B.R. BASKARAN, ACCOUNTANT MEMBER 
AND AMIT SHUKLA, JUDICIAL MEMBER

ORDER

Amit Shukla, Judicial Member - The aforesaid appeal has been preferred by the assessee against order dated 29.7.2011, passed by the ld. CIT(A)-11, Mumbai for the quantum of assessment passed u/s 143(3) for the assessment year 2005-06 on the following grounds :

"1.	On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) ["the CIT (A)"] has legally erred in confirming the action of the learned Assessing Officer ("the AO") of holding that the Appellant has rendered services to the Indian Companies viz. Morgan Stanley Advantage Services Private Limited -and MSIM Global Support and Technology Services Private Limited.
2.	On the facts and in the circumstances of the case, the learned the CIT (A) has legally erred in confirming the action of the learned the AO of treating the reimbursement of salary cost received by the Appellant as Fees for Technical Services under the provisions of Section 9(1) (vii) of the Income-tax Act, 1961 ('the Act').
3.	Without prejudice to the above Grounds, on the facts and in the circumstances of the case, the learned CIT (A) has legally erred in confirming the action of the learned AO of treating the reimbursement of salary cost received by the Appellant as Fees for Included Services under Article 12 of the Double Tax Avoidance Agreement between India and USA.
4.	Without prejudice to the above Grounds, on the facts and in the circumstances of the case, the learned CIT (A) has legally erred in not passing a speaking order/ reasoned order in holding the reimbursement of salary cost received by the Appellant as Fees for Included Services under the Article 12 of the Double Tax Avoidance Agreement between India and USA."

2. The brief facts qua the issue raised are that, the assessee company, M/s Morgan Stanley International Incorporated, is resident of USA and it is a 100% subsidiary of M/s Morgan Stanley USA. Its primary activity is to provide support services to various subsidiaries all over the world and in India. In the relevant previous year, the assessee had entered into an agreement with M/s J M Morgan Stanley Securities Private Limited, an Indian Company for providing support services. The Assessing Officer noted that during the year, the assessee has received certain payments on account of salary to the assessee's employees who were deputed to Indian subsidiaries, M/s Morgan Stanley Advantages Services Pvt. Ltd (MSASPL) and M/s MISM Global Support and Technology Services Pvt Ltd. (GSTSPL). He further noted that, following party wise receipts and tax withholdings was reported by the assessee :—

Name of the party	Amount	Tax Withhold	Taxability
M/s J M Morgan Stanley Securities Private Limited	Rs.6,30,22,098	Rs.95,29,168	Offered for tax as FIS
M/s Morgan Stanley Advantages Services Pvt. Ltd	Rs.4,46,66,994/-	Rs.66,41,000/-	Not taxable as it is reimbursement of expenses
M/s MISM Global Support and Technology Services Pvt Ltd	Rs.2,00,63,673/-	Rs.30,13,000	Not taxable as it is reimbursement of expenses
total	Rs.12,77,52,765/-	Rs.1,91,83,168/-

In this year, the assessee has seconded five of its employees to two of its subsidiary in India as per the Secondment Letter. Their work profile and details of salary paid to them were as under : —

Name of the employers	Name of the employees	Work profile	Salary as per form No.16
Mr.Bhavin Doshi	M/s MISM Global Support and Technology Services Pvt Ltd	Over all management and day to day supervision of IT Team	Rs.2,03,72,379/-
Mr.Ranjit Sharma	M/s Morgan Stanley Advantages Services Pvt. Ltd	Information technology	Rs.3,01,10,271/-
Mr.Timothy Mc Coy	M/s Morgan Stanley Advantages Services Pvt. Ltd	fixed income division	Rs.80,49,854/-
Mr.Michael E Mc Connell	M/s Morgan Stanley Advantages Services Pvt. Ltd	Information technology	Rs.26,63,399/-
Mr.Ketan Parekh	M/s Morgan Stanley Advantages Services Pvt. Ltd	Equity fund services	Rs.1,04,52,210/-
		total salary	Rs.7,16,48,413

