TaxTMI 
TaxTMI 
2022 (6) TMI 1251
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.... of America and the Government of Republic of India for the avoidance of Double Taxation and the prevention of FISCAL evasion? 25 (C) Deduction under Section 195(2) of I.T. Act on the 'sum chargeable under this Act' 31 (D) Whether Deduction is on gross receipts? 33 (E) Secondment and reimbursement of costs 36 (F) Distinguishing the Judgment in Centrica India Offshore (P.) Ltd. v. Commissioner of Income Tax-I, New Delhi 42 V Conclusion 45 The petitioner has called in question the validity of the order dated 01.05.2020 passed by the first respondent at Annexure-'A' whereby the application for 'Nil TDS Certificate' has been rejected and the petitioner has been directed to deduct tax at source at the applicable rate. The conclusion arrived at, in the impugned order is as follows:- "Conclusion: 49. In the preceding paragraphs, the need for secondment, nature of services provided by seconded employees, employer-employee relationship and the taxability of the payments have been discussed elaborately and the following has been established; 1. There is no employer-employee relationship between M/s Flipkart Internet Private limite....
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....four employees to the petitioner and had entered into a 'Global Assignment Arrangement' with the seconded employees, which provided that the seconded employees would work for the benefit of the petitioner. 8. The petitioner is stated to have issued the letters of appointment confirming the employment of seconded employees with the petitioner and in such letters of appointment, the details of responsibilities of the seconded employees has been detailed. 9. It is stated that the petitioner makes contribution to the Provident Fund Authorities as an 'employer of seconded employees' and that the said employees are working in India on 'Employment VISA' wherein, the petitioner is declared to be an 'employer'. 10. In response to the invoices raised by 'Walmart Inc.' as regards the payments made towards salaries of the seconded employees, the petitioner had intended to make payments to 'Walmart Inc.', and in that context, had made an application at Annexure-'G' under Section 195(2) of the I.T. Act requesting for allowing the remittance of cost-to-cost reimbursements to be made by the petitioner without deduction of tax at source. 1....
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....further contended that the payment made by the petitioner to 'Walmart Inc.' are mere reimbursement of salaries paid to the seconded employees and once such payments are salaries, the same falls outside the purview of 'FIS' in terms of Article 12 and 16 of DTAA. In light of the law laid down by the Apex Court in Union of India and Another v. Azadi Bachao Andolan and Another (2003) 263 ITR 706 (SC) and Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax & Another (2021) 432 ITR 471 provisions of 'DTAA' insofar as it is more beneficial to the assessee would prevail over the domestic law and as payments in question being in the nature of salaries under Article 16 cannot be treated as ( 'FIS' by the respondent Authorities by applying Section 9 of the I.T. Act. 18. It is submitted that the stand of Revenue that Certificate under Section 195 is only tentative and a non-conclusive opinion, is not a legally tenable stand. The prima facie deduction of tax and contingency of refund at a later stage cannot make original levy to be valid, when liability to deduct tax is in excess of jurisdiction. 19. It is submitted that as p....
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....ived at the conclusion that there is no 'employer-employee' relationship between M/s.Flipkart Internet Private Limited and the seconded employee. It has further held that the services rendered by the seconded employees are in the nature of technical services under the Income Tax Act and 'DTAA', which findings are well considered and do not call for interference in exercise of limited power of judicial review. 25. The mere deduction of tax at source under Section 192 does not obviate the need to deduct tax at source under Section 195, as tax at source is to be deducted on the gross payment and the question of examining the income element embedded therein in the payment does not arise. 26. As the Agreement entered into is between two related parties, even if consideration is agreed on cost-to-cost basis, the character of payment would not be altered. 27. The terms of Agreement would reveal that the payment made is consideration for rendering of technical consultancy services. 28. The purpose of payment if looked into would fall within the ambit of 'FTS' in terms of Section 9 as well as in terms of 'DTAA'. 29. The contention that provision of servi....
