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TMI Blog2022 (11) TMI 186X X X X Extracts X X X X X X X X Extracts X X X X ..... he ALP accordingly. Interest on receivables - TPO treated the delayed receivables as a separate international transaction and levied a notional interest using 6 months LIBOR + 400 basis points that worked out to 4.485% - HELD THAT:- We notice that as per the financials, the assessee is a debt free company. The impugned issue is squarely covered by the decision of the coordinate Bench of the Tribunal in the case of M/s. Barracuda Networks India Private Limited [ 2022 (5) TMI 322 - ITAT BANGALORE] - we remit the issue back to the TPO/AO for bench marking of the transaction of interest on delayed receivables and recomputation of ALP accordingly. TDS u/s 195 - Secondment charges and reimbursement - Addition u/s 40(a)(ia) - HELD THAT:- In assessee s case on perusal of records it is noticed that the seconded employee is in the payroll of the assessee and tax has duly been deducted on the salary paid to the employee including what is paid in Italy. It is also noticed that the reimbursement has also been taken into account for the purpose of TDS u/s.192B. We further notice that the reimbursement of expenses towards insurance, travelling expenses of the visiting employees is a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s before the DRP. 3. The DRP gave partial relief to the assessee whereby the interest on receivables was reduced to Rs.22,82,138. The DRP also deleted disallowance of interest on delayed remittance of statutory payments. The DRP confirmed the TP adjustment in the manufacturing segment and also the disallowance of secondment charges. The AO passed the final assessment order pursuant to the order of the DRP. 4. The assessee raised concise grounds as per below details:- 1. Ground No.1, 3 9 general grounds 2. Ground 2 legal issue with regard to the order u/s. 92CA does not bear the Document identification number (DIN). 3. Ground 4 (4.1 to 4.14) TP adjustment with respect to manufacturing segment. 4. Ground 5 (5.1 to 5.11) Interest on delayed receivables. 5. Ground 6 (6.1 to 6.16) Disallowance of secondment charges and reimbursement. 6. Ground 7 Levy of interest u/s. 234A 7. Ground 8 Levy of interest u/s. 234B 234C. TP adjustment 5. As per the TP study, the assessee has entered into several international transactions with its AE. In the manufacturing segment, the assessee followed the TNMM as the most appropriate method and operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,90,87,89,429 Variation in price (C)= A-B 16,14,17,954 8. Aggrieved, the assessee filed objections before the DRP who confirmed the TP adjustment in the manufacturing segment. Before us, the ld. AR submitted that out of the final set of comparables selected by the TPO, 2 comparables viz., United Drilling Tools Ltd. and Gross Engineering Tools Ltd. have been excluded by the TPO in the assessee s own case for AY 2015-16. Therefore the ld. AR submitted that the TPO is not correct in taking a different stand for the year under consideration given that there is no change in the facts. The ld. DR did not raise any objections to the contention of the ld. AR. 9. We have heard the rival submissions and perused the material on record. We notice that for the AY 2015-16 in assessee s own case, the TPO issued a show cause notice to the assessee wherein the TPO proposed to include United Drilling Tools Ltd. and Groz Engg. Tools Pvt. Ltd. (pg. 541 of PB) as comparable companies. The assessee filed its response raising objections for inclusion of the said two companies (pg. 545 of PB). We also notice that the TPO after consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng decisions of various benches of the Tribunal, which we shall point out. Sec.92B of the Act defining what is an international transaction was amended by Finance Act, 2012, way of insertion of an Explanation to sec.92B with retrospective effect from 1-4-2002 and the same reads thus:- Explanation- For the removed of doubts, it is hereby clarified then-(i) the expression international transaction shall include- (a) . (b) .. (c) capital financing, including any type of long-term or shortterm borrowing. lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment of receivable or any other debt arising during the course of business: 14. The amendment is to the effect that international transaction would specifically include within its ambit. 'deferred payment or receivable or any other debt arising during the course of business and hence non-charging or under-charging of interest on the excess period of credit allowed to the AE for the realization of invoices would amount to an international transaction. It was so held by the ITAT Delhi Bench in the case of Bechtel India Pvt Ltd (in ITA No.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO. 42. The foregoing discussion discloses that non-charging or undercharging of interest on the excess period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. In view of the above observations. the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted. Similarly, Considering the above discussion, it is held that deferred trade receivable constitutes international transaction. 43. Having concluded that deferred trade receivables constitute international transaction, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. On this aspect we can take useful guidance from the decision of the ITAT Delhi Bench in the case of Techbooks International (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle-3, Noida [2015] 63 taxmann.com 114 (Delhi - Trib.), wherein the Tribunal laid down guidelines on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the 'Provision of IT Enabled data conversion services'. This can be done by increasing the revenue charged by the comparable companies with the amount of interest for the period between that allowed by them in realization of invoices and 150 days as allowed by the assessee, so as to bring such comparables at par with the assessee's international transaction of provision of the ITES. To illustrate, if the comparables have allowed credit period of, say, 60 days and the assessee has realized its invoices in 180 days, then interest for 90 days (150 days minus 60 days) should be added to the price charged by the comparables and the amount of their resultant adjusted operating profit be computed. Rule 10B permits making such an