Service Tax: 12 to 10. How to be done?

IN its nearly 15 years of existence, it is for the first time that the Government has effected an across the board reduction in the rate of service tax, i.e. from 12 % to 10 %, vide Notification No. 8/2009 ST Dated 24.02.2009, which is effective from 24.02.2009. It may be observed that service tax is payable upon realization of value of taxable service, or on receipt of advances for the services to be provided. Though the taxable event for the levy of service tax is the rendering of service, the liability arises on receipt of value of such taxable service. To further elaborate, if a service tax not taxable when rendered, there will be no service tax liability, even if the value for such service is realized after introduction of levy of service tax on such services. But, if the service is already taxable, even when the service was rendered in the past, the rate of service tax applicable would be the rate prevalent on the date of realizing the value of taxable service.

In line with the above, the implication of reduction in service tax rate from 12 % to 10 %, in different situations are tabulated below:


Courtesy:S. Jaikumar & G. Natarajan, Advocates

Applicability of the provisions of the Export of Services Rules, 2005 in certain situations

Circular No.111/05/2009-ST

F.No.137/307/2007-CX.4 (Pt.)
Government of India
Ministry of Finance
Department of Revenue
(Central Board of Excise & Customs)
*****

New Delhi, dated the 24th February, 2009.


Subject: Applicability of the provisions of the Export of Services Rules, 2005 in certain situations

In terms of rule 3 (2) (a) of the Export of Services Rules 2005, a taxable service shall be treated as export of service if “such service is provided from India and used outside India” Instances have come to notice that certain activities, illustrations of which are given below, are denied the benefit of export of services and the refund of service tax under rule 5 of the Cenvat Credit Rules, 2004 [notification No. 5/2006-CE (NT) dated 14.03.2006] on the ground that these activities do not satisfy the condition ‘used outside India’,-

(i) Call centres engaged by foreign companies who attend to calls from customers or prospective customers from all around the world including from India;
(ii) Medical transcription where the case history of a patient as dictated by the doctor abroad is typed out in India and forwarded back to him;
(iii) Indian agents who undertake marketing in India of goods of a foreign seller. In this case, the agent undertakes all activities within India and receives commission for his services from foreign seller in convertible foreign exchange;
(iv) Foreign financial institution desiring transfer of remittances to India, engaging an Indian organisation to dispatch such remittances to the receiver in India. For this, the foreign financial institution pays commission to the Indian organisation in foreign exchange for the entire activity being undertaken in India.

The departmental officers seem to have taken a view in such cases that since the activities pertaining to provision of service are undertaken in India, it cannot be said that the use of the service has been outside India.

2. The matter has been examined. Sub-rule (1) of rule 3 of the Export of Services Rule, 2005 categorizes the services into three categories:

(i) Category (I) [Rule 3(1)(i)] : For services (such as Architect service, General Insurance service, Construction service, Site Preparation service) that have some nexus with immovable property, it is provided that the provision of such service would be ‘export’ if they are provided in relation to an immovable property situated outside India.

(ii) Category (II) [Rule 3(1)(ii)] : For services (such as Rent-a-Cab operator, Market Research Agency service, Survey and Exploration of Minerals service, Convention service, Security Agency service, Storage and Warehousing service) where the place of performance of service can be established, it is provided that provision of such services would be ‘export’ if they are performed (or even partly performed) outside India.

(iii) Category (III) [Rule 3(1)(iii)] : For the remaining services (that would not fall under category I or II), which would generally include knowledge or technique based services, which are not linked to an identifiable immovable property or whose location of performance cannot be readily identifiable (such as, Banking and Other Financial services, Business Auxiliary services and Telecom services), it has been specified that they would be ‘export’,-

(a) If they are provided in relation to business or commerce to a recipient located outside India; and
(b) If they are provided in relation to activities other than business or commerce to a recipient located outside India at the time when such services are provided.

3. It is an accepted legal principle that the law has to be read harmoniously so as to avoid contradictions within a legislation. Keeping this principle in view, the meaning of the term ‘used outside India’ has to be understood in the context of the characteristics of a particular category of service as mentioned in sub-rule (1) of rule 3. For example, under Architect service (a Category I service [Rule 3(1)(i)]), even if an Indian architect prepares a design sitting in India for a property located in U.K. and hands it over to the owner of such property having his business and residence in India, it would have to be presumed that service has been used outside India. Similarly, if an Indian event manager (a Category II service [Rule 3(1)(ii)]) arranges a seminar for an Indian company in U.K. the service has to be treated to have been used outside India because the place of performance is U.K. even though the benefit of such a seminar may flow back to the employees serving the company in India. For the services that fall under Category III [Rule 3(1)(iii)], the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase ‘used outside India’ is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for Category III services [Rule 3(1)(iii)], it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefits of these services accrue outside India. In all the illustrations mentioned in the opening paragraph, what is accruing outside India is the benefit in terms of promotion of business of a foreign company. Similar would be the treatment for other Category III [Rule 3(1)(iii)] services as well.

4. All pending cases may be disposed of accordingly. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned. These instructions should be given wide publicity among trade and field officers.

5. Please acknowledge receipt.

6. Hindi version follows.

Service tax on movie theatres

Circular No. 109/03/2009
F. No. 137/186/2007 - CX. 4
Government of India
Ministry of Finance
Department of Revenue
(Central Board of Excise and Customs)

****

New Delhi, 23rd February, 2009
Subject: Service tax on movie theatres-reg

A query had been raised by the field formation as to whether the activity of screening of film supplied by a film distributor would fall under any of the taxable services and accordingly, whether the theatre owners are required to pay service tax on amount received by them from distributors. Divergent views have been expressed on this issue. One view is that the activity of screening of films supplied by a film distributor falls under the taxable service category of “renting of immovable property”; while an alternative view is that such activity falls under the category of ‘Business Support Service’.

2 The matter has been examined. Normally a producer of a movie sells the rights of showing the movies in a region to a distributor. The distributor in turns enters into agreement with theater owners. This agreement can be of different types. Thus it is necessary to examine different types of arrangements under which a movie is screened, in order to determine whether any tax liability arises on the activities undertaken by a theater owner and a distributor. Typical types of arrangements normally entered into between a theater owner and a distributor are as under:-

2.1. Under one type of arrangement, the distributor leases out the hall for screening of the movie. Here, the theater owner gets a fixed rent from the distributor. The profit or loss from exhibiting the film is borne by the distributor. In such a case, the theatre owner provides the taxable service of ‘Renting of immovable property for furtherance of business or commerce’ and is accordingly liable to pay service tax.

2.2. Another type of arrangement is where the contract between the theatre owner and the distributor is on revenue sharing basis i.e. a fixed and pre-determined portion i.e. percentage of revenue earned from selling the tickets goes to the theater owner and the balance goes to the distributor. In this case, the two contracting parties act on principal-to-principal basis and one does not provide service to another. Hence, in such an arrangement the activities are not covered under service tax.

2.3. In yet another type of arrangement, the theater owner buys the print/CD of the film on payment of a fixed price and thereafter screens it in his theater. This transaction is also not subject to service tax being in the nature of sale of goods.

2.4. The arrangement most commonly entered into between a theater owner and a distributor is that the theater owner screens the movie for fixed number of days under a contract. The proceeds earned through sale of tickets go to the distributor but the theatre owner receives a fixed sum depending upon the number of days of screening. In this arrangement, the advertisement and display of posters etc. is done by the distributor. Under this arrangement, the fixed amount contracted is given to the theater owner by the distributor irrespective of the fact whether the movie runs well or not. However, there is no rental arrangement between the theater owner and the distributor as in the arrangement at paragraph 2.1 above. A view has been expressed that in this arrangement, the theater owner provides ‘Business Support Service’ to the distributor and hence is liable to pay service tax on the fixed amount received by the theater owner.

2.5. The matter has been examined. By definition ‘Business Support Service’ is a generic service of providing ‘support to the business or commerce of the service receiver’. In other words the principal activity is to be undertaken by the client while assistance or support is provided by the taxable service provider. In the instant case the theatre owner screens/exhibits a movie that has been provided by the distributor. Such an exhibition is not a support or assistance activity but is an activity on its own accord. That being the case such an activity cannot fall under ‘Business Support Service’.

3. In the light of above , it is clarified that screening of a movie is not a taxable service except where the distributor leases out the theater and the theater owner get a fixed rent. In such case, the service provided by the theater owner would be categorized as ‘Renting of immovable property for furtherance of business or commerce’ and the theater owner would be liable to pay tax on the rent received from the distributor. The facts of each case and the terms of contract must be examined before a view is taken.

