The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that setback to Ernst & Young EMEIA Limited, no Tax Deducted at Source (TDS) is applicable on reimbursement of salary on a cost-to-cost basis.
The assessee is a limited liability partnership firm, incorporated under the laws of the United States of America, and is engaged in the business of providing professional services in the field of assurance, tax, transaction, and business advisory services etc to its clients across the globe including India.
The assessee is eligible for availing of treaty benefits as per the treaty between India and USA. The assessee has offered its income to tax as per Section 115A of the Income Tax Act read with the provisions of Article of the India-USA Tax Treaty.
During the course of scrutiny assessment proceedings, the Assessing Officer issued a show cause notice to the assessee requiring the assessee to show cause as to why the payments received by the assessee on account seconded employees amounting to Rs. 50,99,38,561/- should not be taxed as FTS/Independent Personal Services [IPS] as per the treaty provisions.
The counsel for the assessee stated that the personnel, after receiving approval from EY India member firms, were seconded by the assessee to EY India member firms and were discharged from all the obligations and rights of employees in their home country, USA, and were subsequently employed by EY India member firms for their business and as employees of such India member firms.
It was also submitted that pursuant to the agreement, seconded personnel were employees of the Indian member firms and, accordingly, invoices raised by the assessee are pursuant to salary cost and other related costs paid by the assessee on behalf of India member firm for administrative convenience.
Further, the assessee’s counsel explained that the invoices so raised are with respect to reimbursement of salary costs and do not fall within the ambit of Article 12 FTS and Article 15 IPS under India – USA tax treaty.
The Departmental Representative supported the findings of the Assessing Officer and placed strong reliance on the decision of the Supreme Court in the case of M/s Northern Operating Systems Pvt Ltd Civil Appeal No. 2289 – 2293 of 2021. He read the relevant part of the judgment to buttress his contention that there is no error in the findings of the Assessing Officer.
The two-bench member comprising of Saktijit Dey (Judicial member) and N.K. Billaiya (Accountant member) are of the considered view that cost-to-cost reimbursement on account of secondment of employees cannot be treated as FTS as defined under Article 12 of India USA-DTAA and seconded personnel are employees of EY India firms whose income has been taxed as salary in their respective hands.
Therefore, the very same amount could not, in law, be subjected twice – firstly in the hands of the seconded employees working in India and secondly again in the hands of the assessee. The Assessing Officer was directed to delete the impugned addition.
Thus, the appeal of the assessee was partly allowed.
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