IBM CANADA LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME-TAX, INTERNATIONAL TAXATION-CIRCLE-1(2), BANGALORE

PER BENCH:

Income Tax Appeals at Sl.Nos.1 to 18 above are relating to sustaining the penalty levied u/s 271(1)(c) of the Income Tax Act, 1961 (in short “The Act”) by NFAC and Sl.Nos.19 to 24 are with regard to sustaining penalty u/s 270A of the Act by NFAC arising out of different orders of NFAC for the respective above assessment years. 2. Facts of the case are that IBM is a multinational corporation, headquartered in the USA with multiple subsidiaries around the globe, including India. IBM foreign entities received notices under section 148/ section 143(2) of the Income-tax Act, 1961 (“the Act”) for various assessment years against which the entities had voluntarily offered the reimbursement of salary cost of the seconded employees to tax as Fees for Technical Services (“FTS”) either in the return of income which was filed in response to the initial 148 notice or by way of a revised computation at the stage of assessment/ reassessment proceedings. Furthermore, IBM Australia Limited also offered the Asia Pacific ("AP") Information Technology (“IT”) service receipts and the miscellaneous support service receipts/ other receipts by way of a revised computation at the stage of assessment proceedings. Parallelly, IBM India Private Limited (“IBM India”) had also opted for the settlement option under the Direct Tax Vivad Se Vishwas Act, 2020 (“VsV”) to settle the pending litigations with

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 6 of 56 respect to the TDS demands under section 201 of the Act; with respect to the taxability of the very same payments in the nature of reimbursement of salary cost (secondment reimbursements) for AY 2009-10 to AY 2015-16. IBM India has duly deducted TDS under section 192 in respect of all the salaries of the seconded employees, in respect of which costs were reimbursed to the IBM foreign companies; Thereafter, reassessment/ assessment proceedings were conducted on the IBM foreign entities and reassessment orders under section 143(3) read with section 147 of the Act/ assessment order under section 143(3) of the Act were issued along with show- cause notices for imposing penalty under section 271(1)(c) of the Act for the matters pertaining to AY 2012-13 to AY 2016-17 and under section 270A of the Act for AY 2017-18 to AY 2019-20 respectively; IBM foreign entities had filed a detailed response during the course of penalty proceedings and requested the officer to drop the penalty proceedings. However, the Assessing Officer (“AO”) imposed penalty under section 271(1)(c)/ section 270A of the Act against which the IBM foreign entities preferred an appeal before the CIT(A). Separately, IBM foreign entities had identified certain mistakes which were apparent from record in the penalty orders against which the rectification applications were filed. As on date, the said applications are still pending disposal, except in the case of IBM Corporation for AY 2016-17 and AY 2017-18 and IBM China Hong Kong Limited (“IBM CHK”) for AY 2014-15 wherein the rectification order has already been passed;

2.1 During the course of hearing before the ld. CIT(A), detailed submissions were made by the ld. A.Rs for the assessees along with required documentation to substantiate the claim of the assessees. Furthermore, the following assessees also furnished revised grounds of appeal in respect of the below cases:

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 7 of 56 − IBM Australia for the AY 2018-19 and the AY 2019-20 − IBM Nederland B.V. for the AY 2017-18 − IBM Corporation for the AY 2017-18 − IBM United Kingdom Limited for the AY 2017-18 and − IBM Canada Limited for the AY 2017-18

2.2 For the case of convenience, the subject matters are classified into following categories based on facts of the case and for ease of understanding:

− Category A: 271(1)(c) cases where original return under section 139(1) of the Act was not filed and receipts were offered to tax in the return filed under section 148 of the Act − Category B: 271(1)(c) case where original return under section 139(1) of the Act was not filed and receipts were offered to tax during the reassessment proceedings − Category C: 271(1)(c) case where original return under section 139(1) of the Act has been filed however, secondment related receipts were offered to tax only in the return filed under section 148 of the Act − Category D: 270A case where original return under section 139(1) of the Act has been filed however, secondment related receipts were offered to tax only in the return filed under section 148 of the Act − Category E: 270A case where original return under section 139(1) of the Act has not been filed and receipts were offered to tax in the return filed under section 148 of the Act − Category F: 270A case where original return under section 139(1) of the Act has been filed and receipts were offered to tax during the course of the assessment proceedings

Entity AY Section ITA No. ITR Offered to tax Category A: 271(1)(c) cases where original return under section 139(1) of the Act was not filed and receipts were offered to tax in the return filed under section 148 of the Act IBM Canada Limited 2013- 271(1)(c) 490/Bang/2024 Not filed In ROI filed 14 u/s 148 IBM Canada Limited 2016- 271(1)(c) 491/Bang/2024 Not filed In ROI filed 17 u/s 148 IBM China Hong Kong 2014- 271(1)(c) 500/Bang/2024 Not filed In ROI filed Limited 15 u/s 148

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 8 of 56 Entity AY Section ITA No. ITR Offered to tax IBM Israel Limited 2014- 271(1)(c) 495/Bang/2024 Not filed In ROI filed 15 u/s 148 IBM Israel Limited 2016- 271(1)(c) 496/Bang/2024 Not filed In ROI filed 17 u/s 148 Category B: 271(1)(c) case where original return under section 139(1) of the Act was not filed and receipts were offered to tax during the reassessment proceedings IBM Deutschland 501/Bang/2024 During re- 2012- GMBH ("IBM 271(1)(c) Not filed assessment 13 Germany") proceedings 489/Bang/2024 During re- 2012- IBM Canada Limited 271(1)(c) Not filed assessment 13 proceedings BM Osterreich 504/Bang/2024 During re- Internationale assessment 2012- Buromaschinen 271(1)(c) Not filed proceedings 13 Gesellschaft m.b.H ("IBM Austria") 502/Bang/2024 During re- 2012- IBM Del Peru SAC 271(1)(c) Not filed assessment 13 proceedings Category C: 271(1)(c) case where original return under section 139(1) of the Act has been filed however, secondment related receipts were offered to tax only in the return filed under section 148 of the Act Compagnie IBM 2013- 271(1)(c) 545/Bang/2024 Filed but In ROI filed France 14 not offered u/s 148 Compagnie IBM 2015- 271(1)(c) 546/Bang/2024 Filed but In ROI filed France 16 not offered u/s 148 2014- 271(1)(c) 487/Bang/2024 Filed but In ROI filed IBM Australia 15 not offered u/s 148 2016- 271(1)(c) 499/Bang/2024 Filed but In ROI filed IBM Corporation 17 not offered u/s 148 2013- 271(1)(c) 492/Bang/2024 Filed but In ROI filed IBM Japan Limited 14 not offered u/s 148 2015- 271(1)(c) 493/Bang/2024 Filed but In ROI filed IBM Japan Limited 16 not offered u/s 148 2016- 271(1)(c) 494/Bang/2024 Filed but In ROI filed IBM Japan Limited 17 not offered u/s 148 IBM United Kingdom 2014- 271(1)(c) 542/Bang/2024 Filed but In ROI filed Limited 15 not offered u/s 148 IBM United Kingdom 2016- 271(1)(c) 497/Bang/2024 Filed but In ROI filed Limited 17 not offered u/s 148

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 9 of 56 Entity AY Section ITA No. ITR Offered to tax Category D: 270A case where original return under section 139(1) of the Act has been filed however, secondment related receipts were offered to tax only in the return filed under section 148 of the Act 2017- 544/Bang/2024 Filed but In ROI filed IBM Corporation 270A 18 not offered u/s 148 2017- 503/Bang/2024 Filed but In ROI filed IBM Netherland B V 270A 18 not offered u/s 148 IBM United Kingdom 2017- 498/Bang/2024 Filed but In ROI filed 270A Limited 18 not offered u/s 148 Category E: 270A case where original return under section 139(1) of the Act has not been filed and receipts were offered to tax in the return filed under section 148 of the Act IBM Canada Limited 2017- 270A 543/Bang/2024 Not filed In ROI filed 18 u/s 148 Category F: 270A case where original return under section 139(1) of the Act has been filed and receipts were offered to tax during the course of the assessment proceedings 488/Bang/2024 During 2018- IBM Australia 270A Filed assessment 19 proceedings 541/Bang/2024 Secondment receipts offered in the ITR, 2019- IBM Australia 270A Filed AP IT/ other 20 receipts offered during assessment proceedings

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 10 of 56 deputations working under the direction and control of IBM India. Suitable expatriate agreements between the respective IBM Foreign Entity and IBM India were entered into. In the subject transaction, IBM India reimbursed salary and other related costs to the respective IBM Foreign Entities, as a part of these salaries were paid abroad for administrative convenience and the IBM Foreign Entities sought reimbursement from IBM India. Furthermore, IBM India has always reported such receipts in its Form 3CEB filed as per the provisions of the Act. Furthermore, all entities which filed return of income under section 139(1) of the Act falling under Category C, D and F had also duly reported the said receipts in Form 3CEB, but did not offer the secondments receipts to tax on the basis of its bonafide belief that the same is not taxable.

3.2 The subject receipts are in the nature of actual costs initially incurred by the respective IBM Foreign Entity in respect of certain employees seconded to IBM India. Therefore, such payment being in the nature of expenses incurred by the respective IBM Foreign Entity on behalf of IBM India on a cost-to-cost basis, no income element is embedded in such payment. Accordingly, there being no income element in the aforesaid reimbursement, the same is not chargeable to tax in India and hence, not subject to taxes as FTS under the Act.

3.3 The above view was backed by various judicial precedents including the Hon’ble Delhi High Court (“HC”) decision in the case of DIT vs HCL Infosystems Ltd. [2005] 274 ITR 261 (Delhi HC), which was pronounced on 6 January 2004. Thereafter, the jurisdictional Bangalore Income-tax Appellate Tribunal (“ITAT”) in the case of M/s Abbey Business Service (India) Private Limited vs DCIT [2012] 23 Taxmann.com 346 (Bangalore ITAT) vide order dated 18 July 2012 has also upheld the said view. Therefore, the Assessees was under a

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 11 of 56 bonafide belief that receipts in the nature of reimbursement of salary cost of employees was not liable for taxation as FTS in India.

3.4 At this juncture, ld. A.Rs for the assessees submitted that they want to strongly highlight that IBM Corporation (one of the IBM Foreign Entities) in its own case received a notice under section 143(2) of the Act on 3 August 2012 in respect of RoI filed for AY 2011-12. It is in the said assessment for the AY 2011-12 that the issue of taxation of secondment reimbursements was first scrutinized threadbare. After a thorough analysis of this issue, an amount of Rs 83,49,00,000 was accepted to be not taxable vide assessment order dated 25 March 2015. They also submitted that IBM Corporation is largest of the IBM Foreign Entities in the context of receipt of secondment reimbursements from India. This order has achieved finality since the same has neither been revised under section 263 nor has been reassessed under section 147 of the Act.

3.5 Subsequent to the above, the issue on taxability payments to seconded employees was revisited in the Hon’ble Delhi HC decision in the case of Centrica India Offshore (P.) Ltd. vs CIT [2014] 44 taxmann.com 300 (Delhi HC) dated 25 April 2014, wherein the said issue was held against the assessee. The AO in the subject matter has placed heavy reliance on the said decision of the Hon’ble Delhi HC, without appreciating that the Petitioner’s case is distinguishable on facts.

