Case Law Details
Tax ability of payments made to overseas group companies under secondment arrangement – AAR
It was held that personnel seconded to the Taxpayer, a group company in India, did not become its employees in the absence of an obligation undertaken by the Taxpayer to pay employment costs of such personnel. This was held despite the fact that the Taxpayer exercised control and supervision and was also responsible for the work of the personnel.
As employees continue to be the employees of the overseas entities and their employer continues to be the overseas entity concerned and employees are rendering services for their employer in India by working for a specified period for a subsidiary or associate enterprise of their employer which give rise to a service PE within the meaning of Art.5 of the India-UK Treaty, falling under Article 5.2(k) thereof. In the light of the discussion as above, our ruling on question No.1 is that the payment by the applicant under the agreement would be income accruing to overseas entities in view of the existence of a service PE in India and on question No.2 is that tax is liable to be deducted at source under section 195 of the Indian Income-tax Act.
AUTHORITY FOR ADVANCE RULINGS
(INCOME TAX)
14th Day of March, 2012
A.A.R. No. 856 of 2010
| Name & address of the applicant | Centrica India Offshore Private Ltd.,L-107, Second Floor,
Lajpat Nagar-II, New Delhi- 110024 |
| Commissioner Concerned | Commissioner of Income-tax-I New Delhi. |
R U L I N G
[By Justice P.K. Balasubramanyan]
1. Centrica India Offshore Private Limited, (for short CIO), the applicant before us, is a company incorporated in India. It is a wholly owned subsidiary of Centrica Plc., United Kingdom, a company incorporated in the United Kingdom (hereafter, U.K.). British Gas Trading Ltd. (BSTL), Director Energy Marketing Limited, Canada (DEML) are also subsidiaries of Centrica Plc. These entities together, hereinafter described as ‘Overseas entities’, are engaged in the business of supplying Gas and Electricity to various consumers across U.K. The overseas entities have outsourced their back office support functions such as consumers’ billings/debt collections/Monthly MIS job to third party vendors in India. In order to ensure that the vendors in India work in accordance with the quality guidelines, the applicant, CIO, was established in India on 11.3.2008 to act as service provider to the overseas entities.
2. On 23.12.2008, a Service Agreement to be effective from 1.12.2008 was executed among Centrica Plc. And its affiliates on the one hand and the applicant CIO, on the other. It acknowledged that the overseas entities had set up CIO an indirect wholly owned subsidiary in order to provide locally based interface between the overseas entities and the Indian service providers and have requested CIO to provide such services to them. CIO was to provide services to the overseas entities in accordance with the provisions of that agreement. As service costs, CIO was to receive from the overseas entities the fully absorbed cost of providing the relevant service. Though the agreement defines, ‘service costs’ as being the meaning given to it in Article 2.2 thereof, in the copy of the agreement filed with the application no Article
2.2 is seen. But right through the agreement and in the written submission, it was stated that the service charges paid to the applicant was cost plus 15% thereof.
3. On the same day, effective from 1.12.2008, the overseas entities entered into another agreement with the application, CIO, described as a ‘Secondment Agreement’ it was confessedly premised on the fact that CIO had asked the overseas entities to provide staff with knowledge of various processes and practices employed by the overseas entities and the experience in managing and supplying such processes and practices. It may be noticed that the applicant had been brought into existence on 11.3.2008 and it needed providing of knowledge of processes and practices of the overseas entities to successfully fulfill its role envisaged with the Service Agreement of even date.
4. Since ruling is sought on consequences arising from the so-called Secondment Agreement, it is proper to notice its terms in some detail. On the request of the applicant, CIO, the overseas entities were to assign relevant individuals to perform the duties at the location of the applicant for the period stipulated and to report to the applicant in accordance with that agreement. The applicant was to designate the concerned secondees to fill certain position in its organization, integrate them into its organization and authorize them to perform the duties in its plan for the agreed period in accordance with that agreement. The applicant had the right to specify the scope and nature of the secondee’s work and the results to be achieved to direct the secondees in the performance of duties. The applicant was to enter into separate secondee agreement with each one of the secondees.
