9911796707
TMI Blog2022 (4) TMI 1443X X X X Extracts X X X X X X X X Extracts X X X X ..... issues identically raised by assessee for assessment year 2015-16. Assessment year 2013-14: 3. Assessee is engaged in manufacturing of automobile components such as seats, door trims and interiors for passenger cars. The assessee is also a licensed manufacturer carrying out manufacturing activities using the technology and technical knowhow, obtained from Toyota Boshoku Corporation, Japan. For year under consideration assessee filed return of income on 29/11/2013, declaring total income of Rs. 33,73,65,270/-. The case was selected for scrutiny and notice under section 143 (2)along with notice under section 142(1) of the Act was issued to the assessee. In response to statutory notices, representative of the assessee appeared before the Ld. AO and file requisite details as called for. 4. The Ld. AO observed that, the international transaction entered by the assessee with its associated enterprises exceeded Rs. 15 crores. Accordingly, the case was referred to the transfer pricing officer. On receipt of the reference under 92 CA of the Act, the Ld. TPO called upon the assessee to furnish economic details of the international transaction. 5. The Ld. TPO from the details filed by as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges in the factories. The Ld. AO was of the opinion that these expenditure was towards capital and therefore assessee was only allowed depreciation on it. Aggrieved by the order of Ld. AO, the assessee filed objections before the DRP. 9. Before the DRP, apart from the above additions, the DRP observed that, the assessee entered into transaction with AE, whereby following payments were made to the AE: Reimbursement of expat salary - Rs. 4,85,23,268/- Purchase of software - Rs. 18,89,528/- The assessee was called upon to furnish details in respect of the expenses incurred and TDS if any, effectuated, in respect of such payments. The assessee vide reply dated 06/04/2017 submitted that, TDS was not effectuated as these were the reimbursement of expenses to the AE and towards purchase of software. 10. The DRP noted that, the assessee deducted TDS under the head salary on the amount payable to the seconded employees, whereas on the reimbursed amount, no TDS was made. 10.1. The DRP after considering various submissions by the assessee, was of the opinion that, reimbursement of salary of the expat employees was in the nature of, "fee for technical services" and that, these were th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate bench of the Tribunal in assessee's sister concern's case of Toyota Kirloskar Auto Parts Ltd. vs. DCIT, reported (2020)185 ITD 806. He submitted that, the facts and circumstances in the sister concern's case is identical, with that of the assessee, and the Ld. TPO therein, also applied PSM to be the most appropriate method to benchmark the royalty transaction. 11.1. On the contrary, the Ld. CIT.DR placed reliance and orders passed by authorities below. 11.2. We have perused submissions advanced by both sides in light of records placed before us. We note that the functions performed by the assessee before us, and that of Toyota Kirloskar (supra) considered by Coordinate Bench of this Tribunal, being the sister concern, are identical in nature. Both these assessee are engaged in manufacture of automotive components, peculiar to automobile industry. The assessee before us aggregated all the international transaction by using TNNM as the most appropriate method to benchmark the international transactions. The Ld. TPO segregated management fees and royalty payment, which constituted major part of the transaction. The entire dispute before us, is in respect of the met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... economic life of the technology would no longer exist. In our view, there is no basis for the TPO as well as the DRP to come to a conclusion that technology in question was to be used by a start-up. There is no basis for the TPO and DRP to come to a conclusion that the Assessee is a start up in manufacture of various parts for automobiles. The technology in question was that of TMC Japan. The technology is being used by the Assessee even today. There is no basis for the TPO/DRP's conclusion that the useful economic life of the technology would be only 5 years. In any event passage of time cannot be the basis to discard TNMM which is already held by the Tribunal and upheld by the Hon'ble High Court as no longer the MAM because the conditions necessary for PSM as MAM are not met in the case of the Assessee. Even going by Rule 10B(1)(d), there should be contribution by each of the parties to a transaction for earning profits from sale of goods or provision of services. Then the contribution of each of the parties is identified and the profit is split between those parties. In the case of the Assessee the technology is given by TMC, Japan for which royalty is paid. The use of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n will be important in determining whether a transactional profit split is potentially applicable. This process should have regard to the commercial and financial relations between the associated enterprises, including an analysis of what each party to the transaction does, and the context in which the controlled transactions take place. That is, the accurate delineation of a transaction requires a two-sided analysis (or a multi-sided analysis of the contributions of more than two associated enterprises, where necessary) irrespective of which transfer pricing method is ultimately found to be the most appropriate. 2.126. The existence of unique and valuable contributions by each party to the controlled transaction is perhaps the clearest indicator that a transactional profit split may be appropriate. The context of the transaction, including the industry in which it occurs and the factors affecting business performance in that sector can be particularly relevant to evaluating the contributions of the parties and whether such contributions ale unique and valuable. Depending on the facts of the case, other indicators that the transactional p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee does not make any unique contribution to the transaction, hence PSM in this case cannot be applied. 