DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), BENGALURU vs. GOLDMAN SACHS SERVICES PVT. LTD, BENGALURU

The rule order of the ld .CIT(A) is opposed to law and facts of the case.

The CIT(A) erred In deleting the disallowance of Rs. 102,34,25,967/- u/s 40(a)(i) of the Act made assessing authority without considering the merits of the case. 3. The CIT(A) erred in directing the AO to delete the disallowance u/s 40(a)(i) without considering ' fact that reimbursements of salary costs to the Es, amounted to payment towards Fee for Technical Services (FTS) under explanation 2 to section 9(1)(vii) of the Act. 4. The CIT(A) erred in not appreciating that the AO has rightly considered the reimbursements paid the assessee to the AE are also taxable as FTS or as Fees for included services (FTS) under DTAA between India and USA/UK and hence disallowed the said reimbursements u/s 40(a)(i) of the Act for non-deduction of taxes on such remittances during the assessment proceedings. 5. For these and other grounds that may be urged upon, the order of the CIT(A) may be reversed an that assessment order to be restored. 2. There was a delay of 74 days in filing the appeal for the assessment year 2011-12 and 101 days in filing appeal for the assessment year 2013-14. The department filed condonation petition explaining reason that delay was due to administrative reasons. 3. We have gone through the reasons advanced by the ld. D.R. and in our opinion, there is a good and sufficient reason in filing the appeals belatedly as noted above in view of the administrative reasons. Accordingly, the delay is condoned in filing the appeals and the appeals are admitted for adjudication. 4. After admitting the appeals, we are of the opinion that the similar issue came for consideration in assessee’s own case in IT(TP)A No.194/Bang/2023 for the assessment year 2015-16, wherein the Tribunal vide order dated 25.5.2023 held as under: 13. We have heard both the parties and perused the material on record. On earlier occasion, the assessee came in appeal before the Tribunal on the issue of assessee being treated as assessee in default u/s. 201(1) and for non-deduction of tax at source u/s. 195 of the Act in various AYs 201112 to 2014-15 & 2015-16 to ITA Nos.1241 & 1242/Bang/2024 M/s. Goldman Sachs Services Pvt. Ltd., Bangalore Page 3 of 16 2018-19 and the Tribunal in to 369 & 338 to 345/Bang/2020 vide order dated 29.4.2022 has passed a speaking order on this issue as follows:- “26.1 In the above background let us analyse the 'India Recharge and Cost Allocation" Agreement', dated 03/03/2006, between the assessee before us and overseas entity, the independent employment contract between the assessee and the seconded employees and the correspondence between the employee and the assessee regarding bifurcation of salary payable to them. The assessee confirms the employment of Mr. Christopher pursuant to which an agreement is entered into between the assessee and Mr. Christopher. The said agreement is reproduced herein above. 26.2 From the recitals to the 'India Recharge and Cost Allocation" Agreement', dated 03/03/2006 between the assessee and overseas entity, it is clear that, the process of secondment of employees by overseas entity to the assessee in India is initiated, when the assessee in India, requires services of seconded employees of overseas entitities, for its business projects by the assessee in India. The assessee in India then enters into an agreement for seconded with such employees. By way of illustration, we may take the case of one Laura May, who is a American national and who is on the rolls of overseas entity. 26.3 Article 3.3 of the 'India Recharge and Cost Allocation" Agreement', dated 03/03/2006 between the assessee and overseas entity imposes obligation of compliance with tax deduction at source as per the Act, on salaries paid to the seconded employees on the assessee in India. 26.4 A reading of article 2, of the Agreement between the assessee and Laura May, shows that the control and supervision of the seconded employee is with the assessee in India. 26.5 As per article 4 of the Agreement between the assessee and Laura May, 75% of the salary of expatriate employee will be paid by the overseas entity, that sends the employee on deputation, and that, overseas entity, continues to be the de jure employer. The assessee in India, to which the employee is sent on deputation is the de facto employer pays the balance 25%. The salary paid by the de jure employer is reimbursed by the assessee in India, to the overseas entity. 26.6 As per Article 13 f the Agreement between the assessee and Laura May shows that, the assessee in India as well as the seconded employee shall not disclose confidential information of the other party. 26.7 Thus the Agreement between assessee in India with the seconded employee, contains following features :-

Notwithstanding paragraph 4, "fees for included services" does not include amounts paid :

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)." & 1242/Bang/2024 M/s. Goldman Sachs Services Pvt. Ltd., Bangalore Page 8 of 16 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 antiabuse provision.

The Ld.DCIT placed reliance on the decision of the Hon'ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd. (supra) 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 (P.) Ltd (supra) dealt with identical case of 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 Offshore (P.) Ltd. case (supra) 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 Faurecia Automotive 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 & 1242/Bang/2024 M/s. Goldman Sachs Services Pvt. Ltd., Bangalore Page 9 of 16 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 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. (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 (IT) v. Morgan Stanley & Co. [2007] 162 Taxman 165/292 ITR 416, 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 (P.) Ltd., In re [2006] 157 Taxman 198/ 287 ITR 421. 29.5 The observations of the Hon'ble Supreme Court in the case of Morgan Stanley & Co. (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. 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 & 1242/Bang/2024 M/s. Goldman Sachs Services Pvt. Ltd., Bangalore Page 10 of 16 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 India (P.) Ltd. (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 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. & 1242/Bang/2024 M/s. Goldman Sachs Services Pvt. Ltd., Bangalore Page 11 of 16 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. 30.2Per 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 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.'s case (supra), 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)."

Hon'ble Mumbai Tribunal in case of Mark & Spencer Reliance India (P.) Ltd., (supra) 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, & 1242/Bang/2024 M/s. Goldman Sachs Services Pvt. Ltd., Bangalore Page 12 of 16 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 HCL Infosystems Ltd. (supra) 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 India (P.) Ltd. (supra), Abbey Business Services India (P.) Ltd.'s case (supra), 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 Business Services India (P.) Ltd (supra), has been upheald by Hon'ble Karnataka High Court in Abbey Business Services India (P.) Ltd.'s case (supra).

Hon'ble Ahmedabad Tribunal in the case of Burt Hill Design (P) Ltd. v. Dy. DIT(IT) [2017] 79 taxmann.com 459/164 ITD 697, 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.

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 — 6. 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 & 1242/Bang/2024 M/s. Goldman Sachs Services Pvt. Ltd., Bangalore Page 14 of 16 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 that the issue is no longer res integra and is covered by decision of Volkswagen India (P.) Ltd. v. 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 2710-2009 was issued and therefore no suppression of facts with an intent to evade payment of duty can be alleged in the subsequent SCN dated 15-4-2013. 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….. 16. In view of the above, Appeal No. ST/25566/2013 & Appeal No. ST/21705/2016 are allowed. & 1242/Bang/2024 M/s. Goldman Sachs Services Pvt. Ltd., Bangalore Page 15 of 16 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. 37. Respectfully following the above views expressed by Hon'ble Karnataka High Court in Abbey Business Services India (P.) Ltd.'s case (supra), Hon'ble AAR in Cholamandalam MS General Insurance Co. Ltd.'s case (supra), Hon'ble Bombay High Court in case of Mark & Spencer Reliance India (P.) Ltd. (supra), Hon'ble Delhi High Court in the case of HCL Infosystems Ltd. (supra), Coordinate bench of this Tribunal in case of IDS Software Solutions India (P.) Ltd.'s (supra), Hon'ble Pune Tribunal in case of Faurecia Automotive Holding (supra), Hon'ble Ahmedabad Tribunal in the case of Burt Hill Design (P.) Ltd. (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.”