Google LLC Vs JCIT (OSD) (ITAT Bangalore)
ITAT Bangalore held that the amount paid by Google India Private Limited (GIPL) to M/s. Google LLC (US) towards seconded employees doesn’t come under the purview of FTS (Fees for Technical Services) or FIS (Fees for Included Services) under the Income Tax Act or under DTAA.
Facts- The solitary issue argued by the assessee is that the AO/DRP erred in taxing the reimbursements of salaries of expat employees made by Google India Pvt. Ltd. (GPIL) to the assessee by characterising such reimbursements as fees for “technical services” (FTS) as per Explanation 2 to Section 9(1)(vii) of the Act as well as “Fees for Included services” (FIS) as per Article 12(4) of the DTAA between India and USA (India-US Tax Treaty).
Conclusion-In light of the judgement of Hon’ble Jurisdictional High Court in the case Flipkart Internet (P.) Ltd. which was followed by the coordinate bench order of Bangalore Tribunal in the case Biesse Manufacturing Company (P.) Ltd.
we hold that the amounts paid by GIPL to the assessee with reference to seconded employees does not come within the ‘FTS’ or ‘FIS’ under the Act or under DTAA. It is ordered accordingly.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These appeals at the instance of the assessee are directed against the two final assessment orders passed under Section 143(3) r.w.s. 147, r.w.s. 144C of the Income Tax Act, 1961 (the Act). The relevant assessment years are 201011 and 2012-13. Common issues are raised in these appeals, hence they were heard together and are being disposed off by this consolidated order.
2. The assessee in both the appeals had raised several grounds. However, the solitary issue argued by the learned Sr. Counsel is that the AO/DRP erred in taxing the reimbursements of salaries of expat employees made by Google India Pvt. Ltd. (GPIL) to the assessee by characterising such reimbursements as fees for “technical services” (FTS) as per Explanation 2 to Section 9(1)(vii) of the Act as well as “Fees for Included services” (FIS) as per Article 12(4) of the DTAA between India and USA (India-US Tax Treaty).
3. The brief facts of the case are as follows: –
The assessee, Google LLC (hereinafter referred as “the assessee”) is a foreign company incorporated in USA. For the assessment years 2010-11 and 2012-13 the AO issued notices under Section 148 of the Act. The reason for issue of notice under Section 148 of the Act was the assessee had received certain payments from GIPL and returns of income were not filed. During the course of reassessment proceedings the matter was referred to the Transfer Pricing Officer (TPO) to determine the arm’s length price (ALP) of the payments received by the assessee. The TPO held that the international transactions with the Associated Enterprises (AE) were at ALP and hence no adjustment is required. However, the AO observed that the assessee company received payments from GIPL for seconding its employees to GIPL. The AO after analysing the arrangements between GIPL and the assessee, observed that “when the transaction is analyzed in its totality, the arrangement between Google India Private Limited (GIPL) and the assessee is such that GIPL has required technical services from the assessee, which were to be provided through certain employees of the assessee, who were technical/managerial experts in their respective domains at a sufficiently higher level in the assessee’ employee hierarchy. In a normal course of action this would amounted to be a service/contractual agreement between GIPL and the assessee. In such an arrangement, the assessee would have provided professional services to the GIPL against which GIPL would have made payments to the assessee. Since, these services are technical and managerial in nature and also, they provide and impart a skill set to the concerned manpower of GIPL for execution of technical and managerial jobs, such an arrangement would have fallen under Indo-USA DTAA and covered as Fees for Included Services”. The AO passed draft assessment order by bringing to tax a sum of Rs.20,63,50,635/- and a sum of Rs.39,48,22,872/- for assessment years 2010-11 and 2012-13, respectively. The AO strongly relied on the Hon’ble Delhi Court judgement in the case of Centrica India Offshore Pvt. Ltd. reported in (2014) 348 ITR 45. The conclusion of the AO in the draft assessment order (AY 10-11) reads as follow: –
“16.1 In the preceding paragraphs, the need for secondment, nature of services provided by seconded employees, employer-employee relationship and the taxability of the payments have been discussed elaborately and the following has been established;
1. There is no employer-employee relationship between GIPL and secondees seconded by assessee, rather the same continues to exists between Google LLC and such employees;
2. The services rendered/provided by the seconded employees are in the nature of technical, managerial, consultancy services.
