Case Law Details
ITO Vs Petroleum India International (ITAT Mumbai)
ITAT Mumbai held that reimbursement of Indian salary and other benefits to the member companies by PII pertaining to all seconded personnel, technical personnel whether posted in India or overseas is not fee for technical services within the ambit of definition of explanation 2 to section 9(1)(vii) of the Act. Hence, TDS not deductible.
Facts- The assessee M/s. Petroleum India International (PII) is an Association Of Persons (AOP) and is assessed as such having main object and activity is to provide technical expertise in the field of oil exploration and refinery. PII has been rendering the aforesaid services by marketing its capabilities through various foreign agents and through direct marketing efforts and when receives enquiries from foreign clients for rendering technical/consultancy services and training it approaches its member companies for locating expert technical personnel who possess specialized knowledge, expertise and experience for the purpose of enquiry raised. For the secondment of such employee by the member/employer company PII is to compensate the member employer company for all expenses incurred by it towards the Indian salary and other benefits of such employees during the period of secondment.
The AO noticed that mostly these payments are made to the secondee who are non-resident and as per section 195 any person responsible for paying to the non-resident other than a company in some chargeable under the provisions of Income Tax Act, 1961.
AO that since the member companies are providing experts to PII for rendering technical services for which assessee is also making payment to member companies on which TDS is deductable under section 194J of the Act but the assessee has failed to deduct any TDS from the above payment.
CIT(A) deleted the demand by accepting the appeal. Being aggrieved, revenue has preferred the present appeal.
Conclusion- Held that member employer company deducts tax at source under section 192 of the Act from the Indian salary of such employee as they continue to get their salary from his employer member companies. Member companies have also continued to deduct statutory deduction like PF, tax, ESI from his salary paid by the member company. Since expert employees continued to get the salary from the member companies during the period of secondment their employer employee relationship continues even during the period of secondment. Moreover, member company in its books of account does not consider the reimbursement by PII as an item of income but the same is credited to the salary of account and as such the Ld. CIT(A) has rightly reached the conclusion that explanation 2 to section 9(1)(vii) is not attracted.
The Ld. CIT(A) has also taken into consideration affidavit dated 28.08.2000 executed by executive chairman of PII wherein it is duly discussed the issue as to reimbursed expenses to employees deputed outside India by various Indian companies eg. Tata Infotech, State Bank of India, Systime, Bank of Baroda, Engineers India Limited, Tata Consultancy Services etc. who are paying such allowances to the employee deputed outside India but are not deducting tax at source on allowance paid in foreign currency to their personnel and all those personnel who are sent to overseas also draw an Indian salary component as a whole.
Held that we are of the considered view that the Ld. CIT(A) has rightly held the assessee not in default under section 201(1) read with section 201(1A) of the Act, hence aforesaid appeals filed by the Revenue are hereby dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
Since common question of law and facts have been raised in these inter-connected appeals, the same are being disposed of by way of composite order to avoid repetition of discussion.
2. The appellant, ITO, TDS-III (3), Mumbai (hereinafter referred to as ‘the Revenue’) by filing the present appeals, sought to set aside the impugned order dated 18.10.2000 passed by Commissioner of Income Tax (Appeals), Mumbai [hereinafter referred to as the CIT(A)] qua the assessment year 1996-97, 1997- 98 & 1998-99 on identically worded grounds except the difference in figures of demand raised by the Assessing Officer (AO) under section 201(1) & 201(1A) inter-alia that (grounds are taken from ITA No.5912/M/2000 for A.Y. 1996-97):-
“(i) On the facts and the circumstances of the case and in law, the learned CIT(A) has erred in deleting the demand raised by the Assessing Officer as 201(1) and u/s 2011A) of the LT. Act 1961 amounting to Rs. 2,71,82,318/-
(ii) On the facts and the circumstances of the case and in law, the learned CTT(A) has creed in holding that the assessee has not committed any default for non-deduction of tact at source us 1943 and us 195 of the LT. Act with regard to payment by way of reimbursement to member companies, allowances paid to resident and non-resident personnel and payment to foreign agents The learned CIT(A) further erred in holding that the assessee cannot be held to be “deemed to be in default” u/s 201(1) and w/s 201(1A) of the IT. Act, ignoring the following facts
(a) That the reimbursement of Indian Salary and benefits to members company is termed as fees for technical services as per explanation 2 to Sec 91xvm) of the LT. Act. The tax is, thus, deductible at source therefrom u/s 1941 of 1.T. Act
(b) That the payment made to secondees by the assessee, who are resident, the tax is deductible at source as per Sec. 194J of the I.T. Act.