2.1 The assessee's case before the assessing officer was that, it has made payment of salary after deduction of tax at source u/s 192 to the employees deputed in India. Such a payment of salary was made on behalf of its Indian subsidiaries, only for administrative convenience and the same amount was reimbursed by the subsidiary companies without any mark-up. Since the payment received was on account of reimbursement of expenses, hence it is not taxable in India as there is no element of income on such a reimbursement . The assessee also filed secondment /deputation letter relating to said employees, who were seconded to India for rendering services for the Indian companies. In the said letter it was mentioned that, the employees would be working under the supervision and control of the Board of Directors of the subsidiary companies in India and day to day responsibility would be managed by the Indian company, and they will be accountable only to them. The assessee had also filed copy of debit notes raised by the assessee on the Indian company for the reimbursement of salary cost and also copy of remittance certificate for the remittance of salary. The assessee also produced the copies of Form No.16 and certificate of TDS deducted u/s 192 on such salary paid. However, the AO did not accept the assessee's contention that the payment made on account of reimbursement of salary is not taxable in India. His main reasoning were :-

(a)		Firstly, the employees have been deputed to India who are highly qualified and technical persons, offering special services to the Indian subsidiaries in the designated areas of work for which they are expected to utilize in India. The nature of services offered by the employees have to be understood in broad terms as there is no secondment agreement between the two parties to this effect.
(b)		Secondly, though the employees have been deputed in India and required to work under the general supervision and control of Indian companies, however, the assessee is responsible for the review, discipline, promotion, appraisal and all other HR and administrative matters of the deputed persons.
(c)		Thirdly, the assessee is providing consultancy services to the Indian companies, as its main business activity is to provide support service to its subsidiaries. Thus, the real business of the assessee is to provide managerial and consultancy services, which is nothing but 'Fee for Technical Services' (FTS);
(d)		Lastly, there is no one to one co-relation between the salary payment and the amount of remittance paid to the assessee.

For these reasons, the AO held that the consideration received by the assessee is for the services provided by the deputed persons to the Indian subsidiaries is taxable as FTS under the domestic law, i.e. 9(1)(vii). Even under Article 12(4) of India-US. DTAA, the consideration received for rendering of technical services in India is taxable in India as these services given by deputed employees, make available technical knowledge, experience, skill, know-how etc. Thus, the payment received by the assessee for rendering the services through its employees are taxable in India as per the provisions of DTAA, being in the nature of 'Fees for Included Services' (FIS). Accordingly, he added the entire amount of reimbursement of salary received by the assessee for sums aggregating to Rs.6,47,30,667/- as FIS.

3. Before the ld. CIT(A), the assessee's main contention was that, it has not rendered any services to the Indian companies, but has merely deputed its employees to the Indian company on the condition that they will be working under the supervision and control of the Indian company. As per the terms of secondment letter and understanding, the assessee would pay salary to these expatriates and same amount would be reimbursed to the assessee. In support of this contention reliance was placed on the decision of ITAT, Mumbai Special Bench in the case of Mahindra & Mahindra Ltd v. Dy. CIT [2009] 313 ITR (AT) 263 . The relevant submissions as well as the synopsis of the decisions relied upon by the assessee been incorporated by the ld. CIT(A) from pages 4 to 9 of the appellate order. The ld. CIT(A) on perusal of the copy of income tax returns filed in India by the two of the employees i.e. Mr.Bhavin Doshi and Mr.Timothy Mc Coy, noticed that there is some discrepancy in the figures given in the remittance of salary reimbursed and the salary income shown by them in their return of income filed in India. Though the assessee explained the difference between remittance and salary income, however, the ld. CIT(A) was not convinced. After analyzing the various decisions as relied upon by the assessee, Ld. CIT(A) observed that they are not applicable to the facts and circumstances of the case and held that the AO has rightly treated the said income taxable as FIS under India US DTAA and also u/s 9(1)(vii). The relevant portion of ld. CIT(A)'s finding is as under :

"3.11. Considering all the above and since, the assessee has failed to demonstrate with evidence that the cost incurred by the foreign company has been reimbursed by the Indian companies 'as such' and that there is no secondment agreement, and that the Indian company cannot remove the employees deputed to India, I am of the view that this is not a case of reimbursement of cost simplicitor. Considering the nature of the job performed by the deputed persons and also the discussion made by A.O. I am of the opinion that this is a case of providing technical services in terms of Article 12 of India-US DTAA and Section 9(1)(vii) of the Income-tax Act, 1961 and the sum remitted is 'fees for technical services'. Therefore, the order of the A.O. is upheld and appeal is dismissed".

