2009 (1) TMI 19 - AAR - Income Tax

Secondment Agreement between applicant (Indian Company) & HMFICL (Korean Company) - an employee of HMFICL, were kept at the disposal of the applicant for a period of two years in order to assist the applicant in matters relating to Korean insurance business - Whether the amount paid or payable by the applicant to HMFICL under the agreement is in the nature of income accruing to M/s. HMFICL in respect of which, tax is liable to be deducted at source by the applicant u/s 195 Held, no

Issues Involved:
1. Whether the payments made by the applicant to HMFICL under the Secondment Agreement are in the nature of income accruing to HMFICL, requiring tax deduction at source under the Income-tax Act, 1961.
2. If the payments are considered income, the applicable rate of tax deduction.
3. Whether HMFICL has a permanent establishment (PE) in India and if any income can be attributed to it under the Income-tax Act and DTAA.

Detailed Analysis:

Issue 1: Nature of Payments and Obligation to Deduct Tax at Source
The primary issue was whether the payments made by the applicant to HMFICL under the Secondment Agreement constituted income accruing to HMFICL, necessitating tax deduction at source under the Income-tax Act, 1961.

- Applicant's Argument: The applicant contended that the payments were merely reimbursements of the salary and benefits paid by HMFICL to the seconded employee (Secondee) and did not constitute income. Therefore, they argued that no tax was required to be deducted at source. They also claimed that HMFICL had no Permanent Establishment (PE) in India.

- Revenue's Argument: The Revenue argued that the payments were fees for technical services (FTS) under Section 9(1)(vii) of the Income-tax Act and Article 12 of the DTAA between India and Korea. They contended that the services provided by the Secondee were technical and consultancy services, thereby generating income for HMFICL in India. Thus, the applicant was liable to deduct tax at source under Section 195 of the Income-tax Act.

- Authority's Analysis: The Authority examined the Secondment Agreement and the nature of services provided by the Secondee. It noted that the services included introducing potential business, assisting in developing insurance products, providing expertise in actuarial and accounting systems, and inputs on reinsurance programs. The Authority considered whether the payments were for technical services or merely reimbursements.

The Authority concluded that the payments were reimbursements of the salary and benefits paid by HMFICL to the Secondee, and no income was generated for HMFICL. The arrangement was mutually beneficial, with no intention of charging a fee for technical services. Therefore, the payments did not fall within the ambit of FTS under Section 9(1)(vii) of the Income-tax Act or Article 13.4 of the DTAA.

Issue 2: Rate of Tax Deduction if Payments are Considered Income
Since the Authority concluded that the payments were not in the nature of income, this issue did not require an answer.

Issue 3: Permanent Establishment (PE) of HMFICL in India
The Revenue initially contended that the seconded employee could be regarded as an agent of HMFICL, thereby constituting an agency PE in India. However, this argument was not pursued further.

- Authority's Analysis: The Authority did not find any basis for considering the seconded employee as an agent of HMFICL or for attributing a PE in India to HMFICL. The Secondment Agreement explicitly stated that the Secondee was not an agent of the applicant and had no authority to conclude contracts on behalf of the applicant.

Conclusion:
The Authority ruled that the payments made by the applicant to HMFICL under the Secondment Agreement were reimbursements of salary and benefits and did not constitute income for HMFICL. Consequently, the applicant was not obliged to deduct tax at source. The other issues regarding the rate of tax deduction and the existence of a PE were rendered moot. The ruling was given and pronounced on January 29, 2009.

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