Karnataka High Court

The Deputy Commissioner Of Income Tax vs M/S Flipkart Internet Pvt Ltd on 12 February, 2025

Author: Krishna S Dixit

Bench: Krishna S Dixit

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                                                           WA No. 992 of 2023




                   IN THE HIGH COURT OF KARNATAKA AT BENGALURU
                        DATED THIS THE 12TH DAY OF FEBRUARY, 2025
                                          PRESENT
                         THE HON'BLE MR JUSTICE KRISHNA S DIXIT
                                             AND
                          THE HON'BLE MR JUSTICE G BASAVARAJA
                           WRIT APPEAL NO. 992 OF 2023 (T-IT)
                   BETWEEN:

                   1.   THE DEPUTY COMMISSIONER OF INCOME TAX
                        (INTERNATIONAL TAXATION)
                        CIRCLE-1(1), ROOM NO. 441,
                        4TH FLOOR, BMTC BUILDING,
                        80 FEET ROAD, KORAMANGALA,
                        BENGALURU-560 095.

                   2.   THE COMMISSIONER OF INCOME TAX-1
                        (INTERNATIONAL TAXATION)
                        4TH FLOOR, BMTC BUILDING,
                        80 FEET ROAD, KORAMANGALA,
                        BENGALURU-560 095.

Digitally signed   3.   THE JOINT COMMISSIONER OF INCOME TAX-1
by SHARADA              C.R. BUILDING NO. 1, QUEEN'S ROAD,
VANI B                  BENGALURU-560 001.
Location:
HIGH COURT         4.   CENTRAL BOARD OF DIRECT TAXES
OF
KARNATAKA               THROUGH THE SECRETARY,
                        DEPARTMENT OF REVENUE,
                        MINISTRY OF FINANCE,
                        GOVERNMENT OF KARNATAKA
                        CENTRAL SECRETARIAT, NORTH BLOCK,
                        NEW DELHI-110 001.
                                                                 ...APPELLANTS
                   (BY SRI. RAVI RAJ Y V., ADVOCATE AND
                       SRI. M DILIP.,ADVOCATE)
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                                             WA No. 992 of 2023



AND:

M/S FLIPKART INTERNET PVT LTD.,
ALYASSA, BEGONIA AND CLOVER
EMBASSY TECH VILLAGE,
OUTER RING ROAD,
DEVARABEESANAHALLI VILLAGE,
BANGALORE-560 103.
THROUGH ITS AUTHORISED SIGNATORY
MS. NEHA AGARWAL.
                                                     ...RESPONDENT

(BY SRI.TARUN GULATI., SENIOR COUNSEL A/W SRI.KISHORE KUNAL.,ADVOCATE AND SRI.PRADEEP NAYAK., ADVOCATE)

THIS WRIT APPEAL FILED U/S 4 OF THE KARNATAKA HIGH COURT ACT PRAYING TO A) SET ASIDE THE ORDER PASSED BY THE LEARNED SINGLE JUDGE IN WP NO.3619/2021 DATED 24/06/2022 AND B) PASS SUCH OTHER SUITABLE ORDERS.

THIS WRIT APPEAL, COMING ON FOR ORDERS THIS DAY, JUDGMENT WAS DELIVERED THEREIN AS UNDER:

CORAM: HON'BLE MR JUSTICE KRISHNA S DIXIT AND HON'BLE MR JUSTICE G BASAVARAJA

ORAL JUDGEMENT

(PER: HON'BLE MR JUSTICE KRISHNA S DIXIT)

In this Intra Court Appeal, Revenue seeks to lay a

challenge to a learned Single Judge's order dated

24.06.2022 whereby Respondent - Asseessee's

W.P.No.3619/2021 (T-IT) having been favoured, the

following relief has been granted:

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"39. Accordingly, in light of the above discussion, the impugned order at Annexure-A dated 01.05.2020 is set aside and the respondent No.1 is directed to issue a Certificate under Section195(2) of I.T.Act to the effect of 'Nil Tax Deduction at Source' as regards the petitioner's application dated 15.01.2020."

