Salary Reimbursements Of Seconded Employees Is Not Taxable As Fees For Technical Services: ITAT
Mariya Paliwala
2 Jun 2024 1:45 PM IST
The Bangalore Bench of Income Tax Appellate Tribunal (ITAT) has held that salary reimbursements of seconded employees are not taxable as fees for technical services.The bench of Beena Pillai (Judicial Member) and Chandra Poojari (Accountant Member) has observed that the conduct of assessees is bona fide, though it was not agreed upon by the department, and it is also noted that assessees have...
The Bangalore Bench of Income Tax Appellate Tribunal (ITAT) has held that salary reimbursements of seconded employees are not taxable as fees for technical services.
The bench of Beena Pillai (Judicial Member) and Chandra Poojari (Accountant Member) has observed that the conduct of assessees is bona fide, though it was not agreed upon by the department, and it is also noted that assessees have all material time to disclosing these secondment receipts in their Form 3CB filed with the department and also with a bona fide explanation before the lower authorities regarding not offering the said receipts for taxation, when the assessees themselves have voluntarily offered the said receipts for taxation, either at the stage of the original assessment, at the stage of reassessment, or in return filed in response to a notice issued under Section 148 of the Act, penalty could not be levied.
'Secondment' refers to an arrangement between two companies to deploy an employee of an organisation to another on agreed terms and conditions.
The appellant/assessee is IBM, a multinational corporation headquartered in the USA with multiple subsidiaries around the globe, including India. IBM foreign entities received notices under Section 148/143(2) of the Income-tax Act, 1961, for various assessment years against which the entities had voluntarily offered the reimbursement of the salary costs of the seconded employees to tax as Fees for Technical Services (FTS), either in the return of income that was filed in response to the initial 148 notice or by way of a revised computation at the stage of assessment or reassessment proceedings. IBM Australia Limited also offered the Asia Pacific (AP) Information Technology (IT) service receipts, miscellaneous support service receipts, and other receipts by way of a revised computation at the stage of assessment proceedings. Parallelly, IBM India Private Limited (IBM India) had also opted for the settlement option under the Direct Tax Vivad Se Vishwas Act, 2020 (VsV) to settle the pending litigations with respect to the TDS demands under Section 201 of the Act and with respect to the taxability of the very same payments in the nature of reimbursement of salary costs (secondment reimbursements) for AY 2009–10 to AY 2015–16.
IBM India has duly deducted TDS under Section 192 in respect of all the salaries of the seconded employees, in respect of which costs were reimbursed to the IBM foreign companies. The reassessment/assessment proceedings were conducted on the IBM foreign entities, and reassessment orders under Section 143(3) read with Section 147 of the Act/assessment order under Section 143(3) were issued along with show-cause notices for imposing penalties under Section 271(1)(c) for the matters pertaining to AY 2012-13 to AY 2016-17 and under Section 270A of the Act for AY 2017-18 to AY 2019-20. IBM foreign entities had filed a detailed response during the course of penalty proceedings and requested the officer to drop the penalty proceedings.
However, the Assessing Officer imposed a penalty under Section 271(1)(c) and Section 270A, against which the IBM foreign entities preferred an appeal before the CIT (A). Separately, IBM foreign entities had identified certain mistakes that were apparent from the record in the penalty orders against which the rectification applications were filed. As of date, the applications are still pending disposal, except in the case of IBM Corporation for AY 2016–17 and AY 2017–18 and IBM China Hong Kong Limited (IBM CHK) for AY 2014–15, in which the rectification order has already been passed.
The assessee contended that in the case of a non-resident, the tax liability, if any, is required to be discharged only by way of TDS. Furthermore, IBM India had duly deducted taxes under Section 192 in respect of the same secondment reimbursements. There was no requirement on the part of the IBM foreign entities to obtain a certificate under Section 197. Additionally, they submitted that the provisions of Section 197 are not mandatory in nature and cannot be imposed upon any assessee.
The assessee relied on the detailed order of the division bench of the Income Tax Appellate Tribunal (TAT) referring the matter of IBM India to the Special Bench of the ITAT, in which the division bench held the facts of IBM to be similar to the jurisdictional ITAT ruling of M/s Abbey Business Service (India) Private Limited vs. DCIT, which had decided the issue in favor of the taxpayer and was later upheld by the Karnataka High Court. In the case of Abbey Business Service (India) Private Limited vs. DCIT, it was held that if the seconded employee is viewed in substance as an employee of the host entity, the payments to the home entity by the host entity may be characterized as mere reimbursement, and no further tax implications arise on the payment. In the subsequent judgment of the Jurisdictional High Court in the case of Flipkart Internet (P.) Ltd., the High Court upheld the decision in the case of Abbey Business Service (India) Private Limited.
The department contended that the assessee has not offered the reimbursement of the salary cost of the secondment of employees to tax. The same has been applied by the assessee while filing a revised return under Section 148 or applying the same for taxation while framing the assessment when the assessee has been cornered and unearthed the discrepancies or lapses by the department. Hence, the penalty is to be sustained.
The tribunal held that it cannot be construed that assessees have concealed any material facts from the department or furnished inaccurate particulars of income. There is a reasonable cause for not offering the same for taxation in the original return or in the revised return, as the assessees are in the bona fide belief that receipts are not liable for taxation in view of the fact that there are contradictory decisions in the case of Abbey Business Service (India) Private Limited.
Counsel For Appellant: Sharath Rao
Counsel For Respondent: D.K. Mishra
Case Title: IBM Canada Limited Versus DCIT
Case No.: IT(IT)A Nos.490 & 491/Bang/2024
