9911796707
TMI Blog2014 (5) TMI 154X X X X Extracts X X X X X X X X Extracts X X X X ..... td. ('BSTL') and Director Energy Marketing Limited, Canada ('DEML') are also subsidiaries of Centrica Plc. These overseas concerns are collectively referred to hereafter as 'overseas entities'. They are in the business of supplying gas and electricity to consumers across the U.K and Canada. The overseas entities outsource their back office support functions - for instance, debt collections/consumers' billings/monthly jobs to third party vendors in India etc. To ensure that the Indian vendors comply with quality guidelines, CIOP was established in India on 11.3.2008. It was to act as service provider to these overseas entities. 3. CIOP entered into service agreement with overseas entities to provide locally based interface between those overseas entities and Indian vendors. The scope and range of services so provided in terms of those agreements/understanding are: (i) management assistance for outsourced supplies in India and facilitating efficient interface back to U.S. business of Centrica Plc; (b) ensure that outsourced suppliers adhered to best practices and share them on e-2-e on optimal basis; (c) expert advice on widening scope of potential services in India to target work f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llows: '(A) PLC shall charge CIO monthly for the actual documented costs and expenses that is incurred by PLC during the terms of this Secondment Agreement in respect of the Secondees during the Secondment (the 'Monthly charge'). (B) The monthly charge shall include: (i) all direct costs of Secondee's base salary and other compensation; (ii) costs of participation in PLC's retirement and social security plans and other benefits in accordance with applicable PLC policies; and (iii) other costs but only if such other costs have been agreed between CIO and PLC.' 5. It is stated that the petitioner offers to tax the salaries paid to every seconded employee in India and that it will file Income Tax Returns in India after dispatching appropriate taxes. It therefore withheld taxes under Section 192 of the Act with respect to the salary paid or payable to the seconded employees. Likewise, service income received by the petitioner from overseas entities in terms of the service agreement is offered by it to tax under the Act. CIOP, a resident Indian company, had sought advance ruling under Chapter XIX-B of the Act by its application dated 06.11.2009 on the following two questions: '(i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , according to the respondent amounted to application of income and not diversion of income by the overriding title. 8. The Authority ruled against the petitioner, by the order impugned in the present case, on 14.03.2012, inter alia, holding that: (a) reimbursement of salary cost paid/payable by the petitioner to overseas entities under the terms of Secondment Agreement is in the nature of income accrued to the overseas entities; (b) the services rendered by seconded employees are managerial in nature but such services will not come within the purview of Article 13.4 of the India-UK DTAA or Article 12.4 of India-Canada DTAA. Therefore, consideration paid by the Petitioner to the overseas entities cannot be held to be fees for technical services; (c) the overseas entities constitute service PE under the relevant DTAA on account of employees deputed by overseas entities to the Petitioner under the terms of Secondment Agreement; and (d) Tax is liable to be deducted at source under Section 195 of the Act on amount paid/payable by Petitioner to overseas entities under the Secondment Agreement The material parts of the Authority's findings are extracted below: XXXXXX XXXXXX XXXXXX '1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has paid by way of salary and other emoluments to the concerned employee, that does not alter the situation. The fact that in the accounts of the applicant, this is entered as reimbursement of cost or it is not shown as income in the account of the overseas entity, cannot be conclusive of the question. What the Model commentary on Article 15 concerning the taxation of income from employment says is that where a comparison of the nature of services rendered by the individual with the business activities carried on by his former employer and by the enterprise to which the services are provided points to an employment relationship that is different from the former contractual relationship, then certain additional factors may be relevant to determine whether the employer who receives the secondees could be treated as their employer. What we find in this case is that the overseas entity has created an Indian company as its subsidiary for ensuring that the services to be rendered to it by various Indian vendors are properly coordinated. The overseas entity wants their services to be consistent with its business and policies. The applicant having been newly constituted, was presumably ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do so - the one responsible for the remuneration, the overseas entity, has to be found to be the employer. XXXXXX XXXXXX XXXXXX 26. In the case on hand, as can be seen, the secondee employees are all rendering managerial services. They are General Manager, Operations Manager, Delivery Manager and Relationship Manager respectively. It is true, as pointed out by the Revenue, that even the separate agreements do not specify the nature of the services required to be provided by the employees. There is no material as of now to indicate that they are performing any technical functions or consultancy functions. They can be said to be managing the business of the subsidiary as requested by Centrica Plc., consistent with its aims. There is no acceptable argument except reliance upon a ruling by this Authority in Version Data Services India Private Limited (AAR No.865 of 2010). We may notice that the High Court of Madras has in a Judgment in Writ Petition No. 14921 of 2011, set aside the finding of this Authority on that question and has remanded the relevant question for a re-consideration. To that extent, the finality of the Version Ruling has now gone. So, the reliance placed on that Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment agreement. The payment of salary of the seconded employee is charged from the economic employer. Learned counsel reiterated that an overall reading of Articles 2.1, 2.2, 2.3, 3.1 and 5.2 of the secondment agreement conclusively establishes that it was a real and economic employer of the seconded employees and that they were acting to its dictate in the performance of their job and not placed there to perform the tasks assigned by the overseas entities. 