IN THE ITAT BANGALORE BENCH ‘A’
Abbey Business Services (India) (P.) Ltd.
V/s.
Deputy Commissioner of Income-tax
IT Appeal NOs. 1141 (BANG.) OF 2010 and 41 & 42 (BANG.) OF 2011
[ASSESSMENT YEARs 2005-06 & 2006-07]
Date of pronouncement – 18.07.2012
ORDER
Jason P. Boaz, Accountant Member – The above three appeals by the assessee are against the orders of the Commissioner of Income Tax (Appeals)-I & II, Bangalore. As these appeals involve common issues, they are heard together and disposed off by way of a common order.
2. The facts of the case, in brief, are as under :
2.1 The assessee is an Indian company incorporated on 22.1.2004 under the Companies Act, 1956. It is a subsidiary of M/s. Anitco Ltd., a foreign company, which is a group company of M/s. Abbey National Plc., a foreign company in the United Kingdom. M/s. Abbey National Plc, UK entered into an agreement with M/s. Msource (India) Pvt. Ltd. on 7.11.2003 to outsource the provision of certain process and call centres to M/s. Msource India Pvt Ltd. who as per the mutually agreed terms and conditions was consistently required to provide high quality services which supports the position of M/s. Abbey National Plc, U.K. and its affiliates as being focused and efficient providers of financial and insurance services to customers in the United Kingdom. In order to ensure that high quality services were provided by M/s. Msource India Pvt Ltd., Abbey National Plc, UK entered into a consultancy agreement with the assessee on 4.2.2004 in which the description of services to be provided by the assessee are laid out and for which the assessee was to be compensated at cost plus 12% which included depreciation but excluded exchange fluctuation loss.
2.2 In order to facilitate the outsourcing agreement between Abbey National Plc, UK and Msource India Pvt Ltd, an agreement for secondment of staff was entered into between Abbey National Plc, UK and the assessee on 4.2.2004. The relevant clauses, of this agreement on the aspect of secondment of staff to the assessee are at Clauses 3.1 to 3.6 thereof which are as under :
“3. Secondment of Staff to Abbey India
3.1 General
In consideration of the payments to be made by Abbey India in accordance with Clause 4 Abbey UK shall second Staff to Abbey India during the term in accordance with the following provisions.
3.2 Particular Secondments
Abbey India and Abbey UK shall complete, sign and date a Secondment Term Sheet in respect of each employee agreed between them to be seconded to Abbey India in accordance with the terms of this Agreement.
3.3 Duration of Secondment
3.3.1 (Subject as below) each Secondment shall be for the period of Secondment specified in the Secondment Term Sheet or as may be otherwise agreed between the parties.
3.3.2 Abbey UK shall at the written reasonable request of Abbey India from time to time immediately withdraw any Secondee from Secondment as Abbey India shall specify and Abbey UK may terminate a particular Secondment prematurely at any time where deemed necessary or desirable by Abbey UK for any reason.
3.3.3 A particular Secondment will also come to an end if terminated by the Secondee through leaving the employment of Abbey UK or terminating his or her secondment to India or by Abbey UK terminating the employment of the Secondee for any reason.
3.4 Work Permits
Abbey UK shall be responsible for ensuring that a valid Work Permit is obtained and renewed where required by Indian Law in respect of each Secondee.
3.5 Supervision and Control
The parties agree that the Secondees shall be under the direct management, supervision and control of Abbey India during the applicable periods of Secondment. It is further agreed that :
(a) Abbey UK shall not be responsible for and shall not be liable for any loss or damage occasioned by the Secondees’ work.
(b) the authority to instruct the Secondees shall lie with Abbey India, and
(c) the Secondees’ work shall be performed at such place as Abbey India may instruct.
3.6 Responsibility for Employment Liabilities
This Agreement is not intended to and nothing in this Agreement shall have the effect of constituting the Secondees as employees of Abbey India and the Secondees shall be and remain employees of Abbey UK during Secondment. The Secondees shall not be entitled to any remuneration nor employment benefits from Abbey India and it is agreed that Abbey UK shall, as employer of the Secondees, be responsible for all such remuneration and benefits (including without limitation Pension Contributions) and all other liabilities as employer and for accounting to the Inland Revenue in the United Kingdom and all other authorities for all taxes, National Insurance or similar contributions.”
2.3 Clause 4 of the secondment agreement deals with payment for secondment by which the assessee agreed to reimburse the remuneration, pension contributions, expenses, statutory payments and other sums incurred by Abbey UK for each secondee during his or her period of secondment. Clause 4 reads as under :
“4. Payment for Secondment
4.1 In consideration of the Secondment of Staff by Abbey UK, Abbey India shall make payments to Abbey UK (in Sterling) equivalent to the Remuneration, Pension Contributions, Expenses, Statutory Payments and any other sums incurred by Abbey UK applicable to each Secondee during his or her period of Secondment.
4.2 The payments under Clause 4.1 shall be made quarterly in arrears against detailed invoice submitted by Abbey UK.”
2.4 Abbey National Plc, UK deducted income tax at source under section 192 of the Act in respect of salaries paid to secondees and the same was paid to the credit of the central government. It also issued Form No. 16 and filed statement of tax deduction at source.
2.5 The above facts are applicable for all the appeals under consideration.
ITA No. 1141/Bang/2010 (A.Y. 2005-06)
3.1 Facts of the case
In the period relevant to Assessment Year 2005-06, 168 employees were seconded by Abbey National Plc. to the assessee under the secondment agreement. The salary costs of these employees incurred and paid by Abbey National Plc. UK amounted to Rs. 16,62,04,340 on which the TDS deducted and paid to the credit of the central government amounted to Rs. 4,98,68,399. Other administration costs incurred in respect of the employees seconded under the secondment agreement amounted to Rs. 10,96,26,174. Thus the total amount to be reimbursed to Abbey National Plc. UK under the secondment agreement was Rs. 27,58,30,154 which comprised of salary and administration expenses which were debited to the profit and loss account in the books of account of the assessee in the relevant period and were claimed as deduction in computing the total income under the Income Tax Act.
3.2 The assessee filed its return of income for Assessment Year 2005-06 on 31.10.2005 declaring a total income of Rs. 2,61,87,279. The return was processed under section 143(1) of the Act and the case was taken up for scrutiny by issue of notice under section 143(2) on 31.10.2006 which was served on the assessee. The value of international transactions being in excess of Rs. 15 Crores, the case was referred to the concerned Transfer Pricing Officer for determination of arms length price of international transactions. After examining the assessee’s case, the TPO accepted the arms length price of the international transactions vide order dt.22.10.2008.
