2012 (9) TMI 466 - HC - Income Tax

Whether the amounts (representing salary and benefits payable by GTE-OC to expatriate employees) reimbursed by the applicant to GTE Overseas Corporation, ( GTE-OC ) is income accruing to GTE-OC and, therefore, whether the same is liable to deduction of tax in accordance with the provisions of section 195 of the Income tax Act Held that - The question as to whether the receipt is really an income or reimbursement is a pure question of fact, which has to be arrived at based on the various clauses in the agreement between the parties. In the context of the discussion in paragraph 13 of the order of the Advance Rulings Authority, we have no hesitation in rejecting the plea of the assessee. - Decided against the assessee.

Issues Involved:
1. Whether the amounts reimbursed by the petitioner to GTE-OC are 'income' accruing to GTE-OC and liable for deduction of tax under section 195 of the Income-tax Act, 1961.
2. Whether the amounts reimbursed are taxable as 'fees for included services' under the Act read with the India-USA Double Taxation Avoidance Agreement (DTAA).
3. Whether GTE-OC has a permanent establishment in India under the DTAA, and if so, whether the amount received by GTE-OC is in the nature of 'business profits' attributable to such permanent establishment.
4. Whether the taxable income is nil if the reimbursements are at actual.
5. The rate at which tax is to be deducted at source on the payments made by the petitioner to GTE-OC.

Detailed Analysis:

Issue 1: Income Accruing to GTE-OC and Tax Deduction under Section 195 of the Income-tax Act

The petitioner argued that the amounts reimbursed to GTE-OC were solely for the salaries of seconded employees and thus were not income liable for tax deduction under section 195. The Advance Rulings Authority (ARA) held that the sums remitted by the petitioner to GTE-OC were income accruing to GTE-OC for services rendered, stating that the correlation between reimbursement and salary paid did not negate the income nature of the payments. The High Court upheld the ARA's decision, stating that the question of whether the receipts are income or reimbursement is a factual one based on the agreement's clauses.

Issue 2: Taxability as 'Fees for Included Services' under the DTAA

The ARA concluded that the managerial services rendered by the seconded employees were not technical but could be considered consultancy services under Article 12(4) of the DTAA. The High Court found inconsistencies in the ARA's reasoning, noting that the ARA agreed the services were managerial and not technical, yet concluded they fell under 'fees for included services'. The Court emphasized that the ARA should have assessed whether the managerial services met the criteria of Article 12(4)(b) of the DTAA, which involves making available technical knowledge, experience, skill, know-how, or processes.

Issue 3: Permanent Establishment and Business Profits under the DTAA

The ARA did not address this issue substantively, considering it academic after concluding the amounts were taxable as 'fees for included services'. The High Court's decision to remand the case implies that this issue requires fresh consideration based on the outcome of Issue 2.

Issue 4: Taxable Income and Reimbursements at Actual

Similarly, this issue was deemed academic by the ARA. The High Court's remand for fresh consideration of Issue 2 necessitates a re-evaluation of whether reimbursements at actual amounts result in nil taxable income.

Issue 5: Rate of Tax Deduction at Source

The ARA applied a 20% tax rate under Article 12(4)(b) of the DTAA. The petitioner argued for a 10% rate under Section 90(2) of the Income-tax Act, which allows for the application of the more beneficial tax rate. The High Court's remand for reconsideration of the nature of services also requires re-evaluation of the applicable tax rate.

Conclusion:

The High Court upheld the ARA's decision on the first issue, affirming that the amounts reimbursed to GTE-OC are income and subject to tax deduction under section 195. However, the Court found the ARA's reasoning on the second issue flawed and remanded the case for fresh consideration of whether the managerial services qualify as 'fees for included services' under the DTAA. Consequently, the Court also remanded Issues 3, 4, and 5 for fresh consideration by the ARA. The writ petition was partly allowed, with no costs awarded.

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