AI Drafter 
TaxTMI 
TaxTMI 
2022 (4) TMI 1443
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....pect of the issues alleged therein shall be applied mutatis mutandis you turn this for the issues identically raised by assessee for assessment year 2015-16. Assessment year 2013-14: 3. Assessee is engaged in manufacturing of automobile components such as seats, door trims and interiors for passenger cars. The assessee is also a licensed manufacturer carrying out manufacturing activities using the technology and technical knowhow, obtained from Toyota Boshoku Corporation, Japan. For year under consideration assessee filed return of income on 29/11/2013, declaring total income of Rs. 33,73,65,270/-. The case was selected for scrutiny and notice under section 143 (2)along with notice under section 142(1) of the Act was issued to the assessee. In response to statutory notices, representative of the assessee appeared before the Ld. AO and file requisite details as called for. 4. The Ld. AO observed that, the international transaction entered by the assessee with its associated enterprises exceeded Rs. 15 crores. Accordingly, the case was referred to the transfer pricing officer. On receipt of the reference under 92 CA of the Act, the Ld. TPO called upon the assessee to furn....
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....corporating the adjustment proposed by the Ld. TPO. In addition, the Ld. AO also disallowed Rs. 42,41,683/- claimed by the assessee towards the layout changes in the factories. The Ld. AO was of the opinion that these expenditure was towards capital and therefore assessee was only allowed depreciation on it. Aggrieved by the order of Ld. AO, the assessee filed objections before the DRP. 9. Before the DRP, apart from the above additions, the DRP observed that, the assessee entered into transaction with AE, whereby following payments were made to the AE: Reimbursement of expat salary - Rs. 4,85,23,268/- Purchase of software - Rs. 18,89,528/- The assessee was called upon to furnish details in respect of the expenses incurred and TDS if any, effectuated, in respect of such payments. The assessee vide reply dated 06/04/2017 submitted that, TDS was not effectuated as these were the reimbursement of expenses to the AE and towards purchase of software. 10. The DRP noted that, the assessee deducted TDS under the head salary on the amount payable to the seconded employees, whereas on the reimbursed amount, no TDS was made. 10.1. The DRP after considering various su....
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....fer pricing adjustment made to the royalty as independent international transaction by using PSM as the most appropriate method. He submitted that, identical issue was considered by coordinate bench of the Tribunal in assessee's sister concern's case of Toyota Kirloskar Auto Parts Ltd. vs. DCIT, reported (2020)185 ITD 806. He submitted that, the facts and circumstances in the sister concern's case is identical, with that of the assessee, and the Ld. TPO therein, also applied PSM to be the most appropriate method to benchmark the royalty transaction. 11.1. On the contrary, the Ld. CIT.DR placed reliance and orders passed by authorities below. 11.2. We have perused submissions advanced by both sides in light of records placed before us. We note that the functions performed by the assessee before us, and that of Toyota Kirloskar (supra) considered by Coordinate Bench of this Tribunal, being the sister concern, are identical in nature. Both these assessee are engaged in manufacture of automotive components, peculiar to automobile industry. The assessee before us aggregated all the international transaction by using TNNM as the most appropriate method to benchmark t....
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.... technology in question was to be used by start-ups and since the assessee was using the technology for a fairly long period of more than 5 years, it would not be proper to adopt the TNMM as the MAM, as the economic life of the technology would no longer exist. In our view, there is no basis for the TPO as well as the DRP to come to a conclusion that technology in question was to be used by a start-up. There is no basis for the TPO and DRP to come to a conclusion that the Assessee is a start up in manufacture of various parts for automobiles. The technology in question was that of TMC Japan. The technology is being used by the Assessee even today. There is no basis for the TPO/DRP's conclusion that the useful economic life of the technology would be only 5 years. In any event passage of time cannot be the basis to discard TNMM which is already held by the Tribunal and upheld by the Hon'ble High Court as no longer the MAM because the conditions necessary for PSM as MAM are not met in the case of the Assessee. Even going by Rule 10B(1)(d), there should be contribution by each of the parties to a transaction for earning profits from sale of goods or provision of services. Then....
