2014 (5) TMI 154 - DELHI HIGH COURT

Technical services - Article 12 and 13 of DTAA – Service Permanent Establishment - Whether the secondment of employees by BSTL and DEML, the overseas entities, falls within Article 12 of the India-Canada and Article 13 of the India-UK DTAAs – Held that:- The mere rendition of service is not an ‘included service’ that triggers tax liability - the enterprise must ‘make available’ the skill behind that service to the other party, i.e the Indian recipient - The definition is more restricted that in the India-UK DTAA - The service provided by the secondees is to be viewed in the context in which their secondment or deputation was necessitated - The overseas entities required the Indian subsidiary, CIOP, to ensure quality control and management of their vendors of outsourced activity - For the activity to be carried out, CIOP required personnel with the necessary technical knowledge and expertise in the field, and thus, the secondment agreement was signed since CIOP - as a newly formed company - did not have the necessary human resource.

Relying upon Morgan Stanley and Co., In re [2006 (2) TMI 77 - AUTHORITY FOR ADVANCE RULINGS] - the salary is ultimately paid through the overseas entity, which is not a mere conduit - the social security, emoluments, additional benefits etc. provided by the overseas entity to the secondee, and more generally, its employees, still govern the secondee in its relationship with CIOP - It would be incongruous to wish away the employment relationship, as CIOP seeks to do today, in the face of such strong linkages - Whilst CIOP may have operational control over these persons in terms of the daily work, and may be responsible (in terms of the agreement) for their failures, these limited and sparse factors cannot displace the larger and established context of employment abroad.

Reimbursement and the doctrine of diversion of income by overriding title – Held that:- Following AT&S India Private Limited, In re [2006 (11) TMI 138 - AUTHORITY FOR ADVANCE RULINGS] - The mere fact that CIOP, and the secondment agreement, phrases the payment made from CIOP to the overseas entity as ‘reimbursement’ cannot be determinative - Neither is the fact that the overseas does not charge a mark-up over and above the costs of maintaining the secondee relevant in it, since the absence to markup (subject to an independent transfer pricing exercise) cannot negate the nature of the transaction - the various factors concerning the determination of the real employment link continue to operate, and the consequent finding that provision of employees to CIOP was the provision of services to CIOP by the overseas entities triggers the DTAAs - The nomenclature or lesser-than-expected amount charged for such services cannot change the nature of the services - once it is established that there was a provision of services, the payment made may indeed be payment for services - which may be deducted in accordance with law - or reimbursement for costs incurred – thus, the ruling of AAR is upheld – Decided against Assessee.