Sunday, July 29, 2012

Reimbursement of secondment's salary to parent co. has no profit element and involves no FTS--No Tax withholding

Secondment of employees by the legal employer to other entity is not rendering of services if the other entity is their 'real and economic employer' – ITAT



[2012] 23 taxmann.com 346 (Bangalore - Trib.)

IN THE ITAT BANGALORE BENCH 'A'

Abbey Business Services (India) (P.) Ltd.

v.

Deputy Commissioner of Income-tax, Circle 11(1), Bangalore

GEORGE GEORGE K, JUDICIAL MEMBER

AND JASON P. BOAZ, ACCOUNTANT MEMBER

IT APPEAL NOS. 1141 (BANG.) OF 2010 AND 41 & 42 (BANG.) OF 2011

[ASSESSMENT YEARS 2005-06 & 2006-07]

JULY 18, 2012



Facts

• The assessee-Indian company(Abbey India) incorporated on 22-1-2004 under the Companies Act, 1956 entered into an agreement for secondment of staff with its overseas parent company (Abbey National Plc., UK) on 4-2-2004.

• The secondment agreement contained inter alia the following clauses 3.2 to 3.6

3.2 Particular Secondments

Abbey India and Abbey UK shall complete, sign and date a Secondment Term Sheet in respect of each employee agreed between them to be seconded to Abbey India in accordance with the terms of this Agreement.

3.3 Duration of Secondment

3.3.1 (Subject as below) each Secondment shall be for the period of Secondment specified in the Secondment Term Sheet or as may be otherwise agreed between the parties.

3.3.2 Abbey UK shall at the written reasonable request of Abbey India from time to time immediately withdraw any Secondee from Secondment as Abbey India shall specify and Abbey UK may terminate a particular Secondment prematurely at any time where deemed necessary or desirable by Abbey UK for any reason.

3.3.3 A particular Secondment will also come to an end if terminated by the Secondee through leaving the employment of Abbey UK or terminating his or her secondment to India or by Abbey UK terminating the employment of the Secondee for any reason.

** ** **

3.5 Supervision and Control

The parties agree that the Secondees shall be under the direct management, supervision and control of Abbey India during the applicable periods of Secondment. It is further agreed that :

(a) Abbey UK shall not be responsible for and shall not be liable for any loss or damage occasioned by the Secondees' work.

(b) the authority to instruct the Secondees shall lie with Abbey India, and

(c) the Secondees' work shall be performed at such place as Abbey India may instruct.

3.6 Responsibility for Employment Liabilities

This Agreement is not intended to and nothing in this Agreement shall have the effect of constituting the Secondees as employees of Abbey India and the Secondees shall be and remain employees of Abbey UK during Secondment. The Secondees shall not be entitled to any remuneration nor employment benefits from Abbey India and it is agreed that Abbey UK shall, as employer of the Secondees, be responsible for all such remuneration and benefits (including

without limitation Pension Contributions) and all other liabilities as employer and for accounting to the Inland Revenue in the United Kingdom and all other authorities for all taxes, National Insurance or similar contributions."

• Clause 4 reads as under :

" 4. Payment for Secondment

4.1 In consideration of the Secondment of Staff by Abbey UK, Abbey India shall make payments to Abbey UK (in Sterling) equivalent to the Remuneration, Pension Contributions, Expenses, Statutory Payments and any other sums incurred by Abbey UK applicable to each Secondee during his or her period of Secondment.

4.2 The payments under Clause 4.1 shall be made quarterly in arrears against detailed invoice submitted by Abbey UK."

• In the period relevant to assessment year 2005-06, 168 employees were seconded by Abbey National Plc. to the assessee under the secondment agreement. The salary costs of these employees incurred and paid by Abbey National Plc. UK amounted to Rs. 16,62,04,340 on which the TDS deducted and paid to the credit of the central government amounted to Rs.4,98,68,399.

• Other administration costs incurred in respect of the employees seconded under the secondment agreement amounted to Rs.10,96,26,174. Thus the total amount to be reimbursed to Abbey National Plc. UK under the secondment agreement was Rs. 27,58,30,154 which comprised of salary and administration expenses which were debited to the profit and loss account in the books of account of the assessee in the relevant period and were claimed as deduction in computing the total income under the Income Tax Act.

• The assessee filed its return of income for assessment year 2005-06 on 31-10-2005 declaring a total income of Rs. 2,61,87,279. The return was processed under section 143(1) of the Act and the case was taken up for scrutiny by issue of notice under section 143(2) on 31-10-2006 which was served on the assessee.

• The Assessing Officer consequently held that the assessee was liable to the deduct tax under section 195 of the Act in respect of reimbursements made to Abbey National Plc., UK under the secondment agreement and since no tax was deducted under section 195 of the Act, the entire payment made by the assessee amounting to Rs.27,58,30,514 was disallowed by the Assessing Officer under section 40(a)(i) of the Act. CIT(A), in appeal, allowed partial relief to assessee.

Held

• Reimbursement ,by definition, involves no income element.

• Reimbursement follows the incurrence of expenditure by replacing the quantum of disbursement.

• Reimbursement of salary costs to a foreign company under a secondment agreement does not involve profit element and is not liable to income tax. If however, there is a surplus, surplus would be taxed.

• Section 9(1)(vii) of the Act is attracted if (i) there is a rendering of service (ii) for which a consideration should follow.

• When the requirements of employer-employee relationship such as the right to hire or accept the secondment, right to control and supervise, right to instruct, right to terminate from secondment are satisfied as in the case of the Indian subsidiary and secondees, overseas parent was only an employer in a legal sense and Indian subsidiary was their 'real and economic employer'. Mere fact that secondees remained on overseas parent's payroll would not lead to the conclusion that the overseas parent is their actual employer There is no rendering of services by overseas parent once Indian subsidiary is real and effective employer of secondees.

• Consideration means something given in return for obtaining or getting a thing. The reimbursement of salary costs and other administration costs did not contain any mark up. As the reimbursement to overseas parent did not result in any profit or gain or income to it, these reimbursements cannot be treated as 'consideration.'

• The reimbursement also cannot be regarded as 'provision of services of technical or other personnel.' The use of the words 'services of' in the above expression mandates the rendering of some sort of work through the act of the services of technical or other personnel. In the instant case, overseas parent company has not rendered any services to the assessee. It has only deputed secondees to the assessee. The expression 'provision of services of technical or other personnel' used in the definition of 'fees for technical services' is thus not satisfied.

• In the result, assessee's appeal allowed and entire disallowance u/s 40(a)(ia) deleted.

Related case

Verizone Data Services India (P.) Ltd. , In re [2011] 11 taxmann.com 177 (AAR - New Delhi) where a contrary view was taken . The facts of that case were different as in that case the Indian subsidiary was a WOS of overseas parent and one of the seconded employees was to perform the function as Managing Director of the applicant and other two were to supervise and provide directions in the manner through which the activities of the applicant are to be carried out and to liaise with the parent company in USA. In view of these facts, the services were held to be managerial in nature and within the scope of FTS under section 9(1)(vii).

■■■

ORDER

________________________________________

Jason P. Boaz, Accountant Member - The above three appeals by the assessee are against the orders of the Commissioner of Income Tax (Appeals)-I & II, Bangalore. As these appeals involve common issues, they are heard together and disposed off by way of a common order.

2. The facts of the case, in brief, are as under :

2.1 The assessee is an Indian company incorporated on 22.1.2004 under the Companies Act, 1956. It is a subsidiary of M/s. Anitco Ltd., a foreign company, which is a group company of M/s. Abbey National Plc., a foreign company in the United Kingdom. M/s. Abbey National Plc, UK entered into an agreement with M/s. Msource (India) Pvt. Ltd. on 7.11.2003 to outsource the provision of certain process and call centres to M/s. Msource India Pvt Ltd. who as per the mutually agreed terms and conditions was consistently required to provide high quality services which supports the position of M/s. Abbey National Plc, U.K. and its affiliates as being focused and efficient providers of financial and insurance services to customers in the United Kingdom. In order to ensure that high quality services were provided by M/s. Msource India Pvt Ltd., Abbey National Plc, UK entered into a consultancy agreement with the assessee on 4.2.2004 in which the description of services to be provided by the assessee are laid out and for which the assessee was to be compensated at cost plus 12% which included depreciation but excluded exchange fluctuation loss.

2.2 In order to facilitate the outsourcing agreement between Abbey National Plc, UK and Msource India Pvt Ltd, an agreement for secondment of staff was entered into between Abbey National Plc, UK and the assessee on 4.2.2004. The relevant clauses, of this agreement on the aspect of secondment of staff to the assessee are at Clauses 3.1 to 3.6 thereof which are as under :

"3. Secondment of Staff to Abbey India

3.1 General

In consideration of the payments to be made by Abbey India in accordance with Clause 4 Abbey UK shall second Staff to Abbey India during the term in accordance with the following provisions.

3.2 Particular Secondments

Abbey India and Abbey UK shall complete, sign and date a Secondment Term Sheet in respect of each employee agreed between them to be seconded to Abbey India in accordance with the terms of this Agreement.

3.3 Duration of Secondment

3.3.1 (Subject as below) each Secondment shall be for the period of Secondment specified in the Secondment Term Sheet or as may be otherwise agreed between the parties.

3.3.2 Abbey UK shall at the written reasonable request of Abbey India from time to time immediately withdraw any Secondee from Secondment as Abbey India shall specify and Abbey UK may terminate a particular Secondment prematurely at any time where deemed necessary or desirable by Abbey UK for any reason.

3.3.3 A particular Secondment will also come to an end if terminated by the Secondee through leaving the employment of Abbey UK or terminating his or her secondment to India or by Abbey UK terminating the employment of the Secondee for any reason.

3.4 Work Permits

Abbey UK shall be responsible for ensuring that a valid Work Permit is obtained and renewed where required by Indian Law in respect of each Secondee.

3.5 Supervision and Control

The parties agree that the Secondees shall be under the direct management, supervision and control of Abbey India during the applicable periods of Secondment. It is further agreed that :

(a) Abbey UK shall not be responsible for and shall not be liable for any loss or damage occasioned by the Secondees' work.

(b) the authority to instruct the Secondees shall lie with Abbey India, and

(c) the Secondees' work shall be performed at such place as Abbey India may instruct.

3.6 Responsibility for Employment Liabilities

This Agreement is not intended to and nothing in this Agreement shall have the effect of constituting the Secondees as employees of Abbey India and the Secondees shall be and remain employees of Abbey UK during Secondment. The Secondees shall not be entitled to any remuneration nor employment benefits from Abbey India and it is agreed that Abbey UK shall, as employer of the Secondees, be responsible for all such remuneration and benefits (including without limitation Pension Contributions) and all other liabilities as employer and for accounting to the Inland Revenue in the United Kingdom and all other authorities for all taxes, National Insurance or similar contributions."

2.3 Clause 4 of the secondment agreement deals with payment for secondment by which the assessee agreed to reimburse the remuneration, pension contributions, expenses, statutory payments and other sums incurred by Abbey UK for each secondee during his or her period of secondment. Clause 4 reads as under :

"4. Payment for Secondment

4.1 In consideration of the Secondment of Staff by Abbey UK, Abbey India shall make payments to Abbey UK (in Sterling) equivalent to the Remuneration, Pension Contributions, Expenses, Statutory Payments and any other sums incurred by Abbey UK applicable to each Secondee during his or her period of Secondment.

4.2 The payments under Clause 4.1 shall be made quarterly in arrears against detailed invoice submitted by Abbey UK."

2.4 Abbey National Plc, UK deducted income tax at source under section 192 of the Act in respect of salaries paid to secondees and the same was paid to the credit of the central government. It also issued Form No. 16 and filed statement of tax deduction at source.

2.5 The above facts are applicable for all the appeals under consideration.

ITA No. 1141/Bang/2010 (A.Y. 2005-06)

3.1 Facts of the case

In the period relevant to Assessment Year 2005-06, 168 employees were seconded by Abbey National Plc. to the assessee under the secondment agreement. The salary costs of these employees incurred and paid by Abbey National Plc. UK amounted to Rs. 16,62,04,340 on which the TDS deducted and paid to the credit of the central government amounted to Rs. 4,98,68,399. Other administration costs incurred in respect of the employees seconded under the secondment agreement amounted to Rs. 10,96,26,174. Thus the total amount to be reimbursed to Abbey National Plc. UK under the secondment agreement was Rs. 27,58,30,154 which comprised of salary and administration expenses which were debited to the profit and loss account in the books of account of the assessee in the relevant period and were claimed as deduction in computing the total income under the Income Tax Act.