4. Before us, the ld. Sr.Counsel, Shri Arvind Sonde after explaining the entire facts of the issue involved, first of all pointed out to the letters of the secondment of the employees and submitted that in the said letter, terms and conditions have been clearly mentioned that the employees have been sent to India for rendering the services for the Indian companies, and they would be under complete supervision and control of Board of the Directors of the Indian companies. The day to day responsibility and activities would be supervised by the Indian Companies only and the employees are answerable for their services to them. The entire payment of salary is borne by the assessee company and on such payment of salary, TDS u/s 192 has been deducted and also deposited in the Indian Government account. The entire salary has been reimbursed by the Indian company to the assessee in terms of secondment letter, which has been treated as taxable in India as FIS. He also invited our attention to the TDS certificates and the details of TDS deducted which have been placed in the paper book. He categorically drew our attention to the certificate issued by S R Batliboy and Co., wherein the detail reasons were given as to why the remittance of Salary cannot be taxed, either as "Royalty' or as "Fees for Included Services" in terms of relevant clause of DTAA. The opinion and the remark appearing in such certificate which is very relevant for understanding the issue involved, is reproduced hereunder :—

"MSTT is a company incorporated in USA. As per section 90(2) of the Act, where an assessee is a resident of a country with whom India has entered into a tax treaty, the provisions of the tax treaty or the Act, whichever is more beneficial to the assessee will apply. Therefore, the provisions of the Double Taxation Avoidance Agreement between Indian and USA (DTAA) will apply to MSTT.

During the financial year ending on March 31, 2005, MSTT has deputed employees to MSAS to work under the supervision and control of MSAS. Further, MSAS proposed to reimburse the salary cost of the deputed employees to MSTT.

Article 12 of the DTAA deals with the taxation of "fees for included services "(FIS) under the DTAA, FIS will be taxed in India at 15% on a gross basis, provided that such payments are in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which, interalia make available technical knowledge., experience, skill, know how or process or consist of the development and transfer of a technical plan or technical design It is represented to us that the deputed employees do not render services which should quality as FIS under Article 12 of the DTAA.

The Supreme Court Of India has in the case of Director Of Income-Tax (International Taxation) V/s Morgan Stanley & Co. has held that a permanent establishment (PE) of the overseas entity is constituted in India on account of deputing its employees to an Indian entity. Further, the Supreme Court held that where the PE, being the Indian entity, is remunerated on an arm's length basis taking into account all the functions and risks undertaken by the PE, there is no further need to attributing profits to the PE.
In this regard, based on the Supreme Court ruling a PE of MSII should be constituted in India on account of deputing employees to MSAS.

Based on discussions with the management, we understand that MSAS is remunerated on an arm's length basis, taking into account the risks assumed and factions performed by MSAS. Accordingly, based on the Supreme Court ruling, no further attribution to the PE of MSII, being MSAS is required. Given the above and as the payment of MSII represents pure reimbursement of costs, it may be contended that the payment to MSII should not be regarded as MSII's income and accordingly, the same is not taxable in India.

However, on a conservative basis, tax has been withheld at the rate of 15% of the gross payments as prescribed under Article 12 of the DTAA"

