Toyota Boshoku Automotive India Private Limited, Bangalore V. The Deputy Commissioner of Income Tax Large Tax Payers Unit Circle-1 , Bangalore

ITA 1646/BANG/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 4567 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 8 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-04-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 06-08-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Double taxation relief; Opportunity of being heard; International transaction; Deemed to accrue or arise in india; Permanent establishment; Advance ruling; Non-deduction of tax; TDS
• Section: 142(1); 195; 192; 43; 9(1); 9(1); 9(1); 44DA; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH: BANGALORE BEFORE SHRI.CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT.BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No. 1646/Bang/2017 Assessment Year : 2013-14 M/s. Toyota Boshoku Automotive India Pvt. Ltd., 41, Bhimenahalli, M.N. Halli Post, Bidadi, Ramanagaram Dist – 562 109. PAN: AAECT1871F Vs. The Deputy Commissioner of Income Tax, LTU, Circle – 1, Bangalore. APPELLANT RESPONDENT & IT(TP)A No. 2586/Bang/2019 Assessment Year : 2015-16 M/s. Toyota Boshoku Automotive India Pvt. Ltd., 41, Bhimenahalli, M.N. Halli Post, Bidadi, Ramanagaram Dist – 562 109. PAN: AAECT1871F Vs. The Assistant Commissioner of Income Tax, LTU, Circle – 2, Bangalore. APPELLANT RESPONDENT Assessee by : Shri Dhanesh Bafna, AR Revenue by : Dr. Manjunath Karkihalli, CIT DR Date of Hearing : 10-02-2022 Date of Pronouncement : 13-04-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER The present appeal has been filed by assessee against the final assessment order dated 31/05/2017 and 28/10/2019 passed by Page 2 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 the Ld.DCIT,LTU, Bangalore for assessment years 2013-14 and 2015-16 respectively. At the outset, both sides submitted that, grounds raised by assessee in both the years under consideration are common on similar facts. We therefore dispose of both the years under consideration by way of a common order. 2. For the sake of convenience we are referring to the facts for assessment year 2013-14 and the view taken in respect of the issues alleged therein shall be applied mutatis mutandis you turn this for the 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 Page 3 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 assessee, observed as under: “Toyota Boshoku India is jointly held by Toyota Boshoku Corporation, Japan (95% shareholding) and Toyota Tsusho Corporation, Japan (5% Shareholding). Toyota Boshoku India manufactures components such as seats, door trims and interiors for the automobile industry. The company’s plant commenced commercial operations from November 1999. Toyota Boshoku India is a licensed manufacturer conducting the manufacturing activities with the license and technical know-how obtained from Toyota Boshoku Corporation, Japan. The company also supplies seats, door trims and interiors to Toyota Kirloskar Motor private Limited (“TKML”), a Toyota Group company incorporated in India.” 6. The Ld.TPO observed that, the assessee had following international transaction for the year under consideration: Particulars Amount Sale of finished goods 3,66,24,101 Purchase capital goods 63,80,140 Software purchase 18,89,528 Royalty paid 10,53,17,196 Technical assistant and fees 26,69,072 Management fees 5,04,75,930 Training fees 7,96,717 Reimbursement of expenses received 4,87,19,820 Total 25,28,72,504 7. From the transfer pricing report filed by the assessee, the Ld.TPO observed as under: “In its TP study, the taxpayer has aggregated all international transactions and has used TNMM as the most appropriate method to benchmark the international transactions. The TPO sees that the sale and purchase transactions with AEs are minimal. Major transactions are payment of management fees and royalty. The taxpayer has a turnover of Rs. 570 Crs and it has used an entity- Page 4 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 level margin as profit level indicator to benchmark international transactions of small value.” The Ld.TPO was of the opinion that, profit split method (PSM) is the appropriate method to benchmark royalty transaction. In support, he placed reliance on the decision of Hon’ble Delhi Tribunal in case of Global One India Pvt.Ltd., and ITA number 5571/Del/2011 and ITA No.5986/Del/2012. The Ld.TPO carried out comparable search and proposed an adjustment of Rs.9,02,28,585/-. 8. On receipt of the transfer pricing order, the Ld.AO passed draft assessment order, incorporating the adjustment proposed by the Ld.TPO. In addition, the Ld.AO also disallowed Rs.42,41,683/- claimed by the assessee towards the layout changes 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. Page 5 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 the employees of the AE, as per the agreement between the AE and assessee. 10.2. The DRP for following reasons, concluded the nature of payment in the form of reimbursement made by the assessee to Toyota Corporation Japan as Fees for Technical Services (FTS) - 1. That Toyota Corporation, Japan, continued to be the employer in respect of the deputed/assigned employees and continued to pay their salaries. That the assessee only reimbursed the salary costs of the concerned expatriate deputed employee to Toyota Corporation Japan. Therefore, the sum reimbursed was not salary paid by the assessee in India to the seconded employee, but was FTS paid to Toyota Corporation, Japan and, is taxable in India. The DRP held that the assessee ought to have deducted tax at source on the reimbursement made to Toyota Corporation, Japan. 