Appeal details
Counselvise Citation
[2020] 111 COUNSELVISE.COM (IT) 2304 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 11 month(s) 6 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
19-03-2020
Appeal Filed By
Assessee
Order Result
Dismissed
Bench Allotted
G
Assessment Year
2014-2015
Appeal Filed On
13-04-2018
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: D, NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER ITA NO.7805/DEL./2017 ASSESSMENT YEAR: 2014-15 AND ITA NO.2580/DEL/2018 ASSESSMENT YEAR: 2014-15 M/S. TERADATA OPERATIONS INC., 10000, INNOVATION DRIVE, DAYTON, OHIO-45301, USA VS. DCIT, CIRCLE-3(1)(1), INTERNATIONAL TAXATION, NEW DELHI PAN :AAECT0303L (APPELLANT) (RESPONDENT) ORDER PER O.P. KANT, AM: THESE TWO APPEALS HAVE BEEN FILED BY THE ASSESSEE, AGAINST THE FINAL ASSESSMENT ORDER DATED 18/10/2017 PASSED BY THE LEARNED DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-3 (1)(1), INTERNATIONAL TAXATION, NEW DELHI, (IN SHORT THE L D. ASSESSING OFFICER) PURSUANT TO THE DIRECTION OF THE LEARNED DISPUTE RESOLUTION PANEL (DRP) FOR ASSESSMENT YEAR 2014-1 5, AND RECTIFICATION ORDER DATED 09/02/2018 PASSED BY THE LD. ASSESSING APPELLANT BY SHRI SALIL KAPOOR, ADV. MS. ANANYA KAPOOR, ADV. RESPONDENT BY SHRI SATPAL GULATI, CIT(DR) DATE OF HEARING 13.01.2020 DATE OF PRONOUNCEMENT 19.03.2020 2 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 OFFICER FOR SAME ASSESSMENT YEAR RESPECTIVELY. BOTH THE APPEALS BEING CONNECTED WITH SAME ASSESSMENT YEAR, HAVE BEE N HEARD TOGETHER AND DISPOSED OFF BY WAY OF THIS CONSOLIDAT ED ORDER FOR CONVENIENCE. THE GROUNDS IN ITA NO. 7805/DEL./2017 ARE REPRODUCED AS UNDER: THESE GROUNDS OF APPEAL REPRESENT THE GRIEVANCES O F THE APPELLANT AGAINST ORDER DATED 18 OCTOBER 2017 PASSED BY THE L EARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 3(1 )(1), NEW DELHI (LD. AO) UNDER SECTION 143(3) R.W.S. 144C (5) OF THE INCOME-TAX AC T, 1961 (THE ACT) IN PURSUANCE OF THE DIRECTIONS ISSUED BY LEARNED DISPU TE RESOLUTION PANEL - 1, DELHI (DRP) DATED 28 AUGUST 2017. 1. THAT THE ASSESSMENT ORDER PASSED UNDER SECTION 1 43(3) R.W.S. 144C(5) OF THE ACT BY THE LD. AO AND THE ADDITIONS MADE BY THE LD. AO, ARE BAD IN LAW .UNLAWFUL AND UNJUST. 2. THAT, IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN DETERMINING THE TOTAL INCOME OF THE APPELLANT AT 3,07,34,310/- AS AGAINST THE RETURNED INCOME OF RS. 72,84,230/- WHICH WAS OFFERED TO TAX ON GROSS BASIS AS PER ARTICLE 12 OF DOUBLE TAXATION AVOIDANC E AGREEMENT (DTAA) BY MAKING AN ADDITION OF RS. 2,32,98,701/- (ASSESSED INCOME RS. 3,07,34,310/- LESS RS. 1,51,473/- OFFERE D TO TAX BY THE APPELLANT ON ACCOUNT OF INADVERTENT MISTAKE IN RETURN OF INCOME FILED) ON ACCOUNT OF SECONDMENT ARRANGEMENT BETWEEN THE APPELLANT AND ITS INDIAN ASSOCIATED ENTERPRISE (AE ). THAT, IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW: 2.1 THE LD. AO/ DRP ERRED IN NOT PASSING A SPEAKING ORDER/DIRECTIONS. 2.2 THE LD. AO/ DRP ERRED IN HOLDING THAT THE APPE LLANT CONSTITUTES A FIXED PLACE PERMANENT ESTABLISHMENT (PE) IN INDIA AS PER ARTICLE 5 OF THE INDIA-USA DTAA. 2.3 THE LD. AO/ DRP ERRED IN HOLDING THAT THE APPE LLANT CONSTITUTES A SERVICE PE IN INDIA AS PER ARTICLE 5 OF THE INDIA-U SA DTAA. 2.4 LD. AO/ DRP ERRED IN PERCEIVING, INTERPRETING AND EVALUATING FACTS AND LAW IN DECIDING/ RELIED UPON CASES AND IN REASO NING TOWARDS PREFERRED OUTCOME BY TOTALLY IGNORING/ MISINTERPRET ING UNDERLYING FACTS AS ALSO PRINCIPLES LAID DOWN IN SUCH DECISION S AND APPLYING THE SAME TO FACTS. 3 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 2.5 THAT, WITHOUT PREJUDICE, THE LD. AO/ DRP ERRED IN HOLDING AND ATTRIBUTING PROFITS TO THE ALLEGED PE OF THE APPELL ANT BY CONSIDERING THAT THE TOTAL REIMBURSEMENT FOR 'RELOCATION EXPENS ES OF RS. 4,10,60,108/- WAS RECEIVED BY THE APPELLANT ONLY IN RELATION TO THE SECONDMENT ARRANGEMENT AND THUS ERRED IN NOT CO NSIDERING THAT IT ALSO INCLUDES REIMBURSEMENT FOR OTHER EMPLO YEES OF ITS AE. 2.6 THE LD. AO/ DRP ERRED IN NOT TAKING COGNIZANCE OF THE ADDITIONAL EVIDENCE PROVIDING SEGREGATION OF THE RELOCATION EX PENSES, FILED AND ADMITTED BY THE APPELLANT DURING THE PROCEEDING S BEFORE THE LD. DRP. 2.7 THAT, WITHOUT PREJUDICE, THE LD. AO/ DRP ERRED IN NOT ALLOWING THE COST OF SECONDED PERSONS WHILE ATTRIBUTING PROF ITS TO THE ALLEGED PE IN INDIA. 2.8 THAT, WITHOUT PREJUDICE, THE LD. AO/ DRP ERRED IN ESTIMATING AN AD-HOC 25% AS PROFITS ATTRIBUTABLE TO THE ALLEGED P E. THE LD. AO ERRED IN IGNORING THE GLOBAL PROFITABILITY STATEMEN TS FILED ON 27 OCTOBER 2017 AS DIRECTED BY LD. DRP. 3. THAT, ON THE FACTS AND IN LAW, THE LD. AO HAS ER RED IN INITIATING PENALTY UNDER SECTION 274 READ WITH SECTION 271 OF THE ACT. 4. THAT ON THE FACTS AND IN LAW, THE LD. AO HAS ER RED IN CHARGING INTEREST UNDER SECTION 234B OF THE ACT. 5. THAT ON THE FACTS AND IN LAW, THE LD. AO HAS ERR ED IN NOT GRANTING CREDIT OF TAX DEDUCTED AT SOURCE AMOUNTING TO RS. 2 2,721. THE ABOVE GROUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE AND WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, VARY, OMIT OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. THE APPELLANT PRAYS FOR APPROPRIATE RELIEF BASED ON THE SAID GROUNDS OF APPEAL AND THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. GROUNDS RAISED IN ITA NO. 2580/DEL/2018 ARE REPRODU CED AS UNDER: THESE GROUNDS OF APPEAL REPRESENT THE GRIEVANCES O F THE APPELLANT AGAINST ORDER DATED 9 FEBRUARY 2018 PASSED BY THE L EARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 3(1 )(1), NEW DELHI (LD. AO') UNDER SECTION 154 OF THE INCOME-TAX ACT, 1961 (THE ACT) (IMPUGNED ORDER) IN PURSUANCE OF THE RECTIFICATION APPLICATION DATED 11 JANUARY 2018 FILED 4 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 BY THE APPELLANT AGAINST THE FINAL ASSESSMENT ORDER DATED 18 OCTOBER 2017 PASSED UNDER SECTION 143(3) READ WITH SECTION 144C(13) OF THE ACT. 1. THAT, THE ORDER PASSED UNDER SECTION 154 READ W ITH SECTION 143(3) OF THE ACT BY THE LD. AO IS ILLEGAL, BAD IN LAW, WI THOUT JURISDICTION AND CONTRARY TO THE FACTS OF CASE. 2. THAT, IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN IGNORING THE SETTLED P OSITION OF LAW THAT PROCEEDINGS BEFORE THE DISPUTE RESOLUTION PANE L (DRP) ARE PART OF THE ASSESSMENT PROCEEDINGS ONLY AND THEREFO RE, FAILED TO APPRECIATE THAT DETAIL OF RELOCATION EXPENSES FILED BEFORE THE LD. DRP WAS PART OF THE ASSESSMENT RECORDS. 3. THAT, IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN HOLDING THAT NO SEGREG ATION OF RELOCATION EXPENSES WAS PROVIDED BY THE APPELLANT D URING THE ASSESSMENT PROCEEDINGS AND ACCORDINGLY, ERRONEOUSLY HELD THAT THERE IS NO MISTAKE APPARENT FROM RECORDS IN THE AS SESSMENT ORDER. 