TaxTMI 
TaxTMI 
2018 (11) TMI 1119
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....des rendering Software Development and Information Technology Services and lease financing activities of its products. It is a wholly owned subsidiary of International Business Machines, USA (IBM USA). 3. The Assessee is part of the IBM group that has entities across the world. IBM Group has policy of sending employees of its group in one country on deputation to another group in another country on assignment. Such people sent on deputation are called "employees sent on Secondment" "Expatriate Employee" etc. The group has a standard expatriate Agreement to regulate and set out the terms and conditions on which employees of IBM group in one country will send on deputation its employee to another group in another country. The terms of the expatriate Agreement dated 1.1.2002 between IBM UK and IBM India, whereby IBM UK agreed to send its employees on request by IBM India to work for IBM India may be taken as illustrative and the terms of the said agreement relevant for adjudication of the present appeals, are as follows:- "Article-1 of the Agreement defines certain terms. (a) Expatriate Employee has been defined to mean a person legally employed by or through IBM UK who is assign....
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...., rules and regulations governing the import, export, collection, and processing of personal information. Article-3 deals with payments and it read thus:- 3.1 Salaries and Expatriate Employee Expenses - IBM India shall reimburse total salary costs of the Expatriate Employees to IBM UK (including reimbursement ofexpenses as applicable). However. for ease of convenience. IBM UK shall pay the actual net salary of the Expatriate Employees and thereafter, IBM India shall reimburse IBM UK for the salaries paid on IBM India's behalf. No mark-up shall he charged by IBM UK at the time of raising a reimbursement claim on IBM India. 3.2 Reimbursement - IBM India shall reimburse IBM UK, in a form to be agreed between the Parties or the commonly accepted format of invoicing prevailing between the parties, on a monthly basis for the salary costs and any expenses paid by it to the Expatriate Employees. IBM UK shall submit such invoices by the end of the month following the relevant calendar period. IBM UK shall maintain adequate records to detail the basis for the invoices. All invoices are due and payable by IBM India within thirty days or receipt. All amounts payable under this Agreem....
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....n (lithe other Party constitutes proprietary lamination and trade secrets valuable to the other Party, and that the unauthorized use, loss or outside disclosure of such Confidential Information may cause irreparable injury to the other Party. Each Party shall inform the other Party immediately upon discovery of any unauthorized use or disclosure of Confidential Information, and will cooperate with the other Party in every reasonable way to help regain possession of such Confidential Information and to prevent its further unauthorized use. Each Party acknowledges that monetary damages may not be a sufficient rented s for unauthorized disclosure of Confidential Information of the other Party and that the other Party shall be entitled, without waving the other rights or remedies, to such injunctive or equitable relief as may be deemed proper by a court of competent jurisdiction. Each Party shall be entitled to recover all reasonable costs and expenses, including reasonable attorneys' fees for any action arising out of or relating to a disclosure of that Party's Confidential Information by the other Party. 4.4 Return of Information - Without prejudice to any other rights pr....
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....ressed to Mrs. Nancy Thomas contains the following features:- 1. She is employee of IBM (USA) and during her assignment to IBM India her employment responsibilities with IBM(USA) will remain suspended during the period of assignment. 2. That she will be under the control and supervision of IBM India. 3. That her unique and specialized knowledge of IBM's processes was vital for the assignment with IBM India and upon completion of the assignment, she is to return to IBM (USA) to resume her responsibilities. 4. That during the assignment period, salary (excluding allowances and expenses paid locally by IBM India) will be paid in home country (i.e. USA) which will be reimbursed by IBM India. 5. That during the period of assignment with IBM India all other terms and conditions as per IBM polices were applicable. 6. IBM India deducted tax at source u/s.192 of the Act on the salary paid to the seconded employees and paid the same to the credit of the Central Government. As we have already seen IBM India had to reimburse the salary cost of the expatriate employees to the concerned IBM oversees entity. At the time of making payment of such reimbursement, no taxes were deducted at....
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....xable in India and therefore IBM India ought to have deducted tax at source on the reimbursement made to IBM oversees entity. Tax deducted at source u/s.192 of the Act were made by IBM India for and on behalf of the IBM oversees entity, who were even otherwise bound to comply with the withholding tax obligation in India, as the salary received by the expatriate employees were for services rendered in India, which income accrues and arises to them in India and were therefore taxable in India in their hands. 2. The nature of services rendered by the expatriate employees was FTS within the meaning of Expln.2 to Sec.9(1)(vii) of the Act. In this regard the DCIT found that all the deputed employees had technical skills and imparted their skill while on deputation to India to further the business projects of IBM India and therefore the payment in the form of reimbursement by IBM India to IBM oversees entity was in the nature of FTS. In coming to the above conclusion, the DCIT referred to the Assignment Initiation Request (AIR) raised by IBM India from time to time requesting IBM Overseas entities to assign secondees for stipulated period in relation to its business projects wherein det....
