INTEL CORPORATION,BANGALORE vs. DY. DIR I.T., BANGALORE

Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the order dt.28.8.2013

of Commissioner of Income Tax (Appeals)-IV, Bangalore for the

Assessment Year 2008-09.

2 IT(TP)A No.1486/Bang/2013 2. The assessee has raised the following grounds :

amount on account of salary, relocation and other related costs of

expatriate employees. The assessee is a foreign company incorporated

under laws of United States of America (USA). The assessee is a leading

manufacturer of microprocessors. During the course of assessment

proceedings, the Assessing Officer noted that the assessee was in receipt

of the following amount from its Indian Subsidiary Intel Technology India

Pvt. Ltd. (ITIPL) and the same were not offered to tax :

3 IT(TP)A No.1486/Bang/2013

Sl.No. Item of receipts Amount Rs. 1. Reimbursement of salary, relocation & other 30,17,13,220 related costs of seconded employees to ITIPL 2. Transfer of fixed assets & supply of boards. 33,53,67,862 3. Miscellaneous receipts. 1,46,06,825

The assessee claimed these receipts as not chargeable to tax in India

under the provisions of the Income Tax Act, 1961 (in short 'the Act') r.w.

Double Taxation Avoidance Agreement (DTAA) between India and USA.

After examining the agreement and nature of services rendered by the

employees transferred under the secondment the A.O. held the receipts

are in the nature of Fees for Technical Services (FTS) within the meaning

of Expln. 2 to Section 9(1)(vii) of the Act r.w. provisions of DTAA. The

Assessing Officer has further observed that the assessee has control

over the seconded employees in order to ensure that the employees

perform the duty entrusted to them by ITIPL and they remain with ITIPL

only during the period of assignment. The seconded employees were

entitled to social security benefit as per law of USA. This clearly shows

that these employees continue their employment with the assessee.

Thus the Assessing Officer concluded that the seconded employees

4 IT(TP)A No.1486/Bang/2013 getting their salary from Intel (the assessee), their protection regarding

social security and such other contribution which they are entitled as a

US citizen clearly shows that those persons remain employees of the

assessee. Accordingly, the Assessing Officer held that the payment

received by the assessee partakes character of FTS/FIS. The assessee

challenged the action of the Assessing Officer before the CIT (Appeals)

but could not succeed.

the following :

• During the FY 2007-08, the Company has received reimbursement of Rs.30,17,13,220 from ITIPL towards salary cost, relocation cost and other related costs of employees transferred to ITIPL. • The internal policy of the Intel Group allows the employees working in the Group to be transferred to different companies within the Group. In accordance with this policy, certain employees who were earlier working with Intel Corp were transferred to the employment of ITIPL. • The services of the transferred employees are rendered to ITIPL and ITIPL is responsible for bearing the costs related thereto and discharging the withholding tax obligations under section 192 of the Act associated with the employees’ transferred to ITIPL. For ease of disbursement and for timely payment to the account of the employees, it has been arranged that Intel Corp shall disburse the salary and other benefits, as required, to the employees in their home country on behalf of ITIPL. ITIPL is required to reimburse Intel Corp the amount disbursed to ITIPL employees on its behalf. • The amount of Rs. 30,17,13,220 represents reimbursement of salary and bonus cost, which was paid by Intel Corp in the first instance on behalf of ITIPL for administrative convenience and later the same was recovered from ITIPL on a cost to cost basis. The same has been accounted by ITIPL as salary cost in its books of accounts. The reimbursement of salary cost has been taxed in the hands of seconded employees and ITIPL has duly deducted tax therefrom under Section 192 of the Act and paid the same to the Government Treasury.