5. The secondee was to be integrated into organization of the applicant CIO for the secondment period and was to be subject to the supervision and control of CIO. All the rules, regulations, policies and other practices established by CIO for its employees was to apply. The secondee was also bound by the instructions and directions of the CIO. The secondee was to perform the duties assigned with due diligence in a competent and professional manner in accordance with applicable laws and regulations, standard and practices and under the supervision and control of CIO. The overseas entities were not to be responsible for the errors/omissions or for the work performed by the secondee employees. CIO was to bear all risk in respect of the work performed by the secondees and had the benefit from the output. CIO was to bear the cost of monthly remuneration and reimbursement of cost to secondee. The secondees were to retain their entitlement to participate in the overseas entities retirement and social security plans and other benefits in accordance with its applicable policies. The monthly cost of such participation and benefits were to be borne by CIO. The overseas entities is to charge CIO monthly for the actual documented costs and expenses that are incurred by the overseas entities during the term secondment agreement in respect of the secondees during the secondment. The monthly charges were to include all direct costs of secondee’s basic salary and other compensation, cost of participation in overseas entities’ retirement and social security plans and other benefits in accordance with its applicable policies and other costs, but only if such other costs have been agreed to between CIO and the overseas entities. The procedure for invoicing the cost over month is set out in the agreement. If there arose any dispute about the invoice raised or any part thereof between the CIO and the overseas entities, they were to confer and resolve the dispute. The value added tax or sales tax were to be borne by CIO and all payments made by CIO under the agreement is to free and clear of any withholding, deductions or levies are required by the applicable legal laws. Either party to the agreement could terminate the agreement by giving a written notice to the other party three months before termination date. It could also be terminated immediately by giving a written notice to the other parties on the grounds specified in the agreement. One of the contingencies is when CIO is no longer wholly owned by Centrica Overseas Holding Limited and Centrica Beta Holding Limited. The other is, that one of the affiliates making up the overseas entities making the secondee available, ceased to be an affiliate. The third is when the secondee ceases to be an employee of the overseas entities or one of their affiliates. CIO had the right to terminate the secondment agreement if the secondees repeatedly failed to comply with work place rules, regulations and policies of CIO or with a direction given by the management of CIO. What is relevant to note is that the applicant CIO is given only the right to terminate the secondment agreement and not the services of the secondee sent over by the other oversees entities.
6. It is the case of the applicant that pursuant to the secondment agreement, certain employees of the overseas entities have been seconded to the applicant. One of them was to work as General Manager for a period of one year and 7 months, to be overall responsible for the activities and functions of the CIO. He is to report to the Board of Directors of the CIO. The second was to be Operations Manager, to work for a period of 13 months, to overseas operations/ various functions and controls of CIO and also to supervise other employees. He is to report to the General Manager. The third was to work as Delivery Manager for a period of 3 months, and be responsible for ensuring that the vendors of overseas entity delivered the services on time. That person is also to report to the General Manager. The fourth is to work as Relationship Manager for one year and 7 months, building relationship with vendors seeking their feedback and so on. That person is also to report to the General Manager.
7. The applicant had thereafter entered into individual agreements with the secondees. They mostly reiterate the terms of the main secondment atgreement. It is the case of the applicant that the secondee’s work was as per the schedule required and notified by the applicant from time to time. Since they work under the control and supervision of the applicant and following the directions and instructions of the applicant, none of the overseas notices is responsible for any work or omission in the work performed by the secondees. The entire risk is borne by the applicant. The applicant has right to specify the scope of the work and the results to be achieved by the seconded employees. The applicant was, therefore, economic employer. The salaries are paid by the applicant and these are accounted for in the books of account of the applicant as salary cost. The overseas entities also show this only as reimbursement of salary expenses. Since the secondee employees are working in India for the Indian entity and receive their salaries, the salaries paid to them is individually offered either for tax by them. The secondee employees were coming to India on deputation for short term assignment. But their families/responsibilities continued to remain in their home country. It was to ensure that the salaries are received uninterruptedly and in time and avoid any delay in payment, that her on the request of the applicant, salaries are being paid by the overseas entities to the seconded employees directly in their overseas bank account. The overseas entities thereafter claim the amount as reimbursement from the applicant on cost basis.
8. The applicant approached this Authority with the present application seeking an advance ruling on the question whether the amount paid by the applicant to the overseas entities, equivalent to salary and other benefits paid to the employees initially by the overseas entities, is taxable in India and whether withholding of tax thereon was contemplated by Section 195 of the Income-tax Act. On 20.1.2010, this Authority allowed the application under section 245R(2) of the Act so as to give a ruling on the following questions:
(a) Whether on the facts and in the circumstances of the case the amount paid or payable by the applicant to the overseas entities under the terms of Secondment Agreement is in the nature of income accrued to the overseas entities?