4. THAT, IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN NOT APPRECIATING THAT THIS A MISTAKE APPARENT ON RECORD AND HENCE FALLS WITHIN THE PURVI EW OF SECTION 154 OF THE ACT. 5. THAT, WITHOUT PREJUDICE, IN ANY CASE, NO ADDITIO N IS CALLED FOR IN RELOCATION EXPENSES, HENCE THE SAME IS LIABLE TO BE DELETED. THE ABOVE GROUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE AND WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, VARY, OMIT OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 3. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSE SSEE IS A COMPANY INCORPORATED IN AND TAX RESIDENT OF THE UNI TED STATES OF AMERICA (USA) AND A PART OF TEREDATA GROUP. THE A SSESSEE WAS ENGAGED IN BUSINESS OF PROVIDING DATA WAREHOUSING SERVICES IN THE FORM OF THEIR PROPRIETARY PACKAGE CALLED TERED ATA SOLUTION. DURING THE YEAR, THE ASSESSEE PROVIDED CERTAIN PROF ESSIONAL SERVICES AND ALSO RECEIVED ROYALTY IN RESPECT OF SO FTWARE LICENSE TO ITS ASSOCIATED ENTERPRISE (AE) IN INDIA, NAMELY, TE RADATA INDIA 5 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 PVT. LTD. (TIPL). FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE FILED RETURN OF INCOME ON 29/11/2014 DECLARING TOTA L INCOME OF 72,84,230/-. DURING THE YEAR, THE ASSESSEE ALSO REC EIVED CERTAIN REIMBURSEMENT IN RESPECT OF THE EMPLOYEES SECONDED TO TIPL, WHICH, INTER ALIA, INCLUDE THE FOLLOWING: 1. 5,21,34,696/-IN RESPECT OF THE COST OF SECONDED PERSONS INCLUDED ON BEHALF OF M/S TERADATA INDIA PRIVATE LIMITED (TIPL)OF IN SHORT TERADATA INDIA. 2. 4,10,60,108/- IN RESPECT OF REIMBURSEMENT OF RELOCATION EXPENSES I.E. VISA EXPENSES AND OTHER TR AVEL COST. 3.1 THE RETURN OF INCOME WAS SELECTED FOR SCRUTINY ASS ESSMENT AND INFORMATION IN RESPECT OF THE SECONDED PERSON W AS FILED BEFORE THE ASSESSING OFFICER. SUMMARY OF THE INFORM ATION IN RESPECT OF THE SECONDED PERSON FILED IS AS UNDER: NAME OF PERSON SECONDED QUALIFICATION OF PERSON SECONDED JOB PROFILE MALLA REDDY MS COMPUTER SCIENCE SOFTWARE DEVELOPMENT SUNANDA REDDY MS ELECTRICAL ENGINEERING SOFTWARE DEVELOPMENT BASHYAM MS COMPUTER SCIENCE SOFTWARE DEVELOPMENT AND GUIDING TERADATA INDIA RAMESH AND BE ELECTRICAL AND ELECTRONIC ENGINEERING TEAM TECHNICALLY IN DEVELOPING TERADATA TECHNOLOGY AND FEATURES RAJ CHERABUDDI MS COMPUTER SCIENCE SOFTWARE DEVELOPMENT AND HANDLING TERADATA INDIA TEAMS WORKING ON WIDE VARIETY OF SOFTWARE DEVELOPMENT PROJECTS 6 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 3.2 IN THE DRAFT ASSESSMENT ORDER DATED 22/12/2016 ISS UED BY THE LEARNED ASSESSING OFFICER UNDER SECTION 144C(1) READ WITH SECTION 143(3) OF THE ACT, HE PROPOSED THAT THE ARR ANGEMENT OF SECONDED EMPLOYEES CONSTITUTE EXISTENCE OF PERMANEN T ESTABLISHMENT (PE) IN INDIA AND A SUM OF 2,32,98,701 (25% OF 9,31,94,804) WAS ATTRIBUTED TO THE SAID PE. THE AMO UNT OF 9,31,94,804/-WAS COMPUTED AS UNDER: PARTICULARS AMOUNT (IN RS.) TOWARDS PAYMENTS MADE FOR INSURANCE, RETIREMENT COSTS AND SOCIAL SECURITY CONTRIBUTIONS 5,21,34,696 TOWARDS VISA CHARGES AND OTHER TRAVEL COSTS PAID BY COMPANY FOR SECONDED PERSONS 4,10,60,108 TOTAL 9,31,94,804 3.3 BEFORE THE ASSESSING OFFICER, THE ASSESSEE CONTENDE D THAT: I. THE EMPLOYEES ARE SECONDED TO TERADATA INDIA UNDER A SECONDMENT AGREEMENT UNDER WHICH THOSE EMPLOYEES WORKED AS EMPLOYEES OF INDIAN COMPANY. II. THE SECONDED EMPLOYEES WORKED UNDER THE CONTROL AND SUPERVISION OF TERADATA INDIA. III. THE SALARY OF SECONDED EMPLOYEES WAS DISBURSED BY T HE ASSESSEE IN THEIR HOME COUNTRY (USA) FOR ADMINISTRA TIVE CONVENIENCE AS THOSE SECONDED EMPLOYEES WERE SITUAT ED IN THE USA AND THE TERADATA INDIA REIMBURSED TO T HE ASSESSEE COMPANY FOR THE PAYMENTS MADE IN THE USA O N ACTUAL COST BASIS. 3.4 THE ASSESSING OFFICER, HOWEVER, DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE. THE LEARNED ASSESSING O FFICER REFERRED TO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF 7 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 CENTRICA INDIA OFFSHORE PRIVATE LIMITED (2014) 44 T AXMANN.COM 300. THE ASSESSING OFFICER OBSERVED THAT IN THE INS TANT CASE, SECONDMENT AGREEMENT REGARDING SECONDMENT OF THE EM PLOYEES BETWEEN THE FOREIGN COMPANY (I.E. THE ASSESSEE) AND THE INDIAN ENTITY (I.E. TERADATA INDIA) AND SECONDMENT/ASSIGNM ENT AGREEMENT BETWEEN THE FOREIGN COMPANY (I.E. THE ASS ESSEE) AND THE EXPATRIATE, EXIST BUT NO EMPLOYMENT AGREEMENT B ETWEEN THE EXPATRIATE AND THE INDIAN COMPANY (I.E. TERADATA IN DIA) EXISTED. THIS FACT WAS DULY ADMITTED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER. IN ABSENCE OF ANY SUCH EMPLOYMENT AGREEMEN T BETWEEN THE EXPATRIATE AND THE TERADATA INDIA, THE ASSESSIN G OFFICER REJECTED THE FOLLOWING ARGUMENTS OF THE ASSESSEE TH AT: I. THE TERADATA INDIA HAS RIGHT TO CONTROL AND SUPERV ISE EXPATRIATE EMPLOYEES. II. THE TERADATA INDIA HAS RIGHT TO TAKE DISCIPLINE REA CTION AGAINST THE EXPATRIATE EMPLOYEES. III. THE TERADATA INDIA HAS AN OBLIGATION TO PAY SALARY TO THE EXPATRIATE EMPLOYEES IV. ALL THE STANDARD TERMS OF EMPLOYMENT WITH TERADATA INDIA SHALL APPLY TO THE EXPATRIATE EMPLOYEES. 3.5 IN PARA 5.6 OF THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS JUSTIFIED THAT THE EXPATRIATE EMPLOYEES CONTINU E TO BE THE EMPLOYEE OF THE ASSESSEE COMPANY DUE TO FOLLOWING R EASONS: I. THE EMPLOYEES CONTINUE TO MAKE SOCIAL SECURITY CONTRIBUTIONS IN USA AS EMPLOYEES OF ASSESSEE COMPANY AND THE SAL ARIES ARE DISBURSED TO THEIR BANK ACCOUNTS IN USA BY ASSE SSEE COMPANY. THIS ALSO IMPLIES THAT THE SECONDED EMPLOY EES CONTINUE ON THE PAYROLL OF ASSESSEE COMPANY. THIS F ACT HAS BEEN SUBMITTED BY THE ASSESSEE AND IS ALSO EVIDENT FROM CLAUSE 4.2 OF THE SECONDMENT AGREEMENT WHICH PROVID ES THAT 8 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 AMONGST OTHER THINGS, TERADATA INDIA SHALL ALSO REI MBURSE ASSESSEE FOR SOCIAL SECURITY CONTRIBUTIONS MAD? ;,N -HE USA. II. THE EMPLOYEES CONTINUE TO BE UNDER ASSESSEE'S E MPLOYMENT AND/OR HAVE LIEN ON OVERSEAS EMPLOYMENT WITH ASSESS EE COMPANY. THES E ARE RELEASED ONLY FOR A SHORT PERIO D OF TIME TO PROVIDE SERVICES TO TERADATA INDIA. THIS IS EVIDENT FROM THE RELEVANT CLAUSE (OBJECTIVE CLAUSES ON FIRST PAGE) O F SECONDMENT AGREEMENT WHICH PROVIDES THAT AND WHEREAS THE INTERNATIONAL ASSIQNEE SHALL BE RELEASED IBRTP THEI R WORK UNDER THE SUPERVISION OF TERADATA OPERATIONS AND'SH ALL BE INTEGRATED AS EMPLOYEES OF TERADATA INDIA FOR A PER IOD OF SECONDMENT WITH TERADATA INDIA'. III. WHERE THE EXPATRIATE EMPLOYEES CONTINUE TO BE THE EMPLOYEES OF THE ASSESSEE COMPANY AND THERE IS NO EMPLOYER-EM PLOYEE RELATIONSHIP BETWEEN , IT IS DIFFICULT