TaxTMI 
TaxTMI 
2024 (9) TMI 77
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....965 ('the Act') pursuant to the directions of the Ld. Dispute Resolution Panel ('Ld. DRP') is bad in law, unlawful and unjust. 2. On the facts and circumstances of the case and in law, the Ld. AO has erred in determining the total income of the Appellant at INR 12.75.31,101 as against the returned income of INR 10,05,04,070 offered to tax by the Appellant. Taxability of employee cost reimbursements as Fee for Technical Services ('FTS) amounting to INR 2,70,27,031 3. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP was not justified in holding that the employee cost reimbursements amounting to INR 2,70,27,031 by the Indian companies to the Appellant is taxable as FTS as per the provisions of section 9(1)(vii) of the Act as well as Article 12 of the India-Japan Double Taxation Avoidance Agreement ('DTAA'). 3.1. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating that there exists an employer-employee relationship between the expatriates and the Indian Associated Enterprises (AEs) and thus, no service was rendered by the Appellant to the Indian AEs. 3.2....
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.... of the Act. Initiation of penalty proceedings 6. On the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under Section 270A of the Act against the Appellant on account of the addition made in the final assessment order. All the above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case." 3. Briefly stated, the assessee is a Japanese company engaged in the business of engineering, manufacturing and sale of brake system and components of automobile companies. The assessee is a tax resident of Japan. It has opted to be governed by the provisions of the Double Taxation Avoidance Agreement between India and Japan ("India-Japan DTAA"), being more beneficial to it. In AY 2017-18, for the effective and efficient conduct of the business of its Indian Associated Enterprises, namely Advics South India Pvt. Ltd. a....
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.... - the assessee is providing service to Indian AEs through the expats; - the assessee is under an obligation for paying salary to the expats; - the expats are providing key management/consultancy/technical services to the Indian AEs; - in all the AEs the President of the company is a seconded employee whose appraisal cannot be done independently by the Indian AEs; - the expat employee is not working under the direct supervision, control and management of Indian AEs; and - the assessee has failed to provide the employment agreement. 3.4 The Ld. AO relied upon various decisions in support of his contention that the employee reimbursement cost received by the assessee is taxable as FTS including, inter-alia the decision of the jurisdictional Hon'ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd. vs. CIT [2014] 364 ITR 336 drawing parity between the facts of that case and the assessee in the present case. 3.5 The Ld. AO vide his draft assessment order dated 10.06.2021 passed under section 143(3) read with section 144C of the Act proposed to make an addition of Rs. 2,70,27,031/- received by the assessee on accou....
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....s not even independently appraising 2 out of 3 employees seconded. At this stage, it is important to analyze the provisions of India Japan DTAA which deal with the Managerial/Technical/Consultancy services. 8. Article 12 of the DTAA between India and Japan Article 12 of the DTAA between India and Japan states that: "The term 'fees for technical services' as used in this article means payments of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel." Hence the Article 12 of the DTAA between India and Japan categorically states that the FTS includes payment made for the consideration of managerial, technical or consultancy nature including the provisions of services of technical or other personnel. In the case under scrutiny, the assessee has seconded key management personnel to its Indian AE and the AE is making payment for the services of these employees to the as....
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.... any element of income. It was remanded to the AO for comments. After examination of the additional evidences the AO has commented in para 4.2 to para 6 of the remand report as under: "4. Hence it is clear that the assessee has seconded its key employees having requisite knowledge, experience and expertise to provide their services at highest levels to its Indian AEs, as per their requirement and the salary/other costs (as stated by the assessee company) of these personnel incurred by the assessee is reimbursed by the Indian AEs to the assessee company in the guise of salary/other cost. Since, the seconded key employees are sent for temporary purpose to deliver their expertise in the concerned filed. Further, as per Article 4.1 and 6.1 it is also noted that the ADVICS has the ultimate command on the seconded employee. During the course of assessment proceeding it is noticed that the seconded employees are providing key management/consultancy/technical services to the Indian company and these facts are confirmed by the assessee vide submission dated 31.03.2021 that "the employees were seconded to India to enable the Indian AEs to have employees having special knowledge, tec....