(c) That the payment made to secondees by the assessee who are non-resident, tax is deductible at source as per provisions of Sec. 195 since the payment is chargeable to income tax under Sec. 5(2)(b) of the 1.T. Act.
(d) That the payment made to foreign agents for services constitutes income deemed or accrued or arise in India as per Sec. 9(1)(1) of the LT. Act. Therefore, TDS is deductible on such payments u/s 195 of the IT. Act.
(iii) The Appellant prays that the order of the CTT(A) on the above grounds be set aside and that of the Assessing Officer restored.
(iv) The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
3. Briefly stated facts necessary for consideration and adjudication of the issues at hand are : assessee M/s. Petroleum India International (PII) is a consortium of 10 public sector companies under the auspices of Ministry of Petroleum and Natural Gas, Government of India, being into the business of petroleum, petro chemicals and allied petroleum business activities. PII is an Association Of Persons (AOP) and is assessed as such having main object and activity is to provide technical expertise in the field of oil exploration and refinery. PII has been rendering the aforesaid services by marketing its capabilities through various foreign agents and through direct marketing efforts and when receives enquiries from foreign clients for rendering technical/consultancy services and training it approaches its member companies for locating expert technical personnel who possess specialized knowledge, expertise and experience for the purpose of enquiry raised. When the assessee chooses the appropriate person the member companies sent their experts (employees) for the project undertaken by the PII which is done vide “secondment letter”. Para 6 of the “secondment letter” says that it is issued by the member companies to the secondee that while on deputation the employee would continue to be employee of the member company thus will continue to maintain lien on his posting and on satisfactory completion of his assignment would revert to his original position with member company. The employee also maintains his seniority with the member company and within the member company and given his due promotion even as he performs duties of his assignment while on segment. During the period of his secondment all the statutory obligations for provident fund contribution, gratuity etc. continued to be deducted by the member companies and after such deduction the member companies continue paying salaries to the seconded personnel in discharge of their obligation to its employees during the period of secondment. The foreign allowance and the food and out of pocket expenses to be paid to the employees are also specified in the letter of assignment issued by the member employer company. For the secondment of such employee by the member/employer company PII is to compensate the member employer company for all expenses incurred by it towards the Indian salary and other benefits of such employees during the period of secondment.
4. During his tenure abroad the secondee continues to draw his present salary from member companies where he is employee and the member companies credits secondee’s Indian bank account with the amount of salary in Indian Rupees. But over and above this secondee is entitled to foreign allowance and living allowance in foreign exchange which is directly paid to him by the assessee but no TDS is deducted on the plea that there is no employer employee relationship between the payer i.e. PII and the payee i.e. secondee because secondee continues to remain in the employment of the member company during his tenure abroad.
The AO noticed that mostly these payments are made to the secondee who are non-resident and as per section 195 any person responsible for paying to the non-resident other than a company in some chargeable under the provisions of Income Tax Act, 1961 (for short ‘the Act’) which at the time of credit to the same account of the payee at the time of payment whichever is earlier, deduct income tax thereon at the rate in force. The AO has taken the view that even if we accept the assessee’s plea that the said payment does not fall under the head “salary” TDS has to be deducted under section 195 of the Act. Because the said amount is definitely chargeable to income tax under the charging provisions under section 5(2)(b) of the Act. The AO also relied upon one CBDT circular 152 dated 27.11.1974. The AO also observed that where a person responsible for paying any sum to a non-resident considered that the whole amount thereof would not be income chargeable under Income Tax Act in the case of recipient non-resident he may make an application under section 195(2) to the ITO for determination of the proper operation of such payment which would be taxable under the Act. Since the assessee has failed to deduct TDS under section 195 of the Act he is deemed to be an assessee in default under section 201(1) of the Act in respect of the sum specified in annexure-1, annexed with common order passed in all the aforesaid assessment years with different annexures.