3.6 Thereafter, IBM India was subject to proceedings under section 201 of the Act (“201 proceedings”) for non-deduction of taxes under section 195 of the Act on the secondment reimbursements, i.e., reimbursement of salary and other related costs of employees paid by IBM India to IBM overseas entities (for AY 2009-10 to AY 2015-16), contending the same to be taxable as FTS under the Act/ respective

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 12 of 56 tax treaties and thereby, order under section 201 of the Act dated 29 March 2016 (“201 order”) was passed. There is no mention of Service PE in the 201 orders.

3.7 Against the adverse CIT(A) order issued to IBM India, IBM India had appealed the same to the ITAT, which referred the appeal to a Special Bench of the ITAT. In this regard, they referred to para 37 of the detailed order of the division bench of the ITAT referring the case to the Special Bench to resolve the conflict, noting the judicial conflict in the views expressed by various judicial authorities over a period of time in respect of the subject matter since there were conflicting HC judgments on this issue as well conflicting ITAT judgments, which they reproduced below –

“37. We may also mention : that in the case of another IBM group company case viz., DCIT (IT) Vs. MIS.IBM Corporation IT (IT)A.No.1/Bang.2014 & IT(IT)A.No.6/Bang/2017 order dated 6.1.2017, the Tribunal took the view that there was an obligation on the part of the Assessee in that case to deduct tax at source u/s.195 of the Act when making payment by way of reimbursement. The conclusions of the Tribunal are contained in paragraph 5 of its order and it is based on failure by the Assessee to furnish certain details before the AO which is extracted in paragraph 2.1 of the CIT(A)'s order which was subject matter of the aforesaid appeal. The CIT(A)'s order which was subject matter of the aforesaid appeal in paragraph 2.4 of his order has referred to the decisions of the ITAT in the case of Mis. Abbey Business Services India Pvt.Ltd.(supra) and IDS Software (supra) and concluded in para 2.5 that the aforesaid decisions were rendered on its own facts and had no applicability to the facts of the Assessee's case. We however find that the facts of the case in these appeals and the facts of the case in the case of Mis. Abbey Business Services India Pvt.Ltd. (supra) and IDS Software (supra) are identical.”

3.8 In the aforesaid referral order, the division bench has discussed various case laws in detail including HCL Infosystems Ltd. (supra), Centrica India Offshore (supra) and M/s Abbey Business Service (supra). While drawing a conclusion, the division bench held

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 13 of 56 that the facts of IBM are similar to the jurisdictional ITAT ruling of M/s Abbey Business Service (supra). This Abbey decision of the ITAT has been confirmed by the jurisdictional Karnataka HC. The HC has in fact distinguished the case of Centrica to say that the said judgment was in the context of Service PE, which is not the case in the case of Abbey. Thereby, it can be said that the bonafide belief of the Petitioner that the said receipts are not taxable [owing to which the said receipts were not offered to tax in the original return of income filed u/s 139(1)/ no return of income was filed u/s 139(1)] stood reaffirmed by the ITAT referral order for constituting the Special Bench to decide the case.

3.9 The very same ITAT judgment of M/s Abbey Business Service (supra) has since been confirmed by the jurisdictional Karnataka HC in the case of DIT Vs Abbey Business Services Private Limited (2020) 122 taxmann.com 174, wherein the Hon’ble HC has specifically distinguished the case of Centrica India Offshore (supra) and held that issue in favour of the assessee. They submitted that the facts in the case of the Petitioner are similar to that of Abbey Business Services (supra) and therefore, said decision ought to apply in the case of the Petitioner.

3.10 Thereafter, the Karnataka HC has again upheld the non- taxability of secondment reimbursements in the case of Flipkart Internet Private Limited (2022) 139 taxmann.com 595.

3.11 The AO in the penalty order has specifically relied on the decision of the Hon’ble SC in the case of CCCEST vs Northern Operating Systems (P.) Ltd [2022] 138 taxmann.com 359 (SC) and the Hon’ble Delhi HC decision in the case of Centrica India Offshore Private Limited (348 ITR 45) (2014) and upheld the taxability of reimbursement of salary expense of seconded employees as FTS.

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 14 of 56 However, we submit that there are plethora of judicial precedents that have referred to both the Northern Operating case of the Supreme Court and the Centrica case of the Delhi HC and have still upheld the non-applicability of these cases and holding that the secondment reimbursements are not taxable as “fees for technical services” under section 9(1)(vii) of the Act read with Article of the DTAA. These judgements are as follows:  Karnataka HC judgment in Flipkart Internet (P.) Ltd (2022) 139 taxmann.com 595;(page 57-77 case law compilation)  Delhi ITAT in Ernst & Young US LLP [2023] 153 taxmann.com 95 (Delhi-Trib); (page 78-87 case law compilation)  Delhi HC in Boeing India Pvt Ltd [2023] 146 taxmann.com 131(Delhi) (page 88-93 case law compilation); and  Bangalore ITAT in Google LLC vs JCIT(OSD)/DCIT(IT) [2023] 147 taxmann.com 428 (Bangalore-Trib) 3.12 They drew our attention to the table capturing various Courts/ Tribunal decisions on said issue in a chronological order, which is as follows: Sl Caselaw with Citation Favourable/ Forum Date of No._ unfavourable pronouncement 1 DIT vs HCL Infosystems Favourable Delhi HC 6 January 2004 Limited [2005] 144 Taxman 492 – followed by Karnataka HC in Abbey case 2 Karl Storz Endoscopy India Favourable Delhi HC 13 September (P) Limited (ITA No 13 of 2010 2008) (Delhi HC) (refer page 199 – 201 of PB) 3 Abbey Business Services Favourable Bangalore 18 July 2012 India Pvt Ltd (23 ITAT Taxmann.com 346) – later on confirmed by Karnataka High Court

4 Marks & Spencer Reliance Favourable Mumbai 4 September India Private Limited [2013] ITAT 2013

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 15 of 56 Sl Caselaw with Citation Favourable/ Forum Date of No._ unfavourable pronouncement 38 taxmann.com 190 (Mumbai – Trib) (refer page 202 – 213 of PB) 5 Centrica India Offshore (P) Unfavourable Delhi HC 25 April 2014 Ltd [2014] 44 taxmann.com 300 (Delhi) 6 Marks & Spencer Reliance Favourable Bombay 3 May 2017 India Private Limited [2017] HC ITA No 893 of 2014 (Bom HC) (refer page 214 – 216 of PB) 7 Morgan Stanley Asia Favourable Mumbai 6 July 2018 (Singapore) Pte Ltd vs DDIT ITAT [2018] 95 taxmann.com 165 (Mumbai ITAT); 8 M/s Faurecia Automotive Favourable Pune ITAT 8 July 2019 Holding vs DCIT (ITA No 784/PUN/2015) (Pune ITAT) 9 DIT vs Abbey Business Favourable Karnataka 1 December Services India Pvt Ltd HC 2020 [2020] 122 taxmann.com 174 (Karnataka) 10 Toyota Boshoku vs DCIT Favourable Bangalore 13 April 2022 [2022] 138 taxmann.com ITAT 166 (Bangalore – Trib) 11 Goldman Sachs vs DCIT Favourable Bangalore 29 April 2022 [2022] 138 taxmann.com ITAT 162 12 Northern Operating system Under service Supreme 19 May 2022 Pvt Ltd tax law, not in Court CIVIL APPEAL NO. 2289- the context of 2293 OF 2021 income-tax 13 Flipkart Internet (P.) Ltd Favourable Karnataka 24 June 2022 (2022) 139 taxmann.com HC 595 14 Delhi HC in Boeing India Favourable Delhi HC 11 October 2022 Pvt Ltd [2023] 146 taxmann.com 131(Delhi) (refer page 193 – 198 of PB)

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 16 of 56 Sl Caselaw with Citation Favourable/ Forum Date of No._ unfavourable pronouncement 15 Google LLC vs Favourable Bangalore 20 February JCIT(OSD)/DCIT(IT) ITAT 2023 [IT(IT)Appeal Nos 167/Bang/2021 & 688/Bang/2022] 16 Ernst & Young US LLP Favourable Delhi ITAT 20 June 2023 [2023] 153 taxmann.com 95 (Delhi-Trib) (refer page183 – 192 of PB 17 Central Circle vs M/s Favourable. Chennai 9 October 2023 Caterpillar India Pvt. Ltd Distinguishing ITAT [ITA No. 1031/Chny/2022] Northern (refer page 217 – 222 of PB) Operating System (supra)

3.13 Nevertheless, with respect to the section 201 proceedings initiated on IBM India on the same subject matter, while the appeals were pending before the ITAT and despite the fact that the Hon’ble ITAT constituted a Special Bench to hear the appeals, noting the judicial conflict in the views expressed by various judicial authorities, with the sole intention of not furthering any litigation on this aspect, IBM India had settled its appeals under VsV scheme for the AY 2009- 10 to AY 2015-16, wherein tax liability of approximately Rs 83 crore was duly paid by IBM India as per the VsV Scheme and the litigation pertaining to seven years was settled to end litigation and attain closure.

3.14 IBM India, on acceptance of the said receipts to tax in India, withdrew its pending appeals before the ITAT (Special Bench) and remitted the taxes due under the VsV scheme (for the AY 2009-10 to AY 2015-16).

3.15 The VsV scheme was also opted by the IBM Foreign Entities for the AY 2007-08 to AY 2017-18 (these are in respect of cases which

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 17 of 56 are not subject to reassessment since they are settled under VsV scheme), in respect of the secondment receipts (in respect all IBM Foreign Entities) and receipts from IBM India for services rendered under the AP IT Services Centre (specifically for IBM Australia). The total tax liability accepted on such cases which were opted under VsV to end litigation and attain closure was approximately Rs 33 crores.

3.16 In summary, a total of 62 applications were filed under the VsV Act and Rs 116 crores (Rs 83 crores + Rs 33 crores) was accepted as tax liability by IBM India and IBM foreign entities collectively under the VsV Scheme.

3.17 Considering the above backdrop and IBM’s intention to not further any litigations, in cases where the proceedings were ongoing and could not be closed under VsV, IBM Foreign Entities had voluntarily offered the aforesaid receipts to tax in India at the first possible instance [ie, (i) where proceedings were initiated under section 148, such receipts were offered to tax in the return filed in response to such notice (without receiving the reasons for reopening); and (ii) where the proceedings were already initiated and ongoing, such receipts were offered to tax during the course of the said proceedings].

