TaxTMI 
TaxTMI 
2024 (9) TMI 77
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....w, 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. On the facts and circumstances of the case and in law, the Ld. AO/ DRP has erred in ignoring and not taking cognizance of documents subm....
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....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. and Advics North India Pvt. Ltd. ("Indian AEs/ AEs"), the assessee assigned some of its employees for a limited period as per the request raised by the AEs by way of Temporary Transfer Agreement(s) ("TTA") along with their re....
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....y 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 account of expat/ seconded employees cost reimbursement from the Indian AEs to be taxable as Fees for Technical Services ("FTS") as per Article 12 of the India-Japan DTAA as well as under the provisions of the Act to the returned income of Rs. 10,05,04,070/-. 3.6 The assessee filed objections before the Ld. DRP who vide....
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....ees 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 assessee in the form of reimbursement of salaries and other expenses of these employees Consequently, it squarely falls under the ambit of Article 12 of the DTAA and is to be categorized as FTS" 4.2.2 The AO has also relied on a number of judicial precedents in support of his conclusions. 4.2.3 The assessee has objected to the conclusion of the assessee that the reimbur....
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....tated 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, techniques, ability and experience to work for the India AEs and take forward the business of the Indian AEs". In all the AE, the president of the company is a seconded employee whose appraisal can't be done independently by the Indian AE. Their salary and other expenses are also paid by the assessee and not by the Indian AEs. Consequently, it squarely falls under the ambit of Article 12 of the DTAA and is to be categorized as FTS. ....
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....A, 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 assessee is that of an employee employer relationship. However, there is no independent employment agreement between the seconded employee and the Indian AEs. Assignment/secondment of the transferred employees to the Indian AEs and control over them is exercised by the assessee. As rightly observed by the AO in page 8 of his order, the seconded personnel cannot be said to be working under direct supervision, control and management of Indian AE, instead they are in Ind....
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.... 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 the Act."; The issue involved in the instant case is identical to the issue decided by the ITAT Chennai in the case of Panasonic Corporation where technical/managerial services were provided by a foreign company to the Indian AEs through senior executives working in technical and managerial capacities. As observed by the AO, these seconded employees functioned under substantial control of the assessee (ADVICS) and therefore, in effect provided services to the domestic AEs on behalf of the assessee compan....
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....nnot 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 its employment policies and that the appraisal of the President of Indian AEs is also done by the Board of the Indian AEs in accordance with the group policy. 6.5 Referring to the relevant clauses of the TTA and MOU, the Ld. AR submitted that it is the responsibility of the Indian AEs to pay the entire salaries of the employees /expats which have been duly paid after deducting the TDS thereon. The assessee has paid certain portion of the salary to the expats in Japan only for administrative convenience, for and on beh....
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....vice, 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 present case, the receipt in dispute is in the nature of salary reimbursements by the Indian companies on which they have duly deducted tax under section 192 of the Act for the component paid to the expats in India as well as abroad remitted for administrative convenience only. The Ld. AR submitted a chart outlining the factual disparity between the facts of Northern Operation Systems Pvt. Ltd.'s case (supra) and assessee's case by giving reference to the relevant clauses of the TTA and MOU, in response to which the Ld. DR offered ....
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.... 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 supervision of the Indian AEs and that during the entire period of secondment, the AE are the real and economic employer of these expats. Article 2 of the respective MOU entered into with both the Indian AEs which is reproduced below clearly states that the expats would work as per the instructions and orders of the Indian AEs (pages 18 to 24 of the Paper Book) refers:- "Article 2. PURPOSE OF TEMPORARY TRANSFER .........The word "Temporary Transfer shall mean, in accordance herewith, (1) for ADVICS and the assigned employee, in principle....
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....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 which are well substantiated by reference to the relevant clause(s) of TTA and MOU: S. No. Facts of Centrica India Offshore (P) Ltd. Facts of Advics Co., Ltd. (assessee) Relevant Clauses of TTA and MOU 1. The seconded employees were not specifically taken into employment by the Indian Company. Seconded employees taken into employment by the Indian AEs. Article 1 of TTA (Page 5 of Paper Book read with Article 1 and Article 2 of MOU (Page18 of Paper Book). 2. The obligation to pay the salary was of Foreign company. Indian Company was merely reimbursing the salary paid b....