adjustment. Sub-rule (2) to rule 10B stipulates that for the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged, inter alia, with reference to: '(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions ' . Then sub-rule (3) mandates that an uncontrolled transaction shall be comparable to an international transaction if &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e repaid. We hold and direct accordingly. All issues on determination of ALP of the transaction are kept open. 16. Respectfully following the above decision of the coordinate Bench, we remit the issue back to the TPO/AO for bench marking of the transaction of interest on delayed receivables and recomputation of ALP accordingly. Secondment charges and reimbursement 17. During the course of assessment proceedings, the AO noticed that the assessee has made payment to M/s. Biesse Spa, Italy towards secondment of employees deputed to India during the year under consideration for an amount of Rs.1,39,07,427. The AO also noticed that no tax was deducted at source on these amounts paid to the AE and issued a show cause notice to the assessee as to why the amount should not be disallowed u/s. 40(a)(i). The assessee submitted that these were salaries paid to Italian employees working in India. The payment was made to the employees in Italy and the same was reimbursed by the assessee. The assessee also submitted that the seconded employees was under the payroll of the assessee and part of salary was paid in Italy for which the AE periodically raised invoice for reimbursement. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S certificate towards reimbursement of salary cost held as follows:- 33. In the present case, the stand taken on the material available is on the construction of legal position. As pointed out in the discussion earlier that the understanding of the legal position being erroneous, the only conclusion that could be arrived at is to allow the application. 34. Though the Revenue has raised numerous contentions that further information is required to record a detailed finding, such stand is taken up for the first time in the present proceedings A perusal of the file of the Department does not make out any instance where the Department had sought for further information which was not furnished On the contrary, the petitioner has made out detailed representation on the legal position and record does not reflect any requisition for further information remaining unanswered In fact, the Apex Court in GE India Technology Centre (P.) Ltd. (supra) has rightly observed at para-16 as follows:- 16. The fact that the Revenue has not obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onded 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 overseas entity that has already subjected to TDS under section 192 of the Act. And therefore, at the time of making such reimbursement, to overseas entity, no taxes were deducted at source by the assessee in respect of reimbursements made as, according to the assessee, it was in the nature of cost-to-cost reimbursement, and, no element of income was involved. 26.10. The assessee in India does the TDS on 100% salaries u/s 192 and pay the same to the credit of the Central Government. Form 16 at page 228- 230 issued to Christopher Roberts of PB Vol I, by the assessee in Indian, Certificate under section 203 of TDS having deducted at source and further indicates the following Employee has a PAN number in India Total taxable salary is Rs 9,761,581 (this corresponds to the US$ 130,000 as total compensation indicated in the local employment contract at para 4 The Indian company does full TDS on 100% of the salaries, although 25% is paid in India and balance 75% outside India TDS done is Rs 2,834,300/-, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en by the recipient or consideration which would be income of the recipient chargeable under the head Salaries . 26.13. The definition of FTS under the Act excludes consideration which would be income of the recipient chargeable under the head salaries. If the seconded employee is regarded as employee of the assessee in India, then the reimbursement to overseas entity, by the assessee in India would not be in the nature of FTS, but would be in the nature of salary , and therefore, the reimbursements cannot be chargeable to tax in the hands of overseas entity, and therefore there would be no obligation to deduct tax at source at the time of making payment u/s.195 of the Act. 26.14. Article 12(4)-(5) of India USA, DTAA deals with Fees for technical services , as under: 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 descr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity, being the economic employer. It is to be noted that the understanding as to who is the employee in order to be excluded from, fees for technical services , cannot be inconsistent with the understanding of employee for the purpose of Article 15 on income from employment, especially when Article 15 is an anti-abuse provision. 29. The Ld.DCIT placed reliance on the decision of the Hon ble Delhi High Court in the case of Centrica India Offshore Pvt.Ltd. reported (2014) 44 taxmann.com 300 concluded that the reimbursement was FTS and that services provided make available technical skill or knowledge for use by the assessee. 29.1. In case of the decision of Hon ble Delhi High Court in the case of Centrica India Offshore Pvt.Ltd vs. CIT(supra) dealt with identical case of reimbursement of salaries paid to expatriate employees. The Hon ble Court held that, overseas entities had, through seconded employees, undoubtedly provided technical services to Centrica India and that, the expression rendering technical services expressly includes provision of services of personnel. The Hon ble Court held that the Seconded employees, were provided by overseas entities and work conduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in case of Verizon Data Services India (P) Ltd. v. AAR and Ors(supra), wherein it is held that, the reimbursement of salary of expatriates to foreign co by Indian company results in taxable income in the hands of the foreign company. Hon ble High Court also upheld the observations of AAR, wherein it characterized the secondment of personnel as provision of managerial services. However, the Hon be Court set aside the ruling of Hon ble AAR, wherein it held that, the reimbursement of salary of expatriates constitutes fees for included services in terms of Article 12(4) of India USA DTAA. Therefore, reliance placed on this decision is of no assistance to revenue. 