TaxTMI 
TaxTMI 
2011 (5) TMI 256
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.... three of the employees of GTE Overseas Corporation, USA (GTE-OC), an affiliate of the parent company and engaged in a business similar to that of the applicant. Pursuant to it, the applicant entered into a Secondment Agreement with GTE-OC on 1st April, 2008. Broadly speaking, the role of the three employees as described in the Secondment Agreement is: that each employee shall function and act exclusively under the direction, control and supervision of the applicant; that GTE-OC shall not be responsible for the work of any employees nor would undertake any obligation or risk with respect to the quality of the results produced from the work performed by such employees during the term of assignment; that GTE-OC would not be responsible for any claim, liability, etc. arising from the actions of the expatriate employee and that GTE-OC shall pay to the employees for the items which an employee is entitled to receive and the applicant shall reimburse GTE-OC for the items paid or provided to the employees. The responsibility to deduct tax under the Indian tax laws shall be upon the applicant. The first employee has assumed the position in the capacity of the Managing Director of the appli....
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....rned/amount received from the applicant. The net income would be nil and there will be no requirement to deduct tax at source. 5. The applicant further submits that in case the payment is held to be income in the hands of GTE-OC as Fees for Included Services then it would be subjected to tax at the rate of 10% plus applicable surcharge and education cess on gross income. 6. Advance ruling is sought on the following questions framed by the applicant:- 1. On the facts and in the circumstances of the case whether the amounts (representing salary and benefits payable by GTE-OC to Expatriate employees) reimbursed by the Applicant to GTE-OC Overseas Corporation ('GTE-OC') is "income" accruing to GTE-OC and therefore, whether the same is liable to deduction of tax in accordance with the provisions of section 195 of the Indian Income Tax Act, 1961 (' the Act')? 2. If the answer to Question No. 1 is in the affirmative, then whether the same is taxable as "Fees for Included Services (FIS)" under the Act read with the India-USA Double Taxation Avoidance Agreement ('DTAA')? 3. Is there a Permanent Establishment of GTE-OC i....
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....yees of GTE-OC who alone has the authority to terminate the employees with or without cause. But the cost of termination is to be borne by the applicant. In the event of dispute reference is to be made to HR of Verizon US for a final decision. If the Secondment Agreement is independent of Verizon US there was no reason to refer the dispute to Verizon US. The arrangement appears to be altruistic and not a commercial arrangement. 10. The learned Addl.DIT further argued that this Authority in the case of AT&S India (P.) Ltd., In re [2006] 287 ITR 421/157 Taxman 198 (AAR-New Delhi), held the view that the payment towards reimbursement of salary cost of the seconded employees is in the nature of FTS and the fact that the taxes are paid under the head 'Salaries' is of no consequence. The seconded employees working under the direct control or supervision did not militate against the compensation paid to AT&S. In the case of Cholamandalam M.S. General Insurance Co. Ltd., In re [2009] 309 ITR 356/178 Taxman 100 (AAR-New Delhi), it is held that withholding of tax is not applicable on reimbursement of salary to an overseas entity. The AAR distinguished the case from AT&S on the ground that....
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....rds, the applicant is required to pay the amount net of taxes. This again is an important aspect of the agreement. Firstly, it is GTE-OC's employees who are to perform managerial services in India and secondly, the applicant is liable to bear the taxes on the remittances. There is no argument that the remittances are in consideration for the services rendered. The reason for the applicant to bear the taxes on the impugned payments to GTE-OC lies in the fact that the services rendered by GTE-OC are liable to tax in India. But an issue has been raised that the remittances are in the nature of reimbursements and as the employees are paying taxes on their salary income there is no income which can be said to have accrued to GTE-OC. We are to analyze how far the applicant's contention is acceptable to us. 13. The Personnel Secondment Agreement specifically provides that the seconded employees shall remain the employees of GTE-OC. The payment of their salaries is not dependent on the applicant. These employees will continue to get their salaries from GTE-OC as long as they remain in their employment. It follows that the managerial services performed by them are as employees of GTE-OC ....
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....not rendered any services to the applicant through its employees. The payment made do not qualify as "fees for including services" and is not liable to tax having regard to the provision of the DTAA. 15. We agree with the learned advocate that the managerial services rendered are not technical but we do not agree that the consultancy services being managerial services, the requirement under Article 12(4) of the DTAA that these must be made available, ought to be satisfied. We now examine the nature of services rendered by the employees on behalf of GTE-OC. 16. The employees whose services are utilized by the applicant are to perform certain managerial or other services and activities in India as stated in the Personnel Secondment Agreement. Their exact details are not mentioned in the Personnel Secondment Agreement. However, these find place in a summary manner in Annexure II to the application filed before the Authority. It is noted that one of the seconded employees is to perform the function as Managing Director of the applicant and other two are to supervise and provide directions in the manner through which the activities of the applicant are to be carried out and to lia....
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....and consultancy services are considered included services only to the following extent; (1) as described in paragraph 4(a), if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which a royalty payment is made; or (2) as described in paragraph 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under paragraph 4(b), consultancy services which are not of a technical nature cannot be included services." The phrase technical or consultancy services appearing in Article 12(4)(b) of the DTAA, is further explained in the MOU as under: "Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person.) This category is narrower than the category describ....