02Direct Tax

December, 2018 – Volume 102

NEWSFLASH

www.nangia.com

ITAT Delhi holds that in cases of secondment, only the markup is subject to withholding tax and not the reimbursement of actual cost

IDEXNEWSFLASHDecember, 2018 – Volume 102

ITAT Delhi holds that in cases of secondment, only the markup is subject to withholding tax and not the reimbursement of actual cost

BRIEF FACTS:

❖ DLF Projects Ltd. (hereinafter referred to as‘Assessee’ or ‘DLF’) a real estate developerhad around 17 sites and more than 800employees.

❖ During the year (‘AY’) DLF had madepayment in the nature of “reimbursement”to a Cyprus based company (‘LOR’) forsupply of manpower for a period of 3months. This reimbursement was doneafter TDS on the 5% markup charged onthe reimbursement of the salary payments.In the absence of any element of profit, inthe reimbursement of actual salarypayments, no tax was deducted by DLF onsuch reimbursements.

❖ On the other hand, LOR deducted tax u/s192 of the Income Tax Act,1961 (the ‘Act’)at the time of making the payment to theemployees.

❖ The AO did not accept the above positionand held that DLF was liable to deduct taxon the entire amount paid to LOR (salarycosts + 5% markup). He further held theamounts payable by DLF to LOR to be Feefor Technical Services (‘FTS’) under the Actas well as under Article 12 of India-CyprusDTAA.

❖ On appeal before the Commissioner ofIncome Tax (‘CIT’) held that the tax wasrequired to be deducted only on themarkup and not the actual reimbursementof salary costs.

❖ Aggreived by the ruling of the CIT, the taxauthorities filed an appeal before the ITAT.

CONTENTIONS OF THE TAX AUTHORITIES:

❖ The Department challenged the CIT(A)’sorder arguing that the CIT(A) ignored thefacts that according to the ‘Manpowersupply Agreement’, LOR is a serviceprovider. Since the services were renderedin India, the payment received by LOR wasaccrued and earned in India. Hence, TDSu/s 195 was to be deducted.

❖ The Department also argued that thenature of such payments (comprising ofboth salary and mark-up) were in nature ofFTS under the Act as well as under Article12 of India-Cyprus DTAA. Therefore,Assessee should have deducted TDS on theentire payment and not only on the mark-up.

ASSESSEE’S CONTENTIONS:

❖ The Assessee contended that the copies ofInvoices and journal vouchers showed thatthe markup component had beenseparately mentioned and on this amountTDS was duly deducted. Since, the actualcost was in the nature of reimbursementdevoid of any element of profit, there wasno requirement to withhold taxes on thesame under section 195.

❖ TDS u/s 192 was duly deducted onpayment of salaries to secondedemployees, and ultimately there is no lossof revenue to the tax authorities.

❖ That, the employees so seconded wereunder the full control and supervision ofDLF.

IDEXNEWSFLASHDecember, 2018 – Volume 102

LOR had merely supplied employees on secondment for execution of the project of DLF, with noresponsibility of services rendered by such employees. The non-resident LOR Cyprus had onlysupplied manpower to DLF and was not a case of ‘making available’ any technical knowledge,experience, skill, know-how or process. In the absence of satisfaction of the make availablecondition, the position of FTS could not hold good.

ITAT’S ORDER:

❖ ITAT upheld the CIT(A)’s order and has held that it is only the mark-up which is liable towithholding tax u/s 195 and not the reimbursement of actual cost to LOR.

❖ Since, the payments had been charged to tax in India u/s 192 by LOR, the assessee could not betreated as assessee in default for non-deduction of TDS.

NANGIA’S TAKE:

This is a welcome judgement of Delhi Tribunal favourable to the taxpayers, wherein it has beenheld that only the markup under manpower supply agreement is subject to withholding tax andnot the actual cost/reimbursement for secondment. This decision again reiterates and approvesthe well settled principle that TDS liability can be fastened only in respect of those payments,which have an element of income and not on pure reimbursements without any element ofincome.

The case also included some other grounds/ issues but the same are not being considered for thepurpose of this newsflash.

ABOUT US

Nangia Advisors LLP is a premier professional services organization offering a diverse range of Taxation,

Transaction Advisory and Business Consulting services. Nangia Advisors LLP has presence currently in Noida,

Delhi, Gurgoan, Mumbai, Dehradun and Singapore.

Quality of our people is the cornerstone of our ability to serve our clients. For this reason, we invest tremendous

resources in identifying exceptional people, developing their skills, and creating an environment that fosters their

growth as leaders. From our newest staff members through senior partners, exceptional client service represents a

dedication to going above and beyond expectations in every working relationship.

We strive to develop a detailed understanding of our clients’ business and industry sector to offer insights on market

developments and assist our clients develop effective strategies and business models. We have the resources and

experience necessary to anticipate and competently serve our clients on issues pertaining to all facets of Tax and

Transaction Advisory. We take pride in our ability to provide definite advice to our clients with the shortest turnaround

time. The business and tax landscapes have changed dramatically, and the pace and complexity of change

continues to increase. We can assist you navigate this shifting landscape.

NOIDAA-109,Sector-136,

Noida (Delhi- NCR)

201304,

INDIA

OUR OFFICES

DELHIB-27, Soami Nagar,

New Delhi – 110017,

INDIA

MUMBAI11th Floor, B Wing, Peninsula

Business Park, Ganpatrao

Kadam Marg, Lower Parel,

Mumbai – 400 013. INDIA

DEHRADUNFirst Floor, “IDA”

46 E. C. Road,

Dehradun – 248001,

Uttarakhand.

INDIA

SINGAPORE24 Raffles Place,

#25-04A, Clifford

Centre,

Singapore - 048621

Copyright © 2018, Nangia Advisors LLP All rights reserved. The Information provided in this document is provided for

information purpose only, and should not be construed as legal advice on any subject matter. No recipients of content from

this document, client or otherwise, should act or refrain from acting on the basis of any content included in the document

without seeking the appropriate legal or professional advice on the particular facts and circumstances at issue. The Firm

expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this document.

GURGOAN812-814, Tower B,

Emaar Digital Greens

Sector 61, Gurgaon,

Haryana- 122102