The Bangalore bench of Income Tax Appellate Tribunal (ITAT) held that no deduction can be made under section 192 the Income Tax Act, 1961 on the Tax Deducted on Service for reimbursement of salary cost made to seconded employee during the secondment.
The assessee M/s. Applied Material India Private Limited is a company engaged in the business of providing software development and support services to its holding company. The assessee had seconded employees from its AE viz., AMAT Material Inc., (seconder) for facilitating its business operation in India.
During the scrutiny assessment, the Assessing Officer (AO) held that there is no employer employee relationship between the assessee and the employee seconded by AMAT Material Inc., and the seconded employees who were rendering services in India was on behalf of the assessee’s AE (Associated Enterprises) and the payment made by the assessee to its AE was not reimbursement of salary cost but Fees for Technical Services (FTS) as per explanation 2 to section 9(1)(vii) of the Income Tax Act.
The AO concluded that, since the assessee had not deducted tax at source under section 195 of the Income Tax Act, the payments made to the AE amounting to Rs.9,67,88,064/- is disallowable under section 40(a)(i) of the Income Tax Act.
Aggrieved by the disallowance, the assessee raised this issue before the Commissioner of Income Tax (Appeals) [CIT(A)], which passed an order of Transfer Pricing (TP) adjustment of Rs.77,83,81,568 and disallowance of Rs.9,67,88,064 under Section 40a(i) of the Income Tax Act.
The assessee filed the appeal before the ITAT. The Authorized Representative (AR) of the assessee, Aliasgar Rampurawala contended that the CIT(A) and AO have erred in disallowing reimbursement of salary costs amounting to INR 9,67,88,064 paid by the Appellant to Applied Inc. by alleging non-deduction of tax at source under Section 195 of the Income Tax Act, and further submitted that the authorities defaulted in concluding that reimbursement of salary cost is Fees for Technical Service [`FTS’] as per Explanation 2 to Section 9(1)(vii) of the income Tax Act.
The Departmental Representative Sunil Kumar Singh supported the orders of the Income Tax authorities.
The bench comprising of Chandra Poojari, Accountant Member and George George K, Judicial Member relied on the decision of Karnataka High Court in case of M/s. Flipkart Internet Pvt. Ltd. vs. DCIT where it was observed that, “The concept of a secondment agreement taking note of the contemporary business practice has indicated that the traditional control test to indicate who the employer is may not be the sole test to be applied,the assessee was held liable to pay service tax for the period the seconded to the assessee”.
The AO was directed to examine whether the assessee has deducted tax at source under Section 192 of the Income Tax Act with respect the salary paid to the seconded employees in its entirety.
If assessee could able to prove that it had deducted tax at source with regard to the salary payment of the seconded employees in its entirety, the AO shall not make any disallowance under Section 40(a)(i) of the Income Tax Act for non-deduction of tax under Section 195 of the Income Tax Act.
Hence, the Tribunal restored the matter to the files of the AO and directed the AO to consider the issue afresh by taking into account the principles laid down by the High Court in the case of Flipkart Internet Pvt. Ltd., Vs. DCIT.
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