TMI Blog2009 (1) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... the 'Secondment Agreement' entered into between them. Under that agreement, the services of Mr. Shin Bong In, (hereinafter referred to as Secondee) who was an employee of HMFICL at Korea were kept at the disposal of the applicant for a period of two years in order to assist the applicant in matters relating to Korean insurance business. 2. The following facts are stated in the application :- 2.1 The applicant is engaged in the business of non-life insurance and is interested in building up business relationship with Indian companies which are subsidiaries/joint ventures of certain foreign Companies. The applicant has, inter alia, two divisions - one each dealing with the Korean and Japanee segments in India. In this regard, the applicant is in need of persons from the respective jurisdictions abroad who are well-versed with the insurance business practices, foreign language and other related information that would be of use to the applicant in the expansion of its business activities. 2.2 In pursuing the above objective, the Secondment Agreement dated 13.3.2006 between HMFICL (Provider) and the applicant (Recipient) was entered into. Pursuant to that agreement, an emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng services of technical personnel to the applicant and the nature of services to be performed by the seconded employee are essentially technical and consultancy services. It is therefore submitted that income shall be deemed to accrue to HMFICL in India both under the provisions of Income-tax Act as well as Art.12 of the DTAA between India and Korea. Hence, the applicant is liable to deduct tax at source as per section 195 of the Income-tax Act 1961. The fact that in respect of salary received from HMFICL income tax is paid in India by the seconded employee and HMFICL deducts the tax and deposits the same with the Income-tax Department in India does not in any way affect the accrual of income to HMFICL in India by way of fees for technical services. These are broadly the contentions of Revenue. 5.1. In the comments of the Commissioner, a contention was also raised that the seconded employee can be regarded as an agent of HMFICL in India and therefore the said company has an agency PE in India. The learned counsel for the Revenue has very rightly not pursued this line of argument having regard to the nature and terms of Agreement. 6. Let us now turn our attention to the rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt within 30 days of receipt of an invoice." 6.4. Schedule-I gives the details of emoluments. The grade of the employee is mentioned as 'MG-7' with the pay scale of Rs.17,000-45,900. In the first column various components of remuneration such as basic, HRA, personal allowance, gratuity etc., are mentioned. The monthly gross salary is shown as Rs.28,560/- (minimum), Rs.52,728/- (mid-point) and Rs.77,112/- (maximum). The other benefits towards furniture, car, medical etc., are reimbursable on the basis of actuals subject to the maximum. The payment is required to be made by the Recipient within 30 days of the receipt of invoice. Clause 3.6 says that during secondment period, the Provider will continue to be responsible for the payment or provision of the salary and benefits to or in respect of the Secondee. No other payment or reimbursement than that agreed upon in Cl.3.3 shall be payable or reimbursable by the Recipient to the Provider [3.8]. 6.5. Clause 4.1 requires the Provider to use all reasonable endeavours to ensure that during the secondment period, the seconded employee remains in the employment of Provider. Clause 4.2 states that nothing in this agreement shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount reimbursed by the applicant constitutes about 55% of the salary house rent and other fringe benefits paid by HMFICL to the seconded employee. 8. The crucial question debated before us is whether the provision in Income-tax Act and the DTAA relating to 'fees for technical services" (FTS) is attracted or not. Explanation 2 to Section 9(1)(vii) of the Income-tax Act, 1961 defines 'FTS' as "any consideration for the rendering of any managerial, technical or consultancy services (including provision of services of technical or other personnel) but does not include consideration for any construction, assembling, mining or like projects undertaken by the recipient or consideration which would be the income of the recipient chargeable under the head "salary". 8.1 Article 13.4 of the DTAA between India and Korea defines FTS substantially in similar terms. 8.2 It is debatable whether the bracketted words - "including provision of services of technical or other personnel" is independent of preceding terminology - "managerial, technical or consultancy services" or whether the bracketted words are to be regarded as integral part of managerial, technical or consultancy s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in Intertek Testing Services (AAR/760/2007) this Authority had occasion to consider the connotation of the expression 'technical and consultancy services' contemplated by Section 9(1)(vii) of the Income-tax Act, 1961. We may also refer to the decision of the Andhra Pradesh High Court in the case of G.V.K. Industries [228 ITR 564] wherein it was held that tendering advice on structuring a financial package in order to secure a huge loan is technical