2012 (2) TMI 550 - AT - Income Tax

Employer-Employee Relationship Established, Reimbursement Not Taxable

M/s Caterpillar India Pvt. Ltd. Versus The Deputy Director of Income-tax, International Taxation, Circle-I (I), Bangalore

The Tribunal allowed the appeal, determining an employer-employee relationship between the assessee and the expatriate employee. It held that the services ... TDS u/s 195 - Held that:- The assesseee was not liable to deduct tax from the amount representing reimbursement of the salary paid by IDS to Dr. Sundararajan while remitting the same to IDS u/s 195 of the IT Act. Issues Involved:1. Employer-employee relationship between the assessee and the expatriate employee.2. Nature of services rendered by the expatriate employee as technical services.3. Requirement of tax deduction at source (TDS) under Section 195 of the IT Act for reimbursement of salary.Issue-wise Detailed Analysis:1. Employer-employee relationship between the assessee and the expatriate employee:The assessee company contended that there existed an employer-employee relationship between it and Mr. Graham J Lythgoe, the expatriate employee deputed by Caterpillar Asia Ltd. (CAL), based on the secondment agreement. The assessee argued that Mr. Lythgoe was under its control, direction, and supervision while working in India. However, the Income Tax Officer (ITO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that the assessee company did not have the authority to terminate the employment or decide the salary of Mr. Lythgoe, indicating no direct employer-employee relationship. The Tribunal referred to a similar case, M/s IDS Software Solutions (India) Pvt. Ltd. vs. ITO, where it was held that the secondment agreement constituted an independent contract of service, making the assessee company the economic employer during the relevant period. The Tribunal concluded that the facts of the present case were identical and thus, the assessee company should be considered the employer of Mr. Lythgoe.2. Nature of services rendered by the expatriate employee as technical services:The ITO held that the services rendered by Mr. Lythgoe were in the nature of technical services as defined under Explanation-2 to Section 9(1)(vii) of the IT Act, which includes managerial, technical, or consultancy services. The CIT(A) upheld this view. However, the Tribunal, referencing the case of IDS Software Solutions, noted that the secondment agreement's clauses indicated an employer-employee relationship rather than a contract for providing technical services. The Tribunal highlighted that the duties outlined in the secondment agreement made the expatriate employee responsible and subservient to the assessee company, which would not be typical in an agreement for rendering technical services. Therefore, the Tribunal did not consider the payment as fees for technical services.3. Requirement of tax deduction at source (TDS) under Section 195 of the IT Act for reimbursement of salary:The ITO argued that the reimbursement of salary to CAL required TDS under Section 195 of the IT Act, as it was considered fees for technical services. The assessee contended that TDS had already been deducted under Section 192 on the salary paid to Mr. Lythgoe in India, and thus, no further TDS was required under Section 195. The Tribunal, following the precedent set in the IDS Software Solutions case, held that since the salary was subject to TDS under Section 192 and paid to Indian tax authorities, the reimbursement to CAL did not attract TDS under Section 195. The Tribunal concluded that the assessee was not liable to deduct tax on the reimbursement amount.Conclusion:The Tribunal allowed the appeal filed by the assessee, holding that there existed an employer-employee relationship between the assessee and Mr. Lythgoe, the services rendered were not technical services, and the reimbursement of salary did not require TDS under Section 195 of the IT Act. The order of the CIT(A) confirming the ITO's decision was overturned.