TMI Blog2014 (5) TMI 154X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2008. It was to act as service provider to these overseas entities. 3. CIOP entered into service agreement with overseas entities to provide locally based interface between those overseas entities and Indian vendors. The scope and range of services so provided in terms of those agreements/understanding are: (i) management assistance for outsourced supplies in India and facilitating efficient interface back to U.S. business of Centrica Plc; (b) ensure that outsourced suppliers adhered to best practices and share them on e-2-e on optimal basis; (c) expert advice on widening scope of potential services in India to target work force through greater control and such other services as may be requested by Centrica Plc from time to time. It is stated that in terms of the agreement, the petitioner is compensated on full costs, i.e. expenses adopted by it in the Profit and Loss Account plus a mark-up of 15%. The petitioner is an income tax assessee and has been filing returns and paying income tax on the income earned out of the service agreement. To seek support during initial year of its operation, CIOP sought some employees on secondment from the overseas entities. For this purpose, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween CIO and PLC. 5. It is stated that the petitioner offers to tax the salaries paid to every seconded employee in India and that it will file Income Tax Returns in India after dispatching appropriate taxes. It therefore withheld taxes under Section 192 of the Act with respect to the salary paid or payable to the seconded employees. Likewise, service income received by the petitioner from overseas entities in terms of the service agreement is offered by it to tax under the Act. CIOP, a resident Indian company, had sought advance ruling under Chapter XIX-B of the Act by its application dated 06.11.2009 on the following two questions: (i) Whether on the facts and in the circumstances of the case, the reimbursements made by the Petitioner to overseas entities of the actual costs of expenses incurred under Secondment Agreement is in nature of income accruing to the overseas entities? (ii) If the answer to question No. 1 above is affirmative, whether tax is liable to be deducted at source by the petitioner under the provisions of Section 195 of the Income-tax Act, 1961? 6. CIOP urged, before the Authority, that in tune with the recognized international principles, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the purview of Article 13.4 of the India-UK DTAA or Article 12.4 of India-Canada DTAA. Therefore, consideration paid by the Petitioner to the overseas entities cannot be held to be fees for technical services; (c) the overseas entities constitute service PE under the relevant DTAA on account of employees deputed by overseas entities to the Petitioner under the terms of Secondment Agreement; and (d) Tax is liable to be deducted at source under Section 195 of the Act on amount paid/payable by Petitioner to overseas entities under the Secondment Agreement The material parts of the Authority s findings are extracted below: XXXXXX XXXXXX XXXXXX 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is former employer and by the enterprise to which the services are provided points to an employment relationship that is different from the former contractual relationship, then certain additional factors may be relevant to determine whether the employer who receives the secondees could be treated as their employer. What we find in this case is that the overseas entity has created an Indian company as its subsidiary for ensuring that the services to be rendered to it by various Indian vendors are properly coordinated. The overseas entity wants their services to be consistent with its business and policies. The applicant having been newly constituted, was presumably not in a position to render help to the various vendors in the matter of fulfilling their obligations or in the matter of ensuring compliance with the processes and practices employed by the overseas entities. The Secondment Agreement is specifically based on the fact that CIO has asked the overseas entity to provide staff with knowledge of various processes and practices employed by the overseas entity and experience in managing and applying such processes and practices. On a look at the list of employees, it is seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as of now to indicate that they are performing any technical functions or consultancy functions. They can be said to be managing the business of the subsidiary as requested by Centrica Plc., consistent with its aims. There is no acceptable argument except reliance upon a ruling by this Authority in Version Data Services India Private Limited (AAR No.865 of 2010). We may notice that the High Court of Madras has in a Judgment in Writ Petition No. 14921 of 2011, set aside the finding of this Authority on that question and has remanded the relevant question for a re-consideration. To that extent, the finality of the Version Ruling has now gone. So, the reliance placed on that Ruling by the Revenue is of no avail. 