M/s. Yokogawa India Limited, Bangalore V. Assistant Commissioner Of Income Tax, LTU, Circle-2, Bangalore

ITA 2608/BANG/2019

AI Insights

Yokogawa India Limited appealed against the final assessment order passed by the Assistant Commissioner of Income Tax, which included various Transfer Pricing adjustments. The Tribunal examined the adjustments made by the TPO, particularly in the manufacturing segment and the interest on receivables, and found merit in the assessee's arguments for a revision of these adjustments. The Tribunal also considered the issue of TDS on expatriate salary reimbursements, directing the AO to follow the legal precedents which exempt such reimbursements from TDS under certain conditions. The appeal led to partial relief for the assessee, with directions for further action on specific contested issues.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 124965 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 1 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Next Hearing Date: 05-02-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 23-12-2019
• Other Referred Cases: Flipkart Internet Pvt. Ltd. v. DCIT (International Taxation), Goldman Sachs Services P. Ltd. v. ACIT, C.C.,C.E& ST, Bangalore v. Northern Operating Systems (P) Ltd., DIT (International Taxation) v. Abbey Business Services India (P.) Ltd., Volkswagen India Pvt. Ltd. Vs CCE, Pune-I, Cholamandalam MS General Insurance Co. Ltd. v. AT & S India Pvt Ltd, Marks & Spencer Reliance India Pvt.Ltd. v. DIT, HCL Infosystems Ltd. v. DIT, IDS Software Solutions v. ITO, Faurecia Automative Holding v. ACIT, Burt Hill Designs (P) Ltd. v. DDIT(IT)
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Double taxation relief; Deemed to accrue or arise in india; Additional evidence; Notional interest; TDS; Set aside
• Section: 139; 143(3); 234B; 201(1); 195; 192; 9(1); 9(1); 9(1); 13; 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.2608/Bang/2019 and SP 60/Bang/2022 Assessment year : 2015-16 Yokogawa India Limited, Plot No.96, 3 rd Cross, Electronic City, Hosur Road, Bangalore – 560 100. PAN: AAACY 0840P Vs. The Assistant Commissioner of Income Tax, LTU, Circle 2, Bangalore APPELLANT RESPONDENT Appellant by : Shri Padam Chand Khincha, CA Respondent by : Shri Sunil Kumar Singh, CIT(DR)(ITAT), Bengaluru. Date of hearing : 06.02.2023 Date of Pronouncement : 14.02.2023 O R D E R Per Padmavathy S., Accountant Member This appeal is against the final assessment order passed by ACIT, LTU, Circle 2, Bangalore dated 25.10.2019 passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] for the assessment year 2015-16. 2. The assessee company is engaged in the manufacture, trading, distribution, installation and servicing of process control systems and IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 2 of 30 industrial automation instrument/equipment and electrical measuring instruments. 3. The assessee filed the return of income for AY 2015-16 on 30.11.2015 declaring a total income of Rs.86,08,17,214. The case was selected for scrutiny and statutory notices were duly served on the assessee. During the year, the assessee had entered into several specified domestic transactions and international transactions with its AEs. Therefore a reference was made to the TPO to determine the arm’s length price (ALP) of the transactions enteed into by the assessee. The TPO made the following adjustments:- 1. Manufacturing segment Rs.32,07,44,000 2. Global sales & marketing fees Rs.1,43,33,706 3. Management fees Rs.74,51,000 4. Interest on receivables Rs.4,64,76,798 4. The assessee filed its objections before the DRP. The DRP gave partial relief to the assessee in terms of deleting adjustments made towards Global Sales & Marketing fees and Management fees. The TPO passed the OGE dated 11.10.2019 wherein the TP adjustment in the manufacturing segment was revised to Rs.30,26,25,000 and in the said order the TPO had mentioned that interest on delayed receivables will be revised as per DRP directions after receiving the relevant details from the assessee. The AO passed the final assessment order dated 25.10.2019 after incorporating the revised TP adjustment as per OGE dated 11.10.2019. Subsequently, the TPO passed the second OGE 5.3.2020 revising the TP adjustment as under:- IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 3 of 30 1. Manufacturing segment Rs.13,68,76,000 2. Interest on receivables Rs.11,88,817 5. Aggrieved, the assessee is in appeal against the final assessment order of the AO dated 25.10.2019. The assessee raised grounds pertaining to the following issues:- Ground 1 : General Ground 2 & 3 : Legal issue relating to TP adjustment Grounds 4 to 8 : TP adjustment in manufacturing segment Grounds 9 & 10 : Notional interest on trade receivables Grounds 11 & 12 : Expat salary reimbursement Ground 13 : Restricting the TDS credit Ground 14 : Interest u/s. 234B 6. During the course of hearing, the ld. AR did not press for ground Nos. 2 & 3 relating to the legal issue. The ld. AR also submitted that the adjustment towards notional interest on trade receivables is not material as per the final OGE dated 5.3.2020 and submitted that if the AO is directed to incorporate the 2 nd OGE in the assessment order, the grounds contending this issue will not be pressed on the basis of materiality of the adjustment. 