4.1 The AO in the penalty orders has refused to accept the ‘bonafide’ intention of the entities for not offering the secondment receipts to tax and for not filing original return offering such receipts (only for cases where original return was not filed). It was considered that secondment of employees to India is used as a tax shifting construct/ arrangement between IBM foreign entities and IBM India. Further, the AO observed that the entities have conspired to escape

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 18 of 56 taxation in India and it is only consequent to initiation of 201 proceedings on IBM India and issuance of notice under section 148 of the Act that all the particulars of income were declared by the foreign entities;

4.1.2 The AO in the penalty orders has relied on the decision of the Hon’ble Supreme Court (“SC”) in case of CCCEST vs Northern Operating Systems (P.) Ltd [2022] 138 taxmann.com 359 (SC) and the Hon’ble Delhi High Court (“HC”) decision in the case of Centrica India Offshore Private Limited (348 ITR 45) (2014) and upheld the taxability of reimbursement of salary expense of seconded employees as FTS; and

4.1.3 Further, the AO has stated that the foreign entities ought to have made an application before the jurisdictional TDS AO as per section 197 of the Act in order to understand its tax liability.

4.2 Specific observation by the AO with respect to penalty under section 271(1)(c) of the Act

4.2.1 The AO in the penalty order has confirmed that the Assessee has ‘concealed’ particulars of income under section 271(1)(c) of the Act (for AY 2012-13 to AY 2016-17) by failing to furnish original return of income under section 139 of the Act and has made full disclosure of income only in the reassessment proceedings under section 148 of the Act.

4.2.2 The AO in concluding so has provided a blanket statement for all the foreign entities and has completely disregarded the fact that not all IBM foreign entities had failed to furnish original return under section 139 of the Act.

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 19 of 56 4.2.3 Further, the AO in the penalty order has taken shelter under Explanation 3 to section 271(1)(c) without considering the specific exclusion for cases where the taxpayer fails to furnish return of income on account of ‘reasonable cause’. Moreover, cases where the original return of income is filed by the taxpayer under section 139 of the Act, such cases ought to be outside the ambit of Explanation 3 to section 271(1)(c). However, the AO has completely disregarded the said fact in case of IBM foreign entities where due return was filed under section 139 of the Act (for AY 2012-13 to AY 2016-17).

4.3 Specific observation by the AO with respect to penalty under section 270A of the Act

4.3.1 The AO in the penalty order has confirmed that the Assessee has ‘under reported income which is in consequence of misreporting’ by not filing a return within the timelines stipulated under section 139 of the Act and hence liable to penalty under section 270A of the Act (for AY 2017-18 to AY 2019-20).

4.3.2 As discussed above, in concluding so the AO has provided a blanket statement for all the foreign entities and has completely disregarded the fact that not all IBM foreign entities had failed to furnish original return under section 139 of the Act.

4.3.3 The AO in the penalty order has arbitrarily rejected the submission and the explanations offered and has therefore, denied the applicability of the provisions of section 270A(6) of the Act, contending the explanations of the Assessee to not be ‘bonafide’.

4.3.4 In the case of IBM Australia for the AY 2014-15, the AO had levied penalty for receipts on secondment receipts. However, while quantifying the amount of penalty, the AO has levied penalty both

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 20 of 56 secondment receipts as well as receipts from the AP IT services/ other miscellaneous services.

4.4 Proceedings before the CIT(A)

4.4.1 Against the above observation made by the AO, the Assessees preferred an appeal before the Commissioner of Income Tax (Appeals) [“CIT(A)”] and filed its detailed submission along with documentary evidence substantiating the claim of the Assessee. Further, Assessee filed a detailed background on the issue of taxability of salary cost of seconded employees along with detailed table capturing various Courts/ Tribunal decisions on said issue.

4.4.2 With respect to penalty levied under section 271(1)(c) of the Act (AY 2012-13 to AY 2016-17), the following specific submissions / contentions were made before the CIT(A): a) Substantiating the ‘bonafide’ intention of the Assessee for not offering secondment receipts to tax under Explanation 1 to section 271(1)(c) of the Act; b) Justifying the non-applicability of Explanation 3 to section 271(1)(c) of the Act on account of ‘reasonable cause’ (for all cases w.r.t. AY 2012-13 to AY 2016-17) and the specific exclusion of cases where return of income was duly furnished under section 139 of the Act; c) In respect of cases falling under Category C, the IBM foreign entities contested the validity of the penalty orders where the matter was adjudicated basis incorrect facts of the case stating that the Assessee failed to furnish return of income under section 139 of the Act, where in fact due return of income was furnished under section 139 of the Act and the details of secondment receipts were duly disclosed in the Form 3CEB filed for the relevant years.

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 21 of 56 d) In respect of cases falling under Category A and B, the IBM foreign entities contested the validity of the penalty orders by highlighting that the receipts were duly offered to tax in the revised ROI (even before receipt of reasons for reopening the assessment) or voluntarily during the course of the reassessment proceedings. e) Reason for levy of penalty under section 271(1)(c) of the Act (i.e, whether for concealment of income or for furnishing of inaccurate particulars) was not discernible from the penalty orders. 4.4.3 With respect to penalty levied under section 270A (AY 2017-18 to AY 2019-20) of the Act, the following specific submissions / contentions were made before the CIT(A): a) Substantiating the ‘bonafide’ intention of the Assessee for not offering secondment receipts to tax under section 270A(6) of the Act which states that where an Assessee offers a ‘bonafide’ explanation to the satisfaction of the AO and duly discloses all material facts to substantiate the explanation offered, such case would not be considered to be a case of under-reporting of income; b) Contesting the validity of the penalty orders (for all entities other than IBM Canada) where the matter was adjudicated basis incorrect facts of the case stating that the Assessee failed to furnish return of income under section 139 of the Act, where in fact duly return of income was furnished under section 139 of the Act and the details of secondment receipts were duly disclosed in the Form 3CEB filed for the relevant years. c) In the case of IBM Canada, it was submitted that the receipts were duly offered to tax in the revised ROI even before receipt of reasons for reopening the assessment. d) Reason for levy of penalty under section 270A of the Act (i.e, whether for underreporting of income or for underreporting of

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 22 of 56 income in consequence of misreporting) was not discernible from the penalty orders.

e) Arbitrary reference to the term ‘misreporting’ without substantiating under which specific limb of section 270A(9) of the Act, misreporting has been undertaken. 4.4.4 However, the CIT(A) vide its order confirmed the order passed by the AO and upheld the penalty levied upon the Assessee. In respect of the 270A cases, the CIT(A) deleted levy of penalty for ‘misreporting’ but however levied penalty for ‘under-reporting’.

4.4.5 Against the orders passed by the CIT(A), the Assessee has preferred the present appeal before your goodself which is registered vide ITA No. 487 to 504/Bang/2024 and ITA No. 541 to 546/Bang/2024.

4.5 Ld. A.Rs’ submissions before ITAT

4.5.1 At the outset, Assessee placed reliance on the detailed order of the division bench of the Income Tax Appellate Tribunal (“ITAT”) referring the matter of IBM India to Special Bench of the ITAT, wherein the division bench held the facts of IBM to be similar to the jurisdictional ITAT ruling of M/s Abbey Business Service (India) Private Limited vs DCIT [2012] 23 Taxmann.com 346 (Bangalore ITAT), which had decided the issue in favour of the taxpayer and later upheld by the Karnataka HC.

4.5.2 Further, in the subsequent judgment of the Hon’ble Jurisdictional High Court in the case of Flipkart Internet (P.) Ltd. [2022] 139 taxmann.com 595 (Karnataka), the High Court upheld the decision in the case of Abbey Business Service (India) Private Limited (supra) and distinguished the decision of the Hon’ble judgment of the

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 23 of 56 Apex Court in Northern Operating Systems (P.) Ltd. [2022] 138 taxmann.com 359. Hence, ld. A.Rs submitted that as of the today, the issue of secondment of employees are not taxable.

4.5.3 However, the foreign entities considering the prolonged litigation with income tax department and for administrative reasons paid the tax merely to buy peace. Hence, although the taxes were not paid during the filing of return u/s 139, the payments were made while filing the revised return u/s 148 and/or during the assessment proceedings. The ld. A.Rs submitted that imposition of penalty is not automatic and the tax payment made by the assessee is it to buy peace and the same cannot be considered as concealment. Assessee relies on the decision of the Punjab and Haryana High Court in the of Rajiv Garg [2008] 175 Taxman 184 wherein the court has held as under:

“Undisputedly, the assessee filed the return of income declaring its total income at Rs. 47,05,230, which inter alia included long-term capital gain on sale of shares amounting to Rs. 29,74,951. The return was processed in terms of section 143(1)(a) of the Act on 15-3-1999. Subsequently, on the basis of some information with regard to sale proceeds of the shares amounting to Rs. 32,40,385 on which the capital gain was declared at Rs. 29,74,951 by the assessee in the original return, a notice under section 148 of the Act was issued. Pursuant to the said notice, the assessee filed the revised return of income showing higher income. The said return of income was accompanied by a note in which the assessee submitted that he surrendered the entire amount of sale proceeds of shares to buy peace of mind and to avoid hazards of litigation and also to save himself from any penal action. Later on, on the basis of revised return, the assessment was framed and the return submitted by the assessee was regularized as it is. …………. The Department has simply rested its conclusion on the act of assessee of having offered additional income in the return filed in response to the notice issued under section 148 of the Act. The Tribunal has further held that the additional income so offered by the assessee was done in good faith and to buy peace. The Tribunal has relied upon the decision of the Apex Court in case of CITv. Suresh Chandra Mittal [2001] 251 ITR

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 24 of 56 9, wherein the Supreme Court has upheld the decision of the Madhya Pradesh High Court CITv. Suresh Chandra Mittal [2000] 241 ITR 124 , where in similar circumstances it was held that the initial burden lies on the revenue to establish that the assessee had concealed the income or had furnished inaccurate particulars of such income. …….. Therefore, in view of the aforesaid finding, the Tribunal was justified in upholding the order of the Commissioner of Income-tax (Appeals), whereby the penalty imposed under section 271(1)(c) of the Act by the Assessing Officer was ordered to be deleted.”

