Brief of the Case
ITAT Bangalore held In the case of M/s Food world Supermarkets Ltd. vs. DDIT that there is no separate contract of employment between the assessee and the secondees. The secondees are under the legal obligation as well as employment of DFCL and assigned to the assessee only for a short period of time. In the absence of any contract between the assessee and the secondees, the parties cannot enforce any right or obligation against each other. The secondees can claim their salary only from the parent company i.e DFCL and not from the assessee. Once it is found that the secondees were rendering the marginal and highly expertise services to the assessee the payment for such services is in the ambit of fee for technical services (FTS) defined in explanation 2 to sec. 9(1)(vii). However, on assessee claim that secondement of employee constitutes a service PE and provision of sec.44AD will applicable, matter remanded to AO to look into all the relevant facts.
Ration decidendi – All the payment made to non-resident on account of FTS or royalty are chargeable to tax irrespective of any profit element in the said payment or not. Being reimbursement for services by employees deputed by foreign entity is covered under FTS u/s 9(1) (vii), TDS liability u/s 195 applicable.
Facts of the Case
The assessee is an Indian company engaged in the business of ownership and operation of supermarket chain in India. The assessee entered into an agreement dated 6/6/2007 with M/s Diary Farm Company Ltd., (DFCL). DFCL is a company based in Hong Kong and engaged in the identical business activity that of assessee. Under the said agreement dated 6/6/2007, DFCL agreed to assign its employees to the assessee and consequently 5 employees/expatriates were deputed by DFCL to the assessee.
The assessee agreed to engage these employees to assist its business operation. It was also agreed between the parties that DFCL would pay salary to the assigned personnel and the assessee would reimburse such amount to DFCL. Accordingly, salary to assigned personnel was paid by DFCL which was subjected to TDS u/s 192. The assessee reimbursed a sum of HC 2582922/- to DFCL towards the salary paid to the assigned personnel. The reimbursement was made without deduction of tax at source. The learned DDIT Bangalore (International taxation) initiated proceedings u/s 201 for not withholding tax at source in respect of reimbursement made to DFCL. An order u/s 201(1) and 201(1A) has been passed by the DDIT (International Taxation) on 31/7/2008 whereby it was held that remittance made by the assessee constitute fee for technical services u/s 9(1) (vii). Therefore, the same is chargeable to tax on gross basis.
The DDIT (International Taxation) was of the view that the assessee was liable to deduct tax u/s 195 @ 10%. Accordingly, he treated the assessee as ‘an assessee in default’ u/s 201(1) for not withholding tax at source. The AO also determined the interest u/s 201(1A).
Contention of the Assessee
The ld counsel of the assessee has referred to various clauses of seconded agreement and submitted that the remittance to DFCL is nothing but reimbursement of remuneration paid to the employees under seconded agreement and said salary was chargeable to tax in India. Therefore, the assessee was under the liability to deduct tax at source u/s 192 which was discharged by the assessee.
He has referred the details of the payment and submitted that the amount represents only reimbursement of salary of five employees deputed with assessee as per the secondment agreement. The learned AR have been referred debit note issued by the DFCL and submitted that the amount of note being salary to the employee matches with the payment made by the assessee. Thus the learned AR has submitted that when the assessee has already discharged its liability by deducting tax at source u/s 192 applicable on salary then the payment in question cannot be held as FTS.
The learned AR has pointed out that the CIT (A) has issued a remand order but the impugned order has been passed without any remand report. It is, therefore, submitted that an identical issue has been considered by the Tribunal in the case of IDS Software Solution Vs. ITO 122 TTJ as well as the decision in the case of Abbey Business Services (India) Pvt. Ltd., 53 SOT 401 wherein tribunal has followed the decision in the case of IDS Software Solution and reaffirmed the view that the payment being reimbursement of salary cannot be treated as FTS.
In rejoinder, the learned AR of the assessee submitted that even if the payment are treated as FTS, the secondees would constitute a service Permanent Establishment (PE) and, therefore, only the net of the expenditure would be chargeable to tax as per the provision of sec. 44D . In support of his contention, he has relied upon the judgment of Hon’ble SC in the case of CIT Vs. Morgan Stanley and Co. Inc., 292 ITR 416 and submitted that while interpreting the definition of PE as provided u/s 92F(iii) as well as considering the CBDT Circular 14 of 2001 the Hon’ble SC has observed that the definition of PE covers services PE, agency PE, Software PE, construction PE etc. Thus, the learned AR has submitted that even in the case of the payment in question is treated as FTS there would be no tax liability because the net amount will be Nil after deducting the expenditure which is in the shape of salary of these secondees.
Contention of the Revenue
The ld counsel of the revenue submitted that as per the terms of the seconded agreement, the assessee did not have any control over deputed personnel. Further these employees were still on the pay role of DFCL and, therefore, there was no relation of master and employees between the assessee and these secondees. DFCL was the actual employer hence the services rendered by this employees were actually rendered on behalf of DFCL. Thus, the learned DR has submitted that the remittance was not towards reimbursement of salary but for the services rendered by the expatriates on behalf of DFCL.