3. The sums received by the assessee company for the previous year relevant to A.Y. 2010-11 are in the nature of Fees for Technical services under the section 9(1)(vii) of the Income Tax Act read with the article 12 of the Indi-USA DTAA.”
4. Aggrieved by the draft assessment order the assessee filed objections before the DRP. The objections of the assessee were disposed off on 16.03.2021 & 190.06.2022 for assessment years 2010-11 and 2012-13, respectively by rejecting all the contentions raised. Pursuant to the DRP directions the impugned final assessment orders were passed on 23.03.2021 and 08.07.2022 for assessment years 2010-11 and 2012-13, respectively.
5. Aggrieved by the final assessment orders the assessee has filed these appeals before the Tribunal. The assessee has filed two sets of paper books (serially numbered comprising of 776 pages) enclosing therein the contentions raised before the AO and the DRP, sample copies of the assignment letters issued by the assessee to its seconded employees, sample copies of Form 16 demonstrating tax has been deducted at source under Section 192 of the Act by GIPL on salaries of the seconded employees, etc. The learned Sr. Counsel submitted that the issues raised are covered by the judgement of the Hon’ble Jurisdictional High Court in the case of Flipkart Internet (P.) Ltd. vs. DCIT reported in 488 ITE 268/139 taxmann.com 595/288 Taxman 699. The learned Sr. Counsel submitted that the above judgment has been followed by the coordinate bench of the Bangalore Tribunal in the case of Biesse Manufacturing Company (P.) Ltd. vs. ACIT reported in (2023) 146 taxmann.com 242 (Bang. Trib.) and Goldman Sachs Services (P.) Ltd. vs. DCIT reported in (2022) 138 taxmanann.com 162 (Bang. Trib.).
6. The learned D.R. supported the orders of the DO and the DRP.
7. We have heard the rival contentions and perused the material on record. The undisputed facts are that certain employees of the assessee were seconded to GIPL. For the purpose of secondment of employees, assessee had issued assignment letters to the seconded employees. Sample copies of the assignment letter between the assessee and the seconded employees are placed on record from pages 201 to 248 of the paper book (Vol. 1). The relevant portion of the above mentioned assignment letter is reproduced below for ready reference :
“Duties of Google India: You shall faithfully and diligently perform your duties in the capacities to which they are seconded and shall devote substantially all of your business time and attention to the business of India.”
“Standard o f Conduct:
Google shall not be responsible for your work during your international secondment^ assignment or assume any risk for the results produced from your work while under secondment to Google India. During the period of your secondment, you will comply with the direction and control of Google India, including Google India’s rules, procedures, working practices and policies except that the terms of this letter continue to govern your assignment with Google India. You will be subject to the day-to-day management and control of Prasad Ram of Google India, from whom you will take instructions.
You are also expected to act at all times with appropriate respect for India and abide by the laws and regulations of India. Accordingly, you are required to maintain a standard of conduct that does not bring discredit upon yourself, your supervisions or upon Google India.
During the period of secondment, for administrative convenience, Google shall make payment towards your salary, bonus and all other eligible benefits as per terms agreed with you (on behalf of Google India) at the time of secondment.
Once you are seconded to Google India, Google shall not have the right to recall in the absence of Google India’s request or consent.”
“Termination of Secondment / Job upon return:
You should understand that nothing contained herein or in the Relocation Policy shall be considered to be a guarantee of employment for the estimated duration of this Assignment and/or upon return from the Assignment. Your employment at all times remains “at will” and may be terminated at any time by either you or Google as is set forth in your Offer Letter.”
8. From the above clauses of the assignment letter following conclusions can be drawn:
“- The seconded employees should work only for Google India and not for Google LLC in any manner. Hence, the services provided by the seconded employees are solely for the benefit of Google India.
– The employees were required to report to Google India and given that the seconded employees were working under the supervision and control solely of Google India being an employer, salary of such employees was ultimately incurred by Google India.
– From an administrative convenience standpoint, Google LLC had agreed to make payment for the salaries of such seconded employees in their overseas bank accounts on behalf of Google India and getting reimbursement of the same from Google India on a cost-to-cost basis.
– Google LLC shall not be responsible and shall not assume any risk for the work undertaken by the seconded employees for GIPL.
