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TMI Blog2024 (9) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 alon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;DTAA'). 3.1. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating that there exists an employer-employee relationship between the expatriates and the Indian Associated Enterprises (AEs) and thus, no service was rendered by the Appellant to the Indian AEs. 3.2. On the facts and circumstances of the case and in law, the Ld. AO/ DRP has erred in ignoring and not taking cognizance of documents submitted as additional evidence to substantiate the existence of employer- employee relationship between the Indian AEs and the expatriates which inter-alia included the employment contract entered into between the Indian AEs and the expatriates and thereby, erroneously concluding that no independent employment agreement was entered into between them. 3.3. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating the fact that the Appellant has not performed any specific function apart from transfer of personnel in order to support the Indian AEs and thus, there could be no FTS in the absence of any service being rendered. 3.4. On the facts and circumstances of the case and in law, the Ld. AO/Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Japan ( India-Japan DTAA ), being more beneficial to it. In AY 2017-18, for the effective and efficient conduct of the business of its Indian Associated Enterprises, namely Advics South India Pvt. Ltd. and Advics North India Pvt. Ltd. ( Indian AEs/ AEs ), the assessee assigned some of its employees for a limited period as per the request raised by the AEs by way of Temporary Transfer Agreement(s) ( TTA ) along with their respective Memorandum of Understanding ( MOU ). Pursuant to this arrangement, three expatriates/ employees ( expats/ seconded employees/ employees ) employed with the assessee were identified by the AEs in accordance with their business objective. Thereafter, the AEs entered into a separate employment agreement with these three expats respectively who then became the employees of the respective AEs. The AEs were responsible for payment of salaries to these expats. However, for administrative convenience, the assessee agreed to disburse part of the remuneration of these expats on behalf of the AEs in their home country i.e. Japan which were subsequently reimbursed by the AEs on cost-to-cost basis without any mark-up. The AEs duly withheld and deposited tax on entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee on account of expat/ seconded employees cost reimbursement from the Indian AEs to be taxable as Fees for Technical Services ( FTS ) as per Article 12 of the India-Japan DTAA as well as under the provisions of the Act to the returned income of Rs. 10,05,04,070/-. 3.6 The assessee filed objections before the Ld. DRP who vide its directions dated 11.02.2022 under section 144C(5) of the Act upheld the action of the Ld. AO by treating the employee reimbursement salary cost of Rs. 2,70,27,031/- taxable as FTS. The observations and findings of the Ld. DRP are reproduced below: 4.2.1 Ground Number 2 along with the sub-grounds 2.1 to 2.5 relate to disallowance of employee cost reimbursement from the Indian AE to the assessee by treating the same as FIS. Brief facts of the case is that the Assessee is a Company incorporated under the laws of Japan and is a tax resident of Japan. During the year under consideration, the company (assessee) sent 3 of its expatriate employees on secondment to its Indian AEs. These employees were seconded to India to enable the Indian AEs to have employees having special knowledge, techniques, ability and experience to work for the Indian AEs and take for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of these employees Consequently, it squarely falls under the ambit of Article 12 of the DTAA and is to be categorized as FTS 4.2.2 The AO has also relied on a number of judicial precedents in support of his conclusions. 4.2.3 The assessee has objected to the conclusion of the assessee that the reimbursements made by the Indian AE to the assessee towards the salary paid by the assessee in Japan to key personnel working for the Indian AE's are in the nature of FTS taxable in the hands of the assessee in India. The assessee has filed detailed submissions in this regard. The crux of the submissions of the assessee is as under: a) Existence of employee-employer relationship between expatriates and Indian Company The amount was paid by the Indian company as salaries to the expatriates and it was only for administrative convenience that part of the salaries were paid by the Assessee in Japan, which was cross charged on cost-to-cost basis, without any element of profit or mark-up. b) No service element in secondment to Indian Company There is no service which is provided by the Assessee to the Indian Company. Thus, without any presence of service element, the amounts do not qualify as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a seconded employee whose appraisal can't be done independently by the Indian AE. Their salary and other expenses are also paid by the assessee and not by the Indian AEs. Consequently, it squarely falls under the ambit of Article 12 of the DTAA and is to be categorized as FTS. This view is also supported by various judicial pronouncements as discussed in the assessment order. Hence, the contention of the assessee that the reimbursement of salary/other cost is not taxable in India is not acceptable. 