TaxTMI 
TaxTMI 
2016 (12) TMI 943
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.... 'royalty'. 2.2. That the learned CIT(A) erred in holding that the payments towards servers represents consideration for use/right to use/transfer of rights in respect of a 'process' and to be taxed as 'royalty'. 2.3. That the learned CIT(A) erred in holding that the payments towards testers represents consideration for use/right to use equipments and to be taxed as 'royalty'. 3.1. That the learned CIT(A) erred in holding that the Appellant has provided use/ right to use scientific equipments to Intel technology India Private Limited ('ITIPL') and the consideration towards the boards of Rs. 12,98,64,473 represents 'royalty'. 3.2. That without prejudice to grounds taken above, the learned CIT (A) has erred in not reducing the alleged income of Rs. 12,98,64,473 by Rs. 11,93,38,358 being the amount reversed from the sum payable for the boards. 4. That the learned CIT(A) has erred in confirming the action of the Assessing Officer in assessing the miscellaneous receipts amounting to Rs. 14,606,825 as 'Income from Other Sources'. 5. That the Appellant craves leave to add to and / or to alter, amend, rescind, modify, the grounds herein above or produce further documents ....
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.... * During the FY 2007-08, the Company has received reimbursement of Rs. 30,17,13,220 from ITIPL towards salary cost, relocation cost and other related costs of employees transferred to ITIPL. * The internal policy of the Intel Group allows the employees working in the Group to be transferred to different companies within the Group. In accordance with this policy, certain employees who were earlier working with Intel Corp were transferred to the employment of ITIPL. * The services of the transferred employees are rendered to ITIPL and ITIPL is responsible for bearing the costs related thereto and discharging the withholding tax obligations under section 192 of the Act associated with the employees' transferred to ITIPL. For ease of disbursement and for timely payment to the account of the employees, it has been arranged that Intel Corp shall disburse the salary and other benefits, as required, to the employees in their home country on behalf of ITIPL. ITIPL is required to reimburse Intel Corp the amount disbursed to ITIPL employees on its behalf. * The amount of Rs. 30,17,13,220 represents reimbursement of salary and bonus cost, which was paid by Intel Corp in the first ins....
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....imed reimbursement of the same from ITIPL. There is no profit element involved in the reimbursement. Therefore, reimbursement of such salary is not subject to tax in the hands of the Appellant. The ratio of decision in HCL Infosystems case (supra) directly applies to the case of Intel Corp. * Similar view has been held in the following cases: o IDS Software Solutions India (P) Ltd. v. ITO [(2009) 122 TTJ 410 (Bangalore ITAT)]. o Ariba Technologies India Pvt. Ltd. [ITA No. 616 (Bang)/2011 dated April 4, 2012). o Abbey Business Services India (P) Ltd. v. DCIT [(2012) (53 SOT 401) Bang.] o As per clause (A) of Article-III of the Agreement, the expatriates shall work under the direct supervision of ITIPL during their entire period of engagement and shall not be deemed to be representing or acting on behalf of the Company while performing their services. Also none of their acts during the course of the engagement shall be deemed to be binding on the Company. o As per clause (B) of Article-III of the Agreement, the Company shall disburse the salary and other benefits to the expatriates in their home country less the withholding tax appli....
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.... performed by the expatriates and none of their acts during the course of the engagement shall be deemed to be binding on Intel Corp. Therefore, ITIPL is to be considered as the real employer of the seconded employees, thereby creating a purported employment relationship with the seconded employees. 5. On the other hand, the learned Departmental Representative has submitted that the Assessing Officer as well as CIT (Appeals) has analysed the various terms and conditions of the agreement and found that the payment in question is FTS and consequently chargeable to tax in India. He has further submitted that there is no difference between the Indo- USA DTAA and Indo-UK DTAA as it was in the case of Centrica India Pvt. Ltd. Vs. CIT 364 ITR 336 (Del) wherein the Hon'ble Delhi High Court has held that the payment on account of salary to the seconded employees is in the nature of FTS. The learned Departmental Representative has further submitted that an identical issue has been considered by the coordinate bench of this Tribunal in the case of Food World Supermarkets Ltd. Vs. DCIT 174 TTJ 859 (Bang-Tribunal). 6. In a rejoinder the ld. AR has submitted that as per the agreement b....