7. Accordingly, we direct the AO to pass the revised final assessment order incorporating the changes made to the TP adjustment in the manufacturing segment and the interest on delayed receivables as per the second OGE issued by the TPO dated 05.3.2020. In view of this direction, the ground no.9 and 10 raised with regard to interest on receivable is left open. IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 4 of 30 TP adjustment in manufacturing segment 8. The functional analysis of the assessee in this segment as per the TP documentation is as under:- “Systems Segment: Yokogawa India imports certain components from its AEs which forms the basic structure of its finished products in the nature of Industrial automation/ process control systems. Yokogawa India purchases supplementary components from unrelated parties, assembles these components, performs engineering work to customise the system to suit its customers' requirements. Yokogawa India sells the systems to unrelated customers and also performs the installation and commissioning work at the customer's site.” 9. The assessee has entered into the following international transaction :- SI. No Nature of Transaction Relevant Segment Amount in INR Method 1 Purchase of raw materials and components Manufacturing 79,30,64,893 TNMM 2 Sale of systems Manufacturing 7,23,13,482 TNMM 3 Purchase of fixed assets Manufacturing 46,08,129 TNMM 4 Payment of engineering service fees Manufacturing 82,35,000 TNMM 5 Payment towards After Sales Services Manufacturing 1,56,94,000 TNMM 6 Rendering of systems related services Manufacturing 7,64,89,970 TNMM 7 Purchase, of traded goods Trading 1,38,52,15,544 TNMM 8 Purchase of fixed assets Trading 21,70,533 TNMM 9 Sale of traded goods Trading 5,16,33,056 TNMM 0 Commission received Trading 2,54,24,392 TNMM 11 Income from rendering of engineering services Engineering 1,43,66,82,295 TNMM 12 Payment of CEC support fees Engineering 2,90,80,000 TNMM IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 5 of 30 13 Management fees Manufacturing & Trading 74,51,000 TNMM 14 Global Sales and Marketing activity Fee Manufacturing & Trading 1,56,70,000 TNMM 15 Reimbursement of expenses - 5,18,91,000 Other method 10. The assessee adopted TNMM as the most appropriate method. In the manufacturing segment assessee has selected 6 comparables out of which the TPO has accepted only one comparable. The TPO did a fresh search and accordingly, the final set of comparables is as given below:- MANUFACTURING ACTIVITY SEGMENT Company Name OP/OC (%) OP/OR (%) 1 Subodhan Engineers (Pune) Pvt, Ltd, 3.46 3.35 2 Precision Automation & Robotics India Ltd. 4.03 3.87 3 Comae Electronics,Pvt. Ltd. 8.07 7.46 4 Concord United Products Pvt. Ltd. 9,90 9.01 5 Sharpline Automation Pvt. Ltd. 12.26 10.92 Average 7.54 6.92 11. Accordingly, the TP adjustment in the manufacturing segment was arrived at by the TPO as below:- MANUFACTURING ACTIVITY SEGMENT Manufacturing Amount in Lakhs Arm's Length Mean Margin on revenue (OP/OR) 6.92% Operating revenue 32945.25 IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 6 of 30 Arm's Length Price(ALP) of Operating cost (@93.08% of OR) 30665,44 Operating cost 33872.88 Variation in cost 3207 Shortfall being adjustment 3207.44 12. During the course of hearing, with regard to the grounds raised for TP adjustment in the manufacturing segment, the ld. AR submitted that if ground No.5 (iv) wherein the following comparables are contended to be excluded is adjudicated, then the rest of the grounds become academic. 13. Ground No.5(iv) reads as follows:- “5. The lower authorities have erred in: (iv) Selecting inappropriate comparables and selecting companies as comparables even though they are not comparable in terms of functions performed, assets utilized, risks assumed, size, turnover have unusual business circumstances, high margin, etc. The lower income tax authorities have erred in adopting the following company as a comparable: a. Subodhan Engineering (Pune) Private Limited; b. Concord United Private Limited; c. Sharpline Automation Private Limited;” 14. Out of the above, the ld. AR presented arguments relating to exclusion of only Concord United Pvt. Ltd. and Sharpline Automation Pvt. Ltd during the course of hearing. Concord United Pvt. Ltd. 15. The ld. AR submitted that the company is functionally different. The ld. AR drew our attention to the profile of Concord (page 965 of IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 7 of 30 PB) wherein it is stated that the company is engaged in designing and manufacturing high processed computer controlled wire cut machines and also deals with electronic toys. The ld. AR submitted that the company is majorly dealing with CMC wire cut EDM and EDM drilling. The ld AR also submitted that the company being a private limited company, the information available in the web is not sufficient for proper analysis and that the financial data with regard to the segmental information is not available. The ld AR therefore prayed for exclusion of the said companies. 