5 IT(TP)A No.1486/Bang/2013 • Further, we wish to submit that ITIPL is governed by the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (‘PF Act’) since the number of employees employed by ITIPL is more than 20. Accordingly, the seconded employees being the employees of ITIPL are covered by the PF Act. Therefore, liability to deduct and deposit Provident Fund as per the PF Act from the salaries of the seconded employees lies with ITIPL and the same has been remitted by ITIPL. • In this regard, we would draw your kind attention to the decision of the Hon’ble Income Tax Appellate Tribunal, Delhi (‘ITAT') in the case of HCL Infosystems Ltd. v. DCIT [(2002) 76 TTJ 505 (Delhi ITAT)]. In this decision, the ITAT was examining the taxability of reimbursement of salary remitted by an Indian company to a foreign company, who had deputed technical personnel to the Indian company to work as employees of the Indian company. The salaries of the personnel were disbursed by the foreign company. The Indian company was deducting tax at source under Section 192 of the Act on the salaries of such employees. The ITAT held that since the Indian company had already deducted and remitted taxes under section 192 of the Act on salaries paid abroad to the technical personnel, and that the reimbursement was on a ‘cost-to-cost’ basis, without any profit element, the provisions of section 195 of the Act cannot be, once again, applied to reimbursement of salaries made to the foreign company. Accordingly, no tax was required to be deducted at source from the reimbursement of the salaries to be remitted to the foreign company. The decision of the ITAT has since been affirmed by the Hon’ble Delhi High Court (‘Delhi HC’) in DIT v. HCL Infosystems Ltd. [(2005) 274 ITR 261 (Delhi HC)]. In the present case, as aforesaid, ITIPL is required to bear and pay the salary of transferred employees. For administrative convenience Intel Corp has disbursed the salary to the employees of ITIPL and has claimed reimbursement of the same from ITIPL. There is no profit element involved in the reimbursement. Therefore, reimbursement of such salary is not subject to tax in the hands of the Appellant. The ratio of decision in HCL Infosystems case (supra) directly applies to the case of Intel Corp. • Similar view has been held in the following cases: IDS Software Solutions India (P) Ltd. v. ITO [(2009) 122 TTJ 410 (Bangalore o ITAT)]. o Ariba Technologies India Pvt. Ltd. [ITA No. 616 (Bang)/2011 dated April 4, 2012). o Abbey Business Services India (P) Ltd. v. DCIT [(2012) (53 SOT 401) Bang.] o As per clause (A) of Article–III of the Agreement, the expatriates shall work under the direct supervision of ITIPL during their entire period of engagement and shall not be deemed to be representing or acting on behalf of the Company while performing their services. Also none of their acts during the course of the engagement shall be deemed to be binding on the Company.

6 IT(TP)A No.1486/Bang/2013 o As per clause (B) of Article–III of the Agreement, the Company shall disburse the salary and other benefits to the expatriates in their home country less the withholding tax applicable on the salary in India. ITIPL shall reimburse the Company the reimbursable expenses.

o As per clause (C) of Article–III of the Agreement, ITIPL shall be responsible for withholding/deposit of tax on account of the salaries of the expatriates.

o As per clause (E) of Article–III of the Agreement, the expatriates shall devote the whole of their time, attention and skills to the duties with ITIPL during the transfer period.

o As per clause (G) of Article–III of the Agreement, during the period of engagement the expatriates may be required to act or serve as officers, authorised signatories, and nominees or in any other lawful personal capacity on behalf of ITIPL, as may be required by ITIPL.

o As per Article VII of the Agreement, the Company does not even warrant the quality of the transferred expatriates. Further as per the Article, ITIPL shall hold the Company harmless and shall indemnify the Company from all claims, demands, suits, actions, loss, damage, costs and expenses to which the Company may become liable as a result of any act or omission by the expatriates.

o As per Article VIII of the Agreement, nothing in the agreement shall constitute either party as the legal representative, partner or agent of the other party nor shall either party has the authority to incur any liability or other obligation against or in the name or on behalf of the other party. Further, the Company is merely transferring expatriates to ITIPL at the latter’s request and the Company is not acting as a provider of manpower to ITIPL. • On a perusal of the above, your kindself will note that Intel Corp transfers the employees to ITIPL only on the request of ITIPL and on the basis of description of qualification given by ITIPL. Again, ITIPL has the right to approve or reject the employees selected for transfer and also to request for their replacement. The salary cost discharged by Intel Corp in the first instance is merely for administrative convenience and the same is duly cross charged to ITIPL without any mark-up. ITIPL is responsible for deducting and remitting tax under section 192 of the Act. Further, the expatriates are under the direct control and supervision of ITIPL and they don’t represent Intel Corp nor act on behalf of Intel Corp while performing their services. Intel Corp is not responsible for any of the activities performed by the expatriates and none of their acts during the course of the engagement shall be deemed to be binding on Intel Corp. Therefore, ITIPL is to be considered as the real employer of the seconded employees, thereby creating a purported employment relationship with the seconded employees. 5. On the other hand, the learned Departmental Representative has

submitted that the Assessing Officer as well as CIT (Appeals) has analysed

7 IT(TP)A No.1486/Bang/2013 the various terms and conditions of the agreement and found that the

payment in question is FTS and consequently chargeable to tax in India.