3.3 In the course of assessment proceedings, the Assessing Officer sought the assessee’s explanation as to why no tax was deducted under section 195 in respect of the reimbursements made by it to Abbey National Plc., UK. The assessee’s explanation that no TDS under section 195 were to be made in respect of these payments as the secondees were its employees for all practical purposes was not accepted by the Assessing Officer. The Assessing Officer was of the view that Abbey National Plc., UK was the employer of the secondee under the secondment agreement and that the assessee had only assumed the role of an intermediary who was authorized by the real employees viz. Abbey National Plc. UK to exercise supervision and control over the seconded employees during the period of secondment. The contention of the assessee that the payment made to Abbey National Plc., UK constituted reimbursement of expenditure was not accepted by the Assessing Officer who held that since the secondees were employees of Abbey National Plc., UK and were providing managerial services to the assessee, the payment made by the assessee to Abbey National Plc., UK under the secondment agreement constituted ‘Fees for technical services’ under section 9(1)(vii) of the Act. In coming to this finding the Assessing Officer relied on the ruling of the AAR in 670 of 2005 in the case of AT & S (I) Pvt. Ltd. v. CIT. The Assessing Officer consequently held that the assessee was liable to the deduct tax under section 195 of the Act in respect of reimbursements made to Abbey National Plc., UK under the secondment agreement and since no tax was deducted under section 195 of the Act, the entire payment made by the assessee amounting to Rs. 27,58,30,514 was disallowed by the Assessing Officer under section40(a)(i) of the Act.
3.4 Aggrieved by the order of assessment passed under section 143(3) of the Act on 15.12.2008, the assessee carried the matter in appeal before the CIT(A). Before the CIT(A) the assessee contended that the reimbursements made under the secondment agreement was without any profit element involved and hence would not constitute income in the hands of Abbey National Plc., UK. It was also argued that the said payments were not in the nature of ‘fees for technical services’ under the Double Taxation Avoidance Agreement (DTAA) between India and UK and therefore were not liable for TDS under section 195 and consequently the disallowance under section 40(a)(i) is to be deleted. The learned CIT(A) relying on the decision of the Hon’ble Karnataka High Court in the case of CIT v. Samsung Electronics P. Ltd. [2010] 320 ITR 209, held that since the assessee had filed an application under section 195(2) of the Act after crediting the amount payable to the account of Abbey National Plc., UK, the assessee had to mandatorily deduct tax at source on this amount. The learned CIT(A), however, considered the order passed under section 201 for Assessment Year 2005-06 on 7.7.2010 wherein out of the total expenditure of Rs. 27,58,30,514, administrative expenditure of Rs. 10,96,26,174 was alone held to be fees for technical services under section 9(1)(vii) of the Act and Article 13(4)(c) of the India UK, DTAA. The remaining expenditure on account of reimbursement of salary costs amounting to Rs. 16,62,04,340 were held as not liable for TDS in the order passed under section 201 dt.7.7.2010 since tax had already been deducted thereon under section 192 of the Act and paid to the central government. Considering the aforesaid finding in the order under section 201 dt.7.7.2010, the learned CIT(A) allowed relief in respect of reimbursement of salary costs amounting to Rs. 16,62,04,340 and consequently the disallowance of the remaining expenditure on account of other administrative costs amounting to Rs. 10,96,26,174 was sustained.
3.5 Aggrieved, by the order of learned CIT(A) dt.6.8.2010, the assessee has filed this appeal before us. Revenue, however, has not filed an appeal against the relief allowed by the learned CIT(A).
ITA No. 41/Bang/2011 (A.Y. 2006-07)
4. Facts of the Case.
4.1 In the relevant Assessment Year, 18 employees were seconded by Abbey National Plc., UK to the assessee company. The salary costs amounting to Rs. 3,92,26,211 and other administration costs amounting to Rs. 1,89,65,662 were incurred as per the secondment agreement. The total amount of Rs. 5,81,91,873 reimbursed under the secondment agreement were credited by the assessee to the account of Abbey National Plc., UK debited to its profit and loss account during the relevant period and claimed as a deduction in computing its income under the Act.
4.2 The assessee filed its return of income for Assessment Year 2006-07 on 27.11.2006 declaring a total income of Rs. 2,09,49,057. The return was processed under section 143(1) of the Act and was taken up for scrutiny by issue of notice under section 143(2) on 16.11.2007 which was served on the assessee. Since the value of international transactions exceeded Rs. 15 crores in the relevant period, the case was referred to the concerned Transfer Pricing Officer for determination of arms length price of international transactions. After examining the assessee’s case, the TPO accepted the arms length price of the international transactions vide order dt.31.10.2009.
4.3 In the course of assessment proceedings, the Assessing Officer sought the assessee’s explanation as to why no tax was deducted under section 195 in respect of the reimbursements made by it to Abbey National Plc. UK. The assessee’s explanation that no TDS under section 195 were to be made in respect of these payments as the secondees were its employees for all practical purposes was not accepted by the Assessing Officer. The Assessing Officer was of the view that Abbey National Plc., UK was the employer of the secondees under the secondment agreement and that the assessee had only assumed the role of an intermediary who was authorized by the real employees viz. Abbey National Plc. UK to exercise supervision and control over the seconded employees during the period of secondment. The contention of the assessee that the payment made to Abbey National Plc., UK constituted reimbursement of expenditure was not accepted by the Assessing Officer who held that since the secondees were employees of Abbey National Plc., UK and were providing managerial services to the assessee, the payment made by the assessee to Abbey National Plc., UK under the secondment agreement constituted ‘Fees for technical services’ under section 9(1)(vii) of the Act. In coming to their finding the Assessing Officer relied on the ruling of the AAR in 670 of 2005 in the case of AT & S (I) Pvt. Ltd. v. CIT. The Assessing Officer consequently held that the assessee was liable to the deduct tax under section 195 of the Act in respect of reimbursements made to Abbey National Plc., UK under the secondment agreement and since no tax was deducted under section 195 of the Act, the entire payment made by the assessee amounting to Rs. 5,81,91,883 was disallowed by the Assessing Officer under section40(a)(i) of the Act.
4.4 Aggrieved, the assessee went in appeal before the CIT(A). It was contended before the CIT(A) that the reimbursement made under the secondment agreement had no profit element involved and hence would not constitute income of Abbey National Plc., UK and therefore were not liable for TDS under section 195 and consequently the disallowance under section 40(a)(i) was not called for. The assessee submitted a copy of the order passed under section 201 of the Act on 19.1.2010 by the DDIT (International Taxation) 1(1) for Assessment Year 2006-07 wherein out of the total reimbursements of Rs. 5,81,91,883, a sum of Rs. 4,53,97,693 only was treated as fees for technical services under section 9(1)(vii) of the Act and Article 13(4)(c) of the India – UK DTAA. The remaining amount of Rs. 1,27,94,180 was held to be not liable for TDS. Considering the findings in the order under section 201 dt.19.1.2010, the learned CIT(A) allowed relief in respect of reimbursement to the extent of Rs. 1,27,94,180 and consequently sustained the disallowance on account of reimbursement to the extent of Rs. 4,53,97,693.
4.5 Aggrieved, the assessee is in appeal before us. However, Revenue has not filed an appeal against the relief allowed by the learned CIT(A).
