2022 (4) TMI 1444 - AT - Income Tax

Reimbursements to Non-Resident for Seconded Employee Salaries Not Taxable Under Section 195, No TDS Default

The ITAT Bangalore held that reimbursements made by the assessee to a non-resident overseas entity for salary costs of seconded employees do not ... TDS u/s 195 - payments made to non-residents for salary costs - amount reimbursed by the assessee to the overseas entity - 'assessee in default' under section 201(1) for non-deduction of taxes at source - HELD THAT:- The amount reimbursed by the assessee to the overseas entity cannot be subjected to tax in India as there does not involve any element of income embedded in it. Respectfully following the above views expressed in DIT vs. Abbey Business Services India (P.) Ltd [2020 (12) TMI 570 - KARNATAKA HIGH COURT], Hon'ble AAR in Cholamandalam MS General Insurance Co. Ltd. [2009 (1) TMI 19 - AUTHORITY FOR ADVANCE RULINGS], Hon'ble Bombay High Court in case of Marks & Spencer Reliance India Pvt. Ltd. [2017 (5) TMI 1638 - BOMBAY HIGH COURT], Hon'ble Delhi High Court in the case of DIT Vs. HCL Infosystems Ltd. [2004 (1) TMI 16 - DELHI HIGH COURT], Coordinate bench of this Tribunal in case of IDS Software Solutions [2009 (1) TMI 363 - ITAT BANGALORE-A], Hon'ble Pune Tribunal in case of M/s. Faurecia Automative Holding [2019 (7) TMI 402 - ITAT PUNE], Hon'ble Ahmedabad Tribunal in the case of Burt Hill Designs (P) Ltd. [2017 (3) TMI 1515 - ITAT AHMEDABAD] we are of the view that the reimbursement made by the assessee in India to overseas entity, towards the seconded employees cannot be regarded as 'Fee For technical Services' Once there is no violation of provision of section 195, assessee cannot be held to be an assessee in default under section 201(1) of the Act for all the years under consideration. We therefore direct the Ld. AO to delete the interest levied under section 201(1A) of the Act for all the years under consideration. Assessee appeal allowed. Issues Involved:1. Treating the assessee as an 'assessee in default' under section 201(1) of the Act for non-deduction of taxes at source under section 195 of the Act.2. Levy of interest under section 201(1A) of the Act.Detailed Analysis:1. Treating the Assessee as an 'Assessee in Default' under Section 201(1) of the Act:The core issue was whether the assessee should be treated as an 'assessee in default' for not deducting taxes at source on payments made to non-residents for salary costs under section 195 of the Act. The Assessing Officer (AO) argued that the payments should be treated as 'Fees for Technical Services/Fees for Included Services' (FTS/FIS) and thus subject to tax deduction at source.The assessee, a subsidiary of Goldman Sachs (Mauritius) LLC, Mauritius, employed expatriate employees whose salaries were partly paid by the assessee and partly by the overseas entity, with the latter reimbursed at cost by the assessee. The assessee contended that these reimbursements were on a cost-to-cost basis without any profit element and thus not chargeable to tax. The assessee also argued that the expatriate employees were under a 'Contract of Employment' with the assessee, and appropriate taxes were deducted under section 192(1) of the Act, paid to the Central Government.The AO did not accept the assessee's submissions, concluding that there was no employer-employee relationship between the expatriate employees and the assessee. Instead, the AO held that the overseas entity was the real employer and had rendered technical, managerial, and consultancy services to the assessee through these employees, thus categorizing the payments as FTS/FIS.Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, relying on various judicial precedents, including the decision of the Hon'ble Delhi High Court in Centrica India Offshore (P) Ltd. and other Tribunal decisions.The Tribunal, however, analyzed the 'India Recharge and Cost Allocation Agreement' and the employment contracts between the assessee and the expatriate employees, concluding that the assessee in India was the economic and de facto employer of the seconded employees. It was noted that the assessee deducted tax at source under section 192 on the entire salary, including the portion reimbursed to the overseas entity. The Tribunal emphasized that the reimbursement was purely cost-to-cost without any profit element, thus not constituting FTS/FIS.2. Levy of Interest under Section 201(1A) of the Act:Given that the Tribunal concluded that the assessee was not in default under section 201(1) of the Act, the interest levied under section 201(1A) was also directed to be deleted for all the years under consideration.Judicial Precedents and Analysis:- The Tribunal referred to multiple precedents, including the Hon'ble Karnataka High Court in DIT vs. Abbey Business Services India (P.) Ltd., which supported the view that reimbursements without profit elements do not constitute FTS/FIS.- The Tribunal also distinguished the case from the Hon'ble Delhi High Court’s decision in Centrica India Offshore (P) Ltd., noting that the facts were materially different, and the assessee had an independent local employment agreement with the expatriate employees.- The Tribunal emphasized the OECD commentary on the concept of 'employer' and the importance of the economic employer concept in determining the tax liability.Conclusion:The Tribunal concluded that the reimbursements made by the assessee to the overseas entity towards the seconded employees did not constitute 'Fees for Technical Services' under the Act or the India-US DTAA. Consequently, there was no obligation to deduct tax at source under section 195 of the Act. The assessee was not to be treated as an 'assessee in default' under section 201(1), and the interest levied under section 201(1A) was to be deleted for all the years under consideration. The appeals filed by the assessee were allowed.