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TMI Blog2018 (11) TMI 1119X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness carried on by the recipient. The Tribunal came to the conclusion that receipts were in the course of business of the Assessee and were therefore business income falling within Article 7 of the DTAA and would therefore not fall within the ambit of Article 23(1) of the DTAA. Since IBM Philippines did not have Permanent Establishment (PE) in India, the receipt was not chargeable to tax in India. As IBM Philippines received the monies in the course of their business and did not have PE in India and therefore the receipt in question cannot be brought to tax under Article 7 of DTAA as well. In the absence of the provision in the DTAA to tax Fees for Technical Services the same would be taxed as per the Article 7 of the DTAA applicable for business profit and in the absence of PE in India, the said income is not chargeable to tax in India. Consequently, we hold that there is no merit in the appeals by the revenue on this issue. Regarding rate of tax at which TDS has to be deducted in the event of the non-resident payee not obtaining Income Tax PAN in India has been settled by a Special Bench ITAT Hyderabad in the case of Nagarjuna Fertilizers & Chemicals and Another Vs. ACI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry will send on deputation its employee to another group in another country. The terms of the expatriate Agreement dated 1.1.2002 between IBM UK and IBM India, whereby IBM UK agreed to send its employees on request by IBM India to work for IBM India may be taken as illustrative and the terms of the said agreement relevant for adjudication of the present appeals, are as follows:- Article-1 of the Agreement defines certain terms. (a) Expatriate Employee has been defined to mean a person legally employed by or through IBM UK who is assigned to render services for the benefit of IBM India and under the direction and control of IBM India. (b) Assigned or Assignment has been defined to mean the transfer of the supervision and control of a person s duties from one entity to another within an organization for the purpose of that person s providing services for the benefit of the entity to which he/she is assigned for a temporary and fixed period of time. (c) Confidential Information has been defined to refer to all information relating to the Agreement received by the other party. Article-2 defines the Scope of the Agreement and it reads thus:- ARTICLE 2 SCO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M India. 3.2 Reimbursement - IBM India shall reimburse IBM UK, in a form to be agreed between the Parties or the commonly accepted format of invoicing prevailing between the parties, on a monthly basis for the salary costs and any expenses paid by it to the Expatriate Employees. IBM UK shall submit such invoices by the end of the month following the relevant calendar period. IBM UK shall maintain adequate records to detail the basis for the invoices. All invoices are due and payable by IBM India within thirty days or receipt. All amounts payable under this Agreement shall be paid in U.S. currency. Article-4 deals with confidentiality and proprietary rights and it reads thus:- ARTICLE 4 CONFIDENTIALITY AND PROPRIETARY RIGHTS 4.1 Confidentiality - Each Party shall maintain in confidence all Confidential 'Information of the other Party, and shall not disclose such Confidential Information to any third party except Affiliates that are subject to similar confidentiality obligations or as reasonably required in connection with such Party's activities pursuant to this Agreement or any separate agreement entered into by the Parties. In maintaining the confidentiality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d s for unauthorized disclosure of Confidential Information of the other Party and that the other Party shall be entitled, without waving the other rights or remedies, to such injunctive or equitable relief as may be deemed proper by a court of competent jurisdiction. Each Party shall be entitled to recover all reasonable costs and expenses, including reasonable attorneys' fees for any action arising out of or relating to a disclosure of that Party's Confidential Information by the other Party. 4.4 Return of Information - Without prejudice to any other rights provided herein. upon the termination of this Agreement. each Party shall, upon request and unless otherwise agreed. return to the other Party or destroy all of the other Party's Confidential Information in its possession or control, including any copies of reproductions thereof, subject to the terms of separate agreement between the Parties. Article-5 deals with Taxes and it reads thus:- ARTICLE 5 TAXES 5.1 Taxes - With respect to salaries of Expatriate Employees under this Agreement, IBM India shall be responsible for ensuring withholding and payment of appropriate taxes properly due to Indian tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocally by IBM India) will be paid in home country (i.e. USA) which will be reimbursed by IBM India. 5. That during the period of assignment with IBM India all other terms and conditions as per IBM polices were applicable. 6. IBM India deducted tax at source u/s.192 of the Act on the salary paid to the seconded employees and paid the same to the credit of the Central Government. As we have already seen IBM India had to reimburse the salary cost of the expatriate employees to the concerned IBM oversees entity. At the time of making payment of such reimbursement, no taxes were deducted at source by IBM India in respect of reimbursements made to IBM Overseas companies in respect of salary paid to seconded employees as, according to IBM India, the same was in the nature of costto- cost reimbursements and no element of income was involved. The Deputy Commissioner of Income-tax, International Taxation, Circle 1(1) ( DCIT ) issued notices calling for details in respect of reimbursements made by IBM India to IBM Overseas companies during the years under consideration and also required IBM India to show cause as to why reimbursements made to IBM Overseas companies should not be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meaning of Expln.2 to Sec.9(1)(vii) of the Act. In this regard the DCIT found that all the deputed employees had technical skills and imparted their skill while on deputation to India to further the business projects of IBM India and therefore the payment in the form of reimbursement by IBM India to IBM oversees entity was in the nature of FTS. In coming to the above conclusion, the DCIT referred to the Assignment Initiation Request (AIR) raised by IBM India from time to time requesting IBM