4. All pending cases may be disposed of accordingly. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned.

5. Please acknowledge receipt.

6. Hindi version follows

Honeywell Ruling by Pune Tribunal

"Current year" financial data of comparables and only the expenses having nexus with operating profits to be considered for FAR Analysis. Though per OECD guidelines, it is permissible to take profit of similar transaction not only of period under consideration, but also for next or previous year or take average of such profit - This however is not permitted under Indian TP Regulations.


HONEYWELL AUTOMATION INDIA LTD
PAN NO : AAACT3904F
Vs
Dy COMMISSIONER OF INCOME TAX
CIRCLE 7, PUNE

FACTS
The taxpayer is engaged in the business of providing integrated automation and software solutions that increase productivity in industry, provide comfort in work environments, ensure safety & security of home and business premises. The company was incorporated as a joint venture between Tata Group and the Honeywell Group in 1988 and currently enjoys a good position in Indian automation and control industry. Subsequent to the year ended March 31, 2004, Tata Group sold its entire equity stake to the Honeywell Group resulting in the Honeywell Group acquiring a controlling stake in the company.

During the year under consideration, the taxpayer, as per its audit report disclosed six international transactions with its associated enterprises. Out of six, in case of five transactions, arm’s length principles have been accepted to be satisfied and accordingly no adjustments made under the transfer pricing regulations. The detail of such transactions is available at page 2 of the order of Transfer Pricing Officer (TPO).

The taxpayer in its audit report justified and supported prices paid to its associated enterprises (AE) for the raw material etc. used in System Integration Division under TNM Method. The Transfer Pricing Officer (TPO), to whom the case was referred, however, found, from the study of report, that taxpayer had bifurcated system integration division for computing operating profit in two sub-business segments namely IS-Infra and Balance Systems. Each of these segments was separately benchmarked by taking external comparables to prove arm’s length price. The TPO did not agree that suitable comparables were taken into consideration. He also rejected bifurcation into two sub-segments (profits) since sub-segments, according to the TPO, were part of business of rendering system integration activities and accordingly TNM Method could be applied to aggregated transactions for computing arm’s length profit. TPO carried fresh analysis after finding uncontrolled comparables and worked out mean margin of the operating profit of such comparables at 0.42% as against negative figure [ (-)0.84%] disclosed by the taxpayer as per its accounts. The TPO vide show cause notice dated November 9, 2006 asked the taxpayer why arm’s length profit be not computed by applying above ratio.

The taxpayer vide its replies dated 13.06.2006, 28.07.2006, 03.08.2006 and 15.11.2006 raised objections against above computation.

The taxpayer submitted that if profit margin of the companies mentioned by the taxpayer for the financial year ended March 31, 2004 was taken into account, it will be minus 0.82%. It was accordingly contended that there was no case for making adjustment under the transfer pricing.

The Transfer Pricing Officer (TPO), on due consideration of taxpayer’s objections, did not find any substance in them. He observed that system integration segment was the identified business unit and, therefore, operating profit of the said unit has to be taken into account for benchmarking. Similar results of comparables were taken into account for analysis after considering functions carried by them. It was not possible to bifurcate and take profit of sub-segments since what was comparable in each case, was systems integration activity for applying Transactional Net Margin Method. The TPO accordingly rejected the objections of the taxpayer.
After rejecting contentions of the taxpayer, the TPO made adjustment of Rs 282 lakhs as per the following calculations:

“The profit of the system integration segment is being computed as follows:
Gross Sales: 22050 lakhs
Operating Profit: -186 lakhs
Arm’s length operating profit margin: 0.42%
Arm’s length operating profit = 22050 lakhs * 0.42% = 93 lakhs
Profit to be added to total income – 189 lakhs – 93 lakhs = 282 lakhs.

On receipt of order of the TPO, the Assessing Officer (A.O) made assessment in conformity with the said order.

The addition made under the head “Transfer Pricing adjustments” was challenged by the taxpayer in appeal before the CIT (Appeals) and the main contention of the taxpayer that the A.O committed an error in the selection of the comparables was reiterated. The CIT (A) did not find any force in the contentions raised by the taxpayer. The Transfer Pricing adjustments were accordingly upheld. The taxpayer being aggrieved has brought the issue in appeal before the Income-tax Appellate Tribunal (ITAT).

The ITAT observed, “In this complicated field of transfer pricing, the taxpayer has raised only a limited issue relating to exclusion of Wellwin Industry Ltd. as a comparable. All other objections raised before revenue authorities have been given up. Neither the selection of most appropriate method (TNMM), nor any parameters of selection have been challenged by the counsel for the taxpayer. As regards the question of not considering profit / losses of Wellwin Industry Ltd., for the period ending March 31, 2004, it is an admitted position that results of that enterprise for the relevant period are not available. The party after September, 2003 maintained accounts for 18 months and closed its account only on March 31, 2005. The company did not maintain separate accounts for the period March 31, 2004. The taxpayer did try to work out the alleged losses of the concern for the period ending March 31, 2004 on some basis by taking average of profits but was unable to show to the revenue authorities that figures so arrived at were correct and reliable for comparison.”

In the OECD guidelines, it is permissible to take profit of similar transaction or enterprises not only of the period under consideration, but also for next or previous year or take the average of such profit. This, however, is not permitted under the Indian Regulations on Transfer Pricing.

For the relevant financial year in which the international transaction took place, is to be considered for comparability analysis. Under the proviso, data for period not being more than two years prior to financial year in which international transaction was entered, may also be considered, if such data reveals facts which could have an influence on the determination of transfer prices. Under the proviso, there is no scope to consider data for a subsequent assessment year. The assessee has not been able to reveal any facts to bring the case within the above proviso. Admittedly, Wellwin Industry Ltd. in the period prior to the financial year under consideration had shown profit and same was taken into consideration for determining arm’s length price for the assessment year 2003-04. However, its accounts for the period ended 31.3.2004 are not available and, therefore, could not be taken for working mean margin of profit.

On these facts, ITAT did not find any error in the approach of revenue authorities in excluding Wellwin Industry Ltd. for a comparative analysis.

As regards the alternative contention of the taxpayer, Tribunal held that for finding operative profit margin of the taxpayer or other similar enterprises, under TNM Method, all receipts and disbursements shown in accounts for the relevant period are required to be scrutinised. Only items of receipt or expenditure having nexus with the operating profit/loss of the enterprises are to be taken into consideration. An item of receipt or expenditure, which has no direct connection with operating profit, is to be ignored. Further, relevant receipts and expenditure for the year ending 31.3.2004 are relevant and not future profit or loss of the subsequent year. It appears that to settle accounts with Tata Group, which withdrew from the enterprise after 31.3.2004, future losses were also provided in the accounts. Otherwise such provision of future losses, prima facie, had no connection with operating profit of the financial year.

The objection that such a claim was not made before the TPO or other revenue authority, cannot debar the taxpayer from raising this claim before the Income-tax Appellate Tribunal. Evidence of claim is available in the primary record considered by the revenue authorities. The matter can be considered and decided on the basis of material available on record and would cause no surprise to the opposite party.
In the case of National Thermal Power Co. Ltd. vs. CIT, the Supreme Court examined the question of powers of Appellate Tribunal relating to question raised for the first time before the Tribunal. The Supreme Court observed:

“There is no reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commissioner of Income-tax (Appeals). Both the assessee as well as the Department has a right to file an appeal/cross-objections before the Tribunal. The Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner (Appeals) is too narrow a view to take of the powers of the Tribunal.

Undoubtedly, the Tribunal has the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should now be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.”

Tribunal therefore, permitted the assessee to raise alternative ground of appeal on question of deduction of provision for future loss debited in the profit and loss account. The Tribunal opined that consideration of above debit entry is fundamental to computation of correct profit margin of the enterprise. As the question was not raised by the taxpayer before the revenue authorities and was neither examined by the taxpayer nor by TPO, ITAT set aside impugned orders and directed that above question be examined in accordance with law and profit margin of the taxpayer be determined as warranted by facts and circumstances of the case.

All relevant details be examined to finally decide the issue. In the interest of justice, the question of claim of deduction of provision of future loss is remitted to the file of the Assessing Officer / T.P.O. The same be examined and allowed in accordance with law. The alternative ground of appeal raised by the taxpayer is accepted, to the extent mentioned above.