11. Reliance was placed upon the judgment reported as CIT v. Eli Lilly and Co. India Private Limited, (2009) 312 ITR 225 (SC), to say that the determinative factors for examining whether the home salary paid by the foreign company in foreign currency abroad can be held to be 'deemed' or 'accrued' or 'assigned' in India depends on an indepth analysis of facts and arrangements in each case. If the salary or remuneration paid by the foreign company is for rendition services in India then the payment fell within Section 9(4)(i) read with Section 192(1). Learned counsel relied upon a recent ruling of the Division Bench of this Court in DIT v. M/s. E-Funds IT Solution, ITA 735/2011. Similarly, reliance was also placed upon the ruling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S. A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the U.N. Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge.' 13. It is submitted that without fulfilling both criteria, i.e. the foreign enterprise assuming responsibility for the deputed personnel's work and the employee being on the payroll or retaining their lien on employment there would no service PE. In the present case, the first is significantly absent and as regards the second, the payment is made exclusively out of the petitioner's funds. Responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny in India). 16. The respondent submits that it is also necessary to see if such services (in the form of expertise and capability of implementation) amount to 'technical services' under the provisions of the domestic tax act and the relevant provisions of the applicable treaties. Section 5 of the Act is the charging section and in case of non-residents clause (2) states as follows: '(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which - (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year.' 17. The Revenue also relies on Section 9 of the Act, which provides for income which is deemed to accrue or arise in India. Section 9(1)(vii) of the Act states as follows: '(vii) Income by way of fees for technical services payable by - (a) The Government; or (b) A person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement functions; and (b) A managerial service is towards the adoption and carrying out the policies of an organization. It is of a permanent nature for the organization as a whole. 19. Further, it is argued that the following services have been held to be managerial services: (a) Hiring and training commercial agents (OECD Report Treaty Characterisation Issues Arising from Ecommerce); (b) Overall management and direction [Advance Ruling No. P 28 (242 ITR 208)]; (c) Development and administration of dealer network, sales and marketing, service etc. (d) Managing financial operations, (e) Supplier development and materials management, including development if local suppliers. 20. The Revenue placed reliance on the decision of the Delhi High Court in the case of CIT v. Bharti Cellullar Ltd., 319 ITR 139, where the scope of the meaning 'managerial service' was examined. The Court held as follows: 'We have already pointed out that the expression 'fees for technical services' as appearing in Section 194J of the said Act has the same meaning as given to the expression in Explanation 2 to Section 9(1)(vii) of the said Act. In the said Explanation the expression 'fees for technical serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA between India and UK defines the term 'technical services' as follows: 'Fees for technical services' means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or (c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design The Revenue states that the term 'managerial service' is not included in the scope of the term 'technical service' within the meaning of the term in Article 13 of the DTAA (revised treaty as entered into in 1993). However, it is urged that the Court should hold that the services of the deputed employees fall within the meaning of the term as contained in Article 13(3), which includes 'making avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure is not supported by any evidence and there is no material to show what was the actual expenditure and what was claimed as a reimbursement. Provisions of the DTAA between India and UK and India and Canada 25. Article 13 of the DTAA between India and UK provides as follows: 'ARTICLE 13 - Royalties and fees for technical services- 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed: (a) In the case of royalties within paragraph 3(a) of this Articles, and fees for technical services within paragraphs 4(a) and (c) of this Article,- (i) During the first five years for which this Convention has effect; (aa) 15 percent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply. 7. Royalties and fees for technical services shall be deemed to arise in a Contracting State where the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to make payments was incurred and the payments are borned by that permanent establishment or fixed base then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies or fees for included services; and (b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services. XXXXXX XXXXXX XXXXXX 4. For the purposes of this Article, 'fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design. 