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TMI Blog2009 (1) TMI 363X X X X Extracts X X X X X X X X Extracts X X X X ..... provided that contract is between connected and relevant parties, that should suffice. It has to be remembered that the services of Dr. Sundararajan, who was appointed as executive vice president of Worldwide Engineering and managing director of the assessee company, were seconded by IDS to the assessee company and his appointment as managing director of the assessee company is traceable only to the relationship between the assessee company and its parent company in USA. The secondment agreement, as we have already held, constitutes an independent contract of service in respect of the employment of Dr. Sundararajan with the assessee company. It may be true that IDS, the US company is the employer of Dr. Sundararajan in a legal sense but since his services have been seconded to the assessee company under the secondment agreement and further since the assessee company is to reimburse the emoluments paid by IDS to Dr. Sundararajan, it is the assessee company which for all practical purposes is to be looked upon as the employer of Dr. Sundararajan during the relevant period. Therefore, we hold that Dr. Sundararajan was an employee of the assessee company during the relevant tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Nov., 2007 by which he dismissed the appeal filed by the assessee against the order passed by the AO under s. 195(2) of the IT Act on 31st July, 2006. 2. The appeal arises this way. The assessee is a company engaged in the business of software development. It is a 100 per cent Indian subsidiary of M/s International Decisions Systems of USA, which is hereinafter referred to as "IDS" or the "US company". On 19th Aug., 2005 it entered into an agreement with IDS. This agreement was for securing the services of certain personnel from IDS to assist the assessee in its business. The agreement would be hereinafter referred to as the "secondment agreement". A copy of the agreement has been placed at pp. 1 to 6 of the paper book filed by the assessee and we shall notice the important terms thereof. The preamble narrates that the assessee is desirous of securing the services of managerial personnel to assist it in its business and that IDS, in order to assist the assessee in the conduct of its business "has agreed to second one of its employees to IDS India" upon the terms set out in the agreement. Article I of the agreement stated that IDS has agreed to second one employee to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellaneous expenses directly related to the secondment. The article clarified that the reimbursement would be of actual costs incurred by IDS without any mark-up thereon. Articles IV and V relate to the payment and the documentation which are not very relevant. Article VI provides for indemnity. It says that the US company will try to provide an appropriate employee for secondment but does not warranty for the quality of the seconded employee. The assessee was to indemnify IDS, the US company from all claims, demands, loss, damages etc., to which IDS may become liable as a consequence of any act or omission committed by the seconded employee. The other clauses of this agreement are not very relevant for our purposes. 3. On 7th June, 2005 i.e., a little above two months earlier, a letter was written by one Nicholas P. Somers who was a member of the board of directors of IDS, the US company to one Dr. Srikanth Sunderarajan, a copy of which is placed at pp. 12 and 13 of the paper book. The gist of the letter is as follows: (a) Dr. Sunderarajan was being offered employment with IDS Group Inc. as Executive Vice President, Worldwide Engineering and managing director of the assessee co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nutes of the meeting that Dr. Srikanth Sundararajan is authorised to operate the account held in HSBC Bank subject to the limits. Under a separate head in the minutes, titled "Authorisation", the following further duties were prescribed for Dr. Sundararajan: (a) He is authorised to execute lease documents pertaining to the office premises to set up a 100 per cent EOU; (b) He is authorised to initiate steps in executing legal agreements, filing of relevant documents for establishment of a hundred per cent EOU in the STP of India; (c) He shall take steps to file applications to the various statutory agencies such as customs, central excise etc., and to furnish undertakings and declarations; (d) He is authorised to secure bank guarantees for customs bonding; (e) He shall prefer applications to the Joint Director General, Foreign Trade for obtaining an Import, Exporter Code; (f) He is authorised to complete all formalities under the laws regarding sales tax, profession tax, labour, shops and establishment Acts and other laws relating to the Karnataka State as well as central laws. 5. In accordance with the above arrangement, Dr. Sundararajan took charge as the managing di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the assessee to IDS cannot be considered to be mere reimbursements so that they can be exempt from tax. Secondly he held that the proposed remittance cannot be considered as salary because there was no employer employee relationship between the assessee and IDS, the US company. According to the AO, the remittance would fall to be considered as "fees for technical services" as defined in Expln. 2 below s. 9 (1)(vii) of the IT Act as also under the art. 12(4) of the DTAA between India and USA. It would appear that the assessee had contended before the AO that no technical services were made available to the assessee company by IDS, but this plea was rejected by the AO who held that the remittance was by way of fees for technical services and, therefore, the assessee was liable to deduct tax therefrom. Accordingly, he directed the assessee to deduct tax at the rate of 10 per cent of the remittance. The assessee was to remit US $ 25,813. The AO directed the assessee to deduction US $ 2,581 from the same. This order was passed by the AO on 31st July, 2000. 