Exchange Gain on Export of Goods & Service--Export Income (Sec-10B)

The exchange gain is sales realisation of the billed amount in US dollar and would be an income derived from the export of goods and articles; therefore, the assessee-EOU would be entitled to the deduction under section 10B with regard to said exchange gain.

ITAT, BENCH ‘C’, AHMEDABAD (THIRD MEMBER)

ITO

v.

Banyan Chemicals Ltd.

ITA No. 2702/Ahd./2004

December 29, 2008

CASE LAW:
9. Sub-section (4) of section 10B provides for computation of profit derived from export. It reads as under:

“10B (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which Bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of tljie business carried on by the undertaking."

10. On a plain reading of these two sub-sections of section 10B, it is evident that a deduction is to be allowed on such profits and gains as are derived by an undertaking from the export of articles or things and as computed under sub- section (4) thereof. The words ''profit and gains as are derived by" are, narrow than the profits attributable or arising from the business of an assessee or an undertaking. The term "derived" has been subject matter of judicial interpretation in various decisions, viz., CIT vs. Sterling Foods, 237 ITR 579 (SC) and Pandian Chemicals Limited vs. CIT, 262 ITR 278 (SC). In Sterling Foods (supra), it is held that the word 'derive' means, "get to trace from a source, arise from, originate in, show the origin or formation of. In this case, the court dealt with the nature of import entitlements and it is held the source of the import entitlements could only be said to be the Export promotion Scheme of the Central Government, whereunder the export entitlements become available. It held that there must be, for the application of words "derived from", a direct nexus between the profits and gains and the industrial undertaking and in the instant case, the nexus was not direct but only incidental. By reason of such export, the Export Promotion Scheme applied, whereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee's industrial undertaking.

11. In other judgment in the case of Pandian Chemicals (supra), the Supreme Court dealt with a case under section 80HH with -regard to interest on security deposits made by the assessee with electricity department for availing electricity which was necessary for running the undertaking. In that connection, the Supreme Court held that, the word "derived from" in section 80HH of the Income-tax Act, 1961, must be understood as something which has a direct or immediate nexus with the assessee's industrial undertaking. Although electricity may be required for the purposes of industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. It held that interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of-electricity for running the industrial undertaking could not be said to be flowing directly from the industrial undertaking itself and was not profit and gains derived by the industrial undertaking. It had also referred to a decision of the Privy Council in the case of CIT vs. Raja Bahadur Kamakhya Narayan Singh 16 ITR 325 (PC) when it said that, the word derived' is not a term of art Its use in the definition indeed demands an enquiry in to the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition." It was, therefore, held to be not an income derived from agricultural land.

16. In the present case, the receipt of the sale consideration is in US Dollar. It was credited/deposited in EEFC Account of the assessee to be retained in US $ as per guidelines for operating this account. In this account, the receipts may be kept in foreign currency instated of converting it to Indian rupee. The gain accounted for by the assessee is the excess rupee value of US $ on the date of realization of sales proceeds credited. Therefore, the exchange gain on the date of deposit in the EEFC account has to be used on account of sales realized in US Dollar on that date. The exchange gain is thus sales realization of the billed amount in US $ and would be an income derived from the export of goods and articles.

18. On a perusal of this chart, we find that receipt of Rs. 15,51,239/- includes 15,31,518/- as the gain on the sale realization in US Dollar on the date of its receipt and deposit in EEFC account and balance Rs. 19,721/- is with regard to exchange gain on import payment. Therefore, the assessee would be entitled to the deduction under section 10B with regard to exchange gain of Rs. 15,31,518/- only which is gthe gain on the day of deposit of US $ in the EEFC Account. In my opinion, therefore, the assessee should be granted deduction under section 10B of the Act with regard to exchange gain of Rs. 15,31,518/- I hold accordingly.

New Procedure for filing ITAT Appeal

INCOME TAX APPELLATE TRIBUNAL BAR ASSOCIATION
10 TH FLOOR ITAT PREMISES, LOK NAYAK BHAWAN, KHAN MARKET
NEW DELHI-110003

K. SAMPATH
(PRESIDENT)
Sub: New procedure for filing of appeals

The Tribunal has devised a new system for appeal filing and fixation.

Henceforth for all appeals which are filed a computerized receipt would be issued as per form annexed. This receipt would contain the rudimentary particulars of the appeal such as the name and address of the appellant, the year to which appeal pertains, the Permanent Account Number (PAN), the e-mail address and such other particulars which you will find on the form and which, I am sure you would find self explanatory. A copy of the set of appeal papers would be immediately dispatched to the Respondent.

The purpose of change of procedure is that the appeal as filed would henceforth get automatically listed for hearing on the 60 th day from the date of filing. If the appeal is on small issues or if it is otherwise covered by the decision of the Tribunal, High Court or Supreme Court an attempt would be made to dispose off the same on that very day. In the event of either parties wanting to file detailed documents/evidence in support of their contentions then the Tribunal would fix a suitable time for hearing.

If alongwith the appeal forms the Counsel's Power of Attorney is also filed with his e-mail address then in the event of the counsel being so authorized a copy of the notice could be endorsed to him. His name would also be included in the cause-list as and when drawn.

Very soon the cause list also would be available on the net including the list for Fridays and pronouncements.

The orders of the Tribunal would be available on the net for a limited period of 30 days and that they could be downloaded therefrom as and when desired. After the 30 th day such facility will be available on payment of a stipulated fee.

The entire exercise is with a view to make the handling of appeals both in the registry and in the court eventually e-complaint so as to ensure acceleration in the process of dispensation of Justice. The exercise is presently experimental and, therefore, the Hon'ble President, the Sr. Vice President and the Hon'ble Vice President have all solicited further suggestions from the Members of the Bar so as to improve the coverage and efficiency of the present exercise.

Additionally the Hon'ble Vice President Shri Veerabhadrappa has informed that every effort is made to have the orders served within 30 days of the pronouncement of the order. In case Members do not receive the order within this time span they are free to inform the Hon'ble Vice President.

The Hon'ble Vice President has also informed that effort is being made to have the Miscellaneous Applications fixed for hearing within a fortnight of their filing. Any delay in this regard may also please be brought to his kind notice.

There may be a few cases where, under section 256(2) of the Act, statements may be pending finalization for forwarding to the Hon'ble High Courts. If any Member is in the knowledge of any such pendency the same may also be urgently brought to the notice of the Hon'ble Vice President for urgent remedial action.

I am placing all these particulars before you so that your valuable help and guidance would be available for effecting further improvements.

(K. SAMPATH)

(To be enclosed with every appeal filed with the I.T.A.T)I.T.A. No.----/Ahd/----Assessment Year :-----

Transfer Pricing Case Law--Essar Shipping

IN THE ITAT MUMBAI BENCH ‘L’

Essar Shipping Ltd.

v.

Deputy Commissioner of Income-tax, Range 5(1), Mumbai

K.C. SINGHAL, VICE PRESIDENT

AND R.S. SYAL, ACCOUNTANT MEMBER

IT APPEAL NOS. 4624 AND 4565 (MUM.) OF 2006

[ASSESSMENT YEAR 2002-03]

NOVEMBER 21, 2008

Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm’s length price - Assessment year 2002-03 - Whether transfer pricing provisions are always applicable when transactions are entered into with associated enterprises and one holds larger voting power in other - Held, yes - Whether transfer pricing provisions provide for allowing deduction towards pro tanto addition to income on account of determination of arm’s length price in case of receipt of dividend from associated enterprises - Held, no - Whether, therefore, where there is a receipt of dividend by one enterprise from other associated enterprise, which is chargeable to tax in India, then application of transfer pricing provisions could not be ruled out to that extent on plea that it would amount to double taxation - Held, yes

