Concept of economic employer — Reimbursement under Secondment Agreement to legal employer on actual cost basis represented salary paid to secondee — No tax was required to be deducted at source.

20 IDS Software Solutions (India) Pvt Ltd
v. ITO

The assessee was wholly-owned subsidiary of an American
company. The assessee was engaged in software development business. To assist it
in its business, the assessee executed Secondment Agreement with its parent
company (which was an American company) for providing services of certain
personnel (‘secondee’). The secondee was to report to, and be responsible to,
the assessee and was to act in accordance with assessee’s instructions and
directions. Though the American company remained the legal employer of the
secondee as per the agreement, the secondee was appointed as per the articles of
association of the assessee and was to act in accordance with reasonable
requests, instructions and directions of the assessee. The assessee was obliged
to reimburse to the American company the entire remuneration (including bonus
and other incidental costs) of the secondee on actual cost basis without any
mark-up. The assessee was also obliged to indemnify the American company for all
claims that may arise as a consequence of any act or omission committed by the
secondee. The American company hired a qualified person and seconded him as
managing director to the assessee.

The assessee applied u/s.195 to the AO for reimbursement of
remuneration to the American company without deduction of tax, on the ground
that for all practical purposes, the secondee was assessee’s employee and salary
received by him from the American company was offered to tax in India in his
individual capacity. The AO held that payment by the assessee to the American
company cannot be considered as mere reimbursement exempt from tax and further
that in absence of employer-employee relationship, the proposed remuneration
cannot be considered as salary. Accordingly, remuneration would be considered as
Fees for Technical Services (‘FTS’) in terms of Explanation 2 to S. 9(1)(vii) of
the Income-tax Act. The assessee’s contention that no technical services were
made available was rejected by the AO who directed it to deduct tax @10%. The
CIT(A) upheld the order of the AO.

Before the Tribunal, the assessee contended that for all
practical purposes, the secondee was an employee of the assessee and
employer-employee relationship existed between the assessee and the secondee.
Accordingly, payment made by the assessee to the American company was only
reimbursement of ‘salary’ cost. The assessee relied on the decisions in CIT
v. Lady Navajbai R. J. Tata, (1947) 15 ITR 8 (Bom.), K. R. Kothanda-raman
v. CIT, (1966) 62 ITR 348 (Mad.), Lakshmi-narayan Ram Gopal and Son Ltd.
v. Government of Hyderabad, (1954) 25 ITR 449 (SC), Anderson v. James
Sutherland, (1941) SC 203 (Scottish Court of Sessions) and Ram Prashad v.
CIT, (1972) 86 ITR 122 (SC) and also certain extracts from Professor Klaus
Vogel’s Commentary to support its contention of employer-employee relationship.

On facts of the assessee’s case, the Tribunal observed that
the assessee was ‘economic employer’ of the secondee. The secondee was rendering
services to the assessee under the control and supervision of the assessee, the
salary costs were borne by the asseesse by way of cross charge, the asseesee
could have terminated the services of the secondee as per articles and the
assessee could regulate the powers and duties of the secondee.

The Tribunal then considered the issue whether the amount
paid to the American company could be considered as FTS. The Tribunal held that
certain terms in Secondment Agreement, like indemnification and duties of the
secondee being mentioned clearly indicated that the secondee was an employee and
— usually not found in an agreement for rendering technical services. These
facts went against the tax authorities’ contention that the payment was FTS.

Payment by the assessee to the American company under
Secondment Agreement was not FTS, but represented reimbursement of salary paid
by the American company to the secondee. The agreement represented an
independent contract of service in respect of employment of the secondee even
though the agreement was per se between the assessee and the American
company. Since tax was deducted at source from salary and was remitted to the
tax authorities in India, the assessee was not liable to deduct tax from the
amount reimbursed to the American company.