1. Introduction In the current global
scenario, the international business entities have extended their
business worldwide and they have made their presence by establishing
their own subsidiaries or group entities with whom they have business
arrangement. These overseas entities depute their technical staff and
human resources in other countries, to support their global business
functions and to ensure quality and consistency in their operations.
Under a classic Secondment agreement, the seconded employees who are
under employment of non-resident overseas entity are deputed or
transferred to subsidiary company in the overseas countries to work for
special assignment which are more technical and managerial in nature.
These seconded employees usually work under direct control and
supervision of the subsidiary entities in their country. Since these
seconded employees belong to the main parent entity, therefore, they
continue to receive their remuneration and salaries with all social
security benefits from the parent entity. Such costs and remuneration
are reimbursed by the subsidiary company to the parent entity. Strictly
speaking on paper they remain the employees of the parent entities but
they are under direct supervision and control of subsidiary entity,
where their day to day activities are managed and governed by them and
so much so they can be removed by them. Once the terms of secondment is
over, they revert back to their overseas entity. In a way, subsidiary
entity is the economic employer of the seconded employee who ultimately
bears the salary cost and exercise control over their work.
Generally,
it is contended that reimbursement of cost cannot be treated as payment
for Fees for Technical Services [FTS] or Fees for Included Services
[FIS], unless there is an explicit agreement between the parties that
technical services would be provided through these employees. The
deputation of employees is mainly for the benefit of the subsidiary
company to smoothly and efficiently conduct the business. However, such a
reimbursement of salary cost by the subsidiary entity has been matter
of huge controversy, as to what is the nature of such payment, whether
it is ‘fee for included services’ or not. Other related controversy is
that, on the basis of duration of the stay of seconded/deputed employees
in the host countries, whether the non-resident parent entity
constitute the service PE in the host country or not. Let us know
discuss the meaning the words ‘Secondment’ or ‘Deputation’.
2. Meaning of the words ‘Deputation’ or ‘Secondment’
Deputation
as per Concise Oxford Dictionary is “a group of people who undertake a
mission on behalf of a larger group”. Whereas Secondment as per Concise
Oxford Dictionary is “temporarily transfer (a worker) to another
position.”
Dictionary meanings of ‘deputation’ and ‘secondment’
are different. However, in common practice, both these terms are used
interchangeably.
The term secondment in common parlance means
that the employee remains an employee of his existing employer but by
virtue of some agreement between the employer and the third person, the
employee has to perform the duties for the benefit of such third person.
With globalisation, mobility of employees has become an
integral part of business enterprise. For various commercial reasons,
employment contracts are often concluded by the legal entity
incorporated in the country where the employee is domiciled at the time
of his appointment. However, this formal contract with the employee is
not intended to restrict the employee from seeking global opportunities.
If the employment is required to be exercised in another country, the
employee makes available his capacity to work to the entity or
establishment in the other country (“host country”). While doing so, the
employee retains a lien on the formal employment contract. This
arrangement of facilitating the global mobility of employees is called
“secondment”.
The entity or establishment in host country
becomes the economic employer, since it bears the responsibility or risk
for the result produced by the employee rendering the service. The
remuneration in relation to services of the employee in the host country
may be disbursed and borne by the entity in the host country.
Alternatively, the remuneration may be disbursed to the employee by the
formal employer and claimed as a reimbursement from the entity in the
host country. In some cases, an overriding fee is also charged from the
entity in the host country to cover the administrative efforts involved
in disbursing salary.
3. Decisions in the case of Centrica India Offshore (P.) Ltd.
3.1
In the case of Centrica India Offshore (P.) Ltd. [CIOPL], [2012] 19
taxmann.com 214 (AAR), the following questions were raised before the
AAR: (a) Whether, on the facts and in the circumstances, of the case
the amount paid or payable by the applicant to the overseas entities
under the terms of Secondment Agreement is in the nature of income
accrued to the overseas entities? (b) If the answer to question no. 1
above is in the affirmative, whether the tax is liable to be deducted at
source by the applicant under the provision of section 195 of the
Income-tax Act, 1961 [the Act]?
The AAR held that the payment by the applicant under the agreement is not FTS but would be income accruing to overseas entities in view of the existence of a service PE in India and on question No. 2, held that tax is liable to be deducted at source u/s. 195 of the Act.