TO ACCEPT TH AT THESE EMPLOYEES WORK UNDER THE CONTROL AND SUPERVISION OF THE INDIAN COMPANY. THE SAID CLAIM OF THE ASSESSEE REMA INS COMPLETELY UNSUBSTANTIATED ALSO ON ACCOUNT OF THE F ACT THAT EXPATRIATE CONTINUES TO ENJOY LIEN WITH THE FOREIGN COMPANY AND ALSO HIS ACCOUNT ON SOCIAL BENEFIT CONTINUES IN THE FOREIGN COUNTRY. IF IT IS NOT SO, NO FOREIGN EXPATRIATE WOU LD LIKE TO BE SECONDED.APPARENTLY, THEREFORE, THERE IS CONTROL EX ERCISED BY THE FOREIGN COMPANY ON THE SECONDED EMPLOYEE EVEN I F HE SHOWN TO HAVE BEEN ECONOMICALLY WORKING WITH THE IN DIAN COMPANY I.E. TERADATA INDIA. IV. IT IS NOT WITHOUT SIGNIFICANCE THAT THE AGREEM ENT IS FOR THE SECONDMENT' OF THE PERSONNEL. THAT THE AGREEMENT E NVISAGES SECONDMENT OF THE PERSONNEL FROM THE HOME ENTITY TO THE HOST ENTITY IS BY ITSELF INDICATIVE OF THE FACT THA T EFFECTIVELY THE EXPATRIATE EMPLOYEES WERE AND CONTINUE TO BE THE EM PLOYEES OF THE HOME ENTITY.THE DICTIONARY MEANING OF THE TE RM SECONDMENT PROVIDES THAT TEMPORARY DETACHMENT OF A PERSON FROM THEIR REGULAR ORGANIZATION FOR TEMPORAR Y ASSIGNMENT ELSEWHERE. THIS SUGGESTS AN ELEMENT OF C ONTINUITY OF THE RELATIONSHIP BETWEEN THE HOME ENTITY AND THE EXPATRIATE DEPUTED TO RENDER SERVICES IN INDIA. NO EMPLOYEE WH O HAS SERVED THE EMPLOYER (I.E. THE HOME ENTITY HEREIN) A ND HAS EARNED VALUABLE RIGHTS IN THE FORM OF SENIORITY,, Q UALIFYING SERVICE COUNTING TOWARDS PENSIONARY/SEVERANCE BENEF ITS, AND OTHER SOCIAL AND ECONOMIC BENEFITS BY VIRTUE OF LON G EMPLOYMENT WITH AN EMPLOYER, WOULD AGREE TO LOSE TH OSE RIGHTS BY ABRUPTLY LEAVING THE EMPLOYER AND ENTER I NTO FRESH EMPLOYMENT WITH A NEW EMPLOYER, UNLESS THERE IS A C LEAR UNDERSTANDING THAT HE OR SHE EFFECTIVELY CONTINUES TO BE THE EMPLOYEE OF THE HOME ENTITY FOR ALL PRACTICAL PURPO SES. 9 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 3.6 THE ASSESSING OFFICER ALSO HIGHLIGHTED VARIOUS TER MS OF ASSIGNMENT EXTENSION LETTER BETWEEN MR. RAJ CHERABU DDI, INTER ALIA, FIXED COMPENSATION PROVIDED SUBJECT TO CERTAI N ADJUSTMENT BY THE ASSESSEE; EXPATRIATE SALARY WAS BASED ON HOM E COUNTRY (USA) POLICIES AND PRACTICES; TERMS OF EMPLOYMENT A FTER END OF THE ASSIGNMENT WILL BE GOVERNED BY THE POLICIES OF THE HOME COUNTRY; EXPATRIATE SHALL ABIDE AND ADHERE TO ASSESSEE COMPA NYS POLICIES AND APPLICABLE LAWS REGARDING CODE OF BUSINESS COND UCT AND ETHICS. 3.7 THE ASSESSING OFFICER OBSERVED THAT THE SECONDED E MPLOYEES WERE ACTUALLY THE EMPLOYEES OF THE ASSESSEE WHO HAD COME TO INDIA TO RENDER SERVICES AND CONDUCT THE HOME ENTIT IES BUSINESS IN INDIA. 3.8 IN VIEW OF THE OBSERVATION, THE LEARNED ASSESSING OFFICER HELD THAT THE PREMISES OF TERADATA INDIA, WHERE THE SECO NDED EMPLOYEE WERE STATIONED, REMAINED AT THE DISPOSAL OF THE ASS ESSEE THROUGHOUT THE DURATION OF THE STAY OF THOSE EMPLOY EES AND ACCORDINGLY, HE CONCLUDED EXISTENCE OF FIXED PLACE PE AS UNDER: 7. THE PLACE MADE AVAILABLE BY TERADATA INDIA WAS USED AS FIXED PLACE BY THEM FOR THE BUSINESS ACTIVITIES OF THE HO ME ENTITY. IT IS SETTLED LAW THAT THE FOREIGN ENTITY NEED NOT BE OWN ER OF THE PREMISES FROM WHICH THE BUSINESS ACTIVITY ARE CARRIED OUT. T HE PLACE OF BUSINESS NEED ONLY BE AT THE DISPOSAL OF THE ENTERP RISE AND IT IS NOT NECESSARY THAT IT SHOULD BE FOR THE EXCLUSIVE VIE O F THE ENTERPRISE. THE PREMISES OF TERADATA INDIA, WHERE THE SECONDED EMPLOYEES WERE STATIONED, REMAINED AT THE DISPOSAL OF THE ASS ESSEE THROUGH- OUT THE DURATION OF THE STAY OF THE TRANSFERRED EMP LOYEES. THEREFORE, A FIXED PLACE PE OF THE ASSESSEE IS CONSTITUTED IN INDIA IN THE FORM OF THE PREMISES FROM WHICH THESE TRANSFERRED EMPLOYEES OPERATED. 10 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 3.9 THE ASSESSING OFFICER ALSO CONCLUDED THAT THE SECO NDED EMPLOYEES RENDERED SERVICES ON BEHALF OF THE ASSESS EE IN INDIA, THEY ALSO CONSTITUTED THE SERVICE PE IN INDIA IN VI EW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F MORGAN STANLEY & CO (SUPRA). 3.10 THE ASSESSING OFFICER HELD THAT THE REIMBURSEMENT IN THE HANDS OF THE ASSESSEE IS A BUSINESS INCOME AS THOSE PAYMENTS HAVE BEEN ON ACCOUNT OF SERVICES RENDERED BY THE AS SESSEE THROUGH ITS EMPLOYEES IN INDIA AND, THEREFORE, THE PROFIT GENERATED ON THE AMOUNT OF ACTIVITIES CARRIED OUT BY THE EMPL OYEE IN INDIA IS LIABLE TO TAX IN INDIA AS BUSINESS INCOME OF FOREIG N ENTITY UNDER ARTICLE 7 OF THE DTAA READ WITH SECTION 9(1) OF THE ACT. 3.11 AS REGARD THE QUANTIFICATION OF THE INCOME OF THE P E, THE LEARNED ASSESSING OFFICER TAKEN THE COST OF SALARY AND RELATABLE EXPENSES PAID BY TERADATA INDIA IN RESPECT OF THE EMPLOYEES UNDER REFERENCE AND PROFIT MARKUP ON SUCH REIMBURSE MENT @ 25% (IN ABSENCE OF GLOBAL PROFITABILITY DATA AND AU DITED GLOBAL ACCOUNTS). THE RELEVANT PART OF THE ASSESSMENT ORDE R IS REPRODUCED AS UNDER: 10.3 THE ABOVE AMOUNTS TOWARDS SALARY AND RELATABL E EXPENSES HAS BEEN DIRECTLY / INDIRECTLY MET BY / PAID BY TER ADATA INDIA IN RESPECT OF EMPLOYEES WORKING FOR THE ASSESSEE COMPA NY I.E. RENDERING SERVICES IN INDIA. THE AFORESAID AMOUNTS RESULTS IN INCOME TO THE ASSESSEE AND SHALL BE CONSIDERED TO BE THE C OST RELATED TO EMPLOYEES WORKING IN INDIA AND THEREFORE RELATES TO THE SERVICE PE / FIXED PLACE PE OF ASSESSEE COMPANY IN INDIA. 11. THE DETERMINATION OF INCOME AND TAX FOR A FOREI GN COMPANY IS A FUNCTION OF TWO FACTORS, NAMELY, PROFITS EMBEDDED I N THE PAYMENTS THE ATTRIBUTION OF INCOME/PROFITS TO ACTIVITIES CAR RIED OUT THROUGH THE PE IN INDIA. IN THE PRESENT CASE, THE PAYMENTS ARE ON ACCOUNT OF THE SERVICES RENDERED IN INDIA. IT IS THE UNDERSTANDING THAT THE ENTIRE SERVICES RENDERED BY THE EMPLOYEES HAVE BEEN IN IND IA THEREFORE THE 11 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 ENTIRE INCOME GENERATED FROM THE SERVICES RENDERED BY EMPLOYEES SHALL BE ATTRIBUTABLE TO THE PE BEING ESTABLISHED. FURTHER, IT IS PRUDENT TO CONSIDER THAT IN AN INDEPENDENT SCENARIO , NO SERVICE PROVIDER SHALL BE PROVIDING SERVICES WITHOUT ANY PR OFIT ELEMENT OR MARK-UP ON COST. FOR DETERMINATION OF SUCH INCOME/P ROFITS, THE COST RECOUPED BY TERADATA INDIA TO THE ASSESSEE FOR REND ITION OF SERVICES AMOUNTING TO INR 9,31,94,804/- COULD BE TAKEN AS TH E BASE. IN ABSENCE OF GLOBAL PROFITABILITY DATA AND AUDITED GL OBAL ACCOUNTS, I HAVE LEFT WITH NO OPTION BUT TO INVOKE THE PROVISIO NS OF RULE 10 OF IT RULE, 1962 TO DETERMINE THE PROFIT ON THE REIMBURSE MENT AMOUNT. KEEPING IN VIEW THE NATURE OF SERVICES AND FACTS OF THE CASE A REASONABLE PROFIT OF 25% IS ESTIMATED ON THE ENTIRE RECEIPT OF RS. 9,31,94,840/- WHICH WOULD BE EARNED BY ANY SERVICE PROVIDER IN AN INDEPENDENT SCENARIO. 