18. Therefore, we are of the view that TNMM is the Most Appropriate Method in the case of assessee. The decision of the Tribunal in the earlier AY 2008-09 has also been upheld by the Hon'ble High Court of Karnataka in CIT v. Toyota Kirloskar Auto Parts (P.) Ltd. [IT Appeal No. 104 of 2015, dated 16-7-2018], which was an appeal of the revenue against the order of Tribunal for AY 2008-09. The Tribunal has upheld TNMM as MAM from AY 2007-08 to 2011-12. In those AYs the dispute was whether TNMM or CUP was the MAM. It is for the first time in AY 2013-14 that the revenue has sought to apply PSM as MAM. In the given facts and circumstances, we are of the view that TNM Method is the Most Appropriate Method and the AO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. The grounds of appeal of the assessee are treated as allowed. 11.5. We note that, the Ld. TPO in present facts of the assessee before us, used identical comparables in order to ascertain the transaction to be at arms length a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Loan work for TBI. The time period during which employees on loan work for TBI shall be determined through consultation between TBC and TBI. Article 6 - Work and Working Conditions during Transfer Period. 1. Working conditions such as working hours and days off of employees on loan, working for TBI, shall conform to the Working Rules and other rules and regulations of TBI. 2. Employees on loan shall be subject to office service regulations based on the Working Rules of TBI, provided, however, when it becomes necessary to meet out reward or punishment to employees on loan in accordance with rules or regulations of TBC, both parties shall consult with each other about it in advance. 3. The employees on loan shall report and perform services as directed by TBI during the transfer period and TBC shall not interfere with such services performed by the employees on loan. 4. It is expressly understood and agreed upon by the parties that TBC will not be considered at any time to have rendered any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade to Japan. Interest if any, for delay in such payments shall be paid only with prior approval of Reserve Bank of India. No service shall be deemed to be rendered by TBC to TBI merely for facilitating the payment as above. Article 8 - Confidentiality Obligation. Neither TBC nor TBI shall disclose or divulge information obtained from the other party through the transfer of employee based on this Agreement to any third party without prior written consent from the other party during the term of this Agreement and even thereafter. Both TBC and TBI shall be obliged to drive this confidentiality obligation home to employees on loan and cause them to comply with it. Article 12 - Governing Law. This agreement shall be governed by and construed in accordance with the laws of Japan unless otherwise barred by Indian Laws." 13.2. The Ld. AR submitted that, based on the above agreement, the assessee entered into independent contract with each of the seconded employees. It is submitted by the Ld. AR that the seconded employees worked under the control of the assessee. It is also mentioned that 100% of the salary p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case of Abbey Business Service Pvt. Ltd vs. DCIT reported in (2012) 23 taxmann.com 346. * Decision of Hon'ble Pune Tribunal in case of M/s. Faurecia Automative Holding vs. DCIT in ITA No. 784/Pun/2015 by order dated 08/07/2019 * Decision of Hon'ble Mumbai Tribunal in case of DIT vs. HCL Infosystems Ltd. reported in: (2005) 144 taxman 492; 13.8. The Ld. AR then submitted that, payments made by the assessee under the secondment agreement, cannot be treated as 'fees for technical services.' It was submitted that an "Agreement for Employees on Loan" dated 01/08/2008, entered by the assessee with Toyota Corporation, Japan, for secondment of employees from Toyota Corporation Japan, to the assessee in India, and that it is not an agreement for rendering of services by Toyota Corporation Japan to the assessee in India. The Ld. AR submitted that, as per Article 2 of the Agreement for Employee loan', the secondees work under the direct management, supervision, control and as per instructions of the assessee in India, during the period of secondment. It was submitted that, the place of performance of their duty, and the manner in which the secondee had to work, wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intermediary does not fulfil the conditions required for him to be considered as the employer within the meaning of paragraph 2. In settling this question, the competent authorities may refer not only to the above mentioned indications but to a number of circumstances enabling them to establish that the real employer is the user of the labour (and not the foreign intermediary): * the hirer does not bear the responsibility or risk for the results produced by the employee's work; * the authority to instruct the worker lies with the user, * the work is performed at a place which is under the control and responsibility of the user; * the remuneration to the hirer is calculated on the basis of the time utilized, or there is in other ways a connection between this remuneration and wages received by the employee; * tools and materials are essentially put at the employee's disposal by the user, * the number and qualifications of the employees are not solely determined by the hirer." 13.12. The Ld. AR thus submitted that, when the assessee is considered as the real and economic employer of the secondees, the reimbursement of salary and other administrative costs to Toyo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apan, were in consideration for services rendered by Toyota Corporation Japan to the assessee. 