| 2018-TII-INSTANT-ALL-526 | 06 February 2018 |
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CASE LAWS ACIT Vs WOCKHARDT LTD: MUMBAI ITAT (Dated: January 05, 2018) Income Tax - Sections 92(2), 143(3) & 154. Keywords - ALP - Buy-back shares - CUP method - Guarantee fee income - Genuineness of claim - Notional interest - Revisionary order - Rate of financial guarantee & Sham transaction. A) The Assessee-company, engaged in the business of manufacturing and trading of pharmaceutical products. The Assessee had filed its return for the relevant AY declaring total income. In the course of the assessment proceeding, the AO noted that the Assessee had entered into an international transactions with its AE namely, namely CP Pharma for the year under consideration and hence, the matter was referred to the TPO to determine the ALP. During the TP proceedings, the TPO found that the AE of the Assessee had acquired loans from HSBC, Bank, UK of 14 million pounds (£) and the Assessee had guaranteed payment of HSBC bank for agreed guarantee fee charged of 0.75% of the loan amount to its AE. Further, the Assessee had adopted CUP method for bench-marking the guarantee fee and claimed that fee at the rate of 0.75% was at arm's length. The Assessee had also claimed that it had obtained quotation from HSBC Mumbai, for guarantee fee charged. Therefore, SCN was issue by the TPO. In reply, the Assessee had made certain submissions. However, the TPO observed that no party would provide guarantee without adequate consideration hence, charge of guarantee fee could not be generalized. There could not be a standard parameters for charging guarantee fee and the fee rate depended on several factors like loan transactions, tenure of loan, conditions of repayment and creditworthiness of the borrower. Accordingly, the quotation produced by the Assessee from HSBC bank-Mumbai was not acceptable and thereby, the TPO had used 3 comparables namely, SCB India, HSBC India and FMO Netherlands. Lastly, the TPO calculated the arm's length by taking the guarantee fee @ 208.33. After receiving the order of the TPO, the AO made upward adjustment to the Assessee's income. On appeal, the FAA held that the Assessee had adopted an appropriate method. The Assessee had obtained quotation from HSBC India to prove the genuineness of the claim made with regard to rate of financial guarantee. The FAA also found that after carrying out the diligence of the Assessee's account, the HSBC bank had arrived at quotation of 0.75% for financial guarantee hence, it was in nature of external CUP. Referring to the order of the FAA of the AY 2006-07, the adjustment made by TPO/AO was deleted by the FAA. B) In the course of the assessment proceeding, the AO further noted that Wockhardt Europe Ltd. (WEL), a wholly owned subsidiary of the Assessee, had brought back 80.22 lakhs ordinary shares from the Assessee at the book value of British Pound. Further, in the relevant AY, WEL had bought back the shares from Assessee at NAV of the company. The investment was made @ 1 British pound per share after which, the net-worth of WEL had gone down. Therefore, the AO directed the Assessee to furnish further details in that regard. In reply, the Assessee had made submissions to which, the AO held that apparent was not real. The AO also noted that no document was filed in respect of the decision and assessment of future profitability. The Assessee wanted to provide financial support to its AE without any financial consideration. The Assessee had sold shares at lesser value incurring a loss. Therefore, the AO stated that the whole transaction was a colourable device used by the Assessee to support WEL. During the TP proceeding, TPO held that the transaction in question was a loan transaction in the garb of share investment. Hence, the amount in respect of bought back shares was remitted to 10th July therein, the rate of interest had to be applied @ 5.07 p.a. from Espharma–Germany. After receiving the order of TPO, the AO made upward adjustment under the head buy-back shares by WEL. On appeal, the FAA held that the TPO had not disputed the valuation of shares either at the time of acquisition of sales by the Assessee or at the time of the sale of shares. The shares were valued by professionals as per the exchange control legislation and restructuring of business investment in subsidiaries or disinvestment from subsidiaries was a common business activity of multinational entities. The said transaction was related to buy back of shares by the AE from the Assessee. The valuation done of shares and submitted during TP proceedings had neither been commented upon nor has been disputed as acceptable. Therefore, TPO was not justified in treating the transaction as interest free loan to the subsidiary. Later on, the AO passed an order u/s 154 which was challenged before the FAA. The FAA had allowed the Assessee's appeal against the said revisionary order. On appeal, the Tribunal held that, Whether