3.12 ALTERNATIVELY, THE ASSESSING OFFICER ALSO HELD TH E REVENUE RECEIVED BY THE ASSESSEE BY VIEW OF REIMBURSEMENT A S FEE FOR INCLUDED SERVICES, PLACING RELIANCE ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CENTRICA INDIA OFFS HORE PRIVATE LIMITED (SUPRA). 3.13 THE ASSESSEE RAISED OBJECTION BEFORE THE LEARNED DRP. THE LEARNED DRP AGREED WITH THE FINDING OF THE ASSESSIN G OFFICER ON THE ISSUE OF FIXED PLACE PE AND SERVICE PE, HOWEVER , ON THE ISSUE OF THE ATTRIBUTION OF THE PROFIT TO THE PE, ISSUED DIRECTION AS UNDER: XV. SINCE IT HAS BEEN HELD THAT THE A HAS PE IN I NDIA, PROFITS NEEDS TO BE ATTRIBUTED TO SUCH PE. THE AO HAS MENTIONED T HAT GLOBAL PROFIT FIGURES OF THE A WERE NOT AVAILABLE AND THEREFORE AN ATTRIBUTION OF 25% WAS MADE BY APPLYING RULE 10 OF IT RULES. IT IS OBSERVED THAT EVEN DURING THE PROCEEDINGS BEFORE US, THE A HAS N OT SUBMITTED THE GLOBAL PROFIT FIGURES OR THE AUDITED ACCOUNT WHICH COULD BE USED FOR THE PURPOSE OF REASONABLE ATTRIBUTION AS DESIRED BY THE A ITSELF. IN VIEW OF THE SAME, THE AO IS DIRECTED TO ONCE AGAIN VERIFY WHETHER THE GLOBAL PROFITABILITY OF THE A IS READILY AVAILABLE AND USE THE SAME FOR ATTRIBUTION OF PROFIT. IF NOT, THE ATTRIBUTION AS P ER RULE 10 IS UPHELD. XVI FURTHER, THE A HAS MENTIONED THAT THE RELOCATI ON EXPENSES OF RS.4,10,60,108/- INCLUDE THE EXPENSES BOTH FOR THE SECONDED EMPLOYEES AND THE OTHER EMPLOYEES OF THE AE. THE AO IS DIRECTED TO VERIFY IF ANY SUCH SEGREGATION HAS BEEN PROVIDED BY THE A DURING 12 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 THE ASSESSMENT PROCEEDING AND TO EXCLUDE THE SUM WH ICH REPRESENTS REIMBURSEMENT TOWARDS RELOCATION EXPENSES IN RELA TION WITH THE OTHER EMPLOYEES OF TIPL WHILE QUANTIFYING THE PROFI TS ATTRIBUTABLE TO THE PE OF THE ASSESSEE IN INDIA. 3.14 IN THE IMPUGNED FINAL ASSESSMENT ORDER, THE ASSESSI NG OFFICER HAS CLAIMED TO HAVE COMPLIED THE DIRECTION OF THE LEARNED DRP AS UNDER: 18.1 THE PERUSAL OF ASSESSMENT RECORD SHOWS THAT T HE ASSESSEE COMPANY HAS NOT PROVIDED THE INFORMATION IN RESPECT OF ITS GLOBAL PROFITABILITY. THE SAME IS NOT READILY AVAILABLE FO R CALCULATION OF PROFIT FOR ATTRIBUTION TO THE PE OF THE ASSESSEE IN INDIA. IN THESE CIRCUMSTANCES, THE PROVISION OF RULE 10 OF IT RULE 1962 TO DETERMINE THE PROFIT ON THE REIMBURSEMENT AMOUNT ARE HEREBY I NVOKED. 19. DURING THE PROCEEDINGS BEFORE HONBLE DRP, THE ASSESSEE HAS CLAIMED THAT THE RELOCATION EXPENSE OF RS. 4,10,60, 108/- INCLUDE THE EXPENSES BOTH FOR THE SECONDED EMPLOYEES AND THE OT HER EMPLOYEES OF THE ASSOCIATE ENTERPRISE. IN PARA XVI, THE HONB LE DRP HAS DIRECTED TO VERIFY, IF ANY, SUCH SEGREGATION HAS BEEN PROVID ED BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS AND TO E XCLUDE THE SUM WHICH REPRESENTS REIMBURSEMENT TOWARDS RELOCATI ON EXPENSES IN RELATION WITH THE OTHER EMPLOYEES OF TIPL WHILE QUANTIFYING THE PROFITS ATTRIBUTABLE TO THE PE OF THE ASSESSEE IN I NDIA. 19.1 THE ASSESSMENT RECORD IS PERUSED AND IT IS FOU ND THAT THE ASSESSEE NEITHER HAS CLAIMED SUCH SEGREGATION NOR H AS FILED ANY SUCH DETAILS DURING ASSESSMENT PROCEEDINGS. HENCE, THE SAME IS NOT VERIFIABLE FROM THE ASSESSMENT RECORD. IN THESE CIR CUMSTANCES, I AM LEFT WITH NO OPTION BUT TO APPLY THE PROVISIONS OF RULE 10 OF IT RULE, 1962 AND TO ATTRIBUTE THE PROFIT @ 25% OF THE PROFI T ESTIMATED @ 15% OF GROSS RECEIPTS OF RS. 9,31,94,804/-, AS CALCULAT ED IN DRAFT ASSESSMENT ORDER. 3.15 AGGRIEVED WITH THE FINAL ASSESSMENT ORDER, THE ASS ESSEE IS BEFORE US BY WAY OF APPEAL HAVING ITA NO.7805/DEL/2 017. 4. ACCORDING TO THE ASSESSEE, IN THE FINAL ASSESSMENT ORDER, THE ASSESSING OFFICER DID NOT FOLLOW THE DIRECTION OF T HE LEARNED DRP FOR SEGREGATING THE RELOCATION EXPENSES OF 4,10,60,108/- TOWARDS SECONDED EMPLOYEE AND OTHER EMPLOYEES OF TE REDATA INDIA AND THEREFORE, IT FILED RECTIFICATION APPLICA TION BEFORE THE 13 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 ASSESSING OFFICER, WHICH WAS REJECTED BY THE LEARNE D ASSESSING OFFICER. AGGRIEVED WITH THE REJECTION OF THE RECTIF ICATION, THE ASSESSEE IS BEFORE US BY WAY OF APPEAL IN ITA NO. 2580/DEL./2018. ITA NO. 7805/DEL/2017 ASSESSMENT YEAR: 2014-15 5. FIRST, WE TAKE UP THE APPEAL BEARING ITA NO. 7805/D EL/2017 FOR ASSESSMENT YEAR 2014-15. 6. WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES ON T HE ISSUE IN DISPUTE. THE LEARNED COUNSEL OF THE ASSESSEE REI TERATED THE SUBMISSION MADE BEFORE THE LOWER AUTHORITIES AND SU BMITTED THAT ABSENCE ONLY OF EMPLOYMENT AGREEMENT BETWEEN THE TE RADATA INDIA AND EXPATRIATE IS NOT DETERMINATIVE OF EMPLOY ER- EMPLOYEE RELATIONSHIP AND OTHER FACTORS LIKE CONTROL AND DIR ECTION TO EMPLOYEES ARE IMPORTANT. HE SUBMITTED THAT RELEVANT CLAUSES OF THE SECONDED AGREEMENT ESTABLISHED BEYOND DOUBT THE FACT THAT SECONDED PERSONS WERE WORKING UNDER THE EMPLOYMENT OF TEREDATA INDIA AND HAD NO RESPONSIBILITY TOWARDS TH E ASSESSEE. THOUGH THE LD. COUNSEL OBJECTED TO THE EXISTENCE OF PE OF THE ASSESSEE IN INDIA, BUT COULD CONTROVERT THAT ISSUE IN DISPUTE IN THE INSTANT CASE IS COVERED BY THE DECISION IN THE CASE OF CENTRICA INDIA OFFSHORE PRIVATE LIMITED (SUPRA), AND HE FOCU SED HIS ARGUMENTS ON NO PROFIT ATTRIBUTION. HE SUBMITTED TH AT NO PROFIT ELEMENT WAS INVOLVED IN REIMBURSEMENT OF COSTS INCU RRED BY THE ASSESSEE IN RELATION TO SALARY AND OTHER EXPENSES O F SECONDED EMPLOYEES. 14 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 6.1 AS FAR AS THE DECISION IN THE CASE OF CENTRICA IND IA OFFSHORE PRIVATE LIMITED (SUPRA) IS CONCERNED, WE FIND THAT IN THAT CASE CENTRICA, UK OUTSOURCED SOME OF THEIR BACK OFFICE S UPPORT FUNCTIONS TO THIRD PARTIES VENDORS IN INDIA. THE CE NTRICA UK SET UP CENTRICA INDIA TO ACT AS AN INTERFACE BETWEEN THE THIRD PARTY VENDORS IN INDIA AND THE OVERSEAS ENTITIES. THE CEN TRICA INDIA PROVIDED SERVICES TO OVERSEAS ENTITIES IN TERMS OF A SERVICE AGREEMENT UNDER COST-PLUS ARRANGEMENT. THE CENTRICA INDIA, IN ORDER TO COMPLY WITH ITS OBLIGATIONS IN THE SERVICE AGREEMENT HAD ASKED CENTRICA UK AND ITS OTHER GLOBAL AFFILIATE TO PROVIDE STAFF WITH KNOWLEDGE AND EXPERIENCE OF VARIOUS PROCESSES AND PRACTICES. PURSUANT TO THAT REQUEST, A SECONDMENT A GREEMENT WAS ENTERED INTO BETWEEN CENTRICA INDIA AND OVERSEAS EN TITIES, UNDER WHICH SOME MANAGEMENT EMPLOYEES OF OVERSEAS ENTITIE S WERE DEPUTED TO CENTRICA INDIA FOR SHORT TERM ASSIGNMENT S RANGING FROM THREE TO NINETEEN MONTHS. IN ABOVE CIRCUMSTANC ES, THE HONBLE HIGH COURT CONFIRMED EXISTENCE OF PE OF CEN TRICA UK IN INDIA OBSERVING AS UNDER: 34. TO DETERMINE THE EXISTENCE OF A SERVICE PE, CI OP ARGUES THAT THE COURT MUST LOOK TOWARDS THE SUBSTANCE OF THE EMPLOY MENT RELATIONSHIP AND NOT THE FORM. THIS IS CORRECT. IN THE PRESENT CASE, THE SECONDED EMPLOYEES ARE TO BE INTEGRATED