AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2024 (8) TMI 1568
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....nel ("Ld. DRP") in the case of Appellant for AY 2021-22, assessing the income of the Appellant for the relevant assessment year at INR 49,70,21,380 as against the returned income of INR 67,74,750 is bad in law and liable to be quashed. Ground 1.2: That on the facts and in the circumstances of the case and in law, the impugned order passed by Ld. AO/ DRP is contrary to correct reading and interpretation of relevant statutory provisions and therefore, the impugned order is bad in law and liable to be set aside. Grounds challenging addition on account of reimbursement of secondment charges Ground 2.1: That on the facts and in the circumstances of the case and in law, the Ld. AO/ DRP has erred in treating mere cost to cost reimbursements on account of secondment of employees amounting to INR 18,28,95,723 to be Fees for Technical Services ("FTS") as defined under Article 12 of India-USA Double Tax Avoidance Agreement ("DTAA") where such payments were made by Appellant for and on behalf of Indian Entities which is directly contrary to the recent judgment of the Honorable Delhi ITAT in Appellant's own case dated 20 June 2023. A copy of the said judgment is being....
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.... in law, the Ld. A.O / DRP completely failed to appreciate that the very same amounts could not in law be subjected to tax twice, firstly in the hands of the seconded employees working in India and, secondly, again in the hands of the Appellant. Ground 2.7: That on the facts and in the circumstances of the case and in law, the Ld. A.O / DRP also failed to appreciate that, similarly, the same amounts could not be subjected twice to deduction of tax at source. Grounds challenging addition on account of income from professional services governed by Article 15 of the DTAA as "Fees for Included Services" under Article 12 of the DTAA Ground 3.1: That on the facts and in the circumstances of the case and in law, the Ld. AO / DRP have completely failed to appreciate the crucial factor that Article 15 of the DTAA is not confined to Professional Services rendered in India. The Ld. AO/ DRP failed to appreciate that Article 15 squarely covers Professional Services rendered from abroad to entities located in India. Hence, the interpretation placed by the Ld. AO / DRP on Article 15 of the DTAA constitutes a complete rewriting of Article 15 of the DTAA, which is illegal....
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.... DTAA cannot possibly be considered to comply with "make available" requirement of Article 12 of the DTAA. In any event, as already stated, the Ld. AO/ DRP also failed to appreciate that this issue is irrelevant and immaterial as no income with respect to training service(s) was earned by the Appellant under the specified contract in the subject year. Ground 3.4: That on the facts and in the circumstances of the case and in law, the Ld. AO / DRP has erred in applying the facts of one agreement having training services as part of the overall scope of work to all other independent agreements without appreciating that the services under other agreements are different and findings related to one agreement cannot be applied to all agreements unanimously. Ground 3.5: Without prejudice to any of the above arguments, on the facts and in the circumstances of the case and in law, even assuming, without conceding, that the taxability of the services performed by EY US is not governed by Article 15 of the DTAA, the Ld. AO / DRP failed to appreciate that in any event be taxed in India because it is undisputed position that the Appellant does not have a Permanent Establishment ....
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....tory notices were issued and served upon the assessee. 8. During the course of scrutiny assessment proceedings, inter alia, the Assessing Officer issued a show cause notice to the assessee requiring the assessee to show cause as to why the payments received by the assessee on account seconded employees amounting to Rs. 4,50,99,38,561/- should not be taxed as FTS/Independent Personal Services [IPS] as per the treaty provisions. 9. The assessee filed detailed reply alongwith documentary evidences pursuant to which, the Assessing Officer framed draft assessment proceedings proposing to make the following valuations to the returned income of the assessee: Total income as declared by the assessee : Rs. 32,73,620/- Add: Secondment cost taxable as FTS Under the provision of DTAA : Rs. 50,99,38,561/- Total proposed assessed income : Rs. 51,32,12,181/- 10. The assessee raised objections before the DRP but without any success. 11. Before us, the ld. counsel for the assessee vehemently stated that the personnel, after receiving approval from EY India member firms, were seconded by the assessee to EY India member firms and were release....
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....n thoughtful consideration to the rival contentions and have carefully perused the order of the authorities below. Since the ld. DR has placed strong reliance on the judgment of the Hon'ble Supreme Court [supra], we would like to address it first. 19. At the very outset, we have to state that the judgment has to be read in the context in which it is delivered and in the words of the Hon'ble Supreme Court, the judgment was delivered for: "48. The task of this court, therefore is to, upon an overall reading of the materials presented by the parties, discern the true nature of the relationship between the seconded employees and the assessee, and the nature of the service provided - in that context - by the overseas group company to the assessee." 20. The Hon'ble Supreme Court, in the above context, observed as under: "33. The issue which this court has to decide is whether the overseas group company or companies, with whom the assessee has entered into agreements, 24 provide it manpower services, for the discharge of its functions through seconded employees. 34. The contemporary global economy has witnessed rapid cross border ar....
