2023 (1) TMI 922 - AT - Income Tax

Tribunal Rules Payments as Salary, Not FTS; Upholds Disallowance for Delayed Provident Fund Contributions.

Yamazen Machinery and Tools India Pvt. Ltd. Versus ACIT, Circle-27 (2), New Delhi

The Tribunal partly allowed the appeal. It deleted the addition of Rs.1,85,20,176/- as Fee for Technical Services (FTS), determining that the payments ... TDS u/s 195 OR 192 - payment made by the assessee to certain persons is in the nature of salary as claimed by the assessee or FTS as held by the AO - HELD THAT:- Facts and materials placed on record, including the terms of the assignment agreement clearly establish that for all practical purposes the concerned persons assigned by the parent company to the assessee were working as employees of the assessee and receiving salary income. The primary factor which influenced the departmental authorities in treating the payment made as FTS for secondment of employees by the parent company to the assessee is the fact that the parent company made the payments to the concerned employees and the assessee reimbursed the cost against debit-notes issued by the parent company. In our view, nothing much can be read into this arrangement as such payments made by the parent company on behalf of the assessee is as per the contractual terms of the assignment agreement. We hold that the payment made by the assessee towards reimbursement of expenses is in the nature of salary cost of the assigned employees subject to TDS under section 192 of the Act, hence, cannot be treated as FTS under section 9(1)(vii) of the Act and Article 12 of the tax treaty. Accordingly, there was no obligation on the part of the assessee to withhold tax at source u/s 195 of the Act. We delete the addition made by the AO. This ground is allowed. Delayed payment of employees contribution to Provident Fund (PF) within the due date prescribed under the PF Act held that the assessee has violated the provisions of section 36(1)(va) - HELD THAT:- There is no dispute that the assessee has not paid employees’ contribution to PF within the time limit prescribed under the PF Act. It is the case of the assessee that the deduction should be allowed as the payment has been made before the due date of filing of return under section 139(1) - In our view, the aforesaid claim of the assessee is not acceptable, as now the issue stands decided against the assessee by the Hon’ble Supreme Court in case of Checkmate Services Pvt. Ltd [2022 (10) TMI 617 - SUPREME COURT] Issues Involved:1. Addition of Rs.1,85,20,176/- as Fee for Technical Services (FTS).2. Disallowance of Rs.2,11,199/- for delayed payment of employees' contribution to Provident Fund (PF).Detailed Analysis:Issue 1: Addition of Rs.1,85,20,176/- as Fee for Technical Services (FTS)The primary issue concerns whether the payment made by the assessee to certain employees should be classified as salary or Fee for Technical Services (FTS). The assessee, a wholly-owned subsidiary of a Japanese corporation, reimbursed its parent company for salaries paid to four expatriate employees working in managerial positions. The Assessing Officer (AO) treated these payments as FTS under section 9(i)(vii) of the Income Tax Act and Article 12 of the India-Japan Double Taxation Avoidance Agreement (DTAA), leading to a disallowance under section 40(a)(i) due to non-deduction of tax at source under section 195.The assessee argued that the employees were under its full supervision and control, and payments made were in the nature of salary, thus subject to TDS under section 192. The AO, however, was not convinced, noting that the payments were made to the parent company, which then paid the employees, suggesting a secondment arrangement.Upon review, the Tribunal examined the assignment agreements, which indicated that the employees were under the complete control and supervision of the assessee, establishing an employer-employee relationship. The payments were treated as salary, with appropriate TDS deducted under section 192, as evidenced by TDS certificates and Income Tax Returns filed by the employees.The Tribunal found that the decision in Centrica India Offshore (P.) Ltd. Vs. CIT did not apply due to factual differences, such as the employment status, payment obligations, and control over employees. Instead, the Tribunal found the decisions cited by the assessee, such as Boeing India Pvt. Ltd. Vs. ACIT, more applicable, which supported the view that the payments were in the nature of salary.Thus, the Tribunal concluded that the payment of Rs.1,85,20,176/- was salary, not FTS, and there was no obligation to withhold tax under section 195. The addition made by the AO was deleted.Issue 2: Disallowance of Rs.2,11,199/- for delayed payment of employees' contribution to Provident Fund (PF)The second issue involved the disallowance of Rs.2,11,199/- due to delayed payment of employees' PF contributions. The AO disallowed the expenditure under section 36(1)(va) as the payments were not made within the due date prescribed under the PF Act. The assessee contended that the deduction should be allowed since the payments were made before the due date of filing the return under section 139(1) of the Act.The Tribunal noted that the issue had been settled against the assessee by the Hon'ble Supreme Court in Checkmate Services Pvt. Ltd. Vs CIT-I, which held that such delayed payments are not allowable deductions.Consequently, the Tribunal upheld the disallowance made by the AO and dismissed this ground of appeal.Conclusion:The appeal was partly allowed. The addition of Rs.1,85,20,176/- as FTS was deleted, while the disallowance of Rs.2,11,199/- for delayed PF contributions was upheld.