2006 (11) TMI 138 - AAR - Income Tax

Agreement for information technology cost sharing with AT&S Austria - Payments made by the applicant to AT&S Austria are in the nature of fees for technical services within the meaning of Explanation 2 to clause (vii) of sub-section (i) of section 9 of the Act and article 12(4) of DTAA and therefore they would be subject to withholding of tax at source u/s195 Question whether AT&S Austria is charging any separate fee for the secondment of the employees, is not material

Summary

Issues Involved:
1. Scope of Section 195 of the Income-tax Act, 1961.
2. Nature of payments under the secondment agreement: reimbursement, royalty, or fees for technical services (FTS).

Detailed Analysis:

1. Scope of Section 195 of the Income-tax Act, 1961:

Section 195(1) of the Income-tax Act, 1961, mandates that any person responsible for paying to a non-resident any sum chargeable under the provisions of the Act must deduct income-tax at the rates in force at the time of payment. The applicant, being responsible for payments under the secondment agreement to a foreign company, must determine if the payments fall within the expression "any other sum chargeable under the provisions of the Act" or are exempt under the head "salaries."

The Supreme Court's decision in *Transmission Corporation of A.P. Ltd. v. CIT* clarifies that the expression "any other sum chargeable under the provisions of this Act" means a sum on which income-tax is leviable. Therefore, the applicant must deduct tax if the payment is chargeable to tax under the Act.

2. Nature of Payments Under the Secondment Agreement:

Reimbursement:
The applicant argued that payments to AT&S Austria are merely reimbursements for actual expenditure incurred for seconded personnel. However, the agreement stipulates that the applicant compensates AT&S Austria for all costs arising from the secondment, including salary, bonus, benefits, and personal travel. The term "reimbursement" is not determinative, and no evidence was provided to substantiate the claim of actual expenditure incurred by AT&S Austria.

Employment Relationship:
The applicant contended that the seconded employees became its employees, evidenced by employment agreements and tax deduction at source certificates. However, the secondment agreement indicated that AT&S Austria retained control over the seconded personnel, including the right to remove and replace them. The OECD commentary and Klaus Vogel's commentaries, which discuss the criteria for determining the real employer, were considered. Despite these arguments, it was concluded that AT&S Austria remained the real employer of the seconded employees, as it provided services under the Foreign Collaboration Agreement (FCA) and the secondment agreement.

Fees for Technical Services (FTS):
Under Section 9(1)(vii) of the Act and Article 12 of the DTAA, FTS includes any consideration for rendering managerial, technical, or consultancy services, including the provision of technical personnel. Payments to AT&S Austria for seconded personnel fall within this definition. The applicant's assertion that AT&S Austria is not engaged in providing technical services in the ordinary course of its business was not supported by evidence. The compensation paid to AT&S Austria was deemed FTS, subject to withholding tax under Section 195.

Conclusion:
The Authority ruled that payments made by the applicant to AT&S Austria are in the nature of FTS under Section 9(1)(vii) of the Act and Article 12(4) of the DTAA. Therefore, they are subject to withholding tax at source under Section 195 of the Act.