Appeal details
Counselvise Citation
[2022] 102 COUNSELVISE.COM (IT) 9146 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 month(s) 10 day(s)
Appellant
Respondent
Appeal Type
Income Tax (International Taxation) Appeal
Pronouncement Date
18-12-2022
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
C
Next Hearing Date
05-12-2022
Assessment Year
2019-2020
Appeal Filed On
08-09-2022
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL “C’’ BENCH: BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER IT(IT)A No.800/Bang/2022 Assessment Year: 2019-20 TOYODA Gosei Company C/o Toyoda Gosei South India Pvt. Ltd. Building No.1, Toyota Techno Park, Plot No.20, Bidadi Industrial Area Bidadi 562 109 RamanagaraDist 562 109 Karnataka India PAN No.AAEFT2706N Vs. Deputy Commissioner of Income-tax International Taxation Circle2(2) Bengaluru APPELLANT RESPONDENT Appellant by : Shri Khirendra Mohan Gupta, Advocate Respondent by : Shri Arun Kumar, D.R. (CIT (TP)-2 Date of Hearing : 06.12.2022 Date of Pronouncement : 16.12.2022 O R D E R PER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER: This appeal by the assessee is against the final assessment order passed by the AO u/s 143(3) r.w.s. 144C(13) of the Act dated 12.7.2022 on the following grounds of appeal:- “General Grounds IT(IT)A No.800/Bang/2022 Page 2 of 40 1. On the facts and circumstances of the case, the assessment order passed by the Learned Assessing Officer (`Ld. AO') under section 143(3) r.w.s. 144C(13) of the Income tax Act, 1961 (`the Act') .pursuant to the directions of the Ld. Dispute Resolution Panel (`Ld. DRP') is bad in law, unlawful and unjust. 2. On the facts and circumstances of the case and in law, the Ld. AO has erred in determining the total income of the Appellant at INR 24,72,78,287 as against the returned income of INR 22,19,87,044 offered to tax by the Appellant. Taxability of employee cost reimbursements as Fee for Technical Services CFI'S') amounting to INR 2,52,91,243 3. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP was not justified in holding that the employee cost reimbursements amounting to INR 2,52,91,243 by the Indian associated enterprises (AEs) i.e., Toyoda Gosei South India Private Limited and Toyoda GoseiMinda India Private Limited to the Appellant is taxable as FTS as per the provisions of section 9(1)(vii) of the Act as well as Article 12 of the India- Japan Double Taxation Avoidance Agreement (`DTAA'). 3.1. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating that there exists an employer-employee relationship between the expatriates and the Indian AEs and thus, no service was rendered by the Appellant to the Indian AEs. 3.2. On the facts and in the circumstances of the case, the Ld. AO/Ld. DRP erred in ignoring the fact the seconded/ transferred employees were reporting to and working under control, direction and supervision and in accordance with the policies and rules of the Indian AEs. The salary was paid by the Appellant to the expatriates only for administrative convenience, which has been later on reimbursed by the Indian AEs to the Appellant. Further, such amount paid by the Appellant has been recorded as 'advances' in its books of accounts while the Indian AEs have accounted the same as 'salaries'. 3.3. On the facts and circumstances of the case and in law, the Ld. AO/ DRP has erred in ignoring and not taking cognizance of documents/ information and explanations (including documents submitted as additional evidence which inter-cilia included the debit notes, Form 16 etc.) to substantiate the existence of employer- employee relationship between the Indian AEs and the expatriates and thereby, erroneouslyconcluding that no employer-employee relation existed between Indian AEs and the seconded/ transferred employees. 3.4. The principle of determining employment relationship through the "economic criteria" is also supported by OECD Commentary on the Model Convention. The Commentary supports the concept of "economic employer" (rather than formal/legal employer) in the context of taxation of dependent personal services. It states that the term "employer" should be interpreted as "the person having rights on the work produced and bearing the relative responsibility and risks". It is the substance that prevails over the form. The real employe is the user of IT(IT)A No.800/Bang/2022 Page 3 of 40 the labour. The Ld. AO/Hon'ble DRP has erred in not relying on the concept of economic and legal employer. 