Shri Arvind Sonde, further pointed out that, in the case of M/s Morgan Stanley, UK and M/s Morgaon Stanley Singapore for the same assessment year, similar reimbursement of salary received for the deputed employees has not been treated as income taxable in India either as FTS or as FIS. The copy of the said assessment orders passed u/s 143(3) have been placed in paper book at pages 24 and 25. He submitted that even, the ld. CIT(A) has not given any proper reasons, as to how the payment is treated as FIS within the scope of Article 12(4) of the DTAA. Since the assessee has claimed benefit under treaty, therefore, provisions of section 9(1)(vii) would not apply. He further submitted that the amount received by the assessee is towards reimbursement of salary cost and does not involve any element of income. The reimbursement is cost recharge arising out of expenditure incurred by one person on behalf of the another and not for provision of services. There is no specific provision for taxing the reimbursement. In support of this contention, he strongly relied upon the decision of jurisdictional High Court in the case of CIT v. Siemens Aktiongesellschaft [2009] 310 ITR 320 (Bom). The second limb of his argument was that even under the domestic law the reimbursement of the salary cost cannot be taxed as FTS u/s 9(1)(vii) as for being taxed under the said section, the fees or royalty has to have character of income, which here in this case, there is no income to the assessee. He submitted that the Transfer Pricing Officer to whom matter was referred by the AO, in his order for the same assessment year has accepted the reimbursement of cost at Arm's length and no adverse inference has been drawn. Regarding allegations of the AO that, there is no secondment agreement, he submitted that all his observations are wholly incorrect, as the secondment letter (placed in the paper book) clearly shows that there is a proposal and acceptance and it duly describes the terms and conditions. For the proposition that such a reimbursement of salary of the seconded employees is not taxable as FIS, he relied upon the decision of ITAT, Mumbai Bench in the case of Temasek Holdings Advisors (I) (P.) Ltd. v. Dy. CIT [2013] 38 taxmann.com 80/60 SOT 134 (URO) and catena of other decision which are as under :

(a)	ITO v. AON Specialist Services (P.) Ltd. [2014] 64 SOT 78/43 taxmann.com 286 (Bang.).
(b)	DIT v. HCL Infosystems Ltd. [2005] 274 ITR 261/144 Taxman 492 (Delhi) Upheld ITAT decision in the case of HCL Infosystems Ltd. v. Dy. CIT [2002] 76 TTJ 505 (Delhi)
(c)	CIT v. Karlstorz Endoscopy India (P.) Ltd. [IT Appeal No. 2929 (Delhi) of 2009]
(d)	Abbey Business services India (P.) Ltd. v. Dy. CIT [2012] 53 SOT 401/23 taxmann.com 346 (Bang)
(e)	Asstt. CIT v. CMS (India) Operations & Maintenance Co. (P.) Ltd [2012] 135 ITD 386/19 taxmann.com 139 (Chennai)
(f)	ITO v. Ariba Technologies (India) (P.) Ltd. [IT Appeal No.616 (Bang.) of 2011]
(g)	IDS Software Solutions (India) (P.) Ltd. v. ITO [International Taxation] [2009] [2009] 32 SOT 25 (Bang.) (URO)
(h)	Cholamandalam MS General Insurance Co.Ltd., In re [2009] 309 ITR 356/178 Taxman 100 (AAR - New Delhi )
(i)	Dy. DIT v. Tekmark Global Solutions LLC [2010] 38 SOT 7 (Mum)

5. Shri Arvind Sonde, further argued that by deputing employees to the Indian Companies, the assessee has not rendered any service nor has made available any kind of technical knowledge , experience, skill, know how etc. These employees deputed to the India, were under direct control and supervision of the Indian company and it cannot be said that the assessee company has rendered any direct or indirect services to the Indian company through employees. Such reimbursement of salary cost does not quality as FIS, in terms of as per Article 12 (4)of India-US DTAA. He draw our attention to the 'make available clause' as given in Article 12(4). Lastly, without prejudice he submitted that, if the seconded employees are to be treated as employees of assessee working in India for the assessee and the payment received is taxable income in India, then it has to be seen from the angle that the seconded employees will constitute Service PE of the assessee in India and therefore, the taxability of the income shall be governed by Article 7 and not Article 12 and in such cases there would be no tax payable, because assessee would be entitled to deduction of the expenditure incurred on salary and on which proper deduction of tax u/s 192 has already been deducted. Thus, from all the angles, reimbursement of salary cost cannot be taxed in India as FIS.

