2020 (12) TMI 570 - HC - Income Tax

TDS u/s 195 - 'assessee in default' under Section 201(1) - expenses incurred by the assessee for hotel and traveling expenses - Expenses incurred towards salary - whether the same can be treated as expenses for providing technical services? - secondment agreement - As submitted that mere deputation of the employees doesn t amount to making available technical Know-How - HELD THAT - Assessee had entered into a secondment agreement for securing services to assist assessee in its business. The expenses incurred by the seconded employees which were reimbursed by the assessee is not liable to deduction to tax at source and the aforesaid amount could not be considered as 'fees for technical services' - secondment agreement constitutes an independent contract of services in respect of employment with assessee. From the perusal of the key features of the agreement, which have been reproduced by the Commissioner of Income Tax (Appeals), it is evident that the seconded employees have to work at such place as the assessee may instruct and the employees have to function under the control, direction and supervision of the assessee and in accordance with the policies, rules and guidelines applicable to the employees of the assessee. The employees in their capacity as employees of the assessee had to control and supervise the activities of Msource India Pvt. Ltd. Therefore, the assessee for all practical purposes has to be treated as employer of the seconded employees. There is no obligation in law for deduction of tax at source on payments made for reimbursement of costs incurred by a non resident enterprise and therefore, the amount paid by the assessee was not to suffer tax deducted at source under Section 195. Similar view has been taken by High Court of Delhi in HCL INFO SYSTEM LTD. 2004 (1) TMI 16 - DELHI HIGH COURT in respect of salaries paid to foreign technicians on behalf of the assessee. - Decided in favour of assessee.

Issues Involved:

1. Whether the assessee can be held as 'assessee in default' under Section 201(1) of the Income Tax Act, 1961.
2. Whether the assessee can be held as 'assessee in default' under Section 201(1A) of the Income Tax Act, 1961.
3. Whether the payments made by the assessee to Abbey National Plc, UK are liable for deduction of TDS under Section 195 of the Income Tax Act, 1961.
4. Whether the payments made by the assessee to Abbey National Plc, UK can be categorized as 'fees for technical services' under Section 9(1)(vii) of the Income Tax Act, 1961 and Article 13(4)(c) of the India-UK Double Taxation Avoidance Agreement (DTAA).

Issue-wise Detailed Analysis:

1. Assessee in Default under Section 201(1):

The tribunal held that the assessee cannot be treated as 'assessee in default' under Section 201(1) of the Act. The High Court upheld this view, noting that the assessee had entered into a secondment agreement for securing services to assist in its business. The expenses incurred by the seconded employees, which were reimbursed by the assessee, were not liable to deduction of tax at source and could not be considered as 'fees for technical services'. The court emphasized that the seconded employees worked under the control, direction, and supervision of the assessee, and thus, the assessee was treated as the employer for all practical purposes. Therefore, there was no obligation to deduct tax at source on these payments.

2. Assessee in Default under Section 201(1A):

The tribunal also quashed the order levying interest under Section 201(1A) of the Act. The High Court agreed, stating that since the payments made by the assessee were not liable for deduction of tax at source, the assessee could not be held as 'assessee in default' under Section 201(1A). The court reiterated that the secondment agreement constituted an independent contract of services in respect of employment with the assessee, and the payments made were not for technical services but were reimbursements of costs incurred by a non-resident enterprise.

3. Liability for Deduction of TDS under Section 195:

The tribunal held that the payments made by the assessee to Abbey National Plc, UK were not liable for deduction of TDS under Section 195 of the Act. The High Court supported this finding, noting that the payments were reimbursements for expenses incurred by the seconded employees and not for technical services. The court highlighted that there is no obligation in law for deduction of tax at source on payments made for reimbursement of costs incurred by a non-resident enterprise. Therefore, the amount paid by the assessee was not subject to TDS under Section 195.

4. Categorization as 'Fees for Technical Services':

The tribunal found that the payments made by the assessee to Abbey National Plc, UK could not be categorized as 'fees for technical services' under Section 9(1)(vii) of the Act and Article 13(4)(c) of the DTAA. The High Court agreed, stating that the seconded employees were engaged in assisting the assessee in its business and were under its control and supervision. The court distinguished the case from the decision in M/s. Centrica India Offshore Pvt. Ltd., where the issue involved was whether the secondment of employees constituted a service permanent establishment. In the present case, the issue of permanent establishment was not involved, making the Centrica decision inapplicable.

Conclusion:

The High Court concluded that the substantial questions of law framed were answered against the revenue and in favor of the assessee. The appeal was dismissed, upholding the tribunal's decision that the assessee was not liable to deduct tax at source on the payments made to Abbey National Plc, UK, and could not be treated as 'assessee in default' under Sections 201(1) and 201(1A) of the Act.

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