(b) If the answer to question no.1 above is in the affirmative, whether the tax is liable to be deducted at source by the applicant under the provision of Section 195 of the Income-tax Act, 1961?
9. In its original objection, the Revenue took up the contention that what is received by the employees is received in India as salary and hence it was taxable in India and Section 195 of the Act was attracted. In its additional objections, the Revenue contended that the payment made by the applicant to the overseas entities were partook the character of ‘fees for technical services’. As regards Canadian overseas entity governed by the Treaty between India and Canada, it was contended to be ‘fees for included services’. It was pleaded that these payments were sought to be cleverly disguise as reimbursement of salary cost of the seconded employees escape the withholding tax in India. The attempt of the applicant to make out a case that the present one is a simple case of reimbursement of cost of the seconded employee was not sustainable. Adequate facts have not been furnished and it would be appropriate for this Authority to decline a ruling on the questions. The services provided by the seconded employees were technical services/included services and were taxable as such. They were taxable in India. The rendition of managerial services would also bring in the question whether overseas entities are not having a permanent establishment in India, the overseas entities have a service PE in India in view of the services being rendered by the seconded employees being managerial in nature. Adequate information was not forthcoming on this question from the applicant and, therefore, it was proper to leave this question for decision by the competent authority. In its further written submission, it is contended that the employer of the seconded employees was the concerned overseas entity. The applicant was not even the economic employer as claimed. What has been entered into is not a contract of service but a contract for service. The contention that what is being paid is fees for technical services/included services is reiterated. It is also asserted that adequate information has not been provided to establish that the reimbursement does not contain any element of income or even otherwise not taxable. There was no diversion of income by overriding title as claimed by the applicant.
10. In its written reply to these arguments, the applicant has reiterated its contention. It has sought to establish that the applicant is economic employer of the concerned employee.
11. It is argued by the learned Sr. counsel for the applicant that the agreements would establish that the applicant was economic employer and what it paid to the overseas entities was only reimbursement of the salary payable to the seconded employees. What was being involved by the overseas entities the actual cost incurred in that regard and the same is reimbursed without any addition by the applicant. It was only for convenience that the salary was being paid in England and Canada depending on from where the secondee has come to serve the applicant. The tax due on the salary paid to the employees is deducted in terms of section 192 of the Income-tax Act and duly deposited. Similarly, the 15% of the cost paid to the applicant as service charges by the overseas entities, is also accounted for and the tax remitted. The amount paid by way of reimbursement to the overseas entities cannot be considered income in the hands of the overseas entities with an obligation on the applicant to comply with the requirement of Section 195 of the Act. The contract was one of service and not one for service and in view of the distinction between the two concepts, the amount cannot be taxed. The concept of legal employer and economic employer has been recognized by some of the Income-tax Appellate Tribunals in India as well. Being an economic employer, the obligation on the applicant was only to deduct the tax on the salary payable to the secondees in terms of 192 of the Act. What was made over to the overseas entities is only reimbursement and there was no element of income in it. In any event, it would be a case of diversion of income by overriding title in that, the payment never becomes ought of the income of the overseas entities. It cannot also be held that what is paid is ‘fees for technical services’ taxable in terms of the Treaty between India and U.K. and that between India and Canada. Thus, on question no.1, a ruling in favour of the applicant deserves to be rendered. On behalf of the Revenue, these contentions were refuted by pleading that the employer of the seconded employees only the overseas entity, that, that entity was providing technical and managerial services to the applicant and what is paid is fees for such services. Merely calling it reimbursement would not take the case of the applicant out of the tax net. There was no diversion of income by overriding title in this case. The principal had no application. The amount was taxable in the hands of overseas entities and hence the applicant had obligation in terms of section 195 of the Act to withhold tax of the above. We shall deal with each of these contentions in some detail.
12. What is the position in this case? The applicant was created as a subsidiary by the overseas entity for coordinating the services of various vendors in India to whom it has outsourced some activities needed by it. A service agreement was then entered into by the overseas entity with the applicant for this purpose. The applicant was to be paid the costs it incurred for doing the work plus 15% of it as profits or compensation. The applicant submits that it has offered this 15% to tax in India.