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....ermining whether the PSM is applicable or not. The relevant extract from the OECD Guidelines is provided below: "2.125. The accurate delineation of the actual transaction will be important in determining whether a transactional profit split is potentially applicable. This process should have regard to the commercial and financial relations between the associated enterprises, including an analysis of what each party to the transaction does, and the context in which the controlled transactions take place. That is, the accurate delineation of a transaction requires a two-sided analysis (or a multi-sided analysis of the contributions of more than two associated enterprises, where necessary) irrespective of which transfer pricing method is ultimately found to be the most appropriate. 2.126. The existence of unique and valuable contributions by each party to the controlled transaction is perhaps the clearest indicator that a transactional profit split may be appropriate. The context of the transaction, including the industry in which it occurs and the factors affecting business performance in that....
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.... royalty with the transaction of manufacturing as it was closely linked and adopted TNMM but that does not mean that the transactions are so interrelated that they cannot be evaluated separately for applying PSM. Further, the Assessee does not make any unique contribution to the transaction, hence PSM in this case cannot be applied. 18. Therefore, we are of the view that TNMM is the Most Appropriate Method in the case of assessee. The decision of the Tribunal in the earlier AY 2008-09 has also been upheld by the Hon'ble High Court of Karnataka in CIT v. Toyota Kirloskar Auto Parts (P.) Ltd. [IT Appeal No. 104 of 2015, dated 16-7-2018], which was an appeal of the revenue against the order of Tribunal for AY 2008-09. The Tribunal has upheld TNMM as MAM from AY 2007-08 to 2011-12. In those AYs the dispute was whether TNMM or CUP was the MAM. It is for the first time in AY 2013-14 that the revenue has sought to apply PSM as MAM. In the given facts and circumstances, we are of the view that TNM Method is the Most Appropriate Method and the AO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee.....
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....quest for employees on loan shall be in Part - A of Form-1 annexed to this Agreement. TBC shall agree to transfer its. designated employees on loan to TBI in Part -B of Form-1. Article 3 - Time period during which Employees on Loan work for TBI. The time period during which employees on loan work for TBI shall be determined through consultation between TBC and TBI. Article 6 - Work and Working Conditions during Transfer Period. 1. Working conditions such as working hours and days off of employees on loan, working for TBI, shall conform to the Working Rules and other rules and regulations of TBI. 2. Employees on loan shall be subject to office service regulations based on the Working Rules of TBI, provided, however, when it becomes necessary to meet out reward or punishment to employees on loan in accordance with rules or regulations of TBC, both parties shall consult with each other about it in advance. 3. The employees on loan shall report and perform services as directed by TBI during the transfer per....
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....quarterly basis and TBI shall make payments within fifteen days of receipt *of the debit note. Bank Charges for making the payments shall be. to the account of TBI. TBI shall obtain necessary approval from Reserve Bank of India for such remittance I repatriations to be made to Japan. Interest if any, for delay in such payments shall be paid only with prior approval of Reserve Bank of India. No service shall be deemed to be rendered by TBC to TBI merely for facilitating the payment as above. Article 8 - Confidentiality Obligation. Neither TBC nor TBI shall disclose or divulge information obtained from the other party through the transfer of employee based on this Agreement to any third party without prior written consent from the other party during the term of this Agreement and even thereafter. Both TBC and TBI shall be obliged to drive this confidentiality obligation home to employees on loan and cause them to comply with it. Article 12 - Governing Law. This agreement shall be governed by and construed in accordance with the laws of Japan unless otherwise barred by Indian Laws." 13.2. The Ld....
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....sion of Authority of Advance Ruling in case of Cholamandalam MS General insurance Co. Ltd. reported in (2009) 309 ITR 356. • Decision of coordinate bench of this Tribunal in case of IDS Software Solutions India Pvt. Ltd. vs. ITO reported in (2009) 122 TTJ 410. • Decision of coordinate bench of this Tribunal in case of Abbey Business Service Pvt. Ltd vs. DCIT reported in (2012) 23 taxmann.com 346. • Decision of Hon'ble Pune Tribunal in case of M/s. Faurecia Automative Holding vs. DCIT in ITA No. 784/Pun/2015 by order dated 08/07/2019 • Decision of Hon'ble Mumbai Tribunal in case of DIT vs. HCL Infosystems Ltd. reported in: (2005) 144 taxman 492; 13.8. The Ld. AR then submitted that, payments made by the assessee under the secondment agreement, cannot be treated as 'fees for technical services.' It was submitted that an "Agreement for Employees on Loan" dated 01/08/2008, entered by the assessee with Toyota Corporation, Japan, for secondment of employees from Toyota Corporation Japan, to the assessee in India, and that it is not an agreement for rendering of services by Toyota Corporation Japan to the assessee in I....