3.2 Against the ruling of the AAR, CIOPL filed a writ petition and the Delhi High Court in its judgment Centrica India Offshore (P.) Ltd. vs CIT, [2014] 44 taxmann.com 300 (Delhi) held that the reimbursement of salaries to the oversea entity is liable to tax as FTS/FIS and also Service PE exists in India.
3.3
A gainst the decision of the Delhi High Court, CIOPL filed a Special
Leave Petition [SPL] in the Supreme Court, which has been dismissed by
the SC. Centrica India Offshore (P.) Ltd. vs CIT [2014] 51 taxmann.com 386 (SC).
3.4 Effect of Rejection of SLP in Limine (at the threshold) by Supreme Court:
a) in Indian Oil Corporation Ltd. vs. State of Bihar [1987] 167 ITR 897; [1986] 4 SCC 146; AIR 1986 SC 1780, the Supreme Court held that “the dismissal of a special leave petition in limine by a non-speaking order does not jus- tify any inference that, by necessary implication, the contentions raised in the special leave petition on the merits of the case have been rejected by the Supreme Court. it has been further held that the effect of a non-speaking order of dismissal of a special leave petition without anything more indicating the grounds or reasons of its dismissal must, by necessary implication, be taken to be that the Supreme Court had decided only that it was not a fit case where special leave should be granted”.
b) the above case has also been referred by the Supreme Court in case of Employees’ Wel- fare Association vs. Union of India, AIR 1990 SC 334; [1989] 4 SCC 187.
c) in V. M. Salgaocar and Brothers Pvt. Ltd. vs. CIT [2000] 243 ITR 383, the Supreme Court held that “when a special leave petition is dismissed this court does not comment on the correctness or otherwise of the order from which leave to appeal is sought. But what the court means is that it does not consider it to be a fit case for exercise of its jurisdiction under article 136 of the Constitution.”
d) thus, the fact that SLP is rejected by the apex Court, especially in limine without assigning any reasons, does not signify that it has ap- proved the judgment of the delhi high Court.
e) therefore, the decision of delhi high Court in the case of Centrica cannot be held as final on the issue of “Secondment”.
4. Concept of ‘Economic or real employer vs Legal employer’
In the context of determination of taxability of reimbursement of such remuneration i the hands of the parent entity, determination of the real employer is very important. In case of Secondment payments, it is very crucial to understand the concept of ‘Economic or real employer vs Legal employer’.
A legal employer appoints someone and, therefore, has the right to terminate the employment. the economic employer, on the other hand, enjoys the fruits of the labour, possesses the authority to inspect and control and bears the risks and results of the work performed by the employee. The place of employment or work would also be that directed by the economic employer. The economic employer may not have the legal right to terminate the employment altogether, it would possess the right to terminate the contractual arrangement, i.e. the secondment agreement. The payment of salary of the seconded employee is charged to/reimbursed by the economic employer.
In this respect, the following points need to be borne in mind:
a) the concept of deputation or secondment proceeds on the presumption that the seconded employees will continue to retain employment only with the parent entity. if they ought to join the indian establishment, it becomes a regular employment and the concept of deputation and a corresponding relationship with an economic employer would not arise.
b) the principle ‘legal employer vs. economic employer’ has gained acceptance and recognition. the legal employer would continue to possess the right to terminate the employment, whereas the economic employer will be possessed only with the right to terminate the services.
c) an entity becomes an economic employer if it has the right to supervise and control over the seconded employees and the employees in turn discharge their duties and responsibilities under the instruction of the economic employer.
d) the decisive test appears to be ‘ control and supervision’ and not ‘ right of termination’.
Thus, if on the facts of a case and considering the tests laid down above, the entity in the host country is held to be the ‘economic or real employer’, then the question of existence of Service PE or characterisation of payment as ftS, may not arise.
5. Relevant commentary of the OECD Model Convention, 2014 on Article 15
The following paragraphs of the oeCd commentary on article 15 are pertinent for determination of the issues relating to secondment of employees:
“8.1 It may be difficult, in certain cases, to determine whether the services rendered in a State by an individual resident of another State, and provided to an enterprise of the first State (or that has a permanent establishment in that State), constitute employment services, to which article 15 applies, or services rendered by a separate enterprise, to which article 7 applies or, more generally, whether the exception applies. While the Commentary previously dealt with cases where arrangements were structured for the main purpose of obtaining the benefits of the exception of paragraph 2 of article 15, it was found that similar issues could arise in many other cases that did not involve tax- motivated transactions and the Commentary was amended to provide a more comprehensive discussion of these questions.
