Article 12 of India-US DTAA – employees deputed by American company to Indian company for providing support services constituted service PE; salary reimbursed to American company was business profit (and not FIS) from which salary costs were deductible.
Facts:
The taxpayer was a resident of USA and 100% subsidiary of another American company. The primary activity of taxpayer was to provide support services to group companies located in various countries including India. During the relevant tax year, the taxpayer entered into agreement with an Indian group company for providing support services. The taxpayer deputed five employees to its Indian subsidiaries. The employees were to work under the supervision and control of the board of Directors of that Indian companies, were to be accountable to Indian companies and their day-to-day responsibility was to be managed by Indian companies.
The taxpayer paid salaries of the deputed employees and also withheld tax from their salaries u/s. 192 of the Act. The Indian subsidiaries reimbursed the salaries to the taxpayer since the taxpayer had paid them on behalf of the Indian subsidiaries and only for administrative convenience of the Indian subsidiaries. As per the taxpayer, the amount reimbursed was purely salary costs, it did not have any income element and hence, it was not taxable in India. However, on conservative basis, the Indian companies withheld tax @15% under Article 12 of India-USA DTAA from the reimbursed amount.
The tax authority concluded that the taxpayer received consideration for the services provided by the deputed employees and hence, the consideration was taxable as FTS u/s. 9(1)(vii) of the Act and as FIS under Article 12 of India- USA DTAA . CIT(A) upheld the order of the tax authority.
Before the Tribunal, the taxpayer contended as follows.
Amount received from Indian companies was reimbursement of salary costs without any income element and hence, question of taxability whether as FTS or FIS did not arise.
The deputed employees were under direct supervision and control of the Indian subsidiaries and hence, the ‘make available’ condition under India-USA DTAA was not fulfilled.
Even if deputed employees were considered to constitute service PE of the taxpayer, FIS provision would not be applicable. Consequently, relying on decision of the Supreme Court in DIT(IT) vs. Morgan Stanley & Co [2007] 292 ITR 416 (SC), the salary costs would have been deductible from the income, resulting in ‘nil’ income.
The tax authority contended that the business of the taxpayer was to provide support services through deputed employees who were highly qualified personnel having technical skills and experience. Hence, payment qualified as FIS under India-USA DTAA.
Held:
Relying on decision of theDelhi High Court in Centrica India Offshore (P) Ltd vs. CIT, [2014] 364 ITR 336 (Del) and decision of the Supreme Court in DIT(IT) vs. Morgan Stanley & Co [2007] 292 ITR 416 (SC), the Tribunal proceeded on the premise that the deputed employees were ‘real’ employees of the taxpayer who had come to India to render services and therefore, they constituted service PE of the taxpayer.
Once a service PE is created, FIS article will have no application since it excludes profits in connection with PE from its ambit. Hence, income should be taxed as business profits under Article 7.
While in Centrica’s case, Delhi High Court considered Article 12(6) of India-Canada DTAA , which embodies a similar provision, the issue of specific exclusion of PE profits from FIS article was not considered by Delhi High Court and hence, that decision cannot be applied.
For computing the business profits under Article 7, the reimbursement made by Indian companies has to be treated as revenue receipts and salary of the deputed employees paid by the taxpayer has to be allowed as deduction.
