TMI Blog2011 (5) TMI 256X X X X Extracts X X X X X X X X Extracts X X X X ..... vices are managerial in nature, the payments are also covered under "fees for technical services" as defined under Explanation 2 to section 9(1)(vii) of the Act - Held that: "Fees for Included Services (FIS)" is taxable at the rate of 20% as provided under Article 12(4)(b) of the DTAA. - A.A.R. NO. 865 OF 2010 - - - Dated:- 27-5-2011 - JUSTICE P.K. BALASUBRAMANYAN, J. KHOSLA AND V.K. SHRIDHAR, JJ. Dr. Anita Sumanth for the Applicant. K.R. Vasudevan for the Respondent. RULING V.K. Shridhar, Member The applicant, Verizon Data Services India Private Limited (VDSI), is a Private Limited company and is incorporated under the provisions of the Indian Companies Act, 1956. It is a wholly owned subsidiary of Verizon Data Services LLC, US (Verizon US). The applicant is engaged in providing services relating to development and maintenance of telecom software solutions and certain information technology enabled services. All services rendered by the applicant are exported from India to its parent company Verizon US. The applicant submits that in order to ensure that efficiency is built into the system and the productivity is optimal, the parent company felt that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that GTE-OC is not rendering any services to the applicant through its expatriate employees. These personnel were deputed at the request of the applicant to work under its control. The reimbursement of salary cost paid by GTE-OC in respect of provision of personnel to the applicant is for administrative convenience and should not qualify as 'Fees for Included Services (FIS)' under India-US DTAA (DTAA). Under Article 12(4)(b), of the DTAA, consideration towards technical knowledge, skill etc. would be considered as FIS only if the technical know-how, skills etc. is made available to the applicant. It would be a case of FIS as there is a transfer of technical knowledge, skills etc. from GTE-OC to the applicant. The expatriate employees are engaged in rendering managerial services and not technical services. It is thus the applicant's case that the payments made to GTE-OC are not in the nature of FIS and not liable to tax in India having regard to the provision of the DTAA. 4. The applicant then submits that GTE-OC has no fixed place from where it is carrying on business in India. If it is held that the GTE-OC has a fixed place of business then salary and expenses incurred on expatr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as observed in the case of Director of Income-tax (International Taxation) v. Morgan Stanley Co. [2007] 292 ITR 416/162 Taxman 165 (SC). 8. The Revenue submits that the applicant is providing exclusively all its services to its parent company Verizon USA. GTE-OC is not benefitted in any way by this Secondment Agreement. While the applicant claims that these seconded employees are on the pay roll of the GTE-OC, the employees show themselves as part of Verizon inasmuch as that Mr. Rajiv Saxena is shown as Senior V.P. of Verizon in his profile. The website of Verizon also shows him as Group V.P.-Europe. 9. Referring to the Secondment Agreement the Revenue submits that the seconded employees are to perform certain managerial or other services and activities. They are not merely performing managerial services. The payment term is for salary, commission, benefits and other items as per the international assignment policy and not merely for salary. Though it does not appear in the application but the applicant is only responsible for housing, car and drivers of the expatriate employees. GTE-OC can replace the seconded employees. The employees shall remain the employees of GTE-OC who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging Director of the applicant company. It is a matter of common knowledge that the Managing Director of a company is incharge of the day-to-day affairs of the company. It is he who runs the company with the team of employees. The Board of Directors holds meetings off and on to take decisions on policy matters of the company. To say that the Managing Director of a company is under the control and supervision of the company is nothing more than use of an expression. The control and superintendence of the company vests with him. In the present case, the three employees together have constituted a team. While these employees are providing services to the applicant, they will remain the employees of GTE-OC. Their employment can only be terminated by GTE-OC. It goes to show that it's GTE-OC who has rendered managerial services to the applicant company. For the items paid or provided to the employees, the applicant is to reimburse GTE-OC on the basis of bills presented by GTE-OC. At the time of remittance, the obligation to withhold taxes is upon the applicant and if any amount is held as taxes the applicant is required to pay GTE-OC an additional amount. In other words, the applicant is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The total income of GTE-OC may be the sum total of receipts under different heads of income, for example: business, royalties, fees for included services, house property, interest, dividends etc. but the expenditure incurred by way of salaries to the employees cannot ipso facto determine the nature of the income which is to be brought to tax either under the Act or under the DTAA in the hands of GTE-OC. We are of the view that, amounts paid by the applicant to GTE-OC represent income in the hands of GTE-OC. The reliance placed on the cases cited by the Learned Advocate are not on the issue as per the facts of the applicant. 14. The Learned Advocate submits that as the definition under DTAA is more beneficial the same may be applied to the applicant's case. Referring to Article 12(4) of the DTAA, it is contended that managerial services being consultancy services are not made available to the applicant. No technical knowledge, experience, skill etc. is transmitted to enable the applicant to independently apply the same. The employees are engaged in rendering managerial services and not technical services. Other than deputing its employees, GTE-OC has not rendered any services to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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." The applicant contends that as the managerial services are not made available to the applicant, the services rendered by the seconded employees are not covered under Article 12(4)(b) of the DTAA. In this connection we may refer to the memorandum of understanding of the DTAA which explains the meaning of "fees for included services" as under: "Article 12 includes only certain technical and consultancy services. By technical services we mean in this context services requiring expertise in a technology. By consultancy services, we mean in this context advisory services. The categories of technical and consultancy services are to some extent overlapping because a consultancy service could also be a technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in a technology is required to perform it. Under paragraph 4, technical and consultancy services are considered included services on ..... 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