8.4 In many States, however, various legislative or jurisprudential rules and criteria (e.g. substance over form rules) have been developed for the purpose of distinguishing cases where services rendered by an individual to an enterprise should be considered to be rendered in an employment relationship (contract of service) from cases where such services should be considered to be rendered under a contract for the provision of services between two separate enterprises (contract for services). That distinction keeps its importance when applying the provisions of article 15, in particular those of subparagraphs 2 b) and c). Subject to the limit described in paragraph 8.11 and unless the context of a particular convention requires otherwise, it is a matter of domestic law of the State of source to determine whether services rendered by an individual in that State are provided in an employment relationship and that determination will govern how that State applies the Convention.
8.11 The conclusion that, under domestic law, a formal contractual relationship should be disregarded must, however, be arrived at on the basis of objective criteria. For instance, a State could not argue that services are deemed, under its domestic law, to constitute employment services where, under the relevant facts and circumstances, it clearly appears that these services are rendered under a contract for the provision of services concluded between two separate enterprises. The relief provided under paragraph 2 of article 15 would be rendered meaningless if States were allowed to deem services to constitute employment services in cases where there is clearly no employment relationship or to deny the quality of employer to an enterprise carried on by a non-resident where it is clear that that enterprise provides services, through its own personnel, to an enterprise car- ried on by a resident. Conversely, where services rendered by an individual may properly be regarded by a State as rendered in an employment relationship rather than as under a contract for services concluded between two enterprises, that State should logically also consider that the individual is not carrying on the business of the enterprise that constitutes that individual’s formal employer; this could be relevant, for example, for purposes of determining whether that enterprise has a permanent establishment at the place where the individual performs his activities.
8.13 The nature of the services rendered by the individual will be an important factor since it is logical to assume that an employee provides services which are an integral part of the business activities carried on by his employer. It will therefore be important to determine whether the services rendered by the individual constitute an integral part of the business of the enterprise to which these services are provided. For that purpose, a key consideration will be which enterprise bears the responsibility or risk for the results produced by the individual’s work.
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 individ- ual regarding the manner in which the work has to be performed;
• who controls and has responsibility for the place at which the work is performed;
• the remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided (see para- graph 8.15 below);
• who puts the tools and materials necessary for the work at the individual’s disposal;
• who determines the number and qualifications of the individuals performing the work;
• who has the right to select the individual who will perform the work and to terminate the contractual arrangements entered into with that individual for that purpose;
• who has the right to impose disciplinary sanctions related to the work of that individual;
• who determines the holidays and work schedule of that individual.”
8.15 Where an individual who is formally an employee of one enterprise provides services to another enterprise, the financial arrangements made between the two enterprises will clearly be relevant, although not necessarily conclusive, for the purposes of determining whether the remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided.
For instance, if the fees charged by the enterprise that formally employs the individual represent the remuneration, employment benefits and other employment costs of that individual for the services that he provided to the other enterprise, with no profit element or with a profit element that is computed as a percentage of that remuneration, benefits and other employment costs, this would be indicative that the remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided. That should not be considered to be the case, however, if the fee charged for the services bears no relationship to the remuneration of the individual or if that remuneration is only one of many factors taken into account in the fee charged for what is really a contract for services (e.g. where a consulting firm charges a client on the basis of an hourly fee for the time spent by one of its employee to perform a particular contract and that fee takes account of the various costs of the enterprise), provided that this is in conformity with the arm’s length principle if the two enter- prises are associated. it is important to note, however, that the question of whether the remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided is only one of the subsidiary factors that are relevant in determining whether services rendered by that individual may properly be regarded by a State as rendered in an employment relationship rather than as under a contract for services concluded between two enterprises.”
In our view, the above tests/criteria laid down by the OECD, though in the context of article 15, are very relevant for determination of the issues relating to taxability of the reimbursement of remuneration of seconded employees in the hands of the overseas entity as FTS or whether such seconded employees constitute PE of the overseas entity in india. The above commentary has not been considered by various judicial authorities in india as would appear from various reported decision on the topic.
6. Whether such payment constitute mere ‘reimbursement of Expenses’ and not FTS/FIS
Reimbursement of salaries to overseas entities in respect of secondment, is normally without mark up and hence claimed to be not liable to tax as the same does not involve any element of income. What constitutes ‘reimbursement’ is a very ticklish issue and there are a number of cases, where based on the facts and circumstances, payments have been held to be ‘reimbursement’.