2. FACTS IN BRIEF:

2.1 Assessee, an Indian Company is a subsidiary of

a foreign entity in Singapore. The said foreign entity had

entered into Inter Company Master Service Agreement

with Holding Company Walmart Inc, Delaware, which is a

USA entity. This US entity provides services to various

affiliates across the globe pursuant to Master Service

Agreement and accordingly the Walmart seconded its

employees to the Assessee Company. For the seconded

service, the Assessee - company having deducted the TDS

remitted the salary amount to the US entity by way of

reimbursement.

2.2 The Assessing Officer having examined the

nature of services rendered by the seconded employees to

the Assessee-Company in the light of Double Taxation

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Avoiding Agreement under the shadow of Income Tax Act,

1961 concluded that the employer-employee relationship

between the seconded employees and the US entity

continued and therefore, the amount earned as income by

the foreign entity in India is liable for levy of tax under

Section 195 of the 1961 Act, the said income not being the

salary reimbursement of the employees concerned.

2.3 The Assessing Officer recorded the finding that

the services rendered by the seconded employees would

fall within the precincts of Section 9(1)(vii) of the 1961 Act

and that the payment made by the Assessee-Company is

towards consideration for the technical services rendered

by the foreign entity. The said amount being income

earned in India was held liable to be taxed and

consequently, Assessee-Company's application filed u/s

195(2) of the Act came to be negatived by the Assessing

Officer vide order dated 01.05.2020. This being challenged

in the subject WP, the Assessee-Company has earned the

impugned order, now put at our hand for examination.

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3. Learned Sr. Panel Counsel appearing for the

Appellant submits that the rejection of Assessee-

Company's application u/s 195(2) could not have been

faltered by the learned Single Judge; the Rulings relied

upon by the Assessee-Company before the learned Single

Judge were not applicable to his case; the very Form

N.15E & Form No.13 reproduced by the learned Single

Judge would demonstrate that application u/s 195 was for

determination for appropriate proportion of sum payable to

non-resident, chargeable to tax in the case of recipient; it

was a plain case of payment made by the Assessee-

Company to the non-resident was for availing the services

of technical or other personnel and that the same would

fall within the ambit of fee for such technical services in

terms of Section 9(1)(vii) of the 1961 Act and Article 12(4)

of DTAA.

4. Learned Sr. Advocate Mr. Tarun Gulati

appearing for the Assessee-Company resisted the Appeal

by making submission in justification of the impugned

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order and the reasoning of the learned Single Judge. He

contends that his client was not required to deduct tax u/s

195 of the 1961 Act on payments made to a foreign entity

towards reimbursement of salaries paid to the seconded

employees; Article 12 of DTAA sums paid from being

regarded as fee for Technical Services and thus, there was

no income earned by Walmart Inc., from taxing in India;

whatever payment the Assessee-Company has made to

the foreign entity is only the actual cost of salaries of

seconded employees and there is no "mark-up" retained

by foreign entity namely Walmart Inc., on such costs; once

such payments are demonstrably salaries, the same would

fall outside the purview of FIS-fees for included service or

FTS - fees for technical service. He draws our attention

to certain terms of DTAA and Clause 3.1 of MSA.

5. Having heard the learned counsel for the parties

and having perused the Appeal papers, we decline

indulgence in the matter for the following reasons:

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5.1 This being an Intra-Court Appeal, it has its own

conventional constraints. The Appellant has to show not

only that the impugned judgement is wrong but it is

unsustainable. One of the main grounds urged in the

Appeal is as to a Coordinate Bench decision in DIRECTOR

OF INCOME TAX (INTERNATIONAL TAXATION) v.