5. Further, on the issue of other additional documents such as Copy of the VISA letter showcasing that secondee employees were working in India on 'employment VISA, Copy of form 16 issued by the Indian AEs to such secondee employees and Copy of sample debit notes raised by the assessee on the Indian AEs submitted by the AR of the assessee to substantiate its claim that the seconded employees are the employee of Indian ALs. This argument does not match with the facts of the case and payments received by the assessee company form its AEs is nothing but the FTS as per Article 17 of the India-France DTAA. 6. In view of the above, the contention of the assessee is not accepted at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployees to the Indian AEs and control over them is exercised by the assessee. As rightly observed by the AO in page 8 of his order, the seconded personnel cannot be said to be working under direct supervision, control and management of Indian AE, instead they are in India to provide their expertise, knowledge and other skills to the Indian AE and in exchange for these services, payments are made by the AEs to the assessee. It is further noticed that the salary payments to the seconded employees are directly made by the assessee. The assessee has submitted that the TDS has been deducted from such reimbursements, but such salary payment has not been directly made to the persons claimed to be the direct employees of Indian AEs by the assessee There is a third party control, i.e. that of the assessee, on the conditions of services to be provided by the seconded employees for the Indian AEs. If there was no control of the assessee over the seconded employees to Indian AEs, there would be a direct employment agreement between the AEs and the seconded personnel and the employment would not be channelled through the assessee under TTA. In the circumstances, the DRP finds no infirmity in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves working in technical and managerial capacities. As observed by the AO, these seconded employees functioned under substantial control of the assessee (ADVICS) and therefore, in effect provided services to the domestic AEs on behalf of the assessee company. In view of the above, the DRP find no infirmity in the action of the AO to treat the reimbursement of salary cost to the assessee from the Indian AEs on account of the managerial and technical services received by the AE from the seconded employees of the assessee as FTS. 3.7 Pursuant to the above, the Ld. AO passed the final assessment order on 19.03.2022 under section 143(3) read with section 144C(13) of the Act assessing the total income of the assessee at Rs. 12,75,31,101/- (Returned Income Rs. 10,05,04,070/- + Addition Rs. 2,70,27,031/-). 4. Aggrieved, the assessee is in appeal before the Tribunal and all the grounds of appeal relate thereto. 5. Ground no. 1 and 2 are general in nature. 6. The main grievance of the assessee is raised in ground No. 3 (along with its sub-ground nos. 3.1 to 3.6) wherein the assessee has challenged the taxability of the employee salary cost reimbursements amounting to Rs. 2,70,27,031/- to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e salaries of the employees /expats which have been duly paid after deducting the TDS thereon. The assessee has paid certain portion of the salary to the expats in Japan only for administrative convenience, for and on behalf of the India AEs. The full amount of salary has been offered to tax by expats in India by filing their respective ITRs. The assessee has submitted copies of ITRs of expats and Form 16 issued to the expats evidencing the same. 6.6 The Ld. AR then referred to Explanation 2 to section 9(1)(vii) of the Act which provides that For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries and submitted that once the payment is in the nature of salary, the same cannot be classified as FTS. 6.7 The Ld. AR referred to the decision of the Hon ble Delhi High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l disparity between the facts of Northern Operation Systems Pvt. Ltd. s case (supra) and assessee s case by giving reference to the relevant clauses of the TTA and MOU, in response to which the Ld. DR offered his point-wise written comments thereto. 9. We have heard the Ld. Representatives of the parties, considered their submissions and perused the records. It is an undisputed fact that the assessee is a tax resident of Japan and thus governed by the provisions of the India-Japan DTAA. The assessee has opted to be governed by the provisions of the India-Japan DTAA being more beneficial to it. The issue that needs to be considered by this Bench here is the taxability of receipts of Rs. 2,70,27,031/- in the nature of reimbursement towards salary cost by the assessee from its Indian AEs that has been treated as FTS by the Revenue and charged to tax under the provisions of Article 12 of India-Japan DTAA viz-a-viz the claim of the assessee that the same be treated as employee salary cost cross charged by the assessee which has no element of service/ income. 