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Facts
The assessee, a Japanese company, made payments to its employees seconded to Indian entities, which were reimbursed by the Indian entities. The Assessing Officer treated these reimbursements as Fee for Technical Services (FTS).
Held
The Tribunal held that the reimbursements were in the nature of salary paid to seconded employees and not FTS. The assessee established an employer-employee relationship between the seconded employees and the Indian entities.
Key Issues
Whether reimbursements of salary paid to seconded employees constitute Fee for Technical Services (FTS) or salary.
Sections Cited
143(3), 144C(13), 9(1)(vii), 192, 195
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Income Tax Appellate Tribunal, DELHI BENCH “D”, DELHI
(A.Y.2020-21) Toshiba Corporation, 1-1, Shibaura 1-Chome, Minato-Ku, ...... अपीलाथ�/Appellant Tokyo, Japan 105-8001 PAN AACCT-4821-F बनाम Vs. The Deputy Commissioner of Income Tax, International Taxation, Circle 3(1)(1), Civic Centre, ..... �ितवादी/Respondent Minto Road, New Delhi 110002 अपीलाथ� �ारा/ Appellant by : Shri Vishal Kalra, Advocate Ms. Reema Grewal, & Shri Kashish Gupta, Chartered Accountants �ितवादी�ारा/Respondent by : Shri Nikhil Kumar Govila, CIT(DR) सुनवाई क� ितिथ/ Date of hearing : 03/09/2025 घोषणा क� ितिथ/ Date of pronouncement : : 01/12/2025 आदेश/ORDER
PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the Assessment Order passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act,1961 (hereinafter referred to as ‘the Act’) dated 27.07.2023, for Assessment Year 2020-21.
Shri Vishal Kalra, appearing on behalf of the assessee submits that the only issue arising in this appeal for adjudication is addition on account of payments made to seconded employees amounting to Rs.10,76,36,392/- being treated as Fee for Technical Services (FTS) u/s. 9(1)(vii) of the Income Tax Act,1961(hereinafter referred to as ‘the Act’) and Article 12(4) of the India-Japan Double Taxation Avoidance Agreement (DTAA).
The ld. Counsel for assessee at the outset submitted that the assessee does not wish to press ground of appeal
no. 2 &
3. Thus, in light of statement made by assessee’s Counsel at Bar, ground of appeal no. 2 & 3 are dismissed.
4. Further, narrating facts of the case, the ld. Counsel submits that the assessee company is tax resident of Japan and is engaged in manufacturing and marketing of communications systems electronic components, heavy electrical operators, consumer product, medical diagnostics, imagine equipments, etc. During the period relevant to assessment year under appeal, the assessee received reimbursements amounting to Rs.10,76,36,392/- in respect of salary paid in Japan to the employees of Toshiba India P. Ltd., Toshiba J.S Powers System P. Ltd., Toshiba Transmission and Distribution Systems India P. Ltd. and Toshiba Software India P. Ltd. The assessee/appellant made payment of salaries in Japan on behalf of Indian employer entities owing to administrative convenience. During the course of assessment proceeding, the assessee had made detailed submissions furnishing complete breakup of reimbursements received. The reimbursements were received without markup and after complying with TDS provisions of the Act. To substantiate that the aforesaid reimbursement was in respect of seconded employees, who were in employment of Indian entities and were working under the control and supervision of Indian entities, the assessee furnished following documents:- (i) Payroll agency agreement; (ii) Sample copy of employment contract between respective Indian entities and seconded employee; (iii) Appointment letter issued by Indian entities to the seconded employee; (iv) Copy of Form No. 16 issued by respective Indian employers to the seconded employees; (v) Sample copy of invoices/debit note issued by the assessee to the Indian entity in relation to reimbursement of salary paid in Japan; & (vi) Sample copy of Form No. 15CA and certificate in Form No. 15CB from a Chartered Accountant evidencing payment of remittances made by Indian companies on account of reimbursement of expenses. The ld. Counsel submits that the Assessing Officer (AO) in Draft Assessment Order has recorded wrong facts after examining the appointment letter. The