2. The nature of services rendered by the expatriate employees was FTS within the meaning of Explanation 2 to Sec.9(1)(vii) of the Act. In this regard the DRP found that all the deputed employees had technical skills and imparted their skill while on deputation to India to further the business projects of assessee and therefore the payment in the form of reimbursement by assessee to Toyota Corporation Japan was in the nature of FTS. Page 6 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 10.3. The DRP, relying on the decision of Hon’ble Delhi Tribunal in case of Centrica India Offshore (P) Ltd vs. CIT reported in (2014) 44 taxman.com 300, treated the amount paid by the assessee as FTS in the hands of the AE, against services provided by the AE, through seconded employees. Reliance was also placed on the decision of Authority for Advance ruling, in case of Target Corporation India (P) Ltd In.re., reported in (2012) 24 taxman.com 152. 10.4. On receipt of the order of the DRP, the Ld.AO passed the final assessment order making disallowance in the hands of assessee at Rs.14,23,93,372/- u/s. 40(a)(i) of the Act. Aggrieved by the order of the Ld.AO, assessee filed present appeal before the Tribunal. At the outset, the Ld.AR submitted that, Ground No.1 is general in nature and therefore do not require any adjudication. 11. Ground No.2 to 10 is in respect of the transfer pricing adjustment made to the royalty as independent international transaction by using PSM as the most appropriate method. He submitted that, identical issue was considered by coordinate 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. Page 7 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 method used for benchmarking the royalty transaction by separately benchmarking it under PSM. 11.3. The overall margin computed by the assessee was at 5.26%. From the transfer pricing study, we note that the assessee paid Rs.105,317,196/- as royalty to the AE, for use of technical know- how relating to manufacture and sale of automotive components. The net sales earned by the assessee for the year under consideration is Rs.4,61,06,57,812/-. Thus, the effective rate of royalty paid by the assessee to the AE is at 2.28% over net sales. We note that, the Ld.TPO computed the royalty rate by using profit split method at 3.19%. The Ld.TPO considered the profit split ratio of 2:3 wherein 40% split was considered to be the share of the AE. There is in the overall margin of 5.26% 2.28% over the net sales are paid as royalty to the AE by assessee. 11.4. We note that, Ld.TPO referred to the decision of Hon’ble Delhi bench in case of Global One India (P.)Ltd. vs. ACIT (supra). On perusal of this decision, we learn that, that was a case where, Global One India, out of highly integrated operations and Page 8 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 deployment of assets and functions of different entities located in different geographical locations, for execution of one transaction, to be ultimately delivered by way of combined effort. It was under such circumstances that profit split method was necessary to be considered as the most appropriate method. 11.5. In the present facts of the case that technology is obtained from the evil witches used by assessee in its manufacturing activity as there is no involvement of the global entities in order to execute the transaction. We have perused the decision case of assessee’s sister concern referred to herein above, wherein, in identical circumstances, the Tribunal observed and held as under: “15. We have considered the rival submissions. We are of the view that the issue with regard to Most Appropriate Method in the case of assessee had already been settled by the Tribunal. The TPO as well as the DRP have not followed the aforesaid decision of the Tribunal on the ground that economic life of the technology had an impact on the MAM and that technology in question was to be used by start-ups and since the assessee was using the technology for a fairly long period of more than 5 years, it would not be proper to adopt the TNMM as the MAM, as the 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 the technology in manufacturing and the sale of the product so manufactured contribute to the profit of the Assessee and TMC, Japan Page 9 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 has nothing to do with that. There is therefore absence the first condition for application of PSM as MAM. As submitted by the Assessee PSM is used as MAM only in a case involving transfer of unique intangible or in multiple inter-related international transactions which cannot be valued separately for determining the ALP. The OECD guidelines cited on behalf of the assessee clearly supports the aforesaid approach and the OECD guidelines in this regard reads as follows:— "Further reliance is also placed on OECD Guidelines, which clearly lay down the situations in which the PSM is selected as an appropriate method for benchmarking. The relevant extract from the OECD Guidelines (para 2.109) is as below: "A transactional profit split method may also be found to be the most appropriate method in cases where both parties to a transaction make unique and valuable contributions (e.g. contribute unique intangibles) to the transaction, because in such a case independent parties might wish to share the profits of the transaction in proportion to their respective contributions and a two-sided method might be more appropriate in these circumstances than a one-sided method. In addition, in the presence of unique and valuable contributions, reliable comparables information might be insufficient to apply another method. On the other hand, a transactional profit split method would ordinarily not be used in cases where one party to the transaction performs only simple functions and does not make any significant unique contribution (e.g. contract manufacturing or contract service activities in relevant circumstances), as in such cases a transactional profit split method typically would not be appropriate in view of the functional analysis of that party". 