27. On the materials now available, it is not possible to hold that the managerial services being rendered in this case, will come within the purview of Article 13.4 of the India-UK Convention or Article 12.4 of the Indo-Canada Convention. Hence, the consideration paid by the applicant to the overseas entities for getting the services of these employees cannot be held to be fees for technical services. In view of the above, it is not necessary to consider the question whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orted as CIT v. Eli Lilly and Co. India Private Limited, (2009) 312 ITR 225 (SC), to say that the determinative factors for examining whether the home salary paid by the foreign company in foreign currency abroad can be held to be deemed or accrued or assigned in India depends on an indepth analysis of facts and arrangements in each case. If the salary or remuneration paid by the foreign company is for rendition services in India then the payment fell within Section 9(4)(i) read with Section 192(1). Learned counsel relied upon a recent ruling of the Division Bench of this Court in DIT v. M/s. E-Funds IT Solution, ITA 735/2011. Similarly, reliance was also placed upon the ruling in Morgan Stanley and Co., In Re, 2006 (284) ITR 260 (SC). The petitioner submits that the substance and not the form of the arrangement should be looked into. The over-emphasis on a singular factor such as legal employment of the seconded employee and the right to terminate it by its overseas entities would distort the correct picture which is that effective and overall control is that of the petitioner. The mere secondment of such employees would not amount to rendition of services through them by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities 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. 13. It is submitted that without fulfilling both criteria, i.e. the foreign enterprise assuming responsibility for the deputed personnel s work and the employee being on the payroll or retaining their lien on employment there would no service PE. In the present case, the first is significantly absent and as regards the second, the payment is made exclusively out of the petitioner s funds. Respondent s contentions: 14. According to the respondent the secondment Agreement dated December 1, 2008 is premised on the following facts: (a) CIOP has asked the overseas entities to provide staff with knowledge of various processes and practices employed by PLC and the experience in managing and applying such processes and practices, and (b) subject to the provisions of this Secondment Agreement, the overseas entities nominated and CIOP accepted the secondees. The above facts, says the respondent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-resident includes all income from whatever source derived which - (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. 17. The Revenue also relies on Section 9 of the Act, which provides for income which is deemed to accrue or arise in India. Section 9(1)(vii) of the Act states as follows: (vii) Income by way of fees for technical services payable by - (a) The Government; or (b) A person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) A person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: (d) [Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) Development and administration of dealer network, sales and marketing, service etc. (d) Managing financial operations, (e) Supplier development and materials management, including development if local suppliers. 20. The Revenue placed reliance on the decision of the Delhi High Court in the case of CIT v. Bharti Cellullar Ltd., 319 ITR 139, where the scope of the meaning managerial service was examined. The Court held as follows: We have already pointed out that the expression fees for technical services as appearing in Section 194J of the said Act has the same meaning as given to the expression in Explanation 2 to Section 9(1)(vii) of the said Act. In the said Explanation the expression fees for technical services means any consideration for rendering of any managerial, technical or consultancy services . The word technical is preceded by the word managerial and succeeded by the word consultancy . Since the expression technical services is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable. The said rule is explained in Maxwell on The Interpretation of Statutes (Twelfth Edition) in the following words:- Where two or more words wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or (c) 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 Revenue states that the term managerial service is not included in the scope of the term technical service within the meaning of the term in Article 13 of the DTAA (revised treaty as entered into in 1993). However, it is urged that the Court should hold that the services of the deputed employees fall within the meaning of the term as contained in Article 13(3), which includes making available technical knowledge, experience, skill, know-how or processes. In terms of the scope of work emerging from the Service Agreement and the Secondment Agreement it is clear that the seconded employees are being sent to India with knowledge of various processes and practices employed by PLC and the experience in managing and applying such processes and practices. This leaves no element of doubt that the seconded employees are making availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed: (a) In the case of royalties within paragraph 3(a) of this Articles, and fees for technical services within paragraphs 4(a) and (c) of this Article,- (i) During the first five years for which this Convention has effect; (aa) 15 percent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the firstmentioned Contracting State or a political sub-division of that State, and (bb) 20 percent of the gross amount of such royalties or fees for technical services in all other cases; and (ii) During subsequent years, 15 percent of the gross amount of such royalties or fees for technical services; and (b) in the case of royalties within paragraph 3(b) of this Article and fees for technical serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply. 7. Royalties and fees for technical services shall be deemed to arise in a Contracting State where 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 technical 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 obligation to make payments was incurred and the payments are borned by that permanent establishment or fixed base then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 8. Where, owing to a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services paid exceeds for whatever reason the amount wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded services. XXXXXX XXXXXX XXXXXX 4. For the 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. Notwithstanding paragraph 4, fees for included services does not include amount paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 5(a); (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of this Agreement. 