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2023 (6) TMI 932 - AT - Income TaxFees for Technical Services FTS - Receipt of Cost-to-cost reimbursements on account of secondment of employees - seconded personnel are employees of EY India firms - Whether payments received by the assessee on account seconded employees should not be taxed as FTS/Independent Personal Services IPS as per the treaty provisions? - whether arrangement between the assessee and Indian entities constitutes the provision of services by the assessee through seconded personnel? - HELD THAT - EY LLP India is alone responsible for complying with the requirement of withholding of tax under the Indian Tax Laws. As in light of the deputation agreement, we are of the considered view that cost to cost reimbursement on account of secondment of employees cannot be treated as FTS as defined under Article 12 of India USA-DTAA and seconded personnel are employees of EY India firms whose income has been taxed as salary in their respective hands. Therefore, the very same amount could not, in law, be subjected twice firstly in the hands of the seconded employees working in India and secondly again the hands of the assessee. AO is accordingly, directed to delete the impugned addition.
Issues Involved:
1. Validity of notice under Section 143(2) of the Income-tax Act. 2. Taxability of cost-to-cost reimbursements for secondment of employees as Fees for Technical Services (FTS) under the India-USA Double Tax Avoidance Agreement (DTAA). Summary: Issue 1: Validity of Notice under Section 143(2) The grievance relating to the validity of notice under Section 143(2) of the Income-tax Act was not pressed by the assessee's counsel and was therefore dismissed as not pressed. Issue 2: Taxability of Cost-to-Cost Reimbursements The primary issue for adjudication was whether the cost-to-cost reimbursements on account of secondment of employees were Fees for Technical Services (FTS) as defined under Article 12 of the India-USA DTAA and whether the arrangement between the assessee and Indian entities constituted the 'provision of services' by the assessee through seconded personnel. The assessee, a limited liability partnership firm incorporated under the laws of the USA, provided professional services globally, including in India, and claimed treaty benefits under the India-USA DTAA. During the scrutiny assessment, the Assessing Officer issued a show cause notice questioning why payments received on account of seconded employees should not be taxed as FTS/Independent Personal Services (IPS) under the treaty provisions. The assessee argued that the seconded personnel were employees of the Indian member firms, and the invoices raised were mere reimbursements of expenses incurred without any profit element, thus not chargeable to tax in India under Article 12 FTS and Article 15 IPS of the India-USA tax treaty. The counsel for the assessee emphasized that the invoices were for amounts already subjected to tax under Section 192 of the Act as income in the hands of the seconded personnel. The Department's Representative (DR) relied on the Supreme Court's decision in M/s Northern Operating Systems Pvt Ltd, which dealt with the taxability of manpower recruitment and supply services. However, the Tribunal noted that the Supreme Court's judgment was context-specific and pertained to service tax, not income tax. The Tribunal referred to various judicial precedents, including the Karnataka High Court's decision in Flipkart Internet [P] Ltd and the Delhi High Court's affirmation in the case of Boeing India [P] Ltd, which distinguished between salary reimbursements and FTS. The Tribunal concluded that the seconded personnel were employees of the Indian entities, and their income had been taxed as salary in their respective hands. Therefore, the same amount could not be subjected to tax twice. Conclusion: The Tribunal directed the Assessing Officer to delete the impugned addition, ruling that cost-to-cost reimbursement on account of secondment of employees cannot be treated as FTS under Article 12 of the India-USA DTAA. The appeal of the assessee was partly allowed. Pronouncement: The order was pronounced in the open court on 20.06.2023.
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