16. The revised guidance (June 2018) on the application of transactional PSM, provided by the OECD state the importance of delineating the transactions in determining whether the PSM is applicable or not. The relevant extract from the OECD Guidelines is provided below: "2.125. The accurate delineation of the actual transaction 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. Page 10 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 profit split may be the most appropriate method could include a high level of integration in the business operations to which the transactions relate and /or the shared assumption of economically significant risks (or the separate assumption of closely related economically significant risks) by the parties to the transactions. It is important to note that the indicators are not mutually exclusive and on the contrary may often be found together in a single case. 2.127. At the other end of the, spectrum, where the accurate delineation of the transaction determines that one party to the transaction performs only simple functions, does not assume economically significant risks in relation to the transaction and does not otherwise make any contribution which is unique and valuable ........ " "2.147. Under the transactional profit split method, the relevant profits are to be split between the associated enterprises on an economically valid basis that approximates the divisi6n of profits that would have been anticipated and reflected in an agreement made at arm's length. In general, the determination of the relevant profits to be split and of the profit splitting factors should: Be consistent with the functional analysis of the controlled transaction under review, and in particular reflect the assumption of the economically significant risks by the parties, and Be capable of being measured in a reliable manner." 17. It is clear from the above OECD guidelines that in 'order to determine the profits to be split, the crux is to understand the functional profile of the entities under consideration. Although the comparability analysis is at the "heart of the application of the arm's length principle", likewise, a functional analysis has always been a cornerstone of the comparability analysis. In the present case the Assessee leverages on the use of technology from the AE and does not contribute any unique intangibles to the transaction. It may be true that the Assessee aggregated payment of royalty with the transaction of manufacturing as it was closely linked and adopted TNMM but that does not mean that the transactions are so interrelated that they cannot be evaluated separately for applying PSM. Further, the Assessee does not make any unique contribution to the transaction, hence PSM in this case cannot be applied. Page 11 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 as it was used in case of the sister concerns case referred to herein above. There is no dispute that, factual metrics and background our identical and the nature of payment having considered identically by the revenue authorities in both these cases. We are therefore respectfully following the view taken by coordinate bench of this tribunal in case of Toyota Kirloskar (supra), we are of the view that TNM Method is the Most Appropriate Method and the Ld.AO/TPO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. Accordingly, Ground No.2-10 raised by assessee for the assessment year 2013-14 stands allowed. 12. The 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 2 to 16 raised their in. Page 12 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 Accordingly, Grounds 2-16 raised by assessee for the assessment year 2015-16 stands allowed. 13. Ground No.11 to 12 is raised by assessee in respect of disallowance of reimbursement of salary or seconded employees on account of non-deduction of tax at source. 13.1. Before considering the issue in hand, it is necessary to understand the terms and conditions agreed between the assessee and the AE towards secondment of employees. The assessee has placed copy of the ‘Agreement for Employees on loan’ dated 01/08/2008 at page 498-507 of paper book. The relevant articles governing the agreement for employees on loan are as under: “Article 1 - Purpose. Employees on loan shall be dispatched to TBI to perform business management in TBI and provide guidance on business management in TBI.. Article 2 - Employees on Loan. This agreement covers all employees transferred on loan from TBC to TBI and they shall be considered as employees on loan. The number of employees on loan shall be determined through consultation between TBC and TBI. The employees who are designated as employees on loan by TBC shall be dispatched to TBI. The request for employees on loan shall be in Part — A of Form-1 annexed to this Agreement. TBC shall agree to transfer its. designated employees on loan to TBI in Part —B of Form-1. Article 3 - Time period during which Employees on 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 Page 13 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 services of whatsoever nature to TBI under this agreement by transfer of employees on loan and that TBC shall not be held responsible for any acts or omissions of the employees on loan during the period of transfer. 5. TBI expressly acknowledges and agrees that the employees on loan will not have at any time any authority of whatsoever nature to act on behalf of or bind TBC in connection with their duties as employee of TBI and further that the. employees on loan will have no express or implied authority whatsoever to act or represent or bind TBC for their acts. 6. The employees on loan shall during the period of transfer remain in the employment of TBC only for the limited purpose of being on the payroll of TBC and being eligible to be covered under all social / retiremental benefits in relation to employment as applicable under the laws of Japan' or other country from which they are sourced. 