Employees Salary Reimbursement Not Taxable in India as FTS under Article 12(4) of India -Japan DTAA:  ITAT deletes addition of 2.70 lakhs [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) deleted the addition of Rs.2.70 lakhs, ruling that employees' salary reimbursement is not taxable in India as Fees for Technical Services ( FTS ) under Article 12(4) of the India-Japan Double Taxation Avoidance Agreement ( DTAA )

The assessee, Advics Co. Ltd. is a Japanese company engaged in the business of engineering, manufacturing and sale of brake systems and components of automobile companies. The assessee was a tax resident of Japan. It has opted to be governed by the provisions of the India-Japan DTAA, being more beneficial to it.

In AY 2017-18, for the effective and efficient conduct of the business of its Indian Associated Enterprises, namely Advics South India Pvt. Ltd. and Advics North India Pvt. Ltd. (“Indian AEs/ AEs”), the assessee assigned some of its employees for a limited period as per the request raised by the AEs by way of Temporary Transfer Agreement(s) (“TTA”) along with their respective Memorandum of Understanding (“MOU”). Pursuant to this arrangement, three expatriates/ employees (“expats/ seconded employees/ employees”) employed with the assessee were identified by the AEs in accordance with their business objective.

Thereafter, the AEs entered into a separate employment agreement with these three expats respectively who then became the employees of the respective AEs. The AEs were responsible for payment of salaries to these expats. However, for administrative convenience, the assessee agreed to disburse part of the remuneration of these expats on behalf of the AEs in their home country i.e. Japan which were subsequently reimbursed by the AEs on cost-to-cost basis without any mark-up. The AEs duly withheld and deposited tax on entire salary payments made to the expats whether disbursed in India or Japan for the services rendered by them in India in accordance with section 192 of the Income Tax  Act, 1961.

Mr. K.M. Gupta submitted that the assessee is on the payroll of the Indian AEs for the period of transfer. The seconded employees/ expats worked in India as employees of the respective Indian AEs which can be corroborated from the employment visas of the expats as well as the contract of employment between the expats and the respective Indian AEs, copies of which are available on record.

Further submitted that it was the responsibility of the Indian AEs to pay the entire salaries of the employees /expats which have been duly paid after deducting the TDS thereon. The assessee has paid a certain portion of the salary to the expats in Japan only for administrative convenience, for and on behalf of the India AEs. The full amount of salary has been offered to tax by expats in India by filing their respective ITRs.

He further submitted that the other cases relied upon by the Ld. AO are also distinguishable on facts for which he submitted a chart outlining the differences in the fact pattern of the said cases and the assessee’s case. He then drew our attention to several decisions where the courts have in a similar fact pattern held the impugned receipts to be not taxable as FTS.

The Department Representative strongly supported the order of the lower authorities. Mr. Vijay B. Vasanta representing the revenue submitted that the case of the assessee is squarely covered by the decision of the Supreme Court rendered in the context of service tax dated 19.05.2022 in Civil Appeal No. in the case of C.C., C.E & S.T-Bangalore vs. M/s. Northern Operating Systems Pvt. Ltd. and placed a copy of the said decision on record, wherein the Supreme Court held that the assessee was the service recipient of the overseas group company concerned, which can be said to have provided manpower supply service, as a taxable service

The bench considered the reliance placed by the revenue on Northern Operating Systems (P.) Ltd.’s case (supra) to substantiate its claim to tax the impugned receipts as FTS in the hands of the assessee is misplaced. Even though there may be certain similarities between the factual positions of both the cases (supra), the applicability of this case to the assessee’s case however, the present case involves determination of taxability of the impugned receipts either as employee salary cost or FTS under the provisions of the Income Tax Act and/ or India-Japan DTAA.

The two member bench of the tribunal comprising G.S Pannu ( Vice president) and Astha Chandra (Judicial member) concluded 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 of Rs. 2, 70, 27,031/- on account of cross charge by the assessee from its Indian AEs was deleted. Accordingly, the appeal of the assessee was allowed.

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