5.1 The grounds of appeal raised in respect of the appeals in ITA No. 1141/Bang/2010 for Assessment Year 2005-06 and ITA No. 41/Bang/2011 for Assessment Year 2006-07 are similar and are therefore the grounds raised for Assessment Year 2005-06 are reproduced hereunder :
1. The Honourable Commissioner of Income tax (Appeals) I (hereinafter referred to as ‘CIT(A)) erred in law and on facts while passing the order.
2. The Honourable CIT(A) erred in holding payments proposed to be made by the appellant as ‘fees for technical services’ under section 9(1)(vii) of the Income tax Act, 1961 (hereinafter referred to as ‘Act’)
3. The Honourable CIT(A) has failed to appreciate that the proposed payments are towards reimbursements of actual costs and does not have any element of income.
4. The Honourable CIT(A) has failed to appreciate that the proposed payments are in the nature of pure reimbursement of administrative cost in consideration of the secondment of the Expatriates to the appellant and not towards any services rendered by ANP.
5. The Honourable CIT(A) has erred in holding that the charges are in the nature of administrative expenses payable by Abbey National Plc is income chargeable under the provisions of the Income tax Act, 1961 under section 195 and disallowing the same on account of non deduction of taxes.
6. Without prejudice to the above argument that the said payment is in the nature of reimbursement of actual costs, if the said payment are held to be in the nature of ‘fees for technical services’ as per the Act, the same would not fall within the definition of ‘fees for technical services’ as per the India – UK Double Taxation Avoidance Agreement.
7. The Honourable CIT(A) has erred in failing to appreciate that the said payment do not ‘make available’ any technical knowledge, experience, shill, know-how or processes, or consist of development and transfer of technical plan or technical design etc as per the terms of the India – UK DTAA.
8. The Honourable CIT(A) ought to have relied on the decision of the Jurisdictional Tribunal in the case of ITO v. De Beers India Minerals P Ltd 297 ITR 176 on the ‘make available’ concept.
9. The Honourable CIT(A) ought to have relied on the decision of the Mumbai ITAT in the case of Raymond Ltd v. DCIT 86 ITD 791 wherein it was held that where the payment though falling under the definition of ‘technical services’ u/s 9(1)(vii), where the said payment does not fall within the definition of ‘fee for technical services’ under article 13.4(c) of the DTAA with UK the non resident was not taxable in India. It was held that the Assessee-company was not liable to deduct tax from the payment and cannot be treated as an assessee in default u/s 201, therefore, interest u/s 201(1A) shall not be charged.
10. The Appellant craves leave to add, to alter or amend all or any of the aforesaid grounds of appeal. For the above and any other grounds which may be revised at the time of hearing, it is prayed that the order of the Honourable CIT(A) be set aside.
5.2 Grounds of appeal raised at S. No. 1 and 10 are general in nature and therefore no adjudication is called for thereon. In the grounds raised at S. No. 2, it is contended that the payments under the secondment agreement are not in the nature of ‘fees for technical services’ under section 9(1)(vii) of the Act. Grounds at S. No. 3 & 5 raise the contention that the impugned payments were in the nature of reimbursement of actual expenditure and were consequently not liable for TDS under section 195. Grounds at S.Nos. 6 to 9 relate to the argument that the impugned payments were not ‘fees for technical services’ under the India – UK DTAA.
6. ITA No. 42/Bang/2011 (A.Y. 2006-07)
6.1 Facts of the case
For Assessment Year 2006-07, the assessee filed an application under section 195(2) of the Act on 19.2.2006 seeking authorization to reimburse salary and other administrative costs to Abbey National Plc., UK without deduction of tax at source under section 195. The ITO vide order dt.12.3.2007 under section 195(2) held that since the application under section 195(2) had been filed after the date of credit of the same to the account of Abbey National Plc., UK in the books of the assessee, the application under section 195(2) is nonest. Against this order, the assessee filed a petition under section 264 of the Act before the DIT (International Taxation) on 29.10.2007 seeking that its application under section 195(2) be decided on merits. The learned DIT (International Taxation) by order under section 264 dt.28.2.2008 directed the Assessing Officer to consider the application under section 195(2), on merits and to pass an order thereon after affording sufficient opportunity of hearing to the assessee. In compliance thereto the DDIT (International Taxation) passed orders under section 201(1) and 201(1A) of the Act on 19.1.2010 wherein out of the total payments of Rs. 5,81,91,873 made during the relevant period, a sum of Rs. 1,27,94,180 was treated as reimbursement of expenses and no taxes were levied in respect of the said sum. However, in respect of the remaining amount of Rs. 4,53,97,693 (viz. Rs. 5,81,91,873 less Rs. 1,27,94,180), it was treated as ‘fees for technical services’ and tax @ 10.45% was levied thereon and interest under section 201(1A) of the Act amounting to Rs. 69,26,299 was also charged on the said amount.
6.2 The assessee went in appeal against the above orders dt.19.1.2010 before the CIT(A) who dismissed the assessee’s appeal. The assessee is now before us in appeal against the order of the learned CIT(A).
7.1 The grounds of appeal raised by the assessee in this appeal are as under :
1. The Hon’ble Commissioner of Income Tax (Appeals)-IV [hereinafter referred to as CIT(A)] erred in law and on facts while passing the order.
2. The Hon’ble CIT(A) ought to have held that the payments proposed to be made by the Appellant to ANP are reimbursements and are not chargeable to tax under section 195 of the Act.
3. The Hon’ble CIT(A) erred in holding that payments proposed to be made by the Appellant are “fees for technical services” under the Act as well as under the Double Taxation Avoidance Agreement (DTAA) between India and UK.
4. The Hon’ble CIT(A) has failed to appreciate that the proposed payments are towards reimbursements of actual costs and does not have any element of income.
5. The Hon’ble CIT(A) has failed to appreciate that the proposed payments are in the nature of pure reimbursement of administrative cost incurred in relation to the secondment of the expatriates to the Appellant and not towards any services rendered by Abbey National PLC, UK.
6. The Hon’ble CIT(A) has erred in upholding the AO’s order that the expatriates are employees of ANP and ANP is involved in providing technical service to MSource on behalf of Abbey India.
7. The Hon’ble CIT(A) has failed to appreciate that as per the secondment agreement for all practical purposes, the expatriates are employees of the appellant as they function under the control, direction and supervision of appellant and in accordance with the policies, rules and guidance applicable to appellant’s employees. The salary was paid by ANP to the expatriates and the payroll was maintained by ANP only for administrative convenience.
8. The Hon’ble CIT(A) ought to have appreciated that there is an employer-employee relationship between the Appellant and the expatriates and that the proposed remittances are towards the reimbursement of actual administrative costs of the expatriates as incurred by ANP.