4.5.4 Without prejudice to the above, the Assessee places heavy reliance the assessment order dated 25 March 2015 issued in the case of IBM Corporation for AY 2011-12 wherein, the issue of taxation of secondment reimbursements was first scrutinized and decided in favour of the Assessee. It was specifically highlighted that the said order has achieved finality since the same has neither been revised under section 263 nor has been reassessed under section 147 of the Act;

4.5.5 Assuming but not admitting, in case of conflicting rulings, the Assessee is entitled to place reliance on rulings favorable to him and ought not to be penalized for adopting a favourable view in the said issue. Relevant judicial precedents were discussed to justify that non-acceptance of the bonafide explanation offered by the Assessee and mere rejection of Assessee’s claim on account of difference of opinion by the AO would per se not lead to levy of penalty;

4.5.6 It has been held by judicial precedents that penalty cannot be imposed in a case where an adjustment has been made in respect of a debatable issue. Without prejudice to the fact that IBM group believes that reimbursement of secondment receipts are not taxable, it wishes to submit that penalty cannot be levied in respect of an adjustment which is debatable or in respect of which two views are

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 25 of 56 possible. In relation to the same, IBM Foreign Entities wish to place reliance on the below judicial precedents:

- CIT v. Reliance Petroproducts [2010] 322 ITR 158 (SC)

The revenue contended that since the assessee had claimed excessive deductions knowing that they were incorrect, it amounted to concealment of income. It was argued that the falsehood in accounts can take either of the two forms: (i) an item of receipt may be suppressed fraudulently; (ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one's income as well as furnishing of inaccurate particulars of income. Such contention could not be accepted as the assessee had furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be in accurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the revenue, that, by itself, would not attract the penalty under section 271(1)(c). If the contention of the revenue was accepted, then in case of every return where the claim made was not accepted by the Assessing Officer for any reason, the assessee would invite penalty under section 271(1)(c).That is clearly not the intendment of the Legislature. (Emphasis Supplied)  GE packaged Power Inc vs DCIT (ITA No: 765/Del/2019) (Delhi ITAT) and others

“Facts are not in dispute. It is not disputed that substantial questions of law on the quantum additions confirmed by ITAT have already been framed by Hon'ble Delhi High Court regarding all the additions in respect of which penalties (disputed in the present appeals before us) have been levied by the AO, u/s 27l(l)(c) of IT Act. It is also not in dispute that quantum additions were on disputable and debatable issues on which different views could legitimately exist. In these facts and circumstances, respectfully following the aforesaid precedents, vide order of Hon'ble Delhi High Court in CIT vs. Liquid Investment and Trading Company (supra), decision of Hon'ble Bombay High Court in CIT vs. Nayan Builders & Developers (supra), decision of ITAT, Delhi in ACIT vs. Moradabad Toll Road Co. Ltd. (supra); and after due consideration of PCIT vs. Mis Shree Gopal Housing and Plantation Corporation (supra); in our view the issue regarding penalty u/s 27l(l)(c) of IT Act disputed in the appeals before us is covered in favour of the assessee by the aforesaid orders; and, therefore, we hold that the

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 26 of 56 penalties levied u/s 27l(l)(c) and disputed in the present appeals before us, are not sustainable. Accordingly, the penalties levied u/s 27l(l)(c) ofIT Act and disputed in the present appeals before us are hereby cancelled.”

(Emphasis Supplied)  CIT vs Harsh International Pvt Ltd (ITA 620/2019, 622/2019 and CM Appl 30811/2019, 301813/2019)

“Having heard the learned counsel for the appellant and having perused the impugned order, this Court is of the view that the ITAT was right in deleting the penalty levied under Section 271(1)(c) of the Act. It has to be noted that penalty proceedings are an outcome of assessment and if the assessment itself is debatable, the penalty proceedings cannot survive.”

(Emphasis Supplied)

4.5.7 Without prejudice to the above, it was highlighted that in case of a non-resident, the tax liability if any is required to be discharged only by way of TDS. Furthermore, IBM India had duly deducted taxes under section 192 of the Act in respect of same secondment reimbursements. Given the same, there was no requirement on part of the IBM Foreign Entities to obtain a certificate under section 197 of the Act. Additionally, they submitted that the provisions of section 197 of the Act are not mandatory in nature and cannot be imposed upon any assessee.

4.5.8 Without prejudice to the above legal submission, the ld. Ars for the Assessee submitted para wise rebuttal to the observations made by the CIT(A) with respect to each of the categories of cases.

Category A: 271(1)(c) cases where original return under section 139(1) of the Act was not filed and receipts were offered to tax in the return filed under section 148 of the Act

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 27 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - - Assessee did not offer the FTS receipts In addition to the above, legal to tax under section 139 of the Act submissions, it is submitted that IBM - Receipts were offered to tax only after India has reported such receipts in 3CEB - proceedings under section 201 of the Explanation 3 refers to the term Act were initiated in case of IBM India ‘reasonable cause’. Reliance can be - Receipts were offered to tax only after placed on decision of SC in Singapore a notice under section 148 of the Act Airlines Ltd. vs Commissioner of Income Tax [2022] 144 taxmann.com was issued, initiating the reassessment proceedings/ during the course of 221 (SC) – page 112-141 of case law reassessment proceedings. compilation wherein the SC (at page 117) - Reference to Explanation 3 to section has dealt with the aspect of ‘reasonable 271(1)(c) of the Act was upheld cause”. The Supreme Court has held that where there are contradictory judicial (Page 10/11 of the CIT(A)’s order) pronouncements on an issue, that itself amounts to a “reasonable cause” for not having done TDS, which acts as a defence against levy of penalty. IBM foreign entities had reasonable cause to not file a return under section 139 of the Act basis: - IBM Corp’s assessment order for AY 2011-12 which had attained finality - Plethora of judicial precedents in assessee’s favor on the secondment matter, including the Special Bench referral order in IBM India’s own case which has referred to IBM’s facts being similar to M/s Abbey Business Service (India) Private Limited vs DCIT [2012] 23 Taxmann.com 346 (Bangalore ITAT) - - The CIT(A) has contended that mere MAK Data (supra) ruling is in the context acceptance of tax liability will not of a case where income was voluntarily preclude the levy of the penalty on the offered pursuant to a survey proceeding assessee. under section 133A of the Act. No - The CIT(A) has relied on the ruling of bonafide explanations were provided the Supreme Court (“SC”) in MAK under Explanation 1 of section 271(1)(c) Data P. Ltd. vs CIT-II [2013] 38 of the Act in respect of the income being taxmann.com 448 (SC) to support the surrendered. The only argument made by above contention the Assessee was that it voluntarily offered receipts to tax and therefore, (Page 10/11 of the CIT(A)’s order) penalty cannot be levied.

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 28 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - In the case of IBM, the matter in respect of taxability of secondment expenses which is at the least a debatable issue, even if not considered as in issue which actually now stands decided in favor of the Assessee. - The above case is therefore distinguishable on facts. Assessee relies on ruling by the Punjab and Haryana HC in the case of CIT v. Rajiv Garg [2008] 175 Taxman 184 – page 204 case law compilation - The CIT(A) has contended that the The AO and CIT(A) have erred in explanations offered by IBM are not holding that the conduct of the Assessee bonafide, since: is not bonafide merely because, the - The explanation offered by the Assessee adopts a position contrary to Assessee was rejected by the AO revenue’s position, basis prevailing - Failure on part of the Assessee to offer judicial precedents. - receipts to tax in the first instance (u/s Receipts were not offered under section 139) and thereby contending that the 139 of the Act basis juridical precedents/ Assessee had not disclosed all the facts IBM Corp’s order for AY 2011-12. - material to the computation of its total AO cannot contend that the Assessee had income. Reference drawn to Delhi not disclosed all material facts, especially Tribunal’s ruling in the case of Ajay when secondment receipts were always Jain vs ITO [2013] 32 taxmann.com disclosed in Form 3CEB. - 270 (Delhi ITAT) Ruling of Ajay Jain vs ITO (supra) is (Page 12 to 13 of the CIT(A)’s order) distinguishable on facts since no explanations were offered by the taxpayer in respect of the income surrendered. Also, the receipts surrendered were not litigative in nature. - The CIT(A) has rejected the judicial CIT(A) has distinguished the facts of precedents of Abbey Business Services IBM with those of Abbey solely on the India (P.) Ltd (supra) and ([2020]122 basis that IBM has voluntarily offered taxmann.com 174 (Karnataka HC), by receipts to tax. However, the CIT(A) has contending that the same are failed to look into the similarity of facts distinguishable on facts. of both these cases. CIT(A) has failed to acknowledge that ITAT in the Special (Page 13 of the CIT(A)’s order) Bench referral order in case of IBM India has noted that the facts in case of IBM are similar to those in case of Abbey (supra). - Provisions of section 195(2)/ 197 of the Act are not mandatory and therefore the

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 29 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations AO cannot be expected to seek recourse to the same. - The CIT(A) has contended that the Provisions of section 195(2)/ 197 of the explanations offered by the Assessee are Act are not mandatory and therefore the not bonafide since no application under AO cannot be expected to seek recourse section 197 was presented by the to the same. - Assessee. The CIT(A) observed that: Therefore, the same isn’t sufficient - The option to present an application ground to contend that the Assessee’s under section 197 of the Act was open conduct is not bonafide. to the Assessee - section 195(2) and section 197 of the Act are in the nature of safeguard sections to make sure that taxes are rightfully deducted on payments. - Assessee has not availed any of the safeguards and basis that has rejected the Assessee’s contention of ‘bonafide belief’. (Page 13-14 of the CIT(A)’s order)

- The CIT(A) has rejected the judicial Merely because IBM has voluntarily precedents cited by the Assessee on the offered receipts to tax, it does not mean ground that: that the same is perse taxable, given that - In all of the rulings relied, the ‘make the same were offered to avoid litigation. available’ criteria under the respective IBM has time and again reiterated DTAAs was not satisfied. repeatedly that it still continues to believe - Assessee offering receipts to tax that the secondment receipts are not establishes by itself that the ‘make taxable as FTS. available’ criteria is satisfied and the subject receipts are taxable as FTS. (Page 14-15 of the CIT(A)’s order) - CIT(A) rejected the Assessee reference to The SC in the subject ruling has laid provisions of 273B of the Act to define the down the legal proposition that if Courts/ term reasonable cause including reliance Tribunals in the ensuing years have on Singapore Airlines Ltd. vs passed contradictory judgements, it Commissioner of Income Tax [2022] 144 results in genuine and a bonafide taxmann.com 221 (SC). difficulty on part of the Assessee and therefore qualifies to be a ‘reasonable (Page 15 of the CIT(A)’s order) cause’ under section 273B of the Act. - The reference to the above case by the Assessee was only in the context of the

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 30 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations legal principle emanating from the same which could also be used in the context of section 271(1)(c) of the Act. - However, the CIT(A) has incorrectly opined that the reference to the subject ruling is misplaced merely because the same is not rendered in context of section 271(1)(c) of the Act. The principle emanating from the subject ruling would also have a bearing on the interpretation of section 271(1)(c) of the Act.

Category B: Category B: 271(1)(c) case where original return under section 139(1) of the Act was not filed and receipts were offered to tax during the reassessment proceedings Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - - The CIT(A) has held that there could Reliance placed by Delhi HC in case of be situations of overlap between New Holland Tractors (supra) is ‘concealment of particulars income incorrect as the same is distinct on facts. and inaccurate particulars of income’ The subject case does not deal with a case - The CIT(A) placed reliance on the where reason for levy of penalty overlaps. - Delhi HC’s ruling in the case of New Merely because ‘concealment’ and Holland Tractors vs CIT [2014] 49 ‘furnishing of inaccurate particulars’ may taxmann.com 573 (Delhi) overlap does not mean that the AO is - The CIT(A) has observed that penalty required to be specific in respect of which order and notice both state that limb penalty is levied and must specify penalty is levied for concealment of the same in the assessment order/ penalty particulars of income notice. - (Page 8-9 of the CIT(A)’s order) Reliance to be placed on the cases relied upon in the submission made before the CIT(A). - - - Assessee did not offer the FTS In addition to the above, legal receipts to tax under section 139 of submissions, it is submitted that IBM the Act India has reported such receipts in 3CEB - - Receipts were offered to tax only Explanation 3 refers to the term after proceedings under section 201 ‘reasonable cause’. Reliance can be of the Act were initiated in case of placed on decision of SC in Singapore IBM India Airlines Ltd. vs Commissioner of - Receipts were offered to tax only Income Tax [2022] 144 taxmann.com 221 (SC) wherein the SC has dealt with after a notice under section 148 of the Act was issued, initiating the the aspect of ‘reasonable cause”. IBM reassessment proceedings/ during the foreign entities had reasonable cause to course of reassessment proceedings.