3.2 The assessee filed its return of income for Assessment Year 2005-06 on 31.10.2005 declaring a total income of Rs. 2,61,87,279. The return was processed under section 143(1) of the Act and the case was taken up for scrutiny by issue of notice under section 143(2) on 31.10.2006 which was served on the assessee. The value of international transactions being in excess of Rs. 15 Crores, the case was referred to the concerned Transfer Pricing Officer for determination of arms length price of international transactions. After examining the assessee's case, the TPO accepted the arms length price of the international transactions vide order dt.22.10.2008.

3.3 In the course of assessment proceedings, the Assessing Officer sought the assessee's explanation as to why no tax was deducted under section 195 in respect of the reimbursements made by it to Abbey National Plc., UK. The assessee's explanation that no TDS under section 195 were to be made in respect of these payments as the secondees were its employees for all practical purposes was not accepted by the Assessing Officer. The Assessing Officer was of the view that Abbey National Plc., UK was the employer of the secondee under the secondment agreement and that the assessee had only assumed the role of an intermediary who was authorized by the real employees viz. Abbey National Plc. UK to exercise supervision and control over the seconded employees during the period of secondment. The contention of the assessee that the payment made to Abbey National Plc., UK constituted reimbursement of expenditure was not accepted by the Assessing Officer who held that since the secondees were employees of Abbey National Plc., UK and were providing managerial services to the assessee, the payment made by the assessee to Abbey National Plc., UK under the secondment agreement constituted 'Fees for technical services' under section 9(1)(vii) of the Act. In coming to this finding the Assessing Officer relied on the ruling of the AAR in 670 of 2005 in the case of AT & S (I) Pvt. Ltd. v. CIT. The Assessing Officer consequently held that the assessee was liable to the deduct tax under section 195 of the Act in respect of reimbursements made to Abbey National Plc., UK under the secondment agreement and since no tax was deducted under section 195 of the Act, the entire payment made by the assessee amounting to Rs. 27,58,30,514 was disallowed by the Assessing Officer under section40(a)(i) of the Act.

3.4 Aggrieved by the order of assessment passed under section 143(3) of the Act on 15.12.2008, the assessee carried the matter in appeal before the CIT(A). Before the CIT(A) the assessee contended that the reimbursements made under the secondment agreement was without any profit element involved and hence would not constitute income in the hands of Abbey National Plc., UK. It was also argued that the said payments were not in the nature of 'fees for technical services' under the Double Taxation Avoidance Agreement (DTAA) between India and UK and therefore were not liable for TDS under section 195 and consequently the disallowance under section 40(a)(i) is to be deleted. The learned CIT(A) relying on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Samsung Electronics P. Ltd. [2010] 320 ITR 209, held that since the assessee had filed an application under section 195(2) of the Act after crediting the amount payable to the account of Abbey National Plc., UK, the assessee had to mandatorily deduct tax at source on this amount. The learned CIT(A), however, considered the order passed under section 201 for Assessment Year 2005-06 on 7.7.2010 wherein out of the total expenditure of Rs. 27,58,30,514, administrative expenditure of Rs. 10,96,26,174 was alone held to be fees for technical services under section 9(1)(vii) of the Act and Article 13(4)(c) of the India UK, DTAA. The remaining expenditure on account of reimbursement of salary costs amounting to Rs. 16,62,04,340 were held as not liable for TDS in the order passed under section 201 dt.7.7.2010 since tax had already been deducted thereon under section 192 of the Act and paid to the central government. Considering the aforesaid finding in the order under section 201 dt.7.7.2010, the learned CIT(A) allowed relief in respect of reimbursement of salary costs amounting to Rs. 16,62,04,340 and consequently the disallowance of the remaining expenditure on account of other administrative costs amounting to Rs. 10,96,26,174 was sustained.

3.5 Aggrieved, by the order of learned CIT(A) dt.6.8.2010, the assessee has filed this appeal before us. Revenue, however, has not filed an appeal against the relief allowed by the learned CIT(A).

ITA No. 41/Bang/2011 (A.Y. 2006-07)

4. Facts of the Case.

4.1 In the relevant Assessment Year, 18 employees were seconded by Abbey National Plc., UK to the assessee company. The salary costs amounting to Rs. 3,92,26,211 and other administration costs amounting to Rs. 1,89,65,662 were incurred as per the secondment agreement. The total amount of Rs. 5,81,91,873 reimbursed under the secondment agreement were credited by the assessee to the account of Abbey National Plc., UK debited to its profit and loss account during the relevant period and claimed as a deduction in computing its income under the Act.

4.2 The assessee filed its return of income for Assessment Year 2006-07 on 27.11.2006 declaring a total income of Rs. 2,09,49,057. The return was processed under section 143(1) of the Act and was taken up for scrutiny by issue of notice under section 143(2) on 16.11.2007 which was served on the assessee. Since the value of international transactions exceeded Rs. 15 crores in the relevant period, the case was referred to the concerned Transfer Pricing Officer for determination of arms length price of international transactions. After examining the assessee's case, the TPO accepted the arms length price of the international transactions vide order dt.31.10.2009.

4.3 In the course of assessment proceedings, the Assessing Officer sought the assessee's explanation as to why no tax was deducted under section 195 in respect of the reimbursements made by it to Abbey National Plc. UK. The assessee's explanation that no TDS under section 195 were to be made in respect of these payments as the secondees were its employees for all practical purposes was not accepted by the Assessing Officer. The Assessing Officer was of the view that Abbey National Plc., UK was the employer of the secondees under the secondment agreement and that the assessee had only assumed the role of an intermediary who was authorized by the real employees viz. Abbey National Plc. UK to exercise supervision and control over the seconded employees during the period of secondment. The contention of the assessee that the payment made to Abbey National Plc., UK constituted reimbursement of expenditure was not accepted by the Assessing Officer who held that since the secondees were employees of Abbey National Plc., UK and were providing managerial services to the assessee, the payment made by the assessee to Abbey National Plc., UK under the secondment agreement constituted 'Fees for technical services' under section 9(1)(vii) of the Act. In coming to their finding the Assessing Officer relied on the ruling of the AAR in 670 of 2005 in the case of AT & S (I) Pvt. Ltd. v. CIT. The Assessing Officer consequently held that the assessee was liable to the deduct tax under section 195 of the Act in respect of reimbursements made to Abbey National Plc., UK under the secondment agreement and since no tax was deducted under section 195 of the Act, the entire payment made by the assessee amounting to Rs. 5,81,91,883 was disallowed by the Assessing Officer under section40(a)(i) of the Act.

4.4 Aggrieved, the assessee went in appeal before the CIT(A). It was contended before the CIT(A) that the reimbursement made under the secondment agreement had no profit element involved and hence would not constitute income of Abbey National Plc., UK and therefore were not liable for TDS under section 195 and consequently the disallowance under section 40(a)(i) was not called for. The assessee submitted a copy of the order passed under section 201 of the Act on 19.1.2010 by the DDIT (International Taxation) 1(1) for Assessment Year 2006-07 wherein out of the total reimbursements of Rs. 5,81,91,883, a sum of Rs. 4,53,97,693 only was treated as fees for technical services under section 9(1)(vii) of the Act and Article 13(4)(c) of the India - UK DTAA. The remaining amount of Rs. 1,27,94,180 was held to be not liable for TDS. Considering the findings in the order under section 201 dt.19.1.2010, the learned CIT(A) allowed relief in respect of reimbursement to the extent of Rs. 1,27,94,180 and consequently sustained the disallowance on account of reimbursement to the extent of Rs. 4,53,97,693.

4.5 Aggrieved, the assessee is in appeal before us. However, Revenue has not filed an appeal against the relief allowed by the learned CIT(A).

5.1 The grounds of appeal raised in respect of the appeals in ITA No. 1141/Bang/2010 for Assessment Year 2005-06 and ITA No. 41/Bang/2011 for Assessment Year 2006-07 are similar and are therefore the grounds raised for Assessment Year 2005-06 are reproduced hereunder :

1. The Honourable Commissioner of Income tax (Appeals) I (hereinafter referred to as 'CIT(A)) erred in law and on facts while passing the order.

2. The Honourable CIT(A) erred in holding payments proposed to be made by the appellant as 'fees for technical services' under section 9(1)(vii) of the Income tax Act, 1961 (hereinafter referred to as 'Act')

3. The Honourable CIT(A) has failed to appreciate that the proposed payments are towards reimbursements of actual costs and does not have any element of income.

4. The Honourable CIT(A) has failed to appreciate that the proposed payments are in the nature of pure reimbursement of administrative cost in consideration of the secondment of the Expatriates to the appellant and not towards any services rendered by ANP.

5. The Honourable CIT(A) has erred in holding that the charges are in the nature of administrative expenses payable by Abbey National Plc is income chargeable under the provisions of the Income tax Act, 1961 under section 195 and disallowing the same on account of non deduction of taxes.

6. Without prejudice to the above argument that the said payment is in the nature of reimbursement of actual costs, if the said payment are held to be in the nature of 'fees for technical services' as per the Act, the same would not fall within the definition of 'fees for technical services' as per the India - UK Double Taxation Avoidance Agreement.

7. The Honourable CIT(A) has erred in failing to appreciate that the said payment do not 'make available' any technical knowledge, experience, shill, know-how or processes, or consist of development and transfer of technical plan or technical design etc as per the terms of the India - UK DTAA.

8. The Honourable CIT(A) ought to have relied on the decision of the Jurisdictional Tribunal in the case of ITO v. De Beers India Minerals P Ltd 297 ITR 176 on the 'make available' concept.

9. The Honourable CIT(A) ought to have relied on the decision of the Mumbai ITAT in the case of Raymond Ltd v. DCIT 86 ITD 791 wherein it was held that where the payment though falling under the definition of 'technical services' u/s 9(1)(vii), where the said payment does not fall within the definition of 'fee for technical services' under article 13.4(c) of the DTAA with UK the non resident was not taxable in India. It was held that the Assessee-company was not liable to deduct tax from the payment and cannot be treated as an assessee in default u/s 201, therefore, interest u/s 201(1A) shall not be charged.

10. The Appellant craves leave to add, to alter or amend all or any of the aforesaid grounds of appeal. For the above and any other grounds which may be revised at the time of hearing, it is prayed that the order of the Honourable CIT(A) be set aside.

5.2 Grounds of appeal raised at S. No. 1 and 10 are general in nature and therefore no adjudication is called for thereon. In the grounds raised at S. No. 2, it is contended that the payments under the secondment agreement are not in the nature of 'fees for technical services' under section 9(1)(vii) of the Act. Grounds at S. No. 3 & 5 raise the contention that the impugned payments were in the nature of reimbursement of actual expenditure and were consequently not liable for TDS under section 195. Grounds at S.Nos. 6 to 9 relate to the argument that the impugned payments were not 'fees for technical services' under the India - UK DTAA.

6. ITA No. 42/Bang/2011 (A.Y. 2006-07)

6.1 Facts of the case

For Assessment Year 2006-07, the assessee filed an application under section 195(2) of the Act on 19.2.2006 seeking authorization to reimburse salary and other administrative costs to Abbey National Plc., UK without deduction of tax at source under section 195. The ITO vide order dt.12.3.2007 under section 195(2) held that since the application under section 195(2) had been filed after the date of credit of the same to the account of Abbey National Plc., UK in the books of the assessee, the application under section 195(2) is nonest. Against this order, the assessee filed a petition under section 264 of the Act before the DIT (International Taxation) on 29.10.2007 seeking that its application under section 195(2) be decided on merits. The learned DIT (International Taxation) by order under section 264 dt.28.2.2008 directed the Assessing Officer to consider the application under section 195(2), on merits and to pass an order thereon after affording sufficient opportunity of hearing to the assessee. In compliance thereto the DDIT (International Taxation) passed orders under section 201(1) and 201(1A) of the Act on 19.1.2010 wherein out of the total payments of Rs. 5,81,91,873 made during the relevant period, a sum of Rs. 1,27,94,180 was treated as reimbursement of expenses and no taxes were levied in respect of the said sum. However, in respect of the remaining amount of Rs. 4,53,97,693 (viz. Rs. 5,81,91,873 less Rs. 1,27,94,180), it was treated as 'fees for technical services' and tax @ 10.45% was levied thereon and interest under section 201(1A) of the Act amounting to Rs. 69,26,299 was also charged on the said amount.

