MYNTRA INC.,UNITED STATES OF AMERICA vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 2(2)(1), INTERNATIONAL TAXATION, NEW DELHI

1. This appeal by the assessee is directed against the Assessment Order passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act,1961 (hereinafter referred to as ‘the Act’) dated 16.10.2023, for Assessment Year 2021-22.

Shri Sachit Jolly, Sr. Advocate appearing on behalf of the assessee at the outset submitted that on instructions from the assessee/appellant he is not (A.Y.2021-22) pressing ground no. 2 of appeal, assailing validity of the Dispute Resolution Panel (DRP) directions sans DIN. In light of the statement made by ld. Counsel for the assessee at Bar, ground of appeal no. 2 is dismissed as not pressed.

The ld. Counsel submits that the two primary issues in the appeal are:

Narrating facts of the case, the ld. Counsel submits that the assessee is a company incorporated in the United States of America (USA). During the period relevant to assessment year under appeal, the assessee provided manpower support services to Flipkart. The services are rendered to Flipkart on year on year basis, the assessee is not making available any technical knowledge, experience, skill, knowhow or processes and there is no transfer of any technical plan or technical design to Flipkart. The services are rendered under service agreement dated 08.03.2021 effective from 1st April, 2020. The said agreement is at page no. 143 to 150 of the paper book. Referring to Annexure -A to the said agreement at page 149 of the paper book that defines scope of work, the ld. Counsel submits

The ld. Counsel submits that the payments received for aforementioned services do not fall within the meaning of FTS as defined under Article 12 of India- US DTAA. He further pointed that in India-US DTAA ‘make available’ condition is required to be satisfied which is conspicuously missing in the instant case. Referring to para 6 of the Draft Assessment Order, the ld. Counsel contends that the AO has erred in recording that the assessee has made submissions that the assessee is assisting the Indian company by providing guidelines on commercial strategy and assisting in developing local commercial strategies. The assessee never made such submissions it is perhaps AO’s own understanding of the service agreement. He further pointed that the DRP has erred in holding that the consultancy service given by the assessee to Flipkart help Flipkart in studying consumer behavior and creating a data base of choices of customers leading to better targeting of customers in future. The assessee is only providing data, analyses of data is done by Flipkart. The assessee does not share information as to how the data is collected. Thus, ‘make available’ condition is not satisfied. The ld. Counsel further contended that there is no finding by the AO or the DRP that the assessee is transferring any technology to create data. In absence of any technology, skill, knowledge or knowhow transfer, the ‘make available’ condition is not satisfied. The ld. Counsel in support of his argument that mere rendition of i. International Management Group (UK) Ltd.vs. CIT, 466 ITR 514 (Del.); & ii. GE Energy Management Services Inc. vs. ADIT, 193 ITD 485 (Del-Trib.). The ld. Counsel further referred to the sample invoice at page 167 of the paper book to show that Flipkart has been invoiced only for providing support services for the period April 2020 to February 2021.

In respect of reimbursements from PhonePe, the ld. Counsel for the asssesee submits that the assessee had entered into cost reimbursement agreement with PhonePe for providing manpower services. As per the agreement dated 01.04.2018 (at pages 151 to 156 of the paper book) PhonePe identifies the person who has requisite expertise and skill to perform the scope of work described in the agreement. Thereafter, PhonePe request the assessee to provide employment to such identified person. The said employees are on the rolls of the assessee, the employees are stationed in US and the services are rendered in US. PhonePe reimburses salary of the employee to the assessee for the services rendered. There is no secondment of employees by the assessee to PhonePe. The AO and the DRP have proceeded on wrong assumption of facts that the assessee seconded its employees to PhonePe. The assessee recovers salary charges from PhonePe without any mark-up. The ld. Counsel further contended that where the payments are in the nature of reimbursements of cost, the same cannot be taxed as FTS. In support of his argument, the ld. Counsel placed reliance on the following decisions. i. DIT vs. AP Moller Maersk AS (2017) 5 SSC 651 (SC);& ii. PCIT vs. Boeing India P. Ltd., 457 ITR 84 (Del.).

We have heard the submissions made by rival sides and have examined the orders of authorities below. We have also considered the decisions on which ld. Counsel for the assessee has placed reliance in support of his submissions.