9. The principle of determining employment relationship through the “economic criteria” is also supported by the OECD Commentary on the Model Convention. The Commentary supports the concept of “economic employer” (rather than formal/legal employer) in the context of taxation of dependent personal services. It states that the term “employer” should be interpreted as “the person having the rights on the work produced and bearing the relative responsibility and risks.” It is the substance that prevails over the form. The real employer is the user of the labour. The Hon’ble CIT(A) has erred in not relying on the concept of economic and legal employer.
10. The Hon’ble CIT(A) has erred in holding that section 195 of the Act is applicable to the present case and that the Appellant is liable to deduct tax at source under that section on the payments proposed to be made to ANP towards reimbursement of expenses.
11. Without prejudice to the above argument that the said payment is in the nature of reimbursement of actual cost, if the said payments are held to be in the nature of ‘fees for technical services’ under the Act, the same would not fall within the definition of ‘fees for technical services’ as per the India-UK Double Taxation Avoidance Agreement.
12. The Hon’ble CIT(A) has erred in failing to appreciate that the said payments do not ‘make available’ any technical knowledge, experience, skill, know-how or processes to the Appellant, nor consists of the development and transfer of a technical plan or technical design etc as per the terms of the India – UK DTAA.
13. The Hon’ble CIT(A) ought to have relied on the decision of the Jurisdictional Tribunal in the case of ITO v. De Beers India Minerals (P) Ltd (297 ITR 176) on the ‘make available’ concept.
14. The Hon’ble CIT(A) ought to have relied on the decision of the Mumbai ITAT in the case of Raymond Ltd v. DCIT (86 ITD 791) wherein it was held that where the payment, through falling under the definition of “technical services” u/s 9(1)(vii) of the Act, does not fall within the definition of “fee for technical services” under article 13.4(c) of the DTAA with UK, the non-resident was not taxable in India. It was held that the assessee-company was not liable to deduct tax from the payment and cannot be treated as an assessee in default u/s 201. Therefore, interest u/s 201(1A) shall not charged.
15. The appellant craves leave to add, to alter or amend all or any of the aforestated grounds of appeals.
16. For the above and any other grounds which may be revised at the time of hearing, it is prayed that the order of the Hon’ble CIT(A) be set aside.
7.2 Ground Nos.1, 15 & 16 are general in nature and therefore no adjudication is called for thereon. Ground Nos.2,4 and 5 are contentions of the assessee that the payments made were in the nature of reimbursement of expenses and therefore not liable for TDS. Grounds 8 and 11 to 14 contend that the payments to Abbey National Plc., UK do not constitute ‘fees for technical services’ under section 9(1)(vii) of the Act and Article 13 of the India – UK DTAA. Grounds 6 to 9 contend that the assessee was the real economic employer of the secondee. Ground No. 10 has the contention that the assessee was not liable to deduct tax at source under section 195 in respect of payments made to Abbey National Plc., UK. In ground No. 14, the assessee challenges the charging of interest under section 201(1A) of the Act.
8.1 The learned counsel for the assessee put forth both written submissions and oral explanation as to why the payments by the assessee under the secondment agreement cannot be treated as ‘fees for technical services.’ It was submitted that the secondment agreement dt.4.2.2004 was an agreement for secondment of staff from Abbey National Plc., UK to the assessee and not an agreement for rendering of services by Abbey National Plc., UK to the assessee. It was submitted that the assessee had undertaken the responsibility to provide certain services to Msource India in relation to the consultancy agreement between Abbey National Plc., UK and Msource India and in order to facilitate the provision of such services, employees of Abbey National Plc., UK were seconded to the assessee under the secondment agreement. The learned counsel for the assessee submitted that as per column 3.5 of the secondment agreement (reproduced supra), the secondees worked under the direct management, supervision and control and as per instructions of the assessee during the period of secondment. It was submitted that the place of performance of this duty and the manner in which the secondee had to work were decided by the assessee and it was the assessee and not Abbey National Plc., UK who was responsible and accountable to ensure proper performance of duty by the secondees. It was also submitted by the learned counsel for the assessee that as per clause 3.3.2 of the secondment agreement, Abbey National Plc., UK was mandatorily required to withdraw any secondee from secondment as may be required by the assessee. It was submitted by the learned counsel for the assessee that since (i) the nature of work to be performed by the secondee was specified by the assessee, (ii) these employees were required to act in accordance with the instructions and directions of the assessee; (iii) the salary costs of these employees were effectively borne by the assessee; (iv) the assessee was responsible and accountable for the work performed by the employees, the assessee was the real employer of the secondees for all practical purposes. In the light of the above contentions, the learned counsel for the assessee referred to the decision in the case of K.R. Kothandaramam v. CIT [1966] 62 ITR 345 (Mad) in support of the proposition that the right of superintendence, direction and control by an assessee over a person would result in an employer-employee relationship and the remuneration paid to such person would be considered as ‘salaries’. Reliance was also placed on the decision of the Hon’ble Apex Court in the case of Ram Prashad v. CIT [1972] 86 ITR 122 in support of the argument that for ascertaining whether a person is a servant, a rough and ready test is whether under the terms of employment, the employer exercises a supervisory control in respect of the work entrusted to him. The learned counsel for the assessee also submitted that since Abbey National Plc., UK did not assume any risk for the performance by the secondees nor exercised any control, direction or supervision over them while on assignment with the assessee. Abbey National Plc., UK cannot be regarded as the economic employer of the secondees.
8.2 As per clause 3.6 of the secondment agreement (reproduced supra), (i) the secondees do not constitute employees of the assessee but shall remain employees of Abbey National Plc, UK ; (ii) the secondees shall not be entitled to any remuneration nor employment benefits from the assessee but Abbey National Plc, UK, as employer of the secondees, shall be responsible for the remuneration, employment benefits, pension contributions, for accounting to the Inland Revenue in the United Kingdom (U.K.) and all other authorities for taxes, national insurance etc. The learned counsel for the assessee submitted that this clause was designed in accordance with U K Laws to protect the individual’s pension and social security position and that this was a common practice in the U.K. It was submitted that if the secondees are absolutely transferred to the payroll of the assessee, they would not be entitled to the benefits of pension contributions, social security, insurance contributions in the U.K. To avoid these consequences and keeping in mind the employees interest and welfare, it was submitted, that the employees of Abbey National Plc, UK were seconded to the assessee under the latter’s supervision and control, however, keeping intact their employment status with Abbey National Plc, UK. It was submitted by the learned counsel for the assessee that the mere fact that the secondees remained on the pay roll of Abbey National Plc, UK does not automatically lead to the conclusion that Abbey National Plc, UK is the actual employer; as notwithstanding the above arrangement, the management control and supervision of the secondees work, the salary and other administrative costs of the secondees was also borne by the assessee since the assessee reimbursed these costs to Abbey National Plc, UK under secondment agreement and therefore the assessee should be regarded as the real and economic employer of the secondees.