6. It is also observed by the AO that since the member companies are providing experts to PII for rendering technical services for which assessee is also making payment to member companies on which TDS is deductable under section 194J of the Act but the assessee has failed to deduct any TDS from the above payment and as such liable to be treated as person deemed to be an assessee in default under section 201(1) of the Act. The assessee is also making payment to various foreign agents for getting various services as per the agreement entered into with them and as per provisions of section 9(1) of the Act such payment constitutes income deemed or arise in India in the hands of payees. Consequently TDS is deductable on such payment under section 195 of the Act. Consequently the assessee is deemed to be assessee in default under section 201(1) of the Act to the tune of Rs.2,54,10,239/-, 2,28,76,323/-, 2,40,00,619/- for A.Y. 1995-96, 1996-97 & 1997-98 respectively
7. The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has deleted the demand by accepting the appeal. Feeling aggrieved with the impugned orders passed by the Ld. CIT(A) the Revenue has come up before the Tribunal by way of filing present appeals.
8. We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.
9. Undisputedly member companies have provided expert personnel to PII/assessee for rendering technical services for which the assessee is also making payment to the member companies. It is also not in dispute that the AO by invoking the provisions contained under section 9(1) of the Act, explanation 2 treated the same as fee for technical services. It is also not in dispute that as per agreement between PII and overseas clients PII is receivable for providing technical services to the overseas clients for which it may call upon member companies to depute an employee to fulfill the required job. It is also not in dispute that there is no privity of contract between the member companies and overseas industrial units. It is also not in dispute that member companies in order to provide these services are fully reimbursed by PII. It is also not in dispute that member employer company deducts tax at source under section 192 of the Act from the Indian salary and benefits paid by it to the employee and the employees have continued to get their salaries from his employer member companies. It is also not in dispute that statutory deductions like PF, tax, ESI and all other deductions are made from their salaries paid by the member companies, so during the period of secondment, no employer employee relationship between the member companies and the seconded personnel continues. It is also not in dispute that member company in its books of account does not consider reimbursement by PII as an item of income but the same is credited to the salary account.
10. We have perused the impugned order passed by the Ld. CIT(A) who has duly thrashed the issues raised and decided by the AO against the assessee in the light of the statutory provisions and law applicable thereto by returning following findings:
“After due consideration of all the material on record, I would like to take up each relevant issue one by one.
(I) PAYMENT TO MEMBER-COMPANIES:-
7. The I.T.O. has stated that since the member companies are providing personnel to PII for rendering technical services for which the appellant is also making payment to member companies, TDS was deductible u/s. 194J of the I.T.Act. This is because, in this view, the definition fees for technical services given in Explanation (2) below section 9(1) of the I.T.Act says that fees for technical services means any consideration for rendering managerial and technical consultancy services or for providing services of technical or managerial personnel.
7.2 As per the agreement on record between the PII and overseas clients, it is PII who is the person responsible for providing the technical services to the oversea clients. It may discharge its obligations by calling upon the member company to depute an employee who fulfills the job requirements. There is no privity of contract as such between the member employer company and the overseas industrial unit. Considering the arrangement between the member company as a whole, it appears that the member companies have agreed as a part of their obligation under the MOU to place at the disposal of the appellant on a no profit basis employees required by the appellant to fulfil its contractual obligation to the overseas clients. The member company obviously would not like to be out-of-pocket for providing this service and, accordingly, are to get fully reimbursed by the PII. In view of the facts mentioned above, it is not correct to say that member-companies are rendering technical services to PII. This finding is contrary to all the facts on records.