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....e Intel US the Reimbursable Expenses (as defined below). All benefits to be provided in India shall be provided by ITIPL. (C) ITIPL shall be responsible for withholding/deposit of tax on account of the salaries of the Expatriates. (D) All Indian taxes and levies payable in relation to this Agreement shall be borne/paid by ITIPL, wherever applicable. (E) During the transfer period, the Expatriates shall devote the whole of their time, attention and skills to the duties with ITIPL. (F) ITIPL shall have the right, at any time, to approve or reject the Expatriate selected for transfer to ITIPL and to request from Intel US the replacement of any Expatriate who, in the opinion of ITIPL, is not qualified or does not meet the requirements necessary to fulfill his/her duties with ITIPL. (G) During the transfer period, the Expatriates transferred from Intel US may be required to act or serve as officers, authorized signatories, nominees or in any other lawful personal capacity on behalf of ITIPL as may be required by ITIPL. (H) If at any time before the transfer of the Expatriate, any one or all of the Expatriates shall cease to be transferred by Intel US for any reason wha....
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....(B) All debit notes issued hereunder shall be payable within 55 days after the date of the debit note or such other period as the parties from time to time mutually agree. (C) Notwithstanding clause B under Article IV above, where ITIPL is required to obtain clearances, for such payment of Reimbursable Expenses, from income tax and other regulatory agencies of the Government of India, the payment would be made after obtaining such clearances. (D) All debit notes shall be denominated in US Dollars or such other currency as the parties may from time to time mutually agree.' As per the business need of ITIPL the assessee to transfer from time to time certain expatriates based on such need and for such duration as may be agreed between the parties. Therefore duration of secondment was to be mutually agreed by the parties and not an exclusive discretion of ITIPL. Further there is no dispute that the expatriates remained the legal employees of the assessee and the assessee was to pay the salary and other benefits to the persons on secondment with ITIPL. The salary and other benefits of the personnel were protected and payable by the assessee and in turn claimed the said paym....
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....dation and Enabling Group which comprises of 159 persons. He headed the site capability office for IT in India. His responsibilities in ITIPL included managing the team of business operations and project managers, setting the direction for the team, reviewing the various programs and initiatives and supervising them and ensuring that they are completed to success. Desai Utpal N Component Engineering Manager Digital Enterprise Group Utpal was part of the Enterprise Microprocessor Group comprising 236 persons. He was the global clocking architect and designated as the component engineering manager in India. He was a tech lead in clocking design and engaged in fub-design/integration activities. Also engaged in driving synergy on clocking-tools/methodologies across different projects. Thus it is clear that all the expatriates are holding managerial position and are experts of their respective fields of managerial skills. Therefore the seconded are rendering the managerial and highly expertise services the ITIPL for which the assessee received the payment in question. An identical issue was considered by the co-ordinate bench of this Tribunal in the case of M/s.....
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....ost identical except the word 'managerial' is missing in the definition provided under tax treaty. For ready reference we quote the definition of FTS under Article 13(4) of Indo-UK DTAA which has been reproduced by the Hon'ble High Court in para 25 as under:- "ARTICLE 13 - Royalties and fees for technical services-"4. The definitions of fees for technical services in paragraph 4 of this Article shall not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in paragraph 3(a) of this Article. (b) for service that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the private use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or partnership for professional service as defined in Article 15 (Independent personal services) of this C....
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....ng out of labour, these functions are to a large extent exercised by the user. In this context, substance should prevail over form, i.e. each case should be examined to see whether the functions of employer were exercised mainly by the intermediary or by the user. It is therefore up to the contracting states to agree on the situations in which the intermediary does not fulfill the conditions required for him to be considered as the employer within the meaning of paragraph 2. In setting this question, the competent authorities may refer not only to the above mentioned indications but to a number of circumstances enabling them to establish that the real employer is the user of the labour (and nor the foreign intermediary); The hirer does not bear the responsibility or risk for the results produced by the employee's work; - The authority to instruct the worker lies with the user; - The work is performed or a place which is under the control and responsibility of the user; - The remuneration to the hirer is calculated on the basis of the time utilized, or there is in other ways a connection between this remuneration and wages received by the employer; ....
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.... been considered by the DTAA, this takes precedence over the taxing regime under Section 9 of the Act. 30. The India-UK DTAA defines 'fees for technical services' as "payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel)". In this case, the overseas entities have, through the seconded employees, undoubtedly provided 'technical' services to CIOP, especially since that expression expressly includes the provision of the services of personnel. The seconded employees, who work, so to say, for CIOP are provided by the overseas entities and the work conducted by them thus, i.e. assistance in conducting the business of COIP of quality control and management is through the overseas entities. The nature of the services - cast as "business support services" by CIOP - as also clearly within the hold "technical or consultancy. These services envisage the provision of quality service by vendors to the overseas entities, which CIOP, and the secondees, are to oversee. This requires the secondees to draw from their technical knowledge, and falls w....
