Section 9 of the Act; Article 12 of India-Japan DTAA – payments received by Japanese company in respect of deputation of high-level technical executives to Indian subsidiary were FTS, particularly because technical knowledge was made available; in absence of reconciliation of receipts with actual payments, the receipts could not be treated as reimbursement of cost.

16.  [2018] 99 taxmann.com 183 (Chennai – Trib.) Panasonic
Corporation vs. DCIT ITA No.: 1483
(Chny) of 2017 A.Y. 2013-14 Date of Order: 2^nd
August, 2018

Section
9 of the Act; Article 12 of India-Japan DTAA – payments received by Japanese
company in respect of deputation of high-level technical executives to Indian
subsidiary were FTS, particularly because technical knowledge was made
available; in absence of reconciliation of receipts with actual payments, the
receipts could not be treated as reimbursement of cost.

FACTS

The Taxpayer was a company
incorporated in Japan. (“FCo”). FCo was engaged in the business of electrical
and electronic products and systems. FCo had a subsidiary in India (“ICo”). In
the course of its business, FCo deputed certain high-level technical executives
to ICo for providing highly technical services to ICo. ICo reimbursed the
salaries of the deputed employees to FCo.

According to ICo, since it was a
case of mere reimbursement of expenses, the receipts by FCo could not be construed
as income of FCo. Further, the objective of secondment was to support ICo and
there was no economic benefit to FCo.

According to the AO, ICo was
required to withhold tax from the payment. Since ICo had not withheld the tax,
the AO disallowed²  the
deduction while passing draft assessment order. The DRP directed FCo to
reconcile receipts from ICo with actual payments. FCo could not reconcile the
same. DRP observed that routing salary through FCo was with the twin objectives
of having absolute control over seconded employees and not letting the customer
know about the margin retained by FCo over the actual salary. DRP further
observed that services rendered by employees of FCo made technology available
to ICo which was apparent since subsequently there was no requirement for
deputation of employees again.

Relying on decision in Food
World Supermarkets Ltd vs. DDIT [2015] 63 taxmann.com 43, DRP conducted
that irrespective of whether amount was received with mark-up or on
cost-to-cost basis, it had to be considered as FTS. Since FCo could not
reconcile the receipts with actual payments, it could not be treated as
reimbursement of expenses. 

HELD

• The
  AO disallowed claim of FCo on the ground that it received FTS. The AO and DRP
  also found that the technical knowledge was made available to ICo. FCo also
  could not reconcile the receipts and the actual payments, before DRP as well as
  the Tribunal.

• The
  deputed personal were all holding senior technical/managerial positions with
  ICo and reported to the top management of FCo. They were working under
  direction, control and supervision of FCo.

• The
  deputed personal were rendering highly technical services. Further, the
  services resulted in technology being made available to ICo, which obviated the
  necessity of employees to be deputed again. Accordingly, order of the AO and
  DRP was confirmed.