Indian Company exercising control and supervision over a seconded employee and bearing the salary cost should be considered as an economic employer and not liable to withhold tax under Section 195 of the Act on the reimbursement of the salary to the foreign company on which tax has been withheld under Section 1923 of the Act. Further the Tribunal held that the payment to IDS USA did not represent ‘Fees for Technical Services’
INCOME-TAX APPELLATE TRIBUNAL,
I.T.A. No.616(Bang.)/2011 – Assessment Year: 2006-07)
The Income-tax Officer,
M/s Ariba Technologies (India) Pvt.Ltd.
Date of pronouncement: 04-04-2012
PER SMT. P. MADHAVI DEVI, JM;
This appeal by the revenue relates to assessment year 2006-07.
2. In this appeal, the revenue is aggrieved by the order of the CIT(A) in allowing the assessee’s claim by holding that the assessee is not liable to deduct tax at source while making the payment to the foreign companies on the transactions of the salary payable to the employee of the foreign company for the services rendered by him to the assessee in India in terms of the secondment agreement between the foreign company and the assessee company. The revenue is aggrieved that the CIT(A) has held that the assessee is not an assessee in default u/s 201(1) and that the interest u/s 201(1A) of the IT Act, 1961 is not leviable.
2.1 The brief facts of the case before us are that the assessee is a company which is engaged in the business of providing data processing, technical consulting, computer programming, technical support and IT enabled services. The Company had entered into separate agreements for programming services, IT enabled products and other services agreements such as R & D agreements. Under the R & D agreements the personnel of M/s Ariba USA was to assist the assessee on short term basis. One of the agreement is termed as ’employee assignment agreement’ i.e secondment agreement which is dated 01-07-2005 to secure the services of certain personnel of M/s Ariba USA to assist the assessee in its business. In terms of the aforesaid agreement M/s Ariba USA has provided services of one of its employees Shri Narayan Venkatesan, to the assessee by deputing him to India and his services were rendered in India. The assessee has claimed that it has reimbursed remuneration/salary of the seconded employee to M/s Ariba USA on account of secondment agreement which was in turn remitted to the employee. Since the assessee has not deducted tax at source as provided u/s 195 of the IT Act, 1961 a show cause notice was issued to the assessee to explain as to why the company should not be treated as the ‘assessee in default in terms of Sec.201(1) and 201(1A) of the IT Act, 1961’. In response to the said notice, the assessee submitted that the company has remitted an amount of Rs. 18,80,778/- to M/s Ariba USA which is after deduction of TDS amount of Rs.8,69,715/- which has been paid to the Government account. It is also submitted that the salary cost to Shri Narayan Venkatesan has been duly accounted for under the head ‘Salaries and Allowances” and that the salary cost discharged by M/s Ariba USA is for administrative convenience only. It was also submitted that the said employee was under the direct control and supervision of the assessee and none of his acts during the course of assignment shall be binding on M/s Ariba USA. It was also submitted that the remittances to M/s Ariba USA cannot be termed as ‘Fees for Included Services’ (FIS) in terms of Article12(4)(a) of the DTAA between India and USA and also that the amount does not constitute income in the hands of the recipient company.
3. The AO however, was not satisfied with the said contentions of the assessee and held that the payment is made by the assessee to non¬resident foreign company for the services rendered by its employee and therefore, tax should have been deducted at source as per the provisions of Sec. 195 of the IT Act. Thus, holding the assessee to be “an assessee in default” u/s 20 1(1) he also levied interest u/s 201(1A) of the IT Act.
3.1 Aggrieved, the assessee preferred an appeal before the CIT(A), who after taking the secondment agreement into consideration, observed that the seconded employee was sent to India and his salaries has been paid by the Indian company after deducting tax from the salary for the reason that he was resident in India during that period and also salary accrued and arose in India. He also observed that the net of salary amount was remitted to M/s Ariba USA at the request of employee to be credited to the employee’s account in USA. Thus, observing, he held that once the amount is already taxed in the hands of the employee, treating the same amount as ‘fees for technical services’ (WTS) remitted to the parent company in USA does not arise. He also held that the AO taxed the WTS at the rate of 10% + Surcharge and Education Cess which put together works out to only 11.22% as against the average rate of tax deducted by the assessee of 31.62%. He thus, held that the AO’s action of treating the same amount as WTS which was already taxed as salary in the hands of the recipient is not correct. He accordingly, allowed the assessee’s appeal. Aggrieved, the revenue is in appeal before us.
