TaxTMI 
TaxTMI 
2018 (11) TMI 1119
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....t, 1956, engaged in the business of selling computers, software, besides 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 ....
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....rforming under this Agreement, each Party shall comply with all applicable laws, rules and regulations, including, but not limited to laws, 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 r....
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....arty to this Agreement and not under a duty of confidentiality to the other Party. 4.3 Unauthorized Disclosure - Each Party acknowledges and confirms that the Confidential Information (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' ....
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....d who is on the rolls of IBM (USA). She is already on deputation/assignment to IBM's group company at Japan. She was sent on assignment/deputation from Japan to IBM India. The offer letter dated 5.3.2015 of IBM India addressed 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 ....
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....at IBM India only reimbursed the salary costs of the concerned expatriate, deputed employee to the concerned IBM Oversees entity. Therefore the sum reimbursed was not salary paid by IBM India to the expatriate employees but was FTS paid to the IBM Oversees entity which is taxable 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....
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....held that once the income falls in the category described under 9(1)(vii) then the TDS sections will come into operation irrespective of the fact whether the amount paid by IBM India is equal to the cost incurred by the SECONDER or whether the SECONDER is having any taxable in its hands or not. These questions 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 i....
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....e Assessee before DCIT was that there was no FTS clause in the DTAA between India and Philippines and therefore payment made to IBM Philippines, a tax resident of Philippines, was to be regarded as income falling within Article 23(1) of the DTAA between India and Philippines which deals with "other income" and as per the said Article, other income is taxable only in the country of residence i.e., Philippines and therefore reimbursements made to IBM Philippines is not taxable in India. This 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 a....
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....see contended that in the absence of an 'FTS' clause in the DTAA, Article 7 (business profits) thereof would be applicable since IBM-Philippines is providing services in the course of its business and since it does not have a PE in India, payments made to IBM-Philippines are not chargeable to tax in India. Alternatively it was contended that if Article 7 of the DTAA is not applicable, the payments would be covered by Article 23 (1) of the DTAA which deals with 'Other Income' which lays down the 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 e....
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....es not provide any rules on the mechanism for computing relief. It is only for such purposes the domestic laws may have to be referred and it cannot be extended to tax business income falling under Article 7 as per domestic law. The Tribunal referring to the aforesaid decision held that Article 24(1) of the India- Philippines DTAA, which is similar to Article 25(1) of the India-UAE Treaty, does not confer a right to invoke the provisions of domestic laws for classification or taxability of income which is governed by 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 Cir....
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.... of section 9(l)(vii) does not make a difference. Fees of this nature can be earned in business or otherwise. If earned in the course of business, they constitute income from business. There is no incompatibility between recognizing the receipts as royalties or technical fees and also looking upon them as the profits of a business. Judicial decisions have recognized the principle in regard to other types of receipts such as dividends and interest. That being so, when technical fees are received in the course of business, 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 roya....