TMI Blog2006 (11) TMI 138X X X X Extracts X X X X X X X X Extracts X X X X ..... nik Aktiengesellschaft, Austria (for short "the AT S Austria"), a company incorporated under the laws of Republic of Austria. The applicant is carrying on the business of manufacturing of Printed Circuit Boards. The applicant entered into various agreements with AT S Austria. It entered into an agreement for Information Technology Cost Sharing with AT S Austria on 13.3.2001 - a fact which is not relevant any more for the present discussion. Among others, two agreements which are material here are Foreign Collaboration Agreement dated 17.8.2000 and Secondment Agreement dated 17.9.2002. Pursuant to the latter agreement the AT S Austria undertook to assign or cause its subsidiaries to assign its qualified employees to the applicant. They are to work for the applicant and will receive compensation substantially similar to what they would have received as employees of AT S Austria or its subsidiaries. Such employees are to be engaged by the applicant on full time basis. Though in the application the applicant set-forth two questions to seek advance ruling of the Authority, at the initial stage of the hearing of the application, Mr. Chythanya, learned counsel appearing for the applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreement are merely reimbursement of cost, tax has to be deducted at source from such payments by the applicant. The applicant has to deduct tax at source under the provisions of Section 195 of the Act from the payments to be made to a the non-resident who can file a return of income before the assessing officer and his claim, if any, will be decided after considering all the relevant facts. On 15.12.2005 the applicant filed rejoinder disputing the contentions raised by the Commissioner and reiterating its case. 3. The Government of Republic of India and the Government of Republic of Austria have entered into an agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income on 5th September, 2001 which is notified by Notification No. GSR 682(E), dated 20th September, 2001 (hereinafter referred to as "the DTAA"). 4. Mr. Chythanya has strenuously contended that pursuant to the secondment agreement on transfer of employees of AT S Austria to the applicant, they have become employees of the applicant and this is evident from the employment agreements and the statement of tax deduction at source; a part of their salaries wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of the Act being in the nature of royalty/FTS, they are subject to withholding tax at the source. 6. In the light of above contentions of the learned counsel for the parties two points need to be considered: What is the scope of Section 195 of the Act is? Whether payments by the applicant to the AT S Austria under the secondment agreement are in the nature of reimbursement, royalty or FTS." We shall first deal with the scope of section 195 of the Act. It will be useful to read the relevant portion of sub-section (1) of Section 195 of the Act which is in the following terms:- Sub-section (1) of Section 195 of the Act "Any person responsible for paying to a non-resident, not being a company, or to a foreign company, and interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force" A plain reading of the above provision shows that it imposes an obliga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement dated 17th August, 2000 (for short "the FCA") between the same parties they have agreed and set-forth the terms and conditions of the secondment agreement. Now, the FCA, says that the applicant has approached AT S Austria to seek complete support through the full range of its expertise, manufacture technology, in order to participate in the Indian and foreign markets at terms and conditions mutually agreed and acceptable to both the parties and requested AT S Austria to participate in the capital of the applicant. Article 4 of the FCA casts an obligation on AT S Austria to provide all assistance and cooperation to the applicant in its venture of carrying on the business by providing appropriate support; technology and such other services as may be required in connection therewith. And Article 4.2 thereof requires AT S Austria to offer the services of its technical experts to the applicant, if requested, for working on the project being executed and such services shall be rendered by the technical experts from AT S Austria subject to their availability and on such charges, terms and conditions as will be agreed between the parties. 8. Reverting to the secondment ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d personnel and that the remainder of such total amount of compensation has to be paid by the applicant to the AT S Austria. However, the annual compensation is subject to changes upon both parties' written agreement. It is provided under article 6 that the parties have understood and agreed that during the term of that agreement AT S Austria shall have no liability whatsoever for any acts or omissions of the seconded personnel and that the applicant releases and agrees to indemnify AT S Austria from and against any and all such liability. From the above analysis of both the agreements it's 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 have to satisfy the characteristic of reimbursement and that the term "reimbursement" in the agreement will not be determinative of nature of payments. The ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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. We shall straightway refer to the following commentary of OECD on Article 15, relied upon by Mr. Chythanya : "…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 responsibility and risks. In cases of international hiring-out of labour, these functions are to a large extent exercised by the user. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eria summed up by the learned authors in the above quoted passages, we are afraid we cannot accede to the contention of the learned counsel. We have referred to the terms of the foreign collaboration agreement and secondment agreement. From the above terms, it is obvious that AT S Austria is to provide services of its employees on terms and conditions agreed to between the parties. The secondment agreement provides that a part of the salary of seconded personnel will be paid by the applicant in Indian rupees and the remaining part shall be paid by the applicant to the AT S Austria in Euro. The employees would go back to AT S Austria on the expiry of the assignment though while working with the applicant the seconded personnel sent by the AT S Austria are required to comply with the regulations and management system of the applicant. During the period the said seconded employees will be working under the applicant, the AT S Austria has power to recall any one of them and replace them with other employees. It is also clear that the applicant cannot pay any amount over and above the salary fixed by the AT S Austria to the employees in India. From the facts and circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable by - the Government; or 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 a person who is a non-resident, where the fees are payable in respect of services utilizes 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: Explanation 1 - x x x x Explanation 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". x x x x x Article 12 of the DTAA deals with "Royalties and fees for technical services". The terms "royalties" and "fees for technical servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son other than payments to an employee of a person making payments in consideration for the services of a managerial, technical or consultancy nature including the provision of services of technical or other personnel. The exception provided in the said definition of FTS is payments to an employee of a person making payments in consideration of services. Here, on the facts of this case, though at first blush salaries paid by the applicant to the seconded employees would appear to fall outside the ambit of the definition of FTS. On a close examination this impression will be dispelled. We have held above that the applicant is not the real employer of the seconded employees. The subject matter of payments is not merely the salaries of such employees, which have suffered tax, but compensation which, as noted above, takes in its ambit other items also which AT S Austria is entitled to receive from the applicant under the secondment agreement. And further the recipient of the consideration of compensation is AT S Austria and not the seconded employees and the compensation is not the income of AT S Austria chargeable under the head 'salaries'. The fact that employees of AT S Austria ..... X X X X Extracts X X X X X X X X Extracts X X X X
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