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TMI Blog2012 (3) TMI 243X X X X Extracts X X X X X X X X Extracts X X X X ..... f Art.5 of the India-UK Treaty, falling under Article 5.2(k) corresponding to provision in paragraph 2(l) of Article 5 of India-Canada Convention. Hence, reimbursement of salary by the applicant under the agreement would be income accruing to overseas entities in view of the existence of a service PE in India and tax is liable to be deducted at source u/s 195 - A.A.R. No. 856 of 2010 - - - Dated:- 14-3-2012 - Mr Justice P.K. Balasubramanyan, Mr. V.K.Shridhar, JJ. Present for the applicant : Mr. N. Venkatraman, Sr.Adovate Mr. Taranpreet Singh, FCA Mr. Akhil Sambhar, ACA Mr. Satish Aggarwal, FACA Mr. Upvan Gupta, ACA Mr. Jagdish Joginedi, ACA Present for the Department : Mr. Deepak Chopra, Sr. Standing Counsel, Income-tax Department, (High Court of Delhi). R U L I N G [By Justice P.K. Balasubramanyan] Centrica India Offshore Private Limited, (for short CIO), the applicant before us, is a company incorporated in India. It is a wholly owned subsidiary of Centrica Plc., United Kingdom, a company incorporated in the United Kingdom (hereafter, U.K.). British Gas Trading Ltd. (BSTL), Director Energy Marketing Limited, Canada (DEML) are also subsidiaries of Centr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the overseas entities were to assign relevant individuals to perform the duties at the location of the applicant for the period stipulated and to report to the applicant in accordance with that agreement. The applicant was to designate the concerned secondees to fill certain position in its organization, integrate them into its organization and authorize them to perform the duties in its plan for the agreed period in accordance with that agreement. The applicant had the right to specify the scope and nature of the secondee s work and the results to be achieved to direct the secondees in the performance of duties. The applicant was to enter into separate secondee agreement with each one of the secondees. 5. The secondee was to be integrated into organization of the applicant CIO for the secondment period and was to be subject to the supervision and control of CIO. All the rules, regulations, policies and other practices established by CIO for its employees was to apply. The secondee was also bound by the instructions and directions of the CIO. The secondee was to perform the duties assigned with due diligence in a competent and professional manner in accordance with applicable la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement if the secondees repeatedly failed to comply with work place rules, regulations and policies of CIO or with a direction given by the management of CIO. What is relevant to note is that the applicant CIO is given only the right to terminate the secondment agreement and not the services of the secondee sent over by the other oversees entities. 6. It is the case of the applicant that pursuant to the secondment agreement, certain employees of the overseas entities have been seconded to the applicant. One of them was to work as General Manager for a period of one year and 7 months, to be overall responsible for the activities and functions of the CIO. He is to report to the Board of Directors of the CIO. The second was to be Operations Manager, to work for a period of 13 months, to overseas operations/ various functions and controls of CIO and also to supervise other employees. He is to report to the General Manager. The third was to work as Delivery Manager for a period of 3 months, and be responsible for ensuring that the vendors of overseas entity delivered the services on time. That person is also to report to the General Manager. The fourth is to work as Relationship M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase the amount paid or payable by the applicant to the overseas entities under the terms of Secondment Agreement is in the nature of income accrued to the overseas entities? (b) If the answer to question no.1 above is in the affirmative, whether the tax is liable to be deducted at source by the applicant under the provision of Section 195 of the Income-tax Act, 1961? 9. In its original objection, the Revenue took up the contention that what is received by the employees is received in India as salary and hence it was taxable in India and Section 195 of the Act was attracted. In its additional objections, the Revenue contended that the payment made by the applicant to the overseas entities were partook the character of fees for technical services . As regards Canadian overseas entity governed by the Treaty between India and Canada, it was contended to be fees for included services . It was pleaded that these payments were sought to be cleverly disguise as reimbursement of salary cost of the seconded employees escape the withholding tax in India. The attempt of the applicant to make out a case that the present one is a simple case of reimbursement of cost of the seconded employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The amount paid by way of reimbursement to the overseas entities cannot be considered income in the hands of the overseas entities with an obligation on the applicant to comply with the requirement of Section 195 of the Act. The contract was one of service and not one for service and in view of the distinction between the two concepts, the amount cannot be taxed. The concept of legal employer and economic employer has been recognized by some of the Income-tax Appellate Tribunals in India as well. Being an economic employer, the obligation on the applicant was only to deduct the tax on the salary payable to the secondees in terms of 192 of the Act. What was made over to the overseas entities is only reimbursement and there was no element of income in it. In any event, it would be a case of diversion of income by overriding title in that, the payment never becomes ought of the income of the overseas entities. It cannot also be held that what is paid is fees for technical services taxable in terms of the Treaty between India and U.K. and that between India and Canada. Thus, on question no.1, a ruling in favour of the applicant deserves to be rendered. On behalf of the Revenue, these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alary paid to the employees, mere reimbursement. In other words, the applicant claims that it has to bear the responsibility for the salary of the employees seconded to it. Clause 3.1 of the Agreement only provides for the overseas entity being entitled to recover the costs of the base salary and other compensation paid to the seconded employee and the cost of participation of the employee in the retirement and social security plans and other benefits in accordance with its policy. This only emphasizes the fact that the seconded employee remains the employee of the original employer and that he has to look to the overseas entity for his salary and other emoluments. 