Expenses for seconded employees under secondment agreements aren't fees for technical services under Section 195 TDS rules

The HC held that expenses reimbursed by the assessee for hotel, travel, and salaries of seconded employees under a secondment agreement do not qualify as fees for technical services and are not subject to TDS under Section 195. The secondment agreement was deemed an independent contract of employment, with the assessee exercising control and supervision over the employees, effectively making the assessee their employer. Consequently, reimbursement payments to the non-resident enterprise were not liable for tax deduction at source under Section 195. The court's decision favored the assessee, aligning with precedent from the Delhi HC in a similar matter involving salaries paid to foreign technicians.

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Issues Involved:

1. Whether the assessee can be held as 'assessee in default' under Section 201(1) of the Income Tax Act, 1961.
2. Whether the assessee can be held as 'assessee in default' under Section 201(1A) of the Income Tax Act, 1961.
3. Whether the payments made by the assessee to Abbey National Plc, UK are liable for deduction of TDS under Section 195 of the Income Tax Act, 1961.
4. Whether the payments made by the assessee to Abbey National Plc, UK can be categorized as 'fees for technical services' under Section 9(1)(vii) of the Income Tax Act, 1961 and Article 13(4)(c) of the India-UK Double Taxation Avoidance Agreement (DTAA).

Issue-wise Detailed Analysis:

1. Assessee in Default under Section 201(1):

The tribunal held that the assessee cannot be treated as 'assessee in default' under Section 201(1) of the Act. The High Court upheld this view, noting that the assessee had entered into a secondment agreement for securing services to assist in its business. The expenses incurred by the seconded employees, which were reimbursed by the assessee, were not liable to deduction of tax at source and could not be considered as 'fees for technical services'. The court emphasized that the seconded employees worked under the control, direction, and supervision of the assessee, and thus, the assessee was treated as the employer for all practical purposes. Therefore, there was no obligation to deduct tax at source on these payments.

2. Assessee in Default under Section 201(1A):

The tribunal also quashed the order levying interest under Section 201(1A) of the Act. The High Court agreed, stating that since the payments made by the assessee were not liable for deduction of tax at source, the assessee could not be held as 'assessee in default' under Section 201(1A). The court reiterated that the secondment agreement constituted an independent contract of services in respect of employment with the assessee, and the payments made were not for technical services but were reimbursements of costs incurred by a non-resident enterprise.

3. Liability for Deduction of TDS under Section 195:

The tribunal held that the payments made by the assessee to Abbey National Plc, UK were not liable for deduction of TDS under Section 195 of the Act. The High Court supported this finding, noting that the payments were reimbursements for expenses incurred by the seconded employees and not for technical services. The court highlighted that there is no obligation in law for deduction of tax at source on payments made for reimbursement of costs incurred by a non-resident enterprise. Therefore, the amount paid by the assessee was not subject to TDS under Section 195.

4. Categorization as 'Fees for Technical Services':

The tribunal found that the payments made by the assessee to Abbey National Plc, UK could not be categorized as 'fees for technical services' under Section 9(1)(vii) of the Act and Article 13(4)(c) of the DTAA. The High Court agreed, stating that the seconded employees were engaged in assisting the assessee in its business and were under its control and supervision. The court distinguished the case from the decision in M/s. Centrica India Offshore Pvt. Ltd., where the issue involved was whether the secondment of employees constituted a service permanent establishment. In the present case, the issue of permanent establishment was not involved, making the Centrica decision inapplicable.

Conclusion:

The High Court concluded that the substantial questions of law framed were answered against the revenue and in favor of the assessee. The appeal was dismissed, upholding the tribunal's decision that the assessee was not liable to deduct tax at source on the payments made to Abbey National Plc, UK, and could not be treated as 'assessee in default' under Sections 201(1) and 201(1A) of the Act.

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