6. On the other hand, the ld. DR strongly relied upon the observations and finding of the AO and CIT(A) and further submitted that, these employees were highly qualified personnels having technical skills and experience to render services to the Indian company in India. Since, the assessee is in the business of rendering support services and therefore, it was through these employees, the assessee has rendered services to the Indian companies, which has to be taxed as FIS under Article 12 of the treaty. In support of his contention, he strongly relied upon the decision of Authority For Advance Ruling (Income Tax), New Delhi Target Corpn. India (P.) Ltd., IN RE [2012] 348 ITR 61/209 Taxman 601/24 taxmann.com 152 And Authority For Advance Rulings (Income-Tax), New Delhi in Verizon Data Services India (P.) Ltd., In re* [2011] 337 ITR 192/199 Taxman 242/11 taxmann.com 177 (AAR - New Delhi). In all these cases, similar issues were involved, whereby seconded employees under the secondment agreement, were deputed and sent to the Indian company for rendering services and their reimbursement of salary was held to be taxable as FIS under similar Article 12(4) of the DTAA. Thus, the amount received by the assessee as reimbursement is nothing but FIS on account of make available clause and has rightly been taxed under Article 12(4) of DTAA in India.

7. After hearing of the case, it came to our notice that, the Hon'ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd. v. CIT, [2014] 364 ITR 336/224 Taxman 122/44 taxmann.com 300, while interpreting Article 13 of India-UK-DTAA and Article 12 of India-Canada-DTAA, on similar kind of transaction has held that secondment of employees of overseas entities who have been paid salary by the overseas entity and reimbursed to the assessee company by the Indian company was held to be payment for technical services within the meaning of FIS clause and also under make available clause of Article 12. For the purpose of clarification, the case was re-fixed for seeking comments of both the parties. The ld. Sr.Counsel, Shri Arvind Sonde submitted that there was an earlier decision of the Hon'ble Delhi High Court in the case of HCL Infosystem Ltd. (supra), wherein this issue of reimbursement of salary was decided in favour of the assessee. This decision of the Delhi High Court has not been considered by the Hon'ble Delhi High Court in its latest decision. However, without prejudice he submitted that the Hon'ble Supreme Court in the case of, DIT (IT) v. Morgan Stanley & Co. [2007] 292 ITR 416/162 Taxman 165 (SC), while examining the issue of Permanent Establishment under India-US DTAA in the context of nature of activity performed by stewards and deputationists deployed by Morgan Stanley Co. to work in India as employees of MSAS; an Indian entity, held that the deputed employees constitutes PE in India within Article 5(2)(l) i.e. Service PE. This issue has been discussed by the Hon'ble Supreme Court at great length. This decision of the Hon'ble Supreme Court has been considered in the decision of the Hon'ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd.(supra) and relying on the said decision, Hon'ble High Court held that seconded employees constitutes Service PE in India. Once, it is held that the seconded employees constitute Service PE of the assessee in India, in terms of decision of the Hon'ble Supreme Court in of Morgan Stanley & Co (supra), then the payment of Salary cannot be taxed as FIS, because in para 6 of Article 12 of the DTAA, it is clearly provided that if the royalties or FIS are attributable to PE, then in such cases the provisions of Article 7 would apply and the income has to be computed in accordance with Article 7. If such a computation of business income is to be done; then the salary cost has to be allowed as deduction to the assessee and no income would be taxed in that case. He submitted the above said submission is without prejudice to his earlier submissions that, no income is liable to be taxed in India on account of reimbursement of the salary cost received by the assessee from the Indian company.

8. The ld. DR submitted that the issue of Service PE has not been dealt , either by the AO or by the ld.CIT(A) and how much amount is attributable as per Article 7 of DTAA, needs to be examined and therefore, the matter should go back to the file of the AO.