6.2 The assessee went in appeal against the above orders dt.19.1.2010 before the CIT(A) who dismissed the assessee's appeal. The assessee is now before us in appeal against the order of the learned CIT(A).

7.1 The grounds of appeal raised by the assessee in this appeal are as under :

1. The Hon'ble Commissioner of Income Tax (Appeals)-IV [hereinafter referred to as CIT(A)] erred in law and on facts while passing the order.

2. The Hon'ble CIT(A) ought to have held that the payments proposed to be made by the Appellant to ANP are reimbursements and are not chargeable to tax under section 195 of the Act.

3. The Hon'ble CIT(A) erred in holding that payments proposed to be made by the Appellant are "fees for technical services" under the Act as well as under the Double Taxation Avoidance Agreement (DTAA) between India and UK.

4. The Hon'ble CIT(A) has failed to appreciate that the proposed payments are towards reimbursements of actual costs and does not have any element of income.

5. The Hon'ble CIT(A) has failed to appreciate that the proposed payments are in the nature of pure reimbursement of administrative cost incurred in relation to the secondment of the expatriates to the Appellant and not towards any services rendered by Abbey National PLC, UK.

6. The Hon'ble CIT(A) has erred in upholding the AO's order that the expatriates are employees of ANP and ANP is involved in providing technical service to MSource on behalf of Abbey India.

7. The Hon'ble CIT(A) has failed to appreciate that as per the secondment agreement for all practical purposes, the expatriates are employees of the appellant as they function under the control, direction and supervision of appellant and in accordance with the policies, rules and guidance applicable to appellant's employees. The salary was paid by ANP to the expatriates and the payroll was maintained by ANP only for administrative convenience.

8. The Hon'ble CIT(A) ought to have appreciated that there is an employer-employee relationship between the Appellant and the expatriates and that the proposed remittances are towards the reimbursement of actual administrative costs of the expatriates as incurred by ANP.

9. The principle of determining employment relationship through the "economic criteria" is also supported by the OECD Commentary on the Model Convention. The Commentary supports the concept of "economic employer" (rather than formal/legal employer) in the context of taxation of dependent personal services. It states that the term "employer" should be interpreted as "the person having the rights on the work produced and bearing the relative responsibility and risks." It is the substance that prevails over the form. The real employer is the user of the labour. The Hon'ble CIT(A) has erred in not relying on the concept of economic and legal employer.

10. The Hon'ble CIT(A) has erred in holding that section 195 of the Act is applicable to the present case and that the Appellant is liable to deduct tax at source under that section on the payments proposed to be made to ANP towards reimbursement of expenses.

11. Without prejudice to the above argument that the said payment is in the nature of reimbursement of actual cost, if the said payments are held to be in the nature of 'fees for technical services' under the Act, the same would not fall within the definition of 'fees for technical services' as per the India-UK Double Taxation Avoidance Agreement.

12. The Hon'ble CIT(A) has erred in failing to appreciate that the said payments do not 'make available' any technical knowledge, experience, skill, know-how or processes to the Appellant, nor consists of the development and transfer of a technical plan or technical design etc as per the terms of the India - UK DTAA.

13. The Hon'ble CIT(A) ought to have relied on the decision of the Jurisdictional Tribunal in the case of ITO v. De Beers India Minerals (P) Ltd (297 ITR 176) on the 'make available' concept.

14. The Hon'ble CIT(A) ought to have relied on the decision of the Mumbai ITAT in the case of Raymond Ltd v. DCIT (86 ITD 791) wherein it was held that where the payment, through falling under the definition of "technical services" u/s 9(1)(vii) of the Act, does not fall within the definition of "fee for technical services" under article 13.4(c) of the DTAA with UK, the non-resident was not taxable in India. It was held that the assessee-company was not liable to deduct tax from the payment and cannot be treated as an assessee in default u/s 201. Therefore, interest u/s 201(1A) shall not charged.

15. The appellant craves leave to add, to alter or amend all or any of the aforestated grounds of appeals.

16. For the above and any other grounds which may be revised at the time of hearing, it is prayed that the order of the Hon'ble CIT(A) be set aside.

7.2 Ground Nos.1, 15 & 16 are general in nature and therefore no adjudication is called for thereon. Ground Nos.2,4 and 5 are contentions of the assessee that the payments made were in the nature of reimbursement of expenses and therefore not liable for TDS. Grounds 8 and 11 to 14 contend that the payments to Abbey National Plc., UK do not constitute 'fees for technical services' under section 9(1)(vii) of the Act and Article 13 of the India - UK DTAA. Grounds 6 to 9 contend that the assessee was the real economic employer of the secondee. Ground No. 10 has the contention that the assessee was not liable to deduct tax at source under section 195 in respect of payments made to Abbey National Plc., UK. In ground No. 14, the assessee challenges the charging of interest under section 201(1A) of the Act.

8.1 The learned counsel for the assessee put forth both written submissions and oral explanation as to why the payments by the assessee under the secondment agreement cannot be treated as 'fees for technical services.' It was submitted that the secondment agreement dt.4.2.2004 was an agreement for secondment of staff from Abbey National Plc., UK to the assessee and not an agreement for rendering of services by Abbey National Plc., UK to the assessee. It was submitted that the assessee had undertaken the responsibility to provide certain services to Msource India in relation to the consultancy agreement between Abbey National Plc., UK and Msource India and in order to facilitate the provision of such services, employees of Abbey National Plc., UK were seconded to the assessee under the secondment agreement. The learned counsel for the assessee submitted that as per column 3.5 of the secondment agreement (reproduced supra), the secondees worked under the direct management, supervision and control and as per instructions of the assessee during the period of secondment. It was submitted that the place of performance of this duty and the manner in which the secondee had to work were decided by the assessee and it was the assessee and not Abbey National Plc., UK who was responsible and accountable to ensure proper performance of duty by the secondees. It was also submitted by the learned counsel for the assessee that as per clause 3.3.2 of the secondment agreement, Abbey National Plc., UK was mandatorily required to withdraw any secondee from secondment as may be required by the assessee. It was submitted by the learned counsel for the assessee that since (i) the nature of work to be performed by the secondee was specified by the assessee, (ii) these employees were required to act in accordance with the instructions and directions of the assessee; (iii) the salary costs of these employees were effectively borne by the assessee; (iv) the assessee was responsible and accountable for the work performed by the employees, the assessee was the real employer of the secondees for all practical purposes. In the light of the above contentions, the learned counsel for the assessee referred to the decision in the case of K.R. Kothandaramam v. CIT [1966] 62 ITR 345 (Mad) in support of the proposition that the right of superintendence, direction and control by an assessee over a person would result in an employer-employee relationship and the remuneration paid to such person would be considered as 'salaries'. Reliance was also placed on the decision of the Hon'ble Apex Court in the case of Ram Prashad v. CIT [1972] 86 ITR 122 in support of the argument that for ascertaining whether a person is a servant, a rough and ready test is whether under the terms of employment, the employer exercises a supervisory control in respect of the work entrusted to him. The learned counsel for the assessee also submitted that since Abbey National Plc., UK did not assume any risk for the performance by the secondees nor exercised any control, direction or supervision over them while on assignment with the assessee. Abbey National Plc., UK cannot be regarded as the economic employer of the secondees.

8.2 As per clause 3.6 of the secondment agreement (reproduced supra), (i) the secondees do not constitute employees of the assessee but shall remain employees of Abbey National Plc, UK ; (ii) the secondees shall not be entitled to any remuneration nor employment benefits from the assessee but Abbey National Plc, UK, as employer of the secondees, shall be responsible for the remuneration, employment benefits, pension contributions, for accounting to the Inland Revenue in the United Kingdom (U.K.) and all other authorities for taxes, national insurance etc. The learned counsel for the assessee submitted that this clause was designed in accordance with U K Laws to protect the individual's pension and social security position and that this was a common practice in the U.K. It was submitted that if the secondees are absolutely transferred to the payroll of the assessee, they would not be entitled to the benefits of pension contributions, social security, insurance contributions in the U.K. To avoid these consequences and keeping in mind the employees interest and welfare, it was submitted, that the employees of Abbey National Plc, UK were seconded to the assessee under the latter's supervision and control, however, keeping intact their employment status with Abbey National Plc, UK. It was submitted by the learned counsel for the assessee that the mere fact that the secondees remained on the pay roll of Abbey National Plc, UK does not automatically lead to the conclusion that Abbey National Plc, UK is the actual employer; as notwithstanding the above arrangement, the management control and supervision of the secondees work, the salary and other administrative costs of the secondees was also borne by the assessee since the assessee reimbursed these costs to Abbey National Plc, UK under secondment agreement and therefore the assessee should be regarded as the real and economic employer of the secondees.

8.3 The learned counsel for the assessee argued that dual employment of a person is well known in law and section 192(2), which provides for TDS from salary, recognizes this. It was submitted that under dual employment of the nature as in the instant case, where the legal employment remains with one employer and the other person exercises supervision over the employee, the latter person should be recognized as the real or economic employer. In support of this argument, the learned counsel for the assessee relied on the following extract from the OECD commentary (on page 137 of the compilation of decisions/relevant material) which is as under :

"It should be noted that the term "employer" is not defined in the Convention but it is understood that the employer is the person having rights on the work produced and bearing the relative responsibility and risks. In cases of international hiring out of labour, these functions are to a large extent exercised by the user. In this context, substance should prevail over form, i.e. each case should be examined to see whether the functions of employer were exercised mainly by the intermediary or by the user. It is therefore up to the Contracting States to agree on the situations in which the intermediary does not fulfil the conditions required for him to be considered as the employer within the meaning of paragraph 2. In settling this question, the competent authorities may refer not only to the above mentioned indications but to a number of circumstances enabling them to establish that the real employer is the user of the labour (and not the foreign intermediary) :

- the hirer does not bear the responsibility or risk for the results produced by the employee's work ;

- the authority to instruct the worker lies with the user,

- the work is performed at a place which is under the control and responsibility of the user,

- the remuneration to the hirer is calculated on the basis of the time utilized, or there is in other ways a connection between this remuneration and wages received by the employee;

- tools and materials are essentially put at the employee's disposal by the user,

- the number and qualifications of the employees are not solely determined by the hirer."

8.4 In support of his contention that the person under whose control and supervision the secondees work should be considered as the real and economic employer and not the person who has seconded the employees under the secondment agreement, the learned counsel for the assessee relied on the following judicial decisions :

1. CIT v. Karl Storz Endoscopy India (P) Ltd - Delhi High Court.

2. Cholamandalam MS General Insurance Co. Ltd. (309 ITR 356) AAR

3. IDS Software Solutions India Pvt Ltd. v. ITO (122 TTJ 410) (Bangalore ITAT)

4. Cerner Healthcare Solutions Pvt Ltd v. ITO (Bangalore ITAT)

5. Caterpillar India P Ltd v. DDIT - Bangalore ITAT - ITA No. 630(Bang)/2010

6. Caterpillar India P Ltd v. DDIT - Bangalore ITAT - ITA No. 607(Bang)/2010

7. Caterpillar India P Ltd v. DDIT - Bangalore ITAT - ITA No. 149(Bang)/2010

8. Caterpillar India P Ltd v. DDIT - Bangalore ITAT - ITA No. 629(Bang)/2010

9. Caterpillar India P Ltd v. DDIT - Bangalore ITAT - ITA No. 606(Bang)/2010

10. ITO v. M/s. Ariba Technologies India Pvt Ltd ITA No. 616/Bang/2011 Dt.4.4.2012.

The learned counsel for the assessee filed a table showing the similarities between the decision of the co-ordinate bench in the case of IDS Software Solutions India P. Ltd. v. ITO reported in 122 TTJ 410 and the instant case and submitted that the ratio of the decision in the case of IDS Software (supra) and other subsequent decisions squarely apply in the present case.

