2012 (3) TMI 243 - AAR - Income Tax

Tax Ruling: Overseas Payments for Services Taxable in India under Income-tax Act

The ruling determined that payments made by Centrica India Offshore Private Limited (CIO) to overseas entities under a Secondment Agreement were not ... India – Canada convention – applicant being wholly owned subsidiary of UK company - outsourcing of back office support functions by overseas entities – assignment of employees of overseas entity to perform the duties at the location of the applicant for the period stipulated and to report to the applicant – salary paid by overseas entity – reimbursement of salary by applicant to overseas entity – whether reimbursement of salary to overseas entity is income accrued to overseas entity – withholding of taxes – Revenue also questioned regarding it to be FTS – Held that:- In present case, secondee employees are all rendering managerial services and there is no indication that any technical functions or consultancy functions is performed, therefore, it cannot be held to be fees for technical services.Further, employees continue to be the employees of the overseas entities and are rendering services for their employer in India by working for a specified period for a subsidiary or associate enterprise of their employer. This gives rise to a service PE within the meaning of Art.5 of the India-UK Treaty, falling under Article 5.2(k) corresponding to provision in paragraph 2(l) of Article 5 of India-Canada Convention.Hence, reimbursement of salary 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 tax is liable to be deducted at source u/s 195 Issues Involved:1. Nature of the amount paid by the applicant to the overseas entities under the Secondment Agreement.2. Tax liability and withholding tax obligations under Section 195 of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Nature of the Amount Paid by the Applicant to the Overseas Entities under the Secondment Agreement:The applicant, Centrica India Offshore Private Limited (CIO), entered into a Secondment Agreement with its overseas parent and affiliates to receive employees with specific knowledge and expertise. The applicant contended that the payments made to the overseas entities were mere reimbursements of salary costs for these seconded employees, asserting that CIO was the economic employer of these employees. The applicant argued that the seconded employees worked under its control and supervision, and the salaries were paid by the overseas entities for convenience, with CIO reimbursing these costs.However, the ruling found that the seconded employees remained employees of the overseas entities, with their salaries and benefits paid by the original employers. The right to claim salaries lay with the overseas entities, not CIO, which could only terminate the secondment agreement, not the employment itself. The ruling concluded that the payments made by CIO to the overseas entities were not mere reimbursements but compensation for managerial services provided by the seconded employees. This was determined by examining the terms of the Secondment Agreement, which highlighted the employees' continued employment with the overseas entities and their managerial roles in CIO.2. Tax Liability and Withholding Tax Obligations under Section 195 of the Income-tax Act, 1961:The Revenue argued that the payments made by CIO to the overseas entities constituted 'fees for technical services' under Section 9(1)(vii) of the Income-tax Act and similar provisions in the Double Taxation Avoidance Agreements (DTAA) with the UK and Canada. It was contended that the seconded employees rendered managerial services, which should be taxable in India.The ruling examined whether the payments fell under 'fees for technical services' as defined in the DTAAs. It was noted that the services provided by the seconded employees were managerial, not technical or consultancy services. Therefore, the payments did not qualify as 'fees for technical services' under the DTAAs with the UK and Canada.However, the ruling determined that the presence of the seconded employees in India constituted a 'service PE' (Permanent Establishment) of the overseas entities, as per Article 5.2(k) of the India-UK DTAA and Article 5.2(l) of the India-Canada DTAA. This meant that the payments made by CIO to the overseas entities were taxable in India as income accruing to the overseas entities due to the existence of a service PE.Consequently, the ruling held that the payments made by CIO to the overseas entities were subject to withholding tax under Section 195 of the Income-tax Act, 1961.Conclusion:The ruling concluded that the payments made by CIO to the overseas entities under the Secondment Agreement were not mere reimbursements but compensation for managerial services. These payments were taxable in India due to the existence of a service PE of the overseas entities. Therefore, CIO was obligated to withhold tax on these payments under Section 195 of the Income-tax Act, 1961. The ruling was pronounced on 14th March 2012.