The AO as well as CIT (A) after examination of expatriates qualification of the secondees have come to the conclusion that they have been involved in management and consultancy services and these services are provided as per the agreement and, therefore, the remittance made by the assessee are actually FTS and notreimbursement of salary. He has relied upon the judgment of Hon’ble Delhi High Court in the case of Centrica India Pvt. Ltd. vs. CIT 364 ITR 336 and submitted that it has been held by the Hon’ble High
Court that the secondees are imparting technical expertise to all regular employees of the assessee. Further nomenclature used in the agreement relating to the payment as reimbursement cannot be a determinative factor.
Held by CIT (A)
The CIT (A) did not accept the contention of the assessee and after examination of the terms and conditions of the seconded agreement arrived at the conclusion that the seconded employees did not have an master servant relationship with assessee. They have provided managerial and consultancy services to the assessee within the meaning of explanation 2 to sec. 9(1)9vii).The CIT (A) upheld the decision of the DDIT (International Taxation).
Held by ITAT
The assessee is engaged in the business of ownership and supermarket chain in India. The assessee was in need of personnel to assist with its operation in India. The assessee expresses its desire to DFCL a Hong Kong based company engaged in the similar line of business and operation to assign certain personnel to assist. Accordingly, the assessee and DFCL entered into an agreement dated 30/6/2007. The said agreement undoubtedly is a secondment agreement and the DFCL assigned 5 personnel/employees of secondees to assessee.
As it is clear that all 5 secondees are not ordinary employees or workers but they are deputed the high level managerial/executive positions which shows that they are deputed because of expertise and managerial skills in the field. This fact is also reflected in the agreement. It is pertinent to note that the secondment agreement is between the assessee and DFCL and these secondees assigned to the assessee are not party to the agreement.
Further the secondees are assigned by DFCL and there is no separate contract of employment between the assessee and the secondees. The secondees are under the legal obligation as well as employment of DFCL and assigned to the assessee only for a short period of time. In the absence of any contract between the assessee and the secondees, the parties cannot enforce any right or obligation against each other. The secondees can claim their salary only from the parent company i.e DFCL and not from the assessee. Thus, the expatriates were performing their duties for and on behalf of the DFCL. Once it is found that the secondees were rendering the marginal and highly expertise services to the assessee the payment for such services is in the ambit of FTS defined in explanation 2 to sec. 9(1)(vii).
An identical issue has been considered and decided by the Hon’ble Delhi High Court in the case of Centrica CIT 364 ITR 336. The Hon’ble High Court while dealing with the definition of FTS under Article 13(iv) of Indo UK DTAA has held that the services of the personnel deputed under the secondment agreement were in the nature of managerial consultancy services to the assessee. It is pertinent to note that the definition under Article 13(4) of the Indo UK DTAA as well as the definition under Explanation 2 to sec. 9(1)(vii) are almost identical except the word ‘managerial’ is missing in the definition provided under tax treaty. The SLP filed against the judgment of Hon’ble Delhi High Court has been dismissed by the Hon’ble Supreme Court in 227 Taxman 368. Therefore the view taken by the Hon’ble High Court has attained finality.
The concept of income includes positive as well as negative income or nil income. In the case of payment being FTS or royalty as per sec. 9(1), it is irrelevant whether any profit element in the income or not. It is not only a matter of computation of total income when the concept of profit element in payment is relevant. If the payment being FTS or royalty is made to nonresident, then the concept of total income becomes irrelevant and the provisions of sec. 44DA recognize the gross payment chargeable to tax. Thus all the payment made by the assessee to non-resident on account of FTS or royalty an chargeable to tax irrespective of any profit element in the said payment or not. However, there is an exception to this Rule of charging the gross amount when the non-resident is having fixed place of business or PE in India and the amount is earned through the PE, then the expenditure incurred in the relation to the PE for earning said amount is allowable as per the provisions of sec. 44DA. Therefore, in view of the judgment of Hon’ble Delhi High Court in the case of Centrica CIT 364 ITR 336, the payment made to foreign company DFCL partakes the character of FTS as per the definition under explanation 2 to sec.9(1) (vii).
The learned AR of the assessee has raised an alternative point that the secondment of employees constitutes a service PE and secondly the amount would be chargeable to tax as per the provision of sec. 44DA. Since this plea has been taken by the assessee for the first time before this Tribunal and there is no DTA between India and Hong Kong therefore, this concept of service PE requires a proper examination of all the relevant facts as well as provisions on the point whether it constitute a service PE in India. Accordingly, the issue is remitted to the record of the AO for adjudication of the plea raised by the assessee that the secondment of the employees constitute a services PE and accordingly provisions of sec. 44DA would be applicable. Needless to say, the AO to adjudicate issue after affording an opportunity of hearing to the assessee.
Accordingly appeal of the assessee partly allowed for statistical purpose.