8.5 The learned counsel for the assessee submitted that when the assessee is considered as the real and economic employer of the secondees under the secondment agreement, the reimbursement of salary and other administrative costs to Abbey National Plc, UK also constitutes expenditure in the nature of 'salary' and consequently the reimbursements made to Abbey National Plc, UK under the secondment agreement cannot be considered as 'fees for technical services' either under the Act or under the Treaty. In support of this proposition, the learned counsel for the assessee placed reliance on the decisions cited above and submitted that consequently the said reimbursements are not liable for TDS u/s.195 of the Act.

8.6 The learned counsel for the assessee contended that the reimbursements made to Abbey National Plc, UK were bereft of any profit or income element which fact was not disputed by the Assessing Officer or learned CIT(A) and submitted that consequently such reimbursement does not result in any profit or income in the hands of the payee is not liable for TDS. In support of this contention, the assessee has relied on the following judicial decisions :

1. CIT v. Tejali Farsaram Kharawalla Ltd (61 ITR 95) (SC)

2. CIT v. Telco (245 ITR 823) (Bom)

3. CIT v. Indian Engineering Projects Pvt Ltd (202 ITR 1014) (Del)

4. Clifford Chance UK v. DCIT (82 ITD 106) (Mum)

5. Raymond Ltd v. DCIT [2003] 86 ITD 791 (Mum SB)

6. CIT v. Dunlop Rubber Co Ltd [1983] 142 ITR 493 (Cal)

7. HNS India VSAT Inc v. DDIT (95 ITD 157) (Del)

8. Gujarat Ambuja Cements Ltd v. DCIT [2005] 2 SOT 784 (Mum)

9. MSEB v. DCIT [2004] 90 ITD 793 (Mum)

10. Saipem SPA v. DCIT [2004] 88 ITD 213 (Delhi) (TM)

11. Sedco Forex International Drilling inc v. DCIT [2000] 72 ITD 415.

12. Pilcom v. ITO [2001] 77 ITD 218 (Cal)

13. DECTA 237 ITR 190 AAR.

14. Coca Cola India Inc v. ACIT [2006] 7 SOT 224 (ITAT - Del)

15. United Hotels Ltd v. ITO (93 TTJ 822) (ITAT Del)

16. ITO v. Dr. Willmar Schwabe India (P) Ltd (95 TTJ 53) (ITAT Del)

17. Expeditors International India P Ltd v. ACIT [2008] 113 TTJ Del 652.

18. Bangalore International Airport Ltd v. ITO [2008] 307 ITR (AT) 295 (Bang)

19. CIT v. Siemens Aktiongesellschaft [2008] 220 CTR 425 (Bom)

8.7 The learned counsel for the assessee relied on the ruling of the AAR in Cholamandalam MS General Insurance Company Ltd reported in (2009) 309 ITR 356 (AAR) where it was held that reimbursement of salary costs to foreign company under a secondment agreement cannot be regarded as 'fees for technical services' as per the provisions of Explanation 2 to section 9(1)(vii) of the Act OR Article 13.4 of the Treaty between India and Korea. It was also held in the said decision that reimbursement of salary costs under a secondment agreement bereft of income or profit element does not constitute income chargeable to tax in India and therefore there would be no liability to deduct TDS u/s.195 of the Act in respect of such reimbursements. In support of the argument that reimbursement of expenses under the secondment agreement is not liable for TDS u/s.195 of the Act, the learned counsel for the assessee relied on the following decisions of this Tribunal :

(i) Cerner Healthcare Solutions Pvt Ltd v. ITO (Bangalore ITAT)

(ii) Caterpillar India P Ltd v. DDIT - Bangalore ITAT - ITA No. 630(Bang)/2010

(iii) Caterpillar India P Ltd v. DDIT - Bangalore ITAT - ITA No. 607(Bang)/2010

(iv) Caterpillar India P Ltd v. DDIT - Bangalore ITAT - ITA No. 149(Bang)/2010

(v) Caterpillar India P Ltd v. DDIT - Bangalore ITAT - ITA No. 629(Bang)/2010

(vi) Caterpillar India P Ltd v. DDIT - Bangalore ITAT - ITA No. 606(Bang)/2010

8.8 The learned counsel for the assessee submitted that the secondment of personnel under the secondment agreement was not tantamount to rendering of technical, professional or consultancy services u/s.9(1)(vii) of the Act, as apart from deputing secondees, Abbey National Plc., UK did not render any service to the assessee. It was submitted that consequently in respect of the reimbursements made, the provisions of section 9(1)(vii) would not be attracted. It was submitted that as per section 9(1)(vii), the term 'fees for technical services' means any 'consideration' for rendering of managerial, consultancy or technical services which meant something given in return for obtaining or getting a thing. The learned counsel for the assessee submitted that the remuneration and other administrative costs relating to seconded personnel was initially paid by Abbey National Plc, UK and these sums were subsequently reimbursed by the assessee. It was also submitted that this arrangement was made out of social security and other reasons such as business exigencies and commercial expediency and did not contain any mark up resulting in any profit or income from it and therefore cannot be treated as 'consideration' as per the definition of the term 'fees for technical services u/s.9(1)(vii) of the Act. The learned counsel for the assessee submitted that as per the facts of the case it was clear that Abbey National Plc. UK did not render any services to the assessee. It only deputed secondees to the assessee as per the secondment agreement and therefore contended that the expression "provision of services of technical or other personnel" as appearing in the definition of 'fees for technical services' was not satisfied. It was also submitted by the learned counsel for the assessee that neither the Assessing Officer nor the learned CIT(A) had brought out any material on record to substantiate the conclusion that the payments to Abbey National Plc, UK were made is consideration for services rendered by Abbey National Plc, UK to the assessee.

8.9 The learned counsel for the assessee further submitted that the reimbursements made by the assessee to Abbey National Plc, UK under the secondment agreement would not be regarded as 'fees for technical services' under Article 13(4) of the India - UK Treaty for to be so considered both the following conditions should be satisfied.

(i) that the payment is made as a consideration for rendering of any technical or consultancy services; and

(ii) such services 'make available' technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. It was submitted by the learned counsel for the assessee that in the instant case, the Assessing Officer has categorized the payments made by the assessee to Abbey National Plc, UK to be for the rendering of 'managerial services.' Referring to the definition of the term 'fees for technical services' under Article 13(4) of the India - UK Treaty, it was submitted that since the above definition covered only technical or consultancy services and the term 'Managerial Services' is absent in Article 13(4)(c), the reimbursements made to Abbey National Plc, UK did not satisfy the first condition above and consequently the said payments were not in the nature of 'fees for technical services' under the India - UK Treaty. The learned counsel for the assessee further submitted that even the second condition mentioned above regarding 'make available' of technical knowledge, experience, skill, know-how or processes or development and transfer of a technical plan or technical design is also not satisfied in the present case. In support of the contention that unless the above two conditions/requirements are satisfied, the payment even though regarded as 'fees for technical services' under the Act, would fall outside the scope of 'fees for technical services' under the Treaty, the learned counsel for the assessee relied on the following judicial decisions:

1. Raymond Ltd v. DCIT [2003] 86 ITD 791 (Mum-Trib)

2. Intertek Testing Services India Private Limited [2008] 307 ITR 418 (AAR)

3. Diamond Services International P Ltd v. Union of India [2008] 304 ITR 201 (Bom)

4. CESC Ltd v. DCIT 80 TTJ 765 (Kol)

5. National Organic Chemical Industries Ltd. v. DCIT 96 TTJ 765

6. NQA Quality System Registrar Limited v. DCIT 92 TTJ 946 (Del)

7. Cushman & Wakefield Pvt Ltd v. DIT [2008] 305 ITR 208 (AAR)

8. Sheraton International Inc. v. DDIT [2007] 106 TTJ (Del) 620.

9. McKinsey And Co., Inc (Philippines) v. ACIT (International Taxation) 284 ITR 227 (AT)(Mum)

10. ITO v. De Beers India Minerals (P) Ltd. [2008] 113 TTJ (Bang) 101.

11. DCIT v. Boston Consulting Group Pte. Ltd. [2005] 93 TTJ (Mum) 293.

12. ACIT v. Paradigm Geophysical (P) Ltd [2008] 117 TTJ (Del) 812.

13. ICICI Bank Ltd v. DCIT [2008] 20 SOT 453 (Mum)

14. Bharat Petroleum Corpn. Ltd. v. JDIT [2007] 14 SOT 307 (Mum)

15. Guy Carpenter & Co. Ltd. v. ADIT in ITA No. 2443/Del/2011 Dt.30.9.2011.

8.10 The learned counsel for the assessee also submitted a copy of the decision of the jurisdictional High Court in the case of CIT v. De Beers India Minerals Ltd in ITA No. 549 of 2007 dt.15.3.2012 in support of the contention that unless the person making the payment is equipped with technical knowledge, skills etc. and he is able to perform the same without recourse to the payee, the payment would not be regarded as 'fees for technical services' under the Treaty. As per the facts of the case, it was submitted that reimbursements made to Abbey National Plc, UK were in respect of provision of services by Msource India to Abbey National Plc, UK. It was submitted that in accordance with the agreement dt.7.11.2003 between Abbey National Plc, UK and Msource India, the secondees worked at the premises of Msource India to develop, maintain, manage, monitor and facilitate Msources' performance and to train and assist Msource and its employees in the provision of their services. It was submitted that the reimbursement made to Abbey National Plc, UK did not result in 'make available' of technical knowledge, experience, skill, know-how or processes to the assessee nor was there any development and transfer of a technical plan or technical design to the assessee as a result of the reimbursements. It was therefore contended that the requirement of 'make available' is not satisfied and therefore the payments were not in the nature of 'fees for technical services' under the Treaty between India and UK. It was also submitted that Abbey National Plc, UK does not have a Permanent Establishment (PE) in India and therefore the reimbursements made to them by the assessee are not chargeable to tax in India and consequently these payments are not liable for withholding tax u/s.195 of the Act.

8.11 The learned counsel for the assessee submitted that the learned CIT(A) has allowed relief in respect of reimbursement of salary costs and sustained the disallowance of reimbursement of other administrative expenses/costs. It was submitted that the reimbursement of other administrative expenses under the secondment agreement are inextricably linked to reimbursement of salary costs. It was therefore argued that if the salary costs reimbursed is held as not liable for disallowance u/s.40(a)(i), the reimbursement of other administrative expenses should also be held as not liable for disallowance u/s.40(a)(i) of the Act. The learned counsel for the assessee further submitted that the Assessing Officer had erred in relying on the ruling of the AAR in the case of A T & S India P. Ltd. (supra). In that case, the foreign company retained the right and control over the seconded personnel and therefore it was held that the India company cannot be considered as the real employer. In the instant case, it is submitted that the right to control, supervise and instruct the secondees were exercised by the assessee who was entitled to terminate the secondment of any secondee. It was also submitted that the above ruling of the AAR did not discuss the taxability of the reimbursements under the Treaty nor was there any discussion on the 'make available' clause. It was therefore argued that the ruling in the case of A T & S India P. Ltd. (supra) does not apply to the assessee's case.

8.12 In view of the above arguments and submissions, the learned counsel for the assessee prayed that the disallowance of reimbursement of other administrative expenditure u/s. 40(a)(i) as confirmed by the learned CIT(A) be deleted and the assessee's appeals for Assessment Years 2005-06 and 2006-07 be allowed.

9. Per contra, the learned Departmental Representative argued the matter in detail and placed reliance on the orders passed by the learned CIT(A). In written submission filed, the learned Departmental Representative explained as to how the facts in the case of IDS Software Solutions India (P) Ltd (2009) 122 TTJ 410 (Bangalore) and the facts of the instant case are different and submitted that therefore the above decision of the co-ordinate bench of the Tribunal does not apply to the facts of the instant case. The learned Departmental Representative also placed reliance on the following judicial decisions in support of the contention that the payments made by the assessee constitute 'fees for technical services' under the Act and under the Treaty :

(i) Cochin Refineries Ltd v. CIT [1996] 222 ITR 354 (Ker)

(ii) South West Mining Ltd [2005] 278 ITR 233 (AAR)

(iii) DIT v. SNL Lavalin International Inc [2011] 332 ITR 314 (Del)

(iv) Sahara Airlines Ltd v. DCIT [2003] 79 TTJ 268 (Del)

The learned Departmental Representative also contended that there is no material on record to establish that the payment made by the assessee were pure reimbursement of expenses. In view of the above, the learned Departmental Representative prayed for dismissal of the appeals filed by the assessee.