– Once seconded employees moved out of the US on secondment, he/she does not have employment guarantee upon return back to the US after the secondment period.”
9. Further the GIPL had duly deducted tax at source under Section 192 of the Act against salary and other allowances paid/payable to such seconded employees and deposited the same with the Government of India. This is evident from Form No. 16 issued by GIPL to its employees, which are placed on record (refer pages 102 to 107 and 113 to 121 of DPP paper book for AY 2010-11). Moreover, GIPL had obtained necessary registration for the said employees with Provident Fund and Foreigners Regional Registration Office and also made appropriate contributions towards social security benefits in India which forms part of their salary cost (evident from Form 16 of the employees that are placed on record). The assessee has also produced the visa stamped by the authorities concerned in the case of seconded employees wherein it is clearly shown as ‘employment visa’. For the family members it is mere entry visa. In most of the cases the families of the seconded employees were in USA and due to convenience, salary of such employees were deposited in bank account of the employees in USA. When the salaries of such seconded employees are deposited in their bank accounts in USA, GIPL reimbursed the same to the assessee on cost to cost basis. The assessee has produced reconciliation of the amount payable in respect of expat employees vis-a-vis the salary and other perquisites, etc. paid to such employees (refer pages 180 & 181 of PB for AY 2010-11). But for a marginal difference on account of foreign exchange there is one to one reconciliation. Therefore in the real sense the payment made by GIPL to the assessee is nothing but reimbursement of cost relating to remuneration on certain employees who were seconded to GIPL from the assessee.
10. The AO in the draft assessment order has assumed that service agreement exist between assessee and GIPL for provision of services by assessee to GIPL. There is nothing on record to suggest that assumption of AO is correct. Moreover, the assessee has strongly denied the same. Based on factual background, it is clear that the seconded employees were working solely under control and supervision of Google India (GIPL) and not on behalf of assessee during the period of secondment. The assessee’s role was merely to facilitate payment of salary on behalf of Google India (GIPL), which was reimbursed by GIPL on actual. On identical facts, the Bangalore Bench of the Tribunal in the case of Biesse Manufacturing Company (P.) Ltd. by following the judgement of the Hon’ble Jurisdictional High Court in the case of Flipkart Internet (P.) Ltd. (supra) and the Bangalore Bench of the Tribunal in the case Goldman Sachs Services (P.) Ltd. (supra) had decided the issue in favour of the assessee. The contentions raised and the findings of the Tribunal in the assessee of Biesse Manufacturing Company (P.) Ltd. (supra) reads as follows: –
“17. During the course of assessment proceedings, the AO noticed that the assessee has made payment to M/s. Biesse Spa, Italy towards secondment of employees deputed to India during the year under consideration for an amount of Rs.1,39,07,427. The AO also noticed that no tax was deducted at source on these amounts paid to the AE and issued a show cause notice to the assessee as to why the amount should not be disallowed u/s. 40(a)(i). The assessee submitted that these were salaries paid to Italian employees working in India. The payment was made to the employees in Italy and the same was reimbursed by the assessee. The assessee also submitted that the seconded employees was under the payroll of the assessee and part of salary was paid in Italy for which the AE periodically raised invoice for reimbursement. The assessee also submitted that tax has been duly deducted u/s. 192B on the salary paid in India and in Italy and therefore no tax was liable to be deducted on the reimbursements made to the AE. The AO rejected the submissions of the assessee and proceeded to treat the payment as fees for technical services and held that the same was liable to be deducted at source u/s. 195 since the assessee has not deducted the tax, the AO disallowed the same.
18. With regard to reimbursement of expenses, the assessee submitted that expenditure on insurance expenses, travelling expenses which are reimbursed to AE in relation to the personnel who visited India for providing technical services. The AO disallowed an amount of Rs.55,33,442 paid as reimbursement to the AE for the reason that tax was not deducted at source. The DRP confirmed the addition.