27. The material portions of the Secondment Agreement entered into by CIOP are also reproduced below: ARTICLE 2 TERMS OF SECONDMENT 2.1 Secondment (A) At the request of CIO, PLC shall assign relevant individuals to perform the Duties at the Secondment Location for the Secondment Period, and to report to CIO in accordance with the Secondment Agreement, and in particular Attachment A thereto. (B) CIO shall designate a Secondee to fill certain positions within CIO s Organization, integrate Secondee into CIO s and authorize Secondee to perform the Duties at the Secondment Location for the Secondment Period in accordance with the Secondment Agreement. (C) CIO shall have the right to specify the scope and nature of Secondee s work and the results to be achieved, and to direct Secondee in the performance of the Duties. (D) CIO shall require Secondee to enter into a Secondee Agreement in the form of Attachment B. 2.2 Conduct (A) Secondee shall be integrated into CIO s organization for the Secondment Period and consequently shall be subject to (1) The supervision and control of CIO; (2) All applicable rules, regulations, policies and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes any substantive or material laws, which in CIO s reasonable judgment significantly impairs secondee s ability to perform the duties or to live and work in the secondment location; or (2) If secondee materially breaches the confidentiality obligations under this secondment agreement, or if applicable, the secondee Agreement. Immediately after any termination without notice CIO shall notify PLC setting out the reasons for such termination. PLC s Right to Terminate the Secondement Secondee shall be assigned to CIO for the Secondment period and PLC will use all reasonable endeavors not to withdraw secondee during the secondment period except that PLC shall have the right to immediately withdraw secondee in case of Force Majeure, or a personal emergency concering the Secondee PLC shall promptly give notice setting out the general circumstances of such Force Majeure event or personal emergency. xxx xxx xxxx 28. CIOP relies on the concept of economic employment as opposed to legal employment and submits that the formal jural or legal relationship of employer and employee as between the seconded employee and the overseas entity is of no significance. It is argued that for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the control and responsibility of the user; - the remuneration to the hirer is calculated on the basis of the time utilized, or there is in other ways a connection between this remuneration and wages received by the employer; - tools and materials are essentially put at the employee s disposal by the user: - the number and qualifications of the employees are not solely determined by the hirer. xxx xxx xxx xxx The Court also notes that the Model Tax Convention on Income and on Capital (Condensed Version, July 2010) in this context, states as follows: 8.14 Where a comparison of the nature of the services rendered by the individual with the business activities carried on by his formal employer and by the enterprise to which the services are provided points to an employment relationship that is different from the formal contractual relationship, the following additional factors may be relevant to determine whether this is really the case: - Who has the authority to instruct the individual regarding the manner in which the work has to be performed. - who controls and has responsibility for the place at which the work is performed; - remuneration of the ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the services - cast as business support services by CIOP - as also clearly within the hold technical or consultancy . These services envisage the provision of quality service by vendors to the overseas entities, which CIOP, and the secondees, are to oversee. This requires the secondees to draw from their technical knowledge, and falls within the scope of the term. This reading of technical services does not limit itself only to technological services, but rather, extends to knowhow, techniques and technical knowledge. This is supported by clause 4 of Article 12 itself, which lists these various sub-categories. Indeed, the term technical has not been defined in the DTAA, and must be accorded its broader dictionary meaning, unless limited by the parties to the instrument. The AAR in Intertek Testing Services India Pvt. Ltd. v. CIT X, (2008) 220 CTR (AAR) 540, considered this question in detail, and rightly held that What is meant by the expression technical ? Should it be confined only to technology relating to engineering, manufacturing or other applied sciences? We do not think so. The expression technical ought not to be construed in a narrow sense. This readi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in the India-UK DTAA. The question is whether the higher threshold, is met in this case. 