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2009 (1) TMI 19

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.... 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 employee of HMFICL, Mr. Shin Bong In, (Secondee) has been seconded to engage in certain specified activities under the supervision and control of the recipient.  The agreement was effective for a period of two years.  HMFICL is not in the business of supply of man power. Under the Agreement, the applicant reimburses HMFICL only a part of the salary and other benefits payable to the seconded employee as provided in th....

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....he 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 relevant terms and clauses in the agreement known as Secondment Agreement to which HMFICL and the applicant are parties. In the agreement, HMFICL is described as 'Provider' and the applicant as 'Recipient'. Mr. Shin Bong In, the employee of the Provider is referred to as 'Secondee'. 6.1. In the preamble it is stated that for developing the Korean business, the Recipient is interested in taking a person who has knowledge of Korea, Korean....

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....  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 have the effect of constituting any relationship of employer and employee between the Recipient and the Secondee. Clause 4.3 then makes it clear that the secondeeis not intended to be an agent of the Recipient. Clause 4.4 lays down that the Secondee shall have no right or authority to contract on behalf of the Recipient or to bind the Recipient in any way in relation to the third parties unless authorized by....

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....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 services undertaken by the payee of fee. In other words, is the bracketted clause a stand alone provision or is it inextricably connected with the said services? HMFICL itself does not render any service of the nature of managerial, technical or consultancy to the applicant and it has not deputed its employee to carry out such services on its behalf. There is no agreement for rendering such services. In this fact situation, it i....

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....e 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 of such consideration within the meaning of Section 9(1)(vii) of the Act read with Article 13.4 of DTAA, the applicant's contention is that it represents partial reimbursement of salary cost borne by the Provider company and nothing more. In effect, the contention of the applicant's counsel is that what is paid by way of such reimbursement does not constitute income in the hands of the payee - HMFICL, even i....

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....ee 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 Indian subsidiary to pay to the assessee company a proportionate part of the costs and expenses (including salaries and research & development expenditure) incurred by the assessee - company for the acquisition and development of information, processes and inventions. The Government of India permitted the Indian company to make payments towards research contribution to the assessee company subject to a ceiling o....

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....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. There also certain technical personnel were deputed by a foreign company under a Secondment Agreement. The question was formulated as follows : "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 to wi....

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.... 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 represent the quantum of 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 ....

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....l 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 Danfoss in providing services to the applicant." It was mainly on that finding that the applicant's contention was rejected. Referring to Dunlop Rubber case (supra) the distinguishing feature was pointed out as follows:- "That was not the case of the assessee-company providing services to an Indian company on payment of consideration in the form of service fees as in the present case. In that case both the assessee-company an....