3.1 Both the parties advanced their arguments in support of their contentions.
3.2 The learned counsel for the assesseee also brought to our notice that the said issue is covered in favour of the assessee by various decisions of this Tribunal which are as follows;
1. M/s IDS Software Solutions (India) Pvt.Ltd., Vs ITO reported in 122 TTJ(Bang.)410
2. ACIT, New Delhi Vs M/s Karlstorz Endoscopy India Pvt.Ltd., in ITA No.2929(Del.)2009 reported in 2010 TII¬1 35-ITAT-Del-Intl.
4. Having heard both the parties and having considered the rival contentions, we find that the case of the assessee is fairly covered by the decision of the Tribunal (cited supra). The relevant portion of the Tribunal’s decision in the case of M/s IDS Software Solutions (India) Pvt.Ltd., is reproduced hereunder;
“”13. The next question is whether the amount can be considered as fees for technical services within the meaning of Explanation-2 below Sec.9(1)(vii) of the IT Act. Under this Explanation fees for technical services means any consideration including lumpsum consideration for the rendering of any managerial, technical or consultancy services, including the provision of services of technical or other personnel, but does not include consideration for 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 Article II and VI of the secondment agreement would be out of pace 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, clauses (A) to (C) of Article II make the seconded employee responsible and subservient to the assessee companywhich cannot be the case if the agreement is for providing technical services by IDS to the assesse company. Similarly, clause(E) which requires the seconded employee to also act as officer or authori2ed signatory or nominee or in any other lawful personal capacity for the assessee company, would also be out of ace in agreement for rendering technical services as it cannot be imagined that a technical person would also be required to act in non-technical capacities under an agreement for rendering technical services. Clause(H), on which considerable reliance was placed by the department to contend that the agreement is one for rendering technical services, is merely a clause ensuring secrecy and confidentiality of the information accessed by the seconded employee in the course of his employment with the assessee company. Such confidentiality extends not only to technical information, which would be the case if the agreement is one for rendering technical services but also to financial or accounting information, price or cost data and any other proprietary or business related information. Article VI which provides for indemnity, that is to say, the liability of the assessee company to indemnify the US company from all claims, demands etc., consequent to any act or omission by the seconded employee is also inconsistent with the claim of the department that this is an agreement for rendering technical services. The Article further provides that nothing in the agreement shall be construed as a warranty of the quality of the seconded employee. It is not usual to find such a stipulation in an agreement for rendering technical services.
14. The department has drawn our attention to the ruling of the Authority for Advance Rulings in the case of AT & S India Pvt.Ltd.,(2006) 287 ITR 21. In his case the agreement entered into by the Indian company with its Austrian parent company was titled “Foreign Collaboration Agreement”. Article 4 of the agreement obliged the Austrian company to provide all assistance and cooperation to the India company in its venture by providing appropriate support technology. Article 4.2 required the Austrian company to offer the services of its technical experts to the assessee for working on the project that was being executed. There was another agreement called the secondment agreement between the India and Austrian companies and it inter-alia provided that the Austrian company can at any time remove the seconded person and replace him with similarly qualified persons. Referring to the secondment agreement, the AAR observed that a plain reading of the above clause would show that the Austrian company retained the right over the seconded personnel and had the power to remove any seconded personnel from 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 assesseee 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 AAR in South West Mining Ltd., In Re (2005) 278 ITR 233. This is a clear case of technical consultants visiting India for collecting random samples for the purpose of sending reports from abroad on the basis of the analysis of the samples. The question was whether the fees paid to the non-resident consultant were fees for technical services. There can be no doubt that the services rendered by the non-resident consultants were technical and consultancy services. In this case there was no secondment agreement. It was a clear and simple case of rendering technical services. This case has nothing in common with the present case.
16. For the above reasons, we are also not able to hold that the payment to IDS represented fees for technical services.
17. In the result, we hold that the assesseee was not liable to deduct tax from the amount representing reimbursement of the salary paid by IDS to Dr. Sundararajan while remitting the same to IDS u/s 195 of the IT Act. The salary paid by the assessee to Dr.Sundararajan has been made the subject of tax deducted at source and the same has been remitted to the Indian Income tax authorities”.
In view of the same, we do not see any reason to interfere with the order of the CIT(A) and the grounds of appeal raised are rejected.
5. In the result, the revenue’s appeal is dismissed.
Order pronounced in the open court on the 4th April, 2012.