INTO CIOP, FOR THE AGREED PERIOD AND ARE SUBJECT TO ITS SUPERVISION AND CONTR OL. THE RULES, REGULATIONS, POLICIES AND OTHER PRACTICES OF CIOP F OR ITS EMPLOYEES WERE APPLICABLE TO THESE EMPLOYEES TOO. THE SECONDE D EMPLOYEES DUTIES AND FUNCTIONS WERE DICTATED BY THE INSTRUCTI ONS AND DIRECTIONS OF THE CIOP. HE/SHE HAD TO PERFORM THE DUTIES ASSIG NED WITH DUE DILIGENCE IN ACCORDANCE WITH THE APPLICABLE LAWS AN D REGULATIONS, STANDARDS AND PRACTICES AND CONTROL OF CIOP. THE OV ERSEAS ENTITIES WERE NOT RESPONSIBLE FOR ANY ERRORS OR OMISSIONS OF SUCH SECONDED EMPLOYEES OR FOR THEIR WORK. CIOP BORE ALL RISKS IN RELATION TO THE WORK OF SECONDED EMPLOYEES, AND REAPED THE BENEFIT FROM THE OUTPUT. CIOP ALSO BORE THE COST OF MONTHLY REMUNERA TION AND REIMBURSEMENT OF COST TO SECONDED EMPLOYEES. HOWEVE R, CRUCIALLY, 15 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 THESE SECONDED EMPLOYEES RETAINED THEIR ENTITLEMENT TO PARTICIPATE IN THE OVERSEAS ENTITIES RETIREMENT AND SOCIAL SECURITY PLANS AND OTHER BENEFITS IN TERMS OF ITS APPLICABLE POLICIES, AND T HE SALARY WAS PROPERLY PAYABLE BY THE OVERSEAS ENTITLE, WHICH CLA IMED THE MONEY FROM CIOP. THERE WAS NO PURPORTED EMPLOYMENT RELATI ONSHIP BETWEEN CIOP AND THE SECONDEES. NONE OF THE DOCUMEN TS, INCLUDING THE ATTACHMENT TO THE SECONDMENT AGREEMENTS PLACED ON RECORD (BETWEEN THE SECONDEES AND CIOP) REVEAL THAT THE LA TTER CAN TERMINATE THE SECONDMENT ARRANGEMENT; THERE IS NO E NTITLEMENT OR OBLIGATION, CLEARLY SPELT OUT, WHEREBY CIOP HAS TO BEAR THE SALARY COST OF THESE EMPLOYEES. THE WP(C) NO.6807/2012 PAG E 40 SECONDEES CANNOT IN FACT SUE THE CIOP FOR DEFAULT I N PAYMENT OF THEIR SALARY- NO OBLIGATION IS SPELT OUT VIS--VIS THE PE TITIONER. ALL DIRECT COSTS OF SUCH SECONDED EMPLOYEE'S BASIC SALARY AND OTHER COMPENSATION, COST OF PARTICIPATION IN OVERSEAS ENT ITIES' RETIREMENT AND SOCIAL SECURITY PLANS AND OTHER BENEFITS IN ACC ORDANCE WITH ITS APPLICABLE POLICIES AND OTHER COSTS WERE ULTIMATELY PAID BY THE OVERSEAS ENTITY. WHILST CIOP WAS GIVEN THE RIGHT TO TERMINATE THE SECONDMENT, (IN ITS AGREEMENT WITH THE OVERSEAS ENT ITIES) THE SERVICES OF THE SECONDEE VIS--VIS THE OVERSEAS ENT ITIES - THE ORIGINAL AND SUBSISTING EMPLOYMENT RELATIONSHIP - COULD NOT BE TERMINATED. RATHER, THAT EMPLOYMENT RELATIONSHIP REMAINED INDEP ENDENT, AND BEYOND THE CONTROL OF COIP. 35. THE CONCEPT OF A LEGAL AND ECONOMIC EMPLOYER, A S CONSIDERED BY VOGEL (RELIED UPON BY CIOP), IS WHEN 'A LOCAL EMPLO YER WISHING TO EMPLOY FOREIGN LABOUR FOR ONE OR MORE PERIODS OF LE SS THAN 183 DAYS RECRUITS THROUGH AN INTERMEDIARY ESTABLISHED ABROAD WHO PURPORTS TO BE THE EMPLOYER AND HIRES THE LABOUR OUT TO THE EMP LOYER.' IN THIS CASE, THE TEMPORAL ELEMENT OF THE THREE-WAY EMPLOYM ENT RELATIONSHIP IS CRUCIAL. THE SECONDEES WERE - ORIGI NALLY - EMPLOYEES OF THE OVERSEAS ENTITIES. THEY WERE NOT HIRED BY TH AT ENTITY AS A FALSE FAADE, WHOSE PRODUCTIVITY IS TO BE ULTIMATELY TRAC ED TO CIOP. RATHER, THE SECONDEES WERE REGULAR EMPLOYEES OF THE OVERSEAS ENTITIES. THERE IS NO DISPUTE WITH THIS FACT. THEY HAVE ONLY BEEN SECONDED OR TRANSFERRED FOR A LIMITED PERIOD OF TIM E TO ANOTHER ORGANIZATION, CIOP, IN ORDER TO UTILIZE THEIR TECHN ICAL EXPERTISE IN THE LATTER. THE SECONDMENT AGREEMENT BETWEEN CIOP AND T HE OVERSEAS ENTITY, AND THE AGREEMENT WP(C) NO.6807/2012 PAGE 4 1 BETWEEN CIOP AND THE EMPLOYEES, ENVISAGES AN END TO THIS EX CEPTION, AND A RETURN TO THE USUAL STATE OF AFFAIRS, WHEN THE SECO NDEES RETURN TO THE OVERSEAS ENTITIES. THE EMPLOYMENT RELATIONSHIP BETW EEN THE SECONDEE AND THE OVERSEAS ORGANIZATION IS AT NO POI NT TERMINATED, NOR IS CIOP GIVEN ANY AUTHORITY TO EVEN MODIFY THAT RELATIONSHIP. THE ATTACHMENT OF THE SECONDEES TO THE OVERSEAS ORGANIZ ATION IS NOT FRAUDULENT OR EVEN FLEETING, BUT RATHER, PERMANENT, ESPECIALLY IN COMPARISON TO CIOP, WHICH IS ADMITTEDLY ONLY THEIR TEMPORARY HOME. TODAY, CIOP ATTEMPTS TO CAST THAT EMPLOYMENT RELATI ONSHIP AS A 16 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 TENUOUS LINK BECAUSE, FOR THE DURATION OF THE SECON DMENT, CIOP PAYS THE SALARY OF THESE. EVEN HERE, THE SALARY IS ULTIM ATELY PAID THROUGH THE OVERSEAS ENTITY, WHICH IS NOT A MERE CONDUIT. C RUCIALLY, THE SOCIAL SECURITY, EMOLUMENTS, ADDITIONAL BENEFITS ETC. PROV IDED BY THE OVERSEAS ENTITY TO THE SECONDEE, AND MORE GENERALLY , ITS EMPLOYEES, STILL GOVERN THE SECONDEE IN ITS RELATIONSHIP WITH CIOP. IT WOULD BE INCONGRUOUS TO WISH AWAY THE EMPLOYMENT RELATIONSHI P, AS CIOP SEEKS TO DO TODAY, IN THE FACE OF SUCH STRONG LINKA GES. WHILST CIOP MAY HAVE OPERATIONAL CONTROL OVER THESE PERSONS IN TERMS OF THE DAILY WORK, AND MAY BE RESPONSIBLE (IN TERMS OF THE AGREEMENT) FOR THEIR FAILURES, THESE LIMITED AND SPARSE FACTORS CA NNOT DISPLACE THE LARGER AND ESTABLISHED CONTEXT OF EMPLOYMENT ABROAD . 36. IN THIS CONTEXT, THE DECISION OF THE SUPREME CO URT IN MORGAN STANLEY (SUPRA) OFFERS SUPPORT FOR THE AUTHORITY S VIEWPOINT, RATHER THAN THE CONTRARY STANCE. IN THAT CASE, THE COURT C ONSIDERED VARIOUS FORMS OF PES, AGENCY, SERVICE ETC, EACH OF WHICH CO NTEMPLATE A DIFFERENT CHARACTERISTIC AND LINK BETWEEN THE DEPUT ED WP(C) NO.6807/2012 PAGE 42 EMPLOYEE/ORGANIZATION AND THE PARENT. IN THE CONTEXT WITH WHICH WE ARE PRESENTLY CONCERNED, THE FOLLOWING OBSERVATIONS ARE CRITICAL: '15. AS REGARDS THE QUESTION OF DEPUTATION, WE ARE OF THE VIEW THAT AN EMPLOYEE OF MSCO WHEN DEPUTED TO MSAS DOES NOT BECOME AN EMPLOYEE OF MSAS. A DEPUTATIONIST HAS A L IEN ON HIS EMPLOYMENT WITH MSCO. AS LONG AS THE LIEN REMAI NS WITH THE MSCO THE SAID COMPANY RETAINS CONTROL OVER THE DEPUTATIONIST'S TERMS AND EMPLOYMENT. ... IT IS IMP ORTANT TO NOTE THAT WHERE THE ACTIVITIES OF THE MULTINATIONAL ENTERPRISE ENTAILS IT BEING RESPONSIBLE FOR THE WORK OF DEPUTA TIONISTS AND THE EMPLOYEES CONTINUE TO BE ON THE PAYROLL OF 'THE MULTINATIONAL ENTERPRISE OR THEY CONTINUE TO HAVE T HEIR LIEN ON THEIR JOBS WITH THE MULTINATIONAL ENTERPRISE, A SER VICE PE CAN EMERGE. ... A DEPUTATIONIST UNDER SUCH CIRCUMSTANCE S IS EXPECTED TO BE EXPERIENCED IN BANKING AND FINANCE. ON COMPLETION OF HIS TENURE HE IS REPATRIATED TO HIS P ARENT JOB. HE RETAINS HIS LIEN WHEN HE COMES TO INDIA. HE LENDS H IS EXPERIENCE TO MSAS IN INDIA AS AN EMPLOYEE OF MSCO AS HE RETAINS HIS LIEN AND IN THAT SENSE THERE IS A SERVI CE PE (MSAS) UNDER ARTICLE 5(2)(1). WE FIND NO INFIRMITY IN THE RULING OF THE ARR 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 TH E ABOVE SITUATION THERE EXISTS A SERVICE PE IN INDIA (MSAS) . ACCORDINGLY, THE CIVIL APPEAL FILED BY THE DEPARTME NT STANDS PARTLY ALLOWED.' 