TMI Blog2015 (11) TMI 271X X X X Extracts X X X X X X X X Extracts X X X X ..... dent is having fixed place of business or PE in India and the amount is earned through the PE, then the expenditure incurred in the relation to the PE for earning said amount is allowable as per the provisions of sec. 44DA of the Act. Therefore, in view of the judgment of Hon’ble Delhi High Court in the case of Centrica (2014 (5) TMI 154 - DELHI HIGH COURT), the payment made to foreign company DFCL partakes the character of FTS as per the definition under explanation 2 to sec . 9(1)(vii) of the Act. The learned AR of the assessee has raised an alternative point that the secondment of employees constitute a service PE and secondly the amount would be chargeable to tax as per the provision of sec. 44DA of the Act. Admittedly there is no DTA between India and Hong Kong and under the provision of Income-tax there is no concept of service PE. The Hon’ble Apex Court in the case of DIT International Vs. Morgan Stanely and Co. Inc. [2007 (7) TMI 201 - SUPREME Court] while analyzing the definition of PE u/s 92F(iii) of the Act has observed that the intention of parliament in adopting an inclusive definition of PE covers the service PE, agency PE, Software PE, Construction PE etc. Sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernative; a) the appellant be held as not liable to deduct tax at source u/s 195 and thereby not to be deemed as assessee in default u/s 201(1); b) the reimbursement made to the foreign company (DFCL), benefit of profit element, be not considered as fees for technical services or income chargeable to tax in India; 3. The assessee is an Indian company engaged in the business of ownership and operation of supermarket chain in India. The assessee entered into an agreement dated 6/6/2007 with M/s Diary Farm Company Ltd., (in short DFCL). DFCL is a company based in Hong Kong and engaged in the identical business activity that of assessee. Under the said agreement dated 6/6/2007, DFCL agreed to assign its employees to the assessee and consequently 5 employees/expatriates were deputed by DFCL to the assessee. 4. The assessee agreed to engage these employees to assist its business operation. It was also agreed between the parties that DFCL would pay salary to the assigned personnel and the assessee would reimburse such amount to DFCL. Accordingly, salary to assigned personnel were paid by DFCL which was subjected to TDS u/s 192 of the Income-tax Act. The assessee reimb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the secondment agreement. The learned AR have been referred debit note issued by the DFCL and submitted that the amount of note being salary to the employee matches with the payment made by the assessee. Thus the learned AR has submitted that when the assessee has already discharged its liability by deducting tax at source u/s 192 applicable on salary then the payment in question cannot be held as FTS. The learned AR has pointed out that the learned CIT(A) has issued a remand order but the impugned order has been passed without any remand report. It is, therefore, submitted that an identical issue has been considered by the Tribunal in the case of IDS Software Solution Vs. ITO (Supra) as well as the decision in the case of Abbey Business Services (India) Pvt. Ltd., 53 SOT 401 wherein tribunal has followed the decision in the case of IDS Software Solution and reaffirmed the view that the payment being reimbursement of salary cannot be treated as FTS. 6. On the other hand, the learned DR has submitted that as per the terms of the seconded agreement, the assessee did not have any control over deputed personnel. Further these employees were still on the pay role of DFCL and, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee was in need of personnel to assist with its operation in India. The assessee express its desire to DFCL a Hong Kong based company engaged in the similar line of business and operation to assign certain personnel to assist. Accordingly, the assessee and DFCL entered into an agreement dated 30/6/2007. The said agreement undoubtedly is a secondment agreement and the DFCL assigned 5 personnel/employees of secondees to assessee. The relevant part of terms and conditions of the agreement are reproduced as under: 1.2 It is clarified that DFCL will only depute manpower as required by Food world under this Agreement and not be rendering any service; to Food world. 1.3 Details of expatriate with name and qualification as on the date of this agreement are enclosed in Annexure 1. Any change in the list of such personnel will be agreed between the parties to the agreement by exchange of letters. 1.4 DFCL shall not be responsible for or assume and risk for the performance by the secondees while on assignment to Food world. The secondees shall function under the control, direction and supervision of Food world and in accordance with the policies, rules and guidelines ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Director. Mark Marshal Chief Operating Officer Apr-07- Mar-08 26 years of retails experience in South Africa Man Yee Linda Shiu Group Category Manager Apr-07- Jan-08 BSC in Food and Nutrition, University of Hong Kong (2000) 6 years of retail experience with welcome, Hong Kong in fresh food and merchandising management positions. Almen Aze Sing Chan Group Category Manager Apr-07- Jan-08 Bachelor of Master in Philosophy : Food Science (2003) BSc in Food and Nutrition Science, University of Hong Kong (2000) 2 years of retail experience with welcome, Hong Kong in fresh food and merchandising management positions. 