7.3 Now let us discuss the provisions of section 9(1)(vii) which deals with income by way of fees for technical services and section 194J ‘fees for technical services’. As per Clause (b) to the Explanation below section 194J, read with Explanation (2) below section 9(1)(vii) of the Act means any consideration for the rendering of any managerial, technical or consultancy services including the provision of services of technical or other personnel. The member company does not render any managerial, technical or consultancy services to PII for which it receives any consideration. It is not receiving consideration for providing to the PII the services of its employees but it is being reimbursed by the PII for the salary it has to pay to the employee, during the period he is deputed on PII’s assignment with the foreign organisation. Here, I would like to state that I agree with the opinion of Shri Sohrab E. Dastur at page-9 of his opinion. I agree that the reference to including the provision of service of technical or other personnel means the provision of service of technical personnel which results in the rendering of service by the member company to the appellant. what Explanation 2 to section 9(1)(vii) provides is that one of the modes of rendering technical service is to provide the services of technical or other personnel. It must be as a part of rendering service that service of technical personnel is provided. It is not something independent of rendering of technical services because, then, instead of the word ‘including’ the word ‘and’ would have been, used, i.e., the provision of the services of technical personnel is an independent item and not related to the rendering of technical services. If, for example, a third party has agreed with the PII to render technical services by providing to PII the services of technical personnel for which it is to receive a fee it would come within the ambit of ‘Fees for Technical Services but not where a member of a consortium as a part of its obligation under the agreement deputes its employee on a reimbursement basis. Further the reimbursement by the PII is not an independent passage of income to the member employer company but the reimbursement of expenditure incurred, as it were, by the member-exmployer company for enabling the PII to discharge its obligation. It has to be mentioned here that the member employer company deducts tax at source u/s. 192 of the Act from the Indian salary and benefits paid by it to the employee, as the employee has continued to get his salary from his employer member company. Additionally, the statutory deductions like Provident Fund, Tax, ESIS, and all other deductions are made from his salary paid by the member-company. Salary paid by the member-company during the period of secondment, the employer-employee relationship between the member-company and the seconded personnel continues. It has also to be mentioned here that member- company in its books does not consider the reimbursement by PII as an item of income but the same is credited to the salary account.
7.4 Keeping in view all the facts of the case and discussion above, I am of the opinion that Income-tax officer was not correct in law in holding that the reimbursement of Indian salary and other benefits to member-companies by PII concerning all seconded personnel, technical as well as managerial whether posted in India or overseas, is fees for technical services within the meaning of ambit of the definition of the said expression in Explanation 2 to section 9(1)(vii). The appellant, therefore, cannot be held to be an assesses in default for this purpose.
8. PAYMENT TO RESIDENT SECONDEES:–
The I.T.O. in his order under appeal has contended that ‘payments made to secondees who are resident, the tax should be deducted at source as per section 1943 of the I.T.Act’.
8.2 At the outset, it must be mentioned that the scope of PII operations as per the MOU is only outside India. Reference of payment to resident secondees has, therefore, to be understood as payment to secondees who were abroad for less than 182 days. The issue as a whole is in respect of foreign and living allowances paid by the appellant directly to the employees of the member employer company who were deputed by the said a member employer company for carrying out the contract entered into by the appellant with the overseas industrial unit. Payment of such allowances falls in two groups, the first group is payment of such allowances to persons who were resident in India as per section 6(1) of the Act, but were working abroad. These would be cases of persons who went abroad for work but during the relevant previous year were resident in India on account of their having met the prescribed condition of residence in India. According to the 1.7.0. tax ought to have been deducted u/s. 194J of the Act in respect of such allowance paid by the appellant pursuant to the deputation letter issued by the member-employer company to the employee. The only difference between this payment and what has already been discussed earlier, namely, reimbursement to the member employer company of the salaries paid by them to the employee, is that in the earlier case there is a reimbursement to the member-employer company and in the latter care there is a direct payment to the employee instead of the payment by the member employer company to the employee and the subsequent reimbursement thereof. For the reasons discussed above in relation to the first issue, it has to be held that provision of section 194J of the Act are not applicable and there was no liability on the appellant to deduct tax at source. In addition to what has been discussed above and even after assuming that this reimbursement was indeed an income in the hands of the secondees it remains a fact that the same could be chargeable only under head salaries and cannot be considered under any other heads of total income or income not considered to be a part of the total income. Considering that the allowance in question only can be considered as part of salary, the issue as to who is the person responsible for paying u/s. 204 of the I.T.Act has also to be considered. Section 204 clearly defines the meaning of ‘person responsible for paying’, with reference to salaries, as the ‘employer’. As already discussed, there was no employer- employee relationship between the PII and the secondees and, hence, PII cannot be considered as the person responsible for paying.
