9911796707
TMI Blog2014 (12) TMI 761X X X X Extracts X X X X X X X X Extracts X X X X ..... d the AO of treating the reimbursement of salary cost received by the Appellant as Fees for Technical Services under the provisions of Section 9(1) (vii) of the Income-tax Act, 1961 ('the Act'). 3. Without prejudice to the above Grounds, on the facts and in the circumstances of the case, the learned CIT (A) has legally erred in confirming the action of the learned AO of treating the reimbursement of salary cost received by the Appellant as Fees for Included Services under Article 12 of the Double Tax Avoidance Agreement between India and USA. 4. Without prejudice to the above Grounds, on the facts and in the circumstances of the case, the learned CIT (A) has legally erred in not passing a speaking order/ reasoned order in holding the reimbursement of salary cost received by the Appellant as Fees for Included Services under the Article 12 of the Double Tax Avoidance Agreement between India and USA. 2. The brief facts qua the issue raised are that, the assessee company, M/s Morgan Stanley International Incorporated, is resident of USA and it is a 100% subsidiary of M/s Morgan Stanley USA. Its primary activity is to provide support services to various subsidiaries all over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f reimbursement of expenses, hence it is not taxable in India as there is no element of income on such a reimbursement . The assessee also filed secondment /deputation letter relating to said employees, who were seconded to India for rendering services for the Indian companies. In the said letter it was mentioned that, the employees would be working under the supervision and control of the Board of Directors of the subsidiary companies in India and day to day responsibility would be managed by the Indian company, and they will be accountable only to them. The assessee had also filed copy of debit notes raised by the assessee on the Indian company for the reimbursement of salary cost and also copy of remittance certificate for the remittance of salary. The assessee also produced the copies of Form No.16 and certificate of TDS deducted u/s 192 on such salary paid. However, the AO did not accept the assessee's contention that the payment made on account of reimbursement of salary is not taxable in India. His main reasoning were :- a) Firstly, the employees have been deputed to India who are highly qualified and technical persons, offering special services to the Indian subsidiaries i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (AT) 263 (Mumbai) (SB). The relevant submissions as well as the synopsis of the decisions relied upon by the assessee been incorporated by the ld. CIT(A) from pages 4 to 9 of the appellate order. The ld. CIT(A) on perusal of the copy of income tax returns filed in India by the two of the employees i.e. Mr.Bhavin Doshi and Mr.Timothy Mc Coy, noticed that there is some discrepancy in the figures given in the remittance of salary reimbursed and the salary income shown by them in their return of income filed in India. Though the assessee explained the difference between remittance and salary income, however, the ld. CIT(A) was not convinced. After analyzing the various decisions as relied upon by the assessee, Ld. CIT(A) observed that they are not applicable to the facts and circumstances of the case and held that the AO has rightly treated the said income taxable as FIS under India US DTAA and also u/s 9(1)(vii). The relevant portion of ld. CIT(A)'s finding is as under : "3.11. Considering all the above and since, the assessee has failed to demonstrate with evidence that the cost incurred by the foreign company has been reimbursed by the Indian companies 'as such' and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Avoidance Agreement between Indian and USA (DTAA) will apply to MSTT. During the financial year ending on March 31, 2005, MSTT has deputed employees to MSAS to work under the supervision and control of MSAS. Further, MSAS proposed to reimburse the salary cost of the deputed employees to MSTT. Article 12 of the DTAA deals with the taxation of "fees for included services "(FIS) under the DTAA, FIS will be taxed in India at 15% on a gross basis, provided that such payments are in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which, interalia make available technical knowledge., experience, skill, know how or process or consist of the development and transfer of a technical plan or technical design It is represented to us that the deputed employees do not render services which should quality as FIS under Article 12 of the DTAA. The Supreme Court Of India has in the case of Director Of Income-Tax (International Taxation) V/s Morgan Stanley & Co. has held that a permanent establishment (PE) of the overseas entity is constituted in India on account of deputing its employees to an Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under the said section, the fees or royalty has to have character of income, which here in this case, there is no income to the assessee. He submitted that the Transfer Pricing Officer to whom matter was referred by the AO, in his order for the same assessment year has accepted the reimbursement of cost at Arm's length and no adverse inference has been drawn. Regarding allegations of the AO that, there is no secondment agreement, he submitted that all his observations are wholly incorrect, as the secondment letter (placed in the paper book) clearly shows that there is a proposal and acceptance and it duly describes the terms and conditions. For the proposition that such a reimbursement of salary of the seconded employees is not taxable as FIS, he relied upon the decision of ITAT, Mumbai Bench in the case of Temasek Holdings V/s DCIT, (2013) 27 ITR (Trib) 125 (Mum) and catena of other decision which are as under : a) ITO V/s AON Specialist Services Private Limited (ITA No.1640/Bang/2012) b) DIT V/s HCL Infosystems Ltd (2005) 274 ITR 261 (Delhi) Upheld ITAT decision in the case of HCL Infosystems Ltd V DCIT -2002 76 TTJ 505) c) CIT V/s Karlstorz Endoscopy India Pvt. Ltd (ITA No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y For Advance Ruling (Income Tax), New Delhi,Target Corpn. India (P.) Ltd., IN RE (2012) 252 CTR (AAR) 242 And Authority For Advance Rulings (Income-Tax), New Delhi in Verizon Data Services India (P.) Ltd., In re*((2011) 337 ITR 192. In all these cases, similar issues were involved, whereby seconded employees under the secondment agreement, were deputed and sent to the Indian company for rendering services and their reimbursement of salary was held to be taxable as FIS under similar Article 12(4) of the DTAA. Thus, the amount received by the assessee as reimbursement is nothing but FIS on account of make available clause and has rightly been taxed under Article 12(4) of DTAA in India. 