Tribunal overturns tax disallowance for Boeing India in landmark decision

The Tribunal ruled in favor of the appellant, M/s. Boeing India Pvt. Ltd., in a tax dispute. The disallowance under section 40(a)(i) of the Income Tax Act for not withholding taxes on reimbursements was overturned. The Tribunal held that the reimbursements to Associated Enterprises (AEs) for salaries of expatriate employees did not constitute fees for technical services, as the employees were under the appellant's control and supervision. Additionally, the Tribunal directed a reevaluation of the determination of Arm's Length Price (ALP) for outstanding receivables from AEs, emphasizing the principle of consistency in tax assessments. Appeals for the relevant assessment years were allowed for statistical purposes.

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Issues Involved:
1. Disallowance under section 40(a)(i) of the Income Tax Act for non-withholding of taxes on reimbursement of salaries and other expenses.
2. Determination of Arm’s Length Price (ALP) for outstanding receivables from Associated Enterprises (AEs).

Issue 1: Disallowance under section 40(a)(i) of the Income Tax Act

The appellant, M/s. Boeing India Pvt. Ltd. (the taxpayer), challenged the disallowance made by the Assessing Officer (AO) under section 40(a)(i) of the Income Tax Act, 1961, for not withholding taxes on reimbursement of salaries and other expenses. The AO treated these reimbursements as fees for technical services (FTS) under section 9(1)(vii) of the Act and as Fees for Included Services (FIS)/Royalty under relevant Articles of Indo-USA and Indo-Australia Tax Treaties.

The taxpayer argued that the payments were not chargeable to tax in India as they pertained to seconded employees of AEs working under its control and supervision, and taxes were duly withheld under section 192 of the Act on salaries paid to these employees. The taxpayer cited a previous decision in its favor for Assessment Year (AY) 2015-16, where the Tribunal had distinguished the decision of the Hon’ble Delhi High Court in Centrica India Offshore P. Ltd. vs. CIT.

The Tribunal noted that the taxpayer was liable to pay the salary to expatriate employees employed in India, who were under its control, creating an employer-employee relationship. The salary was accounted for as an expense under "Salaries & Wages" and taxes were deducted under section 192. The Tribunal found that reimbursing the amount to AEs, who disbursed salaries on behalf of the taxpayer, did not change the nature of the salary paid. The Tribunal relied on decisions from the Hon’ble Delhi High Court and other cases, concluding that the salary payments did not fall under the expression 'fee for technical services' and thus section 195 did not apply. Consequently, the disallowance under section 40(a)(i) was not sustainable and was ordered to be deleted.

Issue 2: Determination of Arm’s Length Price (ALP) for outstanding receivables from AEs

The taxpayer challenged the adjustment made by the Transfer Pricing Officer (TPO) on account of outstanding receivables from AEs, arguing that the outstanding receivables and payables were in accordance with the arm’s length standard and that interest on receivables was not a separate international transaction as it was already built into the price charged for services rendered. The taxpayer also contended that in AY 2011-12, the TPO did not impute any interest on outstanding receivables, hence the principle of consistency should be followed.

The Tribunal noted that the TPO had previously not imputed any interest on outstanding receivables in an identical issue for AY 2011-12. The Tribunal emphasized the principle of consistency, as established by the Hon’ble Supreme Court in cases like CIT vs. Shivsagar Estate and Union of India vs. Kaumudini Narayan Dalal, which mandates that the Revenue should not challenge a point in subsequent years if it has accepted it in earlier years without just cause. Consequently, the Tribunal remitted the issue back to the TPO/AO to decide afresh by following the rule of consistency.

Both appeals for AYs 2012-13 and 2013-14 were allowed for statistical purposes.

Order pronounced in open court on this 27th day of November, 2020.

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