(i) On facts, seconded employees continued to remain employees of foreign company. Hence, services were performed by the foreign company. Therefore, cost-to-cost reimbursement to foreign company was income of foreign company.
(ii) Under India-USA DTAA, ‘make available’ clause does not apply to non-technical services. Hence, payments for managerial services were FTS and chargeable to tax @20%.
(iii) Being managerial services, payments were FTS as defined in Explanation 2 to section 9(1)(vii) of Income-tax Act.
Facts:
The applicant is an Indian company, which is a whollyowned subsidiary of an American Co. The applicant is providing certain telecom and information technology-enabled services to USCo.
For improving efficiency and productivity, the parent American Company seconded certain employees of its affiliate, also an American Company (‘USCo’), to the applicant. USCo was also engaged in a business similar to that of the applicant.
The applicant entered into a secondment agreement with USCo. Pursuant to the secondment agreement, USCo deputed three persons. Each seconded employee was to function and act exclusively under the direction, control and supervision of the applicant and USCo was not responsible or liable as regards the work performed by the seconded employees. USCo was to pay to the employee the salary which the employee was entitled to receive and the applicant was to reimburse the same to USCo. Responsibility to withhold tax was of the applicant and the payment to USCo was to be on net of tax basis.
The applicant raised the following issues before the AAR for its ruling:
(1) Whether reimbursement by the applicant to USCo is income of USCo and liable to tax deduction u/s. 195?
(2) If answer to 1 is ‘yes’, whether it is taxable as FIS?
(3) Does USCo have a PE in India and, if yes, whether amount received by it from the applicant is ‘business profits’ attributable to the PE under the DTAA?
(4) If answer to 3 is yes, whether the taxable income would be nil because of cost-to-cost reimbursement?
(5) If reimbursement is income of USCo, what would be the rate of withholding tax?
The applicant contended as follows:
Since the applicant was the economic employer of these seconded employees, withholding tax obligation was of the applicant. The payments made to USCo were cost-to-cost reimbursements and no income arose to USCo. Since the applicant had withheld tax u/s. 192 (on salary), there should not be any further withholding u/s. 195.
USCo was not rendering any services to the applicant. The employees work under the control of the applicant, the reimbursement of salary to USCo was for administrative convenience and hence, it should not qualify as FIS under Article 12 of the DTAA as FIS would require that technical knowledge, skill, etc. is ‘made available’.
USCo had no fixed place from where it carried on business in India. Even if it was held that USCo had a fixed place of business in India, salary and expenses incurred on seconded employees would be deductible as expenditure and due to cost-to-cost reimbursement, net income would be nil. Hence, no tax deduction would be required.
The Revenue contended as follows:
Since, the applicant, the parent company and USCo were part of the same group, seconded employees represented the parent company and relying on DIT v. Morgan Stanley and Co. Inc, (2007) 292 ITR 416 (SC), they do not become employees of the applicant. Thus, the applicant would not be the economic employer.
Seconded employees claimed to be part of the parent company. Only USCo had the authority to terminate their services.
In A.T. & S. India P. Ltd., In re (2006) 287 ITR 421 (AAR), it was held that reimbursement of cost of seconded employees is in the nature of FTS and payment of taxes under the head ‘salaries’ is of no consequence. It is not correct to say that persons occupying managerial position cease to render technical service. The employees were seconded to render only technical advice/guidance. Hence, payments would be FIS even under DTAA.
Ruling:
The AAR ruled as follows:
(i) The three employees together constituted a team. While they were providing services to the applicant, they remained employees of USCo and their employment could be terminated only by USCo. This showed that it was USCo who rendered managerial services to the applicant.
(ii) As the seconded employees continued to remain the employees of USCo, it followed that the managerial services were performed by them as employees of USCo and not as those of the applicant.
(iii) The two receipts — one in the hands of USCo (for managerial services) and the other in the hands of employees (salary for employment) — spring from different sources, are of different character and represent different species of income. By correlating the two payments/ receipts, neither the nature nor substance of the transaction would change to give it the character of reimbursement. Amounts paid by the applicant to USCo represent income of USCo.
(iv) From reading of MOU to DTAA, it was clear that ‘make available’ clause does not apply to non-technical services. Since services provided by USCo were managerial services, the payments were FIS under Article 12(4) of DTAA. As regards the Income-tax Act, since the services were managerial in nature, the payments were FTS as defined in Explanation 2 to section 9(1)(vii).
(v) Since the reimbursed amounts were FIS, they would be chargeable to tax @20% under Article 12(4)(b) of DTAA. Also, as the payments are taxable as FIS answers to the other questions were academic.