service. The ratio of these decisions apply a fortiori to the present case. 8.4. In the light of the above discussion, there can be no serious controversy that HMFICL Korea did provide the services of technical personnel, being the Seconded employee at the request of the applicant. From that, however, it does not automatically follow that the payments made by the applicant to HMFICL are to be treated as FTS. The more serious question that still remains to be addressed is whether the amounts paid from time to time to HMFICL in terms of the Secondment Agreement has to be construed as the 'consideration' for the provision of services of technical personnel. Whereas, according to the learned counsel for the Revenue, it is in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d atleast one year thereafter, the Provider will not compete within India in regard to the general insurance business [vide clause 8]. It is in the context of these mutually beneficial clauses, the secondment of the employee and reimbursement of only a part of his salary/benefits should be viewed. If so viewed, the reasonable conclusion to be drawn is that the parties never contemplated payment of a fee for technical services within the meaning of Explanation 2 to section 9(1)(vii) of the Act or Article 13.4 of the Treaty. The essence or substance of the transaction is not deriving income by way of charging a fee for the service. 9. We would like to draw support from some decided cases wherein the true nature of receipt in the form of reimbursement of expenses was considered. 9.1 In the case of CIT vs. Dunlop Rubber Co. Ltd., a division Bench of Calcutta High Court consisting of Sabyasachi Mukherjee J. (as he then was) and S.C. Sen J. discussed the question whether reimbursement of a part of expenses incurred on research to the assessee - a non-resident company by its subsidiary constitutes income of the said non-resident company The agreement inter alia required the Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be reimbursed. The ITO disallowed the expenses incurred for traveling and entertainment expenses on the ground that they were beyond permissible limit. The Income-tax Tribunal, however, held in favour of the assessee to the effect that the reimbursement of expenses did not constitute income. The Delhi High Court after referring to judgment of the Supreme Court in CIT vs. K. Tejaji observed thus : "The Supreme Court clearly held that to the extent of the receipt representing reimbursement of the expenses, the same were not taxable. It is only when there was surplus that the same should be taxed. In the present case, the Tribunal has held that the assessee received no sums in excess of the expenses incurred by the assessee under the Agreement." In conclusion, it was observed that reimbursement of expenses can, under no circumstances, be regarded as revenue receipt. No doubt, the question there was whether the reimbursed amount can be regarded as revenue receipt. But, the approach adopted is in line with what was expressed by Calcutta High Court in Dunlop case. 10. Reliance has been placed on behalf of the Revenue on the Ruling of this Authority in AT S India Ltd*. in re. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "reimbursement" in the agreement will not be determinative of the nature of payments. The term "reimbursement" is not a technical word or a word of art. In Oxford English Dictionary, to reimburse means - to repay a person who has spent or lost money - and accordingly reimbursement means to make good the amount 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 the compensation. The premise of the question that the payments are only in the nature of reimbursement of actual expenditure incurred by AT S Austria is not tenable for reasons more than one. First it is not supported by any evidence as no material (except the debit notes of salaries of seconded personnel) is placed before us to show what actual expenditure was incurred by AT S Austria and what is being claimed as reimbursement; secondly, assuming for the sake of argument that the debit notes repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market research and strategies, financial matters and customer relations. The consideration for availing of those services was a service fee based on the portion of the services the applicant's company received in relation to the total cost of the foreign company in providing such services. The question that was addressed by this Authority was whether the payment was in the nature of reimbursement of a portion of the actual expenditure incurred by the Singapore company and whether any income was embedded in it. The question was answered against the applicant. The following observations are crucial: "It is thus clear that there is no direct nexus between the actual costs incurred by the Danfoss Singapore in providing the said services to a Danfoss group company and the fees payable by each individual company which avails of the services. In the absence of the break-up of the cost incurred by Danfoss Singapore in providing such services and fees payable by each individual company, the aforementioned conclusion, in our view, is unassailable. It is, therefore, not possible to conclude that the service fee payable by the applicant is nothing but reimbursement of costs incurred by Danf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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