2025 (6) TMI 135 - AT - Income Tax

Secondment charges not taxable as FIS under Article 12 India-USA DTAA, professional services qualify for Article 15 benefits

Ernst and Young U.S. LLP C/o Authorised Representative, Ernst and Young LLP Versus ACIT Tax– Cir Int. Tax 1 (2) (2) New Delhi

ITAT Delhi ruled in favor of the assessee on two key issues. First, secondment charges were held not taxable as Fees for Included Services (FIS) under ... Receipts on secondment charges being taxable as FIS - Amount being the fees received for the professional services rendered by the highly experienced professionals - Receipts to be taxable as Fees for Included Services under Article 12 and not Professional Services covered by Article 15 - as argued economists, engineers, MBA graduates, diploma holders and other trained technical personnel do not belong to a professional body which governs the profession, such as the Medical Council of India, Bar Council of India and Institute of Chartered Accountants of India Receipts on secondment charges being taxable as FIS - HELD THAT:- The issue is covered in favour of the assessee vide ITAT order in assessee’s own case for AY 2019-20 [2023 (6) TMI 932 - ITAT DELHI] as held 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 to tax twice-firstly in the hands of the seconded employees working in India and secondly again the hands of the assessee - Decided in favour of assessee. Addition made being the fees received by the assessee for the professional services rendered by the professionals of the assessee - denial of benefit of Article 15(2) and Article 12(5)(e) of the India-U.S.A - HELD THAT:- Definition of professional service in Article 15(2) do not provide an exhaustive definition of 'professional services' but an inclusive one. The definition encompasses several categories which pertain to services which neither belong to nor are governed by any professional organization with disciplinary power and control such as scientists, literary persons, artists, teachers, engineers. We are therefore inclined to agree with the assessee that confining Article 15(2) to persons who are governed by a professional organization, would mean re-writing Article 15(2), which is not permissible. We further find that the coordinate bench of ITAT in assesse’s own case [2024 (8) TMI 1568 - ITAT DELHI] after discussing the various provisions of DTAA such as Article 12 and 15 and the provisions in Income Tax Act defining the ‘professional services such as section 194J and 44AA, had held that the said amounts are not FIS because the 'make available' requirement of Article 12(4)(b) of the DTAA is not satisfied. Term ‘professional services’ as defined in Article 15(2) of the DTAA are supported by the definitions in the Explanation (a) to section 194J which specifically refers to 'engineering profession’ and also to 'profession of technical, consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or section 194J. These activities are thus regarded by the statute as professions though they have no governing professional body. We are inclined to agree with the assessee that 'professional services’ as defined in Article 15(2) of the DTAA cannot be circumcised by putting them as belonging to any governing professional body. We are therefore of the considered view that the assessee falls within the meaning of 12(5)(e) of the DTAA and hence benefit of Article 15 of the DTAA cannot be denied to it. Accordingly, we direct the AO to delete the addition on this count. The core legal questions considered in this appeal pertain to the taxability of certain receipts of the assessee under the provisions of the Income Tax Act, 1961 and the India-USA Double Tax Avoidance Agreement (DTAA). The principal issues include:1. Whether the final assessment order passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961, assessing the income of the appellant significantly higher than the returned income, is valid in law.2. Whether the cost-to-cost reimbursements received on account of secondment of employees to Indian entities constitute Fees for Technical Services (FTS) under Article 12 of the India-USA DTAA or are non-taxable reimbursements.3. Whether the fees received by the appellant for professional services rendered by its personnel qualify as 'professional services' under Article 15 of the DTAA or are 'Fees for Included Services' (FIS) taxable under Article 12 of the DTAA.4. Whether the penalty proceedings initiated under section 270A of the Income Tax Act for under-reporting of income are legally sustainable.Issue-wise detailed analysis:1. Validity of the Final Assessment OrderThe appellant challenged the validity of the final assessment order on grounds of procedural and substantive errors, including the absence of a valid Document Identification Number (DIN) on directions passed by the Dispute Resolution Panel (DRP), as mandated by CBDT Circular No. 19/2019. However, the appellant did not press the ground relating to DIN during the hearing. The Court noted that the general grounds challenging the assessment order's validity were not pressed and hence did not require detailed adjudication.2. Taxability of Cost-to-Cost Reimbursements on Secondment of EmployeesLegal Framework and Precedents: Article 12 of the India-USA DTAA defines Fees for Technical Services (FTS), while Article 15 deals with Independent Personal Services. The issue was whether reimbursements for seconded employees' costs constitute FTS under Article 12. The appellant relied on earlier decisions of the Tribunal in its own case for AY 2019-20 and AY 2021-22, which held that such reimbursements are not FTS.Court's Interpretation and Reasoning: The Tribunal examined the deputation agreements and the nature of seconded personnel, concluding that these employees were employees of the Indian entities and the payments were mere reimbursements. The Tribunal emphasized that taxing the same amount as salary in the hands of seconded employees and again as FTS in the hands of the appellant would amount to double taxation, which is impermissible.Key Findings: The Tribunal held that the cost-to-cost