10. FTS is defined under Article 12(4) of the India-Japan DTAA to mean payments of any amount to any person other than payments to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Paper Book) refers:- Article 2. PURPOSE OF TEMPORARY TRANSFER .........The word Temporary Transfer shall mean, in accordance herewith, (1) for ADVICS and the assigned employee, in principle, to cease the employment agreement entered into by and between them, and (1) for ADSNI/ADSSI and the assigned employee to separately enter into an employment agreement. Based on such employment agreement, the assigned employee belongs to ADSNI. As such, the assigned employee works in accordance with ADSSI's/ADNSI's orders and instructions, and ADSNL/ADSSI pays corresponding salaries and usages to the assigned employee Further Article 5 of the TTA reproduced below infers that the AEs shall be completely responsible for the conduct of the expats and the expats are required to follow the rules and policies of AEs. (page 6 of the Paper Book refers): Article 5. Applicable Rules Unless otherwise stipulated in this Agreement, the rules and policy of ADSSI shall apply to Assigned Employee with respect to such matters as working hours, recess, and holidays. 10.3 The fact on record reveals that the assessee has duly furnished the relevant TTA(S) along with their MOU entered into between the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 1 and Article 2 of MOU (Page18 of Paper Book). 2. The obligation to pay the salary was of Foreign company. Indian Company was merely reimbursing the salary paid by Foreign Company. Seconded employees had no right against Indian Company in case of failure of payment of salary. The Indian AEs are obligated/solely responsible for payment of all the costs viz. salary and wages etc. and benefits to the expats which is clearly spelt out in the TTA(s) along with their corresponding MOU. Article 10 of TTA (Page 7 of Paper Book) and Article 2 of MOU (Page 18 of Paper Book) 3. The employment contracts issued by Indian Company to seconded employees were silent on salary details. All compensation and benefits accruing to employees are in accordance with applicable rules of Indian AEs. Article 5 10 of the TTA (Page No. 6 and 7 of Paper Book) and Article 2 of the MOU (page 18 of Paper Book) 4. The seconded employees were not specifically realised by Foreign Company during the period of secondment. TTA along with their corresponding MOU clearly demonstrates that the seconded employees shall work exclusively for the AEs in the conduct of its business. Article 1 2 of the TTA (Page 5 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the respective MOU. All compensation and benefits accruing to employees are in accordance with applicable rules of the AEs. Flughafen AG was providing managerial services to the Indian third party company. Employees were seconded to the Indian AEs to carry on routine business activities as their employee and which continued even after the initial period to operationalize the AEs. Food World Supermarkets Ltd. [2015] 63 Taxmann.com 43 (Bangalore Tribunal) The assessee was an Indian company engaged in the business of ownership and operation of supermarket chain in India. DFCL was a company based in Hong Kong and engaged in the identical business activity as that of assessee. The secondees are assigned by DFCL and there is no separate contract of employment between the assessee and the secondees. The secondees are under the legal obligation as well as employment of DFCL and assigned to the assessee only for a short period of time. Seconded employees taken into employment by the Indian AEs by way of TTA/MOU/Employment Contracts. The expats/ seconded employees work exclusively for the Indian AEs and are under their direct control. Entire salary to assigned personnel and assessee would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sisted the functioning of the taxpayer. (ii) M/s Faurecia Automotive Holding vs. DCIT (ITA No.784/PUN/2015) wherein it has been held that when the foreign company did not provide any 'service' to the Indian company and only received reimbursement on account of part employee cost paid outside India, such amounts would not qualify as FTS. (iii) M/s. Toyota Boshoku Automotive India Private Limited vs. DCIT [IT(TP)A No. 1646/Bang/2017) wherein the Bangalore Tribunal held that reimbursement made by the Indian company to Toyota Corporation, Japan towards seconded employees cannot be regarded as fees for technical services . 