5. Notwithstanding paragraph 4, fees for included services does not include amount paid : (a) for services that are ancillary and subsidiary, as well as inextricably and ess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Agreement.' 27. The material portions of the Secondment Agreement entered into by CIOP are also reproduced below: 'ARTICLE 2 TERMS OF SECONDMENT 2.1 Secondment (A) At the request of CIO, PLC shall assign relevant individuals to perform the Duties at the Secondment Location for the Secondment Period, and to report to CIO in accordance with the Secondment Agreement, and in particular Attachment A thereto. (B) CIO shall designate a Secondee to fill certain positions within CIO's Organization, integrate Secondee into CIO's and authorize Secondee to perform the Duties at the Secondment Location for the Secondment Period in accordance with the Secondment Agreement. (C) CIO shall have the right to specify the scope and nature of Secondee's work and the results to be achieved, and to direct Secondee in the performance of the Dutie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceiving notice of unsatisfactory performance fails to perform the duties in a manner that in CIO's reasonable judgment is satisfactory. (B) CIO may terminate this secondment Agreement immediately without notice to PLC. (1) If secondee engages in serious misconduct or violates any substantive or material laws, which in CIO's reasonable judgment significantly impairs secondee's ability to perform the duties or to live and work in the secondment location; or (2) If secondee materially breaches the confidentiality obligations under this secondment agreement, or if applicable, the secondee Agreement. Immediately after any termination without notice CIO shall notify PLC setting out the reasons for such termination. PLC's Right to Terminate the Secondement Secondee shall be assigned to CIO for the Secondment period and PLC will use all reasonable endeavors not to withdraw secondee during the secondment period except that PLC shall have the right to immediately withdraw secondee in case of Force Majeure, or a personal emergency concering the Secondee PLC shall promptly give notice setting out the general circumstances of such Force Majeure event or personal emergency. xxx xxx xxxx' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the labour (and nor the foreign intermediary); - the hirer does not bear the responsibility or risk for the results produced by the employee's work; - the authority to instruct the worker lies with the user; - the work is performed or a place which is under the control and responsibility of the user; - the remuneration to the hirer is calculated on the basis of the time utilized, or there is in other ways a connection between this remuneration and wages received by the employer; - tools and materials are essentially put at the employee's disposal by the user: - the number and qualifications of the employees are not solely determined by the hirer. xxx xxx xxx xxx' The Court also notes that the Model Tax Convention on Income and on Capital (Condensed Version, July 2010) in this context, states as follows: '8.14 Where a comparison of the nature of the services rendered by the individual with the business activities carried on by his formal employer and by the enterprise to which the services are provided points to an employment relationship that is different from the formal contractual relationship, the following additional factors may be relevant to determine whether this i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k, so to say, for CIOP are provided by the overseas entities and the work conducted by them thus, i.e. assistance in conducting the business of COIP of quality control and management is through the overseas entities. The nature of the services - cast as 'business support services' by CIOP - as also clearly within the hold 'technical or consultancy'. These services envisage the provision of quality service by vendors to the overseas entities, which CIOP, and the secondees, are to oversee. This requires the secondees to draw from their technical knowledge, and falls within the scope of the term. This reading of 'technical' services does not limit itself only to technological services, but rather, extends to knowhow, techniques and technical knowledge. This is supported by clause 4 of Article 12 itself, which lists these various sub-categories. Indeed, the term 'technical' has not been defined in the DTAA, and must be accorded its broader dictionary meaning, unless limited by the parties to the instrument. The AAR in Intertek Testing Services India Pvt. Ltd. v. CIT X, (2008) 220 CTR (AAR) 540, considered this question in detail, and rightly held that 'What is meant by the expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 'included service' that triggers tax liability. Instead, the enterprise must 'make available' the skill behind that service to the other party, i.e the Indian recipient. The definition, as it appears, is more restricted that in the India-UK DTAA. The question is whether the higher threshold, is met in this case. The service provided by the secondees is to be viewed in the context in which their secondment or deputation was necessitated. The overseas entities required the Indian subsidiary, CIOP, to ensure quality control and management of their vendors of outsourced activity. For this activity to be carried out, CIOP required personnel with the necessary technical knowledge and expertise in the field, and thus, the secondment agreement was signed since CIOP - as a newly formed company - did not have the necessary human resource. The secondees are not only providing services to CIOP, but rather tiding CIOP through the initial period, and ensuring that going forward, the skill set of CIOP's other employees is built and these services may be continued by them without assistance. In essence, the secondees are imparting their technical expertise and know-how onto the other regular em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable laws and regulations, standards and practices and control of CIOP. The overseas entities were not responsible