17 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 IN FACT, EVEN THE OECD COMMENTARY ON ARTICLE 15 OF THE MODEL CONVENTION, ON WHICH LEARNED COUNSEL FOR CIOP HAS P LACED GREAT RELIANCE, INTERESTINGLY NOTES THAT '[T]HE SITUATION IS DIFFERENT IF THE EMPLOYEE WORKS EXCLUSIVELY FOR THE ENTERPRISE IN TH E STATE OF EMPLOYMENT AND WAS RELEASED FOR THE PERIOD IN QUEST ION BY THE ENTERPRISE IN HIS STATE OF RESIDENCE.' THIS WAS CLE ARLY, AND CRITICALLY, NOT DONE IN THIS CASE. 37. THIS BRINGS THE COURT TO THE NEXT ISSUE, CONCER NING REIMBURSEMENT AND THE DOCTRINE OF DIVERSION OF INCO ME BY OVERRIDING TITLE. THIS COURT NOTICES THAT A CASE WITH ALMOST I DENTICAL CIRCUMSTANCES, IN IN RE: AT AND S INDIA (P) LTD., MANU/AR/0016/2006, ALSO CAME UP BEFORE THE AAR. THE RE, AN AGREEMENT BETWEEN AT&S INDIA AND ITS PARENT, AT& AU STRIA WAS ENTERED INTO, BY WHICH AT&S AUSTRIA UNDERTOOK TO AS SIGN OR CAUSE ITS SUBSIDIARIES TO ASSIGN ITS QUALIFIED EMPLOYEES TO THE AT&S INDIA. THESE INDIVIDUALS WERE TO WORK FOR AT&S INDIA AND R ECEIVE COMPENSATION SUBSTANTIALLY SIMILAR TO WHAT THEY WOU LD HAVE RECEIVED AS EMPLOYEES OF AT&S AUSTRIA. THEY WERE EN GAGED BY AT&S INDIA ON A FULL TIME BASIS. THE QUESTION BEFOR E THE AAR WAS IDENTICAL TO THIS CASE: 'WHETHER PURSUANT TO THE SECONDMENT AGREEMENT ENTER ED INTO BY THE APPLICANT WITH AT&S AUSTRIA, THE PAYMENT TO BE MADE BY THE APPLICANT TO AT&S AUSTRIA, TOWARDS REIMBURSE MENT OF SALARY COST INCURRED BY AT&S AUSTRIA IN RESPECT OF SECONDED PERSONNEL, WOULD BE SUBJECT TO WITHHOLDING TAX UNDE R SECTION 195 OF THE IT ACT, IN VIEW OF THE FACTS THAT (1) THE P AYMENTS ARE ONLY IN THE NATURE OF REIMBURSEMENT OF ACTUAL EXPEN DITURE INCURRED BY AT&S AUSTRIA. (2) AT&S AUSTRIA IS NOT E NGAGED IN THE BUSINESS OF PROVIDING TECHNICAL SERVICES IN THE ORDINARY COURSE OF ITS BUSINESS, (3) AT&S AUSTRIA IS NOT CHA RGING THE APPLICANT ANY SEPARATE FEE FOR THE SECONDMENT AND ( 4) THE SECONDED PERSONNEL WORK UNDER THE DIRECT CONTROL AN D SUPERVISION OF THE APPLICANT?' IN HOLDING THAT THE OBLIGATION UNDER SECTION 195 WOULD BE TRIGGERED, THE AAR HELD AS FOLLOWS: FROM THE ABOVE ANALYSIS OF BOTH THE AGREEMENTS IT IS CLEAR THAT PURSUANT TO THE OBLIGATION UNDER THE FCA, THE AT&S AUSTRIA HAS OFFERED THE SERVICES OF TECHNICAL EXPER TS TO THE APPLICANT ON THE LATTER'S REQUEST AND THE TERMS AND CONDITIONS FOR PROVIDING SERVICES OF TECHNICAL EXPERTS ARE CON TAINED IN THE SECONDMENT AGREEMENT WHICH WE HAVE REFERRED TO ABOV E IN GREAT DETAILS. THOUGH THE TERM 'REIMBURSEMENT' IS U SED IN THE AGREEMENTS, THE NATURE OF PAYMENTS UNDER THE SECOND MENT AGREEMENT HAS TO SATISFY THE CHARACTERISTIC OF REIM BURSEMENT 18 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 AND THAT THE TERM 'REIMBURSEMENT' IN THE AGREEMENT WILL NOT BE DETERMINATIVE OF NATURE OF PAYMENTS. THE TERM 'REIMBURSEMENT' IS NOT A TECHNICAL WORD OR A WORD O F ARTICLE IN OXFORD ENGLISH DICTIONARY, TO REIMBURSE MEANS--TO R EPAY A PERSON WHO HAS SPENT OR LOST MONEY--AND ACCORDINGLY REIMBURSEMENT MEANS TO MAKE GOOD THE AMOUNT SPENT O R LOST. HOWEVER, UNDER THE SECONDMENT AGREEMENT THE APPLICA NT IS REQUIRED TO COMPENSATE AT&S AUSTRIA FOR ALL COSTS D IRECTLY OR INDIRECTLY ARISEN FROM THE SECONDMENT OF PERSONNEL AND THAT THE COMPENSATION IS NOT LIMITED TO SALARY, BONUS, B ENEFITS, PERSONAL TRAVEL, ETC. THOUGH SALARY, BONUS, ETC. AN D THE AMOUNTS REFERRED TO IN PARA 4.2 OF THE SECONDMENT A GREEMENT FORM PART OF COMPENSATION. THE PREMISE OF THE QUEST ION THAT THE PAYMENTS ARE ONLY IN THE NATURE OF REIMBURSEMEN T OF ACTUAL EXPENDITURE INCURRED BY AT&S AUSTRIA IS NOT TENABLE FOR REASONS MORE THAN ONE. FIRST IT IS NOT SUPPORTED BY ANY EVIDENCE AS NO MATERIAL (EXCEPT THE DEBIT NOTES OF SALARIES OF SECONDED PERSONNEL) IS PLACED BEFORE US TO SHOW WHA T ACTUAL EXPENDITURE WAS INCURRED BY AT&S AUSTRIA AND WHAT I S BEING CLAIMED AS REIMBURSEMENT; SECONDLY, ASSUMING FOR TH E SAKE OF ARGUMENT THAT THE DEBIT NOTES REPRESENT THE QUANTUM OF COMPENSATION AS THE ACTUAL EXPENDITURE, IT WOULD MA KE NO DIFFERENCE AS THE SAME IS PAYABLE TO THE AT&S AUSTR IA UNDER THE SECONDMENT AGREEMENT FOR SERVICES PROVIDED BY I T. IT WOULD, THEREFORE, BE NOT ONLY UNREALISTIC BUT ALSO CONTRARY TO THE TERMS OF THE AGREEMENT TO TREAT PAYMENTS UNDER THE SAID AGREEMENT AS MERE REIMBURSEMENT OF SALARIES OF THE SECONDED EMPLOYEES WHO ARE SAID TO BE THE EMPLOYEES OF THE A PPLICANT. TO SHOW THAT THE REAL EMPLOYER OF SUCH EMPLOYEES IS THE APPLICANT AND NOT THE AT&S AUSTRIA, MR. CHAITANYA I NVITED OUR ATTENTION TO VARIOUS EMPLOYMENT AGREEMENTS ENTERED INTO BETWEEN THE APPLICANT AND THE SECONDED EMPLOYEES AN D ALSO THE CERTIFICATE OF DEDUCTION OF TAX AT SOURCE ON TH EIR GLOBAL SALARY. ALL THE EMPLOYMENT AGREEMENTS ARE SIMILARLY WORDED. WE HAVE CAREFULLY GONE THROUGH THE EMPLOYMENT AGREE MENT BETWEEN THE APPLICANT AND MR. MARKUS STOINKELLNER. THE DURATION OF THE EMPLOYMENT IS FROM 1ST SEPT., 2005 TILL 30TH AUG., 2008. IN ARTICLE 3 THEREOF SALARY OF THE EMPLOYEE IS NOTED AS THE REMUNERATION, PERQUISITES AND OTHER ENTITLEM ENTS AS DETAILED IN APPENDIX-A. HOWEVER, APPENDIX-A DOES NO T SPECIFY ANY AMOUNT. ALL THAT IT SAYS, IS THAT THE SALARY WI LL BE AS FIXED AND AGREED BETWEEN THE EMPLOYEE AND THE COMPANY FRO M TIME TO TIME AND THAT SUCH SALARY MAY BE PAID EITHER IN INDIA OR OUTSIDE INDIA BUT THE TOTAL SALARY SHALL NOT EXCEED THE SALARY FIXED AS ABOVE, BUT NO FIXED SALARY IS MENTIONED IN THE EMPLOYMENT AGREEMENT. OTHER PERQUISITES AND ENTITLE MENTS ARE : TRAVEL EXPENSES, TRANSPORT, BOARDING, LODGING ; AND 19 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 ANNUAL LEAVE OF 30 DAYS PER YEAR; AND HOME LEAVE WH ICH THE EMPLOYEE WILL BE ENTITLED TO ONCE. THE APPLICANT SH ALL HAVE TO ORGANIZE AN ECONOMIC CLASS RETURN FLIGHT TICKETS TO GO ON HOME LEAVE. THE EMPLOYMENT AGREEMENT ALSO PROVIDES THAT THE EMPLOYEE WILL BE RESPONSIBLE FOR MEETING ALL REQUIR EMENTS UNDER INDIAN TAX LAWS INCLUDING TAX COMPLIANCE AND FILING OF RETURNS AND THE APPLICANT IS AUTHORIZED TO DEDUCT T AXES FROM THE COMPENSATION AND BENEFITS PAYABLE.' 