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 31 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - Reference to Explanation 3 to section not file a return under section 139 of the 271(1)(c) of the Act was upheld Act basis: - IBM Corp’s assessment order for AY (Page 10 of the CIT(A)’s order) 2011-12 which had attained finality - Plethora of judicial precedents in assessee’s favor on the secondment matter, including the Special Bench referral order in IBM India’s own case which has referred to IBM’s facts being similar to M/s Abbey Business Service (India) Private Limited vs DCIT [2012] 23 Taxmann.com 346 (Bangalore ITAT) - - The CIT(A) has contended that mere MAK Data (supra) ruling is in the context acceptance of tax liability will not of a case where income was voluntarily preclude the levy of the penalty on the offered pursuant to a survey proceeding assessee. under section 133A of the Act. No - The CIT(A) has relied on the ruling of bonafide explanations were provided the Supreme Court (“SC”) in MAK under Explanation 1 of section 271(1)(c) Data P. Ltd. vs CIT-II [2013] 38 of the Act in respect of the income being taxmann.com 448 (SC) to support the surrendered. The only argument made by above contention the Assessee was that it voluntarily offered receipts to tax and therefore, (Page 10 of the CIT(A)’s order) penalty cannot be levied. - In the case of IBM, the matter in respect of taxability of secondment expenses which is a debatable issue if not considered in favor of the Assessee. - The above case is therefore distinguishable on facts. Assessee relies on ruling by the Punjab and Haryana HC in the case of CIT v. Rajiv Garg [2008] 175 Taxman 184 - The CIT(A) has contended that the The AO and CIT(A) have erred in explanations offered by IBM are not holding that the conduct of the Assessee bonafide, since: is not bonafide merely because, the - The explanation offered by the Assessee adopts a position contrary to Assessee was rejected by the AO revenue’s position, basis prevailing - Failure on part of the Assessee to offer judicial precedents. - receipts to tax in the first instance (u/s Receipts were not offered under section 139) and thereby contending that the 139 of the Act basis juridical precedents/ Assessee had not disclosed all the facts IBM Corp’s order for AY 2011-12.

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 32 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - material to the computation of its total AO cannot contend that the Assessee had income. Reference drawn to Delhi not disclosed all material facts, especially Tribunal’s ruling in the case of Ajay when secondment receipts were always Jain vs ITO [2013] 32 taxmann.com disclosed in Form 3CEB. - 270 (Delhi ITAT) Ruling of Ajay Jain vs ITO (supra) is (Page 11/12 of the CIT(A)’s order) distinguishable on facts since no explanations were offered by the taxpayer in respect of the income surrendered. Also, the receipts surrendered were not litigative in nature. - The CIT(A) has rejected the judicial CIT(A) has distinguished the facts of precedents of Abbey Business Services IBM with those of Abbey solely on the India (P.) Ltd (supra) and ([2020]122 basis that IBM has voluntarily offered taxmann.com 174 (Karnataka HC), by receipts to tax. However, the CIT(A) has contending that the same are failed to look into the similarity of facts distinguishable on facts. of both these cases. CIT(A) has failed to acknowledge that ITAT in the Special (Page 11-12 of the CIT(A)’s order) Bench referral order in case of IBM India has noted that the facts in case of IBM are similar to those in case of Abbey (supra). - Provisions of section 195(2)/ 197 of the Act are not mandatory and therefore the AO cannot be expected to seek recourse to the same. - The CIT(A) has contended that the Provisions of section 195(2)/ 197 of the explanations offered by the Assessee are Act are not mandatory and therefore the not bonafide since no application under AO cannot be expected to seek recourse section 197 was presented by the to the same. - Assessee. The CIT(A) observed that: Therefore, the same isn’t sufficient - The option to present an application ground to contend that the Assessee’s under section 197 of the Act was open conduct is not bonafide. to the Assessee - section 195(2) and section 197 of the Act are in the nature of safeguard sections to make sure that taxes are rightfully deducted on payments. - Assessee has not availed any of the safeguards and basis that has rejected the Assessee’s contention of ‘bonafide belief’. (Page 12-13 of the CIT(A)’s order)

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 33 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations

- The CIT(A) has rejected the judicial Merely because IBM has voluntarily precedents cited by the Assessee on the offered receipts to tax, it does not mean ground that: that the same is perse taxable, given that - In all of the rulings relied, the ‘make the same were offered to avoid litigation. available’ criteria under the respective IBM has time and again reiterated DTAAs was not satisfied. repeatedly that it still continues to believe - Assessee offering receipts to tax that the secondment receipts are not establishes by itself that the ‘make taxable as FTS. available’ criteria is satisfied and the subject receipts are taxable as FTS. (Page 13 of the CIT(A)’s order) - CIT(A) rejected the Assessee reference to The SC in the subject ruling has laid provisions of 273B of the Act to define the down the legal proposition that if Courts/ term reasonable cause including reliance Tribunals in the ensuing years have on Singapore Airlines Ltd. vs passed contradictory judgements, it Commissioner of Income Tax [2022] 144 results in genuine and a bonafide taxmann.com 221 (SC). difficulty on part of the Assessee and therefore qualifies to be a ‘reasonable (Page 13-14 of the CIT(A)’s order) cause’ under section 273B of the Act. - The reference to the above case by the Assessee was only in the context of the legal principle emanating from the same which could also be used in the context of section 271(1)(c) of the Act. - However, the CIT(A) has incorrectly opined that the reference to the subject ruling is misplaced merely because the same is not rendered in context of section 271(1)(c) of the Act. The principle emanating from the subject ruling would also have a bearing on the interpretation of section 271(1)(c) of the Act.

Category C: 271(1)(c) case where original return under section 139(1) of the Act has been filed however, secondment related receipts were offered to tax only in the return filed under section 148 of the Act

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 34 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - - Assessee did not offer the FTS receipts In addition to the above, legal to tax under section 139 of the Act submissions, it is submitted that IBM - Receipts were offered to tax only after India has reported such receipts in 3CEB - proceedings under section 201 of the Explanation 3 refers to the term Act were initiated in case of IBM India ‘reasonable cause’. Reliance can be - Receipts were offered to tax only after placed on decision of SC in Singapore a notice under section 148 of the Act Airlines Ltd. vs Commissioner of Income Tax [2022] 144 taxmann.com was issued, initiating the reassessment proceedings/ during the course of 221 (SC) wherein the SC has dealt with reassessment proceedings. the aspect of ‘reasonable cause”. IBM - Reference to Explanation 3 to section foreign entities had reasonable cause to 271(1)(c) of the Act was upheld not offer the receipts to tax in the return under section 139 of the Act basis: - (Page 10-11 of the CIT(A)’s order) IBM Corp’s assessment order for AY 2011-12 which had attained finality - Plethora of judicial precedents in assessee’s favor on the secondment matter, including the Special Bench referral order in IBM India’s own case which has referred to IBM’s facts being similar to M/s Abbey Business Service (India) Private Limited vs DCIT [2012] 23 Taxmann.com 346 (Bangalore ITAT) - - The CIT(A) has contended that mere MAK Data (supra) ruling is in the context acceptance of tax liability will not of a case where income was voluntarily preclude the levy of the penalty on the offered pursuant to a survey proceeding assessee. under section 133A of the Act. No - The CIT(A) has relied on the ruling of bonafide explanations were provided the Supreme Court (“SC”) in MAK under Explanation 1 of section 271(1)(c) Data P. Ltd. vs CIT-II [2013] 38 of the Act in respect of the income being taxmann.com 448 (SC) to support the surrendered. The only argument made by above contention the Assessee was that it voluntarily offered receipts to tax and therefore, (Page 10/11/15/16 of the CIT(A)’s order) penalty cannot be levied. - In the case of IBM, the matter in respect of taxability of secondment expenses which is a debatable issue if not considered in favor of the Assessee. - The above case is therefore distinguishable on facts. Assessee relies on ruling by the Punjab and Haryana HC

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 35 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations in the case of CIT v. Rajiv Garg [2008] 175 Taxman 184 - The CIT(A) has contended that the The AO and CIT(A) have erred in explanations offered by IBM are not holding that the conduct of the Assessee bonafide, since: is not bonafide merely because, the - The explanation offered by the Assessee adopts a position contrary to Assessee was rejected by the AO revenue’s position, basis prevailing - Failure on part of the Assessee to offer judicial precedents. - receipts to tax in the first instance (u/s Receipts were not offered under section 139) and thereby contending that the 139 of the Act basis juridical precedents/ Assessee had not disclosed all the facts IBM Corp’s order for AY 2011-12. - material to the computation of its total AO cannot contend that the Assessee had income. Reference drawn to Delhi not disclosed all material facts, especially Tribunal’s ruling in the case of Ajay when secondment receipts were always Jain vs ITO [2013] 32 taxmann.com disclosed in Form 3CEB. - 270 (Delhi ITAT) Ruling of Ajay Jain vs ITO (supra) is (Page 11/12 of the CIT(A)’s order) distinguishable on facts since no explanations were offered by the taxpayer in respect of the income surrendered. Also, the receipts surrendered were not litigative in nature. - - The CIT(A) has highlighted that in the While the CIT(A)’s order was received case of Assessee’s group company, prior to the favorable order passed in case IBM Australia for AY 2007-08 and of IBM Corp, the said order of IBM AY 2008-09, the then CIT(A)-IV, Australia was challenged before the Bangalore vide order dated 20 ITAT. Thereafter, the appeal was November 2013 had upheld the withdrawn because IBM Australia chose addition of reimbursement of to settle the litigations under the Vivad se expenses on seconded employees as Vishwas Act, 2020. Therefore, it cannot FTS. Therefore, the CIT(A) has be said that the issue was settled in the rejected the Assessee’s claim that it case of IBM Australia for the AY 2007- was not aware of the Department’s 08 and AY 2008-09. position on the treatment of - reimbursement of secondment Further, the issue of taxation of expenses as FTS. secondment reimbursements was scrutinized and thereby, decided in - Hence the Assessee’s claim that it favour of the Assessee in the order passed harbored a bona fide belief that the subsequently in case of IBM Corporation receipts from reimbursement of for AY 2011-12. We specifically wish to secondment expenses were not highlight that the said order has achieved taxable, is rejected in the face of the finality since the same has neither been facts of its case revised under section 263 nor has been reassessed under section 147 of the Act.