3.5. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating the fact that the Appellant has not performed any specific function apart from transfer of personnel in order to support the Indian AEs and thus, therecould be no FTS in the absence of any service being rendered. 3.6. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating the fact that the reimbursement amount constitutes salary which is not taxable as FTS as per the provisions of section 9(1)(vii) of the Act and Article 12 of India — Japan DTAA. 3.7. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating that the Indian AEs have withheld taxes under section 192 of the Act on the entire salary paid to the expatriates as evidenced by Form 16 issued to the expatriates and such expatriates have offered the entire income to taxes in their respective returns of income filed under the Act. 3.8. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred by not appreciating that the payments made by the Indian AEs to the Appellant are pure reimbursements of the actual employee costs, without any element of income. Levy of interest under section 234C of the Act 4. On the facts and circumstances of the case and in law, the Ld. AO has erred in charging interest under section 234C of the Act despite of the fact of the refund situation (i.e., no tax payable) even after accepting the addition. Initiation of penalty proceedings 5. On the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under Section 270A of the Act against the Appellant on account of the addition made in the final assessment order. All the above grounds are 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.” 2. The brief facts of the case are that the assessee company is a company head quartered in Japan. It has filed its return of income on 29.11.2019 admitting total income of Rs.22,19,87,040/-. The IT(IT)A No.800/Bang/2022 Page 4 of 40 case was selected for scrutiny and statutory notices were issued to the assessee. In response to the notice, the assessee filed submissions. From the submissions it was observed by the AO that the company has entered into an agreement for secondment of its personnel with Indian entities M/s. Toyoda Gosei South India Pvt. Ltd. And M/s. Toyoda GoseiMinda India Pvt. Ltd.. The agreements between the two companies were extracted by the AO in his order. During the impugned financial year, 18 employees were employed with the assessee company and the AO has also observed that the seconded employees were functioning as administrative heads at various levels from the rank of President downwards. Accordingly, the AO noticed that their services are squarely fall under managerial services and the employees were also providing consultancy services in the nature of technical services. Therefore, the same employees falls within the ambit of the definition of fees for technical services both under the income tax Act and DTAA prima facie. The documents furnished by the assessee were examined by the AO and he noted as under: “4.4 The documents furnished have been perused and the copy of the assignment letter examined. The salient aspects of such assignment letters are brought out hereunder: a) Compensation package for the assignment is determined as per the peer to peer policy as against Strategic & Skills Need Policy as in earlier years. b) The compensation is computed on the base salary of the home country c) The assignment letter also mentions the date when the salary will be review. IT(IT)A No.800/Bang/2022 Page 5 of 40 d) Indian employment requires payment of Provident Fund by the employer which shall be returned by the employee e) The assignment letter provides for net supplement to ensure that the assignee has the same net spendable income in comparison to the peers in the host country.” 