Karnataka High Court Directs Income Tax Department To Issue A 'Nil Tax Deduction At Source' Certificate To Flipkart For Reimbursements Made To Walmart

Walmart had seconded employees to Flipkart in terms of a Master Service Agreement. Holding that Flipkart was the employer of the said seconded employees, the Court ruled that the reimbursements made by Flipkart to Walmart, towards the salaries paid by Walmart to the said seconded employees, were not in the nature of Fees for Included Services, in terms of the Indo-U.S. DTAA; and hence, Flipkart cannot be directed to deduct Tax at Source.

The Single Bench of Justice S. Sunil Dutt Yadav ruled that a heavy burden of adjudication cannot be placed upon an assessee before invoking the tentative determination under Section 195(2) of the Income Tax Act, if the assessee is of the view that the payment made by it is not chargeable under the Income Tax Act.

Walmart Inc. and Flipkart Singapore entered into an Inter-Company Master Services Agreement for secondment of employees and provision of services. In terms of the said Master Service Agreement, either of the parties or its affiliates could use the seconded employees.

In terms of the said Master Service Agreement, Walmart Inc. seconded four of its employees to the petitioner M/s. Flipkart Internet Private Limited (India). Walmart Inc. entered into a 'Global Assignment Arrangement' with the seconded employees, which provided that the seconded employees would work for the benefit of the petitioner Flipkart. The petitioner issued letters of appointment confirming the employment of the said seconded employees with the petitioner. Also, the said seconded employees were working in India on 'Employment VISA' wherein, the petitioner was declared to be their 'employer'.

Walmart Inc. made payment of salaries to the said deputed expatriate employees for administrative convenience. Walmart Inc. raised invoices for the said payments made by it, and the petitioner made reimbursements to Walmart Inc. With respect to such payments/reimbursements made by the petitioner, the petitioner made an application under Section 195 (2) of the Income Tax Act, 1961 to allow the remittance of cost-to-cost reimbursements made by the petitioner without deduction of tax at source and requested the Income Tax Department to grant a 'Certificate of No Deduction of Tax at Source'.

However, the said application made by the petitioner was rejected by the Deputy Commissioner of Income Tax (DCIT) and the petitioner was directed to deduct tax at source on the said reimbursements made by it. The DCIT held that there was no employer-employee relationship between M/s Flipkart Internet Private Limited (India) and the seconded employees. The DCIT ruled that the services rendered by the seconded employees were in the nature of technical services, both under the Income Tax Act and under the Indo-U.S. DTAA, and hence, the payment made by Flipkart to Walmart Inc. was in the nature of Fees for Technical Services/ Fees for Included Services, which is to be taxed on gross basis.

Against this, the petitioner filed a writ petition before the Karnataka High Court.

The petitioner Flipkart submitted before the Karnataka High Court that it is not required to deduct tax under Section 195 of Income Tax Act on the payments made by it, which were in the nature of reimbursements. The petitioner added that the 'withholding obligations' under Section 195 arise only when the 'sum paid' to the non-resident is 'chargeable to tax' under the Income Tax Act.

The petitioner argued that since Walmart Inc. is a tax resident of U.S.A., the said transaction would be governed by the provisions of the Indo - U.S. DTAA, in view of Section 90(2) of the Income Tax Act.

The petitioner averred that in view of Article 12 of the DTAA between India and U.S., the sums paid by it could not be regarded as Fees for Technical Services, and hence, there was no income that accrued to Walmart Inc. which was chargeable to tax in India.

The petitioner added that as per Article 12 of the DTAA, only those payments which are made for rendering technical or consultancy services and for making technical knowledge or experience available to the recipient, are covered within the meaning of Fees for Included Services.

Thus, the petitioner averred that any service that does not make any technology available to the person acquiring the service would not fall in the category of 'make available' and, hence, it would stand excluded from the provision of Article 12 of the DTAA.

The revenue department submitted that Section 195(2) of the Income Tax Act provides for determination of the appropriate portion of the sum that is chargeable to tax and that it does not contemplate a 'Nil deduction of tax at source'. The revenue department added that where a 'NIL Deduction Certificate' is sought for, Section 197 of the Income Tax Act must be resorted to. Therefore, the department contended that the application made by the petitioner under Section 195 (2) was not maintainable.

The revenue department averred that the said seconded employees were offered senior positions in the management of Flipkart and that such employees were assigned by Walmart Inc. to the petitioner Flipkart only because of their experience in managerial and consultancy skills, as required by the petitioner. Thus, the revenue department contended that the payments made by the petitioner ought to be construed as Fees for Technical Services, as defined in Section 9(1)(vii) of the Income Tax Act.

The department further contended that the said seconded employees remained the employees of Walmart Inc. even during the period of secondment.

