By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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Part C — Tribunal and International Tax Decisions
19 Cholamandalam MS General Insurance Co.
Ltd. In re
(2009 TIOL 02 ARA IT)
S. 9(1)(vii), Income-tax Act; Article 13.4,
India-Korea DTAA
Dated : 29-1-2009
Issue :
Although services under Secondment Agreement constituted
provisions of services of technical personnel, as the essence or substance of
transaction was for mutual business development and not to derive income for
service and the parties never contemplated payment of FTS, no income in the
nature of FTS can be said to have been accrued to the foreign employer.
Facts :
The applicant is an Indian company, which is engaged in
non-life insurance business. It is interested in developing business
relationship with Indian affiliates of Korean and Japanese companies. For this
purpose, it requires persons who are well-versed with insurance business,
respective language, etc.
To this end, the applicant executed Secondment Agreement with
a Korean company for deputation of Korean company’s employee (‘secondee’) for a
period of two years. The terms of the arrangement for secondment were for mutual
interests. As far as the applicant was concerned, it would benefit from the
services of seconded employees, whereas from the perspective of Korean provider
company, the arrangement would not only promote its business in India but also
that wherever possible, the reinsurance business would be placed with the Korean
company.
In terms of the agreement, the applicant was to reimburse
Korean company for only a part of the salary and other benefits and no payment
was to be made by the applicant to the secondee. The Korean company continued to
remain legal employer of the secondee and pay salary to him. It also deducted
tax from his salary and the tax was deposited with the tax authorities.
The services to be performed by the secondee were defined to
mean : (a) introduce applicant to potential business contacts; (b) assist
applicant to develop insurance products for Indian market; (c) furnish applicant
with necessary expertise to establish and develop business; and (d) to provide
applicant with inputs on design of reinsurance programmes.
Secondment Agreement provided for consideration by way of
reimbursement of the secondee’s salary and benefits, which was not to exceed
those applicable to the applicant’s employees of the same or equivalent grade.
AAR noted that the secondee had no right or authority to conclude any contract
on behalf of the applicant and that the Korean company was not in the business
of supply of manpower.
The tax authorities had initially contended that the secondee
could be regarded as the Korean company’s agent and consequently, it had an
agency PE in India. However, this contention was not pursued. Factually, it was
noticed that reimbursement by the applicant constituted about 55% of salary,
house rent, etc. paid by the Korean company to the secondee.
The AAR referred to definition of Fees for Technical Services
(‘FTS’) in Explanation 2 to S. 9(1)(vii) and Article 13.4 of India-Korea DTAA
and observed that the definitions were substantially similar.
In this background, the issues before the AAR were :
(i) Whether amount payable by the applicant to the Korean
company was in the nature of income requiring deduction of tax at source under
Income-tax Act ?
(ii) If answer to (i) is in affirmative, what should be the
rate of tax to be deducted at source ?
(iii) Whether the Korean company could be considered to
have PE in India requiring attribution of income to that PE ?
The AAR admitted that it is debatable whether the term
‘including provision of services of technical or other personnel’ is independent
of, or integral part of, the term ‘managerial, technical or consultancy
services’. Applying the ratio of decisions in Intertek Testing Services India P
Ltd. In re (2008) 307 ITR 418 (AAR) and G V K Industries Ltd. v.
Income-tax Officer, (1997) 228 ITR 564 (AP), it held that the secondee’s
services were technical in nature involving specialised knowledge and expertise
in insurance business. Accordingly, the Korean company did provide services of
technical personnel.
The AAR then considered the question whether amount paid by
the applicant could be construed as ‘consideration’ for the provision of
services of technical personnel. It observed that the agreement represented a
mutually beneficial arrangement and its essence or substance was not to derive
income by way of fee for service, but only partial reimbursement of the cost.
Thus, no income in the nature of FTS was generated. Viewed in this light, the
parties never contemplated payment of FTS, either under Income-tax Act or under
DTAA.
The AAR examined the ratio of the decisions in CIT v.
Dunlop Rubber Co Ltd., (1983) 142 ITR 493 (Cal.) and CIT v. Industrial
Engineering Projects (P) Ltd., (1993) 202 ITR 1014 (Del.) wherein nature of
receipt of reimbursement of expenses were considered and the respective Courts
had, on facts, held that reimbursement of expenses did not constitute income.
The tax authorities had relied on AAR’s rulings in A T & S
India P Ltd., In re (2006) 287 ITR 421 (AAR) and Danfoss Industries P
Ltd., In re (2004) 268 ITR 1 (AAR), wherein similar payment for
deputation of technical personnel under secondment agreement and for rendering
services to group companies was considered as FTS. The AAR distinguished these
rulings on facts and particularly because in the present case the details
furnished showed that it was only partial reimbursement of cost incurred by the
Korean company.