8.3 The learned counsel for the assessee argued that dual employment of a person is well known in law and section 192(2), which provides for TDS from salary, recognizes this. It was submitted that under dual employment of the nature as in the instant case, where the legal employment remains with one employer and the other person exercises supervision over the employee, the latter person should be recognized as the real or economic employer. In support of this argument, the learned counsel for the assessee relied on the following extract from the OECD commentary (on page 137 of the compilation of decisions/relevant material) which is as under :
“It should be noted that the term “employer” is not defined in the Convention but it is understood that the employer is the person having rights on the work produced and bearing the relative responsibility and risks. In cases of international hiring out of labour, these functions are to a large extent exercised by the user. In this context, substance should prevail over form, i.e. each case should be examined to see whether the functions of employer were exercised mainly by the intermediary or by the user. It is therefore up to the Contracting States to agree on the situations in which the intermediary does not fulfil the conditions required for him to be considered as the employer within the meaning of paragraph 2. In settling this question, the competent authorities may refer not only to the above mentioned indications but to a number of circumstances enabling them to establish that the real employer is the user of the labour (and not 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 at 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 employee;
– 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.”
8.4 In support of his contention that the person under whose control and supervision the secondees work should be considered as the real and economic employer and not the person who has seconded the employees under the secondment agreement, the learned counsel for the assessee relied on the following judicial decisions :
1. CIT v. Karl Storz Endoscopy India (P) Ltd – Delhi High Court.
2. Cholamandalam MS General Insurance Co. Ltd. (309 ITR 356) AAR
3. IDS Software Solutions India Pvt Ltd. v. ITO (122 TTJ 410) (Bangalore ITAT)
4. Cerner Healthcare Solutions Pvt Ltd v. ITO (Bangalore ITAT)
5. Caterpillar India P Ltd v. DDIT – Bangalore ITAT – ITA No. 630(Bang)/2010
6. Caterpillar India P Ltd v. DDIT – Bangalore ITAT – ITA No. 607(Bang)/2010
7. Caterpillar India P Ltd v. DDIT – Bangalore ITAT – ITA No. 149(Bang)/2010
8. Caterpillar India P Ltd v. DDIT – Bangalore ITAT – ITA No. 629(Bang)/2010
9. Caterpillar India P Ltd v. DDIT – Bangalore ITAT – ITA No. 606(Bang)/2010
10. ITO v. M/s. Ariba Technologies India Pvt Ltd ITA No. 616/Bang/2011 Dt.4.4.2012.
The learned counsel for the assessee filed a table showing the similarities between the decision of the co-ordinate bench in the case of IDS Software Solutions India P. Ltd. v. ITO reported in 122 TTJ 410 and the instant case and submitted that the ratio of the decision in the case of IDS Software (supra) and other subsequent decisions squarely apply in the present case.
8.5 The learned counsel for the assessee submitted that when the assessee is considered as the real and economic employer of the secondees under the secondment agreement, the reimbursement of salary and other administrative costs to Abbey National Plc, UK also constitutes expenditure in the nature of ‘salary’ and consequently the reimbursements made to Abbey National Plc, UK under the secondment agreement cannot be considered as ‘fees for technical services’ either under the Act or under the Treaty. In support of this proposition, the learned counsel for the assessee placed reliance on the decisions cited above and submitted that consequently the said reimbursements are not liable for TDS u/s.195 of the Act.
8.6 The learned counsel for the assessee contended that the reimbursements made to Abbey National Plc, UK were bereft of any profit or income element which fact was not disputed by the Assessing Officer or learned CIT(A) and submitted that consequently such reimbursement does not result in any profit or income in the hands of the payee is not liable for TDS. In support of this contention, the assessee has relied on the following judicial decisions :
1. CIT v. Tejali Farsaram Kharawalla Ltd (61 ITR 95) (SC)
2. CIT v. Telco (245 ITR 823) (Bom)
3. CIT v. Indian Engineering Projects Pvt Ltd (202 ITR 1014) (Del)
4. Clifford Chance UK v. DCIT (82 ITD 106) (Mum)
5. Raymond Ltd v. DCIT [2003] 86 ITD 791 (Mum SB)
6. CIT v. Dunlop Rubber Co Ltd [1983] 142 ITR 493 (Cal)
7. HNS India VSAT Inc v. DDIT (95 ITD 157) (Del)
8. Gujarat Ambuja Cements Ltd v. DCIT [2005] 2 SOT 784 (Mum)
9. MSEB v. DCIT [2004] 90 ITD 793 (Mum)
10. Saipem SPA v. DCIT [2004] 88 ITD 213 (Delhi) (TM)
11. Sedco Forex International Drilling inc v. DCIT [2000] 72 ITD 415.
12. Pilcom v. ITO [2001] 77 ITD 218 (Cal)
13. DECTA 237 ITR 190 AAR.
14. Coca Cola India Inc v. ACIT [2006] 7 SOT 224 (ITAT – Del)
15. United Hotels Ltd v. ITO (93 TTJ 822) (ITAT Del)
16. ITO v. Dr. Willmar Schwabe India (P) Ltd (95 TTJ 53) (ITAT Del)
17. Expeditors International India P Ltd v. ACIT [2008] 113 TTJ Del 652.
18. Bangalore International Airport Ltd v. ITO [2008] 307 ITR (AT) 295 (Bang)
19. CIT v. Siemens Aktiongesellschaft [2008] 220 CTR 425 (Bom)
8.7 The learned counsel for the assessee relied on the ruling of the AAR in Cholamandalam MS General Insurance Company Ltd reported in (2009) 309 ITR 356 (AAR) where it was held that reimbursement of salary costs to foreign company under a secondment agreement cannot be regarded as ‘fees for technical services’ as per the provisions of Explanation 2 to section 9(1)(vii) of the Act OR Article 13.4 of the Treaty between India and Korea. It was also held in the said decision that reimbursement of salary costs under a secondment agreement bereft of income or profit element does not constitute income chargeable to tax in India and therefore there would be no liability to deduct TDS u/s.195 of the Act in respect of such reimbursements. In support of the argument that reimbursement of expenses under the secondment agreement is not liable for TDS u/s.195 of the Act, the learned counsel for the assessee relied on the following decisions of this Tribunal :
(i) Cerner Healthcare Solutions Pvt Ltd v. ITO (Bangalore ITAT)
(ii) Caterpillar India P Ltd v. DDIT – Bangalore ITAT – ITA No. 630(Bang)/2010
(iii) Caterpillar India P Ltd v. DDIT – Bangalore ITAT – ITA No. 607(Bang)/2010
(iv) Caterpillar India P Ltd v. DDIT – Bangalore ITAT – ITA No. 149(Bang)/2010
(v) Caterpillar India P Ltd v. DDIT – Bangalore ITAT – ITA No. 629(Bang)/2010
(vi) Caterpillar India P Ltd v. DDIT – Bangalore ITAT – ITA No. 606(Bang)/2010
8.8 The learned counsel for the assessee submitted that the secondment of personnel under the secondment agreement was not tantamount to rendering of technical, professional or consultancy services u/s.9(1)(vii) of the Act, as apart from deputing secondees, Abbey National Plc., UK did not render any service to the assessee. It was submitted that consequently in respect of the reimbursements made, the provisions of section 9(1)(vii) would not be attracted. It was submitted that as per section 9(1)(vii), the term ‘fees for technical services’ means any ‘consideration’ for rendering of managerial, consultancy or technical services which meant something given in return for obtaining or getting a thing. The learned counsel for the assessee submitted that the remuneration and other administrative costs relating to seconded personnel was initially paid by Abbey National Plc, UK and these sums were subsequently reimbursed by the assessee. It was also submitted that this arrangement was made out of social security and other reasons such as business exigencies and commercial expediency and did not contain any mark up resulting in any profit or income from it and therefore cannot be treated as ‘consideration’ as per the definition of the term ‘fees for technical services u/s.9(1)(vii) of the Act. The learned counsel for the assessee submitted that as per the facts of the case it was clear that Abbey National Plc. UK did not render any services to the assessee. It only deputed secondees to the assessee as per the secondment agreement and therefore contended that the expression “provision of services of technical or other personnel” as appearing in the definition of ‘fees for technical services’ was not satisfied. It was also submitted by the learned counsel for the assessee that neither the Assessing Officer nor the learned CIT(A) had brought out any material on record to substantiate the conclusion that the payments to Abbey National Plc, UK were made is consideration for services rendered by Abbey National Plc, UK to the assessee.