Section 92C of the Income-tax Act, 1961, read with rule 10B, of the Income-tax Rules, 1962 - Transfer pricing - Computation of arm’s length price - Assessment year 2002-03 - Assessee had taken on hire one ship from its associate enterprise, namely, EIL which was engaged in operation of ships - Assessing Officer referred matter to Additional Commissioner, Transfer Pricing, under section 92CA(1) for computing arm’s length price of bare boat hire charges - Assessee had worked out amount of hire charges at arm’s length price at US$ 94,550 per month on basis of Comparable Uncontrolled Price Method (CUP Method) - Additional Commissioner, however, rejected said method - Thereafter, assessee submitted an alternate working before Additional Commissioner on basis of cost plus method - Additional Commissioner accepted assessee’s working as per cost plus method, except for reducing claim of dividend on ground that no dividend was, in fact, received by assessee - He, accordingly, reduced dividend of US$ 274 per day from payments made to EIL and, thus, determined amount payable to EIL at Rs. 2,26,02,767 - Assessing Officer upheld order of Additional Commissioner and held that inclusion of dividend by assessee of US$ 274 per day was erroneous - On appeal, Commissioner (Appeals) upheld order of Assessing Officer - Whether as per cost plus method sum of direct and indirect cost along with gross profit mark-up, etc., is taken as arm’s length price in relation to supply of property of provision of services by enterprise - Held, yes - Whether, therefore, what is relevant is to include gross profit mark up and not to reduce anything from cost - Held, yes - Whether therefore, Commissioner (Appeals) was not justified in reducing US$ 274 per day from lease rental by taking it as provision for dividend instead of normal gross profit mark-up for purposes of determination of arm’s length price under section 92C - Held, yes

Facts

The assessee-company had taken on hire one ship from its associated enterprise, namely, EIL, which was engaged in the operation of ships. The Assessing Officer referred the matter to the Additional Commissioner Transfer Pricing under section 92CA(1) for computing the arm’s length price of bare boat hire charges. The assessee contended that it had paid charter hire charges at US$ 94,550 per month to EIL. It also stated that it had entered into an agreement with EIL for taking the above ship for a period of one year and as per Clarkson report, the average one year time charter rates for a similar size of vessel was US$ 12,582 per day. By considering the age of the ship taken on hire, the amount of hire charges at the arm’s length price was worked at US$ 94,550 per month on the Comparable Uncontrolled Price Method (CUP method). The Additional Commissioner, however, rejected said method. Therefore, the assessee submitted an alternate working before the Additional Commissioner, on cost plus method. The Additional Commissioner, had accepted the assessee’s working as per cost plus method, except for reducing claim of the dividend on the ground that no dividend was, in fact, received by the assessee.

He, accordingly, reduced dividend of US$ 274 per day from payments made to EIL and, thus, determined the amount payable to EIL at Rs. 2,26,02,767. The Assessing Officer made an addition for the differential amount of Rs. 22,24,314 to the income of the assessee.

On an appeal, the Commissioner (Appeals) confirmed the action of the Assessing Officer.

On second appeal :

Held

Section 92C deals with the computation of the arm’s length price. Certain methods have been prescribed for determining such price in the international transactions and it has been mentioned in sub-section (2) of section 92C that the most appropriate method shall be applied for the determination of the arm’s length price. [Para 11]

The assessee had justified the charter hire payment by relying on CUP method. That method, as explained in clause (a) of rule 10B, deals with the determination of the arm’s length price on the basis of comparable uncontrolled transaction. The emphasis under that method is to rely on such comparable cases for the price shown, which are not related to the assessee. In simple words, it is just like showing some comparable case justifying the price paid for the services received. Such comparable uncontrolled transaction can also take the shape of any reliable date justifying the market price of similar services. In the instant case, the assessee had relied on the Clarkson Report as the comparable uncontrolled transaction. That report refers to the modern ships which are not more than ten years old and the average one year time charter rate for such vessel has been given at US$ 12,582 per day for the year-in-question. The assessee had computed the charter hire payment made to EIL at the rate of around 25 per cent of the rate as prescribed in Clarkson Report on the ground that the ships hired by it were 22 years old. There was absolutely no material worth the name by which one could justify the reduction at 75 per cent due to age factor of the ship. In principle one was agreeable with the assessee that the adjustment in the price was permissible as per sub-rule (a)(ii) of rule 10B(1). But keeping into consideration such a vast age gap of the two ships one was not inclined to hold that the ad hoc deduction of 75 per cent would bring the case within the adjustable range. [Para 12]

One was also not convinced with the submission of the assessee that the same rate of hire charges had been paid in the preceding year, which had been accepted in the assessment made under section 143(3) and resultantly the same rate should not be brought within the shadow of doubt in the instant year. The provisions for the computation of income from the international transaction having regard to the arm’s length price had been introduced for the first time in the assessment year 2002-03 and the same year was involved in the instant case. Such provisions were not applicable to the preceding year when the same amount of hire charges had been accepted by the revenue. Hence, there was no question of relying on the assessment order for the preceding year to justify the charter hire payment made in the relevant year in the light of the provisions which had seen the light of the day for the first time in the current year. [Para 13]

It was also contended by the assessee that the provision of transfer pricing should not be applied on the ground that the entire amount of dividend receivable from EIL was taxable in its hands and if the amount of lease rental as payable was reduced, that would amount to double taxation on the same income to that extent. In the instant case no dividend was paid/proposed by EIL in respect of the current year as well as for the succeeding year. It implied that the income earned by EIL had remained in its coffers and was not disbursed to the assessee by way of dividend. When the dividend itself was not received, there could not be any point of double taxation of the amount to that extent. Further, there was also no merit in the contention of the assessee that the possibility of EIL paying dividend in the next year out of the accumulated profit could not be ruled out. [Para 14]

One was not agreeable with the proposition that if the assessee-company had received dividend from the associated enterprise, then to that extent, no addition on account of transfer pricing provisions was possible. Firstly, only the transactions with the associated enterprise are brought within the purview of transfer pricing provisions. The definition of the associated enterprise as per section 92A makes it explicitly clear that one enterprise is considered as an associated enterprise of the other if one holds a larger interest in the other by way of management or control or capital, etc. Sub-section (2) of the said section further lists certain cases in which two enterprises shall be deemed to be associated enterprises. One of such deeming clause is that one holds directly or indirectly shares carrying not less than twenty six per cent of the voting power in each of such enterprises Therefore, the transfer pricing provisions are always applicable when the transactions are entered into with the associated enterprises and one holds larger voting power in the other. There is no provision in this section, which provides for allowing deduction towards the pro tanto addition to the income on account of determination of arm’s length price in case of receipt of dividend from the associated enterprises. [Para 15]

Therefore, if there is a receipt of dividend by one enterprise from the other associated enterprise, which is chargeable to tax in India, then the application of the transfer pricing provisions could not be ruled out to that extent on the plea that it would amount to double taxation. The intention of the Legislature becomes further clear on reading of the second proviso to section 92C(3), which also applies to section 92CA by virtue of sub-section (4) providing for not allowing deduction under section 10A, 10AA or 10B under Chapter VI-A in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section. [Para 16]

Therefore, the working of the assessee at the arm’s length price as per CUP Method did not merit acceptance. Now the question arose as to how such price should be determined. The assessee had submitted an alternate working before the Additional Commissioner, Transfer Pricing on the cost plus method and the Additional Commissioner, had accepted the assessee’s working as per cost plus method, except for reducing the claim of the dividend on the ground that no dividend was, in fact, received by the assessee. In such a situation, it became apparent that the cost plus method with which the Additional Commissioner, had proceeded could not be substituted with any other method at the instant stage. The Commissioner (Appeals) had approved of the action of the Assessing Officer by which the inclusion of dividend by the assessee of US$ 274 per day had been held to be erroneous. The assessee was in appeal against that exclusion and the revenue was not aggrieved on that issue. Resultantly, one was confined only to considering whether the Commissioner (Appeals) was justified in excluding US$ 274 per day from the hire charges. The cost plus method as per clause (c) of rule 10B(1) provides for taking the direct and indirect cost of production incurred by the enterprises in respect of property transferred or services provided to an associate enterprise and also in determining the amount of a normal gross profit mark up to such cost. The sum of direct and indirect cost along with the gross profit mark-up, etc., is taken as arm’s length price in relation to the supply of property or provision of services by the enterprise. What is relevant for further inclusion in the cost plus method apart from the direct and indirect costs is to add up the amount of normal gross profit. When the interest on loan and depreciation were considered together, constituting the direct and the indirect costs the amount came to US$ 2767 as lease rental per day. That amount was to be increased further by the amount of a normal gross profit mark-up. The authorities had excluded the dividend portion at 10 per cent from that claimed by the assessee in the calculation made available to the Additional Commissioner, Transfer Pricing on a misnomer. What is relevant is to include the gross profit mark-up and not reduce anything from the cost. The 10 per cent gross profit rate was reasonable one for the inclusion in the direct and indirect costs for determining the arm’s length price on cost plus method. Even if one goes by such a reasonable gross profit mark-up of 10 per cent on such cost the figure would result in US$ 274. Therefore, the Commissioner (Appeals) was not justified in reducing US$ 274 per day from the lease rental by taking it as a provision for dividend instead of the normal gross profit mark-up for the purposes of determination of the arm’s length price under section 92C. Therefore, the appeal of the assessee on that issue deserved to be allowed. [Para 17]

Amount received under non-competing agreement--Held, Capital Receipt

Taxability of payment received by an assessee-confectioner under a non-competition agreement

Where the payment was received by the assessee for ceasing and desisting from carrying on the business of the manufacture and sale of confectionary products in India for a period of 10 years, the receipt constituted a capital receipt not chargeable to tax

ITAT, MUMBAI BENCH ‘B’, MUMBAI
Parke Davis (India) Ltd.
v.
JCIT
ITA NO. 506/HYD/2000
JANUARY 6, 2009

RELEVANT EXTRACTS :

15. As a general proposition, it can be said that the payment for impairment of income earning apparatus, sterilization of a source of income would generally fall in the category of capital receipts. Compensation received for undertaking restrictive covenants of not competing with the business also generally fall in the category of capital receipts. The exception being a case, where such covenants are normal incident of carrying on business. An illustration of the case of exception would be a fee paid to an Advocate for not accepting brief of the opposite party. Such payment are incidental to the legal profession and are revenue receipts chargeable to tax.