16. The ld. DR relied on the orders of lower authorities. 17. We have heard the rival submissions and perused the material on record. We notice that the DRP has upheld the inclusion of the company by stating that assessee is functionally comparable since assessee’s manufacturing installation, servicing of systems related to industrial automation instruments and process controlled systems are similar to that of the company. It is also noticed that the DRP has held that under TNMM, the comparable companies are required to be only broadly comparable to assessee’s system segment business. 18. The ld. AR during the course of hearing drew our attention to the annual report of the company wherein it is stated that “we at Concord United Products will endeavour to be the supplier of choice for Unique Technologies to cater to the needs of Indian manufacturing and tooling industry”, from which it is clear that the company is catering to the industries and not the end customer like the assessee. IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 8 of 30 This, in our view, will have an impact on the FAR analysis of the company and therefore clearly distinguishable functionally from that of the assessee. We also notice that the company is majorly dealing with medium and drilling products whereas the assessee deals in industrial automation and process control. In view of this, we hold that Concord is not functionally comparable to the assessee and accordingly we direct the TPO to exclude the company from the list of comparables. Sharpline Automation Pvt. Ltd. 19. The ld. AR submitted that the company is engaged into diversified business operations such as manufacturing of high technology CMC machines, design & development of special purpose machines with modular design, etc. The ld. AR also submitted that the complete information with regard to financial data is not available. In this regard, the ld. AR drew our attention to the profile of the company in page 974 of PB. 20. The ld. DR relied on the orders of lower authorities. 21. We have heard the rival submissions and perused the material on record. The portfolio of the company from the annual report is as given below:- IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 9 of 30 IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 10 of 30 22. It can be seen from the above that the company is engaged in manufacture and installation of large capacity machining Centres, whereas the assessee is into products in industrial automation and process control systems. Further on perusal of the financials (page 969 of paper book) it is noticed that the company is deriving income from Sale of products as well as services whereas there is segmental information available in this regard. Considering these facts we are of the view that the company being functionally different cannot be comparable with assessee and accordingly we direct the AO to exclude the company from the list of comparables. 23. Through ground No.6 which reads as follows, the assessee is contending the treatment of provision for expected loss and the reversal as being non-operative in nature. “6. The learned AO/TPO has erred in not following the direction of DRP by not considering provision for expected losses as non-operating in nature in the case of the Appellant.” 24. In this regard, the ld. AR submitted that the assessee has debited the profit & loss account towards provision for estimated loss on construction contract and the reversal of excess provision is credited to the profit & loss account. The ld AR further submitted that the TPO while considering the margins of the assessee, has excluded reversal from the operating income of the assessee whereas the provision made debited to the P&L account is not given the same treatment. this from the operating cost and the revenue. The ld. AR drew our attention in this regard to the directions of the DRP in para 3.9.3 in page 19 of DRP IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 11 of 30 order where the direction is given for parity of treatment for the provision and the reversal and submitted that the TPO has not properly given effect to the same. Our attention was also drawn to the decision of the coordinate bench in assessee’s own case (IT(TP)A No.3369/Bang/2018 for AY 2014-15 dated 25.11.2021) where the similar issue is considered and remitted back to the AO. Respectfully following the above decision we remit the issue back to the AO/TPO to consider the issue afresh in the light of the directions of the DRP and the Hon’ble Tribunal in assessee’s own case supra. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly. 25. The AO/TPO is directed to compute the arm’s length price in accordance with the directions given in this order. In view of our decision as rendered above the rest of the grounds with regard to TP adjustment in manufacturing segment are left open. Corporate grounds 26. The AO during the course of assessment called for to submit copies of Form 15CA and to provide ledger extract commenting on the nature of Form 15CA payments. The assessee vide submission dated 10.12.2018 provided the details of expat salary reimbursement amounting to Rs.4,53,92,631 and submitted that no TDS was deducted on the salary reimbursement. The AO held that the salary cost of seconded employees form an integral part of fees for included services and they are not just reimbursements. Therefore, the AO held that tax should have been deducted on the payments and since no tax has been IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 12 of 30 deducted at source, disallowed the amount u/s. 40(a)(i). The DRP held that the assessee could not prove its claim with reliable evidence and confirmed the order of the AO. Aggrieved, the assessee is in appeal. 27. The ld. AR submitted that the issue of TDS on reimbursement of salary of seconded employees is settled now with the decision of the Hon’ble Karnataka High Court in the case of Flipkart Internet Pvt. Ltd. v. DCIT (International Taxation), WP No.3619/2021(T-IT) dated 24.6.2022. The ld. AR further submitted that the coordinate Bench in the case of Goldman Sachs Services P. Ltd. v. ACIT , IT(IT)A No. 362 to 369/Bang/2020 dated 29.4.2022 has considered the similar issue and held that there is no violation of provisions of section 40(a)(ia). 28. The ld. DR relied on the order of the Supreme Court in the case of C.C.,C.E& ST, Bangalore v. Northern Operating Systems (P) Ltd. [Civil Appeal No.2289 to 2293 of 2021) dated 19.5.2022. 29. We have heard the rival submissions and perused the material on record. We notice that the The Hon’ble Karnataka High Court in the case of Flipkart Internet Pvt. Ltd(Supra) while considering the issue of NIL TDS certificate towards reimbursement of salary cost held as follows:- “33. In the present case, the stand taken on the material available is on the construction of legal position As pointed out in the discussion earlier that the understanding of the legal position being erroneous, the only conclusion that could be arrived at is to allow the application. IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 13 of 30 34. Though the Revenue has raised numerous contentions that further information is required to record a detailed finding, such stand is taken up for the first time in the present proceedings A perusal of the file of the Department does not make out any instance where the Department had sought for further information which was not furnished On the contrary, the petitioner has made out detailed representation on the legal position and record does not reflect any requisition for further information remaining unanswered In fact, the Apex Court in GE India Technology Centre (P.) Ltd. (supra) has rightly observed at para-16 as follows:- "16. The fact that the Revenue has not obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all..." 35. Further, it must be noticed that the finding as regards deduction of tax at source under section 195 of the IT Act is tentative insofar as the Revenue is concerned Even if the Revenue orders that there was no obligation to make deduction under section 195, the question of liability of the recipient still remains to be decided subsequently Accordingly, the question of prejudice to the Revenue at the stage of section 195 order is unavailable to it 36. Curiously, the file contains a note by the same DCIT who has eventually passed the impugned order, which note dated 10.03.2020 addressed to the CIT seeks for granting approval for granting deduction of TDS at the rate of zero per cent on cost-to- cost reimbursement However, the opinion was directed to be reconsidered as per the endorsement found in the file and eventually an order was passed by DCIT contrary to the earlier view and has rejected the application 37. Accordingly, the findings in the impugned order and the conclusion regarding the employer-employee relationship is based on a wrong premise and is liable to be set aside As observed by this Court in DIT (International Taxation) v. Abbey Business Services India (P.) Ltd. [2020] 122 taxmann.com 174 (Kar.), "it is also pertinent to note that the Secondment IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 14 of 30 Agreement constitutes an independent contract of services in respect of employment with assessee" Hence, the DCIT in the impugned order has missed this aspect of the matter and has proceeded to consider the aspect of rendering of service as to whether it was 'FIS' 38. In light of setting aside of the impugned order in the context of legal position as noticed, the only order that can now be passed is of one granting 'nil tax deduction at source'. 