On the given facts of the case, we are of the considered opinion that the provisions of Section 195 of the Act do not apply. Considering the facts of the case in totality, in light of judicial decisions referred to hereinabove, we do not find any merit in 22 the disallowance made by the Assessing Officer/DRP. We, accordingly, direct for deletion of addition of Rs. 56.58 crores.
4.3 After following the decision of the Tribunal in Assessment year 2015-16, the Tribunal has deleted the identical disallowances in Assessment Year 2012-13 (ITA No. 2374/Del./2018) and Assessment Year 2013-14 (ITA No. 2375/Del./2018). Further, the learned counsel also brought to our notice that while sending the remand report, the Assessing Officer has admitted that the identical disallowance were being made from Assessment Year 2011-12 onwards. 4.4 In view of the identical issue involved in the year under consideration, respectfully following the finding of the Tribunal (supra), we delete the disallowance made in the impugned order. The Grounds No. 1 to 4 of ITA No.983/Del./2016 are accordingly allowed.
Hence, appeal is allowed. ./2018 (AY: 2011-12) 6. Now, we take up the appeal in ITA No. 3695/Del./2018. The grounds raised by the assessee in the appeal are reproduced as under:
In law, on facts and peculiar circumstances of the present case, the issuance of notice under section 154 of the Act to access the amount of Rs. 6,63,19,411/- as income of the Appellant and passing of order under section 154/ 143(3) of the Act dated March 28, 2018 are illegal, void ab-initio, bad in law and therefore, may kindly be ordered to be quashed.
2. On the facts, in the circumstances of the case and in law, the Ld. AO grossly erred in making an adjustment of Rs. 6,63,19,411/- to the returned income of the Appellant, treating the same as fee for technical services (‘FTS’) as per the provisions of section 9(l)(vii) of the Act and Fee for Included services/ FTS/ Royalty under Article 12(4) of India US Tax Treaty/ Article 12(4) of India UK Tax Treaty/ Article 12(3) of India Australia Tax Treaty respectively, grossly ignoring the fact that the said amount represent pure reimbursement without any income element and holding that the same is to be disallowed under section 40(a)(i) of the Act for failure on the part of the Appellant in deducting the taxes thereof..
3. On the facts, in the circumstances of the case & in law, the Ld. AO erred in not appreciating the fact that such reimbursement of travelling expense and other expense cannot be considered as making available technical knowledge in terms of Article 12(4) of India US Tax Treaty/ Article 12(4) of India UK Tax Treaty/ Article 12(3) of India Australia Tax Treaty respectively. 4. On the facts, in the circumstances of the case and in law, the Ld. AO erred in granting short credit of taxes paid amounting to Rs. 9,44,12,220 instead of Rs. 10,94,12,220 while computing the tax payable by the Appellant while passing the order under section 154/143(3) of the Act. 5. On the facts, in the circumstances of the case and in law, the Ld. AO erred in levying consequential interest under section 234B of the Act.
We find that the Assessing Officer in the impugned order has rectified the amount of disallowance under Section 40(a)(i) to Rs. 31,73,75,430/- from the disallowance made in the original Assessment Order at Rs.25,10,56,019/-. In the impugned rectification order, the Assessing Officer has made net addition of Rs.6,63,19,411/- for payment towards salary, allowances and travel expenses to expatriate employees. 7.1 This issue has already been allowed in favour of the assessee in the foregoing paragraphs, i.e., paras 4 to 4.4. To maintain the consistency in our decisions, this addition is also deleted. Accordingly, the grounds No. 1 to 3 are allowed.
In Ground no. 4, the assessee has raised the issue of short credit of taxes granted. This is a matter of verification at the hand of the Assessing Officer. Accordingly, we direct the Assessing Officer to verify the amount of taxes paid and allow credit in accordance with law. This ground of appeal
is allowed for statistical purposes.
9. In result, the appeal in ITA No. 983/Del./2018 is allowed and the appeal in ITA No. 3695/Del./2018 is allowed for statistical purposes. Order pronounced in the open court on 11th February, 2021