7. TBI has the right to terminate / extend the employment of the employees on loan as per the terms of the employment contract issued to them. TBI shall inform TBC whenever any contract of employment with the employees on loan is terminated / extended. Article 7 - Payment of Employees on Loan. TBI shall in consultation with TBC fix the salary, welfare benefits to be paid to employees on loan. TBI shall be responsible for payment of such Salaries, Welfare benefits and Terminal benefits as per the terms of employment entered into between TBI and employees on loan. All such payments shall be subject to tax in India, as applicable. TBC shall not be eligible for any payment from. TBI for transfer of employees on loan. At the request of TBI, TBC shall on behalf of TBI pay in Japan, on a monthly basis or other agreed intervals, such sums being part of salaries of employees on loan as indicated by them, for maintenance of their families For such payments made by TBC in Japan, TEC shall raise Page 14 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 debit note on TBI on a monthly or quarterly basis and TBI shall make payments within fifteen days of receipt *of the debit note. Bank Charges for making the payments shall be. to the account of TBI. TBI shall obtain necessary approval from Reserve Bank of India for such remittance I repatriations to be made 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 payable by assessee to such employee is subject to TDS under the head salary and a form 16 is issued to the employees that are seconded. In support he referred to a sample contract entered into by assessee with one Mr.Minoru Ashahi placed that page 651-652 of paper book is as under. Page 15 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 Page 16 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 Page 17 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 13.3. It is further submitted that, at the request of the seconded employee, the assessee agree to remit part of the salary to Japan, for the local use and family maintenance there, and part of the salary is received in India. The Ld.AR submitted that, as per the request letter of the seconded employee, the salary is partly payable to the seconded employee in India and balance in Japan to his family. The Ld.AR referred to page 654 which is one such letter issued by Mr.Minoru Ashahi. For sake of convenience we reproduce here with the letter by Mr.Minoru Ashahi as under: Page 18 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 13.4. The Ld.AR then referred to page 653, wherein letter was issued by assessee to Mr.Minoru Ashahi that reads as under: 13.5. From the above, the Lad.AR submitted that, the payment made by assessee to the AE is towards reimbursement of the salary paid by the AE to family of the seconded employee in Japan, at the request of the employee. It is also submitted that 100% of the salary payable by assessee to the seconded employees are subjected to TDS under section 192 of the Act and return of income is filed by such seconded employees in India in Page 19 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 respect of the total salaries earned by the seconded employees in India. 13.6. He thus submitted that the entire payment is subjected to tax, under the head salary in India, and therefore the payment made to the AE was in the nature of reimbursement of expenses. The Ld.AR submitted that, the reimbursement to the AE do not have any character of income in the hands of the AE, and therefore, the taxing provisions under the Act does not get triggered. 13.7. The Ld.AR placed reliance on following decision:  Decision of Hon’ble Bombay High Court in case of DIT(international Taxation) vs. Marks and Spencers reported in (2013) 138 taxmann.com190.  Decision of Authority of Advance Ruling in case of Cholamandalam MS General insurance Co.Ltd reported in (2009) 309 ITR 356.  Decision of coordinate bench of this Tribunal in case of IDS Software Solutions India Pvt.Ltd. vs. ITO reported in (2009) 122 TTJ 410.  Decision of coordinate bench of this Tribunal 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 Page 20 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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, were decided by the assessee in India, and, it was the assessee and not Toyota Corporation Japan, who was responsible and accountable to ensure proper performance of duty by the secondees. It is thus submitted that the entire risk of work performed by the secondees was borne by the assessee. 13.9. It was submitted by the Ld.AR that: (i) the nature of work to be performed by the secondee was specified by the assessee, (ii) the employees were required to act in accordance with the instructions and directions of the assessee; (iii) the salary costs of these employees were effectively borne by the assessee; (iv) the assessee was responsible and accountable for the work performed by the employees, the assessee was the real employer of the secondees for all practical purposes. 13.10. The Ld.AR submitted that, the right of superintendence, direction and control by an assessee over a person would result in an employer-employee relationship and the remuneration paid to such person would be considered as 'salaries'. In support, he Page 21 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 referred to the decision of Hon’ble Madras High Court in case of K.R. Kothandaramam v. CIT reported in (1966) 62 ITR 345. 13.11. TheLd.AR submitted that, dual employment of a person is well known in law and section 192(2), which provides for TDS from salary, recognizes this. It was submitted that, under dual employment as in the instant case, where the legal employment remains with one employer and the other person exercises supervision over the employee, the latter person should be recognized as the real or economic employer. In support of this argument, the Ld.AR relied on the following extract from the OECD commentary, which is as under : "It should be noted that the term "employer" is not defined in the Convention but it is understood that the employer is the person having rights on the work produced and bearing the relative responsibility and risks. In cases of international hiring out of labour, these functions are to a large extent exercised by the user. In this context, substance should prevail over form, i.e. each case should be examined to see whether the functions of employer were exercised mainly by the intermediary or by the user. It is therefore up to the Contracting States to agree on the situations in which the 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." Page 22 