when the assessee himself has charged a rate higher than LIBOR rate for providing loans to its AE, TP adjustment is called for towards the amount of guarantee commission - NO: ITAT Whether genuineness of a transaction can be presumed based on buying back of share at par or at higher or lower rate than the purchase price, even if the valuation is as per the exchange regulations - NO: ITAT + this Tribunal found that during the year under consideration, the Assessee had received guarantee fee of Rs. 1.22 crores from CPP in lieu of financial guarantee given by it for a loan taken by AE in UK, that it obtained quotation from HSBC, India for providing financial guarantee for the loan availed by the AE, that the HSBC Bank, Mumbai provided quotation of 0.75% as guarantee fee, that the Assessee had adopted comparable uncontrolled price as the most appropriate method to benchmark the ALP of its IT, that the quotation from HSBC, Mumbai was considered as valid comparable, that the TPO considered average guarantee fee charged by Standard Chartered Bank (3%) and FMO Netherlands (2.5%) in addition to the quotation obtained by the, that accordingly he computed guarantee fee at the rate of 2.0833%, that he computed ALP of financial guarantee at Rs. 3.40 crores, that after considering fee received by Assessee, he recommended adjustment of Rs. 2.17 crores, that the FAA deleted the addition made by TPO/AO; + it is seen that in the case of Everest Kento Cylinder Ltd., the Bombay High Court has dealt the identical issue and had decided it against the Revenue. The Court held that "... the considerations which applied for issuance of a corporate guarantee are distinct and separate from those in a case of bank guarantee and, accordingly, the commission charged could not be called in question, in the manner the TPO had done. The comparison was not between like transactions but between guarantees issued by commercial banks as against a corporate guarantee issued by holding company for the benefit of its associated enterprise, a subsidiary company. Therefore, no TP adjustment could be made in respect of the commission charged ..." Respectfully following the same, this ground is dismissed; + the Tribunal noted that WEL was incorporated in the AY 2000-01, that the Assessee had invested into WEL, that investment, consequent to bring WEL into existence, was for the purpose of further exploration of business, that investment by the Assessee was @1 pound per share of WEL, that during the year under consideration WEL bought back the shares from the Assessee@ 0.8 pound per share, that the TPO had presumed that buy back of shares was not a normal business transaction, that he treated it as advancing of interest free loan by the Assessee to the AE, that he charged notional interest not only for the year under consideration but upto the date of remittance, that the Assessee had furnished the report of the professionals i.e. CAs who had valued the shares in dispute, that the TPO had not stated that as to what were the defects in the calculation of the professionals in valuing the shares Purchasing the share @ 1pound per share and selling at @ 0.8 pound per share cannot be the basis for presuming that the transaction was not a genuine transaction especially when the valuation was as per the exchange regulations. Buying back of share at par or at higher or lower rate than the purchase price is one of the very common practice of the business world. Until and unless it is proved that such a transaction was not based on scientific basis or was against the provisions of exchange manual/regulation, it should be accepted. Further, the FAA has given a categorical finding that the TPO had not doubted the valuation. In these circumstances, the Tribunal believes that there was no justification for the TPO to charge notional interest. Revenue's appeal partly allowed TE CONNECTIVITY GLOBAL SHARED SERVICES INDIA PVT LTD Vs ITO: BANGALORE ITAT (Dated: December 13, 2017) Income tax - ALP - captive service provider - software development services - ITes segment - related party transaction - working capital adjustment The Assessee company, is engaged in the provision of software development services and shared services to its AE i.e. ADC Telecommunications Inc., USA, which was its holding company. It had filed the return declaring income of Rs.1,04,430, after claiming deduction of Rs.1,44,70,511 u/s 10A. The return was processed u/s 143(1) and the case was subsequently taken up for scrutiny, wherein the AO made a reference to the TPO for determining the ALP of the international transactions entered into with its AEs. The TPO observed that for the software development services segment, the assessee selected 13 companies as comparable to the assessee with an average mean margin of 7.31 %. Since the assessee's profit margin of PLI was higher at 10.12%, the assessee presumed its international transactions in this segment to be at arm’s length. Similarly, for the