8.9 The learned counsel for the assessee further submitted that the reimbursements made by the assessee to Abbey National Plc, UK under the secondment agreement would not be regarded as ‘fees for technical services’ under Article 13(4) of the India – UK Treaty for to be so considered both the following conditions should be satisfied.
(i) that the payment is made as a consideration for rendering of any technical or consultancy services; and
(ii) such services ‘make available’ technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. It was submitted by the learned counsel for the assessee that in the instant case, the Assessing Officer has categorized the payments made by the assessee to Abbey National Plc, UK to be for the rendering of ‘managerial services.’ Referring to the definition of the term ‘fees for technical services’ under Article 13(4) of the India – UK Treaty, it was submitted that since the above definition covered only technical or consultancy services and the term ‘Managerial Services’ is absent in Article 13(4)(c), the reimbursements made to Abbey National Plc, UK did not satisfy the first condition above and consequently the said payments were not in the nature of ‘fees for technical services’ under the India – UK Treaty. The learned counsel for the assessee further submitted that even the second condition mentioned above regarding ‘make available’ of technical knowledge, experience, skill, know-how or processes or development and transfer of a technical plan or technical design is also not satisfied in the present case. In support of the contention that unless the above two conditions/requirements are satisfied, the payment even though regarded as ‘fees for technical services’ under the Act, would fall outside the scope of ‘fees for technical services’ under the Treaty, the learned counsel for the assessee relied on the following judicial decisions:
1. Raymond Ltd v. DCIT [2003] 86 ITD 791 (Mum-Trib)
2. Intertek Testing Services India Private Limited [2008] 307 ITR 418 (AAR)
3. Diamond Services International P Ltd v. Union of India [2008] 304 ITR 201 (Bom)
4. CESC Ltd v. DCIT 80 TTJ 765 (Kol)
5. National Organic Chemical Industries Ltd. v. DCIT 96 TTJ 765
6. NQA Quality System Registrar Limited v. DCIT 92 TTJ 946 (Del)
7. Cushman & Wakefield Pvt Ltd v. DIT [2008] 305 ITR 208 (AAR)
8. Sheraton International Inc. v. DDIT [2007] 106 TTJ (Del) 620.
9. McKinsey And Co., Inc (Philippines) v. ACIT (International Taxation) 284 ITR 227 (AT)(Mum)
10. ITO v. De Beers India Minerals (P) Ltd. [2008] 113 TTJ (Bang) 101.
11. DCIT v. Boston Consulting Group Pte. Ltd. [2005] 93 TTJ (Mum) 293.
12. ACIT v. Paradigm Geophysical (P) Ltd [2008] 117 TTJ (Del) 812.
13. ICICI Bank Ltd v. DCIT [2008] 20 SOT 453 (Mum)
14. Bharat Petroleum Corpn. Ltd. v. JDIT [2007] 14 SOT 307 (Mum)
15. Guy Carpenter & Co. Ltd. v. ADIT in ITA No. 2443/Del/2011 Dt.30.9.2011.
8.10 The learned counsel for the assessee also submitted a copy of the decision of the jurisdictional High Court in the case of CIT v. De Beers India Minerals Ltd in ITA No. 549 of 2007 dt.15.3.2012 in support of the contention that unless the person making the payment is equipped with technical knowledge, skills etc. and he is able to perform the same without recourse to the payee, the payment would not be regarded as ‘fees for technical services’ under the Treaty. As per the facts of the case, it was submitted that reimbursements made to Abbey National Plc, UK were in respect of provision of services by Msource India to Abbey National Plc, UK. It was submitted that in accordance with the agreement dt.7.11.2003 between Abbey National Plc, UK and Msource India, the secondees worked at the premises of Msource India to develop, maintain, manage, monitor and facilitate Msources’ performance and to train and assist Msource and its employees in the provision of their services. It was submitted that the reimbursement made to Abbey National Plc, UK did not result in ‘make available’ of technical knowledge, experience, skill, know-how or processes to the assessee nor was there any development and transfer of a technical plan or technical design to the assessee as a result of the reimbursements. It was therefore contended that the requirement of ‘make available’ is not satisfied and therefore the payments were not in the nature of ‘fees for technical services’ under the Treaty between India and UK. It was also submitted that Abbey National Plc, UK does not have a Permanent Establishment (PE) in India and therefore the reimbursements made to them by the assessee are not chargeable to tax in India and consequently these payments are not liable for withholding tax u/s.195 of the Act.
8.11 The learned counsel for the assessee submitted that the learned CIT(A) has allowed relief in respect of reimbursement of salary costs and sustained the disallowance of reimbursement of other administrative expenses/costs. It was submitted that the reimbursement of other administrative expenses under the secondment agreement are inextricably linked to reimbursement of salary costs. It was therefore argued that if the salary costs reimbursed is held as not liable for disallowance u/s.40(a)(i), the reimbursement of other administrative expenses should also be held as not liable for disallowance u/s.40(a)(i) of the Act. The learned counsel for the assessee further submitted that the Assessing Officer had erred in relying on the ruling of the AAR in the case of A T & S India P. Ltd. (supra). In that case, the foreign company retained the right and control over the seconded personnel and therefore it was held that the India company cannot be considered as the real employer. In the instant case, it is submitted that the right to control, supervise and instruct the secondees were exercised by the assessee who was entitled to terminate the secondment of any secondee. It was also submitted that the above ruling of the AAR did not discuss the taxability of the reimbursements under the Treaty nor was there any discussion on the ‘make available’ clause. It was therefore argued that the ruling in the case of A T & S India P. Ltd. (supra) does not apply to the assessee’s case.