19. Before us, the ld. AR submitted that the payments to AE are purely reimbursements and taxes u/s. 192B is duly deducted. In this regard, the ld. AR drew our attention to Form 16 of the seconded employee (pages 669 to 671 of PB) and the return of income of the seconded employee (pg. 676 to 691 of PB) to substantiate that the amount paid as salary to seconded employee has already suffered tax. The ld. AR further submitted that the amount paid is only reimbursement and therefore not liable to deduct tax at source. The ld. AR submitted that the Hon’ble Karnataka High Court in the case of Flipkart Internet Pvt. Ltd. v. DCIT (WP No.3619/2021) has considered the issue of TDS on reimbursement of salary cost of seconded employees in the context of issue of NIL TDS and directed that the certificate for NIL TDS be issued. It is therefore submitted that the issue under consideration being the applicability of TDS provisions on the reimbursement of salary cost of seconded employees is covered by the above decision of the jurisdictional High Court. The ld AR further relied on the decision of the coordinate bench of the Tribunal in the case of Goldman Sachs Services Pvt. Ltd. vs. DCIT [2022] 138 taxmann.com 162 (bang. – Trib.).
20. The ld DR relied on the order of the lower authorities.
21. We have heard the rival submissions and perused the material on record. We notice that the Hon’ble Karnataka High Court in the case of Flipkart Internet Pvt. Ltd (supra) while considering the issue of NIL TDS certificate towards reimbursement of salary cost held as follows:-
“33. In the present case, the stand taken on the material available is on the construction of legal position. As pointed out in the discussion earlier that the understanding of the legal position being erroneous, the only conclusion that could be arrived at is to allow the application.
34. Though the Revenue has raised numerous contentions that further information is required to record a detailed finding, such stand is taken up for the first time in the present proceedings A perusal of the file of the Department does not make out any instance where the Department had sought for further information which was not furnished On the contrary, the petitioner has made out detailed representation on the legal position and record does not reflect any requisition for further information remaining unanswered In fact, the Apex Court in GE India Technology Centre (P.) Ltd. (supra) has rightly observed at para-16 as follows:
“16. The fact that the Revenue has not obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all…”
35. Further, it must be noticed that the finding as regards deduction of tax at source under section 195 of the IT Act is tentative insofar as the Revenue is concerned Even if the Revenue orders that there was no obligation to make deduction under section 195, the question of liability of the recipient still remains to be decided subsequently Accordingly, the question of prejudice to the Revenue at the stage of section 195 order is unavailable to it
36. Curiously, the file contains a note by the same DCIT who has eventually passed the impugned order, which note dated 10.03.2020 addressed to the CIT seeks for granting approval for granting deduction of TDS at the rate of zero per cent on cost-to-cost reimbursement However, the opinion was directed to be reconsidered as per the endorsement found in the file and eventually an order was passed by DCIT contrary to the earlier view and has rejected the application
37. Accordingly, the findings in the impugned order and the conclusion regarding the employer-employee relationship is based on a wrong premise and is liable to be set aside As observed by this Court in DIT (International Taxation) v. Abbey Business Services India (P.) Ltd. [2020] 122 com 174 (Kar.), “it is also pertinent to note that the Secondment Agreement constitutes an independent contract of services in respect of employment with assessee” Hence, the DCIT in the impugned order has missed this aspect of the matter and has proceeded to consider the aspect of rendering of service as to whether it was ‘FIS’
38. In light of setting aside of the impugned order in the context of legal position as noticed, the only order that can now be passed is of one granting ‘nil tax deduction at source’.
39. Accordingly, in light of the above discussion, the impugned order at Annexure-A dated 1-5-2020 is set aside and the respondent No.1 is directed to issue a Certificate under section 195(2) of IT. Act to the effect of ‘Nil Tax education at Source’ as regards the petitioner’s application dated 15-12020.”
22. We also notice that the coordinate bench of the Tribunal in the case Goldman Sachs Services Pvt. Ltd.(supra) has considered a similar issued and held that –
“26.9 Admittedly, the assessee deducted tax at source u/s.192 of the Act, on the 100% salary paid to the seconded employees, and paid the same to the credit of the Central Government. The assessee only reimbursed part of the salary cost of the seconded employee to overseas entity that has already subjected to TDS under section 192 of the Act. And therefore, at the time of making such reimbursement, to overseas entity, no taxes were deducted at source by the assessee in respect of reimbursements made as, according to the assessee, it was in the nature of cost-to-cost reimbursement, and, no element of income was involved.
26.10 The assessee in India does the TDS on 100% salaries u/s 192 and pay the same to the credit of the Central Government. Form 16 at page 228- 230 issued to Christopher Roberts of PB Vol I, by the assessee in Indian, Certificate under section 203 of TDS having deducted at source and further indicates the following –