39. Accordingly, in light of the above discussion, the impugned order at Annexure-A dated 1-5-2020 is set aside and the respondent No.1 is directed to issue a Certificate under section 195(2) of IT. Act to the effect of 'Nil Tax education at Source' as regards the petitioner's application dated 15-1-2020.” 30. We also notice that the coordinate bench of the Tribunal in the case Goldman Sachs Services Pvt. Ltd.(supra) has considered a similar issued and held that - 26.9. Admittedly, the assessee deducted tax at source u/s.192 of the Act, on the 100% salary paid to 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 overseas entity that has already subjected to TDS under section 192 of the Act. And therefore, at the time of making such reimbursement, to overseas entity, no taxes were deducted at source by the assessee in respect of reimbursements made as, according to the assessee, it was in the nature of cost-to-cost reimbursement, and, no element of income was involved. 26.10. The assessee in India does the TDS on 100% salaries u/s 192 and pay the same to the credit of the Central Government. Form 16 at page 228- 230 issued to Christopher Roberts of PB Vol I, by the assessee in Indian, Certificate under section 203 of TDS having deducted at source and further indicates the following – • Employee has a PAN number in India IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 15 of 30 • Total taxable salary is Rs 9,761,581 (this corresponds to the US$ 130,000 as total compensation indicated in the local employment contract at para 4 • The Indian company does full TDS on 100% of the salaries, although 25% is paid in India and balance 75% outside India • TDS done is Rs 2,834,300/-, which translates to 30.8% of Rs 9,761,58 • Employee also contributes to Indian provident fund Rs.2,57,885/- 26.11. From 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. 26.12. 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 IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 16 of 30 pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Explanation 1. —For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2. —For the purposes of this clause, "fees for technical services" means any 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". 26.13. The definition of FTS under the Act excludes “consideration which would be income of the recipient chargeable under the head salaries.” If the seconded employee is regarded as employee of the assessee in India, then the reimbursement to overseas entity, by the assessee in India would not be in the nature of FTS, but would be in the nature of ‘salary’, and therefore, the reimbursements cannot be chargeable to tax in the hands of overseas entity, and therefore there would be no obligation to deduct tax at source at the time of making payment u/s.195 of the Act. 26.14. Article 12(4)-(5) of India USA, DTAA deals with “Fees for technical services’, as under: “4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 17 of 30 (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 5. Notwithstanding paragraph 4, "fees for included services" does not include amounts paid: (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a); (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services).” 27. Rendering of managerial, technical and consultancy services is governed by Article 12 on ‘Fees for included services’ of the Double Tax Avoidance Agreement, between India and US. Payments made to ‘individual or firm of individuals for service rendered by them in independent professional capacity are specifically excluded since they are covered by Article 15 on Independent Personal Services. Likewise, Article 12 specifically excludes payments made towards services rendered by an ‘employee’ of the enterprise since services rendered under employment are covered by Article 16 on Dependent Personal Services. 