9. Before parting with this issue, I would like to mention Gujarat High court decision in CIT vs. Link 244 ITR 93 wherein it has been held that the living allowance paid to employee is not a personal advantage and therefore does not constitute Perquisite which can be subjected to tax.
10. The appellant, therefore, cannot be held to be an assesse in default for its failure to deduct tax from the payment to resident secondees.
11. PAYMENT TO NON-RESIDENT SECODEES-
The I.T.O. in his order under appeal has contended that on payment made to the secondees who are non-resident, tax should be deducted at source as per section 195 since the payment is chargeable to Income-tax under the charging section 5(2)(b) of the Income-tax Act, 1961. According to the 1.7.0, the income has accrued to the secondees as a result of offer made in India by the Indian concern (member company) and accepted by the secondees in India and the payment has also been made by a concern situated in India. The 1.7.0, has also claimed that the appellant acquires the right to receive the income hence without actual receipt of the same, the income can be said to accrue to him though it may be received later, on its being ascertained. He, further, states that section 195 imposes a statutory obligation on any person responsible for paying to a non-resident, any interest (not being “interest on Securities”) of any other num (not being dividend) chargeable under the provision of the Income-tax Act, to deduct income tax at the rates in force, unless he is himself liable to pay income tax thereon as an agent. He, accordingly, concluded that since the appellant has failed to deduct tax under section 195 of the Act, he is deemed to be an assessee in default u/s. 201 (1) of the I.T. Act in respect of such sums.
11.2 We have already discussed the question of payment of foreign and living allowances to the employees who at the relevant time of payment were resident in India. The only difference is that in those cases the allowances were paid to the employees when they satisfied the condition of being resident in India and in the present case we have to consider where the employee is non-resident.
11.3 Section 195 applies where the sum in question is chargeable under the provision of the Act. In other words, the recipient must be liable to be taxed in respect of the sum so received. Under section 5(2) of the Act, a non-resident is chargeable to tax under the Act in respect of the income received or deemed to be received in India and income which accrues or arises or is deemed to accrue or arise in India during the year. Admittedly the allowances in question were not received nor deemed to be received in India. The service in respect of which the allowances in question were paid were rendered by the non-resident employees outside India. It is the rendering of the service which results in the accural of income. The work which results in the receipt of an allowance has been done outside India. Accordingly, the allowance cannot be regarded as accruing in India.
11.4 Another related issue here is as to the head under which the income would be chargeable in the hands of the recipient. Section 9(1)(11)of the Act clarifies that the income chargeable under the head “Salaries” will be deemed to accrue in India if it is earned in India and the Explanation thereto, provides, for the removal of doubts, that income of the nature of salaries payable for services rendered in India x shall be regarded as income earned in India. It follows from the Explanation that where the service is rendered outside India, the salary would not be regarded as accruing or deemed to accrue in India. As the amount does not accrue or arise nor is received in India and is also not deemed to accrue or arise or to be received in India, it would not constitute a sum chargeable under the provisions of the Act, and, accordingly, section 195 of the Act will not apply.