10. As it is clear that all 5 secondees are not ordinary employees or workers but they are deputed the high level managerial/executive positions which shows that they are deputed because of expertise and managerial skills in the field. This fact is also reflected in the agreement. It is pertinent to note that the secondment agreement i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in paragraph 3(a) of this Article. (b) for service 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 services for the private use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or partnership for professional service as defined in Article 15 (Independent personal services) of this Convention. X X X X X X 12. The Hon ble High Court while deciding the issue has observed that the assessee filed the provision of services of other personnel. The term including the provision of services of technical or other personnel; is common in both definition provided under Explanation 2 to sec. 9(1)(vii) of the Act as well as in the Article 13(4) of the India UK DTA. Moreover the definition of FTS under sec. 9(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the meaning of paragraph 2. In setting this question, the competent authorities may refer not only to the above mentioned indications but to a number of circumstances enabling them to establish that the real employer is the user of the labour (and nor the foreign intermediary); The hirer does not bear the responsibility or risk for the results produced by the employee s work; - The authority to instruct the worker lies with the user; - The work is performed or a place which is under 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 .. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IOP, especially since that expression expressly includes the provision of the services of personnel. The seconded employees, who work, so to say, for CIOP are provided by the overseas entities and the work conducted by them thus, i.e. assistance in conducting the business of COIP of quality control and management is through the overseas entities. The nature 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 know-how, 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 Servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verseas entities in the transaction covered by the India-Canada DTAA, thus, it must not only be showed that technical services were performed, but that such knowledge etc. was 'made available'. xxxxxxxxxx 37. This brings the Court to the next issue, concerning reimbursement and the doctrine of diversion of income by overriding title. This Court notices that a case with almost identical circumstances, in In Re: AT S India (P.) Ltd. (supra), also came up before the AAR. There, an agreement between AT S India and its parent, AT Austria was entered into, by which AT S Austria undertook to assign or cause its subsidiaries to assign its qualified employees to the AT S India. These individuals were to work for AT S India and receive compensation substantially similar to what they would have received as employees of AT S Austria. They were engaged by AT S India on a full time basis. The question before the AAR was identical to this case: Whether pursuant to the secondment agreement entered into by the applicant with AT S Austria, the payment to be made by the applicant to AT S Austria, towards reimbursement of salary cost incurred by AT S Austria in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f compensation as the actual expenditure, it would make no difference as the same is payable to the AT S Austria under the secondment agreement for services provided by it. It would, therefore, be not only unrealistic but also contrary to the terms of the agreement to treat payments under the said agreement as mere reimbursement of salaries of the seconded employees who are said to be the employees of the applicant. To show that the real employer of such employees is the applicant and not the AT S Austria, Mr. Chaitanya invited our attention to various employment agreements entered into between the applicant and the seconded employees and also the certificate of deduction of tax at source on their global salary. All the employment agreements are similarly worded. We have carefully gone through the employment agreement between the applicant and Mr. Markus Stoinkellner. The duration of the employment is from 1st Sept., 2005 till 30th Aug., 2008. In Article 3 thereof salary of the employee is noted as the remuneration, perquisites and other entitlements as detailed in Appendix-A. However, Appendix-A does not specify any amount. All that it says, is that the salary will be as fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect reasoning that conflates liability to tax with subsequent deductions that may be claimed. 13. The SLP filed against the judgment of Hon ble Delhi High Court has been dismissed by the Hon ble Supreme Court in 227 Taxman 368. Therefore the view taken by the Hon ble High Court has attained finality. The concept of income includes positive as well as negative income or nil income. In the case of payment being FTS or royalty as per sec. 9(1) of the Act it is irrelevant whether any profit element in the income or not. It is not only a matter of computation of total income when the concept of profit element in payment is relevant. If the payment being FTS or royalty is made to nonresident, then the concept of total income becomes irrelevant and the provisions of sec. 44D recognize the gross payment chargeable to tax. Thus all the payment made by the assessee to non-resident on account of FTS or royalty an chargeable to tax irrespective of any profit element in the said payment or not. However, there is an exception to this Rule of charging the gross amount when the non-resident is having fixed place of business or PE in India and the amount is earned through the PE, then the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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