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....e first time in the present proceedings. Even otherwise, the scope of Section 197 being distinct from that of Section 195(2), as Section 197 would come into operation on an application by the recipient of an income, which is not the factual scenario in the present case. (v) As per Rule 29BA of Income Tax Rules, 1962, an application can be made by the payer in Form No.15E for grant of Certificate determining appropriate proportion of sum chargeable to tax in the case of payment made to non-resident recipient under Section 195 (2) of the Act. The relevant extract of Rule 29BA and Form No.15E have been extracted hereinbelow : "29BA. Application for grant of certificate for determination of appropriate proportion of sum (other than Salary), payable to non-resident, chargeable in case of the recipients. (1) An application by a person for determination of appropriate proportion of sum chargeable in the case of non-resident recipient under sub-section (2) or sub-section (7) of section 195 shall be made in Form 15E electronically,- i) under digital signature; or ii) through electronic verification code. "[FORM No. 15E [See rule 29BA] [e-Form] Application by a person fo....
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.... and/or I, ............................................................... of ............................................................... do, hereby request that a certificate may be issued to the Seller/Lessor/Licensor, authorising him to collect income- tax at lower rate at the time of debit of such amount to my account or receipt thereof from me, as the case may be. The details are specified in Annexure-III. XXXXX " Accordingly, the Income Tax Rules and the relevant Form makes it clear that the application under Section 195 is at the instance of the person making the payment, while the application under Section 197 is at the instance of the recipient. (vii) This Court in Commissioner Of Income-Tax, International Taxation v. Bovis Lend Lease (India) (P.) Ltd. [2012] 208 Taxmann 168 (Kar) has reiterated this position at Para 12, which is as follows: "12. .......As is clear from Sub-Section (2) of Section 195 of the Act, if the person responsible for paying any amount chargeable under this Act to a non-resident, considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the assessing officer to determi....
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....ke an application to the Assessing Officer to determine "the appropriate proportion of such sums so chargeable"; upon such determination, tax shall be deducted under sub-section (1) only on that portion of the sum which is so chargeable. (c) Not only this, but sub-section (3) provides that any person entitled to receive any interest or other sum on which income- tax is to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of certificate authorising him to receive such interest or other sum without deduction of tax under the sub-section. (d) Further, section 197 provides that recipient can file an application to the Assessing Officer for a certificate that the total income of the recipient justify the deduction of income-tax at any lower rates or no deduction of income tax and the Assessing Officer, if satisfied, can grant such certificate as may be appropriate." (emphasis supplied) (ix) It is the further contention of the respondent that, if the petitioner was of the view that the amount is not chargeable under the provisions of the Act, the question of obtaining certification under Section 195(2) or Sectio....
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....ich reads as follows:- "176. The conclusions in the aforestated paragraph have no direct relevance to the facts on hand as the effect of Section 90 (2) of the Income Tax Act, read with Explanation IV thereof, is to treat the DTAA provision as the law that must be followed by Indian Courts, notwithstanding what may be contained in the Income Tax Act to the contrary, unless more beneficial to the Assessee. " (iii) Article 12(1) of 'DTAA' provides for taxation of Royalties and 'FIS' arising in a Contracting State and paid to a resident of other Contracting State. Further, Article 12(2) provides that Royalties and 'FIS' may also be taxed in the Contracting State in which they arise. (iv) 'FIS' is defined in Article 12(4) as follows:- "4) For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) xxx (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a tec....
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....has through the seconded employees provided technical services to Flipkart Internet Private Limited (India), as technical services would also include provision of services of personnel. In the impugned order what has been lost sight of is the requirement of "make available" in terms of Article 12(4)(b). A perusal of M.S.A. entered on 29.05.2019 would refer to:- "(a) Clause 2.1.1 - The use of certain services described in Annexure-A are in the Scope of Work concluded between the parties or their Affiliates for the relevant Service; (b) Clause 2.1.2 - The use of certain Secondees on terms and conditions described in Annexure-B unless the parties agree to the contrary in respect of the particular secondment in the relevant Scope of Work." (xii) The M.S.A., if subjected to scrutiny as regards the aspect of secondment does not reveal the satisfaction of the requirement of 'make available' which is a sine qua non for being a 'FIS'. (xiii) The DCIT has proceeded to pass the impugned order without examining this aspect. The fact that the employees seconded have "the requisite experience, skill or training capable of completing the services contemplated in Secondment"....