8.12 In view of the above arguments and submissions, the learned counsel for the assessee prayed that the disallowance of reimbursement of other administrative expenditure u/s. 40(a)(i) as confirmed by the learned CIT(A) be deleted and the assessee’s appeals for Assessment Years 2005-06 and 2006-07 be allowed.
9. Per contra, the learned Departmental Representative argued the matter in detail and placed reliance on the orders passed by the learned CIT(A). In written submission filed, the learned Departmental Representative explained as to how the facts in the case of IDS Software Solutions India (P) Ltd (2009) 122 TTJ 410 (Bangalore) and the facts of the instant case are different and submitted that therefore the above decision of the co-ordinate bench of the Tribunal does not apply to the facts of the instant case. The learned Departmental Representative also placed reliance on the following judicial decisions in support of the contention that the payments made by the assessee constitute ‘fees for technical services’ under the Act and under the Treaty :
(i) Cochin Refineries Ltd v. CIT [1996] 222 ITR 354 (Ker)
(ii) South West Mining Ltd [2005] 278 ITR 233 (AAR)
(iii) DIT v. SNL Lavalin International Inc [2011] 332 ITR 314 (Del)
(iv) Sahara Airlines Ltd v. DCIT [2003] 79 TTJ 268 (Del)
The learned Departmental Representative also contended that there is no material on record to establish that the payment made by the assessee were pure reimbursement of expenses. In view of the above, the learned Departmental Representative prayed for dismissal of the appeals filed by the assessee.
10. In response to the learned Departmental Representative’s arguments and written submissions, the learned counsel for the assessee filed a rejoinder explaining why the contentions of the learned Departmental Representative are contrary to facts and law and that the judicial decisions relied on by him were also distinguishable. In response to a query from the bench as to how the payments made to Abbey National Plc, UK were pure reimbursements, the learned counsel for the assessee drew our attention to the notes to accounts for the year ending 31.3.2006, break up of the reimbursements made during the financial year 2005-06 and copy of the ledger ‘administration and general expenses’ in the books of the assessee for the relevant period which were appended to the submissions made by the learned Departmental Representative. The learned counsel for the assessee drew our attention to clause 4.1 of the secondment agreement which stated that in consideration of the secondment of staff by Abbey National Plc. UK, the assessee shall make payments to Abbey National Plc., UK (in sterling) equivalent to the remuneration, pension contributions, expenses, statutory payments and other sums incurred by Abbey National Plc., UK applicable to each secondee during his or her period of secondment. The learned counsel for the assessee submitted that the payments made by the assessee were pure reimbursement of expenses without any profit or income element.
11.1 We have heard both parties and have carefully perused and considered the grounds of appeal raised, arguments put forth and submissions made by both parties and the material on record. In this regard, the following issues/questions arise for our consideration.
(i) Whether the assessee can be regarded as the real and economic employer of the employees seconded to the assessee under the secondment agreement ?
(ii) Whether the payments made by the assessee to Abbey National Plc., UK were pure reimbursement of expenses and if so whether the said reimbursements constituted income in the hands of Abbey National Plc., UK ?
(iii) Whether the payments made by the assessee to Abbey National Plc., UK constitute ‘fees for technical services’ under section 9(1)(vii) of the Income Tax Act, 1961 ?
(iv) Whether the payments made by the assessee to Abbey National Plc., UK constitute ‘fees for technical services’ under Article 13(4) of the DTAA between India & UK ?
(v) Whether the payments made by the assessee to Abbey National Plc., UK were liable for TDS under section 195 of the Act ?
(vi) Whether the payments made by the assessee to Abbey National Plc., UK were liable for disallowance under section 40(a)(i) of the Act ?
12. Whether the assessee can be regarded as the real and economic employer of the employees seconded to the assessee under the secondment agreement ?
12.1 To decide this issue, it is necessary to discuss and evaluate as to who can be regarded as an employer, employee and the relation between employer and employee. As per Shorter Oxford English dictionary, ’employer’ means ‘a person who employs or makes use of a person or an organization that pays someone to do work on a regular or contractual basis’ and the term ’employee’ means ‘a person who works for an employer.’ An employee is a person who works under the direct control, supervision and direction of another person called an employer who exercises such authority over the employee. The employee not only receives instructions from his employer but is also subject to the right of the employer to control the manner in which he should carry out such instructions. A significant feature of employer-employee relationship being ‘control and command.’ In the case of CIT v. Dalmia [1994] 207 ITR 267 (Cal), the Hon’ble Court observed that a person who is required to perform duties subject to the control of the other would be regarded as an employee. The Hon’ble Apex Court in the case of Ram Parshad v. CIT [1972] 86 ITR 122 (SC) held that 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 to him. In the case of Dharmangadha Commercial Works v. State of Saurashtra 1957 SCR 152, the Hon’ble Apex Court observed that the correct method of approach for determination of employer-employee relationship is to consider whether having regard to the nature of work, there was due control and supervision by the employer.
12.2 In the instant case, an agreement for secondment of staff was entered into between the assessee and Abbey National Plc., UK on 4.2.2004 to facilitate the outsourcing agreement between Abbey National Plc., UK and Msource. As per clause 3.1 of the said agreement, Abbey National Plc., UK agreed to second its staff to the assessee in accordance with other terms and conditions of the agreement and in consideration of the payments to be made by the assessee in accordance with clause 4 of the agreement. As per clause 3.2, the parties thereto undertook to sign and date a secondment term sheet in respect of each employee to be seconded to the assessee for the duration to be specified therein or as otherwise agreed between the parties. As per clause 3.3.2, Abbey National Plc. UK was to immediately withdraw any secondee from secondment at the written request of the assessee. Abbey National Plc., UK may also terminate a particular secondment prematurely at any time where deemed desirable or necessary by them for any reason. As per clause 3.3.3, a particular secondment will come to an end if terminated by the secondee through leaving the employment of the secondee for any reason. Clause 3.5 of the agreement which deals with the supervision and control of the secondees is as under :
“The parties agree that the Secondees shall be under the direct management, supervision and control of Abbey India during the applicable Periods of Secondment. It is further agreed that :
(a) Abbey UK shall not be responsible for and shall not be liable for any loss or damage occasioned by the Secondees’ work;
(b) The authority to instruct the Secondees shall lie with Abbey India, and
(c) The Secondees’ work shall be performed at such place as Abbey India may instruct.”