9. We have considered the entire gamut of rival submissions and perused the relevant record, placed before us, including the relevant finding of the AO as well as of the ld. CIT(A). The assessee is a tax resident of USA and is providing support services to various Indian companies, who are subsidiaries. The assessee has deputed five of its employees in terms of deputation letter which have been placed on record. These employees were seconded to India to render their services to the Indian companies under supervision and control of the Board of Directors of the Indian companies and their day to day responsibility and activities were managed by the Indian company. However, their salary were paid by the assessee company after deducting TDS u/s 192 of the Act and duly deposited in the Indian Government Treasury. The entire salary paid by the assessee has been reimbursed by the Indian company to the assessee, which is evident from the debit notes appearing in the page 6 of the paper book. The TDS certificates have also been filed giving the details of tax deducted at source. One of the objection of AO as well as ld. CIT(A) was that, in the case of two employees, there has been some discrepancy in the amount shown in the TDS certificate and the amount shown in their income tax return filed in India. From the TDS certificate and the details of amount payable as clarified by the ld. Counsel, we find that, there is no discrepancy so far as the amount of cost which have been reimbursed by the Indian company to the assessee. However, ultimately the amount which has been received by the assessee towards reimbursement of Salary cost has been taxed as FIS which is a subject of dispute. The main issue before us is, whether such a payment received by the assessee on account of reimbursement of cost of salary paid to the Seconded employee , constitutes fees for included services (FIS) within the meaning of Article 12(4) of India-US DTAA, that is, it is taxable in India and hence TDS u/s 195 of the Act was required to be deducted.

10. In the current global scenario the international business entities have extended their business worldwide and they have made their presence by establishing their own subsidiaries or group entities from whom they have business arrangement. These overseas entities depute their technical staff and human resources in the other countries, which are growing economies to support their global business functions and to ensure quality and consistency in their operations. Under a classic Secondment agreement, the seconded employees who are under employment of non-resident parent company are deputed or transferred to subsidiary company in the overseas countries to work for special assignment which are more technical and managerial in nature. These seconded employees usually work under direct control and supervision of the subsidiary entities in their country. Since these seconded employees belong to the main parent entity, therefore, they continue to receive their remuneration and salaries with all social security and benefits from the parent entity. The salary cost and remuneration are reimbursed by the subsidiary company to the parent entity. Strictly speaking on paper they remain the employees of the parent entities but they are under direct supervision and control of subsidiary entity, where their day to day activities are managed and governed by them and so much so they can be removed by them. Once the terms of secondment is over, they revert back to their parent company entity. In a way subsidiary entity is the economic employer of the seconded employee who ultimately bears the salary cost and exercise control over their work. Generally it is contended that reimbursement of cost cannot be treated as payment for FTS or FIS, unless there is an explicit agreement between the parties that technical services would be provided through these employees. The deputation of employees is mainly for the benefit of the subsidiary company to smoothly and efficiently conduct the business. However, such a reimbursement of salary cost by the subsidiary entity has been matter of huge controversy, as to what is the nature of such payment, whether it is 'fee for included services' or not. Other related controversy is that, on the basis of duration of the stay of seconded /deputed employees in the host countries, whether the non-resident parent entity constitute the service PE in the host country or not.

11. In the present context the salary paid to the seconded employees by the parent company, the TDS has been already been deducted u/s 192 of the Act, which has been credited to the Government of India account. In case, if it is to be held that reimbursement of salary is nothing but payment for rendering technical services, then TDS has to be deduced u/s 195 of the Act. The Hon'ble Bombay High Court, earlier in the case of Siemens Aktiongesellschaft(supra) has held that reimbursement of expenses cannot be regarded as revenue receipt following the decision of the Hon'ble Delhi High Court in the case ofCIT v. Industrial Engineering Projects (P.) Ltd. [1993] 202 ITR 1014 and therefore no TDS is required to be deduced u/s 195. However, this decision is not relied upon as this issue was decided on a different context. We have to examine our case and the issue in hand in the light of Delhi High Court decision.