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....y 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 agreement were under the employment of the assessee and therefore it was not an employment or recruitment by BIAL. Seconded employees taken into employment by the Indian AEs. The expatriate employees work exclusively for the Indian AEs and are under their direct control. Entire Salary and other emoluments of the seconded employees paid by Flughafen AG. The Indian AEs are obligated/solely responsible for payment all the 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. F....
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....TA 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.) Ltd. [2020] 122 taxmann.com 174 (Karnataka) wherein in the similar fact pattern as that of the assessee, the Hon'ble High Court on the basis of the following factual observations, held that the secondees were employees of the taxpayer i.e. the Indian entity and not of the foreign company: * Secondees were to work at places as instructed by the taxpayer; * Secondees were to function under the control, direction and supervision of the taxpayer, in accordance with the policies, rules and guidelines applicable to other employees of the taxpayer; and * Secondees in their capacity as employees assisted the functioning of the taxpayer. (ii) M/s Faurecia Automotive Holding vs. DCIT (ITA No....
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....ok 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 amongst included others salary, employee benefits etc., paid by the Foreign Company. (refer para 57 and Article III of the Secondment Agreement at pages 32 & 20 of the Annexures respectively). The Indian AEs are obligated responsible for payment of remuneration viz, salary and wages, benefits to the expats etc. which is clearly spelt out in the TTAs and in the corresponding MOUs Article 10 of the TTA along with relevant appendix (refer page 7 & 10 of Paper Book) read with Article 2 of the MOU (refer page 20 of Paper Book) The assessee's comments are completely misleading. There is no difference between the 2 cases as is evident from the conjoint reading of Article 1 of MOU of the assessee and Para 53 of the decision of Hon'ble Supreme Court clearly....
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....ns 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 of the secondment Agreement and para 57 at pages 19, 20 and 32 of the Annexures). The TTAs along with their corresponding MOUs clearly demonstrate that the seconded employees hall work "exclusively" for the Indian AEs in the conduct of its business operations. Reference is made to the visa letter issued to the seconded employees from where it is evident that the expats were coming to India on an employment visa and that the same was being sponsored by the respective India AEs thus evidencing that the Indian AEs were the real employers of the expats during the secondment period. As evident from the Visa Letters at page 30 to 33 of Paper Book. The assessee made completely incorrect and misleading statement. Article 1 Secondment of agreement in NOS case clearly mentions: "The em....
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....nt 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 relation to business of foreign entity i.e. NTMS. (refer para 57 at page 32 of the Annexures). The seconded employees have been deployed for furthering the objective of the business of Indian AEs. Article 1 of the MOU (refer page 20 of Paper Book). Completely misleading submission. Investment in Indian AEs have been made by the assessee and during the course of assessment proceedings, the assessee submitted Advics Japan is a separate legal entity and the investment in the Indian AEs are made by the assessee in its own capacity, as part of its own business and not on behalf of any other person. (submissions dated February 18, 2021, Paper Book Page 33) 16.1 From the perusal of the above table, we are of the considered view that the reliance placed by the Revenue on Northern Operating Systems (P.) Ltd.'s case (supra) to substantiat....
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....ot 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 observation made by Ld. DRP and the points as summarized in the said charts and on examination by us Independently, we are of the considered view that the facts and issues involved in the cases Centrica and Northern Operating Systems (supra) were altogether different and distinct from the facts and issues involved in the Assessee's case, as the Hon'ble Apex Court, in those cases dealt with different facts, issues and Acts and therefore dictum laid down in those case, is n applicable to the instant case." 16.2 The various courts/ tribunals have considered the applicability of the Northern Operating Systems (P.) Ltd.'s case (supra) in the similar fact pattern to that of the assessee in the present case and decided the issue in favour of the assessee in those cases holding the same to be inapplicable. The following decisions may be referred: (i) The ....