12.3 From the above, it is evident that the employees were seconded only after a secondment term sheet was entered into in respect of each of the employee by the assessee and Abbey National Plc., UK. Thus, it is clear that the assessee was in a position to determine whether or not the secondment of an employee was to be accepted and the duration of such secondment. Further, it was obligatory for Abbey National Plc., UK to withdraw any secondee from the secondment should the assessee so require it which is similar to the right of an employer to terminate the employment of an employee. As per clause 3.5 of the agreement, the secondees were under the direct supervision and control of the assessee during the period of secondment and were required to perform the work in such manner and place as instructed by the assessee. The agreement indicates that Abbey National Plc., UK was not responsible or liable for any loss or damage caused by the secondee’s work. The economic interest of the secondees were with the assessee in as much as they were under the control and direction of the assessee as to the manner, place, method of their work, the right to issue directions, accept or reject employees for secondment etc., were exercised by the assessee. When the principles laid down by the Hon’ble Apex Court and other judicial decisions referred to supra as to the meaning of employer and employee are examined and applied to the above facts, it would be evident that the assessee is the real and economic employer of the secondees.
12.4 Clause 3.6 of the secondment agreement states that the secondees shall remain and be the employees of Abbey National Plc., UK during secondment and not the assessee. It further states that the secondees shall not be entitled to any remuneration or employment benefits from the assessee and for which Abbey National Plc., UK is responsible as well as for all other liabilities as employer for accounting to Inland Revenue in UK and other authorities for all taxes, national insurance on similar contributions. It is a well settled principle that an agreement or a contract is to be read as a whole. The Hon’ble Apex Court in the case of Ishikawajina-Harima Heavy Industries Ltd v. DCIT [2007] 288 ITR 406 held that “in construing a contract, the terms and conditions are to be read as a whole. A content must be construed keeping in view the intention of the parties. No doubt the applicability of the tax laws would depend on the nature of the contract but the same should not be construed keeping in view the taxing provisions.” The jurisdictional High Court in the case of CIT v. Gogte Minerals [1996] 220 ITR 29 held that the court cannot look at the matter from a narrow angle, but interpret the contract as a whole with reference to the statute. In the instant case, the secondees worked under the supervision and control of the assessee who had the authority to instruct them as to the manner and place in which the work was to be carried out. Abbey National Plc., UK was not responsible and liable for any loss or damage caused by the secondees work. Nevertheless, in clause 3.6 the secondment agreement, it is agreed that Abbey National Plc., UK shall be the employer of the secondees. But the intention and purpose of this is ascertainable if the entire clause is read as a whole. Clause 3.6 provides that Abbey National Plc., UK as the employer of the secondees being responsible for remuneration, benefits, including pension contribution and all other liabilities as employer and for accounting to the Inland Revenue in U.K. and other authorities for all taxes, national insurance or similar contributions. The purpose and intention of this clause appears to be to make Abbey National Plc., UK accountable and responsible before UK Revenue authorities in respect of remuneration and salaries of secondees, for discharging statutory functions such as pension contributions, tax, national insurance or similar contributions under the laws of UK. If the assessee was regarded as employer under clause 3.6, then the seocndees would have to sever their employment with Abbey National Plc., UK resulting in their not being entitled to benefits of pension contributions, social security and insurance contributions under the laws of UK. In view of this, the employee status of secondees with Abbey National Plc., UK was kept intact. This, in our considered opinion, would not alter the position that the assessee should be regarded as the real and economic employer of the secondees. When the requirements of employer-employee relationship such as the right to hire or accept the secondment, right to control and supervise, right to instruct, right to terminate from secondment are satisfied as in the case of the assessee and secondees, Abbey National Plc., UK was only an employer in a legal sense. As rightly argued by the learned counsel for the assessee the mere fact that the secondees remained on the pay roll of Abbey National Plc., UK does not lead to the conclusion that Abbey National Plc., UK is the actual employer. In view of the reasons given, in our view the real employer of the secondees was the assessee.
12.5 The OECD Model Convention on Income on capital on Article 15 thereof holds a view that incase of secondment arrangements, the person under whose supervision and control they are employed should be considered as the real and economic employer. The relevant extracts are as under :
“It should be noted that the term “employer” is not defined in the Convention but it is understood that the employer is the person having rights on the work produced and bearing the relative responsibility and risks. In cases of international hiring-out of labour, these functions are to a large extent exercised by the user. In this context, substance should prevail over form, i.e. each case should be examined to see whether the functions of employer were exercised mainly by the intermediary or by the user. It is therefore up to the Contracting States to agree on the situations in which the intermediary does not fulfil the conditions required for him to be considered as the employer within the meaning of paragraph 2. In settling this question, the competent authorities may refer not only to the above-mentioned indications but to a number of circumstances enabling them to establish that the real employer is the user of the labour (and not 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 at 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 utilised, or there is in other ways a connection between this remuneration and wages received by the employee;
– 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.”
If the above facts are applied to the facts of the instant case, it would be evident that the assessee is the real and economic employer of the secondees.
12.6 The issue as to whether, in a secondment arrangement, the entity who seconds the employees should be considered as the real and economic employer or whether the entity which exercises the actual supervision and control over the secondees should be considered as the real and economic employer was considered by the co-ordinate bench of the Tribunal in the case of IDS Software Solutions P. Ltd. v. ITO reported in 122 TTJ 410. In the said case, the Indian Company exercised the supervision and control over the employee seconded to it by the foreign company. The Tribunal after consideration of the facts and law held that the Indian Company should be regarded as the real and economic employer of the secondee. The relevant portion at paras 11 and 12 of the order read as under :
“11.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. 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 page 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 quality 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. Interfax 331 (1988). The situation is different if the employee works exclusively for the enterprise in the State of employment and was released for the period in question by the enterprise in his State of residence (BFH 114 (1986) re Germany’s DTC with Spain).”
If this view is applied to the present case, the assessee company can be considered as the economic employer because the services are rendered by Dr. Sundararajan to it, the salary is met or borne by it. Be that as it may, the person who actually controls the services of Dr. Sundararajan is the assessee company. Under the secondment agreement he is to act in accordance with the reasonable requests, instructions and directions of the assessee company. He shall devote the whole of his time, attention and skills to the assessee company. He is reportable and responsible to the assessee company. He can be rejected by the assessee company in which case the US company is bound to replace him. Under clause 86 of the Articles of Association of the assessee company, which we have already noticed, the assessee company may remove Dr. Sundararajan before the expiration of the period of his office. Clause 89 of the articles empowers the Board of Directors of the assessee company to regulate the powers and duties of Dr. Sundararajan by passing appropriate resolutions which they have already done. Thus reading the Articles of Association as well as the second agreement together, it seems to us that Dr. Sundararajan was an employee of the assessee company, subject to the supervision and control of its Board of Directors, in addition to being the Managing Director of the assessee company.
12. For the above reasons, we hold that Dr. Sundararajan was an employee of the assessee company during the relevant time and the amount payable to him was not to suffer tax deducted at source at the time of remittance to IDS since the tax has been deducted and paid to the Indian Income-tax authorities.”
12.7 The learned counsel for the assessee also submitted a table showing the similarities between the decision of the co-ordinate bench in the case of IDS Software Solutions P. Ltd. (supra) and the instant case. The said table is extracted as under :