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....than payments to an employee of a person making payments and to any individual for independent personal services referred to in article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel. 4.2.6 The assessee has submitted that the key personnel were transferred to the Indian AEs as Per a Temporary Transfer Agreement (TTA). As per Article 2 of the TTA, the employees of the assessee (ADVICS) were seconded to the Indian AEs to have employees with special knowledge, techniques, ability and experience. Article 1 provides that the transferred/seconded employee will continue to retain his position as ADVICS employee. Articles 4.1 and 6.1 further amplify the position that the assessee, ADVICS has the ultimate command over the seconded employees. It is further noticed that the temporary transfer of the ADVICS employee to Indian AEs is as per TTA between the Indian AEs and the assessee and not under any independent agreement between the expatriate employees and the AEs. The assessee has argued that the status of the seconded employee vis-à-vis the Indian AEs of the assesse....
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....a Indian Offshore (P) Ltd. [2014] 41 taxamnn.com 300 (Delhi). 4.2.8 The Hon'ble ITAT Chennai dealing with similar facts in the case of Panasonic Corporation upheld this view by observing that the rendering of highly technical services through seconded employees of a foreign company to an Indian company and reimbursement of salary cost of such deputed employees to the foreign company falls within the ambit of FTS. Chennai ITAT ruled that payment received by a foreign company from its Indian subsidiary towards salary cost recharge of employees deputed in India, constitutes FTS for AY 2013-14 and not mere reimbursements. The Hon'ble ITAT noted that the personnel seconded to Indian subsidiary were all in senior Technical / Managerial positions and the ultimate responsibility and the direction, control and supervision of the personnel vested with Panasonic Corporation (resident of Japan) and Ruled that "Since the employees deputed by the assessee are high level technical executives and they are rendering highly technical services to Panasonic India, the ( payments for such services would fall within the ambit of FIS as defined in Explanation 2 to Section 9(1)(vii) of th....
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.... set by the group are followed by the Indian AEs and hence the allegation of the Ld. AO that the expats are providing key management / consultancy / technical services are fallacious. 6.3 He submitted that there is no service element involved in the secondment of expats. The assessee has just transferred the expats in order to support the Indian AEs. The impugned payments are in the nature of salary and hence cannot be taxed as FTS. He further submitted that the payment being pure reimbursement of salary costs cannot be taxed as FTS. There is no mark-up or fee charged by the assessee from the Indian AEs. There is no element of income as these payments are merely reimbursement of actual salary costs. He relied upon several favourable rulings in support thereof including the decision of the Hon'ble Delhi Tribunal in the case of Ernst & Young U.S. LLP vs. ACIT [2023] 153 taxmann.com 95 (Delhi-Trib) and Yamazen Machinery and Tools India (P.) Ltd. vs. ACIT [2023] 14 taxmann.com 96 (Delhi - Trib.) 6.4 He also submitted that as per the terms of the TTA and corresponding MOU, the Indian AEs have a right to undertake performance appraisal of the seconded employees in accordance with i....
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.... the case of the assessee is squarely covered by the decision of the Hon'ble Supreme Court rendered in the context of service tax dated 19.05.2022 in Civil Appeal No. 2289-2293 of 2021 in the case of C.C., C.E & S.T-Bangalore vs. M/s. Northern Operating Systems Pvt. Ltd. reported in [2022] 61 GSTL 129 and placed a copy of the said decision on record, wherein the Hon'ble Supreme Court held that the assessee was the service recipient of the overseas group company concerned, which can be said to have provided manpower supply service, as a taxable service. Thus, the impugned issue has been conclusively decided by the Hon'ble Apex Court by holding employees secondment activity as provision of service. He submitted that facts of the present case are absolutely identical with the facts of the case in Northern Operation Systems Pvt. Ltd.'s case (supra). 8. In rebuttal, the Ld. AR submitted that Northern Operating Systems Pvt. Ltd.'s case (supra) is distinguishable on facts as well as in law due to the reasons that - (i) it deals with the levy of service tax on manpower services provided by the foreign company and thus has no application on facts of the present case; and (ii) in the pres....
