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.
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 comments:
Post a Comment