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 Toyota Corporation Japan, constitutes expenditure in the nature of 'salary' and consequently the reimbursements made to Toyota Corporation Japan, under the Agreement of Employees on Loan dated 01/08/2008, cannot be considered as 'fees for technical services' either under the Act, or under the India Japan DTAA, and consequently the said reimbursements are not liable for TDS u/s.195 of the Act. 13.13. The Ld.AR submitted that, the secondment of employees under the agreement do not tantamount to rendering of technical, professional or consultancy services u/s.9(1)(vii) of the Act. It is submitted that apart from deputing secondees, Toyota Corporation Japan did not render any other service to the assessee under the “Agreement for Employees on Loan” dated 01.08.2008. It was submitted that, consequently in respect of the reimbursements made, the provisions of section 9(1)(vii) would not be attracted. 13.14. It was submitted that, as per section 9(1)(vii), the term 'fees for technical services' means any 'consideration' for rendering of managerial, consultancy or technical services. The Ld.AR submitted that, the remuneration and other administrative costs relating to seconded personnel was initially paid by Toyota Corporation, Japan and these sums were reimbursed by the assessee. It was also submitted that, this arrangement was made out of social security and other reasons such as business Page 23 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 exigencies and commercial expediency and did not contain any mark up resulting in any profit or income from it, and therefore, cannot be treated as 'consideration' as per the definition of the term 'fees for technical services u/s.9(1)(vii) of the Act. The Ld.AR relied on letter dated 11/06/2014 by the assessee to the seconded employee reproduced herein above. The Ld.AR thus submitted that, Toyota Corporation Japan, did not render any services to the assessee. It only deputed secondees to the assessee as per the Agreement for Employees on Loan dated 01/08/2008 at the request of the assessee in India and therefore, contended that, the expression "provision of services of technical or other personnel" as appearing in the definition of 'fees for technical services' was not satisfied. He submitted that, the revenue did not bring out any material on record in support of their conclusion that, the payments to Toyota Corporation Japan, were in consideration for services rendered by Toyota Corporation Japan to the assessee. 13.13. 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. 13.14.1. 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 Page 24 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 employees, provided ‘technical’ services to the assessee, and that, the expression, ‘rendering technical services’, expressly include, ‘provision of services of personnel’. 13.14.2. 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 rendering technical services hence taxable as FTS and liable to withholding of tax u/s.195. The Hon’ble Madras High Court in Verizon Data Services India (P) Ltd. v. AAR & Ors., reported in 346 ITR 489 upheld the ruling of AAR. 36. The Ld.DR also relied on the decision of coordinate bench of this Tribunal in case of Food World Supermarkets Ltd vs. DDIT (International Taxation) reported in (2015) 63 taxman.com 43, wherein this Tribunal hailed as under: 13. The SLP filed against the judgment of Hon'ble Delhi High Court has been dismissed by the Hon'ble Supreme Court in Centrica India Offshore (P.) Ltd.'s case (supra). Therefore the view taken by the Hon'ble High Court has attained finality. The concept of income includes positive as well as negative income or nil income. In the case of payment being FTS or royalty as per sec. 9(1) of the Act it is irrelevant whether any profit element in the income or not. It is not only a matter of computation of total income when the concept of profit element in payment is relevant. If the payment being FTS or royalty is made to non-resident, then the concept of total income becomes irrelevant and the provisions of sec. 44D recognize the gross payment chargeable to tax. Thus all the payment made by the assessee to non-resident on account of FTS or royalty an chargeable to tax irrespective of any profit element in the said payment or not. However, there is an exception to this Rule of charging the gross amount when the non-resident is having fixed place of business or PE in India and the amount is earned through the PE, then the expenditure incurred in the relation to the PE for earning said amount is allowable as per the provisions of sec. 44DA of the Act. Therefore, in view of the judgment of Hon'ble Delhi High Court in the case of Centrica (supra), the Page 25 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 payment made to foreign company DFCL partakes the character of FTS as per the definition under explanation 2 to sec. 9(1)(vii) of the Act. The decisions relied upon by the assessee in the case of IDS Software Solutions India (P.) Ltd. (supra) and Abbey Business Services (India) (P.) Ltd.'s case (supra) would not help the case of the assessee when there is a direct judgment of Hon'ble Delhi High Court on this point. 13.14.3. The CIT.DR, thus submitted that, the authorities below were right in disallowing the payment made 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 is deemed to accrue or arise in India, and is deemed to have been earned in India, if is received for services rendered in Page 26 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 India. Under the Act, irrespective of the residential status of the employee, salary would be taxable in India, if it is for services rendered in India, which is deemed to have been earned in India. In the case of seconded employee, if they are tax residents of a country with whom India has Double Taxation Avoidance Agreement (DTAA), Indian tax authorities right to tax salary income would depend on the terms of such treaty. 