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2024 (9) TMI 77 - AT - Income TaxTaxability of employee cost reimbursements as Fee for Technical Services ('FTS) - assessee is a Japanese company engaged in the business of engineering, manufacturing and sale of brake system and components of automobile companies - AR submitted that the assessee is on the payroll of the Indian AEs for the period of transfer and seconded employees/ expats worked in India as employees of the respective Indian AEs which can be corroborated from the employment visa s of the expats - HELD THAT - It is the case of the Revenue that the expats were seconded to the AEs for rendering managerial/ technical services and hence the payments made are in the nature of FTS. According to Revenue the expats are employees of the assessee and not of the Indian AEs and hence this was contract for service and salary reimbursement cost is taxable as FTS. It is, however, a fact corroborated with evidence that the expats were employees of Indian AEs during the term of their transfer and were paid salaries by AEs after due deduction of tax on the entire amounts either disbursed in India or in Japan. 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. 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 The impugned receipts are in the nature of employee salary reimbursement cost not having any element of income and not taxable in India as FTS under the provisions of the India-Japan DTAA. Consequently, the addition on account of cross charge by the assessee from its Indian AEs is deleted.
Issues Involved:
1. Legality of the assessment order. 2. Determination of total income. 3. Taxability of employee cost reimbursements as Fees for Technical Services (FTS). 4. Levy of surcharge and health and education cess on alleged FTS income. 5. Levy of interest under section 234B of the Act. 6. Initiation of penalty proceedings under Section 270A of the Act. Detailed Analysis: 1. Legality of the Assessment Order: The assessee argued that the assessment order passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961, pursuant to the directions of the Dispute Resolution Panel (DRP), is "bad in law, unlawful and unjust." However, this ground was noted as general in nature and was not specifically adjudicated upon. 2. Determination of Total Income: The assessee contested the determination of total income at INR 12,75,31,101 against the returned income of INR 10,05,04,070. This was primarily due to the addition of INR 2,70,27,031, which was treated as FTS by the Assessing Officer (AO) and upheld by the DRP. 3. Taxability of Employee Cost Reimbursements as Fees for Technical Services (FTS): The main grievance involved the taxability of employee salary cost reimbursements amounting to INR 2,70,27,031. The AO and DRP treated these reimbursements as FTS under section 9(1)(vii) of the Act and Article 12 of the India-Japan DTAA. - Assessee's Argument: The assessee contended that the expatriates were employees of the Indian Associated Enterprises (AEs) during their secondment period. They worked under the direct control and supervision of the Indian AEs, which paid their salaries after deducting TDS. The payments were pure reimbursements without any service element or profit markup, thus not taxable as FTS. - Revenue's Argument: The AO argued that the expatriates provided key managerial, consultancy, and technical services to the Indian AEs. The salary reimbursements were treated as FTS, relying on judicial precedents including the decision of the Delhi High Court in Centrica India Offshore (P.) Ltd. vs. CIT. - Tribunal's Findings: The Tribunal found that the expatriates were indeed employees of the Indian AEs during their secondment, working under their direct supervision and control. The payments were pure reimbursements of salary costs without any service element. The Tribunal distinguished the facts from the Centrica case and other cited precedents, ruling that the reimbursements did not qualify as FTS under the India-Japan DTAA. 4. Levy of Surcharge and Health and Education Cess on Alleged FTS Income: This issue was rendered academic as the Tribunal ruled that the reimbursements were not taxable as FTS. Therefore, the question of levying surcharge and cess at a special rate under the India-Japan DTAA did not arise. 5. Levy of Interest under Section 234B of the Act: The levy of interest under section 234B was noted as consequential in nature. Since the primary addition of INR 2,70,27,031 was deleted, the interest levy would also be adjusted accordingly. 6. Initiation of Penalty Proceedings under Section 270A of the Act: The initiation of penalty proceedings was deemed premature and not adjudicated upon by the Tribunal. Conclusion: The Tribunal allowed the appeal of the assessee, deleting the addition of INR 2,70,27,031, thereby ruling that the employee salary cost reimbursements were not taxable as FTS. The issues of surcharge, education cess, and interest under section 234B were resolved consequentially, and the initiation of penalty proceedings was deemed premature.
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