10. In response to the learned Departmental Representative's arguments and written submissions, the learned counsel for the assessee filed a rejoinder explaining why the contentions of the learned Departmental Representative are contrary to facts and law and that the judicial decisions relied on by him were also distinguishable. In response to a query from the bench as to how the payments made to Abbey National Plc, UK were pure reimbursements, the learned counsel for the assessee drew our attention to the notes to accounts for the year ending 31.3.2006, break up of the reimbursements made during the financial year 2005-06 and copy of the ledger 'administration and general expenses' in the books of the assessee for the relevant period which were appended to the submissions made by the learned Departmental Representative. The learned counsel for the assessee drew our attention to clause 4.1 of the secondment agreement which stated that in consideration of the secondment of staff by Abbey National Plc. UK, the assessee shall make payments to Abbey National Plc., UK (in sterling) equivalent to the remuneration, pension contributions, expenses, statutory payments and other sums incurred by Abbey National Plc., UK applicable to each secondee during his or her period of secondment. The learned counsel for the assessee submitted that the payments made by the assessee were pure reimbursement of expenses without any profit or income element.

11.1 We have heard both parties and have carefully perused and considered the grounds of appeal raised, arguments put forth and submissions made by both parties and the material on record. In this regard, the following issues/questions arise for our consideration.

(i) Whether the assessee can be regarded as the real and economic employer of the employees seconded to the assessee under the secondment agreement ?

(ii) Whether the payments made by the assessee to Abbey National Plc., UK were pure reimbursement of expenses and if so whether the said reimbursements constituted income in the hands of Abbey National Plc., UK ?

(iii) Whether the payments made by the assessee to Abbey National Plc., UK constitute 'fees for technical services' under section 9(1)(vii) of the Income Tax Act, 1961 ?

(iv) Whether the payments made by the assessee to Abbey National Plc., UK constitute 'fees for technical services' under Article 13(4) of the DTAA between India & UK ?

(v) Whether the payments made by the assessee to Abbey National Plc., UK were liable for TDS under section 195 of the Act ?

(vi) Whether the payments made by the assessee to Abbey National Plc., UK were liable for disallowance under section 40(a)(i) of the Act ?

12. Whether the assessee can be regarded as the real and economic employer of the employees seconded to the assessee under the secondment agreement ?

12.1 To decide this issue, it is necessary to discuss and evaluate as to who can be regarded as an employer, employee and the relation between employer and employee. As per Shorter Oxford English dictionary, 'employer' means 'a person who employs or makes use of a person or an organization that pays someone to do work on a regular or contractual basis' and the term 'employee' means 'a person who works for an employer.' An employee is a person who works under the direct control, supervision and direction of another person called an employer who exercises such authority over the employee. The employee not only receives instructions from his employer but is also subject to the right of the employer to control the manner in which he should carry out such instructions. A significant feature of employer-employee relationship being 'control and command.' In the case of CIT v. Dalmia [1994] 207 ITR 267 (Cal), the Hon'ble Court observed that a person who is required to perform duties subject to the control of the other would be regarded as an employee. The Hon'ble Apex Court in the case of Ram Parshad v. CIT [1972] 86 ITR 122 (SC) held that 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. In the case of Dharmangadha Commercial Works v. State of Saurashtra 1957 SCR 152, the Hon'ble Apex Court observed that the correct method of approach for determination of employer-employee relationship is to consider whether having regard to the nature of work, there was due control and supervision by the employer.

12.2 In the instant case, an agreement for secondment of staff was entered into between the assessee and Abbey National Plc., UK on 4.2.2004 to facilitate the outsourcing agreement between Abbey National Plc., UK and Msource. As per clause 3.1 of the said agreement, Abbey National Plc., UK agreed to second its staff to the assessee in accordance with other terms and conditions of the agreement and in consideration of the payments to be made by the assessee in accordance with clause 4 of the agreement. As per clause 3.2, the parties thereto undertook to sign and date a secondment term sheet in respect of each employee to be seconded to the assessee for the duration to be specified therein or as otherwise agreed between the parties. As per clause 3.3.2, Abbey National Plc. UK was to immediately withdraw any secondee from secondment at the written request of the assessee. Abbey National Plc., UK may also terminate a particular secondment prematurely at any time where deemed desirable or necessary by them for any reason. As per clause 3.3.3, a particular secondment will come to an end if terminated by the secondee through leaving the employment of the secondee for any reason. Clause 3.5 of the agreement which deals with the supervision and control of the secondees is as under :

"The parties agree that the Secondees shall be under the direct management, supervision and control of Abbey India during the applicable Periods of Secondment. It is further agreed that :

(a) Abbey UK shall not be responsible for and shall not be liable for any loss or damage occasioned by the Secondees' work;

(b) The authority to instruct the Secondees shall lie with Abbey India, and

(c) The Secondees' work shall be performed at such place as Abbey India may instruct."

12.3 From the above, it is evident that the employees were seconded only after a secondment term sheet was entered into in respect of each of the employee by the assessee and Abbey National Plc., UK. Thus, it is clear that the assessee was in a position to determine whether or not the secondment of an employee was to be accepted and the duration of such secondment. Further, it was obligatory for Abbey National Plc., UK to withdraw any secondee from the secondment should the assessee so require it which is similar to the right of an employer to terminate the employment of an employee. As per clause 3.5 of the agreement, the secondees were under the direct supervision and control of the assessee during the period of secondment and were required to perform the work in such manner and place as instructed by the assessee. The agreement indicates that Abbey National Plc., UK was not responsible or liable for any loss or damage caused by the secondee's work. The economic interest of the secondees were with the assessee in as much as they were under the control and direction of the assessee as to the manner, place, method of their work, the right to issue directions, accept or reject employees for secondment etc., were exercised by the assessee. When the principles laid down by the Hon'ble Apex Court and other judicial decisions referred to supra as to the meaning of employer and employee are examined and applied to the above facts, it would be evident that the assessee is the real and economic employer of the secondees.

12.4 Clause 3.6 of the secondment agreement states that the secondees shall remain and be the employees of Abbey National Plc., UK during secondment and not the assessee. It further states that the secondees shall not be entitled to any remuneration or employment benefits from the assessee and for which Abbey National Plc., UK is responsible as well as for all other liabilities as employer for accounting to Inland Revenue in UK and other authorities for all taxes, national insurance on similar contributions. It is a well settled principle that an agreement or a contract is to be read as a whole. The Hon'ble Apex Court in the case of Ishikawajina-Harima Heavy Industries Ltd v. DCIT [2007] 288 ITR 406 held that "in construing a contract, the terms and conditions are to be read as a whole. A content must be construed keeping in view the intention of the parties. No doubt the applicability of the tax laws would depend on the nature of the contract but the same should not be construed keeping in view the taxing provisions." The jurisdictional High Court in the case of CIT v. Gogte Minerals [1996] 220 ITR 29 held that the court cannot look at the matter from a narrow angle, but interpret the contract as a whole with reference to the statute. In the instant case, the secondees worked under the supervision and control of the assessee who had the authority to instruct them as to the manner and place in which the work was to be carried out. Abbey National Plc., UK was not responsible and liable for any loss or damage caused by the secondees work. Nevertheless, in clause 3.6 the secondment agreement, it is agreed that Abbey National Plc., UK shall be the employer of the secondees. But the intention and purpose of this is ascertainable if the entire clause is read as a whole. Clause 3.6 provides that Abbey National Plc., UK as the employer of the secondees being responsible for remuneration, benefits, including pension contribution and all other liabilities as employer and for accounting to the Inland Revenue in U.K. and other authorities for all taxes, national insurance or similar contributions. The purpose and intention of this clause appears to be to make Abbey National Plc., UK accountable and responsible before UK Revenue authorities in respect of remuneration and salaries of secondees, for discharging statutory functions such as pension contributions, tax, national insurance or similar contributions under the laws of UK. If the assessee was regarded as employer under clause 3.6, then the seocndees would have to sever their employment with Abbey National Plc., UK resulting in their not being entitled to benefits of pension contributions, social security and insurance contributions under the laws of UK. In view of this, the employee status of secondees with Abbey National Plc., UK was kept intact. This, in our considered opinion, would not alter the position that the assessee should be regarded as the real and economic employer of the secondees. When the requirements of employer-employee relationship such as the right to hire or accept the secondment, right to control and supervise, right to instruct, right to terminate from secondment are satisfied as in the case of the assessee and secondees, Abbey National Plc., UK was only an employer in a legal sense. As rightly argued by the learned counsel for the assessee the mere fact that the secondees remained on the pay roll of Abbey National Plc., UK does not lead to the conclusion that Abbey National Plc., UK is the actual employer. In view of the reasons given, in our view the real employer of the secondees was the assessee.

12.5 The OECD Model Convention on Income on capital on Article 15 thereof holds a view that incase of secondment arrangements, the person under whose supervision and control they are employed should be considered as the real and economic employer. The relevant extracts are as under :

"It should be noted that the term "employer" is not defined in the Convention but it is understood that the employer is the person having rights on the work produced and bearing the relative responsibility and risks. In cases of international hiring-out of labour, these functions are to a large extent exercised by the user. In this context, substance should prevail over form, i.e. each case should be examined to see whether the functions of employer were exercised mainly by the intermediary or by the user. It is therefore up to the Contracting States to agree on the situations in which the intermediary does not fulfil the conditions required for him to be considered as the employer within the meaning of paragraph 2. In settling this question, the competent authorities may refer not only to the above-mentioned indications but to a number of circumstances enabling them to establish that the real employer is the user of the labour (and not the foreign intermediary):

- the hirer does not bear the responsibility or risk for the results produced by the employee's work;

- the authority to instruct the worker lies with the user;

- the work is performed at a place which is under the control and responsibility of the user;

- the remuneration to the hirer is calculated on the basis of the time utilised, or there is in other ways a connection between this remuneration and wages received by the employee;

- tools and materials are essentially put at the employee's disposal by the user;

- the number and qualifications of the employees are not solely determined by the hirer."

If the above facts are applied to the facts of the instant case, it would be evident that the assessee is the real and economic employer of the secondees.

12.6 The issue as to whether, in a secondment arrangement, the entity who seconds the employees should be considered as the real and economic employer or whether the entity which exercises the actual supervision and control over the secondees should be considered as the real and economic employer was considered by the co-ordinate bench of the Tribunal in the case of IDS Software Solutions P. Ltd. v. ITO reported in 122 TTJ 410. In the said case, the Indian Company exercised the supervision and control over the employee seconded to it by the foreign company. The Tribunal after consideration of the facts and law held that the Indian Company should be regarded as the real and economic employer of the secondee. The relevant portion at paras 11 and 12 of the order read as under :

"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."

12.7 The learned counsel for the assessee also submitted a table showing the similarities between the decision of the co-ordinate bench in the case of IDS Software Solutions P. Ltd. (supra) and the instant case. The said table is extracted as under :

Sl. No. IDS Software Solutions India (P) Ltd. v. ITO Abbey Business Services (India) Private Limited

1. Secondment agreement - Relevant extracts from the decision of the jurisdictional Tribunal. Agreement for the secondment of staff.

2. Preamble - Assessee is desirous of securing the services or managerial services to assist it in its business and 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. Recital - The parties have entered into this agreement to provide for the secondment of certain employees of Abbey UK to Abbey India.

3. Article I - IDS has agreed to second one employee to the assessee during the secondment period from 19.8.2005 to 31.12.2007. Clause 3.1 - General - In consideration of the payments to be made by Abbey India in accordance with Clause 4 Abbey UK shall second staff to Abbey India during the term in accordance with the following provisions

4. Article II - Duties and obligations - 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 3.5 - Supervision and Control - The parties agree that the secondees shall be under the direct management, supervision and control of Abbey India during the applicable periods of secondment. It is further agreed that

(a) Abbey UK shall not be responsible for and shall not be liable for any loss or damage occasioned by the secondees' work .

(b) The authority to instruct the secondees shall lie with Abbey India and

(c) The secondees work shall be performed at such place as Abbey India may instruct.

5. 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 3.3.2 - Abbey UK shall at the written reasonable request of Abbey India from time to time immediately withdraw any secondee from secondment as Abbey India shall specify and Abbey UK may terminate a particular secondment prematurely at any time where deemed necessary or desirable by Abbey UK for any reason.

