2023 (3) TMI 89 - AT - Income Tax

Income deemed to accrue or arise in India - FTS or FIS - taxing the reimbursements of salaries of expat employees made by Google India Pvt. Ltd. (GPIL) to the assessee - characterising such reimbursements as fees for technical services (FTS) as per Explanation 2 to Section 9(1)(vii) of the Act as well as Fees for Included services (FIS) as per Article 12(4) of the DTAA between India and USA (India-US Tax Treaty) - HELD THAT - In light of the judgement of Hon'ble Jurisdictional High Court in the case Flipkart Internet (P.) Ltd. 2022 (6) TMI 1251 - KARNATAKA HIGH COURT which was followed by Bangalore Tribunal in the case Biesse Manufacturing Company (P.) Ltd. 2022 (11) TMI 186 - ITAT BANGALORE we hold that the amounts paid by GIPL to the assessee with reference to seconded employees does not come within the FTS or FIS under the Act or under DTAA.

Summary

Issues Involved:
1. Taxability of reimbursements of salaries of expatriate employees.
2. Characterization of such reimbursements as "fees for technical services" (FTS) under Section 9(1)(vii) of the Income Tax Act, 1961, and "Fees for Included Services" (FIS) under Article 12(4) of the India-US Tax Treaty.

Detailed Analysis:

1. Taxability of Reimbursements of Salaries of Expatriate Employees:
The primary issue argued was whether the reimbursements of salaries made by Google India Pvt. Ltd. (GIPL) to the assessee, Google LLC, for seconded employees should be taxed as fees for technical services (FTS) under Section 9(1)(vii) of the Income Tax Act and as Fees for Included Services (FIS) under Article 12(4) of the India-US Tax Treaty. The Assessing Officer (AO) concluded that these payments were for technical and managerial services provided by the seconded employees, thus falling under FTS and FIS. However, the Tribunal found that the seconded employees worked solely under the control and supervision of GIPL, and the payments were merely reimbursements of salaries without any profit element. The Tribunal relied on the judgment of the Karnataka High Court in Flipkart Internet (P.) Ltd. and similar cases, concluding that the reimbursements did not constitute FTS or FIS.

2. Characterization of Reimbursements as FTS or FIS:
The AO characterized the reimbursements as FTS and FIS, citing the Delhi High Court's judgment in Centrica India Offshore Pvt. Ltd. The Tribunal, however, observed that there was no employer-employee relationship between GIPL and the seconded employees, and the services rendered were for the benefit of GIPL. The Tribunal noted that the seconded employees were under the day-to-day control of GIPL, and the payments were reimbursements of salaries paid by Google LLC on behalf of GIPL. The Tribunal emphasized that the payments were cost-to-cost reimbursements without any profit element, and thus, did not qualify as FTS or FIS.

Conclusion:
The Tribunal held that the amounts paid by GIPL to Google LLC for the seconded employees did not fall under FTS or FIS as per the Income Tax Act or the India-US Tax Treaty. The Tribunal's decision was based on the factual finding that the seconded employees were under the control of GIPL, and the payments were mere reimbursements of their salaries. The appeals filed by the assessee were partly allowed, and the Tribunal ordered that the amounts in question should not be taxed as FTS or FIS.

Final Judgment:
The Tribunal concluded that the reimbursements made by GIPL to Google LLC for the seconded employees were not taxable as FTS or FIS. The appeals were partly allowed, and the amounts paid were ordered not to be taxed under the relevant provisions of the Income Tax Act and the India-US Tax Treaty. The judgment was pronounced in the open court on 20th February 2023.