Facts:
The taxpayer was an Indian subsidiary company of a foreign company (“FCo”). FCo was a group company of a British company (“UKCo”). UKCo entered into an agreement with an Indian company (“ICo”) to outsource the provision of certain process and call centres to ICo. ICo was to provide financial and insurance services to customers of UKCo in the UK.
In order to ensure that high quality services were provided by ICo, UKCo entered into a consultancy agreement with the taxpayer for which the taxpayer was to be compensated at cost plus 12 %. Further, to facilitate the outsourcing agreement between UKCo and ICo, UKCo entered into an agreement for secondment of employees (“Secondment Agreement”) from UKCo to the taxpayer.
In terms of the Secondment Agreement, secondees were under the direct management, supervision and control of the taxpayer during the period of secondment. UKCo was not responsible for any loss or damage occasioned by the works done by the secondees. Secondees performed the tasks at such place, as instructed by taxpayer. At the same time, the secondees remained employees of. UKCo during secondment. Accordingly, UKCo (and not the taxpayer) was responsible to pay remuneration and any other employment benefits to secondees. In terms of section 192 of I T Act, UKCo withheld tax at source on salaries paid to secondees.
The taxpayer reimbursed to UKCo all payments and expenses incurred by UKCo in respect of seconded employees. However, the taxpayer did not withheld taxes on the amount reimbursed to UKCo. The AO was of the view that the reimbursements made to UKCo were in the nature of FTS and hence, the taxpayer ought to have withheld taxes on the same.
In appeal, the CIT(A) held that while reimbursement of salary cost was not subject to withholding, only reimbursement of other administrative expenses was liable for withholding. The issues before the Tribunal were as follows.
1. Whether the taxpayer can be regarded as the real and economic employer of the seconded employees?
2. Whether the payments made by the taxpayer to UKCo were pure reimbursement of expenses and if so, whether they constituted income of UKCo?
3. Whether the payments made by the taxpayer to UKCo constituted FTS u/s. 9(1)(vii) of I T Act?
4. Whether the payments made by the taxpayer to UKCo constituted FTS under Article 13(4) of India-UK DTAA?
Held:
The Tribunal observed and held as follows.
(i) Whether the taxpayer can be regarded as the real and economic employer of the seconded employees. The Tribunal reviewed the Secondment Agreement to determine who was vested with control and supervision of the seconded employees. It found that the taxpayer had control of the seconded employees and if the taxpayer so required, UKCo was obligated to withdraw any seconded employee. Also, UKCo was not liable or responsible for any loss or damage caused due to work of secondees. Thus, direct control and supervision of the seconded employees vested in the taxpayer. The clause stating that UKCo was to remain the employer was for ensuring social security and other benefit to the seconded employees. Hence, UKCo was mere ‘legal employer’ while the taxpayer was ‘real and economic employer’.
(ii) Whether the payments made by the taxpayer to UKCo were pure reimbursement of expenses and if so, whether they constituted income of UKCo
The Tribunal referred to the clause of the Secondment Agreement stating that in consideration for secondment of staff by UKCo, the taxpayer shall make payments equivalent to costs and expenses incurred by UKCo in respect of seconded employees. It further referred to the relevant account in the ledger of the taxpayer as also the Notes to Accounts which stated that the taxpayer reimburse all expenses incurred by UKCo in respect of seconded employees. Hence, following IDS Software Solutions (India) (P) Ltd v ITO [2009] 32 SOT 25 (Bang) (URO), the Tribunal held that the payments were mere reimbursements of salary and other costs.
As regards the second limb of the issue (i.e., whether these payments would be regarded as income chargeable in the hands of UKCo), the Tribunal reiterated the principle laid down in the case of TISCO v Union of India [2001] 2 SCC 41 that reimbursement of salary cost and other expenses cannot be regarded as income in the hands of the recipient since there was no profit or gain element in it.
(iii) Whether the payments made by the taxpayer to UKCo constituted FTS u/s. 9(1)(vii) of I T Act To constitute FTS u/s. 9(1)(vii) of I T Act, the consideration paid should have been for rendition of managerial, technical or consultancy services. Under the Secondment Agreement, the taxpayer had paid consideration only for secondment of staff and not for rendition of any services.
Therefore, the payments made by the taxpayer did not constitute FTS.
(iv) Whether the payments made by the taxpayer to UKCo constituted FTS under Article 13(4) of India-UK DTAA. As held earlier, the reimbursement cannot be regarded as income of UKCo. Also, it does not constitute FTS u/s. 9(1(vii) of I T Act. Since a DTAA cannot impose tax which is not contemplated or levied under I T Act, question of such payments constituting FTS under India-UK DTAA does not survive. In terms of Article 13(4) of India-UK DTAA, to constitute FTS, following two conditions should be satisfied.
(a) The consideration is paid for rendering of technical or consultancy services; and
(b) Such services ‘make available’ technical knowledge, experience, skill, know-how or process or consist of the development and transfer of a technical plant or design.
UKCo has not rendered any service to the taxpayer. Hence, condition (a) would not be satisfied. Further, even if secondment were to be considered as ‘service’, it could only be ‘managerial service’ (mentioned in section 9(1(vii)). However, Article 13(4) (c) includes only technical or consultancy services. Hence, the payment fails the test in (a) above. Additionally, condition (b) requires that services ‘make available’ technical knowledge, etc. As no technical knowledge, etc. was ‘made available’ by UKCo, it also fails the test in (b) above.