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....nded to the assessee, for the duration of their deputation or secondment. Furthermore, in view of the above discussion, the invocation of the extended period of limitation in both cases, by the revenue is not tenable. 66. In light of the above, the revenue's appeals succeed in part; the assessee is liable to pay service tax for the periods spelt out in the SCNs. However, the invocation of the extended period of limitation, in this court's opinion, was unjustified and unreasonable. Resultantly, the assessee is held liable to discharge its service tax liability for the normal period or periods, covered by the four SCNs issued to it. The consequential demands therefore, shall be recovered from the assessee. 67. The impugned common order of the CESTAT is accordingly set aside. The commissioner's orders in original are accordingly restored, except to the extent they seek to recover amounts for the extended period of limitation. The demand against the assessee, for the two separate periods, shall now be modified, excluding any liability for the extended period of limitation." 22. A perusal of the judgment of the Hon'ble Supreme Court [supra] shows that it was in the context ....
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....yer is and determining the nature of payment by itself would have no conclusive bearing on whether the payment made is for 'FIS' in light of the further requirement of "make available." 24. The deputation agreement between the assessee and EY India member firms are exhibited at pages 19 to 43 of the Paper Book. It would be pertinent to refer to certain relevant clauses in the agreement as under: "Assignment' shall mean release of personnel by EYUS to and who is to be in employment by EYGDS India for the period of employment under the terms and conditions agreed by EYGDS and employee." 25. Under the head "General Terms and Conditions of Secondment": "3.1 During the Period of Assignment, the International Assignees shall function solely under the control, direction and supervision of EY LLP INDIA and in accordance with all rules, regulations, policies, guidelines and other practices, generally applicable to the employees of EY LLP INDIA. International Assignees shall work exclusively for EY LLP INDIA and shall be solely responsible to EY LLP INDIA for their work during the Period of Assignment. EY LLP INDIA shall decide the nature of work o....
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....es and this fact alone clearly distinguishes the facts of the decision in the case of Centrica India Offshore Ltd [supra]. 32. The co-ordinate bench in the case of AT & T Communication Services India Pvt. Ltd. [supra], distinguishing the decision of the Hon'ble Delhi High Court in the case of Centrica India Offshore Pvt. Ltd. [supra], has held as under: "30. The DRP has affirmed the decision of the Ld. AO by holding that the assessee has deducted withholding tax on 21 substantial payments and yet argued that the tax is not deductible u/s 195 of the act and provision of section 40(a)(i) cannot be invoked in the case of said payment. 31. The DRP has affirmed the decision of the AO by holding that the assessee has deducted withholding tax on substantial payments and yet argued that the tax is not deductible u/s 195 of the act and provision of section 40(a)(i) cannot be invoked in the case of said payment. 32. The Special Auditors in their Audit Report have worked out particulars of payments in respect of which no TDS was deducted u/s 40(a)(ia) of the Act. Consequently, an amount of Rs. 54,06,328/- was not to be allowed as expenditure." ....
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.... the agents for reimbursement. Not only that, the assessee have been submitted before the Transfer Pricing Officer that these payments were reimbursement in the hands of the assessee and the reimbursement was accepted as such at arm's length. Once the character of the payment is found to be in the nature of reimbursement of the expenses, it cannot be income chargeable to tax." 14. A Division Bench of this Court in Commissioner of Income Tax, Delhi II vs. Karl Storz Endoscopy India (P) Ltd., ITA No. 13/2008 decided on 13th September, 2010 has held as under:- 1. This appeal pertains to the Assessment Year 2001-02. The issue relates to the treatment which is to be given to the amount of Rs. 6,59,416 paid by the assessee to its parent foreign company, i.e., Karl Storz Vertriebs GMBH & Company. The assessee had claimed that he parent company had deputed one of the employees, viz., Mr. Peter Laser to the Indian Company/assessee and the aforesaid amount represented reimbursement of the salary, which was payable to Mr. Peter Laser. The Assessing Officer (AO), however, was of the opinion that since no agreement between the assessee and the parent company was prod....
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....t, the payment cannot be treated as fees for technical service. Explanation 2 to Section 9(1)(vii) gives the meaning of the expression "fees for technical services" as per which, inter alia, any consideration which would be income of the recipient chargeable under the head "salaries", then such payment will not be considered as fees for technical services. Thus, even as per the provisions of the Act, the payment in question cannot be treated as fees for technical services. Moreover, since it is paid as salary to Mr. Laser, tax has been deducted under Section 192 of the Act." 4. Learned counsel also submitted that thereafter in the Assessment Year 1990-00 as well as 2000-01, the amounts reimbursed in identical manner were treated as "salary" to Mr. Laser. He further states that no appeal was filed against the aforesaid order of the Tribunal by the Revenue." 15. Consequently, this Court is of the view that the issues of 'receivables' as well as 'disallowance' under Section 40(a)(ia) of the Act are essentially questions of fact, which give rise to no substantial questions of law especially when the findings of the ITAT are not perverse." 29. Considering the ....
