TaxTMI 
TaxTMI 
2009 (1) TMI 363
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....the paper book filed by the assessee and we shall notice the important terms thereof. The preamble narrates that the assessee is desirous of securing the services of managerial personnel to assist it in its business and that IDS, in order to assist the assessee in the conduct of its business "has agreed to second one of its employees to IDS India" upon the terms set out in the agreement. Article I of the agreement stated that IDS has agreed to second one employee to the assessee during the secondment period which was to commence from 19th Aug., 2005 and end on 31st Dec, 2007. Article II which is titled "Duties and Obligations" lists the obligations of IDS. This article requires the employee to be seconded to "act in accordance with the reasonable requests, instructions and directions of IDS India". The seconded employee was "reportable and responsible" to the assessee company and was required to devote the whole of his time, attention and skills to the duties required by the secondment arrangement. Clause (D) of the article stipulated that the assessee shall have the right at any time to approve or reject the employee chosen for secondment and if necessary, to request IDS to replac....
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....poses. 3. On 7th June, 2005 i.e., a little above two months earlier, a letter was written by one Nicholas P. Somers who was a member of the board of directors of IDS, the US company to one Dr. Srikanth Sunderarajan, a copy of which is placed at pp. 12 and 13 of the paper book. The gist of the letter is as follows: (a) Dr. Sunderarajan was being offered employment with IDS Group Inc. as Executive Vice President, Worldwide Engineering and managing director of the assessee company; (b) He was required to split his time between the various offices of the IDS group and in doing so, he was to spend approx. 8 months in a calendar year in the Bangalore office of the assessee company, three months in the US office and one month in the UK office; (c) The annual base salary of Dr. Sundararajan was around $ 200000 and bonus ranging upto 50 per cent of the salary based on incentives targets with a guarantee of bonus of $ 50,000 to be paid equally in December, 2005 and April, 2006; (d) Relocation expenses would be paid by IDS for Dr. Sundararajan and his family to move from Chennai where he was working for Cognizant Technology Solutions, to Bangalore; (e) He will be provided with a tax adv....
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....ecure bank guarantees for customs bonding; (e) He shall prefer applications to the Joint Director General, Foreign Trade for obtaining an Import, Exporter Code; (f) He is authorised to complete all formalities under the laws regarding sales tax, profession tax, labour, shops and establishment Acts and other laws relating to the Karnataka State as well as central laws. 5. In accordance with the above arrangement, Dr. Sundararajan took charge as the managing director of the assessee company. The details of the cross charge of his salary that is to say the salary paid by IDS and charged to the assessee company are given at pp. 21 and 22 of the assessee's paper book month-wise for the periods 19th Aug., 2005 to 31st March, 2006. According to these details the total cross charge was US $ 65,040 out of which the assessee had credited US $ 39,226 to the account of IDS before the application under s. 195 was made. It is only in respect of the balance of US $ 25,813 that an application was filed by the assessee under s. 195 seeking permission to remit the amount to IDS without deduction of the tax. The taxes remitted on the above amount at the rate of 10 per cent came to US $ 2,581 equiv....
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....echnical services and, therefore, the assessee was liable to deduct tax therefrom. Accordingly, he directed the assessee to deduct tax at the rate of 10 per cent of the remittance. The assessee was to remit US $ 25,813. The AO directed the assessee to deduction US $ 2,581 from the same. This order was passed by the AO on 31st July, 2000. 8. The assessee filed an appeal before the CIT(A), It appears that detailed written submissions were furnished before the CIT(A). The contention of the assessee was that it was not liable to deduct tax under s. 195 for the following reasons: (a) that the payment was only reimbursement of expenses and not of income nature and hence, no liability to deduct tax; (b) that there was an employer employee relationship between the assessee and Dr. Sundararajan and the payment/remittance was in the nature of salary for the services rendered by him to the assessee and not for any services rendered by IDS, the US company; and (c) that the AO was not right in taking the view that the payment represented fees for technical services rendered by IDS and hence tax was deductible. The CIT(A) held against the assessee on all the above three points and hence the....