6. 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 3.5 - Supervision and Control

(b) the authority to instruct the secondees shall lie with Abbey India; and

(c) the secondees' work shall be performed at such place as Abbey India may instruct.

7. 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 3.3.3 - A particular secondment will also come to an end if terminated by the secondee through leaving the employment of Abbey UK or terminating his or her secondment to India or by Abbey UK terminating the employment of the secondee for any reason.

8. 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 3.3.1- (Subject as below) each secondment shall be for the period of secondment specified in the secondment term sheet or as may be otherwise agreed between the parties.

9. 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 Clause 5 - The parties agree that they will comply with the Data Pritection Act 1998 ("DPA") and all other relevant legislation relating to the secondments.

Clause 10 - Governing law - The parties hereby agree that this agreement shall be construed in accordance with English Law and the parties submit to the exclusive jurisdiction of the English Courts.

10. Article III - Duties and obligations of the assessee during the secondment period. Clause 3.5 - Supervision and Control

(b) the authority to instruct the secondees shall lie with Abbey India; and

(c) the secondees' work shall be performed at such place as Abbey India may instruct.

11. Para 3 of the decision - (a) Dr. Sunderarajan was being offered employment with IDS Group Inc. as Executive Vice President, Worldwide Engineering and Managing Director of the assessee company;

Para 11 of the decision - 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 lookedupon as the employer of Dr. Sundararajan during the relevant period." Clause 3.6 - Responsibility for employment liabilities

This agreement is not intended to and nothing in this agreement shall have the effect of constituting the secondment as employees of Abbey India and the Secondees shall be and remain employees of Abbey UK during Secondment. The secondees shall not be entitled to any remuneration nor employment benefits from Abbey India and it is agreed that Abbey UK shall, as employer of the secondees, be responsible for all such remuneration and benefits (including without limitation pension contributions) and all other liabilities as employer and for accounting to the Inland Revenue in the United Kingdom and all other authorities for all taxes, National Insurance or similar contributions.

12.8 The learned Departmental Representative also submitted a table in support of his contention that the facts of the IDS Software Solutions P. Ltd. (supra) and the facts of the instant case are not similar. The learned counsel for the assessee in submission made in his rejoinder thereto submitted another table distinguishing the contention of the learned Departmental Representative point-wise which is extracted hereunder :

Sl. No Facts in the case of IDS India (as stated by learned DR) Facts in the case of Abbey

(as stated by learned DR) Submissions of the appellant

1. IDS Inc has deputed one employee Dr. S. Sundarrajan for a period from 19.08.2005 to 31.12.2007, thus secondment is specific ANP has deputed number of employees and nothing was mention name of employees and their period of deputation. Further, it is observed that during the FY 2005-06 more than 100 employees were seconded, however during the year only 18 employees were retained. The assessee's role to exercise supervision and control over the secondees during the period of secondment and as such secondment is general in nature. Number of employees is not a criteria at all in deciding whether payment of secondment charges is liable for TDS u/s 195.

The conclusion of the Jurisdictional ITAT in IDS Software's case (supra) that payments under secondment agreement were not liable for TDS u/s 195 was not based on the reason that only one employee was seconded. As a result, the ratio or principle underlying the said decision is squarely applicable in the present case

Even in the present case, the secondment was specific. The names of secondees during the AY 2005-06 and AY 2006-07 are on record and the same can be seen at pages 23 to 25 of the written submissions filed by the learned DR

The contention that the appellant's role to exercise supervision and control over the secondees and as such the secondment is general in nature is incorrect. The de facto control, supervision and management of employees seconded were with the appellant. Clause 3.5 of the secondment agreement is clear in this regard.

2. Clause (F) of secondment agreement provided that during the currency of the secondment agreement, the employee ceased to be the employee of IDS Inc, the obligation of IDS to second such employee would also cease. In the case of Abbey India secondees would be and remain employees of Abbey UK during secondment. The secondees shall not be entitled to any remunerations nor employment benefit from Abbey India and it was Abbey Uk shall as employer of secondees, be responsible for all such remuneration and benefits. (kindly refer para 3.6 of secondment agreement) The contention of the learned DR that, in IDS's case, as per clause (F) of the secondment agreement, during the currency of the secondment agreement, the employee ceased to be the employee of IDS Inc, is incorrect.

As provided in Point no. 7 of the table filed by the appellant showing similarities in facts between IDS's case and the present case, 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. In other words, the obligation to second the employee would cease if the employee ceases to be an employee of IDS Inc during the period of secondment agreement.

Para 3.6 of the secondment agreement in the present case which provided that Abbey UK shall be the employer of secondees was only indicative of the legal husk of employee status remaining with it. Even in IDS's case, IDS Inc was the employer of the secondee in legal sense. [refer point no. 11 of the table filed by the appellant showing similarities in facts between IDS's case and the present case]

3. IDS Inc has paid salary to the employee on behalf of IDS India. Salary paid by IDS Inc charged to IDS India. According to the details, total cross charges was US $ 65,040 out of which the IDS India credited US $ 39,226 to the account of IDS Inc. as appears in the application u/s 195 was made before the AO. It is only in respect of the balance of US $ 25,813 an application was filed by IDS India u/s 195 seeking permission to remit the amount to IDS Inc, without deduction of the tax. The taxes remitted on the above amount at the rate of 10% comes to US $ 2,581 equivalent to INR 1,19,876. Abbey India has debited an amount of Rs. 31,00,98,088/- towards secondment and other administrative cost and claimed against income of Rs. 34,09,83,739/- and Rs. 7,92,54,028/- and Rs. 5,81,91,885/- in the FY 2005-06 & 2006-07 respectively received by way of consultancy services and foreign fluctuation gain. There is no details to show that cross charges received from Abbey, UK or [are] being reimbursed to [by] the assessee. The quantum of payments made under secondment arrangement is not decisive or relevant in determining the taxability of such payments.

The conclusion of the Jurisdictional ITAT in IDS Software's case (supra) that payments under secondment agreement were not liable for TDS u/s 195 was not based on quantum of payments

The contention that there are no details to show that cross charges received from Abbey were being reimbursed by assessee is incorrect.

As per clause 4.1 of the secondment agreement, payments equivalent to the remuneration, pension contributions, expenses, statutory payments and any other sums incurred by Abbey UK applicable to each secondee during his or her period of secondment were made by the appellant.

Notes to accounts for the year ended 31st March 2006 [page 17 of DR submissions] stated, "The Company reimburses all expenses incurred by Abbey National plc including payroll costs for the employees who are on secondment for the Company's activities."

Point No. 9 of notes to accounts for the year ended 31st March 2006 [page 18 of DR submissions] stated, "The Company has not yet made any remittance towards the reimbursement of secondment and other administrative costs .... "

Page no. 20 of the DR submissions contains a list of expenses reimbursed under secondment arrangement.

The narration below the journal entries in the ledger 'administration and general expenses' [page 21 of DR submissions] states that the invoice raised by Abbey UK was towards the cost of secondees.

4. Salary cost is borne by IDS India, however received cross charges partly from IDS Inc. Salary cost is borne by Abbey India, the same was claimed against the income of Abbey India as appears in the Profit and loss account for year ending 31.03.2005 and 31.05.2006. The cross charge of expenses, fully or partly, is not determinative or decisive of the taxability of such payments.

5. Tax was deducted at source by IDS India on the salary cost of the employee at US $ 25,813 out of total cross charges of US $ 65,040. Tax has been deducted at source by Abbey India on the salary cost of the employees u/s 192 of Act at Rs. 16,62,26,174/- and no TDS was made on balance amount.

Furthermore there is no details available that Abbey India has received cross charges equivalent to the balance amount. The quantum of payments made under secondment arrangement is not decisive or relevant in determining the taxability of such payments.

The conclusion of the Jurisdictional ITAT in IDS Software's case (supra) that payments under secondment agreement were not liable for TDS u/s 195 was not based on quantum of payments

The contention that there are no details to show that cross charges received from Abbey were being reimbursed by assessee is incorrect.

As per clause 4.1 of the secondment agreement, payments equivalent to the remuneration, pension contributions, expenses, statutory payments and any other sums incurred by Abbey UK applicable to each secondee during his or her period of secondment were made by the appellant.

Notes to accounts for the year ended 31st March 2006 [page 17 of DR submissions] stated, "The Company reimburses all expenses incurred by Abbey National plc including payroll costs for the employees who are on secondment for the Company's activities."

Point No. 9 of notes to accounts for the year ended 31st March 2006 [page 18 of DR submissions] stated, "The Company has not yet made any remittance towards the reimbursement of secondment and other administrative costs"

Page no. 20 of the DR submissions contains a list of expenses reimbursed under secondment arrangement.

The narration below the journal entries in the ledger 'administration and general expenses' [page 21 of DR submissions] states that the invoice raised by Abbey UK was towards the cost of secondees.

6 IDS India proposed to remit the payments to IDS Inc towards salary costs without deducting tax from such payments under section 195 of the Act. Abbey India proposed to remit payments to ANP for Rs. 27,58,30,514/- However, tax deducted at source only on Rs. 16,62,04,340/- which has been allowed by the CIT(A). and the balance Rs. 10,96,26,174/- the Abbey India had not deducted tax and considered disallowable u/s 40(a)(i) of the Act. The difference as pointed out by the learned DR is not at all germane to the issue on hand.

Further, if salary costs reimbursed is held as not liable for disallowance under section 40(a)(i), the reimbursement of expenses should also be held as not liable for disallowance under section 40(a)(i).

12.9 We have heard both parties and have carefully perused and considered the contention and submissions of both the parties and the material on record and are of the considered opinion that the contentions of the learned Departmental Representative cannot be accepted as the quantum of payments or the number of employees seconded is not relevant criteria. The conclusion of the Tribunal in the case of IDS Software Solutions P Ltd (supra) that the Indian Company should be regarded as the economic employer of secondees was not based on the number of employees seconded or the quantum of reimbursements but was based on the terms of the secondment agreement which provided that the secondee was under the supervision and control of the Indian Company and the fact that tax was deducted and paid under section 192 in respect of salaries paid to the secondees. In the IDS Software Solutions P. Ltd. case (supra), though the foreign company was the employer in the legal sense, it was held that the economic employer of the secondee was the Indian Company and not the foreign company. In the instant case, the supervision and control over the secondees and the right to instruct them was with the assessee. Abbey National Plc., UK was not responsible for loss or damage caused by the secondees work; tax was deducted and paid under section 192 of the Act in respect of salaries paid to secondees. Thus, we are of the view that the decision of the co-ordinate bench of the Tribunal in the case of IDS Software Solutions India P. Ltd. (supra) squarely applies to the assessee's case on hand. This decision was followed by the co-ordinate bench in the following cases in which it was held that in the secondment arrangement, the Indian Company reimbursing the salary and other expenses to the foreign entity should be considered as the economic employer of the secondees :

(i) Cerner Healthcare Solutions Pvt. Ltd v ITO Bangalore ITAT

(ii) Caterpillar India P Ltd v DDIT - Bangalore ITAT - I.T.A. No.630(Bang.)/2010

(iii) Caterpillar India P Ltd v DDIT - Bangalore ITAT - I.T.A. No. 607(Bang.)/2010

(iv) Caterpillar India P Ltd v DDIT - Bangalore ITAT I.T.A. No.149(Bang.)/2010

(v) Caterpillar India P Ltd v DDIT - Bangalore ITAT I.T.A. No.629(Bang.)/2010

(vi) Caterpillar India P Ltd v DDIT - Bangalore ITAT I.T.A. No. 606(Bang.)/2010

(vii) ITO v M/s Ariba Technologies India Pvt. Ltd ITA No. 616/Bang/2011 dated 4.4.2012

12.10 On consideration of the facts of the case, the material on record and the discussion above, from paras 12.1 to 12.9 above, we are of the considered opinion that the assessee should be considered as the real and economic employer of the secondees.

13. Whether the payments made by the assessee to Abbey National Plc., UK were pure reimbursement of expenses and if so whether the said reimbursements constituted income in the hands of Abbey National Plc., UK ?