The High Court observed that as per Rule 29 BA of the Income Tax Rules, 1962, an application can be made by the payer in Form No. 15E for grant of Certificate determining the portion of the sum which is chargeable to tax, in the case the payment is made to a non-resident recipient under Section 195 (2) of the Income Tax Act.

The Court further noted that as per Rule 28 of Income Tax Rules, 1962, a person can file an application in Form No. 13 for grant of a Certificate for deduction of income tax at any lower rates or for no deduction of income tax under Section 197(1) of the Income Tax Act. The Court added that Form No.13 prescribes the format of application to be made by the recipient for no deduction of tax at source or for a lower rate for deduction of tax at source.

Thus, the Court ruled that the application under Section 195 is made at the instance of the person making the payment, while the application under Section 197 is made at the instance of the recipient.

Holding that Section 197 can be invoked by the recipient, the Court rejected the contention of the revenue department that the application made by the petitioner under Section 195 (2) was not maintainable.

The Court held that the object of Section 195 (2) and Section 197 of the Income Tax Act is in the nature of a safeguard for the assessee, and is invoked by the assessee to avoid the consequences of eventually finding out, after the assessment is completed, that it ought to have made the deduction.

"Keeping in mind that the determination under Section 195(2) or under Section 197 by grant of Certificate being tentative in nature, the assessee must be permitted to invoke such provision and seek for certificate in order to avoid consequences of non-deduction as enumerated above.", the Court said.

The Court added that the assessee cannot be debarred from invoking the provisions of Section 195(2) or Section 197, if it is of the view that the payment being made is not chargeable under the Income Tax Act. The Court added that, "To place such a heavy burden of adjudication upon the assessee before invoking the tentative determination under Section 195(2), considering the nature of proceedings, may not be called for."

The Court ruled that in view of Section 90(2) of the Income Tax Act, where the provisions of the DTAA are more beneficial than the provisions of the Income Tax Act, it is the DTAA that should be followed and applied. The Court noted that the term Fees for Included Services, as defined under Article 12(4) of the DTAA, is more beneficial to the assessee with respect to his obligation to deduct tax. Thus, the Court ruled that Article 12(4) must be applied to determine whether the payment made by the petitioner to Walmart Inc. would constitute Fees for Included Services, making the petitioner liable to deduct tax.

The Court observed that in terms of Article 12(4)(b) of the DTAA, for the payment to be construed as Fees for Included Services, there must be rendering of technical or consultancy services which must make available some technical knowledge, experience, skill, know-how or processes.

The Court noted that, on the perusal of the said Master Service Agreement, the requirement of 'make available' of any technical knowledge or skill was not satisfied, and hence, the said reimbursements were not in the nature of Fees for Included Services (FIS).

"The fact that the employees seconded have "the requisite experience, skill or training capable of completing the services contemplated in Secondment" (Clause 6.2.4 of M.S.A.) by itself is insufficient to treat it as 'FIS' as has been concluded, de hors the satisfaction of 'make available.", the Court held.

The Court observed that the petitioner is an entity which was incorporated on 01.10.2012, and that it was only subsequently in 2018 that Walmart Inc. acquired majority shareholding in the petitioner Company.

The Court ruled that the petitioner was not merely acting as a back office for providing support service to Walmart Inc. and hence, Walmart cannot be treated as an employer of the seconded employees. The Court added that the petitioner issued the appointment letter to the said seconded employees who reported to the petitioner, and that the petitioner had the power to terminate the services of the said employees. Thus, the Court ruled that, for the purpose of a limited finding under Section 195 of the Income Tax Act, on the basis of the available material, it could be concluded that the petitioner was the employer.

The Court observed that in view of the judgment of the Karnataka High Court in Director of Income Tax (International Taxation) versus Abbey Business Services India (P.) Ltd. (2020), the Secondment Agreement constitutes an independent contract of services in respect of employment with an employer/assessee.

"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.", the Court held. The Court added that, "the only order that can now be passed is of one granting 'nil tax deduction at source.'"

The Court thus, set aside the order passed by DCIT and directed the DCIT to issue a Certificate under Section 195(2) of the Income Tax Act to the effect of 'Nil Tax Deduction at Source' to the petitioner Flipkart.

Case Title: M/S. Flipkart Internet Private Limited versus Deputy Commissioner Of Income Tax (International Taxation) and Ors.

Dated: 24.06.2022 (Karnataka High Court)

Citation: 2022 LiveLaw (Kar) 291 

Counsel For the Petitioner: Mr. Tarun Gulati, Senior Advocate for Mr. Kishore Kunal, Mr. Parth, Ms. Ankita Prakash & Mr. Pradeep Nayak, Advocates

Counsel for the Respondent: Mr. K.V. Aravind, Advocate

Click Here To Read/Download Order