13.15. The Ld. AR submitted that, the issue now stands covered by the decision of Hon'ble Karnataka High Court in case of DIT vs. Abbey Business Services India (P.) Ltd. reported in (2020) 122 taxmann.com. 13.14. On the contrary, the Ld. CIT.DR place reliance on orders passed by authorities below. 13.15.1. The Ld. CIT.DR referred to the decision of Hon'ble Delhi High Court in case of Centrica India Offshore Pvt. Ltd. vs. CIT reported in (2014) 364 ITR 336 (Delhi), wherein similar situation arose. Hon'ble Court held that, overseas entities, through seconded employees, provided 'technical' services to the assessee, and that, the expression, 'rendering technical services', expressly include, 'provision of services of personnel'. 13.15.2. He submitted that in the decisions of, Verizon Data Services India P Ltd. In re reported in 337 ITR 192 the authority for advance ruling held that, the oversees entity is the real employer of the expatriate employees and it retains employer employee relationship with them. Thus, reimbursement of salaries was payment for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by assessee to the overseas entity for non-deduction of tax, as the same amounted to fee for technical services in the hands of the Toyota Corporation, Japan. 14. We have perused the submissions advanced by both sides in light of records placed before us. 14.1. At the outset it would be useful to understand the concept of assignment or secondment. Multi-national companies with a view to utilize skill within the group companies has global mobility policy of assignment or secondment. Secondment is, deputing or sending one employee in one entity of the multi-national company in one country, to another entity of the same multi-national company in another country. For reasons like continued pensionary benefits and other similar reasons the employee would want to retain his contract of employment with the original employer, rather than with the seconded employer. In such agreement there are usually three parties, the employer deputing or seconding his employee, the employee and the employer to whom the employee is seconded or deputed. Such arrangements are also referred to as "International hiring out of labor". Sec. 9(1)(ii) of the Act, lays down that, Income in the form of salaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 15(1) of OECD Model Convention lays down the rule of taxation of income earned by the seconded employee by giving the right to tax by the State where employment is exercised. The term "Employment is exercised" means, the place where the employee is physically present, when performing the activities, for which the employment income is paid. Article 15(2) of OECD Model Convention carves out exception to the rule in Article 15(1) by facilitating short term secondment without the burden of having to pay tax in the country, where the employment is exercised subject to the following three conditions: (a) If the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the fiscal year concerned. and; (b) if the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and, (c) if the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. 14.4.1. The first condition - is not relevant as the seconded employees have been employed in India fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source country where they are performing their services. 14.8. In the above background let us analyse the 'Agreement of employees on loan', dated 01/08/2008, between the assessee and Toyota Corporation Japan, the independent employment contract between the assessee and the seconded employees and the correspondence between the employee and the assessee regarding bifurcation of salary payable to them. As a sample we have reproduced the contract of assessee with Mr. Minoru Asahi herein above. 14.9. A reading of Article 2, of the 'Agreement of employees on loan', dated 01/08/2008, between the assessee and Toyota Corporation, Japan, the request for employees on loan shall be made by a assessee in Part A of Form-1, wherein number of employees with details of the profile would be mentioned. We know that the said form one is annexed at page 507 as an annexure to the agreement of employees on loan dated 01/08/2008. 14.10. A reading of Article 6, of the 'Agreement of employees on loan', dated 01/08/2008, between the assessee and Toyota Corporation, Japan, shows that the control and supervision of the seconded employee is with the assessee in India. As per Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s called upon to continue at the post of specialist PED Quality & New Projects with assessee in India. 4. That, during the assignment period, part of the salary after deducting grossed up income tax, under the Act, on the total salary, will be paid in India and the balance salary payable in Japan, by Toyota Corporation, Japan on behalf of assessee, which shall be reimbursed by the assessee to Toyota Corporation, Japan against a debit note. 5. That, during the period of assignment with the assessee in India, all other terms and conditions as per polices of the assessee company would be applicable. Similar is the situation with all the seconded employees. 14.15. Admittedly, the assessee deducted tax at source u/s. 192 of the Act, on the 100% salary paid to all the seconded employees, and paid the same to the credit of the Central Government. The assessee only reimbursed part of the salary cost of the seconded employee to Toyota Corporation, Japan that was already subjected to TDS under section 192 of the Act. And therefore, at the time of making such reimbursement, to Toyota Corporation Japan, no taxes were deducted at source by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Explanation 1.-For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2.