11.5 In the submissions made by the appellant and in the affidavit filed by the Executive Chairman of PII, it has been stated that payment towards living allowance/foreign allowance on behalf of the member companies, to the secondee is towards reimbursement of living expenses, while fulfilling the duties of their assignment while on secondment oversees. It has also been submitted that average reimbursement paid to the secondees on a daily basis does not exceed US$ 75, which is well within the guidelines of R.B.I. and Ministry of External Affairs. This reimbursement, therefore, cannot be viewed as an income or perquisite or a payment amounting to personal advantage. (CIT . H. LINK (supra).
11.6 Even assuming that this reimbursement was indeed an income in the hands of the secondees, the same could only be considered under the head ‘salaries’ and cannot be considered under any other head of income. It is because it springs from the contract of employment and is payable there under, as, specifically stated in the letter issued by the member employer seconding the employee and it is only the obligation of the employer member company which is being discharged by the appellant. It may be stated here that income chargeable under the head ‘salaries has specifically been excluded from the provision of section 195.
11.7 Even at the risk of repetition it has to be mentioned that as the allowances in question could have only been considered as part of salary, the issue of ‘person responsible for paying has to be considered. As already discussed, there was no employer employee relationship between PII and secondees and, therefore, PII cannot be considered as the person responsible for paying.
11.8 It has, therefore, to be held that I.T.O. is not correct in law in holding that the foreign allowances, food and out-of- pocket expenses paid to non-resident secondée was chargeable to tax in India u/e. 5(2)(b) of the I.T.Act. The appellant, therefore, cannot be held to be an assessee in default for this purpose.
12. PAYMENTS TO FOREIGN AGENTS :-
I.T.O. in his order has stated as under-
“The assessee is also making payment to various foreign agencies for getting various services as per the agreement entered with them and as per the provisions of section 9(1) of the I.T.Act, such payment constitutes an income deemed or accrue or arise in India in the hands of payees.”
Therefore, T.D.S. is deductible on such payment u/s. 195 of the I.T.Act.
12.2 Various services have been rendered by the agents under agreements to the appellant, outside India. This included providing investment and other cost estimates, to provide market intelligence, to arrange for arrival and departure including local transport, hotel and bookings for personnel deputed from India, arrangement of accommodation, automobile, medical insurance for the seconded staff, providing office facilities and secretarial assistance and informing the appellant of relevant local laws, maintaining liaison with clients of the appellant etc. The TDS officer has taken the view that the payment made by the appellant under the agency agreements attracts the provisions of section 195 and the appellant should have deducted x tax at source. The question which is to be decided here is whether the amount receivable by the agent would be chargeable to tax in India. The agents are performing their services wholly outside India and the services which give rise to the earning or remuneration by them are performed in their respective foreign countries. A perusal of all the agreements makes it very clear that foreign agents do not perform any operation within India. No part of the said payment, therefore, can be regarded as chargeable to tax in India. Section 9(1)(i) of the Act deems income accruing or arising through or from any business connection in India to be income accruing or arising in India. Clause (a) of the Explanation clarifies that in the case of a business of which all the operations are not carried out in India, the income of the business deemed to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. In the case of the appellant, it cannot be said that there is any business connection in India between the agent and the appellant. The agent does not perform any operations in India. No part of the sum payable by the appellant can, therefore, be regarded as arising in India so as to be chargeable to tax in India. There was, therefore, no obligation on the appellant to deduct tax at source from the payments.
12.3 Appellant’s reliance on the C.B.D.T’s Circular No. 786 dated February 7, 2000, even though issued subsequently, appears to be correct. The said circular clearly clarifies that T.D.S. should not be deducted on payment of commission to foreign agent who do not have any permenant establishment in India. The said circular clearly mentions that “where the non-resident agent operates outside the country, no part of his income arises in India.” In the facts and circumstances of the case mentioned above, it has, therefore, to be held that no tax was deductible under sec. 195 from the payment made to foreign agents and the appellant, therefore, cannot be held to be an assessee in default for its failure to deduct tax.