12. The Hon'ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd.(supra) had the occasion to deal with the similar issue of taxability of reimbursement of salary cost of the seconded employees, in a Writ Petition against the AAR ruling, wherein their Lordships have analyzed this issue in detail and held that such reimbursement of costs or re-payment, is 'fees for technical services'. Now, we have to analyze, whether this decision would be applicable for the purpose of adjudication of the issue in hand in the present case. The brief facts of the case of Centrica India was that, Centrica India was an Indian company, a wholly owned subsidiary of Centrica Plc, incorporated in the United Kingdom ("UK") which is UK based company. These overseas entities were in the business of supplying gas and electricity to consumers across the U.K and Canada. They outsourced their back office support functions like debt collections, consumers' billings, monthly jobs to third party vendors in India etc. . The Centrica India's principle object was to provide local interface between UK and the Indian vendors so as to ensure that Indian vendors comply with the quality guidelines. For this purpose, the Centrica India had entered into a service agreement with the overseas entities for providing management and quality assurance service for which it was compensated at cost plus 15% mark-up. The Centrica India had also entered into a seconded agreement with overseas entities for secondment of certain employees to India for rendering service and technical services for running its operation at initial stages. Such seconded employees continued to remain on pay roll of the overseas entities and received salary from them. Centrica India reimbursed such salary cost to the overseas employees on cost to cost basis. The AAR held that, since seconded employees continued to be employees of the overseas entity and the seconded employees are rendering their services for their employer in India by working for specified period, this will give rise to service PE within the meaning of Article 5.2 (k) of Indian-UK DTAA and therefore such a payment would be income accruing to the overseas entity and would be taxable in India and TDS has to be deducted u/s 195 of the Act. In the Writ Petition before the Hon'ble Delhi High Court, the major issues for adjudication before their Lordships was, firstly, whether by way of Secondment of employees the overseas entity had rendered any technical services in terms of Article 12 of India -Canada DTAA and Article 13 of India –UK DTAA and secondly, whether the overseas entities establish any Service PE in India. Under these treaties the concept of Service PE has been embodied. The Hon'ble Court after analyzing the definition of 'technical services' and ' FIS' as appearing in the India-UK treaty and India-Canada treaty, concluded that overseas entities are providing technical services to Centrica India through the seconded employees under India-UK treaty and FIS under India-Canada treaty. Regarding the issue, whether overseas entity through their seconded employees have constituted Service PE in India, the Hon'ble High Court has referred and relied upon the decision of the Hon'ble Supreme Court in the case of Morgan Stanley & Co. (supra) and also examined the terms and condition of the employment of seconded employees, whether they are employees of overseas entity or of Centrica India. The Hon'ble High Court came to the conclusion that the overseas entity were not only legal employer but also real employer of the seconded employees to India. After referring to the relevant potion of the decision of the Hon'ble Supreme Court, the Hon'ble Court held that the seconded employees will constitute a Service PE of the overseas entity in India. It was further observed that, even if there is no mark-up on the cost of seconded employees, it does not change the nature of service and will not affect the taxability in India. Thus, finally the Hon'ble High Court concluded that seconded employees rendering the service on behalf of the overseas employer and accordingly they have established Service PE in India and also they are rendering technical services, which is to be taxed in India.

13. If we have to apply the ratio laid down by the Hon'ble Delhi High Court in the present case, then it has to be seen, whether overseas entity i.e. the assessee is the real economic employer of the seconded employees i.e. the employees are maintaining their lien on employment with the original overseas and whether the assessee remains responsible for the work of seconded employees in India or not. The case of the assessee before us has been that, seconded employees were under direct control and supervision of Indian entity who were managing their activities on day to day basis and the assessee was only paying their salary for the employees convenience and benefit. Whether this fact will lead to any deviation from the ratio laid down by the Hon'ble Delhi High Court, we are not entering into semantics of overall terms of employment of the seconded employees, whether the assessee is the real or legal employer or the Indian entity is the employer. We are proceeding on the premise that the seconded employees are the real employees of the assessee who have come to India to render services and once they are rendering services on behalf of assessee in India then, they constitute Service PE in India. Such an establishment of PE under these circumstances have been dealt by the Hon'ble Supreme Court in the case of Morgan Stanley & Co (supra). The Hon'ble Supreme Court held that the employees of overseas entities to the Indian entity constitutes service PE in India. The relevant finding of the Hon'ble Supreme Court in this regard is as under :

"15. As regards the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the U.N. Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of "the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there is a service PE (MSAS) under Article 5(2}(1). We find no infirmity in the ruling of the ARR on this aspect. In the above situation, MSCo is rendering services through its employees to MSAS. Therefore, the Department is right in its contention that under the above situation there exists a Service PE in India (MSAS). Accordingly, the civil appeal filed by the Department stands partly allowed."