17. Learned Departmental Representative placed reliance on the decision of the Mumbai Bench of ITAT in the case of ACIT v. Hinditran Services (P) Ltd., 99 ITD 479 (Mum).

18. We have perused the aforesaid decision and find that the receipt in that case was under a resource transfer agreement or termination of agency. The assessee was acting as agent for 16 foreign companies. One of the principal entered into a Joint Venture with the assessee and one H and transferred all personnel dealing with the foreign principal T to H. The agency with other 15 agencies continued. The agency agreement with T also continued. The consideration received for transfer of personnel and resources was therefore held to be revenue receipt. On facts therefore the decision is clearly distinguishable. We are of the view that the sum of Rs. 6 crores was received by the assessee for ceasing and desisting from carrying on the business of the manufacture and sale in India of confectionery products for a period of 10 years. The receipt constitutes a capital receipt not chargeable to tax. The addition of Rs. 6 crores confirmed by learned Commissioner (Appeals) in this regard is directed to be deleted. Ground No. 1 of the assessee is allowed.

Advance ruling under payment for "Secondment Agreement"--No Tax Withholding

AAR on obligation of an Indian company to deduct tax at source for payments made to a Korean company under ‘Secondment Agreement’



From the mere fact that the Korean company did provide the service of a technical person and received from the applicant-Indian company a substantial part of the salary payable by the Korean company, it cannot be inferred that the part reimbursement in terms of the secondment agreement represents the fee for technical services within the meaning of Explanation 2 to section 9(1)(vii) of the Income-tax Act or Article 13.4 of the Indo-Korean Tax Treaty; therefore, no tax is liable to be deducted at source by the applicant in respect of the payments made or to be made to the Korean company under the terms of the secondment agreement

The Authority for Advance Rulings (Income-tax) New Delhi

Cholamandalam MS General Insurance Co. Ltd., In re

AAR No. 752 of 2007



8.5 The crucial question to be asked and answered is whether the applicant has paid any fee to HMFICL for the service of deputing its own employee having technical knowledge to work with the applicant for a specified period? Whether the part reimbursement of salary of secondee by the applicant shall be construed as consideration for rendering the service of the kind covered by FTS clause? Does it partake the character of income? In our considered view, the answer must be in the negative and the amount paid by the applicant cannot be said to be in the nature of a consideration for offering the services of the seconded employee. A perusal of the agreement would show that the parties have entered into a mutually beneficial arrangement and incidental thereto, the applicant reimburses a part of the salary of the employee payable by the Provider. What the applicant pays goes towards the reimbursement of the cost borne by HMFICL on account of employment of the seconded official, that too partly. In this process, no income can be said to have been generated which answers the description of FTS. From the mere fact that HMFICL did provide the services of a technical person and received from the applicant a substantial part of the salary payable by the said company, it cannot be inferred that the part reimbursement in terms of clause 3.3 represents the fee for technical services. In this connection, it must be noted that this arrangement has been conceived in mutual interest. The applicant will benefit by utilizing the services of the seconded employee. The Provider viz. HMFICL will also benefit because it would not merely promote business relations, but the Recipient would, wherever possible, place the re-insurance business with the Provider, as stipulated in clause 17.2. Further, during the currency of Agreement and atleast one year thereafter, the Provider will not compete within India in regard to the general insurance business [vide clause 8]. It is in the context of these mutually beneficial clauses, the secondment of the employee and reimbursement of only a part of his salary/benefits should be viewed. If so viewed, the reasonable conclusion to be drawn is that the parties never contemplated payment of a fee for technical services within the meaning of Explanation 2 to section 9(1)(vii) of the Act or Article 13.4 of the Treaty. The essence or substance of the transaction is not deriving income by way of charging a fee for the service.

9. We would like to draw support from some decided cases wherein the true nature of receipt in the form of reimbursement of expenses was considered.

9.1 In the case of CIT vs. Dunlop Rubber Co. Ltd., a division Bench of Calcutta High Court consisting of Sabyasachi Mukherjee J. (as he then was) and S.C. Sen J. discussed the question whether reimbursement of a part of expenses incurred on research to the assessee – a non-resident company by its subsidiary constitutes income of the said non-resident company The agreement inter alia required the Indian subsidiary to pay to the assessee company a proportionate part of the costs and expenses (including salaries and research & development expenditure) incurred by the assessee – company for the acquisition and development of information, processes and inventions. The Government of India permitted the Indian company to make payments towards research contribution to the assessee company subject to a ceiling of 0.67% of the volume of sales. The ITO held that the payments received by the assessee–company were in the nature of royalty and therefore he allowed certain percentage as expenditure and the balance was assessed as income. The Appellate Tribunal held that the Revenue was not justified in taxing the assessee company because what was recouped by the assessee company was part of the expenses incurred by it and it cannot be treated as payment of royalty. The High Court affirmed the view taken by the Tribunal and observed thus :

“It appears to us that the Tribunal was right in arriving at the view that it was the recoupment of the expenses incurred for the technical data for which a research department was maintained in London. The result of the research was for the benefit of all concerned including the head office and the subsidiary concerns. It was for sharing of the expenses of the research which was utilized by the subsidiaries as well as the head office that the payments were made by the Indian company and received by the London company. But the very fact that the technical data was jointly obtained and the expenses were shared together indicates that it could not be treated as income. The fact that only 0.67% of the turnover was allowed is because of the restrictions imposed by the Government. In that view of the matter we are of the opinion that the Tribunal arrived at the correct decision keeping in view the background of the agreement.”

9.2 In the case of CIT vs. Industrial Engineering Projects P. Ltd. decided by a division Bench of the Delhi High Court consisting of B.N.Kirpal J. (as he then was) and P.K. Bahri J., the assessee company had an agreement with a Swiss company pursuant to which the assessee had to render some services to the Swiss company for which the assessee would receive a minimum sum per year. It was further provided in the agreement that certain costs and expenses incurred by the assessee while rendering services will be reimbursed. The ITO disallowed the expenses incurred for traveling and entertainment expenses on the ground that they were beyond permissible limit. The Income-tax Tribunal, however, held in favour of the assessee to the effect that the reimbursement of expenses did not constitute income. The Delhi High Court after referring to judgment of the Supreme Court in CIT vs. K.Tejaji observed thus :

“The Supreme Court clearly held that to the extent of the receipt representing reimbursement of the expenses, the same were not taxable. It is only when there was surplus that the same should be taxed. In the present case, the Tribunal has held that the assessee received no sums in excess of the expenses incurred by the assessee under the Agreement.”

In conclusion, it was observed that reimbursement of expenses can, under no circumstances, be regarded as revenue receipt. No doubt, the question there was whether the reimbursed amount can be regarded as revenue receipt. But, the approach adopted is in line with what was expressed by Calcutta High Court in Dunlop case.

10. Reliance has been placed on behalf of the Revenue on the Ruling of this Authority in AT&S India Ltd*. in re. There also certain technical personnel were deputed by a foreign company under a Secondment Agreement. The question was formulated as follows :

“Whether pursuant to the secondment agreement entered into by the applicant with AT&S Austria, the payment to be made by the applicant to AT&S Austria, towards reimbursement of salary cost incurred by AT&S Austria in respect of seconded personnel, would be subject to withholding tax under section 195 of the Income-tax Act.”

