2023 (6) TMI 932 - AT - Income Tax

US entity's employee secondment cost reimbursements not taxable as technical services under India-USA treaty Article 12

ERNST And Young U.S. LLP Versus The A.C.I.T., Circle International Taxation (12) (2) New Delhi

The ITAT Delhi ruled that cost-to-cost reimbursements received by a US entity for seconding employees to Indian EY firms cannot be taxed as Fees for ... Fees for Technical Services [FTS] - Receipt of Cost-to-cost reimbursements on account of secondment of employees - seconded personnel are employees of EY India firms - Whether payments received by the assessee on account seconded employees should not be taxed as FTS/Independent Personal Services [IPS] as per the treaty provisions? - whether arrangement between the assessee and Indian entities constitutes the ‘provision of services’ by the assessee through seconded personnel? - HELD THAT:- EY LLP India is alone responsible for complying with the requirement of withholding of tax under the Indian Tax Laws. As in light of the deputation agreement, we are of the considered view that cost to cost reimbursement on account of secondment of employees cannot be treated as FTS as defined under Article 12 of India USA-DTAA and seconded personnel are employees of EY India firms whose income has been taxed as salary in their respective hands. Therefore, the very same amount could not, in law, be subjected twice – firstly in the hands of the seconded employees working in India and secondly again the hands of the assessee. AO is accordingly, directed to delete the impugned addition. The core legal questions considered by the Tribunal in this appeal are:1. Whether the cost-to-cost reimbursements received by the assessee on account of secondment of employees constitute Fees for Technical Services (FTS) under Article 12 of the India-USA Double Tax Avoidance Agreement (DTAA).2. Whether the arrangement between the assessee and the Indian entities constitutes the 'provision of services' by the assessee through seconded personnel.3. Whether the payments received by the assessee on account of seconded employees are taxable as FTS or Independent Personal Services (IPS) under the treaty provisions.4. Whether the invoices raised by the assessee for reimbursements of salary and related costs fall within the ambit of Article 12 FTS or Article 15 IPS under the India-USA tax treaty.5. Whether the payments made on account of seconded personnel have already been subjected to tax in India under Section 192 of the Income-tax Act, 1961, and if so, whether the same can be taxed again in the hands of the assessee.Issue-wise Detailed AnalysisIssue 1 & 2: Nature of Reimbursements as Fees for Technical Services (FTS) under Article 12 of India-USA DTAA and Provision of Services through Seconded PersonnelThe relevant legal framework includes Article 12 of the India-USA DTAA, which defines Fees for Technical Services, and the Income-tax Act, 1961, particularly provisions related to taxation of income and withholding tax obligations. The Tribunal also considered the principles laid down in judicial precedents, including the Supreme Court judgment in the case of M/s Northern Operating Systems Pvt Ltd, which dealt with the taxability of secondment arrangements.The Supreme Court's judgment was analyzed in detail. The Court emphasized that the true nature of the relationship between seconded employees and the assessee, and the nature of services provided by the overseas entity, are crucial in determining taxability. The Supreme Court acknowledged that in secondment arrangements, employees remain on the payroll of the overseas entity due to legal and social security obligations, but function under the control and supervision of the Indian entity during the secondment period. The Court held that the overseas entity was the service provider, and the Indian entity was the service recipient for manpower recruitment and supply services, which attracted service tax liability.However, the Tribunal noted that the Supreme Court's decision was in the context of service tax and manpower supply services, and the issue before the Tribunal related to the applicability of FTS under the DTAA, which requires a finding on whether the service was 'made available' to the Indian entity.The Tribunal also referred to the Karnataka High Court's decision in Flipkart Internet Pvt Ltd, which distinguished the Supreme Court's ruling by highlighting that the traditional control test is not the sole criterion for determining employer status in secondment arrangements, and that the 'make available' requirement under FTS provisions is a distinct legal consideration.The deputation agreement between the assessee and EY India member firms was examined. Key clauses revealed that during the period of assignment, the seconded personnel functioned solely under the control, direction, and supervision of EY LLP India and were employed by EY LLP India for the duration of the assignment. The overseas entity (EYUS) had no control or responsibility for the secondees during the assignment