Thus, from the aforesaid decision it is amply clear that such deputed employees if continued to be on pay rolls of overseas entities or they continue to have their lien with jobs with overseas entities and are rendering their services in India, Service PE will emerge. This concept and the ratio has been storngly upheld by the Hon'ble Delhi High Court also. We therefore, hold that the seconded employees or deputationist working in India for the Indian entity will constitute a Service PE in India.

14. If we accept this concept that, by virtue of deputing seconded employees in India, the assessee has established a Service PE, then whether such a payment made by Indian entity to the assessee, (even though it is reimbursement of salary cost), would be taxable under Article 12(4) of India –US DTAA. Relevant Article 12 of the treaty reads as under :

'Article 12
ROYALTIES AND FEES FOR INCLUDED SERVICES
1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed:

a., i., A. & B. ii., b., 3., b., **

**

**

4. For purposes of this article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:

a.		are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or
b.		make available technical knowledge, experience, skill, know-how. or processes, or consist of the development and transfer of a technical plan or technical design.

5, a. to e.**

**

**

6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of article 7 (business profits) or article 15 (Independent Personal Services), as the case may be, shall apply.

7. a. Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for included services was incurred, and such royalties or fees for included services are borne by such permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

b. Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State.

8.**

**

**'

Para 6 of Article 12 makes it amply clear that taxability of 'royalty' and 'fees for included services' shall not apply, if the resident of the contracting state (USA) carries on the business in other contracting states (India) in which FIS arises through PE situated therein, then in such case the provisions of Article 7 i.e "Business Profits" shall apply. In other words, if there is a PE, then Royalty or FIS cannot be taxed under Article 12, albeit only under Article 7 of the DTAA. It is an undisputed fact in this case, that DTAA benefit has been availed by the assessee and therefore, treaty benefit has to be given to the assessee for granting relief. Now, if the taxability of such payment has to be examined and determined on the basis of computation of business profit under Article 7, then the salary paid by the assessee would amount to cost to the assessee, which is to be allowed as deduction while computing the business profit of the PE in India. In our opinion, if logical conclusion of the decision of the Hon'ble Supreme Court in the case of Morgan Stanley & Co (supra) and the decision of Hon'ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd(supra) is to be arrived at, then the seconded employees will constitute Service PE of the assessee in India and in that case any payment received on account of rendering of service of such employees will have to be governed under Article 7 as per unequivocal terms of para 6 of Article 12. Thus, the ratio laid down in the decision of Hon'ble Delhi High Court, will not help the case of the revenue, in any manner because under the concept of PE, FIS cannot be taxed under Article 12, but only as a business profit under Article 7. It is very interesting to note that, similar provision is also embodied in the India-Canada DTAA in para 6 of Article 12, but this issue was neither raised or brought to the notice before the Hon'ble Delhi High Court nor it was contested by either parties. There is inherent contradiction in this concept, as in most of the treaties, exclusionary clause like Article 12(6) has been embodied, which makes the issue of taxability of FTS of FIS in such cases as non applicable and have to be viewed from the angle of Article 7. Thus, the decision of the Hon'ble Delhi High Court and all other decisions relied upon by the revenue will not apply in the case of the assessee, as nowhere the concept of para 6 of Article 12 have been taken into account for determining the taxability of such a payment under the provisions of treaty. Thus, in our conclusion, the payment made by the Indian entity to the assessee on account of reimbursement of salary cost of the seconded employees will have to be seen and examined under Article 7 only, that is, while computing the profits under Article 7, payment received by the assessee is to be treated as revenue receipt and any cost incurred has to be allowed as deduction because salary is a cost to the assessee which is to be allowed. Accordingly, the AO is directed to compute the payment strictly under terms of Article 7 and not under Article 12 of the DTAA. In view of the aforesaid finding, the grounds raised by the assessee is treated as allowed.
15. In the result, the appeal of the assessee is allowed.