Section 9(1)(vii) of the Act; Article 13 of India-France DTAA – Reimbursement of salary of seconded employees does not qualify as FTS – By virtue of the MFN clause in India-France DTAA, managerial services do not qualify as FTS

16.  [2019] 56 CCH 0235
(Pune – Trib.)

Faurecia Automotive Holding vs. DCIT (IT)

ITA No.: 784/Pun/2015

A.Y.: 2011-12

Date of order: 8^th July, 2019

Section 9(1)(vii) of the Act; Article 13 of India-France
DTAA – Reimbursement of salary of seconded employees does not qualify as FTS –
By virtue of the MFN clause in India-France DTAA, managerial services do not
qualify as FTS

FACTS – 1

Taxpayer, a company resident in France, was engaged in
designing and building moulded plastic parts for passenger car interiors.
During the year under consideration, it seconded an employee (Mr. X) to an
Indian group entity (ICo). During the relevant year, Taxpayer paid the salary
to Mr X on behalf of ICo, which was then reimbursed by ICo without any mark-up.
Taxpayer contended that the reimbursement received from ICo was not subject to
tax.

However, the AO contended that the amount received from ICo
was FTS under the Act and hence subject to tax in India.

Aggrieved, Taxpayer appealed before the DRP who upheld the
AO’s order on the contention that Mr. X made available his technical knowledge,
experience and skills, etc. to ICo and hence qualifies as FTS under the DTAA.

However, Taxpayer went in appeal before the Tribunal.

HELD – 1

FTS under the Act is defined to mean any consideration for
the rendition of managerial, technical or consultancy services, unless such an
amount is chargeable to tax under the head ‘salaries’ in the hands of the
recipient.

What is of relevance is the real recipient and not the
literal recipient. If an amount is paid to the expatriate of an NR but the real
recipient is the NR, then the nature of that amount may be FTS. However, if the
real recipient is the employee and the NR is merely a person acting as a post
office on behalf of the employee, then the payment made would be in the nature
of salary. Such amount will then not qualify as FTS.

For the following reasons it can be said that the amount paid
by ICo is in the nature of salary payable by ICo to the employee and the
Taxpayer merely receives it on behalf of the employee and hence such payment
does not qualify as FTS:

•    The remuneration of Mr. X was fixed by ICo;

•    A perusal of the employment agreement clearly
  indicated that Mr. X was employed by ICo and was rendering services to ICo;

•    Mr. X was working under the control and
  supervision of ICo;

•    Taxpayer had no role to play in the rendition
  of services by Mr. X to ICo, except that a part of the salary payable by the
  Indian entity was initially paid by Taxpayer in France, which was later on
  recovered without any profit element from ICo.

FACTS – 2

Taxpayer provided Global Information Support services to ICo
which inter alia included assistance in running the operations of ICo,
technical support, etc. Taxpayer contended that such services did not make
available any technical knowledge, experience, skill or knowhow, etc. to ICo
and hence the fee received for such services does not qualify as FTS under the
DTAA.

The AO, however, contended that the amount received by
Taxpayer was in the nature of ‘royalty’ as well as ‘FTS’ under the Act and also
the DTAA.

Aggrieved, the Taxpayer appealed before the DRP who upheld
the AO’s order. Taxpayer then approached the Tribunal.

HELD – 2

Perusal of the agreement indicates that the services rendered
by the Taxpayer catered to various facets of business operations, including
management, marketing, accounting and finance, human resources, IT support
services, etc. These services are in the nature of managerial services as well
as technical services and hence qualify as FTS under the Act as well as the
DTAA.

However, having regard to the Most Favoured Nation (MFN)
clause of the India-France DTAA, the limited scope of FTS under the India-UK
DTAA is to be read into the India-France DTAA.

Article 13(4) of the
India-UK DTAA defines FTS to mean technical or consultancy services which ‘make
available’ technical knowledge, experience or skill, etc. to the recipient.

As the FTS definition in the India-UK DTAA does not include
‘managerial services’, the services rendered by Taxpayer which are in the
nature of managerial services will not qualify as FTS. Further, as the
technical services rendered by Taxpayer did not make available any technical
knowledge or skill, it will not qualify as FTS under the DTAA.