38. THE MERE FACT THAT CIOP, AND THE SECONDMENT AGR EEMENT, PHRASES THE PAYMENT MADE FROM CIOP TO THE OVERSEAS ENTITY AS REIMBURSEMENT CANNOT BE DETERMINATIVE. NEITHER IS THE FACT THAT THE OVERSEAS DOES NOT CHARGE A MARK-UP OVER AND ABO VE THE COSTS OF MAINTAINING THE SECONDEE RELEVANT IN ITSELF, SINCE THE ABSENCE TO MARK- UP (SUBJECT TO AN INDEPENDENT TRANSFER PRICIN G EXERCISE) CANNOT NEGATE THE NATURE OF THE TRANSACTION. IT WOULD LEAD TO AN ABSURD CONCLUSION IF, WP(C) NO.6807/2012 PAGE 46 ALL ELSE CONSTANT, THE FACT THAT NO PAYMENT IS DEMANDED NEGATES ACCRUAL OF INCOME TO THE OVERSEAS ENTITY. INSTEAD, THE VARIOUS FACTORS CONCE RNING THE DETERMINATION OF THE REAL EMPLOYMENT LINK CONTINUE TO OPERATE, AND THE CONSEQUENT FINDING THAT PROVISION OF EMPLOYEES TO CIOP WAS THE PROVISION OF SERVICES TO CIOP BY THE OVERSEAS ENTIT IES TRIGGERS THE DTAAS. THE NOMENCLATURE OR LESSER-THAN-EXPECTED AMO UNT CHARGED FOR SUCH SERVICES CANNOT CHANGE THE NATURE OF THE S ERVICES. INDEED, ONCE IT IS ESTABLISHED, AS IN THIS CASE, THAT THERE WAS A PROVISION OF SERVICES, THE PAYMENT MADE MAY INDEED BE PAYMENT FO R SERVICES - WHICH MAY BE DEDUCTED IN ACCORDANCE WITH LAW - OR R EIMBURSEMENT FOR COSTS INCURRED. THIS, HOWEVER, CANNOT BE USED T O CLAIM THAT THE ENTIRE AMOUNT IS IN THE NATURE OF REIMBURSEMENT, FO R WHICH THE TAX LIABILITY IS NOT TRIGGERED IN THE FIRST PLACE. THIS WOULD MEAN THAT IN ANY CIRCUMSTANCE WHERE SERVICES ARE PROVIDED BETWEE N RELATED PARTIES, THE DEMAND OF ONLY AS MUCH MONEY AS HAS BE EN SPENT IN PROVIDING THE SERVICE WOULD REMOVE THE TAX LIABILIT Y ALTOGETHER. THIS IS CLEARLY AN INCORRECT REASONING THAT CONFLATES LI ABILITY TO TAX WITH SUBSEQUENT DEDUCTIONS THAT MAY BE CLAIMED. 39. SO FAR AS THE DECISION IN M/S. E-FUNDS IT SOLUT ION, GOES, THE JUDGMENT NOTES THE DISTINCTION BETWEEN STEWARDSHIP ACTIVITIES OF EMPLOYEES AND DEPUTATIONISTS, WHICH HAD BEEN HIGHLI GHTED IN MORGAN STANLEY. THE DIVISION BENCH IN E-FUNDS HIGHL IGHTED THAT THE NATURE OF ACTIVITY UNDERTAKEN BY THE EMPLOYEE IS DE TERMINATIVE OF WHETHER IT CONSTITUTES A SERVICE. IN THE PRESENT CA SE, THE OVERSEAS ENTITIES OUTSOURCE THEIR BACK OFFICE SUPPORT FUNCTI ONS LIKE DEBT COLLECTIONS/CONSUMERS BILLINGS/MONTHLY JOBS TO THIRD PARTY VENDORS IN WP(C) NO.6807/2012 PAGE 47 INDIA. THE SECONDED E MPLOYEES IN THE PRESENT CASE, OVERSEE QUALITY CONTROL OF THE WO RK OF SUCH VENDORS. THIS WORK CANNOT BE CHARACTERIZED AS MERE STEWARDSHIP. WHAT COULD HAVE BEEN LEFT TO CIOP TO DO IS IN FACT BEING DONE THROUGH 20 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 THE SECONDED EMPLOYEES, WHOSE EXPERTISE AND TRAININ G LENDS QUALITY AND CONTENT TO THE INDIAN ENTITY. THEREFORE, IT IS HELD THAT THE REAL EMPLOYER OF THESE SECONDED EMPLOYEES CONTINUES TO B E THE OVERSEAS ENTITY CONCERNED. 6.2 IN THE INSTANT CASE ALSO, THE EMPLOYEES OF THE ASS ESSEE HAS BEEN DEPUTED TO MANAGE THE AFFAIRS OF THE INDIAN EN TITY AND PROVIDE TECHNICAL KNOWLEDGE. THE EMPLOYEES THOUGH W ORKED AT THE PREMISES OF THE TERDATA INDIA BUT FOR ALL PRACTICAL PURPOSES THE REMAINED EMPLOYEES OF THE ASSESSEE COMPANY. THE EMP LOYEES CONTINUED TO MAKE THEIR SOCIAL SECURITY CONTRIBUTIO NS IN USA AND THEIR SALARIES WERE ALSO DISTRIBUTED TO THEIR BANK ACCOUNTS IN USA. IN THE CASE OF CENTRICA (SUPRA) THERE WAS AGREEMEN T BETWEEN THE INDIAN ENTITY AND EXPATRIATE, BUT IN THIS CASE, EVE N THERE WAS NO SUCH AGREEMENT ALSO. IN VIEW OF THE ABOVE FACTS, RE SPECTFULLY FOLLOWING THE FINDING OF THE HONBLE HIGH COURT, WE UPHOLD THE FINDING OF THE LOWER AUTHORITIES ON THE ISSUE OF EX ISTENCE OF PE OF THE ASSESSEE IN INDIA IN TERMS OF THE DTAA. THE GRO UND NO. 2.1 TO 2.4 OF THE APPEAL ACCORDINGLY DISMISSED. 7. REGARDING PROFIT ATTRIBUTION, THE LEARNED COUNSEL HAS MADE SEVERAL ARGUMENTS/ SUBMISSIONS IN SUPPORT OF THE GR OUND NOS. RAISED FROM 2.5 TO 2.8 OF THE APPEAL. 7.1 THE FIRST SUBMISSION WHICH HAS BEEN MADE IS THAT R ELOCATION EXPENSES OF 4,10,60,108/- DOES NOT ONLY RELATE TO THE SECONDMENT ARRANGEMENT AND WERE ALSO PAID FOR THE O THER EMPLOYEES OF THE TIPL. THE ASSESSING OFFICER IS OF THE VIEW THAT THE ENTIRE AMOUNT WAS INCURRED TOWARDS VISA CHARGES AND OTHER TRAVEL COST OF SECONDED EMPLOYEES, WHICH PAID BY TH E ASSESSEE COMPANY AND REIMBURSED TO IT BY THE TERADATA INDIA . ACCORDING 21 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 TO THE ASSESSEE, OUT OF THE TOTAL RELOCATION EXPENS ES, EXPENSES OF 3,70,77,547/- RELATED TO EMPLOYEE OTHER THAN SECOND ED EMPLOYEES. THIS ISSUE WAS RAISED BY THE ASSESSEE BE FORE THE LEARNED DRP AND LEARNED DRP DIRECTED TO VERIFY THE CLAIM OF THE ASSESSEE, HOWEVER, IN THE FINAL ASSESSMENT ORDER, T HE LEARNED ASSESSING OFFICER CONSIDERED THE SAME AMOUNT FOR CO ST BASE ON THE GROUND THAT NO SUCH DETAILS WERE PROVIDED BY TH E ASSESSEE IN ASSESSMENT PROCEEDINGS. IN OUR OPINION, THIS IS ISS UE OF THE VERIFICATION AND IF ON VERIFICATION CERTAIN EXPENSE S ARE NOT FOUND PERTAINING TO THE SECONDED EMPLOYEES, SAME NEED TO BE EXCLUDED FOR TAKING COST BASE FOR PROFIT ATTRIBUTION. ACCORD INGLY, WE RESTORE THIS ISSUE TO THE FILE OF THE LEARNED ASSESSING OFF ICER FOR DECIDING AFTER VERIFICATION OF EACH AND EVERY ITEM OF EXPENS E OF 4,10,60,108/- AND INCLUDE ONLY THE ITEM OF THE EXPE NSES PERTAINING TO THE SECONDED EMPLOYEES. THE GROUND NO . 2.5 AND 2.6 OF THE APPEAL ARE ACCORDINGLY ALLOWED FOR STATI STICAL PURPOSES. 8. THE NEXT SUBMISSION OF THE ASSESSEE IS REGARDING N OT CONSIDERING THE GLOBAL PROFIT OF THE ASSESSEE FOR A PPLYING MARKUP ON THE COST BASE AND ADOPTING AN AD-HOC 25% AS PROF IT ATTRIBUTABLE TO THE PE. THE CONTENTION OF THE ASSES SEE THAT LEARNED DRP SPECIFICALLY DIRECTED THE ASSESSING OFF ICER FOR VERIFYING THE GLOBAL PROFIT OF THE ASSESSEE, HOWEVE R, THE LEARNED ASSESSING OFFICER DID NOT CONSIDER THE SUBMISSION O F THE ASSESSEE. 8.1 WE ARE OF THE OPINION THAT THIS IS ISSUE OF VERIFI CATION BY THE ASSESSING OFFICER ACCORDINGLY. WE RESTORE THIS ISSU E TO THE ASSESSING OFFICER FOR DECIDING AFTER VERIFICATION O F THE DOCUMENTS ALONG WITH AUDITED STATEMENTS FILED BY THE ASSESSEE IN SUPPORT OF ITS CLAIM OF THE GLOBAL PROFIT AND DECIDE THE ATTRI BUTION OF PROFIT IN 22 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 ACCORDANCE WITH ARTICLE 7 OF THE INDIAN-USA DTAA. T HE GROUND NO. 2.8 OF THE APPEAL IS ACCORDINGLY ALLOWED FOR ST ATISTICAL PURPOSES. 9. THE NEXT SUBMISSION OF THE LEARNED COUNSEL IS THAT THE SALARY OF RS. 4,78,63,383/- BY THE TIPL TO SECONDE D EMPLOYEES IN INDIA HAS BEEN ACCEPTED AS THE COST OF THE BUSINESS OF THE TIPL, AS HENCE SALARY PAYMENT MADE TO THE SECONDED EMPLOY EES BY THE ASSESSEE ON BEHALF OF THE TIPL SHOULD ALSO BE CONSI DERED AS COST OF BUSINESS OF THE TIPL AND SHOULD NOT BE CONSIDERE D FOR ATTRIBUTING TO THE ALLEGED PE. 9.1 THIS CONTENTION OF THE ASSESSEE IS NOT ACCEPTABLE BECAUSE IN THE INSTANT CASE, REVENUE EARNED BY THE PE FOR PROV IDING SERVICES TO THE INDIAN ENTITY IS UNDER CONSIDERATION FOR PRO FIT ATTRIBUTION AND THE COST OR EXPENDITURE INCURRED BY THE INDIAN ENTITY IS NOT AN ISSUE IN DISPUTE. 