Tribunal rules on salary costs as 'fees for technical services' in tax appeal

The Tribunal partly allowed the appeal, upholding the CIT(A)'s decision that reimbursement of salary costs constituted 'fees for technical services' (FTS) under Section 9(1)(vii) of the Income Tax Act. The assessee was held liable under Section 201 for not withholding tax on the payments. The Tribunal remitted the issue of whether the secondment of employees constituted a service Permanent Establishment (PE) back to the Assessing Officer for further examination.

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Issues Involved:
1. Legality of the CIT(A)'s order.
2. Nature of reimbursement of salary costs as 'fees for technical services' (FTS) under Section 9(1)(vii) of the Income Tax Act, 1961.
3. Assessee's liability as 'assessee in default' under Section 201 of the Income Tax Act, 1961.
4. Application of Section 44DA regarding service Permanent Establishment (PE).

Detailed Analysis:

1. Legality of the CIT(A)'s Order:
The assessee contended that the CIT(A)'s order was prejudicial and bad in law. The CIT(A) upheld the DDIT's decision that the reimbursement of salary costs to DFCL was in the nature of FTS under Section 9(1)(vii) and thus liable for TDS under Section 195. The CIT(A) concluded that the seconded employees did not have a master-servant relationship with the assessee and provided managerial and consultancy services.

2. Nature of Reimbursement of Salary Costs as 'Fees for Technical Services' (FTS):
The assessee argued that the payment to DFCL was merely a reimbursement of salaries for seconded employees, not FTS. The assessee relied on prior tribunal decisions (Mahendra and Mahendra, IDS Software Solutions, and Abbey Business Services) to support this claim. However, the CIT(A) and the DDIT determined that the seconded employees provided managerial and consultancy services, thus classifying the payments as FTS under Explanation 2 to Section 9(1)(vii).

The Tribunal referred to the terms of the secondment agreement, which indicated that the secondees were high-level managerial personnel with significant expertise. The Tribunal cited the Delhi High Court's decision in Centrica India Pvt. Ltd. v. CIT, which held that seconded employees providing managerial and consultancy services fall under the definition of FTS. The Tribunal concluded that the payments to DFCL were indeed FTS and not mere reimbursements.

3. Assessee's Liability as 'Assessee in Default' under Section 201:
The DDIT initiated proceedings under Section 201 for the assessee's failure to withhold tax on the reimbursement payments. The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee was liable to deduct tax at source under Section 195. Consequently, the assessee was treated as 'assessee in default' under Section 201(1).

4. Application of Section 44DA Regarding Service Permanent Establishment (PE):
The assessee raised an alternative argument that the secondment of employees constituted a service PE, and therefore, only the net amount after deducting expenditure should be chargeable to tax under Section 44DA. The Tribunal noted that there was no DTAA between India and Hong Kong, and the concept of service PE under Indian tax laws required further examination.

The Tribunal remitted the issue back to the AO for proper examination of whether the secondment constituted a service PE and the applicability of Section 44DA. The AO was directed to adjudicate this issue after providing an opportunity for hearing to the assessee.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, upholding the CIT(A)'s decision on the nature of payments as FTS and the assessee's liability under Section 201, while remitting the issue of service PE to the AO for further examination. The order was pronounced in the open court on 28th October 2015.

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