TaxTMI 
TaxTMI 
2015 (11) TMI 271
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..../s 9(1)(vii) of the Incometax Act, 1961 and consequently liable for deduction of tax at source u/s 195 of the Income-tax Act, 1961 (Act). 2.2 The learned CIT(A) IV, B'lore has erred in treating the appellant as 'assessee in default' u/s 201 of the Act for not deducting tax at source in respect of the impugned payments. On facts and in the circumstances of the case and law applicable, the impugned payments were not liable for TDS u/s 195 and consequently, the appellant cannot be regarded as 'assessee in default' u/s 201. 3.1 In the view of the above and other grounds to be adduced at the time of hearing the appellant prays that: (i) the order passed u/s 201(1) being bad in law be quashed. Or in the alternative; a) the appellant be held as not liable to deduct tax at source u/s 195 and thereby not to be deemed as assessee in default u/s 201(1); b) the reimbursement made to the foreign company (DFCL), benefit of profit element, be not considered as fees for technical services or income chargeable to tax in India;" 3. The assessee is an Indian company engaged in the business of ownership and operation of supermarket chain in India. The assessee entered into an agreeme....
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....sessee within the meaning of explanation 2 to sec. 9(1)9vii) of the Act. The CIT(A) upheld the decision of the DDIT (International Taxation). 5. Before us, the learned AR of the assessee has referred to various clauses of seconded agreement and submitted that the remittance to DFCL is nothing but reimbursement of remuneration paid to the employees under seconded agreement and said salary was chargeable to tax in India. Therefore, the assessee was under the liability to deduct tax at source u/s 192 of the Act which was discharged by the assessee. He has referred the details of the payment and submitted that the amount represents only reimbursement of salary of five employees deputed with assessee as per the secondment agreement. The learned AR have been referred debit note issued by the DFCL and submitted that the amount of note being salary to the employee matches with the payment made by the assessee. Thus the learned AR has submitted that when the assessee has already discharged its liability by deducting tax at source u/s 192 applicable on salary then the payment in question cannot be held as FTS. The learned AR has pointed out that the learned CIT(A) has issued a remand orde....
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....and Co. Inc., 292 ITR 416 and submitted that while interpreting the definition of PE as provided u/s 92F(iii) as well as considering the CBDT Circular 14 of 2001 the Hon'ble SC has observed that the definition of PE covers services PE, agency PE, Software PE, construction PE etc. Thus, the learned AR has submitted that even in the case of the payment in question is treated as FTS there would be no tax liability because the net amount will be Nil after deducting the expenditure which is in the shape of salary of these secondees. 8. We have considered the rival submission as well as relevant material on record. The assessee is engaged in the business of ownership and supermarket chain in India. The assessee was in need of personnel to assist with its operation in India. The assessee express its desire to DFCL a Hong Kong based company engaged in the similar line of business and operation to assign certain personnel to assist. Accordingly, the assessee and DFCL entered into an agreement dated 30/6/2007. The said agreement undoubtedly is a secondment agreement and the DFCL assigned 5 personnel/employees of secondees to assessee. The relevant part of terms and conditions of the agree....
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....ment roles in senior positions. Prior to secondment, the Fresh Food Director of Welcome, Hon Kogn (an entity with annual sales in excess of US$ 1 billion), reporting to CEO Eric Law Ho Fai General Manager Projects Apr-07- Mar-08 A Levels : Shue Ya College, Hong Knog (1981) Over 20 years of retail experience in Hong Kong, holding a variety of merchandising and operational management positions. Prior to secondment, Fresh Operations Manager for Welcome, Hong Kong, reporting to the Fresh Food Director. Mark Marshal Chief Operating Officer Apr-07- Mar-08 26 years of retails experience in South Africa Man Yee Linda Shiu Group Category Manager Apr-07- Jan-08 BSC in Food and Nutrition, University of Hong Kong (2000) 6 years of retail experience with welcome, Hong Kong in fresh food and merchandising management positions. Almen Aze Sing Chan Group Category Manager Apr-07- Jan-08 Bachelor of Master in Philosophy : Food Science (2003) BSc in Food and Nutrition Science, University of Hong Kong (2000) 2 years of retail experience with welcome, Hong Kong in fresh food and merchandising management positions. 10. As it....
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....y. For ready reference we quote the definition of FTS under Article 13(4) of Indo-UK DTAA which has been reproduced by the Hon'ble High Court in para 25 as under:- "ARTICLE 13 - Royalties and fees for technical services- "4. The definitions of fees for technical services in paragraph 4 of this Article shall not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in paragraph 3(a) of this Article. (b) for service that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the private use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or partnership for professional service as defined in Article 15 (Independent personal services) of this Convention. X X X X X X 12. The Hon'ble High Court while deciding the issue has observed that the assessee filed the provis....