14.2. In OECD Model Commentary, Article 15 provides for right of taxation, in so far as salaries are concerned, between the source state and the residence state. Article 15 of the Model Commentary reads thus: Article 15: INCOME FROM EMPLOYMENT 1. Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived there from may be taxed in that other State. 2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: a)the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and (c ) the remuneration is not borne by a permanent establishment which the employer has in the other State. 3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic, or aboard a boat engaged in inland waterways transport, may be taxed in the Contracting State in which the place of effective management of the enterprise is situated.” 14.3. Article 15(1) of OECD Model Convention lays down the rule of taxation of income earned by the seconded employee by giving Page 27 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 for more than 183 days. 14.4.2 The Second Condition –the remuneration is paid by, or on behalf of, an employer, who is not a resident of the other State. The meaning of the term ‘employer’ is critical, as there are occasions when seconded employees are on the rolls of a non- resident employer, but in essence, work as per the directions and under the supervision of an enterprise to whom he has been seconded and yet claims short stay exemption. Page 28 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 14.5. Since the right of the state of the temporary employment to tax employment income was limited by the provisions and conditions of Article 15, the tax administrations were not happy to notice that non-resident labor was easily entering their boundaries and easily avoiding source country taxation. 14.6. As a possible contribution to solving problems of abuse, recent OECD guidelines lay down guidelines to resolve interpretation issues concerning the concept of "employer" for purposes of paragraph 2 of Article 15. In determining the employer, the guidelines attaches importance to the nature of the services rendered, in order to determine, whether the services rendered by the individual constitute an integral part of the business of the enterprise to which these services are provided. In cases where the nature of the services rendered point to an employment relationship different than the one of the formal employer, the guidelines suggests objective criteria to determine the employer, namely:- − who has the authority to instruct the individual regarding the manner in which the work has to be performed; − who controls and has responsibility for the place at which the work is performed; − the remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided; − who puts the tools and materials necessary for the work at the individual’s disposal; Page 29 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 − who determines the number and qualifications of the individuals performing the work. 14.7. As a consequence, instead of being regarded as non- resident employee of a non-resident employer rendering services on a temporary basis, individuals may, if certain objective criteria are met, be deemed to be the employees of the service recipient in the other country (i.e. source country), and therefore, taxable in the 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 Page 30 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 Corporation, Japan, shows that the control and supervision of the seconded employee is with the assessee in India. As per Article 7 of the ‘Agreement of employees on loan’, dated 01/08/2008 between the assessee and Toyota Corporation Japan, the salary of expatriate employee will be paid by the Toyota Corporation, Japan, that sends the employee on deputation, and that, Toyota Corporation Japan, continues to be the de jure employer. The assessee in India, to which the employee is sent on deputation is the de facto employer. The salary paid by the de jure employer is reimbursed by the assessee in India, to the Toyota Corporation, Japan. 14.11. Article 7 of the ‘Agreement of employees on loan’, dated 01/08/2008 between the assessee and Toyota Corporation Japan imposes obligation of compliance with tax deduction at source as per the Act, on salaries paid to the seconded employees on the assessee in India. 14.12. As per Article 8 of the ‘Agreement of employees on loan’, dated 01/08/2008, between the assessee and Toyota Corporation Japan, the assessee in India as well as the seconded employee shall not disclose confidential information of the other party. 14.13. From the recitals to the the ‘Agreement of employees on loan’, dated 01/08/2008 between the assessee and Toyota Corporation Japan, it is clear that, the process of secondment of employees by Toyota Corporation, Japan to the assessee in India is initiated, when the assessee in India, makes a request requiring the services of seconded employees of the Toyota Corporation, Japan, for its business projects by the assessee in Page 31 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 India. The assessee in India gives offer letter to the seconded employee. By way of illustration, we may take the case of one Mr.Minoru Asahi who is a Japanese national and who is on the rolls of Toyota Corporation, Japan. 14.14. The offer letter dated 11.06.2014 of the assessee in India addressed to Mr.Minoru Asahi contains the following features:- 1. He is employee of Toyota Corporation Japan and during his assignment to assessee India, his employment responsibilities with Toyota Corporation Japan will remains suspended. 2. That, he will be under the control and supervision of the assessee in India. 3. That, his specialized knowledge in PED, Quality & New Projects was vital for the assignment with the assessee in India. From the letter dated 11/06/2014, upon completion of the assignment, it is clear that, Mr.Minoru Asahi was 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. Page 32 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 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. 