Section 9(1)(vii), the Act – reimbursement made for salaries of secondees was FTS since they were performing services based on their technical knowledge; matter remanded to examine the issue whether secondment constitutes service PE under the Act and consequently, is subject to section 44DA of the Act
Facts
The taxpayer was an Indian company engaged in the business of ownership and operation of supermarket chain in India. Taxpayer was in need of personnel to assist with its operations in India. For this purpose, it entered into a Secondment agreement with a Hong Kong based company (“HKCo”), which was engaged in identical business as that of the Taxpayer. Accordingly, HKCo deputed its five employees (“secondees”) to the taxpayer. As per the agreement, HKCo was to pay the salary to the secondees and the taxpayer was to reimburse the same to HKCo. The taxpayer withheld tax from the salary of the secondees u/s. 192 and paid the same to the Government. The taxpayer did not withhold tax from the reimbursement amount paid to HKCo.
According to the AO, the reimbursement amount was FTS and hence, the taxpayer was required to withhold tax therefrom. Concluding that there was no master-servant relationship between the taxpayer and the secondees, CIT upheld the order of the AO.
Held
Payment in nature of FTS u/s. 9(1)(vii) of the Act
It was evident from the agreement and the qualifications of the secondees that they were high level managers/ executives which showed that they were deputed for their expertise and managerial skills in the field.
The agreement was entered into between the taxpayer and HKCo and the secondees were not parties to the agreement. Further, secondees were assigned by HKCo and there was no contract of employment between the taxpayer and the secondees. Their deputation was for a short period and their employment with HKCo continued during the deputation period. Neither the taxpayer nor the secondees had any enforceable right or obligation against each other, including claim for salary. Thus, the secondees were performing their duties for and on behalf of HKCo.
Since the secondees were rendering managerial services requiring high expertise to the taxpayer as part of their duty to HKCo, the payment for such services was in the nature of FTS as defined in explanation 2 to section 9(1) (vii) of the Act.
In Centrica India Pvt. Ltd. vs. CIT 364 ITR 336 (Delhi)2, the High Court, considering an identical issue in the context of definition of FTS in Article 13(4) of India-UK DTAA which includes the expression “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)”, held that as the secondees were required to draw from their technical knowledge, their services fell within the scope of the term technical or consultancy services.
In case of section 9(1)(vii) of the Act, it is irrelevant whether the payment has any element or not. Accordingly, the gross payment is chargeable to tax.
Service PE
There is no tax treaty between India and Hong Kong. Also, there is no concept of a service PE under the Act.
While analysing the definition of PE u/s. 92F(iii) of the Act, in Morgan Stanley and Co Inc.3, the Supreme Court observed that the intention of the Parliament in adopting an inclusive definition of PE covers the service PE, agency PE, software PE, construction PE, etc.
Relying on the said decision, the taxpayer has raised alternative plea that deputation of secondees would constitute service PE and hence, the amount should be chargeable to tax as per the provision of section 44DA of the Act. Since this plea has been raised by the taxpayer for the first time before the Tribunal and since there is no tax treaty between India and Hong Kong, the concept of service PE requires proper examination of all the relevant facts and provisions on the point whether deputation of secondees constitutes service PE in India or not. Accordingly, the issue was remanded to the AO for adjudication.
