Reimbursements for seconded employees did not constitute FTS: Karnataka HC

Director of Income-Tax Vs Abbey Business Services India Pvt. Ltd. (Karnataka High Court)

Karnataka High Court adjudicated the case of Director of Income-Tax vs. Abbey Business Services India Pvt. Ltd., concerning the applicability of tax deduction at source (TDS) on payments made to a non-resident under Section 195 of the Income Tax Act, 1961. The Revenue contended that payments made by Abbey India to Abbey UK for seconded employees constituted “fees for technical services” (FTS) under Section 9(1)(vii) and the India-UK Double Taxation Avoidance Agreement (DTAA). The Assessing Officer deemed Abbey India an “assessee in default” under Section 201(1) for failing to deduct TDS on these payments. The Commissioner of Income Tax (Appeals) upheld this decision, prompting Abbey India to appeal to the Income Tax Appellate Tribunal (ITAT).

The ITAT, in its ruling, set aside the Assessing Officer’s order, holding that the payments made for seconded employees were not in the nature of FTS and therefore not subject to TDS under Section 195. It emphasized that the seconded employees worked under the direct control of Abbey India, making Abbey India their economic employer. The ITAT relied on judicial precedents, including the Delhi High Court’s ruling in DIT vs. HCL Infosystems Ltd., which held that reimbursements for seconded employees did not constitute FTS. The Revenue, dissatisfied with the ITAT’s decision, appealed to the Karnataka High Court, arguing that similar agreements had been scrutinized in Centrica India Offshore Pvt. Ltd. vs. CIT, where the Delhi High Court ruled in favor of TDS applicability.

The Karnataka High Court examined the agreement’s terms and found that the seconded employees were integrated into Abbey India’s operations, working under its direct supervision and control. The court noted that reimbursement of expenses, including salaries, did not amount to consideration for technical services. The High Court distinguished the present case from Centrica India Offshore Pvt. Ltd., stating that the latter involved a different factual matrix concerning permanent establishment issues. The court reaffirmed that for a payment to be categorized as FTS, it must “make available” technical knowledge, which was not established in this case.

In conclusion, the Karnataka High Court upheld the ITAT’s decision, ruling that Abbey India was not required to deduct TDS on the payments made to Abbey UK. The judgment reaffirms the principle that secondment arrangements, where employees function under the control of an Indian entity, do not automatically attract TDS under Section 195. The ruling aligns with prior judgments, including DIT vs. HCL Infosystems Ltd., which have provided clarity on the taxation of secondment arrangements in India.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2005-06. The appeal was admitted by a bench of this Court vide order dated 12.01.2016 on the following substantial questions of law:

(i) Whether in the facts and circumstances of the case, the tribunal is justified in law in holding that the assessee cannot be held as ‘assessee in default’ under Section 201(1) of I. T. Act even when the proceedings initiated by revenue under said provision is in accordance with parameters of said section?

(ii) Whether in the facts and circumstances of the case, the tribunal is justified in law in holding that the assessee cannot be held as ‘assessee in default’ under Section 201(1A) of I.T.Act even when the proceedings initiated by revenue under said provision is in accordance with parameters of said section?

(iii) Whether on the facts and circumstances of the case, the tribunal is right in holding that the payments made by assessee to Abbey National Plc, UK are not liable for deduction of TDS under Section 195 of the I.T. Act and as such invoking of Section 4 0(a)(i) by assessing authority is not proper even when the nature of transactions and materials available on record established that payments made by assessee to Abbey National Plc, UK, can be categorized as ‘fees for technical services’ under Section 9(1)(vii) of the Act’ and as such liable for deduction of TDS under Section 195 of the Act?

(iv) Whether on the facts and circumstances of the case, the tribunal is right in law in holding that the assessee cannot be held as ‘assessee in default under Section 201(1) of the Act’ even when the assessing authority after considering the particulars furnished by assessee, passed order under Section 201(1) of the I.T. Act holding that services rendered by Abbey UK to Abbey, India are in the nature of Technical Services as per Section 9(i)(vii) Explanation 2 Article 13(4)(c) of the India – UK Double Taxation Agreement (for short DTAA)?

2. The factual background, in which the aforesaid substantial questions of law arise for our consideration needs mention. The assessee is an Indian company incorporated on 22.01.2004 under the Companies Act, 1956. It is a subsidiary of ANIT CO Ltd. a group company of Abbey National Plc, UK (hereinafter referred to as ‘ANP’ for short). ANP had entered into a agreement on 07.11.2003 with Abbey, India to outsource the provision of certain process and call centers to M/s Msource India Pvt. Ltd. Under the agreement, Msource India Pvt. Ltd was required to provide high quality services which supports the position of ANP and its affiliates as well as to customers in UK in order to ensure that high quality services were provided by Msource India Pvt. Ltd, ANP entered into a consultancy agreement with the assessee on 04.02.2004 in which description of services to be provided by the assessee has been mentioned and for which the assessee was to be compensated at cost plus 12% which included depreciation but excluded exchange fluctuation loss. In order to facilitate outsourcing agreement between ANP and Msource India Pvt. Ltd. an agreement for secondment of staff was entered into between ANP and the assessee on 04.02.2004. For deputation of its employees, Abbey, India had made certain payments to Abbey UK and ANP part of which was salary reimbursement on which tax was deducted. The assessee filed an application under Section 195(2) of the Act seeking authorization for payments to non residents without deduction of tax vide communication dated 22.06.2005 before the Assessing Officer. The Assessing Officer by an order dated 31.03.2006 inter a/ia held that the application under Section 195 was filed much after the date of credit of the sums to the accounts of the payee and considered the application as non est and disposed of the same without adjudicating the claim of the assessee on merits. The assessee thereupon filed a petition under Section 264 of the Act before Director of Income Tax who rejected the petition preferred by the assessee.

3. Thereafter, the Assessing Officer heard the assessee and found that assessee had deducted tax only on an amount of Rs.16,62,04,340/- and did not deduct the tax on the balance amount of Rs.10,91,02,724/-. The Assessing Officer vide order dated 07.07.2010 inter a/ia held that as per the agreement, the employees of ANP were seconded to India who were highly skilled in technical personnel and ANP had agreed to provide training to some of the employee of MSourcE. It was further held that the assessee’s claim that there was nexus between ANP and the provision of services rendered by the expatriates is not correct as the employees were on the payroll of ANP and ANP was involved in providing technical services. The Assessing Officer held that amount of Rs.10,91,02,724/- was towards payment of ‘fees for technical services’ as per Section 9(i)(vii) of the Act, Explanation 2 and Article 13(4)(c) of Indo-Ur< Double Taxation Avoidance Agreement (hereinafter referred to as ‘the DTAA’ for short).

4. Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 15.02.2011 dismissed the appeal. Thereupon the assessee approached the Income Tax Appellate Tribunal (hereinafter referred to as ‘the tribunal’ for short) by filing an appeal. The tribunal by an order dated 20.12.2013 inter alia by placing reliance on its previous decision held that assessee has been able to establish that payment made to non resident is not taxable in India. It was further held that there was no obligation on the part of the assessee to deduct the tax at source on the payments made to ANP and therefore, the assessee cannot be treated as ‘assessee in default’ under Section 201(1) of the Act. Accordingly, the order levying interest under Section 201(1A) of the Act was quashed. In the result, the appeal preferred by the assessee was allowed. Being aggrieved by the order passed by the tribunal, the revenue has approached this court.

5. Learned counsel for the revenue submitted that the assessee is rendering technical services and substance of the agreement instead of the form of the agreement has to be seen and from perusal of the agreement, it is evident that the payment in question has been made under Fee for Technical Services (FTS). It is further submitted that reimbursement is only a manner of computation for consideration towards FTS and the finding recorded by the tribunal is contrary to the judgment of the High Court of Delhi in M/S CENTRICA INDIA OFFSHORE PVT. LTD. VS. COMMISSIONER OF INCOME TAX-I& ORS., W.P.(C) No.6807/2012 dated 25.04.2014, in which similar agreement and similar services rendered by the assessee were considered and the Special Leave Petition as well as Review Petition filed before the Supreme Court was rejected and the aforesaid decision of the Delhi High Court applies squarely to the facts of the instant case. It is also submitted that key features of the agreement, which has been entered into by the assessee in the instant case are exactly similar, which is evident from the order passed by the Commissioner of Income Tax (Appeals) and the controversy has been now settled by the aforesaid judgment of the Delhi High Court in M/S CENTRICA INDIA OFFSHORE PVT. LTD. supra, in which Delhi High Court has considered all the judgments on the issue involved in this appeal. It is pointed out that the issue pertaining to FTS and ‘make available’ is adjudicated by the Delhi High Court in paragraphs 24 and 30 and 32 respectively.

6. It is also urged that the tribunal ought to have appreciated that the order under Section 201 is strictly in conformity with Section 201 of the Act and the Assessing Officer was well within his jurisdiction to pass such an order. It is also pointed out that the order dated 18.07.2012 passed by the tribunal in I.T.A.No.1141(B)/2010 in case of the assessee by the tribunal is subject matter of appeal filed by the revenue before this court viz., I.T.A.No.420/2015 and the fate of the aforesaid appeal would depend on the decision taken by this court in this appeal. It is therefore urged that in view of decision of Delhi High Court in M/S CENTRICA INDIA OFFSHORE PVT. LTD. supra the substantial questions of law framed in this appeal deserve to be answered in favour of the revenue.

7. On the other hand, learned counsel for the assessee at the outset submitted that the order passed by the Assessing Officer is per se without jurisdiction as the Assessing Officer has assumed jurisdiction under Section 201(1A) of the Act while examining the issue in the light of the order passed by the Director of Income Tax in the context of Section 195(2) of the Act. It is also urged that since, the aforesaid issue is a pure question of law and pertains to jurisdiction, therefore, the same can be raised for the first time in this appeal. It is further submitted that consequences for non deduction of tax are provided in various provisions of the Act. In this connection, our attention has been invited to Section 40(a)(i) and Section 201 of the Act. It is further submitted that the dispute in this appeal is limited only to the extent of expenses incurred by the assessee for hotel and traveling expenses to the tune of Rs.10.96 Crores and whether the same can be treated as expenses for providing technical services. It is also urged that decision rendered by High Court of Delhi in M/S CENTRICA INDIA OFFSHORE PVT. LTD. supra does not apply to the facts of the case for two reasons, firstly, the court dealt with the issue of permanent establishment in the aforesaid decision, secondly, the issue involved in the aforesaid decision was whether expenses incurred towards salary can be treated as expenses for providing technical services. It is also urged that High Court of Delhi while passing the aforesaid judgment has not considered the decision rendered by it in ‘DIT VS. HCL Info SYSTEM LTD.’, 274 ITR 261 (DELHI).

