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2015 (11) TMI 271 - ITAT BANGALORE

2015 (11) TMI 271 - ITAT BANGALORE - TMI - Reimbursement of salary costs of seconded personnel made to M/s Diary Farm Co. Ltd., Hongkong - whether is in the nature of ‘fees for technical services’ u/s 9(1)(vii) and consequently liable for deduction of tax at source u/s 195 - Held that:- 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 .....

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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 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 .....

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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.

Since this plea has been taken by the assessee for the first time before this Tribunal and there is no DTA between India and Hong Kong therefore, this concept of service PE requires a proper examination of all the r .....

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Nos.1356 & 1357/Bang/2013 - Dated:- 28-10-2015 - SHRI VIJAYPAL RAO, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER For The Appellant : Shri Padam Chand Khincha, CA For The Respondent : Shri Saravanan B, JCIT ORDER PER SHRI VIJAYPAL RAO, JUDICIAL MEMBER These appeals by the assessee are directed against the order dated 22/7/2013 of CIT(A) arising from the order passed u/s 201(1) and 201(1A) of the Act for the asst. year 2008-09. 2. The assessee has raised the common grounds for these t .....

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source u/s 195 of the Income-tax Act, 1961 (Act). 2.2 The learned CIT(A) IV, B lore has erred in treating the appellant as assessee in default u/s 201 of the Act for not deducting tax at source in respect of the impugned payments. On facts and in the circumstances of the case and law applicable, the impugned payments were not liable for TDS u/s 195 and consequently, the appellant cannot be regarded as assessee in default u/s 201. 3.1 In the view of the above and other grounds to be adduced at th .....

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nership 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 busin .....

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itiated proceedings u/s 201 of the Act for not withholding tax at source in respect of reimbursement made to DFCL. An order u/s 201(1) and 201(1A) has been passed by the DDIT (International Taxation) on 31/7/2008, whereby it was held that remittance made by the assessee constitute fee for technical services u/s 9(1)(vii) of the Act. Therefore, the same is chargeable to tax on gross basis. The DDIT (International Taxation) was of the view that the assessee was liable to deduct tax u/s 195 @ 10%. .....

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of this Tribunal in the case of IDS software Solution Software India Pvt. Ltd., 122 TTJ which was also followed in the case of M/s Abbey Business Services (India) Pvt. Ltd. The CIT(A) did not accept the contention of the assessee and after examination of the terms and conditions of the seconded agreement arrived at the conclusion that the seconded employees did not have an master servant relationship with assessee. They have provided managerial and consultancy services to the assessee within th .....

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ich was discharged by the assessee. He has referred the details of the payment and submitted that the amount represents only reimbursement of salary of five employees deputed with assessee as 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 ded .....

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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, therefore, there was no relation of master and employees between the assessee and these secondees. DFCL was the ac .....

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nt and, therefore, the remittance made by the assessee are actually FTS and not reimbursement of salary. He has relied upon the judgment of Hon ble Delhi High Court in the case of Centrica India Pvt. Ltd. Vs. CIT 364 ITR 336 and submitted that it has been held by the Hon ble High Court that the secondees are imparting technical expertise to all regular employees of the assessee. Further nomenclature used in the agreement relating to the payment as reimbursement cannot be a determinative factor. .....

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lied upon the judgment of Hon ble SC in the case of CIT Vs. Morgan Stanley and Co. Inc., 292 ITR 416 and submitted that while interpreting the definition of PE as provided u/s 92F(iii) as well as considering the CBDT Circular 14 of 2001 the Hon ble SC has observed that the definition of PE covers services PE, agency PE, Software PE, construction PE etc. Thus, the learned AR has submitted that even in the case of the payment in question is treated as FTS there would be no tax liability because th .....

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l 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 qualif .....

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loyees during the assignment period. EFCL will not have continuing obligation towards Foodworld with regard to the performance of the secondees. The obligation of DFCL shall cease on the acceptance by the relevant secondee of an employment letter from Foodworld. X X X X X X 1.8 Foodworld shall be responsible for complying with the requirements of withholding tax and associated reporting obligations under the Indian tax laws, on the Remuneration and any other payments or benefits paid to the Seco .....

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ated by either party at any time, by providing not less than 90 days written notice to the other party. 9. As per the terms of the above agreement, 5 personnel were deputed with the assessee. The details of the secondees are given at page 6 of the CIT(A) as under: Name of Secondees; Designation Worked during 2007- 08 Qualification Retail Experience Norma Yum Chief Executive Officer Apr-07 Mar-08 MBA from Newport University (Hong Kong) 1999 BA from Regents of American World University, Hong Kong .....

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Prior to secondment, Fresh Operations Manager for Welcome, Hong Kong, reporting to the Fresh Food 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 M .....

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is pertinent to note that the secondment agreement is between the assessee and DFCL and these secondees assigned to the assessee are not party to the agreement. Further the secondees are assigned by DFCL and there is no separate contract of employment between the assessee and the secondees. The secondees are under the legal obligation as well as employment of DFCL and assigned to the assessee only for a short period of time. In the absence of any contract between the assessee and the secondees, .....

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anation [2] - For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head salaries . 11. An ide .....

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c. 9(1)(vii) are almost identical except the word managerial is missing in the definition provided under tax treaty. For ready reference we quote the definition of FTS under Article 13(4) of Indo-UK DTAA which has been reproduced by the Hon ble High Court in para 25 as under:- ARTICLE 13 - Royalties and fees for technical services- 4. The definitions of fees for technical services in paragraph 4 of this Article shall not include amounts paid : (a) for services that are ancillary and subsidiary, .....

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e 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 .....

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nd the overseas entity is of no significance. It is argued that for all practical purposes, CIOP is the real employer, because the content of the work or employment, the entire direction and supervision over the seconded employees work and the pay and emoluments are borne by it. For convenience, the pay is disbursed by the overseas entity, but that amount is reimbursed to the overseas entity. Reliance is firstly placed on the concept of Economic employer, discussed by Klaus Vogel in 'Double .....

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prima facie the three conditions laid down by paragraph 2 and may claim exemption from taxation in the country where he to temporarily working. To prevent such abuse, in situation of this type, the term "employer" should be interpreted in the context of paragraph 2. In this respect it should be noted that the term "employer" is not defined in the convention but it is understood that the employer is the person having rights on the work produced and bearing the relative respon .....

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n 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 contro .....

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10) 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 .....

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ividual who will perform the work and to terminate the contractual arrangements entered into with that individual for that purpose; 29. The issue which arises for the consideration of the Court in this case is 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, which embody the concept of a service permanent establishment (a "service PE"). In terms of those articles, the Court mus .....

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as determined by the Courts. Since the question of technical services has been considered by the DTAA, this takes precedence over the taxing regime under Section 9 of the Act. 30. The India-UK DTAA defines 'fees for technical services' as "payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel)". In this case, the overseas entities have, through the sec .....

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OP - 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 suppor .....

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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 reading was supported by the Supreme Court, in the context of Section 9(1)(iv) of the Act in Continental Construction Ltd. v. CIT [1992] 195 ITR 81/60 Taxman 429. Further, the Court notes that the distinction to be drawn by CIOP between the provision of services by the overseas entities themselves and the 'm .....

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cluded 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 … make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design." This second qualification for the technical knowledge etc. to be 'made available .....

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rsonnel) which … or make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design." In order for the amounts paid to the overseas 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 .....

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ve 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 seconded personnel, would be subject .....

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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 &q .....

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spent or lost. However, under the secondment agreement the applicant is required to compensate AT&S Austria for all costs directly or indirectly arisen from the secondment of personnel and that the compensation is not limited to salary, bonus, benefits, personal travel, etc. though salary, bonus, etc. and the amounts referred to in para 4.2 of the secondment agreement form part of compensation. The premise of the question that the payments are only in the nature of reimbursement of actual e .....

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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 agreeme .....

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d in Appendix-A. However, Appendix-A does not specify any amount. All that it says, is that the salary will be as 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 y .....

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s 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) cannot negate the nature of the transaction. It would lead to an absurd conclusion if, all else constant, the fact that no payment is demanded negates accrual of income to the o .....

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d be payment for services - which may be deducted in accordance with law - or reimbursement for costs incurred. This, however, cannot be used to claim that the entire amount is in the nature of reimbursement, for which the tax liability is not triggered in the first place. This would mean that in any circumstance where services are provided between related parties, the demand of only as much money as has been spent in providing the service would remove the tax liability altogether. This is clear .....

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fit 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 .....

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as per the definition under explanation 2 to sec . 9(1)(vii) of the Act. The decisions relied upon by the assessee in the case of IDS Software Solutions (Supra) and Abbey Business Solution (Supra) would not help the case of the assessee when there is a direct judgment of Hon ble Delhi High Court on this point. 14. 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 p .....

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ng by the Finance Act of 2001. In sec. 92F(iii) the word enterprise is defined to mean a person including a PE of such person who is proposed to be engaged in any activity relating to the production . Under the Central Board of Direct Taxes Circular No.14 of 2001 it has been clarified that the term PE has not been defined in the Act but its meaning may be understood with reference to the DTAA entered into by India. Thus the intention was to rely on the concept and definition of PE in the DTAA. H .....

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