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...."In the case of a director, there may be special terms in the articles of association, or there may be an independent contract which may bring about contractual relationship between the company and the director and constitute the director an employee of the company; but independently of such special contract, a director of a company is not the employee of the company". In the case of K.R. Kothandaraman vs. CIT (1966) 62 ITR 348 (Mad), the question before the Madras High Court was whether the managing director of a company who was getting a fixed monthly remuneration and percentage of profits was a servant of the company so that these amounts could be assessed as his salary. His lordship Justice Veeraswami (as his lordship then was), speaking for the Division Bench observed that the solution to the question would lie in the terms of the agreement between the company and the managing director. In that case the appointment of the assessee as managing director of the company was made in terms of the articles of association of the company, but the terms of the appointment were left to be regulated by a separate agreement. The agreement invested the assessee with extensive powers of mana....
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....ntage of gross profits for his services, could be considered as a servant of the company so that the amount received by him can be assessed as salary or whether it would be business income in his hands. The Supreme Court laid down the following propositions: (a) For ascertaining whether a person is a servant a rough and ready test is whether under the terms of the employment the employer exercises a supervisory control in respect of the work entrusted to him. (b) A managing director may have a dual capacity - as managing director as well as an employee. In the capacity of a managing director, he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee. (c) The nature of his employment may be determined by the articles of association of the company and/or the agreement, if any, under which a contractual relationship between him and the company is brought about. (d) The control which the company exercises over the managing director need not necessarily be one which tells him what to do from day-to-cay nor is it necessary that the company's supervision over him should be a continuous exercise of the power to oversee or superi....
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....assessee company and IDS. In our humble opinion, the special contract need not be between the assessee company and Dr. Sundararajan; so long as the relationship between them is defined in a contract, provided that contract is between connected and relevant parties, that should suffice. It has to be remembered that the services of Dr. Sundararajan, who was appointed as executive vice president of Worldwide Engineering and managing director of the assessee company, were seconded by IDS to the assessee company and his appointment as managing director of the assessee company is traceable only to the relationship between the assessee company and its parent company in USA. We have called for the memorandum and articles of association of the assessee company and the same was filed. Clause 84 of the articles of association says that the board of directors may from time to time, by ordinary resolution increase or reduce the number of directors within the limits specified in art. 74. In art. 74 a minimum of 2 and a maximum of 12 directors are prescribed. It was pursuant to this article that Dr. Sundararajan was inducted as additional director and in the board meeting held on 1st Sept., 2005,....
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....or a foreign enterprise as well. In such cases, the determination of employer rests on the degree of personal and economic dependence of the employee towards the enterprises involved. Accordingly, the foreign enterprise does not qualify as an employer merely because the employee performs services for it or because the enterprise was issuing to the employee instructions regarding his work, or places tools, etc., at his disposals of Hinnekens. L, Interfax 331 (1988). The situation is different if the employee works exclusively for the enterprise in the State of employment and was released for the period in question by the enterprise in his State of residence [BFH 114 (1986) re Germany's DTC with Spain]". "If this view is applied to the present case, the assessee company can be considered as the economic employer because the services are rendered by Dr. Sundararajan to it, the salary is met or borne by it. Be that as it may, the person who actually controls the services of Dr. Sundararajan is the assessee company. Under the secondment agreement he is to act in accordance with the reasonable requests, instructions and directions of the assessee company. He shall devote the whole of hi....
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....vices. For example, cls. (A) to (C) of art. II make the seconded employee responsible and subservient to the assessee company which cannot be the case if the agreement is for providing technical services by IDS to the assessee company. Similarly cl. (E) which requires the seconded employee to also act as officer or authorised signatory or nominee UP in any other lawful personal capacity for the assessee company, would also be out of place in an agreement for rendering technical services as it cannot be imagined that a technical person would also be required to act in non-technical capacities under an agreement for rendering technical services. Clause (H) on which considerable reliance was placed by the Department to contend that the agreement is one for rendering technical services, is merely a clause ensuring secrecy and confidentiality of the information accessed by the seconded employee in the course of his employment with the assessee company. Such confidentiality extends not only to technical information, which would be the case if the agreement is one for rendering technical services but also to financial or accounting information, price or cost data and any other proprietary....