2020 (1) TMI 1474 - AAR - Income Tax

TDS u/s 195/192 - reimbursement of the salary and benefits payable by the applicant to the expatriate personnel - inter-company agreement between KRP and the applicant - applicant requested KRP, a wholly owned subsidiary of PMK, for the supply of such experienced expatriate personnel - social security contribution, insurance and relocation expenses payable by the applicant to the expatriate personnel in their home country - HELD THAT - Provision of services or provision of personnel could be camouflaged as secondment agreements but in the current case it does not seem that any useful purpose is served by cloaking only a very small fraction of obligated payments as reimbursements. It is not a case where entire or substantive salary is paid outside India and then the same is claimed as reimbursement. In that scenario there is possibility of manipulating receipts and relocating it to different accounts of the group companies. Moreover, the entire salary including the reimbursed component has been offered for tax in India by the seconded employees. Given these peculiar facts, we are of the considered view that the social security, insurance, relocation expenses which are in the nature of committed and obligated payments are in the nature of reimbursements and not fee for technical services. In regard to administrative expenditure paid to KRP for performing the facilitative and disbursing agency role, the applicant has himself admitted that payments are subject to tax deduction under section 195 (para 8.2.27 of rejoinder letter) and though no specific submissions were made by the learned authorised representative about its nature, we presume that in the light of the admitted question the applicant has no objection for treating the charges as fees for technical services and thus the issue does not require our adjudication. Ruling 1. The social security, insurance, relocation expenses which are in the nature of committed and obligated payments are in the nature of reimbursements and not fee for technical services. 2. As admitted by learned authorised representative, the administrative fee paid to KRP is liable for tax deduction under section 195 as fee for technical services.

Issues Involved:
1. Taxability of payments made by the applicant to KRP towards salary, social security contributions, insurance, etc., under the Income-tax Act, 1961, and the India-Swiss tax treaty.
2. Determination of the specific section of the Act or article of the treaty under which such payments would be taxable.
3. Rate at which the applicant should withhold taxes under section 195 of the Act on the above payments.

Detailed Analysis:

Issue 1: Taxability of Payments to KRP
The applicant, CTBT Pvt. Ltd., argued that payments to KRP were reimbursements for salary and benefits payable to expatriate personnel and should not be considered as income. The applicant emphasized that these payments were merely facilitative to meet the financial commitments of expatriate personnel in their home countries and did not constitute income accruing from an arrangement. They cited Circular No. 720 to support that no tax withholding is applicable on reimbursements since salary payments already suffered withholding tax under section 192.

The Department contended that the payments to expatriate personnel were in the nature of "technical services" due to their role in ensuring quality and safety standards of the K Group. They relied on case laws such as Flughafen Zurich and Centrica India Offshore, which held that remuneration reimbursed by an Indian company to a foreign company is taxable as fees for technical services (FTS).

The Authority examined the inter-company agreement and concluded that the expatriate personnel were indeed employees of the applicant, with the applicant exercising full operational control over them. The payments made by KRP on behalf of the applicant were for statutory obligations like social security, insurance, and relocation expenses, which were reimbursed on a cost-to-cost basis. Hence, these payments were not considered as fees for technical services.

Issue 2: Specific Section or Article for Taxability
The applicant argued that payments to KRP did not qualify as "fees for technical services" under the provisions of the Act or the India-Swiss Tax Treaty. They emphasized that the payments were in the nature of salary, which falls outside the definition of fees for technical services as per Explanation 2 to section 9(1)(vii) of the Act and article 12(4) of the India-Swiss Tax Treaty.

The Authority agreed with the applicant's contention that the social security, insurance, and relocation expenses were reimbursements and not fees for technical services. However, the administrative fee paid to KRP for disbursing the foreign payroll was admitted by the applicant to be subject to tax deduction under section 195, and thus, it was treated as fees for technical services.

Issue 3: Rate of Withholding Taxes under Section 195
The applicant was willing to consider tax deduction at source under section 195 on the administration fee charged by KRP. The Authority noted that the applicant had admitted the administrative fee paid to KRP was liable for tax deduction under section 195 as fees for technical services.

Conclusion:
1. The social security, insurance, and relocation expenses are in the nature of reimbursements and not fees for technical services.
2. The administrative fee paid to KRP is liable for tax deduction under section 195 as fees for technical services.

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