13. The applicant required to be guided in the processes and procedures of the overseas entity. For this, the overseas entity deputed or seconded some of its employees to the applicant to render their services in India. As we see it, those employees continue to be the employees of the overseas entity and they are paid their salaries and other perquisites or allowances by the concerned overseas entity. All their service benefits are given by the overseas entity. They, thus, remain the employees of their original employer. On a reading of the Secondment Agreement, it is seen that the right of the seconded employees to seek their salaries and other emoluments is against the overseas entity. They cannot claim it as of right against the applicant.
14. The right of dismissal of the employees vests in or rests with the overseas entity. Even though the control and supervision of the employees and their work is with the applicant, the applicant cannot terminate their employment. It can only terminate the secondment agreement of the employees.
15. What is argued is that the applicant is the economic employer, though not the legal employer and its status of economic employer makes what is paid by it to the overseas entity towards salary paid to the employees, mere reimbursement. In other words, the applicant claims that it has to bear the responsibility for the salary of the employees seconded to it. Clause 3.1 of the Agreement only provides for the overseas entity being entitled to recover the costs of the base salary and other compensation paid to the seconded employee and the cost of participation of the employee in the retirement and social security plans and other benefits in accordance with its policy. This only emphasizes the fact that the seconded employee remains the employee of the original employer and that he has to look to the overseas entity for his salary and other emoluments.
16. The individual appointment letters given to the seconded employees also re-affirm this position. They are silent on the salary and other service dues payable to the employee. No obligation at all is undertaken by the applicant to pay them, though provision is made for providing some incidental expenses. This only reaffirms the position that the applicant has no economic control over the employees.
17. Learned Sr. counsel submits that secondment is a concept that is now universally accepted and the very nomenclature of the agreement spells out that the applicant is the economic employer and that this is reaffirmed by the terms of the agreement. The terms of a contract have to be understood on a reading of its terms and mere nomenclature cannot be determinative of the relationship brought about between or among the parties. On a reading of the agreements concerned, we are satisfied that nothing turns on the nomenclature of the concerned agreement as secondment agreement.
18. On the terms of the Secondment Agreement, it is difficult to find that the amount paid by the applicant to the overseas entities is reimbursement as sought to be emphasized by learned counsel for the applicant. Obligation to pay the salary rested with the overseas entities and the right of the employee to claim it is only against the overseas entities. The employee is conferred no right to claim the salary from the applicant nor is the applicant burdened with an obligation to pay that salary. It is difficult to accept the argument that what is paid by the applicant to the overseas entity in view of its sending its employees to the applicant for rendering service is reimbursement of the salary paid by the employer to them. Merely because the overseas entity is not charging the applicant anything more than what it has paid by way of salary and other emoluments to the concerned employee, that does not alter the situation. The fact that in the accounts of the applicant, this is entered as reimbursement of cost or it is not shown as income in the account of the overseas entity, cannot be conclusive of the question. What the Model commentary on Article 15 concerning the taxation of income from employment says is that where a comparison of the nature of services rendered by the individual with the business activities carried on by his former employer and by the enterprise to which the services are provided points to an employment relationship that is different from the former contractual relationship, then certain additional factors may be relevant to determine whether the employer who receives the secondees could be treated as their employer. What we find in this case is that the overseas entity has created an Indian company as its subsidiary for ensuring that the services to be rendered to it by various Indian vendors are properly coordinated. The overseas entity wants their services to be consistent with its business and policies. The applicant having been newly constituted, was presumably not in a position to render help to the various vendors in the matter of fulfilling their obligations or in the matter of ensuring compliance with the processes and practices employed by the overseas entities. The Secondment Agreement is specifically based on the fact that CIO has asked the overseas entity to provide staff with knowledge of various processes and practices employed by the overseas entity and experience in managing and applying such processes and practices. On a look at the list of employees, it is seen that the persons seconded are concerned with managerial functions and they are to oversee the applicants’ operations and to be overall responsible for its activities and functions. This, therefore, appears to be a case where some employees qualified in the processes and procedures of the overseas entity are lent to the applicant, the Indian entity, a subsidiary, to perform the functions envisaged for it. What is paid by the applicant to the overseas entity in view of this lending of service of certain employees, would really spell in the realm of compensation paid for managerial services. Of course, it remains for us to consider whether it is taxable and if it is, whether it is taxable in India.