13. I would now like to discuss some of the case laws relied upon by the I.T.O. He has mentioned the decision of the Madras I.T.A.T. in the case of Florind Shoes Ltd. Va. I.T.O. (40 ITD 28) by only reproducing an extract from the decision, without showing how the same would apply to the appellant’s case. A correct reading of the Gujarat High Court judgment in H.Link’s case would show that there was no personal advantage to the recipient of the living allowance and, therefore, such allowance cannot be treated as a perquisite and consequently, there would be no question of TDS from such allowance. The I.T.O. appears to have pre-concluded that there was a default by the appellant as regards the TDS obligation without ascertaining that in respect of such allowance, the appellant was not under any obligation to deduct tax at source for more than one reason as discussed earlier.
13.2 He has also drawn my attention to the decision of the Calcutta High Court in the case of British Airways V. CIT (193 ITR 439). In this decision, the Hon’ble Calcutta High Court in addition to other things held that the person responsible for paying the salary of an employee was the employer himself. It Log only means that there is an obligation to deduct tax at source from the allowance given to the secondees but in terms of this decision itself, the person responsible for making payment is the employer. The said decision, in fact, supports the case of the appellant as the appellant is not an employer of a secondee. Here, I would like to mention the decision of the Kerala High Court in the case of CIT Vs. G. Eroppino Giovanni (196 ITR 618). In this decision it has been held that there was no employer- exployee relationship between the payer and payee and, therefore, the payee being the third party could not enforce his right against the payer. As already diseased, seconded personnel cannot enforce their right regarding the foreign allowance against the appellant since their entitlement to the foreign allowance arises from the secondment letter issued to them by their employer member companies who undertook the obligation to pay the foreign allowance to the seconded personnel.
13.3 Before I part with the care, I would like to make a mention of the affidavit and letter dated 29-8-2000 from the Executive Chatman of PII. In addition to various issue this letter has thrown light on the issue of reimbursed expenses to employees deputed outside India by various Indian Companion. It has been stated that many Indian companies e.g. Tata Infotech, State Bank of India, Systime, Bank of Baroda, Engineers India Limited, Tata Consultancy Services, etc. who are paying such allowances to employees deputed outside are not deducting tax at source on allowance paid in foreign currency to their personnel. In almost all these cases all the personnel who are sent to overseas also draw an Indian salary component as well.
13.4 To sum up, in the facts and circumstances of the case discussed above, I am of the opinion that the appellant has not committed any default of non-deduction of tax at source u/s.1943 and 195 with regard to payments made to enter companies, payment of allowances in foreign exchange towards living expenses to seconded employees, whether resident or non-resident, and payment to foreign agents. The appellant, therefore, succeeds on all grounds. It, therefore, cannot be held to be deemed to be an assesses in default under section 201 (1) read with section 291 (1A) of the I.T. Act.
14. In the result, appeal is allowed.”
13. In the light of the aforesaid undisputed facts the Ld. CIT(A) reached the conclusion that reimbursement of Indian salary and other benefits to the member companies by PII pertaining to all seconded personnel, technical personnel whether posted in India or overseas is not fee for technical services within the ambit of definition of explanation 2 to section 9(1)(vii) of the Act and as such the assessee is not in default for that purpose.
14. Similarly the Ld. CIT(A) after thrashing the facts qua payment made to resident secondees that since the PII operation as per MOU is only outside India and payment to the secondees were made who worked abroad for less than 182 days, has rightly unsettled the proposition mooted out by the AO that tax ought to have been deducted under section 194J of the Act qua such allowances paid by the assessee pursuant to the deputation issued by the member employer company to the employee.
15. First of all the Ld. CIT(A) has rightly overturned the findings returned by the AO that factum of providing expert personnel of member company to PII for rendering technical services TDS was deductable under section 194J of the Act by relying upon the provisions contained in the Explanation 2 of section 9(1) of the Act by treating the same as fee for technical services on the ground that as per agreement on record between PII and overseas clients it is assessee/PII who is responsible for providing the technical services to the overseas clients and there is no privity of contract between member employer company and the overseas industrial units.
16. Moreover under MOU member companies have placed its employee at the disposal of PII on a net profit basis and employee to fulfill its contractual obligation to the overseas clients. Moreover, member companies have not incurred anything out of pocket for providing these services rather they are fully reimbursed by PII. So we are in agreement with the Ld. CIT(A) that member companies are not rendering technical services to the PII.
17. Moreover, member employer company deducts tax at source under section 192 of the Act from the Indian salary of such employee as they continue to get their salary from his employer member companies. Member companies have also continued to deduct statutory deduction like PF, tax, ESI from his salary paid by the member company. Since expert employees continued to get the salary from the member companies during the period of secondment their employer employee relationship continues even during the period of secondment. Moreover, member company in its books of account does not consider the reimbursement by PII as an item of income but the same is credited to the salary of account and as such the Ld. CIT(A) has rightly reached the conclusion that explanation 2 to section 9(1)(vii) is not attracted.
18. In respect of the payment made to secondees who are residents, the AO reached the conclusion that the tax should be deducted at source under section 194J of the Act. It is undisputed fact that the assessee directly paid foreign and living allowances directly to the employees of the member employer company who were deputed for carrying out the contract entered into between the assessee with overseas industrial units.
19. The Ld. CIT(A) decided this issue by taking into consideration the fact that such secondees to whom payment was made remained abroad for less than 182 days and the Ld. CIT(A) has rightly analysed the payment in two parts. (1) payment of such allowances made to employees who were residents in India as per section 6(1) of the Act but were working abroad and the payment made to them at the most can be considered as part of the salary and when there is no employee employer relationship between PII and secondees, PII cannot be held responsible for making payment by virtue of section 204 of the Act. The Ld. CIT(A) has also rightly relied upon the decision rendered by Hon’ble Gujarat High Court in case of CIT vs. H Link (supra) that living allowance paid to the employees is a personal advantage and therefore does not constitute pre-requisite which can be subjected to tax. So the tax was not required to be deducted from the payment made to the secondees who were resident under section 194J of the Act as has been rightly decided by the Ld. CIT(A).
20. Furthermore, the Ld. CIT(A) has also thrashed the issue at length as to making payment to non-resident secondees. It was case of the AO that tax was required to be deducted at source under section 195 on payment made to the secondees who are non residents as the income has accrued to them as a result of offer made in India by the Indian concern (member company) and accepted by the secondees in India and the payment has also been made by the concern situated in India.
21. The Ld. CIT(A) has rightly reached the conclusion that the foreign allowances, food and out of pocket expenses paid to non resident secondees was not chargeable to tax under section 5(2)(b) of the Act. Because there was no employer employee relationship between PII and secondees and that the services in respect of which allowances in question paid were rendered by the non-resident employee outside India. So we find no ground to interfere into the findings returned by the Ld. CIT(A).
22. So far as question of making payment to foreign agents subjected to TDS under section 195 of the Act by the AO is concerned, the Ld. CIT(A) has rightly reached the conclusion that tax was not required to be deducted by the assessee under section 194J of the Act in respect of the payment made to foreign agents on the ground inter-alia that there was no business connection in India between the agents and the assessee nor the agent has performed any job/operation in India; that there was no employer employee relationship between the payer and the payees and therefore payee being the third party cannot enforce his right against the payer. The Ld. CIT(A) has also taken into consideration affidavit dated 28.08.2000 executed by executive chairman of PII wherein it is duly discussed the issue as to reimbursed expenses to employees deputed outside India by various Indian companies eg. Tata Infotech, State Bank of India, Systime, Bank of Baroda, Engineers India Limited, Tata Consultancy Services etc. who are paying such allowances to the employee deputed outside India but are not deducting tax at source on allowance paid in foreign currency to their personnel and all those personnel who are sent to overseas also draw an Indian salary component as a whole.
23. So in view of what has been discussed above, we are of the considered view that the Ld. CIT(A) has rightly held the assessee not in default under section 201(1) read with section 201(1A) of the Act, hence aforesaid appeals filed by the Revenue are hereby dismissed.
Order pronounced in the open court on 31.03.2023.
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