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....ses of international hiring 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 fulfil the conditions required for him to be considered as the employer within the meaning of paragraph 2. In settling 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 not 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 at 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 ....
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....assessee as per the Agreement for Employees on Loan dated 01/08/2008 at the request of the assessee in India and therefore, contended that, the expression "provision of services of technical or other personnel" as appearing in the definition of 'fees for technical services' was not satisfied. He submitted that, the revenue did not bring out any material on record in support of their conclusion that, the payments to Toyota Corporation Japan, were in consideration for services rendered by Toyota Corporation Japan to the assessee. 13.15. The Ld. AR submitted that, the issue now stands covered by the decision of Hon'ble Karnataka High Court in case of DIT vs. Abbey Business Services India (P.) Ltd. reported in (2020) 122 taxmann.com. 13.14. On the contrary, the Ld. CIT.DR place reliance on orders passed by authorities below. 13.15.1. The Ld. CIT.DR referred to the decision of Hon'ble Delhi High Court in case of Centrica India Offshore Pvt. Ltd. vs. CIT reported in (2014) 364 ITR 336 (Delhi), wherein similar situation arose. Hon'ble Court held that, overseas entities, through seconded employees, provided 'technical' services to the assessee, and that, t....
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....efinition under explanation 2 to sec. 9(1)(vii) of the Act. The decisions relied upon by the assessee in the case of IDS Software Solutions India (P.) Ltd. (supra) and Abbey Business Services (India) (P.) Ltd.'s case (supra) would not help the case of the assessee when there is a direct judgment of Hon'ble Delhi High Court on this point. 13.14.3. The CIT.DR, thus submitted that, the authorities below were right in disallowing the payment made by assessee to the overseas entity for non-deduction of tax, as the same amounted to fee for technical services in the hands of the Toyota Corporation, Japan. 14. We have perused the submissions advanced by both sides in light of records placed before us. 14.1. At the outset it would be useful to understand the concept of assignment or secondment. Multi-national companies with a view to utilize skill within the group companies has global mobility policy of assignment or secondment. Secondment is, deputing or sending one employee in one entity of the multi-national company in one country, to another entity of the same multi-national company in another country. For reasons like continued pensionary benefits and other similar rea....
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....eration is not borne by a permanent establishment which the employer has in the other State. 3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic, or aboard a boat engaged in inland waterways transport, may be taxed in the Contracting State in which the place of effective management of the enterprise is situated. " 14.3. Article 15(1) of OECD Model Convention lays down the rule of taxation of income earned by the seconded employee by giving the right to tax by the State where employment is exercised. The term "Employment is exercised" means, the place where the employee is physically present, when performing the activities, for which the employment income is paid. Article 15(2) of OECD Model Convention carves out exception to the rule in Article 15(1) by facilitating short term secondment without the burden of having to pay tax in the country, where the employment is exercised subject to the following three conditions: (a) If the recipient is present in the other State for a period or periods not exceeding in t....
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....materials necessary for the work at the individual's disposal; - who determines the number and qualifications of the individuals performing the work. 14.7. As a consequence, instead of being regarded as nonresident employee of a non-resident employer rendering services on a temporary basis, individuals may, if certain objective criteria are met, be deemed to be the employees of the service recipient in the other country (i.e. source country), and therefore, taxable in the source country where they are performing their services. 14.8. In the above background let us analyse the 'Agreement of employees on loan', dated 01/08/2008, between the assessee and Toyota Corporation Japan, the independent employment contract between the assessee and the seconded employees and the correspondence between the employee and the assessee regarding bifurcation of salary payable to them. As a sample we have reproduced the contract of assessee with Mr. Minoru Asahi herein above. 14.9. A reading of Article 2, of the 'Agreement of employees on loan', dated 01/08/2008, between the assessee and Toyota Corporation, Japan, the request for employees on loan sh....