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.... in agreement with the AO's observation that the quantum of receipts from Indian clients for services rendered in Indie which do not strictly qualify as professional services, cannot be claimed as exempt in terms Article 15 of India US DTAA. In the instant case, after examining the breakup of all the services claimed amp under Article 15, the AO has found that a sum of Ra. 29,89,50,386/- does not pertain to professional services and therefore, the criteria of exemption under Article 25 is not satisfied. 4.3.6 Nevertheless observed by the AO in para 59 as well as in para 5.15, the receipts for sessions, other than professional services, i.e. Rs. 29,89,50,386/- are in respect of the services which are technical as well as consultancy in nature. Since, the services provided through other professionals (not strictly qualifying to be 'professional services' within the meaning of Article 15(2)), are technical in nature, Article 12 of India US DTAA, is attracted in the instant case. Further as evidenced by the service agreement, these services also include rendering training to the customers of the assesses which provides enduring benefits to the sections of the serv....
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....ceipt under Article 7 of DTAA and since the assessee has no PE in India, the business receipts would be exempt. 11. Arguing further, the ld. AR submitted that even the Section 194-J of the Income Tax Act, 1961 refers to professional or technical services and hence the technical services provider shall be considered as professional. The ld. AR argued that Article 15(2) gives an inclusive definition and therefore services of other functions also qualifies to be a professional service. The ld. AR has also referred to CBDT notification dated 12.01.1977, dated 04.05.2001 and dated 21.08.2008 which has expanded the scope of professional services with regard to Section 194-J and argued that the scope of term of "professional services" is much more wider than the Article 15 in Section 194-J and hence the services rendered by the assessee shall be considered to be the nature of professional services but not in the nature of inclusive services or technical services. The crux of the argument of ld. AR was that the professional services would stand on a wider platform than consultancy and technical service and the work executed by the assessee company was by qualified professionals and henc....
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..... Heard the arguments of both the parties and perused the material available on record. 15. We have gone through the two volumes of paper book filed by the assessee containing 222 pages. 16. The statement of work, scope of services as per the agreement is examined. It refers to the assessee was approached by the client to contribute with the implementation of software for meeting the business requirements which has been evaluated by the party to the agreement for its client. While doing so, the assessee will have responsibility of oversight, delivery and training services pertaining to organizational change management. The assessee shall provide resources for project management, organizational change management and training, business work streaming, technical infrastructure and data conversion. The assessee was supposed to provide input and feedback to the clients with regard to the performance of the services. As per the details given at paper book page 84 to 91, the nature of the services rendered consists of expatriate tax services, TP documentation, tax services & advisory, talent management & leadership development, merger & amalgamation advisory services, HR performance....
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....ded further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such sum by way of fees for professional services or technical services is credited or paid, shall be liable to deduct income-tax under this section : Provided also that no individual or a Hindu undivided family referred to in the second proviso shall be liable to deduct income-tax on the sum by way of fees for professional services in case such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family: Provided also that the provisions of this section shall have effect, as if for the words "ten per cent", the words "two per cent" had been substituted in the case of a payee, engaged only in the business of operation of call centre. (2) [***] (3) [***] Explanation.- For the purposes of this section,- (a) "professional services" means services rendered by a pe....
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....d in "sport" which includes sport persons, coach, referee, physicians, commentator and sport columnist. 22. Further, the provisions of relevant Articles of the DTAA are examined. 23. Article 12(4)(b) reads as under: "ARTICLE 12 - Royalties and fees for included services - 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in subparagraph (b) of this paragraph] : (i) during the first five taxable years for which this Convention has effect, (a) 15 per cent of the gross amount of the royalties or fees for included services as def....
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.... 5. Notwithstanding paragraph 4, "fees for included services" does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ; (c) for teaching in or by educational institutions ; (d) for services for the personal use of the individual or individuals making the payments ; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services). 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situate....
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....of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State : (a) if such person has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or (b) if the person's stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year. 2. The term "professional services" includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants." 25. We have also examined the qualifications of the engagement partners and principal responsible for engagement, we find that these consultants are having qualifications in business management, business administration, masters of science and doctorate in economics o....
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.... Article 15 (Independent Personal Services). 28. To conclude, the case of the assessee has been covered by the benefits of provisions of Article 12(4) (b) of DTAA as the "make available" criteria is not satisfied. The appeal of the assessee on this ground is allowed. 29. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 07/08/2024. ============= Document 1 I'mst & Young USO1 LANH468956 07-11-2020 24.013 17.54.393 Obtain forensic image of the identified computer system and create a backup copies and ship the images to EY india Sonbolian. Jay Master of Science - Criminal Justice. Bachelor of Science - Computer Technology Exhibit 119 Exhibit % Professional services of engineer V.r . Energy 06-08-2/1241 13.957 10,19,714 Transfer Pricing documentation Coke, Rebecca Phi> in Siconomics Exhibit 118 Exhibit 7 Independent activities of similar character i.c. professional Services 05-08-2020 7.073 5.16.753 Preparation of individual tax returns Beck. Randy BA Finance, MSA Business Administration Exhibit 117 Na Independent activities of similar character i.c. professional services 3,000 2,19.180 Review of Transfer Pricing....