AO has erred in misreading the appointment letter/contract agreement that the duration of the contract is for short period and on assignment basis; that the employees were seconded to the Indian entities on their request; the assessee has ultimate lien on the seconded employees and that the seconded employees were for a temporary period under the control of Indian entities and the said employee would revert back to the original position in the assessee company. The ld. Counsel referred to the sample agreement at page 718 of the paper book. He pointed that in para 6 of the said agreement it is categorically mentioned that the assessee company does not guarantee that it will continue to employee or it will have a position available for the seconded employee in India or home country or any other location at the end of employment period. The ld. Counsel submits that the terms and conditions of the contract agreement between the seconded employee and the Indian entities would clearly show that the seconded employee would be working under the control and management of Indian entities and there would be no connection of employer and employee between seconded employee and the assessee. The ld. Counsel submits that the AO has erred in treating receipts from Indian entities on account of reimbursement of expatriate salary as FTS. The AO has failed to consider the fact that the contract between the seconded employees and Indian entities clearly show the relation of employee and employer. The reimbursement of salary of expats does not partake the character of ‘Fee for Technical Service’ (FTS). The ld. Counsel for the assessee in support of his submissions placed reliance on the following decisions: PCIT vs. Boeing India (P) Ltd., 146 taxmann.com 131 (Delhi); Flipkart Internet (P) Ltd. vs. DCIT, 139 taxmann.com 595 (Karnataka); & Advics Co. Ltd. vs. ACIT, 165 taxmann.com 716 (Delhi-Trib.).
Controverting findings of the AO, the ld. Counsel submitted that the reliance by the AO on the decision rendered in the case of Northern Operating Systems P. Ltd., 138 taxmann.com 359 (SC) is misplaced. The said decision was rendered in context of indirect taxation for analyzing whether service tax applies to a secondment agreement which essentially is an agreement for manpower recruitment and supply services. Hence, the said decision is distinguishable.
Per contra, Shri Nikhil Kumar Govila representing the department strongly supported the assessment order and prayed for dismissing appeal of the assessee.
Both sides heard, orders of the authorities below examined and the case laws on which the ld. Counsel for the assessee has placed reliance considered. The short issue for consideration before us in the present appeal is; Whether the payments made by the Indian entities to the assessee in respect of salaries paid to the seconded employees in Japan are in the nature of reimbursement of the salary for the services rendered in India or are in the nature of FTS? 8. The assessee has made payment of Rs.10,76,36,392/- in respect of 26 employees to the assessee as reimbursement of salary paid in Japan for the services rendered by said employees in India. The Indian entities have made payment of the salary to the said employee’s consequent to respective employee entering into a separate agreement/contract of employment. To substantiate that there was employment contract between the seconded employees and Indian entities, the assessee has placed on record one such contract at page 715 of the paper book which lays down the terms and conditions of the employment. A perusal of the said contract/appointment letter would show that the payment of salary to the seconded employees is solely by the Indian company. The salary would be made partly in yen and partly in Indian rupee. The employee would be working under the control of the Indian company and the Indian company would have right to terminate services of the seconded employee in case of breach of the terms and conditions of employment. The Form No. 16 in respect of seconded employees issued by the Indian companies show that the payment of salary made to the seconded employees is subject to TDS provisions. Thus, the tax has been deducted on the payment of salary to the seconded employees by the Indian companies.