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.... the provisions of Section 9 of the I.T. Act does not arise. On this score alone, the conclusion in the impugned order of the payment for the service falling within the description under Section 9 of the I.T. Act as 'deemed income', is to be rejected. (D) Whether Deduction is on gross receipts? (i) The contention of learned counsel Sri. K.V.Aravind is that normally the deduction is on gross receipts as in cases of Section 194J and Section 194C of the I.T. Act and in light of the principle laid down in Associated Cement Co. Ltd. v. Commissioner of Income-Tax (1993) 67 Taxmann 346 (SC), in the present case also the deduction should be on the gross remittance. (ii) Section 194C provides for deductions "at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash....". Similarly, Section 194J provides for deduction "at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash....." (iii) In the case of Associated Cement Company Ltd. (supra), the question was as regards deduction of tax under Section 194C(1) and as to whether deduction was to be confined to the income component of that....
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.... effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act." Accordingly, the contention of learned counsel for the Revenue regarding deduction on gross amount deserves to be rejected. (E) Secondment and reimbursement of costs: (i) In the impugned order, the DCIT has construed the secondment where services are provided and payment made thereon as being within the ambit of tax liability. As discussed supra, the 'FIS' in terms of the 'DTAA' would not include any payment towards provision of mere rendering of service and there must be a sine qua non of 'make available.' Further, the payment must be one chargeable under the provisions of I.T. Act. (ii) The payment is pursuant to M.S.A. and the payment in the present case relates to the secondment of employees. The following clauses of the M.S.A. would be of relevance:- (a) Clause 1.7 defines secondment as the relationship of assigning a secondee by a party to the other party as contemplated under the Agreement. The payment under the Agreement is also only in respect of the secondment. (b) Clause 1.5 defines the....
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....hereby the overseas entity could be treated as an employer. (vii) The petitioner issues the appointment letter, the employee reports to the petitioner, the petitioner has the power to terminate the services of the employee. For the purpose of a limited finding under Section 195 on the basis of the available material, it could be concluded that the petitioner is the employer. (viii) The Revenue has relied upon the judgment of the Apex Court in C.C., C.E. & S.T.-Bangalore (Adjudication) etc. v. M/s.Northern Operating Systems Pvt. Ltd. Civil Appeal Nos.2289-2293/2021 where the Apex Court has interpreted the concept of a secondment agreement taking note of the contemporary business practice and has indicated that the traditional control test to indicate who the employer is may not be the sole test to be applied. The Apex Court while construing a contract whereby employees were seconded to the assessee by foreign group of Companies, had upheld the demand for service tax holding that in a secondment arrangement, a secondee would continue to be employed by the original employer. (ix) The Apex Court in the particular facts of the case had held that the Overseas Co., had a pool of highly....
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.... broadly regarding the existence of Service PE in India. (c) That the reimbursement is a matter to be demonstrated and the nomenclature cannot be determinative and mere payment of costs where the Entities are related would not take such payment out of the consideration of necessity to deduct. (v) It must be noted that the conclusion in Centrica (supra) does not further the case of Revenue, as the decision was rendered in the context of facts and on the basis of the material available. (vi) It must be noted that there was a reiteration of the necessity of demonstration of 'make available' apart from rendering of the requisite service for satisfaction of 'FIS'. (vii) As regards reimbursement is concerned, the Court has merely reiterated that it is not the nomenclature that it is indeed an actual reimbursement that is required. Further, the Court, in light of the material has recorded a finding of the existence of Service PE by implication. (viii) All such findings do not take away from the requirement of establishing that: (a) The Domestic Entity was the real employer, that there was no Service PE in the local Country. (b) That there was indeed a reimburseme....