Overseas entities to assign secondees for stipulated period in relation to its business projects wherein details of the assignee, job profile of the assignees, etc. would be mentioned. According to the DCIT, on analysis of AIR, the requirement of the IBM India is not to carry out its regular or normal business activities. It expresses it requirement of highly qualified, experienced, skilled employees the overseas companies. The seconded employees are not ordinary employees or workers. The overseas companies are assigning certain employees because of their expertise and managerial/consultancy skills which requires IBM India for its business development/improvement/growth. Therefore, the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t services were made available by the oversees entitles. The DCIT held that from the job justification given by IBM India for assignment of employees from overseas companies demonstrated that IBM India is lacking in technical, managerial and consultancy skills/experience in some of its business strategic or development areas. The request for overseas assignees is for Development of needed capabilities or technological skill in India for its business The seconded employees were requested in critical areas to support the growth of specific area or business IBM India CATEGORICALLY mentioned in AIR that the assignment of certain overseas employees ensuring a long - last return on investment in the GMU IBM India needed Managerial Skills in some critical role to lead the large delivery organization in India. IBM India required to bring as assignee with in depth experience in delivery The company needed assignees to Lead development of technical strategy and to work with management on talent development To transfer knowledge and best design practices to the Bangalore team. 4. The DCIT also referred to the job assignment description t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ec.206AA of the Act. 7. The final computation of tax payable u/s.201(1) interest payable u/s.201(1A) of the Act was computed by the DCIT as per the table given as Annexure-1 to this reference. This annexure also gives the TDS paid by the Assessee on salary u/s.192 of the Act. 10. Aggrieved by the order of the DCIT, IBM India filed appeal before CIT(A), who confirmed the order of the AO on points 1 to3 as given above. On point 4 and 5 given above, the CIT(A) held in favour of the Assessee. Aggrieved by the order of the CIT(A) on points 4 5 the revenue has filed these appeals before the Tribunal. 11. We have heard the rival submissions. There are two common issues which arise for consideration in these appeals by the revenue. The first issue is as to whether the CIT(A) was right in holding that even if the reimbursement by IBM India to IBM Philippines are regarded as FTS , yet in so far as payments by IBM India to IBM Philippines is concerned, the same would not be chargeable to tax in the hands of IBM Philippines in India, the source country and therefore there would be no obligation to deduct tax at source u/s.195 by IBM India when it makes payment to IBM Philippin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le for TDS u/s.195 of the Act. 13. The Tribunal after referring to Article 23 and 24 of the DTAA observed that the purpose of Article 24 was elimination of Double Taxation. The Tribunal referred to Article 24(1) of the DTAA which provided that the laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Convention. The tribunal observed that at first sight, it may appear that Articles 23 and 24(1) of the DTAA are in conflict with each other and that Article 23 is an omnibus clause covering all items of income not dealt with in Articles 6 to 22 but it was not so because Article 24(1) specifically refers only to income which are not covered under any of the clauses in the DTAA and therefore Article 24 would be rendered redundant if Article 23(1) were to be construed as covering all other incomes which are not specifically dealt with any of the clauses of the DTAA. The Tribunal observed that if one were to interpret Article 24(1) as conferring right to tax 'FTS' in accordance with the domestic law of a contracting state, which is the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no specific provision in the treaty, the Income Tax Act will govern the same. Both Article 24 of the IndiaIT( Philippine DTAA and CBDT Circular NO.332 dt.2.4.1982 have no role to play in classification of income and allocation of right to tax such income to one or both of the contracting states as the same are to be dealt with in accordance with Article 6 to 23 of the DTAA. Even though the India- Philippines DTAA does not have an Article dealing with 'FTS', its taxation would be governed by Articles 7 or Article 23 as the case may be, depending on the facts and circumstances of each case. If Article 24(1) of the DTAA is interpreted as dealing with taxation of items of income not dealt within the foregoing Articles 6 to 23 of the India-Philippines DTAA, as per domestic laws, it would render Article 23 thereof redundant. The Tribunal ultimately held that there is no merit in the contention put forth by revenue that in the absence of 'FTS' Article under the India-Philippines Treaty, payments made to IBM-Philippines are taxable in India as per Article 24(1). Consequently, the findings of the authorities below that the payments made to IBM Philippines are taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DTAA's between India and Australia (Article 11(4), Canada [Article XIII (SC)] or USA [Article 12(6)]. These indicate that even where royalties and fees for technical services receive separate treatment under a DTAA, it is the Article relating to computation of business income that would apply where such royalties or fees arise in the course of business carried on by the recipient. The Tribunal came to the conclusion that receipts were in the course of business of the Assessee and were therefore business income falling within Article 7 of the DTAA and would therefore not fall within the ambit of Article 23(1) of the DTAA. Since IBM Philippines did not have Permanent Establishment (PE) in India, the receipt was not chargeable to tax in India. 15. The aforesaid decision would squarely apply to the present case as IBM Philippines received the monies in the course of their business and did not have PE in India and therefore the receipt in question cannot be brought to tax under Article 7 of DTAA as well. In view of the above decision of the co-ordinate bench in the case of IBM India Pvt. Ltd. Vs. DDIT (I.T) (supra), we are of the considered opinion that in the absence of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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