reimbursements on secondment do not constitute FTS under Article 12 and are not taxable in the hands of the appellant. This conclusion was consistent with prior Tribunal decisions, which were followed in the present case.Application of Law to Facts: Given the identical factual matrix and legal propositions, the Tribunal allowed the ground in favor of the appellant, directing deletion of the addition made on account of secondment charges.Treatment of Competing Arguments: The Revenue did not dispute the factual matrix or the applicability of precedents. The Tribunal found no reason to deviate from earlier rulings.Conclusion: The addition on account of secondment charges was held to be unsustainable and deleted.3. Taxability of Fees Received for Professional Services RenderedLegal Framework and Precedents: The dispute centered on whether the fees received by the appellant for professional services rendered by its personnel fall under Article 15 (Independent Personal Services) or Article 12 (Fees for Included Services) of the DTAA. Article 15(2) provides an inclusive definition of professional services, listing various professions including engineers, architects, accountants, and others, and includes independent scientific, literary, artistic, educational, or teaching activities. Article 12(5)(e) excludes payments for professional services as defined in Article 15 from FIS.Court's Interpretation and Reasoning: The Tribunal rejected the Revenue's contention that only persons governed by a professional body are covered under Article 15. It emphasized that the definition in Article 15(2) is inclusive, not exhaustive, and includes professionals such as scientists, literary persons, artists, teachers, and engineers, many of whom are not governed by professional bodies. The Tribunal noted that the Revenue's approach amounted to impermissibly rewriting the treaty.The Tribunal also relied on the Income Tax Act's provisions, particularly section 194J and 44AA, and various CBDT notifications which recognize professions without governing bodies, such as film personalities, IT professionals, and sports persons, as professional services providers.Key Evidence and Findings: The Tribunal considered the qualifications and experience of the personnel rendering services, including economists, MBA graduates, and technical professionals, and held that these services qualify as professional services under Article 15.The Tribunal further held that the 'make available' condition under Article 12(4)(b) was not satisfied, meaning the services did not transfer technical knowledge, experience, skill, know-how, or processes to the Indian clients, thereby excluding the receipts from being FIS under Article 12.Application of Law to Facts: The Tribunal applied the inclusive definition of professional services and statutory definitions to the facts, concluding that the appellant's receipts fall within Article 15 and are taxable only in the USA, as the appellant has no fixed base in India.Treatment of Competing Arguments: The Revenue argued that a wider interpretation of Article 15 would render Article 12(5)(e) redundant. The Tribunal rejected this, holding that the two articles operate in tandem and that the appellant's case squarely falls under Article 15.Conclusion: The Tribunal allowed the appeal on this ground, directing deletion of the addition made on account of fees for professional services.4. Initiation of Penalty Proceedings under Section 270AThe appellant challenged the initiation of penalty proceedings for under-reporting of income. The Tribunal held that this ground was premature as the penalty proceedings had only been initiated and not concluded. Therefore, no adjudication was made on the merits of penalty.Significant holdings include the following verbatim excerpts and principles:'Considering the facts of the case in totality, 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 to tax twice-firstly in the hands of the seconded employees working in India and secondly again the hands of the assessee.''We are of the opinion that definition of professional service in Article 15(2) do not provide an exhaustive definition of 'professional services' but an inclusive one. The definition encompasses several categories which pertain to services which neither belong to nor are governed by any professional organization with disciplinary power and control such as scientists, literary persons, artists, teachers, engineers. We are therefore inclined to agree with the assessee that confining Article 15(2) to persons who are governed by a professional organization, would mean re-writing Article 15(2), which is not permissible.''Further, we have gone through the Article 12(5)(e) which states that the FIS does not include the amounts paid to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services).''The term 'professional services' as defined in Article 15(2) of the DTAA are supported by the definitions in the Explanation (a) to section 194J which specifically refers to 'engineering profession' and also to 'profession of technical, consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or section 194J. These activities are thus regarded by the statute as professions though they have no governing professional body.''We are therefore of the considered view that the assessee falls within the meaning of 12(5)(e) of the DTAA and hence benefit of Article 15 of the DTAA cannot be denied to it.'In final determinations, the Tribunal:- Allowed the appeal on grounds challenging the addition on account of secondment charges, holding such reimbursements are not taxable as FTS under Article 12 of the DTAA.- Allowed the appeal on grounds challenging the addition on account of professional fees, holding that the services rendered fall under Article 15 of the DTAA and are not taxable in India due to absence of a fixed base and non-satisfaction of the 'make available' condition under Article 12.- Held that the penalty proceedings under section 270A were premature and did not adjudicate on the merits.- Directed deletion of the impugned additions and allowed the appeal accordingly.