2.1 The AO also observed the concept of secondment which is as under: IT(IT)A No.800/Bang/2022 Page 6 of 40 IT(IT)A No.800/Bang/2022 Page 7 of 40 IT(IT)A No.800/Bang/2022 Page 8 of 40 IT(IT)A No.800/Bang/2022 Page 9 of 40 IT(IT)A No.800/Bang/2022 Page 10 of 40 IT(IT)A No.800/Bang/2022 Page 11 of 40 IT(IT)A No.800/Bang/2022 Page 12 of 40 IT(IT)A No.800/Bang/2022 Page 13 of 40 2.2 During the course of assessment proceedings, the assessee relied on certain judgements, which have not been extracted by the AO and he has also dealt the issue. The AO relied on judgement of Hon’ble Delhi High Court in the case of M/s. Centrica India Offshore Pvt. Ltd. In writ petition No.6807/2022. The AO also relied on some judgments, which have been quoted in his order. After considering the various judgements and analysis of the judgements, he held that the amount paid is a fees for technical services. Accordingly, it was brought to tax in accordance with Indian Income Tax law as well as DTAA. He also referred to section 191 of the Act as well as section 115A of the Act. Accordingly, a sum of Rs.2,52,91,243/- was brought to tax as fees for technical services. Accordingly, order u/s 144C of the Act was passed. The assessee filed objection before the Ld. DRP. The ld. DRP passed the order on 28.6.2022. Accordingly, the final assessment order was passed on 27.7.2022 by making addition on Rs.2,52,91,243/- and completed the assessment. 3. The Ld. A.R. filed written synopsis which is as under: IT(IT)A No.800/Bang/2022 Page 14 of 40 IT(IT)A No.800/Bang/2022 Page 15 of 40 IT(IT)A No.800/Bang/2022 Page 16 of 40 IT(IT)A No.800/Bang/2022 Page 17 of 40 IT(IT)A No.800/Bang/2022 Page 18 of 40 IT(IT)A No.800/Bang/2022 Page 19 of 40 IT(IT)A No.800/Bang/2022 Page 20 of 40 IT(IT)A No.800/Bang/2022 Page 21 of 40 IT(IT)A No.800/Bang/2022 Page 22 of 40 IT(IT)A No.800/Bang/2022 Page 23 of 40 IT(IT)A No.800/Bang/2022 Page 24 of 40 IT(IT)A No.800/Bang/2022 Page 25 of 40 IT(IT)A No.800/Bang/2022 Page 26 of 40 IT(IT)A No.800/Bang/2022 Page 27 of 40 IT(IT)A No.800/Bang/2022 Page 28 of 40 4. The ld AR for the assessee reiterated the submissions made before the lower authorities and vehemently argued his case and submitted that all the details in regard to substantiating that they were employed by the Indian entities. He also referred to the relevant part of the agreements and further submitted that only the revenue has disputed in regard to the 11 employees to whom the amount was paid. The assessee has also deducted TDS as per section 192B of the Act on salary payments and he also submitted that Form No.16 to them is produced along with paper book. The Ld. AR of the assessee also produced the Provident fund account number and contribution made towards Provident fund for proving that the 11 employees were in equal to the regular employees of the company. The Ld. A.R. also submitted that the Hon’ble jurisdictional High Court of Karnataka has decided the similar issue in the case of Abbey Business Services India Pvt. Ltd. Reported in (2020) 122 Taxmann.com 174 (Karn). The relevant part of the order is as under: IT(IT)A No.800/Bang/2022 Page 29 of 40 4.1 He also referred to the written petition filed by the ld AR of the assessee and also referred to the judgement rendered by the Hon’ble Karnataka High Court in the case of M/s. Flipkart Internet Pvt. Ltd. In writ petition No.3619/2021 at para No.37 of the said judgement, which is placed at paper book page No.350. The Ld. AR of the assessee further relied on the judgement of M/s. Toyota Boshoku Automotive India Pvt. Ltd. Vs. DCIT reported in (2022) 138 Taxmann.com 166 (Bang Trib). at para No.14.6 to 15 of the order, which is as under: IT(IT)A No.800/Bang/2022 Page 30 of 40 IT(IT)A No.800/Bang/2022 Page 31 of 40 IT(IT)A No.800/Bang/2022 Page 32 of 40 IT(IT)A No.800/Bang/2022 Page 33 of 40 IT(IT)A No.800/Bang/2022 Page 34 of 40 IT(IT)A No.800/Bang/2022 Page 35 of 40 IT(IT)A No.800/Bang/2022 Page 36 of 40 4.2 He further relied on the order of coordinate bench of the Tribunal in case of Faurecia Automotive Holding Vs. DCIT in ITA No.784/Pune/2015 dated 28.7.2019 for AY 2011-12 at para No.4.5 which is as under: “4.5 We have noticed above that the second exception in the definition of ‘Fees for technical services’ under the Explanation states that the consideration would cease to be fees for technical services if it is income of the ‘recipient’ chargeable under the head ‘salaries’. What is vital to note with reference to the word ‘recipient’ in the provision is the real recipient and not the literal recipient. If an amount is paid by an Indian entity apparently to an expatriate of a non-resident entity, but the real recipient behind the curtain is non-resident entity, then the nature of amount from the angle of taxability would be viewed in the hands of the real recipient, that is, non-resident entity. Ao contrarie, if the real recipient is the expatriate in his own right because f his employer-employee relationship with the Indian entity, but in a given situation, the non-resident entity just acts as a post