2014 (5) TMI 154 - HC - Income Tax

Secondment of Employees by Overseas Firms to Indian Subsidiary is Taxable Under India-Canada and India-UK DTAAs Articles 12 & 13

M/s. Centrica India Offshore Pvt. Ltd. Versus Commissioner of Income Tax-I & Others

The HC held that the secondment of employees by overseas entities to the Indian subsidiary constituted the provision of technical services under Articles ... Nature of reimbursements - Technical services - Article 12 and 13 of DTAA – Service Permanent Establishment - Whether the secondment of employees by BSTL and DEML, the overseas entities, falls within Article 12 of the India-Canada and Article 13 of the India-UK DTAAs – doctrine of ‘diversion of income by overriding title’ - Held that:- The mere rendition of service is not an ‘included service’ that triggers tax liability - the enterprise must ‘make available’ the skill behind that service to the other party, i.e the Indian recipient - The definition is more restricted that in the India-UK DTAA - The service provided by the secondees is to be viewed in the context in which their secondment or deputation was necessitated - The overseas entities required the Indian subsidiary, CIOP, to ensure quality control and management of their vendors of outsourced activity - For the activity to be carried out, CIOP required personnel with the necessary technical knowledge and expertise in the field, and thus, the secondment agreement was signed since CIOP - as a newly formed company - did not have the necessary human resource. Relying upon Morgan Stanley and Co., In re [2006 (2) TMI 77 - AUTHORITY FOR ADVANCE RULINGS] - the salary is ultimately paid through the overseas entity, which is not a mere conduit - the social security, emoluments, additional benefits etc. provided by the overseas entity to the secondee, and more generally, its employees, still govern the secondee in its relationship with CIOP - It would be incongruous to wish away the employment relationship, as CIOP seeks to do today, in the face of such strong linkages - Whilst CIOP may have operational control over these persons in terms of the daily work, and may be responsible (in terms of the agreement) for their failures, these limited and sparse factors cannot displace the larger and established context of employment abroad. Reimbursement and the doctrine of diversion of income by overriding title – Held that:- Following AT&S India Private Limited, In re [2006 (11) TMI 138 - AUTHORITY FOR ADVANCE RULINGS] - The mere fact that CIOP, and the secondment agreement, phrases the payment made from CIOP to the overseas entity as ‘reimbursement’ cannot be determinative - Neither is the fact that the overseas does not charge a mark-up over and above the costs of maintaining the secondee relevant in it, since the absence to markup (subject to an independent transfer pricing exercise) cannot negate the nature of the transaction - the various factors concerning the determination of the real employment link continue to operate, and the consequent finding that provision of employees to CIOP was the provision of services to CIOP by the overseas entities triggers the DTAAs - The nomenclature or lesser-than-expected amount charged for such services cannot change the nature of the services - once it is established that there was a provision of services, the payment made may indeed be payment for services - which may be deducted in accordance with law - or reimbursement for costs incurred – thus, the ruling of AAR is upheld – Decided against Assessee. Issues Involved:1. Nature of reimbursements made by the petitioner to overseas entities under the Secondment Agreement.2. Tax liability under Section 195 of the Indian Income Tax Act, 1961.3. Determination of 'economic employer' vs. 'legal employer'.4. Definition and scope of 'fees for technical services' under the India-UK and India-Canada DTAAs.5. Existence of a Service Permanent Establishment (PE).6. Application of the doctrine of 'diversion of income by overriding title'.Detailed Analysis:1. Nature of Reimbursements:The petitioner (CIOP) argued that the reimbursements to overseas entities were purely on a cost-basis and did not constitute income. They emphasized that the seconded employees worked under CIOP's direct control and supervision, and the overseas entities only paid the salaries out of convenience. The Authority, however, ruled that the reimbursements were in the nature of income accruing to the overseas entities, as the obligation to pay the salaries rested with them, and the employees had no right to claim salaries from CIOP.2. Tax Liability under Section 195:The Authority held that the payments made by CIOP to the overseas entities under the Secondment Agreement were subject to tax deduction at source under Section 195 of the Act. This was because the payments were considered income accruing to the overseas entities due to the existence of a Service PE in India.3. Economic Employer vs. Legal Employer:CIOP contended that it was the 'economic employer' of the seconded employees, despite their legal employment with the overseas entities. They argued that the control and supervision over the employees, along with the bearing of risks and rewards, indicated an economic employment relationship. The Authority, however, found that the legal employment relationship remained with the overseas entities, as they retained the right to terminate the employment and bore the ultimate responsibility for the employees' salaries and benefits.4. Definition and Scope of 'Fees for Technical Services':The Authority examined whether the services rendered by the seconded employees constituted 'fees for technical services' under the DTAAs. It concluded that while the services were managerial in nature, they did not fall within the purview of Article 13.4 of the India-UK DTAA or Article 12.4 of the India-Canada DTAA. Therefore, the consideration paid by CIOP to the overseas entities was not deemed 'fees for technical services'.5. Existence of a Service PE:The Authority determined that the overseas entities had a Service PE in India due to the secondment of employees. This was based on the fact that the employees continued to be on the payroll of the overseas entities, and the latter retained control over their employment terms. The Authority emphasized that the secondment was not merely for convenience but involved the provision of managerial services necessary for CIOP's operations.6. Doctrine of 'Diversion of Income by Overriding Title':CIOP argued that the reimbursements were not income but were diverted by an overriding title to pay the seconded employees. The Authority rejected this argument, stating that the payments were not mere reimbursements but compensation for services rendered by the overseas entities. The doctrine of 'diversion of income by overriding title' was not applicable as the obligation to pay the salaries arose from a separate agreement between the overseas entities and the seconded employees.Conclusion:The High Court upheld the Authority's ruling, dismissing the writ petition filed by CIOP. The Court concluded that the payments made under the Secondment Agreement constituted income accruing to the overseas entities, were subject to tax deduction at source under Section 195, and that the overseas entities had a Service PE in India. The Court also found that the doctrine of 'diversion of income by overriding title' did not apply in this case.