13.1 The learned counsel for the assessee had argued in detail that the impugned payments were pure reimbursements of expenses and therefore did not constitute income in the hands of Abbey National Plc., UK so as to warrant deduction of tax at source thereon. The learned Departmental Representative, on the other hand, has contended that there is no material on record to substantiate that the payments were in the nature of reimbursement of expenses. On being asked by the bench as to how the payments to Abbey National Plc., UK were pure reimbursement of expenses without any mark up or profit element, the learned counsel for the assessee drew our attention to the notes to accounts for the year ending 31.3.2006, break up of the reimbursements made during F.Y. 2005-06; copy of the ledger for 'administration and general expenses' in the books of the assessee for the relevant period and clause 4.1 of the secondment agreement which states that in consideration for secondment of staff by Abbey National Plc., UK, the assessee shall make payments equivalent to the remuneration, pension contribution, expenses, statutory payments and any other sums incurred by Abbey National Plc., UK applicable to each secondee during his or her period of secondment. The learned counsel for the assessee also filed a copy of the report on factual findings dt.20.3.2012 raised by Deloitte LLP, London to M/s. Santander UK, Plc (formerly known as Abbey National Plc., UK) wherein the auditors opined that there was no departure from the processes and controls set out in the report prepared by M/s. Santander UK, Plc to demonstrate that the charge of costs to the assessee were at cost. In this regard the learned counsel for the assessee submitted that the payments were pure reimbursements of expenses without any profit element.

13.2 We have heard both parties and have carefully perused and considered the submissions made and the material on record. As per clause 4 of the secondment agreement which deals with payment for secondment, the assessee agreed to reimburse the remuneration, pension contribution, expenses, statutory payments and any other sums incurred by Abbey National Plc., UK for each secondee during his or her period of secondment. Clause 4 reads as under :

" 4. Payment of Secondment

4.1 In consideration of the Secondment of Staff by Abbey UK, Abbey India shall make payments to Abbey UK (In Sterling) equivalent to the Remuneration, Pension Contributions, Expenses, Statutory Payments and any other sums incurred by Abbey UK applicable to each Secondee during his or her period of Secondment.

4.2 The payments under Clause 4.1 shall be made quarterly in arrears against a detailed invoice submitted by Abbey UK."

It is evident from the above clause that the assessee undertook to make payment equivalent to various sums incurred by Abbey National Plc., UK. The notes to accounts for the relevant period (at page 17 of the submissions filed by learned Departmental Representative) state that :

"Abbey Business Services (India) Private Limited (the 'Company') was incorporated on January 22, 2004. The Company is a subsidiary of ANITCO Limited, UK and is engaged in the business of providing consultancy services. The company provides services through employees of Abbey National Plc who are seconded to the Company. The Company reimburses all expenses incurred by Abbey National Plc including payroll costs for the employees who are on secondment for the Company's activities."

13.3 Point No.9 of notes to accounts for the year ending 31.3.2006 states as under (Page 18 of the submissions filed by the learned Departmental Representative) -

"The Company has not yet made any remittance towards the reimbursement of secondment and other administrative costs to Abbey National Plc pending receipt of permission from the Income Tax authorities under section 195(2) for remittance of such amounts without withholding taxes. The provision for tax has been computed assuming that such permission will be received and no withholding tax maybe required. Reliance has been placed in part on judicial precedents."

13.4 The break up of reimbursements agreed to be made by the assessee are given on page 20 of the submissions of learned DR. Page 21 of the submissions of the learned Departmental Representative contains a copy of the ledger 'administration and general expenses' in the books of the assessee for the period 1.11.2005 to 31.3.2006. The narration below the entries wherein Abbey National Plc., UK: account was credited states that the invoice raised by Abbey National Plc. UK was towards cost of secondees and states that the amount is payable for 'recharge of staff costs (including travel and subsistence) and other Abbey Business Services (India) Limited related expenses for the period.' The 'report on factual findings' dt.20.3.2012 by Deloitte LLP, London to Santander UK (formerly Abbey National Plc., UK) states that there was no departure from the processes and controls set out in the report prepared by M/s. Santander UK, Plc to establish that charge of costs made to the assessee were at cost. In view of the above, we are of the considered opinion that the payments made by the assessee to Abbey National Plc., UK were in the nature of reimbursement of salary and other costs.

14.1 In the light of our findings above that the payments made by the assessee to Abbey National Plc., UK were in the nature of reimbursement of salary and other costs, the issue for consideration now is whether reimbursement of expenses can be regarded as income chargeable in the hands of the non-resident i.e. Abbey National Plc., UK ?

14.2 The Hon'ble Apex Court in the case of TISCO v. Union of India [2001] 2 SCC 41 held that -

(i) in common parlance the word reimbursement would mean and imply to pay back or refund;

(ii) it denotes restoration of something paid in excess

(iii) 'reimbursement' has to mean and imply restoration of an equivalent for something paid or expended and

(iv) 'reimbursement' pre-supposes previous payment.

Thus reimbursement follows the incurrence of expenditure by replacing the quantum of disbursement.

It does not have the potential of earning gains for the payee or the potential of generating a surplus. 'Income' on the other hand would, as per the definition under section 2(24)(i), mean profit or gain.

14.3 In the case of CIT v. Tejaji Farasram Khanwala Ltd [1968] 67 ITR 95 (SC), the Hon'ble Apex Court held that to the extent the receipt represented reimbursement of expenses, the same was not taxable, it is only when there was a surplus, that this surplus should be taxed. This decision of the Hon'ble Apex Court laid down the position of law that reimbursement of expenses does not constitute income in the hands of the payee.

14.4 The Authority for Advance Ruling in Cholamandalam MS General Insurance Co. Ltd. (supra) held that reimbursement of salary costs to foreign company under a secondment agreement has no income or profit element and therefore does not constitute income chargeable to tax in India.

14.5 The jurisdictional High Court in the case of Karnataka Urban Infrastructure Development Finance Corporation v. CIT [2009] 308 ITR 297 held that reimbursement of expenditure incurred towards accommodation and conveyance of employees of non-resident consultant companies is not liable for TDS under section 195 of the Act.

14.6 The Special Bench of the ITAT, Mumbai in the case of Mahindra & Mahindra Ltd. v. DCIT [2009] 313 ITR (AT) 263 held "when a particular amount of expenditure is incurred and that sum is reimbursed as such, that cannot be considered as having any part of it in the nature of income. Any payment, in order to be brought within the scope of income by way of fees for technical services under section 9(1)(vii), should be or have atleast some element of income in it. Such payment should involve some compensation for the rendering of any services, which can be described as income in the hands of the recipient. In other words the component of income must be present in the total amount of fees paid for technical services to constitute as an item falling under section 9(1)(vii). When the expenditure incurred is reimbursed as such without having any element of income in the hands of the recipient, it cannot assume the character of income deemed to accrue or arise in India."

14.7 In the case of IDS Software Solutions India (P) Ltd (supra), the co-ordinate Bench of the Tribunal held that reimbursements made to foreign company under the secondment agreement are not liable for deduction of tax at source. The above decision was followed by the co-ordinate bench of the Tribunal in the following cases :

(i) Cerner Healthcare Solutions Pvt. Ltd v ITO Bangalore ITAT

(ii) Caterpillar India P Ltd v DDIT - Bangalore ITAT - I.T.A. No.630(Bang.)/2010

(iii) Caterpillar India P Ltd v DDIT - Bangalore ITAT - I.T.A. No. 607(Bang.)/2010

(iv) Caterpillar India P Ltd v DDIT - Bangalore ITAT I.T.A. No.149(Bang.)/2010

(v) Caterpillar India P Ltd v DDIT - Bangalore ITAT I.T.A. No.629(Bang.)/2010

(vi) Caterpillar India P Ltd v DDIT - Bangalore ITAT I.T.A. No. 606(Bang.)/2010

(vii) ITO v M/s Ariba Technologies India Pvt. Ltd ITA No. 616/Bang/2011 dated 4.4.2012

14.8 In view of the above, we are of the considered opinion that reimbursement of salary costs and other expenses made by the assessee to Abbey National Plc, UK under the secondment agreement cannot be regarded as income chargeable in the hands of Abbey National Plc, UK.

15. Whether payment made by the assessee to Abbey National Plc, UK constitute 'fees for technical services' u/s. 9(1)(vii) of the Income Tax Act, 1961.

15.1 The next issue for consideration is whether the reimbursement of salary costs and other administrative expenditure made by the assessee to Abbey National Plc, UK constitute 'fees for technical services' (herein after referred to as FTS). The definition of 'fees for technical services' u/s.9(1)(vii) of the Act is as under :

"For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries."

From the definition (supra), it is clear that for rendering of any managerial, technical or consultancy services including the provision of services of technical or other personnel is regarded as fees for technical services u/s.9(1)(vii) of the Act.

15.2 In the instant case, the agreement entered into by the assessee with Abbey National Plc, UK was for secondment of staff and the consideration paid was for this purpose only and not for the rendering of any services. Therefore, in the instant case, the secondment of staff/personnel would not be tantamount to rendering of technical, professional or consultancy services.

15.3 Section 9(1)(vii) of the Act is attracted if there is a rendering of service for which a consideration should follow. In the instant case, it was specifically agreed by the parties that Abbey National Plc, UK would only second staff to the assessee as per the secondment agreement. No services were rendered by it to the assessee. 'Fees for technical services' as per section 9(1)(vii) means any 'consideration' for rendering of managerial, technical or consultancy services (including the provision of services of technical or other personnel). Consideration means something given in return for obtaining OR getting a thing. In the instant case, what was paid to Abbey National Plc. UK by the assessee was reimbursement of salary costs and other administration costs, relating to seconded personnel/staff, which was initially paid by Abbey National Plc, UK. This arrangement was compelled out of social security and other reasons. The reimbursement of salary costs and other administration costs did not contain any mark up as clearly brought out in the clause 4.1 of the secondment agreement which provides that 'in consideration of the secondment of staff by Abbey UK, Abbey India shall make payments to Abbey UK (in sterling) equivalent to the remuneration, pension contribution, expenses, statutory payments and any other sums incurred by Abbey UK applicable to each secondee during his or her period of secondment.' As the reimbursement to Abbey National Plc, UK did not result in any profit or gain or income to it, these reimbursements cannot be treated as 'consideration.'

15.4 The reimbursement made to Abbey National Plc, UK also cannot be regarded as 'provision of services of technical or other personnel.' The use of the words 'services of' in the above expression u/s.9(1)(vii) of the Act mandates the rendering of some sort of work through the act of the services of technical on other personnel. In the instant case, Abbey National Plc, UK has not rendered any services to the assessee. It has only deputed secondees to the assessee. The expression 'provision of services of technical or other personnel' used in the definition of 'fees for technical services' is thus not satisfied. The co-ordinate bench of the Tribunal in the case of IDS Software Solution India (P) Ltd (supra) held that reimbursements made to foreign company under the secondment agreement in circumstances similar to that of the instant case cannot be regarded as 'fees for technical services' u/s.9(1)(vii) of the Act. The Delhi High Court in the case of CIT v. Karl Storz Endoscopy India (P) Ltd in ITA No.13 of 2008 dt.13.9.2010 has held that reimbursement of salary costs of employees under a secondment agreement cannot be regarded as 'fees for technical services' u/s.9(1)(vii) of the Act. In view of the above discussion, we are of the considered opinion that the reimbursement of salary costs and other administration expenses made by the assessee cannot be categorized as 'fees for technical services' u/s.9(1)(vii) of the Act.

16. Whether the payments made by the assessee to Abbey National Plc, UK constitutes 'fees for technical services' under Article 13 of DTAA between India & U.K. ?

16.1 In this order, we have held that the reimbursement of salary costs and other related administration expenses made by the assessee to Abbey National Plc, UK, cannot be regarded as income chargeable to tax in the hands of Abbey National Plc, UK. We have also held that such payments do not constitute 'fees for technical services' u/s.9(1)(vii) of the Act. When a payment made to a non-resident is not regarded as 'fees for technical services' u/s.9(1)(vii) nor income chargeable to tax in its hands, the question, whether such payments constitute fees for technical services' under Article 13 of the Treaty between India - U.K., does not survive. This is because Treaties cannot impose tax which is not contemplated or levied under the provisions of the Act. This position is confirmed by the decision of the Hon'ble Apex Court in the case of UOI v. Azadi Bachao Andolan & Another [2003] 263 ITR 706. The assessee has raised grounds of appeal contending the non-taxability of the reimbursements made under Article 13 of the DTAA between India & U.K. and has made written submissions in this regard. Per contra, the learned Departmental Representative has filed written submissions contending that reimbursements made to Abbey National Plc, UK constitute 'fees for technical services' under Article 13 of the said Treaty.