28. The relevant portion of para 5(e) of Article 12 of the DTAA between India and US reads as follows: - “Fees for included services does not include payments made - to an ‘employee’ of the person making the payment or - to any individual or firm of individuals (other than a company) for professional services as defined in article 15 (Independent Personal Services). IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 18 of 30 The payments made by the Indian entity to the overseas entity is towards reimbursement of salary paid by the overseas entity to the seconded personnel. As discussed in para 14.2 to 14.7 above, for the purpose of Article 15 of the OECD Model Commentary (corresponding to Article 16 of the DTAA between India and US), the seconded personnel are employees of the Indian entity, being the economic employer. It is to be noted that the understanding as to who is the ‘employee’ in order to be excluded from, “fees for technical services”, cannot be inconsistent with the understanding of employee for the purpose of Article 15 on income from employment, especially when Article 15 is an anti-abuse provision. 29. The Ld.DCIT placed reliance on the decision of the Hon’ble Delhi High Court in the case of Centrica India Offshore Pvt.Ltd. reported (2014) 44 taxmann.com 300 concluded that the reimbursement was FTS and that services provided make available technical skill or knowledge for use by the assessee. 29.1. In case of the decision of Hon’ble Delhi High Court in the case of Centrica India Offshore Pvt.Ltd vs. CIT(supra) dealt with identical case of reimbursement of salaries paid to expatriate employees. The Hon’ble Court held that, overseas entities had, through seconded employees, undoubtedly provided ‘technical’ services to Centrica India and that, the expression rendering technical services expressly includes provision of services of personnel. The Hon’ble Court held that the Seconded employees, were provided by overseas entities and work conducted by them thus, i.e. assistance in conducting business of assessee of quality control and management was through overseas entities. The Hon’ble 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. 29.2 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 IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 19 of 30 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 towards salary payable to Mr. Franck. It is thus manifest that this decision has no application to the facts of the instant case.” 29.3 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’ble 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. IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 20 of 30 29.4 There is another decision of Hon’ble Supreme Court in case of DIT v. Morgan Stanley reported in (2007) 162 Taxman 165, wherein, it is held that, in case of deputation, the entity to whom the employees have been deputed cannot be regarded as employer of such employees as the employees continue to have lien on his employment with the entity which deputes him. Entity seconding the employee is the employer as it retained the right over seconded employee is also held by Hon’ble AAR in case of AT & S India Pvt Ltd., reported in 287 ITR 421. 29.5 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:- “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 IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 21 of 30 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).” 29.6 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. 29.7 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 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 IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 22 of 30 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. 30.1 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. 30.2 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. 30.3 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). 31. 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 undertaken by the payee of fee. In other words, is the bracketted clause a stand alone provision or is it inextricably IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 23 of 30 connected with the said services? HMFICL itself does not render any service of the nature of managerial, technical or consultancy to the applicant and it has not deputed its employee to carry out such services on its behalf. There is no agreement for rendering such services. In this factual situation, it is possible to contend that merely providing the service of a technical person for a specified period in mutual business interest not as a part of technical or consultancy service package but independent of it, does not fall within the ambit of S.9(1)(vii).” 32. Hon’ble Bombay High Court in case of Marks & Spencer Reliance India Pvt.Ltd. VS. DIT reported in (2013) 38 taxmann.cm 190, upheld the view of Hon’ble Mumbai Tribunal which held that, payment towards reimbursement of salary expenditure without any element of profit, would not be taxable under the provisions of the Act. Hon’ble Court also held that, when the entire salary has been subjected to tax in India at the highest average tax rate, the assessee could not held to be in default for not without tax under the provisions of the Act. 33. 