14.16. From a conjoint reading of Article 15 of the OECD Model Convention and the articled referred to herein above, there is no doubt in our minds that the assessee in India is the economic and de facto employer of the seconded employees. It is an admitted fact that all the seconded employees are in India for more that 183 days in a 12 month period. Further all the seconded employees have PAN card as well as file their returns in India in respect of the 100 % salary, though the assessee pays only part of the salary in India. We are therefore of the view that there exists an employer-employee relation between the assessee and the seconded employees. Page 33 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 14.17. Article 12(4) of India Japan DTA,A that deals with “Fees for technical services’, as under: “4. The term "fees for technical services" as used in this Article means payments of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in Article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel.” Reading Article 12(4) of India Japan DTAA,it is clear that payments made to individuals or firm of individuals for services rendered by them in independent capacity are specifically excluded as they are covered by Article 14 being “ Independent Personal Services. Article 12(4) also excludes payments made towards services rendered by an ‘employee’ of an enterprise. 14.18. The definition of FTS under the Act is given in Explanation 2 to Sec.9(1)(vii) of the Act that reads as follows:- “Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India :- (i) to (vi) (vii) income by way of fees for technical services payable by— (a) the Government ; or (b) a person who is a resident, except where the fees are payable in 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 Page 34 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 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". 14.19. 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 Toyota Corporation, Japan, 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 Toyota Corporation, Japan, and therefore there would be no obligation to deduct tax at source at the time of making payment u/s.195 of the Act. 14.20. 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. 14.20.1. 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’ Page 35 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 services to Centrica India and that, the expression rendering technical services expressly includes provision of services of personnel. The Court held that the Seconded employees, were provided by overseas entities and work conducted by them thus, i.e. assistance in conducting business of assessee of quality control and management was through overseas entities. The Court also held that, mere fact that secondment agreement, phrases payment made by Centrica India to overseas entity as 'reimbursement' could not be determinative. It was also held that, the fact that overseas entity did not charge mark-up over and above costs of maintaining secondee could not negate nature of transaction. 14.20.2. Hon’ble Pune Tribunal in case 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 could not have been paid to the secondees depending upon the terms of contract. Per contra, we are confronted with a situation wherein the money never accrued to the assessee. It initially paid money to Mr. Franck in advance and then M/s.Faurecia Automotive Holding recovered the same from the Indian entity without any mark-up. There can be no question of the assessee receiving money in its own independent right. Rather, it is a case of discharge by the Indian entity of its own liability Page 36 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 towards salary payable to Mr. Franck. It is thus manifest that this decision has no application to the facts of the instant case.” 14.21. We also note that, reliance is placed on the decision of Hon’ble Madras High Court 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. 14.22. 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., reported in 287 ITR 421. 14.22.1. The observations of the Hon’ble Supreme Court in the case of Morgan Stanley (supra) were in the context of existence of service PE. This is clear from a reading of the relevant portion of the judgment of the Hon’ble Supreme Court, which is as follows:- Page 37 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 “As regards the question of deputation, 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 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 completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there is a service PE (MSAS) under art 5(2)(l). There is no infirmity in the ruling of the AAR on this aspect. In the above situation, MSCo is rendering services through its employees to MSAS. Therefore, the Department is right in its contention that under the above situation there exists a service PE in India (MSAS).” 14.22.2. Per contra, in the present facts of the case there is no finding, of their existing PE, in any form by the revenue and therefore is of no assistance to the revenue. 14.23. As far as the decision of Hon’ble AAR in the case of AT & 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 Page 38 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 and conditions show that the seconded personnel in effect continue to be employees of AT&S. Recipient of the compensation is AT&S and not the seconded employees. Further contention was that AT&S is not engaged in the business of providing technical services in the ordinary course of its business is also not tenable. Therefore, payments made to AT&S by the applicant are for rendering "services of technical or other personnel" 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 section195. 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. Page 39 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 entity to whom employees have been seconded (Indian entity). 