29.4 There is another decision of Hon ble Supreme Court in case of DIT v. Morgan Stanley reported in (2007) 162 Taxman 165, wherein, it is held that, in case of deputation, the entity to whom the employees have been deputed cannot be regarded as employer of such employees as the employees continue to have lien on his employment with the entity which deputes him. Entity seconding the employee is the employer as it retained the right over seconded employee is also held by Hon ble AAR in case of AT S India Pvt Ltd., rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T S (supra) is concerned, the facts of the said case were that AT S, a company incorporated in Austria, offered services of technical experts to applicant, a resident company, pursuant to a foreign collaboration agreement on the terms and conditions contained in secondment agreement. Under the secondment agreement the applicant is required to compensate AT S for all costs directly or indirectly arising from the secondment of the personnel, and the compensation is not limited to salary, bonus, benefits, personal travel, etc. but also includes other items. On the above facts, Hon ble AAR ruled that the Contention that the payments are only in the nature of reimbursement of actual expenditure is not supported by any evidence and there is no material to show what actual expenditure was incurred by AT S and what was claimed as reimbursement. A part of the salary of seconded personnel is paid by the applicant in Indian rupees and the remaining part is paid by the applicant to AT S in Euro. While working with the applicant, the seconded personnel are required to comply with the regulations of the applicant, but they would go back to the AT S on the expiry of assignment. Aforesaid terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egarded as integral part of managerial, technical or consultancy services undertaken by the payee of fee. In other words, is the bracketted clause a stand alone provision or is it inextricably connected with the said services? HMFICL itself does not render any service of the nature of managerial, technical or consultancy to the applicant and it has not deputed its employee to carry out such services on its behalf. There is no agreement for rendering such services. In this factual situation, it is possible to contend that merely providing the service of a technical person for a specified period in mutual business interest not as a part of technical or consultancy service package but independent of it, does not fall within the ambit of S.9(1)(vii). 32. Hon ble Bombay High Court in case of Marks Spencer Reliance India Pvt.Ltd. VS. DIT reported in (2013) 38 taxmann.cm 190, upheld the view of Hon ble Mumbai Tribunal which held that, payment towards reimbursement of salary expenditure without any element of profit, would not be taxable under the provisions of the Act. Hon ble Court also held that, when the entire salary has been subjected to tax in India at the highest average tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical or other personnel) if such services a. . 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. Thus, even if, the rendering of service by the seconded personnel constitutes a contract for service, in the absence of making available any technical knowledge or skill to the Indian entity, the same shall not constitute fees for technical services. In support we refer to the decision of Hon ble Karnataka High Court in the case of CIT vs. De Beers India Minerals Pvt. Ltd. reported in (2012) 21 taxmann.com 214, on the concept of make available , observed and held as under: What is the meaning of 'make available'. The technical or consultancy service rendered should be of such a nature that it 'makes available' to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant has entered into separate employment contract with the Seconded Personnel. The seconded Personnel, during the period of secondment, work under the control and supervision of the Appellant; In terms of the employment contract, the appellant is under obligation to pay salary (including other entitlements) to the Seconded Personnel during the period of secondment in foreign exchange in his home country; for administrative convenience, the Appellant remits the salary payable to the Seconded Personnel in his home country in Foreign Exchange through the Seconder Company; the Seconded Personnel, as required under the Income Tax Act, 1961, files their respective returns under Section 139 of Income Tax Act, 1961 and shows the entire salary paid by the Appellant (including part of the salary paid in Foreign Exchange) as his/her income as salaries and pays the income tax thereon .. 14. Coming to the third issue of payment of salary, allowances and expenses of the personnel drawn from different global entities to work with the appellant, we find that learned Counsel submits that the employer-employee relationship exists between the Appellant and Seconded Personnel who have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ombay High Court in case of Marks Spencer Reliance India Pvt. Ltd. vs. DIT (supra), Hon ble Delhi High Court in the case of DIT Vs. HCL Infosystems Ltd. (supra), Coordinate bench of this Tribunal in case of IDS Software Solutions vs. ITO (supra), Hon ble Pune Tribunal in case of M/s.Faurecia Automative Holding(supra), Hon ble Ahmedabad Tribunal in the case of Burt Hill Designs (P) Ltd. vs. DDIT(IT) (supra), we are of the view that the reimbursement made by the assessee in India to overseas entity, towards the seconded employees cannot be regarded as Fee For technical Services Once there is no violation of provision of section 195, assessee cannot be held to be an assessee in default under section 201(1) of the Act for all the years under consideration. We therefore direct the Ld.AO to delete the interest levied under section 201(1A) of the Act for all the years under consideration. 23. In assessee s case on perusal of records it is noticed that the seconded employee is in the payroll of the assessee and tax has duly been deducted on the salary paid to the employee including what is paid in Italy. It is also noticed that the reimbursement has also been taken into account ..... X X X X Extracts X X X X X X X X Extracts X X X X
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