ITES Segment, the assessee selected five companies with average mean margin of 13.01% to be comparable to the assessee. Since the assessee's profit at PLI was 13.02%, the assessee assumed that its international transactions in the ITES segment to be at arm’s length. After considering the detailed submissions, the TPO rejected the assessee's TP Study for both software development services and ITES segments, and after carrying out a fresh comparability analysis, applying certain filters and considering the assessee's objections, the TPO selected his own final set of comparables for both segments, at an average mean of 24.32%. After allowing working capital adjustment of 0.14%, the TPO worked out the proposed TP adjustment of Rs.1,50,87,408/- for the software development services. Similarly, for the ITES segment, the TPO proposed an Adjustment of Rs.1,23,13,265/-. On appeal, the ITAT held that, Whether company engaged into developing of software products, can be considered as comparable to those who are merely providing software development services to AEs - NO: ITAT Whether a software product company can be compared to a pure software developer - NO: ITAT + as far as selection of KALS Information Systems is concerned, it is seen that the Co-ordinate bench of this Tribunal in the case of Cisco Systems (India) P. Ltd. for A.Y 2009-10 has excluded this company by holding that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6), which was not available in public domain, and hence could not have been used by the TPO, when the same is contrary to the annual report of this company. It was also held by the Mumbai Bench of ITAT that this company was developing software products and not purely or mainly software development service provider. Therefore, following the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., also for Assessment Year 2009-10, it is held that "KALS" which is into developing of software products, should not be considered as comparable to the assessee in the case on hand, who is merely providing software development services to its AEs and accordingly direct the TPO to exclude it from the final set of comparables. Similarly, as far as Bodhtree Consulting Ltd is concerned, it is found that the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd. for A.Y 2009-10 has excluded this company from the final set of comparables, by holding that the mere fact that the assessee had itself proposed this company as comparable, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company. Therefore, respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., it is held that "Bodhtree" which is a software product company, should not be considered as comparable to the assessee in the case on hand; who is merely providing software development services to its AEs and accordingly direct the TPO to exclude it from the final set of comparables; Whether a captive service provider can be compared to a functionally dissimilar giant company owning huge intangibles - NO: ITAT + as far as Infosys Technologies is concerned, it is seen that the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., also for A.Y 2009-10 has directed exclusion of this company ‘Infosys’ from the final list of comparables to a mere provider of software development services, for reasons that it owns significant intangibles and is functionally different as it generates huge revenues from software products. Therefore, respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., also for Assessment Year 2009-10, it is held that Infosys Technologies Limited, is to be excluded from the list of comparables, it being functionally different from the assessee in the case on hand, who is merely providing software development services to its AEs. As far as Persistent Systems Ltd is concerned, it is seen that the co-ordinate bench of this Tribunal in case of VMware Software India Pvt. Ltd., also for A.Y 2009-10, observing that ‘Persistent’ is engaged in software product development and product design services, has excluded this company as one cannot be considered as comparable to a company which is merely providing software development services to its AE’s, as is the assessee in the case on hand. Therefore, respectfully following the decision of the co-ordinate bench of this Tribunal in the case of VMware Software India Pvt. Ltd., it is held that Persistent Systems Ltd., is to be excluded from the list of comparables, it being functionally dissimilar to the assessee in the case on hand, who is merely providing software development services to its AEs; Whether company having related party transactions of more than 25% are eligible to be considered as comparable for purposes of benchmarking - YES: ITAT + as far as Larsen & Turbo Infotech is concerned, it is found that various coordinate benches of this Tribunal have been consistently following application of RPT filter at 25% of turnover. Therefore, respectfully following the decision of the co-ordinate