ABBEY BUSINESS SERVICES INDIA (P) LTD.,1 which

the learned Single Judge has heavily banked upon, in

holding that the Secondment Agreement constitutes an

independent contract of service qua the Assessee; it is also

stated that the review was filed against the same before

the said Bench. Now we are told that the contention of the

Revenue having been rejected, the review has been

negatived by the Coordinate Bench. As a consequence,

law has to be treated as having been rightly declared in

ABBEY supra and therefore, the reasoning of the learned

Single Judge founded on that basis cannot be faltered on

the grounds urged in the Appeal, in that regard.

[2020] 122 Taxmann.com 174 (Kar)

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5.2 The vehement submission of learned Sr. Panel

Counsel that there is absolutely no material evidence to

demonstrate that their existed a vinculum juris of

employer-employee between the Assessee-Company and

the seconded employees and therefore, whatever payment

made to their employer namely, Walmart Inc., cannot be

treated as reimbursement of salary, is bit difficult to

countenance and reasons for this are not far to seek. The

Assessee - company had entered into a MSA with Walmart

Inc., for secondment of employees, in terms of which

either of the parties thereto could use the services of

seconded employees. Clause (2) of MSA provides that the

Company placing the secondees will inter alia invoice the

compensation and the wage cost of secondees incurred in

the Home Country. Out of the two distinct parts in the

MSA, one relates to secondment of employees.

Accordingly, the Wallmart Inc., had seconded four

employees to the Assessee - Company by virtual of Global

Work Assignment with those very employees who would

work for the Assessee-Company. Even the appointment

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letters have been issued to these seconded employees

with material particulars of Job Chart & other details such

as, contribution to Provident Fund, procurement of

Employment Visa. There are all indicia of employer-

employee relationship between the Assessee-Company and

the seconded employees.

5.3 The next contention of the learned Sr. Panel

Counsel that the payments made by the Assessee-

Company directly to the Walmart Inc., in USA is not

towards reimbursement of the salary & emoluments of

seconded employees again is difficult to countenance. The

Assessee-Company had made an application at Annexure-

G to the WP u/s 195(2) of the 1961 Act requesting for

allowing the remittance to the Walmart Inc., on cost to

cost reimbursement, without deduction of tax at source,

specifically mentioning DTAA whereunder the income

earned by a non-resident in India which otherwise is

taxable can be exempted from levy, inasmuch as levy

would amount to double taxation. However, the said

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application came to be rejected directing TDS. This,

learned Single Judge has faltered inasmuch as, in the light

of GE INDIA TECHNOLOGY CENTRE PREIVATE

LIMITED v. CIT2, Section 195(1) & 195(2) have to be

read together and that the payer who considers that no

withholding obligations do arise in this case u/s 195(1) as

to apply u/s 195(2) of the 1961 Act seeking determination

of his tax liability. Therefore, the application could not

have been negatived inter alia on the ground of

maintainability, even if the entire sum so paid was not

taxable vide TRANSMISSION CORPORATION OF A.P.

LTD., v CIT3. Learned Single Judge has rightly observed

that application u/s 197(2) has to be made by the recipient

whereas, the application u/s 195(2) has to be by the

payer. A Coordinate Bench of this Court in CIT v. BOVIS

LEND LEASE (INDIA) (P.) LTD.4, has held that Section

195(2) application is maintainable even if the entire sum is

(2010) 10 SCC 29

(1999) 239 ITR 587 (SC)

(2012) 208 Taxman 168 (Kar)

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not taxable and that Section 195 is not applicable to gross

receipts inasmuch as, it employs the term "any other sum

chargeable under the provisions of this Act" which aspect

has been discussed by GE INDIA supra. Therefore, the

direction issue the Certificate perfectly accords with the

law.