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.... is employee of Toyota Corporation Japan and during his assignment to assessee India, his employment responsibilities with Toyota Corporation Japan will remains suspended. 2. That, he will be under the control and supervision of the assessee in India. 3. That, his specialized knowledge in PED, Quality & New Projects was vital for the assignment with the assessee in India. From the letter dated 11/06/2014, upon completion of the assignment, it is clear that, Mr. Minoru Asahi was called upon to continue at the post of specialist PED Quality & New Projects with assessee in India. 4. That, during the assignment period, part of the salary after deducting grossed up income tax, under the Act, on the total salary, will be paid in India and the balance salary payable in Japan, by Toyota Corporation, Japan on behalf of assessee, which shall be reimbursed by the assessee to Toyota Corporation, Japan against a debit note. 5. That, during the period of assignment with the assessee in India, all other terms and conditions as per polices of the assessee company would be applicable. Similar is the situation....
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....sp; "Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India:- (i) to (vi) (vii) income by way of fees for technical services payable by- (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to any income ....
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....ees, were provided by overseas entities and work conducted by them thus, i.e. assistance in conducting business of assessee of quality control and management was through overseas entities. The Court also held that, mere fact that secondment agreement, phrases payment made by Centrica India to overseas entity as 'reimbursement' could not be determinative. It was also held that, the fact that overseas entity did not charge mark-up over and above costs of maintaining secondee could not negate nature of transaction. 14.20.2. Hon'ble Pune Tribunal in case of M/s. Faurecia Automative Holding (supra) has observed as under: "4.10. We have gone through the facts of the case obtaining in Centrica India (supra). The assessee therein contended that payment to foreign party towards seconded employees was only reimbursement and hence, no income was chargeable to tax in its hands. The Authority for Advance Ruling (AAR) held that payment made by the petitioner to the overseas entity was in the nature of income in view of the existence of Service Permanent establishment (PE) in India and hence liable for tax withholding. Overturning the view of the AAR that Serv....
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....ained the right over seconded employee is also held by Hon'ble AAR in case of AT & S India Pvt. Ltd., reported in 287 ITR 421. 14.22.1. The observations of the Hon'ble Supreme Court in the case of Morgan Stanley (supra) were in the context of existence of service PE. This is clear from a reading of the relevant portion of the judgment of the Hon'ble Supreme Court, which is as follows:- "As regards the question of deputation, an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the UN Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entail it being responsible for the work of deputationists and the employees continue to be on the payroll of t....
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....onded personnel are required to comply with the regulations of the applicant, but they would go back to the AT&S on the expiry of assignment. Aforesaid terms and conditions show that the seconded personnel in effect continue to be employees of AT&S. Recipient of the compensation is AT&S and not the seconded employees. Further contention was that AT&S is not engaged in the business of providing technical services in the ordinary course of its business is also not tenable. Therefore, payments made to AT&S by the applicant are for rendering "services of technical or other personnel" and are in the nature of fees for technical services within the meaning of Explanation 2 to sub clause (vii) of section 9(1) and Article 12(4) of the relevant DTAA and are subject to deduction of tax at source under section 195. 14.23.1. The ruling of Hon'ble AAR is on the factual finding that payments were not only reimbursement of actual salary, bonus etc., but was also included other sums. 14.23.2. Per contra in the present facts of the case, it is not at all the contention of the revenue that, something over and above what was paid as salary, bonus etc. 14.24. Liability under section 195 t....
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....payment towards reimbursement of salary expenditure without any element of profit, would not be taxable under the provisions of the Act. Hon'ble Court also held that, when the entire salary has been subjected to tax in India at the highest average tax rate, the assessee could not held to be in default for not without tax under the provisions of the Act. 14.27. Hon'ble Delhi High Court in the case of DIT Vs. HCL Infosystems Ltd. reported in (2005) 144 Taxmann 492 (Delhi) upheld the order of Hon'ble Delhi Tribunal which held that, when an Indian company had already deducted and remitted taxes under Sec. 192 of the Act on salaries paid abroad to the technical personnel and when such salary is reimbursed on a cost to cost basis without any profit element, the provisions of Sec. 195 of the Act cannot be applied to reimbursement of salaries made to foreign company, once again. 14.28. Coordinate bench of this Tribunal in case of IDS Software Solutions v. ITO reported in (2009) 32 SOT 25, Abbey Business Services (P.) Ltd. v. DCIT reported in (2012) 23 taxmann.com 346, took the view that expats are deputed to work under the control and supervision of the Indian company and....