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 36 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations (Page 11/12/14/15 of the CIT(A)’s order) - The CIT(A) has rejected the judicial CIT(A) has distinguished the facts of precedents of Abbey Business Services IBM with those of Abbey solely on the India (P.) Ltd (supra) and ([2020]122 basis that IBM has voluntarily offered taxmann.com 174 (Karnataka HC), by receipts to tax. However, the CIT(A) has contending that the same are failed to look into the similarity of facts distinguishable on facts. of both these cases. CIT(A) has failed to acknowledge that ITAT in the Special (12-13 of the CIT(A)’s order) Bench referral order in case of IBM India has noted that the facts in case of IBM are similar to those in case of Abbey (supra). - Provisions of section 195(2)/ 197 of the Act are not mandatory and therefore the AO cannot be expected to seek recourse to the same. - The CIT(A) has contended that the Provisions of section 195(2)/ 197 of the explanations offered by the Assessee are Act are not mandatory and therefore the not bonafide since no application under AO cannot be expected to seek recourse section 197 was presented by the to the same. - Assessee. The CIT(A) observed that: Therefore, the same isn’t sufficient - The option to present an application ground to contend that the Assessee’s under section 197 of the Act was open conduct is not bonafide. to the Assessee - section 195(2) and section 197 of the Act are in the nature of safeguard sections to make sure that taxes are rightfully deducted on payments. - Assessee has not availed any of the safeguards and basis that has rejected the Assessee’s contention of ‘bonafide belief’. (Page 13-14 of the CIT(A)’s order)

- The CIT(A) has rejected the judicial Merely because IBM has voluntarily precedents cited by the Assessee on the offered receipts to tax, it does not mean ground that: that the same is perse taxable, given that - In all of the rulings relied, the ‘make the same were offered to avoid litigation. available’ criteria under the respective IBM has time and again reiterated DTAAs was not satisfied. repeatedly that it still continues to believe

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 37 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - Assessee offering receipts to tax that the secondment receipts are not establishes by itself that the ‘make taxable as FTS. available’ criteria is satisfied and the subject receipts are taxable as FTS. (Page 14-15 of the CIT(A)’s order)

Category D: 270A case where original return under section 139(1) of the Act has been filed however, secondment related receipts were offered to tax only in the return filed under section 148 of the Act Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - The CIT(A) has rejected the submission of While the assessment order mentions IBM in respect of discrepancies under under-reporting, the penalty notice which limb penalty is levied, basis the mentions under-reporting in consequence below contentions: of misreporting. - - The provisions of section 270A(2)(a) It is settled position of law that levy of of the Act are applicable penalty must be specific and discernible. - The AO has levied penalty for under- reporting of income, which is the same reason that was recorded in the assessment order read with the corrigendum - Receipts were offered to tax only after a notice under section 148 of the Act was issued, initiating the reassessment proceedings. - The CIT(A) has distinguished the facts of the case from Karnataka HC’s ruling in Manjunatha Cotton & Ginning Factory [2013] 35 Taxmann.com 250 (Karnataka HC) - The CIT(A) has concluded that the provisions of 270A(8) need not be invoked and that the case of the Assessee is covered under section 270A(2)(a) of the Act.

(Page 15 of the CIT(A)’s order) - The CIT(A) has rejected the judicial CIT(A) has distinguished the facts of precedents of DIT(IT) vs Abbey Business IBM with those of Abbey solely on the

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 38 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations Services India (P.) Ltd ([2012] 23 basis that IBM has voluntarily offered taxmann.com 346 (Bangalore ITAT) and receipts to tax. However, the CIT(A) has ([2020]122 taxmann.com 174 failed to look into the similarity of facts (Karnataka HC), by contending that the of both these cases. - same is distinct in facts, on account of the CIT(A) has failed to acknowledge that below reasons: ITAT in the Special Bench referral order - In Abbey’s case, the ITAT/ HC has in case of IBM India has noted that the concluded that there was no profit facts in case of IBM are similar to those element as reimbursements were made in case of Abbey (supra). - on a cost-to-cost basis. In the absence Provisions of section 195(2)/ 197 of the of a profit element, the question of Act are not mandatory and therefore the taxability under the provisions Act AO cannot be expected to seek recourse would not arise. to the same. - Furthermore, since income was not taxable under the Act, the taxability of the same under the provisions of the DTAA was not analyzed in the subject ruling. - The CIT(A) has opined that in IBM’s case, the Assessee has himself admitted to taxability of the secondment receipts as FTS, since they were voluntarily offered to tax. - The CIT(A) also highlighted that in Abbey’s case, the Assessee had furnished an application under section 195 while IBM has not exercised this option.

(Page 15 &16 of the CIT(A)’s order) - The CIT(A) has contended that the Provisions of section 195(2)/ 197 of the explanations offered by the Assessee are Act are not mandatory and therefore the not bonafide since no application under AO cannot be expected to seek recourse section 197 was presented by the to the same. - Assessee. The CIT(A) observed that: Therefore, the same isn’t sufficient - The option to present an application ground to contend that the Assessee’s under section 197 of the Act was open conduct is not bonafide. - to the Assessee at the time of receipt Deduction under section 192 of the Act of payment establishes employer-employee - The placed reliance on Karnataka relationship and is therefore relevant. HC’s ruling in Flipkart Internet (P.) This aspect has also been discussed in Ltd. vs DCIT International Taxation numerous judicial precedents. [2022] 139 taxmann.com 595

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 39 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations (Karnataka HC), whereby the Assessee had presented an application under section 197, in respect to deductibility of tax on similar receipts - The CIT(A) highlighted that section 195(2) and section 197 of the Act are in the nature of safeguard sections to make sure that taxes are rightfully deducted on payments. - The CIT(A) has thereafter contended that the Assessee has not availed any of the safeguards and basis that has rejected the Assessee’s contention of ‘bonafide belief’.

Furthermore, the CIT(A) has contended that deduction of TDS under section 192 of the Act would not be of any relevance since the credit of taxes deducted under section 192 of the Act are given in the hands of the employees whereas the Assessee’s receipts were in nature of FTS.

(Page 16-17 of the CIT(A) order)

The CIT(A) has rejected the below Merely because IBM has voluntarily offered judicial precedents cited by the Assessee: receipts to tax, it does not mean that the same - DIT(IT) Abbey (supra), is perse taxable, given that the same were - Ernst and Young U.S. LLP [2023] 153 offered to avoid litigation. IBM has time and taxmann.com 95 (Delhi-Trib.) again reiterated repeatedly that it still - Addl. DIT (IT) vs Marks and Spencer continues to believe that the secondment Reliance India P. Ltd. [2013] 38 receipts are not taxable as FTS. taxmann.com 190 (Mumbai-Trib.) - Flipkart (Supra) The subject precedents were rejected on account of the below contentions: - In all of the above rulings, the ‘make available’ criteria under the respective DTAAs was not satisfied. - Assessee offering receipts to tax establishes by itself that the ‘make available’ criteria is satisfied and the subject receipts are taxable as FTS.

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 40 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations (Page 17 & 18 of the CIT(A) order)

- - The CIT(A) has contended that mere MAK Data (supra) ruling is in the context acceptance of tax liability will not of a case where income was voluntarily preclude the levy of the penalty on the offered pursuant to a survey proceeding assessee. under section 133A of the Act. No - The CIT(A) has rejected IBM’s bonafide explanations were provided reference to the Punjab and Haryana under Explanation 1 of section 271(1)(c) HC’s ruling in CIT v. Rajiv Garg of the Act in respect of the income being [2008] 175 Taxman 184 (Punjab and surrendered. The only argument made by Haryana HC) by drawing reference to the Assessee was that it voluntarily SC’s ruling in MAK Data P. Ltd. vs offered receipts to tax and therefore, CIT-II [2013] 38 taxmann.com 43 8 penalty cannot be levied. (SC) - - The CIT(A) has noted that the In the case of IBM, the matter in respect Assessee was cognizant about the of taxability of secondment expenses is a nature of payments received by it but debatable issue with various judicial chose not to offer the same to tax. precedents in support of the tax payer. - The above case is therefore Above reference has not been made in distinguishable on facts. IBM Corporation’s order for the AY 2017- - 18 Reference to CIT v. Rajiv Garg [2008] 175 Taxman 184 ruling by the Punjab (Page 18 of the CIT(A) order) and Haryana HC to be retained. - The CIT(A) has contended that the The contention that the explanations of Assessee had offered the additional the Assessee are not bonafide merely receipts only in response to the notice because receipts were offered in the 148 under section 148 indicating that its return is not sufficient. explanation was not bona fide and was - hence not accepted by the AO. The Assessee wishes to re-iterate that it Consequently, the CIT(A) has rejected the had bonafide reasons to not offer receipts plea of the Assessee with respect to the to tax under section 139 basis the IBM said cases being covered under the Corporation’s order and judicial exclusion specified under section 270A(6) precedents. of the Act.

(Page 18 of the CIT(A) order)

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 41 of 56 Category E: 270A case where original return under section 139(1) of the Act has not been filed and receipts were offered to tax in the return filed under section 148 of the Act Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - The CIT(A) has rejected the submission of While the assessment order mentions IBM in respect of discrepancies under under-reporting, the penalty notice which limb penalty is levied, basis the mentions under-reporting in consequence below contentions: of misreporting. - - The provisions of section 270A(2)(b) It is settled position of law that levy of of the Act are applicable penalty must be specific and discernible. - The AO has levied penalty for under- – see Delhi HC in Prem Brothers (page reporting of income, which is the same 142-145 of case law compilation, at page reason that was recorded in the 145, para 8. Also, Pune ITAT in Kishore assessment order read with the Digambar Patil vs ITO – page 157-176 of corrigendum case law compilation) - Receipts were offered to tax only after a notice under section 148 of the Act was issued, initiating the reassessment proceedings. - The CIT(A) has distinguished the facts of the case from Karnataka HC’s ruling in Manjunatha Cotton & Ginning Factory [2013] 35 Taxmann.com 250 (Karnataka HC) - The CIT(A) has concluded that the provisions of 270A(8) need not be invoked and that the case of the Assessee is covered under section 270A(2)(b) of the Act.

(Page 14 of the CIT(A) order) - The CIT(A) has rejected the judicial CIT(A) has distinguished the facts of precedents of DIT(IT) vs Abbey Business IBM with those of Abbey solely on the Services India (P.) Ltd ([2012] 23 basis that IBM has voluntarily offered taxmann.com 346 (Bangalore ITAT) and receipts to tax. However, the CIT(A) has ([2020]122 taxmann.com 174 failed to look into the similarity of facts (Karnataka HC), by contending that the of both these cases. - same is distinct in facts, on account of the CIT(A) has failed to acknowledge that below reasons: ITAT in the Special Bench referral order - In Abbey’s case, the ITAT/ HC has in case of IBM India has noted that the concluded that there was no profit facts in case of IBM are similar to those element as reimbursements were made in case of Abbey (supra).

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 42 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - on a cost-to-cost basis. In the absence Provisions of section 195(2)/ 197 of the of a profit element, the question of Act are not mandatory and therefore the taxability under the provisions Act AO cannot be expected to seek recourse would not arise. to the same. - Furthermore, since income was not taxable under the Act, the taxability of the same under the provisions of the DTAA was not analyzed in the subject ruling. - The CIT(A) has opined that in IBM’s case, the Assessee has himself admitted to taxability of the secondment receipts as FTS, since they were voluntarily offered to tax. - The CIT(A) also highlighted that in Abbey’s case, the Assessee had furnished an application under section 195 while IBM has not exercised this option.