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 this 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. The secondees are not only providing services to CIOP, but rather tiding CIOP through the initial period, and ensuring that going forward, the skill set of CIOP s other employees is built and these services may be continued by them without assistance. In essence, the secondees are imparting their technical expertise and know-how onto the other regular employees of CIOP. Indeed, it is admitted by CIOP that the reason for the secondment agreement was to provide support for the initial years of operation, till the necessary skill-set is acquired by the resident employee group. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the work of seconded employees, and reaped the benefit from the output. CIOP also bore the cost of monthly remuneration and reimbursement of cost to seconded employees. However, crucially, these seconded employees retained their entitlement to participate in the overseas entities retirement and social security plans and other benefits in terms of its applicable policies, and the salary was properly payable by the overseas entitle, which claimed the money from CIOP. There was no purported employment relationship between CIOP and the secondees. None of the documents, including the attachment to the secondment agreements placed on record (between the secondees and CIOP) reveal that the latter can terminate the secondment arrangement; there is no entitlement or obligation, clearly spelt out, whereby CIOP has to bear the salary cost of these employees. The secondees cannot in fact sue the CIOP for default in payment of their salary- no obligation is spelt out vis- -vis the Petitioner. All direct costs of such seconded employee's basic salary and other compensation, cost of participation in overseas entities' retirement and social security plans and other benefits in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us 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. 36. In this context, the decision of the Supreme Court in Morgan Stanley (supra) offers support for the Authority s viewpoint, rather than the contrary stance. In that case, the Court considered various forms of PEs, agency, service etc, each of which contemplate a different characteristic and link between the deputed employee/organization and the parent. In the context with which we are presently concerned, the following observations are critical: 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. It is important to note that where th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of seconded personnel, would be subject to withholding tax under Section 195 of the IT Act, in view of the facts that (1) the payments are only in the nature of reimbursement of actual expenditure incurred by AT S Austria. (2) AT S Austria is not engaged in the business of providing technical services in the ordinary course of its business, (3) AT S Austria is not charging the applicant any separate fee for the secondment and (4) the seconded personnel work under the direct control and supervision of the applicant? In holding that the obligation under Section 195 would be triggered, the AAR held as follows: From the above analysis of both the agreements it is clear that pursuant to the obligation under the FCA, the AT S Austria has offered the services of technical experts to the applicant on the latter's request and the terms and conditions for providing services of technical experts are contained in the secondment agreement which we have referred to above in great details. Though the term reimbursement is used in the agreements, the nature of payments under the secondment agreement has to satisfy the characteristic of reimbursement and that the term re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s fixed and agreed between the employee and the company from time to time and that such salary may be paid either in India or outside India but the total salary shall not exceed the salary fixed as above, but no fixed salary is mentioned in the employment agreement. Other perquisites and entitlements are : travel expenses, transport, boarding, lodging; and annual leave of 30 days per year; and home leave which the employee will be entitled to once. The applicant shall have to organize an economic class return flight tickets to go on home leave. The employment agreement also provides that the employee will be responsible for meeting all requirements under Indian tax laws including tax compliance and filing of returns and the applicant is authorized to deduct taxes from the compensation and benefits payable. 38. 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 itself, since the absence to markup (subject to an independent transfer pricing exercise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tity is not income that accrues to the overseas entity, but rather, money that it is obligated to pass on to the secondees. In other words, this money is overridden by the obligation to pay the secondees, and thus, is not income . This is insubstantial for two reasons. One, in view of the above findings that: (a) the payment is not in the nature of reimbursement, but rather, payment for services rendered, (b) the employment relationship between the overseas entities and CIOP - from which the former s independent obligation to pay the secondees arises - continues to hold, no obligation to use money arising from the payment by CIOP to pay the secondees arises. The overseas entities obligation to pay the secondees arises under a separate agreement, based on independent conditions, in relation to CIOP s obligation to pay the overseas entity. Assuming the agreement between CIOP and the overseas entity envisaged a certain payment for provision of services (and not styled as reimbursement). Surely no argument could be made that such payment is affected by the doctrine of diversion of income by overriding title. If that be the case, then, as held above, the fact that the payment under th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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