In that case, the Secondment Agreement was a sequel to the Foreign Collaboration Agreement between the same parties. The following facts referred to by the AAR are relevant :

“Article 4 of the FCA casts an obligation on AT&S Austria to provide all assistance and co-operation to the applicant in its venture of carrying on the business by providing appropriate support; technology and such other services as may be required in connection therewith. And article 4.2 thereof requires AT&S Austria to offer the services of its technical experts to the applicant, if requested, for working on the project being executed and such services shall be rendered by the technical experts from AT&S Austria subject to their availability and on such charges, terms and conditions as will be agreed between the parties.

Reverting to the secondment agreement, it provides that AT&S Austria shall assign or shall cause its subsidiaries to assign to the applicant certain qualified individuals employed by the former or one or more of its subsidiaries – referred to as the seconded personnel – to work for the applicant who will be compensated on terms substantially similar to the compensation they would have received as employees of its subsidiaries.”

After referring to the various terms of this Secondment Agreement, the Authority observed thus :

“From the above analysis of both the agreements it is clear that pursuant to the obligation under the Foreign Collaboration Agreement, the AT&S Austria has offered the services of technical experts to the applicant on the latter’s request and the terms and conditions for providing services of technical experts are contained in the secondment agreement which we have referred to above in great detail. Though the term “reimbursement” is used in the agreements, the nature of payments under the secondment agreement has to satisfy the characteristic of reimbursement and that the term “reimbursement” in the agreement will not be determinative of the nature of payments. The term “reimbursement” is not a technical word or a word of art. In Oxford English Dictionary, to reimburse means – to repay a person who has spent or lost money – and accordingly reimbursement means to make good the amount spent or lost. However, under the secondment agreement the applicant is required to compensate AT&S Austria for all costs directly or indirectly arisen from the secondment of personnel and that the compensation is not limited to salary, bonus, benefits, personal travel, etc. though salary, bonus etc. and the amounts referred to in para. 4.2 of the secondment agreement form part of the compensation. The premise of the question that the payments are only in the nature of reimbursement of actual expenditure incurred by AT&S Austria is not tenable for reasons more than one. First it is not supported by any evidence as no material (except the debit notes of 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.”

The following observation at paragraph 24 is also pertinent.

“The subject-matter of payments is not merely the salaries of such employees, which have suffered tax, but compensation which, as noted above, takes in its ambit other items also which AT&S Austria is entitled to receive from the applicant under the secondment agreement.”

Thereafter, the AAR went into the question whether the real employer was the applicant or the AT&S Austria. In the view we are taking, that particular aspect need not be discussed by us. We are of the view that the ratio of that Ruling does not apply to the facts of the present case. The Authority placed much reliance on the clause underlined in the above passage which required the applicant to compensate AT&S Austria. The expression ‘compensation’ was used in a wide sense. Moreover, no material was placed before the Authority showing the details of actual expenditure incurred by AT&S Austria and the amount reimbursed, whereas in the present case, the details furnished reveal that there was only part reimbursement of the cost incurred by HMFICL towards the salary of the seconded employee. In the passage extracted above, the Authority concluded that it would not only be unrealistic but also contrary to the terms of the Agreement to treat the payment made under the Secondment Agreement as mere reimbursement of salaries of the seconded employees. In the present case, the fact situation is different. It can be said without hesitation that it is a case of partial reimbursement of salary which is being paid by the Korean employer to the seconded employee.

10.1 Our attention has also been drawn by the learned counsel for Revenue to the ruling of AAR in Danfoss Industries Ltd. In that case, an agreement was entered into with a foreign company which provided for rendering services to its group of companies including the Indian Company (applicant). The services consisted of advice and assistance in market research and strategies, financial matters and customer relations. The consideration for availing of those services was a service fee based on the portion of the services the applicant’s company received in relation to the total cost of the foreign company in providing such services. The question that was addressed by this Authority was whether the payment was in the nature of reimbursement of a portion of the actual expenditure incurred by the Singapore company and whether any income was embedded in it. The question was answered against the applicant. The following observations are crucial:

“It is thus clear that there is no direct nexus between the actual costs incurred by the Danfoss Singapore in providing the said services to a Danfoss group company and the fees payable by each individual company which avails of the services. In the absence of the break-up of the cost incurred by Danfoss Singapore in providing such services and fees payable by each individual company, the aforementioned conclusion, in our view, is unassailable. It is, therefore, not possible to conclude that the service fee payable by the applicant is nothing but reimbursement of costs incurred by Danfoss in providing services to the applicant.”

It was mainly on that finding that the applicant’s contention was rejected. Referring to Dunlop Rubber case (supra) the distinguishing feature was pointed out as follows :-

“That was not the case of the assessee-company providing services to an Indian company on payment of consideration in the form of service fees as in the present case. In that case both the assessee-company and the Indian company were beneficiaries of the research conducted as a joint venture. In the instant case the applicant availed the services provided by Danfoss Singapore on payment of service fees.”

10.2 It is clear from the passages referred to above that the ratio of the ruling rests on different facts and cannot be applied to the present case.

11. At the resumed hearing on 15/9/2008, a contention was raised by the learned counsel for the applicant that the real and economic employer of the seconded employee is the applicant because the day-to-day working of the employee is supervised and controlled by the applicant. It is therefore submitted that the amount paid in the form of reimbursement shall be deemed to be payment made towards salary and not FTS. Certain passages in OECD commentary on Art.15 of the model Treaty have been relied upon to substantiate the argument. We must say that such contention goes contrary to the averments made and the stand taken in the application. In the view we have taken, it is unnecessary to comment on the tenability of the contention and the applicability of the passage cited by the learned counsel.

12. In view of the foregoing discussion, the first question is answered in the negative and we hold that no tax is liable to be deducted at source by the applicant in respect of the payments made or to be made to HMFICL under the terms of the Secondment Agreement. The other two questions do not call for any answer.

Accordingly, the Ruling is given and pronounced on this the 29th day of January, 2009.

No tax withholding on reimbursement of salary under secondment agreement

The ruling highlights that in case of secondment arrangements where an expatriate is seconded to an Indian Company to work under the direction, control and supervision of the Indian Company and the salary cost is also borne by the Indian Company, the Indian Company should be considered as the ‘economic employer’ and is not required to
withhold tax on the salary cost reimbursed to the Overseas Company.

IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE, BENCH 'A'

I.T.A.No.87/Bang/2008
Assessment year: 2006-07

M/s IDS SOFTWARE SOLUTIONS (INDIA) PVT LTD,
6TH FLOOR, TOWER-D, CORPORATE BLOCK,
DIAMOND DISTRICT, AIRPORT ROAD, BANGALORE 560 008

Vs

INCOME-TAX OFFICER (INTERNATIONAL TAXATION),
WARD-19(1), BANGALORE


This appeal is by the assessee and is directed against the order of the Commissioner of Income-tax (Appeals) passed on 30.11.2007 by which he dismissed the appeal filed by the assessee against the order passed by the Assessing Officer u/s. 195(2) of the Income-tax Act on 31.7.2006.

2. The appeal arises this way. The assessee is a company engaged in the business of software development. It is a 100% Indian subsidiary of M/s. International Decisions Systems of USA, which is hereinafter referred to as "IDS" or the "US company". On 19.8.2005 it entered into an agreement with IDS. This agreement was for securing the services of certain personnel from IDS to assist the assessee in its business. The agreement would be hereinafter referred to as the "secondment agreement". A copy of the agreement has been placed at pages 1 to 6 of 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 August, 2005 and end on 31st December, 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 replace the employee if he is not, in the opinion of the assessee, qualified or meet the requirements of the secondment arrangement. Clause (E) clarified that during the secondment period, the seconded employee may be required to act or serve in various capacities such as "officers, authorized signatories, nominees or in any other lawful personal capacity" on behalf of the assessee as may be required. Clause (F) provided that if during the currency of the secondment agreement the employee ceased to be the employee of IDS (the US company), the obligation of IDS to second such employee would also cease. However, the obligation of IDS to second a suitable replacement to the assessee would continue. Clause (G) clarified that the assessee shall have the right to request additional employees for secondment subject to the agreement of IDS and availability of staff. Clause (H) stipulated that the seconded employee shall maintain strict confidentiality with regard to all the information to which he had access during the period of secondment including technical, financial or accounting information and information relating to price or cost or any other proprietary or business related information. He was to refrain from disclosing the information to anybody except with the written consent of the assessee. Article III listed out the duties and obligations of the assessee during the secondment period. The assessee was to reimburse IDS for the remuneration of the employee including but not limited to salary and bonus paid by IDS and all out of pocket expenses incurred by the seconded employee paid by IDS, including but not limited to business travel expenses and other miscellaneous expenses directly related to the secondment. The article clarified that the reimbursement would be of actual costs incurred by IDS without any mark up thereon. Article IV and V relate to the payment and the documentation which are not very relevant. Article VI provides for indemnity. It says that the US company will try to provide an appropriate employee for secondment but does not warranty for the quality of the seconded employee. The assessee was to indemnify IDS, the US company from all claims, demands, loss, damages etc., to which IDS may become liable as a consequence of any act or omission committed by the seconded employee. The other clauses of this agreement are not very relevant for our purposes.