For the proposition that such a reimbursement of salary of the seconded employees is not taxable as fiS, there is a catena of decisions, which are as under:
a) Temasek Holdings vs. DCIT, (2013) 27 itr (trib) 125 (mum) = 2013-tii-163-itat-mum-intL
b) ITO vs. AON Specialist Services Private Limited 2014-tii-78-itat-BanG-intL
c) DIT vs. HCL Infosystems Ltd (2005) 274 ITR 261 (delhi) upheld itat decision in the case of HCL Info- systems Ltd. vs. DCIT -2002 76 ttj 505).
d) CIT vs. Karlstorz Endoscopy India Pvt. Ltd. 2010-tii- 135-itat-deL-intL
e) Abbey Business Services India Pvt. Limited vs. DCIT (2012) 53 Sot 401 (Bang) = 2012-tii-145-itat-BanG-intL
f) ACIT vs. CMS (India) Operations and Maintenance Co. Pvt. Ltd (2012) 135 itd 386 (Chennai)
g) ITO vs. Ariba Technologies (India) Pvt. Ltd. 2012-tii-68-itat-BanG-intL
h) idS Software Solutions (india) Pvt. Ltd (2009) 122 ttj 410; 2009-tii-22-itat-BanG-intL
i) Cholamandalam mS General insurance Co. Ltd (2009) 309 itr 356 (aar); 2009-tii-02-ara-intL
j) DDIT vs. Tekmark Global Solutions LLC (2010) 38 Sot 7 (mum) = 2010-tii-50-itat-mum-intL.
k) Fertilisers and Chemicals Travancore Ltd. vs. CIT – (2002) 255 itr 449 (Ker), (2002) 174 Ctr 257 (Ker)
l) Dolphin Drilling Ltd. vs. ACIT – (2009) 29 Sot 612 (del), (2009) 121 ttj 433 (del)
m) United Hotels Ltd. vs. ITO – (2005) 2 Sot 267 (del), (2005) 93 ttj 822 (del)
n) ADIT vs. Mark & Spencer Reliance India (P.) Ltd. – [2013] 38 taxmann.com 190 (mum)
o) XYZ – (2000) 242 itr 208 (aar), (1999) 156 Ctr 583 (aar)
p) Centrica india offshore Pvt. Ltd. – (2012) 206 taxman 545 (aar) (2012) 249 Ctr 11 (aar)
In the following cases the reimbursement of salaries of seconded employees have been held to be FTS/ FIS:
a. at&S india Pvt. Ltd. – (2006) 287 itr 421 (aar), (2006) 206 Ctr 315 (aar)
b. Verizon data Services india Pvt. Ltd. (2011) 337 itr 192 (aar), (2011) 241 Ctr 393 (aar)
c. flores Gunther vs ito – (1987) 22 itd 504 (hyd), (1987) 29 ttj 392 (hyd)
d. Tekniskil (Sendirian) Berhad vs. CIT – (1996) 222 itr 551 (aar), (1996) 135 Ctr 292 (aar)
e. XYZ Ltd. – 2012-TII-14-ARA-INTL
f. JC Bamford investments rochester vs. ddit – [2014] 47 taxmann.com 283 (delhi – trib.)
g. Centrica india offshore (P.) Ltd. vs Cit, [2014] 44 tax- mann.com 300 (delhi)
7. Whether the such payment claimed to be not-tax- able on the doctrine ‘Diversion of income by Overriding Title’
At times, it is also argued that payment is not the income of the overseas entities on account of the doctrine of ‘diversion of income by overriding title’.