He has further submitted that there is no difference between the Indo-

USA DTAA and Indo-UK DTAA as it was in the case of Centrica India Pvt.

Ltd. Vs. CIT 364 ITR 336 (Del) wherein the Hon'ble Delhi High Court has

held that the payment on account of salary to the seconded employees is

in the nature of FTS. The learned Departmental Representative has

further submitted that an identical issue has been considered by the co-

ordinate bench of this Tribunal in the case of Food World Supermarkets

Ltd. Vs. DCIT 174 TTJ 859 (Bang-Tribunal).

between the assessee and its subsidiary company, the employees were

completely under the supervision and control of the Indian subsidiary

and shall not be deemed to represent or acting on behalf of the assessee

while performing their services. ITIPL has been responsible for

withholding/ deposit of tax on account of salary of the expatriate

employees. Therefore the assessee has merely transferred expatriate to

ITIPL at the later’s request and the company is not acting as provider of

8 IT(TP)A No.1486/Bang/2013 manpower to ITIPL. Salary cost discharged by the assessee in the first

instance is merely for administration convenience and the same is duly

cross charged to ITIPL without any mark up. When the expatriates are

under the direct control and supervision of ITIPL and they do not

represent the assessee while performing their services then ITIPL is to be

considered as real employer of the seconded employees.

material on record. The payment in question was received by the

assessee as per the agreement dt.1.4.2007. The nomenclature of the

agreement is immaterial but the substance and contents of the

agreement are relevant to decide the issue under consideration. The

recital as well as other relevant terms and conditions of the agreement

are reproduced as under :

9 IT(TP)A No.1486/Bang/2013

10 IT(TP)A No.1486/Bang/2013

As per the business need of ITIPL the assessee to transfer from time to

time certain expatriates based on such need and for such duration as

may be agreed between the parties. Therefore duration of secondment

was to be mutually agreed by the parties and not an exclusive discretion

of ITIPL. Further there is no dispute that the expatriates remained the

legal employees of the assessee and the assessee was to pay the salary

and other benefits to the persons on secondment with ITIPL. The salary

and other benefits of the personnel were protected and payable by the

11 IT(TP)A No.1486/Bang/2013 assessee and in turn claimed the said payment from ITIPL. As per the

Clause B of Article III of the agreement the assessee shall disperse the

salary and other benefits to the expatriates. Much stress was given by

the ld. AR on the submission that expatriates are in the economic

employment with ITIPL during the assignment period and only due to

commercial requirement the salary and other benefits are to be

disbursed to the employees overseas bank accounts. He has also

forcefully contended that ITIPL had the administrative control over the

expatriates during the period of employment. It is pertinent to note that

the salary was not remitted to the bank account of the expatriates but

the payment was made to the assessee therefore it is the nature of

payment and not the quantum which is relevant. The payment in

question was received by the assessee under the expartite agreement. It

is not the ordinary working class people who were transferred but all the

personnel are experts in their specific field and holding managerial posts.

The details of the persons are as under :

12 IT(TP)A No.1486/Bang/2013

Thus it is clear that all the expatriates are holding managerial position

and are experts of their respective fields of managerial skills. Therefore

the seconded are rendering the managerial and highly expertise services

the ITIPL for which the assessee received the payment in question. An

identical issue was considered by the co-ordinate bench of this Tribunal

in the case of M/s. Food World Supermarkets Ltd. Vs. DCIT (supra) in

paras 10 to 13 as under :

“ 10. As it is clear that all 5 secondees are not ordinary employees or workers but they are deputed the high level managerial/executive positions which shows that they are deputed because of expertise and managerial skills in the field. This fact is also reflected in the agreement. It is pertinent to note that the secondment agreement is between the assessee and DFCL and these secondees assigned to