14.25. Payment for supplying skilled manpower cannot be regarded as payment towards managerial, technical and consultancy services as per dictionary meanings of these terms. Hon’ble AAR in Cholamandalam MS General Insurance Co. Ltd., reported in 309 ITR 356, took the view that, merely supplying technical, managerial or personnel with managerial skills cannot be regarded as rendering technical services by the person supply such personnel. The following were the relevant observations of Hon’ble AAR:- “It is debatable whether the bracketted words - "including provision of services of technical or other personnel" is independent of preceding terminology - "managerial, technical or consultancy services" or whether the bracketted words are to be regarded as integral part of managerial, technical or consultancy services Page 40 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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).” 14.26. 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 rate, the assessee could not held to be in default for not without tax under the provisions of the Act. 14.27. Hon’ble Delhi High Court in the case of DIT Vs. HCL Infosystems Ltd. reported in (2005) 144 Taxmann 492 (Delhi) upheld the order of Hon’ble Delhi Tribunal which held that, when an Indian company had already deducted and remitted 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 Page 41 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 upheald 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) Ltd. vs. DDIT(IT) (2017) 79 taxmann.com 459, on identical facts, as in the case of the present assessee before us, took the view that, there was no liability to deduct tax at source u/s.195 when payments were made by way of reimbursement. Based on the above detailed analysis of various contrary decisions on the issue, we are of the view that the decisions relied by revenue are distinguishable with the present facts of the case. 15. Respectfully following the above views expressed by Hon’ble Karnataka High Court in DIT vs. Abbey Business Services India (P.)Ltd.(supra), Hon’ble AAR in Cholamandalam MS General Insurance Co. Ltd. (supra), Hon’ble Bombay 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 Page 42 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 Toyota Corporation, Japan, towards the seconded employees cannot be regarded as “Fee For technical Services” and therefore not taxable u/s. 195 of the Act. We therefore direct the Ld.AO to delete the disallowance made u/s. 40(a)(i) of the Act. Accordingly, Ground nos. 11-14 raised by assessee for the assessment year 2013-14 stands allowed. 15.1. The 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 Ground nos. 17 to 19 raised their in. Accordingly, Ground nos.17-19 raised by assessee for the assessment year 2015-16 stands allowed. 16. Ground No.15-17 are raised by assessee challenging the treatment of payment towards plant layout charges as capital in nature. The assessee has incurred expenses towards plant layout charges to facilitate material movement for optimum utilization of space. Due to space constraints, amounts have been spent for re-arranging the production lines on a regular basis. These are minor modifications of small value, which do not result in benefits accruing for a long period. Such expenses have been incurred year-on-year basis to improve utilization of the resources, besides improvement in quality and safety. Such expenditure neither increases the earning capacity of the Page 43 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 putforth 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 covered by Supreme Court decision in the case of Ballimal Naval Kishore & Anr Vs. CIT [1997] 224 ITR 414 (SC) where in the court applied the test propounded by Bombay High Court in the case of New Sharrock Spinning and Manufacturing _Company Ltd (30 ITR 338). The test is proposed in the case by Hon'ble Bombay High Court whether a particular expenditure towards repairs to machinery or building etc. is capital or revenue. As per this decision one need to see, based on facts whether such expenditure is incurred to preserve or maintain already existing assets or it is incurred for renewal, restoration, bringing new asset into existence or bringing new (or) different advantage to the assessee. As observed based on existing facts that the factory production line was fully refurbished and made fit to manufacture new Toyota Corolla Model. Such expenditure brings new (or) different advantage and falls within the definition of capital expenditure as per above test. Accordingly, we confirm the AO's treatment that the expenditure is capital in nature. Ground rejected.” On an appeal before this Tribunal, the Ld.AR reiterated the submissions before the authorities below. The Ld.CIT.DR relied Page 44 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 on orders passed by authorities below and submitted that there is nothing placed on record in support of the claim by assessee. We have perused the submissions advanced by both sides in the light of records placed before us. We note that the alleged expenditure has been claimed as plant layout charges to improve utilisation of resources, besides improvement in quality and safety. The Ld.AR however alternatively prayed that, in the event the said expenditure is upheld to be capitalised, depreciation may be granted. We note that the assessee has not provided any details in respect of the expenditure incurred towards layout of plant, and why was it necessary to be incurred. In our view this issue needs to be revisited based on the evidences filed by the assessee having regard to the principles laid down by Hon’ble Supreme Court in case of Ballimal Naval Kishore & Anr vs. CIT (supra) of DRP order. Accordingly, we direct the assessee to file all relevant details in support of the claim which would be verified by the AO in accordance with law. Accordingly, Ground nos.15-17 raised by assessee for the assessment year 2013-14 stands allowed for statistical purposes. The 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. Page 45 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 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 hereinabove. Order pronounced in open court on 13 th April, 2022. Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 13 th April, 2022. /MS / Page 46 IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore