27th Day of May, 2011
A.A.R. Nos. 865 of 2010
Mr. Justice P.K.Balasubramanyan (Chairman)
Mr. J. Khosla (Member)
Mr. V.K. Shridhar (Member)
|Name & address of the applicant||Verizon Data Services India Private Limited,
Olympia Tech Park, 9th Floor, Altius,
Block No.1, Sidco Industrial Estate, Guindy,
|Commissioner concerned||Commissioner of Income Tax-III, Chennai|
|Present for the Applicant||Dr.Anita Sumanth, Advocate|
|Present for the Department||Mr.K.R.Vasudevan, Addl.DIT(Intl.Tax.)|
(By V. K. Shridhar)
The applicant, Verizon Data Services India Private Limited (VDSI), is a Private Limited company and is incorporated under the provisions of the Indian Companies Act, 1956. It is a wholly owned subsidiary of Verizon Data Services LLC, US (Verizon US). The applicant is engaged in providing services relating to development and maintenance of telecom software solutions and certain information technology enabled services. All services rendered by the applicant are exported from India to its parent company Verizon US. The applicant submits that in order to ensure that efficiency is built into the system and the productivity is optimal, the parent company felt that the applicant needs individuals from US. The requirement was met by sending three of the employees of GTE Overseas Corporation, USA (GTE-OC), an affiliate of the parent company and engaged in a business similar to that of the applicant. Pursuant to it, the applicant entered into a Secondment Agreement with GTEOC on 1st April, 2008. Broadly speaking, the role of the three employees as described in the Secondment Agreement is: that each employee shall function and act exclusively under the direction, control and supervision of the applicant ; that GTE-OC shall not be responsible for the work of any employees nor would undertake any obligation or risk with respect to the quality of the results produced from the work performed by such employees during the term of assignment; that GTE-OC would not be responsible for any claim, liability, etc. arising from the actions of the expatriate employee and that GTE-OC shall pay to the employees for the items which an employee is entitled to receive and the applicant shall reimburse GTE-OC for the items paid or provided to the employees. The responsibility to deduct tax under the Indian tax laws shall be upon the applicant. The first employee has assumed the position in the capacity of the Managing Director of the applicant. The role of the other two employees is to liaise between the applicant and the parent company, to supervise and provide directions on the manner in which the activities of the applicant should be carried out. The applicant submits that GTE-OC shall send the bill on the cost of items incurred for payment by the applicant on a month to month basis.
1. On the facts and in the circumstances of the case whether the amounts (representing salary and benefits payable by GTE-OC to Expatriate employees) reimbursed by the Applicant to GTE-OC Overseas Corporation („GTE-OC‟) is “income” accruing to GTE-OC and therefore, whether the same is liable to deduction of tax in accordance with the provisions of section 195 of the Indian Income Tax Act, 1961 (the Act)?
2. If the answer to Question No 1 is in the affirmative, then whether the same is taxable as “Fees for Included Services (FIS)” under the Act read with the India-USA Double Taxation Avoidance Agreement („DTAA‟)?
3. Is there a Permanent Establishment of GTE-OC in India under the DTAA and if so, is the amount received by GTE-OC from the Applicant in the nature of “business profits” attributable to such Permanent Establishment in India under the DTAA?
4. If the answer to Question No 3 is in the affirmative is the amount of taxable income NIL, in as much as the reimbursements are at actual?
5. It the answer to Question No 1 is in the affirmative, then what is the rate at which tax is to be deducted at source on the payments made by the Applicant to GTE-OC?
7. The learned Addl.DIT argued that the Secondment Agreement does not bring to the fore the complete picture of the arrangement among the three entities: the applicant, the parent company and the affiliate of the parent company. When all three are part of Verizon group, the expatriate employees in substance may well represent the parent company and the plea that the applicant is the economic employer of the employees may not hold good. The act of deduction of tax under section 192 of the Act would not confer the status of an employer upon the applicant. The employees of the deputing company do not become the employees of the company to which they are deputed as observed in the case of Morgan Stanley, reported in 292 ITR 416.
12. The preamble of the Personnel Secondment Agreement states that to perform certain managerial services, the applicant has procured the services of US based personnel who are under the employment of GTE-OC. A team of three employees has been sent by GTE-OC. One of them has assumed the position of the Managing Director of the applicant company. It is a matter of common knowledge that the Managing Director of a company is incharge of the day to day affairs of the company. It is he who runs the company with the team of employees. The Board of Directors holds meetings off and on to take decisions on policy matters of the company. To say that the Managing Director of a company is under the control and supervision of the company is nothing more than use of an expression. The control and superintendence of the company vests with him. In the present case, the three employees together have constituted a team. While these employees are providing services to the applicant, they will remain the employees of GTE-OC. Their employment can only be terminated by GTE-OC. It goes to show that it‟s GTE-OC who has rendered managerial services to the applicant company. For the items paid or provided to the employees, the applicant is to reimburse GTE-OC on the basis of bills presented by GTE-OC. At the time of remittance, the obligation to withhold taxes is upon the applicant and if any amount is held as taxes the applicant is required to pay GTE-OC an additional amount. In other words, the applicant is required to pay the amount net of taxes. This again is an important aspect of the agreement. Firstly, it is GTE-OC‟s employees who are to perform managerial services in India and secondly, the applicant is liable to bear the taxes on the remittances. There is no argument that the remittances are in consideration for the services rendered. The reason for the applicant to bear the taxes on the impugned payments to GTE-OC lies in the fact that the services rendered by GTE-OC are liable to tax in India. But an issue has been raised that the remittances are in the nature of reimbursements and as the employees are paying taxes on their salary income there is no income which can be said to have accrued to GTE-OC. We are to analyze how far the applicant‟s contention is acceptable to us.
13. The Personnel Secondment Agreement specifically provides that the seconded employees shall remain the employees of GTE-OC. The payment of their salaries is not dependent on the applicant. These employees will continue to get their salaries from GTE-OC as long as they remain in their employment. It follows that the managerial services performed by them are as employees of GTE-OC and not as employees of the applicant. Without GTE-OC the seconded employees have no locus standi vis-â-vis the applicant. It is a trite law that the capacity in which the person receives the amount determines its tax ability in his hands. In that view of the matter the sums that are remitted by the applicant accrue and arise to GTE-OC for providing services to the applicant. What accrues and arises to the employees is by virtue of their employment with GTE-OC. The application of the income by GTE-OC while making payment of salaries to its employees has nothing to do with its accrual. The nature of the two receipts, one in the hands of GTE-OC for rendering services and the other in the hands of employees by way of salaries spring from different sources and are of different character and represent different species of income. By correlating the two payments/receipts in the Personnel Secondment Agreement, neither the nature nor substance of the transaction would change to give it the character of reimbursement. The name given to the transaction does not decide the nature of the transaction. A receipt is what it is and what it is called. We have noted that the salaries are paid out of the income of GTE-OC. The total income of GTE-OC may be the sum total of receipts under different heads of income, for example: business, royalties, fees for included services, house property, interest, dividends etc. but the expenditure incurred by way of salaries to the employees cannot ipso facto determine the nature of the income which is to be brought to tax either under the Act or under the DTAA in the hands of GTE-OC. We are of the view that, amounts paid by the applicant to GTE-OC represent income in the hands of GTE-OC. The reliance placed on the cases cited by the Learned Advocate are not on the issue as per the facts of the applicant.
14. The Learned Advocate submits that as the definition under DTAA is more beneficial the same may be applied to the applicant‟s case. Referring to Article 12(4) of the DTAA, it is contended that managerial services being consultancy services are not made available to the applicant. No technical knowledge, experience, skill etc. is transmitted to enable the applicant to independently apply the same. The employees are engaged in rendering managerial services and not technical services. Other than deputing its employees, GTE-OC has not rendered any services to the applicant through its employees. The payment made do not qualify as Ffees for including services’ and is not liable to tax having regard to the provision of the DTAA.
“The adjective “managerial” relates to manager or management. Manager is a person who manages an industry or business or who deals with administration or a person who organizes other people‟s activity. As pointed out by the Supreme Court in R. Dalmia vs. CIT  106 ITR 895, “management” includes the act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involves controlling, directing or administering the business.”
It is fairly clear that the functions performed by these seconded employees are purely managerial in nature. The applicant‟s contention is that these managerial services are consultancy services and are covered under Article 12 (4) of the DTAA. The Article12 (4) reads as under:
“ 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.”
(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.”
The applicant contends that as the managerial services are not made available to the applicant, the services rendered by the seconded employees are not covered under Art 12(4)(b) of the DTAA. In this connection we may refer to the memorandum of understanding of the DTAA which explains the meaning Rf “fees for included services’ as under:
“Article 12 includes only certain technical and consultancy services. By technical services we mean in this context services requiring expertise in a technology. By consultancy services, we mean in this context advisory services. The categories of technical and consultancy services are to some extent overlapping because a consultancy service could also be a technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in a technology is required to perform it.
Under paragraph 4, technical and consultancy services are considered included services only to the following extent; (1) as described in paragraph 4(a), if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which a royalty payment is made; or (2) as described in paragraph 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under paragraph 4(b), consultancy services which are not of a technical nature cannot be included services.”
The phrase technical or consultancy services appearing in Article 12(4)(b) of the DTAA, is further explained in the MOU as under:
“Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person.) This category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered 3PDGe availablI’ DEenHtQe person aSquUrinR the sFTvicL iL eJabled to aVpHU thL technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available.”
17. From the memorandum of understanding of the DTAA it is clear that the services which are not in the nature of technical services, the make available clause would not apply. As the services provided by GTE-OC are in the nature of managerial services, the payments made by the applicant are covered under “fees for included services” under Art.12 (4) of the DTAA. As the services are managerial in nature, the payments are also covered under “fees for technical services” as defined under Explanation 2 to section 9(1)(vii) of the Act.
18. In view of the foregoing discussion, the questions raised by the applicant are answered as follows:
The amounts reimbursed by the applicant represent income accruing to GTE-OC and accordingly charged to tax within the provision of section 195 of the Act. Question is answered in the affirmative.
The amounts reimbursed by the applicant are taxable as “Fes for Included Services (FIS)” under the DTAA and also under the Act.
Question is answered in the affirmative.
Question no.3 &4:
As we have held that the amount reimbursed by the applicant is taxable as FIS, the answers to these questions are academic.
“Fees for Included Services (FIS)” is taxable at the rate of 20% as provided under Article 12 (4)(b) of the DTAA.
Accordingly ruling is given and pronounced on 27th Day of May, 2011.
Sd/- Sd/- Sd/-
(J. Khosla) (P.K.Balasubramanyan) (V.K.Shridhar)
Member Chairman Member
F.No. A.A.R. No. 865 of 2010 Dated ….