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....s. 17-19 raised by assessee for the assessment year 2015-16 stands allowed. 16. Ground No. 15-17 are raised by assessee challenging the treatment of payment towards plant layout charges as capital in nature. The assessee has incurred expenses towards plant layout charges to facilitate material movement for optimum utilization of space. Due to space constraints, amounts have been spent for re-arranging the production lines on a regular basis. These are minor modifications of small value, which do not result in benefits accruing for a long period. Such expenses have been incurred year-on-year basis to improve utilization of the resources, besides improvement in quality and safety. Such expenditure neither increases the earning capacity of the business, nor does it result in additional production capabilities for the company. The Ld. AO held the expenditure to be capital in nature and disallowed the claim of the assessee. On raising objections, the DRP held as under: "7.4 The contentions of the assessee are carefully considered. Broadly the line of argument put forth by the assessee is that these expenses are incurred to re-arrange the production lines a....
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....rovided any details in respect of the expenditure incurred towards layout of plant, and why was it necessary to be incurred. In our view this issue needs to be revisited based on the evidences filed by the assessee having regard to the principles laid down by Hon'ble Supreme Court in case of Ballimal Naval Kishore & Anr vs. CIT (supra) of DRP order. Accordingly, we direct the assessee to file all relevant details in support of the claim which would be verified by the AO in accordance with law. Accordingly, Ground nos. 15-17 raised by assessee for the assessment year 2013-14 stands allowed for statistical purposes. The facts for the assessment year 2015-16 are identical with assessment year 2013-14. Therefore the view taken for assessment year 2013-14 will apply mutatis mutandis to assessment year 2015-16 in respect of Grounds raised therein. Accordingly, Ground nos. 20-23 raised by assessee for the assessment year 2015-16 stands allowed for statistical purposes. 17. Ground No. 18 is raised by the assessee for non granting of credit for advance tax paid. The assessee is directed to furnish requisite evidences in respect of the advance tax paid. The Ld. AO is direc....
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....or employees on loan. The salary is determined in Indian Rupee value equivalent to fixed United States Dollars and Japanese Yens converted to Indian Rupee value at prevailing exchange rates as on 15 May, 2014. The Income tax on your salary is borne by the Company, The above salary is inclusive of grossed up income tax (one round grossup). The said salary will be subject to revision for variation in exchange rates of United States Dollars and Japanese Yens vis-Ã -vis Indian Rupee as on the dates of actual payments of salary. As you have requested the company to pay part of the salary in India and part of it in Japan for local use and family maintenance there, part of the salary as specified by you shall be paid in India after deducting grossed up Indian income tax on the total salary and the balance shall be paid in Japan. For payment of the balance salary in Japan the company shall request Toyota Boshoku Corporation, Japan, the parent company to make payment of the same in Japan on behalf of the company and the Company shall reimburse the same to Toyota Boshoku Corporation against its debit note as per the terms of agreement for employees on Lo....
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.... Family covers spouse, children and parents. Alternatively Company shall reimburse the expenses incurred by you for above other benefits. You shall follow the rules of the company during the term of your service and act according to the direction and control of the Managing Director. The above terms of your appointment shall be effective until further revision. Please sign a copy of this letter as proof of acceptance of the terms of your appointment. With Best Wishes and Warm Welcome, For Toyota Boshoku Automotive India Pvt. Ltd., node AKIHIRO NODA Managing Director Aut India Pvt Pvt Ltd та Toyola HARMONY WITH ENVIRONMENT AN ISO 14001 COMPANY CERTIFIED TRUE COPY 652 Document 3 To, Toyota Boshoku Automotive India Pvt. Ltd., 41, Bhimenahalli, M.N. Halli Post, Bidadi, Ramanagaram, BANGALORE-562 109. Dear Sirs, 11th June, 2014 Sub: Request for payment of my salary partly in India and partly in Japan I have been approved a Total Salary of INR. 8,59,500/- per month inclusive of grossed up taxes from 1st April, 2014. Of the above total salary I request the company to pay me INR. 1,25,000/- per mon....