9911796707
TMI Blog2012 (3) TMI 243X X X X Extracts X X X X X X X X Extracts X X X X ..... have outsourced their back office support functions such as consumers' billings/debt collections/Monthly MIS job to third party vendors in India. In order to ensure that the vendors in India work in accordance with the quality guidelines, the applicant, CIO, was established in India on 11.3.2008 to act as service provider to the overseas entities. 2. On 23.12.2008, a Service Agreement to be effective from 1.12.2008 was executed among Centrica Plc. And its affiliates on the one hand and the applicant CIO, on the other. It acknowledged that the overseas entities had set up CIO an indirect wholly owned subsidiary in order to provide locally based interface between the overseas entities and the Indian service providers and have requested CIO to provide such services to them. CIO was to provide services to the overseas entities in accordance with the provisions of that agreement. As service costs, CIO was to receive from the overseas entities the fully absorbed cost of providing the relevant service. Though the agreement defines, 'service costs' as being the meaning given to it in Article 2.2 thereof, in the copy of the agreement filed with the application no Article 2.2 is seen. But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondee employees. CIO was to bear all risk in respect of the work performed by the secondees and had the benefit from the output. CIO was to bear the cost of monthly remuneration and reimbursement of cost to secondee. The secondees were to retain their entitlement to participate in the overseas entities retirement and social security plans and other benefits in accordance with its applicable policies. The monthly cost of such participation and benefits were to be borne by CIO. The overseas entities is to charge CIO monthly for the actual documented costs and expenses that are incurred by the overseas entities during the term secondment agreement in respect of the secondees during the secondment. The monthly charges were to include all direct costs of secondee's basic salary and other compensation, cost of participation in overseas entities' retirement and social security plans and other benefits in accordance with its applicable policies and other costs, but only if such other costs have been agreed to between CIO and the overseas entities. The procedure for invoicing the cost over month is set out in the agreement. If there arose any dispute about the invoice raised or any part the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into individual agreements with the secondees. They mostly reiterate the terms of the main secondment atgreement. It is the case of the applicant that the secondee's work was as per the schedule required and notified by the applicant from time to time. Since they work under the control and supervision of the applicant and following the directions and instructions of the applicant, none of the overseas notices is responsible for any work or omission in the work performed by the secondees. The entire risk is borne by the applicant. The applicant has right to specify the scope of the work and the results to be achieved by the seconded employees. The applicant was, therefore, economic employer. The salaries are paid by the applicant and these are accounted for in the books of account of the applicant as salary cost. The overseas entities also show this only as reimbursement of salary expenses. Since the secondee employees are working in India for the Indian entity and receive their salaries, the salaries paid to them is individually offered either for tax by them. The secondee employees were coming to India on deputation for short term assignment. But their families/ responsibilitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical services/included services and were taxable as such. They were taxable in India. The rendition of managerial services would also bring in the question whether overseas entities are not having a permanent establishment in India, the overseas entities have a service PE in India in view of the services being rendered by the seconded employees being managerial in nature. Adequate information was not forthcoming on this question from the applicant and, therefore, it was proper to leave this question for decision by the competent authority. In its further written submission, it is contended that the employer of the seconded employees was the concerned overseas entity. The applicant was not even the economic employer as claimed. What has been entered into is not a contract of service but a contract for service. The contention that what is being paid is fees for technical services/included services is reiterated. It is also asserted that adequate information has not been provided to establish that the reimbursement does not contain any element of income or even otherwise not taxable. There was no diversion of income by overriding title as claimed by the applicant. 10. In its wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid is fees for such services. Merely calling it reimbursement would not take the case of the applicant out of the tax net. There was no diversion of income by overriding title in this case. The principal had no application. The amount was taxable in the hands of overseas entities and hence the applicant had obligation in terms of section 195 of the Act to withhold tax of the above. We shall deal with each of these contentions in some detail. 12. What is the position in this case? The applicant was created as a subsidiary by the overseas entity for coordinating the services of various vendors in India to whom it has outsourced some activities needed by it. A service agreement was then entered into by the overseas entity with the applicant for this purpose. The applicant was to be paid the costs it incurred for doing the work plus 15% of it as profits or compensation. The applicant submits that it has offered this 15% to tax in India. 