13 IT(TP)A No.1486/Bang/2013 the assessee are not party to the agreement. Further the secondees are assigned by DFCL and there is no separate contract of employment between the assessee and the secondees. The secondees are under the legal obligation as well as employment of DFCL and assigned to the assessee only for a short period of time. In the absence of any contract between the assessee and the secondees, the parties cannot enforce any right or obligation against each other. The secondeess can claim their salary only from the parent company i.e DFCL and not from the assessee. Thus, the expatriates were performing their duties for and on behalf of the DFCL. Once it is found that the secondees were rendering the marginal and highly expertise services to the assessee the payment for such services is in the ambit of FTS defined in explanation 2 to sec. 9(1)(vii) of the Act, which read as under:- 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’. 11. An identical issue has been considered and decided by the Hon’ble Delhi High Court in the case of Centrica (Supra). The Hon’ble High Court while dealing with the definition of FTS under Article 13(iv) of Indo UK DTAA has held that the services of the personnel deputed under the secondment agreement were in the nature of managerial consultancy services to the assessee. It is pertinent to note that the definition under Article 13(4) of the Indo UK DTAA as well as the definition under Explanation 2 to sec. 9(1)(vii) are almost identical except the word ‘managerial’ is missing in the definition provided under tax treaty. For ready reference we quote the definition of FTS under Article 13(4) of Indo-UK DTAA which has been reproduced by the Hon’ble High Court in para 25 as under:- “ARTICLE 13 – Royalties and fees for technical services-“4. The definitions of fees for technical services in paragraph 4 of this Article shall 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 property described in paragraph 3(a) of this Article. (b) for service 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 private use of the individual or individuals making the payment; or

14 IT(TP)A No.1486/Bang/2013 (e) to an employee of the person making the payments or to any individual or partnership for professional service as defined in Article 15 (Independent personal services) of this Convention. X X X X X X 12. The Hon’ble High Court while deciding the issue has observed that the assessee filed the provision of services of other personnel. The term including the provision of services of technical or ‘other personnel;’ is common in both definition provided under Explanation 2 to sec. 9(1)(vii) of the Act as well as in the Article 13(4) of the India UK DTA. Moreover the definition of FTS under sec. 9(1)(vii) Art 13(iv) of Indo UK DTA has similar except one extra word ‘marginal deed’ to the definition under Income-tax Act. The Hon’ble High Court while dealing with the issue as held in para 28 to 31, 37, 38 as under: 28. CIOP relies on the concept of economic employment as opposed to legal employment and submits that the formal jural or legal relationship of employer and employee as between the seconded employee and the overseas entity is of no significance. It is argued that for all practical purposes, CIOP is the real employer, because the content of the work or employment, the entire direction and supervision over the seconded employees work and the pay and emoluments are borne by it. For convenience, the pay is disbursed by the overseas entity, but that amount is reimbursed to the overseas entity. Reliance is firstly placed on the concept of Economic employer, discussed by Klaus Vogel in 'Double Taxation Conventions', especially the following extracts: - "8. International hiring out of labour Paragraph 2 has given rise to numerous case of abuse through adoption of the practice known as International hiring out of labour. In this system, a local employer wishing to employ foreign labour for one or more periods of less than 183 days recruits through an intermediary established abroad who purports to be the employer and hires the labour out to the employer. The worker thus fulfills prima facie the three conditions laid down by paragraph 2 and may claim exemption from taxation in the country where he to temporarily working. To prevent such abuse, in situation of this type, the term "employer" should be interpreted in the context of paragraph 2. In this respect it should be noted that the term "employer" is not defined in the convention but it is understood that the employer is the person having rights on the work produced and bearing the relative responsibility and risks. In cases of international hiring out of labour, these functions are to a large extent exercised by the user. In this context, substance should prevail over form, i.e. each case should be examined to see whether the functions of employer were exercised mainly by the intermediary or by the user. It is therefore up to the contracting states to agree on the situations in which the intermediary does not fulfill the conditions required for him to be considered as the employer within the meaning of paragraph 2.

15 IT(TP)A No.1486/Bang/2013 In setting this question, the competent authorities may refer not only to the above mentioned indications but to a number of circumstances enabling them to establish that the real employer is the user of the labour (and nor the foreign intermediary); The hirer does not bear the responsibility or risk for the results produced by the employee’s work; - The authority to instruct the worker lies with the user; - The work is performed or a place which is under the control and responsibility of the user; - The remuneration to the hirer is calculated on the basis of the time utilized, or there is in other ways a connection between this remuneration and wages received by the employer; - Tools and materials are essentially put at the employee’s disposal by the user : - the number and qualifications of the employees are not solely determined by the hirer…..” The Court also notes that the Model Tax Convention on Income and on Capital (Condensed Version, July 2010) in this context, states as follows: - "8.14 Where a comparison of the nature of the services rendered by the individual with the business activities carried on by his formal employer and by the enterprise to which the services are provided points to an employment relationship that is different from the formal contractual relationship, the following additional factors may be relevant to determine whether this is really the case: Who has the authority to instruct the individual regarding the manner in which the work has to be performed. - Who controls and has responsibility for the place at which the work is performed; - Remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided (see paragraph 8.15 below) - Who puts the tools and materials necessary for the work at the individuals’ disposal - Who determines the number and qualifications of the individuals performing the work;