In ground of appeal no. 3 & 4, the assessee has assailed addition of Rs.24,72,38,630/- i.e. the amount received from Flipkart for provision of manpower support services. The assessee has claimed the receipts as exempt from tax under India-US DTAA, whereas, the AO has held said receipts in the nature of FTS, taxable u/s.9(1)(vii) of the Act as well as Article 12(4) of India-US DTAA. The assessee is engaged in providing business support services including manpower support services. The assessee entered into service agreement with Flipkart for providing following services:

The Assessing Officer has held that the payments for providing the aforesaid services are in the nature of FTS as the assessee is disseminating its (A.Y.2021-22) experience, knowhow and expertise in the field of business activity which capacitates the recipient of services perform better and enrich its business. Since, the assessee also facilitates to collaborate with academic institution in US as per the requirement of Indian entity, therefore, the services provided by the assesses also satisfies make available clause. The manpower support services provided by the assessee to the Flipkart as detailed above nowhere reflects transfer of any knowhow, technical skill, technical knowledge or process or transfer of any technical plan or design so as to satisfy ‘make available’ condition in Article 12(4)(b) of India-US DTAA. According to the AO ‘make available’ condition is satisfied as the assessee facilitates to collaborate with academic institution in US. The understanding of the AO with respect to ‘make available’ condition is erroneous. There is no finding by the AO or the DRP that the assessee is transferring any technology/knowhow, skill/experience or process or in any manner transfer technical plan or technical design so as to constitute any services for which payments fall within the meaning of FTS. The India-US DTAA Article 12(4) defines Fee for Included Services (FIS). The same reads as under:-

The Hon’ble Delhi High Court in the case of International Management Group (UK) Ltd. vs. CIT (supra) has held that make available condition would be satisfied only if rendering of services involves clear and demonstrable transfer of technical skill, expertise or knowhow to the recipients. The relevant observations of the Hon’ble Jurisdictional High Court on this issue are as under:

This leads us to the definitive conclusion that the rendering of technical and consultancy services has to be read alongside and in conjunction with "make available" as that phrase appears in the aforesaid paragraph. On a plain textual reading of Article 13 it becomes apparent that both the rendering of service and the skill, knowledge and expertise being made available are conditions which must be concurrently and cumulatively satisfied. What we seek to emphasize is that Article 13 in unambiguous terms creates an enduring, unfading and imperishable link between the furnishing of service and a transmission or conferment of technical expertise, knowledge and skill.

In ground of appeal no. 5 to 7, the assessee has assailed addition of Rs.5,22,61,934/- on account of reimbursement of costs by PhonePe, holding it to be FTS u/s.9(1)(vii) of the Act and under Article 12(4) of the DTAA. The ld. Counsel for the assessee has contended that the authorities below have erred in holding that the transaction is in respect of secondment of employees by the assessee to Phonepe. As per the submissions of the ld. Counsel for the assessee, the said findings of the DRP and the AO are based on wrong assumption of facts. However, we find that stand of the assessee before the AO and the DRP in respect of payments received from Phonepe is that the payments are in respect of secondment of employees to Phonepe. This is evident from the submissions made (A.Y.2021-22) by the assessee before the AO dated 16.12.2022 at page no. 188 to 197 of the paper book. In said submissions, the assessee has also claimed that provisions of withholding tax u/s.192 of the Act have also been compiled at the time of remitting the monthly salary. However, no supporting document was furnished to this effect. The assessee for the first time has raised the argument before the Tribunal that it is not a case of secondment of employees and the services have been rendered by the employees based in US. The only document that has been furnished by the assessee in this regard is Cost Reimbursement Agreement (at page 151 of the paper book) between the assessee and Phonepe. The facts on this issue are not clear as the assessee has taken different stand before the Tribunal and the Lower Authorities. Therefore, we deem it appropriate to restore this issue back to the file of AO for denovo adjudication after ascertaining the facts from the documents and submissions of the assessee. Needless, to say that while deciding the issue afresh, the AO shall grant reasonable opportunity of making submissions to the assessee, in accordance with law. In the result, grounds of appeal no. 5 to 7 are allowed for statistical purpose.

In ground of appeal

In ground of appeal no. 9, the assessee has assailed charging of interest u/s.234A and 234B of the Act. Charging interest under aforesaid sections is mandatory and consequential, hence, the said ground is dismissed.

In ground of appeal no. 11 & 12, the assessee has alleged that the AO has failed to grant credit of TDS. The AO is directed to examine the issue and grant TDS credit, in accordance with law. Accordingly, ground of appeal no. 10 to 12 are allowed for statistical purpose.

In the result, appeal of the assessee is partly allowed.