15. Similar view has been taken by the Co-ordinate Bench of Delhi Tribunal in the case of Yamazen Machinery and Tools India Pvt. Ltd. vs. ACIT (ITA No. 582/Del/2020) wherein under the similar fact pattern to that of the assessee the Tribunal observed that the decision in the case of Centrica India Offshore (P.) Ltd. vs. CIT [2014] 364 ITR 336 relied upon by the Revenue is inapplicable and held that the payment made by the assessee towards reimbursement of expenses is in the nature of salary cost of the assigned employees subject to TDS under section 192 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Para 53 of the decision of Hon'ble Supreme Court clearly highlighting Facially, or to put it differently, for all appearances, the seconded employee, for the duration of her or his secondment, is under the control of the assessee, and works under its direction. Yet, the fact remains that they are on the pay rolls of their overseas employer. What is left unsaid- and perhaps crucial, is that this is a legal requirement, since they are entitled to social security benefits in the country of their origin .It is doubtful whether without the comfort of this assurance, they would agree to the secondment. Furthermore, the reality is that the secondment is a part of the global policy of the employer loaning their services, on temporary basis. On the cessation of the secondment period, they have to be repatriated in with accordance a global repatriation policy (of the overseas entity). 3. All compensation and benefits accruing to the employees are in accordance with applicable rules of the Foreign entity including the salary and allowance of the expats which is decided by the overseas entity. (refer the Duration Base Salary and Bonus clauses of the Letter of Understanding and para 54 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly mentions: The employees seconded to NOS shall continue to be remunerated through the payroll of NTMS only for the purpose of continuation of social security, retirement and health benefits but for all practical purposes, NOS; shall be the employer. 6. The supervision and control over the employees were not clearly spelt out as held by the Supreme Court (refer para 57 at page 32 of the Annexures). The TTAs along with their corresponding MOUs clearly state that the seconded employees shall work under the direct supervision and control of the Indian AEs during their entire period of employment with them. Articles 5 of the TTA (refer page 6 of Paper Book read with Article 2 of the MOU) (refer page 20 of Paper Book). There is no such mention by the Hon'ble Supreme Court in Para 57 that supervision and control over the employees were not clearly spelt out. Supervision and control over the overseas employees is clearly and unequivocally spelt out in Article II of Secondment agreement under Duties Obligation as, A. The employee shall act in accordance with the instructions and directions of NOS. B. During the secondment period, the employee shall devote the whole of their time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim to tax the impugned receipts as FTS in the hands of the assessee is misplaced. Even though there may be certain similarities between the factual positions of both the cases (supra), the applicability of this case to the assessee s case, in our humble opinion is questionable. Comments of Ld. DR provided in point 2. of the above table in our view infact supports the case of the assessee which spells out how a secondment arrangement is generally made and to be understood. Part salary has been disbursed in Japan by the assessee only for administrative convenience. Further, the decision in the case of Northern Operating Systems (P.) Ltd. (supra) has been rendered in the context of erstwhile service tax regime to determine the taxability of services provided by the assessee to the Indian entity for the purpose of levy of service tax. It is in this context that the Hon ble Supreme Court considering the facts of that case held those services taxable as manpower recruitment supply services under the erstwhile provisions of the service tax laws. However, the present case involves determination of taxability of the impugned receipts either as employee salary cost or FTS under the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Ernst Young U.S. LLP vs. ACIT (IT) [2023] 153 taxmann.com 95 (Delhi - Trib.) wherein the Tribunal held as under: 22. A perusal of the judgment of the Hon'ble Supreme Court (supra) shows that it was in the context of manpower recruitment and supply of services for which the assessee was recipient of services and was liable to pay service tax. As mentioned elsewhere, this judgment was delivered to discern the true nature of relationship between the seconded employees and the assessee and nature of services provided in that context by oversees group companies to the assessee . (ii) The Hon'ble Karnataka High Court in the case of Flipkart Internet (P.) Ltd. vs. Dy. CIT (International Taxation) [2022] 139 taxmann.com 595 wherein the Hon'ble High Court held as under: 32.(E)(x) It needs to be noted that the judgment rendered was in the context of service tax and the only question for determination was as to whether supply of manpower was covered under the taxable service and was to be treated as a service provided by a Foreign Company to an Indian Company. But in the present case, the legal requirement requires a finding to be recorded to treat a service as ' ..... X X X X Extracts X X X X X X X X Extracts X X X X
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