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....in Japan. 10.1 The Ld. AO/ DRP has observed that services in the nature of managerial and technical nature were provided by the assessee to the Indian AEs through the expats and accordingly the impugned receipts in the nature of reimbursement towards salary cost of expats are FTS. Although there is no specific reference in TTA/ MOU, it has always been the case of the assessee that the expats were seconded to the AEs to carry on routine business activities of Indian AEs as their employees. No material/ evidence have been brought on record by the Revenue to substantiate its claim that the assessee rendered any managerial/ consultancy/ technical services to the Indian AEs through the expats in furtherance of its business in India. Further, the payment made by the Indian AEs is a pure reimbursement of salary costs of expats which has been cross charged by raising debit notes on the Indian AEs. It cannot be, in our view, regarded as FTS in the hands of the assessee as the same is taxable as salary in the hands of the expatriate employees. 10.2 From the perusal of the TTA along with their respective MOUs, it can be inferred that the expats worked under the direct control and superv....
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....28 of the Paper Book refer). Accordingly, the Indian AEs have duly deducted tax under section 192 of the Act and deposited the same into the Government account for the salaries paid to the expats in India as well as abroad (remitted solely for administrative convenience) The expats have offered the entire salary income to tax in their respective returns of income filed under the relevant provisions of the Act which is supported by Form 16 (TDS certificates forming part of the Paper Book) issued to the expats by their respective employers i.e. Indian AEs. 11. The Revenue has heavily relied upon two cases, namely Centrica India Offshore (P) Ltd. (supra) and Northern Operating Systems Pvt. Ltd. (supra) to substantiate its claim of taxability of employee reimbursement cost as FTS. On the contrary, the Ld. DR cited many decisions wherein the courts/ tribunals have in the identical set of facts held these cases (supra) to be inapplicable. 12. So far as the applicability of the jurisdictional Hon'ble Delhi High Court's decision in the case of Centrica India Offshore (P.) Ltd. (supra), in our considered view, the same would not apply to the assessee's case due to following reasons wh....
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.... from that of the assessee. Further the employees seconded by the assessee were not taking forward business of the Appellant in India but were effectively working under the control and supervision of AEs. No specific reference in TTA/ MOU. 7. Employees were seconded for initial period to operationalize the Indian company. Employees were seconded to the Indian entities to carry on business activities as their employee and which continued even after the initial period to operationalize the AEs. 13. The other cases relied by the Ld. AO/ DRP are also distinguishable on facts which can be seen from the table below as submitted by the Ld. AR: Case Facts Assessee's Facts Flughafen Zurich AG (2017) 79 Taxmann.com - ITAT Bangalore Flughafen Zurich AG entered entered into an agreement with Bangalore International Airport Ltd. ('BIAL'), inter alia, Expatriate Remuneration Reimbursement Agreement for secondment of skilled personnel. Thus, agreement was with a third party for providing technical/managerial services and the expatriate employees were not employees of BIAL but continued to be employees of Flighafen AG. Secondees in this case at the time of agreem....
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....ely a case of secondment as evident from the various documents submitted by the assessee. The secondees are assigned by the Foreign Entity and there is no separate employment contract between the Indian entity and the secondees. Seconded employees taken into employment by the Indian AEs by way of a separate employment contract between the AEs and the expats. The entire salary and other direct costs of the assigned personnel is paid by the foreign entity which is subsequently reimbursed by the Indian entity. The Indian AEs are obligated/solely responsible for payment of all costs viz. salary and wages etc. and benefits to the expats which is clearly spelt out in the TTA and in the respective MOU. All compensation and benefits accruing to employees are in accordance with applicable rules of the AEs. 14. We find that the decisions cited by the Ld. AR are more applicable to the facts of the present case wherein the courts/ tribunals have distinguished Centrica India Offshore (P.) Ltd.'s case (supra) in the identical fact scenario holding it to be inapplicable. Reference may be made to the following decisions: (i) DIT(IT) vs. Abbey Business Services India (P.) Lt....