16.2 Article 13 of the India - U.K. DTAA defines 'fees for technical services' as under :

"4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term 'fees for technical services' means payaments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which :

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described inparagraph 3(a) of this article is received; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or

(c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design."

16.3 Clauses (a) and (b) of the above definition deal with payments in the nature of royalty and are not relevant in the instant case as no such payment was made to Abbey National Plc, UK by the assessee. As per Article 13(4)( c ), which is relevant in the instant case, a payment is considered as 'fees for technical services' if both the following conditions are satisfied;

(i) payment is made as a consideration for rendering of any technical or consultancy services; and

(ii) such services 'make available' technical knowledge, experience, skill, know-how or process or consist of the development and transfer of a technical plan or design.

16.4 In the instant case, we have already held that no services were rendered by Abbey National Plc, UK to the assessee. Therefore, the requirement of (i) above would not be satisfied. Even otherwise, unlike in section 9(1)(vii) of the Act, the term 'managerial services' is absent in Article 13(4)(c) which covers only technical or consultancy services. In the instant case, the Assessing Officer had categorized the payments made to Abbey National Plc, UK as 'managerial services' which is not covered in Article 13 of the India - UK Treaty. Therefore, the reimbursement made by the assessee do not fall under Article 13 of the India-U.K. Treaty.

16.5 Additionally, the requirement of 'make available' is to be satisfied for a payment to fall under Article 13 of the India-U.K. Treaty. The meaning of the term 'make available' under the Treaty has been elaborately dealt with in the decision of the Hon'ble jurisdictional High Court in the case of De Beers India Minerals Ltd (supra). The relevant portions of the said decision at paras 13, 14, 22, 26 and 27 are extracted hereunder :

"13. Under the Act if the consideration paid for rendering technical services constitutes income by way of fees for technical services, it is taxable. However, Article 12 of the aforesaid India-Netherlands Treaty defines fees for technical services for the purpose of Article 12 which deals with royalties and fees for technical services. The fees for technical services means the payment of any amount to any person in consideration for rendering of any technical services only. If such services make available technical knowledge, expertise, skill, know-how or processes. If the technical knowledge expertise, skill, know-how or process is not made available by the service provider, who has rendered technical service for the purpose of Article 12 of DTAA it would not constitute fees for technical services. To that extent the definition of fee for technical services found in the agreement is inconsistent with the definition of fees for technical services provided in Explanation 2 to Clause (vii) of sub-section (1) of section 9. In view of section 90 the definition of fees for technical services contained in the agreement overrides the statutory provisions contained to the Act. In fact, the latest agreement between India and Singapore further clarifies this position, where they have explained the meaning of the word 'make available'. According to the aforesaid definition fees for technical service means payments of any kind to any person in consideration for services of technical nature if such service make available technical knowledge, experience, skill, know how or processes, which enables the person acquiring the service to apply technology contained therein. Though this provision is not contained in India Netherlands Treaty, by virtue of Protocol in the agreement. Clause (iv)(2) reads as under :

"If after the signature of this convention under any Convention or Agreement between India and third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention."

14. Therefore the clause in Singapore agreement which explicitly makes it clear the meaning of the word 'make available', the said clause has to be applied and to be read into this agreement also. Therefore, it follows that for attracting the liability to pay tax not only the services should be of technical in nature, but it should be made available to the person receiving the technical services. The technology will be considered 'made available' when the person who received service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge, experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render technical service should also be made available to the recipient of the services so that the recipient also acquires technical knowledge, experience, skill, know how or processes so as to render such technical services. Once all such technology is made available it is open to the recipient of the service to make use of the said technology. The tax is not dependent on the use of the technology by the recipient. The recipient after receiving of technology may use or may not use the technology. It has no bearing on the taxability aspect is concerned. When the technical service is provided, that technical service is to be made use of by the recipient of the service in further conduct of his business. Merely because his business is dependent on the technical service which he receives from the service provider, it does not follow that he is making use of the technology which the service provider utilizes for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used. Therefore, unless the service provider makes available his technical knowledge, experience, skill, know how or process to the recipient of the technical service, in view of the clauses in the DTAA, the liability to tax is not attracted.

15 to 21 …..

22. What is the meaning of 'make available.' The technical or consultancy service rendered should be of such a nature that it 'makes available' to the recipient technical knowledge, know how and the like. The service should be aimed at and result in transmitting technical knowledge, etc. so that the payer of the service could derive an enduring benefit and utilize the knowledge or know how on his own in future without the aid of the service provider. In other words, to fit into the terminology 'making available', the technical knowledge, skills, etc. must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered 'make available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as 'fee for technical / included services' only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.

23 to 25. …….

26. Thus, in terms of the contract entered into with Fugro, they have given the data, photographs and maps. But they have not made available technical expertise, skill or knowledge in respect of such collection or processing of data to the assessees, which the assessee can apply independently and without assistance and undertake such survey independently excluding Fugro in future. The Fugro has not made available the aforesaid technology with the aid of which they were able to collect the data, which was passed onto the assessees as a technical service. In other words, Fugro has rendered technical service to the assessee. They have not made available the technical knowledge with which they rendered technical service. There is no transmission of technical knowledge, expertise, skill, etc. from Fugro along with technical services rendered by them. The assessees are completely kept in dark about the process and the technologies which the Fugro adopted in arriving at the information / data which is passed on to the assessees as technical service. The assessee is unable to make use of the said technical knowledge by itself in its business or for its own benefit without recourse to Fugro. In fact, the question whether along with rendering technical services, whether the technical knowledge with which that services was rendered was also made available to the assessees/customers is purely a question of fact which is to be gathered from the terms of the contract, the nature of services undertaken and what is transmitted in the end after rendering technical services. If along with technical services rendered. If the service provider also makes available the technology which they used in rendering services, then it falls with the definition of fee for technical services as contained in DTAA. However, if the technology is not made available along with the technical services and what is rendered is only technical services and the technical knowledge is with held then, such a technical service would not fall within the definition of technical services in DTAA and not liable to tax.

27. In the background of the aforesaid principles and facts of this case, it is clear that assessees acknowledge the services of Fugro for conducting aerial survey, taking photographs and providing data information and maps. That is the technical services which the Fugro has rendered to the assessees. The technology adopted by Fugro in rendering that technical services is not made available to the assessees. The survey report is very clear. Unless that technology is also made available, the assessees are unable to undertake the very same survey independently excluding Fugro in future. Therefore that technical services which is rendered by Fugro is not of enduring in nature. It is a case specific. That information pertains to 8 blocks. The assessees can make use of the data supplied by way of technical services and put its experience in identify the locations where the diamonds are found and carrying on its business. But the technical services which is provided by Fugro will not enable the assessees to independently undertake any survey either in the very same area Fugro conducted the survey or in any other area. They did not get any enduring benefit from the aforesaid survey. In that view of the matter, though Fugro rendered technical services as defined under section 9(1)(vii) Explanation 2, it does not satisfy the requirement of technical services as contained in DTAA. Therefore the liability to tax is not attracted. Accordingly the first substantial question of law is answered in favour of the assessees and against the Revenue."

16.6 Applying the above principles laid down by the Hon'ble Karnataka High court in the case of De Beers India Minerals Ltd (supra) to the instant case, it would be evident that there is no 'make available' of technology, processes, skills, experience etc. by Abbey National Plc, UK to the assessee. The payments made by the assessee to Abbey National Plc, UK is reimbursement of salaries, costs, etc of seconded staff and not for rendering of any services. As a result of the said payments, the assessee, is not equipped with transfer of technology, processes, skills, etc by Abbey National Plc, UK to the assessee. Therefore, the reimbursement of salary and other costs by the assessee to Abbey National Plc, UK cannot be regarded as 'fees for technical services' under Article 13 of the India-UK Treaty.

16.7 The learned Departmental Representative has placed reliance on certain decisions in support of the contention that the payments made by the assessee to Abbey National Plc, UK constituted 'fees for technical services' under the provisions of the Act and the Treaty which are as under :

(i) Cochin Refineries Ltd. v. CIT [1996] 222 ITR 354 (Ker)

In this case, the amount paid to the US Company to evaluate whether coke produced from a blend of vacuum bottoms and clarified oil from Bombay High Crude is suitable for making anode for the aluminum industry was held to be fees for technical services u/s.9(1)(vii) of the Act.

In this decision, the Court did not address the payment from a Treaty perspective on the requirement of 'make available' condition. Further various judicial decisions in support of the view that reimbursement of expenses is bereft of the income or profit element and hence not liable for TDS were not cited/considered by the Court. The above decision has also been distinguished/not followed in Mahindra and Mahindra Ltd v. DCIT [2009] 122 TTJ 0577 (Mumbai Special Bench). Thus, the decision relied on by the learned Departmental Representative is distinguishable.

(ii) South West Mining Ltd (2005) 278 ITR 233 (AAR)

In the above ruling, fees paid to a resident of Canada as consideration for analysis of samples and ores conducted from technical lab was held as fees for technical services u/s.9(1)(vii) and Article 12 of the India-Canada Treaty. No arguments were made on the aspect of 'make available' requirement present in the definition of 'fees for technical services' under Article 12 of the Treaty and the AAR also did not consider this. Thus, the decision relied on by the learned Departmental Representative is distinguishable.

(iii) DIT v. SNC Lavalin International Inc [2011] 332 ITR 314 (Delhi)

In this decision, it was held that the development and transfer of technical plan or technical design for mere use and for which payment is made , Article 12(4)(6) of the Indo-Canada DTAA is attracted. In the instant case, however, there is no development and transfer of technical plan OR technical design by Abbey National Plc, UK to the assessee. Even otherwise, the Karnataka High Court in the case of De Beers India Minerals P. Ltd (supra) has held that payment to non-resident for obtaining reports does not result in development and transfer of technical plan or design. Thus, the decision relied on by the learned Departmental Representative is distinguishable.

(iv) Sahara Airlines Ltd v. DCIT [2003] 79 TTJ 268 (Del)

In this case, it was held that payment for imparting of training to use highly sophisticated machine results in make available of technical knowledge, experience and hence would be regarded as fees for technical services u/s.9(1)(vii) of the Act and Article 13 of the India-UK Treaty. In the instant case, there is no imparting of training by Abbey National Plc, UK. The payments made by the assessee were in respect of reimbursement of salary costs and other expenses made for secondment of personnel by Abbey National Plc, UK and not for the rendering of any service. Thus, the decision relied on by the learned Departmental Representative is distinguishable.

16.8 Further, in the instant case, the learned CIT(A) has allowed relief in respect of reimbursement of salary costs and confirmed the disallowance of reimbursement of other administration expenses. Revenue has not filed any appeal against the relief granted by the learned CIT(A). The reimbursement of other administration expenses under the secondment arrangement was inseparable and inextricably linked to reimbursement of salary costs. We have already held that reimbursement of salary costs and other administration expenses under the secondment agreement were without any profit element. Thus, if reimbursement of salary costs were held to be not liable for disallowance, by the same yardstick the reimbursement of other expenditure under the secondment agreement should also be held as not liable for disallowance. We hold accordingly.

17. Whether the payments made by the assessee to Abbey National Plc, UK were liable for TDS u/s.195 of the Act ?

Whether the payments made by the assessee to Abbey National Plc, UK were liable for disallowance u/s.40(a)(i) of the Act ?

17.1 In view of our findings that -

(i) the assessee was the real and economic employer of the secondees under the secondment agreement.

(ii) the reimbursement of salary costs and other expenditure was without any profit element and hence cannot be regarded as income chargeable in the hands of Abbey National Plc, UK under Article 13 of the India-U.K. Treaty, the above questions are answered in favour of the assessee and against revenue. In other words, the reimbursement of salary and other expenditure made by the assessee to Abbey National Plc, UK under the secondment agreement were not liable for TDS u/s. 195 of the Act and consequently the said payments are not liable for disallowance u/s.40(a)(i) of the Act.

18. In the result, the appeals of the assessee in ITA Nos.1141/Bang/2010, 41 & 42/Bang/2011 are allowed.

Order pronounced in the open court on 18th July, 2012.





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