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....stions are irrelevant for deciding the taxability of the income from Fees for Technical Services. 3. Some of the IBM oversees entities to who the Assessee made reimbursements were tax residents of USA, UK, Australia, Canada and France. As per the Double Taxation Avoidance Agreement (DTAA) with these countries, FTS received by the resident of the aforesaid countries is taxable in India only when the services rendered by the IBM oversees entitles "make available" the technical skill or expertise for use with some degree of permanence by IBM India. The DCIT came to the conclusion that services were made available by the oversees entitles. The DCIT held that from the job justification given by IBM India for assignment of employees from overseas companies demonstrated that * IBM India is lacking in technical, managerial and consultancy skills/experience in some of its business strategic or development areas. * The request for overseas assignees is for Development of needed capabilities or technological skill in India for its business * The seconded employees were requested in critical areas to support the growth of specific area or business * IBM India CATEGORICALLY mentioned ....
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.... contention was rejected by the DCIT by holding that in the absence of FTS clause in the treaty, the Act will apply and invoked Expln.2 to Sec.9(1)(vii) and held that FTS was taxable in India. 6. There was also dispute was with regard to the rate of tax on FTS since the IBM oversees entities to whom IBM India made payments did not have Permanent Account Number (PAN) in India and in view of the provisions of Sec.206AA of the Act, the DCIT held that tax had to be deducted at source at the higher rate of tax at 20% in view of the provisions of Sec.206AA of the Act. 7. The final computation of tax payable u/s.201(1) & interest payable u/s.201(1A) of the Act was computed by the DCIT as per the table given as Annexure-1 to this reference. This annexure also gives the TDS paid by the Assessee on salary u/s.192 of the Act. 10. Aggrieved by the order of the DCIT, IBM India filed appeal before CIT(A), who confirmed the order of the AO on points 1 to3 as given above. On point 4 and 5 given above, the CIT(A) held in favour of the Assessee. Aggrieved by the order of the CIT(A) on points 4 & 5 the revenue has filed these appeals before the Tribunal. 11. We have heard the rival submissions....
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.... rule that it is only the State of residence of the recipient (Philippines) that would have right to tax 'other income' therefore payments to IBM- Philippines a tax resident of Philippines, would be taxable in Philippines and not in India. Per contra, Revenue contended that in the absence of 'FTS' clause in the DTAA, as per Article 24(1) thereof, the taxability of the said payments would be governed by the domestic laws i.e. Section 9(1)(vii) of the Act and consequently these payments are chargeable to tax in India and liable for TDS u/s.195 of the Act. 13. The Tribunal after referring to Article 23 and 24 of the DTAA observed that the purpose of Article 24 was elimination of Double Taxation. The Tribunal referred to Article 24(1) of the DTAA which provided that the laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Convention. The tribunal observed that at first sight, it may appear that Articles 23 and 24(1) of the DTAA are in conflict with each other and that Article 23 is an omnibus clause covering all items of income not dealt w....
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.... Article 6 to 23 of the India-Philippines Treaty and that Article 24(1) operates in the field of computation of doubly taxed income and tax thereon in accordance with the domestic laws of each contracting state and is not part of Articles 6 to 23 which deal with the classification of income into different heads. Para 2 of CBDT Circular NO.333 dt.2.4.1982 exemplifies what is stated in Article 24 of the India-Philippines DTAA; providing that the Mode of Computation of income as provided in the DTAA should be followed and where there is no specific provision in the treaty, the Income Tax Act will govern the same. Both Article 24 of the IndiaIT( Philippine DTAA and CBDT Circular NO.332 dt.2.4.1982 have no role to play in classification of income and allocation of right to tax such income to one or both of the contracting states as the same are to be dealt with in accordance with Article 6 to 23 of the DTAA. Even though the India- Philippines DTAA does not have an Article dealing with 'FTS', its taxation would be governed by Articles 7 or Article 23 as the case may be, depending on the facts and circumstances of each case. If Article 24(1) of the DTAA is interpreted as dealing w....
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.... one cannot deny them the treatment envisages by Article 7 specifically intended for application to business income. That apart as pointed out earlier, there are several DTAA's which prescribe different modes of taxation for business and for royalties and fees for technical services, but they are dear that the provisions of the "business" clause of the treaty (Article 7 here) will govern where such technical fees are earned in the course of business with a permanent establishment in the State in question. See for e.g., the DTAA's between India and Australia (Article 11(4), Canada [Article XIII (SC)] or USA [Article 12(6)]. These indicate that even where royalties and fees for technical services receive separate treatment under a DTAA, it is the Article relating to computation of business income that would apply where such royalties or fees arise in the course of business carried on by the recipient. The Tribunal came to the conclusion that receipts were in the course of business of the Assessee and were therefore business income falling within Article 7 of the DTAA and would therefore not fall within the ambit of Article 23(1) of the DTAA. Since IBM Philippines did not have....