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....s as under: S. No. Facts of Northern Operating Systems Pvt. Ltd. Facts of Advics Japan Co. (assessee) Relevant Clauses of TTA and MOU Comments of Ld. DR 1. The seconded employees/ expats were not specifically taken into employment by the Indian company i.e, NOS as the terms of their employment even during the period of secondment, was in accordance with the policy of the overseas entity i.e., Northern Trust Management Services Ltd. ('NTMS') (refer para 57 at page 32 of the Annexures). Seconded employees were entirely taken into employment by the Indian AEs i.e., Advics South Indian Private Ltd. ('ADSSI') and Advics North India Private Ltd. ('ADSNI') Articles 1 & 5 of the TTAs [refer page 5 & 6 of the Paper Book read with Articles 1 & 2 of the MOU The submissions filed are completely misleading in view of express language of article 1 of TTA which clearing mentions...while retaining his position as an Advics employee. 2. The obligation to pay the remuneration which inter alia, includes the salary, employee benefits etc., was of the Foreign Company i.e., NTMS. The Indian Company i.e., NOS was reimbursing merely the remuneration which amongs....
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....ntered into with Indian AE and payments are as per "expense division table" which contain various items to be paid in Japan and to be paid in India and includes various items viz Overseas salary and Bonus to be paid in JPY only and in Japan. 4. In addition to the reimbursements made by the Indian entity, the Secondment Agreement further requires for the AE to pay an administrative cost (@1% of the actual cost) to the foreign entity for the payroll services rendered by the foreign entity i.e., NTMS. (refer Article III of the Secondment Agreement at page 20 of the Annexures). No such administrative cost is required to be paid by the AEs Not applicable The statements made are misleading. Identical terms are provided in Article 10.3 of TTA which also mentions of Article 10.4 which is not stated in the TTA enclosed by the assessee. 5. The seconded employees were not specifically released from employment of the Foreign Company during the period of secondment as they were still on the payroll of NTMS (i.e., the foreign entity) and were entirely remunerated (included but not limited to salary and employees benefits) by the Foreign entity (refer Articles I & II....
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....ara 52 at page 31 of the Annexures). Employees were seconded to the Indian AEs to carry on routine business activity of Indian AEs as its employee. No specific reference in TTAs and MOUs Completely incorrect statement made Article 2 of TTA reads as under; "Purpose of Temporary transfer, ADVICS shall send to ADSNI an ADVICS employee with special knowledge, techniques, ability and experience to work for ADSNI." 8. Foreign entity i.e. NTMS to provide replacement of employees rejected e by the Indian entity (refer Articles II(E) of Secondment Agreement at page 20 of the Annexures). The Indian AE has right to terminate the employment of the seconded employees and Advics Japan i.e, assessee, was not under any obligation to replace such employees. Article 4 of the TTA (refer page 5 of Paper Book). Replacement or non replacement of the terminated/ rejected employee does not alter the nature of transaction in any manner. Even in case of NOS, the replacement is only need based which is evident from the words, "to request from NTMS, the replacement of any employee who in the opinion of NOS are not qualified...... 9. The deployment of seconded employee is in relat....
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....ue quo applicability of Centrica and Northern decisions (supra) to the instant case. It is well-settled that the interpretation of any expression used in the context of any statute is not automatically to be imported while interpreting the like expression of other statutes. The expression used in any statute has to be interpreted in the light of its own context and object. The meaning assigned to a particular word in a particular statute cannot be imported to a word used in a different statute. Taxation depends upon the language of the charging section and what is brought to tax within the four corners of the charging section. Therefore, one should be careful and cautious when applying the ratio of judgments relating to one tax enactment as a precedent in a case relating to another fax enactment. This rule of caution is important and should not be overlooked, more so when the language of the enactment and the object and purpose of the enactment are different. It is also well settled that ration decidendi of a case from one enactment, cannot be applied to an altogether different legislation. 22.8 From the facts and circumstances as demonstrated by the parties, the observati....