13. The applicant required to be guided in the processes and procedures of the overseas entity. For this, the overseas entity deputed or seconded some of its employees to the applicant to render their services in India. As we see it, those employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d mere nomenclature cannot be determinative of the relationship brought about between or among the parties. On a reading of the agreements concerned, we are satisfied that nothing turns on the nomenclature of the concerned agreement as secondment agreement. 18. On the terms of the Secondment Agreement, it is difficult to find that the amount paid by the applicant to the overseas entities is reimbursement as sought to be emphasized by learned counsel for the applicant. Obligation to pay the salary rested with the overseas entities and the right of the employee to claim it is only against the overseas entities. The employee is conferred no right to claim the salary from the applicant nor is the applicant burdened with an obligation to pay that salary. It is difficult to accept the argument that what is paid by the applicant to the overseas entity in view of its sending its employees to the applicant for rendering service is reimbursement of the salary paid by the employer to them. Merely because the overseas entity is not charging the applicant anything more than what it has paid by way of salary and other emoluments to the concerned employee, that does not alter the situation. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the enterprise to which the employee is sent does not qualify as an employer merely because the employee performs services for it, or because the enterprise gives the employee instructions regarding his work. The situation is different if the employee works exclusively for the enterprise in the State of employment and was released for the period in question by the enterprise in his State of residence. However, there may certainly be two work relationships simultaneously as well. Determining the employer, then only depends on whether (atleast) one of them is responsible for the remuneration in the State of employment. 20. Here, the enterprise to which the employees are sent is the subsidiary of the original employer. The persons well versed in the processes and procedures of that employer are sent to the subsidiary to enable the subsidiary to perform the work for which it was created in accordance with the processes and procedures of the original employer. The work is also really that of the employer, in the sense, that it is to coordinate the work of the vendors of the employer situated in the other State. It is a work needed by the original employer. On the terms of the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g title, but when after receipt of the income by the assessee the same is passed on to a third person in discharging of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title. The decisions of the Privey Council in Bejoy Singh Dudharia v. CIT and PC Mullick v. CIT together are illustrative of the principle of diversion of income by overriding the title." 23. We have already noticed that there is no obligation on the applicant to pay the salaries of the seconded employees in terms of the agreement. There is also no right in the seconded employee to claim his or her salary from the applicant. The right of the employee to claim the salary is as against his employer, the overseas entity and the obligation to pay the salary is that of the overseas entity. Whether the applicant pays an equivalent amount to the overseas entity or not, the overseas entity is obliged to pay the salary of its employee. As a matter of practice, the salary is paid first by the overseas entity and thereafter an invoice is raised for an equivalent amount of what was paid and the amount is made good by the applicant to the ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia-Canada Convention in respect of the compensation paid to the overseas entities in the light of Section 2(37A)(iii) of the Income-tax Act. The position was not disputed by the Revenue. Therefore, the question whether the compensation paid is taxable in India has to be considered in the context of paragraph 4 of Article 13 of the Double Taxation Avoidance Convention between India and the United Kingdom and paragraph 4 of the Article 12 of the Convention between India and Canada. Under the India-UK Convention, fees for technical services means payment of any kind in consideration for the rendering of any technical or consultancy services. Managerial Services which is included in Section 9(1)(vii) of the Income-tax Act is not covered by the Article. Under the India-Canada Convention, fees for included services means payment in consideration of technical or consultancy services. Here also, managerial services is not included. 26. In the case on hand, as can be seen, the secondee employees are all rendering managerial services. They are General Manager, Operations Manager, Delivery Manager and Relationship Manager respectively. It is true, as pointed out by the Revenue, that e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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." We see nothing in the passage quoted above, that supports the case of the applicant. What we understand the Supreme Court as having said is that if the employees continue on the payroll of the non-resident and have a lien on their jobs in the non-resident multinational, a service PE can emerge if services are rendered in India for specified pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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