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. 34. Coordinate bench of this Tribunal in case of IDS Software Solutions v. ITO reported in (2009) 32 SOT 25, Abbey Business Services (P.) Ltd v. DCIT reported in (2012) 23 taxmann.com 346, took the view that expats are deputed to work under the control and supervision of the Indian company and that the oversees entity is not responsible for the actions of the expatriate employees. Thus, oversees entity does not render any technical service to the Indian company, since such payment are towards reimbursement of salary cost borne by oversees entity, and that, no income can be said to accrue to oversees entity in India. The decision of this IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 24 of 30 Tribunal in case of Abbey(supra) has been upheld by Hon’ble Karnataka High Court in DIT vs. Abbey Business Services India (P.)Ltd., reported in (2020) 122 taxmann.com 174. 35. 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. Further, in the present facts we note that, the concept of make-available is not satisfied in the instant case. As per para 4(b) of Article 12 of the India-US DTAA on ‘Royalties and fees for included services’: “4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services a. .... b. make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of a technical plan or technical design.” Thus, even if, the rendering of service by the seconded personnel constitutes a contract for service, in the absence of making available any technical knowledge or skill to the Indian entity, the same shall not constitute fees for technical services. In support we refer to the decision of Hon’ble Karnataka High Court in the case of CIT vs. De Beers India Minerals Pvt. Ltd. reported in (2012) 21 taxmann.com 214, on the concept of ‘make available’, observed and held as under: “What is the meaning of 'make available'. The technical or consultancy service rendered should be of such a nature that it 'makes available' to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 25 of 30 derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology 'making available', the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b ). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as 'fee for technical/included services' only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. 36. The Ld.AR has placed before this Tribunal a decision rendered by Hon’ble CESTAT, Bangalore, wherein the Hon’ble CESTAT was deciding, whether the assessee in India, was required to pay service tax demand (on reverse charge basis) on the secondment reimbursements, on the basis that the same amounts to “manpower recruitment & supply agency services”, placed at page 66-86. The Hon’ble CESTAT, Bangalore, held that employer-employee relationship exist between the seconded employee and the assessee in India in para 14 of the order passed by Hon’ble CESTAT, Bangalore. The Hon’ble CESTAT, Bangalore, further held that, there is no manpower supply services since assessee in India is the real employer by reason of the employment contract. Service tax demand was deleted. IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 26 of 30 The relevant extracts are below – 6. Submitting on the demand of Service Tax under the category “Manpower Recruitment & Supply Agency Service”, the learned counsel states that the employer-employee relationship exists between the Appellant and Seconded Personnel who have been sent on secondment to the Appellant; the Appellant has entered into separate employment contract with the Seconded Personnel. The seconded Personnel, during the period of secondment, work under the control and supervision of the Appellant; In terms of the employment contract, the appellant is under obligation to pay salary (including other entitlements) to the Seconded Personnel during the period of secondment in foreign exchange in his home country; for administrative convenience, the Appellant remits the salary payable to the Seconded Personnel in his home country in Foreign Exchange through the Seconder Company; the Seconded Personnel, as required under the Income Tax Act, 1961, files their respective returns under Section 139 of Income Tax Act, 1961 and shows the entire salary paid by the Appellant (including part of the salary paid in Foreign Exchange) as his/her income as salaries and pays the income tax thereon..... 