benches of this Tribunal in the case of ITO Vs. CAE Simulation Technologies Pvt. Ltd., the assessee's claim for exclusion of L & T Infotech Ltd., from the list of comparables is rejected. Similarly, as far as Aditya Birla Minacs Worldwide is concerned, it is to be noted that same exclusion clause will apply, consistently following application of RPT filter at 25% of turnover. Therefore this company is also directed to be included by respectfully following the decision of the co-ordinate benches of this Tribunal in the case of ITO Vs. CAE Simulation Technologies Pvt. Ltd; Whether working capital adjustment is required to be allowed on actual basis, before finallizing final set of comparables - YES: ITAT + as far as Thinksoft Global Services Ltd and FCS Software Solutions is concerned, it is seen that the TPO himself in the show cause notices has proposed the said two companies for inclusion in the final set of comparables, but had thereafter came to the view that the working capital adjustment for both these companies exceeded 4% of profits and therefore these two companies could not be taken as proper comparables. It is found that the very same issue, in similar circumstances of inclusion of said two companies was considered by a co-ordinate bench of this Tribunal in the case of ARM Embedded Technology P. Ltd. for A.Y 2009-10, wherein these companies are directed to be included in the final set of comparables and the TPO was directed to work out the correct PLI of the final set of comparables by computing and allowing working capital adjustment on actual basis. Therefore, respectfully following the said decision of the coordinate bench of this Tribunal in the case of ARM Embedded Technologies P. Ltd., the TPO is directed that Thinksoft Global Services Ltd. and FCS Software Solutions Ltd. should be included in the final set of comparables and set aside to the file of the TPO the issue of working out the correct PLI of the final set of comparables by computing and allowing working capital adjustment on actual basis. Assessee's appeal partly allowed TEXAS INSTRUMENTS INDIA PVT LTD: AAR (Dated: January 29, 2018) Income Tax - Sections 2(10), 5(2), 9(1)(ii), 90 & 192 - India-USA DTAA - Articles 4(1), 15, 16 & 25. Keywords: Expatriate assignment - Foreign employer - Foreign tax credit - Indian employer - deputationist - Perquisites - Split pay & TDS liability. The applicant is a global analog and digital semi-conductor integrated circuit design and manufacturing company. The applicant had send one of its employees Mr. T N Santhosh Kumar, on an expatriate assignment to Texas Inc., USA, for a period of 2 years. During the said period, Mr. Santosh Kumar was on the payroll of Texas Inc. and had received base salary and certain allowances in the USA for meeting his cost of housing, transportation. He had further received a part of his salary, based on a monthly basis, and certain bonuses in India from the applicant to meet certain obligations in India such as housing loans repayments etc. Further, in the course of his expatriate assignment, he would be rendering services in the USA, and not in India. During the FY 2011-12, Mr. Santhosh Kumar was a non-resident in India and in respect of FY 2012-13, he was expected to be a resident and ordinarily resident (ROR) in India. Accordingly, as per Article 4(1) of the Indo-US Treaty, Mr. T.N. Santhosh Kumar would be a non-resident in India and was liable to tax in India only on the income accrued, arised, received, deemed to accrue/arise in India for the FY 2011 - 12. As per the USA domestic laws he would be treated as a resident of USA for the calendar years 2010, 2011 and 2012 till the date of his departure from the USA. Therefore, he would be liable to tax on his worldwide income in the USA. The applicant seeks a Ruling for taxability in India of the salary of its employee, sent abroad for rendering services to a foreign company. The AAR held that, Whether salary received by an employee for services rendered outside India, is not subject to tax under I-T Act - YES: AAR Whether no withholding obligations arise for the Indian employer if the income arising to the seconded employee is for services rendered outside India - YES: AAR + section 4 of the Act states that income-tax shall be charged in accordance with and subject to the provisions of this Act in respect of the total income of the previous year of every person. Section 5 deals with the "Scope of Total Income". Section 5(2) begins with the words "Subject to the provisions of this Act", which brings Chapter IV into play, ie. computation of total income. In this chapter, Section 14 lists out the various heads of Income and Section 15 deals with the head "Salaries". Thus chargeability to tax under the head "salaries" arises u/s 5(2) r/w section 15. Revenue's attempt to say that section 5(2) alone is the charging section and income received by Mr T N Santhosh Kumar should be taxed in India as it was received in India, cannot