period, and the privity of employment with EYUS ceased upon entering the employment contract with EY LLP India.Based on these facts, the Tribunal found that the seconded personnel were employees of the Indian entities during the assignment period, and the payments made by the Indian entities to the assessee were reimbursements of salary and related costs paid by the assessee on behalf of the Indian entities for administrative convenience.Issue 3 & 4: Taxability of Payments as FTS or IPS under the India-USA Tax TreatyThe Tribunal considered whether the payments for seconded personnel could be characterized as FTS or IPS under the treaty. The assessee contended that these payments were mere reimbursements without any profit element and thus not taxable as FTS or IPS. The invoices corresponded to salary costs already subjected to tax in India in the hands of the seconded employees under Section 192 of the Act.The Department relied heavily on the Supreme Court decision in Northern Operating Systems Pvt Ltd to argue that the payments constituted taxable services. However, the Tribunal distinguished the facts of the present case from that judgment, emphasizing that the Supreme Court's ruling pertained to service tax and manpower supply, whereas the present case concerned income tax and treaty interpretation.The Tribunal also relied on the coordinate bench decision in Boeing India Pvt Ltd, which was affirmed by the Delhi High Court. That decision held that when seconded employees are under the supervision and control of the Indian entity and salary payments are reimbursed without markup, the payments are not fees for technical services but salary reimbursements. The Delhi High Court further clarified that Section 195 of the Act (dealing with withholding tax on payments to non-residents) is not applicable once the payment is characterized as salary and tax has been deducted under Section 192.Additionally, the Tribunal cited the Delhi High Court's decision in Commissioner of Income Tax, Delhi II vs. Karl Storz Endoscopy India (P) Ltd., which held that payments reimbursing salaries of deputed employees are not technical fees but salary income taxable in India, and thus not subject to tax again as FTS under the DTAA.Issue 5: Double Taxation and Withholding Tax ComplianceThe Tribunal noted that the seconded personnel's salary income had been subjected to tax in India under Section 192, with appropriate tax deducted at source. The invoices raised by the assessee represented cost-to-cost reimbursements without any profit element. Therefore, taxing the same amount again in the hands of the assessee would amount to double taxation, which is not permissible under the principles of tax law and the DTAA.The Tribunal found no merit in the Department's contention that the payments should be treated as FTS and taxable in the hands of the assessee. The assessee had complied with withholding tax obligations under Section 192, and the payments were genuine reimbursements for salary costs of personnel employed by Indian entities during the secondment period.ConclusionsThe Tribunal concluded that the cost-to-cost reimbursements on account of secondment of employees do not constitute Fees for Technical Services as defined under Article 12 of the India-USA DTAA. The seconded personnel were employees of the Indian member firms during the assignment period, and the payments received by the assessee were reimbursements of salary costs already taxed in India.The Tribunal directed the Assessing Officer to delete the addition of Rs. 50,99,38,561/- made on account of treating these reimbursements as FTS income. The appeal was partly allowed accordingly.Significant Holdings'The deputation agreement clearly establishes that during the period of assignment, the International Assignees function solely under the control, direction and supervision of EY LLP India and are employed by EY LLP India. EYUS shall not have any obligation towards EY LLP India regarding the performance of International Assignees and the privity and lien of EYUS ceases during the period of employment with EY LLP India.''The payments received by the assessee on account of seconded employees are mere reimbursements of salary and related costs paid on behalf of Indian entities and do not constitute Fees for Technical Services under Article 12 of the India-USA DTAA.''The income of the seconded personnel has been subjected to tax in India under Section 192 of the Income-tax Act. Therefore, the same amount cannot be subjected to tax again in the hands of the assessee.''The Supreme Court judgment in Northern Operating Systems Pvt Ltd is distinguishable as it pertains to service tax liability for manpower supply services and does not directly apply to the issue of taxation of reimbursements under the DTAA.''Section 195 of the Income-tax Act does not apply to payments characterized as salary where tax has been deducted under Section 192.''The addition made by the Assessing Officer treating cost-to-cost reimbursements as FTS income is unsustainable and is accordingly deleted.'