19. The passages from Klaus Vogel on Double Taxation Conventions relied on, show that the enterprise to which the employee is sent does not qualify as an employer merely because the employee performs services for it, or because the enterprise gives the employee instructions regarding his work. 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. However, there may certainly be two work relationships simultaneously as well. Determining the employer, then only depends on whether (atleast) one of them is responsible for the remuneration in the State of employment.
20. Here, the enterprise to which the employees are sent is the subsidiary of the original employer. The persons well versed in the processes and procedures of that employer are sent to the subsidiary to enable the subsidiary to perform the work for which it was created in accordance with the processes and procedures of the original employer. The work is also really that of the employer, in the sense, that it is to coordinate the work of the vendors of the employer situated in the other State. It is a work needed by the original employer. On the terms of the agreement entered into by CIO with the overseas entity and the separate agreements entered into with the seconded employees, we have held that the obligation to pay the salary is that of the original employer and the right of the employees to claim that salary is against the original employer. The work of the employer in India, is not unconnected with the activity of their original employer, the overseas entity. On the other hand, it is part of it. In this situation, we are of the view that even if we are able to postulate two work relationships – we find it difficult to do so – the one responsible for the remuneration, the overseas entity, has to be found to be the employer.
21. The obligation to pay salary to an employee is different from an obligation undertaken to compensate their employer by tendering the amount equal to what is paid by the employer to the employee. In the absence of an obligation in the applicant to pay the salary of the employees, the contention on its behalf cannot be accepted.
22. Before dealing with the question whether the amount is taxable in India we think it proper to deal with the contention on behalf of the applicant that this was a case of diversion of income by overriding title and nothing is received by the overseas entities as their income. The Supreme Court in CIT v. Sitaldas Thirathdas (41 ITR 367) held that the true test is whether the amount sought to be deducted in truth never reached the assessee as his income. It is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible, but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence in law does not follow. In CIT v. Sunil J. Kinariwala [2003 (1) SCC 660], the Supreme Court held that “the discriminatory factor, in our view, is the nature and effect of the assessees’ obligation in regard to the amount in question. When a third person becomes entitled to receive the amount under an obligation of an assessee even before he could claim to receive it as his income, there would be diversion of income by an overriding title, but when after receipt of the income by the assessee the same is passed on to a third person in discharging of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title. The decisions of the Privey Council in Bejoy Singh Dudharia v. CIT and PC Mullick v. CIT together are illustrative of the principle of diversion of income by overriding the title.”
23. We have already noticed that there is no obligation on the applicant to pay the salaries of the seconded employees in terms of the agreement. There is also no right in the seconded employee to claim his or her salary from the applicant. The right of the employee to claim the salary is as against his employer, the overseas entity and the obligation to pay the salary is that of the overseas entity. Whether the applicant pays an equivalent amount to the overseas entity or not, the overseas entity is obliged to pay the salary of its employee. As a matter of practice, the salary is paid first by the overseas entity and thereafter an invoice is raised for an equivalent amount of what was paid and the amount is made good by the applicant to the overseas entity. At the point of time when the applicant pays the amount to the overseas entity, the event of paying the salary has already taken place and the employee concerned, has no title over that amount which is made over by the applicant to the overseas entity. There is no intervening claim on this amount or overriding title vested in the employees. This is a case where the overseas entities after they fulfill their obligations seek an equivalent amount from the applicant for the purpose of recouping the amount paid which they were under a legal obligation to pay. We are, therefore, of the view that this cannot be held to be a case of diversion of income by overriding title. This has to be treated as income in the hands of the overseas entities subject to the other contentions raised of its nature.
24. What is the nature of this income? According to the Revenue the payment made by the applicant to the overseas entities in this behalf is fees for technical services within the meaning of Section 9(1)(vii) of the Act and Article 13 of the DTAC between India and U.K. and fees for included services within Article 12 of the DTAC between India and Canada. It is argued that the service rendered by the seconded employees is managerial service and hence the remuneration payable to the overseas entity for seconding these employees is fees for technical services within the meaning of Section 9(1)(vii) of the Act. Under Article 13 of the DTAC between India and U.K. though managerial service is not included, it was a case of making available technical knowledge, experience and skill and hence it will come within the scope of fees for technical services therein. It is pointed out that the seconded employees are sent to India with knowledge of various processes and practices employed by the overseas entity and the experience in managing and applying such processes and practices. They were also making available their experience and skill in managing and applying the processes and practices. The object of their secondment for fixed terms is to train and familiarize the staff in India so that once the secondment ceases, the staff in India can apply the processes and practices and that would mean that service is made available within the meaning of the Article.