16 IT(TP)A No.1486/Bang/2013 - Who has the right to select the individual who will perform the work and to terminate the contractual arrangements entered into with that individual for that purpose; 29. The issue which arises for the consideration of the Court in this case is whether the secondment of employees by BSTL and DEML, the overseas entities, falls within Article 12 of the India-Canada and Article 13 of the India-UK DTAAs, which embody the concept of a service permanent establishment (a "service PE"). In terms of those articles, the Court must determine whether the overseas entities rendered "technical services" under Article 13 of the India-UK DTAA and "included services" under Article 12 of the India-Canada DTAA. In essence, the inquiry is whether any tax liability of the overseas entity arises for the provision of services to CIOP in India, such that the trigger in the DTAAs comes into play. This must necessarily depend on the phrasing of each DTAA, construed on its own terms, in light of general principles as determined by the Courts. Since the question of technical services has been considered by the DTAA, this takes precedence over the taxing regime under Section 9 of the Act. 30. The India-UK DTAA defines 'fees for technical services' as "payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel)". In this case, the overseas entities have, through the seconded employees, undoubtedly provided 'technical' services to CIOP, especially since that expression expressly includes the provision of the services of personnel. The seconded employees, who work, so to say, for CIOP are provided by the overseas entities and the work conducted by them thus, i.e. assistance in conducting the business of COIP of quality control and management is through the overseas entities. The nature of the services - cast as "business support services" by CIOP - as also clearly within the hold "technical or consultancy. These services envisage the provision of quality service by vendors to the overseas entities, which CIOP, and the secondees, are to oversee. This requires the secondees to draw from their technical knowledge, and falls within the scope of the term. This reading of 'technical' services does not limit itself only to technological services, but rather, extends to know-how, techniques and technical knowledge. This is supported by clause 4 of Article 12 itself, which lists these various sub-categories. Indeed, the term 'technical' has not been defined in the DTAA, and must be accorded its broader dictionary meaning, unless limited by the parties to the instrument. The AAR in Intertek Testing Services India (P.) Ltd, In re [2008] 307 ITR 418/175 Taxman 375 (AAR), considered this question in detail, and rightly held that "What is meant by the expression 'technical'? Should it be confined only to technology relating to engineering manufacturing or other applied sciences? We do not think so. The expression 'technical' ought not to be construed in a narrow sense."

17 IT(TP)A No.1486/Bang/2013 This reading was supported by the Supreme Court, in the context of Section 9(1)(iv) of the Act in Continental Construction Ltd. v. CIT [1992] 195 ITR 81/60 Taxman 429. Further, the Court notes that the distinction to be drawn by CIOP between the provision of services by the overseas entities themselves and the 'mere' secondment of employees does not make a difference, since the services provided the overseas entities is the provision of technical services through the secondees - an instance envisaged under Article 13 itself. 31. The issue of Article 12 of the India-Canada treaty involves a more nuanced inquiry. Article 12 also incorporates fees for "included services". Whilst this includes "technical services or consultancy service" under clause 4, it states that '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 … make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design." This second qualification for the technical knowledge etc. to be 'made available' is an essential, and additional, requirement under the India-Canada DTAA. This phrasing also finds mention in Article 13 of the India-UK DTAA, this requirement is disjunctive from the rest of the provision, unlike in the India-Canada DTAA. The India-UK DTAA states that 'fees for technical services' "means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which … or make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design." In order for the amounts paid to the overseas entities in the transaction covered by the India-Canada DTAA, thus, it must not only be showed that technical services were performed, but that such knowledge etc. was 'made available'. Xxxxxxxxxx 37. This brings the Court to the next issue, concerning reimbursement and the doctrine of diversion of income by overriding title. This Court notices that a case with almost identical circumstances, in In Re: AT & S India (P.) Ltd. (supra), also came up before the AAR. There, an agreement between AT&S India and its parent, AT& Austria was entered into, by which AT&S Austria undertook to assign or cause its subsidiaries to assign its qualified employees to the AT&S India. These individuals were to work for AT&S India and receive compensation substantially similar to what they would have received as employees of AT&S Austria. They were engaged by AT&S India on a full time basis. The question before the AAR was identical to this case: "Whether pursuant to the secondment agreement entered into by the applicant with AT&S Austria, the payment to be made by the applicant

18 IT(TP)A No.1486/Bang/2013 to AT&S Austria, towards reimbursement of salary cost incurred by AT&S Austria in respect of seconded personnel, would be subject to withholding tax under Section 195 of the IT Act, in view of the facts that (1) the payments are only in the nature of reimbursement of actual expenditure incurred by AT&S Austria. (2) AT&S Austria is not engaged in the business of providing technical services in the ordinary course of its business, (3) AT&S Austria is not charging the applicant any separate fee for the secondment and (4) the seconded personnel work under the direct control and supervision of the applicant?" In holding that the obligation under Section 195 would be triggered, the AAR held as follows: 'From the above analysis of both the agreements it is clear that pursuant to the obligation under the FCA, the AT&S Austria has offered the services of technical experts to the applicant on the latter's request and the terms and conditions for providing services of technical experts are contained in the secondment agreement which we have referred to above in great details. Though the term "reimbursement" is used in the agreements, the nature of payments under the secondment agreement has to satisfy the characteristic of reimbursement and that the term "reimbursement" in the agreement will not be determinative of nature of payments. The term "reimbursement" is not a technical word or a word of Article In Oxford English Dictionary, to reimburse means—to repay a person who has spent or lost money—and accordingly reimbursement means to make good the amount spent or lost. However, under the secondment agreement the applicant is required to compensate AT&S Austria for all costs directly or indirectly arisen from the secondment of personnel and that the compensation is not limited to salary, bonus, benefits, personal travel, etc. though salary, bonus, etc. and the amounts referred to in para 4.2 of the secondment agreement form part of compensation. The premise of the question that the payments are only in the nature of reimbursement of actual expenditure incurred by AT&S Austria is not tenable for reasons more than one. First it is not supported by any evidence as no material (except the debit notes of salaries of seconded personnel) is placed before us to show what actual expenditure was incurred by AT&S Austria and what is being claimed as reimbursement; secondly, assuming for the sake of argument that the debit notes represent the quantum of compensation as the actual expenditure, it would make no difference as the same is payable to the AT&S Austria under the secondment agreement for services provided by it. It would, therefore, be not only unrealistic but also contrary to the terms of the agreement to treat payments under the said agreement as mere reimbursement of salaries of the seconded employees who are said to be the employees of the applicant. To show that the real employer of such employees is the applicant and not the AT&S Austria, Mr. Chaitanya invited our attention to various employment agreements entered into between the applicant and the

19 IT(TP)A No.1486/Bang/2013 seconded employees and also the certificate of deduction of tax at source on their global salary. All the employment agreements are similarly worded. We have carefully gone through the employment agreement between the applicant and Mr. Markus Stoinkellner. The duration of the employment is from 1st Sept., 2005 till 30th Aug., 2008. In Article 3 thereof salary of the employee is noted as the remuneration, perquisites and other entitlements as detailed in Appendix-A. However, Appendix-A does not specify any amount. All that it says, is that the salary will be as fixed and agreed between the employee and the company from time to time and that such salary may be paid either in India or outside India but the total salary shall not exceed the salary fixed as above, but no fixed salary is mentioned in the employment agreement. Other perquisites and entitlements are : travel expenses, transport, boarding, lodging; and annual leave of 30 days per year; and home leave which the employee will be entitled to once. The applicant shall have to organize an economic class return flight tickets to go on home leave. The employment agreement also provides that the employee will be responsible for meeting all requirements under Indian tax laws including tax compliance and filing of returns and the applicant is authorized to deduct taxes from the compensation and benefits payable.' 38. The mere fact that CIOP, and the secondment agreement, phrases the payment made from CIOP to the overseas entity as 'reimbursement' cannot be determinative. Neither is the fact that the overseas does not charge a mark-up over and above the costs of maintaining the secondee relevant in itself, since the absence to markup (subject to an independent transfer pricing exercise) cannot negate the nature of the transaction. It would lead to an absurd conclusion if, all else constant, the fact that no payment is demanded negates accrual of income to the overseas entity. Instead, the various factors concerning the determination of the real employment link continue to operate, and the consequent finding that provision of employees to CIOP was the provision of services to CIOP by the overseas entities triggers the DTAAs. The nomenclature or lesser-than- expected amount charged for such services cannot change the nature of the services. Indeed, once it is established, as in this case, that there was a provision of services, the payment made may indeed be payment for services - which may be deducted in accordance with law - or reimbursement for costs incurred. This, however, cannot be used to claim that the entire amount is in the nature of reimbursement, for which the tax liability is not triggered in the first place. This would mean that in any circumstance where services are provided between related parties, the demand of only as much money as has been spent in providing the service would remove the tax liability altogether. This is clearly an incorrect reasoning that conflates liability to tax with subsequent deductions that may be claimed. 13. The SLP filed against the judgment of Hon’ble Delhi High Court has been dismissed by the Hon’ble Supreme Court in 227 Taxman 368. Therefore the view