-For the purposes of this clause, "fees for technical services" means any co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of M/s. Faurecia Automative Holding (supra) has observed as under: "4.10. We have gone through the facts of the case obtaining in Centrica India (supra). The assessee therein contended that payment to foreign party towards seconded employees was only reimbursement and hence, no income was chargeable to tax in its hands. The Authority for Advance Ruling (AAR) held that payment made by the petitioner to the overseas entity was in the nature of income in view of the existence of Service Permanent establishment (PE) in India and hence liable for tax withholding. Overturning the view of the AAR that Service PE was constituted, the Hon'ble High Court held that the payment to AE was in the nature of 'fees for technical services' and not reimbursement of expenses and further laid down that the nomenclature of reimbursement was not decisive. It noted that: 'Money paid by assessee to overseas entity accrues to overseas entity, which may or may not apply it for payment to secondees, based on its contractual relationship with them.' It is perceptible that in that case money paid by the Indian entity accrued to overseas entities only, which could or coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyment 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 UN 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 the activities of the multinational enterprise entail it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. Applying the above tests to the facts of this case, it is found that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " and are in the nature of fees for technical services within the meaning of Explanation 2 to sub clause (vii) of section 9(1) and Article 12(4) of the relevant DTAA and are subject to deduction of tax at source under section 195. 14.23.1. The ruling of Hon'ble AAR is on the factual finding that payments were not only reimbursement of actual salary, bonus etc., but was also included other sums. 14.23.2. Per contra in the present facts of the case, it is not at all the contention of the revenue that, something over and above what was paid as salary, bonus etc. 14.24. Liability under section 195 to deduct tax at source when making payment to a non-resident arises only if sum paid is chargeable to tax in India. Payment of salaries is not covered under section 195. Thus, it is necessary to take into consideration following aspect to determine Payments to enterprise seconding employees, the Indian entity has an obligation to deduct tax source u/s. 195: (i) Payment of fees by an enterprise (Indian entity) to foreign entity for seconding employees; (ii) Reimbursement of salaries to the entity seconding the employees (foreign entity) from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted taxes under Sec. 192 of the Act on salaries paid abroad to the technical personnel and when such salary is reimbursed on a cost to cost basis without any profit element, the provisions of Sec. 195 of the Act cannot be applied to reimbursement of salaries made to foreign company, once again. 14.28. Coordinate bench of this Tribunal in case of IDS Software Solutions v. ITO reported in (2009) 32 SOT 25, Abbey Business Services (P.) Ltd. v. DCIT reported in (2012) 23 taxmann.com 346, took the view that expats are deputed to work under the control and supervision of the Indian company and that the oversees entity is not responsible for the actions of the expatriate employees. Thus, oversees entity does not render any technical service to the Indian company, since such payment are towards reimbursement of salary cost borne by oversees entity, and that, no income can be said to accrue to oversees entity in India. The decision of this Tribunal in case of Abbey(supra) has been upheld by Hon'ble Karnataka High Court in DIT vs. Abbey Business Services India (P.) Ltd., reported in (2020) 122 taxmann.com 174. 14.29. Hon'ble Ahmedabad Tribunal in the case of Burt Hill Designs (P) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilization of the resources, besides improvement in quality and safety. Such expenditure neither increases the earning capacity of the business, nor does it result in additional production capabilities for the company. The Ld. AO held the expenditure to be capital in nature and disallowed the claim of the assessee. On raising objections, the DRP held as under: "7.4 The contentions of the assessee are carefully considered. Broadly the line of argument put forth by the assessee is that these expenses are incurred to re-arrange the production lines and reposition the process lines which also involved purchases of few mechanical and electrical items. Further the assessee contended that these expenses have not added to the production capacity of the assessee and hence there is no enduring benefit. The assessee also relied on various court decisions in it's favor. However, based on the facts it can be seen that the expenditure is incurred on the capital assets for rearranging, shifting or realigning etc. especially when there is new production line for producing new model of car etc. the production line is essentially re-setup for new production. This issue is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts for the assessment year 2015-16 are identical with assessment year 2013-14. Therefore the view taken for assessment year 2013-14 will apply mutatis mutandis to assessment year 2015-16 in respect of Grounds raised therein. Accordingly, Ground nos. 20-23 raised by assessee for the assessment year 2015-16 stands allowed for statistical purposes. 17. Ground No. 18 is raised by the assessee for non granting of credit for advance tax paid. The assessee is directed to furnish requisite evidences in respect of the advance tax paid. The Ld. AO is directed verify the same and to grant credit for the advance tax paid by assessee. Accordingly, Ground no. 18 raised by assessee for the assessment year 2013-14 stands allowed for statistical purposes. 18. Ground no. 19 for A.Y 2013-14 and Ground no. 24 for A.Y. 2015-15 is against levy of Interest under 234 B& C. This ground is consequential in nature and do not require adjudication. Accordingly, Ground No. 19 for the assessment year 2013-14 and Ground no. 24 for assessment year 2015-16 stands allowed for statistical purposes. In the result appeals filed by assessee for assessment year 2013-14 and 2015-16 stands allowed as indicated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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