In this regard, in the case of Centrica India Offshore (P.) Ltd. vs. CIT (supra), [2014], the Delhi High Court, rejecting the argument of the assessee held as under:
40. The final issue concerns the ‘diversion of income by overriding title’. here, CioP argues that the payment made to the overseas entity is not income that accrues to the overseas entity, but rather, money that it is obligated to pass on to the secondees. in other words, this money is overridden by the obligation to pay the secondees, and thus, is not ‘income’. This is insubstantial for two reasons. One, in view of the above findings that:
(a) the payment is not in the nature of reimbursement, but rather, payment for services rendered, (b) the employment relationship between the overseas entities and CiOP-from which the former’s independent obligation to pay the secondees arises – continues to hold, no obligation to use money arising from the payment by CIOP to pay the secondees arises. the overseas entities’ obligation to pay the secondees arises under a separate agreement, based on independent conditions, in relation to CIOP’s obligation to pay the overseas entity. assuming the agreement between CIOP and the overseas entity envisaged a certain payment for provision of services (and not styled as reimbursement). Surely, no argument could be made that such payment is affected by the doctrine of diversion of income by overriding title. if that be the case, then, as held above, the fact that the payment under the secondment agreement is styled as reimbursement, and limited on facts to that, without any additional charge for the service, cannot be hit by that doctrine either. The money paid by CIOP to the overseas entity accrues to the overseas entity, which may or may not apply it for payment to the secondees, based on its contractual relationship with them. This, at the very least, is independent of the relationship and payment between CiOP and the overseas entity.”
8. Whether such ‘Secondment’ constitutes ‘Service PE’ in india
The moot question which arises for consideration is whether such secondment of the employees could lead to establishment of the Service Pe in india.
Such an establishment of Service Pe under these circum- stances have been dealt by the hon’ble Supreme Court in the case of Morgan Stanley & Co. (2007) 292 ITR 416 (SC). the SC held that the employees of overseas entities to the indian entity constitutes service Pe in india. The relevant finding of the Hon’ble Supreme Court in this regard is as under:
“15. As regards the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist’s terms and employment. The concept of a service PE finds place in the U. N. Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of “the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in bank- ing and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he re- tains his lien and in that sense there is a service PE (MSAS) under Article 5(2}(1). We find no infirmity in the ruling of the ARR on this aspect. In the above situation, MSCo is rendering services through its employees to MSAS. Therefore, the Department is right in its contention that under the above situation there exists a Service PE in India (MSAS). Accordingly, the civil appeal filed by the Department stands partly allowed. “
In Centrica india Offshore (P.) Ltd. [CIOPL], [2012] 19 taxmann.com 214 (AAR), the AAR held as follows:
“29. …. We have found in this case that the employees continue to be the employees of the overseas entities and their employer continues to be the overseas entity concerned. the employees are rendering services for their employer in india by working for a specified pe- riod for a subsidiary or associate enterprise of their employer. We are of the view that this will give rise to a service Pe within the meaning of art.5 of the india-uK treaty, falling under article 5.2(k) thereof.”
In Morgan Stanley International Incorporated vs. DDIT, 2014-TII-186-ITAT-Mum-Intl, [mSii] the mumbai itat after considering the decision of SC in morgan Stanley’s case and the decision of the delhi high Court in CioPL’s case, held as follows:
“Thus, from the aforesaid decision it is amply clear that such deputed employees if continued to be on pay rolls of overseas entities or they continue to have their lien with jobs with overseas entities and are rendering their services in india, Service Pe will emerge. This concept and the ratio has been strongly upheld by the hon’ble delhi high Court also. We therefore, hold that the seconded employees or deputationist working in india for the indian entity will constitute a Service PE in india.”
In addition, in the following cases of secondment also, it has been held that Service PE is constituted in India:
1. [2014] 47 taxmann.com 283 (delhi – trib.) – JC Bam- ford Investments Rochester vs. DDIT IT
2. [2014] 43 taxmann.com 343 (delhi – trib.) – DDIT IT vs. .C Bamford Excavators Ltd.
9. implications of Service PE – Application of Article 12 vs Article 7
The mumbai itat in the case of Morgan Stanley inter- national incorporated (supra), in this regard after proper consideration of provisions of the article 12(6) of the India-USA DTAA, held as under:
“14. If we accept this concept that, by virtue of deputing seconded employees in india, the assessee has established a Service PE, then whether such a payment made by indian entity to the assessee, (even though it is reimbursement of salary cost), would be taxable under article 12(6) of india –US DTAA.
…….