8. It is also submitted that mere deputation of the employees doesn’t amount to making available technical Know-How. Learned counsel has also invited our attention to Articles 5, 7 and 13 of DTAA. It is urged that no substantial question of law arises for consideration in this appeal and the matter stands concluded by finding of fact, which have not been demonstrated to be perverse. Lastly, itis urged that there is no obligation to withhold tax on payments made for reimbursement of costs incurred by a non resident enterprise. In support of aforesaid submissions, reliance has been placed on decisions in ‘SREE MEENAKSHI MILLS LTD. VS. CIT’, (1957) 31 ITR 28 (SC), ‘CIT VS. SIEMENS AKTIONGESELLSCHAFT’, (2009) 310 ITR 320 (BOMBAY), ‘CIT VS. DUNLOP RUBBER CO. LTD., (1983) 142 ITR 493 (CALCUTTA), ‘DIT VS. WNS GLOBAL SERVICES (UK) LTD.’, (2013) 32 TAXMANN.COM 54 (BOMBAY), ‘DIT VS. KRUPP UDHE GMBH’, (2013) 354 ITR 173 (BOMBAY), ‘CIT VS. A.P.MOLLER MAERSK A/S’, (2015) 374 ITR 497 (BOMBAY), ‘CUT VS. ZEE ENTERTAINMENT ENTERPRISES LTD.’, ITA NOS.1107, 1117, 1174, OF 2015 & 126 OF 2016 (BOMBAY), ‘DIT VS. HCL INFOSYSTEM LTD’, (2005) 274 ITR 261 (DELHI), ‘ CIT VS. DE BEERS INDIA MINERALS (P.) LTD.’, (2012) 346 ITR 467 (KAR), ‘ IDS SOFTWARE SOLUTTIONS (INDIA)(P.) LTD. VS. ITO’, (2009) 122 TTJ 410 (BANGALORE) & ‘DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) VS. MORGAN STANLEY & CO.’, (2007) 292 ITR 416 (SC).

9. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of Section 9(i)(vii) and Section 195(1) of the Act, which is reproduced below for the facility of reference:

9(i)(vii) income by way of fees for technical services13 payable by-

(a) the Government ; or

(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or it is apposite to take note from any source outside India ; or

(c) a person who is a non–resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :

Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.

Explanation 1.–For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.

Explanation 2.–For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction16, assembly, mining or like project undertaken by the recipient16 or consideration which would be income of the recipient chargeable under the head “Salaries”.

195(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194L5 or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :

10. After having noticed the relevant statutory provisions, we may take note of relevant clauses of DTAA. Article 5 of DTAA deals with ‘permanent establishment’. Article 5(2)(k) describes the expression ‘permanent establishment’ and furnishing of services including managerial services, other than those taxable under Section 13 within a Contracting State by an enterprise through employees or other personnel. Article 7 deals with business profits and provides that profits of a business of a Contracting State shall be taxable only in that state unless the enterprise carries on business in other contracting state to a permanent establishment situate therein. Article 13 inter alia provides that provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base.

11. Now we may advert to the facts of the case in hand. From perusal of the relevant clauses of the agreement as well as the nature of services provided by the assessee under the agreement, it is evident that the assessee had entered into a secondment agreement for securing services to assist assessee in its business. The expenses incurred by the seconded employees which were reimbursed by the assessee is not liable to deduction to tax at source and the aforesaid amount could not be considered as ‘fees for technical services’. It is also pertinent to note that secondment agreement constitutes an independent contract of services in respect of employment with assessee. From the perusal of the key features of the agreement, which have been reproduced by the Commissioner of Income Tax (Appeals), it is evident that the seconded employees have to work at such place as the assessee may instruct and the employees have to function under the control, direction and supervision of the assessee and in accordance with the policies, rules and guidelines applicable to the employees of the assessee. The employees in their capacity as employees of the assessee had to control and supervise the activities of Msource India Pvt. Ltd. Therefore, the assessee for all practical purposes has to be treated as employer of the seconded employees. There is no obligation in law for deduction of tax at source on payments made for reimbursement of costs incurred by a non resident enterprise and therefore, the amount paid by the assessee was not to suffer tax deducted at source under Section 195 of the Act. Similar view has been taken by High Court of Delhi in HCL INFO SYSTEM LTD. supra in respect of salaries paid to foreign technicians on behalf of the assessee.

12. So far as reliance placed by learned counsel for the revenue on the decision of MIS CENTRICA INDIA OFFSHORE PVT. LTD. supra is concerned, from perusal of paragraph 29 of the aforesaid decision, it is evident that the High Court of Delhi considered the issue whether the secondment of employees by BSTL and DEML, the overseas entities fall within Article 12 of India, Canada and Article 13 of India, UK DTAAs, which embody the concept of service permanent establishment. In the instant case, the issue of permanent establishment is not involved. Therefore, the aforesaid decision is not applicable to the fact situation of the case.

In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee.

In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed_