Background and Facts
M/s. Faurecia Automotive Holding (assessee), a tax resident of France, received certain amount from Faurecia India towards reimbursement of salary cost of an expatriate seconded to Faurecia India and also for rendition of certain services. The Assessing Officer (AO) treated the reimbursement amount as Fee for Technical Services (FTS) on the ground that assessee rendered technical services to Faurecia India through technical staff. The payment for rendition of services was treated as Royalty as per clause (iv) of explanation 2 to section 9(1)(vi) of the Income Tax Act, 1961 (The Act) and also FTS as per explanation 2 to section 9(1)(vii) of the Act.
ITAT held that the same is not taxable in India as FTS under section 9(1)(vii) of the Act. Moreover, with respect to consideration for rendition of technical and managerial services, it was ruled that such services shall be outside the ambit of royalty as per clause (iv) of explanation (2) to section 9(1)(vi) of the Act and applied the 'most favored nation' clause of the India-France Tax Treaty to hold that the same cannot be construed as FTS.
Contentions of the Assessee
The assessee asserted that as per the terms of the secondment agreement, the expatriate was obliged to render services to Faurecia India and a sum from his salary being directly paid by the assessee was reimbursed by FaureciaIndia to the assessee without any mark-up. Moreover, with respect to payment for rendition of certain services by the assessee, it was contended that the services so rendered were merely IT support services. Subsequently, the assessee filed an appeal to the Dispute Resolution Panel (DRP). Aggrieved by the decision of the DRP, the assessee filed an appeal to the ITAT.
The ITAT ruled that amount disbursed by Faurecia India to the assessee towards reimbursement of salary cost of expatriate was not FTS under section 9(1)(vii) of the Act. Key observations of the ITAT are as follows:
The expatriate was employed by Faurecia India on its payroll and acted under the supervision and control of Faurecia India. Moreover, Faurecia India deducted TDS on total salary of the expatriate (inclusive of the salary paid by assessee in France which was later on reimbursed by Faurecia India)
In addition, exception carved in explanation 2 to section 9(1)(vii) of the Act states that an amount shall cease to be FTS if it is the income of the recipient chargeable under the head 'salaries' wherein recipient means 'real recipient'. It was held that the expatriate was the 'real recipient' of the amount received by him and the assessee just acted as a 'post office' in paying some amount to expatriate
Furthermore, the ITAT distinguished the revenue's reliance on the case of 'Centrica India' by opining that in that case, the amount paid by the Indian entity accrued to the foreign entity only, which could or could not have been used by it towards the payment of salary to the deputed employees, depending upon the terms of the contract. On the contrary, in the present case, the amount never accrued to the assessee but accrued to the expatriate who received the amount in his own independent right
Taxation of consideration for technical and managerial services
On perusal of the terms of the agreement, it was apparent that the services rendered by the assessee to Faurecia India were not only IT support services but contained some traces of managerial services as well.
It was observed that the amount paid cannot be construed as royalty as per clause (iv) of explanation (2) to section 9(1)(vi) of the Act, on the ground that the phrase in clause (iv) 'imparting of any information concerning' implies mere transfer of information to be exploited by the recipient and does not partake the character of rendition of services as opposed to the facts of the present case. In this case, the assessee rendered services to Faurecia India and such rendition did not encompass any 'imparting of information' to Faurecia India.
With respect to the taxation of said payment as FTS, the ITAT referred to the protocol of the India-France tax treaty. The ITAT observed that if India entered into a DTAA with a third nation, being a member of OECD, which, inter alia, has a limited scope with respect to taxation of FTS, such limited scope shall be applicable in case of India-France tax treaty applicable in the present case
Hence, as per the said provisions, the India- UK tax treaty (since UK is an OECD member country) shall prevail. Therefore, in the light of the provisions of FTS stipulated under the India- UK tax treaty, the concerned payment cannot be construed as FTS in the absence of satisfaction of 'make available' condition, thereby keeping it outside the gamut of taxation in India
This ruling is a fair enunciation of the case wherein taxability of reimbursement of salary cost of deputed employee shall be precluded from the spectrum of taxation adhering to the facet that the expatriate was the 'real recipient' of salary and no role was rendered by the assessee. Moreover, the ITAT has delivered a prodigious judgement in determining the taxability of technical and managerial services wherein the benefit of 'most favored nation' clause has been accorded to the assessee, thereby giving a cause to the assessee to relish!
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