Case Law Details
DCIT Vs Michlin Global Mobility (ITAT Delhi)
ITAT Delhi held that the social security, insurance, relocation expenses which are in the nature of committed and obligated payments are in the nature of reimbursements and not fee for technical services.
Facts-
During the course of the scrutiny assessment proceedings the assessee was asked to explain why the amount received from the group entity in India was not taxable in India.
The assessee explained with respect to the activities in India the assessee made available expatriates to Miscelin Group Entities in India i.e. AIMPL and MITC. This group entities in India required experienced employees familiar with the Michelin Group methodology and processes to be employed on their local payrolls in India. The personnel assigned to these group entities were released/ discharged in their home country from all the obligations and rights of employment and were subsequently, employed by the respective Indian entity for the services rendered in India. Since, the expatriates were employed by the Indian entities their remuneration cost was fully borne by the respective Indian entities and applicable taxes thereon has been with held as per the provisions of the Act. It was explained that cost to cost reimbursements from Indian entities towards social security, contributors, relocation expenses etc with respect to the expatriate personnel who are the employees of such Indian entities is not in the nature of income of the assessee.
The contention of the assessee did not find any favour with the AO who after referring to several judicial decisions treated the receipt as FTS as per the India-Switzerland DTAA.
The assessee approached the authorities for advance rulings which concluded that the social security, insurance, relocation expenses which are in the nature of committed and obligated payments are in the nature of reimbursements and not fee for technical services.
Conclusion-
Since the first appellate authority has followed the rulings of AAR, wherein, it was held that the social security, insurance, relocation expenses which are in the nature of committed and obligated payments are in the nature of reimbursements and not fee for technical services. We do not find any reason to interfere with the findings of the CIT(A). Both the appeals filed by the revenue are dismissed.
FULL TEXT OF THE ORDER OF ITAT DELHI
ITA No.1962/Del/2020 and 1963/Del/2020 are two separate appeals by the revenue preferred against two separate orders of the CIT(A)-43, New Delhi dated 15.01.2020 pertaining to A.Y. 2015-16.
2. Since common grievance is involved in both these appeals they were heard together and are disposed of by this common order for the sake of convenience and brevity.
3. The common grievance of the revenue read as under :-
1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in not appreciating the facts the reimbursement made by the Indian Company Michelin Switzerlandrelated to social security/insurance/relocation commitments for employees who now become the sole employees of Indian companies having no lien marked with the employment of parent company, is in the nature of Fee for Technical Services.
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in holding that the reimbursement cost paid by the Indian company to overseas entity is not taxable as FTS under the Michelin Global Mobility (Parent Employer) for insurance social security benefit in the home country of the personnel employed in India. 1,43,83,568/-
3. The appellant craves to add, amend, modify or alter any grounds of appeal at any time or before the hearing of the appeal.
Total tax effect (see note below) 1,43,83,568/-
4. At the very outset the Counsel for the assessee drew our attention to the order of the authority for advance rulings income tax Mumbai dated 08.01.2020 and stated that the impugned quarrel has been decided by the AAR in favour of the assessee and against the revenue. Though the DR could not bring any distinguishing decision in favour of the revenue but strongly relied upon the findings of the AO.
5. We have carefully considered the orders of the authorities below. We find that the quarrel is in respect of the receipt of Rs.143835684/- in A.Y.2015-16 and Rs.13,04,56,481/- in A.Y.2016-17 which included reimbursements from MIPL of Rs.12,34,45,546/- and from MITC Rs.15730348/- in A.Y.2015-16 and Rs.860896190/- and Rs.39943463/- respectively in A.Y.2016-17.
6. During the course of the scrutiny assessment proceedings the assessee was asked to explain why the amount received from the group entity in India was not taxable in India. The assessee explained with respect to the activities in India the assessee made available expatriates to Miscelin Group Entities in India i.e. AIMPL and MITC. This group entities in India required experienced employees familiar with the Michelin Group methodology and processes to be employed on their local payrolls in India. The personnel assigned to these group entities were released/ discharged in their home country from all the obligations and rights of employment and were subsequently, employed by the respective Indian entity for the services rendered in India. Since, the expatriates were employed by the Indian entities their remuneration cost was fully borne by the respective Indian entities and applicable taxes thereon has been with held as per the provisions of the Act. It was explained that cost to cost reimbursements from Indian entities towards social security, contributors, relocation expenses etc with respect to the expatriate personnel who are the employees of such Indian entities is not in the nature of income of the assessee.
7. The contention of the assessee did not find any favour with the AO who after referring to several judicial decisions treated the receipt as FTS as per the India-Switzerland DTAA.
8. The assessee approached the authorities for advance rulings where in following question were raised relating to the transaction on which the advance ruling is required :-
“Following Questions were raised relating to the transaction on which the advance ruling is required:
1. On the facts and circumstances of the case, whether payment to be made by the applicant to Michelin global mobility (MGM) towards payments to be made behalf of the employees of the applicant towards portion of salary , social security contribution , insurance etc , would be chargeable to tax in India , in the hands of the MGM, as per the provisions of the income tax act, 1961 (act) read with the provisions of the double taxation avoidance agreement entered into between India and Swiss confederation (tax treaty),
2. In the case answer to question 1 is in the affirmative, under which section of the act or the article of the treaty would the payment be taxable?