for any errors or omissions of such seconded employees or for their work. CIOP bore all risks in relation to the work of seconded employees, and reaped the benefit from the output. CIOP also bore the cost of monthly remuneration and reimbursement of cost to seconded employees. However, crucially, these seconded employees retained their entitlement to participate in the overseas entities' retirement and social security plans and other benefits in terms of its applicable policies, and the salary was properly payable by the overseas entitle, which claimed the money from CIOP. There was no purported employment relationship between CIOP and the secondees. None of the documents, including the attachment to the secondment agreements placed on record (between the secondees and CIOP) reveal that the latter can terminate the secondment arrangement; there is no entitlement or obligation, clearly spelt out, whereby CIOP has to bear the salary cost of these employees. The secondees cannot in fact sue the CIOP for default in payment of their salary- no obligation is spelt out vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mere conduit. Crucially, the social security, emoluments, additional benefits etc. provided by the overseas entity to the secondee, and more generally, its employees, still govern the secondee in its relationship with CIOP. It would be incongruous to wish away the employment relationship, as CIOP seeks to do today, in the face of such strong linkages. Whilst CIOP may have operational control over these persons in terms of the daily work, and may be responsible (in terms of the agreement) for their failures, these limited and sparse factors cannot displace the larger and established context of employment abroad. 36. In this context, the decision of the Supreme Court in Morgan Stanley (supra) offers support for the Authority's viewpoint, rather than the contrary stance. In that case, the Court considered various forms of PEs, agency, service etc, each of which contemplate a different characteristic and link between the deputed employee/organization and the parent. In the context with which we are presently concerned, the following observations are critical: '15. As regards the question of deputation, we are of the view that an employee of MSCO when deputed to MSAS does not become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s identical to this case: 'Whether pursuant to the secondment agreement entered into by the applicant with AT&S Austria, the payment to be made by the applicant to AT&S Austria, towards reimbursement of salary cost incurred by AT&S Austria in respect of seconded personnel, would be subject to withholding tax under Section 195 of the IT Act, in view of the facts that (1) the payments are only in the nature of reimbursement of actual expenditure incurred by AT&S Austria. (2) AT&S Austria is not engaged in the business of providing technical services in the ordinary course of its business, (3) AT&S Austria is not charging the applicant any separate fee for the secondment and (4) the seconded personnel work under the direct control and supervision of the applicant?' In holding that the obligation under Section 195 would be triggered, the AAR held as follows: 'From the above analysis of both the agreements it is clear that pursuant to the obligation under the FCA, the AT&S Austria has offered the services of technical experts to the applicant on the latter's request and the terms and conditions for providing services of technical experts are contained in the secondment agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2008. In Article 3 thereof salary of the employee is noted as the remuneration, perquisites and other entitlements as detailed in Appendix-A. However, Appendix-A does not specify any amount. All that it says, is that the salary will be as fixed and agreed between the employee and the company from time to time and that such salary may be paid either in India or outside India but the total salary shall not exceed the salary fixed as above, but no fixed salary is mentioned in the employment agreement. Other perquisites and entitlements are : travel expenses, transport, boarding, lodging; and annual leave of 30 days per year; and home leave which the employee will be entitled to once. The applicant shall have to organize an economic class return flight tickets to go on home leave. The employment agreement also provides that the employee will be responsible for meeting all requirements under Indian tax laws including tax compliance and filing of returns and the applicant is authorized to deduct taxes from the compensation and benefits payable.' 38. The mere fact that CIOP, and the secondment agreement, phrases the payment made from CIOP to the overseas entity as 'reimbursement' canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the real employer of these seconded employees continues to be the overseas entity concerned. 40. The final issue concerns the 'diversion of income by overriding title'. Here, CIOP argues that the payment made to the overseas entity is not income that accrues to the overseas entity, but rather, money that it is obligated to pass on to the secondees. In other words, this money is overridden by the obligation to pay the secondees, and thus, is not 'income'. This is insubstantial for two reasons. One, in view of the above findings that: (a) the payment is not in the nature of reimbursement, but rather, payment for services rendered, (b) the employment relationship between the overseas entities and CIOP - from which the former's independent obligation to pay the secondees arises - continues to hold, no obligation to use money arising from the payment by CIOP to pay the secondees arises. The overseas entities' obligation to pay the secondees arises under a separate agreement, based on independent conditions, in relation to CIOP's obligation to pay the overseas entity. Assuming the agreement between CIOP and the overseas entity envisaged a certain payment for provision of services ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