3. On 7.6.2005 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 pages 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 approximately 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 up to 50% 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 Advisor who will be paid by IDS. In addition to leased accommodation, he will be provided a car and a driver. He will also be given some shares of IDS.

The other terms of the letter are not very material for our purpose. It can be gathered from the letter that Dr. Sundararajan, who was earlier employed with Cognizant Technology Solutions at Chennai was being offered employment with IDS at Bangalore in its Indian arm, which is the assessee company.

4. On 1.9.2005 a meeting of the Board of Directors of the assessee company was held at IDS centre, Minneapolis, USA with two directors being present. It was recognized in the minutes of the meeting that the Board of Directors were appraised of the need to have a person residing in India to oversee the programme implementation for IDS activities in India and in that connection it was decided to induct Srikanth Sundararajan as Additional Director on the Board of the assessee company in accordance with Section 260 of the Companies Act, 1956 r.w.clause 84 of the Articles of Association. The following resolution was passed at the meeting : "Resolved that Mr. Srikanth Sundararajan be and is hereby appointed Managing Director of the company w.e.f the date of the meeting pursuant to article 89 of the Articles of Association of the company and on the terms and conditions as embodied in the terms of appointment placed before the meeting and signed by the Chairman for the purpose of identification". The reference to the terms of appointment is obviously to the letter dated 7.6.2005 written by Nicholas P. Somers to Srikanth Sundararajan which we have already referred. It is further noted in the minutes of the meeting that Srikanth Sundararajan is authorized to operate the account held in HSBC Bank subject to the limits. Under a separate head in the minutes, titled "Authorisation", the following further duties were prescribed for Dr. Sundararajan :

(a) He is authorized to execute lease documents pertaining to the office premises to set up a 100% EOU ;

(b) He is authorized to initiate steps in executing legal agreements, filing of relevant documents for establishment of a hundred % EOU in the STP of India;

(c) He shall take steps to file applications to the various statutory agencies such as Customs, Central Excise etc., and to furnish undertakings and declarations;

(d) He is authorized to secure 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 authorized 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 pages 21 and 22 of the assessee's paper book monthwise for the period 19.8.2005 to 31.3.2006. 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 u/s.195 was made. It is only in respect of the balance of US $ 25,813 that an application was filed by the assessee u/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% came to US $ 2,581 equivalent to INR 1,19,876/-.

6. On 24.1.2006 the assessee company made an application to the ITO, Ward-11(2), Bangalore seeking permission to remit the amount to IDS without deduction of tax at source. It was explained in the application that Dr. Sundararajan was for all practical purposes an employee of the assessee during the secondment period and the salary received by him from IDS the US company in respect of services rendered in India was being offered to tax in India in his individual capacity. It was pointed out that the assessee intended to provide in its books the amount due to IDS, the US company which was nothing but the salary and other benefits provided by the US company to Dr. Sundararajan and which has been offered by him to tax in India. It was thus claimed that the proposed remittance was in the nature of salary and other benefits on which tax has already been deducted and paid in India. A statement showing the taxes paid for Dr. Sundararajan was enclosed as proof. The assessee also attached as Annexure -5 all the documentation that was required to demonstrate that Dr. Sundararajan was an employee of IDS. The assessee also submitted that there was no agreement for technical services between IDS and the assessee company. It was thus contended that section 195 of the Income-tax Act had no application to the facts of the case and a plea was made for permission to remit the amount without deduction of tax at source. Since the secondment agreement was to end on 31.12.2007, the assessee pleaded for issue of a certificate of non-deduction of tax till that date.

7. The Assessing Officer examined the assessee's claim and firstly held that the payments made by the assessee to IDS cannot be considered to be mere reimbursements so that they can be exempt from tax. Secondly he held that the proposed remittance cannot be considered as salary because there was no employer-employee relationship between the assessee and IDS, the US company. According to the Assessing Officer, the remittance would fall to be considered as "fees for technical services" as defined in Explanation 2 below section 9 (1)(vii) of the Income-tax Act as also under the Article 12(4) of the Double Tax Avoidance Agreement between India and USA. It would appear that the assessee had contended before the Assessing Officer that no technical services were made available to the assessee company by IDS, but this plea was rejected by the Assessing Officer who held that the remittance was by way of fees for technical services and, therefore, the assessee was liable to deduct tax therefrom. Accordingly, he directed the assessee to deduct tax at the rate of 10% of the remittance. The assessee was to remit US $ 25,813. The Assessing Officer directed the assessee to deduction US$ 2,581 from the same. This order was passed by the Assessing Officer on 31.7.2000.

8. The assessee filed an appeal before the Commissioner of Income-tax (Appeals). 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 u/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 Assessing Officer was not right in taking the view that the payment represented fees for technical services rendered by IDS and hence tax was deductible.

The Commissioner of Income-tax (Appeals) held against the assessee on all the above three points and hence the present appeal by the assessee.

9. The first submission of the learned representative for the assessee was that the amount sought to be remitted represented salary for services rendered by Dr. Sundararajan and since the assessee has deducted the tax payable thereon and remitted the same to the Indian tax authorities there was no further liability to deduct tax u/s.195. In order to appreciate the contention, we have to understand the relevant tests for determining whether there is, between two persons, an employer-employee relationship. We may look at some of the relevant authorities where a company and director are involved, the question being whether the director can be said to be an employee of the company. We may first refer to the judgement of the Bombay High Court in CIT Vs. Lady Navajbai R. J. Tata (1947) 15 ITR 8. There the question was whether gratuity received by the lady from a company was taxable u/s.7 of the Indian Income-tax Act, 1922, as salary or u/s.12 of the said Act, as income from other sources. She was a permanent director of the company. She did not attend office everyday like the other directors but attended only the board meetings. She was consulted by the other directors in all important matters. The articles of association of the company provided that the companies business shall be managed by the directors and their monthly remuneration was Rs.100/- plus other sums voted as payable to them. The assessee received Rs.40,000/- from the company as her remuneration and the question was whether this amount was taxable as her salary. Sir Leonard Stone, the Hon'ble Chief Justice of the High Court who presided over the Division Bench noticed that the assessee was only a permanent director under the articles and apart from the articles there was no other contract between her and the company. Even the articles did not appoint her as manager or managing director. On these findings, the Hon'ble Chief Justice held that the assessee was not a servant or an employee of the company and the amount paid to her could not be assessed as salary. Hon'ble Justice Chagla held that though it is true that a director holds an office under the company and is either appointed or elected by the company, it cannot be said that every person who holds an office is necessarily an employee. The following observations at page 14 of the judgment are important: "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, Madras (1966) 62 ITR 345, 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 management covering the entire conduct and exigencies of the business but he was to exercise them subject to the superintendence, direction and control of the Board of Directors and subject to the Memorandum and Articles. The Division Bench noticed the judgement the Supreme Court in Lakshminarayan Ramgopal & Son Ltd., Vs Government of Hyderabad (1954) 25 ITR 449 in which it was held that a master is one who not only directs what and when a thing is to be done but also how it should be done, and though the division bench observed that "we are not certain that this test is necessarily the only test in deciding whether the relationship of master and servant exists, for one has to take note of various changing factors in human and industrial relationships which regulate and change or alter the concept of the relationship of master and servant" nevertheless held, applying the test laid down by the Supreme Court that "We are satisfied that the terms of the agreement and the functions assigned to the assessee and the reservation to the Board of Directors of the right of superintendence, direction and control show that the relationship between the company and the assessee is that of an employer and an employee". Referring to the judgement of the Bombay High Court (supra), the Madras High Court further observed that though a director may not be a servant of the company merely by the reason of that capacity, but there is nothing to prevent him from being a servant of the company too under a special contract of service which he may enter into with the company. The question of the same person having a dual capacity namely that of a Managing Director and also that of an employee of the company has thus been accepted both by the Bombay and the Madras High Courts in the decisions noticed above. A similar view had earlier been expressed by the Scottish Court of Sessions in Anderson Vs James Sutherland (1941) S.C. 203 to the effect that the Managing Director has two functions and two capacities; qua Managing Director he is a party to a contract with the company, and this contract is a contract of employment, a contract of service and not a contract for service. Ram Prashad Vs CIT, New Delhi (1972) 86 ITR 122 was a case decided by the Supreme Court where the question was whether the Managing Director of a company who received monthly remuneration as also a percentage 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 day, nor is it necessary that the company's supervision over him should be a continuous exercise of the power to oversee or superintend the work to be done. The control and supervision is exercised and is exercisable in terms of the Articles of Association by the Board of Directors and the company in its general meeting.

e) If the powers of the Managing Director have to be exercised within the terms and limitations prescribed there under, and subject to the control and supervision of the directors, he would be considered as the servant of the company.