16. The individual appointment letters given to the seconded employees also re-affirm this position. They are silent on the salary and other service dues payable to the employee. No obligation at all is undertaken by the applicant to pay them, though provision is made for providing some incidental expenses. This only reaffirms the position that the applicant has no economic control over the employees. 17. Learned Sr. counsel submits that secondment is a concept that is now universally accepted and the very nomenclatu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with its business and policies. The applicant having been newly constituted, was presumably not in a position to render help to the various vendors in the matter of fulfilling their obligations or in the matter of ensuring compliance with the processes and practices employed by the overseas entities. The Secondment Agreement is specifically based on the fact that CIO has asked the overseas entity to provide staff with knowledge of various processes and practices employed by the overseas entity and experience in managing and applying such processes and practices. On a look at the list of employees, it is seen that the persons seconded are concerned with managerial functions and they are to oversee the applicants operations and to be overall responsible for its activities and functions. This, therefore, appears to be a case where some employees qualified in the processes and procedures of the overseas entity are lent to the applicant, the Indian entity, a subsidiary, to perform the functions envisaged for it. What is paid by the applicant to the overseas entity in view of this lending of service of certain employees, would really spell in the realm of compensation paid for manageri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f cannot be accepted. 22. Before dealing with the question whether the amount is taxable in India we think it proper to deal with the contention on behalf of the applicant that this was a case of diversion of income by overriding title and nothing is received by the overseas entities as their income. The Supreme Court in CIT v. Sitaldas Thirathdas (41 ITR 367) held that the true test is whether the amount sought to be deducted in truth never reached the assessee as his income. It is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible, but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence in law does not follow. In CIT v. Sunil J. Kinariwala [2003 (1) SCC 660], the Supreme Court held that the discriminatory factor, in our view, is the nature and effect of the assessees obligation in regard to the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the meaning of Section 9(1)(vii) of the Act and Article 13 of the DTAC between India and U.K. and fees for included services within Article 12 of the DTAC between India and Canada. It is argued that the service rendered by the seconded employees is managerial service and hence the remuneration payable to the overseas entity for seconding these employees is fees for technical services within the meaning of Section 9(1)(vii) of the Act. Under Article 13 of the DTAC between India and U.K. though managerial service is not included, it was a case of making available technical knowledge, experience and skill and hence it will come within the scope of fees for technical services therein. It is pointed out that the seconded employees are sent to India with knowledge of various processes and practices employed by the overseas entity and the experience in managing and applying such processes and practices. They were also making available their experience and skill in managing and applying the processes and practices. The object of their secondment for fixed terms is to train and familiarize the staff in India so that once the secondment ceases, the staff in India can apply the process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the purview of Article 13.4 of the India-UK Convention or Article 12.4 of the Indo-Canada Convention. Hence, the consideration paid by the applicant to the overseas entities for getting the services of these employees cannot be held to be fees for technical services. In view of the above, it is not necessary to consider the question whether the service is made available to the applicant. 28. It is argued on behalf of the Revenue that the presence of the seconded employees of the overseas entities would result in a service PE of such entities in India and that portion of the income earned by them would be taxable in India especially in the context of paragraph 2(k) of the India-UK DTAC. It is also pointed out that the applicant has not furnished adequate details or information in that regard. It is submitted that rendition of managerial services for periods exceeding the number of days specified in clause (k) of paragraph 2 of Article 5 of the Convention leads to the conclusion that there is a service PE in India for the overseas entities. It is submitted on behalf of the applicant relying on the decision of the Supreme Court in Morgan Stanley (292 ITR 416) that in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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