Advics Co. Ltd. vs The Office Of The Deputy Commissioner Of Income Tax, Circle 1(1)(1)

“2.

Addition of INR 1.03.55.809 on account of employee cost reimbursement taxable as Fees for Technical Services ('FTS') The lower authorities erred in net appreciating that there exists employee-employer relationship between expatriates and the Indian Company i.e. Advics India Private Limited ['Advics India' or 'Indian Associated Enterprises (AE)) and thus no service is rendered by the Appellant to Indian AE.

2.1.

The lower authorities erred in ignoring and not taking cognizance of documents submitted to substantiate the existence of employer-employees relationship between Indian AE and the expatriates which inter-alia included the employment contract entered into between the Indian AE and expatriates and thereby, erroneously concluding that no independent employment agreement was entered into between them.

2.2.

The lower authorities 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 Iulian Al and thus there could be no FTS is absence of any service being rendered.

2.3.

The lower authorities erred in not appreciating the fact that the reimbursement amount is in the nature of salary which is not taxable as FTS as per the provisions of section 9(1)(vil) of the Act and PTS under Article 12 of India-Japan Covered Tax Agreement (‘CTA’).

2.4.

The lower authorities erred in not appreciating the fact that the Indian All have withheld taxes under section 192 of the Act on the entire salary paid to the expats and such expatriates as evidenced by Form 16 issued to the expatriates and such expatriates have offered the entire income to taxes in its return of income filed under the Act.

2.5.

The lower authorities erred in not appreciating the fact that the payments by the Indian All to the Appellant are towards pure reimbursement of actual employee cost and does not have any element of Income.”

“(vi)

From the holistic reading of the clauses above, it is abundantly clear that the assessee company would be responsible to bear and pay transfer allowance, air ticket expenses, health examination expenses etc. though in the name of administrative convenience and ADSIND will reimburse ADS such payments made in relation to the period of secondment. The personnel are actually on the roll of ADS and ADS is merely releasing its personnel for assignment with ADSIND who shall be returning to the assessee company after the completion of the secondment period. This arrangement is akin to a manpower supply arrangement but the assessee has exercised abundant caution in wording the secondment contract in such a manner so that relation between the assessee company and its AE on account of seconded employees cannot be construed otherwise as clear from Article 15 which states that this agreement should not be construed as a manpower agreement or a partnership or a joint venture agreement. So this clause has been introduced so that the tax incidence on account of provisioning of manpower service and fee for technical service is not invoked in the case.

(vii)

So, this logically entails examining another aspect which is the 'Doctrine of Substance and Form' which has long guided the tax authorities for interpretation of agreements and forms an important element of jurisprudence. The intent of the terms of Deputation Agreement is crystal clear which is basically to second the employees of the assessee company to its AE in India with a careful usage in the terms of the contract that it should not be treated as manpower supply contract and would not cast any obligation on the AE to pay any technical fees on the same. Here the Panel examines the agreement under the substance over form doctrine. Tax authorities ought to examine the true nature of a transaction, even if it is worded to imply a non-taxable service or FTS payment. It is imperative that tax laws should not be allowed to be circumvented by superficially crafted agreements. The courts have also emphasized that while taxpayers have the right to structure their affairs to minimize taxes, they cannot do so in a way that distorts the transaction's reality. So, putting the pieces of the jigsaw puzzle together and reading the clauses of contract in totality is important. Substance over form is a fundamental concept in tax law, aimed at ensuring that tax liability is based on the actual economic substance of transactions rather than merely their legal or contractual form. Courts and tax authorities have used this principle to prevent tax avoidance schemes structured solely to exploit tax benefits, treating transactions according to their real purpose and substance rather than their labels. Assessee cannot escape the consequences of law merely by describing an agreement in a particular form though in essence and in substance, it may be a different transaction. It is imperative to disregard the labels used in contracts and instead focus on the true economic purpose of the transaction. Here it is abundantly clear that the structure of a transaction was not designed to achieve genuine business purposes but merely to avoid taxes through contractual language.”

•

“FTS is defined under article 12(4) of the India-Japan DTAA to mean "payments of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel." It is the case of the Revenue that the expats were seconded to the AEs for rendering managerial/technical services and hence the payments made are in the nature of FTS. According to Revenue the expats are employees of the assessee and not of the Indian AEs and hence this was contract for service and salary reimbursement cost is taxable as FTS It is, however, a fact corroborated with evidence that the expats were employees of Indian AEs during the term of their transfer and were paid salaries by AEs after due deduction of tax on the entire amounts either disbursed in India or in Japan. [Para 10]

•

The Assessing Officer/DRP has observed that services in the nature of managerial and technical nature were provided by the assessee to the Indian AEs through the expats and accordingly the impugned receipts in the nature of reimbursement towards salary cost of expats are FTS. Although there is no specific reference in TTA/MOU, it has always been the case of the assessee that the expats were seconded to the AEs to carry on routine business activities of Indian AEs as their employees. No material/evidence has been brought on record by the Revenue to substantiate its claim that the assessee rendered any managerial/consultancy/technical services to the Indian AEs through the expats in furtherance of its business in India. Further, the payment made by the Indian AEs is a pure reimbursement of salary costs of expats which has been cross charged by raising debit notes on the Indian AEs. It cannot be regarded as FTS in the hands of the assessee as the same is taxable as salary in the hands of the expatriate employees. [Para 10.1]

•

From the perusal of the TTA along with their respective MOUs, it can be inferred that the expats worked under the direct control and supervision of the Indian AEs and that during the entire period of secondment, the AE are the real and economic employer of these expats. Article 2 of the respective MOU entered into with both the Indian AEs clearly states that the expats would work as per the instructions and orders of the Indian Alis. [Para 10.2]

•

The fact on record reveals that the assessee has duly furnished the relevant TTA(s) along with their MOU entered into between the assessee and Indian AEs by way of additional evidence filed before the DRP vide letter dated 8-10-2021 and the employment contracts entered into between the assessee and the expats which has not been taken into cognizance by the DRP/Assessing Officer. The assessee has transferred/provided the required personnel to the Indian AEs in order to support the business of the Indian AEs in terms of TTA/MOU. There is no provision of any service, be it managerial or technical by the assessee through the expats seconded employees to the Indian AEs under the TTA/MOU. The employment contracts entered into between the expats and the respective Indian AEs read with MOU makes it clear that the Indian AEs are under an obligation to pay expat's salary and the appropriate taxes have to be withheld thereon. Accordingly, the Indian AEs have duly deducted tax under section 192 and deposited the same into the Government account for the salaries paid to the expats in India as well as abroad (remitted solely for administrative convenience). The expats have offered the entire salary income to tax in their respective returns of income filed under the relevant provisions of the Act which is supported by Form 16 issued to the expats by their respective employers i.e. Indian AEs. [Para 10.3]

•

In the light of the above factual matrix and legal position, it is held that the impugned receipts are in the nature of employee salary reimbursement cost not having any element of income and not taxable in India as FTS under the provisions of the India-Japan DTAA. Consequently, the addition made on account of cross charge by the assessee from its Indian AEs is deleted. [Para 17]”