(Page 15 of the CIT(A) order) - The CIT(A) has contended that the Provisions of section 195(2)/ 197 of the explanations offered by the Assessee are Act are not mandatory and therefore the not bonafide since no application under AO cannot be expected to seek recourse section 197 was presented by the to the same. - Assessee. The CIT(A) observed that: Therefore, the same isn’t sufficient - The option to present an application ground to contend that the Assessee’s under section 197 of the Act was open conduct is not bonafide. - to the Assessee at the time of receipt Deduction under section 192 of the Act of payment establishes employer-employee - The placed reliance on Karnataka relationship and is therefore relevant. HC’s ruling in Flipkart Internet (P.) This aspect has also been discussed in Ltd. vs DCIT International Taxation numerous judicial precedents. [2022] 139 taxmann.com 595 (Karnataka HC), whereby the Assessee had presented an application under section 197, in respect to deductibility of tax on similar receipts - The CIT(A) highlighted that section 195(2) and section 197 of the Act are in the nature of safeguard sections to make sure that taxes are rightfully deducted on payments.

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 43 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - The CIT(A) has thereafter contended that the Assessee has not availed any of the safeguards and basis that has rejected the Assessee’s contention of ‘bonafide belief’.

Furthermore, the CIT(A) has contended that deduction of TDS under section 192 of the Act would not be of any relevance since the credit of taxes deducted under section 192 of the Act are given in the hands of the employees whereas the Assessee’s receipts were in nature of FTS.

(Page 15 &16 of the CIT(A) order)

The CIT(A) has rejected the below Merely because IBM has voluntarily offered judicial precedents cited by the Assessee: receipts to tax, it does not mean that the same - DIT(IT) Abbey (supra), is perse taxable, given that the same were - Ernst and Young U.S. LLP [2023] 153 offered to avoid litigation. IBM has time and taxmann.com 95 (Delhi-Trib.) again reiterated repeatedly that it still - Addl. DIT (IT) vs Marks and Spencer continues to believe that the secondment Reliance India P. Ltd. [2013] 38 receipts are not taxable as FTS. taxmann.com 190 (Mumbai-Trib.) - Flipkart (Supra) The subject precedents were rejected on account of the below contentions: - In all of the above rulings, the ‘make available’ criteria under the respective DTAAs was not satisfied. - Assessee offering receipts to tax establishes by itself that the ‘make available’ criteria is satisfied and the subject receipts are taxable as FTS.

(Page 17 of the CIT(A) order) - - The CIT(A) has contended that mere MAK Data (supra) ruling is in the context acceptance of tax liability will not of a case where income was voluntarily preclude the levy of the penalty on the offered pursuant to a survey proceeding assessee. under section 133A of the Act. No - The CIT(A) has rejected IBM’s bonafide explanations were provided reference to the Punjab and Haryana under Explanation 1 of section 271(1)(c) HC’s ruling in CIT v. Rajiv Garg of the Act in respect of the income being

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 44 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations [2008] 175 Taxman 184 (Punjab and surrendered. The only argument made by Haryana HC) by drawing reference to the Assessee was that it voluntarily SC’s ruling in MAK Data P. Ltd. vs offered receipts to tax and therefore, CIT-II [2013] 38 taxmann.com 43 8 penalty cannot be levied. (SC) - - The CIT(A) has noted that the In the case of IBM, the matter in respect Assessee was cognizant about the of taxability of secondment expenses is a nature of payments received by it but debatable issue with various judicial chose not to offer the same to tax. precedents in support of the tax payer. - The above case is therefore (Page 17 of the CIT(A) order) distinguishable on facts. - Reference to CIT v. Rajiv Garg [2008] 175 Taxman 184 ruling by the Punjab and Haryana HC to be retained. - - The Assessee’s contention that there The contention that the explanations of was reasonable cause for its failure to the Assessee are not bonafide merely offer the receipts from IBM India and because receipts were offered in the 148 hence it was covered under the return. - provisions of section 270A(6) is The Assessee had bonafide reasons to not rejected. offer receipts to tax under section 139 - Further, the Assessee’s reliance on the basis the IBM Corporation’s order and decision of the SC in the case of judicial precedents. - Singapore Airlines Ltd. vs The SC in the subject ruling has opined Commissioner of Income Tax [2022] that if Courts/ Tribunals in the ensuing 144 taxmann.com 221 (SC) is held to years have passed contradictory be misplaced since the said decision judgements, it results in genuine and a was rendered in the context of penalty bonafide difficulty on part of the u/s 271C and the yardstick of Assessee and therefore qualifies to be a reasonable cause u/s 273B was applied ‘reasonable cause’ under section 273B of based on the facts of that case. the Act. - The reference to the above case by the (Page 17-18 of the CIT(A) order) Assessee was only in the context of the principle emanating from the same which could also be used in the context of section 270A of the Act. - However, the CIT(A) has incorrectly opined that the reference to the subject ruling is misplaced merely because the same is not rendered in context of section 270A of the Act. The principle emanating from the subject ruling would

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 45 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations also have a bearing on the interpretation of section 270A of the Act.

- - The CIT(A) has highlighted that in the While the CIT(A)’s order was received case of Assessee’s group company, prior to the favorable order passed in case IBM Australia for AY 2007-08 and of IBM Corp, the said order of IBM AY 2008-09, the then CIT(A)-IV, Australia was challenged before the Bangalore vide order dated 20 ITAT. Thereafter, the appeal was November 2013 had upheld the withdrawn because IBM Australia chose addition of reimbursement of to settle the litigations under the Vivad se expenses on seconded employees as Vishwas Act, 2020. Therefore, it cannot FTS. Therefore, the CIT(A) has be said that the issue was settled in the rejected the Assessee’s claim that it case of IBM Australia for the AY 2007- was not aware of the Department’s 08 and AY 2008-09. position on the treatment of - reimbursement of secondment Further, the issue of taxation of expenses as FTS. secondment reimbursements was scrutinized and thereby, decided in - Hence the Assessee’s claim that it favour of the Assessee in the order passed harboured a bona fide belief that the subsequently in case of IBM Corporation receipts from reimbursement of for AY 2011-12. We specifically wish to secondment expenses were not highlight that the said order has achieved taxable, is rejected in the face of the finality since the same has neither been facts of its case revised under section 263 nor has been reassessed under section 147 of the Act. (Page 17 of the CIT(A) order)

Category F: 270A case where original return under section 139(1) of the Act has been filed and receipts were offered to tax during the course of the assessment proceedings Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - The CIT(A) has rejected the submission of While the assessment order mentions IBM in respect of discrepancies under under-reporting, the penalty notice which limb penalty is levied, basis the mentions under-reporting in consequence below contentions: of misreporting. - - The provisions of section 270A(2)(a) It is settled position of law that levy of of the Act are applicable penalty must be specific and discernible. - The AO has levied penalty for under- reporting of income, which is the same reason that was recorded in the

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 46 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations assessment order read with the corrigendum - Receipts were offered to tax only after a notice under section 148 of the Act was issued, initiating the reassessment proceedings. - The CIT(A) has distinguished the facts of the case from Karnataka HC’s ruling in Manjunatha Cotton & Ginning Factory [2013] 35 Taxmann.com 250 (Karnataka HC) - The CIT(A) has concluded that the provisions of 270A(8) need not be invoked and that the case of the Assessee is covered under section 270A(2)(a) / 270A(2)(b) of the Act.

(Page 14 of the CIT(A) order) - The CIT(A) has rejected the judicial CIT(A) has distinguished the facts of precedents of DIT(IT) vs Abbey Business IBM with those of Abbey solely on the Services India (P.) Ltd ([2012] 23 basis that IBM has voluntarily offered taxmann.com 346 (Bangalore ITAT) and receipts to tax. However, the CIT(A) has ([2020]122 taxmann.com 174 failed to look into the similarity of facts (Karnataka HC), by contending that the of both these cases. - same is distinct in facts, on account of the CIT(A) has failed to acknowledge that below reasons: ITAT in the Special Bench referral order - In Abbey’s case, the ITAT/ HC has in case of IBM India has noted that the concluded that there was no profit facts in case of IBM are similar to those element as reimbursements were made in case of Abbey (supra). - on a cost-to-cost basis. In the absence Provisions of section 195(2)/ 197 of the of a profit element, the question of Act are not mandatory and therefore the taxability under the provisions Act AO cannot be expected to seek recourse would not arise. to the same. - Furthermore, since income was not taxable under the Act, the taxability of the same under the provisions of the DTAA was not analyzed in the subject ruling. - The CIT(A) has opined that in IBM’s case, the Assessee has himself admitted to taxability of the secondment receipts as FTS, since they were voluntarily offered to tax.

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 47 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - The CIT(A) also highlighted that in Abbey’s case, the Assessee had furnished an application under section 195 while IBM has not exercised this option.

(Page 21-22 of the CIT(A) order) - The CIT(A) has contended that the Provisions of section 195(2)/ 197 of the explanations offered by the Assessee are Act are not mandatory and therefore the not bonafide since no application under AO cannot be expected to seek recourse section 197 was presented by the to the same. - Assessee. The CIT(A) observed that: Therefore, the same isn’t sufficient - The option to present an application ground to contend that the Assessee’s under section 197 of the Act was open conduct is not bonafide. - to the Assessee at the time of receipt Deduction under section 192 of the Act of payment establishes employer-employee - The placed reliance on Karnataka relationship and is therefore relevant. HC’s ruling in Flipkart Internet (P.) This aspect has also been discussed in Ltd. vs DCIT International Taxation numerous judicial precedents. [2022] 139 taxmann.com 595 (Karnataka HC), whereby the Assessee had presented an application under section 197, in respect to deductibility of tax on similar receipts - The CIT(A) highlighted that section 195(2) and section 197 of the Act are in the nature of safeguard sections to make sure that taxes are rightfully deducted on payments. - The CIT(A) has thereafter contended that the Assessee has not availed any of the safeguards and basis that has rejected the Assessee’s contention of ‘bonafide belief’.

Furthermore, the CIT(A) has contended that deduction of TDS under section 192 of the Act would not be of any relevance since the credit of taxes deducted under section 192 of the Act are given in the hands of the employees whereas the Assessee’s receipts were in nature of FTS.

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 48 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations (Page 22-23 of the CIT(A) order)

The CIT(A) has rejected the below Merely because IBM has voluntarily offered judicial precedents cited by the Assessee: receipts to tax, it does not mean that the same - DIT(IT) Abbey (supra), is perse taxable, given that the same were - Ernst and Young U.S. LLP [2023] 153 offered to avoid litigation. IBM has time and taxmann.com 95 (Delhi-Trib.) again reiterated repeatedly that it still - Addl. DIT (IT) vs Marks and Spencer continues to believe that the secondment Reliance India P. Ltd. [2013] 38 receipts are not taxable as FTS. taxmann.com 190 (Mumbai-Trib.) - Flipkart (Supra) The subject precedents were rejected on account of the below contentions: - In all of the above rulings, the ‘make available’ criteria under the respective DTAAs was not satisfied. - Assessee offering receipts to tax establishes by itself that the ‘make available’ criteria is satisfied and the subject receipts are taxable as FTS.