The Hon’ble Delhi High Court in the case of PCIT vs. Boeing India (P.) Ltd. (supra) has held that where the reimbursements are in the nature of salary the same could not be treated as FTS. The Hon'ble High Court placed reliance on the decision rendered in the case of CIT vs. Karl Storz Endoscopy India (P) Ltd in IT Appeal No.13 of 2008 decided on 13-9-2010 wherein after analysing facts of the case the Hon'ble High Court held: "10. The foreign company had deputed one of its employees to look after the affairs of the Indian Company. The salary payable to this employee was to be borne by the foreign company. The Indian company was to reimburse this salary at cost, i.e. without any mark-up. Thus, it was merely the question of payment of salary to Mr. Peter Laser. There is no question of any technical fees being paid to the foreign company. Assuming for the sake of argument that it was in the nature of technical fees paid to the foreign company; then, as rightly pointed out by the learned counsel, Article 12.4 was applicable and not Article 13.4 as contended by the learned DR. Even if Article 12.4 was applicable, the said Article specifically excludes payments mentioned in Article 15. Article 15 states that salaries, wages and other similar remuneration derived by a resident of a Contracting State (Germany) in respect of an employment shall be taxable in the other Contracting State (Indian) only if the employment is exercised there. In other words, salaries paid to such personnel like Mr. Laser are taxable in India and they cannot be considered to be fees for technical services. Further, even as per Section 9 of the Act, the payment cannot be treated as fees for technical service. Explanation 2 to Section 9(1)(vii) gives the meaning of the expression "fees for technical services" as per which, inter alia, any consideration which would be income of the recipient chargeable under the head "salaries", then such payment will not be considered as fees for technical services. Thus, even as per the provisions of the Act, the payment in question cannot be treated as fees for technical services. Moreover, since it is paid as salary to Mr. Laser, tax has been deducted under section 192 of the Act."
If we look at the India - Japan DTAA similar provisions are contained in Article 12 that deals with Royalty and FTS. FTS is defined in Article 12(4). The same reads as under:
"(4) The term 'fees for technical services' as used in this article means payments of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred in Article 14" Once it is established that the payments are made as salary to the employees for the services rendered in India, such payments are outside the preview of FTS. The assessee in the instant case has been able to substantiate that the payments made by Indian entities to the assessee are qua reimbursements of salary paid in Japan to the seconded employees for the services rendered in India by them. As is evident from FORM 16 available on record, tax under the Act has also been deducted on payment of salaries.
The Hon'ble Delhi High Court in the case of Flipkart Internet (p) Ltd. (supra) while considering similar issue also examined the decision rendered in the case of Northern Operating Systems (P) Ltd (supra). The Hon'ble High Court held: "(vii) The petitioner issues the appointment letter, the employee reports to the petitioner, the petitioner has the power to terminate the services of the employee. For the purpose of a limited finding under section 195 on the basis of the available material, it could be concluded that the petitioner is the employer. (viii) The Revenue has relied upon the judgment of the Apex Court in C.C., C.E. & S.T. v. Northern Operating Systems (P.) Ltd. [2022] 138 taxmann.com 359 where the Apex Court has interpreted the concept of a secondment agreement taking note of the contemporary business practice and has indicated that the traditional control test to indicate who the employer is may not be the sole test to be applied. The Apex Court while construing a contract whereby employees were seconded to the assessee by foreign group of Companies, had upheld the demand for service tax holding that in a secondment arrangement, a secondee would continue to be employed by the original employer. (ix) The Apex Court in the particular facts of the case had held that the Overseas Co., had a pool of highly skilled employees and having regard to their expertise were seconded to the assessee and upon cessation of the term of secondment would return to their overseas employees, while returning such finding on facts, the assessee was held liable to pay service tax for the period as mentioned in the show cause notice. (x) It needs to be noted that the judgment rendered was in the context of service tax and the only question for determination was as to whether supply of manpower was covered under the taxable service and was to be treated as a service provided by a Foreign Company to an Indian Company. But in the present case, the legal requirement requires a finding to be recorded to treat a service as 'FIS' which is "make available" to the Indian Company." The Hon'ble High Court finally concluded that the Assessing Officer has wrongly held reimbursement of salary as FTS.
In the light of facts of the case and the decisions discussed above we hold that the Revenue has misread the Contract of appointment/Letter of appointment. The assessee has been able to establish employee-employer relationship between the seconded employees and the Indian entities. Where the payments are made to employees as salaries, such payments cannot be recharacterized as FTS.