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....sion, unlike in the India-Canada DTAA. The India-UK DTAA states that 'fees for technical services' "means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which ... or make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design." In order for the amounts paid to the overseas entities in the transaction covered by the India-Canada DTAA, thus, it must not only be showed that technical services were performed, but that such knowledge etc. was 'made available'. Xxxxxxxxxx 37. This brings the Court to the next issue, concerning reimbursement and the doctrine of diversion of income by overriding title. This Court notices that a case with almost identical circumstances, in In Re: AT & S India (P.) Ltd. (supra), also came up before the AAR. There, an agreement between AT&S India and its parent, AT& Austria was entered into, by which AT&S Austria undertook to assign or cause its subsidiaries to assign its qualified employees to....
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....part of compensation. The premise of the question that the payments are only in the nature of reimbursement of actual expenditure incurred by AT&S Austria is not tenable for reasons more than one. First it is not supported by any evidence as no material (except the debit notes of salaries of seconded personnel) is placed before us to show what actual expenditure was incurred by AT&S Austria and what is being claimed as reimbursement; secondly, assuming for the sake of argument that the debit notes represent the quantum of compensation as the actual expenditure, it would make no difference as the same is payable to the AT&S Austria under the secondment agreement for services provided by it. It would, therefore, be not only unrealistic but also contrary to the terms of the agreement to treat payments under the said agreement as mere reimbursement of salaries of the seconded employees who are said to be the employees of the applicant. To show that the real employer of such employees is the applicant and not the AT&S Austria, Mr. Chaitanya invited our attention to various employment agreements entered into between the applicant and the seconded employees and also the certifica....
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....yment made may indeed be payment for services - which may be deducted in accordance with law - or reimbursement for costs incurred. This, however, cannot be used to claim that the entire amount is in the nature of reimbursement, for which the tax liability is not triggered in the first place. This would mean that in any circumstance where services are provided between related parties, the demand of only as much money as has been spent in providing the service would remove the tax liability altogether. This is clearly an incorrect reasoning that conflates liability to tax with subsequent deductions that may be claimed. 13. The SLP filed against the judgment of Hon'ble Delhi High Court has been dismissed by the Hon'ble Supreme Court in 227 Taxman 368. Therefore the view taken by the Hon'ble High Court has attained finality. The concept of income includes positive as well as negative income or nil income. In the case of payment being FTS or royalty as per sec. 9(1) of the Act it is irrelevant whether any profit element in the income or not. It is not only a matter of computation of total income when the concept of profit element in payment is relevant. If the payment being FTS or r....
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....icer concluded that receipts on account of testers and servers amounted to royalty and was taxable in the hands of the assessee company. Similarly it was held that the Boards supplied to ITIPL for which consideration was received amounting to royalty. Accordingly, the Assessing Officer made the addition of the amount received by the assessee on account of transfer of fixed assets to the Indian subsidiary ITIPL. The assessee challenged the action of the Assessing Officer before the CIT (Appeals) but could not succeed. 10. Before us, the learned Authorised Representative of the assessee has submitted that these were all equipments procured by the assessee from third party and transferred to the ITIPL at Written Down Value (WDV). Therefore there is no element of profit in this transaction. The TPO has accepted this transaction at ALP. He has further contended that for the Assessment Year 2012-13, an identical transaction of transfer of assets has been accepted by the Assessing Officer. He has referred to the assessment order at page 43 of the Paper Book-II and submitted that identical assets transferred by the assessee were accepted by the Assessing Officer without any addition. He....
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....he Assessing Officer in treating the payment as royalty is contrary to the facts as well as the provisions of the Act and the DTAA. Accordingly, we delete the addition made by the Assessing Officer on this count. 13. Ground No.3 is regarding transfer of testing boards. This issue is identical to the issue of transfer of assets. 14. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. These testing boards are not the equipments developed by the assessee but these are third party products therefore there is no transfer of any right or right to use in respect of any process or technology know how along with these testing boards. Accordingly in view of our finding on the issue of receipt on transfer of other assets like servers the addition made by the Assessing Officer is deleted. 15. Ground No.4 is regarding miscellaneous receipts. 16. During the year under consideration the assessee received a sum of Rs. 1,46,06,825 but the same was not offered to tax. The Assessing Officer asked the assessee to furnish the details of receipts. The assessee explained that these amounts represent....