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....hould be examined to see whether the functions of employer were exercised mainly by the intermediary or by the user. It is therefore up to the contracting states to agree on the situations in which the intermediary does not fulfill the conditions required for him to be considered as the employer within the meaning of paragraph 2. In setting this question, the competent authorities may refer not only to the above mentioned indications but to a number of circumstances enabling them to establish that the real employer is the user of the labour (and nor the foreign intermediary); The hirer does not bear the responsibility or risk for the results produced by the employee's work; - The authority to instruct the worker lies with the user; - The work is performed or a place which is under the control and responsibility of the user; - The remuneration to the hirer is calculated on the basis of the time utilized, or there is in other ways a connection between this remuneration and wages received by the employer; - Tools and materials are essentially put at the employee's disposal by the user : - the number and qualifications of the employees are not solely determined by the hi....
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....on for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel)". In this case, the overseas entities have, through the seconded employees, undoubtedly provided 'technical' services to CIOP, especially since that expression expressly includes the provision of the services of personnel. The seconded employees, who work, so to say, for CIOP are provided by the overseas entities and the work conducted by them thus, i.e. assistance in conducting the business of COIP of quality control and management is through the overseas entities. The nature of the services - cast as "business support services" by CIOP - as also clearly within the hold "technical or consultancy. These services envisage the provision of quality service by vendors to the overseas entities, which CIOP, and the secondees, are to oversee. This requires the secondees to draw from their technical knowledge, and falls within the scope of the term. This reading of 'technical' services does not limit itself only to technological services, but rather, extends to know-how, techniques and technical knowledge. This is supported by clause 4 of Art....
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....f services of a technical or other personnel) which ... or make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design." In order for the amounts paid to the overseas entities in the transaction covered by the India-Canada DTAA, thus, it must not only be showed that technical services were performed, but that such knowledge etc. was 'made available'. xxxxxxxxxx 37. This brings the Court to the next issue, concerning reimbursement and the doctrine of diversion of income by overriding title. This Court notices that a case with almost identical circumstances, in In Re: AT & S India (P.) Ltd. (supra), also came up before the AAR. There, an agreement between AT&S India and its parent, AT& Austria was entered into, by which AT&S Austria undertook to assign or cause its subsidiaries to assign its qualified employees to the AT&S India. These individuals were to work for AT&S India and receive compensation substantially similar to what they would have received as employees of AT&S Austria. They were engaged by AT&S India on a full time basis. The question before the AAR was iden....
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....salaries of seconded personnel) is placed before us to show what actual expenditure was incurred by AT&S Austria and what is being claimed as reimbursement; secondly, assuming for the sake of argument that the debit notes represent the quantum of compensation as the actual expenditure, it would make no difference as the same is payable to the AT&S Austria under the secondment agreement for services provided by it. It would, therefore, be not only unrealistic but also contrary to the terms of the agreement to treat payments under the said agreement as mere reimbursement of salaries of the seconded employees who are said to be the employees of the applicant. To show that the real employer of such employees is the applicant and not the AT&S Austria, Mr. Chaitanya invited our attention to various employment agreements entered into between the applicant and the seconded employees and also the certificate of deduction of tax at source on their global salary. All the employment agreements are similarly worded. We have carefully gone through the employment agreement between the applicant and Mr. Markus Stoinkellner. The duration of the employment is from 1st Sept., 2005 till 30th Aug., ....
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..... This would mean that in any circumstance where services are provided between related parties, the demand of only as much money as has been spent in providing the service would remove the tax liability altogether. This is clearly an incorrect reasoning that conflates liability to tax with subsequent deductions that may be claimed. 13. The SLP filed against the judgment of Hon'ble Delhi High Court has been dismissed by the Hon'ble Supreme Court in 227 Taxman 368. Therefore the view taken by the Hon'ble High Court has attained finality. The concept of income includes positive as well as negative income or nil income. In the case of payment being FTS or royalty as per sec. 9(1) of the Act it is irrelevant whether any profit element in the income or not. It is not only a matter of computation of total income when the concept of profit element in payment is relevant. If the payment being FTS or royalty is made to nonresident, then the concept of total income becomes irrelevant and the provisions of sec. 44D recognize the gross payment chargeable to tax. Thus all the payment made by the assessee to non-resident on account of FTS or royalty an chargeable to tax irrespective of any pro....