9.2 FURTHER, THE ASSESSEE PROPOSED THAT SALARY COSTS P AID TO SECONDED PERSON IS TO BE ALLOWED AS PER ARTICLE 7 O F THE DTAA WHILE MAKING ATTRIBUTION TO THE ALLEGED PE IN INDIA . THE SUBMISSION OF THE ASSESSEE ARE REPRODUCED AS UNDER: 3.1.1 ARTICLE 7 OF THE DTAA GOVERNS THE TAXABILITY OF BUSINESS INCOME OF AN US RESIDENT IN INDIA, WHICH PROVIDES FOR DEDUCTION OF ANY EXPENSES WHICH ARE IN CURRED FOR THE BUSINESS OF PE. 3.1.2 IN THE INSTANT CASE THIS COST IS THE AMOUNT EXPENDED TOWARDS THE SALARY AND OTHER BENEFIT PAID TO THE SECONDED PERSONS. IT IS ALSO SUBMITTED THAT AS THE REIMBURSEMENTS WERE ON A CASE TO COST BASIS, NO PRO FIT ELEMENT WOULD BE LEFT AND THEREFORE THERE WOULD BE NO TAXABLE INCOME IN INDIA. 3.1.3 IN THE INSTANT CASE, ATTRIBUTION OF PROFITS TO THE ALLEGED PE IN INDIA UNDER THE PROVISIONS OF THE DTAA WOULD STAND AS UNDER: 23 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 PARTICULARS AMOUNT (INR) REIMBURSEMENTS RECEIVED FROM TIPL FOR THE SECONDED PERSONS 5,21,34,696 LESS: SALARY COST PAID BY THE APPELLANT (AS REIMBURSEMENTS ARE ON COST-TO-COST BASIS) 5,21,34,696 TAXABLE INCOME NIL 9.3 FROM THE ABOVE SUBMISSION, WHAT WE FIND THAT THE A SSESSEE IS PROPOSING THAT OUT OF THE REIMBURSEMENT AMOUNT R ECEIVED FROM TERADATA INDIA, FIRST THE COST BASE SHOULD BE DED UCTED AND THEN MARKUP SHOULD BE CHARGED ON THE REMAINING AMOUNT, W HICH WILL BE NIL IN THIS CASE. WE DO NOT AGREE WITH THIS PROP OSITION OF THE ASSESSEE. THE ASSESSEE HAS RENDERED SERVICES TO THE TERADATA INDIA THROUGH THE PE AND THEREFORE THE INCOME WHICH ACCRUED TO THE PE IS THE MARKET VALUE OF THE SERVICES WHICH HA S BEEN PROVIDED BY THE SECONDED EMPLOYEES REDUCED BY THE C OST OF THE SERVICES. THE MARKET VALUE OF THE SERVICES TO PE CA N ALSO BE DEDUCED FROM THE SALE VALUE OR REVENUE FETCHED BY T ERADATA INDIA ON THOSE SERVICES REDUCED BY THE AVERAGE PROFIT MAR GIN OF TERADATA INDIA. THE ASSESSING OFFICER IS REQUIRED T O ATTRIBUTE PROFIT TO THE PE IN ACCORDANCE WITH ARTICLE 7 OF TH E INDO-USA DTAA. THE ARTICLE 7(2) PRESCRIBE THAT PROFIT ATTRIB UTABLE TO PE MAY BE ESTIMATED ON A REASONABLE BASIS, BUT THE ESTIMAT E ADOPTED, HOWEVER, SHOULD BE IN ACCORDANCE WITH PRINCIPLE LAI D DOWN IN ARTICLE 7 OF THE TREATY. THE DEDUCTION OF EXPENSES ARE ALSO TO BE ALLOWED AS PER ARTICLE 7(3) OF THE TREATY. THE ASS ESSING OFFICER HAS CONSIDERED MARKUP AT THE RATE OF 25% ON THE COS T BASE OF THE SECONDED EMPLOYEES IN ABSENCE OF DETAILS OF GLOBAL PROFIT OF THE ASSESSEE. IN OUR OPINION, THIS ACTION OF THE ASSESS ING OFFICER WAS 24 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 NOT TOTALLY ARBITRARY OR IN VIOLATION OF RULES OF E STIMATION, THOUGH WE HAVE ALREADY RESTORED THE ISSUE OF THE ESTIMATIO N OF THE PROFIT TO THE FILE OF THE ASSESSING OFFICER IN ACCORDANCE WITH ARTICLE 7 OF THE INDIAN USA DTAA. 9.4 THE LEARNED COUNSEL ALSO MADE AN ALTERNATIVE ARGUM ENT THAT TERADATA INDIA WAS REMUNERATED AT ARMS LENGTH PRIC E UNDER TRANSFER PRICING PRINCIPLES AND NO FURTHER ATTRIBUT ION TO THE ALLEGED PE OF THE ASSESSEE IS WARRANTED. WE ALSO D O NOT AGREE WITH THIS PROPOSITION BECAUSE, NOTHING IS BROUGHT O N RECORD TO SHOW WHETHER THE SERVICES OF THE SECONDED EMPLOYEE HAS BEEN UTILIZED TOWARDS INTERNATIONAL TRANSACTIONS OF THE INDIAN ENTITY OR HAS BEEN UTILIZED IN DOMESTIC MARKET. EVEN THE SERV ICES HAS BEEN UTILIZED BY ASSOCIATED ENTERPRISES AND REMUNERATED AT ARMS LENGTH PRICE TO TERADATA INDIA, WILL NOT MAKE ANY IMPACT, AS IN THE INSTANT CASE THE INCOME TAXABLE IN THE HANDS OF THE PE IS UNDER CONSIDERATION AND NOTHING HAS BEEN BROUGHT ON RECORD THAT ARMS LENGTH PRICE OF THE SERVICE TRANSACTION BETWE EN PE OF ASSESSEE AND INDIAN ENTITY HAS BEEN DETERMINED. WHA T IS RELEVANT HERE IS THAT INCOME HAS TO BE TAXED IN THE HANDS OF THE CORRECT PERSON AND IN THE INSTANT CASE INCOME FROM RENDERIN G SERVICES BY THE PE HAS TO BE TAXED IN THE HANDS OF THE PE AND R EMUNERATING THE TERADATA INDIA BY OTHER AES AT ARMS-LENGTH PRI CE IS NOT RELEVANT. ACCORDINGLY, WE REJECT THIS ALTERNATIVE A RGUMENT OF THE ASSESSEE. 10. THE GROUND NO. 3 OF THE APPEAL IS PREMATURE AT THI S STAGE AND THE DISMISSED AS INFRUCTUOUS. 11. THE GROUND NO. 4 IS CONSEQUENTIAL AND, THEREFORE, ACCORDINGLY DISMISSED AS INFRUCTUOUS. 25 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 12. IN GROUND NO. 5, THE ASSESSEE HAS SOUGHT CREDIT OF TAX DEDUCTED AT SOURCE FOR AMOUNT OF 22,721/-. THIS IS ISSUE OF VERIFICATION BY THE ASSESSING OFFICER FROM THE RECO RDS OF THE ASSESSEE AS WELL AS FROM THE RECORD OF THE DEPARTME NT AND THEREFORE, ACCORDINGLY, WE RESTORE THIS ISSUE TO TH E FILE OF THE LEARNED ASSESSING OFFICER WITH THE DIRECTION TO THE ASSESSEE TO PRODUCE ALL THE EVIDENCES IN SUPPORT BEFORE THE ASS ESSING OFFICER FOR VERIFICATION AND HE WILL THEN AFTER EXAMINATION OF THE DOCUMENTS/EVIDENCE AND DATA BASE OF THE DEPARTMENT, ALLOW THE CREDIT OF TDS IN ACCORDANCE WITH LAW. 13. THE ASSESSEE HAS ALSO RAISED ADDITIONAL GROUND NO. 6 AND 7 AS UNDER: 6. THAT, IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO HAS ERRED IN IGNORING THE SETTL ED POSITION OF LAW THAT PROCEEDINGS BEFORE THE DISPUTE RESOLUTION PANE L (DRP) ARE PART OF THE ASSESSMENT PROCEEDINGS ONLY AND THEREFO RE, FAILED TO APPRECIATE THAT DETAIL OF RELOCATION EXPENSES FILED BEFORE THE LEARNED DRP WAS PART OF THE ASSESSMENT RECORDS. 7. THAT, WITHOUT PREJUDICE TO OTHER GROUNDS OF APPE AL, THE LEARNED AO/DRP ERRED IN IGNORING THE FACT THAT FOR THE SUBJ ECT SECONDMENT ARRANGEMENT, TIPL WAS REMUNERATED BY THE ASSOCIATED ENTERPRISES AT AN ARMS LENGTH PRICE UNDER TRANSFER PRICING PRI NCIPLES AND ACCORDINGLY, NO FURTHER ATTRIBUTION TO THE ALLEGED PE OF THE APPELALNT IS WARRANTED. 14. BOTH THESE GROUNDS HAVE ALREADY BEEN ADJUDICATED W HILE DEALING WITH THE GROUND NOS. 2.5 TO 2.8 OF THE APPE AL AND ACCORDINGLY, WE ARE NOT REQUIRED TO ADJUDICATE AGAI N ON THESE GROUNDS. THE GROUNDS ARE ACCORDINGLY DISMISSED. ITA NO.2580/DEL/2018 ASSESSMENT YEAR 2014-15 26 ITA NO. 7805/DEL./2017 & 2580/DEL/2018 15. IN APPEAL NO. 2580/DEL/2018, THE ASSESSEE IS AGGRI EVED WITH REJECTION OF THE RECTIFICATION APPLICATION OF THE ASSESSEE. IN THE RECTIFICATION APPLICATION THE ASSESSEE REQUESTE D FOR COMPLYING WITH THE DIRECTION OF THE LEARNED DRP ON THE ISSUE OF RELOCATION EXPENSES. AS THIS ISSUE HAS ALREADY BEEN RESTORED B Y US TO THE FILE OF THE ASSESSING OFFICER WHILE DEALING WITH THE GRO UNDS IN ITA NO. 7805/DEL/2017 AND, THEREFORE, THE GROUNDS RAISED IN ITA NO. 2580/DEL./2018 ARE RENDERED ACADEMIC ONLY AND, THER EFORE, WE ARE NOT ADJUDICATING UPON THE SAME. THE APPEAL IS A CCORDINGLY DISMISSED AS INFRUCTUOUS. 15. IN THE RESULT, THE APPEAL BEARING ITA NO. 7805/DEL ./2017 IS ALLOWED PARTLY FOR STATISTICAL PURPOSES AND THE APP EAL BEARING ITA NO.2580/DEL/2018 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH MARCH, 2020. SD/- SD/- (AMIT SHUKLA) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 19 TH MARCH, 2020. RK/- (D.T.D.S.) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI
