Whether payment of consideration in lieu of sharing of services of one employee of one company by another company is an income of first company liable to income tax or a service liable to service tax?

2009 -TMI - 32254 - AUTHORITY FOR ADVANCE RULINGS

Cholamandalam MS General Insurance Co. Ltd., In re -  decided on 29-1-2009

The Relevant Facts:

The applicant is engaged in the business of non-life insurance and is interested in building up business relationship with Indian companies which are subsidiaries/joint ventures of certain foreign Companies. The applicant has, inter alia, two divisions - one each dealing with the Korean and Japanee segments in India.

In this regard, the applicant is in need of persons from the respective jurisdictions abroad who are well-versed with the insurance business practices, foreign language and other related information that would be of use to the applicant in the expansion of its business activities.

In pursuing the above objective, the Secondment Agreement dated 13.3.2006 between HMFICL (Provider) and the applicant (Recipient) was entered into. Pursuant to that agreement, an employee of HMFICL, Mr. Shin Bong In, (Secondee) has been seconded to engage in certain specified activities under the supervision and control of the recipient. 

The scale of reimbursement is fixed as per clause 3.3 read with Schedule I to the Agreement. Debit notes are raised by HMFICL on the applicant on a monthly basis for the amounts due. No part of the salary or benefits is payable to the Secondee by the applicant.

The Issue

Whether on the facts and circumstances of the case, the amount paid or payable by the applicant to HMFICL under the terms of the secondment agreement dated 13.3.2006 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 under the provisions of Income-tax Act, 1961?

The Ruling:

In the light of the above discussion, there can be no serious controversy that HMFICL Korea did provide the services of technical personnel, being the Seconded employee at the request of the applicant. From that, however, it does not automatically follow that the payments made by the applicant to HMFICL are to be treated as FTS. (FTS = Fees for technical services)

Amount paid by the applicant to the HMFICL is not attracting provisions of TDS under Income Tax Act.

Relied Upon Decisions

In the ruling AAR followed the decision of Calcutta High Court and Delhi High Court.

In CIT vs. Dunlop Rubber Co. Ltd., [2009 -TMI - 32255 - CALCUTTA High Court ] in honorable Calcutta High Court held that:

      "Reimbursement of a part of expenses incurred on research to the assessee - a non-resident company by its subsidiary does not constitute income of the said non-resident company."

In CIT vs. Industrial Engineering Projects P. Ltd.[ 2009 -TMI - 32256 - Delhi High Court], honorable Delhi High court held that:

       "Reimbursement of expenses is not taxable."

On the other side, AAR has distinguished its own ruling in the matter of AT&S India Ltd., Re. [2008 -TMI - 6597 - AUTHORITY FOR ADVANCE RULINGS]

Issue in AT&S India Ltd. and in the present case was similar but not the same. In AT&S India Ltd.., Re. AAR found that :

        "The subject-matter of payments is not merely the salaries of such employees, which have suffered tax, but compensation which, as noted above, takes in its ambit other items also which AT&S Austria is entitled to receive from the applicant under the secondment agreement." Thereafter, the AAR went into the question whether the real employer was the applicant or the AT&S Austria. In the view we are taking, that particular aspect need not be discussed by us.

Further, AAR has distinguished its own previous ruling in the matter of Danfoss Industries Ltd., Re. [2009 -TMI - 32089 - AUTHORITY FOR ADVANCE RULINGS ] on the following grounds:

           "That was not the case of the assessee-company providing services to an Indian company on payment of consideration in the form of service fees as in the present case. In that case both the assessee-company and the Indian company were beneficiaries of the research conducted as a joint venture. In the instant case the applicant availed the services provided by Danfoss Singapore on payment of service fees."

Whether the above ruling is applicable to Service Tax?

Now have look on the provisions of Service Tax. Business Auxiliary Service, Business Support Service, Management Consultancy Service, Consulting Engineering Service etc. etc. may or may not cover the scope of payment made by one company to another company for sharing of service of an employee.

Despite the fact there are many decisions which have been decided under Income Tax, but may not be application in Service Tax because these decisions have been delivered on the basis of provisions of Section 9 of Income Tax Act, 1961 read with DTAA. But, no such provisions or situation is in existence in Service Tax.

But a fair reading of the provisions of Service Tax may be applicable as follows:

-    Service provided to group companies is liable to service tax - See RPG Enterprises Ltd Versus Commissioner of Central Excise, Mumbai [2008 -TMI - 30816 - CESTAT MUMBAI]

-    Amount of reimbursement of expenses claimed for sharing of common expenses is not liable to service tax.

However, a great care is required to formulate and draft the agreement in this regard.

See Full text of judgments:

1.  Cholamandalam MS General Insurance Co. Ltd., In re  [2009 -TMI - 32254 - AUTHORITY FOR ADVANCE RULINGS]

2.  CIT vs. Dunlop Rubber Co. Ltd., [2009 -TMI - 32255 - CALCUTTA High Court ]

3.  CIT vs. Industrial Engineering Projects P. Ltd.[ 2009 -TMI - 32256 - Delhi High Court],

4.  AT&S India Ltd., Re. [2008 -TMI - 6597 - AUTHORITY FOR ADVANCE RULINGS]

5.   Danfoss Industries Ltd., Re. [2009 -TMI - 32089 - AUTHORITY FOR ADVANCE RULINGS ]

6.  RPG Enterprises Ltd Versus Commissioner of Central Excise, Mumbai [2008 -TMI - 30816 - CESTAT MUMBAI]