2012 (8) TMI 466 - AAR - Income Tax

DTAC between India and USA - secondment of the employees by the U.S. Principal based on the U.S. principal s global mobility policy to applicant being fully owned Indian subsidiary - chargeability to tax of secondment charges paid by Indian subsidiary to its US Principal which applicant contends to be reimbursement of charges - taxability of payroll processing charges under relevant DTAA - withholding of taxes - Held that - It is observed that seconded employees even after providing their services to the applicant, their salaries and other service benefits are paid by the US company. The right of dismissal rests or continues to rest with the US Principal. The relationship of the employees with the US Principal never ceased so as to enable them to claim that they have become the employees of the applicant. The absence of a right to terminate the employment as distinct from the right to terminate the secondment is significant. The applicant having no obligation to pay the salaries, what the US Principal collects from the applicant cannot be reimbursements. It is compensation or fees paid by the applicant to the US Principal for making available to it the services of the employees of the Principal. Therefore, the same is income in hands of US Principal subject to withholding of taxes u/s 195 Payroll processing charges - Held that - It is seen that the employees seconded to the applicant are required to have a particular level of expertise in their respective roles. Neither the agreements nor the application, specified what are the duties to be performed by the seconded employees in India. In the absence of adequate material, it will be hazardous to give a ruling, hence this question is left open for a decision by the assessing authorities as and when called upon to do so.

Summary

Issues:
1. Secondment Charge - Tax liability and rate of deduction.
2. Payroll processing charge - Taxability under Double Taxation Avoidance Agreement (DTAA) and withholding tax liability under section 195 of the Income-tax Act, 1961.

Secondment Charge:
The case involved a company incorporated in India, a subsidiary of a U.S. company, which entered an agreement for seconding employees from the U.S. principal. The applicant argued that payments made were reimbursement and not taxable as fees for technical services. However, the Revenue contended that the U.S. principal-employee relationship remained, making the payments taxable. The judge emphasized the absence of an employer-employee relationship between the applicant and employees, ruling the payments as income of the U.S. Principal. The judge held that tax withholding obligations under section 195 of the Act applied to these payments.

Payroll Processing Charge:
The applicant sought rulings on taxability and withholding obligations for payroll processing charges paid to the U.S. Principal. The applicant argued that these charges were not fees for technical services under the DTAA. The Revenue asserted the charges were taxable as technical services or due to a permanent establishment in India. The judge noted the lack of details on the employees' roles and duties, refraining from ruling on taxability. The judge stated that withholding tax obligations under section 195 applied, subject to further adjudication by assessing authorities on the taxability of these charges.

In summary, the judgment clarified the tax implications of payments made for secondment and payroll processing charges in the context of an agreement between an Indian company and its U.S. principal. The ruling highlighted the importance of the employer-employee relationship in determining tax liabilities and emphasized the need for detailed information on roles and duties for accurate tax assessments.