5.4 The contention of the Revenue that the

payments made by the Assessee-Company to Walmart

Inc., do qualify as FTS and therefore would be chargeable

to tax as FTS or FIS rendered by Walmart Inc., to

Assessee-Company, is liable to be rejected since Walmart

Inc., is a tax resident of USA and therefore, the disputed

transaction shall be governed by the provisions of India-US

DTAA which has legal cognition u/s 90(2); Explanation 2 to

Section 9(1)(vii) of the 1961 Act is not attracted. Learned

Sr. Advocate Mr.Gulati appearing for the Assessee is right

in contending that in terms of Article 12 of India-US DTAA,

only those payments which are made for (a) rendering

technical or consultancy services and (b) making the

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technical knowledge, experience, skill, know-how etc.,

available to the recipient, are covered within the meaning

of FIS. An income can be charged to tax as FIS only if it is

a service of technical or managerial nature and the service

provider makes the services available to the Recipient. The

expression 'make available' as employed in DTAA has been

construed in a particular way. In CIT v. DE BEERS INDIA

PVT. LTD.5, a Coordinate Bench has held that a

technology will be considered to be "made available" only

when the person requiring the service is enabled to apply

for the same on his own resulting in some enduring benefit

and that mere existence of the provision of the service by

technical expert, would not mean that the same has been

"made available" to the recipient.

5.5 Learned counsel for the Assessee is justified in

telling us that in the light of Protocol to the India-US

DTAA, what payment would constitute FIS i.e., "fee for

included service", has been illustrated as under:

(2012) 346 ITR 467 (Kar)

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"a. It is made for rendering technical or consultancy services;

b. Said services must make available any technical knowledge, know-how, plan, training, skill, design or process to the recipient;

c. The recipient is enabled to use the aforementioned knowledge, know-how, plan, etc., in future independently, without support from the service provider. This means that the knowledge gained must be enduring in nature;

d. There should be an actual transfer of technical knowledge, plan, know-how, etc., from the service provider to the recipient. Mere technical nature of the services rendered would not qualify the "make available" clause of the India-US DTAA;

e. Day-to-day functions of the employees, not qualifying the above conditions, cannot be considered as "making available" of technical knowledge."

The contention of the Revenue that the Assessee had failed

to place all the material to demonstrate the kind of

services rendered by the seconded employees were not

made available and that they were not requisitioned for

the purpose of training the regular employees of the

Assessee, is too farfetched to gain acceptance. So is the

submission that in the course of training, there would be

transmission of technical knowledge, experience, skill,

know-how and that would satisfy the requirement of

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"make available". If that idea was lurking in the mind of

the Assessing Officer, he could have called for such

information from the sources that be.

5.6 The last contention of the Revenue that as to

absence of power to terminate the services of the

seconded employees, falsifies the existence of employer-

employee relationship between the Assessee and the

seconded employees, is liable to be rejected in view of

what emerges from the perusal of MSA obtaining between

the Assessee-Company and Walmart Inc. The terms are as

under:

"a. the seconded employees, while on secondment, work for and on behalf and for the benefits of the Respondent;

b. in terms of Clause 3.1 of the MSA, the Respondent is authorized to terminate the services of seconded employees in India whereas, Walmart may decide to continue their services with Walmart in US after the termination of their secondment in India;

c. the seconded employees do not report to Walmart Inc. for their work but undertake the work on behalf of the Respondent and are answerable to the employees of the Respondent who supervise and instruct them on the work performed during the secondment period;

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d. the Respondent has the authority to take disciplinary actions against the seconded employees;

e. the seconded employees have the right to legal recourse against the Respondent in relation to payment of their salaries, terms of employment, etc., during the secondment period;

f. the seconded employees are also subject to the same working rules, labour regulations and other internal policies of the responsible as is applicable to the domestic employees;

g. the seconded employees will also be subject to deduction under Section 192 of the Act and provident fund on the salaries and benefits of such seconded employees are paid by the Respondent."

5.7 We have to keep in mind that arrangements of

the kind do obtain in a shrunk globe and that all indicia of

employer-employee relationship, which ordinarily obtain in

the native Service/Industrial Jurisprudence cannot be

expected in the realm of international business of the kind.

If Triple Test namely (i) Direct Control, (ii) Supervision &

(iii) Direction, is satisfied vide ABBEY BUSINESS supra, a

strong case is made out as to the existence of employer-

employee relationship, the absence of a few indicia

notwithstanding. An argument to the contrary would

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