7. After hearing of the case, it came to our notice that, the Hon'ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd. V/s CIT, (2014) 364 ITR 336, while interpreting Article 13 of India-UKDTAA and Article 12 of India-Canada-DTAA, on similar kind of transaction has held that secondment of employees of overseas entities who have been paid salary by the overseas entity and reimbursed to the assessee company by the Indian company was held to be payment for technical services within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is attributable as per Article 7 of DTAA, needs to be examined and therefore, the matter should go back to the file of the AO. 9. We have considered the entire gamut of rival submissions and perused the relevant record, placed before us, including the relevant finding of the AO as well as of the ld. CIT(A). The assessee is a tax resident of USA and is providing support services to various Indian companies, who are subsidiaries. The assessee has deputed five of its employees in terms of deputation letter which have been placed on record. These employees were seconded to India to render their services to the Indian companies under supervision and control of the Board of Directors of the Indian companies and their day to day responsibility and activities were managed by the Indian company. However, their salary were paid by the assessee company after deducting TDS u/s 192 of the Act and duly deposited in the Indian Government Treasury. The entire salary paid by the assessee has been reimbursed by the Indian company to the assessee, which is evident from the debit notes appearing in the page 6 of the paper book. The TDS certificates have also been filed giving the details of tax deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of secondment is over, they revert back to their parent company entity. In a way subsidiary entity is the economic employer of the seconded employee who ultimately bears the salary cost and exercise control over their work. Generally it is contended that reimbursement of cost cannot be treated as payment for FTS or FIS, unless there is an explicit agreement between the parties that technical services would be provided through these employees. The deputation of employees is mainly for the benefit of the subsidiary company to smoothly and efficiently conduct the business. However, such a reimbursement of salary cost by the subsidiary entity has been matter of huge controversy, as to what is the nature of such payment, whether it is 'fee for included services' or not. Other related controversy is that, on the basis of duration of the stay of seconded /deputed employees in the host countries, whether the non-resident parent entity constitute the service PE in the host country or not. 11. In the present context the salary paid to the seconded employees by the parent company, the TDS has been already been deducted u/s 192 of the Act, which has been credited to the Government of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll of the overseas entities and received salary from them. Centrica India reimbursed such salary cost to the overseas employees on cost to cost basis. The AAR held that, since seconded employees continued to be employees of the overseas entity and the seconded employees are rendering their services for their employer in India by working for specified period, this will give rise to service PE within the meaning of Article 5.2 (k) of Indian-UK DTAA and therefore such a payment would be income accruing to the overseas entity and would be taxable in India and TDS has to be deducted u/s 195 of the Act. In the Writ Petition before the Hon'ble Delhi High Court, the major issues for adjudication before their Lordships was, firstly, whether by way of Secondment of employees the overseas entity had rendered any technical services in terms of Article 12 of India - Canada DTAA and Article 13 of India -UK DTAA and secondly, whether the overseas entities establish any Service PE in India. Under these treaties the concept of Service PE has been embodied. The Hon'ble Court after analyzing the definition of 'technical services' and ' FIS' as appearing in the India-UK treaty and India-Canada treaty, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conded employees are the real employees of the assessee who have come to India to render services and once they are rendering services on behalf of assessee in India then, they constitute Service PE in India. Such an establishment of PE under these circumstances have been dealt by the Hon'ble Supreme Court in the case of Morgan Stanley & Co (supra). The Hon'ble Supreme Court held that the employees of overseas entities to the Indian entity constitutes service PE in India. The relevant finding of the Hon'ble Supreme Court in this regard is as under : "15. As regards the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the U.N. Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: XXXX a. XXXXX i. XXXXX A. XXXXX B. XXXX ii. XXXX b. XXXXX 3. xxxxxxxxx b. XXXXX. 4. For purposes of this article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: a. are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or b. make available technical knowledge, experience, skill, know-how. or processes, or consist of the development and transfer of a technical plan or technical design. 5. xxxxx a. XXXXX b. XXXXXX c. XXXXX d. XXXXXX e. XXXX 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en to the assessee for granting relief. Now, if the taxability of such payment has to be examined and determined on the basis of computation of business profit under Article 7, then the salary paid by the assessee would amount to cost to the assessee, which is to be allowed as deduction while computing the business profit of the PE in India. In our opinion, if logical conclusion of the decision of the Hon'ble Supreme Court in the case of Morgan Stanley & Co (supra) and the decision of Hon'ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd(supra) is to be arrived at, then the seconded employees will constitute Service PE of the assessee in India and in that case any payment received on account of rendering of service of such employees will have to be governed under Article 7 as per unequivocal terms of para 6 of Article 12. Thus, the ratio laid down in the decision of Hon'ble Delhi High Court, will not help the case of the revenue, in any manner because under the concept of PE, FIS cannot be taxed under Article 12, but only as a business profit under Article 7. It is very interesting to note that, similar provision is also embodied in the India-Canada DTAA in para ..... X X X X Extracts X X X X X X X X Extracts X X X X
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