(Page 23 of the CIT(A) order) - - The CIT(A) has contended that mere MAK Data (supra) ruling is in the context acceptance of tax liability will not of a case where income was voluntarily preclude the levy of the penalty on the offered pursuant to a survey proceeding assessee. under section 133A of the Act. No - The CIT(A) has rejected IBM’s bonafide explanations were provided reference to the Punjab and Haryana under Explanation 1 of section 271(1)(c) HC’s ruling in CIT v. Rajiv Garg of the Act in respect of the income being [2008] 175 Taxman 184 (Punjab and surrendered. The only argument made by Haryana HC) by drawing reference to the Assessee was that it voluntarily SC’s ruling in MAK Data P. Ltd. vs offered receipts to tax and therefore, CIT-II [2013] 38 taxmann.com 43 8 penalty cannot be levied. (SC) - - The CIT(A) has noted that the In the case of IBM, the matter in respect Assessee was cognizant about the of taxability of secondment expenses is a nature of payments received by it but debatable issue with various judicial chose not to offer the same to tax. precedents in support of the tax payer. - The above case is therefore (Page 20 of the CIT(A) order) distinguishable on facts.

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 49 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - Reference to CIT v. Rajiv Garg [2008] 175 Taxman 184 ruling by the Punjab and Haryana HC to be retained. - - The CIT(A) has relied on the below It is submitted the payment are made to cases to contend that where an buy peace. It is reiterated that there are Assessee has himself admitted that an multiple judicial precedence including amount represented his own income, Jurisdictional Karnataka High Court and no further evidence would be Bangalore ITAT decision including necessary to show that income has assessee’s own special bench matter been concealed: wherein it has been categorically held • ITO vs Leela Mammen (ITAT, that the said receipts are not taxable. Cochin) 63 TTJ 252 However, to avoid litigation, once the • CIT vs Dr. R.C. Gupta & Co. assessment proceedings were initiated, (Raj.) 122 ITR 719 the assessee made the tax payment • ACIT vs S.M. Kanappa merely to buy peace. Automobiles (P.) Ltd. (ITAT, Bangalore) 72 ITD 474 • T. Prashanth Reddy vs ACIT [2011] 9 taxmann.com 231 (Hyderabad ITAT) - Further, the CIT(A) concluded that the Assessee accepting that receipts are in nature of FTS, itself indicates that under reporting has undertaken and therefore, penalty is leviable.

(Page 20 of the CIT(A) order) - The CIT(A) has contended that the The contention that the explanations of Assessee had offered the additional the Assessee are not bonafide merely receipts only in response to the notice because receipts were offered in the 148 under section 148 indicating that its return is not sufficient. explanation was not bona fide and was - hence not accepted by the AO. The Assessee wishes to re-iterate that it Consequently, the CIT(A) has rejected the had bonafide reasons to not offer receipts plea of the Assessee with respect to the to tax under section 139 basis the IBM said cases being covered under the Corporation’s order and judicial exclusion specified under section 270A(6) precedents. of the Act.

(Page 23 of the CIT(A) order)

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 50 of 56 Observation of the CIT(A) Rebuttal to the CIT(A)’s observations - - The CIT(A) has highlighted that in the While the CIT(A)’s order was received case of Assessee’s group company, prior to the favorable order passed in case IBM Australia for AY 2007-08 and of IBM Corp, the said order of IBM AY 2008-09, the then CIT(A)-IV, Australia was challenged before the Bangalore vide order dated 20 ITAT. Thereafter, the appeal was November 2013 had upheld the withdrawn because IBM Australia chose addition of reimbursement of to settle the litigations under the Vivad se expenses on seconded employees as Vishwas Act, 2020. Therefore, it cannot FTS. Therefore, the CIT(A) has be said that the issue was settled in the rejected the Assessee’s claim that it case of IBM Australia for the AY 2007- was not aware of the Department’s 08 and AY 2008-09. position on the treatment of - reimbursement of secondment Further, the issue of taxation of expenses as FTS. secondment reimbursements was scrutinized and thereby, decided in - Hence the Assessee’s claim that it favour of the Assessee in the order passed harboured a bona fide belief that the subsequently in case of IBM Corporation receipts from reimbursement of for AY 2011-12. We specifically wish to secondment expenses were not highlight that the said order has achieved taxable, is rejected in the face of the finality since the same has neither been facts of its case revised under section 263 nor has been reassessed under section 147 of the Act. (Page 21 of the CIT(A) order)

Hence, in light of the above factual position and judicial precedence, it is submitted that the entire penalty levied in the case of the Assessee deserves to be quashed.

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 51 of 56 6. We have heard the rival submissions and perused the materials available on record. In these cases the penalty is levied either u/s 271C of the Act or u/s 270A of the Act, which can be actually classified as follows: Category ‘A’: Levy of penalty u/s 271(1)(c) of the Act, where the original return u/s 139(1) of the Act has not been filed and receipts were offered to tax in the return filed u/s 148 of the Act. Name of the assessee ITA No. Assessment year IBM Canada Limited 490/Bang/2024 2013-14 IBM Canada Limited 491/Bang/2024 2016-17 IBM China Hongkong Limited 500/Bang/2024 2014-15 IBM Israel Limited 495/Bang/2024 2014-15 IBM Israel Limited 496/Bang/2024 2016-17

Category ‘B’ Levy of penalty u/s 271(1)(c) of the Act where original return u/s 139(1) of the Act was not filed and receipts were offered to tax during re-assessment proceedings. Name of the assessee ITA No. Assessment year IBM Deutschland GMBH (“IBM 501/Bang/2024 2012-13 Germany”) IBM Canada Limited 489/Bang/2024 2012-13 IBM Osterreich Internale 504/Bang/2024 2012-13 Buromaschinen Gesellschaft MBH (“IBM Austria”) IBM Del Peru SAC 502/Bang/2024 2012-13

Category ‘C’ Levy of penalty u/s 271(1)(c) of the Act where original return u/s 139(1) of the Act has been filed, however, secondment related receipts were offered to tax only in the return filed u/s 148 of the Act. Name of the assessee ITA No. Assessment year Compagnie IBM France 545/Bang/2024 2013-14 Compagnie IBM France 546/Bang/2024 2015-16

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 52 of 56 IBM Australia 487/Bang/2024 2014-15 IBM Corporation 499/Bang/2024 2016-17 IBM Japan Limited 492/Bang/2024 2013-14 IBM Japan Limited 493/Bang/2024 2015-16 IBM Japan Limited 494/Bang/2024 2016-17 IBM United Kingdom Limited 542/Bang/2024 2014-15 IBM United Kingdom Limited 497/Bang/2024 2016-17

Category ‘D’ Levy of penalty u/s 270A of the Act where return u/s 139(1) of the Act has been filed. However, secondment related receipts were offered to tax only in the return filed u/s 148 of the Act. Name of the assessee ITA No. Assessment year IBM Corporation 544/Bang/2024 2017-18 IBM Netherland B V 503/Bang/2024 2017-18 IBM United Kingdom Limited 498/Bang/2024 2017-18

Category ‘E’ Levy of penalty u/s 270A of the Act where return u/s 139(1) of the Act has not been filed. However, secondment related receipts were offered to tax only in the return filed u/s 148 of the Act. Name of the assessee ITA No. Assessment year IBM Canada Limited 543/Bang/2024 2017-18

Category ‘F’ Levy of penalty u/s 270A of the Act where original return u/s 139(1) of the Act has been filed and receipts were offered to tax during the course of assessment proceedings. Name of the assessee ITA No. Assessment year IBM Australia 488/Bang/2024 2018-19 IBM Australia 541/Bang/2024 2019-20

6.1 As seen from the above, the assessee has offered the said receipts offered during the course of original assessment proceedings or during the return filed u/s 148 of the Act or during the

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 53 of 56 reassessment proceedings. There was no avoiding of the income offered to tax by the assessee. The assessee made a plea before us that though at the time of filing of original return of income or at the time of filing revised return of income, there was a bonafide belief which the assessee is having regarding the taxability of the impugned secondment receipts. At the time of filing original return of income or at the time of revised return of income, there is a doubt in the mind of the assessee regarding taxability of secondment charges. Hence, assessee has not offered the same at earlier stage. However, later, to buy peace, assessee offered the same for taxation. It is also noted that the issue in dispute with regard to taxability of secondment receipts, there is a judgement of jurisdictional High Court in the case of Abbey Business Services India Pvt. Ltd. in ITA No.214 of 2014 dated 1.12.2020, wherein the High court held as under:

“9. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of Section 9(i)(vii) and Section 195(1) of the Act, which is reproduced below for the facility of reference:

9(i)(vii) income by way of fees for technical services13 payable by--

(a) the Government ; or

(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or

(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :

Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.

Explanation 1.--For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 54 of 56 date if the agreement is made in accordance with proposals approved by the Central Government before that date.

Explanation 2.--For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction16, assembly, mining or like project undertaken by the recipient16 or consideration which would be income of the recipient chargeable under the head "Salaries".

195(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 55 of 56 assessee and in accordance with the policies, rules and guidelines applicable to the employees of the assessee. The employees in their capacity as employees of the assessee had to control and supervise the activities of Msource India Pvt. Ltd. Therefore, the assessee for all practical purposes has to be treated as employer of the seconded employees. There is no obligation in law for deduction of tax at source on payments made for reimbursement of costs incurred by a non resident enterprise and therefore, the amount paid by the assessee was not to suffer tax deducted at source under Section 195 of the Act. Similar view has been taken by High Court of Delhi in HCL INFO SYSTEM LTD. supra in respect of salaries paid to foreign technicians on behalf of the assessee.

In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee.”

6.2 Earlier to this judgement, the chargeability of secondment receipts was subject matter of appeal before this Tribunal. The Tribunal in view of the divergent views on this issue referred the matter to Special Bench in the assessee’s own case, wherein it categorically observed that the facts in the case of IBM India Ltd. are similar to that is in case of Abbey Business Services India Pvt. Ltd. cited (supra). In our opinion, the conduct of assessees is bonafide though it was not agreed by the department and it is also noted that assessees have all material time disclosing this secondment receipts in its Form 3CB filed with the department and also with bonafide explanation before the lower authorities regarding not offering the said receipts for taxation, when the assessees itself have voluntarily offered the said receipts for taxation either at the stage of original assessment or at the stage of reassessment or in return filed in response to notice issued u/s 148 of the Act penalty could not be levied. It cannot be construed that assessees have concealed any

IT(IT)A Nos.487 to 504/Bang/2024 & IT(IT)A Nos.541 to 546/Bang/2024 IBM Canada Limited & Others Page 56 of 56 material facts from the department or furnished inaccurate particulars of income. In our opinion, there is a reasonable cause for not offering the same for taxation in original return filed u/s 139(1) of the Act or in revised return u/s 148 of the Act as the assessees are in bonafide belief that said receipts are not liable for taxation in view of the fact that there are contradictory decisions on this impugned issue.

6.3 Further, there is a decision of the jurisdictional High Court in the case of Abbey Business Services India Pvt. Ltd. in ITA No.214 of 2014 dated 1.12.2020 which was in favour of the assessee. In such circumstances, levy of penalty u/s 271(1)(c) or 270A of the Act in these group cases is not justified. Accordingly, we delete the penalty in all these cases. 7. In the result, all the appeals of the assessees are allowed. Order pronounced in the open court on 20th May, 2024

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 20th May, 2024. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.