8. The assessee filed an appeal before the CIT(A), It appears that detailed written submissions were furnished before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resided over the Division Bench noticed that the assessee was only a permanent director under the articles and apart from the articles there was no other contract between her and the company. Even the articles did not appoint her as manager or managing director. On these findings, the Hon'ble Chief Justice held that the assessee was not a servant or an employee of the company and the amount paid to her could not be assessed as salary. Hon'ble Justice Chagla held that though it is true that a director holds an office under the company and is either appointed or elected by the company, it cannot be said that every person who holds an office is necessarily an employee. The following observations at p. 14 of the judgment are important: "In the case of a director, there may be special terms in the articles of association, or there may be an independent contract which may bring about contractual relationship between the company and the director and constitute the director an employee of the company; but independently of such special contract, a director of a company is not the employee of the company". In the case of K.R. Kothandaraman vs. CIT (1966) 62 ITR 348 (Mad), the question before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rector and also that of an employee of the company has thus been accepted both by the Bombay and the Madras High Courts in the decisions noticed above. A similar view had earlier been expressed by the Scottish Court of Sessions in Anderson vs. James Sutherland (1941) S.C. 203 to the effect that the managing director has two functions and two capacities; qua managing director he is a party to a contract with the company, and this contract is a contract of employment, a contract of service and not a contract for service. Ram Prashad vs. CIT 1972 CTR (SC) 97 : (1972) 86 ITR 122 (SC) was a case decided by the Supreme Court where the question was whether the managing director of a company who received monthly remuneration as also a percentage of gross profits for his services, could be considered as a servant of the company so that the amount received by him can be assessed as salary or whether it would be business income in his hands. The Supreme Court laid down the following propositions: (a) For ascertaining whether a person is a servant a rough and ready test is whether under the terms of the employment the employer exercises a supervisory control in respect of the work entrusted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of offer dt. 7th June, 2005, but before the appointment was made in the board meeting. There is no dispute that the services of Dr. Sundararajan were seconded to the assessee company by virtue of the secondment agreement though his name does not find a mention in the secondment agreement obviously because his appointment was made about 15 days later. Be that as it may, the question is whether, apart from the board resolution appointing Dr. Sundararajan as the managing director of the assessee company, there was any independent or special contract with him. We are inclined to view the secondment agreement as a contract governing the relationship between the assessee company and Dr. Sundararajan, though the contract as such is between the assessee company and IDS. In our humble opinion, the special contract need not be between the assessee company and Dr. Sundararajan; so long as the relationship between them is defined in a contract, provided that contract is between connected and relevant parties, that should suffice. It has to be remembered that the services of Dr. Sundararajan, who was appointed as executive vice president of Worldwide Engineering and managing director of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployer of Dr. Sundararajan in a legal sense but since his services have been seconded to the assessee company under the secondment agreement and further since the assessee company is to reimburse the emoluments paid by IDS to Dr. "Sundararajan, it is the assessee company which for all practical purposes is to be looked upon as the employer of Dr. Sundararajan during the relevant period. In this behalf we were referred to the views expressed by Professor Klaus Voegel in his treatise on Double Taxation Conventions under the heading 'International Hiring Agreements' at p.885. The view put forth by him is reproduced hereunder: "The question of who is the employer arises particularly in situations in which the employee is sent abroad to work for a foreign enterprise as well. In such cases, the determination of employer rests on the degree of personal and economic dependence of the employee towards the enterprises involved. Accordingly, the foreign enterprise does not qualify as an employer merely because the employee performs services for it or because the enterprise was issuing to the employee instructions regarding his work, or places tools, etc., at his disposals of Hinnekens. L, I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". It is not denied before us on behalf of the assessee that Dr. Sundararajan is a technical person. What is however submitted is that arts. II and VI of the secondment agreement would be out of place in a contract for providing technical services. Article II as we have already seen contains eight clauses outlining the duties and obligations of the seconded employee. Article VI provides for indemnification which has also been earlier noticed by us. We are inclined to agree with the submission that these two articles are out of place in a contract for providing technical services. For example, cls. (A) to (C) of art. II make the seconded employee responsible and subservient to the assessee company which cannot be the case if the agreement is for providing technical services by IDS to the assessee company. Similarly cl. (E) which requires the seconded employee to also act as officer or authorised signatory or nominee UP in any other lawful personal capacity for the assessee company, would also be out of place in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the right over the seconded personnel and had the power to remove any seconded personnel from the assessee subject only to the condition that a suitable replacement should be made. In the present case under the secondment agreement it is the assessee company which has control and supervision of the work of the seconded employee namely, Dr. Sundararajan. He was appointed as managing director by the board of directors of the assessee company and not by IDS. In fact, the assessee company could even terminate the services of Dr. Sundararajan as managing director during the period of eight months during which he was to serve the assessee company. There was no separate foreign collaboration agreement of the kind which was entered into between the Indian and the Austrian companies in the ruling of the AAR. It appears to us on a reading of the ruling of the AAR that in that case the secondment agreement was subservient to the foreign collaboration agreement. These are thus the features which distinguish the present case from the decision of the AAR. We are, therefore, unable to apply the said decision to the present case. 15. The Department has also relied on another ruling of the Aut ..... X X X X Extracts X X X X X X X X Extracts X X X X
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