25. The applicant, though an Indian company, has claimed the application of the India-UK Convention and the India-Canada Convention in respect of the compensation paid to the overseas entities in the light of Section 2(37A)(iii) of the Income-tax Act. The position was not disputed by the Revenue. Therefore, the question whether the compensation paid is taxable in India has to be considered in the context of paragraph 4 of Article 13 of the Double Taxation Avoidance Convention between India and the United Kingdom and paragraph 4 of the Article 12 of the Convention between India and Canada. Under the India-UK Convention, fees for technical services means payment of any kind in consideration for the rendering of any technical or consultancy services. Managerial Services which is included in Section 9(1)(vii) of the Income-tax Act is not covered by the Article. Under the India-Canada Convention, fees for included services means payment in consideration of technical or consultancy services. Here also, managerial services is not included.
26. In the case on hand, as can be seen, the secondee employees are all rendering managerial services. They are General Manager, Operations Manager, Delivery Manager and Relationship Manager respectively. It is true, as pointed out by the Revenue, that even the separate agreements do not specify the nature of the services required to be provided by the employees. There is no material as of now to indicate that they are performing any technical functions or consultancy functions. They can be said to be managing the business of the subsidiary as requested by Centrica Plc., consistent with its aims. There is no acceptable argument except reliance upon a ruling by this Authority in Virizon Data Services India Private Limited (AAR No.865 of 2010). We may notice that the High Court of Madras has in a Judgment in Writ Petition No. 14921 of 2011, set aside the finding of this Authority on that question and has remanded the relevant question for a re-consideration. To that extent, the finality of the Verizon Ruling has now gone. So, the reliance placed on that Ruling by the Revenue is of no avail.
27. On the materials now available, it is not possible to hold that the managerial services being rendered in this case, will come within the purview of Article 13.4 of the India-UK Convention or Article 12.4 of the Indo- Canada Convention. Hence, the consideration paid by the applicant to the overseas entities for getting the services of these employees cannot be held to be fees for technical services. In view of the above, it is not necessary to consider the question whether the service is made available to the applicant.
28. It is argued on behalf of the Revenue that the presence of the seconded employees of the overseas entities would result in a ‘service PE’ of such entities in India and that portion of the income earned by them would be taxable in India especially in the context of paragraph 2(k) of the India-UK DTAC. It is also pointed out that the applicant has not furnished adequate details or information in that regard. It is submitted that rendition of managerial services for periods exceeding the number of days specified in clause (k) of paragraph 2 of Article 5 of the Convention leads to the conclusion that there is a service PE in India for the overseas entities. It is submitted on behalf of the applicant relying on the decision of the Supreme Court in Morgan Stanley (292 ITR 416) that in the case of secondment, the question of rendition of service will not arise. The following passage from the said decision is quoted in support:
“As regards the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with MSCo the said company retains control over the deputationist’s terms and employment. The concept of a service PE finds place in the U.N. Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge.”
We see nothing in the passage quoted above, that supports the case of the applicant. What we understand the Supreme Court as having said is that if the employees continue on the payroll of the non-resident and have a lien on their jobs in the non-resident multinational, a service PE can emerge if services are rendered in India for specified periods. In fact, if we read what follows the portion quoted by the applicant, the position becomes clear. The Supreme Court has stated:
“Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstance, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there is a service PE (MSAS) under article 5(2)(1). We find no infirmity in the ruling of the AAR on this aspect.
29. We find the facts similar here. We have found in this case that the employees continue to be the employees of the overseas entities and their employer continues to be the overseas entity concerned. The employees are rendering services for their employer in India by working for a specified period for a subsidiary or associate enterprise of their employer. We are of the view that this will give rise to a service PE within the meaning of Art.5 of the India-UK Treaty, falling under Article 5.2(k) thereof.
30. In the India-Canada Convention, the corresponding provision is seen in paragraph 2(l) of Article 5. The position would, therefore, be the same regarding the overseas entity governed by India-Canada Convention.
31. In the light of the discussion as above, our ruling on question No.1 is that the payment by the applicant under the agreement would be income accruing to overseas entities in view of the existence of a service PE in India and on question No.2 is that tax is liable to be deducted at source under section 195 of the Indian Income-tax Act.
32. Accordingly, the ruling is pronounced on this, 14th day of March, 2012.