be accepted; + Mr. Santosh Kumar, being a non-resident, he was rendering services in the USA during that period, therefore, the salary accrued to him is in the USA. Hence, since the income has not accrued in India, the same cannot be considered as chargeable to tax in India. In this respect, the Calcutta High Court in the case of Utanka Roy vs. Director of Income Tax held that "... the services rendered outside India have to be considered as income earned outside India ..." Further, in the case of Avtar Singh Wadhwan, the employer was an Indian company, as in the case of the applicant, and the same conclusion was reached. In other words, whether the employer was Indian or not was immaterial, and the material point was where the services were rendered and income had accrued to the employee of the applicant; + since section 5(2) of the Act starts with the words "Subject to the provisions of the Act", section 90 would also have to be considered, so as to allow any benefit arising there under to the applicant. Article 16 of the India-USA DTAA states that "... salaries, wages and such other remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that state unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State ..." It is clear therefore that, as per the Treaty also the income earned by Mr T N Santhosh Kumar from the services rendered in the USA would be chargeable to tax in the USA, and not in India, during the period that he was rendering services in the USA; + the provisions of section 192 (1) are very clear. Tax is required to be deducted by the employer from the income payable which is chargeable to tax under the head salaries. This Authority had occasion to examine this issue in the case of British Gas India Private Limited, wherein on similar facts this Authority had ruled that salary paid for rendering services in the UK were not taxable in India and that no tax need be deducted therefrom, provided the tax on that income was paid in the UK. The applicant's reliance on the cases of Eli Lily and Co. (India) Private Ltd. and Coromondal Fertilizers Ltd. support this view that unless there was an obligation on the employee to pay tax on income from salaries, there would not be any liability to deduct tax u/s 192 by the employer. Therefore, the split pay and perquisites received in India by Mr T N Santosh Kumar but accrued outside India, would not be taxable in India, and consequently, the applicant would not be obliged to withhold tax on the same at the time of payment u/s 192; Whether when the payments made are in the nature of "Salaries", the provisions of section 192(2) will apply - YES: AAR Whether therefore, as per Article 25 of the India-USA DTAA, an Indian employer can give credit to such employees for the taxes paid in the USA during the deputation period - YES: AAR + the case of the assignee is clearly covered by the provisions contained in Article 25 of the India-USA DTAA. As such he is entitled to the credit for the foreign taxes deducted. Once he becomes resident on return to India during the FY 2012-13, and the nature of payments made to him by the applicant is admittedly in the nature of Salaries, section 192 applies. It follows that when payments are received from more than one source during a particular year, the provisions of section 192(2) will apply, and the present employer can give credit for the taxes deducted during his deputation outside India. This issue was also considered in the case of British Gas India Private Limited, where this Authority had ruled, on similar facts, that where employees are working simultaneously with more than one employer, they are covered u/s 192(2). In the case of Coromandel Fertilisers Ltd. also it was held that where a foreign tax credit is available, the tax payable by the employee is lowered to the extent of the foreign tax credit available; + with regard to the Revenue's concern regarding proper verification, perhaps due to the fact that the Rule and form referred to in section 192(2), seem not fully equipped to deal with foreign tax credit, it has to be said that in the absence of any other provision, as admitted by Revenue, recourse to the specific provision in section 192(2) alone is possible. This provision casts an obligation on the employee to furnish to the employer, in this case the applicant, such details of the salary etc. received by him from the other employer/s, the tax paid or deducted there from, and other particulars, and the employer would examine and take into account such details before computing the tax deductible. This Authority cannot assume that the two parties would not do so, nor can prescribe a procedure which is not in the Act or Rules. Under the existing provision in this section, the applicant would exercise due diligence in this matter, in satisfying itself about the details of the period of residence, TRC, details of income earned and taxes deducted, the period they refer to etc., as may be necessary to work out the correct credit to be given while deducting tax at source in India, failing which, the Revenue can initiate action as the per the Act, as may be deemed necessary. Application ruled in favour of Applicant HEWLETT PACKARD INDIA SOFTWARE OPERATION PVT LTD: AAR (Dated: January 29, 2018) Income Tax - Sections 2(10) & (45), 4, 5(2), 9(1)(ii), 15, 90 & 192 - India-USA & India-Germany DTAAs - Articles 4, 15, 16, 23 & 25 Keywords: Beneficial provisions - Dependent personal service - foreign tax credit - overseas deputation - Non-resident status - payroll - Resident and Ordinarily Resident - ROR - scope of total income - worldwide income. The applicant is M/s Hewlett Packard India Software Operation Pvt Ltd. It sought advance ruling on the issue of taxability of the salary of its employees sent abroad for rendering services to a foreign company. During the period of deputation the assignees were to be on the payrolls of the applicant and regularly received salaries in India from the applicant and received certain allowances in their respective country of deputation for meeting their cost of housing & transportation. During this period of assignment the employees rendered services in their respective country of deputation. The assignees were non-residents in India during the Financial Year 2011-12, and in the year of arrival in India after completion of assignment i.e. Financial Year 2012-13 the assignees were considered as Resident and Ordinarily Resident (ROR). As regards residential status of the assignees as per the USA/German tax laws, the the Applicant submitted that:
As regards residential status of assignees as per applicable treaty in the case of assignees, the following was submitted by the applicant:
The Applicant withheld taxes on the salary paid in India as a matter of abundant caution. The assignees were entitled to relief under the provisions of the Treaty, and hence refund would be claimed by them for the taxes withheld by the applicant in their respective tax returns by virtue of the beneficial provisions of the Treaty. The applicant also submitted that the department had granted refunds to other employees being non-residents, who had claimed relief under the dependent personal service clause of the treaty between India and USA / Germany since their income was not liable to tax in India and who had claimed foreign tax credits in terms of the treaty between India and USA / Germany based on the article for elimination of double taxation. Having heard the counsels, the AAR held that, Whether when the services are rendered outside India by the assignees but the salaries are paid in India, any withholding tax obligations arise for the employer u/s 192 - NO: AAR + Section 4 of the IT Act 1961 states that income-tax shall be charged in accordance with and subject to the provisions of this Act in respect of the total income of the previous year of every person. ‘Total Income' as provided in Section 2(45) of the Act means such total income as is referred to in section 5, computed in the manner laid down in this Act. Section 5 deals with the "Scope of Total Income", and sub-section (2) relates to non-residents. Section 5(2) begins with the words "Subject to the provisions of this Act", which brings Chapter IV into play, i.e. computation of total income. In this chapter, Section 14 lists out the various heads of Income and Section 15 deals with the head "Salaries". Thus, chargeability to tax under the head "Salaries" arises under section 5(2) read with section 15. Revenue's attempt to say that section 5(2) alone is the charging section and income received by the assignees should be taxed in India as it was received in India, cannot be accepted; + although the recipients being non-residents, since they were rendering services in the USA / Germany during that period, the salary accrued to them in the USA / Germany. Revenue's objection that since the assignees were paid and employed in India, and that the employer - employee relationship existed in India, they should be taxed in India, are also not acceptable, as income accrues where the services are rendered. Hence, since the income has not accrued in India, the same cannot be considered as chargeable to tax in India. In the case of Prahlad Vijendra Rao, the High Court of Karnataka held that where the assessee was not resident in India and was rendering services outside India, the salary relating to the period of services rendered outside India has not accrued in India and hence is not taxable in India. In coming to this conclusion the High Court also considered the case of Avtar Singh Wadhwan wherein the High Court of Bombay also held that the relevant test to be applied to decide whether the income accrued to a non-resident in India or outside, is to find the place where the services were rendered, in order to consider where the income accrued. Both these cases were recently considered in the case of Utanka Roy v. DIT (International Taxation), decided by the High Court of Calcutta, and it was held that the services rendered outside India have to be considered as income earned outside India; + in the case of Avtar Singh Wadhwan, the other objection raised by the Revenue was also answered, namely that the case of Prahlad Vijendra Rao, were not applicable since in those cases the employer was a foreign company. In the Avtar Singh Wadhwan case the employer was an Indian company, as in the case of the Applicant, and the same conclusion was reached. In other words, whether the employer was Indian or not was immaterial, and the material point was where the services were rendered and where the income had accrued to the employee of the Applicant company; + since section 5 (2) of the IT Act starts with the words "Subject to the provisions of the Act", section 90 would also have to be considered, so as to allow any benefit arising thereunder to the Applicant. It is clear that the income earned by the assignees/employees from the services rendered in USA / Germany, respectively, would be chargeable to tax in the USA / Germany only, and not in India, for the period of their deputation; TDS obligations + the provisions of section 192 (1) are very clear. Tax is required to be deducted by the employer from the income payable which is chargeable to tax in India under the head salaries. This Authority had occasion to examine this issue in the case of British Gas India Private Limited - 2006-TII-13-ARA-INTL, wherein on similar facts this Authority had ruled that salary paid for rendering services in the UK were not taxable in India and that no tax need be deducted therefrom, provided the tax on that income was paid in the UK. The Applicant's reliance on the cases of Eli Lily and Co. (India) Private Ltd. and Coromondal Fertilizers support this view that unless there was an obligation on the employee to pay tax on income from salaries, there would not be any liability to deduct tax under section 192 by the employer; + the salaries received in India by the assignees but accrued outside India for the FY 2011-12, would not be taxable in India, and consequently, the employer, Hewlett Packard Software Operation Private Limited i.e. the Applicant, would not be obliged to withhold tax on the same at the time of payment, under section 192 of the Act; Foreign Tax Credit Whether, under the provisions of Sec 192, the employer can give credit to the deputationists credit for the taxes paid overseas and such foreign tax credit would be in harmony with the treaty provisions - YES: AAR + the second question raised by the Applicant with regard to the FY 2012-13 is whether u/s 192, the Applicant can give credit to the assignees for the taxes paid in the USA / Germany. The cases of the assignees are clearly covered by the provisions contained in Articles 25 of the India-USA DTAA and Article 23 of India– Germany DTAA respectively. As such they are entitled to the credit for the foreign taxes deducted. Once they become residents on return to India during the FY 2012-13, and the nature of payments made to them by the Applicant is admittedly in the nature of Salaries, section 192 applies. It follows that when payments are received by these employees from more than one source during a particular year, the provisions of section 192(2) will apply, and the present employer can give credit for the taxes deducted during their deputation outside India. This issue was also considered in the case of British Gas India Private Limited, where this Authority had ruled, on similar facts, that where employees are working simultaneously with more than one employer, they are covered under Section 192(2) of the Act. In the case of Coromandel Fertilisers Ltd. also it was held that where a foreign tax credit is available, the tax payable by the employee is lowered to the extent of the foreign tax credit available; + with regard to the Revenue's concern regarding proper verification, provisions of Sec 192(2) cast an obligation on the employee to furnish to the employer, in this case the Applicant, such details of the salary etc. received by him from the other employer/s, the tax paid or deducted there from, and other particulars, and the employer would examine and take into account such details before computing the tax deductible. We cannot assume that the two parties would not do so, nor can we prescribe a procedure which is not in the Act or Rules. Under the existing provision in this section, the Applicant would exercise due diligence in this matter, in satisfying itself about the details of the period of residence, TRC, details of income earned and taxes deducted, the period they refer to etc., as may be necessary to work out the correct credit to be given while deducting tax at source in India, failing which, the Revenue can initiate action as the per the Act, as may be deemed necessary. Answered in favour of Applicant |
Thanking you for your support and cooperation. Regards, TIOL HOUSE, 490, Udyog Vihar, Phase - V |