Reimbursements for employee salaries to expatriates do not constitute FTS and should not be taxable as such under the India-Japan DTAA.

ORDER

PER ASTHA CHANDRA, JM

The appeal filed by the assessee is directed against the final assessment order dated 19.03.2022 passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the “Act”) in pursuance to the directions of Ld. Dispute Resolution Panel (“DRP”) pertaining to the Assessment Year (“AY”) 2017-18.

2. The assessee has taken the following grounds of appeal:-

“General Grounds

1. On the facts and circumstances of the ease, the assessment order passed by the Learned Assessing Officer (‘Ld. AO’) under section 143(3) r.w.s. 144C(13) of the income tax Act, 1965 (‘the Act’) pursuant to the directions of the Ld. Dispute Resolution Panel (‘Ld. DRP’) is bad in law, unlawful and unjust.

2. On the facts and circumstances of the case and in law, the Ld. AO has erred in determining the total income of the Appellant at INR 12.75.31,101 as against the returned income of INR 10,05,04,070 offered to tax by the Appellant.

Taxability of employee cost reimbursements as Fee for Technical Services ('FTS) amounting to INR 2,70,27,031

3. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP was not justified in holding that the employee cost reimbursements amounting to INR 2,70,27,031 by the Indian companies to the Appellant is taxable as FTS as per the provisions of section 9(1)(vii) of the Act as well as Article 12 of the India-Japan Double Taxation Avoidance Agreement ('DTAA').

3.1. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating that there exists an employer-employee relationship between the expatriates and the Indian Associated Enterprises (AEs) and thus, no service was rendered by the Appellant to the Indian AEs.

3.2. On the facts and circumstances of the case and in law, the Ld. AO/ DRP has erred in ignoring and not taking cognizance of documents submitted as additional evidence to substantiate the existence of employer- employee relationship between the Indian AEs and the expatriates which inter-alia included the employment contract entered into between the Indian AEs and the expatriates and thereby, erroneously concluding that no independent employment agreement was entered into between them.

3.3. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating the fact that the Appellant has not performed any specific function apart from transfer of personnel in order to support the Indian AEs and thus, there could be no FTS in the absence of any service being rendered.

3.4. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating the fact that the reimbursement amount constitutes salary which is not taxable as FTS as per the provisions of section 9(1)(vii) of the Act and Article 12 of India–Japan DTAA.

3.5. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred in not appreciating that the Indian AEs have withheld taxes under section 192 of the Act on the entire salary paid to the expatriates as evidenced by Form 16 issued to the expatriates and such expatriates have offered the entire income to taxes in their respective returns of income filed under the Act.

3.6. On the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP has erred by not appreciating that the payments made by the Indian AEs to the Appellant are pure reimbursements of the actual employee costs, without any element of income. Levy of surcharge and health and education cess on alleged FTS income

4. On the facts and circumstances of the case and in law, the Ld. AO has erred in not appreciating the fact that the Appellant is eligible to be governed by the prov