3. In case the answer to question 1 and 2 are in the affirmative, at what rate under section 195 of the act would the applicant to obligated to withhold taxes on the above payments?
9. The authority for advance rulings vide order dated 07.01.2015 rephrased the question in its admission order u/s. 245 R (2) as under :-
“Heard Shri Rajan Vora, learned counsel for the applicant and Shri Munesh Kumar for the Department. The question which falls for consideration in this application is whether the Revenue is justified in treating, all payments from the applicant to Ms Michelin Global Mobility (MGM) in the nature of Fees for Technical Services (FTS). On this question, the matter is admitted. Secretary shall inform the next date of hearing.”
10. After considering the facts and the submissions the AAR ruled as under:-
“26. A perusal of the above documents reveal that there is no lien on employment of the seconded employees with the applicant and also the applicant has the power to terminate the employment and the employee is forbidden to supply his capacity to work to someone else during the period of employment. It is also observed that MGM is providing suitable personnel to the applicant and the applicant is exercising full operational control and the employee is required to abide by policy regulations and guidelines of the applicant company. On the request of the Authority a certificate was also submitted by the MGM and the applicant that the MGM only shared the profile of the expatriate personnel and the process of selection was entirely left with the applicant. It is also avowed that the expatriate personnel are released in their home country’ / earlier employer from all obligations and rights of employment and that the applicant is solely responsible for all payment to expatriate personnel and that no salary payments are made by the applicant outside India. It is also seen that to meet the obligation of the expatriate personnel abroad social security contribution, insurance, relocation cost. etc. were deposited by MGM on the behalf of the personnel and the said contribution which form part of the salary are reimbursed on cost to cost basis by applicant to MGM. The sample copies of the debit notes submitted by the MGM and the applicant were also submitted. A letter was also submitted from auditor that the reimbursed amount is on cost to cost basis.
27. It is also noticed from sample invoices of the company that the reimbursements range from 350 to 1421 euros per month and is roughly above 10*15% of the salary of expatriate employee. From above facts and from perusal of the documents submitted, we are of the view that the expatriate personnel are indeed employees of the applicant and there does exist employee-employer relationship between the personnel and the application company. The applicant has selected the suitable employees depending upon business needs, qualifications and international brand image and best practices of the group from list available with MGM and has issued the employment letters to them. It exercises control and issues directions to the employees who are required to supply their complete time and labour to the applicant. The applicant also has the power to terminate the employment. The sample employment letter submitted also indicates the period of employment as 2 to 4 years. On going through the details of salary and perquisites in form No.16 and form No.12BA, it is noticed that the concerned employee is offering the entire salary and perquisites and social security / insurance / relocation receipts in the return on which tax has been deducted in India.
31. It is common knowledge that in large multi-national companies the talent pool of personnel is deployed to various countries and these personnel’s move from one location to another. They are liable to for certain statutory contributions such as social security contribution in their home countries. To facilitate the statutory commitment toward retirement, insurance etc. in home country some funds are received in their home countries. The parent company assigns this work to some common agency of the group to perform these tasks seamlessly. MGM performs this task in the current case. The payments by MGM are on behalf of applicant which are subsequently reimbursed by the applicant.
32. The MGM is not exercising any operational or functional control over the employees of the applicant. It is not paying any perquisite or performance related payments to the It is merely paying statutory payments on behalf of the personnel in their home countries. This is clearly a supportive function performed by MGM.
33. We are conscious of the tact that provision of services or provision of personnel could be camouflaged as secondment agreements but in the current case it does not seem that any purpose is served by cloaking reimbursements. It is not a case where entire or substantive salary is paid outside India and then the same is claimed as reimbursement. In that scenario there is possibility of manipulating receipts and relocating it to different accounts of the group companies. Moreover, the entire salary including the reimbursed component has been offered for tax in India by the seconded employees.
34. Given these peculiar facts, we are of the considered view that the social security, insurance, relocation expenses which are in the nature of committed and obligated payments are in the nature of reimbursements and not fee for technical services.
35. In regard to administrative expenditure paid to MGM for performing the facilitative and disbursing agency role .the Applicant has himself admitted that payments are subject to tax deduction under Section 195 (para 8.2.27 of rejoinder letter and though no specific submissions were made by learned AR about its nature, we presume that in the light of admitted question the Applicant has no objection for treating the charges as FTS and thus the issue does not require our adjudication.
36. In view of foregoing the admitted and rephrased questions are answered as under:
1. The social security, insurance, relocation expenses which are in the nature of committed and obligated payments are in the nature of reimbursements and not fee for technical services.
2. As admitted by learned AR. the administrative fee paid to MGM is liable for tax deduction under Section 195 as fee for technical services.
11. Since the first appellate authority has followed the rulings of AAR (supra) we do not find any reason to interfere with the findings of the CIT(A). Both the appeals filed by the revenue are dismissed.
12. Decision announced in the open court on 15.12.2022.
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