office in paying some amount to the expatriate and then receiving it back from the Indian entity on cost-to-cost basis, then the nature of amount from the angle of taxability within the second proviso in the Explanation would have to be viewed in the hands of the real recipient, that is, the expatriate and not the non-resident entity.” IT(IT)A No.800/Bang/2022 Page 37 of 40 5. On the other hand, the Ld. DR relied on the order of lower authorities and he further submitted that the ld DRP has observed that the employment of the employees are still with the parent company. The work performed by the seconded employees is the work assigned by the assessee company to the Indian entity. Therefore, the obligation to pay the salary is on the original employer rather than the Indian company. He further submitted that the seconded employees are rendering technical as well as managerial services, therefore, the salaries paid is to be treated as in the nature of fees for technical services, which ought to have been paid to the assessee directly but has been disguised as salary paid to the seconded employees and later reimbursed part of the salary to the assessee company. In fact, the Indian company is paying salary and deducting TDS and issuing Form No.16 is not much that the amount earned in India and have to suffer tax deduction at source. The services rendered by the employees cannot be considered as water tight compartments which are mutually exclusive of each other as in these times, they are intermingled and inter-related. Therefore, the order passed by the lower authorities should be restored. 6. After hearing both the sides and perusing the entire material on record and the orders of lower authorities, from the facts narrated above, we observe that during the impugned assessment year, the 18 employees were engaged by the assessee company, out of which, the payment made for social security in the nature of IT(IT)A No.800/Bang/2022 Page 38 of 40 reimbursement has not been accepted by the AO in respect of 11 employees to the extent of Rs.2,52,91,243/-. From the paper books, we notice that the seconded employees have been paid salaries and duly TDS has been deducted. The AO has accepted the salary payments directly to the employees and while computing total income of the employees, the social security amount has been considered as income in the hands of the employee. The reimbursement made by the assessee is on cost to cost basis and no any profit elements are involved. The terms and conditions of the services of the employees have been examined by the AO and agreements have also been examined. The AR submitted that as per the country of residence of the employees, there are some obligation cost upon the employer for social security of his employees to be maintained. The amount paid by the assessee company is only the reimbursement, which is part of the salary of expatriate employees, which is covered by the Article 12 of DTAA provisions between India and Japan. Considering the entire submissions cited supra from both the sides, we respectfully following the judgment of Hon’ble jurisdictional High Court of Karnataka, the issue is covered in favour of the assessee. Accordingly, we allow the appeal of the assessee. 7. Ground No.1 to 2 is general in nature, hence no adjudication is required. 8. Ground No.3 to 3.8 is allowed in above terms. IT(IT)A No.800/Bang/2022 Page 39 of 40 9. Ground 4 & 5 is consequential in nature. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 16th Dec, 2022 Sd/- (George George K.) Judicial Member Sd/- (Laxmi Prasad Sahu) Accountant Member Bangalore, Dated 16th Dec, 2022. Vms Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar/ITAT, Bangalore.
AI Insights
The case revolves around the taxation of employee cost reimbursements amounting to INR 2,52,91,243 made by Toyoda Gosei Company, a Japanese entity, to its Indian associates, Toyoda Gosei South India Pvt. Ltd. and Toyoda Gosei Minda India Pvt. Ltd. The Indian tax authorities treated these reimbursements as Fees for Technical Services (FTS) under the Income Tax Act and the India-Japan DTAA, leading to additional tax liabilities for the assessee. The Tribunal examined the nature of these reimbursements, the employment relationship of the expatriates, and relevant judicial precedents, ultimately deciding in favor of the assessee by categorizing the payments as non-taxable salary reimbursements rather than FTS.