20 IT(TP)A No.1486/Bang/2013 taken by the Hon’ble High Court has attained finality. The concept of income includes positive as well as negative income or nil income. In the case of payment being FTS or royalty as per sec. 9(1) of the Act it is irrelevant whether any profit element in the income or not. It is not only a matter of computation of total income when the concept of profit element in payment is relevant. If the payment being FTS or royalty is made to nonresident, then the concept of total income becomes irrelevant and the provisions of sec. 44D recognize the gross payment chargeable to tax. Thus all the payment made by the assessee to non-resident on account of FTS or royalty an chargeable to tax irrespective of any profit element in the said payment or not. However, there is an exception to this Rule of charging the gross amount when the non-resident is having fixed place of business or PE in India and the amount is earned through the PE, then the expenditure incurred in the relation to the PE for earning said amount is allowable as per the provisions of sec. 44DA of the Act. Therefore, in view of the judgment of Hon’ble Delhi High Court in the case of Centrica (Supra), the payment made to foreign company DFCL partakes the character of FTS as per the definition under explanation 2 to sec . 9(1)(vii) of the Act. The decisions relied upon by the assessee in the case of IDS Software Solutions (Supra) and Abbey Business Solution (Supra) would not help the case of the assessee when there is a direct judgment of Hon’ble Delhi High Court on this point.”

We find that the ratio of the decisions of Hon'ble Delhi High Court in the

case of Centrica India Pvt. Ltd. Vs. CIT (supra) as well as the decision of

the co-ordinate bench of this Tribunal in the case of Foodworld

Supermarkets Ltd. Vs. DCIT (supra) is applicable to the facts of the case

on hand. The decisions relied upon by the ld. AR are on the point of

double deduction of tax at source under Section 192 and further under

Section 195 of the Act whereas the issue in the case of the assessee is

taxability of the income in the regular assessment and not in the

proceedings under Section 201(1) & 201(1A) of the Act. Therefore the

TDS deducted by the ITIPL would not change the nature of the payment

and chargeability of the same to tax in India. In view of the above facts

21 IT(TP)A No.1486/Bang/2013 and circumstances, the decisions of the Hon'ble Delhi High Court as well

as co-ordinate bench of this Tribunal, we do not find any error or

illegality in the order of authorities below.

assets assessed as royalty.

consideration of transfer of fixed assets to ITIPL and the same was not

offered to tax under Indo-USA Treaty. The Assessing Officer concluded

that receipts on account of testers and servers amounted to royalty and

was taxable in the hands of the assessee company. Similarly it was held

that the Boards supplied to ITIPL for which consideration was received

amounting to royalty. Accordingly, the Assessing Officer made the

addition of the amount received by the assessee on account of transfer

of fixed assets to the Indian subsidiary ITIPL. The assessee challenged the

action of the Assessing Officer before the CIT (Appeals) but could not

succeed.

has submitted that these were all equipments procured by the assessee

22 IT(TP)A No.1486/Bang/2013 from third party and transferred to the ITIPL at Written Down Value

(WDV). Therefore there is no element of profit in this transaction. The

TPO has accepted this transaction at ALP. He has further contended that

for the Assessment Year 2012-13, an identical transaction of transfer of

assets has been accepted by the Assessing Officer. He has referred to

the assessment order at page 43 of the Paper Book-II and submitted that

identical assets transferred by the assessee were accepted by the

Assessing Officer without any addition. He has also referred to the

TPO’s order at page No.83 and 84 of the Paper Book-II and submitted

that the TPO has accepted the transaction at Arm’s Length Price (ALP).