14. Coming to the third issue of payment of salary, allowances and expenses of the personnel drawn from different global entities to work with the appellant, we find that learned Counsel submits that the employer-employee relationship exists between the Appellant and Seconded Personnel who have been sent on secondment to the Appellant; the Appellant has entered into separate employment contract with the Seconded Personnel. The seconded Personnel, during the period of secondment, work under the control and supervision of the Appellant; In terms of the employment contract, the appellant is under obligation to pay salary (including other entitlements) to the Seconded Personnel during the period of secondment in foreign exchange in his home country; for administrative convenience, the Appellant remits the salary payable to the Seconded Personnel in his home country in Foreign Exchange through the Seconder Company; the Seconded IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 27 of 30 Personnel, as required under the Income Tax Act, 1961. We find that the issue is no longer res integra and is covered by decision of Volkswagen India Pvt. Ltd. Vs CCE, Pune-I, 2014 (34) STR 135 (Tri. Mumbai) [maintained by Apex Court in 2016 (42) S.T.R. J145 (S.C.)] wherein it was held that: 5.1 In view of the clauses of agreements noticed herein above and other facts, we hold that the global employees working under the appellant are working as their employees and having employee employer relationship. It is further held that there is no supply of manpower service rendered to the appellant by the foreign/holding company. The method of disbursement of salary cannot determine the nature of transaction. 15. The learned Counsel for the appellants submits that the Department was fully aware of the facts when the SCN dated 27.10.2009 was issued and therefore no suppression of facts with an intent to evade payment of duty can be alleged in the subsequent SCN dated 15.04.2013. He relies upon Nizam Sugar Factory case (supra). We find that the argument is acceptable and for this reason, the second SCN is liable to be set aside ab initio..... 16. In view of the above, Appeal No. ST/25566/2013 & Appeal No. ST/21705/2016 are allowed. Thus, the above decision of Hon’ble CESTST Tribunal further strengthens assessee’s case. We therefore, hold that, the amount reimbursed by the assessee to the overseas entity cannot be subjected to tax in India as there does not involve any element of income embedded in it. 37. 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 M/s.Faurecia Automative IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 28 of 30 Holding(supra), Hon’ble Ahmedabad Tribunal in the case of Burt Hill Designs (P) Ltd. vs. DDIT(IT) (supra), we are of the view that the reimbursement made by the assessee in India to overseas entity, towards the seconded employees cannot be regarded as “Fee For technical Services” Once there is no violation of provision of section 195, assessee cannot be held to be an assessee in default under section 201(1) of the Act for all the years under consideration. We therefore direct the Ld.AO to delete the interest levied under section 201(1A) of the Act for all the years under consideration.” 31. The ld AR submitted that the DRP has upheld the disallowance on the ground that the secondment agreement and assignment letters were produced and whatever was produced was rejected stating the same to be unreliable. The ld AR submitted that same set of documents which are already produced before the lower authorities is now submitted before the Tribunal as additional evidence including the initial secondment agreements. The ld AR prayed for the admission of additional evidence as these evidences when considered would substantiate the claim of the assessee. With regard to disallowance made towards secondment cost, the additional evidences now produced go the root of the issue and the core reason for not allowing the deduction by the lower authorities. For a proper adjudication of the issue and for substantial cause, the additional evidence is admitted and taken on record. IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 29 of 30 32. We accordingly remit the issue back to the AO/TPO for verification of the evidences and allow the deduction keeping in mind the ratio laid down by the Hon’ble Karnataka High Court and also the decision of the coordinate bench of the Tribunal in this regard. This ground is allowed for statistical purposes. 33. Ground no 13 is with regard to AO allowing short credit for TDS. In this regard we direct the AO to verify and allow the credit for TDS accordingly. 34. Ground No.14 is consequential not warranting a separate adjudication. 35. In view of decision above, the stay petition in SP 60/Bang/2022 has become infructuous. 36. In the result, the appeal of the assessee is partly allowed and the Stay Petition is dismissed. Pronounced in the open court on this 14 th day of February, 2023. Sd/- Sd/- ( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 14 th February, 2023. / Desai S Murthy / IT(TP)A No.2608/Bang/2019 & SP 60/Bang/2022 Page 30 of 30 Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.