The recent decision of the Mumbai Income Tax Appellate Tribunal (“ITAT”) in the General Motors Overseas Corporation case has laid new ground in the law relating to secondments. In this update, we shall discuss the facts of the case, arguments raised before the ITAT and the implications of the decision.
FACTS
General Motors Overseas Corporation (“GMOC/the Appellant”), a USA-based corporation, is engaged in the business of providing management and consulting services to its group entities worldwide. It entered into a Management Provision Agreement (“MPA”), dated December 26, 1995, with General Motors India Limited (“GMIL”), which is engaged in the business of manufacture, assembly, marketing and sale of motor vehicles and other products in India. GMIL also entered into a separate ‘technical information and assistance agreement’ with Adam Opel AG.
1. Under the MPA, GMOC assigned two personnel to GMIL whose costs were cross-charged to GMIL without any mark-up:
- President and Managing Director (“MD”): Responsible for overall management and direction of operations.
- Vice President, Manufacturing (“VP”): Responsible for overall management of GMIL facilities to manufacture, produce and assemble products as per the standards.
2. GMOC filed an application before the Advance Ruling Authority (“AAR”) to assess its tax liability with respect to the cross charges from GMIL. The AAR held that with the available information, cross charges do not constitute fee for technical services (“FTS”). However, the concerned authorities may verify it considering detailed facts. The AAR further held that GMOC constitutes a Permanent Establishment (“PE”) in India.
3. GMOC filed its tax returns in India disclosing the cross charges as business income. During the assessment proceedings, the Assessing Officer (“AO”) asked GMOC to provide a service agreement related to the cross charge. However, GMOC did not submit the agreement. In the absence of information, the AO subjected the entire cross charge amount to tax on a gross basis. Further, the AO held that the income of the PE is to be computed as per Article 7(3) of the India – USA Tax Treaty, read with Section 44D of the Income Tax Act, 1961 (“the Act”) i.e. the computation of income from FTS is subject to domestic tax laws (Section 44D). Further that, Section 44D of the Act bars allowability of any expenses to a foreign company while computing the income from FTS.
4. In an appeal before the Commissioner of Income Tax (Appeals) (“CIT(A)”), GMOC did not get the desired relief. CIT(A) held that the services of MD do not qualify as FTS as the “make available” condition isn’t being satisfied and hence, the cross charges towards his salary / expenses remain taxable as business income. With respect to VP, the CIT(A) held that he is an experienced technical personnel and his services qualify the “make available” criterion and hence, cross charge for his services will be FTS / Fees for Included Services (“FIS”).
With the above backdrop, an appeal was filed before the ITAT.
Summary of Arguments: GMOC
- The AAR has already given a binding ruling that the services of two deputies does not qualify as FTS. Therefore, the income tax authorities and ITAT are precluded from taking contrary view.
- Revenue authorities have been examining the activities of GMOC for many years and there is no change in facts. Therefore, principal of consistency should be followed.
- No technology has been made available to GMIL. Also, “managerial” services are not covered under the scope of FIS in Article 12 of the India-US DTAA, as it covers only technical and consultancy services.
- With respect to its contentions that the income of the PE is to be taxed on net basis, it relied on Delhi ITAT in the case of Rolls Royce. Further, relying on the Mumbai ITAT in the case of Morgan Stanley it contended that the cost-to-cost cross charges leave no margins or profits to be taxed in India.
Summary of Arguments: Revenue
- GMOC didn’t submit service agreements before the AAR. The AAR in its ruling has kept it open for the concerned tax authorities to examine the factual position and take appropriate action in proceedings before them.
- The decision of AAR is not binding on the ITAT. ITAT, being the final fact-finding authority, is required to adjudicate the dispute before it. AAR’s decision relied on by GMOC is distinguishable on facts and law and not applicable to the facts of the present case.
- As per Article 7(3) of the India-US DTAA, the domestic tax law must be adhered for providing deduction for expenses in computing the income. If the domestic tax laws do not allow for the deduction for expenses, then the same will not be allowed to calculate the net profit.