10. It seems to us that if the above decisions are to be applied to a particular case, it would be necessary to see whether the director was appointed under the Articles of the company and whether in addition to the Articles, there was an independent or special contract between the company and the director, in which case alone it can be said that the director was an employee of the company. In the present case, as the facts earlier narrated would show, there was first an offer letter written by Nicholas P. Somers who was a director of IDS Group Inc. to Dr. Sundararajan in which all the terms of employment were put down in writing. This was accepted by Dr. Sundararajan. The appointment was confirmed in the meeting of the Board of Directors of the assessee company held on 1.9.2005. Actually he was appointed as the Managing Director of the assessee company with effect from 1.9.2005 and we have already seen that a resolution was passed to that effect. The minutes of the Board meeting also make reference to the various resolutions passed in the Board meeting empowering Dr. Sundararajan to initiate the process of setting shop in India (Bangalore). The secondment agreement was entered into after the letter of offer dt.7.6.2005 but before the appointment was made in the Board meeting. There is no dispute that the services of Dr. Sundararajan were seconded to the assessee company by virtue of the secondment agreement though his name does not find a mention in the secondment agreement obviously because his appointment was made about 15 days later. Be that as it may, the question is whether, apart from the Board resolution appointing Dr. Sundararajan as the Managing Director of the assessee company, there was any independent or special contract with him. We are inclined to view the secondment agreement as a contract governing the relationship between the assessee company and Dr. Sundararajan, though the contract as such is between the 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 Article 74. In Article 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 1.9.2005, was by resolution appointed the Managing Director of the assessee company. Clause 85 of the Articles stipulate that the director appointed by the Board shall hold office only till the following annual general meeting, but shall be eligible at such annual general meeting for election as director. Clause 86 provides that notwithstanding anything contained in the articles or in any agreement between the company and the director, the company may by ordinary resolution of which special notice has been given in accordance with section 190 of the Companies Act, remove such director including the Managing Director, if any, before the expiration of the period of his office and such removal shall be without prejudice to any contract of service between him and the company. Clause 89 of the articles, states that the Board of Directors may appoint one of the directors as the Managing Director of the company who shall have such powers and duties as may, from time to time, be determined by resolutions of the Board. It also says that the remuneration and the term of officer of such Managing Director shall, subject to the provisions of the Companies Act, be fixed or varied by a resolution of the Board. It is in accordance with this clause that various resolutions were passed in the Board meeting held on 1.9.2005, which we have already referred to, outlining the duties and responsibilities of the Managing Director.

11. The secondment agreement, as we have already held, constitutes an independent contract of service in respect of the employment of Dr. Sundararajan with the assessee company. It may be true that IDS, the US company is the employer of Dr. Sundararajan in a legal sense but since his services have been seconded to the assessee company under the secondment agreement and further since the assessee company is to reimburse the emoluments paid by IDS to Dr. Sundararajan, it is the assessee company which for all practical purposes is to be looked upon as the employer of Dr. Sundararajan during the relevant period. In this behalf we were referred to the views expressed by Professor Klaus Voegel in his treatise on Double Taxation Conventions under the heading "International Hiring Agreements" at page 885. The view put forth by him is reproduced hereunder :

"The question of who is the employer arises particularly in situations in which the employee is sent abroad to work for 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 quality 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 his time, attention and skills to the assessee company. He is reportable and responsible to the assessee company. He can be rejected by the assessee company in which case the US company is bound to replace him. Under clause 86 of the Articles of Association of the assessee company, which we have already noticed, the assessee company may remove Dr. Sundararajan before the expiration of the period of his office. Clause 89 of the articles empowers the Board of Directors of the assessee company to regulate the powers and duties of Dr. Sundararajan by passing appropriate resolutions which they have already done. Thus reading the Articles of Association as well as the second agreement together, it seems to us that Dr. Sundararajan was an employee of the assessee company, subject to the supervision and control of its Board of Directors, in addition to being the Managing Director of the assessee company.

12. For the above reasons, we hold that Dr. Sundararajan was an employee of the assessee company during the relevant time and the amount payable to him was not to suffer tax deducted at source at the time of remittance to IDS since the tax has been deducted and paid to the Indian Income-tax authorities.

13. The next question is whether the amount can be considered as fees for technical services within the meaning of Explanation 2 below section 9(1)(vii) of the Income-tax Act. Under this Explanation fees for technical services means any consideration including lumpsum consideration for the rendering of any managerial, technical or consultancy services, including the provision of services of technical or other personnel, but 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 service but also to financial or accounting information, price or cost data and any other proprietary or business related information. Article VI which provides for indemnity, that is to say, the liability of the assessee company to indemnify the US company from all claims, demands, etc., consequent to any act or omission by the seconded employee is also inconsistent with the claim of the department that this is an agreement for rendering technical services. The Article further provides that nothing in the agreement shall be construed as a warranty of the quality of the seconded employee. It is not usual to find such a stipulation in an agreement for rendering technical services.

14. The Department has drawn our attention to the ruling of the Authority for Advance Rulings in the case of AT & S India P. Ltd., (2006) 287 ITR 421. In this case the agreement entered into by the Indian company with its Austrian parent company was titled "Foreign Collaboration Agreement". Article 4 of the agreement obliged the Austrian company to provide all assistance and cooperation to the Indian company in its venture by providing appropriate support technology. Article 4.2 required the Austrian company to offer the services of its technical experts to the assessee for working on the project that was being executed. There was another agreement called the secondment agreement between the Indian and Austrian companies and it inter alia provided that the Austrian company can at any time remove the seconded person and replace him with similarly qualified persons. Referring to the secondment agreement, the AAR observed that a plain reading of the above clause would show that the Austrian company retained the right over the seconded personnel and had the power to remove any seconded personnel from the assessee subject only to the condition that a suitable replacement should be made. In the present case under the secondment agreement it is the assessee company which has control and supervision of the work of the seconded employee namely, Dr. Sundararajan. He was appointed as Managing Director by the Board of Directors of the assessee company and not by IDS. In fact, the assessee company could even terminate the services of Dr. Sundararajan as Managing Director during the period of eight months during which he was to serve the assessee company. There was no separate foreign collaboration agreement of the kind which was entered into between the Indian and the Austrian companies in the ruling of the AAR. It appears to us on a reading of the ruling of the AAR that in that case the secondment agreement was subservient to the foreign collaboration agreement. These are thus the features which distinguish the present case from the decision of the AAR. We are, therefore, unable to apply the said decision to the present case.

15. The department has also relied on another ruling of the AAR in South West Mining Ltd., In Re (2005) 278 ITR 233.This is a clear case of technical consultants visiting India for collecting random samples for the purpose of sending reports from abroad on the basis of the analysis of the samples. The question was whether the fees paid to the non-resident consultant were fees for technical services. There can be no doubt that the services rendered by the non-resident consultants were technical and consultancy services. In this case there was no secondment agreement. It was a clear and simple case of rendering technical services. This case has nothing in common with the present case.

16. For the above reasons we are also not able to hold that the payment to IDS represented fees for technical services.

17. In the result, we hold that the assessee was not liable to deduct tax from the amount representing reimbursement of the salary paid by IDS to Dr. Sundararajan while remitting the same to IDS u/s.195 of the Income-tax Act. The salary paid by the assessee to Dr. Sundararajan has been made the subject of tax deducted at source and the same has been remitted to the Indian Income-tax authorities.

18. The appeal of the assessee is accordingly allowed with no order as to costs.

Order pronounced in the open court on this 21.01.2009.