Para 6 of article 12 makes it amply clear that tax- ability of ‘royalty’ and ‘fees for included services’ shall not apply, if the resident of the contracting state (uSa) carries on the business in other con- tracting states (india) in which FIS arises through Pe situated therein, then in such case the provisions of article 7 i. e., “Business Profits” shall apply. In other words, if there is a PE, then royalty or FIS cannot be taxed under article 12, albeit only under article 7 of the dtaa. It is an undisputed fact in this case, that DTAA benefit has been availed by the assessee and therefore, treaty benefit has to be given to the assessee for granting relief. Now, if the taxability of such payment has to be examined and determined on the basis of computation of business profit under Article 7, then the salary paid by the assessee would amount to cost to the assessee, which is to be allowed as deduction while computing the business profit of the Pe in india. in our opinion, if logical conclusion of the decision of the hon’ble Supreme Court in the case of morgan Stanley & Co (supra) and the decision of the hon’ble delhi high Court in the case of Centrica india offshore (P.) Ltd. (supra) is to be arrived at, then the seconded employees will constitute Service Pe of the assessee in india and in that case any payment received on account of rendering of service of such employees will have to be governed under article 7 as per unequivocal terms of para 6 of article 12. Thus, the ratio laid down in the decision of hon’ble delhi high Court, will not help the case of the revenue, in any manner because under the concept of PE, FIS cannot be taxed under article 12, but only as a business profit under Article 7. It is very interesting to note that, similar provision is also embodied in the india-Canada DTAA in para 6 of Article 12, but this issue was neither raised or brought to the notice before the Hon’ble Delhi High Court nor it was contested by either parties. There is inherent contradiction in this concept, as in most of the treaties, exclusionary clause like Article 12(6) has been embodied, which makes the issue of taxability of FTS of FIS in such cases as non applicable and have to be viewed from the angle of Article 7. Thus, the decision of the hon’ble delhi high Court and all other decisions relied upon by the revenue will not apply in the case of the assessee, as nowhere the concept of para 6 of article 12 have been taken into account for determining the taxability of such a payment under the provisions of treaty. Thus, in our conclusion, the payment made by the indian entity to the assessee on account of reimbursement of salary cost of the seconded employees will have to be seen and examined under Article 7 only, that is, while computing the profits under Article 7, payment received by the assessee is to be treated as revenue receipt and any cost incurred has to be allowed as deduction because salary is a cost to the assessee which is to be allowed. Accordingly, the AO is directed to compute the payment strictly under terms of Article 7 and not under Article 12 of the DTAA. in view of the aforesaid finding, the grounds raised by the assessee is treated as allowed.”
Thus, as per mumbai itat in MSII’s case, on application of article 7 in cases of Service Pe, the salaries of the seconded employees reimbursed to the overseas entity, would not be taxable in india as taxation of the Service Pe under article 7 would be on ‘net’ basis and the amount of salaries reimbursed by the indian entity would be allowable as deduction, leading to nil income of overseas entity in india.
Assuming some adjustment or addition of mark up on account of transfer pricing, the net impact would be restricted to taxation of the mark up amount.
Even if it is held that the nature of payment is that of fees for technical services, still the taxability thereof would be on net basis under section 44DA of the act, as the same would be effectively connected to a Service PE in india.
10. Implications of the absence of ‘Service PE’ clause in a Treaty
It is pertinent to note that the conclusion reached by the mumbai itat in mSii’s case, is in the context of india-uSa dtaa, which has a ‘Service PE’ clause in article 5 relating to Permanent establishment. Similarly, in case of 37 more dtaas signed by india, there is Service PE clause in article 5.
A question arises for consideration is, whether in case of countries with which india has a dtaa but not hav- ing a ‘Service Pe Clause’ in the article 5 of the DTAA, whether such secondment payment, would still be not taxable either as ‘reimbursement of expenses’ or as not falling within definition of the ‘FTS’ [due to absence of the words ‘managerial’ or the phrase ‘including through the provision of services of technical or other personnel’] of given in the respective DTAA.
It is interesting to note that so far such no such case has come up for consideration before any judicial authority and therefore, no judicial guidance is available on this issue.
11. Implications in case of payment to entity in case of non-treaty country
In case of non-treaty countries, the provisions of the income-tax act, 1961 would be applicable and the taxability of such reimbursement of salaries of the seconded employees, would be decided accordingly. No judicial guidance is available on this issue also.
12. Summation
However, the fundamental issue which requires proper consideration is where services rendered by seconded employee to an indian entity should be considered to be rendered in an employment relationship (contract of service) or such services should be considered to be rendered under a contract for the provision of services between two separate enterprises (contract for services). In our view, on proper appreciation and application of the oeCd Commentary on article 15 quoted above, in deciding the taxability of reimbursement of remuneration and costs of the seconded employees in the hands of the overseas entity, the entire controversy on the issue can be amicably settled in favour of the tax- payer as the entire remuneration has already borne taxation in india in the hands of the employee and such an interpretation would avoid double taxation of the same payment.