Thus the ld. AR has submitted that when there is no transfer of

technology or know how then the transfer of assets does not fall under

the definition of royalty as per the provisions of Act or DTAA.

authorities below and submitted that these are not an ordinary

equipment or assets but these items are servers which perform the task

on behalf of the clients. Therefore the technology embedded in these

products have been transferred by the assessee to the ITIPL and the

23 IT(TP)A No.1486/Bang/2013 complex computer software enclosed within the hardware was

transferred and the payments against the same is nothing but royalty.

material on record. The details of the assets have been reproduced by

the authorities below in the impugned order from which it is manifest

that all these assets were independent products of third party which

were purchased by the assessee and used in its business. None of the

assets have been developed by the assessee but it is freely available

equipment/servers of IBM as well as other equipment of third party.

Some of the assets are only power supply equipment of Vanguard and

testers. Similarly the servers of IBM and HP are not assessee's own

products for captive use but these are products available in the market.

Therefore these used products transferred by the assessee to the

subsidiary would not constitute transfer of any technology or know how

or any other process to bring the same under the definition of royalty as

per the provisions of section 9(1)(vii) or as per the provisions of Article XII

of the DTAA. There is nothing in the transaction like transfer of any

information – technical, industrial, commercialor scientific knowledge or

24 IT(TP)A No.1486/Bang/2013 use or right to use any industrial, commercial or scientific equipments

but it is only the used assets / computer equipments were transferred by

the assessee to ITIPL. It is not the case of the Assessing Officer that these

equipments / servers have been specifically programmed by the assessee

and not available in the market. Therefore in the facts and

circumstances of the case, we are of the considered view that the action

of the Assessing Officer in treating the payment as royalty is contrary to

the facts as well as the provisions of the Act and the DTAA. Accordingly,

we delete the addition made by the Assessing Officer on this count.

identical to the issue of transfer of assets.

learned Departmental Representative and considered the relevant

material on record. These testing boards are not the equipments

developed by the assessee but these are third party products therefore

there is no transfer of any right or right to use in respect of any process

or technology know how along with these testing boards. Accordingly in

25 IT(TP)A No.1486/Bang/2013 view of our finding on the issue of receipt on transfer of other assets like

servers the addition made by the Assessing Officer is deleted.

of Rs.1,46,06,825 but the same was not offered to tax. The Assessing

Officer asked the assessee to furnish the details of receipts. The assessee

explained that these amounts represents reimbursement of expenses

which related to the ITIPL but were incurred by the assessee in the first

instance. Thus the assessee contended that the reimbursements are not

chargeable to tax either under the provisions of the Act or under the

provisions of the DTAA. The Assessing Officer did not accept the

contention of the assessee and observed that no evidence was furnished

by the assessee to establish the fact that the amount received were

miscellaneous reimbursement expenses from ITIPL. Accordingly, in the

absence of details, the same were added as income from other sources.

The assessee challenged the action of the Assessing Officer before the

CIT (Appeals) but could not succeed.

26 IT(TP)A No.1486/Bang/2013 17. Before us, the ld. AR of the assessee has reiterated the

contentions raised before the authorities below and submitted that the

amount in question is nothing but the reimbursement expenses incurred

by the assessee which relates to the ITIPL. The ld. AR has thus submitted

that there is no element of income in this amount and therefore not

taxable in the hands of the assessee.

failed to produce any evidence in support of the claim that this is only a

reimbursement of expenses and there is no element of income. He has

relied upon the orders of the authorities below.

material on record, we find that the Assessing Officer specifically asked

the assessee to file the details of receipts in question. In response the

assessee submitted that these are reimbursement of expenses. However

there was no supporting evidence or complete details regarding the

amount in question claimed as miscellaneous reimbursement of

expenses. The CIT (Appeals) has confirmed the action of the Assessing

Officer in para 16.1 as under :

27 IT(TP)A No.1486/Bang/2013 “16.1 The A.O. noted that the break up of the expenses could not be given, no evidence was furnished by the assessee to establish the fact that the amount so received were miscellaneous reimbursements from ITIPL. Hence, he brought the entire sum to tax under the head income from other sources. Before me, the same note was produced without any kind of substantiation. In such circumstances, I have no option, but to confirm the action of the A.O.”

the claim. In the absence of the requisite details or supportive evidence,

we do not find any reason to interfere with the orders of the authorities

below. Accordingly, this ground is dismissed.

Sd/- Sd/- (INTURI RAMA RAO) (VIJAY PAL RAO) Accountant Member Judicial Member

*Reddy gp